Appendices Taxpayers’ Bill of Rights Annual Report to the Legislature

Appendix 1 – Assessments

All tables in Appendix 1 reflect tax increase assessments only. The assessments became final in FY 2020/2021. We may have issued the assessments in prior years; however, due to cases in protest status, we did not resolve them until FY 2020/2021. Appendix 1 totals reflect rounded figures and may not compute exactly. If a single NPA included multiple issues, we categorized the NPA under the issue that provided the majority of the tax change. We categorized the NPA as “Other” when there was no distinct primary issue.

Table 1A Corporation Tax Law

Explanation for Table 1A issues:

• Allocation/Apportionment involves corporations doing business within and outside of California.
• Revenue Agent Reports typically result when California conforms to federal law and a change to a taxpayer’s federal tax return applies to the taxpayer’s California tax return.
• State Adjustments reflect the differences between the IRC and the R&TC.

Table 1B Personal Income Tax Law

Explanation for Table 1B issues:

• The CP2000 category results from the IRS comparing information documents that report income paid to individuals by third parties against income reported on their tax returns.
• Filing Enforcement refers to assessments issued to individuals who have not filed a state income tax return after we notified them of their filing requirement.
• Filing Status primarily reflects notices issued due to head of household adjustments.

Table 2 Corporation Tax Law

* Finance, insurance, real estate, and holding companies.

** Includes agriculture, construction, utilities, transportation, communication, information, and other industries not classified in the sample.

For corporations not filing through a combined report, we base the industry designation on the corporation’s primary business activity in California. In the case of corporations filing through combined reports, we base the industry designation on the primary occupation of the group, not necessarily on the industry of the parent. If the parent is a holding company of a diverse group of subsidiary corporations, then we group it with finance, insurance, real estate, and holding companies.

Tables 3A, 3B, and 4, apply to either the taxable years for which we issued NPAs or the number of years for which a taxpayer receives NPAs because of multiple taxable year audits during the same audit cycle.

Table 3A Corporation Tax Law

Because the statute of limitations for assessing additional tax has passed, the earlier years reflect final figures.

Table 3B Corporation Tax Law

Table 4 Personal Income Tax Law

Table 5 Personal Income Tax Law

*VITA is a program that provides tax return preparation assistance for seniors, disabled, non-English speaking, and those with limited or fixed incomes.

Appendix 2 – Filing Errors

Table 6A Top Errors by Tax Return Type

Table 6B Top Errors by Filing Method

Appendix 3 – Regulations

Regulation Sections 17951-5 and 17951-8 — Market-Based Rules – Personal Income Tax Sourcing

When California adopted market-based sourcing rules pursuant to Proposition 39 as codified in R&TC Section 25136, these rules impacted the Personal Income Tax law. Title 18, of the California Code of Regulations (CCR) at Section 17951-4 directly incorporates R&TC Sections 25120 through 25139 and the regulations thereunder. Therefore, owners of pass-through entities and disregarded entities (such as, sole proprietorships) are also subject to market-based sourcing rules.

The purpose of this regulation project is to clarify the regulations concerning sourcing of income subject to market-based sourcing. The project also will clarify which sourcing rules remain unchanged.

The three-member Board approved staff's request to begin the informal regulatory process on December 3, 2019. On October 8, 2020, staff held an interested parties meeting and received comments from the public. Staff anticipates requesting permission from the three-member Board to proceed to the formal regulatory process in winter 2021.

Regulation Section 17951-7 and 25137(e) – Tax Deferred Exchanges

On June 27, 2013, the California Legislature enacted AB 92. (Stats. 2013, Ch. 26.) Under AB 92, for tax years beginning on or after January 1, 2014, taxpayers who perform IRC Section 1031 exchanges of property located in California for property located outside of California are required to file an annual information return with FTB for each year in which the gain or loss from that exchange has not been recognized. (Refer to R&TC Sections 18032 and 24953.) AB 92 reflects existing California law requiring taxpayers to recognize deferred gains/losses associated with IRC Section 1031 exchanges of property located in California as California source income; however, as a result of the new reporting requirement, FTB has received numerous requests for clarification of the determination of California source income in such exchanges.

For personal income tax, R&TC Section 17954 specifically authorizes FTB to issue regulations for allocating and apportioning gross income from sources within and without California for the purposes of computing taxable income of nonresidents and part-year residents under paragraph (1) of subdivision (i) of R&TC Section 17041.

FTB also has authority for corporate franchise and income tax taxpayers to require alternative apportionment formulas where the standard allocation and apportionment provisions of the Uniform Division of Income for Tax Purposes Act (UDITPA) do not fairly represent the extent of the taxpayer’s business activity in this state. (R&TC Section 25137.)

The purpose of this regulation project is to: (1) clarify the sourcing of deferred gains/losses from IRC Section 1031 exchanges of property located in California; and (2) determine which year’s apportionment factor(s) should be applied to deferred gains/losses from IRC Section 1031 exchanges for apportioning taxpayers.

Staff held an interested parties meeting on February 3, 2016, to discuss multiple scenarios regarding the sourcing and factors for 1031 exchanges. On March 30, 2021, staff held a second interested parties meeting and received comments from the public. Staff anticipates holding a third interested parties meeting in early 2022.

Regulation Section 18001 — Other State Tax Credit

Pursuant to R&TC Section 18001, California allows a credit against the net tax for net income taxes imposed by and paid to another state on specified income. Under R&TC Section 18001, the payment of tax to a sister state is generally eligible for an Other State Tax Credit (OSTC) only where the other state's tax is a net income tax.

The purpose of this regulation project is to elicit public input on the potential adoption of a regulation which would clarify the statutory term "net income taxes paid to another state" for purposes of the OSTC.

On December 10, 2018, the three-member Board approved staff's request to begin the informal regulatory process. Staff held interested parties meetings on August 7, 2019, and July 30, 2020, to receive public input on the issue and present draft amendments. On June 3, 2021, staff received permission from the three-member Board to proceed to the formal regulatory process. Staff anticipates publishing the Notice of Proposed Rulemaking in late 2021.

Regulation Section 18567 — Automatic Extension of Time for Filing Tax Returns by Partnerships

CCR, Title 18, Section 18567 (Automatic Extension Regulation) was adopted on October 12, 2001, to provide an automatic paperless extension for a tax return required to be filed by an individual, fiduciary, or partnership, if the tax return is filed within the extension period. Subsequent to its adoption, FTB staff determined that the Automatic Extension Regulation required updating, to provide consistency with the authority granted by the California Legislature in 2017, to extend the automatic extension period to seven months for a tax return filed by a partnership, or by an LLC that is classified as a partnership for California tax purposes. Accordingly, the purpose of this regulation project is to provide consistency with the statutory authority granted by the Legislature and provide clarity to taxpayers and tax preparers that the automatic extension period is seven months for a tax return filed by a partnership or an LLC that is classified as a partnership for California tax purposes, for taxable years beginning on or after January 1, 2017, while the extension period for an individual or fiduciary tax return remains six months.

On December 7, 2017, staff received permission from the three-member Board to proceed to the formal regulatory process. Staff anticipates publishing the Notice of Proposed Rulemaking in late 2021.

Regulation Sections 18662-4 through 18662-8 – Withholding on Domestic Pass-Through Entities

The purpose of this project is to revise existing withholding on pass-through entities to reflect current statutory requirements under R&TC Section 18662. In particular, the purpose of the proposed new regulation at CCR Section 18662-7 is to modify the withholding on pass-through entities to consider withholding on the “distributive share” of income.

There are two reasons supporting this modification. First, R&TC Section 18662, subdivisions (a) and (b), authorize FTB to require a pass-through entity to withhold on “items of income,” including “partnership income or gains.” Requiring a pass-through entity to withhold on a nonresident partner or member’s “distributive share” of the pass-through entity’s income is consistent with Section 18662, subdivisions (a) and (b), because the withholding amount is determined by the pass-through entity’s income rather than distributions made. Second, FTB staff has found that a vast majority of the states have switched to requiring pass-through entities to withhold on “distributive share” of income. Modifying California’s pass-through entity withholding to be consistent with the rest of the states will lessen the burden on out-of-state pass-through entities that are required to comply with multiple state withholding schemes.

A secondary purpose behind this proposed regulation is to adopt a withholding scheme that best resolves the issues arising from the allocation of withholding. Specifically, pass-through entities have difficulty in filing timely forms to allocate withholding through multiple tiers. This results in the ultimate individual partners or members being denied a claimed withholding credit because the withholding has not been properly allocated.

The project also makes corresponding additional amendments to other withholding regulations in order to be consistent with the proposed new regulation at CCR Section 18662-7.

Staff held interested parties meetings on December 12, 2014, and September 8, 2017. Staff noticed amended proposed regulation draft language in a 90-day notice on March 15, 2019. On June 25, 2020, staff noticed additional amendments to the proposed regulation draft language in a 30-day notice. On June 8, 2021, staff noticed further amendments to the proposed regulatory language in a 45-day notice. On September 9, 2021, staff received permission from the three-member Board to proceed to the formal regulatory process.

Regulation Section 19133 — Penalty for Failure to File Return Upon Notice and Demand

R&TC Section 19133 states if any taxpayer fails to file a tax return upon notice and demand by FTB, the department may add a penalty of 25 percent of the amount of tax owed. The existing regulation at CCR Section 19133, became operative on December 23, 2004, to provide a framework for FTB to impose the notice and demand penalty on individual taxpayers pursuant to authority provided in R&TC Section 19133. This regulation project was commenced to provide an opportunity for staff to explore whether clarifying updates should be made to the existing regulation, to allow for ease of administration, and to avoid confusion regarding FTB's imposition of the notice and demand penalty.

Staff received permission to begin the informal regulatory process from the three-member Board on September 12, 2019. Staff held an interested parties meeting on November 13, 2019. On December 3, 2019, the three-member Board authorized staff to proceed to the formal regulatory process. Staff published the Notice of Proposed Rulemaking on October 9, 2020. Staff received approval of STD Form 399 from the California Department of Finance on August 5, 2021, and anticipates submitting the proposed regulatory amendments to the Office of Administrative Law for approval in fall 2021.

Regulation Sections 19285, 19286, and 19288 – Referral and Hearings on Appeals of Penalties Imposed by CalSavers

On June 29, 2020, the Governor signed Assembly Bill 102, which required the FTB to collect penalties imposed by the CalSavers Retirement Savings Board (CalSavers) for noncompliance with the CalSavers Retirement Savings Program. FTB will only collect penalties referred to it by CalSavers. Assembly Bill 102 required FTB to establish criteria for the referral of penalties, including setting forth a minimum dollar amount subject to referral and collection. FTB is also required to hear and determine appeals related to the imposition of the penalty. The new law also granted FTB the authority to promulgate regulations in order for FTB to implement the administration of the penalty referrals and appeal process.

These regulations clarify the following: The amount of the penalty that CalSavers can refer to FTB for collection must be $250 or more per eligible employer; the process in which an eligible employer requests a hearing for an appeal; and how the hearing will be administered. On December 8, 2020, the three-member Board approved staff's request to begin the informal regulatory process. On August 4, 2021, the Office of Administrative Law approved and filed these regulations with the California Secretary of State's office.

Regulation Section 23663-6 — Assignment of Credits to Combined Group Members

R&TC Section 23663 permits the assignment of credits among affiliated members of the same combined reporting group. To receive a valid assignment of credits, the assignee must be an "eligible assignee" as defined in R&TC Section 23663(b)(3). Among the requirements to be an "eligible assignee" is that the assignee must have been in the same combined reporting group as the assignor on certain key dates. However, when the assignor or assignee of credits has been involved in a corporate reorganization or other corporate restructuring, taxpayers can be uncertain regarding whether the assignor and assignee meet the requirement of being in the same combined reporting group on the required dates. The purpose of the proposed regulation at CCR Section 23663-6 is to provide taxpayers clarity regarding when credits can be assigned after a corporate reorganization or other corporate restructuring.

On June 12, 2014, the same date that staff held the third interested parties meeting for a completed project for CCR Sections 23663-1 through 23663-5, staff also held the first interested parties meeting for this project, during which general structural issues for the regulation were discussed. Staff held a second interested parties meeting on June 12, 2018, to present draft regulatory language for public comment. Staff received permission to proceed to the formal regulatory process from the three-member Board at its September 21, 2018, meeting. Staff published the Notice of Proposed Rulemaking on October 9, 2020. Staff is awaiting approval of STD Form 399 from the California Department of Finance and anticipates submitting the proposed regulatory amendments to the Office of Administrative Law for approval in fall 2021.

Regulation Section 25136-2 — Market-Based Rules for Sales Other Than Sales of Tangible Personal Property

For tax years beginning on or after January 1, 2011, R&TC Section 25136 provides the sales factor numerator assignment rules for all sales other than sales of tangible personal property. R&TC Section 25136, subdivision (b), provides the market-based rules for assignment of sales of other than sales of tangible personal property where taxpayers have made a single-sales factor election.

CCR, Title 18, Section 25136-2 (which became effective on March 27, 2012, and operative for tax years beginning on or after January 1, 2011) provides rules for sales of services and sales of intangible property. In those rules, there are specific provisions for assignment of sales of stock or interests in a pass-through entity and for the incorporation of the special industry rules under CCR Section 25137, including those for mutual fund providers under CCR Section 25137-14.

Staff held an interested parties meeting on January 20, 2017, to elicit public input on further amendments to Section 25136-2, regarding benefit of the service received, asset management fees, government contracts, reasonable approximation, dividends, freight forwarding, and other issues. Staff held additional interested parties meetings on June 16, 2017, May 18, 2018, July 19, 2019, July 21, 2020, and June 4, 2021, to present draft amendments. On September 9, 2021, staff received permission from the three-member Board to proceed to the formal regulatory process.

Regulation Section 25137 — Alternative Apportionment Method Petition Procedures

R&TC Section 25137 states that when the standard allocation and apportionment provisions of UDITPA (R&TC Sections 25120-25139) do not fairly represent the extent of a taxpayer’s business activity in California, the taxpayer may petition for the use of an alternative method to accomplish an equitable allocation or apportionment of income to this state. In recent years, the number of taxpayers seeking to utilize alternative allocation or apportionment methodologies under the authority of R&TC Section 25137 has increased. This proposed rulemaking project would provide guidance to assist taxpayers with submitting petitions for relief under R&TC Section 25137.

On July 12, 2016, the three-member Board gave permission for staff to move forward with the informal regulatory process. Staff held interested parties meetings on June 30, 2017, November 28, 2018, December 4, 2019, and August 11, 2020, to present draft amendments. Staff received permission to proceed to the formal regulatory process from the three-member Board on March 4, 2021. Staff anticipates publishing the Notice of Proposed Rulemaking in early 2022.

Regulation Section 30000 — Architectural and Engineering Services

Under California Government Code (GC) Section 4526, state agencies are required to adopt regulations before contracting for private architectural, landscape architectural, engineering, environmental, land surveying, or construction project management services. The GC imposes certain requirements on the selection of these services, including the demonstrated competence and qualifications of the firms involved. The purpose of this regulation project is to adopt the necessary regulations so that FTB can hire independent vendors for architectural and engineering drawings.

On December 3, 2019, the three-member Board approved staff's request to begin the informal regulatory process. Staff anticipates publishing a notice and seeking public input on draft language by late 2021.

Appendix 4 – Certification Letter

Read the letter