$2 Million Refund of California Franchise Taxes

2M-california-franchise-taxCalifornia’s Franchise Tax Board is known for its two-sided interpretation of the theory of unity and seems to recognize the facts that lead to unity when the tax is greater or non-unitary when the tax is less. The unitary theory is so esoteric that taxpayers have a difficult time determining unity, and if unity exists, when it might exist.

We met with a new client regarding a $2 million California tax attributable to a dividend from a wholly owned subsidiary based in North Carolina. The client had made a water’s edge election, and had been advised that under such an election all dividends were to be considered business income and includible in the tax base. After consulting with two “Big 4” firms, the client had included the dividend and paid $2 million to California as a result.

When asked, we suspected that advisors may have misunderstood the requirement in a water’s edge election that the electing business treat all foreign dividends as business income. In the alternative, perhaps advisors believed the North Carolina subsidiary to be unitary, and sought factor relief by including the subsidiary.

Upon examination we determined that the North Carolina subsidiary was not unitary with the rest of the group and sought a $2 million refund from California. After careful examination the Franchise Tax Board, despite its reputation as self-serving on the unitary issue, awarded the client the full $2 million.

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In Summary, Barnwell Consulting, LLC can:

  • Find state income/franchise tax refunds and have collected millions of dollars in cash refunds
  • Assist with altering corporate structure when good business purpose exists, to help lower state income tax liabilities
  • Assist with FIN 48 accruals, but more importantly with strategies to resolve FIN 48 uncertainty projects that help companies lower the state effective tax rate.
  • Handle complex income and sales/use tax audits and have been successful in eliminating or reducing material assessments
  • Assist clients with SALT issues in acquisitions and divestitures
  • Identify credits and incentives, which fall into two broad categories, statutory and negotiated. With respect to the former, we see our job less as identifying statutory credits – and more focused on whether our client has fully recognized the credit, and obtained the maximum possible benefit.