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California FTB to Hold Meeting on Intercompany Transactions, DISA Reporting

The California Franchise Tax Board (FTB) will hold its second interested parties meeting on September 22, 2010, at 1:00 p.m. PDT to discuss revisions to Regulation 25106.5-1, which addresses

September 15, 2010

The California Franchise Tax Board (FTB) will hold its second interested parties meeting on September 22, 2010, at 1:00 p.m. PDT to discuss revisions to Regulation 25106.5-1, which addresses intercompany transactions. The meeting will address comments and proposed amendments submitted after the first interested parties meeting held in April of this year.   

The purpose of the regulation is to provide rules for reporting intercompany transactions in order to clearly reflect the taxable income, apportionment factors, and tax liability for members of a combined reporting group. Generally, gains or losses between combined group members are deferred in order to produce the effect of transactions between divisions of a single corporation. The FTB is considering revisions to three components of the regulation:

  1. The first issue is to clarify the proper apportionment treatment of intercompany transactions using the simplifying rules of Regulation 25106.5-1(e), which permits taxpayers to elect to be treated as separate entities. The FTB has indicated its intention to clarify that this election does not permit companies to include receipts from intercompany transactions in the sales factor denominator in the year of the election, as such inclusion would double count receipts when the intercompany items are ultimately sold to third parties. The FTB has indicated that this clarification will be applied retroactively.
  2. Second, the FTB is proposing clarifications with respect to Deferred Intercompany Stock Accounts (DISAs), which are created when non-dividend distributions are made in excess of earnings and profits and stock basis. The proposed amendments will specify that stock redemptions will cause a DISA to be taken into account as income or gain; mergers between members of a combined group will not cause a DISA to be taken into account as income or gain if the majority of stock for each is owned by other members of the combined group; and that when the same distribution is made through various tiers of stock ownership, the DISA that might result from the initial distribution will be treated as earnings and profits for purposes of determining the DISA that might result from the subsequent distribution.
  3. Lastly, the FTB is proposing to amend Regulation 25106.5-1(a)(2) to bring it into conformity with the most recently enacted provisions of Treasury Regulation 1.1502-13.

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