Summary of Second Interested Parties Meeting Proposed Regulation Section 18662-7 Domestic Pass-Through Entity Withholding

Administration:

On September 8, 2017 at approximately 1:00 p.m., interested members of the public (commenters) attended an Interested Parties Meeting (IPM) at the Franchise Tax Board (FTB) central office in Sacramento. Commenters attended in person and by telephone. Those physically present were asked to register at the entrance and phone commenters introduced themselves.

IPM facilitators, Leah Thyberg and Doug Powers, listed the four documents made available as handouts: (1) IPM Notice; (2) the Explanation of Draft Language; (3) Proposed Language for discussion purposes; and (4) Diagrams. Commenters were told they had until October 6, 2017 to submit written comments.

The purpose of the meeting was to provide commenters with an opportunity to discuss and provide comments on draft language for proposed California Code of Regulations, title 18, (CCR) section 18662-7, domestic pass-through entity withholding.

Discussion:

The IPM discussion was organized around the draft language for proposed CCR section 18662-7. Each section of the draft language was summarized, and the facilitator followed each section by asking if there were any comments.

Summary:

The text for each proposed subsection of proposed CCR section 18662-7 is presented below, and is followed by a summary of the comments received during the IPM and in writing by the close of the IPM comment period of October 6, 2017.

18662-7. Domestic Pass-Through Entity Withholding.

(a) General. A pass-through entity is required to withhold tax on behalf of a nonresident owner in an amount equal to the nonresident owner's tax rate of withholding multiplied by the nonresident owner's distributive share of the pass-through entity's California source income.

No public comment.

(b) Definitions.

(1) Distributive Share of Income. For purposes of this subsection, distributive share of income shall be computed under Chapters 9 through 11 of Part 10 of the Revenue and Taxation Code; and Chapters 4.5 and 17 of Part 11 of the Revenue and Taxation Code.

No public comment.

(2) Income from California Sources Subject to Withholding. The amount subject to withholding by a pass-through entity is calculated based upon the pass-through entity's California source income. A nonresident owner's distributive share of a pass-through entity's California source income is determined in the manner described in Regulation section 25137-1 for nonresident corporate partners and Regulation section 17951-4 for all other nonresident owners.

A commenter requested clarity on the definition of the term "California source income" used in this subsection, and how it is calculated.

(3) Lower Tier Pass-Through Entity. A lower tier pass-through entity is a pass-through entity with California source income that has an owner that is a pass-through entity.

No public comment.

(4) Nonresident Owner. A nonresident owner includes partners, members, and shareholders that are nonresidents of California, in addition to beneficiaries of an estate or trust that are nonresidents of California.  A nonresident owner includes owners that are nonresident individuals and owners that are non-California business entities, including, but not limited to, such entities as pass-through entities, publicly traded partnerships, master limited partnerships, estates or trusts, corporations, and suspended or forfeited corporations.

(A) Nonresident Individual. A nonresident individual is as defined in Regulation section 18662-2(j) and Regulation section 18662-4.

(B) Non-California Business Entity. A non-California business entity is as defined in Regulation section 18662-2(i) and includes non-California business entities that are doing business in California within the meaning of Revenue and Taxation Code section 23101 and receiving California source income, as explained in Regulation section 18662-4(b)(2).

No public comment.

(5) Pass-Through Entity. For purposes of this regulation, a pass-through entity includes a partnership (as defined by Revenue and Taxation Code section 17008 and Regulation section 18662-2(o)), estate or trust, and S corporation.

No public comment.

(6) Pass-Through Entity Owner. A pass-through entity owner includes partners, members, or S corporation shareholders that own an interest in a pass-through entity, and beneficiaries of an estate or trust. A pass-through entity owner includes individuals and non-California business entities, including, but not limited to, such entities as pass-through entities, publicly traded partnerships, master limited partnerships, estates or trusts, corporations, and suspended or forfeited corporations.

No public comment.

(7) Tax Rate of Withholding. The pass-through entity shall withhold at the rate specified below with respect to each nonresident owner.

(A) Nonresident Individual Owner. The tax rate applicable to each nonresident individual owner's distributive share shall consist of the highest marginal tax rate or rates in effect under Revenue and Taxation Code section 17041.

(B) Pass-Through Entity Nonresident Owner That is a Non-California Business Entity. The tax rate applicable to the distributive share of each nonresident owner that is itself a non-California business entity owner of the pass-through entity shall be the following:

(i) Pass-Through Entity Owner That is a Corporation. The tax rate applicable to the distributive share of each nonresident owner that is itself a non-California corporate owner of the pass-through entity shall consist of the tax rate in effect under Revenue and Taxation Code section 23151(f)(2); or, if applicable, the tax rate in effect under Revenue and Taxation Code section 23186.

(ii) Pass-Through Entity Owner That is an S Corporation. The tax rate applicable to the distributive share of each nonresident owner that is itself a non-California S corporation owner of the pass-through entity shall consist of the tax rate in effect under Revenue and Taxation Code section 23802. The tax rate applicable to the distributive share of each resident or nonresident owner of a non-California upper tier S corporation shall consist of the highest marginal tax rate in effect under Revenue and Taxation Code section 17041.

(iii) Pass-Through Entity Owner That is an Upper Tier Pass-Through Entity Other Than an S Corporation. The tax rate applicable to the distributive share of each nonresident owner that is itself a non-California upper tier pass-through entity shall consist of the highest marginal tax rate in effect under Revenue and Taxation Code section 17041.

A commenter noted they were unsure whether FTB will be repealing the Non-Consenting Non-Resident (NCNR) tax once these regulations are adopted, since it would now be duplicated. The facilitator responded stating that repealing the NCNR would require a legislative change and that it will not be addressed at this point.

Another commenter indicated they were confused as to whether the highest marginal tax rate includes the 1 percent mental health tax. The facilitator responded stating it does include the 1 percent mental health tax.

A commenter then indicated it was unclear if the intent for the S corporation tax rate was to include 13.3 percent to take into account the shareholders, resulting in a 14.8 percent rate. The facilitator responded saying yes.

A commenter requested the draft proposed language include clarity on application of the 1 percent mental health tax as well as clarity on utilization of the highest tax rate for pass-through entities with a Non-California upper tier S corporation owner.

(8) Upper Tier Pass-Through Entity. An upper tier pass-through entity is an owner of a pass-through entity that is itself a pass-through entity. An upper tier pass-through entity also includes any owner of an upper tier pass-through entity that is itself a pass-through entity.

No public comment.

(c) Withholding Payment Due Dates. Payment of withholding on distributive share of income is due by the federal estimated due date as required by Regulation section 18662-8(c)(1)(B). An upper tier pass-through entity that is only allocating withholding paid on its behalf is not required to remit withholding under this subsection unless it has a separate withholding requirement under subsection (f).

No public comment.

(d) Reporting Requirements.

(1) Reporting to Franchise Tax Board.

(A) Form 592-Q, Payment Voucher for Pass-Through Entity Withholding. A pass-through entity must submit a Form 592-Q with each withholding remittance in accordance with Regulation sections 18662-0 through 18662-8. An upper tier pass-through entity that is only allocating withholding paid on its behalf is not required to file Form 592-Q unless it has a separate withholding requirement under subsection (f). See Regulation section 18662-8, subsection (l).

A commenter indicated they were unclear whether Form 592-Q is a voucher showing the amount of the payment, and when currently withholding for domestic withholding nonresidents, whether a quarterly Form 592-Q is filed containing a list of the names of the partners and the amount of withholding paid on a per partner basis. The commenter also indicated they were unclear if FTB's intent is to do away with that quarterly per partner withholding form. The facilitator responded stating it will be very similar to that form.

A commenter noted they were unsure if the Form 592-Q would be retained and if it would be similar to something a filer would attach a check to. The facilitator said yes.

A commenter also noted it was unclear whether the Form 592-Q would require allocation different from the foreign withholding, because with the foreign withholding there is no allocation of the quarterly withholding until the end of the year. The facilitator stated the allocation of the quarterly withholding will be done annually, the same as it is done for foreign withholding currently. The other facilitator added that the payment stays in the partnership's account until the end of the year when the annual reconciliation form is filed and the withholding is allocated from there.

(B) Form 592-PTE, Pass-Through Entity Annual Withholding Return. A pass-through entity that has withheld on the income of a nonresident owner or has had its income withheld upon is required to file a Form 592-PTE on an annual basis to allocate withholding in accordance with Regulation sections 18662-4 and 18662-8. See Regulation section 18662-4, subsection (j).

(i) Lower Tier Pass-Through Entity. A lower tier pass-through entity that has withheld on income of nonresident owners is required to file a Form 592-PTE to allocate withholding to each nonresident owner that has income that has been withheld upon, in accordance with each nonresident owner's interest in the lower tier pass-through entity.

(ii) Upper Tier Pass-Through Entity. An upper tier pass-through entity that has income that has been withheld upon by a lower tier pass-through entity is required to file a Form 592-PTE to allocate withholding paid on its behalf to each owner, whether a resident or nonresident of California, in accordance with each owner's interest in the upper tier pass-through entity.

(I) Upper Tier Pass-Through Entity Owner. Any owner of an upper tier pass-through entity that is itself a pass-through entity must likewise file a Form 592-PTE to allocate withholding to each owner, whether a resident or nonresident of California.

(II) Allocation of Withholding Paid. Once Form 592-PTE allocates withholding paid to an upper tier pass-through entity, the withholding payment made by the lower tier pass-through entity is treated as having been paid on behalf of each upper tier pass-through entity owner.

(III) Credit for Tax Withheld. If an upper tier pass-through entity claims any of the amount withheld on its tax return for the entity-level tax imposed, it must attach a schedule to Form 592-PTE specifying the amount claimed on the upper tier pass-through entity's income tax return and amount to be allocated to the upper tier pass-through entity's owners. See subsection (e)(2) and Regulation section 19002, subsection (b).

A commenter stated the allocation by an upper tier pass-through entity to resident partners as well as to tax-exempt entities and insurance companies would result in allocations to entities or taxpayers that would not typically want or need to be withheld upon. The commenter suggested it may be better if the upper tier pass-through entity was not required to allocate on a pro rata basis according to the interest in the partnership. The commenter added that a refund for the upper tier pass-through entity to receive that withholding the partner does not want, or an allocation of the withholding only to partners subject to withholding, may help. The facilitator stated they are aware of the interest in allowing the upper tier pass-through entity to receive a refund.

Another commenter indicated it was unclear whether the 10 day notification requirement stops at the lower tier pass-through entity level, suggesting it was uncertain what would trigger partners further up the chain to know that they had been withheld upon. The facilitator responded that the 10 day notification requirement would inform the first upper tier pass-through entity that withholding had occurred and that the partners would also receive a Form 592-B at the end of the year. The facilitator explained this mirrored foreign withholding, which requires the information to be passed up the tiers.

A commenter stated that, with the notice requirement, if the remitter has 10 days to notify its partners of the withholding paid, then the notification stops at that level because the upper tier pass-through entity is not required to also notify its partners of the withholding paid. The commenter added that it seemed to be a dead-end, as the higher up entity in the chain of tiered entities will then have no idea that they had been withheld upon. The facilitator responded by asking how practitioners deal with this in federal foreign withholding, but the commenter did not know. The facilitator responded by stating FTB staff adopted the federal process believing that was what withholding agents and representatives would be most familiar with. The facilitator added that FTB staff decided to adjust the Form 592-PTE due date to an annual basis rather than quarterly, but to continue to keep the Form 592-B, in addition to the 10 day notification, all to try and help move the information through the tiers.

A commenter noted confusion about the Form 592-B and Form 592-PTE due dates. The facilitator responded saying the due date for Form 592-B is January 31^st, and that during the first IPM parties discussed what should be the due date for Form 592-PTE. At the first IPM FTB staff offered April 15^th as a possible due date, and the public narrowed in on January 31^st, which ultimately FTB staff adopted. The commenter noted that if an upper tier pass-through entity receives a Form 592-B and that is the first time becoming aware of the withholding, it is unclear if the Form 592-PTE is due on January 31^st or April 15^th. The facilitator stated the Form 592-PTE is due January 31^st. The commenter expressed confusion how Form 592-PTE could be due on the same day as the Form 592-B. The facilitator responded by explaining the problem is that there is a tension with the large multi-tiered structures. If FTB receives withholding on April 15^th, then withholding credits will be held up. The facilitator explained there is no perfect solution to this and that the consensus from the last IPM was that the preference was for a January 31^st due date to prevent refunds from being held up.

A commenter stated that one option may be to only require withholding at the upper most tier level because the complications and compliance burden would then be eliminated. The facilitator responded by stating this was discussed at our first IPM in December 2014 and that FTB staff ultimately decided it was best to stay closest with the California source income and not skip out to the nonresidents for the withholding burden. The facilitator added that programmatically it is very difficult for FTB to administer withholding at the highest upper tier and the two needed to be balanced.

A commenter stated that possibly the January due date is the issue because partners would not know distributive share by then anyways. The commenter suggested moving the date out later to allow more time for the tiers to move the information up.

A commenter added that, if allocating is required through the tiers, and if tax-exempt entities or insurance companies that are not subject to income tax are allocated withholding, some states have a "quickie refund process" where the payee could file a short form as opposed to a full income tax return and report the withholding and explain it is not subject to the income tax, then receive a refund for the withholding. The commenter further explained that, in a multi-tiered structure, if withholding is allocated through each tier, it becomes difficult for the partners to receive the refund because they may not even be filing an income tax return. The facilitator asked which states do this and the commenter responded by stating New Jersey.

Another commenter stated this is a problem for insurance companies and that it would be nice to have a short form to fill out without having to file a full income tax return.

A commenter later recommended that FTB use one deadline (January 31^st of the following year) for the lower-tier pass-through entity, and a second deadline (October 15^th of the following year) for all upper tier pass-through entities.

(2) Notification to Owners of Withholding.

(A) Form 592-B, Resident and Nonresident Withholding Tax Statement. A pass-through entity that has withheld on income of a nonresident owner or has income that has been withheld upon is required to provide a Form 592-B to each owner that is allocated withholding in accordance with Regulation sections 18662-0 through 18662-8. See Regulation section 18662-8, subsection (m).

(i) Lower Tier Pass-Through Entity. A lower tier pass-through entity that has withheld on income of nonresident owners is required to provide a Form 592-B to each nonresident owner that has income that has been withheld upon.

(ii) Upper Tier Pass-Through Entity. An upper tier pass-through entity that has income that has been withheld upon by a lower tier pass-through entity is required to provide a Form 592-B to each owner, whether a resident or nonresident of California, that is to be allocated withholding. Any owner of an upper tier pass-through entity that is itself a pass-through entity must likewise provide a Form 592-B to each owner, whether a resident or nonresident of California, that is to be allocated withholding.

A commenter mirrored the comments under subsection (d)(1), particularly recommending clarity on specific and separate due dates for tiered pass-through entities.

(B) 10-Day Notification Requirement. A pass-through entity must notify each nonresident owner of the withholding paid on the nonresident owner's behalf when the pass-through entity remits a withholding payment to the Franchise Tax Board. The notice required to be given must be provided within 10 days of the withholding payment due date, or, if paid later, the date such payment is made. No particular form is required for a pass-through entity's notification to a nonresident owner, but each notification must include the pass-through entity's name, identification number, address, and the owner's name, identification number, address, the owner's distributive share of income, and the amount of tax paid on behalf of the owner for both the current pass-through entity's taxable year.

(C) 10-Day Notification Exception. A pass-through entity is not required to notify a nonresident owner of a withholding payment made on the owner's behalf, unless requested by the owner, if –

(i) The pass-through entity's agent responsible for providing notice pursuant to this paragraph is the same person that acts as an agent of the owner for purposes of filing the owner's California income tax return for the owner's taxable year that included the withholding payment date; or

(ii) The pass-through entity has at least 500 nonresident owners and the total withholding the pass-through entity determines it is required to pay for the tax year on behalf of such owner's distributive share of income is less than $1,000; or

(iii) The pass-through entity is an upper tier pass-through entity that is only allocating withholding paid on its behalf.

A commenter stated this required a lot of paper.

Another commenter stated the third exception with respect to upper tier pass-through entities does not do very much good. The facilitator responded by stating it limits the notification at the lower tier level, just as the IRS limits the notification at the lower tier level. The commenter stated it is good from a compliance perspective; however, the partners, including the upper most tiers, will not know of the withholding, and the first time they are made aware may not be until January 31^st through the Form 592-B, which would result in a late Form 592-PTE being filed. The facilitator responded by asking if the preference would be for a 10 day notification requirement for each tier instead. The commenter replied stating perhaps no notification as there is a burden on the lowest tier that is not doing much good in a multiple tier structure, making the notification requirement almost useless. The facilitator responded by explaining the issue presented to FTB staff was that the lower tier pass-through entities were delaying sending the Form 592-B much longer beyond the Form 592-B due date, and that the 10 day notification seemed to help resolve that delay. The commenter stated the choice could be to have no notification or go through the chain of all tiers, but people may not like it to go all through the chain because of the administrative burden.

A commenter stated there is a problem with Form 592-B having the same due date as Form 592-PTE and indicated a desire for a reasonable cause exception written into the regulation language. The commenter explained that the penalties for filing the forms late is very burdensome. The facilitator responded by stating the same penalties will continue to apply and noted that this was discussed at the last IPM and FTB staff had to find a solution.  The facilitator also noted that the smaller partnerships want the earlier January 31^st due date and the larger partnerships want the April 15^th due date, and that FTB is trying to help both sides. The commenter wondered if abating the penalty could help with this and explained that, logistically, the penalty battle is time consuming and would likely happen all the time in a tiered structure. The facilitator asked how this would be structured. The commenter stated the reasonable cause exception is virtually impossible to meet, yet there is a conflict in timing here. The facilitator asked how this could be solved and stated if the due date is delayed to April 15^th, then everything would be delayed out even further. The commenter stated if a Form 592-B is received close to the due date of the Form 592-PTE, then there should be a blanket exception, as the payee may be first learning of the withholding at the same time it needs to file, which is not practical. The facilitator stated there would be a 15 day safe harbor for each tier, but then if we go through multiple tiers, the days will add up. The commenter stated that, in the real world, these are not filed until later in the summer and that they do not get done until after filing season, after penalties have been imposed. The facilitator stated FTB would then have many refunds that would need to be held up, adding additional processing and manual workloads. The commenter stated that perhaps a February 28^th due date could help, with a safe harbor for penalty abatement of around 15 days from receipt, suggesting that this way there would be no reasonable cause argument and that does not necessarily mean there are 15 days to forward the information, and would allow the penalties to be abated if the information was forwarded immediately after receiving it. The facilitator explained it was unclear how this would apply in a multi-tier structure, and if it would result in 15 days for each tier. The commenter stated it would end up that way, but the pass-through entity would not have to wait the full 15 days to send the information, and that if the 15 days starts on the date the Form 592-B is received, regardless of which tier, that could help. The facilitator stated FTB staff will consider these comments and speak with internal staff to figure out what is practical.

A commenter stated that if the upper tier pass-through entities do not know about the withholding, then the partners will not be claiming the refund, because they will not know they had been withheld upon. In those situations the partners are not filing for refunds before the forms are filed because the partners do not even know about the withholding.

(e) Credit for Tax Withheld.

(1) Individuals and Corporations. An individual or corporation, not including an S corporation, that has income that has been withheld upon may claim a refund for withholding paid on the respective individual or corporate franchise or income tax return. To receive a credit for withholding paid, a copy of Form 592-B received from the pass-through entity must be attached to the individual or corporate or income tax return.

(2) Upper Tier Pass-Through Entities. An upper tier pass-through entity that has income that has been withheld upon may not claim a refund for withholding paid on the upper tier pass-through entity's income tax return. The owners of the upper tier pass-through entity may authorize the pass-through entity to use some or all of the withholding credit to satisfy the entity-level tax of the pass-through entity due for the taxable year.  See Regulation section 19002, subsection (b). If the upper tier pass-through entity claims any of the amount withheld on its income tax return, then the upper tier pass-through entity must:

(A) Attach a copy of Form 592-B received from the lower tier pass-through entity to the income tax return as well as a schedule specifying the amount to be claimed on the upper tier pass-through entity's income tax return and amount allocated to the upper tier pass-through entity's owners; and

(B) Attach a schedule to Form 592-PTE specifying the amount claimed on the upper tier pass-through entity's income tax return and amount to be allocated to the upper tier pass-through entity's owners.

A commenter noted uncertainty how the schedules will work as electronic filing becomes more common.

A commenter stated that when an upper tier pass-through entity is not allowed a refund, it may have California source income from one lower tier pass-through entity then a loss from another lower tier pass-through entity and the two may off-set each other, resulting in no income or a loss allocated out to the partners of the upper tier pass-through entity. The commenter suggested it was not clear if there is a policy reason why the withholding coming up from the profitable lower tier pass-through entity cannot be refunded at the upper tier pass-through entity level which ends up with the net California loss. The facilitator responded by stating some of this relates to what FTB systems can or cannot do but that FTB will take that into consideration.

(f) Separate Withholding Requirement for Upper Tier Pass-Through Entities. If an upper tier pass-through entity that has income that has been withheld upon has California source income, other than income that has already been withheld upon by a lower tier pass-through entity, then it may have a separate withholding requirement with respect to such income and may be required to withhold on behalf of each nonresident owner in accordance with Regulation sections 18662-0 through 18662-8.

No public comment.

(g) Penalties. Any pass-through entity required to withhold or report withholding that fails to meet its withholding obligation shall be subject to all applicable penalties under Regulation section18662-8(d), and Revenue and Taxation Code sections 18668 and 19183.

A commenter echoed the comments regarding the deadlines from the Form 592-PTE and Form 592-B.

Another commenter suggested there should be an opportunity to put in language to perfect the form so penalties are not imposed for defective forms. The commenter explained that with the Form 593, people are penalized for not fully completing the forms even though it is escrow that is handling the forms. The facilitator asked what imperfections arise from this. The commenter stated dates, SSNs, and titles, and emphasized that they were not the ones completing the forms and are getting penalized when there is no tax due. The facilitator stated Form 593 is not involved in the regulation and asked if there are examples of these issues for Form 592-PTE. The commenter stated an issue may be if there is incomplete detail on the parties. The facilitator asked the FTB program representative attending the IPM if there are issues with this in the pass-through entity area specifically. The FTB program representative stated that currently, if the withholding form filed is incomplete or incorrect, then a penalty is assessed under IRC section 6721 rules and that if the withholding agent submits the incomplete or incorrect form, then a penalty is imposed and it is assessed on a per payee basis, for each partner withheld upon, which greatly multiplies the penalty amount. The facilitator noted that with respect to penalties and reasonable cause, it was mentioned at the last IPM that FTB allows a 30 day grace period if the lower tier pass-through entity filed on January 31^st and the second tier filed within 30 days, then that would meet reasonable cause, and that this would be the same with the following tier. The commenter stated this would be helpful if there is a problem, to give the opportunity to complete the data within the 30 days.

A commenter emphasized how the penalties unfairly punish upper tier pass-through entities for actions beyond their control, and must be proportionate to the offense intended to be corrected. The commenter recommended that the FTB provide an exception to the penalties if a lower tier pass-through entity fails to timely provide the necessary information to the upper tier pass-through entity.

The commenter also added that the penalty section is unclear as to which penalty applies for which respective failure.

(h) Examples.

Example 1: Upper Tier Pass-Through Entity and Lower Tier Pass-Through Entity Definition.

A is a California general partnership with two equal partners, B and C. B is an individual who is a resident of California. C is a non-California general partnership. C has two equal partners, D and E. D is an individual who is a nonresident of California and E is a California general partnership.

A is a lower tier pass-through entity because it has California source income and it has an owner that is a pass-through entity. C is an upper tier pass-through entity because it is an owner of a pass-through entity, A, and is itself a pass-through entity. E is also an upper tier pass-through entity because it is an owner of a pass-through entity, C, and is itself a pass-through entity.

No public comment.

Example 2: Payment Due Date.

Same facts as Example 1. A has $100,000 of California source income in Year X and remits  withholding on behalf of C's $50,000 distributive share of A's $100,000 of California source income by the applicable federal estimated tax due date because C is a nonresident owner. A is not required to withhold on behalf of B's $50,000 distributive share of A's $100,000 of California source income because B is a resident of California.

Assuming C does not have any California source income other than its distributive share from A, C is not required to remit withholding on behalf of D or E with respect to its $50,000 distributive share of A's $100,000 of California source income by the applicable federal estimated tax due date because withholding has already been paid on that income on its behalf by A. Similarly, E is also not required to remit withholding on behalf of its owners with respect to its $25,000 distributive share of C's $50,000 of California source income by the federal estimated tax due dates because withholding has already been remitted on that income on its behalf.

No public comment.

Example 3: Form 592-PTE Filing Requirements.

Same facts as Example 2. A is required to file an annual Form 592-PTE following the end of Year X to report the withholding it paid on behalf of C. The filing of Form 592-PTE will allocate the withholding A paid on behalf of C to C. A is not required to file an annual Form 592-PTE following the end of Year X with respect to B because B was a resident of California and no withholding was required to be paid on his or her behalf.

C is required to file an annual Form 592-PTE following the end of Year X to report the withholding A paid on its behalf throughout Year X and that A allocated to C. The filing of Form 592-PTE will allocate the withholding A paid on C's behalf to C's owners, D and E, regardless of the owner's state of residency and in accordance with each owner's interest in C.

D is not required to file an annual Form 592-PTE following the end of Year X with respect to the withholding allocated to him or her because D is an individual and therefore is not required to allocate withholding. D can claim the withholding credit allocated to him or her on the individual California nonresident income tax return if he or she attaches a copy of Form 592-B received from C.

E is required to file an annual Form 592-PTE following the end of Year X to report the withholding A paid on behalf of C during Year X and that C allocated to E. The filing of Form 592-PTE will allocate the withholding A paid and that C allocated to E and E allocated to E's owners, regardless of the owners' state of residency, and in accordance with each owner's interest in E.

No public comment.

Example 4: Form 592-B Requirements.

Same facts as Example 2. A is required to send a Form 592-B following the end of Year X to C to notify C of withholding  paid on its behalf throughout the year.

C is required to send a Form 592-B following the end of Year X to D and E to notify each owner of withholding paid on C's behalf throughout the year and that has been allocated to D and E.

E is required to send a Form 592-B following the end of Year X to its owners to notify each owner of withholding paid on E's behalf throughout the year and that has been allocated to E's owners.

No public comment.

Example 5: 10-Day Notification Requirements.

Same facts as Example 2. A is required to notify C within 10 days of making each withholding payment that it remits throughout Year X. C is not required to notify its owners of the withholding A paid on its behalf throughout Year X because C is only required to allocate this withholding to its owners following the end of Year X. Similarly, E is not required to notify its owners of the withholding A paid on its behalf because E is only required to allocate this withholding to its owners following the end of Year X.

No public comment.

Example 6: Separate Withholding Requirement for Upper Tier Pass-Through Entities.

Same facts as Example 2. C also has $20,000 of California source business income from its own operations in Year X and, as the $20,000 is unassociated with any ownership interests in pass-through entities, there has been no prior withholding on this income. C is required to remit withholding on behalf of D's $10,000 distributive share of C's $20,000 of California source income by the applicable federal estimated tax due date because D is a nonresident owner. As a result, C is additionally required to notify D within 10 days of each withholding payment, send D a Form 592-B reporting the total withholding paid following the end of the year, and file Form 592-PTE with the Franchise Tax Board to report and allocate the withholding to D. C is not required to remit withholding on behalf of E's $10,000 distributive share of C's $20,000 of California source income by the applicable federal estimated tax due date because E is a California partnership.

No public comment.

Example 7: Upper Tier S Corporation Pass-Through Entity Withholding Payment and Filing Requirements.

A is a California partnership with two equal partners, B and C. B is an individual that is a resident of California. C is a non-California S corporation. C has two equal shareholders, D and E. D is an individual that is a nonresident of California and E is an individual that is a resident of California. 

A is required to withhold tax on behalf of C at the 1.5 percent tax rate in effect under Revenue and Taxation Code section 23802 in addition to the highest marginal tax rate in effect under Revenue and Taxation Code section 17041 by the applicable federal estimated tax due date. A is not required to withhold tax on behalf of B because B was a resident of California in Year X.

A is required to file an annual Form 592-PTE following the end of Year X to report the withholding it paid on behalf of C. The filing of Form 592-PTE will allocate the withholding A paid on behalf of C to C. A is not required to file an annual Form 592-PTE following the end of Year X with respect to B because B was a resident of California and no withholding was required to be paid on his or her behalf in Year X.

C is required to file an annual Form 592-PTE following the end of Year X to report the withholding A paid on its behalf throughout Year X and that A allocated to C. The filing of Form 592-PTE will allocate the withholding A paid on C's behalf to C's owners, D and E, regardless of the owner's state of residency and in accordance with each owner's interest in C.

C cannot claim a refund for withholding paid on its income tax return. However, it can use some or all of the withholding credit to satisfy the 1.5% entity-level tax that was already withheld on its behalf by A. If C claims any of the amount withheld on its income tax return, then it must attach a copy of Form 592-B received from A and a schedule specifying the amount claimed on C's own income tax return as well as the balance allocated to the shareholders to its income tax return. Additionally, C must attach the same schedule to Form 592-PTE to allocate the balance of withholding paid on its behalf to its shareholders, D and E.

D and E are not required to file an annual Form 592-PTE following the end of Year X with respect to the withholding allocated to him or her because D and E are individuals and therefore are not required to allocate withholding. D and E can claim the withholding credit allocated to him or her on the respective individual income tax return if each attach a copy of Form 592-B received from C.

No public comment.

Other comments:

A commenter suggested it was unclear if the existing $1,500 de minimis exemption for withholding will still apply and if other provisions will continue to remain in effect. The facilitator stated the provisions will remain in effect and they are all intended to apply. The commenter stated some believe this regulation operates independently. The facilitator stated if there is a specific suggestion with the language, then direct that suggestion in writing to the facilitator at the address provided in the notice.

Another commenter reiterated a desire for the safe harbor on penalties and stated that because the same payment is going up the tiers and a penalty is imposed on the same payment, then a safe harbor would help.

A commenter requested additional language explaining that the other withholding regulations still apply and co-exist with the pass-through entity withholding regulation, as well as language clarifying the application of the withholding exemptions and waivers regulations.

Closing:

The IPM closed with the facilitator noting that the FTB would accept written comments on the topics discussed at the meeting until October 6, 2017, and that FTB staff intends to consider all comments received on the day of the IPM through the comment deadline.