AB 154
Page 1
ASSEMBLY THIRD READING
AB 154 (Ting)
As Amended May 28, 2015
2/3 vote. Urgency
Committee
Revenue & Taxation
Votes
6-0
Ayes
Ting, Dababneh, Gipson,
Roger Hernández, Mullin,
Quirk
Appropriations
15-0
Gomez, Bigelow, Bonta,
Calderon, Daly, Eggman,
Eduardo Garcia, Gordon,
Holden, Jones, Quirk,
Rendon, Wagner, Weber,
Wood
Noes
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. 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 Business Jobs Act of 2010 (P.L. 111-240).]
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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. 112-240).]
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) 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 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. 113295).]
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) 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.
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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 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 201516, FY 2016-17, and FY 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
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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 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 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
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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 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 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
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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 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) 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 201101-01 "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: 0000669