Amended in Assembly April 8, 2013

California Legislature—2013–14 Regular Session

Assembly Bill No. 769

Introduced by Assembly Member Skinner

February 21, 2013

An act to amend Sections 17276.20, 17276.21, 17276.22, 24416.20, 24416.21, and 24416.22 of begin insert , and to add Sections 41, 42, and 43 to, end insert the Revenue and Taxation Code, relating to taxation, to take effect immediately, tax levy.

LEGISLATIVE COUNSEL’S DIGEST

AB 769, as amended, Skinner. Taxation: begin insert tax expenditures: operative dates: end insert deductions: net operating loss carrybacks.

begin insert

Existing law imposes various taxes and allows specified credits, deductions, exclusions, and exemptions in computing those taxes. The Franchise Tax Board administers the Personal Income Tax Law and the Corporation Tax Law, the State Board of Equalization administers the Sales and Use Tax Law, and various other tax laws.

end insert begin insert

This bill would require any measure, introduced on or after January 1, 2014, that would allow a personal income or corporation tax credit to contain, among other provisions, (1) specified goals, purposes, and objectives that the tax credit will achieve, (2) detailed performance indicators to measure whether the tax credit is meeting those goals, purposes, and objectives, and (3) a requirement that the tax credit cease to be operative no later than 3 years after its effective date, as specified. This bill would also require for passage of a measure that allows a new credit, the approval of 2⁄3 of the membership of each house of the Legislature.

end insert begin insert

This bill would also require the State Board of Equalization and the Franchise Tax Board to adopt, for tax expenditures, as defined, enacted before January 1, 2014, specified goals, purposes, and objectives that the tax expenditure will achieve, detailed performance indicators and data collection requirements for the Legislature to measure or determine whether the tax expenditures are meeting, failing to meet, or exceeding those goals, purposes, and objectives. This bill would also make those specified tax expenditures inoperative on June 20, 2017, unless the inoperative date is extended, as specified.

end insert

The Personal Income Tax Law and the Corporation Tax Law allow individual and corporate 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 disallow the use of net operating loss carrybacks by individual and corporate taxpayers.

This bill would include a change in state statute that would result in a taxpayer paying a higher tax within the meaning of Section 3 of Article XIII A of the California Constitution, and thus would require for passage the approval of 2⁄3 of the membership of each house of the Legislature.

This bill would take effect immediately as a tax levy.

Vote: ²⁄₃. Appropriation: no. Fiscal committee: yes. State-mandated local program: no.

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

begin insert

begin insert SECTION 1. end insert   

end insert begin insert

The Legislature finds and declares the following:

end insert begin insert

(a) Government at all levels enacts tax preferences to promote
equity among taxpayers and enhance economic growth in a way
that is inexpensive to administer and provides direct benefits to
taxpayers.

end insert begin insert

(b) National and state public finance experts recommend that
tax preferences be evaluated alongside direct spending programs,
as both are public initiatives meant to accomplish specified goals.

end insert begin insert

(c) California foregoes more than $49 billion in revenue from
tax preferences, according to the Department of Finance.

end insert begin insert

(d) Many current tax preferences contain neither sunset
provisions nor goals and objectives to measure the performance
of the tax preference.

end insert begin insert

(e) Many current tax preferences neither require taxpayers to
submit data demonstrating the tax incentive’s effectiveness nor
for state agencies to collect and send data to the Legislature to
evaluate the tax incentive.

end insert begin insert

(f) The Legislature should apply the same level of review and
performance measure that it applies to spending programs to tax
incentive programs, including tax credits.

end insert

begin insert

begin insert SEC. 2. end insert   

end insert

begin insert Section 41 is added to the end insert begin insert Revenue and Taxation Code end insert begin insert ,
to read: end insert

begin insert

begin insert 41. end insert   

Notwithstanding any other law, any bill, introduced on or
after January 1, 2014, that would allow a new credit against the
“net tax,” as defined in Section 17039, or against the “tax,” as
defined in Section 23036, or both, shall contain all of the following:

(a) Specific goals, purposes, and objectives that the tax credit
will achieve.

(b) Detailed performance indicators for the Legislature to use
when measuring whether the tax credit meets the goals, purposes,
and objectives stated in the bill.

(c) Data collection requirements to enable the Legislature to
determine whether the tax credit is meeting, failing to meet, or
exceeding those specific goals, purposes, and objectives. The
requirements shall include the specific data and baseline
measurements to be collected and remitted in each year the credit
is in effect, in order for the Legislature to measure the change in
performance indicators, and the specific taxpayers, state agencies,
or other entities required to collect and remit data.

(d) A requirement that the tax credit shall cease to be operative
no later than three years after its effective date, and as of
December 1 of that year is repealed.

(e) The enactment of a measure that allows a credit shall require
for its passage a two-thirds vote of the membership of both houses
of the Legislature.

end insert

begin insert

begin insert SEC. 3. end insert   

end insert

begin insert Section 42 is added to the end insert begin insert Revenue and Taxation Code end insert begin insert ,
to read: end insert

begin insert

begin insert 42. end insert   

(a) Notwithstanding any other law, the board shall adopt
the following for tax expenditures enacted prior to January 1,
2014:

(1) Specific goals, purposes, and objectives that the tax
expenditure will achieve.

(2) Detailed performance indicators for the Legislature to use
when measuring whether the tax expenditure meets the goals,
purposes, and objectives.

(3) Data collection requirements to enable the Legislature to
determine whether the tax expenditure is meeting, failing to meet,
or exceeding those specific goals, purposes, and objectives. The
requirements shall include the specific data and baseline
measurements to be collected and remitted in each year the tax
expenditure is in effect, in order for the Legislature to measure
the change in performance indicators, and the specific taxpayers,
state agencies, or other entities required to collect and remit data.

(b) For the purposes of this section, “tax expenditure” means
an exclusion, exemption, or other tax benefit established in the
following provisions:

(1) Sections 995, 6010.6, 6010.9, 6356.5, 6357.1, 6357.5, 6358,
6359, 6362.7, 6366, 6378, 6379.5, and 6385.

(2) Section 6010.8 of this code and Division 16 (commencing
with Section 26000) of the Public Resources Code.

(c) A tax expenditure subject to this section shall cease to be
operative on June 20, 2017, unless a later enacted statute in a bill
related to the budget extends that date.

end insert

begin insert

begin insert SEC. 4. end insert   

end insert

begin insert Section 43 is added to the end insert begin insert Revenue and Taxation Code end insert begin insert ,
to read: end insert

begin insert

begin insert 43. end insert   

(a) Notwithstanding any other law, the Franchise Tax
Board shall adopt the following for tax expenditures enacted prior
to January 1, 2014:

(1) Specific goals, purposes, and objectives that the tax
expenditure will achieve.

(2) Detailed performance indicators for the Legislature to use
when measuring whether the tax expenditure meets the goals,
purposes, and objectives.

(3) Data collection requirements to enable the Legislature to
determine whether the tax expenditure is meeting, failing to meet,
or exceeding those specific goals, purposes, and objectives. The
requirements shall include the specific data and baseline
measurements to be collected and remitted in each year the tax
expenditure is in effect, in order for the Legislature to measure
the change in performance indicators, and the specific taxpayers,
state agencies, or other entities required to collect and remit data.

(b) For the purposes of this section, “tax expenditure” means
an exclusion, credit, deduction, or other tax benefit established in
Sections 17052.12, 17053.80, 17087, 17087.5, 17201, 17681,
17955, 18006, 18031, 18035.6, 18036.6, 18152.5, 23609, 23623,
23800, 23800.5, 23801, 23802, 23802.5, 23803, 23804, 23806,
23807, 23808, 23809, 23811, 23813, 24365, 24831, 24941, 25110,
25111, 25111.1, 25112, and 25113.

(c) A tax expenditure subject to this section shall cease to be
operative on June 20, 2017, unless a later enacted statute in a bill
related to the budget extends that date.

end insert

begin delete SECTION 1. end delete
begin insert SEC. 5. end insert   

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) Net operating loss carrybacks shall not be allowed.

(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 split-ups, 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.

begin delete SEC. 2. end delete
begin insert SEC. 6. end insert   

Section 17276.21 of the Revenue and Taxation Code
is amended to read:

17276.21.  

(a) Notwithstanding Sections 17276, 17276.1,
17276.2, 17276.4, 17276.5, 17276.6, 17276.7, and 17276.20 of
this code and Section 172 of the Internal Revenue Code, no net
operating loss deduction shall be allowed for any taxable year
beginning on or after January 1, 2008, and before January 1, 2012.

(b) For any net operating loss or carryover of a net operating
loss for which a deduction is denied by subdivision (a), the
carryover period under Section 172 of the Internal Revenue Code
shall be extended as follows:

(1) By one year, for losses incurred in taxable years beginning
on or after January 1, 2010, and before January 1, 2011.

(2) By two years, for losses incurred in taxable years beginning
on or after January 1, 2009, and before January 1, 2010.

(3) By three years, for losses incurred in taxable years beginning
on or after January 1, 2008, and before January 1, 2009.

(4) By four years, for losses incurred in taxable years beginning
before January 1, 2008.

(c) The provisions of this section shall not apply to the following
taxpayers:

(1) For any taxable year beginning on or after January 1, 2008,
and before January 1, 2010, this section shall not apply to a
taxpayer with net business income of less than five hundred
thousand dollars ($500,000) for the taxable year. For purposes of
this paragraph, business income means:

(A) Income from a trade or business, whether conducted by the
taxpayer or by a pass-thru entity owned directly or indirectly by
the taxpayer. For purposes of this paragraph, the term “pass-thru
entity” means a partnership or an “S” corporation.

(B) Income from rental activity.

(C) Income attributable to a farming business.

(2) For any taxable year beginning on or after January 1, 2010,
and before January 1, 2012, this section shall not apply to a
taxpayer with modified adjusted gross income of less than three
hundred thousand dollars ($300,000) for the taxable year. For
purposes of this paragraph, “modified adjusted gross income”
means the amount described in paragraph (2) of subdivision (h)
of Section 17024.5, determined without regard to the deduction
allowed under Section 172 of the Internal Revenue Code, relating
to net operating loss deduction.

begin delete SEC. 3. end delete
begin insert SEC. 7. end insert   

Section 17276.22 of the Revenue and Taxation Code
is amended to read:

17276.22.  

Notwithstanding Section 17276.1, 17276.2, 17276.4,
17276.5, 17276.6, or 17276.7 to the contrary, a net operating loss
attributable to a taxable year beginning on or after January 1, 2008,
shall be a net operating carryover to each of the 20 taxable years
following the year of the loss.

begin delete SEC. 4. end delete
begin insert SEC. 8. end insert   

Section 24416.20 of the Revenue and Taxation Code
is amended to read:

24416.20.  

Except as provided in Sections 24416.1, 24416.2,
24416.4, 24416.5, 24416.6, and 24416.7, a net operating loss
deduction shall be allowed in computing net income under Section
24341 and shall be determined in accordance with Section 172 of
the Internal Revenue Code, except as otherwise provided.

(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 (e).

(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 (e).

(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
paragraph (1) of subdivision (e).

(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 (e).

(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 (e).

(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 paragraph
(2), 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, “net loss” means the amount
of net loss after application of Sections 465 and 469 of the Internal
Revenue Code.

(c) For any taxable year in which the taxpayer has in effect a
water’s-edge election under Section 25110, the deduction of a net
operating loss carryover shall be denied to the extent that the net
operating loss carryover was determined by taking into account
the income and factors of an affiliated corporation in a combined
report whose income and apportionment factors would not have
been taken into account if a water’s-edge election under Section
25110 had been in effect for the taxable year in which the loss was
incurred.

(d) Net operating loss carrybacks shall not be allowed.

(e) (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 years” except as
otherwise provided in paragraphs (2), (3), and (4).

(B) For a net operating loss for any income 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 income year beginning before January 1, 2000, in
the case of a “new business,” the “five taxable years” referred to
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 24416.3, 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 corporation that
was either of the following:

(A) Under the jurisdiction of the court in a Title 11 or similar
case at any time prior to January 1, 1994. The loss carryover
provided in the preceding sentence shall not apply to any loss
incurred in an income year after the taxable year during which the
corporation is no longer under the jurisdiction of the court in a
Title 11 or similar case.

(B) In receipt of assets acquired in a transaction that qualifies
as a tax-free reorganization under Section 368(a)(1)(G) of the
Internal Revenue Code.

(f) 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 income year.

(2) Except as provided in subdivision (g), “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 an “S” corporation, paragraphs (1) and (2) shall be
applied to the partnership or “S” corporation.

(g) 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 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.

(h) For purposes of corporations whose net income is determined
under Chapter 17 (commencing with Section 25101), Section
25108 shall apply to each of the following:

(1) The amount of net operating loss incurred in any taxable
year that may be carried forward to another taxable year.

(2) The amount of any loss carry forward that may be deducted
in any taxable year.

(i) The provisions of Section 172(b)(1)(D) of the Internal
Revenue Code, relating to bad debt losses of commercial banks,
shall not be applicable.

(j) 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 split-ups, shell corporations, partnerships,
tiered ownership structures, or otherwise.

(k) 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.

(l) 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.

begin delete SEC. 5. end delete
begin insert SEC. 9. end insert   

Section 24416.21 of the Revenue and Taxation Code
is amended to read:

24416.21.  

(a) Notwithstanding Sections 24416, 24416.1,
24416.2, 24416.4, 24416.5, 24416.6, 24416.7, and 24416.20 of
this code and Section 172 of the Internal Revenue Code, no net
operating loss deduction shall be allowed for any taxable year
beginning on or after January 1, 2008, and before January 1, 2012.

(b) For any net operating loss or carryover of a net operating
loss for which a deduction is denied by subdivision (a), the
carryover period under Section 172 of the Internal Revenue Code
shall be extended as follows:

(1) By one year, for losses incurred in taxable years beginning
on or after January 1, 2010, and before January 1, 2011.

(2) By two years, for losses incurred in taxable years beginning
on or after January 1, 2009, and before January 1, 2010.

(3) By three years, for losses incurred in taxable years beginning
on or after January 1, 2008, and before January 1, 2009.

(4) By four years, for losses incurred in taxable years beginning
before January 1, 2008.

(c)  The disallowance of any net operating loss deduction for
any taxable year beginning on or after January 1, 2008, and before
January 1, 2010, pursuant to subdivision (a) shall not apply to a
taxpayer with income subject to tax under this part of less than
five hundred thousand dollars ($500,000) for the taxable year.

(d) (1) The disallowance of any net operating loss deduction
for any taxable year beginning on or after January 1, 2010, and
before January 1, 2012, pursuant to subdivision (a) shall not apply
to a taxpayer with preapportioned income of less than three hundred
thousand dollars ($300,000) for the taxable year.

(2) For purposes of this subdivision, “preapportioned income”
means net income after state adjustments, before the application
of the apportionment and allocation provisions of this part.

(3) For taxpayers that are required to be included in a combined
report under Section 25101 or authorized to be included in a
combined report under Section 25101.15, the amount prescribed
in paragraph (1) shall apply to the aggregate amount of
preapportioned income for all members included in a combined
report.

(e) Notwithstanding subdivision (a), this section shall not apply
to a taxpayer that ceased to do business or has a final taxable year
ending prior to August 28, 2008, that sold or transferred
substantially all of its assets resulting in a gain on sale during a
taxable year ending prior to August 28, 2008, for which the gain
could be offset with existing net operating loss deductions and the
sale or transfer occurred pursuant to a plan of reorganization under
Chapter 11 of Title 11 of the United States Code. An amended tax
return claiming net operating loss deductions allowed pursuant to
this subdivision shall be treated as a timely filed original return.

(f) The Legislature finds and declares that the addition of
subdivision (e) to this section by the act adding this subdivision
fulfills a statewide public purpose by providing necessary tax relief
for a taxpayer that ceased to do business or has a final taxable year
ending prior to August 28, 2008, that sold or transferred
substantially all of its assets resulting in a gain or sale during a
taxable year prior to August 28, 2008, for which the gain could be
offset with existing net operating loss deductions and the sale or
transfer occurred pursuant to a plan of reorganization under Chapter
11 of Title 11 of the United States Code, in order to ensure that
these taxpayers are not permanently denied the net operating loss
deduction.

begin delete SEC. 6. end delete
begin insert SEC. 10. end insert   

Section 24416.22 of the Revenue and Taxation Code
is amended to read:

24416.22.  

Notwithstanding Section 24416.1, 24416.2, 24416.4,
24416.5, 24416.6, or 24416.7 to the contrary, a net operating loss
attributable to a taxable year beginning on or after January 1, 2008,
shall be a net operating carryover to each of the 20 taxable years
following the year of the loss.

begin delete SEC. 7. end delete
begin insert SEC. 11. end insert   

This act provides for a tax levy within the meaning
of Article IV of the Constitution and shall go into immediate effect.