Pre- 1979 Income Tax Code

FORMER TITLE 43
ARIZONA REVISED STATUTES
TAXATION OF INCOME

 

CHAPTER I

IN GENERAL

ARTICLE 1. IN GENERAL

Section

43-101. General provisions and definitions.

43-102. Imposition of tax.

43-102.01. Preemption by state of income taxation.

43-102.02. Powers of department of revenue.

43-111. Net income, definition.

43-112. Gross income.

43-112.01. Exclusion from gross income for payments to military survivors plans.

43-112.02. Gross income; gain from sale or exchange of residence of individual who has attained age sixty-five.

43-113. Gross income-forgiveness of indebtedness.

43-114. Gross income-gross income of nonresidents.

43-115. Income taxes of members of armed forces upon death.

43-123. Repealed by Laws 1973, Ch. 7, ' 2, eff. March 6, 1973.

43-123.01. Deductibility of dividends received from Arizona business and financing institutions.

43-123.02. Election to amortize expenditures incurred in the acquisition of atmospheric and water pollution control devices, machinery or equipment.

43-123.03. Deductions for expenses.

43-123.04. Deductions for interest.

43-123.05. Deductions for taxes.

43-123.06. Deductions for sales and other taxes separately stated.

43-123.07. Deductions for losses by individuals.

43-123.08. Deductions for losses by corporations.

43-123.09. Deductions for capital assets, losses.

43-123.10. Deductions for wagering losses.

43-123.11. Deductions for sixty day sales.

43-123,12. Deductions for wash sales.

43-123.13. Deductions for bad debts.

43-123.14. Deductions for depreciation.

43-123.15. Deductions for depletion.

43-123.16. Basis for depreciation and depletion.

43-123.17. Deductions for charitable and other contributions.

43-123.18. Deductions for contributions of an employer to an employee's trust or annuity plan and compensation under a deferred payment plan.

43-123.19. Deductions for charitable and other contributions by corporations.

43-123.20. Savings banks, cooperative banks and building and loan associations -- return paid or credited to withdrawable deposits.

43-123.21. Net operating loss deduction.

43-123.22. Deductions for adoption expenses.

43-123.23. Deductions for alimony.

43-123.24. Bond premium deduction.

43-123.25. Deductions in respect of decedent.

43-123.26. Deductions; medical expenses.

43-123.27. Deductions for care of qualified dependents.

43-123.28. Deductions for amounts representing taxes and interest paid to cooperative apartment corporation.

43-123.29. Optional standard deduction for individuals.

43-123.30. Deductions for development expenses; oil, gas and geothermal resources.

43-123.31. Deductions for development expenses, mines.

43-123.32. Deductions for dividends from Arizona corporations.

43-123.33. Deductions for exploration expenses.

43-123.34. Deductions for farmers' cooperatives and other cooperatives.

43-123.35. Additional first-year depletion allowance.

43-123.36. Unincorporated trusts or associations qualifying as "real estate investment trusts" for federal income tax purposes; income distribution deduction.

43-123.37. Election to amortize expenditures incurred in the acquisition of any solar energy device.

43-123.38. Deduction for child care facilities for employees' children; deduction for facilities of proprietary for profit child care organizations.

43-123.39. Moving expense deduction.

43-123.40. Deduction for retirement savings.

43-123.41. Deduction for retirement savings for certain married individuals.

43-123.42. Qualified pension, profit-sharing, and stock bonus plans.

43-123.43. Taxability of beneficiary of employee's trust.

43-123.44. Taxation of employee annuities.

43-123.45. Deduction for contributions of an employer to an employees' trust or annuity plan and compensation under a deferred-payment plan.

43-123.46. Qualified bond purchase plans.

43-123.47. Deduction for expenses paid for mental retardation residential services.

43-124. Mitigation of effect of renegotiation of war contracts or disallowance of reimbursement.

43-125. Deductions from gross income -- deductions of nonresidents.

43-126. Deductions from gross income -- items not deductible.

43-127. Credits allowed taxpayers -- credits against net income.

43-127.01. Apportionment of deductions and personal exemptions.

43-128. Credit allowed taxpayers -- credit for taxes paid.

43-128.01. Earned credit allowed taxpayers -- credit for property taxes paid.

43-128.02. Credit allowed taxpayers -- credit for rent paid.

43-128.02. Credit allowed taxpayers -- credit for rent paid.

43-128.03. Credit allowed taxpayers for solar energy devices.

43-128.04. Credit allowed taxpayers for installation of residential insulation and devices.

43-129. Alternative optional tax in case of resident individuals and resident married couples.

43-130. Amounts modified to reflect state consumer price index.

43-131. Accounting periods and methods of accounting.

43-132. Accounting factors.

43-133. Deduction and credit, when taken.

43-134. Installment basis.

43-135. Allocation of income deductions.

43-136. Compensation for services rendered for a period of thirty-six months or more and back pay.

43-137. Returns for a period of less than twelve months.

43-141. Returns.

43-142. Returns -- time and place for filing returns.

43-143. Returns executed by tax commission.

43-144. Returns of exempt organizations.

43-145. Publicity of returns; classification.

43-145.01. Confidentiality of information; exception; disclosure; classification.

43-145.02. Solicitation of preparation of returns or reports prohibited; classification.

43-146. Payment of tax.

43-147. Exemptions from tax on corporations.

43-148. Requirements for exemption of certain organizations under ' 43-147(a)(4) and for deductibility of contributions made to such organizations.

43-149. Taxation of business income of certain section 43-147 organizations.

43-151. Gain or loss-determination of gain or loss.

43-152. Gain or loss-recognition of gain or loss.

43-153. Basis for determining gain or loss, unadjusted basis.

43-154. Gain or loss-basis for depreciation and depletion.

43-155. Gross income-dividends and other distributions.

43-157. Capital gains or losses.

43-158. Gross income and deductions in respect of decedents.

43-159. Deductions from gross income-war losses.

43-160. Employee stock options.

43-161. Imposition of tax upon estates and trusts.

43-162. Net income of estates and trusts.

43-163. Taxation of estates and trust-armed services deduction and refunds.

43-164. Taxation of estates and trusts-income in case of divorce.

43-165. Taxation of estates and trusts-employees' trusts.

43-166. Taxation of estates and trusts-trusts taxable to grantor.

43-167. Taxation of estates and trusts-income for benefit of grantor.

43-168. Taxation of estates and trusts-liability of fiduciary.

43-169. Common trust funds.

43-171. Taxation of partnerships.

43-175. Administration of tax-powers and duties of department of revenue.

43-175.01. Renumbered as ' 43-179.01.

43-176. Power of examination.

43-177. Payments and assessments-deficiency assessments.

43-178. Payments and assessments including jeopardy assessments.

43-179. Violations; civil penalty; classification.

43-179-01. Enforcement.

43-180. Payments and assessments-penalties.

43-181. Interest and penalty for failure to remit.

43-183. Transferee liability.

43-184. Overpayments and refunds -- claim for refund.

43-185. Overpayments and refunds -- cancellations.

43-186. Overpayments and refunds -- actions against the department.

43-188. Collection of tax-information at source; withholding tax.

43-189. Nonresident wages; applications to commission.

43-191. Lien of tax -- judgment for tax-priority of tax claim.

43-192. Seizure and sale.

43-193. Collection of tax-suit for tax.

43-195. Collection of tax.

43-196. Disposition of proceeds.

43-196.01. Establishment and distribution of urban revenue sharing fund.

43-197. Cessation of activities; classification.

43-199. General provisions.

 

ARTICLE 1. IN GENERAL

' 43-101. General provisions and definitions

(a) Effective date. The provisions of this title shall apply only to taxable years beginning after December 31, 1953.

(b) Construction. Except where the context otherwise requires, the definitions given in this section govern the construction of this title.

(c) Tax commission. "Tax commission" or "commission" means the department of revenue.

(d) Tax. "Tax" means the taxes imposed under this title.

(e) Taxpayer. "Taxpayer" means any person subject to a tax imposed by this title, but in no case shall it include the United States, the state, counties, cities, villages, school districts, or other political subdivisions or units of the state or federal government.

(f) Individual. "Individual" means a natural person.

(g) Fiduciary. "Fiduciary" means a guardian, trustee, executor, administrator, receiver, conservator, whether individual or corporate, or any person acting in any fiduciary capacity for any person, estate or trust.

(h) Person. "Person" includes individuals, fiduciaries, partnerships, and corporations.

(i) Partnership. "Partnership" includes a syndicate, group, pool, joint venture, or other unincorporated organization, through or by means of which any business, financial operation, or venture is carried on and which is not, within the meaning of this title, a trust or estate or a corporation.

"Partner" includes a member in such a syndicate, group, pool, joint venture, or organization.

(j) Corporation. "Corporation" shall mean and include all corporations, joint stock companies, banks, insurance companies, business trusts or so-called "Massachusetts trusts", investment companies, building and loan associations, and other associations whether incorporated or unincorporated.

(k) Taxable year. "Taxable year" means the calendar year or the fiscal year (ending during such calendar year) upon the basis of which the net income is computed under this title. If no fiscal year has been established, "taxable year" means the calendar year.

"Taxable year" means, in the case of a return made for a fractional part of a year under this title or under regulations prescribed by the tax commission, the period for which the return is made.

(l) Income year. For the purposes of the tax imposed under this title, wherever "income year" is used throughout this title it means "taxable year" as that term is defined in this section.

(m) Fiscal year. "Fiscal year" means an accounting period of twelve months ending on the last day of any month other than December.

(n) Paid or incurred. "Paid or incurred" and "paid or accrued" shall be construed according to the method of accounting upon the basis of which the net income is computed under this title.

(o) Assessment. "Assessment" includes "proposed additional assessment".

(p) Resident. "Resident" includes:

(1) Every individual who is in this state for other than a temporary or transitory purpose.

(2) Every individual domiciled in this state who is outside the state for a temporary or transitory purpose.

Any individual who is a resident of this state continues to be a resident even though temporarily absent from the state.

(q) Nonresident. "Nonresident" means every individual other than a resident.

(r) Presumption of residence. Every individual who spends in the aggregate more than nine months of the taxable year within this state shall be presumed to be a resident, The presumption may be overcome by competent evidence that the individual is in the state for a temporary or transitory purpose.

(s) United States. "United States", when used in a geographical sense, includes the states, the District of Columbia, and the possessions of the United States.

(t) State. "State" includes the states of the United States, the District of Columbia, and the possessions of the United States.

(u) Foreign country. "Foreign country" means any jurisdiction other than one embraced within the United States.

(v) Trade or business. "Trade or business" includes the performance of the functions of a public office.

(w) Husband and wife.

(1) As used in ' 43-112(c)(1), (2) and (4), ' 43-123.23 and ' 43-164, and the last paragraph of ' 43-127(c), if the husband and wife therein referred to are divorced, the term "wife" shall be read "former wife" and the term "husband" shall be read "Former husband". If the payments described in such sections are made by or on behalf of the wife or former wife to the husband or former husband instead of vice versa, wherever appropriate to the meaning of such sections, the term "husband" shall be read "wife" and the term "wife" shall be read "husband".

(2) An individual who is legally separated from his (or her) spouse under a decree of divorce or of separate maintenance shall not be considered as married (or as husband and wife).

(3) A taxpayer shall be considered as married at the close of his (or her) taxable year if his (or her) spouse died during the taxable year.

(x) Head of household. For the purposes of this title, an individual shall be considered a head of a household if, and only if, such individual is not married at the close of his taxable year and maintains as his home a household which constitutes for such taxable year the principal place of abode, as a member of such household, of any person who is a dependent of the taxpayer, if the taxpayer is entitled to an exemption for the taxable year for such person under ' 43-127(c). An individual may be considered as maintaining a household only if over half of the cost of maintaining the household during the taxable year is furnished by such individual.

(y) Military or naval forces. The term "military or naval forces of the United States" includes the army, the navy, the air force, the marine corps, the coast guard, the army nurse corps, female, the women's army auxiliary corps, the navy nurse corps, female, and the women's reserve branch of the naval reserve.

(z) Counsel for tax commission. The terms "counsel for tax commission" and "tax commission counsel" as used in this title, means attorney or attorneys acting subject to the approval and under the supervision of the department of law, and the attorney general.

(aa) Income derived from sources within this state. Income derived from or attributable to sources within this state includes income from tangible or intangible property located or having a situs in this state and income from any activities carried on in this state, regardless of whether carried on in intrastate, interstate or foreign commerce.

(bb) Specific definitions. Definitions, other than general definitions, are set forth in the section to which specifically applicable.

(cc) "Board" means the state board of tax appeals or when applicable a division thereof.

(dd) "Department" means the department of revenue.

(ee) "Director" means the director of the department of revenue.

 

' 43-102. Imposition of tax

(a) Taxes and rates -- individuals, estates and trusts. There shall be levied, collected, and paid for each taxable year upon the entire net income of every estate or trust taxable under this title and of every resident of this state and upon the entire net income of every nonresident which is derived from sources within this state, taxes in the following amounts and at the following rates upon the amount of net income in excess of credits against net income provided in '' 43-127 and 43-128.

On the first one thousand dollars or any part thereof, two per cent.

On the second one thousand dollars or any part thereof, three per cent.

On the third one thousand dollars or any part thereof, four per cent.

On the fourth one thousand dollars or any part thereof, five per cent.

On the fifth one thousand dollars or any part thereof, six per cent.

On the sixth one thousand dollars or any part thereof, seven per cent.

On the seventh one thousand dollars or any part thereof, and all taxable income in excess of seven thousand dollars, eight per cent.

(b) Taxes and rates -- corporations. There shall be levied, collected, and paid for each taxable year upon the entire net income of every corporation, except as otherwise provided in this title or by law, taxes in the following amounts and at the following rates:

Upon net income not in excess of one thousand dollars, two and one-half per cent of such net income.

Twenty-five dollars upon net income of one thousand dollars; and upon net income in excess of one thousand dollars and not in excess of two thousand dollars, four per cent in addition of such excess.

Sixty-five dollars upon net income of two thousand dollars; and upon net income in excess of two thousand dollars and not in excess of three thousand dollars, five per cent in addition of such excess.

One hundred fifteen dollars upon net income of three thousand dollars; and upon net income in excess of three thousand dollars, and not in excess of four thousand dollars, six and one-half per cent in addition of such excess.

One hundred eighty dollars upon net income of four thousand dollars; and upon net income in excess of four thousand dollars and not in excess of five thousand dollars, eight per cent in addition of such excess.

Two hundred sixty dollars upon net income of five thousand dollars; and upon net income in excess of five thousand dollars and not in excess of six thousand dollars, nine per cent in addition of such excess.

Three hundred fifty dollars upon net income of six thousand dollars; and upon net income in excess of six thousand dollars, ten and one-half per cent in addition of such excess.

 

(c) Optional tax.

(1) In lieu of the tax imposed under subsection (a), there shall be levied, collected and paid for each taxable year upon the gross income of each individual whose gross income for such year is less than five thousand dollars and who has elected to pay the tax imposed by this subsection for such year, the tax shown in the following table:

Gross Income

 

Married Couple Filing

Jointly or Single Person

Head of Household

At Least

But Less Than

Single Person or Married

Person Filing Separately

 

$1,100.00

$1,150.00

$ .25

 

$ 0

 

1,150.00

1,200.00

1.15

 

0

 

1,200.00

1,250.00

2.05

 

0

 

1,250.00

1,300.00

2.95

 

0

 

1,300.00

1,350.00

3.85

 

0

 

1,350.00

1,400.00

4.75

 

0

 

1,400.00

1,450.00

5.65

 

0

 

1,450.00

1,500.00

6.55

 

0

 

1,500.00

1,550.00

7.45

 

0

 

1,550.00

1,600.00

8.35

 

0

 

1,600.00

1,650.00

9.25

 

0

 

1,650.00

1,700.00

10.15

 

0

 

1,700.00

1,750.00

11.05

 

0

 

1,750.00

1,800.00

11.95

 

0

 

1,800.00

1,850.00

12.85

 

0

 

1,850.00

1,900.00

13.75

 

0

 

1,900.00

1,950.00

14.65

 

0

 

1,950.00

2,000.00

15.55

 

0

 

2,000.00

2,050.00

16.45

 

0

 

2,050.00

2,100.00

17.35

 

0

 

2,100.00

2,150.00

18.25

 

0

 

2,150.00

2,200.00

19.15

 

0

 

2,200.00

2,250.00

20.07

 

.05

 

2,250.00

2,300.00

21.42

 

.95

 

2,300.00

2,350.00

22.77

 

1.85

 

2,350.00

2,400.00

24.12

 

2.75

 

2,400.00

2,450.00

25.47

 

3.65

 

2,450.00

2,500.00

26.82

 

4.55

 

2,500.00

2,550.00

28.17

 

5.45

 

2,550.00

2,600.00

29.52

 

6.35

 

2,600.00

2,650.00

30.87

 

7.25

 

2,650.00

2,700.00

32.22

 

8.15

 

2,700.00

2,750.00

33.57

 

9.05

 

2,750.00

2,800.00

34.92

 

9.95

 

2,800.00

2,850.00

36.27

 

10.85

 

2,850.00

2,900.00

37.62

 

11.75

 

2,900.00

2,950.00

38.97

 

12.65

 

2,950.00

3,000.00

40.32

 

13.55

 

3,000.00

3,050.00

41.67

 

14.45

 

3,050.00

3,100.00

43.02

 

15.35

 

3,100.00

3,150.00

44.37

 

16.25

 

3,150.00

3,200.00

45.72

 

17.15

 

3,200.00

3,250.00

47.07

 

18.05

 

3,250.00

3,300.00

48.42

 

18.95

 

3,300.00

3,350.00

49.75

 

19.85

 

3,350.00

3,400.00

51.50

 

20.75

 

3,400.00

3,450.00

53.30

 

21.65

 

3,450.00

3,500.00

55.10

 

22.55

 

3,500.00

3,550.00

56.90

 

23.45

 

3,550.00

3,600.00

58.70

 

24.35

 

3,600.00

3,650.00

60.50

 

25.25

 

3,650.00

3,700.00

62.30

 

26.15

 

3,700.00

3,750.00

64.10

 

27.05

 

3,750.00

3,800.00

65.90

 

27.95

 

3,800.00

3,850.00

67.70

 

28.85

 

3,850.00

3,900.00

69.50

 

29.75

 

3,900.00

3,950.00

71.30

 

30.65

 

3,950.00

4,000.00

73.10

 

31.55

 

4,000.00

4,050.00

74.90

 

32.45

 

4,050.00

4,100.00

76.70

 

33.35

 

4,100.00

4,150.00

78.50

 

34.25

 

4,150.00

4,200.00

80.30

 

35.15

 

4,200.00

4,250.00

82.10

 

36.05

 

4,250.00

4,300.00

83.90

 

36.95

 

4,300.00

4,350.00

85.70

 

37.85

 

4,350.00

4,400.00

87.50

 

38.75

 

4,400.00

4,450.00

89.30

 

39.65

 

4,450.00

4,500.00

91.37

 

40.82

 

4,500.00

4,550.00

93.62

 

42.17

 

4,550.00

4,600.00

95.87

 

43.52

 

4,600.00

4,650.00

98.12

 

44.87

 

4,650.00

4,700.00

100.37

 

46.22

 

4,700.00

4,756.00

102.62

 

47.57

 

4,750.00

4,800.00

104.87

 

48.92

 

4,800.00

4,850.00

107.12

 

50.27

 

4,850.00

4,900.00

109.37

 

51.62

 

4,900.00

4,950.00

111.62

 

52.97

 

4,950.00

5,000.00

113.87

 

54.32

 

 

In applying the above table to determine the tax of such individual, there shall be subtracted from his gross income the amount of the federal income tax paid during the taxable year.

In applying the above table to determine the tax of a taxpayer with one or more dependents, there shall be subtracted from his gross income six hundred dollars for each dependent, except that in the case of a "head of household" the deduction for dependents shall be permitted only for those dependents in excess of one.

(2) For the purpose of this subsection:

(A) "Married person" means a married person on the last day of the taxable year.

(B) "Dependent" means a person who is dependent under ' 43-127(c).

(C) An individual, who is not a head of a family or a married person, shall be treated as a single person.

(D) "Head of household" means a head of household on the last day of the taxable year, unless such person dies during the taxable year, in which case such determination shall be made as of the date of death.

(E) In the case of a joint return of a husband and wife filed pursuant to ' 43-141(a)(2), the tax imposed under subsection (a) shall be twice the tax that would be determined if the net income and credits against net income provided by '' 43-127 and 43-128 were reduced by one-half,

(3) This subsection shall not apply to an estate or trust, an individual filing a return for a period of less than twelve months on account of a' change in the accounting period, or to a married individual whose spouse files a return and computes the tax without regard to this section or ' 43-123.29, subsection A.

 

(d) Effect of changes in rates during a taxable year

If any rate of tax imposed by this chapter changes, and if the taxable year includes the effective date of the change (unless that date is the first day of the taxable year), then

(1) Tentative taxes shall be computed by applying the rate for the period before the effective date of the change, and the rate for the period on and after such date, to the taxable income for the entire taxable year; and

(2) The tax for such taxable year shall be the sum of that proportion of each tentative tax which the number of days in each period bears to the number of days in the entire taxable year.

 

(e) In the preparation of any return under this title, the taxpayer may elect to eliminate the fractional dollar by rounding out the fractional dollar to the nearest whole dollar.

 

' 43-102.01. Preemption by state of income taxation

The area of income taxation is preempted by the state, and a county, city, town or other political subdivision of this state shall not levy an income tax, so long as the urban revenue sharing fund is maintained as provided in ' 43-196.01.

 

' 43-102.02. Powers of department of revenue

The department of revenue shall be authorized to alter the optional tax table contained in ' 43-102, subsection (c) to reflect the changes mandated by ' 43-130.

 

' 43-111. Net income, definition

"Net income" means the gross income computed under this title less the deductions allowed by this title.

 

' 43-112. Gross income

(a) Definition -- "Gross income". Gross income includes any amount received or accrued, directly or indirectly, by an individual as a payment for or reimbursement of expenses of moving from one residence to another residence which is attributable to employment or self-employment, gains, profits, and income derived from salaries, wages, or compensation for personal service, including personal service as an officer or employee of this state or the federal government, or any political division thereof or any agency or instrumentality of any one or more of the foregoing, of whatever kind and in whatever form paid, or from professions, vocations, trades, businesses, commerce, or sales, or dealings in property, whether real or personal, growing out of the ownership or use of or interest in such property; also from interest, rent, dividends, securities, or the transaction of any business carried on for gain or profit, or gains or profits and income derived from any source whatever, including interest which now or hereafter constitutionally may be taxed.

(b) Exclusions from gross income. In computing the tax imposed under this title, gross income" does not include any of the items specified in this subsection.

(1) Life insurance -- death benefits. Gross income does not include amounts received:

(A) Under a life insurance contract, paid by reason of the death of the insured or,

(B) Under a contract of an employer providing for the payment of such amounts to the beneficiaries of an employee, paid by reason of the death of the employee; whether in a single sum or otherwise (but if such amounts are held by the insurer, or the employer, under an agreement to pay interest thereon, the interest payments shall be included in gross income). The aggregate of the amounts excludible under (B) by all the beneficiaries of the employee under all such contracts of any one employer may not exceed five thousand dollars.

(2) Life insurance other than death benefits. Gross income also does not include amounts received (other than amounts paid by reason of the death of the insured and interest payments on such amounts and other than amounts received as annuities) under a life insurance or endowment contract, but if such amounts (when added to amounts received before the taxable year under such contract) exceed the aggregate premiums or consideration paid (whether or not paid during the taxable year) then the excess shall be included in gross income.

(3) Annuity. Gross income also does not include amounts received as an annuity under an annuity or endowment contract, but if such amounts (when added to amounts received before the taxable year under such contracts) exceed the aggregate premiums or consideration paid (whether or not paid during the taxable year) then the excess shall be included in gross income.

(4) Other insurance proceeds. Gross income does not include amounts received (other than amounts paid by reason of the death of the insured under life insurance, endowment or annuity contracts) either during the term or at maturity or upon surrender of the contract, equal to the total amount of premiums paid thereon. In the case of a transfer for a valuable consideration by assignment or otherwise, of a life insurance, endowment or annuity contract or any interest therein, only the actual value of such consideration and the amount of the premiums and other sums subsequently paid by the transferee shall be excluded from gross income under paragraph (1). The preceding sentence shall not apply in the case of such a transfer if such contract or interest therein has a basis for determining gain or loss in the hands of a transferee determined in whole or in part by reference to such basis of such contract or interest therein in the hands of the transferor.

(5) Alimony paid under life insurance, endowment, or annuity contract. Paragraphs (1), (2), (3) and (4) shall not apply with respect to so much of a payment under a life insurance, endowment, or annuity contract, or any interest therein, as is includible in gross income under subsection (e), (1), (2), (3) and (4).

(6) Annuities for employees. If an annuity contract is purchased by an employer for an employee under a plan with respect to which the employer's contribution is deductible under section 43-123.18 or if an annuity contract is purchased for an employee by an employer exempt under section 43-147(a) (4) the employee shall include in his income the amounts received under such contract for the year received. If the employee paid any of the consideration for the annuity, the annuity shall be included in his income as provided in paragraphs (2), (3) and (4). The consideration for the annuity is the amount contributed by the employee.

(7) Employee annuities, nonforfeitable. Except as provided in paragraph (6), if the employee's rights under the contract are nonforfeitable other than for failure to pay future premiums, the amount contributed by the employer for such annuity contract on or after such rights become nonforfeitable shall be included in the income of the employee in the year in which the amount is contributed. This amount, together with any amount contributed by the employee, shall constitute the consideration paid for the annuity contract in determining the amount of the annuity required to be included in the income of the employee under paragraphs (2), (3), and (4).

(8) Joint and survivor's annuity. For purposes of paragraphs (2), (3), (4), (6) and (7), where amounts are received by a surviving annuitant under a joint and survivor's annuity contract and the basis of such survivor annuitant's interest is determined under section 43-153(a)(5)(A) the consideration paid for such survivor's annuity shall be considered to be an amount equal to such basis.

(9) Gifts. Gross income also does not include the value of property acquired by gift, bequest, devise, or inheritance. There shall not be excluded from gross income under this paragraph the income from such property, or, in case the gift, bequest, devise, or inheritance is of income from property, the amount of income. For the purposes of this paragraph, if, under the terms of the gift, bequest, devise, or inheritance, payment, crediting, or distribution thereof is to be made at intervals, to the extent that it is paid or credited or to be distributed out of income from property, it shall be considered a gift, bequest, devise, or inheritance of income from property.

(10) Tax exempt interest. Gross income also does not include interest upon the obligations of this state or any political subdivision thereof, or the obligations of the United States or its possessions.

(11) Amounts received for injury or sickness. Except in the case of amounts attributable to, and not in excess of, deductions allowed under ' 43-123.26, subsections A, B and C, gross income also does not include amounts received through accident or health insurance or under workmen's compensation acts as compensation for personal injuries or sickness, plus the amount of any damages received whether by suit or agreement on account of such injuries or sickness. Gross income does not include amounts received as a pension, annuity, medical retirement or similar allowance for personal injuries or sickness resulting from active service in the armed forces of any country.

(12) Minister's compensation. Gross income also does not include the rental value of a dwelling house and appurtenances thereof furnished to a minister of a religion as part of his compensation.

(13) Compensation of employees of foreign government. Gross income also does not include wages, fees, or salary of an employee of a foreign country (including a consular or other officer, or non-diplomatic representative) received as compensation for official services to that country:

(A) If the employee is not a citizen of the United States;

(B) If the services are of a character similar to those performed by employees of the United States in foreign countries; and

(C) If the foreign country and political subdivision thereof do not tax the wages, fees, or salaries of employees of the United States performing similar services in that country.

(14) Discharge of indebtedness evidenced by security. Gross income does not include the amount of any income of a corporation attributable to the discharge, within the income year, of any indebtedness of the taxpayer, or for which the taxpayer is liable, evidenced by a security, as hereinafter defined, if the taxpayer makes and files at the time of filing the return, in such manner as the department by regulation prescribes, its consent to the regulations prescribed under ' 43-153(b)(3). In such case the amount of any income of the taxpayer attributable to any unamortized premium, computed as of the first day of the income year in which such discharge occurred, with respect to such indebtedness shall not be included in gross income and the amount of the deduction attributable to any unamortized discount, computed as of the first day of the income year in which such discharge occurred, with respect to such indebtedness shall not be allowed as a deduction. "Security" means any bond, debenture, note, or certificate, or other evidence of indebtedness, issued by any corporation.

(15) Discharge of indebtedness -- railroad corporation -- Sec. 77m, Bankruptcy Act. Gross income does not include the amount of any income attributable to the discharge, within the income year, of any indebtedness of a railroad corporation, as defined in section 77m of the national bankruptcy act, as amended, to the extent that such income is deemed to have been realized by reason of a modification in or cancellation in whole or in part of such indebtedness pursuant to an order of a court in a receivership proceeding or in a proceeding under section 77 of the national bankruptcy act, as amended. In such case the amount of any income of the taxpayer attributable to any unamortized premium, computed as of the first day of the income year in which such discharge occurred, with respect to such indebtedness shall not be included in gross income and the amount of the deduction attributable to any unamortized discount, computed as of the first day of the income year in which such discharge occurred, with respect to such indebtedness shall not be allowed as a deduction. Paragraph (14) shall not apply with respect to any discharge of indebtedness to which this paragraph applies.

(16) Lessee improvements. Gross income also does not include income, other than rent, derived by a lessor of real property upon the termination of a lease, representing the value of such property attributable to buildings erected or other improvements made by the lessee.

(17) Recovery of bad debt, prior tax, or delinquency amount. Gross income also does not include income attributable to the recovery during the taxable year of a bad debt, prior tax, or delinquency amount, to the extent of the amount of the recovery exclusion with respect to that debt, tax, or amount.

(18) Bad debt. As used in paragraph (17) "bad debt" means a debt on account of worthlessness or partial worthlessness of which a deduction was allowed for a prior taxable year.

(19) Prior tax. As used in paragraph (17) "prior tax" means a tax on account of which a deduction or credit was allowed for a prior taxable year.

(20) Delinquency amount. As used in paragraph (17) "delinquency amount" means an amount paid or accrued on account of which a deduction or credit was allowed for a prior taxable year and which is attributable to failure to file a return with respect to a tax, or pay a tax, within the time required by the law under which the tax is imposed, or to failure to file a return with respect to a tax or pay a tax.

(21) Recovery exclusion. As used in paragraph (17) "recovery exclusion", with respect to a bad debt, prior tax, or delinquency amount, means the amount, determined in accordance with regulations prescribed by the department, of the deductions or credits allowed, on account of such bad debt, prior tax, or delinquency amount, which did not result in a reduction of the taxpayer's tax under this title, reduced by the amount excludible in previous taxable years with respect to such debt, tax or amount under this paragraph.

(22) Compensation for military service.

(A) Gross income also does not include the salary, wages, bonuses, allowances, and other compensation received by an individual for his services as a member of the armed forces of the United States, including any auxiliary branch thereof, up to and including one thousand dollars per annum in the aggregate.

(B) Gross income also does not include amounts received during the taxable year as mustering out payments and terminal leave and unused leave pay and bonds, and educational benefits received under federal or state legislation with respect to services in the military or naval forces of the United States.

(23) Option price -- employee stock options. Gross income also does not include any amount, other than the option price, received by any bank or corporation, or its parent or subsidiary bank or corporation, as consideration for the issuance of stock to an employee of such bank or corporation, as a result of the exercise by the employee of a "restricted stock option" as defined in section 43-160(d)(1).

(24) Constitutionally exempt income. Gross income also does not include income which this state is prohibited from taxing under the constitution or laws of the United States of America or under the constitution of this state.

(25) Federal civil service benefits. The amount of two thousand five hundred dollars or less received each year as annuities under the United States civil service retirement system from the United States government service retirement and disability fund.

(26) Dividends from controlled corporations. Gross income also does not include, in the case of a corporation, dividends received from another corporation owned or controlled directly or indirectly by the recipient-corporation. "Control" for purposes of this subsection shall mean direct or indirect ownership or control of fifty per cent or more of the voting stock of the payor-corporation by the recipient-corporation. Dividends shall have the meaning provided in section 43-155(a). This exclusion shall apply without regard to the provisions of section 43-123.04, section 43-135(g), and section 43-126(a)(5) with the exception of the deduction for federal income taxes.

(27) Tax rebates. Gross income also does not include income gained from special individual income tax rebates given by the federal government in excess of any individual income tax refunds given pursuant to sections 6401 and 6402 of the United States Internal Revenue Code. Tax rebates do not include refunds given as the result of the refiling of a federal individual income tax return or as the result of an audit performed by the internal revenue service.

(c) Inventories, as prescribed by the department. Whenever in the opinion of the department the use of inventories is necessary in order clearly to determine the income of any taxpayer, inventories shall be taken by the taxpayer upon such basis as the department may prescribe as conforming as nearly as may be to the best accounting practice in the trade or business and as most clearly reflecting the income.

(d) Method used in inventorying goods.

(1) First in, last out method, permissible. A taxpayer may use the following method (whether or not the method has been prescribed under subsection (c) ) in inventorying goods specified in the application required under paragraph (2):

(A) Inventory them at cost;

(B) Treat those remaining on hand at the close of the taxable year as being: first, those included in the opening inventory of the taxable year (in order of acquisition) to the extent thereof, and second, those acquired in the taxable year; and

(C) Treat those included in the opening inventory of the taxable year in which the method is first used as having been acquired at the same time and determine their cost by the average cost method.

(2) First in, last out method, when applicable. The method described in paragraph (1) may be used

(A) Only in inventorying goods (required under subsection (c) to be inventoried) specified in an application to use such method filed at such time and in such manner as the department may prescribe; and

(B) Only if the taxpayer establishes to the satisfaction of the department that the taxpayer has used no procedure other than that specified in subparagraphs (B) and (C) of paragraph (1) in inventorying to ascertain the income, profit, or loss of the first taxable year for which the method described in paragraph (1) is to be used, for the purpose of a report or statement covering the taxable year to shareholders, partners, or other proprietors, or to beneficiaries, or for credit purposes.

(3) First in, last out method, department to prescribe regulations. The change to, and the use of, the described method shall be in accordance with such regulations as the department may prescribe as necessary in order that the use of the method may clearly reflect income.

(4) First in, last out method, inventoried at cost. In determining income for the taxable year preceding the taxable year for which the described method is first used, the closing inventory of such preceding year of the goods specified in the application shall be at cost.

(5) First in, last out method, inconsistent use. If a taxpayer, having complied with paragraph (2), uses the method described in paragraph (1) for any taxable year, that method shall be used in all subsequent taxable years unless

(A) With the approval of the department a change to a different method is authorized; or

(B) The department determines that the taxpayer has used for any such subsequent taxable year some procedure other than that specified in subparagraph (B) of paragraph (1) in inventorying the goods specified in the application to ascertain the income, profit or loss of such subsequent taxable year for the purpose of a report or statement covering such taxable year to shareholders, partners, or other proprietors, or beneficiaries, or for credit purposes, and requires a change to a method different from that prescribed in paragraph (1) beginning with such subsequent taxable year or any taxable year thereafter.

In either of the above cases, the change to, and the use of the different method shall be in accordance with such regulations as the department may prescribe as necessary in order that the use of such method may clearly reflect income.

(6) Adjustment of net income, when applicable. The net income of the taxpayer otherwise determined for the year of involuntary liquidation shall be adjusted according to the provisions of paragraphs (7) an (8):

(A) If, for any taxable year beginning after December 31, 1953, and while a state of war exists and prior to the termination of such war as proclaimed by the president of the United States, the closing inventory of a taxpayer inventorying goods under the method provided in this subsection reflects a decrease from the opening inventory of goods for this year; and

(B) If, at the time of the filing of the taxpayer's income tax return for such year, the taxpayer elects to have the provisions of paragraphs (6) through (15) apply and so notifies the department; and

(C) If, at the time of such election, it is established to the satisfaction of the department, in accordance with the rules and regulations prescribed by the department, that such decrease is attributable to the involuntary liquidation of the inventory as defined in paragraph (9); and

(D) If the closing inventory of a subsequent taxable year, ending not more than four years after the termination of such war as proclaimed by the president of the United States, reflects a replacement, in whole or in part, of the goods so previously liquidated.

(7) Adjustment of net income, method. The taxpayer's net income shall be adjusted as follows:

(A) Increased by an amount equal to the excess, if any, of the aggregate cost of such goods reflected in the opening inventory of the year of involuntary liquidation over the aggregate replacement cost; or

(B) Decreased by an amount equal to the excess, if any, of the aggregate replacement cost of such goods over the aggregate cost thereof reflected in the opening inventory of the year of the involuntary liquidation.

(8) Adjustment of taxes. The taxes imposed by this title for the year of such liquidation and for all taxable years intervening between that year and the year of replacement shall be redetermined giving effect to adjustments provided for in paragraph (6). Any increase in taxes resulting from these adjustments shall be assessed and collected as a deficiency but without interest, and any overpayment so resulting shall be credited or refunded to the taxpayer without interest.

(9) Definition -- "involuntary liquidation". As used in paragraphs (6) through (15), "involuntary liquidation" means the sale or other disposition of goods inventoried under the method described in this subsection, either voluntary or involuntary, coupled with a failure on the part of the taxpayer to purchase, manufacture, or otherwise produce and have on hand at the close of the taxable year in which a sale or other disposition occurred such goods as would, if on hand at the close of such taxable year, be subject to the provisions of this subsection if such failure on the part of the taxpayer is due, directly and exclusively:

(A) To enemy capture or control of sources of limited foreign supply;

(B) To shipping or other transportation shortages;

(C) To material shortages resulting from priorities or allocations;

(D) To labor shortages;

(E) To other prevailing war conditions, beyond the control of the taxpayer.

(10) Replacements. If, in the case of any taxpayer subject to the provisions of paragraphs (6), (7) and (8), the closing inventory of the taxpayer for a taxable year, subsequent to the year of involuntary liquidation but prior to the complete replacement of the goods so liquidated, reflects an increase over the opening inventory of the goods for the taxable year, the goods reflecting such increase shall be considered, in the order of their acquisition, as having been acquired in replacement of the goods most recently liquidated (whether or not in a year of involuntary liquidation) and not previously replaced. If the liquidation was an involuntary liquidation, the goods reflecting the increase shall be taken into purchases and included in the closing inventory of the taxpayer for the year of replacement at the inventory cost basis of the goods replaced.

(11) Election, irrevocable. An election by the taxpayer to have the provisions of paragraphs (6) through (15) apply, once made, shall be irrevocable and shall be binding for the year of the involuntary liquidation and for all determinations for prior and subsequent taxable years insofar as they are related to the year of liquidation or replacement.

(12) Adjustment, within three years. If the adjustments specified in paragraphs (6), (7) and (8) are, with respect to any taxable year, prevented, on the date of the filing of the income tax return of the taxpayer for the year of the replacement, or within four years from such date, by any provision or rule of law (other than paragraphs (12) through (15) such adjustments shall nevertheless be made if, in respect to the taxable year for which the adjustment is sought, a notice of proposed additional assessment is mailed or a claim for refund is filed, as the case may be, within four years after the date of the filing of the income tax return for the year of replacement.

(13) Adjustment, limited to effect of liquidation. If, at the time of the mailing of the notice of proposed additional assessment or the filing of the claim for refund, the adjustment is so prevented, then the amount of the adjustment authorized by paragraphs (6) through (15) shall be limited to the increase or decrease of the tax imposed by this title previously determined for the taxable year which results solely from the effect of paragraphs (6), (7) and (8). The tax previously determined shall be ascertained in accordance with rules and regulations prescribed by the department.

(14) Adjustment, method of assessment or refund. The amount of the adjustment shall be assessed and collected, or credited or refunded in the same manner as if it were a deficiency or an overpayment, as the case may be, for such taxable year and as if, of, the date of the filing of the income tax return for the year of the replacement, three years remain before the expiration of the periods of limitation upon assessment or the filing Of claim for refund for the taxable year.

(15) Adjustment, based on paragraph (6). The amount of the adjustment shall not be diminished by any credit or set-off based upon any item, inclusion, deduction, credit exemption, gain, or loss, other than one resulting from the effect of paragraphs (6), (7): and (8). The amount, if paid, shall not be recovered by a claim or suit for refund or suit for erroneous refund based upon any item, inclusion, deduction, credit, exemption, gain, or loss, other than one resulting from the effect of paragraphs (6), (7) and (8).

(e) Alimony, etc.

(1) Alimony-periodic payments. In the case of a wife who is divorced or legally separated from her husband under a decree of divorce or of separate maintenance, periodic payments (whether or not made at regular intervals) received subsequent to such decree in discharge of, or attributable to property transferred (in trust or otherwise) in discharge of, a legal obligation which, because of the marital or family relationship, is imposed upon or incurred by such husband under such decree or under a written instrument incident to such divorce or separation shall be includible in the gross income of such wife. Such amounts received as are attributable to property so transferred shall not be includible in the gross income of such husband.

(2) Minor's support. Paragraph (1) shall not apply to that part of any periodic payment which the terms of the decree or written instrument fix, in terms of an amount of money or a portion of the payment, as a sum which is payable for the support of minor children of the husband. In case any periodic payment is less than the amount specified in the decree or written instrument, that payment, to the extent of the sum payable for support, shall be considered a payment for such support.

(3) Alimony installment payments of less than ten years. Installment payments discharging a part of an obligation the principal sum of which is, in terms of money or property, specified in the decree or instrument shall not be considered period ' payments for the purposes of paragraphs (1) and (2).

(4) Alimony installment payments of more than ten years. An installment payment shall be considered a periodic payment for the purposes of paragraphs (1) and (2) if the principal sum, by the terms of the decree or instrument may be or is to be paid within a period ending more than ten years from the date of such decree or instrument. But it shall be considered a periodic payment only to the extent that the installment payment for the taxable year of the wife (or if more than one installment payment for the taxable year is received during the taxable year, the aggregate of these installment payments) does not exceed ten per cent of the principal sum. For the purposes of paragraph (3) and this paragraph, the portion of a payment of the principal sum which is allocable to a period after the taxable year of the wife in which it is received shall be considered an installment payment for the taxable year in which it is received.

(f) Definition -- "adjusted gross income". As used in this title, the term "adjusted gross income" means the gross income minus --

(1) The deductions allowed by sections 43-123.03 through 43-123.35 which are attributable to a trade or business carried on by the taxpayer, if such trade or business does not consist of the performance of services by the taxpayer as an employee;

(2) The deductions allowed by sections 43-123.03 through 43-123.35 which consist of expenses of travel, meals, and lodging while away from home, paid or incurred by the taxpayer in connection with the performance by him of services as an employee;

(3) The deductions allowed by sections 43-123.03 through 43-123.35 (other than expenses of travel, meals, and lodging while away from home) which consist of expenses paid or incurred by the taxpayer, in connection with the performance by him of services as an employee, under a reimbursement or other expense allowance arrangement with his employer;

(4) The deductions (other than those provided in paragraphs (1), (5) or (6) ) allowed by sections 43-123.03 through 43-123.35, which are attributable to property held for the production of rents or royalties;

(5) The deductions (other than those provided in paragraph (1)) for depreciation and depletion, allowed by sections 43-123.14 and 43-123.15., to a life tenant of property or to an income beneficiary of property held in trust; and

(6) The deductions (other than those provided in paragraph (1)) allowed by sections 43-123.03 through 43-123.35 as losses from the sale or exchange of property.

(g) Dealers in tax exempt securities.

(1) "Short-term municipal bonds", income from. In computing the gross income of a taxpayer who holds during the taxable year a short-term municipal bond (as defined in paragraph (2)(A)) primarily for sale to customers in the ordinary course of his trade or business.

(A) if the gross income of the taxpayer from such trade or business is computed by the use of inventories and his inventories are valued on any basis other than cost, the cost of securities sold (as defined in paragraph (2)(B)) during such year shall be reduced by an amount equal to the amortizable bond premium that would be disallowed as a deduction for such year pursuant to section 43-123.24, subsection B, paragraph 2 if the definition in section 43-123.24, subsection F of the term "bond" did not exclude such short-term municipal bond; or

(B) If the gross income of the taxpayer from such trade or business is computed without the use of inventories, or by use of inventories valued at cost, and the short-term municipal bond is sold or otherwise disposed of during such year, the adjusted basis (computed without regard to this subparagraph) of the short-term municipal bond shall be reduced by the amount of the adjustment that would be required under section 43-153(b)(1)(D) if the definition in section 43-123.24 of the term "bond" did not include such short-term municipal bond.

(2) Definition -- "Short-term municipal bonds." For the purposes of paragraph (l) --

(A) The term "short-term municipal bond" means any obligation issued by a government or political subdivision thereof if the interest on such obligation is excludible from gross income; but such term does not include such an obligation if (i) it is sold or otherwise disposed of by the taxpayer within thirty days after the date of its acquisition by him, or (ii) its earliest maturity or call date is a date more than five years from the date on which it was acquired by the taxpayer.

(B) The term "cost of securities sold" means the amount ascertained by subtracting the inventory value of the closing inventory of a taxable year from the sum of (i) the inventory value of the opening inventory for such year and (ii) the cost of securities and other property purchased during such year which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year.

 

' 43-112.01. Exclusion from gross income for payments to military survivors plans

In computing the tax imposed under this title, gross income does not include, in the case of a member of the uniformed services of the United States, the amount of reduction of such person's retired or retainer pay for participation in certain military survivors annuity plans pursuant to title 10, chapter 73 of the United States Code. When Arizona income taxes have already been paid on amounts not received by the military retiree due to participation in the United States survivor benefit plan or the United States retired serviceman's family protection plan, recoupment may be obtained as follows:

1. All amounts received after December 31, 1977 as retired or retainer pay shall be excluded from gross income until such member has excluded an amount equal to the total amount of such reductions subject to Arizona income tax before December 31, 1977 plus any amounts deposited at any time by such member pursuant to title 10, section 1438 or section 1452(d) of the United States Code. This paragraph shall apply only to the extent that the amounts received would otherwise be includable in gross income.

2. All amounts received by a beneficiary of an annuity under title 10, chapter 73 of the United States Code shall be excluded from gross income until such beneficiary has excluded an amount equal to any exclusion allowable under paragraph 1 which was not previously excluded by the member. Thereafter, all amounts received by a beneficiary shall be included in gross income.

' 43-112.02. Gross income; gain from sale or exchange of residence of individual who has attained age sixty-five

 

A. Subject to the limitations provided in subsection B of this section at the election of the taxpayer, gross income does not include gain from the sale or exchange of property if both of the following apply:

1. The taxpayer has attained the age of sixty-five before the date of such sale or exchange.

2. During the eight-year period ending on the date of the sale or exchange, such property has been owned and used by the taxpayer as his or her principal residence for periods aggregating five years or more.

 

B. If the adjusted selling price of the property sold or exchanged exceeds thirty-five thousand dollars, the provisions of subsection A of this section shall apply to that portion of the gain which bears the same ratio to the total amount of such gain as thirty-five thousand dollars bears to such adjusted selling price. For purposes of this subsection, "adjusted selling price" has the meaning assigned to such term as used in ' 43-152, subsection (n).

 

C. The provisions of subsection A of this section shall not apply to any sale or exchange by the taxpayer if an election by the taxpayer or the taxpayer's spouse pursuant to subsection A of this section with respect to any other sale or exchange is in effect.

 

D. An election pursuant to subsection A of this section may be made or revoked at any time before the expiration of the period for making a claim for credit or refund of the tax imposed by this title for the taxable year in which the sale or exchange occurred and shall be made or revoked in such manner as the department shall by regulations prescribe. In the case of a taxpayer who is married, an election pursuant to subsection A of this section or a revocation may be made only if his or her spouse joins in such election or revocation.

 

E. Both husband and wife shall be treated as satisfying the age, holding and use requirements of subsection A of this section with respect to such property if all of the following apply:

1. Property is held jointly by a husband and wife as joint tenants, tenants by the entirety or community property.

2. Such husband and wife make a joint return pursuant to ' 43-141 for the taxable year of the sale or exchange.

3. One spouse satisfies the age, holding and use requirements of subsection A of this section with respect to such property.

 

F. An unmarried individual whose spouse is deceased on the date of the sale or exchange of property shall be treated as satisfying the holding and use requirements of subsection A, paragraph 2 of this section with respect to such property if:

1. The deceased spouse, during the eight-year period ending on the date of the sale or exchange, satisfied the holding and use requirements of subsection A, paragraph 2 of this section with respect to such property.

2. No election by the deceased spouse pursuant to subsection A of this section is in effect with respect to a prior sale or exchange.

 

G. If the taxpayer holds stock as a tenant-stockholder, as defined in ' 43-123.28, in a cooperative apartment corporation, as defined in ' 43-123.28:

1. The holding requirements of subsection A, paragraph 2 of this section shall be applied to the holding of such stock.

2. The use requirements of subsection A, paragraph 2 of this section shall be applied to the house or apartment which the taxpayer was entitled to occupy as such stockholder.

 

H. For the purposes of this section, the destruction, theft, seizure, requisition or condemnation of property shall be treated as the sale of such property.

 

I. In the case of property only a portion of which, during the eight-year period ending on the date of the sale or exchange, has been owned and used by the taxpayer as his or her principal residence for periods aggregating five years or more, this section shall apply with respect to so much of the gain from the sale or exchange of such property as is determined, pursuant to regulations prescribed by the department, to be attributable to the portion of the property so owned and used by the taxpayer.

 

J. In the case of any sale or exchange:

1. The determination of whether an individual is married shall be made as of the date of the sale or exchange.

2. An individual legally separated from his or her spouse under a decree of separate maintenance shall not be considered as married.

 

K. In applying ' 43-152, subsection (n), relating to the sale or exchange of residence, the amount realized from the sale or exchange of property shall be treated as being the amount determined without regard to this section, reduced by the amount of gain not included in gross income pursuant to an election pursuant to this section.

 

L. The provisions of this section shall be applicable to only one sale or exchange during the lifetime of the taxpayer.

 

 

' 43-113. Gross income forgiveness of indebtedness

(a) Forgiveness of indebtedness and commodity credit loans

(1) Cancellation of indebtedness. If the indebtedness of a taxpayer is cancelled or forgiven in whole or in part without payment at such a time and under such circumstances that the cancellation did not constitute a gift to the taxpayer, the amount so cancelled or forgiven constitutes income to the extent the value of the property, including franchises, of the taxpayer exceeds his liabilities immediately after the cancellation or forgiveness. The remainder of the amount of indebtedness so cancelled or forgiven, if any, shall be applied in reduction of the basis of the assets to the extent the basis thereof exceeds the value thereof immediately after the cancellation or forgiveness. The reduction shall be made in accordance with regulations prescribed by the tax commission.

(2) Outlawed debt presumed cancelled. If an indebtedness is not paid by the time an action to enforce payment is barred by limitation, the indebtedness shall be considered cancelled or forgiven within the meaning of this title unless it can be established that the period of limitation has been extended by a new promise in writing.

(3) Cancellation of indebtedness by stockholder. If a stockholder or stockholders of a corporation cancels any indebtedness owing to the stockholder or stockholders by the corporation, such cancellation shall not constitute income to the taxpayer except to the extent that the taxpayer received a tax benefit, under this title, from such indebtedness.

 

(b) Commodity credit loans

(1) Commodity credit loans -- election. Amounts received as loans from the commodity credit corporation shall, at the election of the taxpayer, be considered as income included in gross income for the taxable year in which received.

(2) Effect of election. If the taxpayer exercises the election provided for in paragraph (1) for any taxable year beginning after December 31, 1953, then the method of computing income so adopted shall be adhered to with respect to all subsequent taxable years unless, with the approval of the tax commission, a change to a different method is authorized.

 

' 43-114. Gross income gross income of nonresidents

(a) Nonresidents, gross income. In the case of nonresidents gross income includes only the gross income from sources within this state.

(b) Nonresidents, intangible income. Income of nonresidents from stocks, bonds, notes, or other intangible personal property is not income from sources within this state unless the property has acquired a business situs in this state, except that if a nonresident buys or sells such property in this state or places orders with brokers in this state to buy or sell such property so regularly, systematically, and continuously as to constitute doing business in this state, the profit or gain derived from such activity is income from sources within this state irrespective of the situs of the property. However, in no case shall transactions extending over a period of less than six months be deemed to constitute doing business in this state.

(c) Nonresident beneficiaries. Income of estates and trusts distributed or distributable to nonresident beneficiaries is income from sources within this state only if distributed or distributable out of income of the estate or trust derived from sources within this state. For the purposes of this section, the nonresident beneficiary shall be deemed to be the owner of intangible personal property from which the income of the estate or trust is derived.

(d) Nonresidents, allocations of income. Gross income from sources within and without this state shall be allocated and apportioned under rules and regulations prescribed by the tax commission.

 

' 43-115. Income taxes of members of armed forces upon death

In the case of any individual who dies while in active service as a member of the armed forces of the United States, if such death occurred while serving in a combat zone or a result of wounds, disease, or injury incurred while so serving --

(a) the tax imposed by this title shall not apply with respect to the taxable year in which falls the date of his death, or with respect to any prior taxable year ending on or after the first day he so served in a combat zone; and

(b) the tax under this title which is unpaid at the date of his death (including interest, additions to the tax, and additional amounts) shall not be assessed, and if assessed the assessments shall be abated, and if collected shall be credited or refunded as an overpayment.

 

 

' 43-123. Repealed by Laws 1973, Ch. 7, ' 2, eff. March 6, 1973

' 43-123.01. Deductibility of dividends received from Arizona business and financing institutions

The income of banks, investment companies and loan associations taxed under the provisions of chapter 5, title 42, shall be deemed subject to taxation under this title for the purposes of determining whether a taxpayer is entitled to a deduction under the provisions of ' 43-123.32 for dividends received by a stockholder of a corporation.

' 43-123.02. Election to amortize expenditures incurred in the acquisition of atmospheric and water pollution control devices, machinery or equipment

 

(a) General rule. Any taxpayer may elect to amortize the adjusted basis of any device, machinery or equipment for the collection and control at the source of atmospheric and water pollutants and contaminants based upon a period of sixty months. In computing net income, such amortization shall be allowed as a deduction ratably over the period allowed under this subsection beginning with the month in which such device, machinery or equipment is completed or acquired and is placed in service by the taxpayer. This election shall be indicated by the taxpayer in an appropriate statement in the taxpayer's income tax return for the taxable year of the acquisition or completion and placement in service of such devices, machinery or equipment. An election to discontinue amortization with respect to the remainder of the amortization period is permitted and shall be indicated by an appropriate statement in the taxpayer's income tax return for the taxable year of discontinuance.

 

(b) Deduction in lieu of depreciation. The deduction provided under subsection shall be in lieu of any allowance for the exhaustion, wear and tear of property used in a trade or business, or of property held for the production of income, including a reasonable allowance for obsolescence as provided under ' 43-123.14.

 

(c) Certification requirement by the department of health services. In determining the adjusted basis for the purposes of subsection (a), such device, machinery or equipment upon certification by the department of health services as a device, machinery or equipment for the collection and control at the source of atmospheric and water pollutants and contaminants shall include only an amount that is properly attributable to the construction, reconstruction, remodeling, installation or acquisition of such device, machinery or equipment as certified by the department of health services.

 

' 43-123.03. Deductions for expenses

A. In computing net income there shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including a reasonable allowance for salaries or other compensation for personal services actually rendered; traveling expenses (including the entire amount expended for meals and lodging) while away from home in the pursuit of a trade or business; and rentals or other payments required to be made as a condition to the continued use or possession, for purposes of the trade or business, of property to which the taxpayer has not taken or is not taking title or in which he has no equity:

1. In the case of a taxpayer engaged in the business of farming, expenditures made for the purpose of soil and water conservation and the prevention of erosion of land used in farming shall be allowed as deductions under this section. For the purposes of this paragraph, the term "expenditures made for the purpose of soil and water conservation and the prevention of erosion" means expenditures for the treatment, moving, or cultivation of earth, including (but not limited to) leveling, grading and terracing, contour furrowing, the construction of diversion channels and drainage ditches, the control and protection of water courses, outlets and ponds, the planting and cultivation of cover and protective crops or windbreaks, the control of weeds and brush and other special or emergency cultivation and tillage; but such term does not include the purchase, construction, installation or improvement of structures, appliances, and facilities made of masonry, concrete, tile, metal, or wood, such as tanks, reservoirs, pipes, conduits, canals, dams, wells, and pumps, which are subject to the allowance for depreciation provided in ' 43-123.14. For the purposes of this paragraph the term "land used in farming" means land used (prior to the expenditure for conservation made by the taxpayer) by the taxpayer or his tenant or the predecessor owner or his tenant for the production of crops, fruits, and similar agricultural products or for the sustenance of livestock.

2. No deduction shall be allowable under this subsection, to a corporation for any contribution or gift which would be allowable as a deduction under ' 43-123.19, subsection A, were it not for the five per cent limitation therein contained and for the requirements therein that payment must be made within the income year.

 

B. In computing net income there shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year for the production or collection of income, or for the management, conservation, or maintenance of property held for the production of income.

 

C. The deductions permitted by subsection A of this section shall not be allowed to the extent that they are connected with the production of income not taxable under this title. Proper apportionment and allocation of such deductions with respect to taxable and nontaxable income shall be determined pursuant to ' 43-126, subsection (a), paragraph (5).

 

D. In computing net income there shall be allowed as a deduction a reasonable amount for ordinary and necessary expenses paid or incurred during the taxable year for additional education or training required for the satisfaction of upgraded professional or occupational requirements. To be eligible to claim the deduction provided by this paragraph, the taxpayer shall be actively engaged in the taxpayer's trade, profession or occupation in the state of Arizona and the purpose of such education must be to maintain or improve a taxpayer's skills or meet the express requirements of the taxpayer's employer. Nothing in this section shall be construed as to allow any educational expenses paid or incurred in regard to sabbatical leave abroad or within the United States, or to meet the minimum educational requirements to qualify for the trade, profession or occupation or to qualify for a new trade, profession or occupation.

 

' 43-123.04. Deductions for interest

In computing net income there shall be allowed as a deduction all interest paid or accrued within the taxable year on indebtedness of the taxpayer. However, no deduction shall be allowed to the extent that it is connected with income not taxable under this title. 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 tax commission.

 

' 43-123.05. Deductions for taxes

In computing net income there shall be allowed as a deduction taxes or licenses paid or accrued during the taxable year, except:

1. Taxes on or according to or measured by income or profits paid or accrued within the taxable year imposed by the authority of the government of any foreign country, or any state, other than the state of Arizona, any territory, or taxing subdivision of any such state or territory.

2. Estate, inheritance, legacy, succession, and gift taxes.

3. Taxes assessed against local benefits of a kind tending to increase the value of the property assessed.

This does not exclude the allowance a s a deduction of so much of the taxes assessed against local benefits as is properly allocable to maintenance or interest charges, nor does this exclude the allowance of any irrigation or other water district taxes or assessments which are levied for the payment of the principal of any improvement or other bonds for which a general assessment on all lands within the district is levied as distinguished from a special assessment levied on part of the area within the district.

4. Taxes imposed as employee contributions under the Federal Insurance Contributions Act, the Railroad Retirement Tax Act, and taxes imposed on self-employment income under the Self-employment Contributions Act of 1954. Taxes imposed for this purpose include amounts levied for old age, survivors, disability insurance, and hospital insurance under the Social Security Act of the United States.

 

' 43-123.06. Deductions for sales and other taxes separately stated

In computing net income there shall be allowed as a deduction any tax imposed by any state, territory, district or possession of the United States, or any political subdivision thereof, upon persons:

1. Engaged in selling tangible personal property at retail, which is measured by the gross sales price or the gross receipts from the sale, or which is a stated sum per unit of such property sold; or

2. Engaged in furnishing services at retail, which is measured by the gross receipts for furnishing such services; or

3. Purchasing services or tangible personal property at retail which is measured by the gross receipts or gross sales price or which is a stated sum per unit of value sold, if the amount of the tax is separately stated, and if purchased otherwise than in connection with the consumer's trade or business. The amount of such tax paid by the consumer subject to the conditions in this paragraph shall be the deductions allowed. To such consumer the amount shall be allowed as a deduction in computing his net income as if the amount constituted a tax imposed upon and paid by him.

 

' 43-123.07. Deductions for losses by individuals

In computing net income there shall be allowed as a deduction in the case of an individual losses sustained during the taxable year and not compensated for by insurance or otherwise:

1. If incurred in trade or business; or

2. If incurred in any transaction entered into for profit, though not connected with the trade or business; or

3. Of property not connected with the trade or business, if the loss arises, from fires, storms, shipwreck, or other casualty, or from theft; or

4. If incurred by reason of the destruction or seizure of property, on or after December 7, 1941, in the course of military or naval operations by the United States or any other country engaged in time of war, subject to the rules and regulations prescribed by the tax commission.

The basis for determining the amount of deduction for losses sustained, to be allowed under this section, shall be the adjusted basis provided in ' 43-153(b) for determining the loss from the sale or other disposition of property.

 

' 43-123.08. Deductions for losses by corporations

A. In computing net income there shall be allowed as a deduction in the case of a corporation, losses sustained during the income year and not compensated for by insurance or otherwise.

 

B. The basis for determining the amount of deduction for losses sustained, to be allowed under this section, shall be the adjusted basis provided in ' 43-153(b) for determining the loss from the sale or other disposition of property.

 

' 43-123.09. Deductions for capital assets, losses

A. Losses from sales or exchanges of capital assets shall be allowed only to the extent provided in ' 43-157.

B. If any securities become worthless during the taxable year and are capital assets, the loss resulting therefrom shall, for the purposes of this title, be considered as a loss from the sale or exchange, on the last day of the taxable year, of capital assets.

C. "Securities", as used in this section, means shares of stock in a corporation, and rights to subscribe for or to receive such shares.

' 43-123.10. Deductions for wagering losses

Losses from wagering transactions shall be allowed only to the extent of the gains from such transactions.

' 43-123.11. Deductions for sixty day sales

In the case of any loss claimed to have been sustained in any sale or disposition of property where it appears that within thirty days before or after the date of such sale or other disposition the taxpayer has acquired (otherwise than by bequest or inheritance) or has entered into a contract or option to acquire substantially identical property and the property acquired is held by the taxpayer for any period after such sale or other disposition, no deduction for the loss shall be allowed unless the claim is made by a taxpayer, a dealer in such property, and with respect to a transaction made in the ordinary course of his business. If such acquisition or the contract or option to acquire is to the extent of part only of substantially identical property, then only a proportionate part of the loss shall be disallowed. Upon the subsequent sale or disposition of such property, in respect of which a loss has been disallowed, the basis for measuring gain or loss in the case of property so acquired shall be the basis in the case of the property so sold or disposed of, except that if the repurchase price was in excess of the sale price such basis shall be increased in the amount of the difference, or if the repurchase price was less than the sale price such basis shall be decreased in the amount of the difference.

' 43-123.12. Deductions for wash sales

A. In the case of any loss claimed to have been sustained from any sale or other disposition of shares of stock or securities where it appears that within a period beginning thirty days before the date of the sale or disposition and ending thirty days after that date, the taxpayer has acquired (by purchase or by an exchange upon which the entire amount of gain or loss was recognized by law) or has entered into a contract or option so to acquire, substantially identical stock or securities, then no deduction for the loss shall be allowed under ' 43-123.07, paragraph 2; nor shall such deduction be allowed under ' 43-123.08 unless the claim is made by a corporation, a dealer in stocks or securities and with respect to a transaction made in the ordinary course of its business.

 

B. If the amount of stock or securities acquired (or covered by the contract or option to acquire) is less than the amount of stock or securities sold or otherwise disposed of, then the particular shares of stock or securities the loss from the sale or other disposition of which is not deductible shall be determined under rules and regulations prescribed by the tax commission.

 

C. If the amount of stock or securities acquired (or covered by the contract or option to acquire) is not less than the amount of stock or securities sold or otherwise disposed of, then the particular shares of stock or securities the acquisition of which (or the contract or option to acquire which) resulted in the nondeductibility of the loss shall be determined under the rules and regulations prescribed by the tax commission. If such acquisition or the contract or option to acquire is to the extent of part only of substantially identical property, then only a proportionate part of the loss shall be disallowed. Upon the subsequent sale or disposition of shares of stock or securities, in respect of which a loss has been disallowed, the basis for measuring gain or loss in the case of property so acquired shall be the basis in the case of the shares or securities so sold or disposed of, except that if the repurchase price was in excess of the sale price such basis shall be increased in the amount of the difference, or if the repurchase price was less than the sale price such basis shall be decreased in the amount of the difference.

 

' 43-123.13. Deductions for bad debts

A. In computing net income there shall be allowed as a deduction debts which become worthless within the taxable year or, in the discretion of the tax commission, a reasonable addition to a reserve for bad debts. When satisfied that a debt is recoverable only in part, the tax commission may allow the debt as a deduction in an amount not in excess of the part charged off within the taxable year as a deduction. If a debt was actually worthless prior to January 1, 1954, but was not ascertained to be worthless and charged off prior to that date, a deduction may be taken therefor during the first taxable year ending after December 31, 1953; if a portion of a debt is claimed and allowed as a deduction in any year no deduction shall be allowed in any subsequent year for any portion of the debt which was charged off, regardless of whether or not claimed as a deduction in any prior year. This subsection does not apply to a debt evidenced by a security as defined in subsection C. If a nonbusiness debt becomes worthless within the taxable year, the loss resulting therefrom shall be considered a loss from the sale or exchange during the taxable year of a capital asset held for not more than six months. The term "nonbusiness debt" means a debt other than a debt evidenced by a security and other than a debt the loss from the worthlessness of which is incurred in the taxpayer's trade or business. The basis for determining the amount of deduction allowed under this subsection shall be the adjusted basis provided in ' 43-153(b) for determining the loss from the sale or other disposition of property.

 

B. If any securities, as defined in subsection C become worthless within the taxable year and are capital assets, the loss resulting shall be considered as a loss from the sale or exchange, on the last day of the taxable year, of capital assets.

 

C. "Securities", as used in subsections A and B means bonds, debentures, notes, 6C certificates, or other evidences of indebtedness, issued by any corporation (including those issued by a government or political subdivision thereof) with interest coupons or in registered form.

 

D. This section shall not apply in the case of a taxpayer, other than a bank, as defined in ' 104, of the Internal Revenue Code, with respect to debts owed by any political party, any national, state or local committee of any political party, or any 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. For the purpose of this subsection, the terms "contributions" and "expenditures" shall have the meanings prescribed for such terms in ' 591 of title 18 of the United States Code.

 

' 43-123.14. Deductions for depreciation

A. In computing net income there shall be allowed as a depreciation deduction a reasonable allowance for the exhaustion, wear and tear including a reasonable allowance for obsolescence:

1. Of property used in the trade or business, or

2. Of property held for the production of income.

 

B. For taxable years ending after December 31, 1969, the term "reasonable allowance" as used in subsection A shall include (but not be limited to) an allowance computed in accordance with regulations prescribed by the tax commission under any of the following methods:

1. The straight line method.

2. The declining balance method, using a rate not exceeding twice the rate which would have been used had the annual allowance been computed under the method described in paragraph 1 of this subsection.

3. The sum of the years-digits method.

4. Any other consistent method productive of an annual allowance which, when added to all allowances for the period commencing with taxpayer's use of the property and including; the taxable year, does not, during the first two-thirds of the useful life of the property, exceed the total of such allowances which would have been used had such allowances been computed under the method described in paragraph 2 of this subsection.

Nothing in this subsection shall be construed to limit or reduce an allowance otherwise allowable under subsection A.

 

C. Paragraphs 2, 3 and 4 of subsection B shall apply only in the case of property (other than intangible property) described in subsection A with a useful life of three years or more:

1. The construction, reconstruction, or erection of which is completed after December 31, 1969, and then only to that portion of the basis which is attributable to such construction, reconstruction, or erection after December 31, 1969, or

2. Acquired after December 31, 1969, if the original use of such property commences with the taxpayer and commences after such date.

 

D. Where, under regulations prescribed by the tax commission, the taxpayer and the tax commission, after the date of enactment of this title, entered into an agreement in writing specifically dealing with the useful life and rate of depreciation of any property, the rate so agreed upon shall be binding on both the taxpayer and the tax commission in the absence of facts or circumstances not taken into consideration in the adoption of such agreement. The responsibility of establishing the existence of such facts and circumstances shall rest with the party initiating the modification. Any change in the agreed rate and useful life specified in the agreement shall not be effective for taxable years before the taxable year in which notice in writing by certified mail or registered mail is served by the party to the agreement initiating such change.

 

E. In the absence of an agreement under subsection D containing a provision to the contrary, a taxpayer may at any time elect in accordance with regulations prescribed by the tax commission to change from the method of depreciation described in subsection B, paragraph 2, to the method described in subsection B, paragraph 1.

 

F. A taxpayer may on or before the last day prescribed by law (including extensions thereof) for filing his return for his first taxable year beginning after December 31, 1969, and in such manner as the tax commission shall by regulations prescribe, elect to change his method of depreciation in respect of ' 43-157(p) and ' 43-157(q) property (as defined in ' 43-157(p)(1)(c) and ' 43-157(q)(3)) from any declining balance or sum of the years-digits method to the straight line method. An election may be made under this subsection notwithstanding any provision to the contrary in an agreement under subsection D.

 

G. Under regulations prescribed by the tax commission, a taxpayer may, for purposes of computing the allowance under subsection A with respect to personal property reduce the amount taken into account as salvage value by an amount which does no; exceed ten per cent of the basis of such property (as determined under subsection H as of the time as of which such salvage value is required to be determined). For purposes of this section, the term "personal property" means depreciable personal property (other than livestock) with a useful life of three years or more acquired after December 31, 1969.

 

H. For the basis upon which exhaustion, wear and tear and obsolescence are to be allowed, see ' 43-123.16.

 

I. In the case of property held by one person for life with remainder to another person, the deduction shall be computed as if the life tenant were the absolute owner of the property and shall be allowed to the life tenant. In the case of property held in trust the allowable deduction shall be apportioned between the income beneficiaries and the trustee in accordance with the pertinent provisions of the instrument creating the trust, or, in the absence of such provisions, on the basis of the trust income allocable to each.

 

J. For the additional rule applicable to depreciation of improvements in the case of mines, oil and gas wells, other natural deposits, and timber, see ' 43-123.15.

 

K. A taxpayer may elect to claim a deduction for emergency facilities, as defined under ' 168 of the United States Internal Revenue Code. The tax commission is authorized to prescribe regulations for the implementation of this section.

 

' 43-123.15. Deductions for depletion

A. In computing net income there shall be allowed as a deduction, in the case of mines, oil, gas and geothermal resource wells, other natural deposits and timber, a reasonable allowance for depletion and for depreciation of improvements, according to the peculiar conditions in each case, such reasonable allowance in all cases to be made under rules and regulations prescribed by the department. In any case in which it is ascertained as a result of operations or of development work that the recoverable units are greater or less than the prior estimate thereof the prior estimate (but not the basis for depletion) shall be revised and the allowance under this section for subsequent taxable years shall be based upon the revised estimate. Any mine using the unit depletion method in computing depletion allowance for Arizona state income tax purposes immediately prior to January 1, 1954, shall continue to use that method and in no subsequent year shall the unit rate of depletion allowance exceed that in use by the mine for the tax year of 1949.

 

B. In the case of leases the deductions shall be equitably apportioned between the lessor and the lessee. In the case of property held by one person for life with remainder to another person, the deduction shall be computed as if the life tenant were the absolute owner of the property and shall be allowed to the life tenant. In the case of property held in trust the allowable deduction shall be apportioned between the income beneficiaries and the trustee in accordance with the pertinent provisions of the instrument creating the trust, or, in the absence of such provisions, on the basis of the trust income allowable to each.

 

C. The percentage of depletion allowable under this section shall be computed in accordance with the provisions of ' 43-154(b)(3) and (4).

 

' 43-123.16. Basis for depreciation and depletion

The basis upon which depletion, exhaustion, wear and tear, and obsolescence are to be allowed in respect to any property shall be as provided in ' 43-154.

 

' 43-123.17. Deductions for charitable and other contributions

A. In computing net income there shall be allowed as a deduction, in the case of an individual, contributions or gifts payment of which is made within the taxable year to or for the use of:

1. The United States, any state, territory, or any political subdivision thereof, or the District of Columbia, for exclusively public purposes.

2. A corporation, or trust, or community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes, or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private shareholder or individual, and no substantial part of the activities of which is carrying on propaganda, or otherwise attempting to influence legislation.

3. Posts or organizations of war veterans, or auxiliary units or societies of any such posts or organizations, if the posts, organizations, units, or societies are organized in the United States and if no part of their net earnings inures to the benefit of any private shareholder or individual.

4. A fraternal society, order, or association, operating under the lodge system, but only if the contributions or gifts are to be used exclusively for religious, charitable, scientific, literary, or educational purposes or for the prevention of cruelty to children or animals.

 

B. In the case of an individual deductions for contributions or gifts shall be allowed to an amount which in all cases listed in subsection A combined does not exceed twenty per cent of the taxpayer's adjusted gross income. The contributions or gifts shall be allowed as deductions only if verified under rules and regulations prescribed by the tax commission.

' 43-123.18. Deductions for contributions of an employer to an employee's trust or annuity plan and compensation under a deferred payment plan

 

A. If contributions are paid by an employer to or under a stock bonus, pension, profit-sharing, or annuity plan, or if compensation is paid or accrued on account of any employee under a plan deferring the receipt of such compensation, such contributions or compensation shall not be deductible under ' 43-123.03 but shall be deductible, if deductible under ' 43-123.03 without regard to this section only to the following extent:

1. In the taxable year when paid, if the contributions are paid into a pension trust, and if such taxable year ends within or with a taxable year of the trust for which the trust is exempt from ' 43-165(a) in an amount determined as follows:

(a) An amount not in excess of five per cent of the compensation otherwise paid or accrued during the income year to all the employees under the trust, but such amount may be reduced for future years if found by the tax commission upon periodical examinations at not less than five-year intervals to be more than the amount reasonably necessary to provide the remaining unfunded cost of past and current service credits of all employees under the plan, plus

(b) Any excess over the amount allowable under subdivision (a) necessary to provide with respect to all of the employees under the trust the remaining unfunded cost of their past and current service credits distributed as a level amount, or a level percentage of compensation, over the remaining future service of each such employee, as determined under regulations prescribed by the tax commission, but if such remaining unfunded cost with respect to any three individuals is more than fifty per cent of such remaining unfunded cost, the amount of such unfunded cost attributable to such individuals shall be distributed over a period of at least five income years, or

(c) In lieu of the amounts allowable under subdivisions (a) and (b) of this paragraph an amount equal to the normal cost of the plan, as determined under regulations prescribed by the tax commission, plus, if past service or other supplementary pension or annuity credits as provided by the plan, an amount not in excess of ten per cent of the cost which would be required to completely fund or purchase such pension or annuity credits as of the date when they are included in the plan, as determined under regulations prescribed by the tax commission, except that in no case shall a deduction be allowed for any amount (other than the normal cost) paid in after such pension or annuity credits are completely funded or purchased.

(d) Any amount paid in an income year in excess of the amount deductible in such year under the foregoing limitations shall be deductible in the succeeding taxable years in order of time to the extent of the difference between the amount paid and deductible in each such succeeding year and the maximum amount deductible for such year in accordance with the foregoing limitations.

2. In the taxable year when paid, in an amount determined in accordance with paragraph 1 of this subsection, if the contributions are paid toward the purchase of retirement annuities and such purchase is a part of a plan which meets the requirements of ' 43-165(a)(3), (4), (5), and (6), and if refunds of premiums, if any, are applied within the current taxable year or next succeeding taxable year toward the purchase of such retirement annuities.

3. In the taxable year when paid, if the contributions are paid into a stock bonus or profit-sharing trust, and if such taxable year ends within or with a taxable year of the trust with respect to which the trust is exempt under ' 43-165(a), and in an amount not in excess of fifteen per cent of the compensation otherwise paid or accrued during the income year to all employees under the stock bonus or profit-sharing plan. If in any taxable year beginning after December 31, 1953, there is paid into the trust, or a similar trust then in effect, amounts less than the amounts deductible under the preceding sentence, the excess, or if no amount is paid, the amounts deductible shall be carried forward and be deductible when paid in the succeeding taxable years in order of time, but the amount so deductible under this sentence in any such succeeding taxable year shall not exceed fifteen per cent of the compensation otherwise paid or accrued during such succeeding taxable year to the beneficiaries under the plan. In addition any amount paid into the trust in a taxable year beginning after December 31, 1953, in excess of the amount allowable with respect to such year under the preceding provisions of this subsection shall be deductible in the succeeding taxable years in order of time, but the amount so deductible under this sentence in any one such succeeding taxable year together with the amount allowable under the first sentence of this paragraph shall not exceed fifteen per cent of the compensation otherwise paid or accrued during such taxable year to the beneficiaries under the plan. "Stock bonus or profit-sharing trust" shall not include any trust designed to provide benefits upon retirement and covering, a period of years, if under the plan the amounts to be contributed by the employer can be determined actuarially as provided in paragraph 1. If the contributions are made to two or more stock bonus or profit-sharing trusts, such trusts shall be considered a single trust for the purpose of applying the limitations in this paragraph.

4. In the taxable year when paid, if the plan is not one included in paragraph 1, 2 or 3, if the employees' rights to or derived from such employer's contribution or such compensation are nonforfeitable at the time the contribution or compensation is paid.

5. For the purposes of paragraphs 1, 2 and 3, a taxpayer on the accrual basis shall be deemed to have made a payment on the last day of the year of accrual if the payment is on account of such income year and is made within sixty days after the close of the taxable year of accrual.

6. If amounts are deductible under paragraphs 1 and 3, or 2 and 3, or 1, 2 and 3, in connection with two or more trusts, or one or more trusts and an annuity plan, the total amount deductible in a taxable year under such trusts and plans shall not exceed twenty-five per cent of the compensation otherwise paid or accrued during the taxable year to the persons who are the beneficiaries of the trusts or plans. In addition, any amount paid into such trust or under such annuity plans in a taxable year beginning after December 31, 1953, in excess of the amount allowable with respect to such year under the preceding provisions of this paragraph shall be deductible in the succeeding taxable years in order of time, but the amount so deductible under this sentence in any one such succeeding taxable year together with the amount allowable under the first sentence of this paragraph shall not exceed thirty per cent of the compensation otherwise paid or accrued during such taxable years to the beneficiaries under the trusts or plans. This paragraph shall not have the effect of reducing the amount otherwise deductible under paragraphs 1, 2 and 3, if no employee is a beneficiary under more than one trust, or a trust and an annuity plan. If there is no plan, but a method of employer contributions or compensation has the effect of a stock bonus, pension, profit-sharing, or annuity plan, or similar plan deferring the receipt of compensation, this paragraph shall apply as if there were such a plan.

 

B. If there is no plan, but a method of employer contributions or compensation has the effect of a stock bonus, pension, profit-sharing, or annuity plan,, or similar plan deferring the receipt of compensation, this subsection shall apply as if there were a plan.

 

C. For the purpose of applying the provisions of subsection A, with respect to contributions to or under a stock bonus, pension, profit-sharing, or annuity plan, and with respect to distributions under such a plan, or by a trust forming part of such a plan, the term "employee" shall include a full time life insurance salesman who is considered an employee for the purpose of subchapter A of chapter 9 of the Federal Internal Revenue Code, or in the case of services performed before January 1, 1954, who would be considered an employee if services were performed during 1954.

 

D. In the case of a stock bonus, pension, profit-sharing or annuity plan in effect on or before January 1, 1954:

1. Such a plan shall not become subject to the requirements of ' 43-165 until the beginning of the first taxable year beginning after December 31, 1953.

2. Such a plan shall be considered as satisfying the requirements of ' 43-165 for the period beginning with the beginning of the first taxable year following December 31, 1953, and ending on December 31, 1955, if the provisions of the plan satisfy such requirements by December 31, 1955, and if by that time all provisions of such plan which are necessary to satisfy such requirements are in effect and have been made effective for all purposes with respect to the portion of such period after December 31, 1953.

3. If the contribution of an employer to such a plan in the employer's income year beginning in 1954 exceeds the maximum amount deductible for such year and under subsection A, the amount deductible in such year shall not be less than the sum of:

(a) The amount paid in such taxable year prior to January 1, 1954, and deductible under ' 43-123.03; and

(b) With respect to the amount paid in such taxable year on or after January 1, 1954, that proportion of the amount deductible for the taxable year under subsection A of this section, which the number of months after December 31, 1953, in the taxable year bears to twelve.

 

E. In the case of a stock bonus, pension, profit-sharing or annuity plan put into effect after December 31, 1953, such a plan shall be considered as satisfying the requirements of ' 43-165 for the period beginning with the date on which such plan was put into effect and ending December 31, 1955, if all provisions of the plan which are necessary to satisfy such requirements are in effect by the end of such period and have been made effective for all purposes with respect to the portion of such period after December 31, 1953.

 

F. In the case of a stock bonus, pension, profit-sharing or annuity plan put into effect after December 31, 1954, the plan will be considered as satisfying the requirements of ' 43-165 for the period beginning with the date on which it was put into effect and ending with the fifteenth day of the fourth month following the close of the taxable year of the employer in which the plan was put into effect if all provisions of the plan which are necessary to satisfy such requirements are in effect by the end of such period and have been effective for all purposes with respect to the whole of such period.

 

' 43-123.19. Deductions for charitable and other contributions by corporations

A. In computing net income there shall be allowed as a deduction in the case of a corporation contributions or gifts, payment of which is made within the taxable year to or for the use of:

1. The United States, any state, territory, or any political subdivision thereof or the District of Columbia, or any possession of the United States, for exclusively public purposes; or

2. A corporation, trust, or community chest, fund, or foundation, created or organized in the United States or in any possession thereof or under the law of the United States or of any state or territory, or of the District of Columbia, or of any possession of the United States, organized and operated exclusively for religious, charitable, scientific, veteran rehabilitation set-vice, literary, or educational purposes or for the prevention of cruelty to children or animals (but only if such contributions or gifts are to be used within the United States or any of its possessions exclusively for such purposes), no part of the net earnings of which inures to the benefit of any private shareholder or individual, and no substantial part of the activities of which is carrying on propaganda, or otherwise attempting, to influence legislation. For disallowance of certain charitable, etc., deductions, otherwise allowable under this paragraph, the provisions of ' 43-162(h)(2) shall apply; or

3. Posts or organizations of war veterans, or auxiliary units of, or trusts or foundations for, any such posts or organizations, if such posts, organizations, units, trusts or foundations are organized in the United States or any of its possessions, and if no part of their net earnings inures to the benefit of any private shareholder or individual; or

4. A corporation or organization which is organized in the United States or any of its possessions by or for members of the armed forces of the United States for the purpose' of aiding or assisting members of such forces or their relatives if no part of the net earnings of such corporation or organization inures to the benefit of any private shareholder or individual.

5. The amount of aggregate deductions allowable under paragraphs 1, 2, 3 and 4 of this subsection, is limited to the extent it does not exceed five per cent of the taxpayer's net income as computed without the benefits of this section.

Such contributions or gifts shall be allowable as deductions only if verified under rules and regulations prescribed by the department.

 

B. In the case of a bank or corporation reporting its net income on the accrual basis, at the election of the taxpayer any contribution or gift, payment of which is made after the close of the taxable year and on or before the fifteenth day of the fourth month following the close of such year shall, for the purposes of subsection A of this section, be considered as paid during such taxable year if, during such year, the board of directors authorized such contribution or gift. Such election shall be made only at the time of the filing of the return for the taxable year and shall be signified in such manner as the department shall by regulations prescribe.

' 43-123.20. Savings banks, cooperative banks and building and loan associations -- return paid or credited to withdrawable deposits

In computing net income there shall be allowed as a deduction in the case of a savings bank, cooperative bank or building and loan association, organized and operating wholly or partly on a mutual plan, or a savings and loan association, organized and operating wholly or partly on a mutual plan, the return paid or credited on or apportioned to their withdrawable shares, account or deposits.

 

' 43-123.2 1. Net operating loss deduction

A. In computing net income there shall be allowed as a deduction a net operating loss deduction computed under this section.

 

B. As used in this section, the term "net operating loss" means the excess of the deductions allowed by this title over the gross income, with the exceptions, additions, and limitations provided in subsection E of this section.

 

C. If for any taxable year beginning after December 31, 1969, the taxpayer has a net operating loss, such net operating loss shall be a net operating loss carry-over for each of the five succeeding taxable years, except that the carry-over in the case of each such succeeding taxable year (other than the first succeeding taxable year) shall be the excess, if any, of the amount of such net operating loss over the sum of the net income for each of the intervening years computed:

1. With the exceptions, additions, and limitations provided in subsection E, paragraphs 1, 2 and 4 of this section, and

2. By determining the net operating loss deduction for each intervening taxable year, without regard to such net operating loss or to the net operating loss for any succeeding taxable year and without regard to any reduction specified in subsection D of this section. For the purpose of the preceding sentence, the net operating loss for any taxable year beginning after December 31, 1969, shall be reduced by the amount, if any, of the net income for the preceding taxable year computed:

(a) With the exceptions, additions, and limitations provided in subsection E, paragraphs 1, 2, 3 and 4 of this section, and

(b) By determining the net operating loss deduction for such preceding taxable year without regard to such net operating loss and without regard to any reduction specified in subsection D of this section.

 

D. The amount of the net operating loss deduction shall be the aggregate of the net operating loss carry-overs to the taxable year reduced by the amount, if any, by which the net income computed with the exceptions and limitations provided in subsection E, paragraphs 1, 2, 3 and 4 of this section exceeds the net income computed without such deduction.

 

E. The exceptions, additions, and limitations referred to in subsections B, C and D of this section shall be as follows:

1. The deduction for depletion shall not exceed the amount which would be allowable if computed without reference to discovery value or to percentage depletion;

2. There shall be included in computing gross income the amount of interest received which is wholly exempt from the taxes imposed by this title, decreased by the amount of interest paid or accrued which is not allowed as a deduction by ' 43-123.04, relating to interest on indebtedness incurred or continued to purchase or carry certain tax-exempt obligations;

3. No net operating loss deduction shall be allowed;

4. Gains and losses from sales or exchanges of capital assets shall be taken into account without regard to the provisions of ' 43-157(b). The amount deductible on account of losses from sales or exchanges of capital assets shall not exceed the amount includible on account of gains from such sales or exchanges.

5. Deductions, including federal income taxes, otherwise allowed by law not attributable to the operation of a trade or business regularly carried on by the taxpayer shall (in the case of a taxpayer other than a corporation) be allowed only to the extent of the amount of the gross income not derived from such trade or business. For the purposes of this paragraph deductions and gross income shall be computed with the exceptions, additions, and limitations specified in paragraphs 1 and 4 of this subsection. This subsection shall not apply with respect to deductions allowable for losses sustained in respect of property, if the losses arise from fire, storm, shipwreck, or other casualty, or from theft. For the purposes of this paragraph any gain or loss from the sale or other disposition of:

(a) Property, used in the trade or business, of a character which is subject to the allowance for depreciation provided in ' 43-123.14 or

(b) Real property used in the trade or business shall be treated as attributable to the trade or business.

 

' 43-123.22. Deductions for adoption expenses

A. In computing net income, there shall be allowed as a deduction, except as limited tinder subsections B and C, any expenses paid or incurred by the taxpayer or his spouse in connection with the adoption of a child by them. Such expenses include any medical and hospital expenses of the natural mother of an adopted child which are incident to the child's birth, and any welfare agency, legal and other fees or costs relating to the adoption.

 

B. A husband and wife who file a joint return may deduct only those adoption expenses which exceed five per cent of the aggregate adjusted gross income of the husband and wife, and the maximum deduction in any such return for any such expenses shall not exceed two thousand five hundred dollars.

 

C. A husband or wife who files a separate return may deduct only those adoption expenses which exceed five per cent of the adjusted gross income of the taxpayer, and the maximum deduction in any such return for any such expense shall not exceed one thousand two hundred fifty dollars.

 

D. A husband and wife who have paid or incurred both medical expenses and adoption expenses which in the aggregate exceed five per cent of the aggregate adjusted gross income of the husband and wife shall be allowed a deduction in the amount of such excess, subject to the usual applicable limitations, notwithstanding that the amount paid or incurred for each such type of expenses does not exceed five per cent of the aggregate adjusted gross income.

 

E. A husband and wife filing separate returns who has paid or incurred both medical expenses and adoption expenses which in the aggregate exceed five per cent of his or her adjusted gross income shall be allowed a deduction in the amount of such excess, subject to the usual applicable limitations, notwithstanding that the amount paid or incurred for each such type of expenses does not exceed five per cent of the adjusted gross income.

 

' 43-123.23. Deductions for alimony

In computing net income there shall be allowed a deduction in the case of a husband described in ' 43-112(e)(1), (2), and (4), amounts includible under those sections in the gross income of his wife, payment of which is made within the husband's taxable year. If the amount of any payment is, under ' 43-112(e)(1), (2) and (4) or under ' 43-164 stated not to be includible in the husband's gross income, no deduction shall be allowed with respect to that payment under this section.

 

' 43-123.24. Bond premium deduction

A. There shall be allowed as a deduction in the case of a bondholder, who makes the election in the method and under the conditions prescribed in subsection G of this section, the deduction for amortizable bond premium provided in this section.

 

B. In the case of any bond, as defined in subsection F, the following rules shall apply to the amortizable bond premium (determined under subsection C of this section) on the bond for any taxable year beginning after December 31, 1953:

1. In the case of a bond (other than a bond the interest on which is excludible from gross income), the amount of the amortizable bond premium for the taxable year shall be allowed as a deduction.

2. In the case of any bond the interest on which is excludible from gross income, no deduction shall be allowed for the amortizable bond premium for the taxable year.

 

C. For the purposes of subsection D of this section, the amount of bond premium, in the case of the holder of any bond, shall be determined with reference to the amount of the basis (for determining loss on sale or exchange) of such bond, and with reference to the amount payable on maturity or on earlier call date, with adjustments proper to reflect unamortized bond premium with respect to the bond, for the period prior to the date as of which subsection B of this section becomes applicable with respect to the taxpayer with respect to such bond. In no case shall the amount of bond premium on a convertible bond include any amount attributable to the conversion features of the bond.

 

D. The amortizable bond premium of the taxable year shall be the amount of the bond premium attributable to such year.

 

E. The determinations required under subsections C and D of this section shall be made:

1. In accordance with the method of amortizing bond premium regularly employed by the holder of the bond, if such method is reasonable;

2. In all other cases, in accordance with regulations prescribing reasonable methods of amortizing bond premium, prescribed by the tax commission.

 

F. As used in this section, "bond" means any bond, debenture, note, or certificate or other evidence of indebtedness, issued by any corporation and bearing interest (including any like obligations issued by a government or political subdivision thereof), with interest coupons or in registered form, but does not include any such obligation which constitutes stock in trade of the taxpayer or any such obligation of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or any such obligation held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business.

 

G. The amount of the amortizable bond premium for the taxable year shall be allowed as a deduction only if a taxpayer has elected to claim such deduction. Such election shall be made in accordance with such regulations as the tax commission shall prescribe. If such election is made with respect to any bond, it shall also apply to all such bonds held by the taxpayer at the beginning of the first taxable year to which the election applies and to all such bonds thereafter acquired by him, and shall be binding for all subsequent taxable years with respect to all such bonds of the taxpayer, unless, upon application by the taxpayer, the tax commission permits him, subject to such conditions as the tax commission deems necessary, to revoke such election.

 

H. For special rules applicable, in the case of dealers in securities with respect to premium attributable to certain "short-term municipal bonds", see ' 43-112(g)(1) and (2).

 

' 43-123.25. Deductions in respect of decedent

A. In computing net income, there shall be allowed as a deduction in the case of a person described in ' 43-158(b), the amount of the deductions in respect of a decedent to the extent allowed by that subsection.

 

B. In computing net income, there shall be allowed as a deduction in the case of a person described in ' 43-158(a), the amount of the deductions in respect of a decedent to the extent allowed by ' 43-158(c).

 

' 43-123.26. Deductions; medical expenses

A. In computing net income, there shall be allowed as a deduction, except as limited under subsections B and C of this section, expenses paid during the taxable year, not compensated for by insurance or otherwise, for medical care of the taxpayer, the taxpayer's spouse or a dependent of the taxpayer as defined in ' 43-127, subsection (c).

 

B. For the purposes of this section, "medical care" means amounts paid:

1. For the diagnosis, cure, mitigation, treatment or prevention of disease or for the purpose of affecting any structure or function of the body.

2. For transportation primarily for and essential to medical care referred to in subsection A of this section.

3. For insurance, including amounts paid as premiums pursuant to Part B of Title XVIII of the Social Security Act, relating to supplementary medical insurance.

 

C. In the case of an insurance contract under which amounts are payable for other than medical care referred to in subsection B, paragraphs 1 and 2 of this section:

1. No amount shall be treated as paid for insurance to which subsection B, paragraph 3 of this section applies unless the charge for such insurance is either separately stated in the contract or furnished to the policyholder by the insurance company in a separate statement.

2. The amount taken into account as the amount paid for such insurance shall not exceed such charge.

3. No amount shall be treated as paid for such insurance if the amount specified in the contract, or furnished to the policyholder by the insurance company in a separate statement, as the charge for such insurance is unreasonably large in relation to the total charges under the contract.

 

D. Any expense allowed as a deduction pursuant to ' 43-123.27 shall not be treated as an expense paid for medical care.

 

' 43-123.27. Deductions for care of qualified dependents

Every taxpayer, in reporting income for purposes of taxation, shall be entitled to the following deductions:

1. For payments made by any taxpayer who provides a home in his own household for any dependent as defined in paragraph 2 of this section, a deduction for wages paid in cash or its equivalent not exceeding the sum of one hundred dollars per month to a housekeeper or nursemaid for services rendered in such household for the care and supervision of such dependents, if such care and supervision is necessary to permit the taxpayer to be gainfully employed. Provided, that no deductions shall be allowed for payments made to a person who, except for such payments would be a dependent of the taxpayer as defined in ' 43-127(c). Or, if no housekeeper or nursemaid is employed in the household of the taxpayer, he may deduct not exceeding the sum of one hundred dollars per month, fees paid to licensed nursery schools or rest homes for the care of such dependents, if such care and supervision is necessary to permit the taxpayer to be gainfully employed.

2. A dependent for the purposes of this section shall be a child, stepchild or adopted child of the taxpayer under the age of sixteen years, or any other dependent as defined in ' 43-127(c) (including a spouse) who is physically or mentally incapable of self care.

3. A deduction under this section shall be allowed only for months in which the taxpayer is gainfully employed on a full-time basis for at least two weeks.

4. Deductions under this section shall not be allowed to any taxpayer if the sum of his or her gross income together with the gross incomes of all members of his household exceed six thousand dollars per year. A member of the household, for purposes of this section, is any person set forth in ' 43-127(c) who resided in the home of the taxpayer for a period in excess of six months for the taxable year involved.

' 43-123.28. Deductions for amounts representing taxes and interest paid to cooperative apartment corporation

 

A. In computing net income, there shall be allowed as a deduction in the case of a tenant-stockholder, amounts, not otherwise deductible, paid or accrued to a cooperative apartment corporation within the taxable year, if those amounts represent that proportion of the real estate taxes on the apartment building and the land on which it is situated, allowable as deductions under ' 43-123.05, paid or incurred by the corporation, or of the interest paid or incurred by the corporation on its indebtedness contracted in the acquisition, construction, alteration, rehabilitation, or maintenance of the apartment building or in the acquisition of the land on which the building is located, which the stock of the corporation owned by the tenant-stockholder is of the total outstanding stock of the corporation, including that held by the corporation.

 

B. As used in subsection A "cooperative apartment corporation" means a corporation:

1. Having one and only one class of stock outstanding;

2. All of the stockholders of which are entitled, solely by reason of their ownership of stock in the corporation, to occupy for dwelling purposes apartments in a building owned or leased by such corporation, and who are not entitled, either conditionally or unconditionally, except upon a complete or partial liquidation of the corporation, to receive any distribution not out of earnings and profits of the corporation, and

3. Eighty per cent or more of the gross income of which for the taxable year in which the taxes and interest described in subsection A are paid or incurred is derived from tenant-stockholders.

 

C. As used in subsection A, "tenant-stockholder" means an individual who is a stockholder is a cooperative apartment corporation, and whose stock is fully paid-up in an amount not less than an amount shown to the satisfaction of the tax commission as bearing a reasonable relationship to the portion of the value of the corporation's equity in the building and the land on which it is situated, which is attributable to the apartment which such individual is entitled to occupy.

 

' 43-123.29. Optional standard deduction for individuals

A. Except as provided in subsection B of this section, an individual, at his election, may take a standard deduction as follows:

1. If his adjusted gross income is five thousand dollars or more, the standard deduction shall be five hundred dollars;

2. If his adjusted gross income is less than five thousand dollars, the standard deduction shall be an amount equal to ten per cent of the adjusted gross income upon the basis of which the tax applicable to the adjusted gross income of the taxpayer is determined under the tax table provided in ' 43-102(c).

3. If the adjusted gross income of a married couple filing a joint return is less than ten thousand dollars, the standard deduction shall be an amount equal to twice ten per cent of one-half of the total adjusted gross income of both taxpayers upon the basis of which the tax applicable to one-half of the adjusted gross income of the taxpayers is determined under the tax table provided in ' 43-102(c).

4. If the adjusted gross income of a married couple filing a joint return is ten thousand dollars or more, the standard deduction shall be one thousand dollars.

 

B. Beginning January 1, 1978, the dollar amounts specified in subsection A of this section shall be changed pursuant to ' 43-130.

 

C. The standard deduction provided for in subsection A of this section shall be in lieu of all deductions other than those which under ' 43-112(f) are to be subtracted from gross income in computing adjusted gross income.

 

D. The standard deduction shall be allowed if the taxpayer so elects in his return, and the tax commission shall by regulation prescribe the manner of signifying such election in the return. An election to compute the tax under ' 43-102(c) is an election to take the standard deduction.

 

E. In the case of a husband and wife, the standard deduction provided for in subsection A of this section shall not be allowed to either if the net income of one of the spouses is determined without regard to the standard deduction. For the purposes of this subsection the determination of whether an individual is married shall be made as of the last day of the taxable year, unless his spouse dies during the taxable year, in which case such determination shall be made as of the date of such spouse's death.

 

F. For standard deduction provided for by subsection A of this section shall not be allowed in the case of a taxable year of less than twelve months on account of a change in the accounting period.

 

G. Under regulations prescribed by the tax commission, a change of an election to take, or not to take, the standard deduction for any taxable year may be made after the filing of the return for such year. If the spouse of the taxpayer filed a separate return for any taxable year corresponding, for the purposes of subsection E of this section to the taxable year of the taxpayer, the change shall not be allowed unless, in accordance with such regulations:

1. The spouse makes a change of election with respect to the standard deduction for the taxable year covered in such separate return, consistent with the change of election sought by the taxpayer, and

2. The taxpayer and his spouse consent in writing to the assessment, within such period as may be agreed upon with the tax commission, of any deficiency, to the extent attributable to such change of election, even though at the time of the filing of such consent the assessment of such deficiency would otherwise be prevented by the operation of any law or rule of law.

 

' 43-123.30. Deductions for development expenses; oil, gas and geothermal resources

Expenditures paid or incurred during the income year for the development of an oil, gas or geothermal resource well if paid or incurred after December 31, 1953, may at the option of the taxpayer be deducted from gross income or charged to capital account.

 

' 43-123.31. Deductions for development expenses, mines

A. Except as provided in subsection C of this section, in computing net income there shall be allowed as a deduction all expenditures paid or incurred during the taxable year for the development of a mine or other natural deposit (other than an oil, gas or geothermal resource well) if paid or incurred after December 31, 1953, and after the existence of ores or minerals in commercially marketable quantities has been disclosed.

 

B. This section shall not apply to expenditures for the acquisition or improvement of property of a character which is subject to the allowance for depreciation provided in ' 43-123.14, but allowances for depreciation shall be considered, for the purposes of this section, as expenditures.

 

C. At the election of the taxpayer, made in accordance with regulations prescribed by the department, expenditures described in subsection A of this section paid or incurred during the taxable year shall be treated as deferred expenses and shall be deductible on a ratable basis as the units of produced ores or minerals benefited by such expenditures are sold. In the case of such expenditures paid or incurred during the development stage of the mine or deposit, the election shall apply only with respect to the excess of such expenditures during the taxable year over the net receipts during the taxable year from the ores or minerals produced from such mine or deposit. The election must be for the total amount of such expenditures, or the total amount of such excess, as the case may be, with respect to the mine or deposit, and shall be binding for such taxable year.

 

D. The amount of expenditures which are treated under subsection C of this section as deferred expenses shall be taken into account in computing the adjusted basis of the mine or deposit, except that such amount, and the adjustments to basis provided in ' 43-154(b)(2)(A), shall be disregarded in determining the adjusted basis of the property for the purpose of computing a deduction for depletion under ' 43-153 of this title.

 

' 43-123.32. Deductions for dividends from Arizona corporations

Every taxpayer, in reporting income for purposes of taxation, shall be entitled to a deduction for dividends received from a corporation the income of which is subject to taxation under this title, which corporation has filed a report of income as required by this title, and the principal business of which is attributable to Arizona. For the purpose of this section the principal business of a corporation shall be considered attributable to Arizona if fifty per cent or more of the entire net income or loss of the corporation after an adjustment for taxes has been made for the year preceding the payment of such dividends, was used in computing the average taxable income provided by this title. This section does not apply to a dividend received from a business trust which qualifies as a "real estate investment trust" under '' 856, 857 and 858 of the United States Internal Revenue Code of 1954 as amended and which is entitled to a deduction under ' 43-123.36.

 

' 43-123.33. Deductions for exploration expenses

A. In the case of expenditures paid or incurred during the taxable year for the purpose of ascertaining the existence, location, extent, or quality of any deposit of ore or other mineral within the state of Arizona, and paid or incurred prior to the beginning of the development stage of the mine or deposit, in computing net income there shall be allowed as a deduction so much of such expenditures as does not exceed seventy-five thousand dollars.

 

B. This section shall apply only with respect to the amount of such expenditures which, but for this section, would not be allowable as a deduction for the taxable year.

 

C. This section shall not apply to expenditures for the acquisition or improvement of property of a character which is subject to the allowance for depreciation provided in ' 43-123.14, but allowances for depreciation shall be considered, for the purposes of this section, as expenditures paid or incurred.

 

D. This section shall likewise apply with respect to amounts paid or incurred for the purpose of ascertaining the existence, location, extent, or quality of any deposit of oil, gas or geothermal resources.

 

E. If the taxpayer elects, in accordance with regulations prescribed by the department, to treat as deferred expenses any portion of the amount deductible for the taxable year under subsection A of this section, such portion shall not be deductible under this section but shall be deductible on a ratable basis as the units or produced ores or minerals discovered or explored by reason of such expenditures are sold. An election made for any taxable year shall be binding for such year.

 

F. The amount of expenditures which are treated under subsection E of this section as deferred expenses shall be taken into account in computing the adjusted basis of the mine or deposit, but such amounts, and the adjustments to basis provided in ' 43-154(b)(2)(A) shall be disregarded in determining the adjusted basis of the property for the purpose of computing a deduction for depletion under ' 43-153 of this title.

 

' 43-123.34. Deductions for farmers' cooperatives and other cooperatives

A. In the case of farmers, fruit growers, or like associations organized and operated on a cooperative or mutual basis, for the purpose of marketing the products of members or other producers, and turning back to them the proceeds of sales, less the necessary marketing expenses, which may include reasonable reserves on the basis of either the quantity or the value of the products furnished by them, or for the purpose of purchasing, or producing, supplies and equipment for the use of members or other persons, and turning over such supplies and equipment to them at actual cost, plus necessary expenses, in computing net income there shall be allowed as a deduction all income resulting from or arising out of such business activities for or with their members carried on by them or their agents when and to the extent distributed in cash to such members.

 

B. In the case of any other association organized and operated on a cooperative or mutual basis no deduction or exemption set forth in subsection A shall be applicable.

 

' 43-123.35. Additional first-year depletion allowance

A. In the case of ' 43-123.35 property, the term "reasonable allowance" as used in ' 43-123.14 may, at the election of the taxpayer, include an allowance, for the first taxable year for which a deduction is allowable under ' 43-123.14 to the taxpayer with respect to such property, of twenty per cent of the cost of such property.

 

B. If in any one taxable year the cost of ' 43-123.35 property with respect to which the taxpayer may elect an allowance under subsection A of this section for such taxable year exceeds ten thousand dollars, then subsection A of this section, shall apply with respect to those items selected by the taxpayer, but only to the extent of an aggregate cost of ten thousand dollars. In the case of a husband and wife who file a joint return, under ' 43-141(a)(2)(B) for the taxable year, the limitation under the preceding sentence shall be twenty thousand dollars in lieu of ten thousand dollars.

 

C. The election under this section for any taxable year shall be made within the time prescribed by law (including extensions thereof) for filing the return for such taxable year. The election shall be made in such manner as the tax commission may by regulations prescribe. Any election made under this section may not be revoked except with the consent of the tax commission.

 

D. For purposes of this section, the term "' 43-123.35 property" means tangible personal property:

1. Of a character subject to the allowance for depreciation under ' 43-123.14.

2. Acquired by purchase after December 31, 1969, for use in a trade or business or for holding for production of income, and

3. With a useful life (determined at the time of such acquisition) of six years or more.

 

E. For purposes of subsection D of this section, the term "purchase" means any acquisition of property, but only if:

1. The property is not acquired from a person whose relationship to the person acquiring it would result in the disallowance of losses under ' 43-126(b) (but, in applying ' 43-126(b)(1) and (2) for purposes of this section, paragraph (D) of ' 43-126(b)(2) shall be treated as providing that the family of an individual shall include only his spouse, ancestors, and lineal descendants).

2. The property is not acquired by one member of an affiliated group from another member of the same affiliated group, and

3. The basis of the property in the hands of the person acquiring it is not determined:

(a) In whole or in part by reference to the adjusted basis of such property in the hands of the person from whom acquired, or

(b) Under ' 43-153(a)(5) (relating to property acquired from a decedent).

 

F. For purposes of this section, the cost of property does not include so much of the basis of such property as is determined by reference to the basis of other property held at any time by the person acquiring such property.

 

G. This section shall not apply to trusts.

 

H. In the case of an estate, this section shall apply to the extent provided in accordance with the provisions herein.

 

I. For purposes of subsection B of this section:

1. All members of an affiliated group shall be treated as one taxpayer, and

2. The tax commission shall apportion the dollar limitation contained in such subsection B of this section among the members of such affiliated group in such manner as it shall by regulations prescribe.

 

J. For the purposes of subsections E and I of this section, the term "affiliated group" has the meaning assigned to 11 controlled corporations" by ' 43-135.

 

K. In applying ' 43-123.14, subsection H, the adjustment under ' 43-153(b)(1)(B) resulting by reason of an election made under this section with respect to any ' 43-123.35 property shall be made before any other deduction allowed by ' 43-123.14 is computed.

 

L. The tax commission shall prescribe such regulations as may be necessary to carry out the purposes of this section.

' 43-123.36. Unincorporated trusts or associations qualifying as "real estate investment trusts" for federal income tax purposes; income distribution deduction

 

A. Any business trust created under or entering this state pursuant to title 10, chapter 1, article 18, which qualifies for federal tax purposes as a "real estate investment trust" under '' 856, 857 and 858 of the United States Internal Revenue Code of 1954, as amended, shall be entitled to a deduction for income distributed during the income year,

 

B. For the purposes of this section, if a real estate investment trust:

1. Declares a dividend before the time prescribed by law for the filing of its return for an income year, including the period of any extension of time granted for filing such return; and

2. Distributes the amount of such dividend to shareholders or holders of beneficial interests in the twelve-month period following the close of such income year and not later than the date of the first regular dividend payment made after such declaration,

the amount so declared and distributed shall, to the extent the trust elects in its return filed with the Internal Revenue Service pursuant to ' 858 of the United States Internal Revenue Code of 1954, as amended, be considered as having been paid during such income year, except as provided in subsections C and D of this section.

 

C. Amounts to which subsection B applies shall be treated as received by the shareholder or holder of a beneficial interest in the income year in which the distribution is made.

 

D. In the case of amounts to which subsection B applies, any return to the tax commission and any notice to shareholders or holders of beneficial interests required by ' 43-188, or regulations of the tax commission thereunder with respect to such amounts shall be made and given for the income year in which the distribution is made.

' 43-123.37. Election to amortize expenditures incurred in the acquisition of any solar energy device

 

(a) General rule. Any taxpayer may elect to amortize the adjusted basis of any solar energy device, whether for residential, commercial, industrial or governmental installations or experimental or demonstration projects, based upon a period of thirty-six months. In computing net income, such amortization shall be allowed as a deduction ratably over the period allowed under this subsection beginning with the month in which such device is completed or acquired and is placed in service by the taxpayer. This election shall be indicated by the taxpayer in an appropriate statement in the taxpayer's income tax return for the taxable year of the acquisition or completion and placement in service of such device. An election to discontinue amortization with respect to the remainder of the amortization period is permitted and shall be indicated by an appropriate statement in the taxpayer's income tax return for the taxable year of discontinuance.

 

(b) Deduction in lieu of depreciation. The deduction provided under subsection (a) shall be in lieu of any allowance for the exhaustion, wear and tear of property used in a trade or business, or of property held for the production of income, including a reasonable allowance for obsolescence as provided under ' 43-123.14.

 

(c) Deduction in lieu of credit. The deduction provided pursuant to subsection (a) shall be in lieu of any credit allowed for installation of a solar heating and cooling device in the taxpayer's residence pursuant to ' 43-128.03.

 

(d) Determining the adjusted basis. In determining the adjusted basis for the purposes of subsection (a), such device shall include only an amount that is properly attributable to the construction, reconstruction, remodeling, installation or acquisition of such device.

 

(e) Definition. In this section and ' 42-123.01, "solar energy device" means a system or a series of mechanisms designed primarily to provide heating, to provide cooling, to produce electrical power, to produce mechanical p6wer, or any combination thereof, by means of collecting and transferring solar-generated energy into such uses either by active or passive means. Such systems may also have the capability of storing such energy for future utilization. Passive systems shall clearly be designated1 as a solar energy device or as a trombe wall and not merely a part of a normal structure such as a window.

 

1So in original. Probably should read "designed."

' 43-123.38. Deduction for child care facilities for employees' children; deduction for facilities of proprietary for profit child care organizations

 

A. At the election of the taxpayer, any expenditure chargeable to capital account made by an employer to purchase, construct, renovate or remodel child care facilities or equipment for employees' children shall be allowable as a deduction ratably over a period of sixty months, beginning with the month in which the property is placed in service. For purposes of this section child care facilities shall be those facilities licensed and approved by the department of health.1

B. At the election of any proprietary for profit child care organizational taxpayer, any expenditure chargeable to capital account made to purchase, construct, renovate or remodel child care facilities or equipment shall be allowable as a deduction ratably over a period of sixty months, beginning with the month in which the property is placed in service.

 

C. The deduction provided by this section shall be in lieu of any allowance for the exhaustion, wear and tear of said property used in a trade or business or of property held for the production of income, including a reasonable allowance for obsolescence as provided under ' 43-123.14.

 

1So in original. Probably should read "department of health services."

 

' 43-123.39. Moving expense deduction

(a) Deduction allowed. There shall be allowed as a deduction moving expenses paid or incurred during the taxable year in connection with the commencement of work by the taxpayer as an employee or as a self-employed individual at a new principal place of work.

 

(b) Definition of moving expenses.

 

(1) In general. For purposes of this section, the term "moving expenses" means only the reasonable expenses:

(A) Of moving household goods and personal effects from the former residence to the new residence.

(B) Of traveling (including meals and lodging) from the former residence to the new place of residence.

(C) Of traveling (including meals and lodging), after obtaining employment, from the former residence to the general location of the new principal place of work and return, for the principal purpose of searching for a new residence.

(D) Of meals and lodging while occupying temporary quarters in the general location of the new principal place of work during any period of thirty consecutive days after obtaining employment.

(E) Constituting qualified residence sale, purchase, or lease expenses.

 

(2) Qualified residence sale, expenses. For purposes 1 paragraph (1)(E), the term "qualified residence sale, purchase, or lease expenses" means only reasonable expenses incident to:

(A) The sale or exchange by the taxpayer or his or her spouse of the taxpayer's former residence (not including expenses for work performed on such residence in order to assist in its sale) which (but for this subsection and subsection (f)) would be taken into account in determining the amount realized on the sale or exchange.

(B) The purchase by the taxpayer or his or her spouse of a new residence in the general location of the new principal place of work which (but for this subsection and subsection (f)) would be taken into account in determining either:

(i) The adjusted basis of the new residence; or

(ii) The cost of a loan (but not including any amounts which represent payments or prepayments of interest).

(C) The settlement of an unexpired lease held by the taxpayer or his or her spouse on property used by the taxpayer as his or her former residence.

(D) The acquisition of a lease by the taxpayer or his or her spouse on property used by the taxpayer as his or her new residence in the general location of the new principal place of work (not including amounts which are payments or prepayments of rent).

 

(3) Limitations.

 

(A) Dollar limits. The aggregate amount allowable as a deduction under subsection (a) in connection with a commencement of work which is attributable to expenses described in subparagraph (C) or (D) of paragraph (1) shall not exceed one thousand dollars. The aggregate amount allowable as a deduction under subsection (a) which is attributable to qualified residence sale, purchase, or lease expenses shall not exceed two thousand five hundred dollars, reduced by the aggregate amount so allowable which is attributable to expenses described in subparagraph (C) or (D) of paragraph (1).

 

(B) Husband and wife. If a husband and wife both commence work at a new principal place of work within the same general location, subparagraph (A) shall be applied as if there was only one commencement of work. In the case of a husband and wife filing separate returns, subparagraph (A) shall be applied by substituting five hundred dollars for one thousand dollars, and by substituting one thousand two hundred fifty dollars for two thousand five hundred dollars.

 

(C) Individuals other than taxpayer. In the case of any individual other than the taxpayer, expenses referred to in subparagraphs (A) through (D) of paragraph (1) shall be taken into account only if such individual has both the former residence and the new residence as his or her principal place of abode and is a member of the taxpayer's household.

 

(c) Conditions for allowance. No deduction shall be allowed under this section unless:

(1) The taxpayer's new principal place of work:

(A) Is at least fifty miles farther from his or her former residence than was his or her former principal place of work; or

(B) If he or she had no former principal place of work, is at least fifty miles from his or her former residence, and

(2) Either:

(A) During the twelve-month period immediately following his or her arrival in the general location of his or her new principal place of work, the taxpayer is a full-time employee, in such general location, during at least thirty-nine weeks, or

(B) During the twenty-four month period immediately following his or her arrival in the general location of his or her new principal place of work, the taxpayer is a full-time employee or performs services as a self-employed individual on a full-time basis, in such general location, during at least seventy-eight weeks, of which not less than thirty-nine weeks are during the twelve-month period referred to in subparagraph (A).

For purposes of paragraph (1), the distance between two points shall be the shortest of the more commonly traveled routes between such two points.

 

 

(d) Rules for application of subsection (c)(2).

(1) The condition of subsection (c)(2) shall not apply if the taxpayer is unable to satisfy such condition by reason of either:

(A) Death or disability.

(B) Involuntary separation (other than for wilful misconduct) from the service of, or transfer for the benefit of, an employer after obtaining full-time employment in which the taxpayer could reasonably have been expected to satisfy such condition.

(2) If a taxpayer has not satisfied the condition of subsection (c)(2) before the time prescribed by law (including extensions thereof) for filing the return for the taxable year during which he or she paid or incurred moving expenses which would otherwise be deductible under this section, but may still satisfy such condition, then such expenses may (at the election of the taxpayer) be deducted for such taxable year notwithstanding subsection (c)(2).

(3) If for any taxable year moving expenses have been deducted in accordance with the rule provided in paragraph (2), and the condition of subsection (c)(2) cannot be satisfied at the close of a subsequent taxable year, then an amount equal to the expenses which were so deducted shall be included in gross income for the first such subsequent taxable year.

 

(e) Reimbursement. In the case of an individual whose former residence was outside this state and his or her new place of residence is located within this state or whose former residence was located in this state and his or her new place of residence is located outside this state, the deduction allowed by this section shall be allowed only if any amount received as payment for or reimbursement of expenses of moving from one residence to another residence is includable in gross income as provided by ' 43-112 and the amount of deduction shall be limited only to the amount of such payment or reimbursement or the amounts specified in subdivision (b), whichever amount is the lesser.

 

(f) Denial of double benefit. The amount realized on the sale of the residence described in subparagraph (A) of subsection (b)(2) shall not be decreased by the amount of any expenses described in such subparagraph which are allowed as a deduction under subsection (a), and the basis of a residence described in subparagraph (B) of subsection (b)(2) shall not be increased by the amount of any expenses described in such subparagraph which are allowed as a deduction under subsection (a). This subsection shall not apply to any expenses with respect to which an amount is included in gross income under subsection (d)(3).

 

(g) Rules for self-employed individuals.

 

(1) Definition. -- For purposes of this section, the term "self-employed individual" means an individual who performs personal services either:

(A) As the owner of the entire interest in an unincorporated trade or business.

(B) As a partner in a partnership carrying on a trade or business.

 

(2) Rule for application of subsections (b)(1)(C) and (D). -- For purposes of subparagraph (C) and (D) of subsection (b)(1), an individual who commences work at a new principal place of work as a self-employed individual shall be treated as having obtained employment when he or she has made substantial arrangement to commence such work.

 

1So in original. Probably should read "purposes of".

 

' 43-123.40. Deduction for retirement savings

A. Deduction allowed. In the case of an individual, there is allowed as a deduction amounts paid in cash during the taxable year by or on behalf of such individual for the benefit of such individual:

1. To an individual retirement account as defined in ' 408 of the Internal Revenue Code.

2. For an individual retirement annuity as defined in ' 408 of the Internal Revenue Code.

3. For a retirement bond defined in ' 409 of the Internal Revenue Code, if the bond is not redeemed within twelve months of the date of its issuance. For the purpose of this section, any amount paid by an employer to such a retirement account or for such a retirement annuity or retirement bond constitutes payment of compensation to the employee, other than a self-employed individual who is an employee within the meaning of ' 43-123.42, includible in his or her gross income, whether or not a deduction for such payment is allowed pursuant to this section to the employee after the application of subsection B of this section.

 

B. Limitations and restrictions.

 

1. Maximum deduction. The amount allowable as a deduction pursuant to subsection A of this section to an individual for any taxable year may not exceed an amount equal to fifteen per cent of the compensation includible in his or her gross income for such taxable year, or one thousand five hundred dollars, whichever is less.

 

2. Covered by certain other plans. No deduction shall be allowed pursuant to subsection A of this section for an individual for the taxable year if for any part of such year either:

(a) The individual was an active participant in:

(i) A plan described in ' 43-123.42, which includes a trust exempt under ' 501(a) of the Internal Revenue Code.

(ii) An annuity plan described in ' 43-123.44, subsection A.

(iii) A qualified bond purchase plan described in ' 43-123.36, subsection A.

(iv) A plan established for its employees by the United States, by this state or any political division of this state, or by an agency or instrumentality of this state or the United States.

(b) Amounts were contributed by his or her employer for an annuity contract described in ' 43-123.44, subsection E, whether or not his or her rights in such contract are nonforfeitable.

 

3. Contribution after age seventy years and six months. No deduction shall be allowed pursuant to subsection A of this section with respect to any payment described in subsection A of this section which is made during the taxable year of an individual who has attained age seventy years and six months before the close of such taxable year.

 

4. Recontributed amounts. No deduction shall be allowed pursuant to this section with respect to a rollover contribution described in '' 43-123.43, subsection E and 43-123.44, subsection D and ' 408(d)(3) or 409(b)(3)(C) of the Internal Revenue Code.

 

5. Amounts contributed under endowment contract. In the case of an endowment contract described in ' 408(b) of the Internal Revenue Code, no deduction shall be allowed under subsection A of this section for that portion of the amounts paid under the contract for the taxable year property allocated to the cost of life insurance.

 

C. Definitions and special rules.

 

1. Compensation. For the purpose of this section, the term "compensation" includes earned income as defined in ' 43-123.42.

 

2. Married individuals. The maximum deduction pursuant to subsection B, paragraph 1 of this section, shall be computed separately for each individual, and this section shall be applied without regard to any community property laws.

 

3. Time when contribution deemed made. For the purposes of this section, a taxpayer shall be deemed to have made a contribution on the last day of the preceding taxable year if the contribution is made on account of such taxable year and is made not later than forty-five days after the end of such taxable year.

 

 

4. Participation in governmental plans by certain individuals.

 

(a) Members of reserve components. A member of a reserve component of the armed forces is not considered to be an active participant in a plan described in subsection B, paragraph 2, subdivision (a), item (iv) for a taxable year solely because he or she was a member of a reserve component, unless such individual has served in excess of ninety days on active duty, other than active duty for training during the year.

 

(b) Volunteer firefighters. An individual whose participation in a plan described in subsection B, paragraph 2, subdivision (a), item (iv) is based solely upon his or her activity as a volunteer firefighter and whose accrued benefits as of the beginning of the taxable year are not more than an annual benefit of one thousand eight hundred dollars, when expressed as a single life annuity commencing at age sixty-five, is not considered to be an active participant in such a plan for the taxable year.

 

' 43-123.4 1. Deduction for retirement savings for certain married individuals

A. Deduction allowed. In the case of an individual, there is allowed as a deduction amounts paid in cash for a taxable year by or on behalf of such individual for the benefit of the individual and the individual's spouse.

1. To an individual retirement account as defined in ' 408 of the Internal Revenue Code.

2. For an individual retirement annuity as defined in ' 408 of the Internal Revenue Code.

3. For a retirement bond as defined in ' 409 of the Internal Revenue Code, but only if the bond is not redeemed within twelve months of the date of its issuance.

For the purpose of this section, any amount paid by an employer to such a retirement account or for such a retirement annuity or retirement bond constitutes payment of compensation to the employee, other than a self-employed individual who is an employ, ee within the meaning of ' 43-123.42, includible in the employee's gross income, whether or not a deduction for such payment is allowed pursuant to this section to the employee after the application of subsection B of this section.

 

B. Limitations and restrictions.

 

1. Maximum deduction. The amount allowable as a deduction pursuant to subsection A of this section to an individual for any taxable year may not exceed the smallest of the following:

(a) Twice the amount paid to the account or annuity, or for the bond, established for the individual or for the individual's spouse to or for which the lesser amount was paid for the taxable year.

(b) An amount equal to fifteen per cent of the compensation includible in the individual's gross income for the taxable year.

(c) One thousand seven hundred fifty dollars.

 

2. Alternative deduction. No deduction shall be allowed pursuant to subsection A of this section for the taxable year if the individual claims the deduction allowed by ' 43-123.40 for the taxable year.

 

3. Coverage by certain other plans. No deduction shall be allowed pursuant to subsection A of this section for an individual for the taxable year if for any part of such year either:

(a) The individual or the individual's spouse was an active participant in:

(i) A plan described in ' 43-123.42, which includes a trust exempt under ' 501(a) of the Internal Revenue Code.

(ii) An annuity plan described in ' 43-123.44, subsection A.

(iii) A qualified bond purchase plan described in ' 43-123.36, subsection A.

(iv) A plan established for its employees by the United States, by this state or any political division of this state, or by an agency or instrumentality of this state or the United States.

(b) Amounts were contributed by the individual's employer, or the individual's spouse's employer, for an annuity contract described in ' 43-123.44, subsection E, whether or not the individual or the individual's spouse's rights in such contract are nonforfeitable.

 

4. Contribution after age seventy years and six months. No deduction shall be allowed pursuant to subsection A of this section with respect to any payment described in subsection A of this section which is made during the taxable year of an individual who has attained age seventy years and six months before the close of such taxable year.

 

5. Recontributed amounts. No deduction shall be allowed pursuant to this section with respect to a rollover contribution described in '' 43-123.43, subsection E and 43-123.44, subsection D and ' 408(d)(3) or 409(b)(3)(C) of the Internal Revenue Code.

 

6. Amounts contributed under endowment contract. In the case of an endowment contract described in ' 408(b) of the Internal Revenue Code, no deduction shall be allowed pursuant to subsection A of this section for that portion of the amounts paid under the contract for the taxable year properly allocated to the cost of life insurance.

 

7. Employed spouses. No deduction shall be allowed pursuant to subsection A of this section with respect to a payment described in subsection A of this section made for any taxable year of the individual if the spouse of the individual has any compensation for the taxable year of such spouse ending with or within such taxable year.

 

C. Definitions and special rules.

 

1. Compensation. For the purpose of this section, the term "compensation" includes earned income as defined in ' 43-123.42.

 

2. Married individuals. This section shall be applied without regard to any community property laws.

 

3. Determination of marital status. The determination of whether an individual is married for purposes of this section shall be made in accordance with the provisions of ' 143(a) of the Internal Revenue Code.

 

4. Time when contribution deemed made. For the purposes of this section, an individual shall be deemed to have made a contribution on the last day of the preceding taxable year if the contribution is made on an account of such taxable year and not later than forty-five days after the end of such taxable year.

 

5. Participation in governmental plans by certain individuals. A member of a reserve component of the armed forces or a volunteer firefighter is not considered to be an active participant in a plan described in subsection B, paragraph 2, subdivision (a), item (iv) if, pursuant to ' 43-123.40 the individual is not considered to be an active participant in such a plan.

 

' 43-123.42. Qualified pension, profit-sharing, and stock bonus plans

A. Requirements for qualification. A trust created or organized in the United States and forming part of a stock bonus, pension or profit-sharing plan of an employer for the exclusive benefit of his employees or their beneficiaries shall constitute a qualified trust under this section if:

1. Contributions are made to the trust by such employer, employees or both, or by another employer who is entitled to deduct his contributions under ' 43-123.45, subsection A, paragraph 3, subdivision (b) (relating to deduction for contributions to profit-sharing and stock bonus plans), for the purpose of distributing to such employees or their beneficiaries the corpus and income of the fund accumulated by the trust pursuant to such plan.

2. Under the trust instrument it is impossible, at any time prior to the satisfaction of all liabilities with respect to employees and their beneficiaries under the trust, for any part of the corpus or income to be (within or after the taxable year) used for, or diverted to, purposes other than for the exclusive benefit of his employees or their beneficiaries.

3. The plan of which such trust is a part satisfies the requirements of ' 410 of the Internal Revenue Code (relating to minimum participation standards).

4. The contributions or the benefits provided under the plan do not discriminate in favor of employees (except employees described in ' 410(b)(2)(A) and (c) of the Internal Revenue Code) who are:

(a) Officers.

(b) Shareholders.

(c) Highly compensated.

 

B. A classification shall not be considered discriminatory within the meaning of paragraph 4, subsection A of this section merely because it excludes employees the whole of whose remuneration constitutes "wages" under ' 3121(a)(1) of the Internal Revenue Code or merely because it is limited to salaried or clerical employees. Neither shall a plan be considered discriminatory within the meaning of such provisions merely because the contributions or benefits of or on behalf of the employees under the plan bear a uniform relationship to the total compensation, or the basic or regular rate of compensation of such employees or merely because the contributions or benefits based on that part of an employee's remuneration which is excluded from "wages" by ' 3121(a)(1) of the Internal Revenue Code differ from the or differ because of any retirement benefits created under state or federal law. For purposes of this subsection and subsection F, paragraph 3 of this section, the total compensation of an individual who is an employee within the meaning of subsection K of this section means such individual's earned income (as defined in subsection K of this section), and the basic or regular rate of compensation of such an individual shall be determined, under regulations prescribed by the department, with respect to that portion of his earned income which bears the same ratio to his earned income as the basic or regular compensation of the employees under the plan bears to the total compensation of such employees. For purposes of determining whether two or more plans of an employer satisfy the requirements of paragraph 4, subsection A of this section when considered as a single plan, if the amount of contributions on behalf of the employees allowed as a deduction under ' 43-123.45 for the taxable year with respect to such plans, taken together, bears a uniform relationship to the total compensation, or the basic or regular rate of compensation, of such employees, the plans shall not be considered discriminatory merely because the rights of employees to, or derived from, the employer contributions under the separate plans do not become nonforfeitable at the same rate. For the purposes of determining whether two or more plans of an employer satisfy the requirements of paragraph 4, subsection A of this section when considered as a single plan, if the employees' rights to benefits under the separate plans do not become nonforfeitable at the same rate, but the levels of benefits provided by the separate plans satisfy the requirements of regulations prescribed by the department to take account of the differences in such rates, the plans shall not be considered discriminatory merely because of the difference in such rates.

 

C. A plan shall be deemed to meet the requirements of paragraph 3, subsection A of this section during the whole of any taxable year of the plan if on one day in each quarter it satisfied such requirements.

 

D. A trust shall not constitute a qualified trust under this section unless:

1. The plan of which such trust is a part satisfies the requirements of ' 411 of the Internal Revenue Code (relating to minimum vesting standards).

2. The plan of which such trust is a part provides that in the case of any merger or consolidation with, or transfer of assets or liabilities to, any other plan after September 2, 1974, each participant in the plan would (if the plan then terminated) receive a benefit immediately after the merger, consolidation or transfer which is equal to or greater than the benefit he would have been entitled to receive immediately before the merger, consolidation or transfer (if the plan had then terminated). This paragraph shall apply in the case of a multiemployer plan only to the extent determined by the federal pension benefit guaranty corporation or its successor.

3. The plan of which such trust is a part provides that benefits provided under the plan may not be assigned or alienated. For purposes of this paragraph, there shall not be taken into account any voluntary and revocable assignment of not to exceed ten per cent of any benefit payment made by any participant who is receiving benefits under the plan unless the assignment or alienation is made for purposes of defraying plan administration costs. For purposes of this paragraph a loan made to a participant or beneficiary shall not be treated as an assignment or alienation if such loan is secured by the participant's accrued nonforfeitable benefit and is exempt from the tax imposed by ' 4975 of the Internal Revenue Code (relating to tax on prohibited transactions) by reason of ' 4975(d)(1) of the Internal Revenue Code. This paragraph shall not apply to assignments which were irrevocable on September 2, 1974.

4. The plan of which such trust is a part provides that, unless the participant otherwise elects, the payment of benefits under the plan to the participant will begin not later than the sixtieth day after the latest of the close of the plan year in which:

(a) The date on which the participant attains the earlier of age sixty-five or the normal retirement age specified under the plan.

(b) Occurs the tenth anniversary of the year in which the participant commenced participation in the plan.

(c) The participant terminates his service with the employer.

5. Under the plan of which such trust is a part such benefits are not decreased by reason of any increase in the benefit levels payable under title II of the Social Security Act or any increase in the wage base under such title II, if such increase takes place after September 2, 1974 or (if later) the earlier of the date of first receipt of such benefits or the date of such separation, as the case may be in the case of a participant:

(a) Or beneficiary who is receiving benefits under such plan.

(b) Who is separated from the service and who has nonforfeitable rights to benefits.

 

E. A trust forming part of a pension plan shall not constitute a qualified trust under this section unless the plan provides that forfeitures must not be applied to increase the benefits any employee would otherwise receive under the plan.

 

F. In the case of a plan which provides:

1. For the payment of an early retirement benefit, a trust forming a part of such plan shall not constitute a qualified trust under this section unless a participant who satisfied the service requirements for such early retirement benefit, but separated from the service (with any nonforfeitable right to an accrued benefit) before satisfying the age requirement for such early retirement benefit, is entitled upon satisfaction of such age requirement to receive a benefit not less than the benefit to which he would be entitled at the normal retirement age, actuarially, reduced under regulations prescribed by the department.

2. Contributions or benefits for employees some or all of whom are employees within the meaning of subsection K of this section, a trust forming part of such plan shall not constitute a qualified trust under this section unless, under the plan, the entire interest of each employee either:

(a) Will be distributed to him not later than the taxable year in which he attains the age of seventy and one-half years or, in the case of an employee other than an owner-employee, in which he retires, whichever is the later.

(b) Will be distributed, commencing not later than such taxable year:

(i) In accordance with regulations prescribed by the department, over the life of such employee or over the lives of such employee and his spouse.

(ii) Pursuant to such regulations, over a period not extending beyond the life expectancy of such employee or the life expectancy of such employee and his spouse.

A trust shall not be disqualified under this paragraph by reason of distributions under a designation, prior to the effective date of this section, by any employee under the plan of which such trust is a part, of a method of distribution which does not meet the terms of this paragraph.

3. Contributions or benefits for employees some or all of whom are owner-employees:

(a) Subsection A, paragraph 3 of this section and the first and second sentences of subsection B of this section, shall not apply, but such plan shall not be considered discriminatory within the meaning of subsection A, paragraph 4 merely because:

(i) The contributions or benefits of or on behalf of employees under the plan bear a uniform relationship to the total compensation, or the basic or regular rate of compensation, of such employees.

(ii) Under the plan contributions described in subsection M of this section which are in excess of the amounts which may be deducted under ' 43-123.45 for the taxable year may be made on behalf of any owner-employee.

(b) A trust forming a part of such plan shall constitute a qualified trust under this section only if the requirements in subsection L of this section are also met.

4. Contributions or benefits for employees some or all of whom are employees within the meaning of subsection K of this section, or are shareholder-employees within the meaning of ' 1379(d) of the Internal Revenue Code, only if the annual compensation of each employee taken into account under the plan does not exceed the first one hundred thousand dollars of such compensation.

 

G. A trust shall not constitute a qualified trust under this section if:

1. The plan of which such trust is a part provides for the payment of benefits in the form of an annuity unless such plan provides for the payment of annuity benefits in a form having the effect of a qualified joint and survivor annuity; subject to the following:

(a) In the case of a plan which provides for the payment of benefits before the normal retirement age (as defined in ' 411(a)(8) of the Internal Revenue Code), the plan is not required to provide for the payment of annuity benefits in a form having the effect of a qualified joint and survivor annuity during the period beginning on the date on which the employee enters into the plan as a participant and ending on the later of:

(i) The date the employee reaches the earliest retirement age under the plan.

(ii) The first day of the one hundred twentieth month beginning before the date on which the employee reaches normal retirement age.

(b) A plan described in subdivision (a) of this paragraph does not meet the requirements of this paragraph unless a participant has a reasonable period during which he may elect the qualified joint and survivor annuity form with respect to the period beginning on the date on which the period de scribed in subdivision (a) of this paragraph ends and ending on the date on which he reaches normal retirement age (as defined in section 41l(a)(8) of the Internal Revenue Code) if he continues his employment during that period. A plan does not meet the requirements of this paragraph unless, in the case of such an election, the payments under the survivor annuity are not less than the payments which would have been made under the joint annuity to which the participant would have been entitled if he made an election described in this paragraph immediately prior to his retirement and if his retirement had occurred on the day before his death and within the period within which an election can be made.

(c) A plan shall not be treated as not satisfying the requirements of this subsection solely because the spouse of the participant is not entitled to receive a survivor annuity (whether or not an election described in subdivision (b) of this paragraph has been made) unless the participant and his spouse have been married throughout the one-year period ending on the date of such participant's death.

(d) A plan shall not be treated as satisfying the requirements of this subsection unless each participant has a reasonable period (as described by the department by regulations) before the annuity starting date during which he may elect in writing (after having received a written explanation of the terms and conditions of the joint and survivor annuity and the effect of an election under this paragraph) not to take such joint and survivor annuity.

(e) A plan shall not be treated as not satisfying the requirements of this subsection solely because under the plan there is a provision that any election described in subdivision M or (e) of this paragraph, and any revocation of any such election, does not become effective (or ceases to be effective) if the participant dies within a period (not ' 43-123.42 in excess of two years) beginning on the date of such election or revocation, as the case may be. The preceding sentence does not apply unless the plan provision described in the preceding sentence also provides that such an election or revocation will be given effect in any case in which each of the following occur:

(i) The participant dies from accidental causes.

(ii) A failure to give effect to the election or revocation would deprive the participant's survivor of a survivor annuity.

(iii) Such election or revocation is made before such accident occurred.

(f) In this subsection:

(i) "Annuity starting date" means the first day of the first period for which an amount is received as an annuity (whether by reason of retirement or by reason of disability).

(ii) "Earliest retirement age" means the earliest date on which, under the plan, the participant could elect to receive retirement benefits.

(iii) "Qualified joint and survivor annuity" means an annuity for the life of the participant with a survivor annuity for the life of his spouse which is not less than one-half of, or greater than, the amount of the annuity payable during the joint lives of the participant and his spouse and which is the actuarial equivalent of a single life annuity for the life of the participant.

(g) For purposes of this subsection, a plan may take into account in any equitable manner (as determined by the department) any increased costs resulting from providing joint and survivor annuity benefits.

(h) This subsection shall apply only if:

(i) The annuity starting date did not occur before the effective date of this section.

(ii) The participant was an active participant in the plan on or after such effective date.

2. The plan of which such trust is a part provides for benefits or contributions which exceed the limitations of ' 415 of the Internal Revenue Code.

3. Under the plan of which such trust is a part any part of a participant's accrued benefit derived from employer contributions (whether or not otherwise nonforfeitable), is forfeitable solely because of withdrawal by such participant of any amount attributable to the benefit derived from contributions made by such participant. This paragraph shall not apply to:

(a) The accrued benefit of any participant unless, at the time of such withdrawal, such participant has a nonforfeitable right to at least fifty per cent of such accrued benefit (as determined under section 411 of the Internal Revenue Code).

(b) The extent that an accrued benefit is permitted to be forfeited in accordance with ' 411(a)(3)(D)(iii) of the Internal Revenue Code (relating to proportional forfeitures of benefits accrued before September 2, 1974, in the event of withdrawal of certain mandatory contributions).

 

H. In the case of a trust which is part of a plan providing a defined benefit for employees some or all of whom are employees within the meaning of subsection K of this section, or are shareholder-employees within the meaning of ' 1379(d) of the Internal Revenue Code only if such plan satisfies the requirements of subsection Q of this section.

 

I. Paragraphs 2, 3, 4 and 5 of subsection D and paragraphs 1 and 3 of subsection G shall apply only in the case of a plan to which section 411 of the Internal Revenue Code (relating to minimum vesting standards) applies without regard to subsection (e)(2) of such section.

 

J. Certain retroactive changes in plan. A stock bonus, pension, profit-sharing or annuity plan shall be considered as satisfying the requirements of subsections A through I for the period beginning with the date on which it was put into effect or for the period beginning with the earlier of the date on which there was adopted or put into effect any amendment which caused the plan to fail to satisfy such requirements and ending with the time prescribed by law for filing the return of the employer for his taxable year in which such plan or amendment was adopted (including extensions thereof) or such later time as the department may designate, if all provisions of the plan which are necessary to satisfy such requirements are in effect by the end of such period and have been made effective for all purposes for the whole of such period.

 

K. Definitions and rules relating to self-employed individuals and owner-employees. In this section:

1. And '' 43-123.43, 43-123.44 and 43-123.45, "annuity" includes a face-amount certificate, as defined in ' 2(a)(15) of the Federal Investment Company Act of 1940 (15 U.S.C., sec. 80a-2); but does not include any contract or certificate issued after December 31, 1962, which is transferable, if any person other than the trustee of a trust described in this section which is exempt from tax under ' 501(a) of the Internal Revenue Code is the owner of such contract or certificate.

2. Contributions on behalf of owner-employees. "Contribution on behalf of an owner-employee" includes, unless the context otherwise requires, a contribution under a plan:

(a) By the employer for an owner-employee.

(b) By an owner-employee as an employee.

 

3. Earned income. "Earned income":

(a) Means the net earnings from self-employment as defined in ' 1402(a) of the Internal Revenue Code. Such net earnings shall be determined:

(i) Only with respect to a trade or business in which personal services of the taxpayer are a material income-producing factor.

(ii) Without regard to paragraphs (4) and (5) of ' 1402(c) of the Internal Revenue Code.

(iii) In the case of any individual who is treated as an employee under '' 3121(d)(3)(A), (C), or (D) of the Internal Revenue Code, without regard to paragraph (2) of ' 1402(c) of the Internal Revenue Code.

(iv) Without regard to items which are not included in gross income for purposes of this title, and the deductions properly allocable to or chargeable against such items.

(b) Includes gains (other than any gain which is treated under any provision of this chapter as gain from the sale or exchange of a capital asset) and net earnings derived from the sale or other disposition of, the transfer of any interest in or the licensing of the use of property (other than goodwill) by an individual whose personal efforts created such property.

 

4. Employee. "Employee" includes, for any taxable year, an individual who has earned income for the taxable year. To the extent provided in regulations prescribed by the department, such term also includes, for any taxable year:

(a) An individual who would be an employee within the meaning of the preceding sentence but for the fact that the trade or business carried on by such individual did not have net profits for the taxable year.

(b) An individual who has been an employee for any prior taxable year.

 

5. Employer. An individual who owns the entire interest in an unincorporated trade or business shall be treated as his own employer. A partnership shall be treated as the employer of each partner who is an employee within the meaning of paragraph 3.

 

6. Owner-employee. "Owner-employee" means an employee who:

(a) Owns the entire interest in an unincorporated trade or business.

(b) In the case of a partnership, is a partner who owns more than ten per cent of either the capital interest or the profits interest in such partnership.

 

L. Additional requirements for qualification of trusts and plans benefiting owner-employees. A trust forming part of a pension or profit-sharing plan which provides contributions or benefits for employees some or all of whom are owner-employees shall constitute a qualified trust under this section only if the following requirements of this subsection are met by the trust and by the plan of which such trust is a part:

1. In the case of a trust which is created on or after October 10, 1962, or which was created before such date but is not exempt from tax as an organization described in subsections A through I of this section on the day before such date, the assets thereof are held by a bank or other person who demonstrates to the satisfaction of the department that the manner in which he will administer the trust will be consistent with the requirements of this section. A trust shall not be disqualified under this paragraph merely because a per son (including the employer) other than the trustee or custodian so administering the trust may be granted, under the trust instrument, the power to control the investment of the trust funds either by directing investments (including reinvestments, disposals and exchanges) or by disapproving proposed investments (including reinvestments, disposals or exchanges). This paragraph shall not apply to a trust created or organized outside the United States before October 10, 1962, if, under ' 43-123.43, subsection G, it is treated as exempt from tax on the day before such date; or, to the extent provided under regulations prescribed by the department, to a trust which uses annuity, endowment or life insurance contracts of a life insurance company exclusively to fund the benefits prescribed by the trust, if the life insurance company supplies annually such information about trust transactions affecting owner-employees as the department shall by forms or regulations prescribe. For purposes of this paragraph, the term "bank" means a bank as defined in ' 581 of the Internal Revenue Code,18 an insured credit union, a corporation which under the laws of the state of its incorporation is subject to supervision and examination by the commissioner of banking or other officer of such state in charge of the administration of the banking laws of such state and, in the case of a trust created or organized outside the United States, a bank or trust company, wherever incorporated, exercising fiduciary powers and subject to supervision and examination by governmental authority.

2. Under the plan:

(a) The employees' rights to or derived from the contributions under the plan are nonforfeitable at the time the contributions are paid to or under the plan. This subdivision shall not apply to contributions which, under provisions of the plan adopted pursuant to regulations prescribed by the department to preclude the discrimination prohibited by subsection A, paragraph 4 of this section, may not be used to provide benefits for designated employees in the event of early termination of the plan.

(b) In the case of a profit-sharing plan, there is a definite formula for determining the contributions to be made by the employer on behalf of employees (other than owner-employees).

(c) Contributions or benefits are not provided for any owner-employee unless such owner-employee has consented to being included under the plan.

(d) No benefits in excess of contributions made by an owner-employee as an employee may be paid to any owner-employee, except in the case of his becoming disabled (within the meaning of ' 72(m)(7) of the Internal Revenue Code), prior to his attaining the age of fifty-nine and one-half years.

(e) If an owner-employee dies before his entire interest has been distributed to him, or if distribution has been commenced in accordance with subsection F, paragraph 2, subdivision (b) of this section to his surviving spouse and such surviving spouse dies before his entire interest has been distributed to such surviving spouse, his entire interest (or the remaining part of such interest if distribution thereof has commenced) will, within five years after his death (or the death of his surviving spouse), be distributed, or applied to the purchase of an immediate annuity for his beneficiary or beneficiaries (or the beneficiary or beneficiaries of his surviving spouse) which will be payable for the life of such beneficiary or beneficiaries (or for a term certain not extending beyond the life expectancy of such beneficiary or beneficiaries) and which will be immediately distributed to such beneficiary or beneficiaries. This subdivision shall not apply if distribution of the interest of an owner-employee has commenced and such distribution is for a term certain over a period permitted under subsection F, paragraph 2, subdivision (b), item 00 of this section.

(f) Contributions on behalf of any owner-employee may be made only with respect to the earned income of such owner-employee which is derived from the trade or business with respect to which such plan is established.

3. The plan benefits each employee having three or more years of service (within the meaning of ' 410(a)(3) of the Internal Revenue Code). For purposes of this paragraph, the term "employee" does not include:

(a) Any employee included in a unit of employees covered by a collective-bargaining agreement described in ' 410(b)(2)(A) of the Internal Revenue Code.

(b) Any employee who is a nonresident alien individual described in ' 410 (b)(2)(C) of the Internal Revenue Code.

4. The plan does not permit:

(a) Contributions to be made by the employer on behalf of any owner-employee in excess of the amounts which may be deducted under ' 43-123.45 for the taxable year.

(b) In the case of a plan which provides contributions or benefits only for owner-employees, contributions to be made on behalf of any owner-employee in excess of the amounts which may be deducted under ' 43-123.45 for the taxable year.

(c) If a distribution under the plan is made to any employee and if any portion of such distribution is an amount described in ' 72(m)(5)(A)(i) of the Internal Revenue Code, contributions to be made on behalf of such employee for the five taxable years succeeding the taxable year in which such distribution is made.

Subdivisions (a) and (b) shall not apply to any contribution which is not considered to be an excess contribution (as defined in subsection M of this section) by reason of the application of subsection M, paragraph 2 of this section.

5. Except as provided in this paragraph, the plan meets the requirements of subsection A, paragraph 4 of this section without taking into account for any purpose contributions or benefits under chapter 2 of the Internal Revenue Code (relating to tax on self-employment income), chapter 21 of the internal Revenue Code (relating to Federal Insurance Contributions Act), title II of the Social Security Act, as amended, or .any other state law. Taxes paid under ' 3111 of the Internal Revenue Code (relating to tax on employers) with respect to an employee may, for purposes of subsection A, paragraph 4 of this section, be taken into account as contributions by the employer for such employee under the plan if:

(a) Of the contributions deductible under ' 43-123.45, not more than one-third is deductible by reason of contributions by the employer on behalf of owner-employees.

(b) Taxes paid by the owner-employees under chapter 2 of the Internal Revenue Code (relating to tax on self-employment income), and the taxes which would be payable under such chapter 2 of the Internal Revenue Code by the owner-employees but for paragraphs (4) and (5) of ' 1402(c) of the Internal Revenue Code, are taken into account as contributions by the employer on behalf of such owner-employees.

6. If the plan provides contributions or benefits for an owner-employee who controls, or for two or more owner-employees who together control, the trade or business with respect to which the plan is established, and who also control as an owner-employee or as owner-employees one or more other trades or businesses, such plan and the plans established with respect to such other trades or businesses, when coalesced, constitute a single plan which meets the requirements of subsections A through I of this section and of this subsection with respect to the employees of all such trades or businesses (including the trade or business with respect to which the plan intended to qualify under this section is established). In addition:

(a) For purposes of this paragraph one or more owner-employees, shall be considered to control a trade or business if such owner-employees together:

(i) Own the entire interest in an unincorporated trade or business.

(ii) In the case of a partnership, own more than fifty per cent of either the capital interest or the profits interest in such partnership.

(b) For purposes of subdivision (a), one or more owner-employees, shall be treated as owning any interest in a partnership which is owned, directly or indirectly, by a partnership which such owner-employees are considered to control within the meaning of subdivision (a).

7. The plan does not provide contributions or benefits for any owner-employee who controls (within the meaning of paragraph 6, subdivision (a) ), or for two or more owner-employees who together control, as an owner-employee or as owner-employees, any other trade or business, unless the employees of each trade or business which such owner-employee or such owner-employees control are included under a plan which meets the requirements of subsections A through I of this section and of this subsection, and provides contributions and benefits for employees which are not less favorable than contributions and benefits provided for owner-employees under the plan.

 

M. Contributions for premiums on annuity, etc., contracts. A contribution by the employer on behalf of an owner-employee is described in this subsection if:

1. Under the plan such contribution is required to be applied (directly or through a trustee) to pay premiums or other consideration for one or more annuity, endowment or life insurance contracts on the life of such owner-employee issued under the plan.

2. The amount of such contribution exceeds the amount deductible under ' 43-123.45 with respect to contributions made by the employer on behalf of such owner-employee under the plan.

3. The amount of such contribution does not exceed the average of the amounts which were deductible under ' 43-123.45 with respect to contributions made by the employer on behalf of such owner-employee under the plan (or which would have been deductible if such section had been in effect) for the first three taxable years:

(a) Preceding the year in which the last such annuity, endowment or life insurance contract was issued under the plan.

(b) In which such owner-employee derived earned income from the trade or business with respect to which the plan is established or for so many of such taxable years as such owner-employee was engaged in such trade or business and derived earned income therefrom. In the case of any individual on whose behalf contributions described in paragraph 1 are made under more than one plan as an owner-employee during any taxable year, this paragraph does not apply if the amount of such contributions under all such plans for all such years exceeds seven thousand five hundred dollars. Any contribution which is described in this subsection shall, for purposes of ' 4972(b) of the Internal Revenue Code, be taken into account as a contribution made by such owner-employee as an employee to the extent that the amount of such contribution is not deductible under ' 43-123.45 for the taxable year, but only for the purpose of applying ' 4972(b) of the Internal Revenue Code to other contributions made by such owner-employee as an employee.

 

N. Certain custodial accounts and annuity contracts. A custodial account or an annuity contract shall be treated as a qualified trust under this section if:

1. The custodial account or annuity contract would, except for the fact that it is not a trust, constitute a qualified trust under this section.

2. In the case of a custodial account the assets thereof are held by a bank or another person who demonstrates, to the satisfaction of the department, that the manner in which he will hold the assets will be consistent with the requirements of this section.

3. In the case of a custodial account or annuity contract treated as a qualified trust under this section by reason of this subsection, the person holding the assets of such account or holding such contract shall be treated as the trustee thereof.

 

O. Medical, etc., benefits for retired employees and their spouses and dependents. Under regulations prescribed by the department, a pension or annuity plan may provide for the payment of benefits for sickness, accident, hospitalization and medical expenses of retired employees, their spouses and their dependents, if:

1. Such benefits are subordinate to the retirement benefits provided by the plan.

2. A separate account is established and maintained for such benefits.

3. The employer's contributions to such separate account are reasonable and ascertainable.

4. It is impossible, at any time prior to the satisfaction of all liabilities under the plan to provide such benefits, for any part of the corpus or income of such separate account to be (within the taxable year or thereafter) used for, or diverted to, any purpose other than the providing of such benefits.

5. Notwithstanding the provisions of subsection A, paragraph 2 of this section, upon the satisfaction of all liabilities under the plan to provide such benefits, any amount remaining in such separate account must, under the terms of the plan, be returned to the employer.

 

P. Certain union-negotiated pension plans. In the case of a trust forming part of a pension plan which has been determined by the department to constitute a qualified trust under this section and to be exempt from taxation under ' 501(a) of the Internal Revenue Code for a period beginning after contributions were first made to or for such trust, such trust shall be considered as having constituted a qualified trust under this section and as having been exempt from taxation under section 501(a) of the Internal Revenue Code for the period beginning on the date on which contributions were first made to or for such trust and ending on the date such trust first constituted (without regard to this subsection) a qualified trust under this section if it is shown to the satisfaction of the department that:

1. Such trust was created pursuant to a collective bargaining agreement between employee representatives and one or more employers.

2. Any disbursements of contributions, made to or for such trust before the time as of which the department determined that the trust constituted a plan of which the trust is a part, as subsequently qualified.

3. Before the time as of which the department determined that the trust constitutes a qualified trust, the contributions to or for such trust were not used in a manner which would jeopardize the interests of its beneficiaries.

 

Q. Defined benefit plans providing benefits for self-employed individuals and shareholder-employees.

 

1. In general. A defined benefit plan satisfies the requirements of this subsection only if the basic benefit accruing under the plan for each plan year of participation by an employee (or a share holder-employee) is permissible under regulations prescribed by the department under this subsection to insure that there will be reasonable comparability (assuming level funding) between the maximum retirement benefits which may be provided with favorable tax treatment under this title for such employees under:

(a) Defined contribution plans.

(b) Defined benefit plans.

(c) A combination of defined contribution plans and defined benefit plans.

 

2. Guidelines for regulations. A plan shall not satisfy the requirements of this subsection if, under the plan, the basic benefit of any employee (or a shareholder-employee) may exceed the sum of the products for each plan year of participation of:

(a) His annual compensation (not in excess of fifty thousand dollars) for such year.

(b) The applicable percentage determined under paragraph 3.

 

3. Applicable percentage. For purposes of paragraph 2, the applicable percentage for any individual for any plan year shall be based on the percentage shown on the following table opposite his age when his current period of participation in the plan began:

Age when Applicable Percentage

30 or less 6.5

35 5.4

40 4.4

45 3.6

50 3.0

55 2.5

60 or over 2.0

The regulations prescribed under this subsection shall include provisions:

(a) For applicable percentages for ages between any two ages shown on the table.

(b) For adjusting the applicable percentages in the case of plans providing benefits other than a basic benefit.

(c) That any increase in the rate of accrual, and any increase in the compensation base which may be taken into account, shall, with respect only to such increase, begin a new period of participation in the plan.

(d) When appropriate, in the case of periods beginning after December 31, 1977, for adjustments in the applicable percentages based on changes in prevailing interest and mortality rates occurring after 1973.

 

4. Certain contributions and benefits may not be taken into account. A defined benefit plan which provides contributions or benefits for owner-employees does not satisfy the requirements of this subsection unless such plan meets the requirements of subsection A, paragraph 4 of this section without taking into account contributions or benefits under chapter 2 of the Internal Revenue Code (relating to tax on self-employment income), chapter 21 of the Internal Revenue Code (relating to Federal Insurance Contributions Act), title II of the Social Security Act, or any other state law.

 

5. Definitions. In this subsection:

(a) "Basic benefit" means a benefit in the form of a straight He annuity commencing at the later of:

(i) Age sixty-five.

(ii) The day five years after the day the participant's current period of participation began.

Under a plan which provides no ancillary benefits and to which employees do not contribute.

(b) "Shareholder-employee" has the same meaning as when used in ' 1379(d) of the Internal Revenue Code.

(c) "Compensation" means:

(i) In the case of an employee, the earned income of such individual.

(ii) In the case of a shareholder-employee, the compensation received or accrued by the individual from the electing small business corporation.

 

6. Special rule. Section 43-123.45, subsection D (relating to special limitations for self-employed individuals) and ' 1379(b) of the Internal Revenue Code (relating to taxability of shareholder-employee beneficiaries) do not apply to a trust to which this subsection applies.

 

' 43-123.43. Taxability of beneficiary of employee's trust

A. Taxability of beneficiary of exempt trust. Except as provided in subsections B and D of this section, the amount actually distributed or made available to any distributee by any employees' trust described in ' 43-123.42 which is exempt from tax under ' 43-147 shall be taxable to him, in the year in which so distributed or made available. The amount actually distributed or made available to any distributee shall not include net unrealized appreciation in securities of the employer corporation attributable to the amount contributed by the employee. Such net unrealized appreciation and the resulting adjustments to basis of such securities shall be determined in accordance with regulations prescribed by the department.

 

B. Capital gains treatment for portion of lump sum distributions. In the case of an employee trust described in ' 43-123.42, which is exempt from tax under ' 43-147, so much of the total taxable amount of a lump sum distribution as is equal to the product of such total taxable amount multiplied by a fraction:

1. The numerator of which is the number of calendar years of active participation by the employee in such plan before January 1, 1974, and

2. The denominator of which is the number of calendar years of active participation by the employee in such plan,

Shall be treated as a gain from the sale or exchange of a capital asset held for more than six months. For purposes of computing the fraction described in this paragraph and the fraction under subsection J, paragraph 3 of this section, the department may prescribe regulations under which plan years may be used in lieu of calendar years. For purposes of this paragraph, in the case of an individual who is an employee without regard to ' 43-123.42, subsection K, determination of whether or not any distribution is a lump sum distribution shall be made without regard to the requirement that an election be made under subsection J, paragraph 1, subdivision (e) of this section, but no distribution to any taxpayer other than an individual, estate, or trust may be treated as a lump sum distribution under this paragraph.

 

C. Definitions. In this section:

1. "Securities" means only shares of stock and bonds or debentures issued by a corporation with interest coupons or in registered form.

2. "Securities of the employer corporation" includes securities of a parent or subsidiary corporation (as defined in subsections (e) and (f) of ' 425 of the internal Revenue Code) of the employer corporation.

 

D. Distributions by United States to nonresident aliens. The amount includible under subsection A or B of this section in the gross income of a nonresident alien individual with respect to a distribution made by the United States in respect of services performed by an employee of the United States shall not exceed an amount which bears the same ratio to the amount includible in gross income without regard to this paragraph as the aggregate basic salary paid by the United States to such employee for such services, reduced by the amount of such basic salary which was not includible in gross income by reason of being from sources without the United States, bears to the aggregate basic salary paid by the United States to such employee for such services. In the case of distributions under the Federal Civil Service Retirement Act (5 U.S.C. 2251), the term "basic salary" shall have the meaning provided in ' 1(d) of such act.

 

E. Rollover amounts. In the case of an employees' trust described in ' 43-123.42 which is exempt from tax under ' 43-147, if:

1. The balance to the credit of an employee is paid to him on one or more distributions which constitute a lump sum distribution within the meaning of subsection J, paragraph 1 of this section (determined without reference to subsection J, paragraph 1, subdivision (e) of this section),

2. The employee transfers all the property he receives in such distribution to an individual retirement account, an individual retirement annuity (other than an endowment contract), or a retirement bond, on or before the sixtieth day after the day on which he received such property, to the extent the fair market value of such property exceeds the amount referred to in subsection J, paragraph 2, subdivision (a) of this section, or if the employee transfers all the property he receives in such distribution to an employees' trust which is exempt from tax, or to an annuity plan described in ' 43-123.44, subsection A on or before the sixtieth day after the day on which he received such property, to the extent the fair market value of such property exceeds the amount referred to in subsection J, paragraph 2, subdivision (a) of this section, and

3. The amount so transferred consists of the property (other than money) distributed, to the extent that the fair market value of such property does not exceed the amount required to be transferred pursuant to paragraph 2, Then such distributions are not includible in gross income for the year in which paid. For purposes of this title, a transfer described in paragraph 2 shall be treated as a rollover contribution. Paragraph 2 does not apply in the case of a transfer to an employees' trust, or annuity plan if any part of the lump sum distribution described in paragraph 1 is attributable to a trust forming part of a plan under which the employee was an employee at the time contributions were made on his behalf under the plan.

 

F. Taxability of beneficiary of nonexempt trust. Contributions to an employees' trust made by an employer during a taxable year of the employer which ends within or with a taxable year of the trust for which the trust is not exempt from tax under ' 43-147 shall be included in the gross income of the employee in accordance with ' 83 of the Internal Revenue Code (relating to property transferred in connection with performance of services), except that the value of the employee's interest in the trust shall be substituted for the fair market value of the property for purposes of applying such section. The amount actually distributed or made available to any distributee by any such trust shall be taxable to him in the year in which so distributed or made available, except that distributions of income of such trust before the annuity starting date shall be included in the gross income of the employee.

 

G. Taxability of beneficiary of certain foreign situs trusts. For purposes of this section, a stock bonus, pension or profit-sharing trust which would qualify for exemption from tax under ' 43-147 except for the fact that it is a trust created or organized outside the United States shall be treated as if it were a trust exempt from tax under ' 43-147.

 

H. Certain employees' annuities. Notwithstanding subsection F of this section or any other provision of this title, a contribution to a trust by an employer shall not be included in the gross income of the employee in the year in which the contribution is made if:

1. Such contribution is to be applied by the trustee for the purchase of annuity contracts for the benefit of such employee.

2. Such contribution is made to the trustee pursuant to a written agreement entered into prior to October 21, 1942, between the employer and the trustee, or between the employer and the employee.

3. Under the terms of the trust agreement the employee is not entitled during his lifetime, except with the consent of the trustee, to any payments under annuity contracts purchased by the trustee other than annuity payments.

The employee shall include in his gross income the amounts received under such contracts for the year received. This subsection shall have no application with respect to amounts contributed to a trust after June 1, 1949, if the trust on such date was exempt under ' 165(a) of the Internal Revenue Code of 1939. For purposes of this subsection, amounts paid by an employer for the purchase of annuity contracts which are transferred to the trustee shall be deemed to be contributions made to a trust or trustee and contributions applied by the trustee for the purchase of annuity contracts. The term annuity contracts purchased by the trustee" shall include annuity contracts so purchased by the employer and transferred to the trustee. The term "employee" shall include only a person who was in the employ of the employer, and was covered by the agreement referred to in paragraph 2, prior to October 21, 1942.

 

I. Tax on lump sum distributions; separate tax. There is hereby imposed a tax on the ordinary income portion of a lump sum distribution in an amount equal to the amount of the initial separate tax for such taxable year multiplied by a fraction, the numerator of which is the ordinary income portion of the lump sum distribution for the taxable year and the denominator of which is the total taxable amount of such distribution for such year.

1. Initial separate tax. The initial separate tax for any taxable year is an amount equal to ten times the tax which would be imposed by subsection (c) of ' 43-102 for a single person if the recipient were such an individual and the taxable income were an amount equal to one-tenth of the excess of:

(a) The total taxable amount of the lump sum distribution for the taxable year, over

(b) The minimum distribution allowance.

2. Minimum distribution allowance. For purposes of this paragraph, the minimum distribution allowance for the taxable year is an amount equal to the lesser of ten thousand dollars or one-half of the total taxable amount of the lump sum distribution for the taxable year, reduced (but not below zero) by twenty per cent of the amount (if any) by which such total taxable amount exceeds twenty thousand dollars.

3. Liability for tax. The recipient shall be liable for the tax imposed by this subsection.

4. Multiple distributions and distributions of annuity contracts. In the case of any recipient of a lump sum distribution for the taxable year with respect to whom during the six-taxable-year period ending on the last day of the taxable year there has been one or more other lump sum distributions after December 31, 1973, or if the distribution (or any part thereof) is an annuity contract, in computing the tax imposed by this subsection, the total taxable amounts of all such distributions during such six-taxable-year period shall be aggregated, but the amount of tax so computed shall be reduced (but not below zero) by the sum of:

(a) The amount of the tax imposed by this subsection paid with respect to such other distributions, plus

(b) That portion of the tax on the aggregated total taxable amounts which is attributable to annuity contracts.

5. For purposes of paragraph 4, a beneficiary of a trust to which a lump sum distribution is made shall be treated as the recipient of such distribution if the beneficiary is an employee (including an employee within the meaning of ' 42-123.42) with respect to the plan under which the distribution is made or if the beneficiary is treated as the owner of such trust. In the case of the distribution of an annuity contract, the taxable amount of such distribution shall be deemed to be the current actuarial value of the contract, determined on the date of such distribution. In the case of a lump sum distribution with respect to any individual which is made only to two or more trusts, the tax imposed by this subsection shall be computed as if such distribution was made to a single trust, but the liability for such tax shall be apportioned among such trusts according to the relative amounts received by each. The department shall prescribe such regulations as may be necessary to carry out the purposes of this paragraph.

6. Allowance of deduction. The ordinary income portion of a lump sum distribution for the taxable year shall be allowed as a deduction from gross income for such taxable year, but only to the extent included in the taxpayer's gross income for such taxable year.

 

J. Definitions and special rules. In this section:

1. And ' 43-123.44, "lump sum distribution" means the distribution or payment within one taxable year of the recipient of the balance to the credit of an employee which becomes payable to the recipient:

(a) On account of the employee's death.

(b) After the employee attains age fifty-nine and one-half.

(c) On account of the employee's separation from the service.

(d) After the employee has become disabled.

From a trust which forms a part of a plan described in ' 43-123.42 and which is exempt from tax under ' 43-147 or from a plan described in ' 43-123.44, subsection A. Subdivision (c) of this paragraph shall be applied only with respect to an individual who is an employee without regard to ' 43-123.42, and subdivision (d) shall be applied only with respect to an employee within the meaning of ' 43-123.42. For purposes of this paragraph, a distribution of an annuity contract from a trust or annuity plan shall be treated as a lump sum distribution. For purposes of this paragraph, a distribution to two or more trusts shall be treated as a distribution to one recipient.

 

(e) Election of lump sum treatment. For purposes of this section and ' 43-123.44, no amount which is not an annuity contract may be treated as a lump sum distribution under this paragraph unless the taxpayer elects for the taxable year to have all such amounts received during such year so treated at the time and in the manner provided under regulations prescribed by the department. Not more than one election may be made under this subdivision with respect to any individual after such individual has attained age fifty-nine and one-half. No election may be made under this subdivision by any taxpayer other than an individual, an estate, or a trust. In the case of a lump sum distribution made with respect to an employee to two or more trusts, the election under this subdivision shall be made by the personal representative of the employee.

 

(f) Aggregation of certain trusts and plans. For purposes of determining the balance to the credit of an employee under this paragraph:

(i) All trusts which are part of a plan, all pension plans maintained by the employer, all profit-sharing plans maintained by the employer and all stock bonus plans maintained by the employer shall be treated as single plans.

(ii) Trusts which are not qualified trusts under ' 42-123.42 and annuity contracts which do not satisfy the requirements of ' 43-123.45, subsection A, paragraph 2 shall not be taken into account.

2. And ' 43-123.44, "total taxable amount" means, with respect to a lump sum distribution, the amount of such distribution which exceeds the sum of:

(a) The amounts considered contributed by the employee, which shall be reduced by any amounts theretofore distributed to him which were not includible in gross income.

(b) The net unrealized appreciation attributable to that part of the distribution which consists of the securities of the employer corporation so distributed.

3. "Ordinary income portion" means, with respect to a lump sum distribution, so much of the total taxable amount of such distribution as is equal to the product of such total taxable amount multiplied by a fraction:

(a) The numerator of which is the number of calendar years of active participation by the employee in such plan after December 31, 1973.

(b) The denominator of which is the number of calendar years of active participation by the employee in such plan.

4. Except as otherwise provided in paragraph I of this subsection, "employee" includes an individual who is an employee within the meaning of ' 42-123.42 and the employer of such individual is the person treated as his employer under ' 42-123.42.

5. Minimum period of service. No amount distributed to an employee from or under a plan may be treated as a lump sum distributed under paragraph 1 unless he has been a participant in the plan for five or more taxable years before the taxable year in which such amounts are distributed.

6. Unrealized appreciation of employer securities. In the case of any distribution including securities of the employer corporation which, without regard to the requirement of paragraph 5, would be treated as a lump sum distribution under paragraph 1, there shall be excluded from gross income the net unrealized appreciation attributable to that part of the distribution which consists of securities of the employer corporation so distributed. In the case of any such distribution or any lump sum distribution including securities of the employer corporation, the amount of net unrealized appreciation of such securities and the resulting adjustments to the basis of such securities shall be determined under regulations prescribed by the department.

 

' 43-123.44. Taxation of employee annuities

A. Taxability of beneficiary under a qualified annuity plan. Except as provided in subsection B, if an annuity contract is purchased by an employer for an employee under a plan which meets the requirements of ' 43-123.45, subsection A, paragraph 2 (whether or not the employer deducts the amounts paid for the contract under such section), the employee shall include in his gross income the amounts received under such contract for the year.

 

B. Capital gains treatment for certain distributions. If:

1. An annuity contract is purchased by an employer for an employee under a plan described in subsection A,

2. Such plan requires that refunds of contributions with respect to annuity contracts purchased under such plan be used to reduce subsequent premiums on the contracts under the plan, and

3. A lump sum distribution (as defined in ' 43-123.43, subsection J) is paid to the recipient,

So much of the total taxable amount (as defined in ' 43-123.43, subsection J) of such distribution as is equal to the product of such total taxable amount multiplied by the fraction described in ' 43-123.43, subsection B shall be treated as a gain from the sale or exchange of a capital asset held for more than six months. For purposes of this subsection, in the case of an individual who is an employee without regard to ' 43-123.42, determination of whether or not any distribution is a lump sum distribution shall be made without regard to the requirement that an election be made under ' 43-123.43, subsection J, but no distribution to any taxpayer other than an individual, estate or trust may be treated as a lump sum distribution under this subsection.

 

C. Self-employed individuals. For purposes of subsections A through D of this section, the term "employee" includes an individual who is an employee within the meaning of ' 43-123.42, subsection K, paragraph 4, and the employer of such individual is the person treated as his employer under ' 43-123.42, subsection K, paragraph 5.

 

D. Rollover amounts. In the case of an employee annuity described in this section, if:

1. The balance to the credit of an employee is paid to him in one or more distributions which constitute a lump sum distribution within the meaning of ' 43-123.43, subsection J determined without reference to ' 43-123.43, subsection J, paragraph 1, subdivision (e),

2. (a) The employee transfers all the property he receives in such distribution to an individual account described in ' 408(a) of the Internal Revenue Code, an individual retirement annuity described in ' 408(b) of the Internal Revenue Code (other than an endowment contract), or a retirement bond described in ' 409 of the Internal Revenue Code, on or before the sixtieth day after the day on which he received such property to the extent the fair market value of such property exceeds the amount referred to in ' 43-123.43, subsection J, paragraph 2, subdivision (a), or

(b) The employee transfers all the property he receives in such distribution to an employees' trust described in ' 43-123.42 which is exempt from tax under ' 43-147, or to an annuity plan described in subsection A on or before the sixtieth day after the day on which he received such property to the extent the fair market value of such property exceeds the amount referred to in ' 43-123.43, subsection J, paragraph 2, subdivision (a), and

3. The amount so transferred consists of the property distributed to the extent that the fair market value of such property does not exceed the amount required to be transferred pursuant to paragraph 2, then such distribution is not includible in gross income for the year in which paid. For purposes of this title, a transfer described in paragraph 2, subdivision (a) shall be treated as a rollover contribution described in ' 408(d)(3) of the Internal Revenue Code. Paragraph 2, subdivision (b) does not apply in the case of a transfer to an employees' trust, or annuity plan if any part of the lump sum distribution described in paragraph 1 is attributable to an annuity plan under which the employee was an employee within the meaning of ' 43-123.42 at the time contributions were made on his behalf under the plan.

 

E. Taxability of beneficiary under annuity purchased by ' 510(c)(3), Internal Revenue Code, organization or public school.

 

1. If:

(a) An annuity contract is purchased:

(i) For an employee by an employer described in ' 501(c)(3) of the Internal Revenue Code which is exempt from tax under section 501 (a) of such code, or

(ii) For an employee (other than an employee described in item (i)), who performs services for an educational institution, by an employer which is this state, a political subdivision, or an agency or instrumentality of any one or more of the foregoing,

(b) Such annuity contract is not subject to subsections A through D, and

(c) The employee's rights under the contract are nonforfeitable, except for failure to pay future premiums,

Then amounts contributed by such employer for such annuity contract on or after such rights become nonforfeitable shall be excluded from the gross income of the employee for the taxable year to the extent that the aggregate of such amounts does not exceed the exclusion allowance for such taxable year. The employee shall include in his gross income the amounts received under such contract for the year received as provided in ' 72 of the Internal Revenue Code (relating to annuities).

 

2. Exclusion allowance. For purposes of this subsection, the exclusion allowance for any employee for the taxable year is an amount equal to the excess, if any, of the amount determined by multiplying twenty per cent of his includible compensation by the number of years of service, over the aggregate of the amounts contributed by the employer for annuity contracts and excludible from the gross income of the employee for any prior taxable year.

 

3. Election to have allowance determined under ' 415 Internal Revenue Code Rules. In the case of an employee who makes an election under ' 415(c)(4)(D) of the Internal Revenue Code to have the provisions of ' 415(c)(4)(C) of the Internal Revenue Code (relating to special rule for ' 403(b) of the Internal Revenue Code contracts purchased by educational institutions, hospitals and home health service agencies) apply, the exclusion allowance for any such employee for the taxable year is the amount which could be contributed (under ' 415 of the Internal Revenue Code) by his employer under a plan described in subsections A through D of this section if the annuity contract for the benefit of such employee were treated as a defined contribution plan maintained by the employer.

 

4. Includible compensation. For purposes of this subsection, "includible compensation" means, in the case of any employee, the amount of compensation which is received from the employer described in paragraph 1, subdivision (a), and which is includible in gross income (computed without regard to '' 105(d) and 911 of the Internal Revenue Code) for the most recent period (ending not later than the close of the taxable year) which under paragraph 4 may be counted as one year of service. Such term does not include any amount contributed by the employer for any annuity contract to which this subsection applies.

 

5. Years of service. In determining the number of years of service for purposes of this subsection, there shall be included:

(a) One year for each full year during which the individual was a full-time employee of the organization purchasing the annuity for him, and

(b) A fraction of a year (determined in accordance with regulations prescribed by the department) for each full year during which such individual was a part-time employee of such organization and for each part of a year during which such individual was a full-time or part-time employee of such organization.

In no case shall the number of years of service be less than one.

 

6. Application to more than one annuity contract. If for any taxable year of the employee this subsection applies to two or more annuity contracts purchased by the employer, such contracts shall be treated as one contract.

 

7. Forfeitable rights which become nonforfeitable. For purposes of this subsection, if rights of the employee under an annuity contract described in paragraph 1, subdivisions (a) and (b) change from forfeitable to nonforfeitable rights, then the amount (determined without regard to this subsection) includible in gross income by reason of such change shall be treated as an amount contributed by the employer for such annuity contract as of the time such rights become nonforfeitable.

 

8. Custodial accounts for regulated investment company stock. Amounts paid by an employer described in paragraph I of this subsection to a custodial account which satisfies the requirements of ' 43-123.42, subsection N, paragraph 2 shall be treated as amounts contributed by him for an annuity contract for his employee if the amounts are paid to provide a retirement benefit for that employee and are to be invested in regulated investment company stock to be held in that custodial account. "Regulated investment company" means a domestic corporation which is a regulated investment company within the meaning of ' 851(a) of the Internal Revenue Code, and which issues only redeemable stock.

 

F. Taxability of beneficiary under nonqualified annuities or under annuities purchased by exempt organizations. Premiums paid by an employer for an annuity contract which is not subject to subsections A through D of this section shall be included in the gross income of the employee, except that the value of such contract shall be substituted for the fair market value of the property for purposes of applying such section. This subsection shall not apply to that portion of the premiums paid which is excluded from gross income under subsection E of this section. The amount actually paid or made available to any beneficiary under such contract shall be taxable to him in the year in which so paid or made available.

' 43-123.45. Deduction for contributions of an employer to an employees' trust or annuity plan and compensation under a deferred-payment plan

 

A. General rule. If contributions are paid by an employer to or under a stock bonus, pension, profit, sharing or annuity plan, or if compensation is paid or accrued on account of any employee under a plan deferring the receipt of such compensation, such contributions or compensation shall not be deductible under ' 43-123.03 (relating to trade or business expenses). If they satisfy the conditions of such section, they shall be deductible under this section, subject to the following limitations as to the amounts deductible in any year:

 

1. Pension trusts. In the taxable year when paid, if the contributions are paid into a pension trust, and if such taxable year ends within or with a taxable year of the trust for which the trust is exempt, in an amount determined as follows:

(a) The amount necessary to satisfy the minimum funding standard provided by ' 412(a) of the Internal Revenue Code for plan years ending within or with such taxable year (or for any prior plan year), if such amount is greater than the amount determined under subdivision (b) or (c) of this paragraph (whichever is applicable with respect to the plan).

(b) The amount necessary to provide with respect to all of the employees under the trust the remaining unfunded cost of their past and current service credits distributed as a level amount, or a level percentage of compensation, over the remaining future service of each such employee, as determined under regulations prescribed by the department, but if such remaining unfunded cost with respect to any three individuals is more than fifty per cent of such remaining unfunded cost, the amount of such unfunded cost attributable to such individuals shall be distributed over a period of at least five taxable years.

(c) An amount equal to the normal cost of the plan, as determined under regulations prescribed by the department, plus, if past service or other supplementary pension or annuity credits are provided by the plan, an amount necessary to amortize such credits in equal annual payments (until fully amortized) over ten years, as determined under regulations prescribed by the department.

In determining the amount deductible in such year under the foregoing limitations the funding method and the actuarial assumptions used shall be those used for such year under ' 412 of the Internal Revenue Code, and the maximum amount deductible for 401 such year shall be an amount equal to the full funding limitation for such year determined under ' 412 of the Internal Revenue Code.

(d) Special rule in case of certain amendments. In the case of a plan which the United States secretary of labor finds to be collectively bargained which makes an election under this subdivision (in such manner and at such time as may be provided under regulations prescribed by the department), if the full funding limitation determined under ' 412(c)(7) of the Internal Revenue Code for such year is zero, if as a result of any plan amendment applying to such plan year, the amount determined under ' 412(c)(7)(B) of the Internal Revenue Code exceeds the amount determined under section 412(c)(7)(A) of the Internal Revenue Code, and if the funding method and the actuarial assumptions used are those used for such year under ' 412 of the Internal Revenue Code, the maximum amount deductible in such year under the limitations of this paragraph shall be an amount equal to the lesser of:

(i) The full funding limitation for such year determined by applying ' 412(c)(7) of the Internal Revenue Code but increasing the amount referred to in subparagraph (A) thereof by the decrease in the present value of all unamortized liabilities resulting from such amendment, or

(ii) The normal cost under the plan reduced by the amount necessary to amortize in equal annual installments over ten years (until fully amortized) the decrease described in item (i).

In the case of any election under this subdivision, the amount deductible under the limitations of this paragraph with respect to any of the plan years following the plan year for which such election was made shall be determined as provided under regulations as may be prescribed by the department to carry out the purposes of this subdivision.

(e) Certain collectively-bargained plans. In the case of a plan which the United States secretary of labor finds to be collectively bargained, established or maintained by an employer doing business in not less than forty states and engaged in the trade or business of furnishing or selling services described in ' 167(l)(3)(A)(iii) of the Internal Revenue Code, with respect to which the rates have been established or approved by a state or political subdivision, by any agency or instrumentality of the United States, or by a public service or public utility commission or other similar body of any state or political subdivision, and in the case of any employer which is a member of a controlled group with such employer, subdivision (d) of this paragraph shall be applied by substituting for the words "plan amendment" the words "plan amendment or increase in benefits payable under title 11 of the Social Security Act". For purposes of this subdivision, "controlled group" has the meaning provided by ' 1563(a) of the Internal Revenue Code, determined without regard to section 1563(a)(4) and (e)(3)(C) of the Internal Revenue Code.

(f) Carryover. Any amount paid in a taxable year in excess of the amount deductible in such year under the foregoing limitations shall be deductible in the succeeding taxable years in order of time to the extent of the difference between the amount paid and deductible in each such succeeding year and the maximum amount deductible for such year under the foregoing limitations.

 

2. Employees' annuities. In the taxable year when paid, in an amount determined in accordance with paragraph 1 of this subsection, if the contributions are paid toward the purchase of retirement annuities, or retirement annuities and medical benefits as described in ' 43-123.42, subsection Q, and such purchase is a part of a plan which meets the requirements of ' 43-123.42, subsection A, paragraphs 3 and 4 and subsections B through H and of ' 43-123.42, subsection L (other than paragraph 1), and if refunds of premiums, if any, are applied within the current taxable year or next succeeding taxable year towards the purchase of such retirement annuities, or such retirement annuities and medical benefits.

 

3. Stock bonus and profit-sharing trusts.

 

(a) Limits on deductible contributions. In the taxable year when paid, if the contributions are paid into a stock bonus or profit-sharing trust, and if such taxable year ends within or with a taxable year of the trust with respect to which the trust is exempt under ' 501(a) of the Internal Revenue Code, in an amount not in excess of fifteen per cent of the compensation otherwise paid or accrued during the taxable year to all employees under the stock bonus or profit-sharing plan. If in any taxable year there is paid into the trust, or a similar trust then in effect, amounts less than the amounts deductible under the preceding sentence, the excess, or if no amount is paid, the amounts deductible, shall be carried forward and be deductible when paid in the succeeding taxable years in order of time, but the amount so deductible under this sentence in any such succeeding taxable year shall not exceed fifteen per cent of the compensation otherwise paid or accrued during such succeeding taxable year to the beneficiaries under the plan, but the amount so deductible under this sentence in any one succeeding taxable year together with the amount so deductible under the first sentence of this subdivision shall not exceed twenty-five per cent of the compensation otherwise paid or accrued during such taxable year to the beneficiaries under the plan. in addition, any amount paid into the trust in any taxable year in excess of the amount allowable with respect to such year under the preceding provisions of this subdivision shall be deductible in the succeeding taxable years in order of time, but the amount so deductible under this sentence in any one such succeeding taxable year together with the amount allowable under the first sentence of this subdivision shall not exceed fifteen per cent of the compensation otherwise paid or accrued during such taxable year to the beneficiaries under the plan. The term "stock bonus or profit-sharing trust", as used in this subdivision, shall not include any trust designed to provide benefits upon retirement and covering a period of years, if under the plan the amounts to be contributed by the employer can be determined actuarially as provided in paragraph 1. If the contributions are made to two or more stock bonus or profit-sharing trusts, such trusts shall be considered a single trust for purposes of applying the limitations in this subdivision.

 

(b) Profit-sharing plan of affiliated group. In the case of a profit-sharing plan, or a stock bonus plan in which contributions are determined with reference to profits, of a group of corporations which is an affiliated group within the meaning of ' 1504 of the Internal Revenue Code, if any member of such affiliated group is prevented from making a contribution -which it would otherwise have made under the plan, by reason of having no current or accumulated earnings or profits or because such earnings or profits are less than the contributions which it would otherwise have made, then so much of the contribution which such member was so prevented from making may be made, for the benefit of the employees of such member, by the other members of the group, to the extent of current or accumulated earnings or profits. Such contribution by each such other member shall be limited, where the group does not file a consolidated return, to that proportion of its total current and accumulated earnings or profits remaining after adjustment for its contribution deductible without regard to this subdivision which the total prevented contribution bears to the total current and accumulated earnings or profits of all the members of the group-remaining after adjustment for all contributions deductible without regard to this subdivision. Contributions made under the preceding sentence shall be deductible under subdivision (a) of this paragraph by the employer making such contribution, and, for the purpose of determining amounts which may be carried forward and deducted under the second sentence of subdivision (a) of this paragraph in succeeding taxable years, shall be deemed to have been made by the employer on behalf of whose employees such contributions were made.

 

4. Trusts created or organized outside the United States. If a stock bonus, pension or profit-sharing trust would qualify for exemption under ' 501(a) of the Internal Revenue Code except for the fact that it is a trust created or organized outside the United States, contributions to such a trust by an employer which is a resident, corporation or other entity of the United States shall be deductible under the preceding paragraphs.

 

5. Other plans. If the plan is not one included in paragraph 1, 2 or 3, in the taxable year in which an amount attributable to the contribution is includible in the gross income of employees participating in the plan, but, in the case of a plan in which more than one employee participates only if separate accounts are maintained for each employee.

 

6. Time when contributions deemed made. For purposes of paragraphs 1, 2 and 3, a taxpayer shall be deemed to have made a payment on the last day of the preceding taxable year if the payment is on account of such taxable year and is made not later than the time prescribed by law for filing the return for such taxable year (including extensions thereof).

 

7. Limit on deductions. If amounts are deductible under paragraphs 1 and 3, or 2 and 3, or 1, 2 and 3 in connection with two or more trusts, or one or more trusts and an annuity plan, the total amount deductible in a taxable year under such trusts and plans shall not exceed the greater of twenty-five per cent of the compensation otherwise paid or accrued during the taxable year to the beneficiaries of the trusts or plans or the amount of contributions made to or under the trusts or plans to the extent such contributions do not exceed the amount of employer contributions necessary to satisfy the minimum funding standard provided by ' 412 of the Internal Revenue Code for the plan year which ends with or within such taxable year (or for any prior plan year). In addition, any amount paid into such trust or under such annuity plans in any taxable year in excess of the amount allowable with respect to such year under the preceding provisions of this paragraph shall be deductible in the succeeding taxable years in order of time, but the amount so deductible under this sentence in any one such succeeding taxable year together with the amount allowable under the first sentence of this, paragraph shall not exceed twenty-five per cent of the compensation otherwise paid or accrued during such taxable years to the beneficiaries under the trusts or plans. This paragraph shall not have the effect of reducing the amount otherwise deductible under paragraphs 1, 2 and 3, if no employee is a beneficiary under more than one trust or a trust and an annuity plan.

 

8. Self-employed individuals. In the case of a plan included in paragraph 1, 2 or 3 which provides contributions or benefits for employees some or all of whom are employees within the meaning of ' 43-123.42, subsection K, paragraph 4, for purposes of this section:

(a) "Employee" includes an individual who is an employee within the meaning of ' 43-123.42, subsection K, paragraph 4, and the employer of such individual is the person treated as his employer under ' 43-123.42, subsection K, paragraph 5.

(b) "Earned income" has the meaning assigned to it by ' 43-123.42, subsection K, paragraph 3.

(c) The contributions to such plan on behalf of an employee shall be considered to satisfy the conditions of ' 43-123.03 to the extent that such contributions do not exceed the earned income of such individual derived from the trade or business with respect to which such plan is established and to the extent that such contributions are not allocable (determined in accordance with regulations prescribed by the department) to the purchase of life, accident, health or other insurance.

(d) Any reference to compensation shall, in the case of an employee, be considered to be a reference to the earned income of such employee, derived from the trade or business with respect to which the plan is established.

 

9. Plans benefiting self-employed individuals. In the case of a plan included in paragraph 1, 2 or 3 of this subsection which provides contributions or benefits for employees some or all of whom are employees within the meaning of ' 43-123.42:

(a) The limitations provided by paragraphs 1, 2, 3 and 7 of this subsection on the amounts deductible for any taxable year shall be computed, with respect to contributions on behalf of employees (other than employees within the meaning of ' 43-123.42), as if such employees were the only employees for whom contributions and benefits are provided under the plan.

(b) The limitations provided by paragraphs 1, 2, 3 and 7 of this subsection on the amounts deductible for any taxable year shall be computed, with respect to contributions on behalf of employees within the meaning of ' 43-123.42:

(i) As if such employees were the only employees for whom contributions and benefits are provided under the plan.

(ii) Without regard to the second sentence of paragraph 3 of this subsection.

(c) The amounts deductible under paragraphs 1, 2, 3 and 7 of this subsection, with respect to contributions on behalf of any employee within the meaning of ' 43-123.42, shall not exceed the applicable limitation provided in subsection D of this section.

 

B. Method of contributions, etc., having the effect of a plan. If there is no plan but a method of employer contributions or compensation has the effect of a stock bonus, pension, profit-sharing, annuity plan or similar plan deferring the receipt of compensation, subsection A of this section shall apply as if there were such a plan.

 

C. Certain negotiated plans. If contributions are paid by an employer:

1. Under a plan under which such contributions are held in trust for the purpose of paying (either from principal or income or both) for the benefit of employees and their families and dependents at least medical or hospital care or pensions on retirement or death of employees; and

2. Such plan was established prior to January 1, 1954, as a result of an agreement between employee representatives and the government of the United States during a period of government operation, under seizure powers, of a major part of the productive facilities of the industry in which such employer is engaged,

Such contributions shall not be deductible under this section nor be made nondeductible by this section, but the deductibility thereof shall be governed solely by ' 43-123.03.

3. For purposes of this title, in the case of any individual who before July 1, 1974, was a participant in a plan described in this subsection:

(a) Such individual, if he is or was an employee within the meaning of ' 43-123.42, shall be treated (with respect to service covered by the plan) as being an employee other than an employee within the meaning of ' 43-123.42 and as being an employee of a participating employer under the plan.

(b) Earnings derived from service covered by the plan shall be treated as not being earned income within the meaning of ' 43-123.42.

(c) Such individual shall be treated as an employee of a participating employer under the plan with respect to service before July 1, 1975, covered by the plan.

 

D. Special limitations for self-employed individuals.

 

1. In general. In the case of a plan included in subsection A, paragraph 1, 2 or 3 of this section, which provides contributions or benefits for employees some or all of whom are employees within the meaning of ' 43-123.42, the amounts deductible under subsection A of this section in any taxable year with respect to contributions on behalf of any employee within the meaning of ' 43-123.42 shall, subject to paragraphs 2 and 4 of this subsection, not exceed seven thousand five hundred dollars, or fifteen per cent of the earned income derived by such employee from the trade or business with respect to which the plan is established, whichever is less.

 

2. Contributions made under more than one plan.

 

(a) Overall limitation. In any taxable year in which amounts are deductible with respect to contributions under two or more plans on behalf of an individual who is an employee within the meaning of ' 43-123.42 with respect to such plans, the aggregate amount deductible for such taxable year under all such plans with respect to contributions on behalf of such employee shall (subject to paragraph 4 of this subsection) not exceed seven thousand five hundred dollars, or fifteen per cent of the earned income derived by such employee from the trades or businesses with respect to which the plans are established, whichever is less.

 

(b) Allocation of amounts deductible. In any case in which the amounts deductible under subsection A of this section (with the application of the limitations of this subsection) with respect to contributions made on behalf of an employee within the meaning of ' 43-123.42 under two or more plans are, by reason of subdivision (a) of this paragraph, less than the amounts deductible under such subsection determined without regard to such subdivision, the amount deductible under subsection A of this section with respect to such contributions under each such plan shall be determined pursuant to regulations prescribed by the department.

 

3. Contributions allocable to insurance protection. For purposes of this subsection, contributions which are allocable (determined under regulations prescribed by the department) to the purchase of life, accident, health or other insurance shall not be taken into account.

 

4. Limitation on limitations. The limitations under paragraph 1 and paragraph 2, subdivision (a) of this subsection for any employee shall not be less than the lesser of:

(a) Seven hundred fifty dollars.

(b) One hundred per cent of the earned income derived by such employee from the trades or businesses taken into account for purposes of paragraph 1 or paragraph 2, subdivision (a) of this subsection.

 

E. Certain loan repayments considered as contributions. For purposes of this section, any amount paid, directly or indirectly, by an owner-employee (within the meaning of ' 43-123.42) in repayment of any loan which was treated as an amount received under a contract purchased by a trust described in ' 43-123.42 which is exempt from tax under ' 501(a) of the Internal Revenue Code or purchased as a part of a plan described in ' 43-123.44 shall be treated as a contribution to which this section applies on behalf of such owner-employee to such trust or to or under such plan.

 

F. Certain employer liability payments considered as contributions. For purposes of this section any amount paid by an employer under ' 4062, 4063, or 4064 of the Federal Employee Retirement Income Security Act of 1974 shall be treated as a contribution to which this section applies by such employer to or under a stock bonus, pension, profit-sharing, or annuity plan.

 

' 43-123.46. Qualified bond purchase plans

A. Requirements for qualification. A plan of an employer for the purchase for and distribution to his employees or their beneficiaries of United States bonds described in subsection B of this section shall constitute a qualified bond purchase plan under this section if:

1. The plan meets the requirements of ' 43-123.42, subsection A, paragraphs 3 and 4, subsections B and C, subsection D, paragraph 1, subsection E, subsection F, paragraphs 2 and 3, subsection G, paragraphs 2 and 3 and subsection L, excluding paragraph 1 and paragraph 4, subdivision (b).

2. Contributions under the plan are used solely to purchase for employees or their beneficiaries United States bonds described in subsection B of this section.

 

B. Bonds to which applicable. This section shall apply only to a bond issued under the Second Liberty Bond Act of the United States, as amended, which by its terms, or by regulations prescribed by the secretary of the treasury under such act:

1. Provides for payment of interest, or investment yield, only upon redemption.

2. May be purchased only in the name of an individual.

3. Ceases to bear interest, or provide investment yield, not later than five years after the death of the individual in whose name it is purchased.

4. May be redeemed before the death of the individual in whose name it is purchased only if such individual either:

(a) Has attained the age of fifty-nine and one-half years.

(b) Has become disabled.

5. Is nontransferable.

6. Must be purchased in name of employee. This section shall apply to a bond described in this subsection only if it is purchased in the name of the employee.

 

C. Deduction for contributions to bond purchase plans. Contributions paid by an employer to or under a qualified bond purchase plan shall be allowed as a deduction in an amount determined under ' 43-123.45 in the same manner and to the same extent as if such contributions were made to a trust described in ' 43-123.42 which is exempt from tax under ' 501(a) of the Internal Revenue Code.

 

D. Taxability of beneficiary of qualified bond purchase plan. In the case of a distributee of a bond described in subsection B of this section under a qualified bond purchase plan, or from a trust described in ' 43-123.42 which is exempt from tax under ' 501(a) of the Internal Revenue Code, gross income does not include any amount attributable to the receipt of such bond. Upon redemption of such bond, the proceeds shall be subject to taxation.

1. Basis. The basis of any bond received by a distributee under a qualified bond purchase plan:

(a) If such bond is distributed to an employee, or with respect to an employee, who at the time of purchase of the bond, was an employee other than an employee within the meaning of ' 43-123.42, shall be the amount of the contributions by the employee which were used to purchase the bond.

(b) If such bond is distributed to an employee, or with respect to an employee, who, at the time of purchase of the bond, was an employee within the meaning of ' 43-123.42, shall be the amount of the contributions used to purchase the bond which were made on behalf of such employee and were not allowed as a deduction under subsection C of this section.

2. The basis of any bond described in subsection B of this section received by a distributee from a trust described in ' 43-123.42 which is exempt from tax under ' 501(a) of the Internal Revenue Code shall be determined under regulations prescribed by the department.

 

E. Capital gains treatment and limitation of tax not to apply to bonds distributed by trusts. Section 43-123.43, subsections B and I shall not apply to any bond described in subsection B of this section distributed to any distributee and, for purposes of applying such sections, any such bond distributed to any distributee and any such bond to the credit of any employee shall not be taken into account.

 

F. Employee defined. In this section, "employee" includes an individual who is an employee within the meaning of ' 43-123.42, and the employer of such individual shall be the person treated as his employer under ' 43-123.42.

 

G. Proof of purchase. At the time of purchase of any bond to which this section applies, proof of such purchase shall be furnished in such form as will enable the purchaser, and the employee in whose name such bond is purchased, to comply with the provisions of this section.

 

' 43-123.47. Deduction for expenses paid for mental retardation residential services

For any taxable year ending after December 31, 1977 in computing net income, there shall be allowed as a deduction expenses paid during the taxable year, not compensated for by insurance or otherwise, for mental retardation residential services pursuant to ' 36-562 for the taxpayer or a dependent of the taxpayer as defined in ' 43-127, subsection (c).

' 43-124. Mitigation of effect of renegotiation of war contracts or disallowance of reimbursement

 

(a) Reduction for prior taxable year

(1) War profits, renegotiated. In the case of a contract with the United States or any agency thereof, or any subcontract thereunder, which is made by the taxpayer; if a renegotiation is made in respect of that contract or subcontract and an amount of excessive profits received or accrued under the contract or subcontract for a taxable year (hereinafter referred to as "prior taxable year") is eliminated, and in a taxable year ending after December 31, 1941, the taxpayer is required to pay or repay to the United States or any agency thereof the amount of profits eliminated, or the amount of profits eliminated is applied as an offset against other amounts due the taxpayer, then the profits so eliminated shall be excluded from gross income for the prior taxable year if they were included in gross income for the prior taxable year.

(A) Definition -- "renegotiation". As used in this subsection, "renegotiation" includes any transaction which is a renegotiation within the meaning of the federal renegotiation act applicable to such transaction; any modification of one or more contracts with the United States or any agency thereof; and any agreement with the United States or any agency thereof in respect of one or more such contracts or subcontracts thereunder.

(B) Definition -- "excessive profits". As used in this subsection, "excessive profits" includes any amount which constitutes excessive profits within the meaning assigned to such term by the applicable federal renegotiation act; any part of the contract price of a contract with the United States or any agency thereof; any part of the subcontract price of a subcontract under a contract; and any profits derived from one or more contracts or subcontracts.

(C) Definition -- "subcontract". As used in this subsection, "subcontract" includes any purchase order or agreement which is a subcontract within the meaning assigned to that term by the applicable federal renegotiation act.

(D) Definition -- "renegotiation act". The term "federal renegotiation act" includes section 403 of the sixth supplemental national defense appropriation act (public law 528, seventy-seventh congress, second session), as amended or supplemented, and the renegotiation act of 1948, as amended or supplemented, and the renegotiation act of 195 1, as amended or supplemented.

(2) War profits, cost-plus-a-fixed-fee contract. In the case of a cost-plus-a-fixed-fee contract between the United States or any agency thereof and the taxpayer, if an item for which the taxpayer has been reimbursed by the United States or any agency thereof is disallowed as an item of cost chargeable to that contract, and, in a taxable year ending after December 31, 1941, the taxpayer is required to repay the United States or any agency thereof the amount disallowed, or the amount disallowed is applied as an offset against other amounts due the taxpayer, for the purposes of this title the amount so disallowed or so applied as an offset shall be allowed as a deduction in the taxable year in which the reimbursement for the item was received or was accrued to the extent that the taxpayer's taxable net income for the year in which the cost was incurred would have been reduced had no reimbursement been received or accrued.

(3) War profits, year of deduction. The amount of the payment, repayment, or offset described in paragraphs (1) and (2) shall not constitute a deduction for the year in which paid or incurred.

(4) Renegotiated profits, deducted in accordance with accounting method. Paragraphs (1) to (3), inclusive, shall not apply in respect of any contract if the taxpayer shows to the satisfaction of the tax commission that a different method of accounting for the amount of the payment, repayment, or disallowance clearly reflects income, and in such case the payment, repayment, or disallowance shall be accounted for with respect to the taxable year provided for under that method.

(b) Renegotiated profits, refund. Any overpayment in tax which results from the application of subsection (a) shall be credited or refunded as provided in this title. Notwithstanding the provisions of any statute of limitations, credit or refund shall be made if claim therefor is filed within four years from the day prescribed for filing the return or within two years from the date of payment, repayment or offset described in subsection (a), whichever is later.

(e) Renegotiated profits, abatement. If prior to the payment of the last installment of tax for the taxable year the taxpayer becomes entitled to the exclusions or deductions provided in subsection (a) for its taxable year, the taxpayer may, under regulation prescribed by the tax commission, file a claim in abatement of any unpaid tax or portion thereof, but not in excess of the reduction in tax resulting from the application of this section.

(d) Renegotiated profits, effect of abatement. In any case in which a claim in abatement is filed pursuant to subsection (c), and the tax commission makes an abatement, the tax disclosed by the original return shall, for the purpose of ' 43-146 be deemed to be reduced by the amount of the tax abated.

 

' 43-125. Deductions from gross income -- deductions of nonresidents

(a) Deductions connected with taxable income. In the case of a nonresident the deductions allowed by '' 43-123.03 through 43-123.35 shall unless otherwise provided in this section be allowed only to the extent that they are connected with the income arising from sources within this state and taxable under this title to a nonresident. The proper apportionment and allocation of the deductions with respect to sources of income within the without the state shall be determined under rules and regulations prescribed by the tax commission.

 

(b) Taxes. Taxes or licenses paid or accrued to this state or its political subdivisions which are deductible under ' 43-123.05 are deductible by nonresidents even though not connected with income from sources within this state.

 

(c) Contributions to local corporations. In the case of a nonresident the deductions for contributions and gifts shall be allowed only as to contributions or gifts to corporations or associations incorporated by or organized under the laws of this state or to this state or any political subdivision thereof for exclusively public purposes.

 

' 43-126. Deductions from gross income -- items not deductible

(a) Personal and capital expenses and expenses allocable to exempt income. In computing net income no deduction shall in any case be allowed in respect of:

(1) Personal, living, or family expenses, except extraordinary medical expenses deductible under ' 43-123.26.

(2) Any amount paid out for new buildings or for permanent improvements or betterments made to increase the value of any property or estate, except expenditures incurred for the purpose of soil and water conservation and the prevention of erosion within the meaning of ' 43-123,03, subsection A, paragraph 1.

(3) Any amount expended in restoring property or in making good the exhaustion thereof for which an allowance is or has been made.

(4) Premiums paid on any life insurance policy covering the life of any officer or employee, or of any person financially interested in any trade or business carried on by the taxpayer when the taxpayer is directly or indirectly a beneficiary under the policy.

(5) Any amount otherwise allowable as a deduction which is allocable to one or more classes or income (whether or not any amount of income of that class or classes is received or accrued) wholly exempt from the taxes imposed by this title. In determining this nondeductible amount, the taxpayer shall divide tax exempt interest as defined in ' 43-112, subsection (b), paragraph (10) by gross income as defined in section 43-112 plus tax exempt income as defined in ' 43-112, subsection (b), paragraph (10), and multiply that figure by the interest deduction which is otherwise allowed pursuant to ' 43-123.04. In addition, the taxpayer shall add ten per cent of the tax exempt income as defined in ' 43-112, subsection (b), paragraph (10) which represents nondeductible administrative expenses related to the production of tax exempt income.

(6) Any amount paid or accrued on indebtedness incurred or continued to purchase a single premium life insurance or endowment contract. For the purposes of this paragraph, if substantially all the premiums on a life insurance or endowment contract are paid within a period of four years from the date on which such contract is purchased, such contract shall be considered a single premium life insurance or endowment contract; or

(7) Amounts paid or accrued for such taxes and carrying charges as, under regulations prescribed by the tax commission, are chargeable to capital account with respect to property, if the taxpayer elects, in accordance with such regulations, to treat those taxes or charges as so chargeable.

 

(b) Losses from sales or exchanges of property

(1) Transactions, between related persons. In computing net income no deduction shall in any case be allowed in respect of losses from sales or exchanges of property, directly or indirectly:

(A) Between members of a family as defined in paragraph (2)(1)).

(B) Except in the case of distributions in liquidation, between a individual and a corporation more than fifty per cent in value of the outstanding stock of which is owned, directly or indirectly, by or for the individual.

(C) Between a partnership and a member thereof, between partnerships where more than fifty per cent of the partnership interest in each are owned by the same persons, and between a partnership and a corporation fifty per cent of the stock of which is owned or controlled by the partnership or members thereof.

(D) Between a grantor and a fiduciary of any trust.

(E) Between the fiduciary of a trust and the fiduciary of another trust, if the same person is a grantor with respect to each trust.

(F) Between a fiduciary of a trust and a beneficiary of such trust.

 

(2) Stock ownership, determination for paragraph (1). For the purposes of determining, in applying paragraph (1), the ownership of stock:

(A) Stock owned, directly or indirectly, by or for a corporation, partnership, estate, or trust, shall be considered as being owned proportionately by or for its shareholders, partners, or beneficiaries.

(B) An individual shall be considered as owning the stock of the partnership interest owned, directly or indirectly, by or for his family.

(C) An individual owning (otherwise than by the application of subparagraph (B)) any stock in a corporation shall be considered as owning the stock owned, directly or indirectly, by or for his partner.

(D) The family of an individual shall include only his brothers and sisters (whether by the whole or half blood), spouse, ancestors, and lineal descendants.

(E) Stock constructively owned by a person by reason of the application of subparagraph (A) shall, for the purpose of applying subparagraphs (A), (B) or (C), be treated as actually owned by such person, but stock constructively owned by an individual by reason of the application of subparagraph (B) or (C) shall not be treated as owned by him for the purpose of again applying either of those subparagraphs in order to make another the constructive owner of such stock.

 

(c) Unpaid expenses and interest. In computing net income no deduction shall be allowed under ' 43-123.03, subsections A and B, relating to expenses incurred, or under ' 43-123.04 relating to interest accrued:

(1) If within the period consisting of the taxable year of the taxpayer and two and one-half months after the close thereof (A) such expenses or interest are not paid, and (B) the amount thereof is not includible in the gross income of the person to whom the payment is to be made; and

(2) If, by reason of the method of accounting of the person to whom the payment is to be made, the amount thereof is not, unless paid, includible in the gross income of that person for the taxable year in which or with which the taxable year of the taxpayer ends; and

(3) If, at the close of the taxable year of the taxpayer or at any time within two and one-half months thereafter, both the taxpayer and the person to whom the payment is to be made are persons between whom losses would be disallowed under ' 43-126(b).

The amount of expenses incurred or interest accrued the deduction of which is disallowed under this section in the year incurred or accrued, may be deducted in the year paid.

 

(d) Life or terminable interest, shrinkage in value. Amounts paid under the laws of any state, territory, District of Columbia, possession of the United States, or foreign country as income to the holder of a life or terminable interest acquired by gift, bequest, or inheritance shall not be reduced or diminished by any deduction for shrinkage (by whatever name called) in the value of such interest due to the lapse of time, or by any deduction allowed by this title (except the deductions provided for in '' 43-123.14 and 43-123.15) for the purpose of computing the net income of an estate or trust but not allowed under the laws of such state, territory, District of Columbia, possession of the United States, or foreign country for the purpose of computing the income to which such holder is entitled.

 

(e) Obligor of covenant bond. In computing net income no deduction shall be allowed to the obligor of a covenant bond for the payment of the tax imposed by this title, or any other tax paid pursuant to the tax-free covenant clause, nor shall such tax be included in the gross income of the obligee.

 

(f) Expenses of unharvested crop sold. Where an unharvested crop sold by the taxpayer is considered under the provisions of ' 43-1570)(3) as "property used in the trade or business", in computing net income no deduction (whether or not for the taxable year of the sale or whether for expenses, depreciation, or otherwise) attributable to the production of such crop shall be allowed.

 

(g) Charitable contributions. In computing net income no deduction shall be allowed under ' 43-123.03, subsection A for any contribution or gift which would be allowable as a deduction under ' 43-123.17 were it not for the twenty per cent limitation therein contained and for the requirement therein that payment must be made within the taxable year.

 

(h) Illegal activities. In computing net income, no deductions shall be allowed to any taxpayer on any of his gross income derived from illegal activities as defined in '' 5-101 through 5-115, 13-3301 through 13-3305 and 44-1651 through 44-1660; nor shall any deductions be allowed to any taxpayer on any of his gross income derived from any other activities which tend to promote or to further, or are connected or associated with, such illegal activities.

 

(i) Employee stock options. Any amount attributable to the transfer of a share of stock pursuant to the exercise of a "restricted stock option", as defined in this title by an employer bank or corporation, or its parent or subsidiary bank or corporation to an employee of the bank or corporation.

 

' 43-127. Credits allowed taxpayers--credits against net income

(a) Personal exemptions. Except as provided in subsection (f) of this section, there shall be allowed as a credit against net income, in the case of a single individual, a personal exemption of one thousand dollars, or, in the case of a head of a household or a married individual, a personal exemption of two thousand dollars. A husband and wife shall receive but one personal exemption of two thousand dollars. If the husband and wife make separate returns, the personal exemption may be taken by either or divided between them.

(1) There shall be an additional exemption of five hundred dollars for the taxpayer if he is blind at the close of his taxable year; and

(2) There shall be an additional exemption of five hundred dollars for the spouse of the taxpayer if a separate return is made by the taxpayer, and if the spouse is blind and, for the calendar year in which the taxable year of the taxpayer begins, has no gross income and is not the dependent of another taxpayer. For the purposes of this paragraph the determination of whether the spouse is blind shall be made as of the close of the taxable year of the taxpayer, unless the spouse dies during such taxable year, in which case such determination shall be made as of the time of such death.

(3) For the purposes of this paragraph an individual is blind only if either his central visual acuity does not exceed 20/200 in the better eye with correcting lenses, or his visual acuity is greater than 20/200 but is accompanied by a limitation in the fields of vision such that the widest diameter of the visual field subtends an angle no greater than twenty degrees.

(4) There shall be an additional exemption of one thousand dollars.

(A) For the taxpayer if he has attained the age of sixty-five years before the close of this taxable year.

(B) For the spouse of the taxpayer if the spouse has attained the age of sixty-five years before the close of such taxable year, and is not the dependent of another taxpayer.

 

(b) Credit for dependents. Except as provided in subsection (f) of this section, there shall also be allowed as a credit six hundred dollars for each dependent.

 

(c) Definition -- "dependent". As used in subsection (b) the term "dependent" means any of the following persons over half of whose support, for the calendar year in which the taxable year of the taxpayer begins, was received from the taxpayer:

(1) A son or daughter of the taxpayer, or a descendant of either;

(2) A stepson or stepdaughter of the taxpayer;

(3) A brother, sister, stepbrother, or stepsister of the taxpayer;

(4) The father or mother of the taxpayer, of an ancestor of either;

(5) A stepfather or stepmother of the taxpayer;

(6) A son or daughter of a brother or sister of the taxpayer;

(7) A brother or sister of the father or mother of the taxpayer;

(8) A son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law of the taxpayer.

As used in this subsection, the terms "brother" and "sister" include a brother or sister by the half-blood. For the purposes of determining whether any of the foregoing relationships exist, a legally adopted child of a person shall be considered a child of such person by blood. A child shall be deemed legally adopted when placed in the custody of the taxpayer for adoption by the latter or his spouse. The term "dependent" does not include any individual who is a citizen or subject of a foreign country unless such individual is a resident of the United States or of a country contiguous to the United States. A payment to a wife which is includible under ' 43-112(e) or ' 43-164, in the gross income of such wife shall not be considered a payment by her husband for the support of any dependent. If the taxpayer would not occupy the status of head of a household except by reason of there being one or more dependents for whom he would be entitled to credit under this section, the credit shall be disallowed with respect to one of the dependents.

 

(d) Credit of estates or trusts. Except as provided in subsection (f) of this section, there shall be allowed as a credit against net income in the case of an estate, an exemption of one thousand dollars and, in the case of a trust, an exemption of one hundred dollars, provided that in the case of a trust, if the amount of tax otherwise due under this title after applying said exemption is less than one dollar the amount of the exemption shall be the amount of the net income of such trust but in no event shall such exemption exceed two hundred dollars.

 

(e) Status of married persons. For purposes of '' 43-127(a) and 43-141(a)(1), (2) and (6)(A), the determination of whether an individual is married or is the head of a household shall be made as of the last day of the taxable year, except if an individual or his spouse dies during the taxable year, such determination shall be made as of the date of death.

 

(f) Amounts after January 1, 1978. Beginning January 1, 1978, the dollar amounts specified in subsections (a), (b) and (d) of this section shall be changed pursuant to ' 43-130.

 

' 43-127.01. Apportionment of deductions and personal exemptions

A. Any resident taxpayer, other than an active member of the armed forces of the United States, or any other auxiliary branch, who commences or terminates his residency in this state during any one taxable year, shall prorate the following on the basis such taxpayer's total adjusted gross income from Arizona sources bears to the total adjusted gross income from all sources:

1. The personal exemption provided in ' 43-127, subsection (a), of one thousand dollars for a single individual or two thousand dollars for a head of a household or a married individual.

2. The deduction provided in ' 43-127, subsection (a), paragraphs (1), (2) and (3) for the blind, of five hundred dollars.

3. The deduction provided in ' 43-127, subsections (b) and (c) for dependents, of six hundred dollars each.

4. The deduction provided in ' 43-127, subsection (a), paragraph (4), subdivisions (A) and (B), for persons age sixty-five or older, of one thousand dollars.

 

B. Any nonresident taxpayer, other than an active member of the armed forces of the United States, or any other auxiliary branch, shall prorate the exemptions and deductions set forth in subsection A on the basis such taxpayer's total adjusted gross income from Arizona sources bears to his total adjusted gross income from all sources. Such apportionment shall be made regardless of taxpayer's adjusted gross income.

 

C. The percentage of exemption or deduction allowed shall be computed by dividing taxpayer's total adjusted gross income from Arizona sources by the total adjusted gross income from all sources.

 

' 43-128. Credit allowed taxpayers--credit for taxes paid

(a) Credit, residents. Subject to the following conditions, residents shall be allowed a credit against the taxes imposed by this title for net income taxes imposed by and paid to another state or country on income taxable under this title:

(1) The credit shall be allowed only for taxes paid to the other state or country on income derived from sources within that state or country which is taxable under its laws irrespective of the residence or domicile of the recipient.

(2) The credit shall not be allowed if the other state or country allows residents of this state a credit against the taxes imposed by that state or country for taxes paid or payable under this title.

(3) The credit shall not exceed such proportion of the tax payable under this title as the income subject to tax in the other state or country and also taxable under this title bears to the taxpayer's entire income upon which the tax is imposed by this title.

 

(b) Credit, nonresident. Subject to the following conditions, nonresidents shall be allowed a credit against the taxes imposed by this for net income taxes imposed by and paid to the state or country of residence on income taxable under this title.

(1) The credit shall be allowed only if the state or country of residence either does not tax income of residents of this state derived from sources within that state or country or allows residents of this state a credit against the taxes imposed by that state or country on such income for taxes paid or payable thereon under this title.

(2) The credit shall not be allowed for taxes paid to a state or country which allows its residents a credit against the taxes imposed by that state or country for income taxes paid or payable under this title irrespective of whether its residents are allowed a credit against the taxes imposed by this title for income taxes paid to that state or country.

(3) Credit shall be allowed only for such proportion of the taxes paid to the state or country of residence as the income taxable under this title and also subject to tax in the state or country of residence bears to the entire income upon which the taxes paid to the state or country of residence are imposed.

(4) The credit shall not exceed such proportion of the tax payable under this title as` the income subject to tax in the state or country of residence and also taxable under this title bears to the entire income taxable under this title.

 

(c) Estate or trust, considered resident of taxing state. For the purposes of this section an estate or trust is considered a resident of the state or country legally entitled to tax the income of the estate or trust irrespective of whether the income is derived from sources within that state or country.

 

(d) Credit, estates and trusts. If an estate or trust is a resident of this state and also a resident of another state or country, it shall, notwithstanding the limitations contained in subsections (a) and (b) of this section, be allowed a credit against the taxes imposed by this title for net income taxes imposed by and paid to the other state or country, subject to the following conditions:

(1) Credit shall be allowed only for such proportion of the taxes paid to the other state or country as the income taxable under this title and also subject to tax in the other state or country bears to the entire income upon which the taxes paid to the other state or country are imposed.

(2) The credit shall not exceed such proportion of the tax payable under this title as the income subject to tax in the other state or country and also taxable under this title bears to the entire income taxable under this title.

 

(e) Credit, resident beneficiary of an estate or trust. A resident beneficiary of an estate or trust who is taxable on the income of the estate or trust under ' 43-161 shall, subject to the following conditions, be allowed a credit against the taxes imposed by this title on such income for net income taxes paid by the estate or trust to another state or country on such income.

(1) Credit shall be allowed only for such proportion of the tax paid to the other state or country by the estate or trust as the income of the estate or trust which is taxable to the beneficiary under this title and also taxed to the estate or trust in the other state or country bears to the entire income of the estate or trust upon which the taxes paid to the other state or country were imposed.

(2) The credit shall not exceed such proportion of the tax payable under this title as the income of the estate or trust which is taxable to the beneficiary under this title and also taxed to the estate or trust in the other state or country bears to the beneficiary's entire income upon which the tax is imposed by this title.

 

(f) Credit, where net income tax levied on partnership as such

(1) A member of a partnership who is taxable on the income thereof shall, subject to the conditions prescribed in paragraphs (2) and (3) be allowed a credit against the taxes imposed by this title on such income for net income taxes paid by the partnership to another state or country on such income.

(2) Credit shall be allowed only for such proportion of the tax paid to such other state or country by the partnership as the income of the partnership which is taxable to the partner under this title and also taxed to the partnership in such other state or country bears to the entire income of the partnership upon which the taxes paid to such other state or country were imposed.

(3) The credit shall not exceed such proportion of the tax payable under this title as the income of the partnership which is taxable to the partner under this title and also taxed to the partnership in such other state or country bears to the partner's entire income upon which the tax is imposed by this title.

 

(g) Credit, subsequent refund. If any taxes paid to another state or country for which a taxpayer has been allowed a credit under this section are at any time credited or refunded to the taxpayer, the taxpayer shall immediately report that fact to the tax commission.

 

(h) Refund, recovery of erroneous credit. A tax equal to the credit allowed for the taxes credited or refunded by the other state or country is due and payable from the taxpayer upon notice and demand from the tax commission.

 

(i) Interest, where credit refunded. Interest shall be added to and collected as a part of the tax at the rate of six per cent per annum from the date the credit was allowed under this title to the date of the notice and demand.

 

(j) Collection of Interest, where credit refunded. If the tax and interest are not paid within ten days from the date of notice and demand, there shall be collected as a part of the tax interest upon the unpaid amount of tax and interest at the rate of six per cent per annum from the date of the notice and demand until the amount is paid.

 

(k) Credit not allowable if it results in illegal discrimination. The credit against the taxes imposed by this title for net income taxes paid to another state or country shall not be allowed to any taxpayer or any class of taxpayers if the allowances of the credit will result in any invalid or illegal discrimination against another taxpayer or another class of taxpayers.

 

' 43-128.01. Earned credit allowed taxpayers -- credit for property taxes paid

(a) Earned credit, residents sixty-five years of age or older. There shall be allowed to each resident a credit against the taxes imposed by this title for a taxable year for property taxes or rent or both, paid in that taxable year, in accordance with the Subsection (b), if:

(1) Such resident attained the age of sixty-five years prior to or during the taxable year, or such resident is a recipient of public monies under title 16 of the social security act as amended;

(2) Such person paid either property taxes or rent during the taxable year; and

(3) Such person either:

(i) Did not live with any other persons and had an income from all sources in the taxable year of less than three thousand seven hundred fifty-one dollars, or

(ii) Lived with one or more persons and the combined income from all sources in the taxable year of all persons residing in the residence was less than five thousand five hundred one dollars.

 

(b) Amount of credit. Except as provided in subsection (c) of this section, the credit allowed under subsection (a) shall be computed as follows:

(1) For a person eligible under subparagraph (3)(i) of subsection (a), according to the following table:

Household Income Tax Credit

 

Household Income

Tax Credit

$ 0-1,750

 

225

 

1,751-1,850

 

215

 

1,851-1,950

 

205

 

1,951-2,050

 

195

 

2,051-2,150

 

185

 

2,151-2,250

 

175

 

2,251-2,350

 

165

 

2,351-2,450

 

155

 

2,451-2,550

 

145

 

2,551-2,650

 

135

 

2,651-2,750

 

125

 

2,751-2,850

 

115

 

2,851-2,950

 

105

 

2,951-3,050

 

95

 

3,051-3,150

 

85

 

3,151-3,250

 

75

 

3,251-3,350

 

65

 

3,351-3,450

 

55

 

3,451-3,550

 

45

 

3,551-3,650

 

35

 

3,651-3,750

 

25

 

 

(2) For a person eligible under subparagraph (3)(ii) of subsection (a), according to the'' following table:

 

Household Income

Tax Credit

$ 0-2,500

 

$225

 

2,501-2,650

 

215

 

2,651-2,800

 

205

 

2,801-2,950

 

195

 

2,951-3,100

 

185

 

3,101-3,250

 

175

 

3,251-3,400

 

165

 

3,401-3,550

 

155

 

3,551-3,700

 

145

 

3,701-3,850

 

135

 

3,851-4,000

 

125

 

4,001-4,150

 

115

 

4,151-4,300

 

105

 

4,301-4,450

 

95

 

4,451-4,600

 

85

 

4,601-4,750

 

75

 

4,751-4,900

 

65

 

4,901-5,050

 

55

 

5,051-5,200

 

45

 

5,201-5,350

 

35

 

5,351-5,500

 

25

 

 

(c) Amounts after January 1, 1978. Beginning January 1, 1978, the dollar amounts specified in subsection (b) of this section shall be changed pursuant to ' 43-130.

 

(d) Disposition of unused credit; offset against tax liabilities; refund. Disposition of the claimant's allowable credit shall be as provided below.

(1) If the allowable amount of such claim exceeds the income taxes otherwise due on the claimant's income, or if there are no state income taxes due on the claimant's income, the amount of the claim not used as an offset against income taxes, after audit by the department, shall be paid in the same manner as a refund granted under ' 43-184. No interest shall be allowed on any payment made to a claimant pursuant to this section.

(2) The amount of any claim otherwise payable for relief for property taxes or rent may be applied by the department against any liability outstanding on the books of the department against the claimant, or against his or her spouse who was a member of the claimant's household in the taxable year.

 

(e) Administration. The department shall make available suitable forms with instructions for claimants. Claimants who certify on the prescribed form that they have no income tax liability for the taxable year shall not be required to file an individual income tax return. The claim shall be in such form as the department may prescribe but shall require the social security numbers of persons who were allowed to claim as dependents for the taxes imposed by this title claimants filing pursuant to this section. The department shall audit a sufficient number of claims to enforce the provisions of this chapter.

 

(f) Filing date; extension of time. No claim with respect to property taxes or with respect to rent shall be allowed or paid unless the claim is actually filed on or before April 15 for the next preceding calendar year. The department may, upon request, grant for a period not to exceed six months an extension of time for filing the claim.

 

(g) Limitation on number of claimants. Only one claimant per household per year shall be entitled to a tax credit pursuant to this section.

 

(h) Definitions. In this section unless the context otherwise requires:

(1) "Claimant" means a person who has filed a claim for credit under this section and was a resident of this state during the entire taxable year. In the case of a claim for rent the claimant shall have rented property in this state during the entire taxable year except as otherwise provided by this section. When two individuals of a household are able to meet the qualifications for a claimant, they may determine between them as to who the claimant shall be. If they are unable to agree, the matter shall be referred to the department and its decision shall be final. If a homestead is occupied by two or more individuals and more than one individual is able to qualify as a claimant, and some or all of the qualified individuals are not related, the individuals may determine among them as to who the claimant shall be. If they are unable to agree, the matter shall be referred to the department, and its decision shall be final.

(2) "Department" means the department of revenue.

(3) "Gross rent" means rental paid for the right of occupancy of a homestead or space rental paid to a landlord for the parking of a mobile home. If the department is satisfied that the gross rent charge was paid solely for purposes of receiving a credit pursuant to this section, it shall not allow a claim.

(4) "Homestead" means the principal dwelling, whether owned or rented by the claimant. "Homestead" may also include a mobile home and the land upon which it is located.

(5) "Household" means the household of the claimant and such other persons as resided with the claimant in his homestead during the taxable year.

(6) "Household income" means all income received by all persons of a household in a taxable year while members of the household.

(7) "Income" means:

(i) The sum of adjusted gross income as defined by the department; and

(ii) The amount of capital gains excluded from adjusted gross income; and

(iii) Nontaxable strike benefits; and

(iv) Nontaxable interest received from the federal government or any of its instrumentalities; and

(v) The gross amount of any pension or annuity not otherwise exempted. Income shall not include monies received from cash public assistance and relief, relief granted under the provisions of this section, railroad retirement benefits, all payments received under the federal social security act, all payments received under Arizona state unemployment insurance laws, all payments received from veterans disability pensions, all payments received as workmen's compensation, the gross amount of "loss of time" insurance, gifts from nongovernmental sources, surplus foods or other relief in kind supplied by a governmental agency.

(8) "Property taxes" means property taxes levied on a claimant's homestead in this state in any taxable year. For purposes of this paragraph property taxes are "levied" when the tax roll is delivered to the county treasurer for collection. If a claimant and his household own their homestead part of the taxable year and rent it or different homesteads for the rest of the same year, provided property taxes were levied on the homestead which was owned by the claimant and his household, such claimant shall be eligible for a credit pursuant to this section.

 

43-128.02 ' 43-128.02. Credit allowed taxpayers -- credit for rent paid

Text as amended by Laws 1978, Ch. 158, ' 1

(a) Credit, residents paying rent. There shall be allowed to each resident a credit of ten per cent of rent paid or fifty dollars, whichever is less, against the taxes imposed by this title for a taxable year for rent constituting property taxes paid in that taxable year.

 

(b) Disposition of unused credit; offset against tax liabilities; refund. Disposition of the claimant's allowable credit shall be as provided below.

(1) If the allowable amount of such claim exceeds the income taxes, otherwise due on the claimant's income, or if there are no state income taxes due on the claimant's income, the amount of the claim not used as an offset against income taxes, after audit by the department, shall be paid in the same manner as a refund granted under ' 43-184. No interest shall be allowed on any payment made to a claimant pursuant to this section.

(2) The amount of any claim otherwise payable for relief for rent constituting property taxes paid may be applied by the department against any liability outstanding on the books of the department against the claimant, or against his or her spouse who was a member of the claimant's household in the taxable year.

 

(c) Public welfare recipients excluded. No claim for relief for rent constituting property taxes paid shall be allowed to any person who was a recipient of public funds for the payment of property taxes or rent during the taxable year.

 

(d) Administration. The department shall make available suitable forms with instructions for claimants, including a form which may be included with or as a part of the individual income tax blank. The claim shall be in such form as the department may prescribe.

 

(e) Filing date; extension of time. No claim with respect to rent constituting property taxes paid shall be allowed or paid unless the claim is actually filed on or before April 15 for the next preceding calendar year. The department may, upon request, grant for a period not to exceed six months an extension of time for filing the claim if such request is received on or before April 15 of the year subsequent to the tax year.

 

(f) Limitation on number of claimants. Only one claimant per household per year shall be entitled to relief pursuant to this section.

 

(g) Definitions. In this section, unless the context otherwise requires:

(1) "Claimant" means a person who has filed a claim for credit under this section and was a resident of this state during the entire taxable year. To qualify for the credit such claimant shall have rented property in this state for not less than six months during the taxable year and, if he has rented for six months or more but less than the full taxable year, shall be entitled to receive a proportional share of the total amount to which he would have been entitled had he rented for the full taxable year. When two individuals of a household are able to meet the qualifications for a claimant, they may determine between them as to whom the claimant shall be. If they are unable to agree, the matter shall be referred to the department and its decision shall be final.

(2) "Department" means the department of revenue.

(3) "Rent" means rental paid solely for the right of occupancy of a homestead or space rental paid to a landlord for the parking of a mobile home, exclusive of charges for any utilities, services, furniture, furnishings or personal property appliances furnished by the landlord as a part of the rental agreement, whether or not expressly set out in the rental agreement.

(h) No person may claim both the credit authorized by this section and the credit allowed by ' 43-128.01 for rent constituting property taxes accrued.

For text as amended by Laws 1978, Ch. 211, ' 19, see ' 43-128.02, post

' 43-128.02. Credit allowed taxpayers -- credit for rent paid

Text as amended by Laws 1978, Ch. 211, ' 19.

(a) Credit, residents paying rent. There shall be allowed to each resident a credit of ten per cent of rent paid or seventy-five dollars whichever is less, against the taxes imposed by this title for any taxable year beginning from and after December 31, 1977 for rent constituting to property taxes1 paid in the taxable year.

 

(b) Amounts after January 1, 1978. Beginning January 1, 1978, the dollar amounts specified in subsection (a) of this section shall be changed pursuant to ' 43-130.

 

(c) Disposition of unused credit; offset against tax liabilities; refund. Disposition of the claimant's allowable credit shall be as provided below.

(1) If the allowable amount of such claim exceeds the income taxes, otherwise due on the claimant's income, or if there are no state income taxes due on the claimant's income, the amount of the claim not used as an offset against income taxes, after audit by the department, shall be paid in the same manner as a refund granted under ' 43-184. No interest shall be allowed on any payment made to a claimant pursuant to this section.

(2) The amount of any claim otherwise payable for relief for rent constituting property taxes paid may be applied by the department against any liability outstanding on the books of the department against the claimant, or against his or her spouse who was a member of the claimant's household in the taxable year.

 

(d) Public welfare recipients excluded. No claim for relief for rent constituting property taxes paid shall be allowed to any person who was a recipient of public funds for the payment of property taxes or rent during the taxable year.

 

(e) Administration. The department shall make available suitable forms with instructions for claimants, including a form which may be included with or as a part of the individual income tax blank. The claim shall be in such form as the department may prescribe.

 

(f) Filing date; extension of time. No claim with respect to rent constituting property taxes paid shall be allowed or paid unless the claim is actually filed on or before April 15 for the next preceding calendar year. The department may, upon request, grant for a period not to exceed six months an extension of time for filing the claim if such request is received on or before April 15 of the year subsequent to the tax year.

 

(g) Limitation on number of claimants. Only one claimant per household per year shall be entitled to relief pursuant to this section.

 

(h) Definitions. In this-section unless the context otherwise requires:

(1) "Claimant" means a person who has filed a claim for credit under this section and was a resident of this state during the entire taxable year. To qualify for the credit such claimant shall have rented property in this state for not less than six months during the taxable year and, if he has rented for six months or more but less than the full taxable year, shall be entitled to receive a proportional share of the total amount to which he would have been entitled had he rented for the full taxable year. When two individuals of a household are able to meet the qualifications for a claimant, they may determine, between them as to whom the claimant shall be. If they are unable to agree, the matter shall be referred to the department and its decision shall be Final.

(2) "Department'' means the department of revenue.

(3) "Rent" means rental paid solely for the right of occupancy of a homestead or space rental paid to a landlord for the parking of a mobile home, exclusive of charges for any utilities, services, furniture, furnishings or personal property appliances furnished by the landlord as a part of the rental agreement, whether or not expressly set out in the rental agreement.

 

(i) No person may claim both the credit authorized by this section and the credit allowed by ' 43-128.01 for rent constituting property taxes accrued.

 

1So in original. Probably should read "constituting property taxes".

For text as amended by Laws 1978, Ch. 158, ' 1, see ' 43-128.02, ante

' 43-128.03. Credit allowed taxpayers for solar energy devices

A. There shall be allowed to each resident who is not a dependent of another taxpayer a tax credit against the taxes imposed by this title for a taxable year for installation of any solar energy device in the taxpayer's residence located in Arizona. Such credit shall be equal to thirty-five per cent of the cost of such device in 1978 and such credit shall decrease at a rate of five per cent per year. The maximum credit shall not exceed one thousand dollars. The person providing such device shall furnish the taxpayer with an accounting of the cost to the taxpayer.

 

B. A taxpayer may claim the credit provided by the provisions of this section only once in a taxable year, and only once for a given residence.

 

C. If the allowable tax credit exceeds the income taxes otherwise due on the claimant's income, or if there are no state income taxes due on the claimant's income, the amount of the claim not used as an offset against income taxes may be carried forward as a tax credit against subsequent years' income tax liability for a period not to exceed five years.

 

D. A husband and wife who file separate returns for a taxable year in which they could have filed a joint return may each claim only one-half of the tax credit that would have been allowed for a joint return.

 

E. The credit provided pursuant to subsection A of this section shall be in lieu of any deduction allowed for installation of a solar energy device in the taxpayer's residence pursuant to ' 43-123.37.

 

F. For the purposes of this section, "solar energy device" means a system or a series of mechanisms designed primarily to provide heating, to provide cooling, to produce electrical power, to produce mechanical power or to provide any combination of the foregoing by means of collecting and transferring solar generated energy into such uses either by active or passive means. Such systems may also have the capability of storing such energy for future utilization. Passive systems shall clearly be designated 1 as a solar energy device or as a trombe wall and not merely a part of a normal structure such as a window.

 

1So in original. Probably should read "designed".

 

' 43-128.04. Credit allowed taxpayers for installation of residential insulation and devices

A. There shall be allowed to each resident who is not a dependent of another taxpayer a tax credit against the taxes imposed by this title for a taxable year for installation during such taxable year of additional loose fill insulation, roll insulation, rigid insulation, foam insulation, insulating screen, reflective glass or film, insulating windows, thermal insulating doors, wind driven turbine attic ventilators, mechanically driven attic ventilation devices or passive roof vents, waste heat water heaters, to such taxpayer's residence. The credit for the total amount of all such improvements shall be equal to twenty-five per cent of the cost of such improvements, not to exceed one hundred dollars.

 

B. A husband and wife who file separate returns for a taxable year in which they could have filed a joint return may each claim only one-half of the tax credit that would have been allowed for a joint return.

 

C. Owners in joint tenancy, tenants in common or other owners of a residence who file separate returns for a taxable year may each claim only their pro rata share of the tax credit allowed under subsection A, based upon their ownership interest in the residence, providing that in no event shall the total credits allowed all such owners of a residence for the improvements described in subsection A exceed the sum of one hundred dollars for a taxable year for installation during such taxable year.

 

D. For the purposes of this section:

1. "Foam insulation" means any foam type insulation used to control heat flow in or out of the building envelope.

2. "Insulating screen" means any reflective or louvered device specifically designed to reduce solar heat gain.

3. "Insulating window" means any multiple-glazed window or such system designed for the same purpose as a multiple-glazed window.

4. "Insulation" means any material or combination of materials which is specifically designed to retard heat flow in 1 or out of the building envelope.

5. "Loose fill insulation" means any blown or poured loose fill insulation used to control heat flow in 1 or out of the building envelope.

6. "Mechanically driven attic ventilation devices" means any power utilizing device which aids in ventilating attic spaces of residences.

7. "Passive roof vents" means nonmechanical devices which allow the natural ventilation of attic spaces of residences.

8. "Reflective glass or film" means any metalized glazing material or product specifically designed to reduce solar heat gain.

9. "Rigid insulation" means any rigid form of insulation used to control heat flow in 1 or out of the building envelope.

10. "Roll insulation" means any roll form insulation.

11. "Thermal insulating door" means any door specifically designed with insulating material.

12. "Waste heat water heater" means any mechanical device which uses the waste heat generated by the refrigeration process to heat water.

13. "Wind driven turbine attic ventilators" means any nonmechanical device installed on the roof to aid in ventilating attic spaces of residences.

 

E. Installation of residential insulation or devices allowed for credit under this section must meet all required fire safety and building code regulations, or other applicable federal, state, or local law.

 

F. Credit under this section shall not be allowed for installation of insulation in violation of title 32, chapter 10, relating to licensing of contractors. An unlicensed contractor shall not install insulation with the customer misunderstanding that the credit is available. This subsection shall not affect the installation of insulation by the owner of the residence.

 

1So in original. Probably should read "into".

' 43-129. Alternative optional tax in case of resident individuals and resident married couples

In lieu of the tax imposed by ' 43-102, upon the amount of net income as defined in ' 43-111 of every resident of the state in excess of the credits against net income provided in ' 43-127, each individual resident of the state, or resident married couple, shall have the privilege and option of filing a return and paying a tax at the rates prescribed in ' 43-102 upon the amount of net income for the same taxable year as now defined in section 21, of the United States Internal Revenue Code in excess of the credits against net income now provided in section 25 of the United States Internal Revenue Code; provided, however, that such amount of net income as so determined shall be further decreased by the amount of federal income tax paid or accrued within the taxable year by such individual resident or resident married couple of the state.

 

' 43-130. Amounts modified to reflect state consumer price index

A. For the purposes of this section:

1. "Designated dollar amounts" means the amounts designated as deductions, exemptions or credits in '' 43-123.29, subsection A, 43-127, subsections (a), (b) and (d), 43-128.01, subsection (a) and 43-128.02, subsection (a).

2. "State consumer price index" means the index determined by the department of revenue based upon changes in consumer prices in the state. Until such time that such index as defined by this paragraph becomes available, the "state consumer price index" shall mean the "metropolitan Phoenix consumer price index".

3. "Metropolitan Phoenix consumer price index" means the index determined by the department of revenue based upon figures published by the bureau of business and economic research, college of business administration, Arizona state university, or its successor agency, which demonstrate changes in prices in the metropolitan Phoenix area.

 

B. Beginning January 1, 1978, the designated dollar amounts shall be changed to reflect the difference between the state consumer price index for the second quarter of the taxable year and the state consumer price index for the second quarter of 1977, except:

1. The revised dollar amounts determined by this section shall be raised to the nearest whole number.

2. The designated dollar amounts shall not be reduced below such amounts allowed as deductions, exemptions or credits on December 31, 1977.

 

C. The department shall adjust the designated dollar amounts prescribed in subsection A, paragraph 1 of this section by multiplying such designated dollar amounts by the difference between the state consumer price index for the second quarter of the taxable year and the state consumer price index for the second quarter of 1977, divided by the state consumer price index for the second quarter of 1977, added to one.

 

' 43-131. Accounting periods and methods of accounting

(a) Net income -- how computed. The net income shall be computed upon the basis of the taxpayer's annual accounting period, fiscal year or calendar year as the case may be, in accordance with the method of accounting regularly employed in keeping the books of such taxpayer; but if no such method of accounting has been so employed, or if the method employed does not reflect the proper income, the computation shall be made in accordance with such method as in the opinion of the tax commission does reflect the proper income. If the taxpayer's annual accounting period is other than a fiscal year, or if the taxpayer has no annual accounting period or does not keep books, the net income shall be computed on the basis of the calendar year.

 

(b) Change of accounting period. If the taxpayer changes his or its accounting period from fiscal year to calendar year, from calendar year to fiscal year, or from one fiscal year to another, the net income shall, with the approval of the tax commission, be computed on the basis of such new accounting period subject to the provisions of ' 43-137(a) and (b).

 

(c) Period in which items of gross income included

(1) General rule. The amount of all items of gross income shall be included in the gross income for the taxable year in which received by the taxpayer unless under the methods of accounting permitted under ' 43-131(a) any such items are to be properly accounted for as of a different period. In the case of the death of a taxpayer, whose net income is computed upon the basis of the accrual method of accounting, amounts (except amounts includible in computing a partner's net income under ' 43-171) accrued only by reason of the death of the taxpayer shall not be included in computing net income for the period in which falls the date of the taxpayer's death.

(2) Non-interest-bearing obligations issued at discount and redeemable at fixed amounts -- election. In the case of a taxpayer owning non-interest-bearing obligations issued at a discount and redeemable for fixed amounts increasing at stated intervals, if the increase in the redemption price of the obligations occurring in the taxable year does not (under the method of accounting used in computing its net income) constitute income to the taxpayer in such year, the taxpayer may, at its election made in its return for any taxable year beginning after December 31, 1953, treat the increase as income received in the taxable year. If election is made with respect to such obligation, it shall apply also to all such obligations owned by the taxpayer at the beginning of the first taxable year to which it applies and to all such obligations thereafter acquired by the taxpayer and shall be binding for all subsequent income years, unless upon application by the taxpayer the tax commission permits the taxpayer, subject to such conditions as the tax commission deems necessary, to change to a different method. In the case of any obligations owned by the taxpayer at the beginning of the first income year to which its election applies, the increase in the redemption price of the obligations occurring between the date of acquisition and the first day of the taxable year shall also be treated as income received in such taxable year.

 

' 43-132. Accounting factors

(a) Tax for fiscal year taxpayers, where law changed. The tax for any period beginning in one calendar year ("first calendar year") and ending in the following calendar year ("second calendar year") where the law applicable to the computation of taxes for taxpayers reporting on a calendar year basis differs for the second calendar year from the law applicable to the first calendar year, shall (except as otherwise provided) be the sum of:

(1) The same proportion of a tax for the entire period, determined under the law applicable to the first calendar year and at the rates for such year, which the portion of such period falling within the first calendar year is of the entire period, and

(2) The same proportion of a tax for the entire period, determined under the law applicable to the second calendar year and at the rates for such year, which the portion of such period falling within the second calendar year is of the entire period.

 

(b) Payment or refund of tax where change in law. If any tax which has been paid under the law applicable to the first calendar year exceeds the tax imposed by subsection (a), the excess shall be refunded or credited to the taxpayer. Any tax in addition to that paid under the law applicable to the first calendar year made necessary by that subsection is immediately due and payable upon notice and demand from the tax commission.

 

(c) Resident or nonresident, change of status. When the status of a taxpayer changes from resident to nonresident, or from nonresident to resident, there shall be included in determining income from sources within or without this state, as the case may be, income and deductions accrued prior to the change of status even though not otherwise includible in respect of the period prior to such change, but the taxation or deduction of items accrued prior to the change of status shall not be affected by the change.

 

' 43-133. Deduction and credit, when taken

The deductions and credits provided for in this title shall be taken for the taxable year in which "paid or accrued" or "paid or incurred", dependent upon the method of accounting upon the basis of which the net income is computed, unless in order clearly to reflect the income the deductions or credits should be taken as of a different period. In the case of the death of a taxpayer whose net income is computed upon the basis of the accrual method of accounting, amounts except amounts includible in computing a partner's net income under ' 43-171, accrued as deductions and credits only by reason of the death of the taxpayer, shall not be allowed in computing net income for the period in which falls the date of the taxpayer's death.

 

' 43-134. Installment basis

(a) Installment sales of personal property in trade or business. Under regulations prescribed by the tax commission a person who regularly sells or otherwise disposes of personal property on the installment plan may return as income therefrom in any taxable year that proportion of the installment payments actually received in that year which the gross profit realized or to be realized when payment is completed, bears to the total contract price.

 

(b) Installment sales, casual personal property and real property. In the case (1) of a casual sale or other casual disposition of personal property (other than property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year) for a price exceeding one thousand dollars, or (2) of a sale or other disposition of real property, if in either case the initial payments do not exceed thirty per cent of the selling price, the income may, under regulations prescribed by the tax commission, be returned on the basis and in the manner prescribed by this section.

As used in this section "initial payments" means the payments received in cash or property other than evidences of indebtedness of the purchaser during the taxable period in which the sale or other disposition is made.

 

(c) Installment reporting, consistency. If a taxpayer entitled to the benefits of subsection (a) elects for any taxable year to report his net income on the installment basis, then in computing his income for the year of change or any subsequent year, amounts actually received during any such year on account of sales or other dispositions of property made in any prior year shall not be excluded.

 

(d) Gain or loss upon disposition of installment obligations

(1) Gain or loss. If an installment obligation is satisfied at other than its face value or distributed, transmitted, sold, or otherwise disposed of, gain or loss shall result to the extent of the difference between the basis of the obligation and (A) in the case of satisfaction at other than face value or a sale or exchange-the amount realized, or (B) in case of a distribution, transmission, or disposition otherwise than by sale or exchange -- the fair market value of the obligation at the time of the distribution, transmission, or disposition.

 

(2) Installment obligations, method of computation. Any gain or loss resulting from the application of paragraph (1) shall be considered as resulting from the sale or exchange of the property in respect of which the installment obligation was received. The basis of the obligation shall be the excess of the face value of the obligation over an amount equal to the income which would be returnable were the obligation satisfied in full.

 

(3) Installment obligations, transfers by death. Paragraphs (1) and (2) do not apply to the transmission at death of installment obligations if there is filed with the tax commission at such time as it by regulation prescribes, a bond in such amount and with such sureties as it may deem necessary, conditioned upon the return as income, by the person receiving any payment on such obligations, of the same proportion of such payment as would be returnable as income by the decedent if he had lived and had received such payment.

 

(4) Installment obligation -- distribution in liquidation. If an installment obligation is distributed by one corporation to another corporation in the course of a liquidation, and under ' 43-152(b)(6) and (7) no gain or loss with respect to the receipt of such obligation is recognized in the case of the recipient corporation, then no gain or loss with respect to the distribution of such obligation shall be recognized in the case of the distributing corporation.

 

(e) Installment obligation -- unreported income in year of dissolution

(1) Where a corporation elects to report income from the sale or other disposition of property as provided in this section, and the entire income therefrom has not been reported prior to the year the taxpayer ceases to be subject to the tax measured by net income imposed under this title, the unreported income shall be included in the measure of the tax for the last year in which the taxpayer is subject to the tax measured by net income imposed under this title. This section shall not be applicable where the installment obligation is transferred pursuant to a reorganization as defined in ' 43-152 to another taxpayer a party to the reorganization subject to tax under this title as the transferror. The determination of any deficiency resulting from this section shall be made under the provisions of ' 43-177, but the period of limitation under that section, and the accrual of interest under ' 43-181, shall commence on the date the taxpayer ceases to be subject to the tax imposed under this title.

(2) "Cessation of business" as herein used means the failure to do business during an entire taxable year.

 

(f) Installment obligation -- unreported income -- bond required or jeopardy assessment. If the tax commission determines that the reporting of income from the sale or other disposition of property in the manner provided in this section may jeopardize the collection of a tax measured by such income, then, unless the taxpayer posts bond or other security in a form and amount satisfactory to the tax commission to guarantee the payment of any tax that may become due measured by such income, the tax commission may require that any of such income not previously reported shall be included in the computation of the measure of the tax for the last year during which the taxpayer was subject to the tax imposed under this title.

 

' 43-135. Allocation of income deductions

(a) Transactions between related persons. In any case of two or more persons, organizations, trades, or businesses, whether or not organized in the United States and whether or not affiliated, owned or controlled directly or indirectly by the same interests, the department is authorized to distribute, apportion, or allocate gross income, deductions, credits or allowances between or among such organizations, trades, or businesses, if it determines that such distribution, apportionment, or allocation is necessary in order to prevent evasion of taxes or clearly to reflect the income of any such persons, organizations, trades or businesses. For the purpose of enforcing this subsection, the department may require the filing of a combined report and such other information as it deems necessary.

 

(b) Controlled corporations. In any case of two or more corporations owned or controlled directly or indirectly by the same interests, the department is authorized to distribute, apportion, or allocate gross income deductions, credits or allowances, between or among such taxpayers, if it determines that such distribution, apportionment, or allocation is necessary in order to prevent evasion of taxes or clearly to reflect the income of any such taxpayer. For the purpose of enforcing this subsection the department may require the filing of a combined report and such other information as it deems necessary.

 

(c) Transactions, between husband and wife. In any case where husband and wife file separate returns, the department may distribute, apportion or allocate gross income between the spouses, if it is determined that such distribution, apportionment, or allocation is necessary in order to reflect the proper income of the spouses.

 

(d) Intercompany transactions. In the case of a corporation doing business within the meaning of this title, whether under agreement or otherwise, in such manner as either directly or indirectly to benefit the members or stockholders of the corporation, or any of them, or any person or persons, directly or indirectly interested in such business, by rendering services of any nature whatsoever, or acquiring or disposing of its products or the goods or commodities in which it deals, at less than a fair price therefor, the department, in order to prevent evasion of taxes or clearly to reflect the income of such corporation, may require a report of such facts as it deems necessary, and may determine the amount which shall be deemed to be the entire net income allocable to this state of the business of such corporation for the calendar or fiscal year, and compute the tax upon such net income. In determining the entire net income the department shall have regard to the fair profits which, but for any agreement, arrangement, or understanding, might be or could have been obtained from dealing in such products, goods or commodities.

 

(e) Consolidated reports required

(1) Consolidated report. In the case of a corporation liable to report under this title owning or controlling, either directly or indirectly, another corporation, or other corporations, and in the case of a corporation liable to report under this title and owned or controlled, either directly or indirectly, by another corporation, the department may require a consolidated report showing the combined net income or such other facts as it deems necessary. The department is authorized and empowered, in such manner as it may determine, to assess the tax against either of the corporations whose net income is involved in the report upon the basis of the combined entire net income and such other information as it may possess, or it may adjust the tax in such other manner as it shall determine to be equitable if it determines it to be necessary in order to prevent evasion of taxes or to clearly reflect the net income earned by said corporation or corporations from business done in this state.

 

(2) Definition -- "control". Direct or indirect ownership or control of more than fifty per cent of the voting stock of the taxpayer shall constitute ownership or control for the purposes of this section.

 

(f) Basis of transferor -- tax evasion -- deduction denied

(1) If (A) any person or persons acquire, on or after January 1, 1954, directly or indirectly, control of a corporation, or (B) any corporation acquires, on or after January 1, 1954, directly or indirectly, property of a corporation, not controlled, directly or indirectly, immediately prior to such acquisition, by such acquiring person or corporation or its stockholders, the basis of which property, in the hands of the acquiring person or 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 title by securing the benefit of a deduction or other allowance which such person or corporation would not otherwise enjoy, then such deduction or other allowance shall not be allowed. For the purposes of subparagraphs (A) and (B) of this paragraph, control means the ownership of stock possessing at least fifty per cent of the total combined voting power of all classes of stock entitled to vote or at least fifty per cent of the total value of shares of all classes of stock of the corporation.

(2) In any case to which paragraph (1) is applicable the department is authorized --

(A) To allow as a deduction or allowance any part of any amount disallowed by such paragraph, if it determines that such allowance will not result in the evasion or avoidance of tax for which the acquisition was made; or

(B) To distribute, apportion, or allocate gross income, and distribute, apportion, or allocate the deductions or allowances the benefit of which was sought to be secured, between or among the persons and corporations, or properties, or parts thereof, involved, and to allow such deductions or allowances so distributed, apportioned, or allocated, but to give effect to such allowance only to such extent as it determines will not result in the evasion or avoidance of tax for which the acquisition was made; or

(C) To exercise its powers in part under subparagraph (A) and in part under subparagraph (B) of this paragraph.

 

(g) Apportionment formula. When the income of a corporation subject to the tax imposed under this title is derived from or attributable to sources both within and without the state, the tax shall be measured by the net income derived from or attributable to sources within this state. Such income shall be determined by first deducting from the income of the taxpayer such part thereof, less related expenses, as follows the situs of the property or the residence of the recipient (provided, that the amount of interest and dividend income deductible under this provision as following the situs of the property or residence of the recipient shall be limited to the total interest and dividend income received in excess of the total interest, expenses and related expenses). The income attributable to sources within this state shall then be determined by (1) separate accounting thereof when requested by the taxpayer or required by the department to more clearly reflect the income of the taxpayer, or, (2) an apportionment upon the basis of sales, purchases, expenses of manufacture, payroll, value and situs of tangible property including leased property or by reference to any of these or other factors or by such other method of apportionment as is fairly calculated to determine the net income derived from or attributable to sources within this state, provided that in no case shall the tax be less than would result from the use of the apportionment method. Income from business carried on partly within and partly without this state shall be apportioned in such a manner as is fairly calculated to apportion such income among the states or countries in which such business is conducted. Income attributable to isolated or occasional transactions in states or countries in which the taxpayer is not doing business shall be allocated to the state in which the taxpayer has its principal place of business or commercial domicile.

If the department reallocates net income upon its examination of any return, it shall, upon the written request of the taxpayer, disclose to him the basis upon which its reallocation has been made.

' 43-136. Compensation for services rendered for a period of thirty-six months or more and back pay

 

(a) Personal services. In the case of compensation (1) received for personal services rendered by an individual or a partnership, and covering a period of thirty-six calendar months or more from the beginning to the completion of such services, (2) all or at least eighty per cent of which is received or accrued in one taxable year, the tax attributable to any part thereof which is included in the gross income of any individual shall not be greater than the aggregate of the taxes attributable to such part had it been included in the gross income of such individual ratably over that part of the period which precedes the date of such receipt or accrual.

 

(b) Patent, copyright, etc.

(1) Definition of artistic work or inventions. As used in paragraph (2), "artistic work or invention", in the case of an individual, means (A) a literary, musical, or artistic composition of that individual or, (B) a patent or copyright covering an invention of a literary, musical, or artistic composition of that individual, (C) the work on which by that individual covered a period of thirty-six calendar months or more from the beginning to the completion of such composition or invention.

 

(2) Compensation for artistic work or inventions covering thirty-six months or more. If, in the taxable year, the gross income of any individual from a particular artistic work or invention by him is not less than eighty per cent of the gross income in respect of such artistic work or invention in the taxable year plus the gross income therefrom in previous taxable years and the twelve months immediately succeeding the close of the taxable year, the tax attributable to the part of such gross income of the taxable year which is not taxable as a gain from the sale or exchange of a capital asset held for more than six months shall not be greater than the aggregate of the taxes attributable to such part had it been received ratably over that part of the period preceding the close of the taxable year but not more than thirty-six calendar months.

 

(c) Definition of month. For the purpose of this section, a fractional part of a month shall be disregarded unless it amounts to more than half a month in which case it shall be considered as a month.

 

(d) Back pay in general

(1) If the amount of the back pay received or accrued by an individual during the taxable year exceeds fifteen per cent of the gross income of the individual for such year, the part of the tax attributable to the inclusion of such back pay in gross income for the taxable year shall not be greater than the aggregate of the increases in the taxes which would have resulted from the inclusion of the respective portions of such back pay in gross income for the taxable years to which such portions are respectively attributable, as determined under regulations prescribed by the tax commission.

 

(2) Definitions of back pay. For the purposes of this subsection, "back pay" means (A) remuneration, including wages, salaries, retirement pay, and other similar compensation, which is received or accrued during the taxable year by an employee for services performed prior to the taxable year for his employer and which would have been paid prior to the taxable year except for the intervention of one of the following events: (i) Bankruptcy or receivership of the employer; (ii) dispute as to the liability of the employer to pay such remuneration, which is determined after the commencement of court proceedings; (iii) if the employer is the United States, a state, a territory, or any political subdivision thereof, of the District of Columbia, or any agency or instrumentality of any of the foregoing, lack of funds appropriated to pay such remuneration; or (iv) any other event determined to be similar in nature under regulations prescribed by the tax commission; and (B) wages or salaries which are received or accrued during the taxable year by an employee for services performed prior to the taxable year for his employer and which constitute retroactive wage or salary increases ordered, recommended, or approved by any federal or state agency, and made retroactive to any period prior to the taxable year; and (C) payments which are received or accrued during the taxable year as a result of an alleged violation by an employer of any state or federal law relating to labor standards or practices, and which are determined under regulations prescribed by the tax commission to be attributable to a prior taxable year. Amounts not includible in gross income shall not constitute "back pay".

 

' 43-137. Returns for a period of less than twelve months

(a) Returns for short period resulting from change of accounting period. If a taxpayer, with the approval of the tax commission, changes the basis of computing net income from fiscal year to calendar year, a separate return shall be made for the period between the close of the last fiscal year for which return was made and the following December 31st. If the change is from calendar year to fiscal year, a separate return shall be made for the period between the close of the last calendar year for which return was made and the date designated as the close of the fiscal year. If the change is from one fiscal year to another fiscal year a separate return shall be made for the period between the close of the former fiscal year and the date designated as the close of the new fiscal year.

 

(b) Income computed on basis of short period. Where a separate return is made under subsection (a), on account of a change in the accounting period, and in all other cases where a separate return is required or permitted by regulations prescribed by the tax commission to be made for a fractional part of a year, the income shall be computed on the basis of the period for which the separate return is made. The due date of the separate return for such period is the fifteenth day of the fourth month following the close of that period.

 

(c) Income placed on annual basis

(1) General rule. If a separate return is made under subsection (a) on account of a change in the accounting period, the net income, computed on the basis of the period for which the separate return is made, hereafter referred to as the "short period", shall be placed on an annual basis by multiplying the amount thereof by twelve and dividing by the number of months in the short period. The tax shall be such part of the tax computed on such annual basis as the number of months in the short period is of twelve months.

(2) Exception

(A) Short period, alternative computation. If the taxpayer establishes the amount of his net income for the period of twelve months beginning with the first day of the short period, computed as if the twelve-month period were a taxable year, under the law applicable to that year, then the tax for the short period shall be reduced to an amount which is that part of the tax computed on the net income for the twelve-month period as the net income computed on the basis of the short period is of the net income for the twelve-month period.

(B) Short period, filing return. The taxpayer (other than a taxpayer to which the next sentence applies) shall compute the tax and file his return without the application of subparagraph (A). If the taxpayer (other than a corporation) was not in existence at the end of the twelve-month period, then in lieu of the net income for the twelve-month period there shall be used for the purposes of subparagraph (A) the net income for the twelve-month period ending with the last day of the short period.

(C) Short period, tax limitations on benefits. The tax computed under subparagraph (A) shall in no case be less than the tax computed on the net income for the short period without placing the net income on an annual basis. The benefits of subparagraph (A) shall not be allowed unless the taxpayer makes application therefor in accordance with and at such time as regulations prescribed hereunder require, but not after the time prescribed for the filing of the return for the first taxable year which ends on or after twelve months after the beginning of the short period.

 

(D) Short period, refund. The application, in case the return was filed without regard to subparagraph (A), shall be considered a claim for credit or refund with respect to the amount by which the tax is reduced under subparagraph (A). The tax commission shall prescribe such regulations as it may deem necessary.

 

(d) Fractional year return, personal exemption and credit. In the case of a return made for a fractional part of the year, under ' 43-178(b), the personal exemption and the credit for dependents shall be reduced respectively to amounts which bear the same ratio to the full credits provided as the number of months in the period for which return is made bears to twelve months.

 

(e) Returns where taxpayer not in existence for twelve months. In the case of a taxpayer not in existence during the whole of an annual accounting period ending on the last day of a month, or, if the taxpayer has no annual accounting period or does not keep books during the whole of a calendar year, the return shall be made for the fractional part of the year during which the taxpayer was in existence.

 

' 43-141. Returns

(a) Individual returns

(1) Returns, filing requirements. Every individual taxable under this title shall make a return to the tax commission which shall contain or be verified by a written declaration that it is made under the penalties of perjury, stating specifically the items of his gross income and the deductions and credits allowed by this title, if he has for the taxable year --

(A) A net income of one thousand dollars or over, if single;

(B) A net income of two thousand dollars or over, if married; or

(C) A gross income of five thousand dollars or over, regardless of the amount of net income.

(2) Husband and wife, returns. If a husband and wife have for the taxable year an aggregate net income of two thousand dollars or over, or an aggregate gross income of five thousand dollars or over-

(A) Each shall make such a return, or

(B) The income of each shall be included in a single joint return, in which case the tax shall be computed on the aggregate income, as provided in ' 43-102(a) or (c). No joint return shall be made if husband and wife have different taxable years; except that if Such taxable years begin on the same day and end on different days because of the death of either or of both, then the joint return may be made with respect to the taxable year of each. The above exception shall not apply if the surviving spouse remarries before the close of his taxable year, nor if the taxable year of either spouse is a fractional part of a year under ' 43-137(a).

(C) In the case of the death of one spouse or both spouses the joint return with respect to the decedent may be made only by his executor or administrator; except that in the case of the death of one spouse the joint return may be made by the surviving spouse with respect to both himself and the decedent if (i) no return for the taxable year has been made by the decedent, (ii) no executor or administrator has been appointed, and (iii) no executor or administrator is appointed before the last day prescribed by law for filing the return of the surviving spouse. If an executor or administrator of the decedent is appointed after the making of the joint return by the surviving spouse, the executor or administrator may disaffirm such joint return by making, within one year after the last day prescribed by law for Citing the return of the surviving spouse, a separate return for the taxable year of the decedent with respect to which the joint return was made, in which case the return made by the survivor shall constitute his separate return.

(3) Determination -- husband and wife. For the purposes of this section, the status as husband and wife of two individuals having taxable years beginning on the same day shall be determined --

(A) If both have the same taxable year -- as of the close of such year; and

(B) If one dies before the close of the taxable year of the other -- as of the time of such death.

(4) Returns by agents or guardians. If the taxpayer is unable to make his own return, the return shall be made by a duly authorized agent or by the guardian or other person charged with the care of the person or property of the taxpayer.

(5) Estate or trust, returns by beneficiary. Every resident or nonresident who is taxable upon income of an estate or trust shall include such income in his gross income.

(6) Fiduciary returns

(A) Requirement of return. Every fiduciary (except a receiver appointed by authority of law in possession of part only of the property of an individual) shall make a return, which shall contain or be verified by a written declaration that it is made under the penalties of perjury, for any of the following taxpayers for whom he acts, stating specifically the items of gross income of the taxpayer and the deductions and credits allowed under this title:

(i) Every individual having a net income for the taxable year of one thousand dollars or over, if single,

(ii) Every individual having a net income for the taxable year of two thousand dollars or over, if married.

(iii) Every individual having a gross income for the taxable year of five thousand dollars or over, regardless of the amount of his net income.

(iv) Every estate the net income of which for the taxable year is one thousand dollars or over.

(v) Every trust the net income of which for the taxable year is one hundred dollars or over.

(vi) Every estate or trust the gross income of which for the taxable year is five thousand dollars or over, regardless of the amount of the net income.

(vii) Every decedent, for the year in which death occurred, and for prior years, if returns for such years should have been filed but have not been filed by the decedent, under such rules and regulations as the tax commission may prescribe.

(B) Fiduciary return, where several fiduciaries. Under such rules and regulations as the tax commission may prescribe, a return filed by one of two or more joint fiduciaries is sufficient. The fiduciary filing the return, which shall contain or be verified by a written declaration that it is made under the penalties of perjury, shall state (i) that he has sufficient knowledge of the affairs of the taxpayer for whom the return is made to enable him to make the return, and (ii) that th6 return is, to the best of his knowledge and belief, true and correct.

(C) Fiduciary returns, liability same as individual. Any fiduciary required to make a return is subject to all the provisions of this title which apply to individuals.

(7) Partnership returns. Returns by partnerships are provided for in ' 43-17 1 (d).

(8) Separate returns after filing joint returns

(A) In general. If a husband and wife have filed a joint return for a taxable year for which separate returns could have been made by them under paragraph (2)(A), and the time prescribed by this title for filing the return for such taxable year has expired, the husband and his spouse may nevertheless make separate returns for such taxable year. Separate returns filed by the spouses in such a case shall constitute their returns for such taxable year, and all payments, credits, refunds or other repayments made or allowed with respect to the joint return for such taxable year shall be taken into account in determining the extent to which the taxes based on the separate returns have been paid.

(B) When change under subparagraph (A) may be made. Separate returns may be filed under subparagraph (A) only if there is paid in full, at or before the time of filing such returns:

(i) All amounts previously assessed with respect to both spouses for such taxable year;

(ii) All amounts shown as the tax by the spouses upon their joint return for such taxable year; and

(iii) Any amount determined, at the time of the filing of the separate returns, as a deficiency with respect to the spouses for such taxable year if, prior to such filing, a notice of proposed deficiency under ' 43-177(c) has been mailed.

(C) When change under subparagraph (A) may not be made. Separate returns cannot be filed under subparagraph (A):

(i) After the expiration of four years from the last date prescribed by this title for filing the return for such taxable year (determined without regard to any extension of time granted for the filing of the joint return);

(ii) After there has been mailed to the spouses, with respect to such taxable year, a notice of deficiency under ' 43-177(c), if the spouses, as to such notice, file a protest under ' 43-177(e) or appeal under ' 43-177(f);

(iii) After the spouses have commenced a suit in court for the recovery of any part of the tax paid for taxable year with respect to the joint return; or

(iv) After the spouses have entered into a closing agreement under ' 43-175(1) with respect to such taxable year as to the tax payable by the spouse under their joint return.

(D) Income and deduction elections per joint return irrevocable. If separate returns are made under subparagraph (A), any election (other than the election to file the joint return) made by the spouses in their joint return for such taxable year with respect to the treatment of any income, deduction, or credit shall not be changed in the making of the separate returns where such election would have been irrevocable if the separate returns had not been filed.

(E) Election per subparagraph (A) after death of either spouse. If separate returns are made under subparagraph (A) after the death of either spouse, such return with respect to the decedent can be made only by his executor or administrator.

(F) Penalties -- subparagraph (A). Where the aggregate amount of the taxes shown by the spouses on their separate returns filed pursuant to subparagraph (A) exceeds the tax shown on their joint return:

(i) If any of such excess is attributable to negligence or intentional disregard of rules and regulations of the tax commission (but without intent to defraud) at the time of making the joint return, then five per cent of the total amount of such excess on each return shall be assessed, collected, and paid in the same manner as if it were a deficiency.

(ii) If any part of such excess is attributable to fraud with intent to evade tax at the time of the making of the joint return, then fifty per cent of the total amount of such excess shall be so assessed, collected, and paid, in lieu of the fifty per cent addition to the tax provided in ' 43-180(e).

(G) Rules for application of '' 43-177(d) and 43-180(a). For the purposes of ' 43-177(d) (relating to periods of limitations upon assessment and collection), and for the purposes of ' 43-180(a) (relating to delinquent returns), separate returns made under subparagraph (A) shall be deemed to have been filed on the date on which the joint return was filed.

(H) Rules for application of ' 43-184. For the purposes of ' 43-184 (relating to refunds and credits), separate returns made under subparagraph (A) shall be deemed to have been filed on the last date prescribed by this title for filing the return for such taxable year (determined without regard to any extension of time granted for the filing of the joint return),

(I) Statute of limitations -- subparagraph (A). If separate returns are made under subparagraph (A) the period of limitations provided in ' 43-177(d) on the making of assessments and collecting taxes shall with respect to such returns include one year immediately after the date of filing of such separate returns (computed without regard to the provisions of subparagraph (G)).

(J) Rule for application of ' 43-179. For the purposes of ' 43-179 (relating to criminal penalties in the case of fraudulent returns) the term "return" includes a joint return filed by spouses with respect to a taxable year for which separate returns are made under subparagraph (A) after the filing of such joint return.

 

(9) Joint return after filing separate return

(A) In general. If an individual has filed a separate return for a taxable year for which a joint return could have been made by him and his spouse under paragraph (2), and the time prescribed by this title for filing the return for such taxable year has expired, such individual and his spouse may nevertheless make a joint return for such taxable year. A joint return filed by the husband and wife in such a case shall constitute the return of the husband and wife for such taxable year, and all payments, credits, refunds, or other repayments made or allowed with respect to the separate return of either spouse for such taxable year shall be taken into account in determining the extent to which the tax based upon the joint return has been paid.

(B) Payments required before a joint return can be made. A joint return can be made under subparagraph (A) only if there is paid in full at or before the time of the filing of the joint return:

(i) All amounts previously assessed with respect to either spouse for such taxable year;

(ii) All amounts shown as the tax by either spouse upon his separate return for such taxable year; and

(iii) Any amount determined, at the time of the filing of the joint return, as a proposed deficiency with respect to either spouse for such taxable year if, prior to such filing, a notice under ' 43-177(c) of such proposed deficiency has been mailed.

(C) Time for making joint return. A joint return cannot be made under subparagraph (A):

(i) After the expiration of four years from the last date prescribed by law for filing the return for such taxable year (determined without regard to any extension of time granted to either spouse);

(ii) After there has been mailed to either spouse, with respect to such taxable year, a notice of deficiency under ' 43-177(c), if the spouse as to such notice, files a protest under ' 43-177(e) or appeal under ' 43-177(f);

(iii) After either spouse has commenced a suit in any court for the recovery of any part of the tax for such taxable year; or

(iv) After either spouse has entered into a closing agreement under ' 43-175(l) with respect to such taxable year.

(D) Elections made in separate returns. If a joint return is made under this paragraph, any election (other than the election to file a separate return) made by either spouse in his separate return for such taxable year with respect to the treatment of any income, deduction, or credit of such spouse shall not be changed in the making of the joint return where such election would have been irrevocable if the joint return had not been made.

(E) Death of spouse. If a joint return is made under this paragraph after the death of either spouse, such return with respect to the decedent can be made only by his executor or administrator.

(F) Additions to the tax. Where the amount shown as the tax by the husband and wife on a joint return made under this paragraph exceeds the aggregate of the amounts shown as the tax upon the separate return of each spouse;

(i) If any part of such excess is attributable to negligence or intentional disregard of rules and regulations (but without intent to defraud) at the time of the making of such separate return, then five per cent of the total amount of such excess shall be assessed, collected, and paid in the same manner as if it were a deficiency;

(ii) If any part of such excess is attributable to fraud with intent to evade tax at the time of the making of such separate return, then fifty per cent of the total amount of such excess shall be so assessed, collected, and paid, in lieu of the fifty per cent addition to the tax provided in ' 43-180(e).

(G) Rules for application of '' 43-177(d) and 43-180(a). For the purposes of ' 43-177(d) (relating to period of limitations upon assessment and collection), and for the purposes of ' 43-180(a) (relating to delinquent returns), a joint return made under subparagraph (A) shall be deemed to have been filed;

(i) Where both spouses filed separate returns prior to making the joint return, on the date the last separate return was filed (but not earlier than the last date prescribed by this title for filing the return of either spouse).

(ii) Where one spouse filed a separate return prior to the making of the joint return, and the other spouse had less than one thousand dollars of net income and less than five thousand dollars of gross income for such taxable year, on the date of the filing of such separate return (but not earlier than the last date prescribed by law for the filing of such separate return).

(iii) Where only one spouse filed a separate return prior to the making of a joint return and the other spouse had a net income of more than one thousand dollars or a gross income of more than five thousand dollars for such taxable year, on the date of the filing of such joint return.

(H) Rules for application of ' 43-184. For the purposes of ' 43-184 (relating to refunds and credits), a joint return made under subparagraph (A) shall be deemed to have been filed on the last date prescribed by this title for filing the return for such taxable year (determined without regard to any extension of time granted to either spouse).

(I) Additional time for assessment. If a joint return is made under subparagraph (A), the period of limitations provided in ' 43-177(d) on the making of assessments and collecting taxes shall with respect to such return include one year immediately after the date of the filing of such joint return (computed without regard to the provisions of subparagraph (G)).

(J) Rule for application of ' 43-179. For the purposes of ' 43-179 (relating to penalties in the case of fraudulent returns) the term "return" includes a separate return filed by a spouse with respect to a taxable year for which a joint return is made under this paragraph after the filing of such separate return.

(10) Returns by persons outside the Americas. In any case in which it is determined by the tax commission, under regulations prescribed by it, that by reason of an individual being outside the states of the union and the District of Columbia, it is impossible or impracticable to perform any one or more of the acts specified in this title, then in determining, under this title whether the act was performed within the time prescribed therefor, in respect of any liability for taxes, interest or penalties affected by the failure to perform the act within such time, and in determining the amount of any credit or refund (including interest) affected by that failure, there shall be disregarded the period such person was thus unable to conform to the provisions of this title.

 

(b) Corporation returns

(1) Requirement. Every corporation subject to the tax imposed by this title shall make a return to the tax commission, stating specifically the items of its gross income and the deductions and credits allowed by this title, and such other information as the tax commission may be regulations prescribe for the purpose of carrying out the provisions of this title.

(2) Returns -- penalties of perjury. In the case of a corporation, every return required by this title to be filed with the tax commission shall be signed by the president, or other principal officer and the treasurer or chief accounting officer, of the taxpayer and contain or be verified by a written declaration that it is made under the penalties of perjury.

In cases where receivers, trustees in bankruptcy, or assignees are operating the property or business of a bank or corporation, such receivers, trustees, or assignees shall make returns for such bank or corporation in the same manner and form as such a bank or corporation is required to make a return.

(3) Collection of tax from receivers, trustees and assignees. Any tax due on the basis of returns made by receivers, trustees, or assignees shall be collected in the same manner as if collected from the bank or corporation of whose business or property they have custody and control.

(c) Amended returns -- federal adjustments. If the amount of net income for any year of any taxpayer as returned to the United States treasury department is changed or corrected by the commissioner of internal revenue or other officer of the United States or other competent authority, or where a renegotiation of a contract or subcontract with the United States results in a change in net income, such taxpayer shall report such change or corrected net income, or the results of such renegotiation, within ninety days after the final determination of such change or correction or renegotiation, or as required by the tax commission, and shall concede the accuracy of such determination or state wherein it is erroneous. Any taxpayer filing an amended return with such department shall also file within ninety days thereafter an amended return with the tax commission which shall contain such information as it shall require.

 

' 43-142. Returns -- time and place for filing returns

(a) Returns, place and form of filing. All returns required by this title shall be in such form as the department may from time to time prescribe, and shall be filed with the department. The department shall prepare blank forms for the returns and shall distribute them throughout the state and furnish them upon application. Failure to receive or secure the form does not relieve any taxpayer from making any return required.

 

(b) Returns, time of filing

(1) General rule. Returns made on the basis of the calendar year shall be filed on or before the fifteenth day of April following the close of the calendar year. Returns made on the basis of a fiscal year shall be filed on or before the fifteenth day of the fourth month following the close of the fiscal year.

(2) Returns, extensions for filing. The department, whenever in its judgment good cause exists, and under such rules and regulations as it shall prescribe, may grant a reasonable extension of time for filing the return or for payment of the tax, or any installment thereof, disclosed by the return, due or to become due within the period of the extension if the request for extension is received on or before the date the return is otherwise due to be filed. If a return filed pursuant to an extension granted by the department is not accompanied by a copy of the extension the taxpayer shall be subject to all the legal penalties, the same as if the extension had not been granted, provided, however, that if the extension has been lost or destroyed, the taxpayer may file affidavit of loss and request a duplicate of the extension. No extension or extensions granted under this paragraph may aggregate more than six months from the due date provided for the filing of returns.

(3) Members of armed forces, extension of time

(A) In the case of a taxpayer who is serving as a member of the armed forces of the United States or any auxiliary branch thereof, or the merchant marine, beyond the boundaries of the continental United States, the department shall automatically grant, without application being made therefor, an extension of time, free from interest and penalties, for filing the return, for payment of the tax, for taking any of the steps required by ' 43-177(e) and (f), and ' 43-184(b)(1), (f) and (g), until one hundred eighty days after his discharge or release from active service therein.

(B) "Continental United States", as used in subparagraph (A), means the forty-eight contiguous states or the United States and the District of Columbia.

 

(c) Returns, automatic extension of time to file return. When the taxpayer has been granted an extension or extensions of time within which to file his final federal return for any taxable year, he shall be deemed to have been granted the same extension of time under this title for filing his Arizona income tax return, provided a copy of such federal extension or extensions shall be filed with the department together with the state tax return.

 

' 43-143. Returns executed by tax commission

(a) False or fraudulent return. If any taxpayer files a false or fraudulent return, or fails or neglects to file a return, with intent to evade tax, the tax commission, at any time, may require a return, or a supplementary return, under oath, or may make an estimate of the net income from any available information, and may propose to assess the amount of tax, interest and penalties due. All the provisions of this title relative to delinquent taxes shall be applicable to the tax, interest and penalties computed hereunder.

 

(b) Right of protest. When any assessment is proposed under subsection (a) the taxpayer shall have the right to protest the same and to have an oral hearing thereon if requested; and to appeal to the tax commission from the tax commission's action on the protest. The taxpayer must proceed under this section in the manner and within the time prescribed by ' 43-177.

 

(c) No return filed. If, in the case of a taxpayer subject to the tax imposed by this title, any return required by this title is not made, the tax commission, at any time, may require a return, under oath, or may make an estimate of the net income, from any available information, and may compute and levy the amount of tax, interest and penalties due under this title. All the provisions of this title, not in conflict herewith, relative to delinquent taxes shall be applicable to the tax, interest and penalties computed and levied hereunder. A proceeding in court for the collection of the tax, interest and penalties provided for in this section may be begun without assessment at any time.

 

' 43-144. Returns of exempt organizations

(a) Returns of unrelated business income. Every organization, otherwise exempt under ' 43-147, but having ' 43-149 net income, shall file a return, verified by an executive officer under penalties of perjury in the form prescribed by the tax commission, within three months and fifteen days of the close of the taxable years, reporting its income from such activities and shall pay a tax at the rates prescribed in ' 43-102 on its ' 43-149 net income as defined in ' 43-149(c).

 

(b) Information returns. Every organization exempt under ' 43-147 except:

(1) A religious organization exempt under ' 43-147(a)(4); or

(2) An educational organization exempt under ' 43-147(a)(4), if such organization normally maintains a regular faculty and curriculum and normally has a regularly organized body of pupils or students in attendance at the place where its educational activities are regularly carried on; or

(3) A charitable organization, or an organization for the prevention of cruelty to children or animals, exempt under ' 43-147(a)(4), if such organization is supported, in whole or in part, by funds contributed by the United States or any state or Political subdivision thereof, or is primarily supported by contributions of the general public; or

(4) An organization exempt under ' 43-147(a)(4), if such organization is operated, supervised, or controlled by or in connection with a religious organization described in paragraph (1); or

(5) An organization exempt solely under ' 43-147(a)(2) shall file an annual return, at such time and in such manner as the tax commission may by regulations prescribe, setting forth --

(A) Its gross receipts for the year,

(B) Its expenses attributable to such income and incurred within the year,

(C) Its disbursements within the year for the purposes for which it is exempt,

(D) Its accumulation of income within the year,

(E) Its aggregate accumulations of income at the beginning of the year,

(F) Its disbursements out of principal in the current and prior years for the purposes for which it is exempt,

(G) A balance sheet showing its assets, liabilities and net worth as of the beginning of such year, and

(H) Such other information as the tax commission may by regulation prescribe.

 

(c) Information return; income less than twenty-five thousand dollars. An organization otherwise required to file the return specified in subsection (b) need not file it if its gross income does not exceed twenty-five thousand dollars.

 

' 43-145. Publicity of returns; classification

(a) Returns to be kept for at least four years. The tax commission shall preserve reports and returns for four years and thereafter until it orders them to be destroyed.

 

(b) Disclosure of information in returns

(1) Judicial order, return information disclosed pursuant to. Such information may be disclosed in accordance with proper judicial order in cases or actions instituted for the enforcement of this title or for the prosecution of violations of this title.

(2) Department of law may have information -- county attorneys may have information when authorized by attorney general. The attorney general or any county attorney authorized in writing by the attorney general shall have the right to inspect the reports or returns of any taxpayer filing a report or return under this title, when required for the purpose of instituting action for the enforcement of this title or any other law relating to taxes or for the prosecution of violations of this title or any other law relating to taxes.

(3) Reciprocal exchange of information. The tax commission may permit the commissioner of internal revenue of the United States, or other tax officials of this state, or., the proper officer of any state imposing an income tax or a tax measured by income, or the authorized representative of any such officer, to inspect the income tax returns of any individual, estate, trust or partnership, or may furnish to the officer or his authorized representative an abstract of the return of income of any taxpayer or supply him with information concerning any item of income contained in any return or disclosed by the report of any investigation of the income or return of income of any taxpayer. Permission shall be granted or information furnished to the officer or his representative only if the statutes of the United States or of the other state, as the case may be, grant substantially similar privileges to the tax commission of this state.

(c) Penalty for disclosing information contained in the return

(1) In general. Except as otherwise provided in this section, it is a class 1 misdemeanor for the tax commission, any deputy, agent, clerk, or other officer or employee, to knowingly disclose in any manner information as to the amount of income or any particulars set forth or disclosed in any report or return required under this title.

(2) Information, penalty for unlawful use. The information furnished or secured pursuant to subsection (b)(2) or (3) shall be used solely for the purpose of administering the tax acts or laws administered by the person or agency obtaining it. Any unwarranted disclosure or use of the information by the person or agency, or the employees and officers thereof, is a class 1 misdemeanor.

 

(d) Disclosure of information, reimbursement for costs thereof. Whenever under this title or any law heretofore or hereafter enacted, the tax commission is required or permitted to disclose information, to furnish abstracts, or to permit access to its records, to or by any official, department, bureau, or agency of this state (including its political subdivisions), or any other state, or the United States, it may charge the official, department, bureau, or agency for the reasonable cost of its services.

 

(e) Statistics. Subsection (a) does not prohibit the publication of statistics so classified as to prevent the identification of particular reports or returns and the items thereof, or the publication of the percentage of dividends paid by any taxpayer which is deductible by the recipients thereof under the provisions of this title.

 

' 43-145.01. Confidentiality of information; exception; disclosure; classification

(a) In general. Except as provided in ' 43-145, and excluding authorized agents of the tax commission and authorized agents of the United States Internal Revenue service, a person who prepares at the request of a taxpayer any report or return required under this title or who receives information from such taxpayer in order to prepare any such report or return shall not disclose to any other person in any manner except by the express permission of the taxpayer any of the information received from such taxpayer.

 

(b) Violation; Classification. Any disclosure or use of such information other than in preparing such report or return in violation of this section is a class 1 misdemeanor.

 

' 43-145.02. Solicitation of preparation of returns or reports prohibited; classification

It is a class 1 misdemeanor for any person to solicit preparation of returns or reports required by this title by offering or giving cash or credit to the taxpayer directly or indirectly based upon all or part of an anticipated refund to the taxpayer indicated by the report or return, or to require by any contract, agreement or pledge an assignment or other transfer of all or any part of an anticipated refund to the taxpayer as indicated by the report or return.

 

' 43-146. Payment of tax

(a) Tax, when payable. The tax imposed under this title shall be paid on the fifteenth day of April following the close of the calendar year, or, if the return is made on the basis of a fiscal year, on the fifteenth day of the fourth month following the close of the fiscal year, but corporations subject to the tax imposed by this title may elect to pay the tax in two installments and, in such event, one-half of the amount of tax disclosed by the return shall be due and payable as a first installment of the tax on or before the fifteenth day of the fourth month following the close of the income year, and the balance of the tax shall be due and payable as a second installment on or before the fifteenth day of the sixth month following the close of the taxable year.

 

(b) Installment payments, election. In the case of a taxpayer, other than a corporation, on or before the date prescribed for the payment of the tax the taxpayer may elect to pay the tax in two installments, and, in such event, one-half of the tax disclosed by the return shall be due and payable as a first installment of the tax on or before the fifteenth day of the fourth month following the close of the income year, and the balance of the tax shall be due and payable as a second installment on or before the fifteenth day of the tenth month following the close of the taxable year. Notwithstanding the provisions of this section, if the amount paid on or before the due date of the first installment is less than the tax as corrected in accordance with the provisions of ' 43-177(i), the taxpayer shall be deemed to have elected to pay the tax in two installments in the manner provided herein. If an installment is not paid on or before the date fixed for its payment, the whole amount of tax unpaid shall be paid upon notice and demand from the department.

 

(c) Payments, may be paid in advance. Any taxpayer may elect to pay the tax or any installment prior to the date prescribed for its payment.

 

(d) Remittances, payable to department. The tax, and any interest and penalties, shall be paid to the department. Remittances may be in the form of a check, payable to the department, during such time and under such regulations as the director may prescribe. If a check is not paid by the bank on which it is drawn, the taxpayer tendering the check remains liable for the payment of the tax, and all interest and penalties, as if he had not tendered the check.

 

(e) Husband and wife, liability for tax. The spouse who controls the disposition of or who receives or spends community income as well as the spouse who is taxable on such income is liable for the payment of the taxes imposed by this title on such income. Where a joint return is filed by a husband and wife, the liability for the tax on the aggregate income is joint and several.

 

(f) Extension of time. Where an extension of time for filing returns has been granted by the department, the first installment of the tax provided for in subsection (a) shall be paid prior to the expiration of such extension.

 

(g) Small tax balances. The director, with the approval of the attorney general, is authorized to abate all or any portion of the unpaid portion of any income tax, if the director determines that the administration and collection costs involved would exceed the amount of the tax due.

 

' 43-147. Exemptions from tax on corporations

(a) Organization exempt as specified. The following organizations are exempt from the taxes imposed under this title, except as provided in ' 43-149.

(1) Labor, agricultural, horticultural, other than co-operatives. Labor, agricultural, or horticultural organizations, other than cooperative organizations described in ' 43-123.34.

(2) Fraternal beneficiary societies. Fraternal beneficiary societies, orders, or organizations, (A) operating under the lodge system or for the exclusive benefit of the members of a fraternity itself operating under the lodge system; and (B) providing for the payment of life, sick, accident, or other benefits to the members of such society, order or organization or their dependents.

(3) Cemetery companies. Cemetery companies owned and operated exclusively for the benefit of their members or which are not operated for profit; or any corporation chartered for burial purposes is a cemetery corporation and not permitted by its charter to engage in any business not necessarily related to that purpose, no part of the net earnings of which inures to the benefit of any private shareholder or individual member thereof.

(4) Religious, charitable, educational, etc. Corporations organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes, or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private shareholder or individual, and no substantial part of the activities of which is carrying on propaganda, or otherwise attempting to influence legislation.

(5) Business leagues, etc. Business leagues, chambers of commerce, real estate boards, or boards of trade, not organized for profit and no part of the net earnings of which inures to the benefit of any private shareholder or individual.

(6) Civic leagues. Civic leagues or organizations not organized for profit but operated exclusively for the promotion of social welfare, or local organizations of employees, the membership of which is limited to the employees of a designated person or persons in a particular municipality, and the net earnings of which are devoted exclusively to charitable, educational, or recreational purposes.

(7) Social clubs. Clubs organized and operated exclusively for pleasure, recreation, and other non-profitable purposes, no part of the net earnings of which inures to the benefit of any private shareholder.

(8) Holding companies. Corporations organized for the exclusive purpose of holding title to property, collecting income therefrom, and turning over the entire amount thereof, less expenses, to an organization which itself is exempt from the tax imposed by this title.

(9) Voluntary employees' beneficiary organizations. Voluntary employees' beneficiary organizations providing for the payment of life, sick, accident, or other benefits to the members of such organizations or their dependents, if (A) no part of their net earnings inures (other than through such payments) to the benefit of any private shareholder or individual, and (B) eighty-five per cent or more of the income consists of amounts collected from members and amounts contributed to the organization by the employer of the members for the sole purpose of making such payments and meeting expenses.

(10) Teachers' or public employees' retirement fund organizations. Teachers' or public employees' retirement fund organizations of a purely local character, if (A) no part of their net earnings inures (other than through payment of retirement benefits) to the benefit of any private shareholder or individual, and (B) the income consists solely of amounts received from public taxation, amounts received from assessments upon the salaries of members, and income in respect of investments. For the purposes of this paragraph, "public employees" means employees of the state, and its political subdivisions.

(11) Religious or apostolic organizations. Religious or apostolic organizations or corporations, if such organizations or corporations have a common treasury or community treasury, even if such corporations or organizations engage in business for the common benefit of the members, but only if the members thereof include (at the time of filing their returns) in their gross income their pro rata shares, whether distributed or not, of the net income of the organizations or corporations for such year. Any amount so included in the gross income of a member shall be treated as a dividend received.

(12) Voluntary beneficiary organizations -- United States government. Voluntary employees' beneficiary organizations providing for the payment of life, sick, accident or other benefits to the members of such organization or their dependents or their designated beneficiaries, if (A) admission to membership in such organization is limited to individuals who are officers or employees of the United States government, and (B) no part of the net earnings of such organization inures (other than through such payments) to the benefit of any private shareholder or individual.

(13) Diversified management companies. Corporations classified as diversified management companies under ' 5 of the federal investment company act of 1940, and registered as provided in that act.

 

(b) Feeder organizations. An organization operated for the primary purpose of carrying on a trade or business for profit shall not be exempt under any subsection of this section on the ground that all of its profits are payable to one or more Organizations exempt under this section from taxation. For the purposes of this subsection, the term "trade or business" shall not include the rental by an organization of its real property (including personal property leased with the real property).

 

(c) Insurance companies. There shall be exempt from taxation under the provisions of this title insurance companies paying to the state tax upon premium income derived from sources within this state.

' 43-148. Requirements for exemption of certain organizations under ' 43-147(a)(4) and for deductibility of contributions made to such organizations

 

(a) Excluded organizations. This section shall apply to any organization described in ' 43-147(a)(4) except --

(1) A religious organization (other than a trust);

(2) An educational organization which normally maintains a regular faculty and curriculum and normally has a regularly enrolled body of pupils or students in attendance at the place where its educational activities are regularly carried on;

(3) An organization which normally receives a substantial part of its support (exclusive of income received in the exercise or performance by such organization of its charitable, educational, or other purpose or function constituting the basis for its exemption under ' 43-147(a)(4) from the United States or any state or political subdivision thereof or from direct or indirect contributions from the general public;

(4) An organization which is operated, supervised, controlled, or principally supported by a religious organization (other than a trust) which is itself not subject to the provisions of this section; and

(5) An organization the principal purposes or function of which are the providing of medical or hospital care or medical education or medical research.

 

(b) Definition-"prohibited transaction". For the purposes of this section, the term prohibited transaction" means any transaction in which an organization subject to the provisions of this section-

(1) Lends any part of its income or corpus, without the receipt of adequate security and a reasonable rate of interest, to;

(2) Pays any compensation, in excess of a reasonable allowance for salaries or other compensation for personal services actually rendered, to;

(3) Makes any part of its services available on preferential basis to;

(4) Makes any substantial purchase of securities or any other property, for more than adequate consideration in money or money's worth, from;

(5) Sells any substantial part of its securities or other property, for less than an adequate consideration in money or money's worth, to; or

(6) Engages in any other transaction which results in a substantial diversion of its income or corpus to; the creator of such organization (if a trust); a person who has made a substantial contribution to such organization; a member of the family (as defined in ' 43-126(b)(2)(D) ) of an individual who is the creator of such trust or who has made a substantial contribution to such organization, or a corporation controlled by such creator or person through the ownership, directly or indirectly, of fifty per cent or more of the total combined voting power of all classes of stock entitled to vote or fifty per cent or more of the total value of shares of all classes of stock of the corporation.

 

(c) Denial of exemption

(1) General rule. No organization subject to the provisions of this section, except those specified in subsection (a), which has engaged in a prohibited transaction after December 31, 1953, shall be exempt from taxation under ' 43-147(a)(4).

(2) Period affected by denial. An organization shall be denied exemption from taxation under ' 43-147(a)(4) by reason of paragraph (1) only for taxable years subsequent to the taxable year during which it is notified by the tax commission that it has engaged in a prohibited transaction, unless such organization entered into such prohibited transaction with the purpose of diverting corpus or income of the organization from its exempt purposes, and such transaction involved a substantial part of the corpus or income of such organization.

 

(d) Application for reinstatement of exemption. Any organization denied exemption under ' 43-147(a)(4) by reason of the provisions of subsection (c) with respect to any taxable year following the taxable year in which notice of denial of exemption was received , may, under regulations prescribed by the tax commission, file claim for exemption, and if the tax commission pursuant to such regulations, is satisfied that such organizations will not knowingly again engage in a prohibited transaction, such organization shall be exempt with respect to taxable years subsequent to the year in which such claim is filed.

(e) Charitable contributions -- limitations -- prohibited transactions. No gift or bequest for religious, charitable, scientific, literary, or educational purposes (including the encouragement of art and the prevention of cruelty to children or animals), otherwise allowable as a deduction, shall be allowed as a deduction if made to an organization which, in the income year of the organization in which the gift or bequest is made, is not exempt under ' 43-147(a)(4) by reason of the provisions of this section. With respect to any taxable year of the organization for which the organization is not exempt pursuant to the provisions of subsection (c) by reason of having engaged in a prohibited transaction with the purpose of diverting the corpus or income, and which taxable year is the same, or prior to, the taxable year of the organization in which such transaction occurred, such deduction shall be disallowed the donor only if it was a party to such prohibited transaction. For the purpose of this section, the term "gift or bequest" means any gift, contribution, bequest, devise, legacy, or transfer.

 

(f) Unreasonable accumulations of surplus. In the case of any organization described in ' 43-147(a)(4) to which subsections (a) through (e) are applicable, if the amounts accumulated out of income during the taxable year or any prior taxable year and not actually paid out by the end of the taxable year --

(1) Are unreasonable in amount or duration in order to carry out the charitable, educational, or other purposes or function constituting the basis for such organization's exemption under ' 43-147(a)(4), or

(2) Are used to a substantial degree for purposes or functions other than those constituting the basis for such organization's exemption under ' 43-147(a)(4), or

(3) Are invested in such a manner as to jeopardize the carrying out of the charitable, educational, or other purpose or function constituting the basis for such organization's exemption under ' 43-147(a)(4); exemption under ' 43-147(a)(4) shall be denied for the taxable year.

 

' 43-149. Taxation of business income of certain section 43-147 organizations

(a) In general. Every organization and trust described in subsection (b) shall be subject to the tax imposed under ' 43-102 upon its "' 43-149" net income as defined in subsection (c).

 

(b) Organization subject to tax. The tax imposed under subsection (a) shall apply in the case of any organization, or trust, or church, or a convention or association of churches, which is exempt, except as provided in this section, from taxation under this title by reason of ' 43-147(a)(1) through (13), '' 43-162(a), and 43-165. Such taxes shall also apply to an organization described in ' 43-147(a)(8) if the income is payable to an organization which itself is subject to the tax imposed under this section or to a church or to a convention or association of churches.

 

(c) Definition -- "' 43-149 net income". The "' 43-149" net income of an organization or trust or any church, convention or association of churches means the amount by which its unrelated business net income, as defined in subsection (d), exceeds one thousand dollars.

 

(d) Definition -- "unrelated business net income". The term "unrelated business net income" means the gross income derived by any organization or trust or any church, convention or association of churches from any unrelated trade or business, as defined in subsection (e), regularly carried on by it, less the deductions allowable by '' 43-123.03 through 43-123.35, which are directly connected with the carrying on of such trade or business, subject to the exceptions, additions, and limitations prescribed in this subsection.

(1) There shall be excluded all dividends, interest, and annuities, and all deductions directly connected with such income.

(2) There shall be excluded all royalties, including over-riding royalties, whether measured by production or by gross or net income for the property, and all deductions directly connected with such income.

(3) There shall be excluded all rents from real property (including personal property leased with the real property), and all deductions directly connected with such rents.

(4) Notwithstanding paragraph (3) in the case of a ' 43-149 lease (as defined in subsection (f)), there shall be included, as an item of gross income derived from an unrelated trade or business, the amount ascertained under subsection (i)(1), and there shall be allowed, as a deduction, the amount ascertained under subsection (i)(2).

(5) There shall be excluded all gains or losses from the sale, exchange, or other disposition of property other than (A) stock in trade or other property of a kind which would properly be includible in inventory if on hand at the close of the taxable year, or (B) property held primarily for sale to customers in the ordinary course of the trade or business.

(6) In computing the "unrelated business net income" there shall be allowed the net operating loss deduction provided in ' 43-123.21, except that (A) in computing such net operating loss for any taxable year, the amount of the net operating loss carry-back or carry-over to any taxable year shall be determined under said ' 43-123.21 without taking into account any amount of income or deduction which is excluded under this section in computing the unrelated business net income; and (B) the terms "preceding taxable year" and "preceding taxable years" as used in ' 43-123.21 shall not include any taxable year for which the organization was not subject to the provisions of this section.

(7) There shall be excluded all income derived from research for (A) the United States or any of its agencies or instrumentalities, or (B) any state or political subdivision thereof; and there shall be excluded all deductions directly connected with such income.

(8)(A) In the case of a college, university, or hospital, there shall be excluded all income derived from research performed for any person, and all deductions directly connected with such income.

(B) In the case of an organization operated primarily for the purposes of carrying on fundamental research, the results of which are freely available to the general public, there shall be excluded all income derived from research performed for any person, and all deductions directly connected with such income.

(9)(A) In the case of any organization described in subsection (b), the so-called "charitable contribution" deduction allowed by ' 43-123.19 shall be allowed (whether or not directly connected with the carrying on of the trade or business), but shall not exceed five per cent of the unrelated business net income computed without the benefit of this subparagraph.

(B) In the case of any trust described in ' 43-162(a), the so-called "charitable contribution" deduction allowed by ' 43-162(a) shall be allowed (whether or not directly connected with the carrying on of the trade or business), and for such purpose a distribution made by the trust to a beneficiary described in ' 43-162(b)(2) shall be considered as a gift or contribution. The deduction allowed by this subparagraph shall not exceed fifteen per cent of the unrelated business net income computed without the benefit of this subparagraph.

If a trade or business regularly carried on by a partnership, of which an organization is a member, is an unrelated trade or business with respect to such organization, such organization in computing its unrelated business net income shall, subject to the exceptions, additions, and limitations contained in paragraphs (1) through (9), above, include its share (whether or not distributed) of the gross income of the partnership from such unrelated trade or business and its share of the partnership deductions directly connected with such gross income. If the taxable year of the organization is different from that of the partnership, the amounts to be included or deducted in computing the unrelated business net income shall be based upon the income and deductions of the partnership for any taxable year of the partnership ending within or with the taxable year of the organization. In the case of an organization described in ' 43-144(b)(2) which is a member of a partnership of all whose members are organizations described in ' 43-144(b)(2), if a trade or business regularly carried on by such partnership is an unrelated trade or business with respect to such organization, such organization shall, for taxable years beginning before January 1, 1954, be allowed a deduction in an amount equal to the portion of the gross income of such partnership from such unrelated trade or business which such organization is required (by a provision of a written contract executed by such organization prior to January 1, 1954, which provision expressly deals with the disposition of the gross income of the partnership) to pay within the taxable year in discharge of indebtedness incurred by such organization in acquiring its share of such trade or business, or to irrevocably set aside within the taxable year for the discharge of such indebtedness (to the extent that such amount has been so paid or set aside) if (i) such partnership was formed prior to January 1, 1954, for the purpose of carrying on such trade or business, and (ii) substantially all the assets used in carrying on such trade or business where acquired by it or by its members prior to such date. As used in the preceding sentence, the word "indebtedness" does not include indebtedness incurred after January 1, 1954.

 

(e) "Unrelated trade or business". The term "unrelated trade or business" means, in the case of any organization subject to the tax imposed by subsection (a), any trade or business the conduct of which is not substantially related (aside from the need of such organization for income or funds or the use it makes of the profits derived) to the exercise or performance by such organization of its charitable, educational, or other purpose or function constituting the basis for its exemption under ' 43-147, except that such term shall not include any trade or business --

(1) In which substantially all the work in carrying on such trade or business is performed for the organization without compensation; or

(2) Which is carried on, in the case of an organization described in ' 43-147(a)(4) by the organization primarily for the convenience of its members, students, patients, officers, or employees; or

(3) Which is the selling of merchandise, substantially all of which has been received by the organization as gifts or contributions.

The term "unrelated trade or business" means in the case of a trust computing its unrelated business net income under this section for the purpose of ' 43-162(h)(1), any trade or business regularly carried on by such trust or by a partnership of which it is a member. If a publishing business carried on by an organization during an income year beginning before January 1, 1954, is, without regard to this sentence, an unrelated trade or business, but before the beginning of the third succeeding income year the business is carried on by it (or by a successor who acquired such business in a liquidation which would constitute a tax-free exchange under ' 43-152(b)(6) and (7)) in such manner that the conduct thereof is substantially related to the exercise or performance by such organization (or such successor) of its educational or other purpose or function described in ' 43-147(a)(4), such publishing business shall not be considered, for the income year, as an unrelated trade or business.

 

(f) "' 43-149 lease". The term "' 43-149 lease" means a lease for a term of more than five years of real property by an organization or trust (or by a partnership of which it is a member), if at the close of the lessor's taxable year there is a ' 43-149 lease indebtedness (as defined in subsection (g)) with respect to such property. In computing the term of a lease which contains an option for renewal or extension, the term of such lease shall be considered as including any period for which such option may be exercised; and the term of any lease made pursuant to an exercise of such option shall include the period during which the prior lease was in effect. If real property is acquired subject to a lease, the term of such lease shall be considered to begin on the date of such acquisition. No lease shall be considered a ' 43-149 lease if (1) such lease is entered into primarily, for purposes which are substantially related (aside from the need of such organization for income or funds or the use it makes of the rents derived) to the exercise or performance by such organization of its charitable, educational, or other purpose or function constituting the basis for its exemption, or (2) the lease is of premises in a building primarily designed for occupancy, and occupied, by the organization. If a lease for more than five years to a tenant is for only a portion of the real property, and space in the real property is rented during the taxable year under a lease for not more than five years to any other tenant of the organization, leases of the real property for more than five years shall be considered as ' 43-149 leases during the taxable year only if --

(A) The rents derived from the real property during the taxable year under such leases represents fifty per cent or more of the total rents derived during the taxable year from the real property; or the area of the premises occupied under such leases represents, at any time during the taxable year, fifty per cent or more of the total area of the real property rented at such time; or

(B) The rent derived from the real property during the taxable year from any tenant under such a lease, or from a group of tenants (under such leases) who are 0) members of an affiliated group or (ii) partners, represents more than ten per cent of the total rents derived during the taxable year from such property; or the area of the premises occupied by any one such tenant, or by any such group of tenants, represents at any time during the taxable year more than ten per cent of the total area of the real property rented at such time. For the purposes of this subparagraph an "affiliated group" means one or more chains of includible corporations connected through stock ownership with a common parent corporation which is an includible corporation if stock possessing at least ninety-five per cent of the voting power of all classes of stock and at least ninety-five per cent of each class of the non-voting stock of each of the includible corporations (except the common parent corporation) is owned directly by one or more of the other includible corporations and the common parent corporation owns directly stock possessing at least ninety-five per cent of the voting power of all classes of stock and at least ninety-five per cent of each class of the non-voting stock of at least one of the other includible corporations. As used in the preceding sentence, the term "stock" does not include non-voting stock which is limited and preferred as to dividends. As used in this subparagraph, the term "includible corporation" means any corporation except corporations exempt from taxation under ' 43-147 and a corporation which is a resident of a foreign country.

 

(g) "' 43-149 lease indebtedness". The term "' 43-149 lease indebtedness" means, with respect to any real property leased for a term of more than five years, the unpaid amount of --

(1) The indebtedness incurred by the lessor in acquiring or improving such property;

(2) The indebtedness incurred prior to the acquisition or improvement of such property if such indebtedness would not have been incurred but for such acquisition or improvement; and

(3) The indebtedness incurred subsequent to the acquisition or improvement of such property if such indebtedness would not have been incurred but for such acquisition or improvement and the incurrence of such indebtedness was reasonably foreseeable at the time of such acquisition or improvement.

Where real property is acquired subject to a mortgage or other similar lien, the amount of the indebtedness secured by such mortgage or lien shall be considered (whether the acquisition was by gift, devise, or purchase) as an indebtedness of the lessor incurred in acquiring such property even though the lessor did not assume or agree to pay such indebtedness, except that where real property was acquired by a gift, bequest, or devise prior to January 1, 1954, subject to a mortgage or other similar lien, the amount of such mortgage or other similar lien shall not be considered as an indebtedness of the lessor incurred in acquiring such property.

Where real property was acquired by gift, bequest, or devise prior to January 1, 1954, subject to a lease requiring improvements in such property upon the happening of stated contingencies, indebtedness incurred in improving such property in accordance with the terms of such lease shall not be considered as an indebtedness for purposes of this subsection. In the case of a corporation described in ' 43-147(a)(8), all of the stock of which was acquired prior to January 1, 1954, by an organization described in ' 43-147(a)(1), (4) or (5) or by a trust described in '' 43-162(a)(2) and 43-165 (and more than one-third of such stock was acquired by such organization or trust by a gift or bequest), any indebtedness incurred by such corporation prior to January 1, 1954, and any indebtedness incurred by such corporation on or after such date in improving real property in accordance with the terms of a lease entered into prior to such date, shall not be considered as an indebtedness with respect to such corporation or such organization for purposes of this section. In determining the amount of the ' 43-149 lease indebtedness where only a portion of the real property is subject to a ' 43-149 lease, proper allocation to the premises covered by such lease shall be made of the indebtedness incurred by the lessor with respect to the real property.

 

(h) Definition -- "real property". For the purposes of this section, the term "real property" and the term "premises" include personal property of the lessor leased by it to a lessee of its real estate if the lease of such personal property is made under, or in connection with, the lease of such real estate.

 

(i) Computation of unrelated business net income. In computing under subsection (d) the unrelated business net income for any taxable year:

(1) There shall be included with respect to each ' 43-149 lease, as an item of gross income derived from an unrelated trade or business, an amount which is the same percentage (but not in excess of one hundred per cent) of the total rents derived during the taxable year under such lease as (A) the ' 43-149 lease indebtedness, at the close of the taxable year, with respect to the premises covered by such lease is of (B) the adjusted basis, at the close of the taxable year, of such premises.

(2) There shall be allowed with respect to each ' 43-149 lease, as a deduction to be taken into account in computing unrelated business net income, an amount which is the same percentage (but not in excess of one hundred per cent) of the sum determined under paragraph (3) as the amount determined under subparagraph (A) of paragraph (1) is of the amount determined under subparagraph (B) of such paragraph.

(3) The sum referred to in paragraph (2) is the sum of the following deductions allowable under '' 43-123.03 through 43-123.35:

(A) Taxes and other expenses paid or accrued during the taxable year upon or with respect to the real property subject to the ' 43-149 lease.

(B) Interest paid or accrued during the taxable year on the ' 43-149 lease indebtedness.

(C) A reasonable allowance for exhaustion, wear and tear (including a reasonable allowance for obsolescence) of the real property subject to such lease.

Where only a portion of the real property is subject to the ' 43-149 lease, there shall be taken into account under subparagraph (A), (B), or (C) only those amounts which are properly allocable to the premises covered by such lease.

 

' 43-15 1. Gain or loss -- determination of gain or loss

(a) Computation of gain or loss. The gain from the sale or other disposition of property shall be the excess of the amount realized therefrom over the adjusted basis provided in ' 43-153(b) for determining gain, and the loss shall be the excess of the adjusted basis provided in that section for determining loss over the amount realized.

 

(b) Amount realized. The amount realized from the sale or other disposition of property shall be the sum of any money received plus the fair market value of any property (other than money) received.

 

(c) Recognition of gain or loss. In the case of a sale or exchange, the extent to which the gain or loss determined under this section shall be recognized for the purposes of this title shall be determined under the provisions of ' 43-152.

 

(d) Installment sales, gain. Nothing in this section shall be construed to prevent (in the case of property sold under contract providing for payment in installments) the taxation of that portion of any installment payment representing gain or profit in the year in which such payment is received.

 

' 43-152. Gain or loss -- recognition of gain or loss

(a) General rule. Upon the sale or exchange of property the entire amount of the gain or loss, determined under ' 43-151, shall be recognized, except as otherwise provided in this section.

 

(b) Exchanges solely in kind

(1) Exchange of property held for productive use or investment. No gain or loss shall be recognized if property held for productive use in trade or business or for investment (not including stock in trade or other property held primarily for sale, or stocks, bonds, notes, choses in action, certificates of trust or beneficial interest, or other securities or evidences of indebtedness or interest) is exchanged solely for property of a like kind to be held either for productive use in trade or business or for investment.

(2) Exchange of stock for stock of same corporation. No gain or loss shall be recognized if common stock in a corporation is exchanged solely for common stock in the same corporation, or if preferred stock in a corporation is exchanged solely for preferred stock in the same corporation.

(3) Exchange of stock for stock on reorganization. No gain or loss shall be recognized if stock or securities in a corporation a party to a reorganization are, in pursuance of the plan of reorganization, exchanged solely for the stock or securities in such corporation or in another corporation a party to the reorganization.

(4) Exchange of property for stock on reorganization. No gain or loss shall be recognized if a corporation a party to a reorganization exchanges property, in pursuance of the plan of reorganization, solely for stock or securities in another corporation a party to the reorganization.

(5) Transfer to corporation controlled by transferor. No gain or loss shall be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock or securities in such corporation, and immediately after the exchange such person or persons are in control of the corporation; but in the case of an exchange by two or more persons this paragraph applies only if the amount of the stock and securities received by each is substantially in proportion to his interest in the property prior to the exchange.

Where the transferee assumes a liability of a transferor, or where property of a transferor is transferred subject to a liability, then for the purpose only of determining whether the amount of stock or securities received by each of the transferors is in the proportion required by this paragraph, the amount of such liability (if under subsection (k) it is not to be considered as "other property or money") shall be considered as stock or securities received by such transferor.

(6) Property received by corporation on complete liquidation of another. No gain or loss shall be recognized upon the receipt by a corporation of property distributed in complete liquidation of another corporation. For the purposes of this paragraph a distribution shall be considered to be in complete liquidation only if:

(A) The corporation receiving such property was, on the date of the adoption of the plan of liquidation, and has continued to be at all times until the receipt of the property, the owner of stock (in such other corporation) possessing at least eighty per cent of the total combined voting power of all classes of stock entitled to vote and the owner of at least eighty per cent of the total number of shares of all other classes of stock (except nonvoting stock which is limited and preferred as to dividends), and was at no time on or after the date of the adoption of the plan of liquidation and until the receipt of the property the owner of a greater percentage of any class of stock than the percentage of such class owned at the time of the receipt of the property; and

(B) No distribution under the liquidation was made before the first day of the first taxable year of the corporation beginning after December 31, 1953; and either

(C) The distribution is by such other corporation in complete cancellation or redemption of all its stock, and the transfer of all the property occurs within the taxable year; in such case the adoption by the shareholders of the resolution under which is authorized the distribution of all the assets of such corporation in complete cancellation or redemption of all its stock, shall be considered an adoption of a plan of liquidation even though no time for the completion of the transfer of the property is specified in such' resolution; or

(D) Such distribution is one of a series of distributions by such other corporation in complete cancellation or redemption of all its stock in accordance with a plan of liquidation under which the transfer of all the property under the liquidation is to be completed within three years from the close of the income year during which is made the first of the series of distributions under the plan, except that if such transfer is not completed within such period, or if the taxpayer does not continue qualified under subparagraph (A) until the completion of such transfer, no distribution under the plan shall be considered a distribution in complete liquidation.

(7) Transfers not completed during taxable year. If the transfer provided in paragraph (6) of all the property does not occur within the taxable year, the department may require of the taxpayer, such bond, or waiver of the statute of limitations on assessment and collection, or both, as it may deem necessary to insure, if the transfer of the property is not completed within such three-year period or if the taxpayer does not continue qualified under subsection (b)(6)(A) until the completion of such transfer, the assessment and collection of all taxes imposed by this title then due or to become due, to the extent attributable to property so received. A distribution otherwise constituting a distribution in complete liquidation within the meaning of this paragraph and paragraph (6) shall not be considered as not constituting such a distribution merely because it does not constitute a distribution or liquidation within the meaning of the corporate law under which the distribution is made; and for the purposes of this paragraph and paragraph (6) a transfer of property of such other corporation to the taxpayer shall not be considered as not constituting a distribution (or one of a series of distributions) in complete cancellation or redemption of all the stock of such other corporation, merely because the carrying out of the plan involves

(i) The transfer under the plan to the taxpayer by such other corporation of property, not attributable to shares owned by the taxpayer, upon an exchange described in subsection (b)(4); and

(ii) The complete cancellation or redemption under the plan as a result of exchanges described in subsection (b)(3), of the shares not owned by the taxpayer.

(8) Gain or loss -- exchanges and distributions in obedience to orders of federal securities and exchange commission. No gain or loss shall be recognized to a shareholder from a distribution of stock or securities in liquidation of a corporation made pursuant to an order of the federal securities and exchange commission under authority vested in it by the public utility holding company act of 1935, as amended.

(9) Loss not recognized on certain railroad reorganizations. No loss shall be recognized if property of a railroad corporation as defined in ' 77m of the national bankruptcy act, as amended, is transferred, after December 31, 1938, in pursuance of an order of the court having jurisdiction of such corporation --

(A) In a receivership proceeding, or

(B) In a proceeding under ' 77 of the national bankruptcy act, as amended, to a railroad corporation, as defined in ' 77m of the national bankruptcy act, as amended, organized or made use of to effectuate a plan of reorganization approved by the court in such proceeding. The term "reorganization'', as used in this paragraph, shall not be limited by the definition of such term in subsection (g).

(10) Gain or loss not recognized on reorganization of corporations in certain receivership and bankruptcy proceedings. No gain or loss shall be recognized if property of a corporation (other than a railroad corporation, as defined in ' 77m of the national bankruptcy act, as amended) is transferred in pursuance of an order of the court having jurisdiction of such corporation --

(A) In a receivership, foreclosure, or similar proceeding, or

(B) In a proceeding under ' 77B or chapter X of the national bankruptcy act, as amended -- to another corporation organized or made use of to effectuate a plan of reorganization approved by the court in such proceeding, in exchange solely for stock or securities in such other corporation.

(11) Distribution of stock not in liquidation. If there is distributed, in pursuance of a plan of reorganization, to a shareholder of a corporation which is a party to the reorganization, stock (other than preferred stock) in another corporation which is a party to the reorganization, without the surrender by such shareholder of stock, no gain to the distributee from the receipt of such stock shall be recognized unless it appears that --

(A) Any corporation which is a party to such reorganization was not intended to continue the active conduct of a trade or business after such reorganization, or

(B) The corporation whose stock is distributed was used principally as a device for the distribution of earnings and profits to the shareholders of any corporation a party to the reorganization.

 

(c) Gain from exchanges not solely in kind

(1) If an exchange would be within the provisions of subsection (b)(1), (2), (3) or (5), or within the provisions of subsection (l) of this section, if it were not for the fact that the property received in exchange consists not only of property permitted by such paragraphs or by subsection (l) to be received without the recognition of gain, but also of other property or money, then the gain, if any, to the recipient shall be recognized, but in an amount not in excess of the sum of such money and the fair market value of such other property.

(2) If a distribution made in pursuance of a plan of reorganization is within the provisions of paragraph (1) of this subsection but has the effect of the distribution of a taxable dividend, there shall be taxed as a dividend to each distributee such an amount of the gain recognized under paragraph (1) as is not in excess of his ratable share of the undistributed earnings and profits of the corporation accumulated after January 1, 1933. The remainder, if any, of the gain recognized under paragraph (1), shall be taxed as a gain from the exchange of property.

 

(d) Same -- Gain of corporation. If an exchange would be within the provisions of subsection (b)(4) or (10) of this section if it were not for the fact that the property received in exchange consists not only of stock or securities permitted by such paragraph to be received without the recognition of gain, but also of other property or money, then:

(1) If the corporation receiving such other property or money distributes it in pursuance of the plan of reorganization, no gain to the corporation shall be recognized from the exchange, but

(2) If the corporation receiving such other property or money does not distribute it in pursuance of the plan of reorganization, the gain, if any, to the corporation shall be recognized, but in an amount not in excess of the sum of such money and the fair market value of such other property so received, which is not so distributed.

(3) Except as provided above under subsections (d)(1) and (2) gain or loss on sales or exchanges in connection with certain corporate liquidations shall be subject to the provisions of ' 43-152(o).

(4) Except as provided above under subsection (d)(1), (2) and (3) gain or loss on sales or exchanges in connection with certain corporate liquidations shall be subject to the provisions of ' 43-152(p).

(5) The provisions of this subsection shall be effective for all years beginning on or after January 1, 1970.

 

(e) Loss from exchanges not solely in kind. If an exchange would be within the provisions of subsection (b)(1) to (5), inclusive, or (10), or within the provisions of subsection (1) of this section if it were not for the fact that the property received in exchange consists not only of property permitted by such paragraph to be received without the recognition of gain or loss, but also of other property or money, then no loss from the exchange shall be recognized.

 

(f) Involuntary conversion. If property (as a result of its destruction in whole or in part, theft, seizure, or requisition or condemnation or threat or imminence thereof) is compulsorily or involuntarily converted --

(1) Into property similar or related in service or use to the property so converted, no gain shall be recognized.

(2) Into money, and the disposition of the converted property occurred before January 1, 1954, no gain shall be recognized if such money is forthwith in good faith, under regulations prescribed by the director, expended in the acquisition of other property similar or related in service or use to the property so converted, or in the acquisition of control of a corporation owning such other property, or in the establishment of a replacement fund. If any part of the money is not so expended, the gain shall be recognized to the extent 4 the money which is not so expended (regardless of whether such money is received in one or more taxable years and regardless of whether or not the money which is not so expended constitutes gain). For the purposes of this paragraph and paragraphs (3) and (4), the term "disposition of the converted property" means the destruction, theft, seizure, requisition, or condemnation of the converted property, or the sale or exchange of such property under threat or imminence of requisition or condemnation.

(3) Into money or into property not similar or related in service or use to the converted property, and the disposition of the converted property (as defined in paragraph (2) ) occurred after January 1, 1954, the gain (if any) shall be recognized except to the extent hereinafter provided in this paragraph.

(A) Nonrecognition of gain. If the taxpayer during the period specified in subparagraph (B), for the purpose of replacing the property so converted, purchases other property similar or related in service or use to the property so converted, or purchases stock in the acquisition of control of a corporation owning such other property, at the election of the taxpayer the gain shall be recognized only to the extent that the amount realized upon such conversion (regardless of whether such amount is received in one or more taxable years) exceeds the cost of such other property or such stock. Such election shall be made at such time and in such manner as the director may by regulations prescribe. For the purpose of this paragraph --

(i) No property or stock acquired before the disposition of the converted property shall be considered to have been acquired for the purpose of replacing such converted property unless held by the taxpayer on the date of such disposition; and

(ii) The taxpayer shall be considered to have purchased property or stock only if, but for the provisions of ' 43-153(a)(9), the unadjusted basis of such property or stock would be its cost within the meaning of ' 43-153(a),

(B) Period within which property must be replaced. The period referred to in subparagraph (A) shall be the period beginning with the date of the disposition of the converted property, or the earliest date of the threat or imminence of requisition or condemnation of the converted property, whichever is the earlier, and ending --

(i) One year after the close of the first taxable year in which any part of the gain upon the conversion is realized, or

(ii) Subject to such terms and conditions as may be specified by the department, at the close of such later date as the department may designate upon application by the taxpayer. Such application shall be made at such time and in such manner as the director may by regulations prescribe.

(C) Time for assessment of deficiency attributable to gain upon conversion. If a taxpayer has made the election provided in subparagraph (A), then

(i) The statutory period for the assessment of any deficiency, for any taxable year in which any part of the gain upon such conversion is realized, attributable to such gain shall not expire prior to the expiration of four years from the date the department is notified by the taxpayer (in such manner as the director may by regulations prescribe) of the replacement of the converted property or of an intention not to replace, and

(ii) Such deficiency may be assessed prior to the expiration of such four-year period notwithstanding the provisions of ' 43-177(d) or the provisions of any other law or rule of law which would otherwise prevent such assessment.

(D) Time for assessment of other deficiency attributable to election. If the election provided in subparagraph (A) is made by the taxpayer and such other property or such stock was purchased prior to the beginning of the last taxable year in which any part of the gain upon such conversion is realized, any deficiency, to the extent resulting from such election, for any taxable year ending before such last taxable year may be assessed (notwithstanding the provisions of ' 43-177(d) or the provisions of any other law or rule of law which would otherwise prevent such assessment) at any time before the expiration of the period within which a deficiency for such last taxable year may be assessed.

(4) Involuntary conversion -- residence. This subsection shall not apply in the case of property used by a taxpayer as his principal residence, if the destruction, theft, seizure, requisition, or condemnation of the residence, or the sale or exchange of such residence under threat or imminence thereof, occurs after January 1, 1954.

 

(g) Definition of reorganization. As used in this section (other than subsection (b)(10) and subsection (0) and in ' 43-153 (other than ' 43-153(a)(20)):

(1) The term "reorganization" means

(A) A statutory merger or consolidation, or

(B) The acquisition by one corporation in exchange solely for all or a part of its voting stock: Of at least eighty per cent of the voting stock and at least eighty per cent of the total number of shares of all other classes of stock of another corporation; or of substantially all the properties of another corporation, but in determining whether the exchange is solely for voting stock, the assumption by the acquiring corporation of a liability of another, or the fact that property acquired is subject to a liability, shall be disregarded, or

(C) A transfer by a corporation of all or a part of its assets to another corporation if immediately after the transfer the transferor or its shareholders or both are in control of the corporation to which the assets are transferred, or

(D) A recapitalization, or

(E) A mere change in identity, form, or place of organization, however effected.

(2) The term "a party to a reorganization" includes a corporation resulting from a reorganization and includes both corporations in the case of a reorganization resulting from the acquisition by one corporation of stock or properties of another.

 

(h) Definition of control. "Control", as used in this section, means the ownership of stock possessing at least eighty per cent of the total combined voting power of all classes of stock entitled to vote and at least eighty per cent of the total number of shares of all other classes of stock of the corporation.

 

(i) Foreign corporations. In determining the extent to which gains shall be recognized in the case of any of the exchanges (made after January 1, 1954) described in subsection (b)(3), (4), (5) or (6) or described in so much of subsection (e) as refers to subsection (b)(3) or (5) or described in subsection (d), a corporation created or organized in a foreign country shall not be considered as a corporation unless, prior to such exchange, it has been established to the satisfaction of the department that the exchange is not in pursuance of a plan having as one of its principal purposes the avoidance of income or franchise taxes.

 

(j) Installment obligations. For nonrecognition of gain or loss in the case of installment obligations, see ' 43-134(d).

 

(k) Assumption of liability not recognized. Where upon an exchange the taxpayer receives as part of the consideration property which would be permitted by subsection (b)(4), (5) or (10) of this section, to be received without the recognition of gain if it were the sole consideration, and as part of the consideration another party to the exchange assumes a liability of the taxpayer or acquires from the taxpayer property subject to a liability, the assumption or acquisition shall not be considered as "other property or money" received by the taxpayer within the meaning of subsection (c), (d) or (e) of this section, and shall not prevent the exchange from being within the provisions of subsection (b)(4), (5) or (10), except that if, taking into consideration the nature of the liability and the circumstances in the light of which the arrangement for the assumption or acquisition was made, it appears that the principal purpose of the taxpayer with respect to the assumption or acquisition was a purpose to avoid state income tax on the exchange, or, if not such purpose, was not a bona fide business purpose, the assumption or acquisition (in the amount of the liability) shall, for the purposes of this section, be considered as money received by the taxpayer upon the exchange.

In any suit or proceeding where the burden is on the taxpayer to prove that the assumption or acquisition is not to be considered as money received by the taxpayer, the burden shall not be considered sustained unless the taxpayer sustains the burden by the clear preponderance of the evidence.

 

(l) Exchanges by security holders in connection with certain corporate reorganizations. No gain or loss shall be recognized upon an exchange consisting of the relinquishment or extinguishment of stock or securities in a corporation the plan of reorganization of which is approved by the court, in a proceeding described in subsection (b)(10), in consideration of the acquisition solely of stock or securities in a corporation organized or made use of to effectuate such plan of reorganization.

 

(m) Gain from sale or exchange to effectuate policies of federal communications commission. If the sale or exchange of property (including stock in a corporation) is certified by the federal communications commission to be necessary or appropriate to effectuate the policies of the commission with respect to the ownership and control of radio broadcasting stations, such sale or exchange shall, if the taxpayer so elects, be treated as an involuntary conversion of such property within the meaning of subsection (f) of this section. For the purposes of subsection (f) of this section, as made applicable by the provisions of this subsection, stock of a corporation operating a radio broadcasting station, whether or not representing control of such corporation, shall be treated as property similar or related in service or use to the property so converted. The part of the gain, if any, upon such sale or exchange to which subsection (f) is not applied shall nevertheless not be recognized, if the taxpayer so elects, to the extent that it is applied to reduce the basis for determining gain or loss upon sale or exchange of property, of a character subject to the allowance for depreciation under ' 43-123.14, remaining in the hands of the taxpayer immediately after the sale or exchange, or acquired in the same taxable year. The manner and amount of such reduction shall be determined under regulations prescribed by the director. Any election made by the taxpayer under this subsection shall be made by a statement to that effect in his return for the taxable year in which the sale or exchange takes place, and such election shall be binding for the taxable year and all subsequent taxable years.

 

(n) Gain from sale or exchange of residence

(1) Nonrecognition of gain. If property (hereinafter in this subsection called "old residence") used by the taxpayer as his principal residence is sold by him and, within a period beginning one year prior to the date of such sale and ending one year after such date, property (hereinafter in this subsection called "new residence") is purchased and used by the taxpayer as his principal residence, gain (if any) from such sale shall be recognized only to the extent that the taxpayer's adjusted selling price of the old residence exceeds the taxpayer's cost of purchasing the new residence.

(2) Rules for application of subsection. For the purposes of this subsection:

(A) An exchange by the taxpayer of his residence for other property shall be considered as a sale of such residence, and the acquisition of a residence upon the exchange of property shall be considered as a purchase of such residence.

(B) If the taxpayer's residence (as a result of its destruction in whole or in part, theft, or seizure) is compulsorily or involuntarily converted into property or into money, such destruction, theft, or seizure shall be considered as a sale of the residence; and if the residence is so converted into property which is used by the taxpayer as his residence, such conversion shall be considered as a purchase of such property by the taxpayer.

(C) In the case of an exchange or conversion described in subparagraph (A) or (B), in determining the extent to which the adjusted selling price of the old residence exceeds the taxpayer's cost of purchasing the new residence, the amount realized by the taxpayer upon such exchange or conversion shall be considered the adjusted selling price of the old residence.

(D) A residence any part of which was constructed or reconstructed by the taxpayer shall be considered as purchased by the taxpayer. In determining the taxpayer's cost of purchasing a residence, there shall be included only so much of his cost as is attributable to the acquisition, construction, reconstruction, and improvements made which are properly chargeable to capital account, during the period specified in paragraph (1).

(E) If a residence is purchased by the taxpayer prior to the date of his sale of the old residence, the purchased residence shall not be treated as his new residence if sold or otherwise disposed of by him prior to the date of the sale of the old residence.

(F) If the taxpayer, during the period described in paragraph (1), purchases more than one residence which is used by him as his principal residence at some time within one year after the date of the sale of the old residence, only the last of the residences so used by him after the date of such sale shall constitute the new residence. If within the one year referred to in the preceding sentence property used by the taxpayer as his principal residence is destroyed, stolen, seized, requisitioned, or condemned, or is sold or exchanged under threat or imminence thereof, then for the purposes of the preceding sentence such one year shall be considered as ending with the date of such destruction, theft, seizure, requisition, condemnation, sale or exchange.

(G) In the case of a new residence the construction of which was commenced by the taxpayer prior to the expiration of one year after the date of the sale of the old residence, the period specified in paragraph (1), and the one year referred to in subparagraph (f) of this paragraph, shall be considered as including a period of eighteen months beginning with the date of the sale of the old residence.

(H) The adjusted sale price is the amount realized on the sale reduced by qualified expenses in order to sell it. Qualified selling expenses include the brokerage c6mmission, title policy fees, transfer taxes, attorneys' fees and loan placement fees or points paid by the seller to lending institutions to assist the buyer in obtaining a home mortgage loan.

(3) Limitation. The provisions of paragraph (1) shall not be applicable with respect to the sale of the taxpayer's residence if within one year prior to the date of such sale the taxpayer sold at a gain other property used by him as his principal residence, and any part of such gain was not recognized by reason of the provisions of paragraph (1). For the purposes of this paragraph, the destruction, theft, seizure, requisition, or condemnation of property or the sale or exchange of property under threat or imminence thereof, shall not be considered as a sale of such property.

(4) Basis of new residence. Where the purchase of a new residence results, under paragraph (1), in the nonrecognition of gain upon the sale of an old residence, in determining the adjusted basis of the new residence as of any time following the sale of the old residence, the adjustments to basis shall include a reduction by an amount equal to the amount of the gain not so recognized upon the sale of the old residence. For this purpose, the amount of the gain not so recognized upon the sale of the old residence includes only so much of such gain as is not recognized by reason of the cost, up to such time, of purchasing the new residence.

(5) Tenant stockholder in cooperative apartment corporation. For the purposes of this subsection, ' 43-153(b)(1)(G) and ' 43-157(h)(6), references to property used by the taxpayer as his principal residence, and references to the residence of a taxpayer, shall include stock held by a tenant-stockholder, as defined in ' 43-123.28, subsection C, in a cooperative apartment as defined in ' 43-123.28, subsection B if --

(A) In the case of stock sold, the apartment which the taxpayer was entitled to occupy as such stockholder was used by him as his principal residence, and

(B) In the case of stock purchased, the taxpayer used as his principal residence the apartment which he was entitled to occupy as such stockholder.

(6) Husband and wife. If the taxpayer and his spouse, in accordance with regulations which shall be prescribed by the director pursuant to this paragraph, consent to the application of subparagraph (B) of this paragraph, then --

(A) For the purposes of this subsection, the words "taxpayer's adjusted selling price of the old residence" shall mean the adjusted selling price (of the taxpayer, or of the taxpayer and his spouse) of the old residence, and the words "taxpayer's cost of purchasing the new residence" shall mean the cost (to the taxpayer, his spouse or both) of purchasing the new residence (whether held by the taxpayer, his spouse, or the taxpayer and his spouse); and

(B) So much of the gain upon the sale of the old residence as is not recognized solely by reason of this paragraph, and so much of the adjustment under paragraph (4) to the basis of the new residence as results solely from this paragraph, shall be allocated between the taxpayer and his spouse as provided in such regulations.

This paragraph shall apply only if the old residence and the new residence are each used by the taxpayer and his spouse as their principal residence. In case the taxpayer and his spouse do not consent to the application of subparagraph (B) of this paragraph, then the recognition of gain upon the sale of the old residence shall be determined under this subsection without regard to the rules provided in this paragraph.

(7) Statute of limitations. If the taxpayer during a taxable year sells at a gain property used by him as his principal residence, then --

(A) The statutory period for the assessment of any deficiency attributable to any part of such gain shall not expire prior to the expiration of four years from the date the department is notified by the taxpayer (in such manner as the director may by regulations prescribe) of --

(i) The taxpayer's cost of purchasing the new residence which the taxpayer claims results in nonrecognition of any part of such gain.

(ii) The taxpayer's intention not to purchase a new residence within the period specified in paragraph (1), or

(iii) A failure to make such purchase within such period; and

(B) Such deficiency may be assessed prior to the expiration of such four-year period notwithstanding the provisions of any other law or rule of law which would otherwise prevent such assessment.

 

(o) Gain or loss on sales or exchanges in connection with certain liquidations

(1) General rule. If

(A) A corporation adopts a plan of complete liquidation after December 31, 1969, and

(B) Within the twelve-month period beginning on the date of the adoption of such plan, all of the assets of the corporation are distributed in complete liquidation, less assets retained to meet claims,

Then no gain or loss shall be recognized to such corporation from the sale or exchange by it of property within such twelve-month period.

(2) Property defined.

(A) In general. For purposes of subsection (1), the term "property" does not include --

(i) Stock in trade of the corporation, or other property of a kind which would properly be included in the inventory of the corporation if on hand at the close of the taxable year, and property held by the corporation primarily for sale to customers in the ordinary course of its trade or business,

(ii) Installment obligations acquired in respect of the sale or exchange (without regard to whether such sale or exchange occurred before, on, or after the date of the adoption of the plan referred to in subsection (1)) of stock in trade or other property described in subparagraph (2) of this paragraph, and

(iii) Installment obligations acquired in respect of property (other than property described in subparagraph (ii)) sold or exchanged before the date of the adoption of such plan of liquidation.

(B) Nonrecognition with respect to inventory in certain cases. Notwithstanding paragraph (A) of this subsection, if substantially all of the property described in subparagraph (i) of such paragraph (A) which is attributable to a trade or business of the corporation is, in accordance with this section, sold or exchanged to one person in one transaction, then for purposes of subsection (1) the term "property" includes --

(i) Such property so sold or exchanged, and

(ii) Installment obligations acquired in respect of such sale or exchange.

(3) Limitations.

(A) Collapsible corporations and liquidations to which ' 43-152(p) applies. This section shall not apply to any sale or exchange --

(i) Made by a collapsible corporation (as defined in ' 43-157(m)),

(ii) Following the adoption of a plan of complete liquidation, if ' 43-152(p) applies with respect to such liquidation, or

(B) Liquidations to which ' 43-152(b)(6) applies. In the case of a sale or exchange following the adoption of a plan of complete liquidation, if ' 43-152(b)(6) applies with respect to such liquidation, then --

(i) If the basis of the property of the liquidating corporation in the hands of the distributee is determined under ' 43-153(a)(15), this section shall not apply.

(4) Special rule for certain minority shareholders. If a corporation adopts a plan of complete liquidation on or after January 1, 1970, and if subsection (1) does not apply to sales or exchanges of property by such corporation, solely by reason of the application of subsection (3)(B), then for the first taxable year of any shareholder (other than a corporation which meets the eighty per cent ownership requirement specified in ' 43-152(b)(6)(A)) in which he receives a distribution in complete liquidation --

(A) The amount realized by such shareholder on the distribution shall be increased by his proportionate share of the amount by which the tax imposed by this subtitle on such corporation would have been reduced if subsection (3)(B) had not been applicable, and

(B) For purposes of this title, such shareholder shall be deemed to have paid, on the last day prescribed by law for the payment of the tax imposed by this subtitle on such shareholder for such taxable year, an amount of tax equal to the amount of the increase described in paragraph (A).

 

(p) Election as to recognition of gain in certain liquidations

(1) General rule. In the case of property distributed in complete liquidation of a corporation (other than a collapsible corporation to which ' 43-157(m) applies), if --

(A) The liquidation is made in pursuance of a plan of liquidation adopted on or after January 1, 1970, and

(B) The distribution is in complete cancellation or redemption of all the stock, and the transfer of all the property under the liquidation occurs within some one calendar month, then in the case of each qualified electing shareholder (as defined in subsection (3)) gain on the shares owned by him at the time of the adoption of the plan of liquidation shall be recognized only to the extent provided in subsection (5) and (6).

(2) Excluded corporation. For purposes of this section, the term "excluded corporation" means a corporation which at any time between January 1, 1970, and the date of the adoption of the plan of liquidation, both dates inclusive, was the owner of stock possessing fifty per cent or more of the total combined voting power of all classes of stock entitled to vote on the adoption of such plan.

(3) Qualified electing shareholders. For purposes of this section, the term "qualified electing shareholder" means a shareholder (other than an excluded corporation) of any class of stock (whether or not entitled to vote on the adoption of the plan of liquidation) who is a shareholder at the time of adoption of such plan, and whose written election to have the benefits of subsection (1) has been made and filed in accordance with subsection (4), but --

(A) In the case of shareholder other than a corporation, only if written elections have been so filed by shareholders (other than corporations) who at the time of the adoption of the plan of liquidation are owners of stock possessing at least eighty per cent combined voting power (exclusive of voting power possessed by stock owned by corporations) of all classes of stock entitled to vote on the adoption of such plan or liquidation; or

(B) In the case of a shareholder which is a corporation, only if written elections have been so filed by corporate shareholders (other than an excluded corporation) which at the time of the adoption of such plan of liquidation are owners of stock possessing at least eighty per cent of the total combined voting power (exclusive of voting power possessed by stock owned by an excluded corporation and by shareholders who are not corporations) of all classes of stock entitled to vote on the adoption of such plan of liquidation.

(4) Making and filing of elections. The written elections referred to in subsection (3) must be made and filed in such manner as to be not in contravention of regulations prescribed by the director. The filing must be within thirty days after the date of the adoption of the plan of liquidation.

(5) Noncorporate shareholders. In the case of qualified electing shareholder other than a corporation --

(A) There shall be recognized, and treated as a dividend, so much of the gain as is not in excess of his ratable share of the earnings and profits of the corporation accumulated after February 28, 1913, such earnings and profits to be determined as of the close of the month in which the transfer in liquidation occurred under subsection (1)(B), but without diminution by reason of distributions made during such month; but by including in the computation thereof all amounts accrued up to the date on which the transfer of all the property under the liquidation is completed; and

(B) There shall be recognized, and treated as short-term or long-term capital gains, as the case may be, so much of the remainder of the gain as is not in excess to the amount by which the value of that portion of the assets received by him which consists of money, or of stock or securities acquired by the corporation after December 31, 1953, exceeds his ratable share of such earnings and profits.

(6) Corporate shareholders. In the case of a qualified electing shareholder which is a corporation, the gain shall be recognized only to the extent of the greater of the two following --

(A) The portion of the assets received by it which consists of money, or of stock or securities acquired by the liquidating corporation after December 31, 1953; or

(B) Its ratable share of the earnings and profits of the liquidating corporation accumulated after February 28, 1913, such earnings and profits to be determined as of the close of the month in which the transfer in liquidation occurred under subsection (1)(B), but without diminution by reason of distributions made during such month; but by including in the computation thereof all amounts accrued up to the date on which the transfer of all the property under the liquidation is completed.

(7) Special rule

(A) In general. In the case of a liquidation occurring after December 31, 1969, of a corporation referred to in paragraph (C) --

(i) The date "December 31, 1953" referred to in subsections (5)(B) and (6)(A) shall be treated as if such date were "December 31, 1962", and

(ii) So much of the gain recognized under subsection (5)(A) as is attributable to the earnings and profits accumulated after February 28, 1913, and before January 1, 1967, shall, in the case of stock in such corporation held for more than six months, be treated as long-term capital gain, and only the remainder of such gain shall be treated as a dividend.

Clause (ii) shall not apply to any earnings and profits to which the corporation succeeds after December 31, 1963, pursuant to any corporate reorganization or pursuant to any liquidation to which '' 43-152(b)(6) and 43-155(c)(1) apply, except earnings and profits which on December 31, 1963, constituted earnings and profits of a corporation referred to in paragraph (C), and except earnings and profits which were earned after such date by a corporation referred to in paragraph (C).

(B) Corporations to which applicable. Paragraph (A) shall apply only with respect to a corporation which is referred to in paragraph (C) and which before December 31, 1970 notifies the department that it may wish to have paragraph (A) apply to it and submits such information as may be required by regulation prescribed by the director.

(C) Corporations referred to. For purpose of paragraph (A) a corporation referred to in this paragraph is a corporation --

(i) Which would have been a personal holding company under United States internal revenue code of 1954 ' 542 as amended and

(ii) Has complied with the special rule for liquidations after December 31, 1966 under United States internal revenue code of 1954 '' 333(g)(2) and (3) as amended.

(D) Mistake as to applicability of subsection. An election made under this section by a qualified electing shareholder of a corporation in which such shareholder states that such election is made on the assumption that such corporation is a corporation referred to in paragraph (C) shall have no force or effect if it is determined that the corporation is not a corporation referred to in paragraph (C).

 

' 43-153. Basis for determining gain or loss, unadjusted basis

(a) In general -- basis is cost. The basis of property shall be the cost of such property except that --

(1) Last inventory value. If the property should have been included in the last inventory, the basis shall be the last inventory value thereof.

(2) Property acquired by gift after 1920. If the property was acquired by gift after December 31, 1920, the basis shall be the same as it would be in the hands of the donor or the last preceding owner by whom it was not acquired by gift, except that if such basis (adjusted for the period prior to the date of the gift as provided in subsection (b)) is greater than the fair market value of the property at the time of the gift, then for the purpose of determining loss the basis shall be such fair market value. If the facts necessary to determine the basis in the hands of the donor or the last preceding owner are unknown to the donee, the tax commission shall, if possible, obtain such facts from such donor or last preceding owner, or any other person cognizant thereof. If the tax commission finds it impossible to obtain such facts, the basis in the hands of such donor or last preceding owner shall be the fair market value of such property as found by the tax commission as of the date or approximate date at which, according to the best information that the tax commission is able to obtain, such property was acquired by such donor or last preceding owner.

(3) Basis, property acquired by transfer in trust. If the property was acquired after December 31, 1920, by a transfer in trust (other than by a transfer in trust by a gift, bequest or devise) the basis shall be the same as it would be in the hands of the grantor, increased in the amount of gain or decreased in the amount of loss recognized to the grantor upon such transfer under the law applicable to the year in which the transfer was made.

(4) Basis, property acquired by transfer in trust or by gift prior to December 31, 1920. If the property was acquired by gift or transfer in trust on or before December 3 1, 1920, the basis shall be the fair market value of the property at the time of its acquisition.

(5) Property transmitted at death

(A) Basis, property acquired by bequest, devise, or inheritance. If the property was acquired by bequest, devise, or inheritance, or by the decedent's estate from the decedent, the basis shall be the fair market value of the property at the time of its acquisition.

In the case of property transferred in trust to pay the income for life to or upon the order or direction of the grantor, with the right reserved to the grantor at all times prior to his death to revoke the trust, or to make any change in the enjoyment thereof through the exercise of power to alter, amend or terminate the trust, the basis of the property in the hands of the persons entitled under the terms of the trust instrument to the property after the grantor's death shall, after his death, be the same as if the trust instrument had been a will executed on the day of the grantor's death.

For the purpose of this paragraph, property passing without full and adequate consideration under a general power of appointment exercised by will shall be deemed to be property passing from the individual exercising the power by bequest or devise.

(B) Basis, surviving spouse's share of community property. For the purposes of this paragraph the surviving spouse's one-half share of community property held by the decedent and the surviving spouse under the community property laws of any state, territory or possession of the United States or any foreign country shall be considered to be property "acquired by bequest, devise, or inheritance" from the decedent, if the death of the decedent is after the effective date of this title, and if at least one-half of the whole community interest in such property is includible in determining the value of the decedent's gross estate under article 1, chapter 9 of Title 42.

(C) Basis, survivor's interest in joint and survivor's annuity. For the purposes of this paragraph the survivor's interest in a joint and survivor's annuity shall be considered to be property "acquired by bequest, devise or inheritance" from the decedent if the death of the decedent was after December 31, 1953, and if the value of any part of such interest was required to be included in determining the value of the decedent's interest taxable under article 1, chapter 9 of Title 42.

(6) Property acquired after February 28, 1913. If the property was acquired, after February 28, 1913, upon an exchange described in ' 43-152(b) to (e), inclusive, or ' 43-152(l) the basis (except as provided in paragraphs (15) or (17) of this subsection) shall be the same as in the case of the property exchanged, decreased in the amount of money received by the taxpayer and increased in the amount of gain or decreased in the amount of loss to the taxpayer that was recognized upon such exchange under the law applicable to the year in which such exchange was made. If the property so acquired consisted in part of the type of property permitted by ' 43-152(b) or ' 43-152(l), to be received without the recognition of gain or loss, and in part of other property, the basis provided in this paragraph shall be allocated between the properties (other than money) received, and for the purpose of the allocation there shall be assigned to such other property an amount equivalent to its fair market value at the date of the exchange. Where, as part of the consideration to the taxpayer, another party to the exchange assumed a liability of the taxpayer or acquired from the taxpayer property subject to a liability, such assumption or acquisition (in the amount of the liability) shall, for the purpose of this paragraph, be considered as money received by the taxpayer upon the exchange. This paragraph shall not apply to property acquired by a corporation by the issuance of its stock or securities as the consideration in whole or in part for the transfer of the property to it.

(7) Property acquired in tax-free reorganization. If the property was acquired:

(A) After December 31, 1917, and in an income year beginning before January 1, 1936, by a corporation in connection with a reorganization, and immediately after the transfer an interest or control in such property of fifty per cent or more remained in the same persons or any of them, or

(B) In an income year beginning after December 31, 1935, by a corporation in connection with a reorganization, then the basis shall be the same as it would be in the hands of the transferror, increased in the amount of gain or decreased in the amount of loss recognized to the transferror upon such transfer under the law applicable to the year in which the transfer was made. This paragraph shall not apply if the property acquired consists of stock or securities in a corporation a party to the reorganization, unless acquired by the issuance of stock or securities of the transferee as the consideration in whole or in part for the transfer.

(8) Property acquired after December 31, 1920. If the property was acquired after December 31, 1920, by a corporation:

(A) By the issuance of its stock or securities in connection with a transaction described in ' 43-152(b) 5, (including, also, cases where part of the consideration for the transfer of such property to the corporation was property or money, in addition to such stock or securities), or

(B) As paid-in surplus or as a contribution to capital, then the basis shall be the same as it would be in the hands of the transferror, increased in the amount of gain or decreased in the amount of loss recognized to the transferror upon such transfer under the law applicable to the year in which the transfer was made.

(9) Involuntary conversion

(A) Basis, property acquired upon involuntary conversion. If the property was acquired after February 28, 1913, as a result of a compulsory or involuntary conversion described in ' 43-152(f), (1) or (2), the basis shall be the same as in the case of the property so converted, decreased in the amount of any money received by the taxpayer which was not expended in accordance with the provisions of law (applicable to the year in which such conversion was made) determining the taxable status of the gain or loss upon the conversion, and increased in the amount of gain or decreased in the amount of loss to the taxpayer recognized upon such conversion under the law applicable to the year in which the conversion was made. In the case of property purchased by the taxpayer which resulted, under the provisions of ' 43-152(f)(3), in the nonrecognition of any part of the gain realized as a result of a compulsory or involuntary conversion, the basis shall be the cost of such property decreased in the amount of the gain not so recognized; and if the property purchased consists of more than one piece of property, the basis determined under this sentence shall be allocated to the purchased properties in proportion to their respective costs.

(B) Basis, property acquired upon involuntary conversion after December 31, 1953. This paragraph shall not apply in respect of property acquired as a result of a compulsory or involuntary conversion of property used by the taxpayer as his principal residence, if the destruction, theft, seizure, requisition, or condemnation of such residence, or the sale or exchange of such residence under threat or imminence thereof, occurred after December 31, 1953.

(10) Basis, securities acquired in a wash sale. If the property consists of stock or securities the acquisition of which (or the contract or option to acquire which) resulted in the nondeductibility (under ' 43-123.12, relating to wash sales) of the loss from the sale or other disposition of substantially identical stock or securities, the basis shall be the basis of the stock or securities so sold or disposed of, increased or decreased, as the case may be, by the difference, if any, between the price at which the property was acquired and the price at which the substantially identical stock or securities were sold or otherwise disposed of.

(11) Property acquired during affiliation. In the case of property acquired by a corporation, during a period of affiliation, from a corporation with which it was affiliated, the basis of such property, after such period of affiliation, shall be determined in accordance with regulations prescribed by the tax commission without regard to intercompany transactions in respect of which gain or loss was not recognized. The basis in case of property acquired by a corporation during any period, in the taxable year 1929 or any subsequent taxable year, in respect of which a consolidated return is made by such corporation under ' 141 of the United States internal revenue code or the federal revenue act of 1928 or the federal revenue act of 1932 or the federal revenue act of 1934 or the federal revenue act of 1936 or the federal revenue act of 1938, shall be determined in accordance with regulations prescribed under ' 141 of the United States internal revenue code or the federal revenue act of 1928 or the federal revenue act of 1932 or the federal revenue act of 1934 or the federal revenue act of 1936 or the federal revenue act of 1938. The basis in the case of property held by a corporation during any period, in the taxable year 1929 or any subsequent taxable year, in respect of which a consolidated return is made by such corporation under ' 141 of the United States internal revenue code or the federal revenue act of 1928 or the federal revenue act of 1932 or the federal revenue act of 1934 or the federal revenue act of 1936 or the federal revenue act of 1938, shall be adjusted in respect of any items relating to such period, in accordance with regulations prescribed under ' 141 of the United States internal revenue code or the federal revenue act of 1928 or the federal revenue act of 1932 or the federal revenue act of 1934 or the federal revenue act of 1936 or the federal revenue act of 1938, applicable to such period.

(12) Basis, where prescribed by revenue act of 1932. If the property was acquired after February 28, 1913, in any taxable year beginning prior to January 1, 1934, and the basis thereof for the purposes of the federal revenue act of 1932 was prescribed by '' 113(a), (6), (7), or (9) of that act, for the purposes of this title, the basis shall be the basis therein prescribed in the federal revenue act of 1932.

(13) Basis, partnership property. If the property was acquired after February 28, 1913, by a partnership and the basis is not otherwise determined under any other paragraph of this subsection, then the basis shall be the same as it would be in the hands of the transferror, increased in the amount of gain or decreased in the amount of loss recognized to the transferror upon the transfer under the law applicable to the year in which the transfer was made. If the property was distributed in kind by a partnership to any partner, the basis of the property in the hands of the partner shall be such part of the basis in his hands of his partnership interest as is properly allocable to the property.

(14) Basis, property acquired before March 1, 1913. In the case of property acquired before March 1, 1913, if the basis otherwise determined under this subsection, adjusted (for the period prior to March 1, 1913) as provided in subsection (b), is less than the fair market value of the property as of March 1, 1913, the basis for determining gain shall be such fair market value. In determining the fair market value of stock in a corporation as of March 1, 1913, due regard shall be given to the fair market value of the assets of the corporation as of that date.

(15) Property received in complete liquidation. If the property was received by a corporation upon distribution in complete liquidation of another corporation within the meaning of ' 43-152(b)(6), then the basis shall be the same as it would be in the hands of the transferror.

(16) Basis, where prescribed by revenue act of 1934. If the property was acquired after March 1, 1913, in any taxable year beginning prior to January 1, 1936, and the basis thereof for the purpose of the federal revenue act of 1934 was prescribed by ' 113(a)(6), (7), or (8) of that act, for the purposes of this title, the basis shall be the same as the basis therein prescribed in the federal revenue act of 1934.

(17) Basis, securities acquired pursuant to federal securities and exchange commission order. In the case of stocks or securities received by a taxpayer on or after January 1, 1943, under circumstances described in ' 43-152(b)(8), the basis of such stocks or securities shall be the same as that of the stocks or securities for the surrender of which they were acquired.

(18) Stock rights acquired after February 28, 1913

(A) If the property was acquired by a shareholder in a corporation and consists of stock in such corporation, or rights to acquire such stock acquired by him after February 28, 1913, in a distribution by such corporation, and

(i) the right to acquire such stock was acquired in an income year beginning before January 1, 1936 (except as provided in subparagraph (13)), or

(ii) the right to acquire such stock was acquired in an income year beginning after December 31, 1935, and its distribution did not constitute income to the shareholder within the meaning of the sixteenth amendment to the constitution of the United States; then the basis of the stock in respect of which the rights were declared and the right to acquire stock, respectively, shall, in the shareholder's hands be determined by allocating between the stock and the right to acquire stock the adjusted basis of the stock, such allocation to be made under regulations which shall be prescribed by the tax commission.

(B) If a stock right was acquired prior to January 1, 1936, for the purpose of the tax imposed by this title, and it constituted income within the purview of the sixteenth amendment to the constitution of the United States, the basis of the stock in respect of which the rights were declared shall not be affected and the basis of the right shall be its fair market value as of the date of its acquisition.

(C) Where the shareholder acquired the right to acquire such stock in an income year beginning before January 1, 1954, and sold the same, and there was included in the gross income for such year of sale the entire amount of the proceeds of such sale, then if before January 1, 1955, the taxpayer has not asserted (by claim for a refund or credit or otherwise) that any part of the proceeds of the sale of such rights should be excluded from gross income for the year of its sale, the basis of the stock shall be determined without regard to subparagraphs (A) and (B), and no part of the proceeds of the sale of such rights shall ever be excluded from the gross income for the year of such sale.

(19) Railroad corporation -- property acquired after December 31, 1942. If the property of a railroad corporation, as defined in section 77m of the national bankruptcy act, as amended, was acquired after December 31, 1938, in pursuance of an order of the court having jurisdiction of such corporation --

(A) In receivership proceeding, or

(B) In a proceeding under ' 77 of the national bankruptcy act, as amended, and the acquiring corporation is a railroad corporation, as defined in ' 77m of the national bankruptcy act, as amended, organized or made use of to effectuate a plan of reorganization approved by the court in such proceeding, the basis shall be the same as it would be in the hands of the railroad corporation whose property was so acquired. The term "reorganization", as used in this paragraph, shall not be limited by the definition of such term in ' 43-152(g).

(20) Property acquired on reorganization of certain corporations. If the property was acquired by a corporation upon a transfer to which ' 43-152(b)(10), or so much of ' 43-152(d) or (e) as relate to ' 43-152(b)(10), is applicable, the basis in the hands of the acquiring corporation shall be the same as it would be in the hands of the corporation whose property was so acquired, increased in the amount of gain recognized to the corporation whose property was so acquired under the law applicable to the year in which the acquisition occurred, and such basis shall not be adjusted under subsection (b)(3) by reason of a discharge of indebtedness pursuant to the plan of reorganization under which such transfer was made.

(21) Adjustments, stock after reorganization. If the property consists of stock distributed to a taxpayer in connection with a transaction described in ' 43-152(b)(11), (hereinafter in this paragraph called "new stock"), or consists of stock in respect of which such distribution was made (hereinafter in this paragraph called "old stock"), then the basis of the new stock and of the old stock, respectively, shall, in the shareholder's hands, be determined by allocating between the old stock and the new stock the adjusted basis of the old stock; such allocation to be made under regulations prescribed by the tax commission.

 

(b) Adjusted basis, general. The adjusted basis for determining the gain or loss from sale or other disposition of property, whenever acquired, shall be the basis determined under subsection (a), adjusted as hereinafter provided.

(1) Adjustments in respect of property. Proper adjustment in respect of the property shall in all cases be made --

(A) For expenditures, receipts, losses, or other items properly chargeable to capital account, but no such adjustment shall be made for taxes or other carrying charges or expenditures described in ' 43-123.03, subsection A, paragraph 1, for which deductions have been taken by the taxpayer in determining net income for the income year or prior income years.

(B) For exhaustion, wear and tear, obsolescence, amortization, and depletion: In the case of a taxpayer subject to the tax imposed by this title, to the extent allowed for Arizona income tax purposes prior to January 1, 1954, (but not less than the amount allowable) under the provisions of this title. However, if a taxpayer has not claimed an amortization deduction for an emergency facility, an adjustment shall be made only to the extent ordinarily provided under ' 43-123.14.

(C) In the case of stock (to the extent not provided for in the foregoing subparagraphs) for the amount of distributions previously made which, under the law applicable to the year in which the distribution was made, either were tax-free or were applicable in reduction of basis (not including distributions made by a corporation, which was classified as a personal service corporation under the federal revenue act of 1918 or 1921, out of its earnings or profits which were taxable in accordance with the provisions of ' 218 of the federal revenue act of 1918 or 192 1).

(D) In the case of taxpayers subject to the tax imposed by this title, in the case of any bond (as defined in ' 43-123.24, subsection F) the interest on which is wholly exempt from the tax imposed by this title, to the extent of the amortizable bond premium disallowable as a deduction pursuant to ' 43-123.24, subsection B, paragraph 2, and in the case of any other bond (as defined in such section) to the extent of the deductions allowance pursuant to ' 43-123.24, subsection B, paragraph 1 with respect thereto.

(E) In the case of property pledged to the commodity credit corporation, to the extent of the amount received as a loan from the commodity credit corporation and treated by the taxpayer as income for the year in which received pursuant to ' 43-113(b)(1) and (2), and to the extent of any deficiency on such loan with respect to which the taxpayer has been relieved from liability.

(F) In the case of any short-term municipal bond (as defined in ' 43-112(g)(1) and (2), to the extent provided in ' 43-112(g)(1)(B)).

(G) In the case of a residence the acquisition of which resulted, under the provisions of ' 43-152(n) in the nonrecognition of any part of the gain realized upon the sale, exchange, or involuntary conversion of another residence, proper adjustment shall be made to the extent provided in ' 43-152(n)(4).

(2) Definition -- "substituted basis". The term "substituted basis" as used in this section means a basis determined under any provisions of subsection (a) of this section, providing that the basis shall be determined:

(A) By reference to the basis in the hands of a transferror, donor, or grantor, or

(B) By reference to other property held at any time by the person for whom the basis is to be determined.

Whenever it appears that the basis of property in the hands of the taxpayer is a substituted basis, then the adjustments provided in paragraph (1) of this subsection shall be made after first making in respect of such substituted basis proper adjustments of a similar nature in respect of the period during which the property was held by the transferror, donor, or grantor, or during which the other property was held by the person for whom the basis is to be determined. A similar rule shall be applied in the case of a series of substituted bases.

(3) Discharge of indebtedness -- exclusion from gross income. Where in the case of a taxpayer any amount is excluded from gross income under ' 43-112(b)(14), on account of the discharge of indebtedness, the whole or a part of the amount so excluded from gross income shall be applied in a reduction of the basis of any property held (whether before or after the time of the discharge) by the taxpayer during any portion of the income year in which such discharge occurred. The amount to be so applied (not in excess of the amount so excluded from gross income, reduced by the amount of any deduction disallowed under ' 43-112(b)(14)), and the particular properties to which the reduction shall be allocated, shall be determined under regulations (prescribed by the tax commission) in effect at the time of the filing of the consent by the taxpayer referred to in ' 43-112(b)(14). The reduction shall be made as of the first day of the income year in which the discharge occurred except in the case of property not held by the taxpayer on such first day, in which case it shall take effect as of the time the holding of the taxpayer began.

(4) Adjustment for deductions disallowed under ' 43-126(f). Proper adjustments shall be made for deductions to the extent disallowed under ' 43-126(f) notwithstanding the provisions of any other paragraph of this subsection.

(5) Development of mines. Proper adjustment shall also be made for amount allowed as deductions under ' 43-123.31 and refusing in a reduction of the taxpayer's taxes under this title but not less than the amounts allowable under such subsection.

(c) Adjustments -- lessee improvements. Neither the basis nor the adjusted basis of any portion of real property shall, in the case of the lessor of the property, be increased or diminished on account of income derived by the lessor in respect of the property and excludible from gross income under ' 43-112(b)(16). If an amount representing any part of the value of real property attributable to building erected or other improvements made by a lessee in respect of the property was included in gross income of the lessor for any taxable year beginning before January 1, 1954, the basis of each portion of the property shall be properly adjusted for the amount so included in gross income.

 

' 43-154. Gain or loss-basis for depreciation and depletion

(a) Basis, depreciation. The basis upon which exhaustion, wear and tear, and obsolescence are to be allowed in respect of any property shall be the adjusted basis provided in ' 43-153(b), for the purpose of determining the gain upon the sale or other disposition of the property.

 

(b) Basis for depletion.

(1) General rule. The basis upon which depletion is to be allowed in respect of any property shall be the adjusted basis provided in ' 43-153(b), for the purpose of determining the gain upon the sale or other disposition of such property, except as provided in the remainder of this subsection.

(2) Discovery value in the case of mines

(A) Basis for depletion, mines. In the case of mines (except mines in respect of which percentage depletion is allowable under paragraph (4) of this subsection) the basis for depletion shall be the fair market value of the property as of January 1, 1954.

In the case of mines (except mines in respect of which percentage depletion 'is allowable under paragraph (4) of this subsection) discovered by the taxpayer after December 31, 1953, the basis for depletion shall be the fair market value of the property at the date of discovery or within thirty days thereafter, if such mines were not acquired at the result of purchase of a proven tract or lease, and if the fair market value of the property is materially disproportionate to the cost.

(B) Depletion allowance, limitation. The depletion allowance under ' 43-123-15 based on discovery value provided in subsection (b)(2)(A), shall not exceed fifty per cent of the net income of the taxpayer (computed without allowance for depletion) from the property upon which the discovery was made. The only cases where the depletion allowance shall be less than it would be if computed without reference to discovery value is in those mines on the unit basis method of computing Arizona state income tax prior to January 1, 1954.

(C) Definition -- "Discoveries". "Discoveries" shall include minerals in commercial quantities contained within a vein or deposit discovered in an existing mine or mining tract by the taxpayer after December 31, 1953, if the vein or deposit thus discovered was not merely the uninterrupted extension of a continuing commercial vein or deposit already known to exist, and if the discovered minerals are of sufficient value and quantity that they could be separately mined and marketed at a profit.

(3) Percentage depletion, oil, gas and geothermal resource wells. In the case of oil, gas and geothermal resource wells the allowance for depletion under ' 43-123.15 shall be twenty-seven and one-half per cent of the gross income from the property during the taxable year, excluding from such gross income an amount equal to any rents or royalties paid or incurred by the taxpayer in respect of the property. The allowance shall not exceed fifty per cent of the net income of the taxpayer (computed without allowance for depletion) from the property, except that in no case shall the depletion allowance be less than it would be if computed without reference to this paragraph.

(4) Percentage depletion, mines

(A) In general the allowance for depletion under ' 43-123.15 shall be:

(i) In the case of sand, gravel, slate, stone (including pumice and scoria), brick and tile clay, shale, oyster shell, clam shell, granite, marble, sodium chloride, and if from brine wells, calcium chloride, magnesium chloride, and bromine, five per cent;

(ii) In the case of coal, asbestos, brucite, dolomite, magnesite, perlite, wollastonite, calcium carbonate other than calcium carbonates specified in item (i), and magnesium carbonates, ten per cent;

(iii) In the case of metal mines, aplite, bauxite, fluorspar, flake graphite, vermiculite, beryl, garnet, feldspar, mica, talc (including pyrophyllite), lepidolite, spodumene, barite, ball and sagger clay, china clay, phosphate rock, rock asphalt, trona, bentonite, gilsonite, thenardite, borax, fuller's earth, tripoli, refractory and fire clay, quartzite, diatomaceous earth, metallurgical grade limestone, chemical grade limestone and potash, fifteen per cent;

(iv) In the case of sulphur, twenty-three per cent; of the gross income from the property during the taxable year, excluding from such gross income an amount equal to any rents or royalties paid or incurred by the taxpayer in respect of the property.

The allowance shall not exceed fifty per cent of the net income of the taxpayer (computed without allowance for depletion) from the property. Only with respect to those mines using the unit depletion method in computing depletion allowance for Arizona state income tax purposes immediately prior to January 1, 1954, shall the depletion allowance be less than it would be if computed by the percentage depletion method.

(B) Definition -- "Gross income from the property". As used in this paragraph the term "gross income from the property" means the gross income from mining. The term "mining", as used herein, shall be considered to include not merely the extraction of the ores or minerals from the ground but also the ordinary treatment processes normally applied by mine owners or operators in order to obtain the commercially marketable mineral product or products, and so much of the transportation of ores or minerals (whether or not by common carrier) from the point of extraction from the ground to the plants or mills in which the ordinary treatment processes are applied thereto as is not in excess of fifty miles unless the department finds that the physical and other requirements are such that the ore or mineral must be transported a greater distance to such plants or mills. The term "ordinary treatment processes", as used herein, shall include the following:

(i) In the case of coal-cleaning, breaking, sizing and loading for shipment;

(ii) In the case of sulphur-pumping to vats, cooling, breaking and loading for shipment;

(iii) In the case of iron ore, bauxite, ball and sagger clay, rock asphalt, and minerals which are customarily sold in the form of a crude mineral product-sorting, concentrating and sintering to bring to shipping grade and form and loading for shipment; and

(iv) In the case of lead, zinc, copper, gold, silver or fluorspar ores, potash, and ores which are not customarily sold in the form of crude mineral product-crushing, grinding and benefication by concentration (gravity, flotation, amalgamation, electro-static or magnetic), cynadation, leaching, crystallization, precipitation (but not including as an ordinary treatment process electrolytic deposition, roasting, thermal or electric smelting or refining), or by substantially equivalent processes or combination of processes used in the separation or extraction of the product or products from the ore, including the furnacing of quicksilver ores.

 

' 43-155. Gross income-dividends and other distributions

(a) Definition of dividend and general statement

(1) Definition -- "dividend". "Dividend" as used in this title means any distribution made by a corporation to its shareholders, whether in money or in other property.

(A) Out of its earnings or profits accumulated after January 1, 1933, or

(B) Out of the earnings or profits of the taxable year (computed as of the close of the taxable year without diminution by reason of any distributions made during the taxable year) without regard to the amount of the earnings and profits at the time the distribution was made.

(2) General statement. In the determination of gross income under this title, corporate distributions received by a taxpayer shall be included in gross income to the extent provided in this section.

 

(b) Dividends, source of. For the purpose of this title every distribution is made out of earnings or profits to the extent thereof, and from the most recently accumulated earnings or profits. Any earnings or profits accumulated, or increase in value of property accrued, before January 1, 1933, may be distributed exempt from tax after the earnings and profits accumulated after December 31, 1932, have been distributed, but any such tax free distribution shall be applied against and reduce the adjusted basis of the stock provided in ' 43-153.

 

(c) Distribution in liquidation

(1) In general. Amounts distributed in complete liquidation of a corporation shall be treated as in full payment in exchange for the stock, and amounts distributed in partial liquidation of a corporation shall be treated as in part or full payment in exchange for the stock. The gain or loss to the distributee resulting from the exchange shall be determined under ' 43-151 and shall be recognized only to the extent provided in ' 43-152.

(2) Distribution of capital effect on recipient. In the case of amounts distributed in partial liquidation (other than a distribution to which the provisions of subsection (h) of this section are applicable) the part of the distribution which is properly chargeable to capital account shall not be considered a distribution of earnings or profits.

(3) Distribution of capital -- effect on declarer. In the case of amounts distributed in partial liquidation (other than a distribution to which the provisions of subsection (h) of this section are applicable), the part of such distribution which is properly chargeable to capital account shall not be considered a distribution of earnings or profits within the meaning of ' 43-155(b) for the purpose of determining the taxability of subsequently distributions by the corporation.

(d) Distribution of capital -- effect on basis. If any distribution (not in partial or complete liquidation) made by a corporation to its shareholders is not out of increase in value of property accrued before January 1, 1933, and is not a dividend, the amount of the distribution shall be applied against and reduce the adjusted basis of the stock provided in ' 43-153 and if in excess of that basis, the excess shall be taxable in the same manner as a gain from the sale or exchange of property.

(e) Stock dividend -- general rule. A distribution made by a corporation to its shareholders in its shares, or in rights to acquire its share shall be treated as a dividend to the extent that it constitutes income to the shareholder within the meaning of the sixteenth amendment to the constitution of the United States.

(f) Stock dividend -- election of shareholders as to medium of payment. Whenever a distribution by a corporation is, at the election of any of the shareholders (whether exercised before or after the declaration thereof), payable either --

(1) In its shares or in rights to acquire its shares, of a class which if distributed without election would not be included in gross income under subsection (e) of this section, or

(2) In money or any other property (including its shares or rights to acquire its shares, of a class which if distributed without election would be included in gross income under subsection (e) of this section), then the distribution shall constitute a taxable dividend in the hands of all shareholders, regardless of the medium in which paid.

(g) Redemption of stock -- In general

(1) If a corporation cancels or redeems its stock (whether or not the stock was issued as a stock dividend) at such time and in such manner as to make the distribution and cancellation or redemption in whole or in part essentially equivalent to the distribution of a taxable dividend, the amount so distributed in redemption or cancellation of the stock, to the extent that it represents a distribution of earnings or profits accumulated after January 1, 1933, shall be treated as a taxable dividend.

(2) Redemption of stock through use of a subsidiary corporation. If stock of a corporation (hereinafter referred to as the issuing corporation) is acquired by another corporation (hereinafter referred to as the acquiring corporation) and the issuing corporation controls (directly or indirectly) the acquiring corporation, the amount paid for the acquisition of the stock shall constitute a taxable dividend from the issuing corporation to the extent that the amount paid for such stock would have been considered, under paragraph (1), as essentially equivalent to a taxable dividend if such amount had been distributed by the acquiring corporation to the issuing corporation and had been applied by the issuing corporation in redemption of its stock. For the purposes of this paragraph, "control" means the ownership of stock possessing at least fifty per cent of the total combined voting power of all classes of stock entitled to vote or at least fifty per cent of the total value of shares of all classes of stock of the corporation.

 

(h) Effect on earnings and profits of distribution of stock. The distribution heretofore or hereafter made to a distributee by or on behalf of a corporation of its stock or securities or stock or securities in another corporation shall not be considered a distribution of earnings or profits of any corporation:

(1) If no gain to the distributee from the receipt of such stock or securities was recognized under the provisions of the federal revenue act of 1936 or prior federal revenue acts in effect at the time of the distribution, or

(2) If the distribution was not subject to tax in the hands of the distributee under the federal revenue act of 1936 or prior federal revenue acts in effect at the time of the distribution because it did not constitute income to him within the meaning of the sixteenth amendment to the constitution of the United States or because exempted to him under section 115(f) of the federal revenue act of 1934, or a corresponding provision of a prior federal revenue act.

As used in this subsection, "stock or securities" includes rights to acquire stock or securities.

 

(i) Definition -- "partial liquidation". As used in this title, "amounts distributed in partial liquidation" means a distribution by a corporation in complete cancellation or redemption of a part of its stock, or one of a series of distributions in complete cancellation or redemption of all or a portion of its stock.

 

(j) Dividend, nonpecuniary. If the whole or any part of a dividend is paid to a shareholder in any medium other than money, the property received other than money shall be included in gross income at its fair market value at the time as of which it becomes income to the shareholder.

 

(k) Earnings, profits -- tax-free transactions. The gain or loss realized from the sale or other disposition (after December 31, 1932) of property by a corporation for the purpose of the computation of earnings and profits of the corporation for any period beginning after December 31, 1932, shall be determined by using as the adjusted basis the adjusted basis (under the law applicable to the year in which the sale or other disposition was made) for determining gain. Gain or loss so realized shall increase or decrease the earnings and profits to, but not beyond, the extent to which such a realized gain or loss was recognized in computing net income under the law applicable to the year in which such sale or disposition was made. Where, in determining the adjusted basis used in computing such realized gain or loss, the adjustment to the basis differs from the adjustment proper for the purpose of determining earnings or profits, then the latter adjustment shall be used in determining the increase or decrease above provided. A loss with respect to which a deduction is disallowed under ' 43-1230) shall not be deemed to be recognized.

Where a corporation receives (after December 31, 1932) a distribution from a second corporation which (under the law applicable to the year in which the distribution was made) was not a taxable dividend to the shareholders of the second corporation, the amount of such distribution shall not increase the earnings and profits of the first corporation in the following cases:

(1) No such increase shall be made in respect of the part of such distribution which (under such law) is directly applied in reduction of the basis of the stock in respect of which the distribution was made.

(2) No such increase shall be made if (under such law) the distribution causes the basis of the stock in respect of which the distribution was made to be allocated between such stock and the property received.

For the purposes of this section "law applicable to the year" shall be deemed to refer to this title, or, prior to the effective date of the "income tax act of 1933", as amended, the United States revenue act in force for the year in which the distribution, sale or other disposition was made.

 

(l) Earnings and profits -- increase because of 1913 value

(1) If any increase or decrease in the earnings or profits for any period beginning after December 31, 1932, with respect to any matter would be different had the adjusted basis of the property involved been determined without regard to its 1913 value, then, except as provided in paragraph (2), as increase (properly reflecting such difference) shall be made in that part of the earnings and profits consisting of increase in value of property accrued before January 1, 1933.

(2) If the application of subsection (k) to a sale or other disposition after December 31, 1932, results in a loss which is to be applied in crease of earnings and profits for any period beginning after December 31, 1913, then, notwithstanding subsection (k), and in lieu of the rule provided in paragraph (1) of this subsection, the amount of such loss so to be applied shall be reduced by the amount, if any, by which the adjusted basis of the property used in determining the loss, exceeds the adjusted basis computed without regard to the value of the property on March 1, 1913, and if such amount so applied in reduction of the decrease exceeds such loss, the excess over such loss shall increase that part of the earnings and profits consisting of increase in value of property accrued before March 1, 1913.

 

' 43-157. Capital gains or losses

(a) Definition -- "capital assets". "Capital assets" means property held by the taxpayer (whether or not connected with his trade or business), but does not include --

(1) Stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business; or

(2) Property used in the trade or business of a character which is subject to the allowance for depreciation provided in ' 43-123.14; or

(3) Real property used in the trade or business of the taxpayer; or

(4) A copyright; a literary, musical, or artistic composition; or similar property; held by --

(i) A taxpayer whose personal efforts created such property, or

(ii) A taxpayer in whose hands the basis of such property is determined, for the purpose of determining gain from a sale or exchange, in whose or in part by reference to the basis of such property in the hands of the person whose personal efforts created such property.

 

(b) Deduction from gross income. In the case of any taxpayer other than a corporation, only the following percentages of the gain or loss recognized upon the sale or exchange of a capital asset shall be taken into account in computing net income:

(1) One hundred per cent if the capital asset has been held for not more than six months;

(2) Fifty per cent if the capital asset has been held for more than six months.

 

(c) Taxability to employee of termination payments. Amounts received from the assignment or release by an employee, after more than twenty years' employment, of all his rights to receive, after termination of his employment, and for a period of not less than five years (or for a period ending with his death), a percentage of future profits or receipts of his employer shall be considered an amount received from the sale or exchange of a capital asset held for more than six months, if such rights were included in the terms of the employment of such employee for not less than twelve years, and if the total of the amounts received for such assignment or release are received in one taxable year and after the termination of such employment.

 

(d) Limitation on capital losses.

(1) Corporations -- In the case of a corporation, losses from sales or exchanges of capital assets shall be allowed only to the extent of, one thousand dollars plus the gains from such sales or exchanges.

(2) Other taxpayers -- In the case of a taxpayer other than a corporation, losses from the sales or exchanges of capital assets shall be allowed only to the extent of the gains from such sales or exchanges plus --

(A) One thousand dollars for a single individual, head of household, trust, estate, or married individuals filing a joint return.

(B) Five hundred dollars for married individuals filing separate returns.

In the case of the limitations provided for under (A) or (B) above, the amount of the net income as computed without regard to capital gains or losses shall apply as a further limitation.

 

(e) Capital loss carry-over. If, for any taxable year beginning after December 31, 1970, the taxpayer has a net capital loss, the amount thereof shall be a capital loss in each of the succeeding taxable years to the extent that such amount has not been deducted in a prior year.

 

(f) Retirement of bonds, etc. Amounts received by the holder upon the retirement of bonds, debentures, notes, or certificates or other evidences of indebtedness issued by any corporation (including those issued by a government or political subdivision thereof), shall be considered as amounts received in exchange therefor.

 

(g) Gains and losses from short sales, etc. For the purposes of this title --

(1) Gains or losses from short sales of property shall be considered as gains or losses from sale or exchanges of capital assets; and

(2) Gains or losses attributable to the failure to exercise privileges or options to buy or sell property shall be considered as gains or losses from sales or exchanges of capital assets held for not more than six months; and

(3) Gain from the sale or exchange of property, to the extent that the adjusted basis of such property is less than its adjusted basis determined without regard to ' 124A of the internal revenue code (relating to amortization deduction), shall be considered as gain from the sale or exchange of property which is neither a capital asset nor property described in subsection (j).

 

(h) Determination of period for which held -- for the purpose of this section.

(1) Holding period. In determining the period for which the taxpayer has held property received on an exchange, for purposes of subsection (b) of this section, there shall be included the period for which he held the property exchanged if under the provisions of ' 43-153 the property received has, for the purpose of determining gain or loss from a sale or exchange, the same basis in whole or in part in his hands as the property exchanged. For the purposes of this paragraph, an involuntary conversion described in ' 43-152(f) shall be considered an exchange of the property converted for the property acquired.

(2) Holding period, where substituted basis. In determining the period for which the taxpayer has held property, however acquired, for purposes of subsection (b) of this section, there shall be included the period for which the property was held by any other person, if under the provisions of ' 43-153 the property has, for the purpose of determining gain or loss from a sale or exchange, the same basis in whole or in part in his hands as it would have in the hands of the other person.

(3) Holding period for stock or securities, which no gain was recognized under revenue act of 1928 or 1932. In determining the period for purposes of subsection (b) of this section, for which the taxpayer has held stock or securities received upon a distribution where no gain was recognized to the distributee under the provisions of ' 112(g) of the federal revenue act of 1928 or the federal revenue act of 1932, or under the provisions of ' 371(c) of the federal revenue act of 1938, there shall be included the period for which he held the stock or securities in the distributing corporation prior to the receipt of the stock or securities upon the distribution.

(4) Holding period, effect of wash sales. In determining the period for purposes of subsection (b) of this section, for which the taxpayer has held stock or securities the acquisition of which (or the contract or option to acquire which) resulted in the nondeductibility (under ' 43-123.12, relating to wash sales) of the loss from the sale or other disposition of substantially identical stock or securities, there shall be included the period for which he held the stock or securities the loss from the sale or other disposition of which was not deductible.

(5) Holding period, of stock acquired through exercise of rights. In determining the period for purposes of subsection (b) of this section, for which the taxpayer has held stock or securities acquired from a corporation by the exercise of rights to acquire the stock or securities, there shall be included only the period beginning with the date upon which the right to acquire was exercised.

(6) Holding period, residence acquired under ' 43-152(n). In determining the period for which the taxpayer has held a residence, the acquisition of which resulted under ' 43-152(n) in the nonrecognition of any part of the gain realized on the sale, exchange, or involuntary conversion of another residence, there shall be included the period for which such other residence had been held as of the date of such sale, exchange or involuntary conversion.

(7) Holding period, property transmitted at death under ' 43-153(a)(5). In determining the period for which the taxpayer has held property transmitted at death, within the meaning of ' 43-153(a)(5), if --

(A) The basis of such property in the hands of such taxpayer is determined under ' 43-153, and

(B) Such property is sold or otherwise disposed of by such taxpayer within six months after the decedent's death, then such taxpayer shall be deemed to have held such property for more than six months.

 

(i) Gain from sale of certain property between spouses or between an individual and a controlled corporation.

(1) Treatment of gain as ordinary income. In the case of a sale or exchange, directly or indirectly, of property described in paragraph (2) --

(A) Between a husband and wife; or

(B) Between an individual and a corporation more than eighty per cent in value of the outstanding stock of which is owned by such individual, his spouse, and his minor children and minor grandchildren; any gain recognized to the transferor from the sale or exchange of such property shall be considered as gain from the sale or exchange of property which is neither a capital asset nor property described in subsection (j).

(2) This subsection shall apply only in the case of a sale or exchange of property by a transferor which in the hands of the transferee is property of a character which is subject to the allowance for depreciation provided in ' 43-123.14.

 

(j) Gains and losses from involuntary conversion and from the sale or exchange of certain property used in the trade or business.

(1) Definition of "property used in the trade or business". For the purposes of this subsection, the term "property used in the trade or business" means property used in the trade or business, of a character which is subject to the allowance for depreciation provided in ' 43-123.14 held for more than six months, and real property used in the trade or business held for more than six months which is not --

(A) Property of a kind which would properly be includible in the inventory of the taxpayer if on hand at the close of the taxable year, or

(B) Property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business, or

(C) A copyright, a literary, musical or artistic composition, or similar property, held by a taxpayer described in subsection (a)(4) of this section.

Such term also includes timber with respect to which subsection (k)(1) or (2) is applicable and unharvested crops to which paragraph (3) is applicable. Such term also includes livestock, regardless of age, held by the taxpayer for draft, breeding, or dairy purposes, and held by him for twelve months or more from the date of acquisition. It does not include poultry.

(2) Gains and losses from sales of property used in trade or business, treatment of. If, during the taxable year, the recognized gains upon sales or exchanges of property used in the trade or business, plus the recognized gains from the compulsory or involuntary conversion, as a result of destruction in whole or in part, theft or seizure, or an exercise of the power of requisition or condemnation or the threat or imminence thereof, of property used in the trade or business and capital assets held for more than six months into other property or money, exceed the recognized losses from the sales, exchanges, and conversions, the gains and losses shall be considered as gains and losses from sales or exchanges of capital assets held or more than six months. If the gains do not exceed the losses, the gains and losses shall not be considered as gains and losses from sales or exchanges of capital assets. For the purposes of this paragraph:

(A) In determining under this paragraph whether gains exceed losses, the gains and losses described therein shall be included only if and to the extent taken into account in computing net income except that subsections (b) and (d) shall not apply.

(B) Losses upon the destruction, in whole or in part, theft or seizure, or requisition or condemnation of property used in the trade or business or capital assets held for more than six months shall be considered losses from a compulsory or involuntary conversion.

(3) Unharvested crop, property used in trade or business. In the case of an unharvested crop on land used in the trade or business and held for more than six months, if the crop and the land are sold or exchanged (or compulsorily or involuntarily converted as described in paragraph (2) ), at the same time and to the same person, the crops shall be considered as "property used in the trade or business".

 

(k) Gain or loss in the case of timber.

(1) If the taxpayer so elects upon his return for a taxable year, the cutting of timber (for sale or for use in the taxpayer's trade or business) during such year by the taxpayer who owns, or has contract right to cut, such timber (providing he has owned such timber or has held such contract right for a period of more than six months prior to the beginning of such year) shall be considered as a sale or exchange of such timber cut during such year. In case such election has been made, gain or loss to the taxpayer shall be recognized in an amount equal to the difference between the adjusted basis for depletion of such timber in the hands of the taxpayer and the fair market value of such timber. Such fair market value shall be the fair market value as of the first day of the taxable year in which such timber is cut, and shall thereafter be considered as the cost of such cut timber to the taxpayer for all purposes for which such cost is a necessary factor. If a taxpayer makes an election under this paragraph, such election shall apply with respect to all timber which is owned by the taxpayer or which the taxpayer has a contract right to cut and shall be binding upon the taxpayer for the taxable year for which the election is made and for all subsequent years, unless the tax commission, on showing of undue hardship, permits the taxpayer to revoke his election; such revocation, however, shall preclude any further elections under this section except with the consent of the tax commission.

(2) In the case of the disposal of timber (held for more than six months prior to such disposal) by the owner thereof under any form or type of contract by virtue of which the owner retains an economic interest in such timber, the difference between the amount received for such timber and the adjusted basis thereof shall be considered as though it were a gain or loss, as the case may be, upon the sale of such timber.

 

(l) Short sales. In the case of a short sale of property made by the taxpayer after the effective date of this title, if substantially identical property has been held by the taxpayer on the date of such short sale for not more than six months (determined without regard to the effect, under paragraph (1) of this subsection, of such short sale on the holding period), or if substantially identical property is acquired by the taxpayer after such short sale and on or before the date of the closing thereof --

(1) Any gain upon the closing of such short sale be considered as a gain upon the sale or exchange of a capital asset held for not more than six months (notwithstanding the period of time any property used to close such short sale has been held); and

(2) The holding period of such substantially identical property shall be considered to begin (notwithstanding the provisions of subsection (h)) on the date of the closing of the short sale, or on the date of a sale, gift or other disposition of such property, whichever date occurs first. This subparagraph shall apply to such substantially identical property in the order of the dates of the acquisition of such property, but only to so much of such property as does not exceed the quantity sold short.

For the purpose of this subsection, the acquisition of an option to sell property at a fixed price shall be considered as a short sale, and the exercise or failure to exercise such option shall be considered as a closing of such short sale.

 

(m) Collapsible corporations.

(1) Treatment of gain to shareholders. Gain from the sale or exchange (whether in liquidation or otherwise) of stock of a collapsible corporation, to the extent that it would be considered (but for the provisions of this subsection) as gain from the sale or exchange of a capital asset held for more than six months, shall, except as provided in paragraph (3), be considered as gain from the sale or exchange of property which is not a capital asset.

(2) Definition -- "collapsible corporation".

(A) For the purposes of this subsection, the term "collapsible corporation" means a corporation formed or availed of principally for the manufacture, construction, or production of property, for the purchase of property which (in the hands of the corporation) is property described in subsection (a)(1), or for the holding of stock in a corporation so formed or availed of, with a view to --

(i) The sale or exchange of stock by its shareholders (whether in liquidation or otherwise), or a distribution to its shareholders, prior to the realization by the corporation manufacturing, constructing, producing, or purchasing the property of a substantial part of the net income to be derived from such property, and

(ii) The realization by such shareholders of gain attributable to such property.

(B) For the purposes of subparagraph (A), a corporation shall be deemed to have manufactured, constructed, produced, or purchased property, if --

(i) It engaged in the manufacture, construction, or production of such property to any extent.

(ii) It holds property having a basis determined, in whole or in part, by reference to the cost of such property in the hands of a person who manufactured, constructed, produced, or purchased the property, or

(iii) It holds property having a basis determined, in whole or in part, by reference to the cost of property manufactured, constructed, produced, or purchased by the corporation.

(3) Limitations on application of subsection. In the case of gain realized by a shareholder upon his stock in a collapsible corporation --

(A) This subsection shall not apply unless, at any time after the commencement of the manufacture, construction, or production of the property, or at the time of the purchase of the property described in subsection (a)(1), or at any time thereafter, such shareholder (i) owned (or was considered as owning) more than ten per cent in value of the outstanding stock of the corporation, or (ii) owned stock which was considered as owned at such time by another shareholder who then owned (or was considered as owning) more than ten per cent in value of the outstanding stock of the corporation;

(B) This subsection shall not apply to the gain recognized during a taxable year unless more than seventy per cent of such gain is attributable to the property so manufactured, constructed, produced, or purchased; and

(C) This subsection shall not apply to gain realized after the expiration of three years following the completion of such manufacture, construction, production, or purchase.

For the purposes of subparagraph (A), the ownership of stock shall be determined in accordance with the rules prescribed by ' 43-126(b)(2), except that, in addition to the persons prescribed by subparagraph (D) of that paragraph, the family of an individual shall include the spouses of that individual's brothers and sisters (whether by the whole or half blood) and the spouses of that individual's lineal descendants.

 

(n) Dealers in securities.

(1) Capital gains. Gain by a dealer in securities from the sale or exchange of any security shall in no event be considered as gain from the sale or exchange of a capital asset unless --

(A) The security was, prior to the expiration of the thirtieth day after the date of its acquisition or after the date of the enactment of this title (whichever is the later), clearly identified in the dealer's records as a security held for investment; and

(B) The security was not, at any time after the expiration of such thirtieth day, held by such dealer primarily for sale to customers in the ordinary course of his trade or business,

(2) Loss by a dealer in securities from the sale or exchange of any security shall in no event be considered as loss from the sale or exchange of property which is not a capital asset if at any time after the thirtieth day following the date of the enactment of this title the security was clearly identified in the dealer's records as a security held for investment.

(3) For the purposes of this subsection the term "security" means any share of stock in any corporation, certificate of stock or interest in any corporation, note, bond, debenture, or evidence of indebtedness, or any evidence of an interest in or right to subscribe to or purchase any of the foregoing.

 

(o) Bonds, etc., losses of banks. For the purpose of this section, in the case- of a bank, as defined in section 104(a) of the Internal Revenue Code, (as amended Oct. 20, 1951, 2:07 p.m., E.S.T., C. 521, Title 111, Sec. 313(h), 65 Stat. 491), if the losses of the taxable year from sales or exchanges of bonds, debentures, notes, or certificates, or other evidence of indebtedness issued by any corporation (including one issued by a government or political subdivision thereof) with interest coupons or in registered form, exceed the gains of the taxable year from such sales or exchanges, no such sale or exchange shall be considered a sale or exchange of a capital asset.

 

(p) Gain from dispositions of certain depreciable property.

(1) General rule.

(A) Ordinary income. Except as otherwise provided in this section, if ' 43-157(p) property is disposed of during a taxable year beginning after December 31, 1969, the amount by which the lower of --

(i) The recomputed basis of the property, or

(ii) In the case of a sale, exchange, or involuntary conversion, the amount realized, or

(iii) In the case of any other disposition, the fair market value of such property,

exceeds the adjusted basis of such property shall be treated as gain from the sale or exchange of property which is neither a capital asset nor property described in ' 43-1570). Such gain shall be recognized notwithstanding any other provision of this subtitle.

(B) Recomputed basis. For purposes of this section, the term "recomputed basis" means --

(i) With respect to any property referred to in paragraph (C)(i) or (ii), its adjusted basis recomputed by adding thereto all adjustments, attributable to periods after December 31, 1969, or

(ii) With respect to any property referred to in paragraph (C)(v), its adjusted basis recomputed by adding thereto all adjustments, attributable to periods after December 31, 1969, reflected in such adjusted basis on account of deductions (whether in respect of the same or other property) allowed or allowable to the taxpayer or to any other person for depreciation, or for amortization under ' 43-123.14, subsection K. For purposes of the preceding sentence, if the taxpayer can establish by adequate records or other sufficient evidence, that the amount allowed for depreciation, or for amortization under ' 43-123.14, subsection K, for any period was less than the amount allowable, the amount added for such period shall be the amount allowed.

(C) Section 43-157(p) property. For purposes of this section the term "' 43-157(p) property" means any property (other than livestock) which is or has been property of a character subject to the allowance for depreciation provided in ' 43-123.14 and is either --

(i) Personal property, or

(ii) Other property (not including a building or its structural components) but only if such other property is tangible and has an adjusted basis in which there are reflected adjustments described in paragraph (B) for a period in which such property (or other property) --

(iii) Was used as an integral part manufacturing production, or extraction or of furnishing transportation, communications, electrical energy, gas, water, or sewage disposal services, or

(iv) Constituted research or storage facilities used in connection with any of the activities referred to in clause (iii), or

(v) An elevator or an escalator.

(2) Exceptions and limitations.

(A) Gifts. Subsection (1) shall not apply to a disposition by gift.

(B) Transfer at death. Except as provided in ' 43-158 (relating to income in respect of a decedent), subsection (1) shall not apply to a transfer at death.

(C) Certain tax-free transactions. If the basis of property in the hands of a transferee is determined by reference to its basis in the hands of the transferor by reason of the application of any of the following -- ' 43-152(b)(4), 43-152(b)(5), 43-152(b)(6), 43-152(b)(9), or 43-152(b)(10), and ' 43-152(c), 43-152(d), or 43-152(e), then the amount of gain taken into account by the transferor under subsection (1)(A) shall not exceed the amount of gain recognized to the transferor on the transfer of such property (determined without regard to this section). This paragraph shall not apply to a disposition to an organization which is exempt from the tax imposed by this title.

(D) Like kind exchanges; involuntary conversions. If property is disposed of and gain (determined without regard to this section) is not recognized in whole or in part under ' 43-152(b)(1), 43-152(b)(2), 43-152(c), or 43-152(f), then the amount of gain taken into account by the transferor under subsection (1)(A) shall not exceed the sum of --

(i) The amount of gain recognized on such disposition (determined without regard to this section), plus

(ii) The fair market value of property acquired which is not ' 43-157(p) property and which is not taken into account under subparagraph W.

(E) Sections 43-152(m) and 43-152(b)(8) transactions. Under regulations prescribed by the tax commission, rules consistent with paragraphs (C) and (D) of this subsection shall apply in the case of transactions described in ' 43-152(m) (relating to gain from sale or exchange to effectuate policies of F.C.C.) or ' 43-152(b)(8) (relating to exchange in obedience to S.E.C. orders).

(3) Adjustments to basis. The tax commission shall prescribe such regulations as it may deem necessary to provide for adjustments to the basis of property to reflect gain recognized under subsection (1).

(4) Application of section. This section shall apply notwithstanding any other provision of this title.

 

(q) Gain from dispositions of certain depreciable realty.

(1) General rule.

(A) Ordinary income. Except as otherwise provided in this section, if ' 43-157(q) property is disposed of after December 31, 1969, the applicable percentage of the lower of --

(i) The additional depreciation (as defined in subsection (2)(A)) in respect of the property, or

(ii) The excess of the amount realized (in the case of a sale, exchange or involuntary conversion) or the fair market value of such property (in the case of any other disposition), over

(iii) The adjusted basis of such property, shall be treated as gain from the sale or exchange of property which is neither a capital asset nor property described in ' 43-1570). Such gain shall be recognized notwithstanding any other provision of this subtitle.

(B) Applicable percentage. For purposes of paragraph (A), the term "applicable percentage" means one hundred per cent minus one percentage point for each full month the property was held after the date on which the property was held twenty full months.

(2) Additional depreciation defined. For purposes of this section --

(A) In general. The term "additional depreciation" means, in the case of any property, the depreciation adjustments in respect of such property; except that, in the case of property held more than one year, it means such adjustments only to the extent that they exceed the amount of the depreciation adjustments which would have resulted if such adjustments had been determined for each taxable year under the straight line method of adjustment. For purposes of the preceding sentence, if a useful life (or salvage value) was used in determining the amount allowed as a deduction for any taxable year, such life (or value) shall be used in determining the depreciation adjustments which would have resulted for such year under the straight line method.

(B) Property held by lessee. In the case of a lessee, in determining the depreciation adjustments which would have resulted in respect of any building erected (or other improvement made) on the leased property, or in respect of any cost of acquiring the lease, the lease period shall be treated as including all renewal periods. For purposes of the preceding sentence --

(i) The term "renewal period" means any period for which the lease may be renewed, extended, or continued pursuant to an option exercisable by the lessee, but

(ii) The inclusion of renewal periods shall not extend the period taken into account by more than two-thirds of the period on the basis of which the depreciation adjustments were allowed.

(C) Depreciation adjustments. The term "depreciation adjustments" means, in respect of any property, all adjustments attributable to periods after December 31, 1969, reflected in the adjusted basis of such property on account of deductions (whether in respect of the same or other property) allowed or allowable to the taxpayer or to any other person for exhaustion, wear and tear, obsolescence, or amortization (other than amortization for emergency facilities under ' 43-123.14, subsection K). For purposes of the preceding sentence, if the taxpayer can establish by adequate records or other sufficient evidence that the amount allowed as a deduction for any period was less than the amount allowable, the amount taken into account for such period shall be the amount allowed.

(3) Section 43-157(q) property. For purposes of this section, the term "' 43-157(q) property" means any real property (other than ' 43-157(p) property), as defined in ' 43-157(p)(1)(C) which is or has been property of a character subject to the allowance for depreciation provided in ' 43-123.14, as amended.

(4) Exceptions and limitations.

(A) Gifts. Subsection (1) shall not apply to a disposition by gift.

(B) Transfers at death. Except as provided in ' 43-158 (relating to income in respect of a decedent), subsection (1) shall not apply to a transfer at death.

(C) Certain tax-free transactions. If the basis of property in the hands of a transferee is determined by reference to its basis in the hands of the transferor by reason of the application of ' 43-152(b)(4), 43-152(b)(5), 43-152(b)(6), 43-152(b)(9), or 43-152(b)(10), and ' 43-152(c), 43-152(d) or 43-152(e), then the amount of gain taken into account by the transferor under subsection (1)(A) shall not exceed the amount of gain recognized to the transferor on the transfer of such property (determined without regard to this section). This paragraph shall not apply to a disposition to an organization which is exempt from the tax imposed by this title.

(D) Like kind exchanges; involuntary conversions.

(i) Recognition limit. If property is disposed of and gain (determined without regard to this section) is not recognized in whole or in part under ' 43-152(b)(1), 43-152(c), or 43-152(f), then the amount of gain taken into account by the transferor under subsection (1)(A) shall not exceed the greater of the following:

(ii) The amount of gain recognized on the disposition (determined without regard to this section), increased as provided in subparagraph (iv), or

(iii) The amount determined under subparagraph (v).

(iv) Increase for certain stock. With respect to any transaction, the increase provided by this subparagraph is the amount equal to the fair market value of any stock purchased in a corporation which (but for this paragraph) would result in nonrecognition of gain under ' 43-152(f)(3)(A).

(v) Adjustment where insufficient ' 43-157(q) property is acquired. With respect to any transaction, the amount determined under this subparagraph shall be the excess of --

(vi) The amount of gain which would (but for this paragraph) be taken into account under subsection (1)(A), over

(vii) The fair market value (or cost in the case of a transaction described in ' 43-152(f)(3) ) of the ' 43-157(q) property acquired in the transaction.

(viii) Basis of property acquired. In the case of property purchased by the taxpayer in a transaction described in ' 43-152(f)(3), in applying the last sentence of ' 43-153(a)(9), such sentence shall be applied --

(ix) First solely to ' 43-157(q) properties and to the amount of gain not taken into account under subsection (1)(A) by reason of this paragraph, and

(x) Then to all purchased properties to which such sentence applies and to the remaining gain not recognized on the transaction as if the cost of the ' 43-157(q) properties were the basis of such properties computed under clause (ix).

In the case of property acquired in any other transaction to which this paragraph applies, rules consistent with the preceding sentence shall be applied under regulations prescribed by the tax commission.

(xi) Additional depreciation with respect to property disposed of. In the case of any transaction described in ' 43-152(b)(1), 43-152(c)(1), 43-152(c), or 43-152(f), the additional depreciation in respect of the ' 43-157(q) property acquired which is attributable to the ' 43-157(q) property disposed of shall be an amount equal to the amount of the gain which was not taken into account under subsection (1)(A) by reason of the application of this paragraph.

(E) Sections 43-152(m) and 43-152(b)(8) transactions. Under regulations prescribed by the tax commission, rules consistent with paragraphs (C) and (D) of this subsection and with subsections (5) and (6) shall apply in the case of transactions described in ' 43-152(m) (relating to gain from sale or exchange to effectuate policies of F.C.C.) or ' 43-152(b)(8) (relating to exchanges in obedience to S.E.C. orders).

(F) Disposition of principal residence. Subsection (1) shall not apply to a disposition of property to the extent used by the taxpayer as his principal residence (within the meaning of ' 43-152(n), relating to sale or exchange of residence).

(5) Holding period. For purposes of determining the applicable percentage under this section, the provisions of ' 43-157(h) shall not apply, and the holding period of ' 43-157(q) property shall be determined under the following rules:

(A) Beginning of holding period. The holding period of ' 43-157(q) property shall be deemed to begin --

(i) In the case of property acquired by the taxpayer, on the day after the date of acquisition, or

(ii) In the case of property constructed, reconstructed, or erected by the taxpayer, on the first day of the month during which the property is placed in service.

(B) Property with transferred basis. If the basis of property acquired in a transaction described in paragraph (A), (B), (C), or (E) of subsection (4) is determined by reference to its basis in the hands of the transferor, then the holding period of the property in the hands of the transferee shall include the holding period of the property in the hands of the transferor.

(C) Principal residence. If the basis of property acquired in a transaction described in paragraph (F) of subsection (4) is determined by reference to the basis in the hands of the taxpayer of other property, then the holding period of the property acquired shall include the holding period of such other property.

(6) Special rules for property which is substantially improved.

(A) Amount treated as ordinary income. If, in the case of a disposition of ' 43-157(q) property, the property is treated as consisting of more than one element by reason of paragraph (C), then the amount taken into account under subsection (1)(A) in respect of such ' 43-157(q) property as gain from the sale or exchange of property which is neither a capital asset nor property described in ' 43-1570) shall be the sum of the amounts determined under paragraph (B).

(B) Ordinary income attributable to an element. For purposes of paragraph (A), the amount taken into account for any element shall be the amount determined by multiplying --

(i) The amount which bears the same ratio to the lower of the amounts specified in subparagraph (i) or (ii) of subsection (1)(A) for the ' 43-157(q) property as the additional depreciation for such element bears to the sum of the additional depreciation for all elements, by

(ii) The applicable percentage for such element. For purposes of this paragraph, determinations with respect to any element shall be made as if it were a separate property.

(C) Property consisting of more than one element. In applying this subsection in the case of any ' 43-157(q) property, there shall be treated as a separate element --

(i) Each separate improvement.

(ii) If, before completion of ' 43-157(q) property, units thereof (as distinguished from improvements) were placed in service each such unit of ' 43-157(q) property, and

(iii) The remaining property which is not taken into account under subparagraphs (i) and (ii).

(D) Property which is substantially improved. For purposes of this subsection --

(i) In general. The term "separate improvement" means each improvement added during the thirty-six month period ending on the last day of any taxable year to the capital account for the property, but only if the sum of the amounts added to such account during such period exceeds the greatest of --

(ii) Twenty-five per cent of the adjusted basis of the property,

(iii) Ten per cent of the adjusted basis of the property, determined without regard to the adjustments provided in paragraph (B) of ' 43-153(b)(1), or

(iv) Five thousand dollars.

For purposes of clauses (ii) and (iii), the adjusted basis of the property shall be determined as of the beginning of the first day of such thirty-six-month period, or of the holding period of the property (within the meaning of subsection (5) whichever is the later.

(v) Exception. Improvements in any taxable year shall be taken into account for purposes of subparagraph (1) only if the sum of the amounts added to the capital account for the property for such taxable year exceeds the greater of --

(vi) Two thousand dollars, or

(vii) One per cent of the adjusted basis refer-red to in subparagraphs (i) and (iii), determined, however, as of the beginning of such taxable year.

For purposes of this section, if the amount added to the capital account for any separate improvement does not exceed the greater of clause (ii) or (iii), such improvement shall be treated as placed in service on the first day, of a calendar month, which is closest to the middle of the taxable year.

(viii) Improvement. The term "improvement" means, in the case of any ' 43-157(q) property, any addition to capital account for such property after the initial acquisition or after completion of the property.

(7) Adjustments to basis. The tax commission shall prescribe such regulations as it may deem necessary to provide for adjustments to the basis of property to reflect gain recognized under subsection (1).

(8) Application of section. This section shall apply notwithstanding any other provision of this title.

 

(r) Certain reacquisitions of real property.

(1) General rules. If

(A) A sale of real property gives rise to indebtedness to the seller which is secured by the real property sold, and

(B) The seller of such property reacquires such property in partial or full satisfaction of such indebtedness,

then, except as provided in subsections (2) and (3), no gain or loss shall result to the seller from such reacquisition, and no debt shall become worthless or partially worthless as a result of such reacquisition.

(2) Amount of gain resulting.

(A) In general. In the case of a reacquisition of real property to which subsection (1) applies, gain shall result from such reacquisition to the extent that --

(i) The amount of money and the fair market value of other property (other than obligations of the purchaser) received, prior to such reacquisition, with respect to the sale of such property, exceeds

(ii) The amount of the gain on the sale of such property returned as income for periods prior to such reacquisition.

(B) Limitation. The amount of gain determined under paragraph (A) resulting from a reacquisition during any taxable year beginning after December 31, 1969 shall not exceed the amount by which the price at which the real property was sold exceeded its adjusted basis, reduced by the sum of --

(i) The amount of the gain on the sale of such property returned as income for periods prior to the reacquisition of such property, and

(ii) The amount of money and the fair market value or other property (other than obligations of the purchaser received with respect to the sale of such property) paid or transferred by the seller in connection with the reacquisition of such property.

For purposes of this paragraph, the price at which real property is sold is the gross sales price reduced by the selling commissions, legal fees, and other expenses incident to the sale of such property which are properly taken into account in determining gain or loss on such sale.

(C) Gain recognized. Except as provided in this section, the gain determined under this subsection resulting from a reacquisition to which subsection (1) applies shall be recognized, notwithstanding any other provision of this subtitle.

(3) Basis of reacquired real property. If subsection (1) applies to the reacquisition of any real property, the basis of such property upon such reacquisition shall be the adjusted basis of the indebtedness to the seller secured by such property (determined as of the date of reacquisition), increased by the sum of --

(A) The amount of the gain determined under subsection (2) resulting from such reacquisition, and

(B) The amount described in subsection (2)(13)(ii). If any indebtedness to the seller secured by such property is not discharged upon the reacquisition of such property, the basis of such indebtedness shall be zero.

(4) Indebtedness treated as worthless prior to reacquisition. If, prior to a reacquisition of real property to which subsection (1) applies, the seller has treated indebtedness secured by such property as having become worthless or partially worthless --

(A) Such seller shall be considered as receiving, upon the reacquisition of such property, an amount equal to the amount of such indebtedness treated by him as having become worthless, and

(B) The adjusted basis of such indebtedness shall be increased (as of the date of reacquisition) by an amount equal to the amount so considered as received by such seller.

(5) Principal residences. If

(A) Subsection (1) applies to a reacquisition of real property with respect to sale of which --

(i) Gain was not recognized under ' 43-152(n) (relating to sale or exchange or residence); and

(ii) Within one year after the date of the reacquisition of such property by the seller, such property is resold by him,

then, under regulations prescribed by the tax commission, subsections (2), (3), and (4) of this section shall not apply to the reacquisition of such property, and, for purposes of applying ' 43-152(n), the resale of such property shall be treated as a part of the transaction constituting the original sale of such property.

(6) The provisions of this subsection shall be effective for all years beginning on or after January 1, 1970.

(s) Taxation of capital gain dividends of shareholders of regulated investment companies and holders of beneficial interests of real estate investment trusts.

(1) Treatment of capital gain dividends by shareholders and holders of beneficial interests. A capital gain dividend shall be treated by the shareholders and holders of beneficial interests of a federally regulated investment company or of a real estate investment trust as a gain from the sale or exchange of a capital asset held for more than six months.

(2) Definition of capital gain dividend. For purposes of this part, a capital gain dividend is any dividend, or part thereof, which is designated by a federally regulated investment company, or by a business trust which qualifies as a "real estate investment trust" under '' 856, 857 and 858 of the United States Internal Revenue Code of 1954, as amended, as a capital gain dividend in a written notice mailed to its shareholders or holders of beneficial interests not later than forty-five days after the close of its taxable year. If the aggregate amount so designated with respect to a taxable year of such company or trust (including capital gains dividends paid after the close of the taxable year) is greater than the excess of the net long-term capital gain over the net short-term capital loss of the taxable year, the portion of each such distribution which shall be a capital gain dividend shall be only that proportion of the amount so designated which such excess of the net long-term capital gain over the net short-term capital loss bears to the aggregate amount so designated.

(3) Treatment by shareholders and holders of beneficial interests of undistributed capital gains. Every shareholder and every holder of a beneficial interest of a federally regulated investment company or of a business trust which qualifies as a 11 real estate investment trust" under '' 856, 857 and 858 of the United States Internal Revenue Code of 1954, as amended, at the close of such company's or trust's taxable year shall include, in computing his long-term capital gains in his return for his taxable year in which the last day of such company's or trust's taxable year falls, such amount as the company or trust shall designate in respect of such shares or beneficial interests in a written notice mailed to its shareholders or holders of beneficial interests at any time prior to the expiration of forty-five days after close of its taxable year, but the amount so includible by any shareholder or holder of a beneficial interest shall not exceed that part of the amount subjected to the federal income tax imposed on the company or trust which he would have received if all of such amount had been distributed as capital gain dividends by the company or trust to the holders of such shares or beneficial interests at the close of its taxable year.

(4) The provisions of this subsection shall be effective for all years beginning on or after January 1, 1970, with respect to shareholders of federally regulated investment companies, and for all years beginning on and after January 1, 1973 with respect to shareholders and holders of beneficial interests of real estate investment trusts.

 

' 43-158. Gross income and deductions in respect of decedents

(a) Inclusions In gross income

(1) Decedent's gross income-to whom taxable. The amount of all items of gross income in respect of a decedent which are not properly includible in respect of the taxable period in which falls the date of his death or a prior period shall be included in the gross income, for the taxable year when received, of:

(A) The estate of the decedent, if the right to receive the amount is acquired by the decedent's estate from the decedent;

(B) The person who, by reason of the death of the decedent, acquires the right to receive the amount, if the right to receive the amount is not acquired by the decedent's estate from the decedent; or

(C) The person who acquires from the decedent the right to receive the amount by bequest, devise, or inheritance, if the amount is received after a distribution by the decedent's estate of such right.

(2) Income in case of sale. (A) If a right, described in paragraph (1), to receive an amount is transferred by the estate of the decedent or a person who receives such right by reason of the death of the decedent or by bequest, devise, or inheritance from the decedent, there shall be included in the gross income of the estate or person, as the case may be, for the taxable period in which the transfer occurs, the fair market value of the right at the time of such transfer plus the amount by which any consideration for the transfer exceeds the fair market value.

(B) As used in this paragraph, "transfer" includes sale, exchange, or other disposition, but does not include a transfer to a person pursuant to the right of that person to receive such amount by reason of the death of the decedent or by bequest, devise, or inheritance from the decedent.

(3) Character of income determined by reference to decedent. The right, described in paragraph (1), to receive an amount shall be treated, in the hands of the estate of the decedent or any person who acquired such right by reason of the death of the decedent, or by bequest, devise, or inheritance from the decedent, as if it had been acquired by the estate or such person in the transaction by which the decedent acquired that right. The amount includible in gross income under paragraph (1) or (2) shall be considered in the hands of the estate or such person to have the character which it would have had in the hands of the decedent if the decedent had lived and received that amount.

 

(b) Deductions attributable to decedent's gross income

(1) In general. The amount of any deduction specified in ' 43-123.03, subsections A and B and '' 43-123.04, 43-123.05 and 43-123.06 (relating to deductions for expenses, interest and taxes), in respect of a decedent which is not properly allowable to the decedent in respect of the taxable period in which falls the date of his death, or a prior period, shall be allowed, in the taxable year when paid, to the estate of the decedent. But if the estate of the decedent is not liable to discharge the obligation to which the deduction relates the amount of the deduction shall be allowed to the person who, by reason of the death of the decedent or by bequest, devise, or inheritance acquires, subject to that obligation, from the decedent an interest in property of the decedent.

(2) Depletion, attributable to decedent's gross income deductibility of. The amount of any deduction specified in ' 43-123.15 (relating to deduction for depletion), in respect of a decedent which is not properly allowable to the decedent in respect of the taxable period in which falls the date of his death, or a prior period, shall be allowed to the person described in subsection (a)(1)(A), (B) or (C) who, in the manner described therein, received the income to which the deduction relates, in the taxable year when the income is received.

 

(c) Deduction for estate tax

(1) Allowance of deduction. A person who includes an amount in gross income under subsection (a) shall be allowed, for the same taxable year, as a deduction an amount which bears the same ratio to the Arizona inheritance tax attributable to the net value for inheritance tax purposes of all items described in subsection (a)(1) as the value for inheritance tax purposes of the items of gross income or portions thereof in respect of which that person included the amount in gross income (or the amount included in gross income, whichever is lower) bears to the value for inheritance tax purposes of all the items described in subsection (a)(1).

(2) Definition -- "inheritance tax". As used in paragraph (1), the term "inheritance tax" means the tax imposed upon the beneficiary of the decedent under article 1 of chapter 9, Title 42. The net value for inheritance tax purposes of all the items described in subsection (a)(1) shall be the excess of the value for inheritance tax purposes of all the items described in subsection (a)(1) over the deductions from the gross estate in respect of claims which represent the deductions described in subsection (b). The inheritance tax attributable to the net value shall be an amount equal to the excess of the inheritance tax over the inheritance tax computed without including in the gross estate the net value.

 

' 43-159. Deductions from gross income -- war losses

(a) War losses. In computing net income there shall be allowed as a deduction losses sustained during the taxable year and not compensated for by insurance or otherwise of property destroyed or seized after December 7, 1941, in the course of military or naval operations by the United States or any other country engaged in war.

(1) Property destroyed or seized on or after December 7, 1941, in the course of military or naval operations by the United States or any other country engaged in war shall be deemed to have been destroyed or seized on a date chosen by the taxpayer in the manner provided in paragraph (4), which falls between --

(A) The latest date, as established to the satisfaction of the tax commission, on which such property may be considered as not destroyed or seized, and

(B) The earliest date, as established to the satisfaction of the tax commission, on which such property may be considered as having already been destroyed or seized.

For the purposes of this paragraph property within an area which comes under the control of a country at war with the United States after the date war with such country' is declared by the United States shall be deemed to have been destroyed or seized in the course of military or naval operations by such country and the date specified in subparagraph (A) shall not be later than the latest date determined by the tax commission as the date on which such area was under the control of the United States or a country not at war with the United States, and the date specified in subparagraph (B) shall not be later than the earliest date determined by the tax commission as the date on which such area may be considered under the control of the country which is at war with the United States.

(2) Property within any country at war with the United States, or within an area under the control of any such country on the date war with such country was declared by the United States, shall be deemed to have been destroyed or seized on the date war with such country was declared by the United States.

(3) Any interest in, or with respect to, property described in paragraph (1) or (2) (including any interest represented by a security) which becomes worthless shall be considered to have been destroyed or seized (and the loss therefrom shall be considered a loss from the destruction or seizure) on the date chosen by the taxpayer which falls between the dates specified in paragraph (1), or on the date prescribed in paragraph (2), as the case may be, when the last property (described in the applicable paragraph) to which the interest relates would be deemed destroyed or seized under the applicable paragraph. This paragraph shall apply only if the interest would have become worthless if the property had been destroyed. For the purpose of this paragraph, an interest shall be deemed to have become worthless notwithstanding the fact that such interest has a value if such value is attributable solely to the possibility of recovery of the property, compensation (other than insurance or similar indemnity) on account of its destruction or seizure, or both. Section 43-123.09 and ' 43-123.13, subsection B shall not apply to any interest which under this section is considered to have been destroyed or seized. Under regulations prescribed by the tax commission, a taxpayer which owns one hundred per cent (excluding qualifying shares) of each class of stock of a corporation may elect to determine the worthlessness of its interest, described in this paragraph, in or with respect to the property of the corporation without regard to the amount of the property of such corporation which would be excluded under subsection (e)(2)(A) in determining the adjusted basis of all the assets of the corporation for the purposes of subsection (e), but such amount shall be treated under subsection (b)(1) as a recovery by the taxpayer in the income year with respect to such interest.

(4) Taxpayer's choice of a date under paragraph (1) or (3) shall be effective only if made within such time and in such manner as may be prescribed by regulations prescribed by the tax commission.

 

(b) Extent of loss determined. In the case of any property or interest in or with respect to property deemed to be destroyed or seized under subsection (a):

(1) The amount of the loss on account of such property or interest shall be determined with regard to any recoveries with respect thereto in the taxable year but without regard to any possibility of recovering such property or interest, or of receiving any compensation (other than insurance or similar indemnity) on account of such property or interest in the taxable year or in any future taxable year.

(2) The taxpayer may choose to decrease the amount of the loss by all obligations or liabilities of the taxpayer with respect to such property or interest discharged or satisfied out of the property or interest upon its destruction or seizure, if the tax commission is satisfied that such obligations or liabilities are so discharged or satisfied in a subsequent income year, or that the taxpayer is unable to determine whether or not such obligations or liabilities are in fact discharged or satisfied.

No loss shall be deemed to have been sustained upon the destruction or seizure of such property or interest to the extent that it is compensated for by the discharge or satisfaction of obligations and liabilities of the taxpayer out of such property or interest in the income year in which such destruction or seizure is deemed to have occurred. The taxpayer's choice under this subsection shall be effective only if made within such time and in such manner as may be prescribed by regulations by the tax commission.

 

(c) Recovery of property

(1) General rule. Upon the recovery in the taxable year of any money or property in respect of property considered under subsection (a) as destroyed or seized in any prior taxable year, the amount of such recovery shall be included in gross income to the extent provided in paragraph (2).

(2) Inclusion in gross income

(A) The amount of the recovery of any money or property in respect of property considered under subsection (a) as destroyed or seized in any prior taxable year shall be an amount equal to the aggregate of such money and the fair market value of such property, determined as of the date of the recovery.

(B) To the extent that such amount plus the aggregate of the amounts of previous such recoveries do not exceed that part of the aggregate of the allowable deductions in prior taxable years on account of the destruction or seizure of property described in subsection (a) which did not result in a reduction of any tax of the taxpayer under this title, such amount shall not be includible in gross income and shall not be deemed gain upon the involuntary conversion of property as a result of its destruction or seizure. To the extent that such amount plus the aggregate of the amounts of previous such recoveries exceed that part of the aggregate of such deductions which did not result in a reduction of any tax of the taxpayer under this title and do not exceed that part of the aggregate of such deductions which did result in a reduction of any tax of the taxpayer under this title, such amount shall be included in gross income but shall not be deemed a gain upon the involuntary conversion of property as a result of its destruction or seizure. To the extent that such amount plus the aggregate of the amounts of previous such recoveries exceed the aggregate of the allowable deductions in prior income years on account of the destruction or seizure of property described in subsection (a), such amount shall be considered again upon the involuntary conversion of property as a result of its destruction or seizure and shall be recognized or not recognized as provided in ' 43-152(f). If for any previous taxable year the taxpayer chooses under subsection (b) to treat any obligations and liabilities as discharged or satisfied out of the property or interest described in subsection (a), and if such obligations and liabilities were not so discharged or satisfied, the amount of such obligations and liabilities treated as discharged or satisfied under subsection (b) shall be considered for the purposes of this section as a deduction by reason of this section which did not result in a red

uction of any tax of the taxpayer under this title. An allowable deduction for any income year on account of the destruction or seizure of property described in subsection (a), shall, to the extent not allowed in computing the tax of the taxpayer for such income year, be considered an allowable deduction which did not result in a reduction of any tax of the taxpayer under this title.

(3) For the purposes of paragraphs (1) and (2), the restoration in whole or in part of the value of any interest described in subsection (a)(3) by reason of any recovery of money or property in respect of property to which such interest related and which was considered under subsection (a)(1) or (2) as destroyed or seized shall be deemed a recovery of property in respect of property considered under subsection (a) as destroyed or seized.

 

(d) Unadjusted basis. The unadjusted basis of property recovered in respect of property considered destroyed or seized under subsection (a) shall be determined under this section. Such basis shall be an amount equal to the fair market value of such property, determined as of the date of the recovery, reduced by an amount equal to the excess of the aggregate of such fair market value and the amounts of previous recoveries of money or property in respect of property considered under subsection (a) as destroyed or seized over the aggregate of the allowable deductions in prior income years on account of the destruction or seizure of property described in subsection (a), and increased by that portion of the amount of the recovery which under subsection (c) is treated as a recognized gain from the involuntary conversion of property. Upon application of the taxpayer, the aggregate of the bases (determined under the preceding sentence) of any properties recovered in respect of properties considered under subsection (a) as destroyed or seized may be allocated among the properties so recovered in such manner as the tax commission may determine under regulations prescribed by it, and the amount so allocated to any such property so recovered shall be the unadjusted basis of such property in lieu of the unadjusted basis of such property determined under the preceding sentence.

 

(e) Corporate liquidation -- fifty per cent owned by taxpayer

(1) If a taxpayer owns not less than fifty per cent of each class of stock of a corporation, if such corporation has property described in subsection (a)(1) or (2) deemed to be destroyed or seized, the adjusted basis for determining loss of which is at least seventy-five per cent of the adjusted basis for determining loss of all such corporation's property, and if such corporation completely liquidates (by distributing all the assets which it is able to distribute and all its rights to assets which it is not able to distribute, including the right to the recovery of the property described in subsection (a)(1) and (2)) within one year after such property is deemed to be destroyed or seized, or by December 31, 1953, whichever is the later, then that part of the loss by the taxpayer on such liquidation which would be attributable to the destruction or seizure of such property as established to the satisfaction of the tax commission, shall be treated for the purposes of this title as a loss by the taxpayer upon the destruction or seizure of the part of the stock or other interest of the taxpayer to which such loss is allocable. Such part of the stock or other interest of the taxpayer shall be treated for the purposes of subsections (b), (c) and (d) as property described in subsection (a)(3).

(2) For the purposes of paragraph (1) --

(A) In determining the adjusted basis of all the property of the corporation there shall be excluded money in money in the United States, bank deposits, the right to receive money from any person not situated in a country at war with the United States or in a territory under the control of such a country, and obligations issued or guaranteed as to principal or interest by the United States, except that there shall not be excluded any such property which is destroyed or seized as described in subsection (a) within or before the taxable period.

(B) The adjusted basis of property of such corporation shall be determined as of the date immediately preceding the first date on which any property was destroyed or seized, as described in subsection (a), or as of any later date falling within or before the taxable period, on the basis of which such determination will produce a greater amount.

 

(f) Rules and regulations. The determination as to whether and to what extent an allowable deduction on account of the destruction or seizure of property described in subsection (a) did or did not result in a reduction of any tax of the taxpayer under this title shall be made in accordance with regulations prescribed by the tax commission.

 

' 43-160. Employee stock options

(a) Time and conditions for exercising employee stock option. If a share of stock is transferred to an individual pursuant to his exercise after December 31, 1953, of a restricted stock option, and no disposition of such share is made by him within two years from the date of the granting of the option nor within six months after the transfer of such share to him, no income shall result at the time of the transfer of such share to the individual upon his exercise of the option with respect to such share. This subsection and subsection (b) shall not apply unless

(1) The individual, at the time he exercises the restricted stock option, is an employee of the corporation granting such option or of a parent or subsidiary corporation of such corporation, or

(2) The option is exercised by him within three months after the date he ceases to be an employee of any of such corporations.

 

(b) Option price less than ninety-five per cent of fair market value. If no disposition of a share of stock acquired by an individual upon his exercise after December 31, 1953, of a restricted stock option is made by him within two years from the date of the granting of the option nor within six months after the transfer of such share to him, but, at the time the restricted stock option was granted, the option price was less than ninety-five per cent of the fair market value at such time of such share, then, in the event of any disposition of such share by him, or in the event of his death (whenever occurring) while owning such share, there shall be included as compensation (and not as gain upon the sale or exchange of a capital asset) in his gross income, for the taxable year in which falls the date of such disposition or for the taxable year closing with his death, whichever is applicable, an amount equal to the amount (if any) by which the option price is exceeded by the lesser of --

(1) The fair market value of the share at the time of such disposition or death, or

(2) The fair market value of the share at the time the option was granted.

In the case of the disposition of such share by the individual, the basis of the share in his hands at the time of such disposition shall be increased by an amount equal to the amount so includible in his gross income.

 

(c) Exchanges. If stock transferred to an individual upon his exercise of the option is exchanged by him for stock or securities in an exchange within the provisions of ' 43-152(b)(2) or (3), or if new stock, as described in ' 43-153(a)(18), is acquired upon a distribution with respect to such stock, the stock or securities acquired in such exchange and such new stock shall be considered as having been transferred to him upon his exercise of such option. A similar rule shall be applied in the case of a series of such exchanges or acquisitions.

 

(d) Definitions -- for the purposes of this section

(1) "Restricted stock option". The term "restricted stock option" means an option granted after December 31, 1953, to an individual, for any reason connected with his employment by a corporation, if granted by the employer corporation or its parent or subsidiary corporation, to purchase stock of any such corporations, but only if --

(A) At the time such option is granted the option price is at least eighty-five per centum of the fair market value at such time of the stock subject to the option; and

(B) Such option by its terms is not transferable by such individual otherwise than by will or the laws of descent and distribution, and is exercisable during his lifetime, only by him; and

(C) Such individual, at the time the option is granted, does not own stock possessing more than ten per cent of the total combined voting power of all classes of stock of the employer corporation or of its parent or subsidiary corporation. For the purposes of this subsection B

(i) Such individual shall be considered as owning the stock owned, directly or indirectly, by or for his brothers and sisters (whether by the whole or half blood), spouse, ancestors, and lineal descendants; and

(ii) Stock owned, directly or indirectly, by or for a corporation, partnership, estate, or trust, shall be considered as being owned proportionately by or for its shareholders, partners, or beneficiaries.

(2) "Parent corporation". The term "parent corporation" means any corporation (other than the employer corporation) in an unbroken chain of corporations ending with the employer corporation if, at the time of granting of the option, each of the corporations other than the employer corporation owns stock possessing more than fifty per cent of the total combined voting power of all classes of stock in one of the other corporations in such chain.

(3) "Subsidiary corporation". The term "subsidiary corporation" means any corporation (other than the employer corporation) in an unbroken chain of corporations beginning with the employer corporation if, at the time of the granting of the option, each of the corporations other than the last corporation in the unbroken chain owns stock possessing more than fifty per cent of the total combined voting power of all classes of stock in one of the other corporations in such chain.

(4) "Disposition". The term "disposition" includes a sale, exchange, gift, or any transfer of legal title, but does not include --

(A) A transfer from a decedent to his estate or a transfer by bequest or inheritance;

(B) An exchange which is within the provisions of ' 43-152(b)(2) or (3); or

(C) A mere pledge or hypothecation.

(5) Date of option subject to approval of stockholders. If the grant of an option is subject to approval by stockholders, the date of grant of the option shall be determined as if the option had not been subject to such approval.

 

(e) Modification of option. For the purposes of subsection (d), if the terms of any option to purchase stock are modified, extended, or renewed, the following rules shall be applied with respect to transfers of stock made upon an exercise of the option after the making of such modification, extension, or renewal:

(1) Such modification, extension, or renewal shall be considered as the granting of a new option;

(2) The fair market value of such stock at the time of the granting of such option shall be considered as

(A) The fair market value of such stock on the date of the original granting of the option;

(B) The fair market value of such stock on the date of the making of such modification, extension, or renewal; or

(C) The fair market value of such stock at the time of the making of any intervening modification, extension, or renewal, whichever is the highest.

 

' 43-161. Imposition of tax upon estates and trusts

(a) Income includible. The taxes imposed by this title upon individuals apply to the income of estates or of any kind of property held in trust (other than so-called Massachusetts trusts), including:

(1) income accumulated in trust for the benefit of unborn or unascertained persons or persons with contingent interests, and income accumulated or held for future distribution under the terms of the will or trust.

(2) Income which is to be distributed currently by the fiduciary to the beneficiaries, and income collected by a guardian of an infant which is to be held or distributed as the court may direct.

(3) Income received by estates of deceased persons during the period of administration or settlement of the estate.

(4) Income which, in the discretion of the fiduciary, may be either distributed to the beneficiaries or accumulated.

 

(b) Estate or trust, taxability. Except as otherwise provided in '' 43-162 and 43-164, the income of an estate or trust is taxable to the estate or trust. The tax applies to the entire net income of an estate, if the decedent was a resident, regardless of the residence of the fiduciary or beneficiary, and to the entire net income of a trust, if the fiduciary or beneficiary is a resident, regardless of the residence of the settler.

 

(c) Trust, taxability dependent upon residence of fiduciary. Where the taxability of income under '' 43-161 through 43-169 and ' 43-171, depends on the residence of the fiduciary and there are two or more fiduciaries for the trust, the income taxable under subsection (b) shall be apportioned according to the number of fiduciaries resident in this state pursuant to rules and regulations prescribed by the tax commission.

 

(d) Trust, taxability dependent upon residence of beneficiary. Where the taxability of income under this title depends on the residence of the beneficiary and there are two or more beneficiaries of the trust, the income taxable under subsection (b) shall be apportioned according to the number and interest of beneficiaries resident in this state pursuant to rules and regulations prescribed by the tax commission.

 

(e) Estate or trust taxes, charge upon same. Taxes on income of an estate or trust which is taxable to the estate or trust are a charge upon the estate or trust and shall be paid by the fiduciary.

 

(f) Trust taxes, liability of beneficiaries. If, for any reason, the taxes imposed on income of a trust which is taxable to the trust because the fiduciary or beneficiary is a resident of this state are not paid when due and remain unpaid when such income is distributable to the beneficiaries, or in case the income is distributable to the beneficiaries, before the taxes are due, if the taxes are not paid when due, such income shall be taxable to the beneficiaries when distributable to them except that in the case of nonresident beneficiaries such income shall be taxable only to the extent it is derived from sources within this state.

 

' 43-162. Net income of estates and trusts

(a) Computation

(1) Net income. Except as otherwise provided in this section as to deductions, the net income of the estate or trust shall be computed in the same manner and on the same basis as in the case of an individual.

(2) Deduction -- charitable contributions. There shall be allowed as a deduction subject to the provisions of this section (in lieu of the deduction for contributions authorized by ' 43-123.17, subsection A and ' 43-125(c)) in computing the net income of the estate or trust, any part of the gross income, without limitation, which pursuant to the terms of the will or deed creating the trust is during the taxable year paid or permanently set aside for the purposes and in the manner specified in those sections or is to be used exclusively for religious, charitable, scientific, literary, or educational purposes, or for the prevention of cruelty to children or animals, or for the establishment, acquisition, maintenance, or operation of a public cemetery not operated for profit.

 

(b) Additional deduction for amounts currently distributable and non-resident beneficiary.

(1) In general. There shall be allowed as an additional deduction in computing the net income of the estate or trust the amount of the income of the estate or trust for its taxable year which is to be distributed currently by the fiduciary to the legatees, heirs, or beneficiaries, but the amount so allowed as a deduction shall be included in computing the net income of the legatees, heirs, or beneficiaries whether distributed to them or not.

In the case of a nonresident beneficiary his income derived through such an estate or trust is taxable only to the extent it is derived from sources within this state.

(2) Definition -- amounts currently distributable. For the purposes of paragraph (1), amounts currently distributable to beneficiaries are distributable out of income of the estate or trust for the taxable year if there is income of the estate or trust for the taxable year out of which such distributions may be made and if, under the terms of the will or trust instrument, distributions may be made out of such income, regardless of the fact that the will or trust instrument provides that the distributions may be made out of the corpus of the estate or trust.

 

(c) Deductions-amounts properly paid or credited. There shall be allowed as an additional deduction in computing the net income of the estate or trust

(1) In the case of income received by estates of deceased persons during the period of administration or settlement of the estate, and

(2) In the case of income which, in the discretion of the fiduciary, may be either distributed to the beneficiary or accumulated, the amount of the income of the estate or trust for its taxable year which is properly paid or credited during such year to any legatee, heir, or beneficiary, but the amount so allowed as a deduction shall be included in computing the net income of the legatee, heir, or beneficiary.

In such cases the income of the legatee, heir or beneficiary, not a resident, shall be taxable only to the extent it is derived from sources within this state.

 

(d) Rules for application of subsections (b) and (c). For the purposes of subsections (b) and (c):

(1) Amounts distributable out of income or corpus. In cases where the amount paid, credited, or to be distributed can be paid, credited, or distributed out of other than income, the amount paid, credited, or to be distributed (except under a gift, bequest, devise, or inheritance not to be paid, credited, or distributed at intervals) during the taxable year of the estate or trust shall be considered as income of the estate or trust which is paid, credited, or to be distributed if the aggregate of such amounts so paid, credited, or to be distributed does not exceed the distributable income of the estate or trust for its taxable year. If the aggregate of such amounts so paid, credited, or to be distributed during the taxable year of the estate or trust in such cases exceeds the distributable income of the estate or trust for its taxable year, the amount so paid, credited, or to be distributed to any legatee, heir, or beneficiary shall be considered income of the estate or trust for its taxable year which is paid, credited, or to be distributed in an amount which bears the same ratio to the amount of such distributable income as the amount so paid, credited, or to be distributed to the legatee, heir, or beneficiary bears to the aggregate of such amounts so paid, credited, or to be distributed to legatees, heirs, and beneficiaries for the taxable year of the estate or trust. For the purposes of this paragraph "distributable income" means either

(A) The net income of the estate or trust computed with the deductions allowed under subsections (b) and (c) in cases to which this paragraph does not apply, or

(B) The income of the estate or trust minus the deductions provided in subsection 1 (b) and (c) in cases to which this paragraph does not apply, whichever is the greater. In computing such distributable income the deductions under subsections (b) and (c) shall be determined without the application of paragraph (2).

(2) Amounts distributable out of income of prior period. In cases, other than cases described in paragraph (1), if on a date more than sixty-five days after the beginning of the taxable year of the estate or trust, income of the estate or trust for any period becomes payable, the amount of such income shall be considered income of the estate or trust for its taxable year which is paid, credited, or to be distributed to the extent of the income of the estate or trust for such period, or if such period is a period of more than twelve months, the last twelve months thereof.

(3) Distribution in first sixty-five days of taxable year

(A) General rule. If within the first sixty-five days of any taxable year of the estate or trust, income of the estate or trust, for a period beginning before the beginning of the taxable year, becomes payable, such income, to the extent of the income of the state or trust for the part of such period not falling within the taxable year or, if such part is longer than twelve months, the last twelve months thereof, shall be considered paid, credited, or to be distributed on the last day of the preceding taxable year. This subparagraph shall not apply with respect to any amount to which subparagraph (B) applies.

(B) Payable out of income or corpus. If within the first sixty-five days of any taxable year of the estate or trust, an amount which can be paid at intervals out of other than income becomes payable, there shall be considered as paid, credited, or to be distributed on the last day of the preceding taxable year the part of such amount which bears the same ratio to such amount as the part of the interval not falling within the taxable year bears to the period of the interval. If the part of the interval not falling within the taxable year is a period of more than twelve months-, the interval shall be considered to begin on the date twelve months before the end of the taxable year.

(4) Excess deductions. If for any taxable year of an estate or trust the deductions allowed under subsection (b) or (c) solely by reason of paragraph (2) or (3)(A) in respect of any income which becomes payable to a legatee, heir, or beneficiary exceed the net income of the estate or trust for such year, computed without such deductions, the amount of such excess shall not be included in computing the net income of such legatee, heir, or beneficiary under subsection (b) or (c). In cases where the income deductible solely by reason of paragraph (2) or (3)(A) becomes payable to two or more legatees, heirs, or beneficiaries, the benefit of such exclusion shall be divided among such legatees, heirs, and beneficiaries, in the proportions in which they share in such income. In any case where the estate or trust is entitled to a deduction by reason of paragraph (1), in the determination of the net income of the estate or trust for the purposes of this paragraph the amount of such deduction shall be determined with the application of paragraph (3)(A).

 

(e) Deduction -- no duplication. Any amount allowed as a deduction under subsection (b)(1) shall not be allowed as a deduction under subsection (c) in the same or any succeeding taxable year.

 

(f) Deduction of administration expenses -- no duplication. Any amount deductible as administration expenses for estate tax purposes pursuant to title 42, chapter 9 shall not be allowed as a deduction for income tax purposes unless the estate files with the department a statement in duplicate to the effect that such amount has not been allowed as a deduction pursuant to title 42, chapter 9 and that all rights to deduct such amount have been waived.

 

(g) Standard deduction, not allowable. The standard deduction provided in ' 43-123.29 shall not be allowed in the case of estates and trusts.

 

(h) Rules for application of subsection (a) in the case of trusts

(1) Trade or business income. In computing the deduction allowable under subsection (a)(2) to a trust for any taxable year beginning after December 31, 1953, no amount otherwise allowable under subsection (a)(2) as a deduction shall be allowed as a deduction with respect to income of the taxable year which is allocable to its unrelated business net income as defined by ' 43-149(d).

(2) "Prohibited transaction" -- limitation of deduction

(A) The amount otherwise allowable under subsection (a)(2) as a deduction shall not exceed fifteen per cent of the net income of the trust (computed without the benefit of subsection (a)(2)) if the trust has engaged in a prohibited transaction, as defined in subparagraph (B) of this paragraph.

(B) For the purposes of this paragraph the term "prohibited transaction" means any transaction after December 31, 1953, in which any trust while holding income or corpus which has been permanently set aside or is to be used exclusively for charitable or other purposes described in subsection (a)(2) --

(i) Lends any part of such income or corpus, without receipt of adequate security and a reasonable rate of interest, to;

(ii) Pays any compensation from such income or corpus, in excess of a reasonable allowance for salaries or other compensation for personal services actually rendered, to;

(iii) Makes any part of its services available on a preferential basis to;

(iv) Uses such income or corpus to make any substantial purchase of securities or any other property, for more than an adequate consideration in money or money's worth, from;

(v) Sells any substantial part of the securities or other property comprising such income or corpus, for less than an adequate consideration in money or money's worth, to;

(vi) Engages in any other transaction which results in a substantial diversion of such income or corpus to; the creator of such trust; any person who has made a substantial contribution to such trust; a member of the family (as defined in ' 43-126(b)(2)(D)) of an individual who is the creator of the trust or who has made a substantial contribution to the trust; or a corporation controlled by any such creator or person through the ownership, directly or indirectly, of fifty per cent or more of the total combined voting power of all classes of stock entitled to vote or fifty per cent or more of the total value or shares of all classes of stock of the corporation.

(C) Period affected -- limitation of deduction. The amount otherwise allowable under subsection (a)(2) as a deduction shall be limited as provided in subparagraph (A) only for taxable years subsequent to the taxable year during which the trust is notified by the department that it has engaged in such transaction. Provided, however, if such trust has entered into such transaction with the purpose of diverting corpus or income from the purposes described in subsection (a)(2) and such transaction involved a substantial part of such corpus or income, it shall not be allowed the deductions specified in subsection (a)(2) for the taxable year in which the prohibited transaction occurred or prior years or future years.

(D) Removal of limitation. If the deduction of any trust under subsection (a)(2) has been limited as provided in this paragraph, such trust, with respect to any taxable year following the taxable year in which notice is received of limitation of deduction under subsection (a)(2), may, under regulations prescribed by the department, file claim for the allowance of the unlimited deduction under subsection (a)(2), and if the department pursuant to such regulations, is satisfied that such trust will not knowingly again engage in a prohibited transaction, the limitation provided in subparagraph (A) shall not be applicable with respect to taxable years subsequent to the year in which such claim is filed.

(E) "Prohibited transaction" -- contributor's deduction disallowed. No gift or bequest for religious, charitable, scientific, literary, or educational purposes (including the encouragement of art and the prevention of cruelty to children or animals), otherwise allowable as a deduction under '' 43-123.17, subsection B, 43-123.19, subsection B and 43-162(a) shall be allowed as a deduction if made in trust and, in the taxable year of the trust in which the gift or bequest is made, the deduction allowed the trust under subsection (a)(2) is limited by subparagraph (A). With respect to any taxable year of a trust in which such deductions have been so limited by reason of entering into a prohibited transaction with the purpose of diverting such corpus or income from the purposes described in subsection (a)(2), and such transaction involved a substantial part of such income or corpus, and which taxable year is the same, or prior to the taxable year of the trust in which such prohibited transaction occurred, such deduction shall be disallowed the donor only if such donor or (if such donor is an individual) any member of his family (as defined in ' 43-126(b)(2)(D)) was a party to such prohibited transaction.

(F) Definition -- "gift or bequest". For the purposes of this paragraph the term "gift or bequest" means any gift, contribution, bequest, devise, legacy, or transfer. For disallowance of certain charitable, religious, scientific, literary, or education deductions otherwise allowed under subsection (a)(2) see subparagraph (C).

(3) Unreasonable or unrelated use. If the amounts permanently set aside, or to be used exclusively, for the charitable and other purposes described in subsection (a)(2) during the taxable year or any prior taxable year and not actually paid out by the end of the taxable year --

(A) Are unreasonable in amount or duration in order to carry out such purposes of the trust; or

(B) Are used to a substantial degree for purposes other than those described in subsection (a)(2); or

(C) Are invested in such a manner as to jeopardize the interest of the religious, charitable, scientific, literary, or educational beneficiaries, the amount otherwise allowable under subsection (a)(2) as a deduction shall be limited to the amount actually paid out during the taxable year and shall not exceed fifteen per cent of the net income of the trust (computed without the benefit of subsection (a)(2)).

 

(i) Taxable year, estate or trust differs from that of beneficiary. If the taxable year of a legatee, heir or beneficiary is different from that of the estate or trust, the amount which he is required, under subsection (b)(1) and subsection (c), to include in computing his net income shall be based upon the income of the estate or trust for any taxable year of the estate or trust ending within or with his taxable year.

 

(j) Information return. Every trust claiming a charitable, religious, scientific, literary, or educational deduction under subsection (a)(2) for the taxable year shall furnish information with respect to such taxable year, at such time and in such manner as the department may by regulations prescribe, setting forth --

(1) The amount of the charitable, religious, scientific, literary, or educational deduction taken under subsection (a)(2) within such year (showing separately the amount of such deduction which was paid out and the amount which was permanently set aside for charitable, religious, scientific, literary, or educational purposes during such year),

(2) The amount paid out within such year which represents amounts for which charitable, religious, scientific, literary, or educational deduction under subsection (a)(2) have been taken in prior years,

(3) The amount for which charitable, religious, scientific, literary, or educational deductions have been taken in prior years but which has not been paid out at the beginning of such year,

(4) The amount paid out of principal in the current and prior years for charitable, religious, scientific, literary, or educational purposes,

(5) The total income of the trust within such year and the expenses attributable thereto, and

(6) A balance sheet showing the assets, liabilities, and net worth of the trust as of the beginning of such year.

This subsection shall not apply in the case of a taxable year if all the net income for such year, determined under the applicable principles of the law of trusts, is required to be distributed currently to the beneficiaries.

 

1 So in original. Probably should read "subsections".

 

' 43-163. Taxation of estates and trust-armed services deduction and refunds

(a) Deductions -- in general

(1) Definition -- deduction, dependent. There shall be allowed as an additional deduction in computing the net income of a trust which accumulated income for a beneficiary who died as a result of disease contracted or injury suffered by reason of military service in the line of duty and not due to his own willful misconduct, and while serving in the armed forces of the United States, during any war in which the United States is now engaged or may become engaged, the amount of the income of the trust for any taxable year (before diminution for income tax) which was accumulated for such beneficiary, if the amount of such accumulated income was, without regard to this section, taxable to the trust, and the income for such taxable year accumulated for the beneficiary, if not distributed to him prior to his death, was payable by the trust at or after his death only to his estate, spouse, or lineal ancestors or descendants.

(2) Residence requirement. Paragraph (1) is applicable only with respect to income either received by a trust, the beneficiary of which was a resident of this state at the time of his death or distributable to a person, or the estate of a person, who was a resident of this state at the time of the death of the decedent.

(3) Double deduction not allowed. Any amount allowed as a deduction under this section shall not be allowed as a deduction under any other provision of this title.

 

(b) Refunds

(1) Refund, to whom payable. If the tax commission believes that there has been an overpayment of tax, penalties, or interest by a taxpayer for any year because of failure to claim the deduction permitted by subsection (a), the amount of the overpayment shall be refunded to the following:

(A) If the trustee of the trust involved has not been discharged, to the trust for distribution pursuant to subsection (a)(1) as if the deduction has been claimed.

(B) If the trustee of the trust involved has been discharged, to each person or estate who or which would have been benefited if the deduction permitted by subsection (a), had been claimed and in the respective amount each would have been benefited.

(2) Refund, when made. A refund may be made within any applicable period allowed by ' 43-184, or within one year after the effective date of this section, whichever is later.

(3) Applicability. To the extent not inconsistent with this section all of the provisions of '' 43-163(b), 43-175(l), 43-184 through 43-186, and 43-195(c) except ' 43-184(a), are applicable to the refunds provided by this section.

 

' 43-164. Taxation of estates and trusts  -- income in case of divorce

(a) Alimony trusts, income not includible in husband's return

(1) There shall be included in the gross income of a wife who is divorced or legally separated under a decree of divorce or separate maintenance the amount of the income of any trust which the wife is entitled to receive and which, except for the provisions of this section would be includible in the gross income of her husband, and such amount shall not, despite any provisions of this title, be includible in the gross income of the husband.

(2) Paragraph (1) shall not apply to that part of any income of the trust which the terms of the decree or trust instrument fix, in terms of an amount of money or a portion of the income, as a sum which is payable for the support of minor children of the husband. In case the income is less than the amount specified in the decree or instrument, for the purpose of applying the preceding sentence, the income, to the extent of the sum payable for support, shall be considered in payment for support.

 

(b) Alimony trusts, income includible in wife's return. For the purposes of computing the net income of the estate or trust and net income of the wife described in ' 43-112(e) or subsection (a) of this section, the wife shall be considered as the beneficiary specified in this section. A periodic payment under ' 43-112(e) to any part of which the provisions of this section are applicable, shall be included in the gross income of the beneficiary in the taxable year in which under ' 43-162(b)(1) such part is required to be included.

 

' 43-165. Taxation of estates and trusts-employees' trusts

(a) Employees' trust, exempt, general rule. A trust forming part of a stock bonus, pension, or profit-sharing plan of an employer for the exclusive benefit of his employees or their beneficiaries shall not be taxable under ' 43-161 if the trust meets all of the conditions prescribed by paragraphs (1), (2), (3) and (4).

(1) Employees' trusts, exempt if distributions to beneficiaries. A trust described in subsection (a) is not taxable if contributions are made to the trust by the employer, or employees, or both, for the purpose of distributing to the employees or their beneficiaries the corpus and income of the fund accumulated by the trust in accordance with the plan.

(2) Employees' trusts, exempt if corpus and income can only be used for benefit of employees. A trust described in subsection (a) is not taxable if under the trust instrument it is impossible, at any time prior to the satisfaction of all liabilities with respect to employees and their beneficiaries under the trust, for any part of the corpus or income to be, within the taxable year or thereafter, used for, or diverted to, purposes other than for the exclusive benefit of his employees or their beneficiaries.

(3) Employees' trusts, if the plan benefits most of the employees and does not discriminate in favor of officers, etc. A trust described in subsection (a) is not taxable if the trust, or two or more trusts, or the trust or trusts and annuity plan or plans are designated by the employer as constituting parts of a plan intended to qualify under this section which benefits either:

(A) Seventy per cent or more of all the employees, or 80 per cent or more of all employees who are eligible to benefit under the plan if seventy per cent or more of all the employees are eligible to benefit under the plan. The percentages shall exclude in each case:

(i) Employees who have been employed not more than a minimum period prescribed by the plan, not exceeding five years; and

(ii) Employees whose customary employment is for not more than twenty hours in any one week; and

(iii) Employees whose customary employment is for not more than five months in any calendar year; or

(B) Employees who qualify under a classification set up by the employer which is found by the tax commission not to be discriminatory in favor of employees who are officers, shareholders, persons whose principal duties consist in supervising the work of other employees, or highly compensated employees.

(4) Employees' trust, exempt if it does not discriminate in favor of supervising officers, etc. A trust described in subsection (a) is not taxable if the contributions or benefits provided under the plan do not discriminate in favor of employees who are officers, shareholders, persons whose principal duties consist in supervising the work of other employees, or highly compensated employees.

(5) Employees' trust, certain exclusions non-discriminatory. A classification shall not be considered discriminatory within the meaning of paragraphs (3) and (4) merely because it excludes employees the whole of whose remuneration constitutes "wages" under section 1426(a)(1) of the internal revenue code (relating to the federal insurance contributions act) or merely because it is limited to salaried or clerical employees. Neither shall a plan be considered discriminatory within the meaning of these provisions merely because the contributions or benefits of or on behalf of the employees under the plan bear a uniform relationship to the total compensation, or the basic or regular rate of compensation, of the employees. Nor shall a plan be considered discriminatory merely because the contributions or benefits based on that part of an employees', remuneration which is excluded from "wages" by section 1426(a)(1) of the internal revenue code differ from the contributions or benefits based on employees' remuneration not so excluded, or differ because of any retirement benefits created under state or federal law.

(6) Time when employees' trust exempt. A plan shall be considered as meeting the requirements of this section during the whole of any taxable year of the plan if on one day in each quarter it satisfied these requirements.

 

(b) Employees' trust, when distributions taxable to employee. The amount actually distributed or made available to any distributee by any such trust shall be taxable to him, in the year in which so distributed or made available, under ' 43-112 as if it were an annuity the consideration for which is the amount contributed by the employee, except that if the total distributions payable with respect to any employee are paid to the distributee within one taxable year of the distributee on account of the employee's separation from the service, the amount of such distribution to the extent exceeding the amounts contributed by the employee, shall be considered a gain from the sale or exchange of a capital asset held for more than six months. Where such total distributions include securities of the employer corporation, there shall be excluded from such excess the net unrealized appreciation attributable to that part of the total distributions which consists of the securities of the employer corporation so distributed. The amount of such net unrealized appreciation and the resulting adjustments to basis of the securities of the employer corporation so distributed shall be determined in accordance with regulations which shall be prescribed by the tax commission. For purposes of this subsection, the term "securities" means only shares of stock and bonds or debentures issued by a corporation with interest coupons or in registered form, and the term "securities of the employer corporation" includes securities of a parent or subsidiary corporation (as defined in ' 43-160(d)(2) and (3)) of the employer corporation. In no event shall the amount actually distributed or made available to any distributee include net unrealized appreciation in securities of the employer corporation attributable to the amount contributed by the employee. Such net unrealized appreciation and the resulting adjustments to basis of such securities shall also be determined in accordance with regulations which shall be prescribed by the tax commission.

 

(c) Employees' trust, taxability of distributions to employee where trust not exempt. Contributions to a trust made by an employer during a taxable year of the employer which ends within or with a taxable year of the trust for which the trust is not exempt under subsection (a) shall be included in the gross income of an employee for the taxable year in which the contribution is made to the trust in the case of an employee whose beneficial interest in the contribution is nonforfeitable at the time the contribution is made.

 

(d) Certain employee annuities. Notwithstanding subsection (c) or any other provision of this title, a contribution to a trust by an employer shall not be included in the income of the employee in the year in which the contribution is made if --

(1) Such contribution is to be applied by the trustee for the purchase of annuity contracts for the benefit of such employee;

(2) Such contribution is made to the trustee pursuant to a written agreement entered into prior to January 1, 1954, between the employer and the trustee, or between the employer and employee; and

(3) Under the terms of the trust agreement the employee is not entitled during his life time, except with the consent of the trustee, to any payments under annuity contracts purchased by the trustee other than annuity payments.

The amount so contributed by the employer shall not constitute consideration paid by the employee for such annuity contract in determining the amount of annuity payments required to be included in his gross income under ' 43-112(b)(2) through (7); except that if the tax imposed by this Act for any taxable year beginning before January 1, 1954, has been paid by the employee with respect to such contribution for such year, and not credited or refunded, the amount so contributed for such year shall constitute consideration paid by the employee for such annuity contract. This subsection shall have no application with respect to amounts contributed to a trust after January 1, 1954, if the trust on Such date was exempt under subsection (a). For the purposes of this subsection, amounts paid by an employer for the purchase of annuity contracts which are transferred to the trustee shall be deemed to be contributions made to a trust or trustee and contributions applied by the trustee for the purchase of annuity contracts; the term "annuity contracts purchased by the trustee" shall include annuity contracts so purchased by the employer and transferred to the trustee; and the term "employee" shall include only a person who was in the employ of the employer, and was covered by the agreement referred to in paragraph (2), prior to December 31, 1953.

 

(e) Employees' trust, when requirements applicable. In the case of a stock bonus, pension, profit-sharing or annuity plan in effect on or before December 31, 1953, such plan shall not become subject to the requirements of subsection (a)(3) through (6) and subsections (b) and (c) until the beginning of the first taxable year beginning after December 31, 1953.

 

(f) Employees' trust, plan put into effect after January 1, 1954. In the case of a stock bonus, pension, profit-sharing or annuity plan put into effect after December 31, 1953, the plan will be considered as satisfying the requirements of subsection (a)(3) through (6) and subsections (b) and (c) for the period beginning with the date on which it was put into effect and ending with the fifteenth day of the third month following the close of the taxable year of the employer in which the plan was put into effect if all provisions of the plan which are necessary to satisfy such requirements are in effect by the end of such period and have been made effective for all purposes with respect to the whole of such period.

 

' 43-166. Taxation of estates and trusts-trusts taxable to grantor

Where the title to any part of the corpus of the trust may at any time revest in the grantor without the consent of any person having a substantial adverse interest in such part of the corpus or the income therefrom, and the revesting is not contingent upon the death of all the beneficiaries, the income of such part of the trust shall be included in computing the net income of the grantor if the grantor is a resident. If the grantor is a nonresident, such income shall be included in computing his income only to the extent it is derived from sources within this state; the balance of the income shall be taxable either to the trust or to the beneficiaries as provided in '' 43-161 and 43-162.

 

' 43-167. Taxation of estates and trusts -- income for benefit of grantor

(a) Trusts in the income of which the grantor retains an interest. Where any part of the income of a trust:

(1) Is, or in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of the income may be, held or accumulated for future distribution to the grantor; or

(2) may, in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of the income, be distributed to the grantor; or

(3) is, or in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of the income may be, applied to the payment of premiums upon policies of insurance on the life of the grantor (except policies of insurance irrevocably payable for the purposes and in the manner specified in '' 43-123.17 and 43-125(c), relating to the so-called "charitable contribution" deduction);

then such part of the income of the trust shall be included in computing the net income of the grantor if the grantor is a resident. If the grantor is a nonresident, such income shall be included in computing his income only to the extent it is derived from sources within this state; the balance of such income shall be taxable either to the trust or to the beneficiaries as provided in '' 43-161 and 43-162.

 

(b) Definition -- "in the discretion of the grantor". The term "in the discretion of the grantor" as used in this section, means "in the discretion of the grantor, either alone or in conjunction with any person not having a substantial adverse interest in the disposition of the part of the income in question".

 

(c) Minor's trusts, taxability of income. Income of a trust shall not be considered taxable to the grantor under subsection (a) or any other provision of this title merely because such income, in the discretion of another person, the trustee, or the grantor acting as a trustee or co-trustee, may be applied or distributed for the support or maintenance of a beneficiary whom the grantor is legally obligated to support or maintain, except to the extent that such income is so applied or distributed. In cases where the amounts so applied or distributed are paid out of corpus or out of other than income for the taxable year, such amounts shall be considered paid out of income to the extent of the income of the trust for such taxable year which is not paid, credited, or to be distributed under ' 43-162 and which is not otherwise taxable to the grantor.

 

(d) Trusts, lien for tax on trust income. Upon recordation of an abstract of judgment or a copy thereof by the tax commission with the county recorder of any county for any taxes due from the grantor of a trust on income of the trust which is taxable to the grantor under '' 43-164, 43-166 and 43-167 and upon its giving notice of the recording to the fiduciary of the trust, or in case there is more than one fiduciary of the trust, or in fiduciaries, the amount of the taxes constitutes a lien upon all property of the trust in the county, owned by the trust or afterwards and before the lien expires acquired by the trust. The lien has the force, effect, and priority of a judgment lien.

 

(e) Lien notice, service. The notice required to be given by subsection (d) may be served upon the fiduciary personally, or by mail; if by mail, service shall be made by registered mail and shall be addressed to the fiduciary at his address as it appears in the records of the tax commission.

 

 

' 43-168. Taxation of estates and trusts-liability of fiduciary

(a) Estate of twenty thousand dollars, tax commissions' certificate. If the value of the assets of an estate at the death of the decedent exceeds twenty thousand dollars, and if any beneficiary is a nonresident, the final account of the fiduciary shall not be allowed by the probate court unless the fiduciary obtains from the tax commission and files with the court a certificate to the effect that all taxes imposed by this title upon the estate or decedent which have become payable have been paid, and that all taxes which may become due are secured by bond, deposit, or otherwise.

 

(b) Estate of twenty thousand dollars, certificate within thirty days. Within thirty days after receiving a request for a certificate, the tax commission shall either issue the certificate or notify the person requesting the certificate of the amount of tax that shall be paid or the amount of bond, deposit, or other security that shall be furnished as a condition of issuance of the certificate.

 

(c) Effect of certificates. The certificate of the tax commission does not relieve the estate for which the fiduciary acts of liability for any taxes which may become due from the decedent or estate under this title after the issuance of the certificate. It also does not relieve the fiduciary of the liability imposed by subsection (d).

 

(d) Liability of fiduciary for nonpayment of estate or trust taxes. Every fiduciary who knowingly pays in whole or in part any claim, other than claims for taxes, expenses of administration, funeral expenses, expenses of last illness, and family allowance, against the person, estate, or trust for whom or for which he acts, or who makes any distribution of the assets of the person, estate (other than estates allowed by law to be set aside to surviving spouse or minor children) or trust, before he satisfies and pays taxes, interest, and penalties, except penalties due from a decedent, which are imposed by this title on the person, estate, or trust for whom or for which he acts, and which are known by such fiduciary to constitute a claim against such person, estate, or trust, or which are known by such fiduciary to constitute a lien or charge on or against the assets of such person, estate, or trust, is personally liable to the state for the taxes, interest, and penalties to the extent of such payments and distributions.

 

(e) Request for notice

(1) Eighteen months' notice, by fiduciary. In the case of income received or accrued during the lifetime of a decedent, or by his estate during the period of administration, or by a trust, the tax commission shall mail notices proposing to assess the tax, and shall commence any proceeding in court without assessment for the collection of the tax, within eighteen months after written request therefor (filed after the return is made) by the fiduciary of the estate or trust or by any other person liable for the tax or any portion thereof.

(2) Waiver of eighteen months' notice. After filing a request pursuant to paragraph (1), a fiduciary may consent in writing to waive the limitation prescribed by said paragraph (1).

 

(f) Notice of assumption of fiduciary capacity. Any person acting in a fiduciary capacity shall assume the duties, and, upon giving notice to the tax commission, shall assume the rights and privileges of the taxpayers in respect of any tax imposed by this title (except as otherwise specifically provided), until he gives notice that his fiduciary capacity has terminated. He shall give notice under this subsection pursuant to rules and regulations prescribed by the tax commission.

 

' 43-169. Common trust funds

(a) Definitions. The term "common trust fund" means a fund established and operated in accordance with the provisions of the laws of the state by a trust company, bank, or other corporation qualified under the laws of the state to engage in the trust business in Arizona. The term "participant" means any trust, guardianship or estate whose moneys have been invested in a common trust fund. The provisions of ' 43-161 are applicable in determining the extent of which each participant's proportionate share of the income is taxable to the participant or to the beneficiaries or grantor of the participant.

 

(b) Taxation of common trust funds. A common trust fund shall not be subject to taxation under the provisions of this title, nor shall the income thereof be taxable under the provisions of this title, or otherwise, but the participants therein or the beneficiaries or grantor of such participants shall be subject to taxation as provided in this section.

 

(c) Taxability of participant. Each participant in a common trust fund, if such participant is required by law to file a return, shall include, in computing its net income, whether or not distributed and whether or not distributable.

(1) As a part of its capital gains or losses, its proportionate share of the net capital gain or loss of the common trust fund;

(2) Its proportionate share of the ordinary net income or the ordinary net loss of the common trust fund; both computed as provided in subsection (d). The appropriate or proportionate share of any participant in any income of a common trust fund which would not be taxable by this state or which this state would be prohibited from taxing by the constitution of this state or of the United States if received directly by the participants shall not be taxable to the recipients of such income.

 

(d) Computation of income. The net income of a common trust fund shall be computed in the same manner and on the same basis as in the case of an individual, except that

(1) There shall be segregated the capital gains and losses, and the net capital gain or loss shall be computed in accordance with the provisions of ' 43-157(b) and other applicable provisions of this title.

(2) After excluding all items of capital gain or loss, there shall be computed

(A) The ordinary net income which shall consist of the excess of the gross income over the deductions, or

(B) The ordinary net loss which shall consist of the excess of the deductions over the gross income.

(3) The so-called "charitable contributions" deduction provided for in ' 43-123.17 shall not be allowed.

(4) The standard exemption provided for in ' 43-123.29 shall not be allowed.

 

(e) Admission and withdrawal. No gain or loss shall be realized by a common trust fund by the admission or withdrawal of a participant. The withdrawal of any participating interest by a participant shall be treated as a sale or exchange of such interest by the participant but any gain or loss realized thereby shall be adjusted by an amount equal to the net aggregate gain or loss previously included in computing such participant's net income under subsection (c)(1).

 

(f) Information return. Every trust company operating a common trust fund shall make a return under penalties of perjury for each taxable year, stating specifically with respect to such fund the items of gross income and the deductions allowed by this section and shall include in the return information sufficient to identify the trusts and estates entitled to share in the net income of the common trust fund and the amount of the proportionate share of each such participant.

 

(g) Taxable year, where participant's differ from trust's. If under the provisions of ' 43-131(a) the taxable year of a common trust fund is different from that of a participant, the inclusions with respect to the net income of such common trust fund in computing the net income of the participant for its taxable year shall be based upon the net income of such common trust fund for any taxable year of such common trust fund, ending within or with the taxable year of the participant.

 

' 43-171. Taxation of partnerships

(a) Partnership, individual partnership liability. An individual carrying on business in partnership is liable for income tax only in his individual capacity.

 

(b) Partner's distributive share. In computing net income of each partner, he shall include, whether or not distribution is made to him --

(1) As part of his gains and losses from sales or exchanges of capital assets, his distributive share of the gains and losses of the partnership from sales or exchanges of capital assets, computed as provided in ' 43-157(b);

(2) His distributive share of the ordinary net income or the ordinary net loss of the partnership, computed as provided in subsection (c).

 

(c) Partnership income. The net income of the partnership shall be computed in the same manner and on the same basis as in the case of an individual, except as provided in this subsection.

(1) There shall be segregated the gains and losses from sales or exchanges of capital assets.

(2) After excluding all item's of gain and loss from sales or exchanges of capital assets, there shall be computed --

(A) An ordinary net income which shall consist of the excess of the gross income over the deductions; or

(B) An ordinary net loss which shall consist of the excess of the deductions over the gross income.

(3) In computing the net income of the partnership, the so-called "charitable contribution" deduction allowed by ' 43-123.17, shall not be allowed; but each partner shall be considered as having made payment, within his taxable year, of his distributive portion of any contribution or gift, payment of which was made by the partnership within its taxable year, of the character which would be allowed to the partnership as a deduction under such section if this subsection had not been enacted.

(4) In computing the net income of the partnership the deduction provided in ' 43-123.29 shall not be allowed.

 

(d) Partnership return. Every partnership shall make a return for each taxable year, stating specifically the items of gross income and the deductions allowed by this title. The return shall include the names and addresses of the individuals, whether residents or nonresidents, who would be entitled to share in the net income if distributed and the amount of the distributive share of each individual. The return shall contain or be verified by a written declaration that it is made under the penalties of perjury, signed by one of the partners.

 

(e) Taxable year of partnership, different from that of partner. If the taxable year of a partner is different from that of the partnership, the distributive share of the net income of the partnership to be included in computing the net income of the partner for his taxable year shall be based upon the net income of the partnership for any taxable year of the partnership ending within or with the taxable year of the partner.

 

' 43-175. Administration of tax-powers and duties of department of revenue

(a) Department of revenue, administrator. The department shall administer and enforce this title. For this purpose it may divide the state into a reasonable number of districts, in each of which a branch office or offices may be maintained during all or such part of the time as may be necessary.

 

(b) Branch offices, bases of establishing. In the establishment of the districts and offices the department shall give due consideration to the matter of economy of administration and service to the taxpayers.

 

(c) Rules and regulations. The department shall prescribe all rules and regulations necessary for the enforcement of this title.

 

(d) Department of revenue, powers and duties. The department of revenue, for the purpose of administering its duties under this title, shall have all of the powers and duties granted or assigned under title 42, chapter 1, article 1.1 and all additional powers and duties provided in this title.

 

(e) Effect of determination by other state agencies, res judicata. In the determination of any issue of law or fact under this title, neither the department, nor any officer or agency having any administrative duties under this title, nor any court shall be bound by the determination of any other executive officer or administrative agency of the state. In the determination of any case arising under this title, the rule of res judicata is applicable only if the liability involved is for the same year as was involved in another case previously determined under this title.

 

(f) Preservation of returns. Reports and returns shall be preserved as set forth in ' 43-145(a).

 

(g) Department, appointment of agents and assistants. The department may appoint and remove, in the manner provided by law, such officers, agents, branch office income tax deputies, and other employees as it deems necessary. They shall have such duties and powers as the department from time to time prescribes.

 

(h) Department, appointment of deputies and assistants to conduct hearings and prescribe regulations. The department may appoint one or more deputies or assistants to conduct hearings, prescribe regulations, or perform any other duty imposed by this title or other laws of the state upon the department.

 

(i) Department, compensation of assistants. The compensation of the personnel required by the department shall be such as determined pursuant to ' 38-611.

 

(j) Department, bonds of assistants. The department may require officers, agents, deputies, and other employees designated by it to give bond for the faithful performance of their duties in such sum and with such sureties as it may determine. It shall pay all premiums on the bonds out of moneys appropriated for the administration of this title.

 

(k) Department, assistants to take oaths and acknowledgments. The department and officers and employees designated by it may administer an oath to any person or take the acknowledgment of any person in respect of any return or report required by this title or the rules and regulations of the department.

 

(l) Closing agreements.

(1) The department or any person authorized in writing by the department is authorized to enter into an agreement in writing with any person relating to the liability of such person (or relating to the liability of the person or estate for whom he acts) in respect of any tax levied under this title for any taxable period.

(2) If such agreement is approved by the department within the time stated in the agreement, or later agreed to, it shall be final and conclusive, except upon a showing of fraud or malfeasance, or misrepresentation of a material fact.

(A) The case shall not be reopened as to the matters agreed upon or the agreement modified, by any officer, employee, or agent of the state, and

(B) In any suit, action, or proceeding, such agreement, or any determination, assessment, collection, payment, abatement, refund, or credit made in accordance therewith, 7,hall not be annulled, modified, set aside, or disregarded.

 

' 43-175.01. Renumbered as ' 43-179.01

' 43-176. Power of examination

The department, in performing its duties pursuant to this title, may:

1. Examine any books, papers, records or memoranda bearing upon the matters required to be included in the return of any taxpayer under this title.

2. Require the attendance of the taxpayer or of any other person having knowledge in the premises and for such purposes may:

(a) Take testimony.

(b) Require material proof for its information.

(c) Administer oaths.

3. Issue subpoenas and subpoenas duces tecum, signed by the director or his designee, to be served on any person for the purposes of this section.

 

' 43-177. Payments and assessments -- deficiency assessments

(a) Deficiency assessment, when department may issue. The department may proceed under this section or ' 43-178 whether or not it requires a return as an amended return under ' 43-141(c).

 

(b) Return, examination by department. As soon as practicable after the return is filed, the department shall examine it and shall determine the correct amount of the tax.

 

(c) Notice of additional assessment. If the department determines that the tax disclosed by the original return is less than the tax disclosed by its examination, it shall mail notice or notices to the taxpayer of the deficiency proposed to be assessed.

(1) Notice, contents. Each notice shall set forth the reasons for the proposed additional assessment and the computation thereof.

(2) Notice, joint returns. In the case of a joint return filed by husband and wife, the notice of deficiency may be a single joint notice, except that if the department is notified by either spouse that separate residences have been established, it shall mail to each spouse, in lieu of the single joint notice, duplicate originals of the joint notice.

 

(d) Proposed assessments, statute of limitations. Except in the case of a fraudulent return and except as otherwise provided in paragraphs (1), (6) and (8), every notice of a proposed deficiency assessment shall be mailed to the taxpayer within four years after the return was filed. No deficiency shall be assessed or collected with respect to the year for which the return was filed unless the notice is mailed within the four-year period or the period otherwise fixed.

(1) Omission from gross income. If the taxpayer omits from gross income an amount properly includible therein which is in excess of twenty-five per cent of the amount of gross income stated in the return, the tax may be assessed at any time within six years after the return was filed.

(2) Failure to report federal changes, statute of limitations. If a taxpayer shall fail to report a change or correction by the commissioner of internal revenue or other officer of the United States or other competent authority or shall fail to file an amended return as required by ' 43-141(c) any deficiency resulting from such adjustments may be assessed and collected within four years after said change, correction or amended return is reported to or filed with the federal government.

(3) Additional time for assessment. If a taxpayer is required to report a change or correction by the commissioner of internal revenue or other officer of the United States or other competent authority or to file an amended return as required by ' 43-141(c) and does report such change or files such return, any deficiency resulting from such adjustments may be assessed within six months from the date when such notice or amended return is filed with the department by the taxpayer, or within the period provided in the first paragraph of subsection (d) and subsection (d)(1), whichever period expires the later.

(4) Deficiency -- section 43-152(n)(7). In case of a deficiency described in ' 43-152(n)(7), such deficiency may be assessed at any time prior to the expiration of the time therein provided.

(5) Statute of limitations -- deficiency -- ' 43-152(f)(3)(C) and (D). In case of a deficiency described in ' 43-152(f)(3)(C) and (D), such deficiency may be assessed at any time prior to the expiration of the time therein provided.

(6) Proposed assessment, limitation where federal waiver. If any taxpayer agrees with the United States commissioner of internal revenue for an extension of renewals thereof of the period for proposing and assessing deficiencies in federal income taxes for any year, the period for mailing a notice of a proposed deficiency shall be four years after the return was filed or six months after the date of the expiration of the agreed period for assessing deficiencies in the federal income tax, whichever period expires the later.

(7) Returns, when deemed filed. For the purposes of this section a return filed before the last day prescribed by law for filing shall be considered as filed on that day.

(8) Waiver of statute of limitations. Where before the expiration of the time prescribed for the mailing of a notice of a proposed deficiency assessment, the taxpayer consents in writing to an assessment after that time, the assessment may be made at any time prior to the expiration of the period agreed upon. The period agreed upon may be extended by subsequent agreements in writing made before the expiration of the period previously agreed upon.

 

(e) Protest, when to be filed. Within ninety days after the mailing of each notice of additional tax proposed to be assessed the taxpayer may file with the department a written protest against the proposed additional tax, specifying in the protest the grounds upon which it is based. Such written protest shall be prepared and verified in the manner prescribed by the department.

(1) Proposed assessments, when final. If no protest is filed, the amount of the deficiency assessed becomes final upon the expiration of the ninety-day period.

(2) Protest, action and hearing. If a protest is filed, the department shall reconsider the assessment of the deficiency and, if the taxpayer has so requested in his protest, shall grant the taxpayer or his authorized representatives an oral hearing. Such hearing shall be held within six months from the date of receipt of written request for such hearing from the taxpayer.

(3) After consideration of the protest and the evidence adduced in the event of such oral hearing, the department's action upon the protest is final upon the expiration of thirty days from the date when notice of its action is received by the taxpayer, unless within that thirty-day period the taxpayer files a notice of appeal in writing from the action of the department to the state board of tax appeals.

(4) The provisions of this subsection shall be effective for all years beginning on or after January 1, 1970.

 

(f) Appeal to state board; finality of order

(1) Any person aggrieved by a decision or order of the department pursuant to subsection (e) may appeal to the state board by filing a notice of appeal in writing within thirty days after the receipt of the decision or order appealed from. The state board shall take testimony and examine documentary evidence as necessary to determine the appeal, all in accordance with rules and regulations to govern such appeals.

(2) Upon determining the appeal, the state board shall issue a decision consistent therewith. The board's decision is final upon the expiration of thirty days from the date when notice of its action is received by the parties, unless either the state or the taxpayer brings an action in superior court as provided in subsection (g) or ' 43-184.

 

(g) Actions in superior court by taxpayer or by state

A taxpayer may bring an action in superior court to challenge the validity of a deficiency assessment, for the recovery of any tax, interest or penalty paid under protest or for a refund which has been properly claimed and which was denied. The state may bring an action in superior court to determine the validity of its deficiency assessment or its denial of taxpayer's claim for a refund. Such actions shall not be commenced more than thirty days after the order or decision of the state board of tax appeals giving rise to the cause of action becomes final, and failure to bring the action within such period constitutes a waiver of the cause of action.

 

(h) Notice of deficiency, due date. When a deficiency is determined and the assessment becomes final, the department shall mail notice and demand to the taxpayer for the payment thereof. The deficiency assessed is due and payable at the expiration of ten days from the date of the notice and demand, unless the taxpayer has elected to pay the tax in installments, in which case the deficiency shall be prorated to the three installments.

(1) Deficiency, installment payments. Except where a jeopardy assessment is made, the part of the deficiency prorated to any installment the date for payments of which has not arrived shall be collected at the same time as, and as part of, the installment.

(2) Deficiency payments, delinquent installments. The part of the deficiency prorated to any installment the date for payment of which has arrived is due and payable at the expiration of ten days from the date of the notice.

 

(i) Certificates, prima facie evidence. A certificate by the department of the mailing of the notices specified in this section is prima facie evidence of the assessment of the deficiency and of the giving of the notices.

 

(j) Mathematical error, collection of tax due thereon. Any amount of tax in excess of that disclosed by the return due to a mathematical error or failure of the taxpayer to compute properly the liability based on the net income reported on the return notice of which has been mailed to the taxpayer, is not a deficiency assessment within the meaning of this section. The taxpayer has no right of protest or appeal as in the case of a deficiency assessment, based on such notice, and the assessment or collection of the amount of tax erroneously omitted in the return is not prohibited by any provision of this section.

 

' 43-178. Payments and assessments including jeopardy assessments

(a) Jeopardy assessments, filing and notice. If the tax commission believes that the assessment or the collection of a deficiency will be jeopardized in whole or in part by delay, it may mail or issue notice of its finding to the taxpayer, together with a demand for immediate payment of the tax or the deficiency declared to be in jeopardy, including interest and penalties and additions thereto.

 

(b) Closing of taxable year. If the tax commission believes that a taxpayer designs quickly to depart from the state or to remove his property therefrom or to conceal himself or his property therein, or to do any other act tending to prejudice or to render wholly or partly ineffectual proceedings to collect the tax for the taxable year then last past or the taxable year then current unless such proceedings be brought without delay, the tax commission shall declare the taxable period for such taxpayer immediately terminated and shall cause notice of such finding and declaration to be given the taxpayer, together with a demand for immediate payment of the tax for the taxable period so declared terminated and of the tax for the preceding taxable year or so much of such tax as is unpaid, whether or not the time otherwise allowed by law for filing return and paying the tax has expired; and such taxes shall thereupon become immediately due and payable.

 

(c) Jeopardy assessments, collection. A jeopardy assessment is immediately due and payable, and proceedings for collection may be commenced at once. The taxpayer, however, may stay collection and prevent the jeopardy assessment from becoming final by filing, within ten days after the date of mailing the notice of jeopardy assessment, a petition for reassessment, accompanied be a bond or other security in such amounts as the tax commission may deem necessary, not exceeding double the amount (including interest and penalties and additions thereto) as to which the stay is desired.

 

(d) Jeopardy assessment, when final. If a petition for reassessment, accompanied by bond or other security is not filed within the ten-day period, the assessment becomes final.

 

(e) Jeopardy assessments, hearing. If the taxpayer has so requested in his petition, the tax commission shall grant him or his authorized representative an oral hearing.

 

(f) Jeopardy assessments, action on petition for reassessment. The tax commission shall consider the petition for reassessment and notify the taxpayer of its decision thereon. Its decision as to the validity of the jeopardy assessment is final.

 

(g) Jeopardy assessments, presumptive evidence of jeopardy. In any proceeding brought to enforce payment of taxes made due and payable by this section, the belief of the tax commission under subsection (a), whether made after notice to the taxpayer or not, is for all purposes presumptive evidence that the assessment or collection of the tax or the deficiency was in jeopardy. A certificate of the tax commission of the mailing or issuing of the notices specified in this section is presumptive evidence that the notices were mailed or issued.

 

(h) Bankruptcy or receivership, immediate assessment. Upon the adjudication of bankruptcy of any taxpayer in any bankruptcy proceeding or the appointment of a receiver for any taxpayer in any receivership proceeding before any court of the United States or of any state or territory or of the District of Columbia, any deficiency (together with all interest, additional amounts, or additions to the tax provided for by law) determined by the tax commission in respect of a tax imposed by this title upon the taxpayer may be immediately assessed.

 

(i) Bankruptcy, notice of tax commission. The trustee in bankruptcy or receiver shall give notice in writing to the tax commission of the adjudication of bankruptcy or the appointment of the receiver. The running of the statute of limitations on the making of assessments shall be suspended for the period from the date of adjudication in bankruptcy or the appointment of the receiver to a date thirty days after the date upon which the notice from the trustee or receiver is received by the tax commission; but in no case shall the suspension be for a period in excess of two years.

 

(j) Bankruptcy, claim for tax and effect on tax commission. Claims for the deficiency and such interest, additional amounts and additions to the tax may be presented, for adjudication in accordance with law, to the court before which the bankruptcy or receivership proceeding is pending, despite the pendency of proceedings for reassessment of the deficiency pursuant to a protest or an appeal to the tax commission or an appeal to the superior court. No appeal from the action of the tax commission to a superior court may be filed after the adjudication of bankruptcy or the appointment of a receiver.

 

(k) Bankruptcy proceedings, collections after. Upon notice and demand from the tax commission after termination of the bankruptcy or receivership proceeding, the taxpayer shall pay any portion of the claim allowed in the proceeding which is unpaid. Such unpaid amount may be collected in the manner provided in this title for collection of delinquent taxes at any time within six years after the termination of the proceeding.

 

(l) Jeopardy assessment, rules and regulations. The tax commission may prescribe rules and regulations necessary properly to carry out the provisions of this section.

 

' 43-179. Violations; civil penalty; classification

(a) Penalty for violation of this title

(1) Civil penalty. Any person who, with or without intent to evade any requirement of this title or any lawful regulation of the tax commission under this title fails to file any return or to supply any information required under this title, or who, with or without such intent, makes, renders, signs, or verifies any false or fraudulent return or statement, or supplies any false or fraudulent information, is liable to a penalty of not more than one thousand dollars. The penalty shall be recovered by the department of law in the name of the state of Arizona by action in any court of competent jurisdiction.

 

(b) Penalty, compromise thereof. The department of law may, with the consent of the tax commission, compromise any penalty for which it may bring an action under this section. The penalties provided by this section are additional to all other penalties provided in this title.

 

(c) Signature presumed to be taxpayer's. The fact that an individual's name is signed to a return, statement or other document filed shall be a presumption of fact that the return, statement or other document was actually signed by him.

 

(d) False or fraudulent returns -- felony. Any person who knowingly makes and subscribes any return, statement, or other document, which contains or is verified by a written declaration that it is made under the penalties of perjury, and which he does not believe to be true and correct as to every material matter, shall be guilty of class 5 felony.

 

(e) Failure to file or supplying false information-intent to evade. Any person who, within the time required by or under the provisions of this title, knowingly fails to file any return or to supply any information with intent to evade any tax imposed by this title, or who, knowingly and with like intent, makes, renders, signs, or verifies any false or fraudulent return or statement or supplies any false or fraudulent information, is guilty of a class 6 felony.

 

(f) Place of trial. The place of trial for the offenses enumerated in this section shall be in the county of residence or principal place of business of the defendant or defendants; provided, that if such defendant has no residence or principal place of business in this state, such trial shall be had in the county of Maricopa.

 

' 43-179.01. Enforcement

The attorney general shall prosecute in the the name of the state all actions necessary to enforce the provisions of this title. The attorney general may defend all actions brought against the state or an officer or agency thereof arising under the provisions of this title. The attorney general may delegate the prosecuting authority to any county attorney for prosecution within that county.

 

' 43-180. Payments and assessments -- penalties

(a) Failure to file return, penalty. If any taxpayer fails to make and file a return required by this title on or before the due date of the return or the due date as extended by the tax commission, then, unless it is shown that the failure is due to reasonable cause and not due to willful neglect, five per cent of the tax found to be remaining due shall be added to the tax for each thirty days or fraction thereof elapsing between the due date of the return and the date on which filed, but the total penalty shall not exceed twenty-five per cent of the tax found to be remaining due. The penalty so added to the tax shall be due and payable upon notice and demand from the tax commission.

 

(b) Failure to file return, penalty where demand made. If any taxpayer, upon notice and demand by the tax commission, fails or refuses to make and file a return required by this title, the tax commission, notwithstanding the provisions of ' 43-178(h), may estimate the net income and compute and levy the amounts of the tax due from any available information. In such case twenty-five per cent of the tax, in addition to the penalty added under subsection (a), shall be added to the tax and shall be due and payable upon notice and demand from the tax commission.

 

(c) Failure to furnish information requested, penalty. If any taxpayer fails or refuses to furnish any information requested in writing by the tax commission, the tax commission may add a penalty of twenty-five per cent of the amount of any deficiency tax assessed by the tax commission concerning the assessment of which the information was required.

 

(d) Negligence, penalty. If any part of any deficiency is due to negligence, or intentional disregard of rules and regulations but without intent to defraud, five per cent of the total amount of the deficiency, in addition to the deficiency and other penalties provided in this section, shall be assessed, collected and paid in the same manner as if it were a deficiency.

 

(e) Fraud, penalty. If any part of any deficiency is due to fraud with intent to evade tax, fifty per cent of the total amount of the tax, in addition to the deficiency and other penalties provided in this section, shall be assessed, collected, and paid in the same manner as if it were a deficiency.

 

' 43-181. Interest and penalty for failure to remit

(a) Failure to remit

(1) If the tax imposed by this title, whether determined by the tax commission or the taxpayer, or any installment or portion of the tax is not paid on or before the date prescribed for its payment, there shall be collected, as a part of the tax, interest upon the unpaid amount at the rate of six per cent per year from the date prescribed for its payment until it is paid.

(2) If the amount, whether determined by the tax commission or the taxpayer, required to be withheld by the employer pursuant to ' 43-188 is not paid over to the tax commission on or before the date prescribed for its remittance, the tax commission, in addition to the interest imposed by (1) of this subsection, may add a penalty of twenty-five per cent of the amount required to be withheld and paid over.

 

(b) Installment payments on assessments, interest. If the time for payment of the tax or any installment thereof is extended, there shall be collected, as part of such tax, interest thereon at the rate of six per cent per year from the date upon which such payment should have been made if no extension had been granted until the date the tax is paid.

 

(c) Deficiency assessments, interest. Interest upon the amount assessed as a deficiency shall be assessed and paid at the same time as the deficiency at the rate of six per cent per year from the date prescribed for the payment of the tax (or, if the tax is paid in installments, from the date prescribed for the payment of the first installment) to the date the deficiency is assessed. If any portion of the deficiency is paid prior to the date it is assessed, interest shall accrue on such portion only to the date paid.

 

(d) Interest, computed where not paid upon demand. Except in the case of a jeopardy assessment, collection of which has been stayed by the posting of a bond, where a deficiency, or any interest or additional amounts imposed in connection therewith under ' 43-180(a)(d) and (e) and subsection (c) of this section, or any addition to tax in case of delinquency provided for in ' 43-180(a)(b) and (c), is not paid in full within ten days from the date of notice and demand from the tax commission, there shall be collected as a part of the tax, interest upon the unpaid amount at the rate of six per cent per year from the date of the notice and demand until it is paid. If any part of the amount prorated to any unpaid installment is not paid in full on or before the date prescribed for the payment of the installment, there shall be collected as a part of the tax, interest upon the unpaid amount at the rate of six per cent per year from that date until it is paid.

 

(e) Spouse's overpayment credited against other spouse's deficiency, interest. Where an overpayment is made by any taxpayer for any year, and a deficiency is owing from the husband or wife of the taxpayer for the same year, and both husband and wife notify the tax commission in writing prior to the expiration of the time within which credit for the overpayment may be allowed that the overpayment may be credited against the deficiency, no interest shall be assessed on such portion of the deficiency as is extinguished by the credit for the period of time subsequent to the date the overpayment was made.

 

(f) Overpayment and underpayment due to same item, interest

(1) Where an overpayment is made by any taxpayer for any year, and a deficiency is owing from the same taxpayer for any other year, the overpayment, if the period within which credit for the overpayment may be allowed has not expired, shall be credited on the deficiency, if the period within which assessment of the deficiency may be proposed has not expired, and the balance, if any, shall be credited or refunded to the taxpayer. No interest shall be assessed on such portion of the deficiency as is extinguished by the credit for the period of time subsequent to the date the overpayment was made.

(2) For the purposes of this subsection the returns of a decedent and his estate shall be considered returns of the same taxpayer and the returns for the decedent and his estate filed for the year of death shall be considered returns for different taxable years.

(3) This subsection is not intended, nor shall it be construed, as a limitation on the tax commission's right to offset or recoup barred assessments against overpayments.

 

(g) Interest, computed where related items or related taxpayers

(1) When the correction of an erroneous inclusion or deduction of an item or items in the computation of income of a trust, estate, parent or husband for any year results in an overpayment for such year by said trust, estate, parent or husband, and also results in a deficiency for the same year for a grantor of such trust or beneficiary of such estate or trust, or child of such parent, or spouse of such child, or the wife of said husband, the overpayment, if the period within which credit for the overpayment may be allowed has not expired, shall be credited on the deficiency, if the period within which the deficiency may be proposed has not expired, and the balance, if any, shall be credited or refunded. No interest shall be assessed on such portion of the deficiency as is extinguished by the credit for the period of time subsequent to the date the overpayment was made.

(2) When the correction of an erroneous inclusion or deduction of an item or items in the computation of income of a grantor of a trust, beneficiary of an estate or trust, a child, or spouse of such child, or a wife for any year results in an overpayment for such year by said grantor, beneficiary, child or wife, and also results in a deficiency for the same year for the grantor's or beneficiary's trust, the beneficiary's estate, the child's parent, or spouse of such child, or the wife's husband, the overpayment, if the period within which credit for the overpayment may be allowed has not expired, shall be credited on the deficiency, if the period within which the deficiency may be proposed has not expired, and the balance, if any, shall be credited or refunded. No interest shall be assessed on such portion of the deficiency as is extinguished by the credit for the period of time subsequent to the date the overpayment was made.

(3) Paragraphs (1) and (2) are not intended, nor shall they be construed as a limitation on the tax commission's right to offset or recoup barred assessments against overpayments.

 

(h) Offset of overpayment against deficiency -- interest. When the correction of an erroneous inclusion or deduction of an item in the computation of income of any year results in an overpayment for one year and a deficiency for another year, the overpayment, if the period within which credit for the overpayment may be allowed has not expired, shall be credited on the deficiency, if the period within which the deficiency may be proposed has not expired, and the balance, if any, shall be credited or refunded as provided in '' 43-184 and 43-186 and in any case described by this subsection no interest shall be assessed on such portion of the deficiency as is extinguished by the credit for the period of time subsequent to the date the overpayment was made.

This subsection does not limit the tax commission's right to offset or recoup barred assessments against overpayments.

 

(i) Voluntary payment of overdue taxes. If a taxpayer voluntarily files a tax return, prior to April 15, 1955, covering any period prior to January 1, 1954, or for any portion of such period not previously covered by a filed return, he shall be liable only for the amount of the tax owing for the period for which such return is filed together with interest at the rate of six per cent on any portion thereof then delinquent, but by making such voluntary filing he shall absolve himself of liability for any criminal penalties or any other penalties relating to the period for which such return is filed. Failure to voluntarily file as above provided prior to April 15, 1955, shall negative the above concessions and the taxpayers shall be liable for the full amount of taxes due together with interest and penalties, as provided by law.

 

' 43-183. Transferee liability

(a) Assessment against transferee. The taxes imposed by this title upon any taxpayer other than a transferee, for whose payment any bank or person other than the taxpayer is liable, at law or in equity, may be assessed against such bank or person in the same manner as is provided in ' 43-177 for the assessment of deficiencies and may be assessed within the periods specified in subsection (c). The provisions of this section and other provisions of this title respecting the collection of taxes shall apply to the collection of such taxes from such bank or person to the same extent and with the same force and effect as though such bank or person were the taxpayer.

 

(b) Transferred assets. The amounts of the following liabilities, except as hereinafter provided in this subsection and subsection (c), shall be assessed, collected, and paid in the same manner and subject to the same provisions and limitations as in the case of a deficiency in a tax imposed by this title (including the provisions in the case of a delinquency in payment after notice and demand, the provisions authorizing proceedings in court for collection, and the provisions prohibiting claims and suits for refunds):

(1) The liability, at law or in equity, of a transferee of property of a taxpayer, in respect of the tax (including interest, additional amounts, and additions to the tax provided by law) imposed upon the taxpayer by this title.

(2) The liability of a fiduciary under this title, in respect of the payment of any such tax from the estate of the taxpayer.

Any such liability may be either as to the amount of tax shown on the return or as to any deficiency in tax.

 

(c) Periods of limitation -- transferees. The period of limitation for assessment of such liability of a transferee or fiduciary of the taxpayer shall be as follows:

(1) In the case of the liability of an initial transferee of the property of the taxpayer, within one year after the expiration of the period of limitation for assessment against the taxpayer;

(2) In the case of the liability of a transferee of a transferee of the property of the taxpayer, within one year after the expiration of the period of limitation for assessment against the preceding transferee, but only if within three years after the expiration of the period of limitation for assessment against the taxpayer; except that if before the expiration of the period of limitation for the assessment of the liability of the transferee of a transferee, a court proceeding for the collection of the tax or liability in respect thereof has been begun against the taxpayer or last preceding transferee, respectively, then the period of limitation for assessment of the liability of the transferee of a transferee shall expire one year after the return of execution in the court proceeding;

(3) In the case of the liability of a fiduciary, not later than one year after the liability arises or not later than the expiration of the period for collection of the tax in respect of which such liability arises, whichever is the later;

(4) Where before the expiration of the time prescribed in paragraph (1), (2) or (3) for the assessment of the liability, both the tax commission and the transferee or fiduciary have consented in writing to its assessment after such time, the liability may be assessed at any time period to the expiration of the period agreed upon. The period so agreed upon may be extended by subsequent agreements in writing made before the expiration of the period previously agreed upon.

 

' 43-184. Overpayments and refunds-claim for refund

(a) Refund, when. If the department believes that there has been an overpayment of tax, penalty, or interest by a taxpayer for any year for any person, the amount of the overpayment shall be credited against any taxes then due from the taxpayer under this title and the balance refunded to the taxpayer, or its successor through reorganization, merger, or consolidation, or to its shareholders upon dissolution.

 

(b) Limitation on allowance of refund.

(1) Refund claim, when to be filed. No credit or refund shall be allowed or made after four years from the last day prescribed for filing the return provided such return has been filed in the period prescribed by law or after one year from the date of the overpayment, whichever period expires the later, unless before the expiration of the period a claim therefor is filed by the taxpayer, or unless before the expiration of the period the department certifies the overpayment to the assistant director for the division of finance for approval of the refund thereof.

(2) Refund claim, effect of extension agreements. The period within which a claim for credit or refund may be filed, or credit or refund allowed or made if no claim is filed, shall be the period within which the department may make an assessment under the same circumstances, if:

(A) The taxpayer has, within the period prescribed in the preceding sentence, agreed in writing, under the provisions of ' 43-177, to extend the time within which the department may propose an additional assessment, or

(B) The taxpayer has agreed with the United States commissioner of internal revenue for an extension (or renewals thereof) of the period for proposing and assessing deficiencies in federal income tax for any year.

(3) Extended period, when applicable. The provisions of paragraph (1) shall apply to any claim filed, or credit or refund allowed or made, before the execution of an agreement pursuant to paragraph (2).

(4) Refund claim, seven-year period in connection with bad debts, etc. Insofar as the claim for credit or refund relates to an overpayment on account of the deductibility, under ' 43-123.13, subsection A, of a debt as one which became worthless, or a loss from worthlessness of a security under ' 43-123.13, subsection B, or ' 43-123.09 or an erroneous inclusion of an amount attributable to the recovery of a bad debt, prior tax or delinquency amount, under ' 43-112(b)(17) to (21), inclusive, due to an adjustment of a bad debt deduction under ' 43-123.13, subsection A, or a loss deduction from worthlessness of a security under section 43-123.13, subsection B, or ' 43-123.09, in lieu of the period of limitations prescribed in paragraph (1), the period shall be seven years from the date prescribed in law for filing the return for the year with respect to which the claim is made.

(5) Refund -- transfer of items from one year to another. Notwithstanding any statute of limitations provided in this title, any overpayment due a taxpayer for any year which results from a transfer of items of income or deductions or both to or from another year for the same taxpayer, or for the same year for a related taxpayer described in ' 43-181(e), shall be allowed as an offset in computing any deficiency in tax for any year resulting from the transfer of such income or deductions or both, but no refund shall be allowed unless the overpayment is certified to the assistant director for the division of finance, or a claim for refund is filed within the time otherwise provided for in this title.

The offset provided herein, however, shall not be allowed after the expiration of seven years from the due date of the return on which the overpayment is determined.

 

(c) Refund claim, effect of denial. A refund claim upon which action has become final shall not thereafter be considered a refund claim within the meaning of subsection (b)(1), except to the extent to has been allowed.

 

(d) Refund claim, form. Every claim for refund shall be in writing and shall state the specific grounds upon which it is founded.

 

(e) Refund claim, notice of denial. If the department disallows any claim for refund, it shall notify the taxpayer accordingly.

 

(f) Refund claim, finality of action. At the expiration of ninety days from the mailing of the notice, the department's action upon the claim is final unless within the ninety-day period the taxpayer protests in writing to the department setting forth reasons for protest and requesting a hearing.

 

(g) Refund claim may be deemed disallowed after six months. If the department fails to mail notice of action on any refund claim within six months after the claim is filed, the taxpayer may prior to mailing of notice of action on the refund claim consider the claim disallowed and appeal to the state board of tax appeals.

 

(h) Protest to department, form and mailing. Protest shall be addressed and mailed to the department at Phoenix, Arizona.

 

(i) Hearings and appeals. Upon the filing of a protest by the taxpayer, all hearings, appeals and other proceedings shall be governed by the provisions of ' 43-177, subsection (e), subsection (f) and subsection (g).

 

(j) Payment of tax -- deemed claim for refund. If, with or after the filing of a protest or an appeal with the department of revenue, state board of tax appeals or the superior court a taxpayer pays the tax protested or appealed before the department, board or superior court acts upon the protest or the appeal, such body shall treat the protest or the appeal as a claim for refund or an appeal from the denial of a claim for refund filed under this section.

 

(k) Interest on overpayment

(1) Refund claims, interest. Interest shall be allowed and paid on any overpayment in respect to any tax, at the rate of six per cent per annum as follows:

(A) In the case of a credit, from the date of the overpayment to the date of the allowance of the credit. Any interest allowed on any credit shall first be credited on any taxes due from the taxpayer under this title.

(B) In the case of a refund, from the date of the overpayment to a date preceding the date of the refund warranty by not more than thirty days, the date to be determined by the department.

(2) Notice of denial. If the department disallows interest on any claim for refund, it shall notify the taxpayer accordingly, and thereafter such claim shall be treated, for procedural purposes, as a claim for refund.

(3) Suit, failure of action. If the department fails to mail notice of action of disallowance of interest on any refund claim within six months after the interest was claimed, the taxpayer may, prior to mailing notice of action of disallowance of interest on the refund claim, consider the interest disallowed and appeal to the board on the grounds set forth for interest in such claim for the recovery of the interest.

(4) Payment, not bona fide. A payment not made incident to a bona fide and orderly discharge of an actual liability or one reasonably assumed to be imposed by law, is not an overpayment for the purposes of paragraph (1) and interest is not payable thereon.

(5) Interest limitation -- bad debts. If a credit or refund of any part of an overpayment would be barred under subsection (b)(1), except for the provisions of subsection (b)(4), no interest shall be allowed or paid with respect to such part of the overpayment for any period beginning after the expiration of the period of limitation provided in subsection (b)(1), for filing claim for credit or refund of such part of the overpayment and ending at the expiration of six months after the date on which the claim was filed or, in case no claim was filed and the overpayment was found by the department, ending at the time the appeal was filed with the board.

 

' 43-185. Overpayments and refunds -- cancellations

Cancellation of illegal tax. If a tax has been illegally levied against a taxpayer, the tax commission shall set forth on its records the reasons therefor and thereafter shall authorize the cancellation of the tax.

 

' 43-186. Overpayments and refunds-actions against the department

(a) Legal or equitable process to enjoin assessment or collection of tax, prohibited. No injunction or writ of mandate or other legal or equitable process shall issue in any suit, action, or proceeding in any court against this state or against any officer of this state to prevent or enjoin the assessment or collection of any tax under this title.

(b) Action, taxpayer may bring. After payment of the tax and denial by the state board of tax appeals of a claim for refund any taxpayer claiming that the tax computed and assessed against him under this title is erroneous in whole or in part, or that the return of interest on any overpayment has been improperly denied, may bring an action upon the grounds set forth in his claim for refund against the department in the superior court where he resides, or if he is not a resident of Arizona, in the superior court of Maricopa county, for the recovery of the whole or any part of the amount paid, and for the recovery of such interest as may legally be owing.

(c) Action, time to be filed. The action provided by subsection (b) shall be filed within four years from the last date prescribed for filing the return provided the return was filed within the period provided by law or within one year from the date the tax was paid, or within ninety days after notice of action by the board on an appeal from the action of the department on a claim for refund, whichever period expires the later.

(d) Action, service of complaint. Whenever an action is commenced against the department under this title a copy of the complaint and the summons shall be served upon the department or the director. A second copy of the complaint and the summons shall be furnished to the department, but this requirement is not jurisdictional.

(1) Actions, department of law to defend. The department of law shall defend the action. In any such action the court may render judgment for plaintiff for any part of the tax, interest, penalties or costs found to be void.

(2) Action barred by statute of limitations. Failure to begin an action within the time specified in this section shall be a bar against the recovery of taxes.

(3) Trial de novo. The superior court shall hear and determine the appeal as a trial de novo.

(4) Appeal from superior court. Within sixty days after the entry of judgment either party may appeal in the manner provided for appeals from the judgment of a superior court.

 

(e) Actions

(1) Interest on judgment. In any judgment of any court rendered for any overpayment, interest shall be allowed at the rate of six per cent per annum upon the amount of the overpayment, from the date of the payment or collection thereof to the date of allowance of credit on account of such judgment or to a date determined by the department preceding the date of the refund warrant by not more than thirty days.

(2) Payment of judgment. If judgment is rendered against the department, the amount thereof shall first be credited against any taxes and interest due from the taxpayer under this title and the remainder refunded to the taxpayer by the state treasurer on warrants drawn by the assistant director for the division of finance.

 

' 43-188. Collection of tax-information at source; withholding tax

(a) Information at source and withholding. This section does not apply to the payment of interest obligations not taxable under this title.

 

(b) Information at source, general. Every individual, estate, trust, partnership, corporation, joint stock company or association, insurance company, business trust, or so-called Massachusetts trust, being a resident or having a place of business in this state, in whatever capacity acting, including lessees or mortgagors of real or personal property, fiduciaries, employers, and all officers and employees of this state or any political subdivision of this state, or any city organized under a charter, or any political body not a subdivision or agency of the state, having the control, receipt, custody, disposal, or payment of interest (other than interest coupons payable to bearer), dividends, rent (except rent paid by the individual taxpayer with respect to his personal dwelling), salaries, wages, premiums, annuities, compensations, remunerations, emoluments, or other fixed or determinable annual or periodical gains, profits, and income amounting to three hundred dollars or over, paid or payable during any year to any taxpayer, shall make a complete return to the department of revenue, which shall contain or be verified by a written declaration that it is made under the penalties of perjury, under such regulations and in such form and manner and to such extent as may be prescribed by it setting forth the amount of such gain, profits and income, and the name and address of the recipient of such payment.

 

(c) Information at source returns -- patronage dividends. Any corporation allocating amounts as patronage dividends, rebates, or refunds (whether in cash, merchandise, capital stock, revolving fund certificates, retain certificates, certificates of indebtedness, letters of advice, or in some other manner that discloses to each patron the amount of such dividend, refund, or rebate) shall render a correct return, which shall contain or be verified by a written declaration that it is made under the penalties of perjury stating the name and address of each patron to whom it has made such allocations amounting to one hundred dollars or more during the calendar year, and the amount of such allocations to each patron. If required by the department, any such corporation shall render a correct return, which shall contain or be verified by a written declaration that it is under penalties of perjury, of all patronage dividends, rebates, or refunds made during the calendar year to its patrons. This subsection shall not apply in the case of any corporation exempt from tax under ' 43-147.

 

(d) Information at source returns, on income from securities. The return described in subsection (b) may be required, regardless of amounts, in the case of

(1) Payments of interest upon bonds, mortgages, deeds of trust, or other similar obligations of corporations.

(2) Dividends paid by corporations.

(3) Collections of items (not payable in the United States) of interest upon the bonds of foreign countries and interest upon the bonds of and dividends from corporations created or organized in a foreign country by persons undertaking as a matter of business or for profit the collection of foreign payments of such interest or dividends by means of coupons, checks, or bills of exchange.

 

(e) Withholding, agent entitled to address of recipient. When necessary to make effective the provisions of this section, the name and address of the recipient of income shall be furnished upon demand of the person paying the income.

The department shall furnish the person paying the income with forms to be signed by the person from whom the tax is being withheld. Such forms shall provide for the information the department deems necessary.

 

(f) Withholding tax.

(1) On and after January 1, 1974, every employer at the time of the payment of wages, salary, bonus or other emolument to any employee whose compensation is for services performed within this state shall deduct and retain therefrom an amount equal to ten per cent or twenty per cent of the total amount of the federal income tax deducted and withheld by an employer from the total value of such wages, bonus or other emolument of an employee under the provisions of the internal revenue code of the United States computed without deductions for any amount withheld, and shall, quarterly, on or before the last day of April, July, October and January of each year, pay over to the department the amount so collected during the preceding calendar quarter. Each employee shall elect which percentage of the federal income tax deducted and withheld, ten per cent or twenty per cent, shall be withheld for application toward his state income tax liability. For the purposes of this section the term "employer" means the person for whom an individual performs or performed any service, of whatever nature, as the employee of such person including any officer or department of the state or any political subdivision or agency of the state, or any city organized under a charter, or any political body not a subdivision or agency of the state, except that if the person for whom the individual performs or performed the services does not have control of the payment of the wages for such services, the term "employer" means the person having control of the payment of such wages.

(2) The election provided under ' 43-188(f)(1) shall be exercised by each employee, in writing on a form prescribed by the department. The election must be made within five days of employment. Each employer shall notify his employees of the election made available under ' 43-188(f)(1) and shall have election forms available at all times. Each form shall be completed in triplicate, with one copy each for the department, the employer and the employee. It shall be the duty of the employer to file a copy of each completed form with the department. Any employee failing to complete an election form as prescribed shall be deemed to have elected the smallest withholding percentage provided for in ' 43-188(f)(1).

(3) The amounts deducted from the wages of an employee during any calendar year in accordance with the provisions of this subsection shall be considered to be paid in part payment of the tax on such employee's taxable income for his tax year which begins within such calendar year, and the return made by the employer pursuant to paragraph (6) may be accepted by the department as prima facie evidence of the amounts so deducted from his wages.

(4) No amount shall be deducted or retained from:

(A) Wages paid for active service in the military or naval forces of the United States.

(B) Wages or salary paid to an employee of a common carrier when such employee is a nonresident of Arizona as defined in ' 43-101 and regularly performs services both within and without the state of Arizona.

(C) Wages paid for domestic service in a private home.

(D) Wages paid for casual labor not in the course of the employer's trade or business.

(E) Wages paid to part-time or seasonal employees whose services to the employer consist solely of labor in connection with the planting, cultivating, harvesting or field packing of seasonal agricultural crops, except such employees whose principal duties are operating any mechanically driven device in such operations.

(5) In the case of nonresident employees who are residents of another state of the United States or the District of Columbia and are allowed a tax credit for income taxes paid to their state of residency or domicile under the provisions of ' 43-128(b)(1) sufficient in amount to offset the tax required by this section to be withheld from the wages of an employee, the department may by rules and regulations relieve the employers of such employees from withholding requirements of this section with respect to such employees.

(6) When the total amount deducted under this subsection exceeds the amount of the tax on the employee's entire taxable income as computed under this title, the department shall, after auditing the annual return filed by the employee in accordance with ' 43-142, and without requiring a filing of a refund claim as provided in ' 43-184(b)(1), refund the amount of the excess deducted, without interest thereon. Failure of the department to make such refund shall not limit the right of the taxpayer to file a claim for a refund as provided in ' 43-184. No refund shall be made to an employee who fails to file such return within one year from the due date of the return in respect of which the tax withheld might have been credited. If the excess tax deducted is less than one dollar, no refund shall be made unless specifically requested by the taxpayer at the time such return is filed. In no event shall any excess be allowed as a credit against any tax accruing on a return filed for a year subsequent to the year during which such excess was withheld, the provisions of ' 43-184 notwithstanding.

The department may make separate refunds of withheld taxes upon request by a husband or wife who has filed a joint return, the refund payable to each spouse being proportioned to the gross earnings of each shown by the information returns filed by the employer or otherwise shown to the satisfaction of the department. If a taxpayer entitled to a refund under this subsection dies, the department may certify to the division of finance that the refund be made to the taxpayer's executor, administrator, or duly appointed representative.

(7) Every employer shall, with each payment made by him to the department, deliver to the department a return in the form prescribed by the department, showing the total amount of wages, salaries, bonuses or other emoluments paid to his employees, the amount deducted therefrom in accordance with the provisions of this subsection, and such other information as the department may require. The employer is charged with the duty of advising the employee of the amount of moneys withheld, in accordance with such regulations as the department may prescribe, using printed forms furnished by the department for such purposes, or when requested by the employer upon forms approved by the department.

The employer shall make an annual return for the calendar year to the department on forms provided by it, summarizing the total compensation paid and the tax withheld for each employee during the calendar year and shall file the same with the department before February 16 of the year following the year for which the report is made. The return required in the preceding sentence shall contain or be verified by a written declaration that it is made under the penalties of perjury, and the information contained in said return shall satisfy the requirements of ' 43-188(b) relating to the salaries and wages included in the report required under this paragraph.

The employer shall, within thirty days after the end of each calendar year, furnish such employee with either a statement of the amount withheld during the previous tax year, showing the gross earnings and the amount of tax withheld, or, if the termination of employment is prior to the end of the year, then, within fifteen days after the termination of employment, a summary statement showing the total earnings for the tax year and the amount of taxes withheld from compensation.

 

(g) Liability for failure to withhold; failure to remit; classification.

(1) The employer shall be liable to the department for the payment of the tax required to be deducted and withheld under this section, and the employee shall not thereafter be liable for the amount of any such payment, nor shall the employer be liable to any person or any employee for the amount of any such payment. For the purpose of making penalty sections of this title applicable, any amount deducted or required to be deducted and remitted io the department under this section shall be considered the tax of the employer and with respect to such amounts he shall be considered as a taxpayer.

(2) Whenever any employer is required to collect or withhold the tax imposed by this title from any employee and to pay such tax over to the department, the amount of tax so collected or withheld shall be held to be a special fund in trust for the state of Arizona. The amount of such fund shall be assessed, collected, and paid in the same manner and subject to the same provisions and limitations (including penalties) as are applicable with respect to the taxes from which such fund arose.

(3) Any employer intrusted with, or having in his control any tax required to be collected or withheld and constituting a "special fund in trust for the state of Arizona" pursuant to this subsection, who fraudulently appropriates, or secretes with a fraudulent intent to appropriate, to any use or purpose not in the due and lawful execution of the trust, pursuant to this section, any portion thereof, is guilty of a class 4 felony.

 

(h) Withholding agent, must pay without resorting to action. Any person required to withhold and transmit any amount pursuant to this section shall Comply with the requirement without resort to any legal or equitable action in a court of law or equity.

 

(i) Withholding tax, refund therefor. Any taxpayer from whom a tax is collected by withholding under this title is entitled to the remedies set forth in '' 43-163(b), 43-175(l), 43-184 to 43-186 and 43-195(c) except where such sections are in conflict with this section.

 

(j) Extension of withholding to annuities.

(1) For the purposes of this title, any payment of an annuity to an individual, if at the time the payment is made a request by the individual that such annuity be subject to withholding under this section is in effect, shall be treated as if it were a payment of wages by an employer to an employee for a payroll period.

(2) For purposes of this subsection, the term "annuity" means any amount paid to an individual as a pension or annuity, but only to the extent that the amount is includable in the gross income of such individual, pursuant to ' 43-112.

(3) A request that an annuity be subject to withholding under this section shall be made by the payee in writing to the person making the annuity payments, and shall be accompanied by a form, prescribed by the department, executed in accordance with the provisions of subsection (f), paragraph (2). Such a request may be terminated by furnishing to the person making the payment a written statement of termination.

 

' 43-189. Nonresident wages; applications to commission

In addition to the exemptions from the withholding provisions contained in subsection (f), paragraph 3, ' 43-188, because of the temporary nature of such employment no amount shall be deducted or retained from wages paid to a nonresident of Arizona engaged in any phase of motion picture production when, prior to the time of payment of such wages, an application is made by the employer to the commission, on forms prescribed by the commission, for an exemption from the withholding provisions of this section, and the commission determines that the nonresident would be allowed a credit under subsection (b) of ' 43-128 against all of the taxes upon such wages imposed by this chapter.

 

' 43-191. Lien of tax -- judgment for tax -- priority of tax claim

(a) Lien

(1) Recording certificate. If any tax, interest or penalty imposed by this title is not paid when due, the department may within four years after the amount of the tax, interest and penalty is due, record in the office of any county recorder a certificate specifying the amount of the tax, interest and penalty due, the name and last known address of the taxpayer liable for the amount, and the fact that the department has complied with all provisions of this title in the determination of the amount required to be paid. From the time of recording, the amount of the tax, interest and penalty set forth constitutes a lien upon all property of the taxpayer in the county, owned by a taxpayer or afterward and before the lien expires acquired by him. The lien has the force, effect and priority of a judgment lien and shall continue for five years from the time of the recording of the certificate unless sooner released or otherwise discharged. The lien may, within five years from the date of the recording of the certificate or within five years from the date of the last extension of the lien in the manner herein provided, be extended by recording a new certificate in the office of the county recorder of any county and from the time of such recording the lien shall be extended to the real property in such county for five years unless sooner released or otherwise discharged.

(2) Release of lien. The department may, at any time, release all or any portion of the property subject to the lien from the lien or subordinate the lien to other liens if it determines that the taxes are sufficiently secured by a lien on other property of the taxpayer or that the release or subordination of the lien will not endanger or jeopardize the collection of such taxes. A certificate by the department to the effect that any property has been released from the lien or that such lien has been subordinated to other liens shall be conclusive evidence that the property has been released or that the lien has been subordinated as provided in the certificate. When any lien established by this section has been satisfied, the department shall issue a release of such lien to the person against whom the lien was claimed. Such release shall be a document in a form as specified in ' 11-480.

 

(b) Judgment for tax

(1) Actions, generally. If any tax, interest, or penalty imposed under this title is not paid when due, the department may file with the clerk of the superior court of Maricopa county or any other county, a certificate specifying the amount of the tax, penalty, and interest due, the name and last known address of the taxpayer liable for the amount due, and the fact that the department has complied with all provisions of this title in the computation and levy of the tax, and a request that judgment be entered against the taxpayer in the amount of the tax, penalty, and interest set forth in the certificate.

(2) Actions, judgment after certificate. The clerk of the superior court immediately upon the filing of the certificate shall enter a judgment for the state of Arizona against the taxpayer in the amount of the tax, penalty, and interest set forth in the certificate. The clerk of the superior court may file the judgment in a loose-leaf book entitled "Income Tax Judgments".

(3) Abstract becomes lien. An abstract or a copy of the judgment may be recorded with the county recorder of any county. From the time of the recording, the amount of the tax, penalty, and interest set forth constitutes a lien upon all property of the taxpayer in the county, owned by him or afterwards and before the lien expires acquired by him. The lien has the force, effect and priority of a judgment lien and continues for five years from the date of the recording unless sooner released or otherwise discharged.

(4) Lien, extension. Within five years from the date of the recording or within five years from the date of the last extension of the lien in the manner provided in this section, the lien may be extended by recording in the office of the county recorder of any county an abstract or copy of the judgment. From the time of the recording the lien extends to the property in the county for five years unless sooner released or otherwise discharged.

 

(c) Priority of tax claim. The amounts required to be paid by any person under this title together with interest and penalties shall be satisfied first in any of the following cases:

(1) Whenever the person is insolvent;

(2) Whenever the person makes a voluntary assignment of his assets;

(3) Whenever the estate of the person in the hands of executors, administrators, or heirs is insufficient to pay all debts due from the deceased;

(4) Whenever the estate and effects of an absconding, concealed, or absent person required to pay any amount under this title are levied upon by process of law.

This subsection does not give the state a preference over any recorded lien which attached prior to the date when the amounts required to be paid became a lien.

 

' 43-192. Seizure and sale

(a) Seizure and sale at public auction. At any time within which an action can be brought to collect any delinquent amounts as provided in ' 43-193, the tax commission may collect the tax, together with penalties and interest, in the following manner: The tax commission shall seize any personal property owned by the taxpayer against whom the tax is assessed, and thereafter sell at public auction such property so seized, or a sufficient portion thereof, to pay the tax due hereunder, together with any interest, and any penalty or penalties imposed hereby for such delinquency, and any and all costs that may have been incurred on account of such seizure and sale. Notice of such intended sale and the time and place thereof, shall be given to such delinquent taxpayer and to all persons appearing of record to have an interest in such property, in writing at least ten days before the date set for such sale by enclosing such notice in an envelope addressed to said taxpayer at its last known place of business in this state, if any, and, in the case of any person appearing of record to have an interest in such property, addressed to such person at the last known place of residence, if any, and depositing the same in the United States mail, postage prepaid, and by publication for at least ten days before the date set for such sale in a newspaper of general circulation published in the county in which the property seized is to be sold; provided, however, that if there be no newspaper of general circulation in such county then by the posting of such notice in three public places in such county for said ten-day period. The said notice shall contain a description of the property to be sold, together with a statement of the amount of the taxes, interest, penalties and costs, together with a statement of the amount of the taxes, interest, penalties and costs, the name of the taxpayer, and the further statement that, unless such taxes, interest, penalties and costs are paid on or before the time fixed in said notice for such sale, said property, or so much thereof as may be necessary, will be sold in accordance with law and said notice.

 

(b) Disposition of proceeds of sale. At any such sale, the property shall be sold by said tax commission or its duly authorized agent in accordance with law and said notice, and the tax commission shall deliver to the purchaser a bill of sale for the property so sold and such bill of sale shall vest title in the purchaser. The unsold portion of any property so seized may be left at the place of sale at the risk of said taxpayer. If, upon any such sale, the moneys so received shall exceed the amount of all taxes, interest, penalties and costs due the state from such taxpayer, any such excess shall be returned to the taxpayer and a receipt therefor obtained; provided, however, that if any person having an interest in or lien upon the property has filed with the tax commission prior to any such sale notice of such interest or lien the tax commission shall withhold any such excess pending a determination of the rights of the respective parties thereto by a court of competent jurisdiction.

If, for any reason, the receipt of such taxpayer shall not be available, the tax commission shall deposit such excess moneys with the state treasurer, as trustee for such owner, subject to the order of such taxpayer or its successor through reorganization, merger, or consolidation, or its stockholders upon dissolution.

 

' 43-193. Collection of tax -- suit for tax

(a) Action to recover tax. The tax commission may, within six years after the determination of liability for any tax, penalties, and interest, or any installment thereof, bring an action in a court of competent jurisdiction in the name of the state of Arizona to recover the amount of any taxes, penalties, and interest due and unpaid under this title.

 

(b) Suits, who prosecutes and where. The department of law shall prosecute the action. The action shall be tried in the county of Maricopa unless the court with the consent of the prosecutor orders a change of place of trial.

 

(c) Suits, writ of attachment. In the action a writ of attachment may be issued, and no bond or affidavit previous to the issuing of the attachment is required.

 

(d) Suits, effect of certificate by tax commission. In an action a certificate by the tax commission showing the delinquency shall be prima facie evidence of the levy of the tax, of the delinquency, and of the compliance by the tax commission with all the provisions of this title in relation to the computation and levy of the tax.

 

(e) Action, outside of Arizona. The tax commission may bring an appropriate action, whether in the form of a common law action or debt or indebitatus assumpsit or a code or other action, in any court of competent jurisdiction in the United States or in a foreign country, in the name of the state of Arizona, to recover the amount of any taxes and interest due under this title. The department of law shall prosecute the action.

 

' 43-195. Collection of tax

(a) Execution procedure by warrant. A warrant may be issued by the tax commission for the collection of any tax, interest or penalty and for the enforcement of any lien, directed to any sheriff, constable or marshal. The warrant shall have the same force and effect as a writ of execution. It may and shall be levied and sale made pursuant to it in the same manner and with the same force and effect as a levy of and sale pursuant to a writ of execution.

The tax commission shall pay or advance to the sheriff, constable or marshal, the same fees, commissions and expenses in connection with services pursuant to said warrant as are provided by law for similar services pursuant to a writ of execution; provided, that fees for publication in a newspaper shall be subject to approval by the tax commission rather than by the court. Such fees, commissions and expenses shall be an obligation of the taxpayer and may be collected from the taxpayer by virtue of the warrant or in any other manner provided in this title for the collection of a tax.

 

(b) Execution procedure on judgment. Execution shall issue upon the judgment provided for in ' 43-191(b) upon request of the tax commission in the same manner as execution may issue upon other judgments, and sales shall be held under such execution as are prescribed for other executions by title 12.

 

(c) Recovery of erroneous refunds

(1) Action for recovery. The tax commission may recover any refund or credit or any portion thereof which is erroneously made or allowed, together with interest at the rate of six per cent per annum from the date the refund was made or the credit allowed, in an action brought within two years after the refund or credit was made in a court of competent jurisdiction in the county of Maricopa in the name of the tax commission.

(2) Venue. The action shall be tried in the county of Maricopa unless the court with the consent of the department of law orders a change of place of trial.

(3) Department of law to prosecute. The department of law shall prosecute the action, and the rules for civil procedure in the superior courts of Arizona, as amended, relating to services of summons, pleadings, proofs, trials, and appeals are applicable to the proceedings.

 

(d) Miscellaneous provisions

(1) Remedies, cumulative. The remedies of the state provided for in this title are cumulative, and no action taken by the tax commission constitutes an election by the state to pursue any remedy to the exclusion of any other remedy for which provision is made in this title.

(2) Tax commission to act for state. In all proceedings under this title the tax commission may act on behalf of the state of Arizona.

 

' 43-196. Disposition of proceeds

(a) Collections, transmitted to state treasurer. The department of revenue shall transmit promptly to the state treasury all monies and remittances received by it under this title as provided in subdivision (b) of this section. It shall at the same time furnish copies of the schedules covering the transmittals to the assistant director for the division of finance.

 

(b) Income tax fund, urban revenue sharing fund, collections deposited therein.

All moneys and remittances so received and so transmitted shall be deposited, after clearance of remittance, in the state treasury and the state treasurer shall credit the same to the specific funds as instructed by the department of revenue, as follows:

(i) Sixteen percent to the income tax fund;

(ii) Amounts sufficient to meet the requirements of ' 43-196.01 to the urban revenue sharing fund, and

(iii) The remainder to the general fund.

 

(c) Income tax fund, use for refunds. The assistant director for the division of finance will draw all sums to be used for making refunds under this title from the income tax fund.

 

(d) Income tax fund, transfers to general fund. At any time during the fiscal year when it appears that the amount in the income tax fund is in excess of the amount required for refunds, the assistant director for finance shall, with concurrence by the director of the department of revenue, transfer such excess amount to the general fund. If such transfers reduce the amount in the income tax fund below the amount required for refunds, the assistant director for finance shall adjust the amount transferred for redeposit in the income tax fund to pay such refunds. Any amount remaining in the income tax fund on June 30 of each year in excess of two hundred thousand dollars shall be deposited in the general fund.

 

' 43-196.01. Establishment and distribution of urban revenue sharing fund

A. Commencing with the fiscal year 1973-74, there is hereby established an urban revenue sharing fund which shall, each fiscal year, consist of an amount equivalent to fifteen percent of the net proceeds of the state income taxes for the fiscal year two years prior to the current fiscal year. The fund shall be distributed to incorporated cities and towns as provided in this section.

 

B. Each city or town shall share in the urban revenue sharing fund in the proportion that the population of each bears to the population of all as determined by the United States Bureau of the Census pursuant to the provisions of '' 42-1341 and 42-1341.01.

 

C. Commencing with July, 1973, the treasurer, upon instruction from the tax commission, shall transmit, no later than the tenth day of each month, to each city or town an amount equal to one-twelfth of that city's or town's total entitlement for the then current fiscal year from the urban revenue sharing fund as determined by the tax commission.

 

D. A newly incorporated city or town shall share in the urban revenue sharing fund beginning the first month of the first full fiscal year following incorporation.

 

' 43-197. Cessation of activities; classification

(a) Tax clearance. No decree of involuntary dissolution shall be made, entered, or filed by any court or the clerk thereof nor shall the corporation commission file any such decree or any document by which the term of existence of any corporation shall be voluntarily reduced or terminated, or any certificate of the surrender by a foreign corporation of its right to do business in this state unless the taxpayer obtains from the tax commission and files with said court, clerk or corporation commission, as the case may be, a certificate to the effect that the tax commission is satisfied from the available evidence that all taxes imposed by this title have been paid or are secured by bond, deposit or otherwise. Within thirty days after receiving a request for a certificate, the tax commission shall either issue the certificate or notify the person requesting the certificate of the amount of tax that must be paid or the amount of bond, deposit or other security that must be furnished as a condition of issuing the certificate. The issuance of the certificate shall not relieve the corporation or any individual from liability for any taxes, penalties, or interest imposed by this title.

 

 

(b) Suspension or forfeiture

(1) Powers of corporation -- suspension for non-payment of tax. Except for the purpose of amending the articles of incorporation to set forth a new name, the corporate powers, rights and privileges of a domestic corporation shall be suspended, and the exercise of the corporate powers, rights and privileges of a foreign corporation in this state shall be forfeited if any of the following conditions occur:

(A) If any tax, penalty or interest, or any portion thereof, which is due and payable either at the time the return is required to be filed, or on or before the fifteenth day of the ninth month following the close of the income year, is not paid on or before 5 o'clock p.m. on the last day of the twelfth month after the close of the income year; or

(B) If any tax, penalty or interest, or any portion thereof, other than jeopardy or fraud assessments, due and payable upon notice and demand from the tax commission, is not paid on or before 5 o'clock p.m. on the last of the eleventh month following the due date of said tax; or

(C) If any jeopardy or fraud assessment, or any interest or penalty thereon, is not paid within forty days from the date such tax, penalty and interest are due and payable upon notice and demand from the tax commission, unless the bond permitted by ' 43-178(c) is filed to stay the collection of said tax, penalty and interest, and said tax, interest and penalty are paid within sixty days after notice by the tax commission on the taxpayer's petition for reassessment.

(2) Certificate of suspension. The tax commission shall transmit the name of such delinquent corporation to the corporation commission, and the suspension or forfeiture herein provided for shall thereupon become effective and the certificate of the corporation commission shall be prima facie evidence of such suspension or forfeiture.

(3) Penalty -- exercise of powers after suspension. Any person who attempts or purports to exercise any of the rights, privileges or powers of any such corporation, except as hereinabove permitted, or who transacts any intrastate business in the state in behalf of any such foreign corporation, shall be guilty of a class 1 misdemeanor. The jurisdiction of such offense shall be held to be in any county in which any part of such attempted exercise of such powers, or any part of such transaction of business occurred, and the county attorney of the county must prosecute such offense. In addition to the penal provisions in this paragraph, any taxpayer which transacts business during the period of suspension or forfeiture shall be subject to tax under the provisions of this title.

(4) Voidable contracts. Every contract made in violation of this subsection is hereby declared to be voidable, at the instance of any party other than the taxpayer.

(5) Application for revivor. Any taxpayer which has suffered the suspension or forfeiture provided for in paragraph (1) may be relieved therefrom upon making application therefor in writing to the tax commission and upon payment of the tax and the interest and penalties for nonpayment of which the suspension or forfeiture occurred, together with all other taxes, deficiencies, interest and penalties due under this title, and upon the issuance by the tax commission of a certificate of revivor. Application for such certificate on behalf of any domestic corporation which has suffered such suspension may be made by any stockholder or creditor or by a majority of the surviving trustees or directors thereof, application for such certificate may be made by any foreign corporation which has suffered such forfeiture or by any stockholder or creditor thereof.

(6) Clearance -- corporation commission. Before such certificate of revivor is issued by the tax commission it shall obtain from the corporation commission an endorsement upon such application of the fact that such corporation then qualifies for revival of corporate powers, rights and privileges. Upon the issuance of such certificate by the tax commission the taxpayer therein named shall become reinstated but such reinstatement shall be without prejudice to any action, defense or right which has accrued by reason of the original suspension or forfeiture. The certificate of revivor shall be prima facie evidence of such reinstatement and such certificate may be recorded in the office of the county recorder of any county of this state. A copy of such certificate shall be forwarded to the corporation commission for its files.

 

' 43-199. General provisions

(a) Object of tax. The object for which the taxes are imposed by this title is to assist in defraying the cost of maintenance of the state government, and to lessen the burden in this regard resting upon tangible property. All taxes collected under the provisions of this title shall be used, together with revenue from other sources, to pay appropriations for the maintenance of the state government.

 

(b) Severability. If any provision of this title be held invalid, such invalidity shall not affect other provisions which can be given effect without the invalid provision, and to this end the provisions of this title are declared to be severable.

 

(c) Repeal; savings clause

(1) The "Income Tax Act of 1933", being section 73-1501 to 73-1551, inclusive, as amended, Arizona Code of 1939, is repealed.

(2) Such repeal shall not affect any act done or any right accruing or accrued, or any suit or proceeding had or commenced in any civil cause before the said repeal, but all rights and liabilities under said act shall continue, and may be enforced in the same manner, as if said repeal had not been made.

(3) All offenses committed, and all penalties, assessments, or forfeitures incurred or imposed under said act repealed, may be prosecuted and punished in the same manner and with the same effect as if this title had not been passed.

 

(d) Source of legislation. The language of parts of the United States internal revenue code and parts 10 and 11, revenue and taxation code of California, has been used to aid the judges and administrators who shall interpret this title, and the taxpayers and their representatives who practice before them.

 

(e) Cross references. The cross references in this title to other portions of the title, where the word "see" is used, are made only for convenience and shall be given no legal effect.

 

 

STATE BOARD OF EQUALIZATION REGULATIONS

 

1996 Michael G. Galloway

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