Articles Posted in States

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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.)

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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.)

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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.)

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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.)

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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.

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

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The California water’s-edge election has proved immensely popular with both foreign and domestic parent corporations potentially engaged in a worldwide unitary business. Many elections are made to reduce or minimize California franchise tax, while others are made to simplify or reduce the compliance burdens under California’s worldwide combined reporting method. However, while credit is due to the California Franchise Tax Board (FTB) and the California Legislature for their efforts over the years to simplify the election, there remain many pitfalls, or traps for the unwary, regarding the consequences of making the election. The situation is further complicated by the fact that one taxpayer’s pitfall may be another taxpayer’s windfall—depending, for example, on whether the taxpayer is based in California versus elsewhere, is a foreign versus a domestic parent corporation, or has gains versus losses.

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Franchise Income Tax: Apportionment and Allocation of Business and Nonbusiness Income
In General Motors Corp. v. Franchise Tax Board, the first of the six “gross receipts” cases in court in California to be decided in the Court of Appeal, the Second Appellate District addressed the issue of what the term “sales” means, as used and defined in Revenue and Taxation Code sections 25120 and 25134. The court affirmed the ruling of the trail court that:

“the return of the principal from securities transactions in the repurchase agreements and maturities categories should not be included as ‘gross receipts’ in the denominator of the sales factor in apportioning income to California. The reason for this conclusion is that such return of principal does not arise out of a sales transaction.”

(The remainder of this article can be accessed in the 2005 edition of the ABA’s State and Local Tax Lawyer.)

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Introduction
As a result of discussions between Governor Arnold Schwarzenegger and the California Legislature as part of the funding of the fiscal 2005 Budget Act, language to implement a tax amnesty program was included in Senate Bill (SB) 1100, which was written by the Senate Budget and Fiscal Committee. Amnesty bills have been pending in the California Legislature for the last several sessions, but none had been enacted until SB 1100. On August 2, 2004, the Legislature passed SB 100, which was signed by the Governor on August 16, 2004, as Stats. 2004, Chapter 226. The bill was classified as an “urgency statute,” which went into immediate effect when signed by the Governor. According to SB 1100, “tax amnesty is an innovative and responsible way to increase state revenue to preserve vital state programs without proposing new tax burdens on business and working families, as well as to expose tax evaders operating in the underground economy.”

The remainder of this article can be accessed in the Nov.-Dec. 2004 edition of The Tax Executive.

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California corporate and individual taxpayers with pending audits, protests, appeals or settlement proceedings with the California Franchise Tax Board (FTB), or with comparable proceedings pending with he California State Board of Equalization (BOE) should pay particular attention to new penalties recently enacted by the Legislature and Gov. Arnold Schwarzenegger as part of California’s new amnesty program.

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For the first time in over 20 years, the California Court of Appeal has issued a published decision interpreting the California residency provisions of Revenue and Taxation Code section 17014. In Homer E. Nobel et al. v. Franchise Tax Board, the court addressed whether the taxpayers were residents of California for personal income tax purposes. Despite the taxpayers’ clear intent to change their domicile and residence to Colorado, the court held the taxpayers were still California residents. Before addressing the Court of Appeal’s decision in Nobel, a brief review of California’s residency law is instructive.

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