Helpful Liaison [California CPA]

CalCPA Committee on Taxation Sits Down with FTB

This year's annual liaison meeting between thc!FFB and the CaICPA Committee on Taxation opened with a presentation from FTB Executive Officer Selvi Stanislaus, who unveiled the FTB's fiveyear strategic plan that was developed over the course of the last year.

Stanislaus shared with the COT a new, proposed mission statement for the FTB: "We provide the services and information to help taxpayers file accurate and timely tax returns and pay the proper amount owed. To accomplish this, we develop knowledgeable and engaged employees, administer and enforce the law with fairness and integrity, and responsibly manage the resources provided to us."

Legislative Update

Patrice Gau-Johnson, FTB assistant bureau director legislative services, presented a legislative update that covered the various tax bills chaptered and vetoed in the past year. For a rundown of all the bills mentioned, visit www.legnfa.ca.gov/index. html.

Some of the chaptered legislation mentioned included:

AB 36: Conforms to the federal law that allows an exclusion or deduction from income for certain medical care expenses of a child under the age of 27.

AB 242: Effective Jan. 1, 2012, and conforms to the following tax provisions of the 2010 Healthcare Reform Act:

* PPACA 10908: Health professional's student loan repayment program exclusion and student loan forgiveness exclusion.

* PPACA 902 1 : Indian tribal government health benefits exclusion.

* PPACA 9022: Safe harbor for small employer cafeteria plans.

* PPACA 1515: Small employer cafeteria plan to allow Exchange-participating health plans.

AB 1423: Generally conforms io the Regulated Investment Company Modernization Act of 2010.

SB 86: A chaptered budget trailer bill that:

* Requires the FTB to revise the income tax booklet instructions to include a use tax table that allows taxpayers to determine the amount of use tax they owe.

* Revises the child and dependent care expenses tax credit Lo be nonreftindable.

* Authorizes a voluntary compliance initiative permitting taxpayers to file amended returns and pay the tax and interest associated with abusive tax avoidance transactions or unreported offshore income and avoid criminal prosecution and the imposition of certain penalties.

* Establishes a record match process between financial institution customer records and FTB debtor records.

COT Affects Reporting of Real Estate Taxes

The FTB presentation portion of the meeting ended with a rather lively discussion on its proposal to require taxpayers to report the Assessor's Parcel Number on up to two properties that a taxpayer is claiming a Schedule A and a three-line worksheet appearing on Schedule CA to assist in taxpayers in computing the deductible portion of the property tax payments.

The instructions for Schedule CA included a discussion of what property tax assessments are deductible and which ones are not.

COT members did not disagree with the discussion in instructions of what is deductible and non-deductible, or with the fTB's expectation of compliance with the statute. Their concerns expressed during the discussion were about the amount of additional effort it would take the average taxpayer to comply with new filing requirements versus any revenue gains from those taxpayers not in compliance.

Committee members mentioned that not all taxpayers retain their property tax bills for the tax that has been paid, and not all California counties have die information required under the proposed rules readily available online.

Gathering this information and making the proper computations would slow down the tax return preparation process and many taxpayers, especially the elderly, do not have the capacity necessary to interpret the rules regarding deductibility and would more than likely be unable to comply.

Further, committee members said there is a point where reporting is so complicated thai it forces non-compliance, and the FTB needs to consider the rewards versus costs of such a requirement. At the very least, it was suggested that any requirement be delayed until the FI1B can encourage counties to provide to taxpayers the amount that Ls deductible as the DMV does on registration forms.

It appears that the FTB was listening to the input received and, as of the publication of this article, it has announced a delay of the implementation of this requirement for a least a year and that it would embark upon a program of education and outreach.

Long Lingo-ing Questions and Answers

As usual, the meeting closed with the FTB responding to a series of questions submitted by the COT prior to the meeting. Topics included the Tax Practitioner's Hotline and use of powers of attorney; e-filing of fiduciary income tax returns; conformity legislation (SB 401); COD and computation of grass income for LLC fee; and My FTB accounts. Complete questions and answers are available at wmv.calcpa.org/lax.

One discussion during the Q&A that was of particular note, and cleared up a long Ungering question, went as follows:

Q: IRC Sec. 645 allows certain trust or trusts to join with the grantor's estate in filing fiduciary income tax returns for the first two years of administration.

If there is no estate, court appointed executor or administrator, the trustee of the decedent's grantor trust or trusts can still make the election to be taxed as an estate for a period normally not to exceed two years.

California determines the residency of an estate based on the residency of the decedent and determines the residency of the trust based on the residencies of the trustees and beneficiaries. There is a question on how the residency of a trust is determined when it enters into a Sec. 645 election.

The two-part question: First, how is it determined if there is an estate entering into the election? Second, how is it determined if there is no estate and the election is being made by the decedent's trust or trusts?

A: Generally, tax applies to the entire taxable income of a trust, if the fiduciary or beneficiary, other than a contingent beneficiary, is a California resident, regardless of the residence of the settlor [California Revenue & Taxation Code section I7742(a)J. In contrast, tax applies to the entire taxable income of an estate if the decedent was a resident, regardless of the residence of lhe fiduciary or beneficiary.

An election under IRC Sec. 645(a) shall be treated as an irrevocable election made by the executor, if any, of the estate and the trustee of the qualified revocable trust for state purposes [R&TC section 1 775 1 (a)] .

If the executor, if any, of the estate and the trustee of the qualified revocable trust fail to make an election under IRC Sec. 645(a) with respect to that qualified revocable trust, thai trust shall be treated and taxed for purposes of this part as a separate trust and no election under IRC Sec. 645(a) or R&TC Sec. 17024.5(e)(3) shall be allowed [R&TC section 17751(b)].

If both the executor of the estate and trustee of the qualified revocable trust elect IRC Sec, 645(a) treatment, such trusi shall be treated and taxed as part of such estate, not as a separate trust, for all taxable years of the estate ending after decedent's death and before the applicable date in IRC Sec. 645(b) (2) [IRC section 645(a)].

The election under subsection (a) of IRC Sec. 645 shall be made not later than the time prescribed for Sung a return for the first taxable year of the estate, determined with regard to extensions, and shall be irrevocable [IRC Sec. 645(c)] .

Whether or not there is an executor, the electing trust is treated as part of the related estate for all purposes of Subtitle A of the IRC [Treas. Reg. sees. 1.64-5-l(e)(2)J.

Executor and trust: Consistent with federal treatment of a trust making an IRC Sec. 645(a) election, California treats the trust as part of the decedent's estate during the applicable period described in IRC Sec. 645(b)(2).

During such period, it is the residence of the decedent that determines whether there is California lax imposed and a California filing requirement.

Federal Form 1041 requires the attachment of federal Form 8855 to support an IRC Sec. 645(a) election. In contrast, CA Form 541 does not describe how a taxpayer should indicate an IRC Sec. 645(a) election. The taxpayer who made an IRC Sec. 645 election should attach to their California return a statement describing the election and provide a copy of federal Form 8855 with the name of the executor, if any, and trustee, and the applicable date of the election and a copy of their corresponding federal Form 1041.

The taxpayer will select "Decedent's Estate1' on the front of CA Form 541 and complete the "Other Information" section of the CA Form 541.

Trust only: A qualified revocable trust making an IRC Sec. 645(a) election without an estate executor, or related estate, is still treated as an estate for IRC purposes while the election is in e0ect [Treas. Reg. Sec. 1.645-l(e)(3j].

The trustee making the election should follow a similar procedure as described above: the trustee completes federal Form 8855 and submits it as an attachment to both federal Form 1 04 1 and CA Form 541 , In addition, the trustee should attach a copy of the corresponding federal Form 1041, reflecting the 645(a) election, to their CA Form 541.

It is recommended the filing trustee also attach a statement to their CA Form 541 indicating lhe election and stating the trust is electing to be treated as an estate under IRC Sec. 645a) and R&TC Sec. 1 775 1 but is without an estate or executor, as applicable.

Upon appointment of an estate executor or discovery of the related estate, the trustee should file an amended return indicating whether the election remains in effect, with agreement of the estate executor, or if the election has been terminated consistent with federal regulations.

"It appears that the FTB was listening to the input recieved ..."

John Woodford, CPA, CaICPA COT member, and CaICPA Managing Editor Damien English contributed to this article. You ean reach them at [email protected] and [email protected].