BILL NUMBER: AB 115 CHAPTERED
BILL TEXT
CHAPTER 691
FILED WITH SECRETARY OF STATE OCTOBER 7, 2005
APPROVED BY GOVERNOR OCTOBER 7, 2005
PASSED THE ASSEMBLY SEPTEMBER 7, 2005
PASSED THE SENATE SEPTEMBER 6, 2005
AMENDED IN SENATE SEPTEMBER 2, 2005
AMENDED IN SENATE AUGUST 30, 2005
AMENDED IN SENATE AUGUST 23, 2005
AMENDED IN SENATE JUNE 20, 2005
AMENDED IN ASSEMBLY MAY 27, 2005
AMENDED IN ASSEMBLY MAY 2, 2005
INTRODUCED BY Assembly Member Klehs
(Principal coauthor: Senator Machado)
JANUARY 12, 2005
An act to amend Sections 17024.5, 17052.6, 17072, 17077, 17085,
17131, 17132.5, 17140, 17140.3, 17144, 17152, 17220, 17250, 17250.5,
17255, 17256, 17279.4, 17501, 17551, 17731, 17733, 18571, 18572,
18628, 18633, 18648, 19008, 19041.5, 19116, 19164, 19166, 19173,
19177, 19179, 19182, 19184, 23051.5, 23701s, 23701w, 23703.5, 23705,
23711, 23712, 24306, 24349, 24356, 24369.4, 24407, 24601, 24654,
24661.5, 24872, 24949.1, and 24949.3 of, to amend and repeal Sections
17204, 19772, 19774, and 19777 of, to add Sections 17131.4, 17131.5,
17131.6, 17139.6, 17201.4, 17201.5, 17201.6, 17204.7, 17215.1,
17215.4, 17681.6, 17734.6, 17760, 18035.6, 18036.6, 18181, 19136.12,
19164.5, 24355.3, 24355.4, 24406.6, 24661.6, 24694, and 24831.6 to,
to add and repeal Sections 17053.62, 17255.5, 23662, and 24356.4 of,
to repeal Sections 17131.8, 17136.5, 17137, 17144.5, 17160.5,
17202.5, 17205, 19773, and 24356.5 of, and to repeal and amend
Section 19559 of, the Revenue and Taxation Code, relating to
taxation, to take effect immediately, tax levy.
LEGISLATIVE COUNSEL'S DIGEST
AB 115, Klehs Taxation: federal conformity.
Under the Personal Income Tax Law and the Corporation Tax Law,
various provisions of the federal Internal Revenue Code, as enacted
as of a specified date, are referenced in various sections of the
Revenue and Taxation Code. Those laws provide that for taxable years
beginning on or after January 1, 2002, the specified date of those
referenced Internal Revenue Code sections is January 1, 2001, unless
otherwise specifically provided.
Existing law requires, for any introduced bill that proposes
changes in any of those dates, that the Franchise Tax Board prepare a
complete analysis of the bill that describes all changes to state
law that will automatically occur by reference to federal law as of
the changed date. It further requires the Franchise Tax Board to
immediately update and supplement that analysis upon any amendment to
the bill, and requires that analysis to be made available to the
public and to be submitted to the Legislature for publication in the
daily journal of each house of the Legislature.
This bill would change the specified date of those referenced
Internal Revenue Code sections to January 1, 2005, for taxable years
beginning on or after January 1, 2005, and thereby would make
numerous substantive changes to both the Personal Income Tax Law and
the Corporation Tax Law with respect to those areas of preexisting
conformity that are subject to changes under federal laws enacted
after January 1, 2002, and that have not been, or are not being,
excepted or modified.
This bill would make certain other changes in federal income tax
laws applicable, with specified exceptions and modifications, and
make specified supplemental, technical, or clarifying changes for
purposes of the Personal Income Tax Law or the Corporation Tax Law,
or both, with respect to, among other things, the exclusion from
income of qualified foster care payments, health savings accounts,
certain definitions, expensing for small businesses, low-income
community tax credits, shareholder treatment, eligible shareholders,
transfers of suspended losses incident to divorce, repayment of loans
for qualifying employer securities, phaseouts of certain motor fuel
excise taxes, suspension of occupational taxes relating to certain
alcoholic beverages, information reporting for certain individuals,
capital gain treatment applying to outright sales for landowners,
expenses of rural letter carriers, expensing of certain reforestation
expenditures, depreciation of certain Alaskan pipeline property,
interest expense allocation rules, translation of foreign taxes,
certain passive foreign investment companies, deductions for certain
expenses incurred by corporate taxpayers, Alaska Native Settlement
trusts, civil rights tax relief, tax shelter provisions, underpayment
penalty, and specified federal acts. This bill would specify various
dates on which specified provisions apply, make findings and
declarations that certain provisions are declaratory of existing law,
specify the intent and operation in the application of provisions
conforming to various federal acts, and repeal obsolete provisions.
The Personal Income Tax Law and the Corporation Tax Law authorize
various deductions and credits in computing the taxes imposed by
those laws.
This bill would, under both laws, for taxable years beginning on
or after July 1, 2005, and before January 1, 2018, allow an
environmental tax credit in an amount equal to 5
for each gallon of ultra low sulfur diesel fuel produced by a small
refiner, as defined, at any facility located in this state. a This
bill would also, under both laws, for a period beginning on January
1, 2005, and ending on January 1, 2009, authorize a small refiner to
elect to treat 75% of qualified capital costs, as defined, as
expenses not chargeable to a capital account and expenses that may be
deducted, as provided.
This bill would take effect immediately as a tax levy.
THE PEOPLE OF THE STATE OF CALIFORNIA DO ENACT AS FOLLOWS:
SECTION 1. Section 17024.5 of the Revenue and Taxation Code is
amended to read:
17024.5. (a) (1) Unless otherwise specifically provided, the
terms "Internal Revenue Code," "Internal Revenue Code of 1954," or
"Internal Revenue Code of 1986," for purposes of this part, mean
Title 26 of the United States Code, including all amendments thereto
as enacted on the specified date for the applicable taxable year as
follows:
Specified Date
of
Internal
Revenue
Taxable Year Code Sections
(A) For taxable years
beginning on or after
January 1, 1983, and on or
before December
31, 1983....................... January 15, 1983
(B) For taxable years
beginning on or after
January 1, 1984, and on or
before December
31, 1984....................... January 1, 1984
(C) For taxable years
beginning on or after
January 1, 1985, and on or
before December
31, 1985....................... January 1, 1985
(D) For taxable years
beginning on or after
January 1, 1986, and on or
before December
31, 1986....................... January 1, 1986
(E) For taxable years
beginning on or after
January 1, 1987, and on or
before December
31, 1988....................... January 1, 1987
(F) For taxable years
beginning on or after
January 1, 1989, and on or
before December
31, 1989....................... January 1, 1989
(G) For taxable years
beginning on or after
January 1, 1990, and on or
before December
31, 1990....................... January 1, 1990
(H) For taxable years
beginning on or after
January 1, 1991, and on or
before December
31, 1991....................... January 1, 1991
(I) For taxable years
beginning on or after
January 1, 1992, and on or
before December
31, 1992....................... January 1, 1992
(J) For taxable years
beginning on or after
January 1, 1993, and on or
before December
31, 1996....................... January 1, 1993
(K) For taxable years
beginning on or after
January 1, 1997, and on or
before December
31, 1997 ...................... January 1, 1997
(L) For taxable years
beginning on or after
January 1, 1998, and on or
before December
31, 2001 ...................... January 1, 1998
(M) For taxable years
beginning on or after
January 1, 2002, and on
or before December 31, 2004.... January 1, 2001
(N) For taxable years
beginning on or
after
January 1, 2005................ January 1, 2005
(2) (A) Unless otherwise specifically provided, for federal laws
enacted on or after January 1, 1987, and on or before the specified
date for the taxable year, uncodified provisions that relate to
provisions of the Internal Revenue Code that are incorporated for
purposes of this part shall be applicable to the same taxable years
as the incorporated provisions.
(B) In the case where Section 901 of the Economic Growth and Tax
Relief Act of 2001 (Public Law 107-16) applies to any provision of
the Internal Revenue Code that is incorporated for purposes of this
part, Section 901 of the Economic Growth and Tax Relief Act of 2001
shall apply for purposes of this part in the same manner and to the
same taxable years as it applies for federal income tax purposes.
(3) Subtitle G (Tax Technical Corrections) and Part I of Subtitle
H (Repeal of Expired or Obsolete Provisions) of the Revenue
Reconciliation Act of 1990 (Public Law 101-508) modified numerous
provisions of the Internal Revenue Code and provisions of prior
federal acts, some of which are incorporated by reference into this
part. Unless otherwise provided, the provisions described in the
preceding sentence, to the extent that they modify provisions that
are incorporated into this part, are declaratory of existing law and
shall be applied in the same manner and for the same periods as
specified in the Revenue Reconciliation Act of 1990.
(b) Unless otherwise specifically provided, when applying any
provision of the Internal Revenue Code for purposes of this part, a
reference to any of the following is not applicable for purposes of
this part:
(1) Except as provided in Chapter 4.5 (commencing with Section
23800) of Part 11 of Division 2, an electing small business
corporation, as defined in Section 1361(b) of the Internal Revenue
Code.
(2) Domestic international sales corporations (DISC), as defined
in Section 992(a) of the Internal Revenue Code.
(3) A personal holding company, as defined in Section 542 of the
Internal Revenue Code.
(4) A foreign personal holding company, as defined in Section 552
of the Internal Revenue Code.
(5) A foreign investment company, as defined in Section 1246(b) of
the Internal Revenue Code.
(6) A foreign trust, as defined in Section 679 of the Internal
Revenue Code.
(7) Foreign income taxes and foreign income tax credits.
(8) Section 911 of the Internal Revenue Code, relating to United
States citizens living abroad.
(9) A foreign corporation, except that Section 367 of the Internal
Revenue Code shall be applicable.
(10) Federal tax credits and carryovers of federal tax credits.
(11) Nonresident aliens.
(12) Deduction for personal exemptions, as provided in Section 151
of the Internal Revenue Code.
(13) The tax on generation-skipping transfers imposed by Section
2601 of the Internal Revenue Code.
(14) The tax, relating to estates, imposed by Section 2001 or 2101
of the Internal Revenue Code.
(c) (1) The provisions contained in Sections 41 to 44, inclusive,
and Section 172 of the Tax Reform Act of 1984 (Public Law 98-369),
relating to treatment of debt instruments, is not applicable for
taxable years beginning before January 1, 1987.
(2) The provisions contained in Public Law 99-121, relating to the
treatment of debt instruments, is not applicable for taxable years
beginning before January 1, 1987.
(3) For each taxable year beginning on or after January 1, 1987,
the provisions referred to by paragraphs (1) and (2) shall be
applicable for purposes of this part in the same manner and with
respect to the same obligations as the federal provisions, except as
otherwise provided in this part.
(d) When applying the Internal Revenue Code for purposes of this
part, regulations promulgated in final form or issued as temporary
regulations by "the secretary" shall be applicable as regulations
under this part to the extent that they do not conflict with this
part or with regulations issued by the Franchise Tax Board.
(e) Whenever this part allows a taxpayer to make an election, the
following rules shall apply:
(1) A proper election filed with the Internal Revenue Service in
accordance with the Internal Revenue Code or regulations issued by
"the secretary" shall be deemed to be a proper election for purposes
of this part, unless otherwise provided in this part or in
regulations issued by the Franchise Tax Board.
(2) A copy of that election shall be furnished to the Franchise
Tax Board upon request.
(3) (A) Except as provided in subparagraph (B), in order to obtain
treatment other than that elected for federal purposes, a separate
election shall be filed at the time and in the manner required by the
Franchise Tax Board.
(B) (i) If a taxpayer makes a proper election for federal income
tax purposes prior to the time that taxpayer becomes subject to the
tax imposed under this part or Part 11 (commencing with Section
23001), that taxpayer is deemed to have made the same election for
purposes of the tax imposed by this part, Part 10.2 (commencing with
Section 18401), and Part 11 (commencing with Section 23001), as
applicable, and that taxpayer may not make a separate election for
California tax purposes unless that separate election is expressly
authorized by this part, Part 10.2 (commencing with Section 18401),
or Part 11 (commencing with Section 23001), or by regulations issued
by the Franchise Tax Board.
(ii) If a taxpayer has not made a proper election for federal
income tax purposes prior to the time that taxpayer becomes subject
to tax under this part or Part 11 (commencing with Section 23001),
that taxpayer may not make a separate California election for
purposes of this part, Part 10.2 (commencing with Section 18401), or
Part 11 (commencing with Section 23001), unless that separate
election is expressly authorized by this part, Part 10.2 (commencing
with Section 18401), or Part 11 (commencing with Section 23001), or
by regulations issued by the Franchise Tax Board.
(iii) This subparagraph applies only to the extent that the
provisions of the Internal Revenue Code or the regulation issued by
"the secretary" authorizing an election for federal income tax
purposes apply for purposes of this part, Part 10.2 (commencing with
Section 18401) or Part 11 (commencing with Section 23001).
(f) Whenever this part allows or requires a taxpayer to file an
application or seek consent, the rules set forth in subdivision (e)
shall be applicable with respect to that application or consent.
(g) When applying the Internal Revenue Code for purposes of
determining the statute of limitations under this part, any reference
to a period of three years shall be modified to read four years for
purposes of this part.
(h) When applying, for purposes of this part, any section of the
Internal Revenue Code or any applicable regulation thereunder, all of
the following shall apply:
(1) References to "adjusted gross income" shall mean the amount
computed in accordance with Section 17072, except as provided in
paragraph (2).
(2) References to "adjusted gross income" for purposes of
computing limitations based upon adjusted gross income, shall mean
the amount required to be shown as adjusted gross income on the
federal tax return for the same taxable year.
(3) Any reference to "subtitle" or "chapter" shall mean this part.
(4) The provisions of Section 7806 of the Internal Revenue Code,
relating to construction of title, shall apply.
(5) Any provision of the Internal Revenue Code that becomes
operative on or after the specified date for that taxable year shall
become operative on the same date for purposes of this part.
(6) Any provision of the Internal Revenue Code that becomes
inoperative on or after the specified date for that taxable year
shall become inoperative on the same date for purposes of this part.
(7) Due account shall be made for differences in federal and state
terminology, effective dates, substitution of "Franchise Tax Board"
for "secretary" when appropriate, and other obvious differences.
(i) Any reference to a specific provision of the Internal Revenue
Code shall include modifications of that provision, if any, in this
part.
SEC. 2. Section 17052.6 of the Revenue and Taxation Code is
amended to read:
17052.6. (a) For each taxable year beginning on or after January
1, 2000, there shall be allowed as a credit against the "net tax" (as
defined in Section 17039) an amount determined in accordance with
Section 21 of the Internal Revenue Code, except that the amount of
the credit shall be a percentage, as provided in subdivision (b) of
the allowable federal credit without taking into account whether
there is a federal tax liability.
(b) For the purposes of subdivision (a), the percentage of the
allowable federal credit shall be determined as follows:
(1) For taxable years beginning before January 1, 2003:
The percentage of
If the adjusted gross income
is: credit is:
$40,000 or less.............. 63%
Over $40,000 but not over 53%
$70,000......................
Over $70,000 but not over 42%
$100,000.....................
Over $100,000................ 0%
(2) For taxable years beginning on or after January 1, 2003:
The percentage of
If the adjusted gross income
is: credit is:
$40,000 or less.............. 50%
Over $40,000 but not over 43%
$70,000......................
Over $70,000 but not over 34%
$100,000.....................
Over $100,000................ 0%
(c) In the case of a taxpayer whose credits provided under this
section exceed the taxpayer's tax liability computed under this part,
the excess shall be credited against other amounts due, if any, from
the taxpayer and the balance, if any, shall be paid from the Tax
Relief and Refund Account and refunded to the taxpayer.
(d) For purposes of this section, "adjusted gross income" means
adjusted gross income as computed for purposes of paragraph (2) of
subdivision (h) of Section 17024.5.
(e) The credit authorized by this section shall be limited, as
follows:
(1) Employment-related expenses, within the meaning of Section 21
of the Internal Revenue Code, shall be limited to expenses for
household services and care provided in this state.
(2) Earned income, within the meaning of Section 21(d) of the
Internal Revenue Code, shall be limited to earned income subject to
tax under this part. For purposes of this paragraph, compensation
received by a member of the armed forces for active services as a
member of the armed forces, other than pensions or retired pay, shall
be considered earned income subject to tax under this part, whether
or not the member is domiciled in this state.
(f) For purposes of this section, Section 21(b)(1) of the Internal
Revenue Code, relating to a qualifying individual, is modified to
additionally provide that a child (as defined in Section 151(c)(3) of
the Internal Revenue Code) shall be treated, for purposes of Section
152 of the Internal Revenue Code (as applicable for purposes of this
section), as receiving over one-half of his or her support during
the calendar year from the parent having custody for a greater
portion of the calendar year, that parent shall be treated as a
"custodial parent" (within the meaning of Section 152(e) of the
Internal Revenue Code, as applicable for purposes of this section),
and the child shall be treated as a qualifying individual under
Section 21(b)(1) of the Internal Revenue Code, as applicable for
purposes of this section, if both of the following apply:
(1) The child receives over one-half of his or her support during
the calendar year from his or her parents who never married each
other and who live apart at all times during the last six months of
the calendar year.
(2) The child is in the custody of one or both of his or her
parents for more than one-half of the calendar year.
(g) The amendments to this section made by the act adding this
subdivision shall apply only to taxable years beginning on or after
January 1, 2002.
SEC. 3. Section 17053.62 is added to the Revenue and Taxation
Code, to read:
17053.62. (a) For each taxable year beginning on or after July 1,
2005, and before January 1, 2018, there shall be allowed as an
environmental tax credit against the "net tax," as defined by Section
17039, an amount equal to five cents ($0.05) for each gallon of
ultra low sulfur diesel fuel produced during the taxable year by a
small refiner at any facility located in this state.
(b) The aggregate credit determined under subdivision (a) for any
taxable year with respect to any facility shall not exceed 25 percent
of the qualified capital costs incurred by the small refiner with
respect to that facility, reduced by the aggregate credits determined
under this section for all prior taxable years with respect to that
facility.
(c) For purposes of this section:
(1) "Small refiner" means any refiner who owns or operates a
refinery in California that:
(A) Has and at all times had since January 1, 1978, a crude oil
capacity of not more than 55,000 barrels per stream day.
(B) Has not been at any time since September 1, 1988, owned or
controlled by any refiner that at the same time owned or controlled
refineries in California with a total combined crude oil capacity of
more than 55,000 barrels per stream day.
(C) Has not been at any time since September 1, 1988, owned or
controlled by any refiner that at the same time owned or controlled
refineries in the United States with a total combined crude oil
capacity of more than 137,500 barrels per stream day.
(2) (A) "Qualified capital costs" means, with respect to any
facility, those costs paid or incurred during the applicable period
for items certified by the California Air Resources Board (CARB)
under subparagraph (B) for compliance with the applicable EPA or CARB
regulations with respect to that facility, including, but not
limited to, expenditures for the construction of new process
operation units or the dismantling and reconstruction of existing
process units to be used in the production of ultra low sulfur diesel
fuel, associated adjacent or offsite equipment (including tankage,
catalyst, and power supply), engineering, construction period
interest, site work, and permitting.
(B) (i) Before claiming a credit under this section, a small
refiner shall request from the California Air Resources Board a
certification that both of the following are true:
(I) That the items for which qualified capital costs were paid or
incurred are for compliance with the applicable EPA or CARB
regulations described in subparagraph (A).
(II) That the items for which qualified capital costs were paid or
incurred have been placed in service by the small refiner.
(ii) The request described in clause (i) shall be in a form and
contain sufficient information to allow the California Air Resources
Board to determine that the items that are requested to be certified
were placed in service for compliance with applicable EPA and CARB
regulations, which information shall include the date on which the
items were placed in service.
(C) The California Air Resources Board shall make a determination
regarding a request described in subparagraph (B) on or before 60
days after the request is submitted. If the board does not make a
determination within this time period, the certification will be
deemed to be granted.
(D) If certification from the Secretary of the Treasury of the
United States, after consultation with the Administrator of the
Environmental Protection Agency, that the taxpayer's qualified
capital costs with respect to a facility are, or will result, in
compliance with applicable EPA regulations, has been received, then
the taxpayer shall be allowed the credit without obtaining
certification from the CARB, unless CARB demonstrates that the fuel
produced does not meet CARB regulations.
(3) "Facility" means a small refiner's petroleum refinery located
in the State of California that has incurred qualified capital costs
to produce ultra low sulfur diesel fuel.
(4) "Applicable EPA regulations" means the Highway Diesel Fuel
Sulfur Control Requirements of the Environmental Protection Agency.
(5) "Applicable CARB regulations" means the Vehicular Diesel Fuel
Sulfur. Control Requirements of the California Air Resources Board
(CARB) under Section 2281 of Article 2 of Chapter 5 of Division 3 of
Title 13 of the California Code of Regulations.
(6) "Applicable period" means, with respect to any facility, the
period beginning on January 1, 2004, and ending on May 31, 2007.
(7) "Ultra low sulfur diesel fuel" means both of the following:
(A) Diesel fuel with a sulfur content of 15 parts per million or
less.
(B) (i) Subject to clause (ii), either of the following:
(I) Vehicular diesel fuel produced and sold by a small refiner on
or after June 1, 2006.
(II) Vehicular diesel fuel produced and sold by the small refiner
before June 1, 2006, that the small refiner specifically identifies
and supports through internal test reports as meeting applicable CARB
regulations.
(ii) For purposes of this section, it is rebuttably presumed that
the fuel described in clause (i) is ultra low sulfur diesel fuel. The
California Air Resources Board may rebut this presumption by
demonstrating that the fuel does not comply with applicable CARB
regulations.
(8) "Barrels per stream day" means the maximum number of barrels
of input that a distillation facility can process within a 24-hour
period when running at full capacity under optimal crude and product
slate conditions with no allowance for downtime.
(d) For purposes of this section, if a credit is determined under
this section for any expenditure with respect to any property, the
increase in basis of that property that would (but for this
subdivision) result from that expenditure shall be reduced by the
amount of the credit so determined.
(e) No deduction shall be allowed for that portion of the expenses
otherwise allowable as a deduction for the taxable year that is
equal to the amount of the credit determined for the taxable year
under this section.
(f) In the case where the credit allowed by this section exceeds
the "net tax," the excess may be carried over to reduce the "net tax"
in the following year, and the 10 succeeding years if necessary,
until the credit is exhausted.
(g) If a small refiner that claims a credit under this section
sells, transfers, or otherwise disposes of, either directly or
indirectly, a facility within five years of the taxable year during
which it first claimed the credit, there shall be added to the "net
tax" of the small refiner during the taxable year of sale, transfer,
or disposition an amount equal to the total credit claimed multiplied
by a fraction, the numerator of which is the remaining term of five
years and the denominator of which is 5.
(h) This section is repealed on January 1, 2018.
SEC. 4. 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, shall apply, except as otherwise
provided.
(b) Section 62(a)(2)(D) of the Internal Revenue Code, relating to
certain expenses of elementary and secondary school teachers, shall
not apply.
SEC. 5. Section 17077 of the Revenue and Taxation Code is amended
to read:
17077. Section 68 of the Internal Revenue Code, relating to
overall limitation on itemized deductions, shall apply, except as
otherwise provided.
(a) "Six percent" shall be substituted for "3 percent" in Section
68(a)(1) of the Internal Revenue Code.
(b) Section 68(b)(1) of the Internal Revenue Code shall not apply
and in lieu thereof the term "applicable amount" in each place it
appears in Section 68(a) of the Internal Revenue Code means one
hundred thousand dollars ($100,000) in the case of a single
individual or a married individual filing a separate return, one
hundred fifty thousand dollars ($150,000) in the case of a head of
household, and two hundred thousand dollars ($200,000) in the case of
a surviving spouse or a husband and wife filing a joint return.
(c) Section 68(b)(2) of the Internal Revenue Code, relating to
inflation adjustments, shall not apply. However, for any taxable year
beginning on or after January 1, 1992, the applicable amounts
specified in subdivision (b) shall be recomputed annually in the same
manner as the recomputation of income tax brackets under subdivision
(h) of Section 17041.
(d) Section 68(f) of the Internal Revenue Code, relating to
phaseout of limitation, shall not apply.
(e) Section 68(g) of the Internal Revenue Code, relating to
termination, shall not apply.
SEC. 6. Section 17085 of the Revenue and Taxation Code is amended
to read:
17085. Section 72 of the Internal Revenue Code, relating to
annuities and certain proceeds of life insurance contracts, is
modified as follows:
(a) The amendments and transitional rules made by Public Law
99-514 shall be applicable to this part for the same transactions and
the same years as they are applicable for federal purposes, except
that the repeal of Section 72(d) of the Internal Revenue Code,
relating to repeal of special rule for employees' annuities, shall
apply only to the following:
(1) Any individual whose annuity starting date is after December
31, 1986.
(2) At the election of the taxpayer, any individual whose annuity
starting date is after July 1, 1986, and before January 1, 1987.
(b) The amount of a distribution from an individual retirement
account or annuity or employee trust or employee annuity that is
includable in gross income for federal purposes shall be reduced for
purposes of this part by the lesser of either of the following:
(1) An amount equal to the amount includable in federal gross
income for the taxable year.
(2) An amount equal to the basis in the account or annuity allowed
by Section 17507 (relating to individual retirement accounts and
simplified employee pensions), the increased basis allowed by
Sections 17504 and 17506 (relating to plans of self-employed
individuals), the increased basis allowed by Section 17501, or the
increased basis allowed by Section 17551 that is remaining after
adjustment for reductions in gross income under this provision in
prior taxable years.
(c) (1) Except as provided in paragraph (2), the amount of the
penalty imposed under this part shall be computed in accordance with
Sections 72(m), (q), (t), and (v) of the Internal Revenue Code using
a rate of 21/2 percent, in lieu of the rate provided in those
sections.
(2) In the case where Section 72(t)(6) of the Internal Revenue
Code, relating to special rules for simple retirement accounts,
applies, the rate in paragraph (1) shall be 6 percent in lieu of the
21/2 percent rate specified therein.
(d) Section 72(f)(2) of the Internal Revenue Code, relating to
special rules for computing employees' contributions, shall be
applicable without applying the exceptions which immediately follow
that paragraph.
SEC. 7. 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, relating to items that are specifically
excluded from gross income, shall apply, except as otherwise
provided.
SEC. 7.5. Section 17131.4 is added to the Revenue and Taxation
Code, to read:
17131.4. Section 106(d) of the Internal Revenue Code, relating to
contributions to health savings accounts, shall not apply.
SEC. 7.6.
Section 17131.5 is added to the Revenue and Taxation Code, to read:
17131.5. Section 125(d)(2)(D) of the Internal Revenue Code,
relating to the exception for health savings accounts, shall not
apply.
SEC. 8. Section 17131.6 is added to the Revenue and Taxation Code,
to read:
17131.6. Section 107 of the Internal Revenue Code is modified by
substituting in paragraph (2) the phrase "the rental allowance paid
to him or her as part of his or her compensation, to the extent used
by him or her to rent or provide a home" in lieu of the phrase "the
rental allowance paid to him as part of his compensation, to the
extent used by him to rent or provide a home and to the extent such
allowance does not exceed the fair rental value of the home,
including furnishings and appurtenances such as a garage, plus the
cost of utilities" contained therein.
SEC. 9. Section 17131.8 of the Revenue and Taxation Code is
repealed.
SEC. 10. Section 17132.5 of the Revenue and Taxation Code is
amended 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) Section 101 of the Internal Revenue Code, as modified by
subdivision (a) is modified to additionally provide that Section 101
(h) of the Internal Revenue Code shall not apply to survivor benefits
attributable to service by a public safety officer who is killed in
the line of duty with respect to deaths occurring before December 31,
1996, that would otherwise be eligible for exclusion pursuant to
Section 101(h) of the Internal Revenue Code, as modified by Public
Law 107-15.
(2) The amendments made to this section by the act adding this
subdivision shall apply to amounts paid after December 31, 2001, with
respect to deaths occurring on or before December 31, 1996.
(c) (1) Section 101 of the Internal Revenue Code, as modified by
subdivision (b), is modified to additionally provide that Section 101
(i) of the Internal Revenue Code shall apply to any astronaut whose
death occurs in the line of duty.
(2) The amendments made to this section by the act adding this
subdivision shall apply to amounts received in taxable years
beginning after December 31, 2002, with respect to deaths occurring
after that date.
SEC. 10.5. Section 17136.5 of the Revenue and Taxation Code is
repealed.
SEC. 11. Section 17137 of the Revenue and Taxation Code is
repealed.
SEC. 12. Section 17139.6 is added to the Revenue and Taxation
Code, to read:
17139.6. Section 139A of the Internal Revenue Code, relating to
federal subsidies for prescription drug plans, shall not apply.
SEC. 13. Section 17140 of the Revenue and Taxation Code is amended
to read:
17140. (a) For purposes of this section, the following terms have
the following meanings as provided in the Golden State Scholarshare
Trust Act (Article 19 (commencing with Section 69980) of Chapter 2 of
Part 42 of the Education Code):
(1) "Beneficiary" has the meaning set forth in subdivision (c) of
Section 69980 of the Education Code.
(2) "Benefit" has the meaning set forth in subdivision (d) of
Section 69980 of the Education Code.
(3) "Participant" has the meaning set forth in subdivision (h) of
Section 69980 of the Education Code.
(4) "Participation agreement" has the meaning set forth in
subdivision (i) of Section 69980 of the Education Code.
(5) "Scholarshare trust" has the meaning set forth in subdivision
(f) of Section 69980 of the Education Code.
(b) For taxable years beginning on or after January 1, 1998, and
before January 1, 2002, except as otherwise provided in subdivision
(c), gross income of a beneficiary or a participant does not include
any of the following:
(1) Any distribution or earnings under a Scholarshare trust
participation agreement, as provided in Article 19 (commencing with
Section 69980) of Chapter 2 of Part 42 of the Education Code.
(2) Any contribution to the Scholarshare trust on behalf of a
beneficiary shall not be includable as gross income of that
beneficiary.
(c) For taxable years beginning on or after January 1, 1998, and
before January 1, 2002:
(1) Any distribution under a Scholarshare trust participation
agreement shall be includable in the gross income of the distributee
in the manner as provided under Section 72 of the Internal Revenue
Code, as modified by Section 17085, to the extent not excluded from
gross income under this part. For purposes of applying Section 72 of
the Internal Revenue Code, the following apply:
(A) All Scholarshare trust accounts of which an individual is a
beneficiary shall be treated as one account, except as otherwise
provided.
(B) All distributions during a taxable year shall be treated as
one distribution.
(C) The value of the participation agreement, income on the
participation agreement, and investment in the participation
agreement shall be computed as of the close of the calendar year in
which the taxable year begins.
(2) A contribution by a for-profit or nonprofit entity, or by a
state or local government agency, for the benefit of an owner or
employee of that entity or a beneficiary whom the owner or employee
has the power to designate, including the owner or employee's minor
children, shall be included in the gross income of that owner or
employee in the year the contribution is made.
(3) For purposes of this subdivision, "distribution" includes any
benefit furnished to a beneficiary under a participation agreement,
as provided in Article 19 (commencing with Section 69980) of Chapter
2 of Part 42 of the Education Code.
(4) (A) Paragraph (1) shall not apply to that portion of any
distribution that, within 60 days of distribution, is transferred to
the credit of another beneficiary under the Scholarshare trust who is
a "member of the family," as that term is used in Section 529(e)(2)
of the Internal Revenue Code, as amended by Section 211 of the
Taxpayer Relief Act of 1997 (P.L. 105-34), of the former beneficiary
of that Scholarshare trust.
(B) Any change in the beneficiary of an interest in the
Scholarshare trust shall not be treated as a distribution for
purposes of paragraph (1) if the new beneficiary is a "member of the
family," as that term is used in Section 529(e)(2) of the Internal
Revenue Code, as amended by Section 211 of the Taxpayer Relief Act of
1997 (P.L. 105-34), of the former beneficiary of that Scholarshare
trust.
(d) For taxable years beginning on or after January 1, 2002,
Sections 529(c) and 529(e) of the Internal Revenue Code, relating to
tax treatment of designated beneficiaries and contributors and to
other definitions and special rules, respectively, shall apply,
except as otherwise provided in Part 11 (commencing with Section
23001) and this part.
SEC. 14. Section 17140.3 of the Revenue and Taxation Code is
amended to read:
17140.3. Section 529 of the Internal Revenue Code, relating to
qualified state tuition programs, shall apply, except as otherwise
provided.
(a) Section 529 (a) of the Internal Revenue Code is modified as
follows:
(1) By substituting the phrase "under this part and Part 11
(commencing with Section 23001)" in lieu of the phrase "under this
subtitle."
(2) By substituting "Article 2 (commencing with Section 23731)" in
lieu of "Section 511."
(b) A copy of the report required to be filed with the Secretary
of the Treasury under Section 529(d) of the Internal Revenue Code
shall be filed with the Franchise Tax Board at the same time and in
the same manner as specified in that section.
SEC. 15. Section 17144 of the Revenue and Taxation Code is amended
to read:
17144. (a) Section 108(b)(2)(B) of the Internal Revenue Code,
relating to general business credit, is modified by substituting
"this part" in lieu of "Section 38 (relating to general business
credit)."
(b) Section 108(b)(2)(G) of the Internal Revenue Code, relating to
foreign tax credit carryovers, shall not apply.
(c) Section 108(b)(3)(B) of the Internal Revenue Code, relating to
credit carryover reduction, is modified by substituting "11.1 cents"
in lieu of "331/3 cents" in each place in which it appears. In the
case where more than one credit is allowable under this part, the
credits shall be reduced on a pro rata basis.
(d) Section 108(g)(3)(B) of the Internal Revenue Code, relating to
adjusted tax attributes, is modified by substituting "($9)" in lieu
of "($3)."
(e) (1) If a taxpayer makes an election for federal income tax
purposes under Section 108(c) of the Internal Revenue Code, relating
to treatment of discharge of qualified real property business
indebtedness, a separate election shall not be allowed under
paragraph (3) of subdivision (e) of Section 17024.5 and the federal
election shall be binding for purposes of this part.
(2) If a taxpayer has not made an election for federal income tax
purposes under Section 108(c) of the Internal Revenue Code, relating
to treatment of discharge of qualified real property business
indebtedness, then the taxpayer shall not be allowed to make that
election for purposes of this part.
SEC. 16. Section 17144.5 of the Revenue and Taxation Code is
repealed.
SEC. 17. Section 17152 of the Revenue and Taxation Code is amended
to read:
17152. Section 121 of the Internal Revenue Code, relating to
exclusion of gain from sale of principal residence, is modified as
follows:
(a) The two-year period in Section 121(a) of the Internal Revenue
Code shall be reduced by the period of the taxpayer's service, not to
exceed 18 months, in the Peace Corps during the five-year period
ending on the date of the sale or exchange.
(b) If the taxpayer is prohibited from filing a joint return
pursuant to Section 18521, Section 121(b)(2)(A) of the Internal
Revenue Code shall nevertheless be treated as being satisfied if the
taxpayer files a joint return for federal income tax purposes for the
same taxable year. However, in no instance shall the total amount
excludable from gross income under Section 121(a) of the Internal
Revenue Code with respect to any sale or exchange exceed the maximum
amount allowed by Section 121(b) of the Internal Revenue Code.
(c) (1) If a taxpayer has, at any time, made an election for
federal purposes under Section 121(f) of the Internal Revenue Code
not to have Section 121 of the Internal Revenue Code apply to a sale
or exchange, Section 121 of the Internal Revenue Code shall not apply
to that sale or exchange for state purposes, a separate election for
state purposes shall not be allowed under paragraph (3) of
subdivision (e) of Section 17024.5, the federal election shall be
binding for purposes of this part, and that election shall be treated
as an election to include in gross income for purposes of this part
all the gain from the sale or exchange of that property, including
that amount which, but for that election, would have been excluded
from income under Section 121(a) of the Internal Revenue Code for
state purposes.
(2) If a taxpayer fails to make an election for federal purposes
under Section 121(f) of the Internal Revenue Code to not have Section
121 of the Internal Revenue Code apply to a sale or exchange, no
election under Section 121(f) of the Internal Revenue Code shall be
allowed for state purposes, Section 121 of the Internal Revenue Code
shall apply to that sale or exchange for state purposes, and a
separate election for state purposes shall not be allowed under
paragraph (3) of subdivision (e) of Section 17024.5.
(d) (1) If a taxpayer has, at any time, made an election for
federal purposes under Section 312(d)(2) of the Taxpayer Relief Act
of 1997 (Public Law 105-34), relating to sales before date of
enactment, or Section 312(d)(4) of that act, relating to binding
contracts, to not have the amendments made by Section 312 of the
Taxpayer Relief Act of 1997 (Public Law 105-34) apply to a sale or
exchange, the amendments made by the act adding this subdivision
shall not apply to that sale or exchange, Sections 1, 4, and 6 of
Chapter 610 of the Statutes of 1997 shall not apply to that sale or
exchange, a separate election for state purposes shall not be allowed
under paragraph (3) of subdivision (e) of Section 17024.5, and the
federal election shall be binding for purposes of this part.
(2) If a taxpayer fails to make an election for federal purposes
under Section 312(d)(2) of the Taxpayer Relief Act of 1997 (Public
Law 105-34), relating to sales before date of enactment, or Section
312(d)(4) of that act, relating to binding contracts, to not have the
amendments made by Section 312 of the Taxpayer Relief Act of 1997
(Public Law 105-34) apply to a sale or exchange, an election under
Section 312(d)(2) of the Taxpayer Relief Act of 1997 (Public Law
105-34), relating to sales before date of enactment, or Section 312
(d)(4) of that act, relating to binding contracts, shall not be
allowed for state purposes, the amendments made by the act adding
this subdivision shall apply to that sale or exchange, Sections 1, 4,
and 6 of Chapter 610 of the Statutes of 1997 shall apply to that
sale or exchange, and a separate election for state purposes shall
not be allowed under paragraph (3) of subdivision (e) of Section
17024.5.
(e) (1) If a taxpayer has, at any time, made or revoked an
election for federal purposes under Section 121(d)(9) of the Internal
Revenue Code to suspend the running of the five-year period
described in Sections 121(a), 121(c)(1)(B), and 121(d)(7) of the
Internal Revenue Code, that election or revocation of election to
suspend the five-year period under Section 121(d)(9) of the Internal
Revenue Code shall be applicable for state purposes, a separate
election or revocation of election for purposes of Section 121(d)(9)
of the Internal Revenue Code may not be allowed under paragraph (3)
of subdivision (e) of Section 17024.5, and the federal election or
revocation of election shall be binding for purposes of this part.
(2) If a taxpayer fails to make an election for federal purposes
under Section 121(d)(9) of the Internal Revenue Code to suspend the
running of the five-year period described in Sections 121(a), 121(c)
(1)(B), and 121(d)(7) of the Internal Revenue Code, that five-year
period may not be suspended under Section 121(d)(9) of the Internal
Revenue Code for state purposes, and a separate election for state
purposes shall not be allowed under paragraph (3) of subdivision (e)
of Section 17024.5.
(f) Section 121(d)(10) of the Internal Revenue Code, relating to
property acquired from a decedent, shall not apply.
SEC. 18. Section 17160.5 of the Revenue and Taxation Code is
repealed.
SEC. 19. Section 17201.4 is added to the Revenue and Taxation
Code, to read:
17201.4. Section 179B of the Internal Revenue Code, relating to
deductions for capital costs incurred in complying with Environmental
Protection Agency sulfur regulations, shall not apply.
SEC. 20. Section 17201.5 is added to the Revenue and Taxation
Code, to read:
17201.5. Section 181 of the Internal Revenue Code, relating to
treatment of certain qualified film and television productions, shall
not apply.
SEC. 21. Section 17201.6 is added to the Revenue and Taxation
Code, to read:
17201.6. Section 199 of the Internal Revenue Code, relating to
income attributable to domestic production activities, shall not
apply.
SEC. 22. Section 17202.5 of the Revenue and Taxation Code is
repealed.
SEC. 23. Section 17204 of the Revenue and Taxation Code is amended
to read:
17204. (a) Section 221 of the Internal Revenue Code, relating to
interest on education loans, is modified to additionally provide that
a deduction shall be allowed under this section only with respect to
interest paid on any qualified education loan during the first 60
months, whether or not consecutive, in which interest payments are
required. For purposes of this subdivision, any loan and period shall
be determined in the form and manner prescribed in forms and
instructions by the Franchise Tax Board in the case of multiple loans
that are refinanced by, or serviced as, a single loan and in the
case of loans incurred before January 1, 2005.
(b) (1) Section 221(b)(2)(B)(i)(I) of the Internal Revenue Code is
modified by substituting the phrase "$40,000 ($60,000 in the case of
a joint return)" in lieu of the phrase "$50,000 ($100,000 in the
case of a joint return)" contained therein.
(2) Section 221(b)(2)(B)(ii) of the Internal Revenue Code is
modified by substituting the phrase "$15,000" in lieu of the phrase
"$15,000 ($30,000 in the case of a joint return)" contained therein.
(3) Section 221(f)(1) of the Internal Revenue Code is modified by
substituting the phrase "$40,000 and $60,000 amounts" in lieu of the
phrase "$50,000 and $100,000 amounts" contained therein.
(c) This section shall apply to taxable years beginning on and
after January 1, 2005, and before January 1, 2006. This section
shall remain in effect only until January 1, 2006, and as of that
date is repealed.
SEC. 24. Section 17204.7 is added to the Revenue and Taxation
Code, to read:
17204.7. Section 222 of the Internal Revenue Code, relating to
qualified tuition and related expenses, shall not apply.
SEC. 25. Section 17205 of the Revenue and Taxation Code, as added
by Section 14 of Chapter 34 of the Statutes of 2002, is repealed.
SEC. 26. Section 17205 of the Revenue and Taxation Code, as added
by Section 14 of Chapter 35 of the Statutes of 2002, is repealed.
SEC. 26.5. Section 17215.1 is added to the Revenue and Taxation
Code, to read:
17215.1. Section 220(f)(5) of the Internal Revenue Code, relating
to rollover contributions, shall not apply.
SEC. 26.6. Section 17215.4 is added to the Revenue and Taxation
Code, to read:
17215.4. Section 223 of the Internal Revenue Code, relating to
health savings accounts, shall not apply.
SEC. 27. Section 17220 of the Revenue and Taxation Code is amended
to read:
17220. (a) Section 164(a)(3) of the Internal Revenue Code,
relating to the deductibility of state, local, and foreign income,
war profits, and excess profits taxes, shall not apply.
(b) Section 164(b)(5) of the Internal Revenue Code, relating to
general sales taxes, shall not apply.
(c) In addition to the provisions of Section 164(c) of the
Internal Revenue Code, relating to deduction denied in case of
certain taxes, no deduction shall be allowed for any tax imposed
under Chapter 10.5 (commencing with Section 17935), Chapter 10.6
(commencing with Section 17941), or Chapter 10.7 (commencing with
Section 17951) of this part or under Part 11 (commencing with Section
23001).
SEC. 28. Section 17250 of the Revenue and Taxation Code is amended
to read:
17250. (a) Section 168 of the Internal Revenue Code is modified
as follows:
(1) Any reference to "tax imposed by this chapter" in Section 168
of the Internal Revenue Code means "net tax," as defined in Section
17039.
(2) (A) Section 168(e)(3) is modified to provide that any
grapevine, replaced in a vineyard in California in any taxable year
beginning on or after January 1, 1992, as a direct result of a
phylloxera infestation in that vineyard, or replaced in a vineyard in
California in any taxable year beginning on or after January 1,
1997, as a direct result of Pierce's disease in that vineyard, shall
be "five-year property," rather than "10-year property."
(B) Section 168(g)(3) of the Internal Revenue Code is modified to
provide that any grapevine, replaced in a vineyard in California in
any taxable year beginning on or after January 1, 1992, as a direct
result of a phylloxera infestation in that vineyard, or replaced in a
vineyard in California in any taxable year beginning on or after
January 1, 1997, as a direct result of Pierce's disease in that
vineyard, shall have a class life of 10 years.
(C) Every taxpayer claiming a depreciation deduction with respect
to grapevines as described in this paragraph shall obtain a written
certification from an independent state-certified integrated pest
management adviser, or a state agricultural commissioner or adviser,
that specifies that the replanting was necessary to restore a
vineyard infested with phylloxera or Pierce's disease. The taxpayer
shall retain the certification for future audit purposes.
(3) Section 168(j) of the Internal Revenue Code, relating to
property on Indian reservations, shall not apply.
(4) Section 168(k) of the Internal Revenue Code, relating to
special allowance for certain property acquired after September 10,
2001, and before January 1, 2005, shall not apply.
(5) Sections 168(b)(3)(G) and 168(b)(3)(H) of the Internal Revenue
Code, relating to property to which the straight line method
applies, shall not apply.
(6) Sections 168(e)(3)(E)(iv) and 168(e)(3)(E)(v) of the Internal
Revenue Code, relating to 15-year property, shall not apply.
(7) Sections 168(e)(6) and 168(e)(7) of the Internal Revenue Code,
relating to qualified leasehold improvement property and to
qualified restaurant property, respectively, shall not apply.
(b) Section 169 of the Internal Revenue Code, relating to
amortization of pollution control facilities, is modified as follows:
(1) The deduction allowed by Section 169 of the Internal Revenue
Code shall be allowed only with respect to facilities located in this
state.
(2) The "state certifying authority," as defined in Section 169(d)
(2) of the Internal Revenue Code, means the State Air Resources
Board, in the case of air pollution, and the State Water Resources
Control Board, in the case of water pollution.
SEC. 29. Section 17250.5 of the Revenue and Taxation Code is
amended to read:
17250.5. Section 167(g) of the Internal Revenue Code, relating to
depreciation under income forecast method, shall be modified as
follows:
(a) Section 167(g)(2)(C) of the Internal Revenue Code is modified
by substituting "Section 19521" in lieu of "Section 460(b)(7)" of the
Internal Revenue Code.
(b) Section 167(g)(5)(D) of the Internal Revenue Code is modified
by substituting "Part 10.2 (commencing with Section 18401) (other
than Section 19136)" in lieu of "Subtitle F (other than Sections 6654
and 6655)."
(c) Section 167(g)(5)(E) of the Internal Revenue Code, relating to
treatment of distribution costs, shall not apply.
(d) Section 167(g)(7) of the Internal Revenue Code, relating to
treatment of participations and residuals, shall not apply.
SEC. 30. Section 17255 of the Revenue and Taxation Code is amended
to read:
17255. (a) Section 179(b)(1) of the Internal Revenue Code,
relating to dollar limitation, shall not apply and in lieu thereof,
the aggregate cost which may be taken into account under Section 179
(a) of the Internal Revenue Code for any taxable year shall not
exceed twenty-five thousand dollars ($25,000).
(b) Section 179(b)(2) of the Internal Revenue Code, relating to
reduction in limitation, shall not apply and in lieu thereof, the
limitation under subdivision (a) for any taxable year shall be
reduced, but not to below zero, by the amount by which the cost of
Section 179 property, as defined in Section 179(d)(1) of the Internal
Revenue Code, except as otherwise provided, placed in service during
the taxable year exceeds two hundred thousand dollars ($200,000).
(c) Section 179 of the Internal Revenue Code is modified to
provide that the "aggregate amount disallowed" referred to in Section
179(b)(3)(B) of the Internal Revenue Code shall be computed under
this part as it read on the date the property generating the amount
disallowed was placed in service.
(d) Section 179(b)(5) of the Internal Revenue Code, relating to
inflation adjustments, shall not apply.
(e) The last sentence in Section 179(c)(2) of the Internal Revenue
Code, relating to election irrevocable, shall not apply.
(f) Section 179(d)(1)(A)(ii) of the Internal Revenue Code,
relating to computer software, shall not apply.
SEC. 31. Section 17255.5 is added to the Revenue and Taxation
Code, to read:
17255.5. (a) For any taxable year which includes part of the
"applicable period" as defined in paragraph (6) of subdivision (c) of
Section 17053.62, a small refiner (as defined in Section 17053.62)
may elect to treat 75 percent of qualified capital costs (as defined
in paragraph (2) of subdivision (c) of Section 17053.62) paid or
incurred by the taxpayer during the taxable year as expenses that are
not chargeable to capital account. Any cost so treated shall be
allowed as a deduction for the taxable year in which paid or
incurred.
(b) (1) For purposes of this part, the basis of any property shall
be reduced by the portion of the cost of that property taken into
account under subdivision (a).
(2) For purposes of Section 1245 of the Internal Revenue Code, and
corresponding section of this part, the amount of the deduction
allowable under subdivision (a) with respect to any property which is
of a character subject to the allowance for depreciation shall be
treated as a deduction allowed for depreciation under Section 167 of
the Internal Revenue Code, or the corresponding section of this part.
(c) This section shall remain in effect only until January 1,
2009, and as of that date is repealed.
SEC. 32. Section 17256 of the Revenue and Taxation Code is amended
to read:
17256. Section 179A of the Internal Revenue Code, relating to
deduction for clean-fuel vehicles and certain refueling property,
shall not apply.
SEC. 33. Section 17279.4 of the Revenue and Taxation Code is
amended to read:
17279.4. Section 198 of the Internal Revenue Code, relating to
expensing of environmental remediation costs, is modified as follows:
(a) For expenditures paid or incurred before January 1, 2004, all
of the following shall apply:
(1) If a taxpayer has, at any time, made an election for federal
purposes under Section 198(a) of the Internal Revenue Code to have
Section 198 of the Internal Revenue Code apply to a qualified
environmental remediation expenditure, Section 198 of the Internal
Revenue Code shall apply to that qualified environmental remediation
expenditure for state purposes, a separate election for state
purposes shall not be allowed under paragraph (3) of subdivision (e)
of Section 17024.5, and the federal election shall be binding
for purposes of this part.
(2) If a taxpayer fails to make an election for federal purposes
under Section 198(a) of the Internal Revenue Code to have Section 198
of the Internal Revenue Code apply to a qualified environmental
remediation expenditure, an election under Section 198(a) of the
Internal Revenue Code shall not be allowed for state purposes,
Section 198 of the Internal Revenue Code shall not apply to that
qualified environmental remediation expenditure for state purposes,
and a separate election for state purposes shall not be allowed under
paragraph (3) of subdivision (e) of Section 17024.5.
(b) No inference as to the proper treatment for purposes of this
part of qualified environmental remediation expenditures paid or
incurred in taxable years beginning before January 1, 1998, shall be
made.
(c) Section 198(h) of the Internal Revenue Code, relating to
termination, shall not apply.
(d) Section 198 of the Internal Revenue Code, relating to
expensing of environmental remediation costs, shall not apply to
expenditures paid or incurred after December 31, 2003.
SEC. 34. 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 the specified date contained in paragraph (1)
of subdivision (a) of 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 income tax 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. 35. 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 the specified date contained in paragraph
(1) of subdivision (a) of 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 income tax 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.
(f) Section 451(i) of the Internal Revenue Code, relating to
special rule for sales or dispositions to implement Federal Energy
Regulatory Commission or state electric restructuring policy, shall
not apply.
SEC. 36. Section 17681.6 is added to the Revenue and Taxation
Code, to read:
17681.6. Section 613A(c)(6)(H) of the Internal Revenue Code,
relating to temporary suspension of taxable income limit with respect
to marginal production, shall not apply.
SEC. 37. 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) Section 692(d)(2) of the Internal Revenue Code, relating to
the ten thousand-dollar ($10,000) minimum benefit, does not apply.
SEC. 37.5. Section 17733 of the Revenue and Taxation Code is
amended to read:
17733. (a) An estate shall be allowed a credit of ten dollars
($10) against the tax imposed under Section 17041, less any amounts
imposed under paragraph (1) of subdivision (d) or paragraph (1) of
subdivision (e), or both, of Section 17560.
(b) (1) Except as provided in paragraph (2), a trust shall be
allowed a credit of one dollar ($1) against the tax imposed under
Section 17041, less any amounts imposed under paragraph (1) of
subdivision (d) or paragraph (1) of subdivision (e), or both, of
Section 17560.
(2) (A) A disability trust, as defined in Section 642(b)(2)(C) of
the Internal Revenue Code, shall be allowed a credit in an amount
equal to the personal exemption credit authorized for a single
individual pursuant to subdivision (a) of Section 17054.
(B) The credit authorized by subparagraph (A) shall be subject to
the credit reduction provisions of Section 17054.1. For purposes of
making the adjustments required by Section 17054.1, the adjusted
gross income of the disability trust shall be computed in accordance
with Section 67(e) of the Internal Revenue Code, relating to
determination of adjusted gross income in case of estates and trusts.
(C) This paragraph applies to taxable years beginning on or after
January 1, 2004.
(c) The credits allowed by this section shall be in lieu of the
credits allowed under Section 17054 (relating to credit for personal
exemption).
SEC. 37.6. Section 17734.6 is added to the Revenue and Taxation
Code, to read:
17734.6. Section 646 of the Internal Revenue Code, relating to
tax treatment of electing Alaska Native Settlement Trusts, shall not
apply.
SEC. 38. Section 17760 is added to the Revenue and Taxation Code,
to read:
17760. Section 684 of the Internal Revenue Code, relating to
recognition of gain on certain transfers to certain foreign trusts
and estates, shall not apply.
SEC. 39. Section 18035.6 is added to the Revenue and Taxation
Code, to read:
18035.6. Section 1014 of the Internal Revenue Code, relating to
basis of property acquired from a decedent, is modified to provide
that Section 1014(f) of the Internal Revenue Code, relating to
termination date, shall not apply.
SEC. 40. Section 18036.6 is added to the Revenue and Taxation
Code, to read:
18036.6. Section 1022 of the Internal Revenue Code, relating to
treatment of property acquired from a decedent dying after December
31, 2009, shall not apply.
SEC. 40.5. Section 18181 is added to the Revenue and Taxation
Code, to read:
18181. Part VI of Subchapter P of Chapter 1 of Subtitle A of the
Internal Revenue Code, relating to treatment of certain passive
foreign investment companies, shall not apply.
SEC. 41. Section 18571 of the Revenue and Taxation Code is
amended to read:
18571. (a) The provisions of Section 7508 of the Internal Revenue
Code, relating to time for performing certain acts postponed by
reason of service in a combat zone or contingency operation, shall
apply except as otherwise provided.
(b) Section 7508(e)(1) of the Internal Revenue Code, relating to
tax in jeopardy, etc., is modified to refer to jeopardy assessments
and liens authorized under this part, in lieu of the references to
Section 6851 and Chapter 70 or 71 of the Internal Revenue Code.
(c) Notwithstanding Section 17034, this section shall be operative
without regard to taxable years and shall be operative with respect
to any actions specified in Section 18570 that are required or
permitted to be taken on or after August 2, 1990.
SEC. 42. Section 18572 of the Revenue and Taxation Code is amended
to read:
18572. Section 7508A of the Internal Revenue Code, relating to
postponement of certain tax-related deadlines, shall apply, except as
otherwise provided.
SEC. 42.5. Section 18628 of the Revenue and Taxation Code is
amended to read:
18628. (a) Section 6111 of the Internal Revenue Code, relating to
disclosure of reportable transactions, applies, except as otherwise
provided.
(b) (1) Except as provided in subdivision (e), a material advisor
is required to send a duplicate of the federal return, if applicable,
or the same information required to be provided on the federal
reportable transactions return for California reportable transactions
to the Franchise Tax Board not later than the date specified by the
Franchise Tax Board or the Secretary of the Treasury.
(2) (A) The information provided to the Franchise Tax Board
pursuant to paragraph (1) shall also include any other information
required by a Franchise Tax Board Notice.
(B) Chapter 3.5 (commencing with Section 11340) of Part 1 of
Division 3 of Title 2 of the Government Code does not apply to any
additional information requested under this section.
(c) Section 6111 of the Internal Revenue Code is modified by
substituting the phrase "Secretary or the Franchise Tax Board" for
the word "Secretary" in each place it appears.
(d) The reportable transactions return requirements of this
section shall apply to any material advisor with respect to any
reportable transaction, as defined in Section 6707A(c) of the
Internal Revenue Code with respect to a material advisor that
satisfies any of the following conditions:
(1) Is organized in this state.
(2) Is doing business in this state.
(3) Derives income from sources in this state.
(4) Provides any material aid, assistance, or advice with respect
to organizing, managing, promoting, selling, implementing, insuring,
or carrying out any reportable transaction with respect to a taxpayer
that meets any of the following requirements:
(A) Is organized in this state.
(B) Does business in this state.
(C) Derives income from sources in this state.
(e) In addition to the requirements set forth in subdivision (a),
for any transactions entered into on or after February 28, 2000, that
become listed transactions (as defined under Section 6707A(c)(2) of
the Internal Revenue Code) at any time, a return for those
transactions shall be required to be filed with the Franchise Tax
Board by the later of:
(1) Sixty days after entering into the transaction.
(2) Sixty days after the transaction becomes a listed transaction.
(3) Sixty days after the effective date of the act amending this
section.
(f) In addition to the requirements set forth in subdivisions (a)
and (e), for any transactions entered into on or after September 2,
2003, that are specifically identified by the Franchise Tax Board for
California income or franchise tax purposes (under the authority of
paragraph (4) of subdivision (a) of Section 18407) as a "listed
transaction" at any time, a return for those transactions shall be
required to be filed with the Franchise Tax Board by the later of:
(1) Sixty days after entering into the transaction.
(2) Sixty days after the transaction becomes a listed transaction.
(3) Sixty days after the effective date of the act amending this
section.
SEC. 43. Section 18633 of the Revenue and Taxation Code is amended
to read:
18633. (a) (1) Every partnership, on or before the 15th day of
the fourth month following the close of its taxable year, shall make
a return for that taxable year, stating specifically the items of
gross income and the deductions allowed by Part 10 (commencing with
Section 17001). Except as otherwise provided in Section 18621.5, the
return shall include the names, addresses, and taxpayer
identification numbers of the persons, whether residents or
nonresidents, who would be entitled to share in the net income if
distributed and the amount of the distributive share of each person.
The return shall contain or be verified by a written declaration that
it is made under penalty of perjury, signed by one of the partners.
(2) In addition to returns required by paragraph (1), every
limited partnership subject to the tax imposed by subdivision (b) of
Section 17935, on or before the 15th day of the fourth month
following the close of its taxable year, shall make a return for that
taxable year, containing the information identified in paragraph
(1). In the case of a limited partnership not doing business in this
state, the Franchise Tax Board shall prescribe the manner and extent
to which the information identified in paragraph (1) shall be
included with the return required by this paragraph.
(b) Each partnership required to file a return under subdivision
(a) for any taxable year shall (on or before the day on which the
return for that taxable year was required to be filed) furnish to
each person who is a partner or who holds an interest in that
partnership as a nominee for another person at any time during that
taxable year a copy of the information required to be shown on that
return as may be required by regulations.
(c) Any person who holds an interest in a partnership as a nominee
for another person shall do both of the following:
(1) Furnish to the partnership, in the manner prescribed by the
Franchise Tax Board, the name, address, and taxpayer identification
number of that other person, and any other information for that
taxable year as the Franchise Tax Board may by form and regulation
prescribe.
(2) Furnish to that other person, in the manner prescribed by the
Franchise Tax Board, the information provided by that partnership
under subdivision (b).
(d) The provisions of Section 6031(d) of the Internal Revenue
Code, relating to the separate statement of items of unrelated
business taxable income, shall apply.
(e) The provisions of Section 6031(f) of the Internal Revenue
Code, relating to electing investment partnerships, shall apply,
except as otherwise provided.
SEC. 43.5. Section 18648 of the Revenue and Taxation Code is
amended to read:
18648. (a) Section 6112 of the Internal Revenue Code, relating to
material advisors of reportable transactions that must keep lists of
advisees, applies except as otherwise provided.
(b) Section 6112 of the Internal Revenue Code is modified by
substituting the phrase "Secretary or the Franchise Tax Board" for
the word "Secretary" each place it appears.
(c) The requirement to maintain lists under this section shall
apply to any material advisor, as defined in Section 6111 of the
Internal Revenue Code, with respect to any reportable transaction, as
defined in Section 6707A(c) of the Internal Revenue Code and
regardless of whether a return is required to be filed under Section
18628 with respect to that reportable transaction and with respect to
a material advisor that satisfies any of the following conditions:
(1) Is organized in this state.
(2) Is doing business in this state.
(3) Derives income from sources in this state.
(4) Provides any material aid, assistance, or advice with respect
to organizing, managing, promoting, selling, implementing, insuring,
or carrying out any reportable transaction with respect to a taxpayer
that meets any of the following conditions:
(A) Is organized in this state.
(B) Does business in this state.
(C) Derives income from sources in this state.
(d) (1) In addition to any regulation issued under Section 6112 of
the Internal Revenue Code, the list required to be maintained by
this section for listed transactions, as defined in Section 6707A(c)
(2) of the Internal Revenue Code, shall be maintained in the form and
manner prescribed by the Franchise Tax Board.
(2) Chapter 3.5 (commencing with Section 11340) of Part 1 of
Division 3 of Title 2 of the Government Code does not apply to any
requirement prescribed by the Franchise Tax Board under this section.
(3) For transactions entered into on or after February 28, 2000,
that become listed transactions (as defined under Section 6707A(c)(2)
of the Internal Revenue Code) at any time, the lists shall be
provided to the Franchise Tax Board by the later of:
(A) Sixty days after entering into the transaction.
(B) Sixty days after the transaction becomes a listed transaction.
(4) For transactions entered into on or after September 2, 2003,
that are specifically identified by the Franchise Tax Board for
California income or franchise tax purposes (under the authority of
paragraph (4) of subdivision (a) of Section 18407) as a "listed
transaction" at any time, the list shall be provided to the Franchise
Tax Board by the later of:
(A) Sixty days after entering into the transaction.
(B) Sixty days after the transaction becomes a listed transaction.
SEC. 44. Section 19008 of the Revenue and Taxation Code is amended
to read:
19008. (a) The Franchise Tax Board may, in cases of financial
hardship, as determined by the Franchise Tax Board, allow an
individual or fiduciary to enter into installment payment agreements
with the Franchise Tax Board to make payments on taxes due, plus
applicable interest and penalties over the life of the installment
period. Failure by an individual or fiduciary to comply fully with
the terms of the installment payment agreement shall render the
agreement null and void, unless the Franchise Tax Board determines
that the failure was due to a reasonable cause, and the total amount
of tax, interest, and all penalties shall be immediately due and
payable.
(b) In the case of a liability for tax of an individual under Part
10 (commencing with Section 17001) or this part, the Franchise Tax
Board shall enter into an agreement to accept the full payment of the
tax in installments if, as of the date the individual offers to
enter into the agreement, all of the following apply:
(1) The aggregate amount of the liability (determined without
regard to interest, penalties, additions to the tax and additional
amounts) does not exceed ten thousand dollars ($10,000).
(2) The taxpayer (and, if the liability relates to a joint return,
the taxpayer's spouse) has not during any of the preceding five
taxable years done any of the following:
(A) Failed to file any return of tax imposed under Part 10
(commencing with Section 17001) or this part.
(B) Failed to pay any tax required to be shown on the return.
(C) Entered into an installment agreement under this section for
payment of any tax imposed by Part 10 (commencing with Section 17001)
or this part.
(3) The Franchise Tax Board determines that the taxpayer is
financially unable to pay the liability in full when due (and the
taxpayer submits any information as the Franchise Tax Board may
require to make this determination).
(4) The agreement requires full payment of the liability within
three years.
(5) The taxpayer agrees to comply with the provisions of this part
and Part 10 (commencing with Section 17001) for the period the
agreement is in effect.
(c) Except in any case where the Franchise Tax Board finds
collection of the tax to which an installment payment agreement
relates to be in jeopardy, or there is a mutual consent to terminate,
alter, or modify the agreement, the agreement shall not be
considered null and void, or otherwise terminated, unless both of the
following occur:
(1) A notice of termination is provided to the individual or
fiduciary not later than 30 days before the date of termination.
(2) The notice includes an explanation of why the Franchise Tax
Board intends to terminate the agreement.
(d) No levy may be issued on the property or rights to property of
any person with respect to any unpaid tax:
(1) During the period that an offer by the taxpayer for an
installment agreement under this section for payment of the unpaid
tax is pending with the Franchise Tax Board.
(2) If the offer is rejected by the Franchise Tax Board, during
the 30 days thereafter (and, if a request for review of the rejection
is filed within the 30 days, during the period that the review is
pending).
(3) During the period that the installment agreement for payment
of the unpaid tax is in effect.
(4) If the agreement is terminated by the Franchise Tax Board,
during the 30 days thereafter (and, if a request for review of the
termination is filed within the 30 days, during the period that the
review is pending).
(5) This subdivision shall not apply with respect to any of the
following:
(A) Any unpaid tax if either of the following occurs:
(i) The taxpayer files a written notice with the Franchise Tax
Board that waives the restriction imposed by this subdivision on levy
with respect to the tax.
(ii) The Franchise Tax Board finds that the collection of that tax
is in jeopardy.
(B) Any levy that was first issued before the date that the
applicable proceeding under this subdivision commenced.
(C) At the discretion of the Franchise Tax Board, any unpaid tax
for which the taxpayer makes an offer of an installment agreement
subsequent to a rejection of an offer of an installment agreement
with respect to that unpaid tax (or to any review thereof).
(D) The period of limitation under Section 19371 shall be
suspended for the period during which the Franchise Tax Board is
prohibited under this subdivision from making a levy.
(e) The Taxpayers' Rights Advocate shall establish procedures for
an independent departmental administrative review for the rejection
of the offer of an installment payment and for installment payment
agreements that are rendered null and void, or otherwise terminated
under this section, for individuals or fiduciaries who request that
review. This administrative review shall not be subject to Chapter
4.5 (commencing with Section 11400) of Part 1 of Division 3 of the
Government Code. Unless review is requested by the taxpayer within 30
days of the date of rejection of the offer of an installment
agreement or termination of the installment agreement, this
administrative review shall not stay collection of the tax to which
the installment payment agreement relates.
(f) In the case of an agreement for partial payment of a tax
liability entered into by the Franchise Tax Board pursuant to
subdivision (a), the Franchise Tax Board shall review the agreement
at least once every two years.
(g) The amendments made by the act adding this subdivision are
operative for any proposed installment agreement submitted after the
effective date of that act.
SEC. 45. Section 19041.5 of the Revenue and Taxation Code is
amended to read:
19041.5. (a) Notwithstanding any other provision of this part,
Part 10 (commencing with Section 17001), or Part 11 (commencing with
Section 23001), the provisions of Section 6603 of the Internal
Revenue Code, relating to deposits made to suspend the running of
interest on potential underpayments, shall apply, except as otherwise
provided. A deposit shall not be considered a payment of tax for
purposes of filing a claim for refund pursuant to Section 19306,
converting an administrative action to an action on a claim pursuant
to Section 19335, or filing an action pursuant to Section 19384,
until either of the following occurs:
(1) The taxpayer provides a written statement to the Franchise Tax
Board specifying that the deposit shall be a payment of tax for
purposes of Section 19306, 19335, or 19384.
(2) The deposit is used to pay a final tax liability.
(b) Section 6603(d) of the Internal Revenue Code is modified to
substitute the phrase "notice of proposed deficiency assessment under
Article 3 of Chapter 4 of this part" for "30-day letter" in each
place that the phrase "30-day letter" appears.
(c) In the case of any amount held by the Franchise Tax Board as a
deposit in the nature of a cash bond pursuant to the provisions of
this section prior to the amendments made by the act adding this
subdivision, the date that the taxpayer identifies that amount as a
deposit made pursuant to this section, as amended by the act adding
this subdivision, shall be treated as the date that the amount is
deposited for purposes of this section, as amended by the act adding
this subdivision.
SEC. 46. Section 19116 of the Revenue and Taxation
Code is amended to read:
19116. (a) In the case of an individual who files a return of tax
imposed under Part 10 (commencing with Section 17001) for a taxable
year on or before the due date for the return, including extensions,
if the Franchise Tax Board does not provide a notice to the taxpayer
specifically stating the taxpayer's liability and the basis of the
liability before the close of the notification period, the Franchise
Tax Board shall suspend the imposition of any interest, penalty,
addition to tax, or additional amount with respect to any failure
relating to the return which is computed by reference to the period
of time the failure continues to exist and which is properly
allocable to the suspension period.
(b) For purposes of this section:
(1) Except as provided in subdivision (e), "notification period"
means the 18-month period beginning on the later of either of the
following:
(A) The date on which the return is filed.
(B) The due date of the return without regard to extensions.
(2) "Suspension period" means the period beginning on the day
after the close of the notification period and ending on the date
which is 15 days after the date on which notice described in
subdivision (a) is provided by the Franchise Tax Board.
(c) This section shall be applied separately with respect to each
item or adjustment.
(d) This section shall not apply to any of the following:
(1) Any penalty imposed by Section 19131.
(2) Any penalty imposed by Section 19132.
(3) Any interest, penalty, addition to tax, or additional amount
involving fraud.
(4) Any interest, penalty, addition to tax, or additional amount
with respect to any tax liability shown on the return.
(5) Any criminal penalty.
(6) Any interest, penalty, addition to tax, or additional amount
with respect to any gross misstatement.
(7) Any interest, penalty, addition to tax, or additional amount
relating to any reportable transaction with respect to which the
requirements of Section 6664(d)(2)(A) of the Internal Revenue Code
are not met, and any listed transaction, as defined in Section 6707A
(c) of the Internal Revenue Code.
(e) For taxpayers required by subdivision (a) of Section 18622 to
report a change or correction by the Commissioner of Internal Revenue
or other officer of the United States or other competent authority
the following rules shall apply:
(1) The notification period under subdivision (a) shall be either
of the following:
(A) One year from the date the notice required by Section 18622 is
filed with the Franchise Tax Board by the taxpayer or the Internal
Revenue Service, if the taxpayer or the Internal Revenue Service
reports that change or correction within six months after the final
federal determination.
(B) Two years from the date when the notice required by Section
18622 is filed with the Franchise Tax Board by the taxpayer or the
Internal Revenue Service, if after the six-month period required in
Section 18622, a taxpayer or the Internal Revenue Service reports a
change or correction.
(2) The suspension period under subdivision (a) shall mean the
period beginning on the day after the close of the notification
period under paragraph (1) and ending on the date which is 15 days
after the date on which notice described in subdivision (a) is
provided by the Franchise Tax Board.
(f) For notices sent after January 1, 2004, this section does not
apply to taxpayers with taxable income greater than two hundred
thousand dollars ($200,000) that have been contacted by the Franchise
Tax Board regarding the use of a potentially abusive tax shelter
(within the meaning of Section 19777).
(g) This section shall apply to taxable years ending after October
10, 1999.
(h) The amendments made to this section by the act adding this
subdivision shall apply to notices sent after January 1, 2005.
SEC. 47. Section 19136.12 is added to the Revenue and Taxation
Code, to read:
19136.12. (a) No addition to tax shall be made pursuant to
Section 19136 for any period before the date prescribed under Section
18566 for the filing of the return for the 2005 taxable year, with
respect to any underpayment of an installment for the 2005 taxable
year, to the extent that the underpayment was created or increased by
any provision of the act adding this section.
(b) No addition to tax shall be made pursuant to Section 18601 for
the filing of the return for the 2005 taxable year, with respect to
any underpayment of an installment for the 2005 taxable year, to the
extent that the underpayment was created or increased by any
provision of the act adding this section.
(c) The Franchise Tax Board shall implement this section in a
reasonable manner.
SEC. 47.1. Section 19164 of the Revenue and Taxation Code is
amended to read:
19164. (a) (1) (A) An accuracy-related penalty shall be imposed
under this part and shall be determined in accordance with Section
6662 of the Internal Revenue Code, relating to imposition of
accuracy-related penalty on underpayments, except as otherwise
provided.
(B) (i) Except for understatements relating to reportable
transactions to which Section 19164.5 applies, in the case of any
proposed deficiency assessment issued after the last date of the
amnesty period specified in Chapter 9.1 (commencing with Section
19730) for any taxable year beginning prior to January 1, 2003, the
penalty specified in Section 6662(a) of the Internal Revenue Code
shall be computed by substituting "40 percent" for "20 percent."
(ii) Clause (i) shall not apply to any taxable year of a taxpayer
beginning prior to January 1, 2003, if, as of the start date of the
amnesty program period specified in Section 19731, the taxpayer is
then under audit by the Franchise Tax Board, or the taxpayer has
filed a protest under Section 19041, or the taxpayer has filed an
appeal under Section 19045, or the taxpayer is engaged in settlement
negotiations under Section 19442, or the taxpayer has a pending
judicial proceeding in any court of this state or in any federal
court relating to the tax liability of the taxpayer for that taxable
year.
(2) With respect to corporations, this subdivision shall apply to
all of the following:
(A) All taxable years beginning on or after January 1, 1990.
(B) Any other taxable year for which an assessment is made after
July 16, 1991.
(C) For purposes of this section, references in Section 6662(e) of
the Internal Revenue Code and the regulations thereunder, relating
to treatment of an affiliated group that files a consolidated federal
return, are modified to apply to those entities required to be
included in a combined report under Section 25101 or 25110. For these
purposes, entities included in a combined report pursuant to
paragraph (4) or (6) of subdivision (a) of Section 25110 shall be
considered only to the extent required to be included in the combined
report.
(3) Section 6662(d)(1)(B) of the Internal Revenue Code is modified
to provide that in the case of a corporation, other than an "S"
corporation, there is a substantial understatement of tax for any
taxable year if the amount of the understatement for the taxable year
exceeds the lesser of:
(A) Ten percent of the tax required to be shown on the return for
the taxable year (or, if greater, two thousand five hundred dollars
($2,500)).
(B) Five million dollars ($5,000,000).
(4) Section 6662(d)(2)(A) of the Internal Revenue Code is modified
to additionally provide that the excess determined under Section
6662(d)(2)(A) of the Internal Revenue Code shall be determined
without regard to items to which Section 19164.5 applies and without
regard to items with respect to which a penalty is imposed by Section
19774.
(b) For purposes of Section 6662(d) of the Internal Revenue Code,
Section 6664 of the Internal Revenue Code, Section 6694(a)(1) of the
Internal Revenue Code, and this part, the Franchise Tax Board may
prescribe a list of positions for which the Franchise Tax Board
believes there is not substantial authority or there is no reasonable
belief that the tax treatment is more likely than not the proper tax
treatment. That list (and any revisions thereof) shall be published
through the use of Franchise Tax Board Notices or other published
positions. In addition, the "listed transactions" identified and
published pursuant to the preceding sentence shall be published on
the Web site of the Franchise Tax Board.
(c) A fraud penalty shall be imposed under this part and shall be
determined in accordance with Section 6663 of the Internal Revenue
Code, relating to imposition of fraud penalty, except as otherwise
provided.
(d) Section 6664 of the Internal Revenue Code, relating to
definitions and special rules, shall apply, except as otherwise
provided.
SEC. 47.2. Section 19164.5 is added to the Revenue and Taxation
Code, to read:
19164.5. (a) A reportable transaction accuracy-related penalty
shall be imposed under this part and shall be determined in
accordance with Section 6662A of the Internal Revenue Code, relating
to the imposition of an accuracy-related penalty on understatements
with respect to reportable transactions, except as otherwise
provided.
(b) (1) The reportable transaction understatement, as determined
under Section 6662A(b) of the Internal Revenue Code, is modified to
not include amounts to which the penalty of Section 19774 is imposed.
(2) Section 6662A(b)(1)(A)(ii) of the Internal Revenue Code is
modified to substitute the phrase "Sections 17041, 23151, 23181, or
23501" for "section 1 (section 11 in the case of a taxpayer which is
a corporation)."
(3) Section 6662A(b)(1)(B) of the Internal Revenue Code is
modified to substitute the phrase "Part 10 (commencing with Section
17001) or Part 11 (commencing with Section 23001)" for "subtitle A."
(4) Section 6662A(b)(2)(B) of the Internal Revenue Code is
modified to substitute the phrase "income or franchise tax" for
"Federal income tax."
(5) Section 6662A(e)(1) of the Internal Revenue Code is modified
to additionally provide that the amount of the understatement is
increased by noneconomic transaction understatements, as defined in
Section 19774.
(c) Section 6662A(e)(2) of the Internal Revenue Code is modified
to additionally provide that Section 6662A of the Internal Revenue
Code does not apply to amounts to which a penalty is imposed under
Section 19774.
(d) The provisions of subdivision (f) of Section 19772, relating
to the rescission of the penalty by the Chief Counsel, shall apply to
any penalty imposed by this section.
SEC. 47.3. Section 19166 of the Revenue and Taxation Code is
amended to read:
19166. (a) A penalty shall be imposed for understatement of any
taxpayer's liability by a tax return preparer and shall be determined
in accordance with Section 6694 of the Internal Revenue Code, except
as otherwise provided.
(b) (1) For taxpayers that have a reportable transaction, as
defined in Section 6707A(c)(1) of the Internal Revenue Code, with
respect to which the requirements of Section 6664(d)(2)(A) of the
Internal Revenue Code are not met, any listed transaction, as defined
in Section 6707A(c)(2) of the Internal Revenue Code, or a gross
misstatement within the meaning of Section 6404(g)(2)(D) of the
Internal Revenue Code, Section 6694(a) of the Internal Revenue Code
is modified to substitute "one thousand dollars ($1,000)" for "two
hundred fifty dollars ($250)."
(2) Section 6694(a)(1) of the Internal Revenue Code is modified to
substitute the phrase "reasonable belief that the tax treatment in
that position was more likely than not the proper treatment" instead
of the phrase "realistic possibility of being sustained on its merits"
contained therein.
(3) Section 6694(a)(3) of the Internal Revenue Code is modified to
substitute the phrase "or there was no reasonable basis for the tax
treatment of that position" instead of the phrase "or was frivolous"
contained therein.
(c) Section 6694(b) of the Internal Revenue Code is modified to
substitute "$5,000" for "$1,000."
(d) Section 6694(c) of the Internal Revenue Code shall not apply
and, in lieu thereof, the following shall apply:
(1) If, within 30 days after the day on which notice and demand of
any penalty under Section 6694(a) or 6694(b) of the Internal Revenue
Code is made against any person who is an income tax return
preparer, that person pays an amount which is not less than 15
percent of the amount of that penalty and files a claim for refund of
the amount so paid, no levy or proceeding in court for the
collection of the remainder of that penalty shall be made, begun, or
prosecuted until the final resolution of a proceeding begun as
provided in paragraph (2). Notwithstanding Section 19381, the
beginning of that proceeding or levy during the time that prohibition
is in force may be enjoined in a proceeding in the superior court.
(2) If, within 30 days after the day on which a claim for refund
of any partial payment of any penalty under Section 6694(a) or 6694
(b) of the Internal Revenue Code is denied (or, if earlier, within 30
days after the expiration of six months after the day on which the
claim for refund has been filed), the income tax return preparer
fails to begin a proceeding in the superior court for the
determination of his or her liability for that penalty, paragraph (1)
shall cease to apply with respect to that penalty, effective on the
day following the close of the applicable 30-day period referred to
in this subdivision.
(3) The running of the period of limitations provided in Section
19371 on the collection by levy or by a proceeding in court in
respect of any penalty described in paragraph (1) shall be suspended
for the period during which the Franchise Tax Board is prohibited
from collecting by levy or a proceeding in court.
SEC. 47.4. Section 19173 of the Revenue and Taxation Code is
amended to read:
19173. (a) A penalty shall be imposed under this part for failure
to maintain lists of advisees with respect to reportable
transactions and shall be determined in accordance with Section 6708
of the Internal Revenue Code, except as otherwise provided.
(b) If a material advisor fails to meet the requirements of
subdivision (d) of Section 18648 with respect to a listed
transaction, as defined in Section 6707A(c)(2) of the Internal
Revenue Code, an additional penalty shall be imposed equal to the
greater of:
(1) One hundred thousand dollars ($100,000).
(2) Fifty percent of the gross income that the material advisor
derived from that activity.
(c) A penalty imposed under this section does not apply if it is
shown that the additional information required under paragraph (1) of
subdivision (d) of Section 18648 was not identified in a Franchise
Tax Board notice issued prior to the date the transaction or shelter
was entered into.
(d) The penalty imposed by subdivision (a) shall be assessed
against the person required to maintain or provide a list under
Section 18648. The penalty may be assessed at any time during the
period ending eight years after the failure has occurred.
(e) (1) The Chief Counsel of the Franchise Tax Board may rescind
all or any portion of any penalty imposed by this section with
respect to a list required to be maintained or provided under Section
18648, if all of the following apply:
(A) The violation is with respect to a reportable transaction,
other than a listed transaction, as defined in Section 6707A(c)(2) of
the Internal Revenue Code.
(B) The person on whom the penalty is imposed has a history of
complying with the requirements of this part and Part 10 (commencing
with Section 17001) or Part 11 (commencing with Section 23001).
(C) It is shown that the violation is due to an unintentional
mistake of fact.
(D) Imposing the penalty would be against equity and good
conscience.
(E) Rescinding the penalty would promote compliance with the
requirements of this part and Part 10 (commencing with Section 17001)
or Part 11 (commencing with Section 23001) and effective tax
administration.
(2) The exercise of authority under paragraph (1) shall be at the
sole discretion of the Chief Counsel of the Franchise Tax Board and
may not be delegated.
(3) Notwithstanding any other law or rule of law, any
determination under this subdivision may not be reviewed in any
administrative or judicial proceeding.
(f) Article 3 (commencing with Section 19031) of this chapter
(relating to deficiency assessments) shall not apply with respect to
the assessment or collection of any penalty imposed by subdivision
(a).
(g) The penalty imposed by this section is in addition to any
penalty imposed under Part 10 (commencing with Section 17001), Part
11 (commencing with Section 23001), or this part.
SEC. 47.5. Section 19177 of the Revenue and Taxation Code is
amended to read:
19177. A penalty shall be imposed for promoting abusive tax
shelters and shall be determined in accordance with the provisions of
Section 6700 of the Internal Revenue Code, except as otherwise
provided.
SEC. 47.6. Section 19179 of the Revenue and Taxation Code is
amended to read:
19179. A penalty shall be imposed for filing a frivolous return
and shall be determined in accordance with Section 6702 of the
Internal Revenue Code, except as otherwise provided.
(a) Section 6702 of the Internal Revenue Code shall be applied to
returns required to be filed under this part.
(b) For taxpayers that have a reportable transaction, as defined
in Section 6707A(c)(1) of the Internal Revenue Code with respect to
which the requirements of Section 6664(d)(2)(A) of the Internal
Revenue Code are not met, any listed transaction, as defined in
Section 6707A(c)(2) of the Internal Revenue Code, or a gross
misstatement within the meaning of Section 6404(g)(2)(D) of the
Internal Revenue Code, Section 6702(a) of the Internal Revenue Code
is modified as follows:
(1) By substituting "$5,000" instead of "$500."
(2) By substituting the term "person" instead of the term
"individual" in each place that it appears.
(3) By substituting "tax imposed under Part 10 (commencing with
Section 17001), Part 11 (commencing with Section 23001), or this part"
instead of the phrase "tax imposed by subtitle A" contained therein.
(4) By substituting the phrase "is based on" instead of the phrase
"is due to" contained therein.
(5) By substituting the phrase "frivolous or is based on a
position that the Franchise Tax Board has identified as frivolous
under subdivision (c) of Section 19179" instead of the term
"frivolous" contained therein.
(6) By substituting the phrase "reflects a desire to delay or
impede the administration of federal income tax laws as determined by
the Secretary of the Treasury or the administration of the tax
imposed under Part 10 (commencing with Section 17001), Part 11
(commencing with Section 23001), or this part as determined by the
Franchise Tax Board" instead of the phrase "a desire (which appears
on the purported return) to delay or impede the administration of
Federal income tax laws" contained therein.
(c) (1) The Franchise Tax Board shall prescribe (and periodically
revise) a list of positions which the Secretary of the Treasury for
federal income tax purposes or the Franchise Tax Board has identified
as being frivolous for purposes of this section.
(2) Chapter 3.5 (commencing with Section 11340) of Part 1 of
Division 3 of Title 2 of the Government Code does not apply to any
standard, criterion, procedure, determination, rule, notice, or
guideline established or prescribed by the Franchise Tax Board
pursuant to paragraph (1).
(d) (1) Except as provided in paragraph (3), any person who
submits a specified frivolous submission shall pay a penalty of five
thousand dollars ($5,000).
(2) For purposes of this section, all of the following shall
apply:
(A) The phrase "specified frivolous submission" means a specified
submission if any portion of that submission meets any of the
following conditions:
(i) Is based on a position which the Franchise Tax Board has
identified as frivolous under subdivision (c).
(ii) Reflects a desire to delay or impede the administration of
federal income tax laws as determined by the Secretary of the
Treasury or the administration of the tax imposed under Part 10
(commencing with Section 17001), Part 11 (commencing with Section
23001), or this part as determined by the Franchise Tax Board.
(B) The phrase "specified submission" means any of the following:
(i) A protest under Section 19041.
(ii) A request for a hearing under Section 19044.
(iii) An application under any of the following sections:
(I) Section 19008 (relating to agreements for payment of tax
liability in installments).
(II) Section 19443 (relating to compromises).
(III) Section 21004 (relating to actions of the Taxpayers' Rights
Advocate).
(3) If the Franchise Tax Board provides a person with notice that
a submission is a specified frivolous submission and the person
withdraws that submission within 30 days after the notice, the
penalty imposed under paragraph (1) does not apply with respect to
that submission.
(e) (1) The Chief Counsel of the Franchise Tax Board may rescind
all or any portion of any penalty imposed by this section if both of
the following apply:
(A) Imposing the penalty would be against equity and good
conscience.
(B) Rescinding the penalty would promote compliance with the
requirements of this part and Part 10 (commencing with Section 17001)
or Part 11 (commencing with Section 23001) and effective tax
administration.
(2) The exercise of authority under paragraph (1) shall be at the
sole discretion of the Chief Counsel of the Franchise Tax Board and
may not be delegated.
(3) Notwithstanding any other law or rule of law, any
determination under this subdivision may not be reviewed in any
administrative or judicial proceeding.
(f) The penalties imposed by this section shall be in addition to
any other penalty provided by law.
SEC. 47.7. 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 shall be determined in
accordance with Section 6707 of the Internal Revenue Code, relating
to failure to furnish information regarding reportable transactions,
except as otherwise provided.
(b) 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.
(c) A penalty under this section does not apply if it is shown
that the additional information required under paragraph (2) of
subdivision (d) of Section 18628 was not identified in a Franchise
Tax Board notice issued prior to the date the transaction or shelter
was entered into.
(d) The provisions of subdivision (e) of Section 19173, relating
to the rescission of the penalty by the Chief Counsel of the
Franchise Tax Board, shall apply to any penalty imposed by this
section.
SEC. 48. Section 19184 of the Revenue and Taxation Code is amended
to read:
19184. (a) A penalty of fifty dollars ($50) shall be imposed for
each failure, unless it is shown that the failure is due to
reasonable cause, by any person required to file who fails to file a
report at the time and in the manner required by any of the following
provisions:
(1) Subdivision (c) of Section 17507, relating to individual
retirement accounts.
(2) Section 220(h) of the Internal Revenue Code, relating to
medical savings accounts for taxable years beginning on or after
January 1, 1997.
(3) Subdivision (b) of Section 17140.3 or subdivision (b) of
Section 23711 relating to qualified tuition programs.
(4) Subdivision (e) of Section 23712, relating to Coverdell
education savings accounts.
(b) (1) Any individual who:
(A) Is required to furnish information under Section 17508 as to
the amount designated nondeductible contributions made for any
taxable year, and
(B) Overstates the amount of those contributions made for that
taxable year, shall pay a penalty of one hundred dollars ($100) for
each overstatement unless it is shown that the overstatement is due
to reasonable cause.
(2) Any individual who fails to file a form required to be filed
by the Franchise Tax Board under Section 17508 shall pay a penalty of
fifty dollars ($50) for each failure unless it is shown that the
failure is due to reasonable cause.
(c) Article 3 (commencing with Section 19031) of this chapter
(relating to deficiency assessments) shall not apply in respect of
the assessment or collection of any penalty imposed under this
section.
SEC. 49. Section 19559 of the Revenue and Taxation Code, as added
by Section 7 of Chapter 690 of the Statutes of 2002, is repealed.
SEC. 50. Section 19559 of the Revenue and Taxation Code, as added
by Section 16 of Chapter 807 of the Statutes of 2002, is amended 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.
(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
Franchise Tax 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, 2005.
SEC. 50.1. Section 19772 of the Revenue and Taxation Code, as
added by Section 13 of Chapter 656 of the Statutes of 2003, is
amended to read:
19772. (a) Section 6707A of the Internal Revenue Code, relating
to penalty for failure to include reportable transactions information
with a return, shall apply, except as otherwise provided.
(b) The penalty amounts in Section 6707A(b) of the Internal
Revenue Code shall not apply, and in lieu thereof, the following
shall apply:
(1) Except as provided in paragraph (2), the amount of the penalty
shall be fifteen thousand dollars ($15,000).
(2) The amount
of the penalty with respect to a listed transaction shall be thirty
thousand dollars ($30,000).
(c) (1) Section 6707A(c)(1) of the Internal Revenue Code is
modified to include reportable transactions within the meaning of
paragraph (3) of subdivision (a) of Section 18407.
(2) Section 6707A(c)(2) of the Internal Revenue Code is modified
to include listed transactions within the meaning of paragraph (4) of
subdivision (a) of Section 18407.
(d) The penalty under this section only applies to taxpayers with
taxable income greater than two hundred thousand dollars ($200,000).
(e) Section 6707A(e) of the Internal Revenue Code, relating to a
penalty reported to the Securities and Exchange Commission, shall not
apply.
(f) Section 6707A(d) of the Internal Revenue Code, relating to the
authority to rescind a penalty, shall not apply, and in lieu
thereof, the following shall apply:
(1) The Chief Counsel of the Franchise Tax Board may rescind all
or any portion of any penalty imposed by this section with respect to
any violation if all of the following apply:
(A) The violation is with respect to a reportable transaction
other than a listed transaction.
(B) The person on whom the penalty is imposed has a history of
complying with the requirements of this part and Part 10 (commencing
with Section 17001) or Part 11 (commencing with Section 23001).
(C) It is shown that the violation is due to an unintentional
mistake of fact.
(D) Imposing the penalty would be against equity and good
conscience.
(E) Rescinding the penalty would promote compliance with the
requirements of this part and Part 10 (commencing with Section 17001)
or Part 11 (commencing with Section 23001) and effective tax
administration.
(2) The exercise of authority under paragraph (1) shall be at the
sole discretion of the Chief Counsel of the Franchise Tax Board and
may not be delegated.
(3) Notwithstanding any other law or rule of law, any
determination under this subdivision may not be reviewed in any
administrative or judicial proceeding.
(g) Article 3 (commencing with Section 19031) of Chapter 4
(relating to deficiency assessments) shall not apply with respect to
the assessment or collection of any penalty imposed under this
section.
(h) The penalty imposed by this section is in addition to any
penalty imposed under Part 10 (commencing with Section 17001), Part
11 (commencing with Section 23001), or this part.
SEC. 50.2. Section 19772 of the Revenue and Taxation Code, as
added by Section 13 of Chapter 654 of the Statutes of 2003, is
repealed.
SEC. 50.3. Section 19773 of the Revenue and Taxation Code, as
added by Section 13 of Chapter 656 of the Statutes of 2003, is
repealed.
SEC. 50.4. Section 19773 of the Revenue and Taxation Code, as
added by Section 13 of Chapter 654 of the Statutes of 2003, is
repealed.
SEC. 50.5. Section 19774 of the Revenue and Taxation Code, as
added by Section 13 of Chapter 656 of the Statutes of 2003, is
amended to read:
19774. (a) If a taxpayer has a noneconomic substance transaction
understatement for any taxable year, there shall be added to the tax
an amount equal to 40 percent of the amount of that understatement.
(b) (1) Subdivision (a) shall be applied by substituting "20
percent" for "40 percent" with respect to the portion of any
noneconomic substance transaction understatement with respect to
which the relevant facts affecting the tax treatment of the item are
adequately disclosed in the return or a statement attached to the
return.
(2) For taxable years beginning before January 1, 2003,
"adequately disclosed" includes the disclosure of the tax shelter
identification number on the taxpayer's return as required by
subdivision (c) of Section 18628, as applicable for the year in which
the transaction was entered into.
(c) For purposes of this section:
(1) The term "noneconomic substance transaction understatement"
means any amount which would be an understatement under Section 6662A
(b) of the Internal Revenue Code, as modified by subdivision (b) of
Section 19164.5 if Section 6662A(b) of the Internal Revenue Code were
applied by taking into account items attributable to noneconomic
substance transactions rather than items to which Section 6662A(b)
applies.
(2) A "noneconomic substance transaction" includes the
disallowance of any loss, deduction or credit, or addition to income
attributable to a determination that the disallowance or addition is
attributable to a transaction or arrangement that lacks economic
substance including a transaction or arrangement in which an entity
is disregarded as lacking economic substance. A transaction shall be
treated as lacking economic substance if the taxpayer does not have a
valid nontax California business purpose for entering into the
transaction.
(d) (1) If the notice of proposed assessment of additional tax has
been sent with respect to a penalty to which this section applies,
only the Chief Counsel of the Franchise Tax Board may compromise all
or any portion of that penalty.
(2) The exercise of authority under paragraph (1) shall be at the
sole discretion of the Chief Counsel of the Franchise Tax Board and
may not be delegated.
(3) Notwithstanding any other law or rule of law, any
determination under this subdivision may not be reviewed in any
administrative or judicial proceeding.
SEC. 50.6. Section 19774 of the Revenue and Taxation Code, as
added by Section 13 of Chapter 654 of the Statutes of 2003, is
repealed.
SEC. 50.7. Section 19777 of the Revenue and Taxation Code, as
amended by Section 331 of Chapter 183 of the Statutes of 2004, is
amended to read:
19777. (a) If a taxpayer has been contacted by the Franchise Tax
Board regarding a reportable transaction, as defined in Section 6707A
(c)(1) of the Internal Revenue Code with respect to which the
requirements of Section 6664(d)(2)(A) of the Internal Revenue Code
are not met, any listed transaction, as defined in Section 6707A(c)
(2) of the Internal Revenue Code, or a gross misstatement within the
meaning of Section 6404(g)(2)(D) of the Internal Revenue Code, and
has a deficiency, there shall be added to the tax an amount equal to
100 percent of the interest payable under Section 19101 for the
period beginning on the last date prescribed by law for the payment
of that tax (determined without regard to extensions) and ending on
the date the notice of proposed assessment is mailed.
(b) The penalty imposed by this section is in addition to any
other penalty imposed under Part 10 (commencing with Section 17001),
Part 11 (commencing with Section 23001), or this part.
SEC. 50.8. Section 19777 of the Revenue and Taxation Code, as
amended by Section 330 of Chapter 183 of the Statutes of 2004, is
repealed.
SEC. 51. Section 23051.5 of the Revenue and Taxation Code is
amended to read:
23051.5. (a) (1) Unless otherwise specifically provided, the
terms "Internal Revenue Code," "Internal Revenue Code of 1954," or
"Internal Revenue Code of 1986," for purposes of this part, mean
Title 26 of the United States Code, including all amendments thereto,
as enacted on the specified date for the applicable taxable year as
defined in paragraph (1) of subdivision (a) of Section 17024.5.
(2) (A) Unless otherwise specifically provided, for federal laws
enacted on or after January 1, 1987, and on or before the specified
date for the taxable year, uncodified provisions that relate to
provisions of the Internal Revenue Code that are incorporated for
purposes of this part, shall be applicable to the same taxable years
as the incorporated provisions.
(B) In the case where Section 901 of the Economic Growth and Tax
Relief Act of 2001 (Public Law 107-16) applies to any provision of
the Internal Revenue Code that is incorporated for purposes of this
part, Section 901 of the Economic Growth and Tax Relief Act of 2001
(Public Law 107-16) shall apply for purposes of this part in the same
manner and to the same taxable years as it applies for federal
income tax purposes.
(3) Subtitle G (Tax Technical Corrections) and Part I of Subtitle
H (Repeal of Expired or Obsolete Provisions) of the Revenue
Reconciliation Act of 1990 (Public Law 101-508) modified numerous
provisions of the Internal Revenue Code and provisions of prior
federal acts, some of which are incorporated by reference into this
part. Unless otherwise provided, the provisions described in the
preceding sentence, to the extent that they modify provisions that
are incorporated into this part, are declaratory of existing law and
shall be applied in the same manner and for the same periods as
specified in the Revenue Reconciliation Act of 1990.
(b) Unless otherwise specifically provided, when applying the
Internal Revenue Code for purposes of this part, a reference to any
of the following is not applicable for purposes of this part:
(1) Domestic International Sales Corporations (DISC), as defined
in Section 992(a) of the Internal Revenue Code.
(2) Foreign Sales Corporations (FSC), as defined in Section 922(a)
of the Internal Revenue Code.
(3) A personal holding company, as defined in Section 542 of the
Internal Revenue Code.
(4) A foreign personal holding company, as defined in Section 552
of the Internal Revenue Code.
(5) A foreign investment company, as defined in Section 1246(b) of
the Internal Revenue Code.
(6) A foreign trust as defined in Section 679 of the Internal
Revenue Code.
(7) Foreign income taxes and foreign income tax credits.
(8) Federal tax credits and carryovers of federal tax credits.
(c) (1) The provisions contained in Sections 41 to 44, inclusive,
and Section 172 of the Tax Reform Act of 1984 (Public Law 98-369),
relating to treatment of debt instruments, is not applicable for
taxable years beginning before January 1, 1987.
(2) The provisions contained in Public Law 99-121, relating to the
treatment of debt instruments, is not applicable for taxable years
beginning before January 1, 1987.
(3) For taxable years beginning on and after January 1, 1987, the
provisions referred to by paragraphs (1) and (2) shall be applicable
for purposes of this part in the same manner and with respect to the
same obligations as the federal provisions, except as otherwise
provided in this part.
(d) When applying the Internal Revenue Code for purposes of this
part, regulations promulgated in final form or issued as temporary
regulations by "the secretary" shall be applicable as regulations
issued under this part to the extent that they do not conflict with
this part or with regulations issued by the Franchise Tax Board.
(e) Whenever this part allows a taxpayer to make an election, the
following rules shall apply:
(1) A proper election filed with the Internal Revenue Service in
accordance with the Internal Revenue Code or regulations issued by
"the secretary" shall be deemed to be a proper election for purposes
of this part, unless otherwise expressly provided in this part or in
regulations issued by the Franchise Tax Board.
(2) A copy of that election shall be furnished to the Franchise
Tax Board upon request.
(3) (A) Except as provided in subparagraph (B), in order to obtain
treatment other than that elected for federal purposes, a separate
election shall be filed with the Franchise Tax Board at the time and
in the manner that may be required by the Franchise Tax Board.
(B) (i) If a taxpayer makes a proper election for federal income
tax purposes prior to the time that taxpayer becomes subject to the
tax imposed under this part or Part 10 (commencing with Section
17001), that taxpayer is deemed to have made the same election for
purposes of the tax imposed by this part, Part 10 (commencing with
Section 17001), and Part 10.2 (commencing with Section 18401), as
applicable, and that taxpayer may not make a separate election for
California tax purposes unless that separate election is expressly
authorized by this part, Part 10 (commencing with Section 17001), or
Part 10.2 (commencing with Section 18401), or by regulations issued
by the Franchise Tax Board.
(ii) If a taxpayer has not made a proper election for federal
income tax purposes prior to the time that taxpayer becomes subject
to tax under this part or Part 10 (commencing with Section 17001),
that taxpayer may not make a separate California election for
purposes of this part, Part 10 (commencing with Section 17001), or
Part 10.2 (commencing with Section 18401), unless that separate
election is expressly authorized by this part, Part 10 (commencing
with Section 17001), Part 10.2 (commencing with Section 18401), or by
regulations issued by the Franchise Tax Board.
(iii) This subparagraph applies only to the extent that the
provisions of the Internal Revenue Code or regulations issued by "the
secretary" authorizing an election for federal income tax purposes
apply for purposes of this part, Part 10 (commencing with Section
17001), or Part 10.2 (commencing with Section 18401).
(f) Whenever this part allows or requires a taxpayer to file an
application or seek consent, the rules set forth in subdivision (e)
shall apply to that application or consent.
(g) When applying the Internal Revenue Code for purposes of
determining the statute of limitations under this part, any reference
to a period of three years shall be modified to read four years for
purposes of this part.
(h) When applying, for purposes of this part, any section of the
Internal Revenue Code or any applicable regulation thereunder, all of
the following shall apply:
(1) For purposes of Chapter 2 (commencing with Section 23101),
Chapter 2.5 (commencing with Section 23400), and Chapter 3
(commencing with Section 23501), the term "taxable income" shall mean
"net income."
(2) For purposes of Article 2 (commencing with Section 23731) of
Chapter 4, the term "taxable income" shall mean "unrelated business
taxable income," as defined by Section 23732.
(3) Any reference to "subtitle," "Chapter 1," or "chapter" shall
mean this part.
(4) The provisions of Section 7806 of the Internal Revenue Code,
relating to construction of title, shall apply.
(5) Any provision of the Internal Revenue Code that becomes
operative on or after the specified date for that taxable year shall
become operative on the same date for purposes of this part.
(6) Any provision of the Internal Revenue Code that becomes
inoperative on or after the specified date for that taxable year
shall become inoperative on the same date for purposes of this part.
(7) Due account shall be made for differences in federal and state
terminology, effective dates, substitution of "Franchise Tax Board"
for "secretary" when appropriate, and other obvious differences.
(8) Any provision of the Internal Revenue Code that refers to a
"corporation" shall, when applicable for purposes of this part,
include a "bank," as defined by Section 23039.
(i) Any reference to a specific provision of the Internal Revenue
Code shall include modifications of that provision, if any, in this
part.
SEC. 52. Section 23662 is added to the Revenue and Taxation Code,
to read:
23662. (a) For each taxable year beginning on or after July 1,
2005, and before January 1, 2018, there shall be allowed as an
environmental tax credit against the "tax," as defined by Section
23036, an amount equal to five cents ($0.05) for each gallon of ultra
low sulfur diesel fuel produced during the taxable year by a small
refiner at any facility located in this state.
(b) The aggregate credit determined under subdivision (a) for any
taxable year with respect to any facility shall not exceed 25 percent
of the qualified capital costs incurred by the small refiner with
respect to that facility, reduced by the aggregate credits determined
under this section for all prior taxable years with respect to that
facility.
(c) For purposes of this section:
(1) "Small refiner" means any refiner who owns or operates a
refinery in California that:
(A) Has and at all times had since January 1, 1978, a crude oil
capacity of not more than 55,000 barrels per stream day.
(B) Has not been at any time since September 1, 1988, owned or
controlled by any refiner that at the same time owned or controlled
refineries in California with a total combined crude oil capacity of
more than 55,000 barrels per stream day.
(C) Has not been at any time since September 1, 1988, owned or
controlled by any refiner that at the same time owned or controlled
refineries in the United States with a total combined crude oil
capacity of more than 137,500 barrels per stream day.
(2) (A) "Qualified capital costs" means, with respect to any
facility, those costs paid or incurred during the applicable period
for items certified by the California Air Resources Board (CARB)
under subparagraph (B) for compliance with the applicable EPA or CARB
regulations with respect to that facility, including, but not
limited to, expenditures for the construction of new process
operation units or the dismantling and reconstruction of existing
process units to be used in the production of ultra low sulfur diesel
fuel, associated adjacent or offsite equipment (including tankage,
catalyst, and power supply), engineering, construction period
interest, site work, and permitting.
(B) (i) Before claiming a credit under this section, a small
refiner shall request from the California Air Resources Board a
certification that both of the following are true:
(I) That the items for which qualified capital costs were paid or
incurred are for compliance with the applicable EPA or CARB
regulations described in subparagraph (A).
(II) That the items for which qualified capital costs were paid or
incurred have been placed in service by the small refiner.
(ii) The request described in clause (i) shall be in a form and
contain sufficient information to allow the California Air Resources
Board to determine that the items that are requested to be certified
were placed in service for compliance with applicable EPA and CARB
regulations, which information shall include the date on which the
items were placed in service.
(C) The California Air Resources Board shall make a determination
regarding a request described in subparagraph (B) on or before 60
days after the request is submitted. If the board does not make a
determination within this time period, the certification will be
deemed to be granted.
(D) If certification from the Secretary of the Treasury of the
United States, after consultation with the Administrator of the
Environmental Protection Agency, that the taxpayer's qualified
capital costs with respect to a facility are, or will result, in
compliance with applicable EPA regulations, has been received, then
the taxpayer shall be allowed the credit without obtaining
certification from the CARB, unless CARB demonstrates that the fuel
produced does not meet CARB regulations.
(3) "Facility" means a small refiner's petroleum refinery located
in the State of California that has incurred qualified capital costs
to produce ultra low sulfur diesel fuel.
(4) "Applicable EPA regulations" means the Highway Diesel Fuel
Sulfur Control Requirements of the Environmental Protection Agency.
(5) "Applicable CARB regulations" means the Vehicular Diesel Fuel
Sulfur Control Requirements of the California Air Resources Board
(CARB) under Section 2281 of Article 2 of Chapter 5 of Division 3 of
Title 13 of the California Code of Regulations.
(6) "Applicable period" means, with respect to any facility, the
period beginning on January 1, 2004, and ending on May 31, 2007.
(7) "Ultra low sulfur diesel fuel" means both of the following:
(A) Diesel fuel with a sulfur content of 15 parts per million or
less.
(B) (i) Subject to clause (ii), either of the following:
(I) Vehicular diesel fuel produced and sold by a small refiner on
or after June 1, 2006.
(II) Vehicular diesel fuel produced and sold by the small refiner
before June 1, 2006, that the small refiner specifically identifies
and supports through internal test reports as meeting applicable CARB
regulations.
(ii) For purposes of this section, it is rebuttably presumed that
the fuel described in clause (i) is ultra low sulfur diesel fuel. The
California Air Resources Board may rebut this presumption by
demonstrating that the fuel does not comply with applicable CARB
regulations.
(8) "Barrels per stream day" means the maximum number of barrels
of input that a distillation facility can process within a 24-hour
period when running at full capacity under optimal crude and product
slate conditions with no allowance for downtime.
(d) For purposes of this section, if a credit is determined under
this section for any expenditure with respect to any property, the
increase in basis of that property that would (but for this
subdivision) result from that expenditure shall be reduced by the
amount of the credit so determined.
(e) No deduction shall be allowed for that portion of the expenses
otherwise allowable as a deduction for the taxable year which is
equal to the amount of the credit determined for the taxable year
under this section.
(f) In the case where the credit allowed by this section exceeds
the "tax," the excess may be carried over to reduce the "tax" in the
following year, and the 10 succeeding years if necessary, until the
credit is exhausted.
(g) If a small refiner that claims a credit under this section
sells, transfers, or otherwise disposes of, either directly or
indirectly, a facility within five years of the taxable year during
which it first claimed the credit, there shall be added to the "tax"
of the small refiner during the taxable year of sale, transfer, or
disposition an amount equal to the total credit claimed multiplied by
a fraction, the numerator of which is the remaining term of five
years and the denominator of which is 5.
(h) This section shall remain in effect only until January 1,
2018, and as of that date is repealed.
SEC. 53. Section 23701s of the Revenue and Taxation Code is
amended to read:
23701s. (a) An employee-funded pension trust described in Section
501(c)(18) of the Internal Revenue Code, except as otherwise
provided.
(b) The last sentence in Section 501(c)(18) of the Internal
Revenue Code, relating to excess contributions under Section 4979,
shall not apply.
SEC. 54. Section 23701w of the Revenue and Taxation Code is
amended to read:
23701w. A veteran's organization, as defined by Section 501(c)
(19) of the Internal Revenue Code.
SEC. 55. Section 23703.5 of the Revenue and Taxation Code is
amended to read:
23703.5. Section 501(p) of the Internal Revenue Code, relating to
suspension of tax-exempt status of terrorist organizations, shall
apply, except as otherwise provided:
(a) References to Section 501(a) of the Internal Revenue Code
shall be modified to refer to Section 23701.
(b) Section 501(p)(4) of the Internal Revenue Code is modified by
substituting the phrase "under Part 10 (commencing with Section
17001) and this part" for the phrase "under any provision of this
title, including Sections 170, 545(b)(2), 556(b)(2), 642(c), 2055,
2106(a)(2), and 2522" contained therein.
(c) This section shall apply only during the period described in
Section 501(p)(3) of the Internal Revenue Code that the federal tax
exemption of the organization described in Section 501(p)(2) of the
Internal Revenue Code is suspended for federal income tax purposes
under Section 501(p)(1) of the Internal Revenue Code.
(d) Section 501(p)(5) of the Internal Revenue Code shall not apply
and in lieu thereof, notwithstanding any other provision of law, no
organization or other person may challenge a suspension under this
section, a designation or identification described in Section 501(p)
(2) of the Internal Revenue Code, the period of suspension described
in Section 501(p)(3) of the Internal Revenue Code, or a denial of a
deduction under Section 501(p)(4) of the Internal Revenue Code as
modified in subdivision (b) in any administrative or judicial
proceeding relating to the California tax liability of the
organization or other person.
(e) (1) Credit or refund (with interest) with respect to an
overpayment shall be made if all of the following apply with respect
to that overpayment:
(A) The tax exemption of any organization described in Section 501
(p)(2) of the Internal Revenue Code is suspended under this section.
(B) Each designation and identification described in Section 501
(p)(2) of the Internal Revenue Code which has been made with respect
to that organization is determined to be erroneous under Section 501
(p)(6) of the Internal Revenue Code for federal income tax purposes.
(C) The erroneous designations and identifications result in an
overpayment of income tax for any taxable year by that organization.
(2) If the credit or refund of any overpayment of tax described in
subparagraph (C) of paragraph (1) is prevented at any time by the
operation of any law or rule of law (including res judicata), the
credit or refund may nevertheless be allowed or made if the claim
therefor is filed before the close of the one-year period beginning
on the date of the last determination described in subparagraph (B)
of paragraph (1).
(f) This section shall apply to designations made before, on, or
after November 11, 2003.
SEC. 56. Section 23705 of the Revenue and Taxation Code is amended
to read:
23705. (a) (1) An organization described in Section 23701i
(voluntary employee's beneficiary associations) or 23701q (qualified
group legal service plans) which is part of a plan of an employer
shall not be exempt from tax under Section 23701, unless that plan
meets the requirements of Section 505(b) of the Internal Revenue
Code.
(2) Paragraph (1) shall not apply to any organization described in
Section 505(a)(2) of the Internal Revenue Code.
(b) A copy of any notice filed with the Secretary of the Treasury,
pursuant to Section 505(c) of the Internal Revenue Code, relating to
application for tax-exempt status, shall be filed at the same time
and in the same manner with the Franchise Tax Board.
SEC. 57. Section 23711 of the Revenue and Taxation Code is amended
to read:
23711. Section 529 of the Internal Revenue Code, relating to
qualified state tuition programs, shall apply, except as otherwise
provided.
(a) Section 529(a) of the Internal Revenue Code is modified as
follows:
(1) By
substituting the phrase "under Part 10 (commencing with Section
17001) and this part" in lieu of the phrase "under this subtitle."
(2) By substituting "Article 2 (commencing with Section 23731)" in
lieu of "section 511."
(b) A copy of the report required to be filed with the Secretary
of the Treasury under Section 529(d) of the Internal Revenue Code
shall be filed with the Franchise Tax Board at the same time and in
the same manner as specified in that section.
SEC. 58. Section 23712 of the Revenue and Taxation Code is amended
to read:
23712. Section 530 of the Internal Revenue Code, relating to
Coverdell education savings accounts, shall apply, except as
otherwise provided.
(a) Section 530(a) of the Internal Revenue Code is modified as
follows:
(1) By substituting the phrase "under Part 10 (commencing with
Section 17001) and this part" in lieu of the phrase "under this
subtitle."
(2) By substituting "Article 2 (commencing with Section 23731)" in
lieu of "section 511."
(b) For taxable years beginning before January 1, 2002, Section
530(b)(1) of the Internal Revenue Code, relating to the definition of
education savings account, is modified to additionally require that
upon the date that the designated beneficiary becomes 30 years of
age, any balance to the credit of the beneficiary shall be
distributed within 30 days after the date the beneficiary becomes 30
years of age to that beneficiary.
(c) Section 530(d) of the Internal Revenue Code is modified as
follows:
(1) By substituting the phrase "under Part 10 (commencing with
Section 17001) in the manner as provided in Section 72(b) of the
Internal Revenue Code, as modified by Part 10" in lieu of the phrase
"in the manner as provided in Section 72(b)" in Section 530(d)(1) of
the Internal Revenue Code.
(2) (A) By substituting the phrase "tax imposed by Part 10
(commencing with Section 17001)" in lieu of the phrase "tax imposed
by this chapter" in Section 530(d)(4)(A) of the Internal Revenue
Code.
(B) By substituting the phrase "increased by 21/2 percent" in lieu
of the phrase "increased by 10 percent" in Section 530(d)(4)(A) of
the Internal Revenue Code.
(C) By substituting the phrase "shall be included in the
contributor's gross income under Part 10 (commencing with Section
17001) or this part" in lieu of the phrase "shall be included in
gross income" in Section 530(d)(4)(C) of the Internal Revenue Code.
(D) For taxable years beginning before January 1, 2005:
(i) By additionally providing that Section 530(d)(4)(A) of the
Internal Revenue Code, relating to additional tax for distributions
not used for educational purposes, shall not apply if the payment or
distribution is made on account of the attendance of the designated
beneficiary at the United States Military Academy, the United States
Naval Academy, the United States Air Force Academy, the United States
Coast Guard Academy, or the United States Merchant Marine Academy,
to the extent that the amount of the payment or distribution does not
exceed the costs of advanced education (as defined by Section 2005
(e)(3) of Title 10 of the United States Code, as in effect on
November 11, 2003) attributable to that attendance.
(ii) The amendments made to this section by Section 12 of Chapter
552 of the Statutes of 2004 shall apply to taxable years beginning
after December 31, 2002.
(d) For purposes of Part 10 (commencing with Section 17001) and
this part, in the case of a custodial account treated as a trust by
reason of Section 530(g) of the Internal Revenue Code, the custodian
of that account shall be treated as the trustee thereof.
(e) A copy of the report, which is required to be filed with the
Secretary of the Treasury under Section 530(h) of the Internal
Revenue Code, shall be filed with the Franchise Tax Board at the same
time and in the same manner as specified in that section.
SEC. 59. Section 24306 of the Revenue and Taxation Code is amended
to read:
24306. (a) For purposes of this section, the following terms have
the following meanings, as provided in the Golden State Scholarshare
Trust Act (Article 19 (commencing with Section 69980) of Chapter 2
of Part 42 of the Education Code):
(1) "Beneficiary" has the meaning set forth in subdivision (c) of
Section 69980 of the Education Code.
(2) "Benefit" has the meaning set forth in subdivision (d) of
Section 69980 of the Education Code.
(3) "Participant" has the meaning set forth in subdivision (h) of
Section 69980 of the Education Code.
(4) "Participation agreement" has the meaning set forth in
subdivision (i) of Section 69980 of the Education Code.
(5) "Scholarshare trust" has the meaning set forth in subdivision
(f) of Section 69980 of the Education Code.
(b) For taxable years beginning on or after January 1, 1998, and
before January 1, 2002, except as otherwise provided in subdivision
(c), gross income of a participant shall not include any of the
following:
(1) Any earnings under a Scholarshare trust, or a participation
agreement, as provided in Article 19 (commencing with Section 69980)
of Chapter 2 of Part 42 of the Education Code.
(2) Contributions to the Scholarshare trust on behalf of a
beneficiary shall not be includable as gross income of that
beneficiary.
(c) For taxable years beginning on or after January 1, 1998, and
before January 1, 2002:
(1) Any distribution under a Scholarshare trust participation
agreement shall be includable in the gross income of the distributee
in the manner as provided under Section 72 of the Internal Revenue
Code, as modified by Section 24272.2, to the extent not excluded from
gross income under any other provision of this part. For purposes of
applying Section 72 of the Internal Revenue Code, the following
apply:
(A) All Scholarshare trust accounts of which an individual is a
beneficiary shall be treated as one account, except as otherwise
provided.
(B) All distributions during a taxable year shall be treated as
one distribution.
(C) The value of the participation agreement, income on the
participation agreement, and investment in the participation
agreement shall be computed as of the close of the calendar year in
which the taxable year begins.
(2) A contribution by a for-profit or nonprofit entity, or by a
state or local government agency, for the benefit of an owner or
employee of that entity or a beneficiary whom the owner or employee
has the power to designate, including the owner or employee's minor
children, shall be included in the gross income of that owner or
employee in the year the contribution is made.
(3) For purposes of this subdivision, "distribution" includes any
benefit furnished to a beneficiary under a participation agreement,
as provided in Article 19 (commencing with Section 69980) of Chapter
2 of Part 42 of the Education Code.
(4) (A) Paragraph (1) shall not apply to that portion of any
distribution that, within 60 days of distribution, is transferred to
the credit of another beneficiary under the Scholarshare trust who is
a "member of the family," as that term is used in Section 529(e)(2)
of the Internal Revenue Code, as amended by Section 211 of the
Taxpayer Relief Act of 1997 (Public Law 105-34), of the former
beneficiary of that Scholarshare trust.
(B) Any change in the beneficiary of an interest in the
Scholarshare trust shall not be treated as a distribution for
purposes of paragraph (1) if the new beneficiary is a "member of the
family," as that term is used in Section 2032A(e)(2) of the Internal
Revenue Code, of the former beneficiary of that Scholarshare trust.
(d) For taxable years beginning on or after January 1, 2002,
Sections 529(c) and 529(e) of the Internal Revenue Code shall apply
except as otherwise provided in Part 10 (commencing with Section
17001) and this part.
SEC. 60. Section 24349 of the Revenue and Taxation Code is amended
to read:
24349. (a) There shall be allowed as a depreciation deduction a
reasonable allowance for the exhaustion, wear and tear (including a
reasonable allowance for obsolescence)--
(1) Of property used in the trade or business; or
(2) Of property held for the production of income.
(b) Except as otherwise provided in subdivision (c), for taxable
years ending after December 31, 1958, the term "reasonable allowance"
as used in subdivision (a) shall include, but shall not be limited
to, an allowance computed in accordance with regulations prescribed
by the Franchise Tax Board, under any of the following methods:
(1) The straight-line method.
(2) The declining balance method, using a rate not exceeding twice
the rate that would have been used had the annual allowance been
computed under the method described in paragraph (1).
(3) The sum of the years-digits method.
(4) Any other consistent method productive of an annual allowance
that, when added to all allowances for the period commencing with the
taxpayer's use of the property and including the taxable year, does
not, during the first two-thirds of the useful life of the property,
exceed the total of those allowances that would have been used had
those allowances been computed under the method described in
paragraph (2).
Nothing in this subdivision shall be construed to limit or reduce
an allowance otherwise allowable under subdivision (a).
(c) Any grapevine replaced in a vineyard in California in a
taxable year beginning on or after January 1, 1992, as a direct
result of a phylloxera infestation in that vineyard, and any
grapevine replaced in a vineyard in California in a taxable year
beginning on or after January 1, 1997, as a direct result of Pierce's
disease in that vineyard, shall have a useful life of five years,
except that it shall have a class life of 10 years for purposes of
depreciation under Section 168(g)(2) of the Internal Revenue Code
where the taxpayer has made an election under Section 263A(d)(3) of
the Internal Revenue Code not to capitalize costs of the infested
vineyard. Every taxpayer claiming a deduction under this section with
respect to a grapevine as described in this subdivision shall obtain
a written certification from an independent state-certified
integrated pest management adviser, or a state agricultural
commissioner or adviser, that specifies that the replanting was
necessary to restore a vineyard infested with phylloxera or Pierce's
disease. The taxpayer shall retain the certification for future audit
purposes.
(d) For purposes of this part, the deduction for property leased
to governments and other tax-exempt entities, as defined in Section
168(h) of the Internal Revenue Code, shall be limited to the amount
determined under Section 168(g) of the Internal Revenue Code,
relating to alternative depreciation system for certain property.
(e) (1) In the case of any building erected or improvements made
on leased property, if the building or improvement is property to
which this section applies, the depreciation deduction shall be
determined under the provisions of this section.
(2) An improvement shall be treated for purposes of determining
gain or loss under this part as disposed of by the lessor when so
disposed of or abandoned if both of the following occur:
(A) The improvement is made by the lessor of leased property for
the lessee of that property.
(B) The improvement is irrevocably disposed of or abandoned by the
lessor at the termination of the lease by the lessee.
This subdivision shall not apply to any property to which Section
168 of the Internal Revenue Code does not apply for federal purposes
by reason of Section 168(f) of the Internal Revenue Code. Any
election made under Section 168(f)(1) of the Internal Revenue Code
for federal purposes with respect to that property shall be treated
as a binding election for state purposes under this subdivision with
respect to that same property and no separate election under
subdivision (e) of Section 23051.5 with respect to that property
shall be allowed.
(3) (A) In determining a lease term, both of the following shall
apply:
(i) There shall be taken into account options to renew.
(ii) Two or more successive leases which are part of the same
transaction (or a series of related transactions) with respect to the
same or substantially similar property shall be treated as one
lease.
(B) For purposes of clause (i) of subparagraph (A), in the case of
nonresidential real property or residential rental property, there
shall not be taken into account any option to renew at fair market
value determined at the time of renewal.
(f) (1) Section 167(g) of the Internal Revenue Code, relating to
depreciation under income forecast method, shall apply except as
otherwise provided.
(2) Section 167(g)(2)(C) of the Internal Revenue Code is modified
by substituting "Section 19521" in lieu of "Section 460(b)(7)" of the
Internal Revenue Code.
(3) Section 167(g)(5)(D) of the Internal Revenue Code is modified
by substituting "Part 10.2 (commencing with Section 18401) (other
than Article 2 (commencing with Section 19021) and Sections 19142 to
19150, inclusive)" in lieu of "Subtitle F (other than Sections 6654
and 6655)."
(4) Section 167(g)(5)(E) of the Internal Revenue Code, relating to
treatment of distribution costs, shall not apply.
(5) Section 167(g)(7) of the Internal Revenue Code, relating to
treatment of participations and residuals, shall not apply.
SEC. 61. Section 24355.3 is added to the Revenue and Taxation
Code, to read:
24355.3. For purposes of computing the depreciation deduction
pursuant to Section 24349, the useful life of any motor sports
entertainment complex, as defined in Section 168(i)(15) of the
Internal Revenue Code, shall be seven years.
SEC. 61.5. Section 24355.4 is added to the Revenue and Taxation
Code, to read:
24355.4. For purposes of computing the depreciation deduction
pursuant to Section 24349, the useful life of any Alaska natural gas
pipeline, as defined in Section 168(i)(16) of the Internal Revenue
Code, shall be seven years.
SEC. 61.7. Section 24356 of the Revenue and Taxation Code is
amended to read:
24356. (a) (1) In the case of Section 24356 property, the term
"reasonable allowance" as used in subdivision (a) of Section 24349,
may, at the election of the taxpayer, include an allowance, for the
first taxable year for which a deduction is allowable under Sections
24349 through 24354 to the taxpayer with respect to such property, of
20 percent of the cost of that property.
(2) If in any one taxable year the cost of Section 24349 property
with respect to which the taxpayer may elect an allowance under
paragraph (1) for that taxable year exceeds ten thousand dollars
($10,000), then paragraph (1) shall apply with respect to those items
selected by the taxpayer, but only to the extent of an aggregate
cost of ten thousand dollars ($10,000).
(b) (1) In lieu of subdivision (a), Section 179 of the Internal
Revenue Code, relating to the election to expense certain depreciable
business assets, shall apply, except as otherwise provided.
(2) Section 179(b)(1) of the Internal Revenue Code, relating to
the dollar limitation, shall not apply and in lieu thereof, the
aggregate cost that may be taken into account under Section 179(a) of
the Internal Revenue Code, for any taxable year, shall not exceed
twenty-five thousand dollars ($25,000).
(3) Section 179(b)(2) of the Internal Revenue Code, relating to
the reduction in the dollar limitation, shall not apply and in lieu
thereof, the limitation under paragraph (2), for any taxable year,
shall be reduced, but not below zero, by the amount by which the cost
of Section 179 property, as defined in Section 179(d)(1) of the
Internal Revenue Code, except as otherwise provided, that is placed
in service during the taxable year, exceeds two hundred thousand
dollars ($200,000).
(4) Section 179 of the Internal Revenue Code is modified to
provide that the "aggregate amount disallowed" referred to in Section
179(b)(3)(B) of the Internal Revenue Code shall be computed under
this part as that section read on the date the property generating
the amount disallowed was placed in service.
(5) Section 179(b)(5) of the Internal Revenue Code, relating to
inflation adjustments, shall not apply.
(6) The last sentence in Section 179(c)(2) of the Internal Revenue
Code, relating to irrevocable elections, shall not apply.
(7) Section 179(d)(1)(A)(ii) of the Internal Revenue Code,
relating to computer software, shall not apply.
(c) (1) The election under this section for any taxable year shall
be made within the time prescribed by law (including extensions
thereof) for filing the return for such taxable year. The election
shall be made in such manner as the Franchise Tax Board may by
regulations prescribe.
(2) Any election made under this section may not be revoked except
with the consent of the Franchise Tax Board.
(d) (1) For purposes of this section, the term "Section 24356
property" means tangible personal property--
(A) Of a character subject to the allowance for depreciation under
Sections 24349 through 24354,
(B) Acquired by purchase after December 31, 1958, for use in a
trade or business, and
(C) With a useful life (determined at the time of such
acquisition) of six years or more.
(2) For purposes of paragraph (1), the term "purchase" means any
acquisition of property, but only if--
(A) The property is not acquired from a person whose relationship
to the person acquiring it would result in the disallowance of losses
under Section 24427 (but, in applying Section 267 of the Internal
Revenue Code, relating to losses, expenses, and interest with respect
to transactions between related taxpayers, for purposes of this
section, Section 267(c)(4) of the Internal Revenue Code shall be
treated as providing that the family of an individual shall include
only his or her spouse, ancestors, and lineal descendants);
(B) The property is not acquired by one member of an affiliated
group from another member of the same affiliated group, and
(C) The basis of the property in the hands of the person acquiring
it is not determined in whole or in part by reference to the
adjusted basis of that property in the hands of the person from whom
acquired.
(3) For purposes of this section, the cost of property does not
include so much of the basis of such property as is determined by
reference to the basis of other property held at any time by the
person acquiring that property.
(4) For purposes of subdivision (a) and subdivision (b) of this
section--
(A) All members of an affiliated group shall be treated as one
taxpayer, and
(B) The Franchise Tax Board shall apportion the dollar limitation
contained in subdivision (a) or subdivision (b) among the members of
the affiliated group in the manner as it shall by regulations
prescribe.
(5) For purposes of paragraphs (2) and (4), the term "affiliated
group" has the meaning assigned to it by Section 1504 of the Internal
Revenue Code, except that, for those purposes, the phrase "more than
50 percent" shall be substituted for the phrase "at least 80 percent"
each place it appears in Section 1504(a) of the Internal Revenue
Code.
(6) In applying Section 24353, the adjustment under paragraph (1)
of subdivision (b) of Section 24916, resulting by reason of an
election made under this section with respect to any Section 24356
property, shall be made before any other deduction allowed by
subdivision (a) of Section 24349 is computed.
(e) The Franchise Tax Board shall prescribe those regulations as
may be necessary to carry out the purposes of this section.
SEC. 62. Section 24356.4 is added to the Revenue and Taxation
Code, to read:
24356.4. (a) For any taxable year, which includes part of the
"applicable period," as defined in paragraph (6) of subdivision (c)
of Section 23662, a small refiner (as defined in Section 23662) may
elect to treat 75 percent of qualified capital costs (as defined in
paragraph (2) of subdivision (c) of Section 23662) paid or incurred
by the taxpayer during the taxable year as expenses that are not
chargeable to a capital account. Any cost so treated shall be allowed
as a deduction for the taxable year in which paid or incurred.
(b) (1) For purposes of this part, the basis of any property shall
be reduced by the portion of the cost of that property taken into
account under subdivision (a).
(2) For purposes of Section 1245 of the Internal Revenue Code, and
corresponding section of this part, the amount of the deduction
allowable under subdivision (a) with respect to any property which is
of a character subject to the allowance for depreciation shall be
treated as a deduction allowed for depreciation under Section 167 of
the Internal Revenue Code, or the corresponding section of this part.
(c) This section is repealed on January 1, 2009.
SEC. 63. Section 24356.5 of the Revenue and Taxation Code is
repealed.
SEC. 64. Section 24369.4 of the Revenue and Taxation Code is
amended to read:
24369.4. (a) Section 198 of the Internal Revenue Code, relating
to expensing of environmental remediation costs, shall apply, except
as otherwise provided.
(b) Section 198(b)(2) is modified to refer to Sections 24349 to
24355, inclusive, in lieu of Section 167 of the Internal Revenue
Code.
(c) Section 198(f) is modified to refer to Section 24442 in lieu
of Section 280B of the Internal Revenue Code.
(d) For expenditures paid or incurred before January 1, 2004, each
of the following shall apply:
(1) If a taxpayer has, at any time, made an election for federal
purposes under Section 198(a) of the Internal Revenue Code to have
Section 198 of the Internal Revenue Code apply to a qualified
environmental remediation expenditure, Section 198 of the Internal
Revenue Code shall apply to that qualified environmental remediation
expenditure for state purposes, a separate election for state
purposes shall not be allowed under paragraph (3) of subdivision (e)
of Section 23051.5, and the federal election shall be binding for
purposes of this part.
(2) If a taxpayer fails to make an election for federal purposes
under Section 198(a) of the Internal Revenue Code to have Section 198
of the Internal Revenue Code apply to a qualified environmental
remediation expenditure, an election under Section 198(a) of the
Internal Revenue Code shall not be allowed for state purposes,
Section 198 of the Internal Revenue Code shall not apply to that
qualified environmental remediation expenditure for state purposes,
and a separate election for state purposes shall not be allowed under
paragraph (3) of subdivision (e) of Section 23051.5.
(e) No inference as to the proper treatment for purposes of this
part of qualified environmental remediation expenditures for periods
before the enactment of this section shall be made.
(f) Section 198(h) of the Internal Revenue Code, relating to
termination, shall not apply.
(g) Section 198 of the Internal Revenue Code, relating to
expensing of environmental remediation costs, shall not apply to
expenditures paid or incurred after December 31, 2003.
SEC. 65. Section 24406.6 is added to the Revenue and Taxation
Code, to read:
24406.6. For purposes of Section 24373.5, and Sections 24404 to
24406.5, inclusive, net earnings shall not be reduced by amounts paid
during the year as dividends on capital stock or other proprietary
capital interests of the organization to the extent that the articles
of incorporation, bylaws of the organization, or other contract with
patrons provide that those dividends are in addition to amounts
otherwise payable to patrons that are derived from business done for
or with patrons during the taxable year.
SEC. 66. Section 24407 of the Revenue and Taxation Code is amended
to read:
24407. (a) The organizational expenditures of a corporation may,
at the election of the corporation (made in accordance with
regulations prescribed by the Franchise Tax Board), be treated as
deferred expenses. In computing net income, the deferred expenses
remaining, if any, after the application of subdivision (b) shall be
allowed as a deduction ratably over that period of not less than 180
months as may be selected by the corporation (beginning with the
month in which the corporation begins business).
(b) (1) The corporation shall be allowed a deduction for the
deferred expenses under subdivision (a) in an amount equal to the
lesser of either of the following:
(A) The amount of organizational expenditures of the taxpayer that
are treated as deferred expenses under subdivision (a).
(B) Five thousand dollars ($5,000), reduced, but not below zero,
by an amount equal to the excess of the amount of the taxpayer's
organizational expenditures treated as deferred expenses under
subdivision (a) over fifty thousand dollars ($50,000).
(2) The deduction under paragraph (1) shall be allowed in the
taxable year in which the first month of the period specified in
subdivision (a) occurs.
(c) The amendments made to this section by the act adding this
subdivision shall apply to amounts paid or incurred on or after
January 1, 2005.
SEC. 67. 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 the date specified in paragraph (1) of
subdivision (a) of 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 income tax purposes.
SEC. 68. Section 24654 of the Revenue and Taxation Code is amended
to read:
24654. (a) Section 448 of the Internal Revenue Code, relating to
limitation on use of cash method of accounting, shall apply, except
as otherwise provided.
(b) For purposes of applying Section 448 of the Internal Revenue
Code, Sections 801(d)(2), 801(d)(3), and 801(d)(5) of the Tax Reform
Act of 1986 (Public Law 99-514), as modified by Section 1008(a) of
Public Law 100-647, shall apply to each taxable year beginning on or
after January 1, 1987.
SEC. 69. Section 24661.5 of the Revenue and Taxation Code is
amended to read:
24661.5. Section 451(e)(3) of the Internal Revenue Code, relating
to special election rule, is modified by substituting the phrase
"subdivision (b) of Section 24949.1" in lieu of the phrase
"section 1033(e)(2)" contained
therein.
SEC. 70. Section 24661.6 is added to the Revenue and Taxation
Code, to read:
24661.6. Section 451(i) of the Internal Revenue Code, relating to
special rule for sales or dispositions to implement Federal Energy
Regulatory Commission or state electric restructuring policy, shall
not apply.
SEC. 71. Section 24694 is added to the Revenue and Taxation Code,
to read:
24694. Section 470 of the Internal Revenue Code, relating to
limitation on deductions allocable to property used by governments or
other tax-exempt entities, shall apply, except as otherwise
provided.
SEC. 72. Section 24831.6 is added to the Revenue and Taxation
Code, to read:
24831.6. Section 613A(c)(6)(H) of the Internal Revenue Code,
relating to temporary suspension of taxable income limit with respect
to marginal production, shall not apply.
SEC. 73. 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) Section 857(b)(7) of the Internal Revenue Code, 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. 74. Section 24949.1 of the Revenue and Taxation Code is
amended to read:
24949.1. (a) For purposes of this part, the sale or exchange of
livestock (other than poultry) held by a taxpayer for draft,
breeding, or dairy purposes in excess of the number the taxpayer
would sell if he or she followed his or her usual business practices
shall be treated as an involuntary conversion to which Sections 24943
to 24949, inclusive, apply if the livestock are sold or exchanged by
the taxpayer solely on account of drought, flood, or other
weather-related conditions.
(b) (1) In the case of drought, flood, or other weather-related
conditions described in subdivision (a) that result in the area being
designated as eligible for assistance by the federal government,
subdivision (b) of Section 24944 shall be applied with respect to any
converted property by substituting "four years" for "two years."
(2) The Franchise Tax Board may extend the period for replacement
under Sections 24943 to 24949, inclusive (after the application of
paragraph (1)), for the additional time as the Franchise Tax Board
determines appropriate if the weather-related conditions that
resulted in the application of paragraph (1) continue for more than
three years.
SEC. 75. Section 24949.3 of the Revenue and Taxation Code is
amended to read:
24949.3. For purposes of Sections 24943 through 24946, if,
because of drought, flood, other weather-related conditions, or soil
contamination or other environmental contamination, it is not
feasible for the taxpayer to reinvest the proceeds from compulsorily
or involuntarily converted livestock in property similar or related
in use to the livestock so converted, other property (including real
property in the case of soil contamination or other environmental
contamination) used for farming purposes shall be treated as property
similar or related in service or use to the livestock so converted.
SEC. 76. Sections 411 to 418, inclusive, of the Job Creation and
Worker Assistance Act of 2002 (Subtitle B of Title IV of Public Law
107-147) and Sections 401 to 408, inclusive, of the Working Families
Tax Relief Act of 2004 (Public Law 108-311) enacted numerous
technical corrections to provisions of the Internal Revenue Code,
including technical corrections relating to the Medicare Prescription
Drug, Improvement, and Modernization Act of 2003 (Public Law
108-173), the Jobs and Growth Tax Relief Reconciliation Act of 2003
(Public Law 108-27), the Job Creation and Worker Assistance Act of
2002 (Public Law 107-147), the Economic Growth and Tax Relief
Reconciliation Act of 2001 (Public Law 107-16), the Community Renewal
Tax Relief Act of 2000 as part of the Consolidated Appropriations
Act, 2001 (Public Law 106-554), the Tax Relief Extension Act of 1999
as part of the Ticket to Work and Work Incentives Improvement Act of
1999 (Public Law 106-170), the Taxpayer Relief Act of 1997 (Public
Law 105-34), the Balanced Budget Act of 1997 (Public Law 105-33), and
the Small Business Job Protection Act of 1996 (Public Law 104-188),
some of which are incorporated by reference into Part 10 (commencing
with Section 17001), Part 10.2 (commencing with Section 18401), and
Part 11 (commencing with Section 23001) of Division 2 of the Revenue
and Taxation Code. Unless otherwise specifically provided, the
technical corrections described in the preceding sentence, to the
extent that they correct provisions that are incorporated by specific
reference into the Revenue and Taxation Code, are declaratory of
existing law and shall be applied in the same manner and for the same
periods as specified in the Job Creation and Worker Assistance Act
of 2002 (Subtitle B of Title IV of Public Law 107-147) and the
Working Families Tax Relief Act of 2004 (Public Law 108-311), or if
later, the specified date of incorporation.
SEC. 77. Section 44 of this bill incorporates amendments to
Section 19008 of the Revenue and Taxation Code proposed by this bill
and SB 157. It shall not become operative if (1) both bills are
enacted and become effective on or before January 1, 2006, (2) each
bill amends Section 19008 of the Revenue and Taxation Code, and (3)
this bill is enacted after SB 157.
SEC. 78. This act provides for a tax levy within the meaning of
Article IV of the Constitution and shall go into immediate effect.