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FTB Legal Notice 97 - 7 - rev

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P.O. Box 1720
Rancho Cordova, CA 95741-1720
Telephone (916) 845-3309
FAX (916) 845-3648




This is in response to a request for the revenue impact of staff recommendations presented in the water’s-edge white paper. We have identified the following three revenue issues in the white paper: (1) a retroactive fix of all invalid elections for any open income year (1988-1997); (2) limited authority to perfect elections in future years; and (3) the change to top tier elections.

With respect to the first issue, we have previously estimated this issue and its transmittal is an attachment to the white paper. The revenue loss was estimated to be $120 million ($80 million tax plus $40 million interest).

The second issue would result in additional revenue losses of an indeterminable amount. Perfecting invalid elections would always result in revenue losses assuming the reason taxpayers elect water’s-edge combined reporting is to minimize tax liabilities. The white paper suggests that the authority should be exercised only in limited situations where there is reasonable cause for the election to be invalid. Use of this authority would rarely occur.

The final issue would result in revenue gains but probably not for seven years. There are roughly 4,200 groups of taxpayers that have elected water’s-edge combined reporting. Of this total, fewer than 50 (approximately 1%) have elected along separate lines of business. Assuming these taxpayers are benefiting from electing along business lines, a change to a top tier election would generate revenue gains. However, revenue gains would not likely occur for seven years after the statutory change because these taxpayers would continue to file along lines of business until their existing water’s-edge contracts expire.

If you have questions or need additional information, please call.

Director, Economic and Statistical Research Bureau

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