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SB-1316 Income taxes: property exchanges: investment credits.(2009-2010)

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SB1316:v94#DOCUMENT

Amended  IN  Senate  August 17, 2010
Amended  IN  Senate  August 02, 2010
Amended  IN  Senate  June 28, 2010
Amended  IN  Senate  June 16, 2010
Amended  IN  Senate  April 22, 2010

CALIFORNIA LEGISLATURE— 2009–2010 REGULAR SESSION

Senate Bill
No. 1316

Introduced  by  Senator Romero

February 19, 2010

An act to add Sections 17053.9 and 23622.9 to, and to add and repeal Sections 18036.8 and 24941.5 24941.6 of, the Revenue and Taxation Code, relating to taxation, and making an appropriation therefor, to take effect immediately, tax levy.


LEGISLATIVE COUNSEL'S DIGEST


SB 1316, as amended, Romero. Income taxes: property exchanges: investment credits.
The Personal Income Tax Law and the Corporation Tax Law provide that no gain or loss is recognized on the exchange of property held for productive use in a trade or business or for investment, if that property is exchanged solely for property of a like kind that is to be held either for productive use in a trade or business or for investment.
This bill would, for taxable years beginning on or after January 1, 2011, and before January 1, 2012, exclude from that nonrecognition, any exchange in which out-of-state real property is received in exchange for real property located in California.
The Personal Income Tax Law and the Corporation Tax Law authorize various credits against the taxes imposed by those laws. Existing law creates the California Tax Credit Allocation Committee, which has specified duties in regard to low-income housing credits.
This bill would authorize a credit under both laws, for taxable years beginning on or after January 1, 2011, and before January 1, 2012, in a specified amount for investments in low-income communities, as provided. This bill would impose specified duties on the California Tax Credit Allocation Committee with regard to the application for, and allocation of, the credit. The bill would require the committee to establish and impose reasonable fees upon entities that apply for the allocation of the credit and use the revenue to defray the cost of administering the program, as specified, thereby making an appropriation. This bill would also appropriate $150,000 from the Tax Credit Allocation Fee Account to the committee for purposes of implementing the tax credit.
This bill would take effect immediately as a tax levy.
Vote: MAJORITY   Appropriation: YES   Fiscal Committee: YES   Local Program: NO  

The people of the State of California do enact as follows:


SECTION 1.

 The Legislature finds and declares all of the following:
(a) The granting of tax benefits for the purchase of real property located beyond California’s borders is of no direct benefit to the people of the State of California, and does not advance any legitimate local purpose.
(b) The revenue from disallowing these tax benefits, which are currently obtained from the exchange of property for like kind property, commonly known as a 1031 exchange, can instead be used to foster greater economic development within California’s borders, and this development advances a legitimate local purpose.
(c) While this disallowance will remove a tax benefit in the form of deferred capital gains taxes from investors who purchase out-of-state properties, these funds amount to only 10 percent of California’s total 1031 exchanges. Furthermore, the lion’s share of the tax benefits for these investment purchases exists at the federal, rather than the state level. For this reason, no substantial decrease in out-of-state real estate investments is anticipated as a result of this legislation.
(d) In the current economic climate, the acquisition of revenue to stimulate in-state economic development cannot be achieved by any nondiscriminatory alternative.

SEC. 2.

 Section 17053.9 is added to the Revenue and Taxation Code, to read:

17053.9.
 There is hereby created the California New Markets Tax Credit Program as provided in this section and Section 23622.9. The purpose of this program is to stimulate economic development, and hasten California’s economic recovery, by granting tax credits for investment in California, including, but not limited to, retail businesses, real property, financial institutions, and schools. The California Tax Credit Allocation Committee shall have responsibility for the administration of this program as provided in this section and Section 23622.9. The program shall be as follows:
(a) (1) For taxable years beginning on or after January 1, 2011, and before January 1, 2012, there shall be allowed to a taxpayer that holds a qualified equity investment on a credit allowance date of the investment which occurs during the taxable year, as a credit against the “net tax,” as defined in Section 17039, an amount equal to the applicable percentage described in paragraph (2).
(2) For purposes of paragraph (1), the applicable percentage shall be 39 percent of the qualified equity investment.
(b) For purposes of this section:
(1) “Credit allowance date” means, with respect to any qualified equity investment, the date on which the investment is initially made.
(2) “Equity investment” means either of the following:
(A) Any stock, other than nonqualified preferred stock as defined in Section 351(g)(2) of the Internal Revenue Code, in an entity which is a corporation.
(B) Any capital interest in an entity which is a partnership.
(3) (A) “Low-income community” means a population census tract where any of the following applies:
(i) The tract has a poverty rate of at least 20 percent.
(ii) The tract is not located within a metropolitan area and the median family income does not exceed 80 percent of the statewide median family income.
(iii) The tract is located within a metropolitan area and the median family income does not exceed 80 percent of the greater statewide median family income or the metropolitan area median family income.
(iv) The tract is located within a high migration rural county and the median income does not exceed 85 percent of the statewide median family income. For purposes of this clause, “high migration rural county” means a county which, during the 20-year period ending with the year in which the most recent census was conducted, has a net out migration of inhabitants from the county of at least 10 percent of the population of the county at the beginning of that period.
(B) Where a community is in a location that is not tracted for population census tracts, the equivalent county divisions shall be used for purposes of determining poverty rates and median family income.
(C) Where a community is in a population census tract with a population of less than 2,000, the community shall be treated as a low-income community if the tract is within an empowerment zone designated under Section 1391 of the Internal Revenue Code and is contiguous to one or more low-income communities, as determined under this paragraph.
(4) (A) “Qualified active low-income community business” means, with respect to any taxable year, a corporation, including a nonprofit corporation, or partnership that, for that taxable year, meets all of the following conditions:
(i) Derives at least 50 percent of its total gross income from the active conduct of a qualified business in a low-income community in California.
(ii) A substantial portion of the use of the tangible property of the entity, whether owned or leased, is within a low-income community in California. “Substantial portion” shall be defined as 40 percent or more of the tangible property of the entity.
(iii) Less than 5 percent of the average of the aggregate unadjusted base of the property of the entity is attributable to collectibles, as defined in Section 408(m)(2) of the Internal Revenue Code.
(iv) Less than 5 percent of the average of the aggregate unadjusted base of the property of the entity is attributable to nonqualified financial property, as defined in Section 1397C(e) of the Internal Revenue Code.
(B) A “qualified active low-income community business” shall include a business carried on by an individual as a proprietor if that business meets the requirements of subparagraph (A) were it incorporated or a trade or business which would qualify if that trade or business were separately incorporated.
(5) “Qualified business” has the same meaning as that in Section 1397C(d) of the Internal Revenue Code except that:
(A) In lieu of applying subparagraph (B) of paragraph (2), the rental to others of real property located in any low-income community shall be treated as a qualified business if there are substantial improvements located on that real property.
(B) Paragraph (3) of that section shall not apply.
(6) (A) “Qualified community development entity” means a domestic corporation or partnership that meets all of the following conditions:
(i) Has a primary mission of serving, or providing investment capital for, low-income communities or low-income persons.
(ii) Maintains accountability to residents of low-income communities through their representation on any governing board of the entity or on any advisory board to the entity.
(iii) Is certified by the California Tax Credit Allocation Committee for purposes of this section as being a qualified community development entity.
(B) A domestic corporation or partnership shall be deemed a “qualified community development entity” if it has entered into an allocation agreement with the Community Development Financial Institutions Fund of the United States Department of the Treasury with respect to credits authorized by Section 45D of the Internal Revenue Code of 1986, as amended, and if the allocation agreement includes the state within its service area.
(7) (A) “Qualified equity investment” means any equity investment in a qualified community development entity if all of the following conditions are met:
(i) The investment is acquired by the taxpayer at its original issue, directly or through an underwriter, solely in exchange for cash.
(ii) Substantially all of the cash is used by the qualified community development entity to make low-income community investments. This requirement shall be deemed met if at least 85 percent of the aggregate gross assets of the qualified community development entity are invested in qualified low-income community investments in California.
(iii) The investment is designated for purposes of this section by the qualified community development entity.
(B) “Qualified equity investment” does not include any equity investment issued by a qualified community development entity more than one year after the date that the entity receives an allocation under subdivision (d).
(C) A “qualified equity investment” shall include any equity investment which would, notwithstanding clause (i) of subparagraph (A), be a qualified equity investment in the hands of the taxpayer if the investment was a qualified equity investment in the hands of a prior holder.
(D) Section 1202(c)(3) of the Internal Revenue Code, relating to purchases by a corporation of its own stock, shall apply.
(8) “Qualified low-income community investment” means any of the following:
(A) Any capital or equity investment in, or loan to, a qualified low-income community business.
(B) Any capital or equity investment in, or loan to, a real estate project in a low-income community.
(C) The purchase from another qualified community development entity of any loan made by that entity which is a qualified low-income community investment.
(D) Financial counseling and other services in support of business activities to businesses located in, and residents of, low-income communities.
(E) Any equity investment in, or loan to, a qualified community development entity.
(c) The California Tax Credit Allocation Committee shall adopt guidelines necessary or appropriate to carry out the purposes of this section. The adoption of the guidelines shall not be subject to the rulemaking provisions of the Administrative Procedure Act of Chapter 3.5 (commencing with Section 11340) of Part 1 of Division 3 of Title 2 of the Government Code. The committee shall establish and impose reasonable fees upon entities that apply for the allocation pursuant to subdivision (d) and use the revenue to defray the cost of administering the program. The committee shall establish the fees in a manner that ensures that (1) the total amount collected equals the amount reasonably necessary to defray the commission’s costs in performing its administrative duties under this section, and (2) the amount paid by each entity reasonably corresponds with the value of the services provided to the entity.
(d) (1) The aggregate amount of credit that may be allowed in any calendar year pursuant to this section and Section 23622.9 shall be an amount equal to the aggregate revenue increase attributable in that same calendar year to Sections 18036.8 and 24941, as amended 24941.6, as added by the act adding this section, as estimated by the Franchise Tax Board, so as to achieve a revenue neutral effect.
(2) The aggregate amount of credit specified under paragraph (1) shall be allocated by the California Tax Credit Allocation Committee among entities that apply for the allocation. The California Tax Credit Allocation Committee shall give priority to applications that either are submitted by an entity that has a record of successfully providing capital or technical assistance to disadvantaged businesses or communities or entities that intend to make qualified low-income community investments in one or more businesses in which persons unrelated to the entity hold the majority equity interest.
(e) Any credits used under subdivision (a) for a qualified equity investment where a recapture event occurs at any time before the close of the seventh taxable year after the qualified equity investment shall be included in the income in the taxable year in which the recapture event occurred. For purposes of this subdivision, a “recapture event” shall include any of the following that occur any time before the close of the seventh taxable year after the qualified equity investment in a qualified community development entity:
(1) The qualified community development entity ceases to be a qualified community development entity.
(2) The proceeds of the investment cease to be used as required under clause (ii) of subparagraph (A) of paragraph (7) of subdivision (b).
(3) The investment is redeemed by a qualified community development entity.
(f) An exception to the provisions of clause (ii) of subparagraph (A) of paragraph (7) of subdivision (b) shall exist wherein an investment shall be considered held by a community development entity even if the investment has been sold or repaid, provided that the community development entity reinvests an amount equal to the capital returned to or recovered by the community development entity from the original investment, exclusive of any profits realized, in another qualified low-income community investment within 12 months of the receipt of that capital. A community development entity shall not be required to reinvest capital returned from qualified low-income community investments after the sixth anniversary of the issuance of the qualified equity investment, the proceeds of which were used to make the qualified low-income community investment, and the qualified low-income community investment shall be considered held by the community development entity through the seventh anniversary of the qualified equity investment’s issuance.

SEC. 3.

 Section 18036.8 is added to the Revenue and Taxation Code, to read:

18036.8.
 (a) For taxable years beginning on or after January 1, 2011, and before January 1, 2012, the provisions of Section 1031 of the Internal Revenue Code, relating to the exchange of property held for productive use or investment, shall not apply to out-of-state real property that is received in exchange for real property located in California.
(b) This section shall remain in effect only until December 1, 2012, and as of that date is repealed.

SEC. 4.

 Section 23622.9 is added to the Revenue and Taxation Code, to read:

23622.9.
 There is hereby created the California New Markets Tax Credit Program as provided in this section and Section 17053.9. The purpose of this program is to stimulate economic development, and hasten California’s economic recovery, by granting tax credits for investment in California, including, but not limited to, retail businesses, real property, financial institutions, and schools. The California Tax Credit Allocation Committee shall have responsibility for the administration of this program as provided in this section and Section 17053.9. The program shall be as follows:
(a) (1) For taxable years beginning on or after January 1, 2011, and before January 1, 2012, there shall be allowed to a taxpayer that holds a qualified equity investment on a credit allowance date of the investment which occurs during the taxable year, as a credit against the “tax,” as defined in Section 23036, an amount equal to the applicable percentage described in paragraph (2).
(2) For purposes of paragraph (1), the applicable percentage shall be 39 percent of the qualified equity investment.
(b) For purposes of this section:
(1) “Credit allowance date” means, with respect to any qualified equity investment, the date on which the investment is initially made.
(2) “Equity investment” means either of the following:
(A) Any stock, other than nonqualified preferred stock as defined in Section 351(g)(2) of the Internal Revenue Code, in an entity which is a corporation.
(B) Any capital interest in an entity which is a partnership.
(3) (A) “Low-income community” means a population census tract where any of the following applies:
(i) The tract has a poverty rate of at least 20 percent.
(ii) The tract is not located within a metropolitan area and the median family income does not exceed 80 percent of the statewide median family income.
(iii) The tract is located within a metropolitan area and the median family income does not exceed 80 percent of the greater statewide median family income or the metropolitan area median family income.
(iv) The tract is located within a high migration rural county and the median income does not exceed 85 percent of the statewide median family income. For purposes of this clause, “high migration rural county” means a county which, during the 20-year period ending with the year in which the most recent census was conducted, has a net out migration of inhabitants from the county of at least 10 percent of the population of the county at the beginning of that period.
(B) Where a community is in a location that is not tracted for population census tracts, the equivalent county divisions shall be used for purposes of determining poverty rates and median family income.
(C) Where a community is in a population census tract with a population of less than 2,000, the community shall be treated as a low-income community if the tract is within an empowerment zone designated under Section 1391 of the Internal Revenue Code and is contiguous to one or more low-income communities, as determined under this paragraph.
(4) (A) “Qualified active low-income community business” means, with respect to any taxable year, a corporation, including a nonprofit corporation, or partnership that, for that taxable year, meets all of the following conditions:
(i) Derives at least 50 percent of its total gross income from the active conduct of a qualified business in a low-income community in California.
(ii) A substantial portion of the use of the tangible property of the entity, whether owned or leased, is within a low-income community in California. “Substantial portion” shall be defined as 40 percent or more of the tangible property of the entity.
(iii) Less than 5 percent of the average of the aggregate unadjusted base of the property of the entity is attributable to collectibles, as defined in Section 408(m)(2) of the Internal Revenue Code.
(iv) Less than 5 percent of the average of the aggregate unadjusted base of the property of the entity is attributable to nonqualified financial property, as defined in Section 1397C(e) of the Internal Revenue Code.
(B) A “qualified active low-income community business” shall include a business carried on by an individual as a proprietor if that business meets the requirements of subparagraph (A) were it incorporated or a trade or business which would qualify if that trade or business were separately incorporated.
(5) “Qualified business” has the same meaning as that in Section 1397C(d) of the Internal Revenue Code except that:
(A) In lieu of applying subparagraph (B) of paragraph (2), the rental to others of real property located in any low-income community shall be treated as a qualified business if there are substantial improvements located on that real property.
(B) Paragraph (3) of that section shall not apply.
(6) (A) “Qualified community development entity” means a domestic corporation or partnership that meets all of the following conditions:
(i) Has a primary mission of serving, or providing investment capital for, low-income communities or low-income persons.
(ii) Maintains accountability to residents of low-income communities through their representation on any governing board of the entity or on any advisory board to the entity.
(iii) Is certified by the California Tax Credit Allocation Committee for purposes of this section as being a qualified community development entity.
(B) A domestic corporation or partnership shall be deemed a “qualified community development entity” if it has entered into an allocation agreement with the Community Development Financial Institutions Fund of the United States Department of the Treasury with respect to credits authorized by Section 45D of the Internal Revenue Code of 1986, as amended, and if the allocation agreement includes the state within its service area.
(7) (A) “Qualified equity investment” means any equity investment in a qualified community development entity if all of the following conditions are met:
(i) The investment is acquired by the taxpayer at its original issue, directly or through an underwriter, solely in exchange for cash.
(ii) Substantially all of the cash is used by the qualified community development entity to make low-income community investments. This requirement shall be deemed met if at least 85 percent of the aggregate gross assets of the qualified community development entity are invested in qualified low-income community investments in California.
(iii) The investment is designated for purposes of this section by the qualified community development entity.
(B) “Qualified equity investment” does not include any equity investment issued by a qualified community development entity more than one year after the date that the entity receives an allocation under subdivision (d).
(C) A “qualified equity investment” shall include any equity investment which would, notwithstanding clause (i) of subparagraph (A), be a qualified equity investment in the hands of the taxpayer if the investment was a qualified equity investment in the hands of a prior holder.
(D) Section 1202(c)(3) of the Internal Revenue Code, relating to purchases by a corporation of its own stock, shall apply.
(8) “Qualified low-income community investment” means any of the following:
(A) Any capital or equity investment in, or loan to, a qualified low-income community business.
(B) Any capital or equity investment in, or loan to, a real estate project in a low-income community.
(C) The purchase from another qualified community development entity of any loan made by that entity which is a qualified low-income community investment.
(D) Financial counseling and other services in support of business activities to businesses located in, and residents of, low-income communities.
(E) Any equity investment in, or loan to, a qualified community development entity.
(c) The California Tax Credit Allocation Committee shall adopt guidelines necessary or appropriate to carry out the purposes of this section. The adoption of the guidelines shall not be subject to the rulemaking provisions of the Administrative Procedure Act of Chapter 3.5 (commencing with Section 11340) of Part 1 of Division 3 of Title 2 of the Government Code. The committee shall establish and impose reasonable fees upon entities that apply for the allocation pursuant to subdivision (d) and use the revenue to defray the cost of administering the program. The committee shall establish the fees in a manner that ensures that (1) the total amount collected equals the amount reasonably necessary to defray the commission’s costs in performing its administrative duties under this section, and (2) the amount paid by each entity reasonably corresponds with the value of the services provided to the entity.
(d) (1) The aggregate amount of credit that may be allowed in any calendar year pursuant to this section and Section 17053.9 shall be an amount equal to the aggregate revenue increase attributable in that same calendar year to Sections 18036.8 and 24941, as amended 24941.6, as added by the act adding this section, as estimated by the Franchise Tax Board, so as to achieve a revenue neutral effect.
(2) The aggregate amount of credit specified under paragraph (1) shall be allocated by the California Tax Credit Allocation Committee among entities that apply for the allocation. The California Tax Credit Allocation Committee shall give priority to applications that either are submitted by an entity that has a record of successfully providing capital or technical assistance to disadvantaged businesses or communities or entities that intend to make qualified low-income community investments in one or more businesses in which persons unrelated to the entity hold the majority equity interest.
(e) Any credits used under subdivision (a) for a qualified equity investment where a recapture event occurs at any time before the close of the seventh taxable year after the qualified equity investment shall be included in the income in the taxable year in which the recapture event occurred. For purposes of this subdivision, a “recapture event” shall include any of the following that occur any time before the close of the seventh taxable year after the qualified equity investment in a qualified community development entity:
(1) The qualified community development entity ceases to be a qualified community development entity.
(2) The proceeds of the investment cease to be used as required under clause (ii) of subparagraph (A) of paragraph (7) of subdivision (b).
(3) The investment is redeemed by a qualified community development entity.
(f) An exception to the provisions of clause (ii) of subparagraph (A) of paragraph (7) of subdivision (b) shall exist wherein an investment shall be considered held by a community development entity even if the investment has been sold or repaid, provided that the community development entity reinvests an amount equal to the capital returned to or recovered by the community development entity from the original investment, exclusive of any profits realized, in another qualified low-income community investment within 12 months of the receipt of that capital. A community development entity shall not be required to reinvest capital returned from qualified low-income community investments after the sixth anniversary of the issuance of the qualified equity investment, the proceeds of which were used to make the qualified low-income community investment, and the qualified low-income community investment shall be considered held by the community development entity through the seventh anniversary of the qualified equity investment’s issuance.

SEC. 5.

 Section 24941.5 24941.6 is added to the Revenue and Taxation Code, to read:

24941.5.24941.6.
 (a) For taxable years beginning on or after January 1, 2011, and before January 1, 2012, the provisions of Section 1031 of the Internal Revenue Code, relating to the exchange of property held for productive use or investment, shall not apply to out-of-state real property that is received in exchange for real property located in California.
(b) This section shall remain in effect only until December 1, 2012, and as of that date is repealed.

SEC. 6.

 Notwithstanding Section 50199.9 of the Health and Safety Code, or any other law, the sum of one-hundred and fifty thousand dollars ($150,000) is hereby appropriated from the Tax Credit Allocation Fee Account to the California Tax Credit Allocation Committee for purposes of implementing the California New Markets Tax Credit Program as provided in Sections 17053.9 and 23622.9 of the Revenue and Taxation Code. The appropriated funds shall remain in the Tax Credit Allocation Fee Account until such time as the funds are required for purposes of implementing this new program, and shall only be available for expenditure until January 1, 2012. It is the intent of the Legislature that these appropriated funds shall be reimbursed by the application fees collected by the committee for this new program.

SEC. 6.SEC. 7.

 This act provides for a tax levy within the meaning of Article IV of the Constitution and shall go into immediate effect.