United States

California FTB issues guidance on application of section 382


On April 6, 2017, the California Franchise Tax Board (FTB) released Technical Advice Memorandum 2017-03 (TAM), addressing the application of sections 382 through 385 as it relates to California apportionment purposes.

In response to a series of questions presented, the FTB provided the following conclusions:

  1. Section 382 is applied on a pre-apportionment basis
  2. The recognized built-in gains and losses (RBIGS and RBILS, respectively) provided for in section 382(h)(2) are determined on a post-apportionment basis
  3. The net unrealized built-in gains and losses (NUBIGs and NUBILS, respectively) provided for in section 382(h)(3) are determined on a post-apportionment basis
  4. The limitation of the use of excess credits provided for in section 383(a)(1), which references the limitation provided for in section 382, is applied on a pre-apportionment basis
  5. California applies the examples found in Reg. section 1.383-1(f), but the federal rates in those examples must be substituted for the applicable state rates
  6. The RBIGs provided for in section 384(a)(2) are determined on a post-apportionment basis when considered for purposes relating to pre-acquisition losses


After a brief description of section 382, the FTB explains that there is no legal authority for applying section 382 on a post-apportionment basis because the section 382 limitation calculation does not relate to net income, or items such as  income, deductions, gains or losses, i.e., apportionable items. The TAM also explains that while other states found authority in their statutes to support post-apportionment methodology, that legislative or case law authority existed in California.

Next, the TAM provides guidance on the state treatment of NUBIGs, RBIGs, NUBILs and RBILs. For California purposes, California tax and revenue code section 25101 relates to apportionment of net income, including gains and losses. Therefore, the apportionment factor percentage that existed at the date of the ownership change should be applied because NUBIGs, RBIGs, NUBILs and RBILs each separately relate to the time of the ownership change.

For California purposes, the section 383 limitation is also determined on a pre-apportioned basis because section 382 provides for the same limitation on the use of credits or capital loss carryovers attributable to the loss corporation.

Finally, the TAM explains that Reg. section 1.383-1 is applicable for applying section 383 for California purposes because California has not adopted any state regulations on those provisions. Accordingly, the various state corporate franchise tax rates provided in California revenue and tax code sections 23151 and 23186 should be substituted for the federal rates included in the regulations.


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