H.B. 191

1

CORPORATE FRANCHISE AND INCOME TAX
2 AMENDMENTS
3 2004 GENERAL SESSION
4 STATE OF UTAH
5 Sponsor: Gordon E. Snow
6
7 LONG TITLE
8 General Description:
9 This bill amends the Corporate Franchise and Income Taxes chapter.
10 Highlighted Provisions:
11 This bill:
12 . amends the definition of "nonresident shareholder" to repeal language providing
13 that an organization exempt under Section 501, Internal Revenue Code, is a
14 nonresident shareholder;
15 . amends the definition of "S corporation";
16 . repeals references to foreign sales corporations that have been repealed under
17 federal law; and
18 . makes technical changes.
19 Monies Appropriated in this Bill:
20 None
21 Other Special Clauses:
22 This bill provides an effective date.
23 Utah Code Sections Affected:
24 AMENDS:
25 59-7-101 (Contingently Superseded 05/02/05), as last amended by Chapter 110, Laws
26 of Utah 2003
27 59-7-101 (Contingently Effective 05/02/05), as last amended by Chapter 327, Laws of

28 Utah 2003
29 59-7-402, as last amended by Chapter 76, Laws of Utah 2002
30 REPEALS:
31 59-7-106.5, as enacted by Chapter 178, Laws of Utah 1994
32
33 Be it enacted by the Legislature of the state of Utah:
34 Section 1. Section 59-7-101 (Contingently Superseded 05/02/05) is amended to read:
35 59-7-101 (Contingently Superseded 05/02/05). Definitions.
36 As used in this chapter:
37 (1) "Adjusted income" means unadjusted income as modified by Sections 59-7-105
38 and 59-7-106 .
39 (2) (a) "Affiliated group" means one or more chains of corporations that are connected
40 through stock ownership with a common parent corporation that meet the following
41 requirements:
42 (i) at least 80% of the stock of each of the corporations in the group, excluding the
43 common parent corporation, is owned by one or more of the other corporations in the group;
44 and
45 (ii) the common parent directly owns at least 80% of the stock of at least one of the
46 corporations in the group.
47 (b) "Affiliated group" does not include corporations that are qualified to do business
48 but are not otherwise doing business in this state.
49 (c) For purposes of this Subsection (2), "stock" does not include nonvoting stock which
50 is limited and preferred as to dividends.
51 (3) "Apportionable income" means adjusted income less nonbusiness income net of
52 related expenses, to the extent included in adjusted income.
53 (4) "Apportioned income" means apportionable income multiplied by the
54 apportionment fraction as determined in Section 59-7-311 .
55 (5) "Business income" [means income] is as defined in Section 59-7-302 .
56 (6) "Corporate return" or "return" includes a combined report.
57 (7) (a) "Common ownership" means the direct or indirect control or ownership of more
58 than 50% of the outstanding voting stock of:

59 (i) a parent-subsidiary controlled group as defined in Section 1563, Internal Revenue
60 Code, except that 50% shall be substituted for 80%;
61 (ii) a brother-sister controlled group as defined in Section 1563, Internal Revenue
62 Code, except that 50% shall be substituted for 80%; or
63 (iii) three or more corporations each of which is a member of a group of corporations
64 described in Subsection (2)(a)(i) or (2)(a)(ii), and one of which is:
65 (A) a common parent corporation included in a group of corporations described in
66 Subsection (2)(a)(i); and
67 (B) included in a group of corporations described in Subsection (2)(a)(ii).
68 (b) Ownership of outstanding voting stock shall be determined by Section 1563,
69 Internal Revenue Code.
70 (8) "Corporation" includes:
71 (a) entities defined as corporations under Sections 7701(a) and 7704, Internal Revenue
72 Code; and
73 (b) other organizations that are taxed as corporations for federal income tax purposes
74 under the Internal Revenue Code.
75 (9) "Dividend" means any distribution, including money or other type of property,
76 made by a corporation to its shareholders out of its earnings or profits accumulated after
77 December 31, 1930.
78 (10) (a) "Doing business" includes any transaction in the course of its business by a
79 domestic corporation, or by a foreign corporation qualified to do or doing intrastate business in
80 this state.
81 (b) Except as provided in Subsection 59-7-102 (2), "doing business" includes:
82 (i) the right to do business through incorporation or qualification;
83 (ii) the owning, renting, or leasing of real or personal property within this state; and
84 (iii) the participation in joint ventures, working and operating agreements, the
85 performance of which takes place in this state.
86 (11) "Domestic corporation" means a corporation that is incorporated or organized
87 under the laws of this state.
88 (12) (a) "Farmers' cooperative" means an association, corporation, or other
89 organization that is:

90 (i) (A) an association, corporation, or other organization of:
91 (I) farmers; or
92 (II) fruit growers; or
93 (B) an association, corporation, or other organization that is similar to an association,
94 corporation, or organization described in Subsection (12)(a)(i)(A); and
95 (ii) organized and operated on a cooperative basis to:
96 (A) (I) market the products of members of the cooperative or the products of other
97 producers; and
98 (II) return to the members of the cooperative or other producers the proceeds of sales
99 less necessary marketing expenses on the basis of the quantity of the products of a member or
100 producer or the value of the products of a member or producer; or
101 (B) (I) purchase supplies and equipment for the use of members of the cooperative or
102 other persons; and
103 (II) turn over the supplies and equipment described in Subsection (12)(a)(ii)(B)(I) at
104 actual costs plus necessary expenses to the members of the cooperative or other persons.
105 (b) (i) Subject to Subsection (12)(b)(ii), for purposes of this Subsection (12), the
106 commission by rule, made in accordance with Title 63, Chapter 46a, Utah Administrative
107 Rulemaking Act, shall define:
108 (A) the terms:
109 (I) "member"; and
110 (II) "producer"; and
111 (B) what constitutes an association, corporation, or other organization that is similar to
112 an association, corporation, or organization described in Subsection (12)(a)(i)(A).
113 (ii) The rules made under this Subsection (12)(b) shall be consistent with the filing
114 requirements under federal law for a farmers' cooperative.
115 (13) "Foreign corporation" means a corporation that is not incorporated or organized
116 under the laws of this state.
117 (14) (a) "Foreign operating company" means a corporation that:
118 (i) is incorporated in the United States; and
119 (ii) 80% or more of whose business activity, as determined under Section 59-7-401 , is
120 conducted outside the United States.

121 (b) "Foreign operating company" does not include a corporation that qualifies for the
122 Puerto Rico and Possession Tax Credit as provided in Section 936, Internal Revenue Code.
123 [(15) "Foreign sales corporation" means a corporation as defined in Section 922,
124 Internal Revenue Code.]
125 [(16)] (15) "Income" includes losses.
126 [(17)] (16) "Internal Revenue Code" means Title 26 of the United States Code as
127 effective during the year in which Utah taxable income is determined.
128 [(18)] (17) "Nonbusiness income" [means income] is as defined in Section 59-7-302 .
129 [(19)] (18) "Nonresident shareholder" means any shareholder of an S corporation who
130 on the last day of the taxable year of the S corporation, is:
131 (a) an individual not domiciled in Utah; or
132 (b) a nonresident trust or nonresident estate, as defined in Section 59-10-103 [; or].
133 [(c) an organization exempt under Section 501, Internal Revenue Code.]
134 [(20)] (19) "Related expenses" means:
135 (a) expenses directly attributable to nonbusiness income; and
136 (b) the portion of interest or other expense indirectly attributable to both nonbusiness
137 and business income which bears the same ratio to the aggregate amount of such interest or
138 other expense, determined without regard to this Subsection [(20)] (19), as the average amount
139 of the asset producing the nonbusiness income bears to the average amount of all assets of the
140 taxpayer within the taxable year.
141 [(21)] (20) "Resident shareholder" means any shareholder of an S corporation who is
142 not a nonresident shareholder.
143 [(22)] (21) "S corporation" means [a small business] an S corporation as defined in
144 Section 1361, Internal Revenue Code.
145 [(23)] (22) "Safe harbor lease" means a lease that qualified as a safe harbor lease under
146 Section 168, Internal Revenue Code.
147 [(24)] (23) "State of the United States" includes any of the 50 states or the District of
148 Columbia and "United States" includes the 50 states and the District of Columbia.
149 [(25)] (24) (a) "Taxable year" means the calendar year or the fiscal year ending during
150 such calendar year upon the basis of which the adjusted income is computed.
151 (b) In the case of a return made for a fractional part of a year under this chapter or

152 under rules prescribed by the commission, "taxable year" includes the period for which such
153 return is made.
154 [(26)] (25) "Taxpayer" means any corporation subject to the tax imposed by this
155 chapter.
156 [(27)] (26) "Threshold level of business activity" means business activity in the United
157 States equal to or greater than 20% of the corporation's total business activity as determined
158 under Section 59-7-401 .
159 [(28)] (27) "Unadjusted income" means federal taxable income as determined on a
160 separate return basis before intercompany eliminations as determined by the Internal Revenue
161 Code, before the net operating loss deduction and special deductions for dividends received.
162 [(29)] (28) (a) "Unitary group" means a group of corporations that:
163 (i) are related through common ownership; and
164 (ii) by a preponderance of the evidence as determined by a court of competent
165 jurisdiction or the commission, are economically interdependent with one another as
166 demonstrated by the following factors:
167 (A) centralized management;
168 (B) functional integration; and
169 (C) economies of scale.
170 (b) "Unitary group" does not include S corporations.
171 [(30)] (29) "Utah net loss" means the current year Utah taxable income before Utah net
172 loss deduction, if determined to be less than zero.
173 [(31)] (30) "Utah net loss deduction" means the amount of Utah net losses from other
174 taxable years that may be carried back or carried forward to the current taxable year in
175 accordance with Section 59-7-110 .
176 [(32)] (31) (a) "Utah taxable income" means Utah taxable income before net loss
177 deduction less Utah net loss deduction.
178 (b) "Utah taxable income" includes income from tangible or intangible property located
179 or having situs in this state, regardless of whether carried on in intrastate, interstate, or foreign
180 commerce.
181 [(33)] (32) "Utah taxable income before net loss deduction" means apportioned income
182 plus nonbusiness income allocable to Utah net of related expenses.

183 [(34)] (33) (a) "Water's edge combined report" means a report combining the income
184 and activities of:
185 (i) all members of a unitary group that are:
186 (A) corporations organized or incorporated in the United States, including those
187 corporations qualifying for the Puerto Rico and Possession Tax Credit as provided in Section
188 936, Internal Revenue Code, in accordance with Subsection [(34)] (33)(b); and
189 (B) corporations organized or incorporated outside of the United States meeting the
190 threshold level of business activity; and
191 (ii) an affiliated group electing to file a water's edge combined report under Subsection
192 59-7-402 (2).
193 (b) There is a rebuttable presumption that a corporation which qualifies for the Puerto
194 Rico and Possession Tax Credit provided in Section 936, Internal Revenue Code, is part of a
195 unitary group.
196 [(35)] (34) "Worldwide combined report" means the combination of the income and
197 activities of all members of a unitary group irrespective of the country in which the
198 corporations are incorporated or conduct business activity.
199 Section 2. Section 59-7-101 (Contingently Effective 05/02/05) is amended to read:
200 59-7-101 (Contingently Effective 05/02/05). Definitions.
201 As used in this chapter:
202 (1) "Adjusted income" means unadjusted income as modified by Sections 59-7-105
203 and 59-7-106 .
204 (2) (a) "Affiliated group" means one or more chains of corporations that are connected
205 through stock ownership with a common parent corporation that meet the following
206 requirements:
207 (i) at least 80% of the stock of each of the corporations in the group, excluding the
208 common parent corporation, is owned by one or more of the other corporations in the group;
209 and
210 (ii) the common parent directly owns at least 80% of the stock of at least one of the
211 corporations in the group.
212 (b) "Affiliated group" does not include corporations that are qualified to do business
213 but are not otherwise doing business in this state.

214 (c) For purposes of this Subsection (2), "stock" does not include nonvoting stock which
215 is limited and preferred as to dividends.
216 (3) "Apportionable income" means adjusted income less nonbusiness income net of
217 related expenses, to the extent included in adjusted income.
218 (4) "Apportioned income" means apportionable income multiplied by the
219 apportionment fraction as determined in Section 59-7-311 .
220 (5) "Business income" [means income] is as defined in Section 59-7-302 .
221 (6) "Corporate return" or "return" includes a combined report.
222 (7) (a) "Common ownership" means the direct or indirect control or ownership of more
223 than 50% of the outstanding voting stock of:
224 (i) a parent-subsidiary controlled group as defined in Section 1563, Internal Revenue
225 Code, except that 50% shall be substituted for 80%;
226 (ii) a brother-sister controlled group as defined in Section 1563, Internal Revenue
227 Code, except that 50% shall be substituted for 80%; or
228 (iii) three or more corporations each of which is a member of a group of corporations
229 described in Subsection (2)(a)(i) or (2)(a)(ii), and one of which is:
230 (A) a common parent corporation included in a group of corporations described in
231 Subsection (2)(a)(i); and
232 (B) included in a group of corporations described in Subsection (2)(a)(ii).
233 (b) Ownership of outstanding voting stock shall be determined by Section 1563,
234 Internal Revenue Code.
235 (8) "Corporation" includes:
236 (a) entities defined as corporations under Sections 7701(a) and 7704, Internal Revenue
237 Code; and
238 (b) other organizations that are taxed as corporations for federal income tax purposes
239 under the Internal Revenue Code.
240 (9) "Dividend" means any distribution, including money or other type of property,
241 made by a corporation to its shareholders out of its earnings or profits accumulated after
242 December 31, 1930.
243 (10) (a) "Doing business" includes any transaction in the course of its business by a
244 domestic corporation, or by a foreign corporation qualified to do or doing intrastate business in

245 this state.
246 (b) Except as provided in Subsection 59-7-102 (2), "doing business" includes:
247 (i) the right to do business through incorporation or qualification;
248 (ii) the owning, renting, or leasing of real or personal property within this state; and
249 (iii) the participation in joint ventures, working and operating agreements, the
250 performance of which takes place in this state.
251 (11) "Domestic corporation" means a corporation that is incorporated or organized
252 under the laws of this state.
253 (12) (a) "Farmers' cooperative" means an association, corporation, or other
254 organization that is:
255 (i) (A) an association, corporation, or other organization of:
256 (I) farmers; or
257 (II) fruit growers; or
258 (B) an association, corporation, or other organization that is similar to an association,
259 corporation, or organization described in Subsection (12)(a)(i)(A); and
260 (ii) organized and operated on a cooperative basis to:
261 (A) (I) market the products of members of the cooperative or the products of other
262 producers; and
263 (II) return to the members of the cooperative or other producers the proceeds of sales
264 less necessary marketing expenses on the basis of the quantity of the products of a member or
265 producer or the value of the products of a member or producer; or
266 (B) (I) purchase supplies and equipment for the use of members of the cooperative or
267 other persons; and
268 (II) turn over the supplies and equipment described in Subsection (12)(a)(ii)(B)(I) at
269 actual costs plus necessary expenses to the members of the cooperative or other persons.
270 (b) (i) Subject to Subsection (12)(b)(ii), for purposes of this Subsection (12), the
271 commission by rule, made in accordance with Title 63, Chapter 46a, Utah Administrative
272 Rulemaking Act, shall define:
273 (A) the terms:
274 (I) "member"; and
275 (II) "producer"; and

276 (B) what constitutes an association, corporation, or other organization that is similar to
277 an association, corporation, or organization described in Subsection (12)(a)(i)(A).
278 (ii) The rules made under this Subsection (12)(b) shall be consistent with the filing
279 requirements under federal law for a farmers' cooperative.
280 (13) "Foreign corporation" means a corporation that is not incorporated or organized
281 under the laws of this state.
282 (14) (a) "Foreign operating company" means a corporation that:
283 (i) is incorporated in the United States; and
284 (ii) 80% or more of whose business activity, as determined under Section 59-7-401 , is
285 conducted outside the United States.
286 (b) "Foreign operating company" does not include a corporation that qualifies for the
287 Puerto Rico and Possession Tax Credit as provided in Section 936, Internal Revenue Code.
288 [(15) "Foreign sales corporation" means a corporation as defined in Section 922,
289 Internal Revenue Code.]
290 [(16)] (15) "Income" includes losses.
291 [(17)] (16) "Internal Revenue Code" means Title 26 of the United States Code as
292 effective during the year in which Utah taxable income is determined.
293 [(18)] (17) "Nonbusiness income" [means income] is as defined in Section 59-7-302 .
294 [(19)] (18) "Nonresident shareholder" means any shareholder of an S corporation who
295 on the last day of the taxable year of the S corporation, is:
296 (a) an individual not domiciled in Utah; or
297 (b) a nonresident trust or nonresident estate, as defined in Section 59-10-103 [; or].
298 [(c) an organization exempt under Section 501, Internal Revenue Code.]
299 [(20)] (19) "Related expenses" means:
300 (a) expenses directly attributable to nonbusiness income; and
301 (b) the portion of interest or other expense indirectly attributable to both nonbusiness
302 and business income which bears the same ratio to the aggregate amount of such interest or
303 other expense, determined without regard to this Subsection [(20)] (19), as the average amount
304 of the asset producing the nonbusiness income bears to the average amount of all assets of the
305 taxpayer within the taxable year.
306 [(21)] (20) "Resident shareholder" means any shareholder of an S corporation who is

307 not a nonresident shareholder.
308 [(22)] (21) "S corporation" means [a small business] an S corporation as defined in
309 Section 1361, Internal Revenue Code.
310 [(23)] (22) "Safe harbor lease" means a lease that qualified as a safe harbor lease under
311 Section 168, Internal Revenue Code.
312 [(24)] (23) "State of the United States" includes any of the 50 states or the District of
313 Columbia and "United States" includes the 50 states and the District of Columbia.
314 [(25)] (24) (a) "Taxable year" means the calendar year or the fiscal year ending during
315 such calendar year upon the basis of which the adjusted income is computed.
316 (b) In the case of a return made for a fractional part of a year under this chapter or
317 under rules prescribed by the commission, "taxable year" includes the period for which such
318 return is made.
319 [(26)] (25) "Taxpayer" means any corporation subject to the tax imposed by this
320 chapter.
321 [(27)] (26) "Threshold level of business activity" means business activity in the United
322 States equal to or greater than 20% of the corporation's total business activity as determined
323 under Section 59-7-401 .
324 [(28)] (27) Except as provided in Section 59-7-102 , "unadjusted income" means federal
325 taxable income as determined on a separate return basis before intercompany eliminations as
326 determined by the Internal Revenue Code, before the net operating loss deduction and special
327 deductions for dividends received.
328 [(29)] (28) (a) "Unitary group" means a group of corporations that:
329 (i) are related through common ownership; and
330 (ii) by a preponderance of the evidence as determined by a court of competent
331 jurisdiction or the commission, are economically interdependent with one another as
332 demonstrated by the following factors:
333 (A) centralized management;
334 (B) functional integration; and
335 (C) economies of scale.
336 (b) "Unitary group" does not include S corporations.
337 [(30)] (29) "Utah net loss" means the current year Utah taxable income before Utah net

338 loss deduction, if determined to be less than zero.
339 [(31)] (30) "Utah net loss deduction" means the amount of Utah net losses from other
340 taxable years that may be carried back or carried forward to the current taxable year in
341 accordance with Section 59-7-110 .
342 [(32)] (31) (a) "Utah taxable income" means Utah taxable income before net loss
343 deduction less Utah net loss deduction.
344 (b) "Utah taxable income" includes income from tangible or intangible property located
345 or having situs in this state, regardless of whether carried on in intrastate, interstate, or foreign
346 commerce.
347 [(33)] (32) "Utah taxable income before net loss deduction" means apportioned income
348 plus nonbusiness income allocable to Utah net of related expenses.
349 [(34)] (33) (a) "Water's edge combined report" means a report combining the income
350 and activities of:
351 (i) all members of a unitary group that are:
352 (A) corporations organized or incorporated in the United States, including those
353 corporations qualifying for the Puerto Rico and Possession Tax Credit as provided in Section
354 936, Internal Revenue Code, in accordance with Subsection [(34)] (33)(b); and
355 (B) corporations organized or incorporated outside of the United States meeting the
356 threshold level of business activity; and
357 (ii) an affiliated group electing to file a water's edge combined report under Subsection
358 59-7-402 (2).
359 (b) There is a rebuttable presumption that a corporation which qualifies for the Puerto
360 Rico and Possession Tax Credit provided in Section 936, Internal Revenue Code, is part of a
361 unitary group.
362 [(35)] (34) "Worldwide combined report" means the combination of the income and
363 activities of all members of a unitary group irrespective of the country in which the
364 corporations are incorporated or conduct business activity.
365 Section 3. Section 59-7-402 is amended to read:
366 59-7-402. Water's edge combined report.
367 (1) Except as provided in Section 59-7-403 , if any corporation listed in Subsection
368 59-7-101 [(34)](33)(a) is doing business in Utah, the unitary group shall file a water's edge

369 combined report.
370 (2) (a) A group of corporations that are not otherwise a unitary group may elect to file a
371 water's edge combined report if each member of the group is:
372 (i) doing business in Utah;
373 (ii) part of the same affiliated group; and
374 (iii) qualified, under Section 1501, Internal Revenue Code, to file a federal
375 consolidated return.
376 (b) Each corporation within the affiliated group that is doing business in Utah must
377 consent to filing a combined report. If an affiliated group elects to file a combined report, each
378 corporation within the affiliated group that is doing business in Utah must file a combined
379 report.
380 (c) Corporations that elect to file a water's edge combined report under this section may
381 not thereafter elect to file a separate return without the consent of the commission.
382 Section 4. Repealer.
383 This bill repeals:
384 Section 59-7-106.5, Foreign sales corporations.
385 Section 5. Retrospective operation -- Effective date.
386 (1) Except as provided in Subsection (2), this bill has retrospective operation for
387 taxable years beginning on or after January 1, 2004.
388 (2) The amendments in this bill to Section 59-7-101 (Contingently Effective 05/02/05)
389 take effect as provided in Chapter 327, Section 30, Laws of Utah 2003.




Legislative Review Note
as of 12-10-03 2:49 PM

A limited legal review of this legislation raises no obvious constitutional or statutory concerns.

Office of Legislative Research and General Counsel