Bringing Back the Buffer: a Proposal to Amend Crtc Section 18604(a) to Provide a Seven-month Filing Extension to Corporate Taxpayers

• Jurisdiction: California,United States
• Author: By Saba S. Shatara and Megan Robertson
• Citation: Vol. 30 No. 1
• Publication year: 2021

Bringing Back the Buffer: A Proposal to Amend CRTC Section 18604(a) to Provide a Seven-Month Filing Extension to Corporate Taxpayers1 2

By Saba S. Shatara and Megan Robertson³

Editor's Note: The annual Sacramento Delegation provides tax practitioners an opportunity to present papers on topics of concern to high-ranking officials of the Franchise Tax Board, California Department of Tax and Fee Administration, Board of Equalization, and Legislative staff for purposes of advocating for legislative or regulatory change. The article below contains the unaltered arguments and materials originally presented by the authors to members of the California State Legislature and Franchise Tax Board ("FTB") leadership at the Sacramento Delegation, held on October 11, 2019. Their proposal recommended that—in the absence of action by the FTB under the authority provided by California Revenue & Taxation Code ("CRTC") Section 18604(a)—the Legislature amend that statute to enact an automatic seven-month extension for filing corporate returns to allow for a one-month buffer between the extended due dates for filing the federal and California corporate tax returns. The authors posited that changing the extended due date for C corporation returns would reduce both the compliance burden and potential for inaccuracies when preparing California corporate returns, as well as costs for both taxpayers and the FTB related to the filing of amended returns. As a result of the presentation at the Sacramento Delegation, the FTB reexamined the matter and issued Notice 2019-07, which extended the corporate filing due date up consistent with this proposal. The 2021 Sacramento Delegation will take place in October. Those interested in participating may obtain additional information by emailing Sacramento Delegation Chair Michael Laisne at Michael.Laisne@ftb.ca.gov.

EXECUTIVE SUMMARY

For decades, the due date to file a corporate tax return⁴ in California was one month after the federal due date. For calendar year taxpayers, the federal due date was March 15, and the California due date was April 15. These staggered dates reflected the simple fact that taxpayers require the final federal return to prepare their California corporate returns. However, in January 2016, the Surface Transportation and Veterans Health Care Choice Improvement Act took effect, amending the federal corporate tax return due date from March 15 to April 15. This caused the due date to file a California corporate return to fall on the same date as the filing of the federal corporate return—thus removing the one-month buffer that had existed for years between the due dates to file these returns. Likewise, since both federal law and California law allow an automatic six-month extension to file these returns, the extended due date under both federal and California law now falls on the same date—six months after the original due date.

While federal law made a similar change to the due date for partnership returns, the California Legislature promptly changed California law so that the California due date for partnership returns⁵ remained 30-days after the federal due date, both for the original return and on extension. The California Legislature declined to amend the original due date for a corporate tax return; thus, the due date for filing the California corporate tax return continues to be the same as the federal due date, with an automatic six-month extension period (to October 15) for calendar year taxpayers.

Although the Franchise Tax Board ("FTB") has discretion to extend the corporate filing due date up to seven-months from the date of the original return, the FTB announced in Notice 2016-04⁶ that California would retain the current six-month extension for corporate tax returns. Thus, the difficulties that were previously avoided because of the staggered due dates are now being experienced. The result is that many more corporate amended returns may need to be filed, which may result in increased costs for both taxpayers and the FTB.

The following proposal seeks to once again allow taxpayers to have, on extension, an additional month after the filing of their federal corporate tax returns to file their California corporate returns. This will provide for greater accuracy in reporting and a reduction of the administrative burdens associated with any resultant increase in amended returns.

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I. INTRODUCTION

This proposal recommends that the California Legislature amend California Revenue & Taxation Code ("CRTC") Section 18604(a) to enact an automatic seven-month extension for filing corporate returns to allow for a one-month buffer between the extended due dates for filing the federal and California corporate tax returns.⁷ The current statute permits the FTB to grant an extension not exceeding seven months. Prior to the change to federal law, the FTB had exercised its discretion under this statute to allow for an automatic six-month extension that paralleled the federal extension and resulted in a one-month buffer from the federal due date (for both the original due date and the extended due date) to file the California return.

For reasons discussed below, changing the extended due date for C corporation returns should reduce both the compliance burden and potential for inaccuracies when preparing California corporate returns. Similarly, California corporate returns to be filed one month after the due date for federal corporate returns could serve to decrease the number of amended returns which may need to be filed, which would in turn reduce costs for both taxpayers and the FTB.

II. BACKGROUND OF CALIFORNIA FILING DEADLINE

CRTC Section 18604(a) provides the FTB with discretion to grant a reasonable extension of time, not to exceed seven months, for taxpayers subject to the California Corporation Tax Law to file their returns.⁸ In October of 1992, the FTB issued Notice 92-11,⁹ introducing A.B. 3224, which provided a seven-month automatic paperless extension for C and S Corporations in good standing with the State of California—permitting California corporate returns to be filed one month after federal corporate returns.¹⁰

Thirteen years after the California Legislature passed A.B. 3224, Congress passed the Surface Transportation and Veterans Health Care Choice Improvement Act (the "Act"), which took effect in January of 2016.¹¹ The Act amended federal return due dates in two significant ways. First, the Act amended the federal partnership return due date from April 15th to March 15th.¹² Second, the Act amended the federal corporate return due date from March 15th to April 15th.¹³ The purpose of this change was to allow the parties receiving the data from the pass-through entity time to incorporate this data into their tax returns.¹⁴ Prior to the Act, the returns were due for corporations before some data was even available from pass-through entities, creating unavoidable errors in the tax returns due to the lack of finalized tax data.

In response to these federal law changes, California enacted A.B. 1775, which changed the due date for C Corporation returns from March 15th to April 15th for tax years beginning on or after January 1, 2016.¹⁵ At the same time, A.B. 1775 changed the due date for partnership tax returns from April 15th to March 15th,¹⁶ which effectively shortened the extended filing period from seven months to six months. To account for this on the pass-through side, the Legislature enacted A.B. 119 the following year, which changed the extended filing period for partnerships six-months to seven-months.¹⁷ However, no such seven-month extension was granted for corporations.¹⁸

The FTB subsequently issued Notice 2016-04, which announced that the FTB would not, under the discretion granted to it by CRTC Section 18604, allow a similar seven-month extension for corporate tax returns; rather, California retained the six-month extended due date for corporate returns, while maintaining a seven-month extended return due date for partnerships.¹⁹ This Notice solidified a shorter extension period for corporations (from seven months to six months), making the California due date of corporate returns the same as the due date of corporate returns for federal purposes.²⁰ According to the legislative history of A.B. 1775, the recent date changes were designed to have California due dates conform with federal due dates as a means to create an easier process for taxpayers by ensuring that they will not have to keep up with different due dates.²¹

III. PROBLEM PRESENTED: COMPLIANCE BURDENS AND THE POTENTIAL FOR INACCURACIES IN REPORTING ON CALIFORNIA CORPORATE RETURNS

As a general rule, the computation of California taxable income uses...