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Federal, state laws concur on taxpayer's treatment of readily tradable stock

2001 Deemed-Sale-and-Repurchase Election Applies to California

Question: What is this election?

Answer: Under federal and California law, if you are an individual taxpayer, you can elect to treat any readily tradable stock (which is a capital asset) you hold on January 1, 2001, and do not sell before January 2, 2001, as having been sold and reacquired on January 2, 2001, for an amount equal to its closing market price on January 2, 2001.

You can elect to treat your other capital assets or property used in a trade or business and held on January 1, 2001, as having been sold and reacquired on January 1, 2001, for an amount equal to its fair market value on January 1, 2001.

Question: How do I recognize a gain or loss as the result of the election?

Answer: Under federal and California law you treat any gain as received or accrued on the date the asset is treated as sold and recognized (included as income) in the taxable year, to the extent the law allows.

The law does not allow any loss resulting from the election for any taxable year.

Question: How do I make this election?

Answer: First, you must specify the assets for which you are making the election. The U.S Treasury Secretary prescribes how to do this, and once made with respect to any asset, the election is irrevocable.

Question: Can I make a different California election?

Answer: Yes. Under normal California election rules, your federal election applies for California purposes unless you choose a different treatment for state purposes. In that case, you can make a separate California election.

The separate California election to retain the asset's original basis and date of acquisition is to be made using the same mechanism specified by the Treasury Secretary for making the federal election.

If you make this separate California election, you must subtract from your return for the taxable year of the deemed sale any gain recognized as a result of the federal election which has been included in federal adjusted gross income (the starting point of the income computations on the California return for 2001).

If you make a separate California election, please note that if you sell the asset in a subsequent taxable year, the gain or loss recognized on that asset's sale will be different for California than for federal purposes. You will need to make a California adjustment on your state return for that subsequent year.

Question: What federal law allows this election, and how has California conformed?

Answer: The federal Taxpayer Relief Act of 1997 (Public Law 105-34) provided this uncodified election in Act Section 311(e) of that law. In 1998, California Assembly Bill 2797 (Chapter 322) conformed our state to this election.

INC Update:

New program uses Schedules K-1 to locate corporate nonfilers
In the past we've used K-1 income information to identify individual partners, but not business entity partners. That will change this year. Our new Integrated Nonfiler Compliance Program (INC) for business entities is now able to use partnership K-1s to identify additional corporate nonfilers.

INC will use K-1 income information to identify corporations who had a partnership interest in California partnerships during the 1999 tax year.

Here's how it works: Partnership income and losses flow through to the partners. 

They maintain the same character as they flow through to the partners and are reported on each partner's Schedule K-1. If the K-1 shows California sourced income, there is a potential California franchise tax due or income tax filing requirement. If the corporate partner has not filed a return, we will request a California tax return from them.

May/June 2001

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