Cal. Code Regs. Tit. 18, §§ 25137-4.2 - Banks and Financial Corporations-Allocation and Apportionment of Income

(a) In general.

(1) Application. Except for a bank or financial corporation subject to the provisions of Regulation Section 25137-10, for income years beginning on or after January 1, 1996, a bank or financial corporation whose income is taxable both within and without this state shall allocate and apportion its net income as provided in section 25120 et seq., California Revenue and Taxation Code, and the regulations adopted pursuant thereto, except as provided herein.

(2) Apportionment. All business income shall be apportioned to this state by multiplying such income by the apportionment percentage which is determined by adding the taxpayer's receipts factor, as described in subsection (c), property factor, as described in subsection (d), and payroll factor, as described in Sections 25132 and 25133 of the Revenue and Taxation Code and the regulations adopted pursuant thereto, together and dividing the sum by three. If one of the factors is missing, the remaining factors are added and the total is divided by the number of factors present. A factor is missing if both its numerator and denominator are zero; it is not missing merely because the numerator is zero.

(3) Accounting for factors. Each factor shall be computed according to the method of accounting (cash or accrual) used by the taxpayer for the income year.

(4) Exception. If the allocation and apportionment provisions of this regulation do not fairly represent the extent of the taxpayer's business activity in this state, the taxpayer may petition for or the Franchise Tax Board may require, in respect to all or any part of the taxpayer's business activity, if reasonable:

(A) Separate accounting;

(B) The exclusion of any one or more of the factors;

(C) The inclusion of one or more additional factors which will fairly represent the taxpayer's business activity in this state; or

(D) The employment of any other method to effectuate an equitable allocation and apportionment of the taxpayer's income.

(b) Definitions. As used in this regulation, unless the context otherwise requires:

(1) "Billing address" means the location indicated in the books and records of the taxpayer on the first day of the income year (or on such later date in the income year when the customer relationship began) as the address where any notice, statement and/or bill relating to a customer's account is mailed.

(2) "Borrower or credit card holder located in this state" shall mean (A) a borrower, other than a credit card holder, that is engaged in a trade or business which maintains its commercial domicile in this state; and (B) a borrower that is not engaged in a trade or business or a credit card holder whose billing address is in this state.

(3) "Commercial domicile" means;

(A) the headquarters of the trade or business, that is, the place from which the trade or business is principally managed and directed, and

(B) if a taxpayer is organized under the laws of a foreign country, or of the Commonwealth of Puerto Rico, or any territory or possession of the United States, such taxpayer's commercial domicile shall be deemed, for the purposes of this regulation, to be the state from which such taxpayer's trade or business in the United States is principally managed and directed. It shall be presumed, subject to rebuttal, that the location from which the taxpayer's trade or business is principally managed and directed is the state of the United States to which the greatest number of its employees are regularly connected or out of which they are working, irrespective of where the services of such employees are performed, as of the last day of the income year.

(4) "Credit Card" means credit, travel or entertainment card.

(5) "Credit card issuer's reimbursement fee" means the fee a taxpayer receives from a merchant's bank because one of the persons to whom the taxpayer has issued a credit card has charged merchandise or services to the credit card.

(6) "Financial institution" includes both banks or financial corporations. "Financial corporation" is defined in Regulation Section 23183.

(7) "Loan" means any extension of credit resulting from direct negotiations between the taxpayer and its customer, and/or the purchase, in whole or in part, of such extension of credit from another person. Loans include participations, syndications, and leases treated as loans for federal income tax purposes.

Loans shall not include: properties treated as loans under Section 595 of the federal Internal Revenue Code; futures or forward contracts; options; notional principal contracts such as swaps; credit card receivables, including purchased credit card relationships; non-interest bearing balances due to depository institutions; cash items in the process of collection; federal funds sold; securities purchased under agreements to resell; assets held in a trading account; securities; interests in a Real Estate Mortgage Investment Conduit (REMIC), or other mortgage-backed or asset-backed security; and other similar items.

(8) "Merchant discount" means the fee (or negotiated discount) charged to a merchant by the taxpayer for the privilege of participating in a program whereby a credit card is accepted in payment for merchandise or services sold to the card holder.

(9) "Participation" means an extension of credit in which an undivided ownership interest is held on a pro rata basis in a single loan or pool of loans and related collateral. In a loan participation, the credit originator initially makes the loan and then subsequently resells all or a portion of it to other lenders. The participation may or may not be known to the borrower.

(10) "Person means an individual, estate, trust, partnership, corporation and any other business entity.

(11) "Principal base of operations" with respect to transportation property means the place of more or less permanent nature from which said property is regularly directed or controlled. With respect to an employee, the "base of operations" means the place of more or less permanent nature from which the employee regularly (A) starts his or her work and to which he or she customarily returns in order to receive instructions from his or her employer, or (B) communicates with his or her customers or other persons, or (C) performs any other functions necessary to the exercise of his or her trade or profession at some other point or points.

(12) "Real property owned" and "tangible personal property owned" means real and tangible personal property, respectively, (A) on which the taxpayer may claim depreciation for federal income tax purposes, or (B) property to which the taxpayer holds legal title and on which no other person may claim depreciation for federal income tax purposes (or could claim depreciation if subject to federal income tax). Real and tangible personal property do not include coin, currency, or property acquired in lieu of or pursuant to a foreclosure.

(13) "Regular place of business" means an office at which the taxpayer carries on its business in a regular and systematic manner and which is continuously maintained, occupied and used by employees of the taxpayer.

(14) "Syndication" is an extension of credit in which two or more persons fund and each person is at risk only up to a specified percentage of the total extension of credit or up to a specified dollar amount.

(15) "Transportation property" means vehicles and vessels capable of moving under their own power, such as aircraft, trains, water vessels and motor vehicles, as well as any equipment or containers attached to such property, such as rolling stock, barges, trailers or the like.

(c) Receipts factor.

(1) In general. The receipts factor shall include only those receipts described herein which give rise to business income and which are included in the computation of the apportionable income base.

(2) Special rules. The receipts factor shall include:

(A) Interest, dividends, net gains (but not less than zero) and other income from investment assets and activities and from trading assets and activities. Investment assets and activities and trading assets and activities include but are not limited to: investment securities; trading account assets; federal funds; securities purchased and sold under agreements to resell or repurchase; options; future contracts; forward contracts; notional principal contracts such as swaps; equities; and foreign currency transactions. With respect to the investment and trading assets and activities described in subsections (B) and (C) of this subsection, the receipts factor shall include the amounts described in such subsections.

(B) The amount by which interest from federal funds sold and securities purchased under resale agreements exceeds interest expense on federal funds purchased and securities sold under repurchase agreements.

(C) The amount by which interest, dividends, gains and other income from trading assets and activities, including but not limited to assets and activities in the matched book, in the arbitrage book, and foreign currency transactions, exceed amounts paid in lieu of interest, amounts paid in lieu of dividends and losses from such assets and activities.

(D) Net gains from the sale of loans including income recorded under the coupon stripping rules of Section 1268 of the Internal Revenue Code.

(3) Numerator. The numerator of the receipts factor includes:

(A) Lease of real property. Receipts from the lease or rental of real property owned by the taxpayer if the property is located within this state or receipts from the sublease of real property if the property is located within this state.

(B) Lease of tangible property.

1. General. Except as described in subsection 2. of this subsection, receipts from the lease or rental of tangible personal property owned by the taxpayer if the property is located within this state when it is first placed in service by the lessee.

2. Transportation property. Receipts from the lease or rental of transportation property owned by the taxpayer to the extent the property is used in this state. The extent to which an aircraft will be deemed to be used in this state and the amount of receipts that is to be included in the numerator of this state's receipts factor is determined by multiplying all the receipts from the lease or rental of the aircraft by a fraction, the numerator of which is the number of landings of the aircraft in this state and the denominator of which is the total number of landings of the aircraft. If the extent of the use of any transportation property within this state cannot be determined, then the property will be deemed to be used wholly in the state in which the property has its principal base of operations. A motor vehicle will be deemed to be used wholly in the state in which it is registered.

(C) Loans secured by real property.

1. General. Interest and fees or penalties in the nature of interest from loans secured by real property if the property is located within this state. If the property is located both within this state and one or more other states, the receipts described in this subsection are included in the numerator of the receipts factor if more than fifty percent of the fair market value of the real property is located within this state. If more than fifty percent of the fair market value of the real property is not located within any one state, then the receipts described in this subsection (C) shall be included in the numerator of the receipts factor if the borrower is located in this state.

2. Secured. A loan is secured by real property if, at the time the original loan agreement was made, fifty percent or more of the aggregate value of the collateral was real property.

3. Location. The determination of whether the real property securing a loan is located within this state shall be made as of the time the original agreement was made and any and all subsequent substitutions of collateral shall be disregarded.

(D) Loans not secured by real property. Interest and fees or penalties in the nature of interest from loans not secured by real property if the borrower is located in this state.

(E) Net gains from sale of loans.

1. Real property. The amount of net gains (but not less than zero), including income recorded under the coupon stripping rules of Section 1286 of the Internal Revenue Code, from the sale of loans secured by real property included in the numerator is determined by multiplying such net gains by a fraction, the numerator of which is the amount included in the numerator of the receipts factor pursuant to subsection (C) of this subsection (3) and the denominator of which is the total amount of interest and fees or penalties in the nature of interest from loans secured by real property.

2. Other loans. The amount of net gains (but not less than zero) from the sale of loans not secured by real property included in the numerator is determined by multiplying such net gains by a fraction, the numerator of which is the amount included in the numerator of the receipts factor pursuant to subsection (D) of this subsection (3) and the denominator of which is the total amount of interest and fees or penalties in the nature of interest from loans not secured by real property.

(F) Credit card receivables. Interest and fees or penalties in the nature of interest from credit card receivables and receipts from fees charged to card holders, such as annual fees, if the billing address of the card holder is in this state.

(G) Sale of credit card receivables. Net gains (but not less than zero) from the sale of credit card receivables multiplied by a fraction, the numerator of which is the amount included in the numerator of the receipts factor pursuant to subsection (F) of this subsection (3) and the denominator of which is the taxpayer's total amount of interest and fees or penalties in the nature of interest from credit card receivables and fees charged to card holders.

(H) Credit card issuer's reimbursement fee. All credit card issuer's reimbursement fees multiplied by a fraction, the numerator of which is the amount included in the numerator of the receipts factor pursuant to subsection (F) of this subsection (3) and the denominator of which is the taxpayer's total amount of interest and fees or penalties in the nature of interest from credit card receivables and fees charged to card holders.

(I) Merchant discount. Receipts from merchant discount if the commercial domicile of the merchant is in this state. Such receipts shall be computed net of any card holder charge backs, but shall not be reduced by any interchange transaction fees or by any issuer's reimbursement fees paid to another for charges made by its card holders.

(J) Loan servicing fees.

1. Real property loans. Loan servicing fees derived from loans secured by real property multiplied by a fraction, the numerator of which is the amount included in the numerator of the receipts factor pursuant to subsection (C) of this subsection (3) and the denominator of which is the total amount of interest and fees or penalties in the nature of interest from loans secured by real property.

2. Other loans. Loan servicing fees derived from loans not secured by real property multiplied by a fraction, the numerator of which is the amount included in the numerator of the receipts factor pursuant to subsection (D) of this subsection (3) and the denominator of which is the total amount of interest and fees or penalties in the nature of interest from loans not secured by real property.

3. Third party servicing. In circumstances in which the taxpayer receives loan servicing fees for servicing either the secured or the unsecured loans of another, the numerator of the receipts factor shall include such fees if the borrower is located in this state.

(K) Services. Receipts from services not otherwise apportioned under this section if the service is performed in this state. If the service is performed both within and without this state, the numerator of the receipts factor includes receipts from services not otherwise apportioned under this section, if a greater proportion of the income-producing activity is performed in this state based on cost of performance. See Section 25136 of the Revenue and Taxation Code and the regulation adopted pursuant thereto.

(L) Investment assets and activities and trading assets and activities.

1. General. The numerator of the receipts factor includes interest, dividends, net gains (but not less than zero) and other income from investment assets and activities and from trading assets and activities described in subsection (2) of this subsection (c) that are attributable to this state.

a. Investment account. The amount of interest, dividends, net gains (but not less than zero) and other income from investment assets and activities in the investment account to be attributed to this state and included in the numerator is determined by multiplying all such income from such assets and activities by a fraction, the numerator of which is the average value of such assets which are properly assigned to a regular place of business of the taxpayer within this state and the denominator of which is the average value of all such assets.

b. Federal funds. The amount of interest from federal funds sold and purchased and from securities purchased under resale agreements and securities sold under repurchase agreements attributable to this state and included in the numerator is determined by multiplying the amount described in subsection (2)(B) of this subsection (c) from such funds and such securities by a fraction, the numerator of which is the average value of federal funds sold and securities purchased under agreements to resell which are properly assigned to a regular place of business of the taxpayer within this state and the denominator of which is the average value of all such funds and such securities.

c. Trading assets and activities. The amount of interest, dividends, gains and other income from trading assets and activities, including but not limited to assets and activities in the matched book, in the arbitrage book and foreign currency transactions (but excluding amounts described in subsections a. or b. of this subsection 1.) attributable to this state and included in the numerator is determined by multiplying the amount described in subsection (2)(C) of this subsection (c) by a fraction, the numerator of which is the average value of such trading assets which are properly assigned to a regular place of business of the taxpayer within this state and the denominator of which is the average value of all such assets.

d. Average value. For purposes of this subsection (L), average value shall be determined under the rules of Sections 25130 and 25131 of the Revenue and Taxation Code and the regulations adopted pursuant to those sections and Section 25137 of the Revenue and Taxation Code, as modified by subsection (d)(2) herein.

2. In lieu method. In lieu of using the method set forth in subsection 1. of this subsection (L), the taxpayer may elect, or the Franchise Tax Board may require in order to fairly represent the business activity of the taxpayer in this state, the use of the method set forth in this subsection 2.

a. Investment account. The amount of interest, dividends, net gains (but not less than zero) and other income from investment assets and activities in the investment account to be attributed to this state and included in the numerator is determined by multiplying all such income from such assets and activities by a fraction, the numerator of which is the gross income from such assets and activities which are properly assigned to a regular place of business of the taxpayer within this state and the denominator of which is the gross income from all such assets and activities.

b. Federal funds. The amount of interest from federal funds sold and purchased and from securities purchased under resale agreements and securities sold under repurchase agreements attributable to this state and included in the numerator is determined by multiplying the amount described in subsection (2)(B) of this subsection (c) from such funds and such securities by a fraction, the numerator of which is the gross income from such funds and such securities which are properly assigned to a regular place of business of the taxpayer within this state and the denominator of which is the gross income from all such funds and such securities.

c. Trading assets and activities. The amount of interest, dividends, gains and other income from trading assets and activities, including but not limited to assets and activities in the matched book, in the arbitrage book and foreign currency transactions (but excluding amounts described in subsections a. or b. of this subsection 2.) attributable to this state and included in the numerator is determined by multiplying the amount described in subsection (2)(C) of subsection (c) by a fraction, the numerator of which is the gross income from such trading assets and activities which are properly assigned to a regular place of business of the taxpayer within this state and the denominator of which is the gross income from all such assets and activities.

3. Use of alternatives. If the taxpayer elects or is required by the Franchise Tax Board to use the method set forth in subsection 2. of this subsection (L), it shall use this method on all subsequent returns unless the taxpayer receives prior permission from the Franchise Tax Board to use, or the Franchise Tax Board requires, a different method.

4. Proof of proper assignment. The taxpayer shall have the burden of proving that an investment asset or activity or trading asset or activity was properly assigned to a regular place of business outside of this state by demonstrating that the day-to-day decisions regarding the asset or activity occurred at a regular place of business outside the state. Where the day-to-day decisions regarding an investment asset or activity or trading asset or activity occur at more than one regular place of business and one such regular place of business is in this state and one such regular place of business is outside this state, such asset or activity shall be considered to be located at the regular place of business of the taxpayer where the investment or trading policies or guidelines with respect to the asset or activity are established. Unless the taxpayer demonstrates to the contrary, such policies and guidelines shall be presumed to be established at the commercial domicile of the taxpayer.

(M) Other receipts. The numerator of the receipts factor includes all other receipts pursuant to the rules set forth in sections 25135 and 25136 of the Revenue and Taxation Code and the regulations adopted pursuant to those sections and Section 25137 of the Revenue and Taxation Code.

(N) Throwback rule. All receipts which would be assigned under this section to a state in which the taxpayer is not taxable shall be included in the numerator of the receipts factor, if the taxpayer's commercial domicile is in this state.

(d) Property factor.

(1) General. The property factor, in addition to property included under Section 25129 of the Revenue and Taxation Code and the regulations adopted pursuant to those sections and Section 25137 of the Revenue and Taxation Code, shall include the average value of the taxpayer's loans and credit receivables located or used within and without this state during the income year.

(2) Value of other property.

(A) Loans. Loans are valued at their outstanding principal balance without regard to any reserve for bad debts. If a loan is charged-off in whole or in part for federal income tax purposes, the portion of the loan charged off is not outstanding. A specifically allocated reserve established pursuant to regulatory or financial accounting guidelines which is treated as charged-off for federal income tax purposes shall be treated as charged-off for purposes of this section.

(B) Credit card receivables. Credit card receivables are valued at their outstanding principal balance without regard to any reserve for bad debts. If a credit card receivable is charged-off in whole or in part for federal income tax purposes, the portion of the receivable charged-off is not outstanding.

(3) Numerator.

(A) Real and tangible property.

1. General. Except as described in subsection 2. of this subsection (A), real property and tangible personal property owned by or rented to the taxpayer is considered to be located within this state if it is physically located, situated or used within this state.

2. Transportation property. Transportation property is included in the numerator of the property factor to the extent that the property is used in this state. The extent an aircraft will be deemed to be used in this state and the amount of value that is to be included in the numerator of this state's property factor is determined by multiplying the average value of the aircraft by a fraction, the numerator of which is the number of landings of the aircraft in this state and the denominator of which is the total number of landings of the aircraft everywhere. If the extent of the use of any transportation property within this state cannot be determined, then the property will be deemed to be used wholly in the state in which the property has its principal base of operations. A motor vehicle will be deemed to be used wholly in the state in which it is registered.

(B) Location of loans.

1.

a. A loan is considered to be located within this state if it is properly assigned to a regular place of business of the taxpayer within this state.

b. A loan is properly assigned to the regular place of business with which it has a preponderance of substantive contacts. A loan assigned by the taxpayer to a regular place of business without the state shall be presumed to have been properly assigned if-

(i) the taxpayer has assigned, in the regular course of its business, such loan on its records to a regular place of business consistent with federal or state regulatory requirements;

(ii) such assignment on its records is based upon substantive contacts of the loan to such regular place of business; and

(iii) the taxpayer uses said records reflecting assignment of loans for the filing of all state and local tax returns for which an assignment of loans to a regular place of business is required.

c. The presumption of proper assignment of a loan provided in subsection (d)(3)(B)1.b. may be rebutted upon a showing by the Franchise Tax Board, supported by a preponderance of the evidence, that the preponderance of substantive contacts regarding such loan did not occur at the regular place of business to which it was assigned on the taxpayer's records. When such presumption has been rebutted, the loan shall then be located within this state if:

(i) the taxpayer had a regular place of business within this state at the time the loan was made, and

(ii) the taxpayer fails to show, by a preponderance of the evidence, that the preponderance of substantive contacts regarding such loan did not occur within this state.

2. In the case of a loan which is assigned by the taxpayer to a place without this state which is not a regular place of business, it shall be presumed, subject to rebuttal by the taxpayer on a showing supported by the preponderance of evidence, that the preponderance of substantive contacts regarding the loan occurred within this state if, at the time the loan was made, the taxpayer's commercial domicile as defined by section (b)(3) was within this state.

(C)

1. To determine the state in which the preponderance of substantive contacts relating to a loan have occurred, the facts and circumstances regarding the loan at issue shall be reviewed on a case-by-case basis and consideration shall be given to such activities as the solicitation, investigation, negotiation, approval and administration of the loan.

2. As used in this regulation:

a. Solicitation. Solicitation is either active or passive. Active solicitation occurs when an employee of the taxpayer initiates the contact with the customer. Such activity is located at the regular place of business which the taxpayer's employee is regularly connected with or working out of, regardless of where the services of such employee were actually performed. Passive solicitation occurs when the customer initiates the contact with the taxpayer. If the customer's initial contact was not at a regular place of business of the taxpayer, the regular place of business, if any, where the passive solicitation occurred is determined by the facts in each case.

b. Investigation. Investigation is the procedure whereby employees of the taxpayer determine the credit worthiness of the customer as well as the degree of risk involved in making a particular agreement. Such activity is located at the regular place of business which the taxpayer's employees are regularly connected with or working out of, regardless of where the services of such employees were actually performed.

c. Negotiation. Negotiation is the procedure whereby employees of the taxpayer and its customer determine the terms of the agreement (e.g., the amount, duration, interest rate, frequency of repayment, currency denomination and security required). Such activity is located at the regular place of business which the taxpayer's employees are regularly connected with or working out of, regardless of where the services of such employees were actually performed.

d. Approval. Approval is the procedure whereby employees or the board of directors of the taxpayer make the final determination whether to enter into the agreement. Such activity is located at the regular place of business which the taxpayer's employees are regularly connected with or working out of, regardless of where the services of such employees were actually performed. If the board of directors makes the final determination, such activity is located at the commercial domicile of the taxpayer.

e. Administration. Administration is the process of managing the account. This process includes bookkeeping, collecting the payments, corresponding with the customer, reporting to management regarding the status of the agreement and proceeding against the borrower or the security interest if the borrower is in default. Such activity is located at the regular place of business which oversees this activity.

(D) Credit card receivables. For purposes of determining the location of credit card receivables, credit card receivables shall be treated as loans and shall be subject to the provisions of subsections (d)(3)(B) and (d)(3)(C).

(E) Period of assignment of loans. A loan that has been properly assigned to a state shall, absent any change of material fact, remain assigned to said state for the length of the original term of the loan. Thereafter, said loan may be properly assigned to another state if said loan has a preponderance of substantive contacts to a regular place of business there.

(e) For taxable years beginning on or after January 1, 2013, pursuant to Section 25128.7, Revenue and Taxation Code, only the receipts factor references in this regulation shall apply, unless subdivision (b) of Section 25128, Revenue and Taxation Code, applies.

Notes

Cal. Code Regs. Tit. 18, §§ 25137-4.2

1. New section filed 3-21-96; operative 4-20-96 (Register 96, No. 12).
2. Change without regulatory effect adding subsection (e) filed 12-9-2013 pursuant to section 100, title 1, California Code of Regulations (Register 2013, No. 50).

Note: Authority cited: Section 19503, Revenue and Taxation Code. Reference: Sections 25128 and 25137, Revenue and Taxation Code.

1. New section filed 3-21-96; operative 4-20-96 (Register 96, No. 12).
2. Change without regulatory effect adding subsection (e) filed 12-9-2013 pursuant to section 100, title 1, California Code of Regulations (Register 2013, No. 50).