BILL ANALYSIS                                                                                                                                                                                                    




            SENATE REVENUE & TAXATION COMMITTEE

            Senator Lois Wolk, Chair

                                                          AB 759 - Ma

                                    Amended: As Proposed to be Amended 

                                                                       

            Hearing: July 8, 2009                            Fiscal: No



            SUMMARY: Changes provisions of law related to the  
            controlled foreign corporations and the California Taxpayer  
            and Shareholder Protection Act of 2003.


             Controlled Foreign Corporations


             EXISTING FEDERAL LAW 


            Provides that all income of a corporation regardless of  
            source is taxable, and allows a credit for taxes paid to  
            foreign countries.  Foreign corporations only file returns  
            in the United States for income effectively connected with  
            a trade or business in the United States, or income from  
            specified U.S investments, called noneffectively connected  
            income.


            Defines a "controlled foreign corporation" (CFCs) as any  
            foreign corporation where more than 50 percent of the  
            voting power, or 50 percent of the value of the stock, is  
            held by U.S. shareholders.  Federal law guiding CFCs, known  
            as "Subpart F," seeks to curtail abuses where companies  
            assign income to offshore tax havens.  U.S Shareholders  
            must include income from CFCs, and federal law treats that  
            income as a dividend paid by the CFC.  A U.S. shareholder's  
            income from a CFC cannot exceed the CFC's earnings and  
            profits for that year.  








            


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            EXISTING STATE LAW 


            Uses the "world-wide unitary method" with respect to all  
            multinational corporations doing business in California.  
            Taxpayers file a combined report for the unitary group or  
            subsidiaries and affiliates showing income, payroll,  
            property and sales both California and worldwide.  Since  
            1986, state law also allows a "water's-edge election,"  
            where taxpayers may limit their combined reports to just to  
            those affiliates domiciled within the "water's edge" of the  
            United States, although state law may require taxpayers to  
            include certain foreign subsidiaries and affiliates under  
            specified circumstances.   


            Determines the portion of a multi-state or multi-national  
            corporation's net income is taxable by California using  
            "formulary apportionment," under which three apportionment  
            factors are computed: a property factor (the amount of  
            property the corporation has in California divided by it's  
            total (nation-wide or world-wide) property); a payroll  
            factor (California payroll divided by total payroll); and a  
            sales factor (California sales divided by total sales). The  
            actual amount of income apportioned to California using  
            this formula is computed by adding the payroll factor, the  
            property factor and twice the sales factor, then dividing  
            that sum by four (the so-called "double-weighted sales  
            factor"). The formula serves to calculate a corporation's  
            tax due in an amount equal to its demand on public  
            services, assuming that taxpayers derive profits from the  
            effective marshalling of labor and capital in the presence  
            of a market.   The formula comes from the Universal  
            Division of Tax Purposes Act (UDITPA), a model statute  
            developed by the National Conference on Uniform State Laws  
            in 1957.  California adopted UDITPA and the apportionment  
            formula in 1966 (AB 11, Petris), and double weighted the  
            sales factor in 1993 (SB 1176, Kopp).


            Conforms to federal definitions of CFC and U.S shareholder,  








            


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            but does not conform to federal Subpart F income  
            provisions, instead requiring a CFC to include a portion of  
            its net income and apportionment factors included in the  
            water's edge filing based on an inclusion ratio, which  
            determines the amount of a CFC's income and apportionment  
            factors a taxpayer includes in the tax return.  The  
            numerator of the ratio is the CFC's current year Subpart F  
            income, and the denominator is the CFC's current earnings  
            and profits.  The CFC then multiplies its business income,  
            nonbusiness income, and apportionment factors by the ratio  
            to determine its includible income for California tax  
            purposes.  The ratio cannot fall below zero or exceed 100%;  
            in such a case, the CFC is included in the water's edge  
            group and its income taxed accordingly.  


             Public Contracts Code


             EXISTING LAW

            Prohibits the state from entering into any contract with a  
            publicly traded foreign incorporated entity or its  
            subsidiary if all of the following apply:

              1)  the United States is the principal market for the  
              public trading of the foreign incorporated entity;

              2)  the foreign incorporated entity has no substantial  
              business activities in the place of incorporation  
              compared to the business activity of its subsidiary or  
              subsidiaries; and

              3)  the foreign entity was incorporated through a  
              transaction or a series of  transactions in which it  
              acquired substantially all of the properties held by a  
              domestic corporation or partnership and immediately after  
              the acquisition more than 50% of the publicly traded  
              stock was transferred to the same shareholders or  
              partners that owned the domestic corporation or  
              partnership.

            Permits the chief executive of a state agency or a designee  








            


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            to waive the ineligibility of a vendor that meets the above  
            test by making a written finding that the contract is  
            necessary to meet a "compelling public interest."  

            Requires each vendor submitting a bid or contract to  
            certify under penalty of perjury that it is not an  
            ineligible vendor pursuant to the test described above.











            THIS BILL 


             Controlled Foreign Corporations:


             Deletes California's current law for calculating CFC income  
            by deleting the inclusion ratios and conforming to federal  
            Subpart F provisions that state that the amount of a CFC's  
            subpart F income included in a water's edge taxpayer's  
            income would be treated as a "deemed dividend," and could  
            be excluded under the state's dividend exclusion and  
            deduction laws.  The measure allows a 27% dividend  
            deduction against the CFC's Subpart F income.  Any income  
            previously taxed as Subpart F income before the bill's  
            effective date would be deemed previously taxed for state  
            purposes, and federal adjustments to the CFC's stock basis  
            would become the new stock basis for state purposes.  


            States that state law does not conform to rules guiding the  
            gain from certain sales or exchanges of CFC stock, the  
            temporary 85% divided received deduction from CFCs, or the  
            foreign tax credit.  When a taxpayer terminates a water's  
            edge election, Subpart F rules no longer apply and only the  








            


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            previously taxed income and stock basis adjustments remain  
            the same.  The measure also required that a taxpayer's High  
            Foreign Tax Rule election must be the same for state  
            purposes as it is for federal.  FTB may also proscribe  
            regulations as it deems necessary to carry out these  
            provisions.

             Public Contracts Code

             Adds another requirement to the list of contract  
            prohibitions as follows:

                 The foreign incorporated entity is domiciled in a  
            jurisdiction that does not have an income tax treaty in  
            force with the United States.


            FISCAL EFFECT: 

            Unknown for the Public Contracts provision

            Less than $500,000 loss for the controlled foreign  
            corporation provision.


            COMMENTS:

       A.Purpose of the bill
                 The purpose of this bill is two-fold: 

           1.Eliminate the complexities with using current state law's  
             CFC partial inclusion rules for calculating how much of a  
             CFC's income and factors to include in the taxable income  
             of a water's-edge taxpayer and allow taxpayer's to use the  
             federal Subpart F rules-an amount the taxpayers have  
             already calculated for their federal tax return.
           2.Expand a provision of the contracts code to allow  
             companies with tax treaties to do business in California. 













            


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            B.   Program History/Background: Foreign Controlled  
            Corporations

            Because of the complexity of the calculations involved in  
            the state's current treatment of Subpart F income, FTB  
            finds low taxpayer compliance with the current statutory  
            method.  When calculating includable income for a CFC, many  
            taxpayers use the federal "deemed Subpart F dividends"  
            amount as reported on their federal return, rather than  
            using the inclusion ratio to determine the amount of CFC  
            income and factors to be included for California purposes. 

            Compliance with the law requires all unitary taxpayers to  
            perform the recordkeeping and analysis for each of their  
            CFCs, regardless of whether the result materially affects  
            California tax or not.  This requirement is particularly  
            burdensome for taxpayers that do not have a large presence  
            in California because the computations in the partial  
            inclusion ratio are unique to California.

            In addition, the CFC inclusion ratio rules are burdensome  
            for the FTB to administer.  FTB auditors spend numerous  
            hours recalculating incorrect methods used by taxpayers to  
            include a CFC's income and factors in the water's-edge  
            group tax filing often only to discover that the audit  
            adjustments have minor tax effect.  One reason for the  
            minor tax effect is because the taxpayer included the  
            federal Subpart F deemed dividend amount in income, which  
            sometimes results in almost the same tax amount.  In  
            addition, any adjustments to the amount of a CFC's income  
            and factors includable in a water's-edge taxpayer's income  
            affects the calculation of the dividend elimination,  
            foreign dividend deduction, foreign investment interest  
            offset, and any deferred intercompany transactions.
            This proposal conforms to the federal Subpart F provisions  
            and allows dividend deductions to offset the Subpart F  
            "deemed" dividend.  Spidell Publishing and Cal-Tax raised  
            concerns about previous legislation that the proposals  
            lacked factor relief or a dividend-received deduction; this  
            proposal includes this dividend received deduction.








            


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            C.   Problem & Solution: CFCs

            Problem: Calculating a CFC's income and apportionment  
            factors for a California water's-edge taxpayer is extremely  
            burdensome-time consuming and expensive-for the taxpayer  
            and the FTB, resulting in frequent taxpayer misapplications  
            of the law and the need for audit.  

             Proposed Solution: Simplify the method used to report a  
            water's-edge taxpayer's portion of its CFC's income by  
            conforming to the federal Subpart F rules for computing the  
            amount of a CFC's income that is included in a  
            shareholder's income.  This proposal would accomplish the  
            following: 


                             Remove current law's "stand alone"  
                      inclusion ratio method for computing the amount  
                      of a CFC's net income and apportionment factors  
                      that are included in the water's-edge group tax  
                      filing.  (Amendment 1)

                             Conform to the federal Subpart F  
                      provisions and provide that the amount of a CFC's  
                      Subpart F income that would be included in a  
                      water's-edge taxpayer's income would be treated  
                      as a "deemed dividend" eligible for current state  
                      law's dividend exclusion and deductions  
                      relief<1>.  (Amendment 3).

                          Provide that a 27% dividend deduction would  
                      be allowed against the CFC's Subpart F income  
                      included in the water's-edge taxpayer's income.   
                      (Amendment 2).

                             Add the following transitional rules for  
                      conforming to the federal Subpart F provisions:   
                      (Amendment 3)
                                       Income previously taxed as  
                           Subpart F income before this proposal is  


                         -----------------
            <1> Revenue and Taxation Code (R&TC) Section 24344, 24410,  
            24411, and 25106.







            


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                           effective would be considered previously  
                           taxed income for state tax purposes.
                                       Federal adjustments to the  
                           CFC's stock basis before this proposal is  
                           effective would become the new stock basis  
                           for the CFC for state purposes. 

                             Specify that state law would not conform  
                      to the following rules relating to CFCs:   
                      (Amendment 3)

                                       The gain from certain sales or  
                           exchanges of stock in certain foreign  
                           corporations<2>,

                                       The temporary 85% dividend  
                           received deduction for dividends received  
                           from CFCs<3>.

                                       The foreign tax credit<4>, 

                             Specify that if a water's-edge election  
                      is terminated, the Subpart F rules would no  
                      longer apply and only the previously taxed income  
                      and stock basis adjustments accumulated during  
                      the water's-edge election would be allowed.   
                      (Amendment 3).

                             Add that the High Foreign Tax Rule  
                      election would be valid for state purposes only  
                      if a valid election was made for federal  
                      purposes.  (Amendment 3).
                             Specify that the Franchise Tax Board may  
                      prescribe regulations as may be necessary and  
                      appropriate to carry out the provisions of this  
                      proposal.   (Amendment 3)


            D.   Role of Tax Treaties
            ------------------------

            <2> Internal Revenue Code (IRC) Section 1248.
            <3> IRC section 965.

            <4> IRC section 960.






            


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                           The United States has tax treaties with a  
                      number of foreign countries. Under these  
                      treaties, residents (not necessarily citizens) of  
                      foreign countries are taxed at a reduced rate, or  
                      are exempt from U.S. taxes on certain items of  
                      income they receive from sources within the  
                      United States. These reduced rates and exemptions  
                      vary among countries and specific items of  
                      income. Under these same treaties, residents or  
                      citizens of the United States are taxed at a  
                      reduced rate, or are exempt from foreign taxes,  
                      on certain items of income they receive from  
                      sources within foreign countries. Most income tax  
                      treaties contain what is known as a "saving  
                      clause" which prevents a citizen or resident of  
                      the United States from using the provisions of a  
                      tax treaty in order to avoid taxation of U.S.  
                      source income.



                                If the treaty does not cover a  
                      particular kind of income, or if there is no  
                      treaty between a specific country and the United  
                      States, the taxpayer must pay tax on the income  
                      in the same way and at the same rates shown in  
                      the instructions for the applicable U.S. tax  
                      return. 
                 Objectives of Bilateral Income Tax Treaties


                  The United States, like other countries, maintains an  
            extensive network of bilateral income tax treaties.  The  
            U.S. network currently includes comprehensive treaties  
            covering 66 countries, including the vast majority of (but  
            by no means all) key U.S. trading partners.


                 Bilateral income tax treaties remove barriers to  
            cross-border investment and trade by allocating taxing  
            jurisdiction between countries with residence-and  
            source-based claims to tax the income from such investment  








            


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            and trade.  Bilateral income tax treaties also provide a  
            framework for the exchange of information between taxing  
            authorities in an effort to prevent tax avoidance and  
            evasion.




               E.   What is a tax haven-it is actually paradise (for  
                 some)?
                 Extensive hearings on corporate inversions or  
            expatriations have been held in Congress in connection with  
            the Homeland Security Act then being debated in Congress.   
            The hearings centered on whether an American company should  
            be allowed to take advantage of tax benefits when it  
            reincorporates in a foreign jurisdiction where the  
            corporate taxes are lower and protection of shareholders  
            and investors are limited compared to the protections  
            afforded by the state where the corporation was originally  
            organized.  The problem is accentuated by the fact that  
            many American corporations have in fact gone global, with  
            income and profits coming from business ventures around the  
            world, and the taxation scheme of the United States Tax  
            Code have encouraged many of them to be "creative" in  
            seeking ways to minimize taxes.  

                 Bermuda and the Cayman Islands have been identified as  
            favorite tax havens for corporate expatriations although  
            there are others in Europe and Asia.  Early last year news  
            about Stanley Works, for example, seeking to reincorporate  
            in Bermuda to save some $30 million in taxes when it only  
            paid $7 million in U.S. taxes on foreign income last year,  
            led to the conclusion that three quarters of the  
            anticipated tax savings would have come from U.S. profits.  
            Amid the hue and cry, Stanley Works opted to remain a  
            Connecticut corporation.  More recently, Ingersoll-Rand,  
            formerly of New Jersey but now operating as a Bermuda  
            corporation, is reported to have avoided $50 million in  
            U.S. taxes alone in 2002, almost as much as its U.S.  
            defense and homeland security federal contracts. Thus, the  
            outcry to restructure the tax code to recapture these taxes  
            and to force domestic companies to stay in-country led to  
            various measures proposed in Congress last year, though  








            


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            none was actually passed.  Rep. Neal, in reintroducing his  
            measure this year, stated that corporate expatriation is a  
            $4 billion problem for the federal treasury.

                 Besides the tax implications of corporate  
            expatriation, concerns about its detrimental effect on  
            shareholder rights have bolstered the cry for reform.   
            Especially in light of rampant corporate irresponsibility  
            exposed by accounting scandals and sleight-of-hand business  
            dealings by major American companies of global stature,  
            corporate expatriation of a publicly held company to a tax  
            haven where shareholder rights are diminished is seen as  
            another insult to the American public.

                 The Senate Office of Oversight and Outcomes provided  
            the following list of federal actions as they relate to tax  
            havens:

                   The GAO reported in December on large U.S.  
                 corporations with subsidiaries in jurisdictions listed  
                 as foreign tax havens.  A quick examination shows  
                 several are headquartered in California: Oracle (77  
                 subsidiaries), Cisco Systems (38), Chevron (23), Wells  
                 Fargo (18), Hewlett-Packard (14), Intel (6), Disney  
                 (3), and Apple (1).  
                  http://www.globalpolicy.org/nations/launder/haven/2008/ 
                 12GAOReport.pdf  
                   Senator Levin estimates the federal government  
                 loses $100 billion each year "from U.S. taxpayers  
                 using offshore tax schemes to dodge their U.S. tax  
                 obligations." California taxpayers' share would be  
                 about $11 billion annually based on our state's  
                 percentage of federal revenues.
                   The Permanent Subcommittee on Investigations  
                 released a report last summer on tax haven banks. The  
                 heart of the report is a series of case studies that  
                 demonstrate the machinations millionaire tax evaders  
                 and their bankers use to thwart the IRS. Four of the  
                 eight cases involve California residents, including  
                 Igor Olinicoff, an Orange County billionaire who has  
                 admitted to hiding $200 million in assets offshore (as  
                 well as the title to a 147-foot yacht).  
                  http://hsgac.senate.gov/public/_files/071708PSIReport.p 








            


                                                       AB 759-Ma Page 13
                 df  


          A.Related Legislation
                 SB 640 (Burton, chapter 657, statutes of 2003) was a  
            method to compel businesses to either repatriate back to  
            the United States or not be allowed to do business with the  
            state; according to the author at the time, it is  
            "[P]articularly reprehensible that these publicly held U.S.  
            expatriate corporations are reaping the benefits of their  
            relocations at a time when the State is struggling to pay  
            for critical needs such as education, mental health and  
            public safety, and when the nation is shouldering the heavy  
            responsibilities of national defense and national  
            security."

                 AB 1178 (Block, 2009) would have required  
            multinational corporations that elect to file tax returns  
            based only on income earned inside the U.S. (known as the  
            water's edge method) to include the income of related  
            corporations in a tax haven country.  If enacted, the  
            analysis projects revenue gains of $130 million in 2010-11  
            and $160 million in 2011-12.  This bill is a two-year bill  
            that requires a 2/3 vote.

                 AB 1561 (Calderon, 2008): In this state, calculating a  
            controlled foreign corporation's (CFC) income and  
            apportionment factors for a California water's-edge  
            taxpayer is extremely burdensome-time consuming and  
                                                            expensive-for the taxpayer and the department, resulting in  
            frequent taxpayer misapplications of the law and the need  
            for audit.  In this bill, the state simplified the method  
            used to report a water's-edge taxpayer's portion of its  
            CFC's income by conforming to the federal Subpart F rules  
            for computing the amount of a CFC's income that is included  
            in a shareholder's income.



            G.   Amendments:

            The bill will be amended to include the following language:  









            


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                                    AMENDMENT 1



                 SECTION 1:  Section 25110 of the Revenue and Taxation  
            Code is amended to read:



                 25110.  (a) Notwithstanding Section 25101, a qualified
            taxpayer, as defined in paragraph (2) of subdivision (b),  
            that is
            subject to the tax imposed under this part, may elect to
            determine its income derived from or attributable to  
            sources
            within this state pursuant to a water's-edge election in
            accordance with the provisions of this part, as modified by  
            this
            article. A taxpayer, that makes a water's-edge election on  
            or
            after January 1, 2006, shall take into account that portion  
            of
            its own income and apportionment factors and the income and
            apportionment factors of its affiliated entities to the  
            extent
            provided below:
                 (1) The entire income and apportionment factors of any
            of the following corporations:
                 (A) Domestic international sales corporations, as
            described in Sections 991 to 994, inclusive, of the  
            Internal
            Revenue Code and foreign sales corporations as described in
            Sections 921 to 927, inclusive, of the Internal Revenue  
            Code.
                 (B) Any corporation (other than a bank), regardless of
            the place where it is incorporated if the average of its
            property, payroll, and sales factors within the United  
            States is
            20 percent or more.
                 (C) Corporations that are incorporated in the United
            States, excluding corporations making an election pursuant  








            


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            to
            Sections 931 to 936, inclusive, of the Internal Revenue  
            Code.
                 (D) Export trade corporations, as described in
            Sections 970 to 972, inclusive, of the Internal Revenue  
            Code.
                 (2)  (A)  With respect to a corporation that is not
            described in subparagraphs (A), (B), (C), and (D) of  
            paragraph
            (1),  as provided in either one or both of the following  
            clauses:  
                  (i) T   t  he income and apportionment factors of that
            corporation to the extent of its income derived from or
            attributable to sources within the United States and its  
            factors
            assignable to a location within the United States in  
            accordance
            with paragraph (3) of subdivision (b). Income of that  
            corporation
            derived from or attributable to sources within the United  
            States
            as determined by federal income tax laws shall be limited  
            to, and
            determined from, the books of account maintained by the
            corporation with respect to its activities conducted within  
            the
            United States.
                       (ii) The income and apportionment factors of  
            that
            corporation that is a  "controlled foreign corporation,"   
            as
            defined in Section 957 of the Internal Revenue Code, to the
            extent determined by multiplying the income and  
            apportionment
            factors of that corporation without application of this
            subparagraph by a fraction not to exceed one, the numerator  
            of
            which is the  "Subpart F income"  of that corporation for  
            that
            taxable year and the denominator of which is the  "earnings  
            and
            profits"  of that corporation for that taxable year.
                       (B) For purposes of this paragraph, both of the








            


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            following apply:
                       (i)  "Subpart F income"  means  "Subpart F  
            income"  as
            defined in Section 952 of the Internal Revenue Code.
                       (ii)  "Earnings and profits"  means  "earnings  
            and
            profits"  as described in Section 964 of the Internal  
            Revenue
            Code.
                 (3) The income and apportionment factors of the
            corporations described in this subdivision shall be taken  
            into
            account only to the extent that they would have been taken  
            into
            account had no election under this section been made.
                       (4) The Franchise Tax Board shall prescribe
            regulations to coordinate implementation of subparagraph  
            (A) of
            paragraph (2) to prevent multiple inclusion or exclusion of
            income and factors in situations where the same item of  
            income is
            described in both clauses.
                 (b) For purposes of this article and Section 24411,
            all of the following definitions apply:
                 (1) An  "affiliated corporation"  means a corporation
            that is a member of a commonly controlled group as defined  
            in
            Section 25105.
                 (2) A  "qualified taxpayer"  means a corporation that
            does both of the following:
                 (A) Files with the state tax return, on which the
            water's-edge election is made, a consent to the taking of
            depositions, at the time and place most reasonably  
            convenient to
            all parties, from key domestic corporate individuals and to  
            the
            acceptance of subpoenas duces tecum requiring reasonable
            production of documents to the Franchise Tax Board, as  
            provided
            in Section 19504, by the State Board of Equalization, as  
            provided
            in Section 5005 of Title 18 of the California Code of
            Regulations, or by the courts of this state, as provided in








            


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            Chapter 2 (commencing with Section 1985) of Title 3 of Part  
            4 of,
            and Chapter 9 (commencing with Section 2025.010) of Title 4  
            of
            Part 4 of, the Code of Civil Procedure. The consent relates  
            to
            issues of jurisdiction and service and does not waive any
            defenses that a taxpayer may otherwise have. The consent  
            shall
            remain in effect as long as the water's-edge election is in
            effect, and shall be limited to providing that information
            necessary to review or adjust income or deductions in a  
            manner
            authorized by Section 482, 861, Subpart F of Part III of
            Subchapter N, or similar provisions, of the Internal  
            Revenue
            Code, together with the regulations adopted pursuant to  
            those
            provisions, and for the conduct of an investigation with  
            respect
            to any unitary business in which the taxpayer may be  
            involved.
                 (B) Agrees that, for purposes of this article,
            dividends received by any corporation whose income and
            apportionment factors are taken into account pursuant to
            subdivision (a) from either of the following are  
            functionally
            related dividends and shall be presumed to be business  
            income:
                 (i) A corporation of which more than 50 percent of the
            voting stock is owned, directly or indirectly, by members  
            of the
            unitary group and which is engaged in the same general line  
            of
            business.
                 (ii) Any corporation that is either a significant
            source of supply for the unitary business or a significant
            purchaser of the output of the unitary business, or that  
            sells a
            significant part of its output or obtains a significant  
            part of
            its raw materials or input from the unitary business.
            "Significant,"  as used in this subparagraph, means an  








            


                                                       AB 759-Ma Page 13
            amount of
            15 percent or more of either input or output.
                 All other dividends shall be classified as business or
            nonbusiness income without regard to this subparagraph.
                 (3) The definitions and locations of property,
            payroll, and sales shall be determined under the laws and
            regulations that set forth the apportionment formulas used  
            by the
            individual states to assign net income subject to taxes on,  
            or
            measured by, net income in that state. If a state does not  
            impose
            a tax on, or measured by, net income or does not have laws  
            or
            regulations with respect to the assignment of property,  
            payroll,
            and sales, the laws and regulations provided in Article 2
            (commencing with Section 25120) shall apply.
                 Sales shall be considered to be made to a state only
            if the corporation making the sale may otherwise be subject  
            to a
            tax on, or measured by, net income under the Constitution  
            or laws
            of the United States, and shall not include sales made to a
            corporation whose income and apportionment factors are  
            taken into
            account pursuant to subdivision (a) in determining the  
            amount of
            income of the taxpayer derived from or attributable to  
            sources
            within this state.
                 (4)  "The United States"  means the 50 states of the
            United States and the District of Columbia.
                 (c) All references in this part to income determined
            pursuant to Section 25101 shall also mean income determined
            pursuant to this section.

                                    AMENDMENT 2

                 SEC. 2  Section 24411 of the Revenue and Taxation Code  
            is amended to read: 

                 24411. (a) For purposes of those taxpayers electing








            


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            to compute income under Section 25110,  to the extent not  
            otherwise allowed as a deduction or eliminated from income:  

                 (1)  100 percent of the qualifying dividends described  
            in subdivision  (c)  (d),   and  
                 (2) 27 percent of qualifying dividends described in  
            Section 25117, and    
                 (3)  75 percent of  other  qualifying dividends  , other  
            than those referred to in paragraphs (1)or(2).   to the  
            extent not otherwise  allowed as a deduction or eliminated  
            from income  .  
                 (b)  "Qualifying dividends" means those received by the  
            water's-edge group from corporations if both of the  
            following conditions are satisfied:
                 (1) The average of the property, payroll, and sales
            factors within the United States for the corporation is  
            less than
            20 percent.
                 (2) More than 50 percent of the total combined voting
            power of all classes of stock entitled to vote is owned  
            directly
            or indirectly by the water's-edge group.
                  (b)   (c)  The water's-edge group consists of  
            corporations
            whose income and apportionment factors are taken into  
            account
            pursuant to Section 25110.
                  (c)   (d)  Dividends derived from a construction project,  
            the
            location of which is not subject to the taxpayer's control.
                 For purposes of this subdivision:
                       (1)  "Construction project"  means any activity  
            which
            meets the following requirements:
                 (A) Is undertaken for any entity, including a
            governmental entity, which is not affiliated with the  
            taxpayer.
                 (B) The majority of its cost of performance is
            attributable to an addition to real property or an  
            alteration of
            land or any improvement thereto as those terms are utilized  
            for
            purposes of this code.








            


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                 "Construction project"  does not include the
            operation, rental, leasing, or depletion of real property,  
            land,
            or any improvement thereto.
                 (2)  "Location of which is not subject to the
            taxpayer's control"  means that the place at which the  
            majority
            of the construction takes place results from the nature or
            character of the construction project and not as a result  
            of the
            terms of the contract or agreement governing the  
            construction
            project.


                                    AMENDMENT 3



                 SEC. 3. Section 25117 of the Revenue and Taxation Code  
            is added to read: 



                  25117.  (a) Except as otherwise provided, income  
            taken into account by all affiliated entities whose income  
            and apportionment factors are determined pursuant to  
            Section 25110 shall include income described in Subpart F  
            of the Internal Revenue Code (commencing with Section 951).  
             The income that is taken into account shall for all  
            purposes be treated as a dividend actually paid, and be  
            subject to any provision or limitation related to the  
            treatment of dividends, including, but not limited to,  
            Sections 24344, 24410, 24411, and 25106.  The amount taken  
            into account shall be treated as business or nonbusiness  
            income (as defined in Section 25120), as the case may be.  
                 (b) In the application of Subpart F of the Internal  
            Revenue Code:
                 (1) Exclusions from gross income under Section 959 of  
            the Internal Revenue Code, relating to previously taxed  
            income, shall apply, including amounts related to income  
            previously taxed under federal law in years prior to the  
            water's edge election.     








            


                                                       AB 759-Ma Page 13
                 (2) Federal adjustments to stock basis made pursuant  
            to Section 961 of the Internal Revenue Code, relating to  
            adjustments to basis of stock in controlled foreign  
            corporations and of other property, including adjustments  
            made prior to the water's edge election, shall apply.  
                 (3) The provisions of and any reference to Section  
            1248 of the Internal Revenue Code, relating to gain from  
            certain sales or exchanges of stock in certain foreign  
            corporations, shall not apply. 
                 (4) Section 960 of the Internal Revenue Code, relating  
            to special rules for foreign tax credit, shall not apply.
                 (5) Section 965 of the Internal Revenue Code, relating  
            to temporary dividends received deduction, shall not apply.  

                 (6) For purposes of this section, a federal election  
            to exclude from Subpart F income the income described in  
            Section 954(b)(4) of the Internal Revenue Code shall apply,  
            including amounts related to income previously taxed under  
            federal law in years prior to the water's edge election.   
            No election under this subparagraph shall be allowed for  
            state purposes unless a valid election was made for federal  
            purposes.   
                 (c) In the event that a water's-edge election is  
            terminated, for taxable years thereafter, the following  
            rules apply:
                 (1) Subpart F of the Internal Revenue Code shall not  
            apply, except as provided in this subdivision.  
                 (2) Section 959 of the Internal Revenue Code, relating  
            to exclusion from gross income of previously taxed earnings  
            and profits,   shall apply, but only to the extent  
            attributable to income that has been taken into account  
            pursuant to subdivision (a) during the period of the  
            water's edge election.  
                 (3) Stock basis shall be determined as if this section  
            did not apply, except that stock basis shall be-- 
                 (A) Increased by income taken into account pursuant to  
            subdivision (a) during the period of the water's edge  
            election, and 
                 (B) Reduced by the following:
                 (i) That portion of amounts excluded from income under  
            paragraph (2) of subdivision (b) that are attributable to  
            income taken into account pursuant to subdivision (a)  
            during the period of the water's edge election, and 








            


                                                       AB 759-Ma Page 13
                 (ii) Amounts described by paragraph (2) of subdivision  
            (c) excluded from income after termination of the water's  
            edge election.   
                 (d)(1) Except as provided in paragraph (2) this  
            section shall apply to taxable years beginning on or after  
            January 1, 2008.  
                 (2) In the event that two or more taxpayers subject to  
            the same election under section 25110 have different  
            taxable years, this section shall apply as of the first day  
            of the first taxable year of those respective taxpayers  
            that begins on or after January 1, 2008.
                 (e) The Franchise Tax Board may prescribe regulations  
            as may be necessary and appropriate to carry out the  
            purposes of this Section  


             Support and Opposition

                 Support:None Received



                 Oppose:None Received



            ---------------------------------

            Consultant: Gayle Miller