A Detailed Comparison of California and Federal Tax Laws: Will California Make Additional Conforming Changes?

By Chris Micheli and Gina Rodriquez

Editor's Note: Conformity is expected to be one of the significant tax issues before the Legislature this year. In this issue, we begin a two-part series on the subject. We publish Chapters I through VI - Introduction, Background on California Conformity Efforts, SB 38 Conformity Provisions; Other 1996 Conformity, Overview of the 1996 Federal Tax Acts and Overview of the 1993 Federal Tax Acts. In our April issue, we will publish Chapters VII through IX - Corporate Tax Law Differences, Personal Income Tax Law Differences, and Conclusion.

I. Introduction

Conformity to federal tax laws, or often the lack thereof, has been an important topic for tax practitioners and taxpayers. One reason is that about one-half of California's Personal Income Tax Law was repealed in 1983 and replaced with references to federal law. The remaining half - the independent or "stand-alone" language - is composed primarily of administrative provisions.

Incorporating federal law by reference requires the California Legislature to enact specific language into state law. In some cases, massive amounts of federal law - such as an entire subchapter - are incorporated into state law. In other cases, a reference may only incorporate a single section. Generally, changes in federal law do not automatically change state law.

Moreover, because the Internal Revenue Code (IRC) is constantly changing, the Legislature created the concept of a "specified date" to identify which version of the IRC is to be applied to which years for California. The "specified date" also freezes state law to that which is already known, and avoids unintended conformity to subsequent federal tax law changes. California's current "specified date" is January 1, 1993.

This article will (1) review recent efforts in California to conform to federal tax laws, (2) review the recently enacted California law changes contained in 1996's SB 38 (Lockyer and Pringle, Stats. 1996, Ch. 954), (3) examine the 1996 federal tax acts, (4) examine the 1993 federal tax acts, (5) list the areas of law where California does not conform to these federal tax laws, and (6) indicate whether California may conform to certain federal law provisions in the future.

II. Background on California Conformity Efforts

Since the enactment of the federal Revenue Reconciliation Act (RRA) of 1993, the California Legislature has struggled to conform state tax law to those changes in the IRC. In addition, there remain a number of federal tax laws to which California has never conformed.

Since the U.S. Congress' overhaul of the IRC in 1986, California has generally enacted a conformity measure in the following year, usually by urgency legislation. For example, in 1987, a state law was passed to conform California tax law to changes made by the federal government 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, has caused Republicans in the California Legislature to reject most attempts to conform California law to the RRA of 1993.

Since California did not enact a conformity bill in 1994, California is still using the IRC as it read on January 1, 1993; that is, prior to the changes made by the RRA of 1993 or any of the 1996 federal tax acts. Thus, many new differences between federal and California laws now exist.

California did enact several minor conformity provisions in 1994. In addition, there was an effort in 1995 to conform to the 1993 federal tax law changes, but those conformity provisions did not occur. They were contained in AB 397 (Hannigan), which was vetoed by Governor Wilson on October 1, 1995.

The Legislature's anti-conformity momentum seemed to change in 1996 when it enacted SB 38, which was signed into law by Governor Wilson on September 26, 1996. This new law made more than a dozen conforming changes in California tax law.

III. SB 38 Conformity Provisions

SB 38 contains 19 partial or full conformity provisions. Most of the conformity changes were effective January 1, 1996. Because of differing dates, however, the effective date of each provision is specifically set forth below.

For each provision described, the California Revenue and Taxation Code (CRTC) citation is given, as well as the corresponding IRC citation.

(Please note that all references to the "1993 federal act" refer to the Revenue Reconciliation Act of 1993 (P.L. 103-66), and that all references to the "1996 federal act" refer to either the Small Business Job Protection Act of 1996 (P.L. 104-188) or the Health Insurance Portability and Accountability Act of 1996 (P.L. 104-191).)

1. Increases the research and development (R & D) tax credit for business-based research from 8 percent to 11 percent and for university-based research from 12 percent to 24 percent beginning Janaury 1, 1997 (CRTC Secs. 17052.12 and 23609) (IRC Sec. 41). In addition to raising the qualified research credit to 11 percent and the basic research credit to 24 percent, university hospitals and certain cancer research facilities will become "qualified institutions" under the basic research credit. California ties its R & D credit to the federal tax credit.

2. Partially conforms to federal law to provide a 5 percent tax credit for enhanced oil recovery by small, independent oil producers beginning January 1, 1996 (CRTC Secs. 17052.8 and 23604) (IRC Sec. 43). Federal law permits a 15 percent credit for costs associated with "enhanced recovery" of oil and gas for projects located within California (i.e., pumping heated liquids or gases into a well to enhance its flow - called "tertiary injectants"). This conforms to federal law, but substitutes a 5 percent credit for the 15 percent (one-third of the federal credit). It only applies to non-vertically-integrated oil producers.

3. Conforms to federal law on employee stock ownership plans beginning January 1, 1996 (CRTC Secs. 18042 and 24611) (IRC Secs. 1042 and 404(k)). This conformity is to the 1996 federal act concerning deductions for dividends paid by employer corporations to an employee stock option plan (ESOP) and employer contributions to retire the ESOP stock-acquisition loans, as well as to allow shareholders to roll over, without recognizing gain, the proceeds from the sale of securi-ties to an ESOP. The 1996 federal act repealed the 50 percent tax exclusion for interest earned by lenders on loans made to ESOPs. Note that this change makes California out of conformity for only the 1995 taxable or income year, as the state formerly conformed to federal law from January 1, 1990 through January 1, 1995. Also, please note that California did not conform to IRC Sec. 1042 for banks and corporations. However, this was an oversight that should be corrected in 1997.

4. Conforms to federal law on the exclusion from an employee's taxable income of employer-provided educational assistance beginning January 1, 1995 (CRTC Sec. 17151) (IRC Sec. 127). This provision reestablishes under state law (which had been dependent upon federal law) the expired federal exclusion of an amount up to $5,250 annually, and excludes graduate courses leading to an advanced degree (i.e., graduate courses must have begun prior to June 30, 1996 to qualify). California's exclusion had only been in effect during the years in which an exclusion from federal income tax was available. This makes the provision permanent, regardless of whether federal tax law provides for such an exclusion, but is limited to undergraduate courses.

5. Partially conforms to federal law by providing a 50 percent tax credit for the first $250 of costs for disabled access compliance beginning January 1, 1996 (CRTC Secs. 17053.42 and 23642) (IRC Sec. 44). Federal law provides a 50 percent credit for complying with the Americans with Disabilities Act (ADA) for expenses ranging from $250 to $10,250.

6. Conforms to federal law on the deduction of corporate charitable contributions (increases the limit from 5 percent to 10 percent of net corporate income) beginning January 1, 1996 (CRTC Sec. 24358) (IRC Sec. 170). California law will now follow the federal 10 percent contribution limit, as well as the five-year carryforward of "excess" contributions.

7. Conforms to federal law on medical savings accounts (MSA) for small employers and self-employed beginning January 1, 1997 (CRTC Secs. 17138.5, 17141.5, 17150, 17201.5, 17267, and 24343.3) (IRC Secs. 106 and 220). It excludes from income any interest or dividends on the deposits to an MSA, subject to certain custodial oversight and reporting. It is also a deductible expense for the employer. Based upon the 1996 federal act, an employer or employee could contribute up to $2,000 per individual ($4,000 for an employee and his or her spouse). This amount will be adjusted annually for inflation. Withdrawals from the MSA for medical expenses would be exempt from taxation, but withdrawals for other purposes would be subject to taxation, as well as a 10 percent penalty. A taxpayer must qualify for a federal MSA to be eligible at the state level.

8. Conforms to federal law on spousal individual retirement account contributions in cases where one spouse is not employed (increases the limit from $250 to $2,000 annually) beginning January 1, 1997 (CRTC Secs. 17210 and 17507) (IRC Secs. 219 and 408). Present law prohibits total contributions from exceeding $2,250. Now both spouses will be able to deduct a total of $4,000, or $2,000 each.

9. Partially conforms to federal law on long-term care services and contracts by allowing a deduction beginning January 1, 1997 (CRTC Secs. 17150 and 17213) (IRC Secs. 106 and 220). Existing state law permits a deduction for medical expenses that exceed 7.5 percent of the taxpayer's federal adjusted gross income. This provision categorizes long-term care expenses (that are unreimbursed) and insurance premiums (using a graduated scale ranging from $200 to a maximum of $2,500 based on the individual's age) as a "medical expense" under state law.

10. Partially conforms to federal law on small business personal property expensing by increasing the current $10,000 deduction to $12,500 for property placed in service on or after January 1, 1997, and to $15,000 after January 1, 1998 (CRTC Sec. 17255) (IRC Sec. 179). The 1993 federal act increased the expensing deduction from $10,000 to $17,500 for tangible personal property placed in service that would otherwise be required to be capitalized and depreciated. The 1996 federal act phases in an increase of the deduction to $25,000 by 2003. It should be noted that California only conforms for personal income taxpayers, and not for corporations.

11. Partially conforms to federal law by increasing the estimated corporate payments from 95 percent to 98 percent of the current year's tax liability beginning January 1, 1998, and to 100 percent beginning January 1, 1999 (CRTC Secs. 19144, 19147, and 19148) (IRC Sec. 6655). The 1993 federal act requires the quarterly prepayment of taxes be based on 100 percent of the current year's tax liability, otherwise a penalty will be assessed. This is merely a matter of timing (i.e., it accelerates the collection of money due) as the full amount of the taxes owed would be collected by the end of the taxable year. The provision also conforms to the federal annualization method changes beginning January 1, 1997.

12. Conforms to federal law by requiring securities held by dealers to be "marked-to-market" beginning January 1, 1997 (CRTC Secs. 17077.5, 17570, 24710, and 24905.5) (IRC Secs. 475 and 988). It requires the inventories of securities dealers to be valued at market value ("marked to market"), including other non-inventory securities such as derivatives and "swap" contracts. The unrealized gains or losses while the securities are still in inventory are recognized for income tax purposes.

13. Conforms to federal law on the discharge of indebtedness by a creditor by excluding income realized in discharging the debt beginning January 1, 1996 (CRTC Secs. 17144, 17330, 17859, 18044, 24307, 24472, and 24903) (IRC Sec. 108, 382, 703, and 1017). This allows the discharge of "qualified real property business indebtedness" to be excluded from income by a non-corporate taxpayer (at his or her election) and adding passive losses and the minimum tax credit to the attributes to be reduced by an exclusion of the discharge. The "stock-for-debt" exception is also repealed under state law.

14. Conforms to federal law by extending the recovery period for depreciation of non-residential real property to 39 years beginning January 1, 1997 (CRTC Sec. 17250) (IRC Sec. 168). For non-corporate taxpayers, this substitutes the previous 31.5 year depreciation period on a straight line basis. State law currently conforms with federal depreciation rules for individuals, partnerships, and Subchapter S corporations, but not for C corporations.

15. Conforms to federal law by restricting the deductibility of interest paid to foreign entities beginning January 1, 1996 (CRTC Secs. 24344 and 24344.7) (IRC Sec. 163). Federal law restricts this interest deductibility when the interest is not taxable to the recipient corporation. The 1993 federal act further restricts the deductibility of interest from loan guarantees by a related foreign entity. The provision expands the definition of "disqualified interest" for purposes of disallowing a portion of the interest deduction by a thinly capitalized corporation.

16. Conforms to federal law by altering the treatment of payments to retired or deceased partners beginning January 1, 1996 (CRTC Sec. 17860) (IRC Secs. 736 and 751). This restricts the deductibility of certain goodwill or unrealized receivable payments to retiring partners or their estates by their former partnerships. It is based upon the 1993 federal act that repealed this special treatment of these partnership distributions.

17. Conforms to federal law by restricting spousal and dependent travel expenses beginning January 1, 1996 (CRTC Secs. 17271 and 24443) (IRC Sec. 274). This provision denies the deduction unless the spouse or dependent is employed by the company and is traveling for a legitimate business purpose.

18. Conforms to federal law by restricting the deductibility of interest paid on the amount borrowed from corporate-owned life insurance policies beginning January 1, 1996 (CRTC Secs. 17279.5 and 24424) (IRC Sec. 264). This provision is taken from the 1996 federal act and affects interest paid on the indebtedness from borrowing (up to $50,000 per insured employee) against insurance policies owned by the business taxpayer for individuals who are officers of the company or who have a financial interest in the taxpayer's business. Federal and state laws now permit the deduction of the interest only in cases of policies for no more than 20 "key employees."

19. Conforms to federal law by limiting the deduction for certain moving expenses by personal income taxpayers beginning January 1, 1996 (CRTC Secs. 17072, 17076, 17084, 17134.5, and 17218) (IRC Sec. 62). This increases the qualifying mileage threshold from 35 miles to 50 miles. It also disallows a deduction for meals during the move and excludes the costs of any pre-move, "house hunting" trips, as well as the costs of temporary living arrangements. Federal law defines the deductible expenses as the reasonable costs of moving household goods from the "old" house to the "new" house and lodging expenses incurred during the move (but not meals).

IV. Other 1996 California Conformity

In addition to SB 38, the California Legislature enacted several bills in 1996 that conformed California tax law to federal provisions. These bills include:

AB 850 (Morrissey, Stats. 1996, Ch. 506) conforms to federal law by incorporating the federal preemption regarding the taxation of nonresident pension income (Public Law 104-95) into California law. The bill is operative for payments received on or after January 1, 1996, and effective only during taxable years in which the federal law is effective.

AB 1624 (Kuehl, Stats. 1996, Ch. 28) and SB 714 (Hughes, Stats. 1996, Ch. 29) conforms to federal law (United States - Federal Republic of Germany Income Tax Convention, August 29, 1989, S. Treaty Doc. No. 10, 101st Cong. Sess. (1990)) to exclude from an individual's gross income any amounts received pursuant to Germany's German Act Regulating Unresolved Property Claims as restitution for property that was confiscated or subject to forced sale prior to or during World War II.

AB 1626 (Alpert, Stats. 1996, Ch. 723) retroactively conforms to federal law (Public Law 104-117) to provide tax relief to members of the armed forces performing services for the peacekeeping efforts in Bosnia and Herzegovina, and increases the combat pay exclusion of officers to equal the maximum amount excluded for enlisted personnel.

SB 715 (Killea, Stats. 1996, Ch. 952) conforms to federal law (August 16, 1954, Ch. 736, 68A Stat. 284) that exempts from gross income certain income held in the United States by foreign governments and related organizations.

V. Overview of the 1996 Federal Tax Acts

Public Law 104-188

The following are the applicable provisions of the federal Small Business Job Protection Act of 1996 (SBJPA) (Public Law 104-188), which was signed into law on August 20, 1996, and the comparable California tax law provisions, if they exist:

1. Provides relief from underpayment penalties resulting from new law (SBJPA Sec. 1102). California law does not conform to this provision and does not provide any separate penalty relief (CRTC Sec. 19136).

2. Increases the expensing treatment for small business tangible personal property to $18,000 in 1997, to $18,500 in 1998, to $19,000 in 1999, to $24,000 in 2000, and to $25,000 in 2003 (SBJPA Sec. 1111) (IRC Sec. 179). California law partially conforms to federal law on small business personal property expensing by increasing the current $10,000 deduction to $12,500 beginning January 1, 1997 and to $15,000 beginning January 1, 1998 (CRTC Secs. 17255 and 24356). [See discussion above on SB 38.] It should be pointed out that California only conforms for personal income taxpayers, and not for corporations.

3. Provides a credit for FICA payments paid with respect to employee cash tips (SBJPA Sec. 1112) (IRC Secs. 38 and 45B). This provision is not applicable to California.

4. Beginning January 1, 1996, federal law permits the storage of product samples, as well as inventory, to qualify under the home office deduction rules (SBJPA Sec. 1113) (IRC Sec. 280A(c)). California law does not have a comparable provision. Only the storage of inventory qualifies a person for this rule (CRTC Sec. 17201). California may conform to this provision.

5. Establishes rules for the treatment of certain charitable risk pools (SBJPA Sec. 1114) (IRC Sec. 501(n)). California law provides nonprofit insurance risk pools are tax-exempt under state law beginning January 1, 1996 (CRTC Sec. 23701z).

6. Modifies the treatment of dues paid to agricultural or horticultural organizations. Retroactive to 1987, the law provides that these organizations with annual dues not exceeding $100 will not have any of their dues treated as unrelated business income (SBJPA Sec. 1115) (IRC Sec. 512(d)). California law treats unrelated business income if an associate member category was formed to produce income (i.e., eligible for member benefits (CRTC Secs. 17651 and 23732). California may conform to this provision, but an issue arises regarding the effective date of the state tax law conformity.

7. Clarifies the employment tax status of certain fisherman and provides for an information reporting requirement (SBJPA Sec. 1116) (IRC Sec. 3121(b), 6050A(a) and 6724). California law does not have a comparable provision (CRTC Sec. 18644). California may conform to this provision.

8. Provides certain rules for tax exempt bonds used by farmers (SBJPA Sec. 1117) (IRC Sec. 147(c)). California law does not have a comparable provision (CRTC Secs. 17143 and 24272). California probably will not conform to this provision.

9. Treats newspaper distributors as direct sellers (SBJPA Sec. 1118) (IRC Sec. 3508(b)). California law does not have a comparable provision. California may conform to this provision.

10. Applies involuntary conversion rules to presidentially declared disasters. This was made retroactive to disasters after 1994 and expanded to include rules for trade or business property or investment property (SBJPA Sec. 1119) (IRC Sec. 1033(h)). California law only applies these special rules to personal residences (CRTC Secs. 18031, 18037, 24943, and 24949.2). California may conform to this provision.

11. Modifies the class life for gas station convenience stores and similar structures (SBJPA Sec. 1120) (IRC Sec. 168). California law does not have a comparable provision (CRTC Sec. 17201, 17250 and 24349). California may conform to this provision.

12. Specifies the treatment of abandonment of lessor improvements at the termination of the lease (SBJPA Sec. 1121) (IRC Sec. 168). California law does not have a comparable provision (CRTC Secs. 17201, 17250 and 24349). California may conform to this provision.

13. Provides special rules relating to the determination whether individuals are employees for purposes of employment taxes (SBJPA Sec. 1122). California law does not have a comparable provision.

14. Provides an exclusion from income for housing provided to employees of university hospitals (SBJPA Sec. 1123) (IRC Sec. 119(d)). California law does not have a comparable exclusion (CRTC Sec. 17131). California may conform to this provision.

15. Provides for the work opportunity tax credit (SBJPA Sec. 1201) (IRC Secs. 38, 41, 45A, 51, and 196). The California jobs tax credit applies only to employees who are hired before January 1, 1994 (CRTC Secs. 17053.7 and 23621). California may conform to this provision.

16. Extends the employer-provided educational assistance program (SBJPA Sec. 1202) (IRC Sec. 127). California law conforms to federal law on the exclusion from an employee's taxable income of employer-provided educational assistance beginning January 1, 1996 (CRTC Sec. 17151). [See discussion above on SB 38.]

17. Provides a FUTA exemption for alien agricultural workers (SBJPA Sec. 1203) (IRC Sec. 3306(c)). California law does not have a comparable provision.

18. Reinstates the R & D tax credit for 11 months, provides an alternative computation, and redefines a "start-up company" (SBJPA Sec. 1204) (IRC Sec. 41). California law increases the R & D tax credit for business-based research from 8 percent to 11 percent and for university-based research from 12 percent to 24 percent beginning January 1, 1997 (CRTC Secs. 17052.12 and 23609). [See discussion above on SB 38.] California may further conform to these provisions.

19. Provides an orphan drug tax credit (SBJPA Sec. 1205) (IRC Secs. 28, 29, 30, 38, 39, 45C, 53, and 55). California law does not have a comparable provision. California probably will not conform to this provision.

20. Modifies the rules for contributions of stock to private foundations. The deduction is limited to the fair market value of appreciated stock if it is contributed after June 30, 1996, and prior to July 1, 1997 (SBJPA Sec. 1206) (IRC Sec. 170(e)). California law had provided a fair market value deduction prior to December 31, 1994. California law only allows a charitable deduction for the cost of the stock (CRTC Secs. 17201, 24357.1, and 24359). California may conform to this provision.

21. Extends the binding contract date for biomass and coal facilities for purposes of the non-conventional fuels credit (SBJPA Sec. 1207) (IRC Sec. 29(g)). California law does not have an equivalent state tax credit. California probably will not conform to this provision.

22. Imposes a moratorium for the excise tax on diesel fuel sold for use or used in diesel-powered motorboats (SBJPA Sec. 1208) (IRC Sec. 4041(a)). California law does not have a comparable provision. California may conform to this provision.

23. Allows Subchapter S corporations to have a maximum of 75 shareholders for years beginning on or after January 1, 1997 (SBJPA Sec. 1301) (IRC Sec. 1361(b)). California law only permits S corporations to have a maximum of 35 shareholders (CRTC Secs. 17087.5 and 23800). California may conform to this provision.

24. Allows S corporations to elect a small business trust for years beginning on or after January 1, 1997 (SBJPA Sec. 1302) (IRC Secs. 641, 1361, and 1366). California law does not have a comparable provision. California may conform to this provision.

25. Expands the post-death qualification for certain trusts for years beginning on or after January 1, 1997 (SBJPA Sec. 1303) (IRC Sec. 1361(c)). California law does not have a comparable provision. California may conform to this provision.

26. Permits financial institutions to hold "safe harbor" debt for years beginning on or after January 1, 1997 (SBJPA Sec. 1304) (IRC Sec. 1361(c)). California law does not have a comparable provision. California may conform to this provision.

27. Provides rules relating to inadvertent terminations and invalid elections for years beginning on or after January 1, 1997 (SBJPA Sec. 1305) (IRC Sec. 1362(f)). California law does not have a comparable provision. California may conform to this provision, but an issue arises regarding the effective date of the state tax law conformity.

28. Allows for an agreement to terminate year for years beginning on or after January 1, 1997 (SBJPA Sec. 1306) (IRC Sec. 1377(a)). California law does not have a comparable provision. California may conform to this provision.

29. Expands the post-termination transition period for years beginning on or after January 1, 1997 (SBJPA Sec. 1307) (IRC Secs. 1366(g), 1377(b), 6037(c), and 6233(b)). California law does not have a comparable provision. California may conform to this provision.

30. Permits S corporations to hold subsidiaries for years beginning on or after January 1, 1997 (SBJPA Sec. 1308) (IRC Secs. 1361(b), 1362(d), and 1504(b)). California law does not have a comparable provision. California may conform to this provision.

31. Modifies the treatment of distributions during loss years for years beginning on or after January 1, 1997 (SBJPA Sec. 1309) (IRC Secs. 1366(d), 1368(d)). California law does not have a comparable provision. California may conform to this provision.

32. Modifies the treatment of S corporations under Subchapter C for years beginning on or after January 1, 1997 (SBJPA Sec. 1310) (IRC Sec. 1371(a)). California law does not have a comparable provision. California may conform to this provision.

33. Eliminates certain earnings and profits by S corporations for years beginning on or after January 1, 1997 (SBJPA Sec. 1311) (IRC Secs. 1042(c), 1362(d), and 1375). California law does not have a comparable provision. California probably will not conform to this provision because the issue appears to be moot.

34. Allows disallowed S corporation losses under the at-risk rules to be carried over to the S corporation's post-termination period for years beginning on or after January 1, 1997 (SBJPA Sec. 1312) (IRC Sec. 1366). California law does not have a comparable provision. California may conform to this provision.

35. Adjusts the basis of inheriting S corporation stock to reflect certain items of income for decedents dying after August 20, 1996 (SBJPA Sec. 1313) (IRC Sec. 1367). California law does not have a comparable provision. California may conform to this provision.

36. Makes S corporations eligible for rules applicable to real property subdivided for sale by noncorporate taxpayers for years beginning on or after January 1, 1997 (SBJPA Sec. 1314) (IRC Sec. 1237). California law does not have a comparable provision. California may conform to this provision.

37. Allows financial institutions to form S corporations for years beginning on or after January 1, 1997 (SBJPA Sec. 1315) (IRC Sec. 1361). California law does not have a comparable provision. California may conform to this provision.

38. Allows certain tax exempt organizations to be S corporation shareholders beginning on or after January 1, 1997 (SBJPA Sec. 1316) (IRC Secs. 170, 404, 512, 1042, and 1361). California law does not have a comparable provision. California may conform to this provision.

39. Changes the effective date for re-electing S corporation status for years beginning on or after January 1, 1997 (SBJPA Sec. 1317) (IRC Sec. 1362). California law does not have a comparable provision. California may conform to this provision because the state already conforms to the other termination rules.

40. Repeals the five-year income averaging rules for lump-sum distributions for years beginning on or after January 1, 2000 (SBJPA Sec. 1401) (IRC Sec. 55, 62, 401, 402, 406, 871, and 877). California law does not have a comparable provision (CRTC Secs. 17062, 17072, 17501, 17504, 23701, and 24601). California may conform to this provision.

41. Repeals the $5,000 exclusion of employees' death benefits for decedents dying after August 20, 1996 (SBJPA Sec. 1402) (IRC Secs. 101, 406, 407, and 7701). California law does not have a comparable provision (CRTC Secs. 17020.12, 17131, 17501, 23045.6, 24301, 24302, and 24601). California may conform to this provision.

42. Simplifies the method for taxing annuity distributions under certain employer plans for annuities beginning after November 18, 1996 (SBJPA Sec. 1403) (IRC Sec. 72). California law does not have a comparable provision (CRTC Secs. 17081 and 17085). California may conform to this provision.

43. Provides for new required beginning date of certain distributions (SBJPA Sec. 1404) (IRC Sec. 401). California law does not have a comparable provision (CRTC Secs. 17501 and 24601). California may conform to this provision.

44. Establishes savings incentive matching plans for employees (SIMPLE) of small employers for years beginning after 1996 (SBJPA Sec. 1421) (IRC Secs. 72, 219, 280, 401, 402, 404, 408, 416, 457, 3121, 3306, 3401, 4972, and 6695). California law does not have a comparable provision. California may conform to this provision.

45. Extends the SIMPLE plan to 401(k) arrangements for years beginning after 1996 (SBJPA Sec. 1422) (IRC Sec. 401). California law does not have a comparable provision. California may conform to this provision.

46. Makes tax-exempt organizations eligible under Sec. 401(k) for years beginning after 1996 (SBJPA Sec. 1426) (IRC Sec. 401). California law does not have a comparable provision. California may conform to this provision.

47. Allows a non-working spouse a full IRA deduction (SBJPA Sec. 1427) (IRC Secs. 219 and 408). California law conforms to federal law on spousal individual retirement account contributions in cases where one spouse is not employed by increasing the limit from $250 to $2,000 annually beginning January 1, 1997 (CRTC Secs. 17210 and 17507). [See discussion above on SB 38.]

48. Changes the definition of a highly compensated employee and repeals the family aggregation rule for years beginning after 1996 (SBJPA Sec. 1431) (IRC Secs. 401, 404, 408, 414, and 416). California law does not have a comparable provision. California may conform to this provision.

49. Modifies the additional participation requirements in defined benefit plans for years beginning after 1996 (SBJPA Sec. 1432) (IRC Sec. 401). California law does not have a comparable provision. California may conform to this provision.

50. Provides nondiscrimination rules for qualified cash or deferred arrangements and matching contributions for years beginning after 1996 (SBJPA Sec. 1433) (IRC Sec. 401). California law does not have a comparable provision. California may conform to this provision.

51. Provides a definition of compensation for purposes of IRC Sec. 415 concerning non-highly compensated employees for years beginning after 1998 (SBJPA Sec. 1434) (IRC Sec. 401). California law does not have a comparable provision. California may conform to this provision.

52. Provides miscellaneous provisions on pension simplification generally for years beginning after 1996 (SBJPA Secs. 1441-1457 and 1459-1465) (IRC Secs. 401, 411, 415 and 457). California law does not have any comparable provisions. California may conform to these provisions.

53. Provides for the treatment of the length of service awards to volunteers performing fire fighting or prevention services, emergency medical services, or ambulance services (SBJPA Sec. 1458) (IRC Secs. 457 and 3121). California law does not have a comparable provision. California may conform to this provision.

54. Provides for alternative nondiscrimination rules for certain 401(k) plans for years beginning after 1998 (SBJPA Sec. 1459) (IRC Sec. 401). California law does not have a comparable provision. California may conform to this provision.

55. Classifies the status of plan assets held in insurance company general accounts generally effective on January 1, 1975, but will not apply to any civil action commenced before November 7, 1995 (SBJPA Sec. 1460) (IRC Sec. 401). California does not have a comparable provision. California may conform to this provision.

56. Permits participation in church plans by chaplains and self-employed ministers for years beginning after 1996 (SBJPA Sec. 1461) (IRC Secs. 404 and 414). California does not have a comparable provision (CRTC Sec. 17501). California may conform to this provision.

57. Defines the term "highly compensated employee" for purposes of church plans for years beginning after 1996 (SBJPA Sec. 1462) (IRC Sec. 414). California does not have a comparable provision (CRTC Sec. 17501). California may conform to this provision.

58. Makes investment in contract rules not applicable to missionaries for years beginning after 1996 (SBJPA Sec. 1463) (IRC Sec. 72(f)). California does not have comparable provisions (CRTC Secs. 17081 and 17085). California may conform to this provision.

59. Waives the excise tax on the failure to pay liquidity shortfall effective as if included in GATT for years beginning after 1994 (SBJPA Sec. 1464) (IRC Sec. 4971). California does not have a comparable provision. California may conform to this provision.

60. Repeals the inclusion of certain earnings invested in excess passive assets for years beginning after 1996 (SBJPA Sec. 1501) (IRC Secs. 904, 951, 959, 989, 956, and 1297). California law does not have a comparable provision. California may conform to this provision concerning Subpart F income.

61. Phases in the repeal of the possessions corporations tax credit (SBJPA Sec. 1601) (IRC Sec. 936). California law does not have a comparable provision.

62. Repeals the exclusion for interest earned by lenders on loans used to acquire employer securities for purposes of an ESOP for loans made on or after August 21, 1996 (SBJPA Sec. 1602) (IRC Secs. 133, 291, 812, 852, 4978, and 7872). California law conforms to federal law on employee stock ownership plans beginning January 1, 1996 (CRTC Secs. 18042 and 24611). [See discussion above on SB 38.]

63. Provides that certain amounts derived from foreign corporations treated as unrelated business taxable income for years beginning after 1995 (SBJPA Sec. 1603) (IRC Sec. 5112). California law does not have a comparable provision (CRTC Secs. 17561 and 23732). California probably will not conform to this provision.

64. Allows depreciation under the income forecast method for property placed in service after September 13, 1995 (SBJPA Sec. 1604) (IRC Sec. 167). California law does not have a comparable provision. California may conform to this provision.

65. Repeals the exclusion for punitive damages and for damages not attributable to physical injuries or sickness generally for amounts received after August 20, 1996 (SBJPA Sec. 1605) (IRC Sec. 104). California law does not have a comparable provision (CRTC Sec. 17131). California may conform to this provision.

66. Repeals the diesel fuel tax rebate to purchasers of diesel-powered automobiles and light trucks (SBJPA Sec. 1609) (IRC Secs. 34, 142, 4001, 4041, 4081, 4091, 4261, 4282, 6421, 6427, and 9502). California law does not have a comparable provision.

67. Modifies the basis adjustment to property held by a corporation where the stock in the corporation is replacement property under involuntary conversion rules (SBJPA Sec. 1610) (IRC Sec. 1033). California law does not have a comparable provision. California may conform to this provision.

68. Provides for the treatment of certain insurance contracts on retired lives (SBJPA Sec. 1611) (IRC Sec. 817). California does not have a comparable provision. California may conform to this provision.

69. Provides for the treatment of contributions in aid of construction of water and sewer facilities (but not electric or gas facilities) (SBJPA Sec. 1613) (IRC Secs. 118 and 168). California law does not have a comparable provision. California may conform to this provision.

70. Permits election to cease status as a qualified funding corporation (SBJPA Sec. 1614) (IRC Sec. 1501). California does not have a comparable provision. California may conform to this provision.

71. Denies certain tax benefits to individuals who fail to provide taxpayer identification numbers (SBJPA Sec. 1615) (IRC Secs. 151, 6109, 6213, and 6724). California law does not have a comparable provision. California probably will not conform to this provision.

72. Repeals the bad debt reserve method for thrift savings associations (SBJPA Sec. 1616) (IRC Secs. 50, 52, 291, 585, 593, 860, 992, 1042, 1277, and 1361). California law does not have a comparable provision. California probably will not conform to this provision.

73. Limits the exclusion of energy conservation subsidies to those subsidies relating to dwelling units (SBJPA Sec. 1617) (IRC Sec. 136). California law does not have a comparable provision. California may conform to this provision.

74. Establishes Financial Asset Securitization Investment Trusts (FASITs) as a new type of entity (SBJPA Sec. 1621) (IRC Sec. 860). California law does not have a comparable provision. California may conform to this provision.

75. Makes technical corrections to previous federal tax acts (SBJPA Secs. 1701-1704). California law does not have comparable provisions. California may conform to these provisions.

76. Provides for diesel fuel dyeing requirement (SBJPA Sec. 1801) (IRC Sec. 4082). California law does not have a comparable provision. California may conform to this provision.

77. Modifies the treatment of certain university accounts relating to employment taxes (SBJPA Sec. 1802) (IRC Sec. 3121). California law does not have a comparable provision. California may conform to this provision.

78. Extends the excise tax exemption to imported, recycled halons (SBJPA Sec. 1803) (IRC Sec. 4682). California law does not have a comparable provision. California may conform to this provision.

79. Affects tax exempt bonds for sale by the Alaska Power Administration facility (SBJPA Sec. 1804) (IRC Secs. 142 and 147). California law does not have a comparable provision. California may conform to this provision.

80. Provides for the nonrecognition of certain transfers by common trust funds to regulated investment companies (SBJPA Sec. 1805) (IRC Sec. 584). California law does not have a comparable provision. California may conform to this provision.

81. Makes qualified state tuition programs exempt from taxation (SBJPA Sec. 1806) (IRC Secs. 135 and 529). The State of California and any of its agencies or instrumentalities are exempt from California income tax.

82. Provides a new adoption expense tax credit commencing in 1997. The credit is nonrefundable and is limited to $5,000. It also excludes from gross income employer adoption assistance program payments (SBJPA Sec. 1807) (IRC Secs. 23, 25, 86, 135, 137, 138, 219, 469, and 1016). California law, effective in 1994, allows a 50 percent tax credit for adoption costs (CRTC Sec. 17052.25). California law does not permit an exclusion from income for employer adoption assistance program payments. California may conform to the exclusion from income provision.

83. Provides foreign trust tax compliance rules (SBJPA Secs. 1901-1907) (IRC Secs. 643, 665, 672, 668, 679, 1491, 1494, 6048, 6724, 6677, 6039, and 7701). California law does not have any comparable provisions.

Public Law 104-191

The following are the applicable provisions of the federal Health Insurance Portability and Accountability Act of 1996 (HIPAA) (Public Law 104-191), which was signed into law on August 21, 1996, and the comparable California tax law provisions, if they exist:

1. Creates medical savings accounts for small employers and self-employed (HIPAA Sec. 301) (IRC Secs. 106 and 220). California law conforms to federal law on MSAs for years beginning after 1996 (CRTC Secs. 17138.5, 17141.5, 17150, 17201.5, 17267, and 24343.3). [See discussion above on SB 38.]

2. Increases the deduction for health insurance costs of self-employed individuals from the current 30 percent to 40 percent in 1997, to 45 percent in 1998, to 50 percent in 2003, to 60 percent in 2004, to 70 percent in 2005, and to 80 percent in 2006 (HIPAA Sec. 311) (IRC Secs. 104 and 162). California law only allows a deduction of 25 percent for health insurance costs incurred by self-employed individuals (CRTC Sec. 17273). California may conform to this provision.

3. Treats long-term health insurance as accident and health insurance contracts and thereby excludes them from an individual's income (HIPAA Sec. 321) (IRC Secs. 106, 125, 807, 4980, and 7702). California law does not have a comparable provision. California may conform to this provision.

4. Includes amounts paid for qualified long-term medical care services and insurance contracts as eligible deductions from income (HIPAA Sec. 322) (IRC Secs. 106, 213 and 220). California law conforms to federal law on the long-term care deduction for years beginning after 1996 (CRTC Secs. 17150 and 17213). [See discussion above on SB 38.]

5. Provides certain reporting requirements and consumer protection provisions (HIPAA Secs. 323-327) (IRC Secs. 4980, 6050, 6724, and 7702). California law does not have comparable provisions. California may conform to these provisions.

6. Specifies the treatment of accelerated death benefits by the recipient who is chronically ill or is a terminally ill individual (HIPAA Secs. 331 and 332) (IRC Secs. 101 and 818). Since 1991, California law has excluded from income the accelerated death benefits paid pursuant to California Insurance Code Sec. 10113.1 upon the occurrence of a catastrophic or life-threatening illness or condition (CRTC Secs. 17131 and 24302). California may conform to this provision.

7. Exempts from income tax any state-sponsored organizations providing health coverage for high-risk individuals (HIPAA Sec. 341) (IRC Sec. 501). The State of California and any of its agencies or instrumentalities are exempt from California income tax.

8. Exempts from income tax any state-sponsored workers' compensation reinsurance organizations (HIPAA Sec. 342) (IRC Sec. 501). The State of California and any of its agencies or instrumentalities are exempt from California income tax.

9. Allows special deduction for certain health plan organizations (HIPPA Sec. 351) (IRC Sec. 833). California does not have a comparable provision. California may conform to this provision.

10. Allows distributions from certain retirement plans to the unemployed may be used without additional tax to pay the premi-ums for financially devastating medical expenses (HIPAA Sec. 361) (IRC Sec. 72). California law does not have a comparable provision. California may conform to this provision.

11. Applies certain group health plan requirements and provides enforcement mechanisms (HIPAA Secs. 401-421) (IRC Sec. 4980). California law does not have comparable provisions. California may conform to these provisions.

12. Denies a deduction for interest on loans from company-owned life insurance policies (HIPAA Sec. 501) (IRC Sec. 264). California law conforms to federal law by restricting the deductibility of interest paid on the amount borrowed from corporate-owned life insurance policies beginning January 1, 1996 (CRTC Secs. 17279.5 and 24424). [See discussion above on SB 38.]

13. Provides certain treatment of individuals who lose their United States citizenship (HIPAA Secs. 511-513) (IRC Secs. 877 and 6039). California law does not have comparable provisions. California may conform to these provisions.

14. Repeals the financial institution transition rule for interest allocation (HIPAA Sec. 521) (Tax Reform Act of 1986 Sec. 1215). California law does not have a comparable provision because the state never conformed to this provision initially.

Public Law 104-193

The following is the applicable provision of the federal Personal Responsibility and Work Opportunity Reconciliation Act of 1996 (PRWORA), which was signed into law on August 22, 1996 (Public Law 104-193) and the comparable California tax law provision, if it exists:

1. Modifies the adjusted gross income definition for purposes of the earned income credit (EIC). (PRWORA Secs. 909 and 910) (IRC Sec. 32). California law does not have a comparable credit.

Public Law 104-7

The following are the applicable provisions of the federal Deduction for Health Insurance Costs of Self-Employed Individuals (DHICSI), which was signed into law on April 11, 1996 (Public Law 104-7) and the comparable California tax law provisions, if they exist:

1. Extends permanently the deduction for health insurance costs of self-employed individuals for years beginning after 1993 (DHICSI Sec. 1(a) and (c)) (IRC Sec. 162). California law pre-conformed to extension of the deduction (CRTC Sec. 17273).

2. Increases the deduction for health insurance costs of self-employed individuals from 25 percent to 30 percent for years beginning after 1995 (DHICSI Sec. 1(b) and (c)) (IRC Sec. 162). California law continues to provide a 25 percent deduction (CRTC Sec. 17273). California probably will not conform to this provision.

3. Provides special rules relating to involuntary conversions (DHICSI Sec. 3) (IRC Sec. 1033). California law continues to apply with previous rules. California may conform to this provision.

Public Law 104-95

The following is the applicable provision of the federal State Income Taxation of Pension Income (SITPI), which was signed into law on January 10, 1996 (Public Law 104-95) and the comparable California tax law provision, if it exists:

1. Limits the state income taxation of certain pension income (SITPI Sec. 1). California conformed to this provision in 1996 in AB 850 (Stats. 1996, Ch. 506).

Public Law 104-117

The following is the applicable provision of the federal Tax Benefits for Servicemen in Bosnia and Herzegovina (TBSBH) (Public Law 104-117) and the comparable California tax law provision, if it exists:

1. Modifies the treatment of certain individuals performing services in hazardous duty areas (TBSBH Sec. 1). California conformed to this provision in 1996 in AB 1626 (Stats. 1996, Ch. 723).

VI. Overview of the 1993 Federal Acts

Following are applicable provisions of the federal Revenue Reconciliation Act of 1993 (Public Law 103-66) and the comparable California tax law provisions, if they exist:

1. Extended the employer-provided educational assistance program (RRA Sec. 13101) (IRC Sec. 127). California law conformed to federal law on the exclusion from an employee's taxable income of employer-provided educational assistance beginning January 1, 1996 (CRTC Secs. 17131 and 17151).

2. Extended the targeted jobs tax credit (RRA Sec. 13102) (IRC Sec. 51). California applies the tax credit to those employees who are hired prior to January 1, 1994 (CRTC Secs. 17053.7 and 23621). California probably will not conform to this provision.

3. Extended the research and development tax credit (RRA Sec. 13111) (IRC Sec. 41). California law conformed to these federal tax law changes and repealed the prior state differences in SB 671 (Alquist, Stats. 1993, Ch. 881). Among other provisions, California's research and development tax credit was made permanent (CRTC Secs. 17052.12 and 23609).

4. Extended the clinical testing tax credit (RRA Sec. 13111) (IRC Sec. 41). California law previously provided such a credit, but this expired (former CRTC Secs. 17057 and 23609.5). California probably will not conform to this provision.

5. Modified the fixed base percentage of the research and development tax credit for certain start-up companies (RRA Sec. 13112) (IRC Sec. 41). California law conformed to these federal tax law changes and repealed the prior state differences in SB 671 (Stats. 1993, Ch. 881) (CRTC Secs. 17052.12 and 23609).

6. Provided a 50 percent exclusion for the gain from the sale of certain small business stock (RRA Sec. 13113) (IRC Secs. 53, 57, 172, 642, 643, 691, 871, 1200, and 6652). California law partially conformed to this provision, and required that the business be located in this state (CRTC Secs. 17062, 17063, 17276, 17736, 17750, 18152.5, 18683.5, and 19133.5). California probably will not conform to this provision.

7. Allowed the rollover of the gain from the sale of certain publicly traded securities into specialized small businesses (RRA Sec. 13114) (IRC Secs. 1016 and 1044). California law does not conform and treats such a rollover as a taxable event (CRTC Secs. 18031, 18036, 24916, 24916.2, and 24917). California probably will not conform to this provision.

8. Modified the alternative minimum tax depreciation rules (the ACE adjustment for corporations) (RRA Sec. 13115) (IRC Sec. 56). California law applies these rules to all property without regard to the date of acquisition of the property (CRTC Secs. 17062, 17201, 23456, and 23802). California probably will not conform to this provision.

9. Increased the expensing treatment for small business tangible personal property to $17,500 (RRA Sec. 13116) (IRC Sec. 179). California law partially conformed to federal law on small business personal property expensing by increasing the current $10,000 deduction to $12,500 beginning January 1, 1997 and to $15,000 beginning January 1, 1998 (CRTC Sec. 17255). [See discussion above on SB 38.] It should be noted that California only conforms for personal income taxpayers, and not for corporations.

10. Extended the low-income housing tax credit (RRA Sec. 13142) (IRC Sec. 42). California law fully conformed to this tax credit in 1994 in AB 3651 (Stats. 1994, Ch. 1164) (CRTC Secs. 17058 and 23610.5).

11. Allowed certain taxpayers involved in real property trades or businesses to escape the passive loss rules (RRA Sec. 13143) (IRC Sec. 469). California law still applies passive loss rules to all taxpayers (CRTC Secs. 17551, 17561 and 24692). California probably will not conform to this provision.

12. Modified the rules concerning real estate investments made by pension funds (RRA Secs. 13144-13149) (IRC Sec. 514). California law continues to apply the previous rules (CRTC Sec. 23735). California may conform to these provisions.

13. Modified the rules concerning the discharge of real property indebtedness allowing an election to exclude realized income (RRA Sec. 13150) (IRC Secs. 108, 382, 703, and 1017). California law conformed to these provisions beginning January 1, 1996

(CRTC Secs. 17144, 17330, 17859, 18044, 24307, 24472, and 24903. [See discussion above on SB 38.]

14. Extended the recovery period for depreciation of non-residential real property (RRA Sec. 13151) (IRC Sec. 168). California law increased the period from 31.5 years to 39 years beginning January 1, 1997 (CRTC Sec. 17250). [See discussion above on SB 38.]

15. Modified the alternative minimum tax treatment of contributions of appreciated property (RRA Sec. 13171) (IRC Secs. 53, 56 and 57). California law still requires an adjustment to be made (CRTC Secs. 17062, 23456 and 23457). California may conform to this provision.

16. Imposed substantiation requirements for charitable contributions (RRA Sec. 13172) (IRC Sec. 170). California law does not have any separate requirement. California may conform to this provision by requiring state taxpayers to comply with the federal requirements.

17. Required disclosure of contributions made quid pro quo (RRA Sec. 13173) (IRC Secs. 6115 and 6714). California law does not require any separate disclosure. California may conform to this provision by requiring state taxpayers to comply with the federal requirements.

18. Temporarily extended the deduction for health insurance costs of self-employed individuals (RRA Sec. 13174) (IRC Sec. 162). California law "pre-conformed" to this provision by making the deduction permanent (CRTC Secs. 17201 and 17273).

19. Increased individual, corporate and alternative minimum tax rates, as well as exemption amounts (RRA Secs. 13201-13205) (IRC Sec. 1). California law retained its current tax rates, but conformed to the itemized deduction and exemption rules; and, the itemized deduction limitation and personal exemption phase-out were made permanent (CRTC Secs. 17041, 17062, 17077, and 17054.1). California probably will not increase its tax rates.

20. Applied ordinary income rule for conversion transactions for transactions entered into after April 30, 1993 (RRA Sec. 13206) (IRC Sec. 1258). California law does not apply this rule (CRTC Secs. 18151 and 24990). California probably will not conform to this provision.

21. Expanded ordinary income rule for tax exempt obligations and market discount bonds issued on or before July 18, 1984, and purchased after April 30, 1993 (RRA Sec. 13206) (IRC Secs. 1276, 1277 and 1278). California law does not apply this rule (CRTC Secs. 18151 and 24990). California probably will not conform to this provision.

22. Expanded ordinary income rule for stripped preferred stock purchased after April 30, 1993 (RRA Sec. 13206) (IRC Secs. 167 and 305). California law does not apply this rule (CRTC Secs. 17321 and 24451). California probably will not conform to this provision.

23. Excluded from investment income capital gain attributable to the disposition of investment property for purposes of the investment interest limitation (RRA Sec. 13206) (IRC Secs. 1 and 163). California law does not apply this rule (CRTC Sec. 17201). California probably will not conform to this provision.

24. Modified partnership treatment of substantially appreciated property (RRA Sec. 13206) (IRC Sec. 751). California law does not apply this rule (CRTC Secs. 17851 and 17856). California probably will not conform to this provision.

25. Repealed the wage limitation subject to health insurance employment tax (part of FICA/SECA) for wages received after December 31, 1993 (RRA Sec. 13207) (IRC Secs. 1402, 3121 - 3123, and 6413). California law provides a health insurance employment tax.

26. Made permanent the top estate and gift tax rates (RRA Sec. 13208) (IRC Sec. 2110). California law does not apply this rule. California probably will not conform to this provision.

27. Reduced the deduction for business meals and entertainment expenses from 80 percent to 50 percent (RRA Sec. 13209) (IRC Sec. 274). California law conformed to this federal tax law change and repealed the prior state differences in SB 671 (Stats. 1993, Ch. 881) (CRTC Secs. 17201, 17271 and 24443).

28. Eliminated the deduction for club membership dues (RRA Sec. 13210) (IRC Sec. 274). With the exception of dues paid to clubs that discriminate, California law still permits a deduction for such dues (CRTC Secs. 17269, 17271, 24343.2, and 24443). California probably will not conform to this provision.

29. Disallowed a deduction for employee remuneration in excess of $1 million (RRA Sec. 13211) (IRC Sec. 162). California law still permits a deduction for such executive compensation (CRTC Secs. 17201 and 24343.5). California probably will not conform to this provision.

30. Limited the deduction for certain moving expenses by personal income taxpayers (RRA Sec. 13213) (IRC Secs. 62 and 1001). California law conformed to these provisions beginning January 1, 1996 (CRTC Secs. 17072, 17076, 17084, 17134.5, and 17218). [See discussion on SB 38.]

31. Simplified estimated tax payments for individual taxpayers (RRA Sec. 13214) (IRC Sec. 6654). California law follows prior federal law by restricting the use of the prior year's exception by virtue of a statutory sunset of December 31, 1996 (CRTC Sec. 19136). California conforms to this provision.

32. Increased the top marginal tax rate for corporations (RRA Sec. 13221) (IRC Secs. 852, 1201 and 1445). California law imposes only one tax rate on corporations (CRTC Secs. 23151, 23501, 24870, and 24871). The rate was decreased from 9.3 percent to 8.84 percent for tax years beginning after 1996 in AB 3499 (Stats. 1996, Ch. 170). California probably will not conform to this provision.

33. Disallowed a deduction for lobbying expenditures (RRA Sec. 13222) (IRC Secs. 162, 170 and 6033). California law still permits a deduction for such expenses (CRTC Secs. 17201 and 24343). California probably will not conform to this provision.

34. Required securities held by dealers to be "marked-to-market" (RRA Sec. 13223) (IRC Secs. 475 and 988). California law conformed to these provisions beginning January 1, 1997 (CRTC Secs. 17077.5, 17570, 24710, and 24905.5). [See discussion above on SB 38.]

35. Increased the estimated corporate payments from 95 percent to 100 percent (RRA Sec. 13225) (IRC Sec. 6655). California law increased the payments from 95 percent to 98 percent of the current year's tax liability beginning January 1, 1998 and to 100 percent beginning January 1, 1999 (CRTC Secs. 19144, 19147, and 19148). [See discussion above on SB 38.]

36. Modified the rules concerning the discharge of indebtedness stock-for-debt exception for stock transfers (RRA Sec. 13226) (IRC Secs. 108, 382, 703, and 1017). California law conformed to these provisions beginning January 1, 1996 (CRTC Secs. 17144, 17330, 17859, 18044, 24307, 24472, and 24903. [See discussion above on SB 38.]

37. Restricted the deductibility of interest paid to foreign entities (RRA Sec. 13228) (IRC Sec. 163). California law conformed to this provision beginning January 1, 1996 (CRTC Sec. 24344.7). [See discussion above on SB 38.]

38. Deferred U.S. tax on controlled foreign corporations (CFC) earnings limitation for years beginning on or after October 1, 1993 (RRA Secs. 13231 - 13233) (IRC Secs. 951, 956, 959, 1296, and 1297). California law does not provide for similar treatment (CRTC Secs. 18151, 23051.5, 24995, and 25110). California probably will not conform to these provisions.

39. Modified the allocation of research and experimental expenses (RRA Sec. 13234) (IRC Sec. 864). California law does not provide for similar treatment (CRTC Sec. 25110). California probably will not conform to these provisions.

40. Eliminated the working capital exception for foreign oil, gas and shipping income earned in years beginning on or after January 1, 1993 (RRA Sec. 13235) (IRC Secs. 907, 914 and 954). California law does not provide for similar treatment (CRTC Secs. 18685, 19164 and 25935). California probably will not conform to these provisions.

41. Imposed an accuracy-related penalty for transfer pricing violations (RRA Sec. 13236) (IRC Sec. 6662). California law does not provide for similar treatment (CRTC Secs. 18685, 19164 and 25935). California probably will not conform to these provisions.

42. Exempted portfolio interest received by nonresident alien individuals or foreign corporations for contingent interest (RRA Sec. 13237) (IRC Secs. 871, 881, 1441, and 1442). California law does not provide for similar treatment (CRTC Secs. 17201 and 24344). California probably will not conform to these provisions.

43. Provided regulatory authority for multi-party conduit arrangements (RRA Sec. 13238) (IRC Sec. 7701). California law does not provide for similar treatment (CRTC Secs. 18685, 19164 and 25935). California probably will not conform to these provisions.

44. Modified the treatment of exports of certain softwood logs (RRA Sec. 13239) (IRC Secs. 861-865, 921-927, 951-964, and 991-996). California law conformed to this provision in 1994 in AB 2925 (Stats. 1994, Ch. 1296) (CRTC Secs. 17091 and 24272.3).

45. Allowed the amortization of certain goodwill and other intangibles (RRA Sec. 13261) (IRC Sec. 197). California law conformed to this provision in 1994 in SB 1880 (Stats. 1994, Ch. 861) (CRTC Secs. 17249, 17279, 17748, 18035, 18060, 18166, 18173, 24353, 24355, 24355.5, 24916, 24966.3, 24990.8, 24990.9, and 25128).

46. Altered the treatment of payments to retired or deceased partners (RRA Sec. 13262) (IRC Secs. 736 and 751). California law conformed to this provision beginning January 1, 1996 (CRTC Sec. 17860). [See discussion above on SB 38.]

47. Denied a deduction for spousal and dependent travel expenses (RRA Sec. 13272) (IRC Sec. 274). California law conformed to this provision beginning January 1, 1996 (CRTC Secs. 17271 and 24443). [See discussion above on SB 38.]

48. Created Empowerment Zones, Enterprise Communities, and Rural Development Investment Areas (RRA Secs. 13301-13311) (IRC Secs. 38, 39, 51, 280, 381, and 1391-1397). California law does not conform to these provisions, but has special rules for its related programs - Enterprise Zones, Los Angeles Revi-talization Zone, and the Local Area Military Base Recovery Areas. California probably will not conform to these provisions.

49. Accelerated the depreciation for property on Indian reservations (RRA Sec. 13321) (IRC Sec. 168). California continues to apply the previous rules for such property (CRTC Secs. 17250, et seq.). California probably will not conform to this provision.

Public Law 103-322

The following is the applicable provision of the federal Violent Crime Control and Law Enforcement Act (VCCLEA) (Public Law 103-322) and the comparable California tax law provision, if it exists:

1. Requires the reporting of cash received by Criminal Court Clerks (VCCLEA Sec. 20415) (IRC Secs. 6050 and 6724 ). California law does not have a comparable provision. California may conform to this provision.

Public Law 103-465

The following are the applicable provisions of the federal General Agreement on Tariffs and Trade (GATT) (Public Law 103-465) and the comparable California tax law provisions, if they exist:

1. Required withholding on the distributions of Indian casino profits to tribal members (GATT Sec. 701) (IRC Sec. 3402). California law does not require such withholding. California probably will not conform to this provision.

2. Allowed voluntary withholding on certain federal payments made and on unemployment compensation paid (GATT Sec. 702) (IRC Secs. 3304 and 3402). California law does not tax unemployment compensation.

3. Modified the treatment of Subpart F income and IRC Sec. 936 income for taxpayers using the annualized method (GATT Sec. 711) (IRC Secs. 6654 and 6655). California law does not have a comparable provision. California probably will not conform to this provision.

4. Changed the time for payments and deposits of certain taxes (GATT Sec. 712) (IRC Secs. 4261, 4271, 5061, 5703, and 6302). California law does not have a comparable provision. California probably will not conform to this provision.

5. Reduced the rate of interest paid on certain corporate overpayments (GATT Sec. 713) (IRC Sec. 6402). California law does not have a comparable provision. California probably will not conform to this provision.

6. Extended the earned income tax credit to certain military personnel stationed outside of the United States (GATT Sec. 721) (IRC Sec. 32). California law does not have a comparable provision.

7. Made certain nonresident aliens ineligible for the earned income tax credit (GATT Sec. 722) (IRC Sec. 32). California law does not have a comparable provision.

8. Disregarded the income of prisoners in determining the earned income tax credit (GATT Sec. 723) (IRC Sec. 32). California law does not have a comparable provision.

9. Modified treatment of excess pension assets used for retiree health benefits (GATT Sec. 731) (IRC Sec. 420). California law does not have a comparable provision. California may conform to this provision.

10. Provided rounding rules for cost-of-living adjustments (GATT Sec. 732) (IRC Secs. 401, 402, 408 and 415). California law does not have a comparable provision. California may conform to this provision.

11. Increased the inclusion of Social Security benefits paid to nonresidents (GATT Sec. 733) (IRC Sec. 871). California law does not have a comparable provision.

12. Modified partnership distributions of marketable securities (GATT Sec. 741) (IRC Secs. 731 and 737). California law does not have a comparable provision. California may conform to this provision.

13. Required taxpayer identification numbers be obtained at birth (GATT Sec. 742) (IRC Secs. 32 and 6109). California law does not have a comparable provision. California probably will not conform to this provision.

14. Extended the Internal Revenue Service user fees (GATT Sec. 743) (Revenue Act of 1987 Sec. 10511). This provision is not applicable to state tax law.

15. Modified the substantial understatement penalty for corporations participating in certain tax shelters (GATT Sec. 744) (IRC Sec. 6662). California law does not have a comparable provision. California may conform to this provision.

16. Modified the authority to set terms and conditions for savings bonds (GATT Sec. 745) (31 U.S.C. Sec. 3105). This provision is not applicable to state tax law.

17. Provided a number of changes to pension rules including minimum funding requirements (GATT Sec. 751); limited changes in current liability assumptions (GATT Sec. 752); Anticipation of bargained benefit increases (GATT Sec. 753); modified the requirement of quarterly contributions (GATT Sec. 754); and, made exceptions to the excise tax on nondeductible contributions (GATT Sec. 755) (IRC Secs. 401, 411, 412, 415, and 417). California law does not have comparable provisions (CRTC Secs. 17501, 23701 and 24601). California may conform to these provisions.

TO BE CONTINUED IN THE APRIL ISSUE OF CAL-TAX DIGEST

Chris Micheli

Gina Rodriguez

Mr. Micheli is an attorney and legislative advocate for the Sacramento governmental relations firm of Carpenter Snodgrass & Associates. Ms. Rodriquez, EA, is the Sacramento editor for Spidell Publishing, Incorporated. The authors are grateful to John Pavalovsky of the Franchise Tax Board for helping compile the list of federal conformity items.