United States:
Adding Insult To Injury: California Delays Tax Refunds, Taxpayers Accelerate Tax Payments
05 February 2009
Sutherland Asbill & Brennan LLP
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Originally published January 20, 2009
On January 16, 2009, California State Controller John Chiang
announced that California is facing a cash shortage issue that may
result in a delay of more than $3.7 billion in outgoing payments,
including payments of tax refunds. In a press conference, the
Controller stated that the delays may take place beginning February
1, unless the California State Legislature can come up with a
solution to California's budget deficit.1 The
San Francisco Chronicle estimated that up to $2 billion in
income tax refunds could be delayed.2
While a delay in refund payments is problematic, the impact may
be magnified as a result of California's new 20% penalty.
See Sutherland's Legal Alert entitled "
California Enacts a New Round of Onerous Penalties," dated
September 29, 2008, and Legal Alert entitled "
California FTB Comments on New 20% Underreporting
Penalty," dated December 9, 2008. Effective October 1,
2008, California imposes a 20% penalty on corporations that
underreport their tax liability by more than $1 million.
The penalty is always imposed, unless the underpayment arises
from a change in law or reliance by the taxpayer on a Chief Counsel
Ruling. The penalty is effective for tax years beginning January 1,
2003. To avoid the penalty, corporate taxpayers may file an amended
return by May 31, 2009, stating the correct tax liability.
Sutherland Observation: As noted above,
California taxpayers should evaluate whether to amend returns and
pay additional tax. Making these decisions will depend on a number
of factors, including:
- The strength of the underlying position, and the taxpayer's
willingness to litigate the underlying position;
- The likelihood that the amended return will draw audit
attention to the underlying position (regardless of the strength of
the position);
- The financial statement consequences of risking the imposition
of the penalty (e.g., whether non-payment results in an increase in
a liability or whether payment results in an increase in an asset
and whether the liability will be in excess of any FIN 48
reserve);
- The financial statement consequences of not paying the
additional tax or representing that it will be paid (e.g., accrual
of penalty);
- The federal income tax deductibility (or non-deductibility) of
the penalty (including effect on effective tax rate due to possible
non-deductibility);
- The cash flow implications of amending a return (or risking the
imposition of the penalty), taking into account California's
financial position;
- The cash flow implications from the inability to carryforward
overpayments to a subsequent year to offset tax due;
- The statute of limitations issues associated with amending a
return;
- The likelihood of a federal tax assessment (or refund) for
post-2002 tax years;
- The likelihood that interest may accrue on the penalty;
and
- Tax attributes, including Net Operating Loss Carry Forwards and
Credits, and California restrictions on utilization of tax
attributes.
|
Footnotes
1. Stu Woo, "California Moves Closer to Delaying Tax
Refunds, Other Payments," The Wall Street Journal,
January 16, 2009, http://online.wsj.com/article/SB123213299391391031.html.
2. Matthew Yi, "State may delay refunds, disability
checks," San Francisco Chronicle, January 17, 2009,
at A-1.
© 2009
Sutherland Asbill & Brennan LLP. All Rights
Reserved.
This article is for informational purposes and is not
intended to constitute legal advice.
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