SB 797, as amended, Anderson. Income taxation: net operating losses: fraudulent investment arrangement losses.
The Personal Income Tax Law and the Corporation Tax Law, in modified conformity with federal income tax laws, allow a deduction for losses sustained during the taxable year and not compensated for by insurance or otherwise. Those state laws conform to specified revenue rulings and revenue procedures of the Internal Revenue Service regarding treatment of losses due to investment arrangements discovered to be criminally fraudulent, except that, among other things, net operating loss carrybacks and carryforwards are not allowed.
This bill would provide a safe harbor for determining the year in which those losses attributable to criminal fraud occurred, as described in a specified revenue procedure of the Internal Revenue Service, and would allow a net operating loss carryover or carryback of any resulting deduction from the losses in conformity with federal income tax law.
This bill would make a legislative finding and declaration relating to the public purpose served by the bill.
This bill would take effect immediately as a tax levy.
Vote: majority. Appropriation: no. Fiscal committee: yes. State-mandated local program: no.
The people of the State of California do enact as follows:
Section 17207.1 is added to the Revenue and
2Taxation Code, to read:
(a) (1) For each taxable year beginning on or after
4January 1, 2008, if a taxpayer that is a qualified investor, as defined
5in the Internal Revenue Service’s Revenue Procedure 2009-20,
6follows the procedures described in Section 6 of that Revenue
7Procedure for federal income tax purposes, and follows the same
8procedures for purposes of this part, the Franchise Tax Board shall
9not challenge the treatment described in paragraph (2) by the
10qualified investor with respect to the qualified loss.
11(2) The treatment described in this paragraph means all of the
12following:
13(A) The loss is deducted as a theft loss.
14(B) The taxable year in which the theft was discovered within
15the meaning of Section 165(e) of the Internal Revenue Codebegin insert,
16relating to theft loss,end insert is the
discovery year described in Section
174.04 of the Internal Revenue Service’s Revenue Procedure 2009-20.
18(C) The amount of the deduction is the amount specified in
19Section 5.02 of the Internal Revenue Service’s Revenue Procedure
202009-20.
21(b) To the extent a deduction resulting from the application of
22this section results in a net operating loss, Section 172 of the
23Internal Revenue Code, as applicable for federal income tax
24purposes for a taxable year, shall be applicable for purposes of this
25section for the same taxable year, without regard to Section
2617276.20.
Section 17276.21 of the Revenue and Taxation Code
28 is amended to read:
(a) Notwithstanding Sections 17276, 17276.1,
3017276.2, 17276.4, 17276.5, 17276.6, 17276.7, and 17276.20 of
31this code and Section 172 of the Internal Revenue Code, no net
32operating loss deduction shall be allowed for any taxable year
33beginning on or after January 1, 2008, and before January 1, 2012.
34(b) For any net operating loss or carryover of a net operating
35loss for which a deduction is denied by subdivision (a), the
P3 1carryover period under Section 172 of the Internal Revenue Code
2shall be extended as follows:
3(1) By one year, for losses incurred in taxable years beginning
4on or after January 1, 2010, and before January 1,
2011.
5(2) By two years, for losses incurred in taxable years beginning
6on or after January 1, 2009, and before January 1, 2010.
7(3) By three years, for losses incurred in taxable years beginning
8on or after January 1, 2008, and before January 1, 2009.
9(4) By four years, for losses incurred in taxable years beginning
10before January 1, 2008.
11(c) Notwithstanding subdivision (a), a net operating loss
12deduction shall be allowed for carryback of a net operating loss
13attributable to a taxable year beginning on or after January 1, 2013.
14(d) The provisions of this section shall not apply to the following
15taxpayers:
16(1) For any taxable year beginning on or after January 1, 2008,
17and before January 1, 2010, this section shall not apply to a
18taxpayer with net business income of less than five hundred
19thousand dollars ($500,000) for the taxable year. For purposes of
20this paragraph, business income means:
21(A) Income from a trade or business, whether conducted by the
22taxpayer or by a passthrough entity owned directly or indirectly
23by the taxpayer. For purposes of this paragraph, the term
24“passthrough entity” means a partnership or an “S” corporation.
25(B) Income from rental activity.
26(C) Income attributable to a farming business.
27(2) For any taxable year beginning on or after January 1, 2010,
28and before January 1, 2012, this section shall not apply to a
29taxpayer with modified adjusted gross income of less than three
30hundred thousand dollars ($300,000) for the taxable year. For
31purposes of this paragraph, “modified adjusted gross income”
32means the amount described in paragraph (2) of subdivision (h)
33of Section 17024.5, determined without regard to the deduction
34allowed under Section 172 of the Internal Revenue Code, relating
35to net operating loss deduction.
36(e) This section shall not apply to a loss resulting from the
37application of Section 17207.1.
Section 19057.5 is added to the Revenue and Taxation
39Code, to read:
Section 6501(h) of the Internal Revenue Code, relating
2begin delete to limitations on credit or refund with respect to the special period to net operating loss or capital loss
3of limitation with respectend delete
4carrybacks, shall apply to a net operating loss resulting from the
5application of Section 17207.1 or Section 24347.1, except as
6otherwise provided.
Section 19306.5 is added to the Revenue and Taxation
8Code, to read:
Section 6511(d)(2) of the Internal Revenue Code,
10relating tobegin delete the limitations on credit or refund with respect toend delete the
11special period of limitation with respect to net operating loss or
12capital loss carrybacks, shall apply to a net operating loss resulting
13from the application of Section 17207.1 or Section 24347.1, except
14as otherwise provided.
Section 24347.1 is added to the Revenue and Taxation
16Code, to read:
(a) (1) For each taxable year beginning on or after
18January 1, 2008, if a taxpayer that is a qualified investor, as defined
19in the Internal Revenue Service’s Revenue Procedure 2009-20,
20follows the procedures described in Section 6 of that Revenue
21Procedure for federal income tax purposes, and follows the same
22procedures for purposes of this part, the Franchise Tax Board shall
23not challenge the treatment described in paragraph (2) by the
24qualified investor with respect to the qualified loss.
25(2) The treatment described in this paragraph means all of the
26following:
27(A) The loss is deducted as a theft loss.
28(B) The taxable year in which the theft was discovered within
29the meaning of Section 165(e) of the Internal Revenue Codebegin insert,
30relating to theft loss,end insert is the discovery year described in Section
314.04 of the Internal Revenue Service’s Revenue Procedure 2009-20.
32(C) The amount of the deduction is the amount specified in
33Section 5.02 of the Internal Revenue Service’s Revenue Procedure
342009-20.
35(b) To the extent a deduction resulting from the application of
36this section results in a net operating loss, Section 172 of the
37Internal Revenue Code,begin insert
relating to net operating loss,end insert as applicable
38for federal income tax purposes for a taxable year, shall be
39applicable for purposes of this section for the same taxable year,
40without regard to Section 24416.20.
Section 24416.21 of the Revenue and Taxation Code
2 is amended to read:
(a) Notwithstanding Sections 24416, 24416.1,
424416.2, 24416.4, 24416.5, 24416.6, 24416.7, and 24416.20 of
5this code and Section 172 of the Internal Revenue Code, no net
6operating loss deduction shall be allowed for any taxable year
7beginning on or after January 1, 2008, and before January 1, 2012.
8(b) For any net operating loss or carryover of a net operating
9loss for which a deduction is denied by subdivision (a), the
10carryover period under Section 172 of the Internal Revenue Code
11shall be extended as follows:
12(1) By one year, for losses incurred in taxable years beginning
13on or after January 1, 2010, and before January 1,
2011.
14(2) By two years, for losses incurred in taxable years beginning
15on or after January 1, 2009, and before January 1, 2010.
16(3) By three years, for losses incurred in taxable years beginning
17on or after January 1, 2008, and before January 1, 2009.
18(4) By four years, for losses incurred in taxable years beginning
19before January 1, 2008.
20(c) Notwithstanding subdivision (a), a net operating loss
21deduction shall be allowed for carryback of a net operating loss
22attributable to a taxable year beginning on or after January 1, 2013.
23(d) The disallowance of any net operating loss deduction for
24any taxable
year beginning on or after January 1, 2008, and before
25January 1, 2010, pursuant to subdivision (a) shall not apply to a
26taxpayer with income subject to tax under this part of less than
27five hundred thousand dollars ($500,000) for the taxable year.
28(e) (1) The disallowance of any net operating loss deduction
29for any taxable year beginning on or after January 1, 2010, and
30before January 1, 2012, pursuant to subdivision (a) shall not apply
31to a taxpayer with preapportioned income of less than three hundred
32thousand dollars ($300,000) for the taxable year.
33(2) For purposes of this subdivision, “preapportioned income”
34means net income after state adjustments, before the application
35of the apportionment and allocation provisions of this part.
36(3) For taxpayers that are required to be included in a combined
37report under Section 25101 or authorized to be included in a
38combined report under Section 25101.15, the amount prescribed
39in paragraph (1) shall apply to the aggregate amount of
P6 1preapportioned income for all members included in a combined
2report.
3(f) Notwithstanding subdivision (a), this section shall not apply
4to a taxpayer that ceased to do business or has a final taxable year
5ending prior to August 28, 2008, that sold or transferred
6substantially all of its assets resulting in a gain on sale during a
7taxable year ending prior to August 28, 2008, for which the gain
8could be offset with existing net operating loss deductions and the
9sale or transfer occurred pursuant to a plan of reorganization under
10Chapter 11 of
Title 11 of the United States Code. An amended tax
11return claiming net operating loss deductions allowed pursuant to
12this subdivision shall be treated as a timely filed original return.
13(g) The Legislature finds and declares that the addition of
14subdivision (f) to this section by the act adding this subdivision
15fulfills a statewide public purpose by providing necessary tax relief
16for a taxpayer that ceased to do business or has a final taxable year
17ending prior to August 28, 2008, that sold or transferred
18substantially all of its assets resulting in a gain or sale during a
19taxable year prior to August 28, 2008, for which the gain could be
20offset with existing net operating loss deductions and the sale or
21transfer occurred pursuant to a plan of reorganization under Chapter
2211 of Title 11 of the United States Code, in order to ensure that
23these
taxpayers are not permanently denied the net operating loss
24deduction.
25(h) This section shall not apply to a loss resulting from the
26application of Section 24347.1.
The Legislature finds and declares that this act fulfills
28a statewide public purpose by providing tax relief for taxpayers
29who are innocent victims of fraudulent investment schemes.
This act provides for a tax levy within the meaning
31of Article IV of the Constitution and shall go into immediate effect.
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