2015 CalCPA/FTB Q&A

2015 CalCPA Questions and Responses
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Q# Topic Subject Matter Experts
1 W2 Withholding Mary Wheat
2 Swart Enterprises Bill Hilson
3 1099 Withholding Ramona Krabbenhoft
4 Electronic Payments Chris Reali
5 Web Pay System Chris Reali
6 Credit Carryover Mary Wheat
7 Calculating Interest Mary Wheat
8 SMLLC Filing Requirement Shane Hofeling
9 Transferee Liability Bruce Langston
10 Other State Tax Credit Kristen Kane
11 Enterprise Data to Revenue Chris Reali
12 Pass-through Income Sourcing Natasha Page
13 Intangible Sourcing Natasha Page
14 Non-Filer Programs Joy Burns
15 E-Filing as an LLC Chris Reali
16 K1 NOL Disallowance Jaymie Mora
17 Installment Sales by Individuals Adam Clark
18 Medicare Surtax Exemption Shane Hofeling

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Question #1
W2 Withholding
Taxpayers sometimes have an almost impossible task in trying to validate the amount of
withholding on their W2’s when FTB discovers a discrepancy between the taxpayer’s amount
and the reported EDD amount. This is a very burdensome situation for taxpayers to try and
resolve.
How can a taxpayer validate their withholding when they no longer have pay stubs available
and the employer (or previous employer) will not provide them, or when the employer is no
longer in business?
Response:
If there is a discrepancy between the withholding amount claimed and the amount reported to
FTB by the Employment Development Department, taxpayers can contact the Franchise Tax
Board at 800.852.5711 for additional assistance. If your client has received a letter from FTB
regarding their withholding, they can call the phone number on the letter.
If the taxpayer is unable to provide pay stubs or the employer is not available, FTB staff will
review the account on a case by case basis to determine whether to allow the withholding. The
documents needed to help validate the claim may differ depending on other information
available to the FTB.
Beginning January 4th
, 2016, Taxpayers can view their withholding by visiting www.ftb.ca.gov
and register for a MyFTB account.
Question #2
Swart Enterprises
What was FTB’s reasoning behind its appeal of the Swart Enterprises Superior Court decision?
In light of the “Swart” decision is FTB requiring businesses that have only a passive LLC interest
in a LLC doing business in California, to continue to file returns? If so, can taxpayers file a
protective claim? If the taxpayers can file protective claims, does FTB plan to have special
“Swart” protective claim procedures? If taxpayers cannot file protective claims, can they deem
the claim denied in six months? Finally, when does FTB expect “Swart” to be resolved?
Response:
To be answered at the meeting.
Question #3

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What can be done, by the taxpayer, preparer, or FTB to correctly and timely apply 1099
withholding for a taxpayer’s account?
Response:
In preparing our response to this question, we requested additional information from the party
who submitted this question in order to determine the type of 1099 issue. We were informed
the issue involved the 1099R reporting of pension income and withholding.
The employer typically reports the withholding timely to the Employment Development
Department (EDD), who in turn provides daily data feeds to FTB. FTB relies upon data from the
EDD to verify withholding from 1099s as well as W-2s. The validation efforts are the same for
both paper and e-file returns.
If the organization withholding on the retirement pay has not submitted the information
properly to EDD, it could cause the return to need further review before the refund can be
issued. FTB makes every attempt to use available taxpayer information to allow the credit in a
timely manner; however, if we are unable to do so, we may request taxpayers or their
representatives to provide additional information. This includes requesting the taxpayer to
submit a copy of the 1099-R to validate the refund. Once the 1099-R has been received, we will
complete our validation efforts to allow the refund.
We have identified an issue that has often caused delays in approving refunds with 1099 data.
Tax practitioners supporting businesses that issue 1099Rs and submit withholding to EDD can
help us with this issue. The issue is when the employer elects to “combine file” their
withholding data with the IRS and the states. The employer sends the detailed withholding
information on each employee timely to the IRS, who in turn will provide the data to the
required state. However, this transmission of data may not occur for 6 – 9 months. Although
this option offers the employer the opportunity to report to both Federal and State agencies in
a single action, it causes a delay in our ability to validate refunds with 1099 data. If the
employer elects to direct file to FTB, it would help alleviate the delay in allowing the refund in
these situations. Additionally, timely filing of the DE-9C with the EDD to report the individual
payees withholding amount is also beneficial.
Question #4
Electronic Payments
FTB requires payments by Web Pay or EFT. The requirement even imposes a penalty against a
mandatory electronic payment taxpayer. It is understood that this is to expedite payments and
use of the funds. Why is it that FTB does not refund payments in the same way? This would
expedite payments and use of funds for the taxpayer and it should be less costly for the state
than paper payments.

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Response:
We appreciate the suggestion to increase use of direct deposit. With the implementation of the
Enhanced MyFTB in January 2016, the application could eventually provide a way for taxpayers
to provide and maintain their banking account information. However, implementing this option
within MyFTB would likely be at least a few years away and would have to be carefully designed
and implemented to meet all of FTB’s privacy & security requirements.
Question #5
Web Pay System
A taxpayer used Web Pay to make a payment to FTB. The taxpayer did not get a ‘confirmation’
but instead a notice that the system was ‘down for maintenance’ and the transaction was not
completed. Later in the day the taxpayer tried the system again and this time received the Web
Pay confirmation. However, when the taxpayer reviewed his checking account they noticed that
both payments had been taken from his account. This is a scenario that we hear too often.
Is FTB aware of this repeated Web Pay system issue? How does a taxpayer get one of these
payments back? Will it be refunded electronically to expedite restoration of the taxpayer’s bank
account and use of funds?
Response:
FTB has heard on rare occasions that a taxpayer submitted a second request because they
didn’t think their original request was accepted. However, FTB has not identified any systemic
issues with Web Pay.
If a taxpayer experiences an issue, it is not necessarily an issue with Web Pay. The issue could
be with the taxpayer’s Internet Service Provider (ISP) or personal computer and it could appear
the transaction never went through. Because issues can occur, FTB generally recommends
taxpayers create a MyFTB account and use Web Pay once they’ve logged in to their account. If
the taxpayer submits a payment request while logged in to their account, any payments they’ve
scheduled will be viewable on the Web Pay Payment Summary (Home) Page. If the user
received some type of error while submitting their Web Pay request, they would be able to
check this page to confirm if the payment request was actually received by FTB. If the taxpayer
is unsure and needs to confirm or verify the request was received by FTB, they can contact our
e-Programs Customer Service Unit at 916.845.0353.
Please note that all taxpayers will be required to create a new MyFTB account in 2016.
Payments scheduled in 2015 to occur in 2016 using an existing MyFTB Account will not be
viewable in Web Pay after January 2nd
, 2016. However, these payments are still scheduled and

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will appear in MyFTB once the payment has posted. Beginning January 4th
, future payments
scheduled in 2016 using the new MyFTB will be viewable in Web Pay.
However, if the taxpayer uses the version of Web Pay without logging in, they cannot see if the
request was actually received by FTB. We encourage users to request an email confirmation of
their payment request to verify the request was accepted by FTB. However, an ISP or computer
issue may prevent delivery or receipt of the email confirmation.
The quickest way for the taxpayer to get their money back is to advise their bank they did not
authorize one of the transactions. Although the taxpayer may have technically submitted two
requests (even though they didn’t think there were two requests), the bank will generally
submit one of the items to FTB and credit the other back to the taxpayer.
Since FTB processing of refunds is contingent on a return being filed with a request for direct
deposit, we cannot issue the overpayment electronically.
Question #6
Credit Carryover
The scenario is that a taxpayer has a credit carryover from last tax year to this year, and then
discovers that the carryover was understated (found additional tax credits). Must the taxpayer
amend the prior year return to correct the carryover amount or can the amount be correct in
the current tax year filing? If it can be corrected in the current year return, what information
needs to be provided for FTB to make the change?
Response:
The taxpayer does not have to file an amended return for the tax year the credit was generated
as long as the tax liability remains the same for that year.
To correct the credit carryover amount in the current year return, the taxpayer should provide
the original credit form as filed (i.e. Form 3805z for EZ, Form 3523 for Research Credit, etc.), the
amended credit form to show the “as revised” credit generated, supporting schedules if any, a
revised credit carryover schedule, and a detailed statement explaining the changes.
Question #7
Calculating Interest
Taxpayers and preparers try very hard to make a full payment when paying FTB, especially for
prior year balances. However, outside of FTB, it is impossible for someone to calculate the
interest due. Is there a tool that could be made available to the public to allow them to do this
interest calculation? If not, what is the most expeditious method to get this calculation?

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Response:
Currently, taxpayers may call the Franchise Tax Board 800.852.5711 to get a current and/or
future balance including any applicable penalties and interest.
Beginning January 4, 2016, taxpayers and tax preparers who register for a new MyFTB account
at www.ftb.ca.gov will be able to calculate a current or future balance due. They can enter the
planned payment date and calculate the projected balance due for that date, including any
applicable penalties and interest.
Question #8
SMLLC Filing Requirement
A Single Member Limited Liability Company (SMLLC) doing business as a partnership holds a
personal residence. The SMLLC has no other activity or assets, and no business is conducted on
the premises. Does the LLC need to register with the CA Secretary of State? Are they required
to pay the $800 LLC Annual Tax for the privilege of doing business in CA?
Response:
As the Franchise Tax Board ("FTB") does not administer the registration of limited liability
companies ("LLCs"), FTB would defer to the California Secretary of State for the determination
of filing requirements. However, it appears the obligation to register with the California
Secretary of State arises under the definition of "transacting intrastate business" in the
California Corporations Code sections 191 and 17708.03, which defines that term as, "…
enter[ing] into repeated and successive transactions of business in this state, other than in
interstate or foreign commerce." For specific questions about the requirement to register to do
business in California, taxpayers should contact the California Secretary of State.
However, the requirement for registration with the California Secretary of State is not the same
as the requirement to file and pay the LLC annual tax and fee. California Revenue and Taxation
Code ("RTC") sections 17941 and 17942 requires the annual tax and fee to be paid if the LLC is
doing business in California. RTC section 23101(a) defines doing business as "… actively
engaging in any transaction for the purpose of financial or pecuniary gain or profit." For taxable
years beginning on or after January 1, 2011, a taxpayer is also "doing business" in California if
any of the following conditions are satisfied: (1) a taxpayer is organized or commercially
domiciled in California or (2) a taxpayer's California sales, property, or payroll exceed the
amounts then applicable amounts under paragraphs (2), (3), or (4) respectively, of subdivision
(b) of Section 23101.
In order to provide a specific answer to the question, some additional information may be
necessary. A SMLLC by its operation only has one member. In order to be doing business as a

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partnership, the LLC would be required to have at least two members. Therefore, the LLC in
this question would either be a SMLCC or a multiple member LLC which is being taxed as a
partnership. In addition, the answer may vary whether the personal residence was located in
California, whether the single member (assuming a SMLLC) was a California resident, whether
the LLC was organized or registered in California, and the value of the personal residence.
Question #9
Transferee Liability
We have received several questions from our members regarding when FTB can hold
shareholders, members, or partners liable for the liabilities of their business entity. Also, we
have received questions based on the Appeal of Howard Zubkoff and Michael Potash, Assumers
and/transferees of Ralite Lamp Corporation (“Ralite”) on whether it is possible for business
owners to walk away from their business without formally dissolving, withdrawing, or
cancelling the entity. Can you discuss these issues?
Response:
A California Domestic Corporation (or a foreign corporation qualified to do business in
California) is required to file annual income tax returns and to pay the appropriate tax until it
formally dissolves (or surrenders the right to transact business in California) with the California
Secretary of State’s office. This is true even if the corporation becomes suspended or its
powers forfeited.
The Appeal of Howard Zubkoff and Michael Potash, Assumers and/or Transferees of Ralite Lamp
Corporation, 90-SBE-004, (April 30, 1990) (referred to as "Ralite") did not change this
requirement. This appeal held that when the Franchise Tax Board (FTB) has exhausted all
reasonable remedies of collecting the tax due from a corporation, that if the shareholders
received assets of the corporation without adequate consideration, then the FTB could collect
the unpaid tax from the shareholders based on transferee liability.
Currently, FTB attempts all reasonable means to acquire any delinquent entity returns and/or
any balances due from the entity itself. For those entities where a shareholder could be held
responsible for the entity’s debt, FTB evaluates the applicable tenets of the law, including
liability in equity as outlined in the Ralite case.
Prior to pursing a transferee assessment, FTB analyzes and considers the facts of the collection
case for collection remedies against the transferor entity. For transfer of liability at equity, the
Ralite decision and California law require FTB to have “exhausted all reasonable remedies
against the “taxpayer-transferor” prior to pursuing a transferee assessment. Exhausting such
reasonable collection remedies against the entity as required by law admittedly delays
assessment against any transferee/shareholder(s).

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Question #10
Other State Tax Credit
In 2014, FTB issued FTB Notice 2014-01, withdrawing FTB guidance regarding the Out of State
Tax Credit (OSTC) and the Texas Revised Franchise Tax (FTB Notice 2010-02). Does FTB plan to
offer any guidance regarding this issue?
Response:
FTB will be issuing guidance on the appropriate way to determine if a tax is deductible or
eligible for the OSTC in early to mid 2016. The guidance will not be specific to a certain tax, but
rather it will cover the manner in which a taxpayer can determine if any tax is deductible or
eligible for the OSTC. The guidance will include hypothetical examples.
Question #11
Enterprise Data to Revenue
We are looking forward to using the new MyFTB. Is FTB going to provide any training to tax
practitioners on how to effectively use the New MyFTB before or after it becomes operational
in January 2016?
Response:
In addition to the many features we’ve added to MyFTB, we updated the design to have a
better look and feel. It includes an intuitive design to make navigation easier and locate
information faster. We also added page level “help” within the application to provide
information directly about the page the customer is on. In addition, we will have the following
information to assist taxpayers and tax professionals on ftb.ca.gov:
 Updated frequently asked questions (FAQs).
 “How To” pages with step-by-step instructions for the following self-service options:
 Build a Client List
 File a Protest
 Submit a Power of Attorney
 File a Nonresident Withholding Waiver
 How to Register
 Published Tax News articles highlighting the features of MyFTB beginning in January
2015 and will continue to have more. To subscribe for Tax News go to ftb.ca.gov and
click on News & Events.
 Links to videos and flyers outlining the benefits of using MyFTB.

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To help tax professionals prepare for January 4, 2016 availability, we are collaborating with
professional organizations to share information about MyFTB. Below are some of the efforts
completed or in progress:
 Demonstrations of MyFTB with professional organizations, including Advisory Board
Meeting, CalCPA meeting and Enrolled Agents Meeting.
 Collaborating with CE providers to include MyFTB material for fall updates and
webinars.
Question #12
Pass-through Income Sourcing
1. In summer of 2014, FTB introduced new proposed regulatory language that sought to apply
apportionment sourcing rules to nonresident individuals for business income (CCR 17951-4)
regardless of the nature of the source of income, principally intangible (RTC 17952). This
seems to infer that FTB believes, and the regulations should clarify this, that if the income is
business income, CCR 17951-4 trumps all other sourcing rules. So far, FTB has been
targeting intangible income sourcing (RTC 17952) because it is based on the state of
residence or domicile of the nonresident. This seems to contradict a prior California Court of
Appeal decision (Gene Valentino et. al. v. FTB, 87 Cal.App.4th
1284, 2001) where the Court
looked to the IRC to determine that pass-through entity owners’ income would be treated
as if earned directly by the owner themselves first. In doing so, the sourcing rules would be
applied after as if the owner themselves sold the property generating the income.
A. Initially, the regulatory calendar shows an interested parties meeting was planned for
this summer. Does FTB plan to continue this proposed regulation change?
Response:
The primary regulation project amends Title 18, section 25137. That project is ongoing. It is
not yet determined whether the final changes will include changes to section 17951-4. The
treatment provided in the proposed regulation is not new.
B. How does the FTB reconcile the proposed regulatory position as not conflicting with
Valentino?
Response:
The existing regulation, and its predecessors back to at least 1982, all provide guidance
consistent with the holding in Valentino v. Franchise Tax Board, as does the proposed
language in the current regulation project.

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Although the taxpayers argued that their distributive share was income from intangible
property, i.e., their S corporation stock, and, therefore, should be sourced to their state of
residence, the Court in Valentino held that their income was not akin to a dividend and was
not income from intangible property. Instead the income was from a business conducted
entirely within California and, thus, entirely sourced to California, pursuant to Regulation
17951-4.
In dictum, the Court mentioned in passing that the only time such income would be income
from intangible property was if the income were from intangible property at the S
corporation level. It is FTB's position that this statement was not necessary to the Court's
finding and is, in fact, incorrect. As explained below, all income from a business entirely
conducted in California is sourced in California (see Regulation 17951-4(a).) Further, in the
case of a multistate business, only nonbusiness income is sourced pursuant to RTC section
17952.
Regulation 17951-4 provides:
If business is conducted wholly within California, the entire income is sourced to California.
If business is conducted wholly without California, none of the income is sourced to
California.
If the business is conducted within and without California such that the part within the state
is so separate and distinct from and unconnected with the part outside the state such that
they are not part of a unitary business, then only the income from the business conducted
within California will be derived from sources within this state.
If the business is conducted within and without the state, such that the parts within and
without the state are unitary, whether the business is conducted as a sole proprietorship,
an S corporation, a partnership, or an LLC:
 the income will be subject to classification under the UDITPA rules at the entity
level, and
 business income will be apportioned using the UDITPA rules found in RTC section
25120 through 25139 and the regulations thereunder, and
 nonbusiness income will be allocated using the PIT sourcing rules found in RTC
sections 17951 through 17955 and the regulations thereunder.
This position is bolstered by RTC section 17955. That statute provides specifically:
(a)(2) "In the case of a partner's distributive share of income from qualifying
investment securities, the partnership qualifies as an investment partnership,
whether or not the partnership has a usual place of business located in this state."

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If the dictum in Valentino were correct, section 17955 would be completely unnecessary
and rendered moot.
C. Does FTB plan to apply CCR 17951-4 to other types of income as well, e.g. business
income sale of real or tangible property under CCR 17951-3? If not, what is the
justification for the distinction?
Example: S corporation develops software for use and licensing globally. S corporation
shareholder is a nonresident of CA. None of the licensing revenue is sourced to CA. S
corporation sells large server farm no longer needed in the business. Sale is excluded
from the sales factor under CCR 25137(c)(1)(A) as occasional sale. All of the server farm
equipment is located in CA. Assets were used in the trade or business. Gain is business
income. How will the flow-through income be sourced to nonresident? Will business
income rules be applied first or will the nature of the income in the hands of the
shareholder be determined first?
Response:
Regulation 17951-4 should be applied when a nonresident receives distributive share
income from a pass-through entity.
Since the facts provide that the S corporation is a multistate enterprise, the distributive
share will be sourced pursuant to Regulation 17951-4. The determination of whether each
item of income is business income or nonbusiness income will be made at the S corporation
level. All business income will be sourced pursuant to the rules set forth in RTC sections
25120-25139 and the regulations thereunder. To the extent there is any nonbusiness
income, determined at the S corporation level, such income will be sourced at the
shareholder level using the sourcing rules found under RTC sections 17951 through 17955,
and the regulations thereunder.
The example provides that the gain is business income, therefore it will be apportioned
pursuant to the UDIPTA rules and reported on the shareholder's Schedule K-1 properly
apportioned and according to the shareholder's ownership interest. The PIT sourcing rules
would not come into play, except to the extent that the shareholder had further unitary
businesses, in which case the shareholder may need to combine this first entity with other
unitary enterprises to arrive at a combined apportionment factor.
Question #13
Intangible Sourcing
The five-member Board of Equalization (BOE) recently ruled in favor of taxpayers in the Appeal
of Mary and Michael Bills. Board members moved to make the decision citable. However,
Randy Ferris, Chief Counsel for BOE, warned that the BOE had a history of not issuing formal

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decisions where the determinations were largely based on facts-and-circumstances, such as the
residency issue which was part of the appeal. The other portion was related to whether
intangible sourcing should be applied to certain earn-out payments made to a retired partner
or whether business income apportionment should be applied. BOE members disagreed with
the FTB position and wanted to resolve that controversy going forward. In an unprecedented
motion, BOE members requested that appeals staff draft a partially precedential decision.
Based on a number of disputes currently in audit or protest, the position argued by FTB in the
appeal appears to still be a position that FTB is asserting on taxpayers.
A. What distinctions, if any, will be made with the Bills decision?
B. Are there any plans to revise audit division policy on this nonresident sourcing issue?
Response:
The FTB has filed a Petition for Rehearing in this case. Therefore, the decision is not final and
the FTB has no comment on how the eventual decision will affect FTB positions or policy.
Question #14
Non-Filer Programs resulting in account levies
On three occasions, I have had clients’ bank accounts levied by FTB for now known reason.
After receiving a frantic call from the client that FTB had levied funds from the client’s account,
subsequent research reveals the following facts:
1. The taxpayer is an attorney with a valid California Bar license
2. The taxpayer has moved out of the State of California
3. The taxpayer has no California-source income
4. The taxpayer has no California tax return filing requirement
5. The California State Bar has consistently had a valid mailing address for the subject
taxpayer.
We have concluded that the valid Bar license has created a non-filer program collection
protocol on these clients. However, when notices are sent to the last known address that is
contained in FTB records, the mail is returned and the account goes to levy.
If the taxpayer is maintaining their current address with the California Bar, which is where the
license information is coming from anyway, why can’t the notices be sent to that address? In
that fashion, the taxpayer would get the notice from the non-filer program and have a chance
to respond? It would appear that a lot of time and anguish would be saved.
Response:

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FTB remains committed and focused on ensuring taxpayers receive notification prior to
involuntary actions. FTB recently implemented new functionality with the Enterprise Data to
Revenue Project, allowing continuous search for the best taxpayer address. The new
functionality uses over 30 address data sources, including the California State Bar. This
functionality selects the most up-to-date, available addresses for all taxpayer notifications,
using the address with the newest effective date. In addition, the best way to avoid a levy is to
call or write to us about your client’s filing requirement.
Question #15
Electronic Filing as an LLC
California businesses are now required to e-file. In order to e-file, corporations must have a 7-
digit California corporation number. LLCs that opt to file as corporations do not have a
California corporation number, they have a 12-digit SOS file number. Therefore, LLCs filing as
corporations cannot e-file and must request a waiver from e-filing from the FTB. The FTB needs
to correct this systemic error and allow e-filing with either a corporation number or an SOS file
number.
Response:
The Business entity e-file program accepts returns without a California ID number for tax years
2014 and forward. The entity should provide an explanation in lieu of a number, such as “LLC is
filing as a corporation”. If practitioners are prevented from e-filing returns without ID numbers,
then it is likely their software preventing it. If this is the case, a waiver from e-filing the return
should be requested. We will send an alert to all software companies making them aware of
the problem. If there are specific companies or products that you are aware of, please provide
the specific information and we will work with them directly.
When FTB processes a corporation return without an ID number, a 7-digit California
Corporation number is assigned to the entity. A letter is sent to the entity notifying them of the
assigned number and advises them to use the number on future tax returns, payments and
documents.
Question #16
K1 NOL Disallowance
IRS incorrectly disallowed NOL from K1 on individual return and notified FTB of disallowance.
IRS later corrected the account, but the FTB did not correct. How can FTB ensure this won’t
happen again in similar circumstances?
Response:

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We generally do not automatically receive the IRS revisions or corrections. They will share such
information with us if we ask for it, but it is largely a manual process and is dependent upon
FTB knowing of the revision (this is usually communicated from the taxpayer when they are
aware that a revision was made but they do not have a copy of it). Therefore, if the taxpayer
receives a notice of proposed assessment (NPA) from the FTB based on an IRS adjustment that
subsequently has been revised or reversed, the taxpayer should send the revised or reversed
IRS determination to us at any time. We enclose FTB 7275 with all the NPAs mailed to the
taxpayers and it is also available in our public website. The taxpayers can mail or fax their
revisions to the address or fax number as indicated on FTB 7275.
With the soon to be released MyFTB account, taxpayers will have the ability to report their
federal adjustments on-line. We encourage taxpayers to use this feature once it becomes
available.
Question #17
Installment Sales by Individuals
Is there any consideration being made to simplify or make exceptions for the withholding on
installment sales by individuals? It is very cumbersome and unnecessary in many instances. I
understand requesting requesting financial institutions to witthold, transmit payments and file
forms correctly, but I believe it is not fair to require it of individuals, especially when it’s the
responsibility of the seller to pay the tax to begin with. The sellershould be required to make
payments of estimated taxes rather than the buyer to withhold from payments. It forces
individuals, often times elderly, to pay for the services of a professional to file the forms, which
is unfair and costly.
Could there be a way for the seller to sign some kind of waiver stating they take responsibility
for making the required estimated tax payments releasing the buyer from this burdensome
obligation 12 times a year?
Response:
Revenue and Taxation Code Section 18662(e)(3)(E)(i) requires withholding on each installment
payment so that the seller has withholding to match their real estate income each tax year. We
do offer an option to release the buyer from the withholding obligation, but it requires the
seller to elect out of withholding on installment payments following the close of escrow. In
order to qualify for this election the seller must:
 File a California tax return and report the entire gain on Schedule D-1 in the year of the
sale.
 Submit a written request to us asking to release the buyer from withholding on
subsequent installment payments.

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 Receive an approval from us. We generally respond within 30 days of receiving the
request.
The Withhold on Installment Sale Election (WISE) written request should include:
 Seller's name, mailing address, TIN, phone and fax number
 Buyer's name, mailing address, TIN, phone and fax number
 Property address, close of escrow date, escrow number or final closing statement
 Tax year and date filed of the tax return where the related installment sale income was
reported
The written request should be mailed to:
Attn: WISE Program
Withholding Services and Compliance MS F182
Franchise Tax Board
PO Box 942867
Sacramento, CA 94267-0651
The request can also be sent to the WSCS general fax line at 916.845.9512, Attn: WISE Program.
This information is available in our new FTB 4010, Withholding on California Real Estate
Installment Sales brochure, which can be given to buyers and sellers in an installment sale
transaction. It can also also be found on ftb.ca.gov, search for the Real Estate Installment Sales
page or Publication 1016.
For more information or to see if your client qualifies for this option, contact the Withholding
Services and Compliance Section at 888.792.4900.
Question #18
Medicare Surtax Exemption
Real estate professionals have elected to group rentals for Federal purposes in order to qualify
for the exemption from the Medicare surtax. Is this grouping applicable for California purposes
even though California does not follow the Federal rules for a “real estate professional”
exemption from the passive loss limitations.
If a taxpayer disposes of a property that was included in the grouping for Federal purposes, can
a carryover loss be deductible in full for California purposes as a complete disposition of that
activity or is the loss carryover deferred until all of the activities included in the Federal
grouping are disposed of?

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Response:
For federal tax purposes, the Internal Revenue Code (“IRC”) imposes an unearned income
Medicare contribution tax, commonly referred to as a “Medicare Surtax”. It is important to
note this is only a federal tax and is not imposed by the California Revenue and Taxation Code.
The tax may be imposed on a taxpayer’s net investment income in a taxable year. Net
investment income may include gross income received from a passive activity. In general,
rental activities are considered passive activities. However, IRC section 469(c)(7) allows rental
real estate professionals to treat a rental real estate activity as an activity that is not a passive
activity as long as they materially participate in each separate rental real estate activity. Certain
real estate professionals can elect to group their rental real estate activities together so that
their activities will be considered one activity for material participation purposes. If the rental
real estate professional is able to show material participation in the rental real estate activity,
then the rental real estate income will not be treated as passive income for federal tax
purposes and may not be subject to the federal Medicare Surtax.
The California Revenue and Taxation Code (“RTC”) does not incorporate IRC section 469(c)(7),
thus California does not follow the federal rental real estate professional passive activity special
rules. As such, rental real estate professionals’ rental real estate activities would be considered
passive regardless of their level of participation. Furthermore, they are not able to group their
rental real estate activities into one activity even if they make the election for federal purposes.
Each separate rental real estate activity would be treated as a separate passive activity for
California tax purposes. Therefore, when one of these activities are disposed of in a fully
taxable transaction, any suspended passive activity losses related to that activity would be
deductible against ordinary income for California tax purposes, even though it may be part of a
group activity for federal purposes.
However, it is important to note that although California does not allow the grouping of rental
real estate under IRC section 469(c)(7), California allows the grouping or rental real estate
activities pursuant to federal Treasury Regulation section 1.469-4. However, since California
does not conform to IRC section 469(c), the grouping of the rental real estate activity for
California tax purposes does not allow rental real estate activities to be considered a non-
passive activity, unlike the federal treatment.

2015 CalCPA/FTB Q&A

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