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AB-1277 Corporate tax: combined reporting: dividend elimination.(2007-2008)

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Amended  IN  Assembly  June 01, 2007
Amended  IN  Assembly  April 10, 2007

CALIFORNIA LEGISLATURE— 2007–2008 REGULAR SESSION

Assembly Bill
No. 1277

Introduced  by  Assembly Member Benoit

February 23, 2007

An act to amend Section 25106 of the Revenue and Taxation Code, relating to taxation.


LEGISLATIVE COUNSEL'S DIGEST


AB 1277, as amended, Benoit. Corporate tax: combined reporting: dividend elimination.
The Corporation Tax Law imposes taxes measured by income and, in the case of a group of corporations that conduct a unitary business, as specified, generally requires or, in some cases, permits the members of the group to compute their tax by utilizing the “combined report” approach, as defined. Existing law provides that dividends paid by one member of a unitary group to another member of that group may be eliminated from the recipient corporation’s taxable income, provided that the dividends are paid out of earnings and profits accumulated by the payer when the payer and recipient were members of the same combined unitary group, as specified.
This bill would clarify that the dividend elimination, as provided, is allowed regardless of whether the payer and payee are taxpayer members of the California combined unitary group return, or whether the payer or payee had previously filed California tax returns, as long as the payer and payee filed as members of a comparable unitary business outside of this state when the earnings and profits from which the dividends were paid arose. ThisThis bill would declare that these changes are declaratory of existing law.
This bill would also specify that the dividend elimination provisions apply to dividends paid out of the specified income, as provided, by a member of a combined unitary group to a newly formed member, as defined.

This bill would declare that these changes are declaratory of existing law.

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

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


SECTION 1.

 Section 25106 of the Revenue and Taxation Code is amended to read:

25106.
 (a) (1) In any case in which the income of a corporation is or has been determined under this chapter, or comparable rules of any other state if the corporation was not subject to tax in this state, with reference to the income and corporation is or has been determined under this chapter, with reference to the income and apportionment factors of one or more other corporations with which it is doing or has done a unitary business, all dividends paid by one to another of any of those corporations shall, to the extent those dividends are paid out of the income previously described of the unitary business, be eliminated from the income of the recipient and, except for purposes of applying Section 24345, shall not be taken into account under Section 24344 or in any other manner in determining the tax of any member of the unitary group.
(2) (A) For purposes of this section, the dividends described in paragraph (1) include dividends paid out of the income previously described of the unitary business by a member of the unitary group to a corporation that is a member of the group but was formed subsequent to the accrual of that income, if the recipient corporation was part of the unitary group during the period from its formation to the receipt of dividends its receipts of those dividends.
(B) The Franchise Tax Board may deny any dividend elimination for the dividends described in this paragraph if the board determines that a transaction is entered into or structured with a principal purpose of evading the tax imposed by this part.
(3) For purposes of this section, “income previously described of the unitary business” shall include income earned by members of the unitary group during taxable years when no member of the unitary group was taxable in this state to the extent that the income of the unitary group would have been determined under this chapter had any member of that corporation’s unitary group been subject to tax in this state at the time that income was earned.
(b) The Franchise Tax Board may prescribe any regulations that may be necessary or appropriate to carry out the purpose of this section, which is to prevent taxation of dividends received by a member of a unitary group where those dividends were paid from the earnings and profits of income previously described of the unitary business by another member of the same unitary group.

(c)Except as provided in paragraph (2), the amendments made by the act adding this subdivision shall apply to taxable years beginning on or after January 1, 2007.

SEC. 2.

(a)The Legislature finds and declares that the amendments made to Section 25106 of the Revenue and Taxation Code by Section 1 of this act do not constitute a change in, but is declaratory of, existing law. It is the intent of the Legislature that no inference be drawn from those amendments as to whether, for any taxable year beginning before January 1, 2007, dividends received by a corporation are eligible for elimination under Section 25106 of the Revenue and Taxation Code if the corporation was formed subsequent to the accrual of earnings and profits from which the dividends are paid.

SEC. 2.

 (a) The Legislature finds and declares that the amendments made to Section 25106 of the Revenue and Taxation Code by Section 1 of this act that added and amended paragraph (1) of subdivision (a) of, and added paragraph (3) of subdivision (a) to, Section 25106 of the Revenue and Taxation Code do not constitute a change in, but are declaratory of, existing law.
(b) (1) Both subdivision (b) and paragraph (2) of subdivision (a) of Section 25106 of the Revenue and Taxation Code, added to that section by this act, shall apply to taxable years beginning on or after January 1, 2007.
(2) It is the intent of the Legislature that no inference be drawn from the addition by this act of paragraph (2) of subdivision (a) to Section 25106 of the Revenue and Taxation Code as to whether, for any taxable year beginning before January 1, 2007, dividends received by a corporation are eligible for elimination under Section 25106 of the Revenue and Taxation Code.