07 November 2016 California Franchise Tax Board issues guidance on its processing of Multistate Tax Compact apportionment election cases post-Gillette Following the US Supreme Court's (USSC) denial of certiorari in Gillette Co. v. Franchise Tax Board1 (Gillette), the lead Multistate Tax Compact (Compact) apportionment election case, the California Franchise Tax Board (FTB) on November 1, 2016, issued Notice 2016-03 in which it advised taxpayers and their representatives of its intended course of action in processing Compact election cases. In the Notice, the FTB advised taxpayers and their representatives "to comply with all applicable laws and procedures to protect their rights and interest, and should not rely on any information in this notice that may result in any activity contrary to statutes or regulations." In Gillette, the California Supreme Court held that corporate taxpayers cannot elect to use the equally weighted three-factor apportionment formula under the Compact for reporting income to California in lieu of the statutorily mandated formula (e.g., double-weighted sales or single sales factor formulae). Because the USSC declined to review the case, the California court's ruling will stand as it cannot be further appealed. For more on these developments, see Tax Alerts 2016-24 and 2016-1732. In February 2016, the FTB announced that it had paused action on any refund claims while the case was pending before the USSC. Since the Gillette case has been finally resolved by the USSC's denial of certiorari, the FTB in its Notice said that it will take the following actions on these claims: — Refund claims containing a Compact election will be processed in the normal course of business, with formal notices in response to the refund claims being sent over the next several months. Taxpayers that made a Compact election should consider making a tax deposit or pay the amount of the proposed deficiency assessment to stop the accrual of interest. Taxpayers also should consider the effect the finalization of the Gillette case will have on their financial statement provisions or FIN 48 disclosures. Further, while the Compact apportionment election litigation has been resolved in California, similar litigation is on-going in Colorado (at the beginning of the litigation process), Michigan (some cases already on appeal to the USSC), Minnesota (petitions for appeal filed with the USSC), Oregon (argued before the state supreme court) and Texas (petition of review filed with the state supreme court). Taxpayers involved with the Michigan litigation, which is now dealing with whether the state's retroactive repeal of the Compact is constitutional, have until November 21, 2016, to file a certiorari petition with the USSC. On October 20, 2016, the taxpayer in the Minnesota litigation filed its certiorari petition with the USSC. If the USSC were to accept a review in one of these cases, and ultimately rule in favor of the taxpayer on the Compact election issue in such a case, that ruling could be binding on California although the facts of these cases are slightly different and it is entirely unclear whether any such ruling would be exactly on point with a taxpayer's situation in California. Given that there is a possibility that a Compact election case pending in another jurisdiction could affect the treatment of the Compact election in California, taxpayers with a California Compact election issue should consider their procedural options, including actions to preserve their rights, such as appealing a claim denial. Lastly, taxpayers that made an election on an originally filed return may be subject to the Large Corporate Understatement Penalty.
1 The Gillette Co. v. Franchise Tax Board, No. S206587 (Cal. S. Ct. Dec. 31, 2015), petition for cert. denied, Dk. No. 15-1442 (US S. Ct. Oct. 3, 2016). Document ID: 2016-1881 | |||||||||||||
