Louis E. Michelson, A Professional Corporation

At the recent meeting of the Business Law Section Nonprofit Organizations Committee, Ron Maddox reviewed Technical Advice Memorandum 2011-14.  The questions are stated below and with summary answers.  The full memorandum is available on the FTB website at the following link.

1.  May the Franchise Tax Board (FTB) grant an exemption from California franchise or income tax retroactively into years in which there are no financial records available to be submitted?

Answer: Yes. As with filing enforcement determinations and other audit adjustments, FTB will consider all available documentation in making the determination. If the normal records were lost or destroyed, FTB may exercise judgment to determine what supporting documentation is sufficient.

2.   In lieu of financial records or statements, may FTB accept a signed statement of a duly elected officer or board member attesting to the fact the entity did not have gross receipts normally exceeding $25,000 for certain years? This includes years during which no financial records are available and no returns were filed.

Answer: Yes. This is one possible method that FTB could use to establish entitlement to exemption from California franchise or income tax where no objective documentation is available. As with all situations where documentation is not available, FTB should exercise discretion and not mechanically accept a statement or other documentation where there is any indication that it might be falsified or fraudulent.

3.   May FTB revive a corporation from suspension before required tax returns or exempt organization returns are filed for all years the corporation was in existence or qualified in California?

Answer: No. A return for each tax period that the corporation was suspended must be submitted with the revivor request. Where the organization does not have access to complete financial records, the organization should estimate the return figures from available information.

4.   Must FTB require payment of all taxes, interest, penalties, and fees for all exempt taxable years before revivor can occur and issuance of an exemption determination is made under California Revenue and Taxation Code section 23701 et seq.?

Answer: No. FTB may consider the exemption simultaneously with the revivor to determine the correct amount of tax, penalty, interest, and fees due for the suspension period that must be paid to revive.

5.   Must FTB require payment of all taxes, interest, penalties, and fees for all non-exempt taxable years before revivor can occur and issuance of an exemption determination is made under California Revenue and Taxation Code section 23701 et seq.?

Answer: No. If FTB determines that revivor without full payment will improve the prospects for collection of the full amount due, FTB may revive the entity without full payment. Rev. & Tax. Code § 23305b.

6.   If an organization files California Corporation Franchise or Income Tax Returns (Form 100) for taxable years 2006-2010, and it files either a California Exemption Application (Form 3500) or a California Submission of Exemption Request (Form 3500A) in 2010, which FTB grants in 2010 but retroactively to 2006, would FTB require the organization to file California Exempt Organization Annual Information Returns (Form 199) for taxable years 2006-2010 and pay Form 199 filing fees? In this fact pattern, assume the organization has gross receipts normally greater than $25,000. Would it make a difference if the organization paid Minimum Franchise Tax (MFT) or no tax with its Form 100’s? In this fact pattern, also assume that the returns are all within the statute of limitations for refunds.

Answer: No. As the Form 100 had substantially all of the information that the Form 199 has, generally there is no reason to make the organization file the Form 199’s for the prior years; however, FTB could ask for it if there is a business need. As to the payments, the entity would get a credit for whatever payments it had made with the Form 100’s for each year, so unless the Form 199 fee is more than previously paid each year, there would be no remaining amount due.

7.   Where a corporation that has not established that it qualifies for exemption from California franchise or income tax erroneously files an exempt organization return, should FTB issue a Return Information Notice (RIN) or a Notice of Proposed Assessment (NPA)?

Answer: The MFT is due and payable by operation of law and so is by definition not a deficiency and can be assessed by a RIN or by other notice and demand such as a Notice of Tax Due (NTD). However, tax in excess of the MFT based on the gross receipts shown on the Form 199 would have to be estimated as a deficiency, and must be issued on an NPA.