California Updates Conformity to Internal Revenue Code, Provides Large Corporate Understatement Penalty Relief

Governor Jerry Brown signed Assembly Bill 154 on September 30, 2015, updating California’s general conformity to the Internal Revenue Code and providing three new exceptions to the imposition of the Large Corporate Understatement Penalty.

Internal Revenue Code Conformity

Assembly Bill 154 (AB 154) changes California’s specified date of conformity to the Internal Revenue Code (IRC) from January 1, 2009, to January 1, 2015, for taxable years beginning on or after January 1, 2015.¹ As a result, California personal income tax and corporation tax laws conform to the changes made to the IRC during that six-year period to the extent California incorporates those provisions by reference, except as otherwise provided.²

In addition to this general IRC conformity, AB 154 also adopts IRC section 6164, which allows corporations expecting a net operating loss carryback to extend the time for payment of taxes for the preceding taxable year, and is operative for taxable years beginning on or after January 1, 2015.³

AB 154 also states that it is the Legislature’s intent to “confirm the validity and ongoing effect” of Senate Bill 401 (SB 401), which was enacted by a majority vote of the Legislature in 2010 to update conformity to the IRC as of January 1, 2009, for IRC provisions incorporated into California tax law by reference.⁴ It is unclear whether SB 401 is valid in light of the passage Proposition 26, which amended section 3 of Article XIII A of the California Constitution to require a two-thirds vote of the Legislature to change a state statute which results in any taxpayer paying a higher tax.⁵

Large Corporate Understatement Penalty Relief

AB 154 provides relief from the Large Corporate Understatement Penalty (LCUP) for an increase to tax resulting from a proper IRC section 338 election reported on a first amended return,⁶ and for understatements attributable to either (1) an alternative apportionment or allocation method imposed by the FTB pursuant to CRTC section 25137,⁶ or (2) a federal accounting method change where the IRS consents to the change after the original due date of the return.⁸

The above LCUP relief provisions are operative for taxable years beginning on or after January 1, 2015, except for the alternative apportionment relief provision, which is operative for any taxable year for which the statute of limitations on assessments has not expired as of September 30, 2015.⁹ Taxpayers should consider filing refund claims for any open years the LCUP was paid and incurred as a result of FTB’s imposition of an alternative apportionment method under CRTC section 25137.

1. California Revenue and Taxation Code (CRTC) section 17024.5(a)(1)(P), incorporated by reference in CRTC section 23051.5(a)(1).
2. For a list of the IRC provisions enacted from 2009 through 2015 that California has and has not adopted, see the Franchise Tax Board (FTB) Analysis of AB 154.
3. CRTC section 19131.5. California did not adopt IRC section 6164(d)(2), which extends the time for payment of tax to when a taxpayer receives notice from the Internal Revenue Service (IRS) about the allowance or disallowance of an application for a tentative carryback adjustment. See CRTC section 19131.5(b)(4).
4. AB 154, section 42.
5. See FTB Legal Division Guidance 2011-01-01.
6. CRTC section 19138(b)(3).
7. CRTC section 19138(f)(2).
8. CRTC section 19138(f)(3).
9. CRTC section 19138(h)(3)(A) and (B); AB 154, section 43.