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 25106.5-2 - Capital, Section 1231 of the Internal Revenue Code, and Involuntary Conversion Gains and Losses

Current through Register 2024 Notice Reg. No. 28, July 12, 2024
(a)
					 Gains or losses from the sale or exchange of a capital asset (or gains or
					 losses treated as capital gains or losses under Subchapter P of Chapter 1 of
					 Subtitle A of the Internal Revenue Code (hereafter also described as capital
					 gains and losses)), property described by Section
					 1231(a)(3) of the
					 Internal Revenue Code (Section
					 1231 property), or property
					 subject to an involuntary conversion shall be removed from the total separate
					 net income of each member of a combined reporting group and shall be
					 apportioned and allocated as provided in this regulation. Any remaining
					 combined report business income shall be apportioned to the taxpayer members
					 without regard to gains or losses described by this subsection. However, the
					 effect of removal of such gains and losses from the total separate net income
					 of the members shall not by itself have an effect upon the apportionment
					 factors of the group or any of its members.
Example: Assume a member of a combined reporting group
						sells property that gives rise to a capital gain which constitutes a "sale"
						within the meaning of section
						25120(e)
						of the Revenue and Taxation Code. That sale will be reflected in the sales
						factor (unless otherwise excluded by operation of Section
						25137), notwithstanding the fact
						that the capital gains are subject to the special rules prescribed by this
						regulation.
(b) Before any
					 netting of gains and losses from the sale or exchange of assets in the classes
					 of long or short term capital assets, Section
					 1231 property, or property subject
					 to an involuntary conversion, such gains and losses are classified as business
					 income or loss, or nonbusiness income or loss, as the case may be.
(c) Each member's combined report business
					 income resulting from gains and losses from the sale or exchange of capital
					 assets, Section
					 1231 property, and involuntary
					 conversions are then assigned to the accounting period of the principal member
					 in accordance with the procedures of Section
					 25106.5-4(a) through
					 (c) of the California Code of Regulations.
					 All of the members' business gains and losses in each class are aggregated and
					 then apportioned, before netting of gain or loss between classes, to each
					 taxpayer member using the apportionment factors applicable to the rest of the
					 members' combined report business income, to arrive at the taxpayer member's
					 California source gain or loss, for the respective class of income or loss. The
					 resulting California source gain or loss for each respective class is then
					 adjusted to align such income to the income year of the taxpayer member to
					 which it relates in accordance with the procedures of Section
					 25106.5-4(d) of
					 the California Code of Regulations.
(d) Nonbusiness gains and losses from the
					 sale or exchange of capital assets, Section
					 1231 property, and involuntary
					 conversions which are allocated to California, and business gains and losses
					 from such transactions which are apportioned to California (including business
					 gains and losses from other combined reporting groups, if any), are then netted
					 by each taxpayer member using the rules of Sections
					 1231 and
					 1222 of the Internal Revenue Code,
					 without regard to any of the taxpayer member's gains or losses from the sale or
					 exchange of capital assets, Section
					 1231 property, and involuntary
					 conversions which are sourced to another state.
(e) Any California source net Section
					 1231 gain of a member produced in
					 the application of the preceding subsection (d) shall be treated as California
					 source ordinary income to the extent that the taxpayer member had California
					 source Section
					 1231 losses in preceding income
					 years, in accordance with the provisions of Section
					 1231(c) of the
					 Internal Revenue Code.
(f) Any
					 resulting California source income (or loss, if the loss is not subject to the
					 limitations of Section
					 1211 of the Internal Revenue Code)
					 of a taxpayer member produced by the application of the preceding subsections
					 of this regulation shall then be applied to all other California source income
					 or loss of that member.
(g) Capital
					 Loss Carryforward. Any resulting California source net capital loss, which is
					 required to be carried forward under the rules of Section
					 1212, Internal Revenue Code, as
					 modified by Section
					 24990.5,
					 Revenue and Taxation Code, shall be treated by the taxpayer member as a
					 California source short-term capital loss for the applicable member's income
					 year of the carryover.
(h) This
					 regulation shall apply to all income years open to adjustment under applicable
					 statutes of limitation.
1. New
						section filed 7-13-99; operative 8-12-99 (Register 99, No. 29).
2.
						Amendment of subsections (a), (d) and (g) filed 11-1-2000; operative 12-1-2000
						(Register 2000, No. 44).
Note: Authority cited: Section
						  19503,
						  Revenue and Taxation Code. Reference: Section
						  25106.5,
						  Revenue and Taxation Code.