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AB-483 Bank and corporation taxes: deduction: insurance company dividends.(2001-2002)



Current Version: 08/27/01 - Amended Senate

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AB483:v97#DOCUMENT

Amended  IN  Assembly  May 16, 2001
Amended  IN  Senate  August 27, 2001

CALIFORNIA LEGISLATURE— 2001–2002 REGULAR SESSION

Assembly Bill
No. 483

Introduced  by  Assembly Member Shelley
 (Coauthor(s): Assembly Member Harman, Nation, Oropeza)
 (Coauthor(s): Senator Brulte)

February 21, 2001

An act to amend Sections 17052.12 and 23609 Section 24410 of the Revenue and Taxation Code, relating to taxation, to take effect immediately, tax levy.


LEGISLATIVE COUNSEL'S DIGEST


AB 483, as amended, Shelley. Personal income taxes: bank Bank and corporation taxes: research and development deduction: insurance company dividends.

The Personal Income Tax Law and the Bank and Corporation Tax Law, by reference to a specified federal statute, allow a credit against taxes imposed by those laws for increasing research expenses, as defined. In general, the amount of the credit under both laws is equal to 15% of the excess of the qualified research expenses, as defined, for the taxable year over the base amount and, in addition, for purposes of the Bank and Corporation Tax Law, 24% of the basic research payments, as defined. Existing law defines the term “base amount” to mean the product of the average annual gross receipts of the taxpayer for each of the specified years preceding the taxable or income year and the fixed-base percentage, as defined, but in no event less than 50% of the qualified research expenses for the taxable or income year.

This bill would, under both laws, for each taxable year beginning on or after January 1, 2001, provide that the credit for increasing research expenses is equal to 16% of the excess qualified research expenses.

The Bank and Corporation Tax Law allows various deductions in computing the income that is subject to the taxes imposed by those laws, including a deduction for dividends received by a corporation that is commercially domiciled in California from an insurance company that is subject to taxation under a specified statute, and 80% of whose stock is owned by the corporation receiving the dividends.
This bill would modify this deduction to instead provide that the deduction is not limited to use by corporations that are commercially domiciled in California. This bill also would make legislative findings and declarations as to the intent of this deduction, and that the bill’s provisions serve to clarify existing law in the wake of the California Court of Appeal decision in the case of Ceridian Corporation v. Franchise Tax Board.
This bill would take effect immediately as a tax levy.
Vote: MAJORITY   Appropriation: NO   Fiscal Committee: YES   Local Program: NO  

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


SECTION 1.

Section 17052.12 of the Revenue and Taxation

Section 24410 of the Revenue and Taxation Code is amended to read:

24410.
 (a) Dividends There shall be allowed as a deduction to a taxpayer dividends received by a corporation commercially domiciled in California during the taxable year from an insurance company subject to tax imposed by Part 7 (commencing with Section 12001) of this division at the time of the payment of the dividends and at least 80 percent of each class of its stock then being owned by the corporation receiving the dividend.

(b)The deduction under this section shall be limited to that portion of the dividends received which are determined to be paid from income from California sources determined pursuant to subdivision (c).

(c)Dividends paid from California sources shall be determined by multiplying the amount of the dividends by an apportionment factor equal to the ratio of gross income from California sources to all gross income of the company. Gross income from California sources equals total gross income less dividends from other insurance companies multiplied by the average of the following three factors:

(1)A gross receipts factor, the denominator of which shall include all receipts, other than dividends from another insurance company, regardless of the nature or source from which derived. The numerator of which shall include all gross receipts, other than dividends from another insurance company, derived from or attributable to this state. With respect to premiums, only receipts which were subject to tax under Part 7 (commencing with Section 12001) of this division, shall be included in the numerator, and with respect to income from intangibles they shall be attributable to the commercial domicile of the insurance company.

(2)A payroll factor determined under the provisions of the Uniform Division of Income for Tax Purposes Act, Chapter 17, Article 2 of this part.

(3)A property factor, determined under the provisions of the Uniform Division of Income for Tax Purposes Act provided for in Article 2 (commencing with Section 25120) of Chapter 17 of this part, provided that for the purposes of this paragraph the property factor shall include all intangible investment property, which intangible property shall be allocated to the commercial domicile of that insurance company.

(4)Plus the portion of the dividends received from another insurance company determined to be paid from California source income pursuant to the formula set forth in paragraphs (1) through (3) based upon the receipts, payroll and property of that other insurance company.

(d)The insurance company from which the dividends are received shall furnish that information as the Franchise Tax Board may require to determine the allocation formula and the Franchise Tax Board may adopt those regulations as it deems necessary to effectuate the purpose of this section.

(b) Nothing in this section shall be construed to limit or affect in any manner any other provisions of this part.

SEC. 2.

 (a) The Legislature finds and declares that the amendments made by this act to Section 24410 of the Revenue and Taxation Code are a clarification of, and do not constitute a change in, existing law for all of the following reasons:
(1) Section 23057 of the Revenue and Taxation Code provides that phrases or sections within the Bank and Corporation Tax Law that have been held unconstitutional and that are reasonably separable from the remainder of the law will not affect the application of the remainder of the law to other taxpayers.
(2) The California Court of Appeal, in a final decision in the case of Ceridian Corp. v. Franchise Tax Bd. (2000) 85 Cal.App.4th 875 (modified by 86 Cal.App.4th 383), held that the portions of Section 24410 of the Revenue and Taxation Code that refer to corporations “commercially domiciled” in California, and to insurance company dividends paid from “income from California sources” violated the Commerce Clause in Clause 3 of Section 8 or Article I of the United States Constitution.
(3) The provisions of Section 24410 of the Revenue and Taxation Code that were held unconstitutional are reasonably separable from the remainder of that section, and therefore the unconstitutional provisions are hereby severed as a matter of law under Section 23057 of the Revenue and Taxation Code.
(b) The Legislature further finds and declares that the reference in subdivision (a) of Section 24410 of the Revenue and Taxation Code to insurance companies “subject to tax imposed by Part 7” does not require that an insurance company actually pay California gross premiums taxes for that insurance company’s dividends to qualify for the deduction provided for in that section, but rather that the reference serves to identify the character of the dividend payor as an insurance company that would pay a California gross premiums tax if the insurance company was subject to the taxing jurisdiction of the state regardless of whether or not the insurance company was subject to the taxing jurisdiction of the state.

SEC. 3.

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

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, and before January 1, 2001, the reference to “20 percent” in Section 41(a)(1) of the Internal Revenue Code is modified to read “15 percent.”

(4)For each taxable year beginning on or after January 1, 2001, the reference to “20 percent” in Section 41(a)(1) of the Internal Revenue Codeis modified to read “16 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 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 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 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 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 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 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.

SEC. 2.Section 23609 of the Revenue and Taxation Code is amended to read:
23609.

For each income 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 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 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 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 year beginning on or after January 1, 2000, and before January 1, 2001, 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.”

(4)For each taxable year beginning on or after January 1, 2001, 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 “16 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 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 year beginning on or after January 1, 1998, and before January 1, 2000:

(A)The reference to “1.65 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 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 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 year beginning on or after January 1, 2000:

(A)The reference to “1.65 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 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 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 year of the taxpayer beginning on or after January 1, 1998. That election shall apply to the income year for which made and all succeeding income 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 the 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 year exceeds the limitation of Section 41(g) of the Internal Revenue Code, that amount may be carried over to other income 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 year.
SEC. 3.

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