Cal. Code Regs. tit. 18 § 24348(c)
Section 24348 provides in part that there shall be allowed as a deduction, in the discretion of the Franchise Tax Board, a reasonable addition to a reserve for bad debts. As authorized by Section 24348 the Franchise Tax Board has issued rulings and regulations relating to the amount allowable as an addition to a reserve for bad debts. This regulation, however, relates to the treatment of a bad debt reserve when all reason for maintaining the reserve ceases.
Since additions to a bad debt reserve reduced the amount of tax which otherwise would have been due, any amount received from the sale or other disposition of receivables for more than their net tax basis in the year that a taxpayer ceases to be subject to the tax imposed by this part or ceases to be subject to a tax measured by net income is required to be included in the measure of tax for the last year that a taxpayer was subject to tax measured by or imposed upon net income to the extent that the amounts derived from such sale resulted in a tax benefit. As used in this regulation the term "net tax basis" means the face value of accounts receivable when sold, less amounts which have been set aside as a reserve for bad debts. The provisions of this paragraph may be illustrated by the following example:
EXAMPLE:
X Corporation, whose accounting period is the calendar year, has as of December 31, 1961, accounts receivable in the amount of $1,000,000. Its reserve for bad debts as of such date is $75,000, $25,000 of which was added during the calendar year 1961. Thus, the net tax basis of its accounts receivables as of December 31, 1961 is $925,000 ($1,000,000 --$75,000). On December 31, 1961, X Corporation ceases to do business and sells its accounts receivable for $1,000,000. The amount to be included in the measure of the tax for the calendar year ended December 31, 1960, the last year that X Corporation was subject to tax measured by income, is $50,000 ($75,000 [the amount added to the reserve for the calendar year 1961, which did not result in a tax benefit]). The tax attributable to this amount must be paid for the calendar year that X Corporation ceased doing business.
The tax measured by the inclusion of such income shall not be subject to the proration provided for in Section 23332.
The provisions of this regulation shall not be applicable where the assets of a taxpayer are transferred to another taxpayer in a reorganization as defined in Section 23251, if the transferee taxpayer succeeds to and takes the amount of the transferee taxpayer's bad debt reserve into account. Any taxpayer which has established a reserve for bad debts and thereafter requests a tax clearance certificate prior to dissolving or withdrawing, shall, at the time it requests a tax clearance, advise the Franchise Tax Board as to the disposition of its reserve for bad debts.
Any additional tax due as the result of the application of this regulation shall be secured or paid before a tax clearance certificate is issued.
Cal. Code Regs. Tit. 18, § 24348(c)
2. Renumbering from Section 24348(b) filed 12-24-71; effective thirtieth day thereafter (Register 71, No. 52).
2. Renumbering from Section 24348(b) filed 12-24-71; effective thirtieth day thereafter (Register 71, No. 52).