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§ 23663-3. Other Defective Assignments.

18 CA ADC § 23663-3BARCLAYS OFFICIAL CALIFORNIA CODE OF REGULATIONS

Barclays Official California Code of Regulations Currentness
Title 18. Public Revenues
Division 3. Franchise Tax Board
Chapter 3.5. Bank and Corporation Tax (Taxable Years Beginning After 12-31-54)
Subchapter 3. Corporation Income Tax
Article 3. Tax Credits
18 CCR § 23663-3
§ 23663-3. Other Defective Assignments.
(a) In General. Pursuant to Regulation 23663-5(a), no assignor, assignee, or any other taxpayer shall claim, assign or otherwise benefit from a credit which was assigned in a defective assignment, unless that credit is allocated to the assignor or assignee under Regulations 23663-2 through 23663-5. This regulation provides rules for the allocation of credits in all defective assignments not covered by Regulation 23663-2, relating to situations where an assignor assigns more credits than it has, and also includes additional restrictions for certain types of defective assignments. This regulation shall apply after any correction made under Regulation 23663-4.
(b) Default Allocation. For an assignment which is a defective assignment for any reason other than that listed in Regulation 23663-2(c), relating to situations where an assignor assigns more credits than it has, or in subsection (c) of this regulation, the following allocation rules shall apply as of an adjustment date:
(1) The identical credits listed as assigned in the defective assignment, or remaining credits after reduction by paragraphs (2) and (3), if applicable, shall be allocated to the assignor.
(2) The identical credits listed as assigned in the defective assignment shall be reduced by the amount of such identical credits claimed in a closed year by the assignee.
(3) If a defective assignment has multiple potential assignees:
(A) Subsection (b)(2) shall apply to each potential assignee, and
(B) If the application of subparagraph (A) would reduce an assignor's identical credits by an amount in excess of the identical credits listed as being assigned on the defective assignment, the assignor's other identical credits shall be reduced as of the taxable year of the defective assignment.
(4) Examples.
Example 1: X reported that it has $350 of 2010 R & D credits. On its original tax return for the 2010 taxable year, X elects to assign $200 of the 2010 R & D credits to Y and $100 of the 2010 R & D credits to Z. Therefore, X retained $50 of 2010 R & D credits. Further assume that Y was not an eligible assignee. Also, Y has claimed $30 of 2010 R & D credits in a closed year as of the adjustment date. Pursuant to subsection (b)(2), as of the adjustment date, the $200 of 2010 R & D credits assigned to Y will be reduced by the $30 which Y claimed in a closed year and the remainder of $170 will be allocated to X. Therefore, assuming any additional restrictions under this regulation have been satisfied, X is treated as having retained $220 of 2010 R & D credits ($50 plus $170), Y is treated as having received no 2010 R & D credits, and Z received $100 of 2010 R & D credits.
Example 2: X reported that it has $350 of 2010 R & D credits. On its original tax return for the 2010 taxable year, X elects to assign $200 of the 2010 R & D credits. However, X's assignment lists the name of Y but FEIN of Z. Subsequently, the FTB mails a notice of proposed assessment to X at which time Y has claimed $150 of 2010 R & D credits in closed years and Z has claimed $60 of 2010 R & D credits in closed years. The 2010 assignment is a defective assignment because it is not clear if Y or Z is the assignee. Under subsection (b)(3), X's $350 of 2010 R & D credits are reduced by the $210 ($150 + $60) of 2010 R & D credits claimed by Y and Z in closed years. Therefore, X is treated as having retained $140 of 2010 R & D credits ($350 less $210), and Y and Z are treated as having received no 2010 R & D credits.
(c) Unspecified Type of Identical Credit or Amount. In the case of any assignment which is a defective assignment under paragraphs (1), (2) or (3) of this subsection, the rules of paragraphs (4) through (7) shall apply in lieu of subsection (b).
(1) The type of identical credits being assigned is unspecified.
(2) The amount of identical credits being assigned is unspecified.
(3) Both paragraphs (1) and (2) apply.
(4) If the assignee claimed credits in a closed year, then as of an adjustment date, the assignor's credits listed as assigned in the defective assignment and the assignor's other credits as of the effective date of the adjustment shall be reduced as follows:
(A) First, the assignor's unclaimed and unassigned credits shall be reduced.
(i) The assignor's credits shall be reduced beginning with the oldest unclaimed and unassigned credits.
(ii) If after reducing all of the assignor's oldest credits, the amount of credits reduced does not equal the amount of credits claimed by the assignee in a closed year, then the assignor's next oldest unclaimed and unassigned credits shall be reduced. This reduction shall continue until the assignor's credits have been reduced in an amount equal to the amount of credits claimed by the assignee in a closed year.
(iii) If an assignor has multiple types of unclaimed and unassigned identical credits which were generated in the same taxable year, then each type of identical credit shall be reduced pro rata based on the assignor's amount of such identical credits.
(B) Second, if after reducing all of an assignor's unclaimed and unassigned credits pursuant to subparagraph (A), an assignor's credits have not been reduced in an amount equal to the credits claimed by an assignee in a closed year, then the following shall apply:
(i) The assignor's claimed credits shall be reduced beginning with the assignor's most recent taxable year for which the extended filing date has passed and which is not a closed year.
(ii) If after reducing all of the assignor's credits claimed in its most recent taxable year for which the extended filing date has passed, the amount of credits reduced does not equal the amount of credits claimed by the assignee in a closed year, then the assignor's claimed credits in its next most recent taxable year for which the extended filing date has passed and which is not a closed year shall be reduced. This reduction shall continue until the assignor's credits have been reduced in an amount equal to the amount of credits claimed by the assignee in a closed year.
(iii) If an assignor has multiple types of claimed identical credits in a taxable year, then each type of identical credit shall be reduced pro rata based on the assignor's amount of such identical credits.
(C) Finally, if after reducing all of an assignor's credits claimed in taxable years which are not closed years pursuant to subparagraph (B), an assignor's credits have not been reduced in an amount equal to the credits claimed by an assignee in a closed year, then the following shall apply:
(i) The assignor's assigned credits shall be reduced beginning with the assignor's most recent taxable year for which the extended due date for filing has passed and which is not a closed year.
(ii) If after reducing all of the assignor's credits assigned in its most recent taxable year for which the extended due date for filing has passed and which is not a closed year, the amount of credits reduced does not equal the amount of credits claimed by the assignee in a closed year, then the assignor's assigned credits in its next most recent taxable year for which the extended filing date has passed and which is not a closed year shall be reduced. This reduction shall continue until the first of the following occurs 1) the assigned credits have been reduced through the taxable year subsequent to the taxable year of the defective assignment or 2) the assignor's credits have been reduced in an amount equal to the amount of credits claimed by the assignee in a closed year.
(iii) If an assignor has multiple assignments in a taxable year, then each such assignment shall be reduced pro rata based on the amount of credits assigned over the total assignments in that taxable year.
(D) Any assigned credits reduced pursuant to subparagraph (C) shall be treated as if such credits had never been assigned, so that the assignee listed on the assignment shall not be entitled to claim or otherwise benefit from such credits.
(5) If the defective assignment clearly identifies the amount of credits being assigned, then the assignor's credits reduced under paragraph (4) shall be limited to such amount of credits for each potential assignee.
(6) If the defective assignment does not clearly identify the type of identical credit being assigned only because it does not clearly identify the year such credits were generated, then subparagraphs (A) through (C) of paragraph (4) shall first be applied in regard to that partially identified type of identical credit.
(7) If the defective assignment clearly identifies the type of identical credit being assigned, then subparagraphs (A) through (C) of paragraph (4) shall first be applied in regard to that identified type of identical credit.
(8) Examples.
Example 3: X reported that it has $300 of 2010 R & D credits, $100 of 2010 low income housing (“LIH”) credits, and $200 of 2011 R & D credits. On its original tax return for the 2011 taxable year, X elects to assign $200 of R & D credits to Y, except that the assignment lists the taxable year the credit was generated as “various”. The assignment to Y is a defective assignment because the assigned credits did not identify the year the credits were generated. Y has claimed $100 of 2011 R & D credits in a closed year as of the adjustment date. Y has not shown that it earned or received the 2011 R & D credits from any other source. Pursuant to paragraphs (4) and (6), as of the adjustment date, X's 2010 R & D credits are reduced by $100. Notably, the year in which Y listed the R & D credits as generated does not impact the application of this subsection. Therefore, under this regulation, X is treated as having retained $200 of 2010 R & D credits, $100 of 2010 LIH credits, and $200 of 2011 R & D credits, and Y is treated as having received no credits.
Example 4: Assume the same facts as in Example 3, except that in addition to not listing the year of R & D credits being assigned, X's assignment of credits to Y also does not list the amount of credits being assigned. Assume further that instead of having claimed $100 of 2011 R & D credits, Y has claimed $300 of 2010 R & D credits in a closed year as of the adjustment date, and X has also claimed $300 of 2010 R & D credits and $50 of 2010 LIH credits in a taxable year which is not a closed year as of the adjustment date. Pursuant to paragraphs (4) and (6), the following reductions to X's credits occur as of the adjustment date: first, X's $200 of unclaimed, unassigned 2011 R & D credits are reduced to $0 ($300 claimed by Y in a closed year less $200 of X's 2011 R & D credits = $100 of credits remaining to be reduced). Next, X's $50 of unclaimed, unassigned 2010 LIH credits are reduced to $0 ($100 of credits remaining to be reduced less $50 of X's 2010 LIH credits = $50 of credits remaining to be reduced). Finally, $50 of X's claimed 2010 R & D credits are reduced, which may result in an additional assessment to X. Therefore, under this regulation, X is treated as having retained $250 of claimed 2010 R & D credits, $50 of claimed 2010 LIH, and no 2011 R & D credits, and Y is treated as having received no credits.
Example 5: Assume the same facts as in Example 4, except that as of the adjustment date, X has subsequently generated $100 of 2013 R & D credits. The result would be the same as the result in Example 4 because under paragraph (4) the reduction is limited to the assignor's credits as of the effective date of the adjustment.
Example 6: X reported that it has $175 of 2010 R & D credits, $100 of 2010 low income housing (“LIH”) credits, and $300 of 2011 R & D credits. On its original tax return for the 2011 taxable year, X elects to assign credits to Y, with the credits being assigned listed as “various” and the amount as $300. On its original tax return for the 2012 taxable year, X elects to assign $200 of 2011 R & D credits to Z. On its original tax return for the 2013 taxable year, X elects to assign $50 of 2010 R & D credits to W and $100 of 2011 R & D credits to Z. The adjustment date occurs in 2016. As of the adjustment date, Y has claimed $300 of 2011 R & D credits in a closed year, and X has claimed $75 of 2010 R & D credits in 2014 which is not a closed year. Y has not shown that it earned or received the 2011 R & D credits from any other source.
Under the assumed facts above, the 2011 assignment to Y is a defective assignment because the credits being assigned were not identified. Under this subsection, X's credits are reduced by the $300 of credits Y claimed in a closed year. Pursuant to paragraph (4)(A), as of the adjustment date, X's oldest unclaimed and unassigned credits are reduced first. Accordingly, X's $50 of unclaimed, unassigned 2010 R & D credits and $100 of 2010 LIH credits are first reduced. After these reductions, the $300 of credits claimed by Y has been reduced to $150 ($300 less $150 = $150 of credits remaining to be reduced). Next, pursuant to paragraph (4)(B), X's $75 of claimed 2010 R & D credits are reduced, which may result in X being assessed additional tax for 2014 ($300 less $150 less $75 = $75 of credits remaining to be reduced). Finally, because X assigned both 2010 R & D credits and 2011 R & D credits in 2013, and the total credits assigned ($150) exceeds the remaining $75 of credits to be reduced, the 2013 assignments to Z and W shall be reduced pro rata pursuant to paragraph (4)(C) by the following amounts:
(i) Z's assigned $100 of 2011 R & D credits are reduced by $50, calculated as $75 credits to be reduced x $100 (2011 R & D credits assigned to Z in 2013) / $150 (total credits assigned by X in 2013).
(ii) W's assigned $50 of 2010 R & D credits are reduced by $25, calculated as $75 credits to be reduced x $50 (2010 R & D credits assigned to W) / $150 (total credits assigned by X in 2013).
Therefore, under this regulation, X is treated as having retained no 2010 R & D credits, no 2010 LIH credits, and no 2011 R & D credits, Y is treated as having received no credits, the 2012 assignment of $200 of 2010 R & D credits to Z was valid, the otherwise valid 2013 assignment of $100 of 2011 R & D credits to Z is reduced to $50 of 2011 R & D credits, and the otherwise valid 2013 assignment of $50 of 2010 R & D credits to W is reduced to $25 of 2010 R & D credits.
Example 7: X reported that it has $300 of 2010 R & D credits and $200 of 2011 low income housing (“LIH”) credits. On its original tax return for the 2011 taxable year, X elects to assign credits; however, X's assignment lists the name of Y but FEIN of Z, and also the assignment does not list the type or amount of credits being assigned. As of the adjustment date in 2016, Y has claimed $150 of 2010 R & D credits in closed years and Z has claimed $300 of 2010 R & D credits in closed years. Y and Z have not shown that they earned or received the claimed credits from any other source. The 2011 assignment is a defective assignment because the assignee is uncertain and the credits being assigned were not identified. Under this subsection, as of the adjustment date, X's credits are reduced based on the total amount of $450 of credits claimed by Y and Z in closed years. First, X's $300 of 2010 R & D credits are reduced by $300 ($450 less $300 = $150 of credits remaining to be reduced). Next, X's $200 of 2011 LIH credits are reduced by $150. Therefore, under this regulation, X is treated as having retained no 2010 R & D credits and $50 of 2011 LIH credits, and Y and Z are treated as having received no credits.
(d) Ineligible Assignees. For the portion of any defective assignment which is a defective assignment only because the assignee is not an eligible assignee, the portion of any such credits shall not be allocated to the assignor, so that the assignor shall neither claim nor assign such credits, unless the FTB approves a request under paragraph (1), or the assignor and assignee meet the conditions set forth in paragraph (2).
(1) The assignor and assignee shall make a request, in the form and manner specified under Regulation 23663-5(f), that the FTB determine that the assignee was not an eligible assignee for purposes of this regulation.
(A) The FTB shall have six months from the receipt of the request to approve the request, unless a longer time period is agreed upon by the FTB, the assignor and the assignee. The FTB may request any information from the assignor and assignee as it deems necessary to make this determination, including any information that might otherwise be requested under Revenue and Taxation Code section 19032 and the regulations thereunder.
(B) At or before the end of the time period specified in subparagraph (A), the FTB shall notify the assignor and the assignee in writing of its determination; otherwise, the request shall be deemed rejected.
(C) If the FTB approves the request that an assignee be found to not be an eligible assignee, then the credits assigned to the assignee in the defective assignment shall be allocated in accordance with subsection (b) and shall be binding on all parties and may not later be changed, even if it is later determined that the assignee was in fact an eligible assignee.
(D) As a condition for approval of a request under this paragraph, the assignor and assignee shall agree that they will not later assert the assignor and assignee are unitary, including filing a claim for refund, for the taxable year or years for which the request asserted the assignee was not an eligible assignee.
(E) The determination made by the FTB under this subsection shall be limited to Revenue and Taxation Code section 23663 and the regulations thereunder, and no inference shall be drawn for any other purpose under Part 11 of the Revenue and Taxation Code.
(2) If the FTB asserts that an assignee is not an eligible assignee, then the limitations of this subsection shall not be removed until a final determination that the assignee is not an eligible assignee has been made for both the assignor and assignee. However, if the FTB only makes such assertion to either the assignor or assignee, but not both, then the limitations of this subsection shall be removed once a final determination that the assignee is not an eligible assignee has been made for the party to whom such assertion was made. If, after an FTB assertion in this paragraph, a final determination is made for the assignee that the assignee was not an eligible assignee, then the credits in the defective assignment shall neither be claimed by nor benefit the assignee under any circumstances.
(3) For purposes of paragraph (2), a final determination means the date on which a deficiency becomes final pursuant to Revenue and Taxation Code section 19049 or an action on a refund claim becomes final under Revenue and Taxation Code section 19321.
(4) Examples.
Example 8: X reported that it has $100 of 2010 R & D credits. On its original tax return for the 2010 taxable year, X elects to assign $100 of the 2010 R & D credits to Y. Subsequently, the FTB mails a notice of proposed assessment to X and Y stating that X and Y were not unitary in 2010 and assessing X $150 of additional tax liability for other reasons. The assignment of credits from X to Y is a defective assignment because Y is not an eligible assignee. X and Y protest the notice of proposed assessment. Under this subsection, as of the adjustment date, Y would be treated as having received no 2010 R & D credits and X would be treated as having retained $100 of 2010 R & D credits, but under this subsection, X would not be allowed to claim those $100 of 2010 R & D credits against its $150 of additional tax liability until a final determination of whether Y was an eligible assignee has been made for both X and Y.
Example 9: Assume the same facts as in Example 8, except that the notice of proposed assessment is mailed to X only. X does not protest the notice of proposed assessment, so that the notice goes final. Under this subsection, X is allocated the $100 of 2010 R & D credits (subject to the other provisions of this regulation) because a final determination was made for X, which is the only entity to which the FTB asserted that Y is not an eligible assignee.
Example 10: X reported that it has $100 of 2010 R & D credits. On its original tax return for the 2010 taxable year, X elects to assign $100 of the 2010 R & D credits to Y. The assignor and assignee make a request under paragraph (1) that Y be found to not be an eligible assignee on the basis that X and Y were not unitary in 2010. The FTB approved X and Y's request. Subsequently, Y files amended tax returns asserting that it was unitary with X in 2010. The FTB would reject Y's amended tax returns because Y agreed under paragraph (1)(D) that it would not assert that it was unitary with X for 2010.
Example 11: Assume the same facts as in Example 10, except that two years after the FTB approves the request in Example 10, the FTB audits X and Y and determines that X and Y were unitary in 2010. The allocation of credits to X under the approved request would be unaffected by the FTB's subsequent determination and the $100 of 2010 R & D credits would remain with X and be available to be claimed or assigned as of the adjustment date (the date the FTB approved the request in Example 10).
(e) Request to Apply this Regulation. For rules governing the form and manner of any request by an assignor to apply this regulation, see Regulation 23663-5(f).
Note: Authority cited: Sections 19503 and 23663, Revenue and Taxation Code. Reference: Section 23663, Revenue and Taxation Code.
HISTORY
1. New section filed 9-18-2018; operative 9-18-2018 pursuant to Government Code section 11343.4(b)(3) (Register 2018, No. 38).
This database is current through 11/13/20 Register 2020, No. 46
18 CCR § 23663-3, 18 CA ADC § 23663-3
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