The California Franchise Tax Board (FTB) recently issued a notice clarifying that the IRC section 367 regulations will be applied in cases involving the transfer of appreciated property to an insurer. Under Cal. Rev. & Tax Code section 24465, a transfer of appreciated property from a corporation to an insurer in a commonly controlled group (which would normally be subject to nonrecognition provisions) is generally a transaction in which gain is recognized because the insurer is subject to a premiums tax as opposed to the franchise tax. If the appreciated property continues to be actively used in the insurer's insurance business, then the recognition of the gain will be deferred, but never completely eliminated. When the property ceases to be utilized in the active conduct of the insurance business or is transferred out of the combined group, the gain will be recognized by the original transferor. Apportionment of the deferred gain will be based on the factors of the original transferor in the year the gain is recognized. Cal. Rev. & Tax Code section 24465 is based on IRC section 367, which disallows deferred gain treatment for transfers of appreciated property to an entity that does not pay the otherwise applicable income tax. One of the critical differences between California law and IRC section 367 is the treatment of complete liquidations of insurance companies, otherwise governed by California's conformity to IRC section 332. Specifically, Cal. Rev. & Tax Code section 24465(h)(2)(B) overrides IRC section 332, and the liquidating distribution is treated as a dividend. In the Notice, the FTB confirms that the principles of the regulations promulgated under IRC section 367, which are generally applied in the context of foreign corporations, will apply to Cal. Rev. & Tax Code section 24465 in the context of the transfer of appreciated property to an insurance company. In the absence of regulations promulgated by the FTB, the FTB “intends to rely upon federal regulations promulgated under IRC section 367 to the extent those latter regulations address similar substantive transactions to those described under California law.” Please contact Hernan Stigliano at (212) 872 6967 or Jodie Scott at (612) 305-5210 with questions on Notice 2019-01.