Amended Wealth Tax Bill to Impose 1% Upon the Worldwide Net Worth of CA Residents Worth Over $25M

On March 24, Assembly Members Miguel Santiago, Lorena Gonzalez, Ash Kalra, and Mark Stone amended Assembly Bill 310 to implement a proposed wealth tax. The bill would add Part 27 (commencing with Section 50301) to Division 2 of the Revenue and Taxation Code. As a tax levy, the measure would take effect upon chaptering. The bill would require a 2/3 vote of both houses of the Legislature.

Section One of the bill would add Part 27, which would be titled “Wealth Tax.” Chapter 1 would provide general provisions and definitions. Chapter 2 would provide for imposition of the tax on wealth.

Under Chapter 1, this section of law would be known as the Wealth Tax Act. The collection and administration of the tax would be governed by the provisions of the Personal Income Tax Law under Part 10.2. The Wealth Tax must be reported with and is due at the same time as annual income taxes of the taxpayer. The Franchise Tax Board (FTB) would be required to amend its tax forms and create any additional ones that are necessary for the reporting of certain assets.

Assets must be reported separately and include, but not be limited to, the following categories of assets:

• Stock in any publicly and privately traded C corporation
• Stock in an S corporation
• Interests in any partnership
• Interests in any private equity or hedge fund
• Interests in any other noncorporate businesses
• Bonds and interest-bearing savings accounts
• Cash and deposits
• Farm assets
• Interest in mutual funds or index funds
• Put and call options
• Futures contracts
• Art and collectibles
• Financial assets held offshore
• Pension funds
• Other assets, excluding real property
• Debts, other than mortgages or other liabilities secured by real property
• Real property
• Mortgages and other liabilities secured by real property

Directly held real property, as well as mortgages and other liabilities secured by real property, are not considered in calculating the taxpayer’s worldwide net worth. There is a severability clause to keep intact the rest of the law if any provision is found to be invalid.

The wealth tax is proposed as “the benefit of accumulating excessive wealth in this state.” The new law would impose an annual tax of 1% upon the worldwide net worth of every resident in this state in excess of $25 million (for married taxpayers filing separately) or $50 million for all other taxpayers. Worldwide net worth would not include any real property directly held by the taxpayer (but would include indirectly held real property).

There would be an additional ½% surtax (for a total combined tax rate of 1.5%) upon the worldwide net worth of every resident in this state in excess of $500 million for married taxpayers filing separately and $1 billion for all other taxpayers. Worldwide net worth would be calculated in the manner set forth for calculating the federal estate tax under the Internal Revenue Code Section 2001. Worldwide net worth would be the value of all worldwide property owned by the taxpayer on December 31 of each year. The FTB would be authorized to adopt regulation to prevent the avoidance of evasion of the wealth tax.

The FTB would also be required to adopt regulations on valuation methods. Publicly-traded assets would be presumed to be their market value at the end of the year, while non-publicly-traded assets would be estimated at current value based on the best available method. The FTB could use a methodology that applies a deemed growth rate to broad asset categories. The FTB would also have to adopt regulations detailing abusive transactions.

The bill would also provide that, for “liquidity-constrained taxpayers with ownership interests in hard-to-value assets and business entities,” to elect for an unliquidated and deferred tax liability to be attached to these assets and a contract with the state would provide for the eventual valuation of the deferred tax liability. However, there is also a presumption against this provision for specified taxpayers. The FTB would also have to adopt regulations around this provision of the law.

The value of all assets subject to the wealth tax must be reported annually. A taxpayer who owns real property indirectly would receive a credit for their pro rate share of any property taxes paid on the gross or net value of real property to any jurisdiction. In order to claim this credit, the taxpayer must separately report specified items. The value of directly held real property must be reported annually on the tax return.

For this section of law, a taxpayer is considered a California resident if the taxpayer is a California resident for purposes of the state’s income tax. There are special rules provided for part-year residents and temporary residents, as well as “wealth tax residents.” There are also special apportionment rules for the wealth tax.

Generally, the apportionment rule is based upon the years of residence in California over the past 10 years. There is a special rule for new residents to California. Moreover, there are specific rules for taxpayers who were subject to the wealth tax one of the preceding four years, but is no longer s resident and does not have a reasonable expectation to return to the state. In addition, there is a special rule for wealth tax residents who were subject to the wealth tax in one of the preceding 10 years and are no longer residents of the state.

The bill would provide a petition process for a taxpayer who seeks an alternative apportionment method. In any proceeding for an alternative apportionment, the burden of proof is on the petitioning party. The FTB may adopt regulations in this regard. If any provision is found by a court to be invalid, that finding will not affect the other provisions of law.

In addition, a taxpayer with an understatement of tax is subject to a penalty if the understatement exceeds $1 million or 20% of the tax shown on the original or amended return. The penalty is 20% of the understatement of tax. This penalty is in addition to any penalty imposed under the Personal Income Tax law. However, no penalty is to be imposed if the understatement is due to a change in law or the taxpayer’s reasonable reliance on a chief counsel ruling issued by the FTB.

Section Two of the bill would provide that the provisions of AB 310 would only become operative if ACA 8 is approved by the voters and takes effect. Section Three of the bill provides that the bill is a tax levy to go into immediate effect. The bill is expected to be head in the first policy committee in April.