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AB-2328 Corporation tax: federal conformity.(2003-2004)



Current Version: 09/25/04 - Chaptered

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AB2328:v91#DOCUMENT

Assembly Bill No. 2328
CHAPTER 782

An act to amend Sections 23809 and 24654 of the Revenue and Taxation Code, relating to taxation, to take effect immediately, tax levy.

[ Filed with Secretary of State  September 25, 2004. Approved by Governor  September 24, 2004. ]

LEGISLATIVE COUNSEL'S DIGEST


AB 2328, Wyland. Corporation tax: federal conformity.
The Corporation Tax Law provides that, for taxable years beginning on or after January 1, 2002, corporations that have elected to be taxed as “S” corporations for federal tax purposes are deemed to be “S” corporations for California income tax purposes, unless the entity is prohibited from being a California “S” corporation. The Corporation Tax Law, in modified conformity to federal income tax laws, provides for the specified tax treatment of “S” corporations and their shareholders. Among other things, that law imposes a tax on built-in gains, attributable to California sources, derived by an “S” corporation from the disposition of its assets that appreciated in value during the years when the “S” corporation was a “C” corporation, as provided.
This bill, for taxable years beginning on or after January 1, 2002, would specify that the built-in gain provisions in the case of a “C” corporation, that became an “S” corporation for state tax purposes as a result of the enactment of Chapter 35 of the Statutes of 2002, as amended by Chapter 807 of the Statutes of 2002, would apply based on the effective date of the election by that corporation to be treated as an “S” corporation for federal tax purposes, regardless of the effective date for state tax purposes. This bill would declare that the retroactive application of the provisions of the bill serves a public purpose by ensuring the fair and consistent application of California tax law, and by avoiding possible legal challenges to that law or its application.
Existing law, in modified conformity to federal income tax laws, limits the use of a cash method of accounting in the case of a “C” corporation, a partnership that has a “C” corporation as a partner, and a tax shelter, but provides an exemption, among others, for the amounts received by a person using an accrual method of accounting for the performance of services.
This bill would provide additional state income and corporation tax law conformity with federal income tax laws by adopting specified provisions of the Jobs and Growth Tax Relief Reconciliation Act of 2003 with respect to the accounting of amounts to be received by a person for the performance of services by that person.
This bill would take effect immediately as a tax levy.

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


SECTION 1.

 Section 23809 of the Revenue and Taxation Code is amended to read:

23809.
 There is hereby imposed a tax on built-in gains attributable to California sources, determined in accordance with the provisions of Section 1374 of the Internal Revenue Code, relating to tax imposed on certain built-in gains, as modified by this section.
(a) (1) The rate of tax specified in Section 1374(b)(1) of the Internal Revenue Code shall be equal to the rate of tax imposed under Section 23151 in lieu of the rate of tax specified in Section 11(b) of the Internal Revenue Code.
(2) In the case of an “S” corporation that is also a financial corporation, the rate of tax specified in paragraph (1) shall be increased by the excess of the rate imposed under Section 23183 over the rate imposed under Section 23151.
(b) The provisions of Section 1374(b)(3) of the Internal Revenue Code, relating to credits, are modified to provide that the tax imposed under subdivision (a) may not be reduced by any credits allowed under this part.
(c) The provisions of Section 1374(b)(4) of the Internal Revenue Code, relating to coordination with Section 1201(a), do not apply.
(d) (1) For corporations described in paragraph (2), the provisions of Sections 1374(c)(1) and 1374(d)(7) of the Internal Revenue Code apply, based upon the effective date of the election to be treated as an “S” corporation for federal tax purposes, regardless of the date on which the corporation became an “S” corporation for state tax purposes.
(2) This subdivision applies to a corporation that, for its last taxable year beginning before January 1, 2002, was an “S” corporation for federal tax purposes and a “C” corporation for purposes of Part 10 (commencing with Section 17001), Part 10.2 (commencing with Section 18401), and this part, and, as a result of the enactment of Chapter 35 of the Statutes of 2002, is an “S” corporation for the corporation’s taxable years beginning on or after January 1, 2002.
(e) The amendments to this section made by the act adding this subdivision shall apply to taxable years beginning on or after January 1, 2002.

SEC. 2.

 Section 24654 of the Revenue and Taxation Code is amended to read:

24654.
 (a) Section 448 of the Internal Revenue Code, relating to limitation on use of cash method of accounting, shall apply, except as otherwise provided.
(b) For purposes of applying Section 448 of the Internal Revenue Code, Sections 801(d)(2), 801(d)(3), and 801(d)(5) of the Tax Reform Act of 1986 (Public Law 99-514), as modified by Section 1008(a) of Public Law 100-647, shall apply to each taxable year beginning on or after January 1, 1987.
(c) For purposes of applying Section 448 of the Internal Revenue Code, Section 403(a) of the Job Creation and Worker Assistance Act of 2002 (Public Law 107-147) shall apply to each taxable year beginning on or after January 1, 2003.

SEC. 3.

 The Legislature finds and declares that the application of this act to taxable years beginning on and after January 1, 2002, serves a public purpose by ensuring the fair and consistent application of California tax law, and by avoiding possible legal challenges to that law or its application.

SEC. 4.

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