Louis E. Michelson, A Professional Corporation

Providing Legal and Tax Advisory Services to Nonprofit Organizations

Franchise Tax Board Comments: Exemption of Title Holding Companies; Proposition 26 and Conformity Legislation; Form 199-N

May 16th, 2011 · No Comments · Uncategorized

The following is an excerpt from minutes of the January 18, 2011 joint meeting of the Nonprofit and Unincorporated Organizations Committee of the Business Law Section and the Exempt Organizations Committee of the Tax Section of the State Bar of California:

Ms. Rosen introduced Diane Deatherage, Program Specialist II, from the Franchise Tax Board, and Ron Maddox, also of the FTB. First, Ms. Deatherage provided a few announcements: Almost 1,000 Forms 199-N have been filed so far. Ninety days is the usual turnaround for Forms 3500, but as the FTB is in transition, the turnaround for some applications of the Form 3500 are closer to six months. Ms. Deatherage suggested that applicants call if there is a problem with that timeline. She noted that the Form 3500A applications are very quickly turned around.

The Franchise Tax Board is currently working through account delinquencies from the 1980s.  Mr. Michelson inquired if there had been any public notice of letters going out regarding delinquent accounts. Ms. Deatherage responded that there had not, but she would look into it.

Ms. Deatherage also responded to questions previously submitted:

1. What are the FTB ’s guidelines with regard to recognition of exemption of title holding companies under RCT 23701h and 23701x? In particularly, how much latitude does the FTB give the organization with regard to the types of assets a title holding company may hold.

Mr. Maddox noted that IRC Section 501 (c)(2) is cross-referenced in the R&TC provision, which is about many types of assets, as long as there is only one owner. Nevertheless, some text in the organization’s formation documents regarding title-holdings is required. IRC Section 501(c)(25) is about real estate ownership in which there can be more than one owner.

Mr. Dostart noted that he received an IRC Section 501(c)(2) ruling where the entity had seven owners, all of whom were unions. Mr. Dostart further asked about a situation in which the only asset held is a security interest. Mr. Maddox noted that would probably be permitted.

2. Please comment on your view of the effects of Proposition 26 and its two- thirds vote requirement on future California tax law changes and on conformity legislation enacted in 2010.

A question was posed about Proposition 26 and the effect of that legislation on the recently passed SB 401 conformity legislation, which enacted many changes conforming the Revenue & Taxation Code, and other state law provisions, to the Internal Revenue Code and other federal tax law. Proposition 26 arguably requires any legislation that would cause any increase in taxes to be passed by a 2/3 vote of the legislature, and it applies retroactively to some legislation enacted prior to the November 2010 election, including (again, arguably) SB 401. The Franchise Tax Board has published guidance on SB 401; at present it is assumed that SB 401 is good law, but it is under review. Mr. Michelson inquired about what will happen in November 2011 (the deadline for approving tax increasing legislation). Ms. Deatherage responded that the current understanding is that if SB 401 is not reenacted with a two-thirds vote, it will be void. Some say only the provisions of the conformity legislation that effect tax increases requires re-enactment, but this is unclear.

Mr. Sternal returned to the topic of Form 199-N. He wanted to know whether the reporting thresholds will be conformed to IRS Forms 990-N and 990-EZ. Ms. Deatherage indicated that the FTB is aware of the issue and it remains to be seen how it will play out, both in connection with SB 401 and otherwise. Ideally there will be legislation that requires the Form 199-N to remain in conformity with the IRS Form 990-N so that California filers whose revenues are higher than the 199-N standard but below the 990-EZ standard are not required to file a full Form 199 where otherwise under federal law they would be required only to file an e-postcard.

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