FTB Q&A highlights: plus: FTB audit emphasis and selected EDD issues.

One of many CalCPA benefits is rapid access to the information tax authorities share at their annual liaison meetings with CalCPA's Committee on Taxation.

These Q&A sessions, with their resulting transcripts, are a great, but often overlooked, resource for tax practitioners.

Highlights from CalCPA's 2005 FTB liaison meeting follow, and the complete transcript of 38 Q&As can be downloaded from www.calcpa.org/members/committees/tax.htm. For a hardcopy version, contact Cindy Kuhlman at [e-mail] or Cindy Kuhlman; 1201 K St., Suite 1000; Sacramento, CA 91203.

Refunds From Amended Returns 

The FTB has issued the following guidelines regarding refunds associated with amended returns:

* For individual returns, normal processing times are 60 to 75 days.

* For general/multi-state corporations, normal processing time is four to six months for those with income less than $25,000.

* For those with income more than $25,000, that time increases to 12 months.

Cost Segregation Studies 

California has conformed to the IRS automatic change in accounting methods based on cost segregation studies, unless there is a difference between federal and state law.

Delaware Series LLC 

The FTB's position is that each series in a Delaware Series LLC is considered a separate LLC and must file its own Form 568, Liability Company Return of Income, and pay its own separate LLC annual tax and fee.

April 1 Due Date for Form 571-L, 'Business Property Statement'

This due date is just one more thing to contend with during the normal income tax filing period. It turns out that, as a practical matter, most counties don't penalize the filers as long as the form is filed by May 7.

It's too late to offer any relief for this year, but keep an eye on it toward the end of the year to see if the escape hatch is still available in 2007.

'Drop & Swap' Sec. 1031 Exchanges

Apparently, the FTB is auditing various types of alleged Sec. 1031 exchanges. A common FTB audit candidate involves qualifying real estate held by a partnership, in which the partners have different goals when the property is going to be sold.

A valid game plan is to convert the ownership to tenants-in-common between the partners, and operating it in that form for some protracted period of time before the disposition. Then, those who want a sale may sell and those who want to exchange may do an exchange with their tenancy-in-common interests.

Part of the conversion to tenancy-in-common ownership should be to change the mortgage from being owed by the partnership to being owed by the individual tenants-in-common. The failure to so caused one such attempt to fail in the FTB audit.

The leading candidates for an FTB audit are those where the ownership is changed from a partnership to a tenancy-in-common only a few minutes or hours before its disposition. That never has been a sound procedure, but it is common and the FTB is hunting them down.

Other Selected FTB Audit Emphasis

Other FTB audit emphasis for businesses include sales factor, unity, business/non-business, enterprise zone credit; and the manufacturer's investment credit.

Under personal income tax, there's a new emphasis on bad debts and worthless stock, since the FTB feels that the criteria for declaring such losses often are not met (FTB's Nov./Dec. Tax News, Jan. 1, 2006).

A Few EDD Items

The following items come from Jim Counts, CPA, CalCPA's Employment Development Department liaison:

* The new toll-free number for the EDD's Taxpayer Advocate Office is [phone].

* The EDD will not follow the IRS conversion to an annual payroll return for employers with a payroll tax liability of less than $1,000.

* Is it possible for an 8-year-old to get unemployment benefits? Because of the requirement that UI recipients be eligible for work, the only likely children who would qualify might be child actors.

* EDD projects to re-classify independent contractors as employees are focused on mortgage brokers and courier truck drivers.

For courier drivers, if the business is paying an independent contractor who is only one driver with one truck, the EDD will convert that independent contractor to an employee.

If the business is paying an independent contractor who has two or more drivers and two or more trucks, the change will not be automatic.

Thanks to the following TaxTalk participants for their contributions to the above items: Jim Bone, CPA; Jim Counts, CPA; Steve Honeyman, CPA; and Ralph Weintraub, CPA.

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By Leonard W. Williams, CPA

Leonard W. Williams, CPA is a Sunnyvale-based sole practitioner. A member of CalCPA's Committee on Taxation, the AICPA Tax Division and a former Peninsula Chapter president, you can reach him at [e-mail].