Cal. Code Regs. tit. 18 § 24411

Current through Register 2024 Notice Reg. No. 40, October 4, 2024

Section 24411 - Deduction for Certain Dividends

(a) Allowance of deduction. Revenue and Taxation Code section 24411, allows taxpayers that have elected to compute their income derived from or attributable to sources within California pursuant to Article 1.5 of Chapter 17 of the Corporation Tax Law a deduction with respect to qualifying dividends. In general, the deduction is an amount equal to 75 percent of such qualifying dividends. However, a deduction in an amount equal to 100 percent is allowed with respect to such qualifying dividends derived from specified construction projects.

(b) Definitions.

(1) Qualifying dividends.

(A) "Qualifying dividends" are those dividends received by any member of the water's-edge group from a corporation, the average of whose property, payroll and sales factors within the United States is less than 20 percent and of which more than 50 percent of the total combined voting power of all classes of stock entitled to vote is owned directly or indirectly by the water's-edge group at the time the dividend is received. The dividend payor need not be in a unitary relationship with the recipient of the dividend or any other member of the water's-edge group. A dividend received from a member of the water's-edge group may be a qualifying dividend when it is treated as being paid out of earnings which were not included in a combined report with those of the recipient. Qualifying dividends shall be classified as business or nonbusiness income pursuant to the rules established in regulations adopted pursuant to Part 11 of the Revenue and Taxation Code. (See Cal. Code Regs., tit. 18, § 25120, sub. (c), and applicable administrative and judicial decisions.)

(B) For purposes of the definition of "qualifying dividends" in Revenue and Taxation Code section 24411, subdivision (a), the term "corporation" shall include banks for taxable years beginning on or after January 1, 1998.

(C) Qualifying dividends do not include amounts deemed to be dividends pursuant to Internal Revenue Code sections 78, 951 et seq., and 1248, or otherwise, unless there is a distribution, actual or constructive, or a provision in the Revenue and Taxation Code requiring that a dividend be deemed to have been received.

(2) United States. For purposes of this section the "United States" means the 50 states of the United States and the District of Columbia.

(3) Water's-edge group. "Water's-edge group," for purposes of the calculations required by Revenue and Taxation Code section 24411, means all banks, corporations or other entities whose income and apportionment factors are considered pursuant to Revenue and Taxation Code section 25110 in computing the income of the individual taxpayer for the current taxable year which is derived from or attributable to sources within this state.

(c) Computation of amount allowable.

(1) In general. The amount of the deduction allowable is equal to 100 percent of the qualifying dividends described in Revenue and Taxation Code section 24411, subdivision (c), and 75 percent of other qualifying dividends not otherwise allowed as a deduction or eliminated from income.

(2) Dividends deductible under other sections. In no event shall a deduction be allowed with respect to a dividend for which a deduction has otherwise been allowed (e.g., Revenue and Taxation Code sections 24402 or 24410) or which has been eliminated from income (e.g., Revenue and Taxation Code section 25106). (See subsection (e) below.)

(d) Dividends derived from construction projects.

(1) General. A deduction in the amount of 100 percent shall be allowed for qualifying dividends derived from construction projects, the locations of which are not subject to the control of the taxpayer. If the payor of the dividend has earnings and profits derived from both construction projects and other activities, the dividend shall be treated as paid from construction projects as described in subsection (d)(5) of this regulation.

(2) Construction project. "Construction project" for purposes of Revenue and Taxation Code section 24411, subdivision (c), means an activity undertaken for an entity, including a governmental entity, which is not affiliated with the water's-edge group, the majority of the cost of performance of which is attributable to an addition to real property or to an alteration of land or any improvement thereto as those terms are defined in the Revenue and Taxation Code and the regulations adopted pursuant thereto.

(A) A "construction project" does not include the operation, rental, leasing or depletion of real property, land or any improvement thereto.

Example: An oil company drills a successful oil well in a foreign country and produces oil. Dividends arising from the production of oil are not derived from a construction project.

(B) For purposes of this subsection (2), an entity is affiliated if it is a member of a commonly controlled group of which a member of the water's-edge group is also a member. (See Cal. Code Regs., tit. 18, § 25110, sub. (b)(2).)

(3) Location not subject to taxpayer's control. A "location is not subject to the taxpayer's control" when the majority of the construction, measured by costs of performance, must be performed at the site in the foreign location because of the nature and character of the project, not because of the terms of the contract.

(4) Examples:

(A) A construction project is undertaken to build a dam. The location is not subject to the taxpayer's control because the dam must be built at a specific site.

(B) A construction project is undertaken to build a skyscraper. The location is not subject to the taxpayer's control because the skyscraper must be built at a specific site.

(C) A construction project is undertaken for the erection of pre-fabricated buildings. The majority of the cost involves pre-fabrication of the components, not their assembly and erection. The components can be pre-fabricated anywhere. The location of the project is under the control of the taxpayer.

(D) An engineering firm designs an oil refinery. The project does not qualify for a deduction under Revenue and Taxation Code section 24411, subdivision (c), because (1) it does not involve construction, and (2) the activity can be conducted anywhere.

(5) Determination of dividends attributable to construction projects the location of which is not subject to the taxpayer's control. For purposes of determining whether dividends are attributable to construction projects the location of which is not subject to the taxpayer's control, dividends shall be considered to be paid out of the current year's earnings and profits to the extent thereof and from the most recently accumulated earnings and profits, by year, thereafter. For any year in which the dividend payor has earnings and profits from activities other than construction projects the location of which is not subject to the taxpayer's control, the dividend shall be attributed to construction projects the location of which is not subject to the taxpayer's control in the ratio which the total earnings and profits from construction projects the location of which is not subject to the taxpayer's control bears to the total earnings and profits for the year. For purposes of applying such ratio, earnings and profits attributable to any particular construction project or other activity of the payor of the dividend shall include all costs and expenses directly attributable to such project or activity as well as an allocable portion of the total other costs and expenses of the payor which are not attributable to a particular project or activity. The total of such other costs and expenses will be allocated among all of the projects and activities of the payor on the basis of their relative gross receipts, or on any other reasonable basis which the payor uses to apportion or allocate such expenses. Following the allocation of all costs and expenses of the payor, any deficit in earnings and profits for any project or activity will be ignored in calculating the ratio referred to above.

Example: Following the allocation of all costs and expenses, the payor has total earnings and profits of $150, comprised of earnings and profits of $100 each from projects A and B and a deficit of $50 for activity C. Of the total earnings and profits of $150, $75 will be attributable to A and $75 to B. No earnings and profits will be attributable to C.

(e) Classification of distributions.

(1) Ordering. For purposes of determining the application of Revenue and Taxation Code sections 24402, 24410, 24411 and 25106, dividends shall be considered to be paid out of the current year's earnings and profits to the extent thereof and from the most recently accumulated earnings and profits by year thereafter.

(2) Partially included entities. In the case of an affiliated corporation, a portion of whose net income and apportionment factors are included in a combined report by reference to Revenue and Taxation Code section 25110, subdivision (a)(4) or (6), which pays dividends to other members of the taxpayer's water's-edge group, the following rules shall apply:

(A) Dividends shall be considered to be paid out of current earnings and profits to the extent thereof and from the most recently accumulated earnings and profits thereafter.

(B) Dividends which are considered paid out of earnings and profits of a year in which a portion of the dividend-paying entity's income and factors were considered in determining the amount of income derived from or attributable to California sources of another entity shall be considered subject to the provisions of Revenue and Taxation Code section 25106, to the extent paid out of the earnings and profits attributable to income included in the combined report.

(3) Subpart F income. For purposes of Revenue and Taxation Code section 25110, a portion of the income and apportionment factors of an entity with Subpart F income, as defined in the Internal Revenue Code, is included in the combined report used to determine the income of the water's-edge group derived from or attributable to sources within this state. For purposes of the Internal Revenue Code, Subpart F income is treated as a deemed dividend to the owner of the corporation. This is different from the treatment provided for in Revenue and Taxation Code section 25110. As a consequence, the rules established in the Internal Revenue Code and the regulations adopted pursuant thereto with regard to the classification of distributions from an entity with Subpart F income have no application for purposes of the Corporation Tax Law. The classification of a distribution for an entity that has Subpart F income shall follow the rules set forth in subsections (e)(1) and (2) of this regulation.

(4) Examples:

Example 1: Corporation A files a water's-edge election which allows it to exclude Corporation C, a foreign incorporated unitary subsidiary with none of its property, payroll, and sales factors within the United States. Corporation C has current earnings and profits of $100 and retained earnings and profits of $100 all earned during years when C was included in the combined report filed by A.

C declares a dividend of $100. The entire payment is subject to the provisions of Revenue and Taxation Code section 24411.

C declares a dividend of $150. The dividend is deemed to be paid first out of the current year's earnings and profits of $100. The remaining $50 is paid from accumulated earnings and profits earned in years when C was included in the combined report filed by A.

A portion of the payment, $100, is subject to the provisions of Revenue and Taxation Code section 24411. The remaining $50 is subject to the provisions of Revenue and Taxation Code section 25106 and is eliminated from A's income.

Example 2: A has filed a water's-edge election effective January 1, 1988, which would allow it to exclude corporation F except for the fact F has Subpart F income that causes F to be a partially included controlled foreign corporation. The partial inclusion ratio equals Subpart F income of the controlled foreign corporation divided by current earnings and profits. Corporation F has a partial inclusion ratio of 66.67% and total earnings and profits of $150 in 1988. Therefore, $100 represents earnings and profits attributable to income ($150 earnings and profits x 66.7% inclusion ratio = $100) included in the combined report required pursuant to Revenue and Taxation Code section 25110.

In 1989 F has a partial inclusion ratio of 50% and total earnings and profits of $100. Therefore, $50 represents earnings and profits attributable to income ($100 earnings and profits x 50% inclusion ratio = $50) included in the combined report required pursuant to Revenue and Taxation Code section 25110. F declares a dividend of $75 in 1989. $37.50 of the dividend for 1989 is treated as having been paid from the $50 of earnings and profits attributable to income included in the combined report in 1989, and $37.50 is treated as having been paid from the other $50 of earnings and profits attributable to income that was not included in the combined report in 1989.

A has dividend income of $37.50 which is subject to the provisions of Revenue and Taxation Code section 25106 and is therefore eliminated from income and $37.50 of dividends subject to the provisions of Revenue and Taxation Code section 24411.

Example 3: Assume the same facts as in Example 2, except that F declares a dividend of $200 in 1989. $50 of the dividend is treated as having been paid from the $50 of earnings and profits attributable to income included in the combined report in 1989, and $50 of the dividend is treated as having been paid from the other earnings and profits that were attributable to income that was not included in the combined report in 1989. The remaining $100 is treated as having been paid from 1988 earnings. $66.67 of the dividend is treated as being paid from earnings and profits attributable to income included in the combined report in 1988 and the remaining $33.33 is from earnings and profits attributable to income that was not included in the combined report in 1988.

A has dividend income of $116.67 ($50 (1989) + $66.67 (1988)) which is subject to the provisions of Revenue and Taxation Code section 25106 and is therefore eliminated from income. A's remaining $83.33 ($50 (1989) + $33.33 (1988)) of dividend income is subject to the provisions of Revenue and Taxation Code section 24411.

Example 4: Corporation A files a water's-edge election which allows it to include Corporation P, a foreign incorporated unitary subsidiary with less than 20 percent of the average of its property, payroll and sales factors within the United States only to the extent of its United States income and factors. Corporation P has current earnings and profits of $100 of which $10 represents earnings and profits attributable to income included in the water's-edge combined report pursuant to Revenue and Taxation Code section 25110, subdivision (a)(4).

P declares a dividend of $50. Of such amount $5 is subject to elimination under Revenue and Taxation Code section 25106, and $45 is subject to the provisions of Revenue and Taxation Code section 24411.

(f) This regulation applies to taxable years beginning on or after January 1, 1996, except as otherwise specifically provided.

Cal. Code Regs. Tit. 18, § 24411

1. New section filed 1-3-89; operative 1-3-89 (Register 89, No. 4).
2. Editorial correction of subsections (e)(2)(B) and (i)(4) Examples 2 and 3 (Register 91, No. 32).
3. Amendment of subsections (b)(2)-(3), (b)(5)-(6), (b)(9), (c)(1), (c)(2)(A), (c)(4)-(5), (d)(1)-(4), (e)(4), and (f)-(g), new subsections (b)(2)(B), (h)(1)(C) Example, and (h)(5), and repealer of subsection (b)(3)(D) filed 11-3-92; operative 12-3-92 (Register 92, No. 45).
4. Change without regulatory effect amending section and NOTE filed 3-13-2002 pursuant to section 100, title 1, California Code of Regulations (Register 2002, No. 11).
5. Editorial correction adding inadvertently omitted subsection (b) designator (Register 2003, No. 6).
6. Change without regulatory effect amending subsection (f) filed 4-9-2003 pursuant to section 100, title 1, California Code of Regulations (Register 2003, No. 15).

Note: Authority cited: Section 19503, Revenue and Taxation Code. Reference: Section 24411, Revenue and Taxation Code.

1. New section filed 1-3-89; operative 1-3-89 (Register 89, No. 4).
2. Editorial correction of subsections (e)(2)(B) and (i)(4) Examples 2 and 3 (Register 91, No. 32).
3. Amendment of subsections (b)(2)-(3), (b)(5)-(6), (b)(9), (c)(1), (c)(2)(A), (c)(4)-(5), (d)(1)-(4), (e)(4), and (f)-(g), new subsections (b)(2)(B), (h)(1)(C) Example, and (h)(5), and repealer of subsection (b)(3)(D) filed 11-3-92; operative 12-3-92 (Register 92, No. 45).
4. Change without regulatory effect amending section and Note filed 3-13-2002 pursuant to section 100, title 1, California Code of Regulations (Register 2002, No. 11).
5. Editorial correction adding inadvertently omitted subsection (b) designator (Register 2003, No. 6).
6. Change without regulatory effect amending subsection (f) filed 4-9-2003 pursuant to section 100, title 1, California Code of Regulations (Register 2003, No. 15).