BILL ANALYSIS                                                                                                                                                                                                    ”



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          ASSEMBLY THIRD READING


          AB  
          154 (Ting)


          As Amended  May 28, 2015


          2/3 vote.  Urgency


           ------------------------------------------------------------------- 
          |Committee       |Votes |Ayes                |Noes                  |
          |                |      |                    |                      |
          |                |      |                    |                      |
          |----------------+------+--------------------+----------------------|
          |Revenue &       |6-0   |Ting, Dababneh,     |                      |
          |Taxation        |      |Gipson, Roger       |                      |
          |                |      |HernŠndez, Mullin,  |                      |
          |                |      |Quirk               |                      |
          |                |      |                    |                      |
          |                |      |                    |                      |
          |----------------+------+--------------------+----------------------|
          |Appropriations  |15-0  |Gomez, Bigelow,     |                      |
          |                |      |Bonta, Calderon,    |                      |
          |                |      |Daly, Eggman,       |                      |
          |                |      |Eduardo Garcia,     |                      |
          |                |      |Gordon, Holden,     |                      |
          |                |      |Jones, Quirk,       |                      |
          |                |      |Rendon, Wagner,     |                      |
          |                |      |Weber, Wood         |                      |
          |                |      |                    |                      |
          |                |      |                    |                      |
           ------------------------------------------------------------------- 


          SUMMARY:  Changes California's specified date of conformity to  








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          federal income tax law from January 1, 2009 to January 1, 2015  
          and, thereby, generally conforms to numerous changes made to  
          federal income tax law during that six-year period.  Specifically,  
          this bill:  
          1)Conforms or partially conforms to the following federal  
            provisions relating to the:
             a)   Exclusion from gross income of qualified military base  
               realignment and closure fringe benefits.  [Worker, Homeowner,  
               and Business Assistance Act of 2009 (Public Law (P.L.)  
               111-92).]
             b)   Denial of deductions for annual fee on branded  
               prescription pharmaceutical manufacturers and importers.  
               [Patient Protection and Affordable Care Act (P. L. 111-148).]
             c)   Disclosure of information with respect to foreign  
               financial assets.  [Hiring Incentives to Restore Employment  
               (HIRE) Act (P.L. 111-147).]
             d)   Increase in additional tax on distributions from Archer  
               MSAs (Medical Savings Accounts) not used for qualified  
               medical expenses.  [Patient Protection and Affordable Care  
               Act (P.L. 111-148).]


             e)   Certain swaps not treated as Section 1256 contracts.   
               [Dodd-Frank Wall Street Reform and Consumer Protection Act  
               (P.L. 111-203).]


             f)   Special rule with respect to certain redemptions by  
               foreign subsidiaries.  [State Fiscal relief and Other  
               Provisions; Revenue Offsets (P.L.111-226).] 


             g)   Limitation on penalty for failure to disclose reportable  
               transactions based on resulting tax benefits.  [Small  
               Business Jobs Act of 2010 (P.L. 111-240).]


             h)   Removal of cellular telephones and similar  
               telecommunications equipment from listed property.  [Small  








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               Business Jobs Act of 2010 (P.L. 111-240).]


             i)   Special rules for annuities received from only a portion  
               of a contract.  [Small Business Jobs Act of 2010 (P.L.  
               111-240).]


             j)   Modification of the definition of "control" for purposes  
               of Internal Revenue Code (IRC) Section 249.  [Federal  
               Aviation Administration Modernization and Reform Act of 2012  
               (P.L. 112-95, Title IX).]


             aa)  Transfers of excess pension assets.  [Moving Ahead for  
               Progress in the 21st Century Act (MAP-21) (P.L. 112-141).]


             bb)  Modifications of provisions related to acquisitions,  
               disposition and aggregation of research credit expenditures.   
               [American Taxpayer Relief Act of 2012 (ATRA) (P.L. 112-240).]


             cc)  Indian general welfare benefits.  [Tribal General Welfare  
               Act of 2014 (P.L. 113-168).]


             dd)  Investment direction rule for 529 plans.  [The Achieving a  
               Better Life Experience Act of 2014 (P.L. 113-295).]


          2)Provides that the state shall not conform to certain federal  
            provisions, including, among others:
             a)   Deferral and ratable inclusion of income arising from  
               business indebtedness discharged by the reacquisition of a  
               debt instrument.  [American Recovery and Reinvestment Tax Act  
               of 2009 (P.L. 111-5).]   
             b)   Exception from the limitations applicable to a "loss  
               corporation" that experiences an "ownership change" and the  








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               extent to which it may offset taxable income in any  
               post-change taxable year by pre-change net operating loss  
               (NOL), certain built-in losses, and deductions attributable  
               to the pre-change period. [American Recovery and Reinvestment  
               Act of 2009 (P.L. 111-5).]


             c)   Increase in penalty for failure to file a partnership or  
               "S" corporation return.  [Worker, Homeowner, and Business  
               Assistance Act of 2009 (P.L. 111-92).]
             d)   Requirements for certain tax preparers to file tax returns  
               electronically. [Worker, Homeowner, and Business Assistance  
               Act of 2009 (P. L. 111-92).]
             e)   Modification of itemized deduction for medical expenses.  
               [Patient Protection and Affordable Care Act (P. L. 111-148).]
             f)   Qualified ABLE programs. [The Achieving a Better Life  
               Experience Act of 2014 (P.L. 113-295).]


             g)   Inflation adjustment for certain civil penalties.  [The  
               Achieving a Better Life Experience Act of 2014 (P.L.  
               113-295).]
             h)   Extension of Work Opportunity credit.  [Tax Increase  
               Prevention Act of 2014 (P.L. 113-295).]
          3)Conforms to the federal NOL rules that allow corporations  
            expecting an NOL carryback to extend the time for payment of  
            taxes for the preceding taxable year. 
          4)Makes technical changes, corrects cross-references and deletes  
            unnecessary language that was used to conform to federal law  
            changes subsequent to January 1, 2009 and prior to January 1,  
            2015. 


          5)States legislative intent to confirm the validity and ongoing  
            effect of SB 401 (Wolk), Chapter 14, Statutes of 2010.  


          6)Provides that specified technical corrections to federal income  
            tax laws incorporated by this bill into the state law are  








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            declaratory of existing law and shall be applied in the same  
            manner and for the same periods as specified for federal  
            purposes, or if later, the specified date of incorporation. 


          7)Takes effect immediately as an urgency statute, but will be  
            operative for taxable years beginning on or after January 1,  
            2015, except as otherwise provided. 


          EXISTING LAW conforms the state's Revenue and Taxation Code, in  
          many instances, to provisions contained in the federal IRC.   
          California does not automatically conform to new federal  
          legislation.  Rather, California may conform to specific  
          enactments at the federal level or may conform to the IRC as of a  
          specified date.  The last IRC to which California conformed was  
          that in effect as of January 1, 2009.  


          FISCAL EFFECT:  According to the Assembly Appropriations  
          Committee:


          1)Potentially significant General Fund (GF) costs to Franchise Tax  
            Board (FTB) to administer the changes to forms, procedures, and  
            systems.


          2)The two provisions in this bill have offsetting revenue impacts:


             a)   Estimated GF revenue increases of $15.2 million, $16.0  
               million, and $17.2 million in Fiscal Year (FY) 2015-16, FY  
               2016-17, and FY 2017-18, respectively, for the conforming  
               changes contained in provision 1) above; and


             b)   Estimated GF revenue decreases of $12.0 million, $8.0  
               million, and $3.0 million in FY 2015-16, FY 2016-17, and FY  








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               2017-18, respectively, for the conforming changes contained  
               in provision 2) above.


            As a result, estimated net GF revenue impacts are increases of  
            $3.2 million, $8.0 million, and$14.2 million in FY 2015-16, FY  
            2016-17, and FY 2017-18, respectively.


          COMMENTS:  


          1)Author's Statement.  According to the author's office, "AB 154  
            is a vital measure conforming state tax law to federal tax,  
            easing tax preparation for taxpayers and tax preparers alike.   
            This measure is intended to narrow differences between state and  
            federal law and provide relief to members of the United States  
            Armed Forces, businesses, and individual taxpayers."
          2)Arguments in Support.  The proponents argue that this bill "is a  
            critical first step toward reinstating comprehensive conformity,  
            and is important for taxpayers and the state."  They cite the  
            independent FTB Taxpayers' Right Advocate's 2014 report to the  
            Legislature stating that "non-conformity is a leading cause for  
            taxpayer error and non-compliance."  The proponents assert that  
            conformity "would reduce the number of different adjustments and  
            methodologies required when filing a state return, reducing the  
            potential for errors and penalty and interest assessments."  The  
            proponents note that, due to non-conformity with federal law,  
            the state must utilize more staff "to answer questions, conduct  
            separate audits, and initiate collections on errors."  All in  
            all, conformity "would reduce the need for many of these  
            activities, saving the state and taxpayers time and money."


          3)Arguments in Opposition:  None submitted.


          4)Conformity Decisions.  Full descriptions of each of the  
            conformity items in this bill are included in the FTB's annual  








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            report to the Legislature, "Summary of Federal Income Tax  
            Changes," that are available on the FTB's Web site.


          5)The Importance (and Conundrum) of Conformity.  When changes are  
            made to the federal income tax law, California does not  
            automatically adopt such provisions.  Instead, state legislation  
            is needed to conform to most of those changes.  Conformity  
            legislation is introduced either as individual tax bills to  
            conform to specific federal changes or as one omnibus bill to  
            conform to the federal law as of a certain date with specified  
            exceptions, a so-called "conformity" bill.  


          6)In the 1980s through the early 1990s, the state enacted  
            conformity legislation almost every year.  However, since the  
            mid-1990s, state conformity has taken place less frequently - in  
            1997, 1998, 2001, 2005, and 2010.  In 2008, AB 1561 (Charles  
            Calderon) of the 2007-08 Regular Session, a conformity bill,  
            required a two-thirds vote of the membership in each house.  AB  
            1561 did not advance from the Senate Floor because it failed to  
            secure 27 Senate votes.  A year later, in 2009, the Legislature  
            approved AB 1580 (Charles Calderon), but the Governor vetoed it  
            because of a "single provision inserted at the last minute" that  
            he could not support.  In 2010, the Legislature, in the Eighth  
            Extraordinary Session, passed SB 32 X8 (Wolk), which was similar  
            to AB 1580; the Governor also vetoed SB 32 X8 for the same  
            reason.  


            Finally, SB 401, the latest California-federal conformity bill,  
            was enacted in 2010 [SB 401 (Wolk), Chapter 14, Statutes of  
            2010]; and for the last five years, businesses, tax  
            practitioners and state tax agencies have been advocating for a  
            new bill to conform state tax laws to ever-changing federal tax  
            laws.  Businesses generally prefer conformity to federal tax  
            laws because it reduces their state tax compliance costs.  The  
            tax practitioners have argued that failure to conform to federal  
            law in some areas may lead to improper tax reporting to  








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            California and extra costs to the taxpayers.  As an example, a  
            taxpayer may roll-over balances in an Archer MSA to a new Health  
            Savings Account without triggering liability at the federal  
            level, but will unknowingly face penalties for the transfer  
            since it constitutes a disqualified distribution for state  
            purposes.  Finally, conformity legislation is also important to  
            state agencies.  Conformity eases the burden, and reduces the  
            costs, of tax administration because the state may rely on  
            federal audits, federal case law, and regulations.


            While state conformity to federal income tax provisions offers  
            certain advantages and reduces tax compliance costs, it can also  
            significantly impact state revenues.  Thus, it would be  
            difficult to achieve complete conformity with federal income tax  
            rules.  Often, the Legislature needs to increase tax rates to  
            fund a new or expand an existing credit or deduction allowed for  
            federal income tax purposes.  Tax credits, deductions, and  
            exemptions are designed to provide incentives for taxpayers that  
            incur certain expenses or to influence behavior, including  
            business practices and decisions.  Both the federal and state  
            governments often use tax policy to influence taxpayers'  
            behavior.  However, federal tax incentives may not necessarily  
            produce the same effect on the taxpayer's behavior at the state  
            level if adopted by the state government as they do on the  
            federal level.  Furthermore, unlike the Federal Government,  
            California cannot print money to subsidize its budget.   
            Therefore, the Legislature must be mindful of fiscal effects of  
            conforming to federal tax laws, even if those may not trigger  
            significant fiscal concerns in Congress. 


            The Legislature continues to struggle with tax conformity and  
            this bill represents the most recent attempt to ease the  
            hardship on taxpayers and tax practitioners by bringing the two  
            tax codes closer together. 


          7)Homeowner Assistance Program Payment for Employees and Members  








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            of the Armed Forces.   Under federal law, the Secretary of  
            Defense is authorized to provide assistance or reimbursement for  
            losses in the sale of family dwellings by members of the Armed  
            Forces living on or near a military installation in situations  
            where there was a base closure or realignment and the property  
            was the owner's primary residence, among other requirements.   
            These amounts are excluded from gross income for federal income  
            tax purposes and are not considered wages for Federal Insurance  
            Contributions Act tax purposes.  The excludable amount is  
            limited to the reduction in the fair market value of the  
            property.  Under state law, however, these assistance payments  
            are subject to the state income tax.  This bill would exclude  
            those amounts from the state income tax, in conformity with the  
            federal law. 
          8)Annual Fee on Branded Prescription:  Manufacturers and  
            Importers.  Under federal law effective starting in 2010,  
            certain entities engaged in the business of manufacturing or  
            importing branded prescription drugs for sale to any specified  
            government program or pursuant to coverage under any such  
            program are subject to an annual fee.  The collected revenues  
            are credited to the Medicare Part B Trust fund.  The fee amount  
            imposed on each individual entity fluctuates.  The aggregate fee  
            amount is set by the federal government for each calendar year  
            and is apportioned among the covered entities based on the  
            entity's relative share of branded prescription drug sales taken  
            into account during the previous calendar year.  The fees are  
            treated as excise taxes for purposes of the federal income tax  
            law and are considered a non-deductible tax as described in IRC  
            Section 275(a)(6).  As discussed, California conforms to the IRC  
            as of the specified date - January 1, 2009.  The federal  
            provision imposing the fee in question was enacted in 2010,  
            after the "specified date" of January 1, 2009.  Therefore, the  
            fee is deductible under the Personal Income Tax Law.  Because of  
            the interaction between the federal and state income tax laws  
            and the lack of conformity, the state is currently subsidizing  
            the fee imposed by the federal government by allowing a  
            deduction to the affected entities for purposes of calculating  
            their California income tax liability.  This bill would  
            eliminate this subsidy and conform to the federal tax treatment  








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            of the fee as a nondeductible tax. 


          9)NOL Carryback Procedures.  On September 30, 2008, the Governor  
            signed AB 1452 (Budget Committee), Chapter 763, Statutes of  
            2008, to implement provisions of the 2008-09 Budget agreement.   
            Among other things, AB 1452 suspended the NOL deduction for the  
            2008 and 2009 tax years (except for taxpayers with net business  
            income of less than $500,000), authorized NOL carrybacks for  
            losses incurred in 2011 or later tax years, and expanded the NOL  
            carryforward period from 10 years to 20 years for losses  
            incurred after January 1, 2008.  AB 1452 authorized taxpayers to  
            use carrybacks to offset their income during the two prior tax  
            years.  The carryback provisions were scheduled to phase in,  
            with 50% of any 2011 NOLs available for carryback, 75% of any  
            2012 NOLs, and full carryback for NOLs in subsequent years.  


            Two years later, when the Legislature was facing another  
            difficult budget, SB 858 (Budget and Fiscal Review Committee),  
            Chapter 721, Statutes of 2010, was enacted.  SB 858 further  
            suspended the NOL deductions for the 2010 and 2011 taxable years  
            and delayed the implementation of the NOL carrybacks provisions,  
            among other changes.  Specifically, SB 858 disallowed NOL  
            carrybacks for any NOLs attributable to taxable years beginning  
            before January 1, 2013.  Consequently, under existing law, the  
            carryback provisions are scheduled to phase in with 50% of any  
            2013 NOLs available for carryback, 75% of any 2014 NOLs, and  
            full carryback for NOLs attributable to tax year 2015 and  
            thereafter.


            Federal law allows a corporation anticipating a current-year NOL  
            to file Form 1138 to postpone the payment of all or some of its  
            income tax from the immediately preceding year.  Generally, to  
            take advantage of NOLs, taxpayers have to first wait for the  
            conclusion of the tax year and then file an amended return or  
            ask for a refund.  In this case, a corporation can file for a  
            postponement of payment of taxes from the preceding tax year in  








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            the current (unfinished) tax year.  By allowing a corporation to  
            postpone part or all of the payments during the year, companies  
            can keep more cash on hand to pay debts or make payroll.  This  
            bill would conform California law to the federal rules allowing  
            a corporation expecting an NOL carryback to extend the time for  
            payment of taxes for the immediately preceding taxable year.  


          1)SB 401 and Proposition 26 (2010).  Proposition 26 was approved  
            by the voters on November 2, 2010.  By amending California  
            Constitution Article XII A, Section 3, Proposition 26 expanded  
            the definition of a "tax" to include many state and local  
            government assessments classified as "fees" and provided that  
            any change in state statute that results in any taxpayer paying  
            a higher tax must be passed by a two-thirds vote of the  
            Legislature.  Proposition 26 also included a provision stating  
            that any state law adopted between January 1, 2010 and November  
            2, 2010 that conflicts with Proposition 26 would be repealed one  
            year after the proposition's approval.  This repeal would not  
            take place, however, if the Legislature passed the law again in  
            compliance with Proposition 26.  There is significant ambiguity  
            regarding the scope and meaning of this provision.  According to  
            the FTB legal staff, there is no basis to believe that SB 401 is  
            not a valid law, at least for the 12-month period following the  
            adoption of Proposition 26.  Furthermore, California  
            Constitution Article III, Section 3.5 requires the FTB to  
            enforce SB 401 until an appellate court has made a determination  
            that some portion or all of SB 401 is "void" pursuant to  
            Proposition 26 and, therefore, unenforceable.  [FTB publication,  
            Legal Division Guidance 2011-01-01 "Impact of Proposition 26 on  
            SB 401 (Wolk)".]  Despite the FTB pronouncement, some taxpayers  
            are seeking reassurance that the last conformity bill stands on  
            firm legal ground, which this bill would provide.  Specifically,  
            this bill includes a legislative intent provision confirming the  
            validity and ongoing effect of SB 401.


          Analysis Prepared by:                                               
                          Oksana Jaffe / REV. & TAX. / (916) 319-2098  FN:  








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