Questions Answered: FTB-COT Liaison Meeting Summary.
Mental Health Services Tax and Annualization
Q: The Form 5805 annualization calculation annualizes income tax for penalty purposes, but spreads the Mental Health Services Tax evenly among all four quarters. For taxpayers who would otherwise not be subject to the Mental Health Services Tax, but receive a windfall in the fourth quarter, penalties are assessed as if the windfall was received evenly throughout the year. This is unfair and likely not the FTB's intent. Would the FTB please look at this apparent error in penalty calculation?
A: RTC Sec. 17043 imposes the Mental Health Services Tax (MHST) as an additional tax at the rate of 1 percent on the portion of a taxpayer's taxable income in excess of $I million. RTC Sec. 19136 and IRC Sec. 6654 allow a taxpayer who recognized income at an uneven rate during the taxable year to use an annualized income installment method to determine required installments.
The instructions for the 2017 form 1TB 5805, under Part Ill Annualized Income Installment Method, state you should "Complete line 1 through line 16 to figure your current year tax, per quarter, based on your income as you earned it." Therefore, when completing Bart Ill, line 14b, figure and enter the MHST in each column based on the annualized taxable income for that period.
We will clarify Form 5805, Part Ill, line 14b, instructions in a similar manner to equivalent federal Form 2210 instructions.
Concurrent Voluntary Disclosure With CDTFA and FTB Q: When a business applies for voluntary disclosure with CDTFA, a requirement is that the business registers for sales tax remittance simultaneously. When the business registers for sales tax remittance, they can also become registered with the Secretary of State (SOS) as part of that process. Generally; an SOS registration disqualifies a business from participating in a voluntary disclosure program (VDP) with the FTB and creates an issue for businesses who are also concurrently or later attempting to apply for voluntary disclosure with the FTB.
Would the SOS registration as part of a sales tax voluntary disclosure with CDTFA impede or inhibit the taxpayer's ability to participate in a voluntary disclosure program with the FTB if the SOS registration and FTB application occur close in time to one another? If taxpayers could maintain eligibility for an FTB YDA despite the SOS registration through the DTFA YDA, what steps should the taxpayer take to ensure the application is accepted?
A: Registering with the SOS will inhibit a taxpayer's ability to enter the FTB's VDP. Therefore, as to the second question, there are no steps that a taxpayer can take to "maintain eligibility" to apply to the FTB's YDP while already registered with the SOS. For a taxpayer to register with the SOS without inhibiting the taxpayer's eligibility for YDP, a change would need to be made to the applicable statute. The only alternative option available to a taxpayer disqualified from participating in VDP may be to enter into an FTB Filing Compliance Agreement (FCA). The FTB and CDTFA arc aware that it is impossible to simultaneously apply to the respective YDPs. For this reason, the F'FB's and CDTFA's YDP websites contain similar language warning taxpayer of the potential disqualification. Visit ftb.ca.gov/bills_and_notices/voluntary/volumary.shtml and cdtfa.ca.gov/formspubs/publ 78/ for more information.
For practitioners, the FTB also would like to note that once the FTB VDP application has a stamp from a national carrier with the date of mailing, it may then enter the CDTFA's YDP process as soon as the next day. The FTB has interpreted RTC sees. 19191 and 19192 to provide that a taxpayer must not have registered with the SOS before entering into, but not completing, FTB's VDP process. Additionally, receiving the acknowledgement letter from the VDP section of FTB definitively means the applicant has "entered" the program, and the applicant is free to then enter CDTFA's program.
Nonconformity and Technical
Q: Will the instruction for Forms 565 and 568 address California's nonconformity to repeal of the federal technical termination rules made by the federal Tax Cuts and Jobs Act? A July 2018 Tax News article (ftb.ca.gov/Professionals/Taxnews/ Editions/2018/July. shtml#AHAboutBusiness) provided a lot of good information, however, it is not a widely known resource, especially for out of state practitioners.
A: Yes. For taxable years beginning on or after Jan. 1, 2018, the federal Tax Cuts and Jobs Act repealed the IRC Sec. 708(b)(1)(B) rule providing for technical terminations of partnerships. California does not conform to the federal repeal of technical terminations of partnerships. For California purposes, two short-period tax returns are still required. Instructions in the 2018 565 and 568 Booklets will be updated to address this issue.
Change in Key Corporation Q: It is not uncommon for a combined group of corporations to have a need to change its key corporation. However, the change usually causes the corporation to receive notices from the FTB. It would be great if there were a cheek box on the Schedule R-7 to indicate that there is a new key corporation. In the absence of a check box, can the FTB recommend how to indicate that there has been a change in the key corporation?
A: If there is a change in the members listed on the Schedule R-7 from the prior year, including a change in the key corporation, box B(2) on the Form 1 00 should be checked "yes."
The rules pertaining to the designation of a key corporation to facilitate the filing of a group return are contained in California Code of Regulations, title 18, (CCR) See. 25106.5-11. As provided for in CCR Sec. 25106.5-11(a), an election to file a group return occurs on an annual basis. CCR Sec. 25106.5-1 1(b) states that the election to file a group return includes the designation of a key corporation. Pursuant to CCR Sec. 25106.5-1 1(b)(1), among other things, if it is not the parent company, the key corporation must be the California taxpayer member with the largest California property factor numerator and must be in good standing with the California Secretary of State and not have filed a petition with the U.S. Bankruptcy Court. According to CCR Sec. 25106.5-11(c), the key corporation files a group return on behalf of the other California taxpayer members of the combined reporting group. Pursuant lo CCR Sec. 25106.5-1 1(d), the key corporation acts as the agent for the other California taxpayer members of the combined reporting group.
There arc instances when a key corporation that has been previously designated no longer satisfies the requirements of CCR Sec. 25106.5-11(b)(1), for instance because it is no longer in good standing with the SOS. If that is the case, the previously designated key corporation can no longer act as an agent for the other California taxpayer members of the combined reporting group. For purposes of sending notices, the default position would be for the FTB to issue separate notices to each of the other California taxpayer members of the combined reporting group. Notwithstanding this, CCR Sec. 25106.5-1 1(g)(2) allows the other California taxpayer members to the combined reporting group, with the FTB's consent, to designate another key corporation. CCR Sec. 25106.5-1 1(g)(2) does not provide specific details of how the designation of another key corporation is effectuated. However, if the group return were being examined by the FTB, it would follow that the other California taxpayer members of the combined reporting group could notify the FTB auditor of the replacement key corporation, presuming that the replacement key corporation meets the requirements of CCR Sec. 25106.5-11(b)(1).
FTB Cold Calls
Q: Will the FTB ever call a practitioner directly to ask questions about a tax return? A: FTB staff does not make it common practice to contact taxpayers or practitioners directly about tax return details during return processing, prior lo the issuance of a notice. However, there arc two potential situations where processing staff may contact a taxpayer, which may seem like a cold call.
The first scenario is that sometimes taxpayer payments arc submitted with insufficient information with regard to how to apply the payment (e.g., tax year, identifying taxpayer information, type of payment, etc.). In some of these instances, there may be a phone call made to the taxpayer or their representative to try and determine where lo apply the payment to facilitate proper processing of the lax year and an accurate result if a bill or refund needs to be issued by Fl'B.
.Additionally, sometimes during the processing of large corporate tax returns, there can be questions about the members of the group being included on the return, the identity of key corporation, etc FTB staff, on occasion, may call the taxpayer or their representative to try and clear up questions about these items during processing so that the return can be processed correctly.
In any situation, FTB staff should clearly identify themselves, give their name, provide a phone number if asked and should never ask for things like bank statements, account passwords or other types of sensitive information not directly related to the staled business purpose for which they are calling. If you have any concerns about the legitimacy of the call, please feel free to ask to speak to the employee's supervisor to verily.
Finally, if you think you have received a phone call from a scammer or someone trying lo commit identity theft, you can obtain further information on our website (ftb.ca.gov/ouline/Fraud Referral/index.shlml) or by going to ftb.ca.gov and using keyword "scams."
BY STUART SIMON
Stuart Simon is senior counsel at Buchalter Nemer, A Professional Law Corporation, and a member of the CalCPA Committee on Taxation. You can reach him at email@example.com.
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|Title Annotation:||california taxation|
|Date:||Dec 1, 2018|
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