California Wealth Tax & Proposal (AB-2088)
What is California Wealth Tax & Proposal (AB-2088): As one might imagine, the idea of a California State Wealth tax does not sit well with many US Taxpayers throughout the State of California. In fact, California already has one of the highest state income tax rates throughout the nation. The idea of making wealthy residents have to pay additional taxes, when there is no similar tax at the federal level does not sit well with most — even those who are not directly impacted by it. Adding insult to injury, this proposed tax comes after the federal government already did away with most of the benefits of the SALT deduction — which means now many taxpayers cannot deduct the full amount of their state income taxes paid on the Schedule A of their Federal Tax Return.
While the idea of increasing the tax rate to nearly 17% is absurd — there is some logic behind it; it coincides with the concept of a progressive tax rate already in place. But the additional idea of taxing individuals on their wealth is simply not fair in the United States – where a wealth tax does not exist at the federal level.
ART 27. Wealth Tax
CHAPTER 1. General Provisions and Definitions
This part shall be known, and may be cited, as the Wealth Tax Act.
The collection and administration of the tax described in this part shall be governed by the provisions of Part 10.2 (commencing with Section 18401) unless expressly superseded by the provisions of this part.
(a) The Wealth Tax shall be reported with, and is due at the same time as, the annual income taxes of a taxpayer under Part 10 (commencing with Section 17001). The Franchise Tax Board shall amend the Personal Income Tax Forms, and amend or create any other forms necessary, for the reporting of certain assets. Assets that must be reported separately shall include, but shall not be limited to, the following categories:
(1) Stock in any publicly and privately traded C-corporation.
(2) Stock in any S-corporation.
(3) Interests in any partnership.
(4) Interests in any private equity or hedge fund.
(5) Interests in any other noncorporate businesses.
(6) Bonds and interest bearing savings accounts.
(7) Cash and deposits.
(8) Farm assets.
(9) Interest in mutual funds or index funds.
(10) Put and call options.
(11) Futures contracts.
(12) Art and collectibles.
(13) Financial assets held offshore.
(14) Pension funds.
(15) Other assets, excluding real property.
(16) Debts other than mortgages or other liabilities secured by real property.
(17) Real property.
(18) Mortgages and other liabilities secured by real property.
(b) For the avoidance of doubt, directly held real property, and mortgages and other liabilities secured by directly held real property, must be listed separately in accordance with subdivision (a), but those items are not considered in calculating the taxpayer’s worldwide net worth under this part pursuant to Section 50306.
If any section, subdivision, paragraph, or provision of this part is found to be invalid, unconstitutional, or otherwise unenforceable that finding shall not affect any other section, subdivision, paragraph, or provision in this part that can be enforced without the use of the offending provision.
CHAPTER 2. Imposition of Tax on Wealth
(a) For the benefit of accumulating excessive wealth in this state, there shall be imposed an annual tax of 0.4 percent upon the worldwide net worth of every resident in this state in excess of the following:
(1) For married taxpayers filing separately, fifteen million dollars ($15,000,000).
(2) For all other taxpayers, thirty million dollars ($30,000,000).
(1) Except as explicitly provided for in this part, for purposes of subdivision (a) worldwide net worth shall be calculated in the manner set for calculation of the Federal Estate Tax under Chapter 11 (commencing with Section 2001) of Subtitle B of the Internal Revenue Code as that chapter reads as of June 15, 2020.
(2) Except as otherwise provided in this part, and only to the extent allowable under the California Constitution, United States Constitution, and other governing federal law, worldwide net worth shall be the value of all worldwide property owned by the taxpayer on December 31 of each year. Any transaction, a primary purpose of which is to reduce the valuation of a taxpayer’s worldwide net worth as of December 31, shall be disregarded. The Franchise Tax Board shall adopt regulations designed to prevent the avoidance or evasion of the tax imposed under this part.
Worldwide net worth shall not include any real property directly held by the taxpayer. However, worldwide net worth shall include the value of real property held indirectly, as through a corporation, partnership, limited liability company, trust, or other such legal form, except to the extent that such inclusion is prohibited by the California Constitution, by the United States Constitution, or other governing federal law.
The Franchise Tax Board shall adopt regulations on the following subjects to clarify valuation methods.
(a) Valuation Method
(1) For publicly traded assets, the value of the assets will be presumed to be their market value at the end of the tax year.
(2) (A) For nonpublicly traded assets, the best available methodology and information shall be used to estimate a current value at the end of the tax year.
(B) The estimated value in subparagraph (A) shall be subject to later reconciliation with market transactions, or any other objective indicator of value, involving the formerly nonpublicly traded assets or substantially similar assets. For this purpose, objective indicators of value shall include, but not be limited to, sales or partial sales of the taxpayer’s ownership interests in the relevant assets or entity, any substantial transfer of the entity’s assets to taxpayers on account of their ownership interests, or issuance of new stock to investors. Reconciliation procedures established under this subparagraph shall give rise to a tax liability or refund as necessary where the reconciled value diverges from the value estimated under subparagraph (A).
(3) In establishing estimated valuations under paragraph (2), the Franchise Tax Board may use a methodology that applies a deemed growth rate to broad categories of assets, similar to the application of depreciation schedules for broad categories of assets under Section 168 of the Internal Revenue Code.
(4) For taxpayers with nonpublicly traded assets that have not been subject to reconciliation under paragraph (2), the Franchise Tax Board shall adopt regulations requiring the taxpayer to confirm to the Franchise Tax Board each year whether a reconciliation event has occurred.
(5) The Franchise Tax Board shall create any additional tax forms necessary to allow item-by-item reporting of transactions where a taxpayer that has been subject to the tax imposed by this part realizes capital gains or losses by selling assets in a given year. The forms shall allow the taxpayer to report the basis, amount realized, and most recent fair market value reported for purposes of this part.
(6) The Franchise Tax Board shall adopt regulations detailing abusive transactions whose aim is to change the nature of an asset from public to nonpublic or vice versa.
(b) For assets held within trusts or other entities that are owned or partially owned by a taxpayer, the Franchise Tax Board shall adopt regulations determining the assessed value of the taxpayer’s ownership rights in these entities. Any feature of an asset intended to, and having the effect of, decreasing the value of the asset, such as a “poison pill,” shall be disregarded. Additionally, no valuation discount, or any other discount, shall apply if the effect of the discount would be to reduce the value of a pro rata economic interest in an asset below the pro rata value of the entire asset.
(c) (1) Liquidity-constrained taxpayers with ownership interests in hard-to-value assets and business entities, such as startup businesses, shall be able to elect for an unliquidated and deferred tax liability to be attached to these assets instead of the net value of these assets being assessed at the end of a tax year. The tax liability shall be backed by a contract with the state specifying the reference for the eventual valuation of the unliquidated and deferred tax liability. The contract shall also list the actions or situations that trigger the tax liability becoming liquidated and due.
(2) The Legislature presumes that any taxpayer subject to the Wealth Tax is not a liquidity-constrained taxpayer if the taxpayer’s hard-to-value assets are less than 80 percent of the taxpayer’s total net worth. The Franchise Tax Board shall adopt regulations in regard to substantiating who is or is not a liquidity-constrained taxpayer. For the removal of doubt, the Legislature finds that most taxpayers subject to the Wealth Tax should not be found liquidity constrained.
(3) The Franchise Tax Board shall adopt regulations specifying how contracts entered into pursuant to paragraph (1) are to be structured, allowing for valuation to be made by reference to the taxpayer’s percentage ownership interests, such as stock or partnerships interest in a privately held business. These regulations shall further specify the scenarios under which any such unliquidated and deferred tax liabilities would later be required to become due and liquidated. The scenarios that the Franchise Tax Board shall specify as triggering a liquidation of previously unliquidated and deferred tax liabilities shall include, but shall not be limited to, sales or partial sales of the taxpayers’ ownership interests in the relevant assets or entities, any substantial transfer of an entity’s assets to taxpayers on account of their ownership interests, or issuance of new stock to investors.
(a) The value of all assets subject to the Wealth Tax shall be reported annually, but any amount of net-worth wealth tax on those assets paid to another jurisdiction shall be credited against the Wealth Tax. Any credits created by this section, however, shall not exceed the total tax owed under the Wealth Tax. For the avoidance of doubt, this section shall only provide a credit for a tax on net worth, or a tax on real property as described in subdivision (b), and no credit shall be created by any tax on transactions, income, capital gains, or other taxes.
(b) Notwithstanding subdivision (a), a taxpayer who owns real property indirectly, as through a corporation, partnership, limited liability company, trust, or other such legal form, shall receive a credit for their pro rata share of any property taxes paid on the gross or net value of real property to any jurisdiction. This credit is limited to taxes paid with regard to ownership of the real property, and no credit shall be created by any transactions tax, excise tax, or any other tax based on use of the property. The credit created by this subdivision for each separate unit of real property shall not exceed the portion of the taxpayer’s total Wealth Tax liability attributable to the taxpayer’s ownership interest in the real property.
(c) To claim the credits described in subdivision (b), a taxpayer must separately report each of the following items:
(1) The fair market value of each unit of real property.
(2) The assessed value used to calculate any creditable property taxes imposed on each unit of real property.
(3) The property taxes paid, for which credit is being claimed.
(4) All mortgages and other liabilities secured by or used for the purpose of each unit of real property.
Notwithstanding the provisions of Section 50306, the value of directly held real property excluded from calculation of a taxpayer’s worldwide net worth shall be reported on the taxpayer’s annual return, along with any liabilities secured by or used for the benefit of directly held real property. Liabilities secured by or used for the benefit of directly held real property shall not be considered in determining worldwide net worth of a taxpayer. The Franchise Tax Board shall adopt regulations for apportioning taxpayer’s overall liabilities to exclude liabilities related to directly held real property. These regulations shall provide that, at a minimum, a percentage of each taxpayer’s overall liabilities, equal to the percentage the taxpayer’s directly held real property interest bears to all of the taxpayer’s worldwide assets, shall be excluded from the calculation of the taxpayer’s worldwide net worth.
(1) For purposes of this part, a taxpayer is considered a resident of California for a given year, if such taxpayer is a California resident for purposes of the California income tax as determined by Section 17014.
(2) Part-Year Resident. A part-year resident is determined as by Section 17015.5. Part-year residents shall be taxed on their worldwide net worth according to this part, but for purposes of calculating such tax, the taxpayer’s worldwide net worth shall be multiplied by the percentage of days in the year such taxpayer was present in this state.
(3) Temporary Resident. A taxpayer who spends more than 60 days in California, but who does not qualify as a resident under Section 17014 or part-year resident under 17015.5, shall be treated as a temporary resident. Temporary residents shall be taxed on their worldwide net worth according to this part, but for purposes of calculating that tax, the taxpayer’s worldwide net worth shall be multiplied by the percentage of days in the year the taxpayer was present in this state.
(4) Wealth Tax Resident. Any taxpayer with extreme wealth sourced to this state according to the rule of paragraph (3) of subdivision (b).
(b) Special Apportionment Rules for Wealth Tax.
(1) General Rule. In general, the portion of a taxpayer’s wealth subject to the tax imposed by this part shall be multiplied by a fraction, the numerator of which shall be years of residence in California over the 10 last years, and the denominator of which shall be 10. For the purpose of calculating the numerator described in the previous sentence, any partial year of residence as calculated under paragraphs (2) and (3) of subdivision (a) and shall be included in the numerator.
(2) Special Rule for New Residents. For residents of California who have never been a California resident before, the calculation of the numerator under paragraph (1) of subdivision (b) shall, for the first year of residence in California, be a fraction between 0 and 1, as calculated under paragraph (2) of subdivision (a). For each subsequent year, the number 1 should be added until the numerator reaches 10.
(3) Special Rule for Wealth Tax Residents.
(A) For taxpayers who were subject to the Wealth Tax in one of the preceding 10 years, and are no longer residents of this state as residence is defined in Section 50310, and do not have the reasonable expectation to return to this state, the calculation of the numerator under paragraph (1) shall be as follows. For the first year of nonresidence in California, a fraction between 0 and 1, as calculated under subdivision (b) of Section 50310, plus the years of residence in California over the nine previous years shall be the numerator. For each subsequent year, the number 1 should be subtracted until the numerator reaches 0.
(B) For any taxpayer who pays tax under this part as a former resident, but then returns to California, the apportionment rule shall be the general rule of paragraph (1) of subdivision (b).
(4) Petition for Alternative Apportionment. If apportionment provisions of this part do not fairly represent the extent of the benefit granted to the taxpayer to accumulate extreme wealth in this state, then the taxpayer may petition for, or the tax administrator may require, in respect to all or any part of the taxpayer’s wealth, the use of an alternative apportionment method.
(A) Burden of Proof. In any proceeding for alternative apportionment, the burden shall be on the petitioning party to demonstrate by clear and convincing evidence that the standard method is unfair and that a more fair and reasonable method is available.
(B) Authority to Adopt Regulations. In case of recurring fact patterns involving taxpayers, the Franchise Tax Board may, in addition to the authority provided in this part, adopt appropriate rules or regulations for determining alternative apportionment methods for those taxpayers.
(c) For purposes of calculating who is a resident under this part, the taxpayer is only considered a resident when no longer a dependent of another taxpayer, as dependent is defined in Section 17056.
(d) In the event any provision of this section, including, but not limited to, paragraphs (2), (3), and (4) of subdivision (a), is found by a court to be invalid, unconstitutional, or otherwise unenforceable, that finding shall not affect the enforceability of any other provision of this section.
(a) A taxpayer subject to the tax imposed under this part with an understatement of tax for any taxable year shall be subject to the penalty imposed under this section if that understatement exceeds the greater of the following:
(1) One million dollars ($1,000,000).
(2) Twenty percent of the tax shown on an original return or shown on an amended return filed on or before the original or extended due date of the return for the taxable year.
(b) The penalty under this section shall be an amount equal to 20 percent of any understatement of tax. For purposes of this section, “understatement of tax” means the amount by which the tax imposed by this part exceeds the amount of tax shown on an original return or shown on an amended return filed on or before the original or extended due date of the return for the taxable year.
(c) The penalty imposed by this section shall be in addition to any other penalty imposed under Part 10.2 (commencing with Section 18401).
(d) A refund or credit for any amounts paid to satisfy a penalty imposed under this section may be allowed only on the grounds that the amount of the penalty was not properly computed by the Franchise Tax Board.
(e) No penalty shall be imposed under this section on any understatement to the extent that the understatement is attributable to any of the following:
(1) A change in law that is enacted, adopted, issued, or becomes final after the earlier of either of the following dates:
(A) The date the taxpayer files the return for the taxable year for which the change is operative.
(B) The extended due date for the return of the taxpayer for the taxable year for which the change is operative.
(2) For purposes of this subdivision, a “change of law” means a statutory change or an interpretation of law or rule of law by regulation, legal ruling of counsel, within the meaning of subdivision (b) of Section 11340.9 of the Government Code, or a published federal or California court decision.
(3) The Franchise Tax Board shall implement this subdivision in a reasonable manner.
(f) No penalty shall be imposed under this section to the extent that a taxpayer’s understatement is attributable to the taxpayer’s reasonable reliance on written advice of the Franchise Tax Board, but only if the written advice was a legal ruling by the chief counsel, within the meaning of paragraph (1) of subdivision (a) of Section 21012.
This act provides for a tax levy within the meaning of Article IV of the California Constitution and shall go into immediate effect.
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