California Water's-Edge Election for Unitary Reporting covers the complex laws permitting California unitary corporate franchise and income taxpayers to elect to use a water's-edge combination reporting method. Written by Joanne M. Garvey, Esq., Sheppard, Mullin, Richter & Hampton, LLP, this Portfolio discusses both pre-1994 and current provisions to the water’s-edge legislation, and it identifies where they differ as the former continue to apply to elections made for income years prior to 1994. This Portfolio explains who may make the election, what makes up the water's-edge group, and how the election is made.
In addition, California Water's-Edge Election for Unitary Reporting provides practitioners with factors to consider when determining whether to make the election and in identifying planning opportunities once the election is made. These factors include:
This Portfolio also explains the offset of interest expense incurred for foreign investments, intercompany eliminations, examinations of water's-edge returns, and penalties for failure to supply information or documents.
California Water's-Edge Election for Unitary Reporting allows you to benefit from:
This Portfolio is part of the Premier State Tax Library, a comprehensive series, which covers major state tax transactions and issues with expert, in-depth analysis, and offers commentary on a wide range of multi-state and state-specific taxation topics, including Sales and Use, Corporate Income, Individual Income, Property, Gross Receipts, Limitations on States' Authorities to Tax, Credits and Incentives, Electronic Commerce, Mergers and Acquisitions, Procedure and Administration, Special Industries, and more.
Detailed Analysis
1940.01. INTRODUCTION
1940.02. WHO MAY ELECT: THE QUALIFIED TAXPAYER
Introductory Material
A. Consent to Taking of Depositions and Acceptance of Subpoenas Duces Tecum
1. Information to Which the Consent Applies
2. Individuals Subject to Being Deposed
3. Time and Location of Deposition
4. Production of Documents
5. Use of Depositions and Subpoenas Duces Tecum
B. Functionally Related Dividends
1. Dividends from Certain Affiliates
2. Dividends from Significant Purchasers or Suppliers
1940.03. COMPOSITION OF THE WATER'S-EDGE GROUP
A. General Provisions
B. Entities Included in the Water's-Edge Return
1. Corporations Includible in Consolidated Returns
2. DISCs and FSCs
3. Corporations with 20 percent or More U.S. Activity
4. Affiliated Domestic Corporations
5. Export Trade Corporations
6. Controlled Foreign Corporations With Subpart F Income
7. Foreign Corporations With Less Than 20 Percent U.S. Activity - The "Deemed Subsidiary"
8. Electing Taxpayers
1940.04. THE ELECTION
A. The Post-2002 Statutory Election
1. Combined Reporting Group
2. Termination of Election
B. Making the Pre-2003 Election
1. The Contract
a. Time for Election
b. Election by Common Parent
c. Validity of Election
d. Changes in Affiliation
e. Length of the Contract
2. Nonrenewal
3. Election for Each Unitary Business
C. Rescission of Pre-1994 Water's-Edge Elections
D. Termination of Pre-2003 Election
1. Acquisition by a Larger Non-Electing Entity
2. Permissive Change of Election
3. Procedures for Termination of Election
E. Conditions on Change of the Pre-2003 Election
1. Conditions Imposed
a. Dividends
b. Gains
c. Losses
d. Gain on Stock or Assets of Water's-Edge Affiliates
e. Loss on Stock or Assets of Water's-Edge Affiliates
2. Review by the Franchise Tax Board
3. Effect of Disregard
1940.05. ELECTION FEE: PRE-1994
A. Calculation of the Water's-Edge Election Fee
1. Period of the Fee - Short Years
2. The Base Year
3. Reductions to the Fee Base
a. Newly Constructed Plant or Facility
b. New Tangible Personal Property
c. Replacement Property
d. New Employees
e. Taxpayer Without California Property or Payroll in Base Year
f. Limitations on Reduction of the Fee
4. Reorganization
5. Maintenance of Records
B. Waiver of the Fee
C. Payment of the Fee
D. Refund of the Fee
E. Rate of the Fee
F. Deduction of the Fee
1940.06. DOMESTIC DISCLOSURE SPREADSHEET: PRE-1994
A. Background of Domestic Disclosure Spreadsheet
B. Threshold for Filing Domestic Disclosure Spreadsheet
C. De Minimis Activities
D. Filing the Spreadsheet
1. Initial Filing and Frequency
2. Substantial Change in Business Activity
3. Time of Filing
E. Information Required
1. Schedule of State Tax Liabilities
a. Entities Included
b. Information to Be Supplied
2. Affiliated Corporations
F. Review of the Spreadsheet
G. Penalties
H. Information Return: 1994-1995
1940.07. DEDUCTION FOR QUALIFYING DIVIDENDS
A. Pre-1996 Deduction
1. Qualifying Dividends
2. Calculation of Amount Allowable as Deduction
a. Definitions
(1) Base Period
(2) Base Period Qualifying Dividends
(3) Foreign Payroll Factor
b. Calculations Relating to the Deduction for Qualifying Dividends
(1) General Limitations
(2) Subdivision (b) Dividends
(3) Determination of Application of Subdivisions (c) or (d)
(4) Subdivision (c) Dividends
(5) Subdivision (d) Dividends
(6) Absence of Base Period Dividends or Foreign Payroll
(7) Maintenance of Records
3. Reorganizations
a. Merger, Liquidation, or Redemption Terminating the Existence of a corporation
b. Divisive Reorganizations
c. Purchase or Sale of Assets or Stock
B. Deductions - 1996 and Thereafter
C. Dividends Derived from Construction Projects
1. Definitions
a. Construction Project
b. Location Not Subject to Taxpayer's Control
2. When Dividends are Attributable to Qualifying Construction Projects
D. Tracing the Source of Distributions
1. Ordering
2. Deemed Subsidiaries
3. Subpart F Income
4. Examples
E. Business/Nonbusiness Income Classifications
1940.08. OFFSET OF INTEREST EXPENSE INCURRED FOR FOREIGN INVESTMENT
A. Interest Expense Incurred for Purposes of Foreign Investment
1. Offset Against Section 24411 Dividends
2. Definitions
a. Foreign Investment
b. Interest Expense
B. Calculation of the Offset Amount
1. Interest Assignable to Specific Property Under Regulation 24344(c)(4)
2. Otherwise Unassigned Interest Expense Attributable to Foreign Investment (Regulation 24344(c)(5))
a. Interest Paid on Pre-January 1, 1988 Debt
b. Interest Paid on Debts Incurred on or After January 1, 1988
3. Valuation of Assets for Purposes of the Various Ratios
1940.09. INTERCOMPANY ELIMINATIONS
A. Effect on Income
B. Intercompany Accounts Defined
C. Effect of Election on Intercompany Transactions
D. Limitation of Net Operating Loss Carryover
1940.10. EXAMINATION OF WATER'S-EDGE RETURNS
1940.11. PENALTIES FOR FAILURE TO MAINTAIN OR SUPPLY INFORMATION OR DOCUMENTS
A. Monetary Penalties Under Section 25112
1. Initial Penalty
2. Additional Penalties
3. Reasonable Cause as Bar to Penalty
B. Non-Monetary Penalties Under Section 25112
1. Formal Document Request
2. Motion to Quash
3. Exclusion of Documents from Evidence
a. Substantial Compliance
b. Reasonable Cause
4. Miscellaneous Procedural Matters
C. Record Keeping Requirements and Penalties Under Section 19141.6
1. Record Keeping Obligations of a Water's-Edge Taxpayer
a. Record Keeping - In General
b. Safe Harbor
c. Other Record Maintenance Requirements
d. United States Maintenance of Records
e. Examination and Copying of Records
f. Period of Retention
2. Penalties and Enforcement
a. Monetary Penalties
(1) Reasonable Cause as Excuse
(2) Improper Use or Threat of Penalties
b. Nonmonetary Penalties
(1) Failure to Furnish Records or Testimony
(2) Franchise Tax Board's Power To Determine Specific Tax Items
(3) Failure to Maintain Records Described in Reg. 19141.6(e)
(4) Authorization of an Agent
1940.12. PLANNING CONSIDERATIONS
A. Should a Taxpayer Elect?
1. Comparison of the Cost of the Water's-Edge Tax to Tax Under Worldwide Combined Reporting
2. Administrative Compliance
a. Document Retention and Maintenance
b. Consents to Deposition and Acceptance of Subpoenas
c. Functionally Related Dividends
d. Certainty of Treatment
B. Planning Opportunities
Working Papers
Item Description Sheet
Worksheet 1 FTB Notice 97-7 (Aug. 15, 1997): Water's-Edge White Paper
Worksheet 2 [Reserved.]
Worksheet 3 California Regulations: Section 19141.6
Worksheet 4 [Reserved.]
Bibliography