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SB-567 Taxation.(2017-2018)

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Date Published: 02/17/2017 02:00 PM
SB567:v99#DOCUMENT


CALIFORNIA LEGISLATURE— 2017–2018 REGULAR SESSION

Senate Bill No. 567


Introduced by Senator Lara

February 17, 2017


An act to amend Sections 17755, 18031, 24343, 24911, 25110, and 25113 of the Revenue and Taxation Code, relating to taxation, to take effect immediately, tax levy.


LEGISLATIVE COUNSEL'S DIGEST


SB 567, as introduced, Lara. Taxation.
(1) The Personal Income Tax Law does not conform to specified provisions of federal law relating to the taxation of specified trusts. Existing law exempts from tax for the taxable year any charitable remainder annuity trust or charitable remainder unitrust, subject to specified requirements, including that the value of the charitable remainder interest must be at least 10% of the initial fair market value of all of the property placed in trust.
This bill would, for taxable years beginning January 1, 2018, require that the charitable remainder interest must be at least 40% of the initial fair market value of all of the property placed in trust.
(2) The Personal Income Tax Law and Corporate Tax Law provide, in modified conformity with federal law, that for purposes of calculating the gain or loss upon the disposition of property, generally the basis of property acquired from a decedent is the fair market value at the date of death.
This bill would revise this provision with regard to decedents who died on or after January 1, 2018, to provide that no adjustment shall be allowed where the person who acquires the property has an adjusted gross income or net income over specified amounts.
(3) The Corporation Tax Law allows various deductions in computing the income that is subject to the taxes imposed by that law. That law, in modified conformity, applies provisions of the Internal Revenue Code relating to business or trade deductions. The Internal Revenue Code provides that a publicly held corporation may not deduct, as a trade or business expense, applicable employee remuneration, as defined, paid to the chief executive officer or other specified employees to the extent that the amount of that compensation exceeds $1,000,000 in the taxable year. The term “applicable employee remuneration” does not include any compensation payable solely on account of the chief executive officer based on commission or on meeting certain performance goals, thereby allowing a deduction for that compensation even if it exceeds $1,000,000.
This bill, for taxable years beginning January 1, 2017, would eliminate those deductions for compensation payable to the chief executive officer for based on commission or on meeting certain performance goals under the Corporation Tax Law, thereby no longer conforming to federal income tax law.
(4) The Corporation Tax Law allows corporations to elect whether their income is determined on a “water’s-edge” basis or on a worldwide unitary basis.
This bill would remove the water’s-edge election for taxable years beginning on or after January 1, 2017, and would specify that existing electors would be unable to elect to file using the water’s-edge method for taxable years beginning on or after January 1, 2023.
(5) This bill would include a change in state statute that would result in a taxpayer paying a higher tax within the meaning of Section 3 of Article XIII A of the California Constitution, and thus would require for passage the approval of 2/3 of the membership of each house of the Legislature.
This bill would take effect immediately as a tax levy.
Vote: 2/3   Appropriation: NO   Fiscal Committee: YES   Local Program: NO  

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


SECTION 1.

 Section 17755 of the Revenue and Taxation Code is amended to read:

17755.
 (a) For taxable years beginning on or after January 1, 2014, Section 664(c)(2) of the Internal Revenue Code, relating to excise tax, shall not apply and, in lieu thereof, the unrelated business taxable income, as defined in Section 23732, of every charitable remainder annuity trust or charitable remainder unitrust shall be subject to tax under Section 17651.
(b) For taxable years beginning on or after January 1, 2018, Section 664(d)(1)(D) of the Internal Revenue Code is modified by substituting “40 percent” for “10 percent.”

SEC. 2.

 Section 18031 of the Revenue and Taxation Code is amended to read:

18031.
 (a) Subchapter O of Chapter 1 of Subtitle A of the Internal Revenue Code, relating to gain or loss on disposition of property, shall apply, except as otherwise provided.
(b) (1) The basis of property in the hands of a person who acquires that property from a decedent or to whom property passed from a decedent, unless such property is sold, exchanged or otherwise disposed of before the decedent’s death by that person, shall be determined under Section 1015 of the Internal Revenue Code, relating to basis of property acquired by gifts and transfers in trust, for those persons described in paragraphs (2) and (3), and Section 1014(a), relating to in general, and Section 1014(f) of the Internal Revenue Code, as added by Section 2004(a) of Public Law 114-41, relating to basis must be consistent with estate tax return, shall not apply to those persons.
(2) For individuals with the following adjusted gross income for the taxable year of the decedent’s death:
(A) Two million dollars ($2,000,000) or greater in the case of a joint return or surviving spouse, as defined in Section 17046.
(B) One million five hundred thousand dollars ($1,500,000) or greater in the case of a head of household, as defined in Section 17042.
(C) One million dollars ($1,000,000) or greater for all other filers.
(3) For persons other than individuals with total income for the taxable year of the decedent’s death of one million dollars ( $1,000,000) or greater.
(4) An adjustment shall not be allowed to increase the basis of inherited property to which the rules of this subdivision apply with respect to any federal estate tax paid on the acquisition of such property.
(5) This subdivision shall apply to property acquired or inherited from decedents who died on or after January 1, 2018.

SEC. 3.

 Section 24343 of the Revenue and Taxation Code is amended to read:

24343.
 (a) Section 162 of the Internal Revenue Code, relating to trade or business expenses, shall apply, except as otherwise provided.
(b) For purposes of applying Section 162 of the Internal Revenue Code, any references to Section 170 of the Internal Revenue Code Code, relating to charitable, etc, contributions and gifts, shall be modified to refer to Sections 24357 to 24359.1, inclusive, of this part.
(c) For taxable years beginning on or after January 1, 2017, Section 162(m)(4)(B) of the Internal Revenue Code, relating to exception for remuneration payable on commission basis, and Section (m)(4)(C) of the Internal Revenue Code, relating to other performance-based compensation, shall not apply.

SEC. 4.

 Section 24911 of the Revenue and Taxation Code is amended to read:

24911.
 (a) The adjusted basis for determining the gain or loss from the sale or other disposition of property, whenever acquired, shall be the basis (determined basis, determined under Section 24912) 24912, or other applicable sections of Chapter 15 (relating 15, relating to gain or loss on disposition of property) property, and Chapter 8 (relating 8, relating to corporate distributions and adjustments), adjustments, adjusted as provided in Sections 24916 and 24917.
(b) If a deduction is allowable under Section 24357 (relating 24357, relating to charitable contributions) contributions, by reason of a sale, then the adjusted basis for determining the gain from such sale shall be that portion of the adjusted basis which bears the same ratio to the adjusted basis as the amount realized bears to the fair market value of the property.
(c) (1) The basis of property in the hands of a person who acquires that property from a decedent or to whom property passed from a decedent, unless such property is sold, exchanged or otherwise disposed of before the decedent’s death by that person, shall be determined under Section 1015 of the Internal Revenue Code for persons subject to tax under this part with net income for the taxable year of the decedent’s death of one million dollars ($1,000,000) or greater and Section 1014(a), relating to in general, and Section 1014(f) of the Internal Revenue Code, as added by Section 2004(a) of Public Law 114-41, relating to basis must be consistent with estate tax return, shall not apply to those persons.
(2) An adjustment shall not be allowed to increase the basis of inherited property to which the rules of this subdivision apply with respect to any federal estate tax paid on the acquisition of that property.
(3) This subdivision shall apply to property acquired or inherited from decedents who died on or after January 1, 2018.

SEC. 5.

 Section 25110 of the Revenue and Taxation Code is amended to read:

25110.
 (a) Notwithstanding Section 25101, for taxable years beginning before January 1, 2023, a qualified taxpayer, as defined in paragraph (2) of subdivision (b), that is subject to the tax imposed under this part, may elect to determine its income derived from or attributable to sources within this state pursuant to a water’s-edge election in accordance with the provisions of this part, as modified by this article. A taxpayer, that makes a water’s-edge election on or after January 1, 2006, shall take into account that portion of its own income and apportionment factors and the income and apportionment factors of its affiliated entities to the extent provided below:
(1) The entire income and apportionment factors of any of the following corporations:
(A) Domestic international sales corporations, as described in Sections 991 to 994, inclusive, of the Internal Revenue Code and foreign sales corporations as described in Sections 921 to 927, inclusive, of the Internal Revenue Code.
(B) Any corporation (other than a bank), regardless of the place where it is incorporated if the average of its property, payroll, and sales factors within the United States is 20 percent or more.
(C) Corporations that are incorporated in the United States, excluding corporations making an election pursuant to Sections 931 to 936, inclusive, of the Internal Revenue Code.
(D) Export trade corporations, as described in Sections 970 to 972, inclusive, of the Internal Revenue Code.
(2) (A) With respect to a corporation that is not described in subparagraphs (A), (B), (C), and (D) of paragraph (1), as provided in either one or both of the following clauses:
(i) The income and apportionment factors of that corporation to the extent of its income derived from or attributable to sources within the United States and its factors assignable to a location within the United States in accordance with paragraph (3) of subdivision (b). Income of that corporation derived from or attributable to sources within the United States as determined by federal income tax laws shall be limited to, and determined from, the books of account maintained by the corporation with respect to its activities conducted within the United States.
(ii) The income and apportionment factors of that corporation that is a “controlled foreign corporation,” as defined in Section 957 of the Internal Revenue Code, to the extent determined by multiplying the income and apportionment factors of that corporation without application of this subparagraph by a fraction not to exceed one, the numerator of which is the “Subpart F income” of that corporation for that taxable year and the denominator of which is the “earnings and profits” of that corporation for that taxable year.
(B) For purposes of this paragraph, both of the following apply:
(i) “Subpart F income” means “Subpart F income” as defined in Section 952 of the Internal Revenue Code.
(ii) “Earnings and profits” means “earnings and profits” as described in Section 964 of the Internal Revenue Code.
(3) The income and apportionment factors of the corporations described in this subdivision shall be taken into account only to the extent that they would have been taken into account had no election under this section been made.
(4) The Franchise Tax Board shall prescribe regulations to coordinate implementation of subparagraph (A) of paragraph (2) to prevent multiple inclusion or exclusion of income and factors in situations where the same item of income is described in both clauses.
(b) For purposes of this article and Section 24411, all of the following definitions apply:
(1) An “affiliated corporation” means a corporation that is a member of a commonly controlled group as defined in Section 25105.
(2) A “qualified taxpayer” means a corporation that does both of the following:
(A) Files with the state tax return, on which the water’s-edge election is made, a consent to the taking of depositions, at the time and place most reasonably convenient to all parties, from key domestic corporate individuals and to the acceptance of subpoenas duces tecum requiring reasonable production of documents to the Franchise Tax Board, as provided in Section 19504, by the State Board of Equalization, as provided in Section 5005 of Title 18 of the California Code of Regulations, or by the courts of this state, as provided in Chapter 2 (commencing with Section 1985) of Title 3 of Part 4 of, and Chapter 9 (commencing with Section 2025.010) of Title 4 of Part 4 of, the Code of Civil Procedure. The consent relates to issues of jurisdiction and service and does not waive any defenses that a taxpayer may otherwise have. The consent shall remain in effect as long as the water’s-edge election is in effect, and shall be limited to providing that information necessary to review or adjust income or deductions in a manner authorized by Section 482, 861, Subpart F of Part III of Subchapter N, or similar provisions, of the Internal Revenue Code, together with the regulations adopted pursuant to those provisions, and for the conduct of an investigation with respect to any unitary business in which the taxpayer may be involved.
(B) Agrees that, for purposes of this article, dividends received by any corporation whose income and apportionment factors are taken into account pursuant to subdivision (a) from either of the following are functionally related dividends and shall be presumed to be business income:
(i) A corporation of which more than 50 percent of the voting stock is owned, directly or indirectly, by members of the unitary group and which is engaged in the same general line of business.
(ii) Any corporation that is either a significant source of supply for the unitary business or a significant purchaser of the output of the unitary business, or that sells a significant part of its output or obtains a significant part of its raw materials or input from the unitary business. “Significant,” as used in this subparagraph, means an amount of 15 percent or more of either input or output.
All other dividends shall be classified as business or nonbusiness income without regard to this subparagraph.
(3) The definitions and locations of property, payroll, and sales shall be determined under the laws and regulations that set forth the apportionment formulas used by the individual states to assign net income subject to taxes on, or measured by, net income in that state. If a state does not impose a tax on, or measured by, net income or does not have laws or regulations with respect to the assignment of property, payroll, and sales, the laws and regulations provided in Article 2 (commencing with Section 25120) shall apply.
Sales shall be considered to be made to a state only if the corporation making the sale may otherwise be subject to a tax on, or measured by, net income under the Constitution or laws of the United States, and shall not include sales made to a corporation whose income and apportionment factors are taken into account pursuant to subdivision (a) in determining the amount of income of the taxpayer derived from or attributable to sources within this state.
(4) “The United States” means the 50 states of the United States and the District of Columbia.
(c) All references in this part to income determined pursuant to Section 25101 shall also mean income determined pursuant to this section.

SEC. 6.

 Section 25113 of the Revenue and Taxation Code is amended to read:

25113.
 (a) Except as provided in subdivision (f), for taxable years beginning on or after January 1, 2003, and before January 1, 2017, the election provided for in Section 25110 shall be made on an original, timely filed return for the year of the election. The election will be considered valid if both of the following conditions are satisfied:
(1) The tax is computed in a manner consistent with a water’s-edge election.
(2) A written notification of election is filed with the return on a form prescribed by the Franchise Tax Board. Pursuant to regulations promulgated under this section, the Franchise Tax Board may accept the filing of other objective evidence that supports the conclusion that a water’s-edge election was intended in lieu of notification on the designated form.
(b) Except as otherwise provided, a water’s-edge election shall be effective only if made by every member of the self-assessed combined reporting group that is subject to taxation under this part.
(1) An election made on a group return of a self-assessed combined reporting group shall constitute an election by each taxpayer member included in that group return, unless one of those taxpayers files a separate return in which no election is made and paragraph (2) does not apply.
(2) A taxpayer that fails to make an election on its own timely filed original return shall be deemed to have elected if either of the following applies:
(A) It has a parent corporation that is an electing taxpayer that included the income and apportionment factors of the nonelecting taxpayer in the self-assessed combined reporting group reflected in the electing parent’s timely filed original return, including a group return.
(B) The income and apportionment factors of the nonelecting taxpayer are reflected in the self-assessed combined reporting group of a timely filed original return of an electing taxpayer, and the notification of election filed by the electing taxpayer pursuant to paragraph (2) of subdivision (a) is signed by an officer or other authorized agent of either a parent corporation of the nonelecting taxpayer or another corporation with authority to bind the nonelecting taxpayer to an election.
(3) For purposes of this subdivision, a “parent corporation” of the taxpayer is a corporation that owns or constructively owns stock possessing more than 50 percent of the voting power of the taxpayer as determined under subdivisions (e) and (f) of Section 25105.
(4) If a corporation that is a member of a combined reporting group is not itself subject to taxation under this part in the year for which the water’s-edge election is made, but subsequently becomes subject to taxation under this part, that corporation shall be deemed to have elected with the other taxpayer members of the combined reporting group.
(5) A taxpayer that is engaged in more than one apportioning trade or business as defined in paragraph (6) of subdivision (d) of Section 25128 may make a separate election for each apportioning trade or business.
(c) A water’s-edge election shall remain in effect or be terminated in accordance with this subdivision.
(1) Except as otherwise provided in this subdivision, if one or more electing taxpayer members of a combined reporting group later become disaffiliated or otherwise cease to be included in the combined reporting group, the water’s-edge election shall remain in effect as to both the departing taxpayer members and any remaining taxpayer members.
(2) If an electing taxpayer and a nonelecting taxpayer become members of a new unitary affiliate group, the nonelecting taxpayer shall be deemed to have elected if the value of the total business assets of the electing taxpayer, and its component unitary group, if any, is larger than the value of the total business assets of the nonelecting taxpayer, and its component unitary group, if any. Otherwise, the water’s-edge election shall be automatically terminated at the time the electing members become part of the combined report. For purposes of applying paragraphs (9) and (10), the commencement date of the deemed election shall be the same as the commencement date of the electing taxpayers.
(3) If taxpayers filing under water’s-edge elections with different commencement dates become members of a new unitary affiliate group, the earliest election date shall be deemed to apply to all electing taxpayers if the total business assets of the earlier electing taxpayer, and its component unitary group, if any, is larger than the value of the total business assets of the later electing taxpayer, and its component unitary group, if any. Otherwise, the later election commencement date shall apply to all electing taxpayers.
(4) (A) If a taxpayer with an election that has been terminated under paragraph (9) or (10) becomes a member of a new unitary affiliate group that includes another electing or nonelecting taxpayer not affected by those paragraphs, any water’s-edge election of the other taxpayer member, if applicable, shall terminate, and any restrictions on making a new water’s-edge election, relating to an election terminated under those paragraphs, shall apply to all taxpayer members of the new unitary affiliate group if the total business assets of the taxpayer with the terminated election, and its component unitary group, if any, is larger than the other taxpayer, and its component unitary group, if any. Otherwise, paragraph (2) shall apply, if applicable. If paragraph (2) does not apply, all taxpayer members of the new unitary affiliate group will be treated as nonelecting taxpayers that are not subject to any restrictions on making a new water’s-edge election.
(B) If two nonelecting taxpayers with different termination dates under paragraph (9) or (10) become members of a new unitary affiliate group, the earliest termination date shall be deemed to apply to all nonelecting taxpayers, as well as any restrictions on making a new water’s-edge election relating to that termination, if the total business assets of the earlier terminating taxpayer, and its component unitary group, if any, is larger than the value of the total business assets of the later terminating taxpayer, and its component unitary group, if any. Otherwise, the later termination date, and the related restrictions on making a new water’s-edge election, shall apply to all taxpayer members of the new unitary affiliate group.
(5) (A) Except as provided in subparagraph (B), if one or more electing taxpayers did not report their income and apportionment factors as members of a combined reporting group with one or more nonelecting taxpayers, and, pursuant to a Franchise Tax Board audit determination, the nonelecting taxpayers, are properly in the same combined reporting group as the electing taxpayers, the water’s-edge election of the electing taxpayers shall remain in effect and the nonelecting taxpayers shall be deemed to have made a water’s-edge election. The commencement date of the deemed water’s-edge election shall be the same as the commencement date of the electing taxpayers.
(B) Subparagraph (A) may not apply if the value of total business assets of the electing taxpayers does not exceed the value of total business assets of the nonelecting taxpayers. In that event, the water’s-edge election of each electing taxpayer is terminated as of the date the nonelecting taxpayers are, pursuant to the audit determination described in subparagraph (A), properly included in the same combined reporting group as the electing taxpayers.
(C) For purposes of applying the business asset test of this paragraph, the term “business assets” shall have the same meaning as subparagraph (A) of paragraph (6), except that the business assets of other members of the unitary affiliate group that are not taxpayers shall not be taken into account.
(D) Notwithstanding subparagraph (A), nonelecting taxpayers may not be deemed to have made a water’s-edge election if the Franchise Tax Board audit determination described in subparagraph (A) is withdrawn or otherwise overturned.
(6) For purposes of paragraphs (2) to (5), inclusive, the following shall apply:
(A) “Business assets” are assets, including intangible assets, other than stock of a member of the unitary affiliate group, which are used in the conduct of the business of the unitary affiliate group or would produce business income to the unitary affiliate group, if an election were not in place, if the assets were sold. Business assets shall be valued at net book value.
(B) The phrase “unitary affiliate group” refers to all of those corporations that would constitute a unitary group if a water’s-edge election were not made.
(C) The phrase “new unitary affiliate group” refers to a unitary affiliate group that is created by a new affiliation of two or more corporations, or by the addition of one or more new members to an existing unitary affiliate group.
(D) The phrase “component unitary group” means that portion of a group of corporations that have become members of a new unitary affiliate group that were members of their own respective unitary affiliate group prior to entering the new unitary affiliate group, disregarding any corporations that did not become part of the new unitary group.
(7) In the application of paragraphs (2) to (4), inclusive, a series of acquisitions as steps of a single transaction shall be aggregated as a single change of membership.
(8) In the event of a merger or consolidation, the water’s-edge status and election commencement date or termination date of the surviving corporation shall be consistent with the result that would have been obtained under paragraphs (2) to (4), inclusive, if the surviving corporation had acquired the stock of the transferor corporation.
(9) A water’s-edge election may be terminated without the consent of the Franchise Tax Board after it has been in effect for at least 84 months. The termination shall be made on an original, timely filed return for the first year in which the water’s-edge election is to be terminated. To be effective, the termination shall be made by every taxpayer that is a member of the water’s-edge group in the same manner as the election provided under subdivisions (a) and (b).
(10) A water’s-edge election may be terminated before the 84-month period described in paragraph (9) has elapsed, but only with the consent of the Franchise Tax Board. A request for termination shall be made at the time and in the manner specified by the Franchise Tax Board.
(A) The request may be granted for good cause. For purposes of this section, good cause shall have the same meaning as specified in Treasury Regulations Section 1.1502-75(c).
(B) The Franchise Tax Board shall consent to a termination requested by all members of a water’s-edge group, if the purpose of the request is to permit the state to contract with an expatriate corporation, or its subsidiary, pursuant to paragraph (2) of subdivision (b) of Section 10286 of the Public Contract Code. A water’s-edge election terminated pursuant to this subparagraph shall, however, be effective for the year in which the expatriate corporation, or its subsidiary, enters into the contract with the state.
(11) Except for deemed elections as provided in paragraphs (2), (4), and (5), if a water’s-edge election is terminated under paragraph (9) or (10), another election may not be made under this section for any taxable year that begins within the 84-month period following the last day of the election period that was terminated. The Franchise Tax Board may waive the application of this prohibition period for good cause.
(12) A water’s-edge election shall remain in effect until terminated.
(13) (A) Notwithstanding anything to the contrary in this section, a water’s-edge election shall not apply with respect to taxable years beginning on or after January 1, 2023.
(B) In addition to regulations prescribed pursuant to subdivision (e), the Franchise Tax Board may prescribe regulations to revise income, deductions, or basis as may be necessary or appropriate as a result of the termination of a water’s-edge election pursuant to the act adding this paragraph.
(d) For purposes of this section, the following shall apply:
(1) A “combined reporting group” means those corporations whose income and apportionment factors are properly considered pursuant to this chapter in computing the income of the individual taxpayer that is derived from or attributable to sources within this state, taking into account a valid water’s-edge election.
(2) A “group return” refers to the single return which taxpayer members of a combined reporting group may elect by contract to file, in the form and manner prescribed by the Franchise Tax Board, in lieu of filing their own respective returns.
(3) A “self-assessed combined reporting group” means that group of corporations whose income and apportionment factors are reflected in a combined report prepared pursuant to this chapter in a timely filed return, taking into account the effects of a purported water’s-edge election, whether or not the membership of the corporations in that combined report was correctly determined.
(e) The Franchise Tax Board may prescribe any regulations as may be necessary or appropriate to carry out the purposes of this section.
(f) To the extent that a taxpayer would have been required to file on a water’s-edge basis in its first taxable year beginning on or after January 1, 2003, pursuant to a water’s-edge election made in a prior year under Section 25111, the terms of Section 25111 may not apply and the election shall be deemed to have been made under the terms of this section. However, the commencement date of the election made in a prior year under Section 25111 shall continue to be treated as the commencement date of the water’s-edge election period for purposes of applying this section.

SEC. 7.

 It is the intent of the Legislature to enact legislation for taxable years beginning on or after January 1, 2017, to modify the way payments are taxed to related parties, as defined in Section 267, 318, or 707 of the Internal Revenue Code.

SEC. 8.

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