Leaving California: And other hot state tax topics - California Tax - Brief Article

California CPA, March, 2002 by Leonard W. Williams

The TaxTalk listserve is a gold mine of almost 400 CPAs and attorneys who discuss tax issues, ask tax questions and share information. Following are recent California tax highlights from TaxTalk.

Leaving California to Avoid Tax

A member's client has owned and operated a C corporation in California for many years. The client received a lucrative offer to sell the business and asks his CPA about moving to Nevada before the sale, and executing all of the sale documents there. Is this an effective way to avoid California personal income tax on the sale's profit?

This stirred a lot of TaxTalk discussion. Most responded that California takes the position that once a Californian, always a Californian. So you start out with a heavy presumption against you by the FTB. If the taxpayer moves back to California, the FTB will treat the taxpayer as if he or she had never left.

A couple of CPAs told of former clients who had successfully executed such a maneuver. A byproduct was that the clients had to jettison their California CPA. The FTB will glom onto any contact with California as evidence that taxpayers haven't severed their ties with California.

An FTB "Audit?"

A CPA shared a story about her client who had a part-year residency return audited by the FTB. The FTB apparently investigated credit card records of expenditures, without notifying or asking the client any questions.

Although the salary split between California and the prior state was documented on a W-2, the FTB made its own allocation, based on its analysis.

The Tax Practitioner Hotline was able to fill in the CPA on the background of the notice that the client received. However, hotline staff was unable to assist in locating anyone in the FTB to whom the client and CPA could present their arguments.

When the dilemma was posted on TaxTalk, the prevailing advice was to contact the Taxpayer Advocate's office and ask for a re-audit.

Problems, Complaints or Suggestions for the FIB?

Don't forget that CalCPA's Committee on Taxation holds an annual liaison meeting with the FTB. To submit your queries for the FTB, contact Cindy Kuhlman at cindy.kuhlman@calcpa.org. Submissions are due by May 17.

Client Can't Pay Sales Tax Due?

The State Board of Equalization is amenable to payment plans. After a CaICPA member inquired about a client who couldn't pay sales tax owed to the state, several members said that the BOE is easy to work with in setting up a payment plan. The BOE is considerably less flexible if a payment is missed.

Innocent Spouses

At CalCPA's Oct. 22, 2001 FTB liaison meeting, FTB officials presented material on innocent spouse matters. The FTB pointed out California Rev. & Tax Code Sec. 19006 says the courts may designate in the divorce settlement who is responsible for which taxes.

However, the chair of the California State Bar's Tax Section posted a comment on TaxTalk that it isn't so simple. He pointed out that various limitations on the applicability of Sec. 19006 must be noted. He also added that Sec. 19006 should be reviewed carefully before assuming that the FTB will be required to follow the court order.

Out-of-State Sec. 529 Plans

In Professor Kitty Wright's presentation on California taxes at the California CPA Education Foundation's Annual Tax Planning & Update Conference, she raised the possibility that California might tax current earnings from out-of-state Sec. 529 plans, but not those from California's Golden State ScholarShare plan.

California Rev. & Tax Code Sec. 17140 only specifies tax treatment for California's Golden State ScholarShare program, not all Sec. 529 plans. If the FTB issues no additional clarification, then this probably should be on the list of questions submitted for this fall's FTB liaison meeting.

To illustrate how easily things can get confused, someone posted on TaxTalk that he had learned that the IRS would not treat out-of-state Sec. 529 plans the same as California's plan. However, the question pertains to the FTB's tax treatment, not the IRS'.

How to Avoid a Year's Tax When Forming a Corporation at Year End

A listserve member wanted to know if a calendar-year client was liable for a California corporate tax return if the client incorporated Dec. 12, 2001.

It turns out that California Rev, and Tax Code Sec. 23114 says that a corporation will not be subject to income tax if it did no business in California and the income year was 15 days or less. In other words, the corporation would have to have been formed after Dec. 15 to avoid the corporate income tax. Although the $800 minimum tax has been eliminated for the first year, the tax as a percentage of profits would apply to the corporation formed Dec. 12, 2001.

Thanks to CalCPA members and/or attorneys Cherie Putnam, Dave Kelly, Ann E. Sherrod, Steve Kramer, John Levy, Jack Jacobs, Bob Hines, Jim Counts, Chuck Rettig, Don Yamagishi and Professor Kitty Wright for their participation.

Leonard W. Williams, CPA, is a Sunnyvale-based sole practitioner. He is a member of CalCPA's Committee on Taxation, an AICPA Tax Division member and a former Peninsula Chapter president.