§ 23809

There is hereby imposed a tax on built-in gains attributable to California sources, determined in accordance with the provisions of Section 1374 of the Internal Revenue Code, relating to tax imposed on certain built-in gains, as modified by this section.

(a) (1) The rate of tax specified in Section 1374(b)(1) of the Internal Revenue Code shall be equal to the rate of tax imposed under Section 23151 in lieu of the rate of tax specified in Section 11(b) of the Internal Revenue Code.

(2) In the case of an “S” corporation that is also a financial corporation, the rate of tax specified in paragraph (1) shall be increased by the excess of the rate imposed under Section 23183 over the rate imposed under Section 23151.

(b) The provisions of Section 1374(b)(3) of the Internal Revenue Code, relating to credits, are modified to provide that the tax imposed under subdivision (a) may not be reduced by any credits allowed under this part.

(c) The provisions of Section 1374(b)(4) of the Internal Revenue Code, relating to coordination with Section 1201(a), do not apply to taxable years beginning before January 1, 2018, and ending before January 1, 2025.

(d) (1) For corporations described in paragraph (2), the provisions of Sections 1374(c)(1) and 1374(d)(7) of the Internal Revenue Code apply, based upon the effective date of the election to be treated as an “S” corporation for federal tax purposes, regardless of the date on which the corporation became an “S” corporation for state tax purposes.

(2) This subdivision applies to a corporation that, for its last taxable year beginning before January 1, 2002, was an “S” corporation for federal tax purposes and a “C” corporation for purposes of Part 10 (commencing with Section 17001), Part 10.2 (commencing with Section 18401), and this part, and, as a result of the enactment of Chapter 35 of the Statutes of 2002, is an “S” corporation for the corporation’s taxable years beginning on or after January 1, 2002.

(e) Section 1374(d)(7)(A) of the Internal Revenue Code, relating to recognition period, is modified by substituting “10-year” in lieu of “5-year.”

(f) The amendments to this section made by Section 1 of Chapter 782 of the Statutes of 2004 shall apply to taxable years beginning on or after January 1, 2002.

(Amended by Stats. 2025, Ch. 231, Sec. 87. (SB 711) Effective October 1, 2025.)