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AB-1582 Income taxes: withholding: real property sales: Katz-Harris Taxpayers’ Bill of Rights Act: report.(2021-2022)

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Date Published: 03/10/2021 09:00 PM
AB1582:v99#DOCUMENT


CALIFORNIA LEGISLATURE— 2021–2022 REGULAR SESSION

Assembly Bill
No. 1582


Introduced by Committee on Revenue and Taxation

March 10, 2021


An act to amend Sections 18662 and 21006 of the Revenue and Taxation Code, relating to taxation.


LEGISLATIVE COUNSEL'S DIGEST


AB 1582, as introduced, Committee on Revenue and Taxation. Income taxes: withholding: real property sales: Katz-Harris Taxpayers’ Bill of Rights Act: report.
(1) Existing law generally requires the transferee of a California real property interest, in specified circumstances, to withhold for income tax purposes 31/3% of the sales price of the property when the property is acquired from either an individual, or a partnership or corporation without a permanent place of business, as specified. Under existing law, a transferee is not required to withhold any amount under these provisions if the transferee, in good faith and based upon the information of which the transferee has knowledge, certifies under penalty of perjury that the California real property being conveyed is either (A) the seller’s or decedent’s principal residence, as specified, or (B) is being exchanged, or will be exchanged, for property of like kind, but only to the extent of the amount of the gain not required to be recognized for California income or franchise tax purposes, as specified. In the case of a real property sale not subject to withholding by reason of a like kind exchange under these provisions, existing law requires the transferee to notify the Franchise Tax Board in writing within 10 days of the expiration of the statutory periods specified in federal law and thereafter remit the applicable withholding amounts determined as provided.
This bill, with respect to dispositions of California real property interests that occur on or after January 1, 2022, would provide that the transferee is required to notify the Franchise Tax Board and remit the applicable withholding amount, as described above, only to the extent that an intermediary or accommodator has received amounts from the disposition of California real property and has not disbursed those amounts for the purpose of completing an exchange or exchanges, as specified. The bill would authorize the Franchise Tax Board to prescribe rules, guidelines, procedures, or other guidance to carry out the purposes of these provisions and exempt those rules, guidelines, procedures, or other guidance from the rulemaking provisions of the Administrative Procedure Act.
(2) The Katz-Harris Taxpayers’ Bill of Rights Act requires the Franchise Tax Board to establish the position of the Taxpayers’ Rights Advocate and makes the advocate or their designee responsible for coordinating the resolution of taxpayer complaints and problems, including any taxpayer complaints regarding unsatisfactory treatment of taxpayers by board employees. Existing law requires the board, in consultation with the Taxpayers’ Rights Advocate, to develop and implement a taxpayer education and information program directed at, but not limited to, identifying forms, procedures, regulations, or laws which are confusing and lead to taxpayer errors. Existing law requires the board to perform annually a systematic identification of areas of recurrent taxpayer noncompliance and report its findings to the Legislature on December 1 of each year.
This bill, instead, would require the Franchise Tax Board to submit that report by January 15 of each year.
Vote: MAJORITY   Appropriation: NO   Fiscal Committee: YES   Local Program: NO  

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


SECTION 1.

 Section 18662 of the Revenue and Taxation Code is amended to read:

18662.
 (a) The Franchise Tax Board may, by regulation, require any person, in whatever capacity acting, including lessees or mortgagors of real or personal property, fiduciaries, employers, and any officer or department of the state, or any political subdivision or agency of the state, or any city organized under a freeholder’s charter, or any political body not a subdivision or agency of the state, having the control, receipt, custody, disposal, or payment of items of income specified in subdivision (b), to withhold an amount, determined by the Franchise Tax Board to reasonably represent the amount of tax due when the items of income are included with other income of the taxpayer, and to transmit the amount withheld to the Franchise Tax Board at the time as it may designate.
(b) The items of income referred to in subdivision (a) are interest, dividends, rents, prizes and winnings, premiums, annuities, emoluments, compensation for services, including bonuses, partnership income or gains, and other fixed or determinable annual or periodical gains, profits, and income.
(c) The Franchise Tax Board may authorize the tax under subdivision (a) to be deducted and withheld from the interest upon any securities the owners of which are not known to the withholding agent.
(d) Any person that fails to withhold from any payments any amounts required to be withheld by this section or fails to remit the taxes withheld is liable for the amount specified in Section 18668.
(e) (1) This subdivision applies to any disposition of a California real property interest by:
(A) Any person, other than either of the following:
(i) Except as otherwise provided in this subdivision, a corporation, including an entity classified for tax purposes as a corporation under Part 11 (commencing with Section 23001).
(ii) Except as otherwise provided in this subdivision, a partnership, as determined in accordance with Subchapter K of Chapter 1 of Subtitle A of the Internal Revenue Code, including an entity classified as a partnership for tax purposes under Part 10 (commencing with Section 17001).
(B) A corporation or partnership, if that corporation or partnership immediately after the transfer of the title to the California real property has no permanent place of business in California. For purposes of this subdivision, a corporation or partnership has no permanent place of business in California if all of the following apply:
(i) It is not organized and existing under the laws of California.
(ii) It does not qualify with the office of the Secretary of State to transact business in California.
(iii) It does not maintain and staff a permanent office in California.
(2) (A) Except as provided in subparagraph (B), in the case of any disposition of a California real property interest by a transferor described in paragraph (1), the transferee, including for this purpose any intermediary or accommodator in a deferred exchange, is required to withhold an amount equal to 31/3 percent of the sales price of the California real property conveyed.
(B) If the transferor makes an election under this subparagraph, the transferee, including any intermediary or accommodator in a deferred exchange, is required to withhold an amount equal to an amount certified by the transferor in writing under penalty of perjury. The amount certified shall not be less than the gain required to be recognized under Part 10 (commencing with Section 17001) and Part 11 (commencing with Section 23001) on the disposition of the California real property multiplied by the rate specified in either Section 23151 or Section 23186, as applicable, for transferors that are corporations, or the highest rate specified in Section 17041 for transferors other than corporations. For purposes of applying the previous sentence, the following shall apply:
(i) The highest rate specified in Section 17041 is determined without regard to any other tax rate specified under Part 10 (commencing with Section 17001) irrespective of whether the applicable statute provides that tax shall be treated as if imposed under Section 17041.
(ii) For corporations that are “S” corporations subject to the modified tax rate specified in Section 23802, the rate shall be the sum of the rate specified in subdivision (b) of Section 23802 and the highest rate specified in Section 17041, as described in clause (i).
(C) (i) The written certification required by subparagraph (B) shall be in a form, as prescribed by the Franchise Tax Board. The form shall provide as follows:
“Title and escrow persons and exchange accommodators are not authorized to provide legal or accounting advice for purposes of determining withholding amounts. Transferors are strongly encouraged to consult with a competent tax professional for this purpose.”
(ii) The Franchise Tax Board shall make this form available electronically on its Web site in a format that allows a transferor to complete and print the form. The Franchise Tax Board shall also provide electronic means to enable the transferor to estimate the amount of gain required to be recognized by the transferor in the transaction. Any form or worksheet, electronic or otherwise, developed for this purpose shall provide as follows:
“Title and escrow persons and exchange accommodators are not authorized to provide legal or accounting advice for purposes of determining withholding amounts. Transferors are strongly encouraged to consult with a competent tax professional for this purpose.”
(3) Notwithstanding any other provision of this subdivision, all of the following shall apply:
(A) No transferee is required to withhold any amount under this subdivision unless the sales price of the California real property conveyed exceeds one hundred thousand dollars ($100,000).
(B) No transferee, other than an intermediary or an accommodator in a deferred exchange, is required to withhold any amount under this subdivision unless written notification of the withholding requirements of this subdivision has been provided by the real estate escrow person.
(C) (i) No transferee, trustee under a deed of trust, or mortgagee under a mortgage with a power of sale is required to withhold under this subdivision when the transferee has acquired California real property at a sale pursuant to a power of sale under a mortgage or deed of trust or a sale pursuant to a decree of foreclosure or has acquired the property by a deed in lieu of foreclosure.
(ii) No transferee is required to withhold under this subdivision when the transferor is a bank acting as trustee other than a trustee of a deed of trust.
(D) No transferee, including for this purpose any intermediary or accommodator in a deferred exchange, is required to withhold any amount under this subdivision if the transferee, in good faith and based on all the information of which he or she the transferee has knowledge, relies on a written certificate executed by the transferor, certifying, under penalty of perjury, one of the following:
(i) (I) The California real property being conveyed is the seller’s or decedent’s principal residence, within the meaning of Section 121 of the Internal Revenue Code.
(II) The last use of the property being conveyed was use by the transferor as the transferor’s principal residence within the meaning of Section 121 of the Internal Revenue Code.
(ii) (I) The California real property being conveyed is being exchanged, or will be exchanged, for property of like kind, within the meaning of Section 1031 of the Internal Revenue Code, but only to the extent of the amount of the gain not required to be recognized for California income or franchise tax purposes under Section 1031 of the Internal Revenue Code.
(II) Subclause (I) may not apply if an exchange does not qualify for nonrecognition treatment for California income or franchise tax purposes under Section 1031 of the Internal Revenue Code, in whole or in part, due to the failure of the transaction to comply with the provisions of Section 1031(a)(3) of the Internal Revenue Code, relating to the requirement that property be identified and that the exchange be completed not more than 180 days after the transfer of the exchanged property.
(III) In any case where clause (ii) applies, the transferee, including for this purpose any intermediary or accommodator in a deferred exchange, is required to notify the Franchise Tax Board in writing within 10 days of the expiration of the statutory periods specified in Section 1031(a)(3) of the Internal Revenue Code and thereafter remit the applicable withholding amounts determined under this subdivision in accordance with paragraph (4). (4), but only to the extent that an intermediary or accommodator has received amounts from the disposition of California real property and has not disbursed those amounts for the purpose of completing an exchange or exchanges within the meaning of Section 1031 of the Internal Revenue Code, relating to exchange of real property held for productive use or investment.
(IV) (ia) The Franchise Tax Board may prescribe any regulations necessary or appropriate to carry out the purposes of subclause (III), including, but not limited to, any regulations to clarify the meaning of disbursement for the purpose of completing an exchange or exchanges within the meaning of Section 1031 of the Internal Revenue Code.
(ib) The Franchise Tax Board may prescribe rules, guidelines, procedures, or other guidance to carry out the purposes of subclause (III). Chapter 3.5 (commencing with Section 11340) of Part 1 of Division 3 of Title 2 of the Government Code shall not apply to any rule, guideline, procedure, or other guidance prescribed by the Franchise Tax Board pursuant to subclause (III).
(iii) The California real property has been compulsorily or involuntarily converted, within the meaning of Section 1033 of the Internal Revenue Code, and the transferor intends to acquire property similar or related in service or use so as to be eligible for nonrecognition of gain for California income tax purposes under Section 1033 of the Internal Revenue Code.
(iv) The transaction will result in either a net loss or a net gain not required to be recognized for California income or franchise tax purposes.
(v) The transferor is a corporation with a permanent place of business in California.
(E) (i) In the case of any transaction otherwise subject to this subdivision that qualifies as an “installment sale,” within the meaning of Section 453(b) of the Internal Revenue Code, for California income tax purposes, the provisions of this subdivision shall be separately applied to each principal payment to be made under the terms of the installment sale agreement between the parties.
(ii) For purposes of clause (i), subparagraph (A) of paragraph (3) does not apply to each individual payment to be received under the terms of the installment sale agreement.
(4) (A) Amounts withheld and payments made in accordance with this subdivision shall be reported and remitted to the Franchise Tax Board in the form and manner and at the time specified by the Franchise Tax Board. Notwithstanding the foregoing, funds withheld on individual transactions by real estate escrow persons may, at the option of the real estate escrow person, be remitted by the 20th day of the month following the close of escrow for the individual transaction, or may be remitted on a monthly basis in combination with other transactions closed during that month.
(B) The transferor shall submit a copy of the written certificate and supporting documentation for the reduced withholding specified in subparagraph (B) of paragraph (2) or subparagraph (D) of paragraph (3), executed by the transferor, to the Franchise Tax Board upon request.
(5) For purposes of this subdivision, “California real property interest” means an interest in real property located in California and defined in Section 897(c)(1)(A)(i) of the Internal Revenue Code.
(6) For purposes of this subdivision, “real estate escrow person” means any of the following persons involved in the real estate transaction:
(A) The person, including any attorney, escrow company, or title company, responsible for closing the transaction.
(B) If no person described in subparagraph (A) is responsible for closing the transaction, then any other person who receives and disburses the consideration or value for the interest or property conveyed.
(7) (A) Unless the real estate escrow person provides “assistance,” it shall be unlawful for any real estate escrow person to charge any customer for complying with the requirements of this subdivision.
(B) For purposes of this paragraph, “assistance” includes, but is not limited to, helping the parties clarify with the Franchise Tax Board the issue of whether withholding is required under this subdivision or, upon request of the parties, withholding an amount under this subdivision and remitting that amount to the Franchise Tax Board.
(C) For purposes of this paragraph, “assistance” does not include providing the written notification of the withholding requirements of this subdivision.
(D) In a case where the real estate escrow person provides “assistance” in complying with the withholding requirements of this subdivision, it shall be unlawful for the real estate escrow person to charge any customer a fee that exceeds forty-five dollars ($45).
(8) For purposes of this subdivision, “sales price” means the sum of all of the following:
(A) The cash paid, or to be paid, but excluding for this purpose any stated or unstated interest or original issue discount, as determined under Sections 1271 through 1275, inclusive, of the Internal Revenue Code.
(B) The fair market value of other property transferred, or to be transferred.
(C) The outstanding amount of any liability assumed by the transferee or to which the California real property interest is subject immediately before and after the transfer.
(9) The Franchise Tax Board may prescribe, by forms, instructions, published notices, or regulations, any requirements necessary for the efficient administration of this subdivision relating to the treatment of “de minimis” amounts otherwise required under this section.
(f) Withholding is not required under this section with respect to wages, salaries, fees, or other compensation paid by a corporation for services performed in California for that corporation to a nonresident corporate director for director services, including attendance at a board of directors’ meeting.
(g) In the case of any payment described in subdivision (f), the person making the payment shall do each of the following:
(1) File a return with the Franchise Tax Board at the time and in the form and manner specified by the Franchise Tax Board.
(2) Provide the payee with a statement at the time and in the form and manner specified by the Franchise Tax Board.
(h) (1) The amendments to this section made by Chapter 488 of the Statutes of 2002 apply to dispositions of California real property interests that occur on or after January 1, 2003.
(2) In the case of any payments received on or after January 1, 2003, pursuant to an installment sale agreement relating to a disposition occurring before January 1, 2003, the amendments to this section made by Chapter 488 of the Statutes of 2002 do not apply to those payments.
(i) (1) The amendments made to this section by the act adding this subdivision shall apply to dispositions of California real property interests that occur on or after January 1, 2009.
(2) In the case of any payments received on or after January 1, 2009, pursuant to an installment sale agreement relating to a disposition occurring before January 1, 2009, the amendments made to this section by the act adding this subdivision do not apply to those payments.
(j) The amendments made to this section by the act adding this subdivision shall apply to dispositions of California real property interests that occur on or after January 1, 2022.

SEC. 2.

 Section 21006 of the Revenue and Taxation Code is amended to read:

21006.
 (a) The board shall perform annually a systematic identification of areas of recurrent taxpayer noncompliance and shall report its findings to the Legislature on December 1 by January 15 of each year.
(b) As part of the identification process described in subdivision (a), the board shall do both of the following:
(1) Compile and analyze sample data from its audit process, including, but not limited to, all of the following:
(A) The statute or regulation violated by the taxpayer.
(B) The amount of tax involved.
(C) The industry or business engaged in by the taxpayer.
(D) The number of years covered in the audit period.
(E) Whether professional tax preparation assistance was utilized by the taxpayer.
(F) Whether income tax or bank and corporation tax returns were filed by the taxpayer.
(2) Conduct an annual hearing before the board itself where industry representatives and individual taxpayers are allowed to present their proposals on changes to the Personal Income Tax Law or the Corporation Tax Law which may further facilitate achievement of the legislative findings.
(c) The board shall include in its report recommendations for improving taxpayer compliance and uniform administration, including, but not limited to, all of the following:
(1) Changes in statute or board regulations.
(2) Improvement of training of board personnel.
(3) Improvement of taxpayer communication and education.
(4) Increased enforcement capabilities.
(d) The board shall include in its report a summary of cases where relief was granted pursuant to subdivision (c) of Section 21004, including the nature of the error or delay, and the steps taken by the board to remedy systemic issues that caused the error or delay.