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S.B. 22
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7 LONG TITLE
8 Committee Note:
9 The Revenue and Taxation Interim Committee recommended this bill.
10 General Description:
11 This bill amends provisions related to corporate franchise and income taxes.
12 Highlighted Provisions:
13 This bill:
14 . amends the definition of "common ownership" for purposes of corporate franchise
15 and income taxes;
16 . repeals provisions related to certain distributions by corporations from depletion
17 reserves;
18 . addresses the circumstances under which certain receipts, rents, royalties, or sales
19 are considered to be in this state;
20 . addresses intercompany transactions for purposes of apportionment of income to the
21 state; and
22 . makes technical and conforming changes.
23 Money Appropriated in this Bill:
24 None
25 Other Special Clauses:
26 This bill has retrospective operation for a taxable year beginning on or after January 1,
27 2011.
28 Utah Code Sections Affected:
29 AMENDS:
30 59-7-101, as last amended by Laws of Utah 2010, Chapter 198
31 59-7-108, as repealed and reenacted by Laws of Utah 1993, Chapter 169
32 59-7-319, as last amended by Laws of Utah 2008, Chapters 105 and 283
33 59-7-404.5, as enacted by Laws of Utah 1994, Chapter 83
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35 Be it enacted by the Legislature of the state of Utah:
36 Section 1. Section 59-7-101 is amended to read:
37 59-7-101. Definitions.
38 As used in this chapter:
39 (1) "Adjusted income" means unadjusted income as modified by Sections 59-7-105
40 and 59-7-106 .
41 (2) (a) "Affiliated group" means one or more chains of corporations that are connected
42 through stock ownership with a common parent corporation that meet the following
43 requirements:
44 (i) at least 80% of the stock of each of the corporations in the group, excluding the
45 common parent corporation, is owned by one or more of the other corporations in the group;
46 and
47 (ii) the common parent directly owns at least 80% of the stock of at least one of the
48 corporations in the group.
49 (b) "Affiliated group" does not include corporations that are qualified to do business
50 but are not otherwise doing business in this state.
51 (c) For purposes of this Subsection (2), "stock" does not include nonvoting stock which
52 is limited and preferred as to dividends.
53 (3) "Apportionable income" means adjusted income less nonbusiness income net of
54 related expenses, to the extent included in adjusted income.
55 (4) "Apportioned income" means apportionable income multiplied by the
56 apportionment fraction as determined in Section 59-7-311 .
57 (5) "Business income" is as defined in Section 59-7-302 .
58 (6) (a) "Captive real estate investment trust" means a real estate investment trust if:
59 (i) the shares or beneficial interests of the real estate investment trust are not regularly
60 traded on an established securities market; and
61 (ii) more than 50% of the voting power or value of the shares or beneficial interests of
62 the real estate investment trust are directly, indirectly, or constructively:
63 (A) owned by a controlling entity of the real estate investment trust; or
64 (B) controlled by a controlling entity of the real estate investment trust.
65 (b) In accordance with Title 63G, Chapter 3, Utah Administrative Rulemaking Act, the
66 commission may make rules defining "established securities market."
67 (7) (a) "Common ownership" means the direct or indirect control or ownership of more
68 than 50% of the outstanding voting stock of:
69 (i) a parent-subsidiary controlled group as defined in Section 1563, Internal Revenue
70 Code, except that 50% shall be substituted for 80%;
71 (ii) a brother-sister controlled group as defined in Section 1563, Internal Revenue
72 Code[
73 (iii) three or more corporations each of which is a member of a group of corporations
74 described in Subsection (2)(a)(i) or (ii), and one of which is:
75 (A) a common parent corporation included in a group of corporations described in
76 Subsection (2)(a)(i); and
77 (B) included in a group of corporations described in Subsection (2)(a)(ii).
78 (b) Ownership of outstanding voting stock shall be determined by Section 1563,
79 Internal Revenue Code.
80 (8) (a) "Controlling entity of a captive real estate investment trust" means an entity
81 that:
82 (i) is treated as an association taxable as a corporation under the Internal Revenue
83 Code;
84 (ii) is not exempt from federal income taxation under Section 501(a), Internal Revenue
85 Code; and
86 (iii) directly, indirectly, or constructively holds more than 50% of:
87 (A) the voting power of a captive real estate investment trust; or
88 (B) the value of the shares or beneficial interests of a captive real estate investment
89 trust.
90 (b) "Controlling entity of a captive real estate investment trust" does not include:
91 (i) a real estate investment trust, except for a captive real estate investment trust;
92 (ii) a qualified real estate investment subsidiary described in Section 856(i), Internal
93 Revenue Code, except for a qualified real estate investment trust subsidiary of a captive real
94 estate investment trust; or
95 (iii) a foreign real estate investment trust.
96 (c) In accordance with Title 63G, Chapter 3, Utah Administrative Rulemaking Act, the
97 commission may make rules defining "established securities market."
98 (9) "Corporate return" or "return" includes a combined report.
99 (10) "Corporation" includes:
100 (a) entities defined as corporations under Sections 7701(a) and 7704, Internal Revenue
101 Code; and
102 (b) other organizations that are taxed as corporations for federal income tax purposes
103 under the Internal Revenue Code.
104 (11) "Dividend" means any distribution, including money or other type of property,
105 made by a corporation to its shareholders out of its earnings or profits accumulated after
106 December 31, 1930.
107 (12) (a) "Doing business" includes any transaction in the course of its business by a
108 domestic corporation, or by a foreign corporation qualified to do or doing intrastate business in
109 this state.
110 (b) Except as provided in Subsection 59-7-102 (2), "doing business" includes:
111 (i) the right to do business through incorporation or qualification;
112 (ii) the owning, renting, or leasing of real or personal property within this state; and
113 (iii) the participation in joint ventures, working and operating agreements, the
114 performance of which takes place in this state.
115 (13) "Domestic corporation" means a corporation that is incorporated or organized
116 under the laws of this state.
117 (14) (a) "Farmers' cooperative" means an association, corporation, or other
118 organization that is:
119 (i) (A) an association, corporation, or other organization of:
120 (I) farmers; or
121 (II) fruit growers; or
122 (B) an association, corporation, or other organization that is similar to an association,
123 corporation, or organization described in Subsection (14)(a)(i)(A); and
124 (ii) organized and operated on a cooperative basis to:
125 (A) (I) market the products of members of the cooperative or the products of other
126 producers; and
127 (II) return to the members of the cooperative or other producers the proceeds of sales
128 less necessary marketing expenses on the basis of the quantity of the products of a member or
129 producer or the value of the products of a member or producer; or
130 (B) (I) purchase supplies and equipment for the use of members of the cooperative or
131 other persons; and
132 (II) turn over the supplies and equipment described in Subsection (14)(a)(ii)(B)(I) at
133 actual costs plus necessary expenses to the members of the cooperative or other persons.
134 (b) (i) Subject to Subsection (14)(b)(ii), for purposes of this Subsection (14), the
135 commission by rule, made in accordance with Title 63G, Chapter 3, Utah Administrative
136 Rulemaking Act, shall define:
137 (A) the terms:
138 (I) "member"; and
139 (II) "producer"; and
140 (B) what constitutes an association, corporation, or other organization that is similar to
141 an association, corporation, or organization described in Subsection (14)(a)(i)(A).
142 (ii) The rules made under this Subsection (14)(b) shall be consistent with the filing
143 requirements under federal law for a farmers' cooperative.
144 (15) "Foreign corporation" means a corporation that is not incorporated or organized
145 under the laws of this state.
146 (16) (a) "Foreign operating company" means a corporation if:
147 (i) the corporation is incorporated in the United States;
148 (ii) at least 80% of the corporation's business activity, as determined under Section
149 59-7-401 , is conducted outside the United States; and
150 (iii) as calculated in accordance with Part 3, Allocation and Apportionment of Income -
151 Utah UDITPA Provisions, the corporation has:
152 (A) at least $1,000,000 of payroll located outside the United States; and
153 (B) at least $2,000,000 of property located outside the United States.
154 (b) "Foreign operating company" does not include a corporation that qualifies for the
155 Puerto Rico and possession tax credit as provided in Section 936, Internal Revenue Code.
156 (17) (a) "Foreign real estate investment trust" means:
157 (i) a business entity organized outside the laws of the United States if:
158 (A) at least 75% of the business entity's total asset value at the close of the business
159 entity's taxable year is represented by:
160 (I) real estate assets, as defined in Section 856(c)(5)(B), Internal Revenue Code;
161 (II) cash or cash equivalents; or
162 (III) one or more securities issued or guaranteed by the United States;
163 (B) the business entity is:
164 (I) not subject to income taxation:
165 (Aa) on amounts distributed to the business entity's beneficial owners; and
166 (Bb) in the jurisdiction in which the business entity is organized; or
167 (II) exempt from income taxation on an entity level in the jurisdiction in which the
168 business entity is organized;
169 (C) the business entity distributes at least 85% of the business entity's taxable income,
170 as computed in the jurisdiction in which the business entity is organized, to the holders of the
171 business entity's:
172 (I) shares or beneficial interests; and
173 (II) on an annual basis;
174 (D) (I) not more than 10% of the following is held directly, indirectly, or constructively
175 by a single person:
176 (Aa) the voting power of the business entity; or
177 (Bb) the value of the shares or beneficial interests of the business entity; or
178 (II) the shares of the business entity are regularly traded on an established securities
179 market; and
180 (E) the business entity is organized in a country that has a tax treaty with the United
181 States; or
182 (ii) a listed Australian property trust.
183 (b) In accordance with Title 63G, Chapter 3, Utah Administrative Rulemaking Act, the
184 commission may make rules defining:
185 (i) "cash or cash equivalents";
186 (ii) "established securities market"; or
187 (iii) "listed Australian property trust."
188 (18) "Income" includes losses.
189 (19) "Internal Revenue Code" means Title 26 of the United States Code as effective
190 during the year in which Utah taxable income is determined.
191 (20) "Nonbusiness income" is as defined in Section 59-7-302 .
192 (21) "Real estate investment trust" is as defined in Section 856, Internal Revenue Code.
193 (22) "Related expenses" means:
194 (a) expenses directly attributable to nonbusiness income; and
195 (b) the portion of interest or other expense indirectly attributable to both nonbusiness
196 and business income which bears the same ratio to the aggregate amount of such interest or
197 other expense, determined without regard to this Subsection (22), as the average amount of the
198 asset producing the nonbusiness income bears to the average amount of all assets of the
199 taxpayer within the taxable year.
200 (23) "Safe harbor lease" means a lease that qualified as a safe harbor lease under
201 Section 168, Internal Revenue Code.
202 (24) "S corporation" means an S corporation as defined in Section 1361, Internal
203 Revenue Code.
204 (25) "State of the United States" includes any of the 50 states or the District of
205 Columbia.
206 (26) (a) "Taxable year" means the calendar year or the fiscal year ending during such
207 calendar year upon the basis of which the adjusted income is computed.
208 (b) In the case of a return made for a fractional part of a year under this chapter or
209 under rules prescribed by the commission, "taxable year" includes the period for which such
210 return is made.
211 (27) "Taxpayer" means any corporation subject to the tax imposed by this chapter.
212 (28) "Threshold level of business activity" means business activity in the United States
213 equal to or greater than 20% of the corporation's total business activity as determined under
214 Section 59-7-401 .
215 (29) "Unadjusted income" means federal taxable income as determined on a separate
216 return basis before intercompany eliminations as determined by the Internal Revenue Code,
217 before the net operating loss deduction and special deductions for dividends received.
218 (30) (a) "Unitary group" means a group of corporations that:
219 (i) are related through common ownership; and
220 (ii) by a preponderance of the evidence as determined by a court of competent
221 jurisdiction or the commission, are economically interdependent with one another as
222 demonstrated by the following factors:
223 (A) centralized management;
224 (B) functional integration; and
225 (C) economies of scale.
226 (b) "Unitary group" includes a captive real estate investment trust.
227 (c) "Unitary group" does not include an S corporation.
228 (31) "United States" includes the 50 states and the District of Columbia.
229 (32) "Utah net loss" means the current year Utah taxable income before Utah net loss
230 deduction, if determined to be less than zero.
231 (33) "Utah net loss deduction" means the amount of Utah net losses from other taxable
232 years that may be carried back or carried forward to the current taxable year in accordance with
233 Section 59-7-110 .
234 (34) (a) "Utah taxable income" means Utah taxable income before net loss deduction
235 less Utah net loss deduction.
236 (b) "Utah taxable income" includes income from tangible or intangible property located
237 or having situs in this state, regardless of whether carried on in intrastate, interstate, or foreign
238 commerce.
239 (35) "Utah taxable income before net loss deduction" means apportioned income plus
240 nonbusiness income allocable to Utah net of related expenses.
241 (36) (a) "Water's edge combined report" means a report combining the income and
242 activities of:
243 (i) all members of a unitary group that are:
244 (A) corporations organized or incorporated in the United States, including those
245 corporations qualifying for the Puerto Rico and Possession Tax Credit as provided in Section
246 936, Internal Revenue Code, in accordance with Subsection (36)(b); and
247 (B) corporations organized or incorporated outside of the United States meeting the
248 threshold level of business activity; and
249 (ii) an affiliated group electing to file a water's edge combined report under Subsection
250 59-7-402 (2).
251 (b) There is a rebuttable presumption that a corporation which qualifies for the Puerto
252 Rico and possession tax credit provided in Section 936, Internal Revenue Code, is part of a
253 unitary group.
254 (37) "Worldwide combined report" means the combination of the income and activities
255 of all members of a unitary group irrespective of the country in which the corporations are
256 incorporated or conduct business activity.
257 Section 2. Section 59-7-108 is amended to read:
258 59-7-108. Distributions by corporations.
259 (1) (a) For [
260 earnings or profits to the extent [
261 accumulated earnings or profits. [
262 (b) (i) Subject to Subsection (1)(b)(ii), any earnings or profits accumulated or increase
263 in value of property accrued before January 1, 1931, may be excluded from taxable income
264 after the earnings and profits accumulated after December 31, 1930 have been distributed[
265
266 (ii) A distribution described in Subsection (1)(b)(i) shall be applied against and reduce
267 the basis of the stock.
268 (2) [
269 or complete liquidation is made by a corporation to its shareholders, is not out of increase in
270 value of property accrued before January 1, 1931, and is not out of earnings or profits, [
271 the amount of [
272 (b) If [
273 of the stock, the excess shall be treated as a gain from the sale or exchange of property. [
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276 Section 3. Section 59-7-319 is amended to read:
277 59-7-319. Circumstances under which a receipt, rent, royalty, or sale is
278 considered to be in this state.
279 (1) (a) Subject to Subsection (1)(b), as used in this section, "regulated investment
280 company" is as defined in Section 851(a), Internal Revenue Code, in effect for the taxable year.
281 (b) "Regulated investment company" includes a trustee or sponsor of an employee
282 benefit plan that has an account in a regulated investment company.
283 (2) The following are considered to be in this state:
284 (a) a rent in connection with:
285 (i) real property if the real property is in this state; or
286 (ii) tangible personal property if the tangible personal property is in this state;
287 (b) a royalty in connection with real property if the real property is in this state;
288 (c) a sale in connection with real property if the real property is in this state; or
289 (d) other income in connection with real property or tangible personal property if the
290 real property or tangible personal property is in this state.
291 (3) (a) Subject to Subsection (3)(b), a receipt from the performance of a service is
292 considered to be in this state if the purchaser of the service receives a greater benefit of the
293 service in this state than in any other state.
294 (b) In accordance with Title 63G, Chapter 3, Utah Administrative Rulemaking Act, the
295 commission may by rule prescribe the circumstances under which a purchaser of a service
296 receives a greater benefit of the service in this state than in any other state.
297 (4) (a) Subject to Subsection (4)(b), a receipt in connection with intangible property is
298 considered to be in this state if the intangible property is used in this state.
299 (b) If the intangible property described in Subsection (4)(a) is used in this state and
300 outside this state, a receipt in connection with the intangible property shall be apportioned to
301 this state in accordance with Subsection (4)(c).
302 (c) For purposes of Subsection (4)(b), for a taxable year the percentage of a receipt in
303 connection with intangible property that is considered to be in this state is the percentage of the
304 use of the intangible property that occurs in this state during the taxable year.
305 (5) (a) Notwithstanding Subsections (2) through (4), a sale, other than a sale of tangible
306 personal property, derived, directly or indirectly, from the sale of management, distribution, or
307 administration services to, or on behalf of a regulated investment company, is considered to be
308 in this state:
309 (i) to the extent that shareholders of the regulated investment company are domiciled in
310 the state; and
311 (ii) as provided in this Subsection (5).
312 (b) For purposes of Subsection (5)(a), the amount of a sale, other than a sale of tangible
313 personal property, that is considered to be in this state is calculated by determining the product
314 of:
315 (i) the taxpayer's total dollar amount of sales of the services; and
316 (ii) a fraction, the numerator of which is the average of the sum of the beginning of the
317 year and the end of year balance of shares owned by the investment company shareholders
318 domiciled in this state and the denominator of which is the average of the sum of the beginning
319 of the year and end of year balance of shares owned by the investment company shareholders.
320 (c) A separate computation shall be made to determine the sales for each investment
321 company.
322 (6) (a) Notwithstanding Subsections (2) through (4) and subject to Subsection (6)(b),
323 the following sales are considered to be in this state to the extent that customers of a securities
324 brokerage business are domiciled in the state:
325 (i) a sale, other than a sale of tangible personal property, derived, directly or indirectly,
326 from the sale of a securities brokerage service by a taxpayer if that taxpayer is primarily
327 engaged in providing a service in this state to a regulated investment company; or
328 (ii) a sale, other than a sale of tangible personal property, derived, directly or indirectly,
329 from the sale of a securities brokerage service by a taxpayer that is an affiliate of a taxpayer
330 that provides a service in this state to a regulated investment company.
331 (b) For purposes of Subsection (6)(a), the amount of a sale, other than a sale of tangible
332 personal property, that is considered to be in this state is calculated by determining the product
333 of:
334 (i) the taxpayer's total dollar amount of sales of securities brokerage services; and
335 (ii) a fraction, the numerator of which is the receipts from securities brokerage
336 services from customers of the taxpayer domiciled in this state, and the denominator of which
337 is the receipts from securities brokerage services from all customers of the taxpayer.
338 (7) Whether sales by an airline, other than sales of tangible personal property, are in
339 this state is determined as provided in this section, subject to the calculation required by
340 Subsection 59-7-317 (2).
341 Section 4. Section 59-7-404.5 is amended to read:
342 59-7-404.5. Adjustment to apportionment factors for corporations in a combined
343 report -- Sales factor -- Property factor.
344 For purposes of [
345 and Apportionment of Income - Utah UDITPA Provisions:
346 (1) [
347 59-7-403 may not include intercompany sales or other intercompany transactions between the
348 corporations included in the combined report [
349 [
350
351 (2) corporations filing a combined report under Section 59-7-402 or 59-7-403 may not
352 include intercompany rents or other intercompany transactions between the corporations
353 included in the combined report in determining the property factor.
354 Section 5. Retrospective operation.
355 This bill has retrospective operation for a taxable year beginning on or after January 1,
356 2011.
Legislative Review Note
as of 11-17-10 1:24 PM