California Court of Appeals upholds FTB's disallowance of dividends received deduction, imposition of amnesty penalty

This article provides an overview of related cases involving the dividends received deduction (DRD) under Cal. Rev. & Tax. Code §24402 that led up to River Garden, summarizes the appeals court opinion in River Garden with respect to the DRD and amnesty penalty issues, and briefly discusses cases in which the amnesty penalty under Cal. Rev. & Tax. Code §19777.5 was recently or is currently being litigated.

California Court of Appeal's decision

On July 15, 2010, the California Court of Appeal, First Appellate District, issued its decision in River Garden Retirement Home v. California Franch. Tax Bd.In River Garden, the Franchise Tax Board (FTB) disallowed a DRD taken by the taxpayer under Cal. Rev. & Tax. Code§24402 for tax years 1999 and 2000 for dividends paid out of income that had been subject to California tax in the hands of the payors.

The FTB also imposed an amnesty penalty on the taxpayer under §19777.5 for the same tax years. The court of appeal held in favor of the FTB on both issues, ultimately concluding that the FTB was correct both in its disallowance of the DRD and in the imposition of the amnesty penalty.

On August 25, 2010, the taxpayer in River Garden timely filed a petition for review with the California Supreme Court. The outcome of the River Garden litigation may impact other taxpayers who are subject to an assessment for the amnesty penalty applicable to pre-2003 deficiencies.

2 River Garden Retirement Home v. California Franch. Tax Bd., 186 Cal. App. 4th 922 (Cal. Ct. App. 2010)

By Valerie Dickerson and Shirley Wei | Originally published in Bloomberg BNA "Tax Management Multistate Tax Report" on September 24, 2010
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