BILL ANALYSIS �
AB 2687
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Date of Hearing: May 25, 2012
ASSEMBLY COMMITTEE ON APPROPRIATIONS
Felipe Fuentes, Chair
AB 2687 (Committee on Revenue and Taxation) - As Introduced:
March 12, 2012
Policy Committee: Revenue and
Taxation Vote: 8-0
Urgency: Yes State Mandated Local Program:
No Reimbursable:
SUMMARY
This bill allows a charitable remainder trust (CRT) to retain
its tax-exempt status when it has an unrelated business taxable
income (UBTI) by paying tax on that income. Specifically, this
bill:
1)Provides California UBTI of a CRT is subject to tax under the
graduated personal income tax rates that range from 1% to
10.3%.
2)Contains legislative findings and declarations stating that
this bill serves a public purpose by preventing the loss of a
tax exemption for charitable remainder annuity trusts and
charitable remainder unitrusts.
3)Takes effect immediately as a tax levy but will be operative
for taxable years beginning on or after January 1, 2011.
FISCAL EFFECT
Franchise Tax Board staff estimates this bill will result in an
annual revenue loss of $400,000 in the fiscal year (FY) 2011-12,
$300,000 in FY 2012-13, and $300,000 in FY 2013-14.
COMMENTS
1)Purpose . AB 2687 conforms California law to the federal tax
treatment of CRTs that have UBTI, in order to allow such
trusts to retain their tax-exempt status for California tax
purposes.
AB 2687
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2)Arguments in Support . The California Taxpayers Association
states California follows the pre-2006 federal law, which
creates an extreme hardship for CRTs, precisely the hardship
that the federal legislation was designed to alleviate. They
contend that the loss of tax exempt status under California
law is particularly burdensome and can be trap for the unwary
because California almost always follows federal treatment for
tax-exemption, especially in the area of charitable
organizations. As a result, they note CRTs pay income tax on
all income, not just on the UBTI and compliance burdens are
increased.
3)Background . Defines a CRT as a trust that is (a) funded by a
donor's irrevocable contribution of cash or property, (b)
provides donors or other designated beneficiaries with an
income stream for a specified period, commonly for the life of
one or more beneficiaries, and (c) contributes the remainder
of the trust to charity.
A qualified CRT is subject to neither the federal nor state
income tax, which means that its income is not taxable until
it is distributed to a beneficiary.
While a CRT is exempt from federal income tax, it may still be
subject to tax on its UBTI. Generally, UBTI is defined as
income from a trade or business regularly conducted by an
exempt organization and not substantially related to the
performance by the organization of its exempt purpose or
function. An example of an activity that generates UBTI is a
working interest in an oil and gas well.
A CRT that has UBTI is treated differently under the federal
and California tax laws. Under federal law, such a CRT will
be subject to a 100% excise tax on its UBTI, but it will
retain its tax-exempt status, which means other types of
income generated by the CRT will continue being exempted from
the federal income tax. In contrast, under California's law
the CRT will lose its tax-exempt status and all of its income,
including UBTI, will be subject to the income tax in
California.
Analysis Prepared by : Roger Dunstan / APPR. / (916) 319-2081
AB 2687
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