The California Franchise Tax Board (“FTB”) has scheduled an interested parties meeting for April 21, 2010 at 1:00 p.m. PD T to discuss updating Regulation 25106.5-1, which relates to the treatment of intercompany transactions. Issues to be discussed include the effect on the sales factor when companies make a separate entity election and the effect of various transactions on Deferred Intercompany Stock Accounts (“DISA ”).
Income or loss from intercompany transactions between members of the combined group generally is deferred until there is a triggering event, such as a sale to a third party. Regulation 25106.5-1(e) permits taxpayers to elect to treat members of the combined group as separate entities in certain circumstances, thus accelerating the recognition of income or loss to the year of the intercompany transaction. The FTB staff proposes to amend Regulation 25106.5-1(e) so that intercompany receipts will not be included in the sales factor during the year of the intercompany transaction, and instead will be included during the year involving transactions with third parties.
A DISA , a regime that is unique to California, is created by non-dividend distributions that exceed earnings and profits and basis. Specifically, the FTB is requesting input on (1) whether a merger should trigger the recognition of a DISA , (2) whether a subsequent capital contribution should reduce or eliminate a DISADISADISADISA, and (3) whether more than one DISA should be created, if the same distribution is effectively made through various tiers of stock ownership. For more information on California’s DISA reporting requirements, see Sutherland Legal Alert: What Is DISA All About? We will keep you posted on the results of the meeting and further developments with Regulation 25106.5-1.