(a) For purposes of computing “taxable income of a nonresident or part-year resident” under paragraph (1) of subdivision (i) of Section 17041, notwithstanding Sections 17951, 17952, and 17953, gross income of a nonresident (as defined in Section 17015) from sources within this state shall not include dividends, interest, or gains and losses from qualifying investment securities if any of the following apply:
(1) In the case of an individual, with respect to the qualifying investment securities, the taxpayer’s only contact with this state is through a broker, dealer, or investment adviser located in this state.
(2) In the case of a partner’s distributive share of income from qualifying investment securities, the partnership qualifies as an investment partnership, whether or not the partnership has a usual place of business located in this state.
(3) In the case of a beneficiary of a qualifying estate or trust, the taxpayer’s only contact with this state is through an investment account managed by a corporate fiduciary located in this state.
(4) In the case of a unit holder in a regulated investment company (as defined in Section 851 of the Internal Revenue Code), to the extent of the dividends distributed by the regulated investment company, whether or not the regulated investment company has a principal place of business in this state.
(b) This section shall not apply to income derived from investment activity that is interrelated with any trade or business activity of the nonresident or an entity in which the nonresident owns an interest in this state, whose primary activities are separate and distinct from the acts of acquiring, managing, or disposing of qualified investment securities, or if those securities were acquired with working capital of a trade or business activity conducted in this state in which the nonresident owns an interest.
(c) For purposes of this section:
(1) “Investment partnership” means a partnership that meets both of the following requirements:
(A) No less than 90 percent of the partnership’s cost of its total assets consist of qualifying investment securities, deposits at banks or other financial institutions, and office space and equipment reasonably necessary to carry on its activities as an investment partnership.
(B) No less than 90 percent of its gross income consists of interest, dividends, and gains from the sale or exchange of qualifying investment securities.
(2) “Qualifying estate or trust” means an estate or trust that meets both of the following requirements:
(A) No less than 90 percent of the estate’s or trust’s cost of its total assets consist of qualifying investment securities, deposits at banks or other financial institutions, and office space and equipment reasonably necessary to carry on its investment activities.
(B) No less than 90 percent of its gross income consists of interest, dividends, and gains from the sale or exchange of qualifying investment securities.
(3) (A) “Qualifying investment securities” include all of the following:
(i) Common stock, including preferred or debt securities convertible into common stock, and preferred stock.
(ii) Bonds, debentures, and other debt securities.
(iii) Foreign and domestic currency deposits or equivalents and securities convertible into foreign securities.
(iv) Mortgage- or asset-backed securities secured by federal, state, or local governmental agencies.
(v) Repurchase agreements and loan participations.
(vi) Foreign currency exchange contracts and forward and futures contracts on foreign currencies.
(vii) Stock and bond index securities and futures contracts, and other similar financial securities and futures contracts on those securities.
(viii) Options for the purchase or sale of any of the securities, currencies, contracts, or financial instruments described in clauses (i) to (vii), inclusive.
(ix) Regulated futures contracts.
(B) “Qualifying investment securities” does not include an interest in a partnership unless that partnership is itself an investment partnership.
(Amended by Stats. 2001, Ch. 920, Sec. 24. Effective January 1, 2002.)