Cal. Code Regs. Tit. 18, §§ 23663-2

Current through Register 2024 Notice Reg. No. 40, October 4, 2024

Section 23663-2 - Assignor Has Less Credits than Assigned

(a) In General. Pursuant to Regulation 23663-5(a), no assignor, assignee, or any other taxpayer shall claim, assign or otherwise benefit from a credit which was assigned in a defective assignment, unless that credit is allocated to the assignor or assignee under Regulations 23663-2 through 23663-5. This regulation provides default rules for the allocation of credits in defective assignments when an assignor assigns more credits than it has, and also includes alternative allocation rules that are available before first contact. This regulation shall apply after any correction made under Regulation 23663-4.

(b) Rules for Aggregating Defective Assignments. If, in a single taxable year, an assignor makes multiple assignments of the same type of identical credit, these multiple assignments shall be aggregated for purposes of determining whether the assignments were defective assignments. If the assignor has less identical credits available than the aggregate amount assigned, then all assignments made in a single taxable year of that type of identical credit shall be defective assignments.

Example 1: X reported that it has $200 of 2010 R & D credits. On its original tax return for the 2010 taxable year, X elects to assign $100 of the 2010 R & D credits to Y and $100 of the 2010 R & D credits to Z. Subsequently, X discovers that it only had $120 of 2010 R & D credits. The assignments to Y and Z will be aggregated for purposes of determining whether both are defective assignments because both assignments involved the same type of identical credit and were made in the same taxable year. Both assignments will be treated as being defective assignments because X did not have the $200 of 2010 R & D credits which were assigned to Y and Z in the taxable year of the assignment.

Example 2: Assume the same facts as in Example 1, except that the assignment to Z was made on X's 2011 original tax return. While the assignments to X and Y deal with the same type of identical credit, the assignments were made in different taxable years and so are not aggregated for purposes of applying subsection (b). (See also Regulation 23663-5(d)(1).)

Example 3: Assume the same facts as in Example 1, except that instead of assigning $100 of 2010 R & D credits to Z in 2010, X assigned $100 of 2009 R & D credits to Z on its 2010 tax return. The assignments to Y and Z are not aggregated under this section because the 2009 R & D credits and 2010 R & D credits are not identical credits.

Example 4: Assume the same facts as in Example 3, except that instead of assigning $100 of 2009 R & D credits to Z, X assigned $100 of 2010 low income housing credits to Z. The assignments to Y and Z are not aggregated under this section because the 2010 R & D credits and 2010 low income housing credits are not identical credits.

(c) Default Allocation. For an assignment which is a defective assignment because an assignor's amount of identical credits available for assignment is less than the amount of those identical credits assigned, such identical credits shall be allocated according to the following rules as of an adjustment date:

(1) The assignor's identical credits, or remaining credits after adjusted by paragraph (2) if applicable, shall be allocated to the aggregated eligible assignees pro rata pursuant to the ratio of the identical credits assigned in the original defective assignments.

(2) If the assignor or any aggregated eligible assignees claimed credits in a closed year, then subparagraphs (A) and (B) shall apply.

(A) First, the assignor's identical credits shall be allocated to the assignor and any aggregated eligible assignees to the extent they claimed such credits in a closed year; except that if the amount of identical credits claimed in closed years by the assignor and aggregated eligible assignees exceeds the assignor's amount of such identical credits available for assignment, then the credits shall be allocated to the assignor and aggregated eligible assignees pro rata based on the aggregate amount of credits each claimed in closed years.

(B) Second, any credits remaining after application of subparagraph (A) shall be allocated to the aggregated eligible assignees with the lowest pro rata allocation of credits until all aggregated eligible assignees have been allocated a pro rata portion of credits pursuant to the ratio of the identical credits assigned in the original defective assignments.

(3) Examples.

Example 5: X reported that it has $350 of 2010 R & D credits. On its original tax return for the 2010 taxable year, X elects to assign $200 of the 2010 R & D credits to Y and $100 of the 2010 R & D credits to Z. Therefore, X retained $50 of the 2010 R & D credits. Subsequently, X discovers that it only had $150 of R & D credits in 2010. Pursuant to subsection (c)(1), as of the adjustment date, X's actual $150 of 2010 R & D credits will be allocated to the aggregated eligible assignees (Y and Z) as follows: for Y - $200 ($200 is the total 2010 R & D credits assigned to Y) / $300 ($300 is the total 2010 R & D credits assigned to eligible assignees) x $150 ($150 is X's actual amount of 2010 R & D credits) = $100 and for Z - $100 / $300 x $150 = $50. Therefore, under this regulation, X is treated as having retained no 2010 R & D credits, Y is treated as having received $100 of 2010 R & D credits, and Z is treated as having received $50 of 2010 R & D credits.

Example 6: Assume the same facts as in Example 5, except that X has claimed $30 of 2010 R & D credits in a closed year as of the adjustment date. Pursuant to subsection (c)(2)(A), the first $30 of 2010 R & D credits are allocated to X. Pursuant to subsection (c)(1), the remaining $120 of 2010 R & D credits ($150 less $30) will be allocated to the aggregated eligible assignees as follows: for Y - $200 ($200 is the total 2010 R & D credits assigned to Y) / $300 ($300 is the total 2010 R & D credits assigned to eligible assignees) x $120 ($120 is X's remaining amount of 2010 R & D credits) = $80 and for Z - $100 / $300 x $120 = $40. Therefore, under this regulation, X is treated as having retained $30 of 2010 R & D credits (the $30 claimed in a closed year), Y is treated as having received $80 of 2010 R & D credits, and Z is treated as having received $40 of 2010 R & D credits.

Example 7: Assume the same facts as in Example 6, except that Y has also claimed $40 of 2010 R & D credits in a closed year as of the adjustment date. Pursuant to subsection (c)(2)(A), $30 of 2010 R & D credits are first allocated to X and $40 of 2010 R & D credits to Y. Next, pursuant to subsection (c)(2)(B), of the remaining $80 of 2010 R & D credits ($150 less $70), $20 of 2010 R & D credits will be allocated to Z so that Y and Z end up with a pro rata allocation of credits using the original defective assignment amounts. $40 ($40 is the 2010 R & D credits already allocated to Y) / $200 ($200 is the total 2010 R & D credits assigned to Y) = 20% x $100 ($100 is the total 2010 R & D credits assigned to Z) = $20. Finally, pursuant to subsection (c)(1), the remaining $60 of 2010 R & D credits ($150 less $70 less $20) will be allocated as follows: for Y - $200 ($200 is the total 2010 R & D credits assigned to Y) / $300 ($300 is the total 2010 R & D credits assigned to aggregated eligible assignees) x $60 ($60 is X's remaining amount of 2010 R & D credits) = $40 and for Z - $100 / $300 x $60 = $20. Therefore, under this regulation, X is treated as having retained $30 of 2010 R & D credits, Y is treated as having received $80 of 2010 R & D credits and Z is treated as having received $40 of R & D credits.

Example 8: Assume the same facts as in Example 5, except that instead of assigning credits to Y and Z in the amounts listed, X assigns $150 of the 2010 R & D credits to Y, $100 of the 2010 R & D credits to Z, and $50 of the 2010 R & D credits to T. As of the adjustment date, Y has claimed $90 of 2010 R & D credits in a closed year and Z has also claimed $10 of 2010 R & D credits in a closed year. Pursuant to subsection (c)(2)(A), as of the adjustment date, X's actual $150 of 2010 R & D credits will be allocated to the aggregated eligible assignees (Y, Z and T) as follows: $90 of 2010 R & D credits are first allocated to Y and $10 of 2010 R & D credits to Z. Therefore, after this first step, Y, Z and T have received the following percentage of the credits assigned to them in the original defective assignments: Y - 60% ($90 / $150), Z - 10% ($10 / $100) and T - 0% ($0 / $50).

Next, pursuant to subsection (c)(2)(B), $5 of 2010 R & D credits (10% x 50 credits assigned to T) will be allocated to T so that T has the same 10% allocation as Z. Z and T now both have a 10% allocation of the 2010 R & D credits assigned to them in the original defective assignments. The remaining $45 of 2010 R & D credits ($150 less $100 less $5) will be allocated to Z and T until they both have received a 60% allocation of 2010 R & D credits. The credits to be allocated to Z and T are calculated as follows:

(i) for Z - 60% x $100 = $60 less the $10 already allocated to Z = $50, and

(ii) for T - 60% x $50 = $30 less the $5 already allocated to Z = $25. Therefore, a total of $75 of 2010 R & D credits are to be allocated to Z and T.

However, because X only has $45 of 2010 R & D credits remaining to be allocated to the aggregate eligible assignees after the earlier adjustments (instead of $75), the $45 of 2010 R & D credits are allocated pro rata between Z and T as follows:

(iii) for Z - $45 x $100 (the amount of credits assigned to Z in the original assignment) / $150 (total credits assigned to Z and T on the original assignment) = $30 of 2010 R & D credits to go to Z, and

(iv) for T - $45 x $50 / $150 = $15 of 2010 R & D credits to go to T. Therefore, under this regulation, X is treated as having retained $0 of 2010 R & D credits, Y is treated as having received $90 of 2010 R & D credits, Z is treated as having received $40 of 2010 R & D credits and T is treated as having received $20 of 2010 R & D credits.

(d) Alternative Allocation. Any request for an alternative allocation of a defective assignment under this regulation shall meet all of the following conditions:

(1) Maximum Credits to Assignor. The alternative allocation shall not allocate to the assignor a higher amount of identical credits than the amount the assignor would have retained had all defective assignments of identical credits aggregated under subsection (b) been valid, as increased by the amount of identical credits otherwise allocated to the assignor pursuant to Regulation 23663-3.

(2) Maximum Credits to Assignees. The alternative allocation shall not allocate to any eligible assignee a higher amount of identical credits than the amount assigned to such eligible assignee in the original defective assignment.

(3) Eligible Parties. The alternative allocation shall only allocate credits to the assignor and those aggregated eligible assignees of the defective assignment who have joined the assignor's request for an alternative allocation.

(4) Included Credits. An alternative allocation shall be limited to the type of identical credit which was assigned in the defective assignment for which an alternative allocation is being requested.

(5) Excluded Credits. An alternative allocation shall not include the following:

(A) The aggregate amount of identical credits assigned in the same taxable year to assignees who do not join in the assignor's request for an alternative allocation, except to the extent Regulations 23663-3 and 23663-4 have already allocated such amounts to the assignor.

(B) The amount of identical credits which would create the actuality or possibility of that amount of identical credits being claimed more than once if they were to be included in the alternative allocation.

(6) Closed Years. An alternative allocation shall first allocate identical credits pursuant to subsection (c)(2).

(7) First Contact. An assignor may only request application of this subsection before first contact.

(8) Limitation on Requests. The assignor or any members of the same combined reporting group (pursuant to Revenue and Taxation Code sections 25101 or 25110) shall not have requested another alternative allocation in any other taxable year within a four taxable year period. For purposes of the preceding sentence, the four taxable year period means the taxable year of the defective assignment for which the alternative allocation is being requested, and the three taxable years immediately preceding that taxable year and the three taxable years immediately following that taxable year.

(9) Examples.

Example 9: X reported that it has $350 of 2010 R & D credits. On its original tax return for the 2010 taxable year, X elects to assign $200 of the 2010 R & D credits to Y and $100 of the 2010 R & D credits to Z. Therefore, X retained $50 of the 2010 R & D credits. Subsequently, X discovers that it only generated $150 of R & D credits in 2010. X makes a request, joined by Y and Z, for an alternative allocation under this subsection to allocate X's $150 of 2010 R & D credits from X's aggregated defective assignments as follows: $50 of 2010 R & D credits to X and $100 of 2010 R & D credits to Y. Assuming all other conditions of this subsection are satisfied, the FTB would approve X's request; therefore, under this regulation, X is treated as having retained $50 of 2010 R & D credits, Y is treated as having received $100 of 2010 R & D credits, and Z is treated as having received $0 of R & D credits.

Example 10: Assume the same facts as in Example 9, except that X, joined by Y and Z, requests an alternative allocation under this subsection to allocate all of X's $150 of 2010 R & D credits from its aggregated defective assignments to X. Under these facts, the FTB would reject X's request because under paragraph (1) it would result in X being treated as retaining more 2010 R & D credits than X would have retained had the defective assignments been valid.

Example 11: Assume the same facts as in Example 9, except that X, joined by Y and Z, requests to allocate X's $150 of 2010 R & D credits from its aggregated defective assignments to K. Under these facts, the FTB would reject X's request because under paragraph (3), K is not an aggregated eligible assignee.

Example 12: X reported that it has $200 of 2009 R & D credits and $200 of 2010 R & D credits. On its original tax return for the 2010 taxable year, X elects to assign $100 of the 2009 R & D credits to Y and $100 of the 2010 R & D credits to Z. Therefore, X retained $100 of the 2009 R & D credits and $100 of the 2010 R & D credits. Subsequently, X discovers that it only generated $50 of 2009 R & D credits and $40 of 2010 R & D credits. X makes a request, joined by Y and Z, to allocate $50 of 2009 R & D credits and $40 of 2010 R & D credits to Y. Under these facts, the FTB would reject X's request because under paragraph (3) of this subsection, X and Y are not aggregated eligible assignees; therefore, the identical credits in X's defective assignment to Y cannot be combined with the identical credits in X's defective assignment to Z.

Example 13: Assume the same facts as in Example 9, except that X, only joined by Z, requests to allocate $100 of X's actual $150 of 2010 R & D credits from its aggregated defective assignments to Z. Under these facts, the FTB would reject X's request because under paragraph (5) of this subsection, X has only $50 of 2010 R & D credits available for an alternative allocation (X's actual $150 of 2010 R & D credits reduced by the $100 of 2010 R & D credits assigned to Y who did not join the request for an alternative allocation). See also Regulation 23663-5(e)(3).

Example 14: X reported that it has $350 of R & D credits generated in 2010. On its original tax return for the 2010 taxable year, X elects to assign $200 of the 2010 R & D credits to Y and $100 of the 2010 R & D credits to Z. Therefore, X retained $50 of the 2010 R & D credits. Subsequently, X discovers that it only generated $150 of R & D credits in 2010. The FTB mails correspondence to Y regarding taxable year 2010. Subsequently, X mails a request for an alternative allocation to the FTB. Under these facts, the FTB would reject X's request because it was sent after first contact.

Example 15: Assume the same facts as in Example 9, except that in 2017, six taxable years after the alternative allocation adjustment, X requests an alternative allocation for a defective assignment made on X's original 2008 tax return. Under these facts, the FTB would reject X's request for the 2008 alternative allocation because pursuant to paragraph (8) of this subsection, the second alternative allocation request is for an alternative allocation for a taxable year (2008) that is within the four taxable year period of the alternative allocation request made for the 2010 taxable year.

(e) Request to Apply this Regulation. For rules governing the form and manner of any request by an assignor to apply this regulation, see Regulation 23663-5(f).

Cal. Code Regs. Tit. 18, §§ 23663-2

1. New section filed 9-18-2018; operative 9-18-2018 pursuant to Government Code section 11343.4(b)(3) (Register 2018, No. 38).

Note: Authority cited: Sections 19503 and 23663, Revenue and Taxation Code. Reference: Section 23663, Revenue and Taxation Code.

1. New section filed 9-18-2018; operative 9/18/2018 pursuant to Government Code section 11343.4(b)(3) (Register 2018, No. 38).