Governor Jerry Brown signed Assembly Bill 154 on September 30, 2015, updating California’s general conformity to the Internal Revenue Code and providing three new exceptions to the imposition of the Large Corporate Understatement Penalty.
Internal Revenue Code Conformity
Assembly Bill 154 (AB 154) changes California’s specified date of conformity to the Internal Revenue Code (IRC) from January 1, 2009, to January 1, 2015, for taxable years beginning on or after January 1, 2015.1 As a result, California personal income tax and corporation tax laws conform to the changes made to the IRC during that six-year period to the extent California incorporates those provisions by reference, except as otherwise provided.2
In addition to this general IRC conformity, AB 154 also adopts IRC section 6164, which allows corporations expecting a net operating loss carryback to extend the time for payment of taxes for the preceding taxable year, and is operative for taxable years beginning on or after January 1, 2015.3
AB 154 also states that it is the Legislature’s intent to “confirm the validity and ongoing effect” of Senate Bill 401 (SB 401), which was enacted by a majority vote of the Legislature in 2010 to update conformity to the IRC as of January 1, 2009, for IRC provisions incorporated into California tax law by reference.4It is unclear whether SB 401 is valid in light of the passage Proposition 26, which amended section 3 of Article XIII A of the California Constitution to require a two-thirds vote of the Legislature to change a state statute which results in any taxpayer paying a higher tax.5
Large Corporate Understatement Penalty Relief
AB 154 provides relief from the Large Corporate Understatement Penalty (LCUP) for an increase to tax resulting from a proper IRC section 338 election reported on a first amended return,6 and for understatements attributable to either (1) an alternative apportionment or allocation method imposed by the FTB pursuant to CRTC section 25137,6 or (2) a federal accounting method change where the IRS consents to the change after the original due date of the return.8
The above LCUP relief provisions are operative for taxable years beginning on or after January 1, 2015, except for the alternative apportionment relief provision, which is operative for any taxable year for which the statute of limitations on assessments has not expired as of September 30, 2015.9Taxpayers should consider filing refund claims for any open years the LCUP was paid and incurred as a result of FTB’s imposition of an alternative apportionment method under CRTC section 25137.