Allocating Corporate Income

Division 2, Part 11, Chapter 17 deals with the allocation of income under the California Corporation Tax Law. Article 1 contains general provisions.

Section 25101 provides that, when the income of a taxpayer subject to the tax imposed under this part is derived from or attributable to sources both within and without the state, then the tax is measured by the net income derived from or attributable to sources within this state. 

However, any method of apportionment is required to take into account as income derived from or attributable to sources without the state, income derived from or attributable to transportation by sea or air without the state, whether or not the transportation is located in or subject to the jurisdiction of any other state, the United States or any foreign country. If the FTB reapportions net income upon its examination of any return, it is required to disclose, upon the written request of the taxpayer, the basis upon which its reapportionment has been made.

Section 25101.15 provides that, if the income of two or more taxpayers is derived solely from sources within this state and their business activities are such that if conducted within and without this state a combined report would be required to determine their business income derived from sources within this state, then the taxpayers must be allowed to determine their business income in accordance with Section 25101.

Section 25101.3 states that the property factor as it relates to the aircraft of an air carrier or foreign air carrier, or the operator of an air taxi, is allocated on the basis of a formula consisting of time and arrivals and departures as specified with five conditions.

Section 25102 provides that, in the case of two or more persons owned or controlled directly or indirectly by the same interests, the FTB may permit or require the filing of a combined report and other information as it deems necessary and is authorized to impose the tax due under this part as though the combined entire net income was that of one person, or to distribute, apportion, or allocate the gross income or deductions between or among persons, if it determines that consolidation, distribution, apportionment, or allocation is necessary in order to reflect the proper income of any persons.

Section 25103 says that, in the case of a corporation doing business within the meaning of this part, whether under agreement or otherwise, in the manner as either directly or indirectly to benefit the members or stockholders of the corporation, or any of them, or any person or persons, directly or indirectly interested in such business, by rendering services of any nature whatsoever, or acquiring or disposing of its products or the goods or commodities in which it deals, at less than a fair price therefore, the FTB, in order to prevent evasion of taxes or clearly to reflect the income of such corporation, may require a report of such facts as it deems necessary, and may determine the amount which shall be deemed to be the entire net income allocable to this State of the business of such corporation for the calendar or fiscal year, and compute the tax upon the net income. In determining the entire net income, the FTB must have regard to the fair profits which, but for any agreement, arrangement, or understanding, might be or could have been obtained from dealing in products, goods or commodities.

Section 25104 provides that, in the case of a corporation liable to report under this part owning or controlling, either directly or indirectly, another corporation, or other corporations, and in the case of a corporation liable to report under this part and owned or controlled, either directly or indirectly, by another corporation, the FTB may require a consolidated report showing the combined net income or other facts as it deems necessary.

The FTB is authorized and empowered, in a manner as it may determine, to assess the tax against either of the corporations whose net income is involved in the report upon the basis of the combined entire net income and other information as it may possess, or it may adjust the tax in such other manner as it determines to be equitable if it determines it to be necessary in order to prevent evasion of taxes or to clearly reflect the net income earned by said corporation or corporations from business done in this State.

Section 25105 states that the income and apportionment factors of two or more corporations are included in a combined report only if the corporations, otherwise meeting the requirements of Section 25101 or 25101.15, are members of a commonly controlled group. The term “commonly controlled group” is defined.

Section 25106 provides that, in any case in which the income of a corporation is or has been determined under this chapter with reference to the income and apportionment factors of one or more other corporations with which it is doing or has done a unitary business, all dividends paid by one to another of any of those corporations must, to the extent those dividends are paid out of the income previously described of the unitary business, be eliminated from the income of the recipient and are not taken into account under Section 24344 or in any other manner in determining the tax of any member of the unitary group.

These dividends nclude dividends paid out of the income previously described of the unitary business by a member of the unitary group to a corporation formed subsequent to the accrual of the income, if the recipient corporation was part of the unitary group during the period from its formation to its receipt of those dividends.

Section 25107 states that, for the purposes of allocation and apportionment of income under Sections 25101 and 25121, an international banking facility maintained by a bank within California is considered doing business without the state. Intangible personal property and sales reflected on the segregated books and records recognized by the Board of Governors of the Federal Reserve System as attributable to the international banking facility shall be attributed to that international banking facility in determining the property, payroll, and sales factors of the bank. The term “bank” is defined.

Section 25108 provides that, for corporations whose income is subject to the provisions of Section 25101 or 25101.15, the net operating loss determined in accordance with Section 172 of the Internal Revenue Code for a particular taxable year is the corporation’s “net loss for state purposes.” The net operating loss deduction allowed by Sections 24416, 24416.1, and 24416.2, for a taxable year is deducted from “net income for state purposes” for that taxable year. The term “net income (loss) for state purposes” is defined.