2010 California Update Follow-up

The information included here is follow-up to the 2011 California Update presentation and seminar materials:

Registered Domestic Partners

The final word from IRS on whether they were serious about applying community income/property rules as per CCA 201021050 (5/28/10) to the single or head of household federal tax returns of California RDPs is:  Yes, they are!

The IRS very quietly confirmed their decision in the printing of Publication 17.  You will find the following on page 5 of Publication 17:  “A registered domestic partner in California, Nevada, or Washington must report half the combined community income earned by the individual and his or her domestic partner.  See Publication 555.”

This IRS ruling emphasizes more than ever the importance of separate property agreements between RDPs where appropriate.   This is an area where referral for legal services should be recommended to clients.

Federal Mandatory E-File

As most tax professionals have already discovered, California is not accepting e-filed Forms 541 for trusts and estates during the 2011 filing season for 2010 tax returns.  Under the federal mandatory e-file program, practitioners should be e-filing federal trust and estate returns (Form 1041).  It is highly recommended to alert your clients to this inconsistency, so they don’t assume their state return was also e-filed.

FTB Contacts Taxpayers with 2007 and 2008 Foreclosures

In January 2011, FTB began mailing letters to pre-selected individuals who received Form 1099-C Cancellation of Debt for tax years 2007 and 2008.  The letter focuses on COD income related to “nonqualified properties” or properties that were not residences.  The FTB is advising that although mortgage relief provisions do not apply, relief may be available under other provisions of the tax code (insolvency, etc).

Real Estate Withholding Rate Decreases

As of January 1, 2011, the California real estate withholding rates changed.  The optional gain on sale withholding rates decreased for individuals and non-California partnerships to 9.3%, S corporations to 10.8% and financial S corporations to 12.8%.  Since the .25% tax increase, effective for tax years 2009 and 2010, may be reinstated in the new budget, this could be a short-lived reduction, but time will tell.

EFT Penalties

As explained in the Update presentation, FTB will be assessing EFT penalties for taxpayers that were required to pay their taxes electronically beginning with 2011.  Some taxpayers mailed tax payments postmarked on or before December 31, 2010, but the payments were posted by FTB as received in January 2011.

FTB has announced they will refund any EFT penalty assessed in these circumstances.  This is a one-time exception to the penalty.  The tax practitioner may contact the FTB Tax Practitioner Hotline at 916-845-7057 and provide information on the mail date and the date the check cleared the bank to determine if the penalty exception has been met.

Health Insurance for Adult Child Update—Pending Conformity

Pending AB 36 (Perea and Blumenfield) would retroactively conform California tax law to federal tax law by excluding the value of health insurance benefits and employer reimbursements for medical care for an adult child under age 27 from the gross income of the parent. 

New California Listed Transaction

The FTB has issued Notice 2011-1, which identifies the use of partnerships to improperly inflate the sales factor denominator, and reduce the taxpayer’s California apportionment percentage, as a listed transaction.  This particular transaction is referred to as “Abusive Sales Factor” and should be reported on IRS Form 8886 Reportable Transaction Disclosure Statement on the tax return.

The general rule for California purposes is that Form 8886 must be attached to the taxpayer’s original or amended tax return for each taxable year for which the taxpayer participates in a reportable transaction, including listed transactions.

Material advisors of listed transactions are required to compete IRS Form 8918 Material Advisor Disclosure Statement, when applicable as well, including instances where the transaction is listed for California purposes only, as is the case with the “Abusive Sales Factor” transaction, which affects state apportionment calculations only.

Both forms came be sent to: