BILL NUMBER: SB 1229 CHAPTERED 10/10/99 CHAPTER 987 FILED WITH SECRETARY OF STATE OCTOBER 10, 1999 APPROVED BY GOVERNOR OCTOBER 10, 1999 PASSED THE SENATE SEPTEMBER 8, 1999 PASSED THE ASSEMBLY SEPTEMBER 3, 1999 AMENDED IN ASSEMBLY SEPTEMBER 2, 1999 AMENDED IN ASSEMBLY AUGUST 16, 1999 AMENDED IN ASSEMBLY JUNE 30, 1999 AMENDED IN SENATE APRIL 12, 1999 INTRODUCED BY Committee on Revenue and Taxation (Senators Chesbro (Chair), Alpert, Bowen, Burton, Johnston, McPherson, and Poochigian) FEBRUARY 26, 1999 An act to amend Section 52514.5 of the Health and Safety Code, to amend Sections 9201 and 9203 of the Probate Code, to amend Sections 17053.45, 17053.49, 17054.5, 17071, 17073, 17074, 17075, 17076, 17077, 17083, 17085, 17087, 17140, 17140.3, 17142.5, 17143, 17144, 17250, 17268, 17270, 17274, 17276.5, 17287, 17551, 17552, 17553, 17639, 17640, 17651, 17671, 17732, 17851, 17853, 17857, 17935, 18601, 18604, 18622, 18662, 18711, 18721, 18741, 18763, 18782, 18793, 18801, 18812, 18821, 18841, 18851, 18871, 19023, 19059, 19060, 19089, 19106, 19145, 19151, 19311, 19411, 23153, 23221, 23335, 23612.2, 23622.7, 23645, 23649, 23701c, 23704.5, 23704.6, 23731, 23736.1, 23740, 23776, 23777, 23778, 24306, 24357.6, 24410, 24416.2, 24416.5, 24436.5, 25106, and 25114 of, and to repeal Sections 17013, 17077.5, 17084, 17085.5, 17132.5, 17134.5, 17139, 17218, 17275.6, 17330, 17551.5, 17563, 17852, 17859, 17860, 18605, 19053, 23043, and 23701q of, the Revenue and Taxation Code, and to amend Section 1185 of the Unemployment Insurance Code, relating to taxation, to take effect immediately, tax levy. LEGISLATIVE COUNSEL'S DIGEST SB 1229, Committee on Revenue and Taxation. Income and bank and corporation taxes. The Personal Income Tax Law and the Bank and Corporation Tax Law generally prohibit, in computing the income that is subject to the taxes imposed by those laws, the deduction by any taxpayer who derives rental income from substandard housing, as defined, of any interest, taxes, depreciation, or amortization paid during a taxable or income year with respect to substandard housing. This bill would make technical, clarifying changes to these provisions with respect to the definition of substandard housing. The Bank and Corporation Tax Law provides, in the case of a business with income derived from, or attributable to, sources both within and without this state, that income is apportioned between this state and foreign jurisdictions in accordance with a specified formula. The Bank and Corporation Tax Law authorizes a taxpayer whose income is subject to apportionment to determine its income under a water's edge election made in connection with a specified contract. This bill would modify these provisions to delete obsolete language with respect to the apportionment of dividends, and would make clarifying changes with respect to the audit process followed by the Franchise Tax Board with respect to taxpayers that have made a water's-edge election. This bill would make legislative findings and declarations that these clarifying changes do not constitute a change in, but are declaratory of, existing law. The Personal Income Tax Law allows a dependent parent credit in an amount equal to the lesser of 30% of the net tax or $200, as adjusted, to a taxpayer who meets certain requirements. This bill would provide an additional requirement that the taxpayer uses the head of household or surviving spouse filing status. The Personal Income Tax Law provides for specified taxation with respect to nonresidents. This bill would clarify the treatment accorded to nonresidents and part-year residents, as provided. Existing law providing for the administration of income and bank and corporation tax laws requires every taxpayer subject to taxes under the Bank and Corporation Tax Law to file a return within 2 months and 15 days after the close of its income year. This bill would require those taxpayers to file a return on or before the 15th day of the 3rd month following the close of its income year. Existing franchise and income tax laws provide, among other things, an extension for filing certain corporation tax returns, payment of estimated taxes by corporations, and certain penalties and additions to tax. This bill would make nonsubstantive, clarifying changes to those provisions. The Bank and Corporation Tax Law provides for the suspension or forfeiture of certain exempt corporations. This bill would provide that if those corporations have suffered a suspension or forfeiture, as specified, they may be required to file a new application for exemption with an application for revivor. Existing unemployment insurance law requires the Director of Employment Development, in collaboration with the Franchise Tax Board, to take certain actions with respect to disability insurance contribution overpayments. This bill would clarify those duties and the manner in which interest is to be paid on overpayments. This bill would for purposes of the Personal Income Tax Law or the Bank and Corporation Tax Law, or both, make numerous technical, clarifying, and supplemental changes relating to, among other things, federal determinations and changes, alternative minimum tax, voluntary contribution funds, various credits, net operating losses, scholarshare, emergency food assistance, minimum franchise tax, and dividends received from an insurance company subsidiary. This bill would also make numerous nonsubstantive, technical changes relating to taxation, as provided. This bill would incorporate changes to certain laws proposed by this bill, AB 473, SB 1125, or AB 1208 or any combination thereof, if this bill and those other bills are chaptered, as provided. This bill would take effect immediately as a tax levy. THE PEOPLE OF THE STATE OF CALIFORNIA DO ENACT AS FOLLOWS: SECTION 1. Section 52514.5 of the Health and Safety Code is amended to read: 52514.5. All payments to the agency by the borrower on any note executed pursuant to Section 52514 shall be considered payments of interest for the purposes of Section 17230 of the Revenue and Taxation Code. SEC. 2. Section 9201 of the Probate Code is amended to read: 9201. (a) Notwithstanding any other statute, if a claim of a public entity arises under a law, act, or code listed in subdivision (b): (1) The public entity may provide a form to be used for the written notice or request to the public entity required by this chapter. Where appropriate, the form may require the decedent's social security number, if known. (2) The claim is barred only after written notice or request to the public entity and expiration of the period provided in the applicable section. If no written notice or request is made, the claim is enforceable by the remedies, and is barred at the time, otherwise provided in the law, act, or code. (b) Law, Act, or Code Applicable Section Sales and Use Tax Law Section 6487.1 of the (commencing with Section Revenue and 6001 of the Revenue and Taxation Code Taxation Code) Bradley-Burns Uniform Section 6487.1 of the Local Sales and Use Tax Revenue and Law (commencing with Taxation Code Section 7200 of the Revenue and Taxation Code) Transactions and Use Section 6487.1 of the Tax Law (commencing Revenue and with Section 7251 of the Taxation Code Revenue and Taxation Code) Motor Vehicle Fuel License Section 7675.1 of the Tax Law (commencing with Revenue and Section 7301 of the Taxation Code Revenue and Taxation Code) Use Fuel Tax Law Section 8782.1 of the (commencing with Section Revenue and 8601 of the Revenue Taxation Code and Taxation Code) Administration of Section 19517 of the Franchise and Income Revenue and Tax Law (commencing Taxation Code with Section 18401 of the Revenue and Taxation Code) Cigarette Tax Law Section 30207.1 of the (commencing with Section Revenue and 30001 of the Revenue Taxation Code and Taxation Code) Alcoholic Beverage Section 32272.1 of the Tax Law (commencing Revenue and with Section Taxation Code 32001 of the Revenue and Taxation Code) Unemployment Insurance Section 1090 of the Code Unemployment Insurance Code State Hospitals for Section 7277.1 of the the Mentally Disordered Welfare and (commencing with Section Institutions Code 7200 of the Welfare and Institutions Code) Medi-Cal Act (com- Section 9202 of the mencing with Section Probate Code 14000 of the Welfare and Institutions Code) Waxman-Duffy Prepaid Section 9202 of the Health Plan Act (com- Probate Code mencing with Section 14200 of the Welfare and Institutions Code) SEC. 3. Section 9203 of the Probate Code is amended to read: 9203. (a) Failure of a person to give the written notice or request required by this chapter does not affect the validity of any proceeding under this code concerning the administration of the decedent's estate. (b) If property in the estate is distributed before expiration of the time allowed a public entity to file a claim, the public entity has a claim against the distributees to the full extent of the public entity's claim, or each distributee's share of the distributed property, whichever is less. The public entity's claim against distributees includes interest at a rate equal to that specified in Section 19521 of the Revenue and Taxation Code, from the date of distribution or the date of filing the claim by the public entity, whichever is later, plus other accruing costs as in the case of enforcement of a money judgment. SEC. 4. Section 17013 of the Revenue and Taxation Code is repealed. SEC. 5. Section 17053.45 of the Revenue and Taxation Code is amended to read: 17053.45. (a) For each taxable year beginning on or after January 1, 1995, there shall be allowed as a credit against the "net tax" (as defined by Section 17039) an amount equal to the sales or use tax paid or incurred by the taxpayer in connection with the purchase of qualified property to the extent that the qualified property does not exceed a value of one million dollars ($1,000,000). (b) For purposes of this section: (1) "LAMBRA" means a local agency military base recovery area designated in accordance with Section 7114 of the Government Code. (2) "Taxpayer" means a taxpayer that conducts a trade or business within a LAMBRA and, for the first two taxable years, has a net increase in jobs (defined as 2,000 paid hours per employee per year) of one or more employees in the LAMBRA. (A) The net increase in the number of jobs shall be determined by subtracting the total number of full-time employees (defined as 2,000 paid hours per employee per year) the taxpayer employed in this state in the taxable year prior to commencing business operations in the LAMBRA from the total number of full-time employees the taxpayer employed in this state during the second taxable year after commencing business operations in the LAMBRA. For taxpayers who commence doing business in this state with their LAMBRA business operation, the number of employees for the taxable year prior to commencing business operations in the LAMBRA shall be zero. If the taxpayer has a net increase in jobs in the state, the credit shall be allowed only if one or more full-time employees is employed within the LAMBRA. (B) The total number of employees employed in the LAMBRA shall equal the sum of both of the following: (i) The total number of hours worked in the LAMBRA for the taxpayer by employees (not to exceed 2,000 hours per employee) who are paid an hourly wage divided by 2,000. (ii) The total number of months worked in the LAMBRA for the taxpayer by employees who are salaried employees divided by 12. (C) In the case of a taxpayer who first commences doing business in the LAMBRA during the taxable year, for purposes of clauses (i) and (ii), respectively, of subparagraph (B), the divisors "2,000" and "12" shall be multiplied by a fraction, the numerator of which is the number of months of the taxable year that the taxpayer was doing business in the LAMBRA and the denominator of which is 12. (3) "Qualified property" means property that is each of the following: (A) Purchased by the taxpayer for exclusive use in a trade or business conducted within a LAMBRA. (B) Purchased before the date the LAMBRA designation expires, is no longer binding, or becomes inoperative. (C) Any of the following: (i) High technology equipment, including, but not limited to, computers and electronic processing equipment. (ii) Aircraft maintenance equipment, including, but not limited to, engine stands, hydraulic mules, power carts, test equipment, handtools, aircraft start carts, and tugs. (iii) Aircraft components, including, but not limited to, engines, fuel control units, hydraulic pumps, avionics, starts, wheels, and tires. (iv) Section 1245 property, as defined in Section 1245(a)(3) of the Internal Revenue Code. (c) The credit provided under subdivision (a) shall be allowed only for qualified property manufactured in California unless qualified property of a comparable quality and price is not available for timely purchase and delivery from a California manufacturer. (d) In the case where the credit otherwise allowed under this section exceeds the "net tax" for the taxable year, that portion of the credit which exceeds the "net tax" may be carried over and added to the credit, if any, in succeeding years, until the credit is exhausted. The credit shall be applied first to the earliest taxable years possible. (e) Any taxpayer who elects to be subject to this section shall not be entitled to increase the basis of the property as otherwise required by Section 164(a) of the Internal Revenue Code with respect to sales or use tax paid or incurred in connection with the purchase of qualified property. (f) (1) The amount of credit otherwise allowed under this section and Section 17053.46, including any credit carryover from prior years, that may reduce the "net tax" for the taxable year shall not exceed the amount of tax that would be imposed on the taxpayer's business income attributed to a LAMBRA determined as if that attributable income represented all the income of the taxpayer subject to tax under this part. (2) Attributable income is that portion of the taxpayer's California source business income that is apportioned to the LAMBRA. For that purpose, the taxpayer's business income that is attributable to sources in this state shall first be determined in accordance with Chapter 17 (commencing with Section 25101) of Part 11. That business income shall be further apportioned to the LAMBRA in accordance with Article 2 (commencing with Section 25120) of Chapter 17 of Part 11, as modified for purposes of this section in accordance with paragraph (3). (3) Income shall be apportioned to a LAMBRA by multiplying the total California business income of the taxpayer by a fraction, the numerator of which is the property factor, plus the payroll factor, and the denominator of which is two. For purposes of this paragraph: (A) The property factor is a fraction, the numerator of which is the average value of the taxpayer's real and tangible personal property owned or rented and used in the LAMBRA during the taxable year, and the denominator of which is the average value of all the taxpayer's real and tangible personal property owned or rented and used in this state during the taxable year. (B) The payroll factor is a fraction, the numerator of which is the total amount paid by the taxpayer in the LAMBRA during the taxable year for compensation, and the denominator of which is the total compensation paid by the taxpayer in this state during the taxable year. (4) The portion of any credit remaining, if any, after application of this subdivision, shall be carried over to succeeding taxable years, as if it were an amount exceeding the "net tax" for the taxable year, as provided in subdivision (d). (g) (1) If the qualified property is disposed of or no longer used by the taxpayer in the LAMBRA, at any time before the close of the second taxable year after the property is placed in service, the amount of the credit previously claimed, with respect to that property, shall be added to the taxpayer's tax liability in the taxable year of that disposition or nonuse. (2) At the close of the second taxable year, if the taxpayer has not increased the number of its employees as determined by paragraph (2) of subdivision (b), then the amount of the credit previously claimed shall be added to the taxpayer's net tax for the taxpayer's second taxable year. (h) If the taxpayer is allowed a credit for qualified property pursuant to this section, only one credit shall be allowed to the taxpayer under this part with respect to that qualified property. (i) The amendments made to this section by the act adding this subdivision shall apply to taxable years beginning on or after January 1, 1998. SEC. 6. Section 17053.49 of the Revenue and Taxation Code is amended to read: 17053.49. (a) (1) A qualified taxpayer shall be allowed a credit against the "net tax," as defined in Section 17039, equal to 6 percent of the qualified cost of qualified property that is placed in service in this state. (2) In the case of any qualified costs paid or incurred on or after January 1, 1994, and prior to the first taxable year of the qualified taxpayer beginning on or after January 1, 1995, the credit provided under paragraph (1) shall be claimed by the qualified taxpayer on the qualified taxpayer's return for the first taxable year beginning on or after January 1, 1995. No credit shall be claimed under this section on a return filed for any taxable year commencing prior to the qualified taxpayer's first taxable year beginning on or after January 1, 1995. (b) (1) For purposes of this section, "qualified cost" means any cost that satisfies each of the following conditions: (A) Except as otherwise provided in this subparagraph, is a cost paid or incurred by the qualified taxpayer for the construction, reconstruction, or acquisition of qualified property on or after January 1, 1994, and prior to the date this section ceases to be operative under paragraph (2) of subdivision (i). In the case of any qualified property constructed, reconstructed, or acquired by the qualified taxpayer (or any person related to the qualified taxpayer within the meaning of Section 267 or 707 of the Internal Revenue Code) pursuant to a binding contract in existence on or prior to January 1, 1994, costs paid pursuant to that contract shall be subject to allocation as follows: contract costs shall be allocated to qualified property based on a ratio of costs actually paid prior to January 1, 1994, and total contract costs actually paid. "Cost paid" shall include, without limitation, contractual deposits and option payments. To the extent of costs allocated, whether or not currently deductible or depreciable for tax purposes, to a period prior to January 1, 1994, the cost shall be deemed allocated to property acquired before January 1, 1994, and is thus not a "qualified cost." (B) Except as provided in paragraph (3) of subdivision (d) and subparagraph (B) of paragraph (4) of subdivision (d), is an amount upon which the qualified taxpayer has paid, directly or indirectly, as a separately stated contract amount or as determined from the records of the qualified taxpayer, sales or use tax under Part 1 (commencing with Section 6001). (C) Is an amount properly chargeable to the capital account of the qualified taxpayer. (2) (A) For purposes of this subdivision, any contract entered into on or after January 1, 1994, that is a successor or replacement contract to a contract that was binding prior to January 1, 1994, shall be treated as a binding contract in existence prior to January 1, 1994. (B) If a successor or replacement contract is entered into on or after January 1, 1994, and the subject of the successor or replacement contract relates both to amounts for the construction, reconstruction, or acquisition of qualified property described in the original binding contract and to costs for the construction, reconstruction, or acquisition of qualified property not described in the original binding contract, then the portion of those amounts described in the successor or replacement contract that were not described in the original binding contract shall not be treated as costs paid or incurred pursuant to a binding contract in existence on or prior to January 1, 1994, under subparagraph (A) of paragraph (1). (3) (A) For purposes of this section, an option contract in existence prior to January 1, 1994, under which a qualified taxpayer (or any other person related to the qualified taxpayer within the meaning of Section 267 or 707 of the Internal Revenue Code) had an option to acquire qualified property, shall be treated as a binding contract under the rules in paragraph (2). For purposes of this subparagraph, an option contract shall not include an option under which the optionholder will forfeit an amount less than 10 percent of the fixed option price in the event the option is not exercised. (B) For purposes of this section, a contract shall be treated as binding even if the contract is subject to a condition. (4) For purposes of this subdivision, in the case of any qualified taxpayer engaged in those lines of business described in Codes 7371 to 7373, inclusive, of the Standard Industrial Classification (SIC) Manual published by the United States Office of Management and Budget, 1987 edition, "the first taxable year beginning on or after January 1, 1998," shall be substituted for "January 1, 1994," in each place in which it appears. (c) (1) For purposes of this section, "qualified taxpayer" means any taxpayer engaged in those lines of business described in Codes 2011 to 3999, inclusive, or Codes 7371 to 7373, inclusive, of the Standard Industrial Classification (SIC) Manual published by the United States Office of Management and Budget, 1987 edition. (2) In the case of any passthrough entity, the determination of whether a taxpayer is a qualified taxpayer under this section shall be made at the entity level and any credit under this section or Section 23649 shall be allowed to the passthrough entity and passed through to the partners or shareholders in accordance with applicable provisions of Part 10 (commencing with Section 17001) or Part 11 (commencing with Section 23001). For purposes of this paragraph, the term "passthrough entity" means any partnership or S corporation. (3) The Franchise Tax Board may prescribe regulations to carry out the purposes of this section, including any regulations necessary to prevent the avoidance of the effect of this section through splitups, shell corporations, partnerships, tiered ownership structures, sale-leaseback transactions, or otherwise. (d) For purposes of this section, "qualified property" means property that is described as any of the following: (1) Tangible personal property that is defined in Section 1245(a) of the Internal Revenue Code for use by a qualified taxpayer in those lines of business described in Codes 2011 to 3999, inclusive, of the Standard Industrial Classification (SIC) Manual published by the United States Office of Management and Budget, 1987 edition, that is primarily used for any of the following: (A) For the manufacturing, processing, refining, fabricating, or recycling of property, beginning at the point at which any raw materials are received by the qualified taxpayer and introduced into the process and ending at the point at which the manufacturing, processing, refining, fabricating, or recycling has altered tangible personal property to its completed form, including packaging, if required. (B) In research and development. (C) To maintain, repair, measure, or test any property described in this paragraph. (D) For pollution control that meets or exceeds standards established by the state or by any local or regional governmental agency within the state. (E) For recycling. (2) Computers and computer peripheral equipment, as defined in Section 168(i)(2)(B) of the Internal Revenue Code, that is tangible personal property as defined in Section 1245(a) of the Internal Revenue Code for use by a qualified taxpayer in those lines of business described in SIC Codes 7371 to 7373, inclusive, of the SIC Manual, 1987 edition, that is primarily used to develop or manufacture prepackaged software or custom software prepared to the special order of the purchaser who uses the program to produce and sell or license copies of the program as prepackaged software. (3) The value of any capitalized labor costs that are directly allocable to the construction or modification of property described in paragraph (1) or (2). (4) In the case of any qualified taxpayer engaged in manufacturing activities described in SIC Code 357 or 367, those activities related to biotechnology described in SIC Code 8731, those activities related to biopharmaceutical establishments only that are described in SIC Codes 2833 to 2836, inclusive, those activities related to space vehicles and parts described in SIC Codes 3761 to 3769, inclusive, those activities related to space satellites and communications satellites and equipment described in SIC Codes 3663 and 3812 (but only with respect to "qualified property" that is placed in service on or after January 1, 1996), or those activities related to semiconductor equipment manufacturing described in SIC Code 3559 (but only with respect to "qualified property" that is placed in service on or after January 1, 1997), "qualified property" also includes the following: (A) Special purpose buildings and foundations that are constructed or modified for use by the qualified taxpayer primarily in a manufacturing, processing, refining, or fabricating process, or as a research or storage facility primarily used in connection with a manufacturing process. (B) The value of any capitalized labor costs that are directly allocable to the construction or modification of special purpose buildings and foundations that are used primarily in the manufacturing, processing, refining, or fabricating process, or as a research or storage facility primarily used in connection with a manufacturing process. (C) (i) For purposes of this paragraph, "special purpose building and foundation" means only a building and the foundation immediately underlying the building that is specifically designed and constructed or reconstructed for the installation, operation, and use of specific machinery and equipment with a special purpose, which machinery and equipment, after installation, will become affixed to or a fixture of the real property, and the construction or reconstruction of which is specifically designed and used exclusively for the specified purposes as set forth in subparagraph (A) (" qualified purpose"). (ii) A building is specifically designed and constructed or modified for a qualified purpose if it is not economical to design and construct the building for the intended purpose and then use the structure for a different purpose. (iii) For purposes of clause (i) and clause (vi), a building is used exclusively for a qualified purpose only if its use does not include a use for which it was not specifically designed and constructed or modified. Incidental use of a building for nonqualified purposes does not preclude the building from being a special purpose building. "Incidental use" means a use which is both related and subordinate to the qualified purpose. It will be conclusively presumed that a use is not subordinate if more than one-third of the total usable volume of the building is devoted to a use which is not a qualified purpose. (iv) In the event an entire building does not qualify as a special purpose building, a taxpayer may establish that a portion of a building, and the foundation immediately underlying the portion, qualifies for treatment as a special purpose building and foundation if the portion satisfies all of the definitional provisions in this subparagraph. (v) To the extent that a building is not a special purpose building as defined above, but a portion of the building qualifies for treatment as a special purpose building, then all equipment which exclusively supports the qualified purpose occurring within that portion and which would qualify as Internal Revenue Code Section 1245 property if it were not a fixture or affixed to the building shall be treated as a cost of the portion of the building which qualifies for treatment as a special purpose building. (vi) Buildings and foundations which do not meet the definition of a special purpose building and foundation set forth above include, but are not limited to: buildings designed and constructed or reconstructed principally to function as a general purpose manufacturing, industrial, or commercial building; research facilities that are used primarily prior to or after, or prior to and after, the manufacturing process; or storage facilities that are used primarily prior to or after, or prior to and after, completion of the manufacturing process. A research facility shall not be considered to be used primarily prior to or after, or prior to and after, the manufacturing process if its purpose and use relate exclusively to the development and regulatory approval of the manufacturing process for specific biopharmaceutical products. A research facility which is used primarily in connection with the discovery of an organism from which a biopharmaceutical product or process is developed does not meet the requirements of the preceding sentence. (5) Subject to the provisions in subparagraph (B) of paragraph (1) of subdivision (b), qualified property also includes computer software that is primarily used for those purposes set forth in paragraph (1) or (2) of this subdivision. (6) Qualified property does not include any of the following: (A) Furniture. (B) Facilities used for warehousing purposes after completion of the manufacturing process. (C) Inventory. (D) Equipment used in the extraction process. (E) Equipment used to store finished products that have completed the manufacturing process. (F) Any tangible personal property that is used in administration, general management, or marketing. (G) Any vehicle for which a credit is claimed pursuant to Section 17052.11 or 23603. (e) For purposes of this section: (1) "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 which make use of chemical compounds to produce commercial products. (2) "Fabricating" means to make, build, create, produce, or assemble components or property to work in a new or different manner. (3) "Manufacturing" means the activity of converting or conditioning property by changing the form, composition, quality, or character of the property for ultimate sale at retail or use in the manufacturing of a product to be ultimately sold at retail. Manufacturing includes any improvements to tangible personal property that result in a greater service life or greater functionality than that of the original property. (4) "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. (5) "Primarily" means tangible personal property used 50 percent or more of the time in an activity described in subdivision (d). (6) "Process" means the period beginning at the point at which any raw materials are received by the qualified taxpayer and introduced into the manufacturing, processing, refining, fabricating, or recycling activity of the qualified taxpayer and ending at the point at which the manufacturing, processing, refining, fabricating, or recycling activity of the qualified taxpayer has altered tangible personal property to its completed form, including packaging, if required. Raw materials shall be considered to have been introduced into the process when the raw materials are stored on the same premises where the qualified taxpayer's manufacturing, processing, refining, or recycling activity is conducted. Raw materials that are stored on premises other than where the qualified taxpayer's manufacturing, processing, refining, fabricating, or recycling activity is conducted, shall not be considered to have been introduced into the manufacturing, processing, refining, fabricating, or recycling process. (7) "Processing" means the physical application of the materials and labor necessary to modify or change the characteristics of property. (8) "Refining" means the process of converting a natural resource to an intermediate or finished product. (9) "Research and development" means those activities that are described in Section 174 of the Internal Revenue Code or in any regulations thereunder. (10) "Small business" means a qualified taxpayer that meets any of the following requirements during the taxable year for which the credit is allowed: (A) Has gross receipts of less than fifty million dollars ($50,000,000). (B) Has net assets of less than fifty million dollars ($50,000,000). (C) Has a total credit of less than one million dollars ($1,000,000). (D) For taxable years beginning on or after January 1, 1997, 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 has not received regulatory approval for any product from the United States Food and Drug Administration. (f) The credit allowed under subdivision (a) shall apply to qualified property that is acquired by or subject to lease by a qualified taxpayer, subject to the following special rules: (1) A lessor of qualified property, irrespective of whether the lessor is a qualified taxpayer, shall not be allowed the credit provided under subdivision (a) with respect to any qualified property leased to another qualified taxpayer. (2) For purposes of paragraphs (2) and (3) of subdivision (b), "binding contract" shall include any lease agreement with respect to the qualified property. (3) (A) For purposes of determining the qualified cost paid or incurred by a lessee in any leasing transaction that is not treated as a sale under Part 1 (commencing with Section 6001), the following rules shall apply: (i) Except as provided by subparagraph (C) of this paragraph, subparagraphs (A) and (C) of paragraph (1) of subdivision (b) shall not apply. (ii) Except as provided in subparagraph (B) and clause (iii), the "qualified cost" upon which the lessee shall compute the credit provided under this section shall be equal to the original cost to the lessor (within the meaning of Section 18031) of the qualified property that is the subject of the lease. (iii) Except as provided in clause (iv), the requirement of subparagraph (B) of paragraph (1) of subdivision (b) shall be treated as satisfied only if the lessor has made a timely election under either Section 6094.1 or subdivision (d) of Section 6244 and has paid sales tax reimbursement or use tax measured by the purchase price of the qualified property (within the meaning of paragraph (5) of subdivision (g) of Section 6006). For purposes of this subdivision and clause (iv), the amount of original cost to the lessor which may be taken into account under clause (ii) shall not exceed the purchase price upon which sales tax reimbursement or use tax has been paid under the preceding sentence or under clause (iv). (iv) With respect to leases entered into between January 1, 1994, and the effective date of this clause, the lessor may elect to pay use tax measured by the purchase price of the property by reporting and paying the tax with the return of the lessor for the fourth calendar quarter of 1994. In computing the use tax under the preceding sentence, a credit shall be allowed under Part 1 (commencing with Section 6001) for all sales or use tax previously paid on the lease. (B) For purposes of applying subparagraph (A) only, the following special rules shall apply: (i) The original cost to the lessor of the qualified property shall be reduced by the amount of any original cost of that property that was taken into account by any predecessor lessee in computing the credit allowable under this section. (ii) Clause (i) shall not apply in any case where the predecessor lessee was required to recapture the credit provided under this section pursuant to subdivision (g). (iii) For purposes of this section only, in any case where a successor lessor has acquired qualified property from a predecessor lessor in a transaction not treated as a sale under Part 1 (commencing with Section 6001), the original cost to the successor lessor of the qualified property shall be reduced by the amount of the original cost of the qualified property that was taken into account by any lessee of the predecessor lessor in computing the credit allowable under this section. (C) In determining the original cost of any qualified property under this paragraph, only amounts paid or incurred by the lessor on or after January 1, 1994, and prior to the date this section ceases to be operative under paragraph (2) of subdivision (i), shall be taken into account. In the case of any qualified property constructed, reconstructed, or acquired by a lessor pursuant to a binding contract in existence on or prior to January 1, 1994, the allocation rule specified in subparagraph (A) of paragraph (1) of subdivision (b) shall apply in determining the original cost to the lessor of qualified property. (D) Notwithstanding subparagraph (A), in the case of any leasing transaction for which the lessee is allowed the credit under this section and thereafter the lessee (or any party related to the lessee within the meaning of Section 267 or 318 of the Internal Revenue Code) acquires the qualified property from the lessor (or any successor lessor) within one year from the date the qualified property is first used by the lessee under the terms of the lease, the lessee's (or related party's) acquisition of the qualified property from the lessor (or successor lessor) shall be treated as a disposition by the lessee of the qualified property that was subject to the lease under subdivision (g). (4) For purposes of determining the qualified cost paid or incurred by a lessee in any leasing transaction that is treated as a sale under Part 1 (commencing with Section 6001), the following rules shall apply: (A) Subparagraph (A) of paragraph (1) of subdivision (b) shall be applied by substituting the term "purchase" for the term "construction, reconstruction, or acquisition." (B) Subparagraph (C) of paragraph (1) of subdivision (b) shall apply. (C) The requirement of subparagraph (B) of paragraph (1) of subdivision (b) shall be treated as satisfied at the time that either the lessor or the qualified taxpayer pays sales or use tax under Part 1 (commencing with Section 6001). (5) (A) In the case of any leasing transaction described in paragraph (3), the lessor shall provide a statement to the lessee specifying the amount of the lessor's original cost of the qualified property and the amount of that cost upon which a sales or use tax was paid within 45 days after the close of the lessee's taxable year in which the credit is allowable to the lessee under this section. (B) The statement required under subparagraph (A) shall be made available to the Franchise Tax Board upon request. (6) For purposes of this subdivision, in the case of any qualified taxpayer engaged in those lines of business described in Codes 7371 to 7373, inclusive, of the Standard Industrial Classification (SIC) Manual published by the United States Office of Management and Budget, 1987 edition, "the first taxable year beginning on or after January 1, 1998," shall be substituted for "January 1, 1994," in each place in which it appears. In addition, "the effective date of this paragraph" shall be substituted for "the effective date of this clause" and "fourth calendar quarter of 1998" shall be substituted for "fourth calendar quarter of 1994." (g) No credit shall be allowed if the qualified property is removed from the state, is disposed of to an unrelated party, or is used for any purpose not qualifying for the credit provided in this section in the same taxable year in which the qualified property is first placed in service in this state. If any qualified property for which a credit is allowed pursuant to this section is thereafter removed from this state, disposed of to an unrelated party, or used for any purpose not qualifying for the credit provided in this section within one year from the date the qualified property is first placed in service in this state, the amount of the credit allowed by this section for that qualified property shall be recaptured by adding that credit amount to the net tax of the qualified taxpayer for the taxable year in which the qualified property is disposed of, removed, or put to an ineligible use. (h) In the case where the credit allowed by this section exceeds the "net tax," the excess may be carried over to reduce the "net tax" in the following year, and succeeding years as follows: (1) Except as provided in paragraph (2), for the seven succeeding years if necessary, until the credit is exhausted. (2) In the case of a small business, for the nine succeeding years, if necessary, until the credit is exhausted. (i) (1) This section shall remain in effect until the date specified in paragraph (2), on which date this section shall cease to be operative, and as of that date is repealed. (2) (A) This section shall cease to be operative on January 1, 2001, or on January 1 of the earliest year thereafter, if the total employment in this state, as determined by the Employment Development Department on the preceding January 1, does not exceed by 100,000 jobs the total employment in this state on January 1, 1994. The department shall report to the Legislature annually with respect to the determination required by the preceding sentence. (B) For purposes of this paragraph, "total employment" means the total employment in the manufacturing sector, excluding employment in the aerospace sector. (j) The amendments made by the act adding this subdivision shall be operative for taxable years beginning on or after January 1, 1997, except as provided in paragraph (3) of subdivision (d). (k) The amendments made by the act adding this subdivision shall be operative for taxable years beginning on or after January 1, 1998. SEC. 6.5. Section 17054.5 of the Revenue and Taxation Code is amended to read: 17054.5. (a) (1) There shall be allowed as a credit against the "net tax" (as defined in Section 17039) of a qualified individual an amount equal to 30 percent of the net tax. (2) For taxable years beginning on or after January 1, 1987, and before January 1, 1988, a qualified individual means a qualified joint custody head of household as defined in subdivision (c). (3) For taxable years beginning on or after January 1, 1988, a qualified individual means either of the following: (A) A "qualified joint custody head of household" as defined in subdivision (c). (B) A "qualified taxpayer" as defined in subdivision (e). (4) The amount of the credit under this section shall not exceed two hundred dollars ($200) for any taxable year. (b) For each taxable year beginning on or after January 1, 1988, the Franchise Tax Board shall recompute the maximum credit prescribed in subdivision (a). That computation shall be made as follows: (1) The California Department of Industrial Relations shall transmit annually to the Franchise Tax Board the percentage change in the California Consumer Price Index as modified for rental equivalent homeownership for all items from June of the prior calendar year to June of the current calendar year, no later than August 1 of the current calendar year. (2) The Franchise Tax Board shall add 100 percent to the percentage change figure which is furnished to them pursuant to paragraph (1) and divide the result by 100. (3) The Franchise Tax Board shall multiply the immediately preceding taxable year credit by the inflation adjustment factor determined in paragraph (2), and round off the resulting product to the nearest one dollar ($1). (c) "Qualified joint custody head of household" means an individual who meets all of the following: (1) Is not married at the close of the taxable year, or files a separate return and does not have his or her spouse as a member of his or her household during the entire taxable year. (2) Maintains as his or her home a household which constitutes for the taxable year the principal place of abode for a qualifying child, as defined in subdivision (d), for no less than 146 days of the taxable year but no more than 219 days of the taxable year, under a decree of dissolution or separate maintenance, or under a written agreement between the parents prior to the issuance of a decree of dissolution or separate maintenance where the proceedings have been initiated. (3) Furnishes over one-half the cost of maintaining the household during the taxable year. (4) Does not qualify as a head of household under Section 17042 or as a surviving spouse under Section 17046. (d) For purposes of this section, a "qualifying child" means a son, stepson, daughter, or stepdaughter of the taxpayer or a descendant of a son or daughter of the taxpayer, but if that son, stepson, daughter, stepdaughter, or descendant is married at the close of the taxpayer's taxable year, only if the taxpayer is entitled to a credit for the taxable year for that person under Section 17054. (e) "Qualified taxpayer" means an individual who meets all of the following: (1) Is married and files a separate return. (2) During the last six months of the taxable year the taxpayer's spouse was not a member of the taxpayer's household. (3) Maintains a household, whether or not the taxpayer's home, which constitutes the principal place of abode of a dependent mother or father of the taxpayer for the taxable year. (4) Furnishes over one-half of the cost of maintaining the household during the taxable year. (5) Does not qualify as a head of household under Section 17042 or as a surviving spouse under Section 17046. SEC. 7. Section 17071 of the Revenue and Taxation Code is amended to read: 17071. Section 61 of the Internal Revenue Code, relating to gross income defined, shall apply, except as otherwise provided. SEC. 8. Section 17073 of the Revenue and Taxation Code is amended to read: 17073. (a) Section 63 of the Internal Revenue Code, relating to taxable income defined, shall apply, except as otherwise provided. (b) For individuals who do not itemize deductions, the standard deduction computed in accordance with Section 17073.5 shall be allowed as a deduction in computing taxable income. SEC. 9. Section 17074 of the Revenue and Taxation Code is amended to read: 17074. Section 64 of the Internal Revenue Code, relating to ordinary income defined, shall apply, except as otherwise provided. SEC. 10. Section 17075 of the Revenue and Taxation Code is amended to read: 17075. Section 65 of the Internal Revenue Code, relating to ordinary loss defined, shall apply, except as otherwise provided. SEC. 11. Section 17076 of the Revenue and Taxation Code is amended to read: 17076. Section 67 of the Internal Revenue Code, relating to the 2-percent floor on miscellaneous itemized deductions, shall apply, except as otherwise provided. SEC. 12. Section 17077 of the Revenue and Taxation Code is amended to read: 17077. Section 68 of the Internal Revenue Code, relating to overall limitation on itemized deductions, shall apply, except as otherwise provided. (a) "Six percent" shall be substituted for "3 percent" in Section 68(a)(1) of the Internal Revenue Code. (b) Section 68(b)(1) of the Internal Revenue Code shall not apply and in lieu thereof the term "applicable amount" in each place it appears in Section 68(a) of the Internal Revenue Code means one hundred thousand dollars ($100,000) in the case of a single individual or a married individual making a separate return, one hundred fifty thousand dollars ($150,000) in the case of a head of household, and two hundred thousand dollars ($200,000) in the case of a surviving spouse or a husband and wife making a joint return. (c) Section 68(b)(2) of the Internal Revenue Code, relating to inflation adjustments, shall not apply. However, for any taxable year beginning on or after January 1, 1992, the applicable amounts specified in subdivision (b) shall be recomputed annually in the same manner as the recomputation of income tax brackets under subdivision (h) of Section 17041. SEC. 13. Section 17077.5 of the Revenue and Taxation Code is repealed. SEC. 14. Section 17083 of the Revenue and Taxation Code is amended to read: 17083. Section 85 of the Internal Revenue Code, relating to unemployment compensation, shall not apply. SEC. 15. Section 17084 of the Revenue and Taxation Code is repealed. SEC. 16. Section 17085 of the Revenue and Taxation Code is amended to read: 17085. Section 72 of the Internal Revenue Code, relating to annuities and certain proceeds of life insurance contracts, shall be modified as follows: (a) The amendments and transitional rules made by Public Law 99-514 shall be applicable to this part for the same transactions and the same years as they are applicable for federal purposes, except that the repeal of Section 72(d) of the Internal Revenue Code, relating to repeal of special rule for employees' annuities, shall apply only to the following: (1) Any individual whose annuity starting date is after December 31, 1986. (2) At the election of the taxpayer, any individual whose annuity starting date is after July 1, 1986, and before January 1, 1987. (b) The amount of a distribution from an individual retirement account or annuity or employees' trust or employee annuity that is includable in gross income for federal purposes shall be reduced for purposes of this part by the lesser of either of the following: (1) An amount equal to the amount includable in federal gross income for the taxable year. (2) An amount equal to the basis in the account or annuity allowed by Section 17507 (relating to individual retirement accounts and simplified employee pensions) or the increased basis allowed by Sections 17504 and 17506 (relating to plans of self-employed individuals) remaining after adjustment for reductions in gross income under this provision in prior taxable years. (c) (1) Except as provided in paragraph (2), the amount of the penalty imposed under this part shall be computed in accordance with Sections 72(m), (q), (t), and (v) of the Internal Revenue Code using a rate of 21/2 percent, in lieu of the rate provided in those sections. (2) In the case where Section 72(t)(6) of the Internal Revenue Code, relating to special rules for simple retirement accounts, applies, the rate in paragraph (1) shall be 6 percent in lieu of the 21/2 percent rate specified therein. (d) Section 72(f)(2) of the Internal Revenue Code, relating to special rules for computing employees' contributions, shall be applicable without applying the exceptions which immediately follow that paragraph. SEC. 17. Section 17085.5 of the Revenue and Taxation Code is repealed. SEC. 18. Section 17087 of the Revenue and Taxation Code is amended to read: 17087. (a) Section 86 of the Internal Revenue Code, relating to Social Security and Tier 1 Railroad Retirement Benefits, shall not apply. (b) Section 72(r) of the Internal Revenue Code, relating to Tier 2 Railroad Retirement Benefits, shall not apply. (c) Section 105(h) of the Internal Revenue Code, relating to sick pay under the Railroad Unemployment Insurance Act, shall not apply. SEC. 19. Section 17132.5 of the Revenue and Taxation Code is repealed. SEC. 20. Section 17134.5 of the Revenue and Taxation Code is repealed. SEC. 21. Section 17139 of the Revenue and Taxation Code is repealed. SEC. 22. Section 17140 of the Revenue and Taxation Code is amended to read: 17140. (a) For purposes of this section, the following terms have the following meanings as provided in the Golden State Scholarshare Trust Act (Article 19 (commencing with Section 69980) of Chapter 2 of Part 42 of the Education Code): (1) "Beneficiary" has the meaning set forth in subdivision (c) of Section 69980 of the Education Code. (2) "Benefit" has the meaning set forth in subdivision (d) of Section 69980 of the Education Code. (3) "Participant" has the meaning set forth in subdivision (h) of Section 69980 of the Education Code. (4) "Participation agreement" has the meaning set forth in subdivision (i) of Section 69980 of the Education Code. (5) "Scholarshare trust" has the meaning set forth in subdivision (f) of Section 69980 of the Education Code. (b) Except as otherwise provided in subdivision (c), gross income of a beneficiary or a participant does not include any of the following: (1) Any distribution or earnings under a Scholarshare trust participation agreement, as provided in Article 19 (commencing with Section 69980) of Chapter 2 of Part 42 of the Education Code. (2) Any contribution to the Scholarshare trust on behalf of a beneficiary shall not be includable as gross income of that beneficiary. (c) (1) Any distribution under a Scholarshare trust participation agreement shall be includable in the gross income of the distributee in the manner as provided under Section 72 of the Internal Revenue Code, as modified by Section 17085, to the extent not excluded from gross income under this part. For purposes of applying Section 72 of the Internal Revenue Code, the following apply: (A) All Scholarshare trust accounts of which an individual is a beneficiary shall be treated as one account, except as otherwise provided. (B) All distributions during a taxable year shall be treated as one distribution. (C) The value of the participation agreement, income on the participation agreement, and investment in the participation agreement shall be computed as of the close of the calendar year in which the taxable year begins. (2) A contribution by a for-profit or nonprofit entity, or by a state or local government agency, for the benefit of an owner or employee of that entity or a beneficiary whom the owner or employee has the power to designate, including the owner or employee's minor children, shall be included in the gross income of that owner or employee in the year the contribution is made. (3) For purposes of this subdivision, "distribution" includes any benefit furnished to a beneficiary under a participation agreement, as provided in Article 19 (commencing with Section 69980) of Chapter 2 of Part 42 of the Education Code. (4) (A) Paragraph (1) shall not apply to that portion of any distribution that, within 60 days of distribution, is transferred to the credit of another beneficiary under the Scholarshare trust who is a "member of the family," as that term is used in Section 529(e)(2) of the Internal Revenue Code, as amended by Section 211 of the Taxpayer Relief Act of 1997 (P.L. 105-34), of the former beneficiary of that Scholarshare trust. (B) Any change in the beneficiary of an interest in the Scholarshare trust shall not be treated as a distribution for purposes of paragraph (1) if the new beneficiary is a "member of the family," as that term is used in Section 529(e)(2) of the Internal Revenue Code, as amended by Section 211 of the Taxpayer Relief Act of 1997 (P.L. 105-34), of the former beneficiary of that Scholarshare trust. (d) For purposes of determining adjusted gross income, Section 62 (a)(9) of the Internal Revenue Code shall not apply to any amount forfeited upon distribution of an account created pursuant to a participation agreement. (e) The amendments made to the Internal Revenue Code by Section 211 of the Taxpayer Relief Act of 1997 (P.L. 105-34) shall apply to taxable years beginning on or after January 1, 1998. SEC. 23. Section 17140.3 of the Revenue and Taxation Code is amended to read: 17140.3. Section 529 of the Internal Revenue Code, relating to qualified state tuition programs, shall apply, except as otherwise provided. (a) Section 529 (a) of the Internal Revenue Code is modified as follows: (1) By substituting the phrase "under this part and Part 11 (commencing with Section 23001)" in lieu of the phrase "under this subtitle." (2) By substituting "Article 2 (commencing with Section 23731)" in lieu of "Section 511." (b) A copy of the report required to be filed with the Secretary of the Treasury under Section 529(d) of the Internal Revenue Code shall be filed with the Franchise Tax Board at the same time and in the same manner as specified in that section. SEC. 24. Section 17142.5 of the Revenue and Taxation Code is amended to read: 17142.5. (a) For purposes of the following provisions of the Internal Revenue Code, a qualified hazardous duty area shall be treated in the same manner as if it were a combat zone (as determined under Section 112 of the Internal Revenue Code): (1) Section 2 (a)(3) (relating to a special rule where a deceased spouse was in missing status). (2) Section 112 (relating to certain combat zone compensation of members of the Armed Forces). (3) Section 692 (relating to income taxes of members of Armed Forces upon death). (4) Section 7508 (relating to time for performing certain acts postponed by reason of service in combat zone). (b) "Qualified hazardous duty area" means Bosnia and Herzegovina, Croatia, or Macedonia, if, as of March 20, 1996, any member of the Armed Forces of the United States is entitled to special pay under Section 310 of Title 37 of the United States Code (relating to special pay; duty subject to hostile fire or imminent danger) for services performed in that country. "Qualified hazardous duty area" includes any country only during the period that entitlement is in effect. Solely for purposes of applying Section 7508 of the Internal Revenue Code, in the case of an individual who is performing services as part of Operation Joint Endeavor outside the United States while deployed away from the individual's permanent duty station, the term "qualified hazardous duty area" includes, during the period for which that entitlement is in effect, any area in which those services are performed. SEC. 25. Section 17143 of the Revenue and Taxation Code is amended to read: 17143. Sections 103 and 141 to 150, inclusive, of the Internal Revenue Code, relating to interest on governmental obligations, shall not apply. SEC. 26. Section 17144 of the Revenue and Taxation Code is amended to read: 17144. (a) Section 108(b)(2)(B) of the Internal Revenue Code, relating to general business credit, is modified by substituting "this part" in lieu of "Section 38 (relating to general business credit)." (b) Section 108(b)(2)(G) of the Internal Revenue Code, relating to foreign tax credit carryovers, shall not apply. (c) Section 108(b)(3)(B) of the Internal Revenue Code, relating to credit carryover reduction, is modified by substituting "11.1 cents" in lieu of "331/3 cents" in each place in which it appears. In the case where more than one credit is allowable under this part, the credits shall be reduced on a pro rata basis. (d) Section 108(g)(3)(B) of the Internal Revenue Code, relating to adjusted tax attributes, is modified by substituting "($9)" in lieu of "($3)." (e) (1) If a taxpayer makes an election for federal income tax purposes under Section 108(c) of the Internal Revenue Code, relating to treatment of discharge of qualified real property business indebtedness, a separate election shall not be allowed under paragraph (3) of subdivision (e) of Section 17024.5 and the federal election shall be binding for purposes of this part. (2) If a taxpayer has not made an election for federal income tax purposes under Section 108(c) of the Internal Revenue Code, relating to treatment of discharge of qualified real property business indebtedness, then the taxpayer shall not be allowed to make that election for purposes of this part. SEC. 27. Section 17218 of the Revenue and Taxation Code is repealed. SEC. 28. Section 17250 of the Revenue and Taxation Code is amended to read: 17250. (a) Section 168 of the Internal Revenue Code is modified as follows: (1) Any reference to "tax imposed by this chapter" in Section 168 of the Internal Revenue Code means "net tax," as defined in Section 17039. (2) (A) Section 168(e)(3) is modified to provide that any grapevine, replaced in a vineyard in California in any taxable year beginning on or after January 1, 1992, as a direct result of a phylloxera infestation in that vineyard, or replaced in a vineyard in California in any taxable year beginning on or after January 1, 1997, as a direct result of Pierce's Disease in that vineyard, shall be "five-year property," rather than "10-year property." (B) Section 168(g)(3) of the Internal Revenue Code is modified to provide that any grapevine, replaced in a vineyard in California in any taxable year beginning on or after January 1, 1992, as a direct result of a phylloxera infestation in that vineyard, or replaced in a vineyard in California in any taxable year beginning on or after January 1, 1997, as a direct result of Pierce's Disease in that vineyard, shall have a class life of 10 years. (C) Every taxpayer claiming a depreciation deduction with respect to grapevines as described in this paragraph shall obtain a written certification from an independent state-certified integrated pest management adviser, or a state agricultural commissioner or adviser, that specifies that the replanting was necessary to restore a vineyard infested with phylloxera or Pierce's Disease. The taxpayer shall retain the certification for future audit purposes. (3) Section 168(j) of the Internal Revenue Code, relating to property on Indian reservations, shall not apply. (b) Section 169 of the Internal Revenue Code, relating to amortization of pollution control facilities, is modified as follows: (1) The deduction allowed by Section 169 of the Internal Revenue Code shall be allowed only with respect to facilities located in this state. (2) The "state certifying authority," as defined in Section 169(d) (2) of the Internal Revenue Code, means the State Air Resources Board, in the case of air pollution, and the State Water Resources Control Board, in the case of water pollution. SEC. 29. Section 17268 of the Revenue and Taxation Code is amended to read: 17268. (a) For each taxable year beginning on or after January 1, 1995, a taxpayer may elect to treat 40 percent of the cost of any Section 17268 property as an expense that is not chargeable to the capital account. Any cost so treated shall be allowed as a deduction for the taxable year in which the taxpayer places the Section 17268 property in service. (b) In the case of a husband or wife filing separate returns for a taxable year in which a spouse is entitled to the deduction under subdivision (a), the applicable amount shall be equal to 50 percent of the amount otherwise determined under subdivision (a). (c) (1) An election under this section for any taxable year shall meet both of the following requirements: (A) Specify the items of Section 17268 property to which the election applies and the portion of the cost of each of those items that is to be taken into account under subdivision (a). (B) Be made on the taxpayer's return of the tax imposed by this part for the taxable year. (2) Any election made under this section, and any specification contained in that election, may not be revoked except with the consent of the Franchise Tax Board. (d) (1) For purposes of this section, "Section 17268 property" means any recovery property that is each of the following: (A) Section 1245 property (as defined in Section 1245(a)(3) of the Internal Revenue Code). (B) Purchased by the taxpayer for exclusive use in a trade or business conducted within a LAMBRA. (C) Purchased before the date the LAMBRA designation expires, is no longer binding, or becomes inoperative. (2) For purposes of paragraph (1), "purchase" means any acquisition of property, but only if both of the following apply: (A) The property is not acquired from a person whose relationship to the person acquiring it would result in the disallowance of losses under Section 267 or 707(b) of the Internal Revenue Code (but, in applying Section 267(b) and Section 267(c) of the Internal Revenue Code for purposes of this section, Section 267(c)(4) of the Internal Revenue Code shall be treated as providing that the family of an individual shall include only his or her spouse, ancestors, and lineal descendants). (B) The basis of the property in the hands of the person acquiring it is not determined by either of the following: (i) In whole or in part by reference to the adjusted basis of the property in the hands of the person from whom acquired. (ii) Under Section 1014 of the Internal Revenue Code, relating to basis of property acquired from a decedent. (3) For purposes of this section, the cost of property does not include that portion of the basis of the property that is determined by reference to the basis of other property held at any time by the person acquiring the property. (4) This section shall not apply to estates and trusts. (5) This section shall not apply to any property for which the taxpayer may not make an election for the taxable year under Section 179 of the Internal Revenue Code because of the provisions of Section 179(d) of the Internal Revenue Code. (6) In the case of a partnership, the dollar limitation in subdivision (f) shall apply at the partnership level and at the partner level. (7) This section shall not apply to any property described in Section 168(f) of the Internal Revenue Code, relating to property to which Section 168 of the Internal Revenue Code does not apply. (e) For purposes of this section: (1) "LAMBRA" means a local agency military base recovery area designated in accordance with the provisions of Section 7114 of the Government Code. (2) "Taxpayer" means a taxpayer that conducts a trade or business within a LAMBRA and, for the first two taxable years, has a net increase in jobs (defined as 2,000 paid hours per employee per year) of one or more employees in the LAMBRA. (A) The net increase in the number of jobs shall be determined by subtracting the total number of full-time employees (defined as 2,000 paid hours per employee per year) the taxpayer employed in this state in the taxable year prior to commencing business operations in the LAMBRA from the total number of full-time employees the taxpayer employed in this state during the second taxable year after commencing business operations in the LAMBRA. For taxpayers who commence doing business in this state with their LAMBRA business operation, the number of employees for the taxable year prior to commencing business operations in the LAMBRA shall be zero. If the taxpayer has a net increase in jobs in the state, the credit shall be allowed only if one or more full-time employees is employed within the LAMBRA. (B) The total number of employees employed in the LAMBRA shall equal the sum of both of the following: (i) The total number of hours worked in the LAMBRA for the taxpayer by employees (not to exceed 2,000 hours per employee) who are paid an hourly wage divided by 2,000. (ii) The total number of months worked in the LAMBRA for the taxpayer by employees who are salaried employees divided by 12. (C) In the case of a taxpayer who first commences doing business in the LAMBRA during the taxable year, for purposes of clauses (i) and (ii), respectively, of subparagraph (B) the divisors "2,000" and "12" shall be multiplied by a fraction, the numerator of which is the number of months of the taxable year that the taxpayer was doing business in the LAMBRA and the denominator of which is 12. (f) The aggregate cost of all Section 17268 property that may be taken into account under subdivision (a) for any taxable year shall not exceed the following applicable amounts for the taxable year of the designation of the relevant LAMBRA and taxable years thereafter: The applicable amount is: Taxable year of designation ............ $100,000 1st taxable year thereafter ............ 100,000 2nd taxable year thereafter ............ 75,000 3rd taxable year thereafter ............ 75,000 Each taxable year thereafter ........... 50,000 (g) This section shall apply only to property that is used exclusively in a trade or business conducted within a LAMBRA. (h) (1) Any amounts deducted under subdivision (a) with respect to property that ceases to be used in the trade or business within a LAMBRA at any time before the close of the second taxable year after the property was placed in service shall be included in income for that year. (2) At the close of the second taxable year, if the taxpayer has not increased the number of its employees as determined by paragraph (2) of subdivision (e), then the amount of the deduction previously claimed shall be added to the taxpayer's taxable income for the taxpayer's second taxable year. (i) Any taxpayer who elects to be subject to this section shall not be entitled to claim for the same property the deduction under Section 179 of the Internal Revenue Code, relating to an election to expense certain depreciable business assets. SEC. 30. Section 17270 of the Revenue and Taxation Code is amended to read: 17270. (a) For purposes of Section 162(a)(2) of the Internal Revenue Code, relating to travel expenses, all of the following shall apply: (1) The place of residence of a member of the Legislature within the district represented shall be considered the tax home. (2) The provisions of Section 162(h) of the Internal Revenue Code, relating to state legislators' travel expenses away from home, shall not be applied. (b) The provisions of Section 280C(a) of the Internal Revenue Code (relating to rule for employment credits) shall not apply. (c) Section 280C(c)(3)(B) of the Internal Revenue Code is modified to refer to Section 17041 in lieu of Section 11(b)(1) of the Internal Revenue Code. SEC. 31. Section 17274 of the Revenue and Taxation Code is amended to read: 17274. (a) Notwithstanding any other provisions in this part to the contrary, no deduction shall be allowed for interest, taxes, depreciation, or amortization paid or incurred in the taxable year with respect to substandard housing located in this state, except as provided in subdivision (e). (b) "Substandard housing" means occupied dwellings from which the taxpayer derives rental income or unoccupied or abandoned dwellings for which both of the following apply: (1) Either of the following occurs: (A) For occupied dwellings from which the taxpayer derives rental income, a state or local government regulatory agency has determined that the housing violates state law or local codes dealing with health, safety, or building. (B) For dwellings that are unoccupied or abandoned for at least 90 days, a state or local government regulatory agency has cited the housing for conditions that constitute a serious violation of state law or local codes dealing with health, safety, or building, and that constitute a threat to public health and safety. (2) Either of the following occurs: (A) After written notice of violation by the regulatory agency, specifying the applicability of this section, the housing has not been brought to a condition of compliance within six months after the date of the notice or the time prescribed in the notice, whichever period is later. (B) Good faith efforts for compliance have not been commenced, as determined by the regulatory agency. "Substandard housing" also means employee housing that has not, within 30 days of the date of the written notice of violation or the date for compliance prescribed in the written notice of violation, been brought into compliance with the conditions stated in the written notice of violation of the Employee Housing Act (Part 1 (commencing with Section 17000) of Division 13 of the Health and Safety Code) issued by the enforcement agency that specifies the application of this section. The regulatory agency may, for good cause shown, extend the compliance date prescribed in a violation notice. (c) (1) When the period specified in paragraph (2) of subdivision (b) has expired without compliance, the regulatory agency shall mail to the taxpayer a notice of noncompliance. The notice of noncompliance shall be in a form and shall include information prescribed by the Franchise Tax Board, shall be mailed by certified mail to the taxpayer at the taxpayer's last known address, and shall advise the taxpayer of (A) an intent to notify the Franchise Tax Board of the noncompliance within 10 days unless an appeal is filed, (B) where an appeal may be filed, and (C) a general description of the tax consequences of the filing with the Franchise Tax Board. Appeals shall be made to the same body and in the same manner as appeals from other actions of the regulatory agency. If no appeal is made within 10 days or if after disposition of the appeal the regulatory agency is sustained, the regulatory agency shall notify, in writing, the Franchise Tax Board of the noncompliance. (2) The notice of noncompliance shall contain the legal description or the lot and block numbers of the real property, the assessor's parcel number, and the name of the owner of record as shown on the latest equalized assessment roll. In addition, the regulatory agency shall, at the same time as notification of the notice of noncompliance is sent to the Franchise Tax Board, record a copy of the notice of noncompliance in the office of the recorder for the county in which the substandard housing is located that includes a statement of tax consequences that may be determined by the Franchise Tax Board. However, the failure to record a notice with the county recorder does not relieve the liability of any taxpayer nor does it create any liability on the part of the regulatory agency. (3) The regulatory agency may charge the taxpayer a fee in an amount not to exceed the regulatory agency's costs incurred in recording any notice of noncompliance or issuing any release of that notice. The notice of compliance shall be recorded and shall serve to expunge the notice of noncompliance. The notice of compliance shall contain the same recording information required for the notice of noncompliance. No deduction by the taxpayer, or any other taxpayer who obtains title to the property subsequent to the recordation of the notice of noncompliance, shall be allowed for the items provided in subdivision (a) from the date of the notice of noncompliance until the date the regulatory agency determines that the substandard housing has been brought to a condition of compliance. The regulatory agency shall mail to the Franchise Tax Board and the taxpayer a notice of compliance, which notice shall be in the form and include the information prescribed by the Franchise Tax Board. In the event the period of noncompliance does not cover an entire taxable year, the deductions shall be denied at the rate of 1/12 for each full month during the period of noncompliance. (4) If the property is owned by more than one owner or if the recorded title is in the name of a fictitious owner, the notice requirements provided in subdivision (b) and this subdivision shall be satisfied for each owner if the notices are mailed to one owner or to the fictitious name owner at the address appearing on the latest available property tax bill. However, notices made pursuant to this subdivision do not relieve the regulatory agency from furnishing taxpayer identification information required to implement this section to the Franchise Tax Board. (d) For the purposes of this section, a notice of noncompliance shall not be mailed by the regulatory agency to the Franchise Tax Board if any of the following occur: (1) The housing was rendered substandard solely by reason of earthquake, flood, or other natural disaster except where the condition remains for more than three years after the disaster. (2) The owner of the substandard housing has secured financing to bring the housing into compliance with those laws or codes that have been violated, causing the housing to be classified as substandard, and has commenced repairs or other work necessary to bring the housing into compliance. (3) The owner of substandard housing that is not within the meaning of housing accommodation as defined by subdivision (d) of Section 35805 of the Health and Safety Code has done both of the following: (A) Attempted to secure financing to bring the housing into compliance with those laws or codes that have been violated, causing the housing to be classified as substandard. (B) Been denied that financing solely because the housing is located in a neighborhood or geographical area in which financial institutions do not provide financing for rehabilitation of any of that type of housing. (e) This section does not apply to deductions from income derived from property rendered substandard solely by reason of a change in applicable state or local housing standards unless the violations cause substantial danger to the occupants of the property, as determined by the regulatory agency which has served notice of violation pursuant to subdivision (b). (f) The owner of substandard housing found to be in noncompliance shall, upon total or partial divestiture of interest in the property, immediately notify the regulatory agency of the name and address of the person or persons to whom the property has been sold or otherwise transferred and the date of the sale or transference. (g) By July 1 of each year, the regulatory agency shall report to the appropriate legislative body of its jurisdiction all of the following information, for the preceding calendar year, regarding its activities to secure code enforcement, which shall be public information: (1) The number of written notices of violation issued for substandard housing under subdivision (b). (2) The number of violations complied with within the period prescribed in subdivision (b). (3) The number of notices of noncompliance issued pursuant to subdivision (c). (4) The number of appeals from those notices pursuant to subdivision (c). (5) The number of successful appeals by owners. (6) The number of notices of noncompliance mailed to the Franchise Tax Board pursuant to subdivision (c). (7) The number of cases in which a notice of noncompliance was not sent pursuant to subdivision (d). (8) The number of extensions for compliance granted pursuant to subdivision (b) and the mean average length of the extensions. (9) The mean average length of time from the issuance of a notice of violation to the mailing of a notice of noncompliance to the Franchise Tax Board where the notice is actually sent to the Franchise Tax Board. (10) The number of cases where compliance is achieved after a notice of noncompliance has been mailed to the Franchise Tax Board. (11) The number of instances of disallowance of tax deductions by the Franchise Tax Board resulting from referrals made by the regulatory agency. This information may be filed in a supplemental report in succeeding years as it becomes available. (h) The provisions of this section relating to substandard housing consisting of abandoned or unoccupied dwellings do not apply to any lender engaging in a "federally related transaction," as defined in Section 11302 of the Business and Professions Code, who acquires title through judicial or nonjudicial foreclosure, or accepts a deed in lieu of foreclosure. The exception provided in this subdivision covers only substandard housing consisting of abandoned or unoccupied dwellings involved in the federally related transaction. SEC. 32. Section 17275.6 of the Revenue and Taxation Code is repealed. SEC. 33. Section 17276.5 of the Revenue and Taxation Code is amended to read: 17276.5. (a) For each taxable year beginning on or after January 1, 1995, the term "qualified taxpayer" as used in Section 17276.1 includes a taxpayer engaged in the conduct of a trade or business within a LAMBRA. For purposes of this subdivision, all of the following shall apply: (1) A net operating loss shall not be a net operating loss carryback for any taxable year, and a net operating loss for any taxable year beginning on or after the date the area in which the taxpayer conducts a trade or business is designated a LAMBRA shall be a net operating loss carryover to each following taxable year that ends before the LAMBRA expiration date or to each of the 15 taxable years following the taxable year of loss, if longer. (2) "LAMBRA" means a local agency military base recovery area designated in accordance with Section 7114 of the Government Code. (3) "Taxpayer" means a person or entity that conducts a trade or business within a LAMBRA and, for the first two taxable years, has a net increase in jobs (defined as 2,000 paid hours per employee per year) of one or more employees in the LAMBRA and this state. For purposes of this paragraph: (A) The net increase in the number of jobs shall be determined by subtracting the total number of full-time employees (defined as 2,000 paid hours per employee per year) the taxpayer employed in this state in the taxable year prior to commencing business operations in the LAMBRA from the total number of full-time employees the taxpayer employed in this state during the second taxable year after commencing business operations in the LAMBRA. For taxpayers who commence doing business in this state with their LAMBRA business operation, the number of employees for the taxable year prior to commencing business operations in the LAMBRA shall be zero. The deduction shall be allowed only if the taxpayer has a net increase in jobs in the state, and if one or more full-time employees is employed within the LAMBRA. (B) The total number of employees employed in the LAMBRA shall equal the sum of both of the following: (i) The total number of hours worked in the LAMBRA for the taxpayer by employees (not to exceed 2,000 hours per employee) who are paid an hourly wage divided by 2,000. (ii) The total number of months worked in the LAMBRA for the taxpayer by employees who are salaried employees divided by 12. (C) In the case of a taxpayer who first commences doing business in the LAMBRA during the taxable year, for purposes of clauses (i) and (ii), respectively, of subparagraph (B), the divisors "2,000" and "12" shall be multiplied by a fraction, the numerator of which is the number of months of the taxable year that the taxpayer was doing business in the LAMBRA and the denominator of which is 12. (4) "Net operating loss" means the loss determined under Section 172 of the Internal Revenue Code, as modified by Section 17276.1, attributable to the taxpayer's business activities within a LAMBRA prior to the LAMBRA expiration date. The attributable loss shall be determined in accordance with Chapter 17 (commencing with Section 25101) of Part 11, modified for purposes of this section as follows: (A) Loss shall be apportioned to a LAMBRA by multiplying total loss from the business by a fraction, the numerator of which is the property factor plus the payroll factor, and the denominator of which is 2. (B) "The LAMBRA" shall be substituted for "this state." (5) A net operating loss carryover shall be a deduction only with respect to the taxpayer's business income attributable to a LAMBRA. (6) Attributable income is that portion of the taxpayer's California source business income that is apportioned to the LAMBRA. For that purpose, the taxpayer's business income attributable to sources in this state first shall be determined in accordance with Chapter 17 (commencing with Section 25101) of Part 11. That business income shall be further apportioned to the LAMBRA in accordance with Article 2 (commencing with Section 25120) of Chapter 17 of Part 11, modified for purposes of this subdivision as follows: (A) Business income shall be apportioned to a LAMBRA by multiplying total California business income of the taxpayer by a fraction, the numerator of which is the property factor plus the payroll factor, and the denominator of which is two. For purposes of this clause: (i) The property factor is a fraction, the numerator of which is the average value of the taxpayer's real and tangible personal property owned or rented and used in the LAMBRA during the taxable year, and the denominator of which is the average value of all the taxpayer's real and tangible personal property owned or rented and used in this state during the taxable year. (ii) The payroll factor is a fraction, the numerator of which is the total amount paid by the taxpayer in the LAMBRA during the taxable year for compensation, and the denominator of which is the total compensation paid by the taxpayer in this state during the taxable year. (B) If a loss carryover is allowable pursuant to this section for any taxable year after the LAMBRA designation has expired, the LAMBRA shall be deemed to remain in existence for purposes of computing the limitation specified in paragraph (5) and allowing a net operating loss deduction. (7) "LAMBRA expiration date" means the date the LAMBRA designation expires, is no longer binding, or becomes inoperative pursuant to Section 7110 of the Government Code. (b) A taxpayer who qualifies as a "qualified taxpayer" under one or more sections shall, for the taxable year of the net operating loss and any taxable year to which that net operating loss may be carried, designate on the original return filed for each year the section that applies to that taxpayer with respect to that net operating loss. If the taxpayer is eligible to qualify under more than one section, the designation is to be made after taking into account subdivision (c). (c) If a taxpayer is eligible to qualify under this section and either Section 17276.2, 17276.4, or 17276.6 as a "qualified taxpayer," with respect to a net operating loss in a taxable year, the taxpayer shall designate which section is to apply to the taxpayer. (d) Notwithstanding Section 17276, the amount of the loss determined under this section or Section 17276.2, 17276.4, or 17276.6 shall be the only net operating loss allowed to be carried over from that taxable year and the designation under subdivision (b) shall be included in the election under Section 17276.1. (e) This section shall apply to taxable years beginning on or after January 1, 1998. SEC. 34. Section 17287 of the Revenue and Taxation Code is amended to read: 17287. Section 269A of the Internal Revenue Code is modified by substituting "California Personal Income Tax" for "Federal income tax." SEC. 36. Section 17330 of the Revenue and Taxation Code is repealed. SEC. 37. Section 17551 of the Revenue and Taxation Code is amended to read: 17551. (a) Subchapter E of Chapter 1 of Subtitle A of the Internal Revenue Code, relating to accounting periods and methods of accounting, shall apply, except as otherwise provided. (b) Section 444(c)(1) of the Internal Revenue Code, relating to effect of election, shall not apply. SEC. 38. Section 17551.5 of the Revenue and Taxation Code is repealed. SEC. 39. Section 17552 of the Revenue and Taxation Code is amended to read: 17552. (a) Notwithstanding Section 17565, a return for a period of less than 12 months shall also be made when the Franchise Tax Board terminates the taxpayer's taxable year under Section 19082 (relating to tax in jeopardy). (b) Section 443(c) of the Internal Revenue Code, relating to adjustment in deduction for personal exemption, is modified by substituting the phrase "the credit allowed under Section 17054" for the phrase "the exemptions allowed as a deduction under section 151 (and any deduction in lieu thereof)." SEC. 40. Section 17553 of the Revenue and Taxation Code is amended to read: 17553. Section 454(c) of the Internal Revenue Code, relating to matured United States Savings Bonds, shall not apply. SEC. 41. Section 17563 of the Revenue and Taxation Code is repealed. SEC. 42. Section 17639 of the Revenue and Taxation Code is amended to read: 17639. For purposes of subdivision (a) of Section 17637, a bond, debenture, note, or certificate or other evidence of indebtedness (hereinafter in this section referred to as "obligation") acquired by a trust described in Section 401(a) of the Internal Revenue Code shall not be treated as a loan made without the receipt of adequate security if-- (a) The obligation is acquired-- (1) On the market, either (i) at the price of the obligation prevailing on a national securities exchange which is registered with the Securities and Exchange Commission, or (ii) if the obligation is not traded on such a national securities exchange, at a price not less favorable to the trust than the offering price for the obligation as established by current bid and asked prices quoted by persons independent of the issuer; (2) From an underwriter, at a price (i) not in excess of the public offering price for the obligation as set forth in a prospectus or offering circular filed with the Securities and Exchange Commission, and (ii) at which a substantial portion of the same issue is acquired by persons independent of the issuer; or (3) Directly from the issuer, at a price not less favorable to the trust than the price paid currently for a substantial portion of the same issue by persons independent of the issuer; (b) Immediately following acquisition of the obligation-- (1) Not more than 25 percent of the aggregate amount of obligations issued in the issue and outstanding at the time of acquisition is held by the trust, and (2) At least 50 percent of the aggregate amount referred to in paragraph (1) is held by persons independent of the issuer; and (c) Immediately following acquisition of the obligation, not more than 25 percent of the assets of the trust is invested in obligations of persons described in Section 17637. SEC. 43. Section 17640 of the Revenue and Taxation Code is amended to read: 17640. Subdivision (a) of Section 17637 shall not apply to a loan made by a trust described in Section 401(a) of the Internal Revenue Code to the employer (or to a renewal of such a loan or, if the loan is repayable upon demand, to a continuation of such a loan) if the loan bears a reasonable rate of interest, and if (in the case of a making or renewal)-- (a) The employer is prohibited (at the time of the making or renewal) by any law of the United States or regulation thereunder from directly or indirectly pledging, as security for such a loan, a particular class or classes of his assets the value of which (at that time) represents more than one-half of the value of all his or her assets; (b) The making or renewal, as the case may be, is approved in writing as an investment that is consistent with the exempt purposes of the trust by a trustee who is independent of the employer, and no other similar trustee had previously refused to give that written approval; and (c) Immediately following the making or renewal, as the case may be, the aggregate amount loaned by the trust to the employer, without the receipt of adequate security, does not exceed 25 percent of the value of all the assets of the trust. (d) For purposes of subdivision (b), the term "trustee" means, with respect to any trust for which there is more than one trustee who is independent of the employer, a majority of those independent trustees. For purposes of subdivision (c), the determination as to whether any amount loaned by the trust to the employer is loaned without the receipt of adequate security shall be made without regard to Section 17639. SEC. 44. Section 17651 of the Revenue and Taxation Code is amended to read: 17651. (a) There is hereby imposed for each taxable year on the unrelated business taxable income (as defined in Section 23732) of every trust a tax computed as provided in subdivision (e) of Section 17041. In making that computation for purposes of this section, the term "taxable income" as used in subdivisions (a) and (e) of Section 17041 shall be read as "unrelated business taxable income" as defined in Section 23732. (b) The tax imposed by subdivision (a) shall apply in the case of any trust which is exempt, except as provided in this article, from taxation under this part by reason of Section 17631 and which, if it were not for such exemption, would be subject to Chapter 9 (commencing with Section 17731) relating to estates, trusts, beneficiaries, and decedents. SEC. 45. Section 17671 of the Revenue and Taxation Code is amended to read: 17671. Section 584 of the Internal Revenue Code, relating to common trust funds, shall apply, except as otherwise provided. SEC. 46. Section 17732 of the Revenue and Taxation Code is amended to read: 17732. Section 642(b) of the Internal Revenue Code, relating to deduction for personal exemption, shall not apply. SEC. 47. Section 17851 of the Revenue and Taxation Code is amended to read: 17851. Subchapter K of Chapter 1 of Subtitle A of the Internal Revenue Code, relating to partners and partnerships, shall apply, except as otherwise provided. SEC. 48. Section 17852 of the Revenue and Taxation Code is repealed. SEC. 49. Section 17853 of the Revenue and Taxation Code is amended to read: 17853. Section 703(a)(2) of the Internal Revenue Code is modified to additionally provide that the deduction for taxes provided in Section 164(a) of the Internal Revenue Code with respect to taxes, described in Section 18006, paid to another state shall not be allowed to the partnership. SEC. 50. Section 17857 of the Revenue and Taxation Code is amended to read: 17857. Section 751(e) of the Internal Revenue Code, relating to the limitation on tax attributable to deemed sales of Section 1248 stock, shall not apply. SEC. 51. Section 17859 of the Revenue and Taxation Code is repealed. SEC. 52. Section 17860 of the Revenue and Taxation Code is repealed. SEC. 53. Section 17935 of the Revenue and Taxation Code is amended to read: 17935. (a) For each taxable year beginning on or after January 1, 1997, every limited partnership doing business in this state (as defined by Section 23101) and required to file a return under Section 18633 shall pay annually to this state a tax for the privilege of doing business in this state in an amount equal to the applicable amount specified in Section 23153. (b) (1) In addition to any limited partnership that is doing business in this state and therefore is subject to the tax imposed by subdivision (a), for each taxable year beginning on or after January 1, 1997, every limited partnership that has executed, acknowledged, and filed a certificate of limited partnership with the Secretary of State pursuant to Section 15621 of the Corporations Code, and every foreign limited partnership that has registered with the Secretary of State pursuant to Section 15692 of the Corporations Code, shall pay annually the tax prescribed in subdivision (a). The tax shall be paid for each taxable year, or part thereof, until a certificate of cancellation is filed on behalf of the limited partnership with the office of the Secretary of State pursuant to Section 15623 or 15696 of the Corporations Code. (2) If a taxpayer files a return with the Franchise Tax Board that is designated its final return, that board shall notify the taxpayer that the minimum tax is due annually until a certificate of cancellation is filed with the Secretary of State pursuant to Section 15623 or 15696 of the Corporations Code. (c) The tax imposed under this section shall be due and payable on the date the return is required to be filed under former Section 18432 or 18633. (d) For purposes of this section, "limited partnership" means any partnership formed by two or more persons under the laws of this state or any other jurisdiction and having one or more general partners and one or more limited partners. (e) Notwithstanding subdivision (b), any limited partnership that ceased doing business prior to January 1, 1997, filed a final return with the Franchise Tax Board for a taxable year ending before January 1, 1997, filed a certificate of dissolution with the Secretary of State pursuant to Section 15623 of the Corporations Code prior to January 1, 1997, and files a certificate of cancellation with the Secretary of State pursuant to that section of the Corporations Code at any time during the period from the date of enactment of the act adding this subdivision to the date that is not later than 60 days after the date of the mailing of a notice of proposed deficiency assessment of tax or the date of the mailing of a notice of tax due (whichever is applicable) for any period following the date the certificate of dissolution was filed with the Secretary of State, shall not be subject to the tax imposed by this section for the period following the date the certificate of dissolution was filed with the Secretary of State. SEC. 54. Section 18601 of the Revenue and Taxation Code is amended to read: 18601. (a) Except as provided in subdivision (b) or (c), every taxpayer subject to the tax imposed by Part 11 (commencing with Section 23001) shall, on or before the 15th day of the third month following the close of its income year, transmit to the Franchise Tax Board a return in a form prescribed by it, specifying for the income year, all the facts as it may by rule, or otherwise, require in order to carry out this part. A tax return, disclosing net income for any income year, filed pursuant to Chapter 2 (commencing with Section 23101) or Chapter 3 (commencing with Section 23501) of Part 11 shall be deemed filed pursuant to the proper chapter of Part 11 for the same income period, if the chapter under which the return is filed is determined erroneous. (b) In the case of cooperative associations described in Section 24404, returns shall be filed on or before the 15th day of the ninth month following the close of its income year. (c) In the case of taxpayers required to file a return for a short period under Section 24634, the due date for the short period return shall be the same as the due date of the federal tax return that includes the net income of the taxpayer for that short period, or the due date specified in subdivision (a) if no federal return is required to be filed that would include the net income for that short period. (d) For income years beginning on or after January 1, 1997, each "S corporation" required to file a return under subdivision (a) for any income year shall, on or before the day on which the return for the income year was filed, furnish each person who is a shareholder at any time during the income year a copy of the information shown on the return. (e) For taxable or income years beginning on or after January 1, 1997: (1) A shareholder of an "S corporation" shall, on the shareholder' s return, treat a Subchapter S item in a manner that is consistent with the treatment of the item on the corporate return. (2) (A) In the case of any Subchapter S item, paragraph (1) shall not apply to that item if both of the following occur: (i) Either of the following occurs: (I) The corporation has filed a return, but the shareholder's treatment of the item on the shareholder's return is, or may be, inconsistent with the treatment of the item on the corporate return. (II) The corporation has not filed a return. (ii) The shareholder files with the Franchise Tax Board a statement identifying the inconsistency. (B) A shareholder shall be treated as having complied with clause (ii) of subparagraph (A) with respect to a Subchapter S item if the shareholder does both of the following: (i) Demonstrates to the satisfaction of the Franchise Tax Board that the treatment of the Subchapter S item on the shareholder's return is consistent with the treatment of the item on the schedule furnished to the shareholder by the corporation. (ii) Elects to have this paragraph apply with respect to that item. (3) In any case described in subclause (I) of clause (i) of subparagraph (A) of paragraph (2), and in which the shareholder does not comply with clause (ii) of subparagraph (A) of paragraph (2), any adjustment required to make the treatment of the items by the shareholder consistent with the treatment of the items on the corporate return shall be treated as arising out of a mathematical error and assessed and collected under Section 19051. (4) For purposes of this subdivision, "Subchapter S item" means any item of an "S corporation" to the extent provided by regulations that, for purposes of Part 10 (commencing with Section 17001) or this part, the item is more appropriately determined at the corporation level than at the shareholder level. (5) The penalties imposed under Article 7 (commencing with Section 19131) of Chapter 4 shall apply in the case of a shareholder's negligence in connection with, or disregard of, the requirements of this section. SEC. 54.5. Section 18604 of the Revenue and Taxation Code is amended to read: 18604. (a) The Franchise Tax Board may grant a reasonable extension of time for filing any return, declaration, statement, or other document required by Part 11 (commencing with Section 23001), in the manner and form as the Franchise Tax Board may determine. No extension or extensions shall aggregate more than seven months from the due date for filing the return. (b) An extension of time granted pursuant to this section is not an extension of time for payment of tax required to be paid on or before the due date of the return without regard to extension. Underpayment of tax penalties shall be imposed as provided by law without regard to any extension granted under this section. SEC. 55. Section 18605 of the Revenue and Taxation Code is repealed. SEC. 56. Section 18622 of the Revenue and Taxation Code is amended to read: 18622. (a) If any item required to be shown on a federal tax return, including any gross income, deduction, penalty, credit, or tax for any year of any taxpayer is changed or corrected by the Commissioner of Internal Revenue or other officer of the United States or other competent authority, or where a renegotiation of a contract or subcontract with the United States results in a change in gross income or deductions, that taxpayer shall report each change or correction, or the results of the renegotiation, within six months after the date of each final federal determination of the change or correction or renegotiation, or as required by the Franchise Tax Board, and shall concede the accuracy of the determination or state wherein it is erroneous. For any individual subject to tax under Part 10 (commencing with Section 17001), changes or corrections need not be reported unless they increase the amount of tax payable under Part 10 (commencing with Section 17001) for any year. (b) Any taxpayer filing an amended return with the Commissioner of Internal Revenue shall also file within six months thereafter an amended return with the Franchise Tax Board which shall contain any information as it shall require. For any individual subject to tax under Part 10 (commencing with Section 17001), an amended return need not be filed unless the change therein would increase the amount of tax payable under Part 10 (commencing with Section 17001) for any year. (c) Notification of a change or correction by the Commissioner of Internal Revenue or other officer of the United States or other competent authority, or renegotiation of a contract or subcontract with the United States that results in a change in any item or the filing of an amended return must be sufficiently detailed to allow computation of the resulting California tax change and shall be reported in the form and manner as prescribed by the Franchise Tax Board. (d) For purposes of this part, the date of each final federal determination shall be the date on which each adjustment or resolution resulting from an Internal Revenue Service examination is assessed pursuant to Section 6203 of the Internal Revenue Code. SEC. 57. Section 18662 of the Revenue and Taxation Code is amended to read: 18662. (a) The Franchise Tax Board may, by regulation, require any person, in whatever capacity acting (including lessees or mortgagors of real or personal property, fiduciaries, employers, and any officer or department of the state or any political subdivision or agency of the state, or any city organized under a freeholder's charter, or any political body not a subdivision or agency of the state), having the control, receipt, custody, disposal, or payment of items of income specified in subdivision (b), to withhold an amount, determined by the Franchise Tax Board to reasonably represent the amount of tax due when the items of income are included with other income of the taxpayer, and to transmit the amount withheld to the Franchise Tax Board at the time as it may designate. (b) The items of income referred to in subdivision (a) are interest, dividends, rents, prizes and winnings, premiums, annuities, emoluments, compensation for services, including bonuses, partnership income or gains, and other fixed or determinable annual or periodical gains, profits, and income. (c) The Franchise Tax Board may authorize the tax under subdivision (a) to be deducted and withheld from the interest upon any securities the owners of which are not known to the withholding agent. (d) Any person failing to withhold from any payments any amounts required by subdivision (a) to be withheld is liable for the amount withheld or the amount of taxes due from the person to whom the payments are made to an extent not in excess of the amounts required to be withheld, whichever is greater, unless it is shown that the failure to withhold is due to reasonable cause. (e) (1) In the case of any disposition of a California real property interest by a person (but not a partnership as determined in accordance with Subchapter K of Chapter 1 of Subtitle A of the Internal Revenue Code, or a corporation), when the return required to be filed with the Secretary of the Treasury under Section 6045(e) of the Internal Revenue Code indicates, or the authorization for the disbursement of the transaction's funds instructs, that the funds be disbursed either to a transferor with a last known street address outside the boundaries of this state at the time of the transfer of the title to the California real property or to the financial intermediary of the transferor, the transferee shall be required to withhold an amount equal to 31/3 percent of the sales price of the California real property conveyed. (2) In the case of any disposition of a California real property interest by a corporation, the transferee shall be required to withhold an amount equal to 31/3 percent of the sales price of the California real property conveyed, if the corporation immediately after the transfer of the title to the California real property has no permanent place of business in California. For purposes of this subdivision, a corporation has no permanent place of business in California if all of the following apply: (A) It is not organized and existing under the laws of California. (B) It does not qualify with the office of the Secretary of State to transact business in California. (C) It does not maintain and staff a permanent office in California. (3) Notwithstanding any other provision of this subdivision, all of the following shall apply: (A) No transferee shall be required to withhold any amount under this subdivision if the sales price of the California real property conveyed does not exceed one hundred thousand dollars ($100,000). (B) No transferee shall be required to withhold any amount under this subdivision unless written notification of the withholding requirements of this subdivision has been provided by the real estate escrow person. (C) No transferee shall be required to withhold under this subdivision when the transferor is a bank acting as trustee other than a trustee of a deed of trust. (D) No transferee shall be required to withhold under this subdivision when the transferee is a corporate beneficiary under a mortgage or beneficiary under a deed of trust and the California real property is acquired in judicial or nonjudicial foreclosure or by a deed in lieu of foreclosure. (E) No transferee shall be required to withhold any amount under this subdivision if the transferee, in good faith and based on all the information of which he or she has knowledge, relies on a written certificate executed by the transferor, certifying under penalty of perjury, any of the following: (i) That the transferor is a resident of California. (ii) That the California real property being conveyed is the principal residence of the transferor, within the meaning of Section 121 of the Internal Revenue Code. (iii) The transferor, if a corporation, has a permanent place of business in California. (4) (A) At the request of the transferor, the Franchise Tax Board may authorize that a reduced amount or no amount be withheld under this subdivision if the Franchise Tax Board determines that to substitute a reduced amount or no amount shall not jeopardize the collection of tax imposed by Part 10 (commencing with Section 17001) or Part 11 (commencing with Section 23001). If the transferor provides documentation sufficient for the Franchise Tax Board to determine the actual gain required to be recognized on the transaction, the Franchise Tax Board may authorize a reduced amount based on the amount of the gain, as determined, which will result in a sum which is substantially equivalent to the amount of tax reasonably estimated to be due under Part 10 (commencing with Section 17001) or Part 11 (commencing with Section 23001) from the inclusion of the gain in the gross amount of the transferor. (B) Within 45 days after receiving a request that a reduced amount or no amount be withheld, the Franchise Tax Board shall either authorize a reduced amount or no amount, or deny the request. (C) In the case where the parties to the transaction are requesting that a reduced amount or no amount be withheld and the response by the Franchise Tax Board to the request has not been received at the time title to the California real property is transferred, the parties may direct the real estate escrow person to hold in trust for 45 days the amount required to be withheld under this subdivision. The parties shall instruct the real estate escrow person that at the end of 45 days the real estate escrow person shall remit the amount withheld to the Franchise Tax Board in accordance with this section, unless the Franchise Tax Board has authorized that a reduced amount or no amount be withheld. (5) Amounts withheld and payments made in accordance with this subdivision shall be reported and remitted to the Franchise Tax Board in the form and at the time as the Franchise Tax Board shall determine. (6) "California real property interest" means an interest in real property located in California and defined in Section 897(c)(1)(A)(i) of the Internal Revenue Code. (7) For purposes of this subdivision, "financial intermediary" means an agent for the purpose of receiving and transferring funds to a principal. (8) For purposes of this subdivision, "real estate escrow person" means any of the following persons involved in the real estate transaction: (A) The person (including any attorney, escrow company, or title company) responsible for closing the transaction. (B) If no other person described in subparagraph (A) is responsible for closing the transaction, then any other person who receives and disburses the consideration or value for the interest or property conveyed. (9) (A) Unless the real estate escrow person provides "assistance," it shall be unlawful for any real estate escrow person to charge any customer for complying with the requirements of this subdivision. (B) For purposes of this paragraph, "assistance" includes, but is not limited to, helping the parties clarify with the Franchise Tax Board the issue of whether withholding is required under this subdivision, helping the parties request that the Franchise Tax Board authorize a reduced amount or no amount be withheld under this subdivision, or, upon request of the parties, withholding an amount under this subdivision and remitting the amount to the Franchise Tax Board. (C) For purposes of this paragraph, "assistance" does not include providing the written notification of the withholding requirements of this subdivision, or providing the certification that either: (i) The transferor is a resident of California or that the California real property being conveyed is the transferor's principal residence. (ii) The transferor, if a corporation, has a permanent place of business in California. (D) In a case where the real estate escrow person provides "assistance" in complying with the withholding requirements of this subdivision, it shall be unlawful for the real estate escrow person to charge any customer a fee that exceeds forty-five dollars ($45). (10) For purposes of this subdivision, "sales price" means the sum of all of the following: (A) The cash paid, or to be paid. The term "cash paid, or to be paid" does not include stated or unstated interest or original issue discount (as determined by Sections 1271 to 1275, inclusive, of the Internal Revenue Code). (B) The fair market value of other property transferred, or to be transferred. (C) The outstanding amount of any liability assumed by the transferee or to which the California real property interest is subject immediately before and after the transfer. (f) Whenever any person has withheld any amount pursuant to this section, the amount so withheld shall be held in trust for the State of California. The amount of the fund shall be assessed, collected, and paid in the same manner and subject to the same provisions and limitations (including penalties) as are applicable with respect to the taxes imposed by Part 10 (commencing with Section 17001), Part 11 (commencing with Section 23001), or this part. (g) Withholding shall not be required under this section with respect to wages, salaries, fees, or other compensation paid by a corporation for services performed in California for that corporation to a nonresident corporate director for director services, including attendance at a board of directors' meeting. (h) In the case of any payment described in subdivision (g), the person making the payment shall do each of the following: (1) File a return with the Franchise Tax Board at the time and in the form and manner specified by the Franchise Tax Board. (2) Provide the payee with a statement at the time and in the form and manner specified by the Franchise Tax Board. SEC. 58. Section 18711 of the Revenue and Taxation Code is amended to read: 18711. (a) Any individual may designate on the tax return that a contribution in excess of the tax liability, if any, be made to the State Children's Trust Fund. (b) The contribution shall be in full dollar amounts and may be made individually by each signatory on the joint return. (c) A designation under subdivision (a) shall be made for any taxable year on the initial return for that taxable year, and once made shall be irrevocable. In the event that payments and credits reported on the return, together with any other credits associated with the taxpayer's account do not exceed the tax liability, if any, shown thereupon, the return shall be treated as though no designation has been made. (d) The Franchise Tax Board shall revise the form of the return to include a space labeled the "State Children's Trust Fund for the Prevention of Child Abuse" to allow for the designation permitted under subdivision (a). (e) A deduction shall be allowed under Article 6 (commencing with Section 17201) of Chapter 3 of Part 10 for any contribution made pursuant to subdivision (a). SEC. 59. Section 18721 of the Revenue and Taxation Code is amended to read: 18721. (a) Any individual may designate on the tax return that a contribution in excess of the tax liability, if any, be made to the California Fund for Senior Citizens established by Section 18722 to be used to conduct the sessions of the California Senior Legislature and to support its ongoing activities on behalf of older persons. (b) The contribution shall be in full dollar amounts and may be made individually by each signatory on the joint return. (c) A designation under subdivision (a) shall be made for any taxable year on the initial return for that taxable year, and once made shall be irrevocable. In the event that payments and credits reported on the return, together with any other credits associated with the individual's account do not exceed the tax liability, if any, shown thereupon, the return shall be treated as though no designation has been made. (d) The Franchise Tax Board shall revise the forms of the return to include a space labeled the "California Fund for Senior Citizens" to allow for the designation permitted under subdivision (a). The forms shall also include in the instructions the information that the contribution may be in the amount of one dollar ($1) or more and that the contribution will be used to conduct the sessions of the California Senior Legislature and to support its ongoing activities on behalf of older persons. (e) A deduction shall be allowed under Article 6 (commencing with Section 17201) of Chapter 3 of Part 10 for any contribution made pursuant to subdivision (a). SEC. 60. Section 18741 of the Revenue and Taxation Code is amended to read: 18741. (a) Any individual may designate on the tax return that a contribution in excess of the tax liability, if any, be made to the Endangered and Rare Fish, Wildlife, and Plant Species Conservation and Enhancement Account in the Fish and Game Preservation Fund. (b) The contribution shall be in full dollar amounts and may be made individually by each signatory on a joint return. (c) A designation under subdivision (a) shall be made for any taxable year on the initial return for that taxable year, and once made shall be irrevocable. If payments and credits reported on the return, together with any other credits associated with the individual's account, do not exceed the tax liability, if any, shown thereon, the return shall be treated as though no designation has been made. (d) The Franchise Tax Board shall revise the form of the return to include a space labeled "Rare and Endangered Species Preservation Program" to allow for the designation permitted under subdivision (a). (e) A deduction shall be allowed under Article 6 (commencing with Section 17201) of Chapter 3 of Part 10 for any contribution made pursuant to subdivision (a). SEC. 61. Section 18763 of the Revenue and Taxation Code is amended to read: 18763. (a) Any individual may designate on the tax return that a contribution in excess of the tax liability, if any, be made to the California Alzheimer's Disease and Related Disorders Research Fund, that is established by Section 18764. (b) The contributions shall be in full dollar amounts and may be made individually by each signatory on the joint return. (c) A designation under subdivision (a) shall be made for any taxable year on the individual return for that taxable year, and once made shall be irrevocable. In the event that payments and credits reported on the return, together with any other credits associated with the individual's account, do not exceed the individual's tax liability, the return shall be treated as though no designation has been made. (d) The Franchise Tax Board shall revise the forms of the return to include a space labeled the "Alzheimer's Disease/Related Disorders Fund" to allow for the designation permitted under subdivision (a). The forms shall also include in the instructions information that the contribution may be in the amount of one dollar ($1) or more and that the contribution shall be used to conduct research relating to the cure and treatment of Alzheimer's disease. (e) A deduction shall be allowed under Article 6 (commencing with Section 17201) of Chapter 3 of Part 10 for any contribution made pursuant to subdivision (a). SEC. 62. Section 18782 of the Revenue and Taxation Code is amended to read: 18782. (a) Any individual may designate on the tax return that a contribution in excess of the tax liability, if any, be made to the D.A.R.E. California (Drug Abuse Resistance Education) Fund, which is established by Section 18783. That designation is to be used as a voluntary checkoff on the tax return. (b) The contributions shall be in full dollar amounts and may be made individually by each signatory on the joint return. (c) A designation shall be made for any taxable year on the initial return for that taxable year, and once made shall be irrevocable. In the event that payments and credits reported on the return, together with any other credits associated with the taxpayer' s account, do not exceed the taxpayer's liability, the return shall be treated as though no designation has been made. (d) The Franchise Tax Board shall revise the forms of the return to include a space labeled the "D.A.R.E. California (Drug Abuse Resistance Education) Fund" to allow for the designation permitted. The forms shall also include in the instructions information that the contribution may be in the amount of one dollar ($1) or more and that the contribution shall be used for purposes of drug abuse resistance education. (e) A deduction shall be allowed under Article 6 (commencing with Section 17201) of Chapter 3 of Part 10 for any contribution made pursuant to subdivision (a). SEC. 63. Section 18793 of the Revenue and Taxation Code is amended to read: 18793. (a) Any individual may designate on the tax return that a contribution in excess of the tax liability, if any, be made to the California Breast Cancer Research Fund, which is established by Section 18794. (b) The contributions shall be in full dollar amounts and may be made individually by each signatory on the joint return. (c) A designation shall be made for any taxable year on the individual return for that taxable year, and once made shall be irrevocable. In the event that payments and credits reported on the return, together with any other credits associated with the individual's account, do not exceed the individual's liability, the return shall be treated as though no designation has been made. (d) The Franchise Tax Board shall revise the forms of the return to include a space labeled the "California Breast Cancer Research Fund" to allow for the designation permitted. The forms shall also include in the instructions information that the contribution may be in the amount of one dollar ($1) or more and that the contribution shall be used to conduct research relating to the cure, screening, and treatment of breast cancer. (e) A deduction shall be allowed under Article 6 (commencing with Section 17201) of Chapter 3 of Part 10 for any contribution made pursuant to subdivision (a). SEC. 64. Section 18801 of the Revenue and Taxation Code is amended to read: 18801. (a) Any individual may designate on the tax return that a contribution in excess of the tax liability, if any, be made to the California Firefighters' Memorial Fund, which is established by Section 18802. That designation is to be used as a voluntary checkoff on the tax return. (b) The contributions shall be in full dollar amounts and may be made individually by each signatory on the joint return. (c) A designation shall be made for any taxable year on the initial return for that taxable year, and once made shall be irrevocable. In the event that payments and credits reported on the return, together with any other credits associated with the taxpayer' s account, do not exceed the taxpayer's liability, the return shall be treated as though no designation has been made. (d) The Franchise Tax Board shall revise the forms of the return to include a space labeled the "California Firefighters' Memorial Fund" to allow for the designation permitted. The forms shall also include in the instructions information that the contribution may be in the amount of one dollar ($1) or more and that the contribution shall be used to construct a memorial to California firefighters on the grounds of the State Capitol. (e) A deduction shall be allowed under Article 6 (commencing with Section 17201) of Chapter 3 of Part 10 for any contribution made pursuant to subdivision (a). SEC. 65. Section 18812 of the Revenue and Taxation Code is amended to read: 18812. (a) Any individual may designate on the tax return that a contribution in excess of the tax liability, if any, be made to the California Public School Library Protection Fund, which is established by Section 18813. That designation is to be used as a voluntary checkoff on the tax return. (b) The contributions shall be in full dollar amounts and may be made individually by each signatory on the joint return. (c) A designation shall be made for any taxable year on the initial return for that taxable year, and once made shall be irrevocable. In the event that payments and credits reported on the return, together with any other credits associated with the taxpayer' s account, do not exceed the taxpayer's liability, the return shall be treated as though no designation has been made. (d) The Franchise Tax Board shall revise the forms of the return to include a space labeled the "California Public School Library Protection Fund" to allow for the designation permitted. The forms shall also include in the instructions information that the contribution may be in the amount of one dollar ($1) or more and that the contribution shall be used to purchase books and library media technology for schools as described in Sections 18177 and 18178 of the Education Code. (e) A deduction shall be allowed under Article 6 (commencing with Section 17201) of Chapter 3 of Part 10 for any contribution made pursuant to subdivision (a). SEC. 66. Section 18821 of the Revenue and Taxation Code is amended to read: 18821. (a) Any individual may designate on the tax return that a contribution in excess of the tax liability, if any, be made to the California Mexican American Veterans' Memorial Beautification and Enhancement Account in the General Fund established by Section 1340 of the Military and Veterans Code. That designation is to be used as a voluntary checkoff on the tax return only after the Franchise Tax Board has been notified in writing that construction of the veterans' memorial has commenced. If the Franchise Tax Board has been notified in writing by the Veterans' Memorial Commission at any time during the taxable year that construction has commenced, the California Mexican American Veterans' Memorial Beautification and Enhancement Account shall first appear for contribution on the tax return filed for the taxable year beginning on or after January 1 of that year. (b) The contributions shall be in full dollar amounts and may be made individually by each signatory on the joint return. (c) A designation under subdivision (a) shall be made on the initial return for that taxable year, and once made shall be irrevocable. In the event that payments and credits reported on the return, together with any other credits associated with the taxpayer' s account, do not exceed the taxpayer's liability, the return shall be treated as though no designation has been made. (d) The Franchise Tax Board shall revise the forms of the return to include a space labeled the "California Mexican American Veterans' Memorial" to allow for the designation permitted under subdivision (a). The forms shall also include in the instructions information that the contribution may be in the amount of one dollar ($1) or more and that the contribution shall be used to beautify and enhance an existing memorial. (e) A deduction shall be allowed under Article 6 (commencing with Section 17201) of Chapter 3 of Part 10 for any contribution made pursuant to subdivision (a). SEC. 67. Section 18841 of the Revenue and Taxation Code is amended to read: 18841. (a) Any individual may designate on the tax return that a contribution in excess of the tax liability, if any, be made to the California Military Museum Fund, which is established by Section 18842. That designation is to be used as a voluntary checkoff on the tax return. (b) The contributions shall be in full dollar amounts and may be made by the signatory on an individual return or individually by each signatory on a joint return. (c) A designation shall be made for any taxable year on the initial return for that taxable year, and once made shall be irrevocable. In the event that payments and credits reported on the return, together with any other credits associated with the taxpayer' s account, do not exceed the taxpayer's liability, the return shall be treated as though no designation has been made. If the amount available for designation is insufficient to satisfy the total amount designated, the amount designated shall be adjusted to correspond to the amount available for designation. (d) The Franchise Tax Board shall revise the forms of the return to include a space labeled the "California Military Museum Fund" to allow for the designation permitted. The forms shall also include in the instructions information that the contribution may be in the amount of one dollar ($1) or more and that the contribution shall be used to operate the California Military Museum. It is the intent of the Legislature that tax returns for taxable years during which this article remains in effect shall include a space for the California Military Museum Fund. (e) A deduction shall be allowed under Article 6 (commencing with Section 17201) of Chapter 3 of Part 10 for any contribution made pursuant to subdivision (a). SEC. 68. Section 18851 of the Revenue and Taxation Code is amended to read: 18851. (a) An individual may designate on the tax return that a contribution in excess of the tax liability, if any, be made to the Emergency Food Assistance Program Fund, which is established by Section 18852. That designation is to be used as a voluntary checkoff on the tax return. (b) The contributions shall be in full dollar amounts and may be made individually by each signatory on a joint return. (c) A designation shall be made for any taxable year on the initial return for that taxable year and once made is irrevocable. If payments and credits reported on the return, together with any other credits associated with the taxpayer's account do not exceed the taxpayer's liability, the return shall be treated as though no designation has been made. (d) The Franchise Tax Board shall revise the form of the return to include a space labeled the "Emergency Food Assistance Program Fund" to allow for the designation permitted. The form shall also include in the instructions information that the contribution may be in the amount of one dollar ($1) or more and that the contribution shall be used for the Emergency Food Assistance Program. (e) A deduction shall be allowed under Article 6 (commencing with Section 17201) of Chapter 3 of Part 10 for any contribution made pursuant to subdivision (a). SEC. 69. Section 18871 of the Revenue and Taxation Code is amended to read: 18871. In implementing this chapter, all of the following requirements shall apply: (a) Unless otherwise specifically required by law, each voluntary contribution fund or account established by this chapter shall be included on the forms of the return through the taxable year immediately preceding the year of repeal of the article establishing that voluntary contribution fund or account. (b) Notwithstanding the repeal of any article of this chapter, the voluntary contribution fund or account specified in that article shall continue in effect until December 31 of the year of the repeal of that article, and any contribution designated pursuant to that article on a timely filed initial return for the taxable year immediately preceding the date of repeal shall be transferred and disbursed, and all costs incurred by the Franchise Tax Board and Controller in connection with the transfer and disbursement of these contribution amounts shall continue to be paid, in accordance with that article as it read immediately prior to its repeal. (c) Unless otherwise specifically required by law, a contribution made to any voluntary contribution fund or account established by this chapter shall be subject to the following provisions: (1) In the event that no designee is specified, the contribution shall, after reimbursement of the direct actual costs of the Franchise Tax Board for the collection and administration of contributions made under this article, be transferred to the General Fund. (2) In the event an individual designates a contribution to more than one account or fund listed on the tax return, and the amount available is insufficient to satisfy the total amount designated, the contribution shall be allocated among the designees on a pro rata basis. SEC. 70. Section 19023 of the Revenue and Taxation Code is amended to read: 19023. For purposes of this article, in the case of a corporation, other than a bank or financial corporation, or an organization described in Section 23731, the term "estimated tax" means the amount which the corporation or organization described in Section 23731 estimates as the amount of the tax imposed by Part 11 (commencing with Section 23001) and the amount of its liability for the tax of each wholly owned subsidiary under Section 23800.5; but in no event shall the estimated tax of a corporation subject to the tax imposed by Article 2 (commencing with Section 23151) of Chapter 2 of Part 11 be less than the minimum tax prescribed in Section 23153. SEC. 70.5. Section 19053 of the Revenue and Taxation Code is repealed. SEC. 71. Section 19059 of the Revenue and Taxation Code is amended to read: 19059. (a) If a taxpayer is required by subdivision (a) of Section 18622 to report a change or correction by the Commissioner of Internal Revenue or other officer of the United States or other competent authority and does report the change or correction within six months after the final federal determination, or the Internal Revenue Service reports that change or correction within six months after the final federal determination, a notice of proposed deficiency assessment resulting from those adjustments may be mailed to the taxpayer within two years from the date when the notice is filed with the Franchise Tax Board by the taxpayer or the Internal Revenue Service, or within the periods provided in Section 19057, 19058, or 19065, whichever period expires later. (b) If a taxpayer is required by subdivision (b) of Section 18622 to file an amended return and does file the return within six months of filing an amended return with the Commissioner of Internal Revenue, a notice of proposed deficiency assessment in excess of the self-assessed tax on the amended return, and resulting from the adjustments may be mailed to the taxpayer within two years from the date when the amended return is filed with the Franchise Tax Board by the taxpayer, or within the periods provided in Section 19057, 19058, or 19065, whichever period expires later. SEC. 72. Section 19060 of the Revenue and Taxation Code is amended to read: 19060. (a) If a taxpayer fails to report a change or correction by the Commissioner of Internal Revenue or other officer of the United States or other competent authority or fails to file an amended return as required by Section 18622, a notice of proposed deficiency assessment resulting from the adjustment may be mailed to the taxpayer at any time. (b) If, after the six-month period required in Section 18622, a taxpayer or the Internal Revenue Service reports a change or correction by the Commissioner of Internal Revenue or other officer of the United States or other competent authority or files an amended return as required by Section 18622, a notice of proposed deficiency assessment resulting from the adjustment may be mailed to the taxpayer within four years from the date the taxpayer or the Internal Revenue Service notifies the Franchise Tax Board of that change or correction or files that return. SEC. 73. Section 19089 of the Revenue and Taxation Code is amended to read: 19089. (a) Every trustee in a case under Title 11 of the United States Code, receiver, assignee for the benefit of creditors or like fiduciary shall give notice of qualification as such to the Franchise Tax Board in the manner and at the time that may be required by regulations of the Franchise Tax Board. The Franchise Tax Board may by regulation provide for any exemptions from the requirements of this section that the Franchise Tax Board deems proper. (b) If the regulations issued pursuant to this section require the giving of any notice by any fiduciary in any case under Title 11 of the United States Code, or by a receiver in any other court proceeding to the Franchise Tax Board of qualification as such, the running of the period of limitations for mailing a notice of proposed deficiency assessment shall be suspended for the period from the date of the institution of the proceeding to a date 30 days after the date upon which the notice from the receiver or other fiduciary is received by the Franchise Tax Board; but the suspension under this section shall in no case be for a period in excess of two years. SEC. 74. Section 19106 of the Revenue and Taxation Code is amended to read: 19106. Except as provided in Section 19111, interest shall be imposed under Section 19101 with respect to any assessable penalty, additional amount, or addition to tax imposed under this article, as follows: (a) In the case of a penalty, additional amount, or addition to tax which, when assessed, is due and payable on notice and demand, other than a penalty imposed under Section 19131 (relating to failure to file a return on or before the due date), Section 19132 (relating to underpayment of tax), or Section 19164 (relating to imposition of the accuracy-related penalty), interest shall be imposed from the date of the notice and demand to the date of payment. (b) In the case of a penalty, additional amount, or addition to tax which is initially assessed as a deficiency, other than a penalty imposed under Section 19131 (relating to failure to file a return on or before the due date), Section 19132 (relating to underpayment of tax), or Section 19164 (relating to imposition of the accuracy-related penalty), interest shall be imposed from the date of the notice of proposed deficiency assessment to the date of payment. (c) In the case of a penalty or addition to tax imposed by Section 19131 (relating to failure to file a return on or before the due date), Section 19132 (relating to underpayment of tax), or Section 19164 (relating to imposition of the accuracy-related penalty), for the period that-- (1) Begins on the date on which the return of the tax with respect to which that penalty is imposed is required to be filed (including any extensions), and (2) Ends on the date of payment of that penalty or addition to tax. SEC. 75. Section 19145 of the Revenue and Taxation Code is amended to read: 19145. For purposes of Section 19142, the period of the underpayment shall run from the date the installment was required to be made to whichever of the following dates is the earlier: (a) The 15th day of the third month following the close of the income year, except in the case of an organization described in Section 23731 subject to the tax imposed under Section 23731, in which case "fifth" shall be substituted for "third." (b) With respect to any portion of the underpayment, the date on which that portion is paid. For purposes of this subdivision, a payment of estimated tax on any installment date shall be considered a payment of any previous underpayment only to the extent the payment exceeds the amount of the installment determined under subdivision (a) of Section 19144 for the installment date. SEC. 75.3. Section 19151 of the Revenue and Taxation Code is amended to read: 19151. Notwithstanding Sections 19142 to 19150, inclusive, the addition to the tax with respect to underpayment of any installment shall not be imposed on an exempt organization described in Section 23731 whose exemption is retroactively revoked unless the organization described in Section 23731 has notice that the estimated tax should have been paid. The denial of the organization's exemption application or the revocation of its exemption by the Internal Revenue Service normally satisfies the notice requirement. SEC. 75.5. Section 19311 of the Revenue and Taxation Code is amended to read: 19311. (a) If a change or correction is made or allowed by the Commissioner of Internal Revenue or other officer of the United States or other competent authority, a claim for credit or refund resulting from the adjustment may be filed by the taxpayer within two years from the date of the final federal determination (as defined in Section 18622), or within the period provided in Section 19306, 19307, or 19308, whichever period expires later. (b) This section shall apply to any federal determination that becomes final on or after January 1, 1993. SEC. 76. Section 19411 of the Revenue and Taxation Code is amended to read: 19411. The Franchise Tax Board may recover any refund or credit or any portion thereof which is erroneously made or allowed, together with interest at the adjusted annual rate established pursuant to Section 19521 from the date demand for recovery was made, in an action brought in a court of competent jurisdiction in the County of Sacramento in the name of the people of the State of California within whichever of the following periods expires the later: (a) Two years after the refund or credit was made. (b) During the period within which the Franchise Tax Board may mail a notice of proposed deficiency assessment. (c) In the case of a corporation, interest shall be computed from the date the refund was made or the credit allowed, instead of the date a demand for recovery was made. SEC. 77. Section 23043 of the Revenue and Taxation Code is repealed. SEC. 78. Section 23153 of the Revenue and Taxation Code, as amended by Chapter 64 of the Statutes of 1999, is amended to read: 23153. (a) Every corporation described in subdivision (b) shall be subject to the minimum franchise tax specified in subdivision (d) from the earlier of the date of incorporation, qualification, or commencing to do business within this state, until the effective date of dissolution or withdrawal as provided in Section 23331 or, if later, the date the corporation ceases to do business within the limits of this state. (b) Unless expressly exempted by this part or the California Constitution, subdivision (a) shall apply to each of the following: (1) Every corporation that is incorporated under the laws of this state. (2) Every corporation that is qualified to transact intrastate business in this state pursuant to Chapter 21 (commencing with Section 2100) of Division 1 of Title 1 of the Corporations Code. (3) Every corporation that is doing business in this state. (c) The following entities are not subject to the minimum franchise tax specified in this section: (1) Credit unions. (2) Nonprofit cooperative associations organized pursuant to Chapter 1 (commencing with Section 54001) of Division 20 of the Food and Agricultural Code that have been issued the certificate of the board of supervisors prepared pursuant to Section 54042 of the Food and Agricultural Code. The association shall be exempt from the minimum franchise tax for five consecutive income years, commencing with the first income year for which the certificate is issued pursuant to subdivision (b) of Section 54042 of the Food and Agricultural Code. This paragraph only applies to nonprofit cooperative associations organized on or after January 1, 1994. (d) (1) Except as provided in paragraph (2), corporations subject to the minimum franchise tax shall pay annually to the state a minimum franchise tax of eight hundred dollars ($800). (2) The minimum franchise tax shall be twenty-five dollars ($25) for each of the following: (A) A corporation formed under the laws of this state whose principal business when formed was gold mining, which is inactive and has not done business within the limits of the state since 1950. (B) A corporation formed under the laws of this state whose principal business when formed was quicksilver mining, which is inactive and has not done business within the limits of the state since 1971, or has been inactive for a period of 24 consecutive months or more. (3) For purposes of paragraph (2), a corporation shall not be considered to have done business if it engages in other than mining. (e) Notwithstanding subdivision (a), for income years beginning on or after January 1, 1999, and before January 1, 2000, every "qualified new corporation" shall pay annually to the state a minimum franchise tax of five hundred dollars ($500) for the second taxable year. This subdivision shall apply to any corporation that is a qualified new corporation and is incorporated on or after January 1, 1999, and before January 1, 2000. (1) The determination of the gross receipts of a corporation, for purposes of this subdivision, shall be made by including the gross receipts of each member of the commonly controlled group, as defined in Section 25105, of which the corporation is a member. (2) "Gross receipts, less returns and allowances reportable to this state," means the sum of the gross receipts from the production of business income, as defined in subdivision (a) of Section 25120, and the gross receipts from the production of nonbusiness income, as defined in subdivision (d) of Section 25120. (3) "Qualified new corporation" means a corporation that is incorporated under the laws of this state or has qualified to transact intrastate business in this state, that begins business operations at or after the time of its incorporation and that reasonably estimates that it will have gross receipts, less returns and allowances, reportable to this state for the income year of one million dollars ($1,000,000) or less. "Qualified new corporation" does not include any corporation that began business operations as a sole proprietorship, a partnership, or any other form of business entity prior to its incorporation. This subdivision shall not apply to any corporation that reorganizes solely for the purpose of reducing its minimum franchise tax. (4) This subdivision shall not apply to limited partnerships, as defined in Section 17935, limited liability companies, as defined in Section 17941, limited liability partnerships, as defined in Section 17948, charitable organizations, as described in Section 23703, regulated investment companies, as defined in Section 851 of the Internal Revenue Code, real estate investment trusts, as defined in Section 856 of the Internal Revenue Code, real estate mortgage investment conduits, as defined in Section 860D of the Internal Revenue Code, financial asset securitization investment trusts, as defined in Section 860L of the Internal Revenue Code, qualified Subchapter S subsidiaries, as defined in Section 1361(b)(3) of the Internal Revenue Code, or to the formation of any subsidiary corporation, to the extent applicable. (5) For any income year beginning on or after January 1, 1999, and before January 1, 2000, if a corporation has qualified to pay five hundred dollars ($500) for the second taxable year under this subdivision, but in its second taxable year, the corporation's gross receipts, as determined under paragraphs (1) and (2), exceed one million dollars ($1,000,000), an additional tax in the amount equal to three hundred dollars ($300) for the second taxable year shall be due and payable by the corporation on the due date of its return, without regard to extension, for that year. (f) (1) Notwithstanding subdivision (a), every corporation that incorporates or qualifies to do business in this state on or after January 1, 2000, shall not be subject to the minimum franchise tax for its first and second taxable years. (2) This subdivision shall not apply to limited partnerships, as defined in Section 17935, limited liability companies, as defined in Section 17941, limited liability partnerships, as defined in Section 17948, charitable organizations, as described in Section 23703, regulated investment companies, as defined in Section 851 of the Internal Revenue Code, real estate investment trusts, as defined in Section 856 of the Internal Revenue Code, real estate mortgage investment conduits, as defined in Section 860D of the Internal Revenue Code, financial asset securitization investment trusts, as defined in Section 860L of the Internal Revenue Code, and qualified Subchapter S subsidiaries, as defined in Section 1361(b)(3) of the Internal Revenue Code, to the extent applicable. (3) This subdivision shall not apply to any corporation that reorganizes solely for the purpose of avoiding payment of its minimum franchise tax. (g) Notwithstanding subdivision (a), a domestic corporation, as defined in Section 167 of the Corporations Code, that files a certificate of dissolution in the office of the Secretary of State pursuant to subdivision (c) of Section 1905 of the Corporations Code and that does not thereafter do business shall not be subject to the minimum franchise tax for income years beginning on or after the date of that filing. (h) The minimum franchise tax imposed by paragraph (1) of subdivision (d) shall not be increased by the Legislature by more than 10 percent during any calendar year. SEC. 79. Section 23221 of the Revenue and Taxation Code, as amended by Section 2 of Chapter 64 of the Statutes of 1999, is amended to read: 23221. (a) Except as provided under subdivisions (b) and (f), a corporation which incorporates under the laws of this state or qualifies to transact intrastate business in this state shall thereupon prepay the minimum tax provided in Section 23153, except that any credit union shall thereupon prepay a tax of twenty-five dollars ($25). The prepayment shall be made to the Secretary of State with the filing of the articles of incorporation or the statement and designation by a foreign corporation. The Secretary of State shall transmit the amount of the prepayment to the Franchise Tax Board. The Franchise Tax Board shall certify to the Secretary of State on an individual or class basis those domestic or foreign corporations which are exempt from prepayment or for which prepayment to the Secretary of State is waived. (b) (1) For income years commencing on or after January 1, 1997, and before January 1, 1999, the amount payable by a qualified new corporation under subdivision (a) shall be six hundred dollars ($600). (2) For income years commencing on or after January 1, 1999, and before January 1, 2000, the amount payable by a qualified new corporation that is incorporated on or after January 1, 1999, under subdivision (a) shall be three hundred dollars ($300). (c) For purposes of this section, "qualified new corporation" means a corporation that begins operation at or after the time of its incorporation and that reasonably estimates that, for the income year, it will have both gross receipts, less returns and allowances reportable to this state, of one million dollars ($1,000,000) or less and a tax liability under Section 23151 that does not exceed eight hundred dollars ($800). "Qualified new corporation" does not include any corporation that began business operations as a sole proprietorship, a partnership, or any other form of business entity prior to its incorporation. (1) The determination of gross receipts of a corporation, for purposes of this section, shall be made by including the gross receipts of each member of the commonly controlled group, as defined in Section 25105, of which the bank or corporation is a member. (2) "Gross receipts, less returns and allowances reportable to this state," means the sum of the gross receipts from the production of business income, as defined in subdivision (a) of Section 25120, and the gross receipts from the production of nonbusiness income, as defined in subdivision (d) of Section 25120. (d) Subdivision (b) shall not apply to any corporation if 50 percent or more of its stock is, or will be upon the initial issuance of stock, owned by another corporation. (e) (1) For income years commencing on or after January 1, 1997, and before January 1, 1999, if a corporation paid six hundred dollars ($600) under paragraph (1) of subdivision (b), but for its first income year the corporation's tax liability under Section 23151 exceeds eight hundred dollars ($800), or the corporation's gross receipts, as determined under paragraph (2) of subdivision (c), exceed one million dollars ($1,000,000), an additional tax in an amount equal to two hundred dollars ($200) shall be due and payable by the corporation on the due date of its return, without regard to extension, for its first income year. (2) For income years commencing on or after January 1, 1999, and before January 1, 2000, if a corporation paid three hundred dollars ($300) under paragraph (2) of subdivision (b), but for its first income year the corporation's tax liability under Section 23151 exceeds eight hundred dollars ($800), or the corporation's gross receipts, as determined under paragraphs (1) and (2) of subdivision (c), exceed one million dollars ($1,000,000), an additional tax in an amount equal to five hundred dollars ($500) shall be due and payable by the corporation on the due date of its return, without regard to extension, for its first income year. (f) Every corporation that incorporates under the laws of this state or qualifies to transact intrastate business in this state on or after January 1, 2000, and before January 1, 2001, shall not be subject to the amount payable under subdivision (a), except that any credit union shall thereupon prepay a tax of twenty-five dollars ($25). (g) This section shall remain in effect only until January 1, 2001, and as of that date is repealed. SEC. 80. Section 23335 of the Revenue and Taxation Code is amended to read: 23335. (a) Any return filed pursuant to Section 18601 that the taxpayer designates in the appropriate place on the form provided by the Franchise Tax Board as the taxpayer's final return as the result of a dissolution or withdrawal shall be treated as a request for a certificate issued by the Franchise Tax Board pursuant to Section 23334 unless the taxpayer has otherwise filed a request with the Franchise Tax Board for that certificate. (b) If a taxpayer has filed a return that is a request for a tax clearance certificate as described in subdivision (a), the Franchise Tax Board shall provide the taxpayer with information, including forms and instructions, regarding all documents that are required by this article to be filed with the Franchise Tax Board and the Secretary of State. SEC. 81. Section 23612.2 of the Revenue and Taxation Code is amended to read: 23612.2. (a) There shall be allowed as a credit against the "tax" (as defined by Section 23036) for the income year an amount equal to the sales or use tax paid or incurred during the income year by the taxpayer in connection with the taxpayer's purchase of qualified property. (b) For purposes of this section: (1) "Taxpayer" means a corporation engaged in a trade or business within an enterprise zone. (2) "Qualified property" means: (A) Any of the following: (i) Machinery and machinery parts used for fabricating, processing, assembling, and manufacturing. (ii) Machinery and machinery parts used for the production of renewable energy resources. (iii) Machinery and machinery parts used for either of the following: (I) Air pollution control mechanisms. (II) Water pollution control mechanisms. (iv) Data processing and communications equipment, including, but not limited to, computers, computer-automated drafting systems, copy machines, telephone systems, and faxes. (v) Motion picture manufacturing equipment central to production and postproduction, including, but not limited to, cameras, audio recorders, and digital image and sound processing equipment. (B) The total cost of qualified property purchased and placed in service in any income year that may be taken into account by any taxpayer for purposes of claiming this credit shall not exceed twenty million dollars ($20,000,000). (C) The qualified property is used by the taxpayer exclusively in an enterprise zone. (D) The qualified property is purchased and placed in service before the date the enterprise zone designation expires, is no longer binding, or becomes inoperative. (3) "Enterprise zone" means the area designated as an enterprise zone pursuant to Chapter 12.8 (commencing with Section 7070) of Division 7 of Title 1 of the Government Code. (c) If the taxpayer has purchased property upon which a use tax has been paid or incurred, the credit provided by this section shall be allowed only if qualified property of a comparable quality and price is not timely available for purchase in this state. (d) In the case where the credit otherwise allowed under this section exceeds the "tax" for the income year, that portion of the credit which exceeds the "tax" may be carried over and added to the credit, if any, in the following year, and succeeding years if necessary, until the credit is exhausted. The credit shall be applied first to the earliest income years possible. (e) Any taxpayer who elects to be subject to this section shall not be entitled to increase the basis of the qualified property as otherwise required by Section 164(a) of the Internal Revenue Code with respect to sales or use tax paid or incurred in connection with the taxpayer's purchase of qualified property. (f) (1) The amount of credit otherwise allowed under this section and Section 23622.7, including any credit carryover from prior years, that may reduce the "tax" for the income year shall not exceed the amount of tax which would be imposed on the taxpayer's business income attributable to the enterprise zone determined as if that attributable income represented all of the income of the taxpayer subject to tax under this part. (2) Attributable income shall be that portion of the taxpayer's California source business income that is apportioned to the enterprise zone. For that purpose, the taxpayer's business income attributable to sources in this state first shall be determined in accordance with Chapter 17 (commencing with Section 25101). That business income shall be further apportioned to the enterprise zone in accordance with Article 2 (commencing with Section 25120) of Chapter 17, modified for purposes of this section in accordance with paragraph (3). (3) Business income shall be apportioned to the enterprise zone by multiplying the total California business income of the taxpayer by a fraction, the numerator of which is the property factor plus the payroll factor, and the denominator of which is two. For purposes of this paragraph: (A) The property factor is a fraction, the numerator of which is the average value of the taxpayer's real and tangible personal property owned or rented and used in the enterprise zone during the taxable year, and the denominator of which is the average value of all the taxpayer's real and tangible personal property owned or rented and used in this state during the taxable year. (B) The payroll factor is a fraction, the numerator of which is the total amount paid by the taxpayer in the enterprise zone during the taxable year for compensation, and the denominator of which is the total compensation paid by the taxpayer in this state during the taxable year. (4) The portion of any credit remaining, if any, after application of this subdivision, shall be carried over to succeeding income years, as if it were an amount exceeding the "tax" for the income year, as provided in subdivision (d). (g) The amendments made to this section by the act adding this subdivision shall apply to income years beginning on or after January 1, 1998. SEC. 82. Section 23622.7 of the Revenue and Taxation Code is amended to read: 23622.7. (a) There shall be allowed a credit against the "tax" (as defined by Section 23036) to a taxpayer who employs a qualified employee in an enterprise zone during the income year. The credit shall be equal to the sum of each of the following: (1) Fifty percent of qualified wages in the first year of employment. (2) Forty percent of qualified wages in the second year of employment. (3) Thirty percent of qualified wages in the third year of employment. (4) Twenty percent of qualified wages in the fourth year of employment. (5) Ten percent of qualified wages in the fifth year of employment. (b) For purposes of this section: (1) "Qualified wages" means: (A) (i) Except as provided in clause (ii), that portion of wages paid or incurred by the taxpayer during the income year to qualified employees that does not exceed 150 percent of the minimum wage. (ii) For up to 1,350 qualified employees who are employed by the taxpayer in the Long Beach Enterprise Zone in aircraft manufacturing activities described in Codes 3721 to 3728, inclusive, and Code 3812 of the Standard Industrial Classification (SIC) Manual published by the United States Office of Management and Budget, 1987 edition, "qualified wages" means that portion of hourly wages that does not exceed 202 percent of the minimum wage. (B) Wages received during the 60-month period beginning with the first day the employee commences employment with the taxpayer. Reemployment in connection with any increase, including a regularly occurring seasonal increase, in the trade or business operations of the taxpayer does not constitute commencement of employment for purposes of this section. (C) Qualified wages do not include any wages paid or incurred by the taxpayer on or after the zone expiration date. However, wages paid or incurred with respect to qualified employees who are employed by the taxpayer within the enterprise zone within the 60-month period prior to the zone expiration date shall continue to qualify for the credit under this section after the zone expiration date, in accordance with all provisions of this section applied as if the enterprise zone designation were still in existence and binding. (2) "Minimum wage" means the wage established by the Industrial Welfare Commission as provided for in Chapter 1 (commencing with Section 1171) of Part 4 of Division 2 of the Labor Code. (3) "Zone expiration date" means the date the enterprise zone designation expires, is no longer binding, or becomes inoperative. (4) (A) "Qualified employee" means an individual who meets all of the following requirements: (i) At least 90 percent of whose services for the taxpayer during the income year are directly related to the conduct of the taxpayer's trade or business located in an enterprise zone. (ii) Performs at least 50 percent of his or her services for the taxpayer during the income year in an enterprise zone. (iii) Is hired by the taxpayer after the date of original designation of the area in which services were performed as an enterprise zone. (iv) Is any of the following: (I) Immediately preceding the qualified employee's commencement of employment with the taxpayer, was a person eligible for services under the federal Job Training Partnership Act (29 U.S.C. Sec. 1501 et seq.), or its successor, who is receiving, or is eligible to receive, subsidized employment, training, or services funded by the federal Job Training Partnership Act, or its successor. (II) Immediately preceding the qualified employee's commencement of employment with the taxpayer, was a person eligible to be a voluntary or mandatory registrant under the Greater Avenues for Independence Act of 1985 (GAIN) provided for pursuant to Article 3.2 (commencing with Section 11320) of Chapter 2 of Part 3 of Division 9 of the Welfare and Institutions Code, or its successor. (III) Immediately preceding the qualified employee's commencement of employment with the taxpayer, was an economically disadvantaged individual 14 years of age or older. (IV) Immediately preceding the qualified employee's commencement of employment with the taxpayer, was a dislocated worker who meets any of the following: (aa) Has been terminated or laid off or who has received a notice of termination or layoff from employment, is eligible for or has exhausted entitlement to unemployment insurance benefits, and is unlikely to return to his or her previous industry or occupation. (bb) Has been terminated or has received a notice of termination of employment as a result of any permanent closure or any substantial layoff at a plant, facility, or enterprise, including an individual who has not received written notification but whose employer has made a public announcement of the closure or layoff. (cc) Is long-term unemployed and has limited opportunities for employment or reemployment in the same or a similar occupation in the area in which the individual resides, including an individual 55 years of age or older who may have substantial barriers to employment by reason of age. (dd) Was self-employed (including farmers and ranchers) and is unemployed as a result of general economic conditions in the community in which he or she resides or because of natural disasters. (ee) Was a civilian employee of the Department of Defense employed at a military installation being closed or realigned under the Defense Base Closure and Realignment Act of 1990. (ff) Was an active member of the armed forces or National Guard as of September 30, 1990, and was either involuntarily separated or separated pursuant to a special benefits program. (gg) Is a seasonal or migrant worker who experiences chronic seasonal unemployment and underemployment in the agriculture industry, aggravated by continual advancements in technology and mechanization. (hh) Has been terminated or laid off, or has received a notice of termination or layoff, as a consequence of compliance with the Clean Air Act. (V) Immediately preceding the qualified employee's commencement of employment with the taxpayer, was a disabled individual who is eligible for or enrolled in, or has completed a state rehabilitation plan or is a service-connected disabled veteran, veteran of the Vietnam era, or veteran who is recently separated from military service. (VI) Immediately preceding the qualified employee's commencement of employment with the taxpayer, was an ex-offender. An individual shall be treated as convicted if he or she was placed on probation by a state court without a finding of guilt. (VII) Immediately preceding the qualified employee's commencement of employment with the taxpayer, was a person eligible for or a recipient of any of the following: (aa) Federal Supplemental Security Income benefits. (bb) Aid to Families with Dependent Children. (cc) Food stamps. (dd) State and local general assistance. (VIII) Immediately preceding the qualified employee's commencement of employment with the taxpayer, was a member of a federally recognized Indian tribe, band, or other group of Native American descent. (IX) Immediately preceding the qualified employee's commencement of employment with the taxpayer, was a resident of a targeted employment area (as defined in Section 7072 of the Government Code). (X) An employee who qualified the taxpayer for the enterprise zone hiring credit under former Section 23622 or the program area hiring credit under former Section 23623. (XI) Immediately preceding the qualified employee's commencement of employment with the taxpayer, was a member of a targeted group, as defined in Section 51(d) of the Internal Revenue Code, or its successor. (B) Priority for employment shall be provided to an individual who is enrolled in a qualified program under the federal Job Training Partnership Act or the Greater Avenues for Independence Act of 1985 or who is eligible as a member of a targeted group under the Work Opportunity Tax Credit (Section 51 of the Internal Revenue Code), or its successor. (5) "Taxpayer" means a corporation engaged in a trade or business within an enterprise zone designated pursuant to Chapter 12.8 (commencing with Section 7070) of Division 7 of Title 1 of the Government Code. (6) "Seasonal employment" means employment by a taxpayer that has regular and predictable substantial reductions in trade or business operations. (c) The taxpayer shall do both of the following: (1) Obtain from either the Employment Development Department, as permitted by federal law, or the local county or city Job Training Partnership Act administrative entity or the local county GAIN office or social services agency, as appropriate, a certification that provides that a qualified employee meets the eligibility requirements specified in clause (iv) of subparagraph (A) of paragraph (4) of subdivision (b). The Employment Development Department may provide preliminary screening and referral to a certifying agency. The Employment Development Department shall develop a form for this purpose. (2) Retain a copy of the certification and provide it upon request to the Franchise Tax Board. (d) (1) For purposes of this section: (A) All employees of all corporations which are members of the same controlled group of corporations shall be treated as employed by a single taxpayer. (B) The credit, if any, allowable by this section to each member shall be determined by reference to its proportionate share of the expense of the qualified wages giving rise to the credit, and shall be allocated in that manner. (C) For purposes of this subdivision, "controlled group of corporations" means "controlled group of corporations" as defined in Section 1563(a) of the Internal Revenue Code, except that: (i) "More than 50 percent" shall be substituted for "at least 80 percent" each place it appears in Section 1563(a)(1) of the Internal Revenue Code. (ii) The determination shall be made without regard to subsections (a)(4) and (e)(3)(C) of Section 1563 of the Internal Revenue Code. (2) If an employer acquires the major portion of a trade or business of another employer (hereinafter in this paragraph referred to as the "predecessor") or the major portion of a separate unit of a trade or business of a predecessor, then, for purposes of applying this section (other than subdivision (e)) for any calendar year ending after that acquisition, the employment relationship between a qualified employee and an employer shall not be treated as terminated if the employee continues to be employed in that trade or business. (e) (1) (A) If the employment, other than seasonal employment, of any qualified employee with respect to whom qualified wages are taken into account under subdivision (a) is terminated by the taxpayer at any time during the first 270 days of that employment, whether or not consecutive, or before the close of the 270th calendar day after the day in which that employee completes 90 days of employment with the taxpayer, the tax imposed by this part for the income year in which that employment is terminated shall be increased by an amount equal to the credit allowed under subdivision (a) for that income year and all prior income years attributable to qualified wages paid or incurred with respect to that employee. (B) If the seasonal employment of any qualified employee, with respect to whom qualified wages are taken into account under subdivision (a) is not continued by the taxpayer for a period of 270 days of employment during the 60-month period beginning with the day the qualified employee commences seasonal employment with the taxpayer, the tax imposed by this part, for the income year that includes the 60th month following the month in which the qualified employee commences seasonal employment with the taxpayer, shall be increased by an amount equal to the credit allowed under subdivision (a) for that income year and all prior income years attributable to qualified wages paid or incurred with respect to that qualified employee. (2) (A) Subparagraph (A) of paragraph (1) shall not apply to any of the following: (i) A termination of employment of a qualified employee who voluntarily leaves the employment of the taxpayer. (ii) A termination of employment of a qualified employee who, before the close of the period referred to in subparagraph (A) of paragraph (1), becomes disabled and unable to perform the services of that employment, unless that disability is removed before the close of that period and the taxpayer fails to offer reemployment to that employee. (iii) A termination of employment of a qualified employee, if it is determined that the termination was due to the misconduct (as defined in Sections 1256-30 to 1256-43, inclusive, of Title 22 of the California Code of Regulations) of that employee. (iv) A termination of employment of a qualified employee due to a substantial reduction in the trade or business operations of the taxpayer. (v) A termination of employment of a qualified employee, if that employee is replaced by other qualified employees so as to create a net increase in both the number of employees and the hours of employment. (B) Subparagraph (B) of paragraph (1) shall not apply to any of the following: (i) A failure to continue the seasonal employment of a qualified employee who voluntarily fails to return to the seasonal employment of the taxpayer. (ii) A failure to continue the seasonal employment of a qualified employee who, before the close of the period referred to in subparagraph (B) of paragraph (1), becomes disabled and unable to perform the services of that seasonal employment, unless that disability is removed before the close of that period and the taxpayer fails to offer seasonal employment to that qualified employee. (iii) A failure to continue the seasonal employment of a qualified employee, if it is determined that the failure to continue the seasonal employment was due to the misconduct (as defined in Sections 1256-30 to 1256-43, inclusive, of Title 22 of the California Code of Regulations) of that qualified employee. (iv) A failure to continue seasonal employment of a qualified employee due to a substantial reduction in the regular seasonal trade or business operations of the taxpayer. (v) A failure to continue the seasonal employment of a qualified employee, if that qualified employee is replaced by other qualified employees so as to create a net increase in both the number of seasonal employees and the hours of seasonal employment. (C) For purposes of paragraph (1), the employment relationship between the taxpayer and a qualified employee shall not be treated as terminated by either of the following: (i) By a transaction to which Section 381(a) of the Internal Revenue Code applies, if the qualified employee continues to be employed by the acquiring corporation. (ii) By reason of a mere change in the form of conducting the trade or business of the taxpayer, if the qualified employee continues to be employed in that trade or business and the taxpayer retains a substantial interest in that trade or business. (3) Any increase in tax under paragraph (1) shall not be treated as tax imposed by this part for purposes of determining the amount of any credit allowable under this part. (f) Rules similar to the rules provided in Section 46(e) and (h) of the Internal Revenue Code shall apply to both of the following: (1) An organization to which Section 593 of the Internal Revenue Code applies. (2) A regulated investment company or a real estate investment trust subject to taxation under this part. (g) For purposes of this section, "enterprise zone" means an area designated as an enterprise zone pursuant to Chapter 12.8 (commencing with Section 7070) of Division 7 of Title 1 of the Government Code. (h) The credit allowable under this section shall be reduced by the credit allowed under Sections 23623.5, 23625, and 23646 claimed for the same employee. The credit shall also be reduced by the federal credit allowed under Section 51 of the Internal Revenue Code. In addition, any deduction otherwise allowed under this part for the wages or salaries paid or incurred by the taxpayer upon which the credit is based shall be reduced by the amount of the credit, prior to any reduction required by subdivision (i) or (j). (i) In the case where the credit otherwise allowed under this section exceeds the "tax" for the income year, that portion of the credit that exceeds the "tax" may be carried over and added to the credit, if any, in succeeding income years, until the credit is exhausted. The credit shall be applied first to the earliest income years possible. (j) (1) The amount of the credit otherwise allowed under this section and Section 23612.2, including any credit carryover from prior years, that may reduce the "tax" for the income year shall not exceed the amount of tax which would be imposed on the taxpayer's business income attributable to the enterprise zone determined as if that attributable income represented all of the income of the taxpayer subject to tax under this part. (2) Attributable income shall be that portion of the taxpayer's California source business income that is apportioned to the enterprise zone. For that purpose, the taxpayer's business attributable to sources in this state first shall be determined in accordance with Chapter 17 (commencing with Section 25101). That business income shall be further apportioned to the enterprise zone in accordance with Article 2 (commencing with Section 25120) of Chapter 17, modified for purposes of this section in accordance with paragraph (3). (3) Business income shall be apportioned to the enterprise zone by multiplying the total California business income of the taxpayer by a fraction, the numerator of which is the property factor plus the payroll factor, and the denominator of which is two. For purposes of this paragraph: (A) The property factor is a fraction, the numerator of which is the average value of the taxpayer's real and tangible personal property owned or rented and used in the enterprise zone during the income year, and the denominator of which is the average value of all the taxpayer's real and tangible personal property owned or rented and used in this state during the income year. (B) The payroll factor is a fraction, the numerator of which is the total amount paid by the taxpayer in the enterprise zone during the income year for compensation, and the denominator of which is the total compensation paid by the taxpayer in this state during the income year. (4) The portion of any credit remaining, if any, after application of this subdivision, shall be carried over to succeeding income years, as if it were an amount exceeding the "tax" for the income year, as provided in subdivision (i). (k) The changes made to this section by the act adding this subdivision shall apply to income years on or after January 1, 1997. SEC. 83. Section 23645 of the Revenue and Taxation Code is amended to read: 23645. (a) For each income year beginning on or after January 1, 1995, there shall be allowed as a credit against the "tax" (as defined by Section 23036) for the income year an amount equal to the sales or use tax paid or incurred by the taxpayer in connection with the purchase of qualified property to the extent that the qualified property does not exceed a value of twenty million dollars ($20,000,000). (b) For purposes of this section: (1) "LAMBRA" means a local agency military base recovery area designated in accordance with Section 7114 of the Government Code. (2) "Taxpayer" means a corporation that conducts a trade or business within a LAMBRA and, for the first two income years, has a net increase in jobs (defined as 2,000 paid hours per employee per year) of one or more employees in the LAMBRA. (A) The net increase in the number of jobs shall be determined by subtracting the total number of full-time employees (defined as 2,000 paid hours per employee per year) the taxpayer employed in this state in the income year prior to commencing business operations in the LAMBRA from the total number of full-time employees the taxpayer employed in this state during the second income year after commencing business operations in the LAMBRA. For taxpayers who commence doing business in this state with their LAMBRA business operation, the number of employees for the income year prior to commencing business operations in the LAMBRA shall be zero. If the taxpayer has a net increase in jobs in the state, the credit shall be allowed only if one or more full-time employees is employed within the LAMBRA. (B) The total number of employees employed in the LAMBRA shall equal the sum of both of the following: (i) The total number of hours worked in the LAMBRA for the taxpayer by employees (not to exceed 2,000 hours per employee) who are paid an hourly wage divided by 2,000. (ii) The total number of months worked in the LAMBRA for the taxpayer by employees that are salaried employees divided by 12. (C) In the case of a taxpayer who first commences doing business in the LAMBRA during the income year, for purposes of clauses (i) and (ii), respectively, of subparagraph (B) the divisors "2,000" and "12" shall be multiplied by a fraction, the numerator of which is the number of months of the income year that the taxpayer was doing business in the LAMBRA and the denominator of which is 12. (3) "Qualified property" means property that is each of the following: (A) Purchased by the taxpayer for exclusive use in a trade or business conducted within a LAMBRA. (B) Purchased before the date the LAMBRA designation expires, is no longer binding, or becomes inoperative. (C) Any of the following: (i) High technology equipment, including, but not limited to, computers and electronic processing equipment. (ii) Aircraft maintenance equipment, including, but not limited to, engine stands, hydraulic mules, power carts, test equipment, handtools, aircraft start carts, and tugs. (iii) Aircraft components, including, but not limited to, engines, fuel control units, hydraulic pumps, avionics, starts, wheels, and tires. (iv) Section 1245 property, as defined in Section 1245(a)(3) of the Internal Revenue Code. (c) The credit provided under subdivision (a) shall only be allowed for qualified property manufactured in California unless qualified property of a comparable quality and price is not available for timely purchase and delivery from a California manufacturer. (d) In the case where the credit otherwise allowed under this section exceeds the "tax" for the income year, that portion of the credit which exceeds the "tax" may be carried over and added to the credit, if any, in succeeding years, until the credit is exhausted. The credit shall be applied first to the earliest income years possible. (e) Any taxpayer who elects to be subject to this section shall not be entitled to increase the basis of the property as otherwise required by Section 164(a) of the Internal Revenue Code with respect to sales or use tax paid or incurred in connection with the purchase of qualified property. (f) (1) The amount of the credit otherwise allowed under this section and Section 23646, including any credit carryovers from prior years, that may reduce the "tax" for the income year shall not exceed the amount of tax that would be imposed on the taxpayer's business income attributed to a LAMBRA determined as if that attributable income represented all the income of the taxpayer subject to tax under this part. (2) Attributable income shall be that portion of the taxpayer's California source business income that is apportioned to the LAMBRA. For that purpose, the taxpayer's business income that is attributable to sources in this state shall first be determined in accordance with Chapter 17 (commencing with Section 25101). That business income shall be further apportioned to the LAMBRA in accordance with Article 2 (commencing with Section 25120) of Chapter 17, modified for purposes of this section in accordance with paragraph (3). (3) Income shall be apportioned to a LAMBRA by multiplying the total California business income of the taxpayer by a fraction, the numerator of which is the property factor, plus the payroll factor, and the denominator of which is two. For purposes of this paragraph: (A) The property factor is a fraction, the numerator of which is the average value of the taxpayer's real and tangible personal property owned or rented and used in the LAMBRA during the income year, and the denominator of which is the average value of all the taxpayer's real and tangible personal property owned or rented and used in this state during the income year. (B) The payroll factor is a fraction, the numerator of which is the total amount paid by the taxpayer in the LAMBRA during the income year for compensation, and the denominator of which is the total compensation paid by the taxpayer in this state during the income year. (4) The portion of any credit remaining, if any, after application of this subdivision, shall be carried over to succeeding income years, as if it were an amount exceeding the "tax" for the income year, as provided in subdivision (d). (g) (1) If the qualified property is disposed of or no longer used by the taxpayer in the LAMBRA, at any time before the close of the second income year after the property is placed in service, the amount of the credit previously claimed, with respect to that property, shall be added to the taxpayer's tax liability in the income year of that disposition or nonuse. (2) At the close of the second income year, if the taxpayer has not increased the number of its employees as determined by paragraph (2) of subdivision (b), then the amount of the credit previously claimed shall be added to the taxpayer's tax for the taxpayer's second income year. (h) If the taxpayer is allowed a credit for qualified property pursuant to this section, only one credit shall be allowed to the taxpayer under this part with respect to that qualified property. (i) The amendments made to this section by the act adding this subdivision shall apply to income years beginning on or after January 1, 1998. SEC. 84. Section 23649 of the Revenue and Taxation Code is amended to read: 23649. (a) (1) A qualified taxpayer shall be allowed a credit against the "tax," as defined in Section 23036, equal to 6 percent of the qualified cost of qualified property that is placed in service in this state. (2) In the case of any qualified costs paid or incurred on or after January 1, 1994, and prior to the first income year of the qualified taxpayer beginning on or after January 1, 1995, the credit provided under paragraph (1) shall be claimed by the qualified taxpayer on the qualified taxpayer's return for the first income year beginning on or after January 1, 1995. No credit shall be claimed under this section on a return filed for any income year commencing prior to the qualified taxpayer's first income year beginning on or after January 1, 1995. (b) (1) For purposes of this section, "qualified cost" means any cost that satisfies each of the following conditions: (A) Except as otherwise provided in this subparagraph, is a cost paid or incurred by the qualified taxpayer for the construction, reconstruction, or acquisition of qualified property on or after January 1, 1994, and prior to the date this section ceases to be operative under paragraph (2) of subdivision (i). In the case of any qualified property constructed, reconstructed, or acquired by the qualified taxpayer (or any person related to the qualified taxpayer within the meaning of Section 267 or 707 of the Internal Revenue Code) pursuant to a binding contract in existence on or prior to January 1, 1994, costs paid pursuant to that contract shall be subject to allocation as follows: contract costs shall be allocated to qualified property based on a ratio of costs actually paid prior to January 1, 1994, and total contract costs actually paid. "Cost paid" shall include, without limitation, contractual deposits and option payments. To the extent of cost allocated, whether or not currently deductible or depreciable for tax purposes, to a period prior to January 1, 1994, the cost shall be deemed allocated to property acquired before January 1, 1994, and is thus not a "qualified cost." (B) Except as provided in paragraph (3) of subdivision (d) and subparagraph (B) of paragraph (4) of subdivision (d), is an amount upon which the qualified taxpayer has paid, directly or indirectly as a separately stated contract amount or as determined from the records of the qualified taxpayer, sales or use tax under Part 1 (commencing with Section 6001). (C) Is an amount properly chargeable to the capital account of the qualified taxpayer. (2) (A) For purposes of this subdivision, any contract entered into on or after January 1, 1994, that is a successor or replacement contract to a contract that was binding prior to January 1, 1994, shall be treated as a binding contract in existence prior to January 1, 1994. (B) If a successor or replacement contract is entered into on or after January 1, 1994, and the subject of the successor or replacement contract relates both to amounts for the construction, reconstruction, or acquisition of qualified property described in the original binding contract and to costs for the construction, reconstruction, or acquisition of qualified property not described in the original binding contract, then the portion of those amounts described in the successor or replacement contract that were not described in the original binding contract shall not be treated as costs paid or incurred pursuant to a binding contract in existence on or prior to January 1, 1994, under subparagraph (A) of paragraph (1). (3) (A) For purposes of this section, an option contract in existence prior to January 1, 1994, under which a qualified taxpayer (or any other person related to the qualified taxpayer within the meaning of Section 267 or 707 of the Internal Revenue Code) had an option to acquire qualified property, shall be treated as a binding contract under the rules in paragraph (2). For purposes of this subparagraph, an option contract shall not include an option under which the optionholder will forfeit an amount less than 10 percent of the fixed option price in the event the option is not exercised. (B) For purposes of this section, a contract shall be treated as binding even if the contract is subject to a condition. (4) For purposes of this subdivision, in the case of any qualified taxpayer engaged in those lines of business described in Codes 7371 to 7373, inclusive, of the Standard Industrial Classification (SIC) Manual published by the United States Office of Management and Budget, 1987 edition, "the first income year beginning on or after January 1, 1998," shall be substituted for "January 1, 1994," in each place in which it appears. (c) (1) For purposes of this section, "qualified taxpayer" means any taxpayer engaged in those lines of business described in Codes 2011 to 3999, inclusive, or Codes 7371 to 7373, inclusive, of the Standard Industrial Classification (SIC) Manual published by the United States Office of Management and Budget, 1987 edition. (2) In the case of any passthrough entity, the determination of whether a taxpayer is a qualified taxpayer shall be made at the entity level and any credit under this section or Section 17053.49 shall be allowed to the passthrough entity and passed through to the partners or shareholders in accordance with applicable provisions of Part 10 (commencing with Section 17001) or Part 11 (commencing with Section 23001). For purposes of this paragraph, the term "passthrough entity" means any partnership or S corporation. (3) The Franchise Tax Board may prescribe regulations to carry out the purposes of this section, including any regulations necessary to prevent the avoidance of the effect of this section through splitups, shell corporations, partnerships, tiered ownership structures, sale-leaseback transactions, or otherwise. (d) For purposes of this section, "qualified property" means property that is described as either of the following: (1) Tangible personal property that is defined in Section 1245(a) of the Internal Revenue Code for use by a qualified taxpayer in those lines of business described in Codes 2011 to 3999, inclusive, of the Standard Industrial Classification (SIC) Manual published by the United States Office of Management and Budget, 1987 edition, that is primarily used for any of the following: (A) For the manufacturing, processing, refining, fabricating, or recycling of property, beginning at the point at which any raw materials are received by the qualified taxpayer and introduced into the process and ending at the point at which the manufacturing, processing, refining, fabricating, or recycling has altered tangible personal property to its completed form, including packaging, if required. (B) In research and development. (C) To maintain, repair, measure, or test any property described in this paragraph. (D) For pollution control that meets or exceeds standards established by the state or by any local or regional governmental agency within the state. (E) For recycling. (2) Computers and computer peripheral equipment, as defined in Section 168(i)(2)(B) of the Internal Revenue Code, that is tangible personal property as defined in Section 1245(a) of the Internal Revenue Code for use by a qualified taxpayer in those lines of business described in SIC Codes 7371 to 7373, inclusive, of the SIC Manual, 1987 edition, that is primarily used to develop or manufacture prepackaged software or custom software prepared to the special order of the purchaser who uses the program to produce and sell or license copies of the program as prepackaged software. (3) The value of any capitalized labor costs that are directly allocable to the construction or modification of property described in paragraph (1) or (2). (4) In the case of any qualified taxpayer engaged in manufacturing activities described in SIC Code 357 or 367, those activities related to biotechnology described in SIC Code 8731, those activities related to biopharmaceutical establishments only that are described in SIC Codes 2833 to 2836, inclusive, those activities related to space vehicles and parts described in SIC Codes 3761 to 3769, inclusive, those activities related to space satellites and communications satellites and equipment described in SIC Codes 3663 and 3812 (but only with respect to "qualified property" that is placed in service on or after January 1, 1996), or those activities related to semiconductor equipment manufacturing described in SIC Code 3559 (but only with respect to "qualified property" that is placed in service on or after January 1, 1997), "qualified property" also includes the following: (A) Special purpose buildings and foundations that are constructed or modified for use by the qualified taxpayer primarily in a manufacturing, processing, refining, or fabricating process, or as a research or storage facility primarily used in connection with a manufacturing process. (B) The value of any capitalized labor costs that are directly allocable to the construction or modification of special purpose buildings and foundations that are used primarily in the manufacturing, processing, refining, or fabricating process, or as a research or storage facility primarily used in connection with a manufacturing process. (C) (i) For purposes of this paragraph, "special purpose building and foundation" means only a building and the foundation immediately underlying the building that is specifically designed and constructed or reconstructed for the installation, operation, and use of specific machinery and equipment with a special purpose, which machinery and equipment, after installation, will become affixed to or a fixture of the real property, and the construction or reconstruction of which is specifically designed and used exclusively for the specified purposes as set forth in subparagraph (A) (" qualified purpose"). (ii) A building is specifically designed and constructed or modified for a qualified purpose if it is not economical to design and construct the building for the intended purpose and then use the structure for a different purpose. (iii) For purposes of clause (i) and clause (vi), a building is used exclusively for a qualified purpose only if its use does not include a use for which it was not specifically designed and constructed or modified. Incidental use of a building for nonqualified purposes does not preclude the building from being a special purpose building. "Incidental use" means a use which is both related and subordinate to the qualified purpose. It will be conclusively presumed that a use is not subordinate if more than one-third of the total usable volume of the building is devoted to a use which is not a qualified purpose. (iv) In the event an entire building does not qualify as a special purpose building, a taxpayer may establish that a portion of a building, and the foundation immediately underlying the portion, qualifies for treatment as a special purpose building and foundation if the portion satisfies all of the definitional provisions in this subparagraph. (v) To the extent that a building is not a special purpose building as defined above, but a portion of the building qualifies for treatment as a special purpose building, then all equipment which exclusively supports the qualified purpose occurring within that portion and which would qualify as Internal Revenue Code Section 1245 property if it were not a fixture or affixed to the building shall be treated as a cost of the portion of the building which qualifies for treatment as a special purpose building. (vi) Buildings and foundations which do not meet the definition of a special purpose building and foundation set forth above include, but are not limited to: buildings designed and constructed or reconstructed principally to function as a general purpose manufacturing, industrial, or commercial building; research facilities that are used primarily prior to or after, or prior to and after, the manufacturing process; or storage facilities that are used primarily prior to or after, or prior to and after, completion of the manufacturing process. A research facility shall not be considered to be used primarily prior to or after, or prior to and after, the manufacturing process if its purpose and use relate exclusively to the development and regulatory approval of the manufacturing process for specific biopharmaceutical products. A research facility which is used primarily in connection with the discovery of an organism from which a biopharmaceutical product or process is developed does not meet the requirements of the preceding sentence. (5) Subject to the provisions in subparagraph (B) of paragraph (1) of subdivision (b), qualified property also includes computer software that is primarily used for those purposes set forth in paragraph (1) or (2) of this subdivision. (6) Qualified property does not include any of the following: (A) Furniture. (B) Facilities used for warehousing purposes after completion of the manufacturing process. (C) Inventory. (D) Equipment used in the extraction process. (E) Equipment used to store finished products that have completed the manufacturing process. (F) Any tangible personal property that is used in administration, general management, or marketing. (G) Any vehicle for which a credit is claimed pursuant to Section 17052.11 or 23603. (e) For purposes of this section: (1) "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 which make use of chemical compounds to produce commercial products. (2) "Fabricating" means to make, build, create, produce, or assemble components or property to work in a new or different manner. (3) "Manufacturing" means the activity of converting or conditioning property by changing the form, composition, quality, or character of the property for ultimate sale at retail or use in the manufacturing of a product to be ultimately sold at retail. Manufacturing includes any improvements to tangible personal property that result in a greater service life or greater functionality than that of the original property. (4) "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. (5) "Primarily" means tangible personal property used 50 percent or more of the time in an activity described in subdivision (d). (6) "Process" means the period beginning at the point at which any raw materials are received by the qualified taxpayer and introduced into the manufacturing, processing, refining, fabricating, or recycling activity of the qualified person and ending at the point at which the manufacturing, processing, refining, fabricating, or recycling activity of the qualified taxpayer has altered tangible personal property to its completed form, including packaging, if required. Raw materials shall be considered to have been introduced into the process when the raw materials are stored on the same premises where the qualified taxpayer's manufacturing, processing, refining, fabricating, or recycling activity is conducted. Raw materials that are stored on premises other than where the qualified taxpayer's manufacturing, processing, refining, fabricating, or recycling activity is conducted, shall not be considered to have been introduced into the manufacturing, processing, refining, fabricating, or recycling process. (7) "Processing" means the physical application of the materials and labor necessary to modify or change the characteristics of property. (8) "Refining" means the process of converting a natural resource to an intermediate or finished product. (9) "Research and development" means those activities that are described in Section 174 of the Internal Revenue Code or in any regulations thereunder. (10) "Small business" means a qualified taxpayer that meets any of the following requirements during the income year for which the credit is allowed: (A) Has gross receipts of less than fifty million dollars ($50,000,000). (B) Has net assets of less than fifty million dollars ($50,000,000). (C) Has a total credit of less than one million dollars ($1,000,000). (D) For income years beginning on or after January 1, 1997, 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 has not received regulatory approval for any product from the United States Food and Drug Administration. (f) The credit allowed under subdivision (a) shall apply to qualified property that is acquired by or subject to lease by a qualified taxpayer, subject to the following special rules: (1) A lessor of qualified property, irrespective of whether the lessor is a qualified taxpayer, shall not be allowed the credit provided under subdivision (a) with respect to any qualified property leased to another qualified taxpayer. (2) For purposes of paragraphs (2) and (3) of subdivision (b), "binding contract" shall include any lease agreement with respect to the qualified property. (3) (A) For purposes of determining the qualified cost paid or incurred by a lessee in any leasing transaction that is not treated as a sale under Part 1 (commencing with Section 6001), the following rules shall apply: (i) Except as provided by subparagraph (C) of this paragraph, subparagraphs (A) and (C) of paragraph (1) of subdivision (b) shall not apply. (ii) Except as provided in subparagraph (B) and clause (iii), the "qualified cost" upon which the lessee shall compute the credit provided under this section shall be equal to the original cost to the lessor (within the meaning of Section 24912) of the qualified property that is the subject of the lease. (iii) Except as provided in clause (iv), the requirement of subparagraph (B) of paragraph (1) of subdivision (b) shall be treated as satisfied only if the lessor has made a timely election under either Section 6094.1 or subdivision (d) of Section 6244 and has paid sales tax reimbursement or use tax measured by the purchase price of the qualified property (within the meaning of paragraph (5) of subdivision (g) of Section 6006). For purposes of this subdivision and clause (iv), the amount of original cost to the lessor which may be taken into account under clause (ii) shall not exceed the purchase price upon which sales tax reimbursement or use tax has been paid under the preceding sentence or under clause (iv). (iv) With respect to leases entered into between January 1, 1994, and the effective date of this clause, the lessor may elect to pay use tax measured by the purchase price of the property by reporting and paying the tax with the return of the lessor for the fourth calendar quarter of 1994. In computing the use tax under the preceding sentence, a credit shall be allowed under Part 1 (commencing with Section 6001) for all sales or use tax previously paid on the lease. (B) For purposes of applying subparagraph (A) only, the following special rules shall apply: (i) The original cost to the lessor of the qualified property shall be reduced by the amount of any original cost of that property that was taken into account by any predecessor lessee in computing the credit allowable under this section. (ii) Clause (i) shall not apply in any case where the predecessor lessee was required to recapture the credit provided under this section pursuant to subdivision (g). (iii) For purposes of this section only, in any case where a successor lessor has acquired qualified property from a predecessor lessor in a transaction not treated as a sale under Part 1 (commencing with Section 6001), the original cost to the successor lessor of the qualified property shall be reduced by the amount of the original cost of the qualified property that was taken into account by any lessee of the predecessor lessor in computing the credit allowable under this section. (C) In determining the original cost of any qualified property under this paragraph, only amounts paid or incurred by the lessor on or after January 1, 1994, and prior to the date this section ceases to be operative under paragraph (2) of subdivision (i), shall be taken into account. In the case of any qualified property constructed, reconstructed, or acquired by a lessor pursuant to a binding contract in existence on or prior to January 1, 1994, the allocation rule specified in subparagraph (A) of paragraph (1) of subdivision (b) shall apply in determining the original cost to the lessor of qualified property. (D) Notwithstanding subparagraph (A), in the case of any leasing transaction for which the lessee is allowed the credit under this section and thereafter the lessee (or any party related to the lessee within the meaning of Section 267 or 318 of the Internal Revenue Code) acquires the qualified property from the lessor (or any successor lessor) within one year from the date the qualified property is first used by the lessee under the terms of the lease, the lessee's (or related party's) acquisition of the qualified property from the lessor (or successor lessor) shall be treated as a disposition by the lessee of the qualified property that was subject to the lease under subdivision (g). (4) For purposes of determining the qualified cost paid or incurred by a lessee in any leasing transaction that is treated as a sale under Part 1 (commencing with Section 6001), the following rules shall apply: (A) Subparagraph (A) of paragraph (1) of subdivision (b) shall be applied by substituting the term "purchase" for the term "construction, reconstruction, or acquisition." (B) Subparagraph (C) of paragraph (1) of subdivision (b) shall apply. (C) The requirement of subparagraph (B) of paragraph (1) of subdivision (b) shall be treated as satisfied at the time that either the lessor or the qualified taxpayer pays sales or use tax under Part 1 (commencing with Section 6001). (5) (A) In the case of any leasing transaction described in paragraph (3), the lessor shall provide a statement to the lessee specifying the amount of the lessor's original cost of the qualified property and the amount of that cost upon which a sales or use tax was paid within 45 days after the close of the lessee's taxable year in which the credit is allowable to the lessee under this section. (B) The statement required under subparagraph (A) shall be made available to the Franchise Tax Board upon request. (6) For purposes of this subdivision, in the case of any qualified taxpayer engaged in those lines of business described in Codes 7371 to 7373, inclusive, of the Standard Industrial Classification (SIC) Manual published by the United States Office of Management and Budget, 1987 edition, "the first income year beginning on or after January 1, 1998," shall be substituted for "January 1, 1994," in each place in which it appears. In addition, "the effective date of this paragraph" shall be substituted for "the effective date of this clause" and "fourth calendar quarter of 1998" shall be substituted for "fourth calendar quarter of 1994." (g) No credit shall be allowed if the qualified property is removed from the state, is disposed of to an unrelated party, or is used for any purpose not qualifying for the credit provided in this section in the same taxable year in which the qualified property is first placed in service in this state. If any qualified property for which a credit is allowed pursuant to this section is thereafter removed from this state, disposed of to an unrelated party, or used for any purpose not qualifying for the credit provided in this section within one year from the date the qualified property is first placed in service in this state, the amount of the credit allowed by this section for that qualified property shall be recaptured by adding that credit amount to the net tax of the qualified taxpayer for the taxable year in which the qualified property is disposed of, removed, or put to an ineligible use. (h) In the case where the credit allowed by this section exceeds the "tax," the excess may be carried over to reduce the "tax" in the following year, and succeeding years as follows: (1) Except as provided in paragraph (2), for the seven succeeding years if necessary, until the credit is exhausted. (2) In the case of a small business, for the nine succeeding years, if necessary, until the credit is exhausted. (i) (1) This section shall remain in effect until the date specified in paragraph (2) on which date this section shall cease to be operative, and as of that date is repealed. (2) (A) This section shall cease to be operative on January 1, 2001, or on January 1 of the earliest year thereafter, if the total employment in this state, as determined by the Employment Development Department on the preceding January 1, does not exceed by 100,000 jobs the total employment in this state on January 1, 1994. The department shall report to the Legislature annually with respect to the determination required by the preceding sentence. (B) For purposes of this paragraph, "total employment" means the total employment in the manufacturing sector, excluding employment in the aerospace sector. (j) The amendments made by the act adding this subdivision shall be operative for income years beginning on or after January 1, 1997, except as provided in paragraph (3) of subdivision (d). (k) The amendments made by the act adding this subdivision shall be operative for income years beginning on or after January 1, 1998. SEC. 85. Section 23701c of the Revenue and Taxation Code is amended to read: 23701c. Cemetery companies owned and operated exclusively for the benefit of their members or which are not operated for profit; and any corporation chartered solely for the purpose of the disposal of bodies by burial or cremation which is not permitted by its charter to engage in any business not necessarily incident to that purpose and no part of the net earnings of which inures to the benefit of any private shareholder or individual. SEC. 86. Section 23701q of the Revenue and Taxation Code is repealed. SEC. 87. Section 23704.5 of the Revenue and Taxation Code is amended to read: 23704.5. (a) In the case of an organization to which this section applies, exemption from taxation under Section 23701 shall be denied because a substantial part of the activities of that organization consists of carrying on propaganda, or otherwise attempting to influence legislation, but only if that organization normally-- (1) Makes lobbying expenditures in excess of the lobbying ceiling amount for that organization for each taxable year, or (2) Makes grassroots expenditures in excess of the grassroots ceiling amount for that organization for each taxable year. (b) For purposes of this section-- (1) The term "lobbying expenditures" means expenditures for the purpose of influencing legislation (as defined in subdivision (d) of Section 23740). (2) The lobbying ceiling amount for any organization for any taxable year is 150 percent of the lobbying nontaxable amount for the organization for that taxable year, determined under Section 23740. (3) The term "grassroots expenditures" means expenditures for the purpose of influencing legislation (as defined in subdivision (d) of Section 23740 without regard to subparagraph (B) of paragraph (1) thereof). (4) The grassroots ceiling amount for any organization for any taxable year is 150 percent of the grassroots nontaxable amount for that organization for that taxable year, determined under Section 23740. (c) This section shall apply to any organization which has elected (in that manner and at that time as the Franchise Tax Board may prescribe) to have the provisions of this section apply to that organization and which, for the taxable year which includes the date the election is made, is described in Section 23701d and-- (1) Is described in subdivision (d), and (2) Is not a disqualified organization under subdivision (e). (d) An organization is described in this paragraph if it is described in-- (1) Section 170(b)(1)(A)(ii) of the Internal Revenue Code (relating to educational institutions), (2) Section 170(b)(1)(A)(iii) of the Internal Revenue Code (relating to hospitals and medical research organizations), (3) Section 170(b)(1)(A)(iv) of the Internal Revenue Code (relating to organizations supporting government schools), (4) Section 170(b)(1)(A)(vi) of the Internal Revenue Code (relating to organizations publicly supported by charitable contributions), (5) Section 509(a)(2) of the Internal Revenue Code (relating to organizations publicly supported by admissions, sales, etc.), or (6) Section 509(a)(3) of the Internal Revenue Code (relating to organizations supporting certain types of public charities) except that for purposes of this paragraph, Section 509(a)(3) of the Internal Revenue Code shall be applied without regard to the last sentence of Section 509(a) of the Internal Revenue Code. (e) For purposes of subdivision (c) an organization is a disqualified organization if it is-- (1) Described in Section 170(b)(1)(A)(i) of the Internal Revenue Code (relating to churches), (2) An integrated auxiliary of a church or of a convention or association of churches, or (3) A member of an affiliated group of organizations (within the meaning of paragraph (2) of subdivision (f) of Section 23740) if one or more members of that group is described in paragraphs (1) and (2). (f) An election by an organization under this section shall be effective for all taxable years of those organizations which-- (1) End after the date the election is made, and (2) Begin before the date the election is revoked by that organization (under regulations prescribed by the Franchise Tax Board). (g) With respect to any organization for a taxable year for which-- (1) That organization is a disqualified organization (within the meaning of subdivision (e)), or (2) An election under this section is not in effect for that organization, nothing in this section or in Section 23740 shall be construed to affect the interpretation of the phrase, "no substantial part of the activities of which is carrying on propaganda, or otherwise attempting, to influence legislation, under Section 23701d." (h) For rules regarding affiliated organizations see subdivision (f) of Section 23740. SEC. 88. Section 23704.6 of the Revenue and Taxation Code is amended to read: 23704.6. (a) An organization which-- (1) Was exempt (or was determined by the Franchise Tax Board to be exempt) from taxation under Section 23701 by reason of being an organization described in Section 23701d, and (2) Is not an organization described in Section 23701d: (A) By reason of carrying on propaganda, or otherwise attempting, to influence legislation, or (B) By reason of participating in, or intervening in, any political campaign on behalf of (or in opposition to) any candidate for public office, shall not at any time thereafter be treated as an organization described in Section 23701f. (b) The Franchise Tax Board shall prescribe those regulations as may be necessary or appropriate to prevent the avoidance of subdivision (a), including regulations relating to a direct or indirect transfer of all or part of the assets of an organization to an organization controlled (directly or indirectly) by the same person or persons who control the transferor organization. (c) Subdivision (a) shall not apply to any organization which is a disqualified organization within the meaning of subdivision (e) of Section 23704.5 (relating to churches, etc.) for the taxable year immediately preceding the first taxable year for which that organization is described in paragraph (2) of subdivision (a). SEC. 89. Section 23731 of the Revenue and Taxation Code is amended to read: 23731. Every organization or trust exempt under this chapter, except as provided in this article, is subject to the tax imposed upon its unrelated business taxable income, as defined in Section 23732, as follows: (a) Corporations (other than banks and financial corporations), associations, and business trusts are subject to the tax imposed under Section 23501. (b) Trusts are subject to the tax imposed by subdivision (e) of Section 17041. This section applies to income years beginning after December 31, 1970. SEC. 90. Section 23736.1 of the Revenue and Taxation Code is amended to read: 23736.1. (a) For the purposes of this article, the term "prohibited transaction" means any transaction in which an organization subject to the provisions of this article-- (1) Lends any part of its income or corpus, without the receipt of adequate security and a reasonable rate of interest, to; (2) Pays any compensation, in excess of a reasonable allowance for salaries or other compensation for personal services actually rendered, to; (3) Makes any part of its services available on a preferential basis to; (4) Makes any substantial purchase of securities or any other property, for more than adequate consideration in money or money's worth, from; (5) Sells any substantial part of its securites or other property, for less than an adequate consideration in money or money's worth, to; or (6) Engages in any other transaction which results in a substantial diversion of its income or corpus to; the creator of the organization (if a trust); a person who has made a substantial contribution to the organization; a member of the family (as defined in Section 267(c)(4) of the Internal Revenue Code) of an individual who is the creator of that trust or who has made a substantial contribution to that organization; or a corporation controlled by that creator or person through the ownership, directly or indirectly, of 50 percent or more of the total combined voting power of all classes of stock entitled to vote or 50 percent or more of the total value of shares of all classes of stock of the corporation. (b) For purposes of subdivision (a), a bond, debenture, note, or certificate or other evidence of indebtedness (hereinafter in this section referred to as "obligation") acquired by a trust described in Section 23701n shall not be treated as a loan made without the receipt of adequate security if-- (1) Such obligation is acquired-- (A) On the market, either (i) at the price of the obligation prevailing on a national securities exchange which is registered with the Securities and Exchange Commission, or (ii) if the obligation is not traded on such a national securities exchange, at a price not less favorable to the trust than the offering price for the obligation as established by current bid and asked prices quoted by persons independent of the issuer; (B) From an underwriter, at a price (i) not in excess of the public offering price for the obligation as set forth in a prospectus or offering circular filed with the Securities and Exchange Commission, and (ii) at which a substantial portion of the same issue is acquired by persons independent of the issuer; or (C) Directly from the issuer, at a price not less favorable to the trust than the price paid currently for a substantial portion of the same issue by persons independent of the issuer; (2) Immediately following acquisition of that obligation-- (A) Not more than 25 percent of the aggregate amount of obligations issued in that issue and outstanding at the time of acquisition is held by the trust, and (B) At least 50 percent of the aggregate amount referred to in subparagraph (A) is held by persons independent of the issuer; and (3) Immediately following acquisition of the obligation, not more than 25 percent of the assets of the trust is invested in obligations of persons described in subdivision (a). (4) (A) In the case of a trust described in Section 23701n, or in the case of a corporation described in Section 23701h, all of the stock of which was acquired before January 1, 1961, by a trust described in Section 23701n, any indebtedness incurred by that trust or that corporation before January 1, 1961, in connection with real property which is leased before January 1, 1961, and any indebtedness incurred by that trust or that corporation on or after that date necessary to carry out the terms of that lease, shall not be considered as an indebtedness with respect to that trust or that corporation for purposes of this section. (B) In the application of paragraph (1) of subdivision (a), if a trust described in Section 23701n forming part of a supplemental unemployment compensation benefit plan lends any money to another trust described in Section 23701n forming part of the same plan, that loan shall not be treated as an indebtedness of the borrowing trust, except to the extent that the loaning trust-- (i) Incurs any indebtedness in order to make that loan, (ii) Incurred indebtedness before the making of that loan which would not have been incurred but for the making of that loan, or (iii) Incurred indebtedness after the making of that loan which would not have been incurred but for the making of that loan and which was reasonably foreseeable at the time of making that loan. (c) Subdivision (a) shall not apply to a loan made by a trust described in Section 23701n to the employer (or to a renewal of that loan or, if the loan is repayable upon demand, to a continuation of that loan) if the loan bears a reasonable rate of interest, and if (in the case of a making or renewal)-- (1) The employer is prohibited (at the time of that making or renewal) by any law of the United States or regulation thereunder from directly or indirectly pledging, as security for the loan, a particular class or classes of his or her assets the value of which (at that time) represents more than one-half of the value of all his or her assets; (2) The making or renewal, as the case may be, is approved in writing as an investment that is consistent with the exempt purposes of the trust by a trustee who is independent of the employer, and no other independent trustee had previously refused to give that written approval; and (3) Immediately following the making or renewal, as the case may be, the aggregate amount loaned by the trust to the employer, without the receipt of adequate security, does not exceed 25 percent of the value of all the assets of the trust. (4) For purposes of paragraph (2) the term "trustee" means, with respect to any trust for which there is more than one trustee who is independent of the employer, a majority of those independent trustees. For purposes of paragraph (3), the determination as to whether any amount loaned by the trust to the employer is loaned without the receipt of adequate security shall be made without regard to subdivision (b). SEC. 91. Section 23740 of the Revenue and Taxation Code is amended to read: 23740. (a) This section applies to any organization with respect to which an election under Section 23704.5 (relating to lobbying expenditures by public charities) is in effect for the taxable year. (b) For purposes of this section, the term "excess lobbying expenditures" means for a taxable year, the greater of-- (1) The amount by which the lobbying expenditures made by the organization during the taxable year exceed the lobbying nontaxable amount for the organization for that taxable year, or (2) The amount by which the grassroots expenditures made by the organization during the taxable year exceed the grassroots nontaxable amount for that organization for such taxable year. (c) For purposes of this section-- (1) The term "lobbying expenditures" means expenditures for the purpose of influencing legislation (as defined in subdivision (d)). (2) The lobbying nontaxable amount for any organization for any taxable year is the lesser of (A) one million dollars ($1,000,000) or (B) the amount determined under the following table: If the exempt purpose The lobbying nontaxable expenditures are-- amount is-- Not over $500,000 .......... 20 percent of the exempt purpose expenditures. Over $500,000 but not over $1,000,000 ............... $100,000, plus 15 percent of the excess of the exempt purpose expenditures over $500,000. Over $1,000,000 but not over $1,500,000 ............... $175,000, plus 10 percent of the excess of the exempt purpose expenditures over $1,000,000. Over $1,500,000 ............ $225,000, plus 5 percent of the excess of the exempt purpose expenditures over $1,500,000. (3) The term "grassroots expenditures" means expenditures for the purpose of influencing legislation (as defined in subdivision (d) without regard to subparagraph (B) of paragraph (1) thereof). (4) The grassroots nontaxable amount for any organization for any taxable year is 25 percent of the lobbying nontaxable amount (determined under paragraph (2) for the organization for that taxable year. (d) (1) Except as otherwise provided in paragraph (2), for purposes of this section, the term "influencing legislation" means-- (A) Any attempt to influence any legislation through an attempt to affect the opinions of the general public or any segment thereof, and (B) Any attempt to influence any legislation through communication with any member or employee of a legislative body, or with any government official or employee who may participate in the formulation of the legislation. (2) For purposes of this section, the term "influencing legislation," with respect to an organization, does not include-- (A) Making available the results of nonpartisan analysis, study, or research; (B) Providing of technical advice or assistance (where such advice would otherwise constitute the influencing of legislation) to a governmental body or to a committee or other subdivision thereof in response to a written request by that body or subdivision, as the case may be; (C) Appearances before, or communications to, any legislative body with respect to a possible decision of that body that might affect the existence of the organization, its powers and duties, tax-exempt status, or the deduction of contributions to the organization; (D) Communications between the organization and its bona fide members with respect to legislation or proposed legislation of direct interest to the organization and such members, other than communications described in paragraph (3); and (E) Any communication with a government official or employee, other than-- (i) A communication with a member or employee of a legislative body (where that communication would otherwise constitute the influencing of legislation), or (ii) A communication, the principal purpose of which is to influence legislation. (3) (A) A communication between an organization and any bona fide member of the organization to directly encourage that member to communicate as provided in subparagraph (B) of paragraph (1) shall be treated as a communication described in subparagraph (B) of paragraph (1). (B) A communication between an organization and any bona fide member of the organization to directly encourage that member to urge persons other than members to communicate as provided in either subparagraph (A) or subparagraph (B) of paragraph (1) shall be treated as a communication described in subparagraph (A) of paragraph (1). (e) For purposes of this section-- (1) (A) The term "exempt purpose expenditures" means, with respect to any organization for any taxable year, the total of the amounts paid or incurred by the organization to accomplish purposes described in paragraph (2) of subdivision (b) of Section 24359 (relating to religious, charitable, educational, etc., purposes). (B) The term "exempt purpose expenditures" includes-- (i) Administrative expenses paid or incurred for purposes described in paragraph (2) of subdivision (b) of Section 24359, and (ii) Amounts paid or incurred for the purpose of influencing legislation (whether or not for purposes described in paragraph (2) of subdivision (b) of Section 24359). (C) The term "exempt purpose expenditures" does not include amounts paid or incurred to or for-- (i) A separate fundraising unit of the organization, or (ii) One or more other organizations, if the amounts are paid or incurred primarily for fundraising. (2) The term "legislation" includes action with respect to acts, bills, resolutions, or similar items by the Congress, any state legislature, any local council, or similar governing body or by the public in a referendum, initiative, constitutional amendment, or similar procedure. (3) The term "action" is limited to the introduction, amendment, enactment, defeat, or repeal of acts, bills, resolutions, or similar items. (4) In computing expenditures paid or incurred for the purpose of influencing legislation (within the meaning of paragraph (1) or (2) of subdivision (b)) or exempt purpose expenditures (as defined in paragraph (1)), amounts properly chargeable to capital account shall not be taken into account. There shall be taken into account a reasonable allowance for exhaustion, wear and tear, obsolescence or amortization. The allowance shall be computed only on the basis of the straight line method of depreciation. For purposes of this section, a determination of whether an amount is properly chargeable to capital account shall be made on the basis of the principles that apply under this part to amounts which are paid or incurred in a trade or business. (f) (1) Except as otherwise provided in paragraph (4), if for a taxable year two or more organizations described in Section 23701d are members of an affiliated group of organizations as defined in paragraph (2), and an election under Section 23704.5 is effective for at least that organization for that year, then-- (A) The determination as to whether excess lobbying expenditures have been made and the determination as to whether the expenditure limits of subdivision (a) of Section 23704.5 have been exceeded shall be made as though the affiliated group is one organization. (B) If the group has excess lobbying expenditures, each organization as to which an election under Section 23704.5 is effective for that year shall be treated as an organization that has excess lobbying expenditures in an amount which equals the organization's proportionate share of the group's excess lobbying expenditures. (C) If the expenditure limits of subdivision (a) of Section 23704.5 are exceeded, each organization as to which an election under Section 23704.5 is effective for that year shall be treated as an organization that is not described in Section 23701d by reason of the application of Section 23704.5, and (D) Subparagraphs (C) and (D) of paragraph (2) of subdivision (d), paragraph (3) of subdivision (d), and clause (i) of subparagraph (C) of paragraph (1) of subdivision (e) shall be applied as if the affiliated group were one organization. (2) For purposes of paragraph (1), two organizations are members of an affiliated group of organizations but only if-- (A) The governing instrument of one organization requires it to be bound by decisions of the other organization on legislative issues, or (B) The governing board of one organization includes persons who-- (i) Are specifically designated representatives of another organization or are members of the governing board, officers, or paid executive staff members of the other organization, and (ii) By aggregating their votes, have sufficient voting power to cause or prevent action on legislative issues by the first organization. (3) If members of an affiliated group of organizations have different taxable years, their expenditures shall be computed for purposes of this section in a manner to be prescribed by regulations promulgated by the Franchise Tax Board. (4) If two or more organizations are members of an affiliated group of organizations (as defined in paragraph (2) without regard to subparagraph (B) thereof), no two members of the affiliated group are affiliated (as defined in paragraph (2) without regard to subparagraph (A) thereof), and the governing instrument of no organization requires it to be bound by decisions of any of the other organizations on legislative issues other than as to action with respect to acts, bills, resolutions, or similar items by the Congress or State Legislature, then-- (A) In the case of any organization whose decisions bind one or more members of the affiliated group, directly or indirectly, the determination as to whether the organization has paid or incurred excess lobbying, expenditures and the determination as to whether the organization has exceeded the expenditure limits of subdivision (a) of Section 23704.5 shall be made as though the organization has paid or incurred those amounts paid or incurred by the members of the affiliated group to influence legislation with respect to acts, bills, resolutions, or similar items by the Congress or State Legislature, and (B) In the case of any organization to which subparagraph (A) does not apply, but which is a member of the affiliated group, the determination as to whether the organization has paid or incurred excess lobbying expenditures and the determination as to whether the organization has exceeded the expenditure limits of subdivision (a) of Section 23704.5 shall be made as though the organization is not a member of the affiliated group. SEC. 92. Section 23776 of the Revenue and Taxation Code is amended to read: 23776. (a) Any organization which has suffered the suspension or forfeiture provided for in Section 23775 may, in accordance with Section 23305a, be relieved therefrom upon the filing of all of the following: (1) An application for revivor. (2) When required by the Franchise Tax Board, a new application for exemption under Section 23701. (3) Any returns, statements, notifications, or amounts due under Sections 23772, 23774, or 23775 which were not previously submitted or paid and which resulted in the suspension or forfeiture. (4) An information return or statement and the amounts specified under Section 23772 for each year, or part thereof, during the period of suspension or forfeiture in which the organization conducted any activities or received income, grants, gifts or any other asset. (b) Any organization exempt from tax under Section 23701 which has suffered the suspension or forfeiture provided for in Section 23301 or 23301.5 may be required by the Franchise Tax Board to file a new application for exemption in connection with an application for revivor under Section 23305. SEC. 93. Section 23777 of the Revenue and Taxation Code is amended to read: 23777. The exemption granted to any organization under the provisions of Article 1 (commencing with Section 23701) of this chapter may be revoked by the Franchise Tax Board if the organization fails to-- (a) File any return required under this chapter or pay any amount due under this part or Part 10.2 (commencing with Section 18401) on or before the last day of the 12th month following the close of the income year; (b) Comply with Section 19504 (relating to powers of the Franchise Tax Board to examine records and subpoena witnesses); or (c) Confine its activities to those permitted by the section under which the exemption was granted. SEC. 94. Section 23778 of the Revenue and Taxation Code is amended to read: 23778. An organization whose exemption was revoked under Section 23777 may be reestablished as an exempt organization upon: (a) The filing or payment of: (1) A new application for exemption and payment of the filing fee required under Section 23701; (2) Any returns, statements, or payment of any amounts due under this part or Part 10.2 (commencing with Section 18401) which were not previously submitted or paid and which resulted in the revocation. (b) When revocation occurred under subdivision (c) of Section 23777, satisfactory proof that-- (1) The organization has corrected its nonexempt activities; and (2) That it will operate in an exempt manner in the future; and (3) The payment of any tax for periods the organization was not qualified for exemption. SEC. 95. Section 24306 of the Revenue and Taxation Code is amended to read: 24306. (a) For purposes of this section, the following terms have the following meanings, as provided in the Golden State Scholarshare Trust Act (Article 19 (commencing with Section 69980) of Chapter 2 of Part 42 of the Education Code): (1) "Beneficiary" has the meaning set forth in subdivision (c) of Section 69980 of the Education Code. (2) "Benefit" has the meaning set forth in subdivision (d) of Section 69980 of the Education Code. (3) "Participant" has the meaning set forth in subdivision (h) of Section 69980 of the Education Code. (4) "Participation agreement" has the meaning set forth in subdivision (i) of Section 69980 of the Education Code. (5) "Scholarshare trust" has the meaning set forth in subdivision (f) of Section 69980 of the Education Code. (b) Except as otherwise provided in subdivision (c), gross income of a participant shall not include any of the following: (1) Any earnings under a Scholarshare trust, or a participation agreement, as provided in Article 19 (commencing with Section 69980) of Chapter 2 of Part 42 of the Education Code. (2) Contributions to the Scholarshare trust on behalf of a beneficiary shall not be includable as gross income of that beneficiary. (c) (1) Any distribution under a Scholarshare trust participation agreement shall be includable in the gross income of the distributee in the manner as provided under Section 72 of the Internal Revenue Code, as modified by Section 24272.2, to the extent not excluded from gross income under any other provision of this part. For purposes of applying Section 72 of the Internal Revenue Code, the following apply: (A) All Scholarshare trust accounts of which an individual is a beneficiary shall be treated as one account, except as otherwise provided. (B) All distributions during an income year shall be treated as one distribution. (C) The value of the participation agreement, income on the participation agreement, and investment in the participation agreement shall be computed as of the close of the calendar year in which the income year begins. (2) A contribution by a for-profit or nonprofit entity, or by a state or local government agency, for the benefit of an owner or employee of that entity or a beneficiary whom the owner or employee has the power to designate, including the owner or employee's minor children, shall be included in the gross income of that owner or employee in the year the contribution is made. (3) For purposes of this subdivision, "distribution" includes any benefit furnished to a beneficiary under a participation agreement, as provided in Article 19 (commencing with Section 69980) of Chapter 2 of Part 42 of the Education Code. (4) (A) Paragraph (1) shall not apply to that portion of any distribution that, within 60 days of distribution, is transferred to the credit of another beneficiary under the Scholarshare trust who is a "member of the family," as that term is used in Section 529(e)(2) of the Internal Revenue Code, as amended by Section 211 of the Taxpayer Relief Act of 1997 (P.L. 105-34), of the former beneficiary of that Scholarshare trust. (B) Any change in the beneficiary of an interest in the Scholarshare trust shall not be treated as a distribution for purposes of paragraph (1) if the new beneficiary is a "member of the family," as that term is used in Section 2032A(e)(2) of the Internal Revenue Code, of the former beneficiary of that Scholarshare trust. SEC. 96. Section 24357.6 of the Revenue and Taxation Code is amended to read: 24357.6. No deduction shall be allowed under this part for an out-of-pocket expenditure made on behalf of an organization described in Section 24359 (other than an organization described in subdivision (e) of Section 23704.5 (relating to churches, etc.)) if the expenditure is made for the purpose of influencing legislation (within the meaning of Section 23701d). SEC. 97. Section 24410 of the Revenue and Taxation Code is amended to read: 24410. (a) Dividends received by a corporation commercially domiciled in California during the income year from an insurance company subject to tax imposed by Part 7 (commencing with Section 12001) of this division at the time of the payment of the dividends and at least 80 percent of each class of its stock then being owned by the corporation receiving the dividend. (b) The deduction under this section shall be limited to that portion of the dividends received which are determined to be paid from income from California sources determined pursuant to subdivision (c). (c) Dividends paid from California sources shall be determined by multiplying the amount of the dividends by an apportionment factor equal to the ratio of gross income from California sources to all gross income of the company. Gross income from California sources equals total gross income less dividends from other insurance companies multiplied by the average of the following three factors: (1) A gross receipts factor, the denominator of which shall include all receipts, other than dividends from another insurance company, regardless of the nature or source from which derived. The numerator of which shall include all gross receipts, other than dividends from another insurance company, derived from or attributable to this state. With respect to premiums, only receipts which were subject to tax under Part 7 (commencing with Section 12001) of this division, shall be included in the numerator, and with respect to income from intangibles they shall be attributable to the commercial domicile of the insurance company. (2) A payroll factor determined under the provisions of the Uniform Division of Income for Tax Purposes Act, Chapter 17, Article 2 of this part. (3) A property factor, determined under the provisions of the Uniform Division of Income for Tax Purposes Act provided for in Article 2 (commencing with Section 25120) of Chapter 17 of this part, provided that for the purposes of this paragraph the property factor shall include all intangible investment property, which intangible property shall be allocated to the commercial domicile of that insurance company. (4) Plus the portion of the dividends received from another insurance company determined to be paid from California source income pursuant to the formula set forth in paragraphs (1) through (3) based upon the receipts, payroll and property of that other insurance company. (d) The insurance company from which the dividends are received shall furnish that information as the Franchise Tax Board may require to determine the allocation formula and the Franchise Tax Board may adopt those regulations as it deems necessary to effectuate the purpose of this section. Nothing in this section shall be construed to limit or affect in any manner any other provisions of this part. SEC. 97.5. Section 24410 of the Revenue and Taxation Code is amended to read: 24410. (a) Dividends received by a corporation during the income year from an insurance company subject to tax imposed by Part 7 (commencing with Section 12001) at the time of the payment of the dividends and at least 80 percent of each class of its stock then being owned by the corporation receiving the dividend. (b) The deduction under this section shall be limited to that portion of the dividends received which are determined to be paid from income from California sources determined pursuant to subdivision (c). (c) Dividends paid from California sources shall be determined by multiplying the amount of the dividends by an apportionment factor equal to the ratio of gross income from California sources to all gross income of the company. Gross income from California sources equals total gross income less dividends from other insurance companies multiplied by the average of the following three factors: (1) A gross receipts factor, the denominator of which shall include all receipts, other than dividends from another insurance company, regardless of the nature or source from which derived. The numerator of which shall include all gross receipts, other than dividends from another insurance company, derived from or attributable to this state. With respect to premiums, only receipts which were subject to tax under Part 7 (commencing with Section 12001) shall be included in the numerator, and with respect to income from intangibles they shall be attributable to the commercial domicile of the insurance company. (2) A payroll factor determined under the provisions of the Uniform Division of Income for Tax Purposes Act (Article 2 (commencing with Section 25120) of Chapter 17). (3) A property factor, determined under the provisions of the Uniform Division of Income for Tax Purposes Act (Article 2 (commencing with Section 25120) of Chapter 17), provided that for the purposes of this paragraph the property factor shall include all intangible investment property, which intangible property shall be allocated to the commercial domicile of the insurance company. (4) Plus the portion of the dividends received from another insurance company determined to be paid from California source income pursuant to the formula set forth in paragraphs (1) to (3), inclusive, based upon the receipts, payroll and property of that other insurance company. (d) The insurance company from which the dividends are received shall furnish any information as the Franchise Tax Board may require to determine the allocation formula and the Franchise Tax Board may adopt any regulations as it deems necessary to effectuate the purpose of this section. (e) Section 24425 shall not apply to any expense that is related to dividends that are deductible under subdivision (a). (f) Nothing in this section shall be construed to limit or affect in any manner any other provisions of this part. SEC. 98. Section 24416.2 of the Revenue and Taxation Code is amended to read: 24416.2. (a) The term "qualified taxpayer" as used in Section 24416.1 includes a corporation engaged in the conduct of a trade or business within an enterprise zone designated pursuant to Chapter 12.8 (commencing with Section 7070) of Division 7 of Title 1 of the Government Code. For purposes of this subdivision, all of the following shall apply: (1) A net operating loss shall not be a net operating loss carryback for any income year and a net operating loss for any income year beginning on or after the date that the area in which the taxpayer conducts a trade or business is designated as an enterprise zone shall be a net operating loss carryover to each of the 15 income years following the income year of loss. (2) For purposes of this subdivision: (A) "Net operating loss" means the loss determined under Section 172 of the Internal Revenue Code, as modified by Section 24416.1, attributable to the taxpayer's business activities within the enterprise zone (as defined in Chapter 12.8 (commencing with Section 7070) of Division 7 of Title 1 of the Government Code) prior to the enterprise zone expiration date. That attributable loss shall be determined in accordance with Chapter 17 (commencing with Section 25101), modified for purposes of this subdivision as follows: (i) Loss shall be apportioned to the enterprise zone by multiplying total loss from the business by a fraction, the numerator of which is the property factor plus the payroll factor, and the denominator of which is two. (ii) "The enterprise zone" shall be substituted for "this state." (B) A net operating loss carryover shall be a deduction only with respect to the taxpayer's business income attributable to the enterprise zone as defined in Chapter 12.8 (commencing with Section 7070) of Division 7 of Title 1 of the Government Code. (C) Attributable income is that portion of the taxpayer's California source business income that is apportioned to the enterprise zone. For that purpose, the taxpayer's business income attributable to sources in this state first shall be determined in accordance with Chapter 17 (commencing with Section 25101). That business income shall be further apportioned to the enterprise zone in accordance with Article 2 (commencing with Section 25120) of Chapter 17, modified for purposes of this subdivision as follows: (i) Business income shall be apportioned to the enterprise zone by multiplying the total California business income of the taxpayer by a fraction, the numerator of which is the property factor plus the payroll factor, and the denominator of which is two. For purposes of this clause: (I) The property factor is a fraction, the numerator of which is the average value of the taxpayer's real and tangible personal property owned or rented and used in the enterprise zone during the income year, and the denominator of which is the average value of all the taxpayer's real and tangible personal property owned or rented and used in this state during the income year. (II) The payroll factor is a fraction, the numerator of which is the total amount paid by the taxpayer in the enterprise zone during the income year for compensation, and the denominator of which is the total compensation paid by the taxpayer in this state during the income year. (ii) If a loss carryover is allowable pursuant to this section for any income year after the enterprise zone designation has expired, the enterprise zone shall be deemed to remain in existence for purposes of computing the limitation set forth in subparagraph (B) and allowing a net operating loss deduction. (D) "Enterprise zone expiration date" means the date the enterprise zone designation expires, is no longer binding, or becomes inoperative. (3) The changes made to this subdivision by the act adding this paragraph shall apply to income years beginning on or after January 1, 1998. (b) A taxpayer who qualifies as a "qualified taxpayer" under one or more sections shall, for the income year of the net operating loss and any income year to which that net operating loss may be carried, designate on the original return filed for each year the section which applies to that taxpayer with respect to that net operating loss. If the taxpayer is eligible to qualify under more than one section, the designation is to be made after taking into account subdivision (c). (c) If a taxpayer is eligible to qualify under this section and either Section 24416.4, 24416.5, or 24416.6 as a "qualified taxpayer," with respect to a net operating loss in an income year, the taxpayer shall designate which section is to apply to the taxpayer. (d) Notwithstanding Section 24416, the amount of the loss determined under this section, or Section 24416.4, 24416.5, or 24416.6 shall be the only net operating loss allowed to be carried over from that income year and the designation under subdivision (b) shall be included in the election under Section 24416.1. SEC. 99. Section 24416.5 of the Revenue and Taxation Code is amended to read: 24416.5. (a) For each income year beginning on or after January 1, 1995, the term "qualified taxpayer" as used in Section 24416.1 includes a taxpayer engaged in the conduct of a trade or business within a LAMBRA. For purposes of this subdivision, all of the following shall apply: (1) A net operating loss shall not be a net operating loss carryback for any income year and, except as provided in subparagraph (B), a net operating loss for any income year beginning on or after the date the area in which the taxpayer conducts a trade or business is designated a LAMBRA shall be a net operating loss carryover to each following income year that ends before the LAMBRA expiration date or to each of the 15 income years following the income year of loss, if longer. (2) In the case of a financial institution to which Section 585, 586, or 593 of the Internal Revenue Code applies, a net operating loss for any income year beginning on or after January 1, 1984, shall be a net operating loss carryover to each of the five years following the income year of the loss. Subdivision (b) of Section 24416.1 shall not apply. (3) "LAMBRA" means a local agency military base recovery area designated in accordance with Section 7114 of the Government Code. (4) "Taxpayer" means a bank or corporation that conducts a trade or business within a LAMBRA and, for the first two income years, has a net increase in jobs (defined as 2,000 paid hours per employee per year) of one or more employees in the LAMBRA and this state. For purposes of this paragraph, all of the following shall apply: (A) The net increase in the number of jobs shall be determined by subtracting the total number of full-time employees (defined as 2,000 paid hours per employee per year) the taxpayer employed in this state in the income year prior to commencing business operations in the LAMBRA from the total number of full-time employees the taxpayer employed in this state during the second income year after commencing business operations in the LAMBRA. For taxpayers who commence doing business in this state with their LAMBRA business operation, the number of employees for the income year prior to commencing business operations in the LAMBRA shall be zero. The deduction shall be allowed only if the taxpayer has a net increase in jobs in the state, and if one or more full-time employees are employed within the LAMBRA. (B) The total number of employees employed in the LAMBRA shall equal the sum of both of the following: (i) The total number of hours worked in the LAMBRA for the taxpayer by employees (not to exceed 2,000 hours per employee) who are paid an hourly wage divided by 2,000. (ii) The total number of months worked in the LAMBRA for the taxpayer by employees who are salaried employees divided by 12. (C) In the case of a taxpayer that first commences doing business in the LAMBRA during the income year, for purposes of clauses (i) and (ii), respectively, of subparagraph (B) the divisors "2,000" and "12" shall be multiplied by a fraction, the numerator of which is the number of months of the income year that the taxpayer was doing business in the LAMBRA and the denominator of which is 12. (5) "Net operating loss" means the loss determined under Section 172 of the Internal Revenue Code, as modified by Section 24416.1, attributable to the taxpayer's business activities within a LAMBRA prior to the LAMBRA expiration date. The attributable loss shall be determined in accordance with Chapter 17 (commencing with Section 25101), modified for purposes of this section as follows: (A) Loss shall be apportioned to a LAMBRA by multiplying total loss from the business by a fraction, the numerator of which is the property factor plus the payroll factor, and the denominator of which is 2. (B) "The LAMBRA" shall be substituted for "this state." (6) A net operating loss carryover shall be a deduction only with respect to the taxpayer's business income attributable to a LAMBRA. (7) Attributable income is that portion of the taxpayer's California source business income that is apportioned to the LAMBRA. For that purpose, the taxpayer's business income attributable to sources in this state first shall be determined in accordance with Chapter 17 (commencing with Section 25101). That business income shall be further apportioned to the LAMBRA in accordance with Article 2 (commencing with Section 25120) of Chapter 17, modified as follows: (A) Business income shall be apportioned to a LAMBRA by multiplying total California business income of the taxpayer by a fraction, the numerator of which is the property factor plus the payroll factor, and the denominator of which is two. For purposes of this clause: (i) The property factor is a fraction, the numerator of which is the average value of the taxpayer's real and tangible personal property owned or rented and used in the LAMBRA during the income year, and the denominator of which is the average value of all the taxpayer's real and tangible personal property owned or rented and used in this state during the income year. (ii) The payroll factor is a fraction, the numerator of which is the total amount paid by the taxpayer in the LAMBRA during the income year for compensation, and the denominator of which is the total compensation paid by the taxpayer in this state during the income year. (B) If a loss carryover is allowable pursuant to this section for any income year after the LAMBRA designation has expired, the LAMBRA shall be deemed to remain in existence for purposes of computing the limitation specified in subparagraph (D) and allowing a net operating loss deduction. (8) "LAMBRA expiration date" means the date the LAMBRA designation expires, is no longer binding, or becomes inoperative pursuant to Section 7110 of the Government Code. (b) A taxpayer who qualifies as a "qualified taxpayer" under one or more sections shall, for the income year of the net operating loss and any income year to which that net operating loss may be carried, designate on the original return filed for each year the section that applies to that taxpayer with respect to that net operating loss. If the taxpayer is eligible to qualify under more than one section, the designation is to be made after taking into account subdivision (c). (c) If a taxpayer is eligible to qualify under this section and either Section 24416.2, 24416.4, or 24416.6 as a "qualified taxpayer," with respect to a net operating loss in an income year, the taxpayer shall designate which section is to apply to the taxpayer. (d) Notwithstanding Section 24416, the amount of the loss determined under this section or Section 24416.2, 24416.4, or 24416.6 shall be the only net operating loss allowed to be carried over from that income year and the designation under subdivision (b) shall be included in the election under Section 24416.1. (e) This section shall apply to income years beginning on and after January 1, 1998. SEC. 100. Section 24436.5 of the Revenue and Taxation Code is amended to read: 24436.5. (a) No deduction shall be allowed for interest, depreciation, taxes, or amortization paid or incurred in the income year under Section 24343, 24344, 24345, or 24349, with respect to substandard housing located in this state, except as provided in subdivision (e). (b) "Substandard housing" means occupied dwellings from which the taxpayer derives rental income or unoccupied or abandoned dwellings for which both of the following apply: (1) Either of the following occurs: (A) For occupied dwellings from which the taxpayer derives rental income, a state or local government regulatory agency has determined that the housing violates state law or local codes dealing with health, safety, or building. (B) For dwellings that are unoccupied or abandoned for at least 90 days, a state or local government regulatory agency has cited the housing for conditions that constitute a serious violation of state law or local codes dealing with health, safety, or building, and that constitute a threat to public health and safety. (2) Either of the following occurs: (A) After written notice of violation by the regulatory agency, specifying the applicability of this section, the housing has not been repaired or brought to a condition of compliance within six months after the date of the notice or the time prescribed in the notice, whichever period is later. (B) Good faith efforts for compliance have not been commenced, as determined by the regulatory agency. "Substandard housing" also means employee housing that has not, within 30 days of the date of the written notice of violation or the date for compliance prescribed in the written notice of violation, been brought into compliance with the conditions stated in the written notice of violation of the Employee Housing Act (Part 1 (commencing with Section 17000) of Division 13 of the Health and Safety Code) issued by the enforcement agency that specifies the application of this section. The regulatory agency may, for good cause shown, extend the compliance date prescribed in a violation notice. (c) (1) When the period specified in paragraph (2) of subdivision (b) has expired without compliance, the government regulatory agency shall mail to the taxpayer a notice of noncompliance. The notice of noncompliance shall be in a form and shall include information prescribed by the Franchise Tax Board, shall be mailed by certified mail to the taxpayer at his or her last known address, and shall advise the taxpayer of (A) an intent to notify the Franchise Tax Board of the noncompliance within 10 days unless an appeal is filed, (B) where an appeal may be filed, and (C) a general description of the tax consequences of that filing with the Franchise Tax Board. Appeals shall be made to the same body and in the same manner as appeals from other actions of the regulatory agency. If no appeal is made within 10 days or if after disposition of the appeal the regulatory agency is sustained, the regulatory agency shall notify, in writing, the Franchise Tax Board of the noncompliance. (2) The notice of noncompliance shall contain the legal description or the lot and block numbers of the real property, the assessor's parcel number, and the name of the owner of record as shown on the latest equalized assessment roll. In addition, the regulatory agency shall, at the same time as notification of the notice of noncompliance is sent to the Franchise Tax Board, record a copy of the notice of noncompliance in the office of the recorder for the county in which the substandard housing is located that includes a statement of tax consequences that may be determined by the Franchise Tax Board. However, the failure to record a notice with the county recorder does not relieve the liability of any taxpayer nor does it create any liability on the part of the regulatory agency. (3) The regulatory agency may charge the taxpayer a fee in an amount not to exceed the regulatory agency's costs incurred in recording any notice of noncompliance or issuing any release of that notice. The notice of compliance shall be recorded and shall serve to expunge the notice of noncompliance. The notice of compliance shall contain the same recording information required for the notice of noncompliance. No deduction by the taxpayer, or any other taxpayer who obtains title to the property subsequent to the recordation of the notice of noncompliance, shall be allowed for the items provided in subdivision (a) from the date of the notice of noncompliance until the date the regulatory agency determines that the substandard housing has been brought to a condition of compliance. The regulatory agency shall mail to the Franchise Tax Board and the taxpayer a notice of compliance, which notice shall be in the form and include the information prescribed by the Franchise Tax Board. In the event the period of noncompliance does not cover an entire income year, the deductions shall be denied at the rate of 1/12 for each full month during the period of noncompliance. (4) If the property is owned by more than one owner or the recorded title is in the name of a fictitious owner, the notice requirements provided in subdivision (b) and this subdivision shall be satisfied for each owner if the notices are mailed to one owner or to the fictitious name owner at the address appearing on the latest available property tax bill. However, notices made pursuant to this subdivision shall not relieve the regulatory agency from furnishing taxpayer identification information required to implement this section to the Franchise Tax Board. (d) For the purposes of this section, a notice of noncompliance shall not be mailed by the regulatory agency to the Franchise Tax Board if any of the following occur: (1) The housing was rendered substandard solely by reason of earthquake, flood or other natural disaster except where the condition remains for more than three years after the disaster. (2) The owner of the substandard housing has secured financing to bring the housing into compliance with those laws or codes that have been violated, causing the housing to be classified as substandard, and has commenced repairs or other work necessary to bring the housing into compliance. (3) The owner of substandard housing that is not within the meaning of housing accommodation, as defined in subdivision (d) of Section 35805 of the Health and Safety Code, has done both of the following: (A) Attempted to secure financing to bring the housing into compliance with those laws or codes that have been violated, causing the housing to be classified as substandard. (B) Been denied that financing solely because the housing is located in a neighborhood or geographical area in which financial institutions do not provide financing for rehabilitation of any of that type of housing. (e) The provisions of this section do not apply to deductions from income derived from property rendered substandard solely by reason of a change in applicable state or local housing standards unless those violations cause substantial danger to the occupants of the property, as determined by the regulatory agency which has served notice of violation pursuant to subdivision (b). (f) The owner of substandard housing found to be in noncompliance shall, upon total or partial divestiture of interest in the property, immediately notify the regulatory agency of the name and address of the person or persons to whom the property has been sold or otherwise transferred and the date of the sale or transference. (g) By July 1 of each year, the regulatory agency shall report to the appropriate legislative body of its jurisdiction all of the following information, for the preceding calendar year, regarding its activities to secure code enforcement, which shall be public information: (1) The number of written notices of violation issued for substandard housing under subdivision (b). (2) The number of violations complied with within the period prescribed in subdivision (b). (3) The number of notices of noncompliance issued pursuant to subdivision (c). (4) The number of appeals from those notices pursuant to subdivision (c). (5) The number of successful appeals by owners. (6) The number of notices of noncompliance mailed to the Franchise Tax Board pursuant to subdivision (c). (7) The number of cases in which a notice of noncompliance was not sent pursuant to the provisions of subdivision (d). (8) The number of extensions for compliance granted pursuant to subdivision (b) and the mean average length of the extensions. (9) The mean average length of time from the issuance of a notice of violation to the mailing of a notice of noncompliance to the Franchise Tax Board where the notice is actually sent to the Franchise Tax Board. (10) The number of cases where compliance is achieved after a notice of noncompliance has been mailed to the Franchise Tax Board. (11) The number of instances of disallowance of tax deductions by the Franchise Tax Board resulting from referrals made by the regulatory agency. This information may be filed in a supplemental report in succeeding years as it becomes available. (h) The provisions of this section relating to substandard housing consisting of abandoned or unoccupied dwellings do not apply to any lender engaging in a "federally related transaction," as defined in Section 11302 of the Business and Professions Code, who acquires title through judicial or nonjudicial foreclosure, or accepts a deed in lieu of foreclosure. The exception provided in this subdivision covers only substandard housing consisting of abandoned or unoccupied dwellings involved in the federally related transaction. SEC. 101. Section 25106 of the Revenue and Taxation Code is amended to read: 25106. In any case in which the tax of a corporation is or has been determined under this chapter with reference to the income and apportionment factors of another corporation with which it is doing or has done a unitary business, all dividends paid by one to another of those corporations shall, to the extent those dividends are paid out of the income previously described of the unitary business, be eliminated from the income of the recipient and, except for purposes of applying Section 24345, shall not be taken into account under Section 24344 or in any other manner in determining the tax of any member of the unitary group. SEC. 102. Section 25114 of the Revenue and Taxation Code is amended to read: 25114. (a) The Franchise Tax Board, for purposes of administering the provisions of this article, shall examine the returns filed by taxpayers subject to these provisions. Where this examination reveals potential noncompliance, a detailed examination shall be made, notwithstanding the potential net revenue benefit to the state, unless the taxpayer is being examined by the Internal Revenue Service for the same year or years on the same issues. (b) (1) In any case of two or more organizations, trades, or businesses (whether or not organized in the United States and whether or not affiliated) owned or controlled directly or indirectly by the same interests, the Franchise Tax Board may distribute, apportion, or allocate gross income, deductions, credits, or allowances between or among these organizations, trades, or businesses, if the board determines that the distribution, apportionment, or allocation is necessary in order to prevent evasion of taxes or clearly to reflect the income of any of these organizations, trades, or businesses. In the case of any transfer (or license) of intangible property (within the meaning of Section 936(h)(3)(B) of the Internal Revenue Code), the income with respect to that transfer or license shall be commensurate with the income attributable to the intangible property. (2) In making distributions, apportionments, and allocations under this section, the Franchise Tax Board shall generally follow the rules, regulations, and procedures of the Internal Revenue Service in making audits under Section 482 of the Internal Revenue Code. Any of these rules, regulations, and procedures adopted by the Franchise Tax Board shall not be subject to review by the Office of Administrative Law. (3) If the Internal Revenue Service has conducted a detailed audit pursuant to Section 482 of the Internal Revenue Code or Subchapter N of Chapter 1 of Subtitle A of the Internal Revenue Code and has made adjustments pursuant to those provisions, it shall be presumed, to the extent that the provisions relate to the determination of the amount of income and factors required to be taken into account pursuant to Section 25110, that no further adjustments are necessary for this state's purposes. If the Internal Revenue Service has conducted a detailed audit pursuant to Section 482 of the Internal Revenue Code or Subchapter N of Chapter 1 of Subtitle A of the Internal Revenue Code and has made or proposed no adjustments to the transactions examined, it shall be presumed, to the extent that the provisions relate to the determination of the amount of income and factors required to be taken into account pursuant to Section 25110, that no adjustment is necessary for this state's purposes. These presumptions apply to all Internal Revenue Service audit determinations, including determinations made by the Appeals and Competent Authority. These presumptions shall be overcome if the Franchise Tax Board or the taxpayer demonstrates that an adjustment or a failure to make an adjustment was erroneous, if it demonstrates that the results of such an adjustment would produce a minimal tax change for federal purposes because of correlative or offsetting adjustments or for other reasons, or if substantially the same federal tax result was obtained under other sections of the Internal Revenue Code. No inference shall be drawn from an Internal Revenue Service failure to audit international transactions pursuant to Section 482 of the Internal Revenue Code or Subchapter N of Chapter 1 of Subtitle A of the Internal Revenue Code and it shall not be presumed that any of those transactions were correctly reported. SEC. 102.5. Section 25114 of the Revenue and Taxation Code is amended to read: 25114. (a) The Franchise Tax Board, for purposes of administering the provisions of this article, shall examine the returns filed by taxpayers subject to these provisions. Where this examination reveals potential noncompliance, a detailed examination shall be made, notwithstanding the potential net revenue benefit to the state, unless the taxpayer is being examined by the Internal Revenue Service for the same year or years on the same issues. (b) (1) In any case of two or more organizations, trades, or businesses (whether or not organized in the United States and whether or not affiliated) owned or controlled directly or indirectly by the same interests, the Franchise Tax Board may distribute, apportion, or allocate gross income, deductions, credits, or allowances between or among these organizations, trades, or businesses, if the board determines that the distribution, apportionment, or allocation is necessary in order to prevent evasion of taxes or clearly to reflect the income of any of these organizations, trades, or businesses. In the case of any transfer (or license) of intangible property (within the meaning of Section 936(h)(3)(B) of the Internal Revenue Code), the income with respect to that transfer or license shall be commensurate with the income attributable to the intangible property. (2) In making distributions, apportionments, and allocations under this section, the Franchise Tax Board shall generally follow the rules, regulations, and procedures of the Internal Revenue Service in making audits under Section 482 of the Internal Revenue Code. Any of these rules, regulations, and procedures adopted by the Franchise Tax Board shall not be subject to review by the Office of Administrative Law. (3) If the Internal Revenue Service has conducted a detailed audit pursuant to Section 482 of the Internal Revenue Code or Subchapter N of Chapter 1 of Subtitle A of the Internal Revenue Code and has made adjustments pursuant to those provisions, it shall be presumed, to the extent the provisions relate to the determination of the amount of income and factors required to be taken into account pursuant to Section 25110, that no further adjustments are necessary for this state's purposes. If the Internal Revenue Service has conducted a detailed audit pursuant to Section 482 of the Internal Revenue Code or Subchapter N of Chapter 1 of Subtitle A of the Internal Revenue Code and has made or proposed no adjustments to the transactions examined, it shall be presumed, to the extent the provisions relate to the determination of the amount of income and factors required to be taken into account pursuant to Section 25110, that no adjustment is necessary for this state's purposes. These presumptions shall apply to all Internal Revenue Service audit determinations, including determinations made by Appeals and Competent Authority. These presumptions shall be overcome if the Franchise Tax Board or the taxpayer demonstrates that an adjustment or a failure to make an adjustment was erroneous, if it demonstrates that the results of such an adjustment would produce a minimal tax change for federal purposes because of correlative or offsetting adjustments or for other reasons, or if substantially the same federal tax result was obtained under other sections of the Internal Revenue Code. No inference shall be drawn from an Internal Revenue Service failure to audit international transactions pursuant to Section 482 of the Internal Revenue Code or Subchapter N of Chapter 1 of Subtitle A of the Internal Revenue Code and it shall not be presumed that any of those transactions were correctly reported. (4) Notwithstanding subdivision (a), to the extent that a corporation's federal tax has been properly determined by reference to the profit split method under Section 936(h)(5)(C)(ii) of the Internal Revenue Code, the allocation of combined taxable income under the profit split method shall be presumed to be a proper allocation under the principles of Section 482 of the Internal Revenue Code. This presumption may be rebutted. For purposes of this paragraph, "combined taxable income" shall be computed in accordance with Section 936(h)(5)(C)(ii) of the Internal Revenue Code. SEC. 103. Section 1185 of the Unemployment Insurance Code is amended to read: 1185. The director, in collaboration with the Franchise Tax Board, shall do all of the following: (a) Identify taxpayers who have overpaid disability insurance contributions in any or all tax years from January 1, 1993, to December 31, 1995, inclusive, and have not received refunds due to them. For purposes of this subdivision, "taxpayers" means any individual who filed a FTB Form 540A or 540EZ. (b) (1) By October 15, 1997, credit the taxpayers identified in this subdivision with the amount of any overpaid disability insurance pursuant to Section 17061 of the Revenue and Taxation Code. If the amount credited pursuant to this subdivision exceeds any amount then due from the taxpayer, the difference shall be refunded to the taxpayer. For taxable years 1993, 1994, and 1995, inclusive, interest, at the rate established pursuant to Section 19521 of the Revenue and Taxation Code, shall accrue from April 15 of the tax year following the overpayment to a date preceding the date of the refund warrant by not more than 30 days. (2) Identify and refund overpayments, with interest, to those taxpayers who have overpaid disability insurance contributions, and who have not claimed refunds due to them. (3) Interest on overpayments of disability insurance contributions shall be allowed and paid pursuant to Sections 19340 and 19341 of the Revenue and Taxation Code. (4) For purposes of Section 19340 of the Revenue and Taxation Code, any overpayment of disability insurance contributions shall be deemed to have been paid on the last day prescribed for filing the return under Article 1 (commencing with Section 18501) or Article 2 (commencing with Section 18601) of Chapter 2 of Part 10.2 of the Revenue and Taxation Code without regard to any extension of time for filing the return with respect to which the overpayment is allowable as a credit under Section 17061 of the Revenue and Taxation Code. SEC. 104. The amendments made by this act to Sections 17053.49 and 23649 of the Revenue and Taxation Code apply to taxable or income years beginning on or after January 1, 1998. SEC. 105. The amendments made by this act to Sections 18622, 19059, 19060, and 19311 of the Revenue and Taxation Code apply to federal determinations that become final (as defined by this act) on or after January 1, 2000. SEC. 106. Sections 6 and 84 of this bill incorporate amendments to Sections 17053.49 and 23649 of the Revenue and Taxation Code, respectively, proposed by this bill and AB 473. If both this bill and AB 473 are enacted and each bill amends Sections 17053.49 and 23649 of the Revenue and Taxation Code, then Sections 17053.49 and 23649 of the Revenue and Taxation Code, as amended by this bill, shall remain operative only until the operative date of AB 473, at which time Sections 17053.49 and 23649 of the Revenue and Taxation Code, as amended by AB 473, shall become operative. SEC. 107. (a) The amendments to subdivision (a) of Section 24410 of the Revenue and Taxation Code made by this act shall apply to all income years for which the Franchise Tax Board may propose an assessment or allow a claim for refund. (b) The Legislature finds and declares that the amendments to subdivision (a) of Section 24410 of the Revenue and Taxation Code made by this act fulfill a statewide public purpose because they revise a potentially unconstitutional provision contained in the Bank and Corporation Tax Law. (c) Section 97.5 of this bill incorporates amendments to Section 24410 of the Revenue and Taxation Code proposed by both this bill and SB 1125. It shall only become operative if (1) both bills are enacted and become effective on or before January 1, 2000, (2) each bill amends Section 24410 of the Revenue and Taxation Code, and (3) this bill is enacted after SB 1125, in which case Section 24410 of the Revenue and Taxation Code, as amended by SB 1125, shall remain operative only until the operative date of this bill, at which time Section 97.5 of this bill shall become operative and Section 97 of this bill shall not become operative. SEC. 108. (a) The amendments made by this act to paragraph (3) of subdivision (b) of Section 25114 of the Revenue and Taxation Code do not constitute a change in, but are declaratory of, existing law. (b) Section 102.5 of this bill incorporates amendments to Section 25114 of the Revenue and Taxation Code proposed by both this bill and AB 1208. It shall only become operative if (1) both bills are enacted and become effective on or before January 1, 2000, (2) each bill amends Section 25114 of the Revenue and Taxation Code, and (3) this bill is enacted after AB 1208, in which case Section 25114 of the Revenue and Taxation Code, as amended by AB 1208, shall remain operative only until the operative date of this bill, at which time Section 102.5 of this bill shall become operative and Section 102 shall not become operative. (c) If Section 102.5 of this bill becomes operative, then the amendments made by this act adding paragraph (4) to subdivision (b) of Section 25114 of the Revenue and Taxation Code shall become operative on January 1, 1999, and shall apply to all income years for which the Franchise Tax Board may propose an assessment or allow a claim for refund. SEC. 109. This act provides for a tax levy within the meaning of Article IV of the Constitution and shall go into immediate effect.