When did a calendar-year taxpayer's California water's-edge election expire after it filed a nonrenewal notice one day before its October 15 anniversary date?

Plain-English summary

California Chief Counsel Ruling 2002-02 held that a calendar-year taxpayer's water's-edge election expired on December 31, 2004.

The taxpayer filed its nonrenewal notice on October 14, 1998, one day before its October 15 contract anniversary. That was too late to stop the 1998 automatic one-year addition because the statute required at least 90 days' advance notice.

The notice was, however, early enough to stop another addition on the next anniversary in 1999.

The taxpayer's contract

The taxpayer made a water's-edge election beginning January 1, 1994 and filed the contract with its timely extended California return.

Because the return was filed on extension, the contract anniversary date was October 15. The regulation fixed that anniversary date when the contract began and kept it the same in later years.

The taxpayer filed Form 1116, Notice of Nonrenewal of Water's-Edge Contract, on approximately October 14, 1998.

The rolling contract rule

Section 25111(a) provided an initial 84-month term and added another year on each anniversary unless the taxpayer filed a valid nonrenewal notice.

Section 25111(d) required written notice at least 90 days before the annual renewal date.

Without timely notice, the election automatically renewed under the rolling contract mechanism.

Why the notice affected two different anniversaries

October 14, 1998 was not 90 days before October 15, 1998. The notice therefore did not prevent the additional year that attached on the 1998 anniversary.

But October 14, 1998 was more than 90 days before October 15, 1999. The same notice prevented another year from being added at the next anniversary.

After the 1998 addition, the contract period was 84 months beginning with taxable year 1998. With no 1999 addition, that period ended December 31, 2004.

Holding

The water's-edge election expired December 31, 2004.

The ruling illustrates that a nonrenewal notice can be too late for the imminent anniversary while still being timely for the following anniversary.

What this means for you

Multinational corporations

Do not measure the 90-day period only from the calendar year-end. Identify the contract's fixed anniversary date from the original return's actual or extended due date.

Corporate tax departments

Maintain the original election, filing-extension record, contract anniversary calculation, each nonrenewal form, proof of delivery, and a year-by-year rolling expiration schedule.

Tax advisers

Calculate the effect of notice on each anniversary separately. Missing one cutoff may add a year even when the notice prevents later renewals.

Common questions

Q: Why was the anniversary date October 15?

A: The original contract was filed with an extended return, and the regulation used the later actual or extended return due date.

Q: Did the October 14 notice stop the October 15, 1998 renewal?

A: No. It was not filed at least 90 days in advance.

Q: Did the notice have any effect?

A: Yes. It was timely for the October 15, 1999 anniversary and prevented another year from being added then.

Q: What expiration date resulted?

A: December 31, 2004.

Q: Is that date a general rule for other taxpayers?

A: No. It followed this taxpayer's contract start, anniversary date, and notice timing.

Citations and references

• Cal. Rev. & Tax. Code § 25111(a) and (d)
• Cal. Code Regs., tit. 18, § 25111(b)(2) and (h)(2)(A), Example 1(b)

Source

• Landing page: Chief Counsel Ruling index
• Official ruling: Chief Counsel Ruling 2002-02

Original ruling text

STATE OF CALIFORNIA
KATHLEEN CONNELL
FRANCHISE TAX BOARD
Chair
Legal Branch
JOHN CHIANG
PO Box 2229
Member
Sacramento, CA 95812-2229
(916) 845-3307 Fax (916) 845-3191
B. TIMOTHY GAGE
Member

November 13, 2002
Chief Counsel Ruling
2002-02

RE: ****

Dear **:

This chief counsel ruling is issued in response to your **, request for advice as to the date upon which the water's-edge election of ***** will expire.

FACTS

** is a calendar-year taxpayer. It timely filed, on extension, its Form 100-WE, Water's-Edge Contract, making a water's-edge election beginning January 1, 1994. It filed its Form 1116, Notice of Nonrenewal of Water's-Edge Contract, on or about October 14, 1998, at the same time as it filed its Franchise Tax Return for the ***.

ISSUE

What is the expiration date of *** water's-edge election?

HOLDING

*** water's-edge election expires December 31, 2004.

DISCUSSION

Revenue & Taxation Code section 25111(a) provides that a water's-edge election shall be made on the original return for a year and shall be for an initial term of 84 months. It further provides that an additional year shall be added to the contract term on the anniversary date of the contract unless notice of nonrenewal is filed as prescribed in subdivision (d) of section 25111.

Subdivision (d) of 25111 provides that the taxpayer shall serve written notice of nonrenewal upon the Board at least 90 days in advance of the annual renewal

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November 13, 2002
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date. Unless that written notice is provided to the board, the election shall be considered renewed as provided in subdivision (a).

California Code of Regulations, title 18 (CCR), section 25111(b)(2) defines the anniversary date of the contract as the later of the due date of the return or the due date of the return as extended. The anniversary date is established when the taxpayer enters into the contract and remains the same for each subsequent year.

** made a water's-edge election on its return for ***
*. Thus, ** anniversary date is October 15. ** Notice of Nonrenewal was filed on October 14, 1998. Because the Notice of Nonrenewal was not filed at least 90 days in advance of the annual renewal date of October 15, 1998, another year was added to the contract, and the contract period as of that date was 84 months from the beginning of taxable year 1998. Because the Notice of Nonrenewal was filed more than 90 days before the next anniversary date, October 15, 1999, another year was not added to the contract period, and the contract will expire 84 months from the beginning of taxable year 1998, on December 31, 2004. (See CCR § 25111(h)(2)(A), Example 1(b).)

This letter is a legal ruling by the Franchise Tax Board's Chief Counsel within the meaning of Revenue and Taxation Code section 21012, subdivision (a)(1). Please attach a copy of this letter and your request to the back of the appropriate return(s) (if any) when filed or to your response to any notices or inquiries which might be issued.

Very truly yours,

Claudia K. Land
Tax Counsel IV