California Legislature—2013–14 Regular Session

Assembly Bill No. 456

Introduced by Assembly Member Morrell

February 19, 2013

An act to amend Section 17276.20 of the Revenue and Taxation Code, relating to taxation.

LEGISLATIVE COUNSEL’S DIGEST

AB 456, as introduced, Morrell. Taxation: deductions: net operating losses.

The Personal Income Tax Law allows individual taxpayers to utilize net operating losses and carryovers and carrybacks of those losses for purposes of offsetting their individual and corporate tax liabilities. Existing law allows net operating losses attributable to taxable years beginning on or after January 1, 2013, to be carrybacks to each of the preceding 2 taxable years, as provided.

This bill would make a technical, nonsubstantive change to this provision.

Vote: majority. Appropriation: no. Fiscal committee: no. State-mandated local program: no.

The people of the State of California do enact as follows:

SECTION 1.  

Section 17276.20 of the Revenue and Taxation
Code is amended to read:

17276.20.  

Except as provided in Sections 17276.1, 17276.2,
17276.4, 17276.5, 17276.6, and 17276.7, the deduction provided
by Section 172 of the Internal Revenue Code, relating to net
operating loss deduction, shall be modified as follows:

(a) (1) Net operating losses attributable to taxable years
beginning before January 1, 1987, shall not be allowed.

(2) A net operating loss shall not be carried forward to any
taxable year beginning before January 1, 1987.

(b) (1) Except as provided in paragraphs (2) and (3), the
provisions of Section 172(b)(2) of the Internal Revenue Code,
relating to amount of carrybacks and carryovers, shall be modified
so that the applicable percentage of the entire amount of the net
operating loss for any taxable year shall be eligible for carryover
to any subsequent taxable year. For purposes of this subdivision,
the applicable percentage shall be:

(A) Fifty percent for any taxable year beginning before January
1, 2000.

(B) Fifty-five percent for any taxable year beginning on or after
January 1, 2000, and before January 1, 2002.

(C) Sixty percent for any taxable year beginning on or after
January 1, 2002, and before January 1, 2004.

(D) One hundred percent for any taxable year beginning on or
after January 1, 2004.

(2) In the case of a taxpayer who has a net operating loss in any
taxable year beginning on or after January 1, 1994, and who
operates a new business during that taxable year, each of the
following shall apply to each loss incurred during the first three
taxable years of operating the new business:

(A) If the net operating loss is equal to or less than the net loss
from the new business, 100 percent of the net operating loss shall
be carried forward as provided in subdivision (d).

(B) If the net operating loss is greater than the net loss from the
new business, the net operating loss shall be carried over as
follows:

(i) With respect to an amount equal to the net loss from the new
business, 100 percent of that amount shall be carried forward as
provided in subdivision (d).

(ii) With respect to the portion of the net operating loss that
exceeds the net loss from the new business, the applicable
percentage of that amount shall be carried forward as provided in
subdivision (d).

(C) For purposes of Section 172(b)(2) of the Internal Revenue
Code, the amount described in clause (ii) of subparagraph (B) shall
be absorbed before the amount described in clause (i) of
subparagraph (B).

(3) In the case of a taxpayer who has a net operating loss in any
taxable year beginning on or after January 1, 1994, and who
operates an eligible small business during that taxable year, each
of the following shall apply:

(A) If the net operating loss is equal to or less than the net loss
from the eligible small business, 100 percent of the net operating
loss shall be carried forward to the taxable years specified in
subdivision (d).

(B) If the net operating loss is greater than the net loss from the
eligible small business, the net operating loss shall be carried over
as follows:

(i) With respect to an amount equal to the net loss from the
eligible small business, 100 percent of that amount shall be carried
forward as provided in subdivision (d).

(ii) With respect to that portion of the net operating loss that
exceeds the net loss from the eligible small business, the applicable
percentage of that amount shall be carried forward as provided in
subdivision (d).

(C) For purposes of Section 172(b)(2) of the Internal Revenue
Code, the amount described in clause (ii) of subparagraph (B) shall
be absorbed before the amount described in clause (i) of
subparagraph (B).

(4) In the case of a taxpayer who has a net operating loss in a
taxable year beginning on or after January 1, 1994, and who
operates a business that qualifies as both a new business and an
eligible small business under this section, that business shall be
treated as a new business for the first three taxable years of the
new business.

(5) In the case of a taxpayer who has a net operating loss in a
taxable year beginning on or after January 1, 1994, and who
operates more than one business, and more than one of those
businesses qualifies as either a new business or an eligible small
business under this section, paragraph (2) shall be applied first,
except that if there is any remaining portion of the net operating
loss after application of clause (i) of subparagraph (B) of that
paragraph, paragraph (3) shall be applied to the remaining portion
of the net operating loss as though that remaining portion of the
net operating loss constituted the entire net operating loss.

(6) For purposes of this section, the term “net loss” means the
amount of net loss after application of Sections 465 and 469 of the
Internal Revenue Code.

(c) Section 172(b)(1) of the Internal Revenue Code, relating to
years to which the loss may be carried, is modified as follows:

(1) Net operating loss carrybacks shall not be allowed for any
net operating losses attributable to taxable years beginning before
January 1, 2013.

(2) A net operating loss attributable to taxable years beginning
on or after January 1, 2013, shall be a net operating loss carryback
to each of the two taxable years preceding the taxable year of the
loss in lieu of the number of years provided therein.

(A) For a net operating loss attributable to a taxable year
beginning on or after January 1, 2013, and before January 1, 2014,
the amount of carryback to any taxable year shall not exceed 50
percent of the net operating loss.

(B) For a net operating loss attributable to a taxable year
beginning on or after January 1, 2014, and before January 1, 2015,
the amount of carryback to any taxable year shall not exceed 75
percent of the net operating loss.

(C) For a net operating loss attributable to a taxable year
beginning on or after January 1, 2015, the amount of carryback to
any taxable year shall not exceed 100 percent of the net operating
loss.

(3) Notwithstanding paragraph (2), Section 172(b)(1)(B) of the
Internal Revenue Code, relating to special rules for REITs, and
Section 172(b)(1)(E) of the Internal Revenue Code, relating to
excess interest loss, and Section 172(h) of the Internal Revenue
Code, relating to corporate equity reduction interest losses, shall
apply as provided.

(4) A net operating loss carryback shall not be carried back to
any taxable year beginning before January 1, 2011.

(d) (1) (A) For a net operating loss for any taxable year
beginning on or after January 1, 1987, and before January 1, 2000,
Section 172(b)(1)(A)(ii) of the Internal Revenue Code is modified
to substitute “five taxable years” in lieu of “20 taxable years”
except as otherwise provided in paragraphs (2) and (3).

(B) For a net operating loss for any taxable year beginning on
or after January 1, 2000, and before January 1, 2008, Section
172(b)(1)(A)(ii) of the Internal Revenue Code is modified to
substitute “10 taxable years” in lieu of “20 taxable years.”

(2) For any taxable year beginning before January 1, 2000, in
the case of a “new business,” the “five taxable years” in paragraph
(1) shall be modified to read as follows:

(A) “Eight taxable years” for a net operating loss attributable
to the first taxable year of that new business.

(B) “Seven taxable years” for a net operating loss attributable
to the second taxable year of that new business.

(C) “Six taxable years” for a net operating loss attributable to
the third taxable year of that new business.

(3) For any carryover of a net operating loss for which a
deduction is denied by Section 17276.3, the carryover period
specified in this subdivision shall be extended as follows:

(A) By one year for a net operating loss attributable to taxable
years beginning in 1991.

(B) By two years for a net operating loss attributable to taxable
years beginning prior to January 1, 1991.

(4) The net operating loss attributable to taxable years beginning
on or after January 1, 1987, and before January 1, 1994, shall be
a net operating loss carryover to each of the 10 taxable years
following the year of the loss if it is incurred by a taxpayer that is
under the jurisdiction of the court in a Title 11 or similar case at
any time during the income year. The loss carryover provided in
the preceding sentence shall not apply to any loss incurred after
the date the taxpayer is no longer under the jurisdiction of the court
in a Title 11 or similar case.

(e) For purposes of this section:

(1) “Eligible small business” means any trade or business that
has gross receipts, less returns and allowances, of less than one
million dollars ($1,000,000) during the taxable year.

(2) Except as provided in subdivision (f), “new business” means
any trade or business activity that is first commenced in this state
on or after January 1, 1994.

(3) “Title 11 or similar case” shall have the same meaning as
in Section 368(a)(3) of the Internal Revenue Code.

(4) In the case of any trade or business activity conducted by a
partnership or “S” corporation paragraphs (1) and (2) shall be
applied to the partnership or “S” corporation.

(f) For purposes of this section, in determining whether a trade
or business activity qualifies as a new business under paragraph
(2) of subdivision (e), the following rules shall apply:

(1) In any case where a taxpayer purchases or otherwise acquires
all or any portion of the assets of an existing trade or business
(irrespective of the form of entity) that is doing business in this
state (within the meaning of Section 23101), the trade or business
thereafter conducted by the taxpayer (or any related person) shall
not be treated as a new business if the aggregate fair market value
of the acquired assets (including real, personal, tangible, and
intangible property) used by the taxpayer (or any related person)
in the conduct of its trade or business exceeds 20 percent of the
aggregate fair market value of the total assets of the trade or
business being conducted by the taxpayer (or any related person).
For purposes of this paragraph only, the following rules shall apply:

(A) The determination of the relative fair market values of the
acquired assets and the total assets shall be made as of the last day
of the first taxable year in which the taxpayer (or any related
person) first uses any of the acquired trade or business assets in
its business activity.

(B) Any acquired assets that constituted property described in
Section 1221(1) of the Internal Revenue Code in the hands of the
transferor shall not be treated as assets acquired from an existing
trade or business, unless those assets also constitute property
described in Section 1221(1) of the Internal Revenue Code in the
hands of the acquiring taxpayer (or related person).

(2) In any case where a taxpayer (or any related person) is
engaged in one or more trade or business activities in this state, or
has been engaged in one or more trade or business activities in this
state within the preceding 36 months (“prior trade or business
activity”), and thereafter commences an additional trade or business
activity in this state, the additional trade or business activity shall
only be treated as a new business if the additional trade or business
activity is classified under a different division of the Standard
Industrial Classification (SIC) Manual published by the United
States Office of Management and Budget, 1987 edition, than are
any of the taxpayer’s (or any related person’s) current or prior
trade or business activities.

(3) In any case where a taxpayer, including all related persons,
is engaged in trade or business activities wholly outside of this
state and the taxpayer first commences doing business in this state
(within the meaning of Section 23101) after December 31, 1993
(other than by purchase or other acquisition described in paragraph
(1)), the trade or business activity shall be treated as a new business
under paragraph (2) of subdivision (e).

(4) In any case where the legal form under which a trade or
business activity is being conducted is changed, the change in form
shall be disregarded and the determination of whether the trade or
business activity is a new business shall be made by treating the
taxpayer as having purchased or otherwise acquired all or any
portion of the assets of an existing trade or business under the rules
of paragraph (1) of this subdivision.

(5) “Related person” shall mean any person that is related to
the taxpayer under either Section 267 or 318 of the Internal
Revenue Code.

(6) “Acquire” shall include any gift, inheritance, transfer incident
to divorce, or any other transfer, whether or not for consideration.

(7) (A) For taxable years beginning on or after January 1, 1997,
the term “new business” shall include any taxpayer that is engaged
in biopharmaceutical activities or other biotechnology activities
that are described in Codes 2833 to 2836, inclusive, of the Standard
Industrial Classification (SIC) Manual published by the United
States Office of Management and Budget, 1987 edition, and as
further amended, and that has not received regulatory approval for
any product from the United States Food and Drug Administration.

(B) For purposes of this paragraph:

(i) “Biopharmaceutical activities” means those activities that
use organisms or materials derived from organisms, and their
cellular, subcellular, or molecular components, in order to provide
pharmaceutical products for human or animal therapeutics and
diagnostics. Biopharmaceutical activities make use of living
organisms to make commercial products, as opposed to
pharmaceutical activities that make use of chemical compounds
to produce commercial products.

(ii) “Other biotechnology activities” means activities consisting
of the application of recombinant DNA technology to produce
commercial products, as well as activities regarding pharmaceutical
delivery systems designed to provide a measure of control over
the rate, duration, and site of pharmaceutical delivery.

(g) In computing the modifications under Section 172(d)(2) of
the Internal Revenue Code, relating to capital gains and losses of
taxpayers other than corporations, the exclusion provided by
Section 18152.5 shall not be allowed.

(h) Notwithstanding any provisions of this section to the
contrary, a deduction shall be allowed to a “qualified taxpayer” as
provided in Sections 17276.1, 17276.2, 17276.4, 17276.5, 17276.6,
and 17276.7.

(i) The Franchise Tax Board may prescribe appropriate
regulations to carry out the purposes of this section, including any
regulations necessary to prevent the avoidance of the purposes of
this section through begin delete splitups end delete begin insert split-ups end insert , shell corporations,
partnerships, tiered ownership structures, or otherwise.

(j) The Franchise Tax Board may reclassify any net operating
loss carryover determined under either paragraph (2) or (3) of
subdivision (b) as a net operating loss carryover under paragraph
(1) of subdivision (b) upon a showing that the reclassification is
necessary to prevent evasion of the purposes of this section.

(k) Except as otherwise provided, the amendments made by
Chapter 107 of the Statutes of 2000 shall apply to net operating
losses for taxable years beginning on or after January 1, 2000.