BILL ANALYSIS                                                                                                                                                                                                    �




                   Senate Appropriations Committee Fiscal Summary
                            Senator Kevin de Le�n, Chair


          AB 1172 (Bocanegra) - Income Taxes: Charitable Remainder Trusts
          
          Amended: June 17, 2014          Policy Vote: G&F 7-0
          Urgency: No                     Mandate: No
          Hearing Date: August 4, 2014                            
          Consultant: Robert Ingenito     
          
          This bill meets the criteria for referral to the Suspense File.


          Bill Summary: AB 1172 would conform state law to federal  
          treatment for charitable remainder trusts (CRTs) generating  
          unrelated business taxable income (UBTI).

          Fiscal Impact: The Franchise Tax Board (FTB) indicates that the  
          bill would result in estimated revenue losses (General Fund) of  
          $450,000 in 2014-15, $300,000 in 2015-16, and $300,000 in  
          2016-17. The bill would not significantly impact FTB's  
          administrative costs.

          Background: Under current law, a CRT is as a trust that is (1)  
          funded by a donor's irrevocable contribution of cash or  
          property, (2) provides donors or other designated beneficiaries  
          with an income stream for a specified period, commonly for the  
          life of one or more beneficiaries, and (3) 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 percent 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  








          AB 1172 (Bocanegra)
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          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.

          Proposed Law: This bill would provide that any UBTI generated by  
          a CRT shall be subject to the personal income tax, and deletes  
          previous law that conformed to pre-2006 federal law that revoked  
          the CRT's tax-exempt status if it generated UBTI.  The measure  
          would take effect in the 2014 taxable year.

          Related Legislation: AB 2687 (Assembly Committee on Revenue and  
          Taxation, 2012) would have, similar to this bill, conformed to  
          the federal treatment of charitable remainder trusts with  
          unrelated business taxable income. AB 2687 failed to pass.