BILL NUMBER: SB 219 CHAPTERED 09/23/02 CHAPTER 807 FILED WITH SECRETARY OF STATE SEPTEMBER 23, 2002 APPROVED BY GOVERNOR SEPTEMBER 22, 2002 PASSED THE SENATE AUGUST 28, 2002 PASSED THE ASSEMBLY AUGUST 26, 2002 AMENDED IN ASSEMBLY AUGUST 23, 2002 AMENDED IN ASSEMBLY JUNE 13, 2002 AMENDED IN ASSEMBLY MAY 20, 2002 AMENDED IN SENATE JANUARY 7, 2002 INTRODUCED BY Senator Scott FEBRUARY 14, 2001 An act to amend Sections 17131, 17501, 17551, 17560, 17731, 18535, 19109, 19311, 23801, 24601, and 24667 of, to amend and renumber Section 17132.6 of, to add Sections 17131.8, 17137, 19316, and 19559 to, and to repeal and add Section 18572 of, the Revenue and Taxation Code, and to amend Section 76 of Chapter 35 of the Statutes of 2002, relating to taxation, and declaring the urgency thereof. LEGISLATIVE COUNSEL'S DIGEST SB 219, Scott. Income taxes: federal conformity: victims of terrorism. The Personal Income Tax Law provides for, in specified conformity to federal income tax laws, the tax treatment of certain survivor benefits, provisions relating to estates, trusts, beneficiaries, and decedents, postponement of certain tax deadlines, and disclosure of tax return information. This bill would also provide conformity to the federal Victims of Terrorism Tax Relief Act of 2001, as specified. The Personal Income Tax Law or the Bank and Corporation Tax Law, or both, as applicable, provide conformity to federal income tax law with respect to, among other things, an exclusion of certain items from gross income including amounts received as qualified scholarships, the Ricky Ray Hemophilia Fund, deferred compensation, retirement plans, special rules for nondealers with respect to installment obligations, and an election to be an "S" corporation. This bill would provide additional conformity to federal law relating to secured indebtedness with respect to nondealers, the election to be an "S" corporation, and the exclusion from gross income with respect to qualified scholarships. The bill would also clarify the taxable years to which specified federal provisions apply and make various technical changes. Existing law provides for the waiver of interest accrued against the income tax liability of an individual during a filing extension period authorized for individuals determined to be affected by a presidentially declared disaster, if that individual is located in an area affected by a presidentially declared disaster or in a county or city that is proclaimed by the Governor to be in a state of disaster. This bill would extend this waiver provision to any taxpayer, including a business entity, located in an area affected by a presidentially declared disaster or in a county or city proclaimed by the Governor to be in a state of disaster. Existing income tax laws authorize the Franchise Tax Board to provide for the filing of a group return for electing nonresident partners, as specified. This bill would authorize the board to adjust the income of those taxpayers to properly reflect income, as provided. Existing law pertaining to personal income taxes provides for a specified statute of limitations for filing a claim for refund. This bill would suspend the running of that statute of limitations in the case of an individual who is financially disabled, as provided. This bill would declare that it is to take effect immediately as an urgency statute. THE PEOPLE OF THE STATE OF CALIFORNIA DO ENACT AS FOLLOWS: SECTION 1. Section 17131 of the Revenue and Taxation Code is amended to read: 17131. Part III of Subchapter B of Chapter 1 of Subtitle A of the Internal Revenue Code, as amended by Sections 111 and 113 of the Victims of Terrorism Tax Relief Act of 2001 (Public Law 107-134), relating to items that are specifically excluded from gross income, shall apply, except as otherwise provided. SEC. 2. Section 17131.8 is added to the Revenue and Taxation Code, to read: 17131.8. Section 117 of the Internal Revenue Code, as amended by the Economic Growth and Tax Relief Reconciliation Act of 2001, relating to qualified scholarships, shall apply, except as otherwise provided. SEC. 3. Section 17132.6 of the Revenue and Taxation Code, as amended by Section 20 of Chapter 322 of the Statutes of 1998, is amended and renumbered to read: 17132.5. Section 101 of the Internal Revenue Code, relating to certain death benefits, is modified as follows: (a) Section 101(h) of the Internal Revenue Code, relating to survivor benefits attributable to service by a public safety officer who is killed in the line of duty, is modified to apply to amounts received in taxable years beginning after December 31, 1996, with respect to individuals dying after December 31, 1996. (b) (1) The amendments made to Section 101 of the Internal Revenue Code by Section 102 of the Victims of Terrorism Tax Relief Act of 2001 (Public Law 107-134) shall apply to taxable years ending before, on, or after September 11, 2001. (2) If a refund or a credit of any overpayment of tax resulting from the amendments made by the act amending and renumbering this section is precluded at any time before the close of the one-year period beginning on the operative date of that act by the operation of any law or rule of law, including res judicata, that refund or credit may nevertheless be made or allowed if a claim therefor is filed on or before the close of that one-year period. SEC. 4. Section 17132.6 of the Revenue and Taxation Code, as added by Section 9 of Chapter 35 of the Statutes of 2002, is amended, and renumbered to read: 17132.7. A payment under Section 103(c)(10) of the Ricky Ray Hemophilia Relief Fund Act of 1998 (Public Law 105-369) to an individual shall be treated for purposes of this part, Part 10.2 (commencing with Section 18401) and Part 11 (commencing with Section 23001) as damages described in Section 104(a)(2) of the Internal Revenue Code. SEC. 5. Section 17137 is added to the Revenue and Taxation Code, to read: 17137. Section 137 of the Internal Revenue Code, relating to adoption assistance programs, is modified to include the amendments made by Section 202 of the Economic Growth and Tax Relief Act of 2001 (Public Law 107-16). SEC. 6. Section 17501 of the Revenue and Taxation Code is amended to read: 17501. (a) Subchapter D of Chapter 1 of Subtitle A of the Internal Revenue Code, relating to deferred compensation, shall apply, except as otherwise provided. (b) Notwithstanding Section 17024.5, Part I of Subchapter D of Chapter 1 of Subtitle A of the Internal Revenue Code, relating to pension, profitsharing, stock bonus plans, etc., shall apply, except as otherwise provided, without regard to taxable year to the same extent as applicable for federal purposes. (c) The maximum amount of elective deferrals (as defined in Section 402(g)(3)) for the taxable year that may be excluded from gross income under Section 402(g) of the Internal Revenue Code, as applicable for state purposes, shall not exceed the amount of elective deferrals that may be excluded from gross income under Section 402(g) of the Internal Revenue Code, as amended by Title VI of the Economic Growth and Tax Relief Reconciliation Act of 2001 (Public Law 107-16) and Section 411 of the Job Creation and Worker Assistance Act of 2002 (Public Law 107-147), including additional elective deferrals under Section 414(v) of the Internal Revenue Code, as added by Title VI of the Economic Growth and Tax Relief Reconciliation Act of 2001 (Public Law 107-16) and as amended by Section 411 of the Job Creation and Worker Assistance Act of 2002 (Public Law 107-147). (d) (1) For taxable years beginning on or after January 1, 2002, the basis of any person in the plan, account, or annuity shall be increased by the amount of elective deferrals not excluded as a result of the application of subdivision (c). (2) Any basis described in paragraph (1) shall be recovered in the manner specified in Section 17085. (e) Notwithstanding the limitations provided in subdivision (c), any income attributable to elective deferrals in taxable years beginning on or after January 1, 2002, in conformance with Part I of Subchapter D of Chapter 1 of Subtitle A of the Internal Revenue Code, as applicable for federal and state purposes, shall not be includable in the gross income of the individual for whose benefit the plan or account was established until distributed pursuant to the plan or by operation of law. SEC. 7. Section 17551 of the Revenue and Taxation Code is amended to read: 17551. (a) Subchapter E of Chapter 1 of Subtitle A of the Internal Revenue Code, relating to accounting periods and methods of accounting, shall apply, except as otherwise provided. (b) Section 444(c)(1) of the Internal Revenue Code, relating to effect of election, shall not apply. (c) (1) Notwithstanding Section 17024.5, Section 457 of the Internal Revenue Code, relating to deferred compensation plans of state and local governments and tax-exempt organizations, shall apply, except as otherwise provided, without regard to taxable year to the same extent as applicable for federal purposes. (2) The maximum deferred compensation for the taxable year that may be excluded from gross income under Section 457 of the Internal Revenue Code, as applicable for state purposes, shall not exceed the amount of deferred compensation that may be excluded from gross income under Section 457 of the Internal Revenue Code, as amended by Title VI of the Economic Growth and Tax Relief Reconciliation Act of 2001 (Public Law 107-16) and as amended by Section 411 of the Job Creation and Worker Assistance Act of 2002 (Public Law 107-147), including additional elective deferrals under Section 414(v) of the Internal Revenue Code, as added by Title VI of the Economic Growth and Tax Relief Reconciliation Act of 2001 (Public Law 107-16) and Section 411 of the Job Creation and Worker Assistance Act of 2002 (Public Law 107-147). (d) (1) For taxable years beginning on or after January 1, 2002, the basis of any person in the plan shall be increased by the amount of compensation not allowed to be excluded under subdivision (a). (2) Any basis described in paragraph (1) shall be recovered in the manner specified in Section 17085. (e) Notwithstanding the limitations provided in subdivision (a), any income attributable to compensation deferred in a plan in taxable years beginning on or after January 1, 2002, in conformance with Section 457 of the Internal Revenue Code, as applicable for federal and state purposes, shall not be includable in the gross income of the individual for whose benefit the plan was established until distributed pursuant to the provisions of the plan or by operation of law. SEC. 8. Section 17560 of the Revenue and Taxation Code is amended to read: 17560. (a) The provisions of 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. (b) The provisions of Section 812 of Public Law 99-514, relating to the disallowance of use of installment method for certain obligations as modified by Section 1008(g) of Public Law 100-647, shall apply to taxable years beginning on or after January 1, 1987. (c) 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 in taxable years beginning on or after January 1, 1990. (d) (1) In the case of any installment obligation 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 imposed under Section 17041 or 17048 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) The provisions of Sections 10202 and 10204 of Public Law 100-203 are modified to provide for each of the following: (A) The provisions of Section 10202 shall apply to dispositions in taxable years beginning on or after January 1, 1990. (B) The provisions of 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. (e) (1) 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 imposed by Section 17041 or 17048 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. (2) 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 17041 in lieu of the maximum rate of tax imposed under Section 1 or 11 of the Internal Revenue Code. SEC. 9. Section 17731 of the Revenue and Taxation Code is amended to read: 17731. (a) Subchapter J of Chapter 1 of Subtitle A of the Internal Revenue Code, relating to estates, trusts, beneficiaries, and decedents, shall apply, except as otherwise provided. (b) (1) (A) The amendments made to Section 692 of the Internal Revenue Code by Section 101 of the Victims of Terrorism Tax Relief Act of 2001 (Public Law 107-134) shall apply to taxable years ending before, on, or after September 11, 2001, except as otherwise provided. (B) Section 692(d)(2) of the Internal Revenue Code, relating to the ten thousand dollar ($10,000) minimum benefit, does not apply. (2) The amendments made to Sections 642 and 692 of the Internal Revenue Code by Sections 113 and 116 of the Victims of Terrorism Tax Relief Act of 2001 (Public Law 107-134) shall apply to taxable years ending on or after September 11, 2001. (c) If a refund or a credit of any overpayment of tax resulting from the amendments made by this section is prevented at any time before the close of the one-year period beginning on the date of enactment of this act by the operation of any law or rule of law (including res judicata), that refund or credit may nevertheless be made or allowed if a claim therefor is filed on or before the close of that one-year period. SEC. 10. Section 18535 of the Revenue and Taxation Code is amended to read: 18535. (a) In lieu of electing nonresident partners filing a return pursuant to Section 18501 or 18507, the Franchise Tax Board may, pursuant to requirements and conditions set forth in forms and instructions, provide for the filing of a group return for electing nonresident partners by a partnership doing business in, or deriving income from, sources in California. The tax rate or rates applicable to each electing partner's distributive share shall be the highest marginal rate or rates provided by Part 10 (commencing with Section 17001). Except as provided in subdivision (b), no deductions shall be allowed except those necessary to determine each partner's distributive share, and no credits shall be allowed except those directly attributable to the partnership. As required by the Franchise Tax Board, the partnership as agent for the electing partners shall make the payments of tax, additions to tax, interest, and penalties otherwise required to be paid by the electing partners. (b) Deductions provided by Chapter 5 (commencing with Section 17501) of Part 10, attributable to earned income of a partner derived from a partnership filing a group return on behalf of electing nonresident partners under subdivision (a), shall be allowed if the partner certifies, in the form and manner as the Franchise Tax Board may prescribe, that he or she has no earned income from any other source. (c) This section shall also be applicable to a nonresident shareholder of a corporation which is treated as an "S corporation" under Chapter 4.5 (commencing with Section 23800) of Part 11. In that case, the provisions of subdivisions (a) and (b) are modified to refer to"shareholder or shareholders" in lieu of "partners" and to "S corporation" in lieu of "partnership." (d) This section shall also be applicable to a nonresident person with a membership or economic interest in a limited liability company, registered limited liability partnership, or foreign limited liability partnership, which is classified as a partnership for California tax purposes. In that case, the provisions of subdivisions (a) and (b) are modified to refer to "holders of a membership or economic interest" in lieu of "partners" and to "limited liability companies" in lieu of "partnerships," and "partnerships" shall include registered limited liability partnerships and foreign limited liability partnerships. (e) The Franchise Tax Board may adjust the income of an electing nonresident taxpayer included in a group return filed under this section to properly reflect income under Part 10 (commencing with Section 17001), including Chapter 11 thereof (commencing with Section 17951), this part (commencing with Section 18401), and Part 11 (commencing with Section 23001), including Chapter 17 thereof (commencing with Section 25101). SEC. 11. Section 18572 of the Revenue and Taxation Code is repealed. SEC. 12. Section 18572 is added to the Revenue and Taxation Code, to read: 18572. (a) Section 7508A of the Internal Revenue Code, relating to postponement of certain tax related deadlines, shall apply, except as otherwise provided. (b) The amendments made to Section 7508A of the Internal Revenue Code by Section 112 of the Victims of Terrorism Tax Relief Act of 2001 (Public Law 107-134) shall apply to disasters and terroristic or military actions occurring on or after September 11, 2001, with respect to any action of the Secretary of the Treasury, the Secretary of Labor, or the Pension Benefit Guaranty Corporation occurring on or after January 23, 2002. SEC. 13. Section 19109 of the Revenue and Taxation Code is amended to read: 19109. (a) If the Franchise Tax Board extends for any period the time for filing a return under Section 18572 or subdivision (a) of Section 18567 and the time for paying the tax under Section 18572 or subdivision (c) of Section 18567 (and waives any penalties relating to the failure to so file or so pay) for any taxpayer located in a presidentially declared disaster area or any county or city in this state which is proclaimed by the Governor to be in a state of disaster that incurred a loss, the Franchise Tax Board shall, notwithstanding subdivision (b) of Section 18572, abate for that period the assessment of any interest prescribed under this article on that tax. (b) For purposes of subdivision (a), the term "presidentially declared disaster area" means, with respect to any taxpayer, any area which the President has determined warrants assistance by the federal government under the Disaster Relief and Emergency Assistance Act. SEC. 14. Section 19311 of the Revenue and Taxation Code is amended to read: 19311. (a) (1) If a change or correction is made or allowed by the Commissioner of Internal Revenue or other officer of the United States or other competent authority, a claim for credit or refund resulting from the adjustment may be filed by the taxpayer within two years from the date of the final federal determination (as defined in Section 18622), or within the period provided in Section 19306, 19307, 19308, or 19316, whichever period expires later. (2) Within two years of the date of the final determination (as defined in Section 18622) or within the period provided in Section 19306, 19307, or 19308, whichever period expires later, the Franchise Tax Board may allow a credit, make a refund, or mail to the taxpayer a notice of proposed overpayment resulting from the final federal determination. (b) The amendments made by the act adding this paragraph shall apply, without regard to taxable year, to federal determinations that become final on or after the effective date of the act adding this paragraph. SEC. 15. Section 19316 is added to the Revenue and Taxation Code, to read: 19316. (a) In the case of an individual taxpayer under the Personal Income Tax Law (Part 10 (commencing with Section 17001)), the running of any period specified in Section 19306, 19308, 19311, 19312, or 19313 shall be suspended during any period during which that individual taxpayer is "financially disabled" as defined in subdivision (b). The financial disability of an individual taxpayer shall be established in accordance with those procedures and requirements specified by the Franchise Tax Board. (b) (1) For purposes of this section, except as otherwise provided in paragraph (2), an individual taxpayer is "financially disabled" if that individual taxpayer is unable to manage his or her financial affairs by reason of a medically determinable physical or mental impairment that is either deemed to be a terminal impairment or is expected to last for a continuous period of not less than 12 months. (2) An individual taxpayer shall not be considered to be "financially disabled" for any period during which that individual's spouse or any other person is legally authorized to act on that individual's behalf in financial matters. (c) This section applies to periods of disability commencing before, on, or after the effective date of the act adding this section, but does not apply to any claim or refund that (without regard to this section) is barred by the operation or rule of law, including res judicata, as of the effective date of the act adding this section. SEC. 16. Section 19559 is added to the Revenue and Taxation Code, to read: 19559. (a) (1) The Franchise Tax Board may disclose returns and return information to federal agencies on the same terms and to the same extent as returns and return information may be disclosed by the Secretary of the Treasury under paragraph (3)(C) or paragraph (7) of Section 6103 (i) of the Internal Revenue Code, as amended by Section 201 of the Victims of Terrorism Tax Relief Act of 2001 (Public Law 107-134). (2) Notwithstanding paragraph (1), the Franchise Tax Board may not disclose any return or return information under this section if the Franchise Tax Board determines, in the manner specified by the board, that this disclosure would identify a confidential informant or seriously impair a civil or criminal tax investigation. (b) This section shall apply to disclosures made on or after January 23, 2002, except that no disclosures may be made under this section after December 31, 2003. SEC. 17. Section 23801 of the Revenue and Taxation Code is amended to read: 23801. (a) Except as otherwise provided, a corporation that has in effect for federal purposes a valid election under Section 1362(a) of the Internal Revenue Code shall be an "S" corporation for purposes of Part 10 (commencing with Section 17001), Part 10.2 (commencing with Section 18401), and this part. (b) A corporation that is an "S corporation" for federal income tax purposes, shall be an "S corporation" for purposes of Part 10 (commencing with Section 17001), Part 10.2 (commencing with Section 18401), and this part, and its shareholders shall be shareholders of an "S corporation" without regard to whether the corporation is qualified to do business or is incorporated in this state. (c) Notwithstanding subdivision (a), a corporation that elects "S corporation" status under Section 1362 of the Internal Revenue Code for federal income tax purposes but which is not qualified to be an "S corporation" under subdivision (a) of Section 23800.5, shall not be an "S corporation" for purposes of Part 10 (commencing with Section 17001), Part 10.2 (commencing with Section 18401, and this part. (d) Except as provided in subdivision (e), a corporation that is an "S corporation" for purposes of this part shall not be included in a combined report pursuant to Chapter 17 (commencing with Section 25101). (e) (1) In cases where the Franchise Tax Board determines that the reported income or loss of a group of commonly owned or controlled corporations (within the meaning of Section 25105), which includes one or more corporations treated as an "S corporation" under Chapter 4.5 (commencing with Section 23800), does not clearly reflect income (or loss) of a member of that group or represents an evasion of tax by one or more members of that group, and the Franchise Tax Board determines that the comparable uncontrolled price method prescribed by regulations pursuant to Section 482 of the Internal Revenue Code cannot practically be applied, the Franchise Tax Board may, in lieu of other methods prescribed by regulations pursuant to Section 482 of the Internal Revenue Code, apply methods of unitary combination, pursuant to Article 1 (commencing with Section 25101) of Chapter 17, to properly reflect the income or loss of the members of the group. (2) The application of the provisions of this subdivision shall not affect the treatment of any corporation as an "S corporation." (f) The tax for a "C corporation" for a short year shall be determined in accordance with Chapter 13 (commencing with Section 24631), in lieu of Section 1362(e)(5) of the Internal Revenue Code. (g) (1) A termination of a federal election pursuant to Section 1362(d) of the Internal Revenue Code, that is not an inadvertent termination pursuant to Section 1362(f) of the Internal Revenue Code, shall simultaneously terminate the "S corporation" election for purposes of Part 10 (commencing with Section 17001), Part 10.2 (commencing with Section 18401), and this part. (2) A federal termination by revocation shall be effective for purposes of this part and shall be reported to the Franchise Tax Board in the form and manner prescribed by the Franchise Tax Board no later than the last date allowed for filing federal termination for that year under Section 1362(d) of the Internal Revenue Code. (h) (1) The provisions of Section 1362(b)(5) of the Internal Revenue Code, relating to authority to treat late elections, etc., as timely, shall apply only for taxable years beginning on or after January 1, 1997, with respect to elections under Section 1362(a) of the Internal Revenue Code for taxable years beginning on or after January 1, 1997. (2) Notwithstanding the provisions of paragraph (1), if for any taxable year beginning on or after January 1, 1987, a corporation fails to qualify as an "S corporation" for federal income tax purposes solely because the federal Form 2553 (Election by a Small Business Corporation) was not filed timely, the corporation shall be treated for purposes of this part as an "S corporation" for the taxable year the "S corporation" election should have been made, and for each subsequent year until terminated, if both of the following conditions are met: (A) The corporation and all of its shareholders reported their income for California tax purposes on original returns consistent with "S corporation" status for the year the "S corporation" election should have been made, and for each subsequent taxable year (if any) until terminated. (B) The corporation and its shareholders have filed with the Internal Revenue Service a federal Form 2553 requesting automatic relief with respect to the late "S corporation" election, in full compliance with the federal Revenue Procedure 1997-48, I.R.B. 1997-43, and have received notification of the acceptance of the untimely filed "S corporation" election from the Internal Revenue Service. A copy of the notification shall be provided to the Franchise Tax Board upon request. (i) The provisions of Section 1362(f) of the Internal Revenue Code, relating to inadvertent invalid elections or terminations, shall apply only for taxable years beginning on or after January 1, 1997, with respect to elections under Section 1362(a) of the Internal Revenue Code for taxable years beginning on or after January 1, 1997. SEC. 18. Section 24601 of the Revenue and Taxation Code is amended to read: 24601. (a) Subchapter D of Chapter 1 of Subtitle A of the Internal Revenue Code, relating to deferred compensation, etc., shall apply, except as otherwise provided. (b) Notwithstanding Section 23051.5, Part I of Subchapter D of Chapter 1 of Subtitle A of the Internal Revenue Code, relating to pension, profitsharing, stock bonus plans, etc., shall apply, except as otherwise provided, without regard to taxable year to the same extent as applicable for federal purposes. SEC. 19. Section 24667 of the Revenue and Taxation Code is amended to read: 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. SEC. 20. Section 76 of Chapter 35 of the Statutes of 2002 is amended to read: Sec. 76. If a corporation that had in effect a valid federal election to be treated as an "S" corporation for federal purposes and a valid state election to be a "C" corporation for state purposes for taxable years beginning before January 1, 2002, is an "S" corporation pursuant to Section 23801 as amended by this act, the effective date of the election to be treated as an "S" corporation for state purposes shall be the first day of the taxable year beginning on or after January 1, 2002. SEC. 21. (a) (1) For purposes of the Internal Revenue Code of 1986, as applicable for purposes of Part 10 (commencing with Section 17001), Part 10.2 (commencing with Section 18401), and Part 11 (commencing with Section 23001) of the Revenue and Taxation Code, payments made by an organization described in Section 501(c)(3) of the Internal Revenue Code by reason of the death, injury, wounding, or illness of an individual incurred as the result of the terrorist attacks against the United States on September 11, 2001, or an attack involving anthrax occurring on or after September 11, 2001, and before January 1, 2002, shall be treated as related to the purpose or function constituting the basis for that organization's exemption under Section 501 of the Internal Revenue Code, if the payments are made in good faith using a reasonable and objective formula that is consistently applied. (2) This subdivision shall apply to payments made on or after September 11, 2001. (b) For purposes of the Internal Revenue Code of 1986, as applicable for purposes of Part 10 (commencing with Section 17001), Part 10.2 (commencing with Section 18401), and Part 11 (commencing with Section 23001) of the Revenue and Taxation Code, both of the following shall apply: (1) Gross income does not include any amount that, but for this section, would be includible in gross income by reason of the discharge, in whole or in part, of indebtedness of any taxpayer if the discharge is by reason of the death of an individual incurred as the result of the terrorist attacks against the United States on September 11, 2001, or as the result of illness incurred as a result of an attack involving anthrax occurring on or after September 11, 2001, and before January 1, 2002. (2) Return requirements under Section 6050P of the Internal Revenue Code, shall not apply to any discharge described in paragraph (1). (3) This subdivision shall apply to discharges made on or after September 11, 2001, and before January 1, 2002. SEC. 22. The amendments made by this act to Sections 18572 and 19109 of the Revenue and Taxation Code apply to any disaster that occurs on or after September 11, 2001. SEC. 23. This act is an urgency statute necessary for the immediate preservation of the public peace, health, or safety within the meaning of Article IV of the Constitution and shall go into immediate effect. The facts constituting the necessity are: In order to provide necessary tax relief for adoption assistance and the financially disabled to provide further conformity with federal tax laws at the earliest possible time it is necessary that this act go into immediate effect.