BILL ANALYSIS �
AB 1423
Page 1
CONCURRENCE IN SENATE AMENDMENTS
AB 1423 (Perea)
As Amended July 12, 2011
2/3 vote. Urgency
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|ASSEMBLY: | |(May 16, 2011) |SENATE: |38-0 |(August 31, |
| | | | | |2011) |
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(vote not relevant)
Original Committee Reference: REV. & TAX.
SUMMARY : Conforms several provisions of state income tax law to the
federal Regulated Investment Company (RIC) Modernization Act of
2010.
The Senate amendments delete the Assembly version of this bill and,
instead, in conformity with the federal RIC Modernization Act of
2010:
1)Revise the California income tax laws to treat RICs similarly to
individuals with regard to capital loss carryover, thus, allowing
RICs to carry over capital losses for an unlimited number of
years.
2)Allow a RIC, upon identifying a de minimis asset test failure, as
defined, at the end of the quarter, to maintain its status as a
RIC, provided that, within six months, the RIC fulfills the
requirements of the asset test, as prescribed. Allow a RIC, which
fails either the "gross income" test or the "asset test" (outside
of the de minimis range), to cure the failure by paying tax and
satisfying certain specified requirements.
3)Replace the requirement to designate distributions as certain
types of income with a requirement for RICs to report, in a
written statement furnished to shareholders, the designations of
capital gain dividends and other pass-through items. Allow RICs
to satisfy the reporting requirement by issuing to shareholders
Form 1099.
4)Allow a capital loss carryover of a RIC to be taken into account
in determining the RIC's current and accumulated earnings and
profits. Provide that deductions associated with tax-exempt
interest income of a RIC may be taken into account in computing
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current earnings and profits, thus allowing dividend distributions
to shareholders in excess of tax-exempt interest to be treated as
a return of capital gain rather than ordinary taxable dividends.
5)Allow RICs with 50% or more of the value of its total assets
invested in other RICs to pass through exempt-interest dividends
and foreign tax credits to shareholders, as specified.
6)Authorize a RIC to declare a "spillover dividend," as defined, by
the 15th day of the 9th month following the close of the taxable
year to which the spillover dividend relates, or the extended due
date for filing the RIC's tax return, whichever is later. Require
spillover dividends, once declared, to be paid by the date of the
next dividend payment of the same type, but no later than 12
months after the end of the tax year to which the spillover
dividend relates.
7)Specify that, if a RIC distributes dividends in a taxable year
that, in the aggregate, exceed the RIC's current and accumulated
earnings and profits, the current earnings and profits are
allocated first to distributions made prior to January 1st.
8)Treat the redemption of a publicly offered RIC stock as an
exchange, rather than a distribution of property, for tax
purposes, if the redemption is upon the demand of the shareholder
and the RIC issues only stock that is redeemable upon the
shareholder demand. Specifies that a "publicly offered RIC" is a
RIC that offers its shares publicly, trades on an established
securities market, or has at least 500 persons holding shares at
all times.
9)Provide that a publicly offered RIC, as defined, is not required
to follow the "preferential dividend" rule, as specified.
10)Authorize a RIC to choose whether or not to postpone post-October
capital losses and qualified late-year ordinary losses to the
first day of the next taxable year.
11)Allow a RIC shareholder to claim a loss on the sale or exchange
of the stock held for six months or less, to the extent of the
amount of the exempt-interest dividend, if certain requirements
are satisfied.
12)Limit the application of the Sales Load Basis Deferral rule only
to those cases where a RIC shareholder disposes of the RIC stock
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within 90 days of the acquisition but subsequently acquires RIC
stock in the same fund family without incurring a new sales load,
pursuant to the shareholder's reinvestment rights, before January
31 of the calendar year following the year of the disposal of the
original stock.
13)Add the urgency clause.
AS PASSED BY THE ASSEMBLY , this bill deleted obsolete provisions of
the Sales and Use Tax (SUT) Law, and made technical amendments to
existing SUT exemption provisions as a matter of code maintenance.
FISCAL EFFECT : The Franchise Tax Board estimates that this bill
will result in an annual General Fund revenue loss of $925,000 in
fiscal year (FY) 2011-2012, $383,500 in FY 2012-2013, and $73,500 in
FY 2013-2014, followed by revenue gains from FY 2014-15 until FY
2017-18.
EXISTING LAW conforms to the federal income tax law relating to
RICs, as of January 1, 2009. Specifically, the California law:
1)Treats a capital loss carryover from a prior year as a short-term
capital loss in subsequent years and allows a RIC to carry over
capital losses only for eight years.
2)Requires a RIC to satisfy, among other things, a "qualifying
income" and "asset diversification" tests for each taxable year,
in order to qualify for tax treatment as a RIC.
3)Requires RICs to notify shareholders within 60 days of the end of
the taxable year of the designation of capital gain dividends and
other items. Failure to designate the entire amount of any such
item in a timely fashion results in a permanent inability of the
shareholders to obtain "pass-through" treatment of the amount of
that item not designated for that year.
4)Provides that only accumulated, and not current, earnings and
profits of a RIC may be reduced by a net capital loss in the
taxable year the loss arose. Disallows a reduction of the RIC's
earnings and profits by the amount of its expenses allocable to
the tax-exempt interest income that is distributed to
shareholders.
5)Allows a RIC to pass through exempt-interest dividends or foreign
tax credits only if 50% or more of the RIC's assets, respectively,
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consist of tax-exempt obligations or stock in foreign
corporations. Thus, if 50% or more of a RIC's assets consist of
shares in another RIC, the former RIC may not pass through
exempt-interest dividends or foreign tax credits.
6)Requires spillover dividends to be declared by the extended
deadline for filing the RIC's tax return and to be distributed by
the date of the next dividend payment, no later than 12 months
after the end of the taxable year.
7)Requires RICs to distribute dividends during the year in which
they generate the net income, or else the distribution is deemed a
return of capital, which requires an adjustment to the
shareholder's basis in the RIC stock and must be allocated
proportionately among all distributions made during the year.
8)Requires an open-end RIC to redeem its shares at a shareholder's
request, with some exceptions but does not specify whether the
redemption of some, but not all, shares is treated as a dividend
or a sale eligible for capital gain or loss treatment.
9)Requires a publicly offered RIC to follow the "preferential
dividend" rule, which mandates that dividends be distributed pro
rata with no preference to any shareholder or class of stocks.
10)Provides that a RIC must distribute to the shareholders 98% of
its capital gain net income and net ordinary income by December
31st each year. Imposes a 4% excise tax on amounts not timely
distributed.
11)Specifies that, if a RIC shareholder receives exempt-interest
dividends with respect to a share of RIC stock held for six or
fewer months, then the shareholder may not deduct any loss on the
sale or exchange of the share, to the extent of the amount of the
exempt-interest dividend.
12)Disallows a RIC shareholder to take into account a load charge in
determining gains or losses on the disposition of the RIC shares
if (a) the load charge was incurred in connection with the
acquisition of the RIC stock and a reinvestment right, (b) the RIC
stock was disposed of by the shareholder within 90 days of the
acquisition, and (c) the shareholder subsequently acquired a RIC
stock and the otherwise applicable load charge was reduced due to
the reinvestment right from the prior RIC stock. Does not specify
any time limit applicable to the subsequent acquisition of RIC
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stock.
COMMENTS : This bill was substantially amended in the Senate and the
Assembly-approved version of this bill was deleted. This bill, as
amended in the Senate, is inconsistent with Assembly actions and the
provisions of this bill, as amended in the Senate, have not been
heard in an Assembly policy committee.
Analysis Prepared by : Ryan Globus and Oksana G. Jaffe / REV. & TAX.
/ (916) 319-2098
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