In “California Office of Tax Appeals Rejects Franchise Tax Board’s Broad Interpretation of California’s “Doing Business” Standard,” the SALT team examines the board’s rejection of the California Franchise Tax Board’s (FTB) extremely narrow interpretation and application of Swart Enterprises, Inc. v. Franchise Tax Board, involving California’s “doing business” standard.
(This article originally was published by Law360 on October 7, 2017.)
On Sept. 16, 2017, California Governor Jerry Brown signed Assembly Bill (A.B.) 131 into law, which takes effect immediately and makes various changes to the Taxpayer Transparency and Fairness Act of 2017 enacted on June 27, 2017. The Act overhauled the California State Board of Equalization (BOE) and created two new tax agencies.
(This alert was also published as a bylined article by Law360 on July 31, 2015.)
Over five years into a personal income tax residency audit by the California Franchise Tax Board (FTB), Gilbert Hyatt filed a civil suit in Nevada state court against FTB alleging tortious conduct by FTB auditors. After more than 17 years of litigation, including a previous trip to the United States Supreme Court, the High Court has again agreed to weigh in, this time to decide the extent the United States Constitution requires Nevada to provide the FTB immunity from such a civil suit.
The California Franchise Tax Board has issued a chief counsel ruling stating that a registered broker-dealer must include the entire sales price received from the sale of securities—including the return of capital—in the sales apportionment factor. Interestingly, the chief counsel determined that California’s alternative apportionment provisions do not apply to the combined group’s intrastate apportionment result.
California generally conforms to the federal provisions regarding net operating loss (NOL) deductions. However, California’s seemingly endless battle with budget deficits has resulted in periodic suspensions of California taxpayers’ ability—both personal and corporate—to take NOL deductions. For example, California suspended NOL deductions for the 2002 and 2003 taxable years. More recently, California generally suspended NOL deductions for the 2008 through 2011 taxable years.
Beginning August 1, California income taxpayers that used a tax shelter or that have unreported income from the use of an offshore financial arrangement for tax years beginning before January 1, 2011, will have the opportunity to pay tax and interest on income related to those transactions and avoid a barrage of penalties under California’s new voluntary compliance initiative (VCI 2). According to the California Franchise Tax Board, VCI 2 is aimed at “tax schemes that serve no significant purpose other than reducing tax.” Taxpayers may recall California’s first voluntary compliance initiative (VCI 1), which was enacted in 2003 as part of the state’s initial deluge of antitax shelter legislation and in response to what the FTB claimed to be a steady loss of revenue because of tax shelter transactions. Although VCI 2 mirrors its predecessor in many ways, as explained in greater detail below, there are significant differences worth consideration. Moreover, VCI 2 follows closely on the heels of the latest round of FTB notices aimed at identifying some transactions as abusive tax avoidance transactions for purposes of California’s widening penalty provisions. Clearly, a storm is on the horizon; however, refuge under cover of voluntary compliance should be taken only after careful consideration of the pros and cons associated with participating in VCI 2.
The California Franchise Tax Board (FTB) has recently issued a Legal Notice generally providing that taxpayers who previously filed incomplete IRS Forms 8886 or failed to file Forms 8886 with FTB will avoid penalties by filing completed forms within 60 days. Taxpayers that may have concerns regarding Form 8886 FTB compliance issues should take this opportunity to review and correct any prior errors or omissions.
The remainder of this article can be accessed in the August 2007 edition of Thomson Reuters’ Practical U.S./Domestic Tax Strategies.
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.
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.
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.)