Installment Payment Program Is Streamlined California Franchise

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					      N O V E M B E R                 1 9 9 7

      Package X:                                        Installment
     Order Now for                                   Payment Program                                     Inside ...
                                                                                                          2 ... Legal notice addresses refund
    January Delivery                                  Is Streamlined                                            claims
                                                                                                          2 ... 1099 reporting of punitive
                                                                                                                damages: California follows
The 1997 California Package X in paper and          Qualifying to pay taxes in installments is                  federal
CD-ROM versions will be distributed on a            about to get easier.                                  3 ... How to order Package X, Tax
first-come, first-served basis.                                                                                 News
                                                    Starting in January 1998, California taxpayers
                                                                                                          3 ... Package X: What’s on the
Your best bet for an early delivery is to order     will be able to make installment payments                   CD-ROM?
right now, even though the Package X will not       without filling out a financial statement. To         4 ... Electronic filing: Two new
be shipped until January. All early orders will     qualify, taxpayers must owe no more than                    advantages
be processed immediately so that labeling           $10,000 and agree to pay their liabilities by         4 ... Electronic filing: Who needs to
information is ready to print as soon as the        electronic funds transfer (EFT) within three                apply?
Package X is produced.                              years. They also must have filed all required         4 ... What are Package X CD-ROM
                                                    tax returns.                                                specifications?
In most cases, paper versions of the                                                                      5 ... Questions answered according
Package X will be distributed to street             To apply for the installment payment                        to topic
addresses by an expedited delivery as they          agreement, taxpayers must send the new form           5 ... FTB calendar
were last year. As a result, deliveries are         FTB 3567, “Installment Agreement Request,”            6 ... Use revised form 100X
expected to be completed quickly once the           to the Franchise Tax Board. The form is not           7 ... Reducing the R&D credit:
books are produced. Previously, paper               yet available. However, by the first of the                 S corporations and shareholders
                                                                                                                use different rates
                                                                                   CONTINUED ON PAGE 2    7 ... Clarification
                              CONTINUED ON PAGE 2
                                                                                                          8 ... Taxpayers’ Bill of Rights
                                                                                                                hearing is this month

                            Putting It on Paper                                                           8 ... California has new Taxpayers’
                                                                                                                Bill of Rights
                                                                                                          9 ... It’s the law!
                                                                                                          9 ... Want copy of new law?
                                                                                                         10 ... Tax Talk offers learn-at-home
                                                                                                         10 ... Interest rates
                                                                                                         11 ... Are you a Tax News
                                                                                                         12 ... SBE opinions
                                                                                                         13 ... Watch for Tax News index
                                                                                                         14 ... Visit FTB in cyberspace
                                                                                                         14 ... 1099s: When magnetic media is
                                                                                                         14 ... FTB has new EFT bank
                                                                                                         15 ... Scannable/substitute forms
                                                                                                                producers need FTB approval
                                                                                                         15 ... Does your software support
                                                                                                                fiscal-year filing?
                                                                                                         16 ... Disaster victims reside in 48
                                                                                                         16 ... New tax law aids disaster
                                                                                                                            CONTINUED ON PAGE 3

               California tax forms will be printed on paper from giant rolls like these,
                                in place at the Office of State Printing.
  Page 2

                                                  Legal Notice Addresses Refund Claims
                                              The Franchise Tax Board has published                 raise the failure to pay as a
                                              its position regarding refund claims and              jurisdictional issue.
             Volume 97-6 November 1997
                                              the “full payment rule.”                        Earlier, based on various recent court
          TAX NEWS is a bimonthly             FTB Notice 97-8 provides guidance on            decisions, FTB withdrew a 1977 Legal
publication of the Taxpayer Advocate
    Bureau, California Franchise Tax          administrative claims and appeals to the        Ruling holding that a refund claim would
    Board. Its primary objective is to        State Board of Equalization (SBE) and           be valid if, when it was filed, all assessed
   provide information to income tax          also to refund actions filed in court. It       or asserted tax and penalties, although not
  practitioners about state income tax
       laws, regulations, policies and        states that, pending a final controlling        interest, had been paid.
                           procedures.        appellate judicial decision on the issue:       Notice 97-8 states that taxpayers may
             Members of the Board:            • For purposes of administrative claims         avoid uncertainty by paying all amounts,
                                                   and SBE appeals, FTB will continue         including interest, when or before they
             Kathleen Connell, Chair               to accept refund claims that are filed     file a refund claim.
                     State Controller
                                                   with or after the tax, additions to tax    You will find the notice, issued on
             Ernest J. Dronenburg, Jr.             and penalties are paid in full. Interest
   Chair, State Board of Equalization                                                         September 4, at FTB’s
                                                   does not need to be paid. However, Internet Web site.
                     Craig L. Brown                any unpaid interest amount will            It also has been published by most tax
     Director, Department of Finance               continue to compound daily,
                                                   according to Revenue and Taxation
                   Executive Officer:              Code Section 19521(b).
                  Gerald H. Goldberg
                                              • For refund actions filed in court, if all
                           Pat Huberty
                                                   tax, additions to tax, penalties and         1099 Reporting of
                                                   interest are not paid in full, FTB will
To update or correct your address or
                                                                                                Punitive Damages:
to subscribe to TAX NEWS (send $12
  for a one-year subscription), write:
                                                Package X: Order Now                            California Follows
                          TAX NEWS
                         P.O. Box 520
   Rancho Cordova, CA 95741-0520                 for January Delivery                                Federal
              or call: (916) 845-7070.
                                              CONTINUED FROM PAGE 1                           If you or your clients paid punitive
     For information about a client’s                                                         damages recently, keep in mind that
                    account, contact:         versions were sent by fourth class mail,
     Tax Practitioner Support Unit                                                            California conforms to the change in
             (916) 845-7057 (phone)           which is a much slower process.                 federal information reporting
                (916) 845-6377 (fax)          CD-ROM for Windows versions of the              requirements.
  For recorded answers to questions           Package X will be distributed by first-         Payers must now report on Form
  on California taxes, to order forms         class mail.                                     1099-MISC all payments for punitive
          or check on a refund, call:
                                              To obtain a Package X order form, call          damages of $600 or more, including those
          F.A.S.T. (800) 338-0505
  From outside U.S. (916) 845-6600            (916) 845-7070.                                 related to physical injury or physical
             —————————-                                                                       sickness. For information reporting
               Information Center:                                                            purposes, the change applies for
                     (800) 852-5711             Installment Payment                           payments after August 20, 1996. This
   From outside U.S. (916) 845-6500                                                           change in information reporting does not
                 Hearing Impaired:
                                               Program Is Streamlined                         mean that punitive damages related to
                TDD (800) 822-6268            CONTINUED FROM PAGE 1                           physical injury or physical sickness were
               __________________                                                             previously excludable from gross income
               FTB on the Internet            year, it may be obtained from FTB’s             reported on income tax returns.
               F.A.S.T. (Fast Answers about State
                                              Taxes) service; call (800) 338-0505,            Internal Revenue Code Section 104(a)(2)
                 Printed on recycled paper.
                                              access “Personal Income Tax Forms               has been modified to reaffirm that
                                              Request” at the voice prompt and then           punitive damage payments related to
                                              enter code 949. The form will be                personal physical injury or physical
                                              included in the 1997 California                 sickness are taxable. California Income
                                              Package X. It also will be available at         Tax Law Section 17131 incorporates this
                                              the first of the year at FTB’s                  federal law section.
                                     Internet address
                                              and by mail from Tax Forms Request,                                        CONTINUED ON PAGE 6
                                              P.O. Box 307, Rancho Cordova, CA
                                              95741-0307.    V

                                              November 1997
                                                                                                                            Page 3

      How to Order Package X, Tax News
Would you like a 1997 California               •    Do not add sales tax.
Package X?                                     •    If you want to send one check for
To order a Package X in either a paper or           multiple subscriptions to Tax News
CD-ROM for Windows version, call                    and/or copies of Package X and you
(916) 845-7070 for an order form. You               want them sent to different                 Inside ...
also can use the form to renew your Tax             individuals and/or different                CONTINUED FROM PAGE 1
News subscription or to subscribe for the           addresses, print “Multiple
first time.                                         Addresses” prominently on the front         16 ... Were tax returns lost in flood?
                                                    of the order form. Then, attach a           17 ... Comments sought on proposed
The Tax News/Package X order form has                                                                  telecommunications/electronic
a new look this year, including a vertical          sheet of paper with the other names                services regulation
bar code and full and half boxes for the            and addresses and indicate which part       17 ... Address correction
information you fill in. The changes have           of the order goes to each person or         17 ... Tax practitioner contacts
been instituted as a prelude to the image-          address.                                    17 ... Send vouchers with all 1997
processing of order forms and checks,          • Be sure to enclose your check or                      tax payments
which will begin in mid-1998.                       money order, payable to the                 18 ... Wage amounts to be verified
                                                    Franchise Tax Board. Orders                 18 ... Automated checks lead to
To order:                                                                                              withholding adjustments
                                                    without payments are not processed.
• Use the 1997 order form. Do not use               Do not send cash.
      a form from a previous year. Even if
      you cross out the year and replace it    • Mail the form and your check or
      with “1997,” you are using an out-of-         money order to: Tax News/
      date order form and your order may            Package X, P.O. Box 2708, Rancho
      be delayed.                                   Cordova, CA 95741-2708.
• Make any necessary corrections to            For more information about Tax News or
      your name and mailing address that       Package X, call (916) 845-7070. Also,
                                               see other articles about Tax News and
      are printed on the form.
• Fill in your telephone number.
                                               Package X in this issue.

• Supply a street address in the space
      provided if the mailing address at the
      top of the order form is a post office
      box. A street address is required by
      the Package X delivery service.                  Package X:
• To renew a Tax News subscription or                  What’s on
      subscribe for the first time, multiply
      the number of subscriptions you want           the CD-ROM?
      by $12 and enter the full amount in
      the space at the right of the form.      The CD-ROM version of this year’s
                                               Package X provides 1997 California tax
• To order a 1997 Package X, list the
                                               forms and much more.
      number of bound, loose-leaf or CD-
      ROM for Windows versions you are         If you order the CD-ROM, which must be
      ordering. Then, multiply the number      used with Windows software, you get:
      of paper copies by $12. Multiply the     • 1997 California Package X forms.
      number of CD-ROM versions by
      $19.                                     • 1997 Internal Revenue Service
                                                    Package X forms.
• Follow the same procedure to order a
      paper version of Package X for a         • California Package X forms for the
      prior year. Prior year loose-leaf             three previous years.
      versions of Package X are available      • Information on electronic filing.
      only for 1993, 1994, 1995 and 1996.      The CD-ROM has a search feature so that
      (1994 through 1996 Package Xs are        you can locate references to special words
      included on the CD-ROM.)                 or terms in both the tax forms and
• Add the above amounts and write the          instructions. And in March you will
      total in the space marked “Total         receive a second disk with updated forms.
      Amount Paid.”
                                                                          CONTINUED ON PAGE 4
Page 4

                                       Electronic Filing: Who Needs to Apply?
                                     For the coming tax season, tax                Record Layouts for the State of California
                                     practitioners who are electronic filing       Individual Income Tax Returns.” It will
 Electronic Filing:                  veterans generally do not need to reapply     be available on disk in early December.
                                     but newcomers must apply in order to                                                 V
                                                                                   It also will be available on the Internet.
         Two New                     participate.
                                     If you are already enrolled in California’s
       Advantages                    electronic filing program, do not apply
             If you participate in
                                     again unless the information on the
                                     application you submitted earlier has
                                                                                          Package X:
   California’s electronic filing    changed. For example, you should               What’s on the CD-ROM?
   program, you now can offer        reapply if your business moved, if you
   clients two new advantages:       designate someone new as a contact             CONTINUED FROM PAGE 3
      direct refund deposits and     person or if you have a new telephone
               nonresident filing.                                                  The tax forms on the CD-ROM are not
                                     number. The Franchise Tax Board will           interactive. You must print out the form
   For the first time, California    perform a suitability check to make sure       in order to enter data on it. You cannot
     tax refunds can be directly     that you are still in compliance with          enter data onto the forms by computer.
       deposited in your clients’    electronic filing policies.
                                                                                    The CD-ROM will be delivered by first
      bank accounts, but only if
           they file their returns
                                     If you are new to electronic filing, you
                                     must apply by December 1, 1997.
                                                                                    class mail in January.  V
 electronically. Direct deposit
                                     Whether you need to reapply or are
 may be available to taxpayers
 who file their returns on paper     applying for the first time, be sure to use   What Are Package X
                                     the 1997 version of form FTB 8633,
                         by 1999.
                                     “California Application to Participate in         CD-ROM
 In addition, nonresidents may       the Electronic Filing Program.” You can
         use the electronic filing   obtain a copy of the form by:                   Specifications?
  system for the first time. For
   the 1997 tax year, taxpayers      • Downloading it from FTB’s                   If you plan to order the 1997 California
   may electronically file Form  Internet           Package X on CD-ROM for Windows,
             540NR, “California           address.                                 make sure that your computer is
      Nonresident or Part-Year       • Calling the Electronic Filing Help          compatible with the disk.
           Resident Income Tax            Desk at (916) 845-0353. Also call        You should be able to use the CD-ROM if
   Return,” as well as Schedule           the Help Desk for additional             you have:
      CA (540NR), “California             information on FTB’s electronic
   Adjustments - Nonresidents             filing program.                          • A 386DX, 486DX or Pentium
  or Part-Year Residents,” and                                                          computer with a processor speed of
                                     • Contacting your local IRS district               33 megahertz or faster.
           Schedule P (540NR),            coordinator.
    “Alternative Minimum Tax                                                       • Microsoft Windows 3.1 or later with
        and Credit Limitations -     When you fill out the form FTB 8366, be            a mouse.
     Nonresidents or Part-Year       sure to:
                   Residents.” V     • Sign the application. FTB cannot
                                                                                   • Four megabytes of RAM (main
                                          process applications without
                                          signatures.                              • Double speed or greater CD-ROM
                                                                                        drive capable of reading ISO 9660
                                     • Include a business address where you             format.
                                          can be reached by mail all year, not
                                          just during the tax filing season.       • VGA, SVGA or higher resolution
                                                                                        color video display/adapter.
                                     • Provide the name of a person FTB
                                          can contact year-round and a             • PostScript Windows-compatible
                                          telephone number where that person            printer or Hewlett-Packard Laserjet
                                          can be reached during traditional             III and above with 1 megabyte of
                                          business hours.                               user RAM.
                                     • Add your Internet electronic mail           If you have questions about your
                                          address, if you have one.                computer’s compatibility with the
                                                                                   Package X CD-ROM, send a fax to the
                                     FTB will send you a copy of the tax year      Franchise Tax Board’s CD-ROM
                                     1997 FTB Publication 1345, “Electronic
                                     Filing Handbook, File Specifications and
                                                                                   coordinator at (916) 845-4788.V

                                     November 1997
                                                                                                                    Page 5

                     Questions Answered
                     According to Topic                                                       FTB Calendar
Do you have a question? Give the              •    General tax information, which
Franchise Tax Board a ring.                        provides answers to commonly asked         November
The answer to your question may be                 questions about personal income            • Demands to file 1995 tax
                                                   taxes, bank and corporation taxes and         returns continue to be
available from one of FTB’s interactive                                                          mailed to corporations.
voice response (IVR) telephone services.           homeowner and renter assistance.
All of the IVR numbers are available in       • Personal income tax refund                     7 1997 Package X order
                                                                                                 forms are distributed as
English and Spanish, 24 hours a day,               information, which provides the               part of Tax News.
seven days a week, unless the information          status of the caller’s current year
below states otherwise. And you must               refund. If the refund has not been         17 Franchise Tax Board’s
                                                                                                 Taxpayers’ Bill of Rights
use a touch-tone phone.                            authorized, the caller will be told           hearing.
You and your clients can dial up a wide            how long the refund process may
                                                   take. The caller also will be told if      14 Last day to mail payment
spectrum of information, categorized by                                                          and order for Tax Talk
subject matter. Here are the topics and            the refund has been applied to the            home study course.
the numbers to call about tax- and                 next year’s estimated taxes or to
                                                   another tax year liability or              20 Previous month
revenue-related matters:                                                                         withholding at source
                                                   intercepted by another agency.                payments due if total
Bank and corporation collection -
(888) 889-8876. You will hear answers         • Personal income tax forms, which                 withholding exceeded
                                                   callers may order for the current year        $2,500.
to questions about California corporation
tax and exempt organization fees and               and the three previous years. Internal     December
                                                   Revenue Service forms also may be
taxes, suspension of a corporation,                                                           • Demands to file 1996 tax
revivor of a suspended corporation, FTB            ordered from January through April            returns are mailed to
mailing addresses and telephone numbers,           15.                                           individuals.
corporation filing requirements, penalties,   • Bank and corporation forms, which             1 Deadline for submitting
contract voidability, how to get exempt            may be ordered for the current year.          electronic filing
status and how an exempt organization         • Personal income tax payment                      applications.
can incorporate without paying                     verification and account balance           20 See November 20.
corporation fees and costs. (Available in          information, which provides the            26 1997 personal income tax
English only.)                                     status of the caller’s tax account.           forms are mailed.
Delinquent corporations and limited           To order forms or check a refund status or      January
partnerships - (800) 478-7194. Your
business entity clients may want to call
                                              account information, call between        6      • Demands to file 1996 tax
                                              a.m. and 10 p.m., seven days a week                returns are mailed to
this IVR service if they receive a notice     except state holidays. Also, callers must          individuals.
asking for a tax return or a Notice of
Proposed Assessment (NPA). Depending
                                              enter their Social Security or account          • Wage verification
                                              numbers, the numbers in their street               program will begin.
on their delinquency situation, they can      address and their zip codes.
hear, among other things, answers to                                                          • Package X is published
commonly asked questions for qualified        Head of household - (800) 338-0505.                and distributed.
and nonqualified entities, information on     Out of the country - (916) 845-6600.             2 Written comments on
California’s Taxpayers’ Bill of Rights,       Taxpayers who receive a head of                    proposed regulation
Schedule K-1 guidelines and an                household audit questionnaire will get             25137.13 are due.
explanation of penalties, interest and the    step-by-step and line-by-line instructions      12 Electronic filing return
effects of suspension. (Available in          for answering the questions. They also             transmissions begin.
English only.)                                may hear the qualifications for claiming        15 Personal income tax
                                              the head of household filing status,               payments are due.
F.A.S.T. (Fast Answers about State            answers to questions about audit letters
Taxes) - (800) 338-0505. Out of the                                                           20 See November 20.
                                              and information about letters stating that
country - (916) 845-6600. When you            their head of household claim has not           February
call FTB’s F.A.S.T. telephone number,         been changed.                                   20 See November 20.
you may listen to general tax information,
order tax forms or check on personal
income tax refunds. Specific options
include:                                                                CONTINUED ON PAGE 6
Page 6

                                                      1099 Reporting of Punitive Damages:
            Use Revised                                    California Follows Federal
                                      CONTINUED FROM PAGE 2
            Form 100X
                                      Individuals, partnerships, corporations       forms must be filed annually with both the
       The form used to amend a       and other organizations that are engaged      Internal Revenue Service and the
           California corporate tax   in a trade or business in California and      Franchise Tax Board.
           return has been revised.   that make payments in the course of their
                                                                                    If you have questions about information
                                      trade or business must report the amounts
 Be sure to use the most recent                                                     reporting, call FTB at (916) 845-6304 or
                                      on Form 1099-MISC. Payments
      version of the Form 100X,                                                     check FTB’s Internet Web site at
                                      reportable on Form 1099-MISC include
           “Amended Corporation                                            and look under “General
                                      payments for punitive damages, any
                                                                                    Tax Information, Information Return
          Franchise or Income Tax
              Return,” so that your
                                      damages for nonphysical injuries or
                                      sickness and other taxable damages. The
                                                                                    Reporting.” V
  corporate clients’ returns will
   be processed quickly. Using
   the correct form also ensures                    Questions Answered According to Topic
     that any refunds due will be
  issued as quickly as possible.      CONTINUED FROM PAGE 5

          Form 100X underwent a       Installment agreements -
  major revision in 1993, when        (916) 845-4470. After validating their        Withhold-at-source - (916) 845-4900.
      three columns replaced the      Social Security number, current address       Callers will hear information about
    former one-column “Income         and zip code, your clients can access the     withholding that is required on payments
              and Deductions” and     current balance due on their tax accounts.    of California source income made to
            “Computation of Tax”      Also available is general information         nonresidents of California. They can
       sections. And Form 100X        about installment agreements, electronic      listen to general information about the
             was further refined in   funds transfers, missed or skipped            withholding requirements on California
        subsequent years. Recent      payments, where to mail payments, how         sourced income earned by nonresident
             modifications include    to update addresses, Earnings                 sellers of California real estate,
  additions and revisions to the      Withholding Orders for Taxes and Orders       nonresident partners and members,
       series of questions on side    to Withhold received by their bank.           entertainers and athletes and nonresident
           one of the form and the    Callers also may order financial statement    independent contractors. General
     addition of symbols that aid     and power of attorney forms. Although         information on the nonadmitted insurance
 in the efficient capture of data     the IVR system is available all day, every    tax and on bulk transfers also is available.
 when the forms are processed.        day, representatives are available Monday     And callers can select options to obtain
                                      through Friday from 8 a.m. to 5 p.m.          withhold-at-source forms and publications
      The most recent version of
         the Form 100X should be      Personal income tax filing enforcement        by fax or mail. (Available in English
  used to amend all corporation       - (800) 545-5009. Callers will hear           only.)
    tax returns. And you should       answers to commonly asked questions           Withhold-at-source forms -
     indicate which year you are      about letters they receive informing them     (800) 998-3676. You may request forms
      amending in the box in the      that they should file a tax return. The IVR   to be sent to you by fax. (Available in
     upper left corner. The form      program lets callers respond to the letters   English only.)
     will be included in the 1997     and gives them the opportunity to fully
                                      resolve their accounts. In fact, callers      FTB also maintains four IVR telephone
 Package X. In January, it will
                                      may cancel an assessment if the required      services related to its non-tax debt
  be available on the Internet at
                                      return is already on file. This telephone     collection activities:
       the Franchise Tax Board’s
       line is open from 6 a.m. to 8 p.m., seven     Child support collections -
  address. You also may order         days a week, except state holidays.           (916) 845-4010. Callers may listen to
 the form from FTB’s F.A.S.T.         Personal income tax NPA -                     general information about child support
        (Fast Answers about State     (800) 895-5440. You can listen to             billing notices, notices to employers,
          Taxes) system by calling    general information about personal            earnings withholding and child support
        (800) 338-0505. Or write      income tax NPAs and hear answers to           collection.
 Tax Forms Request, P.O. Box          questions associated with the NPAs.           Court-ordered debt collections -
      307, Rancho Cordova, CA
                                      Anyone who calls also may order prior         (916) 845-4064. Callers will receive
                    95741-0307.       year personal income tax forms.               general information about payment
                                                                                    notices, earnings withholding and notices

                                                                                                               CONTINUED ON PAGE 7

                                      November 1997
                                                                                                                          Page 7

             Reducing the R&D Credit:
          S Corporations and Shareholders
                Use Different Rates
If both your S corporation client and your       full credit, and the Schedule K-1 should
S corporation shareholder client elect to        reflect each shareholder’s allocable share     In the September issue of Tax
reduce their research and development            of the credit.                                 News, a Question Column
credits by the amount of tax imposed, be         For example, the XYZ Corporation,              response to a question on
sure to use different rates to compute each      which is an S corporation, generates a         depreciation stated that the
one’s credit.                                    research and development credit of             camera of a photographer
For taxable years beginning after                $300,000 in tax year 1996. XYZ elects to       who is a Schedule C filer
December 31, 1989, a corporation’s, an           take a reduced credit of $295,500              does not qualify as eligible
S corporation’s or an individual                 ($300,000 x 98.5 percent) before               personal property under
taxpayer’s business deduction for                applying the one-third limitation on           Internal Revenue Code
research and development expenditures            S corporation credits. The corporation         Section 179. The response
under Internal Revenue Code (IRC)                ends up with a research and development        assumed that the camera was
Section 174 must be reduced by the               credit of $98,500 ($295,500 ÷ 3). Ms.          not used exclusively for a
amount of the research credit for the year.      Smith, the 100 percent shareholder, also       business purpose. The
However, the taxpayer may make an                elects to take a reduced credit. Her pro       camera would qualify as
irrevocable election to reduce the research      rata share of the research and                 eligible personal property if it
                                                                                                is used exclusively for
credit that is generated by the amount of        development credit is $300,000 and her
tax that is imposed, using the highest tax       reduced credit is $272,100 ($300,000 x         business purposes.
rate for the taxpayer. The election must         90.7 percent).
be made when the tax return for the credit
                                                 For tax or income years prior to
year is filed, either at the original due date
                                                 January 1, 1997, S corporations and their
or at the time of the automatically
                                                 shareholders were allowed to make
extended due date.
                                                 separate decisions about whether to
For California tax purposes, different tax       reduce the research credit by the tax
rates are used in computing the reduced          imposed. However, the Governor
credit at the S corporation and                  recently signed SB 5 – Lockyer
shareholder levels. For S corporations, it       (Ch. 97-610) that, for tax or income years
must be the highest corporate rate. And          after January 1, 1997, requires
for shareholders, it must be the highest         shareholders to make the same research
individual rate. To determine the tax            and development election that the S
rates, refer to California Revenue and           corporation makes. So, if the S
Taxation Code Section 24440 for bank             corporation elects to reduce a credit in tax
and corporation taxpayers and Section            year 1997, the shareholders also would
17270 for personal income taxpayers.             have to reduce the credit. However,
Both sections modify the federal tax rates       different tax rates for the S corporation
given in IRC Section 280C.                       and the shareholder still must be used to
For income years prior to 1993, a reduced        compute the credit.     V
credit at the S corporation level is 97.5
percent of the full credit, to be offset
against a 2.5 percent franchise tax. For
income years 1993 and later, a reduced               Questions Answered
credit at the S corporation level is 98.5
percent of the full credit, to be offset         CONTINUED FROM PAGE 6
against a 1.5 percent franchise tax. On          to employers.
the other hand, for tax years prior to
1996, a reduced credit at the shareholder
level is 89 percent of the full credit, to be    Student loan collections -
offset against a potential 11 percent            (916) 845-5775. You can access general
personal income tax. For 1996 and later,         information about billing notices and
a reduced credit at the shareholder level is     earnings withholding notices.
90.7 percent of the full credit. As a
                                                 Vehicle registration collections -
result, the Schedule K that the S                (916) 845-6872. Callers will receive
corporation produces should reflect the          general information about Department of
Page 8

                                     California Has New Taxpayers’ Bill of Rights
                                    California taxpayers are the beneficiaries         terms of an installment agreement or
                                    of a new Taxpayers’ Bill of Rights.                if it determines that a levy release
                                    Assembly Bill 713 - Caldera                        would facilitate collection or be in
 Taxpayers’ Bill of                 (Ch. 97-600), which takes effect on                the best interests of the state.
   Rights Hearing                   January 1, 1998, conforms the laws             •   If FTB files or records a lien in
                                    administered by the Franchise Tax Board            violation of its administrative
    Is This Month                   to the federal Taxpayers’ Bill of                  procedures or of the terms of an
                                    Rights II. Among other things, the new             installment agreement, it must follow
     November 17 is the date of     law, which the Franchise Tax Board                 the procedure for releasing the lien as
     the Franchise Tax Board’s      sponsored, institutes these provisions:            though the lien were filed or recorded
      Taxpayers’ Bill of Rights     • Taxpayers may file a joint return if             in error.
               hearing this year.        they qualify even if either taxpayer      •   A taxpayer can sue the state for
 The hearing, where taxpayers            has not paid a previous, separate             damages and costs up to $500,000, if
      may present proposals for          liability.                                    FTB employees or officers
          changing existing state   • Third parties, such as payers of                 intentionally enticed the taxpayer’s
  income tax law, is scheduled           wages, interest or dividends, must            representative to provide information
  for the early part of a regular        include a telephone number in                 in exchange for settling or
  meeting of the three-member            addition to name and address on any           compromising the representative’s
     Franchise Tax Board. The            California-only information return            tax.
     meeting begins at 2 p.m. in         that they are required to file with a     •   If married persons filed a joint return
       Room 121, 450 N Street,           taxpayer and FTB.                             with an amount due and are no longer
                    Sacramento.                                                        married or living together, either one
                                    • Thirty days before terminating an
       Changes proposed at the           installment payment agreement                 can find out from FTB whether FTB
 hearing should be intended to           without the taxpayer’s consent, FTB           has attempted to collect the
         improve the clarity and         must mail the taxpayer a notice               delinquency from the other taxpayer,
      understanding of tax law.          stating the reason for the termination.       the general nature of the collection
  Anyone who plans to make a                                                           activities and the amount collected.
       proposal should submit a     • After receiving a notice and demand
                                         for payment, a taxpayer has 15            •   During an appeal of an amount that
  written statement prior to the                                                       FTB assessed as a result of certain
        hearing. The statement           instead of 10 calendar days to pay an
                                         amount due without incurring                  income items reported by third
   should include the proposed                                                         parties on information returns filed
   law change and the Revenue            additional interest.
                                                                                       with FTB or wage information filed
   and Taxation Code (R&TC)         • Enrolled agents are included as third-           with the Employment Development
          sections that would be         party recordkeepers for the purpose           Department and that FTB used, FTB
    affected. Taxpayers should           of serving subpoenas.                         may have the burden of proving that
        send their statements to
                                    • FTB can abate interest attributable to           the information is correct, if the
   Taxpayer Advocate Bureau,                                                           taxpayer fulfills certain criteria.
                                         unreasonable errors or delays that are
          P.O. Box 520, Rancho
     Cordova, CA 95741-0520.
                                         caused by an FTB officer or               •   FTB must make a reasonable attempt
                                         employee.                                     to notify the taxpayer if it is unable to
           The annual hearing is    • An FTB regulation applies                        locate the taxpayer’s account within
 required by a provision of the          retroactively only if FTB issues it           60 days of receiving a payment.
      Taxpayers’ Bill of Rights,
                R&TC Sections
                                         within 24 months of (a) the               •   FTB must send a taxpayer with a
                21001-21022.  V          publication date of a federal
                                         temporary or final regulation as long
                                                                                       delinquent personal income tax or
                                                                                       business entity tax liability a
                                         as California conforms to the                 delinquent notice at least once a year,
                                         underlying law or (b) the date that the       unless the post office returned
                                         California underlying law was                 previous notices to the same address
                                         enacted.                                      or the taxpayer’s account was no
                                    • In civil actions involving taxes, the            longer being held responsible for the
                                         state may reimburse prevailing                tax.
                                         taxpayers for reasonable litigation       •   In determining whether tax returns or
                                         costs and expenses and appeal fees            payments are timely, FTB will
                                         and expenses.                                 process “mail” from private delivery
                                    • FTB must release a levy on property
                                         that is in violation of either its                                   CONTINUED ON PAGE 9
                                         administration procedures or the

                                    November 1997
                                                                                                                      Page 9

                              It’s the Law!
A number of legislative measures dealing     counties to refer to FTB for collection
with taxes or affecting the Franchise Tax    amounts associated with court-ordered
Board were signed into law by press time.    fines, penalties, forfeitures or restitution
Among other things, the new laws cover:      orders. It also allows restitution that is
                                             due to a victim to be referred to FTB for
Customer comment forms. AB 206 -
Hertzberg (Ch. 97-416) requires every
                                             collection under certain conditions. It
                                             allows FTB to prescribe the extent to
                                                                                              Want Copy of
state agency to put a customer comment       which partner information must be                New Law?
form on its Internet Web site. (FTB’s        included with limited partnership returns
form will be available on the Internet by    and member information with limited              Would you like to have a
July 1, 1998.)                               liability company returns. The bill              copy of one of the legislative
Confidentiality. SB 458 - Peace              amends Chapter 952 of the 1996 statutes          measures recently signed into
(Ch. 97-685) prohibits state agencies from   to reflect that its provisions apply to          law by the Governor?
mailing correspondence to an individual if   taxable or income years beginning on or          You can request a copy by
it contains personal information about the   after January 1, 1997. It changes                writing Legislative Bill
individual including, but not limited to,    Administration of Franchise and Income           Room, Room B-32, State
Social Security, driver’s license,           Tax Laws Section 19340 so that, when an          Capitol, Sacramento, CA
telephone and credit card numbers, unless    overpayment is credited against any              95814. Or call the Bill Room
the correspondence is sealed and no          amount due, any interest on the                  at (916) 445-2323.
personal information can be seen from the    overpayment also is credited against the
                                                                                              If you have Internet access,
outside of the envelope. The law applies     amount due. It clarifies changes to
                                                                                              you also will find new laws at
to all correspondence mailed after           California Qualified Stock Options
January 1, 1998.                             (CQSO) by requiring corporations that
                                                                                              which is the Official
                                             want to issue a CQSO to designate it as
Conformity. SB 455 - Alpert                                                                   California Legislation
(Ch. 97-611) generally conforms              one when the option is granted. And,
                                                                                              Information Web site
California’s Personal Income Tax Law         among other things, the bill specifies that
                                             for purposes of enterprise zone and Los
and Bank and Corporation Tax Law to the
Internal Revenue Code (IRC) that was in      Angeles Revitalization Zone net operating
effect on January 1, 1997. Until now,        loss deductions, taxpayers may use the
California law generally conformed to the    carryover against the income that derived
IRC as it was on January 1, 1993. The        from an expired zone business as though
bill also provides some exceptions and       the zone remained in existence.
modifications to the conformity. Most of     Deposit credit. AB 1520 - Vincent
the provisions apply to taxable or income    (Ch. 97-497) allows a credit of 20 percent
years beginning on or after January 1,       of the amount of each “qualified deposit”
1997.                                        into a “community development financial
                                             institution.” The bill also allows the
Court-ordered debt collection,
partnerships, interest, stock options,       credit to be recaptured if the deposit is
etc. SB 1106 - Senate Revenue and            reduced or withdrawn before the end of a
Taxation Committee (Ch. 97-604),             60-month period. The law is effective for
sponsored by FTB, allows the state and       taxable and income years beginning on or
                                             after January 1, 1997, and before
                                             January 1, 2002.
  California Has New                         Disaster losses. AB 1X- Cardoza (Ch.
                                             97-3X) allows special disaster treatment
Taxpayers’ Bill of Rights                    of losses sustained as a result of storms or
                                             flooding or any other related casualty that
                                             occurred during December 1996 or
     services that the IRS designates as     January 1997 in any county that was
     though it had been mailed with the      declared a disaster area. (See “New Tax
     postal service.    V                    Law Aids Disaster Victims” in this issue.)
                                             The bill also amends Revenue and
                                             Taxation Code provisions about property
                                                                       CONTINUED ON PAGE 10
Page 10

                                                                            It’s the Law!
                                         CONTINUED FROM PAGE 9
                                         Disclosure. SB 504 - Johnston                  SB 965 - Costa (Ch. 97-603) provides
                                         (Ch. 97-192) requires anyone who               language that cleans up enterprise zone
                                         submits a written communication to a           tax incentive provisions of three 1996
       Tax Talk Offers                   state agency to disclose the identity of any
                                         person for the production of the
                                                                                        bills that substantively changed the
                                                                                        Enterprise Zone Act. The law is effective
       Learn-at-Home                     communication if it was created                January 1, 1997, as a tax levy and applies
                                         specifically for presentation to the state     to taxable and income years beginning on
               Videos                    agency. The law is effective January 1,        or after January 1, 1996.
                                         1998.                                          Electronic mail. SB 1273 - Hurtt
  The first entry in the Tax Talk
    Continuing Education Video           Economic development areas. AB 797 -           (Ch. 97-697) permits a state agency to
           Series is now available.      Takasugi (Ch. 97-461) makes changes            send correspondence and other
                                         under the Government Code to the               communications by electronic mail at the
  “Office-in-Home Deductions”            Enterprise Zone Act regarding both             recipient’s request, unless doing so is
   is the initial title in the series.   “targeted employment areas” as defined         impractical or contrary to federal or
      It will be followed later this     and preferences given to certain contracts.    another state law. The law is effective on
  year by “California Tax Rules          The bill also requires FTB to give the         January 1, 1998.
          for Nonresidents.” Each        Trade and Commerce Agency and the
       course includes a one-hour                                                       Entity classification. SB 1234 - Alpert
                                         Legislature information each year on the       (Ch. 97-608) conforms to the federal
               videotape, textbook,      dollar value of the enterprise zone tax
       workbook and brief, “open         credits that are claimed each year. The                                        CONTINUED ON PAGE 11
    book” examination. Anyone            law is effective January 1, 1998.
     who correctly completes the
           examination earns three       AB 1217 - Bustamante (Ch. 97-602)
    continuing education credits.        authorizes a new kind of economic
                                         development area, called a “targeted tax
                                                                                               Interest Rates
       Both courses are expanded         area,” under the Government Code. It
     adaptations of presentations                                                          For the first six months of 1998, the
                                         requires the Trade and Commerce Agency            interest rate on under- and over-
     at Tax Talk seminars. Each          to designate one targeted tax area in
                           costs $60.                                                      payments of California income taxes
                                         addition to the 39 enterprise zones.              will continue to be 9 percent. The
        If you would like either or      Under the Revenue and Taxation Code,              following table lists interest rates
            both of the videos, call     the bill also extends to businesses               since 1986.
     (916) 845-7070 for an order         engaged in manufacturing (except
              form. Or contact the       tobacco), warehousing, certain                    Effective date                        Rate
            Franchise Tax Board’s        transportation fields and wholesaling, as         1 Jan. 1986      -   30 June 1986     10%         specified by Standard Industrial                  1 July 1986      -   31 Dec. 1986      9%
      taxtalk.htm Internet address       Classification Manual codes, tax                  1 Jan. 1987      -   30 Sept. 1987     8%
             for the order forms.  V     incentives similar to those available to
                                         businesses operating in enterprise zones.
                                                                                           1 Oct. 1987
                                                                                           1 Jan. 1988
                                                                                                                31 Dec. 1987
                                                                                                                31 Mar. 1988
                                         The law applies to taxable or income              1 Apr. 1988      -   30 Sept. 1988    10%
                                         years beginning on or after January 1,            1 Oct. 1988      -   30 June 1989     11%
                                         1998.                                             1 July 1989      -   31 Dec. 1989     12%
                                                                                           1 Jan. 1990      -   30 June 1990     11%
                                         SB 200 - Kelley (Ch. 97-609) authorizes           1 July 1990      -   31 Dec. 1990     11%
                                         a new type of economic development                1 Jan. 1991      -   30 June 1991     11%
                                         area, called a “manufacturing                     1 July 1991      -   31 Dec. 1991     10%
                                         enhancement area.” It requires the Trade          1 Jan. 1992      -   30 June 1992     10%
                                         and Commerce Agency to designate two              1 July 1992      -   31 Dec. 1992      9%
                                         of the new areas in addition to the 39            1 Jan. 1993      -   30 June 1993      8%
                                         enterprise zones. It also allows the              1 July 1993      -   31 Dec. 1993      7%
                                         agency to specify that, to qualify for the        1 Jan. 1994      -   30 June 1994      7%
                                         tax credit, businesses located in the areas       1 July 1994      -   31 Dec. 1994      7%
                                         must hire at least 50 percent of their            1 Jan. 1995      -   30 June 1995      8%
                                         workforces from the county in which the           1 July 1995      -   31 Dec. 1995      9%
                                         area is located. It also allows businesses        1 Jan. 1996      -   30 June 1996      9%
                                         operating in the new areas a hiring credit        1 July 1996      -   31 Dec. 1996      9%
                                         similar to the hiring credit allowed to           1 Jan. 1997      -   30 June 1997      9%
                                         businesses operating in enterprise zones.         1 July 1997      -   31 Dec. 1997      9%
                                         The law is effective on January 1, 1998.          1 Jan. 1998      -   30 June 1998      9%

                                         November 1997
                                                                                                                        Page 11

                                    It’s the Law!
entity classification or check-the-box         excepted, and provides specific language
regulations and generally provides that        to exempt banks from existing provisions
the classification adopted for federal         of the Administration of Franchise and
purposes must be used for California           Income Tax Laws (AFITL) and the Bank
purposes. It also provides special rules       and Corporation Tax Law for which               Are You a
for single-member limited liability            intentional differences between the
companies that are disregarded for federal     treatment of corporations and banks is          Tax News
tax purposes. The law applies to taxable       clear. (This would reverse FTB’s policy
or income years beginning on or after          of not applying Section 24411 to banks
January 1, 1997.                               and allow a foreign bank to pay exempt
                                               dividends to a water’s-edge taxpayer.)          If you do not subscribe to Tax
Exemptions, conformity. SB 1233 -                                                              News, this is your chance to
Lockyer (Ch. 97-612) increases the             The bill also changes AFITL Section
                                               19340 so that, when an overpayment is           sign up for the newsletter.
dependent exemption credit by $50 in
                                               credited against any amount due, any            This issue of Tax News is
1998 and $100 in 1999 and conforms to
                                               interest on the overpayment also would be       being mailed to a number of
the federal Tax Relief Act of 1997 by
                                               credited against the amount due. The bill       tax professionals who do not
making permanent the capital gains
                                               removes the election provision from the         currently subscribe. It is the
exclusion for home sales and by adopting
                                               Los Angeles Revitalization Zone (LARZ)          Franchise Tax Board’s way of
enhancements to IRA programs. The bill
                                               sales or use tax credit, the Local Agency       introducing the newsletter to
also increases the exemption amounts
                                               Military Base Recovery Area (LAMBRA)            more registered tax preparers,
used in calculating the alternative
                                               sales or use tax credit and the LAMBRA          certified public accountants,
minimum tax for individuals and annually
                                               hiring credit and replaces it with a            enrolled agents and others. It
indexes the exemption amounts. Other
                                               provision limiting the taxpayer to one          is also a means of distributing
provisions eliminate the increase in the S
                                               credit. And, among other things, the bill       information on the 1997
corporation tax rate set by SB 5 and
                                               repeals Bank and Corporation Tax Law            California Package X to a
conform to the federal treatment of
                                               sections referring to offset provisions for     broad audience.
excluding gain on a principal residence
after July 1, 1998 (See SB 5 on page 12).      personal property taxes or license fees         To subscribe to Tax News or
Most provisions apply to taxable or            that are obsolete.                              order a Package X, call
                                               Non-tax debt collection - child support.        (916) 845-7070 for an order
income years beginning January 1, 1998.
                                               AB 1542 - Ducheny (Ch. 97-270) creates          form.
Grapevines. AB 122 - Brown
                                               a Child Support Collection and
(Ch. 97-607) extends to grapevines
                                               Enforcement Advisory Committee to
infested with Pierce’s Disease provisions
                                               review and make recommendations about
that allow accelerated depreciation for
                                               the development and implementation of a
grapevines invested with phylloxera. It
                                               Child Support Centralized Collection and
also would make changes to property tax
                                               Distribution Unit, which federal law
provisions for grapevines. The law
                                               requires. FTB representatives will be
applies to taxable or income years
                                               included on the committee. The law is
beginning on or after January 1, 1997.
                                               effective on January 1, 1998.
Indebtedness discharge, bonds,                 AB 573 - Kuehl (Ch. 97-599) allows
corporation definition, economic               district attorneys to voluntarily refer
development areas, offsets,                    current child support obligations to FTB
overpayment interest. AB 1040 -                for collection. Also, it requires the
Assembly Revenue and Taxation                  Employment Development Department to
Committee (Ch. 97-605), which was              give the Governor and the Legislature a
sponsored by FTB, allows FTB to receive        report on independent contractors for
federal information return data on the         purposes of collecting delinquent child
discharge or cancellation of indebtedness,     support. The law is effective on
creates a reporting requirement for payers     January 1, 1998.
of interest or dividends from bonds that
are issued by another state and are exempt     AB 702 - Villaraigosa (Ch. 97-697),
from federal tax, and amends Chapter 952       through a cooperative agreement with the
of the 1996 statutes, which enacted SB         Department of Social Services, allows
715, to reflect that its provisions apply to   FTB to operate an “information match”
taxable or income years beginning on or        with financial institutions doing business
after January 1, 1997. The bill also           in California. Using automated data
modifies the definition of “corporation”       exchanges as much as possible, the
to include banks, unless otherwise
                                                                        CONTINUED ON PAGE 12
Page 12

                                                                          It’s the Law!
                                       CONTINUED FROM PAGE 11
                                       system each quarter must match persons        the federal research credit made by the
                                       who owe delinquent child support with         Small Business Job Protection Act of
                                       accounts maintained at the financial          1996. The law applies to taxable or
          SBE Opinions                 institutions. The law is effective on         income years beginning on or after
                                       January 1, 1998, but requires an              January 1, 1998.
                                       implementation plan in the annual Budget      S corporations, sale of principal
   Appeal of William Tierney,          Act.
                    97-SBE-006-A,                                                    residence. SB 5 - Lockyer (Ch. 97-610)
   September 10, 1997, Order           AB 1395 - Escutia (Ch. 97-614) requires       substantially conforms California law to
             Denying Petition for      district attorneys to refer all their child   the changes made to federal S corporation
   Rehearing. For purposes of          support accounts that are 91 days             rules by the Small Business Protection
         head of household filing      delinquent to FTB for collection and          Act of 1996. The law:
       status, if the taxpayer was     allows them to refer accounts that are        • Increases the number of
    married at some time during        more than 30 days but less than 91 days            S corporation shareholders to 75.
           the year but was legally    delinquent. Counties with child support
                                       programs and systems that were in             • Allows electing small business trusts
   divorced under a final decree                                                          to hold S corporation stock.
               of divorce or legally   operation as of April 1, 1997, and that are
          separated from a spouse      comparable to FTB’s program and system        • Extends the post-death qualification
    under a final decree of legal      may apply for an exemption from                    to two years for certain trusts.
       separation, one-half of the     participating in FTB’s program. The bill      • Allows financial institutions to hold
             time during which the     also provides that, when an individual             safe-harbor debt and to become
     taxpayer, the taxpayer’s ex-      owes both delinquent taxes and child               S corporations.
      spouse and a child or other      support, FTB would give priority to tax
   qualifying individual lived in      collection. The bill allows district          • Expands the post-termination
    the taxpayer’s home may be         attorneys to request FTB to search for the         transition period.
  included in determining if the       Social Security numbers of noncustodial       • Allows exempt organizations to be
         taxpayer’s home was the       parents in any child support case, using           S corporation shareholders.
      principal place of abode of      tax enforcement or child enforcement
                                       information for the search. The law is        • Allows S corporations that
    the qualifying individual for                                                         terminated within the previous five
            more than one-half the     effective on January 1, 1998.
                            year.V     SB 247 - Lockyer (Ch. 97-601) shifts the
                                                                                          years to reelect to be S corporations.
                                                                                     The bill also conforms California to the
                                       funding for FTB’s child support
                                       collection program from county incentive      federal S corporation rules dealing with:
                                       payments to the state’s General Fund.         • The termination year for shareholders
                                       The law is effective on January 1, 1998.           who sell an interest.
                                       Open meetings. SB 95 - Ayala and              • Distributions during loss years.
                                       Kopp (Ch. 97-949) revises the Bagley-         • The carryover of losses and
                                       Keene Open Meeting Act, to which FTB               deductions under the at-risk rules.
                                       is subject. Among other things, it
                                       requires a state body to list on agendas      • The treatment of inherited stock and
                                       more detailed descriptions of discussion           gain from subdivided real estate.
                                       items for closed sessions. The law is         With certain exceptions, the bill provides
                                       effective January 1, 1998.                    conformity to the federal rules relating to
                                       Peace officers. SB 951 - Johnson              inadvertent invalid elections and
                                       (Ch. 97-670) amends the Penal Code and        termination, the treatment of
                                       the Government Code to include FTB’s          S corporations under Subchapter C and
                                       special agents in the list of designated      S corporation ownership of subsidiaries.
                                       peace officers. The bill is effective on      The bill also provides transitional relief
                                       January 1, 1998.                              under the Revenue and Taxation Code
                                                                                     regarding estimated tax payments; as a
                                       Renter’s credit. AB 1592 - Leonard            result, a C corporation that elects to be an
                                       (Ch. 97-292) suspends the renter’s credit     S corporation in 1997 could request to
                                       until January 1, 1998.                        have part of the estimated tax payment,
                                       Research credit. AB 1042 - Wayne              which would be an amount in excess of
                                       (Ch. 97-613) conforms state law to            the S corporation’s expected tax liability,
                                       federal, except as otherwise modified, to     transferred to the principal income tax
                                       permit the alternative way of calculating
                                                                                                              CONTINUED ON PAGE 13

                                       November 1997
                                                                                                                        Page 13

                                    It’s the Law!
accounts of the shareholders. Most of the      SB 78 - M. Thompson (Ch. 97-87)
S corporation provisions are effective for     reenacts and extends to January 1, 2002,
taxable or income years beginning on or        the operation of the Endangered and Rare
after January 1, 1997. The bill also           Fish, Wildlife, and Plant Species
increases the tax rate on S corporations       Conservation and Enhancement Fund              Watch for
for 1997 and subsequent years.                 voluntary contribution. It also provides
In addition to Small Business Protection       that the fund must receive $250,000,           Tax News Index
Act of 1996 conformity, the bill also          indexed annually for inflation, in
                                               contributions each year to remain on the       The 1997 Tax News Index is
conforms to changes made by the                                                               scheduled to be published in
Taxpayer Relief Act of 1997 to the             income tax return. The law is effective on
                                               January 1, 1998, and first applies to 1997     the January 1998 issue.
federal treatment of excluding gain up to
$500,000 from the sale or exchange of a        individual tax returns filed in 1998.          The index will list all articles
principal residence. The change is             SB 532 - Solis (Ch. 97-596) extends the        from 1997 issues of the
                                                                                              newsletter, categorized by
effective from May 7, 1997, through June
30, 1998. The existing state $125,000
                                               operation of the California Firefighters’
                                               Memorial Fund voluntary contribution to        subject matter. V
once-in-a-lifetime exclusion and rollover      January 1, 2001. It requires the fund to
of gain provisions do not apply during         receive a minimum contribution of
that time.                                     $100,000 for 1999 and $250,000 in
Student loans. AB 364 - Baca                   subsequent years to remain on the tax
(Ch. 97-228) provides that any loan made       return. The law is effective on January 1,
pursuant to the California State               1998, and first applies to 1997 individual
University’s Forgivable Loan Program is        tax returns filed in 1998.
a “student loan” for purposes of exclusion     AB 1033 - Frusetta (Ch. 97-630) reenacts
from gross income resulting from               and extends the operation of the
discharges of student loan indebtedness.       Children’s Trust Fund voluntary
The law applies to taxable years               contribution to January 1, 2002. The law
beginning on or after January 1, 1997,         is effective on January 1, 1998, and first
and to discharges occurring on or after the    applies to 1997 individual tax returns
same date.                                     filed in 1998.
Tuition. AB 530 - Higher Education             SB 602 - Alpert (Ch. 97-337), among
Committee (Ch. 97-851) establishes in the      other things, extends the operation of the
Education Code the Golden State                California Breast Cancer Research Fund
Scholarshare Trust, a prepaid tuition plan     voluntary contribution to January 1, 2003.
to be administered by the Student Aid          The fund must receive a $250,000
Commission. Under the Revenue and              minimum contribution, adjusted for
Taxation Code, the bill excludes from          inflation, to remain on the tax return. The
gross income any interest accruing on a        law is effective on January 1, 1998, and
Scholarshare Trust during the taxable          first applies to 1997 individual tax returns
year. The law applies to taxable years         filed in 1998.
beginning on or after January 1, 1998.         Warrants. AB 874 - Takasugi
Voluntary contributions. SB 1253 -             (Ch. 97-920) restructures the negotiability
Mountjoy (Ch. 97-856), among other             of state warrants, generally reducing the
things, reenacts the California Military       negotiable period from four years to one
Museum Fund voluntary contribution and         year. The law applies to all state warrants
extends its operation to January 1, 2002.      issued on or after
The fund must receive a $250,000               January 1, 1998. V
minimum contribution, adjusted for
inflation, to remain on the tax return. The
law is effective on January 1, 1998, and
first applies to 1997 individual tax returns
filed in 1998.
SB 39 - Johannessen (Ch. 97-7)
appropriates the monies in the California
Military Museum Fund and the D.A.R.E.
(Drug Abuse Resistance Education) Fund.
The law is effective now.
Page 14

                                       1099s: When Magnetic Media Is Required
                                   Some of your clients who file information
                                   returns in California may experience a                medium to another, such as from tape
                                   “magnetic pull.”                                      to diskette.
                                   That’s because they are required to file on
           Visit FTB in            magnetic media with the Franchise Tax
                                                                                         First-time magnetic media direct
                                                                                         filers must file form FTB 4092,
            Cyberspace             Board if they file 250 or more of one kind            “Magnetic Media Filing
                                   of information return. However, anyone                Application,” by December 31, 1997.
                                   who files information returns may choose              The Franchise Tax Board generally
      Contact the Franchise Tax
                                   to file on magnetic media, no matter how              responds within three weeks with a
   Board on the Internet for tax
                                   many returns are involved.                            filing package that includes media
    forms, FTB news and quick
     access to other government    All the Form 1099 series, 1098, 5498 and              labels, a transmittal form and an
             agency Web pages.     W-2G are subject to the magnetic media                information bulletin that covers any
                                   filing requirement. Keep in mind that                 changes in filing procedures for the
       You can locate FTB at its
                                   Forms 1099-R, even ones with                          year. Anyone who filed magnetically Internet
                                   withholding, are now filed with FTB.
                                   And Forms 1099-C and 1099-LTC must
                                                                                         in a past year will automatically
                                                                                         receive the filing package in
                                   be filed with FTB beginning with the                  November.
                                   1997 calendar year. All information              • Indirect filing. With this method, a
                                   returns are due February 28, except the               transmitter acts as an agent on the
                                   5498 returns, which are due May 31.                   filer’s behalf. The transmitter may
                                   FTB does not have an electronic filing                file under the combined program or
                                   program for information returns, but                  directly with California. The
                                   magnetic media filers may use diskette,               transmitter is responsible for
                                   cartridge or tape in certain formats. Filers          submitting any required IRS approval
                                   also may choose from one of three                     letter or application to FTB.
                                   methods of filing:                               If you have any questions or want to
                                   • Combined federal/state filing                  request an application to file
                                         program. With this program, a filer        magnetically, call FTB’s magnetic media
                                         does not need to file separately with
                                         California, because the Internal
                                         Revenue Service will forward the
                                         magnetically filed information it
                                                                                          FTB Has
                                         receives to the Franchise Tax Board.
                                         However, a filer must request IRS
                                                                                        New EFT Bank
                                         approval to participate in the             The Franchise Tax Board soon will use a
                                         program by sending the IRS a test          new bank account for tax payments made
                                         file between November 1 and                by electronic funds transfer (EFT).
                                         December 31. The IRS informs the
                                         filer by letter whether the test file is   Starting January 1, 1998, EFT payments
                                         acceptable. An approved filer then         must be transmitted to a Union Bank of
                                         must send a copy of the approval           California account, instead of to a Bank
                                         letter to the Franchise Tax Board.         of America account. FTB will mail the
                                         Not all types of information returns       necessary bank account information to all
                                         can be filed through the combined          affected EFT participants during the first
                                         federal/state program. For                 week of December. The participants in
                                         information on the program, call the       turn must provide the information to their
                                         IRS at (304) 263-8700.                     financial institutions for any payments
                                                                                    due in January 1998 or later.
                                         Direct filing. Anyone who files
                                         directly with California is not            The change in EFT transmission
                                         required to submit a test file.            information applies to business entity
                                         However, magnetic media filers             taxpayers who remit payments by EFT.
                                         might want to send a test the first        However, only taxpayers who remit
                                         time or if their organization has either   payments by the Automated Clearing
                                         undergone a significant system             House (ACH) credit method or by
                                         change or is changing from one             Fedwire are affected. With the ACH

                                                                                                            CONTINUED ON PAGE 18

                                   November 1997
                                                                                                                      Page 15

Scannable/Substitute Forms Producers Need FTB Approval
Are you planning to use scannable or         CLR/Ace Division (770) 432-1996
substitute 1997 state tax forms?             CLR/Fast Tax (800) 327-8829
                                             CompuCraft Tax Services (800) 435-7829
If so, make sure they meet the Franchise     Computer Systems Analysis Corporation
Tax Board’s requirements. Otherwise,         Consolidated Business Systems
the software you use may produce forms            (800) 262-4461
that cannot be processed quickly.            CPASoftware (800) 434-2685                      Does Your
                                             CPSystems, Inc. (804) 346-0640
Processing problems are especially likely
to happen when unapproved Schedule           Creative Solutions Inc. (313) 426-5860          Software Support
K-1 forms are filed.                         Curtis Publications Inc.
                                             Data Technology Group, Inc. (617) 661-1118
All companies that publish, produce or       Dave Gomberg’s JCF Systems
                                                  (415) 731-7793
sell electronically-processed substitute
California tax forms or image-processed      David Osman’s Tax and Accounting                If any of your clients file on a
scannable Forms 540 and 540A must file       Deloitte & Touche Tax Technologies LLC
                                                  (800) 966-1639                             fiscal-year basis, make sure
an agreement to comply with FTB              DRAKE Software (704) 524-8020                   that the tax software you use
requirements for the forms. Also, FTB        EXACTAX Inc. (800) 352-3638                     accommodates their needs.
must approve the forms before they are       Federated Tax Service Inc.
sold or provided to tax preparers. Com-                                                      Not all tax software supports
                                             Gear Up Tax Seminars (916) 268-6508             fiscal-year filing. As a result,
panies that sell or provide photocopies of   Gemisys Corporation (303) 705-6000
official FTB forms do not need approval.                                                     you may need to fill out some
                                             Hambrecht & Quist (415) 576-3300
                                             H&R Block/Tax Systems Development               clients’ tax forms manually.
To date, the companies listed below have          (816) 753-6900
filed form FTB 1096, “Agreement to                                                           Whether you use tax software
                                             Hayden R. Wisdom, E.A. (916) 888-1040           or fill out the forms manually,
Comply with FTB Publication 1098,” for       Hogan & Hartson, L.L.P. (202) 637-8566
the 1997 tax year. The form states that                                                      be sure to enter the fiscal-year
                                             HowardSoft (619) 454-0121                       date in the appropriate place
the companies agree to follow certain        Independent Preparer Services, Inc.
rules for developing scannable and                (818) 701-3090                             on the form. If you do not,
substitute forms. Filing form FTB 1096,      Inland Society of Tax Consultants               the tax return will
however, does not constitute approval        Intuit, Inc. (619) 784-4274                     automatically be processed as
from FTB.                                    ITS, Inc. (800) 487-8291                        a calendar-year return. When
                                             Jackson Hewitt Tax Service (757) 473-3300       this happens, the taxpayer
Be sure to ask a company to show you         JTR Bookkeeping & Tax (888) 869-4017            most likely will appear to be
FTB’s letter of approval before you use      KPMG Peat Marwick LLP                           delinquent in some way. As a
its forms. Do not accept a general           Lacerte Software Corporation (972) 490-8500     result, the taxpayer could
statement that the forms have been           Les Blend Co. (650) 917-0558                    receive a delinquent or late
approved. Instead, give the company a        MAVRICC Management Systems                      payment of tax penalty or an
list of the forms you plan to use, and            (248) 614-4500
                                             Mercury Printing and Stationery Co.             underpayment of estimated
make sure that each one is approved.              (800) 421-2220                             tax penalty and may be
Companies that have filed form FTB           Micro Vision Software, Inc. (800) 829-7354      assessed interest.
1096 to date are:                            Nelco, Inc. (920) 337-2848
                                                                                             If you have questions about
                                             ORRTAX Software (800) 377-3337
AEI Fund Management, Inc.
                                             Pencil Pushers Tax Software (617) 273-4556
                                                                                             your software’s ability to
Abel-Wagner Inc. (714) 572-8585                                                              support fiscal-year filing,
                                             PETZ Enterprises, Inc. (209) 835-2720
Accountant Stationers & Printers                                                             contact the company that
     (800) 423-9717
Accountware (513) 561-1881
                                             Prestige Graphics (619) 560-8213
                                             Professional Stationers Inc. (800) 874-7383     produces the software. V
Alpine Data Inc. (800) 525-1040              Probate Software Co., Inc. (970) 330-3260
AM Software (816) 741-7848                   RealNet Software, Inc.
American Tax Services                        Reynolds & Reynolds (formerly Duplex
                                                  Products, Inc.) (408) 934-8540
Applied Information Solutions
     (303) 893-8936                          Rosemberg Escobar Services (213) 563-0497
Arthur Andersen LLP (941) 365-9469           Service Data Corporation (402) 691-6338
Atilla M. Taluy (805) 984-0248               Short Form Software (914) 353-4177
ATX Forms (207) 455-4848                     Spidell Publishing Inc. (714) 776-7850
Block Financial Corporation (Tax Cut)        STF Services Corporation (800) 541-7197
     (913) 599-2885                          Tax And Accounting Software Corporation
Brass Tax Presentations (619) 487-2553            (800) 998-9990
Bryan Cave LLP                               Tax Biz (408) 243-1472
BSoft Corporation (408) 438-7071             Tax Form Library (800) 466-9110
CCH Federal and State Tax Unit               Tax Forms, Inc.
CCH Incorporated (Torrance) (310) 543-6200   Tax Link, Inc. (614) 457-1949
CCH Incorporated (Wichita, KS)
     (316) 685-8100                                                   CONTINUED ON PAGE 16
Page 16

                                           New Tax Law Aids Disaster Victims
                                    A new California law provides special           by April 15, 1997, and corporation
                                    disaster loss carryover treatment for           disaster victims were required to file by
                                    victims of last year’s storms and floods.       the 15th day of the third month after the
                                    It also allows some victims additional          close of the 1996 income year.
     Disaster Victims               time to elect to claim their disaster losses    For losses suffered in 1997. Individual
                                    on the preceding year’s tax return.             disaster area victims who file on a
            Reside in               A disaster loss is a casualty loss that is      calendar year basis must claim the loss on
         48 Counties                due to a disaster and that is not
                                    reimbursed by insurance or other
                                                                                    an original return filed by October 15,
                                                                                    1997, or on an amended 1996 return filed
          Disaster victims in 48    payments.                                       no later than October 15, 1998.
         California counties are    Assembly Bill 1X - Cardoza (Ch. 97-3X),         Corporation victims must file their
   affected by the provisions of    which became law in September, states           amended 1996 returns no later than the
                                                                                    15th day of the tenth month after the
  Assembly Bill 1X (see article
                   on this page).
                                    that flood and storm victims in 48
                                    California counties (see list on this page)                 V
                                                                                    year’s close.
      The 48 counties, declared     during December 1996 and January 1997
        disaster areas due to the
   December 1996 and January
                                    may carry forward 100 percent of the
                                    disaster loss for five years. Fifty percent
                                                                                       Were Tax Returns
    1997 storms and floods, are     of any remaining loss may be carried
                                    forward for the next 10 years.
                                                                                        Lost in Flood?
     Alameda, Alpine, Amador,
      Butte, Calaveras, Colusa,     The new law also deals with electing to         Did any of your clients lose their tax
       Contra Costa, Del Norte,     claim a loss on a preceding year’s return:      returns in the December 1996 or January
     El Dorado, Fresno, Glenn,                                                      1997 storms and floods?
       Humboldt, Kings, Lake,       For losses suffered in 1996. The bill
                                    extended to October 15, 1997, the date by       They can request free copies of lost or
        Lassen, Madera, Marin,                                                      damaged returns by writing the Franchise
         Mariposa, Mendocino,       which individuals who file on a calendar
                                    year basis could amend previously filed         Tax Board. FTB keeps personal income
        Merced, Modoc, Mono,                                                        tax returns up to four years. For example,
      Monterey, Napa, Nevada,       tax returns in order to claim the loss in the
                                    prior year. For corporation disaster            as of this month, FTB has personal
   Placer, Plumas, Sacramento,                                                      income tax and partnership returns for tax
     San Benito, San Francisco,     victims, the date was extended to the 15th
                                    day of the tenth month after the close of       years 1994, 1995 and 1996. Beginning in
          San Joaquin, San Luis                                                     January, FTB also will have returns for
      Obispo, San Mateo, Santa      the 1996 income year. Prior to AB 1X’s
                                    passage, individual disaster victims were       1997. Bank and corporation returns are
      Clara, Santa Cruz, Shasta,                                                    kept up to five years.
       Sierra, Siskiyou, Solano,    required to file an amended 1995 return
    Sonoma, Stanislaus, Sutter,                                                     Your clients may request copies of returns
   Tehama, Trinity, Tuolumne,                                                       by completing and mailing form FTB
      Tulare, Yolo and Yuba.  V         Scannable/Substitute                        3516, which on one side is a “Request for
                                                                                    Copy of Personal Income Tax or
                                         Forms Producers                            Fiduciary Return” and on the other side is
                                    CONTINUED FROM PAGE 15                          a “Request for Copy of Bank and
                                                                                    Corporation or Partnership Return.” Or
                                    Tax Systems, Inc. (713) 682-1791
                                    TAXBYTE, Inc. (800) 245-8299                    your clients can send a letter to FTB
                                    Tax$imple, Inc. (800) 989-8955                  stating the tax year and type of return they
                                    Taxware Systems, Inc. (800) 877-1065            need. They should write to RID Unit,
                                    Taxworks by Laser Systems (801) 552-8800        Franchise Tax Board, P.O. Box 942840,
                                    Technology Funding, Inc. (505) 982-2200         Sacramento, CA 94249-0060.
                                    TFP Data Systems                                Victims of the storms and floods in
                                    TK Publishing Inc. (Tax Shop) (407) 351-0966    counties designated as disaster areas by
                                    TMI Tax Services, Inc. (612) 935-6111
                                                                                    the President will not be charged for
                                    Total Peripherals, Inc.
                                    Universal Tax Systems (706) 232-7757            copies of their tax returns if they print
                                    U.S. Tax Systems, Inc. (800) 966-8787           “DISASTER” at the top of the letter or
                                    Visible Computer Service (630) 377-2586         form FTB 3516. For other taxpayers, the
                                    Wallace Computer Service (630) 377-2586         charge for a copy of a personal income
                                    Weaver Tax Service (408) 258-0912               tax return is $10. Charges for copies of
                                    Westpro LTD                                     partnership or bank and corporation
                                    William H. Downs, CPA (818) 981-4313            returns vary according to the number of
                                    XPRESS Software, Inc. (800) 285-1065  V         pages. FTB will notify the taxpayer of
                                                                                    the amount due. V
                                    November 1997
                                                                                                                                         Page 17

         Comments Sought on Proposed
               Services Regulation                                                                           Send Vouchers
The Franchise Tax Board is seeking                (916) 845-3354 or send a fax to                            With All 1997
public comment on a draft regulation              (916) 845-3648. And information is
affecting businesses involved in                  available at FTB’s                   Tax Payments
telecommunications, subscription                  Internet site.
                                                                                                             Starting with the 1997 income
television, Internet access and electronic        The notice states that, in 1995, FTB held                  tax forms, all of your clients
information services. The regulation              a symposium on apportionment for                           who owe taxes must attach a
would prescribe special apportionment             affected businesses. A second                              voucher as well as a check to
rules for dividing the businesses’ income         symposium or a public meeting may be                       their returns.
for tax purposes.                                 held before the formal notice process for
                                                                                                             The new vouchers will be
FTB Notice 97-9 is a request for public           the regulation begins. Notice 97-9, issued
                                                                                                             published in all 1997 income
                                                  on September 5, has been published by
comment on the draft of proposed                                                                             tax booklets for both
regulation 25137-13. The draft was                most tax services.
                                                                                                             individuals and business
prepared for discussion purposes, and                                                                        entities. They are a cost-
written comments are due to FTB by                                                                           saving measure, designed to
January 2, 1998.                                       Address Correction                                    make the processing of
The draft, among other things, proposes                                                                      returns faster and more
                                                  An article in the September issue of Tax
rules for determining the property factor         News listed two addresses for mailing                      efficient.
and sales factor numerators of the                scannable returns. The correct address
apportionment formula to be applied to            for mailing scannable returns showing
affected taxpayers.                               that a refund or no amount is due is Image
To obtain copies of the discussion draft          Processing, Franchise Tax Board, P.O.
regulation and explanation, write Legal           Box 942840, Sacramento, CA 94240-
Branch-Telecommunications, Franchise              0009. Scannable returns with a balance
Tax Board, P.O. Box 1720, Rancho                  due should be sent to Franchise Tax
                                                  Board, P.O. Box 942867, Sacramento,
Cordova, CA 95741-1720. You may call
the FTB’s Legal Branch at                         CA 94267-0001.     V

                                                       Tax Practitioner Contacts
                                     Tax Practitioner Support Unit (not toll free)
       California                     Telephone. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .(916) 845-7057
       Franchise                      Fax. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .(916) 845-6377
       Tax Board                     General Public Services
                                      F.A.S.T. (Fast Answers about State Taxes). . . .(Phone) (800) 338-0505
                                      Internet. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
                                      General Information (Phone)
                                       From within the U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . (800) 852-5711
                                       From outside the U.S. (not toll-free). . . . . . . . . . . . . . . (916) 845-6500
                                       Hearing impaired TDD. . . . . . . . . . . . . . . . . . . . . . . . . (800) 822-6268
   FTB 1029 (REV 10-97) SIDE 1
Page 18

   Wage Amounts to                        Automated Checks Lead to Withholding Adjustments
        Be Verified                       By the end of August, the Franchise Tax          identified another 11,000 tax returns that
                                          Board had adjusted the withholding               will be reviewed at a later date when they
                                          amounts claimed by almost 80,000                 can be checked against more complete
           What happens when the
  amount that a taxpayer claims           taxpayers on their 1996 returns.                 EDD employment information.
     as wages on a California tax         The withholding amount increased for
   return is not the same amount          some taxpayers because the wages they
              that the Employment         claimed were substantiated. In fact, FTB                    FTB Has
        Development Department            increased more taxpayer withholding
                            reports?      claims on 1996 returns than for any                       New EFT Bank
  Due to a new automated wage             previous tax year. However, more often
                                                                                           CONTINUED FROM PAGE 14
           verification system, the       than not, the adjustments led to a decrease
         Franchise Tax Board will         in the amount of the withholding claimed.        credit method, the taxpayer’s bank debits
         discover discrepancies as        A automated on-line withholding                  the taxpayer’s account and credits the
               1997 tax returns are       verification process allows FTB to check         state’s bank. Fedwire is an electronically
      processed. When errors are          withholding amounts that taxpayers claim         transmitted payment system offered by the
    spotted, FTB will check with          on their returns against amounts that the        banking industry.
   employers and, in June 1998,           Employment Development Department                (Taxpayers who make EFT payments with
          will begin correcting the       reports. It is one aspect of an automated        the ACH debit, instead of the credit,
          returns. FTB will notify        information exchange between FTB and             method are not affected by the change in
     taxpayers of the corrections.        EDD and part of an ongoing integration           bank accounts. With the ACH debit
   Taxpayers do not have to file          of California’s personal income tax and          method, taxpayers authorize the state’s
       amended returns to correct         employment tax systems. A wage                   bank to debit the taxpayer’s account on
                          the errors.     verification process will begin in 1998          each payment occasion and specify the
             The wage verification        (see article on this page).                      payment’s amount and date.)
      program that begins in June         As a result of the withholding verification      Business entity taxpayers must pay their
          will be a pilot. FTB will       process, FTB has reviewed 2.5 million            taxes by EFT if any single estimated tax
           implement a permanent          1996 tax returns since the first of the year     payment or extension payment exceeds
      program the following year.         and made adjustments to the withholding          $20,000 or if their total tax liability
           Wage verification is the       amounts claimed on 78,486 returns. Of            exceeds $80,000 for any income year.
        second automated, on-line         these adjustments, 21,038 were increases,        Others may volunteer to pay taxes by
  check to determine if taxpayer          and 57,448 were decreases. In addition,          EFT.
    and EDD information match.            the verification process identified              If you or your clients have not received
    The first verification process        approximately $2 million in fraudulent           the new bank account information by
                checks withholding        refund claims that then were denied.
                     information.     V   The withholding verification process also
                                                                                           December 20, call FTB’s EFT Help Desk
                                                                                           at (916) 845-4025.   V

                                            Tax Practitioner Contacts (continued)
                                                                              FTB on the Internet — The Franchise Tax Board
           Which Number Do I Call?                                            Web site gives you access to tax forms and
            Tax Practitioner Support Unit Telephone — Do                      information 24 hours a day, 7 days a week. You can
            you need a quick answer? Specially trained                        download tax forms and publications and access
            technicians are available from 8 a.m. to 5 p.m.,                  specific program information, e.g., electronic filing,
            Monday through Friday, to answer questions related                withhold-at-source and Legal Rulings. (This service
            to client accounts. (This service is for tax                      is available to the general public.)
            practitioners only.)

            Tax Practitioner Support Unit Fax — Do you                        F.A.S.T. — An interactive voice response service
            need to write to FTB? You can fax your                            provides recorded answers to more than 160 of the
            correspondence any time, 24 hours a day, 7 days a                 most commonly asked state income tax questions,
            week. (This service is for tax practitioners only.                24 hours a day, 7 days a week. Tax refund status
            Please limit faxes to 15 pages.)                                  and forms ordering are available from 6 a.m. to 10
                                                                              p.m., 7 days a week, except state holidays. (This
                                                                              service is available to the general public.)
            FTB 1029 (REV 10-97) SIDE 2

                                          November 1997

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