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 8. Corporate Distributions and Adjustments [24451 - 24481]
  ( Chapter 8 repealed and added by Stats. 1991, Ch. 117, Sec. 82. )

24451.
  

Subchapter C of Chapter 1 of Subtitle A of the Internal Revenue Code, relating to corporate distributions and adjustments, shall apply, except as otherwise provided.

(Amended by Stats. 1993, Ch. 873, Sec. 40. Effective October 6, 1993.)

24451.1.
  

(a) Notwithstanding paragraph (3) of subdivision (e) of Section 23051.5, if an election has been made by a taxpayer under Section 338 of the Internal Revenue Code, relating to certain stock purchases treated as asset acquisitions, or where a taxpayer is deemed to have made an election under Section 338(e) of the Internal Revenue Code, relating to deemed election where purchasing corporation acquires asset of target corporation, for federal income tax purposes, a separate election shall not be allowed under this part and the federal election shall be binding for purposes of this part, Part 10 (commencing with Section 17001), and Part 10.2 (commencing with Section 18401).

(b) Notwithstanding paragraph (3) of subdivision (e) of Section 23051.5, if an election has not been made by a taxpayer under Section 338 of the Internal Revenue Code, relating to certain stock purchases treated as asset acquisitions, or where a taxpayer has not been deemed to have made an election under Section 338(e) of the Internal Revenue Code, relating to deemed election where purchasing corporation acquires asset of target corporation, for federal income tax purposes, the taxpayer shall not make a separate state election with respect to Section 338 of the Internal Revenue Code, relating to certain stock purchases treated as asset acquisitions, under this part.

(c) This section shall apply to acquisitions made on or after the effective date of this section, except as provided in subdivision (d).

(d) This section shall not apply in the case of an acquisition that is subject to a binding contract entered into before the effective date of this section and which remains binding at all times after that date.

(Added by Stats. 2019, Ch. 39, Sec. 28. (AB 91) Effective July 1, 2019.)

24452.
  

Section 301(e)(2) of the Internal Revenue Code, relating to 20 percent corporate shareholders, is modified to refer to Section 24402 in lieu of Sections 243, 244, and 245 of the Internal Revenue Code.

(Added by Stats. 1991, Ch. 117, Sec. 82. Effective July 16, 1991.)

24453.
  

Section 302(c)(2) of the Internal Revenue Code, relating to determining termination of interest, is modified to refer to the periods of limitation provided in “Chapter 4 (commencing with Section 19001) and Chapter 5 (commencing with Section 19201) of Part 10.2,” in lieu of “Sections 6501 and 6502” of the Internal Revenue Code and to refer to “taxes imposed under the Personal Income Tax Law” and the “Corporation Tax Law,” in lieu of “Federal income tax.”

(Amended by Stats. 2001, Ch. 543, Sec. 38. Effective January 1, 2002.)

24454.
  

Section 304(b)(5)(B) of the Internal Revenue Code, relating to special rule in case of foreign acquiring corporation, shall apply to acquisitions on or after January 1, 2015.

(Added by Stats. 2015, Ch. 359, Sec. 35. (AB 154) Effective September 30, 2015. Applicable to taxable years beginning on or after January 1, 2015, as provided in Sec. 41 of Stats. 2015, Ch. 359.)

24455.
  

(a) The Franchise Tax Board may include in the gross income of the taxpayer (or a member of the taxpayer’s combined reporting group) in that taxable year the taxpayer’s pro rata share (or the pro rata share of a member of the taxpayer’s combined reporting group) of any of those insurers’ current earnings and profits in that taxable year, but not to exceed an amount equal to the specific insurer’s net income attributable to investment income for that year minus that insurer’s net written premiums received in that same taxable year, if all of the following apply:

(1) For any taxable year an insurer is a member of a taxpayer’s commonly controlled group.

(2) The ratio of the five-year average net written premiums to the five-year average total income of all insurers in the commonly controlled group is equal to or less than 0.10 (or, for taxable years beginning on or after January 1, 2008, 0.15).

(3) The accumulation of earnings and profits of the insurers in the commonly controlled group had a substantial purpose of avoidance of taxes on, according to, or measured by income, of this state or any other state.

The amount so included shall be treated as a dividend received from an insurance company during the taxable year, and to the extent applicable, Section 24410 shall apply to that amount.

(b) If the insurer members of the commonly controlled group constitute a predominantly captive insurance group (as defined in paragraph (6) of subdivision (e)), then the ratio described in subdivision (a) shall be 0.40.

(c) To the extent that amounts are included in the gross income of a taxpayer (or a member of the taxpayer’s combined reporting group) pursuant to subdivision (a), those amounts shall not again be considered as investment income in the application of the ratio described in paragraph (2) of subdivision (a).

(d) The amounts included in gross income under subdivision (a) shall not again be included in gross income when subsequent distributions are made to the taxpayer (or a member of the taxpayer’s combined reporting group), or another taxpayer that acquires an interest in the stock of the taxpayer (or a member of the taxpayer’s combined reporting group with respect to which subdivision (a) was applied), or any successor or assign of the respective taxpayers (or a member of the taxpayer’s combined reporting group) described in this subdivision. For purposes of applying this subdivision, distributions from an insurer shall be considered first made from amounts included under subdivision (a).

(e) For purposes of this section, the following definitions shall apply:

(1) Except as otherwise provided, the phrases “net written premiums,” “five-year average net written premiums” and the “five-year average total income” shall each have the same meaning, respectively, as applicable for purposes of subdivision (c) of Section 24410, whether or not a dividend is actually received from any insurer member of the taxpayer’s commonly controlled group in that taxable year.

(2) “Net income attributable to investment income” means net income of the insurer multiplied by a ratio, the numerator of which is the insurer’s gross investment income from interest, dividends (other than dividends from members of the taxpayer’s commonly controlled group), rent, and realized gains or losses, and the denominator of which is the insurer’s gross income (other than dividends from members of the taxpayer’s commonly controlled group) from all sources. In the application of the preceding sentence, if an insurer is required to file a Statutory Annual Statement pursuant to the Annual Statement Instructions and Accounting Practices and Procedures Manual promulgated by the National Association of Insurance Commissioners, “net income” means net income required to be reported in the insurer’s Statutory Annual Statement.

(3) An insurer is any insurer within the meaning of Section 28 of Article XIII of the California Constitution, whether or not the insurer is engaged in business in California.

(4) The phrase “commonly controlled group” shall have the same meaning as that phrase has under Section 25105.

(5) The phrase “combined reporting group” means those corporations whose income is required to be included in the same combined report pursuant to Section 25101 or 25110.

(6) A “predominantly captive insurance group” means the insurer members of a commonly controlled group where the insurers receive more than 50 percent of their net written premiums (without regard to the weighting factors in paragraph (1) of subdivision (e) of Section 24410) from members of the commonly controlled group or the ratios in clause (i) or clause (ii) of subparagraph (B) of paragraph (1) of subdivision (d) of Section 24410 is greater than 50 percent. The provisions of paragraph (4) of subdivision (d) of Section 24410 shall apply for purposes of this paragraph.

(7) (A) The taxpayer’s “pro rata share” of the current earnings and profits of an insurer member of a commonly controlled group is the amount that would have been received as a dividend by the taxpayer (or a member of the taxpayer’s combined reporting group) if both of the following apply:

(i) The insurer had directly distributed its current earnings and profits with respect to its stock held by the taxpayer (or member of the taxpayer’s combined reporting group).

(ii) In the case of an insurer holding the stock of another insurer, all other insurer members of the taxpayer’s commonly controlled group had distributed the same current earnings and profits with respect to their stock, in the same taxable year, until amounts were received as a dividend by the taxpayer (or a member of the taxpayer’s combined reporting group) from an insurer member of the commonly controlled group.

(B) In the application of this section, amounts treated as a dividend received by a partnership shall be considered a dividend received by each partner that is a member of the commonly controlled group, either directly or through a series of tiered partnerships.

(f) The Franchise Tax Board may prescribe those regulations that are appropriate to describe conditions under which the accumulation of earnings and profits of those insurers described in paragraph (2) of subdivision (a) do not have the substantial purpose of avoidance of taxes on, according to, or measured by income, of this state or any other state.

(g) If this section or any portion of this section is held invalid, or the application of this section to any person or circumstance is held invalid, that invalidity shall not affect other provisions of the act adding this section, or the provisions of this section that are severable.

(Added by renumbering Section 24900 by Stats. 2013, Ch. 76, Sec. 190. (AB 383) Effective January 1, 2014.)

24456.
  

Section 306(f) of the Internal Revenue Code, relating to source of gain, shall not apply.

(Added by Stats. 1991, Ch. 117, Sec. 82. Effective July 16, 1991.)

24458.
  

Internal Revenue Service Notice 2008-83, 2008-42 I.R.B. 905, issued on October 20, 2008, relating to the treatment of deductions under Section 382(h) of the Internal Revenue Code following an ownership change, shall not be applicable for purposes of taxes imposed under Part 11 (commencing with Section 23001) of Division 2, of this code with respect to any ownership change occurring at any time.

(Added by Stats. 2009, Ch. 401, Sec. 1. (AB 11) Effective October 11, 2009.)

24459.
  

Section 382(n) of the Internal Revenue Code, relating to special rule for certain ownership changes, shall not apply.

(Added by Stats. 2015, Ch. 359, Sec. 36. (AB 154) Effective September 30, 2015. Applicable to taxable years beginning on or after January 1, 2015, as provided in Sec. 41 of Stats. 2015, Ch. 359.)

24461.
  

(a) For purposes of this part, the provisions of Section 633 of Public Law 99-514, relating to effective dates for recognition of gain and loss on distributions of property in liquidation, shall apply except as otherwise provided.

(b) The provisions of Section 633(e) of Public Law 99-514, relating to other transition rules, shall not apply.

(c) The amendments to Section 633 of Public Law 99-514 made by Section 1006(g)(1) to 1006(g)(8), inclusive, of Public Law 100-647, relating to effective dates for recognition of gain and loss on distributions of property in liquidation, are declaratory of existing law and shall be applied in the same manner and for the same periods as specified in Public Law 100-647.

(Added by Stats. 1991, Ch. 117, Sec. 82. Effective July 16, 1991.)

24462.
  

(a) Section 355 of the Internal Revenue Code, as in effect for federal income tax purposes as of January 1, 2010, shall apply to distributions made on or after January 1, 2010, without regard to taxable year, except as otherwise provided.

(b) Section 355(g) of the Internal Revenue Code, relating to section not to apply to distributions involving disqualified investment corporations, is modified by substituting the phrase “January 1, 2010,” for “the date of the enactment of this subsection” in Section 355(g)(2)(A)(i) of the Internal Revenue Code.

(c) The provisions of Section 4(d)(2) of the Tax Technical Corrections Act of 2007 (Public Law 110-172), relating to modification of active business definition under Section 355, shall apply and are modified by substituting “January 1, 2010,” for “May 17, 2006.”

(d) The provisions of Section 507(b) of the Tax Increase Prevention and Reconciliation Act of 2005 (Public Law 109-222), relating to effective dates, shall apply and are modified as follows:

(1) The phrase “January 1, 2010,” shall be substituted for “the date of the enactment of this Act” in Section 507(b)(1) of the Tax Increase Prevention and Reconciliation Act of 2005 (Public Law 109-222).

(2) The phrase “January 1, 2010,” shall be substituted for “such date of enactment” in Section 507(b)(2)(A) of the Tax Increase Prevention and Reconciliation Act of 2005 (Public Law 109-222).

(e) This section shall apply as of the dates specified in this section, without regard to taxable year.

(Added by Stats. 2010, Ch. 14, Sec. 75. (SB 401) Effective January 1, 2011.)

24465.
  

(a) (1) If, in connection with any exchange described in Section 332, 351, 354, 356, or 361 of the Internal Revenue Code, a taxpayer transfers property to an insurer, the insurer shall not, for purposes of determining the extent to which gain shall be recognized on that transfer, be considered to be a corporation for purposes of this part.

(2) Paragraph (1) shall not apply to any of the following types of transactions, unless that transaction has the effect (directly or indirectly) of transferring appreciated property from a taxpayer subject to tax under this part (or a member of the taxpayer’s combined reporting group) to an insurer:

(A) An exchange or transfer pursuant to Section 368(a)(2)(D) or Section 368(a)(2)(E) of the Internal Revenue Code.

(B) A transfer of stock in an 80 percent-owned insurer for the purpose of filing a consolidated tax return or for financial or regulatory reporting.

(C) A transfer or exchange of publicly owned stock of the parent corporation.

(3) If a transaction described in paragraph (2) would qualify under that paragraph but for the fact that the transaction has the effect (directly or indirectly) of transferring appreciated property from a taxpayer subject to tax under this part (or a member of the taxpayer’s combined reporting group) to an insurer, then, if the property is used in the active trade or business of the insurer, subdivision (b) shall be deemed to apply to that transfer.

(4) For purposes of this subdivision, “appreciated property” means property whose fair market value, as of the date of the transfer subject to this section, exceeds its adjusted basis as of that date.

(b) (1) Except as provided in subdivision (c), or as otherwise provided by regulations prescribed by the Franchise Tax Board, if property subject to paragraph (1) of subdivision (a) or to subdivision (g) is transferred to an insurer for use in the active conduct of a trade or business of the insurer, then any gain otherwise required to be recognized under that subdivision shall be deferred until the date that the property is no longer owned by an insurer in the taxpayer’s commonly controlled group (or a member of the taxpayer’s combined reporting group), or the property is no longer used in the active conduct of the insurer’s trade or business (or the trade or business of another member in the taxpayer’s combined reporting group), or the holder of the property is no longer held by an insurer in the commonly controlled group of the transferor (or a member of the taxpayer’s combined reporting group).

(2) Any of the events described in paragraph (1) shall be treated as a disposition of the property under this subdivision, irrespective of whether any other provision in this part or in the Internal Revenue Code would otherwise permit nonrecognition treatment of the transaction described in this subdivision.

(3) Notwithstanding paragraph (2) of this subdivision, an insurer that becomes a member of the taxpayer’s commonly controlled group or a corporation that becomes a member of the taxpayer’s combined reporting group, as a result of a transaction of which a transfer referred to in this subdivision is a part, shall be treated as a member of the taxpayer’s commonly controlled group or a member of the taxpayer’s combined reporting group at the time of the transfer for purposes of this subdivision.

(4) For purposes of this subdivision, stock of an insurance subsidiary constitutes property used in the active trade or business of the insurer.

(5) If the deferred gain required to be taken into account under this subdivision is business income (as defined by subdivision (a) of Section 25120), the gain shall be apportioned using the apportionment percentage for the taxable year that the gain is required to be taken into account under this subdivision. Except as provided in regulations under Section 25137, for purposes of the sales factor for that taxable year, the transaction giving rise to that gain shall be treated as a sale occurring in the taxable year the gain is taken into account. The amount of any gain required to be recognized under this subdivision upon any disposition described in this subdivision shall not exceed the lesser of the deferred gain or the gain realized in the transaction in which gain is required to be recognized under this subdivision.

(6) For purposes of computing the amount of gain required to be recognized under this subdivision, appropriate adjustments may be made, pursuant to regulations issued by the Franchise Tax Board, to the basis of stock to reflect the disallowance of any expenses under paragraph (2) of subdivision (b) of Section 24425.

(c) The Franchise Tax Board may prescribe regulations providing for an annual reporting requirement in the form of a statement or other form, to be attached to the transferor taxpayer’s return, regarding the current ownership of any property for which any gains were previously deferred pursuant to subdivision (b). If the transferor taxpayer fails to provide any information required by the Franchise Tax Board pursuant to the preceding sentence, the Franchise Tax Board may, in lieu of the year described by subdivision (b), require that the transferor taxpayer take those gains into account in the first taxable year in which the current ownership of the property is not reported. The preceding sentence shall not apply so long as the property is still owned by the transferee and the failure to provide the information was due to reasonable cause and not willful neglect. Notwithstanding any other provision of law, if a taxpayer fails to satisfy the reporting requirements of this subdivision, then a notice of proposed deficiency assessment resulting from adjustments attributable to gains previously deferred pursuant to subdivision (b) with respect to which the reporting requirements were not satisfied may be mailed to the taxpayer within four years from the date on which the reporting requirements are satisfied by the taxpayer.

(d) Subdivision (b) shall not apply to any property described by Section 367(a)(3)(B) of the Internal Revenue Code.

(e) Except as provided by regulations prescribed by the Franchise Tax Board, a transfer by a taxpayer of an interest in a partnership to an insurer in a transaction described in subdivision (a) shall be treated as a transfer to that insurer of the taxpayer’s pro rata share of the assets of the partnership.

(f) For purposes of this section, any distribution described by Section 355 of the Internal Revenue Code (or so much of Section 356 of the Internal Revenue Code as it relates to Section 355 of the Internal Revenue Code) shall be treated as an exchange under this section, whether or not the distribution is an exchange. This subdivision shall not apply to any distribution in which either of the following applies:

(1) The distributing corporation is an insurer.

(2) The distributee is a person other than an insurer.

(g) For purposes of this part, any transfer of property to an insurer as a contribution to capital of that insurer by one or more persons who, immediately after the transfer, own (within the meaning of Section 318 of the Internal Revenue Code) stock possessing at least 80 percent of the total combined voting power of all classes of stock of that insurer that are entitled to vote shall be treated as an exchange of that property for stock of the insurer equal in value to the fair market value of the property transferred.

(h) (1) In the case of any distribution described in Section 355 of the Internal Revenue Code (or so much of Section 356 of the Internal Revenue Code as it relates to Section 355 of the Internal Revenue Code) by a taxpayer to an insurer, to the extent provided in regulations prescribed by the Franchise Tax Board, gain shall be recognized under principles similar to the principles of this section.

(2) In the case of any liquidation to which Section 332 of the Internal Revenue Code applies, except as provided in regulations prescribed by the Franchise Tax Board, both of the following shall apply:

(A) Sections 337(a) and 337(b)(1) of the Internal Revenue Code shall not apply, where the 80 percent distributee is an insurer.

(B) Where the distributor is an insurer, the distributee shall treat the distribution as a distribution from the insurer’s earnings and profits, to the extent thereof.

(3) For purposes of the preceding paragraph, the deemed distribution from earnings and profits shall be treated as a dividend eligible for a deduction, to the extent otherwise provided in Section 24410, as if actually distributed as a dividend.

(i) For purposes of this section, the following definitions shall apply:

(1) An insurer is any insurer within the meaning of Section 28 of Article XIII of the California Constitution, whether or not the insurer is engaged in business in California.

(2) The phrase “commonly controlled group” shall have the same meaning as that phrase has under Section 25105.

(3) The phrase “combined reporting group” means those corporations whose income is required to be included in the same combined report pursuant to Section 25101 or 25110.

(j) The Franchise Tax Board may prescribe any regulations that may be appropriate to carry out the purpose of this section, which purpose is to prevent the removal of gain inherent in property at the time of a transfer from taxation under this part. Those regulations may provide for appropriate adjustments to the amount of deferred income described in subdivision (b) to avoid the double inclusion of income for situations, including but not limited to, the property transferred to an insurer member of the commonly controlled group is later acquired by a noninsurer member of the taxpayer’s combined reporting group.

(k) Upon an adequate showing by a taxpayer that a transaction referred to in subdivision (a) or (h) would not violate the purposes of this section to prevent the removal of gain inherent in property at the time of a transfer from taxation under this part, the Franchise Tax Board may grant relief from the application of this section. In an appeal filed with the State Board of Equalization, or an action filed under Section 19382 or 19385, the State Board of Equalization or the court, as the case may be, shall have jurisdiction to grant that relief only upon a specific finding that the transfer did not remove gain inherent in property at the time of transfer from taxation under this part.

(l) This section applies to transactions entered into on or after June 23, 2004, or transactions entered into after June 23, 2004, pursuant to a binding written contract in existence on June 23, 2004. For purposes of this subdivision, transactions entered into on or after June 23, 2004, that were given final approval by a regulatory insurance commissioner before June 23, 2004, shall be considered a transaction entered into before June 23, 2004, pursuant to a binding written contract in existence on June 23, 2004.

(Added by Stats. 2004, Ch. 868, Sec. 4. Effective September 29, 2004.)

24471.
  

Section 381(c) of the Internal Revenue Code, relating to items of the distributor or transferor corporation, is modified to provide that, in lieu of paragraph (24), relating to credit under Section 38, and paragraph (25), relating to credit under Section 53, the acquiring corporation shall take into account (to the extent proper to carry out the purposes of Section 381 of the Internal Revenue Code) the items required to be taken into account for purposes of each credit allowable under this part with respect to the distributor or transferor corporation.

(Repealed and added by Stats. 1991, Ch. 117, Sec. 82. Effective July 16, 1991.)

24472.
  

The amendments to Section 382 of the Internal Revenue Code made by Section 13226 of the Revenue Reconciliation Act of 1993 (P.L. 103-66), relating to modifications of discharge of indebtedness provisions, shall apply to discharges occurring on or after January 1, 1996, in taxable years beginning on or after January 1, 1996.

(Amended by Stats. 2001, Ch. 543, Sec. 39. Effective January 1, 2002.)

24473.
  

Notwithstanding any other provision of law, the contribution or other transfer of the assets of a mutual water company established prior to September 26, 1977, that is tax exempt under Section 501(c)(12) of the Internal Revenue Code, but is a taxable entity under California Law, including its lands, easements, rights, and obligations to act as sole agent of the stockholders in exercising the riparian rights of the stockholders, and rights relating to the ownership, operation, and maintenance of a water system and facilities serving the customers of the company, to a community services district formed pursuant to Part 1 (commencing with Section 61100) of Division 3 of Title 6 of the Government Code, is not a transfer subject to taxes imposed by this part if all of the following requirements are met:

(a) The consideration for the transfer of all or substantially all of the assets is the assumption by the district of the company’s liability to provide service to the company’s stockholders.

(b) The legal or beneficial title to all or substantially all of the company’s assets is vested in the district on or before January 1, 2008.

(c) For the one-year period immediately prior to commencement of the transfer and continuing until the transfer is completed, 85 percent or more of the company’s income consists of amounts collected from stockholders for the sole purpose of meeting losses and expenses.

(Added by Stats. 2002, Ch. 1108, Sec. 1. Effective September 29, 2002.)

24481.
  

Section 383 of the Internal Revenue Code, relating to special limitations on certain excess credits, etc., is modified to apply to credits allowable under Chapter 3.5 (commencing with Section 23601), and the minimum tax credit allowable under Section 23453.

(Repealed and added by Stats. 1991, Ch. 117, Sec. 82. Effective July 16, 1991.)

RTCRevenue and Taxation Code - RTC