Ever-dependable California has stepped up to the plate and become the first state to require the submission of a federal Schedule Uncertain Tax Position Statement (Schedule UTP). The Franchise Tax Board (FTB) announced on December 1, 2010 that, for taxable years beginning on or after January 1, 2010, it will require taxpayers that file federal Schedule UTP to attach the same schedule to their Franchise or Corporate Income Tax Return (Form 100/100W). Taxpayers cannot hide from this requirement because they will also be asked to check a box on their California Form 100/100W indicating whether or not they filed a federal Schedule UTP.
For taxable years beginning on or after January 1, 2010, the Internal Revenue Service requires a corporation to file Schedule UTP with its income tax return if:
- The corporation files Form 1120, U.S. Corporation Income Tax Return; Form 1120-F, U.S. Income Tax Return of a Foreign Corporation; Form 1120-L, U.S. Life Insurance Company Income Tax Return; or Form 1120-PC, U.S. Property and Casualty Insurance Company Income Tax Return;
- The corporation has assets that equal or exceed $100 million (there is an IRS announced phase-in that reduces the asset threshold to $50 million for 2012 and 2013 tax years and to $10 million for tax years 2014 and after);
- The corporation or a related party issued audited financial statements reporting all or a portion of the corporation’s operations for all or a portion of the corporation’s tax year; and
- The corporation has one or more tax positions that must be reported on Schedule UTP. Affiliated groups filing federal consolidated returns are required to file federal Schedule UTP for the entire affiliated group.
California’s announcement raises several concerns. There are serious questions about California’s authority to require receipt of confidential information regarding corporations that may not be subject to California’s taxing powers, i.e., non-nexus corporations included in a California combined report or corporations that may not be subject to the California franchise or income tax, such as insurance companies. Because California taxpayers come in all shapes and sizes, there is a high likelihood that simply attaching a federal Schedule UTP will transmit information to California regarding corporations over which it has no jurisdiction to tax. Thus, the question arises as to whether a taxpayer will be deemed compliant with this new FTB edict if, rather than submitting the entire federal Schedule UTP, it instead provides a redacted version that deletes information regarding affiliates outside of California’s taxing authority or the scope of the franchise or income tax.
For now, California has reserved its discussions on devising its own UTP form and is not requiring disclosure of California-specific tax positions. The FTB plans to include additional details regarding this Schedule UTP attachment requirement in the instructions to Form 100/100W for 2010. Of course, the question remains whether additional states will join in the search under taxpayers’ mattresses by requiring the submission of Schedule UTP or adopting their own state-specific UTP schedules.