Cal. Code Regs. Tit. 18, §§ 25106.5-2 - Capital, Section 1231 of the Internal Revenue Code, and Involuntary Conversion Gains and Losses

(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.

Notes

Cal. Code Regs. Tit. 18, §§ 25106.5-2

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.

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).