California Code of Regulations › Title 18 - Public Revenues › Division 3 - Franchise Tax Board › Chapter 3.5 - Bank and Corporation Tax › Subchapter 1 - General Provisions and Definitions › Article 2 - Definitions › Section 23038(a) - "Corporation" Defined

Current through Register 2024 Notice Reg. No. 28, July 12, 2024
(1)
					 Scope of Definition. The term "corporation" applies to all corporations, other
					 than corporations specifically exempt under Article 1, Chapter 4, or under the
					 provisions of Article XIII of the Constitution of the State of California.
					 Corporations and limited liability companies classified as an association for
					 California income and franchise tax purposes which are qualified to do or are
					 "doing business" in this State, and domestic corporations not otherwise taxed
					 under this part, are subject to the tax imposed under Chapter 2. See Sections
					 23028
					 and
					 23151-
					 23155
					 of the Revenue and Taxation Code and Reg. §
											23151. Unless specifically
					 exempted, foreign corporations engaged exclusively in interstate commerce,
					 holding companies and unincorporated associations are subject to the tax
					 imposed under Chapter 3 on income derived from sources within this State. See
					 Reg. §
											23501 and Reg. §
											23504.
Generally, banks are included in the definition of
						"corporation," but they are taxable in a different manner. The law contains
						special provisions for determining and computing the rate and applicable
						provisions.
(2) Corporations
					 Under Chapter 3. For the purpose of the tax imposed under Chapter 3 the term
					 "corporation" is not limited to incorporated bodies, nor does it include all
					 incorporated bodies. Banking associations are excluded from the meaning of the
					 term, and associations, business trusts, and other business entities classified
					 as associations under Regs. §
											23038(b) -
					 1 to §
											23038(b) -
					 3 are included in its
					 meaning.
(3)
(A) Ordinary trusts. In general, the term
					 "trust," as used in the Personal Income Tax Law, refers to an arrangement
					 created by a will or by an inter vivos declaration whereby trustees take title
					 to the property for the purpose of protecting or conserving it for the
					 beneficiaries under the ordinary rules applied in chancery and probate courts.
					 The beneficiaries of such a trust generally do no more than accept the benefits
					 thereof and are not the voluntary planners or creators of the trust
					 arrangement. However, the beneficiaries of such a trust may be the persons who
					 create it and it will be recognized as a trust under the Revenue and Taxation
					 Code if it was created for the purpose of protecting or conserving the trust
					 property for beneficiaries who stand in the same relation to the trust as they
					 would if the trust had been created by others for them. Generally speaking, an
					 arrangement will be treated as a trust under the Revenue and Taxation Code if
					 it can be shown that the purpose of the arrangement is to vest in trustees
					 responsibility for the protection and conservation of property for
					 beneficiaries who cannot share in the discharge of this responsibility and,
					 therefore, are not associates in a joint enterprise for the conduct of business
					 for profit.
(B) Business trusts.
					 There are arrangements which are known as trusts because the legal title to
					 property is conveyed to trustees for the benefit of beneficiaries, but which
					 are not classified as trusts for purposes of the Revenue and Taxation Code
					 because they are not simply arrangements to protect or conserve the property
					 for beneficiaries. These trusts, which are often known as business or
					 commercial trusts, generally are created by the beneficiaries simply as a
					 device to carry on a profit-making business which normally would have been
					 carried on through business organizations that are classified as corporations
					 or partnerships under the Revenue and Taxation Code. However, the fact that the
					 corpus of the trust is not supplied by the beneficiaries is not sufficient
					 reason in itself for classifying the arrangement as an ordinary trust rather
					 than an association or a partnership. The fact that any organization is
					 technically cast in the trust form, by conveying title to property to trustees
					 for the benefit of persons designated as beneficiaries, will not change the
					 real character of the organization if the organization is more properly
					 classified as a business entity under Reg. §
												23038(b) -
					 2.
(C) Certain investment trusts. An
					 "investment" trust will not be classified as a trust if there is a power under
					 the trust agreement to vary the investment of the certificate holders. An
					 investment trust with a single class of ownership interests, representing
					 undivided beneficial interests in the assets of the trust, will be classified
					 as a trust if there is no power under the trust agreement to vary the
					 investment of the certificate holders. An investment trust with multiple
					 classes of ownership interests will ordinarily be classified as an association
					 or a partnership under Reg. §
												23038(b) -
					 3; however, an investment trust
					 with multiple classes of ownership interests, in which there is no power under
					 the trust agreement to vary the investment of the certificate holders, will be
					 classified as a trust if the trust is formed to facilitate direct investment in
					 the assets of the trust and the existence of multiple classes of ownership
					 interests is incidental to that purpose.
(D) Liquidating trusts. Certain organizations
					 which are commonly known as liquidating trusts are treated as trusts for
					 purposes of the Revenue and Taxation Code. An organization will be considered a
					 liquidating trust if it is organized for the primary purpose of liquidating and
					 distributing the assets transferred to it, and if its activities are all
					 reasonably necessary to, and consistent with, the accomplishment of that
					 purpose. A liquidating trust is treated as a trust for purposes of the Revenue
					 and Taxation Code because it is formed with the objective of liquidating
					 particular assets and not as an organization having as its purpose the carrying
					 on of a profit-making business which normally would be conducted through
					 business organizations classified as corporations or partnerships. However, if
					 the liquidation is unreasonably prolonged or if the liquidation purpose becomes
					 so obscured by business activities that the declared purpose of liquidation can
					 be said to be lost or abandoned, the status of the organization will no longer
					 be that of a liquidating trust. Bondholders' protective committees, voting
					 trusts, and other agencies formed to protect the interests of security holders
					 during insolvency, bankruptcy, or corporate reorganization proceedings are
					 analogous to liquidating trusts, but if subsequently utilized to further the
					 control or profitable operation of a going business on a permanent continuing
					 basis, they will lose their classification as trusts for purposes of the
					 Revenue and Taxation Code.
(E)
					 Environmental remediation trusts.
1. An
					 environmental remediation trust is considered a trust for purposes of the
					 Revenue and Taxation Code. For purposes of this subsection (E), an organization
					 is an environmental remediation trust if the organization is organized under
					 state law as a trust; the primary purpose of the trust is collecting and
					 disbursing amounts for environmental remediation of an existing waste site to
					 resolve, satisfy, mitigate, address, or prevent the liability or potential
					 liability of persons imposed by federal, state, or local environmental laws;
					 all contributors to the trust have (at the time of contribution and thereafter)
					 actual or potential liability or a reasonable expectation of liability under
					 federal, state, or local environmental laws for environmental remediation of
					 the waste site; and the trust is not a qualified settlement fund within the
					 meaning of Treas. Reg. §
													1.468 B-1(a), as applicable for
					 California income and franchise tax purposes pursuant to Sections
					 23051.5
					 and
					 24693
					 of the Revenue and Taxation Code. An environmental remediation trust is
					 classified as a trust because its primary purpose is environmental remediation
					 of an existing waste site and not the carrying on of a profit-making business
					 that normally would be conducted through business organizations classified as
					 corporations or partnerships. However, if the remedial purpose is altered or
					 becomes so obscured by business or investment activities that the declared
					 remedial purpose is no longer controlling, the organization will no longer be
					 classified as a trust. For purposes of this subsection (E), environmental
					 remediation includes the costs of assessing environmental conditions, remedying
					 and removing environmental contamination, monitoring remedial activities and
					 the release of substances, preventing future releases of substances, and
					 collecting amounts from persons liable or potentially liable for the costs of
					 these activities. For purposes of this subsection (E), persons have potential
					 liability or a reasonable expectation of liability under federal, state, or
					 local environmental laws for remediation of the existing waste site if there is
					 authority under a federal, state, or local law that requires or could
					 reasonably be expected to require such persons to satisfy all or a portion of
					 the costs of the environmental remediation.
2. Each contributor (grantor) to the trust is
					 treated as the owner of the portion of the trust contributed by that grantor
					 under rules provided in Section
					 677 of the Internal Revenue Code
					 and Treas. Reg. §
													1.677(a) -
					 1(d), as
					 applicable for California income and franchise tax purposes pursuant to
					 Sections
					 17024.5
					 and
					 17731
					 of the Revenue and Taxation Code. Section
					 677 of the Internal Revenue and
					 Taxation Code and Treas. Reg. §
													1.677(a) -
					 1(d) provide
					 rules regarding the treatment of a grantor as the owner of a portion of a trust
					 applied in discharge of the grantor's legal obligation. Items of income,
					 deduction, and credit attributable to an environmental remediation trust are
					 not reported by the trust on California income tax return of the trust (Form
					 541 or any successor form), but are shown on a separate statement to be
					 attached to that form. See Treas. Reg. §
													1.671-4(a). The
					 trustee must also furnish to each grantor a statement that shows all items of
					 income, deduction, and credit of the trust for the grantor's taxable year
					 attributable to the portion of the trust treated as owned by the grantor. The
					 statement must provide the grantor with the information necessary to take the
					 items into account in computing the grantor's taxable income, including
					 information necessary to determine the federal tax treatment of the items (for
					 example, whether an item is a deductible expense under Section
					 162(a) of the
					 Internal Revenue Code, as applicable for California income and franchise tax
					 purposes, or a capital expenditure under Section
					 263(a) of the
					 Internal Revenue Code, as applicable for California income and franchise tax
					 purposes) and how the item should be taken into account under the economic
					 performance rules of Section
					 461(h) of the
					 Internal Revenue Code and the regulations thereunder, as applicable for
					 California income and franchise tax purposes pursuant to Sections
					 17024.5,
					 17551,
					 23051.5,
					 and
					 24681
					 of the Revenue and Taxation Code. See Treas. Reg. §
													1.461-4 for rules relating to
					 economic performance.
3. All
					 amounts contributed to an environmental remediation trust by a grantor
					 (cash-out grantor) who, pursuant to an agreement with the other grantors,
					 contributes a fixed amount to the trust and is relieved by the other grantors
					 of any further obligation to make contributions to the trust, but remains
					 liable or potentially liable under the applicable environmental laws, will be
					 considered amounts contributed for remediation. An environmental remediation
					 trust agreement may direct the trustee to expend amounts contributed by a
					 cash-out grantor (and the earnings thereon) before expending amounts
					 contributed by other grantors (and the earnings thereon). A cash-out grantor
					 will cease to be treated as and owner of a portion of the trust when the
					 grantor's portion is fully expended by the trust.
Effective Date: This regulation applies to taxable or
						income years beginning on or after January 1,
						1997.