Section 25106.5-9 - Partial Combined Reporting Periods(a) If a member of a combined reporting group is not a member of the combined reporting group during the entire accounting period of the principal member (e.g., because of lack of unity of ownership under Section 25105, Revenue and Taxation Code, or termination of a unitary relationship), modified combined reporting procedures apply as provided herein. Business income and apportionment data of a member is included in the combined report of the remaining members only for the period (or partial period) for which all of the members are in the combined reporting group. Thus, if a member of a combined reporting group enters or leaves the group at a time during the middle of the accounting period of the principal member, a separate combined report determination is required to be made only for the partial period of combination. The partial period combination is made using the same combined reporting procedures for a 12 month period, except that income, payroll, property and sales data will reflect only the amounts applicable to the partial period. A pro rata method may be used to determine each member's income and apportionment data for the partial period, unless it results in a material misstatement of income. If so, the interim closing method must be used. (See Section 25106.5-4 of the California Code of Regulations for a description of the pro rata and interim closing methods.) Establishment or termination of a combined reporting relationship will not, by itself, cause a short period filing requirement. However, in many cases, the effect of leaving or entering an affiliated group of corporations cause a short period filing requirement under other provisions of law, independently of this regulation. Example 1: Corporations A, B, and C are members of a combined reporting group. Corporation A is the principal member, and has a calendar accounting period. On May 1, Corporation A acquires Corporation D. Because of substantial preexisting business relationships, Corporation D immediately becomes a member of the combined reporting group on that date. Only Corporations B and C are taxpayer members. As provided in this subsection, two combined report calculations are required. The first combined report calculation includes the combined report business income and apportionment data of Corporations A, B, and C from January 1 through April 30. The combined report business income for that period is then apportioned to taxpayer members B and C, for the period January 1 through April 30. The second combined report calculation includes the combined report business income and apportionment data of Corporations A, B, C, and D from May 1 through December 31. The combined report business income for that period is then apportioned to taxpayer members B and C for the period May 1 through December 31.
(b) If a taxpayer member's income year does not begin and end on the same dates as the partial period combination (e.g., a short-period return is not required), the taxpayer member's California source income earned during that portion of the income year before and after the partial period combination is aggregated (or netted) with the taxpayer member's California source combined report income from the partial period combination. On occasion, the California source income so described will include income from two or more partial period combinations. Example 2: Corporation P owns all of the stock of Corporation S for the 12 month period ended December 31, 1998. Corporations P and S are unitary and are obligated to file a combined report for the entire period. Corporation P acquires 51% of the stock possessing voting power of Corporation A on March 7, 1998. The acquisition does not compel the filing of a short period return by Corporation A. All of the Corporations have a calendar accounting period. Corporation A becomes unitary with Corporations P and S on July 1, 1998 and is obligated to file a combined report with Corporations P and S for the partial period beginning on July 1, 1998. The income and apportionment data of Corporation A for the period prior to July 1, 1998 cannot be included in a combined report with Corporations P and S. Under the rule prescribed by subsections (a) and (b) of this regulation, two separate partial period combined report calculations are required. One is for the P-S group for the partial period ended June 30, 1998, and the other is for the P-S-A group for the partial period from July 1, 1998 to December 31, 1998. Assume that Corporation P's California source combined report income is $250,000 for the partial period ended June 30, 1998 and is ($60,000) for the partial period ended December 31, 1998. Corporation P's California source combined reporting income for its income year ended December 31, 1998 is $190,000. Assume that Corporation A has California source income from its unaffiliated and nonunitary partial period (or from another combined reporting group, if applicable) of $50,000 and California source combined reporting income of ($30,000) for the combined report partial period after it joined the combined reporting group. Corporation A's California source income for its income year ended December 31, 1998 is $20,000.
(c) In lieu of partial period combination method described by subsection (a), the taxpayer members of the commonly controlled group may elect to utilize the method provided in this subsection. The election must be consistently used by all taxpayer members. The election may not be utilized if the results of that method, compared with the provisions of subsection (a) of this regulation, results in a material misstatement of the taxpayer member's California source income. Under the method described in this subsection, the partial period combined reporting income of a member, which is not in a combined reporting relationship with the principal member for the entire accounting period of the principal member, is considered to be reflected by the relative weighting of the apportionment data of the partial period member to the apportionment data of the rest of the combined reporting group for the accounting period of the principal member. The method applies as follows: (1) The principal member's income and apportionment data are determined for its entire accounting period (usually a 12 month period). All other members which were members of the combined reporting group during the entire period of the principal member also include their income and apportionment data for that period, using fiscalization methods, if appropriate.(2) Members who were not members of the combined reporting group for the entire accounting period of the principal member include in the combined report only their income for the partial period during which they were a member. Normally this income will be determined by an interim closing of the member's books of account (determined in accordance with the Revenue and Taxation Code). Similarly, the apportionment data of that member is included only for that same partial period.(3) Property factor data for the partial period member (both California property and total property) must be adjusted to reflect the fact that the property was not utilized in the combined reporting group for the entire period of the principal member. For example, if the partial period member was in the combined reporting group for only 7 months of the 12 month accounting period of the principal member, and monthly weighted averaging is not required under Section 25131 of the Revenue and Taxation Code, only 7/12's of the member's average California and total property for the period are reflected in the combined report.(4) Apportionment is then computed using the amounts included in subsections (c)(1) through (3) of this regulation, as if the partial period members were members for the entire accounting period of the principal member. The amounts apportioned to the individual taxpayer members then reflects the member's California source combined reporting income for the partial period. That member then aggregates (or nets) California source combined reporting income with its California source income from other activity to compute income subject to taxation for the entire income year. Example 3: Assume the same facts as provided in Example 1, except that the members of the group elect to report under subsection (c) of this regulation. Under that election, Corporation A, B, and C determine their income and apportionment data for the entire 12 months of the calendar year. Corporation D determines its income and apportionment data for the period May 1-December 31. However, because Corporation D was not a member of the combined reporting group for the entire calendar year, the average of its beginning and ending property factor values for the combined reporting period must be multiplied by 8/12ths to reflect a weighted average value of that property in the principal member's accounting period. If monthly weighted average property values are required under Section 25131 of the Revenue and Taxation Code and the regulations thereunder, the average monthly property values for the months that Corporation D was a member of the combined reporting group are totaled and divided by 12, to determine the weighted average of Corporation D's property in the property factor. The California source combined report income of Corporations B and C are then determined as if Corporation D's income and apportionment data were entirely earned in the principal member's accounting period.
Example 4. Assume the same facts as Example 3, except that Corporation D is a calendar year California taxpayer, and its addition to the combined reporting group did not cause a short period filing requirement. Corporation D's California source combined report income, determined under this subsection, would be treated as earned for the period May 1 through December 31. That California source income would be aggregated (or netted) with its other California source income for the entire calendar year, as provided in subsection (b) of this regulation.
(d) This regulation shall apply to income years open to adjustment under applicable statutes of limitation. For apportionment formula purposes, all references to the property factor in this regulation are applicable only during taxable years for which the taxpayer did not make the single sales factor apportionment formula annual election pursuant to Section 25128.5, Revenue and Taxation Code, or was not subject to the single sales factor apportionment formula pursuant to Section 25128.7, Revenue and Taxation Code.Cal. Code Regs. Tit. 18, §§ 25106.5-9
1. New section filed 7-13-99; operative 8-12-99 (Register 99, No. 29).
2. Change without regulatory effect amending subsection (d) 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: Section 25106.5, Revenue and Taxation Code.
1. New section filed 7-13-99; operative 8-12-99 (Register 99, No. 29).
2. Change without regulatory effect amending subsection (d) filed 12-9-2013 pursuant to section 100, title 1, California Code of Regulations (Register 2013, No. 50).