Cal. Rev. & Tax. Code Section 24425 operates to prevent taxpayers from deducting expenses incurred to generate nontaxable income.
Expense attribution has become an important issue in California in light of the Ceridian, Farmer Brothers, and Abbot Laboratories decisions in which the dividends received deduction treatment under Cal. Rev. & Tax. Code Sections 24410 and 24402, were held to be unconstitutional. Practitioners are well advised to follow the changing landscape with regard to expense attribution under Section 24425.
(The remainder of this article can be accessed in the June 2006 edition of Lexis California Tax Practice Insights.)