New rules clarify the assignment of California corporate tax credits to combined group members. The rules provide guidance for when a defective assignment occurs.
What Is a Defective Assignment?
California allows affiliated members of a combined reporting group to assign credits among members. Taxpayers make the assignment as an election on an original tax return. Although not an exclusive list, all of the following can cause a defective assignment:
– failing to clearly identify the taxable year from which the credit was earned;
– failing to clearly identify the amount of any credit;
– failing to clearly identify the type of credit;
– assigning an amount of credit greater than the total amount of eligible credits;
– assigning a credit that is not an eligible credit; or
– assigning a credit to an assignee who is not clearly identified or who is not an eligible assignee.
How Are Defectively Assigned Credits Allocated?
Assigned more credits than available: If a taxpayer assigned more credits than it has, default allocation rules apply. Generally, the allocation will be in the ratio of the identical credits assigned in the original defective assignment. Special rules apply if the assignor or any assignee claimed credits in a closed tax year.
Alternative Allocation: Under some circumstances, taxpayers may request an alternative allocation. An alternative allocation request must meet all of the following requirements:
– it does not allocate a higher amount of identical credits to the assignor than the assignor would have retained if all defective assignments for not having enough credits had been valid, increased by the amount of identical credits allocated to the assignor from other defective assignments;
– it does not allocate a higher amount of identical credits to an assignee than the amount assigned in the defective assignment;
– it allocates credits only to those that have joined in the request for an alternative allocation;
– it allocates only the type of identical credits in the defective assignment;
– it does not include credits assigned to an assignee that does not join in the request for an alternative allocation, except for certain amounts allocated to the transferor;
– it does not include credits that might result in credits being claimed more than once;
– it applies the special rules for claimed credits in a closed tax year;
– the assignor requests it before initial audit contact from the Franchise Tax Board (FTB); and
– combined group members have not requested another alternative allocation for the taxable year or the three immediately preceding years.
Other defective assignments:For defective assignments other than when a taxpayer assigned more credits than it has, the following allocation rules apply:
– identical credits assigned in the defective assignment, or remaining after reduction, are allocated to the assignor;
– identical credits assigned in the defective assignment are reduced by the amount of credits claimed in a closed year by the assignee;
– if a defective assignment has multiple potential assignees, the reduction applies to credits claimed in a closed year by each assignee; and
– if all of this would reduce the assignor’s identical credits by an amount greater than the credits originally assigned, then the assignor’s other identical credits must be reduced as of the taxable year of the defective assignment.
For defective assignments involving an unspecified type or amount of credits, the assignor’s credits are reduced if an assignee claimed credits in a closed tax year. The rules provide detailed instructions for these reductions.
For defective assignments involving ineligible assignees, the assignor may not claim or assign the credits unless:
– the FTB approves a request by the assignor and the assignee for a determination that the assignee is an ineligible assignee; or
– the FTB asserts that an assignee is an ineligible assignee and makes a final determination on the matter.
For cases involving an overlap between the various rules, the rules specify an order in which they apply.
How Can Taxpayers Correct Errors in Assignments?
An assignor may request the correction of an error in an assignment if:
– the assignment is defective;
– all parties to the defective assignment consent in writing to the correction;
– the assignor demonstrates that it made an error;
– the assignor demonstrates that the correction is consistent with its original intent;
– the corrected assignment meets the requirements of a valid assignment, except for the election on an original return; and
– the assignor makes the request by the earlier of the filing date or the extended due date of the its, or any assignee’s, return for the year after the year of the original assignment.
However, for one year from when the new rules take effect, assignors may request corrections without regard to the normal limitations period.
Additional limitations:For defective assignments made in taxable years beginning on or after January 1, 2017, the following additional limitations apply:
– the amount of credits allocated pursuant to the correction must not exceed the amount originally assigned; and
– for defects involving a wrong assignor, incorrectly identified assignee, or wrong or unspecified type or amount of credits, combined group members must not have not requested another correction for the year or the three immediately preceding years.
Subscribers can view the text of the rules.
Regs. 23663-1 through 23663-5, California Franchise Tax Board, effective September 18, 2018