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AB-1972 Income share agreements: postsecondary training: gross income exclusion.(2017-2018)

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Date Published: 01/31/2018 09:00 PM
AB1972:v99#DOCUMENT


CALIFORNIA LEGISLATURE— 2017–2018 REGULAR SESSION

Assembly Bill No. 1972


Introduced by Assembly Member Choi

January 31, 2018


An act to add Title 4.5 (commencing with Section 1924) to Part 4 of Division 3 of the Civil Code, and to add Sections 17134.5 and 24273.6 to the Revenue and Taxation Code, relating to obligations.


LEGISLATIVE COUNSEL'S DIGEST


AB 1972, as introduced, Choi. Income share agreements: postsecondary training: gross income exclusion.
Existing law prescribes the manner in which contracts or agreements may be created. The California Constitution prohibits usury, which is the loan or forbearance of any money, goods, or things at a rate of interest in excess of specified rates, but exempts certain transactions and lenders from these provisions, and allows the Legislature to exempt additional classes of person by statute.
This bill would authorize an individual to enter into income share agreements with any person for payments to or on behalf of that individual for costs associated with a postsecondary training program or any other program designed to increase the individual’s human capital, employability, or earning potential in exchange for agreeing to pay to the holder of the income share agreement, defined as the ISA funder, a specified percentage of the individual’s future income, subject to certain terms and conditions, and would define terms for these purposes. The bill would exempt these income share agreements from the usury provision of the California Constitution.
The Personal Income Tax Law imposes taxes upon taxable income and the Corporation Tax Law imposes taxes according to, measured by, or upon net income, as specified. Those laws generally define “gross income” as income from whatever source derived, except as specifically excluded, and provide various exclusions from gross income.
This bill would provide an exclusion from gross income under the Personal Income Tax Law for payments made under an income share agreement to or on behalf of an individual who commits to pay a specified percentage of his or her future income, as provided.
This bill would specify how payments of future income received by a holder of an income share agreement, as defined as the ISA funder, would be treated for purposes of calculation of gross income under the Personal Income Tax Law and the Corporation Tax.
Vote: MAJORITY   Appropriation: NO   Fiscal Committee: YES   Local Program: NO  

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


SECTION 1.

 Title 4.5 (commencing with Section 1924) is added to Part 4 of Division 3 of the Civil Code, to read:

TITLE 4.5. Investing in Student Achievement Act of 2018

1924.
 This act shall be known and may be cited as the Investing in Student Achievement Act of 2018.

1924.1.
 The Legislature finds and declares that it is the purpose of this title to authorize individuals to enter into income share agreements for the purposes of obtaining funds for postsecondary education in exchange for agreeing to pay to the holder of the contract a specified percentage of the individual’s future income.

1924.2.
 For the purposes of this title, the following terms have the following meanings:
(a) “Comparable loan” means a loan that meets all of the following:
(1) Has an original principal amount such that, after any origination fees on the loan are paid, the amount of loan financing received by the individual is equal to the total amount of funding provided under the income share agreement to the individual receiving funds under the income share agreement.
(2) Has the same term to maturity as the duration of the income share agreement.
(3) Is fully amortized over that term to maturity with monthly payments of principal and interest.
(b) “Income share agreement” means an agreement between an individual in this state and an ISA funder under which the individual commits to pay a specified percentage of the individual’s future income, for a specified period of time, in exchange for payments to or on behalf of such individual for costs associated with a postsecondary training program or any other program designed to increase the individual’s human capital, employability, or earning potential, including, but not limited to, programs eligible to participate under Title IV of the federal Higher Education Act of 1965 (20 U.S.C. Sec. 1001, et. seq.; Public Law 89-329), and any personal expenses, including, but not limited to, books, supplies, transportation, and living costs, incurred by the individual while enrolled in such a program or for the refinancing of debt used for these purposes.
(c) “ISA funder” means the person who pays amounts to, or on behalf of, an individual under an income share agreement in exchange for the right to receive a specified percentage of the individual’s future income or a successor in interest of an ISA funder.
(d) “Receiver” means the individual receiving funds under an income share agreement who agrees to pay a specified percentage of his or her income to an ISA funder under that income share agreement.

1924.4.
 (a) An income share agreement that complies with the requirements of this title shall be a valid, binding, and enforceable contract notwithstanding any other law limiting or otherwise regulating assignments of future wages or other income.
(b) Pursuant to Section 1 of Article XV of the California Constitution, the restrictions upon rates of interest contained in Section 1 of Article XV of the California Constitution shall not apply to an income share agreement that complies with the requirements of this title. This subdivision creates and authorizes an exempt class of persons pursuant to Section 1 of Article XV of the California Constitution.
(c) An income share agreement represents an obligation by the receiver to pay the specific percentage of future income, but shall not be construed to give the ISA funder any rights over a receiver’s actions.

1924.6.
 An income share agreement complies with the requirements of this title if all of the following are met:
(a) (1) (A) The income share agreement shall specify the percentage of future income that the receiver shall be obligated to pay.
(B) The income share agreement shall provide that when a receiver has an income that is equal to or below the amount that is 150 percent of the poverty line for a single person, as defined in Section 673 of the Community Services Block Grant Act (42 U.S.C. 9902; Public Law 97-35), the percentage of income obligation for the individual is zero. The preceding sentence shall not be construed to preclude the charging of fees or nominal payments during this period.
(2) The agreement shall specify any nominal monthly payment that is required during periods when the receiver has no percentage of income obligation, except that such nominal monthly payment shall not exceed twenty-five dollars ($25.00) per month adjusted each year to reflect changes in the Consumer Price Index for All Urban Consumers published by the federal Bureau of Labor Statistics of the United States Department of Labor for the most recent 12-month period for which the data are available.
(b) (1) An income share agreement shall specify the definition of income to be used for purposes of calculating a receiver’s obligation under the income share agreement.
(2) The definition of income shall not include the income of any children of the receiver.
(c) The maximum percentage of income a receiver under an income share agreement would be required to pay shall not exceed 20 percent, and the product of such percentage and the number of years of the agreement shall not exceed 2.25, which figure is the product of 7.5 percent and the number of years in the longest allowable income share agreement under this title.
(d) The payments required under an income share agreement for a receiver with income during the payment term equal to 175 percent of the poverty line for a single person, as defined in Section 673 of the Community Services Block Grant Act (42 U.S.C. 9902; Public Law 97-35), shall not exceed the payments on a comparable loan that bears interest at a rate equal to the annual percentage rate of interest limitation under Section 987(b) of Title 10 of the United States Code (10 U.S.C. 987(b)).
(e) The income share agreement shall specify the maximum period of time during which the receiver shall be obligated to pay a percentage of his or her income, excluding periods when a nominal payment, as described in paragraph (2) of subdivision (a), is required. The maximum period shall not exceed 360 months, except as provided in subdivision (f).
(f) The income share agreement may provide for the extension of the period by a number of months during which the receiver’s percentage of income obligation, excluding nominal payments and fees, was zero either because of further enrollment in education or training or the receiver’s income was below the level at which payments are required under the income share agreement.
(g) The income share agreement shall specify the terms and conditions by which the receiver may terminate the receiver’s obligations under the income share agreement before the end of the payment period specified in the income share agreement and any extension provided for in the income share agreement pursuant to subdivision (f).
(h) The ISA funder shall provide the receiver, before entry into an income share agreement with the ISA funder, a document that clearly and simply discloses all of the following:
(1) That the agreement is not a debt instrument.
(2) That the amount the receiver will be required to pay under the income share agreement may be more or less than the amount provided to the receiver by the ISA funder and will vary in proportion to the receiver’s future income.
(3) That the obligations of the receiver under the agreement may not be dischargeable under federal bankruptcy law.
(4) Whether the obligations of the receiver under the income share agreement may be extinguished through prepayment, and, if so, under what terms.
(5) The duration of the receiver’s obligations under the income share agreement, absent any prepayments, including any circumstances under which the income share agreement would be extended or discharged.
(6) The percentage of income the receiver is committing to pay under the income share agreement, including whether the percentage of income is fixed or variable, and the minimum amount of annual income that, pursuant to subdivision (a), triggers the receiver’s obligation under the income share agreement to make payments for that year.
(7) The definition of income to be used for purposes of calculating the receiver’s obligation under the income share agreement.
(8) A comparison of (A) the amounts a receiver would be required to pay under the income share agreement at a range of annual income levels, which income levels shall correspond to the levels the receiver might reasonably be expected to make given the intended use of the funds provided under the income share agreement, and (B) the amounts required to be paid under a comparable loan.
(9) Income documentation, including federal tax information, that the receiver may be required to provide under the income share agreement.
(10) The intent to conduct annual reconciliation relating to obligations owed by the receiver under the income share agreement.
(11) Any nominal payments required under the income share agreement.

1924.8.
 (a) If a receiver does not provide income documentation to the ISA funder under an income share agreement, the ISA funder of that agreement may assume a reasonable income level for the receiver based upon his or her particular occupation, up to the level that would create an obligation equal to the maximum payment amount under the income share agreement.
(b) If a receiver supplies an ISA funder with his or her income documentation within 180 days of the ISA funder assuming an income level for that receiver under subdivision (a), the receiver shall be entitled to have any payments that were made in excess of his or her actual obligation under the income share agreement either refunded to them or credited to future obligations under the income share agreement.

SEC. 2.

 Section 17134.5 is added to the Revenue and Taxation Code, to read:

17134.5.
 (a) Gross income does not include any payments made under an income share agreement to or on behalf of the receiver and any difference in value of the payments to or on behalf of that receiver and the total amount paid by that receiver to the ISA funder.
(b) Payments received by an ISA funder pursuant to an income share agreement shall be treated as follows:
(1) First, with respect to so much of a payment that does not exceed the amount of the payments to which subdivision (a) applies with respect to an income share agreement, as a repayment of investment in the contract that reduces the ISA funder’s basis in that income share agreement.
(2) Second, as income on the income share agreement that is included in gross income.
(c) For purposes of this section, the following terms shall have the following meanings:
(1) “Income share agreement” means an income share agreement under Title 4.5 (commencing with Section 1924) of Part 4 of Division 3 of the Civil Code.
(2) “ISA funder” has the same definition as under Section 1924.2 of the Civil Code.
(3) “Receiver” has the same definition as under Section 1924.2 of the Civil Code.

SEC. 3.

 Section 24273.6 is added to the Revenue and Taxation Code, to read:

24273.6.
 (a) Payments received by an ISA funder pursuant to an income share agreement shall be treated as follows:
(1) First, with respect to so much of a payment that does not exceed the amount of the payments to which subdivision (a) of Section 17134.5 applies with respect to an income share agreement, as a repayment of investment in the contract that reduces the ISA funder’s basis in that income share agreement.
(2) Second, as income on the income share agreement that is included in gross income.
(b) For purposes of this section, the following terms shall have the following meanings:
(1) “Income share agreement” means an income share agreement under Title 4.5 (commencing with Section 1924) of Part 4 of Division 3 of the Civil Code.
(2) “ISA funder” has the same definition as under Section 1924.2 of the Civil Code.