California Revenue and Taxation Code
CH 17 - Allocation of Income
Article 1.5 Water's Edge Allocation
REVENUE AND TAXATION CODE
SECTION 25110-25116
25110. (a) Notwithstanding Section 25101, a qualified taxpayer, as
defined in paragraph (2) of subdivision (b), that is subject to the
tax imposed under this part, may elect to determine its income
derived from or attributable to sources within this state pursuant to
a water's-edge election in accordance with the provisions of this
part, as modified by this article. A taxpayer, that made a water'
s-edge election prior to January 1, 2006, shall take into account the
income and apportionment factors of the following affiliated
entities only:
(1) Domestic international sales corporations, as described in
Sections 991 to 994, inclusive, of the Internal Revenue Code and
foreign sales corporations as described in Sections 921 to 927,
inclusive, of the Internal Revenue Code.
(2) Any corporation (other than a bank), regardless of the place
where it is incorporated if the average of its property, payroll, and
sales factors within the United States is 20 percent or more.
(3) Corporations that are incorporated in the United States,
excluding corporations making an election pursuant to Sections 931 to
936, inclusive, of the Internal Revenue Code, of which more than 50
percent of their voting stock is owned or controlled directly or
indirectly by the same interests.
(4) A corporation that is not described in paragraphs (1) to (3),
inclusive, or paragraph (5), but only to the extent of its income
derived from or attributable to sources within the United States and
its factors assignable to a location within the United States in
accordance with paragraph (3) of subdivision (b). Income of that
corporation derived from or attributable to sources within the United
States as determined by federal income tax laws shall be limited to
and determined from the books of account maintained by the
corporation with respect to its activities conducted within the
United States.
(5) Export trade corporations, as described in Sections 970 to
972, inclusive, of the Internal Revenue Code.
(6) Any affiliated corporation which is a "controlled foreign
corporation," as defined in Section 957 of the Internal Revenue Code,
if all or part of the income of that affiliate is defined in Section
952 of Subpart F of the Internal Revenue Code ("Subpart F income").
The income and apportionment factors of any affiliate to be included
under this paragraph shall be determined by multiplying the income
and apportionment factors of that affiliate without application of
this paragraph by a fraction (not to exceed one), the numerator of
which is the "Subpart F income" of that corporation for that taxable
year and the denominator of which is the "earnings and profits" of
that corporation for that taxable year, as defined in Section 964 of
the Internal Revenue Code.
(7) (A) The income and factors of the above-enumerated
corporations shall be taken into account only if the income and
factors would have been taken into account under Section 25101 if
this section had not been enacted.
(B) The income and factors of a corporation that is not described
in paragraphs (1) to (3), inclusive, and paragraph (5) and that is an
electing taxpayer under this subdivision shall be taken into account
in determining its income only to the extent set forth in paragraph
(4).
(b) For purposes of this article and Section 24411 all of the
following definitions apply:
(1) An "affiliated corporation" means a corporation that is a
member of a commonly controlled group as defined in Section 25105.
(2) A "qualified taxpayer" means a corporation which does both of
the following:
(A) Files with the state tax return on which the water's-edge
election is made a consent to the taking of depositions at the time
and place most reasonably convenient to all parties from key domestic
corporate individuals and to the acceptance of subpoenas duces tecum
requiring reasonable production of documents to the Franchise Tax
Board as provided in Section 19504 or by the State Board of
Equalization as provided in Title 18, California Code of Regulations,
Section 5005, or by the courts of this state as provided in Chapter
2 (commencing with Section 1985) of Title 3 of Part 4 of, and Chapter
9 (commencing with Section 2025.010) of Title 4 of Part 4 of, the
Code of Civil Procedure. The consent relates to issues of
jurisdiction and service and does not waive any defenses a taxpayer
may otherwise have. The consent shall remain in effect so long as the
water's-edge election is in effect and shall be limited to providing
that information necessary to review or to adjust income or
deductions in a manner authorized under Sections 482, 861, Subpart F
of Part III of Subchapter N, or similar provisions of the Internal
Revenue Code, together with the regulations adopted pursuant to those
provisions, and for the conduct of an investigation with respect to
any unitary business in which the taxpayer may be involved.
(B) Agrees that for purposes of this article, dividends received
by any corporation whose income and apportionment factors are taken
into account pursuant to subdivision (a) from either of the following
are functionally related dividends and shall be presumed to be
business income:
(i) A corporation of which more than 50 percent of the voting
stock is owned, directly or indirectly, by members of the unitary
group and which is engaged in the same general line of business.
(ii) Any corporation that is either a significant source of supply
for the unitary business or a significant purchaser of the output of
the unitary business, or that sells a significant part of its output
or obtains a significant part of its raw materials or input from the
unitary business. "Significant," as used in this subparagraph, means
an amount of 15 percent or more of either input or output.
All other dividends shall be classified as business or nonbusiness
income without regard to this subparagraph.
(3) The definitions and locations of property, payroll, and sales
shall be determined under the laws and regulations that set forth the
apportionment formulas used by the individual states to assign net
income subject to taxes on or measured by net income in that state.
If a state does not impose a tax on or measured by net income or does
not have laws or regulations with respect to the assignment of
property, payroll, and sales, the laws and regulations provided in
Article 2 (commencing with Section 25120) shall apply.
Sales shall be considered to be made to a state only if the
corporation making the sale may otherwise be subject to a tax on or
measured by net income under the Constitution or laws of the United
States, and shall not include sales made to a corporation whose
income and apportionment factors are taken into account pursuant to
subdivision (a) in determining the amount of income of the taxpayer
derived from or attributable to sources within this state.
(4) "The United States" means the 50 states of the United States
and the District of Columbia.
(c) All references in this part to income determined pursuant to
Section 25101 shall also mean income determined pursuant to this
section.
(d) (1) This section shall apply only to a taxable year of a
taxpayer that determines its income derived from or attributable to
sources within this state pursuant to a water's-edge election made
prior to January 1, 2006, where that election may not be terminated
for that taxable year without the consent of the Franchise Tax Board
pursuant to paragraph (9) of subdivision (c) of Section 25113.
(2) This section shall be repealed on January 1, 2014.
25110. (a) Notwithstanding Section 25101, a qualified taxpayer, as
defined in paragraph (2) of subdivision (b), that is subject to the
tax imposed under this part, may elect to determine its income
derived from or attributable to sources within this state pursuant to
a water's-edge election in accordance with the provisions of this
part, as modified by this article. A taxpayer, that makes a water'
s-edge election on or after January 1, 2006, shall take into account
that portion of its own income and apportionment factors and the
income and apportionment factors of its affiliated entities to the
extent provided below:
(1) The entire income and apportionment factors of any of the
following corporations:
(A) Domestic international sales corporations, as described in
Sections 991 to 994, inclusive, of the Internal Revenue Code and
foreign sales corporations as described in Sections 921 to 927,
inclusive, of the Internal Revenue Code.
(B) Any corporation (other than a bank), regardless of the place
where it is incorporated if the average of its property, payroll, and
sales factors within the United States is 20 percent or more.
(C) Corporations that are incorporated in the United States,
excluding corporations making an election pursuant to Sections 931 to
936, inclusive, of the Internal Revenue Code.
(D) Export trade corporations, as described in Sections 970 to
972, inclusive, of the Internal Revenue Code.
(2) (A) With respect to a corporation that is not described in
subparagraphs (A), (B), (C), and (D) of paragraph (1), as provided in
either one or both of the following clauses:
(i) The income and apportionment factors of that corporation to
the extent of its income derived from or attributable to sources
within the United States and its factors assignable to a location
within the United States in accordance with paragraph (3) of
subdivision (b). Income of that corporation derived from or
attributable to sources within the United States as determined by
federal income tax laws shall be limited to, and determined from, the
books of account maintained by the corporation with respect to its
activities conducted within the United States.
(ii) The income and apportionment factors of that corporation that
is a "controlled foreign corporation," as defined in Section 957 of
the Internal Revenue Code, to the extent determined by multiplying
the income and apportionment factors of that corporation without
application of this subparagraph by a fraction not to exceed one, the
numerator of which is the "Subpart F income" of that corporation for
that taxable year and the denominator of which is the "earnings and
profits" of that corporation for that taxable year.
(B) For purposes of this paragraph, both of the following apply:
(i) "Subpart F income" means "Subpart F income" as defined in
Section 952 of the Internal Revenue Code.
(ii) "Earnings and profits" means "earnings and profits" as
described in Section 964 of the Internal Revenue Code.
(3) The income and apportionment factors of the corporations
described in this subdivision shall be taken into account only to the
extent that they would have been taken into account had no election
under this section been made.
(4) The Franchise Tax Board shall prescribe regulations to
coordinate implementation of subparagraph (A) of paragraph (2) to
prevent multiple inclusion or exclusion of income and factors in
situations where the same item of income is described in both
clauses.
(b) For purposes of this article and Section 24411, all of the
following definitions apply:
(1) An "affiliated corporation" means a corporation that is a
member of a commonly controlled group as defined in Section 25105.
(2) A "qualified taxpayer" means a corporation that does both of
the following:
(A) Files with the state tax return, on which the water's-edge
election is made, a consent to the taking of depositions, at the time
and place most reasonably convenient to all parties, from key
domestic corporate individuals and to the acceptance of subpoenas
duces tecum requiring reasonable production of documents to the
Franchise Tax Board, as provided in Section 19504, by the State Board
of Equalization, as provided in Section 5005 of Title 18 of the
California Code of Regulations, or by the courts of this state, as
provided in Chapter 2 (commencing with Section 1985) of Title 3 of
Part 4 of, and Chapter 9 (commencing with Section 2025.010) of Title
4 of Part 4 of, the Code of Civil Procedure. The consent relates to
issues of jurisdiction and service and does not waive any defenses
that a taxpayer may otherwise have. The consent shall remain in
effect as long as the water's-edge election is in effect, and shall
be limited to providing that information necessary to review or
adjust income or deductions in a manner authorized by Section 482,
861, Subpart F of Part III of Subchapter N, or similar provisions, of
the Internal Revenue Code, together with the regulations adopted
pursuant to those provisions, and for the conduct of an investigation
with respect to any unitary business in which the taxpayer may be
involved.
(B) Agrees that, for purposes of this article, dividends received
by any corporation whose income and apportionment factors are taken
into account pursuant to subdivision (a) from either of the following
are functionally related dividends and shall be presumed to be
business income:
(i) A corporation of which more than 50 percent of the voting
stock is owned, directly or indirectly, by members of the unitary
group and which is engaged in the same general line of business.
(ii) Any corporation that is either a significant source of supply
for the unitary business or a significant purchaser of the output of
the unitary business, or that sells a significant part of its output
or obtains a significant part of its raw materials or input from the
unitary business. "Significant," as used in this subparagraph, means
an amount of 15 percent or more of either input or output.
All other dividends shall be classified as business or nonbusiness
income without regard to this subparagraph.
(3) The definitions and locations of property, payroll, and sales
shall be determined under the laws and regulations that set forth the
apportionment formulas used by the individual states to assign net
income subject to taxes on, or measured by, net income in that state.
If a state does not impose a tax on, or measured by, net income or
does not have laws or regulations with respect to the assignment of
property, payroll, and sales, the laws and regulations provided in
Article 2 (commencing with Section 25120) shall apply.
Sales shall be considered to be made to a state only if the
corporation making the sale may otherwise be subject to a tax on, or
measured by, net income under the Constitution or laws of the United
States, and shall not include sales made to a corporation whose
income and apportionment factors are taken into account pursuant to
subdivision (a) in determining the amount of income of the taxpayer
derived from or attributable to sources within this state.
(4) "The United States" means the 50 states of the United States
and the District of Columbia.
(c) All references in this part to income determined pursuant to
Section 25101 shall also mean income determined pursuant to this
section.
25111. (a) For taxable years beginning before January 1, 2003, the
making of a water's-edge election as provided for in Section 25110
shall be made by contract with the Franchise Tax Board in the
original return for a year and shall be effective only if every
taxpayer that is a member of the water's-edge group and which is
subject to tax under this part makes the election. A single taxpayer
that is engaged in more than one business activity subject to
allocation and apportionment as provided in Article 2 (commencing
with Section 25120) of Chapter 17 may make a separate election for
each business. The form and manner of making the water's-edge
election shall be prescribed by the Franchise Tax Board. Each
contract making a water's-edge election shall be for an initial term
of 84 months, except as provided in subdivision (b). Each contract
shall provide that on the anniversary date of the contract or any
other annual date specified by the contract a year shall be added
automatically to the initial term unless notice of nonrenewal is
given as provided in subdivision (d). An affiliated corporation that
is a member of the water's-edge group and subsequently becomes
subject to tax under this part or is a nonelecting taxpayer that is
subsequently proved to be a member of the water's-edge group pursuant
to a Franchise Tax Board audit determination, as evidenced by a
notice of deficiency proposed to be assessed or a notice of tax
change, shall be deemed to have elected.
No water's-edge election shall be made for a taxable year
beginning prior to January 1, 1988.
(b) A water's-edge election may be terminated by a taxpayer prior
to the end of the 84-month period if either of the following occurs:
(1) The taxpayer is acquired directly or indirectly by a
nonelecting entity which alone or together with those affiliates
included in its combined report is larger than the taxpayer as
measured by equity capital.
(2) With the permission of the Franchise Tax Board.
(c) In granting a change of election, the Franchise Tax Board
shall impose any conditions that are necessary to prevent the
avoidance of tax or to clearly reflect income for the period the
election was, or was purported to be, in effect. These conditions may
include a requirement that income, including dividends paid from
income earned while a water's-edge election was in effect, which
would have been included in determining the income of the taxpayer
from sources within and without this state pursuant to Section 25101
but for the water's-edge election shall be included in income in the
year in which the election is changed.
(d) If the taxpayer desires in any year not to renew the election,
the taxpayer shall serve written notice of nonrenewal upon the board
at least 90 days in advance of the annual renewal date. Unless that
written notice is provided to the board, the election shall be
considered renewed as provided in subdivision (a).
(e) If the taxpayer serves notice of intent in any year not to
renew the existing water's-edge election, that existing election
shall remain in effect for the balance of the period remaining since
the original election or the last renewal of the election, as the
case may be.
(f) To the extent that a taxpayer would have been required to file
on a water's-edge basis in its first taxable year beginning on or
after January 1, 2003, pursuant to a water's-edge election made in a
prior year under this section, the terms of this section no longer
apply and that election shall be deemed to have been made under the
terms of Section 25113. However, the commencement date of the
election made in a prior year under this section shall continue to be
treated as the commencement date of the water's-edge election period
for purposes of applying the provisions of Section 25113.
25111.1. (a) For any taxable year beginning on or after January 1,
1994, consideration for water's-edge contracts in existence as of
that date is no longer provided for by law. Contracts entered into
for taxable years beginning prior to January 1, 1994, are rescinded
for any periods remaining on those contracts commencing on the first
day of the taxpayer's first taxable year that begins on or after
January 1, 1994. Any fiscal year taxpayer whose contract is in effect
as of December 31, 1993, shall continue to be bound by that contract
until the close of its taxable year after January 1, 1994, and
before December 31, 1994.
(b) Notwithstanding subdivision (a), and except for the purposes
of Section 25115, all taxpayers that are members of a water's-edge
group consisting of taxpayers with different taxable years shall
continue to be bound by the contract in effect as of December 31,
1993, until the taxable year beginning prior to January 1, 1994, and
ending in 1994 for each of the taxpayer members of the water's-edge
group has ended.
25112. (a) If a taxpayer electing to file under Section 25110 fails
to supply any information described in subdivision (b), the taxpayer
shall pay a penalty of one thousand dollars ($1,000) for each
taxable year with respect to which the failure occurs.
(b) A taxpayer electing to file pursuant to Section 25110 shall do
all of the following:
(1) Retain and make available to the Franchise Tax Board, upon
request, the documents and information, including any questionnaires
completed and submitted to the Internal Revenue Service or qualified
states, that are necessary to audit issues involving attribution of
income to the United States or foreign jurisdictions under Sections
482, 861, 863, 902, and 904, and Subpart F of Part III of Subchapter
N, or similar sections of the Internal Revenue Code.
(2) Identify, upon request, principal officers or employees who
have substantial knowledge of, and access to, documents and records
that discuss pricing policies, profit centers, cost centers, and the
methods of allocating income and expense among these centers. The
information shall include the employees' titles and addresses.
(3) Retain and make available, upon request, all documents and
correspondence ordinarily available to a corporation included in the
water's-edge election that are submitted to, or obtained from, the
Internal Revenue Service, foreign countries or their territories or
possessions, and competent authority pertaining to ruling requests,
rulings, settlement resolutions, and competing claims involving
jurisdictional assignment and sourcing of income that affect the
assignment of income to the United States. The documents shall
include all ruling requests and rulings on reorganizations involving
foreign incorporation of branches, all ruling requests and rulings on
changing a corporation's jurisdictional incorporation, and all
documents that are ordinarily available to a corporation included in
the water's-edge election that pertain to the determination of
foreign tax liability, including examination reports issued by
foreign taxing administrations. If the documents have been
translated, the translations shall be furnished.
(4) Retain and make available, upon request, information filed
with the Internal Revenue Service to comply with Sections 6038,
6038A, 6038B, 6038C, and 6041 of the Internal Revenue Code.
(5) Upon request, prepare and make available for each corporation
organized or created under the laws of the United States or a
political subdivision thereof, of which 50 percent or more of its
voting stock is directly or indirectly owned or controlled, the
information that would be included in the forms described in
paragraph (4) if those forms were required for United States
corporations.
(6) Retain and make available, upon request, all state tax returns
filed by each corporation included under subdivision (a) in each
state, including the District of Columbia.
(7) Comply with reasonable requests for information necessary to
determine or verify its net income, apportionment factors, or the
geographic source of that income pursuant to the Internal Revenue
Code.
(8) For purposes of this subdivision, information for any year
shall be retained for that period of time in which the taxpayer's
income or franchise tax liability to this state may be subject to
adjustment, including all periods in which additional income or
franchise taxes may be assessed or during which an appeal is pending
before the State Board of Equalization or a lawsuit is pending in the
courts of this state or the United States with respect to California
franchise or income tax.
(c) If the failure continues for more than 90 days after the date
on which the Franchise Tax Board mails notice of that failure to the
taxpayer, the taxpayer shall pay a penalty (in addition to the amount
required under subdivision (a)) of one thousand dollars ($1,000) for
each 30-day period (or fraction thereof) during which the failure
continues after the expiration of the 90-day period. The increase in
any penalty under this subdivision shall not exceed twenty-four
thousand dollars ($24,000).
(d) If the taxpayer fails to comply substantially with any formal
document request arising out of the examination of the tax treatment
of any item (hereafter in this section referred to as the "examined
item") before the 90th day after the date of the mailing of the
request, any court having jurisdiction of a civil proceeding in which
the tax treatment of the examined item is an issue may, upon motion
by the Franchise Tax Board, prohibit the introduction by the taxpayer
of documentation covered by that request.
(e) For purposes of this section, the time in which information is
to be furnished (and the beginning of the 90-day period after notice
by the Franchise Tax Board) shall be treated as beginning not
earlier than the last day on which reasonable cause existed for
failure to furnish the information.
(f) This section shall not apply with respect to any requested
documentation if the taxpayer establishes that the failure to provide
the documentation, as requested by the Franchise Tax Board, is due
to reasonable cause. For purposes of subdivision (d), the fact that a
foreign jurisdiction would impose a civil or criminal penalty on the
taxpayer (or any other person) for disclosing the requested
documentation is not reasonable cause unless, after in-camera review
of the documentation, the court finds otherwise.
(g) For purposes of this section, the term "formal document
request" means any request (made after the normal request procedures
have failed to produce the requested documentation) for the
production of documentation that is mailed by registered or certified
mail to the taxpayer at its last known address and that sets forth
all of the following:
(1) The time and place for the production of the documentation.
(2) A statement of the reason the documentation previously
produced (if any) is not sufficient.
(3) A description of the documentation being sought.
(4) The consequences to the taxpayer of the failure to produce the
documentation described in this section.
(h) Notwithstanding any other law or rule of law, any taxpayer to
whom a formal document request is mailed may begin a proceeding to
quash that request not later than the 90th day after the date the
request was mailed. In that proceeding, the Franchise Tax Board may
seek to compel compliance with the request.
(i) The superior courts of the State of California for the
Counties of Los Angeles, Sacramento, and San Diego, and for the City
and County of San Francisco shall have jurisdiction to hear any
proceeding brought under subdivision (h). An order denying the
petition shall be deemed a final order that may be appealed.
The running of the 90-day period referred to in subdivision (c)
shall be suspended during any period during which a proceeding
brought under subdivision (h) is pending.
(j) For purposes of this section, "documentation" means any
documentation which may be relevant or material to the tax treatment
of the examined item.
(k) The Franchise Tax Board, and any court having jurisdiction
over a proceeding under subdivision (g), may extend the 90-day period
referred to in subdivision (b).
(l) If any corporation takes any action as provided in subdivision
(h), the running of any period of limitations under Sections 19057
to 19067, inclusive (relating to the assessment and collection of
tax), or under Section 19704 (relating to criminal prosecutions) with
respect to that corporation shall be suspended for the period during
which the proceedings under subdivision (h) and appeals thereto are
pending.
25113. (a) Except as provided in subdivision (f), for taxable years
beginning on or after January 1, 2003, the election provided for in
Section 25110 shall be made on an original, timely filed return for
the year of the election. The election will be considered valid if
both of the following conditions are satisfied:
(1) The tax is computed in a manner consistent with a water's-edge
election.
(2) A written notification of election is filed with the return on
a form prescribed by the Franchise Tax Board. Pursuant to
regulations promulgated under this section, the Franchise Tax Board
may accept the filing of other objective evidence that supports the
conclusion that a water's-edge election was intended in lieu of
notification on the designated form.
(b) Except as otherwise provided, a water's-edge election shall be
effective only if made by every member of the self-assessed combined
reporting group that is subject to taxation under this part.
(1) An election made on a group return of a self-assessed combined
reporting group shall constitute an election by each taxpayer member
included in that group return, unless one of those taxpayers files a
separate return in which no election is made and paragraph (2) does
not apply.
(2) A taxpayer that fails to make an election on its own timely
filed original return shall be deemed to have elected if either of
the following apply:
(A) It has a parent corporation that is an electing taxpayer that
included the income and apportionment factors of the nonelecting
taxpayer in the self-assessed combined reporting group reflected in
the electing parent's timely filed original return, including a group
return.
(B) The income and apportionment factors of the nonelecting
taxpayer is reflected in the self-assessed combined reporting group
of a timely filed original return of an electing taxpayer, and the
notification of election filed by the electing taxpayer pursuant to
paragraph (2) of subdivision (a) is signed by an officer or other
authorized agent of either a parent corporation of the nonelecting
taxpayer or another corporation with authority to bind the
nonelecting taxpayer to an election.
(3) For purposes of this subdivision, a "parent corporation" of
the taxpayer is a corporation that owns or constructively owns stock
possessing more than 50 percent of the voting power of the taxpayer
as determined under subdivisions (e) and (f) of Section 25105.
(4) If a corporation that is a member of a combined reporting
group is not itself subject to taxation under this part in the year
for which the water's-edge election is made, but subsequently becomes
subject to taxation under this part, that corporation shall be
deemed to have elected with the other taxpayer members of the
combined reporting group.
(5) A taxpayer that is engaged in more than one apportioning trade
or business as defined in paragraph (6) of subdivision (d) of
Section 25128 may make a separate election for each apportioning
trade or business.
(c) A water's-edge election shall remain in effect or be
terminated in accordance with this subdivision.
(1) Except as otherwise provided in this subdivision, if one or
more electing taxpayer members of a combined reporting group later
become disaffiliated or otherwise cease to be included in the
combined reporting group, the water's-edge election shall remain in
effect as to both the departing taxpayer members and any remaining
taxpayer members.
(2) If an electing taxpayer and a nonelecting taxpayer become
members of a new unitary affiliate group, the nonelecting taxpayer
shall be deemed to have elected if the value of the total business
assets of the electing taxpayer, and its component unitary group, if
any, is larger than the value of the total business assets of the
nonelecting taxpayer, and its component unitary group, if any.
Otherwise, the water's-edge election shall be automatically
terminated at the time the electing members become part of the
combined report. For purposes of applying paragraphs (9) and (10),
the commencement date of the deemed election shall be the same as the
commencement date of the electing taxpayers.
(3) If taxpayers filing under water's-edge elections with
different commencement dates become members of a new unitary
affiliate group, the earliest election date shall be deemed to apply
to all electing taxpayers if the total business assets of the earlier
electing taxpayer, and its component unitary group, if any, is
larger than the value of the total business assets of the later
electing taxpayer, and its component unitary group, if any.
Otherwise, the later election commencement date shall apply to all
electing taxpayers.
(4) (A) If a taxpayer with an election that has been terminated
under paragraph (9) or (10) becomes a member of a new unitary
affiliate group that includes another electing or nonelecting
taxpayer not affected by those paragraphs, any water's-edge election
of the other taxpayer member, if applicable, shall terminate, and any
restrictions on making a new water's-edge election, relating to an
election terminated under those paragraphs, shall apply to all
taxpayer members of the new unitary affiliate group if the total
business assets of the taxpayer with the terminated election, and its
component unitary group, if any, is larger than the other taxpayer,
and its component unitary group, if any. Otherwise, paragraph (2)
shall apply, if applicable. If paragraph (2) does not apply, all
taxpayer members of the new unitary affiliate group will be treated
as nonelecting taxpayers that are not subject to any restrictions on
making a new water's-edge election.
(B) If two nonelecting taxpayers with different termination dates
under paragraph (9) or (10) become members of a new unitary affiliate
group, the earliest termination date shall be deemed to apply to all
nonelecting taxpayers, as well as any restrictions on making a new
water's-edge election relating to that termination, if the total
business assets of the earlier terminating taxpayer, and its
component unitary group, if any, is larger than the value of the
total business assets of the later terminating taxpayer, and its
component unitary group, if any. Otherwise, the later termination
date, and the related restrictions on making a new water's-edge
election, shall apply to all taxpayer members of the new unitary
affiliate group.
(5) (A) Except as provided in subparagraph (B), if one or more
electing taxpayers did not report their income and apportionment
factors as members of a combined reporting group with one or more
nonelecting taxpayers, and, pursuant to a Franchise Tax Board audit
determination, the nonelecting taxpayers, are properly in the same
combined reporting group as the electing taxpayers, the water's-edge
election of the electing taxpayers shall remain in effect and the
nonelecting taxpayers shall be deemed to have made a water's-edge
election. The commencement date of the deemed water's-edge election
shall be the same as the commencement date of the electing taxpayers.
(B) Subparagraph (A) shall not apply if the value of total
business assets of the electing taxpayers does not exceed the value
of total business assets of the nonelecting taxpayers. In that event,
the water's-edge election of each electing taxpayer is terminated as
of the date the nonelecting taxpayers are, pursuant to the audit
determination described in subparagraph (A), properly included in the
same combined reporting group as the electing taxpayers.
(C) For purposes of applying the business asset test of this
paragraph, the term "business assets" shall have the same meaning as
subparagraph (A) of paragraph (6), except that the business assets of
other members of the unitary affiliate group that are not taxpayers
shall not be taken into account.
(D) Notwithstanding subparagraph (A), nonelecting taxpayers may
not be deemed to have made a water's-edge election if the Franchise
Tax Board audit determination described in subparagraph (A) is
withdrawn or otherwise overturned.
(6) For purposes of paragraphs (2) to (5), inclusive, the
following shall apply:
(A) "Business assets" are assets, including intangible assets,
other than stock of a member of the unitary affiliate group, which
are used in the conduct of the business of the unitary affiliate
group or would produce business income to the unitary affiliate
group, if an election were not in place, if the assets were sold.
Business assets shall be valued at net book value.
(B) The phrase "unitary affiliate group" refers to all of those
corporations that would constitute a unitary group if a water's-edge
election were not made.
(C) The phrase "new unitary affiliate group" refers to a unitary
affiliate group that is created by a new affiliation of two or more
corporations, or by the addition of one or more new members to an
existing unitary affiliate group.
(D) The phrase "component unitary group" means that portion of a
group of corporations that have become members of a new unitary
affiliate group that were members of their own respective unitary
affiliate group prior to entering the new unitary affiliate group,
disregarding any corporations that did not become part of the new
unitary group.
(7) In the application of paragraphs (2) to (4), inclusive, a
series of acquisitions as steps of a single transaction shall be
aggregated as a single change of membership.
(8) In the event of a merger or consolidation, the water's-edge
status and election commencement date or termination date of the
surviving corporation shall be consistent with the result that would
have been obtained under paragraphs (2) to (4), inclusive, if the
surviving corporation had acquired the stock of the transferor
corporation.
(9) A water's-edge election may be terminated without the consent
of the Franchise Tax Board after it has been in effect for at least
84 months. The termination shall be made on an original, timely filed
return for the first year in which the water's-edge election is to
be terminated. To be effective, the termination shall be made by
every taxpayer that is a member of the water's-edge group in the same
manner as the election provided under subdivisions (a) and (b).
(10) A water's-edge election may be terminated before the 84-month
period described in paragraph (9) has elapsed, but only with the
consent of the Franchise Tax Board. A request for termination shall
be made at the time and in the manner specified by the Franchise Tax
Board. The request may be granted for good cause. For purposes of
this section, good cause shall have the same meaning as specified in
Treasury Regulations Section 1.1502-75(c).
(11) Except for deemed elections as provided in paragraphs (2),
(4), and (5), if a water's-edge election is terminated under
paragraph (9) or (10), another election may not be made under this
section for any taxable year that begins within the 84-month period
following the last day of the election period that was terminated.
The Franchise Tax Board may waive the application of this prohibition
period for good cause.
(12) A water's-edge election shall remain in effect until
terminated.
(d) For purposes of this section, the following shall apply:
(1) A "combined reporting group" means those corporations whose
income and apportionment factors are properly considered pursuant to
this chapter in computing the income of the individual taxpayer that
is derived from or attributable to sources within this state, taking
into account a valid water's-edge election.
(2) A "group return" refers to the single return which taxpayer
members of a combined reporting group may elect by contract to file,
in the form and manner prescribed by the Franchise Tax Board, in lieu
of filing their own respective returns.
(3) A "self-assessed combined reporting group" means that group of
corporations whose income and apportionment factors are reflected in
a combined report prepared pursuant to this chapter in a timely
filed return, taking into account the effects of a purported water'
s-edge election, whether or not the membership of the corporations in
that combined report was correctly determined.
(e) The Franchise Tax Board may prescribe any regulations as may
be necessary or appropriate to carry out the purposes of this
section.
(f) To the extent that a taxpayer would have been required to file
on a water's-edge basis in its first taxable year beginning on or
after January 1, 2003, pursuant to a water's-edge election made in a
prior year under Section 25111, the terms of Section 25111 shall not
apply and the election shall be deemed to have been made under the
terms of this section. However, the commencement date of the election
made in a prior year under Section 25111 shall continue to be
treated as the commencement date of the water's-edge election period
for purposes of applying this section.
25113. (a) Except as provided in subdivision (f), for taxable years
beginning on or after January 1, 2003, the election provided for in
Section 25110 shall be made on an original, timely filed return for
the year of the election. The election will be considered valid if
both of the following conditions are satisfied:
(1) The tax is computed in a manner consistent with a water's-edge
election.
(2) A written notification of election is filed with the return on
a form prescribed by the Franchise Tax Board. Pursuant to
regulations promulgated under this section, the Franchise Tax Board
may accept the filing of other objective evidence that supports the
conclusion that a water's-edge election was intended in lieu of
notification on the designated form.
(b) Except as otherwise provided, a water's-edge election shall be
effective only if made by every member of the self-assessed combined
reporting group that is subject to taxation under this part.
(1) An election made on a group return of a self-assessed combined
reporting group shall constitute an election by each taxpayer member
included in that group return, unless one of those taxpayers files a
separate return in which no election is made and paragraph (2) does
not apply.
(2) A taxpayer that fails to make an election on its own timely
filed original return shall be deemed to have elected if either of
the following applies:
(A) It has a parent corporation that is an electing taxpayer that
included the income and apportionment factors of the nonelecting
taxpayer in the self-assessed combined reporting group reflected in
the electing parent's timely filed original return, including a group
return.
(B) The income and apportionment factors of the nonelecting
taxpayer are reflected in the self-assessed combined reporting group
of a timely filed original return of an electing taxpayer, and the
notification of election filed by the electing taxpayer pursuant to
paragraph (2) of subdivision (a) is signed by an officer or other
authorized agent of either a parent corporation of the nonelecting
taxpayer or another corporation with authority to bind the
nonelecting taxpayer to an election.
(3) For purposes of this subdivision, a "parent corporation" of
the taxpayer is a corporation that owns or constructively owns stock
possessing more than 50 percent of the voting power of the taxpayer
as determined under subdivisions (e) and (f) of Section 25105.
(4) If a corporation that is a member of a combined reporting
group is not itself subject to taxation under this part in the year
for which the water's-edge election is made, but subsequently becomes
subject to taxation under this part, that corporation shall be
deemed to have elected with the other taxpayer members of the
combined reporting group.
(5) A taxpayer that is engaged in more than one apportioning trade
or business as defined in paragraph (6) of subdivision (d) of
Section 25128 may make a separate election for each apportioning
trade or business.
(c) A water's-edge election shall remain in effect or be
terminated in accordance with this subdivision.
(1) Except as otherwise provided in this subdivision, if one or
more electing taxpayer members of a combined reporting group later
become disaffiliated or otherwise cease to be included in the
combined reporting group, the water's-edge election shall remain in
effect as to both the departing taxpayer members and any remaining
taxpayer members.
(2) If an electing taxpayer and a nonelecting taxpayer become
members of a new unitary affiliate group, the nonelecting taxpayer
shall be deemed to have elected if the value of the total business
assets of the electing taxpayer, and its component unitary group, if
any, is larger than the value of the total business assets of the
nonelecting taxpayer, and its component unitary group, if any.
Otherwise, the water's-edge election shall be automatically
terminated at the time the electing members become part of the
combined report. For purposes of applying paragraphs (9) and (10),
the commencement date of the deemed election shall be the same as the
commencement date of the electing taxpayers.
(3) If taxpayers filing under water's-edge elections with
different commencement dates become members of a new unitary
affiliate group, the earliest election date shall be deemed to apply
to all electing taxpayers if the total business assets of the earlier
electing taxpayer, and its component unitary group, if any, is
larger than the value of the total business assets of the later
electing taxpayer, and its component unitary group, if any.
Otherwise, the later election commencement date shall apply to all
electing taxpayers.
(4) (A) If a taxpayer with an election that has been terminated
under paragraph (9) or (10) becomes a member of a new unitary
affiliate group that includes another electing or nonelecting
taxpayer not affected by those paragraphs, any water's-edge election
of the other taxpayer member, if applicable, shall terminate, and any
restrictions on making a new water's-edge election, relating to an
election terminated under those paragraphs, shall apply to all
taxpayer members of the new unitary affiliate group if the total
business assets of the taxpayer with the terminated election, and its
component unitary group, if any, is larger than the other taxpayer,
and its component unitary group, if any. Otherwise, paragraph (2)
shall apply, if applicable. If paragraph (2) does not apply, all
taxpayer members of the new unitary affiliate group will be treated
as nonelecting taxpayers that are not subject to any restrictions on
making a new water's-edge election.
(B) If two nonelecting taxpayers with different termination dates
under paragraph (9) or (10) become members of a new unitary affiliate
group, the earliest termination date shall be deemed to apply to all
nonelecting taxpayers, as well as any restrictions on making a new
water's-edge election relating to that termination, if the total
business assets of the earlier terminating taxpayer, and its
component unitary group, if any, is larger than the value of the
total business assets of the later terminating taxpayer, and its
component unitary group, if any. Otherwise, the later termination
date, and the related restrictions on making a new water's-edge
election, shall apply to all taxpayer members of the new unitary
affiliate group.
(5) (A) Except as provided in subparagraph (B), if one or more
electing taxpayers did not report their income and apportionment
factors as members of a combined reporting group with one or more
nonelecting taxpayers, and, pursuant to a Franchise Tax Board audit
determination, the nonelecting taxpayers, are properly in the same
combined reporting group as the electing taxpayers, the water's-edge
election of the electing taxpayers shall remain in effect and the
nonelecting taxpayers shall be deemed to have made a water's-edge
election. The commencement date of the deemed water's-edge election
shall be the same as the commencement date of the electing taxpayers.
(B) Subparagraph (A) may not apply if the value of total business
assets of the electing taxpayers does not exceed the value of total
business assets of the nonelecting taxpayers. In that event, the
water's-edge election of each electing taxpayer is terminated as of
the date the nonelecting taxpayers are, pursuant to the audit
determination described in subparagraph (A), properly included in the
same combined reporting group as the electing taxpayers.
(C) For purposes of applying the business asset test of this
paragraph, the term "business assets" shall have the same meaning as
subparagraph (A) of paragraph (6), except that the business assets of
other members of the unitary affiliate group that are not taxpayers
shall not be taken into account.
(D) Notwithstanding subparagraph (A), nonelecting taxpayers may
not be deemed to have made a water's-edge election if the Franchise
Tax Board audit determination described in subparagraph (A) is
withdrawn or otherwise overturned.
(6) For purposes of paragraphs (2) to (5), inclusive, the
following shall apply:
(A) "Business assets" are assets, including intangible assets,
other than stock of a member of the unitary affiliate group, which
are used in the conduct of the business of the unitary affiliate
group or would produce business income to the unitary affiliate
group, if an election were not in place, if the assets were sold.
Business assets shall be valued at net book value.
(B) The phrase "unitary affiliate group" refers to all of those
corporations that would constitute a unitary group if a water's-edge
election were not made.
(C) The phrase "new unitary affiliate group" refers to a unitary
affiliate group that is created by a new affiliation of two or more
corporations, or by the addition of one or more new members to an
existing unitary affiliate group.
(D) The phrase "component unitary group" means that portion of a
group of corporations that have become members of a new unitary
affiliate group that were members of their own respective unitary
affiliate group prior to entering the new unitary affiliate group,
disregarding any corporations that did not become part of the new
unitary group.
(7) In the application of paragraphs (2) to (4), inclusive, a
series of acquisitions as steps of a single transaction shall be
aggregated as a single change of membership.
(8) In the event of a merger or consolidation, the water's-edge
status and election commencement date or termination date of the
surviving corporation shall be consistent with the result that would
have been obtained under paragraphs (2) to (4), inclusive, if the
surviving corporation had acquired the stock of the transferor
corporation.
(9) A water's-edge election may be terminated without the consent
of the Franchise Tax Board after it has been in effect for at least
84 months. The termination shall be made on an original, timely filed
return for the first year in which the water's-edge election is to
be terminated. To be effective, the termination shall be made by
every taxpayer that is a member of the water's-edge group in the same
manner as the election provided under subdivisions (a) and (b).
(10) A water's-edge election may be terminated before the 84-month
period described in paragraph (9) has elapsed, but only with the
consent of the Franchise Tax Board. A request for termination shall
be made at the time and in the manner specified by the Franchise Tax
Board.
(A) The request may be granted for good cause. For purposes of
this section, good cause shall have the same meaning as specified in
Treasury Regulations Section 1.1502-75(c).
(B) The Franchise Tax Board shall consent to a termination
requested by all members of a water's-edge group, if the purpose of
the request is to permit the state to contract with an expatriate
corporation, or its subsidiary, pursuant to paragraph (2) of
subdivision (b) of Section 10286 of the Public Contract Code. A water'
s-edge election terminated pursuant to this subparagraph shall,
however, be effective for the year in which the expatriate
corporation, or its subsidiary, enters into the contract with the
state.
(11) Except for deemed elections as provided in paragraphs (2),
(4), and (5), if a water's-edge election is terminated under
paragraph (9) or (10), another election may not be made under this
section for any taxable year that begins within the 84-month period
following the last day of the election period that was terminated.
The Franchise Tax Board may waive the application of this prohibition
period for good cause.
(12) A water's-edge election shall remain in effect until
terminated.
(d) For purposes of this section, the following shall apply:
(1) A "combined reporting group" means those corporations whose
income and apportionment factors are properly considered pursuant to
this chapter in computing the income of the individual taxpayer that
is derived from or attributable to sources within this state, taking
into account a valid water's-edge election.
(2) A "group return" refers to the single return which taxpayer
members of a combined reporting group may elect by contract to file,
in the form and manner prescribed by the Franchise Tax Board, in lieu
of filing their own respective returns.
(3) A "self-assessed combined reporting group" means that group of
corporations whose income and apportionment factors are reflected in
a combined report prepared pursuant to this chapter in a timely
filed return, taking into account the effects of a purported water'
s-edge election, whether or not the membership of the corporations in
that combined report was correctly determined.
(e) The Franchise Tax Board may prescribe any regulations as may
be necessary or appropriate to carry out the purposes of this
section.
(f) To the extent that a taxpayer would have been required to file
on a water's-edge basis in its first taxable year beginning on or
after January 1, 2003, pursuant to a water's-edge election made in a
prior year under Section 25111, the terms of Section 25111 may not
apply and the election shall be deemed to have been made under the
terms of this section. However, the commencement date of the election
made in a prior year under Section 25111 shall continue to be
treated as the commencement date of the water's-edge election period
for purposes of applying this section.
25114. (a) The Franchise Tax Board, for purposes of administering
the provisions of this article, shall examine all returns filed by
taxpayers subject to these provisions.
(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.
(c) The amendments made to this section by the act adding this
subdivision shall apply to examinations commenced by the Franchise
Tax Board on or after the effective date of that act. An examination
will be considered commenced when a taxpayer is first contacted by
the Franchise Tax Board concerning any examination with respect to
the taxpayer's return.
25116. Notwithstanding paragraph (1) of subdivision (a) of Section
23051.5, when provisions of this article refer to provisions of the
Internal Revenue Code that do not otherwise apply for purposes of
Part 10.2 (commencing with Section 18401) or this part, the term
"Internal Revenue Code" means Title 26 of the United States Code,
including all amendments thereto, as in effect for federal purposes
for the taxable period, except as otherwise specifically provided in
this article.
DCarsonCPA.com working in support of Financial Decision Makers with knowledge that supports Leadership. In this instance looking at a relevant element of Multi-State Taxation for greater overall awareness of the implications of Regional Decision Making, This citation from California Tax Rules is as of 9/15/12 but may be referenced to a different original date, accordingly you must confirm for yourself as filing and you may NOT rely on this citation. That stated the citation still bears some educational value to familiarize with elements of Multi-State Taxation in this occurence to CA.
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