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2015 CalCPA Questions and Responses
Q# Topic Subject Matter Experts
1 W2 Withholding Mary Wheat
2 Swart Enterprises Bill...
2015 CalCPA Questions and Responses
Question #1
W2 Withholding
Taxpayers sometimes have an almost impossible task in try...
2015 CalCPA Questions and Responses
What can be done, by the taxpayer, preparer, or FTB to correctly and timely apply 10...
2015 CalCPA Questions and Responses
We appreciate the suggestion to increase use of direct deposit. With the i...
2015 CalCPA Questions and Responses
will appear in MyFTB once the payment has posted. Beginning January 4th
, future pay...
2015 CalCPA Questions and Responses
Currently, taxpayers may call the Franchise Tax Board 800.852.5711 to get ...
2015 CalCPA Questions and Responses
partnership, the LLC would be required to have at least two members. Therefore, the ...
2015 CalCPA Questions and Responses
Question #10
Other State Tax Credit
In 2014, FTB issued FTB Notice 2014-01, withdraw...
2015 CalCPA Questions and Responses
To help tax professionals prepare for January 4, 2016 availability, we are collabora...
2015 CalCPA Questions and Responses
Although the taxpayers argued that their distributive share was income from intangi...
2015 CalCPA Questions and Responses
If the dictum in Valentino were correct, section 17955 would be completely unnecess...
2015 CalCPA Questions and Responses
decisions where the determinations were largely based on facts-and-circumstances, s...
2015 CalCPA Questions and Responses
FTB remains committed and focused on ensuring taxpayers receive notification prior ...
2015 CalCPA Questions and Responses
We generally do not automatically receive the IRS revisions or corrections. They wi...
2015 CalCPA Questions and Responses
 Receive an approval from us. We generally respond within 30 days of receiving the...
2015 CalCPA Questions and Responses
For federal tax purposes, the Internal Revenue Code (“IRC”) imposes an un...
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2015 CalCPA/FTB Q&A


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The CalCPA Committee on Taxation recently met with FTB representatives to discuss trending tax topics. Questions presented by CalCPA; answers provided by FTB.

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2015 CalCPA/FTB Q&A

  1. 1. 2015 CalCPA Questions and Responses 1 Q# Topic Subject Matter Experts 1 W2 Withholding Mary Wheat 2 Swart Enterprises Bill Hilson 3 1099 Withholding Ramona Krabbenhoft 4 Electronic Payments Chris Reali 5 Web Pay System Chris Reali 6 Credit Carryover Mary Wheat 7 Calculating Interest Mary Wheat 8 SMLLC Filing Requirement Shane Hofeling 9 Transferee Liability Bruce Langston 10 Other State Tax Credit Kristen Kane 11 Enterprise Data to Revenue Chris Reali 12 Pass-through Income Sourcing Natasha Page 13 Intangible Sourcing Natasha Page 14 Non-Filer Programs Joy Burns 15 E-Filing as an LLC Chris Reali 16 K1 NOL Disallowance Jaymie Mora 17 Installment Sales by Individuals Adam Clark 18 Medicare Surtax Exemption Shane Hofeling
  2. 2. 2015 CalCPA Questions and Responses 2 Question #1 W2 Withholding Taxpayers sometimes have an almost impossible task in trying to validate the amount of withholding on their W2’s when FTB discovers a discrepancy between the taxpayer’s amount and the reported EDD amount. This is a very burdensome situation for taxpayers to try and resolve. How can a taxpayer validate their withholding when they no longer have pay stubs available and the employer (or previous employer) will not provide them, or when the employer is no longer in business? Response: If there is a discrepancy between the withholding amount claimed and the amount reported to FTB by the Employment Development Department, taxpayers can contact the Franchise Tax Board at 800.852.5711 for additional assistance. If your client has received a letter from FTB regarding their withholding, they can call the phone number on the letter. If the taxpayer is unable to provide pay stubs or the employer is not available, FTB staff will review the account on a case by case basis to determine whether to allow the withholding. The documents needed to help validate the claim may differ depending on other information available to the FTB. Beginning January 4th , 2016, Taxpayers can view their withholding by visiting and register for a MyFTB account. Question #2 Swart Enterprises What was FTB’s reasoning behind its appeal of the Swart Enterprises Superior Court decision? In light of the “Swart” decision is FTB requiring businesses that have only a passive LLC interest in a LLC doing business in California, to continue to file returns? If so, can taxpayers file a protective claim? If the taxpayers can file protective claims, does FTB plan to have special “Swart” protective claim procedures? If taxpayers cannot file protective claims, can they deem the claim denied in six months? Finally, when does FTB expect “Swart” to be resolved? Response: To be answered at the meeting. Question #3
  3. 3. 2015 CalCPA Questions and Responses 3 What can be done, by the taxpayer, preparer, or FTB to correctly and timely apply 1099 withholding for a taxpayer’s account? Response: In preparing our response to this question, we requested additional information from the party who submitted this question in order to determine the type of 1099 issue. We were informed the issue involved the 1099R reporting of pension income and withholding. The employer typically reports the withholding timely to the Employment Development Department (EDD), who in turn provides daily data feeds to FTB. FTB relies upon data from the EDD to verify withholding from 1099s as well as W-2s. The validation efforts are the same for both paper and e-file returns. If the organization withholding on the retirement pay has not submitted the information properly to EDD, it could cause the return to need further review before the refund can be issued. FTB makes every attempt to use available taxpayer information to allow the credit in a timely manner; however, if we are unable to do so, we may request taxpayers or their representatives to provide additional information. This includes requesting the taxpayer to submit a copy of the 1099-R to validate the refund. Once the 1099-R has been received, we will complete our validation efforts to allow the refund. We have identified an issue that has often caused delays in approving refunds with 1099 data. Tax practitioners supporting businesses that issue 1099Rs and submit withholding to EDD can help us with this issue. The issue is when the employer elects to “combine file” their withholding data with the IRS and the states. The employer sends the detailed withholding information on each employee timely to the IRS, who in turn will provide the data to the required state. However, this transmission of data may not occur for 6 – 9 months. Although this option offers the employer the opportunity to report to both Federal and State agencies in a single action, it causes a delay in our ability to validate refunds with 1099 data. If the employer elects to direct file to FTB, it would help alleviate the delay in allowing the refund in these situations. Additionally, timely filing of the DE-9C with the EDD to report the individual payees withholding amount is also beneficial. Question #4 Electronic Payments FTB requires payments by Web Pay or EFT. The requirement even imposes a penalty against a mandatory electronic payment taxpayer. It is understood that this is to expedite payments and use of the funds. Why is it that FTB does not refund payments in the same way? This would expedite payments and use of funds for the taxpayer and it should be less costly for the state than paper payments.
  4. 4. 2015 CalCPA Questions and Responses 4 Response: We appreciate the suggestion to increase use of direct deposit. With the implementation of the Enhanced MyFTB in January 2016, the application could eventually provide a way for taxpayers to provide and maintain their banking account information. However, implementing this option within MyFTB would likely be at least a few years away and would have to be carefully designed and implemented to meet all of FTB’s privacy & security requirements. Question #5 Web Pay System A taxpayer used Web Pay to make a payment to FTB. The taxpayer did not get a ‘confirmation’ but instead a notice that the system was ‘down for maintenance’ and the transaction was not completed. Later in the day the taxpayer tried the system again and this time received the Web Pay confirmation. However, when the taxpayer reviewed his checking account they noticed that both payments had been taken from his account. This is a scenario that we hear too often. Is FTB aware of this repeated Web Pay system issue? How does a taxpayer get one of these payments back? Will it be refunded electronically to expedite restoration of the taxpayer’s bank account and use of funds? Response: FTB has heard on rare occasions that a taxpayer submitted a second request because they didn’t think their original request was accepted. However, FTB has not identified any systemic issues with Web Pay. If a taxpayer experiences an issue, it is not necessarily an issue with Web Pay. The issue could be with the taxpayer’s Internet Service Provider (ISP) or personal computer and it could appear the transaction never went through. Because issues can occur, FTB generally recommends taxpayers create a MyFTB account and use Web Pay once they’ve logged in to their account. If the taxpayer submits a payment request while logged in to their account, any payments they’ve scheduled will be viewable on the Web Pay Payment Summary (Home) Page. If the user received some type of error while submitting their Web Pay request, they would be able to check this page to confirm if the payment request was actually received by FTB. If the taxpayer is unsure and needs to confirm or verify the request was received by FTB, they can contact our e-Programs Customer Service Unit at 916.845.0353. Please note that all taxpayers will be required to create a new MyFTB account in 2016. Payments scheduled in 2015 to occur in 2016 using an existing MyFTB Account will not be viewable in Web Pay after January 2nd , 2016. However, these payments are still scheduled and
  5. 5. 2015 CalCPA Questions and Responses 5 will appear in MyFTB once the payment has posted. Beginning January 4th , future payments scheduled in 2016 using the new MyFTB will be viewable in Web Pay. However, if the taxpayer uses the version of Web Pay without logging in, they cannot see if the request was actually received by FTB. We encourage users to request an email confirmation of their payment request to verify the request was accepted by FTB. However, an ISP or computer issue may prevent delivery or receipt of the email confirmation. The quickest way for the taxpayer to get their money back is to advise their bank they did not authorize one of the transactions. Although the taxpayer may have technically submitted two requests (even though they didn’t think there were two requests), the bank will generally submit one of the items to FTB and credit the other back to the taxpayer. Since FTB processing of refunds is contingent on a return being filed with a request for direct deposit, we cannot issue the overpayment electronically. Question #6 Credit Carryover The scenario is that a taxpayer has a credit carryover from last tax year to this year, and then discovers that the carryover was understated (found additional tax credits). Must the taxpayer amend the prior year return to correct the carryover amount or can the amount be correct in the current tax year filing? If it can be corrected in the current year return, what information needs to be provided for FTB to make the change? Response: The taxpayer does not have to file an amended return for the tax year the credit was generated as long as the tax liability remains the same for that year. To correct the credit carryover amount in the current year return, the taxpayer should provide the original credit form as filed (i.e. Form 3805z for EZ, Form 3523 for Research Credit, etc.), the amended credit form to show the “as revised” credit generated, supporting schedules if any, a revised credit carryover schedule, and a detailed statement explaining the changes. Question #7 Calculating Interest Taxpayers and preparers try very hard to make a full payment when paying FTB, especially for prior year balances. However, outside of FTB, it is impossible for someone to calculate the interest due. Is there a tool that could be made available to the public to allow them to do this interest calculation? If not, what is the most expeditious method to get this calculation?
  6. 6. 2015 CalCPA Questions and Responses 6 Response: Currently, taxpayers may call the Franchise Tax Board 800.852.5711 to get a current and/or future balance including any applicable penalties and interest. Beginning January 4, 2016, taxpayers and tax preparers who register for a new MyFTB account at will be able to calculate a current or future balance due. They can enter the planned payment date and calculate the projected balance due for that date, including any applicable penalties and interest. Question #8 SMLLC Filing Requirement A Single Member Limited Liability Company (SMLLC) doing business as a partnership holds a personal residence. The SMLLC has no other activity or assets, and no business is conducted on the premises. Does the LLC need to register with the CA Secretary of State? Are they required to pay the $800 LLC Annual Tax for the privilege of doing business in CA? Response: As the Franchise Tax Board ("FTB") does not administer the registration of limited liability companies ("LLCs"), FTB would defer to the California Secretary of State for the determination of filing requirements. However, it appears the obligation to register with the California Secretary of State arises under the definition of "transacting intrastate business" in the California Corporations Code sections 191 and 17708.03, which defines that term as, "… enter[ing] into repeated and successive transactions of business in this state, other than in interstate or foreign commerce." For specific questions about the requirement to register to do business in California, taxpayers should contact the California Secretary of State. However, the requirement for registration with the California Secretary of State is not the same as the requirement to file and pay the LLC annual tax and fee. California Revenue and Taxation Code ("RTC") sections 17941 and 17942 requires the annual tax and fee to be paid if the LLC is doing business in California. RTC section 23101(a) defines doing business as "… actively engaging in any transaction for the purpose of financial or pecuniary gain or profit." For taxable years beginning on or after January 1, 2011, a taxpayer is also "doing business" in California if any of the following conditions are satisfied: (1) a taxpayer is organized or commercially domiciled in California or (2) a taxpayer's California sales, property, or payroll exceed the amounts then applicable amounts under paragraphs (2), (3), or (4) respectively, of subdivision (b) of Section 23101. In order to provide a specific answer to the question, some additional information may be necessary. A SMLLC by its operation only has one member. In order to be doing business as a
  7. 7. 2015 CalCPA Questions and Responses 7 partnership, the LLC would be required to have at least two members. Therefore, the LLC in this question would either be a SMLCC or a multiple member LLC which is being taxed as a partnership. In addition, the answer may vary whether the personal residence was located in California, whether the single member (assuming a SMLLC) was a California resident, whether the LLC was organized or registered in California, and the value of the personal residence. Question #9 Transferee Liability We have received several questions from our members regarding when FTB can hold shareholders, members, or partners liable for the liabilities of their business entity. Also, we have received questions based on the Appeal of Howard Zubkoff and Michael Potash, Assumers and/transferees of Ralite Lamp Corporation (“Ralite”) on whether it is possible for business owners to walk away from their business without formally dissolving, withdrawing, or cancelling the entity. Can you discuss these issues? Response: A California Domestic Corporation (or a foreign corporation qualified to do business in California) is required to file annual income tax returns and to pay the appropriate tax until it formally dissolves (or surrenders the right to transact business in California) with the California Secretary of State’s office. This is true even if the corporation becomes suspended or its powers forfeited. The Appeal of Howard Zubkoff and Michael Potash, Assumers and/or Transferees of Ralite Lamp Corporation, 90-SBE-004, (April 30, 1990) (referred to as "Ralite") did not change this requirement. This appeal held that when the Franchise Tax Board (FTB) has exhausted all reasonable remedies of collecting the tax due from a corporation, that if the shareholders received assets of the corporation without adequate consideration, then the FTB could collect the unpaid tax from the shareholders based on transferee liability. Currently, FTB attempts all reasonable means to acquire any delinquent entity returns and/or any balances due from the entity itself. For those entities where a shareholder could be held responsible for the entity’s debt, FTB evaluates the applicable tenets of the law, including liability in equity as outlined in the Ralite case. Prior to pursing a transferee assessment, FTB analyzes and considers the facts of the collection case for collection remedies against the transferor entity. For transfer of liability at equity, the Ralite decision and California law require FTB to have “exhausted all reasonable remedies against the “taxpayer-transferor” prior to pursuing a transferee assessment. Exhausting such reasonable collection remedies against the entity as required by law admittedly delays assessment against any transferee/shareholder(s).
  8. 8. 2015 CalCPA Questions and Responses 8 Question #10 Other State Tax Credit In 2014, FTB issued FTB Notice 2014-01, withdrawing FTB guidance regarding the Out of State Tax Credit (OSTC) and the Texas Revised Franchise Tax (FTB Notice 2010-02). Does FTB plan to offer any guidance regarding this issue? Response: FTB will be issuing guidance on the appropriate way to determine if a tax is deductible or eligible for the OSTC in early to mid 2016. The guidance will not be specific to a certain tax, but rather it will cover the manner in which a taxpayer can determine if any tax is deductible or eligible for the OSTC. The guidance will include hypothetical examples. Question #11 Enterprise Data to Revenue We are looking forward to using the new MyFTB. Is FTB going to provide any training to tax practitioners on how to effectively use the New MyFTB before or after it becomes operational in January 2016? Response: In addition to the many features we’ve added to MyFTB, we updated the design to have a better look and feel. It includes an intuitive design to make navigation easier and locate information faster. We also added page level “help” within the application to provide information directly about the page the customer is on. In addition, we will have the following information to assist taxpayers and tax professionals on  Updated frequently asked questions (FAQs).  “How To” pages with step-by-step instructions for the following self-service options:  Build a Client List  File a Protest  Submit a Power of Attorney  File a Nonresident Withholding Waiver  How to Register  Published Tax News articles highlighting the features of MyFTB beginning in January 2015 and will continue to have more. To subscribe for Tax News go to and click on News & Events.  Links to videos and flyers outlining the benefits of using MyFTB.
  9. 9. 2015 CalCPA Questions and Responses 9 To help tax professionals prepare for January 4, 2016 availability, we are collaborating with professional organizations to share information about MyFTB. Below are some of the efforts completed or in progress:  Demonstrations of MyFTB with professional organizations, including Advisory Board Meeting, CalCPA meeting and Enrolled Agents Meeting.  Collaborating with CE providers to include MyFTB material for fall updates and webinars. Question #12 Pass-through Income Sourcing 1. In summer of 2014, FTB introduced new proposed regulatory language that sought to apply apportionment sourcing rules to nonresident individuals for business income (CCR 17951-4) regardless of the nature of the source of income, principally intangible (RTC 17952). This seems to infer that FTB believes, and the regulations should clarify this, that if the income is business income, CCR 17951-4 trumps all other sourcing rules. So far, FTB has been targeting intangible income sourcing (RTC 17952) because it is based on the state of residence or domicile of the nonresident. This seems to contradict a prior California Court of Appeal decision (Gene Valentino et. al. v. FTB, 87 Cal.App.4th 1284, 2001) where the Court looked to the IRC to determine that pass-through entity owners’ income would be treated as if earned directly by the owner themselves first. In doing so, the sourcing rules would be applied after as if the owner themselves sold the property generating the income. A. Initially, the regulatory calendar shows an interested parties meeting was planned for this summer. Does FTB plan to continue this proposed regulation change? Response: The primary regulation project amends Title 18, section 25137. That project is ongoing. It is not yet determined whether the final changes will include changes to section 17951-4. The treatment provided in the proposed regulation is not new. B. How does the FTB reconcile the proposed regulatory position as not conflicting with Valentino? Response: The existing regulation, and its predecessors back to at least 1982, all provide guidance consistent with the holding in Valentino v. Franchise Tax Board, as does the proposed language in the current regulation project.
  10. 10. 2015 CalCPA Questions and Responses 10 Although the taxpayers argued that their distributive share was income from intangible property, i.e., their S corporation stock, and, therefore, should be sourced to their state of residence, the Court in Valentino held that their income was not akin to a dividend and was not income from intangible property. Instead the income was from a business conducted entirely within California and, thus, entirely sourced to California, pursuant to Regulation 17951-4. In dictum, the Court mentioned in passing that the only time such income would be income from intangible property was if the income were from intangible property at the S corporation level. It is FTB's position that this statement was not necessary to the Court's finding and is, in fact, incorrect. As explained below, all income from a business entirely conducted in California is sourced in California (see Regulation 17951-4(a).) Further, in the case of a multistate business, only nonbusiness income is sourced pursuant to RTC section 17952. Regulation 17951-4 provides: If business is conducted wholly within California, the entire income is sourced to California. If business is conducted wholly without California, none of the income is sourced to California. If the business is conducted within and without California such that the part within the state is so separate and distinct from and unconnected with the part outside the state such that they are not part of a unitary business, then only the income from the business conducted within California will be derived from sources within this state. If the business is conducted within and without the state, such that the parts within and without the state are unitary, whether the business is conducted as a sole proprietorship, an S corporation, a partnership, or an LLC:  the income will be subject to classification under the UDITPA rules at the entity level, and  business income will be apportioned using the UDITPA rules found in RTC section 25120 through 25139 and the regulations thereunder, and  nonbusiness income will be allocated using the PIT sourcing rules found in RTC sections 17951 through 17955 and the regulations thereunder. This position is bolstered by RTC section 17955. That statute provides specifically: (a)(2) "In the case of a partner's distributive share of income from qualifying investment securities, the partnership qualifies as an investment partnership, whether or not the partnership has a usual place of business located in this state."
  11. 11. 2015 CalCPA Questions and Responses 11 If the dictum in Valentino were correct, section 17955 would be completely unnecessary and rendered moot. C. Does FTB plan to apply CCR 17951-4 to other types of income as well, e.g. business income sale of real or tangible property under CCR 17951-3? If not, what is the justification for the distinction? Example: S corporation develops software for use and licensing globally. S corporation shareholder is a nonresident of CA. None of the licensing revenue is sourced to CA. S corporation sells large server farm no longer needed in the business. Sale is excluded from the sales factor under CCR 25137(c)(1)(A) as occasional sale. All of the server farm equipment is located in CA. Assets were used in the trade or business. Gain is business income. How will the flow-through income be sourced to nonresident? Will business income rules be applied first or will the nature of the income in the hands of the shareholder be determined first? Response: Regulation 17951-4 should be applied when a nonresident receives distributive share income from a pass-through entity. Since the facts provide that the S corporation is a multistate enterprise, the distributive share will be sourced pursuant to Regulation 17951-4. The determination of whether each item of income is business income or nonbusiness income will be made at the S corporation level. All business income will be sourced pursuant to the rules set forth in RTC sections 25120-25139 and the regulations thereunder. To the extent there is any nonbusiness income, determined at the S corporation level, such income will be sourced at the shareholder level using the sourcing rules found under RTC sections 17951 through 17955, and the regulations thereunder. The example provides that the gain is business income, therefore it will be apportioned pursuant to the UDIPTA rules and reported on the shareholder's Schedule K-1 properly apportioned and according to the shareholder's ownership interest. The PIT sourcing rules would not come into play, except to the extent that the shareholder had further unitary businesses, in which case the shareholder may need to combine this first entity with other unitary enterprises to arrive at a combined apportionment factor. Question #13 Intangible Sourcing The five-member Board of Equalization (BOE) recently ruled in favor of taxpayers in the Appeal of Mary and Michael Bills. Board members moved to make the decision citable. However, Randy Ferris, Chief Counsel for BOE, warned that the BOE had a history of not issuing formal
  12. 12. 2015 CalCPA Questions and Responses 12 decisions where the determinations were largely based on facts-and-circumstances, such as the residency issue which was part of the appeal. The other portion was related to whether intangible sourcing should be applied to certain earn-out payments made to a retired partner or whether business income apportionment should be applied. BOE members disagreed with the FTB position and wanted to resolve that controversy going forward. In an unprecedented motion, BOE members requested that appeals staff draft a partially precedential decision. Based on a number of disputes currently in audit or protest, the position argued by FTB in the appeal appears to still be a position that FTB is asserting on taxpayers. A. What distinctions, if any, will be made with the Bills decision? B. Are there any plans to revise audit division policy on this nonresident sourcing issue? Response: The FTB has filed a Petition for Rehearing in this case. Therefore, the decision is not final and the FTB has no comment on how the eventual decision will affect FTB positions or policy. Question #14 Non-Filer Programs resulting in account levies On three occasions, I have had clients’ bank accounts levied by FTB for now known reason. After receiving a frantic call from the client that FTB had levied funds from the client’s account, subsequent research reveals the following facts: 1. The taxpayer is an attorney with a valid California Bar license 2. The taxpayer has moved out of the State of California 3. The taxpayer has no California-source income 4. The taxpayer has no California tax return filing requirement 5. The California State Bar has consistently had a valid mailing address for the subject taxpayer. We have concluded that the valid Bar license has created a non-filer program collection protocol on these clients. However, when notices are sent to the last known address that is contained in FTB records, the mail is returned and the account goes to levy. If the taxpayer is maintaining their current address with the California Bar, which is where the license information is coming from anyway, why can’t the notices be sent to that address? In that fashion, the taxpayer would get the notice from the non-filer program and have a chance to respond? It would appear that a lot of time and anguish would be saved. Response:
  13. 13. 2015 CalCPA Questions and Responses 13 FTB remains committed and focused on ensuring taxpayers receive notification prior to involuntary actions. FTB recently implemented new functionality with the Enterprise Data to Revenue Project, allowing continuous search for the best taxpayer address. The new functionality uses over 30 address data sources, including the California State Bar. This functionality selects the most up-to-date, available addresses for all taxpayer notifications, using the address with the newest effective date. In addition, the best way to avoid a levy is to call or write to us about your client’s filing requirement. Question #15 Electronic Filing as an LLC California businesses are now required to e-file. In order to e-file, corporations must have a 7- digit California corporation number. LLCs that opt to file as corporations do not have a California corporation number, they have a 12-digit SOS file number. Therefore, LLCs filing as corporations cannot e-file and must request a waiver from e-filing from the FTB. The FTB needs to correct this systemic error and allow e-filing with either a corporation number or an SOS file number. Response: The Business entity e-file program accepts returns without a California ID number for tax years 2014 and forward. The entity should provide an explanation in lieu of a number, such as “LLC is filing as a corporation”. If practitioners are prevented from e-filing returns without ID numbers, then it is likely their software preventing it. If this is the case, a waiver from e-filing the return should be requested. We will send an alert to all software companies making them aware of the problem. If there are specific companies or products that you are aware of, please provide the specific information and we will work with them directly. When FTB processes a corporation return without an ID number, a 7-digit California Corporation number is assigned to the entity. A letter is sent to the entity notifying them of the assigned number and advises them to use the number on future tax returns, payments and documents. Question #16 K1 NOL Disallowance IRS incorrectly disallowed NOL from K1 on individual return and notified FTB of disallowance. IRS later corrected the account, but the FTB did not correct. How can FTB ensure this won’t happen again in similar circumstances? Response:
  14. 14. 2015 CalCPA Questions and Responses 14 We generally do not automatically receive the IRS revisions or corrections. They will share such information with us if we ask for it, but it is largely a manual process and is dependent upon FTB knowing of the revision (this is usually communicated from the taxpayer when they are aware that a revision was made but they do not have a copy of it). Therefore, if the taxpayer receives a notice of proposed assessment (NPA) from the FTB based on an IRS adjustment that subsequently has been revised or reversed, the taxpayer should send the revised or reversed IRS determination to us at any time. We enclose FTB 7275 with all the NPAs mailed to the taxpayers and it is also available in our public website. The taxpayers can mail or fax their revisions to the address or fax number as indicated on FTB 7275. With the soon to be released MyFTB account, taxpayers will have the ability to report their federal adjustments on-line. We encourage taxpayers to use this feature once it becomes available. Question #17 Installment Sales by Individuals Is there any consideration being made to simplify or make exceptions for the withholding on installment sales by individuals? It is very cumbersome and unnecessary in many instances. I understand requesting requesting financial institutions to witthold, transmit payments and file forms correctly, but I believe it is not fair to require it of individuals, especially when it’s the responsibility of the seller to pay the tax to begin with. The sellershould be required to make payments of estimated taxes rather than the buyer to withhold from payments. It forces individuals, often times elderly, to pay for the services of a professional to file the forms, which is unfair and costly. Could there be a way for the seller to sign some kind of waiver stating they take responsibility for making the required estimated tax payments releasing the buyer from this burdensome obligation 12 times a year? Response: Revenue and Taxation Code Section 18662(e)(3)(E)(i) requires withholding on each installment payment so that the seller has withholding to match their real estate income each tax year. We do offer an option to release the buyer from the withholding obligation, but it requires the seller to elect out of withholding on installment payments following the close of escrow. In order to qualify for this election the seller must:  File a California tax return and report the entire gain on Schedule D-1 in the year of the sale.  Submit a written request to us asking to release the buyer from withholding on subsequent installment payments.
  15. 15. 2015 CalCPA Questions and Responses 15  Receive an approval from us. We generally respond within 30 days of receiving the request. The Withhold on Installment Sale Election (WISE) written request should include:  Seller's name, mailing address, TIN, phone and fax number  Buyer's name, mailing address, TIN, phone and fax number  Property address, close of escrow date, escrow number or final closing statement  Tax year and date filed of the tax return where the related installment sale income was reported The written request should be mailed to: Attn: WISE Program Withholding Services and Compliance MS F182 Franchise Tax Board PO Box 942867 Sacramento, CA 94267-0651 The request can also be sent to the WSCS general fax line at 916.845.9512, Attn: WISE Program. This information is available in our new FTB 4010, Withholding on California Real Estate Installment Sales brochure, which can be given to buyers and sellers in an installment sale transaction. It can also also be found on, search for the Real Estate Installment Sales page or Publication 1016. For more information or to see if your client qualifies for this option, contact the Withholding Services and Compliance Section at 888.792.4900. Question #18 Medicare Surtax Exemption Real estate professionals have elected to group rentals for Federal purposes in order to qualify for the exemption from the Medicare surtax. Is this grouping applicable for California purposes even though California does not follow the Federal rules for a “real estate professional” exemption from the passive loss limitations. If a taxpayer disposes of a property that was included in the grouping for Federal purposes, can a carryover loss be deductible in full for California purposes as a complete disposition of that activity or is the loss carryover deferred until all of the activities included in the Federal grouping are disposed of?
  16. 16. 2015 CalCPA Questions and Responses 16 Response: For federal tax purposes, the Internal Revenue Code (“IRC”) imposes an unearned income Medicare contribution tax, commonly referred to as a “Medicare Surtax”. It is important to note this is only a federal tax and is not imposed by the California Revenue and Taxation Code. The tax may be imposed on a taxpayer’s net investment income in a taxable year. Net investment income may include gross income received from a passive activity. In general, rental activities are considered passive activities. However, IRC section 469(c)(7) allows rental real estate professionals to treat a rental real estate activity as an activity that is not a passive activity as long as they materially participate in each separate rental real estate activity. Certain real estate professionals can elect to group their rental real estate activities together so that their activities will be considered one activity for material participation purposes. If the rental real estate professional is able to show material participation in the rental real estate activity, then the rental real estate income will not be treated as passive income for federal tax purposes and may not be subject to the federal Medicare Surtax. The California Revenue and Taxation Code (“RTC”) does not incorporate IRC section 469(c)(7), thus California does not follow the federal rental real estate professional passive activity special rules. As such, rental real estate professionals’ rental real estate activities would be considered passive regardless of their level of participation. Furthermore, they are not able to group their rental real estate activities into one activity even if they make the election for federal purposes. Each separate rental real estate activity would be treated as a separate passive activity for California tax purposes. Therefore, when one of these activities are disposed of in a fully taxable transaction, any suspended passive activity losses related to that activity would be deductible against ordinary income for California tax purposes, even though it may be part of a group activity for federal purposes. However, it is important to note that although California does not allow the grouping of rental real estate under IRC section 469(c)(7), California allows the grouping or rental real estate activities pursuant to federal Treasury Regulation section 1.469-4. However, since California does not conform to IRC section 469(c), the grouping of the rental real estate activity for California tax purposes does not allow rental real estate activities to be considered a non- passive activity, unlike the federal treatment.