California Issues Guidance for MTC Election Refund Claims

Following the recent California Court of Appeal decision affirming Gillette’s election to apportion income under the Multistate Tax Compact (MTC), the California Franchise Tax Board (FTB) has issued guidance for taxpayers who wish to preserve the statute of limitations by filing amended returns that elect the MTC method retroactively.

The FTB has made clear its position that a taxpayer cannot elect to utilize the methodology contained in the MTC on an amended return. The FTB also is clear that it will only take action on the claims once Gillette has been fully resolved. Nonetheless, taxpayers wishing to file a protective claim retroactively electing to utilize the apportionment method contained in the MTC should mail an amended return or a letter claim to the FTB at:

Compact Method 347 MS: F381
Franchise Tax Board
C/O FTB Notice 2012-01
P.O. Box 1673
Sacramento, CA 95812-1673

The amended return should include

  • a revised Schedule R
  • a computation of the refund amount, and
  • “COMPACT METHOD” should be written in red at the top of the amended return.

An amended return is required for each year for which the retroactive election is made.

Please refer to the announcement for additional filing requirements.

FTB Notice 2012-01

California: FTB’s Alternate Apportionment Formula Approved Against General Mills

The California Court of Appeal has ruled that the Franchise Tax Board could impose an alternative apportionment method against General Mills because the apportionment method used by the taxpayer did not fairly represent its business activity in California.

The Court of Appeal had previously ruled that General Mills properly included hedging receipts in the denominator of its sales factor for California apportionment purposes. General Mills v. Franchise Tax Board, 172 Cal.App.4th 1535 (2009). The effect of that determination substantially reduced General Mills’ corporate income tax liability in California.

However, the case was remanded to the trial court to determine whether inclusion of the hedging receipts in the apportionment formula calculation resulted in a fair representation of General Mills’ business activity in California under California Revenue & Taxation Code § 25137. The trial court determined that it did not. The trial court then adopted the FTB’s alternative apportionment formula which included only the taxpayer’s net gains from its hedging strategy in the sales factor. In this ruling, the Court of Appeal affirmed the lower court’s determination and the imposition of the alternative apportionment formula.

Read the opinion here:
General Mills v. FTB, No. A131477 (Cal. App. Aug. 29, 2012)

California Court of Appeal Decision on MTC Election Vacated for Rehearing

On August 9, 2012, the California Court of Appeal (1st Appellate District) “on its own motion and for good cause” vacated its decision and opinion issued on July 24, 2012 in Gillette v. Franchise Tax Board, and ordered a rehearing.

The vacated opinion held that, absent a complete or specific repeal, the Multistate Tax Compact (“MTC”) was binding on member states and a member state could not prevent taxpayers from electing into the MTC’s three-factor apportionment method. The appellants and other practitioners welcomed the decision but, alas, it is no more. Taxpayers and advisors anxious to take action based on the decision will have to wait.

Though the Court of Appeal’s order indicates that the decision to rehear the case was on its own motion, the Franchise Tax Board had filed a Motion for Rehearing the day before which was met by a request to modify the opinion by one of the appellants’ counsel (the case had been consolidated on appeal). It seems that the court did not recognize either motion in its order, but it did make it clear that “additional briefing from any party or any amicus curiae is not requested.”

A date for rehearing has not yet been scheduled.

California Supreme Court: Employer Must Prove Qualified Employees to Receive Tax Credit

In a long-awaited decision affecting many large California employers and hundreds of millions of dollars of tax credits, the California Supreme Court reversed the Court of Appeal decision in Dicon Fiberoptics v. Franchise Tax Board, holding that the Franchise Tax Board (FTB) may require a taxpayer to establish that certain employees in specified enterprise zones are “qualified employees”, above and beyond the state’s certification process, in order to receive hiring incentive tax credits.

The Court of Appeal had held that the state-issued vouchers received by Dicon (and every other employer who participated in the enterprise zone tax credit program) were “prima facie” proof of a qualified employee and that the FTB had to establish that the employee was not eligible under the program before denying the employer the benefit of the associated tax credit. As a practical matter, the Court of Appeals case treated the state-issued certifications as conclusory evidence of the employee’s qualification. The Supreme Court reversed this crucial element of the Court of Appeal decision, thereby allowing the FTB to deny the credit where the only evidence of the employee’s qualification was the voucher and shifting the burden to the taxpayer to establish that the employee was otherwise qualified for the incentive tax credit.

Read the entire opinion here:
Dicon Fiberoptics v. Franchise Tax Board, No. S173860 (Ca. Sup. April 26, 2012)

California Court of Appeals: Vouchers are Prima Facie Evidence for Tax Credits

The California Court of Appeals has held that state-issued vouchers certifying certain employees as “qualified” under a hiring incentive tax credit is “prima facie” evidence that the employee was qualified and the Franchise Tax Board must prove otherwise before disallowing an employer’s claim for the credit.

Read the opinion here:
Dicon Fiberoptics v. Franchise Tax Board