23800. Subchapter S of Chapter 1 of Subtitle A of the Internal
Revenue Code, relating to the tax treatment of "S corporations" and
their shareholders, shall apply, except as otherwise provided.
23800.5. (a) Section 1361(b)(3) of the Internal Revenue Code,
relating to treatment of certain wholly owned subsidiaries, is
modified as follows:
(1) For purposes of Part 10 (commencing with Section 17001), Part
10.2 (commencing with Section 18401), and this part:
(A) Section 1361(b)(3)(A)(i) of the Internal Revenue Code shall
apply, except as provided in subparagraph (B).
(B) There is hereby imposed a tax annually in an amount equal to
the applicable amount specified in paragraph (1) of subdivision (d)
of Section 23153 on a qualified Subchapter S subsidiary that is
incorporated under the laws of this state, 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,
or doing business in this state.
(C) Every qualified Subchapter S subsidiary described in
subparagraph (B) shall be subject to the tax imposed under
subparagraph (B) from the earlier of the date of incorporation,
qualification, or commencement of business in 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
in this state.
(2) For purposes of Part 10 (commencing with Section 17001), Part
10.2 (commencing with Section 18401), and this part:
(A) Section 1361(b)(3)(A)(ii) of the Internal Revenue Code does
not apply and, in lieu thereof, subparagraph (B) shall apply and all
references to Section 1361(b)(3)(A)(ii) of the Internal Revenue Code
shall be treated as a reference to subparagraph (B).
(B) All activities, assets, liabilities, including liability for
the tax imposed under this subdivision, and items of income,
deduction, and credit of a qualified Subchapter S subsidiary shall be
treated as activities (including activities for purposes of Section
23101), assets, liabilities, and those items, as the case may be, of
the "S corporation."
(3) Section 1361(b)(3)(B) of the Internal Revenue Code is modified
to include the following requirements in addition to the
requirements contained therein:
(A) The "S corporation" has in effect a valid election to treat
the corporation as a qualified Subchapter S subsidiary for federal
income tax purposes.
(B) An election made by the "S corporation" under Section 1361(b)
(3)(B)(ii) of the Internal Revenue Code to treat the corporation as a
qualified Subchapter S subsidiary for federal income tax purposes
shall be treated for purposes of this part as an election made by the
"S corporation" under this subdivision and a separate election under
paragraph (3) of subdivision (e) of Section 23051.5 may not be
allowed.
(C) No election under this subdivision shall be allowed unless the
"S corporation" has made the election under Section 1361(b)(3)(B)
(ii) of the Internal Revenue Code to treat the corporation as a
qualified Subchapter S subsidiary for federal income tax purposes.
(b) Section 1361(c)(6) of the Internal Revenue Code, relating to
certain exempt organizations permitted as shareholders, is modified
by substituting a reference to Section 17631 or Section 23701d in
lieu of the reference to Section 501(c)(3) of the Internal Revenue
Code and by substituting a reference to Section 17631 or Section
23701 in lieu of the reference to Section 501(a) of the Internal
Revenue Code.
(c) Section 1361(e)(1)(B)(ii) of the Internal Revenue Code,
relating to certain trusts not eligible, is modified by substituting
"under Part 10 (commencing with Section 17001) or this part" in lieu
of "under this subtitle."
(d) Section 1361(e)(3) of the Internal Revenue Code, relating to
election, is modified to include the following provisions:
(1) An election made by the trustee under Section 1361(e) of the
Internal Revenue Code to be an electing small business trust for
federal income tax purposes shall be treated for purposes of this
part as an election made by the trustee under this subdivision and a
separate election under paragraph (3) of subdivision (e) of Section
23051.5 may not be allowed. Any election made shall apply to the
taxable year of the trust for which that election is made and to all
subsequent taxable years of that trust, unless revoked with the
consent of the Franchise Tax Board.
(2) No election under this subdivision shall be allowed unless the
trustee has made the election under Section 1361(e) of the Internal
Revenue Code to be an electing small business trust for federal
income tax purposes.
23801. (a) A corporation that has in effect for federal income tax
purposes a valid election under Section 1362(a) of the Internal
Revenue Code shall be an "S" corporation for purposes of Part 10
(commencing with Section 17001), Part 10.2 (commencing with Section
18401), and this part.
(b) A corporation that is an "S corporation" for federal income
tax purposes, shall be an "S corporation" for purposes of Part 10
(commencing with Section 17001), Part 10.2 (commencing with Section
18401), and this part, and its shareholders shall be shareholders of
an "S corporation" without regard to whether the corporation is
qualified to do business or is incorporated in this state.
(c) Except as provided in subdivision (d), a corporation that is
an "S corporation" for purposes of this part may not be included in a
combined report pursuant to Chapter 17 (commencing with Section
25101).
(d) (1) In cases where the Franchise Tax Board determines that the
reported income or loss of a group of commonly owned or controlled
corporations (within the meaning of Section 25105), that includes one
or more corporations treated as an "S corporation" under Chapter 4.5
(commencing with Section 23800), does not clearly reflect income (or
loss) of a member of that group or represents an evasion of tax by
one or more members of that group, and the Franchise Tax Board
determines that the comparable uncontrolled price method prescribed
by regulations pursuant to Section 482 of the Internal Revenue Code
cannot practically be applied, the Franchise Tax Board may, in lieu
of other methods prescribed by regulations pursuant to Section 482 of
the Internal Revenue Code, apply methods of unitary combination,
pursuant to Article 1 (commencing with Section 25101) of Chapter 17,
to properly reflect the income or loss of the members of the group.
(2) The application of the provisions of this subdivision shall
not affect the treatment of any corporation as an "S corporation."
(e) (1) A termination of a federal election pursuant to Section
1362(d) of the Internal Revenue Code, that is not an inadvertent
termination pursuant to Section 1362(f) of the Internal Revenue Code,
shall simultaneously terminate the "S corporation" election for
purposes of Part 10 (commencing with Section 17001), Part 10.2
(commencing with Section 18401), and this part.
(2) A federal termination by revocation shall be effective for
purposes of this part and shall be reported to the Franchise Tax
Board in the form and manner prescribed by the Franchise Tax Board no
later than the last date allowed for filing federal termination for
that year under Section 1362(d) of the Internal Revenue Code.
(f) The tax for a "C corporation" for a short year shall be
determined in accordance with Chapter 13 (commencing with Section
24631), in lieu of Section 1362(e)(5) of the Internal Revenue Code.
(g) Section 1362(d)(3) of the Internal Revenue Code, relating to
circumstances where passive investment income exceeds 25 percent of
gross receipts for three consecutive taxable years and the
corporation has accumulated earnings and profits, does not apply
unless the "S" election is terminated for federal income tax
purposes.
(h) (1) The provisions of Section 1362(b)(5) of the Internal
Revenue Code, relating to authority to treat late elections, etc., as
timely, shall apply only for taxable years beginning on or after
January 1, 1997, with respect to elections under Section 1362(a) of
the Internal Revenue Code for taxable years beginning on or after
January 1, 1997.
(2) Notwithstanding the provisions of paragraph (1), if for any
taxable year beginning on or after January 1, 2003, a corporation
fails to qualify as an "S corporation" for federal income tax
purposes solely because the federal Form 2553 (Election by a Small
Business Corporation) was not filed timely, the corporation shall be
treated for purposes of this part as an "S corporation" for the
taxable year the "S corporation" election should have been made, and
for each subsequent year until terminated, if the corporation and its
shareholders have filed with the Internal Revenue Service a federal
Form 2553 requesting automatic relief with respect to the late "S
corporation" election, in full compliance with the federal Revenue
Procedure 1997-48, I.R.B. 1997-43, and have received notification of
the acceptance of the untimely filed "S corporation" election from
the Internal Revenue Service. A copy of the notification shall be
provided to the Franchise Tax Board upon request.
(i) The provisions of Section 1362(f) of the Internal Revenue
Code, relating to inadvertent invalid elections or terminations,
shall apply only for taxable years beginning on or after January 1,
1997, with respect to elections under Section 1362(a) of the Internal
Revenue Code for taxable years beginning on or after January 1,
1997.
23802. (a) Section 1363(a) of the Internal Revenue Code, relating
to the taxability of an "S" corporation does not apply.
(b) Corporations that are "S" corporations under this chapter
shall continue to be subject to the taxes imposed under Chapter 2
(commencing with Section 23101) and Chapter 3 (commencing with
Section 23501), except as follows:
(1) The tax imposed under Section 23151 or 23501 shall be imposed
at a rate of 1 1/2 percent rather than the rate specified in those
sections.
(2) In the case of an "S" corporation that is also a financial
corporation, the rate of tax specified in paragraph (1) shall be
increased by the excess of the rate imposed under Section 23183 over
the rate imposed under Section 23151.
(c) An "S" corporation shall be subject to the minimum franchise
tax imposed under Section 23153.
(d) (1) For purposes of subdivision (b), an "S" corporation shall
be allowed a deduction under Section 24416 or 24416.1 (relating to
net operating loss deductions), but only with respect to losses
incurred during periods in which the corporation is an "S"
corporation for purposes of this part.
(2) Section 1371(b) of the Internal Revenue Code, relating to
denial of carryovers between "C" years and "S" years, shall apply for
purposes of the tax imposed under subdivision (b), except as
provided in paragraph (1).
(3) The provisions of this subdivision do not affect the amount of
any item of income or loss computed in accordance with the
provisions of Section 1366 of the Internal Revenue Code, relating to
pass-thru of items to shareholders.
(4) For purposes of subdivision (b) of Section 17276, relating to
limitations on loss carryovers, losses passed through to shareholders
of an"S" corporation, to the extent otherwise allowable without
application of that subdivision, shall be fully included in the net
operating loss of that shareholder and then that subdivision shall be
applied to the entire net operating loss.
(e) For purposes of computing the taxes specified in subdivision
(b), an"S" corporation shall be allowed a deduction from income for
built-in gains and passive investment income for which a tax has been
imposed under this part in accordance with the provisions of Section
1374 of the Internal Revenue Code, relating to tax imposed on
certain built-in gains, or Section 1375 of the Internal Revenue Code,
relating to tax imposed on passive investment income.
(f) For purposes of computing taxes imposed under this part, as
provided in subdivision (b):
(1) An "S" corporation shall compute its deductions for
amortization and depreciation in accordance with the provisions of
Part 10 (commencing with Section 17001) of Division 2.
(2) Section 465 of the Internal Revenue Code, relating to
limitation of deductions to the amount at risk, shall be applied in
the same manner as in the case of an individual.
(3) (A) Section 469 of the Internal Revenue Code, relating to
limitations on passive activity losses and credits, shall be applied
in the same manner as in the case of an individual. For purposes of
the tax imposed under Section 23151 or 23501, as modified by this
section, material participation shall be determined in accordance
with Section 469(h) of the Internal Revenue Code, relating to certain
closely held "C" corporations and personal service corporations.
(B) For purposes of this paragraph, the "adjusted gross income" of
the"S" corporation shall be equal to its "net income," as determined
under Section 24341 with the modifications required by this
subdivision, except that no deduction shall be allowed for
contributions allowed by Section 24357.
(4) The exclusion provided under Section 18152.5 may not be
allowed to an "S" corporation.
(5) The deduction for bad debts under paragraph (2) of subdivision
(a) of Section 24348 may not be allowed to an "S" corporation.
(g) (1) The provisions of Section 1363(d) of the Internal Revenue
Code, relating to recapture of LIFO benefits, shall be modified for
purposes of this part to refer to Section 19101 in lieu of Section
6601 of the Internal Revenue Code.
(2) For purposes of Section 19023, relating to the definition of
"estimated tax," and Section 19142, relating to an addition to tax
for underpayment of estimated tax, the tax imposed pursuant to this
subdivision is not a tax imposed by this part.
23802.5. (a) Section 1366(a)(1) of the Internal Revenue Code,
relating to determination of shareholder's tax liability, is modified
to apply to the final taxable year of a trust or estate that
terminates before the end of the corporation's taxable year.
(b) Section 1366(d)(1)(A) of the Internal Revenue Code, relating
to losses and deductions that cannot exceed shareholder's basis in
stock and debt, is modified to additionally provide that the adjusted
basis of a shareholder's stock in the "S corporation" is to be
decreased by distributions by the corporation that were not
includable in the income of the shareholder by reason of Section 1368
of the Internal Revenue Code.
(c) Section 1366(d)(3) of the Internal Revenue Code, relating to
carryover of disallowed losses and deductions to post-termination
transition period, is modified to provide that to the extent that any
increase in adjusted basis described in Section 1366(d)(3)(B) of the
Internal Revenue Code would have increased the shareholder's amount
at risk under Section 465 if the increase had occurred on the day
preceding the commencement of the post-termination transition period,
rules similar to the rules described in Section 1366(d)(3)(A) to
(C), inclusive, of the Internal Revenue Code shall apply to any
losses disallowed by reason of Section 465(a) of the Internal Revenue
Code.
23803. (a) With respect to credits that are otherwise allowed to
reduce the taxes imposed under this part:
(1) The amount of any credit to be claimed shall be limited to
one-third of the amount otherwise allowable.
(2) (A) Any unused portion of the credit allowable under paragraph
(1) (one-third of the total credit) shall be allowed to be carried
forward and may not be subject to additional reductions under
paragraph (1) in later years.
(B) No carryforward shall be allowed for the portion of the credit
denied under paragraph (1) (two-thirds of the total credit).
(C) Credits carried forward from taxable years beginning prior to
the first taxable year in which the corporation is treated as an "S
corporation" under this part, shall be reduced in accordance with
paragraph (1) for that first taxable year and may not be subject to
additional reductions under paragraph (1) in later years.
(D) The provisions of paragraphs (2) and (3) of subdivision (f) of
Section 23802 shall be applied prior to the reduction required by
paragraph (1).
(E) No portion of any credit to which this subdivision applies
shall be passed through to the shareholders of the "S corporation."
(F) The provisions of this subdivision do not affect the amount of
any credit computed under Part 10 (commencing with Section 17001)
for pass through to shareholders in accordance with the provisions of
Section 1366 of the Internal Revenue Code.
(b) Section 1366(f) of the Internal Revenue Code, relating to
special rules, shall be modified as follows:
(1) The amount of tax used to compute the loss allowed by Section
1366(f)(2) shall be the amount of tax imposed on built-in gains under
this part.
(2) The amount of tax used to compute the reduction allowed by
Section 1366(f)(3) shall be the amount of tax imposed on excess net
passive income under this part.
23804. Section 1367(b)(4) of the Internal Revenue Code, relating to
adjustments in case of inherited stock, shall apply for decedents
dying after December 31, 1996.
23806. (a) Section 1371(a) of the Internal Revenue Code, relating
to application of Subchapter C rules, is modified to provide that,
notwithstanding subdivisions (a) and (e) of Sections 17024.5 and
23051.5, any election by an "S corporation" or its shareholders under
Section 338 of the Internal Revenue Code, relating to certain stock
purchases treated as asset acquisitions, for federal purposes shall
be treated as an election for purposes of this part and a separate
election under paragraph (3) of subdivision (e) of Section 17024.5 or
23051.5 shall not be allowed.
(b) No election under Section 338 of the Internal Revenue Code,
relating to certain stock purchases treated as asset acquisitions,
shall be allowed for state purposes unless the "S corporation" or its
shareholders made a valid election for federal purposes under
Section 338 of the Internal Revenue Code.
(c) Section 1371 (d) of the Internal Revenue Code shall not apply.
(d) (1) Subdivisions (a) and (b) shall apply to any transaction
occurring on or after January 1, 1998, in a taxable year beginning on
or after January 1, 1997.
(2) Subdivision (c) shall apply to taxable years beginning on or
after January 1, 1997.
23807. Section 1372 of the Internal Revenue Code shall be modified
so that references to partnership treatment shall be to Internal
Revenue Code partnership provisions, as modified by Part 10
(commencing with Section 17001).
23808. Sections 1373 and 1379 of the Internal Revenue Code shall
not be applicable.
23809. There is hereby imposed a tax on built-in gains attributable
to California sources, determined in accordance with the provisions
of Section 1374 of the Internal Revenue Code, relating to tax imposed
on certain built-in gains, as modified by this section.
(a) (1) The rate of tax specified in Section 1374(b)(1) of the
Internal Revenue Code shall be equal to the rate of tax imposed under
Section 23151 in lieu of the rate of tax specified in Section 11(b)
of the Internal Revenue Code.
(2) In the case of an "S" corporation that is also a financial
corporation, the rate of tax specified in paragraph (1) shall be
increased by the excess of the rate imposed under Section 23183 over
the rate imposed under Section 23151.
(b) The provisions of Section 1374(b)(3) of the Internal Revenue
Code, relating to credits, are modified to provide that the tax
imposed under subdivision (a) may not be reduced by any credits
allowed under this part.
(c) The provisions of Section 1374(b)(4) of the Internal Revenue
Code, relating to coordination with Section 1201(a), do not apply.
(d) (1) For corporations described in paragraph (2), the
provisions of Sections 1374(c)(1) and 1374(d)(7) of the Internal
Revenue Code apply, based upon the effective date of the election to
be treated as an "S" corporation for federal tax purposes, regardless
of the date on which the corporation became an "S" corporation for
state tax purposes.
(2) This subdivision applies to a corporation that, for its last
taxable year beginning before January 1, 2002, was an "S" corporation
for federal tax purposes and a "C" corporation for purposes of Part
10 (commencing with Section 17001), Part 10.2 (commencing with
Section 18401), and this part, and, as a result of the enactment of
Chapter 35 of the Statutes of 2002, is an "S" corporation for the
corporation's taxable years beginning on or after January 1, 2002.
(e) The amendments to this section made by the act adding this
subdivision shall apply to taxable years beginning on or after
January 1, 2002.
23811. Except as otherwise provided in this section, there is
hereby imposed a tax on passive investment income attributable to
California sources, determined in accordance with the provisions of
Section 1375 of the Internal Revenue Code, relating to tax imposed on
passive investment income, as modified by this section.
(a) The tax imposed under this section may not be imposed on an "S
corporation" that has no excess net passive income for federal
income tax purposes determined in accordance with Section 1375 of the
Internal Revenue Code.
(b) (1) The rate of tax shall be equal to the rate of tax imposed
under Section 23151 in lieu of Section 11(b) of the Internal Revenue
Code.
(2) In the case of an "S corporation" that is also a financial
corporation, the rate of tax specified in paragraph (1) shall be
increased by the excess of the rate imposed under Section 23183 over
the rate imposed under Section 23151.
(c) Section 1375(c)(1) of the Internal Revenue Code, relating to
credits, is modified to provide that the tax imposed under
subdivision (a) may not be reduced by any credits allowed under this
part.
(d) The term "subchapter C earnings and profits" or "accumulated
earnings and profits" as used in Section 1375 of the Internal Revenue
Code shall mean the "subchapter C earnings and profits" of the
corporation attributable to California sources determined under this
part, modified as provided in subdivision (e).
(e) (1) In the case of a corporation that is an "S corporation"
for purposes of this part for its first taxable year for which it has
in effect a valid federal S election, there shall be allowed as a
deduction in determining that corporation's "subchapter C earnings
and profits" at the close of any taxable year the amount of any
consent dividend (as provided in paragraph (2)) paid after the close
of that taxable year.
(2) In the event there is a determination that a corporation
described in paragraph (1) has "subchapter C earnings and profits" at
the close of any taxable year, that corporation shall be entitled to
distribute a consent dividend to its shareholders. The amount of the
consent dividend may not exceed the difference between the
corporation's "subchapter C earnings and profits" determined under
subdivision (d) at the close of the taxable year with respect to
which the determination is made and the corporation's "subchapter C
earnings and profits" for federal income tax purposes at the same
date. A consent dividend must be paid within 90 days of the date of
the determination that the corporation has "subchapter C earnings and
profits." For this purpose, the date of a determination means the
effective date of a closing agreement pursuant to Section 19441, the
date an assessment of tax imposed by this section becomes final, or
the date of execution by the corporation of an agreement with the
Franchise Tax Board relating to liability for the tax imposed by this
section. For purposes of Part 10 (commencing with Section 17001),
Part 10.2 (commencing with Section 18401), and this part, a
corporation must make the election provided in Section 1368(e)(3) of
the Internal Revenue Code.
(3) If a corporation distributes a consent dividend, it shall
claim the deduction provided in paragraph (1) by filing a claim
therefor with the Franchise Tax Board within 120 days of the date of
the determination specified in paragraph (2).
(4) The collection of tax imposed by this section from a
corporation described in paragraph (2) shall be stayed for 120 days
after the date of the determination specified in paragraph (2). If a
claim is filed pursuant to paragraph (3), collection of that tax
shall be further stayed until the date the claim is acted upon by the
Franchise Tax Board.
(5) If a claim is filed pursuant to paragraph (3), the running of
the statute of limitations on the making of assessments and actions
for collection of the tax imposed by this section shall be suspended
for a period of two years after the date of the determination
specified in paragraph (2).
23813. Section 1377(b)(2) of the Internal Revenue Code, relating to
determination defined, is modified to include, in addition to the
items specified therein, the following:
(a) A decision by the State Board of Equalization that has become
final.
(b) A closing agreement made under Article 6 (commencing with
Section 19441) of Chapter 6 of Part 10.2.
(c) A final disposition by the Franchise Tax Board of a claim for
refund.
23800. Subchapter S of Chapter 1 of Subtitle A of the Internal
Revenue Code, relating to the tax treatment of "S corporations" and
their shareholders, shall apply, except as otherwise provided.
23800.5. (a) Section 1361(b)(3) of the Internal Revenue Code,
relating to treatment of certain wholly owned subsidiaries, is
modified as follows:
(1) For purposes of Part 10 (commencing with Section 17001), Part
10.2 (commencing with Section 18401), and this part:
(A) Section 1361(b)(3)(A)(i) of the Internal Revenue Code shall
apply, except as provided in subparagraph (B).
(B) There is hereby imposed a tax annually in an amount equal to
the applicable amount specified in paragraph (1) of subdivision (d)
of Section 23153 on a qualified Subchapter S subsidiary that is
incorporated under the laws of this state, 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,
or doing business in this state.
(C) Every qualified Subchapter S subsidiary described in
subparagraph (B) shall be subject to the tax imposed under
subparagraph (B) from the earlier of the date of incorporation,
qualification, or commencement of business in 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
in this state.
(2) For purposes of Part 10 (commencing with Section 17001), Part
10.2 (commencing with Section 18401), and this part:
(A) Section 1361(b)(3)(A)(ii) of the Internal Revenue Code does
not apply and, in lieu thereof, subparagraph (B) shall apply and all
references to Section 1361(b)(3)(A)(ii) of the Internal Revenue Code
shall be treated as a reference to subparagraph (B).
(B) All activities, assets, liabilities, including liability for
the tax imposed under this subdivision, and items of income,
deduction, and credit of a qualified Subchapter S subsidiary shall be
treated as activities (including activities for purposes of Section
23101), assets, liabilities, and those items, as the case may be, of
the "S corporation."
(3) Section 1361(b)(3)(B) of the Internal Revenue Code is modified
to include the following requirements in addition to the
requirements contained therein:
(A) The "S corporation" has in effect a valid election to treat
the corporation as a qualified Subchapter S subsidiary for federal
income tax purposes.
(B) An election made by the "S corporation" under Section 1361(b)
(3)(B)(ii) of the Internal Revenue Code to treat the corporation as a
qualified Subchapter S subsidiary for federal income tax purposes
shall be treated for purposes of this part as an election made by the
"S corporation" under this subdivision and a separate election under
paragraph (3) of subdivision (e) of Section 23051.5 may not be
allowed.
(C) No election under this subdivision shall be allowed unless the
"S corporation" has made the election under Section 1361(b)(3)(B)
(ii) of the Internal Revenue Code to treat the corporation as a
qualified Subchapter S subsidiary for federal income tax purposes.
(b) Section 1361(c)(6) of the Internal Revenue Code, relating to
certain exempt organizations permitted as shareholders, is modified
by substituting a reference to Section 17631 or Section 23701d in
lieu of the reference to Section 501(c)(3) of the Internal Revenue
Code and by substituting a reference to Section 17631 or Section
23701 in lieu of the reference to Section 501(a) of the Internal
Revenue Code.
(c) Section 1361(e)(1)(B)(ii) of the Internal Revenue Code,
relating to certain trusts not eligible, is modified by substituting
"under Part 10 (commencing with Section 17001) or this part" in lieu
of "under this subtitle."
(d) Section 1361(e)(3) of the Internal Revenue Code, relating to
election, is modified to include the following provisions:
(1) An election made by the trustee under Section 1361(e) of the
Internal Revenue Code to be an electing small business trust for
federal income tax purposes shall be treated for purposes of this
part as an election made by the trustee under this subdivision and a
separate election under paragraph (3) of subdivision (e) of Section
23051.5 may not be allowed. Any election made shall apply to the
taxable year of the trust for which that election is made and to all
subsequent taxable years of that trust, unless revoked with the
consent of the Franchise Tax Board.
(2) No election under this subdivision shall be allowed unless the
trustee has made the election under Section 1361(e) of the Internal
Revenue Code to be an electing small business trust for federal
income tax purposes.
23801. (a) A corporation that has in effect for federal income tax
purposes a valid election under Section 1362(a) of the Internal
Revenue Code shall be an "S" corporation for purposes of Part 10
(commencing with Section 17001), Part 10.2 (commencing with Section
18401), and this part.
(b) A corporation that is an "S corporation" for federal income
tax purposes, shall be an "S corporation" for purposes of Part 10
(commencing with Section 17001), Part 10.2 (commencing with Section
18401), and this part, and its shareholders shall be shareholders of
an "S corporation" without regard to whether the corporation is
qualified to do business or is incorporated in this state.
(c) Except as provided in subdivision (d), a corporation that is
an "S corporation" for purposes of this part may not be included in a
combined report pursuant to Chapter 17 (commencing with Section
25101).
(d) (1) In cases where the Franchise Tax Board determines that the
reported income or loss of a group of commonly owned or controlled
corporations (within the meaning of Section 25105), that includes one
or more corporations treated as an "S corporation" under Chapter 4.5
(commencing with Section 23800), does not clearly reflect income (or
loss) of a member of that group or represents an evasion of tax by
one or more members of that group, and the Franchise Tax Board
determines that the comparable uncontrolled price method prescribed
by regulations pursuant to Section 482 of the Internal Revenue Code
cannot practically be applied, the Franchise Tax Board may, in lieu
of other methods prescribed by regulations pursuant to Section 482 of
the Internal Revenue Code, apply methods of unitary combination,
pursuant to Article 1 (commencing with Section 25101) of Chapter 17,
to properly reflect the income or loss of the members of the group.
(2) The application of the provisions of this subdivision shall
not affect the treatment of any corporation as an "S corporation."
(e) (1) A termination of a federal election pursuant to Section
1362(d) of the Internal Revenue Code, that is not an inadvertent
termination pursuant to Section 1362(f) of the Internal Revenue Code,
shall simultaneously terminate the "S corporation" election for
purposes of Part 10 (commencing with Section 17001), Part 10.2
(commencing with Section 18401), and this part.
(2) A federal termination by revocation shall be effective for
purposes of this part and shall be reported to the Franchise Tax
Board in the form and manner prescribed by the Franchise Tax Board no
later than the last date allowed for filing federal termination for
that year under Section 1362(d) of the Internal Revenue Code.
(f) The tax for a "C corporation" for a short year shall be
determined in accordance with Chapter 13 (commencing with Section
24631), in lieu of Section 1362(e)(5) of the Internal Revenue Code.
(g) Section 1362(d)(3) of the Internal Revenue Code, relating to
circumstances where passive investment income exceeds 25 percent of
gross receipts for three consecutive taxable years and the
corporation has accumulated earnings and profits, does not apply
unless the "S" election is terminated for federal income tax
purposes.
(h) (1) The provisions of Section 1362(b)(5) of the Internal
Revenue Code, relating to authority to treat late elections, etc., as
timely, shall apply only for taxable years beginning on or after
January 1, 1997, with respect to elections under Section 1362(a) of
the Internal Revenue Code for taxable years beginning on or after
January 1, 1997.
(2) Notwithstanding the provisions of paragraph (1), if for any
taxable year beginning on or after January 1, 2003, a corporation
fails to qualify as an "S corporation" for federal income tax
purposes solely because the federal Form 2553 (Election by a Small
Business Corporation) was not filed timely, the corporation shall be
treated for purposes of this part as an "S corporation" for the
taxable year the "S corporation" election should have been made, and
for each subsequent year until terminated, if the corporation and its
shareholders have filed with the Internal Revenue Service a federal
Form 2553 requesting automatic relief with respect to the late "S
corporation" election, in full compliance with the federal Revenue
Procedure 1997-48, I.R.B. 1997-43, and have received notification of
the acceptance of the untimely filed "S corporation" election from
the Internal Revenue Service. A copy of the notification shall be
provided to the Franchise Tax Board upon request.
(i) The provisions of Section 1362(f) of the Internal Revenue
Code, relating to inadvertent invalid elections or terminations,
shall apply only for taxable years beginning on or after January 1,
1997, with respect to elections under Section 1362(a) of the Internal
Revenue Code for taxable years beginning on or after January 1,
1997.
23802. (a) Section 1363(a) of the Internal Revenue Code, relating
to the taxability of an "S" corporation does not apply.
(b) Corporations that are "S" corporations under this chapter
shall continue to be subject to the taxes imposed under Chapter 2
(commencing with Section 23101) and Chapter 3 (commencing with
Section 23501), except as follows:
(1) The tax imposed under Section 23151 or 23501 shall be imposed
at a rate of 1 1/2 percent rather than the rate specified in those
sections.
(2) In the case of an "S" corporation that is also a financial
corporation, the rate of tax specified in paragraph (1) shall be
increased by the excess of the rate imposed under Section 23183 over
the rate imposed under Section 23151.
(c) An "S" corporation shall be subject to the minimum franchise
tax imposed under Section 23153.
(d) (1) For purposes of subdivision (b), an "S" corporation shall
be allowed a deduction under Section 24416 or 24416.1 (relating to
net operating loss deductions), but only with respect to losses
incurred during periods in which the corporation is an "S"
corporation for purposes of this part.
(2) Section 1371(b) of the Internal Revenue Code, relating to
denial of carryovers between "C" years and "S" years, shall apply for
purposes of the tax imposed under subdivision (b), except as
provided in paragraph (1).
(3) The provisions of this subdivision do not affect the amount of
any item of income or loss computed in accordance with the
provisions of Section 1366 of the Internal Revenue Code, relating to
pass-thru of items to shareholders.
(4) For purposes of subdivision (b) of Section 17276, relating to
limitations on loss carryovers, losses passed through to shareholders
of an"S" corporation, to the extent otherwise allowable without
application of that subdivision, shall be fully included in the net
operating loss of that shareholder and then that subdivision shall be
applied to the entire net operating loss.
(e) For purposes of computing the taxes specified in subdivision
(b), an"S" corporation shall be allowed a deduction from income for
built-in gains and passive investment income for which a tax has been
imposed under this part in accordance with the provisions of Section
1374 of the Internal Revenue Code, relating to tax imposed on
certain built-in gains, or Section 1375 of the Internal Revenue Code,
relating to tax imposed on passive investment income.
(f) For purposes of computing taxes imposed under this part, as
provided in subdivision (b):
(1) An "S" corporation shall compute its deductions for
amortization and depreciation in accordance with the provisions of
Part 10 (commencing with Section 17001) of Division 2.
(2) Section 465 of the Internal Revenue Code, relating to
limitation of deductions to the amount at risk, shall be applied in
the same manner as in the case of an individual.
(3) (A) Section 469 of the Internal Revenue Code, relating to
limitations on passive activity losses and credits, shall be applied
in the same manner as in the case of an individual. For purposes of
the tax imposed under Section 23151 or 23501, as modified by this
section, material participation shall be determined in accordance
with Section 469(h) of the Internal Revenue Code, relating to certain
closely held "C" corporations and personal service corporations.
(B) For purposes of this paragraph, the "adjusted gross income" of
the"S" corporation shall be equal to its "net income," as determined
under Section 24341 with the modifications required by this
subdivision, except that no deduction shall be allowed for
contributions allowed by Section 24357.
(4) The exclusion provided under Section 18152.5 may not be
allowed to an "S" corporation.
(5) The deduction for bad debts under paragraph (2) of subdivision
(a) of Section 24348 may not be allowed to an "S" corporation.
(g) (1) The provisions of Section 1363(d) of the Internal Revenue
Code, relating to recapture of LIFO benefits, shall be modified for
purposes of this part to refer to Section 19101 in lieu of Section
6601 of the Internal Revenue Code.
(2) For purposes of Section 19023, relating to the definition of
"estimated tax," and Section 19142, relating to an addition to tax
for underpayment of estimated tax, the tax imposed pursuant to this
subdivision is not a tax imposed by this part.
23802.5. (a) Section 1366(a)(1) of the Internal Revenue Code,
relating to determination of shareholder's tax liability, is modified
to apply to the final taxable year of a trust or estate that
terminates before the end of the corporation's taxable year.
(b) Section 1366(d)(1)(A) of the Internal Revenue Code, relating
to losses and deductions that cannot exceed shareholder's basis in
stock and debt, is modified to additionally provide that the adjusted
basis of a shareholder's stock in the "S corporation" is to be
decreased by distributions by the corporation that were not
includable in the income of the shareholder by reason of Section 1368
of the Internal Revenue Code.
(c) Section 1366(d)(3) of the Internal Revenue Code, relating to
carryover of disallowed losses and deductions to post-termination
transition period, is modified to provide that to the extent that any
increase in adjusted basis described in Section 1366(d)(3)(B) of the
Internal Revenue Code would have increased the shareholder's amount
at risk under Section 465 if the increase had occurred on the day
preceding the commencement of the post-termination transition period,
rules similar to the rules described in Section 1366(d)(3)(A) to
(C), inclusive, of the Internal Revenue Code shall apply to any
losses disallowed by reason of Section 465(a) of the Internal Revenue
Code.
23803. (a) With respect to credits that are otherwise allowed to
reduce the taxes imposed under this part:
(1) The amount of any credit to be claimed shall be limited to
one-third of the amount otherwise allowable.
(2) (A) Any unused portion of the credit allowable under paragraph
(1) (one-third of the total credit) shall be allowed to be carried
forward and may not be subject to additional reductions under
paragraph (1) in later years.
(B) No carryforward shall be allowed for the portion of the credit
denied under paragraph (1) (two-thirds of the total credit).
(C) Credits carried forward from taxable years beginning prior to
the first taxable year in which the corporation is treated as an "S
corporation" under this part, shall be reduced in accordance with
paragraph (1) for that first taxable year and may not be subject to
additional reductions under paragraph (1) in later years.
(D) The provisions of paragraphs (2) and (3) of subdivision (f) of
Section 23802 shall be applied prior to the reduction required by
paragraph (1).
(E) No portion of any credit to which this subdivision applies
shall be passed through to the shareholders of the "S corporation."
(F) The provisions of this subdivision do not affect the amount of
any credit computed under Part 10 (commencing with Section 17001)
for pass through to shareholders in accordance with the provisions of
Section 1366 of the Internal Revenue Code.
(b) Section 1366(f) of the Internal Revenue Code, relating to
special rules, shall be modified as follows:
(1) The amount of tax used to compute the loss allowed by Section
1366(f)(2) shall be the amount of tax imposed on built-in gains under
this part.
(2) The amount of tax used to compute the reduction allowed by
Section 1366(f)(3) shall be the amount of tax imposed on excess net
passive income under this part.
23804. Section 1367(b)(4) of the Internal Revenue Code, relating to
adjustments in case of inherited stock, shall apply for decedents
dying after December 31, 1996.
23806. (a) Section 1371(a) of the Internal Revenue Code, relating
to application of Subchapter C rules, is modified to provide that,
notwithstanding subdivisions (a) and (e) of Sections 17024.5 and
23051.5, any election by an "S corporation" or its shareholders under
Section 338 of the Internal Revenue Code, relating to certain stock
purchases treated as asset acquisitions, for federal purposes shall
be treated as an election for purposes of this part and a separate
election under paragraph (3) of subdivision (e) of Section 17024.5 or
23051.5 shall not be allowed.
(b) No election under Section 338 of the Internal Revenue Code,
relating to certain stock purchases treated as asset acquisitions,
shall be allowed for state purposes unless the "S corporation" or its
shareholders made a valid election for federal purposes under
Section 338 of the Internal Revenue Code.
(c) Section 1371 (d) of the Internal Revenue Code shall not apply.
(d) (1) Subdivisions (a) and (b) shall apply to any transaction
occurring on or after January 1, 1998, in a taxable year beginning on
or after January 1, 1997.
(2) Subdivision (c) shall apply to taxable years beginning on or
after January 1, 1997.
23807. Section 1372 of the Internal Revenue Code shall be modified
so that references to partnership treatment shall be to Internal
Revenue Code partnership provisions, as modified by Part 10
(commencing with Section 17001).
23808. Sections 1373 and 1379 of the Internal Revenue Code shall
not be applicable.
23809. There is hereby imposed a tax on built-in gains attributable
to California sources, determined in accordance with the provisions
of Section 1374 of the Internal Revenue Code, relating to tax imposed
on certain built-in gains, as modified by this section.
(a) (1) The rate of tax specified in Section 1374(b)(1) of the
Internal Revenue Code shall be equal to the rate of tax imposed under
Section 23151 in lieu of the rate of tax specified in Section 11(b)
of the Internal Revenue Code.
(2) In the case of an "S" corporation that is also a financial
corporation, the rate of tax specified in paragraph (1) shall be
increased by the excess of the rate imposed under Section 23183 over
the rate imposed under Section 23151.
(b) The provisions of Section 1374(b)(3) of the Internal Revenue
Code, relating to credits, are modified to provide that the tax
imposed under subdivision (a) may not be reduced by any credits
allowed under this part.
(c) The provisions of Section 1374(b)(4) of the Internal Revenue
Code, relating to coordination with Section 1201(a), do not apply.
(d) (1) For corporations described in paragraph (2), the
provisions of Sections 1374(c)(1) and 1374(d)(7) of the Internal
Revenue Code apply, based upon the effective date of the election to
be treated as an "S" corporation for federal tax purposes, regardless
of the date on which the corporation became an "S" corporation for
state tax purposes.
(2) This subdivision applies to a corporation that, for its last
taxable year beginning before January 1, 2002, was an "S" corporation
for federal tax purposes and a "C" corporation for purposes of Part
10 (commencing with Section 17001), Part 10.2 (commencing with
Section 18401), and this part, and, as a result of the enactment of
Chapter 35 of the Statutes of 2002, is an "S" corporation for the
corporation's taxable years beginning on or after January 1, 2002.
(e) The amendments to this section made by the act adding this
subdivision shall apply to taxable years beginning on or after
January 1, 2002.
23811. Except as otherwise provided in this section, there is
hereby imposed a tax on passive investment income attributable to
California sources, determined in accordance with the provisions of
Section 1375 of the Internal Revenue Code, relating to tax imposed on
passive investment income, as modified by this section.
(a) The tax imposed under this section may not be imposed on an "S
corporation" that has no excess net passive income for federal
income tax purposes determined in accordance with Section 1375 of the
Internal Revenue Code.
(b) (1) The rate of tax shall be equal to the rate of tax imposed
under Section 23151 in lieu of Section 11(b) of the Internal Revenue
Code.
(2) In the case of an "S corporation" that is also a financial
corporation, the rate of tax specified in paragraph (1) shall be
increased by the excess of the rate imposed under Section 23183 over
the rate imposed under Section 23151.
(c) Section 1375(c)(1) of the Internal Revenue Code, relating to
credits, is modified to provide that the tax imposed under
subdivision (a) may not be reduced by any credits allowed under this
part.
(d) The term "subchapter C earnings and profits" or "accumulated
earnings and profits" as used in Section 1375 of the Internal Revenue
Code shall mean the "subchapter C earnings and profits" of the
corporation attributable to California sources determined under this
part, modified as provided in subdivision (e).
(e) (1) In the case of a corporation that is an "S corporation"
for purposes of this part for its first taxable year for which it has
in effect a valid federal S election, there shall be allowed as a
deduction in determining that corporation's "subchapter C earnings
and profits" at the close of any taxable year the amount of any
consent dividend (as provided in paragraph (2)) paid after the close
of that taxable year.
(2) In the event there is a determination that a corporation
described in paragraph (1) has "subchapter C earnings and profits" at
the close of any taxable year, that corporation shall be entitled to
distribute a consent dividend to its shareholders. The amount of the
consent dividend may not exceed the difference between the
corporation's "subchapter C earnings and profits" determined under
subdivision (d) at the close of the taxable year with respect to
which the determination is made and the corporation's "subchapter C
earnings and profits" for federal income tax purposes at the same
date. A consent dividend must be paid within 90 days of the date of
the determination that the corporation has "subchapter C earnings and
profits." For this purpose, the date of a determination means the
effective date of a closing agreement pursuant to Section 19441, the
date an assessment of tax imposed by this section becomes final, or
the date of execution by the corporation of an agreement with the
Franchise Tax Board relating to liability for the tax imposed by this
section. For purposes of Part 10 (commencing with Section 17001),
Part 10.2 (commencing with Section 18401), and this part, a
corporation must make the election provided in Section 1368(e)(3) of
the Internal Revenue Code.
(3) If a corporation distributes a consent dividend, it shall
claim the deduction provided in paragraph (1) by filing a claim
therefor with the Franchise Tax Board within 120 days of the date of
the determination specified in paragraph (2).
(4) The collection of tax imposed by this section from a
corporation described in paragraph (2) shall be stayed for 120 days
after the date of the determination specified in paragraph (2). If a
claim is filed pursuant to paragraph (3), collection of that tax
shall be further stayed until the date the claim is acted upon by the
Franchise Tax Board.
(5) If a claim is filed pursuant to paragraph (3), the running of
the statute of limitations on the making of assessments and actions
for collection of the tax imposed by this section shall be suspended
for a period of two years after the date of the determination
specified in paragraph (2).
23813. Section 1377(b)(2) of the Internal Revenue Code, relating to
determination defined, is modified to include, in addition to the
items specified therein, the following:
(a) A decision by the State Board of Equalization that has become
final.
(b) A closing agreement made under Article 6 (commencing with
Section 19441) of Chapter 6 of Part 10.2.
(c) A final disposition by the Franchise Tax Board of a claim for
refund.
23800. Subchapter S of Chapter 1 of Subtitle A of the Internal
Revenue Code, relating to the tax treatment of "S corporations" and
their shareholders, shall apply, except as otherwise provided.
23800.5. (a) Section 1361(b)(3) of the Internal Revenue Code,
relating to treatment of certain wholly owned subsidiaries, is
modified as follows:
(1) For purposes of Part 10 (commencing with Section 17001), Part
10.2 (commencing with Section 18401), and this part:
(A) Section 1361(b)(3)(A)(i) of the Internal Revenue Code shall
apply, except as provided in subparagraph (B).
(B) There is hereby imposed a tax annually in an amount equal to
the applicable amount specified in paragraph (1) of subdivision (d)
of Section 23153 on a qualified Subchapter S subsidiary that is
incorporated under the laws of this state, 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,
or doing business in this state.
(C) Every qualified Subchapter S subsidiary described in
subparagraph (B) shall be subject to the tax imposed under
subparagraph (B) from the earlier of the date of incorporation,
qualification, or commencement of business in 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
in this state.
(2) For purposes of Part 10 (commencing with Section 17001), Part
10.2 (commencing with Section 18401), and this part:
(A) Section 1361(b)(3)(A)(ii) of the Internal Revenue Code does
not apply and, in lieu thereof, subparagraph (B) shall apply and all
references to Section 1361(b)(3)(A)(ii) of the Internal Revenue Code
shall be treated as a reference to subparagraph (B).
(B) All activities, assets, liabilities, including liability for
the tax imposed under this subdivision, and items of income,
deduction, and credit of a qualified Subchapter S subsidiary shall be
treated as activities (including activities for purposes of Section
23101), assets, liabilities, and those items, as the case may be, of
the "S corporation."
(3) Section 1361(b)(3)(B) of the Internal Revenue Code is modified
to include the following requirements in addition to the
requirements contained therein:
(A) The "S corporation" has in effect a valid election to treat
the corporation as a qualified Subchapter S subsidiary for federal
income tax purposes.
(B) An election made by the "S corporation" under Section 1361(b)
(3)(B)(ii) of the Internal Revenue Code to treat the corporation as a
qualified Subchapter S subsidiary for federal income tax purposes
shall be treated for purposes of this part as an election made by the
"S corporation" under this subdivision and a separate election under
paragraph (3) of subdivision (e) of Section 23051.5 may not be
allowed.
(C) No election under this subdivision shall be allowed unless the
"S corporation" has made the election under Section 1361(b)(3)(B)
(ii) of the Internal Revenue Code to treat the corporation as a
qualified Subchapter S subsidiary for federal income tax purposes.
(b) Section 1361(c)(6) of the Internal Revenue Code, relating to
certain exempt organizations permitted as shareholders, is modified
by substituting a reference to Section 17631 or Section 23701d in
lieu of the reference to Section 501(c)(3) of the Internal Revenue
Code and by substituting a reference to Section 17631 or Section
23701 in lieu of the reference to Section 501(a) of the Internal
Revenue Code.
(c) Section 1361(e)(1)(B)(ii) of the Internal Revenue Code,
relating to certain trusts not eligible, is modified by substituting
"under Part 10 (commencing with Section 17001) or this part" in lieu
of "under this subtitle."
(d) Section 1361(e)(3) of the Internal Revenue Code, relating to
election, is modified to include the following provisions:
(1) An election made by the trustee under Section 1361(e) of the
Internal Revenue Code to be an electing small business trust for
federal income tax purposes shall be treated for purposes of this
part as an election made by the trustee under this subdivision and a
separate election under paragraph (3) of subdivision (e) of Section
23051.5 may not be allowed. Any election made shall apply to the
taxable year of the trust for which that election is made and to all
subsequent taxable years of that trust, unless revoked with the
consent of the Franchise Tax Board.
(2) No election under this subdivision shall be allowed unless the
trustee has made the election under Section 1361(e) of the Internal
Revenue Code to be an electing small business trust for federal
income tax purposes.
23801. (a) A corporation that has in effect for federal income tax
purposes a valid election under Section 1362(a) of the Internal
Revenue Code shall be an "S" corporation for purposes of Part 10
(commencing with Section 17001), Part 10.2 (commencing with Section
18401), and this part.
(b) A corporation that is an "S corporation" for federal income
tax purposes, shall be an "S corporation" for purposes of Part 10
(commencing with Section 17001), Part 10.2 (commencing with Section
18401), and this part, and its shareholders shall be shareholders of
an "S corporation" without regard to whether the corporation is
qualified to do business or is incorporated in this state.
(c) Except as provided in subdivision (d), a corporation that is
an "S corporation" for purposes of this part may not be included in a
combined report pursuant to Chapter 17 (commencing with Section
25101).
(d) (1) In cases where the Franchise Tax Board determines that the
reported income or loss of a group of commonly owned or controlled
corporations (within the meaning of Section 25105), that includes one
or more corporations treated as an "S corporation" under Chapter 4.5
(commencing with Section 23800), does not clearly reflect income (or
loss) of a member of that group or represents an evasion of tax by
one or more members of that group, and the Franchise Tax Board
determines that the comparable uncontrolled price method prescribed
by regulations pursuant to Section 482 of the Internal Revenue Code
cannot practically be applied, the Franchise Tax Board may, in lieu
of other methods prescribed by regulations pursuant to Section 482 of
the Internal Revenue Code, apply methods of unitary combination,
pursuant to Article 1 (commencing with Section 25101) of Chapter 17,
to properly reflect the income or loss of the members of the group.
(2) The application of the provisions of this subdivision shall
not affect the treatment of any corporation as an "S corporation."
(e) (1) A termination of a federal election pursuant to Section
1362(d) of the Internal Revenue Code, that is not an inadvertent
termination pursuant to Section 1362(f) of the Internal Revenue Code,
shall simultaneously terminate the "S corporation" election for
purposes of Part 10 (commencing with Section 17001), Part 10.2
(commencing with Section 18401), and this part.
(2) A federal termination by revocation shall be effective for
purposes of this part and shall be reported to the Franchise Tax
Board in the form and manner prescribed by the Franchise Tax Board no
later than the last date allowed for filing federal termination for
that year under Section 1362(d) of the Internal Revenue Code.
(f) The tax for a "C corporation" for a short year shall be
determined in accordance with Chapter 13 (commencing with Section
24631), in lieu of Section 1362(e)(5) of the Internal Revenue Code.
(g) Section 1362(d)(3) of the Internal Revenue Code, relating to
circumstances where passive investment income exceeds 25 percent of
gross receipts for three consecutive taxable years and the
corporation has accumulated earnings and profits, does not apply
unless the "S" election is terminated for federal income tax
purposes.
(h) (1) The provisions of Section 1362(b)(5) of the Internal
Revenue Code, relating to authority to treat late elections, etc., as
timely, shall apply only for taxable years beginning on or after
January 1, 1997, with respect to elections under Section 1362(a) of
the Internal Revenue Code for taxable years beginning on or after
January 1, 1997.
(2) Notwithstanding the provisions of paragraph (1), if for any
taxable year beginning on or after January 1, 2003, a corporation
fails to qualify as an "S corporation" for federal income tax
purposes solely because the federal Form 2553 (Election by a Small
Business Corporation) was not filed timely, the corporation shall be
treated for purposes of this part as an "S corporation" for the
taxable year the "S corporation" election should have been made, and
for each subsequent year until terminated, if the corporation and its
shareholders have filed with the Internal Revenue Service a federal
Form 2553 requesting automatic relief with respect to the late "S
corporation" election, in full compliance with the federal Revenue
Procedure 1997-48, I.R.B. 1997-43, and have received notification of
the acceptance of the untimely filed "S corporation" election from
the Internal Revenue Service. A copy of the notification shall be
provided to the Franchise Tax Board upon request.
(i) The provisions of Section 1362(f) of the Internal Revenue
Code, relating to inadvertent invalid elections or terminations,
shall apply only for taxable years beginning on or after January 1,
1997, with respect to elections under Section 1362(a) of the Internal
Revenue Code for taxable years beginning on or after January 1,
1997.
23802. (a) Section 1363(a) of the Internal Revenue Code, relating
to the taxability of an "S" corporation does not apply.
(b) Corporations that are "S" corporations under this chapter
shall continue to be subject to the taxes imposed under Chapter 2
(commencing with Section 23101) and Chapter 3 (commencing with
Section 23501), except as follows:
(1) The tax imposed under Section 23151 or 23501 shall be imposed
at a rate of 1 1/2 percent rather than the rate specified in those
sections.
(2) In the case of an "S" corporation that is also a financial
corporation, the rate of tax specified in paragraph (1) shall be
increased by the excess of the rate imposed under Section 23183 over
the rate imposed under Section 23151.
(c) An "S" corporation shall be subject to the minimum franchise
tax imposed under Section 23153.
(d) (1) For purposes of subdivision (b), an "S" corporation shall
be allowed a deduction under Section 24416 or 24416.1 (relating to
net operating loss deductions), but only with respect to losses
incurred during periods in which the corporation is an "S"
corporation for purposes of this part.
(2) Section 1371(b) of the Internal Revenue Code, relating to
denial of carryovers between "C" years and "S" years, shall apply for
purposes of the tax imposed under subdivision (b), except as
provided in paragraph (1).
(3) The provisions of this subdivision do not affect the amount of
any item of income or loss computed in accordance with the
provisions of Section 1366 of the Internal Revenue Code, relating to
pass-thru of items to shareholders.
(4) For purposes of subdivision (b) of Section 17276, relating to
limitations on loss carryovers, losses passed through to shareholders
of an"S" corporation, to the extent otherwise allowable without
application of that subdivision, shall be fully included in the net
operating loss of that shareholder and then that subdivision shall be
applied to the entire net operating loss.
(e) For purposes of computing the taxes specified in subdivision
(b), an"S" corporation shall be allowed a deduction from income for
built-in gains and passive investment income for which a tax has been
imposed under this part in accordance with the provisions of Section
1374 of the Internal Revenue Code, relating to tax imposed on
certain built-in gains, or Section 1375 of the Internal Revenue Code,
relating to tax imposed on passive investment income.
(f) For purposes of computing taxes imposed under this part, as
provided in subdivision (b):
(1) An "S" corporation shall compute its deductions for
amortization and depreciation in accordance with the provisions of
Part 10 (commencing with Section 17001) of Division 2.
(2) Section 465 of the Internal Revenue Code, relating to
limitation of deductions to the amount at risk, shall be applied in
the same manner as in the case of an individual.
(3) (A) Section 469 of the Internal Revenue Code, relating to
limitations on passive activity losses and credits, shall be applied
in the same manner as in the case of an individual. For purposes of
the tax imposed under Section 23151 or 23501, as modified by this
section, material participation shall be determined in accordance
with Section 469(h) of the Internal Revenue Code, relating to certain
closely held "C" corporations and personal service corporations.
(B) For purposes of this paragraph, the "adjusted gross income" of
the"S" corporation shall be equal to its "net income," as determined
under Section 24341 with the modifications required by this
subdivision, except that no deduction shall be allowed for
contributions allowed by Section 24357.
(4) The exclusion provided under Section 18152.5 may not be
allowed to an "S" corporation.
(5) The deduction for bad debts under paragraph (2) of subdivision
(a) of Section 24348 may not be allowed to an "S" corporation.
(g) (1) The provisions of Section 1363(d) of the Internal Revenue
Code, relating to recapture of LIFO benefits, shall be modified for
purposes of this part to refer to Section 19101 in lieu of Section
6601 of the Internal Revenue Code.
(2) For purposes of Section 19023, relating to the definition of
"estimated tax," and Section 19142, relating to an addition to tax
for underpayment of estimated tax, the tax imposed pursuant to this
subdivision is not a tax imposed by this part.
23802.5. (a) Section 1366(a)(1) of the Internal Revenue Code,
relating to determination of shareholder's tax liability, is modified
to apply to the final taxable year of a trust or estate that
terminates before the end of the corporation's taxable year.
(b) Section 1366(d)(1)(A) of the Internal Revenue Code, relating
to losses and deductions that cannot exceed shareholder's basis in
stock and debt, is modified to additionally provide that the adjusted
basis of a shareholder's stock in the "S corporation" is to be
decreased by distributions by the corporation that were not
includable in the income of the shareholder by reason of Section 1368
of the Internal Revenue Code.
(c) Section 1366(d)(3) of the Internal Revenue Code, relating to
carryover of disallowed losses and deductions to post-termination
transition period, is modified to provide that to the extent that any
increase in adjusted basis described in Section 1366(d)(3)(B) of the
Internal Revenue Code would have increased the shareholder's amount
at risk under Section 465 if the increase had occurred on the day
preceding the commencement of the post-termination transition period,
rules similar to the rules described in Section 1366(d)(3)(A) to
(C), inclusive, of the Internal Revenue Code shall apply to any
losses disallowed by reason of Section 465(a) of the Internal Revenue
Code.
23803. (a) With respect to credits that are otherwise allowed to
reduce the taxes imposed under this part:
(1) The amount of any credit to be claimed shall be limited to
one-third of the amount otherwise allowable.
(2) (A) Any unused portion of the credit allowable under paragraph
(1) (one-third of the total credit) shall be allowed to be carried
forward and may not be subject to additional reductions under
paragraph (1) in later years.
(B) No carryforward shall be allowed for the portion of the credit
denied under paragraph (1) (two-thirds of the total credit).
(C) Credits carried forward from taxable years beginning prior to
the first taxable year in which the corporation is treated as an "S
corporation" under this part, shall be reduced in accordance with
paragraph (1) for that first taxable year and may not be subject to
additional reductions under paragraph (1) in later years.
(D) The provisions of paragraphs (2) and (3) of subdivision (f) of
Section 23802 shall be applied prior to the reduction required by
paragraph (1).
(E) No portion of any credit to which this subdivision applies
shall be passed through to the shareholders of the "S corporation."
(F) The provisions of this subdivision do not affect the amount of
any credit computed under Part 10 (commencing with Section 17001)
for pass through to shareholders in accordance with the provisions of
Section 1366 of the Internal Revenue Code.
(b) Section 1366(f) of the Internal Revenue Code, relating to
special rules, shall be modified as follows:
(1) The amount of tax used to compute the loss allowed by Section
1366(f)(2) shall be the amount of tax imposed on built-in gains under
this part.
(2) The amount of tax used to compute the reduction allowed by
Section 1366(f)(3) shall be the amount of tax imposed on excess net
passive income under this part.
23804. Section 1367(b)(4) of the Internal Revenue Code, relating to
adjustments in case of inherited stock, shall apply for decedents
dying after December 31, 1996.
23806. (a) Section 1371(a) of the Internal Revenue Code, relating
to application of Subchapter C rules, is modified to provide that,
notwithstanding subdivisions (a) and (e) of Sections 17024.5 and
23051.5, any election by an "S corporation" or its shareholders under
Section 338 of the Internal Revenue Code, relating to certain stock
purchases treated as asset acquisitions, for federal purposes shall
be treated as an election for purposes of this part and a separate
election under paragraph (3) of subdivision (e) of Section 17024.5 or
23051.5 shall not be allowed.
(b) No election under Section 338 of the Internal Revenue Code,
relating to certain stock purchases treated as asset acquisitions,
shall be allowed for state purposes unless the "S corporation" or its
shareholders made a valid election for federal purposes under
Section 338 of the Internal Revenue Code.
(c) Section 1371 (d) of the Internal Revenue Code shall not apply.
(d) (1) Subdivisions (a) and (b) shall apply to any transaction
occurring on or after January 1, 1998, in a taxable year beginning on
or after January 1, 1997.
(2) Subdivision (c) shall apply to taxable years beginning on or
after January 1, 1997.
23807. Section 1372 of the Internal Revenue Code shall be modified
so that references to partnership treatment shall be to Internal
Revenue Code partnership provisions, as modified by Part 10
(commencing with Section 17001).
23808. Sections 1373 and 1379 of the Internal Revenue Code shall
not be applicable.
23809. There is hereby imposed a tax on built-in gains attributable
to California sources, determined in accordance with the provisions
of Section 1374 of the Internal Revenue Code, relating to tax imposed
on certain built-in gains, as modified by this section.
(a) (1) The rate of tax specified in Section 1374(b)(1) of the
Internal Revenue Code shall be equal to the rate of tax imposed under
Section 23151 in lieu of the rate of tax specified in Section 11(b)
of the Internal Revenue Code.
(2) In the case of an "S" corporation that is also a financial
corporation, the rate of tax specified in paragraph (1) shall be
increased by the excess of the rate imposed under Section 23183 over
the rate imposed under Section 23151.
(b) The provisions of Section 1374(b)(3) of the Internal Revenue
Code, relating to credits, are modified to provide that the tax
imposed under subdivision (a) may not be reduced by any credits
allowed under this part.
(c) The provisions of Section 1374(b)(4) of the Internal Revenue
Code, relating to coordination with Section 1201(a), do not apply.
(d) (1) For corporations described in paragraph (2), the
provisions of Sections 1374(c)(1) and 1374(d)(7) of the Internal
Revenue Code apply, based upon the effective date of the election to
be treated as an "S" corporation for federal tax purposes, regardless
of the date on which the corporation became an "S" corporation for
state tax purposes.
(2) This subdivision applies to a corporation that, for its last
taxable year beginning before January 1, 2002, was an "S" corporation
for federal tax purposes and a "C" corporation for purposes of Part
10 (commencing with Section 17001), Part 10.2 (commencing with
Section 18401), and this part, and, as a result of the enactment of
Chapter 35 of the Statutes of 2002, is an "S" corporation for the
corporation's taxable years beginning on or after January 1, 2002.
(e) The amendments to this section made by the act adding this
subdivision shall apply to taxable years beginning on or after
January 1, 2002.
23811. Except as otherwise provided in this section, there is
hereby imposed a tax on passive investment income attributable to
California sources, determined in accordance with the provisions of
Section 1375 of the Internal Revenue Code, relating to tax imposed on
passive investment income, as modified by this section.
(a) The tax imposed under this section may not be imposed on an "S
corporation" that has no excess net passive income for federal
income tax purposes determined in accordance with Section 1375 of the
Internal Revenue Code.
(b) (1) The rate of tax shall be equal to the rate of tax imposed
under Section 23151 in lieu of Section 11(b) of the Internal Revenue
Code.
(2) In the case of an "S corporation" that is also a financial
corporation, the rate of tax specified in paragraph (1) shall be
increased by the excess of the rate imposed under Section 23183 over
the rate imposed under Section 23151.
(c) Section 1375(c)(1) of the Internal Revenue Code, relating to
credits, is modified to provide that the tax imposed under
subdivision (a) may not be reduced by any credits allowed under this
part.
(d) The term "subchapter C earnings and profits" or "accumulated
earnings and profits" as used in Section 1375 of the Internal Revenue
Code shall mean the "subchapter C earnings and profits" of the
corporation attributable to California sources determined under this
part, modified as provided in subdivision (e).
(e) (1) In the case of a corporation that is an "S corporation"
for purposes of this part for its first taxable year for which it has
in effect a valid federal S election, there shall be allowed as a
deduction in determining that corporation's "subchapter C earnings
and profits" at the close of any taxable year the amount of any
consent dividend (as provided in paragraph (2)) paid after the close
of that taxable year.
(2) In the event there is a determination that a corporation
described in paragraph (1) has "subchapter C earnings and profits" at
the close of any taxable year, that corporation shall be entitled to
distribute a consent dividend to its shareholders. The amount of the
consent dividend may not exceed the difference between the
corporation's "subchapter C earnings and profits" determined under
subdivision (d) at the close of the taxable year with respect to
which the determination is made and the corporation's "subchapter C
earnings and profits" for federal income tax purposes at the same
date. A consent dividend must be paid within 90 days of the date of
the determination that the corporation has "subchapter C earnings and
profits." For this purpose, the date of a determination means the
effective date of a closing agreement pursuant to Section 19441, the
date an assessment of tax imposed by this section becomes final, or
the date of execution by the corporation of an agreement with the
Franchise Tax Board relating to liability for the tax imposed by this
section. For purposes of Part 10 (commencing with Section 17001),
Part 10.2 (commencing with Section 18401), and this part, a
corporation must make the election provided in Section 1368(e)(3) of
the Internal Revenue Code.
(3) If a corporation distributes a consent dividend, it shall
claim the deduction provided in paragraph (1) by filing a claim
therefor with the Franchise Tax Board within 120 days of the date of
the determination specified in paragraph (2).
(4) The collection of tax imposed by this section from a
corporation described in paragraph (2) shall be stayed for 120 days
after the date of the determination specified in paragraph (2). If a
claim is filed pursuant to paragraph (3), collection of that tax
shall be further stayed until the date the claim is acted upon by the
Franchise Tax Board.
(5) If a claim is filed pursuant to paragraph (3), the running of
the statute of limitations on the making of assessments and actions
for collection of the tax imposed by this section shall be suspended
for a period of two years after the date of the determination
specified in paragraph (2).
23813. Section 1377(b)(2) of the Internal Revenue Code, relating to
determination defined, is modified to include, in addition to the
items specified therein, the following:
(a) A decision by the State Board of Equalization that has become
final.
(b) A closing agreement made under Article 6 (commencing with
Section 19441) of Chapter 6 of Part 10.2.
(c) A final disposition by the Franchise Tax Board of a claim for
refund.
