BILL NUMBER: AB 1743 CHAPTERED 08/04/03 CHAPTER 185 FILED WITH SECRETARY OF STATE AUGUST 4, 2003 APPROVED BY GOVERNOR AUGUST 3, 2003 PASSED THE SENATE JULY 21, 2003 PASSED THE ASSEMBLY APRIL 28, 2003 AMENDED IN ASSEMBLY APRIL 21, 2003 INTRODUCED BY Committee on Revenue and Taxation (Chavez (Chair), Laird, Leno, and Simitian) MARCH 11, 2003 An act to amend Section 17539.3 of the Business and Professions Code, to amend Section 32311 of the Education Code, to amend Section 7162 of the Government Code, to amend Section 38040 of the Health and Safety Code, to amend Sections 17020.5, 17020.11, 17054, 17072, 17140.5, 17509, 17510, 17856, 18006, 18036.5, 18037, 18038, 18039, 18155.5, 18171, 18171.5, 18177, 19023, 19182, 23036, 23043.5, 23772, 23809, 24872.4, and 24991 of, and to repeal Sections 17088.5, 17088.6, 18037.3, 18037.5, 18043, 18044, 19022, 19024, 19062, 24871.5, and 24872.5 of, the Revenue and Taxation Code, and to amend Section 5060 of the Vehicle Code, relating to taxation. LEGISLATIVE COUNSEL'S DIGEST AB 1743, Committee on Revenue and Taxation. Personal income and bank and corporation taxes: technical code maintenance. The Bank and Corporation Tax Law, in general, imposes upon a corporate taxpayer a franchise tax measured by the net income from California sources of the preceding taxable year. Similarly, the Personal Income Tax Law imposes a tax on the entire taxable income of an individual taxpayer subject to that law. The Personal Income Tax Law and the Bank and Corporation Tax Law allow various deductions in computing the income that is subject to the taxes imposed by those laws. This bill would make technical, nonsubstantive changes to those provisions. This bill would also correct cross-references, eliminate obsolete provisions, and make conforming changes to related provisions. THE PEOPLE OF THE STATE OF CALIFORNIA DO ENACT AS FOLLOWS: SECTION 1. Section 17539.3 of the Business and Professions Code is amended to read: 17539.3. (a) Sections 17539.1 and 17539.2 do not apply to a game conducted to promote the sale of an employer's product or service by his or her employees, when those employees are the sole eligible participants. (b) As used in Sections 17539.1 and 17539.2 "person" includes firm, corporation, or association, but does not include any charitable trust, corporation or other organization exempted from taxation under Section 23701d of the Revenue and Taxation Code or Section 501(c) of the Internal Revenue Code of 1954. (c) Nothing in Sections 17539 to 17539.2, inclusive, shall be construed to permit any contest or any series of contests or any act or omission in connection therewith which is prohibited by any other provision of law. (d) Nothing in Section 17539.1 or 17539.2 shall be construed to hold any newspaper publisher or radio or television broadcaster liable for publishing or broadcasting any advertisement relating to a contest, unless that publisher or broadcaster is the person conducting or holding that contest. (e) As used in Sections 17539 to 17539.2, inclusive, the term contest includes any game, contest, puzzle, scheme or plan which holds out or offers to prospective participants the opportunity to receive or compete for gifts, prizes, or gratuities as determined by skill or any combination of chance and skill and that is, or in whole or in part may be, conditioned upon the payment of consideration; (f) Sections 17539 to 17539.2, inclusive, do not apply to (1) the mailing or otherwise sending of an application for admission, or a notification or token evidencing the right of admission to, or (2) the operation of a contest, performance, sporting event or tournament of skill, speed, or power or endurance between participants physically present at that contest, performance, sporting event, or tournament. SEC. 2. Section 32311 of the Education Code is amended to read: 32311. This article does not apply to: (a) Any institution classified as an educational institution within the meaning and intent of Section 501 of the Internal Revenue Code of the United States or of Section 23701d of the Revenue and Taxation Code and that, nevertheless, pays general state and county taxes within this state upon any printing plant and printing equipment owned by it. (b) The production of forms, materials, and supplies at any state educational institution under the exclusive management and control of the state and authorized by law. (c) Any publication, printed and produced at any state educational institution under the exclusive management and control of the state for the dissemination of technical or scientific information and that is sold at cost. (d) Printing which may be classified as "instruction" or "student activity." SEC. 3. Section 7162 of the Government Code is amended to read: 7162. "State tax lien" means a lien created pursuant to Section 8048 of the Fish and Game Code, Section 3423 or 3772 of the Public Resources Code, Section 6757, 7872, 8996, 13610, 16063, 16810, 19221, 30322, 32363, or 38532 of the Revenue and Taxation Code, or Section 1703 of the Unemployment Insurance Code. SEC. 4. Section 38040 of the Health and Safety Code is amended to read: 38040. As used in this chapter: (a) "Financial and compliance audit" means a systematic review or appraisal to determine each of the following: (1) Whether the financial statements of an audited organization fairly present the financial position and the results of financial operations in accordance with generally accepted accounting principles. (2) Whether the organization has complied with laws and regulations that may have a material effect upon the financial statements. (b) "Public accountants" means certified public accountants, or state licensed public accountants. (c) "Independent auditors" means public accountants who have no direct or indirect relationship with the functions or activities being audited or with the business conducted by any of the officials or contractors being audited. (d) "Generally accepted auditing standards" means the auditing standards set forth in the financial and compliance element of the "Standards for Audit of Governmental Organizations, Programs, Activities, and Functions" issued by the Comptroller General of the United States and incorporating the audit standards of the American Institute of Certified Public Accountants. (e) "Direct service contract" means any contract provided by a state agency pursuant to Chapter 4 (commencing with Section 38030). (f) "Nonprofit organization" means an organization described in Section 501(c)(3) of the Internal Revenue Code of 1986 that is exempt from taxation under Section 501(a) of that code or any nonprofit, scientific or educational organization qualified under Section 23701d of the Revenue and Taxation Code. SEC. 5. Section 17020.5 of the Revenue and Taxation Code is amended to read: 17020.5. For purposes of this part, in determining the amount of gain or loss (or deemed gain or loss) with respect to any property, Section 7701(g) of the Internal Revenue Code, relating to nonrecourse indebtedness, applies, except as otherwise provided. SEC. 6. Section 17020.11 of the Revenue and Taxation Code is amended to read: 17020.11. Section 7701(h) of the Internal Revenue Code, relating to motor vehicle operating leases, applies, except as otherwise provided. SEC. 7. Section 17054 of the Revenue and Taxation Code is amended to read: 17054. In the case of individuals, the following credits for personal exemption may be deducted from the tax imposed under Section 17041 or 17048, less any increases imposed under paragraph (1) of subdivision (d) or paragraph (1) of subdivision (e), or both, of Section 17560. (a) In the case of a single individual, a head of household, or a married individual making a separate return, a credit of fifty-two dollars ($52). (b) In the case of a surviving spouse (as defined in Section 17046), or a husband and wife making a joint return, a credit of one hundred four dollars ($104). If one spouse was a resident for the entire taxable year and the other spouse was a nonresident for all or any portion of the taxable year, the personal exemption shall be divided equally. (c) In addition to any other credit provided in this section, in the case of an individual who is 65 years of age or over by the end of the taxable year, a credit of fifty-two dollars ($52). (d) (1) A credit of two hundred twenty-seven dollars ($227) for each dependent (as defined in Section 17056) for whom an exemption is allowable under Section 151(c) of the Internal Revenue Code, relating to additional exemption for dependents. The credit allowed under this subdivision for taxable years beginning on or after January 1, 1999, shall not be adjusted pursuant to subdivision (i) for any taxable year beginning before January 1, 2000. (2) The credit allowed under paragraph (1) may not be denied on the basis that the identification number of the dependent, as defined in Section 17056, for whom an exemption is allowable under Section 151(c) of the Internal Revenue Code, relating to additional exemption for dependents, is not included on the return claiming the credit. (e) A credit for personal exemption of fifty-two dollars ($52) for the taxpayer if he or she is blind at the end of his or her taxable year. (f) A credit for personal exemption of fifty-two dollars ($52) for the spouse of the taxpayer if a separate return is made by the taxpayer, and if the spouse is blind and, for the calendar year in which the taxable year of the taxpayer begins, has no gross income and is not the dependent of another taxpayer. (g) For the purposes of this section, an individual is blind only if either (1) his or her central visual acuity does not exceed 20/200 in the better eye with correcting lenses, or (2) his or her visual acuity is greater than 20/200 but is accompanied by a limitation in the fields of vision such that the widest diameter of the visual field subtends an angle no greater than 20 degrees. (h) In the case of an individual with respect to whom a credit under this section is allowable to another taxpayer for a taxable year beginning in the calendar year in which the individual's taxable year begins, the credit amount applicable to that individual for that individual's taxable year is zero. (i) For each taxable year beginning on or after January 1, 1989, the Franchise Tax Board shall compute the credits prescribed in this section. That computation shall be made as follows: (1) The California Department of Industrial Relations shall transmit annually to the Franchise Tax Board the percentage change in the California Consumer Price Index as modified for rental equivalent home ownership for all items from June of the prior calendar year to June of the current calendar year, no later than August 1 of the current calendar year. (2) The Franchise Tax Board shall add 100 percent to the percentage change figure which is furnished to them pursuant to paragraph (1), and divide the result by 100. (3) The Franchise Tax Board shall multiply the immediately preceding taxable year credits by the inflation adjustment factor determined in paragraph (2), and round off the resulting products to the nearest one dollar ($1). (4) In computing the credits pursuant to this subdivision, the credit provided in subdivision (b) shall be twice the credit provided in subdivision (a). SEC. 8. Section 17072 of the Revenue and Taxation Code is amended to read: 17072. (a) Section 62 of the Internal Revenue Code, relating to adjusted gross income defined, applies, except as otherwise provided. (b) The deduction allowed by Section 17204, relating to interest on education loans, is allowed in computing adjusted gross income. SEC. 9. Section 17088.5 of the Revenue and Taxation Code is repealed. SEC. 10. Section 17088.6 of the Revenue and Taxation Code is repealed. SEC. 11. Section 17140.5 of the Revenue and Taxation Code is amended to read: 17140.5. Gross income does not include compensation for military or naval service within the meaning of Section 574 of Title 50 of the United States Code (Soldiers' and Sailors' Civil Relief Act of 1940) performed by a nonresident not domiciled in this state and attributable to a resident spouse solely because of the application of any community property law or rule. SEC. 12. Section 17509 of the Revenue and Taxation Code is amended to read: 17509. Sections 413(b)(6) and 413(c)(5) of the Internal Revenue Code, relating to liability for funding tax, do not apply. SEC. 13. Section 17510 of the Revenue and Taxation Code is amended to read: 17510. Section 7701(j) of the Internal Revenue Code, relating to Federal Thrift Savings Funds, applies, except as otherwise provided. SEC. 14. Section 17856 of the Revenue and Taxation Code is amended to read: 17856. Section 751(d)(3) of the Internal Revenue Code, relating to appreciated inventory items subject to tax as a gain on foreign investment company stock, does not apply. SEC. 15. Section 18006 of the Revenue and Taxation Code is amended to read: 18006. For purposes of determining a credit under Section 18001 (relating to residents) or Section 18002 (relating to nonresidents), both of the following apply: (a) A member of a partnership is allowed to treat his, her, or its pro rata share of net income taxes paid to another state by the partnership as if those taxes had been paid directly by the partner. (b) (1) A shareholder of a corporation that is an S corporation under Chapter 4.5 (commencing with Section 23800) of Part 11 is allowed to treat his or her pro rata share of net income taxes paid to another state by the S corporation as if those taxes had been paid by the shareholder. (2) This subdivision applies only if either of the following requirements is met: (A) The state imposing the tax does not allow corporations to elect to be treated as an S corporation. (B) The state imposes a tax on S corporations and the corporation referred to in paragraph (1) has elected to be treated as an S corporation in the other state. SEC. 16. Section 18036.5 of the Revenue and Taxation Code is amended to read: 18036.5. In addition to the adjustments to basis provided by Section 1016(a) of the Internal Revenue Code, a proper adjustment shall also be made in the case of property the acquisition of which resulted under Section 18038.5 in the nonrecognition of any part of the gain realized on the sale of other property, to the extent provided in paragraph (4) of subdivision (b) of Section 18038.5. SEC. 17. Section 18037 of the Revenue and Taxation Code is amended to read: 18037. An election made by a taxpayer pursuant to Section 1033(g) (3) of the Internal Revenue Code, relating to the election to treat outdoor advertising displays as real property, may not be denied because the taxpayer has, on his or her federal return, elected to expense the asset. SEC. 18. Section 18037.3 of the Revenue and Taxation Code is repealed. SEC. 19. Section 18037.5 of the Revenue and Taxation Code is repealed. SEC. 20. Section 18038 of the Revenue and Taxation Code is amended to read: 18038. Section 1040 of the Internal Revenue Code, relating to transfer of certain real property, does not apply. SEC. 21. Section 18039 of the Revenue and Taxation Code is amended to read: 18039. Section 1052 of the Internal Revenue Code, relating to basis established by prior revenue acts, is modified as follows: (a) Section 1052(c) of the Internal Revenue Code does not apply. (b) If the property was acquired, after February 28, 1913, in a transaction to which the Personal Income Tax Law of 1954 applied, and the basis thereof, for purposes of the Personal Income Tax Law of 1954, was prescribed by Section 17747, 17751, 17755, 17756, 17757, 17758, or 17788 of that law, then for purposes of this part the basis shall be the same as the basis therein prescribed in the Personal Income Tax Law of 1954. SEC. 22. Section 18043 of the Revenue and Taxation Code is repealed. SEC. 23. Section 18044 of the Revenue and Taxation Code, as added by Section 27 of Chapter 954 of the Statutes of 1996, is repealed. SEC. 24. Section 18155.5 of the Revenue and Taxation Code is amended to read: 18155.5. Section 1223 of the Internal Revenue Code, relating to holding period of property, is modified to additionally provide that in determining the period for which the taxpayer has held property the acquisition of which resulted under Section 18038.5 in the nonrecognition of any part of the gain realized on the sale of other property, there shall be included the period for which that other property has been held as of the date of the sale. SEC. 25. Section 18171 of the Revenue and Taxation Code is amended to read: 18171. Section 1250(b) of the Internal Revenue Code, relating to additional depreciation, is modified as follows: (a) "Depreciation adjustments," as defined in Section 1250(b)(3) of the Internal Revenue Code, do not include the following: (1) For taxable years beginning on or after January 1, 1983, amortization under Section 17251 or under Section 188 of the Internal Revenue Code. (2) For taxable years beginning prior to January 1, 1983, amortization under former Section 17226, relating to pollution control facilities, or former Section 17227, relating to trademarks. (b) "Additional depreciation," as defined in Section 1250(b)(4) of the Internal Revenue Code, includes the following: (1) For taxable years beginning on or after January 1, 1983, amortization under Section 167(k) of the Internal Revenue Code. (2) For taxable years beginning before January 1, 1983, amortization under former Section 17211.7, relating to low-income rental housing, or former Section 17228.5, relating to certified historic structures. SEC. 26. Section 18171.5 of the Revenue and Taxation Code is amended to read: 18171.5. Section 1250(a) of the Internal Revenue Code is modified as follows: (a) The date "December 31, 1970" is substituted for "July 24, 1969," and "December 31, 1969." (b) The date "January 1, 1971" is substituted for "January 1, 1970." (c) The date "December 31, 1976" is substituted for "December 31, 1975." (d) The date "January 1, 1977" is substituted for "January 1, 1976." SEC. 27. Section 18177 of the Revenue and Taxation Code is amended to read: 18177. Section 1275(a)(3) of the Internal Revenue Code, relating to the definition of tax-exempt obligations, does not apply but instead the term "tax-exempt obligation" means an obligation the interest on which is exempt from tax under this part. SEC. 28. Section 19022 of the Revenue and Taxation Code is repealed. SEC. 29. Section 19023 of the Revenue and Taxation Code is amended to read: 19023. For purposes of this article, in the case of a corporation or an organization described in Section 23731, the term "estimated tax" means the amount which the corporation or organization described in Section 23731 estimates as the amount of the tax imposed by Part 11 (commencing with Section 23001) and the amount of its liability for the tax of each wholly owned subsidiary under Section 23800.5; but in no event shall the estimated tax of a corporation subject to the tax imposed by Article 2 (commencing with Section 23151) of Chapter 2 of Part 11 be less than the minimum tax prescribed in Section 23153. SEC. 30. Section 19024 of the Revenue and Taxation Code is repealed. SEC. 31. Section 19062 of the Revenue and Taxation Code is repealed. SEC. 32. Section 19182 of the Revenue and Taxation Code is amended to read: 19182. (a) A penalty shall be imposed for failure to furnish information pursuant to Section 18628 and the penalty amount shall be determined in accordance with Section 6707 of the Internal Revenue Code. (b) If the person required to register the tax shelter has complied, for federal purposes, with the requirements of Section 6111 (d) of the Internal Revenue Code, relating to certain confidential arrangements treated as tax shelters, the person required to register the tax shelter is deemed to have complied with the requirements of Section 18628 for purposes of this part and no penalty shall be imposed under subdivision (a). (c) Article 3 (commencing with Section 19031) of this chapter (relating to deficiency assessments) does not apply in respect of the assessment or collection of any penalty imposed under this section. SEC. 33. Section 23036 of the Revenue and Taxation Code is amended to read: 23036. (a) (1) The term "tax" includes any of the following: (A) The tax imposed under Chapter 2 (commencing with Section 23101). (B) The tax imposed under Chapter 3 (commencing with Section 23501). (C) The tax on unrelated business taxable income, imposed under Section 23731. (D) The tax on S corporations imposed under Section 23802. (2) The term "tax" does not include any amount imposed under paragraph (1) of subdivision (e) of Section 24667 or paragraph (2) of subdivision (f) of Section 24667. (b) For purposes of Article 5 (commencing with Section 18661) of Chapter 2, Article 3 (commencing with Section 19031) of Chapter 4, Article 6 (commencing with Section 19101) of Chapter 4, and Chapter 7 (commencing with Section 19501) of Part 10.2, and for purposes of Sections 18601, 19001, and 19005, the term "tax" also includes all of the following: (1) The tax on limited partnerships, imposed under Section 17935, the tax on limited liability companies, imposed under Section 17941, and the tax on registered limited liability partnerships and foreign limited liability partnerships imposed under Section 17948. (2) The alternative minimum tax imposed under Chapter 2.5 (commencing with Section 23400). (3) The tax on built-in gains of S corporations, imposed under Section 23809. (4) The tax on excess passive investment income of S corporations, imposed under Section 23811. (c) Notwithstanding any other provision of this part, credits is allowed against the "tax" in the following order: (1) Credits that do not contain carryover provisions. (2) Credits that, when the credit exceeds the "tax," allow the excess to be carried over to offset the "tax" in succeeding taxable years, except for those credits that are allowed to reduce the "tax" below the tentative minimum tax, as defined by Section 23455. The order of credits within this paragraph shall be determined by the Franchise Tax Board. (3) The minimum tax credit allowed by Section 23453. (4) Credits that are allowed to reduce the "tax" below the tentative minimum tax, as defined by Section 23455. (5) Credits for taxes withheld under Section 18662. (d) Notwithstanding any other provision of this part, each of the following applies: (1) No credit may reduce the "tax" below the tentative minimum tax (as defined by paragraph (1) of subdivision (a) of Section 23455), except the following credits: (A) The credit allowed by former Section 23601 (relating to solar energy). (B) The credit allowed by former Section 23601.4 (relating to solar energy). (C) The credit allowed by former Section 23601.5 (relating to solar energy). (D) The credit allowed by Section 23609 (relating to research expenditures). (E) The credit allowed by former Section 23609.5 (relating to clinical testing expenses). (F) The credit allowed by Section 23610.5 (relating to low-income housing). (G) The credit allowed by former Section 23612 (relating to sales and use tax credit). (H) The credit allowed by Section 23612.2 (relating to enterprise zone sales or use tax credit). (I) The credit allowed by former Section 23612.6 (relating to Los Angeles Revitalization Zone sales tax credit). (J) The credit allowed by former Section 23622 (relating to enterprise zone hiring credit). (K) The credit allowed by Section 23622.7 (relating to enterprise zone hiring credit). (L) The credit allowed by former Section 23623 (relating to program area hiring credit). (M) The credit allowed by former Section 23623.5 (relating to Los Angeles Revitalization Zone hiring credit). (N) The credit allowed by former Section 23625 (relating to Los Angeles Revitalization Zone hiring credit). (O) The credit allowed by Section 23633 (relating to targeted tax area sales or use tax credit). (P) The credit allowed by Section 23634 (relating to targeted tax area hiring credit). (Q) The credit allowed by Section 23649 (relating to qualified property). (2) No credit against the tax may reduce the minimum franchise tax imposed under Chapter 2 (commencing with Section 23101). (e) Any credit which is partially or totally denied under subdivision (d) is allowed to be carried over to reduce the "tax" in the following year, and succeeding years if necessary, if the provisions relating to that credit include a provision to allow a carryover of the unused portion of that credit. (f) Unless otherwise provided, any remaining carryover from a credit that has been repealed or made inoperative is allowed to be carried over under the provisions of that section as it read immediately prior to being repealed or becoming inoperative. (g) Unless otherwise provided, if two or more taxpayers share in costs that would be eligible for a tax credit allowed under this part, each taxpayer is eligible to receive the tax credit in proportion to its respective share of the costs paid or incurred. (h) Unless otherwise provided, in the case of an S corporation, any credit allowed by this part is computed at the S corporation level, and any limitation on the expenses qualifying for the credit or limitation upon the amount of the credit applies to the S corporation and to each shareholder. (i) (1) With respect to any taxpayer that directly or indirectly owns an interest in a business entity that is disregarded for tax purposes pursuant to Section 23038 and any regulations thereunder, the amount of any credit or credit carryforward allowable for any taxable year attributable to the disregarded business entity is limited in accordance with paragraphs (2) and (3). (2) The amount of any credit otherwise allowed under this part, including any credit carryover from prior years, that may be applied to reduce the taxpayer's "tax," as defined in subdivision (a), for the taxable year is limited to an amount equal to the excess of the taxpayer's regular tax (as defined in Section 23455), determined by including income attributable to the disregarded business entity that generated the credit or credit carryover, over the taxpayer's regular tax (as defined in Section 23455), determined by excluding the income attributable to that disregarded business entity. No credit is allowed if the taxpayer's regular tax (as defined in Section 23455), determined by including the income attributable to the disregarded business entity is less than the taxpayer's regular tax (as defined in Section 23455), determined by excluding the income attributable to the disregarded business entity. (3) If the amount of a credit allowed pursuant to the section establishing the credit exceeds the amount allowable under this subdivision in any taxable year, the excess amount may be carried over to subsequent taxable years pursuant to subdivisions (d), (e), and (f). (j) (1) Unless otherwise specifically provided, in the case of a taxpayer that is a partner or shareholder of an eligible pass-through entity described in paragraph (2), any credit passed through to the taxpayer in the taxpayer's first taxable year beginning on or after the date the credit is no longer operative may be claimed by the taxpayer in that taxable year, notwithstanding the repeal of the statute authorizing the credit prior to the close of that taxable year. (2) For purposes of this subdivision, "eligible pass-through entity" means any partnership or S corporation that files its return on a fiscal year basis pursuant to Section 18566, and that is entitled to a credit pursuant to this part for the taxable year that begins during the last year a credit is operative. (3) This subdivision applies to credits that become inoperative on or after the operative date of the act adding this subdivision. SEC. 34. Section 23043.5 of the Revenue and Taxation Code is amended to read: 23043.5. For purposes of this part, in determining the amount of gain or loss (or deemed gain or loss) with respect to any property, Section 7701(g) of the Internal Revenue Code, relating to nonrecourse indebtedness, applies, except as otherwise provided. SEC. 35. Section 23772 of the Revenue and Taxation Code is amended to read: 23772. (a) For the purposes of this part-- (1) Except as provided in paragraph (2), every organization exempt from taxation under Section 23701 and every trust treated as a private foundation because of Section 4947(a)(1) of the Internal Revenue Code shall file an annual return, stating specifically the items of gross income, receipts, and disbursements, and any other information for the purpose of carrying out the laws under this part as the Franchise Tax Board may by rules or regulations prescribe, and shall keep any records, render under oath any statements, make any other returns, and comply with any rules and regulations as the Franchise Tax Board may from time to time prescribe. The return shall be filed on or before the 15th day of the fifth full calendar month following the close of the taxable year. (2) Exceptions from filing-- (A) Mandatory exceptions--Paragraph (1) does not apply to-- (i) Churches, their integrated auxiliaries, and conventions or association of churches, (ii) Any organization (other than a private foundation as defined in Section 23709), the gross receipts of which in each taxable year are normally not more than twenty-five thousand dollars ($25,000), or (iii) The exclusively religious activities of any religious order. (B) Discretionary exceptions--The Franchise Tax Board may permit the filing of a simplified return for organizations based on either gross receipts or total assets or both gross receipts and total assets, or may permit the filing of an information statement (without fee), or may permit the filing of a group return for incorporated or unincorporated branches of a state or national organization where it determines that an information return is not necessary to the efficient administration of this part. (3) An organization that is required to file an annual information return shall pay a filing fee of ten dollars ($10) on or before the due date for filing the annual information return (determined with regard to any extension of time for filing the return) required by this section. In case of failure to pay the fee on or before the due date, unless it is shown that the failure is due to reasonable cause, the filing fee shall be twenty-five dollars ($25). All collection remedies provided in Article 5 (commencing with Section 18661) of Chapter 2 of Part 10.2 are applicable to collection of the filing fee. However, the filing fee does not apply to the organization described in paragraph (4). (4) Paragraph (3) does not apply to: (A) a religious organization exempt under Section 23701d; (B) an educational organization exempt under Section 23701d, if that organization normally maintains a regular faculty and curriculum and normally has a regularly organized body of pupils or students in attendance at the place where its educational activities are regularly carried on; (C) a charitable organization, or an organization for the prevention of cruelty to children or animals, exempt under Section 23701d, if that organization is supported, in whole or in part, by funds contributed by the United States or any state or political subdivision thereof, or is primarily supported by contributions of the general public; (D) an organization exempt under Section 23701d, if that organization is operated, supervised, or controlled by or in connection with a religious organization described in subparagraph (A). (b) Every organization described in Section 23701d that is subject to the requirements of subdivision (a) is required to furnish annually information, at the time and in the manner as the Franchise Tax Board may by rules or regulations prescribe, setting forth all of the following: (1) Its gross income for the year. (2) Its expenses attributable to gross income and incurred within the year. (3) Its disbursements within the year for the purposes for which it is exempt. (4) A balance sheet showing its assets, liabilities, and net worth as of the beginning of that year. (5) The total of the contributions and gifts received by it during the year, and the names and addresses of all substantial contributors. (6) The names and addresses of its foundation manager (within the meaning of Section 4946 of the Internal Revenue Code) and highly compensated employees. (7) The compensation and other payments made during the year to each individual described in paragraph (6). (8) In the case of an organization with respect to which an election under Section 23704.5 is effective for the taxable year, the following amounts for that organization for that taxable year: (A) The lobbying expenditures (as defined in Section 4911(c)(1) of the Internal Revenue Code). (B) The lobbying nontaxable amount (as defined in Section 4911(c) (2) of the Internal Revenue Code). (C) The grassroots expenditures (as defined in Section 4911(c)(3) of the Internal Revenue Code). (D) The grassroots nontaxable amount (as defined in Section 4911 (c)(4) of the Internal Revenue Code). For purposes of this paragraph, if Section 23740 applies to the organization for the taxable year, the organization shall furnish the amounts with respect to the affiliated group as well as with respect to the organization. (9) Other information with respect to direct or indirect transfers to, and other direct or indirect transactions and relationships with, other organizations described in Sections 23701a to 23701w, inclusive (other than Sections 23701d, 23701k, and 23701t), as the Franchise Tax Board may require to prevent either of the following: (A) Diversion of funds from the organization's exempt purpose. (B) Misallocation of revenue or expense. (10) Any other relevant information as the Franchise Tax Board may prescribe. (c) For the purposes of this part-- (1) In the case of a failure to file a return required under this section on the date and in the manner prescribed therefor (determined with regard to any extension of time for filing), unless it is shown that the failure is due to reasonable cause, there shall be paid (on notice and demand by the Franchise Tax Board and in the same manner as tax) by the exempt organization or trust failing so to file, five dollars ($5) for each month or part thereof during which the failure continues, but the total amount imposed hereunder on any organization for failure to file any return may not exceed forty dollars ($40). (2) The Franchise Tax Board may make written demand upon a private foundation failing to file under paragraph (1) of this subdivision specifying therein a reasonable future date by which the filing shall be made, and if the filing is not made on or before that date, and unless it is shown that failure so to file is due to reasonable cause, there shall be paid (on notice and demand by the Franchise Tax Board and in the same manner as tax) by the person failing so to file, in addition to the penalty prescribed in paragraph (1), a penalty of five dollars ($5) each month or part thereof after the expiration of the time specified in the written demand during which the failure continues, but the total amount imposed hereunder on all persons for the failure to file shall not exceed twenty-five dollars ($25). If more than one person is liable under this paragraph for a failure to file, all of those persons shall be jointly and severally liable with respect to the failure. The term "person" as used herein means any officer, director, trustee, employee, member, or other individual who is under a duty to perform the act in respect of which the violation occurs. SEC. 36. Section 23809 of the Revenue and Taxation Code is amended to read: 23809. There is hereby imposed a tax on built-in gains attributable to California sources, determined in accordance with the provisions of Section 1374 of the Internal Revenue Code, relating to tax imposed on certain built-in gains, as modified by this section. (a) (1) The rate of tax specified in Section 1374(b)(1) of the Internal Revenue Code is equal to the rate of tax imposed under Section 23151 in lieu of the rate of tax specified in Section 11(b) of the Internal Revenue Code. (2) In the case of an "S corporation" that is also a financial corporation, the rate of tax specified in paragraph (1) is increased by the excess of the rate imposed under Section 23183 over the rate imposed under Section 23151. (b) The provisions of Section 1374(b)(3) of the Internal Revenue Code, relating to credits, are modified to provide that the tax imposed under subdivision (a) may not be reduced by any credits allowed under this part. (c) The provisions of Section 1374(b)(4) of the Internal Revenue Code, relating to coordination with Section 1201(a), do not apply. SEC. 37. Section 24871.5 of the Revenue and Taxation Code is repealed. SEC. 38. Section 24872.4 of the Revenue and Taxation Code is amended to read: 24872.4. (a) Section 856(d)(7)(C)(ii) of the Internal Revenue Code is modified by substituting the phrase "if received by an organization described in subdivision (b) of Section 17651 of Part 10 or Section 23731" for the phrase "if received by an organization described in section 511(a)(2)." (b) (1) An election under Section 856(e)(5) of the Internal Revenue Code for federal income tax purposes is treated for purposes of this part as an election made by the real estate investment trust under Section 856(e)(5) of the Internal Revenue Code for state purposes and a separate election under paragraph (3) of subdivision (e) of Section 23051.5 is not allowed. (2) Any revocation of an election under Section 856(e)(5) of the Internal Revenue Code for federal income tax purposes is treated for purposes of this part as a revocation of the election made by the real estate investment trust under Section 856(e)(5) of the Internal Revenue Code for state purposes and a separate election under paragraph (3) of subdivision (e) of Section 23051.5 is not allowed with respect to the property for any subsequent taxable year. (3) If the real estate investment trust fails to make an election under Section 856(e)(5) of the Internal Revenue Code for federal income tax purposes with respect to any property, that property may not be treated for purposes of this part as foreclosure property, an election under Section 856(e)(5) of the Internal Revenue Code for state purposes with respect to that property is not allowed, and a separate election under paragraph (3) of subdivision (e) of Section 23051.5 is not allowed with respect to that property. SEC. 39. Section 24872.5 of the Revenue and Taxation Code is repealed. SEC. 40. Section 24991 of the Revenue and Taxation Code is amended to read: 24991. Section 1275(a)(3) of the Internal Revenue Code, relating to the definition of tax-exempt obligation, does not apply but instead the term "tax-exempt obligation" means an obligation the interest on which is exempt from tax under this part. SEC. 41. Section 5060 of the Vehicle Code is amended to read: 5060. (a) An organization may apply to the department for participation in a special interest license plate program and the department shall issue special license plates for that program if the issuance of those plates is required by this article, the sponsoring organization complies with the requirements of this section, and the organization meets all of the following criteria: (1) Qualifies for tax-exempt status under Section 501(c)(3) of the Internal Revenue Code and Section 23701d of the Revenue and Taxation Code. (2) Submits a financial plan describing the purposes for which the revenues described in paragraph (2) of subdivision (e) will be used. (3) Submits a design of the organization's proposed special interest license plate that, among other things, provides for the placement of the number and letter characters in a manner that allows for law enforcement to readily identify those characters. (b) Any person described in Section 5101 may apply for special interest license plates, in lieu of the regular license plates. (c) The design criteria for a special interest license plate are as follows: (1) The license plate for a passenger vehicle, commercial vehicle, or trailer shall provide a space not larger than 2 inches by 3 inches to the left of the numerical series and a space not larger than five-eighths of an inch in height below the numerical series for a distinctive design, decal, or descriptive message as authorized by this article. The plates shall be issued in sequential numerical order or, pursuant to Section 5103, in a combination of numbers or letters. (2) Special interest license plates authorized under this article may be issued for use on a motorcycle. That license plate shall contain a five digit configuration issued in sequential numerical order or, pursuant to Section 5103, in a combination of numbers or letters. There shall be a space to the left of the numerical series for a distinctive design or decal and the characters shall contrast sharply with the uniform background color. No motorcycle plate containing a full plate graphic design is authorized. Those particular special interest license plates that were issued prior to the discontinuation provided by this paragraph may continue to be used and attached to the vehicle for which they were issued and may be renewed, retained, or transferred pursuant to this code. (d) (1) No organization may be included in the program until not less than 7,500 applications for the particular special interest license plates are received. Each organization shall collect and hold applications for the plates. Once the organization has received at least 7,500 applications, it shall submit the applications, along with the necessary fees, to the department. The department shall not issue any special interest license plate until an organization has received and submitted to the department not less than 7,500 applications for that particular special interest license plate within the time period prescribed in this section. Advanced payment to the department by an organization representing the department's estimated or actual administrative costs associated with the issuance of a particular special interest license plate shall not constitute compliance with this requirement. The organization shall have 12 months, following the effective date of the enactment of the specific legislation enabling the organization to participate in this program, to receive the required number of applications. If, after that 12 months, 7,500 applications have not been received, the organization shall immediately do either of the following: (A) Refund to all applicants any fees or deposits that have been collected. (B) Contact the department to indicate the organization's intent to undertake collection of additional applications and fees or deposits for an additional period, not to exceed 12 months, in order to obtain the minimum 7,500 applications. If an organization elects to exercise the option under this paragraph, it shall contact each applicant who has submitted an application with the appropriate fees or deposits to determine if the applicant wishes a refund of fees or deposits or requests the continuance of the holding of the application and fees or deposits until that time that the organization has received 7,500 applications. The organization shall refund the fees or deposits to any applicant so requesting. In no event shall an organization collect and hold applications for a period exceeding 24 months following the date of authorization as described in paragraph (2) of subdivision (a). (C) Sequential plate fees shall be paid for the original issuance, renewal, retention, replacement, or transfer of the special interest license plate as determined by the organization and authorized by department's regulations. Those plates containing a personalized message are subject to the fees required pursuant to Sections 5106 and 5108 in addition to any fees required by the special interest license plate program. (2) (A) If the number of currently outstanding and valid special interest license plates in any particular program provided for in this article is less than 7,500, the department shall notify the sponsoring organization of that fact and shall inform the organization that if that number is less than 7,500 one year from the date of that notification, the department will no longer issue or replace those special interest license plates. (B) Those particular special interest license plates that were issued prior to the discontinuation provided by subparagraph (A) may continue to be used and attached to the vehicle for which they were issued and may be renewed, retained, or transferred pursuant to this code. (e) (1) The department shall deduct its costs to develop and administer the special interest license plate program from the revenues collected for the plates. (2) The department shall deposit the remaining revenues from the original issuance, renewal, retention, replacement, or transfer of the special interest license plate in a fund which shall be established by the Controller. (f) When payment of renewal fees is not required as specified in Section 4000, or when a person determines to retain the special interest license plate upon a sale, trade, or other release of the vehicle upon which the plate has been displayed, the person shall notify the department and the person may retain and use the plate as authorized by department regulations. (g) An organization that is eligible to participate in a special interest license plate program pursuant to this article and receives funds from the additional fees collected from the sale of special license plates shall not expend annually more than 25 percent of those funds on administrative costs, marketing, or other promotional activities associated with encouraging application for, or renewal of, the special license plates. (h) (1) Every organization authorized under this article to offer special interest license plates shall prepare and submit an annual accounting report to the department by June 30. The report shall include an accounting of all revenues and expenditures associated with the special interest license plate program. (2) If an organization submits a report pursuant to paragraph (1) indicating that the organization violated the expenditure restriction set forth in subdivision (g), the department shall immediately cease depositing fees in the fund created by the Controller for that organization under paragraph (2) of subdivision (e) and, instead, shall deposit those fees that would have otherwise been deposited in that fund in a separate fund created by the Controller, which fund is subject to appropriation by the Legislature. The department shall immediately notify the organization of this course of action. The depositing of funds in the account established pursuant to this paragraph shall continue until the organization demonstrates to the satisfaction of the department that the organization is in compliance or will comply with the requirements of subdivision (g). If one year from the date that the organization receives the notice described in this paragraph, the organization is still unable to satisfactorily demonstrate to the department that it is in compliance or will comply with the requirements of subdivision (g), the department shall no longer issue or replace those special interest license plates associated with that organization. Those particular special interest license plates that were issued prior to the discontinuation provided by this paragraph may continue to be used and attached to the vehicle for which they were issued and may be renewed, retained, or transferred pursuant to this code. (3) Upon receiving the reports required under paragraph (1), the department shall prepare and transmit an annual consolidated report to the Legislature containing the revenue and expenditure data. SEC. 42. Any section of any act enacted by the Legislature during the 2003 calendar year that takes effect on or before January 1, 2004, and that amends, amends and renumbers, adds, repeals and adds, or repeals a section that is amended, amended and renumbered, repealed and added, or repealed by this act, shall prevail over this act, whether that act is enacted prior to, or subsequent to, the enactment of this act.