For the purpose of this chapter, the following terms shall have the respective meanings ascribed by this section:

(1) CASH. Any legal tender, negotiable paper, or solvent credit.

(2) CORPORATION. The term includes associations, joint stock companies, and any other entity classified as an association taxable as a corporation for federal income tax purposes.

(3) DISREGARDED ENTITY. A limited liability entity that is disregarded for purposes of federal income tax or a qualified subchapter S subsidiary, as defined in 26 U.S.C. §1361.

(4) DOMESTIC. When applied to a corporation or subchapter K entity means created or organized under the laws of the State of Alabama.

(5) FIDUCIARY. A guardian, trustee, executor, administrator, receiver, conservator, or any person acting in any fiduciary capacity for any person.

(6) FISCAL YEAR. An accounting period of twelve months ending on the last day of any month other than December.

(7) FOREIGN. When applied to a corporation or a subchapter K entity means created or organized under a jurisdiction other than the State of Alabama.

(8) HEAD OF FAMILY. As used in this chapter, the term 'head of family' has the same meaning as the term 'head of household' as defined in 26 U.S.C. §2(b).

(9) INTANGIBLE EXPENSES AND COSTS. Any expenses, losses, and costs for, related to, or in connection directly or indirectly with the acquisition, use, maintenance, management, ownership, sale, exchange, or disposition of intangible property to the extent such amounts are allowed as deductions in determining taxable income before operating loss deduction and special deductions for the taxable year including, without limitation, expenses or losses related to or incurred in connection directly or indirectly with factoring transactions or discounting transactions, royalties, patents, technical and copyright licensing fees, and other similar expenses and costs. Intangible expenses and costs paid for the use of intangible property in this state are, to the recipient, income derived from sources within Alabama.

(10) INTANGIBLE PROPERTY. Patents, patent applications, trade names, trademarks, service marks, franchises, know-how, formulas, designs, patterns, processes, formats, copyrights and similar types of intangible assets, choses in action, and accounts receivable.

(11) INTEREST EXPENSES AND COSTS. Amounts directly or indirectly allowed as deductions under 26 U.S.C. §163 for purposes of determining taxable income under the Internal Revenue Code. Interest expenses and costs paid to a related member by a subchapter K entity or a corporation, to the extent apportioned to Alabama by the payor, are to the recipient related member income derived from sources within Alabama.

(12) PAID. For the purpose of deductions and credits hereinafter provided for with respect to income tax means paid or accrued or paid or incurred, and the terms 'paid or accrued' and 'paid or incurred' shall be construed according to the method of accounting on the basis of which the net income is computed under this chapter.

(13) PERSON. Any individual, trust, estate, corporation, association, disregarded entity, or subchapter K entity.

(14) RELATED ENTITY. A stockholder who is an individual, or a member of the stockholder's family enumerated in Section 318 of the Internal Revenue Code, if the stockholder and the members of the stockholder's family own, directly, indirectly, beneficially, or constructively, in the aggregate, at least fifty percent of the value of the taxpayer's outstanding stock; a stockholder, or a stockholder's partnership, limited liability company, estate, trust or corporation, if the stockholder and the stockholder's partnerships, limited liability companies, estates, trusts, and corporations own directly, indirectly, beneficially or constructively, in the aggregate, at least fifty percent of the value of the taxpayer's outstanding stock; or a corporation, or a party related to the corporation in a manner that would require an attribution of stock from the corporation to the party or from the party to the corporation under the attribution rules of 26 U.S.C. §318, if the taxpayer owns, directly, indirectly, beneficially, or constructively, at least fifty percent of the value of the corporation's outstanding stock. The attribution rules of 26 U.S.C. §318 shall apply for purposes of determining whether the ownership requirements of this subdivision have been met.

(15) RELATED MEMBER. A person that, with respect to the taxpayer any time during the taxable year, is a related entity as defined in this section, a component member as defined in 26 U.S.C. §1563(b) of a controlled group of which the taxpayer is also a component, or is a person to or from whom there is attribution of stock ownership in accordance with 26 U.S.C. §1563(e).

(16) REPORT FROM SOURCE. All individuals, corporations, associations, and partnerships, in whatever capacity acting, including lessees or mortgagors of real or personal property, fiduciaries, employers, and all other officers and employees of the state or of any municipal corporation or political subdivision of the state having control, receipt, custody, or payment of interest, rent, salaries, wages, premiums, annuities, compensation, remunerations, emoluments, barter income, or other fixed or determinable annual or periodical gains, profits, and income taxable under this chapter.

(17) SUBCHAPTER K ENTITY. A partnership, including a limited partnership or limited liability partnership, limited liability company, or any other entity subject to subchapter K of the Internal Revenue Code, 26 U.S.C. §§ 701 to 761, for federal income tax purposes, not including a single member limited liability company.

(18) TAXABLE YEAR. The calendar year or the fiscal year ending during the calendar year upon the basis of which net income is computed, or a period of less than twelve months resulting from a change in accounting period as provided in Section 40-18-30.

(19) TAXPAYER. Any person subject to a tax imposed by this chapter, or whose income is, in whole or in part, subject to a tax imposed by this chapter.

(a) For purposes of this chapter, the statement that gain, loss, income, basis, earnings and profits, or any other item shall be determined in accordance with a specified section or sections of Title 26 United States Code (26 U.S.C.) or a specified federal public law (Pub. L. or P.L.) means that the principles set forth in such specified section or sections and the computations required by such section or sections shall be applied for purposes of this chapter, but shall be applied to the amounts of gain, loss, income, basis, earnings, and profits or other items determined for purposes of this chapter and not to such items for federal income tax purposes.

(b) The Legislature hereby finds and declares that the adoption by this state for its personal and corporate income tax purposes of certain provisions of the laws of the United States relating to the determination of income for federal income tax purposes will (1) simplify preparation of state income tax returns by taxpayers, (2) improve enforcement of the state income tax laws through better use of information obtained from federal income tax audits, and (3) aid the interpretation of the state tax laws through increased use of federal judicial and administrative determinations and precedents. The Legislature does therefore declare that the amendments to this section are intended to accomplish the foregoing purposes. Accordingly, for the purposes of this chapter, the term '26 U.S.C.' means the Internal Revenue Code, Title 26 of the United States Code, as in effect from time to time.

(c) The Department of Revenue shall have the authority to prescribe rules and regulations necessary to implement the principles stated above in the enforcement of this chapter.

In addition to all other taxes now imposed by law, there is hereby levied and imposed a tax on the taxable income, as defined in this chapter, which tax shall be assessed, collected, and paid annually at the rate specified herein and for each taxable year as hereinafter provided. Persons and subjects taxable under this chapter are:

(1) Every individual residing in Alabama;

(2) Every corporation domiciled in Alabama or licensed or qualified to transact business in Alabama;

(3) Every corporation doing business in Alabama or deriving income from sources within Alabama, including income from property located in Alabama;

(4) Every resident individual or corporation acting in a fiduciary capacity;

(5) Every estate and trust resident in the State of Alabama;

(6) Every nonresident individual receiving income from property owned or business transacted in Alabama;

(7) Every natural person domiciled in the State of Alabama, and every other natural person who maintains a permanent place of abode within the state or spends in the aggregate more than seven months of the income year within the state, shall be presumed to be residing within the state for the purposes of determining liability for income taxes under this chapter.

All income earned from any missionary service rendered by a foreign missionary while he or she is physically present in a foreign country or countries for a minimum of 24 months and is employed or appointed by a church or other like religious organization is hereby exempted from any state income taxation or like taxation by whatever name called.

The salaries, fees, commissions or other income of officers or agents of the United States or its agencies and instrumentalities or its contractees, received from the United States or from its agencies and instrumentalities, shall be subject to income taxes levied by the State of Alabama as other income is taxed, but without discrimination, and only to the same extent and in the same manner as other income is taxed, insofar as the State of Alabama may be constitutionally or legally authorized to tax such income; provided, that money paid by the United States to a person as compensation for active service as a member of the armed forces of the United States in a combat zone designated by executive order of the President of the United States shall not be subject to income taxes levied by the State of Alabama for the calendar year 1965 or any subsequent year.

Interest or other income on obligations of the United States, or its possessions, or interest or other income on bonds or other securities of any agencies or instrumentalities of the United States, or of corporations organized under the laws of the United States, received by any resident individual or by any corporation organized under the laws of the State of Alabama, shall be included in the gross income of such person or corporation in determining liability for income taxes due by such person or corporation, but without discrimination, and only to the same extent and in the same manner other income is taxed, insofar as the State of Alabama may be constitutionally or legally authorized to tax such income.

The tax levied and imposed by Section 40-18-2 shall be computed as follows:

(1) For a single person, head of family, or married persons filing separate returns:

a. Two percent of taxable income not in excess of five hundred dollars ($500).

b. Four percent of taxable income in excess of five hundred dollars ($500) and not in excess of three thousand dollars ($3,000).

c. Five percent of taxable income in excess of three thousand dollars ($3,000).

(2) For married persons filing a joint return:

a. Two percent of taxable income not in excess of one thousand dollars ($1,000).

b. Four percent of taxable income in excess of one thousand dollars ($1,000) and not in excess of six thousand dollars ($6,000).

c. Five percent of taxable income in excess of six thousand dollars ($6,000).

(a) Basis (unadjusted) of property. The basis of property shall be the cost of the property with the following exceptions:

(1) INVENTORY VALUE. If the property should have been included in the last inventory, the basis shall be the last inventory value thereof.

(2) GIFT or TRANSFER IN TRUST. If the property was acquired by gift or by a transfer in trust the basis shall be determined in accordance with 26 U.S.C. § 1015. If property was acquired by gift or transfer in trust on or after December 31, 1932 and prior to March 15, 1985, the basis shall be the fair and reasonable market value of the property at the time of the acquisition.

(3) PROPERTY TRANSMITTED AT DEATH. If the property was acquired from a decedent, the taxpayer's basis in the property shall be determined in accordance with 26 U.S.C. § 1014.

(4) PROPERTY ACQUIRED UPON LIKE-KIND EXCHANGE. If the property was acquired upon an exchange described in subsection (c) of Section 40-18-8, the basis shall be determined in accordance with 26 U.S.C. § 1031(d).

(5) TRANSFERS TO CORPORATION. The basis of property received by a distributee in a transaction described in subsection (e) or (f) of Section 40-18-8 shall be determined in accordance with 26 U.S.C. § 358. The basis of property acquired by a corporation in a transaction described in subsection (e) or (f) of Section 40-18-8 shall be determined in accordance with 26 U.S.C. § 362.

(6) PROPERTY ACQUIRED ON LIQUIDATION OF SUBSIDIARY. The basis of property acquired by a corporation as a result of a liquidation of a subsidiary to which Section 40-18-8(h) applies shall be determined in accordance with 26 U.S.C. § 334(b).

(7) BASIS OF PROPERTY OF SUBSIDIARY AFTER ACQUISITION. The basis of property owned by a corporation shall be determined under 26 U.S.C. § 338, relating to the treatment of certain stock purchases as asset acquisitions, if an election under the section is in effect for federal income tax purposes.

(8) BASIS OF PROPERTY RECEIVED IN LIQUIDATION IN WHICH GAIN OR LOSS IS RECOGNIZED. The basis of property received in a distribution in complete liquidation in which a gain or loss is recognized on the receipt of the property shall be determined in accordance with 26 U.S.C. § 334(a).

(9) BASIS OF STOCK AFTER STOCK DIVIDEND. The basis of stock with respect to which a corporation makes a distribution of its stock and the basis of the stock so distributed shall be determined in accordance with 26 U.S.C. § 307.

(10) INVOLUNTARY CONVERSION. If property was acquired in connection with an involuntary conversion in which a gain or loss was not recognized under subsection (d) of Section 40-18-8, the basis of the property shall be determined in accordance with 26 U.S.C. § 1033.

(11) PROPERTY ACQUIRED BEFORE JANUARY 1, 1933. The basis for determining gain or loss on the sale or disposition of property acquired prior to January 1, 1933, shall be the fair and reasonable market value as of January 1, 1933. In determining the fair and reasonable market value of stock in a corporation as of January 1, 1933, due regard shall be given to the fair and reasonable market value of the assets of the corporation as of that date.

(12) DETERMINATION OF AMOUNT OF LOSS OR GAIN OR OF DEPRECIATION OR DEPLETION. Whenever in the calculation of income taxable hereunder for any taxable year it is necessary to determine the amount of gain or loss or of depreciation or depletion in the case of property acquired before January 1, 1933, the basis of property shall be fixed in the same manner as is provided in subdivision (11) of this subsection.

(13) PROPERTY ACQUIRED FROM SPOUSE OR FORMER SPOUSE. If the property was acquired from a spouse or former spouse in a transaction in which a gain or loss was determined under Section 40-18-8(m), then the basis shall be determined in accordance with 26 U.S.C. § 1041.

(14) BASIS OF REPLACEMENT PROPERTY IN SALE OF STOCK TO EMPLOYEE STOCK OWNERSHIP PLAN OR COOPERATIVE. If, in connection with a sale of securities to an employee stock ownership plan or an eligible worker-owned cooperative, any gain was not recognized pursuant to Section 40-18-8(n), the basis of the qualified replacement property, as defined in 26 U.S.C. § 1042, shall be determined in accordance with 26 U.S.C. §1042(d).

(15) BASIS OF PROPERTY TO SUBCHAPTER K ENTITY. The basis of property contributed to a subchapter K entity under Section 40-18-8(o) shall be determined in accordance with 26 U.S.C. §723.

(16) BASIS OF INTEREST IN SUBCHAPTER K ENTITY.

a. Initial basis. The basis of an interest in a subchapter K entity resulting from a contribution of property described in Section 40-18-8(o) shall be determined in accordance with 26 U.S.C. §722.

b. Adjustments to basis. The basis determined under paragraph a. shall be increased or decreased in accordance with 26 U.S.C. §705. The amount of the increases and decreases shall be determined without regard to the allocation and apportionment rules of Section 40-18-22.

c. Special basis adjustments. If a subchapter K entity has in effect an election under 26 U.S.C. §754, the basis of the property of the subchapter K entity shall be determined in accordance with 26 U.S.C. §§734 and 743.

(17) BASIS OF PROPERTY DISTRIBUTED BY SUBCHAPTER K ENTITY. The basis of property distributed by a subchapter K entity shall be determined in accordance with 26 U.S.C. §732.

(b) Adjusted basis. The adjusted basis for determining the gain or loss from the sale or other disposition of property, whenever acquired, shall be the basis determined under subsection (a), adjusted as hereinafter provided. Proper adjustment in respect of the property shall in all cases be made:

(1) For expenditures, receipts, losses, or other items, properly chargeable to capital account, including taxes and other carrying charges on unimproved and unproductive real property, but no such adjustment shall be made for taxes or other carrying charges for which deductions have been taken by the taxpayer in determining taxable income for the taxable year or prior taxable year.

(2) For exhaustion, wear and tear, obsolescence, amortization, and depletion, to the extent allowed, but not less than the amount allowable under this chapter.

(3) In the case of stock, to the extent not provided for in the foregoing paragraphs, 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.

(4) Basis of property of individuals establishing Alabama domicile. Property, both real and personal, owned on the date Alabama domicile is established shall have the same basis for Alabama income tax purposes as its basis for federal income tax purposes as of that date.

(5) Allocation of basis. The basis of property acquired in an applicable asset acquisition (as defined in 26 U.S.C. §1060) shall be determined in accordance with 26 U.S.C. §1060.

(a) Computation of gain or loss. Except as hereinafter provided in this section, 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 subsection (b) of Section 40-18-6, and the loss shall be the excess of such basis 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 and reasonable market value of the 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 as determined under this section shall be recognized for the purposes of this title, shall be determined under the provisions of Section 40-18-8.

(d) Installment sales. 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.

(a) General rule. Except as provided in this section, upon the sale or exchange of property, the entire amount of the gain or loss determined under Section 40-18-7 shall be recognized.

(b) 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.

(c) Like-kind exchanges. If an exchange of property satisfies the requirements of 26 U.S.C. § 1031, relating to like-kind exchanges, then the amount of gain or loss recognized in the exchange shall be determined in accordance with 26 U.S.C. § 1031.

(d) Involuntary conversions. If a taxpayer validly elects to determine the amount of gain recognized for federal income tax purposes under 26 U.S.C. § 1033, relating to involuntary conversions, the amount of gain recognized shall be determined in accordance with 26 U.S.C. § 1033.

(e) Transfer of property to corporation controlled by transferor. If property is transferred to a corporation in a transaction which satisfies the requirements of 26 U.S.C. § 351, relating to transfers to corporations controlled by the transferor, the amount of gain or loss recognized shall be determined in accordance with 26 U.S.C. § 351, as modified by 26 U.S.C. § 357, relating to the recognition of gain as a result of the transferee corporation's assumption of liabilities.

(f) Reorganizations. In the case of a reorganization defined in 26 U.S.C. § 368, relating to definitions applicable to corporate reorganizations, or a distribution, other than a reorganization, subject to 26 U.S.C. § 355, the amount of gain or loss recognized shall be determined in accordance with 26 U.S.C. §§ 354, 355, 356, 361, 371, and 374.

(g) Exchange of stock for property. No gain or loss shall be recognized by a corporation on the receipt of money or other property in exchange for stock, including treasury stock, of the corporation or with respect to the acquisition or lapse of an option to buy or sell its stock.

(h) Complete liquidation of subsidiaries. No gain or loss shall be recognized on the receipt by a corporation of property on the complete liquidation of a subsidiary corporation when the requirements of 26 U.S.C. § 332, relating to complete liquidation of subsidiaries, are satisfied.

(i) Gain or loss on sales or exchanges in connection with certain liquidations. The amount of gain or loss recognized by a corporation on the sale or exchange of property shall be determined in accordance with 26 U.S.C. § 337 if every requirement for the application of 26 U.S.C. § 337 is satisfied.

(j) Election under 26 U.S.C. § 338. If a valid election under 26 U.S.C. § 338 is made, the amount of gain recognized by the target corporation shall be determined in accordance with 26 U.S.C. § 338.

(k) Taxability of corporation on distribution. The amount of gain recognized by a corporation on the distribution of its stock, rights to acquire its stock, or property shall be determined in accordance with 26 U.S.C. § 311, relating to taxability of corporations on distributions.

(l) Gain recognized on liquidation. The amount of gain recognized by a liquidating corporation on the distribution of its property in complete liquidation shall be determined in accordance with 26 U.S.C. § 336.

(m) Gain or loss on property transferred to spouse or former spouse. The amount of gain or loss on the transfer of property to a spouse or former spouse shall be determined in accordance with 26 U.S.C. § 1041.

(n) Sales of stock to employee stock ownership plans or certain cooperatives. The amount of gain recognized by a taxpayer who has validly elected to determine the amount of gain recognized for federal income tax purposes under 26 U.S.C. § 1042, relating to sales of stock to employee stock ownership plans or certain cooperatives, shall be determined in accordance with 26 U.S.C. § 1042. If a taxpayer disposes of any qualified replacement property and recognizes gain under 26 U.S.C. § 1042(e), then, notwithstanding any other provision of this chapter, gain, if any, shall be recognized to the same extent and at the same time for purposes of this chapter as under 26 U.S.C. § 1042(e). The term 'qualified replacement property' shall have the meaning set forth in 26 U.S.C. § 1042.

(o) Contribution of property to subchapter K entity. The amount of gain or loss recognized on the contribution of property to a subchapter K entity in exchange for an interest in the subchapter K entity shall be determined in accordance with 26 U.S.C. § 721.

(p) Distribution of property by subchapter K entity. The amount of gain or loss recognized on the distribution of property by a subchapter K entity shall be determined in accordance with 26 U.S.C. § 731.

(q) Transfer of property to trust. Gain or loss shall not be recognized on the transfer of property to a trust.

(r) Nonrecognition treatment for certain transfers from common trust funds to regulated investment companies. The tax consequences of the transfer of assets of a common trust fund in exchange for stock in one or more regulated investment companies and the tax consequences of the distribution of the stock to the participants of the common trust fund shall be determined in accordance with 26 U.S.C. § 584.

If, in the case of a taxpayer owning any noninterest-bearing obligation issued at a discount and redeemable for fixed amounts increasing at stated intervals, the increase in the redemption price of such obligation occurring in the taxable year does not, under the method of accounting used in computing his net income, constitute income to him in such year, such taxpayer may, at his election made in his return for any taxable year beginning after December 31, 1942, treat such increase as income received in such taxable year. If any such election is made with respect to any 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 him and shall be binding for all subsequent taxable years, unless upon application by the taxpayer the Commissioner of Revenue permits him, subject to such conditions as the Commissioner of Revenue deems necessary, to change to a different method. In the case of any such obligations owned by the taxpayer at the beginning of the first taxable year to which his election applied, the increase in the redemption price of such obligations occurring between the date of acquisition and the first day of such taxable year shall also be treated as income received in such taxable year.

In the case of any obligation of the United States or any of its possessions or of a state or territory, or any political subdivision thereof, or of the District of Columbia, issued on or after March 1, 1941, on a discount basis and payable without interest at a fixed maturity date not exceeding one year from the date of issue, the amount of discount at which such obligation is originally sold shall not be considered to accrue until the date on which such obligation is paid at maturity, sold or otherwise disposed of.

Whenever in the opinion of the Department of Revenue the use of inventories is necessary in order clearly to determine the income of any taxpayer, the inventory shall be taken by such taxpayer in accordance with the methods and procedures prescribed in 26 U.S.C. §§263A, 471, 472, 473 and 474.

Repealed by Act 98–502, § 2.

(a) Income shall be computed on the basis of the same taxable year and in accordance with the same method of accounting that the taxpayer properly employs for federal income tax purposes. If no such method of accounting has been employed or if the method so employed does not clearly reflect income, computation shall be made upon such basis and in such manner as in the opinion of the Department of Revenue, and consistent with federal income tax treatment, does clearly reflect income. If the taxpayer has no annual accounting period or does not keep proper books of account, the income shall be computed on the basis of the calendar year.

(b) In the case of a partnership, Alabama S corporation, or personal service corporation electing a taxable year under 26 U.S.C. §444, this section shall be applied without regard to the requirement to make payments under 26 U.S.C. §7519.

The term 'gross income' as used herein:

(1) Includes gains, profits and income derived from salaries, wages, or compensation for personal services of whatever kind, or in whatever form paid, including the salaries, income, fees, and other compensation of state, county, and municipal officers and employees, or from professions, vocations, trades, business, commerce or sales, or dealings in property whether real or personal, growing out of ownership or use of or interest in such property; also from interest, royalties, rents, dividends, securities, or transactions of any business carried on for gain or profit and the income derived from any source whatever, including any income not exempted under this chapter and against which income there is no provision for a tax. The term 'gross income' as used herein also includes alimony and separate maintenance payments to the extent they are includable in gross income for federal income tax purposes under 26 U.S.C. § 71 (relating to alimony and separate maintenance payments). The term 'gross income' as used herein also includes any amount included in gross income under 26 U.S.C. § 83 at the time it is so included under 26 U.S.C. § 83.

(2) For purposes of this chapter, the reductions in tax attributes required by 26 U.S.C. § 108 shall be applied only to the net operating losses determined under this chapter and the basis of depreciable property. The basis reductions of depreciable property shall not exceed the basis reductions for federal income tax purposes. All other tax attribute reductions required by 26 U.S.C. § 108 shall not be recognized.

(3) Gross income does not include the following items which shall be exempt from income tax under this chapter:

a. Amounts received under life insurance policies and contracts paid by reason of the death of the insured in accordance with 26 U.S.C. § 101;

b. Amounts received, other than amounts paid by reason of the death of the insured, under life insurance, endowment or annuity contracts, determined in accordance with 26 U.S.C. § 72;

c. The value of property acquired by gift, bequest, devise, or descent, but the income from such property shall be included in the gross income, in accordance with 26 U.S.C. § 102;

d. Interest upon obligations of the United States or its possessions; or securities issued under provisions of the Federal Farm Loan Act of July 18, 1916;

e. Any amounts received by an individual which are excludable from gross income under 26 U.S.C. § 104 (relating to compensation for injuries or sickness) or 26 U.S.C. § 105 (relating to amounts received under accident or health plans);

f. Interest on obligations of the State of Alabama and any county, municipality, or other political subdivision thereof;

g. The rental value of a parsonage provided to a minister of the gospel to the extent excludable under 26 U.S.C. § 107;

h. Income from discharge of indebtedness to the extent allowed by 26 U.S.C. § 108;

i. For each individual resident taxpayer, or each husband and wife filing a joint income tax return, as the case may be, any gain realized from the sale of a personal residence of the taxpayer shall be excluded to the extent excludable for federal income tax purposes under 26 U.S.C. § 121;

j. Contributions made by an employer on behalf of an employee to a trust which is part of a qualified cash or deferred arrangement (as defined in 26 U.S.C. § 401(k)(2), or 5 U.S.C. § 8437) under which the employee has an election whether the contribution will be made to the trust or received by the employee in cash and contributions made by an employer for an employee for an annuity contract, which contributions would be excludable from the gross income (for federal income tax purposes) of the employee in accordance with the provisions of 26 U.S.C. § 403(b). The limitations imposed by 26 U.S.C. § 402(g) shall apply for purposes of this paragraph;

k. Amounts that an employee is allowed to exclude from gross income for federal income tax purposes pursuant to 26 U.S.C. § 125 (relating to cafeteria plans) and 26 U.S.C. § 132 (relating to certain fringe benefits); and

l. Amounts paid or incurred by an employer on behalf of an employee if the amounts may be excluded from gross income for federal income tax purposes by an employee pursuant to 26 U.S.C. § 129 (relating to dependent care expenses).

(4) The term 'gross income,' in the case of a resident individual, includes income from sources within and outside Alabama, and in the case of a nonresident individual, includes only income from property owned or business transacted in Alabama.

Notwithstanding any other laws, all deferred compensation plans for public or private employees authorized in this state shall receive the same tax deferred treatment for state income tax purposes which the plan receives from the Internal Revenue Service for federal income tax purposes in a tax year. Contributions to such a plan which are subject to state income tax for the 1996 calendar year and prior years shall not be subject to any further state income taxation at the time of withdrawal.

(a) The term 'adjusted gross income,' as used in this section, shall mean the gross income as defined by Section 40-18-14, minus the following deductions:

(1) The deductions allowed by this chapter, other than the net operating loss deduction allowed under Section 40-18-15.2, which are attributable to a trade or business carried on by the taxpayer if the trade or business does not consist of the performance of services by the taxpayer as an employee;

(2) The deduction allowed by this chapter for travel expenses of Alabama state legislators while away from home to the extent reimbursed by the State of Alabama;

(3) The deductions allowed by this chapter which consist of expenses paid or incurred by the taxpayer in connection with the performance by him or her of services as an employee, to the extent reimbursed by his or her employer;

(4) The deductions allowed by this chapter attributable to property held for the production of rents or royalties;

(5) The deductions allowed by this chapter to a life tenant of property or to an income beneficiary of property held in trust;

(6) The deduction allowed by this chapter as losses from the sale or exchange of property;

(7) The deduction allowed by this chapter relating to adoption expenses;

(8) The deduction allowed by this chapter for individual retirement accounts;

(9) The deduction allowed by this chapter relating to retirement plans;

(10) The deduction allowed by this chapter relating to alimony;

(11) The deduction allowed by this chapter relating to moving expenses;

(12) The deduction allowed by Section 40-18-15(a)(25) relating to grants-in-aid.

(b) Nothing in this section shall allow any item to be deducted more than once.

Gross income shall include original issue discount determined in accordance with 26 U.S.C. §§1271 to 1275, inclusive, and interest or other income determined in accordance with 26 U.S.C. §7872, related to certain related party loans, tax avoidance loans, etc. with below-market interest rates.

(a) No deduction shall be allowed for any losses, expenses, or interest deferred or disallowed pursuant to 26 U.S.C. § 267 or for any cost required to be capitalized in accordance with 26 U.S.C. § 263A; otherwise, there shall be allowed as deductions:

(1) All ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, as determined in accordance with 26 U.S.C. § 162.

(2) Interest paid or accrued within the taxable year on indebtedness, limited to the amount allowable as an interest deduction for federal income tax purposes in the corresponding tax year or period pursuant to the provisions of 26 U.S.C. §§ 163, 264, and 265.

(3) The following taxes paid or accrued within the taxable year:

a. Income taxes, Federal Insurance Contribution Act taxes, taxes on self-employment income and estate and gift taxes imposed by authority of the United States or any possession of the United States.

b. State and local, and foreign, occupational license taxes, and contributions to state unemployment funds.

c. State and local, and foreign, real property taxes.

d. State and local personal property taxes.

e. The generation-skipping transfer (GST) tax imposed on income distributions by 26 U.S.C. § 2601.

f. The taxes described in paragraphs c., d., and e. shall be deductible only to the extent that the taxes are deductible for federal income tax purposes under 26 U.S.C. § 164 (relating to taxes).

g. In addition, there shall be allowed as a deduction, state and local, and foreign taxes, except income taxes, and taxes imposed by authority of the United States or any possession of the United States, which are paid or accrued within the taxable year in carrying on a trade or business or an activity described in 26 U.S.C. § 212 (relating to expenses for the production of income).

h. Notwithstanding paragraph g., any tax described in any paragraph preceding paragraph g. that is paid or accrued in connection with an acquisition or disposition of property shall be treated as part of the cost of the acquired property or, in the case of a disposition, as a reduction in the amount realized on the disposition of that property.

(4) Losses sustained during the taxable year and not compensated for by insurance or otherwise if incurred in a trade or business, in accordance with 26 U.S.C. § 165(c)(1).

(5) Losses sustained during the taxable year and not compensated for by insurance or otherwise, if incurred in any transaction entered into for profit, though not connected with the trade or business in accordance with 26 U.S.C. § 165(c)(2); but, in the case of a taxpayer other than a resident of the state, only as to those transactions within the state.

(6) Casualty and theft losses sustained during the taxable year of property not connected with the conduct of a trade or business or a transaction entered into for profit as determined in accordance with subsections (c)(3) and (h) of 26 U.S.C. § 165. In the case of a nonresident, the deduction shall be allowed only for the losses arising from property located within the State of Alabama and the limitations in 26 U.S.C. § 165 shall be applied with regard only to the taxpayer's Alabama adjusted gross income. No loss shall be allowed if at the time of filing the return, the loss has been claimed on a federal estate tax return.

(7) Losses from debts ascertained to be worthless and charged off during the taxable year of ascertainment, if sustained in the conduct of the regular trade or business of the taxpayer.

(8) A reasonable allowance for the exhaustion, wear and tear of property from which any income is derived, including a reasonable allowance for obsolescence, in accordance with 26 U.S.C. §§ 167 and 168, and an allowance for the amortization of intangibles determined in accordance with 26 U.S.C. § 197.

(9) In the case of mines, oil, and gas wells, other natural deposits and timber, a reasonable allowance for depletion and for depreciation of improvements, according to the peculiar condition in each case based upon the cost, including the cost of development not otherwise deducted, such reasonable allowance in all cases to be made under rules and regulations to be prescribed by the Department of Revenue; and, in the case of leasehold interests, the deduction allowed by this section shall be equitably apportioned between the lessor and the lessee.

(10) Charitable contributions to the extent allowed for federal income tax purposes under 26 U.S.C. § 170 (relating to charitable contributions and gifts).

(11) The deduction allowed to the individual for federal income tax purposes by 26 U.S.C. § 219 (relating to retirement savings).

(12) The deduction allowed for federal income tax purposes by 26 U.S.C. § 404 (relating to qualified pension, profit sharing, stock bonus, and annuity plans).

(13) For each individual income taxpayer, medical and dental expenses, including amounts paid for medicine and drugs and amounts paid for accident and health insurance, as determined in accordance with 26 U.S.C. § 213; provided, however, that the limitation of the deduction to the excess of those expenses over 7.5 percent of adjusted gross income as provided in 26 U.S.C. § 213 shall instead be limited to the excess of those expenses over 4.0 percent of adjusted gross income.

(14) For each individual income taxpayer, the deduction determined in accordance with 26 U.S.C. § 212 for 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, or in connection with the determination, collection, or refund of any tax.

(15) Any expense not exceeding $1,000 actually incurred during the taxable year in constructing on his or her property a family radioactive fallout shelter, as approved and certified by the State Department of Emergency Management, and any amount not exceeding $1,000 which he or she contributed during the taxable year toward the construction of a community radioactive fallout shelter.

(16) A deduction from the taxpayer's adjusted gross income for state income tax purposes of the total cost of installation for conversion from gas or electricity to wood as the primary energy source for heating their individual domestic homes for the taxable year during which a conversion was completed.

(17) Alimony and separate maintenance payments, the amount deductible to be the same as the amount deductible for federal income tax purposes under 26 U.S.C. § 215 (relating to alimony payments).

(18) Moving expenses paid or incurred during the taxable year as allowed under 26 U.S.C. § 217 (relating to moving expenses). However, in applying 26 U.S.C. § 217, the term 'new principal place of work' means only places of work located within the State of Alabama.

(19) Any expense not exceeding $35,000 actually incurred during the taxable year in removing from his or her property any architectural or transportation barriers to handicapped persons with nonambulatory and semiambulatory disabilities; provided, however, that any improvements resulting from that expense shall not be eligible to be capitalized for depreciation.

(20) Notwithstanding subdivision (1), the deduction for expenses of travel, entertainment, and meals shall be determined in accordance with 26 U.S.C. § 274.

(21) The deduction allowed by 26 U.S.C. § 179 (relating to expensing certain depreciable property), provided that no deduction shall be allowed under subdivision (8) for any amount allowed as a deduction under this subdivision.

(22) The deduction allowed by 26 U.S.C. § 195 (relating to amortization of start-up expenditures), but in the case of a nonresident, only if the principal place of business of the business investigated, created, or acquired is located in the State of Alabama.

(23) The deduction allowed by subdivision (1), to the extent that it consists of unreimbursed employee business expenses, and the deduction allowed by subdivision (14) shall be allowed only to the extent that the aggregate of the deductions exceeds 2 percent of adjusted gross income.

(24) The reasonable medical and legal expenses paid or incurred by the taxpayer in connection with the adoption of a minor. For purposes of this subdivision, medical expenses shall include any medical and hospital expenses of the adoptee and the adoptee's biological mother which are incident to the adoptee's birth and subsequent medical care and which, in the case of the adoptee, are paid or incurred before the petition is granted.

(25) The amount of any aid or assistance, whether in the form of property, services, or monies, provided to the State Industrial Development Authority pursuant to Section 41-10-44.8(d) in order to induce an approved company to undertake a major project within the state.

(26) The amount of premiums paid pursuant to a qualifying insurance contract for qualified long-term care coverage.

(27) The amount deductible by the taxpayer in accordance with 26 U.S.C. § 162(h).

(b) In lieu of the deductions allowable to individual taxpayers, as provided in subdivision (1) of subsection (a) to the extent of unreimbursed employee business expenses, and as provided in subdivisions (2), (3), (5), (6), (10), (13), (14), (15), (16), (19), (22), and (26) of subsection (a) of this section, the taxpayer may elect to take the optional standard deduction of 20 percent of the adjusted gross income or $2,000, whichever is the lesser. Taxpayers filing jointly as defined in Section 40-18-27 may elect to take the optional standard deduction of 20 percent of the adjusted gross income or $4,000, whichever is the lesser.

(c) A deduction is allowable for the amount of federal income tax paid or accrued within the taxable year. In the case of a nonresident taxpayer, the amount of federal income tax deductible to Alabama shall be determined by the ratio that the amount of adjusted gross income received from sources within the State of Alabama bears to the amount of adjusted gross income received from sources within and outside the State of Alabama.

(d) If separate returns are filed by husband and wife and one spouse elects to claim the optional standard deduction, the other spouse must also claim the optional standard deduction.

(e) In the case of a nonresident individual:

(1) The deductions allowed in subdivisions (1), (2), (3), (4), (5), (7), (8), (9), (11), (12), (19), (21), (23), and (25) of subsection (a) of this section shall be allowed only to the extent that they are paid or incurred in carrying on a trade or business within the State of Alabama and the deduction allowed by Section 40-18-15.2 shall be allowed only to the extent it arose from a trade or business carried on in Alabama.

(2) The deductions allowed by subdivisions (2), (3), (5), (8), (9), (14), and (19) of subsection (a) shall be allowed only to the extent arising from property located in Alabama or transactions producing income that is subject to tax in the State of Alabama.

(3) The amount of the deductions allowed by subdivisions (2), (3), (6), (10), (13), (15), (16), (17), (19), (24), and (26) of subsection (a) (and not allowed by subdivisions (1) or (2) of this subsection), or by subsection (b)(1) if the taxpayer elects the standard deduction, shall be limited to the amount determined by multiplying the total of such deductions by a fraction, the numerator of which is the taxpayer's adjusted gross income determined using the rules provided in subdivisions (1) and (2) of this subsection and the denominator of which is the taxpayer's adjusted gross income determined under Section 40-18-14.2. The deduction allowed in subdivision (17) of subsection (a) shall not be subtracted in calculating either the numerator or denominator in the previous sentence.

(f) Nothing in this section shall allow any item to be deducted more than once.

For purposes of this chapter, the term 'taxable income' or 'net income' shall mean 'gross income,' as defined in Section 40-18-14, less the deductions allowed to individuals by this chapter.

Individuals may calculate a net operating loss from a trade or business and apply the net operating loss against prior taxable income or future taxable income pursuant to this section.

(1) For purposes of this section, the term 'net operating loss' means the excess of the deductions allowed by this chapter over the gross income. The excess shall be computed with the modifications specified in subdivision (5).

(2) A net operating loss may be carried back to each of the two taxable years preceding the taxable year of the loss. A net operating loss carryover may be carried to each of the 15 years following the taxable year of the loss.

(3) The entire amount of the net operating loss for any taxable year (hereinafter referred to as the 'loss year') shall be carried to the earliest of the taxable years to which, by reason of subdivision (2) that loss may be carried. The portion of the loss which shall be carried to each of the other taxable years shall be the excess, if any, of the amount of the loss over the sum of the taxable income for each of the prior taxable years to which the loss may be carried. For purposes of the preceding sentence, the taxable income for any such prior taxable year shall be computed:

a. With the modifications specified in subdivision (5)b. and d.

b. By determining the amount of the net operating loss deduction without regard to the net operating loss for the loss year or for any taxable year thereafter, and the taxable income so computed shall not be considered to be less than zero.

(4) Any taxpayer entitled to a carryback period under subdivision (2) may elect to relinquish the entire carryback period in one of two ways. An election shall be made in a manner prescribed by the Department of Revenue, and shall be made by the due date of the loss year return, including extensions, for which the election is to be in effect. If no election is made by the due date of the loss year, including return extensions, then the filing of the subsequent year's return by the due date, including extensions, and claiming the loss thereon shall be deemed to be the taxpayer's election to forego the entire carryback period. An election, once made for any taxable year, shall be irrevocable for that taxable year.

(5) The modifications referred to in this subdivision are as follows:

a. No net operating loss deduction shall be allowed.

b. No deduction shall be allowed under Sections 40-18-19(a) (8) and (a)(9) and 40-18-19(b), relating to personal exemptions and credit for dependents.

c. The deductions allowable by this chapter which are not attributable to a taxpayer's trade or business, including the federal individual income tax deduction, shall be allowed only to the extent of the amount of the gross income not derived from a trade or business. For purposes of the preceding sentence:

1. Any gain or loss from the sale or other disposition of property used in the trade or business of a character which is subject to the allowance for depreciation provided in Section 40-18-15 (a) (8) and (a)(9), or real property used in the trade or business, shall be treated as attributable to the trade or business.

2. Any deduction allowable in Section 40-18-15(a) (6), relating to casualty losses, shall not be taken into account.

3. Any deduction allowed under Section 40-18-15(a) (12) to the extent attributable to contributions which are made on behalf of an individual who is an employee within the meaning of said 26 U.S.C. § 401(c) (1), relating to self-employed individuals, shall not be treated as attributable to the trade or business of such individual.

d. The optional standard deduction allowed under Section 40-18-15(b) shall be treated as a deduction allowed by this chapter. For purposes of subdivision (1), the deduction provided by the preceding sentence shall be in lieu of any itemized deductions of the taxpayer.

(6) In determining the amount of any net operating loss carryback or carryover to any taxable year, the necessary computations involving any other taxable year shall be made under the law applicable to the other taxable year.

(7) Nonresident taxpayers shall be allowed only that portion of the net operating loss attributed to income related to Alabama. Proration of income shall be computed based upon the ratio of gross income from all sources to Alabama gross income.

(a) Basis for depreciation. The basis upon which exhaustion, wear and tear, depreciation and obsolescence are to be allowed shall be such reasonable allowance as may be determined by the Department of Revenue on the adjusted basis provided in Section 40-18-6 for the purpose of determining the gain or loss upon sale or other disposition of such property.

(b) Basis for depletion.

(1) GENERAL RULE. The basis upon which depletion is to be allowed shall be such reasonable allowance as may be determined by the Department of Revenue on the adjusted basis provided in Section 40-18-6 for the purpose of determining the gain or loss upon the sale or other disposition of such property, except as provided in subdivision (2) of this subsection.

(2) AMOUNT. In the case of oil and gas wells, the allowance for depletion shall be 12 percent 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 to the property. Such amounts shall not exceed 50 percent 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 the amount allowable under federal income tax law. In the case of leases the deductions allowed by this paragraph shall be equitably apportioned between the lessor and the lessee.

In computing net income, no deduction shall in any case be allowed in respect of personal, living, or family expense; any amount paid out for new buildings or for permanent improvements or betterment made to increase the value of any property or estate; any amount expended in restoring property or in making good the exhaustion thereof, for which an allowance is or has been made; or 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 such policy.

Repealed by Act 98-502, § 2.

(a) The following exemptions from income taxation shall be allowed to every individual resident taxpayer:

(1) Retirement allowances, pensions and annuities, or optional allowances, approved by the Board of Control of the Teachers' Retirement System of Alabama, which exempt status is set out in Section 16-25-23;

(2) Retirement allowances, pensions and annuities or optional allowances, approved by the Board of Control of the Employees' Retirement System of Alabama, which exempt status is set out in Section 36-27-28;

(3) The first $8,000 of any retirement compensation, retirement allowances, pensions and annuities, or optional allowances, received by any eligible fire fighter, as defined in Sections 36-32-1 and 36-32-2, or his designated beneficiary, from any firefighting agency established in the State of Alabama, but only if such retirement compensation, retirement allowances, pensions and annuities, or optional allowances as are awarded as a result of fire protection services rendered. This subdivision shall become effective for the taxable years beginning January 1, 1987, and thereafter following its passage and approval by the Governor, or upon its otherwise becoming a law; provided, that for the taxable years beginning on or after January 1, 1991, all of such pension and retirement payments shall be exempt from taxation;

(4) The first $8,000 of any retirement compensation, retirement allowances, pensions and annuities, or optional allowances received by any eligible peace officer, as defined in subsection (11) of Section 36-21-60, or his designated beneficiary, from any police retirement system established in the State of Alabama, but only if such retirement compensation, retirement allowances, pensions and annuities, or optional allowances are awarded as a result of police services rendered. This subdivision shall become effective for taxable years beginning January 1, 1984, and thereafter; provided, that for the taxable years beginning on or after January 1, 1991, all of such pension and retirement payments shall be exempt from taxation;

(5) Income received as annuities under the United States Retirement System from the United States Government Civil Service Retirement and Disability Fund including income received from the Tennessee Valley Authority's pension system, income received as annuities under the United States Foreign Service Retirement and Disability Fund or income received from any other United States government retirement and disability fund;

(6) Beginning January 1, 1991, all payments made on or after such date to a retiree or his designated beneficiary under a 'defined benefit plan,' as defined under Section 414(j) of the Internal Revenue Code of 1986, as amended from time to time, to the extent such payment would be taxable for federal income tax purposes;

(7) Net income realized by individuals and partnerships from time to time in the business of conducting a financial business employing moneyed capital coming into competition with the business of national banks, but only if such individuals and partnerships are subject to an excise tax imposed by this state on or with respect to such income;

(8) In the case of a single person or a married person not living with husband or wife, a personal exemption of $1,500 or, in the case of a head of a family or a married person living with husband or wife, a personal exemption of $3,000, but a husband and wife living together shall receive only one personal exemption of $3,000 against their aggregate income, and in case they make separate returns each must claim a personal exemption of $1,500;

(9) Three hundred dollars for each person, other than husband or wife, dependent upon the taxpayer, and over half of whose support, for the calendar year in which the taxable year for the taxpayer begins, was received from the taxpayer. For the purposes of this section, 'dependent' shall mean: a son or daughter of the taxpayer or a descendant of either; a stepson or stepdaughter of the taxpayer; a brother, sister, stepbrother, or stepsister of the taxpayer; the father or mother of the taxpayer or an ancestor of either; a stepfather or stepmother of the taxpayer; a son or daughter of a brother or sister of the taxpayer; a brother or sister of the father or mother of the taxpayer; 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 paragraph the terms 'brother' and 'sister' include a brother or sister by the half blood. For the purpose of determining whether any of the foregoing relationships exist, a legally adopted child of a person shall be considered a child of such a person by blood; and

(10) Beginning January 1, 1998, all benefits received from prepaid tuition contracts administered under Title 16, Chapter 33C, shall be exempt from all income taxation by the state and by all of its political subdivisions.

(b) Of the following personal exemptions allowed resident taxpayers, each nonresident individual taxpayer shall be allowed that proportion thereof that the adjusted gross income received by said nonresident individual taxpayer from sources within the State of Alabama bears to his or her adjusted gross income received from sources within and without the State of Alabama: In the case of a single person or a married person not living with husband or wife, a personal exemption of $1,500 or, in the case of a head of a family or a married person living with husband or wife, a personal exemption of $3,000, a husband and wife living together shall receive but one personal exemption of $3,000 against their aggregate income; and, in case they make separate returns, each must claim a personal exemption of $1,500; and $300 for each person, other than husband or wife, dependent upon and receiving his chief support from the taxpayer.

(a) Effective for the 1997 state income tax year and each year thereafter, an amount up to twenty-five thousand dollars ($25,000) received as severance, unemployment compensation or termination pay, or as income from a supplemental income plan, or both, by an employee who, as a result of administrative downsizing, is terminated, laid-off, fired, or displaced from his or her employment, shall be exempt from any state, county, or municipal income tax.

(b) An employee whose termination from employment is due to misconduct shall not be allowed to take the tax exemption provided in subsection (a).

(c) The Department of Revenue shall promulgate rules and regulations to administer this section.

(a) The first $4,750 retirement or compensation received as retirement benefit from the military services by any person retired from the military services of the United States of America and survivor benefits derived therefrom is hereby exempt from any state, county or municipal income tax or like tax by whatever name called.

(b) Effective January 1, 1983, the amount of the exemption provided for in subsection (a) of this section shall be increased to $8,000.

(c) Effective January 1, 1985, the amount of the exemption provided for in subsection (b) of this section shall be increased to $10,000.

(d) Effective January 1, 1989, and for all successive tax years, all retirement payments or compensation recognized under this section shall be exempt.

(a) (1) For the purpose of ascertaining the income tax due under the provisions of this chapter by individual residents of Alabama whose gross income, as defined herein, is derived from sources both within and without the State of Alabama, there shall be allowed a credit against the amount of tax found to be due by such resident, on account of income derived from without the State of Alabama, the amount of income tax actually paid by such resident to any state or territory on account of business transacted or property held without the State of Alabama.

(2) In case the amount of tax actually paid by an individual resident of Alabama to another state or territory is in excess of the amount that would be due on the same income computed on the income tax rate in Alabama, then only such amount as would be due in this state on such taxable income shall be allowed as a credit

(3) If the amount of income tax actually paid by an individual resident of this state to any other state or territory on account of business transacted or property held is less than the amount of tax that would be due, as computed on Alabama income tax rates, then the income tax levied herein shall be computed on the entire taxable income from sources from both within and without the state as defined herein, and the tax shall be paid less the credit allowed in this section for tax paid on income derived from without the state.

(4) Before a resident of Alabama may claim the credit allowed under this subsection (a), he or she shall file with his or her tax return a certificate showing amount of gross and net income derived from sources without this state together with the amount of tax paid or to be paid on such income.

(b) Any taxpayer described in Section 40-18-2(1) or Section 40-18-2(6), who, during any year, has been assessed a job development fee as described in Section 41-10-44.8(b), shall be allowed a credit against the amount of income tax due under the provisions of this chapter in such year in an amount equal to the job development fee withheld from the taxpayer's wages during the year.

Taxpayers, including trusts and corporations, as well as subchapter K entities and Alabama S corporations, engaged in multistate business in such a manner as to subject their income to allocation and apportionment provided by the Multistate Tax Compact shall allocate and apportion their income, gains, losses, deductions, credits, and exemptions in the manner provided by Chapter 27. This section shall not apply to individuals.

Any taxpayer who has taxable income from business activities both within and without this state, whose only business activities within this state consist of sales and do not include owning or renting real estate or tangible personal property, and whose dollar volume of gross sales made during the tax year within this state is not in excess of $100,000 may elect to report and pay any income tax due on the basis of a percentage of such volume. If a taxpayer elects to report and pay income tax due on the basis of a percentage of sales in this state, the percentage rate shall be one fourth of one percent of such volume of sales. The report shall be made on forms prescribed by the Commissioner of Revenue and shall be due and payable on the same date and in the same manner as provided in Sections 40-18-27 and 40-18-39.

(a) The amount of income, deduction, gain, loss, or credit includable or deductible by an owner of an interest in a subchapter K entity shall be determined in accordance with subchapter K of the Internal Revenue Code, 26 U.S.C. §§ 701-761.

(b) For purposes of computing its net income, a subchapter K entity shall add back otherwise deductible interest expenses and costs and intangible expenses and costs directly or indirectly paid, accrued or incurred to, or in connection directly or indirectly with, one or more direct or indirect transactions, with one or more related members, except to the extent the subchapter K entity shows, upon request by the commissioner, that the corresponding item of income was in the same taxable year:

(1) subject to a tax based on or measured by the related member's net income in Alabama or any other state of the United States, or

(2) subject to a tax based on or measured by the related member's net income by a foreign nation which has in force an income tax treaty with the United States, if the recipient was a 'resident' (as defined in the income tax treaty) of the foreign nation.

(c) For purposes of subsection (b), 'subject to a tax based on or measured by the related member's net income' means that the receipt of the payment by the recipient related member is reported and included in income for purposes of a tax on net income, and not offset or eliminated in a combined or consolidated return which includes the payor.

(d) The subchapter K entity shall make the adjustments required in subsection (b) of this section unless the subchapter K entity establishes that the adjustments are unreasonable, or the subchapter K entity and the Commissioner of Revenue agree in writing to the application or use of alternative adjustments and computations. Nothing in this section shall be construed to limit or negate the commissioner's authority to otherwise enter into agreements and compromises otherwise allowed by law.

(e) The adjustments required in subsection (b) shall not apply to that portion of interest expenses and costs and intangible expenses and costs if the subchapter K entity can establish that the transaction giving rise to the interest expenses and costs or the intangible expenses and costs between the subchapter K entity and the related member did not have as a principal purpose the avoidance of any Alabama tax and the related member is not primarily engaged in the acquisition, use, licensing, maintenance, management, ownership, sale, exchange, or any other disposition of intangible property, or in the financing of related entities. If the transaction giving rise to the interest expenses and costs or intangible expenses and costs, as the case may be, has a substantial business purpose and economic substance and contains terms and conditions comparable to a similar arm's length transaction between unrelated parties, the transaction will be presumed to not have as its principal purpose tax avoidance, subject to rebuttal by the Commissioner of the Department of Revenue.

(f) Nothing in this section shall require a subchapter K entity to add to its net income more than once any amount of interest expenses and costs or intangible expenses and costs that the subchapter K entity pays, accrues, or incurs to a related member described in subsection (b).

(g) Nothing in this section shall be construed to limit or negate the commissioner's authority to make adjustments under this chapter.

(h) Subsection (b) shall not limit the deduction of the interest portion of rent paid under lease agreements described in Section 40-18-35(a)(9).

(i) Except with regard to payments described in Sections 40-18-35(a)(4)b and 40-18-35(a)(9), nothing in this section shall be construed to allow any item to be deducted more than once or to allow a deduction for any item that is excluded from income or to allow any item to be included in the Alabama taxable income of more than one taxpayer.

(a) The Department of Revenue shall permit a subchapter K entity which has income apportioned to Alabama in accordance with Section 40-18-22 to file a composite return and to make a composite payment on behalf of some or all of its nonresident owners if there are one or more nonresident owners during any part of the taxable year. The Department of Revenue may permit composite returns and payments to be made by a subchapter K entity on behalf of its resident owners. The term 'nonresident owner' shall mean for any taxable year a partner (with respect to a partnership) or a member (with respect to a limited liability company) who, in the case of an individual, is not a resident of Alabama during such taxable year, or which, in the case of an owner other than an individual, is not legally or commercially domiciled in Alabama during such taxable year, and the term 'resident owner' shall mean a partner (with respect to a partnership) or a member (with respect to a limited liability company) who, in the case of an individual, is a resident of Alabama during such taxable year, or which, in the case of an owner other than an individual, is legally or commercially domiciled in Alabama during such taxable year.

(b) For purposes of this section, a 'composite return' means an informational return similar in form to U.S. Treasury Department Schedule K-1 to Form 1065 containing information concerning one or more subchapter K entity owner's respective shares of income, deductions, and losses passed through to them by virtue of their status as owners of the subchapter K entity, any credit to which the owner is entitled to claim by virtue of the subchapter K entity's payment of tax on his, her, or its behalf pursuant to subsection (e), and containing such other information as the Department of Revenue shall prescribe. For purposes of this section, a 'composite payment' means a remittance of tax by the subchapter K entity on behalf of the owner or owners to which the accompanying composite return relates, applying the highest marginal Alabama income tax rate applicable to C corporations if the nonresident owner is a corporation, and otherwise at the highest marginal Alabama income tax rate applicable to individuals, for the period in question.

(c) A subchapter K entity shall file with the Department of Revenue, in the form prescribed by the Department of Revenue, the agreement of each nonresident owner of the subchapter K entity either to file a return and to make timely payment of all taxes imposed by this chapter on the nonresident owner with respect to the income of the subchapter K entity apportioned to Alabama, or in the case of a nonresident owner that is a subchapter K entity or an Alabama S corporation, to comply with the requirements of this section or with the requirements of Section 40-18-176, whichever is applicable, with respect to its owners. In the case of a nonresident owner which is neither a subchapter K entity nor an Alabama S corporation, an agreement to be subject to personal jurisdiction in this state for purposes of the collection of unpaid income tax, together with related interest and penalties, from the nonresident owner shall also be filed with the Department of Revenue. If the subchapter K entity fails timely to file the agreements required by this subsection on behalf of each of its nonresident owners, then the subchapter K entity shall, at the times set forth in subsection (d) for the filing of the agreements, pay to this state on behalf of each nonresident owner in respect of whom or of which an agreement has not been timely filed an amount equal to the highest tax rate applicable to C corporations under this chapter if the nonresident owner is a corporation, and otherwise the highest tax rate applicable to individuals under this chapter, multiplied by the amount of the owner's distributive share of the net taxable income allocated and apportioned to Alabama, as reflected on the subchapter K entity's return for the period in question.

If the nonresident owner that has filed a consent pursuant to this section does not pay the tax due at the required time, the subchapter K entity shall pay such amount on behalf of the nonresident owner within 60 days after notice and demand from the department, which notice and demand shall not be valid if issued before the expiration of the time for filing (including extensions) of the nonresident owner's income tax return for the taxable years.

(d) The agreements required to be filed pursuant to subsection (c) shall be filed at the following times:

(1) At the time the annual return is required to be filed for the first taxable year for which the subchapter K entity becomes subject to this chapter, and

(2) At the time the annual return is required to be filed for any taxable year in which the subchapter K entity had a nonresident owner on whose behalf the agreement has not previously been filed.

(e) Any amount paid by a subchapter K entity to this state pursuant to subsection (a) or (c) shall be considered to be a payment by the owner on account of the income tax imposed on the owner for the year in question.

(a) The tax imposed by this chapter shall apply to the income of estates or of any kind of property held in trust, including:

(1) Income received by estates of deceased persons during the period of administration or settlement or settlements of the estate.

(2) Income accumulated in trust for the benefit of unborn or unascertained persons with contingent interests.

(3) Income held for future distribution under the terms of a will or trust.

(4) Income which is to be distributed to the beneficiaries periodically, whether or not at regular intervals, and the income collected by a guardian of an infant to be held or distributed as the court may direct.

(b) The fiduciary shall be responsible for making the return of income for the estate or trust for which he or she acts. The net income of the estate or trust shall be computed in the same manner and on the same basis as provided in this chapter for individual taxpayers; except, that the deduction for amounts paid or permanently put aside for a charitable purpose shall be allowed to the extent specified in 26 U.S.C. § 642(c), relating to amounts paid or permanently set aside for a charitable purpose; and in cases under subdivision (4) of subsection (a) of this section, the fiduciary shall include in the return a statement of each beneficiary's distributive share of the net income, whether or not distributed before the close of the taxable year for which the return is made.

(c) In cases under subdivisions (1), (2), and (3) of subsection (a) of this section, the tax shall be imposed upon the net income of the estate or trust using the rate schedule in subdivision (1) of Section 40-18-5 and shall be paid by the fiduciary; except, that in determining the net income of the estate of any deceased person during the period of administration or settlement, there may be deducted the amount of any income properly paid or credited to any legatee, heir, or other beneficiary. In those cases the estate or trust shall be allowed the same exemptions as are allowed to single persons under Section 40-18-19, and in those cases the estate or trust created by a person not a resident and an estate of a person not a resident shall be subject to tax only to the extent to which individuals other than residents are liable under subdivision (3) of Section 40-18-14.

(d) In cases under subdivision (4) of subsection (a) of this section, and in the case of any income of an estate during the period of administration or settlement permitted by subsection (c) to be deducted from the net income upon which tax is to be paid by the fiduciary, the tax shall not be paid by the fiduciary, but there shall be included in computing the net income of each beneficiary his or her distributive share whether distributed or not, of the net income of the estate or trust for the taxable year, or, if his or her net income for the taxable year is computed upon the basis of a period different from that upon the basis of which the net income of the estate or trust is computed, then his or her distributive share of the net income of the estate or trust for any accounting period of the estate or trust ending within the fiscal year upon the basis of which the beneficiary's net income is computed. In those cases the income of a beneficiary of the estate or trust not a resident shall be taxable to the extent provided in subdivision (3) of Section 40-18-14 for individuals other than residents, but only to the extent that the income of the trust or estate shall arise from sources within the state. For the purpose of determining any income tax due by any nonresident beneficiary of any trust or estate, the income from intangible personal property shall not be construed to arise from sources within the state merely because the title and ownership of such intangible personal property is vested in a resident fiduciary or trust or estate or the evidence of ownership thereof is located within the state.

(e) There shall be exempt from taxation imposed by this chapter income of any qualified trust defined in 26 U.S.C. § 401(a), relating to qualified pension, profit sharing, and stock bonus plans; any custodial account, any annuity contract or any contract issued by an insurance company treated as a qualified trust by reason of 26 U.S.C. § 401(f), relating to certain custodial accounts and contracts; any individual retirement account, any individual retirement annuity, or any custodial account which is exempt from federal income tax under 26 U.S.C. § 408(e), 26 U.S.C. § 408A, or 26 U.S.C. § 530, relating to individual retirement accounts; and any retirement bond described in 26 U.S.C. § 409, relating to retirement bonds. The foregoing exemption shall not apply to any entity which is not exempt from federal income tax by reason of 26 U.S.C. § 502 or 26 U.S.C. § 503 and shall not apply to any income which would constitute 'unrelated business taxable income' as defined in 26 U.S.C. § 512, relating to unrelated business taxable income.

(f) There shall be exempt from taxation imposed by this chapter income of any trust which is described in Section 501(c)(2), 501(c)(3), 501(c)(9), 501(c)(11), 501(c)(17), 501(c)(20) or 501(c)(21) of 26 U.S.C., relating to exemption from tax on corporations, certain trusts, etc. The foregoing exemption shall not apply to any entity which is not exempt from federal income tax by reason of 26 U.S.C. § 502, relating to feeder organizations, or 26 U.S.C. § 503, relating to requirements for exemption, and shall not apply to any income which would constitute 'unrelated business taxable income,' as defined in 26 U.S.C. § 512, relating to unrelated business taxable income.

(g) Distributions from or rollovers to individual retirement accounts described in 26 U.S.C. §§ 408A and 530, shall be taxed to the distributee according to 26 U.S.C. §§ 408A or 530. The amount actually distributed to any distributee of any other trust described in subsection (e) of this section, any other individual retirement account, individual retirement annuity, individual retirement bond, or custodial account which is treated as an individual retirement account shall be taxable to the distributee in accordance with 26 U.S.C. § 72 in the year in which distributed as if it were an annuity the consideration for which is the amount contributed by the employee. Notwithstanding the preceding sentence, distributions which are not included in gross income for federal income tax purposes by reason of the rollover provisions in 26 U.S.C. § 402, relating to taxability of beneficiary of employees' trust, 26 U.S.C. § 403, relating to taxation of employee annuities, 26 U.S.C. § 408, relating to individual retirement accounts, or 26 U.S.C. § 409, relating to retirement bonds, shall not be included in gross income for purposes of this chapter.

For the foregoing purposes, 'the amount contributed by the employee' means:

(1) Amounts contributed prior to January 1, 1982, by an individual for himself or herself, his or her spouse or both under an individual retirement account, annuity or bond for which no deduction was allowed under Section 40-18-15 or corresponding provisions of prior laws of this state.

(2) Amounts contributed prior to January 1, 1982, by a person described in Section 40-18-15(a)(12) to a trust described in subsection (e) of this section for which no deduction was allowed under Section 40-18-15 or corresponding provisions of prior laws of this state.

(3) The amount included in gross income in prior years by the employee, the distributee, his or her predecessor in interest, or the trust by reason of the lack of exemption from the tax imposed by this chapter of a trust, individual retirement account, individual retirement annuity or individual retirement bond to which contributions described in (1) and (2) were made.

(4) The amount included in gross income by the employee, distributee, or predecessor in interest as a result of a distribution from any other trust, individual retirement plan, individual retirement account, individual retirement bond, or custodial account because the distribution was not excludable from gross income under the second sentence of this subsection when made or was includable pursuant to 26 U.S.C. § 408(m), relating to investment in collectibles treated as distributions.

(h) The income of a charitable remainder annuity trust or a charitable remainder unitrust, as those terms are defined in 26 U.S.C. § 664, relating to charitable remainder trusts, shall be exempt from the tax imposed by this chapter to the extent provided in 26 U.S.C. § 664. Recipients of distributions from charitable remainder unitrust and charitable remainder annuity trusts shall include in gross income the amounts specified in 26 U.S.C. § 664(b)(1) and 26 U.S.C. § 664(b)(2).

(i) 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 (e) of this section 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 such contribution is nonforfeitable at the time the contribution is made or if the interest of the employee is not nonforfeitable in such year, the fair market value of the employee's interest in the trust shall be included in the gross income of the employee in the year in which it becomes nonforfeitable.

(j) The tax on an electing small business trust, as defined in 26 U.S.C. § 1361(e)(1), and the beneficiaries of the trust shall be determined as follows:

(1) The portion of the trust that consists of stock in one or more Alabama S corporations, as defined in Section 40-18-160, shall be treated as a separate trust. The net income of the separate trust shall be computed including only the items taken into account under Section 40-18-162, gain or loss from the disposition of stock of an Alabama S corporation, and federal income taxes and administrative expenses allocable to the income items treated under this subsection. The net income shall be taxed at the rate of five percent. The separate trust shall not be allowed any personal exemption.

(2) No item shall be apportioned to any beneficiary of the trust from the separate trust described in subdivision (1).

(3) The income taxation of the remainder of the trust that does not own the stock of any Alabama S corporation and its beneficiaries shall be determined under subsections (b), (c), and (d) of this section without regard to the income, gain, deductions, loss, or credits of the separate trust owning stock in one or more Alabama S corporations.

(k) In the case of a qualified subchapter S trust, as defined in 26 U.S.C. § 1361(d), all the items of income, deduction, and credit of the portion of the trust consisting of the stock in an Alabama S corporation shall not be subject to tax under this section but shall be included in computing the net income of the beneficiary of the trust.

Every resident individual, corporation, association, or agent shall make a report to the Department of Revenue of complete information covering the amount of all interest, rent, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, or other fixed or determinable gains, profits and income, except interest coupons payable to bearer, of any taxpayer taxable under this chapter, of $1,500 or more in any taxable year under such regulations and in such form and manner and to such extent as may be prescribed by the Department of Revenue.

(a) Effective for tax years beginning after December 31, 1997, every taxpayer having an adjusted gross income for the taxable year of more than one thousand eight hundred seventy-five dollars ($1,875) if single or if married and not living with spouse, and of more than three thousand seven hundred fifty dollars ($3,750) if married and living with spouse, shall each year file with the Department of Revenue a return stating specifically the items of gross income, the deductions and credits allowed by this chapter, the place of residence, and post office address. If a husband and wife living together have an adjusted gross income of more than three thousand seven hundred fifty dollars ($3,750), each shall file a return unless the income of each is included in a single joint return. If the taxpayer is unable to file a return, the return shall be filed by a duly authorized agent, a guardian, or other person charged with the care of the person or property of the taxpayer.

(b) A taxpayer other than a resident shall not be entitled to the deductions authorized by Sections 40-18-15 and 40-18-15.2 unless the taxpayer files a complete return showing the gross income of the taxpayer both from within and outside the state. Included on every income tax return shall be the name, and address, and social security number of the person who prepared the return. The taxpayer shall be held liable for any statement made by an agent of the taxpayer with reference to any information required by law to be furnished in connection with that tax return.

(c) Returns filed on the basis of the calendar year shall be filed on or before April 15 following the close of the calendar year. Returns filed 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. The department may grant a reasonable extension of time for filing returns, under rules and regulations as it shall prescribe. Except in the case of taxpayers who are abroad, no extension shall be for more than six months. If the taxpayer has requested an extension of time for the filing of a return, the period during which the return will be considered timely filed shall not expire until 10 days after the Department of Revenue mails to the taxpayer a rejection of the request for an extension of time for filing the return. The return must be signed or otherwise validated by both the taxpayer(s) and, if applicable, the tax return preparer under rules or regulations of the Department of Revenue and must contain a printed declaration that the return is filed under the penalties of perjury.

(d) Every individual who willfully files and signs or otherwise validates under rules or regulations of the Department of Revenue a return which the individual does not believe to be true and correct as to every material particular shall be guilty of perjury and, upon conviction thereof, shall be imprisoned in the penitentiary for not less than one, nor more than five years.

(e) In the event a husband and wife file a joint return, the husband and wife shall be jointly and severally liable for the income tax shown on the return or as may be determined by the Department of Revenue to be due by them to the State of Alabama. Notwithstanding the foregoing, an innocent spouse shall be relieved of certain liabilities to the same extent and in the same manner as granted by the Internal Revenue Code for federal income tax purposes.

Every subchapter K entity, and every single member limited liability company, shall make a return to the Department of Revenue for each taxable year, stating specifically the items of its gross income and the deductions allowed by this chapter, and shall include in the return the names and addresses of the partners or members and the amount of the distributive share of each partner or member. The return must be subscribed by the person who makes it and must contain a printed declaration that it is made under the penalties of perjury. A person who willfully makes and subscribes a return which he or she does not believe to be true and correct as to every material particular shall be guilty of perjury and upon conviction shall be punished as prescribed in Section 40-18-27.

(a) Every fiduciary, except receivers appointed by authority of law in possession of part only of the property of a taxpayer, shall make a return for the taxpayer for whom he acts, first, if the net income of such taxpayer is $1,500 or over, if single or if married and not living with husband or wife, or $3,000 or over, if married and living with husband or wife, or second, if the net income of such taxpayer, if an estate or trust, is $1,500 or over, or if any beneficiary is a taxpayer other than a resident of the state, which returns shall state specifically the items of the gross income and the deductions, exemptions and credits allowed by this chapter under such regulations as the Department of Revenue may prescribe, a return made by one or two or more joint fiduciaries and filed in the office of the Department of Revenue shall be a sufficient compliance with the above requirement. The fiduciary shall certify that he has sufficient knowledge of the affairs of such individual, estate or trust to enable him to make the return, and that the same is, to the best of his knowledge and belief, true and correct. Except as herein provided and as provided in Section 40-18-42, fiduciaries required to make returns under this chapter shall be subject to all provisions of this chapter which apply to taxpayers.

(b) Returns made on the basis of a calendar year shall be filed on or before April 15 following the close of such 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 such fiscal year. The Commissioner of Revenue or such person as may be in charge of the Department of Revenue may grant any reasonable extension of time for filing returns.

(a) Taxpayer filing separate returns. If a taxpayer, with the approval of the Department of Revenue, changes the basis of computing taxable income from the fiscal year to the calendar year, a separate return shall be filed for the period between the close of the last fiscal year for which return shall be made and the following December 31. If the change is made from the calendar year to the fiscal year, a separate return shall be filed for the period between the close of the last calendar year for which return was filed and the date designated as the close of the last fiscal year. If the change is made from one fiscal year to another fiscal year, a separate return shall be filed for the period between the close of the former fiscal year and the date designated as the close of the new fiscal year. If a taxpayer filing the taxpayer's first return for income tax keeps accounts on the basis of a fiscal year, the taxpayer shall file a separate return for the period between the beginning of a calendar year in which such fiscal year ends and the end of such fiscal year. In all of the above cases the taxable income shall be computed on the basis of such period for which the separate return is filed, and the tax shall be paid thereon at the rate in effect during the calendar year in which such period is included; and, except for the period during which the taxpayer dies, the exemptions allowed in this chapter shall be reduced respectively to amounts which bear the same ratio to the full exemptions provided for as the number of months in such period to 12 months.

(b) Corporations filing Alabama consolidated returns. If a corporation changes the basis of computing its income from the fiscal year to the calendar year by virtue of its election to file an Alabama consolidated return under Section 40-18-39, an Alabama consolidated return shall be filed for the period between the close of the last fiscal year for which the return shall be filed and the following December 31. If the change is made from the calendar year to the fiscal year, and the taxpayer elects to file an Alabama consolidated return under Section 40-18-39, an Alabama consolidated return shall be filed for the period between the close of the last calendar year for which the return was filed and the date designated as the close of the first fiscal year. If the change is made from one fiscal year to another fiscal year, and the taxpayer elects to file an Alabama consolidated return under Section 40-18-39, an Alabama consolidated return shall be filed for the period between the close of the former fiscal year and the date designated as the close of the new fiscal year for the Alabama affiliated group. If a taxpayer filing an initial return for income tax keeps accounts on the basis of a fiscal year, and the taxpayer elects to file an Alabama consolidated return under Section 40-18-39, the taxpayer shall file an Alabama consolidated return for the period between the beginning of the calendar year in which its fiscal year ends and the end of such fiscal year for the Alabama consolidated group. In all the above cases, the taxpayer's taxable income shall be computed on the basis of the period for which the Alabama consolidated return is filed, and the tax shall be paid thereon at the rate in effect during the calendar year in which such period is included.

(a) A corporation subject to the tax imposed by Section 40-18-2 shall pay a tax equal to six and one-half percent of the taxable income of the corporation, as defined in this chapter.

(b) If the taxpayer elects to file an Alabama consolidated return under Section 40-18-39, the tax shall be assessed, collected, and paid annually for each taxable year at the rate specified in subsection (a), upon and with respect to the taxable income of the Alabama affiliated group.

Repealed by Act 99-664, effective Dec. 31, 2000.

With the exception of unrelated business taxable income determined in accordance with 26 U.S.C. § 512, the tax imposed by Section 40-18-31 shall not apply to the organizations referred to in 26 U.S.C. § 501(a), and the following entities:

(1) Farmers and other mutual hail, cyclone, or fire insurance companies, mutual ditch or irrigation companies or like organizations of a purely local character, the income of which consists solely of assessments, dues, and fees collected from members for the sole purpose of meeting expenses;

(2) Farmers, fruit growers, or like associations organized and operated as sales agents for the purpose of marketing the products of members and turning back the proceeds of sales, less the necessary selling expenses, on the basis of quantity of produce furnished by them;

(3) Federal land banks and national farm loan associations as provided in 12 U.S.C. § 2055;

(4) All national banks and national banking associations and all corporations engaged in the business of banking and of conducting a financial business employing moneyed capital coming into competition with the business of national banks during and for the periods during which such national banks and corporations are subject to an excise tax imposed by this state on or with respect to their respective incomes;

(5) Building and loan associations, substantially all the business of which is confined to making loans to members and insurance companies upon which the statutes of Alabama impose a tax upon their premium income; and

(6) Counties, municipalities, municipal corporations, political subdivisions of the state, instrumentalities of counties, municipalities, municipal corporations, the State of Alabama, and corporations or associations owned solely by counties, municipalities or the State of Alabama.

In the case of a corporation subject to the tax imposed by Section 40-18-31, the term 'taxable income' means federal taxable income without the benefit of federal net operating losses plus the additions prescribed and less the deductions and adjustments allowed by this chapter and as allocated and apportioned to Alabama.

The following items shall be added to federal taxable income for purposes of computing taxable income under this chapter:

(a) State and local income taxes that are deductible in computing federal taxable income.

(b) Interest on obligations of state or local governments other than Alabama that is excludable from gross income for federal income tax purposes.

(c) Refunds of federal income taxes deducted.

(d) Dividends received from a corporation in which the taxpayer owns less than 20% of the stock (by vote and value), but only to the extent such dividends are properly deducted in computing taxable income for federal income tax purposes.

(a) The following items shall be deducted from federal taxable income for purposes of computing taxable income under this chapter:

(1) Refunds of state and local income taxes.

(2) Federal income tax paid or accrued during the taxpayer's taxable year. The portion of federal income tax deductible by a corporation earning income from sources both inside and outside of Alabama shall be determined by the ratio that the corporation's taxable income, computed without the deduction for federal income tax, apportioned and allocated to Alabama bears to the corporation's taxable income, computed without the deduction for federal income tax, apportioned and allocated everywhere.

(3) Interest income earned on obligations of the United States.

(4)a. Interest income earned on obligations of the State of Alabama or its subdivisions or instrumentalities thereof to the extent included in gross income for the purposes of federal income taxation.

b. Interest income earned on obligations of the State of Alabama or its subdivisions or instrumentalities thereof to the extent included in gross income for the purposes of federal income taxation if such obligations were issued prior to January 1, 1995, to pay the cost of assets to which subsections (c) through (e) of Section 40-9B-7 apply.

(5) The amount of any aid or assistance, whether in the form of property, services or monies, provided to the State Industrial Development Authority pursuant to Section 41-10-44.8(d) in order to induce an approved company to undertake a major project within the state.

(6) Expenses otherwise deductible that were not deducted on the federal income tax return as a result of an election to claim a credit for those expenses.

(7) If the taxpayer owns greater than 20 percent of the stock, by vote or value, of the distributing corporation the following deductions are allowed:

a. Amounts described in 26 U.S.C. § 78;

b. Dividend income, including amounts described in 26 U.S.C. § 951, from non-U.S. corporations to the same extent such dividend income would be deductible under 26 U.S.C. § 243 if received from U.S. corporations; and

c. Dividends received from foreign sales corporations as defined in 26 U.S.C. § 922.

(8) The portion of total deductible interest expense classified as nonbusiness interest expense not deductible at arriving at apportioned income, but instead allocated to the situs of the related nonbusiness income producing assets, shall be based upon the ratio of the average cost of the corporation's nonbusiness assets to the average cost of the corporation's total assets.

(9) The interest portion of rent paid under lease agreements entered into prior to January 1, 1995, relating to obligations issued by the State of Alabama or subdivisions or instrumentalities thereof, to the extent that such obligations were issued to pay the cost of assets to which subsections (c) through (e) of Section 40-9B-7 apply.

(10) The amount by which the depletion allowance specified in Section 40-18-16(b) exceeds the depletion allowance deducted in calculating federal taxable income.

(b) Restrictions on the deductibility of certain intangible expenses and interest expenses with a related member.

(1) For purposes of computing its taxable income, a corporation shall add back otherwise deductible interest expenses and costs and intangible expenses and costs directly or indirectly paid, accrued, or incurred to, or in connection directly or indirectly with one or more direct or indirect transactions, with one or more related members, except to the extent the corporation shows, upon request by the commissioner, that the corresponding item of income was in the same taxable year: a. Subject to a tax based on or measured by the related member's net income in Alabama or any other state of the United States, or b. subject to a tax based on or measured by the related member's net income by a foreign nation which has in force an income tax treaty with the United States, if the recipient was a 'resident' (as defined in the income tax treaty) of the foreign nation. For purposes of this section, 'subject to a tax based on or measured by the related member's net income' means that the receipt of the payment by the recipient related member is reported and included in income for purposes of a tax on net income, and not offset or eliminated in a combined or consolidated return which includes the payor.

(2) The corporation shall make the adjustments required in subdivision (1) unless the corporation establishes that the adjustments are unreasonable, or the corporation and the Commissioner of Revenue agree in writing to the application or use of alternative adjustments and computations. Nothing in this section shall be construed to limit or negate the commissioner's authority to otherwise enter into agreements and compromises otherwise allowed by law.

(3) The adjustments required in subdivision (1) shall not apply to that portion of interest expenses and costs and intangible expenses and costs if the corporation can establish that the transaction giving rise to the interest expenses and costs or the intangible expenses and costs between the corporation and the related member did not have as a principal purpose the avoidance of any Alabama tax and the related member is not primarily engaged in the acquisition, use, licensing, maintenance, management, ownership, sale, exchange, or any other disposition of intangible property, or in the financing of related entities. If the transaction giving rise to the interest expenses and costs or intangible expenses and costs, as the case may be, has a substantial business purpose and economic substance and contains terms and conditions comparable to a similar arm's length transaction between unrelated parties, the transaction will be presumed to not have as its principal purpose tax avoidance, subject to rebuttal by the Commissioner of the Department of Revenue.

(4) Nothing in this section shall require a corporation to add to its taxable income more than once any amount of interest expenses and costs or intangible expenses and costs that the corporation pays, accrues or incurs to a related member described in subdivision (1).

(5) Nothing in this section shall be construed to limit or negate the commissioner's authority to make adjustments under this chapter.

(6) This subsection shall not limit the deduction of the interest portion of rent paid under lease agreements described in subsection (a)(9).

(c) Except with regard to payments described in subsections (a)(4)b and (a)(9), nothing in this section shall be construed to allow any item to be deducted more than once or to allow a deduction for any item that is excluded from income or to allow any item to be included in the Alabama taxable income of more than one taxpayer.

(d) The following credits shall be allowed against the tax levied by Section 40-18-31:

(1) the amount provided to an approved company pursuant to Section 41-10-44.8(a)(1), subject however, to the limitations contained in Section 41-10-44.8(c); and

(2) the amount provided in Section 41-10-44.9 to an approved company for a payment by such company into a tax increment fund.

In computing the taxable income of corporations subject to income tax as outlined in Section 40-18-35, there shall be allowed, in addition to the deductions specified therein, a deduction for the sum of the net operating losses which may be carried forward to the taxable year for which the net income of the corporation is being computed.

(1) The term 'net operating loss' for the purposes of this section means the excess of the deductions (other than the deduction allowed by this subdivision) allowed by this chapter during a taxable year of the corporation over the corporation's gross income during that taxable year. For purposes of this paragraph, the corporation's gross income and allowable deductions shall be determined under the provisions of this chapter applicable to the year in which the net operating loss arises.

(2) A net operating loss shall be carried forward to the earliest subsequent taxable year in which the corporation has taxable income (determined without taking into account the deduction allowed by this subdivision). The amount of a net operating loss which may be carried to any later taxable year shall be the excess of the net operating loss over the sum of the amounts thereof deductible under this subdivision in all the taxable years preceding this taxable year.

(3) If net operating losses arising in more than one taxable year can be carried forward to a taxable year of the corporation, the net operating loss arising from the earliest of those years shall be deducted first.

(4) The net operating loss deduction allowed by this section shall be limited to sources attributable to Alabama.

(5) A net operating loss may be carried forward and deducted only during the 15 consecutive year period immediately following the taxable year in which it arose.

(6) In the case of an acquiring corporation subject to the rules of 26 U.S.C. § 381, or in the case of a new loss corporation within the meaning of 26 U.S.C. § 382, or in the case of the recognized built-in gains of a gain corporation within the meaning of 26 U.S.C. § 384, only the net operating losses as are allowable in accordance with 26 U.S.C. §§ 381, 382, and 384 shall be allowed as a deduction under this section. This subdivision shall be applied before the limitations in the preceding subdivisions are applied.

(7) Notwithstanding the foregoing provisions of this section, for a taxpayer's taxable year beginning during calendar year 2001 no deduction for any net operating loss shall be allowed or allowable. If and only to the extent that any net operating loss deduction is disallowed by reason of this subdivision, the date on which the amount of the disallowed net operating loss deduction would otherwise expire will be extended by one year. A corporation dissolved and completely liquidated within calendar year 2001 may use its net operating loss without the restrictions provided in this subdivision.

Repealed by Act 99-664, effective Dec. 31, 2000.

In computing net income of corporations, no deduction shall in any case be allowed in respect to any of the items specified in Section 40-18-17.

Repealed by Act 99-664, effective Dec. 31, 2000.

(a) Except as provided in subsection (c), every corporation, joint stock company, or association subject to income tax under this chapter shall file a return with the Department of Revenue for each taxable year, stating specifically the items of its gross income and the deductions and credits allowed by this chapter. In cases where receivers, trustees in bankruptcy, or assignees are operating the property or business of corporations, such receivers, trustees, or assignees shall file returns for such corporations in the same manner and form as corporations are required to file returns. Any tax due on the basis of such returns filed by receivers, trustees, or assignees shall be collected in the same manner as if collected from the corporations of whose business or property they have custody and control. Returns filed on the basis of the calendar year shall be filed on or before March 15 following the close of the calendar year. Returns filed on the basis of a fiscal year shall be filed on or before the fifteenth day of the third month following the close of the fiscal year. The Department of Revenue may grant a reasonable extension of time for filing returns under such rules and regulations as it shall prescribe. Except in the case of taxpayers who are abroad, no such extension shall be for more than six months.

(b) As used in this chapter, unless the context requires otherwise:

(1) 'Alabama affiliated group' means a group of corporations, each member of which is subject to tax under Section 40-18-31 and Public Law 86-272 (15 U.S.C. §§ 381-384), which are members of an affiliated group as defined in 26 U.S.C. § 1504 and which affiliated group files a federal consolidated corporate income tax return, each member of which:

a. Has the same taxable year;

b. Is a member of the group for the entire taxable year or was a member of the group for a portion of the taxable year if the member was subject to Section 40-18-31 during the entire portion of the taxable year during which it was not a member of the federal consolidated group;

c. Apportions Alabama taxable income or loss separately for each corporation;

d. Allocates taxable income or loss separately for each corporation in accordance with Section 40-27-1, Article IV;

e. Computes apportionable income or loss utilizing separate apportionment factors for each corporation in accordance with Section 40-27-1, Article IV; and

f. Combines and reports taxable income or loss computed in accordance with paragraphs c through e of this subsection on a single return for the Alabama affiliated group;

and which includes all members of the affiliated group included on the federal consolidated income tax return that are eligible under this section to be included in the Alabama affiliated group; but shall not include corporations subject to the insurance premium license tax imposed by Section 27-4A-1 et seq. or the financial institution excise tax imposed by Section 40-16-1 et seq.

(2) 'Alabama consolidated return' means an Alabama corporation income tax return filed by or on behalf of the members of an Alabama affiliated group in accordance with this section, pursuant to an election made under subsection (c) below.

(3) 'Separate return' means an Alabama corporation income tax return filed by a single corporation in accordance with this chapter.

(4) 'Common parent' shall have the meaning given to that term by 26 U.S.C. § 1504(a).

(5) 'Treasury regulations' means final and temporary regulations now or hereafter promulgated by the U.S. Treasury Department pursuant to 26 U.S.C. § 1501 et seq. References to applicable Internal Revenue Code sections in this section shall include the related Treasury regulations.

(c)(1) An Alabama affiliated group filing or required to file a federal consolidated income tax return may elect to file an Alabama consolidated return for the same taxable year. However, under no circumstances may the Department of Revenue compel a taxpayer to file an Alabama consolidated return if the taxpayer has not so elected.

(2) Notwithstanding any provision in this section to the contrary, foreign corporations that are members of an Alabama affiliated group electing to file an Alabama consolidated return and not otherwise subject to the business privilege tax levied by Section 40-14A-22 shall not become subject to the business privilege tax by virtue of being a member of an Alabama affiliated group filing an Alabama consolidated return.

(3) All transactions between and among members of the Alabama affiliated group shall be reported on an arm's length basis consistent with subsection (j) in determining the property, payroll, and sales factors of each member of the Alabama affiliated group, in determining the separate allocation and apportionment of income and loss by each member of the Alabama affiliated group, and in computing taxable income in accordance with Section 40-18-33.

(4) The election made in accordance with this subsection shall be filed by the common parent of the Alabama affiliated group as agent for all members of the Alabama affiliated group, on a form prescribed by the Department of Revenue. If the common parent is not a member of the Alabama affiliated group, the members shall designate to the Department of Revenue which member of the Alabama affiliated group shall serve in that role for purposes of this section. The election and designation of common parent, if required, shall be filed with the department on or before the due date of the Alabama consolidated return, including extensions, for the first taxable year for which the election is made and is to be effective.

(5) Each member of the Alabama affiliated group shall determine and allocate and apportion its separate income and loss under Chapter 27 before consolidation. For purposes of allocation and apportionment, each member of the Alabama affiliated group shall be considered a separate taxpayer. Any taxable loss of a member of the Alabama affiliated group shall be deductible against the taxable income of any other member of the Alabama affiliated group only if and to the extent such loss is apportioned and allocated to Alabama.

(6) The tax liability of the Alabama affiliated group shall be determined by applying the rate specified in Section 40-18-31 to the taxable income of the Alabama affiliated group. The separate taxable income or loss of each corporation that is included in the Alabama affiliated group shall be included in the consolidated taxable income or loss to the extent that its taxable income or loss is separately apportioned or allocated to the State of Alabama. The separate taxable income or loss of each member of the Alabama affiliated group, and the separate business and nonbusiness income of each member, shall be computed and determined in accordance with this chapter and with the rules of allocation and apportionment under Section 40-27-1, Article IV, and the regulations promulgated thereunder by the Department of Revenue.

(7) Any election to file an Alabama consolidated return pursuant to this subsection shall be binding on both the Department of Revenue and the Alabama affiliated group for a period beginning with the first month of the first taxable year for which the election is made and ending with the conclusion of the taxable year in which the one hundred twentieth consecutive calendar month expires, except that the election shall terminate automatically upon the revocation or termination of its federal consolidated return election. If an election made pursuant to this subsection is terminated by an Alabama affiliated group by virtue of the revocation or termination of its federal or Alabama consolidated return election, no member of the Alabama affiliated group may be included in an Alabama consolidated return filed by the Alabama affiliated group, or by another Alabama affiliated group with the same common parent or a successor to the same common parent, before the sixty-first month beginning after the first taxable year for which the election was revoked; provided, however, that the Department of Revenue may waive application of this provision to any corporation or Alabama affiliated group for any period, consistent with the provisions of 26 U.S.C. § 1504.

(8) An Alabama affiliated group that has made an Alabama consolidated return election under this subsection shall be assessed an annual fee for the privilege of filing an Alabama consolidated return, which shall be assessed, collected, and distributed as an income tax but shall be due and payable at the time the return is due, including any extensions thereof. The annual fee shall be a graduated fee based upon the aggregate amount of total assets, determined in accordance with Treasury Department Form 1120 or any successor form, of the Alabama affiliated group for the taxable year to which the fee relates, as set out below:

(d) Each corporation included as part of an Alabama affiliated group filing an Alabama consolidated return shall be jointly and severally liable for the Alabama income tax liability of the Alabama affiliated group with respect to the taxable year, and the fee prescribed above; except that any corporation which was not a member of the Alabama affiliated group for the entire taxable year shall be jointly and severally liable only for the portion of the Alabama consolidated income tax liability attributable to that portion of the year during which the corporation was a member of the Alabama affiliated group, prorated on a daily basis.

(e) Every corporation return or report required by this chapter shall be executed by one of the following officers of the corporation: The president, vice-president, secretary, treasurer, assistant secretary, assistant treasurer, or chief accounting or financial officer, except that in the case of an Alabama affiliated group filing an Alabama consolidated return, one of the above-described officers of the common parent of the Alabama affiliated group may execute the return on behalf of the Alabama affiliated group. The Department of Revenue may require a further or supplemental report of information and data necessary for computation of the tax.

(f) If the taxpayer has requested an extension of time for the filing of a separate or Alabama consolidated return, the period during which such return will be considered timely filed shall not expire until 10 days after the Department of Revenue mails to the taxpayer a rejection of its request for an extension of time for filing such return.

(g) If, in a taxable year preceding the filing of the first Alabama consolidated return for the Alabama affiliated group of which the corporation is a member, (1) the corporation realized a gain or loss on a transaction; (2) the corporation was subject to tax under Section 40-18-31 in the year; (3) the transaction was treated as a deferred intercompany transaction for federal income tax purposes; and (4) the transaction was not deferred for Alabama income tax purposes, the taxable income and basis in the hands of the Alabama affiliated group shall be adjusted to reflect the different treatment of the transaction and any property acquired or disposed of in the transaction.

(h) If, in a taxable year before the corporation became a member of an Alabama affiliated group that has elected to file an Alabama consolidated return, the corporation incurred a net operating loss, the deductibility of the loss on the Alabama consolidated return shall be limited to only the amount necessary to reduce to zero the Alabama taxable income, calculated on a separate return basis, of the corporation that incurred the net operating loss. Except as provided in the preceding sentence, the separate return limitation year ('SRLY') rules contained in 26 U.S.C. § 1502 shall apply.

(i) Nothing in this section shall be construed as allowing or requiring the filing of a combined income tax return under the unitary business concept.

(j) The Department of Revenue shall promulgate regulations interpreting the provisions of this section that are consistent, to the maximum extent possible, with applicable Treasury regulations. The regulations shall further provide that, if the commissioner, for the tax year in question, establishes that one or more members of an Alabama affiliated group have engaged in any nonarm's-length transaction that causes a material distortion of income allocated or apportioned to this state, the commissioner may deny retroactively, for the taxable year or years in which the material distortion occurs or occurred, the consolidation election of any member of an Alabama affiliated group, in order to fairly represent the tax base attributable to this state.

(k) Notwithstanding subdivision (c) (7), due to the material change in the criteria for qualification as a member of an Alabama affiliated group, an Alabama affiliated group filing an Alabama consolidated return under this section, prior to its amendment by Act 2001-1089, shall have the option either to terminate its election with respect to tax years after the period covered by the last Alabama consolidated return due under this section prior to its amendment, or to re-elect under the revised criteria imposed by Act 2001-1089 and to begin another 120 calendar month election period. The decision of an Alabama affiliated group currently filing an Alabama consolidated income tax return to opt out of the Alabama consolidated return election shall be evidenced by written notice thereof to the department. Such notice shall be filed by March 15, 2002, or the due date, with extensions, of the last consolidated income tax return due to be filed under the law prior to its amendment by Act 2001-1089, whichever date occurs last. The failure to timely file such notice shall be deemed an election by those members of the Alabama affiliated group that are subject to tax under Section 40-18-31 and otherwise qualify under this section as members of an Alabama affiliated group to file an Alabama consolidated return under this section, as amended, including a new 120-calendar month election period under subdivision (c)(7).

The income tax provided in this chapter shall be reported on forms as prescribed by the department. The failure to receive such form from the department shall not relieve a taxpayer from liability for any tax penalty or interest otherwise due. The tax due as reported on such return shall constitute a prima facie liability for that amount. The department may compute and assess additional tax penalty or interest against a taxpayer in accordance with the procedures set forth in Chapter 2A of this title.

Any surplus remaining from the proceeds of the tax imposed by this chapter after providing for interest and installment annual payments or annual amortization installments on the current debts of the state as of September 30, 1932, shall be applied to the reduction of the ad valorem state tax on real and personal property.

(a) Time of payment for individuals. In the case of individuals the total balance of the tax owed after credits for taxes paid through withholding as provided in Section 40-18-78, or through estimated payments as provided in Sections 40-18-82 and 40-18-83, shall be due and payable on April 15 following the close of the calendar year or, if the return should be made on the basis of a fiscal year, then on the fifteenth day of the fourth month following the close of the fiscal year.

(b) Time of payment for fiduciaries. In the case of fiduciaries, the total amount of the tax imposed by this chapter shall be paid on April 15 following the close of the calendar year or, if the return should be made on the basis of a fiscal year, then on the fifteenth day of the fourth month following the close of the fiscal year.

(c) Time of payment for corporations. In the case of corporations, the balance of the tax owed after credits for taxes paid through estimated payments as provided in Section 40-18-80.1 shall be due and paid on March 15 following the close of the calendar year or, if the return should be made on the basis of the fiscal year, then on the fifteenth day of the third month following the close of the fiscal year.

(d) Voluntary advance payment. The tax imposed by this chapter or any estimated tax payment thereof may be paid, at the election of the taxpayer, prior to the date prescribed for its payment.

Income arising from an installment sale (including the sale by a dealer in personal property) may be reported in accordance with 26 U.S.C. §453, provided that the amendment made to said Section 453 by the Tax Reform Act of 1984 (Pub. L. No. 98-369), adding 26 U.S.C. §453(i), shall not apply. The Department of Revenue shall prescribe regulations relating to the election to report on the installment method or not to report on the installment method.

Any person or corporation, joint stock company or association liable to income tax under this chapter, which shall fail to make return as required by this chapter within the time allowed, shall be guilty of a misdemeanor and on conviction thereof shall be fined not less than $10, nor more than $1,000.

In every respect herein specified in this chapter, returns for the levy and collection of the taxes herein provided for shall be subject to the lien provisions of this title.

All income taxes collected by the Department of Revenue shall be as soon as practicable turned over to the Treasurer and his receipt taken therefor.

The Department of Revenue shall not take any action to collect any income tax before the same becomes delinquent, except in cases of emergency where delayed action might result in the loss of such taxes.

All income tax returns filed under this chapter, or copies thereof on file with the State Department of Revenue, shall be open to inspection by officials or duly authorized agents of the Bureau of Internal Revenue lawfully charged with the administration or enforcement of the federal income tax law or officials or duly authorized agents lawfully charged with the administration or enforcement of the income tax laws of any state which allows the State of Alabama or its authorized officials or agents a like privilege, for the purpose of administration and enforcement of such laws, subject to the conditions hereinafter included. The inspection shall only be permitted under such rules and regulations as may be prescribed by the Commissioner of Revenue.

The assessment and collection of the income taxes imposed by this chapter shall be under the supervision of the Department of Revenue.

Every corporation, joint stock company, or association organized under the laws of the state or organized under the laws of any other state, nation, or territory and doing business in this state, whether taxable under this chapter or not, shall furnish to the officers and employees of the state charged with the duties of carrying out the provisions of this chapter, a true and accurate statement at such times and in such manner and form and setting forth such facts as the Department of Revenue shall deem necessary to enforce the provisions of this chapter. Such statement shall be made upon oath or affirmation of the officer or employee of the corporation, joint stock company, or association best qualified to furnish the desired information.

The Department of Revenue may at any time, in its discretion, require the taxpayer to furnish a sworn statement of the annual return of income made under the provisions of the act of Congress of the United States for the calendar or fiscal year in question or for the preceding calendar or fiscal year. Any person who shall willfully fail to comply with this demand shall be guilty of a misdemeanor and, on conviction thereof, shall be fined not more than $100, and may be sentenced to hard labor for the county for not more than six months, or both. No taxpayer shall be subjected to unnecessary examination or investigation, and only one inspection of a taxpayer's books or accounts shall be made for a taxable year unless the taxpayer requests otherwise or unless the Department of Revenue, after investigation, notifies the taxpayer in writing that an additional inspection is necessary, together with the reasons for such additional inspection.

The Department of Revenue shall from time to time, as said department shall deem desirable, promulgate such reasonable rules and regulations governing procedure and methods of ascertaining and determining gains and income so as to conform as nearly as possible to the best accounting practice in every trade or business and as most clearly reflecting the income therefrom.

There is hereby appropriated out of the proceeds of the income tax levied and collected under the provisions of this chapter to the Property Tax Relief Fund such an amount as may be necessary for the replacement of any revenues lost by reason of the exemption of homesteads from all state ad valorem taxes as provided for in this title, after provision has been made for the payment of any and all expenses incurred by the Department of Revenue in the administration of this chapter and in the collection of the taxes as provided herein; provided, that the amount of such expenses, including salary, travel, equipment, and all items of cost necessary for the enforcement of the provisions of this chapter shall be limited to the amount appropriated therefor by the Legislature in the general appropriation bill and shall be budgeted, allotted and expended pursuant to the provisions of Article 4 of Chapter 4 of Title 41. The Comptroller, with the approval of the Governor, is hereby directed to transfer out of the proceeds of the income tax levied and collected under the provisions of this chapter, after payment of the expenses in the administration of this chapter as provided herein, to the Property Tax Relief Fund such amount as may be necessary for the replacement of any revenues lost by exemption of homesteads from all state ad valorem taxes as is provided for in this title, and the residue shall be placed in the State Treasury to the credit of the Education Trust Fund to be used for the payment of public school teachers' salaries only.

In addition to all other appropriations heretofore or hereinafter made, there is hereby appropriated to the Department of Revenue for the fiscal year ending September 30, 2000, such amount as is reasonably required to offset its conversion costs as a first charge against the revenues from the tax levied by Act 99-664. For all subsequent years, there shall be appropriated to the Department of Revenue as a first charge against the revenues from the tax levied by Act 99-664 an amount that will offset its actual costs in the administration and regulation of this tax.

For the purpose of this article, the following terms shall have the respective meanings ascribed by this section:

(1) INTERNAL REVENUE CODE. The Internal Revenue Code of the United States, as amended and in effect January 1, 1955.

(2) EMPLOYER. 'Employer' as defined in the Internal Revenue Code.

(3) EMPLOYEE. 'Employee' as defined in the Internal Revenue Code.

(4) WAGES. 'Wages' as defined in the Internal Revenue Code.

(a) Every employer, as defined under the laws of the United States in effect July 1, 1982, or as subsequently may be defined, with respect to income tax collected at source, making payment of wages as defined under such laws to employees, shall deduct and withhold upon such wages, reduced by the optional standard deduction provided in subsection (b) of Section 40-18-15 and the federal income tax withheld, a tax equal to two percent of the first $500 or less, four percent of the next $2,500 or less, five percent of the excess over $3,000, by which the amount of such wages paid or to be paid in the calendar year by such employer to such employee, exceeds the amount of the exemptions granted to such employee under Section 40-18-19 as claimed on a certificate to be filed with the employer in such form and containing such information and detail as may be prescribed by the commissioner, pursuant to the provisions of Section 40-18-73; provided, however, that in determining the amount to be deducted and withheld under this subsection (a), an employer shall allow as a credit against such amount the job development fee described in Section 41-10-44.7(b).

(b) At the election of the employer with respect to such employee, the employer may deduct and withhold upon the wages paid to such employee a tax determined on the basis of tables to be prepared and furnished by the commissioner, which tax shall be substantially equivalent to the tax provided in subsection (a) of this section and which shall be in lieu of the tax required in such subsection.

(c) In determining the amount to be deducted and withheld under this section, the wages may, at the election of the employer, be computed to the nearest dollar.

(d) The department may, by regulations, authorize employers:

(1) To estimate the wages which will be paid to any employee in any quarter of the calendar year;

(2) To determine the amount to be deducted and withheld upon each payment of wages to such employee during such quarter as if the appropriate average of the wages so estimated constituted the actual wages paid; and

(3) To deduct and withhold upon any payment of wages to such employee during such quarter such amount as may be necessary to adjust the amount actually deducted and withheld upon the wages of such employee during such quarter to the amount that would be required to be deducted and withheld during such quarter if the payroll period of the employee was quarterly.

(e) The department is authorized to provide by regulation, under such conditions and to such extent as it deems proper, for withholding in addition to that otherwise required under this section and in cases in which the employer and the employee agree to such additional withholding. Such additional withholding shall, for all purposes, be considered the tax required to be deducted and withheld under this chapter.

If the remuneration paid by an employer to an employee for services performed during one half or more of any payroll period of not more than 31 consecutive days constitutes wages, all the remuneration paid by such employer to such employee for such period shall be deemed to be wages; but if the remuneration paid by an employer to an employee for services performed during more than one half of any such payroll period does not constitute wages, then none of the remuneration paid by such employer to such employee for such period shall be deemed to be wages.

(a) Every employee, on or before the date of commencement of employment, shall furnish his or her employer with a signed withholding exemption certificate relating to the number of withholding exemptions which he or she claims, which in no event shall exceed the number to which the employee is entitled.

(b) Withholding exemption certificates shall take effect upon the beginning of the employee's first payroll period, or the first payment of wages made without regard to a payroll period, after the date on which the certificate is completed and submitted.

(c) A withholding exemption certificate which takes effect under this section shall continue in effect with respect to the employer until another certificate takes effect under this section. If a withholding exemption certificate is submitted to take the place of an existing certificate, the employer, at his or her option, may continue the old certificate in force with respect to all wages paid on or before the first status determination date and adjust the withholding on January 1 or July 1, whichever occurs at least 30 days after the date on which the new certificate is furnished, or may adjust the withholding immediately.

(d) If, on any day during the calendar year, the number of withholding exemptions to which the employee may reasonably be expected to be entitled at the beginning of his or her next taxable year is different from the number to which the employee is currently entitled, the employee shall, according to rules established by the department, provide the employer with a withholding exemption certificate relating to the number of exemptions which he or she claims with respect to the next taxable year, which shall not exceed the number to which he or she may reasonably be expected to be so entitled. Exemption certificates issued pursuant to this subsection shall not take effect with respect to any payment of wages made in the calendar year in which the certificate is submitted.

(e) Whenever the number of exemptions of an employee either increases or decreases, the employee shall submit to the employer a new exemption certificate which accurately states the true number of exemptions to which that employee is entitled.

(f) Effective for tax years beginning January 1, 1998, and thereafter, an employer shall not be required to deduct and withhold any tax under this chapter upon a payment of wages to an employee if there is in effect with respect to the payment a withholding exemption certificate furnished to the employer by the employee certifying that the employee:

(1) Incurred no liability for income tax imposed under this chapter for the preceding taxable year.

(2) Anticipates that he or she will not incur a liability for income tax imposed under this chapter for the current year.

(g) Withholding exemption certificates shall be in the form and contain that information which the department may require, and be submitted in accordance with regulations which the department shall prescribe.

(a) Every employer required to deduct and withhold tax under Section 40-18-71 shall for each quarterly period, on or before the last day of the month following the close of each quarterly period, file a return and pay to the Department of Revenue the tax required to be withheld under Section 40-18-71. Where the aggregate amount required to be deducted and withheld by any employer for either the first or second month of a calendar quarter exceeds $1,000 the employer shall by the fifteenth day of the succeeding month file a return and pay the aggregate amount to the Department of Revenue. The amount paid shall be allowed as a credit against the liability shown on the employer's quarterly withholding return required by this section. Any employer required under this section to make monthly payments of the aggregate amount required to be deducted and withheld that does not file a return and pay the aggregate amount by the prescribed date shall be subject to the same penalties provided in Section 40-2A-11.

(b) If the department, in any case, has reason to believe that the collection of the tax provided for in Section 40-18-71 is in jeopardy, it may require the employer to file a return and pay the tax at any time.

(c) Every employer, who fails to withhold or pay to the department any sums required by this chapter to be withheld and paid, shall be personally and individually liable therefor to the State of Alabama, and any sum or sums withheld in accordance with the provisions of Section 40-18-71 shall be deemed to be held in trust for the state.

(d) In the event an employer fails to withhold or pay to the department any amount required to be withheld under Section 40-18-71, that amount may be assessed against the employer in the same manner as is prescribed for the assessment of income tax under the provisions of Section 40-18-40. The employer may appeal from the final assessment in the same manner as is prescribed by law for appeals by the taxpayer. When no appeal is taken by the employer, execution may be issued upon the final assessment in the same manner as is provided by law for the issuance of an execution by the Department of Revenue.

(e) The state shall have a lien upon all the property of any employer who fails to withhold or pay to the department sums required to be withheld under Section 40-18-71. If the employer withholds but fails to pay the amounts withheld to the department, the lien shall accrue as of the date the amounts withheld were required to be paid to the department. If the employer fails to withhold, the lien shall accrue at the time the liability of the employer becomes fixed.

(a) Every person required to deduct and withhold from an employee a tax under Section 40-18-71 shall furnish to each such employee in respect of the remuneration paid by such person to such employee during the calendar year, on or before January 31 of the succeeding year, or, if his employment is terminated before the close of such calendar year, within 30 days from the day on which the last payment of remuneration is made, a written statement showing the following:

(1) The name of such person;

(2) The name of the employee and his Social Security account number;

(3) The total amount of wages, as defined in Section 40-18-70;

(4) The total amount deducted and withheld as tax under Section 40-18-71.

(b) The statement required to be furnished by this section in respect of any wages shall be furnished at such other times, shall contain such other information and shall be in such forms as the department may by regulations prescribe. A duplicate of such statement, if made and filed in accordance with regulations prescribed by the department, shall constitute the return required to be made in respect of such wages under Section 40-18-26.

(c) The department may promulgate regulations providing for reasonable extensions of time, not in excess of 30 days, to employers required to furnish statements under this section.

An employer shall be liable for the payment of the tax required to be deducted and withheld under Section 40-18-71 and shall not be liable to any person for the amount of any such payment.

(a) Where there has been an overpayment of tax under Section 40-18-71, refund or credit shall be made to the employer only to the extent that the amount of such overpayment was not deducted and withheld under Section 40-18-71 by the employer.

(b) Any refund allowed by this section shall be administered in accordance with the procedures set out in Chapter 2A of this title.

The amount deducted and withheld as tax under Section 40-18-71 during any calendar year upon the wages of any individual shall be allowed as a credit to the recipient of the income against the tax imposed by Section 40-18-5 for taxable years beginning in such calendar year. If more than one taxable year begins in such calendar year, such amount shall be allowed as a credit against the tax for the last taxable year so beginning.

Where there has been an overpayment of any tax imposed under Section 40-18-71 or 40-18-82, the amount of such overpayment may, if a petition for refund is timely filed or the department otherwise allows an automatic refund within that period, be credited against any income tax or installment thereof then due from the taxpayer, and any balance shall be refunded to the taxpayer.

(a) If 90 percent of the tax, determined without regard to the credit under Section 40-18-78, in the case of individuals other than farmers exercising an election under Sections 40-18-82 and 40-18-83, or 66 2/3 percent of such tax so determined in the case of such farmers, exceeds the estimated tax increased by such credit, there shall be added to the tax an amount equal to such excess, or equal to six percent of the amount by which such tax so determined exceeds the estimated tax so increased, whichever is the lesser.

(b) Subsection (a) shall not apply to the taxable year in which:

(1) The death of the taxpayer occurs.

(2) The taxpayer makes a timely payment on April 15, June 15, and September 15 of that year, and on January 15 of the year succeeding the taxable year, or in the case of farmers exercising an election under Section 40-18-83(a)(6) and who make payment in an amount equal to one hundred percent of the tax shown on the return for the preceding taxable year (or, if no return is filed, ninety percent of the tax for such year).

(3) The liability for the previous year was zero (0) (except for a net operating loss carryback to that year).

(a) Addition to tax. Except as otherwise provided in this section, in the case of any underpayment of estimated tax by a corporation, there shall be added to the tax under this chapter for the taxable year an amount determined by applying the underpayment rate established under 26 U.S.C. § 6621, to the amount of the underpayment for the period of the underpayment.

(b) Amount of underpayment; period of underpayment. For purposes of subsection (a):

(1) Amount is the required installment, in excess of the amount (if any) of the installment paid on or before the due date for the installment.

(2) The period of the underpayment shall run from the due date for the installment to whichever of the following dates is the earlier:

a. The 15th day of the 3rd month following the close of the taxable year, or

b. With respect to any portion of the underpayment, the date on which such portion is paid.

(3) For purposes of paragraph (2)b, a payment of estimated tax shall be credited against unpaid required installments in the order in which such installments are required to be paid.

(c) Number of required installments; due dates. For purposes of this section there shall be four required installments for each taxable year, the time for payment of installments shall be:

(d) Amount of required installments. For purposes of this section:

(1) a. Except as otherwise provided in this section, the amount of any required installment shall be 25 percent of the required annual payment.

b. Except as otherwise provided in this subsection, the term 'required annual payment' means the lesser of:

1. 100 percent of the tax shown on the return for the taxable year (or, if no return is filed, 100 percent of the tax for such year), or

2. 100 percent of the tax shown on the return of the corporation for the preceding taxable year. However, this shall not apply if the preceding taxable year was not a taxable year of 12 months, or the corporation did not file a return for such preceding taxable year showing a liability for tax. For the first taxable year beginning after December 31, 2000, the first sentence of this subparagraph shall be applied using 130 percent of the tax shown on the return for the preceding taxable year in lieu of 100 percent of such amount.

(2) Large corporations are required to pay 100 percent of the current year tax.

(3) Except as provided in paragraph b, subparagraph 2 of paragraph (1)b shall not apply in the case of a large corporation.

a. The corporation may use the amount of last year's tax for first installment.

b. Paragraph a shall not apply for purposes of determining the amount of the first required installment for any taxable year. Any reduction in such first installment by reason of the preceding sentence shall be recaptured by increasing the amount of the next required installment determined under subdivision (1) by the amount of such reduction.

(e) Lower required installment where annualized income installment or adjusted seasonal installment is less than amount determined under subsection (d). In the case of any required installment, the corporation may establish that the accrued income installment or the adjusted seasonal installment is less than the amount determined under (d) (1) in accordance with 26 U.S.C. § 6655(e).

(f) Exception where tax is small amount. No addition to tax shall be imposed under subsection (a) for any taxable year if the tax shown on the return for such taxable year (or, if no return is filed, the tax) is less than $5000.

(g) Definitions and special rules. For purposes of this section, the meaning of the following terms are:

(1) TAX:

a. The excess of the tax levied by Sections 40-18-31, over

b. The credits against tax provided by Sections 40-18-35(b) and 40-18-243.

(2) LARGE CORPORATION:

a. Any corporation if such corporation (or any predecessor corporation) had taxable income of $1,000,000 or more for any taxable year during the testing period.

b. Rules for applying subparagraph a.

1. Testing period. For purposes of subparagraph a the term 'testing period' means the 3 taxable years immediately preceding the taxable year involved.

2. Certain carrybacks and carryovers not taken into account. For purposes of subparagraph a., taxable income shall be determined without regard to any net operating loss carried to the taxable year under Section 40-18-35.1.

(3) CERTAIN TAX-EXEMPT ORGANIZATIONS:

a. Any organization subject to the tax on unrelated business taxable income shall be treated as a corporation subject to tax under Section 40-18-31.

b. Any reference to taxable income shall be treated as including a reference to unrelated business taxable income. In the case of any organization described in subparagraph a, subsection (b)(2)a shall be applied by substituting '5th month' for '3rd month.'

(4) APPLICATION OF SECTION TO CERTAIN TAXES IMPOSED ON S CORPORATIONS. In the case of an S corporation, for purposes of this section:

a. The following taxes shall be treated as imposed by Section 40-18-31:

1. The tax imposed by Section 40-18-174(a) (or the corresponding provisions of prior law.)

2. The tax imposed by Section 40-18-175(a).

b. Paragraph (2) of subsection (d) shall not apply.

c. Subparagraph 2 of subsection (d)(1)b shall be applied as if it read as follows:

2. The sum of

(i) The amount determined under subparagraph 1 by only taking into account the taxes referred to in subparagraphs 1 and 3 of subsection (g)(4)a and

(ii) 100 percent of the tax imposed by Section 40-18-175(a) which was shown on the return of the corporation of the preceding taxable year.

d. The requirement in the last sentence in subsection (d)(1)b that the return for the preceding taxable year show a liability for tax shall not apply.

e. Any reference to subsection (e) to taxable income shall be treated as including a reference to the net recognized built-in gain or the excess passive income (as the case may be.)

(h) Fiscal years and short years.

(1) FISCAL YEARS. In applying this section to a taxable year beginning on any date other than January 1, there shall be substituted, for the months specified in this section, the months which correspond thereto.

(2) SHORT TAXABLE YEAR. This section shall be applied to taxable years of less than 12 months in accordance with regulations prescribed by the commissioner.

(i) Regulations. The commissioner shall prescribe such regulations as may be necessary to carry out the purposes of this section.

Any individual may elect to file a 'short form' return provided by the Department of Revenue and pay any tax due; provided, that the individual does not have income from sources other than wages except for interest and dividend income of not more than $1,500. Items allowed on the short forms shall be determined by regulation under the provisions of the Alabama Administrative Procedure Act.

(a) Individuals shall remit in accordance with subsection (b) if net income from sources other than wages, in the case of a single person or married persons filing separate returns, can reasonably be expected to exceed $1,875 for the taxable year; and in the case of married persons living with husband or wife and filing a joint return, if net income can be reasonably expected to exceed $3,750.

(b) The payments required under subsection (a) shall be remitted to the department on or before April 15 of the taxable year; except, that if the requirements of subsection (a) are first met:

(1) After April 1 and before June 2 of the taxable year, the payment shall be remitted on or before June 15 of the taxable year;

(2) After June 1 and before September 2 of the taxable year, the payment shall be remitted on or before September 15 of the taxable year; or

(3) After September 1 of the taxable year, the payment shall be remitted on or before January 15 of the succeeding taxable year. However, if a return is filed and payment made by January 15 of the succeeding taxable year by individuals, the estimated payment provided for by this subsection shall not be required.

(a) The estimated tax provided for in Section 40-18-82 shall be paid as follows:

(1) If the requirements of subsection (a) of Section 40-18-82 are first met on or before April 15 of the taxable year, the estimated tax shall be paid in four equal installments. The first installment shall be paid on April 15, the second and third on June 15 and September 15, respectively, of the taxable year and the fourth on January 15 of the succeeding taxable year for individuals.

(2) If the requirements of subsection (a) of Section 40-18-82 are first met after April 15 and not after June 15 of the taxable year and is not required by subsection (a) of Section 40-18-82 to be filed on or before April 15 of the taxable year, the estimated tax shall be paid in three equal installments. The first installment shall be paid on June 15 and the second on September 15 of the taxable year and the third on January 15 of the succeeding taxable year for individuals.

(3) If the filing requirements of subsection (a) of Section 40-18-82 are first met after June 15 and not after September 15 of the taxable year and is not required by subsection (a) of Section 40-18-82 to be filed on or before June 15 of the taxable year, the estimated tax shall be paid in two equal installments; the first installment shall be paid on September 15 and the second on January 15 of the succeeding taxable year for individuals.

(4) If the filing requirements of subsection (a) of Section 40-18-82 are first met after September 15 of the taxable year, and is not required by subsection (a) of Section 40-18-82 to be filed on or before September 15 of the taxable year, the estimated tax shall be paid in full on January 15 of the succeeding taxable year for individuals.

(5) If the installment payments are made after the time prescribed in subsection (a), subdivisions (2), (3), and (4) of this subsection shall not apply, and there shall be paid at the time of the payment all installments of estimated tax, including interest at the prescribed rate which would have been payable on or before that time if the installments had been paid within the time(s) prescribed in subsection (a) of Section 40-18-82, and the remaining installments shall be paid at the times at which and in the amounts in which they would have been payable.

(6) In the case of an individual whose estimated gross income from farming for the taxable year is at least two thirds of the total estimated gross income from all sources for the taxable year the individual shall be permitted to make the estimated payment on or before February 15 of the succeeding tax year, and further provided that if such an individual files a return on or before February 28 of the succeeding tax year and pays in full the amount computed on the return as payable, such return shall have the effect of satisfying the requirements prescribed in subdivisions (1), (2), (3), (4), and (5) of this subsection.

(b) If during the taxable year a taxpayer determines that the estimated tax payments were incorrect, the remaining installments, if any, shall be ratably increased or decreased as the case may be, to reflect the respective increase or decrease in the estimated tax; and if any taxpayer determination is made after October 15 of the taxable year, any increase in the estimated tax by reason thereof shall be paid at the time of the taxpayer determination.

(c) At the election of the taxpayer, any installment of the estimated tax may be paid prior to the date prescribed for its payment.

(d) Payment of the estimated tax, or any installment thereof, shall be considered payment on account of the tax for the taxable year. Assessment in respect of the estimated tax shall be limited to the amount paid.

(e) The application of this section, Section 40-18-82, and subsection (a) of Section 40-18-80 to taxable years of less than 12 months shall be as prescribed in regulations promulgated by the department.

(f) In the application of this section and Section 40-18-82 to taxpayers reporting income on a fiscal year basis, there shall be substituted for the dates specified therein the months corresponding thereto.

The 1983 amendment to Section 40-18-42 with respect to the requirements for corporations to file declarations of estimated tax and the payments of such estimated tax shall be in effect for all taxable years beginning January 1, 1983 and thereafter. The 1983 amendments to Sections 40-18-80, 40-18-82, and 40-18-83 with respect to the requirements for corporations to file declarations of estimated tax and the payments of such estimated tax shall be effective as follows: For the tax year beginning January 1, 1984 through December 31, 1984 corporations shall be required to file a declaration of estimated tax and pay an amount equal to one-half of the estimated tax. This one-half payment shall be paid in four equal installments as provided in Section 40-18-83. For the tax year beginning January 1, 1985 and all years thereafter, corporations shall be required to file and pay a declaration of estimated tax and pay such tax in accordance with the requirements of Sections 40-18-82 and 40-18-83.

Repealed by Act 98-502, §2.

Nothing in this article shall be construed to require declarations to be filed by estates and trusts.

As used in this division, the following terms shall have the following meanings, respectively, unless the context clearly indicates otherwise:

(1) PERSON. Individuals, firms, partnerships, companies, corporations, associations, trustees, receivers, the State of Alabama, and any of its agencies, authorities, boards, bureaus, commissions, departments, and instrumentalities, each incorporated municipality and any agencies, authorities, boards, bureaus, commissions, and departments of such municipalities, and the several counties of the State of Alabama and any agencies, authorities, boards, bureaus, commissions, and departments of such counties, and any other political subdivisions of the State of Alabama by whatever name or description.

(2) STATE. The State of Alabama.

(3) WINNINGS SUBJECT TO WITHHOLDING. Proceeds from a wagering transaction in those amounts and sources as defined in 26 U.S.C. §3402, as amended from time to time.

(4) PROCEEDS FROM A WAGER. Those proceeds as described in 26 U.S.C. §3402, as amended from time to time.

(5) WAGERING TRANSACTION. A wagering transaction as described in 26 U.S.C. §3402, as amended from time to time.

(a) Each person making any payment of proceeds from a wager which constitutes 'winnings subject to withholding' as defined by Section 40-18-90, shall deduct and withhold income tax in the amount of five percent of the payment.

(b) Each person making withholding of state income taxes as required by this division shall remit the same to the state Revenue Department in the same manner and at the same time as that provided for payments of other withheld income taxes as set out in Article 2, Chapter 18, of this title, and shall be subject to the same penalties as provided therein. Each person required to make withholding of state income taxes, who shall fail to do so, shall be personally liable for all amounts required to be withheld as provided in Sections 40-18-74, 40-18-76, 40-29-73 and 40-29-111.

(c) Any person receiving proceeds from a wager which constitutes winnings subject to withholding shall furnish the payer a statement, made under the penalties of perjury, which contains such information as shall be designated by the state Revenue Department as necessary to identify the recipient for tax compliance purposes.

(d) The payer shall furnish to the recipient a statement of the amount of winnings subject to withholding and the amount of tax withheld in accordance with procedures which shall be established by the state Revenue Department. Furthermore, the payer shall report to the Department of Revenue the payment of all such proceeds from wagers in those amounts as the same are required to be reported pursuant to 26 U.S.C. §6041, as amended from time to time.

(e) Each person for whom income tax was withheld pursuant to this division shall be entitled to a credit therefor against any income tax liability due this state as imposed by Chapter 18, Title 40.

For the purposes of this article, the following terms shall have the respective meanings ascribed by this section:

(1) CLAIMANT AGENCY. Only:

a. The Alabama Commission on Higher Education with respect to the collection of debts under:

1. The Alabama Student Grant Program provided for by Chapter 33A of Title 16; and

2. The Alabama Guaranteed Student Loan Program provided for by Chapter 33B of Title 16.

b. The Alabama Department of Human Resources with respect to the collection of debts and money owed under any and all of its public assistance programs and other programs administered by that department, including support programs administered pursuant to the requirements of Title IV-D of the Social Security Act.

c. The Alabama Medicaid Agency with respect to the collection of debts and money owed under any and all of the programs it administers.

d. The Alabama Department of Industrial Relations with respect to the collection or recovery, or both, of debts owed as a result of overpayments of state unemployment compensation benefits.

e. The Unified Judicial System with respect to the collection of fines and court costs owed as a result of any court or judicial proceeding.

(2) DEBTOR. Any individual owing money or having a delinquent account with any claimant agency, which obligation has not been adjudicated, satisfied by court order, set aside by court order, or discharged in bankruptcy.

(3) DEBT. Any liquidated sum due and owing any claimant agency which has accrued through contract, subrogation, tort, or operation of law regardless of whether there is an outstanding judgment for that sum, or any liquidated sum of child or spousal support, or both child and spousal support, due and owing any individual eligible for and receiving child support enforcement services through the Alabama Department of Human Resources.

(4) DEPARTMENT. The Department of Revenue of the State of Alabama.

(5) REFUND. The Alabama income tax refund which the department determines to be due any individual taxpayer.'

The collection remedy authorized by this article is in addition to and not in substitution for any other remedy available by law.

(a) A claimant agency may submit debts in excess of $25 to the department for collection through setoff, under the procedure established by this article, except in cases where the validity of the debt is legitimately in dispute, an alternate means of collection is pending and believed to be adequate, or such collection would result in a loss of federal funds or federal assistance.

(b) Upon the request of a claimant agency, the department shall set off any refund, as defined in subdivision (5) of Section 40-18-100, against the sum certified by the claimant agency as provided in this article.

(a) Within a time frame specified by the department, a claimant agency seeking to collect a debt through setoff shall supply the information necessary to identify each debtor whose refund is sought to be set off and certify the amount of debt or debts owed by each such debtor.

(b) If a debtor identified by a claimant agency is determined by the department to be entitled to a refund of at least $25 the department shall transfer an amount equal to the refund owed, not to exceed the amount of the claimed debt certified, to the claimant agency. When the income tax refund owed exceeds the claimed debt, the department shall send the excess amount to the debtor within a reasonable time after such excess is determined.

(c) At the time of the transfer of funds to a claimant agency pursuant to subsection (b) of this section, the department shall notify the taxpayer or taxpayers whose refund is sought to be set off that the transfer has been made. Such notice shall clearly set forth the name of the debtor, the manner in which the debt arose, the amount of the claimed debt, the transfer of funds to the claimant agency pursuant to subsection (b) of this section and the intention to set off the refund against the debt, the amount of the refund in excess of the claimed debt, the taxpayer's opportunity to give written notice to contest the setoff within 30 days of the date of mailing of the notice, the name and mailing address of the claimant agency to which the application for a hearing must be sent, and the fact that the failure to apply for such a hearing, in writing, within the 30-day period will be deemed a waiver of the opportunity to contest the setoff. In the case of a joint return or a joint refund, the notice shall also state the name of the taxpayer named in the return, if any, against whom no debt is claimed, the fact that a debt is not claimed against such taxpayer, the fact that such taxpayer is entitled to receive a refund if it is due him regardless of the debt asserted against his spouse, and that in order to obtain a refund due him such taxpayer must apply, in writing, for a hearing with the claimant agency named in the notice within 30 days of the date of the mailing of the notice. If a taxpayer fails to apply in writing for such a hearing within 30 days of the mailing of such notice, he will have waived his opportunity to contest the setoff.

(d) Upon receipt of funds transferred from the department pursuant to subsection (b) of this section, the claimant agency shall deposit and hold such funds in an escrow account until a final determination of the validity of the debt.

(a) When the claimant agency receives a protest or application in writing from a taxpayer within 30 days of the notice issued by the department pursuant to subsection (c) of Section 40-18-103, the claimant agency shall set a date to hear the protest and give notice to the taxpayer by registered or certified mail of the date so set. The time and place of such hearing shall be designated in such notice and the date set shall not be less than 15 days from the date of such notice. If, at hearing, the sum asserted as due and owing is found not to be correct, an adjustment to the claim may be made. The claimant agency shall give notice to the debtor of its final determination and inform the debtor of his right to appeal such final determination as provided in subsection (c) of this section.

(b) No issues shall be reconsidered at the hearing which have been previously litigated.

(c) If any debtor is dissatisfied with the final determination made at the hearing by the claimant agency, he may appeal the final determination to the Circuit Court of Montgomery County or to the circuit court of the county in which the debtor resides by filing notice of appeal with the administrative head of the claimant agency and with the clerk or register of the circuit court of the county to which the appeal shall be taken within 30 days from the date notice of final determination was given by claimant agency.

(a) Upon final determination of the amount of the debt due and owing by means of a hearing provided by Section 40-18-104 or by the taxpayer's default through failure to comply with Section 40-18-103 mandating timely request for review, the claimant agency shall remove the amount of the debt due and owing from the escrow account established pursuant to Section 40-18-103 and credit such amount to the debtor's obligation.

(b) Upon transfer of the debt due and owing from the escrow account to the credit of the debtor's account, the claimant agency shall notify the debtor in writing of the finalization of the setoff. Such notice shall include a final accounting of the refund which was set off including the amount of the refund to which the debtor was entitled prior to the setoff, the amount of the debt due and owing, the amount of the refund in excess of the debt which was returned to the debtor by the department pursuant to subsection (b) of Section 40-18-103, and the amount of the funds transferred to the claimant agency pursuant to Section 40-18-103 in excess of the debt determined to be due and owing at a hearing held pursuant to Section 40-18-104, if such a hearing was held. At such time, the claimant agency shall refund to the debtor the amount of the claimed debt originally certified and transferred to it by the department in excess of the amount of the debt finally found to be due and owing.

The department has priority over every claimant agency for collection by setoff under this article.

(a) Notwithstanding any confidentiality statute, the Commissioner of Revenue may provide to a claimant agency all information necessary to accomplish and effectuate the intent of this article.

(b) The information obtained by a claimant agency from the department in accordance with the provisions of this article shall retain its confidentiality and shall only be used by a claimant agency in pursuit of its debt collection duties and practices; and any employee or prior employee of any claimant agency who unlawfully discloses any such information for any other purpose, except as specifically authorized by law, shall be subject to the same penalties specified by law for unauthorized disclosure of confidential information by an agent or employee of the Department of Revenue.

When the setoff authorized by this article is exercised, the refund which is set off shall be deemed granted.

In those cases where the amount claimed to be due and owing by the claimant agency is less than the refund due the taxpayer the State Treasurer is authorized upon the request of the department to issue two warrants, one payable to the claimant agency for the amount claimed to be due and owing and one to the taxpayer for the amount of the refund in excess of the amount claimed to be due and owing by the claimant agency.

Repealed by Act 98-502, §2.

Repealed by Act 98–502, §2.

It is the intent of the Legislature to institute programs that will make Alabama more competitive with other states in the recruitment and retention of physicians and reduce inequities that a small or rural hospital and small or rural communities have in the funding and recruitment of physician services.

For the purposes of this article, the following words have the following meanings, respectively, unless the context clearly indicates otherwise:

(1) RURAL PHYSICIAN. A physician licensed to practice medicine in Alabama who practices and resides in a small or rural community and has admission privileges to a small or rural hospital.

(2) SMALL OR RURAL COMMUNITY. A community in Alabama that has less than 25,000 residents according to the latest decennial census and has a hospital with an emergency room.

(3) SMALL OR RURAL HOSPITAL. An acute care hospital that meets one of the following requirements:

a. Contains less than 105 beds and is located more than 20 miles, under normal travel conditions, from another acute care hospital located in Alabama.

b. Receives Medicare rural reimbursement from the federal government.

Beginning with the 1994 tax year, a person qualifying as a rural physician shall be allowed a credit against the tax imposed by Section 40-18-2, in the sum of $5,000. No credit shall be allowed to a rural physician who is, on May 4, 1993, practicing in a small or rural community. No credit shall be allowed to a physician who has previously practiced in a small or rural community unless, after May 4, 1993, that physician returns to practice in a small or rural community after having practiced in a large or urban community for at least three years. The tax credit may be claimed for not more than five consecutive tax years. The Department of Revenue shall promulgate any rules and regulations necessary to implement and administer the provisions of this article.

The following definitions apply to this article:

(1) APPROVED BASIC SKILLS EDUCATION PROGRAM. A basic skills education program that has received written approval from the Alabama Department of Education pursuant to this article.

(2) BASIC SKILLS EDUCATION PROGRAM. An approved employer provided or employer sponsored education program that enhances basic skills of employees up to and including the twelfth grade functional level.

(3) COSTS OF EDUCATION. Direct instructional expenses incurred for or relating to instructors, materials, or equipment used in the qualifying program, or for supplies, textbooks, or salaries, including compensation paid to employees while participating in an approved basic skills education program.

(4) EMPLOYEE. An individual resident of Alabama who is employed for at least 24 hours per week by the employer seeking the tax credit and who has been continuously employed for at least 16 weeks.

(5) EMPLOYER. An individual or corporate business, including, but not limited to, a subchapter 'S' corporation, that is subject to the state income tax.

(6) EMPLOYER PROVIDED. An approved basic skills education program offered by the employer on the premises of the employer or on premises approved by the Alabama Department of Education.

(7) EMPLOYER SPONSORED. A contractual arrangement with a school, college, university, adult basic skills education program, or other approved provider that offers an approved basic skills education program that is paid for by the employer.

Beginning with tax year 1993, a tax credit of 20 percent of the actual costs of education shall be provided to an employer who provides or sponsors an approved basic skills education program pursuant to this article.

The tax credit available to an employer pursuant to this article shall be limited to the amount of the employer's income tax liability for the taxable year as computed without regard to this article.

The Alabama Department of Education shall promulgate and adopt rules regarding the methods, procedures, and standards it deems necessary for approving employer provided or employer sponsored basic skills education programs. The Department of Education shall include in its rules and regulations a means to determine and set for each individual the maximum number of months that said individual may be eligible for the education program provided herein.

No tax credit shall be granted pursuant to this article to any employer of an employee participating in a basic skills education program if the employer receives or requires reimbursement or any form of remuneration for any cost of the education.

(a) Resident individual taxpayers who file an Alabama income tax return and who will receive a tax refund from the Department of Revenue may designate that a contribution be made to the Arts Development Fund by marking the appropriate box printed on the return pursuant to subsection (b) of this section.

(b) The Department of Revenue shall print on the face of the state income tax form for residents a space for taxpayers to designate that a contribution be made to the Arts Development Fund from their income tax refund due. The space for designating the contribution shall provide for checkoff boxes in the amount of $1, $5, $10 or other dollar amount, commencing for the tax year of 1982 and thereafter.

(a) There is established in the General Fund of the State Treasury an 'Arts Development Fund' consisting of all moneys transferred to it under this section. The Commissioner of the Department of Revenue shall transfer to the fund an amount equal to the total amount designated by individuals to be paid to the fund under Section 40-18-140, less an amount, equal to not more than three percent of the total of such funds then collected, for the additional cost incurred by the Department of Revenue in collecting and handling such funds which shall be deposited in the General Fund of the State Treasury for the use of the said department. Such deposits shall be made not less than quarterly commencing with the first day such funds are collected from the taxpayer.

(b) Moneys contained in the 'Arts Development Fund' are continuously appropriated to the Council on the Arts and Humanities for the purposes of grants to tax exempt organizations or associations to encourage development of high quality and artistically significant arts activities or cultural facilities in local areas. Such funds shall be supplemental to any and all other appropriations heretofore or hereafter made to the Council on the Arts and Humanities. No provision of this section shall be construed to be in lieu of annual appropriations.

(c) The Council on the Arts and Humanities shall have access to and control of the moneys in said fund and shall be authorized to distribute such funds only for the purposes of this section and pursuant to Article 3, Chapter 9, Title 41.

The Legislature hereby declares that all vertebrate wildlife species not commonly pursued, killed, or consumed either for sport or profit, herein referred to as 'nongame wildlife,' have need of special protection and that it is in the public interest to preserve, protect, perpetuate, and enhance such nongame wildlife resources of this state through preservation of a satisfactory environment and an ecological balance. The Legislature specifically declares that such 'nongame wildlife' is under the jurisdiction of the Division of Wildlife and Freshwater Fisheries of the Department of Conservation and Natural Resources, and that it is in the best interest of the citizens of Alabama to provide an additional means by which the management of such nongame wildlife may be financed through a voluntary check-off designation on state income tax return forms. The intent of the Legislature is that this check-off program shall be supplemental to any funding, and in no way is intended to take the place of any funding, that would otherwise be appropriated for this purpose.

(a) Each Alabama state individual income tax return form for the 1982 tax year and each year thereafter shall contain a designation as follows:

Check ( ) if you wish to designate $1, $5, $10 or more of your state income tax refund for this program.

If joint return, check ( ) if spouse wishes to designate $1, $5, $10 or more.

(b) Each individual taxpayer required to file a state income tax return pursuant to this chapter desiring to contribute to the Alabama Nongame Wildlife Program may designate, by placing an 'X' in the appropriate box on the state income tax form, that such contribution shall be credited to said program.

The Department of Revenue shall determine annually the total amount designated pursuant to Section 40-18-143 for the Alabama Nongame Wildlife Program and shall deposit such amount, less costs of administration not to exceed 10 percent of revenue produced, in the State Treasury to the credit of the Game and Fish Fund to be used exclusively for purposes of preserving, protecting, perpetuating, and enhancing nongame wildlife in this state.

The Commissioner of the Department of Revenue and the Commissioner of the Department of Conservation and Natural Resources are hereby authorized to prescribe and implement such forms, rules and regulations as shall be necessary to carry out the intent of Sections 40-18-142 through 40-18-144. Nothing contained in Sections 40-18-142 through 40-18-144 shall be construed to give any rights of condemnation to the Department of Conservation and Natural Resources.

(a) For purposes of this article, the term 'political party' shall be defined as provided in Section 17-16-2.

(b) Every individual who files a state income tax return may designate a contribution to a political party as provided under this section. Amounts of contributions for an individual return shall be $1 and, for a joint return, $2. Such contributions shall increase the tax liability of the taxpayer by the amount contributed.

(c) The designation for a political party shall appear on the face of the individual income tax return. The contributions so designated by the taxpayer and collected by the State of Alabama, Department of Revenue, shall be reserved for remittance to the appropriate officials of the state governing authority of the designated political party. The state Revenue Commission shall annually certify by December 1, all such designated amounts to be paid by the State Comptroller, and the Comptroller shall remit by the following January 1, such funds to the appropriate officials of the state governing authority of the designated political party.

(a) The Legislature hereby declares that nearly all aging citizens of Alabama have need of special services and that it is in the public interest to preserve, protect, perpetuate, and enhance the abilities of such aging citizens of this state to remain independent through preservation of a satisfactory environment and appropriate supportive assistance. The Legislature specifically declares that such aging citizens are under the jurisdiction of the Department of Senior Services of the State of Alabama, and that it is in the best interest of the citizens of Alabama to provide an additional means by which the management of such environments and supportive assistance may be financed through a voluntary check-off designation on state income tax return forms. The intent of the Legislature is that this check-off program shall be supplemental to any funding, and in no way is intended to take the place of any funding, that would otherwise be appropriated for this purpose.

(b)(1) Each Alabama state individual income tax return form for the 1984 tax year and each year thereafter shall contain a designation as follows:

Check ( ) if you wish to designate $1, $5, $10 or more of your state income tax refund for this program.

If joint return, check ( ) if spouse wishes to designate $1, $5, $10 or more.

(2) Each individual taxpayer required to file a state income tax return pursuant to this chapter desiring to contribute to the Alabama Aging Program may designate, by placing an 'X' in the appropriate box on the state income tax form, that such contribution shall be credited to said program.

(c) The Department of Revenue shall determine annually the total amount designated pursuant to subsection (b) of this section for the Alabama Aging Program and shall deposit such amount, less costs of administration not to exceed ten percent of revenue produced, in the Alabama Senior Services Trust Fund to be used exclusively for purposes of preserving, protecting, perpetuating and enhancing the abilities of the aging citizens in this state to remain independent.

(d) The Commissioner of the Department of Revenue and the Executive Director of the Department of Senior Services are hereby authorized to prescribe and implement such forms, rules, and regulations as shall be necessary to carry out the intent of this section with the approval of the Alabama Department of Senior Services.

(a) State Department of Veterans' Affairs - Legislative declarations and intent. The Legislature hereby declares that Alabama's ailing and aged veterans of the armed services have need of special nursing and related health care services and that it is in the public interest to preserve, protect, perpetuate, and enhance the lives of such veterans through the provision of appropriate supportive assistance through nursing and related health care. The Legislature specifically declares that such veterans are under the jurisdiction of the state Department of Veterans' Affairs, and that it is in the best interest of the citizens of Alabama to provide an additional means by which the management of such environments and supportive assistance may be financed through a voluntary check-off designation on state income tax return forms. The intent of the Legislature is that this check-off program shall be supplemental to any funding, and in no way is intended to take the place of any funding, that would otherwise be appropriated for this purpose.

(b) Contribution designation form. (1) Each Alabama state individual income tax form for the 1989 tax year and each year thereafter shall contain a designation as follows:

Check ( ) if you wish to designate $1, $5, $10, or more of your state income tax refund for this program.

If joint return, check ( ) if spouse wishes to designate $1, $5, $10, or more.

(2) Each individual taxpayer required to file a state income tax return pursuant to this chapter desiring to contribute to the Alabama Veterans' Program may designate, by placing an 'X' in the appropriate box on the state income tax form, that such contribution shall be credited to said program.

(c) Appropriation. The Department of Revenue shall determine annually the total amount designated pursuant to subsection (b) of this section for the Alabama Veterans' Program and shall deposit such amount, less costs of administration not to exceed 10 percent of revenue produced, in the State Treasury to the credit of the Department of Veterans' Affairs, to be used exclusively for purposes of providing nursing home and health care for aged and disabled veterans in this state.

(d) The Commissioner of the Department of Revenue and the Director of the state Department of Veterans' Affairs are hereby authorized to prescribe and implement such forms, rules and regulations as shall be necessary to carry out the intent of this section.

(a) For the tax year beginning January 1, 1990, and every year thereafter, resident individual taxpayers who file an Alabama income tax return and who will receive a tax refund from the Department of Revenue may designate that a contribution be made to the Alabama Indian Affairs Commission for educational scholarships, by marking the appropriate box printed on the return pursuant to subsection (b) of this section.

(b) The Department of Revenue shall print on the face of the state income tax form for residents a space for taxpayers to designate that a contribution be made to the Alabama Indian Children's Scholarship Fund, from their income tax refund due. The space for designating the contribution shall provide for checkoff boxes in the amount of $1, $5, $10, or other dollar amount, commencing for the tax year of 1990 and thereafter.

(c) All funds received by the Department of Revenue pursuant to the provisions of this section, less costs of administration not to exceed ten percent of revenue produced, shall be distributed to the Alabama Indian Affairs Commission.

(a) For the tax year beginning January 1, 1992, and every year thereafter, resident individual taxpayers who file an Alabama income tax return and who will receive a tax refund from the Department of Revenue may designate that a contribution be made to the Foster Care Trust Fund established by Sections 38-10-50 and 38-10-51. This designation shall be made by marking the appropriate box printed on the return pursuant to subsection (b).

(b) The Department of Revenue shall print on the state income tax form for residents a space for taxpayers to designate that a contribution be made to the Foster Care Trust Fund from their income tax refund due. The space for designating the contribution shall provide for checkoff boxes in the amount of $1, $5, $10, or other dollar amount.

(c) The Department of Human Resources may, from time to time, change the designated checkoff sums, in accordance with the administrative procedure laws and upon proper notification to the Department of Revenue.

(d) All funds received by the Department of Revenue pursuant to this section, less costs of administration not to exceed three percent of revenue produced, shall be distributed to the Foster Care Trust Fund.

(e) Funds contained in the Foster Care Trust Fund shall continuously be appropriated to the Department of Human Resources. These funds shall be supplemental to any and all other appropriations heretofore or hereafter made to the Department of Human Resources.

(a) For the tax year beginning January 1, 1997, and every year thereafter, resident individual taxpayers who file an Alabama income tax return and who will receive a tax refund from the Department of Revenue may designate that a contribution be made to the Alliance for the Mentally Ill of Alabama (AMI) and for the Mental Health Consumers of Alabama (MHCA). This designation shall be made by marking the appropriate box printed on the return pursuant to subsection (b).

(b) The Department of Revenue shall print on the state income tax form for residents a space for taxpayers to designate that a contribution be made to the Alliance for the Mentally Ill of Alabama and for the Mental Health Consumers of Alabama from their income tax refund due. The space for designating the contribution shall provide for check-off boxes in the amount of $1, $5, $10, or other dollar amount.

(c) The Department of Mental Health and Mental Retardation, or its successor agency, may, from time to time, change the designated check-off sums, in accordance with the administrative procedure laws and upon proper notification to the Department of Revenue.

(d) All funds received by the Department of Revenue pursuant to this section, less costs of administration not to exceed three percent of revenue produced, shall be distributed to the Alliance for the Mentally Ill of Alabama (AMI) and the Mental Health Consumers of Alabama (MHCA) equally between the organizations.

(a) Each Alabama state individual income tax return form for the 2001 tax year and each year thereafter shall contain a designation as follows:

ALABAMA BREAST AND CERVICAL CANCER RESEARCH PROGRAM

Check ( ) if you wish to designate $1, $5, $10, or more of your state income tax refund for this program.

If joint return, check ( ) if spouse wishes to designate $1, $5, $10 or more.

(b) Each individual taxpayer required to file a state income tax return pursuant to this chapter desiring to contribute to the Alabama Breast and Cervical Cancer Research Program may designate, by placing an 'X' in the appropriate box on the state income tax form, that such contribution shall be credited to said program.

(c) The Department of Revenue shall determine annually the total amount designated pursuant to subsection (b) for the program and shall deposit such amount, less costs of administration not to exceed 10 percent of revenue produced, to the University of Alabama at Birmingham, which shall implement and administer the program.

(d) The Commissioner of the Department of Revenue is hereby authorized to prescribe and implement such forms, rules, and regulations as shall be necessary to carry out the intent of this section with the approval of the University of Alabama at Birmingham.

(a) Each Alabama state individual income tax return form for the 2003 tax year and each year thereafter shall contain a designation as follows:

'Alabama 4-H Club Foundation, Incorporated.

'Check ( ) if you wish to designate $1, $5, $10, or more of your state income tax refund.

'If joint return, check ( ) if spouse wishes to designate $1, $5, $10, or more.'

(b) Each individual taxpayer required to file a state income tax return desiring to contribute to the Alabama 4-H Club Foundation, Incorporated, may designate, by placing an 'X' in the appropriate box on the state income tax form, that such contribution shall be credited to the foundation.

(c) The Department of Revenue shall determine annually the total amount designated pursuant to subsection (b) of this section for the commission and shall deposit such amount, less costs of administration not to exceed 10 percent of revenue produced, to the Alabama 4-H Club Foundation, Incorporated.

(d) The Commissioner of the Department of Revenue is hereby authorized to prescribe and implement such forms, rules, and regulations as shall be necessary to carry out the intent of this section with the approval of the Alabama 4-H Club Foundation, Incorporated.

(a) An Alabama S corporation shall not be subject to the tax imposed by Section 40-18-31.

(b) For purposes of this chapter, an 'Alabama S corporation' is a corporation:

(1) With respect to which an election under 26 U.S.C. §1362 is in effect; or

(2)a. With respect to which there is in effect an election under 26 U.S.C. §1361(b)(3) to treat such corporation as a qualified subchapter S subsidiary; and

b. All the stock of which is owned by an S corporation qualifying as an 'Alabama S corporation' under subdivision (b)(1).

No corporation shall be an Alabama S corporation for any portion of a taxable year of the corporation during which an election under 26 U.S.C. §1362 or §1361(b)(3), whichever is applicable, is not in effect for federal income tax purposes. No corporation shall be an Alabama S corporation if it is a financial institution, as defined in Section 40-16-1.

(c) For purposes of this chapter, an 'Alabama C corporation' means any corporation other than an Alabama S corporation.

(d) With respect to a qualified subchapter S subsidiary for which there is in effect an election under 26 U.S.C. § 1361 (b)(3), all of its assets, liabilities, and items of income, deductions, and credit shall be treated as assets, liabilities, and such items, as the case may be, of the Alabama S corporation owning the stock of the qualified subchapter S subsidiary.

(a) The taxable income of an Alabama S corporation shall be determined in the same manner as in the case of an individual except that the items determined in subdivision (1), subsection (a) of Section 40-18-162 shall be separately stated, and the following deductions shall not be allowed:

(1) Personal exemptions otherwise allowed by Section 40-18-19.

(2) Charitable contributions otherwise allowed by Section 40-18-15, subdivision (a)(10).

(3) The net operating loss deduction otherwise allowed by Section 40-18-15, subdivision (a)(16).

(4) Medical expenses otherwise allowed by Section 40-18-15, subdivision (a)(13).

(5) Alimony otherwise allowed by Section 40-18-15, subdivision (a)(18).

(6) The deduction for certain expenses of producing income and determining taxes otherwise allowed by Section 40-18-15, subdivision (a)(14).

(7) Contributions to individual retirement accounts otherwise allowed by Section 40-18-15, subdivision (a)(11).

(8) Depletion on oil or gas wells otherwise allowed by Section 40-18-15, subdivision (a)(9).

(b) Amounts of income, loss, deduction, or credit for purposes of this article shall be determined under the allocation and apportionment rules of Chapter 27.

(c) Any election affecting the computation of items derived from an Alabama S corporation shall be made by the corporation.

(d)(1) If an Alabama S corporation was an Alabama C corporation for the last taxable year before the first taxable year during which it became an Alabama S corporation, and the corporation inventoried goods under the LIFO method for the last taxable year, the LIFO recapture amount shall be included in the gross income of the corporation for the last taxable year and appropriate adjustments to the basis of the inventory shall be made to take into account the amount included in gross income under this subdivision.

(2) Any increase in the tax imposed by this chapter by reason of this subsection shall be payable in four equal installments. The first installment shall be paid not later than the due date, (without extension), for filing the return for the last taxable year before the corporation became an Alabama S corporation and the three succeeding installments shall be paid not later than the due date, (without extension), for filing the returns for the succeeding three years. For purposes of computing interest on underpayments, the last three installments shall not be considered underpayments until after the payment dates specified in the previous sentence.

(3) For purposes of this subsection, the term 'LIFO recapture amount' means the excess, (if any), of

a. the inventory amount of the inventory assets under the first-in, first-out method over

b. the inventory amount of such assets under the LIFO method. For purposes of the preceding sentence, inventory amounts shall be determined as of the close of the last taxable year before the corporation became an Alabama S corporation.

(4) For purposes of this subsection:

a. The term 'LIFO method' means the method authorized by 26 U.S.C. § 472.

b. The term 'inventory assets' means 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.

c. The inventory amount of assets under the first-in, first-out method shall be determined - as follows:

1. By using the retail method of valuing inventories if the corporation uses that method in connection with the LIFO method, or

2. If subparagraph 1 does not apply, then by using cost or market, whichever is lower.

(a) In determining the tax of a shareholder for the shareholder's taxable year in which the taxable year of the Alabama S corporation ends, or for the final taxable year of a shareholder who dies or of a trust or estate that terminates before the end of the corporation's taxable year, there shall be taken into account the shareholder's pro rata share of the corporation's:

(1) Items of income, including tax-exempt income, loss, deduction, or credit the separate treatment of which could affect the liability for tax of any shareholder, including charitable contributions, and

(2) Nonseparately computed income or loss. The term 'nonseparately computed income or loss' means gross income minus the deductions allowed to the corporation under this article, determined by excluding all items described in subdivision (1) of this subsection.

(b) The character of any item included in a shareholder's pro rata share under subsection (a) of this section shall be determined as if the item were realized directly from the source from which realized by the corporation, or incurred in the same manner as incurred by the corporation.

(c) In any case where it is necessary to determine the gross income of a shareholder for purposes of this article, such gross income shall include the shareholder's pro rata share of the gross income of the corporation.

(d) The following special rules for losses and deductions shall apply:

(1) The aggregate amount of losses and deductions taken into account by a shareholder under subsection (a) of this section for any taxable year shall not exceed the sum of:

a. The adjusted basis of the shareholder's stock in the Alabama S corporation as determined with regard to subsections (a) and (b)(1) of Section 40-18-164 for the taxable year, and

b. The shareholder's adjusted basis of any indebtedness of the Alabama S corporation to the shareholder as determined without regard to any adjustment under subsection (c)(2) of Section 40-18-164 for the taxable year.

(2) Any loss or deduction which is disallowed for any taxable year by reason of subdivision (1) of this subsection shall be treated as incurred by the corporation in the succeeding taxable year with respect to that shareholder.

(3) The carryover of disallowed losses and deductions to the post-termination transition period shall be determined as follows:

a. If for the last taxable year of a corporation for which it was an Alabama S corporation, a loss or deduction was disallowed by reason of subdivision (1) of this subsection, the loss or deduction shall be treated as incurred by the shareholder on the last day of any post-termination transition period.

b. The aggregate amount of losses and deductions taken into account by a shareholder under paragraph a of this subdivision shall not exceed the adjusted basis of the shareholder's stock in the corporation as determined at the close of the last day of the post-termination transition period and without regard to this paragraph.

c. The shareholder's basis in the stock of the corporation shall be reduced by the amount allowed as a deduction by reason of this subdivision.

(e) If any Alabama income tax is imposed under Section 40-18-174 for any taxable year on an Alabama S corporation, for purposes of subsection (a), the amount of each recognized built-in gain, within the meaning of Section 40-18-174, for the taxable year shall be reduced by its proportionate share of the tax.

(f) If any tax is imposed under Section 40-18-175 for any taxable year on an Alabama S corporation, for purposes of subsection (a), each item of passive investment income shall be reduced by an amount which bears the same ratio to the amount of such tax as the amount of the item bears to the total passive investment income for the taxable year.

If an individual who is the spouse or lineal descendant or ancestor of one or more shareholders of an Alabama S corporation or who is a spouse, a lineal descendant or ancestor of a beneficiary of a trust which is a shareholder of an Alabama S corporation renders services for the corporation or furnishes capital to the corporation without receiving reasonable compensation therefor, the Department of Revenue shall make such adjustments in the items taken into account by such individual and such shareholders as may be necessary in order to reflect the value of such services or capital.

(a) The basis of each shareholder's stock in an Alabama S corporation shall be increased for any period by the sum of the following items determined with respect to that shareholder for the period:

(1) The items of income described in subdivision (1) of subsection (a) of Section 40-18-162.

(2) Any nonseparately computed income determined under subdivision (2) of subsection (a) of Section 40-18-162.

(3) The excess of the deductions for depletion over the basis of the property subject to depletion.

(b) The basis of each shareholder's stock in an Alabama S corporation shall be decreased for any period, but not below zero, by the sum of the following items determined with respect to the shareholder for the period:

(1) Distributions by the corporation which were not includable in the income of the shareholder by reason of Section 40-18-165.

(2) The items of loss and deduction described in subdivision (1) of subsection (a) of Section 40-18-162.

(3) Any nonseparately computed loss determined under subdivision (2) of subsection (a) of Section 40-18-162.

(4) Any expense of the corporation not deductible in computing its taxable income and not properly chargeable to capital account.

(5) The amount of the shareholder's deduction for depletion for any oil and gas property held by the S corporation to the extent such deduction does not exceed the proportionate share of the adjusted basis of such property allocated to the shareholder.

(c) The following special rules shall apply:

(1) The increases under subsection (a) and the decreases under subsection (b) shall include the entire amount, without allocation and apportionment under Chapter 27, of the shareholder's pro rata share of such increases and decreases during the taxable year.

(2)a. If for any taxable year the amounts specified in subdivisions (2), (3), (4), and (5) of subsection (b) of this section exceed the amount which reduces the shareholder's basis to zero, the excess shall be applied to reduce, but not below zero, the shareholder's basis in any indebtedness of the Alabama S corporation to the shareholder.

b. If for any taxable year there is a reduction under paragraph (a) of this subdivision in the shareholder's basis in the indebtedness of an Alabama S corporation to a shareholder, any net increase, after the application of subsections (a) and (b) of this section, for any subsequent taxable year shall be applied to restore such reduction in basis before any of it may be used to increase the shareholder's basis in stock of the Alabama S corporation.

(3) This section and Sections 40-18-162 and 40-18-163 shall be applied before determining the amount of loss in any taxable year of the shareholder or the corporation in which the security or debt becomes worthless.

(4) An item of income which is required to be included in the gross income of a shareholder and shown on his or her return shall be taken into account under subdivisions (a)(1) and (a)(2) of this section only to the extent such amount is included in the shareholder's gross income on his or her return, increased or decreased by any adjustment of such amount in a redetermination of the shareholder's tax liability. If an item of income is subject to allocation and apportionment, the basis increases provided by subdivisions (a)(1), (a)(2), and (c)(1) shall be allowed only in the proportion that the amount of such income reported on the taxpayer's return bears to the amount of income properly allocated and apportioned to Alabama and required to be included in gross income and reported by the shareholder, increased or decreased by any adjustment of such amount in a redetermination of the shareholder's tax liability.

(5) Adjustments in case of inherited stock.

a. If any person acquires stock in an Alabama S corporation by reason of the death of a decedent or by bequest, devise, or inheritance, then the treatment of any item of income of the S corporation shall be determined in accordance with 26 U.S.C. § 691, which shall be applied as if the decedent had held directly his or her pro rata share of such item.

b. The basis determined under Section 40-18-6 of any stock in an S corporation shall be reduced by the portion of the value of the stock that is attributable to items constituting income in respect of the decedent.

(a) A distribution of property made by an Alabama S corporation with respect to its stock to which, but for this article, Section 40-18-36 would apply shall be treated in the manner provided in subsection (b) or (c) of this section, whichever applies.

(b) In the case of a distribution described in subsection (a) of this section by an Alabama S corporation which has no accumulated earnings and profits:

(1) The distribution shall not be included in gross income to the extent that it does not exceed the adjusted basis of the stock.

(2) If the amount of the distribution exceeds the adjusted basis of the stock, such excess shall be treated as gain from the sale or exchange of property.

(c) In the case of a distribution described in subsection (a) of this section by an Alabama S corporation which has accumulated earnings and profits:

(1) That portion of the distribution which does not exceed the accumulated adjustments account shall be treated in the manner provided by subsection (b) of this section.

(2) That portion of the distribution which remains after the application of subdivision (c)(1) of this section shall be treated as a dividend to the extent it does not exceed the accumulated earnings and profits of the Alabama S corporation.

(3) Any portion of the distribution remaining after the application of subdivision (2) of this subsection (c) of this section shall be treated in the manner provided by subsection (b) of this section. Except to the extent provided in regulations, if the distributions during the taxable year exceed the amount in the accumulated adjustments account at the close of the taxable year, for purposes of this subsection, the balance of such account shall be allocated among such distributions in proportion to their respective sizes.

(d) Subsections (b) and (c) of this section shall be applied by taking into account to the extent proper:

(1) The adjustments to the basis of the shareholder's stock described in Section 40-18-164, and

(2) The adjustments to the accumulated adjustments account which are required by Section 40-18-166.

(e) In the case of any distribution made during any taxable year, the adjusted basis of the stock shall be determined with regard to the adjustments provided in subsection (a) of Section 40-18-164 for the taxable year.

(a)(1) Except as provided in subsection (b), for purposes of this article, the term 'accumulated adjustments account' means an account of the Alabama S corporation which is adjusted for the S period in a manner similar to the adjustments under Section 40-18-164 hereof including subdivision (4) of subsection (c), except that no adjustment shall be made for income and related expenses which are exempt from tax under this chapter and the phrase 'but not below zero' shall be disregarded in Section 40-18-164(c)(2)a.

(2) In the case of any redemption which is treated as an exchange under Section 40-18-36, the adjustment in the accumulated adjustments account shall be an amount which bears the same ratio to the balance in the account as the number of shares redeemed in such redemption bears to the number of shares of stock in the corporation immediately before the redemption.

(3) In applying this section to distributions during any taxable year, the amount of the accumulated adjustments account as of the close of the taxable year shall be determined without regard to any net negative adjustment for the taxable year. The term 'net negative adjustment' means, with respect to any taxable year, the excess, if any, of the reductions in the account for the taxable year, other than for distributions, over the increases in such account for the taxable year.

(4) For purposes of this article, the term 'S period' means the most recent continuous period during which the corporation has been an Alabama S corporation. The period shall not include any taxable year beginning before January 1, 1985.

(b) An Alabama S corporation may, with the consent of all of its affected shareholders, elect to have subdivision (1) of subsection (c) of Section 40-18-165 not apply to all distributions made during the taxable year for which the election is made. For purposes of this subsection, the term 'affected shareholder' means any shareholder to whom a distribution is made by the Alabama S corporation during the taxable year.

Except to the extent inconsistent with this article, the rules of Article 1 of this chapter shall apply to an Alabama S corporation and its shareholders.

No carryforward and no carryback arising for a taxable year for which a corporation is not an Alabama S corporation may be carried to a taxable year which such corporation is an Alabama S corporation. No carryforward and no carryback shall arise at the corporate level for a taxable year for which a corporation is an Alabama S corporation. Nothing in this section shall prevent treating a taxable year for which a corporation is an Alabama S corporation as a taxable year for purposes of determining the number of taxable years to which an item may be carried back or carried forward.

Section 40-18-169

Adjustments to earnings and profits.

(a) Except as provided in subsections (b) and (c) of this section, no adjustment shall be made to the earnings and profits of an Alabama S corporation.

(b) In the case of any transaction involving redemption, liquidation, reorganization or division of any Alabama S corporation, proper adjustment to any accumulated earnings and profits of the corporation shall be made.

(c) Subsection (a) of this section shall not apply with respect to that portion of a distribution which is treated as a dividend under subdivision (2) of subsection (c) of Section 40-18-165.

(d) Any distribution of money by a corporation with respect to its stock during a post-termination transition period shall be applied against and reduce the adjusted basis of the stock, to the extent that the amount of the distribution does not exceed the accumulated adjustments account. An Alabama S corporation may elect to have the first sentence of this subsection not apply to all distributions made during a post-termination transition period described in Section 40-18-172 but only if all the shareholders of the Alabama S corporation to whom distributions are made by the Alabama S corporation during such post-termination transition period consent to such election.

(Code 1975, §40-14-99; Acts 1984, 1st Ex. Sess., No. 84-756, p. 121, §10; Acts 1989, No. 89-837, p. 1671, §7.)

For purposes of applying the provisions of this chapter which relate to employee fringe benefits, the Alabama S corporation shall be treated as a partnership, and any two-percent shareholder of the Alabama S corporation shall be treated as a partner of such partnership. The term 'two-percent shareholder' means any person who owns, or is considered as owning in accordance with 26 U.S.C. §318, as in effect from time to time, on any day during the taxable year of the Alabama S corporation more than two percent of the outstanding stock of such corporation or stock possessing more than two percent of the total combined voting power of all stock of such corporation.

(a) For purposes of this article, except as provided in subsection (b), each shareholder's pro rata share of any item for any taxable year shall be the sum of the amounts determined with respect to the shareholder by assigning an equal portion of the item to each day of the taxable year, and then by dividing that portion pro rata among the shares outstanding on the day.

(b) Under regulations prescribed by the Department of Revenue, if any shareholder terminates his or her interest in the corporation during the taxable year and all affected shareholders and the corporation agree to the application of this subsection, subsection (a) of this section shall be applied to the affected shareholders as if the taxable year consisted of two taxable years the first of which ends on the date of the termination.

(c) For purposes of subsection (b), the term 'affected shareholders' means the shareholder whose interest is terminated and all shareholders to whom such shareholder has transferred shares during the taxable year. If such shareholder has transferred shares to the corporation, the term 'affected shareholders' shall include all persons who are shareholders during the taxable year.

(a) For purposes of this article, the term 'post-termination transition period' means:

(1) The period beginning on the day after the last day of the corporation's last taxable year as an Alabama S corporation and ending on the later of:

a. The day which is one year after the last day.

b. The due date for filing the return for the last year as an Alabama S corporation, including extensions.

(2) The 120-day period beginning on the date of a determination pursuant to an audit of the taxpayer which follows the termination of the corporation's election to be treated as a federal S corporation and which adjusts a subchapter S item of income, loss, or deduction of the corporation arising during the S period.

(3) The 120-day period beginning on the date of a determination that the corporation's election under 26 U.S.C. § 1362 had terminated for a previous taxable year.

(b) For purposes of subsection (a), the term 'determination' means:

(1) A determination as defined in 26 U.S.C. § 1313(a); or

(2) An agreement between the corporation and the U.S. Secretary of the Treasury that the corporation failed to qualify as an S corporation.

Due consideration shall be given in the interpretation of this article to applicable sections of the U.S. Internal Revenue Code in effect from time to time, its rulings and regulations provided such Code, rulings, and regulations are not in direct conflict with any portion of this article.

(a) If for any taxable year beginning in the recognition period an Alabama S corporation has a net recognized built-in gain, there is hereby imposed a tax (computed under subsection (b)) on the income of such corporation for such taxable year.

(b)(1) The amount of the tax imposed by subsection (a) shall be computed by multiplying five percent by the net recognized built-in gain of the Alabama S corporation for the taxable year.

(2) Notwithstanding Section 40-18-168, any net operating loss carryforward which would be deductible except for Section 40-18-168 and which arose in a taxable year for which the corporation was not an Alabama S corporation, shall be allowed as a deduction against the net recognized built-in gain of the Alabama S corporation for the taxable year. For purposes of determining the amount of any such loss which may be carried to subsequent taxable years, the net recognized built-in gain shall be treated as taxable income.

(c) The following limitations shall apply:

(1) Subsection (a) shall not apply to any corporation that has had in effect an election to be treated as an S corporation under Subchapter S of the U.S. Internal Revenue Code, Title 26, U.S.C., as in effect from time to time or as recodified, for each of its taxable years. Except as provided in regulations, an Alabama S corporation and any predecessor corporation shall be treated as one corporation for purposes of the preceding sentence.

(2) The amount of the net recognized built-in gain taken into account under this section for any taxable year shall not exceed the excess (if any) of the net unrealized built-in gain over the net recognized built-in gain for prior taxable years beginning in the recognition period.

(d) For purposes of this section:

(1) The term 'net unrealized built-in gain' means the amount (if any) by which the fair market value of the assets of the corporation exceeds the aggregate adjusted basis of such assets as of the beginning of its first taxable year for which it is treated as an Alabama S corporation.

(2)a. The term 'net recognized built-in gain' means, with respect to any taxable year in the recognition period, the lesser of (i) the amount which would be taxable income of the Alabama S corporation for such taxable year if (except as provided in subsection (b)(2)) only recognized built-in gains and recognized built-in losses were taken into account, or (ii) such corporation's taxable income for such taxable year (determined as provided in subsection (b)(1) of Section 40-18-175).

b. If, for any taxable year, the amount referred to in clause (i) of paragraph a. exceeds the amount referred to in clause (ii) of paragraph a., such excess shall be treated as a recognized built-in gain in the succeeding taxable year.

(3) The term 'recognized built-in gain' means any gain recognized during the recognition period on the disposition of any asset except to the extent that the Alabama S corporation established that

a. Such asset was not held by the Alabama S corporation as of the beginning of the first taxable year for which it was an Alabama S corporation, or

b. Such gain exceeds the excess (if any) of the fair market value of such asset as of the beginning of such first taxable year, over the adjusted basis of the asset as of such time.

(4) The term 'recognized built-in loss' means any loss recognized during the recognition period on the disposition of any asset to the extent that the Alabama S corporation establishes that

a. Such asset was held by the Alabama S corporation as of the beginning of the first taxable year referred to in subdivision (3), and

b. Such loss does not exceed the excess of the adjusted basis of such asset as of the beginning of such first taxable year, over the fair market value of such asset as of such time.

(5)a. Any item of income which is properly taken into account during the recognition period but which is attributable to periods before the first taxable year for which the corporation was an Alabama S corporation shall be treated as a recognized built-in gain for the taxable year in which it is properly taken into account.

b. Any amount which is allowable as a deduction during the recognition period but which is attributable to periods before the first taxable year referred to in paragraph a. shall be treated as a recognized built-in loss for the taxable year for which it is allowable as a deduction.

c. The amount of the net unrealized built-in gain shall be properly adjusted for amounts treated as recognized built-in gains or losses under this subdivision.

(6) If the adjusted basis of any asset is determined (in whole or in part) by reference to the adjusted basis of any other asset held by the Alabama S corporation as of the beginning of the first taxable year referred to in subdivision (3)

a. Such asset shall be treated as held by the Alabama S corporation as of the beginning of such first taxable year, and

b. Any determination under subdivision (3)b or (4)b with respect to such asset shall be made by reference to the fair market value and adjusted basis of such other asset as of the beginning of such first taxable year.

(7) The term 'recognition period' means the ten-year period beginning with the first day of the first taxable year for which the corporation was an Alabama S corporation.

(8)a. Except to the extent provided in regulations, if an Alabama S corporation acquires any asset, and the Alabama S corporation's basis in such asset is determined (in whole or in part) by reference to the basis of such asset (or any other property) in the hands of an Alabama C corporation, then a tax is hereby imposed on any net recognized built-in gain attributable to any such assets for any taxable year beginning in the recognition period. The amount of such tax shall be determined under the rules of this section as modified by paragraph b.

b. For purposes of this subdivision, the modifications of this paragraph are as follows: (i) The preceding subdivisions of this subsection shall be applied by taking into account the day on which the assets were acquired by the Alabama S corporation in lieu of the beginning of the first taxable year for which the corporation was an Alabama S corporation, and (ii) subdivision (1) of subsection (c) shall not apply.

(9) Any reference in this section to the first taxable year for which the corporation was an Alabama S corporation shall be treated as a reference to the first taxable year for which the corporation most recently became an Alabama S corporation.

(e) The Department of Revenue shall prescribe such regulations as may be necessary to carry out the purposes of this section including regulations providing for the appropriate treatment of successor corporations.

(a) If for the taxable year an Alabama S corporation has accumulated earnings and profits at the close of the taxable year derived from years during which the corporation was an Alabama C corporation, and gross receipts more than 25 percent of which are passive investment income, then there is imposed a tax on the income of the corporation for the taxable year. The tax shall be computed by multiplying the excess net passive income by five percent.

(b) (1) For purposes of this section:

a. Except as provided in paragraph b below, the term 'excess net passive income' means an amount which bears the same ratio to the net passive income for the taxable year as (i) the amount by which the passive investment income for the taxable year exceeds 25 percent of the gross receipts for the taxable year, bears to (ii) the passive investment income for the taxable year.

b. The amount of the excess net passive income for any taxable year shall not exceed the corporation's taxable income for the taxable year as determined under Section 40-18-161 without regard to the deduction under subdivisions (a)(14) and (a)(15) of Section 40-18-35 and under Section 40-18-35.1.

(2) The term 'net passive income' means passive investment income, reduced by the deductions allowable under this chapter which are directly connected with the production of the income, other than deductions allowable by subdivisions (a)(14) and (a)(15) of Section 40-18-35 and by Section 40-18-35.1.

(3) The terms 'passive investment income' and 'gross receipts' shall have the same respective meanings as when used in 26 U.S.C. § 1362(d)(3).

(4) Notwithstanding subdivision (3), the amount of passive investment income shall be determined by not taking into account any recognized built-in gain or loss of the Alabama S corporation for any taxable year in the recognition period. Terms used in the preceding sentence shall have the same respective meanings as when used in Section 40-18-174.

(c) If the Alabama S corporation establishes to the satisfaction of the Department of Revenue that it determined in good faith that it had no earnings and profits at the close of a taxable year derived from years during which it was an Alabama C corporation, and during a reasonable period of time after it was determined that it did have such earnings and profits, the earnings and profits were distributed, the Department of Revenue may waive the tax imposed by subsection (a) for the taxable year.

(a) The Department of Revenue shall permit an Alabama S corporation to file composite returns and to make composite payments on behalf of some or all of its nonresident shareholders if there are one or more nonresident shareholders during any part of the taxable year. The Department of Revenue may permit composite returns and payments to be made by an Alabama S corporation on behalf of its resident shareholders.

(b) For purposes of this section, a 'composite return' means an informational return similar in form to U.S. Treasury Department Schedule K-1 containing information concerning one or more Alabama S corporation shareholder's respective shares of income, deductions and losses passed through to them by virtue of their status as shareholders of an Alabama S corporation, any credit to which the shareholder is entitled to claim by virtue of the Alabama S corporation's payment of tax on his or her behalf pursuant to subsection (e), and containing other information as the Department of Revenue shall prescribe. For purposes of this section, a 'composite payment' means a remittance of tax by the Alabama S corporation on behalf of the shareholder or shareholders to which the accompanying composite return relates, applying the highest marginal Alabama income tax rate applicable to individuals for the period in question.

(c) An Alabama S corporation shall file with the Department of Revenue, in the form prescribed by the Department of Revenue, the agreement of each nonresident shareholder of the corporation (1) to file a return and to make timely payment of all taxes imposed by this chapter on the shareholder with respect to the income of the Alabama S corporation, and (2) to be subject to personal jurisdiction in this state for purposes of the collection of unpaid income tax, together with related interest and penalties, from the nonresident shareholder. If the Alabama S corporation fails timely to file the agreements required by the preceding sentence on behalf of each of its nonresident shareholders, then the corporation shall, at the times set forth in subsection (d) for the filing of the agreements, pay to this state on behalf of each nonresident shareholder in respect of whom an agreement has not been timely filed an amount equal to five percent multiplied by the amount of the shareholder's pro rata share of the income allocated and apportioned to Alabama, as reflected on the corporation's return for the period in question. The payment made by the Alabama S corporation on behalf of a nonresident shareholder shall be considered a loan from the corporation to the shareholder, payable on demand, bearing interest from the date of the loan to the date of its payment, at the minimum 'applicable federal rate' with respect to demand instruments, as provided under 26 U.S.C. § 7872.

(d) The agreements required to be filed pursuant to subsection (c) shall be filed at the following times:

(1) At the time the annual return is required to be filed for the first taxable year for which the Alabama S corporation becomes subject to this article, and

(2) At the time the annual return is required to be filed for any taxable year in which the Alabama S corporation had a nonresident shareholder on whose behalf the agreement has not previously been filed.

(e) Any amount paid by the Alabama S corporation to this state pursuant to subsection (a) or (c) shall be considered to be a payment by the shareholder on account of the income tax imposed on the shareholder for the year in question.

The following terms shall have the following meanings, respectively, when used in this article unless the context clearly requires otherwise:

(1) BASE WAGE REQUIREMENT. Either an average hourly wage of not less than eight dollars ($8) per hour or an average total compensation of not less than ten dollars ($10) per hour, including benefits. Notwithstanding the foregoing, wages of direct processors of agriculture food products shall be subject to the local labor market. In the event that reliable local labor market statistics are not available, the department shall, by regulation or ruling, establish a source of wage information that best represents the average hourly wage rate in Alabama for direct processors of agriculture food products.

(2) CAPITAL COSTS. All costs and expenses incurred by one or more investing companies in connection with the acquisition, construction, installation and equipping of a qualifying project during the period commencing with the date on which such acquisition, construction, installation and equipping commences and ending on the date on which the qualifying project is placed in service, including, without limitation all of the following:

a. The costs of acquiring, constructing, installing, equipping and financing a qualifying project, including all obligations incurred for labor and to contractors, subcontractors, builders, and materialmen.

b. The costs of acquiring land or rights in land and any cost incidental thereto, including recording fees.

c. The costs of contract bonds and of insurance of all kinds that may be required or necessary during the acquisition, construction or installation of a qualifying project.

d. The costs of architectural and engineering services, including test borings, surveys, estimates, plans and specifications, preliminary investigations, environmental mitigation and supervision of construction, as well as for the performance of all the duties required by or consequent upon the acquisition, construction and installation of a qualifying project.

e. The costs associated with installation of fixtures and equipment; surveys, including archaeological and environmental surveys; site tests and inspections; subsurface site work; excavation; removal of structures, roadways, cemeteries, and other surface obstructions; filling, grading, paving and provisions for drainage, storm water retention, installation of utilities, including water, sewer, sewage treatment, gas, electricity, communications, and similar facilities; off-site construction of utility extensions to the boundaries of the property.

f. All other costs of a nature comparable to those described, including, without limitation, all project costs which are required to be capitalized for federal income tax purposes pursuant to 26 U.S.C. § 263A.

g. Costs otherwise defined as capital costs that are incurred by the investing company where the investing company is the lessee under a lease that: (1) has a term of not less than five years, and (2) is characterized as a capital lease for federal income tax purposes; provided, that if the project is a headquarters facility, the lease may be characterized as an operating lease for federal income tax purposes in which event capital costs shall include the net present value of the payments made by the investing company under the lease computed using the applicable federal rate for the month in which the qualifying project is placed in service and for the term most closely approximating the term of the lease. Capital costs shall not include property owned or leased by the investing company or a related party before the commencement of the acquisition, construction, installation or equipping of the qualifying project unless such property was physically located outside the state for a period of at least one year prior to the date on which the qualifying project was placed in service.

h. Costs either paid or incurred by (i) a public industrial development board or authority, city, or county, or other public corporation or political subdivision (a 'public entity') for the benefit of a qualifying project where such costs are treated as costs paid by an investing company with respect to the qualifying project for federal income tax purposes (such costs shall not include amounts contributed by a public entity to a qualifying project as a capital contribution or gift except to the extent that an investing company has cost basis in the contribution or gift for federal income tax purposes); or (ii) a related party to an investing company to the extent such costs are included in or taken into account in determining the investing company's federal income tax basis in the qualifying project, whether or not incurred by an investing company.

(3) CAPITAL CREDIT. An annual amount equal to five percent of the capital costs of the qualifying project, such amount to be credited or allowed in accordance with Section 40-18-194 hereof and other provisions of law, against the state income tax liability generated by or arising out of the qualifying project in each of the 20 years commencing with the year during which the qualifying project is placed in service and continuing for 19 consecutive years thereafter.

(4) DEPARTMENT. The Alabama Department of Revenue.

(5) FAVORED GEOGRAPHIC AREA. Either of the following:

a. Any area designated or created as an enterprise zone by law or that is governed by the Alabama Enterprise Zone Act.

b.1. Any Alabama county which is considered to be less developed. A county is considered to be less developed if it has been found to be less developed by the Alabama Department of Industrial Relations using the most current data available from the United States Departments of Labor or Commerce, the United States Bureau of the Census, or any other federal or state agency, and which finding shall be made immediately upon passage of Act 2001-965 and not later than January 1 of each year thereafter.

2. A county shall be found to be less developed if it is ranked as the forty-fifth through sixty-seventh county, inclusive, using the following factors:

(i) Percent change in population over the most recent five-year period.

(ii) Personal per capita income in the last calendar year for which data are available.

(iii) The average percent employed over the last 12 months for which data are available.

3. The factors used in ranking counties will be weighted in the following manner:

(i) Percent change in population (25 percent).

(ii) Personal per capita income (25 percent).

(iii) Average percent employed (50 percent).

(6) HEADQUARTERS FACILITIES. A facility which will serve as the national, regional or state headquarters for an investing company that conducts significant business operations outside the state and will serve as the principal office of the principal operating officer of the qualifying project. For purposes of this Article 7, the term 'principal operating officer' is defined as the person with chief responsibility for the daily business operations of the qualifying project.

(7) INDUSTRIAL, WAREHOUSING OR RESEARCH ACTIVITY. Any trade or business described in the 1997 North American Industry Classification System, promulgated by the Executive Office of the President of the United States, Office of Management and Budget, Sectors 31 (other than National Industry 311811), 32, 33, and 42; subsector 511; Industry Groups 5142 and 5415; Industries 54138, 54171; and National Industry 514191 and includes such trades and businesses as may be hereafter reclassified in any subsequent publication of the North American Industry Classification System or other industry classification system developed in conjunction with the United States Department of Commerce, or any process or treatment facility which recycles, reclaims, or converts materials, which include solids, liquids, or gases, to a reusable product.

(8) INVESTING COMPANY. Any corporation, partnership, limited liability company, proprietorship, trust or other business entity, regardless of form, making a qualified investment.

(9) NEW EMPLOYEES. Those persons who have not been previously employed at the site on which the qualifying project is or will be located or by an investing company or companies in the state; will be employed full-time at the qualifying project; and will be subject to the personal income tax imposed by Section 40-18-2, upon commencement of employment at the qualifying project.

(10) PROJECT. Any land, building or other improvement, and all real and personal properties deemed necessary or useful in connection therewith, whether or not previously in existence, located or to be located in the state.

(11) QUALIFYING INVESTMENT. The undertaking by one or more investing companies of a qualifying project.

(12) QUALIFYING PROJECT. A project to be sponsored or undertaken by one or more investing companies meeting any one of the following requirements:

a. A project the capital costs of which are not less than $2,000,000, and at which the predominant trade or business activity conducted will constitute industrial, warehousing or research activity.

b. A small business addition the capital costs of which are not less than $1,000,000, and at which the predominant trade or business activity conducted will constitute industrial, warehousing or research activity.

c. A headquarters facility the capital costs of which are not less than $2,000,000.

d. A project located in a favored geographic area the capital costs of which are not less than five hundred thousand dollars ($500,000), and at which the predominant trade or business activity conducted will constitute industrial, warehousing, or research activity.

(13) RELATED PARTY. A person or entity that bears a relationship to an investing company described in Section 267(b), (c), or (e) of the Internal Revenue Code of 1986, as amended.

(14) SMALL BUSINESS ADDITION. Any land, building or other improvement, and all real and personal properties deemed necessary or useful in connection therewith, whether or not previously in existence, to be used as a part of any existing facility of a business located in the state that, prior to the date on which the addition is placed in service, had 100 or fewer full-time employees.

(15) TAX YEAR. The applicable taxable year as the term is defined in Section 40-18-1(12).

(16) 1993 ACT. Act No. 93-851, H. 27 and Act No. 93-852, H. 83 adopted at the 1993 First Special Session of the Legislature of Alabama, as amended by Act No. 94-370, S. 559 adopted at the 1994 Regular Session of the Legislature of Alabama.

At anytime prior to the date on which a qualifying project is placed in service, an investing company may file with the department a written statement of intent to claim the capital credit provided in this article. Such filing by an investing company shall constitute a filing on behalf of the shareholders, partners, members, owners or beneficiaries of the investing company entitled to the capital credit in accordance with such subsection (b) of Section 40-18-194. Such statement shall contain a description of the qualifying project; the date on which the acquisition, construction, installation or equipping of the qualifying project was commenced or is expected to commence; the actual or if not known the estimated capital costs of the qualifying project; the number of new employees to be employed at the qualifying project; the name of each investing company, or the name or names of its shareholders, partners, members, owners or beneficiaries to become entitled to the capital credit; and any other information required by the department.

Subject to compliance with Section 40-18-193, each investing company shall, upon filing of the statement required by Section 40-18-191 and upon the making of qualified investments and upon compliance with subsection (a) of Section 40-18-193, be entitled to the capital credit, such credit to be allocated and available in accordance with subsection (b) of Section 40-18-194. The department shall enter into written agreements with an investing company or companies specifying the method by which income generated by or arising out of the project will be determined, and with respect to qualifying projects undertaken by partnerships, limited liability companies, or other joint ventures, the allocation and treatment of the capital credit provided pursuant to this article.

(a) It shall be a condition to the receipt of a capital credit that either of the following occur:

(1) Not less than 20 jobs for new employees at a qualifying project except as otherwise provided in this section and commencing with the date which is not later than one year after the qualifying project is placed in service and that the average wages for all new employees at the qualifying project be not less than the base wage requirement by the date which is not later than one year after the qualifying project is placed in service and during each year during which all or any part of the capital credit is available with respect to the qualifying project.

(2) Not less than 15 jobs for new employees at the qualifying project which is a small business addition be provided commencing with the date which is not later than one year after the qualifying project is placed in service and that the average wages for all new employees at the qualifying project be not less than the base wage requirement by the date which is not later than one year after the qualifying project is placed in service and during each year during which all or any part of the capital credit is available with respect to the qualifying project.

(3) Not less than five jobs for new employees at the qualifying project which is located in a favored geographic area and commencing with the date which is not later than one year after the qualifying project is placed in service and that the average wages for all new employees at the qualifying project be not less than the base wage, as defined in Section 40-18-190 (1), requirement by the date which is not later than one year after the qualifying project is placed in service and during each year during which all or part of the capital credit is available with respect to the qualifying project.

If an investing company closes an existing facility in this state and within two years following the closing places a qualifying project in service, only the number of new employees in excess of the number of employees who worked at the existing facility at the time of the closure shall be deemed to be new employees for purposes of this section.

(b) The Legislature recognizes that one or more entities may enter into a joint venture in the form of a limited liability company, partnership, or other form of business entity in connection with a qualifying project. It is the intent of this article that the requirements of this article respecting minimum capital costs and employment be applied to the qualifying project and that the capital credit be available and granted to those entities liable for or against which the state income tax is allocated or assessed with respect to the income generated by or arising out of the qualifying project. It shall not be a requirement of this article that the entity employing any new employees be the same entity entitled to receive the capital credit so long as the requirements of capital costs and new employees are implemented and maintained with respect to the qualifying project.

(c) A change of ownership or assignment of interest in any qualifying project shall not qualify the qualifying project or any taxpayer to receive any additional capital credits, and the purchaser, assignee, or successor of the qualifying project or interests therein shall be entitled to the capital credit upon the same conditions and for the same period as the investing company or companies originally entitled to the capital credit.

(d) The Legislature recognizes that while certain periods specified in this article with respect to the capital credit are measured by calendar years it will be necessary for the capital credit to be applied with respect to the tax years of the recipients of the capital credit. Accordingly, the department is hereby authorized to adopt regulations to provide that the capital credit may be allocated to the tax years of the recipient of the capital credit, including the method of determining the pro rata amount of capital credit, if any, available where the tax year of the recipient of the capital credit will end subsequent to the end of any calendar year period specified in this article.

(e) A company shall be considered to have met the employment and wage requirements for the portion of the year following the date upon which such requirements are first met and for each full year thereafter (such portion of a year and each full year thereafter during the 20 year credit period is hereinafter referred to as a 'compliance year') if the employment requirement is satisfied for at least 11/12 of each compliance year and the wage requirement is met based on an average determined over each compliance year.

(f) Any investing company that meets the employment and wage requirements of this section by a date which is not later than one year after the date on which the qualifying project is placed in service, but fails to meet such requirements in any subsequent compliance year, may still claim the capital credit for each compliance year in which such investing company again meets the employment and wage requirements of this section. In no event, however, shall an investing company be able to claim a capital credit in a compliance year beginning: (i) after the third compliance year (whether or not consecutive) in which the investing company fails to meet the employment and wage requirements of this section; or (ii) more than nineteen (19) years after the year in which the qualifying project is first placed in service.

(a) The Legislature recognizes that a substantial number of businesses are organized as limited liability companies, partnerships, and other types of business entities and that certain business entities, organized as corporations, elect to be treated as 'S' corporations under federal and state tax laws, and that it is essential that the capital credit amount shall be available on a pass-through basis in the manner hereinafter provided.

(b) Each investing company, or its shareholders, partners, members, owners, or beneficiaries shall be entitled to the capital credit for each tax year of an investing company with respect to which a capital credit is provided pursuant to this article. The capital credit shall be allowed as follows:

(1) The owner of an investing company which is a proprietorship shall receive a credit against the individual income tax levied by Section 40-18-5 that otherwise would be owed to the state in any year by the owner with respect to the income of the investing company generated by or arising out of the qualifying project.

(2) An investing company which is an Alabama C corporation as defined in Section 40-18-160, or which is an Alabama S corporation and which is subject to taxation under Section 40-18-174, or Section 40-18-175, shall receive a credit against the corporate income tax levied by Section 40-18-31 or by Section 40-18-174 or Section 40-18-175, that otherwise would be owed to the state in any year by the investing company with respect to the income generated by or arising out of the qualifying project.

(3) The shareholders of an investing company which is an Alabama S corporation as defined in Section 40-18-160, and whose taxable income is subject to determination under Section 40-18-161, each shall receive a credit against the individual income tax levied by Section 40-18-5 that otherwise would be owed to the state in any year by each shareholder of the investing company with respect to income of the investing company generated by or arising out of the qualifying project.

(4) The partners, members, or owners of an investing company, the income of which is subject to taxation under Section 40-18-24, each shall receive a credit against the corporate income tax levied by Section 40-18-31, or against the individual income tax levied by Section 40-18-5, whichever is applicable to each such partner, member, or owner that otherwise would be owed to the state in any year by each partner, member, or owner of the investing company with respect to income of the investing company generated by or arising out of the qualifying project.

(5) An investing company which is a trust or estate having income subject to taxation under Section 40-18-25(c) shall receive a credit against the income tax levied by Section 40-18-5 that otherwise would be owed to the state in any year by the investing company on the income generated by or arising out of the qualifying project.

(6) The beneficiaries of an investing company which is a trust or estate the income of which is subject to taxation under Section 40-18-25(d) each shall receive a credit against the corporate income tax levied by Section 40-18-31, or against the individual income tax levied by Section 40-18-5, whichever is applicable to each such beneficiary, that otherwise would be owed to the state in any year by each beneficiary of the investing company with respect to income of the investing company generated by or arising out of the qualifying project.

(7) A shareholder, partner, member, owner or beneficiary which is eligible to receive a credit under subdivision (3), (4) or (6) of this subsection and which is an Alabama S corporation, or which has income which is subject to taxation under Section 40-18-24 or Section 40-18-25(d), solely for purposes of the application of this subsection, shall be treated as though the shareholder, partner, member, owner, or beneficiary were also an investing company.

(8) The capital credit allowed under this subsection for any tax year of an investing company shall not exceed the aggregate amount which otherwise would be due from the investing company, its shareholders, partners, members, owners, or beneficiaries to the state in tax with respect to the income of the investing company generated by or arising out of the qualifying project, determined after the application of all other deductions, losses, or credits permitted under Titles 40 and 41, for the taxable year, and determined by applying the maximum rate applicable to individuals under Section 40-18-5, or the rate applicable to corporations under Section 40-18-31, as the case may be.

(9) In no event may any amount described in this subsection be carried forward or back by any investing company, shareholders, partners, members, owners, or beneficiaries with respect to a prior or subsequent year.

(10) Any shareholder, partner, member, owner, or beneficiary of an investing company may elect annually to use his or her allowable portion of the income tax credit created by this article as a nonrefundable estimated tax payment against his or her individual income tax liability. If a taxpayer makes an annual election to use the aforementioned credit as a nonrefundable estimated payment, the taxpayer shall compute the amount of the credit as though it were a credit, subject to all the requirements and limitations provided by law for the credit, but shall use the amount computed as a nonrefundable estimated payment and shall not use the same amount as a credit. In no event shall this provision be construed to allow the credit or nonrefundable estimated tax payment to expand the 20-year limitation of the credit or estimated tax payment. In no event shall a credit used as nonrefundable estimated payment exceed the amount that would be available if the credit were not used as a nonrefundable estimate payment.

The capital credit shall be reduced or eliminated with respect to a qualifying project at the time the sum of all capital credits received or allowed with respect to a qualifying project equals 100 percent of the capital costs of such qualifying project, all to the end that the aggregate amount of capital credits shall not exceed 100 percent of the capital costs of the qualifying project.

The department shall report annually to the Legislature and the public as to qualifying projects with respect to which capital credits are claimed during the year. The report shall be due on the fifth legislative day of each regular session and shall state the number of qualifying projects, the capital costs of each qualifying project and the total amount of capital credits claimed during the year.

The department shall adopt regulations to carry out the provisions of this article. The department shall audit each investing company periodically to monitor compliance by the investing company with the provisions hereof which are conditions to the availability of capital credits for each year.

At the time of filing any tax return with the department in which any capital credit is claimed under this article, the chief executive officer, the chief financial officer, or the person signing the tax return on behalf of the investing company shall file with the department an affidavit stating that the investing company was, during the tax year for which a capital credit is claimed, in compliance with this article which are conditions to the qualification for and the availability of the capital credit herein authorized. The affidavit shall certify that the sum of all capital credits therefore received or allowed, when added to the capital credit claimed in the return, does not exceed the capital costs of the qualifying project.

This article shall supersede the provisions of the 1993 Act pertaining to the income tax credits and the job development fee provided for in the 1993 Act except with respect to projects approved by the State Industrial Development Authority prior to January 16, 1995. Upon the passage of this article, the State Industrial Development Authority shall not grant tax credits or job development fees pursuant to Section 41-10-44.8, except with respect to entities with respect to which a resolution was adopted by the State Industrial Development Authority prior to January 16, 1995. The State Industrial Development Authority shall continue to have full power to implement the 1993 Act with respect to entities and projects approved prior to January 16, 1995, and all incentives shall remain in effect and may be fully implemented by the State Industrial Development Authority. Nothing contained in this section shall limit any other power or authority of the State Industrial Development Authority heretofore conferred upon it, and the authority shall possess all power and authority heretofore conferred upon it by law other than those enumerated in this section. Each agreement or action on the part of the State Industrial Development Authority intended to constitute an inducement or official action on the part of the authority for purposes of Section 1.150-2 of the regulations under the Internal Revenue Code of 1986, as amended, shall remain in full force and effect.

Each business entity and each project for each business entity with respect to which the State Industrial Development Authority adopted, prior to January 16, 1995, a resolution accepting a project for such entity may, at any time prior to December 31, 1996, file with the department a written election to receive the capital credit granted by this article, and upon the filing, each entity shall thereupon become entitled to the capital credit provided for in this article. Each entity shall, however, upon the filing of the election, be deemed to have waived and relinquished all tax future credits, job development fees, or other incentives provided for in the 1993 Act, and the amount of any tax credits, job development fees, or other incentives actually received by the entity pursuant to the 1993 Act, as well as the period during which the entity was entitled to receive any incentives under the 1993 Act, shall be taken into account for all purposes of this article, specifically including, without limitation, the period during which the capital credit is available and the limitation on the total amount of capital credits provided in Section 40-18-195.

Each investing company receiving a capital credit shall maintain or cause to be maintained records with respect to the qualifying project sufficient to allow the income of the investing company to be identified separately from other income of such investing company subject to Alabama income taxation. In order to limit the capital credit to the income tax liability attributable to the income generated by or arising from the qualified project within the state, the department shall promulgate regulations respecting the determination of income generated by or arising from the qualified project and the income tax attributable to such income.

Capital credits authorized by this article shall not be available for new qualifying projects after December 31, 1998, unless the Legislature, by joint resolution, votes to continue or reinstate the capital credit for new projects after that date. No action or inaction on the part of the Legislature shall reduce or suspend any capital credit in any past or future calendar year with respect to any investing company which files a statement of intent pursuant to Section 40-18-191 on or prior to December 31, 1998, it being the sole intention of this section that failure of the Legislature to adopt a joint resolution continuing the capital credit for periods after December 31, 1998, shall affect only the availability of the capital credit to new qualifying projects after that date, and shall not affect qualifying projects which have established their eligibility to receive capital credits under Section 40-18-191 on or prior to December 31, 1998.

The administration of this article by the department shall be governed by the provisions of the Taxpayers' Bill of Rights and the Uniform Revenue Procedures Act contained in Chapter 2A of this title.

For the tax years beginning on and after January 1, 1995, every corporation, whether a 'subchapter S' corporation, as defined by the 1995 Internal Revenue Code, or not, foreign or domestic, that is doing business in Alabama, as a producer of coal mined in Alabama, shall be allowed a credit against the tax imposed by Section 40-18-2, in the amount of one dollar ($1) per ton of increased production of coal over the previous year's production of coal as set out herein below. Such tax credit shall be based on coal produced after January 1, 1995, provided the coal was mined in Alabama as certified by the producer of the coal. The amount of the total of credit in any one year shall be based on the number of tons of Alabama coal produced by the corporation in the year which exceeds the number of tons of Alabama coal produced by the corporation in calendar year 1994. In the event a corporation did not produce Alabama coal during calendar year 1994, such corporation must establish a base year by producing Alabama coal for twelve consecutive months. Thereafter, such corporation shall be eligible for the tax credit as specified herein above over the base year production.

The Department of Revenue shall promulgate and issue rules and regulations to implement and administer this article.

As used in this article, the following terms shall have the following meanings:

(1) CAPITAL COSTS. All costs and expenses incurred by one or more investing companies in connection with the acquisition, construction, installation, and equipping of a qualifying project during the period commencing with the date on which the acquisition, construction, installation, and equipping commences and ending on the date on which the qualifying project is placed in service, including, without limitation, all of the following:

a. The costs of acquiring, constructing, installing, equipping, and financing a qualifying project, including all obligations incurred for labor and to contractors, subcontractors, builders, and materialmen.

b. The costs of acquiring land or rights in land and any cost incidental thereto, including recording fees.

c. The costs of contract bonds and of insurance of all kinds that may be required or necessary during the acquisition, construction, or installation of a qualifying project.

d. The costs of architectural and engineering services, including test borings, surveys, estimates, plans, and specifications, preliminary investigations, environmental mitigation, and supervision of construction, as well as for the performance of all the duties required by or consequent upon the acquisition, construction, and installation of a qualifying project.

e. The costs associated with installation of fixtures and equipment; surveys, including archaeological and environmental surveys; site tests and inspections; subsurface site work; excavation; removal of structures, roadways, cemeteries, and other surface obstructions; filling, grading, paving, and provisions for drainage, storm water retention, installation of utilities, including water, sewer, sewage treatment, gas, electricity, communications, and similar facilities; off-site construction of utility extensions to the boundaries of the property.

f. All other costs of a nature comparable to those described, including, without limitation, all project costs which are required to be capitalized for federal income tax purposes pursuant to 26 U.S.C. §263A.

g. Costs otherwise defined as capital costs that are incurred by the investing company where the investing company is the lessee under a lease that contains a term of not less than five years and is characterized as a capital lease for federal income tax purposes. Capital costs shall not include property owned or leased by the investing company or a related party before the commencement of the acquisition, construction, installation, or equipping of the qualifying project unless such property was physically located outside the state for a period of at least one year prior to the date on which the qualifying project was placed in service.

h. Costs either paid or incurred by the Alabama State Port Authority for the benefit of a qualifying project where the costs are treated as costs paid by an investing company with respect to the qualifying project for federal income tax purposes, except that the costs shall not include amounts contributed by the Alabama State Port Authority to a qualifying project as a capital contribution or gift except to the extent that an investing company has cost basis in the contribution or gift for federal income tax purposes; or a related party to an investing company to the extent the costs are included in or taken into account in determining federal income tax basis of the investing company in the qualifying project, whether or not incurred by an investing company.

(2) CAPITAL CREDIT. An annual amount equal to five percent of the capital costs of the qualifying project, such amount to be credited or allowed in accordance with Section 40-18-243 and other provisions of law, against the state income tax liability generated by or arising out of the qualifying project in each of the 20 years commencing with the year during which the qualifying project is placed in service and continuing for 19 consecutive years thereafter.

(3) DEPARTMENT. The Alabama Department of Revenue.

(4) INDUSTRIAL, WAREHOUSING, OR RESEARCH ACTIVITY. Any trade or business described in the 1997 North American Industry Classification System within Subsector 493 (Warehousing and Storage), Industry Number 488310 (Port and Harbor Operations), or Industry Number 488320 (Marine Cargo Handling), when the trade or business is conducted on premises in which the Alabama State Port Authority has an ownership, leasehold, or other possessory interest and such premises are used as part of the operations of the Alabama State Port Authority, including the above trades and businesses as they may hereafter be reclassified in any subsequent publication of the NAICS or similar classification system developed in conjunction with the United States Department of Commerce or Office of Management and Budget.

(5) INVESTING COMPANY. Any corporation, partnership, limited liability company, proprietorship, trust, or other business entity, regardless of form, making a qualifying investment.

(6) PROJECT. Any land, building, or other improvement, and all real and personal properties deemed necessary or useful in connection therewith, whether or not previously in existence, located or to be located in the state.

(7) QUALIFYING INVESTMENT. The undertaking by one or more investing companies of a qualifying project.

(8) QUALIFYING PROJECT. A project to be sponsored or undertaken by one or more investing companies that have a capital cost of not less than eight million dollars ($8,000,000), and at which the predominant trade or business activity conducted will constitute industrial, warehousing, or research activity.

(9) RELATED PARTY. A person or entity that bears a relationship to an investing company described in Section 267(b), (c), or (e) of the Internal Revenue Code of 1986, as amended.

(10) TAX YEAR. The applicable taxable year as the term is defined in Section 40-18-1.

An investing company seeking the capital credit shall, prior to the date on which a qualifying project is placed in service, obtain the written approval of the Governor, Finance Director, and Alabama State Port Authority and shall file with the department a written statement of intent to claim the capital credit provided in this article. The filing by an investing company shall constitute a filing on behalf of the shareholders, partners, members, owners, or beneficiaries of the investing company entitled to the capital credit in accordance with subsection (b) of Section 40-18-243. The statement shall contain a description of the qualifying project; the date on which the acquisition, construction, installation, or equipping of the qualifying project was commenced or is expected to commence; the actual or if not known the estimated capital costs of the qualifying project; the name of each investing company, or the name or names of its shareholders, partners, members, owners, or beneficiaries to become entitled to the capital credit; and any other information required by the department.

Each investing company shall, upon securing the approvals and filing of the statement required by Section 40-18-241 and upon the making of qualified investments, be entitled to the capital credit, such credit to be allocated and available in accordance with subsection (b) of Section 40-18-243. The department shall enter into written agreements with an investing company or companies specifying the method by which income generated by or arising out of the project will be determined, and with respect to qualifying projects undertaken by partnerships, limited liability companies, or other joint ventures, the allocation and treatment of the capital credit provided pursuant to this article.

(a) The Legislature recognizes that a substantial number of businesses are organized as limited liability companies, partnerships, and other types of business entities and that certain business entities, organized as corporations, elect to be treated as 'S' corporations under federal and state tax laws, and that it is essential that the capital credit amount shall be available on a pass-through basis in the manner hereinafter provided.

(b) Each investing company, or its shareholders, partners, members, owners, or beneficiaries shall be entitled to the capital credit for each tax year of an investing company with respect to which a capital credit is provided pursuant to this article. The capital credit shall be allowed as follows:

(1) The owner of an investing company which is a proprietorship shall receive a credit against the individual income tax levied by Section 40-18-5, that otherwise would be owed to the state in any year by the owner with respect to the income of the investing company generated by or arising out of the qualifying project.

(2) An investing company which is an Alabama C corporation as defined in Section 40-18-160, or which is an Alabama S corporation and which is subject to taxation under Section 40-18-174 or Section 40-18-175, shall receive a credit against the corporate income tax levied by Section 40-18-31, Section 40-18-174, or Section 40-18-175, that otherwise would be owed to the state in any year by the investing company with respect to the income generated by or arising out of the qualifying project.

(3) The shareholders of an investing company which is an Alabama S corporation as defined in Section 40-18-160, and whose taxable income is subject to determination under Section 40-18-161, each shall receive a credit against the individual income tax levied by Section 40-18-5 that otherwise would be owed to the state in any year by each shareholder of the investing company with respect to income of the investing company generated by or arising out of the qualifying project.

(4) The partners, members, or owners of an investing company, the income of which is subject to taxation under Section 40-18-24, each shall receive a credit against the corporate income tax levied by Section 40-18-31, or against the individual income tax levied by Section 40-18-5, whichever is applicable to each such partner, member, or owner that otherwise would be owed to the state in any year by each partner, member, or owner of the investing company with respect to income of the investing company generated by or arising out of the qualifying project.

(5) An investing company which is a trust or estate having income subject to taxation under subsection (c) of Section 40-18-25, shall receive a credit against the income tax levied by Section 40-18-5, that otherwise would be owed to the state in any year by the investing company on the income generated by or arising out of the qualifying project.

(6) The beneficiaries of an investing company which is a trust or estate the income of which is subject to taxation under subsection (d) of Section 40-18-25, each shall receive a credit against the corporate income tax levied by Section 40-18-31, or against the individual income tax levied by Section 40-18-5, whichever is applicable to each beneficiary, that otherwise would be owed to the state in any year by each beneficiary of the investing company with respect to income of the investing company generated by or arising out of the qualifying project.

(7) A shareholder, partner, member, owner, or beneficiary which is eligible to receive a credit under subdivision (3), (4), or (6) of this subsection and which is an Alabama S corporation, or which has income which is subject to taxation under Section 40-18-24, or subsection (d) of Section 40-18-25, solely for purposes of the application of this subsection, shall be treated as though the shareholder, partner, member, owner, or beneficiary were also an investing company.

(8) The capital credit allowed under this subsection for any tax year of an investing company shall not exceed the aggregate amount which otherwise would be due from the investing company, its shareholders, partners, members, owners, or beneficiaries to the state in tax with respect to the income of the investing company generated by or arising out of the qualifying project, determined after the application of all other deductions, losses, or credits permitted under this title and Title 41, for the taxable year, and determined by applying the maximum rate applicable to individuals under Section 40-18-5, or the rate applicable to corporations under Section 40-18-31, as the case may be.

(9) No amount described in this subsection shall be carried forward or back by any investing company, shareholders partners, members, owners, or beneficiaries with respect to a prior or subsequent year.

The capital credit shall be reduced or eliminated with respect to a qualifying project at the time the sum of all capital credits received or allowed with respect to a qualifying project equals 100 percent of the capital costs of the qualifying project, all to the end that the aggregate amount of capital credits shall not exceed 100 percent of the capital costs of the qualifying project.

The department shall report annually to the Legislature and the public as to qualifying projects with respect to which capital credits are claimed during the year. The report shall be due on the fifth legislative day of each regular session and shall state the number of qualifying projects, the capital costs of each qualifying project and the total amount of capital credits claimed during the year.

The department shall adopt regulations to carry out the provisions of this article. The department shall audit each investing company periodically to monitor compliance by the investing company with the provisions hereof which are conditions to the availability of capital credits for each year.

At the time of filing any tax return with the department in which any capital credit is claimed under this article, the chief executive officer, the chief financial officer, or the person signing the tax return on behalf of the investing company shall file with the department an affidavit stating that the investing company was, during the tax year for which a capital credit is claimed, in compliance with this article which are conditions to the qualification for and the availability of the capital credit herein authorized. The affidavit shall certify that the sum of all capital credits therefor received or allowed, when added to the capital credit claimed in the return, does not exceed the capital costs of the qualifying project.

Each investing company receiving a capital credit shall maintain or cause to be maintained records with respect to the qualifying project sufficient to allow the income of the investing company to be identified separately from other income of such investing company subject to Alabama income taxation. In order to limit the capital credit to the income tax liability attributable to the income generated by or arising from the qualified project within the state, the department shall promulgate regulations respecting the determination of income generated by or arising from the qualified project and the income tax attributable to such income.

Capital credits authorized by this article shall not be available for new qualifying projects after December 31, 2005, unless the Legislature, by joint resolution, votes to continue or reinstate the capital credit for new projects after that date. No action or inaction on the part of the Legislature shall reduce or suspend any capital credit in any past or future calendar year with respect to any investing company which files a statement of intent pursuant to Section 40-18-191, on or prior to December 31, 2005, it being the sole intention of this section that failure of the Legislature to adopt a joint resolution continuing the capital credit for periods after December 31, 2005, shall affect only the availability of the capital credit to new qualifying projects after that date, and shall not affect qualifying projects which have established their eligibility to receive capital credits under Section 40-18-241 on or prior to December 31, 2005.

The administration of this article by the department shall be governed by the provisions of the Taxpayers' Bill of Rights and the Uniform Revenue Procedures Act contained in Chapter 2A of this title.