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M A R C H 1 9 9 8

Why and How to File Want Head of Inside ...


2 ... Taxpayers using new payment
Electronically Household voucher
2 ... Corporations fail to file for
Electronic filing has advantages for both you Symposium? 1995
3 ... Who qualifies to exclude home
and your clients. sale gain?
If you offer electronic filing as an option, you Contact FTB Now! 3 ... Andal is new board member
can: 4 ... Need Package X?
Are you interested in learning all the ins and 4 ... Excess state disability insurance
• Assure your clients that they will receive outs of the head of household filing status? credit refunded
refunds within one to two weeks, which is 4 ... Legal ruling addresses timber,
faster than refunds issued when paper The Franchise Tax Board is considering a mineral royalties
returns are filed. symposium in the Sacramento area to increase 5 ... What to expect during
awareness of the qualifications needed to partnership audits - part 2
• Arrange for your clients to have their claim the status, if enough tax professionals 5 ... Tax News by E-mail
refunds directly deposited in their bank show an interest. So, if you want information 5 ... FTB calendar
accounts. This option is open only to and an opportunity to have all your questions 6 ... Long Beach office relocates
electronic filers and cuts the refund time answered, be sure to get in touch. 6 ... Small business expenses: State/
even further. The Franchise Tax Board federal differences
expects to issue between 70,000 and 6 ... Small business expenses
CONTINUED ON PAGE 15 6 ... Roth IRAs: California conforms
CONTINUED ON PAGE 8 7 ... Tax form clarifications
announced
7 ... Head of the house? Or head of
As Far as the Eye Can See household?
8 ... Electronic filing in 2001
8 ... Electronic filing: Check the
’Net
8 ... 1997 tax returns received by
February 15, 1998
9 ... Some electronic filers forget to
send check
9 ... Partnerships’ nonpaper
Schedule K-1s: Two million
before 2000?
9 ... Water’s-edge election
symposium is March 11
9 ... 1997 electronic filing calendar
10 ... Send EFT payments to Union
Bank
10 ... Where to find tax education
information
10 ... Most business taxes paid
electronically
11 ... President declares disaster
areas
11 ... Thirty-one counties are disaster
areas
12 ... Tax Talk video is honored
12 ... Tax Talk: New ways to earn
education credits
12 ... FTB contacts more 1996
nonfilers
At the Franchise Tax Board, filing “cabinets” for paper tax returns are warehouse size. FTB’s
information storage operation houses more than 90 million returns and documents. CONTINUED ON PAGE 3
Page 2

Taxpayers Using Corporations


New Payment Fail to File
Volume 98-2 March 1998

TAX NEWS is a bimonthly


Voucher for 1995
publication of the Taxpayer Advocate Tax professionals and individual
Bureau, California Franchise Tax In December 1997, the Franchise Tax
Board. Its primary objective is to taxpayers are using the Franchise Tax Board asked about 8,100 corporations to
provide information to income tax Board’s new tax payment voucher in file their delinquent 1995 tax returns.
preparers about state income tax greater numbers than expected. At press
laws, regulations, policies and This month, FTB will send Notices of
procedures. time, more than six out of 10 taxpayers Proposed Assessments (NPAs) to the
with tax liabilities have mailed their ones that did not produce a return or
Members of the Board: payments and returns with Form 540-V, explain why they do not have a filing
Kathleen Connell, Chair “Return Payment Voucher for obligation.
State Controller Individuals.”
The assessments include not only FTB’s
Dean Andal Although there is no penalty for not using estimate of the tax due but also penalties,
Chair, State Board of Equalization the voucher, FTB has asked taxpayers to interest and fees related to the
Craig L. Brown fill it out and mail it in with their returns delinquency.
Director, Department of Finance because it is helpful in processing returns
and payments accurately and efficiently. FTB bases its tax assessments on
———————— information about the corporations’
Executive Officer: If you are one of the tax professionals
Gerald H. Goldberg income and activities that the Internal
advising clients to use the voucher, you Revenue Service, State Board of
Editor: will find a revised version of the Equalization and Employment
Pat Huberty voucher instructions at FTB’s Development Department supply:
http://www.ftb.ca.gov Internet address.
To update or correct your address or
to subscribe to TAX NEWS (send $12 You may download the revised • The IRS provides the names of
for a one-year subscription), write: information as a separate form or as part corporations that file federal returns
TAX NEWS of either the “Resident Booklet” or the and that have California addresses.
P.O. Box 520 Also included is income information
Rancho Cordova, CA 95741-0520 “Nonresident Booklet.” The revised form
or call: (916) 845-7070. also is included in the paper and CD- from the federal tax return.
For information about a client’s
ROM versions of the 1997 Package X. • The SBE supplies income
account, contact: (The original version was included in the information on corporations with
Tax Practitioner Support Unit 1997 personal income tax booklets and active California sales and use tax
(916) 845-7057 (phone) also printed as a separate form available
(916) 845-6377 (fax) permits.
by mail order from FTB.)
For recorded answers to questions • EDD provides the names of
on California taxes, to order forms The revised voucher instructions clarify corporations with employees subject
or check on a refund, call: that the amount entered on the voucher to payroll withholding requirements.
F.A.S.T. (800) 338-0505 should match the amount of the check or
From outside U.S. (916) 845-6600 Also this month, FTB will contact an
money order being remitted, including
additional 25,000 corporations with
To send a facsimile about a client’s any 1997 penalties or interest. The
account, transmit to: requests to file a delinquent 1995
instructions read: “Enter the amount of
Electronic Correspondence corporate tax return.
(916) 845-6377 payment that you are sending with your
—————————- return. If you are paying penalties or If some of your clients receive either the
Information Center: interest in addition to the tax you owe, be NPA or the request to file, you may be
(800) 852-5711 able to save them money by urging them
sure to enter the total amount of your
From outside U.S. (916) 845-6500
Hearing Impaired:
check or money order on Form 540-V.” † to respond quickly. The sooner they
comply with the tax laws the smaller the
TDD (800) 822-6268 amount of interest and penalties will be.
__________________
Clients who want more information about
FTB on the Internet
http://www.ftb.ca.gov either notice will find answers to
frequently asked questions by calling
Printed on recycled paper. FTB’s automated voice response system
at (800) 478-7194. †

March 1998
Page 3

Who Qualifies to Exclude


Home Sale Gain?
Married couples may now exclude up to • The taxpayer is selling or exchanging
Inside ...
$500,000 of gain from the sale of their a principal residence because of a CONTINUED FROM PAGE 1
principal residence as long as they meet change in the place of employment, 13 ... The question column:
certain conditions. health considerations or certain Must carryover credits
California conforms to new federal law unforeseen circumstances. be claimed in a specific
order?
that permits the exclusion, starting with Only one difference exists between Who gets estimate
1997 tax returns. The law also allows California and federal law on the new payment credit in
single taxpayers to exclude up to rules for excluding gain from the sale of a divorce?
$250,000 of gain. principal residence. In California, up to Which securities are
certain limits, time spent away from the taxable?
To qualify for the $500,000 exclusion: 13 ... Software errors identified
residence due to Peace Corps service
• A couple must file jointly for the tax counts as time during which the property 14 ... Omit SSN from return
year in which the property was sold. postcard
was used.
14 ... Are you moving?
• One or both of the spouses must have The new rules for excluding gain from a 14 ... More expected toring in
owned the property for two years. principal residence sale replace a law that tax returns
• Both spouses must have used the allowed taxpayers older than 55 a once- 14 ... “Striking Gold” wins
property as a principal residence for in-a-lifetime exclusion of a lesser amount. award
any 24 months in the preceding five The law permitting deferral of gain if a 14 ... Ruling addresses
manufacturers’
more expensive home is purchased has
†
years. If only one spouse meets this investment credit issue
requirement, the exclusion is limited been repealed. 15 ... Sacramento area head of
to $250,000. household symposium
• Neither spouse must have used the 15 ... Package X notice
exclusion in the preceding two years.
However, this limitation of one sale
Andal Is New 15 ... Reminder for installment
payers
16 ... When is SSN required?
every two years applies only to home
sales that occur after May 6, 1997.
Board Member 16 ... In 1999, missing “wages”
entry will delay refund
And, the limitation does not stop a
Dean Andal, as the new chair of the State
husband and wife who file a joint
Board of Equalization, now serves on the
return from excluding up to $250,000
three-member California Franchise Tax
of gain from the sale of each spouse’s
Board.
principal residence.
Andal was elected to the Board of
In a divorce, the spouse that receives a
Equalization in 1994. He previously was
house in a property settlement is
the President of Andal Communications
considered to have owned the property
in Stockton. In 1992 and 1993, he served
during the time that the other spouse
in the state Assembly, representing the
owned it. However, the spouse receiving th
17 Assembly District. He was named
the house is not considered to have used
1992 Legislator of the Year by
the property during the time that the other
California’s major taxpayer organizations
spouse used it.
and served as the chief budget negotiator
Taxpayers who have sold principal for Assembly Republicans.
residences within the last two years and
On the Franchise Tax Board, Andal joins
some taxpayers who fail to meet the
Controller Kathleen Connell, who is the
ownership and use requirements may
board’s chair, and Department of Finance
exclude a reduced amount. To qualify,
they must meet both of these conditions:
Director Craig L. Brown. †
• The regular exclusion does not apply
either because the taxpayer does not
meet the ownership and use
requirements or because the
exclusion is limited to one sale every
two years.
Page 4

Excess State Disability Insurance


Credit Refunded
Need Have any of your clients received 1099 insert included with the refunds provides
Package X? forms from the Franchise Tax Board? an explanation.
Some of the forms may be associated with In January 1997, in response to
Do you need a 1997 excess state disability insurance (SDI) legislation, FTB began issuing excess SDI
Package X? credit that your clients received. refunds to taxpayers who qualified for the
Use the form printed on the A taxpayer who received a refund of more credit but failed to claim it on their 1993,
last page of the November than $10 in excess SDI credit in 1997 will 1994 or 1995 returns. Then in December
1997 Tax News to place your receive a 1099G reporting the income. 1997, FTB began issuing refunds for
order. And if interest of more than $10 was paid unclaimed credits and interest to
on the overpayment, FTB also will issue a taxpayers who did not claim an excess
If you no longer have that SDI credit on their 1996 returns. The
issue, do not use an order 1099INT. Neither form specifically
1099s were distributed for all refunds
form from a previous year.
Instead, call (916) 845-7070
identifies the overpayment or interest as
associated with excess SDI. However, an issued in 1997.†
for another order form.
You will be able to order the
1997 Package X on a
CD-ROM for $19 or in a
Legal Ruling Addresses
paper version for $12.† Timber, Mineral Royalties
The Franchise Tax Board has issued a The ruling provides two examples. In
legal ruling that addresses the property one, Corporation A enters into a contract
factor treatment of timber and mineral with State X, under which it extracts oil
royalties. from the state’s land. The corporation
Legal Ruling 97- 2, “Application of 18 agrees to pay the state in cash or oil equal
California Code of Regulations Section to one-eighth of the cash value of the
25137(b)(1)(B) to Timber and Mineral extracted oil. In exchange, Corporation A
Royalties as Rental Equivalents in the acquires title to the remaining oil
Property Factor,” was issued on extracted, which it sells.
December 17, 1997. In the second example, Corporation B
The ruling holds that regulations enters into a contract with Corporation Y,
“authorize capitalization of royalties paid under which Corporation B may cut and
with respect to a property interest in the remove timber from Corporation Y’s land
nature of a profit a prendre, to the extent and pay a specified amount per cubic foot
actually used by the taxpayer, as a of the timber removed.
substantial equivalent to a rental, reflected In both cases, according to the ruling, the
at an eight-multiple capitalization rate.” royalty payments made by corporations
The ruling states that the specific A and B are treated as rent for purposes
provisions of Section 25137(b)(1)(B), as of 18 Cal. Code of Regs. Section
the State Board of Equalization applied 25137(b)(1)(B).
them in the Appeal of Procter and Legal Ruling 97-2 is available at FTB’s
Gamble in 1989, provide for the Internet http://www.ftb.ca.gov address. It
authorization “(d)espite the limitations of also has been published by most tax
18 Cal. Code of Regs. Section
25130(b)(4),” which states, among other
services.†
things, that the term “annual rent” does
not include royalties based on the
extraction of natural resources.

March 1998
Page 5

Part 2

What to Expect
FTB Calendar
During Partnership Audits
March
This is the second of two articles on Although the current FTB procedures • Notices of Proposed
partnership audits. See the January 1998 appear to be working well, FTB is open to Assessment are issued to
issue of Tax News for Part 1. alternate methods, including the recent nonqualified corporations
Your partnership clients may be in for a federal law changes to large partnership that failed to respond to
surprise if they expect a Franchise Tax audits. If you have any questions, Demand to File notices
comments or suggestions about FTB’s for 1995 corporate tax
Board audit to be a mirror image of a returns.
federal audit. position, send a letter marked “TEFRA”
at the top to Division Chief, Audit • Demand to File notices
California generally conforms to the Branch, Mail Stop D-15, P.O. Box 1779, are issued to qualified
Internal Revenue Code’s Subchapter K,
“Partners and Partnerships,” and has
Rancho Cordova, CA 95741-1779. † corporations that have
not yet filed a 1995
adopted the related Internal Revenue corporate tax return.
Service regulations. But California does • Approximately 120,000
not conform to the Tax Equity and Fiscal Tax News Proposed Assessments
are mailed to individuals
Responsibility Act (TEFRA) of 1982,
which establishes the federal rules for
partnership audits. As a result,
by E-Mail who failed to file a 1996
tax return.
partnership audits in California may be 11 FTB’s water’s-edge
Tax News is now available by electronic symposium is held.
procedurally different from their federal mail.
counterparts. 20 Previous month
Starting immediately, you may sign up to nonresident withholding
TEFRA contains a myriad of complex receive Tax News automatically by payments are due if total
rules and regulations that were codified E-mail every other month. There is no withholding exceeded
into 12 law sections and more than 50 charge for the service. $2,500.
regulations. They could be difficult to
To subscribe, contact the Franchise Tax 27 Last day to notify the
administer and would probably increase Franchise Tax Board of
the cost of compliance. Instead, FTB Board at its http:www.ftb.ca.gov Internet interest in a Head of
administratively uses the best parts of address. Access the Education and Household symposium.
TEFRA as a guide and combines them Outreach page. Click on the Tax News
with recent technological advances and logo and then on “Tax News by E-Mail.” April
improvements to FTB’s computer Next, add your E-mail and other address • Proposed Assessments
systems. Procedurally, with this information in the fields provided. Click that were issued in early
streamlined approach, FTB: on “subscribe” and then on “submit” so February to individuals
that your subscription will be recorded. who failed to file 1996
• Conducts partnership audits at the You may cancel your subscription at any tax returns are due and
entity level, reaching partners payable.
time, by filling out the address
through the partnership. information again and clicking on 15 1997 personal income tax
• Works with the general partner to “unsubscribe.” returns are due.
notify affected partners about the 15 First quarter 1998
Tax News also is available on the Internet
start of the audit. for downloading, viewing and printing. † personal income tax
estimate payments are
• Notifies affected partners of the due.
proposed adjustments. 20 See March 20.
• Works with partnerships and their
partners to coordinate protests,
amended returns or other items that CONTINUED ON PAGE 7
stem from the audit.
Page 6

Small Business Roth IRAs:


Long Beach Expenses: California
Office Relocates State/Federal Conforms
The Franchise Tax Board’s Differences In general, California conforms to federal
office in Long Beach has law that governs Roth Individual
formed a Taxpayer Service If your small business clients elect to Retirement Accounts (IRAs).
Center with the Employment deduct the expense of business property
instead of depreciation, keep in mind that The Roth IRA is a new retirement vehicle
Development Department.
federal and state maximum expensing established by the federal Taxpayer Relief
FTB’s new location is 4300 Act of 1997. Unlike regular IRAs, the
amounts currently are different.
Long Beach Boulevard, Roth IRA offers tax-free distributions
Suite 700B, Long Beach According to federal and state law, under certain circumstances, and
90807-2019. It gives tax certain taxpayers with sufficiently small contributions are not deductible under any
practitioners and taxpayers a amounts of annual investment may elect circumstances.
one-stop shopping in lieu of depreciation to deduct, within
limits, the cost of qualifying property A California exception to federal Roth
opportunity for a variety of
placed in service in a taxable year IRA law is likely to be temporary.
tax information and
beginning after December 31, 1996. California requires that a regular IRA
assistance.
rollover be held in a Roth IRA for five
The Long Beach center is one Federal and state maximum expensing years in order to avoid a premature
of five Taxpayer Service amounts are different for 1997 and 1998. withdrawal penalty and to use the ratable
Centers. The others are in In 1999 and subsequently, they will match income inclusion rules. This provision is
Bakersfield, San Bernardino, (see chart below). considered the Congressional intent of the
Stockton and Ventura. FTB The deduction limit is reduced, but not federal law, which is expected to
and EDD are represented at below zero, by the cost of Section 179 incorporate the five-year rule.
all centers; the State Board of property that is placed in service during Distributions from a Roth IRA are not
Equalization is a participant the taxable year and that does not exceed taxed at federal or state levels if they are
at the Bakersfield, Stockton
and Ventura locations. † $200,000. Also, the amount eligible to be
expensed for a taxable year may not
made at least five tax years from the date
of the first contribution and one of these
exceed taxable income that is derived conditions exists:
from the active conduct of any trade or
business, determined without regard to • The contributor is at least 59½ years
this provision. Any amount disallowed as old.
a deduction because of the taxable income • The contributor has died.
limit may be carried forward to • The contributor has become disabled.
succeeding taxable years and is subject to
†
carry-forward limitations. • The distribution is for the special
purpose of buying a principal
†
residence for the first time.

Small Business Expenses


For taxable years Federal maximum State maximum
beginning in: expensing: expensing:
1997 $18,000 $13,000
1998 18,500 16,000
1999 19,000 19,000
2000 20,000 20,000
2001 24,000 24,000
2002 24,000 24,000
2003 and later 25,000 25,000

March 1998
Page 7

Tax Form Clarifications Announced


Tax practitioners should revise some Form 568, “Limited Liability Company
1997 tax form information that has Return of Income,” Side 1. FTB Calendar
already been distributed. Line 14 reads: Amount due. Add line 8 CONTINUED FROM PAGE 5
The changes should be made to: and line 15. It should read: Amount due.
Instructions for 1998 Form 100-ES Add line 9 and line 13. May
- Corporation Estimated Tax, page 2, The error is in the paper version of the • Demand to file notices
line 11, paragraph 2, bulleted items. Package X. The information is correct on are mailed to individuals
The bulleted information is incorrect. It the Internet, the CD-ROM (release 1 of 2) who failed to file a 1996
should read: version of the Package X and the single tax return.
copy version of the form. • Notices of Proposed
• If line 8 is smaller than line 9, Assessment are issued to
multiply line 8 (total tax) times the Form FTB 5805, “Underpayment of
Estimated Tax by Individuals and qualified corporations
applicable percentage (25%, 50%, that failed to file
75% or 100%) shown for each Fiduciaries,” Instructions, page 3, requested 1995 corporate
quarter at the top of column (1) column 2, chart with “Rate Period” tax returns.
through column (4). Enter the result and “Days in Rate Period.”
20 See March 20.
for each quarter on line 11. Rate Period 2 currently reads: 199 days.
It should read: 303 days. June
• If line 9 is smaller than line 8, • Demand to file notices
determine the amount to enter as Rate Period 3 currently reads: 107 days. are mailed to individuals
follows: It should read: 212 days. who failed to file a 1996
(a) Enter 25% of line 9 in column (1) The errors are in the paper version of the tax return.
of line 11. Package X and the single copy version. 15 Second quarter 1998
The information is correct on the Internet personal income tax
(b) Enter 50% of line 8 in column (2) estimate payments are
and on the CD-ROM (release 1 of 2)
of line 11.
† due.
†
version of the Package X.
(c) Enter 75% of line 8 in column (3) 20 See March 20.
of line 11.
(d) Enter 100% of line 8 in column Head of the House?
(4) of line 11.
The errors are on the paper and CD-ROM Or Head of
(release 1 of 2) versions of the Package X
and the single copy version of the form. Household?
The information is correct on the Internet
and will be correct on the CD-ROM
(release 2 of 2) version of the Package X.
Form 541-B, “Charitable Remainder
and Pooled Income Trusts,” Side 2,
Part V.
Line 50b currently reads: “…line 44,
column (b) from line 38, column (b)…”
It should read: “line 44, column (c) from
line 38, column (c)…”
The error is in the paper and the CD-
ROM (release 1 of 2) versions of the
Package X and the single copy version.
The information is correct on the Internet
and will be correct on the CD-ROM
(release 2 of 2) version of the Package X. Are your clients confused about the head
of household filing status? A proposed
symposium could give you all the
information you need to make sure your
clients understand what qualifies them to
file as head of household. For more
information, see the article beginning on
page 1 and a mail-in form on page 15.
Page 8

Electronic Filing:
Electronic Filing Check the ’Net
in 2001 The Franchise Tax Board has expanded • The five most common reasons that
its “Electronic Service” page on the initial transmissions of 1996 tax
By 2001, the Franchise Tax Internet. returns were not acceptable.
Board predicts, nearly one in The bigger-than-ever information site for • 1997 electronic filing forms and
every four individuals will electronic filing in California now has the publications.
file tax returns without using following information for tax • How software developers may
paper. practitioners, software developers and participate in the electronic filing
The FTB prediction is more taxpayers: program.
than double the percentage of • Electronic filing calendar. • Program updates and other
nonpaper tax returns expected
• Electronic filing FAQs (Frequently information for software developers.
this year.
Asked Questions). You can locate all of the information at
Although 95 percent of all
• How practitioners may participate in FTB’s http://www.ftb.ca.gov/elecserv/
taxpayers are qualified to file
electronic filing. elf.asp electronic filing site on the
electronically, only eight
percent are expected to file
Internet. †
their 1997 tax returns either
electronically or by telephone
this year. Even so, the Why and How to File Electronically
number has doubled each
year since electronic filing CONTINUED FROM PAGE 1
was introduced as a pilot
program in California four 100,000 direct deposits of 1997 Tax returns may be filed electronically in
years ago. † refunds this year. California in two ways. Most of the
600,000 electronic returns expected in
• Avoid processing delays caused by
errors on the tax return. If something 1997 will be prepared by “electronic
is wrong on a tax return filed return originators” who are tax
electronically, the transmission is not professionals approved by FTB to
accepted and you are notified produce the returns that are relayed to
promptly that a correction is needed. FTB by transmission services.
• Appeal to more clients than ever. In addition, about 25,000 electronic
This year, for the first time, returns are expected to be filed through
nonresidents may file California FTB’s Transmitter/On-line Service
returns electronically, as long as they (TROLS); taxpayers who use TROLS
file on a calendar year, not a fiscal prepare their own returns and transmit
them to FTB through companies that have
year, basis.
signed up for the program.†

1997 Tax Returns


Received by February 15, 1998
Paper returns 720,173 63.4%

Electronic returns 275,143 24.3%

TeleFile returns 140,698 12.3%


_________ ______
1,136,014 100 %

March 1998
Page 9

Some Electronic Filers


Forget to Send Check 1997 Electronic
Do you have clients who file “Payment Voucher for Electronically Filing Calendar
electronically now and pay later? Be sure Transmitted Returns.” Be sure to give
to remind those clients that “later” ends your clients this form when they pick up If you offer your clients the
on April 15, 1998. their tax return copies. You may option of filing electronically,
Once their tax returns are filed download the form from FTB’s here are some dates to
electronically, some taxpayers forget that http://www.ftb.ca.gov Internet address. remember:
the process has not been completed. They You also will find it in the 1997 • April 15 – Last day to
neglect to mail the Franchise Tax Board a Package X. Or you may order the form pay a balance due return
by calling F.A.S.T. (Fast Answers about
check for any taxes they owe.
Electronic filers should send FTB their
State Taxes) at (800) 338-0505. † on time.
• April 30 – Last day for
tax payments with form FTB 3582, test transmissions.
• October 15 – Last day to
transmit timely filed
Partnerships’ Nonpaper Schedule K-1s: returns.
Two Million Before 2000? • October 19 – Last day to
retransmit returns
rejected on October 15 or
If the current rate of increase continues,
the number of Schedule K-1s that
To take advantage of the simpler, paper-
free method of filing Schedule K-1s for a †
earlier.
partnerships file in California without client, work with your client’s software
paper could hit two million by the end of developer and/or the vendor who
the century. produces the client’s K-1s. In addition,
In 1996, the Franchise Tax Board technical information is available in FTB
received 900,000 Schedule K-1s (565), Publication 1062, “Guide for K-1 (565)
“Partner’s Share of Income, Deductions, Filing by Diskette or Magnetic Media.”
Credits, etc.,” on magnetic tape or You may download a copy from FTB’s
diskette. Last year, the number increased http://www.ftb.ca.gov Internet address.
Or call FTB’s Electronic Filing Help
by more than 30 percent to 1.3 million.
Desk at (916) 845-0353 for a copy. †

Water’s-Edge Election Symposium


Is March 11
The Franchise Tax Board will hold a regulation and to discuss FTB’s draft of a
symposium to draft an amendment to the legislative proposal that would provide
water’s-edge election regulation and to taxpayers with standards for perfecting
frame a related legislative proposal. previously invalid elections and that
The symposium is scheduled for 10 a.m. would simplify the election process
on March 11, 1998, at the State Board of generally.
Equalization, Room 121, 450 N Street in Prior to the symposium, check FTB’s
Sacramento. http://www.ftb.ca.gov Internet site for
The symposium will address water’s-edge FTB’s legislative proposal, drafts of
Regulation 25111 and the presumption Regulation 25111 amendments that have
that the Legislature’s intent has been to been submitted by some symposium
participants and a list of problems
permit all taxpayers to make a water’s-
edge election if they wish to. Participants associated with water’s-edge elections. †
are expected to draft an amendment to the
Page 10

Where to Find
Send EFT Tax Education Information
Payments to You have a question about your Since its inception, the Council has:
Union Bank continuing tax education. You are not
sure of the rules for becoming a registered
• Approved or grandfathered in 130
tax education schools, the highest
Make sure your corporate tax preparer. You want to help a friend total in history. Forty-six are
clients transmit their plan a career in tax preparation. Where “qualifying education” schools that
California electronic funds do you find the information you need? provide entry level courses to
transfer (EFT) payments to Call (916) 492-0457. That is the potential tax professionals. Some of
the Union Bank of California. telephone number for the California Tax the 46 plus many more, for a total of
Starting January 1, 1998, the Education Council, which replaced the 121, offer continuing education
Union Bank replaced Bank of Department of Consumer Affairs’ Tax courses.
America as the Franchise Tax Preparer Program last July. (The • Distributed more than 5,000 lists of
Board’s bank for bank and council’s programs do not apply to approved tax education providers in
corporation tax payments certified public accountants, enrolled response to requests.
made by EFT. (See the agents or attorneys.)
• Registered 26,261 tax preparers by
November 1997 issue of Tax
January 30, 1998. Of these, 22,740
News.) Any EFT payments
were renewals and 3,521 were new to
transmitted to the former
Bank of America account will Most Business Taxes the field.
be returned by the bank. • Distributed registration certificates
Taxpayers who remit their
Paid Electronically well in advance of the four to six
week turnaround period promised.
EFT payments to FTB using California collects most of its bank and
the Automated Clearing corporation tax revenue by electronic To qualify as a registered tax preparer,
House (ACH) Credit or funds transfer (EFT), even though only a one must complete 60 hours of tax
Fedwire payment methods small number of entities choose or are instruction from an approved provider, be
must give their financial obliged to use EFT. at least 18 years old and obtain a $5,000
institution the new banking tax preparer bond. Each subsequent year,
information that FTB mailed The Franchise Tax Board expects to a tax preparer must complete 20 hours of
in December 1997. If you or receive $6.6 billion in bank and approved continuing education and
your clients did not receive corporation revenue during 1998. The maintain the bond.
the information, contact entities responsible for paying that
amount will remit 78 percent, or $5.2 The California Tax Education Council is
FTB’s EFT Help Desk at a nonprofit, public benefit corporation
(916) 845-4025. billion, by EFT. However, the EFT tax
payments will come from only 7 percent with members appointed according to
Each state agency uses a of all bank and corporation taxpayers. state law. Current Council
different bank account representatives were appointed by the
number for EFT payments. Bank and corporation taxpayers must California Society of Accounting and Tax
So, if you or your clients make EFT payments if their total tax Professionals; California Society of
remit EFT payments to liability is more than $80,000 or if any Enrolled Agents; East Bay Association of
another agency, such as the single estimated tax or extension payment Enrolled Agents, Inc.; H&R Block, Inc.;
Employment Development is more than $20,000 for any income year Inland Society of Tax Consultants, Inc.;
Department or the State beginning on or after January 1, 1995. Jackson Hewitt Tax Service; Mission
Board of Equalization, be The number of EFT transactions expected Society of Enrolled Agents; National
sure to obtain the account in 1998 is 33,000, which is about 135 Association of Enrolled Agents; and
number for that agency. † percent more than the 14,000 received in National Association of Tax Practitioners.
1994. Tax Talk, a program of the Center for Tax
For information about individuals’ use of Education sponsored in part by the
EFT, see “Reminder for Installment Franchise Tax Board, produces
Payers” on page 15. † continuing education programs certified
by the Council, but FTB is not associated
with the Council.†

March 1998
Page 11

President Declares Disaster Areas


The President has designated 31 No matter when the loss is deducted,
California counties as disaster areas as a taxpayers should:
result of the storms and floods that began • Complete federal Form 4684,
on February 2, 1998. “Casualties and Thefts,” using Thirty-one
The President’s designation allows storm California amounts on the federal
and flood victims in the disaster areas (see form, and attach it and any other Counties Are
list on this page) to deduct disaster losses support schedules to their return.
on either their 1997 or 1998 tax forms. A • Complete Form 4684, Section B,
Disaster Areas
disaster loss is a casualty loss that is using California amounts, to figure
sustained as a result of a disaster and that The 31 counties designated
the disaster loss for property that is disaster areas by the President
is not reimbursed by insurance or trade or business, income-producing
otherwise. as a result of the 1998 storms
or rent or royalty property. and floods are: Alameda,
In addition, a disaster victim can treat the • Determine whether losses need to be Amador, Butte, Calaveras,
loss as a net operating loss. This means a reported on Schedule D-1, “Sales of Colusa, Contra Costa, Fresno,
victim can carry forward 50 percent of Business Property,” form FTB Glenn, Humboldt, Lake,
any disaster loss to future taxable years. 3805V, “Net Operating Loss (NOL) Marin, Mendocino, Merced,
The California Legislature and the Computation and NOL and Disaster Monterey, Napa, Sacramento,
Governor could provide further relief by Loss Limitation – Individuals, Estates San Benito, San Francisco,
passing a statute, as they have following and Trusts,” or form FTB 3805Q, San Joaquin, San Luis
many previous disasters, to permit “Net Operating Loss (NOL) Obispo, San Mateo, Santa
taxpayers in the disaster areas to carry Computation and NOL and Disaster Barbara, Santa Clara, Santa
forward 100 percent of any excess Loss Limitations – Corporations.” Cruz, Solano, Sonoma, Sutter,
disaster loss to future taxable years. At Tehama, Ventura, Yolo and
press time, however, disaster relief • Attach to the return a statement that
lists the disaster date and the city and Yuba. At press time, the
legislation had not been introduced. Governor had requested the
county in which it occurred.
Also, the Franchise Tax Board delayed President to designate
issuing billing notices for storm and flood • Print “Storms/Floods ‘98” in red ink additional counties as disaster
victims for a two-week period. Other at the top of Side 1 of the return.
This will speed up processing so that
†
areas.
billing notices were distributed on
schedule. Inserts included with these taxpayers who qualify for refunds
notices explain that any flood victim who will receive them sooner.
inadvertently receives a bill and is To determine when to file the tax return
experiencing a financial hardship should and for other information, see FTB
immediately call the number on the bill or Publication 1026O, “California Disaster
insert. Relief Tax Provisions.” The publication
To deduct a loss on a 1997 tax return that is available at the Franchise Tax Board’s
has not yet been filed or on a 1998 tax http://www.ftb.ca.gov Internet address.
return, individuals must file California You also may obtain a copy from FTB’s
Form 540, “California Resident Income Tax Practitioner Support Unit by calling
Tax Return.” Corporations must file Form (916) 845-7057 or faxing
100, “California Corporation Franchise or (916) 845-6377. Or write Tax Forms
Request, Franchise Tax Board, P.O. Box
Income Tax Return,” and S corporations
must file Form 100S, “California S 307, Rancho Cordova, CA 95741-0307. †
Corporation Franchise or Income Tax
Return.” To amend a 1997 tax return that
has already been filed, individuals must
file Form 540X, “Amended Individual
Income Tax Return.” Corporations and
S corporations must file Form 100X,
“Amended Corporation Franchise or
Income Tax Return.”
Page 12

Tax Talk: New Ways


to Earn Education Credits
Tax Talk Video If you are looking for tax updates and audience of tax professionals at
continuing education credits, shop the Cosumnes River College in
Is Honored Tax Talk marketplace. Sacramento.
Tax Talk offers a growing series of The course includes a video,
The Tax Talk one-hour video
single-topic videos as well as four- and textbook and an examination that can
titled “Office-In-Home
eight-hour video courses. Tax Talk is a yield four continuing education
Deductions” was awarded an
program of the Center for Tax Education, credits. The cost is $80.
honorable mention for video
production in a competition sponsored by the Internal Revenue • Tax Talk ’97 Home Study Course.
held by the State Information Service, the Franchise Tax Board, the Topics include partnerships, trusts,
Officers Council. State Board of Equalization, the penalties and sales and use tax. The
Employment Development Department, course includes a video of an eight-
The video is one of four now the California State University, hour seminar broadcast in 1997, a
or soon to be available as part Sacramento, School of Business textbook and a test for eight credits.
of a Tax Talk series. For Administration and California The course costs $150.
more information, see “Tax Community Colleges.
Talk: New Ways to Earn You may obtain an order form for all of
Education Credits” on this Available now or in the near future are these educational opportunities on FTB’s
†
page. these Tax Talk education programs: http://www.ftb.ca.gov/education Internet
• Continuing Education Video site. Or request an order form by calling
Series. Two new titles are on the (916) 845-7070. †
drawing board. EDD’s “Employee
or Independent Contractor?” will be
available this spring, and SBE’s
“Sales and Use Tax” will debut in the
summer. Also available are “Office- FTB Contacts
In-Home Deductions” (see “Tax Talk
Video Is Honored” on this page) and More 1996
“California Tax Rules for
Nonresidents.” Nonfilers
Each video runs one hour and comes
with a textbook that includes During the past three months, about
comprehension checkpoints and a 450,000 Franchise Tax Board notices
workbook that has both exercises and have urged individuals to file their 1996
an “open book” examination to return California income tax returns. More are
for grading and three credits. Each on the way.
video course costs $60. FTB will send 200,000 notices to
• Tax Talk ’98 Home Study Course. individuals in the next few months,
This new four-hour video course looking for additional 1996 tax forms.
offers federal and California versions Individuals who do not respond to the
of “When the Smoke Clears,” a notices by filing a tax return or stating
rundown on what your clients need to why they do not have to do so will be
know about the 1997 tax year. The assessed a tax with penalties, interest and
course also covers “Do-It-Yourself fees. The tax calculation will be based on
Audits: SBE’s New Managed Audit reports that FTB receives about income
Program,” “Help Wanted: Apply and business activity.
Your Situation Here – How Although the tax assessments are
California’s Employment Factors estimates, calculations made this year
Work” and “What Your Clients Get should be more accurate than any in the
Out of Partnerships…and How.” past. That is because recent legislation
Each presentation includes a made employers’ tax withholding
question-and-answer session. The information available to FTB. And FTB
program was taped before an has fine-tuned its methods of estimating
self-employment income. †

March 1998
Page 13

The Question Column Software Errors


Identified
Must Carryover Credits Be Claimed in separate returns are asked to state how Early in the filing season, the
a Specific Order? they want the estimate payments to be Franchise Tax Board
What is the pecking order for using allocated. The instructions for line 39 on identified two errors on some
credits in subsequent years? Which the Form 540, “California Resident scannable returns prepared
carryover credit is reduced first to Income Tax Return,” states, “If you and using ORRTAX Software.
offset individual tax? your spouse paid joint estimated tax but
are filing separate returns, either of you So far, FTB appears to have
The law establishes the order in which may claim all of the amount paid, or you found and fixed all errors.
credits are used to offset individual tax. may each claim a part of it. Attach a And tax preparers who use
Revenue and Taxation Code Section statement signed by you and your spouse the software updates that
17039 groups credits according to certain explaining how you want your payments ORRTAX has supplied for
characteristics and provides that they be divided. Show both social security scannable Forms 540 and
claimed in this order: numbers on both returns.” 540A should not experience
• Credits that may not be carried over at least one of the errors.
When taxpayers attach such a statement to
and are not refundable. a return, FTB honors the request. If a The software errors involve:
• Credits that may be carried over but statement is not attached to the first return • Tax data in the scanband
are not refundable. received, FTB does not assume that the that does not match data
• Credits that may be carried over and credit or a portion of the credit will be that prints on the
are refundable. claimed on another taxpayer’s return. corresponding line of the
Instead, the credit is given to the first conventional area.
• The alternative minimum tax credit. spouse to file. ORRTAX is working
• Credits for taxes paid to other states. with tax professionals to
identify and correct this
• Credits that are refundable but may Which Securities Are Taxable? problem.
not be carried over.
Can the Franchise Tax Board provide • A million dollar figure
The Franchise Tax Board has the personal income taxpayers with a list of that is incorrect and that
authority to establish an order by which securities that are taxable to California prints in various fields of
credits in each category may be claimed. and those that are tax-exempt in the form’s scanband and
However, FTB has not done so. Instead, California? conventional areas.
it allows taxpayers to determine the order The number of securities that are
in which they will take the credits within One of two things caused the
available to investors on any given day is incorrect million dollar
each category. vast and virtually precludes creating and figure. The preparer may
publishing a comprehensive list. So, have used an incorrect
Who Gets Estimate Payment Credit in taxpayers must track the attributes of their version of the Schedule CA
Divorce? various investments in order to determine program instead of the
whether any are taxable. They may do updated version. Or the
Let’s say that a husband and wife send this by relying on the prospectus and the
estimated tax payments to the preparer used a very early
year-end statement that firms offering version of the federal
Franchise Tax Board for their joint securities provide.
liability. Then, they divorce. The next program instead of a program
year, they file separate tax returns. As a general rule, however, taxpayers can enhancement distributed in
Each spouse requests refunds based on follow the instructions for California January. A “bug” in the early
the estimate payments. In such a case, personal income tax forms. These program affected the federal
FTB credits the estimate to the first instructions state that interest income Schedule A, which in turn
spouse to file, even if that person does from the following types of investments is affected the California
not claim the entire amount. Why does tax-exempt in California: Schedule CA. So, make sure
this happen? • U.S. savings bonds. that you are using the most
current version of your
FTB regularly receives returns from both • U.S. Treasury bills. ORRTAX software for
married and single taxpayers who fail to
claim the entire estimated tax that they • Bonds or obligations of the U.S. and federal and California forms.
its territories and California cities. And if you have any
have paid. FTB’s policy is to give questions, call the ORRTAX
taxpayers credit for all payments even if • Government agency obligations
technical staff at (800)
they do not claim them. specifically exempted by federal law.
377-3337. †
Married people who make joint estimated
tax payments and subsequently file CONTINUED ON PAGE 14
Page 14

More Expected to “Striking Gold”


Omit SSN from Ring in Wins Award
Return Postcard Tax Returns The “Striking Gold in California” video,
part of a tax education package for small
Do you generally include Starting with the 1997 tax year, more businesses, won second place honors for
return receipt postcards with people qualify to pick up the phone to file video production in a competition judged
client tax returns? In the their tax returns. by the State Information Officers Council.
future, be sure to omit your The Franchise Tax Board has added some The complete package, including a video,
clients’ social security features to its TeleFile program to make it a booklet and a directory of services and
numbers. available to more taxpayers. About information sources, was produced by the
Some tax preparers use the 350,000 returns are expected to be filed Small Business Tax Connection. The
return postcards so that the by phone this year, compared to 220,000 organization is a committee of Franchise
Franchise Tax Board will last year. Tax Board, Internal Revenue Service,
verify that it has received the Employment Development Department
TeleFiling is now open to taxpayers with and State Board of Equalization
tax returns or other a “married filing joint” filing status as
documents. However, state representatives.
well as to single taxpayers. In addition,
agencies are precluded from the number of Forms W-2 allowed has Tax professionals and their small business
mailing any documents with expanded from five to 10. clients who want to be invited to “Striking
social security numbers Gold in California” seminars and other
showing. So, do not show a Anyone who qualifies to file a tax return events should contact local offices of
visible social security number by telephone has already received a 1997 community sponsors to find out if an
on return receipt postcards TeleFile booklet. Generally, taxpayers
†
event has been scheduled. The
that you forward to FTB. may file by phone if they have incomes of community sponsors are the Service
$50,000 or less, have no dependents, do Corps of Retired Executives (SCORE),
not itemize deductions and otherwise the California Society of Enrolled Agents
meet the qualifications for using the Form and the Small Business Development
540EZ, “California Resident Income Tax Center.
Return For Single and Joint Filers With
No Dependents.” † For more information on “Striking Gold
in California,” see the January 1998 issue
Are You Moving? of Tax News. †
If you plan to move soon, be
The Question Column
sure to alert Tax News. Ruling Addresses
CONTINUED FROM PAGE 13
Keep Tax News coming by
sending your new address and The instructions also state that interest Manufacturers’
telephone number to: Tax from these investments is taxable to
News, P.O. Box 520, Rancho California: Investment Credit Issue
Cordova, CA 95741-0520. • Bonds issued by states other than A new Franchise Tax Board Legal Ruling
Also include the account California. addresses issues related to the
number that is printed above • Bonds issued by a county, city, town manufacturers’ investment credit
your name and address on the
†
last page of this issue.
or other local government unit not
located in California.
capitalized costs of labor for engineering
and design.
• Obligations of the District of Legal Ruling 98-1 describes three
Columbia issued after December 27, situations and offers an analysis and
1973. holding for each in answer to the
question: To what extent may capitalized
• Federal National Mortgage costs of labor paid or incurred by a
Association (Fannie Mae) bonds. qualified taxpayer for engineering and
• Government National Mortgage design services constitute qualified costs
Association (Ginnie Mae) bonds. for purposes of California’s
• Federal Home Loan Mortgage manufacturers’ investment credit?
Corporation (Freddie Mac) The ruling, issued on February 2, 1998, is
securities. † available at FTB’s http://www.ftb.ca.gov
Internet site and has been published by
most tax services.†
March 1998
Page 15

Want Head of Household Symposium?


Contact FTB Now! Reminder for
CONTINUED FROM PAGE 1 Installment
Head of household is the most • Telephoning (916) 845-7961 and Payers
misunderstood filing status. Each year, responding to voice prompts.
more than one million California • Faxing (916) 845-6756. Individuals who have been
taxpayers claim the filing status, and approved by the Franchise
nearly 60,000 do not qualify. • Mailing the information to the
Franchise Tax Board, P.O. Tax Board to pay their tax
The deadline for expressing interest in the Box 1998, Rancho Cordova, CA liabilities in installments
symposium is March 27, so act quickly. 95741-1998. usually must pay by
Just let FTB know: electronic funds transfer
If you fax or mail your response, you may
• If a January 1999 symposium date
would be convenient.
†
send a letter or use the form below.
(EFT).
The EFT requirement, which
• If you prefer a morning, afternoon or became effective in 1997, is a
evening session. safeguard against
forgetfulness. Individuals do
• If you prefer a weekday or a Saturday Package X Notice not have to worry about
session. writing a check on time,
The Franchise Tax Board recently
• What specific head of household became aware that some orders for because the funds are
issues you would like the symposium Package X were incorrectly processed. transferred automatically on
to cover. If you have not received the number of the payment dates. And the
default rate among taxpayers
• Specific ways you would like to copies of Package X that you ordered,
call FTB immediately. using EFT for installment
receive information about the head of
payments has dropped from
household filing status instead of, or FTB’s Education and Outreach 40 percent to 5 percent.
in addition to, a symposium. Section has been assigned
For more EFT coverage, see
You do not have to answer all the responsibility for resolving this
problem. The Section can be reached page 10. †
†
questions, and you can deliver your
responses to FTB by: at (916) 845-7070.

Sacramento Area Head of Household Symposium


To: Franchise Tax Board, P.O. Box 1998, Rancho Cordova, CA 95741-1998

• †
January 1999 is a convenient date. Yes † No
• Instead of January 1999, I prefer this month:___________________________________________________
• † † †
I prefer a morning afternoon evening session.
• † †
I prefer a weekday Saturday session.
• I am interested in these head of household filing status issues: __________________________________
__________________________________________________________________________________
_______________________________________________________________________________________
• † Instead of a symposium † In addition to a symposium, I would like to receive head of household filing
status information in these ways:________________________________________________________
_______________________________________________________________________________________
• Comments______________________________________________________________________________
• Optional: Name ______________________________________Telephone__________________________
(Mail a photocopy of this form if you do not wish your mailing address to show on the back.)
Page 16

When Is SSN In 1999, Missing “Wages” Entry


Required? Will Delay Refund
When is a tax practitioner’s When a client’s wages and federal Department. If the wages entry on the tax
social security number adjusted gross income are the same, do return is blank, FTB’s processing system
required on a tax return? you skip the wage entry when you fill out will perceive a discrepancy between the
The Franchise Tax Board a tax return? amounts that the taxpayer claims and that
follows federal policy that Starting in 1999, be sure to include the the employer reports. As a result, the
requires a tax professional’s amount on both the “State wages” and return will be manually processed, and
social security number or “Federal adjusted gross income” lines on any refund due will be delayed.
federal employer the return. The California wages entry is The wage checking process is the second
identification number (FEIN) made on box 12 of the Form 540 and on phase of a verification program that FTB
on the copy of a tax return line 12A on both Form 540A and Form inaugurated in 1997. Last January, FTB
that is filed. The number is 540EZ. started checking withholding amounts
not required on the taxpayer’s claimed on tax returns against information
copy of the return. The state wages entry is needed because,
in January 1999, the Franchise Tax Board that employers report to EDD on W-2
Internal Revenue Code will begin an on-line comparison of the forms. Both processes are the result of a
Section 6109 requires cooperative FTB/EDD automated
practitioners to include an
amount of California wages reported on a
taxpayer’s return and the amount of information exchange. †
identifying number on a filed wages that the taxpayer’s employer
return. However, the Internal reports to the Employment Development
Revenue Service, in its
Revenue Ruling 78-317,
states that the number may be
omitted on the taxpayer’s
†
copy.