California Code of Regulations › Title 18 - Public Revenues › Division 3 - Franchise Tax Board › Chapter 3.5 - Bank and Corporation Tax › Subchapter 17 - Allocation of Income › Article 1 - General Provisions › Section 25106.5-1 - Intercompany Transactions

Current through Register 2024 Notice Reg. No. 28, July 12, 2024
(a)
					 In general.
(1) Purpose. This regulation
					 provides rules for taking into account items of income, gain, deduction, and
					 loss of members of a combined reporting group from intercompany transactions.
					 The purpose of this regulation is to provide rules for reporting intercompany
					 transactions in order to clearly reflect the taxable income (and tax liability)
					 of the taxpayer members that is allocated or apportioned to California. The
					 general rule is one of deferring gains or losses from intercompany transactions
					 in order to produce the effect of transactions between divisions of a single
					 corporation.
(2) Conformity to
					 Treasury Regulation section
					 1.1502-13. Intercompany
					 transactions. Except as otherwise provided, this regulation incorporates
					 Treasury Regulation section
					 1.1502-13, as amended through
					 April 1, 2012, to the extent possible consistent with combined reporting
					 principles to enable ease of administration and compliance. This regulation
					 does not restate all the provisions of the federal regulation in full (a copy
					 of which can be obtained at
www.irs.gov/taxpros
), but the methodology of
					 the federal regulation shall apply except as otherwise provided in this
					 regulation. When a federal regulation that is incorporated explicitly provides
					 that no federal tax benefit can be derived from its application, similarly,
					 when that regulation is applied for California purposes, no California tax
					 benefit can be derived from its application. Exceptions will arise due to the
					 differences between the composition of the federal consolidated group and the
					 combined reporting group, the requirements of California's allocation and
					 apportionment provisions, jurisdictional limitations, and treatment of members
					 of a combined reporting group as separate entities for many purposes under the
					 Revenue and Taxation Code. Further exceptions will arise in those instances
					 when Treasury Regulation section
					 1.1502-13 incorporates by
					 reference provisions of the Internal Revenue Code to which California has not
					 conformed. Unless explicitly provided otherwise, conformity to Treasury
					 Regulation section
					 1.1502-13 in no way implies
					 conformity to any other regulation under section
					 1502 of the Internal Revenue
					 Code.
(3) Timing rules as a method
					 of accounting. This regulation applies the provisions of Treasury Regulation
					 section 1.1502-13(a)(3),
					 except for the reference to Treasury Regulation section
					 1.1502-17. The rules shall apply
					 to all members of the combined reporting group.
(4) Other Law. Other applicable law
					 (including nonstatutory authorities) shall apply in addition to the rules of
					 this regulation to the extent that this regulation does not exclude such
					 application.
(A) Non-applicability of section
					 304 of the Internal Revenue Code.
					 As provided in Treasury Regulation section
					 1.1502-80, section
					 304 of the Internal Revenue Code,
					 to which California conforms pursuant to section
					 24451
					 of the Revenue and Taxation Code, does not apply to any acquisition of stock of
					 a corporation in an intercompany transaction occurring on or after the
					 effective date of this regulation.
(B) Non-applicability of section
					 163(e)(5) of the
					 Internal Revenue Code. As provided in Treasury Regulation section
					 1.1502-80, section
					 163(e)(5) of the
					 Internal Revenue Code, to which California conforms pursuant to section
					 24344
					 of the Revenue and Taxation Code, does not apply to any intercompany obligation
					 (within the meaning of subsection (g) of this regulation) issued in an income
					 year beginning on or after the effective date of this regulation.
(C) Non-applicability of section
					 1031 of the Internal Revenue Code.
					 As provided in Treasury Regulation section
					 1.1502-80, section
					 1031 of the Internal Revenue Code,
					 to which California conforms pursuant to section
					 24941
					 of the Revenue and Taxation Code, does not apply to any intercompany
					 transaction occurring in income years beginning on or after the effective date
					 of this regulation.
(D)
					 Non-applicability of Title 18, California Code of Regulations, section
					 25110(e). To the
					 extent that the provisions of Regulation section
					 25110(e) are not
					 consistent with the provisions of this regulation, this regulation will be
					 controlling and Title 18, California Code of Regulations, section
					 25110(e) shall
					 not be applicable.
(5)
					 Sourcing. In the income year that intercompany items are taken into account,
					 their source shall be determined as if the selling member (S) and the buying
					 member (B) are divisions of a single corporation. Therefore, such intercompany
					 items are treated as current apportionable business income and apportioned to
					 California in accordance with sections
					 25120-
					 25141
					 of the Revenue and Taxation Code. California law does not conform to the
					 federal sourcing rules provided or referenced in Treasury Regulation section
					 1.1502-13.
(A) Sales Factor.
1. Sales attributable to intercompany items
					 are not included in S's sales factor either in the year of the transaction or
					 in the year(s) in which such intercompany items are taken into
					 account.
2. Gross receipts from the
					 sale generating B's corresponding item will be included in B's sales factor in
					 the year of the sale if otherwise included under section
					 25134
					 of the Revenue and Taxation Code, unless such gross receipts are excluded under
					 Title 18, California Code of Regulations, section
					 25137.
3. Deemed sales under Treasury Regulation
					 section 1.1502-13(d)(1)(ii)
					 will be disregarded for purposes of the sales factor.
4. Subsections (a)(5)(A)1. through 3., above,
					 shall apply regardless of whether an election is made under subsection (e)(2)
					 of this regulation to recognize income or loss from an intercompany transaction
					 on a separate entity basis.
(B) Property Factor.
1. On the date of the intercompany
					 transaction, the property transferred from S to B will be included in B's
					 property factor at the original cost (within the meaning of section
					 25106.5
					 of the Revenue and Taxation Code) to S.
2. Intercompany rent expense is not included
					 in the property factor.
3.
					 Intercompany obligations otherwise includable under Title 18, California Code
					 of Regulations, sections
					 25137-4.2 or 25137-10 shall not be
					 included in the property factor.
4.
					 If S's intercompany item is accelerated as a result of S or B no longer being
					 members of the same combined reporting group, the value of B's property
					 acquired from S in an intercompany transaction will be adjusted immediately
					 after the acceleration event to reflect B's original cost (the purchase price
					 paid by B to S).
5. Subsections
					 (a)(5)(B)1. through 4. above shall apply regardless of whether an election is
					 made under subsection (e)(2) of this regulation to treat an intercompany
					 transaction on a separate entity basis.
(6) Overview. The principal rules of this
					 regulation that implement single entity treatment are the matching rule of
					 subsection (c) and the acceleration rule of subsection (d). Under the matching
					 rule, Seller (S) and Buyer (B) are generally treated as divisions of a single
					 corporation for purposes of taking into account their items from intercompany
					 transactions. The acceleration rule provides rules for taking the items into
					 account if the effect of treating S and B as divisions cannot be achieved (for
					 example, if S or B leave the combined reporting group or if the asset
					 transferred in the intercompany transaction is converted to nonbusiness use).
					 Intercompany items will be treated as current apportionable business income for
					 the year(s) in which the item is taken into account. Subsection (b) of this
					 regulation provides definitions used in the application of this regulation.
					 Subsection (e) of this regulation provides simplifying rules for certain
					 transactions. Subsections (f) and (g) of this regulation provide additional
					 rules for stock and obligations of members. Subsections (h) and (j) of this
					 regulation provide anti-avoidance rules and miscellaneous operating rules.
					 Subsection (i) of this regulation is reserved for future
					 use.