Cal. Code Regs. Tit. 18, §§ 23663-5

Current through Register 2024 Notice Reg. No. 40, October 4, 2024

Section 23663-5 - Special Rules

Special Rules. For purposes of Regulations 23663-2 through 23663-5, inclusive, the following special rules shall apply:

(a) Credits Which Are the Subject of Defective Assignments.

(1) 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 on an adjustment date pursuant to Regulations 23663-2 through 23663-5.

(2) Any assignment of an amount of identical credits by the assignor in a taxable year after the taxable year in which the defective assignment of that amount of identical credits was made, and before the adjustment date when an adjustment is made under Regulations 23663-2 through 23663-5, shall be invalid and may not be corrected or adjusted under Regulations 23663-2 through 23663-5.

(3) In any case where an assignee claims a credit in a closed year that was the subject of an invalid assignment under paragraph (2), then the assignor's credits shall be reduced in the same manner as set forth in Regulation 23663-3(c).

(4) Example.

Example 1: X reported that it has $200 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 the FEIN of Z. X discovers that the 2010 assignment was a defective assignment, and in the 2013 taxable year X elects to assign the $200 of the 2010 R & D credits to T. In the 2014 taxable year, X, Y and Z request and are allowed application of the rules under Regulation 23663-3 so that the $200 of 2010 R & D credits assigned in the 2010 defective assignment are allocated to X as of the date of the defective assignment. However, pursuant to paragraph (2) the 2013 assignment of $200 of 2010 R & D credits to T is an invalid assignment because the assignment was made before the adjustment date in the 2014 taxable year. Therefore, under this regulation, X is treated as having retained $200 of 2010 R & D credits, and Y, Z and T are treated as having received no 2010 R & D credits.

(b) Finality of Election to Assign Credits. Except as otherwise specifically provided in Regulations 23663-1 through 23663-5, the election to assign credits under Revenue and Taxation Code section 23663 is irrevocable and final as of the date the assignor files its original tax return for the taxable year in which the assignment is made, and any subsequent adjustments to the assignor's tax liability for the taxable year in which the assignment was made cannot modify the original assigned amount of eligible credit. Within any taxable year, any credit assigned under Revenue and Taxation Code section 23663, or allocated or reduced under Regulations 23663-2 through 23663-5, shall not be available for application against any tax liability of the assignor in the same taxable year.

Example 2: X reported that it has $500 of 2010 R & D credits. On its original tax return for the 2010 taxable year, X elects to assign $250 of the 2010 R & D credits to Y and $250 of the 2010 R & D credits to Z. In 2015, a notice of proposed assessment for the 2010 taxable year makes an adjustment unrelated to the amount of R&D credits allowable, and increases X's tax liability by $300. X cannot claim the 2010 R&D credits to offset the increased 2010 tax liability because the assignments to Y and Z are valid assignments, and under this subsection, X's available 2010 R & D credits ($500) are first reduced by the amount of credits assigned to Y and Z ($250 + $250 = $500) before being available to X to offset the increased tax liability of $300. Therefore, X has no remaining 2010 R & D credits to offset the increased tax liability.

Example 3: Assume the same facts as Example 2, except that X had $700 of 2010 R&D credits in 2010 and carried the $200 excess forward to 2011. X can claim $200 of the 2010 R&D credits to offset the increased 2010 tax liability because X retained $200 of 2010 R & D credits after the valid assignments to Y and Z. Under this subsection, X's available 2010 R & D credits ($700) are first reduced by the amount of credits assigned to Y and Z ($250 + $250 = $500) before being available to X to offset the increased tax liability of $300. Therefore, X has $200 of remaining 2010 R & D credits to offset the increased tax liability of $300.

Example 4: Assume the same facts as in Example 3, except that on the 2010 assignment form X listed the name of Y but FEIN of W. X also claimed $50 of 2010 R & D credits against its own tax liability in 2010. As of the adjustment date, Y and W have each claimed $225 of 2010 R & D credits in a closed year. X's available 2010 R & D credits ($700) are first reduced by the amount of credits assigned to Z ($250). Next, pursuant to this subsection and Regulation 23663-3, X's remaining $450 of 2010 R & D credits are further reduced by the amount of credits claimed by Y and W in a closed year ($225 + $225 = $450). Therefore, X does not have the $50 of 2010 R & D credits that X claimed against its tax in 2010 nor does X have any 2010 R & D credits to offset the additional tax assessed by the notice of proposed assessment.

(c) Ordering Rules. In any case where there is an overlap between Regulations 23663-2 through 23663-4 on the adjustment date, the rules of those regulations shall be applied in the following order:

(1) If an assignor requests an adjustment (or multiple adjustments) prior to the earlier of the date set forth in Regulation 23663-4(b)(6), as modified by Regulation 23663-4(e), or first contact, and the requested adjustment (or multiple adjustments) could be made under the authority of either Regulation 23663-4 or Regulations 23663-2 or 23663-3, and the assignor has not clearly requested application of Regulations 23663-2 or 23663-3 pursuant to subsection (f)(1)(A), then the adjustment (or multiple adjustments) shall be treated as having been made under Regulation 23663-4.

(2) If multiple adjustments are being made simultaneously, and the adjustments to be made include both adjustments under Regulation 23663-2 and adjustments under Regulation 23663-3, then the adjustments under Regulation 23663-3 shall be treated as occurring first.

(3)

(A) In any case where adjustments are being made under either, or both, Regulation 23663-2 and Regulation 23663-3, and a portion of the adjustments involve credits claimed in a closed year by either an assignor or an assignee, the amount of any closed year adjustments shall first be taken from any credits originally earned by the assignor or assignee, as the case may be, prior to reducing any credits received via assignment under Revenue and Taxation Code section 23663 or any other provision of Part 11 of the Revenue and Taxation Code permitting assignment of credits.

(B) If credits have been received by an assignee both via assignment under a provision of Part 11 of the Revenue and Taxation Code permitting assignment of credits (other than under Revenue and Taxation Code section 23663) and also under Revenue and Taxation Code section 23663, then for purposes of applying subparagraph (A), credits received under a provision of Part 11 of the Revenue and Taxation Code permitting assignment of credits (other than under Revenue and Taxation Code section 23663) shall be treated as being reduced before credits received via assignment under Revenue and Taxation Code section 23663.

(4) Examples.

Example 5: 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. Subsequently, X discovers that it only generated $150 of 2010 R & D credits. X also discovers that Y is not an eligible assignee. X requests and is allowed adjustments pursuant to Regulations 23663-2 and 23663-3, including a determination under Regulation 23663-3(d) that Y is not an eligible assignee. Pursuant to paragraph (2), the adjustment under Regulation 23663-3 is applied first, thereby allocating credits from the X - Y assignment to X, so that X has $150 of 2010 R & D credits available for assignment before the application of Regulation 23663-2 for the X - Z assignment. As a result, Regulation 23663-2 does not apply, because X's assignment to Z is not a defective assignment as X has the $100 of 2010 R & D credits assigned to Z. Therefore, X is treated as having retained $50 of 2010 R & D credits, Y is treated as having received no 2010 R & D credits, and Z received $100 of R & D credits.

Example 6: Assume the same facts as in Example 5, except that X discovers Y is not an eligible assignee after the adjustment date in Example 5. Therefore, X requests and is allowed an adjustment pursuant to pursuant to Regulation 23663-2. Accordingly, pursuant to Regulation 23663-2, X's actual $150 of 2010 R & D credits are allocated $100 to Y and $50 to Z, with X treated as having retained no 2010 R & D credits. Later, the FTB issues a notice of proposed assessment. As of this subsequent adjustment date, adjustments are made pursuant to Regulation 23663-3, so that, assuming the limitations of Regulation 23663-3(d) no longer apply, the $100 of 2010 R & D credits previously allocated to Y would then be allocated to X. Therefore, following these two adjustments, X would be treated as retaining $100 of 2010 R & D credits, Y is treated as having received no 2010 R & D credits, and Z is treated as having received $50 of R & D credits.

Example 7: 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 $150 of the 2010 R & D credits to Y and $150 of the 2010 R & D credits to Z. Y has also generated $100 of 2010 R & D credits. Subsequently, X discovers that it only generated $100 of 2010 R & D credits. As of the adjustment date, Y has claimed $100 of 2010 R & D credits in a closed year. Pursuant to paragraph (3)(A), in applying Regulation 23663-2, Y is treated as having claimed no 2010 R & D credits assigned from X in a closed year because the 2010 R & D credits that Y earned are treated as having been claimed before credits received in the assignment from X. Therefore, under Regulation 23663-2, X is treated as retaining no 2010 R & D credits, and Y and Z are both allocated $50 of 2010 R & D credits.

(d) Effect and Timing of Adjustments. Any credits allocated or reduced under Regulations 23663-2 through 23663-5 are treated as if they were assigned or retained by the assignor on a timely-filed original tax return as of the effective date of the adjustment, or reduced as of the effective date of the adjustment.

Example 8: 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 the 2010 R & D credits. Subsequently, X discovers that it only generated $150 of R & D credits in 2010. X makes a request, joined by Y and Z, for an alternative allocation under Regulation 23663-2 to allocate X's $150 of 2010 R & D credits from X's aggregated defective assignments as follows: $50 of 2010 R & D credits to X and $100 of 2010 R & D credits to Y. The FTB allows X's request. Subsequently, the FTB issues a notice of proposed assessment which reduces X's actual 2010 R & D credits from $150 to $75. Pursuant to subsection (d), for purposes of applying 23663-2(c), the alternative allocation is treated as if it were the original assignment on the timely-filed original tax return. As a result of the prior alternative allocation, Z would now receive no 2010 R & D credits under Regulation 23663-2, so that X's $75 of 2010 R & D credits are allocated to Y. Accordingly, X is treated as having retained $0 of 2010 R & D credits, Y is treated as having received $75 of 2010 R & D credits, and Z is treated as having received $0 of R & D credits.

(e) Other Rules. For purposes of Regulations 23663-2 through 23663-5, the following other rules shall apply:

(1) For purposes of determining the order in which assignments are treated as having been made:

(A) In the case of assignments of identical credits made in the same taxable year, the assignments shall be treated as being made simultaneously.

(B) In the case of assignments made in different taxable years than the taxable year for which an adjustment is being made, a first-in, first-out rule shall apply, and assignments from earlier years shall be treated as occurring before assignments from subsequent years.

(C) In the case of multiple assignments of identical credits made in the same taxable year under both a provision of Part 11 of the Revenue and Taxation Code permitting assignment of credits (other than under Revenue and Taxation Code section 23663) and under Revenue and Taxation Code section 23663, the assignments made under such other provisions shall be treated as occurring before any assignments made under Revenue and Taxation Code section 23663.

(2) To the extent the provisions of Regulations 23663-2 through 23663-5 are applied on multiple adjustment dates, allocations and reductions based on credits claimed in closed years shall not be modified based on such closed years being open at the time the provisions of Regulations 23663-2 through 23663-5 are subsequently applied.

(3) In the case of any defective assignment for which a request is made under Regulation 23663-5(f) to allocate credits pursuant to Regulations 23663-2 through 23663-5, where one or more parties to a defective assignment does not join the request, the adjustments made under Regulations 23663-2 through 23663-5 shall not include the aggregate amount of identical credits from all defective assignments assigned to any parties to the defective assignment who do not join in the request, except to the extent the provisions of Regulations 23663-2 through 23663-5 have already allocated such identical credits to the assignor or assignees who do join the request.

(4) In any case where an assignor has requested an adjustment to a defective assignment under either Regulation 23663-2 or 23663-3 and the FTB has allowed such request, then no further request shall be made with respect to the same defective assignment.

(5) Pursuant to a written request by the FTB, any parties to a defective assignment shall provide within 45 days of the request all requested copies of tax returns and amended tax returns that demonstrate whether such party has claimed credits which were the subject of a defective assignment in any taxable year, including any closed year. If a party to a defective assignment does not provide such copies within 45 days, then it shall be conclusively presumed that such party has claimed all credits listed as assigned to that assignee in the original defective assignment in closed years.

(6) In the case of multiple assignors making separate defective assignments to one or more assignees, for purposes of applying the rules of Regulations 23663-2 through 23663-5, the credits claimed in closed years by such assignee shall be allocated to the assignors pro rata based on the amount of credits assigned on the original defective assignments.

(7) Any adjustments of a credit under the rules of Regulations 23663-2 through 23663-5 shall not be treated as a recapture of such credit under any specific credit provision of Part 11 of the Revenue and Taxation Code.

(8) Examples.

Example 9: X reported that it has $200 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. On its original tax return for the 2011 taxable year, X elects to assign $100 of the 2010 R & D credits to Z. Subsequently, X discovers that it only generated $120 of 2010 R & D credits. While the assignments to X and Y deal with the same type of identical credit, they are not aggregated pursuant to Regulation 23663-2(b). Under paragraph (1)(B), because the 2010 assignment to Y was made in an earlier year than the 2011 assignment to Z, the assignment to Y is treated as having occurred before the assignment to Z. Therefore, the assignment of $100 of 2010 R & D credits to Y is a valid assignment because X has the $100 of 2010 R & D credits being assigned. But, the 2011 assignment to Z is a defective assignment because X only has $20 of 2010 R & D credits ($120 available in 2010 less the $100 assigned to Y = $20) available for assignment in 2011.

Example 10: X reported that it has $200 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 and $100 of the 2010 R & D credits to Z. In 2016, X discovers that it only had $140 of 2010 R & D credits, and requests and is allowed to apply the default rules of Regulation 23663-2. Y has claimed $100 of the 2010 R & D credits in 2010, which is a closed year for Y as of the adjustment date. Under Regulation 23663-2, X's actual $140 of 2010 R & D credits are allocated $100 to Y and $40 to Z. Subsequently, in 2017 under Revenue and Taxation Code section 19058, the FTB issues a notice of proposed assessment for the 2010 taxable year which reduces X's 2010 R & D credits to $80. As of this subsequent adjustment date, the 2010 taxable year is no longer a closed year for Y. However, pursuant to paragraph (2), the 2016 adjustment is not later changed if a closed year subsequently opens. In addition, under subsection (d), the adjustment in 2016 is treated as if made on an original tax return. Therefore, as of the second adjustment date, all $80 of 2010 R & D credits are allocated to Y and no 2010 R & D credits are allocated to Z because under paragraph (2) the allocation of $100 of 2010 R & D credits to Y based on credits claimed in a closed year is not modified as of a subsequent adjustment.

Example 11: X reported that it has $200 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 and $100 of the 2010 R & D credits to Z. Subsequently, X discovers that it only had $120 of 2010 R & D credits. X, joined by Y, requests application of the default rules under Regulation 23663-2. Pursuant to paragraph (3), $20 of 2010 R & D credits are available for allocation under Regulation 23663-2. Therefore, X is treated as retaining no 2010 R & D credits, Y is treated as receiving $10 of 2010 R & D credits, and Z is treated as receiving $10 of 2010 R & D credits. The other $100 of 2010 R & D credits are not allocated to Z, but instead, as of an adjustment date, such $100 of 2010 R & D credits would be allocated among X, Y and Z pursuant to Regulation 23663-2.

Example 12: On its original tax return for the 2010 taxable year, X elects to assign 2010 R & D credits to Y and Z. Subsequently, X discovers that it had less credits than it assigned. X requests and is allowed application of the default rules under Regulation 23663-2. After the adjustment date, X, joined by Y and Z, requests an alternative allocation under Regulation 23663-2. Under these facts, the FTB would reject the alternative allocation request because, pursuant to paragraph (4), X may only request the application of Regulations 23663-2 or 23663-3 once per defective assignment.

(f) Form and Manner for Requests for Correction of an Error or Alternative Allocation.

(1) Any requests made under Regulations 23663-2 through Regulation 23663-4 shall contain all of the following information:

(A) The applicable regulation and applicable subsection of that regulation under which the request is made (Regulation 23663-2(c), Regulation 23663-2(d), Regulation 23663-3(b), Regulation 23663-3(c), Regulation 23663-3(d), or Regulation 23663-4).

(B) The name, FEIN, signature, date, and telephone number of the assignor.

(C) The name, FEIN, signature, date, and telephone number of the assignee, and, if there are multiple potential assignees, then the name, FEIN, signature, date, and telephone number of each potential assignee.

(D) The name, FEIN, signature, date, and telephone number of each party to the defective assignment joining the request.

(E) A summary of the defective assignment including:

(i) The type and amount of identical credits assigned in the defective assignment.

(ii) The amount of identical credits listed as retained by the assignor on the defective assignment.

(F) The reason that the assignment was a defective assignment.

(G) The amount and taxable year in which the assignor or any assignees have claimed credits which were assigned in the defective assignment.

(H) For the same type of identical credit which is the subject of the defective assignment, the amount of the assignor's actual identical credits available for assignment as of the taxable year of the assignment.

(I) A summary of all subsequent assignments of the same type of identical credit, including:

(i) The amount of identical credits assigned in the assignment.

(ii) The amount of identical credits listed as retained by the assignor in the assignment.

(iii) The name and FEIN of the assignee in the assignment.

(J) A copy of the original Form 3544 (or successor form) which contained the defective assignment for which a request is being made.

(K) Copies of all Forms 3544A (or successor form) relating to the defective assignment.

(L) A copy of the assignor's tax return for the year of the defective assignment.

(M) A copy of the assignor's tax returns in which the type of identical credit type assigned in the defective assignment was claimed.

(N) A copy of the assignor's most recently filed tax return.

(O) A copy of the tax returns for the year of the defective assignment for each assignee and each party to the defective assignment joining the request.

(P) A copy of tax returns in which the type of identical credit assigned in the defective assignment was claimed for each assignee and each party to the defective assignment joining the request.

(Q) A copy of the most recently filed tax return for each assignee and each party to the defective assignment joining the request.

(R) All correspondence that the assignor, assignee, and parties to the defective assignment joining the request have received from the FTB regarding the taxable year of the defective assignment or any taxable year in which the assignor, assignee or parties to the defective assignment joining the request have claimed credits which were the subject of the defective assignment.

(S) Amended tax returns reflecting the requested allocation for the assignor and all parties to the defective assignment joining the request for the taxable year in which the defective assignment was made and all subsequent taxable years that would be affected by the request.

(T) Necessary waivers of the statute of limitations on assessment from all parties to the defective assignment joining the request for the taxable year of the defective assignment and all other taxable years in which any credits which were the subject of the defective assignment were claimed which are not closed years.

(2) In addition to the information required under paragraph (1), any requests for default allocations under Regulations 23663-2(c), 23663-3(b), or 23663-3(c) shall also include:

(A) The requested amount of credits to be allocated to the assignor under the regulation.

(B) The requested amount of credits to be allocated to the assignee under the regulation, or for allocations involving aggregated eligible assignees, the amount to be allocated to each eligible assignee.

(C) The calculations to be made under Regulations 23663-2(c), 23663-3(b), or 23663-3(c) which demonstrate the requested allocation.

(3) In addition to the information required under paragraph (1), any requests for an alternative allocation under Regulation 23663-2(d) shall also include:

(A) The requested amount of credits to be allocated to the assignor under the regulation.

(B) The requested amount of credits to be allocated to the assignee under the regulation, or for allocations involving aggregated eligible assignees, the amount to be allocated to each assignee.

(C) A summary of any actual or deemed requests under the subsection in other taxable years.

(D) The calculations to be made under Regulation 23663-2(d) which demonstrate the requested allocation.

(4) In addition to the information required under paragraph (1), any requests for the correction of an error under Regulation 23663-4 shall also include:

(A) The requested corrected amount of credits to be allocated to the assignor under the regulation.

(B) The requested corrected amount of credits to be allocated to the assignee under the regulation.

(C) A summary of any actual or deemed requests under the regulation in other taxable years.

(D) The calculations to be made under Regulation 23663-4 which demonstrate the requested correction.

(E) Documentation required under Regulation 23663-4(b)(3).

(F) Documentation required under Regulation 23663-4(b)(4).

(5) In the case of any request under this subsection that is incomplete, and therefore invalid, but in the sole discretion of the Franchise Tax Board contains substantially all of the information specified in this subsection, the FTB may allow the assignor 30 additional days to provide the missing information to complete the invalid request. If the assignor provides all missing information to the FTB within 30 days of the date the FTB mailed notice to the assignor of additional time to provide missing information, and the request is subsequently granted, the adjustment date shall be the date that the assignor's original request was received by the FTB.

(g) Miscellaneous.

(1) Disclosure. In adjusting credits under Regulations 23663-2 through 23663-5, an audit, protest, and claim for refund are all considered administrative proceedings regarding tax administration within the meaning of Revenue and Taxation Code section 19545.

(2) Math Error. To the extent an assignor or an assignee claims credits in a manner inconsistent with the provisions of Regulations 23663-2 through 23663-5, the provisions of Revenue and Taxation Code section 19051 shall apply and the amount of credit claimed shall be treated as a math error adjustment.

(3) Examples in Regulations. Unless otherwise provided, assume that all entities in the examples in Regulations 23663-2 through 23663-5 are affiliated corporations for all taxable years relevant to the examples and, unless otherwise specifically stated, meet all of the other conditions and requirements of Revenue and Taxation Code section 23663 and Regulations 23663-2 through 23663-5.

Cal. Code Regs. Tit. 18, §§ 23663-5

1. New section filed 9-18-2018; operative 9-18-2018 pursuant to Government Code section 11343.4(b)(3) (Register 2018, No. 38).

Note: Authority cited: Sections 19503 and 23663, Revenue and Taxation Code. Reference: Section 23663, Revenue and Taxation Code.

1. New section filed 9-18-2018; operative 9/18/2018 pursuant to Government Code section 11343.4(b)(3) (Register 2018, No. 38).