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 25106.5-9 - Partial Combined Reporting Periods

Current through Register 2024 Notice Reg. No. 28, July 12, 2024
(a) If a member of a combined reporting group
					 is not a member of the combined reporting group during the entire accounting
					 period of the principal member (e.g., because of lack of unity of ownership
					 under Section
					 25105,
					 Revenue and Taxation Code, or termination of a unitary relationship), modified
					 combined reporting procedures apply as provided herein. Business income and
					 apportionment data of a member is included in the combined report of the
					 remaining members only for the period (or partial period) for which all of the
					 members are in the combined reporting group. Thus, if a member of a combined
					 reporting group enters or leaves the group at a time during the middle of the
					 accounting period of the principal member, a separate combined report
					 determination is required to be made only for the partial period of
					 combination. The partial period combination is made using the same combined
					 reporting procedures for a 12 month period, except that income, payroll,
					 property and sales data will reflect only the amounts applicable to the partial
					 period. A pro rata method may be used to determine each member's income and
					 apportionment data for the partial period, unless it results in a material
					 misstatement of income. If so, the interim closing method must be used. (See
					 Section 25106.5-4 of the California Code
					 of Regulations for a description of the pro rata and interim closing methods.)
					 Establishment or termination of a combined reporting relationship will not, by
					 itself, cause a short period filing requirement. However, in many cases, the
					 effect of leaving or entering an affiliated group of corporations cause a short
					 period filing requirement under other provisions of law, independently of this
					 regulation.
Example 1: Corporations A, B, and C are members of a
						combined reporting group. Corporation A is the principal member, and has a
						calendar accounting period. On May 1, Corporation A acquires Corporation D.
						Because of substantial preexisting business relationships, Corporation D
						immediately becomes a member of the combined reporting group on that date. Only
						Corporations B and C are taxpayer members. As provided in this subsection, two
						combined report calculations are required. The first combined report
						calculation includes the combined report business income and apportionment data
						of Corporations A, B, and C from January 1 through April 30. The combined
						report business income for that period is then apportioned to taxpayer members
						B and C, for the period January 1 through April 30. The second combined report
						calculation includes the combined report business income and apportionment data
						of Corporations A, B, C, and D from May 1 through December 31. The combined
						report business income for that period is then apportioned to taxpayer members
						B and C for the period May 1 through December 31.
(b) If a taxpayer member's income year does
					 not begin and end on the same dates as the partial period combination (e.g., a
					 short-period return is not required), the taxpayer member's California source
					 income earned during that portion of the income year before and after the
					 partial period combination is aggregated (or netted) with the taxpayer member's
					 California source combined report income from the partial period combination.
					 On occasion, the California source income so described will include income from
					 two or more partial period combinations.
Example 2: Corporation P owns all of the stock of
						Corporation S for the 12 month period ended December 31, 1998. Corporations P
						and S are unitary and are obligated to file a combined report for the entire
						period. Corporation P acquires 51% of the stock possessing voting power of
						Corporation A on March 7, 1998. The acquisition does not compel the filing of a
						short period return by Corporation A. All of the Corporations have a calendar
						accounting period. Corporation A becomes unitary with Corporations P and S on
						July 1, 1998 and is obligated to file a combined report with Corporations P and
						S for the partial period beginning on July 1, 1998. The income and
						apportionment data of Corporation A for the period prior to July 1, 1998 cannot
						be included in a combined report with Corporations P and S. Under the rule
						prescribed by subsections (a) and (b) of this regulation, two separate partial
						period combined report calculations are required. One is for the P-S group for
						the partial period ended June 30, 1998, and the other is for the P-S-A group
						for the partial period from July 1, 1998 to December 31, 1998. Assume that
						Corporation P's California source combined report income is $250,000 for the
						partial period ended June 30, 1998 and is ($60,000) for the partial period
						ended December 31, 1998. Corporation P's California source combined reporting
						income for its income year ended December 31, 1998 is $190,000. Assume that
						Corporation A has California source income from its unaffiliated and nonunitary
						partial period (or from another combined reporting group, if applicable) of
						$50,000 and California source combined reporting income of ($30,000) for the
						combined report partial period after it joined the combined reporting group.
						Corporation A's California source income for its income year ended December 31,
						1998 is $20,000.
(c) In lieu
					 of partial period combination method described by subsection (a), the taxpayer
					 members of the commonly controlled group may elect to utilize the method
					 provided in this subsection. The election must be consistently used by all
					 taxpayer members. The election may not be utilized if the results of that
					 method, compared with the provisions of subsection (a) of this regulation,
					 results in a material misstatement of the taxpayer member's California source
					 income. Under the method described in this subsection, the partial period
					 combined reporting income of a member, which is not in a combined reporting
					 relationship with the principal member for the entire accounting period of the
					 principal member, is considered to be reflected by the relative weighting of
					 the apportionment data of the partial period member to the apportionment data
					 of the rest of the combined reporting group for the accounting period of the
					 principal member. The method applies as follows:
(1) The principal member's income and
					 apportionment data are determined for its entire accounting period (usually a
					 12 month period). All other members which were members of the combined
					 reporting group during the entire period of the principal member also include
					 their income and apportionment data for that period, using fiscalization
					 methods, if appropriate.
(2)
					 Members who were not members of the combined reporting group for the entire
					 accounting period of the principal member include in the combined report only
					 their income for the partial period during which they were a member. Normally
					 this income will be determined by an interim closing of the member's books of
					 account (determined in accordance with the Revenue and Taxation Code).
					 Similarly, the apportionment data of that member is included only for that same
					 partial period.
(3) Property factor
					 data for the partial period member (both California property and total
					 property) must be adjusted to reflect the fact that the property was not
					 utilized in the combined reporting group for the entire period of the principal
					 member. For example, if the partial period member was in the combined reporting
					 group for only 7 months of the 12 month accounting period of the principal
					 member, and monthly weighted averaging is not required under Section
					 25131
					 of the Revenue and Taxation Code, only 7/12's of the member's average
					 California and total property for the period are reflected in the combined
					 report.
(4) Apportionment is then
					 computed using the amounts included in subsections (c)(1) through (3) of this
					 regulation, as if the partial period members were members for the entire
					 accounting period of the principal member. The amounts apportioned to the
					 individual taxpayer members then reflects the member's California source
					 combined reporting income for the partial period. That member then aggregates
					 (or nets) California source combined reporting income with its California
					 source income from other activity to compute income subject to taxation for the
					 entire income year.
Example 3: Assume the same facts as provided in Example
						1, except that the members of the group elect to report under subsection (c) of
						this regulation. Under that election, Corporation A, B, and C determine their
						income and apportionment data for the entire 12 months of the calendar year.
						Corporation D determines its income and apportionment data for the period May
						1-December 31. However, because Corporation D was not a member of the combined
						reporting group for the entire calendar year, the average of its beginning and
						ending property factor values for the combined reporting period must be
						multiplied by 8/12ths to reflect a weighted average value of that property in
						the principal member's accounting period. If monthly weighted average property
						values are required under Section
						25131
						of the Revenue and Taxation Code and the regulations thereunder, the average
						monthly property values for the months that Corporation D was a member of the
						combined reporting group are totaled and divided by 12, to determine the
						weighted average of Corporation D's property in the property factor. The
						California source combined report income of Corporations B and C are then
						determined as if Corporation D's income and apportionment data were entirely
						earned in the principal member's accounting period.
Example 4. Assume the same facts as Example 3, except
						that Corporation D is a calendar year California taxpayer, and its addition to
						the combined reporting group did not cause a short period filing requirement.
						Corporation D's California source combined report income, determined under this
						subsection, would be treated as earned for the period May 1 through December
						31. That California source income would be aggregated (or netted) with its
						other California source income for the entire calendar year, as provided in
						subsection (b) of this regulation.