AB 154
Page 1
CONCURRENCE IN SENATE AMENDMENTS
AB 154 (Ting)
As Amended
2/3 vote. Urgency
ASSEMBLY:
75-0
(June 3, 2015)
SENATE:
39-0
(August 31, 2015)
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,
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. 111148).]
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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).]
k) Transfers of excess pension assets. [Moving Ahead for Progress in the 21st Century Act
(MAP-21) (P.L. 112-141).]
l) Modifications of provisions related to acquisitions, disposition and aggregation of
research credit expenditures. [American Taxpayer Relief Act of 2012 (ATRA) (P.L. 112240).]
m) Indian general welfare benefits. [Tribal General Welfare Act of 2014 (P.L. 113-168).]
n) 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 postchange 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).]
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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 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. 113295).]
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:
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.
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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 socalled "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 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 everchanging 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 hardship on taxpayers and tax practitioners by bringing the two tax
codes closer together.
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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 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.
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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 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 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