Unintended consequences of I.R.C. conformity
California rules taxpayer may disregard Treas.Reg.§1.337(d)-2
In this article, Brian Sullivan and Michael Paxton of Deloitte Tax LLP discuss one potential trap for the unwary related to a state's general adoption of the I.R.C. and, as part of that adoption, the application of Treas. Reg. § 1.337 (d)-2.
Internal Revenue Code conformity
In the spirit of consistency and ease of administration, most states that impose corporate income taxes begin their computation of taxable income with federal taxable income. One method adopted by states to accomplish this objective is to require a corporation to use the amount reported on its federal tax return as the starting point. The majority of states, however, have enacted legislation to conform to the Internal Revenue Code ("I.R.C.")¹ in some respect, either through rolling conformity or static conformity.² Moreover, it has been quite common for states in recent past to opt out of certain federal tax provisions that states may view as either unfavorable or inconsistent with their income tax policies. For example, some states opt out of bonus depreciation (I.R.C. § 168(k)), the expensing of depreciable business assets (I.R.C. §179), the domestic production activities deduction (I.R.C. §199), and the deferral of certain cancellation of debt income provided by I.R.C. §108(i). But, it is also possible that the general conformity to the I.R.C. provisions may have other unintended consequences.
In this article, the authors:
- Discuss one potential trap for the unwary related to a state’s general adoption of the I.R.C. and, as part of that adoption, the application of Treas. Reg. §1.337(d)-2
- Summarize the approach taken by the California Franchise Tax Board in its Chief Counsel Ruling 2012-06 address of Treas. Reg. §1.337(d)-2’s potential unintended consequence, and
- Address the potential implications of Treas. Reg. §1.337(d)-2 application in other states
By Brian Sullivan and Michael Paxton of Deloitte Tax LLP, originally published in Bloomberg BNA “Tax Management Weekly State Tax Report” on March 15, 2013
¹ Statutory and regulatory references to the “Code” or “I.R.C. §” are to the Internal Revenue Code of 1986, as amended, and all “Treas. Reg. §” references are to the Treasury regulations thereunder
² Rolling (or “moving date”) conformity refers to a state conformity statute that automatically adopts any changes to the federal law while static (or “fixed date”) conformity refers to a state conformity statute that automatically adopts the federal law on a certain date, such as Jan. 1, 2009, and does not include any federal law changes enacted after that date. Note that California conforms to the I.R.C. as of Jan. 1, 2009. See, Cal. Rev.& Tax. Code §§23051(a)(1) and 17024.5(a).