Section 25137-10 - Combination of General (Non-Financial) and Financial Corporations(a) Application. (1) The income of a unitary business which is conducted by two or more entities, one or more of which would be classified as a bank or financial corporation and one or more of which would be classified as a general corporation for purposes of the Revenue and Taxation Code, sections 23001, et seq., whose predominant activity is other than financial activity, shall be allocated and apportioned pursuant to this regulation for income years beginning on or after January 1, 1989.(2) A unitary business subject to this regulation normally consists of a parent corporation engaged by itself, or with or through a subsidiary or subsidiaries, in a mining, manufacturing, mercantile or service business which forms a unitary subsidiary or subsidiaries to perform financial functions which are ancillary to the parent's business. EXAMPLES:
1. A corporation engaged in the operation of a department store establishes a unitary subsidiary to hold title to receivables arising from the extension of credit for the purchase of goods from the store. The unitary business is subject to the regulation.2. A manufacturer of consumer products establishes a unitary subsidiary to provide financing to third-party marketers of its product and/or financing for the purchasers of such products from third parties. The unitary business is subject to the regulation.3. A bank forms a unitary subsidiary to hold title to its headquarters buildings and branch locations. The unitary business is not subject to the regulation.(b) Definitions. (1) Bank or Financial Corporation. A "bank or financial corporation" is an entity whose tax, if it were doing business in California, would be determined pursuant to Revenue and Taxation Code sections 23181 and 23183.(2) Financial Activity. "Financial" activity is an activity involving the use of moneyed capital in activities which are in competition with and which are substantially similar to those which national banks are permitted to conduct.(3) General Corporation. A "general corporation" is a corporation whose tax, if it were doing business in California, would be determined pursuant to Revenue and Taxation Code section 23151. It is a corporation which is neither a bank nor a financial corporation. (See subsection (b)(1).)(4) Predominant Activity. An activity is predominant when its conduct gives rise to gross income which constitutes more than 50 percent of the unitary business's gross income. The classification of a business as a general or financial business will not be changed based upon an occasional year in which its gross income from financial activities does or does not exceed the 50 percent level, as the case may be.(5) Receivables of General Corporations Arising From Financial Activities. Receivables of general corporations arising from financial activities are receivables arising from the sale of tangible property through the extension of credit which in the normal course can give rise to the receipt, payment, or accrual of interest or its equivalent including, but not limited to, charge account sales, credit card sales, installment sales, time purchases, floor financing and financing leases. Receivables of general corporations arising from financial activities do not include other intangible property such as cash or currency, deposits, investments of capital, whether short term or long term, patents, copyrights or other similar intangibles. EXAMPLES:
1. Goods are sold to a holder of a credit card. No interest is charged on the account if the balance is paid in full within 25 days of the billing date. Amounts unpaid at that time accrue interest at the rate of 1percent per month. Ninety percent of the cardholders pay their accounts off within 25 days of the billing date. All balances owing by the credit cardholders are receivables of a general corporation arising from a financial activity because interest may be received in the normal course.2. Goods are sold on terms net 30 days. No interest is charged for the thirty-day period nor on delinquencies in the normal course of business. The receivables are not a receivable of a general corporation arising from financial activity because no interest may be received in the normal course.(6) Retail Sale. Retail sale means a sale of tangible personal property for any purpose other than resale in the regular course of business.(7) Transferred Receivables. Transferred receivables are receivables of general corporations arising from financial activities which are transferred, directly or indirectly, to a bank or financial corporation which is a member of the same unitary business.(c) Presumptions. (1) Exclusion of intangibles. Exclusion of intangibles from the apportionment formula when a bank or financial corporation is part of the unitary business gives rise to a strong presumption that the normal statutory provisions of the Uniform Division of Income for Tax Purposes Act (secs. 25120 et seq., Cal. Rev. & Tax. Code) and the regulations adopted pursuant thereto do not fairly reflect activities in this state.(2) Bank or Financial Corporation Taxable in a State. Without otherwise limiting taxability, a bank or financial corporation is presumed to be in an agency relationship with an affiliate and taxable in this state when: (A) it holds transferred receivables which arose as the result of an application for credit being made to, or the extension of credit by, the affiliate in this state, or(B) the affiliate makes, or receives collections upon, or in any other manner services, in this state, receivables transferred to, or of, the financial corporation.(d) Apportionment of Business Income. The business income of a unitary business subject to this regulation shall be apportioned pursuant to the apportionment formula as set forth in this regulation. (1) Property factor. (A) Denominator. The denominator of the property factor shall include:1. the property of the general corporations required to be included pursuant to section 25129 through section 25131 and section 25137 of the Revenue and Taxation Code and the regulations adopted pursuant thereto, plus2. the property of the banks or financial corporations required to be included pursuant to Regulation Sections 25137-4.1(c)(1)(B) or 25137-4.2(d)(1) and (2), to be determined based upon the income year, plus3. the receivables of the general corporations arising from financial activities to the extent not otherwise included pursuant to subsections (d)(1)(A)1. and 2.(B) Numerator. 1. In the case of a general corporation, the numerator of the property factor shall include: a. property assigned to this state pursuant to sections 25129 through 25131 of the Revenue and Taxation Code, and the regulations adopted pursuant thereto, plusb. receivables arising from financial activities of a general corporation to the extent they arise from either a retail sale made from an outlet located in this state, whether or not owned by the taxpayer, or other than a retail sale made to a customer in this state, plusc. if the taxpayer is not taxable in the state where the sale, whether or not made by the taxpayer, which gave rise to the extension of credit is made, receivables arising from financial activities of the general corporation if the office at which credit was first applied for is in this state.2. In the case of a bank or financial corporation, the numerator of the property factor shall include: a. the assets, other than transferred receivables, assigned to this state pursuant to Regulation Sections 25137-4.1(c)(1)(B) or 25137-4.2(d)(3), to be determined based upon the income year, plusb. if the bank or financial corporation is taxable in this state, transferred receivables to the extent they would have been assigned to this state pursuant to subsections (d)(1)(B)1.a., b. and c., if held by a general corporation, plusc. if the commercial domicile of the bank or financial corporation is in this state, transferred receivables which, if held by a general corporation, would have been assigned pursuant to subsections (d)(1)(B)1.a., b. and c., to a state in which the bank or financial corporation was not taxable.3. If the records maintained by either the holder or by another corporation which is a member of the same unitary business of receivables of general corporations arising from financial activities or transferred receivables do not establish the location of the sale which gave rise to such receivables, then, if the holder is otherwise taxable in this state, such receivables shall be assigned to this state based upon the ratio of sales in this state of the corporation making such sales to total sales of such corporation, or any other method if established to be more reasonable.(C) Valuation of certain property included in the property factor. Intangible personal property, coin and currency included in the property factor pursuant to subsections (d)(1)(A)2. and 3. shall, for purposes of both subsections (d)(1)(A) and (B), be valued at 20 percent of its tax basis for federal income tax purposes.(2) Payroll factor. The payroll factor shall be computed pursuant to sections 25132 and 25133 of the Revenue and Taxation Code and the regulations adopted pursuant thereto.(3) Sales factor. (A) Denominator. The denominator of the sales factor shall include the receipts required to be included pursuant to sections 25134 through 25137 of the Revenue and Taxation Code and the regulations adopted pursuant thereto.(B) Numerator. 1. In the case of a general corporation, the numerator of the sales factor shall include: a. the items assigned to this state pursuant to sections 25134 through 25137 of the Revenue and Taxation Code and the regulations adopted pursuant thereto, plusb. to the extent not assigned pursuant to subsection a., amounts realized with respect to receivables of general corporations arising from financial activity assigned to this state pursuant to subsections (d)(1)(B)1.a., b. and c.2. In the case of a bank or financial corporation, the numerator of the sales factor shall include: a. receipts, other than receipts from transferred receivables, assigned to this state pursuant to Regulation Sections 25137-4.1(c)(2) or 25137-4.2(c)(3), to be determined based upon the income year, plusb. amounts realized with respect to transferred receivables assigned to this state pursuant to subsections (d)(1)(B)2.b. and c.(e) Exceptions. (1) The Franchise Tax Board may permit or require the use of a method other than that provided for in this regulation if, in extraordinary circumstances, the provisions of this regulation reach an unreasonable result.(2) Notwithstanding the provisions of this regulation, the Franchise Tax Board may reallocate items of income, expenses or apportionment factors between entities when it is necessary to fairly reflect the activities or contributions of such entities.(f) Example. Two non-financial corporations, A and B, conduct a unitary business with two financial corporations, C and D. The unitary business is one in which the non-financial activities predominate. A and B each have 50 percent of the general corporations' income and factors with A being located wholly inside California and B being located wholly outside of California. C and D each have 50 percent of the financial corporations' income and factors and have no office in California. Seventy-five percent of the receivables held by D are transferred receivables arising from California sales made by A. A conducted the initial credit investigation and receives payments made to D on such accounts. | | | EVERYWHERE ACTIVITIES |
| | | GENERAL CORPORATIONS | | FINANCIAL CORPORATIONS |
| BALANCE SHEET* | 12/31/88 | | 12/31/89 | | 12/31/88 | | 12/31/89 |
| Current Assets | | | | | | | |
| Cash | $ 250,000 | | $ 260,000 | | $ 45,000 | | $ 48,000 |
| Marketable Securities | 60,000 | | 75,000 | | 75,000 | | 70,000 |
| Receivables -- Customer | 750,000 | | 800,000 | | 950,000 | | 980,000 |
| Allowance for Doubtful | | | | | | | |
| | Accounts | -15,000 | | -16,000 | | -20,000 | | -25,000 |
| | Inventories | 450,000 | | 600,000 | | 0 | | 0 |
| | | | | | | | |
| Total Current Assets | 1,495,000 | | 1,719,000 | | 1,050,000 | | 1,073,000 |
| | | | | | | |
| Investment in Subsidiaries | 360,000 | | 430,000 | | 0 | | 0 |
| Due from Parent | 0 | | 0 | | 100,000 | | 150,000 |
| Goodwill | 100,000 | | 100,000 | | 0 | | 0 |
| Property, Plant & Equipment | 920,000 | | 980,000 | | 40,000 | | 45,000 |
| Allowance for Depreciation | -110,000 | | -200,000 | | -6,000 | | -7,000 |
| Prepaid Expenses | 15,000 | | 13,000 | | 1,000 | | 2,000 |
| | | | | | | |
| Total Assets | $2,780,000 | | $3,047,000 | | $1,185,000 | | $1,263,000 |
| *Financial Purposes |
| |
| Excerpts from Income Statement |
| Sales | | | $3,500,000 | | | | |
| Interest Income | | | | | | | |
| | Business | | | 25,000 | | | | $290,000 |
| | Non-business | | | 10,000 | | | | |
| | From Parent | | | | | | | 10,000 |
| Dividends | | | | | | | |
| | From Affiliates | | | 50,000 | | | | |
| | Business | | | | | | | 15,000 |
| | Non-business | | | 10,000 | | | | |
| Interest Expense -- to Subsidiaries | | | 10,000 | | | | |
| | Other | | 15,000 | | | | 120,000 |
| Rent Expense | | | 30,000 | | | | 15,000 |
| Payroll | | | 250,000 | | | | 95,000 |
| Business Income Subject to Apportionment | | | $ 135,000 | | | | $ 65,000 |
| | CALIFORNIA ACTIVITIES |
| | A | | D |
| BALANCE SHEET | 12/31/88 | 12/31/89 | | 12/31/88 | | 12/31/89 |
| Current Assets | | | | | | |
| Cash | $ 125,000 | $ 130,000 | | 0 | | 0 |
| Marketable Securities | 30,000 | 37,500 | | 0 | | 0 |
| Receivables -- Customer | 375,000 | 400,000 | | 356,250 | | 367,500 |
| Allowance for Doubtful | | | | | | |
| | Accounts | -7,500 | -8,000 | | -7,500 | | -9,500 |
| | Inventories | 225,000 | 300,000 | | 0 | | 0 |
| | | | | | | |
| Total Current Assets | $ 747,500 | $ 859,500 | | $ 348,750 | | $ 358,000 |
| | | | | | |
| Investment in Unconsolidated | | | | | | |
| Subsidiaries | 180,000 | 215,000 | | 0 | | 0 |
| Due from Parent | 0 | 0 | | 50,000 | | 75,000 |
| Goodwill | 50,000 | 50,000 | | 0 | | 0 |
| Property, Plant & Equipment | 460,000 | 490,000 | | 0 | | 0 |
| Allowance for Depreciation | -55,000 | -100,000 | | 0 | | 0 |
| Prepaid Expenses | 7,500 | 9,000 | | 0 | | 0 |
| Total Assets | $1,390,000 | $1,523,500 | | $ 398,750 | | $ 433,000 |
| | | | | | |
| Sales | | $1,750,000 | | | | |
| Interest Income | | | | | | $108,750 |
| Rent Expense | | $ 15,000 | | | | 0 |
| Payroll | | 125,000 | | | | 0 |
| | | CALCULATION OF APPORTIONMENT FACTORS AND INCOME ASSIGNED TO CALIFORNIA |
| | | | | | | | | |
| | | GENERAL CORPORATIONS | | FINANCIAL CORPORATIONS |
| Property Factor -- | 12/31/88 | 12/31/89 | | 12/31/88 | | 12/31/89 | Combined |
| Denominator | | | | | | | |
| Total Assets -- per Balance Sheet | $2,780,000 | $1,047,000 | | $1,185,000 | | $1,263,000 | |
| Add | | | | | | | |
| Allowance for Doubtful Accounts | 15,000 | 16,000 | | 20,000 | | 25,000 | |
| Allowance for Depreciation | 110,000 | 200,000 | | 6,000 | | 7,000 | |
| Deduct | | | | | | | |
| Cash | 250,000 | 260,000 | | 0 | | 0 | |
| Marketable Securities | 60,000 | 75,000 | | 0 | | 0 | |
| Investment in Subsidiaries | 360,000 | 430,000 | | | | | |
| Intercompany Receivables | | | | 100,000 | | 150,000 | |
| Goodwill | 100,000 | 100,000 | | 0 | | 0 | |
| Prepaid Expenses | 15,000 | 18,000 | | 1,000 | | 2,000 | |
| Subsection (C) Adjustment | 600,000 | 640,000 | | 856,000 | | 878,4000 | |
| | | | | | | | |
| Totals | $1,520,000 | $1,740,000 | | $ 254,000 | | $ 264,600 | |
| | | | | | | |
| Add: Beginning Balance | | 1,520,000 | | | | 254,000 | |
| Totals | | 3,260,000 | | | | 518,600 | |
| Average ( 1/2) | | 1,630,000 | | | | 259,300 | |
| Capitalized Rent | | | | | | | |
| (Rent Expense x 8) | | 240,000 | | | | 120,000 | |
| | | | | | | | |
| Total | | $1,870,000 | | | | $379,300 | 2,249,300 |
| Property Factor -- Numerator | A | | D | |
| Total California Assets -- Balance Sheet | $1,390,000 | | $1,523,500 | | $398,750 | | $433,000 | |
| | | | | | | | |
| Add | | | | | | | | |
| Allowance for Doubtful Accounts | 7,500 | | 8,000 | | 7,500 | | 9,500 | |
| Allowance for Depreciation | 55,000 | | 100,000 | | | | | |
| Deduct |
| Cash | 125,000 | | 130,000 | | | | | |
| Marketable Securities | 30,000 | | 37,500 | | | | | |
| Investment in Subsidiaries | 180,000 | | 215,000 | | | | | |
| Intercompany Receivables | | | | | 50,000 | | 75,000 | |
| Goodwill | 50,000 | | 50,000 | | | | | |
| Prepaid Expenses | 7,500 | | 9,000 | | | | | |
| Subsection (C) Adjustment | 300,000 | | 320,000 | | 285,000 | | 294,000 | |
| | | | | | | | | |
| Total | $760,000 | | $870,000 | | $71,250 | | $73,500 | |
| | | | | | | | |
| Add: Beginning Balance | | | 760,000 | | | | 71,250 | |
| Totals | | | 1,630,000 | | | | 144,750 | |
| | | | | | | | |
| Average ( 1/2) | | | 815,000 | | | | 72,375 | |
| Capitalized Rent | | | | | | | | |
| (Rent Expense x 8) | | | 120,000 | | | | 0 | |
| | | | | | | | | |
| Total | | | 935,000 | | | | 72,375 | 1,007,375 |
| | | | | | | | |
| Property Factor | | | | | | | | |
| (Cal. Entity Total/Combined | | | | | | | | |
| Everywhere Total) | 41.5685% | | | | 3.2177% | | | 44.7862% |
| | | | | | | | | |
| Payroll Factor | Generals | | | | Financials | | | Combined |
| Payroll Denominator | 250,000 | | | | 95,000 | | | 345,000 |
| Payroll Numerator | 125,000 | | | | 0 | | | 125,000 |
| CALCULATION OF APPORTIONMENT FACTORS AND INCOME ASSIGNED TO CALIFORNIA |
| |
| GENERAL CORPORATIONS | FINANCIAL CORPORATIONS |
| Payroll Factor | | | | |
| (Cal. Entity Total/Combined Everywhere Total) | 36.2319 % | | 036.2319% | |
| Receipts Factor | | | | |
| Receipts Denominator | 3,525,000 | | 290,000 | 3,815,000 |
| Receipts Numerator | 1,750,000 | | 108,750 | 1,858,750 |
| Receipts Factor | | | | |
| (Cal. Entity Total/Combined Everywhere Total) | 45.8716 % | | 2.8506 % | 48.7222 % |
| Total Ratios | 123.6720 % | | 6.0683 % | 129.7403 % |
| Average Ratio | 41.2240 % | | 2.0228 % | 43.2468 % |
| Combined Business Income | | | | 200,000 |
| Assignment to California | 82,448 | | 4,045 | 86,493 |
__________
* Applicable as stated on the face of the regulation and exempted from the provisions of Regulation section 25139.
** Assumes dividends are excluded from receipts factor pursuant to Regulation Section 25137(c)(1)(C).
(g) 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.Cal. Code Regs. Tit. 18, §§ 25137-10
1. New section filed 8-27-90; operative 9-26-90 (Register 90, No. 42). For prior history, see Register 87, No. 7.
2. Change without regulatory effect amending section filed 10-15-90 pursuant to section 100, title 1, California Code of Regulations (Register 91, No. 3).
3. New subsection (d)(1)(C) and amendment of Calculations of Apportionment Factors and Income Assigned to California table filed 2-21-92; operative 3-23-92 (Register 92, No. 12).
4. Change without regulatory effect amending subsections (d)(1)(A)2., (d)(1)(B)2.a. and (d)(3)(B)2.a. filed 8-1-96 pursuant to section 100, title 1, California Code of Regulations (Register 96, No. 31).
5. Change without regulatory effect adding subsection (g) and amending NOTE 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 25137, Revenue and Taxation Code.
1. New section filed 8-27-90; operative 9-26-90 (Register 90, No. 42). For prior history, see Register 87, No. 7.
2. Change without regulatory effect amending section filed 10-15-90 pursuant to section 100, title 1, California Code of Regulations (Register 91, No. 3).
3. New subsection (d)(1)(C) and amendment of Calculations of Apportionment Factors and Income Assigned to California table filed 2-21-92; operative 3-23-92 (Register 92, No. 12).
4. Change without regulatory effect amending subsections (d)(1)(A)2., (d)(1)(B)2.a. and (d)(3)(B)2.a. filed 8-1-96 pursuant to section 100, title 1, California Code of Regulations (Register 96, No. 31).
5. Change without regulatory effect adding subsection (g) and amending Note filed 12-9-2013 pursuant to section 100, title 1, California Code of Regulations (Register 2013, No. 50).