Appendices Taxpayers’ Bill of Rights Annual Report to the Legislature

Appendix 1 – Assessments

Appendix 1 totals reflect rounded figures and may not compute exactly. Tables 1-4 in Appendix 1 reflect tax increase assessments only. The assessments became final in FY 2023/2024. We may have issued the assessments in prior years; however, due to cases in protest status, we did not resolve them until FY 2023/2024.

Table 1A Corporation Tax Law

Explanation for Table 1A:

• Allocation/Apportionment involves corporations doing business within and outside of California.
• Revenue Agent Reports typically result when 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:

• 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.

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

Table 3B Corporation Tax Law

Table 4 Personal Income Tax Law

Table 5 reflects electronically filed personal income tax returns.

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) in 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. On September 9, 2024, staff received permission from the three-member Board to proceed to the formal regulatory process.

Regulation Sections 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.

The purpose of this regulation project is to clarify the sourcing of deferred gains/losses from IRC Section 1031 exchanges of property located in California.

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 noticed amended proposed regulation draft language in a 30-day notice on August 21, 2024. Staff continues to develop this regulatory concept and is finalizing the necessary economic conclusions.

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 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. Thereafter, staff discovered additional necessary edits to the draft language and issued another 30-day notice on December 30, 2022. On December 6, 2023, staff received permission from the three-member Board to proceed to the formal regulatory process with updated regulatory language. Staff anticipates publishing the Notice of Proposed Rulemaking in early 2025.

Regulation Sections 23701, 23772, and 23775 through 23778 — Exemption from Taxation

The purpose of this regulatory project is to evaluate possible amendments to the regulations implementing the statutes relating to exemption from taxation. Given statutory amendments to Revenue and Taxation Code Sections 23701, 23772, 23776, and 23777, contained in SB 1229 (1999), SB 401 (2010), AB 1677 (2012), AB 1173 (2013), AB 94 (2017), and SB 934 (2020), and the repeal and addition of Revenue and Taxation Code Section 23778, contained in SB 934 (2020), California Code of Regulations, title 18, Sections 23701, 23772, 23776, 23777, and 23778 appears to no longer accurately reflect the current versions of the statutes they implement. In addition, California Code of Regulations, title 18, Section 23775 contains language that conflicts with Revenue and Taxation Code Section 23302. Therefore, this regulation project was added to the rulemaking calendar to allow staff to begin the process of identifying necessary updates to the relevant regulations to reflect the current version of the corresponding statutes.

On December 8, 2022, the three-member Board approved staff's request to begin the informal regulatory process. Staff held an interested parties meeting on June 18, 2024, to elicit public input regarding possible additions and/or amendments to the regulations. Staff is reviewing comments and continues to develop this regulatory concept.

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. Staff finalized the necessary Standardized Regulatory Impact Analysis and the Office of Administrative Law published the Notice of Proposed Rulemaking, on September 13, 2024.

Appendix 4 – Certification Letter

Read the letter