CA: Governor Signs Legislation Adopting Federal Partnership Audit Rules

On September 23, 2018, Governor Jerry Brown signed Senate Bill 274, which incorporates into California law certain federal provisions related to partnership audits. Under Senate Bill 274, elections made by partnerships for federal audit purposes will generally be binding for California purposes. For example, if a partnership pays the tax on adjustments identified during a federal audit (the imputed underpayment), the partnership would be required to compute a California imputed underpayment. However, a partnership may file a request with the Franchise Tax Board (FTB) to make a different election for California purposes. The FTB must grant the request if the partnership can establish the election would not impede the FTB’s ability to collect any related California income or franchise taxes. While Senate Bill 274 aligns closely with the federal rules, there are a number of important differences. For example, if a corporation is unitary with a partnership that has been audited and pays a federal imputed underpayment, the corporation must file an amended return to report its share of the related California adjustments and the California imputed underpayment paid by the audited partnership must be adjusted to account for the exclusion of the adjustments attributable to the unitary corporate partner. Also, if an audited partnership makes an election to push out the federal audit adjustments to its partners, the partnership must file an amended Nonresident Group Return for all nonresident direct partners and pay any additional California tax resulting from the audit adjustments. While the federal partnership representative is the default representative in California, Senate Bill 274 does permit partnerships to designate a separate partnership representative for California tax purposes. Finally, Senate Bill 274 includes provisions addressing tiered partnership structures that allow an additional 90 days from the federal deadline to comply with all necessary filing and payment requirements. Please stay tuned to TWIST for future legislative developments.