California Code of Regulations › Title 18 - Public Revenues › Division 3 - Franchise Tax Board › Chapter 3.5 - Bank and Corporation Tax › Subchapter 17 - Allocation of Income › Article 1 - General Provisions › Section 25111 - Water's-Edge Election

Current through Register 2024 Notice Reg. No. 28, July 12, 2024
(a)
					 General. This regulation shall be applicable to election contracts entered into
					 for taxable years beginning on or after January 1, 1994 and before January 1,
					 2003. To the extent that a taxpayer would have been required to file on a
					 water's-edge basis in its first taxable year beginning on or after January 1,
					 2003, pursuant to a water's-edge election made in a prior year under Revenue
					 and Taxation Code section
					 25111
					 and this regulation, the terms of this regulation no longer apply and that
					 election shall be deemed to have been made under the terms of Revenue and
					 Taxation Code section
					 25113.
					 However, the commencement date of the election made in a prior year under
					 Revenue and Taxation Code section
					 25111
					 and this regulation shall continue to be treated as the commencement date of
					 the water's-edge election period for purposes of applying the provisions of
					 Revenue and Taxation Code section
					 25113.
(1) The election. In order to make the
					 water's-edge election permitted by Revenue and Taxation Code section
					 25110,
					 a taxpayer must enter into a contract with the Franchise Tax Board. The
					 contract must be for an 84-month period.
(2) Validity of Election. The election
					 contract shall be considered valid so long as there has been substantial
					 performance of the requirements for entering into the contract.
(A) For purposes of this subsection
					 "substantial performance" means that although there may have been noncompliance
					 with one or more procedural or statutory requirements for making the election,
					 the tax was computed consistent with a water's-edge election and there exists
					 additional objective evidence to support the conclusion that an election was
					 intended.
1. For purposes of this section
					 objective evidence includes, but is not limited to:
a. One or more of the following substantially
					 completed forms (or their successors) were attached to the original return:
					 100-WE, 1115, 1116, 2411, 2416, 2424, or 2426, or
b. A Form 1117 request to terminate an
					 election which sets forth the expiration date of the contract from which the
					 first year of intended election can be determined, was filed before January 1,
					 1997; or
c. A statement was
					 attached to the original return indicating a water's-edge election was being
					 made.
2. There may exist
					 other evidence sufficient to support the conclusion that an election was
					 intended, which may include checking a water's-edge box on the
					 return.
(B) In the
					 absence of a common parent election, whether or not there has been substantial
					 performance of the procedural and statutory requirements for entering into a
					 contract shall be determined with reference to the actions of the entire
					 water's-edge group, as defined in subsection (b)(1). Substantial performance by
					 every member of the water's-edge group shall constitute substantial performance
					 by the entire water's-edge group. It is not necessary for every member of the
					 group to substantially perform for an election to be valid.
(3) Termination.
(A) A taxpayer may request and the Franchise
					 Tax Board shall terminate the election if the taxpayer is acquired by a larger
					 nonelecting entity as described in subsection (i)(2)(A) of this regulation. The
					 Franchise Tax Board may also in its discretion grant the taxpayer permission to
					 terminate the election in other circumstances.
(B) For taxable years ending on or before
					 January 31, 1997, if the water's-edge election of a corporation is affected by
					 the amendments to this regulation effective October 31, 1998,
1. if prior to the effective date of such
					 amendments the corporation was acquired by a non-electing, non-affiliated
					 entity, and
2. if subsequent to the
					 acquisition but prior to the effective date of such amendments, the acquired
					 taxpayer filed its returns as if no water's-edge election were in place, the
					 acquired taxpayer shall be deemed to have requested and been granted a
					 termination of the water's-edge election as of the time of acquisition. Any
					 termination resulting from the operation of this subsection (a)(3)(B) shall not
					 be subject to the provisions of subsection (j) of this
					 regulation.
(4)
					 Ability to re-elect. The fact that a taxpayer has filed a notice of nonrenewal,
					 or has terminated an election, or has been granted a change of election, shall
					 not affect its ability to make an election subsequently.