BILL NUMBER: AB 1423	ENROLLED
	BILL TEXT

	PASSED THE SENATE  AUGUST 31, 2011
	PASSED THE ASSEMBLY  SEPTEMBER 8, 2011
	AMENDED IN SENATE  JULY 12, 2011
	AMENDED IN SENATE  JUNE 16, 2011

INTRODUCED BY   Assembly Member Perea

                        MARCH 22, 2011

   An act to amend Sections 17088, 17145, 18155, 24427, 24870, 24871,
and 24990.5 of, and to add Sections 17280.1, 17322.1, 24452.1, and
24871.1 to, the Revenue and Taxation Code, relating to taxation, and
declaring the urgency thereof, to take effect immediately.


	LEGISLATIVE COUNSEL'S DIGEST


   AB 1423, Perea. Income taxes: federal conformity: Regulated
Investment Company Modernization Act of 2010.
   The Personal Income Tax Law and the Corporation Tax Law, in
modified conformity with federal income tax laws, provide for
particular treatment of regulated investment companies, as specified,
including particular treatment regarding capital loss carryovers,
income and asset tests, dividend designation and allocation rules,
the determination of earnings and profits, the passthrough of
exempt-interest dividends and foreign tax credits, spillover
dividends, return of capital distribution, distributions in
redemption of stock, preferential dividends, deferral of late-year
losses, holding period requirements, and sales load basis.
   This bill would, under both laws, provide additional conformity
with federal income tax laws by adopting specified provisions of the
Regulated Investment Company Modernization Act of 2010 relating to
regulated investment companies, as specified, including the
imposition of a tax upon those companies that fail the
above-mentioned asset test.
   This bill would declare that it is to take effect immediately as
an urgency statute.


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

  SECTION 1.  Section 17088 of the Revenue and Taxation Code is
amended to read:
   17088.  (a) (1) Subchapter M of Chapter 1 of Subtitle A of the
Internal Revenue Code, relating to regulated investment companies and
real estate investment trusts, shall apply, except as otherwise
provided.
   (2) Part 1 of Subchapter M of Chapter 1 of Subtitle A of the
Internal Revenue Code, relating to regulated investment companies, as
amended by the Regulated Investment Company Modernization Act of
2010 (Public Law 111-325), shall apply, except as otherwise provided.

   (b) Section 17145 shall apply in lieu of Section 852(b)(5) of the
Internal Revenue Code, relating to exempt-interest dividends.
   (c) (1) Section 852(b)(3)(D) of the Internal Revenue Code,
relating to treatment by shareholders of undistributed capital gains,
shall not apply.
   (2) Section 852(g)(1)(A) of the Internal Revenue Code is modified
by substituting the phrase "subdivision (a) of Section 17145" for the
phrase "the first sentence of subsection (b)(5)" contained therein.
   (d) (1) Except as provided in paragraph (2), the amendments made
to this section by the act adding this paragraph shall apply to
taxable years beginning on or after December 23, 2010.
   (2) (A) Section 851 of the Internal Revenue Code, relating to
definition of regulated investment company, as amended by Section 201
of the Regulated Investment Company Modernization Act of 2010
(Public Law 111-325), and Section 852(b)(2)(G) of the Internal
Revenue Code, as amended by Section 201 of the Regulated Investment
Company Modernization Act of 2010 (Public Law 111-325), shall apply
to taxable years with respect to which the due date (determined with
regard to any extensions) of the return of tax for such taxable year
is on or after December 23, 2010.
   (B) Section 852(b)(4) of the Internal Revenue Code, relating to
loss on sale or exchange of stock held six months or less, as amended
by Section 309 of the Regulated Investment Company Modernization Act
of 2010 (Public Law 111-325), shall apply to losses incurred on
shares of stock for which the taxpayer's holding period begins on or
after December 23, 2010.
   (C) Section 852(f)(1)(C) of the Internal Revenue Code, as amended
by Section 502 of the Regulated Investment Company Modernization Act
of 2010 (Public Law 111-325), shall apply to charges incurred in
taxable years beginning on or after December 23, 2010.
   (D) Section 855(a) of the Internal Revenue Code, relating to
general rule, as amended by Section 304 of the Regulated Investment
Company Modernization Act of 2010 (Public Law 111-325), shall apply
to distributions in taxable years beginning on or after December 23,
2010.
  SEC. 2.  Section 17145 of the Revenue and Taxation Code is amended
to read:
   17145.  (a) A regulated investment company, as defined in Section
851 of the Internal Revenue Code, relating to definition of regulated
investment company, or series thereof, is qualified to pay
exempt-interest dividends to its shareholders if, at the close of
each quarter of its taxable year, at least 50 percent of the value of
its total assets consists of obligations which, when held by an
individual, the interest therefrom is exempt from taxation by this
state.
   (b) For purposes of this section:
   (1) "Aggregate reported amount" means the aggregate amount of
dividends reported by the company under paragraph (4) as
exempt-interest dividends for the taxable year (including
exempt-interest dividends paid after the close of the taxable year
described in Section 855 of the Internal Revenue Code).
   (2) "Excess reported amount" means the excess of the aggregate
reported amount over the exempt interest of the company for the
taxable year.
   (3) "Exempt interest" means, with respect to any regulated
investment company, the excess of the amount of interest received by
it during its taxable year on obligations, interest on which, if held
by an individual, is exempt from taxation by this state, over the
amounts that, if it were treated as an individual, would be
disallowed as deductions under Section 17280 of this part or Section
171(a)(2) of the Internal Revenue Code.
   (4) (A) Except as provided in subparagraph (B), "exempt-interest
dividend" means any dividend or part thereof (other than a capital
gain dividend) paid by a regulated investment company or series
thereof and reported by the company as an exempt-interest dividend in
written statements furnished to its shareholders.
   (B) If the aggregate reported amount with respect to the company
for any taxable year exceeds the exempt interest of the company for
such taxable year, an exempt-interest dividend is the excess of the
reported exempt-interest dividend amount over the excess reported
amount which is allocable to such reported exempt-interest dividend
amount.
   (C) (i) Except as provided in clause (ii), the excess reported
amount (if any) which is allocable to the reported exempt-interest
dividend amount is that portion of the excess reported amount which
bears the same ratio to the excess reported amount as the reported
exempt-interest dividend amount bears to the aggregate reported
amount.
   (ii) In the case of a taxable year which does not begin and end in
the same calendar year, if the post-December reported amount equals
or exceeds the excess reported amount for such taxable year, clause
(i) shall be applied by substituting "post-December reported amount"
for "aggregate reported amount" and no excess reported amount shall
be allocated to any dividend paid on or before December 31 of such
taxable year.
   (5) "Post-December reported amount" means the aggregate reported
amount determined by taking into account only dividends paid after
December 31 of the taxable year.
   (6) "Reported exempt-interest dividend amount" means the amount
reported to its shareholders under paragraph (4) as an
exempt-interest dividend.
   (7) "Series" means a segregated portfolio of assets, the
beneficial interest in which is owned by the holders of a class or
series of stock of the regulated investment company that is preferred
over all other classes or series with respect to that portfolio of
assets.
   (8) "Value" means, with respect to securities (other than those of
majority-owned subsidiaries) for which market quotations are readily
available, the market value of those securities; and with respect to
other securities and assets, fair market value as determined in good
faith by the board of directors or trustees, except that in the case
of securities of majority-owned subsidiaries that are investment
companies, as defined in the Investment Company Act of 1940, that
fair value shall not exceed market value or asset value, whichever is
higher.
   (c) An exempt-interest dividend shall be treated by recipients
thereof as an item of interest excludable from income.
   (d) In the case of a qualified fund of funds, as defined in
Section 852(g)(2) of the Internal Revenue Code, relating to fund of
funds, that fund shall be qualified to pay tax-exempt dividends to
its shareholders without regard to whether that fund satisfies the
requirements of subdivision (a).
   (e) The amendments made to this section by the act adding this
subdivision shall apply to taxable years beginning on or after
December 23, 2010.
  SEC. 3.  Section 17280.1 is added to the Revenue and Taxation Code,
to read:
   17280.1.  (a) Section 267(f)(3) of the Internal Revenue Code,
relating to loss deferral rules not to apply in certain cases, as
amended by Section 306 of the Regulated Investment Company
Modernization Act of 2010 (Public Law 111-325), shall apply, except
as otherwise provided.
   (b) This section shall apply to distributions on or after December
23, 2010.
  SEC. 4.  Section 17322.1 is added to the Revenue and Taxation Code,
to read:
   17322.1.  (a) Section 302 of the Internal Revenue Code, relating
to distributions in redemption of stock, as amended by Section 306 of
the Regulated Investment Company Modernization Act of 2010 (Public
Law 111-325), shall apply, except as otherwise provided.
   (b) Section 316 of the Internal Revenue Code, relating to dividend
defined, as amended by Section 305 of the Regulated Investment
Company Modernization Act of 2010 (Public Law 111-325), shall apply,
except as otherwise provided.
   (c) (1) Subdivision (a) shall apply to distributions on or after
December 23, 2010.
   (2) Subdivision (b) shall apply to distributions made in taxable
years beginning on or after December 23, 2010.
  SEC. 5.  Section 18155 of the Revenue and Taxation Code is amended
to read:
   18155.  (a) A deduction shall not be allowed for capital loss
carrybacks provided by Section 1212 of the Internal Revenue Code,
relating to capital loss carrybacks and carryovers.
   (b) Section 1212(a)(1)(C) of the Internal Revenue Code, as amended
by Section 101 of the Regulated Investment Company Modernization Act
of 2010 (Public Law 111-325), shall apply, except as otherwise
provided.
   (c) Section 1212(a)(3) of the Internal Revenue Code, relating to
regulated investment companies, as amended by Section 101 of the
Regulated Investment Company Modernization Act of 2010 (Public Law
111-325), shall apply, except as otherwise provided.
   (d) Section 1222(10) of the Internal Revenue Code, relating to net
capital loss, as amended by Section 101 of the Regulated Investment
Company Modernization Act of 2010 (Public Law 111-325), shall apply,
except as otherwise provided.
   (e) (1) Except as provided in paragraph (2), the amendments made
to this section by the act adding this paragraph shall apply to net
capital losses for taxable years beginning on or after December 23,
2010.
   (2) Section 1212(a)(3)(B) of the Internal Revenue Code, relating
to coordination with general rule, as added by Section 101 of the
Regulated Investment Company Modernization Act of 2010 (Public Law
111-325), shall apply to taxable years beginning on or after December
23, 2010.
  SEC. 6.  Section 24427 of the Revenue and Taxation Code is amended
to read:
   24427.  (a) Section 267 of the Internal Revenue Code, relating to
losses, expenses, and interest with respect to transactions between
related taxpayers, shall apply, except as otherwise provided.
   (b) Section 267(f)(3) of the Internal Revenue Code, relating to
loss deferral rules not to apply in certain cases, as amended by
Section 306 of the Regulated Investment Company Modernization Act of
2010 (Public Law 111-325), shall apply, except as otherwise provided.

   (c) The amendments made to this section by the act adding this
subdivision shall apply to distributions on or after December 23,
2010.
  SEC. 7.  Section 24452.1 is added to the Revenue and Taxation Code,
to read:
   24452.1.  (a) Section 302 of the Internal Revenue Code, relating
to distributions in redemption of stock, as amended by Section 306 of
the Regulated Investment Company Modernization Act of 2010 (Public
Law 111-325), shall apply, except as otherwise provided.
   (b) Section 316 of the Internal Revenue Code, relating to dividend
defined, as amended by Section 305 of the Regulated Investment
Company Modernization Act of 2010 (Public Law 111-325), shall apply,
except as otherwise provided.
   (c) (1) Subdivision (a) shall apply to distributions on or after
December 23, 2010.
   (2) Subdivision (b) shall apply to distributions made in taxable
years beginning on or after December 23, 2010.
  SEC. 8.  Section 24870 of the Revenue and Taxation Code is amended
to read:
   24870.  (a) (1) Subchapter M of Chapter 1 of Subtitle A of the
Internal Revenue Code, relating to regulated investment companies and
real estate investment trusts, shall apply, except as otherwise
provided in this part.
   (2) Part 1 of Subchapter M of Chapter 1 of Subtitle A of the
Internal Revenue Code, relating to regulated investment companies, as
amended by the Regulated Investment Company Modernization Act of
2010 (Public Law 111-325), shall apply, except as otherwise provided.

   (b) (1) Except as provided in paragraph (2), the amendments made
to this section by the act adding this paragraph shall apply to
taxable years beginning on or after December 23, 2010.
   (2) (A) Section 851 of the Internal Revenue Code, relating to
definition of regulated investment company, as amended by Section 201
of the Regulated Investment Company Modernization Act of 2010
(Public Law 111-325), and Section 852(b)(2)(G) of the Internal
Revenue Code, as amended by Section 201 of the Regulated Investment
Company Modernization Act of 2010 (Public Law 111-325), shall apply
to taxable years with respect to which the due date (determined with
regard to any extensions) of the return of tax for such taxable year
is on or after December 23, 2010.
   (B) Section 852(b)(4) of the Internal Revenue Code, relating to
loss on sale or exchange of stock held six months or less, as amended
by Section 309 of the Regulated Investment Company Modernization Act
of 2010 (Public Law 111-325), shall apply to losses incurred on
shares of stock for which the taxpayer's holding period begins on or
after December 23, 2010.
   (C) Section 852(f)(1)(C) of the Internal Revenue Code, as amended
by Section 502 of the Regulated Investment Company Modernization Act
of 2010 (Public Law 111-325), shall apply to charges incurred in
taxable years beginning on or after December 23, 2010.
   (D) Section 855(a) of the Internal Revenue Code, relating to
general rule, as amended by Section 304 of the Regulated Investment
Company Modernization Act of 2010 (Public Law 111-325), shall apply
to distributions in taxable years beginning on or after December 23,
2010.
  SEC. 9.  Section 24871 of the Revenue and Taxation Code is amended
to read:
   24871.  (a) (1) Section 852(b)(1) of the Internal Revenue Code,
relating to imposition of tax on regulated investment companies, does
not apply.
   (2) Every regulated investment company 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 "investment company income," as defined
in subdivision (b).
   (3) (A) Section 851(d)(2)(C)(i)(I) of the Internal Revenue Code is
modified by substituting "$12,500" for "$50,000."
   (B) Section 851(d)(2)(C)(i)(II) of the Internal Revenue Code is
modified by substituting the phrase "the rate of tax specified in
Section 23151" for the phrase "the highest rate of tax specified in
section 11" contained therein.
   (C) Section 851(d)(2)(C)(iii) of the Internal Revenue Code,
relating to administrative provisions, is modified by substituting
the phrase "Article 3 of Part 10.2 (commencing with Section 19031), a
tax imposed by this subparagraph shall be treated as a tax with
respect to which the deficiency procedures of such article apply" for
the phrase "subtitle F, a tax imposed by this subparagraph shall be
treated as an excise tax with respect to which the deficiency
procedures of such subtitle apply" contained therein.
   (D) Section 851(i)(2) of the Internal Revenue Code, relating to
imposition of tax on failures, shall not apply.
   (b) "Investment company income" means investment company taxable
income, as defined in Section 852(b)(2) of the Internal Revenue Code,
modified as follows:
   (1) Section 852(b)(2)(A) of the Internal Revenue Code, relating to
an exclusion for net capital gain, does not apply.
   (2) Section 852(b)(2)(B) of the Internal Revenue Code, relating to
net operating losses, is modified to deny the deduction allowed
under Sections 24416 and 24416.1, in lieu of denying the deduction
allowed by Section 172 of the Internal Revenue Code.
   (3) In lieu of the provision of Section 852(b)(2)(C) of the
Internal Revenue Code, relating to special deductions for
corporations, no deduction shall be allowed under Sections 24402,
24406, 24410, and 25106.
   (4) (A) The deduction for dividends paid, under Section 852(b)(2)
(D) of the Internal Revenue Code, is modified to allow capital gain
dividends and exempt interest dividends (to the extent that interest
is included in gross income under this part) to be included in the
computation of the deduction.
   (B) For purposes of this paragraph, Section 562(c) of the Internal
Revenue Code, relating to preferential dividends, as amended by
Section 307 of the Regulated Investment Company Modernization Act of
2010 (Public Law 111-325), shall apply.
   (c) Section 852(b)(3)(A) of the Internal Revenue Code, relating to
capital gains, does not apply.
   (d) (1) Section 852(b)(5) of the Internal Revenue Code, relating
to exempt-interest dividends, is modified by substituting the phrase
"that, when held by an individual, the interest therefrom is exempt
from taxation by this state" for the phrase "described in section 103
(a)" contained therein.
   (2) Section 852(b)(5)(A)(iv)(V) of the Internal Revenue Code,
relating to exempt interest, is modified by substituting the phrase
"on obligations that, if held by an individual, is exempt from
taxation by this state, over the amounts disallowed as deductions
under subdivision (b) of Section 24360 or Section 24425" for the
phrase "excludable from gross income under section 103(a) over the
amounts disallowed as deductions under sections 265 and 171(a)(2)"
contained therein.
   (3) Section 852(b)(5)(B) of the Internal Revenue Code, relating to
treatment of exempt-interest dividends by shareholders, does not
apply.
   (e) Section 854 of the Internal Revenue Code, relating to
limitations applicable to dividends received from regulated
investment companies, is modified to refer to Sections 24402, 24406,
24410, and 25106, in lieu of Section 243 of the Internal Revenue
Code.
   (f) Section 852(g)(1)(A) of the Internal Revenue Code is modified
by substituting the phrase "subdivision (a) of Section 17145" for the
phrase "the first sentence of subsection (b)(5)" contained therein.
   (g) (1) Except as provided in paragraphs (2) and (3), the
amendments made to this section by the act adding this subdivision
shall apply to taxable years with respect to which the due date
(determined with regard to any extensions) of the return of tax for
such taxable year is on or after December 23, 2010.
   (2) Subparagraph (B) of paragraph (4) of subdivision (b) shall
apply to distributions in taxable years beginning on or after
December 23, 2010.
   (3) Subdivision (f) shall apply to taxable years beginning on or
after December 23, 2010.
  SEC. 10.  Section 24871.1 is added to the Revenue and Taxation
Code, to read:
   24871.1.  (a) Section 860(f)(2)(B) of the Internal Revenue Code,
as amended by Section 301 of the Regulated Investment Company
Modernization Act of 2010 (Public Law 111-325), shall apply, except
as otherwise provided.
   (b) This section shall apply to taxable years beginning on or
after December 23, 2010.
  SEC. 11.  Section 24990.5 of the Revenue and Taxation Code is
amended to read:
   24990.5.  (a) Section 1201 of the Internal Revenue Code, relating
to alternative tax for corporations, shall not be applicable.
   (b)  The provisions of Section 1212 of the Internal Revenue Code,
relating to capital loss carrybacks and carryovers, as amended by
Section 101 of the Regulated Investment Company Modernization Act of
2010 (Public Law 111-325), shall apply, except as otherwise provided.

   (1) Section 1212(a)(1)(A) of the Internal Revenue Code, relating
to capital loss carrybacks, shall not apply.
   (2) Section 1212(a)(4) of the Internal Revenue Code, relating to
special rules on carrybacks, shall not apply.
   (3) Sections 1212(b) and 1212(c) of the Internal Revenue Code,
relating to other taxpayers and carryback of losses from Section 1256
contracts to offset prior gains from such contracts, respectively,
shall not apply.
   (c) Section 1222(10) of the Internal Revenue Code, relating to net
capital loss, as amended by Section 101 of the Regulated Investment
Company Modernization Act of 2010 (Public Law 111-325), shall apply,
except as otherwise provided.
   (d) (1) Except as provided in paragraph (2), the amendments made
to this section by the act adding this paragraph shall apply to net
capital losses for taxable years beginning on or after December 23,
2010.
   (2) Section 1212(a)(3)(B) of the Internal Revenue Code, relating
to coordination with general rule, as added by Section 101 of the
Regulated Investment Company Modernization Act of 2010 (Public Law
111-325), shall apply to taxable years beginning on or after December
23, 2010.
  SEC. 12.  This act is an urgency statute necessary for the
immediate preservation of the public peace, health, or safety within
the meaning of Article IV of the Constitution and shall go into
immediate effect. The facts constituting the necessity are:
   Given the enactment of the federal Regulated Investment Company
Modernization Act on December 22, 2010, which has already changed the
tax rules pertaining to mutual funds and their shareholders for
federal tax purposes, in order to avoid having two materially
different federal and California tax rules governing the same
investment and same income, and to eliminate uncertainty and
confusion regarding the taxation of earnings and profits of Regulated
Investment Companies and of the distributions to the some 6 million
California shareholders, and thereby minimize unnecessary and costly
administrative burdens that adversely impact the Franchise Tax Board,
it is necessary for this act to take effect immediately.