California Unitary Group of Corporations; Intercompany Distributions; Deferred Gain Tracking

California Unitary Group of Corporations; Intercompany Distributions; Deferred Gain Tracking

New Form 3726 – Deadline Extended to 10/15/09

Unitary Groups must do more tracking in some cases. The Franchise Tax Board wants to make sure deferred intercompany gains don’t get lost over the years (and therefore, never taxed), so they are forcing taxpayers to provide annual details in the corporate tax return.

“If the taxpayer fails to disclose its DISA balance (see below) on its annual tax return, the staff of the Franchise Tax Board may, in its discretion, require the amounts in the undisclosed DISA accounts to be taken into account (meaning, trigger the taxable gain) in part or in whole in any year of such failure.”

Franchise Tax Board Notice 2009-01 on the issue: http://www.ftb.ca.gov/law/notices/2009/2009_1_corrected.pdf

The Franchise Tax Board (FTB) announced that the deadline for filing Form 3726 (DISA and Capital Gain Information) to satisfy the requirements of Cal. Code Regs. § 25106.5-1(j)(7) has been extended to October 15, 2009.

FTB Form 3726 – DISA and Capital Gain Information:
http://www.ftb.ca.gov/forms/2008/08_3726.pdf

From the form instructions:

“Cal. Code Regs., tit. 18 section 25106.5-1 provides detailed rules relating to the treatment of intercompany transactions between members of a combined reporting group. These regulations apply to intercompany transactions that occur on or after January 1, 2001. In general, the regulations adopt the treatment of intercompany transactions for federal consolidated return purposes. (Treas. Reg., Section 1.1502 13.) R&TC Section 25106 allows for the elimination of dividend distributions between members of the combined report. Distributions are dividends to the extent that they are paid out of earnings and profits (E&P). Once the current year E&P and accumulated E&P have been depleted, additional distributions will reduce the shareholder’s basis in the stock. Distributions in excess of current year E&P, accumulated E&P, and the shareholder’s basis in the stock, are then treated as a capital gain.

Cal. Code Regs., tit. 18 section 25106.5-1(f)(1)(B) provides that for transactions occurring on or after January 1, 2001, the capital gain may be deferred, but must be tracked in a Deferred Intercompany Stock Account (DISA). Under Cal. Code Regs., tit. 18 section 25106.5-1(b)(8), the balance of each DISA must be disclosed annually on the taxpayer’s return. The capital gain is deferred until either the distributor or recipient is no longer included in the combined report, or the occurrence of any other triggering event. See Cal. Code Regs., tit. 18 section 25106.5-1(f)(1)(B), for more information. If there is a partial stock sale of the distributor outside of the combined reporting group and the distributor remains in the combined report after the stock sale, then a portion of the DISA balance will be taxable to the extent of the stock sale.”

Prior Years!!!!

“For years 2001 through 2007, taxpayers who have not yet fulfilled their disclosure obligation on the original return can fulfill their disclosure obligation by submitting a Form 3726 disclosing their DISA balances for each of those prior years. An amended return does not need to be filed. However, taxpayers should file an amended return if they discover that a prior triggering event has occurred that would have required taking into income the relevant DISA amount. If taxpayers satisfy their disclosure obligations as indicated in this notice, the previously undisclosed balances will not be included in income due to the prior nondisclosures.”

Consequences for Failure to Disclose
If the prior DISA balances for years 2001 through 2007 are not reported as income due to the occurrence of a triggering event described in CCR section 25106.5-1, subsection (f)(1)(B), or disclosed as required, then pursuant to CCR section 25106.5-1, subsection (j)(7), the undisclosed balances may be accelerated by the FTB and required to be taken into income. This could result in additional tax liability and the imposition of various penalties, including the accuracy-related penalty under CRTC section 19164 and the large corporate underpayment penalty under CRTC section 19138.”

I am always available for questions or comments at (510) 797 8661 x237 and we are ready to help your company comply with these rules.

—————————————————————————————————————————————————————————————————————

We hope you found this article about “California Unitary Group of Corporations; Intercompany Distributions; Deferred Gain Tracking” helpful.  If you have questions or need expert tax or family office advice that’s refreshingly objective (we never sell investments), please contact us or visit our Family office page  or our website at www.GROCO.com.  Unfortunately, we no longer give advice to other tax professionals gratis.

To receive our free newsletter, contact us here.

Subscribe our YouTube Channel for more updates.

Alan Olsen, is the Host of the American Dreams Show and the Managing Partner of GROCO.com.  GROCO is a premier family office and tax advisory firm located in the San Francisco Bay area serving clients all over the world.

 

Alan L. Olsen, CPA, Wikipedia Bio

 

 

GROCO.com is a proud sponsor of The American Dreams Show.

 

The American Dreams show was the brainchild of Alan Olsen, CPA, MBA. It was originally created to fill a specific need; often inexperienced entrepreneurs lacked basic information about raising capital and how to successfully start a business.

Alan sincerely wanted to respond to the many requests from aspiring entrepreneurs asking for the information and introductions they needed. But he had to find a way to help in which his venture capital clients and friends would not mind.

The American Dreams show became the solution, first as a radio show and now with YouTube videos as well. Always respectful of interview guest’s time, he’s able to give access to individuals information and inspiration previously inaccessible to the first-time entrepreneurs who need it most.

They can listen to venture capitalists and successful business people explain first-hand, how they got to where they are, how to start a company, how to overcome challenges, how they see the future evolving, opportunities, work-life balance and so much more..

MyPaths.com (Also sponsored by GROCO) provides free access to content and world-class entrepreneurs, influencers and thought leaders’ personal success stories. To help you find your path in life to true, sustainable success & happiness.  It’s mission statement:

In an increasingly complex and difficult world, we hope to help you find your personal path in life and build a strong foundation by learning how others found success and happiness. True and sustainable success and happiness are different for each one of us but possible, often despite significant challenges.

Our mission at MyPaths.com is to provide resources and firsthand accounts of how others found their paths in life, so you can do the same.