Sep 03, 2015
On June 19, 2015, the State of California’s Franchise Tax Board clearly answered this question:
What is the proper treatment for California tax purposes of transactions between corporations designated as an IC-DISC for federal purposes, and its owners?
The short answer: IC DISC does not have any taxable income for California purposes.
The guidance puts to rest years of uncertainty concerning the California tax treatment of the IC-DISC.
As stated in the explanation of Letter Ruling 2015-02: “…section 25102 authorizes the Franchise Tax Board to allocate gross income and deductions between ‘persons,’ …that are directly or indirectly owned by the same interests if it is necessary to reflect the proper income of such ‘persons’….Thus section 25012 grants the Franchise Tax Board the authority to allocate gross income and deductions between a corporation that has been designated as an IC DISC for federal tax purposes and its owner(s).”
The commission income and expense offsets one another for both the IC DISC and the owner, leaving nothing to tax.
The explanation continued, “…this treatment is necessary in order to reflect the proper income of the corporation that has been designated as an IC DISC for federal purposes and its owner(s), reflecting the economic substance of the transactions that generate the income for California tax purposes.”
To view details on the ruling, https://www.ftb.ca.gov/tax-pros/law/legal-rulings/2015-02.pdf.
If you have questions, please contact WTP’s National Managing Director of the International Tax Practice, Brian Schwam at Brian.Schwam@wtpadvisors.com.