(1)The Personal Income Tax Law and the Corporation Tax Law, in conformity with federal income tax law, generally defines gross income as income from whatever source derived, except as specifically excluded, and provides various exclusions from gross income.

This bill would provide an exclusion from gross income for any qualified amount, as defined, received by a qualified taxpayer, which means a person that currently owns or previously owned real property within the Carousel Housing Tract in Carson, California or that resides or previously resided within that tract for amounts received for costs associated with temporary accommodations and from a settlement, as provided.

(2)This bill would apply its provisions to taxable years beginning before, on, and after the effective date of this bill. The bill would make legislative findings and declarations regarding the public purpose served by this bill.

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

(1)The Personal Income Tax Law and the Corporation Tax Law, in conformity with federal income tax law, generally defines gross income as income from whatever source derived, except as specifically excluded, and provides various exclusions from gross income.

This bill would provide an exclusion from gross income for any qualified amount, as defined, received by a qualified taxpayer, which means a person that currently owns or previously owned real property within the Carousel Housing Tract in Carson, California or that resides or previously resided within that tract for amounts received for costs associated with temporary accommodations and from a settlement, as provided.

(2)This bill would apply its provisions to taxable years beginning before, on, and after the effective date of this bill. The bill would make legislative findings and declarations regarding the public purpose served by this bill.

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

(1)The Personal Income Tax Law and the Corporation Tax Law, in conformity with federal income tax law, generally defines gross income as income from whatever source derived, except as specifically excluded, and provides various exclusions from gross income.

This bill would provide an exclusion from gross income for any qualified amount, as defined, received by a qualified taxpayer, which means a person that currently owns or previously owned real property within the Carousel Housing Tract in Carson, California or that resides or previously resided within that tract for amounts received for costs associated with temporary accommodations and from a settlement, as provided.

(2)This bill would apply its provisions to taxable years beginning before, on, and after the effective date of this bill. The bill would make legislative findings and declarations regarding the public purpose served by this bill.

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

(1)The Personal Income Tax Law and the Corporation Tax Law, in conformity with federal income tax law, generally defines gross income as income from whatever source derived, except as specifically excluded, and provides various exclusions from gross income.

This bill would provide an exclusion from gross income for any qualified amount, as defined, received by a qualified taxpayer, which means a person that currently owns or owned real property within the Carousel Housing Tract in Carson, California or that resides or resided within that tract for amounts received for costs associated with temporary accommodations and from a settlement, as provided. The bill would make legislative findings and declarations regarding the public purpose served by the bill.

(2)The Personal Income Tax Law and the Corporation Tax Law allow various deductions in computing the income that is subject to the taxes imposed by that law.

This bill would allow as a deduction an amount equal to any unreimbursed expenses incurred by a qualified taxpayer during the taxable year for qualified amounts, as provided.

(3)This bill would apply its provisions to taxable years beginning before, on, and after the effective date of this bill. The bill would make legislative findings and declarations regarding the public purpose served by this bill.

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

(1)The Personal Income Tax Law and the Corporation Tax Law, in conformity with federal income tax law, generally defines gross income as income from whatever source derived, except as specifically excluded, and provides various exclusions from gross income.

This bill would provide an exclusion from gross income for any qualified amount, as defined, received by a qualified taxpayer, which means a person that currently owns or owned real property within the Carousel Housing Tract in Carson Carson, California or that resides or resided within that tract for amounts received for costs associated with temporary accommodations and from a settlement, as provided. The bill would make legislative findings and declarations regarding the public purpose served by the bill.

(2)The Personal Income Tax Law and the Corporation Tax Law allow various deductions in computing the income that is subject to the taxes imposed by that law.

This bill would allow as a deduction an amount equal to any unreimbursed expenses incurred by a qualified taxpayer during the taxable year for qualified amounts, as provided.

(3)This bill would apply its provisions to taxable years beginning before, on, and after the effective date of this bill. The bill would make legislative findings and declarations regarding the public purpose served by this bill.

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

(1)The Personal Income Tax Law, Law and the Corporation Tax Law, in conformity with federal income tax law, generally defines gross income as income from whatever source derived, except as specifically excluded, and provides various exclusions from gross income.

This bill would provide an exclusion from gross income for any qualified amount, as defined, received by a taxpayer, including amounts received by a taxpayer, directly or indirectly, during the remediation of the Carousel Housing Tract, as provided, and qualified taxpayer, which means a person that currently owns or owned real property within the Carousel Housing Tract in Carson California or that resides or resided within that tract for amounts received for costs associated with temporary accommodations and from a settlement, as provided. The bill would make legislative findings and declarations regarding the public purpose served by the bill.

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

Existing law provides that the Board of Parole Hearings or its successor in interest shall be the states parole authority. Existing law requires that a prisoner who is found to be permanently medically incapacitated, as specified, be granted medical parole, if the Board of Parole Hearings determines that the conditions under which the prisoner would be released would not reasonably pose a threat to public safety. Existing law exempts a prisoner sentenced to death, a prisoner sentenced to life without the possibility of parole, a prisoner who is serving a sentence for which parole is prohibited by initiative statute, and a prisoner who was convicted of the first-degree murder of a peace officer or a person who had been a peace officer from medical parole eligibility.

Existing law authorizes a court to resentence or recall the sentence of a prisoner if the court finds that the prisoner is terminally ill, as specified, or the prisoner is permanently medically incapacitated, as specified, and, in either case, the conditions under which the prisoner would be released or receive treatment do not pose a threat to public safety. Existing law exempts a prisoner sentenced to death, a term of life without the possibility of parole, or a prisoner who was convicted of the first-degree murder of a peace officer or a person who had been a peace officer from eligibility for compassionate release pursuant to these provisions.

This bill would state the intent of the Legislature to enact legislation that would allow a prisoner who is 70 years of age or older to petition for release, to allow a prisoner who is 70 years of age or older and has a serious medical condition to be moved to a facility that may provide better treatment, and to allow a prisoner who is 60 years of age or older and has a serious health condition to petition for release. The bill would make related findings and declarations.

 UNFINISHED BUSINESS  

Bill No: SB 343

Author:

:

Vote:

SENATE GOVERNANCE & FIN. COMMITTEE: 7-0, 6/28/17

AYES: McGuire, Nguyen, Beall, Hernandez, Hertzberg, Lara, Moorlach

SENATE APPROPRIATIONS COMMITTEE: 7-0, 9/1/17

AYES: Lara, Bates, Beall, Bradford, Hill, Nielsen, Wiener

SENATE FLOOR: 39-0, 9/6/17

AYES: Allen, Anderson, Atkins, Bates, Beall, Berryhill, Bradford, Cannella, De León, Dodd, Fuller, Gaines, Galgiani, Glazer, Hernandez, Hill, Hueso, Jackson, Lara, Leyva, McGuire, Mendoza, Mitchell, Monning, Moorlach, Morrell, Newman, Nguyen, Nielsen, Pan, Portantino, Roth, Skinner, Stern, Stone, Vidak, Wieckowski, Wiener, Wilk

NO VOTE RECORDED: Hertzberg

ASSEMBLY FLOOR: 80-0, 8/29/18 - See last page for vote

SUBJECT: Income taxes: gross income exclusions: Kast Property Tank Farm facility cleanup

SOURCE: Author

DIGEST:

This bill enacts an exclusion from income for amounts received by taxpayers who received amounts from a settlement pursuant to California Regional Water Quality Control Board, Los Angeles Region, Order R4-2011-046.

Assembly Amendments

delete the above-the-line deduction for any unreimbursed nondeductible expenses, and correct a cross reference.

ANALYSIS:

Existing law:

1. Defines “income” includes all income from any source, such as wages, dividends, or capital gains, unless specifically excluded, such as employer’s health insurance contributions, insurance payments, or specified discharges of mortgage indebtedness.
2. Provides, generally, that the tax treatment of legal awards or settlements depends upon the origin of the claim:
   1. Any lost wages recovered are taxed as wages, and any compensation for lost profits are taxed as profits.
   2. Any damages for physical injuries are not subject to tax, but damages for non-physical injuries, such as damages from emotional distress, defamation, and sexual harassment are taxed.
   3. Any compensation for medical expenses regardless of whether the condition is mental or physical is not taxed.
   4. Any punitive damages or interest paid are almost always taxable.

This bill:

1. Enacts a personal income tax exclusion for a “qualified taxpayer” receiving a “qualified amount,” defined as:
   1. Amounts received during the remediation of the Carousel Housing Tract, located in Carson, California, from the Shell Oil Company for costs associated with temporary accommodations and relocation pursuant to California Regional Water Quality Control Board, Los Angeles Region, Order R4-2011-046.
   2. Amounts received that were paid under the Optional Real Estate Program or the Revised Remedial Action Plan, Relocation Plan, developed by the URS Corporation for Shell Oil Products dated September 19, 2014.
   3. Any amounts received by a qualified taxpayer from a settlement arising out of the investigation, cleanup, or abatement of the waste discharged at the former Kast Property Tank Farm facility pursuant to California Regional Water Quality Control Board, Los Angeles Region, Order R4-2011-046.
2. Excludes from the definition of “qualified amount” any reimbursed amounts representing any expenses deducted by the taxpayer.
3. Defines “qualified taxpayer” as:
   1. Any taxpayer who currently owns or owned real property located within the Carousel Housing Tract, located in Carson, CA, who received amounts, incurred expenses, or received amounts from a settlement pursuant to California Regional Water Quality Control Board, Los Angeles Region, Order R4-2011-046.
   2. Any taxpayer currently or previously residing in the Carousel Housing Tract, located in Carson, CA, who received amounts, incurred expenses, or received amounts from a settlement pursuant to California Regional Water Quality Control Board, Los Angeles Region, Order R4-2011-046.
4. Applies its provisions to any taxable year, and allows for refunds for taxes previously paid on this income without regard to operation of law, including res judicata, so long as a claim for refund is filed within a one year period commencing on the bill’s effective date.
5. Adopts parallel provisions under the Corporation Tax Law.
6. Makes legislative findings and declarations supporting its purposes, including that its retroactive effect does not constitute a gift of public funds for specified reasons.
7. Contains an urgency clause.

Background

Shell Oil once operated the Kast Property Tank Farm, a 44 acre site in the City of Carson, which included three oil storage reservoirs from the 1920s until the 1960s. Shell sold the property in 1965, which was subsequently developed into the Carousel residential neighborhood, consisting of 285 single-family homes. However, in preparation for development, the oil storage reservoir walls were torn down and buried on-site, resulting in severe public health effects on Carousel residents.

Beginning in 2007, the Department of Toxic Substances Control initiated an environmental investigation into the site, which subsequently included other environmental regulatory agencies, finding that the property contaminated with benzene and methane. In 2011, the Los Angeles Regional Water Quality Control Board found that the oil reservoirs caused soil, soil vapor, and groundwater pollution, including discharges of waste to the waters of the state, and nuisance, and issued a cleanup and abatement order to Shell. In 2014, the Board rejected Shell’s proposed cleanup plan, and issued a notice of violation due to Shell’s lack of compliance. In 2015, the Board revised its initial order, and Shell committed to a $146 million plan to clean up soils (Cleanup and Abatement Order No. R4-2011-046). Shell has also agreed a relocation plan for affected residents, called the Remedial Action Plan (RAP) relocation plan.

In 2009, 1,500 residents of the Carousel neighborhood filed suit against Chevron and the Dole Food Company (which acquired the developer) to seek compensation from damages from anxiety, cancerous tumors, asthma, blood disorders, and other ailments related to longtime exposure to benzene and other chemicals in petroleum products. Last year, Chevron and Dole agreed to settle the suit for $120 million.

FISCAL EFFECT: Appropriation: Fiscal Com.: Local:

The Assembly Appropriations Committee estimates “annual General Fund revenue loss of up to $2.3 million in 2017-18, $4.0 million in 2018-19, and $400,000 in 2019-20. These revenue losses make the conservative assumption that all relevant settlement proceeds are taxable. However, in reality, an unknown amount of these proceeds are likely excludable, and revenue losses may be lower.”

SUPPORT: (Verified 8/22/18)

City of Carson

OPPOSITION: (Verified 8/22/18)

None received

ARGUMENTS IN SUPPORT: According to the author, “According to the author, “In the 1960’s, an industrial property was sold by the Shell Corporation to the Barclay Hollander Curci Corporation to create a housing development of 285 homes, known as the Carousel Tract, in the city of Carson. Los Angeles Regional Water Quality Control Board ordered a clean-up of the properties in 2015 to remove contaminated soil. In 2016 clean-up started. The work involves relocating the affected residents, removing 10 to 15 feet of soil and replacing it with new soil and landscaping. Recently, some of the affected residents learned that relocation payments are considered taxable income by both the Franchise Tax Board and Internal Revenue Service. This process seems to be at odds with the purpose of the payments. We need to fix the tax code to make sure these residents don’t have to pay taxes on their relocation and other related expenses.”

ASSEMBLY FLOOR: 80-0, 8/29/18

AYES: Acosta, Aguiar-Curry, Travis Allen, Arambula, Baker, Berman, Bigelow, Bloom, Bonta, Brough, Burke, Caballero, Calderon, Carrillo, Cervantes, Chau, Chávez, Chen, Chiu, Choi, Chu, Cooley, Cooper, Cunningham, Dahle, Daly, Eggman, Flora, Fong, Frazier, Friedman, Gabriel, Gallagher, Cristina Garcia, Eduardo Garcia, Gipson, Gloria, Gonzalez Fletcher, Gray, Grayson, Harper, Holden, Irwin, Jones-Sawyer, Kalra, Kamlager-Dove, Kiley, Lackey, Levine, Limón, Low, Maienschein, Mathis, Mayes, McCarty, Medina, Melendez, Mullin, Muratsuchi, Nazarian, Obernolte, O'Donnell, Patterson, Quirk, Quirk-Silva, Reyes, Rivas, Rodriguez, Rubio, Salas, Santiago, Steinorth, Mark Stone, Thurmond, Ting, Voepel, Waldron, Weber, Wood, Rendon

Prepared by:

8/30/18 10:22:07

**** END ****

SENATE THIRD READING

STR Bill Id:SB 343

Author:(Bradford)

As Amended Ver:

2/3 vote. Urgency

SENATE VOTE: 39-0

SUMMARY: Provides, under the Personal Income Tax (PIT) Law and the Corporation Tax (CT) Law, a gross income exclusion for "qualified amounts" received by a qualified taxpayer pursuant to the California Regional Water Quality Control Board, Los Angeles Region, Order R4-2011-046 (Cleanup Order). Specifically, this bill:

1. Provides that gross income does not include "qualified amounts" received by a "qualified taxpayer."
2. Defines "qualified amounts" as any of the following:
   1. Amounts received during the remediation of the Carousel Housing Tract from the Shell Oil Company for costs associated with temporary accommodations and relocation pursuant to the Cleanup Order.
   2. Amounts received that were paid under the Temporary Living Assistance or the Optional Real Estate Program of the Revised Remedial Action Plan, Relocation Plan, developed by the URS Corporation for Shell Oil Products dated September 19, 2014; or,
   3. Amounts received from a settlement arising out of the investigation, cleanup, or abatement of the waste discharged at the former Kast Property Tank Farm facility pursuant to the Cleanup Order.
3. Excludes from the definition of "qualified amount" any reimbursed amounts representing any expenses deducted by the taxpayer.
4. Defines a "qualified taxpayer" as any of the following:
   1. A taxpayer that currently owns or previously owned real property located within the Carousel Housing Tract who received amounts, incurred expenses, or received amounts from a settlement arising out of the Cleanup Order; or,
   2. A taxpayer that currently resides or previously resided within the Carousel Housing Tract, who received amounts, incurred expenses, or received amounts from a settlement arising out of the Cleanup Order.
5. Requires payors under the Revised Remedial Action Plan, Relocation Plan, developed by the URS Corporation for Shell Oil Products dated September 19, 2014, and payors of the settlement proceeds arising out of the Cleanup Order, to provide, upon request by the Franchise Tax Board (FTB), an annual list of names, addresses, payment dates, and amounts paid to "qualified taxpayers."
6. Applies to any taxable year, and allows for refunds of taxes previously paid without regard to operation of law, including res judicata, so long as a claim for refund is filed within a one year period commencing on the bill's effective date.
7. Makes findings and declarations regarding the cleanup and abatement order issued by the California Regional Water Quality Control Board for the former Kast Property Tank Farm facility.
8. Makes findings and declarations related to the public purpose of preventing undue hardship on taxpayers who reside in the Carousel Housing Tract and specifies that the retroactive effect does not constitute a gift of public funds.
9. Takes immediate effect as an urgency.

EXISTING LAW:

1. Provides that gross income includes all income from whatever source derived, including compensation for services, business income, gains from property, interest, dividends, rents, and royalties, unless specifically excluded. Internal Revenue Code (IRC) Section 61.
2. Excludes compensation for medical expenses from gross income. For purposes of this exclusion, emotional distress shall not be treated as a physical injury or physical sickness. However, emotional distress arising from a physical injury or physical sickness will be excluded from gross income. IRC Section 104.
3. Provides that settlement amounts for a loss in value of property that are less than the adjusted basis of the property are not taxable and generally do not need to be reported on tax returns.
4. Provides that gross income does not include insurance proceeds received for temporary increase in living expenses resulting from the loss of use or occupancy of a principal residence due to damage or destruction by fire, storm, or other casualty. Code of Federal Regulations Section 1.123-1.
5. Allows taxpayers to exclude from gross income gains from:
   1. The sale or exchange of property if the property, for two of the five years prior to the sale, was owned and used as the taxpayer's principal residence. The allowable exclusion is $250,000 (or $500,000 for taxpayers who are married filing jointly); and,
   2. The involuntary conversion of property, resulting from destruction, into similar property^[1] or into money used to acquire replacement property within a specified period.

FISCAL EFFECT: According to the Assembly Appropriations Committee, annual General Fund revenue loss of up to $300,000 in 2017-18, $600,000 in 2018-19, and $50,000 in 2019-20.

COMMENTS:

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

Residents of the Carousel Housing Tract in the City of Carson have suffered decades of poor physical and mental health because of oil buried mere feet beneath their homes. Until 1965, the Shell Oil Company ran an oil storage facility where their homes now stand. But when the site was redeveloped by the Barclay Hollander Curci Corporation, the oil reservoirs were demolished and wrongfully buried on site. In 2015, the Los Angeles Regional Water Quality Control Board issued a final cleanup and abatement order to finally bring relief to Carousel Tract residents. Because this process requires the removal of up to 10 feet of soil around each house, residents must move off site for several months. Various payments for relocation costs incurred during this process should not be taxed as income. These families have suffered enough, and SB 343 will immediately alleviate any additional burden by ensuring residents are not further penalized for the irresponsible behavior of others.

1. Proponents state that "[f]or nearly two years, the City of Carson has been working with its Congressional representatives on the issue of the Federal taxability of the settlement and relocation payments made to the Carousel Tract residents: first, with Congresswoman Hahn and since December of 2016, with Congresswoman Barragan. This issue is the taxability of (1) the relocation payments made to Carousel Tract residents by Shell Oil under the Remedial Action Plan ordered by the California Regional Water Quality Control Board (Los Angeles) ('Regional Water Board"); and (2) the individual settlement payments being distributed to the plaintiffs in the Acosta cases by Girardi & Keese (the plaintiffs' attorneys)." The proponents state that "[t]he issue of equitable treatment on taxes was first raised in 2016 by Carousel Tract residents, who pointed out that the Porter Ranch residents, who suffered through relocation due to the Gas Company's blowout in late 2015, received a determination from the IRS that some of their relocation payments were not taxable income. The Gas Company relied on this determination to issue the relocation checks without 1099s. We think there are a number of similarities in the two situations and the Carousel Tract residents should be entitles to the same relief. Such precedent is not unique to the IRS: even while raising the issue of Reverse Nonconformity, the Committee's own report notes that '...the Legislature previously excluded disaster assistance payments for victims of the San Bruno gas explosion despite the payments being taxable for federal purposes (AB 50 (Hill), Chapter 18, Statutes of 2011).' If our efforts in Washington are successful, the issue of nonconformity may be settled and the Carousel residents can achieve an additional measure of justice."
2. Committee staff comments:
   1. Background: Shell Oil once operated the Kast Property Tank Farm, a 44 acre site in the City of Carson, which included three oil storage reservoirs from 1923 until the early 1960s. Shell transferred the property in October 1966, which was subsequently developed by Lomita Development Company into the Carousel residential neighborhood, consisting of 285 single-family homes. In preparation for development, the oil storage reservoir walls were torn down and buried on-site.

In 2008, after discovering contamination nearby, the Los Angeles Regional Water Quality Control Board directed Shell Oil to conduct environmental testing of the Carousel Housing tract. These investigations revealed the presence of petroleum hydrocarbons in the areas where Shell's former oil reservoirs had been located.

In 2011, the Los Angeles Regional Water Quality Control Board found that the oil reservoirs caused soil, soil vapor, and groundwater pollution, including discharges of waste to the waters of the state, and nuisance, and issued cleanup and abatement order R4-2011-046. Shell Oil's original Remediation Action Plan was rejected and a revised plan was submitted in June 2014. Under the revised plan, Shell Oil would excavate five to ten feet beneath the homes, install a vapor extraction and venting mechanism and institute comprehensive long-term monitoring. Additionally, Shell Oil would provide temporary relocation assistance in connection with implementing the Remediation Action Plan, and compensate Carousel Housing Tract homeowners to ensure they receive fair market value if they elect to sell their home.

In addition to the remediation action plan, 1,500 residents of the Carousel neighborhood filed suit against Chevron and the Dole Food Company (which acquired the developer) to seek compensation from damages from anxiety, cancerous tumors, asthma, blood disorders, and other ailments related to longtime exposure to benzene and other chemicals in petroleum products. Last year, Chevron and Dole agreed to settle the suit for $120 million.

• 1. Taxability of compensation: The taxability of settlement amounts is affected by a number of factors but is generally determined by the item being replaced and the nature of the underlying claim. Compensation for lost wages or lost profits, damages for breach of contract, and attorney fees and costs are generally included in gross income. Compensatory damages for personal physical injury or physical sickness is generally not included in gross income. The same applies to damages received for emotional distress due to physical injury or sickness. However, certain damages received for emotional distress that is not due to physical injury or sickness such as defamation or sexual harassment must be included in income. Also, a reimbursement for medical care is generally not taxable. Finally, payments received for property damage are not taxable if the payments are not more than the adjusted basis in the property.

Shell Oil and Dole agreed to pay a $120 million settlement to the benefit of about 1500 residents. The specifics of the settlement agreement have not been made available to Committee staff but it appears that allocations of the settlement amount shall be made to plaintiffs based upon the plaintiff's inclusion in one of four categories: cancer claims; non-cancer personal injury claims; medical monitoring and/or fear of cancer only; or property damage without physical personal injury^[2]. As noted above, reimbursement for medical expenses and property damage is generally not taxable. However, noneconomic damages may be taxable, and the settlement does not differentiate between economic and noneconomic damages^[3]. Although it is unclear to what degree the amounts from the settlement and amounts received pursuant to the Cleanup Order would be taxable under existing law, it is clear that a large portion of those amounts are likely not taxable. As such, this bill may not provide meaningful tax relief.

In addition to the settlement agreement, Cleanup Order requires Shell is required to relocate residents during the remediation process. In helping residents determine the taxability of per-diem payments, temporary accommodations, and inconvenience fees, the IRS has provided guidance specific to this situation^[4]. The IRS states that "reimbursements for non-deducted extra expenses incurred due to the payer's wrongdoing are generally not taxable." The IRS then provides examples illustrating what is and is not taxable. Per-diem amounts used to pay for food costs are taxable to a homeowner who has access to a full kitchen at the temporary location because the homeowner would pay those costs, regardless of the move to the temporary location. However, the per-diem amount used to pay for "laundry fees, the extra cost of housewares and the extra cost for transportation to and from work or school is not taxable." Portions of the inconvenience fees used to pay for landscaping costs, cleaning or repainting the home's exterior, outdoor fixtures, furniture or appliances is not taxable. The IRS also made clear that the value of the temporary living facilities provided by Shell Oil is not taxable.

• 1. Reverse conformity: As noted above, California generally conforms to federal law with respect to the definition of income. In general, state conformity with federal law promotes greater simplicity and eases administration of complex tax laws. By excluding all amounts received from gross income, this bill would take California out of conformity with federal law.
  2. Complications continue: As noted in FTB's analysis, individuals who received taxable benefits in prior years will have to file amended returns to take advantage of the proposed exclusion. Additionally, providing a gross income exclusion for amounts received does not necessarily mitigate the difficulty of having to distinguish amounts that are taxable from amounts that are not taxable since this bill does not change federal law, and all of those calculations would still have to be performed for federal purposes. In fact, providing this gross income exclusion may actually create additional work since state tax returns will likely differ from federal tax returns for the foreseeable future.

Analysis Prepared by: Carlos Anguiano / REV. & TAX. / (916) 319-2098 FN: 0004360

1. Any gain is deferred until the sale of the replacement property. ↑

2. Dole Food Co., Inc. v. Superior Court, 242 Cal. App. 4th 894, at 903. ↑

3. Id. ↑

4. Internal Revenue Service, IRS Explains Tax Treatment of Settlement Payments to Some Carson Homeowners, CA-2017-001, August 17, 2017 ↑

Date of Hearing: August 8, 2018

ASSEMBLY COMMITTEE ON APPROPRIATIONS

Lorena Gonzalez Fletcher, Chair

SBPCA Bill Id:SB 343

Author:(Bradford) – As Amended Ver:July 5, 2018

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

SUMMARY:

This bill provides an Personal Income Tax and Corporation Tax gross income exclusion for specified settlement amounts and other types of payments resulting from the contaminated property in the Carousel Housing Tract. This bill also provides an “above-the-line” deduction for related but unreimbursed expenses. Specifically, this bill:

1. Allows the following “qualified amounts” to be excluded from specified taxpayers’ gross income:
   1. Amounts received during the remediation of the tract from the Shell Oil Company for costs associated with temporary accommodations and relocation pursuant to the California Regional Water Quality Control Board, Los Angeles Region, Order R4-2011-046 (Cleanup Order).
   2. Payments under the Optional Real Estate Program of the Revised Remedial Action Plan, Relocation Plan, developed by the URS Corporation for Shell Oil Products dated September 19, 2014.
   3. Settlement amounts arising out of the investigation, cleanup, or abatement of the waste discharged at the former Kast Property pursuant to the Cleanup Order.
2. Provides an above-the-line deduction for unreimbursed expenses incurred for the above-cited qualified amounts.

FISCAL EFFECT:

Annual General Fund revenue loss of up to $2.3 million in 2017-18, $4.0 million in 2018-19, and $400,000 in 2019-20. These revenue losses make the conservative assumption that all relevant settlement proceeds are taxable. However, in reality, an unknown amount of these proceeds are likely excludable, and revenue losses may be lower. (See Comment #3)

COMMENTS:

1. Background. Shell Oil Company sold land known as the “Kast Property Tank Farm Facility” in October of 1965 to a group of residential developers who intended to convert the property to a residential subdivision. After the oil storage reservoirs were decommissioned and the walls were tore down and buried on site, the land was rezoned and the Carousel Housing Tract was constructed in the early 1970s. However, in 2008, discovering contamination nearby, the Los Angeles Regional Water Quality Control Board (Board) directed Shell to conduct environmental testing at the Carousel Housing Tract. These investigations revealed the presence of petroleum hydrocarbons in the areas where Shell’s former oil reservoirs had been located. On March 11, 2011, the Board issued the Cleanup Order, requiring Shell to investigate, clean up, and abate waste discharged at its former Kast Property Tank Farm Facility.

After Shell’s initial Remediation Action Plan (RAP) was rejected, Shell submitted a revised RAP in June 2014, with an addendum in October 2014. Under the revised RAP, Shell would excavate five to ten feet beneath the homes, install a vapor extraction and venting mechanism and institute comprehensive long-term monitoring. In addition, Shell would provide temporary relocation assistance in connection with implementing the RAP, and compensate each Carousel Housing Tract homeowner to ensure they receive fair market value if they elect to sell their home. Additionally, included in the RAP are costs to relocate the residents during the remediation process.

1. Purpose. According to the author, SB 343 will alleviate the financial burden placed on residents who have suffered decades of poor physical and mental health because of oil buried beneath their homes. The author notes that because of the cleanup and abatement process, residents must move off site for several months. The author contends that these payments for relocation costs should not be taxed as income.
2. Taxability of settlement agreements As the Assembly Committee on Revenue and Taxation analysis notes, some of the settlement amounts received by Carousel residents may not be taxable because of the intended purpose of those amounts. For example, reimbursements for medical expenses and property damage are generally not taxable, but noneconomic damages are. Because the details of the $120 million settlement between Shell Oil and Dole (which acquired the developer) and residents are not yet known, it is unclear how much of those dollars will be subject to taxation. SB 343 will ensure that the entirety of the settlement amounts, regardless of their purpose, will be exempt from taxation. While this will make state tax determination more straightforward, taxpayers will still need to navigate the complex rules around the taxation of settlement agreement compensation when filing their federal taxes.
3. Taxability of relocation reimbursements. The Internal Revenue Service (IRS) issued guidance in August 2016 on the taxability of the per-diem payments, temporary accommodations, and inconvenience fees that Shell must pay residents per the Cleanup Order. The IRS states that these reimbursements are typically not taxable, though they may be in some instances. For example, reimbursements used to pay for food costs are taxable to a homeowner who otherwise has access to a full kitchen at the temporary location.

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

Date of Hearing: March 5, 2018

ASSEMBLY COMMITTEE ON REVENUE AND TAXATION

Autumn Burke, Chair

SBPCA Bill Id:SB 343

Author:(Bradford) – As Amended Ver:September 1, 2017

2/3 vote. Urgency. Fiscal committee.

SENATE VOTE: 39-0

SUBJECT: Income taxes: gross income exclusions: deductions: Kast Property Tank Farm facility cleanup

SUMMARY: Provides, under the Personal Income Tax (PIT) Law and the Corporation Tax (CT) Law, a gross income exclusion for "qualified amounts" received and an above-the-line deduction for unreimbursed expenses incurred by a qualified taxpayer pursuant to the California Regional Water Quality Control Board, Los Angeles Region, Order R4-2011-046 (Cleanup Order). Specifically, this bill:

1. Provides an above-the-line deduction, for unreimbursed expenses incurred by a "qualified taxpayer," without regard to taxable year, for "qualified amounts."
2. Provides that gross income does not include "qualified amounts" received by a "qualified taxpayer."
3. Defines "qualified amounts" as any of the following:
   1. Amounts received during the remediation of the Carousel Housing Tract from the Shell Oil Company for costs associated with temporary accommodations and relocation pursuant to the Cleanup Order.
   2. Amounts received that were paid under the Temporary Living Assistance or the Optional Real Estate Program of the Revised Remedial Action Plan, Relocation Plan, developed by the URS Corporation for Shell Oil Products dated September 19, 2014; or,
   3. Amounts received from a settlement arising out of the investigation, cleanup, or abatement of the waste discharged at the former Kast Property Tank Farm facility pursuant to the Cleanup Order.
4. Excludes from the definition of “qualified amount” any reimbursed amounts representing any expenses deducted by the taxpayer.
5. Defines a "qualified taxpayer" as any of the following:
   1. A taxpayer that currently owns or previously owned real property located within the Carousel Housing Tract who received amounts, incurred expenses, or received amounts from a settlement arising out of the Cleanup Order; or,
   2. A taxpayer that currently resides or previously resided within the Carousel Housing Tract, who received amounts, incurred expenses, or received amounts from a settlement arising out of the Cleanup Order.
6. Requires payors under the Revised Remedial Action Plan, Relocation Plan, developed by the URS Corporation for Shell Oil Products dated September 19, 2014, and payors of the settlement proceeds arising out of the Cleanup Order, to provide, upon request by the Franchise Tax Board (FTB), an annual list of names, addresses, payment dates, and amounts paid to "qualified taxpayers."
7. Applies to any taxable year, and allows for refunds of taxes previously paid without regard to operation of law, including res judicata, so long as a claim for refund is filed within a one year period commencing on the bill’s effective date.
8. Makes findings and declarations regarding the cleanup and abatement order issued by the California Regional Water Quality Control Board for the former Kast Property Tank Farm facility.
9. Makes findings and declarations related to the public purpose of preventing undue hardship on taxpayers who reside in the Carousel Housing Tract and specifies that the retroactive effect does not constitute a gift of public funds.
10. Takes immediate effect as an urgency.

EXISTING LAW:

1. Provides that gross income includes all income from whatever source derived, including compensation for services, business income, gains from property, interest, dividends, rents, and royalties, unless specifically excluded. Internal Revenue Code (IRC) Section 61.
2. Excludes compensation for medical expenses from gross income. For purposes of this exclusion, emotional distress shall not be treated as a physical injury or physical sickness. However, emotional distress arising from a physical injury or physical sickness will be excluded from gross income. IRC Section 104.
3. Provides that settlement amounts for a loss in value of property that are less than the adjusted basis of the property are not taxable and generally do not need to be reported on tax returns.
4. Provides that gross income does not include insurance proceeds received for temporary increase in living expenses resulting from the loss of use or occupancy of a principal residence due to damage or destruction by fire, storm, or other casualty. Code of Federal Regulations Section 1.123-1.
5. Allows taxpayers to exclude from gross income gains from:
   
   1. The sale or exchange of property if the property, for two of the five years prior to the sale, was owned and used as the taxpayer's principal residence. The allowable exclusion is $250,000 (or $500,000 for taxpayers who are married filing jointly); and,
      
   2. The involuntary conversion of property, resulting from destruction, into similar property^[1] or into money used to acquire replacement property within a specified period.

FISCAL EFFECT: The Franchise Tax Board (FTB) estimates that this bill will result in general fund revenue loss of $700,000 in fiscal year (FY) 2016-17, $6.1 million in FY 2017-18, $150,000 in FY 2018-19, and $100,000 in FY2019-20.

COMMENTS:

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

Residents of the Carousel Housing Tract in the City of Carson have suffered decades of poor physical and mental health because of oil buried mere feet beneath their homes. Until 1965, the Shell Oil Company ran an oil storage facility where their homes now stand. But when the site was redeveloped by the Barclay Hollander Curci Corporation, the oil reservoirs were demolished and wrongfully buried on site. In 2015, the Los Angeles Regional Water Quality Control Board issued a final cleanup and abatement order to finally bring relief to Carousel Tract residents. Because this process requires the removal of up to 10 feet of soil around each house, residents must move off site for several months. Various payments for relocation costs incurred during this process should not be taxed as income. These families have suffered enough, and SB 343 will immediately alleviate any additional burden by ensuring residents are not further penalized for the irresponsible behavior of others.

1. Proponents state that "[f]or nearly two years, the City of Carson has been working with its Congressional representatives on the issue of the Federal taxability of the settlement and relocation payments made to the Carousel Tract residents: first, with Congresswoman Hahn and since December of 2016, with Congresswoman Barragan. This issue is the taxability of (1) the relocation payments made to Carousel Tract residents by Shell Oil under the Remedial Action Plan ordered by the California Regional Water Quality Control Board (Los Angeles) (‘Regional Water Board”); and (2) the individual settlement payments being distributed to the plaintiffs in the Acosta cases by Girardi & Keese (the plaintiffs’ attorneys)." The proponents state that "[t]he issue of equitable treatment on taxes was first raised in 2016 by Carousel Tract residents, who pointed out that the Porter Ranch residents, who suffered through relocation due to the Gas Company’s blowout in late 2015, received a determination from the IRS that some of their relocation payments were not taxable income. The Gas Company relied on this determination to issue the relocation checks without 1099s. We think there are a number of similarities in the two situations and the Carousel Tract residents should be entitles to the same relief. Such precedent is not unique to the IRS: even while raising the issue of Reverse Nonconformity, the Committee’s own report notes that '...the Legislature previously excluded disaster assistance payments for victims of the San Bruno gas explosion despite the payments being taxable for federal purposes (AB 50, Hill 2011).' If our efforts in Washington are successful, the issue of nonconformity may be settled and the Carousel residents can achieve an additional measure of justice."
2. Committee staff comments:
   1. Background: Shell Oil once operated the Kast Property Tank Farm, a 44 acre site in the City of Carson, which included three oil storage reservoirs from 1923 until the early 1960s. Shell transferred the property in October 1966, which was subsequently developed by Lomita Development Company into the Carousel residential neighborhood, consisting of 285 single-family homes. In preparation for development, the oil storage reservoir walls were torn down and buried on-site.

In 2008, after discovering contamination nearby, the Los Angeles Regional Water Quality Control Board directed Shell Oil to conduct environmental testing of the Carousel Housing tract. These investigations revealed the presence of petroleum hydrocarbons in the areas where Shell’s former oil reservoirs had been located.

In 2011, the Los Angeles Regional Water Quality Control Board found that the oil reservoirs caused soil, soil vapor, and groundwater pollution, including discharges of waste to the waters of the state, and nuisance, and issued cleanup and abatement order R4-2011-046. Shell Oil's original Remediation Action Plan was rejected and a revised plan was submitted in June 2014. Under the revised plan, Shell Oil would excavate five to ten feet beneath the homes, install a vapor extraction and venting mechanism and institute comprehensive long-term monitoring. Additionally, Shell Oil would provide temporary relocation assistance in connection with implementing the Remediation Action Plan, and compensate Carousel Housing Tract homeowners to ensure they receive fair market value if they elect to sell their home.

In addition to the remediation action plan, 1,500 residents of the Carousel neighborhood filed suit against Chevron and the Dole Food Company (which acquired the developer) to seek compensation from damages from anxiety, cancerous tumors, asthma, blood disorders, and other ailments related to longtime exposure to benzene and other chemicals in petroleum products. Last year, Chevron and Dole agreed to settle the suit for $120 million.

• 1. Taxability of compensation: The taxability of settlement amounts is affected by a number of factors but is generally determined by the item being replaced and the nature of the underlying claim. Compensation for lost wages or lost profits, damages for breach of contract, and attorney fees and costs are generally included in gross income. Compensatory damages for personal physical injury or physical sickness is generally not included in gross income. The same applies to damages received for emotional distress due to physical injury or sickness. However, certain damages received for emotional distress that is not due to physical injury or sickness such as defamation or sexual harassment must be included in income. Also, a reimbursement for medical care is generally not taxable. Finally, payments received for property damage are not taxable if the payments are not more than the adjusted basis in the property.

Shell Oil and Dole agreed to pay a $120 million settlement to the benefit of about 1500 residents. The specifics of the settlement agreement have not been made available to Committee staff but it appears that allocations of the settlement amount shall be made to plaintiffs based upon the plaintiff's inclusion in one of four categories: cancer claims; non-cancer personal injury claims; medical monitoring and/or fear of cancer only; or property damage without physical personal injury^[2]. As noted above, reimbursement for medical expenses and property damage is generally not taxable. However, noneconomic damages may be taxable, and the settlement does not differentiate between economic and noneconomic damages^[3]. Although it is unclear to what degree the amounts from the settlement and amounts received pursuant to the Cleanup Order would be taxable under existing law, it is clear that a large portion of those amounts may potentially not be taxable. As such, the degree to which this bill provides tax relief is not clear.

In addition to the settlement agreement, Cleanup Order requires Shell is required to relocate residents during the remediation process. In helping residents determine the taxability of per-diem payments, temporary accommodations, and inconvenience fees, the IRS has provided guidance specific to this situation^[4]. The IRS states that "reimbursements for non-deducted extra expenses incurred due to the payer’s wrongdoing are generally not taxable." The IRS then provides examples illustrating what is and is not taxable. Per-diem amounts used to pay for food costs are taxable to a homeowner who has access to a full kitchen at the temporary location because the homeowner would pay those costs, regardless of the move to the temporary location. However, the per-diem amount used to pay for "laundry fees, the extra cost of housewares and the extra cost for transportation to and from work or school is not taxable." Portions of the inconvenience fees used to pay for landscaping costs, cleaning or repainting the home’s exterior, outdoor fixtures, furniture or appliances is not taxable. The IRS also made clear that the value of the temporary living facilities provided by Shell Oil is not taxable.

• 1. Reverse conformity: As noted above, California generally conforms to federal law with respect to the definition of income. In general, state conformity with federal law promotes greater simplicity and eases administration of complex tax laws. By excluding all amounts received from gross income and providing an above the line deduction for unreimbursed amounts, this bill would take California out of conformity with federal law.
  2. Complications continue: As noted in FTB's analysis, individuals who received taxable benefits in prior years will have to file amended returns to take advantage of the proposed exclusion. However, this bill also provides benefits that may have to be corrected later on a subsequent tax return. For example, this bill provides an above-the-line deduction for unreimbursed expenses incurred by a "qualified taxpayer," without regard to taxable year, for "qualified amounts." If this above-the-line deduction in this bill were to be enacted, an individual would be able to deduct the full amount of an unreimbursed medical expense instead of receiving a partial benefit for the portion of the medical expense that exceeds 7.5% of gross income. Individuals would receive the full benefit of this bill in the current taxable year. However, if the individual receives a reimbursement of those medical expenses in a subsequent year, the individual may have to file an amended return, since under existing law, reimbursements for medical expenses are generally not taxable.

Additionally, providing a gross income exclusion for amounts received does not necessarily mitigate the difficulty of having to distinguish amounts that are taxable from amounts that are not taxable since this bill does not change federal law, and all of those calculations would still have to be made for federal purposes. In fact, providing this gross income exclusion and above the line deduction may actually create additional work since state tax returns may have to differ from federal tax returns for the foreseeable future.

• 1. Technical Amendments: The author has provide the following technical amendments to correct cross references:
     1. On page 3, in line 3, strike out "17209" and insert "17212"; and,
     2. On page 4, line 3, strike out "17209" and insert "17212".

REGISTERED SUPPORT / OPPOSITION:

Support

City of Carson (Sponsor)

Opposition

None on file

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

1. Any gain is deferred until the sale of the replacement property. ↑

2. Dole Food Co., Inc. v. Superior Court, 242 Cal. App. 4th 894, at 903. ↑

3. Id. ↑

4. Internal Revenue Service, IRS Explains Tax Treatment of Settlement Payments to Some Carson Homeowners, CA-2017-001, August 17, 2017 ↑

 THIRD READING  

Bill No: SB 343

Author:

Amended: 9/1/17

Vote:

SENATE GOVERNANCE & FIN. COMMITTEE: 7-0, 6/28/17

AYES: McGuire, Nguyen, Beall, Hernandez, Hertzberg, Lara, Moorlach

SENATE APPROPRIATIONS COMMITTEE: 7-0, 9/1/17

AYES: Lara, Bates, Beall, Bradford, Hill, Nielsen, Wiener

SUBJECT:

SOURCE: Author

DIGEST:

This bill enacts a deduction and an income exclusion for amounts received by taxpayers who received amounts, incurred expenses, or received amounts from a settlement pursuant to California Regional Water Quality Control Board, Los Angeles Region, Order R4-2011-046.

ANALYSIS:

Existing law:

1. Allows taxpayers to deduct expenses incurred for certain activities or purchases up to a certain amount in one of two ways.
   1. First, taxpayers can claim deductions from total gross income, known as “above-the-line” deductions, for specified expenses, such as student loan interest, IRA contributions, or alimony paid, among others, to calculate adjusted gross income (AGI).
   2. Second, taxpayers can either claim the standard deduction ($4,129 single, $8,258 joint in 2016), or itemized deductions for other expenses, such as business expenses, higher education expenses, mortgage interest, and subtract that amount from AGI to calculate taxable income. Taxpayers can only claim itemized miscellaneous deductions that exceed 2% of their AGI, and unreimbursed medical expenses that exceed 7.5% of AGI.
2. Defines “income” includes all income from any source, such as wages, dividends, or capital gains, unless specifically excluded, such as employer’s health insurance contributions, insurance payments, or specified discharges of mortgage indebtedness.
3. Provides, generally, that the tax treatment of legal awards or settlements depends upon the origin of the claim:
   1. Any lost wages recovered are taxed as wages, and any compensation for lost profits are taxed as profits.
   2. Any damages for physical injuries are not subject to tax, but damages for non-physical injuries, such as damages from emotional distress, defamation, and sexual harassment are taxed.
   3. Any compensation for medical expenses regardless of whether the condition is mental or physical is not taxed.
   4. Any punitive damages or interest paid are almost always taxable.

This bill:

1. Allows an above-the-line deduction for state tax purposes for any unreimbursed nondeductible expenses, without regard to taxable years for “qualified amounts,” regardless of whether they exceed 2% of AGI.
2. Enacts a personal income tax exclusion for a “qualified taxpayer” receiving a “qualified amount,” defined as:
   1. Amounts received during the remediation of the Carousel Housing Tract, located in Carson, California, from the Shell Oil Company for costs associated with temporary accommodations and relocation pursuant to California Regional Water Quality Control Board, Los Angeles Region, Order R4-2011-046.
   2. Amounts received that were paid under the Optional Real Estate Program or the Revised Remedial Action Plan, Relocation Plan, developed by the URS Corporation for Shell Oil Products dated September 19, 2014.
   3. Any amounts received by a qualified taxpayer from a settlement arising out of the investigation, cleanup, or abatement of the waste discharged at the former Kast Property Tank Farm facility pursuant to California Regional Water Quality Control Board, Los Angeles Region, Order R4-2011-046.
3. Excludes from the definition of “qualified amount” any reimbursed amounts representing any expenses deducted by the taxpayer.
4. Defines “qualified taxpayer” as:
   1. Any taxpayer who currently owns or owned real property located within the Carousel Housing Tract, located in Carson, CA, who received amounts, incurred expenses, or received amounts from a settlement pursuant to California Regional Water Quality Control Board, Los Angeles Region, Order R4-2011-046.
   2. Any taxpayer currently or previously residing in the Carousel Housing Tract, located in Carson, CA, who received amounts, incurred expenses, or received amounts from a settlement pursuant to California Regional Water Quality Control Board, Los Angeles Region, Order R4-2011-046.
5. Applies its provisions to any taxable year, and allows for refunds for taxes previously paid on this income without regard to operation of law, including res judicata, so long as a claim for refund is filed within a one year period commencing on the bill’s effective date.
6. Adopts parallel provisions under the Corporation Tax Law.
7. Makes legislative findings and declarations supporting its purposes, including that its retroactive effect does not constitute a gift of public funds for specified reasons.
8. Contains an urgency clause.

Background

Shell Oil once operated the Kast Property Tank Farm, a 44 acre site in the City of Carson, which included three oil storage reservoirs from the 1920s until the 1960s. Shell sold the property in 1965, which was subsequently developed into the Carousel residential neighborhood, consisting of 285 single-family homes. However, in preparation for development, the oil storage reservoir walls were torn down and buried on-site, resulting in severe public health effects on Carousel residents.

Beginning in 2007, the Department of Toxic Substances Control initiated an environmental investigation into the site, which subsequently included other environmental regulatory agencies, finding that the property contaminated with benzene and methane. In 2011, the Los Angeles Regional Water Quality Control Board found that the oil reservoirs caused soil, soil vapor, and groundwater pollution, including discharges of waste to the waters of the state, and nuisance, and issued a cleanup and abatement order to Shell. In 2014, the Board rejected Shell’s proposed cleanup plan, and issued a notice of violation due to Shell’s lack of compliance. In 2015, the Board revised its initial order, and Shell committed to a $146 million plan to clean up soils (Cleanup and Abatement Order No. R4-2011-046). Shell has also agreed a relocation plan for affected residents, called the Remedial Action Plan (RAP) relocation plan.

In 2009, 1,500 residents of the Carousel neighborhood filed suit against Chevron and the Dole Food Company (which acquired the developer) to seek compensation from damages from anxiety, cancerous tumors, asthma, blood disorders, and other ailments related to longtime exposure to benzene and other chemicals in petroleum products. Last year, Chevron and Dole agreed to settle the suit for $120 million.

FISCAL EFFECT: Appropriation: Fiscal Com.: Local:

According to the Senate Appropriations Committee, “The Franchise Tax Board (FTB) estimates that the bill would result in General Fund revenue losses of $150,000 in 2016-17, $6.4 million in 2017-18, $250,000 in 2018-19, and $200,000 in 2019-20. FTB would incur minor administration expenses.”

SUPPORT: (Verified 9/1/17)

City of Carson

OPPOSITION: (Verified 9/1/17)

None received

ARGUMENTS IN SUPPORT: According to the author, “According to the author, “In the 1960’s, an industrial property was sold by the Shell Corporation to the Barclay Hollander Curci Corporation to create a housing development of 285 homes, known as the Carousel Tract, in the city of Carson. Los Angeles Regional Water Quality Control Board ordered a clean-up of the properties in 2015 to remove contaminated soil. In 2016 clean-up started. The work involves relocating the affected residents, removing 10 to 15 feet of soil and replacing it with new soil and landscaping. Recently, some of the affected residents learned that relocation payments are considered taxable income by both the Franchise Tax Board and Internal Revenue Service. This process seems to be at odds with the purpose of the payments. We need to fix the tax code to make sure these residents don’t have to pay taxes on their relocation and other related expenses.”

Prepared by:

9/2/17 16:48:42

**** END ****

SENATE COMMITTEE ON

Senator Ricardo Lara, Chair

2017 - 2018 Regular Session

SB 343 (Bradford) - Income taxes: gross income exclusions: deductions: Kast Property Tank Farm facility cleanup

*********** ANALYSIS ADDENDUM – SUSPENSE FILE ***********

The following information is revised to reflect amendments

adopted by the committee on September 1, 2017

Bill Summary:

SB 343 would enact a personal income tax exclusion for specified amounts received by taxpayers resulting from contaminated property in the Carousel Neighborhood

Fiscal Impact:

The Franchise Tax Board (FTB) estimates that the bill would result in General Fund revenue losses of $150,000 in 2016-17, $6.4 million in 2017-18, $250,000 in 2018-19, and $200,000 in 2019-20. FTB would incur minor administration expenses.

Author Amendments:

Make technical changes.

-- END --

SENATE COMMITTEE ON

Senator Ricardo Lara, Chair

2017 - 2018 Regular Session

SB 343 (Bradford) - Income taxes: gross income exclusions: deductions: Kast Property Tank Farm facility cleanup

This bill meets the criteria for referral to the Suspense File.

Bill Summary:

SB 343 would enact a personal income tax exclusion for specified amounts received by taxpayers resulting from contaminated property in the Carousel Neighborhood.

Fiscal Impact:

The Franchise Tax Board (FTB) estimates that the bill would result in General Fund revenue losses of $150,000 in 2016-17, $6.4 million in 2017-18, $250,000 in 2018-19, and $200,000 in 2019-20. FTB would incur minor administration expenses.

Background:

Shell Oil Company (Shell) sold land known as the “Kast Property Tank Farm Facility” in October of 1965 to a group of residential developers who intended to convert the property into a residential subdivision. Shell transferred title to the property in October 1966. In preparation for the change in use, the oil storage reservoirs were decommissioned, the reservoir walls were torn down and buried on site, and the land was graded for home construction. The land was rezoned from industrial to residential, and the Carousel housing tract homes were constructed and sold by the early 1970’s.

In 2008, after discovering contamination nearby, the Los Angeles Regional Water Quality Control Board (RWQCB) directed Shell to conduct environmental testing at the Carousel housing tract. These investigations revealed the presence of petroleum hydrocarbons in the areas where Shell’s former oil reservoirs had been located. On March 11, 2011, the Los Angeles RWQCB issued Order R4-2011-046 (Order), requiring Shell to investigate, clean up, and abate waste discharged at its former Kast Property Tank Farm Facility.

After Shell’s initial Remediation Action Plan (RAP) was rejected, Shell submitted a revised RAP in June 2014, with an addendum in October 2014. Under the revised RAP, Shell would excavate five to ten feet beneath the homes, install a vapor extraction and venting mechanism and institute comprehensive long-term monitoring. In addition, Shell would provide temporary relocation assistance in connection with implementing the RAP, and compensate Carousel Housing Tract homeowners to ensure they receive fair market value if they elect to sell their home.

Additionally, included in the RAP are costs to relocate the residents on the site during the remediation process. This bill would relieve the tax burden placed on those taxpayers living in the Carousel Housing Tract homes by the amounts received and expenses incurred as a result of the RAP.

Proposed Law:

This bill would do the following with respect to qualified amounts received, and unreimbursed expenses incurred, by a qualified taxpayer before, on, or after the date of enactment, and during remediation of the Carousel Housing Tract: (1) exclude qualified amounts from gross income, (2) allow an above the line under the PITL deduction for unreimbursed expenses of qualified amounts, and (3) allow a waiver of limitations for claiming an overpayment of tax that results in a credit or refund, for a one-year period beginning on the date the bill is enacted.

Staff Comments:

Using publicly available information, FTB assumes qualified taxpayers would receive settlement proceeds of $120 million. FTB assumes that 50 percent, or $60 million, would be paid to qualified taxpayers while the remainder would go toward attorney fees and other costs. FTB further assumes that 90 percent of the settlement proceeds would be paid to personal income taxpayers and 10 percent would be paid to corporate franchise taxpayers.

Corporation Tax. FTB thus assumes that $6 million settlement proceeds would be received by corporate taxpayers and would be excluded from gross income in 2017. At a five percent tax rate, the revenue loss would be $300,000. FTB assumes that these taxpayers would not have a need to participate in the relocation program. Consequently, they would not receive reimbursement of expenses associated with their temporary living arrangements due to remediation-related excavation activities. In addition, FTB assumes that these taxpayers would not incur any expense that would not otherwise be deductible.

Personal Income Tax. FTB assumes that $54 million in settlement proceeds would be received by personal income taxpayers and excluded from gross income in 2017.

Under Shell Oil Company’s Temporary Relocation Program, residing owners or tenants of qualified Carousel Housing Tract properties would qualify for either direct pay or reimbursement of expenses associated with their temporary living arrangements due to remediation-related excavation activities. In the case where taxpayers choose the expense reimbursement program, Shell would provide eligible participants with assistance towards temporary living expenses such as lodging, meals, and pet boarding. FTB assumes that Shell would relocate 42 properties each year and each property would include a family of four. FTB assumes that the average family would receive approximately $90,000 in reimbursed expenses that would be excluded from income and would incur an additional $6,500 in unreimbursed expenses that would be treated as a deduction from adjusted gross income.

In addition, FTB assume that individuals that received payments prior to the enactment of this bill would have received and/or incurred similar amounts and would amend their tax returns to exclude income received and/or report unreimbursed expenses related to temporary accommodations. It is assumed that these taxpayers would amend their returns over the next three years (60 percent in 2017, 30 percent in 2018, and 10 percent in 2019).

In total, between the settlement income, the exclusion for reimbursed expenses, and the deduction for unreimbursed expenses, FTB estimates personal taxpayers would exclude or deduct approximately $60 million in 2017. At a tax rate of 10 percent, the revenue loss would be $6.1 million in 2017. The estimated revenue loss would be approximately $250,000 in 2018 and $200,000 each year thereafter for the costs related to the temporary accommodations and relocation. The amounts related to prior year amended returns are accrued back one year.

-- END --

SENATE COMMITTEE ON GOVERNANCE AND FINANCE

Senator Mike McGuire, Chair

2017 - 2018 Regular

Personal income taxes: gross income exclusion: Kast Property Tank Farm facility cleanup (URGENCY)

Enacts a personal income tax exclusion for specified amounts received by taxpayers resulting from contaminated property in the Carousel Neighborhood.

Background

Shell Oil once operated the Kast Property Tank Farm, a 44 acre site in the City of Carson, which included three oil storage reservoirs from the 1920s until the 1960s. Shell sold the property in 1965, which was subsequently developed into the Carousel residential neighborhood, consisting of 285 single-family homes. However, in preparation for development, the oil storage reservoir walls were torn down and buried on-site, resulting in severe public health effects on Carousel residents.

Beginning in 2007, the Department of Toxic Substances Control initiated an environmental investigation into the site, which subsequently included other environmental regulatory agencies, finding that the property contaminated with benzene and methane. In 2011, the Los Angeles Regional Water Quality Control Board found that the oil reservoirs caused soil, soil vapor, and groundwater pollution, including discharges of waste to the waters of the state, and nuisance, and issued a cleanup and abatement order to Shell. In 2014, the Board rejected Shell’s proposed cleanup plan, and issued a notice of violation due to Shell’s lack of compliance. In 2015, the Board revised its initial order, and Shell committed to a $146 million plan to clean up soils (Cleanup and Abatement Order No. R4-2011-046). Shell has also agreed a relocation plan for affected residents, called the Remedial Action Plan (RAP) relocation plan.

In 2009, 1,500 residents of the Carousel neighborhood filed suit against Chevron and the Dole Food Company (which acquired the developer) to seek compensation from damages from anxiety, cancerous tumors, asthma, blood disorders, and other ailments related to longtime exposure to benzene and other chemicals in petroleum products. Last year, Chevron and Dole agreed to settle the suit for $120 million.

Generally, federal and state tax law provide that “income” includes all income from any source, such as wages, dividends, or capital gains, unless specifically excluded, such as employer’s health insurance contributions, insurance payments, or specified discharges of mortgage indebtedness. The tax treatment of legal awards or settlements depends upon the origin of the claim: any lost wages recovered are taxed as wages, and any compensation for lost profits are taxed as profits. Any damages for physical injuries are not subject to tax, but due to changes made by Congress in 1996, damages for non-physical injuries, such as damages from emotional distress, defamation, and sexual harassment are taxed. However, any compensation for medical expenses regardless of whether the condition is mental or physical is not taxed. Additionally, any punitive damages or interest paid are almost always taxable.

Seeking to ensure that any relocation expenses or amounts resulting from the settlement made to persons affected by the environmental degradation of the Kast Property Tank Farm are not subject to tax, the author wants to exclude these payments for state tax purposes.

Proposed Law

Senate Bill 343 enacts a personal income tax exclusion for any qualified amount received by a taxpayer, defined as:

• Costs associated with temporary accommodations and relocation pursuant to Regional Water Quality Control Board Order R4-2011-046, which include hotel expenses, including meal reimbursement, mileage reimbursement, parking expenses, pet boarding fees, Internet connectivity and access fees, electric vehicle charging fees, laundry fees, expenses related to staying with friends or family during remediation, expenses related to renting another home for a lease term including the purchase of housewares, appliances, pet fees, furniture rental, utility fees, and moving expenses, a mileage allowance or costs related to alternative transportation for a taxpayer whose child or children attend relocated area schools until the date the taxpayer exited the relocation program, moving expenses, and expenses related to cleaning the interior of an affected home or vehicle.
• Amounts equal to any unreimbursed expenses related to the Order.
• The proceeds from a settlement arising out of the investigation, clean up, or abatement of the waste discharged at the former Kast Property Tank Farm, Regional Water Quality Control Board Order R4-2011-046, or any combination thereof.

The measure contains legislative findings and declarations, including a statement that due to the public purpose for preventing undue hardship for affected taxpayers in the Carousel neighborhood, the measure’s retroactive effect does not constitute a gift of public funds. The bill also contains an urgency clause.

State Revenue Impact

Pending.

Comments

1. Purpose of the bill. According to the author, “In the 1960’s, an industrial property was sold by the Shell Corporation to the Barclay Hollander Curci Corporation to create a housing development of 285 homes, known as the Carousel Tract, in the city of Carson. Los Angeles Regional Water Quality Control Board ordered a clean-up of the properties in 2015 to remove contaminated soil. In 2016 clean-up started. The work involves relocating the affected residents, removing 10 to 15 feet of soil and replacing it with new soil and landscaping. Recently, some of the affected residents learned that relocation payments are considered taxable income by both the Franchise Tax Board and Internal Revenue Service. This process seems to be at odds with the purpose of the payments. We need to fix the tax code to make sure these residents don’t have to pay taxes on their relocation and other related expenses.”

2. Reverse nonconformity. Generally, when the federal government changes its tax laws, California enacts its own conformity legislation to reduce differences between the two codes, thereby easing the tax preparation burden on taxpayers, tax preparers, and the Franchise Tax Board (FTB). As noted above, the current federal and state tax treatment of legal awards and settlements is complicated, and depends upon the origin of the claim. SB 343 disconnects the origin of the claim concept to instead exclude specified amounts from income for residents of the Carousel neighborhood, thereby providing a direct financial benefit for residents affected by the contaminated site. However, the measure would create a difference in the tax treatment for the same item of income by excluding income for state purposes which may have to be included for federal tax based on the origin of the claim, absent congressional action. While the measure would create a precedent for damage awards, the Legislature previously excluded disaster assistance payments for victims of the San Bruno gas explosion despite the payments being taxable for federal purposes (AB 50, Hill, 2011). While California law contains several differences in the definition of income, SB 343’s extension a state benefit in absence of similar federal treatment may confuse taxpayers, who are not used to different treatment of the same income. The Committee may wish to consider whether the precedent SB 343 creates, and whether the distance it creates between federal and state tax law is worth the benefit for affected taxpayers.

3. Related legislation. Taxpayers can generally deduct damages paid as ordinary and necessary business expense deductions. Earlier this year, the Committee approved SB 66 (Wieckowski), which disallowed deductions for amounts taxpayers pay to plaintiffs in punitive damages relating to any judgment or settlement. The bill is currently pending in the Assembly. Additionally, last year, the Legislature approved SB 1304 (Huff), which would have expanded eligibility for disaster reassessment, allows assessors to consider environmental contamination when revaluing the property, and applied its provisions retroactively to taxpayers affected by the Porter Ranch gas leak. However, the Governor vetoed the bill.

4. Urgency. As an urgency statute, SB 343 must be approved by 2/3 vote of each house of the Legislature. Regular legislation takes effect on the January 1 following its passage, but urgency bills take effect as soon as they're passed, signed, and chaptered.

5. Public purpose. Section Six of Article XVI of the California Constitution prohibits the state from making a gift of public funds, which could be interpreted to include changes in tax law which could give rise to refunds on taxes paid in previous taxable years. SB 343 states legislative findings and declarations stating the necessity of preventing undue hardship to taxpayers who reside in the Carousel Housing Tract of Carson, California as the reason that the prohibition should not apply in this case.

6. Suggested amendments. FTB and Committee staff recommends the following amendments:

• Define a “qualified individual.”
• In the paragraph authorizing the exclusion for temporary relocation expenses, replace current language and instead define expenses included in the RAP relocation plan developed by URS Corporation for Shell Oil, without regard to taxable years.
• Substitute the measure’s exclusion for amounts currently deductible with an above-the-line deduction for any unreimbursed nondeductible expenses, without regard to taxable years.
• In the paragraph authorizing the exclusion for income from the settlement, specify that excludible expenses do not include attorney compensation or fees, or payments made to non-qualified individuals.
• Specify applicable taxable years for the exclusion for settlement income, commencing in the 2017 taxable year.
• Require any administrator of amounts paid to provide any required information upon request to the FTB.
• Adopt parallel provisions for settlement income under the Corporation Tax Law.
• Ensure that taxpayers can claim the exclusion or deduction for the same item of income, but not both.

Support and Opposition

(6/23/17)

Support: Unknown.

Opposition: Unknown.

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