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J U L Y 1 9 9 7

April 15: Going Down to the Wire Inside ...


A new California resident wanted Michigan wanted to know if he needed to report the
tax forms. A long-time resident said that the money distributed to him. Another taxpayer 2 ... April 15 — Now and then
local post offices were fresh out of tax forms did not understand whether he needed to fill 2 ... Ruling on refund claims
and wanted to know where else he should withdrawn
out a Schedule CA. Still another needed
look. A former resident needed to locate considerable convincing that she and her 3 ... Sign up for Tax Talk
California tax forms out of state. husband were required to use for California 3 ... Walk in to S.F. office -
Walk out with revivor
These three taxpayers were among many who the same filing status that they used on their 3 ... Seven topics set for Tax Talk
called the Franchise Tax Board on April 15 federal return. Some callers expressed 4 ... SBE opinions
because they did not have the income tax surprise that their calls went through so
4 ... Out-of-state businesses: How to
forms they intended to fill out and mail that quickly. pay back taxes for six years
day. In all, FTB's Taxpayer Services Center took only
25,336 calls from taxpayers on April 15, 4 ... S corporation shareholders and
Among the tens of thousands of other back taxes
April 15 callers to FTB was a worker whose which is about 3.6 percent of the 710,076 5 ... Tax returns have fewer errors
employer closed out a profit-sharing plan; he 5 ... Tax return error rate
CONTINUED ON PAGE 2 5 ... Tax return errors by type
5 ... FTB calendar

Executives Answer Taxing Questions 6 ... Some partnerships file on


wrong date
7 ... Trusts: Too good to be true?
Part 1
7 ... Trusts: Internal Revenue
Service notice 97-24
7 ... Watch for tax form changes
8 ... Renew Tax News subscription
8 ... Internet has legislative bills
9 ... The question column:
ŒCashing a refund check for a
deceased spouse
ŒCorporation tax returns
9 ... Tax Practitioners’ Institute
heads south
9 ... Tax Practitioners’ Institute is
upcoming
10 ... Electronic filing: Rapid refunds
have appeal
10 ... Electronic filing: Looking
ahead
10 ... FTB drops two billing forms
11 ... What carries over when
economic development areas
end?
11 ... Did you take enterprise zone
hiring credit? Check your
software
12 ... Reminder: Tax Practitioner
Support Unit has new number
Filing Division Chief Lisa Crowe and Assistant Executive Officer Will Bush were among 12 ... K-1 filers: How to save a tree
the Franchise Tax Board executives who pitched in on April 15 to provide answers to the
25,000-plus taxpayers who called FTB's Taxpayer Services Center.
Page 2

April 15 Ruling on Refund


CONTINUED FROM PAGE 1 Claims Withdrawn
Volume 97-4 July 1997 calls received since the first of the year. The Franchise Tax Board has withdrawn
The calls averaged less than four minutes a 1977 Legal Ruling dealing with the
TAX NEWS is a bimonthly each. And on FTB's busiest day of the
publication of the validity of claims for refund.
Taxpayer Advocate Bureau, year for incoming calls, the average
California Franchise Tax Board. Its amount of time that callers spent on hold Legal Ruling 402, published on
primary objective is to provide was 63.3 seconds. January 27, 1977, held that a refund claim
information to income tax would be valid if, at the time it was filed,
practitioners about state income On April 15, taxpayers also made 41,627
tax laws, regulations, policies all assessed or asserted tax and penalties,
and procedures. calls to FTB's F.A.S.T. (Fast Answers although not interest, had been paid. The
about State Taxes) automated telephone ruling also stated that, when a taxpayer
Members of the Board: service. The number is slightly more than satisfies all requirements for a refund
Kathleen Connell, Chair 2 percent of the 1.5 million-plus calls except for paying tax and penalties, the
State Controller received since January 1. It also is 150 refund request is considered an "informal
percent higher than the average number of claim" that could be "perfected" by
Ernest J. Dronenburg, Jr.
Chair, State Board of Equalization calls to F.A.S.T. per day since January 1; paying the entire tax.
the service takes calls seven days a week.
Craig L. Brown The ruling’s withdrawal was prompted by
Director, Department of Finance Unlike the general public, tax two recent judicial decisions. FTB Notice
professionals have access to FTB's Tax 97-4, which announced the withdrawal,
———————— Practitioner Support Unit's telephone and
Executive Officer: explains that a 1991 judicial decision in
Gerald H. Goldberg fax service. Most tax professionals tend Shiseido Cosmetics (America), Ltd. v.
to contact this service well in advance of Franchise Tax Board held that FTB could
Editor: April 15. As a result, calls to the unit
Pat Huberty not authorize as valid a purported refund
were relatively low, at 388, on April 15. claim that did not satisfy the statutory
To update or correct your address or The unit took 8,274 calls and received
to subscribe to TAX NEWS (send $12 criteria of prepayment and provide a clear
for a one-year subscription), write: 459 faxes during April. written statement that a claim was being
TAX NEWS On the other hand, FTB's Internet home sought. The Notice also states that the
P.O. Box 520
Rancho Cordova, CA 95741-0520 page was a busy place on April 15. Just California Court of Appeal in Anand G.
or call: (916) 845-7070. over 22,700 users visited FTB home page Garg, et al. v. The People ex rel. State
sites 203,456 times and downloaded Board of Equalization (February 28,
For information about California tax
law and/or a client’s account, 38,892 tax forms. 1997) determined that the California
contact: Constitution forbids a court from
Tax Practitioner Support Unit
(916) 845-7057 (phone) CONTINUED ON PAGE 6
(916) 845-6377 (fax) CONTINUED ON PAGE 11
For recorded answers to questions
on California taxes, to order forms
or check on a refund, call:
F.A.S.T. (800) 338-0505
April 15 — Now and Then
From outside U.S. (916) 845-6600
—————————- 1996 tax year 1995 tax year
Information Center:
(800) 852-5711
From outside U.S. (916) 845-6500 Taxpayer calls to
Hearing Impaired: Taxpayer Services Center 25,336 26,346
TDD (800) 822-6268
__________________ Taxpayer calls to F.A.S.T.
(Fast Answers about State Taxes) 41,627 52,777
FTB on the Internet
http://www.ftb.ca.gov Tax practitioner calls to
Printed on recycled paper. Tax Practitioner Support Unit 388 n.a.
Visits to FTB on the Internet 203,456 74,564
Tax forms downloaded from
the Internet 38,892 11,574
Electronic filing/TeleFiling 16,152 4,062 *

* Only 100,000 individuals were invited to file by phone last year, while 1.6 million were eligible this year.

July 1997
Page 3

Sign up for Tax Talk Seven Topics Set


Have you received your Tax Talk Administration, California State for Tax Talk
registration information? A brochure and University, Sacramento.
registration form for the one-day seminar Tax Talk on October 7 will
This year, Tax Talk will offer seven cover seven topics, plus field
were mailed in late June. presentations (see column at right), plus a reports:
With a quick response to the invitation to series of field reports and question-and-
register, you can save $45. If you sign up answer sessions. If you attend the full General Partnerships:
for the seminar before September 19, you program, you can earn up to eight hours What's In It For Me? Learn
will pay $150. Registration on or after of credit toward the continuing education how to form a partnership and
that date costs $195. requirements of the California State why one might be beneficial
Board of Accountancy; the California Tax for some of your clients.
Tax Talk is an all-day seminar that will be
telecast on October 7 to more than 20 Education Council, which replaces the Sales Tax: Compliance or
locations in California, Nevada and Department of Consumer Affairs' Tax Confusion? Find out about
Oregon. It is a program of the Center for Preparer Program this month; and, for common sales tax reporting
Tax Education presented by the California enrolled agents, the Internal Revenue errors and how to help clients
Franchise Tax Board, Employment Service. avoid costly sales tax audit
Development Department, State Board of You can attend Tax Talk this year at any errors.
Equalization, Internal Revenue Service of 24 locations. In California, the sites Experience Rating System:
and the School of Business What You Don't Know
CONTINUED ON PAGE 6 Could Cost You. What can
you do to lower your client's
Walk in to S.F. Office - unemployment insurance
taxes? Find out what affects
the unemployment insurance
Walk out with Revivor rate.
Trusts: Are Your Trusts
The Franchise Tax Board's walk-in, same- Relief from Contract Voidability." You Worthy? Do you have
day "revivor" service for corporations is can obtain forms FTB 2518 and 3557 clients who hope to reduce
now available at its San Francisco branch without charge from Tax Forms Request, taxes by transferring assets
office. Franchise Tax Board, P.O. Box 307, into trusts? Get the
A revivor reinstates a suspended Rancho Cordova, CA 95741-0307. information that will help
corporation's privilege to do business in To obtain same-day revivor service in San your clients understand and
California and revives the corporation to Francisco, a corporation representative avoid abusive trust schemes.
good standing. The San Francisco office must hand deliver all necessary revivor Alternate Filing Methods:
is the fourth location to provide same-day documents to FTB's branch office at 50 The Wave of the Future.
revivor service. Fremont Street, Suite 900. If the This discussion of electronic
To qualify for the swift service, a corporation meets all requirements and filing includes a look at
suspended corporation must show that it the Secretary of State confirms that the possible future methods of tax
has an escrow closing, litigation, loan or corporation name is still available, FTB collection.
federal grant pending. Before your client can issue a Certificate of Revivor within
three hours. Penalties: Read the Fine
goes to the branch office, you should call Print. Experts from four tax
FTB's Tax Practitioner Support Unit at Corporation representatives should allow agencies discuss when
(916) 845-7057 to check on all revivor adequate time for processing and consider penalties are assessed and
requirements that apply. Depending on a that branch offices do not accept under what circumstances
number of factors, the corporation may appointments. they can be canceled.
have to: In addition to the new service in San Employment and Excluded
• File all past due tax returns. Francisco, representatives of suspended Services: Are You Paying
corporations may obtain same-day revivor
• Pay any unpaid tax, penalty and More Taxes Than
service in: Required? Which employ-
interest by cash, cashier's check or
money order. • Los Angeles at 300 S. Spring Street, ment services are exempt
Suite 5704. from employment taxes? Are
• Complete form FTB 3557, exempt employees excluded
"Application for Certificate of • Sacramento at 8745 Folsom
from all or just certain
Revivor." Boulevard, Suite 150.
• Santa Ana at 600 W. Santa Ana
employment taxes? †
The corporation also may decide to
submit form FTB 2518, "Application for Boulevard, Suite 300.†
Page 4

Out-of-State Businesses:
How to Pay Back Taxes for Six Years Only
Paying back taxes for six years is better Usually, a tax representative makes
than paying back taxes for seven or more voluntary disclosure inquiries on behalf of
SBE Opinions years. That's good advice for out-of-state a company that remains anonymous. If
businesses that should have filed the company appears to qualify for the
California tax returns but have not. program and wants to apply, the three-
Appeal of Al Tirpa & If a business qualifies for the Franchise member Franchise Tax Board must
Associates, Inc., April 24, Tax Board's voluntary disclosure approve an agreement. The company
1997. The State Board of program, it may file tax returns and pay gives up its anonymity when it signs the
Equalization upheld the the associated tax liabilities and interest agreement. Then, FTB verifies the
Franchise Tax Board's for the last six income years. In return, company's qualifications for the program.
position that the SBE has no FTB may waive penalties for those years To qualify for voluntary disclosure, a
jurisdiction to hear an appeal and will waive all tax, interest and business must be all of the following:
from a foreign corporation penalties for all preceding years. • A bank or corporation.
that is not qualified to do
business in California. A • A business that, along with any
nonqualified corporation, like predecessors, has never filed a
California tax return.
a suspended corporation, has
no right of administrative
S Corporation
• A business that, along with any
appeal. Shareholders predecessors, FTB has never
Appeal of Brooks, Jr. and contacted about a tax liability.
Danielle Walker, et al., and Back Taxes • A business that contacts FTB about
April 24, 1997. The SBE voluntary disclosure before FTB
sustained FTB's denial of Beginning January 1, 1997,
S corporation shareholders were contacts it about its tax liability.
small business stock treatment
to shareholders who owned included in the Franchise Tax Board's • A business that makes a complete
convertible debentures, voluntary disclosure program (see and accurate disclosure about its
converted them to stock after article on this page). activities in the state for the last six
the corporation ceased to be a To qualify for voluntary disclosure, years.
qualifying small business, and an individual must be a: In addition, the business must not:
then sold the stock.
• Shareholder of an S corporation • Be organized and existing under
Appeal of Ray and Phyllis that qualifies for voluntary California law.
Watts, May 8, 1997. The disclosure.
SBE determined that a • Be qualified or registered with the
California resident was • Nonresident of California on the Office of the California Secretary of
taxable on distributions from date the voluntary disclosure State.
agreement is signed.
an Individual Retirement • Maintain and staff a permanent
Account (IRA) created by a A voluntary disclosure agreement facility in California. However, a
rollover contribution from an with an S corporation shareholder business may qualify for voluntary
employer-sponsored pension will not apply to: disclosure if it stores items in a
plan made before the taxpayer • Any year in which the public warehouse in the state.
became a California resident. shareholder was a California If a business is an S corporation,
At press time, case numbers resident. shareholders also may qualify for
had not been assigned to
these opinions.† • Αny wages the S corporation
paid to the shareholder.
voluntary disclosure (see box on this
page).
• The shareholder's income from To obtain an application and instructions
any other California source. † for voluntary disclosure, call FTB's filing
enforcement staff at (916) 845-3294. Ask
for form FTB 4925, "Application for
Voluntary Disclosure." †

July 1997
Page 5

Tax Returns Have Fewer Errors


Tax professionals particularly and the returns processed but had 30 percent
taxpayers generally made fewer errors on of all errors. Form 540, "California
their tax returns this year. Resident Income Tax Return," ran a close
Of all 1996 tax returns processed between second. It represented 15 percent of the FTB Calendar
January 1 and the end of April, only 4.5 returns processed and had 29 percent of
percent contained errors that resulted in a all errors.
change to the return. Last year, 5.4 The number of scannable returns July
percent of the processed returns had processed was, at 42 percent, more than • Requests for 1995 tax
errors. manually-processed Forms 540A and 540 returns are issued to
One reason for the decrease in errors may combined. However, the scannable approximately 60,000
be the increase in the number of returns returns had only 16 percent of total errors. personal income
filed electronically and by telephone. Fifteen percent of the returns processed taxpayers.
Last year, these returns accounted for were Form 540EZ, "California Resident • Notices of Proposed
about 3 percent of the total number of Income Tax Return For Single and Joint Assessment are issued to
returns. This year, they make up 8 Filers With No Dependents," and they approximately 75,000
percent of the total. Most errors on contained 15 percent of all errors. Form persons who failed to
respond to earlier
electronically filed returns are detected at 540NR, "California Nonresident or Part- requests for 1995 tax
the time of transmission and corrected Year Resident Income Tax Return," returns.
before the returns are accepted. And represented only 3 percent of all returns
20 Previous month
because taxpayers supply information for and had 8 percent of all errors. Returns withholding at source
phoned-in returns in response to voice that were electronically filed or payments are due if total
prompts, many possibilities for error are telephoned added up to 8 percent of all withholding exceeded
avoided. returns with about 1 percent of all errors. $2,500.
The greatest number of errors this year Errors on 1996 tax returns fall into 11 August
occurred on Form 540A, "California general categories: • Notices of Proposed
Resident Income Tax Return." The Form Assessment are sent to
540A accounted for only 17 percent of taxpayers who do not
CONTINUED ON PAGE 6 appear to qualify for
head of household filing
status.
Tax Return Tax Return Errors 20 See July 20.
31 Final filing date for
Error Rate by Type Homeowner/Renter
Assistance claims.
% of all Exemptions 31.1% September
% of all returns 15 Personal income tax
returns with Estimates 12.8%
estimate payments are
processed errors Tax 12.6% due.
20 See July 20.
Form 540A 17% 30% Withholding 8.3%
October
Form 540 15% 29% Nonresidency 4.7% 15 Final extended due date
Scannable 42% 16% for personal income tax
Deductions 4.5% returns.
returns
State disability 3.9% 20 See July 20. †
Form 540EZ 15% 15% insurance credit
Form 540NR 3% 8% Adjusted gross 1.6%
Electronically 5% 1% income
filed returns Filing status 1.3%
Telefiled returns 3% * Credits 0.1%
Miscellaneous 19.1%
* less than 1 %
Page 6

Tax Returns Have Fewer Errors


CONTINUED FROM PAGE 5
Some
• Exemptions. Close to one-third of with an incorrect standard deduction.
Partnerships File all errors involved exemptions. And In some cases, taxpayers itemized
on Wrong Date the majority of these errors occurred
because the total exemption amount
deductions that totaled less than the
standard deduction.
A number of partnerships was transferred to the wrong line on • State disability insurance. In
have filed short-period returns the return. Some other errors in this almost 4 percent of the errors, the
on the wrong date. category occurred because taxpayers state disability insurance credit did
claimed dependent exemption credits not match the maximum amount
The law requires partnerships but did not list dependents or because
to file Form 565, "Partnership given on the accompanying W-2
claimed exemption amounts were form.
Return of Income," and to pay incorrect.
any tax due by the 15th day of • Adjusted gross income/
the fourth month after the end • Estimates. Almost 13 percent of the adjustments. In this category,
of their tax year. Recently, errors occurred because estimate accounting for 1.6 percent of all
some partnerships that payments were incorrectly errors, mistakes occurred either
terminated failed to start the calculated. because incorrect totals were
filing countdown from the • Tax. Tax was the focus of 12.6 transferred from schedules or
termination date. Instead, percent of the errors. Usually, the because of faulty addition or
they waited for the filing date tax was computed incorrectly. subtraction.
of their regular fiscal or
calendar tax year. • Withholding. Withholding amounts • Filing status. A filing status that
were involved in 8.3 percent of the was incorrect, according to
To make sure that your errors. In most cases, the information provided in the return,
partnership clients avoid late withholding amounts did not match accounted for 1.3 percent of all
filing penalties, remind them amounts supplied on W-2 or 1099 errors.
that filing a short-period forms or by a government agency.
return changes the due date. • Credits. Credits accounted for only
Some taxpayers incorrectly added 0.1 percent of the total errors. Often,
For example, a partnership amounts on multiple W-2s. Others
that terminates and has a special credit was claimed along
submitted out-of-state W-2s or failed with the alternative minimum tax, or
distributed all its assets by to submit any W-2s.
March 31 must file by a joint custody head of household
July 15, even though its • Nonresidency. These errors, at 4.7 credit was claimed erroneously.
former tax years ended on percent of the total, mostly occurred • Miscellaneous. Another 19 percent
December 31 and its former in prorating net tax liabilities.
filing dates were April 15. † • Deductions. Most of these errors,
of all errors make up this group.
Included are math mistakes, incorrect
4.5 percent of the total, had to do refund or balance due amounts,
incorrect computations of taxable
income and incomplete
Sign up for Tax Talk information. †
CONTINUED FROM PAGE 3
Ruling on Refund
are: Anderson, Bakersfield, Del Mar,
Eureka, Fresno, Indio, Irvine, Long Claims Withdrawn
Beach, Los Angeles, Monrovia,
Monterey, Pleasanton, Riverside, CONTINUED FROM PAGE 2
Sacramento, San Jose, Santa Barbara, adjudicating the validity of a tax before
Santa Rosa, South San Francisco, the tax, penalties and interest are paid in
Stockton, Vallejo, Van Nuys and Ventura. full.
Tax Talk also will be telecast to Ashland, FTB currently is assessing the impact of
OR, and Reno, NV. both court decisions.
If you have not received Tax Talk Notice 97-4, issued on June 2, 1997, has
registration information, call
(916) 845-7070. † been published by most tax services. †

July 1997
Page 7

Part 1 Watch for Tax


Form Changes
Trusts: Too Good to Be True? In 1997 and beyond,
California tax forms will have
When a trust seems too good to be true, it • Correct tax returns this year. some new features.
probably is. • Amended tax returns for other years Among the tax forms changes
That's the wisdom contained in Internal that they participated in abusive trust you can expect are:
Revenue Service Notice 97-24. And it arrangements.
has implications for California as well as • Personal income tax
For more information, attend the IRS forms that are printed in
federal tax returns. presentation on abusive trusts that is part booklets in 1997 will
The Franchise Tax Board and the IRS are of the Tax Talk seminar on October 7. have a series of boxes,
working together to identify abusive (See "Sign up for Tax Talk" and "Seven called constrained hand
trusts. And they are encouraging Topics Set for Tax Talk" on page 3.) print boxes, in which
taxpayers who have participated in For an adaptation of parts of the notice,
†
figures will be written.
abusive trust arrangements to adhere to see box below. For example, each of the
the law voluntarily. In order to comply,
numerals of an adjusted
taxpayers should file:
gross income of $29,370
would be written in a
separate box. Currently,
figures are inserted on
Trusts: Internal Revenue Service lines. The use of boxes
Notice 97-24 will increase the
likelihood that automated
The following summary includes Abusive trust arrangements often equipment can accurately
portions of Internal Revenue Service advertise that they provide tax benefits scan or "read" the
Notice 97-24. For specific application, without any meaningful change in the figures. This change
refer to the entire text of the notice. taxpayer's ability to control or benefit does not apply to
Additional information will be published from the income or assets that were put computer-prepared tax
in the September Tax News. into the trust. Trust promoters may returns.
Taxpayers should beware of abusive promise that the trust will reduce or even • All personal income tax
trust schemes. However, they also eliminate income subject to tax, self- forms eventually will
should know that many trusts have employment taxes or gift and estate feature a bar code that
lawful uses. For example, taxpayers use taxes. Promised benefits also may identifies the form by
trusts properly in estate planning, to aid include deductions for the taxpayer's type and year. This
in legitimately transferring property to personal expenses that the trust pays, helps the scanning
charities and to hold property for minors depreciation deductions for a personal equipment "know" where
or for people declared incompetent. residence and furnishings and a stepped- to look for data on the
up basis for property transferred to the page. Another bar code
An abusive trust, on the other hand, may trust.
try to hide the true ownership of assets will identify payment
and income or to disguise the nature of a Many of the abusive trust arrangements documents, such as the
transaction. Often, more than one trust that the IRS has identified fall into five Form 540-ES,
is involved; each one holds different categories: "Estimated Tax for
assets of one taxpayer. For example, The Business Trust. With this abusive Individuals," for the
different trusts may hold the taxpayer's trust, a business owner transfers the scanner.
business, business equipment, home, business to a trust, which sometimes is • Eventually, all tax
automobile and other assets. Funds may described as an unincorporated business documents will be
move from one trust to another as a trust. The transfer is made in exchange designed so that taxpayer
result of rental agreements, fees for for units or certificates of beneficial data, such as name and
services, purchase and sale agreements interest. This trust makes payments to address, social security
and distributions. Other trusts claim to the trust unit holders or to other trusts number and payment
encompass charitable purposes when that the owner creates. Often, these amount, appear at the
they do not. Sometimes, one or more payments are characterized as deductible same place on every
foreign trusts may be part of the business expenses or as deductible form. However, the
arrangement. change will be made on
only a few 1997 personal
†
CONTINUED ON PAGE 8
income tax forms.
Page 8

Trusts: Internal Revenue Service


Notice 97-24
Renew Tax News CONTINUED FROM PAGE 7
Subscription distributions. They are intended to reports no gain. The trust claims to be
reduce the trust's taxable income to the in the rental business and purports to
Keep Tax News coming.
point where little or no tax is due. Also, rent the residence back to the owner.
You will receive a Tax News the self-employed owner claims that the However, in most cases, the owner pays
renewal form when your trust arrangement reduces or eliminates little or no rent. Instead, the owner
subscription to the newsletter self-employment tax because the owner contends that he or she and family
is about to run out. receives little or no income from the members are caretakers or provide
Be sure to return the renewal operation of the business. In some services to the trust and, therefore, live
form immediately so that you cases, the trust units are canceled at the in the residence for the benefit of the
will not miss any upcoming owner's death or sold at a nominal price trust. Sometimes, the family residence
issues.† to the owner's children. Promoters use
this feature to claim that there is no
trust receives funds, which are treated as
trust income, from business or other
estate tax liability. trusts. In order to reduce the tax that
The Equipment or Service Trust. might be due on this income and from
These trusts are formed to hold any rent the owner pays, the trust may
equipment that is rented or leased to a attempt to deduct depreciation and the
Internet Has business trust or to provide services to expenses of maintaining the residence.
the business trust, often at inflated rates The Charitable Trust. The owner of
Legislative Bills or fees. The business trust may purport this abusive trust transfers assets to a
to reduce its income by making allegedly purported charitable trust. The owner
Are you interested in bills that deductible payments to the equipment or then claims either that the assets are
the California Legislature is service trust. Also, an equipment owner deductible or that payments made by the
considering? may claim that transferring equipment to trust are deductible charitable
Now, you can get copies of the equipment trust in exchange for trust contributions. However, these payments
legislative measures from the units is a taxable exchange. The trust's to charitable organizations are mostly
Internet. They are located at position is that the trust has "purchased" for the educational, living or recreational
the http://www.leginfo.ca.gov the equipment at its fair market value, expenses of the owner or the owner's
address of the Official which becomes the tax basis of the family, such as college tuition for the
California Legislation equipment for purposes of claiming owner's child.
Information Web site. depreciation deductions. The owner, on The Final Trust. Under this
the other hand, claims that the value of arrangement, the U.S. owner of one or
Copies of bills also are the trust units cannot be determined, so
available from: more abusive trusts establishes a "final"
he or she has no taxable gain on the trust that holds the trust units of the
Legislative Bill Room transaction. The equipment or service other trusts and to which the other trusts'
Room B-32 trust also may attempt to reduce or income is distributed. A final trust often
State Capitol eliminate its income by making is formed in a foreign country that
Sacramento, CA 95814
†
distributions to other trusts. imposes little or no tax on the trust.
(916) 445-2323. The Family Residence Trust. With Sometimes, more than one foreign trust
this abusive trust arrangement, the owner is used, so that cash flows from one trust
of a family residence transfers the to another until it is ultimately
residence and its furnishings to a trust. distributed or made available,
Then, the parties involved claim purportedly tax free, to the U.S.
inconsistent tax treatment, as they do owner. †
with equipment trusts. The trust claims
that the exchange results in a stepped-up
basis for the property, while the owner

July 1997
Page 9

The Question Column Tax Practitioners’


Institute Is
Cashing a Refund Check for a corporate officer or trustee making Upcoming
Deceased Spouse the request. Without this
authorization, FTB cannot provide a In November and December,
When a taxpayer receives a refund copy of a return.
check made out to her and her you can earn up to 24 hours of
deceased husband, can she cash the In addition, a suspended corporation must continuing professional
check? pay any outstanding tax liability and/or education credits.
penalties before FTB can supply a copy The Tax Practitioners'
A taxpayer whose spouse passes away of a return. To find out how much the
before a California income tax refund Institute’s three-day education
corporation owes, call FTB at program is an opportunity to
check arrives may be able to cash the (800) 852-5711 from within the United
check even though it is made out to both earn credits toward satisfying
States, (916) 845-6500 from out of the the requirements of the
spouses. country or (800) 822-6268 if you are California State Board of
The taxpayer should take the check and a hearing impaired. Accountancy; the California
copy of the spouse's death certificate to If you request a tax return for a bank, Tax Education Council, which
the bank and ask to cash or deposit it. If corporation, partnership or limited replaces the Department of
the bank does not accept the refund liability company client that is in Consumer Affairs' Tax
check, the taxpayer should call the bankruptcy, you must provide one of the Preparer Program this month;
Franchise Tax Board's Taxpayer Services following: and, for enrolled agents, the
Center at (800) 852-5711. FTB can send Internal Revenue Service.
the taxpayer a letter that authorizes the • Court documents showing that you
bank to accept the check. Then, the have been appointed trustee. The Institute's program is
offered at eight Northern
taxpayer should bring the letter, the check • A letter signed by the trustee California locations. (See box
and a copy of the death certificate to the authorizing you to receive the tax
bank. on this page for late Institute
return, plus a copy of the court news.) For enrollment,
If the bank still does not accept the check, documents appointing the trustee. registration fee and other
the taxpayer should send it back to FTB, • Other appropriate authorization. information, call the telephone
along with a copy of the death certificate number listed below at the
and a letter asking for the check to be Do not send money with your request for
a bank, corporation, partnership or limited Institute site nearest you:
made out to the surviving spouse only.
The information should be sent to: liability company return. FTB will send a Sacramento: November 3 - 5
bill with the copy of the return. FTB will (916) 278-6346
Franchise Tax Board, P.O. Box 942840,
Sacramento, CA 94240-0040. The refund mail the copy you requested within six to Fresno: November 6 - 8
will be mailed within 10 to 12 weeks of eight weeks of the date of your request. (209) 278-5663
the date of the letter. Send your request for a tax return copy to: Sunnyvale: November 10 - 12
R.I.D. Unit, Franchise Tax Board, P.O. (408) 342-0236
Corporation Tax Returns Box 942857, Sacramento, CA 94257- Chico: November 17 - 19
How may a corporation obtain a copy 0560. If you have questions, call the
†
(916) 898-6105
of a tax return that it filed several R.I.D. Unit at (916) 845-5116. Shell Beach: November 20 - 22
years ago? (408) 342-0236
If you want to obtain a copy of a prior- Oakland: December 1 - 3
year tax return for a bank, corporation, (510) 881-2312
partnership or limited liability company, Monterey: December 4 - 6
send the Franchise Tax Board a written (408) 342-0236
request that includes: Tax Practitioners’ Arcata: December 11 - 13
• The name of the entity. Institute Heads South (707) 826-3731
• Its California corporation number. Institute sponsors are the
• Its federal employer identification Just prior to press time, the Tax California State University,
number. Practitioners’ Institute announced that Chico, Fresno, Hayward and
its three-day program will be held at Sacramento; Humboldt State
• Its telephone number. University; the University of
some Southern California locations. For
• Its mailing address. information on the sites and dates, call
California, Santa Cruz; the
Franchise Tax Board; and the
• The tax year or years of the returns
requested.
(916) 278-6346. (For Northern
†
California sites, see article at right.)
Internal Revenue Service. †
• The signature and title of the
Page 10

Electronic Filing: Looking Ahead


What's in store for tax professionals who Internet E-mail address if you have
offer their clients the option of filing tax one. FTB hopes to use E-mail more
returns electronically? often as part of its effort to do
Electronic Filing: business with less paper.
Next year, the Franchise Tax Board's
Rapid Refunds electronic filing program will usher in • You will not have to reapply for
Have Appeal several new developments: acceptance into FTB's electronic
• The diskette version of FTB filing program if you participated
In 1997, for the second year, Publication 1345, "California this year and if you have no changes
taxpayers were able to Franchise Tax Board Handbook for to make to your initial application.
electronically file balance due Electronic Filers," will no longer be See FTB Publication 1345 for
California tax returns. But distributed with a copy of the Adobe guidelines on when you need to
not many did. Acrobat Reader. This software submit a revised application. Even
enables you to view the publication though applying for the electronic
Taxpayers who qualify for
on diskette and to view and print tax filing program can be a one-time
refunds continue to be the
forms on FTB's Internet home page. requirement, FTB will make yearly
primary customers for the
The Adobe Acrobat Reader is free suitability checks to verify that
Franchise Tax Board's
electronic filing program. software that you may share with participants are complying with FTB
Refunds that result from others. You can obtain a copy by policies.
electronically filed returns are visiting the Adobe Internet home In addition, FTB, along with all other
mailed within 10 days after page at its http://www.adobe.com state entities and companies, is working to
FTB receives the return. address. Also, FTB provides a link make the changes to electronic systems
Refunds to taxpayers who file to the Adobe home page from its that must be in place before 2000. If any
paper returns are mailed http://www.ftb.ca.gov Internet changes to the file specifications and
within six to eight weeks. address. record layouts for electronic filing are
necessary for next year, FTB staff will
Of the 355,877 electronically
filed returns processed by
• Electronic filing Help Desk staff will
be in touch with you to obtain your †
notify you before the end of this year.
April 21 this year:
• 85 percent were refund
returns. FTB Drops Two Billing Forms
• 8 percent were balance
due returns. The Franchise Tax Board has streamlined Before discontinuing the Employment
• 7 percent were zero its personal income tax billing and Confirmation Request, FTB studied a
balance returns.† collection processes by discontinuing two
forms. As a result, FTB will be issuing
sample of employer responses to the form
and conducted informal employer
fewer billing notices. surveys. It found that eliminating the
Taxpayers will no longer receive an forms would be beneficial to the business
Official Notice, which is one of several community, FTB and the state.
notices asking taxpayers to comply Employers save time and expense
voluntarily with the tax law. Depending involved in responding to the
on the particular account, taxpayers will Employment Confirmation Request. FTB
now receive two or three notices before a saves the cost of producing and
levy on wages is issued, instead of three processing the form. And the state
to five notices. benefits from an earlier deposit of funds
because wage garnishments will be issued
FTB also is discontinuing its use of the sooner.
Employment Confirmation Request,
except when it has an incorrect address In addition, FTB now receives current
for a taxpayer. The Employment and accurate employment information
Confirmation Request is issued to through an automated information
employers to obtain information on an exchange with the Employment
individual's employment status, phone Development Department. The exchange
diminishes the need for an Employment
number, address, occupation and union
affiliation. Confirmation Request. †

July 1997
Page 11

What Carries Over When Economic


Development Areas End? Did You Take
Enterprise Zone
What happens to a carryover credit or LAMBRA is deemed to remain in
deduction when an economic existence for purposes of determining Hiring Credit?
development area's term expires? the area business income that can be
offset by the NOL deduction Check Your
The answer depends on whether the area
is an enterprise zone (EZ), a Local carryover. The LAMBRA deduction
may be carried forward until it is
Software
Agency Military Base Recovery Area
(LAMBRA) or the Los Angeles exhausted or up to 15 taxable or
income years after incurring the loss, A developer of California
Revitalization Zone (LARZ) and on the income tax software is
nature of the credit or deduction. whichever is shorter.
advising customers that one
Taxpayers operating in economic For taxpayers operating in an EZ or of its products does not
development areas are eligible for certain the LARZ, no such law exists. As a remind practitioners to supply
tax incentives. The incentives can be result, the deduction cannot be supporting forms.
used only to offset either business income carried forward. However, if the
economic development area proposal If you use SCS/Compute’s
earned in the area or tax on the area's software for Form 100,
business income. As a result, taxpayers that is currently part of Assembly Bill
1040 (Committee on Revenue and “California Corporation
may no longer claim the credits or Franchise or Income Tax
deductions when an area's term ends Taxation) becomes law, EZs and the
LARZ will be deemed to remain in Return,” to claim an
unless a law provides otherwise. enterprise zone hiring credit,
existence for purposes of determining
The incentives include a sales or use tax the area business income that can be you will need to supply
credit, a hiring credit and a 100 percent offset by the NOL carryover supporting forms.
net operating loss deduction. Qualified deduction. They then will have the The SCS/Compute Form 100
creditors of businesses operating in EZs same carryover rules as the software requires tax
and the LARZ also are eligible for a net LAMBRA. practitioners to manually
interest deduction. produce any required
• Net interest deduction. This
Here is how the carryover rules work for deduction is no longer available to supporting forms or
the various incentives. creditors when the term of an EZ or schedules, such as the Form
• Sales or use tax credit and hiring the LARZ expires. † 3805Z, “Enterprise Zone/
Program Area Deduction and
credit. These credits may be carried
Credit Summary,” or
over even though the term of the
Schedule P (100),
economic development area has
expired. However, the credits may April 15 “Alternative Minimum Tax
and Credit Limitations -
offset only the tax associated with the
CONTINUED FROM PAGE 2 Corporations.” Some
economic development area's
practitioners who have filed
business income. So, the law deems
Electronic filing and filing by telephone the Form 100 so far failed to
the area to remain in existence for the
are especially attractive options for produce the supporting forms
purpose of calculating the business
taxpayers who want fast refunds. So, because the software does not
income and the related tax.
most of these returns come in to FTB prompt them to do so.
For taxpayers who operated in an EZ earlier in the year. April 15 was a Also, if you claim an
or a LAMBRA, the credit can be relatively slow day with 6,039 returns enterprise zone credit for
carried forward until it is exhausted. filed electronically and 10,113 by your client on Form 100, be
For taxpayers who operated in the telephone. sure to check the “yes” box
LARZ, the credit can be carried
Taxpayers filed an estimated 4.5 million next to question “H” on the
forward until it is exhausted or up to
personal income tax paper returns on form’s Side 2. Question H
15 taxable or income years after
April 15. They also paid about $3 billion asks, “Is this corporation
incurring the credit, whichever is
in taxes on that date. Half of the amount claiming enterprise zone,
shorter.
arrived with 1996 tax returns. The other program area, LARZ or
• 100 percent net operating loss half represented either 1997 first quarter LAMBRA tax benefits?” If
(NOL) deduction. Any net estimate payments or 1996 or earlier taxes the “yes” box is not checked,
operating loss that is carried forward paid either before or after filing a the software automatically
can offset only future economic return.† †
defaults to a “no” answer.
development area business income.
For taxpayers operating in a
LAMBRA, the law provides that the
Page 12

K-1 Filers: How to Save a Tree


Reminder:
If your partnership clients want to save information and penalties for filing a
Tax Practitioner the expense of processing paper when Form 565 incorrectly.
Support Unit Has they file Schedule K-1s (565), remind
them that they can file on magnetic
To obtain Publication 1062, you may do
one of the following:
New Number media. Very large partnerships might
even save a tree or two by eliminating • Download a copy from the Franchise
To obtain tax and client paper filing. Tax Board's http://www.ftb.ca.gov
information, call the new Internet address.
For all the information a partnership
number, (916) 845-7057, for needs to file on magnetic media, see the • Contact the Tax Practitioner's
the Franchise Tax Board's new FTB Publication 1062, "Guide for K- Support Unit by calling
Tax Practitioner Support 1 (565) Filing by Diskette or Magnetic (916) 845-7057 or faxing
Unit. Media." Among other things, it covers (916) 845-6377.
The Support Unit changed reporting requirements, acceptable media • Write Tax Forms Request, Franchise
from an outside to an internal formats, file specifications, filing Tax Board, P.O. Box 307, Rancho
telephone prefix because it
can handle more calls. The
procedures, general and K-1 record layout Cordova, CA 95741-0307.†
unit's services are for tax
practitioners only, not their
clients.
The Support Unit also can be
reached by fax at
(916) 845-6377. †