BILL ANALYSIS                                                                                                                                                                                                    



                                                          SB 455  
                                                         Page 1

Date of Hearing:  July 14, 1997

            ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
                       Louis Caldera, Chair

           SB 455 (Alpert) - As Amended:  July 10, 1997

Majority vote required.  Fiscal Committee.

  SENATE FLOOR VOTE 38-0          SENATE REVENUE AND TAXATION8-0       


  SUBJECT  :  Income taxes; conformity.  As amended, conforms  
California income tax laws to selected counterpart provisions of  
the federal Internal Revenue Code added to federal law between  
January 1, 1993 through January 1, 1997.

  SUMMARY  :  Specifically,  this bill  as amended: 

1) Conforms to selected counterpart provisions of the federal  
   Internal Revenue Code (IRC) described under Comments  
   1/1A/1B/1C/1D/1E, below.  

  EXISTING LAW  :  Existing law [R&T Code Section 17024.5(a)(1)(J)]  
provides that the federal Internal Revenue Code in effect January  
1, 1993 governs parallel provisions in the Personal Income Tax  
(PIT) and Bank & Corporation Tax (B&CT) Laws, unless differences  
from the federal Internal Revenue Code are specified.

Thus, many federal Internal Revenue Code changes made in 1993,  
1994, 1995 and 1996 do not now apply under California's two income  
tax laws.

  FISCAL EFFECT  :  Based on Franchise Tax Board (FTB) Economic &  
Statistical Research Bureau estimates for specific proposals, the  
following fiscal year revenue losses or gains are projected by the  
FTB:

                 FY  1997-1998       1998-1999     1999-2000   

1)   Spreadsheet $10   m. loss     $ 3   m. loss $23    m. loss 

2)    CIAC      $ 2.5 m. loss     $ 2.5 m. loss $ 2.5  m. loss

      TOTAL:       $12.5 m. loss      $ 5.5 m. loss $ 25.5 m. loss  
 

 1) The revenue loss/gain estimates for the various provisions in  
    this bill are included in the attached FTB spreadsheet ["SB  
    455 (Alpert)], except for "CIAC."

 2)  The revenue loss estimate for the "CIAC" provision (discussed  
under Comment 1E(viii), below) is contained in the attached May 12  
FTB memo ("CIAC Conformity Estimates - Effective Date Issue").

  COMMENTS  :







                                                          SB 455  
                                                         Page 2


 1) The provisions in this bill conform California income tax law  
    to the federal IRC in the following areas:

1A)  Small Business Job Protection Act of 1996 ("SBJPA")  :

        (i)      Estimated penalty relief  :  SBJPA and this bill  
           include provisions waiving penalties for underpayment  
           of estimated taxes where, at the time the estimated  
           payment was made, the payment was sufficient under the  
           law that existed at the time, prior to the conformity  
           with federal provisions.

       (ii)      Small business expensing  :  SBJPA and this bill  for  
           Personal   Income Tax (PIT) Law filers only  , increase the  
           amounts small businesses may immediately deduct in a  
           year from the existing law amounts of $12,500 in  
           1997/$15,000 in 1998 to:

                1997 -- $18,000
                1998 -- $18,500
                1999 -- $19,000
                2000 -- $20,000
                2001 -- $24,000 
                2002 -- $25,000

Note:  This bill does not extend this federal conformity for small  
business expensing to  B&CT Law filers  .

      (iii)      Storage of product samples  :  Treats home storage  
           of product samples as eligible for the existing  
           federal/California law deductions for business use of  
           the taxpayer's home.

      (iv)   Dues paid to agricultural/horticultural organizations  :  
     if annual membership dues to a tax-exempt  
    agricultural/horticultural organization do not exceed $100,  
    then no portion of the dues will be treated as "unrelated  
    business income."
     
       (v)   Fish purchasers for resale must report cash over $600  :  
     Persons who buy fish for resale from a person in the business  
    of fishing must submit information returns to the federal  
    Internal Revenue Service (IRS) and under this bill, the FTB.

       (vi)      Involuntary conversions in disasters  :  Business  
           owners who are forced by a presidentially declared  
           disaster to change businesses no longer have the  
           conversion treated as a "taxable event", meaning that  
           any gain must be recognized; under this bill, the  
           conversion due to a declared disaster only would be  
           treated as a continuation of the pre-disaster business.

      (vii)      Adjusted basis on involuntarily converted  
           property  :  When property is involuntarily converted  
           (e.g., an insured business is destroyed by fire), and  







                                                          SB 455  
                                                         Page 3

           the taxpayer replaces the destroyed property by  
           purchasing stock in a business, instead of acquiring  
           the replacement property outright, the taxpayer is  
           deemed, for tax purposes, to have purchased the stock  
           at the same price that he purchased the destroyed but  
           insured business.

     (viii)      Gas station depreciation  :  All gas stations get  
           15-year depreciation, regardless of whether  
           food/convenience items are sold at the station; prior  
           IRS practice gave 15-year treatment only if 50% of both  
           sales and square footage were gas-related.
                [The California Independent Oil Marketers  
           Association (CIOMA) supports this bill because of this  
           provision].

       (ix)      Abandoned lessee improvements  :  Lessor who  
           disposes of 
    improvement made by lessor for the lessee gets the adjusted  
    basis of the improvement in determining the gain  if the  
    improvement is   abandoned at the end of the lease  .

(NOTE:  Identical to AB 1155 (Shelley) (passed by the Assembly  
77-0 and now pending in the Senate).

        (x)  Employee housing at medical centers  :  Excludes from  
    income housing provided to employees at medical centers;  
    similar to existing law income exclusion for university  
    employee housing.

       (xi)  Lump sum distributions from pension plans :  Effective  
    1999, repeals ability to average over 5 year period.

      (xii)  Death benefit exclusion  :  Repeals  
    exclusion-from-income treatment for employer-provided death  
    benefits.

     (xiii)  Pension plan provisions :  conforms to federal SBJPA  
    methods of taxing annuity distributions; states that persons  
    aged 70.5 who are not retired are not required to take  
    distributions from pension plans (IRA distributions remain  
    mandatory); conforms to federal definition of "highly  
    compensated employee" used to determine whether plans  
    discriminate in favor of highly paid employees; modifies  
    participation requirements so that only 2 employees need  
    participate; allows nondiscrimination test to be made on the  
    basis of prior-year, rather than current-year, deferrals made  
    by non-highly-compensated employees; changes definition of  
    "compensation" to include deferrals made to 401(k), 457 or  
    cafeteria plans; eliminates special aggregation rules for  
    retirement plans maintained by self-employed individuals;  
    expands the definition of "rural electric cooperative" to  
    include public utility district; allows rural co-op retirement  
    plans to permit distributions after age 59.5 or on account of  
    hardship; modifies limits on contributions and benefits in  
    defined benefit plans administered by governments; allows  







                                                          SB 455  
                                                         Page 4

    continued employer contributions on behalf of disabled  
    employees as long as such contributions are available for all  
    employees, regardless of compensation; indexes in $500  
    increments the dollar limit on contributions to "457" plans  
    maintained by governments and tax-exempt organizations;  
    corrects interest rate and actuarial assumptions used in  
    adjusting benefits and retirement limitations that were  
    originally contained in federal General Agreement on Tariffs &  
    Trade (GATT) legislation; salary reduction agreements for  
    403(b) plans given the same compensation limit rules as 401(k)  
    plans; allows participant and participant's spouse to waive  
    the 30-day minimum waiting period for distributions; repeals  
    overall limit on contributions for persons who simultaneously  
    participate in "defined benefit" and "defined contribution"  
    plans; clarifies that "457" plan length-of-service  
    requirements do not apply to length-of-service awards to  
    volunteer firefighters; makes technical changes to  
    nondiscrimination rules used in certain pension plans; makes  
    technical changes regarding pension plans administered by  
    churches; permits self-employed ministers to set up a  
    qualified church pension plan.

      (xiv)  Savings Incentive Match Plans for Employees (SIMPLE)  :   
    conforms to federal law allowing employers with 100 or fewer  
    employees to 
    set up SIMPLE retirement programs, in which employers must  
    match employee contributions; employees may contribute up to  
    $6000, and employers can match up to 3% of salary, or as  
    little as 1% in any 2 of 5 years, or 2% each year.

       (xv)  Tax-exempt organizations can offer 401(k) savings  
    plans  :  they couldn't under prior federal law; this change  
    conforms California law to the federal SBJPA which allows them  
    to do so. 

      (xvi)  Requires that "457" retirement plans maintained by  
    governments   must be held in trust for exclusive benefit of  
    employees  .
     
     (xvii) Modifies the "income forecast" depreciation method  ,  
    which is the method generally applicable to motion pictures,  
    books, patents, sound recordings and video games, by:  (i)  
    including all income estimated to be generated by the  
    property; (ii) allowing costs incurred more than 10 years  
    after the property is placed in service to be written off in  
    the year incurred; and (iii) requiring that in the third year  
    after the depreciated property is placed in service (i.e.,  
    after the movie is released), the claimed depreciation is  
    compared with the depreciation that would have been claimed  
    had the actual income been known at the beginning.

    (xviii)  Clarifies that punitive damage awards are included in  
    income  .

      (xix)  Repeals partial exclusion from income for subsidies  
    provided by a   utility for installing energy conservation  







                                                         SB 455  
                                                         Page 5

    measures in   nonresidential structures  .  California's income  
    exclusion for residential structure energy conservation  
    measures expired January 1, 1995, and has not been renewed.   
    AB 873 (Takasugi) (now a 2-year bill) attempts to address  
    these and related issues.

       (xx)  Financial Asset Securitization In  v  estment Trusts  .   
    Known as "FASITs", these entities facilitate the  
    securitization of credit card receivables, auto loans, and  
    home equity loans.  As a flow-through entity, all income or  
    losses to the FASIT pass through to the owner.  Because the  
    FASIT device accelerates the recognition of income, it results  
    in FTB-estimated revenue gains of $3 million in FY 1997-1998;  
    $2 million in FY 1998-1999; and $500,000 in 1999-2000.   
    However, FTB projects losses which would "approximate $1  
    million by 2005-06, and increase roughly an additional  
    $200,000 each year thereafter."
      
      (xxi)  Conversion of common trust funds to Regulated  
    Investment   Companies  (RICs).  Allows bank common trust funds  
    to be converted to mutual funds (Regulated Investment  
    Companies) without a gain or loss being recognized by either  
    entity.  Common trust funds and RICs are similar in that both  
    are pass-through entities where income and losses are passed  
    through to the shareholders.

                [The California Bankers Association supports this  
           bill because of the provisions described in (xx) and  
           (xxi) above].

     (xxii)  Adoption assistance  :  excludes from income up to $5000  
    per year in employer-provided adoption assistance, or up to  
    $6000 in employer-provided adoption assistance for the  
    adoption of a special needs child.  (NOTE:  depending upon the  
    taxpayer's 
    bracket, this is the equivalent of a $750-$2400 federal tax  
    credit, or at the 9.3% California PIT rate, a $450-$550 state  
    tax credit.)

1B)  Health Insurance Portability and Accountability Act of 1996  
("HIPAA")  

        (i)      Excludes self-insurance payments for personal  
           injury or sickness   from taxable income  :  thus,  
           self-insured get the same income exclusion available to  
           persons who buy insurance and receive payouts.

      (ii)   Long-term care insurance  is added to the category of  
    insurance which qualifies for the existing law 25% deduction  
    available to the self-employed.

      (iii)  Excludes from taxable income long-term care insurance  
    benefits  .

       (iv)  Imposes information reporting requirements on  
    companies paying   long-term care benefits  .







                                                          SB 455  
                                                         Page 6


        (v)  Allows penalty-free IRA withdrawals for medical  
    expenses or for   insurance  that exceed 7.5% of Adjusted Gross  
    Income (AGI) by individuals unemployed for 12 weeks or more.

 1C)  Revenue Reconciliation Act of 1993 (President Clinton's  
    Deficit Reduction   Legislation)  .

        (i)  Purchases of Specialized Small Business Investment  
    Company   (SSBIC) securities  .  Allows individuals and "C  
    corporations" to "roll over" any capital gains generated from  
    the sale of publicly traded stock  if the proceeds of the sale  
    are used to purchase   stock in a SSBIC within 30 days of the  
    stock sale  .

       (ii)  Real estate investment by pension funds  is permitted  
    to a greater extent than under previous federal/California  
    law.

      (iii)  Substantiation requirements for charitable donations  :   
    conforms to federal law, and provides that California law is  
    satisfied if the federal requirement is met.

       (iv)  Provisions to prevent conversion of ordinary income  
    into capital   gains  :  The 1993 federal law made five changes  
    which treat as ordinary income the income which results from  
    transactions designed to move otherwise ordinary income (taxed  
    at 40% in the highest federal bracket) to capital gain income  
    (taxed at a maximum rate of 28% under federal law).  These  
    transactions are known as conversion transactions, market  
    discount transactions, stripped preferred stock, investment  
    interest transactions, and partnership inventory transactions.  
     

        (v)  Estimated tax penalties for high income individuals  :   
    requires penalties if estimated tax payments do not equal at  
    least 110% of prior year tax liabilities, if taxpayer has  
    income of $150,000 per year or more.

       (vi)  Accuracy-related penalties  :  permits existing law  
    penalties for substantial misstatement of income items by  
    large taxpayers to be avoided only where there is a  
    "reasonable basis" for the taxpayer 
    to have taken the position.  Also, reduces from $10 million to  
    $5 million the threshold for application of the "substantial  
    valuation misstatement" penalty relating to transfer pricing  
    adjustments.

 1D)  General Agreement on Tariffs & Trade Act of 1994  :

        (i)  Excess pension assets  can be used for retiree health  
    benefits without subjecting the employer to tax.

       (ii)  Rounding rules for cost of living allowances  in  
    pension plans; indexes benefits/additions in $5000 increments,  
    and limits on elective deferrals in $500 increments.







                                                          SB 455  
                                                         Page 7


      (iii)  Partnership distributions of securities  :  when  
    partnership distributes marketable securities to a partner,  
    the partner is taxed on the amount represented by the fair  
    market value of the security on the date of the distribution,  
    plus any money received, minus the partner's basis in the  
    partnership interest.
     
       (iv)  Substantial understatement penalty  :  for corporate  
    taxpayers with "tax shelter items", penalties for "substantial  
    understatement" will apply unless the taxpayer demonstrates  
    reasonable cause for the understatement and good faith.

        (v)  Pension plan funding  :  incorporates federal law  
    changes regarding funding levels required of defined benefit  
    pension plans.

 1E)  Other Conformity Issues In This Bill  :

        (i)  Amortization of child care facilities  :  repeals  
    existing California law permitting five-year amortization  
    (write-off) of certain child care facilities; parallel federal  
    law provision repealed in 1981.

       (ii)  Deferral of deposits for ship building  :  is eligible  
    for vote off the Suspense File May 19, 199: conforms to  
    federal law deferral of tax on deposits into/interest earned  
    by capital construction funds earmarked for merchant marine  
    and commercial fishing vessel construction.

      (iii)  Exempt Polish bonds from Original Issue Discount (OID)  
    treatment  :  federal law provides special treatment of interest  
    from bonds with below-market interest rates issued by Israel  
    and Poland.  Existing California law conforms with the  
    treatment for Israeli bonds, but not with Polish bonds.  This  
    bill/SB 455 would conform with federal treatment of interest  
    from Polish bonds.

       (iv)  Political convention program advertising denied  
    deduction  :  conforms with existing federal law, which  
    disallows a business expense deduction for advertising which  
    appears in political convention programs and similar  
    publications.

        (v)  Seven-year amortization of forest land improvements  :   
    Maximum $10,000 in forest land improvements may be written off  
    over seven years; existing California law has no dollar cap  
    and allows a five year write off.

       (vi)  Required filing of federal information return by  
    officers of   controlled foreign corporations  :  Officers,  
    directors and certain major shareholders of foreign personal  
    holding companies would be required to file a copy of the  
    federal Form 5471 information return.

      (vii)  100% corporate estimated payments starting in 1998  :   







                                                         SB 455  
                                                         Page 8

    1993 federal law required corporations to make estimated  
    payments based on 100% of the current year's tax.  Last year's  
    SB 38 (Lockyer) conformed to this requirement, but only in  
    1999, and allowed 1998 estimated payments to be based on 98%  
    of current year's tax.  This bill would accelerate the 100%  
    estimated payment requirement by one year, from 1999 to 1998;  
    to put it another way, corporate taxpayers in 1998 will have  
    pay 2% more "up front." 

    (viii)   Eliminating the tax on contributions in aid of  
    construction for   water utilities;  provision is sponsored by  
    the California Water Association (CWA).  The federal SBJPA  
    repealed 1986 federal law which included contributions in aid  
    of construction (CIAC) in the gross income of water utilities;  
    before 1986, CIAC had been treated as a contribution to  
    capital rather than as taxable income under federal law.   
    California law prior to a 1991 FTB ruling treated CIAC as a  
    contribution to capital; the 1991 FTB ruling held that CIAC  
    were income, and should be treated as income retroactively to  
    1977.  AB 1757 (Klehs) (Statutes of 1991, Chapter 604)  
    provided that CIAC should be treated as income only  
    prospectively.   This bill as amended would treat CIAC as  
      contributions to capital, and not as taxable income  .

    Water utilities are highly capital intensive.  Historically,  
    both privately-owned and publicly-owned water utilities have  
    received capital for new construction directly from new  
    customers (sometimes real estate developers), in order to  
    protect existing customers from rate increases; this transfer  
    of property is known as a CIAC.  The California Public  
    Utilities Commission (CPUC) requires water utilities to  
    collect the taxed portion of CIAC from the developers/new  
    customers;  thus, this bill as   amended will relieve water  
    customers from the burden of paying this tax  .

    As indicated above, CIAC is no longer taxed under federal law.  
     This bill as amended will eliminate the need for water  
    companies to record CIAC under two different tax systems.

 2)  The following provisions in AB 1044 (Revenue & Taxation  
    Committee), as   passed by the Assembly Committee on Revenue &  
    Taxation May 19, 1997, are   not in this bill :

    A)     immediate deductibility of expensing for  incorporated   
       small businesses under the Bank & Corporation Tax (B&CT)  
       Law;

    B)     conformity for calendar year 1995 only regarding sales  
       of stock to employee stock ownership plans or worker-owned  
       cooperatives; and,

    C)     denying deductions for club dues, and/or executive  
       compensation in excess of $1,000,000 per year.    

    These provisions are explained in greater detail under  
    Comments 2A/2B/2C, below.  These provisions -- and the  







                                                          SB 455  
                                                         Page 9

    provisions that are parallel to this bill's provisions -- were  
    removed by the Assembly Committee on 
Appropriations, and intent language was substituted.  In intent  
language form, AB 1044 passed the Assembly 47-24.  AB 1044 has  
been amended in the Senate to include all provisions removed by  
Assembly Appropriations, technical amendments suggested by FTB,  
and the R&D credit conformity provisions from AB 1499 (Caldera).

2A)  Immediate deductibility for equipment purchases made by small  
    businesses   extended to B&CT Law filers  .  This bill permits  
    Personal Income Tax law   filers only  to immediately deduct from  
    taxable income the amounts set forth in the federal SBJPA.  AB  
    1044 includes not only this bill's provisions,  but also  
    extends them to B&CT Law filers  .  Thus, under AB 1044 -- but  
    not this bill --  all small businesses (incorporated,  
    unincorporated, subchapter S, limited liability companies)  
    will be able to immediately deduct the federal law equipment  
    purchase amounts  on both   federal and California returns  , as  
    follows:

    1998 -- $18,500;
    1999 -- $19,000;
    2000 -- $20,000;
    2001 -- $24,000;
    2003 -- $25,000.
  
NOTE: Immediate deductibility is more favorable to the taxpayer  
than any depreciation schedule, because the taxpayer can deduct  
the entire amount of the qualifying purchase all at once.

    FTB projects the following revenue losses:

    FY 1997-1998:  $30 million
    FY 1998-1999:  $20 million
    FY 1999-2000:  $15 million

    See FTB E&SRB Memo of January 31, 1997 to Committee staff  
    ("Bank & Corporation Tax").

2B)  Treatment of sales of stock to Employee Stock Ownership Plans  
    (ESOPs) and   worker-owned cooperatives  .  This provision is  
    sponsored by The Wornick Company and is supported by The ESOP  
    Association of America.  ESOPs and worker-owned cooperatives  
    allow employees to become partial, or in some cases, full,  
    owners of the company which is their employer.  ESOPs  
    specifically allow employees as a group to voluntarily invest  
    in the corporate stock of their employer as part of their  
    retirement plan; the company's earnings are used to buy the  
    ESOP stock for the employees commensurate with their  
    compensation.  The ESOP concept was developed by University of  
    California economist Louis Kelso, who along with associate Ron  
    Ludwig started a seedbed of ESOP industries in San Francisco;  
    the concept later spread nationwide.     

    Existing federal law (IRC sections 1042 and 404(k))) gives tax  
    incentives for ESOP formation, by allowing:  (i) employers to  







                                                          SB 455  
                                                         Page 10

    deduct from taxable income dividends paid to the ESOP or  
    cooperative; and, (ii) for closely held, non-public companies,  
    employers to sell stock to the ESOP or cooperative without  
    recognition of gain if the ESOP or cooperative immediately  
    reinvests the proceeds of the sale in other corporate stock.
    
    As part of SB 38 (Lockyer/Pringle) (Statutes of 1996, Chapter  
    954; Revenue & Taxation (R&T) Code sections 18042/24611),  
    California conformed to these provisions, effective January 1,  
    1996.  Prior (1988) legislation 
conformed to these provisions effective January 1, 1990, but  
ending December 31, 1994.   Thus, for calendar year 1995 only,  
California does   not conform to federal law tax treatment of ESOPs  .  
 This provision would so conform. 

    By enacting SB 38 and its 1988 predecessor, the Legislature  
    has already given its seal of approval to ESOPs.  The 1988  
    legislation conformed on a sunset basis through the end of  
    1994.  In 1996, California again conformed, but the SB 38  
    language making the re-enactment of conformity effective  
    January 1, 1996 left ESOPs formed in 1995 out of conformity  
                                                                for one anomalous year.  This occurred only because SB 979  
    (Solis) did not pass the Assembly Appropriations Committee in  
    August 1996; instead, the provisions of SB 979,  without the  
    January 1, 1995 effective date, were   included in SB 38  . 
  
    See Chris Micheli and James Clark, "California Conforms Again  
    on ESOPs -- But Not For '95",  State Tax Notes  , October 21,  
    1996, at 1155-1156. 

    FTB estimates a one-time $4 million revenue loss from this  
    provision in FY 1997-1998, and zero losses thereafter.  FTB  
    E&SRB Memo of May 27, 1997 to Committee staff.
     
2C)   Denial of deductions for club dues, and executive  
compensation in excess   of $1 million  .  These provisions are  
identical to AB 1291 (Strom-Martin), as introduced.  AB 1044  
conforms California income tax laws (PIT & B&CT Laws) to the  
federal Revenue Reconciliation Act of 1993 (Public Law 103-66)  
("RRA"), by denying taxpayers business expense deductions for:   
(i) club dues; and (ii) in the case of a publicly held  
corporation, employee pay in excess of $1 million to the Chief  
Executive Officer (CEO) or the next four highest compensated  
officers, if their salaries are required by federal securities law  
to be reported to shareholders.   Existing California law does not  
conform to either federal RRA provision  , meaning that:  (i)  
employee pay in any amount is fully deductible; and (ii) club dues  
are deductible if the taxpayer proves that the dues are "directly  
related" to the conduct of the taxpayer's business; and (ii) the  
club does not restrict membership on the basis of race, color,  
religion, ancestry, national origin, sex or age.

    FTB projects the following  revenue gains  from these  
    provisions:

     Clubs      $ 12 m. GAIN       $ 8 m. Gain  $ 8 m. GAIN







                                                          SB 455  
                                                         Page 11

     Ex Pay     $  4 m. GAIN       $ 4 m. Gain  $ 5 m. GAIN

     TOTAL GAIN: $ 16 m.            $12 m.      $13 m.

     See FTB Bill Analysis of AB 1291 (Strom-Martin) as  
introduced.  AB 1291, as amended, passed the Assembly 41-37, and  
is now pending in the Senate.  AB 1291 as amended denies all  
deductions for executive compensation in excess of $1 million, and  
any deduction for club dues  in excess of $500  per year  .

 3)  When AB 1291 was heard before the Assembly Committee on  
Revenue & Taxation, opponent California Chamber of Commerce stated  
in its March 25, 1997 letter to the Committee:  "[W]hen there are  
conformity provisions which increase taxes . . . we believe that  
they should be used to offset tax cuts from conformity" and that  
"[the California Chamber of Commerce] believe[s] that California  
should conform to federal tax laws as much as possible to ease the  
burden of compliance with two different tax 
systems."  Proponent California Tax Reform Association, it is  
April 3, 1997 support letter, stated:  "We support [AB 1291],  
which would provide for federal conformity on important pieces of  
the 1993 [federal] tax act . . . We hope that [AB 1291] becomes  
part of a counterbalancing federal conformity effort, and we have  
referenced it with regard to all of the other federal conformity  
bills which provide for tax losses."  AB 1044 arguably supports  
the positions stated by both the California Chamber of Commerce  
and the California Tax Reform Association, with respect to AB  
1291.                               

 4)  AB 1044 as amended June 25, 1997 also includes the  Research &  
Development   credit conformity provisions  from AB 1499 (Caldera),  
which passed the Assembly Committee on Revenue & Taxation 10-0 and  
is now held in suspense at the Assembly Committee on  
Appropriations.

 5)  AB 1044 will be heard by the Senate Committee on Revenue &  
Taxation July 16, 1997. 

 6) Spidell Publishing, a major publisher of California tax  
    publications, supports this bill (SB 455), stating:   
    "Conformity to federal law simplifies tax return preparation,  
    and allows tax professionals to become proficient at one set  
    of rules.  With the lack of a major conformity bill for the  
    past several years, California's tax laws have become  
    increasingly difficult to understand.  With this lack of  
    understanding comes an increase in taxpayer noncompliance.   
    This, in turn, results in increased governmental costs  
    associated with tax audits and 
    collections . . . ."

    The California Society of Enrolled Agents expressed similar  
    sentiments.

6A)  The Franchise Tax Board members have voted to support this  
    bill. 








                                                          SB 455 
                                                         Page 12

6B)  The California Taxpayers Association (Cal-Tax) supports this  
bill, believing that it "is a fair and balanced approach to the  
conformity problem, bringing the state into closer conformity with  
federal law, and avoiding divisive issues that could derail the  
bill."  In contrast, Cal-Tax opposes AB 1044, solely because of  
the "club dues" and "executive pay" provisions discussed in  
Comments 2C/3 above; see May 22, 1997 Cal-Tax letter to Committee  
opposing AB 1044.

6C)  This bill is supported by the California Chamber of Commerce.

6D)  This bill is also supported by Childress Auto Repair,  
Sacramento CA.  Childress wrote the Senate Revenue & Taxation  
Committee as follows:   "We've Been Waiting Twenty-One Years For  
This  ! . . . [this bill] contains a conformity provision for the  
new federal SIMPLE . . .  matching  [pension] plan which gives  
incentive to the employees to share in the responsibility of their  
own retirement . . . This was such a great opportunity for our  
employees we immediately implemented the plan.  If California does  
not conform effective January 1, 1997 we will have a slight  
bookkeeping nightmare.  (Emphasis included)." 

     The Assembly Committee on Revenue & Taxation staff has  
received telephone calls expressing similar sentiments with  
specific reference to SIMPLE conformity [see Comment 1A(xiv),  
above] from small business owners referred by Assemblymembers  
Wally Knox, Sheila Kuehl, and Bernie Richter. 
6E)  The CIAC provision [discussed in Comment 1E(viii), above] is  
supported by 
the California Water Association.

6F)  The Department of Finance position on this bill is "neutral,  
note concerns." 
        
  Support  

Franchise Tax Board
California Chamber of Commerce
Spidell Publishing
California Society of Enrolled Agents
California Taxpayers Association (Cal-Tax)
Childress Auto Repair, Sacramento, CA
California Water Association
California Association of Life Underwriters (CALU)
California Water Association
California Independent Oil Marketers Assn. (CIOMA)
California Bankers Assn.

  Neutral, note concerns  :

Department of Finance

  Opposition  

None on file (as of 5:00 p.m., Monday, July 7, 1997).








                                                          SB 455  
                                                         Page 13

  Analysis prepared by  :  Steven M. Kamp / arevtax / (916) 322-3730