California FTB: Taxpayers Can File Refund Claims Using MTC Apportionment Option

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By Laura Mahoney  


SACRAMENTO, Calif.--Corporate taxpayers can file claims for refund if they want to calculate state income tax based on a formula facing a legal challenge, but they will likely wait several years before their refund claims are resolved, the Franchise Tax Board said in a recent notice. [Cal. Franch. Tax Bd., FTB Notice 2012-01, 10/5/12]

The FTB Notice 2012-01 applies to taxpayers that want to use the income apportionment formula in the Multistate Tax Compact, which may be available for open tax years depending on the outcome of pending litigation (Gillette Co. v. Franchise Tax Board, Cal. Ct. App., No. A130803, 10/2/12).

Taxpayers cannot use the formula on amended tax returns, but they can file protective claims for refund in case the ultimate outcome of the lawsuit makes the formula an option, the FTB said.

“The Franchise Tax Board will treat such a protective claim as a request that Franchise Tax Board take no action on the claim currently, but rather that the claim is filed to avoid the bar of refunds by the statute of limitations,” the FTB said in the Oct. 5 notice.

“Franchise Tax Board will only take action on the claim once Gillette has been fully resolved.”

'Heads We Win, Tails You Lose.’

Although the FTB notice offers taxpayers a way to file protective refund claims, the tax agency's approach seems to close off the possibility of taxpayers ever getting a refund, a representative of large corporate taxpayers told BNA Oct. 9.

If the FTB's position hinges on the formula taxpayers choose on original returns, the FTB could ultimately reject claims for refund on the grounds that taxpayers are asking to change their apportionment formula from their original choice, said Gregory Turner, an attorney who filed a friend-of-the-court brief for the Council On State Taxation (COST) in Gillette.

“This is a 'heads we win, tails you lose’ construction that taxpayers get so frustrated with,” Turner said.

FTB Will Appeal Court Ruling.

The FTB issued the notice in response to an Oct. 2 appellate court ruling in the Gillette case.

Under the ruling, the FTB must allow taxpayers to use the income apportionment formula in the Multistate Tax Compact, which is a three-factor formula weighted equally on property, payroll, and sales in the state versus sales elsewhere.

The ruling overturned the FTB's position, which was that taxpayers must use a formula enacted in 1993 that deviates from the compact and requires apportionment based on property, payroll, and two-times sales.

Once the ruling becomes final Nov. 1, the FTB is expected to appeal to the state Supreme Court. If the current ruling is upheld, the case will eventually go back before a state trial court to resolve the question of refunds for the companies that are parties to the lawsuit. The FTB said it will raise other arguments to oppose Gillette's claim for refund in the case, including the issue of whether the election to use the compact formula can be made on an amended return.

FTB: No Retroactive Choice for MTC Formula.

While the case is pending, the FTB will continue to take the position that taxpayers cannot elect to use the apportionment formula in the compact retroactively on an amended return. The choice to use the three-factor formula must be made on an original return for the taxable period for which the election applies, the FTB said.

Despite its position that taxpayers cannot choose the compact formula retroactively, the FTB said it issued the notice in response to inquiries from taxpayers asking how they can file a protective refund claim “purporting to make the compact method election.”

According to the notice, if a taxpayer wants to file a protective claim purporting to retroactively elect to utilize the apportionment method contained in the Multistate Tax Compact, the taxpayer or its representative should mail an amended return or a letter claim to Compact Method 347 MS: F381, Franchise Tax Board, c/o FTB Notice 2012-01, P.O. Box 1673, Sacramento, Calif. 95812-1673.

For courier service delivery or private courier, send the letter or amended return to Compact Method 347 MS: F381, Franchise Tax Board, c/o FTB Notice 2012-01, Sacramento, Calif. 95827.

Amended returns should indicate at the top of the return in red “Compact Method” and should include a revised Schedule R as well as a computation of the refund amount. An amended return is necessary for each year in which the taxpayer purports to make such a retroactive election.

Contents of Letter.

Letters making the compact election must contain:

• the name, the California corporate number, and the federal identification number for the taxpayer and, if applicable, that the taxpayer is acting on behalf of a combined reporting group for which it is the key corporation for the year or years in issue;

• a statement that the letter is a protective claim raising the Compact Method election issue;

• the tax year(s) involved;

• the amount of the claim for each of the years involved; and

• schedules showing the computation of the amount of the claim for each of the years involved.


The letter must be signed by a representative with a valid power of attorney or signed by the taxpayer itself.

FTB Notice 2012-01 applies more broadly than other guidance the agency issued Oct. 5 regarding the Gillette case.

The FTB said in the earlier alert that because the Oct. 2 court ruling in Gillette is not final until Nov. 1, taxpayers facing an Oct. 15 deadline to file 2011 income tax returns must use the four-factor apportionment formula, not the three-factor compact formula, or risk a 20 percent penalty that applies to large corporate underpayments of tax.

Full text of the notice is available at

By Laura Mahoney  

Copyright 2012, The Bureau of National Affairs, Inc.

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