BILL ANALYSIS                                                                                                                                                                                                    



                                                                     AB 154


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          CONCURRENCE IN SENATE AMENDMENTS


          AB  
          154 (Ting)


          As Amended  


          2/3 vote. Urgency


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          |ASSEMBLY:  | 75-0 |(June 3, 2015) |SENATE: |39-0  |(August 31,      |
          |           |      |               |        |      |2015)            |
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          |           |      |               |        |      |                 |
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          Original Committee Reference:  REV. & TAX.




          SUMMARY:  Changes California's specified date of conformity to  
          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.  


          The Senate amendments:


          1)Add the following exceptions to the Large Corporate  
            Understatement Penalty (LCUP):


             a)   An increase in tax from a proper election under Internal  
               Revenue Code (IRC) Section 338 as reported on the first  
               amended return; and,








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             b)   An understatement attributable to either of the  
               following:


               i)     The Franchise Tax Board's (FTB) imposition of an  
                 alternative apportionment or allocation method under the  
                 authority of Revenue and Taxation Code (R&TC) Section  
                 25137; or,


               ii)    A change to the taxpayer's federal method of  
                 accounting where the due date of the return is before the  
                 Secretary of the Treasury's determination to change the  
                 accounting method. 


          2)Rearrange the changes to R&TC Section 19167, and make  
            additional technical and conforming changes.
          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.  




          AS PASSED BY THE ASSEMBLY, this bill:  
          1)Conformed or partially conformed 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).]








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             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  
               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).]








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             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)Provided 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  
               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 (Achieving a Better Life Experience)  
               programs.  [The Achieving a Better Life Experience Act of  








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


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


          FISCAL EFFECT:  According to the Senate Appropriations  
          Committee, the Franchise Tax Board (FTB) estimates that the  
          bill's cumulative revenue impact from all its provision would be  
          General Fund increases of $3 million in 2015-16, $7.8 million in  
          2016-17, and $14 million in 2017-18.  This bill would not impact  
          FTB's administration costs.


          COMMENTS:  








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          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)Conformity Decisions.  Full descriptions of each of the  
            conformity items in this bill are included in the FTB's annual  
            report to the Legislature, "Summary of Federal Income Tax  
            Changes," that are available on the FTB's Web site.


          3)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.  


          4)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  








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            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 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  








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            hardship on taxpayers and tax practitioners by bringing the  
            two tax codes closer together. 


          5)Homeowner Assistance Program Payment for Employees and Members  
            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. 
          6)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  








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            affected entities for purposes of calculating their California  
            income tax liability.  This bill would eliminate this subsidy  
            and conform to the federal tax treatment of the fee as a  
            nondeductible tax. 


          7)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  








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            corporation can file for a postponement of payment of taxes  
            from the preceding tax year in 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. 


          8)LCUP.  This bill makes changes to the state's LCUP, which only  
            applies to large corporate taxpayers that significantly  
            understate tax on their original returns.  The changes would  
            provide that any amount of tax reflecting a proper 338  
            election does not count toward the understatement amount for  
            purposes of the penalty.  Additional, no penalty shall apply  
            when FTB imposes an alternative apportionment formula under  
            R&TC Section 25137, or as a result of a change in the  
            taxpayer's federal accounting method where the due date of the  
            return is before the Secretary of the Treasury's determination  
            to change the accounting method.  The LCUP was enacted in 2008  
            as part of the package aimed at reducing the budget deficit.   
            It is a strict liability penalty, meaning that the taxpayer  
            has no appeal rights.  The penalty applies even if the  
            understatement does not result from any wrongdoing on the part  
            of the taxpayer.  These changes will provide taxpayer relief.   
               
          9)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  








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            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:  
          0001887