TaxTalk and beyond.

Propositions 60, 90 and 110 provide for transferring the Prop. 13 tax basis from one property to another under certain circumstances and for certain categories of taxpayers.

There is some confusion about the rules, but help is available. The Board of Equalization issued a letter Feb. 6 (2006/010) to county assessors dubbed "Revenue and Taxation Code Section 69.5; Propositions 60, 90 and 110."

The 28-page document can be obtained at www.boe.ca.gov/proptaxes/pdf/lta06010.pdf.

It begins with a two-page summary of Sec. 69.5 and is followed by Q & As in 12 categories. The material seems to cover virtually every possible combination of events, and anyone advising clients in this realm should get a copy of the document.

Continued: Nevada Corporations Promoted as 'Tax Shelters'

The November 2005 issue of this column discussed ads that tout alleged tax benefits of incorporating in Nevada or forming a Nevada LLC. The promoters continue to sell their ideas.

Just as with the limited partnership sales pitches prior to the Internal Revenue Code of 1986, promoters often have given clients voluminous material, but the client is reluctant to pay for the time required to read and evaluate those materials.

One fact that will answer many of the inquiries is that California Revenue and Taxation Code Sec. 24271 is virtually a carbon copy of IRC Sec. 61--a California resident is taxable on all income, from whatever source.

So, as long as someone is a California resident, dividends, interest and capital gains--regardless of where they're generated--are taxable to the individual.

Scams and Frauds in General

A great listing of current scams and frauds can be found at www.quatloos.com, a public education website maintained by Financial Tax Fraud Education Associates, Inc., a California-based nonprofit.

Update: Offers in Compromise Program Streamlined

California's three tax agencies announced they simplified the OIC process by making a single form--DE 999CA, Multi-Agency Form for Offer In Compromise--that individuals can use for any of the state's tax agencies.

The form, which is valid for the Board of Equalization, Employment Development Department and FTB--can be obtained at www.edd.ca.gov/taxrep/de999ca.pdf.

CA Tobacco Tax Returns

The State Board of Equalization is mailing cigarette and tobacco product excise tax and use tax returns to California taxpayers who have purchased untaxed tobacco products (including cigarettes) from out of state merchants, by either mail order or online.

The first mailing will include about 12,000 taxpayers statewide, with tax liabilities ranging from $45-$8,000. The BOE estimates that the mailings will result in collections of $50 million during the next two years.

The BOE obtains invoices from online cigarette and tobacco vendors, detailing purchases by California customers. The agency receives about 10,000 invoices each month, and has so far identified several hundred thousand purchases (News Release 54-G, CA BOE, Sept. 26, 2006).

A Real World Situation

A TaxTalk member asked for the group's advice regarding this situation: A client's daughter was considering buying a business that sells candles, with 98 percent of the sales being wholesale.

When the CPA advised her that she needs to have the sellers provide a "Tax Clearance Certificate" from the BOE, the daughter replied that the sellers didn't have a resale permit. Instead, they were using the permit of one of their parents (who owns a furniture store), and they've been doing so for five years.

Bob Petersen's excellent analysis said that there are three alternatives:

1. Insist that the seller apply for a tax clearance certificate, which will protect the buyer from any successor liability. However, it probably will result in an audit, since they aren't registered, but they should get credit for the taxes paid via the furniture store account. Of course, it also might kill the deal.

2. Don't buy the business. Instead, purchase only the name and depreciable equipment, but not the accounts receivable or other assets. Thus the business as a unit has not been purchased and there is no successor liability. Review the seller's assets to be sure that the buyer hasn't inadvertently purchased all of the assets.

3. Have the seller post a guarantee that can be called upon to fund any sales tax deficiency resulting from buying the business. However, since sales tax returns haven't been filed, there probably is an extended statue of limitations. This is dangerous and could become a collection problem, with accompanying litigation.

Suggestion No. 2 is the most likely. There are sellers who deliberately attempt to trap the purchaser into being responsible for prior unpaid taxes, and the seller would not sell to anyone who was knowledgeable or represented by counsel. See Revenue and Taxation Sec. 6811 for a Tax Clearance Certificate and the successor liability provision.

Thanks to the following Tax Talk participants: CPAs Jim Bone, Jim Counts, Joel Garfield, Bob Petersen and Don Yamagishi, JD, 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].

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By Leonard W. Williams, CPA