United States

California: Receipts from Occasional Sale Excluded From Sales Factor

Sep 21, 2015
From KPMG TaxWatch

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Recently, the California Franchise Tax Board (FTB) addressed whether certain receipts were excludable from the taxpayer’s sales factor.  The taxpayer at issue sold one of two lines of business. The sale generated significant gross receipts and gain. Under California’s regulations, gross receipts arising from an occasional sale of a fixed asset or other property used or held in the regular course of a taxpayer’s trade or business are excluded entirely from the sales factor. The taxpayer requested guidance as to whether receipts from the sale of the line of business would be excluded under the occasional sale regulation.

The FTB noted that two elements must be met for gross receipts to be excluded- the sale must be substantial and occasional.  California regulations provide that a sale will be considered substantial if excluding the receipts results in a five percent or greater decrease in the sales factor denominator.  Excluding the receipts at issue resulted in the taxpayer’s sales factor denominator decreasing by 33 percent.  Thus, the substantial prong of the test was met. The FTB next addressed whether the sale of the line of business was occasional in nature. Under California’s regulations, a sale will be considered occasional if the transaction is outside the taxpayer’s normal course of business and occurs infrequently. Although the taxpayer had from time to time acquired and disposed of brands and their associated assets to expand its business, there was no indication such activity was a regular and systematic occurrence in the taxpayer’s corporate life. In addition, this was the first time the taxpayer had disposed of an entire line of business, including all the brands within that line. The FTB concluded that the sale qualified as an occasional sale and therefore the receipts at issue were excludable from the numerator and denominator of the sales factor.  Please contact Doug Bramhall at 480-459-3491 with questions on Chief Counsel Ruling 2015-01. 

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The following information is not intended to be "written advice concerning one or more federal tax matters" subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.