Articles Posted in Issues

For purposes of the California sales and use tax law, a “sale” and “purchase” do not include the design, development, writing, translation, fabrication, lease or transfer for a consideration of title or possession of a custom computer program. An issue that often arises with respect to a custom computer program is whether such program is deemed a performance of service, versus a sale or purchase of tangible personal property. In addition, it is often difficult to determine how much “customization” is necessary to constitute a custom computer program.

(The remainder of this article can be accessed in the June 2006 edition of Lexis California Tax Practice Insights.)

Pursuant to Cal. Rev. & Tax. Code Section 19306(a) a claim for refund typically must be filed within for years from the date the return was filed, four years from the last day prescribed for filing the return (determined without regard to any extension of time for filing the return), or one year from the date of the overpayment, whichever expired later. If six months elapses without any action upon a filed refund claim, the taxpayer generally may consider the claim disallowed or “deemed denied” and either appeal the claim to the State Board of Equalization (SBE) or file a suit for refund in court.

(The remainder of this article can be accessed in the June 2006 edition of Lexis California Tax Practice Insights.)

Taxpayers intending to change their residency for California personal income tax purposes should be aware that intent alone is insufficient to establish new residency. Moreover, intent coupled with physical acts of starting to move or transition to another state is also insufficient to establish new residency. The California courts have held if one is a resident of California, that person cannot be in California for “a temporary or transitory purpose” until that person’s acts as well as his or her intent show that he or she has moved out of California. That one may intend to move from California at some time in the future does not make that person someone who is in California for a temporary or transitory purpose. One is a resident for tax purposes until there are sufficient indicia of an actual change of such residence.

(The remainder of this article can be accessed in the June 2006 edition of Lexis California Tax Practice Insights.)

Pursuant to Cal. Rev. & Tax. Code Section 17041, a California resident is taxed on all income, from whatever sources derived. In contrast, Cal. Rev. & Tax. Code Sections 17041(b) and 17951 state that nonresidents and part-year residents of California are only taxable on income from sources within California. Exactly what income has a California “source” is the subject of much debate and legislative action.

(The remainder of this article can be accessed in the June 2006 edition of Lexis California Tax Practice Insights.)

Pursuant to Cal. Rev. & Tax. Code Section 17014(a), a resident is an individual who (1) is in California for “other than a temporary or transitory purpose” or (2) is “domiciled” in California but is outside California for “a temporary or transitory purpose.” Presence within California for more than nine months of a taxable year creates a rebuttable presumption of California residence under Cal. Rev. & Tax. Code Section 17016. However, no presumption of nonresidency arises when an individual spends less than nine months of the year in California.

(The remainder of this article can be accessed in the June 2006 edition of Lexis California Tax Practice Insights.)

In situations where the taxpayer has not paid the tax in full but has otherwise filed a valid claim for refund, Cal. Rev. & Tax. Code Section 19322.1 allows a taxpayer to file an informal claim for refund tolling (delaying the expiration of) the statute of limitations. Practitioners should be aware of some of the common pitfalls associated with filing an informal refund claim, including situations involving taxpayers making payments under an installment agreement, the effective date of the statute and the Franchise Tax Board’s (FTB) Notice interpreting the statute.

(The remainder of this article can be accessed in the June 2006 edition of Lexis California Tax Practice Insights.)

Cal. Rev. & Tax. Code Section 19043.5 was added by the California Legislature during the 2001-2002 legislative session. Under the prior law, if an adjustment proposed by the Franchise Tax Board (FTB) did not result in additional tax due, but only affected the amount of a tax credit that may be carried over to the next year, the FTB could issue a zero-balance notice of proposed assessment under Cal. Rev. & Tax. Code Section 19043. However, the taxpayer’s right to appeal a zero-balance notice of proposed assessment was not clear, because there was no dispute over the amount of tax due. Section 19043.5 was adopted to specifically address this issue.

(The remainder of this article can be accessed in the June 2006 edition of Lexis California Tax Practice Insights.)

Under Cal. Rev. & Tax. Code Section 19306(a), a claim for refund typically must be filed within four years from the date the return was filed, four years from the last day prescribed for filing the return (determined without regard to any extension of time for filing the return) or one year from the date of the overpayment, whichever expires later. However, practitioners should be aware that under Cal. Rev. & Tax. Code Section 19308 a claim for refund may also be filed within the same period the Franchise Tax Board (FTB) may mail a notice of proposed deficiency assessment under the same circumstances if either (1) the taxpayer has extended the California statute of limitations for issuing a deficiency assessment of (2) the taxpayer has agreed with the Internal Revenue Service to extend the federal statute of limitations for issuing a deficiency assessment for any year.

(The remainder of this article can be accessed in the June 2006 edition of Lexis California Tax Practice Insights.)

The accuracy-related and fraud penalties under Cal. Rev. & Tax. Code Section 19164 are generally determined in accordance with federal law. The federal counterparts to Section 19164 are I.R.C. Sections 6662-6665. Defending against the accuracy-related and fraud penalties can be difficult and requires a solid understanding of the applicable exceptions to the imposition of such penalties. Moreover, counsel should also be aware of the enhanced accuracy-related penalty (40 percent instead of 20 percent) for potentially abusive tax shelter items and the modified exceptions to the imposition of such penalty.

(The remainder of this article can be accessed in the June 2006 edition of Lexis California Tax Practice Insights.)

Cal. Rev. & Tax. Code Section 24425 operates to prevent taxpayers from deducting expenses incurred to generate nontaxable income.

Analysis
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.