AB 1869

AB1869:v98#DOCUMENT

Bill Start

CALIFORNIA LEGISLATURE— 2025–2026 REGULAR SESSION

Assembly Bill

No. 1869

An act to amend Section 24872.4 of the Revenue and Taxation Code, relating to taxation.

LEGISLATIVE COUNSEL'S DIGEST

AB 1869, as amended, Haney. Real Estate Investment Trusts: management duties.

The Corporation Tax Law, in modified conformity with federal income tax law, allows a corporation, trust, or association that would otherwise be taxable as a domestic corporation to elect to be treated as a real estate investment trust (REIT) if specified requirements are met in relation to the character of income received by the entity, including a requirement that 95% of the entity’s income fits into several categories, including rents from real property. Existing law specifically excludes from the term “rents from real property” impermissible tenant service income, defined to include amounts received directly or indirectly for managing or operating real property.

This bill would clarify that exercising control over, or reserving the right to exercise control over, specified activities of a lodging facility, as defined, are actions that constitute managing or operating real property. The bill would state that this provision does not constitute a change in, but is declaratory of, existing law. The bill would also allow affected employees of a lodging facility facility, as defined, or their representative to provide evidence to the Franchise Tax Board Labor Commissioner of activities performed by a REIT that constitute direct or indirect operation or management of a lodging facility. The bill would require the Franchise Tax Board Labor Commissioner to confirm receipt of that evidence and, within ____ 45 days of receipt, would require the Franchise Tax Board Labor Commissioner to provide the affected employee or representative a written response to the submission. submission, and would require the Labor Commissioner to forward that response to the Franchise Tax Board.

Digest Key

Vote: MAJORITY Appropriation: NO Fiscal Committee: YES Local Program: NO

Bill Text

The people of the State of California do enact as follows:

SECTION 1.

Section 24872.4 of the Revenue and Taxation Code is amended to read:

24872.4.

(a) Section 856(d)(7)(C)(ii) of the Internal Revenue Code is modified by substituting the phrase “if received by an organization described in subdivision (b) of Section 17651 of Part 10 or Section 23731” for the phrase “if received by an organization described in section 511(a)(2).”

(b) (1) An election under Section 856(e)(5) of the Internal Revenue Code for federal income tax purposes is treated for purposes of this part as an election made by the real estate investment trust under Section 856(e)(5) of the Internal Revenue Code for state purposes and a separate election under paragraph (3) of subdivision (e) of Section 23051.5 is not allowed.

(2) Any revocation of an election under Section 856(e)(5) of the Internal Revenue Code for federal income tax purposes is treated for purposes of this part as a revocation of the election made by the real estate investment trust under Section 856(e)(5) of the Internal Revenue Code for state purposes and a separate election under paragraph (3) of subdivision (e) of Section 23051.5 is not allowed with respect to the property for any subsequent taxable year.

(3) If the real estate investment trust fails to make an election under Section 856(e)(5) of the Internal Revenue Code for federal income tax purposes with respect to any property, that property may not be treated for purposes of this part as foreclosure property, an election under Section 856(e)(5) of the Internal Revenue Code for state purposes with respect to that property is not allowed, and a separate election under paragraph (3) of subdivision (e) of Section 23051.5 is not allowed with respect to that property.

(c)(1)(A)For purposes of Section 856(d)(7)(A) of the Internal Revenue Code, relating to impermissible tenant service income, and Section 856(l)(3)(A) of the Internal Revenue Code, the following actions are considered operating and managing when done in connection with a lodging facility, as that term is defined in Section 856(d)(9)(D) of the Internal Revenue Code:

(i)Exercising, or reserving the right to exercise, control over any aspect of the wages, hours, or working conditions of employees at the lodging facility.

(ii)Exercising control over the discretion of another entity, including an eligible independent contractor as defined in Section 856(d)(9)(A) of the Internal Revenue Code, to establish any aspect of the wages, hours, or working conditions of employees at the lodging facility through establishing or maintaining an operating budget or operating allowances for the lodging facility, provided that nothing in this clause shall preclude a taxable REIT subsidiary from bearing the expenses for the operation of a qualified lodging facility by an eligible independent contractor pursuant to a management agreement or similar service contract.

(iii)Exercising, or reserving the right to exercise, control over the negotiation, approval, or application of any collective bargaining agreement, or any part of a collective bargaining agreement, covering employees at the lodging facility.

(B)This paragraph does not constitute a change in, but is declaratory of, existing law.

(2)

(c) (1) Affected employees at a lodging facility facility, as that term is defined in Section 856(d)(9)(D) of the Internal Revenue Code, or their representative may provide evidence to the Franchise Tax Board Labor Commissioner or their designee that a real estate investment trust or a taxable REIT subsidiary is directly or indirectly operating or managing a lodging facility. At the affected employee’s or representative’s election, the Franchise Tax Board shall treat such communication and any related evidence as confidential. The Franchise Tax Board shall confirm receipt of that evidence and shall, within ____ days of receipt, provide the affected employee or representative a written response to the submission. facility by doing any of the following:

(A) Exercising, or reserving the right to exercise, control over any aspect of the wages, hours, or working conditions of employees at the lodging facility.(B) Exercising control over the discretion of another entity, including an eligible independent contractor, as defined in Section 856(d)(9)(A) of the Internal Revenue Code, to establish any aspect of the wages, hours, or working conditions of employees at the lodging facility through establishing or maintaining an operating budget or operating allowances for the lodging facility, provided that nothing in this clause shall preclude a taxable REIT subsidiary from bearing the expenses for the operation of a qualified lodging facility by an eligible independent contractor pursuant to a management agreement or similar service contract.(C) Exercising, or reserving the right to exercise, control over the negotiation, approval, or application of any collective bargaining agreement, or any part of a collective bargaining agreement, covering employees at the lodging facility.(2) At the election of the affected employee or representative, the Labor Commissioner shall treat such communication and any related evidence as confidential. The Labor Commissioner shall confirm receipt of that evidence and shall, within 45 days of receipt, provide the affected employee or representative a written response to the submission, and shall forward a copy of that response to the Franchise Tax Board.