Tax News August 2023

Chief Counsel Corner: FTB Notice 2023-02 Resolution of Micro-Captive Insurance and Syndicated Conservation Easement Transactions 

On May 31, 2023, the Franchise Tax Board (FTB) published FTB Notice 2023-02 Resolution of Micro-Captive Insurance and Syndicated Conservation Easement Transactions. The resolution provides eligible taxpayers an opportunity for a limited time to resolve micro-captive insurance and syndicated conservation easement transactions that may be subject to the non-economic substance transaction understatement penalty under California Revenue & Taxation Code (R&TC) section 19774 and receive reduced penalties.

Eligible taxpayers may participate in the FTB Notice 2023-02 resolution from July 10, 2023, through November 17, 2023, by submitting a FTB Notice 2023-02 closing agreement that reverses the tax benefits and the deductions for related transaction costs attributable to the transactions.  

With the resolution in mind, we want to take the opportunity to share some information about micro-captive insurance and syndication conservation easement transactions. 

Micro-Captive Insurance Transactions

Premiums for property and casualty (non-life) insurance are deductible under Internal Revenue Code (IRC) section 162(a) as ordinary and necessary expenses, if paid or incurred in connection with a trade or business. Insurance premiums earned are also included in the computation of taxable income of insurance companies for federal income tax purposes. (For federal purposes, a non-life insurance company which has net written premiums below a certain threshold for the taxable year and which meets certain other requirements may elect to be taxed only on its investment income (IRC § 831(b)).)  

Micro-captive insurance transactions that may be eligible for resolution under FTB Notice 2023-02 include transactions in which a taxpayer attempts to reduce aggregate taxable income by using contracts between the taxpayer's business (Insured Entity) and a company related to the taxpayer and the Insured Entity. The parties treat the contracts as insurance contracts and treat the related company as an insurance company. Because the purported insurance company is related to the taxpayer and makes an election under IRC section 831(b), which requires that its annual net premiums be limited by statute, the company is referred to as a micro-captive insurance company.

While purporting to write insurance, the micro-captive insurance company uses premium payments it receives for purposes other than administering and paying claims under the contracts. For instance, it may use the premiums to benefit the taxpayer, the insured entities, or persons related to the taxpayer through transfers of the premiums as purported loans. As a factual matter, the manner in which the parties interpret, administer, and apply the contracts is not consistent with arm's length transactions and sound business practices. As a legal matter, the arrangement fails one or more of the four requirements for insurance, such as risk distribution, and does not constitute insurance for purposes of the deductibility of the payments as business expenses for federal and California income tax purposes. 

Syndicated Conservation Easement Transactions

Qualified conservation contributions are deductible under IRC section 170(f)(3)(B)(iii). The R&TC generally conforms to IRC section 170, as it existed on January 1, 2015, except as otherwise provided. A qualified conservation contribution is a contribution of a qualified real property interest to a qualified organization exclusively for conservation purposes. A qualified real property interest includes a restriction, granted in perpetuity, on the use of real property and is commonly referred to as a conservation easement. 

Syndicated conservation easement transactions that may be eligible for resolution pursuant to FTB Notice 2023-02 include transactions where a taxpayer participates in an investment opportunity which purports to grant investors charitable contribution deductions with respect to conservation easement or fee simple donations in amounts that significantly exceed the amounts invested. In a typical syndicated conservation easement transaction, an investor receives promotional materials that offer prospective investors in a pass-through entity the possibility of a charitable contribution deduction for conservation easement donations that generally exceed an amount that is two and one-half (2.5) times the investor’s investment. 

The investor purchases an interest directly or indirectly in the pass-through entity that holds real property. A promoter receives fees and/or other consideration with respect to the promotion and obtains an appraisal that purports to be a qualified appraisal as defined in IRC section 170(f)(11)(E). However, the appraisal greatly inflates the value of the conservation easement placed on the property based on unreasonable conclusions about the development potential of the property. The pass-through entity then donates the conservation easement encumbering the property and allocates a charitable contribution deduction to the investor. But for the tax benefit in the form of inflated charitable contribution deductions based on flawed valuations, the investor would not have made the initial investment. The deductions are not allowed for federal and California income tax purposes

Get more information on FTB Notice 2023-02 Resolution of Micro-Captive Insurance and Syndicated Conservation Easement Transactions.

One-time Penalty Abatement

FTB will begin to accept one-time penalty abatement requests for taxable years beginning on or after January 1, 2022, for failure-to-file or failure-to-pay timeliness penalties after the October 16, 2023, extended due date. 

Unlike the federal first-time abatement penalty, the California penalty abatement is only available to individual taxpayers (not business entities) and is a once in a lifetime abatement. Taxpayers may choose to pursue one-time abatement as an alternative to reasonable cause abatement, or they may pursue one-time abatement after a request for reasonable cause abatement has been rejected.

Requests for reasonable cause penalty abatement are analyzed on a case-by-case basis, and the taxpayer must demonstrate ordinary business care and prudence by showing they made every effort to comply with their tax obligations, but for circumstances beyond their control, were unable to do so.

Taxpayers may choose to request a one-time penalty abatement when reasonable cause is absent in writing, by filing FTB 2918, or verbally, by calling 800-689-4776.

To be eligible, taxpayers must:

• Be compliant with all tax return filing requirements.
• Have not previously been granted a one-time abatement under R&TC 19132.5. 
• Have paid in full all outstanding liabilities (other than the specific timeliness penalty you are seeking to have abated) or arranged to pay pursuant to an installment agreement and be current on all installment payments.

If a penalty abatement request is rejected, the taxpayer is mailed a rejection letter. There are no appeal rights for the rejection of a penalty abatement on an unpaid balance. The taxpayer is advised to pay in full and then file a claim for refund.

To avoid having to request the one-time penalty abatement, file as soon as possible, preferably using e-file. Filing early and electronically helps to avoid processing delays. 

Power of Attorney Reminders

One of Franchise Tax Board’s goals is to deliver Exceptional Service. We strive to continuously enhance our customers' experience. One of our enhancements is to expedite processing of the Power of Attorney (POA) and Tax Information Authorization (TIA) through MyFTB. 

MyFTB provides individuals, business representatives, and tax professionals online access to tax account information and online services. Taxpayers and tax professionals can file a new POA/TIA, check the processing status of an existing POA/TIA, and manage POA representatives. POA/TIAs submitted and approved through MyFTB will continue to be the most expeditious processing path. While our processing time frames for POA/TIAs are generally 15 business days or less, we averaged an 11-day processing time frame for the year, and our current processing time frame is 7 business days.

With a valid POA or TIA, your client may grant you full online account access. With full online account access, you may retrieve your client’s account information at your convenience 24/7. For more information see Tax Professional Online Account Access.

Please be aware that without an established TIA or POA on file, our call center staff may only provide limited information after you provide enough information from current tax records/notices and a taxpayer’s account for us to conclude that you have authorization to receive limited account information. While we regret this may cause an inconvenience, it is necessary to safeguard your client’s confidential tax information.

A reminder for large firms: only the representatives listed on the POA may request taxpayer confidential information from our call center agents. Please review Part IV Additional Authorizations (Line 1) of the FTB 3520-PIT or FTB 3520-BE POA declaration forms for additional actions that your client may authorize you to take, such as to add additional representatives.

Voluntary Administrative Dissolution

Beginning January 1, 2019, a qualified domestic corporation or qualified domestic limited liability company can request a voluntary administrative dissolution/cancelation. Upon written request by a qualified entity, the unpaid qualified taxes, penalties, and interest for the taxable years in which the entity certifies may be abated. To do this, an entity, under penalty of perjury, must certify that it is not actively engaging in any transaction for the purpose of financial or monetary gain or profit, it has ceased doing business or never conducted business, and it has no remaining assets in the business name. It does, however, require the entity to file and pay in full for the tax years in which it conducted business.

The entity must submit a request form to us by mail or fax. Only an officer, owner, member, director, or a FTB approved POA is authorized to request Voluntary Administrative Dissolution/Cancellation.

The request forms to submit by entity are:

• Corporations: Domestic Corporation Request for Voluntary Administrative Dissolution (FTB 3715 PC)
• Limited liability companies (LLC): Domestic Limited Liability Company Request for voluntary Administrative Cancelation (FTB 3716 PC)

Business entities can mail or fax forms to the address or fax number below: 

• Mailing Address
• Business Entity Correspondence
• Franchise Tax Board
• PO Box 942857
• Sacramento CA 94257-4040

• Fax Number
• 916-855-5519

Applying for Voluntary Administrative Dissolution does not legally terminate a business. The entity is still required to submit the proper dissolution/cancellation forms to the Secretary of State to close their business entity. 

The business entity may qualify if it:

• Is a domestic corporation or domestic LLC registered for more than 12 months with the SOS. 
• Is not actively engaging in any transaction for the purpose of financial or monetary gain or profit.
• Has stopped doing business or never did business.
• Has no assets.

Additional informaiton is available at Voluntary administrative dissolution/cancelation.

Update Your Clients' Addresses

In order for us to effectively communicate with your clients, please remind them to make sure we have their correct and most current address. This will help your clients receive: 

• Important notices and/or other correspondence.
• Refunds in a timely manner.

We understand there are many responsibilities when a person moves and, changing their address with us may not be a priority. We ask for your assistance to ensure we have your clients’ current address, even if it is out of state. 

Here are a few ways your clients can report a change of address:

• Create an account on MyFTB. Complete a one-time registration process to create a login account. You can then login to view your account information or update your address and phone number online. 
• For personal income taxes, timely file a personal income tax return with the correct and up to date address information. 
• If they pay estimated taxes, mail their estimate voucher (Form 540-ES) with the full and correct address information.
• For individuals, mail a change of address form (FTB 3533). 
• For businesses, mail a change of address form (FTB 3533-B).

For individuals or businesses, mail completed forms to:

Franchise Tax Board
PO Box 942840
Sacramento CA 94240-0002

Learn more information about How do I change my address?

New Tax News Layout

We moved content around to better assist you to get information quickly as you read each edition of Tax News. These moves separate and better define articles from recurring content. We relocated recurring content as links to a “Resources” box at the top right of the edition. These links direct you to the specific webpage for additional information. 

The content included in the “Resources” box includes: 

• Information for tax professionals (directs to the tax pros webpage)
• Newsroom (for critical news that includes Tax News flashes, press releases, etc.)
• What’s new with tax forms? (new and revised tax forms)
• Ask a legal expert (receive informal answers to basic legal questions about taxes that the Franchise Tax Board administers)
• Submit an idea (tell us about a future article or information you need)

We also encourage you to preview the left navigation bar of Tax News to find “Related content” which includes:

• Job opportunities (discover career opportunities with the state and FTB)
• Event calendar (find out about public events that may help you)
• Request a speaker (Invite a speaker to provide your group training on tax updates, small business, and what Taxpayers’ Rights Advocate Office can do for you)

We strive to constantly improve our services to you. If you have an idea, or article, you’d like us to feature, please submit to taxnews@ftb.ca.gov

Internal Revenue Service (IRS) Updates and More

We partnered with the IRS to provide monthly IRS articles to assist our tax professional and small business communities. We are excited to share this information; however, if you have questions about the content, you will need to contact the IRS directly. 

IRS, Security Summit announce special summer series as Nationwide Tax Forums begin; tax pros should remain vigilant against identity theft amid continued threats

IR-2023 -124, July 11, 2023 — IRS joins with its Security Summit partners to announce the start of a special summer “Protect Your Clients; Protect Yourself” campaign aimed to ensure tax professionals stay alert against new and ongoing threats of tax-related identity theft.

IRS, Security Summit partners warn taxpayers of new scam; unusual delivery service mailing tries to trick people into sending photos, bank account information

IR-2023-123, July 3, 2023 —IRS warned taxpayers to be on the lookout for a new scam mailing that tries to mislead people into believing they are owed a refund.

Ask the Advocate: The Tax Appeals Assistance Program (TAAP)

I hope everyone is remaining cool during this extreme summer heat wave.

This month I am highlighting the TAAP program which has been an essential tool in fulfilling the intent of the Taxpayers’ Bill of Rights since its inception by the Board of Equalization (BOE) in 2006. TAAP offers free legal help to taxpayers who have appealed Franchise Tax Board (FTB) actions to the Office of Tax Appeals (OTA). If your client filed an appeal with the Office of Tax Appeals on an action taken by the FTB, and the appeal has been acknowledged by the OTA, your client may qualify for free legal assistance through the TAAP.

In January 2018, the program was transferred to the California Department of Tax and Fee Administration (CDTFA), and in January 2019, the Franchise and Income Tax issues were transferred to the FTB and aligned under the Taxpayers’ Rights Advocate’s Office (TRAO).

We can provide this valuable service by a partnership with several California law schools. If your client’s case is accepted, a law student, closely supervised by an experienced TAAP tax attorney, will assist with the appeal. Law students research issues, provide advice and guidance, draft reply briefs, and may represent your client at pre-hearing conferences and oral hearings before the OTA. TRAO-TAAP and FTB are separate and distinct therefore, privacy is protected by the attorney-client privilege, and you may withdraw your client’s case from the TAAP at any time.

To qualify for free legal assistance, the amount in dispute must be less than $30,000. Other factors for qualification include, but are not limited to, the type of tax issue the appeal involves, availability of staff and resources, and an evaluation of the educational potential of your case.

Taxes are often the most sensitive point of contact between taxpayers and their government. TAAP provides taxpayers the opportunity to present their tax disputes and have their voices heard. I am proud to report, under the close supervision of our experienced TAAP attorney, 295 law students have assisted 687 (i) taxpayers since January 2019. Assisting 687 taxpayers, resulted in 429 cases resolved.(ii)

Learn more information about TAAP.

I hope you enjoy the rest of your summer, stay cool and hydrated.

i. 94 transfer cases from CDTFA.

ii. 429 cases resolved includes: 1.FTB Legal concedes, 2. Appellant concedes, 3. Appellant wins in written decision, 4. Appellant wins after oral hearing, 5. Partial win.