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.
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.
Income and Franchise Taxation: Apportionment/Allocation and Business/NonBusiness Income
In Appeal of Polaroid Corp., the State Board of Equalization (SBE) held that proceeds received by the taxpayer from apatent infringement lawsuit were business income and must be included in the (numerator and the denominator of the) sales factor. The SBE also held that only net income from the taxpayer’s investment of excess short-term financial instruments may be included in the sales factor
(The remainder of this article can be accessed in the 2004 edition of the ABA’s State and Local Tax Lawyer.)
Legislation: Income and Franchise Taxation
2002 Cal Stat. ch. 488 is the major tax bill for the 2002 Legislative Session that responds to California’s $23.6 billion budget gap: (1) it conforms California law to federal law relative to the bad debt reserve of large banks (California had permitted charge-offs to establish bad debt reserves, but federal law had changed to only permit the charge-off of actual bad debt); (2) it requires withholding on stock options and bonus payments at a 9.3 percent rate (California had some optional withholding at 6 percent); (3) it permits the California Franchise Tax Board (FTB) and California State Board of Equalization (SBE), through June 30, 2003, to negotiate waivers of underpayment fees and penalties for certain high-risk accounts where the agency determines the amount would otherwise not be paid or it would be uneconomical to collect; and (4) it suspends the net operating loss (NOL) deduction for taxable years 2002 and 2003, but the carryover period is extended by one year for losses incurred during 2002 and by two years for losses incurred during 2003, and 100 percent of the NOLs incurred in taxable years beginning after 2003 are allowed as a carry forward deduction.
(The remainder of this article can be accessed in the 2003 edition of the ABA’s State and Local Tax Lawyer.)
Legislation: Income and Franchise Taxation
2001 Cal. Stat. Ch. 334, amending the taxpayer bill of rights, requires the Franchise Tax Board (FTB), to provide documents given to board members on items on the board’s agenda to interested parties without delay before the board can take final action. Chapter 334 also provide that the purpose of proceedings between taxpayers and the FTB is to determine the “taxpayer’s correct tax liability,” allowing taxpayers “every opportunity to present all relevant information pertaining to the taxpayer’s liability,” and allowing for the FTB to “inquire into … all relevant information pertaining to the taxpayer’s liability.”
(The remainder of this article can be accessed in the 2002 edition of the ABA’s State and Local Tax Lawyer.)
On September 25, 2000, the California Franchise Tax Board (FTB) issued FTB Notice 2000-7, which requested public comment and gave notice of a symposium regarding a new proposed regulation relating to audit procedures. The FTB’s proposal is to add Regulation section 19032, “Audit Procedures,” to Title 18 of the California Code of Regulations. This article traces the progress of the FTB’s proposed regulation over the course of the past year, and highlights some of the most significant and controversial provisions of the current draft.
Assembly Bill 2412 (Migden and Aroner), now pending in the California Legislature, would drastically expand the California rules for nexus to tax under the California Sales and Use Tax Law. The bill should be of high interest to Internet retailers who do not have a physical presence in California. A.B. 2412 would expand California law to provide that a retailer has nexus with California based solely on the relationship between the out-of-state retailer and another retailer who does have nexus with California.
(The remainder of this article can be accessed in the July/August 2000 edition of Cyberspace Lawyer.)
Legislation: Income and Franchise Taxation
1999 Cal. Stat. ch. 64, amending Cal. Rev. & Tax. Code section 23153, amending and repealing Cal. Rev. & Tax. Code section 23221, adding Cal. Rev. & Tax. Code 23221, exempts every corporation that incorporates or qualifies to do business in California on or after January 1, 2000, from the minimum franchise tax for the second taxable year and the minimum franchise tax for the second taxable year.
(The remainder of this article can be accessed in the 2000 edition of the ABA’s State and Local Tax Lawyer.)
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