BILL NUMBER: AB 10 CHAPTERED 03/29/01 CHAPTER 4 FILED WITH SECRETARY OF STATE MARCH 29, 2001 APPROVED BY GOVERNOR MARCH 29, 2001 PASSED THE ASSEMBLY MARCH 19, 2001 PASSED THE SENATE MARCH 15, 2001 AMENDED IN SENATE MARCH 8, 2001 AMENDED IN ASSEMBLY FEBRUARY 6, 2001 INTRODUCED BY Assembly Member Corbett DECEMBER 4, 2000 An act to amend Sections 19147 and 24872 of, and to add Section 24872.6 to, the Revenue and Taxation Code, relating to taxation, to take effect immediately, tax levy. LEGISLATIVE COUNSEL'S DIGEST AB 10, Corbett. Bank and corporation taxes: real estate investment trusts. The Bank and Corporation Tax Law provides for the taxation of real estate investment trusts in partial conformity to the Internal Revenue Code. This bill would, as provided, conform existing law with respect to payment of estimated tax for closely held real estate investment trusts, and income and services provided by real estate investment trust subsidiaries, to changes in federal income tax law. This bill would take effect immediately as a tax levy. THE PEOPLE OF THE STATE OF CALIFORNIA DO ENACT AS FOLLOWS: SECTION 1. Section 19147 of the Revenue and Taxation Code is amended to read: 19147. (a) Notwithstanding Sections 19142 to 19145, inclusive, the addition to the tax with respect to any underpayment of any installment shall not be imposed if the total amount of all payments of estimated tax paid on or before the last date prescribed for the payment of the installment equals or exceeds the amount which would have been required to be paid on or before that date if the estimated tax were whichever of the following is the lesser: (1) (A) The tax shown on the return of the taxpayer for the preceding taxable year if a return showing a liability for tax was filed by the taxpayer for the preceding year and that preceding year was a year of 12 months. The tax shown on the return, in the case of the tax imposed by Article 3 (commencing with Section 23181) of Chapter 2 of Part 11, means the amount of tax shown on the return for the taxable year as prescribed in Section 19021. (B) In the case of a large corporation, subparagraph (A) shall not apply, except as provided in clauses (i) and (ii). (i) Subparagraph (A) shall apply for purposes of determining the amount of the first required installment for any taxable year. (ii) Any reduction in the first required installment by reason of clause (i) shall be recaptured by increasing the amount of the next required installment by the amount of that reduction. (2) (A) An amount equal to the applicable percentage specified in Section 19144 of the tax for the taxable year computed by placing on an annualized basis the taxable income: (i) For the first three months of the taxable year, in the case of the installment required to be paid in the fourth month. (ii) For the first three months of the taxable year, in the case of the installment required to be paid in the sixth month. (iii) For the first six months of the taxable year, in the case of the installment required to be paid in the ninth month. (iv) For the first nine months of the taxable year, in the case of the installment required to be paid in the 12th month of the taxable year. (B) (i) If the taxpayer makes an election under this clause, each of the following shall apply: (I) Clause (i) of subparagraph (A) shall be applied by substituting "two months" for "three months." (II) Clause (ii) of subparagraph (A) shall be applied by substituting "four months" for "three months." (III) Clause (iii) of subparagraph (A) shall be applied by substituting "seven months" for "six months." (IV) Clause (iv) of subparagraph (A) shall be applied by substituting "ten months" for "nine months." (ii) If the taxpayer makes an election under this clause, each of the following shall apply: (I) Clause (ii) of subparagraph (A) shall be applied by substituting "five months" for "three months." (II) Clause (iii) of subparagraph (A) shall be applied by substituting "eight months" for "six months." (III) Clause (iv) of subparagraph (A) shall be applied by substituting "eleven months" for "nine months." (iii) An election under clause (i) or (ii) shall apply to the taxable year for which the election is made and shall be effective only if the election is made on or before the date required for the payment of the first required installment for that taxable year. (iv) This subparagraph shall apply to taxable years beginning on or after January 1, 1997. (C) For purposes of this paragraph, the taxable income shall be placed on an annualized basis in the following manner: (i) Multiply by 12 the taxable income referred to in subparagraph (A). (ii) Divide the resulting amount by the number of months in the taxable year referred to in subparagraph (A). "Taxable income" as used in this paragraph means "net income" includable in the measure of tax or "alternative minimum taxable income" (as defined by Section 23455). (D) In the case of any corporation which is subject to the tax imposed under Section 23731, any reference to taxable income shall be treated as including a reference to unrelated business taxable income and, except in the case of an election under subparagraph (B), each of the following shall apply: (i) Clause (i) of subparagraph (A) shall be applied by substituting "two months" for "three months." (ii) Clause (ii) of subparagraph (A) shall be applied by substituting "four months" for "three months." (iii) Clause (iii) of subparagraph (A) shall be applied by substituting "seven months" for "six months." (iv) Clause (iv) of subparagraph (A) shall be applied by substituting "ten months" for "nine months." (3) The applicable percentage specified in Section 19144 or more of the tax for the taxable year was paid by withholding of tax pursuant to Section 18662. (4) The applicable percentage specified in Section 19144 or more of the net income for the taxable year consists of items from which an amount was withheld pursuant to Section 18662, the amount of the first installment under Section 19025 equals at least the minimum franchise tax specified in Section 23153, and the amount of any installment under Section 19025 includes an amount equal to the applicable tax under Section 23800.5. (b) (1) For purposes of this section, "large corporation" means any corporation if that corporation (or any predecessor corporation) had taxable income (computed without regard to net operating loss deductions) of one million dollars ($1,000,000) or more for any taxable year during the testing period. (2) For purposes of this subdivision, "testing period" means the three taxable years immediately preceding the taxable year involved. (c) (1) Any dividend received from a closely held real estate investment trust by any person that owns (after application of Sections 856(d)(5) and 856(l)(3)(B) of the Internal Revenue Code) 10 percent or more (by vote or value) of the stock or beneficial interests in the trust shall be taken into account in computing annualized income installments under paragraph (2) of subdivision (a) in a manner similar to the manner under which partnership income inclusions are taken into account. (2) For purposes of paragraph (1), the term "closely held real estate investment trust" means a real estate investment trust with respect to which five or fewer persons own (after application of Sections 856(d)(5) and 856(l)(3)(B) of the Internal Revenue Code) 50 percent or more (by vote or value) of the stock or beneficial interests in the trust. (3) The amendments made to this section by the act adding this subdivision shall apply to estimated tax payments due on or after January 1, 2001. SEC. 2. Section 24872 of the Revenue and Taxation Code is amended to read: 24872. (a) A real estate investment trust shall be deemed to have satisfied the distribution requirements of Section 857(a)(1) of the Internal Revenue Code for purposes of this part if it satisfies the distribution requirements of Section 857(a)(1) of the Internal Revenue Code for federal purposes. (b) (1) Section 857(b)(1) of the Internal Revenue Code, relating to imposition of tax on real estate investment trusts, shall not apply. (2) Every real estate investment trust shall be subject to the taxes imposed under Chapter 2 (commencing with Section 23101) and Chapter 3 (commencing with Section 23501), except that its "net income" shall be equal to its "real estate investment trust income," as defined in subdivision (c). (c) "Real estate investment trust income" means real estate investment company taxable income, as defined in Section 857(b)(2) of the Internal Revenue Code, modified as follows: (1) In lieu of Section 857(b)(2)(A) of the Internal Revenue Code, relating to special deductions for corporations, no deduction shall be allowed under Section 24402. (2) Section 857(b)(2)(D) of the Internal Revenue Code, relating to an exclusion for an amount equal to the net income from foreclosure property, shall not apply. (3) Section 857(b)(2)(E) of the Internal Revenue Code, relating to a deduction for an amount equal to the tax imposed in the case of failure to meet certain requirements for the taxable year, shall not apply. (4) Section 857(b)(2)(F) of the Internal Revenue Code, relating to an exclusion for an amount equal to any net income derived from prohibited transactions, shall not apply. (d) Section 857(b)(3) of the Internal Revenue Code, relating to an alternative tax in case of capital gains, shall not apply. (e) Section 857(b)(4)(A) of the Internal Revenue Code, relating to the imposition of tax on income from foreclosure property, shall not apply. (f) Section 857(b)(5) of the Internal Revenue Code, relating to the imposition of tax in case of failure to meet certain requirements, shall not apply. (g) Section 857(b)(6)(A) of the Internal Revenue Code, relating to the imposition of tax on income from prohibited transactions, shall not apply. (h) (1) Sections 541 through 547 of Public Law 106-170 shall apply unless otherwise provided. (2) Section 857(b)(7) of the Internal Revenue Code, as added by Section 545 of Public Law 106-170, relating to income from redetermined rents, redetermined deductions, and excess interest, shall not apply. (i) Section 857(c) of the Internal Revenue Code, relating to restrictions applicable to dividends received from real estate investment trusts, is modified to refer to Sections 24402, 24406, 24410, and 25106, in lieu of Section 243 of the Internal Revenue Code. (j) The amendments to this section by Chapter 878 of the Statutes of 1993 are clarifications of legislative intent and shall apply to taxable years beginning on or after January 1, 1987. SEC. 3. Section 24872.6 is added to the Revenue and Taxation Code, to read: 24872.6. (a) A corporation, trust, or association that is a real estate investment trust for any taxable year for federal purposes under Part II (commencing with Section 856) of Subchapter M of Chapter 1 of Subtitle A of the Internal Revenue Code (as applicable for federal purposes for the taxable year) shall be a real estate investment trust for purposes of this part for the same taxable year. (b) A corporation, trust, or association that is not a real estate investment trust for any taxable year for federal purposes under Part II (commencing with Section 856) of Subchapter M of Chapter 1 of Subtitle A of the Internal Revenue Code (as applicable for federal purposes for the taxable year) shall not be a real estate investment trust for purposes of this part for the same taxable year. (c) (1) An election to be a real estate investment trust for federal purposes under Section 856(c)(1) of the Internal Revenue Code (as applicable for federal purposes for the taxable year) shall be treated, for purposes of Part 10 (commencing with Section 17001), Part 10.2 (commencing with Section 18401), and this part, as an election to be a real estate investment trust for state purposes for the same taxable year and a separate election under paragraph (3) of subdivision (e) of Section 23051.5 shall not be allowed. (2) The termination or revocation of an election described in paragraph (1) for federal purposes under Section 856(g) of the Internal Revenue Code (as applicable for federal purposes for the taxable year) shall be treated, for purposes of Part 10 (commencing with Section 17001), Part 10.2 (commencing with Section 18401), and this part, as a termination or revocation, as the case may be, of an election described in paragraph (1) for state purposes and a separate termination or revocation of an election described in paragraph (1) under paragraph (3) of subdivision (e) of Section 23051.5 shall not be allowed. (3) This subdivision shall apply to any election to be a real estate investment trust that is effective for federal purposes for taxable years beginning on or after January 1, 2001. SEC. 4. This act provides for a tax levy within the meaning of Article IV of the Constitution and shall go into immediate effect.