Existing law prohibits a provision in a settlement agreement that prevents the disclosure of factual information related to the action in a civil action with a factual foundation establishing a cause of action for civil damages for certain enumerated sexual offenses. Existing law prohibits a court from entering an order in any of these types of civil actions that restricts disclosure of this information, as specified, and it makes a provision in a settlement agreement that prevents the disclosure of factual information related to the action, entered into on or after January 1, 2017, void as a matter of law and against public policy.

This bill would expand this prohibition to cover a settlement agreement in an action with a factual foundation establishing a cause of action for sexual abuse or harassment.

Date of Hearing: May 16, 2018

ASSEMBLY COMMITTEE ON APPROPRIATIONS

Lorena Gonzalez Fletcher, Chair

ABPCA Bill Id:AB 3057

Author:(Quirk-Silva) – As Amended Ver:March 13, 2018

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

SUMMARY:

This bill conforms, with specified modifications, to federal law regarding the tax treatment of mutual water companies, as defined, for tax years beginning on or after January 1, 2018.

FISCAL EFFECT:

Annual General Fund revenue loss of $3.7 million in 2018-19, $3.3 million in 2019-20, and $3.1 million in 2021.

COMMENTS:

1. Background. Mutual water companies are private corporations or associations organized for the purpose of delivering water to members or stockholders at cost. Federal law provides mutual water companies tax exempt status if at least 85% of the income collected from members is for the sole purposes of meeting losses and expenses. California law does not conform to this provision in federal law, but a mutual water company may obtain tax-exempt status is it qualifies as a homeowners’ association.
2. Cooperatives and mutual associations. A mutual water company may substantially reduce taxable income if it operates as a cooperative or mutual association, which allows it to deduct income resulting from business activities with its members and even deduct income done with nonmembers if done on a nonprofit basis. Because of this, many mutual water companies operating as cooperatives or mutual associations can effectively eliminate almost all taxable income. However, these deductions do not provide tax-exempt status, and the companies must pay other tax obligations such as the minimum franchise tax (MFT).
3. Purpose. According to the author, AB 3057 will allow mutual water companies to be eligible for certain state grants and loans by aligning state law with federal law. Proponents point out that without tax-exempt status at the state level, mutual water companies are ineligible for grants allowing them to improve their water systems. Moreover, confusion about their tax exempt status has led to some mutual water companies failing to pay the MFT, which has resulted in FTB suspending them.

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

Date of Hearing: May 7, 2018

ASSEMBLY COMMITTEE ON REVENUE AND TAXATION

Autumn R. Burke, Chairwoman

ABPCA Bill Id:AB 3057 (

Author:Quirk-Silva) – As Amended Ver:March 13, 2018

Majority vote. Tax levy. Fiscal committee.

SUBJECT: Corporation taxes: exempt organizations: mutual ditch or irrigation companies

SUMMARY: Conforms, with specified modifications, to Internal Revenue Code (IRC) Section 501(c)(12), relating to mutual ditch or irrigation companies (mutual water companies). Specifically, this bill:

1. Conforms, beginning on or after January 1, 2018, to the federal income tax treatment of mutual water companies as specified under IRC Section 501(c)(12).
2. Provides that Revenue and Taxation Code (R&TC) Section 24473, related to the contribution or other transfer of assets to a mutual water company, applies to taxable years beginning on or before January 1, 2018.
3. Takes effect immediately as a tax levy.

EXISTING FEDERAL LAW exempts mutual water companies from taxation, but only if 85% or more of income consists of amounts collected from members for the sole purpose of meeting losses and expenses, under IRC Section 501(c)(12).

EXISTING STATE LAW:

1. Fails to conform to IRC Section 501(c)(12).
2. Allows mutual water companies to qualify for tax-exempt status as a Homeowners' Association (HOA) if certain requirements are met.
3. Allows cooperative or mutual associations to deduct all income resulting from business activities with their members, or when done on a nonprofit basis with nonmembers. The deduction does not apply if income is principally derived from the sale in the regular course of business of tangible personal property other than water, agricultural products, or food sold at wholesale.
4. Provides that the contribution or other transfer of the assets of a mutual water company to a community services district is not a transfer subject to tax if the following requirements are met:
   1. The consideration for the transfer of the assets is the assumption by the district of the company's liability to provide service to the company's stockholders;
   2. The title to all of the company's assets is vested in the district on or before January 1, 2008; and,
   3. For the one-year period immediately prior to commencement of the transfer and continuing until the transfer is completed, 85% or more of the company’s income consists of amounts collected from stockholders for the sole purpose of meeting losses and expenses.

FISCAL EFFECT: The Franchise Tax Board estimates General Fund revenue losses of $3.7 million in fiscal year (FY) 2018-19, $3.3 million in FY 2019-20, and $3.1 million in FY 2020-21.

COMMENTS:

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

Mutual water, mutual ditch and irrigation companies in California are currently able to obtain tax-exemption at the federal level, but no similar statutory authority is now available under California law.

In order to be eligible for certain state grants and loans dedicated to small water systems, such as mutual water companies, a company must attest to its tax-exempt status. No California authority applies that enables mutual water companies to obtain that status at the state level.

By amending current California Revenue and Taxation Code to conform to the tax-exemption provided under the Internal Revenue Code, AB 3057 will help the state expedite grants to help small water systems through improvements and/or consolidations, as well as remove current disincentives to water efficiency measures.

1. Proponents state that "[t]o qualify for tax-exemption at the federal level under Internal Revenue Code Section 501(c)(12), mutual water companies must derive 85% or more of their revenue from serving their communities, and are limited to charging only for the cost of service. Mutual water companies in California are currently able to obtain tax-exemption at the federal level under Section 501(c)(12), but no similar statutory authority is now available under California law." Furthermore, this bill "would amend the California Revenue and Taxation Code to conform to federal income tax law (i.e., Section 501(c)(12) of the Internal Revenue Code) by exempting not-for-profit mutual water, mutual ditch, or irrigation corporations from California income taxes and franchise fees beginning on January 1, 2018." By doing so, proponents argue that this bill will ultimately "help the state expedite grants to help small water systems with infrastructure improvements, as well as remove current disincentives to water-efficiency measures."
2. Committee Staff Comments:
   1. Tax status of mutual water companies: Federal law exempts mutual water companies from taxation under IRC Section 501(c)(12), but only if 85% or more of the income consists of amounts collected from members for the sole purpose of meeting losses and expenses. California does not specifically conform to this federal provision. However, existing state law provides two ways in which a mutual water company may become tax exempt or substantially reduce its tax liability.

First, mutual water companies may qualify for tax-exempt status as an HOA. To qualify for tax-exempt status as an HOA, a mutual water company must first meet the general "organizational" and "operational" tests for all HOAs. More specifically, a mutual water company must also meet the following requirements: (i) members' use of water is for residential purposes only; (ii) mutual water companies must charge members for water on an equal basis or based on the size or value of each member's property; and, (iii) if water meters are in use, income from metered assessments may not exceed 40% of total receipts.

Second, mutual water companies may substantially reduce income if they operate as a cooperative or mutual association. Mutual water companies that operate as cooperatives or mutual associations can deduct all income resulting from business activities with their members and even deduct income done with nonmembers if done on a nonprofit basis. Additionally, amounts transferred into a reserve may also be deducted. As such, many mutual water companies operating as cooperatives or mutual associations can effectively eliminate almost all taxable income. However, the deduction allowed when operating as a cooperative or mutual association does not provide tax-exempt status; it simply eliminates most, if not all, taxable income.

• 1. Stated need for this bill: As explained by the author's office, to be eligible for certain state grants and loans dedicated to small water systems, a mutual water company must attest to its tax-exempt status. According to the author's office, this is problematic because there is no state equivalent to the federal 501(c)(12) tax-exempt status. Additionally, that author states that because mutual water companies are tax exempt at the federal level, many believe that they are also tax exempt at the state level, which has led to instances where mutual water companies have failed to pay the annual franchise tax and have become suspended. The suspension makes them ineligible for grant funds. According to the author's office, the minimum franchise tax is creating the biggest problem for mutual water companies.
  2. Changing landscape: Over the last few years, policies have changed the way mutual water companies operate. Specifically, existing law requires all urban water suppliers to install water meters on all service connections on or before January 1, 2025. As noted earlier, a mutual water company that wishes to be tax exempt as an HOA must, in addition to other requirements, keep income generated by water meters to less than 40% of total receipts. Clearly, this is a problem for mutual water companies wanting to maintain their tax-exempt status as an HOA at a time when the state is mandating that all services connections have a water meter. As such, it appears that by 2025, no urban water supplier that is a mutual water company will be able to utilize the HOA tax-exempt status.

The loss of the tax-exempt status, however, does not necessarily mean that mutual water companies are now subject to tax. As noted earlier, state law allows a cooperative or a mutual association to deduct all income resulting from business activities with their members. Unfortunately, unlike an HOA, mutual water companies operating as a cooperative are subject to the minimum franchise tax of $800. According to proponents of this bill, the imposition of the $800 has become a problem for many mutual water companies primarily because they are unaware that they owe the minimum franchise tax. As a result, some mutual water companies have been suspended by the FTB. Proponents argue that the suspension of their business entity status makes them ineligible for grants and loans under California's Proposition 1 (2014), Safe, Clean, and Reliable Water Supply Act.

• 1. Conformity: Businesses and individuals generally prefer conformity to federal tax laws because it reduces state tax compliance costs. Failure to conform to federal law in some areas may lead to improper tax reporting to California and extra costs to the taxpayers. Conformity legislation is also important to state agencies, as it eases the burden, and reduces the costs, of tax administration because the state may rely on federal audits, federal case law, and regulations. However, while state conformity to federal income tax provisions offers certain advantages and reduces tax compliance costs, it can also significantly impact state revenues.
  2. Camel's nose: This bill conforms only to the IRC Section 501(c)(12) provisions related to mutual water companies. The federal exemption, however, also applies to benevolent life insurance associations of a purely local character, mutual or cooperative telephone companies, and mutual or cooperative electric companies. If this bill were to be enacted, some of the other entities covered by 501(c)(12) may seek to be added.
  3. Prior legislation: SB 1977 (Johannessen), Chapter 1108, Statutes of 2002, specified that a transfer of assets from a mutual water company to a community services district is not subject to tax. It is the only provision that specifically exempts mutual water companies from any tax, and SB 1977 was enacted specifically for the transfer of assets from Lake Shastina Mutual Water Company to Lake Shastina Community Services District. Analyses for SB 1977 attempted to discern why California had not conformed to federal law, but no clear answer was found. Perhaps it is due to the fact that many mutual water companies have operated as HOAs and, as a practical matter, have not needed the additional tax benefits affordable under federal law. Or perhaps it is due to the fact that most income can be deducted when operating as a cooperative. Whatever the reason, the shift in policy towards greater use of water meters may require a change in the way mutual water companies are treated for tax purposes.

REGISTERED SUPPORT / OPPOSITION:

Support

Atascadero Mutual Water Company

Averydale Mutual Water Company

Bellflower Somerset Mutual Water Company

BizFed Central Valley

Blue Lake Springs Mutual Water Company

CalMutuals

California Domestic Water Company

Cherry Valley Mutual Water Company

Eastern Municipal Water District

Farm Mutual Water Company

Jubilee Mutual Water Company

Las Cumbres Mutual Water Company

Lincoln Avenue Water Company

Lone Tree Mutual Water Company

Maywood Mutual Water Company #1

Midway City Mutual Water Company

Milky Way Water Company

Montebello Land & Water Company

Northern California Water Association

Oak Tail Ranch Mutual Water Company

Olide Water Company

Page Avenue Mutual Water Company

Roseview Heights Mutual Water Company

Rubio Canon Land and Water Association

Self Help Enterprise

South Mesa Water Company

South Midway City Mutual Water Company

Sundale Mutual Water Company

Sunny Slope Water Company

Tract 180 Mutual Water Company

Valencia Heights Water Company

Valley Water Company

Varian Ranch Mutual Water Company

Vaughn Water Company

Villa Glen Mutual Water Company

Western Heights Water Company

Opposition

Unknown

Analysis Prepared by: Carlos Anguiano / REV. & TAX. / (916) 319-2098