Talking California Tax.

More Highlights From CalCPA's TaxTalk Listserve

Tax Treatment of Stock Options

California's Employment Development Department has revised its information sheet on stock options (DE 231SK). It is available on the EDD Web site at www.edd.ca.gov/de231sk.pdf. DE 2315K describes the IRS treatment, then gives the corresponding California treatment.

Persistence Pays

A recent TaxTalk posting involved an in-house error: A $50,000 overpayment had been designated as an estimated tax payment when the taxpayer and CPA really had wanted the overpayment refunded.

When the CPA called the FTB Practitioner Hotline to get this changed, the FTB employee told her no, absolutely not and cited a code section that stated it couldn't be done. She called another time, hoping to get a different answer from a different employee, but struck out again. She then left a message on the Policies and Issues line for tax practitioners.

The CPA finally talked to the supervisor of the two employees who had answered her initial inquiries. The supervisor had heard from the employees and the Policies and Issues line liaison, and knew the story.

The supervisor was very understanding and had the CPA write a letter admitting the mistake, and stating under penalties of perjury that the taxpayer may be subject to underpayment penalties for 2001. The supervisor then approved the refund. The supervisor said that the employees were correct in their response, and to do otherwise would have been beyond the scope of their authority.

Effective Use of an Elected Official

A CPA was at a client's office for the day, and had left instructions for his secretary to prepare the extensions for another client. The amount due to the FTB for this latter client was $370,000. Due to a typo, it came out as $37,000. A standing arrangement with the client is that the extensions are sent to his broker and the checks are issued from his brokerage account, so neither the client nor the CPA saw the extension or check.

The mistake wasn't discovered until the return was prepared.

The FTB assessed late filing penalties and interest of more than $90,000, and the client expected the CPA to pay it.

The CPA called and wrote the FTB to offer an explanation and ask that the penalty be abated. His efforts got nowhere.

A TaxTalk member suggested that the CPA contact his state Assembly member with the hope that the Assembly member would be able to arrange a one-on-one meeting between the CPA and an FTB official with some authority. The Assembly member was able to arrange that meeting, and the penalty was abated. The interest had to be paid, but all that the client wanted was the difference between what the FTB charged and what he had been earning in the account. That turned out to be almost no difference and the problem went away.

You Read it Here First

Professor Kitty Wright, JD, CPA, will have a new book coming out later this year "Manual of California Taxes," to be published by CCH.

Moving to Nevada

A client posed the idea of moving to Nevada but to continue working in California. He knew that he still would have to pay tax on his California earnings. When asked what the objective was, he said that he should be able to avoid tax on his stock option exercises.

This was tax myopia on his part.

California will source the bargain element on NQSOs to California as payment for services rendered.

Interestingly enough, there is no FTB rule on what to report as a preference item in these circumstances when an ISO is exercised and held.

The probable stance when he exercises while he is employed in California is that the FTB will use a duty-days formula (days in California over total days between grant and exercise).

The FTB has informally taken the position that the income from a qualifying disposition of an ISO is taxable in the seller's state of residence.

Losses on California Rentals Owned by Non-California Residents

This seems to be one of the situations lacking clear guidance from the FTB. Of the various alternatives posted on TaxTalk, the most appealing is to categorize the owners as not actively participating, thus turning the losses into true suspended losses that will be available when the property is eventually sold.

Treating the rentals as qualifying for the $25,000 deduction turns the losses into NOLs if there is no other California income. However, carrying forward the NOLs won't work out if there are no federal NOLs.

Canadian RRSPs

People who move to California from Canada frequently have RRSP accounts, which are very similar to U.S. 401(k)s.

The belief and practice had been that the annual earnings within those accounts were subject to California tax, but not federal tax. The June 2001 California CPA reported that the FTB had informally told a CalCPA member that those earnings are not subject to California tax. This was verified on Page 70 of the May 2001 Spidell's California Tax Letter. California tax returns for open years should be amended to claim refunds for the taxes erroneously paid on those earnings.

Thanks to CalCPA members Mark Leavitt, Joan Rutkouski, Professor Kitty Wright, Glenn B. Hammill, Woody Fox, Bill West and Kate Leonard for their participation in these issues.

Leonard W. Williams, CPA, is a Sunnyvale-based sole practitioner. He is a member of Ca/CPA's Committee on Taxation, AICPA Tax Division member and former Peninsula Chapter president.