United States

California: FTB Issues Guidance on Application of IRC Sections 382-384

Apr 17, 2017
From KPMG TaxWatch

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The California Franchise Tax Board recently issued a Technical Advice Memorandum (TAM 2017-03) that addresses the application of Internal Revenue Code (IRC) sections 382-384 to California-apportioning taxpayers. These federal code sections generally place limitations on the use of losses and other tax attributes after there is a substantial change in ownership by one corporation in another corporation. The TAM answers five different questions as to whether IRC sections 382, 383, and 384 are to be applied on a pre- or post-apportionment basis. Notably, the TAM concludes that the IRC section 382 limitation, which is the product of the value of the loss corporation multiplied by the long-term interest rate allowed by the federal government, is applied in California on a pre-apportionment basis. The reason for this is that neither of the components (value of the loss corporation and federal interest rate) used in computing the 382 limitation involve items that relate to net income, and those sections of the California Revenue and Tax Code governing apportionment deal only with items such as income, deductions, gains, and losses. Therefore, there is no basis to apportion the loss limitation. The TAM does note that the California treatment is somewhat different than in other states. Notably, the taxing authorities in Alabama, Georgia, Pennsylvania, and South Carolina have all concluded that the IRC section 382 limitation should be applied on a post-apportionment basis. With respect to determining net unrealized built-in gains, net unrealized built-in losses, recognized built-in gains, and recognized built-in losses, such amounts relate to net income and would be determined on a post-apportionment basis. Because these items each relate to an ownership change, the apportionment factor percentage that existed at the date of the ownership change should be applied. In addition, the TAM clarifies that when utilizing the examples contained in Treasury Regulation section 1.383-1(f), which illustrates the application of IRC section 383, the California corporate franchise tax rate should be substituted for the applicable federal corporate income tax rate referenced in the examples. Please contact John Harper at (213) 593-6704 with questions on Technical Advice Memorandum 2017-03. 

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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.