§ 23663-6. Corporate Reorganizations and Other Corporate Restructurings.
18 CA ADC § 23663-6Barclays Official California Code of Regulations
18 CCR § 23663-6
§ 23663-6. Corporate Reorganizations and Other Corporate Restructurings.
(b) Eligible Credit. For purposes of Revenue and Taxation Code section 23663(b)(2), “any credit earned by the taxpayer” includes any credit allowed to the taxpayer for any reason other than that the credit was sold or assigned to the taxpayer pursuant to Revenue and Taxation Code section 23663, or any other section which permits the sale or assignment of credits.
Example 1--Assignor acquired by another combined reporting group.
In 2010, A, B and C are members of the same combined reporting group, with A owning 100 percent of B, and B owning 100 percent of C. X, Y and Z are members of an unrelated combined reporting group, with X owning 100 percent of Y, and Y owning 100 percent of Z. The ownership structures of A, B and C, as well as X, Y, and Z, are illustrated by the following diagram:
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B earns credits in 2010, which are neither used against its tax, nor assigned in either 2010 or 2011. In 2012, B and C are acquired by the X-Y-Z group in a tax-free “B” reorganization so that thereafter B is wholly owned by Y. The ownership structure of remaining entity A, and entities X, Y (with acquired entities B and C), and Z, is illustrated by the following diagram:
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In 2013, B wants to assign its credits that it earned in 2010. C is the only eligible assignee for B's 2010 credits because C is the only entity that was in B's combined reporting group both in 2010 (the year the credits were earned) and in 2013 (the year of the assignment).
Example 2--Spin-off.
B and C are members of the same combined reporting group, with B owning 100 percent of C. C earns credits in 2010, which are neither allowed against its tax nor assigned in either 2010 or 2011. The ownership structure of B and C is illustrated by the following diagram:
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In 2012, D was formed and spun off from B, with B contributing assets to D in exchange for D stock, which qualified as a “D” reorganization under Internal Revenue Code section 368(a)(1)(D). D's stock was distributed to B's shareholders in a tax-free Internal Revenue Code section 355 transaction. The ownership structure of B, C and D thereafter is illustrated by the following diagram:
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In 2013, C wants to assign the credits that it earned in 2010 to D. However, because D did not exist in 2010, D was not in the same combined reporting group as C when C earned the credits, and so, D is not an eligible assignee.
Example 3--Split-off.
A, B and C are members of the same combined reporting group, with A owning 100 percent of B, and A and B each owning 50 percent of C. B earns credits in 2010, which are neither allowed against its tax nor assigned in either 2010 or 2011. The ownership structure of A, B and C is illustrated by the following diagram:
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In 2012, D is formed and is split off of C, with C contributing assets to D for D's shares in a D reorganization under Internal Revenue Code section 368(a)(1)(D). C distributes D's shares to B in complete redemption of B's interest in C in a transaction that qualified under Internal Revenue Code section 355. As a result, A owns 100 percent of B and C, and B owns 100 percent of D. The ownership structure of A, B, C and D thereafter, is illustrated by the following diagram:
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In 2013, B wants to assign the credits it earned in 2010 to D. However, since D was not in B's combined reporting group in 2010 because it was not in existence, D is not an eligible assignee.
Example 4-- Split-up.
A, B and C are part of the same combined reporting group in 2010, with A owning 100 percent of B and 100 percent of C. A and B earn credits in 2010. The ownership structure of A, B and C is illustrated by the following diagram:
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In 2012, A distributes B and C's shares to A's shareholders in complete redemption of their A shares. As a result, A ceases to exist, and any credits it owned from prior years are extinguished because Internal Revenue Code section 381 does not apply. The ownership structure of remaining entities B and C, is illustrated by the following diagram:
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B and C continue to be in the same combined reporting group because they retain the same ownership and meet all other unitary requirements. C is an eligible assignee of the credits B earned in 2010 because C was part of B's combined reporting group at the end of the taxable year that the credits were allowed, and at the end of the taxable year that the credits were assigned.
(d) Pre-Reorganization Credits. For purposes of determining whether a potential assignee meets the requirements of subsection (c) of this regulation and Revenue and Taxation Code sections 23663(b)(3)(A)(i) and (b)(3)(B)(i), when an assignor receives another taxpayer's credits as a result of a reorganization or other corporate restructuring, the taxpayer that originally earned the credits will be treated as the assignor. However, for any credits earned in taxable years beginning before July 1, 2008, the assignor will be the taxpayer that was allowed the credits as of the taxable year which includes the date of June 30, 2008.
Example 5--Pre-Reorganization Credits.
Assume the same initial facts as in Example 1, except that both B and C earned credits in 2010 and in 2012 B was instead merged into Y in a tax-free “A” reorganization under Internal Revenue Code section 368(a)(1)(A). Y is the surviving entity, and the credits B earned in 2010 are now Y's credits. As a result, X owns 100 percent of Y, and Y owns 100 percent of C and Z. The ownership structure of remaining entity A, and the X-Y-C-Z combined reporting group (with B merged into Y as represented by the layered boxes) is illustrated by the following diagram:
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In 2013, Y wants to assign credits earned by B before the merger that are now held by Y. C is the only eligible assignee for the credits B earned in 2010 because B is the deemed assignor and C is the only entity that was in B's combined reporting group in 2010 (the year the credits were earned) and in Y's combined reporting group in 2013 (the year of the assignment). However, while Y may assign the credits B earned in 2010 to C under these facts, C cannot assign any of the credits C earned in 2010 to X, Y or Z because X, Y and Z were not in C's combined reporting group when C earned its credits.
Example 6--No eligible assignees for the assignment of pre-merger credits.
Assume the same initial facts as in Example 1, except that Z also earned credits in 2010 and does not use the credits against its tax nor assigns them in either 2010 or 2011. In 2012, the A-B-C group acquires Z by having Z merge into C, with C as the surviving corporation. The ownership structure of A, B, and C (with acquired entity Z merged into C as represented by the layered boxes), and remaining entities X, and Y, is illustrated by the following diagram:
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After the merger, C holds credits Z earned before the merger. C has none of its own credits. C cannot assign credits Z earned before the merger to A or B because neither A nor B were in the same combined reporting group as Z, the deemed assignor, in 2010. However, A and B can assign credits they earned before the merger to C (assuming subsection (f) of this regulation does not apply).
(e) F Reorganizations. If a taxpayer would be an eligible assignee but for a reorganization under Internal Revenue Code section 368(a)(1)(F) that occurs after credits were earned, then the taxpayer will be treated as an eligible assignee for purposes of this section and Revenue and Taxation Code section 23663(b)(3).
Example 7--F Reorganization.
Assume the same initial facts as in Example 1, except that in 2012, C, previously an Ohio corporation, reincorporates as D, a Nevada corporation, in a transaction that qualifies as an “F” reorganization under Internal Revenue Code section 368(a)(1)(F). As a result, A owns 100 percent of B, and B owns 100 percent of D, and C ceases to exist as a separate entity. The ownership structure of entities A, B, and D, is illustrated by the following diagram:
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In 2013, B wants to assign its credits to D. Subsection (e) of this regulation applies, and D is an eligible assignee as to A and B for purposes of this section and Revenue and Taxation Code section 23663.
(2) In the reorganization or restructuring, the member acquired assets (including real, personal, tangible, and intangible property) used in conducting its trade or business, with an aggregate fair market value that exceeds 80 percent of the aggregate fair market value of the total assets of the trade or business being conducted by the member immediately after the acquisition. For purposes of this paragraph only, the following rules shall apply:
B. Any acquired assets that constituted property described in Internal Revenue Code section 1221(a)(1) in the hands of the transferor shall not be treated as assets acquired from an existing trade or business, unless those assets also constitute property described in Internal Revenue Code section 1221(a)(1) in the hands of the acquiring taxpayer (or related person).
Example 8--Ineligible assignee.
Assume the same initial facts as in Example 1, except in 2010, C is an operating business with minimal business assets, and Z is an operating business with significant business assets. In 2012, B acquires Z by having Z merge into C, with C as the surviving corporation, in a transaction that qualifies as an “A” reorganization under Internal Revenue Code section 368(a)(1)(A). The fair market value of C's assets immediately before the merger are less than 20% of the fair market value of C's total business assets immediately after the merger. The ownership structure of entity A, B and C (which merged with Z and is the surviving entity, as represented by the layered boxes) and entities X, and Y, is illustrated by the following diagram:
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B wants to assign credits to C in 2013. However, C is not an eligible assignee for purposes of this section and Revenue and Taxation Code section 23663 because the fair market value of C's assets immediately prior to the merger with Z was less than 20% of the fair market value of C's assets immediately after the acquisition.
(g) Limitations. For purposes of applying Revenue and Taxation Code section 23663, any limitations on the allowance of any credit against the tax that would apply to the assignor in the absence of an assignment shall also apply to the same extent to the allowance of that assigned credit against the tax of the assignee.
Example 9--Application of credit limitations.
Assume the same initial facts as in Example 1, except that B earned credits in 2010 pursuant to Revenue and Taxation Code section 23622.7 (the “EZ Credits”). The EZ Credits are allowed against B's tax subject to the limitation in Revenue and Taxation Code section 23622.7(j).
In 2013, B assigns the EZ Credits to C. After B assigns the EZ Credits to C, the EZ Credits are allowed against C's tax subject to the limitation in Revenue and Taxation Code section 23622.7(j), since the same limitation would have applied to B's use of the credits if B had not assigned the EZ Credits to C.
Credits
Note: Authority cited: Sections 19503 and 23663, Revenue and Taxation Code. Reference: Section 23663, Revenue and Taxation.
History
1. New section filed 12-7-2021; operative 1-1-2022 pursuant to Government Code section 11343.4(b)(3) (Register 2021, No. 50). Filing deadline specified in Government Code section 11349.3(a) extended 60 calendar days pursuant to Executive Order N-40-20.
This database is current through 4/5/24 Register 2024, No. 14.
Cal. Admin. Code tit. 18, § 23663-6, 18 CA ADC § 23663-6
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