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AB-694 Income and corporation taxes: sales and use taxes.(2001-2002)

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AB694:v98#DOCUMENT

Amended  IN  Assembly  September 06, 2001

CALIFORNIA LEGISLATURE— 2001–2002 REGULAR SESSION

Assembly Bill
No. 694

Introduced  by  Assembly Member Corbett

February 22, 2001

An act to add and repeal Sections 17053.65 and 23665 of the Revenue An act to amend Sections 6377, 17024.5, 17039, 17052.12, 17275.5, 17560, 17570, 17731.5, 17751, 18038.5, 19133, 19136, 19141, 19521, 23038.5, 23609, 24357.9, 24424, 24667, 24710, and 24942 of, to amend and repeal Section 24949.1 of, to add Sections 6018.3, 17062.3, 17132, 17132.6, 17552.3, 17563.5, 19136.7, 23456.5, 24661.3, and 24685.5 to, to add and repeal Sections 17052.3, 17052.55, 17053.88, 17057, 17267, 23610.2, 23655, and 23688 of, and to repeal Section 17279.5 of, the Revenue and Taxation Code, to take effect immediately, tax levy.


LEGISLATIVE COUNSEL'S DIGEST


AB 694, as amended, Corbett. Personal income and bank and corporation tax laws: credits: health coverage Income and corporation taxes: sales and use taxes.
Under the Personal Income Tax Law and the Bank and Corporation Tax Law, various provisions of the federal Internal Revenue Code, as enacted as of a specified date, are referenced in various sections of the Revenue and Taxation Code. Those laws provide that for taxable years beginning on or after January 1, 1998, the specified date of those referenced Internal Revenue Code sections is January 1, 1998, unless otherwise specifically provided.
Existing law requires, for any introduced bill that proposes changes in any of those dates, that the Franchise Tax Board prepare a complete analysis of the bill that describes all changes to state law that will automatically occur by reference to federal law as of the changed date. It further requires the Franchise Tax Board to immediately update and supplement that analysis upon any amendment to the bill, and requires that analysis to be made available to the public and to be submitted to the Legislature for publication in the daily journal of each house of the Legislature.
This bill would change the specified date of those referenced Internal Revenue Code sections to January 1, 2001, for taxable years beginning on or after January 1, 2001, and thereby would make numerous substantive changes to both the Personal Income Tax Law and the Bank and Corporation Tax Law with respect to those areas of preexisting conformity that are subject to changes under federal laws enacted after January 1, 1998, and that have not been, or are not being, excepted or modified.
This bill would make certain other changes in federal income tax laws applicable, with specified exceptions and modifications, and make specified supplemental, technical, or clarifying changes, for purposes of the Personal Income Tax Law or the Bank and Corporation Tax Law, or both, with respect to, among other things, credits that may reduce certain taxes below the tentative minimum tax, the credit for research and development expenses, the exclusion of extraterritorial income, the Ricky Ray Hemophilia Relief Fund Act of 1998, the mark to market accounting method, the inapplicability of excise tax on premiums paid, certain amounts paid in connection with insurance contracts, specified federal acts, the installment method of accounting, the Federal Agriculture Improvement and Reform Act of 1996, determinations relating to deferred compensation, special rule for certain receivables, taxation of estates and trusts, small business stock, failure by an individual to pay estimated income tax, underpayment of estimated tax, underpayments of installments, elimination of interest on overlapping periods of tax overpayments and underpayments, certain publicly traded partnerships treated as corporations, the deduction for a qualified computer contribution, secured indebtedness, securities futures contracts, and the sale or exchange of livestock. This bill would specify various dates on which specified provisions apply, make findings and declarations that certain provisions are declaratory of existing law, and specify the intent and operation in the application of provisions conforming to various federal acts.
The Personal Income Tax Law and the Bank and Corporation Tax Law authorize various credits against the taxes imposed by those laws.
This bill would authorize a credit against those taxes for each taxable year beginning on or after January 1, 2001, and before January 1, 2006, in an amount, determined pursuant to a specified section of the Internal Revenue Code, that is paid or incurred during the taxable year for rehabilitation of historic buildings. This bill would provide for a 25% credit for rehabilitation of a certified historic structure within a redevelopment area.
This bill would, under both laws, for taxable years beginning on or after January 1, 2002, and before January 1, 2007, allow a credit in an amount equal to 10% of the cost to be included in inventory costs, as specified with respect to the donation of agricultural products to food banks located in California.
This bill would authorize a credit against those taxes for each taxable year beginning on or after January 1, 2001, and before January 1, 2006, in an amount equal to 50% of the amount paid or incurred during the taxable year for qualified expenses, as defined, in connection with lending qualified employees, as defined, to public schools, as defined, for the purpose of teaching mathematics or science.
The Personal Income Tax Law allows various deductions in computing the amount of income that is subject to the taxes imposed by that law.
This bill would authorize, until January 1, 2006, a deduction under that law for the costs paid or incurred during the taxable year for specified mortgage insurance or related funding fees by a first-time homebuyer, as defined, for each year that he or she owns a principal residence located in California.
The Personal Income Tax Law allows a credit against the taxes imposed by that law in an amount equal to 50% of the costs, as specified, paid or incurred by a taxpayer for the adoption of any minor child who is a citizen or legal resident of the United States and was in the custody of a public agency of either this state or a political subdivision of this state.
This bill would, for taxable years beginning on or after January 1, 2001, and before January 1, 2006, provide conformity to the credit for adoption expenses allowed by federal income tax laws for adoptions that are not eligible for the existing state income tax credit, with specified exceptions and modifications.
Under existing law the Franchise Tax Board is authorized to impose a 25% penalty for (1) failure to file a return upon notice and demand of the Franchise Tax Board and (2) failure to furnish information in response to a written request from the Franchise Tax Board.
This bill provides that, in the case of an individual taxpayer, the 25% penalty only applies to the portion of the tax, reduced by any applicable credits, that remains unpaid after the date prescribed for the payment of the tax.
The Sales and Use Tax Law imposes a tax on the gross receipts from the sale in this state of, or the storage, use, or other consumption in this state of, tangible personal property. That law provides various exemptions from that tax, including an exemption from state sales and use taxes for the gross receipts from the sale of, and the storage, use, or other consumption of, certain tangible personal property purchased for use by a qualified person, as defined, to be used primarily in any stage of manufacturing, processing, refining, fabricating, or recycling of property.
This bill would expand this exemption to also include computers and computer peripheral equipment used by computer software developers.
The Sales and Use Tax Law imposes a tax on the gross receipts from the sale in this state of, or the storage, use, or other consumption in this state of, tangible personal property. That law provides various exemptions and partial exemptions from that tax, including a partial exemption for vitamins, minerals, dietary supplements, and orthotic devices used or furnished by a licensed chiropractor in the performance of his or her professional services.
This bill would additionally provide a partial exemption with respect to any herb, herbal formula or preparation, vitamin, mineral, dietary supplement, orthotic device, or other naturally occurring substance included in the Encyclopedia of Chinese Materia Medica that is used or furnished by an acupuncturist in the performance of his or her professional services.
Counties and cities are authorized to impose local sales and use taxes in conformity with state sales and use taxes. Exemptions from state sales and use taxes enacted by the Legislature are incorporated into the local taxes.
Section 2230 of the Revenue and Taxation Code provides that the state will reimburse counties and cities for revenue losses caused by the enactment of sales and use tax exemptions.
This bill would provide that, notwithstanding Section 2230 of the Revenue and Taxation Code, no appropriation is made and the state shall not reimburse local agencies for sales and use tax revenues lost by them pursuant to this bill. This bill would take effect immediately as a tax levy, but the operative date of specified provisions would depend on the effective date of the bill.

The Personal Income Tax Law and the Bank and Corporation Tax Law authorize various credits against the taxes imposed by those laws.

This bill would authorize a credit against those taxes for each taxable year beginning on or after January 1, 2002, and before January 1, 2008, in an amount equal to 20% of the amount paid or incurred during the taxable year for health coverage for eligible employees and their dependents, or 10% of the amount paid or incurred during the taxable year for health coverage for eligible employees only.

This bill would take effect immediately as a tax levy.

Vote: MAJORITY   Appropriation: NO   Fiscal Committee: YES   Local Program: YES  

The people of the State of California do enact as follows:


SECTION 1.

Section 17053.65 is added to the Revenue and

Section 6018.3 is added to the Revenue and Taxation Code, to read:

6018.3.
 A licensed acupuncturist is a consumer of, and shall not be considered a retailer with respect to, any herb, herbal formula or preparation, vitamin, mineral, dietary supplement, orthotic device, or other naturally occurring substance included in the Encyclopedia of Chinese Materia Medica that is used or furnished by him or her in the performance of his or her professional services.

Section 6377 of the Revenue and Taxation Code is amended to read:

6377.
 (a) There are exempted from the taxes imposed by this part the gross receipts from the sale of, and the storage, use, or other consumption in this state of, any of the following:
(1) Tangible personal property purchased for use by a qualified person to be used primarily in any stage of the manufacturing, processing, refining, fabricating, or recycling of property, beginning at the point any raw materials are received by the qualified person and introduced into the process and ending at the point at which the manufacturing, processing, refining, fabricating, or recycling has altered property to its completed form, including packaging, if required.
(2) Tangible personal property purchased for use by a qualified person to be used primarily in research and development.
(3) Tangible personal property purchased for use by a qualified person to be used primarily to maintain, repair, measure, or test any property described in paragraph (1) or (2).
(4) Tangible personal property purchased for use by a contractor purchasing that property either as an agent of a qualified person or for the contractor’s own account and subsequent resale to a qualified person for use in the performance of a construction contract for the qualified person who will use the tangible personal property as an integral part of the manufacturing, processing, refining, fabricating, or recycling process, or as a research or storage facility for use in connection with the manufacturing process.
This exemption shall not apply to any tangible personal property that is used primarily in administration, general management, or marketing.
(b) For purposes of this section:
(1) “Fabricating” means to make, build, create, produce, or assemble components or property to work in a new or different manner.
(2) “Manufacturing” means the activity of converting or conditioning property by changing the form, composition, quality, or character of the property for ultimate sale at retail or use in the manufacturing of a product to be ultimately sold at retail. Manufacturing includes any improvements to tangible personal property that result in a greater service life or greater functionality than that of the original property.
(3) “Primarily” means tangible personal property used 50 percent or more of the time in an activity described in subdivision (a).
(4) “Process” means the period beginning at the point at which any raw materials are received by the qualified taxpayer and introduced into the manufacturing, processing, refining, fabricating, or recycling activity of the qualified taxpayer and ending at the point at which the manufacturing, processing, refining, fabricating, or recycling activity of the qualified taxpayer has altered tangible personal property to its completed form, including packaging, if required. Raw materials shall be considered to have been introduced into the process when the raw materials are stored on the same premises where the qualified taxpayer’s manufacturing, processing, refining, or recycling activity is conducted. Raw materials that are stored on premises other than where the qualified taxpayer’s manufacturing, processing, refining, fabricating, or recycling activity is conducted, shall not be considered to have been introduced into the manufacturing, processing, refining, fabricating, or recycling process.
(5) “Processing” means the physical application of the materials and labor necessary to modify or change the characteristics of property.
(6)  “Qualified person” means any person that is both of the following:
(A) A new trade or business. In determining whether a trade or business activity qualifies as a new trade or business, the following rules shall apply:
(i) In any case where a person purchases or otherwise acquires all or any portion of the assets of an existing trade or business (irrespective of the form of entity) that is doing business in this state (within the meaning of Section 23101), the trade or business thereafter conducted by that person (or any related person) shall not be treated as a new business if the aggregate fair market value of the acquired assets (including, real, personal, tangible, and intangible property) used by that person (or any related person) in the conduct of his or her trade or business exceed 20 percent of the aggregate fair market value of the total assets of the trade or business being conducted by the person (or any related person). For purposes of this subparagraph only, the following rules shall apply:
(I) The determination of the relative fair market values of the acquired assets and the total assets shall be made as of the last day of the month following the quarterly period in which the person (or any related person) first uses any of the acquired trade or business assets in his or her business activity.
(II) Any acquired assets that constituted property described in Section 1221(1) of the Internal Revenue Code in the hands of the transferor shall not be treated as assets acquired from an existing trade or business, unless those assets also constitute property described in Section 1221(1) of the Internal Revenue Code in the hands of the acquiring person (or related person).
(ii) In any case where a person (or any related person) is engaged in one or more trade or business activities in this state, or has been engaged in one or more trade or business activities in this state within the preceding 36 months (“prior trade or business activity”), and thereafter commences an additional trade or business activity in this state, the additional trade or business activity shall only be treated as a new business if the additional trade or business activity is classified under a different division of the Standard Industrial Classification Manual published by the United States Office of Management and Budget, 1987 edition, than are any of the person’s (or any related person’s) current or prior trade or business activities in this state.
(iii) In any case where a person, including all related persons, is engaged in trade or business activities wholly outside of this state and that person first commences doing business in this state (within the meaning of Section 23101) after December 31, 1993 (other than by purchase or other acquisition described in clause (i)), the trade or business activity shall be treated as a new business.
(iv) In any case where the legal form under which a trade or business activity is being conducted is changed, the change in form shall be disregarded and the determination of whether the trade or business activity is a new business shall be made by treating the person as having purchased or otherwise acquired all or any portion of the assets of an existing trade or business under the rules of clause (i).
(v) “Related person” means any person that is related to that person under either Section 267 or 318 of the Internal Revenue Code.
(vi) “Acquire” includes any gift, inheritance, transfer incident to divorce, or any other transfer, whether or not for consideration.
(B) Engaged in those lines of business described in Codes 2011 to 3999, inclusive, or Codes 7371 to 7373, inclusive, of the Standard Industrial Classification Manual published by the United States Office of Management and Budget, 1987 edition.
(7) Notwithstanding paragraph (6), “qualified person” shall not include any person who has conducted business activities in a new trade or business for three or more years.
(8) “Refining” means the process of converting a natural resource to an intermediate or finished product.
(9) “Research and development” means those activities that are described in Section 174 of the Internal Revenue Code or in any regulations thereunder.
(10) “Tangible personal property” does not include any of the following:
(A) Consumables with a normal useful life of less than one year, except as provided in subparagraph (E) of paragraph (10).
(B) Furniture, inventory, equipment used in the extraction process, or equipment used to store finished products that have completed the manufacturing process.
(C) Any property for which a credit is claimed under either Section 17053.49 or 23649.
(11) “Tangible personal property” includes, but is not limited to, all of the following:
(A) Machinery and equipment, including component parts and contrivances such as belts, shafts, moving parts, and operating structures.
(B) All equipment or devices used or required to operate, control, regulate, or maintain the machinery, including, without limitation, computers, data processing equipment, and computer software, together with all repair and replacement parts with a useful life of one or more years therefor, whether purchased separately or in conjunction with a complete machine and regardless of whether the machine or component parts are assembled by the taxpayer or another party.
(C) Property used in pollution control that meets or exceed standards established by this state or any local or regional governmental agency within this state.
(D) Special purpose buildings and foundations used as an integral part of the manufacturing, processing, refining, or fabricating process, or that constitute a research or storage facility used during the manufacturing process. Buildings used solely for warehousing purposes after completion of the manufacturing process are not included.
(E) Fuels used or consumed in the manufacturing process.
(F) Property used in recycling.
(G) Computers and computer peripheral equipment, as defined in Section 168(i)(2)(B) of the Internal Revenue Code, that is tangible personal property, as defined in Section 1245(a) of the Internal Revenue Code, for use by a qualified taxpayer in those lines of business described in Codes 7371 to 7373, inclusive, of the Standard Industrial Classification Manual published by the United States Office of Management and Budget, 1987 edition, that is primarily used to develop or manufacture prepackaged software or custom software prepared to the special order of the purchaser who uses the program to produce and sell or license copies of the program as prepackaged software.
(c) No exemption shall be allowed under this section unless the purchaser furnishes the retailer with an exemption certificate, completed in accordance with any instructions or regulations as the board may prescribe, and the retailer subsequently furnishes the board with a copy of the exemption certificate. The exemption certificate shall contain the sales price of the machinery or equipment that is exempt pursuant to subdivision (a).
(d) Notwithstanding any provision of the Bradley-Burns Uniform Local Sales and Use Tax Law (Part 1.5 (commencing with Section 7200)) or the Transactions and Use Tax Law (Part 1.6 (commencing with Section 7251)), the exemption established by this section shall does not apply with respect to any tax levied by a county, city, or district pursuant to, or in accordance with, either of those laws.
(e) (1) Notwithstanding subdivision (a), the exemption provided by this section shall not apply to any sale or use of property which, within one year from the date of purchase, is either removed from California or converted from an exempt use under subdivision (a) to some other use not qualifying for the exemption.
(2) Notwithstanding subdivision (a), on or after January 1, 1995, the exemption established by this section shall does not apply with respect to any tax levied pursuant to Sections 6051.2 and 6201.2, or pursuant to Section 35 of Article XIII of the California Constitution.
(f) If a purchaser certifies in writing to the seller that the property purchased without payment of the tax will be used in a manner entitling the seller to regard the gross receipts from the sale as exempt from the sales tax, and within one year from the date of purchase, the purchaser (1) removes that property outside California, (2) converts that property for use in a manner not qualifying for the exemption, or (3) uses that property in a manner not qualifying for the exemption, the purchaser shall be liable for payment of sales tax, with applicable interest, as if the purchaser were a retailer making a retail sale of the property at the time the property is so removed, converted, or used, and the sales price of the property to the purchaser shall be deemed the gross receipts from that retail sale.
(g) (1) This section shall remain in effect until the date specified in paragraph (2), on which date this section shall cease to be operative, and as of that date is repealed.
(2) (A) This section shall cease to be operative on January 1, 2001, or on January 1 of the earliest year thereafter, if the total employment in this state, as determined by the Employment Development Department on the preceding January 1, does not exceed by 100,000 jobs the total employment in this state on January 1, 1994. The department shall report annually to the Legislature with respect to the determination required by the preceding sentence.
(B) For purposes of this paragraph, “total employment” means the total employment in the manufacturing sector, excluding employment in the aerospace sector.
(h) This section applies to leases of tangible personal property classified as “continuing sales” and “continuing purchases” in accordance with Sections 6006.1 and 6010.1. The exemption established by this section shall apply to the rentals payable pursuant to such a lease, provided the lessee is a qualified person and the property is used in an activity described in subdivision (a). Rentals which that meet the foregoing requirements are eligible for the exemption for a period of six years from the date of commencement of the lease. At the close of the six-year period from the date of commencement of the lease, lease receipts are subject to tax without exemption.

Section 17024.5 of the Revenue and Taxation Code is amended to read:

17024.5.
 (a) (1) Unless otherwise specifically provided, the terms “Internal Revenue Code,” “Internal Revenue Code of 1954,” or “Internal Revenue Code of 1986,” for purposes of this part, mean Title 26 of the United States Code, including all amendments thereto as enacted on the specified date for the applicable taxable year as follows:
Taxable Year
Specified Date of
Internal Revenue
Code Sections
(A) For taxable years beginning on or after January 1, 1983, and on or before December 31, 1983 ........................
January 15, 1983
(B) For taxable years beginning on or after January 1, 1984, and on or before December 31, 1984 ........................
January 1, 1984
(C) For taxable years beginning on or after January 1, 1985, and on or before December 31, 1985 ........................
January 1, 1985
(D) For taxable years beginning on or after January 1, 1986, and on or before December 31, 1986 ........................
January 1, 1986
(E) For taxable years beginning on or after January 1, 1987, and on or before December 31, 1988 ........................
January 1, 1987
(F) For taxable years beginning on or after January 1, 1989, and on or before December 31, 1989 ........................
January 1, 1989
(G) For taxable years beginning on or after January 1, 1990, and on or before December 31, 1990 ........................
January 1, 1990
(H) For taxable years beginning on or after January 1, 1991, and on or before December 31, 1991 ........................
January 1, 1991
(I) For taxable years beginning on or after January 1, 1992, and on or before December 31, 1992 ........................
January 1, 1992
(J) For taxable years beginning on or after January 1, 1993, and on or before December 31, 1996 ........................
January 1, 1993
(K) For taxable years beginning on or after January 1, 1997, and on or before December
31, 1997 ........................
January 1, 1997
(L) For taxable years beginning on or after
 January 1, 1998, and on or before
 December 31, 2000 ........................
January 1, 1998
(M) For taxable years beginning on or after
 January 1, 2001 ........................
January 1, 2001
(2) Unless otherwise specifically provided, for federal laws enacted on or after January 1, 1987, and on or before the specified date for the taxable year, uncodified provisions that relate to provisions of the Internal Revenue Code that are incorporated for purposes of this part shall be applicable to the same taxable years as the incorporated provisions.
(3) Subtitle G (Tax Technical Corrections) and Part I of Subtitle H (Repeal of Expired or Obsolete Provisions) of the Revenue Reconciliation Act of 1990 (Public Law 101-508) modified numerous provisions of the Internal Revenue Code and provisions of prior federal acts, some of which are incorporated by reference into this part. Unless otherwise provided, the provisions described in the preceding sentence, to the extent that they modify provisions that are incorporated into this part, are declaratory of existing law and shall be applied in the same manner and for the same periods as specified in the Revenue Reconciliation Act of 1990.
(b) Unless otherwise specifically provided, when applying any provision of the Internal Revenue Code for purposes of this part, a reference to any of the following shall not be applicable for purposes of this part:
(1) Except as provided in Chapter 4.5 (commencing with Section 23800) of Part 11 of Division 2, an electing small business corporation, as defined in Section 1361(b) of the Internal Revenue Code.
(2) Domestic international sales corporations (DISC), as defined in Section 992(a) of the Internal Revenue Code.
(3) A personal holding company, as defined in Section 542 of the Internal Revenue Code.
(4) A foreign personal holding company, as defined in Section 552 of the Internal Revenue Code.
(5) A foreign investment company, as defined in Section 1246(b) of the Internal Revenue Code.
(6) A foreign trust, as defined in Section 679 of the Internal Revenue Code.
(7) Foreign income taxes and foreign income tax credits.
(8) Section 911 of the Internal Revenue Code, relating to United States citizens living abroad.
(9) A foreign corporation, except that Section 367 of the Internal Revenue Code shall be applicable.
(10) Federal tax credits and carryovers of federal tax credits.
(11) Nonresident aliens.
(12) Deduction for personal exemptions, as provided in Section 151 of the Internal Revenue Code.
(13) The tax on generation-skipping transfers imposed by Section 2601 of the Internal Revenue Code.
(14) The tax, relating to estates, imposed by Section 2001 or 2101 of the Internal Revenue Code.
(c) (1) The provisions contained in Sections 41 to 44, inclusive, and 172 of the Tax Reform Act of 1984 (Public Law 98-369), relating to treatment of debt instruments, shall not be applicable for taxable years beginning before January 1, 1987.
(2) The provisions contained in Public Law 99-121, relating to the treatment of debt instruments, shall not be applicable for taxable years beginning before January 1, 1987.
(3) For each taxable year beginning on or after January 1, 1987, the provisions referred to by paragraphs (1) and (2) shall be applicable for purposes of this part in the same manner and with respect to the same obligations as the federal provisions, except as otherwise provided in this part.
(d) When applying the Internal Revenue Code for purposes of this part, regulations promulgated in final form or issued as temporary regulations by “the secretary” shall be applicable as regulations under this part to the extent that they do not conflict with this part or with regulations issued by the Franchise Tax Board.
(e) Whenever this part allows a taxpayer to make an election, the following rules shall apply:
(1) A proper election filed with the Internal Revenue Service in accordance with the Internal Revenue Code or regulations issued by “the secretary” shall be deemed to be a proper election for purposes of this part, unless otherwise provided in this part or in regulations issued by the Franchise Tax Board.
(2) A copy of that election shall be furnished to the Franchise Tax Board upon request.
(3) To obtain treatment other than that elected for federal purposes, a separate election shall be filed at the time and in the manner required by the Franchise Tax Board.
(f) Whenever this part allows or requires a taxpayer to file an application or seek consent, the rules set forth in subdivision (e) shall be applicable with respect to that application or consent.
(g) When applying the Internal Revenue Code for purposes of determining the statute of limitations under this part, any reference to a period of three years shall be modified to read four years for purposes of this part.
(h) When applying, for purposes of this part, any section of the Internal Revenue Code or any applicable regulation thereunder, all of the following shall apply:
(1) References to “adjusted gross income” shall mean the amount computed in accordance with Section 17072, except as provided in paragraph (2).
(2) References to “adjusted gross income” for purposes of computing limitations based upon adjusted gross income, shall mean the amount required to be shown as adjusted gross income on the federal tax return for the same taxable year.
(3) Any reference to “subtitle” or “chapter” shall mean this part.
(4) The provisions of Section 7806 of the Internal Revenue Code, relating to construction of title, shall apply.
(5) Any provision of the Internal Revenue Code that becomes operative on or after the specified date for that taxable year shall become operative on the same date for purposes of this part.
(6) Any provision of the Internal Revenue Code that becomes inoperative on or after the specified date for that taxable year shall become inoperative on the same date for purposes of this part.
(7) Due account shall be made for differences in federal and state terminology, effective dates, substitution of “Franchise Tax Board” for “secretary” when appropriate, and other obvious differences.
(i) Any reference to a specific provision of the Internal Revenue Code shall include modifications of that provision, if any, in this part.

Section 17039 of the Revenue and Taxation Code is amended to read:

17039.
 (a) Notwithstanding any provision in this part to the contrary, for the purposes of computing tax credits, the term “net tax” means the tax imposed under either Section 17041 or 17048 plus the tax imposed under Section 17504 (relating to lump-sum distributions) less the credits allowed by Section 17054 (relating to personal exemption credits) and any amount imposed under paragraph (1) of subdivision (d) and paragraph (1) of subdivision (e) of Section 17560. Notwithstanding the preceding sentence, the “net tax” shall not be less than the tax imposed under Section 17504 (relating to the separate tax on lump-sum distributions), if any. Credits shall be allowed against “net tax” in the following order:
(1) Credits that do not contain carryover or refundable provisions, except those described in paragraphs (4) and (5).
(2) Credits that contain carryover provisions but do not contain refundable provisions.
(3) Credits that contain both carryover and refundable provisions.
(4) The minimum tax credit allowed by Section 17063 (relating to the alternative minimum tax).
(5) Credits for taxes paid to other states allowed by Chapter 12 (commencing with Section 18001).
(6) Credits that contain refundable provisions but do not contain carryover provisions.
The order within each paragraph shall be determined by the Franchise Tax Board.
(b) Notwithstanding the provisions of Sections 17061 (relating to refunds pursuant to the Unemployment Insurance Code) and 19002 (relating to tax withholding), the credits provided in those sections shall be allowed in the order provided in paragraph (6) of subdivision (a).
(c) (1) Notwithstanding any other provision of this part, no tax credit shall reduce the tax imposed under Section 17041 or 17048 plus the tax imposed under Section 17504 (relating to the separate tax on lump-sum distributions) below the tentative minimum tax, as defined by Section 17062, except the following credits, but only after allowance of the credit allowed by Section 17063:
(A) The credit allowed by Section 17052.2 (relating to teacher retention tax credit).
(B) The credit allowed by former Section 17052.4 (relating to solar energy).
(C) The credit allowed by former Section 17052.5 (relating to solar energy). energy, repealed on January 1, 1987).
(D) The credit allowed by former Section 17052.5 (relating to solarenergy). energy, repealed on December 1, 1994).
(E) The credit allowed by Section 17052.12 (relating to research expenses).
(F) The credit allowed by former Section 17052.13 (relating to sales and use tax credit).
(G) The credit allowed by former Section 17052.15 (relating to Los Angeles Revitalization Zone sales tax credit).
(H) The credit allowed by Section 17052.25 (relating to adoption costs credit).
(I) The credit allowed by Section 17053.5 (relating to the renter’s credit).

(I)

(J) The credit allowed by former Section 17053.8 (relating to enterprise zone hiring credit).

(J)

(K) The credit allowed by former Section 17053.10 (relating to Los Angeles Revitalization Zone hiring credit).

(K)

(L) The credit allowed by former Section 17053.11 (relating to program area hiring credit).

(L)

(M) For each taxable year beginning on or after January 1, 1994, the credit allowed by former Section 17053.17 (relating to Los Angeles Revitalization Zone hiring credit).

(M)

(N) The credit allowed by Section 17053.33 (relating to targeted tax area sales or use tax credit).

(N)

(O) The credit allowed by Section 17053.34 (relating to targeted tax area hiring credit).

(O)

(P) The credit allowed by Section 17053.49 (relating to qualified property).

(P)

(Q) The credit allowed by Section 17053.70 (relating to enterprise zone sales or use tax credit).

(Q)

(R) The credit allowed by Section 17053.74 (relating to enterprise zone hiring credit).

(R)

(S) The credit allowed by Section 17054 (relating to credits for personal exemption).

(S)

(T) The credit allowed by Section 17054.5 (relating to credits for qualified joint custody head of household and qualified taxpayer with a dependent parent).
(U) The credit allowed by Section 17054.7 (relating to qualified senior head of household credit).
(V) The credit allowed by former Section 17057 (relating to clinical testing expenses).

(T)

(W) The credit allowed by Section 17058 (relating to low-income housing).

(U)

(X) The credit allowed by Section 17061 (relating to refunds pursuant to the Unemployment Insurance Code).

(V)

(Y) Credits for taxes paid to other states allowed by Chapter 12 (commencing with Section 18001).

(W)

(Z) The credit allowed by Section 19002 (relating to tax withholding).
(2) Any credit that is partially or totally denied under paragraph (1) shall be allowed to be carried over and applied to the net tax in succeeding taxable years, if the provisions relating to that credit include a provision to allow a carryover when that credit exceeds the net tax.
(d) Unless otherwise provided, any remaining carryover of a credit allowed by a section that has been repealed or made inoperative shall continue to be allowed to be carried over under the provisions of that section as it read immediately prior to being repealed or becoming inoperative.
(e) (1) Unless otherwise provided, if two or more taxpayers (other than husband and wife) share in costs that would be eligible for a tax credit allowed under this part, each taxpayer shall be eligible to receive the tax credit in proportion to his or her respective share of the costs paid or incurred.
(2) In the case of a partnership, the credit shall be allocated among the partners pursuant to a written partnership agreement in accordance with Section 704 of the Internal Revenue Code, relating to partner’s distributive share.
(3) In the case of a husband and wife who file separate returns, the credit may be taken by either or equally divided between them.
(f) Unless otherwise provided, in the case of a partnership, any credit allowed by this part shall be computed at the partnership level, and any limitation on the expenses qualifying for the credit or limitation upon the amount of the credit shall be applied to the partnership and to each partner.
(g) (1) With respect to any taxpayer that directly or indirectly owns an interest in a business entity that is disregarded for tax purposes pursuant to Section 23038 and any regulations thereunder, the amount of any credit or credit carryforward allowable for any taxable year attributable to the disregarded business entity shall be limited in accordance with paragraphs (2) and (3).
(2) The amount of any credit otherwise allowed under this part, including any credit carryover from prior years, that may be applied to reduce the taxpayer’s “net tax,” as defined in subdivision (a), for the taxable year shall be limited to an amount equal to the excess of the taxpayer’s regular tax (as defined in Section 17062), determined by including income attributable to the disregarded business entity that generated the credit or credit carryover, over the taxpayer’s regular tax (as defined in Section 17062), determined by excluding the income attributable to that disregarded business entity. No credit shall be allowed if the taxpayer’s regular tax (as defined in Section 17062), determined by including the income attributable to the disregarded business entity, is less than the taxpayer’s regular tax (as defined in Section 17062), determined by excluding the income attributable to the disregarded business entity.
(3) If the amount of a credit allowed pursuant to the section establishing the credit exceeds the amount allowable under this subdivision in any taxable year, the excess amount may be carried over to subsequent taxable years pursuant to subdivisions (c) and (d).

Section 17052.12 of the Revenue and Taxation Code is amended to read:

17052.12.
 For each taxable year beginning on or after January 1, 1987, there shall be allowed as a credit against the “net tax” (as defined by Section 17039) for the taxable year an amount determined in accordance with Section 41 of the Internal Revenue Code, except as follows:
(a) For each taxable year beginning before January 1, 1997, the reference to “20 percent” in Section 41(a)(1) of the Internal Revenue Code is modified to read “8 percent.”
(b) (1) For each taxable year beginning on or after January 1, 1997, and before January 1, 1999, the reference to “20 percent” in Section 41(a)(1) of the Internal Revenue Code is modified to read “11 percent.”
(2) For each taxable year beginning on or after January 1, 1999, and before January 1, 2000, the reference to “20 percent” in Section 41(a)(1) of the Internal Revenue Code is modified to read “12 percent.”
(3) For each taxable year beginning on or after January 1, 2000, the reference to “20 percent” in Section 41(a)(1) of the Internal Revenue Code is modified to read “15 percent.”
(c) Section 41(a)(2) of the Internal Revenue Code, relating to basic research payments, shall not apply.
(d) “Qualified research” shall include only research conducted in California.
(e) In the case where the credit allowed under this section exceeds the “net tax,” the excess may be carried over to reduce the “net tax” in the following year, and succeeding years if necessary, until the credit has been exhausted.
(f) (1) With respect to any expense paid or incurred after the operative date of Section 6378, Section 41(b)(1) of the Internal Revenue Code is modified to exclude from the definition of “qualified research expense” any amount paid or incurred for tangible personal property that is eligible for the exemption from sales or use tax provided by Section 6378.
(2) For each taxable year beginning on or after January 1, 1998, the reference to “Section 501(a)” in Section 41(b)(3)(C) of the Internal Revenue Code, relating to contract research expenses, is modified to read “this part or Part 11 (commencing with Section 23001).”
(g) (1) For each taxable year beginning on or after January 1, 1998, and before January 1, 2000:
(A) The reference to “1.65 “2.65 percent” in Section 41(c)(4)(A)(i) of the Internal Revenue Code is modified to read “one and thirty-two hundredths of one percent.”
(B) The reference to “2.2 “3.2 percent” in Section 41(c)(4)(A)(ii) of the Internal Revenue Code is modified to read “one and seventy-six hundredths of one percent.”
(C) The reference to “2.75 “3.75 percent” in Section 41(c)(4)(A)(iii) of the Internal Revenue Code is modified to read “two and two-tenths of one percent.”
(2) For each taxable year beginning on or after January 1, 2000:
(A) The reference to “1.65 “2.65 percent” in Section 41(c)(4)(A)(i) of the Internal Revenue Code is modified to read “one and forty-nine hundredths of one percent.”
(B) The reference to “2.2 “3.2 percent” in Section 41(c)(4)(A)(ii) of the Internal Revenue Code is modified to read “one and ninety-eight hundredths of one percent.”
(C) The reference to “2.75 “3.75 percent” in Section 41(c)(4)(A)(iii) of the Internal Revenue Code is modified to read “two and forty-eight hundredths of one percent.”
(3) Section 41(c)(4)(B) shall not apply and in lieu thereof an election under Section 41(c)(4)(A) of the Internal Revenue Code may be made for any taxable year of the taxpayer beginning on or after January 1, 1998. That election shall apply to the taxable year for which made and all succeeding taxable years unless revoked with the consent of the Franchise Tax Board.
(4) Section 41(c)(6) of the Internal Revenue Code, relating to gross receipts, is modified to take into account only those gross receipts from the sale of property held primarily for sale to customers in the ordinary course of the taxpayer’s trade or business that is delivered or shipped to a purchaser within this state, regardless of f.o.b. point or any other condition of the sale.
(h) Section 41(h) of the Internal Revenue Code, relating to termination, shall not apply.
(i) Section 41(g) of the Internal Revenue Code, relating to special rule for passthrough of credit, is modified by each of the following:
(1) The last sentence shall not apply.
(2) If the amount determined under Section 41(a) of the Internal Revenue Code for any taxable year exceeds the limitation of Section 41(g) of the Internal Revenue Code, that amount may be carried over to other taxable years under the rules of subdivision (e); except that the limitation of Section 41(g) of the Internal Revenue Code shall be taken into account in each subsequent taxable year.

Section 17052.3 is added to the Revenue and Taxation Code, to read:

17052.3.
 (a) For each taxable year beginning on or after January 1, 2001, and before January 1, 2006, with respect to an adoption not eligible for the credit under Section 17052.25, there shall be allowed as a credit against the “net tax,” as defined in Section 17039, an amount equal to 50 percent of the amount determined in accordance with Section 23 of the Internal Revenue Code, modified as follows:
(1) Section 23(b)(1) of the Internal Revenue Code, relating to dollar limitation on the aggregate amount of qualified adoption expenses to which the credit applies, is modified to include only those qualified adoption expenses that exceed five thousand dollars ($5,000) (six thousand dollars ($6,000) in the case of a child with special needs) but do not exceed ten thousand dollars ($10,000) (eleven thousand dollars ($11,000) in the case of a child with special needs).
(2) Section 23(c) of the Internal Revenue Code, relating to carryforwards of unused credit, does not apply. If the credit allowed by this section exceeds the “net tax,” the excess may be carried over to reduce the “net tax” in the following year, and the succeeding six years if necessary, until the credit is exhausted.
(3) Section 23(d)(2) of the Internal Revenue Code, relating to the definition of an eligible child, is modified so that the term “eligible child” means any individual who meets at least one of the following requirements:
(A) Has not attained age 18 years.
(B) Is physically or mentally incapable of caring for himself or herself.
(C) Is a child with special needs.
(b) The Franchise Tax Board shall report annually to the Legislature, to the extent data is available, on the utilization of the credit allowed by this section.
(c) This section shall remain in effect only until December 1, 2007, and as of that date is repealed.

Section 17052.55 is added to the Revenue and Taxation Code, to read:

17052.55.
 (a) For each taxable year beginning on or after January 1, 2001, and before January 1, 2006, there shall be allowed as a credit against the “net tax,” as defined in Section 17039, an amount equal to 50 percent of the amount paid or incurred during the taxable year by the taxpayer as qualified wages in connection with lending a qualified employee to a public school for the purpose of teaching mathematics or science.
(b) For purposes of this section:
(1) “Qualified wages” means the pro rata amount of the total, direct wages of a qualified employee paid or incurred by the taxpayer for the qualified teaching time of that qualified employee, except that “wages” for this purpose does not include pensions or other deferred compensation, or bonuses, stock options, or other lump-sum payments.
(2) “Qualified employee” means an employee whose employment specialty incorporates mathematical or scientific concepts. Employment specialties include, but are not limited to, careers in engineering, accounting, financial analysis, medicine, and computer technology.
(3) “Qualified teaching time” means:
(A) The actual hours the qualified employee spends teaching a classroom period of mathematics or science for the full school term as defined by the local school or school district.
(B) An hour of preparation time for each day that the qualified employee teaches mathematics or science courses.
(4) “Public school” means any middle school or high school (grades 7 to 12, inclusive, or any portion thereof) or community college in this state that is part of a public school district with a vacant teaching position.
(5) “Mathematics” means instruction designed to develop fluency in basic computational skills and an understanding of mathematical concepts and mathematical reasoning and problem solving, including, but not limited to, number sense, algebraic functions, geometry and other measurement functions, statistics, data analysis, probability analysis, and quantitative concepts. “Mathematics” includes, but is not limited to, courses in algebra I, algebra II, linear algebra, calculus, geometry, trigonometry, mathematical analysis, probability and statistics, and advanced probability and statistics.
(6) “Science” means instruction designed to develop skills and procedures for the systematic pursuit of knowledge that includes, but is not limited to, problem solving and recognition, the collection of data through observation and experiment, and the formulation and testing of hypotheses. “Science” includes, but is not limited to, courses in biology, life science, physical science, physics, chemistry, geoscience, health science, and computer science.
(c) Qualified employees shall enroll in a district pre-service training program for a minimum of 40 hours of pedagogical training that is aligned with the California Standards for the Teaching Profession. The pre-service training should be completed before the qualified employee begins classroom instruction. The pre-service training program shall include the following:
(1) Classroom management and organization.
(2) An assessment of subject matter competency measured by the qualified employee’s performance on subject matter examinations approved by the Commission on Teacher Credentialing.
(3) Appropriate grade-level curriculum content and instructional models and strategies for the classes taught by the qualified employee.
(4) Pupil assessment practices and techniques.
(5) Equity, access, and diversity training.
(6) Appropriate instructional strategies for non-English speaking students and students with special needs.
(d) (1) A credit may be allowed under this section only if the qualified teaching time is certified by the public school receiving the teaching services.
(2) For purposes of this subdivision, “certified” means the issuance to the taxpayer of a qualified employee’s service record by the public school verifying receipt of the qualified teaching time. That qualified employee’s service record shall contain the qualified employee’s name, dates qualified teaching time was provided, number of hours of qualified teaching time, and a verified signature from an authorized agent or designee of the public school. The qualified employee’s service record shall also contain certification from the governing school district that the teaching position in the public school for which the qualified employee provided qualified teaching time was vacant at the time the school made the decision to have the qualified employee provide teaching services. The determination that a position is vacant is valid only for one school year or until the qualified employee is no longer providing teaching services to the school, whichever comes first.
(e) No credit may be allowed under this section with respect to the lending of a qualified employee to a public school for the purpose of teaching mathematics or science unless the public school has a teaching position that is vacant due to the unavailability, as certified by the governing school district, of a teacher who possesses a valid credential or authorization to teach mathematics or science, as appropriate.
(f) The credit allowed by this section shall be limited to wages paid or incurred in connection with qualified teaching time in this state.
(g) No deduction may be allowed to a taxpayer for any qualified wages for which a credit is allowed to that taxpayer under this section.
(h) The Franchise Tax Board shall report annually to the Legislature, to the extent data is available, on the utilization of the credit allowed by this section.
(i) In the case where the credit allowed by this section exceeds the “net tax,” the excess may be carried over to reduce the “net tax” in the following year, and succeeding seven years if necessary, until the credit is exhausted.
(j) This section shall remain in effect only until December 1, 2006, and as of that date is repealed.

Section 17053.88 is added to the Revenue and Taxation Code, to read:

17053.88.
 (a) In the case of a taxpayer who donates agricultural products to a food bank located in California under Chapter 5 (commencing with Section 58501) of Part 1 of Division 21 of the Food and Agricultural Code, for taxable years beginning on or after January 1, 2002, and before January 1, 2007, there shall be allowed as a credit against the “net tax” (as defined by Section 17039), an amount equal to 10 percent of the cost included in inventory costs under Section 263A of the Internal Revenue Code, or that would be required to be included in inventory costs under Section 263A of the Internal Revenue Code but for the exception for farming businesses contained in Section 263A (d) of the Internal Revenue Code, with respect to those agricultural products.
(b) If the credit allowed by this section is claimed by the taxpayer, any deduction otherwise allowed under this part for that amount of the cost paid or incurred by the taxpayer that is eligible for the credit shall be reduced by the amount of the credit provided in subdivision (a).
(c) Upon receipt of the donated agricultural product, the nonprofit organization shall provide a certificate to the donor. The certificate shall contain a statement signed and dated by a person authorized by that organization that the product is donated under Chapter 5 (commencing with Section 58501) of Part 1 of Division 21 of the Food and Agricultural Code. The certificate shall also contain the type and quantity of product donated, the name of donor or donors, and the name and address of the donee. Upon the request of the Franchise Tax Board, the taxpayer shall provide a copy of the certification to the Franchise Tax Board.
(d) In the case where the credit allowed by this section exceeds the“net tax,” the excess may be carried over to reduce the “net tax” in the following year, and for the six succeeding years if necessary, until the credit has been exhausted.
(e) To the extent that data are available, the Franchise Tax Board shall report annually to the Legislature regarding the utilization of the credit authorized by this section.
(f) This section shall remain in effect only until December 1, 2007, and as of that date is repealed.

Section 17057 is added to the Revenue and Taxation Code, to read:

17057.
 For each taxable year beginning on or after January 1, 2001, and before January 1, 2006, there shall be allowed as a credit against the “net tax,” as defined in Section 17039, an amount determined in accordance with Section 47 of the Internal Revenue Code, except as follows:
(a) The applicable percentage shall be 25 percent for any certified rehabilitation of a certified historic structure within a redevelopment area. For purposes of this section, “redevelopment area” means a geographical area within this state that has been designated by the local redevelopment agency pursuant to Part 1 (commencing with Section 33000) of Division 24 of the Health and Safety Code, as a redevelopment area.
(b) The credit provided by this section may only apply to expenditures with respect to a qualified rehabilitated building located within this state.
(c) No deduction may be allowed under this part for any cost for which a credit is allowed by this section.
(d) If a credit is determined under this section with respect to any property, the basis of that property shall be reduced by the amount of the credit determined.
(e) In the case where the credit allowed by this section exceeds the “net tax,” the excess may be carried over to reduce the “net tax” in the following year, and the seven succeeding years if necessary, until the credit is exhausted.
(f) The Franchise Tax Board shall report annually to the Legislature, to the extent data is available, on the utilization of the credit allowed by this section.
(g) This section shall remain in effect only until December 1, 2006, and as of that date is repealed.

SEC. 10.

 Section 17062.3 is added to the Revenue and Taxation Code, to read:

17062.3.
 The amendments made to Section 56, relating to adjustments in computing alternative minimum taxable income, by Section 4(1) of Public Law 106-519, relating to the exclusion under Section 114 of the Internal Revenue Code, shall not apply.

SEC. 11.

 Section 17132 is added to the Revenue and Taxation Code, to read:

17132.
 Section 114 of the Internal Revenue Code, relating to extraterritorial income, shall not apply.

SEC. 12.

 Section 17132.6 is added to the Revenue and Taxation Code, to read:

17132.6.
 A payment under Section 103(c)(1) of the Ricky Ray Hemophilia Relief Fund Act of 1998 (Public Law 105-369) to an individual shall be treated for purposes of this part, Part 10.2 (commencing with Section 18401), and Part 11 (commencing with Section 23001) as damages described in Section 104(a)(2) of the Internal Revenue Code.

Section 17267 is added to the Revenue and Taxation Code, to read:

17267.
 (a) For each taxable year beginning on or after January 1, 2001, and before January 1, 2006, there shall be allowed as a deduction an amount equal to the amount paid or incurred by a first-time homebuyer for each year that he or she owns a principal residence located in California, for any of the following:
(1) Private mortgage insurance.
(2) Mortgage insurance protection in connection with a Federal Housing Administration (FHA) loan.
(3) Any funding fee in connection with a Veterans Administration (VA) loan.
(b) For purposes of this section:
(1) “First-time homebuyer” means a individual who acquired a principal residence and is a first-time homebuyer within the meaning of Section 72(t)(8)(D) of the Internal Revenue Code.
(2) “Funding fee” means a loan fee in connection with a housing loan that is guaranteed, insured, or made under Chapter 37 (commencing with Section 3701) of Title 38 of the United States Code.
(3) “Principal residence” has the same meaning as applicable for purposes of Section 121 of the Internal Revenue Code.
(4) “Private mortgage insurance” means private mortgage insurance as defined for purposes of the Homeowners Protection Act of 1998 (Public Law 105-216).
(c) On or before January 1, 2007, the Franchise Tax Board shall report to the Legislature on the utilization of the deduction allowed by this section.
(d) The Franchise Tax Board shall report annually to the Legislature, to the extent data is available, on the utilization of the deduction allowed by this section.
(e) This section shall remain in effect until December 1, 2006, and as of that date, is repealed.

Section 17275.5 of the Revenue and Taxation Code is amended to read:

17275.5.
 (a) No deduction shall be denied under Section 170(f)(8) of the Internal Revenue Code, relating to substantiation requirement for certain contributions, upon a showing that the requirements in Section 170(f)(8) of the Internal Revenue Code have been met with respect to that contribution for federal purposes.
(b) Section 170(f)(9) of the Internal Revenue Code, relating to denial of deduction where contribution for lobbying activities, shall not apply.
(c) Section 170(f)(10)(F) of the Internal Revenue Code, relating to excise tax on premiums paid, shall not apply.

Section 17279.5 of the Revenue and Taxation Code is repealed.
17279.5.Section 264 of the Internal Revenue Code, relating to certain amounts paid in connection with insurance contracts, is modified to read as follows:

(a)No deduction shall be allowed for—

(1)Premiums on any life insurance policy, or endowment or annuity contract, if the taxpayer is directly or indirectly a beneficiary under the policy or contract.

(2)Any amount paid or accrued on indebtedness incurred to purchase or carry a single premium life insurance, endowment, or annuity contract. This paragraph shall apply with respect to annuity contracts only as to contracts purchased after December 31, 1954.

(3)Except as provided in subdivision (c), any amount paid or accrued on indebtedness incurred or continued to purchase or carry a life insurance, endowment, or annuity contract (other than a single premium contract or a contract treated as a single premium contract) pursuant to a plan of purchase which contemplates the systematic direct or indirect borrowing of part or all of the increases in the cash value of that contract (either from the insurer or otherwise). This paragraph shall apply only with respect to contracts purchased after August 6, 1963.

(4)Except as provided in subdivision (d), any interest paid or accrued on any indebtedness with respect to one or more insurance policies owned by the taxpayer covering the life of any individual, or any endowment or annuity contracts owned by the taxpayer covering the life of any individual, or any endowment or annuity contracts owned by the taxpayer covering any individual.

This paragraph shall apply with respect to contracts purchased after June 20, 1986.

(b)Paragraph (1) of subdivision (a) shall not apply to either of the following:

(1)Any annuity contract described in Section 72(s)(5) of the Internal Revenue Code.

(2)Any annuity contract to which Section 72(u) of the Internal Revenue Code applies.

(c)For purposes of paragraph (2) of subdivision (a), a contract shall be treated as a single premium contract if either of the following conditions exist:

(1)Substantially all the premiums on the contract are paid within a period of four years from the date on which the contract is purchased.

(2)An amount is deposited after December 31, 1954, with the insurer for payment of a substantial number of future premiums on the contract.

(d)Paragraph (3) of subdivision (a) shall not apply to any amount paid or accrued by a person during a taxable year on indebtedness incurred or continued as part of a plan referred to in paragraph (3) of subdivision (a) if any of the following are applicable:

(1)No part of four of the annual premiums due during the seven-year period (beginning with the date the first premium on the contract to which that plan relates was paid) is paid under that plan by means of indebtedness.

(2)The total of the amounts paid or accrued by the person during that taxable year for which (without regard to this paragraph) no deduction would be allowable by reason of paragraph (3) of subdivision (a) does not exceed one hundred dollars ($100).

(3)That amount was paid or accrued on indebtedness incurred because of an unforeseen substantial loss of income or unforeseen substantial increase in its financial obligations.

(4)That indebtedness was incurred in connection with its trade or business.

For purposes of applying paragraph (1), if there is a substantial increase in the premiums on a contract, a new seven-year period described in that paragraph with respect to that contract shall commence on the date the first that increased premium is paid.

(e)(1)Paragraph (4) of subdivision (a) shall not apply to any interest paid or accrued on any indebtedness with respect to policies or contracts covering an individual who is a key person to the extent that the aggregate amount of that indebtedness with respect to policies and contracts covering that individual does not exceed fifty thousand dollars ($50,000).

(2)(A)No deduction shall be allowed by reason of paragraph (1) or the last sentence of subdivision (a) with respect to interest paid or accrued for any month beginning after December 31, 1995, to the extent the amount of that interest exceeds the amount which would have been determined if the applicable rate of interest were used for that month.

(B)For purposes of subparagraph (A):

(i)The applicable rate of interest for any month is the rate of interest described as Moody’s Corporate Bond Yield Average-Monthly Average Corporates, as published by Moody’s Investors Service, Inc., or any successor thereto, for that month.

(ii)In the case of indebtedness on a contract purchased on or before June 20, 1986, all of the following shall apply:

(I)If the contract provides a fixed rate of interest, the applicable rate of interest for any month shall be the Moody’s rate described in clause (i) for the month in which the contract was purchased.

(II)If the contract provides a variable rate of interest, the applicable rate of interest for any month in an applicable period shall be the Moody’s rate described in clause (i) for the third month preceding the first month in that period.

(III)For purposes of subclause (II), the term “applicable period” means the 12-month period beginning on the date the policy is issued (and each successive 12-month period thereafter) unless the taxpayer elects a number of months (not greater than 12) other than that 12-month period to be its applicable period. That election shall be made not later than the 90th day after the date of the enactment of the act adding this sentence and, if made, shall apply to the taxpayer’s first taxable year ending on or after December 31, 1995, and all subsequent taxable years unless revoked with the consent of the Franchise Tax Board.

(3)For purposes of paragraph (1), “key person” means an officer or 20-percent owner, except that the number of individuals who may be treated as key persons with respect to any taxpayer shall not exceed the greater of:

(A)Five individuals.

(B)The lesser of 5 percent of the total officers and employees of the taxpayer or 20 individuals.

(4)For purposes of this subdivision, “20-percent owner” means both of the following:

(A)If the taxpayer is a corporation, any person who owns directly 20 percent or more of the outstanding stock of the corporation or stock possessing 20 percent or more of the total combined voting power of all stock of the corporation.

(B)If the taxpayer is not a corporation, any person who owns 20 percent or more of the capital or profits interest in the taxpayer.

(5)(A)For purposes of subparagraph (A) of paragraph (4) and for purposes of applying the fifty thousand dollar ($50,000) limitation in paragraph (1) both of the following shall apply:

(i)All members of a controlled group shall be treated as one taxpayer.

(ii)The limitation shall be allocated among the members of the controlled group in the manner the Franchise Tax Board may prescribe.

(B)For purposes of this paragraph, all persons treated as a single employer under Section 52(a) or 52(b) of the Internal Revenue Code, relating to special rules, or Section 414(m) or 414(o) of the Internal Revenue Code, relating to definitions and special rules, shall be treated as members of a controlled group.

(f)(1)No deduction shall be allowed for that portion of the taxpayer’s interest expense which is allocable to unborrowed policy cash values.

(2)For purposes of paragraph (1), the portion of the taxpayer’s interest expense which is allocable to unborrowed policy cash values is an amount which bears the same ratio to the interest expense as:

(A)The taxpayer’s average unborrowed policy cash values of life insurance policies, and annuity and endowment contracts, issued after June 8, 1997, bears to

(B)The sum of:

(i)In the case of assets of the taxpayer which are life insurance policies or annuity or endowment contracts, the average unborrowed policy cash values of those policies and contracts, and

(ii)In the case of assets of the taxpayer not described in clause (i), the average adjusted bases (within the meaning of Section 1016 of the Internal Revenue Code) of those assets.

(3)For purposes of this subdivision, the term “unborrowed policy cash value” means, with respect to any life insurance policy or annuity or endowment contract, the excess of:

(A)The cash surrender value of the policy or contract determined without regard to any surrender charge, over

(B)The amount of any loan with respect to that policy or contract.

(4)(A)Paragraph (1) shall not apply to any policy or contract owned by an entity engaged in a trade or business if the policy or contract covers only one individual and if that individual is (at the time first covered by the policy or contract):

(i)A 20-percent owner of the entity, or

(ii)An individual (not described in clause (i)) who is an officer, director, or employee of that trade or business.

A policy or contract covering a 20-percent owner of the entity shall not be treated as failing to meet the requirements of the preceding sentence by reason of covering the joint lives of the owner and the owner’s spouse.

(B)Paragraph (1) shall not apply to any annuity contract to which Section 72(u) of the Internal Revenue Code applies.

(C)Any policy or contract to which paragraph (1) does not apply by reason of this paragraph shall not be taken into account under paragraph (2).

(D)For purposes of subparagraph (A), the term “20-percent owner” has the meaning given that term by paragraph (4) of subdivision (e).

(5)(A)(i)This subdivision shall not apply to any policy or contract held by a natural person.

(ii)If a trade or business is directly or indirectly the beneficiary under any policy or contract, the policy or contract shall be treated as held by that trade or business and not by a natural person.

(iii)(I)Clause (ii) shall not apply to any trade or business carried on as a sole proprietorship and to any trade or business performing services as an employee.

(II)The amount of the unborrowed cash value of any policy or contract which is taken into account by reason of clause (ii) shall not exceed the benefit to which the trade or business is directly or indirectly entitled under the policy or contract.

(iv)A copy of the report required for federal purposes under Section 264(f) of the Internal Revenue Code shall be filed with the Franchise Tax Board at the time and in the manner specified for federal purposes and shall be treated as a statement referred to in Section 6724(d)(1) of the Internal Revenue Code.

(B)In the case of a partnership or S corporation, this subdivision shall be applied at the partnership and corporate levels.

(6)(A)If interest on any indebtedness is disallowed under subdivision (a) or Section 17280, both of the following shall apply:

(i)The disallowed interest shall not be taken into account for purposes of applying this subdivision.

(ii)The amount otherwise taken into account under subparagraph (B) of paragraph (2) shall be reduced (but not below zero) by the amount of the indebtedness.

(B)This subdivision shall be applied before the application of Section 263A of the Internal Revenue Code, relating to capitalization of certain expenses where taxpayer produces property.

(7)The term “interest expense” means the aggregate amount allowable to the taxpayer as a deduction for interest (within the meaning of Section 265(b)(4) of the Internal Revenue Code) for the taxable year (determined without regard to this subdivision, Section 265(b) of the Internal Revenue Code, and Section 291 of the Internal Revenue Code).

(8)All members of a controlled group (within the meaning of subparagraph (B) of paragraph (5) of subdivision (e)) shall be treated as one taxpayer for purposes of this subdivision.

(g)(1)The amendments made to this section by the act adding this subdivision shall apply to interest paid or accrued after December 31, 1995.

(2)(A)The amendments made to this section by the act adding this subdivision shall not apply to qualified interest paid or accrued on that indebtedness after December 31, 1995, and before January 1, 1999, in the case of either of the following:

(i)Indebtedness incurred before January 1, 1996.

(ii)Indebtedness incurred before January 1, 1997, with respect to any contract or policy entered into in 1994 or 1995.

(B)For purposes of subparagraph (A), the qualified interest with respect to any indebtedness for any month is the amount of interest (otherwise deductible) which would be paid or accrued for that month on that indebtedness if—

(i)In the case of any interest paid or accrued after December 31, 1995, indebtedness with respect to no more than 20,000 insured individuals were taken into account, and

(ii)The lesser of the following rates of interest were used for that month:

(I)The rate of interest specified under the terms of the indebtedness as in effect on December 31, 1995 (and without regard to modification of the terms after that date).

(II)The applicable percentage of the rate of interest described as Moody’s Corporate Bond Yield Average-Monthly Average Corporates, as published by Moody’s Investors Service, Inc., or any successor thereto, for that month. For purposes of clause (i), all persons treated as a single employer under Section 52(a) or 52(b) of the Internal Revenue Code, relating to special rules, or Section 414(m) or 414(o) of the Internal Revenue Code, relating to definitions and special rules, shall be treated as one person. Subclause (II) of clause (ii) shall not apply to any month before January 1, 1996.

(C)For purposes of subparagraph (B), the applicable percentage is as follows:

For calendar year:

The percentage is:

1996

100 percent

1997

90 percent

1998

80 percent

(3)This subdivision shall not apply to any contract purchased on or before June 20, 1986, except that paragraph (2) of subdivision (d) shall apply to interest paid or accrued after December 31, 1995.

(h)(1)Any amount received under any life insurance policy or endowment or annuity contract described in paragraph (4) of subdivision (a) shall be includable in gross income (in lieu of any other inclusion in gross income) ratably over the four taxable year period beginning with the taxable year that amount would (but for this paragraph) be includable, upon the occurrence of either of the following:

(A)The complete surrender, redemption, or maturity of that policy or contract during the calendar year 1996, 1997, or 1998.

(B)The full discharge during calendar year 1996, 1997, or 1998, of the obligation under the policy or contract which is in the nature of a refund of the consideration paid for the policy or contract.

(2)Paragraph (1) shall only apply to the extent the amount is includable in gross income for the taxable year in which the event described in subparagraph (A) or (B) of paragraph (1) occurs.

(3)Solely by reason of an occurrence described in subparagraph (A) or (B) of paragraph (1) or solely by reason of no additional premiums being received under the contract by reason of a lapse occurring after December 31, 1995, a contract shall not be treated as either of the following:

(A)Failing to meet the requirement of paragraph (1) of subdivision (c).

(B)A single premium contract under paragraph (1) of subdivision (b).

(i)The amendments made by the act adding this subdivision shall apply to contracts issued after June 8, 1997, in taxable years beginning on or after January 1, 1998. For purposes of the preceding sentence, any material increase in the death benefit or other material change in the contract shall be treated as a new contract, except that the addition of covered lives shall be treated as a new contract only with respect to those additional covered lives. For purposes of this subdivision, an increase in the death benefit under a policy or contract issued in connection with a lapse described in Section 501(d)(2) of the Health Insurance Portability and Accountability Act of 1996 shall not be treated as a new contract.

SEC. 16.

 Section 17552.3 is added to the Revenue and Taxation Code, to read:

17552.3.
 (a) (1) The options under Sections 112(d)(2) and 112(d)(3) of the Federal Agriculture Improvement and Reform Act of 1996 (7 U.S.C. Sec. 7212(d)(2) and (3)), as in effect on October 21, 1998, shall be disregarded in determining the taxable year for which any payment under a production flexibility contract under Subtitle B of Title I of that act (as so in effect) is properly includable in gross income for purposes of this part, Part 10.2 (commencing with Section 18401), and Part 11 (commencing with Section 23001).
(2) In order to provide farmers with the same tax treatment for all payments in years beginning before January 1, 2001, with respect to production flexibility contract payments as under federal law, as modified by Public Law 105-277, this subdivision shall apply to taxable years ending after December 31, 1995.
(b) Any option to accelerate the receipt of any payment under a production flexibility contract entered into on or after January 1, 2001, which is payable under the Federal Agriculture Improvement and Reform Act of 1996 (7 U.S.C. Sec. 7200 et seq.), as in effect on December 17, 1999, shall be disregarded in determining the taxable year for which that payment is properly includable in gross income for purposes of this part, Part 10.2 (commencing with Section 18401), and Part 11 (commencing with Section 23001).

Section 17560 of the Revenue and Taxation Code is amended to read:

17560.
 (a) The provisions of Sections 811(c)(2), 811(c)(4), 811(c)(6), and 811(c)(7) of Public Law 99-514, as modified by Section 1008(f) of Public Law 100-647, shall apply.
(b) The provisions of Section 812 of Public Law 99-514, relating to the disallowance of use of installment method for certain obligations as modified by Section 1008(g) of Public Law 100-647, shall apply to taxable years beginning on or after January 1, 1987.
(c) The repeal of Section 453C of the Internal Revenue Code by Section 10202(a) of Public Law 100-203, relating to repeal of the proportionate disallowance of the installment method, shall apply to dispositions in taxable years beginning on or after January 1, 1990.
(d) (1) In the case of any installment obligation to which Section 453(l)(2)(B) of the Internal Revenue Code applies, in lieu of the provisions of Section 453(l)(3)(A) of the Internal Revenue Code, the tax imposed under Section 17041 or 17048 for any taxable year for which payment is received on that obligation shall be increased by the amount of interest determined in the manner provided under Section 453(l)(3)(B) of the Internal Revenue Code.
(2) The provisions of Sections 10202 and 10204 of Public Law 100-203 are modified to provide for each of the following:
(A) The provisions of Section 10202 shall apply to dispositions in taxable years beginning on or after January 1, 1990.
(B) The provisions of Section 10204 shall apply to costs incurred in taxable years beginning on or after January 1, 1990.
(C) Any adjustments required by Section 481 of the Internal Revenue Code shall be included in gross income as follows:
(i) Fifty percent in the first taxable year beginning on or after January 1, 1990.
(ii) Fifty percent in the second taxable year beginning on or after January 1, 1990.
(e) (1) In the case of any installment obligation to which Section 453A of the Internal Revenue Code applies and which is outstanding as of the close of the taxable year, in lieu of the provisions of Section 453A(c)(1) of the Internal Revenue Code, the tax imposed by Section 17041 or 17048 for the taxable year shall be increased by the amount of interest determined in the manner provided under Section 453A(c)(2) of the Internal Revenue Code.
(2) The provisions of Section 453A(c)(3)(B) of the Internal Revenue Code, relating to the maximum rate used in calculating the deferred tax liability, are modified to refer to the maximum rate of tax imposed under Section 17041 in lieu of the maximum rate of tax imposed under Section 1 or 11 of the Internal Revenue Code.
(f) (1) The last sentence in Section 453A(d)(4) of the Internal Revenue Code, relating to secured indebtedness, shall not apply.
(2) This subdivision shall apply to sales or other dispositions occurring on or after January 1, 2001.

SEC. 18.

 Section 17563.5 is added to the Revenue and Taxation Code, to read:

17563.5.
 (a) The amendment by Section 7001(a) of the Internal Revenue Service Restructuring and Reform Act of 1998 (Public Law 105-206) to Section 404(a)(11) of the Internal Revenue Code, regarding determinations relating to deferred compensation, shall apply to taxable years beginning on or after January 1, 2001.
(b) In the case of any taxpayer required by the enactment of this section to change its method of accounting for its first taxable year beginning on or after January 1, 2001, each of the following shall apply for purposes of this part, Part 10.2 (commencing with Section 18401), and Part 11 (commencing with Section 23001):
(1) The change shall be treated as initiated by the taxpayer.
(2) The change shall be treated as made with the consent of the Franchise Tax Board.
(3) The net amount of the adjustments required to be taken into account by the taxpayer under Chapter 6 (commencing with Section 17551) shall be taken into account ratably over the three-taxable-year period beginning with the taxpayer’s first taxable year beginning on or after January 1, 2001.

Section 17570 of the Revenue and Taxation Code is amended to read:

17570.
 (a) For each taxable year beginning on or after January 1, 1997, Section 475 of the Internal Revenue Code, relating to mark to market accounting method for securities dealers, shall apply, except as otherwise provided.
(b)Section 13233(c)(2)(C) of the Revenue Reconciliation Act of 1993 (P.L. 103-66), relating to the effective date for changes in the mark to market accounting method for securities dealers, is modified to provide that the amount taken into account under Section 481 of the Internal Revenue Code of 1986 shall be taken into account ratably over the five-taxable-year period beginning with the first taxable year beginning on or after January 1, 1997.
(b) For any taxpayer required by the act amending this subdivision (which act incorporated by reference the amendments made by Section 7003 of the Internal Revenue Service Restructuring and Reform Act of 1998 (Public Law 105-206) to Section 475 of the Internal Revenue Code for taxable years beginning on or after January 1, 2001) to change its method of accounting for its first taxable year beginning on or after January 1, 2001, each of the following shall apply for purposes of this part, Part 10.2 (commencing with Section 18401), and Part 11 (commencing with Section 23001):
(1) The change shall be treated as initiated by the taxpayer.
(2) The change shall be treated as made with the consent of the Franchise Tax Board.
(3) The taxpayer shall not be required to change its method of accounting until the taxpayer’s first taxable year beginning on or after January 1, 2001.
(4) The net amount of the adjustments required to be taken into account by the taxpayer under Chapter 6 (commencing with Section 17551) shall be taken into account ratably over the three-taxable-year period beginning with the taxpayer’s first taxable year beginning on or after January 1, 2001.
(c) (1) If a taxpayer has, at any time, made an election for federal purposes under Section 475(e) of the Internal Revenue Code, relating to election of mark to market for dealers in commodities, to have Section 475 of the Internal Revenue Code apply, Section 475 of the Internal Revenue Code shall apply to that dealer in commodities for state purposes, a separate election for state purposes shall not be allowed under paragraph (3) of subdivision (e) of Section 17024.5, and the federal election shall be binding for purposes of this part.
(2) If a taxpayer fails to make, or has not previously made, an election for federal purposes under Section 475(e) of the Internal Revenue Code, relating to election of mark to market for dealers in commodities, to have Section 475 of the Internal Revenue Code apply, an election under Section 475(e) of the Internal Revenue Code shall not be allowed for state purposes, Section 475 of the Internal Revenue Code shall not apply to that dealer in commodities for state purposes, and a separate election for state purposes shall not be allowed under paragraph (3) of subdivision (e) of Section 17024.5.
(d) (1) If a taxpayer has, at any time, made an election for federal purposes under Section 475(f)(1) of the Internal Revenue Code, relating to election of mark to market for traders in securities, to have Section 475 of the Internal Revenue Code apply to a trade or business, Section 475 of the Internal Revenue Code shall apply to that trader in securities for state purposes with respect to that trade or business, a separate election for state purposes with respect to that trade or business shall not be allowed under paragraph (3) of subdivision (e) of Section 17024.5, and the federal election shall be binding for purposes of this part.
(2) If a taxpayer fails to make, or has not previously made, an election for federal purposes under Section 475(f)(1) of the Internal Revenue Code, relating to election of mark to market for traders in securities, to have Section 475 of the Internal Revenue Code apply to a trade or business, an election under Section 475(f)(1) of the Internal Revenue Code shall not be allowed for state purposes with respect to that trade or business, Section 475 of the Internal Revenue Code shall not apply to that trader in securities for state purposes with respect to that trade or business, and a separate election for state purposes shall not be allowed under paragraph (3) of subdivision (e) of Section 17024.5.
(e) (1) If a taxpayer has, at any time, made an election for federal purposes under Section 475(f)(2) of the Internal Revenue Code, relating to election of mark to market for traders in commodities, to have Section 475 of the Internal Revenue Code apply to a trade or business, Section 475 of the Internal Revenue Code shall apply to that trader in commodities for state purposes with respect to that trade or business, a separate election for state purposes with respect to that trade or business shall not be allowed under paragraph (3) of subdivision (e) of Section 17024.5, and the federal election with respect to that trade or business shall be binding for purposes of this part.
(2) If a taxpayer fails to make, or has not previously made, an election for federal purposes under Section 475(f)(2) of the Internal Revenue Code, relating to election of mark to market for traders in commodities, to have Section 475 of the Internal Revenue Code apply to a trade or business, an election under Section 475(f)(2) of the Internal Revenue Code shall not be allowed for state purposes with respect to that trade or business, Section 475 of the Internal Revenue Code shall not apply to that trader in commodities for state purposes with respect to that trade or business, and a separate election for state purposes with respect to that trade or business shall not be allowed under paragraph (3) of subdivision (e) of Section 17024.5.
(f) (1) An election under Section 475(e) or (f) of the Internal Revenue Code made for federal purposes with respect to a taxable year beginning before January 1, 1998, shall be treated as having been made for state purposes with respect to the first taxable year beginning on or after January 1, 1998.
(2) Section 1001(d)(4)(B) of the Taxpayer Relief Act of 1997 (P.L. 105-34), relating to the effective date for election of mark to market by securities traders and traders and dealers in commodities, is modified to provide that the requirement for timely identification shall be treated as timely made for state purposes if that identification is treated as timely made for federal purposes, and the amount taken into account under Section 481 of the Internal Revenue Code of 1986 shall be taken into account ratably over the four-taxable-year period beginning with the first taxable year beginning on or after January 1, 1998.

Section 17731.5 of the Revenue and Taxation Code is amended to read:

17731.5.
 (a) Section 641(d)(2)(A) 641(c)(2)(A) of the Internal Revenue Code is modified to read: “The amount of the tax imposed by subdivision (e) of Section 17041 shall be determined by using the highest rate of tax applicable to an individual under subdivision (a) of Section 17041.”
(b) Section 641(d)(2)(B) 641(c)(2)(B) of the Internal Revenue Code is modified to read: “The credit allowed under subdivision (b) of Section 17733 shall be zero.”

Section 17751 of the Revenue and Taxation Code is amended to read:

17751.
 Section 646 645 of the Internal Revenue Code, relating to certain revocable trusts treated as part of estate, is modified as follows:
(a) An election under Section 646(a) 645(a) of the Internal Revenue Code for federal purposes shall be treated for purposes of this part as an election made by the executor, if any, of the estate and the trustee of the qualified revocable trust under Section 646(a) 645(a) of the Internal Revenue Code for state purposes and a separate election under paragraph (3) of subdivision (e) of Section 17024.5 shall not be allowed.
(b) If the executor, if any, of the estate and the trustee of a qualified revocable trust fail to make an election under Section 646(a) 645(a) of the Internal Revenue Code for federal purposes with respect to that qualified revocable trust, that trust shall be treated and taxed for purposes of this part as a separate trust, an election under Section 646(a) 645(a) of the Internal Revenue Code for state purposes with respect to that trust shall not be allowed, and a separate election under paragraph (3) of subdivision (e) of Section 17024.5 shall not be allowed with respect to that trust.

Section 18038.5 of the Revenue and Taxation Code is amended to read:

18038.5.
 (a) In the case of any sale of qualified small business stock held by an individual a taxpayer other than a corporation for more than six months and with respect to which that individual taxpayer elects the application of this section, gain from that sale shall be recognized only to the extent that the amount realized on that sale exceeds:
(1) The cost of any qualified small business stock purchased by the taxpayer during the 60-day period beginning on the date of that sale, reduced by
(2) Any portion of the cost previously taken into account under this section.
This section shall not apply to any gain which is treated as ordinary income for purposes of this part.
(b) For purposes of this section:
(1) The term “qualified small business stock” has the meaning given that term by subdivision (c) of Section 18152.5.
(2) A taxpayer shall be treated as having purchased any property if, but for paragraph (3), the unadjusted basis of that property in the hands of the taxpayer would be its cost (within the meaning of Section 1012 of the Internal Revenue Code).
(3) If gain from any sale is not recognized by reason of subdivision (a), that gain shall be applied to reduce (in the order acquired) the basis for determining gain or loss of any qualified small business stock which is purchased by the taxpayer during the 60-day period described in subdivision (a).
(4) For purposes of determining whether the nonrecognition of gain under subdivision (a) applies to stock which is sold, both of the following shall apply:
(A) The taxpayer’s holding period for that stock and the stock referred to in paragraph (1) of subdivision (a) shall be determined without regard to section 1223 of the Internal Revenue Code.
(B) Only the first six months of the taxpayer’s holding period for the stock referred to in paragraph (1) of subdivision (a) shall be taken into account for purposes of applying paragraph (2) of subdivision (c) of Section 18152.5.
(5) Rules similar to the rules of subdivisions (f), (g), (h), (i), (j), and (k) of Section 18152.5 shall apply.
(c) This section shall apply to sales made after August 5, 1997.

Section 19133 of the Revenue and Taxation Code is amended to read:

19133.
 (a) If any taxpayer fails or refuses to furnish any information requested in writing by the Franchise Tax Board, or if any taxpayer other than an individual fails or refuses to make and file a return required by this part upon notice and demand by the Franchise Tax Board, then, unless the failure is due to reasonable cause and not willful neglect, the Franchise Tax Board may add a penalty of 25 percent of the amount of tax determined pursuant to Section 19087 or of any deficiency tax assessed by the Franchise Tax Board concerning the assessment of which the information or return was required.
(b) If any individual fails or refuses to make and file a return required by this part upon notice and demand by the Franchise Tax Board, then, unless the failure is due to reasonable cause and not willful neglect, the Franchise Tax Board may add a penalty of 25 percent of the amount of tax required to be shown on the return, as reduced under this subdivision. For purposes of this subdivision, the amount of tax required to be shown on the return shall be reduced by the amount of any part of the tax that is paid on or before the date prescribed for payment of the tax, and by the amount of any credit against the tax that may be claimed upon the return.
(c) The amendments made by the act adding this subdivision shall apply to penalties imposed on or after January 1, 2002.

Section 19136 of the Revenue and Taxation Code is amended to read:

19136.
 (a) Section 6654 of the Internal Revenue Code, relating to failure by an individual to pay estimated income tax, shall apply, except as otherwise provided.
(b) Section 6654(a)(1) of the Internal Revenue Code is modified to refer to the rate determined under Section 19521 in lieu of Section 6621 of the Internal Revenue Code.
(c) (1) For purposes of Section 6654(d) of the Internal Revenue Code, relating to the amount of required installments, any reference to “90 percent” is modified to read “80 percent.”
(2) Section 6654(d)(2)(C)(ii) of the Internal Revenue Code, relating to applicable percentages, is modified as follows:
In the case of the following
The applicable
required installments:
percentage is:
     1st ........................
20
     2nd ........................
40
     3rd ........................
60
     4th ........................
80
(3) The annualized income installment, determined under Section 6654(d)(2) of the Internal Revenue Code, shall not include “alternative minimum taxable income” or “adjusted self-employment income.”
(d) (1) Section 6654(e)(1) of the Internal Revenue Code, relating to exceptions where the tax is a small amount, shall not apply.
(2) No addition to the tax shall be imposed under this section if any of the following applies:
(A) The tax imposed under Section 17041 or 17048 for the preceding taxable year, minus the sum of any credits against the tax provided by Part 10 (commencing with Section 17001) or this part, or the tax computed under Section 17041 or 17048 upon the estimated income for the taxable year, minus the sum of any credits against the tax provided by Part 10 (commencing with Section 17001) or this part, is less than two hundred dollars ($200), except in the case of a separate return filed by a married person the amount shall be less than one hundred dollars ($100).
(B) Eighty percent or more of the tax imposed under Section 17041 or 17048 for the preceding taxable year, less any credits against the tax other than the credit allowed under Section 19002, was paid by withholding pursuant to Section 18662 or 18666 of this code or Section 13020 of the Unemployment Insurance Code.
(C) Eighty percent or more of the estimated tax for the taxable year will be paid by withholding of tax pursuant to Section 18662 or 18666 of this code or Section 13020 of the Unemployment Insurance Code.
(D) Eighty percent or more of the adjusted gross income for the taxable year consists of items subject to withholding pursuant to Section 18662 or 18666 of this code or Section 13020 of the Unemployment Insurance Code.
(3) Paragraph (2) shall not apply if the employee files a false or fraudulent withholding exemption certificate for the taxable year, or the taxpayer provides a false or fraudulent document or documents to obtain reduced withholding at source for the taxable year.
(e) Section 6654(f) of the Internal Revenue Code shall not apply and for purposes of this section the term “tax” means the tax imposed under Section 17041 or 17048, less any credits against the tax provided by Part 10 (commencing with Section 17001) or this part, other than the credit provided by subdivision (a) of Section 19002.
(f) The credit for tax withheld on wages, as specified in Section 6654(g) of the Internal Revenue Code, shall be the credit allowed under subdivision (a) of Section 19002.
(g) This section shall apply to a nonresident individual.
(h) No addition to tax shall be made under this section for any period before April 16, 1999, with respect to any underpayment of an installment for the 1998 taxable year, to the extent that the underpayment was created or increased as the result of a distribution to which Section 408A(d)(3) of the Internal Revenue Code, relating to rollovers from an IRA other than a Roth IRA, applies.
(i) (1) For purposes of Section 6654(d)(1)(C)(i) of the Internal Revenue Code, relating to the applicable percentage, any reference to “106 percent,” “108.6 percent,” “110 percent,” or “112 percent” is modified to read “105 percent.”
(2) The changes made to this section by the act adding this subdivision shall apply with respect to any installment payment due with respect to taxable years beginning on or after January 1, 2001.

SEC. 25.

 Section 19136.7 is added to the Revenue and Taxation Code, to read:

19136.7.
 (a) No addition to tax shall be made under Section 19136 for any period before April 15, 2002, with respect to any underpayment of an installment for the 2001 taxable year, to the extent that the underpayment was created or increased by any provision of the act adding this section.
(b) No addition to tax shall be made under Section 19142 for any period before April 15, 2002, with respect to any underpayment of an installment for the 2001 taxable year, to the extent that the underpayment was created or increased by any provision of the act adding this section.
(c) The Franchise Tax Board shall implement this section in a reasonable manner.

Section 19141 of the Revenue and Taxation Code is amended to read:

19141.
 Upon certification by the Secretary of State pursuant to subdivision (a) of Section 2204 or subdivision (a) of Section 17563 of the Corporations Code, the Franchise Tax Board shall assess a penalty of two hundred fifty dollars ($250). Upon certification by the Secretary of State pursuant to subdivision (a) of Section 6810 or subdivision (a) of Section 8810 of the Corporations Code, the Franchise Tax Board shall assess a penalty of fifty dollars ($50). Any such penalty shall be a final assessment due and payable at the time of assessment but no interest shall accrue thereon. The assessment shall be collected as other taxes, interest, and penalties are collected by the Franchise Tax Board unless the Secretary of State decertifies the name of the corporation as provided in subdivision (e) or (f) of Section 2204, subdivision (e) of Section 6810, or subdivision (e) of Section 8810 of the Corporations Code.

Section 19521 of the Revenue and Taxation Code is amended to read:

19521.
 (a) The rate established under this section (referred to in other code sections as “the adjusted annual rate”) shall be determined in accordance with Section 6621 of the Internal Revenue Code, except that:
(1) The overpayment rate specified in Section 6621(a)(1) of the Internal Revenue Code shall be modified to be equal to the underpayment rate determined under Section 6621(a)(2) of the Internal Revenue Code; and
(2) The determination specified in Section 6621(b) of the Internal Revenue Code shall be modified to be determined semiannually as follows:
(A) The rate for January shall apply during the following July through December, and
(B) The rate for July shall apply during the following January through June.
(b) (1) For purposes of this part, Part 10 (commencing with Section 17001), Part 11 (commencing with Section 23001), and any other provision of law referencing this method of computation, in computing the amount of any interest required to be paid by the state or by the taxpayer, or any other amount determined by reference to that amount of interest, that interest and that amount shall be compounded daily.
(2) Paragraph (1) shall not apply for purposes of computing the amount of any addition to tax under Section 19136 or 19142.
(c) Section 6621(c) of the Internal Revenue Code, relating to increase in underpayment rate for large corporate underpayments, is modified as follows:
(1) The applicable date shall be the 30th day after the earlier of either of the following:
(A) The date on which the proposed deficiency assessment is issued.
(B) The date on which the notice and demand is sent.
(2) This subdivision shall apply for purposes of determining interest for periods after December 31, 1991.
(3) Section 6621(c)(2)(B)(iii) of the Internal Revenue Code shall apply for purposes of determining interest for periods after December 31, 1998.
(d) Section 6621(d) of the Internal Revenue Code, relating to elimination of interest on overlapping periods of tax overpayments and underpayments, shall not apply.

Section 23038.5 of the Revenue and Taxation Code is amended to read:

23038.5.
 (a) Section 7704 of the Internal Revenue Code, relating to certain publicly traded partnerships treated as corporations, shall apply, except as otherwise provided.
(b) (1) Section 7704(a) of the Internal Revenue Code shall not apply to an electing 1987 partnership.
(2) For purposes of this subdivision, the term “electing 1987 partnership” means any publicly traded partnership if all of the following apply:
(A) The partnership is an existing partnership (as defined in Section 10211(c)(2) of the Revenue Reconciliation Act of 1987).
(B) Section 7704(a) of the Internal Revenue Code has not applied (and without regard to Section 7704(c)(1) of the Internal Revenue Code would not have applied) to that partnership for all prior taxable years beginning after December 31, 1987, and before January 1, 1998.
(C) (i) The partnership has made the election under Section 7704(g)(1)(C) 7704(g)(2)(C) of the Internal Revenue Code (as added by Public Law 105-34) for federal tax purposes.
(ii) The election for federal tax purposes described in clause (i) shall be treated as a binding election and a separate election for state tax purposes shall not be allowed under paragraph (3) of subdivision (e) of Section 23051.5.
(iii) The election for federal tax purposes described in clause (i) shall be treated as a binding consent to the application of the tax imposed under paragraph (3) and a separate election for state tax purposes shall not be allowed under paragraph (3) of subdivision (e) of Section 23051.5.
(D) A partnership which, but for this subparagraph, would be treated as an electing 1987 partnership shall cease to be so treated (and the election under subparagraph (C) shall cease to be in effect) as of the first day after December 31, 1997, that the partnership is no longer treated as an electing 1987 partnership for federal tax purposes (and the election under Section 7704(g)(1)(C) 7704(g)(2)(C) of the Internal Revenue Code (as added by Public Law 105-34) ceases to be in effect for federal tax purposes).
(3) (A) There is hereby imposed for each taxable year beginning on or after January 1, 1998, on the gross income of each electing 1987 partnership a tax equal to 1 percent of that partnership’s gross income from all sources reportable to this state, taking into account Section 25101 and any election under Section 25110, attributable to the active conduct of trades and businesses by the partnership.
(B) The tax shall be due and payable on the date the return of the partnership is required to be filed under Section 18633, 18633 and shall be paid by the partnership. The tax shall be paid, collected, and refunded in the same manner as other taxes imposed by this part on corporations, and shall be subject to interest and applicable penalties. Section 19147 shall be applied to the partnership with respect to the tax imposed by this paragraph in the same manner as if any reference in that section to taxable income was a reference to gross income referred to in subparagraph (A).
(C) For purposes of this paragraph, if a partnership is a partner in another partnership, the gross income referred to in subparagraph (A) shall include the partnership’s distributive share of the gross income of the other partnership from all sources reportable to this state, taking into account Section 25101 and any election under Section 25110, attributable to the active conduct of trades and businesses of that other partnership. A similar rule shall apply in the case of lower-tiered partnerships.
(D) The tax imposed by this paragraph shall be treated as imposed by this part other than for purposes of determining the amount of any credit allowable under this part.
(4) The provisions of this subdivision shall apply to the taxable year for which the election described in clause (i) of subparagraph (C) of paragraph (2) is made for federal purposes and all subsequent taxable years unless revoked by the partnership for federal purposes. Any revocation made for federal purposes shall be treated as a binding revocation under this part, but, once so revoked, may not be reinstated and a separate revocation for state purposes shall not be allowed under paragraph (3) of subdivision (e) of Section 23051.5.
(c) The amendment made to this section by the act adding this subdivision shall apply to taxable years beginning on or after January 1, 1998.

SEC. 29.

 Section 23456.5 is added to the Revenue and Taxation Code, to read:

23456.5.
 The amendments made to Section 56, relating to adjustments in computing alternative minimum taxable income, by Section 4(1) of Public Law 106-519, relating to the exclusion under Section 114 of the Internal Revenue Code, shall not apply.

Section 23609 of the Revenue and Taxation Code is amended to read:

23609.
 For each income taxable year beginning on or after January 1, 1987, there shall be allowed as a credit against the “tax” (as defined by Section 23036) an amount determined in accordance with Section 41 of the Internal Revenue Code, except as follows:
(a) For each income taxable year beginning before January 1, 1997, both of the following modifications shall apply:
(1) The reference to “20 percent” in Section 41(a)(1) of the Internal Revenue Code is modified to read “8 percent.”
(2) The reference to “20 percent” in Section 41(a)(2) of the Internal Revenue Code is modified to read “12 percent.”
(b) (1) For each income taxable year beginning on or after January 1, 1997, and before January 1, 1999, both of the following modifications shall apply:
(A) The reference to “20 percent” in Section 41(a)(1) of the Internal Revenue Code is modified to read “11 percent.”
(B) The reference to “20 percent” in Section 41(a)(2) of the Internal Revenue Code is modified to read “24 percent.”
(2) For each income taxable year beginning on or after January 1, 1999, and before January 1, 2000, both of the following shall apply:
(A) The reference to “20 percent” in Section 41(a)(1) of the Internal Revenue Code is modified to read “12 percent.”
(B) The reference to “20 percent” in Section 41(a)(2) of the Internal Revenue Code is modified to read “24 percent.”
(3) For each income taxable year beginning on or after January 1, 2000, both of the following shall apply:
(A) The reference to “20 percent” in Section 41(a)(1) of the Internal Revenue Code is modified to read “15 percent.”
(B) The reference to “20 percent” in Section 41(a)(2) of the Internal Revenue Code is modified to read “24 percent.”
(c) (1) With respect to any expense paid or incurred after the operative date of Section 6378, Section 41(b)(1) of the Internal Revenue Code is modified to exclude from the definition of “qualified research expense” any amount paid or incurred for tangible personal property that is eligible for the exemption from sales or use tax provided by Section 6378.
(2) “Qualified research” and “basic research” shall include only research conducted in California.
(d) The provisions of Section 41(e)(7)(A) of the Internal Revenue Code, shall be modified so that “basic research,” for purposes of this section, includes any basic or applied research including scientific inquiry or original investigation for the advancement of scientific or engineering knowledge or the improved effectiveness of commercial products, except that the term does not include any of the following:
(1) Basic research conducted outside California.
(2) Basic research in the social sciences, arts, or humanities.
(3) Basic research for the purpose of improving a commercial product if the improvements relate to style, taste, cosmetic, or seasonal design factors.
(4) Any expenditure paid or incurred for the purpose of ascertaining the existence, location, extent, or quality of any deposit of ore or other mineral (including oil and gas).
(e) (1) In the case of a taxpayer engaged in any biopharmaceutical research activities that are described in codes 2833 to 2836, inclusive, or any research activities that are described in codes 3826, 3829, or 3841 to 3845, inclusive, of the Standard Industrial Classification (SIC) Manual published by the United States Office of Management and Budget, 1987 edition, or any other biotechnology research and development activities, the provisions of Section 41(e)(6) of the Internal Revenue Code shall be modified to include both of the following:
(A) A qualified organization as described in Section 170(b)(1)(A)(iii) of the Internal Revenue Code and owned by an institution of higher education as described in Section 3304(f) of the Internal Revenue Code.
(B) A charitable research hospital owned by an organization that is described in Section 501(c)(3) of the Internal Revenue Code, is exempt from taxation under Section 501(a) of the Internal Revenue Code, is not a private foundation, is designated a “specialized laboratory cancer center,” and has received Clinical Cancer Research Center status from the National Cancer Institute.
(2) For purposes of this subdivision:
(A) “Biopharmaceutical research activities” means those activities that use organisms or materials derived from organisms, and their cellular, subcellular, or molecular components, in order to provide pharmaceutical products for human or animal therapeutics and diagnostics. Biopharmaceutical activities make use of living organisms to make commercial products, as opposed to pharmaceutical activities that make use of chemical compounds to produce commercial products.
(B) “Other biotechnology research and development activities” means research and development activities consisting of the application of recombinant DNA technology to produce commercial products, as well as research and development activities regarding pharmaceutical delivery systems designed to provide a measure of control over the rate, duration, and site of pharmaceutical delivery.
(f) In the case where the credit allowed by this section exceeds the “tax,” the excess may be carried over to reduce the “tax” in the following year, and succeeding years if necessary, until the credit has been exhausted.
(g) For each income taxable year beginning on or after January 1, 1998, the reference to “Section 501(a)” in Section 41(b)(3)(C) of the Internal Revenue Code, relating to contract research expenses, is modified to read “this part or Part 10 (commencing with Section 17001).”
(h) (1) For each income taxable year beginning on or after January 1, 1998, and before January 1, 2000:
(A) The reference to “1.65 “2.65 percent” in Section 41(c)(4)(A)(i) of the Internal Revenue Code is modified to read “one and thirty-two hundredths of one percent.”
(B) The reference to “2.2 “3.2 percent” in Section 41(c)(4)(A)(ii) of the Internal Revenue Code is modified to read “one and seventy-six hundredths of one percent.”
(C) The reference to “2.75 “3.75 percent” in Section 41(c)(4)(A)(iii) of the Internal Revenue Code is modified to read “two and two-tenths of one percent.”
(2) For each income taxable year beginning on or after January 1, 2000:
(A) The reference to “1.65 “2.65 percent” in Section 41(c)(4)(A)(i) of the Internal Revenue Code is modified to read “one and forty-nine hundredths of one percent.”
(B) The reference to “2.2 “3.2 percent” in Section 41(c)(4)(A)(ii) of the Internal Revenue Code is modified to read “one and ninety-eight hundredths of one percent.”
(C) The reference to “2.75 “3.75 percent” in Section 41(c)(4)(A)(iii) of the Internal Revenue Code is modified to read “two and forty-eight hundredths of one percent.”
(3) Section 41(c)(4)(B) shall not apply and in lieu thereof an election under Section 41(c)(4)(A) of the Internal Revenue Code may be made for any income taxable year of the taxpayer beginning on or after January 1, 1998. That election shall apply to the income taxable year for which made and all succeeding income taxable years unless revoked with the consent of the Franchise Tax Board.
(4) Section 41(c)(6) of the Internal Revenue Code, relating to gross receipts, is modified to take into account only those gross receipts from the sale of property held primarily for sale to customers in the ordinary course of the taxpayer’s trade or business that is delivered or shipped to a purchaser within this state, regardless of f.o.b. point or any other condition of the sale.
(i) Section 41(h) of the Internal Revenue Code, relating to termination, shall not apply.
(j) Section 41(g) of the Internal Revenue Code, relating to special rule for passthrough of credit, is modified by each of the following:
(1) The last sentence shall not apply.
(2) If the amount determined under Section 41(a) of the Internal Revenue Code for any income taxable year exceeds the limitation of Section 41(g) of the Internal Revenue Code, that amount may be carried over to other income taxable years under the rules of subdivision (f), except that the limitation of Section 41(g) of the Internal Revenue Code shall be taken into account in each subsequent income taxable year.

Section 23610.2 is added to the Revenue and Taxation Code, to read:

23610.2.
 For each taxable year beginning on or after January 1, 2001, and before January 1, 2006, there shall be allowed as a credit against the “tax,” as defined in Section 23036, an amount determined in accordance with Section 47 of the Internal Revenue Code, except as follows:
(a) The applicable percentage shall be 25 percent for any certified rehabilitation of a certified historic structure within a redevelopment area. For purposes of this section, “redevelopment area” means a geographical area within this state that has been designated by the local redevelopment agency pursuant to Part 1 (commencing with Section 33000) of Division 24 of the Health and Safety Code, as a redevelopment area.
(b) The credit provided by this section may only apply to expenditures with respect to a qualified rehabilitated building located within this state.
(c) No deduction may be allowed under this part for any cost for which a credit is allowed by this section.
(d) If a credit is determined under this section with respect to any property, the basis of that property shall be reduced by the amount of the credit determined.
(e) In the case where the credit allowed by this section exceeds the “tax,” the excess may be carried over to reduce the “tax” in the following year, and the seven succeeding years if necessary, until the credit is exhausted.
(f) The Franchise Tax Board shall report annually to the Legislature, to the extent data is available, on the utilization of the credit allowed by this section.
(g) This section shall remain in effect only until December 1, 2006, and as of that date is repealed.

Section 23655 is added to the Revenue and Taxation Code, to read:

23655.
 (a) For each taxable year beginning on or after January 1, 2001, and before January 1, 2006, there shall be allowed as a credit against the “tax,” as defined in Section 23036, an amount equal to 50 percent of the amount paid or incurred during the taxable year by the taxpayer as qualified wages in connection with lending a qualified employee to a public school for the purpose of teaching mathematics or science.
(b) For purposes of this section:
(1) “Qualified wages” means the pro rata amount of the total wages of a qualified employee paid or incurred by the taxpayer for the qualified teaching time of that qualified employee, except that “wages” for this purpose does not include pensions or other deferred compensation, or bonuses, stock options, or other lump-sum payments.
(2) “Qualified employee” means an employee whose employment specialty incorporates mathematical or scientific concepts. Employment specialties include, but are not limited to, careers in engineering, accounting, financial analysis, medicine, and computer technology.
(3) “Qualified teaching time” means:
(A) The actual hours the qualified employee spends teaching a classroom period of mathematics or science for the full school term as defined by the local school or school district; and
(B) An hour of preparation time for each day that the qualified employee teaches mathematics or science courses.
(4) “Public school” means any middle school or high school (grades 7 to 12, inclusive, or any portion thereof) or community college in this state that is part of a public school district with a vacant teaching position.
(5) “Mathematics” means instruction designed to develop fluency in basic computational skills and an understanding of mathematical concepts and mathematical reasoning and problem solving, including, but not limited to, number sense, algebraic functions, geometry and other measurement functions, statistics, data analysis, probability analysis, and quantitative concepts. “Mathematics” includes, but is not limited to, courses in algebra I, algebra II, linear algebra, calculus, geometry, trigonometry, mathematical analysis, probability and statistics, and advanced probability and statistics.
(6) “Science” means instruction designed to develop skills and procedures for the systematic pursuit of knowledge that includes, but is not limited to, problem solving and recognition, the collection of data through observation and experiment, and the formulation and testing of hypotheses. “Science” includes, but is not limited to, courses in biology, life science, physical science, physics, chemistry, geoscience, health science, and computer science.
(c) Qualified employees shall enroll in a district pre-service training program for a minimum of 40 hours of pedagogical training that is aligned with the California Standards for the Teaching Profession. The pre-service training should be completed before the qualified employee begins classroom instruction. The pre-service training program shall include the following:
(1) Classroom management and organization.
(2) An assessment of subject matter competency measured by the qualified employee’s performance on subject matter examinations approved by the Commission on Teacher Credentialing.
(3) Appropriate grade-level curriculum content and instructional models and strategies for the classes taught by the qualified employee.
(4) Pupil assessment practices and techniques.
(5) Equity, access, and diversity training.
(6) Appropriate instructional strategies for non-English speaking students and students with special needs.
(d) (1) A credit may be allowed under this section only if the qualified teaching time is certified by the public school receiving the teaching services.
(2) For the purposes of this subdivision, “certified” means the issuance to the taxpayer of a qualified employee’s service record by the public school verifying receipt of the qualified teaching time. That qualified employee’s service record shall contain the qualified employee’s name, dates the qualified teaching time was provided, number of hours of qualified teaching time, and a verified signature from an authorized agent or designee of the public school. The qualified employee’s service record shall also contain certification from the governing school district that the teaching position in the public school for which the qualified employee provided qualified teaching time was vacant at the time the school made the decision to have the qualified employee provide teaching services. The determination that a position is vacant is valid only for one school year or until the qualified employee is no longer providing teaching services to the school, whichever comes first.
(e) No credit may be allowed under this section with respect to the lending of a qualified employee to a public school for the purpose of teaching mathematics or science unless the public school has a teaching position that is vacant due to the unavailability, as certified by the governing school district, of a teacher who possesses a valid credential or authorization to teach mathematics or science, as appropriate.
(f) The credit allowed by this section shall be limited to wages paid or incurred in connection with qualified teaching time in this state.
(g) No deduction may be allowed to a taxpayer for any qualified wages for which a credit is allowed to that taxpayer under this section.
(h) The Franchise Tax Board shall report annually to the Legislature, to the extent data is available, on the utilization of the credit allowed by this section.
(i) In the case where the credit allowed by this section exceeds the “tax,” the excess may be carried over to reduce the “tax” in the following year, and succeeding seven years if necessary, until the credit is exhausted.
(j) This section shall remain in effect only until December 1, 2006, and as of that date is repealed.

Section 23688 is added to the Revenue and Taxation Code, to read:

23688.
 (a) In the case of a taxpayer who donates agricultural products to a food bank located in California under Chapter 5 (commencing with Section 58501) of Part 1 of Division 21 of the Food and Agricultural Code, for taxable years beginning on or after January 1, 2002, and before January 1, 2007, there shall be allowed as a credit against the “tax” (as defined by Section 23036), an amount equal to 10 percent of the cost included in inventory costs under Section 263A of the Internal Revenue Code, or that would be required to be included in inventory costs under Section 263A of the Internal Revenue Code, but for the exception for farming businesses contained in Section 263A (d) of the Internal Revenue Code, with respect to those agriculture products.
(b) If the credit allowed by this section is claimed by the taxpayer, any deduction otherwise allowed under this part for that amount of the cost paid or incurred by the taxpayer that is eligible for the credit shall be reduced by the amount of the credit provided in subdivision (a).
(c) Upon receipt of the donated agricultural product, the nonprofit organization shall provide a certificate to the donor. The certificate shall contain a statement signed and dated by a person authorized by that organization that the product is donated under Chapter 5 (commencing with Section 58501) of Part 1 of Division 21 of the Food and Agriculture Code. The certificate shall also contain the type and quantity of product donated, the name of donor or donors, and the name and address of the donee. Upon the request of the Franchise Tax Board, the taxpayer shall provide a copy of the certification to the Franchise Tax Board.
(d) In the case where the credit allowed by this section exceeds the “tax,” the excess may be carried over to reduce the “tax” in the following year, and for the six succeeding years if necessary, until the credit has been exhausted.
(e) To the extent that data are available, the Franchise Tax Board shall report annually to the Legislature regarding the utilization of the credit authorized by this section.
(f) This section shall remain in effect only until December 1, 2007, and as of that date is repealed.

Section 24357.9 of the Revenue and Taxation Code is amended to read:

24357.9.
 (a) In the case of a qualified elementary or secondary educational computer contribution, the amount otherwise allowed as a deduction under Section 24357 shall be reduced by that amount of the reduction provided by Section 24357.1 which is no greater than the sum of the following:
(1) One-half of the amount computed pursuant to Section 24357.1 (computed without regard to this paragraph).
(2) The amount (if any) by which the charitable contribution deduction under this section for any qualified elementary or secondary educational contribution (computed by taking into account the amount determined by paragraph (1), but without regard to this paragraph) exceeds twice the basis of the property.
(b) For purposes of this section, the term “qualified elementary or secondary educational computer contribution” means a charitable contribution by a corporation of any computer technology or equipment, but only if all of the following apply:
(1) The contribution is to either any of the following:
(A) An educational organization described in Section 170(b)(1)(A)(ii) of the Internal Revenue Code.
(B) An entity described in Section 23701d and exempt from tax under Section 23701 (other than an entity described in subparagraph (A)) that is organized primarily for purposes of supporting elementary and secondary education in California.
(C) A public library (as described in Section 170(e)(6)(B)(i)(III) of the Internal Revenue Code.
(2) The contribution is made not later than two three years after the date the taxpayer acquired the property (or in the case of property constructed by the taxpayer, the date the construction of the property is substantially completed).
(3) The original use of the property is by the donor or the donee.
(4) Substantially all of the use of the property by the donee is for use within California for educational purposes in any of the grades K through 12 that are related to the purpose or function of the organization or entity.
(5) The property is not transferred by the donee in exchange for money, other property, or services, except for shipping, installation, and transfer of costs.
(6) The property will fit productively into the entity’s educational plan.
(7) The entity’s use and disposition of the property will be in accordance with paragraphs (4) and (5).
(8) The property meets the standards, if any, as the Secretary of the Treasury may have prescribed by regulation under Section 170(e)(6) of the Internal Revenue Code to assure that the property meets minimum functionality and suitability standards for educational purposes.
(c) A contribution by a corporation of any computer technology or equipment to a private foundation (as defined in Section 509 of the Internal Revenue Code) shall be treated as a qualified elementary or secondary educational computer contribution for purposes of this section if both of the following apply:
(1) The contribution to the private foundation satisfies the requirements of paragraphs (2) and (5) of subdivision (b).
(2) Within 30 days after that contribution, the private foundation does both of the following:
(A) Contributes the property to an entity described in paragraph (1) of subdivision (b) that satisfies the requirements of paragraphs (4) to (7), inclusive, of subdivision (b).
(B) Notifies the donor of that contribution.
(d) In the case of property that is reacquired by the person who constructed the property, both of the following shall apply:
(1) Paragraph (2) of subdivision (b) shall be applied to a contribution of that property by that person by taking into account the date that the original construction of the property was substantially completed.
(2) Paragraph (3) of subdivision (b) shall not apply to that contribution.
(e) For purposes of this section, property shall be treated as constructed by the taxpayer only if the cost of the parts used in the construction of that property (other than parts manufactured by the taxpayer or a related person) do not exceed 50 percent of the taxpayer’s basis in that property.

(e)

(f) For purposes of this section:
(1) “Computer technology or equipment” means computer software (as defined by Section 197(e)(3)(B) of the Internal Revenue Code), computer or peripheral equipment (as defined by Section 168(i)(2)(B) of the Internal Revenue Code), and fiber-optic cable related to computer use.
(2) “Corporation” shall not include any of the following:
(A) An “S corporation.”
(B) A personal holding company (as defined in Section 542 of the Internal Revenue Code).
(C) A service organization (as defined in Section 414(m)(3) of the Internal Revenue Code).

(f)

(g) (1) This section shall not apply to any contribution made during any taxable year beginning on or after January 1, 2000, and before December 31, 2000.
(2) This section shall not apply to any contribution made during any taxable year beginning after December 31, 2003.

Section 24424 of the Revenue and Taxation Code is amended to read:

24424.
 (a)No deduction shall be allowed for—

(1)Premiums paid on any life insurance policy, or endowment or annuity contract, if the taxpayer is directly or indirectly a beneficiary under that policy or contract.

(2)Any amount paid or accrued on indebtedness incurred to purchase or carry a single premium life insurance, endowment, or annuity contract. This paragraph shall apply with respect to annuity contracts only as to contracts purchased after December 31, 1954.

(3)Except as provided in subdivision (c), any amount paid or accrued on indebtedness incurred or continued to purchase or carry a life insurance, endowment, or annuity contract (other than a single premium contract or a contract treated as a single premium contract) pursuant to a plan of purchase which contemplates the systematic direct or indirect borrowing of part or all of the increases in the cash value of that contract (either from the insurer or otherwise). This paragraph shall apply only with respect to contracts purchased after August 6, 1963.

(4)Except as provided in subdivision (d), any interest paid or accrued on any indebtedness with respect to one or more insurance policies owned by the taxpayer covering the life of any individual, or any endowment or annuity contracts owned by the taxpayer covering any individual.

This paragraph shall apply with respect to contracts purchased after June 20, 1986.

(b)Paragraph (1) of subdivision (a) shall not apply to either of the following:

(1)Any annuity contract described in Section 72(s)(5) of the Internal Revenue Code.

(2)Any annuity contract to which Section 72(u) of the Internal Revenue Code applies.

(c)For purposes of paragraph (2) of subdivision (a), a contract shall be treated as a single premium contract if either of the following conditions exist:

(1)Substantially all the premiums on the contract are paid within a period of four years from the date on which the contract is purchased.

(2)An amount is deposited after December 31, 1954, with the insurer for payment of a substantial number of future premiums on the contract.

(d)Paragraph (3) of subdivision (a) shall not apply to any amount paid or accrued by a person during a taxable year on indebtedness incurred or continued as part of a plan referred to in paragraph (3) of subdivision (a) if any of the following is applicable:

(1)No part of four of the annual premiums due during the seven-year period (beginning with the date the first premium on the contract to which that plan relates was paid) is paid under that plan by means of indebtedness.

(2)The total of the amounts paid or accrued by that person during that taxable year for which (without regard to this paragraph) no deduction would be allowable by reason of paragraph (3) of subdivision (a) does not exceed one hundred dollars ($100).

(3)That amount was paid or accrued on indebtedness incurred because of an unforeseen substantial loss of income or unforeseen substantial increase in its financial obligations.

(4)That indebtedness was incurred in connection with its trade or business.

For purposes of applying paragraph (1), if there is a substantial increase in the premiums on a contract, a new seven-year period described in that paragraph with respect to that contract shall commence on the date the first increased premium is paid.

(e)(1)Paragraph (4) of subdivision (a) shall not apply to any interest paid or accrued on any indebtedness with respect to policies or contracts covering an individual who is a key person to the extent that the aggregate amount of that indebtedness with respect to policies and contracts covering that individual does not exceed fifty thousand dollars ($50,000).

(2)(A)No deduction shall be allowed by reason of paragraph (1) or the last sentence of subdivision (a) with respect to interest paid or accrued for any month beginning after December 31, 1995, to the extent the amount of that interest exceeds the amount which would have been determined if the applicable rate of interest were used for that month.

(B)For purposes of subparagraph (A):

(i)The applicable rate of interest for any month is the rate of interest described as Moody’s Corporate Bond Yield Average-Monthly Average Corporates, as published by Moody’s Investors Service, Inc., or any successor thereto, for that month.

(ii)In the case of indebtedness on a contract purchased on or before June 20, 1986, all of the following shall apply:

(I)If the contract provides a fixed rate of interest, the applicable rate of interest for any month shall be the Moody’s rate described in clause (i) for the month in which the contract was purchased.

(II)If the contract provides a variable rate of interest, the applicable rate of interest for any month in an applicable period shall be the Moody’s rate described in clause (i) for the third month preceding the first month in that period.

(III)For purposes of subclause (II), the term “applicable period” means the 12-month period beginning on the date the policy is issued (and each successive 12-month period thereafter) unless the taxpayer elects a number of months (not greater than 12) other than that 12-month period to be its applicable period. That election shall be made not later than the 90th day after the date of the enactment of the act adding this sentence and, if made, shall apply to the taxpayer’s first taxable year ending on or after December 31, 1995, and all subsequent taxable years, unless revoked with the consent of the Franchise Tax Board.

(3)For purposes of paragraph (1), “key person” means an officer or 20-percent owner, except that the number of individuals who may be treated as key persons with respect to any taxpayer shall not exceed the greater of:

(A)Five individuals.

(B)The lesser of 5 percent of the total officers and employees of the taxpayer or 20 individuals.

(4)For purposes of this subdivision, “20-percent owner” means both of the following:

(A)If the taxpayer is a corporation, any person who directly owns 20 percent or more of the outstanding stock of the corporation or stock possessing 20 percent or more of the total combined voting power of all stock of the corporation.

(B)If the taxpayer is not a corporation, any person who owns 20 percent or more of the capital or profits interest in the taxpayer.

(5)(A)For purposes of subparagraph (A) of paragraph (4) and for purposes of applying the fifty thousand dollars ($50,000) limitation in paragraph (1) both of the following shall apply:

(i)All members of a controlled group shall be treated as one taxpayer.

(ii)The limitation shall be allocated among the members of the controlled group in the manner the Franchise Tax Board may prescribe.

(B)For purposes of this paragraph, all persons treated as a single employer under Section 52(a) or 52(b) of the Internal Revenue Code, relating to special rules, or Section 414(m) or 414(o) of the Internal Revenue Code, relating to definitions and special rules, shall be treated as members of a controlled group.

(f)(1)No deduction shall be allowed for that portion of the taxpayer’s interest expense which is allocable to unborrowed policy cash values.

(2)For purposes of paragraph (1), the portion of the taxpayer’s interest expense which is allocable to unborrowed policy cash values is an amount which bears the same ratio to the interest expense as:

(A)The taxpayer’s average unborrowed policy cash values of life insurance policies, and annuity and endowment contracts, issued after June 8, 1997, bears to

(B)The sum of:

(i)In the case of assets of the taxpayer which are life insurance policies or annuity or endowment contracts, the average unborrowed policy cash values of those policies and contracts, and

(ii)In the case of assets of the taxpayer not described in clause (i), the average adjusted bases (within the meaning of Section 24916) of those assets.

(3)For purposes of this subdivision, the term “unborrowed policy cash value” means, with respect to any life insurance policy or annuity or endowment contract, the excess of:

(A)The cash surrender value of the policy or contract determined without regard to any surrender charge, over

(B)The amount of any loan with respect to that policy or contract.

(4)(A)Paragraph (1) shall not apply to any policy or contract owned by an entity engaged in a trade or business if the policy or contract covers only one individual and if that individual is (at the time first covered by the policy or contract):

(i)A 20-percent owner of the entity, or

(ii)An individual (not described in clause (i)) who is an officer, director, or employee of that trade or business.

A policy or contract covering a 20-percent owner of the entity shall not be treated as failing to meet the requirements of the preceding sentence by reason of covering the joint lives of the owner and the owner’s spouse.

(B)Paragraph (1) shall not apply to any annuity contract to which Section 72(u) of the Internal Revenue Code applies.

(C)Any policy or contract to which paragraph (1) does not apply by reason of this paragraph shall not be taken into account under paragraph (2).

(D)For purposes of subparagraph (A), the term “20-percent owner” has the meaning given such term by paragraph (4) of subdivision (e).

(5)(A)(i)This subdivision shall not apply to any policy or contract held by a natural person.

(ii)If a trade or business is directly or indirectly the beneficiary under any policy or contract, the policy or contract shall be treated as held by that trade or business and not by a natural person.

(iii)(I)Clause (ii) shall not apply to any trade or business carried on as a sole proprietorship and to any trade or business performing services as an employee.

(II)The amount of the unborrowed cash value of any policy or contract which is taken into account by reason of clause (ii) shall not exceed the benefit to which the trade or business is directly or indirectly entitled under the policy or contract.

(iv)A copy of the report required for federal purposes under Section 264(f) of the Internal Revenue Code shall be filed with the Franchise Tax Board at a time and in the manner specified for federal purposes and shall be treated as a statement referred to in Section 6724(d)(1) of the Internal Revenue Code.

(B)In the case of a partnership or S corporation, this subdivision shall be applied at the partnership and corporate levels.

(6)(A)If interest on any indebtedness is disallowed under subdivision (a) or Section 24425, both of the following shall apply:

(i)The disallowed interest shall not be taken into account for purposes of applying this subdivision.

(ii)The amount otherwise taken into account under subparagraph (B) of paragraph (2) shall be reduced (but not below zero) by the amount of the indebtedness.

(B)This subdivision shall be applied before the application of Section 263A of the Internal Revenue Code, relating to capitalization of certain expenses where taxpayer produces property.

(7)The term “interest expense” means the aggregate amount allowable to the taxpayer as a deduction for interest (within the meaning of Section 24344) for the taxable year (determined without regard to this subdivision, Section 24425, and Section 291 of the Internal Revenue Code).

(8)All members of a controlled group (within the meaning of subparagraph (B) of paragraph (5) of subdivision (e)) shall be treated as one taxpayer for purposes of this subdivision.

(g)(1)The amendments made to this section by the act adding this subdivision shall apply to interest paid or accrued after December 31, 1995.

(2)(A)The amendments made to this section by the act adding this subdivision shall not apply to qualified interest paid or accrued on that indebtedness after December 31, 1995, and before January 1, 1999, in the case of either of the following:

(i)Indebtedness incurred before January 1, 1996.

(ii)Indebtedness incurred before January 1, 1997, with respect to any contract or policy entered into in 1994 or 1995.

(B)For purposes of subparagraph (A), the qualified interest with respect to any indebtedness for any month is the amount of interest (otherwise deductible) which would be paid or accrued for that month on that indebtedness if—

(i)In the case of any interest paid or accrued after December 31, 1995, indebtedness with respect to no more than 20,000 insured individuals were taken into account, and

(ii)The lesser of the following rates of interest were used for that month:

(I)The rate of interest specified under the terms of the indebtedness as in effect on December 31, 1995 (and without regard to modification of the terms after that date).

(II)The applicable percentage of the rate of interest described as Moody’s Corporate Bond Yield Average-Monthly Average Corporates as published by Moody’s Investors Service, Inc., or any successor thereto, for that month. For purposes of clause (i), all persons treated as a single employer under Section 52(a) or 52(b) of the Internal Revenue Code, relating to special rules, or Section 414(m) or 414(o) of the Internal Revenue Code, relating to definitions and special rules, shall be treated as one person. Subclause (II) of clause (ii) shall not apply to any month before January 1, 1996.

(C)For purposes of subparagraph (B), the applicable percentage is as follows:

For calendar year:

The percentage is:

1996

100 percent

1997

90 percent

1998

80 percent

(3)This subdivision shall not apply to any contract purchased on or before June 20, 1986, except that paragraph (2) of subdivision (d) shall apply to interest paid or accrued after December 31, 1995.

(h)(1)Any amount received under any life insurance policy or endowment or annuity contract described in paragraph (4) of subdivision (a) shall be includable in gross income (in lieu of any other inclusion in gross income) ratably over the four-taxable-year period beginning with the taxable year that amount would (but for this paragraph) be includable, upon the occurrence of either of the following:

(A)The complete surrender, redemption, or maturity of that policy or contract during calendar year 1996, 1997, or 1998.

(B)The full discharge during calendar year 1996, 1997, or 1998 of the obligation under the policy or contract which is in the nature of a refund of the consideration paid for the policy or contract.

(2)Paragraph (1) shall only apply to the extent the amount is includable in gross income for the taxable year in which the event described in subparagraph (A) or (B) of paragraph (1) occurs.

(3)Solely by reason of an occurrence described in subparagraph (A) or (B) of paragraph (1) or solely by reason of no additional premiums being received under the contract by reason of a lapse occurring after December 31, 1995, a contract shall not be treated as either of the following:

(A)Failing to meet the requirement of paragraph (1) of subdivision (c).

(B)A single premium contract under paragraph (1) of subdivision (b).

(i)The amendments made by the act adding this subdivision shall apply to contracts issued after June 8, 1997, in taxable years beginning on or after January 1, 1998. For purposes of the preceding sentence, any material increase in the death benefit or other material change in the contract shall be treated as a new contract, except that the addition of covered lives shall be treated as a new contract only with respect to those additional covered lives. For purposes of this subdivision, an increase in the death benefit under a policy of contract issued in connection with a lapse described in Section 501(d)(2) of the Health Insurance Portability and Accountability Act of 1996 shall not be treated as a new contract. Section 264 of the Internal Revenue Code, relating to certain amounts paid in connection with insurance contracts, shall apply, except as otherwise provided.

SEC. 36.

 Section 24661.3 is added to the Revenue and Taxation Code, to read:

24661.3.
 (a) (1) The options under Sections 112(d)(2) and Section 112(d)(3) of the Federal Agriculture Improvement and Reform Act of 1996 (7 U.S.C. Sec. 7212(d)(2) and (3)), as in effect on October 21, 1998, shall be disregarded in determining the taxable year for which any payment under a production flexibility contract under Subtitle B of Title 1 of that act (as so in effect) is properly includable in gross income for purposes of this part, Part 10.2 (commencing with Section 18401), or Part 10 (commencing with Section 17001).
(2) In order to provide farmers with the same tax treatment for all payments in years beginning before January 1, 2001, with respect to production flexibility contract payments as under federal law, as modified by Public Law 105-277, this section shall apply to taxable years ending after December 31, 1995.
(b) Any option to accelerate the receipt of any payment under a production flexibility contract entered into on or after January 1, 2001, which is payable under the Federal Agriculture Improvement and Reform Act of 1996 (7 U.S.C. Sec. 7200 et seq.), as in effect on December 17, 1999, shall be disregarded in determining the taxable year for which that payment is properly includable in gross income for purposes of this part, Part 10.2 (commencing with Section 18401), and Part 10 (commencing with Section 17001).

Section 24667 of the Revenue and Taxation Code is amended to read:

24667.
 (a) (1) Sections 453, 453A, and 453B of the Internal Revenue Code, relating to installment method, special rules for nondealers, and gain or loss on disposition of installment obligations, respectively, shall apply, except as otherwise provided.
(2) Sections 811(c)(2), 811(c)(4), 811(c)(6), and 811(c)(7) of Public Law 99-514, as modified by Section 1008(f) of Public Law 100-647, shall apply to each taxable year beginning on or after January 1, 1988.
(3) Section 812 of Public Law 99-514, relating to the disallowance of use of the installment method for certain obligations, as modified by Section 1008(g) of Public Law 100-647, shall apply to each taxable year beginning on or after January 1, 1988.
(b) For purposes of subdivision (a), any references in the Internal Revenue Code to sections that have not been incorporated into this part by reference shall be deemed to refer to the corresponding section, if any, of this part.
(c) In the case of any taxpayer who made sales under a revolving credit plan and was on the installment method under former Section 24667 or 24668 for the taxpayer’s last taxable year beginning before January 1, 1988, the provisions of this section shall be treated as a change in method of accounting for the first taxable year beginning after December 31, 1987, and all of the following shall apply:
(1) That change shall be treated as initiated by taxpayer.
(2) That change shall be treated as having been made with the consent of the Franchise Tax Board.
(3) The period for taking into account adjustments under Article 6 (commencing with Section 24721) by reason of that change shall not exceed four years.
(d) The repeal of Section 453C of the Internal Revenue Code by Section 10202(a) of Public Law 100-203, relating to repeal of the proportionate disallowance of the installment method, shall apply to dispositions on or after January 1, 1990, in taxable years beginning on or after January 1, 1990.
(e) (1) In the case of any installment obligations to which Section 453(l)(2)(B) of the Internal Revenue Code applies, in lieu of the provisions of Section 453(l)(3)(A) of the Internal Revenue Code, the “tax” (as defined by subdivision (a) of Section 23036) for any taxable year for which payment is received on that obligation shall be increased by the amount of interest determined in the manner provided under Section 453(l)(3)(B) of the Internal Revenue Code.
(2) Sections 10202 and 10204 of Public Law 100-203, are modified to provide for each of the following:
(A) Section 10202 shall apply to dispositions in taxable years beginning on or after January 1, 1990.
(B) Section 10204 shall apply to costs incurred in taxable years beginning on or after January 1, 1990.
(C) Any adjustments required by Section 481 of the Internal Revenue Code shall be included in gross income as follows:
(i) Fifty percent in the first taxable year beginning on or after January 1, 1990.
(ii) Fifty percent in the second taxable year beginning on or after January 1, 1990.
(f) (1) The amendments to Section 453A of the Internal Revenue Code made by Section 2004 of Public Law 100-647, relating to special rules for nondealers, shall apply to each taxable year beginning on or after January 1, 1990.
(2) In the case of any installment obligation to which Section 453A of the Internal Revenue Code applies and which is outstanding as of the close of the taxable year, in lieu of the provisions of Section 453A(c)(1) of the Internal Revenue Code, the “tax” (as defined by subdivision (a) of Section 23036) for the taxable year shall be increased by the amount of interest determined in the manner provided under Section 453A(c)(2) of the Internal Revenue Code.
(3) The provisions of Section 453A(c)(3)(B) of the Internal Revenue Code, relating to the maximum rate used in calculating the deferred tax liability, are modified to refer to the maximum rate of tax imposed under Section 23151, 23186, or 23802, whichever applies, in lieu of the maximum rate of tax imposed under Section 1 or 11 of the Internal Revenue Code.
(g) (1) The last sentence in Section 453A(d)(4) of the Internal Revenue Code, relating to secured indebtedness, shall not apply.
(2) This subdivision shall apply to sales or other dispositions occurring on or after January 1, 2001.

SEC. 38.

 Section 24685.5 is added to the Revenue and Taxation Code, to read:

24685.5.
 (a) The amendment made by Section 7001(a) of the Internal Revenue Service Restructuring and Reform Act of 1998 (Public Law 105-206) to Section 404(a)(11) of the Internal Revenue Code, regarding determinations relating to deferred compensation, shall apply to taxable years beginning on or after January 1, 2001.
(b) In the case of any taxpayer required by this section to change its method of accounting for its first taxable year beginning on or after January 1, 2001, each of the following shall apply for purposes of this part, Part 10 (commencing with Section 17001), and Part 10.2 (commencing with Section 18401):
(1) The change shall be treated as initiated by the taxpayer.
(2) The change shall be treated as made with the consent of the Franchise Tax Board.
(3) The net amount of the adjustments required to be taken into account by the taxpayer under Chapter 13 (commencing with Section 24631) shall be taken into account ratably over the three-taxable-year period beginning with the taxpayer’s first taxable year beginning on or after January 1, 2001.

Section 24710 of the Revenue and Taxation Code is amended to read:

24710.
 (a) For each taxable year beginning on or after January 1, 1997, Section 475 of the Internal Revenue Code, relating to mark to market accounting method for securities dealers, shall apply, except as otherwise provided.
(b) Section 13233(c)(2)(C) of the Revenue Reconciliation Act of 1993 (P.L. 103-66), relating to the effective date for changes in the mark to market accounting method for securities dealers, is modified to provide that the amount taken into account under Section 481 of the Internal Revenue Code of 1986 shall be taken into account ratably over the five-taxable-year period beginning with the first taxable year beginning on or after January 1, 1997.
(c) (1) If a taxpayer has, at any time, made an election for federal purposes under Section 475(e) of the Internal Revenue Code, relating to election of mark to market for dealers in commodities, to have Section 475 of the Internal Revenue Code apply, Section 475 of the Internal Revenue Code shall apply to that dealer in commodities for state purposes, a separate election for state purposes shall not be allowed under paragraph (3) of subdivision (e) of Section 23051.5, and the federal election shall be binding for purposes of this part.
(2) If a taxpayer fails to make, or has not previously made, an election for federal purposes under Section 475(e) of the Internal Revenue Code, relating to election of mark to market for dealers in commodities, to have Section 475 of the Internal Revenue Code apply, an election under Section 475(e) of the Internal Revenue Code shall not be allowed for state purposes, Section 475 of the Internal Revenue Code shall not apply to that dealer in commodities for state purposes, and a separate election for state purposes shall not be allowed under paragraph (3) of subdivision (e) of Section 23051.5.
(d) (1) If a taxpayer has, at any time, made an election for federal purposes under Section 475(f)(1) of the Internal Revenue Code, relating to election of mark to market for traders in securities, to have Section 475 of the Internal Revenue Code apply to a trade or business, Section 475 of the Internal Revenue Code shall apply to that trader in securities for state purposes with respect to that trade or business, a separate election for state purposes with respect to that trade or business shall not be allowed under paragraph (3) of subdivision (e) of Section 23051.5, and the federal election shall be binding for purposes of this part.
(2) If a taxpayer fails to make, or has not previously made, an election for federal purposes under Section 475(f)(1) of the Internal Revenue Code, relating to election of mark to market for traders in securities, to have Section 475 of the Internal Revenue Code apply to a trade or business, an election under Section 475(f)(1) of the Internal Revenue Code shall not be allowed for state purposes with respect to that trade or business, Section 475 of the Internal Revenue Code shall not apply to that trader in securities for state purposes with respect to that trade or business, and a separate election for state purposes shall not be allowed under paragraph (3) of subdivision (e) of Section 23051.5.
(e) (1) If a taxpayer has, at any time, made an election for federal purposes under Section 475(f)(2) of the Internal Revenue Code, relating to election of mark to market for traders in commodities, to have Section 475 of the Internal Revenue Code apply to a trade or business, Section 475 of the Internal Revenue Code shall apply to that trader in commodities for state purposes with respect to that trade or business, a separate election for state purposes with respect to that trade or business shall not be allowed under paragraph (3) of subdivision (e) of Section 23051.5, and the federal election with respect to that trade or business shall be binding for purposes of this part.
(2) If a taxpayer fails to make, or has not previously made, an election for federal purposes under Section 475(f)(2) of the Internal Revenue Code, relating to election of mark to market for traders in commodities, to have Section 475 of the Internal Revenue Code apply to a trade or business, an election under Section 475(f)(2) of the Internal Revenue Code shall not be allowed for state purposes with respect to that trade or business, Section 475 of the Internal Revenue Code shall not apply to that trader in commodities for state purposes with respect to that trade or business, and a separate election for state purposes with respect to that trade or business shall not be allowed under paragraph (3) of subdivision (e) of Section 23051.5.
(f) (1) An election under Section 475(e) or (f) of the Internal Revenue Code made for federal purposes with respect to a taxable year beginning before January 1, 1998, shall be treated as having been made for state purposes with respect to the first taxable year beginning on or after January 1, 1998.
(2) Section 1001(d)(4)(B) of the Taxpayer Relief Act of 1997 (P.L. 105-34), relating to the effective date for election of mark to market by securities traders and traders and dealers in commodities, is modified to provide that the requirement for timely identification shall be treated as timely made for state purposes if that identification is treated as timely made for federal purposes, and the amount taken into account under Section 481 of the Internal Revenue Code of 1986 shall be taken into account ratably over the four-taxable-year period beginning with the first taxable year beginning on or after January 1, 1998.
(g) For any taxpayer required by the act adding this subdivision (which act incorporated by reference the amendments made by Section 7003 of the Internal Revenue Service Restructuring and Reform Act of 1998 (Public Law 105-206) to Section 475 of the Internal Revenue Code for taxable years beginning on or after January 1, 2001) to change its method of accounting for its first taxable year beginning on or after January 1, 2001, each of the following shall apply for purposes of this part, Part 10 (commencing with Section 17001), and Part 10.2 (commencing with Section 18401).
(1) The change shall be treated as initiated by the taxpayer.
(2) The change shall be treated as made with the consent of the Franchise Tax Board.
(3) The taxpayer shall not be required to change its method of accounting until its first taxable year beginning on or after January 1, 2000.
(4) The net amount of the adjustments required to be taken into account by the taxpayer under Chapter 13 (commencing with Section 24631) shall be taken into account ratably over the three-taxable-year period beginning with the taxpayer’s first taxable year beginning on or after January 1, 2001.

Section 24942 of the Revenue and Taxation Code is amended to read:

24942.
 (a) No gain or loss shall be recognized to a corporation on the receipt of money or other property in exchange for stock (including treasury stock) of that corporation. No gain or loss shall be recognized by a corporation with respect to any lapse or acquisition of an option option, or with respect to a securities futures contract (as defined in Section 1234B of the Internal Revenue Code), to buy or sell its stock (including treasury stock).
(b) For basis of property acquired by a corporation in certain exchanges for its stock, see Sections 24552 to 24554, inclusive.

Section 24949.1 of the Revenue and Taxation Code, as added by Chapter 846 of the Statutes of 1961, is amended to read:

24949.1.
  For purposes of this part, the sale or exchange of livestock (other than poultry) held by a taxpayer for draft, breeding, or dairy purposes in excess of the number the taxpayer would sell if he followed his, she, or it followed his, her, or its usual business practices shall be treated as an involuntary conversion to which Sections 24943 to 24949, inclusive, apply if such that livestock are is sold or exchanged by the taxpayer solely on account of drought drought, flood, or other weather-related conditions.

Section 24949.1 of the Revenue and Taxation Code is repealed.
24949.1.(a)Section 1033(e) of the Internal Revenue Code, relating to livestock sold on account of drought, is modified by substituting the phrase “on account of drought, flood, or other weather-related conditions” in lieu of the phrase “on account of drought” contained therein.

(b)This section shall apply to sales and exchanges after December 31, 1996.

(c)This section shall not apply to taxable years beginning on or after January 1, 1998.

SEC. 43.

 In order to provide employers and employees with the same tax treatment for all years with respect to meals or lodging furnished for the convenience of the employer as under federal law, amendments made by this act, which incorporate by reference the amendments made by Section 5002 of the Internal Revenue Service Restructuring and Reform Act of 1998 (Public Law 105-206) to Section 119 of the Internal Revenue Code, shall apply to taxable or income years beginning before, on, or after July 22, 1998.

SEC. 44.

 Sections 6001 to 6024, inclusive, of the Internal Revenue Service Restructuring and Reform Act of 1998 (Title VI of Public Law 105-206), Sections 4001 to 4006, inclusive, of the Tax and Trade Relief Extension Act of 1998 (Title IV of Division J of Public Law 105-277) and Sections 311 to 319, inclusive, of the Consolidated Appropriations Act, 2001 (Subtitle B of Title III of Public Law 106-554) enacted numerous technical corrections to provisions of the Internal Revenue Code, the Ticket to Work and Work Incentives Improvement Act of 1999 (Public Law 106-170), the Tax and Trade Relief Extension Act of 1998 (Public Law 105-277), the Internal Revenue Service Restructuring and Reform Act of 1998 (Public Law 105-206), the Taxpayer Relief Act of 1997 (Public Law 105-34), the Small Business Job Protection Act of 1996 (Public Law 104-188), the Uruguay Round Agreements Act (Public Law 103-465), the Omnibus Budget Reconciliation Act of 1993 (Public Law 103-66), the Revenue Reconciliation Act of 1990 (Public Law 101-508), the Technical and Miscellaneous Revenue Act of 1988 (Public Law 100-647), the Tax Reform Act of 1986 (Public Law 99-514), and the Tax Reform Act of 1984 (Public Law 98-369), some of which are incorporated by specific reference into Part 10 (commencing with Section 17001), Part 10.2 (commencing with Section 18401), and Part 11 (commencing with Section 23001) of Division 2 of the Revenue and Taxation Code. Unless otherwise specifically provided, the technical corrections described in the preceding sentence, to the extent that they correct provisions that are incorporated by specific reference into the Revenue and Taxation Code, are declaratory of existing law and shall be applied in the same manner and for the same periods as specified in the Internal Revenue Service Restructuring and Reform Act of 1998 (Title VI of Public Law 105-206), the Tax and Trade Relief Extension Act of 1998 (Title IV of Division J of Public Law 105-277), and the Consolidated Appropriations Act, 2001 (Subtitle B of Title III of Public Law 106-554) or if later, the specified date of incorporation.

SEC. 45.

 The amendments made to Section 17731.5 by this act are declaratory of existing law, and shall be applied in the same manner and for the same taxable years as the amendments made by Section 6007(f)(2) of the Internal Revenue Service Restructuring and Reform Act or if later, the specified date of incorporation.

SEC. 46.

 The amendments made to Section 17751 by this act are declaratory of existing law, and shall be applied in the same manner and for the same taxable years as the amendments made by Section 6013(a) of the Internal Revenue Service Restructuring and Reform Act of 1998 (Public Law 105-206) or if later, the specified date of incorporation.

SEC. 47.

 The amendments made to Section 18038.5 by this act are declaratory of existing law, and shall be applied in the same manner and for the same taxable years as the amendments made by Section 6005(f) of the Internal Revenue Service Restructuring and Reform Act of 1998 (Public Law 105-206) or if later, the specified date of incorporation.

SEC. 48.

 Amendments made by this act, which incorporate by reference the amendments made by Section 3001 of the Tax and Trade Relief Extension Act of 1998 (Public Law 105-277) to Sections 332 and 334 of the Internal Revenue Code, shall apply to distributions made on or after January 1, 2001.

SEC. 49.

 In order to provide the same tax treatment for all years with respect to the tax treatment of a cash option for qualified prizes as under federal law, as modified by Public Law 105-277:
(a) Amendments made by this act, which incorporate by reference the amendments made by Section 5301 of the Tax and Trade Relief Extension Act of 1998 (Public Law 105-277) to Section 451 of the Internal Revenue Code, shall apply to any prize to which a person first becomes entitled after October 21, 1998.
(b) Amendments made by this act, which incorporate by reference the amendments made by Section 5301 of the Tax and Trade Relief Extension Act of 1998 (Public Law 105-277) to Section 451 of the Internal Revenue Code, shall apply to any prize to which a person first becomes entitled on or before October 21, 1998, except that in determining whether an option is a qualified prize option as defined in Section 451 (h)(2)(A) of the Internal Revenue Code:
(1) Section 451(h)(2)(A)(ii) of the Internal Revenue Code shall not apply.
(2) That option shall be treated as a qualified prize option if it is exercisable only during all or part of the 18-month period beginning on July 1, 1999.

SEC. 50.

 Amendments made by this act, which incorporate by reference the amendments made by Section 3001 of the Miscellaneous Trade and Technical Corrections Act of 1999 (Public Law 106-36) to Sections 351, 357, 358, 362, 368, 584, and 1031 of the Internal Revenue Code, shall apply to transfers made on or after January 1, 2001.

SEC. 51.

 Section 502(d) of the Ticket to Work and Work Incentives Improvement Act of 1999 (Public Law 106-170), relating to special rule delaying the claiming of the research credit, shall not apply.

SEC. 52.

 Amendments made by this act, which incorporate by reference the amendments made by Section 532 of the Ticket to Work and Work Incentives Improvement Act of 1999 (Public Law 106-170), shall apply to any instrument held, acquired, or entered into, any transaction entered into, and supplies held or acquired on or after January 1, 2001.

SEC. 53.

 Amendments made by this act, which incorporate by reference the amendments made by Section 534 of the Ticket to Work and Work Incentives Improvement Act of 1999 (Public Law 106-170), which added Section 1260 of the Internal Revenue Code to Subchapter P of Chapter 1 of the Internal Revenue Code, shall apply to transactions entered into on or after January 1, 2001.

SEC. 54.

 Amendments made by this act, which incorporate by reference the amendments made by Section 537 of the Ticket to Work and Work Incentives Improvement Act of 1999 (Public Law 106-170) to Section 170 of the Internal Revenue Code, shall apply to transfers made on or after January 1, 2001.

SEC. 55.

 In order to provide the same tax treatment under Part 10 (commencing with Section 17001), Part 10.2 (commencing with Section 18401), and Part 11 (commencing with Section 23001) of Division 2 of the Revenue and Taxation Code, with respect to distributions by a partnership to a corporate partner, each of the following shall apply:
(a) Except as provided in subdivision (b), amendments made by this act, which incorporate by reference the amendments made by Section 538 of the Ticket to Work and Work Incentives Improvement Act of 1999 (Public Law 106-170) to Section 732 of the Internal Revenue Code, shall apply to distributions made on or after January 1, 2001.
(b) (1) In the case of a corporation which is a partner in a partnership as of January 1, 2000, the amendment made by Section 538 of the Ticket to Work and Work Incentives Improvement Act of 1999 (Public Law 106-170) to Section 732 of the Internal Revenue Code, shall apply to any distribution made (or treated as made) to that partner from that partnership after June 30, 2001.
(2) (A) Paragraph (1) shall not apply to any distribution unless the partner has made the election under Section 538(b)(2) of the Ticket to Work and Work Incentives Improvement Act of 1999 (Public Law 106-170) to have Section 538(b)(2) of the Ticket to Work and Work Incentives Improvement Act of 1999 (Public Law 106-170) apply for federal purposes to that distribution on the partner’s return of federal income tax for the taxable year in which the distribution occurs.
(B) No separate election shall be allowed under paragraph (3) of subdivision (e) of Section 17024.5 or paragraph (3) of subdivision (e) of Section 23051.5.

SEC. 56.

 Amendments made by this act to Section 24357.9 shall apply to a qualified computer contribution made on or after January 1, 2001.

SEC. 57.

 In order to provide the same tax treatment under Part 10 (commencing with Section 17001), Part 10.2 (commencing with Section 18401) and Part 11 (commencing with Section 23001) of Division 2 of the Revenue and Taxation Code, with respect to the sale or exchange of livestock sold or exchanged solely on account of flood or other weather-related conditions, the amendments made to Section 24949.1 of the Revenue and Taxation Code, as added by Chapter 846 of the 1961 Statutes, shall apply to taxable years beginning on or after January 1, 1999.

SEC. 58.

 Notwithstanding Section 2230 of the Revenue and Taxation Code, no appropriation is made by this act and the state shall not reimburse any local agency for any sales and use tax revenues lost by it under this act.

SEC. 59.

 This act provides for a tax levy within the meaning of Article IV of the Constitution and shall go into immediate effect. However, the provisions of Sections 1 and 2 of this act shall become operative on the first day of the first calendar quarter commencing more than 90 days after the effective date of this act.

Taxation Code, to read:

17053.65.

(a)For each taxable year beginning on or after January 1, 2002, and before January 1, 2008, there shall be allowed as a credit against the “net tax” (as defined by Section 17039), amount determined under subdivision (c) for amounts paid or incurred during the taxable year by an eligible employer for health coverage provided to an eligible employee for the employee, and that employee’s dependents.

(b)For purposes of this section:

(1)“Eligible employee” means an individual who satisfies either of the following requirements:

(A)Is employed by an eligible employer to perform services in California for that eligible employer for at least 36 hours per week during the period that health coverage is provided by the eligible employer.

(B)Is a self-employed individual within the meaning of Section 401(c)(1)(B) of the Internal Revenue Code (relating to self-employed individuals) who has earned income from self-employment (within the meaning of Section 401(c)(2) of the Internal Revenue Code, relating to earned income) in California of at least ____ dollars ($____) for the period during which health coverage is provided by the eligible employer.

(2)“Dependent” means a dependent, as defined in Section 17056.

(3)(A)“Eligible employer” means a taxpayer that satisfies either of the following:

(i)A taxpayer that, during the calendar year immediately preceding the beginning of the employer’s taxable year for which the credit is allowed, employed on average no more than 25 employees. The average number of employees employed during a calendar year shall equal the sum of the average number of hourly employees employed during the calendar year and the average number of salaried employees employed during the calendar year. The average number of hourly employees shall be determined by dividing the total number of hours of employment of employees paid on an hourly basis by 1,872. The average number of salaried employees shall be determined by dividing the total number of months of employment of employees paid on a monthly salaried basis by 12.

(ii)An owner-employee, within the meaning of Section 401(c)(3) of the Internal Revenue Code (relating to owner-employees), other than an owner-employee described in Section 401(c)(3)(B) (relating to partners in partnerships), shall be considered an eligible employer.

(B)“Eligible employer” does not include any taxpayer that reorganizes or otherwise restructures their legal existence primarily for the purpose of meeting the 25-employee limitation described in the first sentence of subparagraph (A).

(4)“Health coverage” means a plan, insurance policy, contract, or similar arrangement that is either of the following:

(A)A health care service plan, as defined under subdivision (f) of Section 1345 of the Health and Safety Code that, at a minimum, provides coverage for basic health care services, as defined in subdivision (b) of Section 1345 of the Health and Safety Code, and is licensed pursuant to Section 1353 of the Health and Safety Code.

(B)A disability insurance policy that is issued by a licensed insurer in accordance with the Insurance Code that, at a minimum, covers hospital, medical, or surgical expenses as provided in Part 2 (commencing with Section 10110) of Division 2 of the Insurance Code.

(c)The amount of the credit determined under this subdivision shall be one of the following:

(1)Ten percent of the amount paid or incurred by the employer during the taxable year for employee-only health coverage provided to an eligible employee.

(2)Twenty percent of the amount paid or incurred by the employer during the taxable year for employee and dependent health coverage provided to an eligible employee.

(d)To qualify for the credit under this section, an eligible employer shall do all of the following:

(1)(A)In circumstances where health coverage is provided by a health maintenance organization, as defined in Section 1373.10 of the Health and Safety Code, the eligible employer shall pay 100 percent of the monthly premium amount described in either paragraph (1) or (2) of subdivision (c) for an eligible employee who elects to have that type of health coverage.

(B)In circumstances where health coverage is provided by a preferred provider organization or a point-of-service plan contract, as defined in Section 1374.60 of the Health and Safety Code, the eligible employer shall pay no less than 80 percent of the monthly premium amount described in either paragraph (1) or (2) of subdivision (c) for am eligible employee who elects to have that method of health coverage.

(2)At least annually, make health coverage available to all eligible employees described in subparagraph (A) of paragraph (1) of subdivision (b). Nothing in this section may construed to prohibit an employer from making additional health benefits available to an eligible employee at the employer’s or eligible employee’s expense.

(e)The credit allowed by this section shall be in lieu of any deduction for amounts paid or incurred on which a credit under this section is based, and no deduction shall be allowed for those amounts.

(f)In the case where the credit allowed by this section exceeds the “net tax,” the excess may be carried over to reduce the “net tax” in the following year, and six succeeding years if necessary, until the credit is exhausted.

(g)(1)The Department of Managed Health Care shall forward to the Franchise Tax Board, upon request, a list of all health care service plans that are licensed to provide coverage for basic health care services pursuant to Chapter 2.2 (commencing with Section 1340) of Division 2 of the Health and Safety Code.

(2)The Department of Insurance shall forward to the Franchise Tax Board, upon request, a list of disability insurers that are authorized to transact disability insurance in this state for the purpose of providing coverage for hospital, medical, or surgical expenses.

(h)The Franchise Tax Board may prescribe those regulations as may be appropriate to carry out the purposes of this section, including regulations to specify what constitutes restructuring for the purposes of meeting the 25-employee limitation.

(i)This section shall remain in effect only until December 1, 2008, and as of that date is repealed.

SEC. 2.Section 23665 is added to the Revenue and Taxation Code, to read:
23665.

(a)For each taxable year beginning on or after January 1, 2002, and before January 1, 2008, there shall be allowed as a credit against the “tax” (as defined by Section 23036), the amount determined under subdivision (c) for amounts paid or incurred during the taxable year by an eligible employer for health coverage provided to an eligible employee for the employee, and that employee’s dependents.

(b)For purposes of this section:

(1)“Eligible employee” means an individual who is employed by an eligible employer to perform services in California for that eligible employer for at least 36 hours per week during the period that health coverage is provided by the eligible employer.

(2)“Dependent” means a dependent, as defined in Section 17056.

(3)(A)“Eligible employer” means a taxpayer that, during the calendar year immediately preceding the beginning of the employer’s taxable year for which the credit is allowed, employed on average no more than 25 employees. The average number of employees employed during a calendar year shall equal the sum of the average number of hourly employees employed during the calendar year and the average number of salaried employees employed during the calendar year. The average number of hourly employees shall be determined by dividing the total number of hours of employment of employees paid on an hourly basis by 1,872. The average number of salaried employees shall be determined by dividing the total number of months of employment of employees paid on a monthly salaried basis by 12.

(B)“Eligible employer” does not include any taxpayer that reorganizes or otherwise restructures their legal existence primarily for the purpose of meeting the 25-employee limitation described in the first sentence of subparagraph (A).

(4)“Health coverage” means a plan, insurance policy, contract, or similar agreement that is either of the following:

(A)A health care service plan, as defined under subdivision (f) of Section 1345 of the Health and Safety Code, that, at a minimum, provides coverage for basic health care services, as defined in subdivision (b) of Section 1345 of the Health and Safety Code, and is licensed pursuant to Section 1353 of the Health and Safety Code.

(B)A disability insurance policy that is issued by a licensed insurer in accordance with the Insurance Code that, at a minimum, covers hospital, medical, or surgical expenses as provided in Part 2 (commencing with Section 10110) of Division 2 of the Insurance Code.

(c)The amount of the credit determined under this subdivision shall be one of the following:

(1)Ten percent of the amount paid or incurred by the employer during the taxable year for employee-only health coverage provided to an eligible employee.

(2)Twenty percent of the amount paid or incurred by the employer during the taxable year for employee and dependent health coverage provided to an eligible employee.

(d)To qualify for the credit under this section, an eligible employer shall do all of the following:

(1)(A)In circumstances where health coverage is provided by a health maintenance organization, as defined in Section 1373.10 of the Health and Safety Code, the eligible employer shall pay 100 percent of the monthly premium amount described in either paragraph (1) or (2) of subdivision (c) for an eligible employee who elects to have that type of health coverage.

(B)In circumstances where health coverage is provided by a preferred provider organization or a point-of-service plan contract, as defined in Section 1374.60 of the Health and Safety Code, the eligible employer shall pay no less than 80 percent of the monthly premium amount described in either paragraph (1) or (2) of subdivision (c) for an eligible employee who elects to have that method of health coverage.

(2)At least annually, make health coverage available to all eligible employees described in paragraph (1) of subdivision (b). Nothing in this section may be construed to prohibit an employer from making additional health benefits available to an eligible employee at the employer’s or eligible employee’s expense.

(e)The credit allowed by this section shall be in lieu of any deduction for amounts paid or incurred on which a credit under this section is based, and no deduction shall be allowed for those amounts.

(f)In the case where the credit allowed by this section exceeds the “tax,” the excess may be carried over to reduce the “tax” in the following year, and six succeeding years if necessary, until the credit is exhausted.

(g)(1)The Department of Managed Health Care shall forward to the Franchise Tax Board, upon request, a list of all health care service plans that are licensed to provide coverage for basic health care services pursuant to Chapter 2.2 (commencing with Section 1340) of Division 2 of the Health and Safety Code.

(2)The Department of Insurance shall forward to the Franchise Tax Board, upon request, a list of disability insurers that are authorized to transact disability insurance in this state for the purpose of providing coverage for hospital, medical, or surgical expenses.

(h)The Franchise Tax Board may prescribe those regulations as may be appropriate to carry out the purposes of this section, including regulations to specify what constitutes restructuring for the purposes of meeting the 25-employee limitation.

(i)This section shall remain in effect only until December 1, 2008, and as of that date is repealed.
SEC. 3.

This act provides for a tax levy within the meaning of Article IV of the Constitution and shall go into immediate effect.