(a)
For taxable years commencing on or after January 1, 2004, the allowable dividends received deduction with respect to qualified dividends received by a corporation during the taxable year from a corporation that 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, if at the time of each dividend payment at least 80 percent of each class of the stock of the insurer was owned, directly or indirectly, by the corporation receiving the
dividend shall equal the percentage specified in paragraph (1) of the amount of the qualified dividends received.
(1)
For purposes of this subdivision, the percentage is equal to:
(A)
Eighty percent for taxable years beginning on or after January 1, 2004, and before January 1, 2008.
(B)
Eighty-five percent for taxable years beginning on or after January 1, 2008, and thereafter.
(b)
(1)For all taxable years ending on or after December 1, 1997, and commencing before January 1, 2004, a taxpayer may elect to determine its deduction under this section for dividends received by the taxpayer (or the members of the taxpayer’s commonly controlled group, if any) during each taxable year from a corporation that 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, in an amount equal to 80 percent of the qualified dividends received, if at the time of each dividend payment at least 80 percent of each class of stock of the insurer was owned, directly or indirectly, by the corporation receiving the dividend.
(2)
A taxpayer shall make the election under this subdivision by timely filing a return for at least one taxable year ending on or after December 1, 1997, and commencing before January 1, 2004, expressly electing to be subject to the dividends received deduction in accordance with the percentage set forth in paragraph (1), and reporting and remitting any amounts due pursuant to that election.
(3)
A return is timely filed for purposes of paragraph (2) if it is filed within 180 days of the effective date of
the act adding this section.
(4)
By making the election pursuant to this subdivision, the taxpayer agrees to all of the following:
(A)
To be subject to the dividends received deduction in accordance with the percentage set forth in paragraph (1) for all taxable years ending on or after December 1, 1997, and commencing before January 1, 2004, for which the Franchise Tax Board may propose an assessment or allow a claim for refund, or in which the final determination of tax for the taxable year has not been made because of a dispute related to the dividends received deduction or the application of Section 24425 to any expense related to that dividends received deduction.
(B)
(i)Except as provided in clause (ii), to file a return (or amended return) and remit any amounts due pursuant to the
election for all taxable years ending on or after December 1, 1997, and commencing before January 1, 2004, for which the Franchise Tax Board may propose an assessment or allow a claim for refund, within 180 days of the effective date of the act adding this section.
(ii)
In the case of a taxable year for which the due date of the return is more than 180 days after the effective date of the act adding this section, to file the return and remit any amounts due pursuant to the election under this subdivision on or before the due date of the return.
(5)
For purposes of determining taxable income on the return (or amended returns) filed pursuant to the election set forth in paragraph (1), Section 24425 does not apply to the amount of the dividends received deduction.
(6)
The election is irrevocable. With respect to
electing taxpayers, no refund, credit, or offset may be allowed for a deduction for dividends received from an insurance company in excess of the amounts allowed under this subdivision for taxable years ending on or after December 1, 1997, and beginning before January 1, 2004.
(c)
For purposes of determining the allowable dividend received deduction under this section, a qualified dividend received during the taxable year means a dividend received by the taxpayer during the taxable year multiplied by the percentage prescribed under paragraph (1), (2), or (3) of this subdivision, as the case may be.
(1)
If the ratio of the five-year average net written premiums for all insurance companies in a commonly controlled group to the five-year average total income for all insurance companies in the commonly controlled group for the taxable year is greater than or equal to the applicable
percentage, then the percentage under this subdivision shall be 100 percent.
(2)
If the ratio of the five-year average net written premiums for all insurance companies in a commonly controlled group to the five-year average total income for all insurance companies in the commonly controlled group for the taxable year is less than the applicable percentage and greater than 10 percent, then the percentage under this subdivision shall be equal to the following fraction, expressed as a percentage:
(A)
The numerator is the five-year average net written premiums for the taxable year.
(B)
The denominator is the applicable percentage times the five-year average total income for that taxable year.
(3)
If the ratio of the five-year average net written premiums
for all insurance companies in a commonly controlled group to the five-year average total income for all insurance companies in the commonly controlled group for the taxable year is equal to or less than 10 percent, the percentage under this subdivision shall be zero.
(4)
For purposes of this subdivision:
(A)
The “five-year average” means the aggregate net written premiums or total income, as the case may be, over the five immediately preceding calendar or fiscal years, divided by five. For purposes of this computation, if an insurance company in the commonly controlled group has been in existence for fewer than five years, its aggregate net written premiums and total income shall each be multiplied by five and divided by the number of years of its existence. If an insurance company does not have a regulatory filing requirement, the period covered shall be the fiscal year used for
the insurance company’s financial statements. The use of either the calendar year or fiscal year, as the case may be, for determination of the five-year average shall, for the first taxable year in which it is computed, be treated as an accounting method under this part and may thereafter only be changed with the written consent of the Franchise Tax Board.
(B)
For taxable years beginning before January 1, 2008, the applicable percentage shall be 60 percent. For taxable years beginning on or after January 1, 2008, the applicable percentage shall be 70 percent.
(d)
The following rules apply with respect to the application of this section to dividends received from an insurance company that insures risks of a member of the insurance company’s commonly controlled group.
(1)
Notwithstanding paragraph (2), for purposes of
determining the amount of the deduction authorized by subdivisions (a) and (b), no deduction is allowed for dividends attributable to premiums received or accrued by the insurance company from a member of the insurance company’s commonly controlled group. For purposes of this paragraph, dividends attributable to premiums received or accrued from a member of a commonly controlled group is equal to total dividends received multiplied by the greater of either of the following:
(A)
The ratio of net written premiums from a member of the insurance company’s commonly controlled group divided by total net written premiums.
(B)
(i)For a property casualty insurer, the ratio of the underwriting risk associated with a member of the commonly controlled group’s insurance contracts to the insurance company’s total underwriting risks for all insurance contracts. The
underwriting risk is the underwriting risk reserves (losses plus expense risk-based capital after discount) as calculated using the “RBC Instructions.”
(ii)
For a life insurer, the ratio of aggregate reserves for life, accident, and health contracts plus liability for deposit type contracts plus contract claims held for policies issued to members of the insurance company’s commonly controlled group divided by total aggregate reserves for life, accident, and health contracts plus liability for deposit type contracts plus contract claims.
(2)
Net written premiums do not include premiums received or accrued from another member of the insurance company’s commonly controlled group. Premiums from another member of the commonly controlled group is the greater of either of the following:
(A)
Net written premiums from a
member of the insurance company’s commonly controlled group.
(B)
(i)For a property casualty insurer, the net written premiums received or accrued by the insurance company multiplied by the ratio of the underwriting risk associated with the member of the commonly controlled group’s insurance contracts to the insurance company’s total underwriting risks for all insurance contracts. The underwriting risk is the underwriting risk reserves (loss plus expense risk-based capital after discount) as calculated using the “RBC Instructions.”
(ii)
For a life insurer, net written premiums received or accrued by the insurance company multiplied by the ratio of aggregate reserves for life, accident, and health contracts plus liability for deposit type contracts plus contract claims held for policies issued to members of the insurance company’s commonly controlled group
divided by total aggregate reserves for life, accident, and health contracts plus liability for deposit type contracts plus contract claims.
(3)
For purposes of this section, investment income shall be limited to that portion of investment income equal to the ratio of net written premiums (determined under paragraph (2)) to total net written premiums (determined without regard to paragraph (2)).
(4)
For purposes of the limitations described in this subdivision, premiums received or accrued from a member of the insurance company’s commonly controlled group does not include premiums where the direct insurance risks ceded by affiliates and assumed by the insurance company originated with a person that is not a member of the insurance company’s commonly controlled group.
(e)
For purposes of this section:
(1)
“Net written premiums” means direct written premiums plus premiums from reinsurance assumed, less premiums ceded to a reinsurance company, as would be required to be reported in an insurer’s Statutory Annual Statement in accordance with the Annual Statement Instructions and Accounting Practices and Procedures Manual promulgated by the National Association of Insurance Commissioners. Net written premiums from life insurance contracts shall be determined by multiplying the net written premiums received, assumed, or ceded by 1.3. Net written premiums from financial guaranty insurance contracts shall be determined by multiplying the net written premiums received, assumed, or ceded by the lesser of 2.3 or an amount that would cause the ratio of the five-year average net written premiums for all financial guaranty insurance companies in the commonly controlled group to the five-year average total income for all financial guaranty insurance companies
in the commonly controlled group to be equal to the applicable percentage. Paragraph (4) of subdivision (c) applies for purposes of the preceding sentence.
(A)
“Direct written premiums” means amounts written by an insurance company in consideration for insurance and annuity contracts issued to policyholders.
(B)
“Premiums from reinsurance assumed” means amounts received or accrued by an insurance company in consideration for liabilities it assumes from another insurance company.
(C)
“Premiums ceded” means insurance premiums paid or accrued by an insurance company to a reinsurer to support the liabilities assumed by the reinsurer.
(2)
“Total income” means net written premiums plus investment income.
(3)
“Investment income” means an insurance company’s earnings from its investment portfolio, including interest, dividends, realized gains (or losses), and rent, as would be required to be reported in an insurer’s Statutory Annual Statement in accordance with the Annual Statement Instructions and Accounting Practices and Procedures Manual promulgated by the National Association of Insurance Commissioners, except as otherwise provided.
(A)
Except for reinsurance transactions, realized gains (or losses) do not include losses incurred in transactions with a person that is a member of the taxpayer’s or the insurance company’s commonly controlled group.
(B)
Investment income does not include dividends from a person that is a member of the commonly controlled group. Intercompany dividends that have been eliminated from investment income as would be required to be reported
in the Statutory Annual Statement in accordance with the Annual Statement Instructions and Accounting Practices and Procedures Manual promulgated by the National Association of Insurance Commissioners shall not again be eliminated for this purpose.
(C)
Investment income does not include income included in the taxpayer’s combined report filed in accordance with Chapter 17 (commencing with Section 25101) of this part.
(4)
For taxable years beginning before January 1, 2004, the “RBC Instructions” as defined in Section 739 of the Insurance Code means the Risk Based Capital Instructions and Report as promulgated by the National Association of Insurance Commissioners, as it read on January 1, 2004. For taxable years beginning on or after January 1, 2004, the “RBC Instructions” as defined in Section 739 of the Insurance Code means the Risk Based Capital Instructions and Report as
promulgated by the National Association of Insurance Commissioners, or any substantially equivalent successor instructions and report, as it read on January 1 of the year in which the taxpayer’s taxable year begins.
(5)
The phrase “commonly controlled group” shall have the same meaning as that phrase has under Section 25105.
(f)
The Franchise Tax Board may prescribe those regulations that may be necessary to provide for the following:
(1)
Establishment of a comparable weighting factor as described in paragraph 1 of subdivision (e) for new lines of insurance not described in the act adding this subdivision.
(2)
For purposes of determining the applicable ratios described in subdivisions (c) and (d), the inclusion or exclusion of items of investment income
to eliminate the effects of devices designed to manipulate those ratios for purposes of avoiding the tax imposed under this part.
(3)
For purposes of determining the applicable ratios described in subdivisions (c) and (d), the inclusion or exclusion of items of investment income to prevent distortion causing significant reduction in those ratios.