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 December 1998

by Gina Rodriquez and Chris Micheli


As part of the 1998-99 California State Budget, the Legislature passed significant tax relief for individuals and businesses. The tax relief package, which includes major conformity to federal tax law provisions, is contained in three pieces of legislation, which were signed into law by Governor Pete Wilson on August 20, 1998.

One bill, SB 27 (Maddy) (Stats. 1998, Ch. 335), contains $40 million annually in license fee relief for California's horseracing industry. The other two bills, AB 2797 (Cardoza) (Stats. 1998, Ch. 322) and AB 2798 (Machado) (Stats. 1998, Ch. 323), contain a number of significant tax cuts, several of which are important to the business community.

Among the provisions of AB 2797 is state conformity to selected federal tax law provisions that were enacted in the Taxpayer Relief Act of 1997 (81 provisions), Balanced Budget Act of 1997 (two provisions), and Omnibus Budget Reconciliation Act of 1993 (one provision). In addition, SB 1383 (Leslie) (Stats. 1998, Ch. 623) partially conforms California law to the federal Taxpayer Browsing Protection Act of 1997.

As a result of the enactment of AB 2797, California's specified date of conformity to the Internal Revenue Code (IRC) has now been changed to January 1, 1998 (California Revenue & Taxation Code [CRTC] §§ 17024.5 and 23051.5). It should also be noted that this new law retroactively conforms state law to the federal provisions relating to employee stock ownership plans (ESOPs) for the 1995 tax year.

Also of interest to readers is the fact that Governor Wilson vetoed AB 1469 (Ortiz) on September 30, 1998. That bill would have enacted the Taxpayer's Bill of Rights Act of 1998 by providing several new taxpayer-friendly procedures and conforming to four provisions of the IRS Restructuring and Reform Act of 1998.

AB 1469 would have conformed to the following provisions of the '98 federal act: (1) innocent spouse relief; (2) suspension of statute of limitations on certain refund claims; (3) changes for calculating the exclusion for gain on sales of principal residence; and, (4) Roth IRA rollovers changes.

Prior Conformity Efforts

Earlier this year, the California Legislature and Governor Wilson enacted SB 519 (Stats. 1998, Ch. 7), a measure that provides retroactive conformity to selected provisions of federal tax law and that makes a number of technical corrections to 1997's billion-dollar tax cut "mega-deal."

As SB 519 was signed into law prior to March 15, 1998 (the due date of the first quarterly payments), selected conformity provisions were made retroactive to January 1, 1997, consistent with the federal Taxpayer Relief Act of 1997 (P.L. 105-34). With the recent enactment of AB 2797, California has now conformed to most of the '97 federal act.

Also of interest is the fact that Governor Wilson vetoed AB 1469 (Ortiz) on September 30, 1998. That bill would have enacted the Taxpayer's Bill of Rights Act of 1998 by providing several new taxpayer-friendly procedures and conforming to four provisions of the IRS Restructuring and Reform Act of 1998.

AB 1469 would have conformed to the following provisions of the '98 federal act: (1) innocent spouse relief; (2) suspension of statute of limitations on certain refund claims; (3) changes for calculating the exclusion for gain on sales of principal residence; and, (4) Roth IRA rollovers changes.

In 1997, the Legislature enacted a number of significant measures that conformed California law to a majority of the federal provisions enacted in 1993 through 1996. Also, in 1996, the Legislature enacted SB 38 (Lockyer and Pringle) (Stats. 1996, Ch. 954), which contained a number of provisions conforming California law to federal law.

Since the enactment of the federal Omnibus Budget Reconciliation Act (OBRA) of 1993, the California Legislature has struggled to conform state tax law to those changes in the IRC. After Congress' overhaul of the IRC in 1986, and the subsequent enactment of several federal tax reform acts, California has generally followed with a conformity measure in the year immediately following the year in which the federal law was enacted. This was usually done by urgency legislation, so that the changes were effective simultaneously with the new federal provisions.

For example, in 1987, a state law was passed to conform California tax law to reforms made by Congress in 1986. That was the normal course of events until 1993. In 1993, Congress enacted President Clinton's budget plan, which passed both Houses of Congress without a single Republican vote.

This fact, coupled with the large number of revenue-raising tax changes, caused Republicans in the California Legislature to reject most attempts to conform to the OBRA of 1993. That position finally changed in 1996 and SB 38 was approved with a number of important conformity provisions.

How California Conformity Works

When researching whether California law conforms to a specific provision of the federal Internal Revenue Code, there is a two-step process to complete:

(1) Check the "specified date change" provisions contained in CRTC §§ 17024.5 and 23051.5. These code sections identify which version of the IRC is to be applied to which taxable and income years.

(2) Conformity requires specific language that incorporates federal law into state law. At times, large chunks of federal law are incorporated (e.g., an entire subchapter). At other times, an individual code section is incorporated by reference.

The following example demonstrates the process to be followed: If you wanted to determine whether California conforms to the federal deduction for self-employed health insurance premiums for the 1998 taxable year, you would take the following steps:

(1) The federal provision is found at IRC § 162(l).

(2) CRTC § 17201 incorporates IRC Subtitle A, Chapter 1, Subchapter B, Part VI (itemized deductions/§§ 161-197). Hence, IRC § 162(l) has been conformed to in state law. A state-federal cross-reference listing is helpful when going from Step 1 to Step 2. Most major publishers offer this product.

(3) Then determine whether California made any modifications to the federal provision for state tax purposes. In CRTC Part 10 (PITL), Chapter 3 (Computation of Taxable Income), Article 6 (Deductions), you will find CRTC § 17273.1. As recently amended by AB 2797 (Ch. 98-322), 40% is substituted for the amount of the federal percentage.

As a result of this process, you can ascertain that California has partially conformed to federal law because California has substituted 40%, rather than 45% under federal law, for the 1998 taxable year.

AB 2797 Conformity Provisions

The following are the conformity provisions contained in AB 2797 and the relevant revenue estimate when the full effect of the tax law change is realized (if available). These state conformity provisions apply to taxable or income years beginning on or after January 1, 1998, unless otherwise noted.

Revenue Reconciliation Act of 1993 (P.L. 103-66)

Elimination of adjusted current earnings (ACE) adjustment for alternative minimum tax (AMT) [IRC § 56(g); CRTC § 23456] - Corporations are required to make two depreciation calculations to compute their AMT: one uses the 150% declining balance method to determine AMT income; the second uses the straight line method to determine the corporation's ACE. The '93 federal act eliminated the depreciation component of the ACE adjustment. ($11 million loss)

Balanced Budget Act of 1997 (P.L. 105-33)

(1) Medicare Plus Choice distributions [IRC §§ 220 and 4973; CRTC § 17201] - BBA creates the Medicare+Choice medical savings account (MSA) that allows Medicare eligible individuals to establish MSAs to pay for Medicare-related expenses. Withdrawals from the MSA for medical expenses are tax-exempt. (negligible loss)

(2) Hospitals participating in provider-sponsored organizations [IRC § 501; CRTC § 23704.3] - BBA provides that an organization does not fail to be treated as organized and operated for charitable purposes solely because a hospital owned and operated by the organization participates in a provider-sponsored organization. (negligible loss)

Taxpayer Relief Act of 1997 (P.L. 105-34)

(1) Deduction for student loan interest [IRC § 221; CRTC § 17201] - TRA allows a phased-in deduction up to $2,500 by 2001 (its starts at $1,000 in 1998) of interest paid on qualified education loans for tuition, fees, room, and board. Deductions are allowed only for the first 60 months of interest payments and are phased out for AGI of $55,000 (single filers) and $75,000 (joint or head of household filers). ($16 million loss)

(2) Qualified state tuition programs [IRC §§ 135 and 529; CRTC §§ 17140.3, 23711] - TRA expands definition of qualified expenses to include room and board, as well as postsecondary vocational institution expenses. Taxpayers may make a tax-free rollover of a qualified account from the beneficiary to anyone who may be claimed as the taxpayer's dependent. It also allows withdrawals from a prepaid tuition plan to qualify for either the HOPE credit or lifetime learning credit. (no revenue impact)

(3) Contributions of computer equipment to schools [IRC § 170; CRTC § 24357.9] - TRA allows corporations an enhanced deduction (the taxpayer's basis in the property plus half of the property's fair market value) for donating medical supplies and research equipment, as well as computer equipment to schools. State law conforms for donations of computer equipment to elementary or secondary schools (K-12 grades), but not for donations of medical supplies or research equipment. ($4 million loss)

(4) Cancellation of certain student loans [IRC § 108; CRTC § 17143] - TRA allows taxpayers to exclude from income certain cancellations of student loan debt if the taxpayer performs qualifying public service activities. (minor revenue loss)

(5) Repeal of depreciation adjustment for AMT [IRC § 56; CRTC §§ 17062 and 23456] - TRA conforms the two depreciation methods to the shorter recovery periods used for determining regular tax. This no longer treats accelerated depreciation as a tax preference item for AMT purposes. This applies for assets placed in service in 1999 and thereafter. ($9 million loss)

(6) Repeal of throwback rules [IRC §§ 644 and 646; CRTC §§ 17731 and 13302] - TRA repeals the throwback rules for domestic trust contributions. (minor revenue loss)

(7) Home office deduction [IRC § 280A; CRTC § 17201] - TRA specifically provides that a home office qualifies as the "principal place of business" if it is an office used by the taxpayer to conduct administrative activities of a trade or business, and there is no other fixed location where the taxpayer conducts those activities. California's conformity commences on January 1, 1999. ($9 million loss)

(8) Expensing of environmental remediation costs [IRC § 198; CRTC §§ 17279.4 and 24369.4] - TRA allows taxpayers to elect to treat as deductible expenses certain environmental remediation expenses related to the abatement or control of hazardous substances at a qualified contamination site. These expenses ordinarily would be capitalized. The federal and state provisions are effective through December 31, 2000. ($5 million loss)

(9) Shrinkage estimates for inventory accounting [IRC § 471; CRTC §§ 17551 and 24701] - TRA allows shrinkage estimates based upon physical inventories taken other than at year-end and if done regularly at all of the taxpayer's physical locations. Taxpayers are also required to adjust their ending inventory pursuant to all physical counts during the tax year. The adjustment must be reflected in income over a 4-year period. ($1 million loss)

(10) Timeshare associations [IRC § 528; CRTC § 23701t] - TRA permits timeshares meeting certain tests to be taxed at a rate of 32% on their income for tax years beginning on or after January 1, 1997. (negligible loss)

(11) Increased deduction of business meals for DOT employees [IRC § 274; CRTC § 17271] - TRA increased the deduction for business meals to 80%, rather than the current 50%, for employees subject to hours of service limitations of the U.S. Department of Transportation (e.g., truck drivers, pilots, tower operators, railroad employees, merchant marines). ($1 million loss)

(12) Deductibility of meals provided for convenience of employer [IRC § 132; CRTC § 17131] - TRA permits employers to fully deduct the cost of meals provided in employer cafeterias if the meals were for the convenience of the employer. ($1 million loss)

(13) Modify limits on depreciation of luxury automobiles [IRC § 280F; CRTC §§ 17201 and 24349.1] - TRA provides an exclusion from certain limits for the incremental cost of a clean-fuel vehicle, and triples the luxury vehicle depreciation limits for electric vehicles, for vehicles placed in service from August 5, 1997 through the end of 2004. (negligible loss)

(14) Suspension of income limit of percentage depletion [IRC § 613; CRTC §§ 17681 and 24831] - TRA and state law suspend the 100% income limit on which the depletion deduction is based for marginal domestic wells for the 1998 and 1999 tax years. ($1 million loss)

(15) Mileage deduction for charitable use of an auto [IRC § 170; CRTC §§ 17201 and 24341] - TRA increases the current $0.12 per mileage deduction rate to $0.14 per mile. ($2 million loss)

(16) Receivables purchased by coop hospitals [IRC § 501; CRTC § 23704] - TRA clarifies that certain purchasing of patron accounts qualifies as a tax-exempt cooperative hospital service. (negligible loss)

(17) Provide above-the-line deduction for certain business expenses [IRC § 62; CRTC § 17072] - TRA allows a state or local government official to deduct employee business expenses, so long as the official is reimbursed for services on a fee basis. ($1 million loss)

(18) Recognition of gain on certain appreciated financial positions [IRC § 1259; CRTC § 18151 and 24990] - TRA provides that, if there is a constructive sale of an appreciated financial asset, the taxpayer must recognize gain as if the asset were sold as of the date of the constructive sale. ($2 million gain)

(19) Mark-to-market election [IRC § 475; CRTC §§ 17570 and 24710] - TRA allows securities traders and commodities dealers to elect to use the mark-to-market accounting method. (negligible gain)

(20) Limit exception for investment companies [IRC § 351; CRTC §§ 17321 and 24551] - TRA expands the list of assets subject to the 80% test for defining an investment company. (negligible gain)

(21) Gains/losses on terminations of property [IRC §§ 1233 and 1234; CRTC §§ 18151 and 24990] - TRA expressly provides for capital treatment of gains or losses in any termination (cancellations, lapses, expirations) of all types of property. ($1 million gain)

(22) Original issue discount (OID) on pooled debt obligations [IRC § 1272; CRTC §§ 18178 and 24994] - Under TRA, holders of pooled debt instruments that require interest after a certain date (e.g., credit card receivables) are required to accrue interest on the pool based upon a reasonable assumption about the timing of payments. This is the same treatment used for "original issue discount." ($11 million gain)

(23) Deny interest deduction on certain debt instruments [IRC § 163; CRTC §§ 17201 and 24344] - TRA denies a deduction for interest from debt that is payable in stock of the issuer. ($1 million gain)

(24) Require gain recognition for certain extraordinary dividends [IRC § 1059; CRTC §§ 18031 and 24966] - TRA requires corporate shareholders to recognize gain immediately on these transactions if the redemption is treated as a dividend due to options being counted as stock ownership. ($2 million gain)

(25) Require gain recognition on certain distributions of controlled stock [IRC §§ 351, 355, 358, 368; CRTC §§ 17321 and 24451] - TRA requires recognition of gain if either the distributing or the controlled corporation is acquired pursuant to a plan in existence on the date of distribution. ($7 million gain)

(26) Reform tax treatment of certain corporate stock transfers [IRC §§ 304 and 1059; CRTC §§ 17321, 18031, 24451, 24966] - TRA treats the acquiring corporation as having redeemed stock in certain transactions, and the stock is treated as having been issued to the transferor (rather than as a partially nontaxable dividend distribution). (minor gain)

(27) Treat certain preferred stock as "boot" [IRC §§ 351, 354, 355; CRTC §§ 17321 and 24451] - TRA treats the preferred stock as boot, thereby triggering the recognition of gain or loss. ($1 million gain)

(28) Holding period for dividends received deduction [IRC § 246; CRTC § 24402] - TRA denies dividends received deduction unless the stock is held by the receiving corporation at least 46 days of the 90-day period that begins 45 days before the dividends are paid. (minor gain)

(29) Reporting of certain payments made to attorneys [IRC § 6045; CRTC § 18641] - TRA requires businesses to report gross amounts paid to attorneys. California conforms by deeming the taxpayer to have complied with state law if the taxpayer has complied with federal law. (minor gain)

(30) Beneficiaries of estates and trusts returns [IRC §§ 6034 and 6048; CRTC § 18505] - TRA extends the consistency requirement to beneficiaries of estates and trusts by requiring them to report information in the same manner as the returns filed by the fiduciaries. (negligible gain)

(31) Registration of confidential corporate tax shelters [IRC §§ 1028, 6707, 6111; CRTC § 19182] - TRA requires registration with the IRS and penalizes late registration or underpayment of taxes. California conforms by deeming the taxpayer to have complied with state law if the taxpayer has complied with federal law. ($1 million gain)

(32) Extend unrelated business income tax (UBIT) rules to second-tier subsidiaries and amend control test [IRC § 512; CRTC §§ 17651 and 23732] - TRA reduces the "control" test from 80% to 50%. Hence, certain income received by a tax exempt entity from a subsidiary that is more than 50% owned by the tax exempt entity will be considered UBIT. (minor gain)

(33) Basis allocation for partnership property distributions [IRC § 732; CRTC § 17851] - TRA modifies rules to take into account the fair market value of the property for purposes of appropriately allocating basis in the hands of distributees. ($2 million gain)

(34) Appreciation of inventory when partnership interest sold [IRC §§ 731-735, 751; CRTC § 17856] - TRA repeals the personal income tax requirements related to substantially appreciated inventory thereby treating any difference between market value and basis as income. (minor gain)

(35) Extension of time for taxing precontribution gains [IRC §§ 704 and 737; CRTC § 17851] - TRA requires appreciated property to be held for seven years (instead of five years) to avoid gain at the partner's level. (minor gain)

(36) Cashout of certain accrued benefits [IRC §§ 411, 417, 457; CRTC § 17501] - TRA increases from $3,500 to $5,000 the maximum plan value that an employer can cash out without the employee's permission. (minor gain)

(37) Cash in lieu of parking benefits [IRC § 132; CRTC § 17149] - TRA allows employees to exclude from wages the value of any qualified parking provided by an employer up to $170 per month. For California purposes, there is no limit and the exclusion applies only if there is no option of taking cash in lieu of free parking. (minor gain)

(38) Basis recovery rules on annuities [IRC § 72; CRTC § 17085] - TRA creates a new table of expected payments for joint and surviving annuities that recognizes that more payments are likely under this type of annuity than a single life annuity. This allows the basis to be spread out over a longer period of time. (minor gain)

(39) Denial of certain amounts paid in connection with insurance [IRC §§ 101, 264, 805, 807; CRTC §§ 17279.5 and 24424] - TRA prohibits businesses from deducting premiums on life insurance or interest paid or incurred on money borrowed to fund an insurance policy, endowment or annuity contract if the taxpayer is directly or indirectly a beneficiary under the policy. ($5 million gain)

(40) Limits on property using income forecast method [IRC §§ 167 and 168; CRTC §§ 17250 and 24349] - TRA limits the application of the income forecast method to film, video and sound recordings, copyrights, books, patents, and other intellectual property. Goods leased through rent-to-own contracts are depreciated over three years. (minor gain)

(41) Replacement of involuntarily converted property [IRC § 1033; CRTC §§ 18031 and 24943] - TRA expands the related person exception to other entities that acquire replacement property from related persons in certain circumstances. (minor gain)

(42) Exceptions to installment sales rules [TRA § 1088; CRTC §§ 17024.5 and 23051.5] - TRA repeals the exception for sales between manufacturers and dealers. ($4 million gain)

(43) Charitable remainder trust eligibility [IRC §§ 664 and 2055; CRTC § 17731] - TRA prevents charitable remainder trusts from paying annuities greater than 50% of the fair market value of the trust's assets. (negligible gain)

(44) Estimated tax safe harbor rules (accelerated payments) [IRC § 6654; CRTC § 19136] - TRA increases the monetary threshold from $500 to $1,000. California law now uses $200 (instead of $100) as the threshold. ($1 million loss)

(45) Personal transactions and foreign currency gain [IRC § 988; CRTC §§ 17078 and 24905] - TRA provides an exclusion for individual taxpayers who acquire foreign currency and dispose of it, as long as the gain does not exceed $200. (negligible loss)

(46) Transfers to foreign entities [IRC §§ 367, 684, 721; CRTC §§ 17321, 17731, 17851, 24451] - TRA applies a reporting requirement with respect to transfers of property to foreign partnerships in certain circumstances. California conforms with the federal reporting requirement, but not with the federal penalty requirement. (minor gain)

(47) Controlled foreign partnerships info reporting [IRC § 6038; CRTC § 19141.2] - TRA requires similar reporting from U.S. owners of controlled foreign partnerships. (minor gain)

(48) Foreign partnership property transfer reports and penalty [IRC § 6038; CRTC § 19141.2] - TRA establishes a 10% ownership floor below which information reporting is not required. (minor gain)

(49) Statute of limitations when foreign info is needed [IRC § 6501; CRTC § 19063] - TRA extends the statute of limitations provision to cover transfers to foreign partnerships, trusts and estates. (minor gain)

(50) Increased AMT exemption amount for children under 14 [IRC § 59; CRTC § 17062] - TRA establishes AMT exemption for children under age 14 as the lesser of the exemption available to an individual taxpayer ($33,750) or the sum of the child's earned income plus $5,000. (negligible loss)

(51) Waiver of penalty due to underpayment [IRC § 6654; CRTC § 19136.6] - TRA waives estimated tax penalties for underpayment of taxes due. (minor loss)

(52) Reimbursed expenses of rural mail carriers [IRC § 162; CRTC § 17201] - TRA simplifies certain calculations, repeals the special 150% mileage rate, and requires that the equipment maintenance allowance provided by the Postal Service be considered equivalent to mail carriers' expenses. The intent is to ensure that postal carriers will not have to report these amounts. (negligible loss)

(53) Travel expenses of federal employees [IRC § 162; CRTC § 17201] - TRA exempts federal employees certified by the Attorney General from the one-year limit if the travel is related to investigation or prosecution of a federal crime. (negligible gain)

(54) Look-back method for long-term leases [IRC § 460; CRTC §§ 17564 and 24673.2] - TRA provides that taxpayers may elect not to apply the look-back method if, for each prior contract year, the cumulative income or loss as determined using estimated prices and costs is within 10% of cumulative income using actual prices and costs. (negligible loss)

(55) Construction allowances for short-term leases [IRC §§ 110, 168, 6724; CRTC §§ 17131 and 24309.5] - TRA clarifies that cash payments or rent reductions are not included in gross income if used by the retailer for construction or improvements to the leased space. (negligible loss)

(56) Close of partnership year for deceased partners [IRC § 706; CRTC § 17851] - TRA provides that the tax year of a partnership closes for any partner whose entire interest in the partnership terminates, whether by death, liquidation or otherwise. (negligible gain)

(57) Reasonable cause exception for penalties [IRC §§ 6652, 6683, 7519; CRTC § 19133.5] - TRA adds four new penalties which may be waived for reasonable cause. California only conforms to the waiver of penalty for reasonable cause for failure to report small business stock. (negligible loss)

(58) Statute of limitations on assessments [IRC § 6501; CRTC § 19066.5] - TRA provides that the statute of limitations begins to run at the time the shareholder or partner files an individual tax return. (no impact)

(59) Revocable trusts treated as part of estate [IRC §§ 646 and 663; CRTC §§ 17751 and 17752] - TRA provides for an election to treat qualified revocable trusts as part of a decedent's estate for tax purposes. (negligible loss)

(60) Distributions during first 65 days of tax year [IRC § 663; CRTC § 17752] - TRA applies the 65-day rule so that executors may treat distributions paid by the estate within 65 days after the close of the estate's tax year as having been paid on the last day of that year. (negligible loss)

(61) Separate share rules available to estates [IRC § 663; CRTC § 17752] - TRA provides that, if decedent's will creates separate economic interests in one beneficiary that do not accrue to other beneficiaries, then the "separate share" rule applies in order to provide different tax treatment of the distributions to different beneficiaries. (negligible loss)

(62) Executor and beneficiary treated as related persons [IRC § 267; CRTC §§ 17201 and 24427] - TRA treats an estate and a beneficiary of the estate as related persons. (negligible loss)

(63) Interest on large corporate underpayments [IRC § 6654; CRTC §§ 19136 and 19521] - TRA applies a special interest rate on large corporate underpayments beginning with the first letter or notice of deficiency in excess of $100,000. (negligible loss)

(64) Matching contributions of self-employed [IRC § 402; CRTC § 17504] - TRA provides that matching contributions made on behalf of self-employed individuals do not count against the $9,500 cap. (negligible loss)

(65) Reduced benefits for crime against the plan [IRC § 401; CRTC §§ 17501 and 24601] - TRA provides that retirement benefits to an individual can be reduced if the individual is convicted of a crime involving the retirement plan or civil judgment or settlement is brought concerning violation of fiduciary responsibilities. (no impact)

(66) Elimination of paperwork burden [IRC §§ 101-108; CRTC §§ 17131 and 24301] - TRA eliminates the automatic filing requirement on plans, but provides that employers are required to file these plans upon request, and that penalties may be imposed for failure to comply with the request. California conforms by deeming the taxpayer to have complied with state law if that taxpayer has complied with federal law. (no impact)

(67) Exclusion allowance modified [IRC § 403(b); CRTC §§ 17501 and 24601] - TRA modifies contribution amount limits to make them the same as those allowed under IRC § 415. (negligible loss)

(68) Moratorium on nondiscrimination rules [IRC §§ 401 and 403; CRTC §§ 17501 and 24601] - TRA makes the moratorium on providing plan information for government permanent. (negligible loss)

(69) S corporations and ESOPs [IRC § 409; CRTC §§ 17501 and 24601] - TRA provides that ESOPs established by S corporations need not give participants the right to demand that distributions be in the form of the S corporation's shares. (negligible loss)

(70) Exception to rule for nondeductible contributions [IRC § 4972; CRTC § 17501] - TRA creates an exception from the excise tax for contributions made to certain defined plans which exceed combined deduction limits. While California conforms to this provision, the State does not impose these excise taxes. (negligible loss)

(71) Funding requirement for company plans [IRC § 769; CRTC § 17501] - TRA creates an exception from minimum funding targets for interstate bus companies with pension plans that are closed to new participants. (negligible loss)

(72) Rules for rollover contributions [IRC § 401; CRTC §§ 17501 and 24601] - TRA clarifies the rules so that qualified pension plans do not lose their qualified status by receiving contributions from unqualified plans in error. (negligible loss)

(73) Increased current liability funding limit [IRC § 412; CRTC § 17501] - TRA increases the maximum funding levels to 155% in 1999 and 2000, to 160% in 2001 and 2002, 165% for 2003 and 2004, and 170% for 2005 and future years. ($1 million loss)

(74) Treatment of ministers [IRC § 414; CRTC § 17501] - TRA treats contributions on behalf of self-employed ministers as subject to the same rules as if the minister were an employee of the church. (negligible loss)

(75) Repeal of UBIT for certain ESOPs [IRC §§ 404, 415, 664, 674, 4978, 4979; CRTC §§ 17501 and 17731] - TRA provides that ESOPs which are S corporation shareholders need not treat income items from the S corporation as unrelated business income. ($1 million loss)

(76) Investment diversification rules [IRC § 407(b); CRTC § 17501] - TRA provides that IRC § 401(k)-type retirement plans do not include any employee contribution if the contribution is in the employer's stock and exceeds 1% of the employee's salary. (negligible loss)

(77) Plans for irrigation entities [IRC § 401(k); CRTC § 17501] - TRA creates an exemption from this restriction for irrigation and drainage districts. (negligible loss)

(78) Permissive service credits [IRC § 415; CRTC § 17501] - TRA allows participants in a state or local government retirement plan to purchase service credits in a new plan based upon service with another government employer. ($1 million loss)

(79) Defined benefit payment limits [IRC § 415; CRTC § 17501] - TRA creates an exclusion from the defined benefit reduction for police and fire district employees who retire early. (minor gain)

(80) Transfers for employees' benefit [IRC § 664; CRTC § 17731] - TRA permits charitable remainder trusts to make certain limited transfers of qualified employee securities to an ESOP without adversely affecting the status of the trust. (negligible loss)

(81) Amending retirement plans [TRA § 1541; CRTC §§ 17024.5 and 23051.5] - TRA provides that changes to retirement plans to conform to the TRA are not required to be made until January 1, 1999. (negligible loss)

SB 1383 Conformity Provisions

Taxpayer Browsing Protection Act of 1997 (P.L. 105-35)
Criminal penalties for unauthorized inspections [IRC § 7213A; CRTC §§ 7056.5 and 19542.1] - California law already makes it a misdemeanor if an FTB or BOE employee discloses taxpayer information or makes unauthorized inspections of taxpayer records. (negligible gain)

Major Items of Nonconformity

It is important to note that California has not conformed to a number of federal tax law provisions. The following is a sampling of federal provisions without corresponding state tax law provisions:

- Reduced tax rate on capital gains (IRC § 1).

- Denial of the deduction of lobbying expenses (IRC §§ 162, 170 and 6033).

- Denial of the deduction for compensation of certain employees in excess of $1 million (IRC § 162).

- Denial of the dependent exemption for failing to provide a proper taxpayer identification number (IRC §§ 151, 6109 and 6213).

- Denial of the reserve method for bad debts for thrift savings associations (IRC §§ 50, 52, 291, and 585).

- Deduction for self-employed health insurance (which was increased to 100% and accelerated in its phase-in) (IRC § 162).

- Real estate professional rules for passive activities (IRC § 469).

- Unrecognized gain portion of a charitable contribution not included as a preference item for AMT purposes (IRC §§ 56 and 57).

- Denial of deduction for club dues (California does deny a deduction if the club discriminates) (IRC § 274).

- Accelerated depreciation for property used in a trade or business conducted within an Indian reservation (IRC § 168).


1998 represents another important year for California's conformity to provisions of the Internal Revenue Code. With the recent enactment of the federal IRS Restructuring and Reform Act of 1998 (P.L. 105-206), California must pursue another omnibus conformity measure during the 1999 Legislative Session.

It is likely that the conformity working group in the state will continue its work during the fall to prepare a measure for enactment in 1999. Individual taxpayers are adversely affected due to the veto of a measure that would have provided conformity to a number of key '98 federal tax law changes.

Gina Rodriquez is an enrolled agent and the Sacramento Editor for Spidell Publishing, Inc. (530/676-0662).
Chris Micheli is an attorney and registered lobbyist for Carpenter Snodgrass & Associates in Sacramento (916/447-2251).