Current through Register 2024 Notice Reg. No. 52, December 27, 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. §
2 3038(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.
1. New
section filed 7-13-73; effective thirtieth day thereafter (Register 73, No.
28).
2. Amendment of section and NOTE filed 4-3-96; operative 5-3-96
(Register 96, No. 14).
3. Amendment of section and NOTE filed
1-9-98; operative 1-9-98 pursuant to Government Code section
11343.4(d)
(Register 98, No. 2).
Note: Authority cited: Sections
19503
and
23038,
Revenue and Taxation Code. Reference: Sections
17024.5,
17551,
17731,
17954,
23038,
23040,
23051.5,
24651,
24667,
24668.1,
24672,
24673,
24681
and
24693,
Revenue and Taxation Code.
