24421-24449

REVENUE AND TAXATION CODE
SECTION 24421-24449




24421.  In computing "net income" of taxpayers under this part, no
deduction shall be allowed for the items specified in this article.



24422.  No deduction shall be allowed for both of the following:
   (a) Any amount paid out for new buildings or for permanent
improvements or betterments made to increase the value of any
property or estate. This subdivision shall not apply to:
   (1) Expenditures for the development of mines or deposits
deductible under Section 616 of the Internal Revenue Code.
   (2) Soil and water conservation expenditures deductible under
Section 24369.
   (3) Expenditures for farmers for fertilizer, etc., deductible
under Section 24377.
   (4) Research and experimental expenditures deductible under
Section 24365.
   (5) Expenditures for which a deduction is allowed under Section
24356.7.
   (6) Expenditures for which a deduction is allowed under Section
24356.4.
   (7) Expenditures for which a deduction is allowed under Section
24356.5.
   (8) Expenditures for removal of architectural and transportation
barriers to the handicapped and elderly that the taxpayer elects to
deduct under Section 24383.
   (b) Any amount expended in restoring property or in making good
the exhaustion thereof for which an allowance is or has been made.




24422.3.  Section 263A of the Internal Revenue Code, relating to
capitalization and inclusion in inventory costs of certain expenses,
shall apply, except as otherwise provided.



24423.  (a) Notwithstanding Section 24422, regulations shall be
prescribed by the Franchise Tax Board under this part corresponding
to the regulations which granted the option to deduct as expenses
intangible drilling and development costs in the case of oil and gas
wells and which were recognized and approved by the Congress in House
Concurrent Resolution 50, Seventy-ninth Congress.
   (b) The provisions of Section 263(i) of the Internal Revenue Code,
relating to special rules for intangible drilling and development
costs incurred outside the United States, shall apply to costs paid
or incurred after December 31, 1986.


24424.  Section 264 of the Internal Revenue Code, relating to
certain amounts paid in connection with insurance contracts, shall
apply, except as otherwise provided.



24425.  (a) No deduction shall be allowed for any amount otherwise
allowable as a deduction which is allocable to one or more classes of
income not included in the measure of the tax imposed by this part,
regardless of whether that income was received or accrued during the
taxable year.
   (b) No deduction shall be allowed for any expense described in
paragraphs (1) or (2) that is paid or incurred to an insurer if the
insurer is a member of the taxpayer's commonly controlled group and
the amount paid or incurred would constitute income to the insurer if
the insurer were subject to the California income or franchise tax.
   (1) An expense described in this paragraph means any of the
following interest amounts payable to an insurer in the same commonly
controlled group:
   (A) (i) Interest paid or incurred to an insurer in the taxpayer's
commonly controlled group with respect to indebtedness (other than
qualified marketable debt instruments), the principal amount of which
is attributable to a contribution of money by a noninsurer member of
the taxpayer's commonly controlled group to the capital of an
insurer member of that group, including the principal amount of a
loan arising from a direct or indirect transfer of money from that
contribution to capital from one insurer to another insurer of the
same commonly controlled group.
   (ii) Interest paid or incurred to an insurer with respect to a
note or other debt instrument (other than qualified marketable debt
instruments) contributed to the capital of an insurer with respect to
its stock by a noninsurer member of the commonly controlled group.
   (iii) For purposes of this subparagraph, "qualified marketable
debt instruments" means publicly available debt instruments of all
noninsurer members of the commonly controlled group issued, but only
to the extent that the aggregate principal amount of publicly
available debt instruments held by all insurer members of the
commonly controlled group constitutes less than 10 percent of the
total outstanding principal amount of publicly available debt
instruments issued by all noninsurer members.
   (iv) For purposes of this subparagraph, "publicly available debt
instruments" means debt instruments available to the general public,
including bonds, debentures, and negotiable instruments (as defined
in Section 3104 of the California Commercial Code) that are rated by
a nationally recognized statistical rating agency (as that term is
used in Rule 15c3-1(c)(2)(vi)(F) under the Securities Exchange Act of
1934) in one of its generic rating categories that signifies
investment grade.
   (B) Interest paid or incurred within five years after the direct
or indirect acquisition of the insurer by a member of the commonly
controlled group (other than interest on qualified marketable debt
instruments as defined in clause (iii) of subparagraph (A)).
   (C) The amount of interest paid or incurred during the taxable
year to any insurer in the commonly controlled group multiplied by
the disqualifying percentage. The disqualifying percentage is an
amount equal to 100 percent less the percentage described in
paragraph (1), (2), or (3) of subdivision (c) of Section 24410 (as
the case may be) for that taxable year whether or not a dividend is
paid or accrued.
   (D) An amount of interest determined by multiplying the amount of
interest paid or incurred to an insurer in the commonly controlled
group by the ratio of the commonly controlled group determined under
paragraph (1) of subdivision (d) of Section 24410 for the taxable
year (whether or not a dividend was paid or accrued in that year).
   (2) An expense described in this paragraph means any expense other
than interest described by paragraph (1), that is either of the
following:
   (A) Attributable to property formerly held by the taxpayer or a
member of the taxpayer's commonly controlled group that was acquired
by the insurer in a transaction in which gain was realized but not
recognized (including for this purpose any income deferred under
Section 24465) by the taxpayer or a member of its commonly controlled
group.
   (B) Attributable to property purchased with the proceeds
attributable to a contribution by a noninsurer member of the
taxpayers' commonly controlled group to the capital of an insurer
member of that group, including amounts attributable to a direct or
indirect transfer of money from that contribution from one insurer to
another insurer in the same group.
   (3) For purposes of this subdivision, amounts that are described
in more than one subparagraph of either paragraph (1) or (2) shall be
included only in that subparagraph that will result in the highest
disallowance amount.
   (4) For purposes of this subdivision, the phrase "commonly
controlled group" shall have the same meaning as that phrase has
under Section 25105.
   (5) For purposes of this subdivision, an insurer is an insurer
within the meaning of Section 28 of Article XIII of the California
Constitution, whether or not the insurer is engaged in business in
California.



24426.  Amounts paid or accrued for such taxes and carrying charges
as, under regulations prescribed by the Franchise Tax Board, are
chargeable to capital account with respect to property, if the
taxpayer elects, in accordance with such regulations, to treat such
taxes or charges as so chargeable.



24427.  Section 267 of the Internal Revenue Code, relating to
losses, expenses, and interest with respect to transactions between
related taxpayers, shall apply, except as otherwise provided.



24429.  Section 276 of the Internal Revenue Code, relating to
certain indirect contributions to political parties, shall apply,
except as otherwise provided.


24431.  (a) If--


    (1) Any person or persons acquire, or acquired on or after
October 8, 1940, directly or indirectly, control of a corporation; or

    (2) Any corporation acquires, or acquired on or after October 8,
1940, directly or indirectly, property of another corporation, not
controlled, directly or indirectly, immediately before such
acquisition, by such acquiring corporation or its stockholders, the
basis of which property, in the hands of the acquiring corporation,
is determined by reference to the basis in the hands of the
transferor corporation;


and the principal purpose for which such acquisition was made is
evasion or avoidance of tax under this part by securing the benefit
of a deduction, credit, or other allowance which such person or
corporation would not otherwise enjoy, then such deduction, credit,
or other allowance shall not be allowed. For purposes of this
subdivision, control means the ownership of stock possessing at least
50 percent of the total combined voting power of all classes of
stock entitled to vote or at least 50 percent of the total value of
shares of all classes of stock of the corporation.
   (b) (1) If--


    (A) There is a qualified stock purchase by a corporation of
another corporation,

    (B) An election is not made under Section 24519 with respect to
that purchase,

    (C) The acquired corporation is liquidated pursuant to a plan of
liquidation adopted not more than two years after the acquisition
date, and

    (D) The principal purpose for that liquidation is the evasion or
avoidance of tax under this part by securing the benefit of a
deduction, credit, or other allowance which the acquiring corporation
would not otherwise enjoy,


then the Franchise Tax Board may disallow that deduction, credit, or
other allowance.
   (2) For purposes of paragraph (1), the terms "qualified stock
purchase" and "acquisition date" have the same respective meanings as
when used in Section 24519.
   (c) In any case to which subdivision (a) applies, the Franchise
Tax Board may do any of the following:
   (1) Allow as a deduction, credit, or allowance any part of any
amount disallowed by that section, if it determines that such
allowance will not result in the evasion or avoidance of tax under
this part for which the acquisition was made.
   (2) Distribute, apportion, or allocate gross income, and
distribute, apportion, or allocate the deductions, credits, or
allowances the benefit of which was sought to be secured, between or
among the corporations, or properties, or parts thereof, involved,
and to allow those deductions, credits, or allowances so distributed,
apportioned, or allocated, but to give effect to that allowance only
to the extent which it determines shall not result in the evasion or
avoidance of tax under this part for which the acquisition was made.
   (3) Exercise its powers, in part, under paragraph (1) and, in
part, under paragraph (2).


24434.  (a) In the case of a taxpayer (other than a bank as defined
in Section 23039) no deduction shall be allowed under Section 24347
or 24348 by reason of the worthlessness of any debt owed by a
political party.
   (b) (1) For purposes of subdivision (a), the term "political party"
means any of the following:
   (A) A political party.
   (B) A national, state, or local committee of a political party.
   (C) A committee, association, or organization which accepts
contributions or makes expenditures for the purpose of influencing or
attempting to influence the election of presidential or vice
presidential electors or of any individual whose name is presented
for election to any federal, state, or local elective public office,
whether or not such individual is elected.
   (2) For purposes of paragraph (1)(C), the term "contributions"
includes a gift, subscription, loan, advance, or deposit, of money,
or anything of value, and includes a contract, promise, or agreement
to make a contribution, whether or not legally enforceable.
   (3) For purposes of paragraph (1)(C), the term "expenditures"
includes a payment, distribution, loan, advance, deposit, or gift, of
money, or anything of value, and includes a contract, promise, or
agreement to make an expenditure, whether or not legally enforceable.
   (c) In the case of a taxpayer who uses an accrual method of
accounting, subdivision (a) shall not apply to a debt which accrued
as a receivable on a bona fide sale of goods or services in the
ordinary course of a taxpayer's trade or business if both of the
following apply:
   (1) For the taxable year in which the receivable accrued, more
than 30 percent of all receivables which accrued in the ordinary
course of the trades or businesses of the taxpayer were due from
political parties.
   (2) The taxpayer made substantial continuing efforts to collect on
the debt.


24436.  In computing net income, no deductions shall be allowed to
any taxpayer on any of its gross income directly derived from illegal
activities as defined in Chapters 9, 10 or 10.5 of Title 9 of Part 1
of the Penal Code of California; nor shall any deduction be allowed
to any taxpayer on any of its gross income derived from any other
activities which directly tend to promote or to further, or are
directly connected or associated with, such illegal activities. 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 State Board of Equalization.



24436.1.  (a) In computing net income, no deductions (including
deductions for cost of goods sold) shall be allowed to any taxpayer
on any of its 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 its 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.


24436.5.  (a) No deduction shall be allowed for interest,
depreciation, taxes, or amortization paid or incurred in the taxable
year under Section 24343, 24344, 24345, or 24349, 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 repaired or 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 government 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 his or her 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 that 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 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 shall 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 in 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) The provisions of this section do 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
those 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 the provisions of 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.




24437.  Section 277 of the Internal Revenue Code, relating to
deductions incurred by certain membership organizations in
transactions with members, shall apply, except as otherwise provided.




24438.  (a) No deduction shall be allowed for any interest paid or
incurred by a taxpayer during the taxable year with respect to its
corporate acquisition indebtedness to the extent that such interest
exceeds--
   (1) Five million dollars ($5,000,000), reduced by
   (2) The amount of interest paid or incurred by such corporation
during such year on obligations (A) issued after December 31, 1967,
to provide consideration for an acquisition described in paragraph
(1) of subdivision (b), but (B) which are not corporate acquisition
indebtedness.
   (b) For purposes of this section, the term "corporate acquisition
indebtedness" means any obligation evidenced by a bond, debenture,
note, or certificate or other evidence of indebtedness issued after
October 9, 1969, by a corporation (hereinafter in this section
referred to as "issuing corporation") if--
   (1) Such obligation is issued to provide consideration for the
acquisition of--
   (A) Stock in another corporation (hereinafter in this section
referred to as "acquired corporation"), or
   (B) Assets of another corporation (hereinafter in this section
referred to as "acquired corporation") pursuant to a plan under which
at least two-thirds (in value) of all the assets (excluding money)
used in trades and businesses carried on by such corporation are
acquired,
   (2) Such obligation is either--
   (A) Subordinated to the claims of trade creditors of the issuing
corporation generally, or
   (B) Expressly subordinated in right of payment to the payment of
any substantial amount of unsecured indebtedness, whether outstanding
or subsequently issued, of the issuing corporation,
   (3) The bond or other evidence of indebtedness is either--
   (A) Convertible directly or indirectly into stock of the issuing
corporation, or
   (B) Part of an investment unit or other arrangement which
includes, in addition to such bond or other evidence of indebtedness,
an option to acquire, directly or indirectly, stock in the issuing
corporation, and
   (4) As of a day determined under paragraph (1) of subdivision (c)
either--
   (A) The ratio of debt to equity (as defined in paragraph (2) of
subdivision (c)) of the issuing corporation exceeds 2 to 1, or
   (B) The projected earnings (as defined in paragraph (3) of
subdivision (c)), do not exceed three times the annual interest to be
paid or incurred (determined under paragraph (4) of subdivision
(c)).
   (c) For purposes of paragraph (4) of subdivision (b)--
   (1) Determinations are to be made as of the last day of any
taxable year of the issuing corporation in which it issues any
obligation to provide consideration for an acquisition described in
paragraph (1) of subdivision (b) of stock in, or assets of, the
acquired corporation.
   (2) The term "ratio of debt to equity" means the ratio which the
total indebtedness of the issuing corporation bears to the sum of its
money and all its other assets (in an amount equal to their adjusted
basis for determining gain) less such total indebtedness.
   (3) (A) The term "projected earnings" means the "average annual
earnings" (as defined in subparagraph (B)) of--
   (i) The issuing corporation only, if cause (ii) does not apply, or
   (ii) Both the issuing corporation and the acquired corporation, in
any case where the issuing corporation has acquired control (as
defined in Section 24564), or has acquired substantially all of the
properties of the acquired corporation.
   (B) The average annual earnings referred to in subparagraph (A)
is, for any corporation, the amount of its earnings and profits for
any three-year period ending with the last day of a taxable year of
the issuing corporation described in paragraph (1), computed without
reduction for--
   (i) Interest paid or incurred,
   (ii) Depreciation or amortization allowed under this part,
   (iii) Liability for tax under this part, and
   (iv) Distributions to which Section 301(c)(1) of the Internal
Revenue Code, relating to property distributions, applies (other than
such distributions from the acquired to the issuing corporation),
and reduced to an annual average for such three-year period pursuant
to regulations prescribed by the Franchise Tax Board. Such
regulations shall include rules for cases where any corporation was
not in existence for all of such three-year period or such period
includes only a portion of a taxable year of any corporation.
   (4) The term "annual interest to be paid or incurred" means--
   (A) If subparagraph (B) does not apply, the annual interest to be
paid or incurred by the issuing corporation only, determined by
reference to its total indebtedness outstanding, or
   (B) If projected earnings are determined under clause (ii) of
subparagraph (A) of paragraph (3), the annual interest to be paid or
incurred by both the issuing corporation and the acquired
corporation, determined by reference to their combined total
indebtedness outstanding.
   (5) With respect to any corporation which is a bank or is
primarily engaged in a lending or finance business--


    (A) In determining under paragraph (2) the ratio of debt to
equity of such corporation (or of the affiliated group of which such
corporation is a member), the total indebtedness of such corporation
(and the assets of such corporation) shall be reduced by an amount
equal to the total indebtedness owed to such corporation which arises
out of the banking business of such corporation, or out of the
lending or finance business of such corporation, as the case may be;

    (B) In determining under paragraph (4) the annual interest to be
paid or incurred by such corporation (or by the issuing and acquired
corporations referred to in subparagraph (B) of paragraph (4) or by
the affiliated group of which such corporation is a member) the
amount of such interest (determined without regard to this paragraph)
shall be reduced by an amount which bears the same ratio to the
amount of such interest as the amount of the reduction for the
taxable year under subparagraph (A) bears to the total indebtedness
of such corporation; and

    (C) In determining under subparagraph (B) of paragraph (3), the
average annual earnings, the amount of the earnings and profits for
the three-year period shall be reduced by the sum of the reductions
under subparagraph (B) for such period.


For purposes of this paragraph, the term "lending or finance business"
means a business of making loans or purchasing or discounting
accounts receivable, notes, or installment obligations.
   (d) In applying this section--
   (1) The deduction of interest on any obligation shall not be
disallowed under subdivision (a) before the first taxable year of the
issuing corporation as of the last day of which the application of
either subparagraph (A) or subparagraph (B) of paragraph (4) of
subdivision (b) results in such obligation being corporate
acquisition indebtedness.
   (2) Except as provided in paragraphs (3), (4), and (5), if an
obligation is determined to be corporate acquisition indebtedness as
of the last day of any taxable year of the issuing corporation, it
shall be corporate acquisition indebtedness for such taxable year and
all subsequent taxable years.
   (3) If an obligation is determined to be corporate acquisition
indebtedness as of the close of a taxable year of the issuing
corporation in which clause (i) of subparagraph (A) of paragraph (3)
of subdivision (c) applied, but would not be corporate acquisition
indebtedness if the determination were made as of the close of the
first taxable year of such corporation thereafter in which clause
(ii) of subparagraph (A) of paragraph (3) of subdivision (c) could
apply, such obligation shall be considered not to be corporate
acquisition indebtedness for such later taxable year and all taxable
years thereafter.
   (4) If an obligation which has been determined to be corporate
acquisition indebtedness for any taxable year would not be such
indebtedness for each of any three consecutive taxable years
thereafter if paragraph (4) of subdivision (b) were applied as of the
close of each of such three years, then such obligation shall not be
corporate acquisition indebtedness for all taxable years after such
three consecutive taxable years.
   (5) In the case of obligations issued to provide consideration for
the acquisition of stock in another corporation, such obligations
shall be corporate acquisition indebtedness for a taxable year only
if the issuing corporation owns 5 percent or more of the total
combined voting power of all classes of stock entitled to vote of
such other corporation.
   (e) An acquisition of stock of a corporation of which the issuing
corporation is in control (as defined in Section 24564) in a
transaction in which gain or loss is not recognized shall be deemed
an acquisition described in paragraph (1) of subdivision (b) only if
immediately before such transaction (1) the acquired corporation was
in existence, and (2) the issuing corporation was not in control (as
defined in Section 24564) of such corporation.
   (f) For purposes of this section, the term "corporate acquisition
indebtedness" does not include any indebtedness issued to any person
to provide consideration for the acquisition of stock in, or assets
of, any foreign corporation substantially all of the income of which,
for the three-year period ending with the date of such acquisition
or for such part of such period as the foreign corporation was in
existence, is from sources without the United States.
   (g) In any case in which the issuing corporation is a member of an
affiliated group, the application of this section shall be
determined, pursuant to regulations prescribed by the Franchise Tax
Board, by treating all of the members of the affiliated group in the
aggregate as the issuing corporation, except that the ratio of debt
to equity of, projected earnings of, and annual interest to be paid
or incurred by any corporation (other than the issuing corporation
determined without regard to this subdivision) shall be included in
the determinations required under subparagraphs (A) and (B) of
paragraph (4) of subdivision (b) as of any day only if such
corporation is a member of the affiliated group on such day, and, in
determining projected earnings of such corporation under paragraph
(3) of subdivision (c), there shall be taken into account only the
earnings and profits of such corporation for the period during which
it was a member of the affiliated group. For purposes of this
section, the term "affiliated group" has the meaning assigned to such
term by Section 1504 of the Internal Revenue Code except that all
corporations other than the acquired corporation shall be treated as
includable corporations and the acquired corporation shall not be
treated as an includable corporation.
   (h) For purposes of this section--
   (1) Any extension, renewal, or refinancing of an obligation
evidencing a preexisting indebtedness shall not be deemed to be the
issuance of a new obligation.
   (2) Any obligation which is corporate acquisition indebtedness of
the issuing corporation is also corporate acquisition indebtedness of
any corporation which becomes liable for such obligation as
guarantor, endorser, or indemnitor or which assumes liability for
such obligation in any transaction.
   (i) No inference shall be drawn from any provision in this section
that any instrument designated as a bond, debenture, note, or
certificate or other evidence of indebtedness by its issuer
represents an obligation or indebtedness of such issuer in applying
any other provision of this part.
   (j) This section shall apply to the determination of the
allowability of the deduction of interest paid or incurred with
respect to indebtedness incurred after December 31, 1970.



24439.  (a) No deduction shall be allowed to the issuing corporation
for any premium paid or incurred upon the repurchase of a bond,
debenture, note, or certificate or other evidence of indebtedness
which is convertible into the stock of the issuing corporation, or a
corporation in control of, or controlled by, the issuing corporation,
to the extent the repurchase price exceeds an amount equal to the
adjusted issue price plus a normal call premium on bonds or other
evidences of indebtedness which are not convertible. The preceding
sentence shall not apply to the extent that the corporation can
demonstrate to the satisfaction of the Franchise Tax Board that such
excess is attributable to the cost of borrowing and is not
attributable to the conversion feature.
   (b) For purposes of subdivision (a)--
   (1) The adjusted issue price is the issue price (as defined in
Sections 1273(b) and 1274 of the Internal Revenue Code) increased by
any amount of discount deducted before repurchase, or, in the case of
bonds or other evidences of indebtedness issued after February 28,
1913, decreased by any amount of premium included in gross income
before repurchase by the issuing corporation.
   (2) The term "control" has the meaning assigned to such term by
Section 24564.
   (c) The provisions of this section shall not apply to a
convertible bond or other convertible evidence of indebtedness
repurchased pursuant to a binding obligation incurred on or before
April 22, 1969, to repurchase such bond or other evidence of
indebtedness at a specified call premium, but no inference shall be
drawn from the fact that this section does not apply to the
repurchase of such convertible bond or other convertible evidence of
indebtedness.


24440.  (a) Section 280C(b) of the Internal Revenue Code, relating
to credit for qualified clinical testing expenses for certain drugs,
shall apply, except as otherwise provided.
   (b) (1) Section 280C(c) of the Internal Revenue Code, relating to
credit for increasing research activities, shall apply, except as
otherwise provided.
   (2) Section 280C(c)(3)(B) of the Internal Revenue Code is modified
to refer to Section 23151, 23186, or 23802 in lieu of Section 11(b)
(1) of the Internal Revenue Code.



24441.  In computing net income no deduction shall be allowed for
(a) abandonment fees paid in respect of property on which the
open-space easement is terminated under Section 51061 or 51093 of the
Government Code or (b) tax recoupment fees paid under Section 51142
of the Government Code.



24442.  In the case of the demolition of any structure--
   (1) No deduction otherwise allowable under this part shall be
allowed to the owner or lessee of such structure for--
   (A) Any amount expended for such demolition, or
   (B) Any loss sustained on account of such demolition; and
   (2) Amounts described in paragraph (1) shall be treated as
property chargeable to capital account with respect to the land on
which the demolished structure was located.



24442.5.  Section 280H of the Internal Revenue Code, relating to
limitation on certain amounts paid to employee-owners by personal
service corporations electing alternative taxable years, shall apply
to taxable years beginning on or after January 1, 1989, except as
otherwise provided.



24443.  Section 274 of the Internal Revenue Code, relating to the
disallowance of certain entertainment, gift, travel, etc., expenses,
shall apply, except as otherwise provided.



24447.  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 18631 on the date prescribed therefor (determined
with regard to any extension of time for filing).



24448.  (a) Notwithstanding any other provisions in this part, in
the case of a taxpayer who owns real property and has either failed
to provide the 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 for interest, taxes, depreciation, or amortization under
Section 24343, 24344, 24345, 24349, or 24354.2 shall be allowed which
relate 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.



24449.  (a) Section 291 of the Internal Revenue Code, relating to
special rules relating to corporate preference items, shall apply,
except as otherwise provided.
   (b) The reference in Section 291(b)(1) of the Internal Revenue
Code to "Section 263(c)" shall be modified to mean the deduction
under Section 24423 of this part.