Ask the Advocate
FTB Responds to Tax Community's Proposals
The annual Taxpayers’ Bill of Rights Hearing was held December 3, 2009. We received several proposals and recommendations from the tax community. The following is a collaborative effort from our different business areas in response to the proposals that we received:
Lack of Conformity and Need for Standalone Tax Return
California used a standalone Form 540 until 1987. The standalone tax return required the taxpayer to complete a tax form that was similar to the federal tax form. To determine California AGI, the taxpayer entered all income items and adjustments to income. In addition, other forms were required to report various income items and adjustments. Forms required included Schedule B for interest and dividends, Schedule C-E-F for profit or loss from a business or profession, supplemental income, and farm income and expenses. California Schedules D and D-1 were also required to report capital gains and losses and supplemental gains and losses, and form FTB 3885 was used to report depreciation and amortization. If the taxpayer itemized their deductions, they completed California Schedule A. Taxpayers filing their federal form also complete similar forms and schedules to determine federal AGI. In many cases, the California forms duplicated information entered on the federal forms and schedules.
Beginning with the 1987 tax year, the standalone tax return became obsolete. Taxpayers now complete their California return by starting with federal AGI. Many components of federal AGI are the same as California AGI for most taxpayers, although there are differences. Those differences are reported on Schedule CA to determine California AGI. Taxpayers would need to make these adjustments even if they were using a standalone tax return.
The current format allows the taxpayer to first complete their federal return, and then only report adjustments for differences in federal and California law on the Schedule CA of the California return. Returning to a standalone Form 540 would still require the taxpayer to determine the differences between federal and California law. Those differences would be included on various California forms and schedules as in the past. Instead of completing various forms and schedules to make adjustments with a standalone tax return, all of these adjustments are made on Schedule CA.
Since many items of income and deduction are the same for California and federal purposes, the California instructions are dedicated to the differences in federal and California law in order to correctly compute the California adjustment amounts. Changing to a standalone form would require instructions for each income and adjustment line item, which would be duplicative of the federal Form 1040. This would result in increased complexity for taxpayers and increase the taxpayer's burden to file their California return. We continue to support federal conformity as the best solution to simplify taxpayers’ filing requirements. For these reasons, we do not recommend a California tax return completed on a “standalone” basis.
Credit and Debit Card Convenience Fees
California conforms to IRC section 212. Accordingly, we conform to the recent IRS conclusion allowing a deduction for credit card fees paid in connection with the payment of federal income taxes. Taxpayers that claim these credit card fees on their federal return and report their itemized deductions for California purposes do not need to make an adjustment on Schedule CA. Please note that the recent IRS conclusion also applies to credit card fees paid in connection with the payment of state income taxes.
Automatic Disaster Tax Relief
When the President declares a federal disaster, federal disaster loss tax relief is provided under Internal Revenue Code section 165(i). The taxpayer can immediately claim a disaster loss on a federal income tax return for the year in which the disaster occurred, or file an amended federal return for the prior year to expedite a refund. No additional federal legislation is needed.
In the case of a presidentially declared disaster occurring in California, the taxpayer can elect to file an amended income tax return for the prior year so that the refund is expedited. Specific legislation is required for each disaster, both to allow taxpayers to carry excess loss forward for 15 years and, in some instances, to permit an extension to file a return for the year in which the disaster occurred.
For disasters that receive only a Governor’s proclamation, legislation is required to provide all of the disaster loss tax relief described above. Occasionally, disaster loss tax relief legislation is enacted shortly before the deadline to file a prior year’s state return, which could preclude some taxpayers from taking advantage of the relief.
To provide automatic disaster loss tax relief for “Governor-only” proclaimed disasters, as suggested by this proposal, would require legislation. Enacting legislation for automatic disaster loss tax relief would improve efficiency by eliminating the need for legislation on each disaster, and would mitigate instances where taxpayers are unable to claim the relief due to missed filing deadlines. Further, this proposal would simplify the tax code by eliminating the lengthy list of disasters that must be reviewed to determine if a loss qualifies for treatment. However, you should be aware that past experience demonstrates that legislators want to maintain opportunities to enact legislation that demonstrates action in response to disasters and supports their constituents.
It is recommended that FTB forward this proposal to the FTB’s three member board for consideration.
Statement of Information Coordination
California law requires corporations, limited liability companies, and common interest development associations to update the records of the California Secretary of State (SOS) on an annual or biennial basis by filing a statement of information (SI). To address the questions specifically:
- Taxpayers can e-file their SI to SOS for most corporations. From a business perspective, we are extremely disinclined to see SIs filed with income tax returns because of the experience we have had allowing taxpayers to report Board of Equalization (BOE) use tax on Business Entity (BE) returns. The SI would be even more complicated than use tax because we would need to receive and capture information from an entire schedule. The information would have to be transferred to SOS so they could update their files and not issue the penalty fee of $250. The BOE use tax was seemingly less complicated as it was the addition of a single line on the BE return and receipt of associated funds. Despite this, the BOE use tax has become a 100 percent fallout workload that causes delays in return processing. If taxpayers filed the SI with their income tax return, we fear the fallout and delays would be similar if not worse.
- We could, feasibly, add a line on the return to collect the SI filing fee. We would also need to process the information from the SI and provide it to the SOS. Due to issues addressed above, we do not recommend including the SI with the income tax return.
- Currently, FTB and SOS do share certain information. When business entities initially register with SOS, the information is sent to FTB. However, if an entity subsequently files a tax return with a different address than what was received from SOS, FTB uses the address from the return, but the information is not sent to SOS to update their records. The main reason is that FTB wouldn't know if the address should update SOS. The address on the tax return may be the address the entity wants FTB to use for billing, refund, correspondence, etc., but it may not be the actual address of record they want with SOS. The same could be true when the entity files their required SI with SOS. The entity may want to change the address of record they want SOS to use, but not necessarily FTB.
When SOS imposes the $250 penalty for failure to file the SI, address information is again sent to FTB, but FTB doesn’t necessarily update its records because the address that FTB has may or may not be the better address. When FTB collects the $250, it does not notify SOS of the collection and therefore does not send information to SOS. Although FTB may have had a different address that was used to successfully bill and collect from the entity, that doesn’t necessarily mean that it is the actual address of record for the entity that should be used for SOS purposes. So again, FTB does not send the information to SOS.
SOS and FTB also exchange information when one of the agencies changes the status of an entity (e.g., suspends, removes suspension, etc.). While every effort is made to keep each agency updated, there could be times when each agency may not have the most current information. This is generally caused through manual intervention of changes.
While there could be some benefit for FTB and SOS to share more information, it becomes problematic to know which information would be appropriate for each respective agency to share and use, as well as what the entity intends each agency to use as its address. The information (e.g., address) provided to each agency may be different, and intentionally different because of who the entity wants each agency to contact.
Interest Calculation on NOL Carrybacks
Internal Revenue Code (IRC) section 6611(f)(1) provides that when an NOL carryback creates an overpayment in the year to which an NOL is carried back, interest is computed from the original due date of the return for the year creating the NOL carryback, not the year to which the carryback is made. IRC section 6601(d)(1) provides rules for the computation of interest on underpayments reduced by NOL carrybacks.
For many years, California did not allow NOL carrybacks, and California law never conformed to IRC section 6611(f)(1) or IRC section 6601(d)(1). (See RTC sections 19340-19341 and RTC sections 19101-19114.)
However, in 2008, AB 1452 (Stats. 2008, Ch. 763) amended RTC sections 17526 and 24416.9 to allow NOL carrybacks beginning in 2011. Therefore, California law is out of conformity in this area with respect to the computation of interest on overpayments that would result from the application of an NOL carryback.
It appears that the proposal is suggesting that legislation should be pursued conforming to the federal interest rules in IRC section 6611(f) and, presumably IRC section 6601(d), with respect to NOL carrybacks.
Other State Tax Credit Adjustments
California allows a credit for taxes paid to other states (OSTC) on income taxed by both states. See RTC section 18001 and 18002.
When the tax for which a credit was allowed is reduced or changed by the other state, California requires a corresponding adjustment to "recapture" the California credit. See RTC sections 18007-18009. Specifically, section 18009 requires interest to be charged on this recapture of the previously-allowed OSTC back to the date that the credit was originally allowed (usually the original due date of the return claiming the original OSTC amount).
It is recommended that FTB forward this proposal to the FTB’s three member board for consideration.
Steve Sims, EA
Follow our FTB Advocate on Twitter at twitter.com/FTBAdvocate