Legal ruling 1992-1

Effect of Previously Issued Legal Rulings

As explained in the Taxpayers' Bill of Rights, Franchise Tax Board Chief Counsel's Guidelines, FTB Notice 89-277, May 10, 1989, published Legal Rulings are California's equivalent of IRS Revenue Rulings, and are issued to publicize the Franchise Tax Board's official conclusion on how the law in existence at the time the ruling is issued is applied to a specific set of facts. Rulings may be superseded by subsequent changes in the law or by judicial decisions.

All published Franchise Tax Board positions must be read in light of subsequent statutory, regulatory, administrative and judicial decisions. In some cases, the holding of Legal Rulings may have been completely superseded. In others, a particular statutory change or judicial interpretation may have modified the holding of ruling in some particular, but the balance of the reasoning or conclusion remains in effect.

It is the taxpayer's responsibility to be aware of changes in the law, and how such changes apply to the taxpayer's individual situation. Reliance on a Legal Ruling which has been superseded by a change in the law will not constitute reasonable cause for waiver of penalties, nor are such rulings "substantial authority" for purposes of the substantial understatement penalty.

Taxpayers should be particularly aware of the following issues:

Federal Conformity: In 1983, AB 36 (Stats. 1983, Ch. 488) made extensive changes to the Personal Income Tax Law, generally repealing many California's "stand alone" statutes and conforming California law by reference to the Internal Revenue Code. A similar, although less comprehensive, conformity of the Bank and Corporation Tax Law commenced in 1987. (SB 572; Stats. 1987, Ch. 1139). Where California code sections have been repealed and replaced by references to Internal Revenue Code sections, taxpayers should look to federal authority for the proper interpretation of those statutes and to California authority construing the statute after the federal incorporation.

California Method: In 1982, SB 1326 (Stats. 1982, Ch. 327) changed the method of computing tax on the income of nonresidents. This method first computes a tentative tax under the same rules applicable to residents, then applies a ratio of California source income to total income to determine how much of the tentative tax is properly attributable to California sources. Taxpayers should be especially cautious of rulings issued under the old method (which excluded income entirely if it was not from California sources) and those which apply the old method in computing basis, source of income, etc.

Compounding of Interest: AB 223 (Stats.1983, Ch. 323) changed California's method of computing interest on deficiencies and refunds from simple interest, computed separately on each adjustment, to the federal method of compounded daily interest, charged or paid on the combined daily balance of taxes, assessed penalties, additions to tax, and overpayments applicable to a particular taxable or income year.

Drafting Information

The principal author of this ruling is Bruce R. Langston of the Franchise Tax Board Legal Division. For further information regarding this notice, contact Mr. Langston at the Franchise Tax Board Legal Division, P.O. Box 1468, Sacramento, CA 95812-1468.

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