§40-14A-23. Definition of net worth.

(a) Net worth of corporation. The net worth of a corporation shall equal the aggregate net amount of the following items determined as of the first day of the corporation's taxable year and adjusted as required in this article:

(1) In the case of a corporation, the sum of the following:

a. The issued capital stock and any additional paid-in capital, without reduction for treasury stock; and

b. Retained earnings, but not less than zero, which shall include any amounts designated for the payment of dividends until the amounts are definitely and irrevocably placed to the credit of stockholders subject to withdrawal on demand, and

(2) In the case of an entity taxed as a corporation under this article that does not issue stock, the difference between the book value of the entity's assets and liabilities, but not less than zero.

(b) Net worth of limited liability entities. The net worth of a limited liability entity shall be an amount equal to the sum, but not less than zero, of the capital accounts of the owners of the limited liability entity determined as of the first day of the taxable year of the entity and as further adjusted pursuant to this article.

(c) All the items that would enter into determining a disregarded entity's net worth shall be instead taken into account in determining the net worth of its owner, and the net worth of the disregarded entity shall be zero. Provided, however, that if the owner of the disregarded entity is an individual, general partnership, or other entity not subject to this tax, the net worth of the disregarded entity shall be equal to the assets minus the liabilities of the disregarded entity.

(d) Net worth of business trusts classified as corporations. The net worth of a business trust classified as an association taxable as a corporation for federal income tax purposes shall be equal to the book value of the assets minus the liabilities of the business trust but not less than zero.

(e) Additions to net worth.

(1) Additions to net worth may be positive amounts only.

(2) Net worth shall include related-party debt in certain situations as follows:

a. If a taxpayer is indebted to related parties in an amount that exceeds the net worth of the taxpayer determined under subsections (a), (b), or (c), then the amount of the excess shall be included in the net worth of the taxpayer.

b. For purposes of this subsection, the terms "debt," "indebted," and "indebtedness" shall not include trade debt, accounts payable, or deposit liabilities to related parties that are doing business in Alabama.

(f) There shall be added to net worth, as determined above, compensation and distributions paid or accrued in certain situations.

(1) CORPORATIONS OTHER THAN ALABAMA S CORPORATIONS.

a. For a C corporation, net worth shall include compensation or similar amounts paid or accrued to a direct or indirect shareholder if such shareholder owns at least a 5% capital, profits, or voting interest in such corporation, to the extent such amount exceeds $500,000 with respect to each shareholder in the determination period. The rules of 26 U.S.C. §267(c) shall apply in determining whether an individual is a direct or indirect shareholder who owns at least a 5% capital, profits, or voting interest in such corporation.

b. All compensation or similar amounts paid or accrued to shareholders described in paragraph a. shall be aggregated if such shareholders are members of the same family as described in 26 U.S.C. §267(b)(1), unless the shareholders are 21 years of age or older and materially participate in the business.

c. Compensation or similar amounts paid or accrued to a person not described in paragraphs a. and b. shall be included in such aggregate amount if such person is related to any of the shareholders described in paragraphs a. and b., in accordance with the rules of 26 U.S.C. §267(b)(1), unless the person is 21 years of age or older and materially participates in the business.

(2) ALABAMA S CORPORATIONS.

a. For an Alabama S corporation, add to the above net worth the sum of compensation, distributions or similar amounts paid or accrued to a direct or indirect shareholder if that shareholder owns at least a 5% capital, profits, or voting interest in the corporation, to the extent such amounts exceed $500,000 with respect to each shareholder in the determination period. The rules of 26 U.S.C. §267(c) shall apply in determining whether an individual is a direct or indirect shareholder who owns at least a 5% capital, profits, or voting interest in the corporation.

b. All compensation, distributions, or similar amounts paid or accrued to shareholders described in paragraph a. shall be aggregated if such shareholders are members of the same family as described in 26 U.S.C. §267(b)(1), unless the shareholders are 21 years of age or older and materially participate in the business.

c. Compensation or other similar amounts and distributions paid or accrued to a person not described in paragraphs a. and b. shall be included in such aggregate amount if such person is related to any of the shareholders described in paragraphs a. and b., in accordance with the rules of 26 U. S. C. §267(b)(1), unless the person is 21 years of age or older and materially participates in the business.

(3) LIMITED LIABILITY ENTITIES.

a. For a limited liability entity, net worth shall include compensation, distributions or similar amounts paid or accrued to each direct or indirect partner or member to the extent the amounts exceed $500,000 with respect to each partner or member in the determination period. In determining whether an individual is an indirect partner or member, the principles of 26 U.S.C. §267(c) shall apply.

b. All compensation, distributions, or similar amounts paid or accrued to partners or members described in paragraph a. shall be aggregated if such partners or members are members of the same family as described in 26 U.S.C. §267(b)(1), unless the partners or members are 21 years of age or older and materially participate in the business.

c. Compensation, distributions, or other similar amounts paid or accrued to a person not described in paragraphs a. and b. shall be included in such aggregate amount if such person is related to any of the partners or members described in the paragraphs a. and b., in accordance with the rules of 26 U.S.C. §267(b)(1), unless the person is 21 years of age or older and materially participates in the business.

(4) DISREGARDED ENTITIES.

a. For a disregarded entity, net worth shall include compensation, distributions, or similar amounts paid or accrued to a direct or indirect owner to the extent the amount exceeds $500,000 in the determination period. In determining whether an individual is an indirect owner, the principles of 26 U.S.C. §267(c) shall apply.

b. All compensation, distributions, or similar amounts paid or accrued to an owner or indirect owners described in paragraph a. shall be aggregated if the owner or indirect owners are members of the same family as described in 26 U.S.C. §267(b)(1), unless the owner or indirect owners are 21 years of age or older and materially participate in the business.

c. Compensation, distributions, or similar amounts paid or accrued to persons not described in paragraphs a. and b. shall be included in the aggregate amount if the person is related to any of the owners described in paragraphs a. and b., in accordance with the rules of 26 U.S.C. §267(b)(1), unless the person is 21 years of age or older and materially participates in the business.

(g) From the sum of the items and additions to net worth determined in subsections (a) through (f), the following items shall be subtracted:

(1) The book value of the investment by the taxpayer in the equity of any other taxpayer (including any excess related-party debt described in paragraph (e)(2)a. that is included in the net worth of the taxpayer) that is doing business in Alabama. The subtraction shall not include the book value of any security held by a dealer primarily for sale to customers in the ordinary course of its trade or business pursuant to 26 U.S.C. §1236.

(2) In the case of financial institutions, the investment by the taxpayer in the equity (including any excess related-party debt added to net worth pursuant to paragraph (e)(2)a.) of any other corporation or limited liability entity that is not doing business in Alabama if the taxpayer owns more than 50 percent of the outstanding capital stock of the other corporation or more than 50 percent of the capital and profits interest of the limited liability entity, unless the other corporation or limited liability entity is dormant and not regularly engaged in one or more business activities. A corporation shall not be deemed dormant and shall be considered regularly engaged in one or more business activities if the corporation owns, directly or indirectly, more than 50 percent of the outstanding capital stock of another corporation regularly engaged in one or more business activities. A corporation shall be deemed to directly or indirectly own more than 50 percent of another corporation if both corporations would be part of a controlled group of corporations as defined in 26 U.S.C. §1563 if a 50 percent ownership requirement were applied in lieu of the 80 percent ownership requirement in 26 U.S.C. §1563.

(3) The unamortized portion of goodwill and core deposit intangibles appearing on the taxpayer's balance sheet by reason of a direct purchase of another corporation or limited liability entity.

(4) The unamortized balance of any amount that the taxpayer properly elected, pursuant to Pronouncement 106 of the Financial Accounting Standards Board or any equivalent successor authority, to amortize over a period of years rather than immediately charging that amount to earnings.

(5) In the case of a financial institution, the amount of net worth as adjusted pursuant to this section that exceeds six percent of its assets.

(Act 99-665, 2nd Sp. Sess., p. 131, §2; Act 2000-705, p. 1442, §2.)