FTB Offers Credit Card Option

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FTB Offers Credit Card Option                                                                          Inside ...
In January the Franchise Tax Board launched            date, although FTB may not actually post the
a pilot program that allows some taxpayers to          payment to the taxpayer’s account until          2 ... New Members Join Tax Board
use their credit cards to pay their tax                three to five days after the transaction.        2 ... Service on the Rise During
liabilities.                                           To make a credit card payment, the taxpayer            Filing Season
During the six-month pilot, certain qualified          calls the toll-free number provided in the       3 ... Frequently Asked Questions:
                                                                                                              FTB’s Credit Card Payment
taxpayers will receive an insert along with            FTB insert and accesses an interactive voice           Program
their tax bill explaining how they can use their       response (IVR) system operated by an FTB-        3 ... Convenience Fee Chart
Discover/NOVUS, MasterCard or American                 approved credit card payment-processing          4 ... Court Opinions
Express credit card to pay their past due state        vendor. Once the IVR has all the required        4 ... The Question Column
tax bill. Estimate payments and payments               information, it gives the taxpayer a             5 ... ABCs of LLCs
made with a tax return are not yet part of             confirmation number. That number serves          5 ... FTB Calendar
FTB’s credit card program.                             as the taxpayer’s receipt.
                                                                                                        6 ... What’s Your Excuse? Better to
The current program allows taxpayers to use            The payment will show up later on the                  File Late Than Not at All
their credit cards to pay all or part of their         taxpayer’s credit card statement as a            6 ... FTB e-filers: Keep Signature
bill. Taxpayers may also use more than one             payment to FTB.                                        Documents
credit card to pay their liability.                                                                     7 ... Check SSNs on Mortgage
                                                       Taxpayers will be charged a convenience fee            Statements
With credit card payments, the date the                by the vendor for use of the automated credit    7 ... Voluntary Disclosure Program
taxpayer completes the credit card transaction         card service. For more information about               Helps Nonfilers
is the effective date of the payment. That             the fee see: “Credit Cards: Frequently Asked     7 ... Not Everyone Has to File
means that the interest charges stop on that           Questions,” on page 3.                          .7 ... Wanted: New FTB e-filers
                                                                                                        7 ... FTB Calendar
                                                                                                        8 ... Manufacturers’ Investment
                                                                                                              Credit: Avoid Common Errors
                           Tax Help: At Your Fingertips                                                       Found With MIC
                                                                                                        8 ... Manufacturers’ Investment
                                                                                                              Credit: For Your Information
                                                                                                        9 ... Tax Form Corrections
                                                                                                        9 ... Free Seminars For Businesses,
                                                                                                       10 ... Head of the House or Head of
                                                                                                       10 ... FTB Offers e-pay Option
                                                                                                       11... Head of Household
                                                                                                              Presentations Available

 A customer uses a kiosk to download tax forms       tax store. Please see the article on page 2
 at a prototype tax store in the Great Mall of the   entitled “Service on the Rise During Filing
 Bay Area. FTB is also participating in the new      Season.” FTB photo by Dan Chan
  Page 2

                                         New Members Join Tax Board
                                         The California Franchise Tax Board has         California Assembly for 12 years.
                                         two new members.                               Gage, who was appointed director of the
                Volume 99-2 March 1999
                                         Johan Klehs, the newly elected chair of        Department of Finance in December by
          TAX NEWS is a bimonthly        the State Board of Equalization, and B.        Governor Gray Davis, has held several
  publication of the Communications
Services Bureau, California Franchise    Timothy Gage, the newly appointed              finance positions in state government,
Tax Board. Its primary objective is to   director of the Department of Finance,         most recently four years as chief fiscal
   provide information to income tax     now serve on the three-member Franchise        advisor to the Senate President Pro
 professionals about state income tax
       laws, regulations, policies and   Tax Board.                                     Tempore.
                          procedures.                                                   He also worked for seven years as the
                                         Klehs was first elected to the State Board
             Members of the Board:       of Equalization in November 1994 and           chief consultant to the Assembly Ways
                                         was re-elected in 1998. He served as the       and Means Committee and six years as
             Kathleen Connell, Chair                                                    assistant fiscal advisor to the Senate
                     State Controller    chair of the State Board of Equalization in
                                         1995 and 1996 and therefore also served        President Pro Tempore.
                         Johan Klehs     as a member of the Franchise Tax Board
   Chair, State Board of Equalization                                                   Klehs and Gage join Kathleen Connell,
                                         in those years.                                who was re-elected State Controller in
                    B. Timothy Gage      Before his election to the State Board of      1998. Connell is the chair of the
     Director, Department of Finance
                                         Equalization, Klehs served in the              Franchise Tax Board.
                   Executive Officer:
                  Gerald H. Goldberg
                        Marvin Meek
                                         Service on the Rise During Filing Season
To update or correct your address or                                                    before April 15 (March 20 and 27 and
to subscribe to TAX NEWS (send $12                                                      April 3 and 10), from 8 a.m. until 5 p.m.
  for a one-year subscription), write:
                          TAX NEWS                                                      There are several ways to reach the Tax
                         PO Box 2708                                                    Practitioner Support Unit. If you have
   Rancho Cordova, CA 95741-2708                                                        questions about account resolution
              or call: (916) 845-7070.
                                                                                        problems or questions about tax law, call
  To view TAX NEWS on the Internet                                                      (916) 845-7057 or send a fax with your
     or to request an electronic mail                                                   question to (916) 845-6377.
    subscription, contact FTB on the
                             Internet:                                                  If you have questions concerning the
                                                                collection of personal income taxes, send
     For information about a client’s                                                   a fax with your question to           (916)
                    account, contact:                                                   845-0494.
     Tax Practitioner Support Unit
             (916) 845-7057 (phone)                                                     Typically, the Tax Practitioner Support
                (916) 845-6377 (fax)                                                    Unit responds to questions received by
For recorded answers to questions on                                                    fax within three working days. The
  California taxes, to order forms or                                                   maximum wait for a response by fax is
             check on a refund, call:                                                   seven working days.
          F.A.S.T. (800) 338-0505
  From outside U.S. (916) 845-6600                                                      Remember, the FTB Tax Practitioner
  To send a facsimile about a client’s                                                  Support Unit provides on-line and written
                 account, transmit to:   Trinh Vo, facility manager of the tax store,   assistance solely to qualified tax
        Electronic Correspondence        prepares a sign for the front window. FTB      practitioners, attorneys, enrolled agents
                      (916) 845-6377     photo by Dan Chan                              and certified public accountants.

                Information Center:
                      (800) 852-5711       ncreased hours of operation and                      Taxpayer Assistance
   From outside U.S. (916) 845-6500        telephone system upgrades have made          FTB has also made it easier for taxpayers
                 Hearing Impaired:         it easier to get assistance from the         to get assistance during the 1999 filing
                TDD (800) 822-6268       Franchise Tax Board during the 1999            season. From January 4 through         April
               __________________        peak filing season.                            15, the FTB general toll-free telephone
                FTB on the Internet                                                     service is available Monday through
                     Tax Practitioner Assistance                Friday, 6 a.m. until midnight; Saturday
                                         The Tax Practitioner Support Unit is           and holidays, 8 a.m. until 5 p.m.
                                         available Monday through Friday, 7 a.m.
                                                                                        From within the United States, the
                                         to 8 p.m., and on the last four Saturdays
                                                                                                                 CONTINUED ON PAGE 12

                                          March 1999
                                                                                                                            Page 3

Here are the answers to frequently asked        advance fee that taxpayers could be
questions about FTB’s credit card
program for personal income tax
                                                charged for making a tax payment                 Chart
                                                using a credit card?
liabilities:                                    Discover/NOVUS and American Express              Taxpayers will be charged a
Why should I use my credit card to pay          will not charge a cash advance fee for the       convenience fee by the vendor
my tax liability?                               tax payment transaction. Some banks that         for use of the automated credit
Payment by credit card is another               issue MasterCard credit cards may charge         card service.
payment option. Taxpayers can still make        a cash advance fee for tax payments.             The convenience fee amount
payment by check, money order, cash or          Cardholders should check with the                varies according to the payment
Western Union money transfer.                   financial institution that issued the credit     amount. The chart below
Taxpayers who are unable to pay the total       card to see if there is a cash advance fee.      shows what a taxpayer can
amount owed may also request a payment          The credit card payment processor’s IVR          expect to pay for payment
arrangement. However, with partial              system also has been programmed to               amounts up to $4,999.99. For
payments, the interest and/or penalties         notify cardholders if their bank charges a       payments of $5,000 or more,
will continue to accrue on any unpaid           cash advance fee for the FTB payment.            eligible taxpayers can contact
balances.                                       Cardholders then have the option of              the credit card processing
                                                continuing the transaction, using another        vendor at to find out exactly
Which credit cards will FTB accept?             credit card or ending       the call.            how much the vendor will
Taxpayers can use their Discover/               Can taxpayers make partial payments              charge them to make the
NOVUS, MasterCard and/or American               with their credit card?                          payment.
Express cards.
                                                Yes. Taxpayers may pay all or part of the
Is FTB accepting credit cards for all           balance due by credit card; however,
types of taxes?                                                                                            Fee Chart
                                                interest and/or penalties will continue to
No. The pilot program is limited to             accrue on any unpaid past due balances.           Amount Charged           Fee
individual taxpayers who have a past due        Can parents or friends use their own              $ 1-99.99            $     3
state tax liability. FTB plans to expand        credit card to pay balance due taxes for          $ 100-199.99         $     6
the program to other types of tax               another person?
payments in the future.                                                                           $ 200-399.99         $     11
                                                Yes. The credit card program allows               $ 400-699.99         $     16
Will FTB have access to taxpayers’              relatives or friends to pay the tax bill for
credit card information?                                                                          $ 700-799.99         $     19
                                                the taxpayer in certain situations, as long
No. FTB’s credit card processing vendor         as they have the appropriate taxpayer             $ 800-1099.99        $     25
will not disclose taxpayers’ credit card        information when they make                 the    $ 1100-1599.99       $     35
numbers to FTB at any time during               payment.                                          $ 1600-2299.99       $     49
the process.                                    What should taxpayers do if they have             $ 2300-3099.99       $     68
How much is the convenience fee?                a problem with their credit card                  $ 3100-3999.99       $     87
The convenience fee amount varies               payment?
                                                                                                  $ 4000-4999.99       $     109
according to the payment amount. For            If taxpayers have questions or problems
example, the credit card processing             concerning billing errors, fees or interest       $5000 and up, contact the credit
                                                                                                  card processing vendor.
vendor will charge taxpayers a                  charged, they should first contact the bank
convenience fee of $19 for a $740               that issued the credit card. If they have
payment. For payments of $5,000 or              questions or a dispute concerning the
more, eligible taxpayers can contact the        amount of the tax owed or any other
credit card processing vendor to find out       matter concerning their tax return, they
exactly how much the vendor will charge         should call FTB’s general toll-free
them to make the payment. (For more             telephone service at (800) 852-5711.
information about the convenience fee,
see the related article on this page entitled
“Convenience Fee Chart.”
Are there any other fees such as a cash
Page 4

                                                      The Question Column
  Court Opinions

        On January 26, 1999, the               Power of Attorney                      br. Lexis 139) bridged the gap between
                                                                                      the reporting requirements of the Revenue
         Third Appellate District     Will FTB accept an Internal Revenue             and Taxation Code (RTC) Section 18622
         (Sacramento) California      Service IRS Form 2848,
                                                                                      and the filing requirements of Section
         Court of Appeal decided      “Power of Attorney?”
                                                                                      523(a)(1)(B)(i),11 U.S.C.
         William Schatz, et. al. v.   Yes, provided the power of attorney
            Franchise Tax Board.                                                      In cases involving Chapters 7, 11 and 12
                                      includes language that states it also
                                                                                      bankruptcies, when the IRS produces a
      In a published opinion, the     applies to the taxpayer’s state income
                                                                                      final federal determination, it creates a
      court held that a California    tax matters.
                                                                                      new filing requirement with FTB. The
    assessment of additional tax      Will powers of attorney ever be                 due date for taxpayers to report any
    did not become final (and so      centralized at the Franchise Tax Board          changes to their federal return is six
            was not discharged in     like at the IRS?                                months after the IRS’ final determination.
      bankruptcy) until amended                                                       The additional assessment must not fall
            returns self-assessing    Yes. FTB is currently developing a
                                      system that will allow it to store power of     under the “Exceptions to Discharge”
      additional tax based on the                                                     Section 523, 11 U.S.C.
      federal determination were      attorney information in a central location
   accepted and posted by FTB.        and allow employees to access that              In other words, the additional assessment
                                      information from anywhere in the                has a new three-year rule and 240-day
           The court rejected the     department.                                     rule under Section 523 (a)(1)(A), 11
       taxpayer's argument that a                                                     U.S.C. and a new two-year rule in Section
   self-assessed amended return       Does FTB accept powers of attorney
                                      sent by fax?                                    523 (a)(1)(B), 11 U.S.C.
  created an immediate due and
     payable liability. The court     Yes. FTB accepts powers of attorney             For the additional assessment to be
     explained that "assessment"      forms sent by fax. However, if it appears       dischargeable, the debtor must volunteer
        for bankruptcy discharge      that the form has been forged or is             the information as specified in RTC
  purposes does not occur until       invalid, an original will be required.          Section 18622. If the debtor provides the
        FTB formally and finally                                                      final determination or amended return
    fixes the amount payable by                    240-Day Rule                       after the time specified in RTC Section
       accepting the computation      What is FTB’s position on the 240-day           18622, it would be treated as a delinquent
          shown on the amended        rule in the following situation?                return for bankruptcy purposes. In this
          returns and posting the                                                     situation the delinquent return would have
                                      (1) The taxpayer files an original
    additional tax on its records.                                                    to be filed more then two years before the
                                                                                      petition date as required in Section
  See “240-Day Rule” found in         (2) Then the IRS issues a notice of             523(a)(1)(B)(ii), 11 U.S.C.
     “The Question Column” on         deficiency;
                         this page.                                                   If the debtor does not volunteer the
                                      (3) Then the taxpayer fails to file an          additional assessment based on IRS
                                      FTB Form 540X, “Amended Individual              information, it is not dischargeable.
                                      Income Tax Return;”                             However, FTB is not actively collecting
                                      (4) As a result, FTB makes an                   on these liabilities until there is a binding
                                      assessment;                                     decision in the 9th circuit on this issue. It
                                                                                      may take another two years to have this
                                      (5) After 240 days pass, the taxpayer           issue fully resolved.
                                      files for Chapter 7 bankruptcy.
                                                                                      What is the current status of the
                                      FTB's position is that if the debtor fails to
                                                                                      "Blutter" issue?
                                      report the information and FTB receives
                                      it under the exchange of information            The "Blutter" issue is working its way to
                                      agreement with the IRS (Internal Revenue        conclusion. The department has one case
                                      Code 6103(d)), the additional assessment        pending in the Ninth Circuit Court of
                                      is not dischargeable under section              Appeals. Oral argument was held
                                      523(a)(1)(B)(i), 11 U.S.C.                      December 11, 1998 and the department is
                                                                                      expecting a decision by mid-year.
                                      This situation is equivalent to the person
                                      not filing a return for the additional
                                      The court in: Blutter (177 br. 209; 1995

                                        March 1999
                                                                                                                    Page 5

                                                                                            FTB Calendar

                                                                                            • Requests for Tax Return
                                                                                                are mailed to individuals
                                                                                                who have not filed their
                                                                                                1997 personal income tax
                                                                                            • Notices of Proposed
                                                                                                Assessment are mailed to
                                                                                                individuals who have not
Limited Liability Co: Anything But Simple                                                       filed their 1997 tax
For many years there were three basic               Note: Limited partnerships must file
types of business entities: (1) sole                Secretary of State Form LP-4/7,         20 Previous month
                                                                                                nonresident withholding
proprietorships, (2) partnerships and (3)           “Certificate of Cancellation,” or           payments are due if total
corporations.                                       Form LP-9, “Certificate of Merger,”         withholding exceeded
In recent years, a new legal structure has          to end their filing and annual tax          $2,500.
been created — limited liability                    requirements. An automatic six-
                                                    month extension is available for        April
companies (LLCs).                                                                           • Requests for Tax Return
                                                    filing the return, however; if an
Generally, California tax law mirrors               annual tax is due, file form FTB            are mailed to individuals
federal tax law. However, major                     3538, “Payment Voucher for                  who have not filed their
differences exist in the treatment of the                                                       1997 personal income tax
                                                    Automatic Extension for Limited             return.
conversion of a partnership into an LLC             Partnerships, LLPs, and REMICS,”
not classified as a corporation.                    with payment, by the regular due date   • Notices of Proposed
                                                                                                Assessment are mailed to
Federal tax law treats general                      of the short period return.                 individuals who have not
partnerships, limited partnerships, limited    3 File Form 568, “Limited Liability              filed their 1997 tax
liability partnerships and limited liability        Company Return of Income,” on or            returns.
companies treated as partnerships in the            before the 15th day of the fourth       15 1998 personal income tax
same manner. Consequently, they all file            month after the end of the LLC’s            returns are due.
Form 1065, “U.S. Partnership Return of              short taxable year. An automatic six-   15 First quarter 1999
Income.”                                            month extension is available for            personal income tax
An LLC not classified as a corporation              filing the return. However; if an           estimate payments
for California tax purposes is subject to           LLC annual fee or nonconsenting             are due.
additional requirements. This creates a             nonresident members’ tax is due, file   20 See March 20.
requirement for the converting business             form FTB 3537, “Payment Voucher         May
entity to file two short period returns.            for Automatic Extension for Limited
                                                    Liability Companies,” with payment,     • Requests for Tax Return
The specific requirements of an LLC are                                                         are mailed to individuals
                                                    by the regular due date of the short        who have not filed their
explained in Form 568, “Limited Liability
                                                    period return. The LLC annual fee           1997 personal income tax
Company Tax Booklet.”
                                                    for the current taxable year is also        return.
In summary, three steps need to be taken            due on or before the 15th day of the
by business entities converting from a                                                      • Notices of Proposed
                                                    fourth month after the beginning of         Assessment are mailed to
partnership into an LLC:                            the LLC’s taxable year.                     individuals who have not
1 File form FTB 3522, “Limited                 For more information about California’s          filed their 1997 tax
     Liability Company Tax Voucher,”           filing requirements for LLCs, contact the        returns.
     and pay the annual tax on or before       Tax Practitioner Support Unit at (916)       20 See March 20.
     the 15th day of the fourth month after    845-7057. To download, view or print
     the beginning of the LLC’s short          Form 568, visit the FTB Web site at
     taxable year.                    and go to the                 CONTINUED ON PAGE 7
2 File Form 565, “Partnership Return           Tax Forms page.
     of Income,” on or before the 15th day
     of the fourth month after the end of
     the partnership’s short tax year.
Page 6

           FTB e-filers:
         Keep Signature
     Most tax practitioners who e-
         file already know that both
      the Internal Revenue Service
      and the Franchise Tax Board
      require a signature document
       for each return filed. Fewer
             know the proper way to
                         process them.
      The confusion lies in what to
       do after the taxpayer and the
         electronic return originator
          (ERO) complete the form.
        FTB asks that EROs do not
                mail form FTB 8453,
    “California Individual Income
     Tax Declaration for e-file” to
    FTB. EROs are to retain the
           original signed form FTB
          8453 in their files for four
             years. In addition, FTB
                                                                                                            FTB Graphic By Frank Soto
       instructs EROs not to mail a
           copy of FTB’s form FTB
                      8453 to the IRS.
            The IRS, however, does
     require EROs to mail the IRS
                                                     What’s Your Excuse?
       original signed federal Form
       8453 to the appropriate IRS                 Better to File Late Than Not at All
                        service center.
           The FTB e-file process is
    truly paperless. “If we need a
                copy of any signature
        documents, we will contact
                                          “M            y dog ate my tax return.”
                                          “I was going to file but my accountant
                                                                                      The Franchise Tax Board is currently in
                                                                                      the process of reminding nearly 700,000
                                                                                      of those individuals of their need to file.
                                                                                      If the required returns aren’t filed, FTB
                                          was abducted by aliens.” “My husband        will likely follow up with proposed
               the ERO,” said Alison      used our tax return to wrap the fish he     assessments based on the information that
     Adams, lead analyst in FTB’s         caught.”                                    is available to the department.
                Electronic Document
         Services Unit. “If an ERO        These are just about the only excuses the   The key is to file the return. Even if your
              inadvertently mails any     Franchise Tax Board hasn’t heard yet for    client receives a notice of proposed
      signature documents to FTB,         why people didn’t file their 1997 tax       assessment for not filing, the proposed
           we mail them back to the       returns on time.                            figures will be adjusted based on the
                    ERO,” she added.      Reasons for not filing have ranged from     validated figures when a return is filed.
        For more information about        “accidentally tucking it away in a          Also, by filing before they are contacted
    the e-file program, contact the       neglected corner” to having them “eaten”    (or within 30 days of a request for tax
    FTB e-file Help Desk at (916)         by a personal computer.”                    return), they can avoid being charged
       845-0353. Help Desk hours          The good news is, regardless of the         additional penalties, interest and fees over
               are 8 a.m. until 5 p.m.,   reason people haven’t filed their 1997      and above what they would             already
            Monday through Friday.        return yet (even though the 1998 due date   owe.
                                          is almost here), they can still file.

                                          March 1999
                                                                                                                  Page 7

Check SSNs on Mortgage Statements                                                       Wanted:
You may have clients who received a            these notices because their mortgage     New
notice requesting that they file a 1997 tax    lenders are reporting the wrong social
return because they 1) paid over $10,000       security numbers on the Form 1098,       FTB e-filers
in mortgage interest during 1997, and 2)       “Mortgage Interest Statement.”
had not yet filed a return.                    Practitioners should verify that their   More and more practitioners
If they received the notice, they were         clients’ social security numbers are     are joining the FTB e-file
among the nearly 25,000 people who             correctly reflected on all their tax     program. By the close of the
were contacted recently as part of a new       documents, including Forms 1098, Form    1998 filing season, FTB had
FTB nonfiler program. The request for          W-2, Forms 1099 “ and Schedule K-1s.     accepted 5,618 tax
return notices were issued to individuals      Problems also arise when a Form 1098     practitioners into its e-file
who had not filed tax returns, although        is reported under the social security    program.
information reported to FTB indicated          number of a deceased spouse or an ex-    At press time, that number
that they may have had enough income to        spouse who no longer pays the mortgage   had grown to 7,157, an
require that one be filed.                     on the property.                         increase of 27 percent over
These individuals should file the required     If you find that your client’s social    last year.
returns as soon as possible to keep at a       security number has been reported        To join the FTB e-file
minimum the additional penalties, interest     incorrectly, contact the reporting       program, access form FTB
and fees associated with the nonfiling.        organization to have it corrected.       8633, “California Application
Some individuals, however, are receiving                                                to Participate in the e-file
                                                                                        Program.” from the FTB Web
                                                                                        site at
Voluntary Disclosure Program Helps Nonfilers                                            Download the form, complete
                                                                                        it and send it by fax to FTB at
The Franchise Tax Board’s Voluntary            directed to the Corporation Filing       (916) 845-0287.
Disclosure Program allows a qualified          Enforcement Unit at (916) 845-3294 or
business entity or shareholder to              (916) 845-3795.                          For more information, call the
voluntarily file up to six past due tax                                                 FTB e-file Help Desk at
returns and pay all outstanding tax                                                     (916) 845-0353. Help Desk
liabilities.                                                                            hours are Monday through
                                                Not Everyone Has to File                Friday, 8 a.m. until 5 p.m.
As part of the voluntary agreement, FTB
may waive penalties associated with the         Beginning January 1, 1996,
return filings.                                 corporations not incorporated under     FTB Calendar
A qualified business entity is one that is      the laws of California may be
not registered with the California Office       excluded from California filing         CONTINUED FROM PAGE 5
of the Secretary of State, has never filed a    requirements if they are engaged
                                                solely in convention and trade show     June
return with FTB and has not been the
subject of an inquiry by FTB with respect       activities.                             • Requests for Tax Return
                                                                                           are mailed to individuals
to liability for any taxes.                     For the corporation to be excluded         who have not filed their
A qualified shareholder is an individual        from a filing requirement and not be       1997 personal income tax
who is a nonresident on the signing date        subject to the minimum franchise           return.
of the voluntary disclosure agreement and       tax, the corporation must be            • Notices of Proposed
is a shareholder in an S corporation that       engaged in such activities for seven       Assessment are mailed to
has applied for a voluntary                     or fewer days during the income            individuals who have not
disclosure agreement.                           year and earn gross income from            filed their 1997 tax
                                                such activities of $10,000 or less.        returns.
Representatives for qualified business                                                  • Requests for Tax Return
entities and shareholders who want to           This tax provision does not apply to
                                                corporations qualified to do               are mailed to
apply for a voluntary disclosure                                                           corporations who have
agreement can call (800) 852-5711 to            business in California through the         not filed their 1997
request form FTB 4925, “Application for         California Office of the Secretary of      corporate tax return.
Voluntary Disclosure.” Qualified                State. Qualified corporations must
                                                still report California gross income    15 Second quarter 1999
business entities or shareholders are not                                                  personal income tax
required to identify themselves when            and pay the corporate tax.                 estimate payments are
they call.                                                                                 due.
Questions about the program can be                                                      20 See March 20.
Page 8

   Manufacturers’                     Manufacturers’ Investment Credit:
          Credit:                        Avoid Common Errors Found With MIC
        For Your
                                     In the July 1998 issue of Tax News,            firms and biopharmaceuticals.
     Information                     “qualified taxpayer,” “qualified               Nonqualified taxpayers, however, have
                                     property” and “qualified costs,” the           erroneously included costs for parking
     Information that will help      three key requirements for claiming the        lots, landscape, fencing and buildings.
 your clients better understand      Manufacturers’ Investment Credit (MIC),
the manufacturers’ investment                                                                      Qualified Cost
                                     were discussed. The following is an
       credit (see article on this   overview of common errors found with           This is an area where errors are frequently
    page) is available from the      these requirements.                            made. For example, some taxpayers
          Franchise Tax Board.                                                      erroneously include sales or use tax
                                                 Qualified Taxpayer                 amounts paid to other states. Some
        FTB 1113, “Frequently
   Asked Questions About the         Generally, the taxpayer’s business activity    taxpayers also erroneously include as
    Manufacturers’ Investment        must be in manufacturing as described by       qualified costs those amounts upon which
       Credit (MIC),” provides       codes 2011 through 3999 in the Standard        no sales or use tax were paid or incurred.
answers to 19 questions about        Industrial Classification (SIC) Manual,        Generally, there are two basic
      the credit. The questions      1987 edition. Codes 2011 through 3999          requirements for costs to be qualified for
     include, “How is the MIC        are under Division D, manufacturing, of        the MIC. First, California sales or use tax
     claimed?” and “Do leases        the SIC Manual.                                must be paid, directly or indirectly, on all
  qualify for the MIC?” For a        One common error found involves                costs, with the major exception of
          copy, visit FTB at its     taxpayers that have business activities in     capitalized labor costs. Web site.        other divisions of the SIC Manual. Some        The MIC law states that qualified costs
    Click on “Tax Forms” and         of these taxpayers erroneously claim the       are an amount upon which California
       scroll to “Miscellaneous      credit. For example, taxpayers who are         sales or use tax is paid, either directly or
         California Income Tax       engaged in the retail sale of bakery goods     indirectly. For example, if you pay $100
        Forms, Instructions and      are claiming a MIC for costs paid for          for a machine, plus $8 in California sales
       Publications.” Or write:      qualified property. However, these             tax, for a total cost of $108, then the
       Tax Forms Request Unit        taxpayers would generally be classified in     qualified cost for the MIC is $100, not
          Franchise Tax Board        SIC Code 5461, “Retail Bakeries.” Since        $108. Thus, the qualified costs for the
                    PO Box 307,      these taxpayers are not engaged in an          MIC can never include sales or use tax
          Rancho Cordova, CA         activity described under Division D,           amounts paid. If, however, you did not
                    95741-0307.      manufacturing, the taxpayers are not           pay the $8 in California sales tax, the
                 Or you may call     considered qualified taxpayers for             $100 paid for the machine would not be
                (800) 852-5711.      purposes of claiming the MIC.                  treated as a qualified cost.
      You also can obtain form                   Qualified Property                 Another common error found with
   FTB 3535, “Manufacturers’         Qualified property can either be new or        qualified costs is the inclusion of costs
  Investment Credit,” from the       used tangible personal property that is        that are currently expensed under Internal
 same FTB sources. The form          used in a qualified activity such as           Revenue Code (IRC) Section 179. The
      includes instructions that     manufacturing. Tangible personal               second requirement for qualified costs is
feature the Standard Industrial      property means any tangible property           that amounts must be properly chargeable
 Classification (SIC) Manual’s       except land and improvements. Some             to your capital account.
            Division D listings.     taxpayers have erroneously included real       In order to meet this requirement, costs
  Also, see MIC regulations at       property (buildings, foundations, docks,       must be properly includable in the tax
   Title 18, California Code of      etc.) and intangible assets such as patents,   basis for computing depreciation. Costs
          Regulations, Sections      copyrights and purchased technology            that are not included in the depreciable
            17053.49-0 through       when listing qualified property.               basis for tax purposes, such as amounts
17053.49-11 and          23649.0     One exception to the general tangible          currently expensed under IRC Section
              through 23649.11.      personal property requirement is for           179 and similar provisions (such as the
                                     “special purpose buildings and                 Los Angeles Revitalization Zone business
                                     foundations” owned by taxpayers engaged        expense deduction) are not eligible for the
                                     in specified SIC codes. Generally, this        MIC. For example, if you purchased 10
                                     exception applies to “clean rooms” used        stainless steel racks for $100 and elected
                                     by computer chip manufacturers, biotech        to expense the item for California
                                                                                    franchise tax purposes, the $100 paid
                                                                                                               CONTINUED ON PAGE 9

                                     March 1999
                                                                                                                       Page 9

Tax Form Corrections Announced
Tax practitioners should note the                  2. Reduce Schedule A, line 27 by
following corrections to the 1998 tax              the amount of the casualty and theft
form information that has already been             loss deduction and enter here _____
distributed:                                       3. Recalculate Schedule A, line 20
Instructions for Schedule CA (540 and              through line 26 including the casualty
540NR), page 6, column 2, line 38.                 and theft loss deduction and enter
Add the following new paragraph:                   here ____                                 Free Seminars
Casualty and Theft Losses for                      4. Add line 2 and line 3 ____             For Businesses,
Income-producing Property - You may                5. Subtract line 5 from line 1 and
need to make an adjustment for this                include it as a negative number on        Taxpayers
deduction since California and federal             line 38.
law are not the same. California law          Instructions for Form 5805,                    “Taxpayer Service Days” and
does not conform to the federal               “Underpayment of Estimated Tax by              “Small Business Fairs” are
provision that allows taking the full         Individuals and Fiduciaries,” page 2,          free, educational conferences
deduction for the loss rather than a          column 3, line 10:                             featuring representatives from
miscellaneous itemized deduction                                                             the State Board of
subject to 2% of AGI. If you included a       Delete the second bullet reading "IRC          Equalization, Franchise Tax
casualty or theft loss from income-           Section 644, tax on trusts."                   Board, Internal Revenue
producing property on federal Schedule        Form 5805F, “Underpayment of                   Service, Employment
A, line 27 and Schedule A, line 26 is:        Estimated Tax by Farmers and                   Development Department,
• More than zero — no adjustment is           Fishermen.”                                    County Assessor's Office and
     necessary.                                First line directly below title:              several other local, state, and
                                                                                             federal agencies.
• Zero — make the following                   Insert "or Form 541" after
     adjustment:                              "Form 540NR."                                  The following seminars have
                                                                                             been scheduled:
     1. Enter the total of the amounts on
     your federal Schedule A, line 26 and                                                    Friday, March 12, in Long
     line 27______                                                                           Beach at the Long Beach
                                                                                             Convention Center.
                                                                                             (310) 516-4330
Manufacturers' Investment Credit: Avoid Errors                                               Thursday, March 18, in
CONTINUED FROM PAGE 8                         entire credit for such item of property        Stockton at the
                                              must be recaptured by adding the amount        University of Pacific.
would not be treated as a qualified cost                                                     (209) 932-2338
since the amount is not properly              of credit claimed to the “tax” of the
chargeable to your capital account.           qualified taxpayer for the following           Tuesday, March 23, in
                                              taxable or income year.                        Inland Empire at
Capitalized labor costs for constructing                                                     California State University,
or modifying qualified property can also                     Recordkeeping
                                                                                             San Bernardino.
qualify for the MIC as long as they are       What records do you want to keep?              (909) 680-6705
treated as “direct” costs under IRC           Generally, invoices, contracts, books and
Section 263A. Direct costs include basic                                                     Wednesday, March 24, in
                                              records should be maintained and will be       Chico at
compensation, overtime pay, payroll           adequate for purposes of substantiating
taxes, holiday pay, sick pay, etc.                                                           California State University,
                                              the MIC. However, sales tax payment,           Chico.
Some taxpayers, however, erroneously          where required, must be evident (usually       (916) 227-1883
include “indirect” costs such as training     shown on invoices and contracts). Books
costs, officer’s compensation, insurance,     and records should be kept as long as the
                                                                                             CONTINUED ON PAGE 11
travel and entertainment expenses,            statute of limitations, generally four years
utilities, and freight charges.               from the original due date or the date the
                  Recapture                   return was filed, remains open.
Regarding recapture: if within one year
of the date the qualified property is
placed in service, such property is (1)
removed from California, or (2) primarily
used in a non-qualified activity, or (3)
transferred to an unrelated party, then the
Page 10

                   FTB               On December 9, 1998, eighty-five tax         joint return because the spouse is
                                     practitioners and taxpayers came to the      undocumented and does not have a
           Offers e-pay              Franchise Tax Board to participate in a      valid social security number.)
                Option               symposium on the head of household
                                     filing status.
                                                                                  No. To qualify for the head of household
                                                                                  filing status, the taxpayer must be
                                     The symposium provided an opportunity        unmarried at the end of the year or meet
   The Franchise Tax Board is        for participants to learn more about head    the requirements for being considered
           offering an electronic    of household filing status requirements      unmarried at the end of the year. For this
      payment (e-pay) option to      and to discuss their comments and            taxpayer to be considered unmarried, the
  taxpayers who file electronic      questions about the filing status with a     taxpayer would have to have met all the
      returns with balances due.     panel of experts from FTB and the            following requirements:
        With the new option, an      Internal Revenue Service.                    • Taxpayer filed a separate return from
 e-filer with a balance due may      Representatives from FTB also                     his or her spouse.
  authorize FTB to debit his or
           her bank account on a
                                     demonstrated FTB’s new computer-based        • Taxpayer paid more than half the
                                     FTB Publication 1540, “California Head            cost of keeping up his or her home
  specified date for the amount      of Household Filing Status Information,”
  due. Now, not only can your                                                          for the year.
                                     on CD-ROM.
   clients e-file, but e-pay also,                                                • Taxpayer’s spouse did not live in the
 eliminating the need to mail a      Listed below are some of the questions            taxpayer’s home at any time during
     check and form FTB 3582,        and answers discussed at the symposium:           the last six months of the year.
          “Payment Voucher for
     Electronically Transmitted
                                     How can a parent prove that his or her       • For more than half the year, the
                                     home was his or her child's main home             taxpayer’s home was the main home
          Returns,” by April 15.     for more than one half the year?                  of his or her child, stepchild or
                                     A parent could submit evidence to FTB.            adopted child or, for the entire year
                                     FTB will consider any and all evidence.           the taxpayer’s home was the main
                                     Such evidence could include a notarized           home of his or her foster child.
                                     statement signed under penalty of perjury    • Taxpayer was entitled to claim his or
                                     from the other parent, a copy of the joint        her child, stepchild, adopted child or
                                     custody agreement, records kept by the            foster child as his or her dependent.
                                     parent or a calendar reflecting the time
                                     the child lived with the parent.             Because the taxpayer's spouse lived in the
                                                                                  taxpayer’s home during the last six
                                     Can parents take turns claiming the          months of the year, the taxpayer cannot be
                                     head of household filing status every        considered unmarried, and thus cannot
                                     other year?                                  qualify for head of household filing
                                     Yes. The parent claiming the filing status   status.
                                     must have met all of the head of             If the taxpayer's spouse is not eligible for
                                     household requirements, including the        a social security number, the spouse can
                                     requirement that the parent's home was       apply for an individual taxpayer
                                     the child's main home for more than half     identification number (ITIN) by filing a
                                     the year.                                    Form W-7 “Application for IRS
                                     If a taxpayer’s alien spouse lives with      Individual Taxpayer Identification
                                     him or her all year, can the taxpayer        Number” with the IRS.
                                     qualify for the head of household filing     For a taxpayer to qualify for the head
                                     status? (The taxpayer could not file a       of household filing status, is the age of
                                                                                                            CONTINUED ON PAGE 11

                                     March 1999
                                                                                                                     Page 11

Head of the House or Head of Household?
the taxpayer’s child important ?               of the tax year and the Godek opinion
Yes and no. If the taxpayer is single, the
                                               addresses taxpayers who were legally        Free Seminars
                                               married at the end of the tax year.
age of the taxpayer's child is not
significant unless the child is married. If    Is the question in Section C of the Head
                                                                                           For Businesses,
the child is married, he or she must
qualify as the taxpayer's dependent by
                                               of Household Audit Letter, "Did any
                                               other person live with you," an
meeting the five dependency tests, in          invasion of the taxpayer’s privacy?         CONTINUED FROM PAGE 9
which age is a factor.                         No. This question is asked on the audit     Saturday, March 27, in
If the taxpayer is married and lived           letter to determine if there were any       Sacramento at         American
separate from his or her spouse for the        members of the household who could          River College.
last six months, the child must qualify as     qualify the taxpayer for the head of        (916) 227-1883
the taxpayer’s dependent by meeting the        household filing status. Some taxpayers
                                               completing the audit letter list a person   Tuesday, March 30, in
five dependency tests, in which age       is                                               Ventura at
a factor.                                      that cannot qualify them for head of
                                               household. If the taxpayer provides         Ventura Community College.
How does having a child placed in the          information about another person, that      (805) 677-2771
taxpayer’s home for adoption affect            person could possibly qualify the           Wednesday, March 31, in
the taxpayer’s ability to qualify for the      taxpayer for the head of household          Bakersfield at
head of household filing status?               filing status.                              Bakersfield College.
Before legal adoption, a child is                                                          (805) 334-3929
considered the taxpayer's child if the child
                                                                                           Thursday, April 1, in
was placed with the taxpayer for adoption
                                                                                           Fresno at
by an authorized placement agency. To
                                                                                           California State University,
qualify for the head of household filing
status, a taxpayer must meet all of the
                                                                                           (209) 248-4209
requirements, including the requirement
that “the taxpayer's home was the child's         Head of Household                        Saturday, May 1, in Hayward
main home for more than half the year.”                                                    at California State University,
(If the child was born during the last half     Presentations Available                    Hayward.
of the year, the taxpayer's home must                                                      (510) 637-2473
have been the child's main home for the        Head of household presentations similar
                                               to the symposium held at the Franchise      To attend a seminar, call the
portion of the year after the child was                                                    telephone number provided
born.)                                         Tax Board’s Central Office have been
                                               well received in other California cities    for the location of your
How does the State Board of                    as well.                                    choice. For-up-to-date
Equalization (SBE) become involved                                                         information about these and
with head of household cases?                  Since December, FTB has conducted           other taxpayer education
                                               head of household presentations in Santa    opportunities, visit the BOE
When a taxpayer disagrees with the             Barbara, Stockton, Watsonville,             Web site at
Franchise Tax Board's action on the            Lancaster and Escondido.                    and click on “Taxpayer
taxpayer's protest against a proposed
                                               The presentations are geared towards        Education.”
assessment or a denial of a claim for
refund, the taxpayer may file an appeal        helping practitioners better understand     For more information about
with the State Board of Equalization.          the head of household filing status. A      FTB’s participation in the
                                               typical presentation includes a head of     seminars, contact Alvaro
Explain the difference between the             household program overview, an              Hernandez, FTB Small
SBE Appeal of William Tierney (97-             explanation of the qualification criteria   Business Tax Education
SBE-006-A) and the new SBE opinion             for using the head of household filing      Coordinator, at
on the Appeal of Barbara Godek                 status and a discussion about important
(98-SBE-005).                                                                              (916) 845-5257.
                                               questions that practitioners should ask
Both SBE opinions address how to treat         their clients who file head of household.
the time a taxpayer, taxpayer's spouse and     For information on how to get a head of
taxpayer's claimed qualifying individual       household presentation conducted in your
lived together to determine how long a         area, contact FTB’s Head of Household
taxpayer’s home was the claimed                Unit at (916) 845-6265.
qualifying individual’s main home during
the year. The Tierney opinion addresses
taxpayers who were unmarried by the end
Page 12

                                  toll-free number is (800) 852-5711.           Taxpayers can file their returns
             Service              From outside the United States, the           electronically from the store site or drop
                                                                                off completed paper tax returns.
                                  number is (916) 845-6500 (This number
              on the              is not toll-free).                            Taxpayers can also obtain tax forms and
                                                                                information and use available auto-dialers
                Rise                       FTB Field Offices                    to contact FTB and IRS telephone centers.
                                  Taxpayers can also visit FTB at one of        Tax forms and publications can be
                                  the 16 field offices located throughout       downloaded from the kiosks and printed
          CONTINUED FROM PAGE 2                                                 for the taxpayer on-site.
                                  California. Office hours are Monday
                                  through Friday, 8 a.m. to 5 p.m. The field    FTB’s hours of operations during the
                                  offices offer extended hours on               1999 filing season will be Monday
                                  Wednesdays until 7 p.m. and are open on       through Friday, 10 a.m. to 7 p.m.;
                                  Saturdays from 8:30 a.m. until 12:30 p.m.     Saturday, 10 a.m. to 4 p.m.; and Sunday,
                                  In addition, all field offices will be open   11 a.m. to 4 p.m.
                                  Thursday, April 15 from 8 a.m. to 7 p.m.
                                              The Tax Store
                                  The Franchise Tax Board is participating
                                  with the Internal Revenue Service in a
                                  prototype tax store in the Great Mall of
                                  the Bay Area located in Milpitas.

                                                                                                     First-Class Mail
                                                                                                    U.S. Postage Paid
 P.O. Box 520                                                                                       Sacramento, CA
 Rancho Cordova, CA 95741-0520                                                                       Permit No. 312

 Address Service Requested

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