Chief Counsel Corner December 2018 Tax News
New defective credit assignment regulations
Limited time "catch-up" provision available until September 18, 2019.
Regulations pertaining to defective credit assignments under Revenue and Taxation Code (RTC) Section 23663 recently became effective. In addition to providing taxpayers with standard rules for the allocation of credits in the case of defective assignments, the regulations give taxpayers the following alternatives when dealing with defective assignments.
Correction of an error – Including a "catch-up" provision available until September 18, 2019
California Code of Regulations, title 18 ("Regulation"), Section 23663-4 allows taxpayers to cure many defective assignments when a request is made before taxpayers file their next year's tax return. The defective credit assignments which may be corrected under this regulation include, originally-filed assignment forms that contain unclear, inconsistent or incomplete information, erroneous assignors, erroneous assignees, or clerical errors listing the wrong credit types or amounts.
Until September 18, 2019, corrections of an error will be available for all defective assignments made before the regulations became effective on September 18, 2018. This one-year special "catch-up" period was intended to allow taxpayers to cure many of their pre-regulation defective assignments so that they can move forward with a fresh start.
When taxpayers assign more credits than they actually have, Regulation Section 23663-2(d) allows taxpayers to choose how their actual credits are allocated among the parties involved in the defective assignment. This alternative allows allocations different than the standard allocation rules and is available at any time before an audit begins.
When a credit assignment is defective due to the parties involved not being unitary, taxpayers are not able to utilize the credits in the assignment until the unitary issue is finalized. Regulation Section 23663-3(d) allows taxpayers to make a unitary determination for credit assignment purposes only. This allows taxpayers to move forward and be able to utilize the credits at issue before the ultimate unitary determination is made.
Standard allocation rules
Taxpayers do not need to wait for an audit to allocate credits under the standard allocation rules. Taxpayers can request that the FTB apply the standard allocation rules under Regulation Sections 23663-2 and 23663-3. This will allow taxpayers to have the standard allocation rules applied so that they can move forward with the proper amount of credits.
How to Make Requests under the Regulations
FTB Notice 2018-03 provides instructions regarding how taxpayers can make requests under the defective assignment regulations.