Existing law authorizes the Franchise Tax Board to grant a reasonable extension of time for filing any return, declaration, statement or other document required by the Personal Income Tax Law in the manner and form determined by the Franchise Tax Board. Except as specified, existing law prohibits an extension for more than 6 months. If any taxpayer fails to make and file a return required by the Personal Income Tax Law on or before the due date of the return or the due date as extended by the Franchise Tax Board, then, unless it is shown that the failure is due to reasonable cause and not due to willful neglect, a specified penalty is required to be added. Existing law also requires a specified penalty to be imposed against any partnership required to file a return that fails to file at the prescribed time as determined with regard to any extension of time for filing, as provided.

This bill, for taxable years beginning on or after January 1, 2017, would authorize an extension for no more than 7 months for partnerships. The bill would also declare the intent of the Legislature that, for the 2016 taxable year only, the Franchise Tax Board is required to presume reasonable cause and not willful neglect in the case of any partnership filing an income tax return if that partnership meets specified requirements.

This bill would declare that it is to take effect immediately as an urgency statute.

Existing law authorizes the Franchise Tax Board to grant a reasonable extension of time for filing any return, declaration, statement or other document required by the Personal Income Tax Law in the manner and form determined by the Franchise Tax Board. Except as specified, existing law prohibits an extension for more than 6 months.

This bill would instead prohibit an extension for more than 7 months.

This bill would declare that it is to take effect immediately as an urgency statute.

Date of Hearing: May 17, 2017

ASSEMBLY COMMITTEE ON APPROPRIATIONS

Lorena Gonzalez Fletcher, Chair

ABPCA Bill Id:AB 1171

Author:(Obernolte) – As Amended Ver:April 24, 2017

Urgency: Yes State Mandated Local Program: No Reimbursable: No

SUMMARY:

This bill extends, from six months to seven months, the maximum number of months that the Franchise Tax Board (FTB) may grant as an automatic extension of time for filing specified partnership returns beginning on taxable year 2017. This bill also makes legislative findings and declarations that FTB will presume reasonable cause if a partnership requests penalty relief and that partnership’s 2016 tax return is filed by the extended due date under former law rather than current law.

FISCAL EFFECT:

No impact on state revenues and minimal impact on penalty revenue because this bill does not materially change FTB’s authority to waive or impose penalties on employers.

COMMENTS:

1. Background. In 2015, Congress enacted legislation to shorten the federal tax return due date for partnerships by one month (to March 15^th), and extend the due date for "C" corporations by one month (to April 15^th), so that the filing deadline for partnerships would precede the due dates of their individual and corporate investors. These new federal due dates are intended to alleviate timing pressures and provide a more logical flow of information for a more efficient tax preparation process.

In 2016, the Legislature enacted AB 1775 (Obernolte), Chapter 348, Statutes of 2016, which similarly shortened the state tax return due date for partnerships by one month and extended the due date for "C" corporations by one month, in conformity with federal due dates for such returns.

1. Extended Return Due Dates. Under former state and federal law, the extended due date – the additional time automatically granted to a taxpayer to file a return following the initial due date in March or April – was one month apart between state and federal returns. In the case of state partnerships, the federal extended due date was September 15^th and the state extended due date was October 15^th. This was done to allow the state return to include information provided in the federal return that was submitted 30 days prior. However, as a result of AB 1775, those extended due dates are now the same day (September 15) for both federal and state returns.
2. Purpose. According to the author, AB 1171 addresses an issue that has arisen following efforts to conform state law to federal law in regards to tax return due dates. That conformity had an interaction with due dates extended for six months under current law, which has misaligned the extended return dates with the historical practice of granting partnerships an additional 30 days.

Analysis Prepared by: Luke Reidenbach / APPR. / (916) 319-2081

Date of Hearing: May 8, 2017

ASSEMBLY COMMITTEE ON REVENUE AND TAXATION

Sebastian Ridley-Thomas, Chair

ABPCA Bill Id:AB 1171 (

Author:Obernolte) – As Amended Ver:April 24, 2017

2/3 vote. Urgency. Fiscal committee.

SUBJECT: Personal income taxes: return filing extension

SUMMARY: Declares legislative intent to require the Franchise Tax Board (FTB), for the 2016 taxable year only, to presume reasonable cause and not willful neglect for specified partnerships that file returns one month late; and, for taxable years beginning on or after January 1, 2017, extends by one month the reasonable extension of time for filing returns that may be granted by the FTB, but for specified partnerships only. Specifically, this bill:

1. Finds and declares that AB 1175 (Obernolte), Chapter 348, Statutes of 2016, beginning with returns for the 2016 taxable year, accelerated by one month the original filing due date for returns required to be filed by partnerships under Revenue and Taxation Code (R&TC) Section 18633 and by limited liability companies (LLCs) classified as partnerships under R&TC Section 18633.5.
2. States legislative intent, due to the challenges of complying with the accelerated filing due date coupled with the inherent complexities of preparing partnership returns, that the FTB shall presume, for the 2016 taxable year only, reasonable cause and not willful neglect in the case of any partnership that meets both of the following:
3. The partnership return for taxable year 2016 is filed by the extended due date under former law, which is October 15 for a calendar year partnership or by the 15th day of the 10th month following the close of the taxable year for a fiscal year partnership.
4. The partnership requests relief, in the form and manner specified by the FTB, from the imposition of penalties for delinquent filing (R&TC Section 19131) or failure of a partnership to comply with filing requirements (R&TC Section 19172). The Legislature intends that this relief be implemented in a streamlined manner.
5. Provides, for returns required to be filed for taxable years beginning on or after January 1, 2017 by partnerships under R&TC Section 18633 or 18633.5, that the existing extension of time for filing any return or other document, as specified, that may be granted by the FTB is to be no more than seven months (instead of six months).
6. Takes effect immediately as an urgency statute.

EXISTING FEDERAL LAW:

1. Requires a partnership to file its federal tax return by the fifteenth day of the third month following the close of the taxable year (generally March 15).
2. Requires a "C" corporation to file its federal tax return by the fifteenth day of the fourth month following the close of the taxable year (generally April 15).
3. Provides, generally, that the Secretary of the U.S. Department of the Treasury may grant a reasonable extension of time for filing any return, declaration, statement, or other required document, not to exceed 6 months. (Internal Revenue Code (IRC) Section 6081(a).)
4. Allows a six-month extension of time to file for partnerships (making the extended due date for partnership returns September 15).
5. Allows a six-month extension of time to file for corporations, but provides, for taxable years beginning before January 1, 2026, that a calendar year "C" corporation is only allowed a five-month extension and a fiscal year "C" corporation is allowed a seven-month extension. (IRC Section 6081(b).)
6. Allows, pursuant to IRC Section 6081(a), calendar year "C" corporations a six-month extension of time to file for the 2016 tax year (specifically October 16, 2017). (Instructions for Form 7004.)

EXISTING STATE LAW:

1. Requires a partnership or a LLC classified as a partnership to file a return by the fifteenth day of the third month following the close of its taxable year (generally March 15).
2. Requires a "C" corporation or a LLC classified as a "C" corporation to file a return by the fifteenth day of the fourth month following the close of its taxable year (generally April 15).
3. Authorizes the FTB to grant a reasonable extension of time, not to exceed six months, for filing any return, declaration, statement, or other document required by individuals, partnerships, and other entities under the Personal Income Tax (PIT) Law. (R&TC Section 18567.)
4. Authorizes the FTB to grant a reasonable extension of time, not to exceed seven months, for filing any return, declaration, statement, or other document required under the Corporation Tax (CT) Law. (R&TC Section 18604.)
5. Provides, for taxable years beginning on or after January 1, 2016, that the extended due date for "C" corporations and LLCs classified as a "C" corporation is the fifteenth day of the tenth month following the close of the taxable year (generally October 15). (FTB Notice 2016-04.)
6. Provides that an extension of time to file does not provide for an extension of time for payment of tax, and underpayment of tax penalties are imposed without regard to any extension granted under both the PIT and CT Law.
7. Requires the FTB to impose various penalties in its administration of the PIT Law and the CT Law unless reasonable cause is shown, including penalties for:
8. Failure to file a return or late filing by taxpayers required to file a return, but who fail to do so by the due date. The penalty is 5% of the tax due, after applying any timely payments, for every month that the return is late, up to a maximum of 25%, with a minimum penalty for individuals and fiduciaries that is the lesser of $135 or 100% of the tax required to be shown on the return (R&TC Section 19131); and,
9. Failure to file a return or filing a return which fails to show the information required under R&TC Section 18633 for partnerships or R&TC Section 18633.5 for LLCs classified as partnerships. The penalty is $18 multiplied by the number of persons who were partners in the partnership during any part of the taxable year, and is imposed for each month during which the failure continues, not to exceed 12 months. (R&TC Section 19172.)

FISCAL EFFECT: The FTB states that this bill would not impact state income tax or franchise tax liabilities, but may have an impact on the timing of payments received with returns filed by the extended due date, resulting in unknown revenue loss.

COMMENTS:

1. The author has provided the following statement in support of this bill:

This bill would authorize the Franchise Tax Board to set an extended due date of 30 days for partnership tax returns, aligning state partnership due dates with the extended corporate returns. In other words this bill would restore the October 15th partnership extension due date that has historically been in place in California. Last year I authored AB 1775, which conformed state law with federal law in regards to tax filing deadlines. In doing so, there was an unintended consequence. Specifically, AB 1775's interaction with [R&TC] Section 18567 eliminated the 30-day period provided to taxpayers to complete their state partnership tax returns. This is a problem because it causes the state partnership tax returns to be due on September 15th, the same day as the federal returns are due. Before last year's AB 1775 took effect, the state returns for both [corporations] and partnerships have always been due a month after the federal returns. This extra 30 day time period is crucial because state partnership returns are so complicated. To ensure that [businesses] file their state partnership returns correctly, they need this 30 day extension. AB 1171 is important to maintain the dates that historically were in place prior to passage of AB 1775.

1. The California Society of CPAs states the following in support of this bill:

Historically, California business partnerships have been afforded 30 days following their federal filing deadline to file their California tax returns. The additional time allowed practitioners and taxpayers to complete their federal returns first, calculate relevant state-apportioned data, and make the necessary adjustments to prepare their state returns. Often times, these taxpayers have complex state tax returns where the additional time is necessary to verify numerous calculations, adjustments and accurately report them on a multitude of tax forms and schedules.

Recent legislative changes to conform state due dates to new original federal deadlines allows for the 30 day period between federal and state extended due dates in California corporate tax returns, but did not include a modification to allow for the 30 day period for business partnerships. Therefore, these taxpayers will no longer have the usual period to make the changes necessary to prepare timely California returns. This could lead to unintended errors, penalties, and complications for taxpayers.

1. Committee Staff Comments:
2. Recent Changes to Original Return Due Dates: In 2015, Congress enacted legislation to shorten the federal tax return due date for partnerships by one month, and extend the due date for "C" corporations by one month, so that the filing deadline for partnerships would precede the due dates of their individual and corporate investors. These new federal due dates are intended to alleviate timing pressures and provide a more logical flow of information for a more efficient tax preparation process.

In 2016, the Legislature enacted AB 1775 (Obernotle), Chapter 348, Statutes of 2016, which similarly shortened the state tax return due date for partnerships by one month and extended the due date for "C" corporations by one month, in conformity with federal due dates for such returns. Maintaining conformity with federal law reduces taxpayer errors and eases tax filing and administration.

1. Impact of Changes on Extended Return Due Dates: Both federal and state law allow for a reasonable extension of time for taxpayers to file any return, declaration, statement, or other required document. However, the extension of time to file does not extend the time by which a taxpayer must pay tax – tax is due on the original due date of the return without regard to any extension.

In summary, federal and state laws provide partnerships with a six month extension of time to file returns. For calendar year partnerships currently required to file by March 15, the extension results in an extended due date of September 15 for both federal and state returns. In previous years, federal and state laws provided that the extended due date for federal partnership returns was one month prior to the extended due date for state partnership returns.

Federal^[1] and state^[2] laws also provide corporations an extension of time to file returns. For the 2016 taxable year, both federal and state "C" corporation returns have an original due date of April 18, 2017 and an extended due date of October 16, 2017.

1. What Does This Bill Do? This bill authorizes the FTB to grant extended due dates for state partnership returns that are one month later than the extended due dates for federal partnership returns. According to supporters of this bill, it is important that the state's extended due date remains one month after the federal extended due date because information from the federal return is needed to accurately complete the state return. However, the authorization provided by this bill would only go into effect for taxable years beginning on or after January 1, 2017.

This bill originally provided that partnerships may have an additional month to file state returns for the 2016 taxable year as well, resulting in an extended due date of October 16, 2017 instead of September 15, 2017. However, the FTB raised implementation concerns regarding the disruptive costs and workload associated with changing forms and instructions for the 2016 taxable year midway through the year itself. Thus, for the 2016 taxable year, this bill now provides that the state's extended due date for partnership returns would remain the same as the federal extended due date for partnership returns (September 15, 2017). However, this bill declares legislative intent to require the FTB to presume, for the 2016 taxable year only, reasonable cause and not willful neglect for partnerships that file returns one month past the state's extended due date.

To benefit from the presumption of reasonable cause intended by the Legislature, the partnership must file its return by the extended due date in place prior to the enactment of AB 1775 (October 16, 2016), and the partnership must request relief from the imposition of the delinquent filing penalty or the failure of a partnership to comply with filing requirements penalty. The presumption of reasonable cause means that a partnership that files a return after the due date will not likely incur a penalty for doing so. Thus, the overall effect of this bill is to allow partnerships to continue the practice of filing their state returns one month after the extended due date for their federal returns.

While it seems logical that partnerships use information from their completed federal return to accurately complete their state return, it is unclear what precludes a partnership from completing its federal return in a timely manner to assist with its state return absent a change in the state's extended due date. Although the extended federal and state due dates for partnership returns are currently the same, the original due dates for both are six months prior. Furthermore, allowing an additional month for partnerships to file their state returns would provide that the state's extended due date for partnership returns is the same as the state's extended due date for "C" corporation returns (generally October 15). The original shift in due dates was intended to stagger partnership returns before corporate and individual returns so those taxpayers, as investors, had timely access to information from the partnership's return to file their own returns. As such, the Committee may wish to consider the extent to which this bill benefits a specific subset of taxpayers but disadvantages a different subset of taxpayers.

1. Setting a Precedent: The FTB imposes numerous penalties to increase taxpayer compliance and collect the proper amount of tax revenue due to California under the PIT Law and the CT Law. Many of these penalties are only abated if reasonable cause and lack of willful neglect can be demonstrated. To establish reasonable cause, a taxpayer must show that failure to file occurred despite the exercise of ordinary business care and prudence. Examples of reasonable cause include death or illness of the taxpayer, destruction of the taxpayer's records by fire or flood, and the taxpayer's temporary absence from home. A delay in filing a return due to difficulty obtaining requisite information or the overall complexity of the tax law is not generally considered reasonable cause.

This bill states legislative intent to require the FTB to presume reasonable cause and not willful neglect when specified partnerships file a late return "[d]ue to the challenges of complying with the accelerated filing due date, coupled with the inherent complexities of preparing partnership returns". The Committee may wish to consider the precedent set by stating the legislative intent for a tax agency to be required to presume reasonable cause in specified instances, instead of requiring reasonable cause to be demonstrated by the taxpayer.

1. Prior Legislation: AB 1775 (Obernolte), Chapter 348, Statutes of 2016, modified the original due dates for the California returns of partnerships and "C" corporations to conform to the federal due dates for those entities' returns.

REGISTERED SUPPORT / OPPOSITION:

Support

California Taxpayers Association (Sponsor)

Air Logistics Corporation

Associated General Contractors of California

California Beer and Beverage Distributors

California Building Industry Association

California Business Properties Association

California Chamber of Commerce

California Hotel and Lodging Association

California Society of CPAs

Council on State Taxation

Deloitte LLP

Ernst & Young LLP

Grant Thornton LLP

Kern County Taxpayers Association

KPMG LLP

National Federation of Independent Business

Orange County Taxpayers Association

PricewaterhouseCoopers LLP

Spidell Publishing, Inc.

Opposition

None on file

Analysis Prepared by: Irene Ho / REV. & TAX. / (916) 319-2098

1. Federal law provides corporations with a six-month extension of time to file returns; except for taxable years beginning before January 1, 2026, calendar year "C" corporations required to file by April 15 are provided an extension of only five months. However, for 2016 taxable year returns, "C" corporations are being granted an additional one month extension, resulting in a total extension of six months. ↑

2. State law authorizes the FTB to grant corporations a seven-month extension of time to file returns, which historically provided that calendar year corporations required to file by March 15 had an extended due date of October 15. However, FTB Notice 2016-04, issued on November 4, 2016, announced that for taxable years beginning on or after January 1, 2016, the extended due date for "C" corporations would be shortened to six months since the original due date for "C" corporation returns is now April 15. According to the FTB, allowing a seven-month extension to November 15 would result in tax returns being processed too late during the taxable year and cause administrative difficulties. ↑