California: Guidance Issued on Alternative Apportionment Requests

In recently-issued Legal Ruling 19-01, the Franchise Tax Board (FTB) provides guidance on what it considers to be appropriate subject matter for a request under R&TC section 25137 to vary from the standard apportionment formula. In the FTB’s view, section 25137 expressly grants statutory authority to provide variances only to the apportionment formula and the allocation provisions. It does not expressly grant authority to provide variances for items unrelated to the apportionment formula and the allocation provisions. The ruling walks through certain situations for which the FTB does not believe a variance is proper, such as when a taxpayer is seeking to be de-combined from its affiliates.  The FTB also believes that requests to treat dividends as nonbusiness income would be outside the scope of a 25137 request this issue involves the determination of business versus nonbusiness income, but does not relate to the allocation and apportionment of income. Another instance that would not be appropriate for a section 25137 request is when a taxpayer wishes to include the factors of a unitary foreign entity in the water’s edge combined report. In the FTB’s view, section 25137 does not apply to “water’s-edge mechanics.” An example of when a 25137 variance is appropriate is when a three-factor taxpayer has no sales anywhere. In that instance, it may be appropriate to exclude sales from the company’s apportionment factor. Please contact Gina Rodriquez at 916- 551-3132 with questions.