BILL NUMBER: SB 788	CHAPTERED  10/05/07

	CHAPTER  306
	FILED WITH SECRETARY OF STATE  OCTOBER 5, 2007
	APPROVED BY GOVERNOR  OCTOBER 5, 2007
	PASSED THE SENATE  AUGUST 30, 2007
	PASSED THE ASSEMBLY  AUGUST 27, 2007
	AMENDED IN ASSEMBLY  JULY 9, 2007

INTRODUCED BY   Senator Cogdill

                        FEBRUARY 23, 2007

   An act to amend Section 25114 of the Revenue and Taxation Code,
relating to taxation.


	LEGISLATIVE COUNSEL'S DIGEST


   SB 788, Cogdill. Corporation tax law: water's-edge:
administration.
   Existing law provides that, in the case of a business with income
derived from, or attributable to, sources both within and without
this state, the income is apportioned between this state and other
states and foreign countries for tax purposes in accordance with a
specified formula based on the property, payroll, and sales within
and without this state, except as otherwise provided. Existing law
permits certain taxpayers, as provided, to elect to determine their
income under a water's-edge election and requires the Franchise Tax
Board to examine the annual filings of those taxpayers for any
potential noncompliance, and, if the noncompliance is found, to
conduct a detailed examination of those filings, regardless of the
net revenue benefit to the state, as specified.
   This bill would permit the Franchise Tax Board to conduct audits
of those annual returns on a discretionary rather than mandatory
basis and would apply to audits commenced on or after the effective
date of this bill.


THE PEOPLE OF THE STATE OF CALIFORNIA DO ENACT AS FOLLOWS:

  SECTION 1.  Section 25114 of the Revenue and Taxation Code is
amended to read:
   25114.  (a) The Franchise Tax Board, for purposes of administering
the provisions of this article, shall examine all returns filed by
taxpayers subject to these provisions.
   (b) (1) In any case of two or more organizations, trades, or
businesses, whether or not organized in the United States and whether
or not affiliated, owned or controlled directly or indirectly by the
same interests, the Franchise Tax Board may distribute, apportion,
or allocate gross income, deductions, credits, or allowances between
or among these organizations, trades, or businesses, if the board
determines that the distribution, apportionment, or allocation is
necessary in order to prevent evasion of taxes or clearly to reflect
the income of any of these organizations, trades, or businesses. In
the case of any transfer, or license, of intangible property, within
the meaning of Section 936(h)(3)(B) of the Internal Revenue Code, the
income with respect to that transfer or license shall be
commensurate with the income attributable to the intangible property.

   (2) In making distributions, apportionments, and allocations under
this section, the Franchise Tax Board shall generally follow the
rules, regulations, and procedures of the Internal Revenue Service in
making audits under Section 482 of the Internal Revenue Code. Any of
these rules, regulations, and procedures adopted by the Franchise
Tax Board shall not be subject to review by the Office of
Administrative Law.
   (3) If the Internal Revenue Service has conducted a detailed audit
pursuant to Section 482 of the Internal Revenue Code or Subchapter N
of Chapter 1 of Subtitle A of the Internal Revenue Code and has made
adjustments pursuant to those provisions, it shall be presumed, to
the extent that the provisions relate to the determination of the
amount of income and factors required to be taken into account
pursuant to Section 25110, that no further adjustments are necessary
for this state's purposes. If the Internal Revenue Service has
conducted a detailed audit pursuant to Section 482 of the Internal
Revenue Code or Subchapter N of Chapter 1 of Subtitle A of the
Internal Revenue Code and has made or proposed no adjustments to the
transactions examined, it shall be presumed, to the extent that the
provisions relate to the determination of the amount of income and
factors required to be taken into account pursuant to Section 25110,
that no adjustment is necessary for this state's purposes. These
presumptions apply to all Internal Revenue Service audit
determinations, including determinations made by the Appeals and
Competent Authority. These presumptions shall be overcome if the
Franchise Tax Board or the taxpayer demonstrates that an adjustment
or a failure to make an adjustment was erroneous, if it demonstrates
that the results of such an adjustment would produce a minimal tax
change for federal purposes because of correlative or offsetting
adjustments or for other reasons, or if substantially the same
federal tax result was obtained under other sections of the Internal
Revenue Code. No inference shall be drawn from an Internal Revenue
Service failure to audit international transactions pursuant to
Section 482 of the Internal Revenue Code or Subchapter N of Chapter 1
of Subtitle A of the Internal Revenue Code and it shall not be
presumed that any of those transactions were correctly reported.
   (c) The amendments made to this section by the act adding this
subdivision shall apply to examinations commenced by the Franchise
Tax Board on or after the effective date of that act. An examination
will be considered commenced when a taxpayer is first contacted by
the Franchise Tax Board concerning any examination with respect to
the taxpayer's return.