2005 California Revenue and Taxation Code Sections 17201-17299.9 Article 6. Deductions

17201.  (a) Part VI of Subchapter B of Chapter 1 of Subtitle A of
the Internal Revenue Code, relating to itemized deductions for
individuals and corporations, shall apply, except as otherwise
provided.
   (b) Part VII of Subchapter B of Chapter 1 of Subtitle A of the
Internal Revenue Code, relating to additional itemized deductions for
individuals, shall apply, except as otherwise provided.
   (c) Part IX of Subchapter B of Chapter 1 of Subtitle A of the
Internal Revenue Code, relating to items not deductible, shall apply,
except as otherwise provided.
17201.4.  Section 179B of the Internal Revenue Code, relating to
deductions for capital costs incurred in complying with Environmental
Protection Agency sulfur regulations, shall not apply.
17201.5.  Section 181 of the Internal Revenue Code, relating to
treatment of certain qualified film and television productions, shall
not apply.
17201.6.  Section 199 of the Internal Revenue Code, relating to
income attributable to domestic production activities, shall not
apply.
17202.  There shall be allowed to an employer as an ordinary and
necessary expense paid or incurred during the taxable year in
carrying on any trade or business (as provided in Section 162(a) of
the Internal Revenue Code), the expenses involved in carrying out a
parking cash-out program, as defined by subdivision (f) of Section
65088.1 of the Government Code.
17203.  For purposes of applying limitations on the deductions
described in this section, any reference to "compensation" or "earned
income" shall be a reference to the amount required to be used for
purposes of limiting the deduction in computing federal income tax
for the same taxable year.
   (a) The deduction allowed by Section 219 of the Internal Revenue
Code.
   (b) The deductions allowed by Sections 162(l) and 404 of the
Internal Revenue Code in the case of an individual who is an employee
within the meaning of Section 401(c)(1) of the Internal Revenue
Code.
17204.7.  Section 222 of the Internal Revenue Code, relating to
qualified tuition and related expenses, shall not apply.
17206.  (a) For purposes of Section 17201, Section 170 of the
Internal Revenue Code, as amended by Public Law 109-1, shall be
applied to allow a taxpayer to elect to treat any contribution
described in subdivision (b) made in January 2005, as if that
contribution was made on December 31, 2004, and not in January 2005.
   (b) A contribution is described in this subdivision if that
contribution is a cash contribution made for the relief of victims in
areas affected by the December 26, 2004, Indian Ocean tsunami for
which a charitable contribution deduction is allowable under Section
17201.
17207.  (a) An excess disaster loss, as defined in subdivision (c),
shall be carried to other taxable years as provided in subdivision
(b), with respect to losses resulting from any of the following
disasters:
   (1) Forest fire or any other related casualty occurring in 1985 in
California.
   (2) Storm, flooding, or any other related casualty occurring in
1986 in California.
   (3) Any loss sustained during 1987 as a result of a forest fire or
any other related casualty.
   (4) Earthquake, aftershock, or any other related casualty
occurring in 1987 in California.
   (5) Earthquake, aftershock, or any other related casualty
occurring in 1989 in California.
   (6) Any loss sustained during 1990 as a result of fire or any
other related casualty in California.
   (7) Any loss sustained as a result of the Oakland/Berkeley Fire of
1991, or any other related casualty.
   (8) Any loss sustained as a result of storm, flooding, or any
other related casualty occurring in February 1992 in California.
   (9) Earthquake, aftershock, or any other related casualty
occurring in April 1992 in the County of Humboldt.
   (10) Riots, arson, or any other related casualty occurring in
April or May 1992 in California.
   (11) Any loss sustained as a result of the earthquakes that
occurred in the County of San Bernardino in June and July of 1992, or
any other related casualty.
   (12) Any loss sustained as a result of the Fountain Fire that
occurred in the County of Shasta, or as a result of either of the
fires in the Counties of Calaveras and Trinity that occurred in
August 1992, or any other related casualty.
   (13) Any loss sustained as a result of storm, flooding, or any
other related casualty that occurred in the Counties of Alpine,
Contra Costa, Fresno, Humboldt, Imperial, Lassen, Los Angeles,
Madera, Mendocino, Modoc, Monterey, Napa, Orange, Plumas, Riverside,
San Bernardino, San Diego, Santa Barbara, Sierra, Siskiyou, Sonoma,
Tehama, Trinity, and Tulare, and the City of Fillmore in January
1993.
   (14) Any loss sustained as a result of a fire that occurred in the
Counties of Los Angeles, Orange, Riverside, San Bernardino, San
Diego, and Ventura, during October or November of 1993, or any other
related casualty.
   (15) Any loss sustained as a result of the earthquake,
aftershocks, or any other related casualty that occurred in the
Counties of Los Angeles, Orange, and Ventura on or after January 17,
1994.
   (16) Any loss sustained as a result of a fire that occurred in the
County of San Luis Obispo during August of 1994, or any other
related casualty.
   (17) Any loss sustained as a result of the storms or flooding
occurring in 1995, or any other related casualty, sustained in any
county of this state subject to a disaster declaration with respect
to the storms and flooding.
   (18) Any loss sustained as a result of the storms or flooding
occurring in December 1996 or January 1997, or any related casualty,
sustained in any county of this state subject to a disaster
declaration with respect to the storms or flooding.
   (19) Any loss sustained as a result of the storms or flooding
occurring in February 1998, or any related casualty, sustained in any
county of this state subject to a disaster declaration with respect
to the storms or flooding.
   (20) Any loss sustained as a result of a freeze occurring in the
winter of 1998-99, or any related casualty, sustained in any county
of this state subject to a disaster declaration with respect to the
freeze.
   (21) Any loss sustained as a result of an earthquake occurring in
September 2000, that was included in the Governor's proclamation of a
state of emergency for the County of Napa.
   (22) Any loss sustained as a result of the Middle River levee
break in San Joaquin County occurring in June 2004.
   (23) Any losses sustained as a result of the fires that occurred
in the Counties of Los Angeles, San Bernardino, Riverside, San Diego,
and Ventura in October and November 2003, or as a result of floods,
mudflows, and debris flows, directly related to fires.
   (24) Any losses sustained in the Counties of Santa Barbara and San
Luis Obispo as a result of the San Simeon earthquake, aftershocks,
and any other related casualties.
   (25) Any losses sustained as a result of the wildfires that
occurred in Shasta County, commencing August 11, 2004, and any other
related casualty.
   (26) Any loss sustained in the Counties of Kern, Los Angeles,
Orange, Riverside, San Bernardino, San Diego, Santa Barbara, and
Ventura as a result of the severe rainstorms, related flooding and
slides, and any other related casualties, that occurred in December
2004, January 2005, February 2005, March 2005, or June 2005.
   (b) (1) In the case of any loss allowed under Section 165(c) of
the Internal Revenue Code, relating to limitation of losses of
individuals, any excess disaster loss shall be carried forward to
each of the five taxable years following the taxable year for which
the loss is claimed. However, if there is any excess disaster loss
remaining after the five-year period, then the applicable percentage,
as set forth in paragraph (1) of subdivision (b) of Section 17276,
of that excess disaster loss shall be carried forward to each of the
next 10 taxable years.
   (2) The entire amount of any excess disaster loss as defined in
subdivision (c) shall be carried to the earliest of the taxable years
to which, by reason of subdivision (b), the loss may be carried. The
portion of the loss which shall be carried to each of the other
taxable years shall be the excess, if any, of the amount of excess
disaster loss over the sum of the adjusted taxable income for each of
the prior taxable years to which that excess disaster loss is
carried.
   (c) "Excess disaster loss" means a disaster loss computed pursuant
to Section 165 of the Internal Revenue Code which exceeds the
adjusted taxable income of the year of loss or, if the election under
Section 165(i) of the Internal Revenue Code is made, the adjusted
taxable income of the year preceding the loss.
   (d) The provisions of this section and Section 165(i) of the
Internal Revenue Code shall be applicable to any of the losses listed
in subdivision (a) sustained in any county or city in this state
which was proclaimed by the Governor to be in a state of disaster.
   (e) Losses allowable under this section may not be taken into
account in computing a net operating loss deduction under Section 172
of the Internal Revenue Code.
   (f) For purposes of this section, "adjusted taxable income" shall
be defined by Section 1212(b)(2)(B) of the Internal Revenue Code.
   (g) For losses described in paragraphs (15) to (26), inclusive, of
subdivision (a), the election under Section 165(i) of the Internal
Revenue Code may be made on a return or amended return filed on or
before the due date of the return (determined with regard to
extension) for the taxable year in which the disaster occurred.
17207.4.  (a) Section 165(i) of the Internal Revenue Code is
modified to additionally provide that an appraisal for the purpose of
obtaining a loan of federal funds or a loan guarantee from the
federal government as a result of a presidentially declared disaster,
as defined by Section 1033(h)(3) of the Internal Revenue Code, may
be used to establish the amount of any loss described in Section 165
(i)(1) or (2) of the Internal Revenue Code to the extent provided in
regulations or other guidance of the Secretary of the Treasury under
Section 165(i)(4) of the Internal Revenue Code, as added by Section
912 of Public Law 105-34.
   (b) This section shall apply on and after August 5, 1997.
17208.1.  (a) There shall be allowed as a deduction the amount of
interest paid or incurred by a taxpayer during the taxable year on
any loan or financed indebtedness obtained from a publicly owned
utility company for the purpose of acquiring and installing any
energy efficient product or equipment to a qualified residence
located in this state.
   (b) For purposes of this section:
   (1) "Energy efficient product or equipment" means any product or
equipment certified by a publicly owned utility company that will
improve the energy efficiency, as defined by paragraph (2) of
subdivision (a) of Section 399.4 of the Public Utilities Code, of a
qualified residence on which the product or equipment is installed or
applied.
   (2) "Energy efficient product or equipment" shall include, but not
be limited to, heating, ventilation, air-conditioning, lighting,
solar, advanced metering of energy usage, windows, insulation, zone
heating products, and weatherization systems.
   (3) "Zone heating products" mean gas room heaters certified by the
California Energy Commission or wood fueled stoves certified by the
federal Environmental Protection Agency.
   (4) "Publicly owned utility company" has the same meaning as set
forth in subdivision (d) of Section 9604 of the Public Utilities
Code.
   (5) "Qualified residence" has the same meaning as set forth in
Section 163(h)(4)(A) of the Internal Revenue Code.
   (6) "Publicly owned utility company loan or financial indebtedness"
means any amount borrowed from a publicly owned utility company to
finance the acquisition and installation of energy efficient products
and equipment installed or applied to a qualified residence located
in this state.
   (c) Any interest amount that is allowed as a deduction pursuant to
this section (and the application of Section 17072) may not
otherwise be allowed as a deduction for purposes of this part.
   (d) The publicly owned utility company shall issue a federal
income tax Form 1098, or similar form, for the purpose of notifying
the taxpayer of his or her eligibility for the deduction allowed by
this section.
   (e) The deduction allowed by this section shall be in lieu of any
credit allowed by this part for interest paid or incurred by the
taxpayer in connection with the purchase of energy efficient
equipment.
   (f) The Legislature finds and declares that many taxpayers may be
unaware that they may deduct interest paid or incurred pursuant to
this section.  The Legislature further finds that it is important to
inform taxpayers of this deduction.  Therefore, it is the intent of
the Legislature to encourage all publicly owned utility companies to
inform their customers in writing that they may deduct interest paid
or incurred pursuant to this section.  It is the further intent of
the Legislature to encourage all publicly owned utility companies
that are unable to offer customer financing to acquire or install
energy efficient products and equipment to inform their customers in
writing that interest on a home equity or home improvement loan used
to purchase energy efficient products and equipment may also be tax
deductible.
   (g) It is the intent of the Legislature to inquire with the
Internal Revenue Service as to whether the loan program administered
by the Sacramento Municipal Utility District qualifies for an
interest deduction in compliance with the Internal Revenue Code and
the regulations thereunder.
17215.  (a) Section 220(a) of the Internal Revenue Code, relating to
deduction allowed, is modified to provide that the amount allowed as
a deduction shall be an amount equal to the amount allowed to that
individual as a deduction under Section 220 of the Internal Revenue
Code, relating to medical savings accounts, on the federal income tax
return filed for the same taxable year by that individual.
   (b) Section 220(f)(4) of the Internal Revenue Code, relating to
additional tax on distributions not used for qualified medical
expenses, is modified by substituting "10 percent" in lieu of "15
percent."
17215.1.  Section 220(f)(5) of the Internal Revenue Code, relating
to rollover contributions, shall not apply.
17215.4.  Section 223 of the Internal Revenue Code, relating to
health savings accounts, shall not apply.
17220.  (a) Section 164(a)(3) of the Internal Revenue Code, relating
to the deductibility of state, local, and foreign income, war
profits, and excess profits taxes, shall not apply.
   (b) Section 164(b)(5) of the Internal Revenue Code, relating to
general sales taxes, shall not apply.
   (c) In addition to the provisions of Section 164(c) of the
Internal Revenue Code, relating to deduction denied in case of
certain taxes, no deduction shall be allowed for any tax imposed
under Chapter 10.5 (commencing with Section 17935), Chapter 10.6
(commencing with Section 17941), or Chapter 10.7 (commencing with
Section 17951) of this part or under Part 11 (commencing with Section
23001).
17222.  No deduction shall be allowed for the tax deducted and
withheld under Section 18662 and Section 13020 of the Unemployment
Insurance Code either to the employer or to the recipient of the
income in computing taxable income under this part.
17224.  Section 163(e) of the Internal Revenue Code is modified as
follows:
   (a) For taxable years beginning on or after January 1, 1987, and
before the taxable year in which the debt obligation matures or is
sold, exchanged, or otherwise disposed, the amount deductible under
this part is the same as the amount deductible on the federal tax
return.
   (b) The difference between the amount deductible on the federal
tax return and the amount allowable under this part, with respect to
obligations issued after December 31, 1984, for taxable years
beginning before January 1, 1987, shall be allowed as a deduction in
the taxable year in which the debt obligation matures or is sold,
exchanged, or otherwise disposed.
   (c) The provisions of Section 7202(c) of Public Law 101-239,
relating to the effective date for treatment of certain high yield
original issue discount obligations, shall apply.
17230.  Payments made to the California Housing Finance Agency by
the borrower pursuant to Section 52514 of the Health and Safety Code
shall be considered payments of interest for purposes of Section 163
of the Internal Revenue Code.
17235.  (a) There shall be allowed as a deduction the amount of net
interest received by the taxpayer in payment on indebtedness of a
person or entity engaged in the conduct of a trade or business
located in an enterprise zone.
   (b) No deduction shall be allowed under this section unless at the
time the indebtedness is incurred each of the following requirements
are met:
   (1) The trade or business is located solely within an enterprise
zone.
   (2) The indebtedness is incurred solely in connection with
activity within the enterprise zone.
   (3) The taxpayer has no equity or other ownership interest in the
debtor.
   (c) "Enterprise zone" means an area designated as an enterprise
zone pursuant to Chapter 12.8 (commencing with Section 7070) of
Division 7 of Title 1 of the Government Code.
17250.  (a) Section 168 of the Internal Revenue Code is modified as
follows:
   (1) Any reference to "tax imposed by this chapter" in Section 168
of the Internal Revenue Code means "net tax," as defined in Section
17039.
   (2) (A) Section 168(e)(3) is modified to provide that any
grapevine, replaced in a vineyard in California in any taxable year
beginning on or after January 1, 1992, as a direct result of a
phylloxera infestation in that vineyard, or replaced in a vineyard in
California in any taxable year beginning on or after January 1,
1997, as a direct result of Pierce's disease in that vineyard, shall
be "five-year property," rather than "10-year property."
   (B) Section 168(g)(3) of the Internal Revenue Code is modified to
provide that any grapevine, replaced in a vineyard in California in
any taxable year beginning on or after January 1, 1992, as a direct
result of a phylloxera infestation in that vineyard, or replaced in a
vineyard in California in any taxable year beginning on or after
January 1, 1997, as a direct result of Pierce's disease in that
vineyard, shall have a class life of 10 years.
   (C) Every taxpayer claiming a depreciation deduction with respect
to grapevines as described in this paragraph shall obtain a written
certification from an independent state-certified integrated pest
management adviser, or a state agricultural commissioner or adviser,
that specifies that the replanting was necessary to restore a
vineyard infested with phylloxera or Pierce's disease. The taxpayer
shall retain the certification for future audit purposes.
   (3) Section 168(j) of the Internal Revenue Code, relating to
property on Indian reservations, shall not apply.
   (4) Section 168(k) of the Internal Revenue Code, relating to
special allowance for certain property acquired after September 10,
2001, and before January 1, 2005, shall not apply.
   (5) Sections 168(b)(3)(G) and 168(b)(3)(H) of the Internal Revenue
Code, relating to property to which the straight line method
applies, shall not apply.
   (6) Sections 168(e)(3)(E)(iv) and 168(e)(3)(E)(v) of the Internal
Revenue Code, relating to 15-year property, shall not apply.
   (7) Sections 168(e)(6) and 168(e)(7) of the Internal Revenue Code,
relating to qualified leasehold improvement property and to
qualified restaurant property, respectively, shall not apply.
   (b) Section 169 of the Internal Revenue Code, relating to
amortization of pollution control facilities, is modified as follows:
   (1) The deduction allowed by Section 169 of the Internal Revenue
Code shall be allowed only with respect to facilities located in this
state.
   (2) The "state certifying authority," as defined in Section 169(d)
(2) of the Internal Revenue Code, means the State Air Resources
Board, in the case of air pollution, and the State Water Resources
Control Board, in the case of water pollution.
17250.5.  Section 167(g) of the Internal Revenue Code, relating to
depreciation under income forecast method, shall be modified as
follows:
   (a) Section 167(g)(2)(C) of the Internal Revenue Code is modified
by substituting "Section 19521" in lieu of "Section 460(b)(7)" of the
Internal Revenue Code.
   (b) Section 167(g)(5)(D) of the Internal Revenue Code is modified
by substituting "Part 10.2 (commencing with Section 18401) (other
than Section 19136)" in lieu of "Subtitle F (other than Sections 6654
and 6655)."
   (c) Section 167(g)(5)(E) of the Internal Revenue Code, relating to
treatment of distribution costs, shall not apply.
   (d) Section 167(g)(7) of the Internal Revenue Code, relating to
treatment of participations and residuals, shall not apply.
17255.  (a) Section 179(b)(1) of the Internal Revenue Code, relating
to dollar limitation, shall not apply and in lieu thereof, the
aggregate cost which may be taken into account under Section 179(a)
of the Internal Revenue Code for any taxable year shall not exceed
twenty-five thousand dollars ($25,000).
   (b) Section 179(b)(2) of the Internal Revenue Code, relating to
reduction in limitation, shall not apply and in lieu thereof, the
limitation under subdivision (a) for any taxable year shall be
reduced, but not to below zero, by the amount by which the cost of
Section 179 property, as defined in Section 179(d)(1) of the Internal
Revenue Code, except as otherwise provided, placed in service during
the taxable year exceeds two hundred thousand dollars ($200,000).
   (c) Section 179 of the Internal Revenue Code is modified to
provide that the "aggregate amount disallowed" referred to in Section
179(b)(3)(B) of the Internal Revenue Code shall be computed under
this part as it read on the date the property generating the amount
disallowed was placed in service.
   (d) Section 179(b)(5) of the Internal Revenue Code, relating to
inflation adjustments, shall not apply.
   (e) The last sentence in Section 179(c)(2) of the Internal Revenue
Code, relating to election irrevocable, shall not apply.
   (f) Section 179(d)(1)(A)(ii) of the Internal Revenue Code,
relating to computer software, shall not apply.
17255.5.  (a) For any taxable year which includes part of the
"applicable period" as defined in paragraph (6) of subdivision (c) of
Section 17053.62, a small refiner (as defined in Section 17053.62)
may elect to treat 75 percent of qualified capital costs (as defined
in paragraph (2) of subdivision (c) of Section 17053.62) paid or
incurred by the taxpayer during the taxable year as expenses that are
not chargeable to capital account. Any cost so treated shall be
allowed as a deduction for the taxable year in which paid or
incurred.
   (b) (1) For purposes of this part, the basis of any property shall
be reduced by the portion of the cost of that property taken into
account under subdivision (a).
   (2) For purposes of Section 1245 of the Internal Revenue Code, and
corresponding section of this part, the amount of the deduction
allowable under subdivision (a) with respect to any property which is
of a character subject to the allowance for depreciation shall be
treated as a deduction allowed for depreciation under Section 167 of
the Internal Revenue Code, or the corresponding section of this part.
   (c) This section shall remain in effect only until January 1,
2009, and as of that date is repealed.
17256.  Section 179A of the Internal Revenue Code, relating to
deduction for clean-fuel vehicles and certain refueling property,
shall not apply.
17260.  (a) No deduction, other than depreciation, shall be allowed
for expenditures for tertiary injectants as provided by Section 193
of the Internal Revenue Code.
   (b) Section 263(a) of the Internal Revenue Code shall not apply to
expenditures for which a deduction is allowed under Section 17266 or
17267.2.
17267.2.  (a) A taxpayer may elect to treat 40 percent of the cost
of any Section 17267.2 property as an expense which is not chargeable
to a capital account.  Any cost so treated shall be allowed as a
deduction for the taxable year in which the taxpayer places the
Section 17267.2 property in service.
   (b) In the case of a husband and wife filing separate returns for
a taxable year, the applicable amount under subdivision (a) shall be
equal to 50 percent of the percentage specified in subdivision (a).
   (c) (1) An election under this section for any taxable year shall
do both of the following:
   (A) Specify the items of Section 17267.2 property to which the
election applies and the percentage of the cost of each of those
items that are to be taken into account under subdivision (a).
   (B) Be made on the taxpayer's original return of the tax imposed
by this part for the taxable year.
   (2) Any election made under this section, and any specification
contained in that election, may not be revoked except with the
consent of the Franchise Tax Board.
   (d) (1) For purposes of this section, "Section 17267.2 property"
means any recovery property that is:
   (A) Section 1245 property (as defined in Section 1245(a) (3) of
the Internal Revenue Code).
   (B) Purchased and placed in service by the taxpayer for exclusive
use in a trade or business conducted within an enterprise zone
designated pursuant to Chapter 12.8 (commencing with Section 7070) of
Division 7 of Title 1 of the Government Code.
   (C) Purchased and placed in service before the date the enterprise
zone designation expires, is no longer binding, or becomes
inoperative.
   (2) For purposes of paragraph (1), "purchase" means any
acquisition of property, but only if both of the following apply:
   (A) The property is not acquired from a person whose relationship
to the person acquiring it would result in the disallowance of losses
under Section 267 or Section 707 (b) of the Internal Revenue Code.
However, in applying Section 267(b) and 267(c) for purposes of this
section, Section 267(c) (4) shall be treated as providing that the
family of an individual shall include only the individual's spouse,
ancestors, and lineal descendants.
   (B) The basis of the property in the hands of the person acquiring
it is not determined in whole or in part by reference to the
adjusted basis of that property in the hands of the person from whom
it is acquired.
   (3) For purposes of this section, the cost of property does not
include that portion of the basis of the property that is determined
by reference to the basis of other property held at any time by the
person acquiring the property.
   (4) This section shall not apply to estates and trusts.
   (5) This section shall not apply to any property for which the
taxpayer may not make an election for the taxable year under Section
179 of the Internal Revenue Code because of the application of the
provisions of Section 179(d) of the Internal Revenue Code.
   (6) In the case of a partnership, the percentage limitation
specified in subdivision (a) shall apply at the partnership level and
at the partner level.
   (e) For purposes of this section, "taxpayer" means a person or
entity who conducts a trade or business within an enterprise zone
designated pursuant to Chapter 12.8 (commencing with Section 7070) of
Division 7 of Title 1 of the Government Code.
   (f) Any taxpayer who elects to be subject to this section shall
not be entitled to claim for the same property, the deduction under
Section 179 of the Internal Revenue Code, relating to an election to
expense certain depreciable business assets.  However, the taxpayer
may claim depreciation by any method permitted by Section 168 of the
Internal Revenue Code, commencing with the taxable year following the
taxable year in which the Section 17267.2 property is placed in
service.
   (g) The aggregate cost of all Section 17267.2 property that may be
taken into account under subdivision (a) for any taxable year shall
not exceed the following applicable amount for the taxable year of
the designation of the relevant enterprise zone and taxable years
thereafter:
                                            The applicable
                                               amount is:
Taxable year of designation .............      $ 100,000
1st taxable year thereafter .............        100,000
2nd taxable year thereafter .............         75,000
3rd taxable year thereafter .............         75,000
Each taxable year thereafter ............         50,000
   (h) Any amounts deducted under subdivision (a) with respect to
property subject to this section that ceases to be used in the
taxpayer's trade or business within an enterprise zone at any time
before the close of the second taxable year after the property is
placed in service shall be included in income in the taxable year in
which the property ceases to be so used.
17267.6.  (a) For each taxable year beginning on or after January 1,
1998, a qualified taxpayer may elect to treat 40 percent of the cost
of any Section 17267.6 property as an expense that is not chargeable
to a capital account.  Any cost so treated shall be allowed as a
deduction for the taxable year in which the qualified taxpayer places
the Section 17267.6 property in service.
   (b) In the case of a husband and wife filing separate returns for
a taxable year, the applicable amount under subdivision (a) shall be
equal to 50 percent of the percentage specified in subdivision (a).
   (c) (1) An election under this section for any taxable year shall
do both of the following:
   (A) Specify the items of Section 17267.6 property to which the
election applies and the percentage of the cost of each of those
items that are to be taken into account under subdivision (a).
   (B) Be made on the qualified taxpayer's original return of the tax
imposed by this part for the taxable year.
   (2) Any election made under this section, and any specification
contained in that election, may not be revoked except with the
consent of the Franchise Tax Board.
   (d) (1) For purposes of this section, "Section 17267.6 property"
means any recovery property that is:
   (A) Section 1245 property (as defined in Section 1245(a)(3) of the
Internal Revenue Code).
   (B) Purchased and placed in service by the qualified taxpayer for
exclusive use in a trade or business conducted within a targeted tax
area designated pursuant to Chapter 12.93 (commencing with Section
7097) of Division 7 of Title 1 of the Government Code.
   (C) Purchased and placed in service before the date the targeted
tax area designation expires, is revoked, is no longer binding, or
becomes inoperative.
   (2) For purposes of paragraph (1), "purchase" means any
acquisition of property, but only if both of the following apply:
   (A) The property is not acquired from a person whose relationship
to the person acquiring it would result in the disallowance of losses
under Section 267 or Section 707(b) of the Internal Revenue Code.
However, in applying Sections 267(b) and 267(c) for purposes of this
section, Section 267(c)(4) shall be treated as providing that the
family of an individual shall include only the individual's spouse,
ancestors, and lineal descendants.
   (B) The basis of the property in the hands of the person acquiring
it is not determined in whole or in part by reference to the
adjusted basis of that property in the hands of the person from whom
it is acquired.
   (3) For purposes of this section, the cost of property does not
include that portion of the basis of the property that is determined
by reference to the basis of other property held at any time by the
person acquiring the property.
   (4) This section shall not apply to estates and trusts.
   (5) This section shall not apply to any property for which the
qualified taxpayer may not make an election for the taxable year
under Section 179 of the Internal Revenue Code because of the
application of the provisions of Section 179(d) of the Internal
Revenue Code.
   (6) In the case of a partnership, the percentage limitation
specified in subdivision (a) shall apply at the partnership level and
at the partner level.
   (e) (1) For purposes of this section, "qualified taxpayer" means a
person or entity that meets both of the following:
   (A) Is engaged in a trade or business within a targeted tax area
designated pursuant to Chapter 12.93 (commencing with Section 7097)
of Division 7 of Title 1 of the Government Code.
   (B) Is engaged in those lines of business described in Codes 2000
to 2099, inclusive; 2200 to 3999, inclusive; 4200 to 4299, inclusive;
4500 to 4599, inclusive, and 4700 to 5199, inclusive, of the
Standard Industrial Classification (SIC) Manual published by the
United State Office of Management and Budget, 1987 edition.
   (2) In the case of any pass-through entity, the determination of
whether a taxpayer is a qualified taxpayer under this section shall
be made at the entity level and any deduction under this section or
Section 24356.6 shall be allowed to the pass-through entity and
passed through to the partners or shareholders in accordance with
applicable provisions of this part of Part 11 (commencing with
Section 23001).  For purposes of this subparagraph, the term
"pass-through entity" means any partnership or S corporation.
   (f) Any qualified taxpayer who elects to be subject to this
section shall not be entitled to claim for the same property, the
deduction under Section 179 of the Internal Revenue Code, relating to
an election to expense certain depreciable business assets.
However, the qualified taxpayer may claim depreciation by any method
permitted by Section 168 of the Internal Revenue Code, commencing
with the taxable year following the taxable year in which the Section
17267.6 property is placed in service.
   (g) The aggregate cost of all Section 17267.6 property that may be
taken into account under subdivision (a) for any taxable year shall
not exceed the following applicable amount for the taxable year of
the designation of the relevant targeted tax area and taxable years
thereafter:
                                                  The applicable
                                                    amount is:
  Taxable year of designation .................      $100,000
  1st taxable year thereafter .................       100,000
  2nd taxable year thereafter .................        75,000
  3rd taxable year thereafter .................        75,000
  Each taxable year thereafter ................        50,000
   (h) Any amounts deducted under subdivision (a) with respect to
Section 17267.6 property that ceases to be used in the qualified
taxpayer's trade or business within a targeted tax area at any time
before the close of the second taxable year after the property is
placed in service shall be included in income in the taxable year in
which the property ceases to be so used.
17268.  (a) For each taxable year beginning on or after January 1,
1995, a taxpayer may elect to treat 40 percent of the cost of any
Section 17268 property as an expense that is not chargeable to the
capital account.  Any cost so treated shall be allowed as a deduction
for the taxable year in which the taxpayer places the Section 17268
property in service.
   (b) In the case of a husband or wife filing separate returns for a
taxable year in which a spouse is entitled to the deduction under
subdivision (a), the applicable amount shall be equal to 50 percent
of the amount otherwise determined under subdivision (a).
   (c) (1) An election under this section for any taxable year shall
meet both of the following requirements:
   (A) Specify the items of Section 17268 property to which the
election applies and the portion of the cost of each of those items
that is to be taken into account under subdivision (a).
   (B) Be made on the taxpayer's return of the tax imposed by this
part for the taxable year.
   (2) Any election made under this section, and any specification
contained in that election, may not be revoked except with the
consent of the Franchise Tax Board.
   (d) (1) For purposes of this section, "Section 17268 property"
means any recovery property that is each of the following:
   (A) Section 1245 property (as defined in Section 1245(a)(3) of the
Internal Revenue Code).
   (B) Purchased by the taxpayer for exclusive use in a trade or
business conducted within a LAMBRA.
   (C) Purchased before the date the LAMBRA designation expires, is
no longer binding, or becomes inoperative.
   (2) For purposes of paragraph (1), "purchase" means any
acquisition of property, but only if both of the following apply:
   (A) The property is not acquired from a person whose relationship
to the person acquiring it would result in the disallowance of losses
under Section 267 or 707(b) of the Internal Revenue Code (but, in
applying Section 267(b) and Section 267(c) of the Internal Revenue
Code for purposes of this section, Section 267(c)(4) of the Internal
Revenue Code shall be treated as providing that the family of an
individual shall include only his or her spouse, ancestors, and
lineal descendants).
   (B) The basis of the property in the hands of the person acquiring
it is not determined by either of the following:
   (i) In whole or in part by reference to the adjusted basis of the
property in the hands of the person from whom acquired.
   (ii) Under Section 1014 of the Internal Revenue Code, relating to
basis of property acquired from a decedent.
   (3) For purposes of this section, the cost of property does not
include that portion of the basis of the property that is determined
by reference to the basis of other property held at any time by the
person acquiring the property.
   (4) This section shall not apply to estates and trusts.
   (5) This section shall not apply to any property for which the
taxpayer may not make an election for the taxable year under Section
179 of the Internal Revenue Code because of the provisions of Section
179(d) of the Internal Revenue Code.
   (6) In the case of a partnership, the dollar limitation in
subdivision (f) shall apply at the partnership level and at the
partner level.
   (7) This section shall not apply to any property described in
Section 168(f) of the Internal Revenue Code, relating to property to
which Section 168 of the Internal Revenue Code does not apply.
   (e) For purposes of this section:
   (1) "LAMBRA" means a local agency military base recovery area
designated in accordance with the provisions of Section 7114 of the
Government Code.
   (2) "Taxpayer" means a taxpayer that conducts a trade or business
within a LAMBRA and, for the first two taxable years, has a net
increase in jobs (defined as 2,000 paid hours per employee per year)
of one or more employees in the LAMBRA.
   (A) The net increase in the number of jobs shall be determined by
subtracting the total number of full-time employees (defined as 2,000
paid hours per employee per year) the taxpayer employed in this
state in the taxable year prior to commencing business operations in
the LAMBRA from the total number of full-time employees the taxpayer
employed in this state during the second taxable year after
commencing business operations in the LAMBRA.  For taxpayers who
commence doing business in this state with their LAMBRA business
operation, the number of employees for the taxable year prior to
commencing business operations in the LAMBRA shall be zero.  If the
taxpayer has a net increase in jobs in the state, the credit shall be
allowed only if one or more full-time employees is employed within
the LAMBRA.
   (B) The total number of employees employed in the LAMBRA shall
equal the sum of both of the following:
   (i) The total number of hours worked in the LAMBRA for the
taxpayer by employees (not to exceed 2,000 hours per employee) who
are paid an hourly wage divided by 2,000.
   (ii) The total number of months worked in the LAMBRA for the
taxpayer by employees who are salaried employees divided by 12.
   (C) In the case of a taxpayer who first commences doing business
in the LAMBRA during the taxable year, for purposes of clauses (i)
and (ii), respectively, of subparagraph (B) the divisors "2,000" and
"12" shall be multiplied by a fraction, the numerator of which is the
number of months of the taxable year that the taxpayer was doing
business in the LAMBRA and the denominator of which is 12.
   (f) The aggregate cost of all Section 17268 property that may be
taken into account under subdivision (a) for any taxable year shall
not exceed the following applicable amounts for the taxable year of
the designation of the relevant LAMBRA and taxable years thereafter:
                                          The applicable
                                            amount is:
Taxable year of designation ............     $100,000
1st taxable year thereafter ............      100,000
2nd taxable year thereafter ............       75,000
3rd taxable year thereafter ............       75,000
Each taxable year thereafter ...........       50,000
   (g) This section shall apply only to property that is used
exclusively in a trade or business conducted within a LAMBRA.
   (h) (1) Any amounts deducted under subdivision (a) with respect to
property that ceases to be used in the trade or business within a
LAMBRA at any time before the close of the second taxable year after
the property was placed in service shall be included in income for
that year.
   (2) At the close of the second taxable year, if the taxpayer has
not increased the number of its employees as determined by paragraph
(2) of subdivision (e), then the amount of the deduction previously
claimed shall be added to the taxpayer's taxable income for the
taxpayer's second taxable year.
   (i) Any taxpayer who elects to be subject to this section shall
not be entitled to claim for the same property the deduction under
Section 179 of the Internal Revenue Code, relating to an election to
expense certain depreciable business assets.
17269.  Whereas, the people of the State of California desire to
promote and achieve tax equity and fairness among all the state's
citizens and further desire to conform to the public policy of
nondiscrimination, the Legislature hereby enacts the following for
these reasons and for no other purpose:
   (a) The provisions of Section 162(a) of the Internal Revenue Code
shall not be applicable to expenses incurred by a taxpayer with
respect to expenditures made at, or payments made to, a  club which
restricts membership or the use of its services or facilities on the
basis of age, sex, race, religion, color, ancestry, or national
origin.
   (b) A club described in subdivision (a) holding an alcoholic
beverage license pursuant to Division 9 (commencing with Section
23000) of the Business and Professions Code, except a club holding an
alcoholic beverage license pursuant to Section 23425 thereof, shall
provide on each receipt furnished to a taxpayer a printed  statement
as follows:
   "The expenditures covered by this receipt are nondeductible for
state income tax purposes or franchise tax purposes."
   (c) For purposes of this section:
   (1) "Expenses" means those expenses otherwise deductible under
Section 162(a) of the Internal Revenue Code, except for subdivision
(a), and includes, but is not limited to, club membership dues and
assessments, food and beverage expenses, expenses for services
furnished by the club, and reimbursements or salary adjustments to
officers or employees for any of the preceding expenses.
   (2) "Club" means a club as defined in Division 9 (commencing with
Section 23000) of the Business and Professions Code, except a club as
defined in Section 23425 thereof.
17269.  Whereas, the people of the State of California desire to
promote and achieve tax equity and fairness among all the state's
citizens and further desire to conform to the public policy of
nondiscrimination, the Legislature hereby enacts the following for
these reasons and for no other purpose:
   (a) The provisions of Section 162(a) of the Internal Revenue Code
shall not be applicable to expenses incurred by a taxpayer with
respect to expenditures made at, or payments made to, a  club which
restricts membership or the use of its services or facilities on the
basis of age, sex, race, religion, color, ancestry, or national
origin.
   (b) A club described in subdivision (a) holding an alcoholic
beverage license pursuant to Division 9 (commencing with Section
23000) of the Business and Professions Code, except a club holding an
alcoholic beverage license pursuant to Section 23425 thereof, shall
provide on each receipt furnished to a taxpayer a printed statement
as follows:
   "The expenditures covered by this receipt are nondeductible for
state income tax purposes or franchise tax purposes."
   (c) For purposes of this section:
   (1) "Expenses" means those expenses otherwise deductible under
Section 162(a) of the Internal Revenue Code, except for subdivision
(a), and includes, but is not limited to, club membership dues and
assessments, food and beverage expenses, expenses for services
furnished by the club, and reimbursements or salary adjustments to
officers or employees for any of the preceding expenses.
   (2) "Club" means a club as defined in Division 9 (commencing with
Section 23000) of the Business and Professions Code, except a club as
defined in Section 23425 thereof.
17270.  (a) For purposes of Section 162(a)(2) of the Internal
Revenue Code, relating to travel expenses, all of the following shall
apply:
   (1) The place of residence of a member of the Legislature within
the district represented shall be considered the tax home.
   (2) The provisions of Section 162(h) of the Internal Revenue Code,
relating to state legislators' travel expenses away from home, shall
not be applied.
   (b) The provisions of Section 280C(a) of the Internal Revenue Code
(relating to rule for employment credits) shall not apply.
   (c) Section 280C(c)(3)(B) of the Internal Revenue Code is modified
to refer to Section 17041 in lieu of Section 11(b)(1) of the
Internal Revenue Code.
17273.  For each taxable year beginning on or after January 1, 1999,
Section 162(l)(1) of the Internal Revenue Code, relating to
applicable percentage, is modified to provide that Section 2002 of
the Tax and Trade Relief Extension Act of 1998 (P.L. 105-277),
relating to phase in of a 100-percent deduction for health insurance,
shall apply.
17274.  (a) Notwithstanding any other provisions in this part to the
contrary, no deduction shall be allowed for interest, taxes,
depreciation, or amortization paid or incurred in the taxable year
with respect to substandard housing located in this state, except as
provided in subdivision (e).
   (b) "Substandard housing" means occupied dwellings from which the
taxpayer derives rental income or unoccupied or abandoned dwellings
for which both of the following apply:
   (1) Either of the following occurs:
   (A) For occupied dwellings from which the taxpayer derives rental
income, a state or local government regulatory agency has determined
that the housing violates state law or local codes dealing with
health, safety, or building.
   (B) For dwellings that are unoccupied or abandoned for at least 90
days, a state or local government regulatory agency has cited the
housing for conditions that constitute a serious violation of state
law or local codes dealing with health, safety, or building, and that
constitute a threat to public health and safety.
   (2) Either of the following occurs:
   (A) After written notice of violation by the regulatory agency,
specifying the applicability of this section, the housing has not
been brought to a condition of compliance within six months after the
date of the notice or the time prescribed in the notice, whichever
period is later.
   (B) Good faith efforts for compliance have not been commenced, as
determined by the regulatory agency.
   "Substandard housing" also means employee housing that has not,
within 30 days of the date of the written notice of violation or the
date for compliance prescribed in the written notice of violation,
been brought into compliance with the conditions stated in the
written notice of violation of the Employee Housing Act (Part 1
(commencing with Section 17000) of Division 13 of the Health and
Safety Code) issued by the enforcement agency that specifies the
application of this section.  The regulatory agency may, for good
cause shown, extend the compliance date prescribed in a violation
notice.
   (c) (1) When the period specified in paragraph (2) of subdivision
(b) has expired without compliance, the regulatory agency shall mail
to the taxpayer a notice of noncompliance.  The notice of
noncompliance shall be in a form and shall include information
prescribed by the Franchise Tax Board, shall be mailed by certified
mail to the taxpayer at the taxpayer's last known address, and shall
advise the taxpayer of (A) an intent to notify the Franchise Tax
Board of the noncompliance within 10 days unless an appeal is filed,
(B) where an appeal may be filed, and (C) a general description of
the tax consequences of the filing with the Franchise Tax Board.
Appeals shall be made to the same body and in the same manner as
appeals from other actions of the regulatory agency.  If no appeal is
made within 10 days or if after disposition of the appeal the
regulatory agency is sustained, the regulatory agency shall notify,
in writing, the Franchise Tax Board of the noncompliance.
   (2) The notice of noncompliance shall contain the legal
description or the lot and block numbers of the real property, the
assessor's parcel number, and the name of the owner of record as
shown on the latest equalized assessment roll.  In addition, the
regulatory agency shall, at the same time as notification of the
notice of noncompliance is sent to the Franchise Tax Board, record a
copy of the notice of noncompliance in the office of the recorder for
the county in which the substandard housing is located that includes
a statement of tax consequences that may be determined by the
Franchise Tax Board.  However, the failure to record a notice with
the county recorder does not relieve the liability of any taxpayer
nor does it create any liability on the part of the regulatory
agency.
   (3) The regulatory agency may charge the taxpayer a fee in an
amount not to exceed the regulatory agency's costs incurred in
recording any notice of noncompliance or issuing any release of that
notice.  The notice of compliance shall be recorded and shall serve
to expunge the notice of noncompliance.  The notice of compliance
shall contain the same recording information required for the notice
of noncompliance.  No deduction by the taxpayer, or any other
taxpayer who obtains title to the property subsequent to the
recordation of the notice of noncompliance, shall be allowed for the
items provided in subdivision (a) from the date of the notice of
noncompliance until the date the regulatory agency determines that
the substandard housing has been brought to a condition of
compliance.  The regulatory agency shall mail to the Franchise Tax
Board and the taxpayer a notice of compliance, which notice shall be
in the form and include the information prescribed by the Franchise
Tax Board.  In the event the period of noncompliance does not cover
an entire taxable year, the deductions shall be denied at the rate of
1/12 for each full month during the period of noncompliance.
   (4) If the property is owned by more than one owner or if the
recorded title is in the name of a fictitious owner, the notice
requirements provided in subdivision (b) and this subdivision shall
be satisfied for each owner if the notices are mailed to one owner or
to the fictitious name owner at the address appearing on the latest
available property tax bill.  However, notices made pursuant to this
subdivision do not relieve the regulatory agency from furnishing
taxpayer identification information required to implement this
section to the Franchise Tax Board.
   (d) For the purposes of this section, a notice of noncompliance
shall not be mailed by the regulatory agency to the Franchise Tax
Board if any of the following occur:
   (1) The housing was rendered substandard solely by reason of
earthquake, flood, or other natural disaster except where the
condition remains for more than three years after the disaster.
   (2) The owner of the substandard housing has secured financing to
bring the housing into compliance with those laws or codes that have
been violated, causing the housing to be classified as substandard,
and has commenced repairs or other work necessary to bring the
housing into compliance.
   (3) The owner of substandard housing that is not within the
meaning of housing accommodation as defined by subdivision (d) of
Section 35805 of the Health and Safety Code has done both of the
following:
   (A) Attempted to secure financing to bring the housing into
compliance with those laws or codes that have been violated, causing
the housing to be classified as substandard.
   (B) Been denied that financing solely because the housing is
located in a neighborhood or geographical area in which financial
institutions do not provide financing for rehabilitation of any of
that type of housing.
   (e) This section does not apply to deductions from income derived
from property rendered substandard solely by reason of a change in
applicable state or local housing standards unless the violations
cause substantial danger to the occupants of the property, as
determined by the regulatory agency which has served notice of
violation pursuant to subdivision (b).
   (f) The owner of substandard housing found to be in noncompliance
shall, upon total or partial divestiture of interest in the property,
immediately notify the regulatory agency of the name and address of
the person or persons to whom the property has been sold or otherwise
transferred and the date of the sale or transference.
   (g) By July 1 of each year, the regulatory agency shall report to
the appropriate legislative body of its jurisdiction all of the
following information, for the preceding calendar year, regarding its
activities to secure code enforcement, which shall be public
information:
   (1) The number of written notices of violation issued for
substandard housing under subdivision (b).
   (2) The number of violations complied with within the period
prescribed in subdivision (b).
   (3) The number of notices of noncompliance issued pursuant to
subdivision (c).
   (4) The number of appeals from those notices pursuant to
subdivision (c).
   (5) The number of successful appeals by owners.
   (6) The number of notices of noncompliance mailed to the Franchise
Tax Board pursuant to subdivision (c).
   (7) The number of cases in which a notice of noncompliance was not
sent pursuant to subdivision (d).
   (8) The number of extensions for compliance granted pursuant to
subdivision (b) and the mean average length of the extensions.
   (9) The mean average length of time from the issuance of a notice
of violation to the mailing of a notice of noncompliance to the
Franchise Tax Board where the notice is actually sent to the
Franchise Tax Board.
   (10) The number of cases where compliance is achieved after a
notice of noncompliance has been mailed to the Franchise Tax Board.
   (11) The number of instances of disallowance of tax deductions by
the Franchise Tax Board resulting from referrals made by the
regulatory agency.  This information may be filed in a supplemental
report in succeeding years as it becomes available.
   (h) The provisions of this section relating to substandard housing
consisting of abandoned or unoccupied dwellings do not apply to any
lender engaging in a "federally related transaction," as defined in
Section 11302 of the Business and Professions Code, who acquires
title through judicial or nonjudicial foreclosure, or accepts a deed
in lieu of foreclosure.  The exception provided in this subdivision
covers only substandard housing consisting of abandoned or unoccupied
dwellings involved in the federally related transaction.
17275.  In computing taxable income, no deduction shall be allowed
for any of the following:
   (a) Abandonment fees paid under Section 51061 or 51093 of the
Government Code.
   (b) Tax recoupment fees paid under Section 51142 of the Government
Code.
17275.5.  (a) No deduction shall be denied under Section 170(f)(8)
of the Internal Revenue Code, relating to substantiation requirement
for certain contributions, upon a showing that the requirements in
Section 170(f)(8) of the Internal Revenue Code have been met with
respect to that contribution for federal purposes.
   (b) Section 170(f)(10)(F) of the Internal Revenue Code, relating
to the excise tax on premiums paid, shall not apply.
17276.  Except as provided in Sections 17276.1, 17276.2, 17276.4,
17276.5, 17276.6, and 17276.7, the deduction provided by Section 172
of the Internal Revenue Code, relating to a net operating loss
deduction, shall be modified as follows:
   (a) (1) Net operating losses attributable to taxable years
beginning before January 1, 1987, shall not be allowed.
   (2) A net operating loss shall not be carried forward to any
taxable year beginning before January 1, 1987.
   (b) (1) Except as provided in paragraphs (2) and (3), the
provisions of Section 172(b)(2) of the Internal Revenue Code,
relating to the amount of carryovers, shall be modified so that the
applicable percentage of the entire amount of the net operating loss
for any taxable year shall be eligible for carryover to any
subsequent taxable year.  For purposes of this subdivision, the
applicable percentage shall be:
   (A) Fifty percent for any taxable year beginning before January 1,
2000.
   (B) Fifty-five percent for any taxable year beginning on or after
January 1, 2000, and before January 1, 2002.
   (C) Sixty percent for any taxable year beginning on or after
January 1, 2002, and before January 1, 2004.
   (D) One hundred percent for any taxable year beginning on or after
January 1, 2004.
   (2) In the case of a taxpayer who has a net operating loss in any
taxable year beginning on or after January 1, 1994, and who operates
a new business during that taxable year, each of the following shall
apply to each loss incurred during the first three taxable years of
operating the new business:
   (A) If the net operating loss is equal to or less than the net
loss from the new business, 100 percent of the net operating loss
shall be carried forward as provided in subdivision (d).
   (B) If the net operating loss is greater than the net loss from
the new business, the net operating loss shall be carried over as
follows:
   (i) With respect to an amount equal to the net loss from the new
business, 100 percent of that amount shall be carried forward as
provided in subdivision (d).
   (ii) With respect to the portion of the net operating loss that
exceeds the net loss from the new business, the applicable percentage
of that amount shall be carried forward as provided in subdivision
(d).
   (C) For purposes of Section 172(b)(2) of the Internal Revenue
Code, the amount described in clause (ii) of subparagraph (B) shall
be absorbed before the amount described in clause (i) of subparagraph
(B).
   (3) In the case of a taxpayer who has a net operating loss in any
taxable year beginning on or after January 1, 1994, and who operates
an eligible small business during that taxable year, each of the
following shall apply:
   (A) If the net operating loss is equal to or less than the net
loss from the eligible small business, 100 percent of the net
operating loss shall be carried forward to the taxable years
specified in subdivision (d).
   (B) If the net operating loss is greater than the net loss from
the eligible small business, the net operating loss shall be carried
over as follows:
   (i) With respect to an amount equal to the net loss from the
eligible small business, 100 percent of that amount shall be carried
forward as provided in subdivision (d).
   (ii) With respect to that portion of the net operating loss that
exceeds the net loss from the eligible small business, the applicable
percentage of that amount shall be carried forward as provided in
subdivision (d).
   (C) For purposes of Section 172(b)(2) of the Internal Revenue
Code, the amount described in clause (ii) of subparagraph (B) shall
be absorbed before the amount described in clause (i) of subparagraph
(B).
   (4) In the case of a taxpayer who has a net operating loss in a
taxable year beginning on or after January 1, 1994, and who operates
a business that qualifies as both a new business and an eligible
small business under this section, that business shall be treated as
a new business for the first three taxable years of the new business.
   (5) In the case of a taxpayer who has a net operating loss in a
taxable year beginning on or after January 1, 1994, and who operates
more than one business, and more than one of those businesses
qualifies as either a new business or an eligible small business
under this section, paragraph (2) shall be applied first, except that
if there is any remaining portion of the net operating loss after
application of clause (i) of subparagraph (B) of that paragraph,
paragraph (3) shall be applied to the remaining portion of the net
operating loss as though that remaining portion of the net operating
loss constituted the entire net operating loss.
   (6) For purposes of this section, the term "net loss" means the
amount of net loss after application of Sections 465 and 469 of the
Internal Revenue Code.
   (c) Net operating loss carrybacks shall not be allowed.
   (d) (1) (A) For a net operating loss for any taxable year
beginning on or after January 1, 1987, and before January 1, 2000,
Section 172(b)(1)(A)(ii) of the Internal Revenue Code, relating to
years to which net operating losses may be carried, is modified to
substitute "five taxable years" in lieu of "20 taxable years" except
as otherwise provided in paragraphs (2) and (3).
   (B) For a net operating loss for any taxable year beginning on or
after January 1, 2000, Section 172(b)(1)(A)(ii) of the Internal
Revenue Code, relating to years to which net operating losses may be
carried, is modified to substitute "10 taxable years" in lieu of "20
taxable years."
   (2) For any taxable year beginning before January 1, 2000, in the
case of a "new business," the "five taxable years" in paragraph (1)
shall be modified to read as follows:
   (A) "Eight taxable years" for a net operating loss attributable to
the first taxable year of that new business.
   (B) "Seven taxable years" for a net operating loss attributable to
the second taxable year of that new business.
   (C) "Six taxable years" for a net operating loss attributable to
the third taxable year of that new business.
   (3) For any carryover of a net operating loss for which a
deduction is denied by Section 17276.3, the carryover period
specified in this subdivision shall be extended as follows:
   (A) By one year for a net operating loss attributable to taxable
years beginning in 1991.
   (B) By two years for a net operating loss attributable to taxable
years beginning prior to January 1, 1991.
   (4) The net operating loss attributable to taxable years beginning
on or after January 1, 1987, and before January 1, 1994, shall be a
net operating loss carryover to each of the 10 taxable years
following the year of the loss if it is incurred by a taxpayer that
is under the jurisdiction of the court in a Title 11 or similar case
at any time during the income year.  The loss carryover provided in
the preceding sentence shall not apply to any loss incurred after the
date the taxpayer is no longer under the jurisdiction of the court
in a Title 11 or similar case.
   (e) For purposes of this section:
   (1) "Eligible small business" means any trade or business that has
gross receipts, less returns and allowances, of less than one
million dollars ($1,000,000) during the taxable year.
   (2) Except as provided in subdivision (f), "new business" means
any trade or business activity that is first commenced in this state
on or after January 1, 1994.
   (3) "Title 11 or similar case" shall have the same meaning as in
Section 368(a)(3) of the Internal Revenue Code.
   (4) In the case of any trade or business activity conducted by a
partnership or "S corporation," paragraphs (1) and (2) shall be
applied to the partnership or "S corporation."
   (f) For purposes of this section, in determining whether a trade
or business activity qualifies as a new business under paragraph (2)
of subdivision (e), the following rules shall apply:
   (1) In any case where a taxpayer purchases or otherwise acquires
all or any portion of the assets of an existing trade or business
(irrespective of the form of entity) that is doing business in this
state (within the meaning of Section 23101), the trade or business
thereafter conducted by the taxpayer (or any related person) shall
not be treated as a new business if the aggregate fair market value
of the acquired assets (including real, personal, tangible, and
intangible property) used by the taxpayer (or any related person) in
the conduct of its trade or business exceeds 20 percent of the
aggregate fair market value of the total assets of the trade or
business being conducted by the taxpayer (or any related person).
For purposes of this paragraph only, the following rules shall apply:
   (A) The determination of the relative fair market values of the
acquired assets and the total assets shall be made as of the last day
of the first taxable year in which the taxpayer (or any related
person) first uses any of the acquired trade or business assets in
its business activity.
   (B) Any acquired assets that constituted property described in
Section 1221(1) of the Internal Revenue Code 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 Section 1221(1) of the Internal Revenue Code in the
hands of the acquiring taxpayer (or related person).
   (2) In any case where a taxpayer (or any related person) is
engaged in one or more trade or business activities in this state, or
has been engaged in one or more trade or business activities in this
state within the preceding 36 months ("prior trade or business
activity"), and thereafter commences an additional trade or business
activity in this state, the additional trade or business activity
shall only be treated as a new business if the additional trade or
business activity is classified under a different division of the
Standard Industrial Classification (SIC) Manual published by the
United States Office of Management and Budget, 1987 edition, than are
any of the taxpayer's (or any related person's) current or prior
trade or business activities.
   (3) In any case where a taxpayer, including all related persons,
is engaged in trade or business activities wholly outside of this
state and the taxpayer first commences doing business in this state
(within the meaning of Section 23101) after December 31, 1993 (other
than by purchase or other acquisition described in paragraph (1)),
the trade or business activity shall be treated as a new business
under paragraph (2) of subdivision (e).
   (4) In any case where the legal form under which a trade or
business activity is being conducted is changed, the change in form
shall be disregarded and the determination of whether the trade or
business activity is a new business shall be made by treating the
taxpayer as having purchased or otherwise acquired all or any portion
of the assets of an existing trade or business under the rules of
paragraph (1) of this subdivision.
   (5) "Related person" shall mean any person that is related to the
taxpayer under either Section 267 or 318 of the Internal Revenue
Code.
   (6) "Acquire" shall include any gift, inheritance, transfer
incident to divorce, or any other transfer, whether or not for
consideration.
   (7) (A) For taxable years beginning on or after January 1, 1997,
the term "new business" shall include any taxpayer that is engaged in
biopharmaceutical activities or other biotechnology activities that
are described in Codes 2833 to 2836, inclusive, of the Standard
Industrial Classification (SIC) Manual published by the United States
Office of Management and Budget, 1987 edition, and as further
amended, and that has not received regulatory approval for any
product from the United States Food and Drug Administration.
   (B) For purposes of this paragraph:
   (i) "Biopharmaceutical activities" means those activities that use
organisms or materials derived from organisms, and their cellular,
subcellular, or molecular components, in order to provide
pharmaceutical products for human or animal therapeutics and
diagnostics.  Biopharmaceutical activities make use of living
organisms to make commercial products, as opposed to pharmaceutical
activities that make use of chemical compounds to produce commercial
products.
   (ii) "Other biotechnology activities" means activities consisting
of the application of recombinant DNA technology to produce
commercial products, as well as activities regarding pharmaceutical
delivery systems designed to provide a measure of control over the
rate, duration, and site of pharmaceutical delivery.
   (g) In computing the modifications under Section 172(d)(2) of the
Internal Revenue Code, relating to capital gains and losses of
taxpayers other than corporations, the exclusion provided by Section
18152.5 shall not be allowed.
   (h) Notwithstanding any provisions of this section to the
contrary, a deduction shall be allowed to a "qualified taxpayer" as
provided in Sections 17276.1, 17276.2, 17276.4, 17276.5, 17276.6, and
17276.7.
   (i) The Franchise Tax Board may prescribe appropriate regulations
to carry out the purposes of this section, including any regulations
necessary to prevent the avoidance of the purposes of this section
through splitups, shell corporations, partnerships, tiered ownership
structures, or otherwise.
   (j) The Franchise Tax Board may reclassify any net operating loss
carryover determined under either paragraph (2) or (3) of subdivision
(b) as a net operating loss carryover under paragraph (1) of
subdivision (b) upon a showing that the reclassification is necessary
to prevent evasion of the purposes of this section.
   (k) Except as otherwise provided, the amendments made by Chapter
107 of the Statutes of 2000 shall apply to net operating losses for
taxable years beginning on or after January 1, 2000.
17276.1.  (a) A qualified taxpayer, as defined in Section 17276.2,
17276.4, 17276.5, 17276.6, or 17276.7, may elect to take the
deduction provided by Section 172 of the Internal Revenue Code,
relating to the net operating loss deduction, as modified by Section
17276, with the following exceptions:
   (1) Subdivision (a) of Section 17276, relating to years in which
allowable losses are sustained, shall not be applicable.
   (2) Subdivision (b) of Section 17276, relating to the 50-percent
reduction of losses, shall not be applicable.
   (b) The election to compute the net operating loss under this
section shall be made in a statement attached to the original return,
timely filed for the year in which the net operating loss is
incurred and shall be irrevocable.  In addition to the exceptions
specified in subdivision (a), the provisions of Section 17276.2,
17276.4, 17276.5, 17276.6, or 17276.7, as appropriate, shall be
applicable.
   (c) Any carryover of a net operating loss sustained by a qualified
taxpayer, as defined in subdivision (a) or (b) of Section 17276.2 as
that section read immediately prior to January 1, 1997, shall, if
previously elected, continue to be a deduction, as provided in
subdivision (a), applied as if the provisions of subdivision (a) or
(b) of Section 17276.2, as that section read prior to January 1,
1997, still applied.
17276.2.  (a) The term "qualified taxpayer" as used in Section
17276.1 includes a person or entity engaged in the conduct of a trade
or business within an enterprise zone designated pursuant to Chapter
12.8 (commencing with Section 7070) of Division 7 of Title 1 of the
Government Code.  For purposes of this subdivision, all of the
following shall apply:
   (1) A net operating loss shall not be a net operating loss
carryback to any taxable year and a net operating loss for any
taxable year beginning on or after the date that the area in which
the taxpayer conducts a trade or business is designated as an
enterprise zone shall be a net operating loss carryover to each of
the 15 taxable years following the taxable year of loss.
   (2) For purposes of this subdivision:
   (A) "Net operating loss" means the loss determined under Section
172 of the Internal Revenue Code, as modified by Section 17276.1,
attributable to the taxpayer's business activities within the
enterprise zone (as defined in Chapter 12.8 (commencing with Section
7070) of Division 7 of Title 1 of the Government Code) prior to the
enterprise zone expiration date.  That attributable loss shall be
determined in accordance with Chapter 17 (commencing with Section
25101) of Part 11, modified for purposes of this subdivision, as
follows:
   (i) Loss shall be apportioned to the enterprise zone by
multiplying total loss from the business by a fraction, the numerator
of which is the property factor plus the payroll factor, and the
denominator of which is two.
   (ii)  "The enterprise zone" shall be substituted for "this state."
   (B) A net operating loss carryover shall be a deduction only with
respect to the taxpayer's business income attributable to the
enterprise zone as defined in Chapter 12.8 (commencing with Section
7070) of Division 7 of Title 1 of the Government Code.
   (C) Attributable income is that portion of the taxpayer's
California source business income that is apportioned to the
enterprise zone.  For that purpose, the taxpayer's business income
attributable to sources in this state first shall be determined in
accordance with Chapter 17 (commencing with Section 25101) of Part
11.  That business income shall be further apportioned to the
enterprise zone in accordance with Article 2 (commencing with Section
25120) of Chapter 17 of Part 11, modified for purposes of this
subdivision as follows:
   (i) Business income shall be apportioned to the enterprise zone by
multiplying the total California business income of the taxpayer by
a fraction, the numerator of which is the property factor plus the
payroll factor, and the denominator of which is two.  For purposes of
this clause:
   (I) The property factor is a fraction, the numerator of which is
the average value of the taxpayer's real and tangible personal
property owned or rented and used in the enterprise zone during the
taxable year, and the denominator of which is the average value of
all the taxpayer's real and tangible personal property owned or
rented and used in this state during the taxable year.
   (II) The payroll factor is a fraction, the numerator of which is
the total amount paid by the taxpayer in the enterprise zone during
the taxable year for compensation, and the denominator of which is
the total compensation paid by the taxpayer in this state during the
taxable year.
   (ii) If a loss carryover is allowable pursuant to this section for
any taxable year after the enterprise zone designation has expired,
the enterprise zone shall be deemed to remain in existence for
purposes of computing the limitation set forth in subparagraph (B)
and allowing a net operating loss deduction.
   (D) "Enterprise zone expiration date" means the date the
enterprise zone designation expires, is no longer binding, or becomes
inoperative.
   (3) The changes made to this subdivision by the act adding this
paragraph shall apply to taxable years beginning on or after January
1, 1998.
   (b) A taxpayer who qualifies as a "qualified taxpayer" under one
or more sections shall, for the taxable year of the net operating
loss and any taxable year to which that net operating loss may be
carried, designate on the original return filed for each year the
section which applies to that taxpayer with respect to that net
operating loss.  If the taxpayer is eligible to qualify under more
than one section, the designation is to be made after taking into
account subdivision (c).
   (c) If a taxpayer is eligible to qualify under this section and
either Section 17276.4, 17276.5, or 17276.6 as a "qualified taxpayer,"
with respect to a net operating loss in a taxable year, the taxpayer
shall designate which section is to apply to the taxpayer.
   (d) Notwithstanding Section 17276, the amount of the loss
determined under this section or Section 17276.4, 17276.5, or 17276.6
shall be the only net operating loss allowed to be carried over from
that taxable year and the designation under subdivision (b) shall be
included in the election under Section 17276.1.
17276.3.  (a) Notwithstanding Sections 17276, 17276.1, 17276.2,
17276.4, 17276.5, 17276.6, and 17276.7 of this code and Section 172
of the Internal Revenue Code, no net operating loss deduction shall
be allowed for any taxable year beginning on or after January 1,
2002, and before January 1, 2004.
   (b) For any carryover of a net operating loss for which a
deduction is denied by subdivision (a), the carryover period under
Section 172 of the Internal Revenue Code shall be extended as
follows:
   (1) By one year, for losses incurred in taxable years beginning on
or after January 1, 2002, and before January 1, 2003.
   (2) By two years, for losses incurred in taxable years beginning
before January 1, 2002.
17276.4.  (a) The term "qualified taxpayer" as used in Section
17276.1 includes a person or entity engaged in the conduct of a trade
or business within the Los Angeles Revitalization Zone designated
pursuant to Section 7102 of the Government Code.  For purposes of
this subdivision, all of the following shall apply:
   (1) A net operating loss shall not be a net operating loss
carryback for any taxable year, and a net operating loss for any
taxable year beginning on or after the date the area in which the
taxpayer conducts a trade or business is designated the Los Angeles
Revitalization Zone shall be a net operating loss carryover to each
following taxable year that ends before the Los Angeles
Revitalization Zone expiration date or to each of the 15 taxable
years following the taxable year of loss, if longer.
   (2) "Net operating loss" means the loss determined under Section
172 of the Internal Revenue Code, as modified by Section 17276.1,
attributable to the taxpayer's business activities within the Los
Angeles Revitalization Zone (as defined in Section 7102 of the
Government Code) prior to the Los Angeles Revitalization Zone
expiration date.  The attributable loss shall be determined in
accordance with Chapter 17 (commencing with Section 25101) of Part
11, modified as follows:
   (A) Loss shall be apportioned to the Los Angeles Revitalization
Zone by multiplying total loss from the business by a fraction, the
numerator of which is the property factor plus the payroll factor,
and the denominator of which is 2.
   (B) "The Los Angeles Revitalization Zone" shall be substituted for
"this state."
   (3) A net operating loss carryover shall be a deduction only with
respect to the taxpayer's business income attributable to the Los
Angeles Revitalization Zone (as defined in Section 7102 of the
Government Code) determined in accordance with subdivision (c).
   (4) If a loss carryover is allowable pursuant to this section for
any taxable year after the Los Angeles Revitalization Zone
designation has expired, the Los Angeles Revitalization Zone shall be
deemed to remain in existence for purposes of computing the
limitation set forth in paragraph (2) and allowing a net operating
loss deduction.
   (5) Attributable income shall be that portion of the taxpayer's
California source business income which is apportioned to the Los
Angeles Revitalization Zone.  For that purpose, the taxpayer's
business income attributable to sources in this state first shall be
determined in accordance with Chapter 17 (commencing with Section
25101) of Part 11.  That business income shall be further apportioned
to the Los Angeles Revitalization Zone in accordance with Article 2
(commencing with Section 25120) of Chapter 17 of Part 11, modified as
follows:
   (A) Business income shall be apportioned to the Los Angeles
Revitalization Zone by multiplying total California business income
of the taxpayer by a fraction, the numerator of which is the property
factor plus the payroll factor, and the denominator of which is 2.
   (B) The property factor is a fraction, the numerator of which is
the average value of the taxpayer's real and tangible personal
property owned or rented and used in the Los Angeles Revitalization
Zone during the taxable year and the denominator of which is the
average value of all the taxpayer's real and tangible personal
property owned or rented and used in this state during the taxable
year.
   (C) The payroll factor is a fraction, the numerator of which is
the total amount paid by the taxpayer in the Los Angeles
Revitalization Zone during the taxable year for compensation, and the
denominator of which is the total compensation paid by the taxpayer
in this state during the taxable year.
   (6) "Los Angeles Revitalization Zone expiration date" means the
date the Los Angeles Revitalization Zone designation expires, is
repealed, or becomes inoperative pursuant to Section 7102, 7103, or
7104 of the Government Code.
   (b) This section shall be inoperative on the first day of the
taxable year beginning on or after the determination date, and each
taxable year thereafter, with respect to the taxpayer's business
activities within a geographic area that is excluded from the map
pursuant to Section 7102 of the Government Code, or an excluded area
determined pursuant to Section 7104 of the Government Code.  The
determination date is the earlier of the first effective date of a
determination under subdivision (c) of Section 7102 of the Government
Code occurring after December 1, 1994, or the first effective date
of an exclusion of an area from the amended Los Angeles
Revitalization Zone under Section 7104 of the Government Code.
However, if the taxpayer has any unused loss amount as of the date
this section becomes inoperative, that unused loss amount may
continue to be carried forward as provided in this section.
   (c) A taxpayer who qualifies as a "qualified taxpayer" under one
or more sections shall, for the taxable year of the net operating
loss and any taxable year to which that net operating loss may be
carried, designate on the original return filed for each year the
section that applies to that taxpayer with respect to that net
operating loss.  If the taxpayer is eligible to qualify under more
than one section, the designation is to be made after taking into
account subdivision (d).
   (d) If a taxpayer is eligible to qualify under this section and
either Section 17276.2, 17276.5, or 17276.6 as a "qualified taxpayer,"
with respect to a net operating loss in a taxable year, the taxpayer
shall designate which section is to apply to the taxpayer.
   (e) Notwithstanding Section 17276, the amount of the loss
determined under this section or Section 17276.2, 17276.5, or 17276.6
shall be the only net operating loss allowed to be carried over from
that taxable year and the designation under subdivision (c) shall be
included in the election under Section 17276.1.
   (f) This section shall cease to be operative on December 1, 1998.
However, any unused net operating loss may continue to be carried
over to following years as provided in this section.
17276.5.  (a) For each taxable year beginning on or after January 1,
1995, the term "qualified taxpayer" as used in Section 17276.1
includes a taxpayer engaged in the conduct of a trade or business
within a LAMBRA.  For purposes of this subdivision, all of the
following shall apply:
   (1) A net operating loss shall not be a net operating loss
carryback for any taxable year, and a net operating loss for any
taxable year beginning on or after the date the area in which the
taxpayer conducts a trade or business is designated a LAMBRA shall be
a net operating loss carryover to each following taxable year that
ends before the LAMBRA expiration date or to each of the 15 taxable
years following the taxable year of loss, if longer.
   (2) "LAMBRA" means a local agency military base recovery area
designated in accordance with Section 7114 of the Government Code.
   (3) "Taxpayer" means a person or entity that conducts a trade or
business within a LAMBRA and, for the first two taxable years, has a
net increase in jobs (defined as 2,000 paid hours per employee per
year) of one or more employees in the LAMBRA and this state.  For
purposes of this paragraph:
   (A) The net increase in the number of jobs shall be determined by
subtracting the total number of full-time employees (defined as 2,000
paid hours per employee per year) the taxpayer employed in this
state in the taxable year prior to commencing business operations in
the LAMBRA from the total number of full-time employees the taxpayer
employed in this state during the second taxable year after
commencing business operations in the LAMBRA.  For taxpayers who
commence doing business in this state with their LAMBRA business
operation, the number of employees for the taxable year prior to
commencing business operations in the LAMBRA shall be zero.  The
deduction shall be allowed only if the taxpayer has a net increase in
jobs in the state, and if one or more full-time employees is
employed within the LAMBRA.
   (B) The total number of employees employed in the LAMBRA shall
equal the sum of both of the following:
   (i) The total number of hours worked in the LAMBRA for the
taxpayer by employees (not to exceed 2,000 hours per employee) who
are paid an hourly wage divided by 2,000.
   (ii) The total number of months worked in the LAMBRA for the
taxpayer by employees who are salaried employees divided by 12.
   (C) In the case of a taxpayer who first commences doing business
in the LAMBRA during the taxable year, for purposes of clauses (i)
and (ii), respectively, of subparagraph (B), the divisors "2,000" and
"12" shall be multiplied by a fraction, the numerator of which is
the number of months of the taxable year that the taxpayer was doing
business in the LAMBRA and the denominator of which is 12.
   (4) "Net operating loss" means the loss determined under Section
172 of the Internal Revenue Code, as modified by Section 17276.1,
attributable to the taxpayer's business activities within a LAMBRA
prior to the LAMBRA expiration date.  The attributable loss shall be
determined in accordance with Chapter 17 (commencing with Section
25101) of Part 11, modified for purposes of this section as follows:
   (A) Loss shall be apportioned to a LAMBRA by multiplying total
loss from the business by a fraction, the numerator of which is the
property factor plus the payroll factor, and the denominator of which
is 2.
   (B) "The LAMBRA" shall be substituted for "this state."
   (5) A net operating loss carryover shall be a deduction only with
respect to the taxpayer's business income attributable to a LAMBRA.
   (6) Attributable income is that portion of the taxpayer's
California source business income that is apportioned to the LAMBRA.
For that purpose, the taxpayer's business income attributable to
sources in this state first shall be determined in accordance with
Chapter 17 (commencing with Section 25101) of Part 11.  That business
income shall be further apportioned to the LAMBRA in accordance with
Article 2 (commencing with Section 25120) of Chapter 17 of Part 11,
modified for purposes of this subdivision as follows:
   (A) Business income shall be apportioned to a LAMBRA by
multiplying total California business income of the taxpayer by a
fraction, the numerator of which is the property factor plus the
payroll factor, and the denominator of which is two.  For purposes of
this clause:
   (i) The property factor is a fraction, the numerator of which is
the average value of the taxpayer's real and tangible personal
property owned or rented and used in the LAMBRA during the taxable
year, and the denominator of which is the average value of all the
taxpayer's real and tangible personal property owned or rented and
used in this state during the taxable year.
   (ii) The payroll factor is a fraction, the numerator of which is
the total amount paid by the taxpayer in the LAMBRA during the
taxable year for compensation, and the denominator of which is the
total compensation paid by the taxpayer in this state during the
taxable year.
   (B) If a loss carryover is allowable pursuant to this section for
any taxable year after the LAMBRA designation has expired, the LAMBRA
shall be deemed to remain in existence for purposes of computing the
limitation specified in paragraph (5) and allowing a net operating
loss deduction.
   (7) "LAMBRA expiration date" means the date the LAMBRA designation
expires, is no longer binding, or becomes inoperative pursuant to
Section 7110 of the Government Code.
   (b) A taxpayer who qualifies as a "qualified taxpayer" under one
or more sections shall, for the taxable year of the net operating
loss and any taxable year to which that net operating loss may be
carried, designate on the original return filed for each year the
section that applies to that taxpayer with respect to that net
operating loss.  If the taxpayer is eligible to qualify under more
than one section, the designation is to be made after taking into
account subdivision (c).
   (c) If a taxpayer is eligible to qualify under this section and
either Section 17276.2, 17276.4, or 17276.6 as a "qualified taxpayer,"
with respect to a net operating loss in a taxable year, the taxpayer
shall designate which section is to apply to the taxpayer.
   (d) Notwithstanding Section 17276, the amount of the loss
determined under this section or Section 17276.2, 17276.4, or 17276.6
shall be the only net operating loss allowed to be carried over from
that taxable year and the designation under subdivision (b) shall be
included in the election under Section 17276.1.
   (e) This section shall apply to taxable years beginning on or
after January 1, 1998.
17276.6.  (a) For each taxable year beginning on or after January 1,
1998, the term "qualified taxpayer" as used in Section 17276.1
includes a person or entity that meets both of the following:
   (1) Is engaged in a trade or business within a targeted tax area
designated pursuant to Chapter 12.93 (commencing with Section 7097)
of Division 7 of Title 1 of the Government Code.
   (2) Is engaged in those lines of business described in Codes 2000
to 2099, inclusive; 2200 to 3999, inclusive; 4200 to 4299, inclusive;
4500 to 4599, inclusive; and 4700 to 5199, inclusive, of the
Standard Industrial Classification (SIC) Manual published by the
United States Office of Management and Budget, 1987 edition.  In the
case of any pass-through entity, the determination of whether a
taxpayer is a qualified taxpayer under this section shall be made at
the entity level.
   (b) For purposes of subdivision (a), all of the following shall
apply:
   (1) A net operating loss shall not be a net operating loss
carryback to any taxable year and a net operating loss for any
taxable year beginning on or after the date that the area in which
the qualified taxpayer conducts a trade or business is designated as
a targeted tax area shall be a net operating loss carryover to each
of the 15 taxable years following the taxable year of loss.
   (2) "Net operating loss" means the loss determined under Section
172 of the Internal Revenue Code, as modified by Section 17276.1,
attributable to the qualified taxpayer's business activities within
the targeted tax area (as defined in Chapter 12.93 (commencing with
Section 7097) of Division 7 of Title 1 of the Government Code) prior
to the targeted tax area expiration date.  That attributable loss
shall be determined in accordance with Chapter 17 (commencing with
Section 25101) of Part 11, modified for purposes of this section as
follows:
   (A) Loss shall be apportioned to the targeted tax area by
multiplying total loss from the business by a fraction, the numerator
of which is the property factor plus the payroll factor, and the
denominator of which is 2.
   (B) "The targeted tax area" shall be substituted for "this state."
   (3) A net operating loss carryover shall be a deduction only with
respect to the qualified taxpayer's business income attributable to
the targeted tax area as defined in Chapter 12.93 (commencing with
Section 7097) of Division 7 of Title 1 of the Government Code.
   (4) Attributable income shall be that portion of the qualified
taxpayer's California source business income that is apportioned to
the targeted tax area.  For that purpose, the qualified taxpayer's
business income attributable to sources in this state first shall be
determined in accordance with Chapter 17 (commencing with Section
25101) of Part 11.  That business income shall be further apportioned
to the targeted tax area in accordance with Article 2 (commencing
with Section 25120) of Chapter 17 of Part 11, modified for purposes
of this subdivision as follows:
   (A) Business income shall be apportioned to the targeted tax area
by multiplying the total business income of the taxpayer by a
fraction, the numerator of which is the property factor plus the
payroll factor, and the denominator of which is two.  For purposes of
this clause:
   (i) The property factor is a fraction, the numerator of which is
the average value of the taxpayer's real and tangible personal
property owned or rented and used in the targeted tax area during the
taxable year, and the denominator of which is the average value of
all the taxpayer's real and tangible personal property owned or
rented and used in this state during the taxable year.
   (ii) The payroll factor is a fraction, the numerator of which is
the total amount paid by the taxpayer in the targeted tax area during
the taxable year for compensation, and the denominator of which is
the total compensation paid by the taxpayer in this state during the
taxable year.
   (B) If a loss carryover is allowable pursuant to this subdivision
for any taxable year after the targeted tax area expiration date, the
targeted tax area designation shall be deemed to remain in existence
for purposes of computing the limitation specified in subparagraph
(B) and allowing a net operating loss deduction.
   (5) "Targeted tax area expiration date" means the date the
targeted tax area designation expires, is revoked, is no longer
binding, or becomes inoperative.
   (b) A taxpayer who qualifies as a "qualified taxpayer" under one
or more sections shall, for the taxable year of the net operating
loss and any taxable year to which that net operating loss may be
carried, designate on the original return filed for each year the
section that applies to that taxpayer with respect to that net
operating loss.  If the taxpayer is eligible to qualify under more
than one section, the designation is to be made after taking into
account subdivision (c).
   (c) If a taxpayer is eligible to qualify under this section and
either Section 17276.2, 17276.4, or 17276.5 as a "qualified taxpayer,"
with respect to a net operating loss in a taxable year, the taxpayer
shall designate which section is to apply to the taxpayer.
   (d) Notwithstanding Section 17276, the amount of the loss
determined under this section or Section 17276.2, 17276.4, or 17276.5
shall be the only net operating loss allowed to be carried over from
that taxable year and the designation under subdivision (b) shall be
included in the election under Section 17276.1.
   (e) This section shall apply to taxable years beginning on or
after January 1, 1998.
17276.7.  (a) The term "qualified taxpayer" as used in Section
17276.1 includes a person or entity that conducts a farming business
that is directly affected by Pierce's disease and its vectors.  For
purposes of this subdivision, all of the following shall apply:
   (1) A net operating loss shall not be a net operating loss
carryback to any taxable year, and a net operating loss for any
taxable year beginning on or after the date that the area in which
the taxpayer conducts a farming business is affected by Pierce's
disease and its vectors shall be a net operating loss carryover to
each of the nine taxable years following the taxable year of loss,
until used.
   (2) For purposes of this subdivision:
   (A) "Net operating loss" means the loss determined under Section
172 of the Internal Revenue Code, as modified by Section 17276.1,
attributable to the taxpayer's farming business activities affected
by Pierce's disease and its vectors.  That attributable loss shall be
determined in accordance with Chapter 17 (commencing with Section
25101) of Part 11, modified for purposes of this subdivision, as
follows:
   (i) A loss shall be apportioned to the area affected by Pierce's
disease and its vectors by multiplying the total loss from the
farming business by a fraction, the numerator of which is the
property factor plus the payroll factor, and the denominator of which
is two.
   (ii) "The area affected by Pierce's disease and its vectors" shall
be substituted for "this state."
   (B) A net operating loss carryover computed under this section
shall be allowed as a deduction only with respect to the taxpayer's
farming business income attributable to the area affected by Pierce's
disease and its vectors.
   (C) Attributable income is that portion of the taxpayer's
California source farming business income that is apportioned to the
area affected by Pierce's disease and its vectors.  For that purpose,
that taxpayer's farming business income attributable to sources in
this state first shall be determined in accordance with Chapter 17
(commencing with Section 25101) of Part 11.  That farming business
income shall be further apportioned to the area affected by Pierce's
disease and its vectors in accordance with Article 2 (commencing with
Section 25120) of Chapter 17 of Part 11, modified for purposes of
this subdivision as follows:
   (i) Farming business income shall be apportioned to the area
affected by Pierce's disease and its vectors by multiplying the total
California farming business income of the taxpayer by a fraction,
the numerator of which is the property factor plus the payroll
factor, and the denominator of which is two.  For purposes of this
paragraph:
   (I) The property factor is a fraction, the numerator of which is
the average value of the taxpayer's real and tangible personal
property owned or rented and used in the area affected by Pierce's
disease and its vectors during the taxable year, and the denominator
of which is the average value of all the taxpayer's real and tangible
personal property owned or rented and used in this state during the
taxable year.
   (II) The payroll factor is a fraction, the numerator of which is
the total amount paid by the taxpayer in the area affected by Pierce'
s disease and its vectors during the taxable year for compensation,
and the denominator of which is the total compensation paid by the
taxpayer in this state during the taxable year.
   (ii) If a loss carryover is allowable pursuant to this section for
any taxable year after Pierce's disease and its vectors have
occurred, the area affected by Pierce's disease and its vectors shall
be deemed to remain in existence for purposes of computing the
limitation set forth in subparagraph (B) and allowing a net operating
loss deduction.
   (b) A taxpayer who qualifies as a "qualified taxpayer" under one
or more sections shall, for the taxable year of the net operating
loss and any taxable year to which that net operating loss may be
carried, designate on the original return filed for each year the
section that applies to that taxpayer with respect to that net
operating loss.  If the taxpayer is eligible to qualify under more
than one section, the designation is to be made after taking into
account subdivision (c).
   (c) If a taxpayer is eligible to compute its net operating loss
under this section and either Section 17276.2, 17276.4, 17276.5, or
17276.6 as a "qualified taxpayer," with respect to a net operating
loss in a taxable year, the taxpayer shall designate which section is
to apply to the taxpayer.
   (d) Notwithstanding Section 17276, the amount of the loss
determined under this section or Section 17276.2, 17276.4, 17276.5,
or 17276.6 shall be the only net operating loss allowed to be carried
over from that taxable year and the designation under subdivision
(b) shall be included in the election under Section 17276.1.
   (e) (1) A qualified taxpayer may utilize the net operating loss
carryover allowed by this section only if the Department of Food and
Agriculture confirms that the taxpayer's farming business was
affected by Pierce's disease and its vectors during the year for
which the qualified taxpayer seeks a deduction under this section.
   (2) To make the determination required by this subdivision, the
Department of Food and Agriculture shall utilize the definitions in
Title 3 of the California Code of Regulations, relating to Pierce's
disease and its vectors.
   (3) The Franchise Tax Board shall develop a management agreement
with the cooperation of the Department of Food and Agriculture to
establish procedures by which the Franchise Tax Board secures the
information.  This subdivision shall not be construed to require the
Department of Food and Agriculture to confirm more than the fact that
the taxpayer's farming business was affected by Pierce's disease and
its vectors during the year for which the qualified taxpayer seeks a
deduction.
   (f) This section applies to net operating losses attributable to
taxable years beginning on or after January 1, 2001, and before
January 1, 2003.
17278.  (a) To the extent specified in subdivision (b), there shall
be allowed as a deduction to a taxpayer those payments of the
taxpayer which are made pursuant to an interindemnity arrangement
specified in Section 1280.7 of the Insurance Code and which are paid
to a trust of members of a cooperative corporation organized and
operated under Part 2 (commencing with Section 12200) of Division 3
of Title 1 of the Corporations Code and the members of which consist
solely of physicians and surgeons licensed in this state.
   (b) The deduction authorized by subdivision (a) shall be taken
with respect to the taxable year in which the payment is made and
shall be taken only to the extent that the payment does not exceed
the amount which would otherwise be payable to an independent
insurance company for similar coverage for medical malpractice
insurance in that taxable year.  Any portion of the payment in excess
of that amount shall be treated as a payment under the
interindemnity arrangement for five succeeding taxable years and may
be carried forward as a deduction to those  five succeeding taxable
years until used.  The deduction shall be applied first to the
earliest years possible.
   (c) In the event any payment is refunded by the trust to the
taxpayer for any reason, the payment shall be included in the
taxpayer's income for the taxable year in which it is received to the
extent that the payment or any portion thereof was taken as a
deduction in any earlier taxable year.
   (d) Any refund of a payment which is made by a trust to a taxpayer
shall be reported by the trust to the Franchise Tax Board in the
year in which the refund is made.  The trust shall furnish the
taxpayer with a copy of that report.  In the case of any payment to
be made to a taxpayer who is not a resident of the State of
California in the year in which the refund is made, the Franchise Tax
Board may, by regulation, require the trust to withhold an amount
from the refund, determined by the Franchise Tax Board to reasonably
represent the amount of tax due when that refund is included with
other income of the taxpayer, and to transmit the amount withheld to
the Franchise Tax Board at a time as it may designate.
   (e) For purposes of this section:
   (1) "Payment" means a contribution to or an assessment by an
interindemnity arrangement described in Section 1280.7 of the
Insurance Code.
   (2) "Taxpayer" means a physician or surgeon licensed in this state
who is a participating member in an interindemnity arrangement
described in Section 1280.7 of the Insurance Code.
   (3) "Trust" means a trust described in subdivision (a).
   (f) Upon request, the trust shall submit to the Franchise Tax
Board the names and membership dates of all participating doctors.
   (g) The Franchise Tax Board shall prescribe those regulations as
may be necessary to carry out the purposes of this section.
17278.5.  The deduction allowed by Section 194 of the Internal
Revenue Code, relating to amortization of reforestation expenditures,
shall be available only with respect to qualified timber property
located in this state.
17279.  Section 197 of the Internal Revenue Code, relating to
amortization of goodwill and certain other intangibles, is modified
as follows:
   (a) (1) Section 13261(g) of the Revenue Reconciliation Act of 1993
(P.L. 103-66), relating to effective dates, shall apply, except as
otherwise provided.
   (2) (A) If a taxpayer has, at any time, made an election for
federal purposes under Section 13261(g)(2) of the Revenue
Reconciliation Act of 1993 (P.L. 103-66), relating to election to
have amendments apply to property acquired after July 25, 1991, or
Section 13261(g)(3) of that act, relating to elective binding
contract exception, a separate election for state purposes shall not
be allowed under paragraph (3) of subdivision (e) of Section 17024.5
and the federal election shall be binding for purposes of this part.
   (B) If a taxpayer has not made an election for federal purposes
under Section 13261(g)(2) of the Revenue Reconciliation Act of 1993
(P.L. 103-66), relating to election to have amendments apply to
property acquired after July 25, 1991, or Section 13261(g)(3) of that
act, relating to elective binding contract exception, with respect
to property acquired before August 11, 1993, then the taxpayer shall
not be allowed to make an election under Section 13261(g) of the
Revenue Reconciliation Act of 1993 (P.L. 103-66), for purposes of
this part, with respect to that property.
   (b) Notwithstanding any other provision of this section, each of
the following shall apply:
   (1) No deduction shall be allowed under this section for any
taxable year beginning prior to January 1, 1994.
   (2) No inference is intended with respect to the allowance or
denial of any deduction for amortization in any taxable year
beginning before January 1, 1994.
   (3) In the case of an intangible that was acquired in a taxable
year beginning before January 1, 1994, the amount to be amortized
shall not exceed the adjusted basis of that intangible as of the
first day of the first taxable year beginning on or after January 1,
1994, and that amount shall be amortized ratably over the period
beginning with the first month of the first taxable year beginning on
or after January 1, 1994, and ending 15 years after the month in
which the intangible was acquired.
17279.4.  Section 198 of the Internal Revenue Code, relating to
expensing of environmental remediation costs, is modified as follows:
   (a) For expenditures paid or incurred before January 1, 2004, all
of the following shall apply:
   (1) If a taxpayer has, at any time, made an election for federal
purposes under Section 198(a) of the Internal Revenue Code to have
Section 198 of the Internal Revenue Code apply to a qualified
environmental remediation expenditure, Section 198 of the Internal
Revenue Code shall apply to that qualified environmental remediation
expenditure for state purposes, a separate election for state
purposes shall not be allowed under paragraph (3) of subdivision (e)
of Section 17024.5, and the federal election shall be binding for
purposes of this part.
   (2) If a taxpayer fails to make an election for federal purposes
under Section 198(a) of the Internal Revenue Code to have Section 198
of the Internal Revenue Code apply to a qualified environmental
remediation expenditure, an election under Section 198(a) of the
Internal Revenue Code shall not be allowed for state purposes,
Section 198 of the Internal Revenue Code shall not apply to that
qualified environmental remediation expenditure for state purposes,
and a separate election for state purposes shall not be allowed under
paragraph (3) of subdivision (e) of Section 17024.5.
   (b) No inference as to the proper treatment for purposes of this
part of qualified environmental remediation expenditures paid or
incurred in taxable years beginning before January 1, 1998, shall be
made.
   (c) Section 198(h) of the Internal Revenue Code, relating to
termination, shall not apply.
   (d) Section 198 of the Internal Revenue Code, relating to
expensing of environmental remediation costs, shall not apply to
expenditures paid or incurred after December 31, 2003.
17280.  (a) No deduction shall be denied as provided by Section 265
of the Internal Revenue Code, relating to expenses and interest
relating to tax-exempt income.
   (b) No deduction shall be allowed for any of the following:
   (1) Any amount otherwise allowable as a deduction which is
allocable to one or more classes of income other than interest
(whether or not any amount of income of that class or classes is
received or accrued) wholly exempt from the taxes imposed by this
part, or any amount otherwise allowable under Section 212 of the
Internal Revenue Code (relating to expenses for production of income)
which is allocable to interest (whether or not any amount of such
interest is received or accrued) wholly exempt from the taxes imposed
by this part.
   (2) Interest on indebtedness incurred or continued to purchase or
carry obligations the interest on which is wholly exempt from the
taxes imposed by this part.  The proper apportionment and allocation
of the deduction with respect to taxable and nontaxable income shall
be determined under rules and regulations prescribed by the Franchise
Tax Board.
   (3) Interest on indebtedness incurred or continued to purchase or
carry shares of stock of a management company or series thereof which
during the taxable year of the holder thereof distributes
exempt-interest dividends.
   (c) For purposes of paragraph (2) of subdivision (b):
   (1) "Interest" includes any amount paid or incurred--
   (A) By any person making a short sale in connection with personal
property used in that short sale, or
   (B) By any other person for the use of any collateral with respect
to that short sale.
   (2) If--
   (A) The taxpayer provides cash as collateral for any short sale,
and
   (B) The taxpayer receives no material earnings on that cash during
the period  of the sale, subparagraph (A) of paragraph (1) shall not
apply to that short sale.
   (d) No deduction shall be denied under this section for interest
on a mortgage on, or real property taxes on, the home of the taxpayer
by reason of the receipt of an amount as either of the following:
   (1) A military housing allowance.
   (2) A parsonage allowance excludable from gross income under
Section 107 of the Internal Revenue Code.
17281.  In computing taxable income, no deductions shall be allowed
to any taxpayer on any of his or her gross income directly derived
from illegal activities as defined in Chapter 9 (commencing with
Section 319), 10 (commencing with Section 330), or 10.5 (commencing
with Section 337.1) of Title 9 of Part 1 of the Penal Code; nor shall
any deductions be allowed to any taxpayer on any of his or her gross
income derived from any other activities which directly tend to
promote or to further, or are directly connected or associated with,
those illegal activities.  A prior, final determination by a court of
competent jurisdiction of the state in any criminal proceeding or
any proceeding in which the state, county, city and county, city, or
other political subdivision was a party thereto on the merits of the
legality of the activities of a taxpayer or predecessor in interest
of a taxpayer shall be binding upon the Franchise Tax Board and State
Board of Equalization.
17282.  (a) In computing taxable income, no deductions (including
deductions for cost of goods sold) shall be allowed to any taxpayer
on any of his or her gross income directly derived from illegal
activities as defined in Sections 266h or 266i of, or in Chapter 4
(commencing with Section 211) of Title 8 of, Chapter 7.5 (commencing
with Section 311) of Title 9 of, Chapter 8 (commencing with Section
314) of Title 9 of, or Chapter 2 (commencing with Section 459),
Chapter 5 (commencing with Section 484), or Chapter 6 (commencing
with Section 503) of Title 13 of, Part 1 of the Penal Code, or as
defined in Chapter 6 (commencing with Section 11350) of Division 10
of the Health and Safety Code; nor shall any deductions be allowed to
any taxpayer on any of his or her gross income derived from any
other activities which directly tend to promote or to further, or are
directly connected or associated with, those illegal activities.
   (b) A prior, final determination by a court of competent
jurisdiction of this state in any criminal proceedings or any
proceeding in which the state, county, city and county, city, or
other political subdivision was a party thereto on the  merits of the
legality of the activities of a taxpayer or predecessor in interest
of a taxpayer shall be binding upon the Franchise Tax Board and the
State Board of Equalization.
   (c) This section shall be applied with respect to taxable years
which have not been closed by a statute of limitations, res judicata,
or otherwise.
17286.  In addition to the deduction denied under Section 162(c)(1)
of the Internal Revenue Code, relating to payments made to officials
or employees of a foreign government, no deduction shall be allowed
for any payment that would be unlawful under the laws of the United
States, if those laws were applicable to the payment and to the
official or employee.
17287.  Section 269A of the Internal Revenue Code is modified by
substituting "California Personal Income Tax" for "Federal income
tax."
17299.8.  The Franchise Tax Board may disallow a deduction under
this part to an individual or entity for amounts paid as remuneration
for personal services if that individual or entity fails to report
the payments required under Section 13050 of the Unemployment
Insurance Code or Section 18637 or 18638 on the date prescribed
therefor (determined with regard to any extension of time for
filing).
17299.9.  (a) Notwithstanding any other provisions in this part, in
the case of a taxpayer who owns real property and has either failed
to provide information required pursuant to Section 18642, or has
provided information which is either false, misleading, or incomplete
in the information return required pursuant to Section 18642, no
deduction shall be allowed for interest, taxes, depreciation, or
amortization paid or incurred with respect to that real property, as
provided in subdivision (b).
   (b) No deduction shall be allowed for the items provided in
subdivision (a) from 60 days after the due date for filing the
information return required pursuant to Section 18642 until the date
the Franchise Tax Board determines that all provisions of Section
18642 have been complied with.
   (c) In the event the period of noncompliance does not cover an
entire taxable year, the deductions shall be denied at the rate of
one-twelfth for each full month during the period of noncompliance.