Meeting of minds: a roundup of the annual COT-FTB liaison meeting.
Gail Hall, FTB legislative services bureau director. presented a legislative update of tax bills chaptered and vetoed in the past year. A rundown of all the bills mentioned is available at www.ftb.ca.gov/la/legis/. Key legislation includes:
* AB 1143: Add foreign nonqualified to the definition of taxpayer as it relates to contract voidability. As such. foreign nonqualified LLCs are subject to the same terms of contact voidability as CUrreillIV applies 1(1 foreign n) inqualitied corporations.
* AB 2754: Requires certain business entities to e-file their tax return unless a waiver is granted. The bill also provides that no dependent exempt it in credit will be allowed unless the dependent's taxpayer identification number is provided.
* AB 1393: Extends California's modified conformity In mortgage forgiveness debt relief for discharges occurring on or alter Jan. 1, 2013. and before Jan. I. 2014. The maximum amount of qualified principal residence indebtedness is $800,0110 ($400,000 on a separate return). The total amount excludable from gross income is $500,000 ($250,000 on a separate return).
* AB 2434: Excludes from gross income amounts received for participation in a turf removal water conservation program.
* SB 1271: Excludes from gross income student. loan debt that is forgiven or repaid under the income-based repayment programs administered by the U.S. Department or Education.
* AB 1839: Crets a new qualified motion picture production credit, administered by the Caliibrnia Film (:ommission, that is operative for tax Years beginning on or afierim 1.201ft
* AB 2758: Modifies the priority of payments related to use tax reported on income tax returns administered by the 1e113. Use-tax liability replaces income tax liability as the first priority for payment.
* SB 1159: Requires that a licensing board Furnish to the FTB. upon request, a licensee's individual taxpayer identification number in addition to other license information. This identification number information would not be public record.
Audit Division Chid' Debbie Langsea presented a discussion of the most common audit issues her stall' is pursuing. They include:
* Like-kind exchanges under IRC Sec. 1031: According to Langsea. noncompliance continues to be a problem in the following areas: gain computation errors. invalid property identifications. including costs of post-exchange improvements in the boot calculation and the withdrawal of cash out of the proceeds from the relinquished property.
* Other state tax credits: use of third-party data and other information is used to confirm payments made to other states. Credits are being disallowed that have been claimed to states that do not have a reciprocal agreement with Calif bruin.
* Head of Household filing status: Common errors include the qualifying individual's income exceeding Mt gross income limit of $3.700 and issues arising with the requirement that taxpayers be considered unmarried.
* Expired credits: Credits that are being carried forward in excess of statutory limits are being disallowed. These include the ridesharing, Los Angeles Revitalization Zone, Solar Energy, Political Contribution and Water Conservation credits.
* Partnership/LLC property dispositions: Reporting issues discovered under audit are related to like-kind exchanges. real estate foreclosures and cancellation of debt income.
* Partnership/LLC terminations: Issues include partnership and LLC liquidations reported by both the entity and its partners.
* Transfer of partnership interests: Issues include the disposition of partnership and LLC interests by the parnters/members of partnerships arid LLCs. The FTB continues to identify taxpayers attempting to create higher basis by transferring such between related entities.
* Shareholder/partner/owner's basis in pass-through entity: The FTB is verifying shareholders basis in S corp stock to ensure appropriate flow-through of income., deductions, losses and credits. Correct basis is used to determine if it is sufficient for the deduction of losses or to determine the taxability of distributions.
* S corp liquidations: Common liquidation issues include taxpayers not accelerating the recognition of installment sale gain for California purposes in the final Year. shareholders not recognizing IRC Sec. 331(a) gain and nonresident shareholders not reporting gain that was recognized by the S corp on dispositions of intangible assets.
* Charitable deductions for trusts: The FTB is verifying that amounts donated from the gross income of the rust are paid according to the terms of the governing; document.
* Charitable remainder trusts: The LIB is verifying that the trust is operated according to the terms or the governing document. A CRT that is not operated according to its document could lose its tax-exempt stauts.
* Apportionment of trust income: The FTB is verifying the allocation of source income within and without California.
* Corporation sourcing of intangible sales: Fur years beginning after Jan. 1. 201l. sales from intangible sales and services an' assigned based upon the cost of performance. kn. years beginning on or after Jan. 1. 201 I. single-sales. factor-electing corporations will use market rules for assigning asles from intangibles and services instead of cost of perfrmance rules.
* Sales factor and gross receipts: The FFB continues to sec items in the sales fasctor denominator that do not meet the definition of gross receipts or distort the apportionment calculation.
Questions and Answers
As in prior years, the meeting closed with the FTB responding to a series of questions submitted to and reviewed by the COT.
Various topics populated the Q&A. including problems with the application of withholding from forms 593, substantiation of AAA basis for an S corp shareholder, filing enforcement with regard to economic nexus, designing a more streamlined filing of Secretary of State Form SI-200 and My FTB accounts. Complete questions and answers are available at www.calcpa.org/COT_FTB.
One question that created lively discussion related to the substantiation of AAA basis for an S corp shareholder. More specifically, the question related to members having experience with audits of basis requiring the provision of all prior year S corp and, most likely, the impacted shareholder's tax returns to support the basis claimed. The years at issue could go back 25 years or longer.
Langsra said that records supporting a shareholder's snick basis is besi siipported by copies of tax returns filed. However. if not available, schedulcs provided by the taxpayer and other evidence available to the FTB should be utilized to support basis amounts. It was made clear that good recordkeeping is key.
Langsea also said communication between the taxpayer, practitiner and the FTB auditor is key. While FTB personnel should be willing to work with the taxpayer and practitioner to determine alternative sources documentation to support the basis amounts, difficulties should be moved up the chain or II min wild.
2014 Saul Braverman Award
Lastly, the 2014 Saul Braverman Award was awarded during the meeting to Roseville-based David Fogel, CPA for his long involvement of providing his talent to the profession and other practitioners. His generous offering of his knowledge, and result support of the California CPA community, is a key precept of the Saul Braverman Award. The COT is pleased to make the award to him.
David R. Flamer, CPA is president of David R. Flamei; An Accountancy Corporation and chair of the CalC PA Committee on Taxation. You can reach him at firstname.lastname@example.org.