FTB is reviewing interest calculations in certain circumstances involving:
- May Department Stores v. United States (IRS Revenue Ruling 99-40), or
- Corporation Interest Netting (IRS Revenue Procedure 94-60).
- May Department Stores
- Corporation Interest Netting adjustment
- Frequently asked questions
- September 2015 Board Update
- Taxpayer filed an amended return for additional tax OR received a deficiency assessment after the original return was filed for the same tax year, AND
- On the original return, taxpayer elected an overpayment transfer to the subsequent year’s estimate tax, AND
- On the subsequent year, the required first quarter estimate payment was less than the requested overpayment transfer amount. The maximum amount of the May Department Stores adjustment is one year of interest on the additional tax or deficiency amount.
May Department Stores example
In 2013, taxpayer timely filed their 2012 tax return and requested their $400,000 overpayment be transferred as an estimate payment for tax year 2013. In 2014, taxpayer received a notice proposing additional tax of $75,000 for tax year 2012.
- Without the May Department Stores adjustment: If the entire $400,000 overpayment was applied to the 2013 first quarter estimate payment, taxpayer owes $1910 interest on the $75,000 additional tax for the 2012 tax year.
- With the May Department Stores adjustment: If the entire $400,000 overpayment was more than their required 2013 first quarter estimate payment, the taxpayer owes $383 interest, provided the minimum estimate payment needed was $120,000 (1st quarter). This is a potential net reduction of $1527 interest ($1910 - $383 = $1527).
Taxpayer received a notice revising his 2012 filing status with additional tax of $3900. Since he requested an estimate payment transfer for tax year 2013, he may have a net reduction of $27 interest (with the May Department Stores adjustment) assuming an estimate transfer of $14,000 and 2013 tax liability of $39,000.
May impact corporations with all of the following:
- Previous refund or payment transfer.
- Subsequent deficiency or amended return for additional tax with interest for the same tax year.
Corporation Interest Netting example
In 2015, corporation filed an amended return for $60,000 in additional tax for tax year 2012.
- Corporation Interest Netting does NOT apply: If the corporation did not receive a refund for the 2012 tax year, prior to filing the amended return for additional tax, then the corporation owes $60,000 tax plus $3710 interest, as of March 15, 2015.
- Corporation Interest Netting does apply: If the corporation received a refund prior to filing the amended return for additional tax, (for example $70,000) for the same tax year, Interest Netting applies. The corporation owes $60,000 plus $2363 interest, as of March 15, 2015. This is a net reduction of $1347 interest ($3710 - $2363 = $1347).
These interest calculations are complex and must be manually performed. We will work with taxpayers to adjust interest calculations, as appropriate. We will be providing additional information on our FTB website and in upcoming Tax News articles.
Due to the potential statute of limitations expiring for tax year 2010, taxpayers (who may have been impacted by either of these scenarios) should submit the following information in a letter with the taxpayer’s signature:
- Taxpayer Name or Entity Name as filed on return
- Taxpayer / Entity Identification Number
- Tax year(s)
For proper handling, please reference in red on the top of your correspondence "INTEREST ADJUSTMENT" and mail the letter by US Mail to:
FRANCHISE TAX BOARD
PO BOX 1779
RANCHO CORDOVA CA 95741-1779
Interest Computation Adjustments – September 2015 Update
- On July 21, 2015, at the meeting of the Franchise Tax Board, FTB provided an update on progress made to identify tax years that may be subject to interest computation adjustments as a result of the following rulings:
- May Department Stores v. United States (IRS Revenue Ruling 99-40)
- Corporate Interest Netting (IRS Revenue Procedure 94-60)
- At the July board meeting, FTB shared that the estimated universe of these taxpayers is approximately:
|Tax Type||Computation||Maximum Taxpayers Impacted|
|Personal Income Tax||May Dept Store||24,000|
|Business Entities||May Dept Store||2,000|
|Business Entities||Corporate Interest Netting||1,000|
- Additionally, FTB committed to providing an update in September 2015 regarding the fiscal impacts of the various groups. We estimate those impacts to be approximately:
|Tax Type||Computation||Maximum Fiscal Impact|
|Personal Income Tax||May Dept Store||$1.5 million|
|Business Entities||May Dept Store||$14.5 million|
|Business Entities||Corporate Interest Netting||To Be Determined|
- Determine fiscal impact of Corporate Interest Netting and provide an update to include those figures.
- Begin issuing refunds/credits and sending letters of explanation to impacted taxpayers in Fall, 2015.
- Who may be impacted by the interest computation adjustments?
- Are interest computation adjustments subject to the statute of limitations?
Yes. To be valid, interest computation requests must be filed within the statute of limitations.
Generally the statute of limitations are:
- Four years from the date the return was filed (if filed within the extension period).
- One year from the date a payment was made.
- Any other applicable Statute of Limitations (See Exceptions).
- If I believe I'm impacted, what should I do?
Submit a letter signed by you or your authorized representative with the following information:
- Your Name or Entity Name as filed on return.
- Your / Entity Identification Number.
- Tax Year(s).
- If I'm entitled to a refund, will it include interest?
Refunds will include interest as allowed by law.
- What if my tax year is pending an audit, protest, settlement, or collection?
If you think you are impacted and are currently working with an FTB staff representative on an audit, protest, settlement, or collection case, please contact your FTB staff representative directly to discuss.
- Does Corporate Interest Netting apply to other types of business entities such as partnerships or limited liability companies (LLCs) filing as partnerships?
No. Refunds on partnership and LLCs filing as partnerships are not subject to Corporate Interest Netting. The interest rates charged on underpayments and paid on overpayments are the same for these taxpayers. Therefore, there is nothing to net out. Business entities which elect to file as a corporation could be subject to interest netting, just like other types of corporations.
- My entity is suspended. What do I need to do?
You will need to revive the entity. Upon request, we will examine whether your entity is entitled to an interest adjustment for years that are within statute and provide you with an amount due to revive.
- If I have additional questions, what should I do?
Taxpayers can call us at 800.852.5711, weekdays, 7 a.m. to 5 p.m., except state holidays.
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