How did a California water's-edge group with different fiscal year-ends make or renew its election during the 1994 transition?

Plain-English summary

Legal Ruling 1995-4 explained a one-time 1994 transition problem for water's-edge groups whose members had different fiscal year-ends.

Each member had to elect on its original return for the income year being elected. The group election became effective at the beginning of the income year of the last member to file its election, and the historical 84-month period ran from that common effective date.

Pre-1994 contracts were being rescinded under special transition rules. Because members reached their first post-1993 income years on different dates, a group could need a short-period election and then a new 84-month election.

The governing rule

Regulation 25111-1(g) required every member with a different fiscal year to elect on its initial return for the relevant year. The effective date was the beginning of the income year of the last member to elect.

The prior regulation used the same structure for a 60-month period. The new historical rule used 84 months.

Revenue and Taxation Code section 25111.1 rescinded pre-1994 contracts as members moved through their transition years, while preserving those contracts until the last relevant income year ending in 1994 closed.

Situation 1: election desired January 1, 1994

Corporation A used a calendar year ending December 31, 1994. Corporation B used a fiscal year ending March 31, 1994. Neither had an existing election.

To start January 1, 1994:

• A had to make two elections with its 1994 return: one covering January 1 through March 31, 1994, and another for the 84-month period beginning April 1, 1994.

• B had to elect with both its returns for the years ending March 31, 1994 and March 31, 1995.

The first election became effective January 1 but was rescinded when B's income year ending in 1994 closed. The new 84-month period began April 1, 1994. If the corporations filed nonrenewal notices, it ran through March 31, 2001.

The ruling also said B owed the former election fee through its income year ending in 1994, while A did not owe the fee for its income year beginning January 1, 1994.

Situation 2: election desired April 1, 1994

The corporations had the same year-ends but wanted the election to begin April 1.

• A elected on its return for the year ending December 31, 1994.

• B elected on its return for the year ending March 31, 1995.

Because B's relevant income year began April 1, 1994, that became the common effective date. Before then, the group computed income on a worldwide basis.

Situation 3: an old election already existed

A and B had an election scheduled from April 1, 1992 through March 31, 1997 and wanted a new election beginning April 1, 1994.

The old contract was rescinded on March 31, 1994 under the transition statute. A then elected with its December 31, 1994 return, and B elected with its March 31, 1995 return.

A did not owe the former fee for January-March 1994, while B paid it for the period before April 1 because their income years began on different sides of the statutory repeal date.

What this means for you

Historical 1994 return research

Map each member's fiscal year, original-return date, existing contract period, and desired common effective date. A single group could require different election filings by member.

Groups with staggered year-ends

The last member's income-year start controlled the common effective date. The rule did not simply use the earliest filing or the calendar year.

Current compliance

Do not reuse these expired transition steps. They addressed rescission of contracts in existence on December 31, 1993 and a repealed fee.

Common questions

Q: Did every member have to file an election?

A: Yes, on its initial return for the income year covered.

Q: What determined the effective date?

A: The beginning of the income year of the last member to elect.

Q: Why did Situation 1 require two elections?

A: The January 1 election was cut off by the statutory rescission at the end of B's transition year, so a new 84-month period began April 1.

Q: Did the former election fee apply equally to A and B?

A: No. Their income years began on different dates relative to the January 1, 1994 repeal.

Q: Are these procedures still available?

A: No. They were specific to the 1994 transition.

Citations and references

• Cal. Rev. & Tax. Code §§ 25111.1 and 25115
• Cal. Code Regs., tit. 18, §§ 25111(g) and 25111-1(g)
• Stats. 1994, ch. 22, § 6

Source

• Landing page: California FTB Legal Rulings
• Official HTML: Legal Ruling 1995-4

Original ruling text

Home

Legal ruling 1995-4

STATE OF CALIFORNIA
Franchise Tax Board - Legal Division
PO Box 1468
Rancho Cordova CA 95812-1468

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FAX: (---) --------

July 20, 1995

1994 Water’s-Edge Elections When Members of the Group Have Different Fiscal Years

Issue

When the taxpayer members of a water's-edge group have different fiscal years, for which income year must each elect in order to obtain a proper election for the entire group as of a certain date in 1994?

Holding

The answer varies according to whether an election is already in place and according to the start date desired. Several fact patterns are described for illustrative purposes.

Law and Analysis

Title 18, Cal. Code of Regs. §25111-1(g), effective for income years beginning on or after January 1, 1994, provides:

In the case of taxpayers which are on different fiscal years, each member of the water's-edge group shall make the election upon its initial return for the income year for which the election is being made. The election shall become effective as of the beginning of the income year of the last member of the water's-edge group to file its return and election. The 84-month election period for each member of the group will run from the date that the election becomes effective, i.e., the beginning of the income year of the last member of the group to elect.

The above quoted language is identical to 18 Cal. Code of Regs. §25111(g), effective for income years beginning prior to January 1, 1994, except that §25111(g) refers to a 60-month rather than an 84-month election period.

Revenue and Taxation Code (RTC) §25111.1 provides:

(a) For any income year beginning on or after January 1, 1994, consideration for water's-edge contracts in existence as of that date is no longer provided for by law. Contracts entered into for income years beginning prior to January 1, 1994, are rescinded for any periods remaining on those contracts commencing on the first day of the taxpayer’s first income year that begins on or after January 1, 1994. Any fiscal year taxpayer whose contract is in effect as of December 31, 1993, shall continue to be bound by that contract until the close of its income year after January 1, 1994, and before December 31, 1994.

(b) Not withstanding subdivision (a), and except for the purposes of Section 25115, all taxpayers that are members of a water's-edge group consisting of taxpayers with different income years shall continue to be bound by the contract in effect as of December 31, 1993, until the income year beginning prior to January 1, 1994, and ending in 1994 for each of the taxpayer members of the water's-edge group has ended.

Further, RTC §25115(n) provides that RTC §25115 shall remain in effect until January 1, 1994, and as of that date is repealed. This was subsequently clarified by Stats. 1994, Chapter 22, Section 6, which provides that Section 25115 of the Revenue and Taxation Code, as that section read on December 31, 1993, applies to any income year beginning before January 1, 1994.

Analysis of Factural Situations

Situation 1. Corporations A and B are California taxpayers engaged in a unitary business. Corporation A's income year ends December 31, 1994, and Corporation B's income year ends March 31, 1994. Corporation A and B do not currently have a water's-edge election. To obtain a water's-edge election beginning on January 1, 1994, when must Corporations A and B elect water's-edge?

Answer: Corporation A must make two water's-edge elections with its return for income year ended December 31, 1994. The first covers the period from January 1, 1994, through March 31, 1994; the second covers the 84-month period beginning April 1, 1994. Corporation B must elect water's-edge with both its returns for income years ended March 31, 1994, and March 31, 1995.

Analysis: Title 18, Cal. Code of Regs. §25111 and §25111-1 each provides that in the case of taxpayers with different fiscal years, each must elect water's-edge with its original return and that the election becomes effective as of the beginning of the income year of the last member of the group to elect. To obtain an election beginning January 1, 1994, Corporation B must elect water's-edge with its return for the income year ended March 31, 1994. When Corporation A elects water's-edge with its return for the income year ended December 31, 1994, it becomes the last member of the group to file its return within B's income year. The election will become effective as of the beginning of A's income year, January 1, 1994, and will be rescinded as of the close of Corporation B's income year ending in 1994. (RTC §25111.1(b).) Prior to January 1, 1994, both A and B would compute their unitary taxable income on a worldwide basis.

Because contracts entered into for income years prior to January 1, 1994, are rescinded for any periods remaining on those contracts as of the first day of the taxpayer’s first income year beginning on or after January 1, 1994, Corporation B's election is rescinded as of April 1, 1994. Corporation B will owe the election fee through the end of its income year ended in 1994 because RTC §25115 remains in effect for taxpayers whose income years begin prior to January 1, 1994. Corporation A will not owe an election fee because RTC §25115(n) repeals RTC §25115 for income years beginning on or after January 1, 1994. Corporation B must reelect, for the new statutory period of 84 months, with its return filed for its income year ended March 31, 1995. Corporation A's election commencing January 1, 1994, also is rescinded as of the last day of B's income year ended in 1994, therefore it also must file an additional contract covering the period beginning on April 1, 1994, and continuing for the next 84 months. (RTC §25111.1(b).) If Corporations A and B file a Notice of Nonrenewal, their election will run through March 31, 2001.

Situation 2. Assume the same facts as Situation 1 except that the taxpayers want the election to begin on April 1, 1994.

Answer: To obtain a water's-edge election beginning on April 1, 1994, Corporation A must elect water's-edge with its return for the year ended December 31, 1994. Corporation B must elect water's-edge with its return for the income year ended March 31, 1995.

Analysis: Title 18, Cal. Code of Regs. §25111-1(g) provides that in the case of taxpayers which are on different fiscal years, each member shall make its election upon its initial return for the income year for which the election is being made. The election becomes effective as of the beginning of the income year of the last member of the water's-edge group to file its return and election, in this fact situation, April 1, 1994. Prior to April 1, 1994, both A and B would compute their unitary taxable income on a worldwide basis.

Situation 3. Corporations A and B are California taxpayers engaged in a unitary business. Corporation A's income year ends December 31, 1994, and Corporation B's income year ends March 31, 1994. Corporations A and B had elected water's-edge effective for the period April 1, 1992, through March 31, 1997. Corporations A and B want to obtain a water's-edge election commencing April 1, 1994.

Answer: Corporation A must elect water's-edge with its return for the income year ended December 31, 1994. Corporation B must elect water's-edge with its return for income year ended March 31, 1995.

Analysis: Corporations A and B's water's-edge election beginning April 1, 1992, and ending March 31, 1997, would be rescinded as of the last day of the last income year ending in 1994. (RTC §25111.1.) Therefore, each member must make a new election for its income year beginning in 1994. Both Corporations A and B would apply the rules applicable to water's-edge elections for income years beginning before 1994 until their contract is rescinded on March 31, 1994. However, Corporation A would not owe the water's-edge election fee for the period from January 1, 1994, to March 31, 1994, while Corporation B would pay the election fee for the period prior to April 1, 1994. (RTC §25111.1.)

Drafting Information

The principal author of this ruling is Claudia Land of the Franchise Tax Board Legal Division. For further information regarding this ruling, contact Ms. Land at the Manhattan District Office, 1212 Avenue of the Americas, 4th Floor, New York, NY 10036-1601, 212-704-9243, or Elaine Segarra of the Franchise Tax Board Compliance Division, P.O. Box 1779, Rancho Cordova, CA 95741-1779, 916-845-3940.

NOTE: ((---)) = Indicates obsolete information.

Last updated: 09/24/2025