BILL ANALYSIS
SENATE REVENUE & TAXATION COMMITTEE
Senator Michael Machado, Chair
SB 217 - Dutton
Amended: March 17, 2005
Hearing: April 27, 2005 Tax Levy Fiscal: Yes
SUBJECT: Retroactively conforms to existing law to treat
an old refund claim as though it was paid or
deducted in 1993.
EXISTING LAW
The United States Supreme Court first enunciated the claim
of right doctrine in North American Oil v. Burnet (1932)
286 U.S. 417. Generally, under the claim of right doctrine
a taxpayer must include in gross income any income to which
the taxpayer has an apparent unrestricted right at the time
of receipt or accrual. Examples of an individual's income
that may be subject to the claim of right doctrine are:
incorrectly computed wages or commissions, excess social
security payments, and excess unemployment compensation
payments. Under federal law, a taxpayer who repays that
amount in a subsequent year may claim either a deduction or
a refundable credit for the amount of tax paid on the
repaid income in the previous year, as explained below.
State Law
Conforms with federal law for taxable years beginning on or
after January 1, 2004 to provide a special relief provision
to compensate the taxpayer in the year of repayment for
taxes paid on amounts included in income under the claim of
right doctrine.
Taxpayers are allowed to deduct the amount of claim of
right income repaid in the year of repayment or claim a
credit equal to the decrease in tax for the year of the
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receipt if the repaid item is excluded from gross income in
that year, whichever results in the least tax. In order to
deduct the claim, the taxpayer must meet the following
criteria:
An item of income was properly included in income
for a prior year because it appeared that the taxpayer
had an unrestricted right to the income,
It is established that the taxpayer did not have an
unrestricted right to all or a portion of the item of
income,
The amount of the repayment exceeds $3,000.
THIS BILL
Deletes the requirement that limits relief for state
purposes to taxpayers that obtained relief for federal tax
purposes.
Allows the claim of right refund to apply retroactively to
ANY taxable year for which a claim for refund may be filed
and for any taxable year for which an individual has a
pending refund that has not been finally adjudicated.
Goes into effect immediately as a tax levy.
FISCAL EFFECT:
According to FTB, this bill would result in at least a $5
million revenue loss.
COMMENTS:
A. Purpose of the bill
According to the author, this bill is intended to properly
conform California law to federal tax law. Specifically,
the bill would amend last year's AB 3073 that purported to
conform to the federal claim of right provision. However,
SB 217-Dutton Page 3
that bill did not do so completely.
In some limited instances, taxpayers will seek a refund,
rather than a deduction, because they have insufficient
taxable income to utilize a deduction. Unfortunately, the
Franchise Tax Board has taken the position that these
taxpayers are not entitled to claim a refund of any of the
taxes paid, but instead would be limited to the deduction.
SB 217 would make two changes to last year's legislation:
First, it would modify the effective date and, second, it
would strike non-conforming language.
If this law is not corrected, the State of California will
reap a windfall of mistakenly paid taxes. The State is not
entitled to keep this money. SB 217 would ensure that
taxpayers receive the amount of taxes previously paid on
income they did not actually earn.
B. Retroactive Tax Benefits
This bill provides a retroactive tax benefit. Not only do
retroactive tax benefits create some confusion, but can
also constitute a "gift of public funds." A "gift of
public funds" is prohibited by the California Constitution
in Article XVI, Section 6. Specifically, the Legislature
shall have no power to make any gift of public money unless
there is a public reason. Therefore, before the
Legislature gives this tax benefit, the committee may wish
to consider the public purpose of this retroactive benefit.
C. One Taxpayer Benefits
Ackerman, Peter & Joanne v. Franchise Tax Board is a
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pending case before the Los Angeles Superior Court<1>. At
issue in this case is whether the plaintiffs are entitled
to a refund of taxes pursuant to federal law at a time when
state law was not in conformity. This case was filed on
May 23, 2003 and has not been decided. The amount of the
claim is $4.9 million dollars.
It appears as though this bill is intended to legislatively
resolve this court case and there may not be other
taxpayers with similar circumstances. It has generally not
been the policy of this committee to resolve legal disputes
for a single taxpayer.
D. The Conformity Problem
The author states that the intent of this bill is to
conform to federal law. If the author wishes to conform to
federal law, this bill should be amended in a manner
similar to AB 1767 (Committee on Assembly Revenue and
Taxation). This bill clarifies a drafting error in the
conformity law.
Support and Opposition
Support:None Received
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Consultant: Gayle Miller
04/26/05 09:38
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<1> Docket No. BC296334, Court of Appeal, 2nd Appellate
Dist. Div P No. B178750