By Evan Hamme and Tim Gustafson

In a rare Chief Counsel Ruling (the first of 2015), the California Franchise Tax Board (FTB) held that the sale of an entire line of business qualified as an “occasional sale” for corporate franchise tax purposes, thus requiring the selling taxpayer to exclude the resulting gross receipts from its California sales factor. The taxpayer operated two lines of business and, through the transaction at issue, sold one to an unrelated party in order to focus on the other. California Code of Regulations, title 18, section 25137(c)(1)(A) requires taxpayers to exclude from the sales factor gross receipts resulting from a transaction that is both: (1) “substantial” (i.e., a 5% or greater decrease to the sales factor denominator would result from excluding the gross receipts); and (2) “occasional” (i.e., “is outside the taxpayer’s normal course of business and occurs infrequently”). The FTB found the transaction was “substantial” because excluding the gross receipts decreased the taxpayer’s denominator by approximately 33%. Adopting and applying an analysis from case law interpreting California’s transactional test for business income, the FTB also found the transaction was “occasional” because (1) the taxpayer’s disposition of an entire line of business was “an extraordinary corporate occurrence” that did not occur in the taxpayer’s regular course of business; and (2) the sale was infrequent since this was the only time the taxpayer had disposed of an entire line of business. Cal. FTB Chief Counsel Ruling No. 2015-01 (Jul. 31, 2015).