Code Section Group

Revenue and Taxation Code - RTC

DIVISION 2. OTHER TAXES [6001 - 61045]

  ( Heading of Division 2 amended by Stats. 1968, Ch. 279. )

PART 11. CORPORATION TAX LAW [23001 - 25141]

  ( Heading of Part 11 amended by Stats. 2001, Ch. 543, Sec. 21. )

CHAPTER 13. Accounting Periods and Methods of Accounting [24631 - 24726]

  ( Chapter 13 added by Stats. 1955, Ch. 938. )

ARTICLE 3. Year of Inclusion [24661 - 24679]
  ( Article 3 added by Stats. 1955, Ch. 938. )

24661.
  

Section 451 of the Internal Revenue Code, relating to the general rule for taxable year of inclusion, shall apply, except as otherwise provided.

(Amended by Stats. 1994, Ch. 1243, Sec. 66. Effective September 30, 1994.)

24661.3.
  

(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 12, 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 (commencing with Section 17001), or Part 10.2 (commencing with Section 18401).

(2) In order to provide farmers with the same tax treatment for all payments in years beginning before January 1, 2002, with respect to production flexibility contract payments as provided 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, 2002, that 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 (commencing with Section 17001), or Part 10.2 (commencing with Section 18401).

(Added by Stats. 2002, Ch. 35, Sec. 54. Effective May 8, 2002.)

24661.5.
  

Section 451(e)(3) of the Internal Revenue Code, relating to special election rule, is modified by substituting the phrase “subdivision (b) of Section 24949.1” in lieu of the phrase “section 1033(e)(2)” contained therein.

(Amended by Stats. 2005, Ch. 691, Sec. 69. Effective October 7, 2005.)

24661.6.
  

Section 451(i) of the Internal Revenue Code, relating to special rule for sales or dispositions to implement Federal Energy Regulatory Commission or state electric restructuring policy, shall not apply.

(Added by Stats. 2005, Ch. 691, Sec. 70. Effective October 7, 2005.)

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)(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.

(Amended by Stats. 2002, Ch. 807, Sec. 19. Effective September 23, 2002.)

24668.1.
  

Any taxpayer who disposes of property as a result of the exercise of the power of requisition or condemnation may, at his or her election, have the income derived from that disposition taken into account pursuant to Section 24667, if the taxpayer and the acquiring entity have, in conformity with Section 1263.015 of the Code of Civil Procedure or Section 15854.1 of the Government Code, contracted for the payment of compensation for the acquisition in a manner which satisfies the requirements of Section 24667.

(Added by Stats. 1982, Ch. 1368, Sec. 4.)

24672.
  

(a) Where a taxpayer reports income arising from the sale or other disposition of property as provided in this article, and the entire income therefrom has not been reported prior to the year that the taxpayer ceases to be subject to the tax imposed by Chapter 2 (commencing with Section 23101) or Chapter 3 (commencing with Section 23501), the unreported income shall be included in the measure of the tax for the last year in which the taxpayer is subject to the tax imposed by Chapter 2 (commencing with Section 23101) or Chapter 3 (commencing with Section 23501).

(b) Subdivision (a) shall not be applicable where the installment obligation is transferred pursuant to a reorganization (as defined in Section 368(a) of the Internal Revenue Code) to another taxpayer that is a party to the reorganization (as defined in Section 368(b) of the Internal Revenue Code) subject to tax under the same chapter as the transferor, or is transferred to any exempt nonprofit cemetery corporation as defined in Section 23701c of this code.

(c) The determination of any deficiency resulting from this section shall be made under Article 3 (commencing with Section 19032) of Chapter 4 of Part 10.2, but the period of limitation under that article, and the accrual of interest under Article 6 (commencing with Section 19101) of Chapter 4 of Part 10.2, shall commence on the date the taxpayer ceases to be subject to the tax imposed by Chapter 2 (commencing with Section 23101) or Chapter 3 (commencing with Section 23501).

(Amended by Stats. 1996, Ch. 952, Sec. 51. Effective January 1, 1997.)

24673.
  

Where a corporation subject to the tax imposed by Chapter 2 is engaged in the performance of a contract in this State which will require more than a year to complete, the Franchise Tax Board may require that the income from the contract be reported on the basis of percentage of completion unless the corporation furnishes bond or other security guaranteeing the payment of a tax measured by the income received on the completion of the contract even though the corporation is not doing business in this State in the year subsequent to the year of completion.

(Added by Stats. 1955, Ch. 938.)

24673.2.
  

(a) Section 460 of the Internal Revenue Code, relating to special rules for long-term contracts, shall apply, except as otherwise provided.

(b) (1) Section 804(d) of Public Law 99-514, relating to the effective date of modifications in the method of accounting for long-term contracts, shall apply to taxable years beginning on or after January 1, 1987.

(2) In the case of a contract entered into after February 28, 1986, during a taxable year beginning before January 1, 1987, an adjustment to income shall be made upon completion of the contract, if necessary, to correct any underreporting or overreporting of income, for purposes of this part, resulting from differences between state and federal law for the taxable year in which the contract began.

(c) (1) The amendments to Section 460 of the Internal Revenue Code made by Section 10203 of Public Law 100-203, relating to a reduction in the percentage of items taken into account under the completed contract method, shall apply to each taxable year beginning on or after January 1, 1990.

(2) In the case of a contract entered into after October 13, 1987, during a taxable year beginning before January 1, 1990, an adjustment to income shall be made upon completion of the contract, if necessary, to correct any underreporting or overreporting of income, for purposes of this part, resulting from differences between state and federal law for each taxable year beginning prior to January 1, 1990.

(d) (1) The amendments to Section 460 of the Internal Revenue Code made by Section 5041 of Public Law 100-647, relating to a reduction in the percentage of items taken into account under the completed contract method, shall apply to each taxable year beginning on or after January 1, 1990.

(2) In the case of a contract entered into after June 20, 1988, during a taxable year beginning before January 1, 1990, an adjustment to income shall be made upon completion of the contract, if necessary, to correct any underreporting or overreporting of income, for purposes of this part, resulting from differences between state and federal law for each taxable year beginning prior to January 1, 1990.

(e) (1) The amendments to Section 460 of the Internal Revenue Code made by Section 7621 of Public Law 101-239, relating to the repeal of the completed contract method of accounting for long-term contracts, shall apply to each taxable year beginning on or after January 1, 1990.

(2) In the case of a contract entered into after July 10, 1989, during a taxable year beginning on or before January 1, 1990, an adjustment to income shall be made upon completion of the contract, if necessary, to correct any underreporting or overreporting of income, for purposes of this part, resulting from differences between state and federal law for each taxable year beginning prior to January 1, 1990.

(f) For purposes of applying paragraphs (2) to (6), inclusive, of Section 460(b) of the Internal Revenue Code, relating to the look-back method, any adjustment to income computed under paragraph (2) of subdivision (b), (c), (d), or (e) shall be deemed to have been reported in the taxable year from which the adjustment arose, rather than the taxable year in which the contract was completed.

(g) (1) For contracts entered into on or after the effective date of the act adding this subdivision, the amendments made by Section 13102(d) of the Tax Cuts and Jobs Act (Public Law 115-97) to Section 460 of the Internal Revenue Code, relating to special rules for long-term contracts, shall apply, except as otherwise provided.

(2)  For contracts entered into on or after the effective date of the act adding this subdivision, the amendments made by Section 13102(e)(3) of the Tax Cuts and Jobs Act (Public Law 115-97), relating to exemption from percentage completion for long-term contracts, shall apply, expect as otherwise provided.

(3) (A) Any change in method of accounting made pursuant to this paragraph shall be treated for purposes of applying Section 24721, as initiated by the taxpayer and made with the consent of the Franchise Tax Board.

(B) Section 13102(e)(1) of the Tax Cuts and Jobs Act (Public Law 115-97) does not apply to this subdivision.

(C) Notwithstanding subparagraph (B), a taxpayer may elect to apply the provisions of this subdivision, where otherwise allowed, to contracts entered into on or after January 1, 2018, in taxable years ending after January 1, 2018.

(Amended by Stats. 2019, Ch. 39, Sec. 32. (AB 91) Effective July 1, 2019.)

24674.
  

(a) If, in the case of a taxpayer owning any non-interest-bearing obligation issued at a discount and redeemable for fixed amounts increasing at stated intervals the increase in the redemption price of such obligation occurring in the taxable year does not (under the method of accounting used in computing its income) constitute income to it in such year, such taxpayer may, at its election made in its return for any taxable year, treat such increase as income received in such taxable year. If any such election is made with respect to any such obligation, it shall apply also to all such obligations owned by the taxpayer at the beginning of the first taxable year to which it applies and to all such obligations thereafter acquired by it and shall be binding for all subsequent taxable years, unless on application by the taxpayer the Franchise Tax Board permits it, subject to such conditions as the Franchise Tax Board deems necessary, to change to a different method.

(b) In the case of any obligation—

(1) Of the United States; or

(2) Of a state, a territory, or a possession of the United States, or any political subdivision of any of the foregoing, or of the District of Columbia,

which is issued on a discount basis and payable without interest at a fixed maturity date not exceeding one year from the date of issue, the amount of discount at which such obligation is originally sold shall not be considered to accrue until the date on which such obligation is paid at maturity, sold, or otherwise disposed of.

(Amended by Stats. 2000, Ch. 862, Sec. 184. Effective January 1, 2001.)

24675.
  

If an amount representing compensatory damages is received or accrued by a taxpayer during a taxable year as the result of an award in a civil action for infringement of a patent issued by the United States, then the tax attributable to the inclusion of such amount in gross income for the taxable year shall not be greater than the aggregate of the increases in taxes which would have resulted if such amount had been included in gross income in equal installments for each month during which such infringement occurred.

(Amended by Stats. 2000, Ch. 862, Sec. 185. Effective January 1, 2001.)

24676.
  

(a) Prepaid subscription income to which this section applies shall be included in gross income for the taxable years during which the liability described in subsection (d)(2) exists.

(b) In the case of any prepaid subscription income to which this section applies—

(1) If the liability described in subsection (d)(2) ends, then so much of such income as was not includable in gross income under subsection (a) for preceding taxable years shall be included in gross income for the taxable year in which the liability ends.

(2) If the taxpayer ceases to be subject to tax measured by net income imposed under Chapter 2 (commencing at Section 23101) or Chapter 3 (commencing at Section 23501) of this part, then so much of such income as was not includable in gross income under subsection (a) for preceding taxable years shall be included in the measure of tax for the last year in which the taxpayer is subject to the tax measured by net income imposed under Chapter 2 or Chapter 3 of this part.

(c) (1) This section shall apply to prepaid subscription income if and only if the taxpayer makes an election under this section with respect to the trade or business in connection with which such income is received. The election shall be made in such manner as the Franchise Tax Board may by regulations prescribe. No election may be made with respect to a trade or business if in computing net income the cash receipts and disbursements method of accounting is used with respect to such trade or business.

(2) An election made under this section shall apply to all prepaid subscription income received in connection with the trade or business with respect to which the taxpayer has made the election; except that the taxpayer may, to the extent permitted under regulations prescribed by the Franchise Tax Board, include in gross income for the taxable year of receipt the entire amount of any prepaid subscription income if the liability from which it arose is to end within 12 months after the date of receipt. An election made under this section shall not apply to any prepaid subscription income received before the first taxable year for which the election is made.

(3) (A) A taxpayer may, with the consent of the Franchise Tax Board, make an election under this section at any time.

(B) A taxpayer may, without the consent of the Franchise Tax Board, make an election under this section for his first taxable year (i) which begins after December 31, 1960, and (ii) in which it receives prepaid subscription income in the trade or business. Such election shall be made not later than the time prescribed by law for filing the return for the taxable year (including extensions thereof) with respect to which such election is made.

(4) An election under this section shall be effective for the taxable year with respect to which it is first made and for all subsequent taxable years, unless the taxpayer secures the consent of the Franchise Tax Board to the revocation of such election. For purposes of this part, the computation of net income under an election made under this section shall be treated as a method of accounting.

(d) For purposes of this section—

(1) The term “prepaid subscription income” means any amount (includable in gross income) which is received in connection with, and is directly attributable to, a liability which extends beyond the close of the taxable year in which such amount is received, and which is income from a subscription to a newspaper, magazine, or other periodical.

(2) The term “liability” means a liability to furnish or deliver a newspaper, magazine, or other periodical.

(3) Prepaid subscription income shall be treated as received during the taxable year for which it is includable in gross income under Section 24661 (without regard to this section).

(e) Notwithstanding the provisions of this section, any taxpayer who has, for taxable years prior to the first taxable year to which this section applies, reported his income under an established and consistent method or practice of accounting for prepaid subscription income (to which this section would apply if an election were made) may continue to report his income for taxable years to which this part applies in accordance with such method or practice.

(Amended by Stats. 2000, Ch. 862, Sec. 186. Effective January 1, 2001.)

24676.5.
  

(a) A taxpayer who is on an accrual method of accounting may elect not to include in the gross income for the taxable year the income attributable to the qualified sale of any magazine, paperback, or record which is returned to the taxpayer before the close of the merchandise return period.

(b) For purposes of this section—

(1) The term “magazine” includes any other periodical.

(2) The term “paperback” means any book which has a flexible outer cover and the pages of which are affixed directly to such outer cover. Such term does not include a magazine.

(3) The term “record” means a disc, tape, or similar object on which musical, spoken, or other sounds are recorded.

(4) If a taxpayer makes qualified sales of more than one category of merchandise in connection with the same trade or business, this section shall be applied as if the qualified sales of each such category were made in connection with a separate trade or business. For purposes of the preceding sentence, magazines, paperbacks, and records shall each be treated as a separate category of merchandise.

(5) A sale of a magazine, paperback, or record is a qualified sale if—

(A) At the time of sale, the taxpayer has a legal obligation to adjust the sales price of such magazine, paperback, or record if it is not resold, and

(B) The sales price of such magazine, paperback, or record is adjusted by the taxpayer because of a failure to resell it.

(6) The amount excluded under this section with respect to any qualified sale shall be the lesser of—

(A) The amount covered by the legal obligation described in paragraph (5)(A), or

(B) The amount of the adjustment agreed to by the taxpayer before the close of the merchandise return period.

(7) (A) Except as provided in subparagraph (B), the term “merchandise return period” means, with respect to any taxable year—

(i) In the case of magazines, the period of 2 months and 15 days first occurring after the close of the taxable year, or

(ii) In the case of paperbacks and records, the period of 4 months and 15 days first occurring after the close of the taxable year.

(B) The taxpayer may select a shorter period than the applicable period set forth in subparagraph (A).

(C) Any change in the merchandise return period shall be treated as a change in the method of accounting.

(8) As prescribed by the Franchise Tax Board, the taxpayer may substitute, for the physical return of magazines, paperbacks, or records required by subdivision (a), certification or other evidence that the magazine, paperback, or record has not been resold and will not be resold if such evidence—

(A) Is in the possession of the taxpayer at the close of the merchandise return period, and

(B) Is satisfactory to the Franchise Tax Board.

(9) A repurchase by the taxpayer shall be treated as an adjustment of the sales price rather than as a resale.

(c) (1) This section shall apply to qualified sales of magazines, paperbacks, or records, as the case may be, if and only if the taxpayer makes an election under this section with respect to the trade or business in connection with which such sales are made. An election under this section may be made without the consent of the Franchise Tax Board. The election shall be made in such manner as the Franchise Tax Board may prescribe and shall be made for any taxable year not later than the time prescribed by law for filing the return for such taxable year (including extensions thereof).

(2) An election made under this section shall apply to all qualified sales of magazines, paperbacks, or records, as the case may be, made in connection with the trade or business with respect to which the taxpayer has made the election.

(3) An election under this section shall be effective for the taxable year for which it is made and for all subsequent taxable years, unless the taxpayer secures the consent of the Franchise Tax Board to the revocation of such election.

(4) Except to the extent inconsistent with the provisions of this section, for purposes of this subtitle, the computation of taxable income under an election made under this section shall be treated as a method of accounting.

(d) In applying Section 24723 with respect to any election under this section which applies to magazines, the period of taking into account any decrease in taxable income resulting from the application of subdivision (b) of Section 24721 shall be the taxable year for which the election is made and the four succeeding taxable years.

(e) (1) In the case of any election under this section which applies to paperbacks or records, in lieu of applying Sections 24721 through 24725, the taxpayer shall establish a suspense account for the trade or business for the taxable year for which the election is made.

(2) The opening balance of the account described in paragraph (1) for the first taxable year to which the election applies shall be the largest dollar amount of returned merchandise which would have been taken into account under this section for any of the three immediately preceding taxable years if this section had applied to such preceding three taxable years. This paragraph and paragraph (3) shall be applied by taking into account only amounts attributable to the trade or business for which such account is established.

(3) At the close of each taxable year the suspense account shall be—

(A) Reduced by the excess (if any) of—

(i) The opening balance of the suspense account for the taxable year, over

(ii) The amount excluded from gross income for the taxable year under subdivision (a), or

(B) Increased (but not in excess of the initial opening balance) by the excess (if any) of—

(i) The amount excluded from gross income for the taxable year under subdivision (a), over

(ii) The opening balance of the account for the taxable year.

(4) (A) In the case of any reduction under paragraph (3)(A) in the account for the taxable year, an amount equal to such reduction shall be excluded from gross income for such taxable year.

(B) In the case of any increase under paragraph (3)(B) in the account for the taxable year, an amount equal to such increase shall be included in gross income for such taxable year.

If the initial opening balance exceeds the dollar amount of returned merchandise which would have been taken into account under subdivision (a) for the taxable year preceding the first taxable year for which the election is effective if this section had applied to such preceding taxable year, then an amount equal to the amount of such excess shall be included in gross income for such first taxable year.

(5) The application of this subdivision with respect to a taxpayer which is a party to any transaction with respect to which there is nonrecognition of gain or loss to any party to the transaction by reason of Chapter 8 shall be determined as prescribed by the Franchise Tax Board.

(6) The amendments to this section made by the 1979–80 Regular Session of the Legislature shall apply to taxable years beginning on or after October 1, 1979.

(Amended by Stats. 2000, Ch. 862, Sec. 187. Effective January 1, 2001.)

24677.
  

(a) If an amount representing damages is received or accrued by a corporation during a taxable year as a result of an award in a civil action for breach of contract or breach of a fiduciary duty or relationship, then the tax attributable to the inclusion in gross income for the taxable year of that part of the amount that would have been received or accrued by the corporation in a prior taxable year or years but for the breach of contract, or breach of a fiduciary duty or relationship, shall not be greater than the aggregate of the increases in taxes that would have resulted had that part been included in gross income for that prior taxable year or years.

(b) A corporation in computing the tax shall be entitled to deduct all credits and deductions for depletion, depreciation, and other items to which it would have been entitled, had the income been received or accrued by the corporation in the year during which it would have received or accrued it, except for the breach of contract or for the breach of fiduciary duty or relationship. The credits, deductions, or other items referred to in the prior sentence, attributable to property, shall be allowed only with respect to that part of the award which represents the corporation’s share of income from the actual operation of the property.

(c) Subdivision (a) shall not apply unless the amount representing damage is three thousand dollars ($3,000) or more.

(Amended by Stats. 2000, Ch. 862, Sec. 188. Effective January 1, 2001.)

24678.
  

(a) If an amount representing damages is received or accrued during a taxable year as a result of an award in, or settlement of, a civil action brought under Section 4 of the act entitled “An act to supplement existing laws against unlawful restraints and monopolies, and for other purposes,” approved October 15, 1914 (commonly known as the Clayton Act), for injuries sustained by a corporation in its business or property by reason of anything forbidden in the antitrust laws, then the tax attributable to the inclusion of that amount in gross income for the taxable year shall not be greater than the aggregate of the increases in taxes which would have resulted if that amount had been included in gross income in equal installments for each month during the period in which the injuries were sustained by the corporation.

(b) This section shall apply to taxable years ending after June 23, 1961, but only with respect to amounts received or accrued after that date as a result of awards or settlements made after that date.

(Amended by Stats. 2000, Ch. 862, Sec. 189. Effective January 1, 2001.)

24679.
  

For purposes of Sections 24675 through 24678, a fractional part of a month shall be disregarded unless it amounts to more than half a month, in which case it should be considered as a month.

(Added by Stats. 1961, Ch. 846.)

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