California Code of Regulations › Title 18 - Public Revenues › Division 3 - Franchise Tax Board › Chapter 3.5 - Bank and Corporation Tax › Subchapter 7 - Net Income › Article 1 - Deductions › Section 24348(c) - Taxability of Bad Debt Reserves of Taxpayers Who Cease to be Subject to Tax

Current through Register 2024 Notice Reg. No. 28, July 12, 2024
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.
1. New
						section filed 8-6-62; effective thirtieth day thereafter (Register 62, No.
						16).
2. Renumbering from Section
						24348(b) filed
						12-24-71; effective thirtieth day thereafter (Register 71, No.
						52).