BILL ANALYSIS
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|SENATE RULES COMMITTEE | SB 401|
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UNFINISHED BUSINESS
Bill No: SB 401
Author: Wolk (D), et al
Amended: 4/6/10
Vote: 21
PRIOR VOTE NOT RELEVANT
ASSEMBLY FLOOR : 47-24, 4/8/10 - See last page for vote
SUBJECT : Tax conformity
SOURCE : Author
DIGEST : Assembly Amendments delete the Senate version of
the bill which provided a single, consistent definition for
abusive tax shelters, which will be referred to as "an
abusive tax avoidance transaction," and adopts the federal
reportable transaction category for "transactions for
interest.
This bill generally conforms California personal income
tax, corporation tax, and administration of franchise and
income tax laws to federal income tax laws as set forth in
the Internal Revenue Code (IRC) as of January 1, 2009. The
bill also conforms to one provision of federal tax law
enacted in 2009, from the Recovery and Reinvestment Act of
2009 by excluding income grants made-in-lieu of federal
renewable energy tax credits. [This bill is substantially
similar to SB 32 X8, which was vetoed], SB 401 does not
contain the erroneous refund penalty provision of SB 32 X8
CONTINUED
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which the Governor objected in his veto message.
ANALYSIS :
I. Tax Conformity
Although there are many exceptions, California's
personal income tax and corporation tax laws are
generally patterned after federal law. In most cases,
state legislation is needed to conform to federal law
changes. Over the past five years since the Legislature
passed the last conformity bill, significant differences
have emerged between state and federal law. The lack of
conformity can be attributed to several factors, some
involving fiscal concerns, and others involving policy
related issues.
Specifically this bill:
1. Conforms or partially conforms to, among other
provisions, the following federal provisions relating to
the:
A. Federal tax treatment of certain disaster
mitigation payments. The Disaster Mitigation
Payments Act.
B. Federal treatment of electric transmission
property, certain atmospheric pollution control
facilities, nuclear decommissioning cost, natural gas
distribution lines, natural gas gathering lines, and
amortizable Internal Revenue Code (IRC) Section 197
intangibles. The Energy Tax Incentives Act of 2005.
C. Effective date of exception from suspension rules
for certain listed and reportable transactions and
tax technical provisions of the Gulf Opportunity Zone
Act of 2005.
D. Modification of active business definition under
IRC Section 355, treatment of loans to qualified
continuing care facilities, distributions involving
disqualified investment companies, taxation of
certain settlement funds, capital gains treatment for
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certain self-created musical works, amortization of
expenses incurred in creating or acquiring music or
music copyrights, and the application of earnings
stripping rules to partners that are corporations.
The Tax Increase Prevention and Reconciliation Act of
2005 and the Tax Relief and Health Care Act of 2006.
E. Clarification of treatment of self-employment for
purposes of the limitation on state taxation of
retirement income. The Clarification of Treatment of
Self-Employment for Purposes of the Limitation on
State Taxation of Retirement Income.
F. Reform of funding for self-employed defined
benefit pension plans, funding rules for
multiemployer defined benefit pension plans, and
general reforms of charitable contribution reporting.
The Pension Protection Act of 2006 (PPA).
G. Inflation indexing of gross income limitations on
certain retirement savings incentives and allowance
of additional Individual Retirement Account (IRA)
payments in certain bankruptcy cases.
H. Waiver of the early withdrawal penalty for
distributions made from a governmental plan to a
qualified public safety employee and penalty-free
withdrawals from retirement plans for individuals
called to active duty.
I. Modified treatment of certain charitable
contributions and reporting by exempt organizations.
J. Frivolous tax submissions, sale of property by
judicial officers, and exclusion of gain from sale of
principal residence by certain employees of the
intelligence community.
(1) Federal extension of mortgage debt
forgiveness until January 1, 2013, modified to
increase the state's limitation on the amount
that can be excluded from gross income from
$250,000 (or $125,000 in the case of a married
individual/RDP filing a separate return) to
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$500,000 (or $250,000 in the case of a married
individual/RDP filing a separate return). The
Mortgage Forgiveness Debt Relief Act (MFDRA),
P.L. 110-343, Division A, Title III, Section
303 and the Emergency Economic Stabilization
Act of 2008 (EESA).
(2) Exclusion from income for benefits
provided to Emergency Medical Services
volunteers and firefighters.
(3) Increase in age of minor children whose
unearned income is taxed as if it is parents'
income.
(4) Federal penalty on understatement of a
taxpayer's liability by a tax return preparer,
in modified conformity, to incorporate the
federal rule that the penalty will be the
greater of a base amount ($250 for the
first-tier penalty and $5,000 for the
second-tier penalty) or 50 percent of the
income derived (or to be derived) by the tax
return preparer.
(5) Special rule encouraging contribution of
capital gain real property for conservation
purposes, dedication of endangered species
recovery expenditures, depreciation schedule
for race horses, and information reporting for
commodity credit corporation transactions.
Heartland, Habitat, Harvest, and Horticulture
Act of 2008.
(6) Special tax treatment of distributions,
contributions, exclusions, and disposition of
amounts paid to, or made by, individuals called
to active duty, other service members, and
employees of the Intelligence Community. The
Heroes Earnings Assistance and Relief Tax Act
of 2008.
(7) Various tax incentives related to the
low-income housing tax credit. The Housing and
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Economic Recovery Act of 2008.
(8) Special rules for tax treatment of
executive compensation of employers
participating in the Troubled Assets Relief
Program, modified tax treatment of certain
payments to controlling exempt organizations,
and charitable contributions of property.
(9) Treatment of certain reimbursements from
governmental plans for medical care and
modification of penalty for failure to file
partnership and "S" corporation returns. The
Worker, Retiree, and Employer Recovery Act of
2008.
(10) Exclusion from gross income for energy
property grants provided to a taxpayer by the
Secretary of Treasury for qualified property
placed in service during either 2009 or 2010
year.
2. Provides that the state shall not conform to certain
federal provisions, including, among others:
A. The seven-year recovery period for motor sports
racing track facilities.
B. The five-year recovery period for certain farming
business machinery and equipment.
C. The enhanced charitable deductions for
contributions of food inventory.
D. The enhanced charitable deductions for
contributions of book inventory.
E. The federal changes made to the determination of a
small refiner for purposes of the depletion
deduction.
3. Takes effect on or after January 1, 2011.
II. Renewable Energy Grants
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Federal law allows an income tax credit for the
production of electricity from qualified energy
resources at qualified facilities. Congress enacted and
the President signed the American Recovery and
Reinvestment Act (ARRA), which authorizes the Secretary
of Treasury to provide a grant to each person who places
in service during 2009 or 2010 energy property that is
either (1) an electricity production facility otherwise
eligible for the renewable electricity production credit
or (2) qualifying property otherwise eligible for the
energy credit. In lieu of the tax credits, ARRA allows
for the exclusion of the grant proceeds from a
taxpayer's federal income. However, the basis of the
property is reduced by fifty percent of the amount of
the grant. In addition, some or all of each grant is
subject to recapture if the grant eligible property is
disposed of by the grant recipient within five years of
being placed in service. The provision also permits
taxpayers to claim the credit with respect to otherwise
eligible property that is not placed in service in 2009
and 2010 so long as construction begins in either of
those years and is completed prior to 2013 (in the case
of wind facility property), 2014 (in the case of other
renewable power facility property eligible for credit
under IRC section 45), or 2017 (in the case of any
specified energy property described in IRC section 48).
Under the provision, if a grant is paid, no renewable
electricity credit or energy credit may be claimed with
respect to the grant eligible property. However, in
absence of an authorized statute, taxpayers must include
the grant proceeds as income for state purposes. This
bill excludes these grants from income for 2009-2010 tax
year, because an unexpected tax could cause project
developers to terminate or delay the projects, causing
job losses and less renewable power for the state. This
bill additionally conforms to federal law by excluding
these grants from state income and requiring the 50
percent basis adjustment.
III. Mortgage Debt Forgiveness .
The Legislature approved SB 1055 (Machado), Chapter 282,
Statutes of 2008, which provided modified conformity to
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the MFDRA for discharge of mortgage indebtedness in the
2007 and 2008 tax years. Last year, the Senate Revenue
and Taxation Committee held SB 97 (Calderon), which
extended modified conformity to discharge of mortgage
indebtedness in the 2009 and 2010 tax years, and the
Assembly Revenue and Taxation Committee held AB 111
(Niello), which provided full conformity to MFDRA. AB
1580, which was vetoed by the Governor in 2009, would
have provided homeowners greater assistance, not only by
extending the mortgage debt forgiveness provisions until
January 1, 2013, but also by increasing the amount of
forgiven mortgage indebtedness excludable from
taxpayer's gross income from $250,000 ($125,000 in the
case of a married individual filing a separate return)
to $500,000 ($250,000 in case of a married individual
filing a separate return). The same mortgage debt
forgiveness provisions are included in SB 32 x8, tying
California law to federal law until 2013. In addition,
SB 32 x8 provides for a retroactive application of those
provisions for cancellation of debt income arising from
mortgage debt forgiveness until the 2012 tax year.
Similar/Prior Legislation
AB 115 (Klehs), Chapter 691, Statutes of 2005, was
California's last federal conformity bill.
AB 1561 (Calderon), which would have conformed state law to
federal income tax law changes up through December 31,
2007, failed passage on the Senate Floor in 2008 on a vote
of 24-16. That bill would have resulted in an increase in
state tax revenue, triggering the 2/3 vote requirement in
Article XIIIA of the State Constitution.
AB 1580 (Calderon), which was vetoed by the Governor last
year, was the most recent attempt to ease the hardship on
taxpayers and practitioners by bringing the federal and
state tax codes closer together. The Governor's veto
message indicated an unwillingness to sign a conformity
bill that does not reflect consensus, while noting a
specific objection to a conformity provision related to
penalties on erroneously claimed tax refunds.
SB 32 x8 (Wolk), 2009-10 introduced in the 8th
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Extraordinary Session, is identical to SB 401 but for one
provision - an erroneous refund claim penalty. SB 32 x8
was passed by both the Assembly and the Senate but was
vetoed by the Governor on March 25, 2010.
FISCAL EFFECT : Appropriation: No Fiscal Com.: Yes
Local: Yes
According to the Franchise Tax Board (FTB) Analyses, the
bill will result in a decrease in tax revenues and
offsetting increases in interest and penalties. The net
impact is estimated by FTB to be revenue losses of $28
million in 2009-10; 14.0 million in 2010-11, and $15.0
million 2011-12, and a loss of $5.5 million in 2012-13.
SUPPORT : (Verified 4/8/10)
American Federation of State, County and Municipal
Employees, AFL-CIO
BrightSource Energy
California Bankers Association
California Chamber of Commerce
California Conference Board of Amalgamated Transit Union
California Conference of Machinists
California Manufacturers and Technology Association
California School Employees Association
California Society of Enrolled Agents
California Tax Reform Association
California Taxpayers' Association
California Teamsters Public Affairs Council
California Wind Energy Association
Calpine Corporation
Center for Responsible Lending
Coast Longshore Division
Engineers and Scientists of California, Local 20,
IFPTFL-CIO &CLC
Independent Energy Producers
Western States Petroleum Association
International Longshore and Warehouse Union
Laborers International Union of North America, AFL-CIO
NextEra Energy
Professional and Technical Engineers, Local 21IFPTEAFL-CIO
Service Employees International Union
Strategic Committee of Public Employees, Pacific Southwest
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Region
Tech America
Terra-Gen Power
Unite Here International Union, AFL-CIO, United Food and
Commercial Workers Western States Council
OPPOSITION : (Verified 4/8/10)
Howard Jarvis Taxpayers Association
ARGUMENTS IN SUPPORT : According to the author's office,
"SB 401 is a vital measure conforming state tax law to
federal tax, and includes provisions that provide needed
relief to struggling homeowners, ensure that renewable
energy projects are not unduly taxed on federal grants, and
provides needed conformity to federal tax law, easing tax
preparation for taxpayers and tax preparers alike. This
measure works to prevent onerous taxation of distressed
Californians who are already struggling to protect their
homes, their largest investment, as many Californians face
foreclosure and are forced to walk away from their homes;
the last thing they should have to think about is paying
taxes on debt they couldn't repay. This measure puts an end
to this onerous application of tax law. Additionally,
since tax credits are never considered income, taxing
renewable energy production grants would treat the
renewable energy production industry inequitably and would
add additional costs onto these projects need for job
creation and energy sustainability. It is important that
we avoid this kind of unnecessary roadblock to economic
growth as our state works to rebuild its financial
prosperity."
ASSEMBLY FLOOR :
AYES: Ammiano, Arambula, Bass, Beall, Block, Blumenfield,
Bradford, Brownley, Buchanan, Caballero, Carter, Chesbro,
Coto, Davis, De La Torre, De Leon, Eng, Evans, Feuer,
Fong, Fuentes, Furutani, Galgiani, Hall, Hayashi,
Hernandez, Hill, Huffman, Jones, Lieu, Bonnie Lowenthal,
Ma, Mendoza, Monning, Nava, Portantino, Ruskin, Salas,
Saldana, Skinner, Solorio, Swanson, Torlakson, Torres,
Torrico, Yamada, John A. Perez
NOES: Anderson, Bill Berryhill, Tom Berryhill, Conway,
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Cook, DeVore, Emmerson, Fletcher, Fuller, Gaines,
Garrick, Hagman, Harkey, Jeffries, Knight, Miller,
Nestande, Niello, Nielsen, Norby, Silva, Smyth, Audra
Strickland, Villines
NO VOTE RECORDED: Adams, Blakeslee, Charles Calderon,
Gilmore, Huber, Logue, V. Manuel Perez, Tran, Vacancy
DLW:do 4/14/10 Senate Floor Analyses
SUPPORT/OPPOSITION: SEE ABOVE
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