EXAMPLE (1): The taxpayer acquired a factory building in this state at a cost of $500,000 and 18 months later expended $100,000 for major remodeling of the building. Taxpayer files its return for the current income year on the calendar year basis. Depreciation deduction in the amount of $22,000 was claimed on the building for its return for the current income year. The value of the building includible in the numerator and denominator of the property factor is $600,000 as the depreciation deduction is not taken into account in determining the value of the building for purposes of the factor.
EXAMPLE (2): During the current income year, X Corporation merges into Y Corporation in a tax-free reorganization under the Internal Revenue Code. At the time of the merger, X Corporation owns a factory which X built five year earlier at a cost of $1,000,000. X has been depreciating the factory at the rate of two percent per year, and its basis in X's hands at the time of the merger is $900,000. Since the property is acquired by Y in a transaction in which, under the Internal Revenue Code, its basis in Y's hands is the same as its basis in X's, Y includes the property in Y's property factor at X's original cost, without adjustment for depreciation, i.e., $1,000,000.
EXAMPLE (3): Corporation Y acquires the assets of Corporation X in a liquidation by which Y is entitled to use its stock cost as the basis of the X assets under Internal Revenue Code section 334(b)(2) (i.e. stock possessing 80 percent control is purchased and liquidated within two years). Under these circumstances, Y's cost of the assets is the purchase price of the X stock, prorated over the X assets.
If original cost of property is unascertainable, the property is included in the factor at its fair market value as of the date of acquisition by the taxpayer.
Subrents are not deducted when the subrents constitute business income because the property which produces the subrents is used in the regular course of a trade or business of the taxpayer when it is producing such income. Accordingly there is no reduction in its value.
EXAMPLE (1): The taxpayer receives subrents from a bakery concession in a food market operated by the taxpayer. Since the subrents are business income they are not deducted from rent paid by the taxpayer for the food market.
EXAMPLE (2): The taxpayer rents a 5-story office building primarily for use in its multistate business, uses three floors for its offices and subleases two floors to various other businesses and persons such as professional people, shops and the like. The rental of the two floors is incidental to the operation of the taxpayer's trade or business. Since the subrents are business income they are not deducted from the rent paid by the taxpayer.
EXAMPLE (3): The taxpayer rents a 20-story office building and uses the lower two stories for its general corporation headquarters. The remaining 18 floors are subleased to others. The rental of the 18 floors is not incidental to but rather is separate from the operation of the taxpayer's trade or business. Since the subrents are nonbusiness income they are to be deducted from the rent paid by the taxpayer.
EXAMPLE (1): Taxpayer A which ordinarily files its returns based on a calendar year is merged into Taxpayer B on April 30. The net rent paid under a lease with 5 years remaining is $2,500 a month. The rent for the tax period January 1 to April 30 is $10,000. After the rent is annualized the net rent is $30,000 ($2,500 x 12).
EXAMPLE (2): Same facts as in Example (1) except that the lease would have terminated on August 31. In this case the annualized net rent is $20,000 ($2,500 x 8).
EXAMPLE: A taxpayer, pursuant to the terms of a lease, pays a lessor $1,000 per month as a base rental and at the end of the year pays the lessor 1 percent of its gross sales of $400,000. The annual rent is $16,000 ($12,000 plus 1 percent of $400,000 or $4,000).
EXAMPLE (1): A taxpayer, pursuant to the terms of a lease, pays the lessor $12,000 a year rent plus taxes in the amount of $2,000 and interest on a mortgage in the amount of $1,000. The annual rent is $15,000.
EXAMPLE (2): A taxpayer stores part of its inventory in a public warehouse. The total charge for the year was $1,000 of which $700 was for the use of storage space and $300 for inventory insurance, handling and shipping charges, and C.O.D. collections. The annual rent is $700.
Cal. Code Regs. Tit. 18, § 25130
2. Amendment of subsection (a)(1) filed 1-3-90 as an emergency; operative 1-3-90 (Register 90, No. 3). A Certificate of Compliance must be transmitted to OAL within 120 days or emergency language will be repealed by operation of law on 5-3-90.
3. Certificate of Compliance as to 1-3-90 order transmitted to OAL 3-19-90 and filed 4-18-90 (Register 90, No. 18).
4. Amendment of section and NOTE filed 1-28-2005; operative 2-27-2005 (Register 2005, No. 4).
Note: Authority cited: Section 19503, Revenue and Taxation Code. Reference: Section 25130, Revenue and Taxation Code.
2. Amendment of subsection (a)(1) filed 1-3-90 as an emergency; operative 1-3-90 (Register 90, No. 3). A Certificate of Compliance must be transmitted to OAL within 120 days or emergency language will be repealed by operation of law on 5-3-90.
3. Certificate of Compliance as to 1-3-90 order transmitted to OAL 3-19-90 and filed 4-18-90 (Register 90, No. 18).
4. Amendment of section andNotefiled 1-28-2005; operative 2-27-2005 (Register 2005, No. 4).