Proposal for Statutory and Regulatory Change: Modifiying an Assignment of Tax Credits After Subsequent Adjustments to the Assignee's Tax Liability

JurisdictionCalifornia,United States
AuthorAUTHORS: Karen Notz and Ovsep Akopchikyan
CitationVol. 31 No. 2
Publication year2022

AUTHORS: Karen Notz1 and Ovsep Akopchikyan2


This paper primarily proposes a regulatory change that would allow modifying an original assignment of tax credits in the event the assignee's tax liability for the taxable year in which the assignment was made is subsequently adjusted. If this proposal requires a change to Section 23663 of the California Revenue and Taxation Code, which would be helpful in any event, we also propose a statutory change.

Statutory tax credits often are provided to encourage specific economic activity in California, such as credits for hiring employees in a designated geographic area and for research and development performed in the State. This paper addresses the assignment of tax credits generated within a combined reporting group—that is, the assignment of tax credits between taxpayer members of a commonly controlled group of corporations engaged in a unitary trade or business within and outside of California.

Section 23663 of the California Revenue and Taxation Code allows members of a combined reporting group to assign certain tax credits to eligible assignees within the group. The legislative intent behind Section 23663 "was to view combined reporting groups as a unified entity for the purpose of using

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tax credits, allowing such credits to be used anywhere within the combined reporting group to reduce the unitary group's total tax."6 This intent is consistent with the unitary business principle in that members of the combined reporting group collectively are engaged in the desired business activity that results in California tax credits and liabilities. To continue to require separate accounting for utilizing tax credits seems contradictory to the legislative intent behind these economic incentives.

The Franchise Tax Board is authorized to "issue any regulations necessary to implement the purposes of this section."7 The existing regulations prohibit the modification of an original assignment when subsequently adjustments are made to the assignee's tax liability (for instance, when the Franchise Tax Board subsequently adjusts the assignee's tax liability on audit). Based on our practical experience from working on many audits, we respectfully submit that the regulations are overly restrictive considering the Legislature's stated intent of Section 23663, which is to liberalize the use of tax credits within a combined reporting group and reduce the unitary group's tax. Put differently, the prohibition in the current regulation is not mandated by the plain language of the statute.

More specifically, Section 23663 provides that an election to assign tax credits is "irrevocable once made, and shall be made by the taxpayer allowed that credit on its original return for the taxpayer in which the assignment is made."8 Therefore, in practice, tax credits are assigned on an as-needed basis only—that is, the assignor assigns an amount of credit after the assignee's tax liability for that taxable year has been computed during the return preparation process. In many cases, which is where the problem arises, the assignor has more credits than the assignee needs to offset its tax liability. However, if the Franchise Tax Board subsequently increases the assignee's tax liability for the taxable year in which the assignment was made, the regulations prohibit the assignor from assigning additional credits from that taxable year.

This proposal is consistent with the stated intent of Section 23663. Credits generated by the unitary group's activities should be available to offset the unitary group's total tax. However, because of the mechanics of preparing a combined report, this can be done only by allowing an assignment of additional tax credits. Additionally, this proposed change is also consistent with Section 23663 because the original return demonstrates the intent of both the assignor and assignee to assign sufficient credits to offset the assignee's tax liability and, had the parties known that the assignee's tax liability would be adjusted, the amount of the original assignment may have been different. In other words, the assignor would have assigned additional credits had the unitary group known the amount of the assignee's "final" tax liability after any subsequent adjustments.


A taxpayer member of a unitary group that qualifies for tax credits—for hiring employees in a designated geographic area or for research and development performed in the State—often has significant employees and capital investments in California. However, that entity's portion of the combined report's California income is sometimes minimal because other taxpayer members account for most of the combined group's California sales. While the ability to assign credits helps mitigate this issue, the current assignment rules do not address the situation where, for instance, the Franchise Tax Board adjusts the combined group's business income or the assignee's apportionment ratio on audit, or if the combined group voluntarily files an amended return that adjusts the assignee's tax liability. Under the existing regulations, the resulting tax increases cannot be offset by eligible tax credits held by the assignor in the same group.

In order to better effectuate the intent of Section 23663, we propose a regulatory change that would allow modifying the original assignment of tax credits in the event the assignee's tax liability is increased

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