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.
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:
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.
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).
Cal. Code Regs. Tit. 18, §§ 23663-3
Note: Authority cited: Sections 19503 and 23663, Revenue and Taxation Code. Reference: Section 23663, Revenue and Taxation Code.