Section 25106.5-4 - Fiscalization(a) If the accounting period of a principal member and one of the other members of a combined reporting group do not begin and end on the same dates, adjustments must be made to the other members' combined report business income and apportionment data to assign an appropriate amount of those values to the accounting period of the principal member in order for total group combined report business income to be apportioned. Each member of the group should generally use combined report business income and apportionment data from its books of account earned during the accounting period of the principal member. This will require an interim closing of the books for members whose normal accounting period differs from the principal member. However, a pro rata method of converting income to the principal member's accounting period will be accepted as long as the method does not produce a material misstatement of income apportioned to this state. Unless otherwise permitted or required by the Franchise Tax Board, the treatment of both the income and the apportionment data of any particular member must use the same method. If one method was used to account for a member's income and apportionment data in the combined report for the principal member's preceding accounting period and another method will be used in the combined report for the principal member's next accounting period, adjustments to income and apportionment data of the member shall be made to prevent income and apportionment data from being omitted or duplicated.(b) Interim closing method. (1) The combined report business income and expense of a member of the combined reporting group is determined by reference to the sum (or net) of such income from the actual books and records (determined under the Revenue and Taxation Code) of that member for each of the partial accounting periods of the member shared with the principal member. For example, if the principal member has an accounting period ending on December 31, 1997, and another member has an accounting period ended March 31, 1998, the other member determines its income from its actual books and records for the partial accounting periods beginning January 1, 1997 and ending March 31, 1997, and from April 1, 1997 and ending December 31, 1997.(2) The apportionment data (property, payroll, and sales in California, and everywhere) shall also be determined by reference to the member's books and records, as provided in Sections 25129- 25137 of the Revenue and Taxation Code and the regulations thereunder, for the appropriate partial accounting year. Under the interim method, the property factor computation should reflect the actual, not prorated, property owned and rented during the principal member's accounting period. Example 1. If the principal member has an accounting period ending on December 31, 1997, and another member has an accounting period ended March 31, 1998, and monthly weighted averaging of the property factor is not required under Section 25131, Revenue and Taxation Code, the other member will determine its total property and its California property on the dates of January 1, 1997 and December 31, 1997 from its actual books and records.
Example 2. Assume the same facts as Example 1, except monthly weighted averaging is required. In that case, the actual monthly California property and total property values of the member required to fiscalize to accounting period of the principal member will be determined for each of the twelve months during the 1997 calendar year from that member's actual books and records.
(3) Interim combined report business income and apportionment data from the respective partial periods is then combined with the income and apportionment data of the accounting period of the principal member, along with business income and apportionment data of other members of the combined reporting group for the same period, using, if applicable, the methods prescribed in this regulation.(c) Pro rata method. (1) At the election of the members of a combined reporting group, fiscalization of combined report business income of one or more members of the group to the accounting period of the principal member may be determined by use of a pro rata method. However, the election is not available if that method produces a material misstatement of income. Under the pro rata method, the apportionment data and combined report business income from the member's adjusted separate books of account (i.e., adjusted to reflect the determination of income under the Revenue and Taxation Code) is assigned to the respective portion of the principal member's accounting period based on the ratio of months in common with that member. For example, if the principal member's accounting period ends on December 31, 1997, a member whose income year ends on March 31 will reflect 3/12ths of its adjusted separate combined report business income and its payroll and sales for its income year ended March 31, 1997 in the December 31, 1997 accounting period of the principal member. That member will then reflect 9/12ths of its adjusted separate combined report business income and its payroll and sales for its income year ended March 31, 1998 in the December 31, 1997 accounting period of the principal member.(2) For members utilizing the pro rata method, if the property factor is not required to be determined on a monthly weighted averaging method described by Section 25131 of the Revenue and Taxation Code, the property factor data used for a member using that method will be the pro rata portion of the member's property numerator and denominator values for its respective separate accounting periods, reflecting beginning and ending average property values for those separate accounting periods. Example. Assume that the principal member's accounting period ends on December 31, 1997, and another taxpayer member's income year ends on March 31. That member is required to fiscalize its income to the accounting period of the principal member. The fiscalizing member determines its California beginning and ending property, and its total beginning and ending property, to determine its California and total property for the period ended March 31, 1997. That member then makes a comparable determination for the period ended March 31, 1998. The fiscalizing member will apply 3/12ths of the California property and total property for the March 31, 1997 income year and 9/12ths of the California property and total property for the March 31, 1998 income year to the principal member's December 31, 1997 accounting period for computation of the property factor for the combined reporting group.
(3) The combined report business income and apportionment data from the respective partial periods is then combined with the income and apportionment data of the accounting period of the principal member, along with business income and apportionment data of other members of the combined reporting group for the same period, using, if applicable, the methods prescribed in this regulation. The combined business income is then apportioned to each of the taxpayer members of the group.(4) In the event that the pro rata method requires the determination of income and apportionment data of a corporation whose accounting period has not yet closed, and the information cannot be obtained in time for the other members to file an accurate return, the income and apportionment data for that period shall be estimated based on available information. If the use of actual income and apportionment data results in a material change in the tax liabilities of the taxpayer members of the group, the taxpayer members must file an amended return to reflect the change.(d) After the combined reporting group's income is apportioned to California, California source combined report business income of a taxpayer member is then proportionately assigned to the applicable portion of that member's income year, based on the number of months falling within the common accounting period of the principal member. For example, if the principal member's accounting period year ends on December 31, 1997, a taxpayer member whose income year ends on March 31 will reflect 3/12ths of its share of apportioned income from the principal member's December 31, 1997 accounting period in its income year ended March 31, 1997, and 9/12ths of its share of such income in its income year ended March 31, 1998. The resulting income from such segments is then aggregated (or netted) together for the member's income year to determine that member's business income from California sources attributable to the combined reporting group.(e) This regulation shall apply to income years open to adjustment under applicable statutes of limitation.Cal. Code Regs. Tit. 18, § 25106.5-4
1. New section filed 7-13-99; operative 8-12-99 (Register 99, No. 29). 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).