United States

California: Acquiring Taxpayer Deemed to Make a Water’s-Edge Election Due to Value of Goodwill

Oct 09, 2017
From KPMG TaxWatch

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Recently, the California FTB addressed whether a taxpayer (the Acquiring Company), as a result of an acquisition, was deemed to have made a water’s-edge election. The Acquiring Company was a worldwide filer and the Target Company had elected to file on a water’s-edge basis. California requires unitary groups to file on a worldwide combined basis unless an election is made to file a water's-edge combined report. Various provisions of California law address the effect of an acquisition, merger, or consolidation on a water’s-edge election. Notably, if an electing taxpayer and a non-electing taxpayer become members of a new unitary affiliate group, the non-electing taxpayer is deemed to have elected to file on a water’s-edge basis if the value of the total business assets of the electing taxpayer, and its component unitary group, if any, is larger than the value of the total business assets of the non-electing taxpayer, and its component unitary group, if any. Business assets are valued at their net book value as of the date the electing taxpayers and non-electing taxpayers or non-taxpayers become members of a new unitary affiliate group. The definition of business assets is broad and includes intangible assets.

In recent Chief Counsel Ruling 2017-02, the FTB concluded that although not specifically stated in the statute or regulations, goodwill is considered a “business asset” for purposes of the total business assets test. Because the goodwill at issue was integral to the Target Company’s business, it was attributed the company. Because the value of the Target Company’s total business assets, including the goodwill, was larger than that of the Acquiring Company when the new unitary affiliate group was established, the Acquiring Company was deemed to have made a water's-edge election. Please contact Gina Rodriquez at 916-551-3132 with questions.


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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.