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Page 3
FTB conforms with Supreme Court decision
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The basis increase takes place at the time of the discharge (the year in which the COD income is incurred), and before the tax attributes reduction (the year following the discharge).

Treasury Regulation section
1.1366(a)(2)(viii) was recently amended to specifically state that the COD income is not tax-exempt income. Nevertheless, the U.S. Supreme Court decision holds that S Corporation COD income is an item of income for pass through
purposes per Internal Revenue Code section 1366.

Treasury Regulation section 1.1366(a)(2)(viii) no longer has a bearing on the COD income issue. We will apply this position for all tax years retroactively. Please keep in mind that the statute of limitations for all tax years is still applicable and requests for refunds must be filed prior to the expiration of the statute of limitations.

As with any other claims/amended returns, the returns may be subject to examination, and taxpayers should be prepared to provide supporting documents upon request.

Your clients should consider filing an amended return if the statute of limitations is open, and if:

. The S Corporation had COD income.

. The S Corporation was insolvent at the time of the discharge.

. Their proportionate share of the S Corporation's COD income did not increase the shareholder's basis.

. They previously filed a return and/or paid taxes based on our previous position.

Important: To ensure prompt handling of your claim or amended return, write S Corporation COD Gitlitz prominently on top of the return.

Ask the Advocate
picture of Debbie Newcomb Taxpayer Advocate
Debbie Newcomb
Taxpayer Advocate

Q: I am having trouble trying to resolve problems with several tax agencies. I heard that most tax agencies have advocates. Can you tell me how I contact them?

A: If you have tried to resolve your tax issue through normal channels without success, you may contact the following taxpayer advocate or problem resolution offices:


For federal tax issues contact:Internal Revenue Service
Telephone:(877) 777-4778
Internet: www.irs.gov

For sales and use taxes, property taxes, and special taxes contact:
Board of Equalization Taxpayers' Rights
MIC 70
PO Box 942879
Sacramento CA 94279-0070
Telephone:(888) 324-2798
Fax:(916) 323-3319
Internet:
www.boe.ca.gov/tra/tra.htm


For employment taxes contact:
Employment Development Dept
Problem Resolution Office
MIC 93
PO Box 826880
Sacramento CA
94280-0001
Telephone:(916) 654-8957
Fax:(916) 654-6969
Internet: www.edd.ca.gov


Continued on page 5

Interest Rates

For the period of July 1, 2001, through December 31, 2001, the interest rate on underpayments and overpayments of California income taxes will be nine percent.

The following table lists interest rates since July 1990.
Effective Date Rate Effective Date Rate
1 July 1990 to 31 Dec. 1990 11% 1 Jan. 1996 to 30 June 1996 9%
1 Jan. 1991 to 30 June 1991 11% 1 July 1996 to 31 Dec. 1996  9%
1 July 1991 to 31 Dec. 1991 10% 1 Jan. 1997 to 30 June 1997 9%
1 Jan. 1992 to 30 June 1992 10% 1 July 1997 to 31 Dec. 1997 9%
1 July 1992 to 31 Dec. 1992 9% 1 Jan. 1998 to 30 June 1998 9%
1 Jan. 1993 to 30 June 1993 8% 1 July 1998 to 31 Dec. 1998 9%
1 July 1993 to 31 Dec. 1993 7% 1 Jan. 1999 to 30 June 1999 8%
1 Jan. 1994 to 30 June 1994 7% 1 July 1999 to 31 Dec. 1999 7%
1 July 1994 to 31 Dec. 1994 7% 1 Jan. 2000 to 30 June 2000 8%
1 Jan. 1995 to 30 June 1995 8% 1 July 2000 to 31 Dec. 2000  8%
1 July 1995 to 31 Dec. 1995 9% 1 Jan. 2001 to 30 June 2001  9%

May/June 2001

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