Header:
CALIFORNIA CODE OF REGULATIONS
TITLE 18. PUBLIC REVENUES
DIVISION 3. FRANCHISE TAX BOARD
CHAPTER 2.6. ADMINISTRATION OF FRANCHISE AND INCOME TAX
SUBCHAPTER 4. PAYMENTS AND ASSESSMENTS
ARTICLE 7. PENALTIES AND ADDITIONS TO TAX
Date:
08/31/2009
Document:
18 CCR 19141.6 (2011)
ยง 19141.6. Duty to Maintain and Make Available Records
(a) General.
(1) Duty to maintain and make available records; examination and copying. Each taxpayer which determines its income subject to tax pursuant to sections 25101 or 25110 of the Revenue and Taxation Code for income years beginning on or after January 1, 1994, is required to maintain and make available, upon request, records regarding the determination of the components of any unitary business of which it might be a part, the apportionment factors of such business, the classification of an item of income or loss as business or nonbusiness, and the attribution of income to either foreign jurisdictions of the United States for the taxpayer and related parties under section 882, or Subpart F, or other similar sections of the Internal Revenue Code. Records which are made available are subject to examination and copying pursuant to section 19504 of the Revenue and Taxation Code.
(2) Penalty for failure to maintain records. Failure to maintain such records shall subject the taxpayer to a monetary penalty of ten thousand dollars ($ 10,000) for each income year for which the failure occurs unless reasonable cause existed for the failure. If the failure continues for a period of more than 90 days after notice of the failure has been mailed, an additional penalty of ten thousand dollars $ 10,000) shall accrue for each month for each income year in which the failure continues or until the taxpayer demonstrates compliance with the record maintenance requirements for the income year in which the examination occurs and subsequent years to the satisfaction of the Franchise Tax Board. (See subsection (j) (4) (B), infra.) For income years beginning on or after January 1, 1994; and prior to December 31, 1995, such additional penalty shall not exceed fifty thousand dollars ($ 50,000) per income year if the failure is not willful.
(3) Additional powers of the Franchise Tax Board if a taxpayer does not make records available or is not authorized to act as the limited agent of its related parties. In addition to the monetary penalty described above, if a taxpayer fails to comply with a subpoena or subpoena duces tecum for the records which the taxpayer is required to maintain pursuant to section 19141.6 of the Revenue and Taxation Code, or if a taxpayer is not authorized to act as the limited agent of its related parties solely for purposes of applying section 19504 of the Revenue and Taxation Code, the Franchise Tax Board, in its sole discretion, and based upon its own knowledge or from other information which it obtains, may determine the components of the unitary business or businesses of which the taxpayer is a part, the apportionment factors of such business or businesses, the classification of any item of income or loss received by a component of such business or businesses as business or nonbusiness, and the correct amount of income attributable to the United States or foreign jurisdictions under section 882, Subpart F, or other similar sections of the Internal Revenue Code. The powers of the Franchise Tax Board under this authority do not allow it to disregard a properly made election to file under section 25110 of the Revenue and Taxation Code. (See subsection (1)(2) infra.)
(b) Definitions. For purposes of section 19141.6 of the Revenue and Taxation Code and this regulation--
(1) "Business income" is defined by subdivision (a) of section 25120 of the Revenue and Taxation Code and the regulations adopted pursuant thereto. Business income is subject to apportionment by formula amongst California and the other jurisdictions where the taxpayer has a taxable presence.
(2) A "combined report" means the calculations by which a unitary business apportions income on a geographic basis. In a combined report, the aggregate business income from all activities required to be included in the combined report computation (determined pursuant to either section 25101 or 25110 of the Revenue and Taxation Code) is apportioned to this state using the apportionment formula described in sections 25128 through 25137 of the Revenue and Taxation Code.
(3) A "combined report group" means all corporations or other entities whose income and apportionment factors are required to be considered pursuant to Chapter 17 of the Bank and Corporation Tax Law, determined pursuant to either section 25101 or section 25110 of the Revenue and Taxation Code, as the case may be, in computing the income of the particular taxpayer for the current year which is derived from or attributable to sources within this state.
(4) "Excluded entity" means a related party which is not included, for whatever reason, in the combined report used to determine the taxpayer's liability imposed by Part 10.2 and Part 11 of the Revenue and Taxation Code.
(5) "Foreign Related Party" means a corporation that is not created or organized under the laws of a state of the United States or the United States and which is a related party as defined in subsection (b)(9).
(6) "Maintained," except as otherwise provided in subsections (e) (1) (B)1., (e) (1) (B) 2. and (m), means retained and preserved either in original form, on microfilm or microfiche, or in electronic media. "Maintained," except as provided above, does not mean to create or establish records.
(7) "Nonbusiness income" is defined by subdivision (d) of section 25120 of the Revenue and Taxation Code and the regulations adopted pursuant thereto. Nonbusiness income is allocated to a specific jurisdiction.
(8) "Records" include any books, papers, or other data, on whatever medium recorded. A record will normally encompass all matters included within section 250 of the Evidence Code.
(9) "Related Party" means corporations that are related because one owns or controls directly or indirectly more than 50 percent of the voting stock of the other or because more than 50 percent of the voting stock of each is owned or controlled, directly or indirectly, by the same interests. A corporation need not be a taxpayer as defined in section 23037 of the Revenue and Taxation Code, and need not be included in any combined report filed pursuant to section 25101 or 25110 of the Revenue and Taxation Code, in order to be considered a related party. Corporations are considered related for purposes of this section if the over-50-percent-ownership or control standard is met at any time during the taxpayer's income year. If any corporation described above has more than a fifty-percent interest in the capital or profits of a domestic or foreign partnership or limited liability company (if such company is treated as a partnership for purposes of Part 11 of the Revenue and Taxation Code), such partnership or limited liability company shall be considered a related party for purposes of this section. A limited liability company which is not treated as a partnership for purposes of Part 10, Part 10.2 or Part 11 of the Revenue and Taxation Code shall be treated as a corporation for purposes of determining whether it is a "related party."
">(10) "Related party group" means the taxpayer and all related parties as defined in subsection (b) (9).
(11) A "unitary business" consists of those activities required to be included in a combined report pursuant to section 25101 of the Revenue and Taxation Code and the cases decided thereunder and reported in official published decisions of the courts of this state or the California State Board of Equalization, and in decisions of the United States Supreme Court construing the "unitary business principle." Activities constitute a "unitary business" if unity of ownership, unity of operation, and unity of use are present, or if the activities carried on within the state contribute to or are dependent upon the activities carried on without the state, or if there is a flow of value between the activities. (See Regulation section 25120(b) which sets forth certain indicia and standards for determining whether activities constitute a single trade or business and are therefore unitary.
(12) Except as otherwise provided in this regulation or otherwise defined by the Revenue and Taxation Code, the definitions contained in Evidence Code sections 110, 115, 210, 225, 255, 260 and 1271 shall apply in implementing this regulation.
(c) General record maintenance requirements.
(1) (A) Reserved.
(B) 1. Except as provided in subsections (c)(1) (B) 3. and (c) (1) (B) 4. of this regulation, a taxpayer that has made a proper election under section 25111 of the Revenue and Taxation Code needs to maintain records necessary to determine the components of the unitary business or businesses of which it is a part, the apportionment factors and the classification of any item of income or loss as business or nonbusiness, as described by paragraphs (1), (2) and (3) of subdivision (a) of section 19141.6 of the Revenue and Taxation Code, only with respect to those entities and activities required to be included in the combined report under section 25110 of the Revenue and Taxation Code.
2. In addition to the records required by subsection (c) (1) (B) 1., a taxpayer which has made a proper election under section 25111 of the Revenue and Taxation Code needs to maintain records sufficient to determine the proper attribution of income to either foreign jurisdictions or the United States for the taxpayer and other related parties. Records which a taxpayer is required to maintain for purposes of section 6038A of the Internal Revenue Code shall be sufficient for purposes of section 19141.6 of the Revenue and Taxation Code to the extent they relate to equivalent transfer pricing issues.
3. Except as provided in subsection (c) (1)(B) 4. of this regulation, those taxpayers which have made a proper election under section 25110 of the Revenue and Taxation Code need to maintain for entities not required to be included in the combined report pursuant to section 25110 of the Revenue and Taxation Code, the records required to be maintained for purposes of section 6038A of the Internal Revenue Code, and records relating to ownership and capital structure as required by subsection (e) (2) (E) of this regulation.
4. Notwithstanding the provisions of subsection (c)(1)(B) 3., a taxpayer shall be required to maintain some or all of the records detailed in subsections (e) (2) (A) through (e) (2) (H) for entities excluded pursuant to an election under section 25110 of the Revenue and Taxation Code if it is determined by the Franchise Tax Board, in its sole discretion, that those records are necessary to properly determine the components of the unitary business or businesses of which it is a part, the apportionment factors of such business, the classification of any item of income or loss as business or nonbusiness income, and the proper attribution of income to foreign jurisdictions or the United States under section 882, Subpart F, or other similar sections of the Internal Revenue Code. The taxpayer shall be notified of the duty to maintain, or to cause another to maintain, the record by letter signed by the Executive Officer, the Chief Counsel, or an Assistant Executive Officer of the Franchise Tax Board. The duty to maintain the records shall apply to the first income year of the taxpayer beginning after the date of the letter of notification and shall continue until the Franchise Tax Board notifies the taxpayer that it is no longer required to maintain these records with respect to excluded entities. A taxpayer that fails to maintain the records after notification shall be subject to the penalties provided in subdivision (c) and (d) of section 19141.6 of the Revenue and Taxation Code.
5. Examples
EXAMPLE 1: P, a United States corporation doing business in California, owns 100 percent of the stock of F, a corporation incorporated in Foreign Country X. F is the European distribution agent for tangible personal property manufactured in the United States by S. Pursuant to section 25111 of the Revenue and Taxation Code, P elected to report on a water's-edge basis and excluded F from its combined report. Because F is excluded from the combined report filed by P, records created by F that would be relevant to determining its apportionment factors and the correct classification of its income or loss as business or nonbusiness will generally not be subject to the record maintenance requirement of this section. If, however, on audit it is determined that the income and apportionment factors of F are required to be included in the combined report filed by P (because, for example, F is determined at audit to have Subpart F income as defined in section 952 of the Internal Revenue Code), all records relevant to determining the apportionment factors or the classification of income or loss as business or nonbusiness will be subject to the record maintenance requirements of this section. (See subsection (j) (2) for application of reasonable cause exception for avoiding penalties.)
EXAMPLE 2: F, a foreign incorporated entity, creates Sub1 and Sub2, wholly owned United States subsidiaries, in order to purchase tangible property from unrelated parties in the United States and resell such property to F. The property purchased by Sub1 and Sub2 is either used in F's business or resold to other unrelated parties by F. Sub1 is doing business in California. Sub2 is located in New York and is not a California taxpayer. The sole function of Sub1 and Sub2 is to act as a buyer for F. There are no transactions between Sub1 and Sub2. Because F is not required to be included in the combined report pursuant to section 25110 of the Revenue and Taxation Code, the records of F and Sub2 maintained for purposes of section 6038A of the Internal Revenue Code and the records required by subsection (e) (2) (E) of this regulation are subject to the record maintenance requirements of this section. In addition, F and Sub2 may be subject to additional record maintenance requirements as provided in subsection (c) (1) (B) 3. of this regulation.
EXAMPLE 3: RC, a California taxpayer, is owned 100 percent by F, a foreign country corporation. RC determines its California taxable income on the basis of a worldwide combined report. RC purchases tangible property from F for resale in the United States. Because RC files a worldwide combined report, any potential audit issue with respect to the treatment of these transactions under section 24725 of the Revenue and Taxation Code (section 482 of the Internal Revenue Code) is not relevant to determine the correct amount of any liability imposed by Part 10.2 and Part 11 of the Revenue and Taxation Code. Therefore, RC is not required to maintain the material profit and loss statements described in subsection (e) (2) (B). RC and F are required to maintain all other records specified in subsection (e) (2).
(C) 1. Under section 19141.6 of the Revenue and Taxation Code, the Franchise Tax Board may require any taxpayer or related party to render such statements, or keep such specific records as will enable the Franchise Tax Board to determine the correct liability for any of the taxes imposed by Part 10.2 and Part 11 of the Revenue and Taxation Code.
2. Such records must be permanent, accurate, and complete. They must clearly establish income, deductions and credits. Additionally, in appropriate cases, such records must include sufficient relevant cost data from which a profit and loss statement may be prepared for products or services transferred between members of a combined report of which the taxpayer is a part and any excluded entity.
3. Taxpayers which are subject to the record maintenance requirements of section 6038A of the Internal Revenue Code for equivalent profit and loss statement data shall meet the record maintenance requirements of section 19141.6 of the Revenue and Taxation Code to the extent such records relate to equivalent transfer pricing issues. In many circumstances, such equivalent profit and loss statement data, except as might otherwise be provided in this regulation, will not satisfy the requirement that a taxpayer maintain records regarding the determination of the components of any unitary business of which it might be a part, the apportionment factors of such business, or the classification of an item of income or loss as business or nonbusiness, or the proper attribution of income to foreign jurisdictions or the United States under section 882, Subpart F, or other similar provisions of the Internal Revenue Code (other than section 482).
(D) 1. These general record maintenance requirements include records of the taxpayer and all members of the combined report of which the taxpayer is a part, as well as records of any excluded entity that may be relevant to determine the correct California tax liability imposed by Part 10.2 and Part 11 of the Revenue and Taxation Code.
2. The relevance of such records with respect to transactions with any excluded entity shall be determined upon the basis of all the facts and circumstances.
3. Records which have been determined to be sufficient for purposes of section 6038A of the Internal Revenue Code shall be sufficient for purposes of section 19141.6 of the Revenue and Taxation Code if the issues to which they relate are equivalent. In many circumstances, records which have been determined to be sufficient for purposes of section 6038A of the Internal Revenue Code, except as might otherwise be provided in this regulation, will not satisfy the requirement that a taxpayer maintain records regarding the determination of the components of any unitary business of which it might be a part, the apportionment factors of such business, the classification of an item of income or loss as business or nonbusiness, or the proper attribution of income to foreign jurisdictions or the United States under section 882, Subpart F, or other similar provisions of the Internal Revenue Code (other than section 482).
(2) (A) Safe Harbor. A safe harbor for record maintenance is provided under subsection (e), which sets forth detailed guidance concerning the types of records to be maintained with respect to the correct preparation of a combined report and transactions with any excluded entity. The safe harbor consists of an all-inclusive list of record types that could be relevant to different taxpayers under a variety of facts and circumstances. It does not constitute a checklist of records that every taxpayer must maintain or that generally should be requested by the Franchise Tax Board. A taxpayer is required to maintain or cause another to maintain, and the Franchise Tax Board will request, only those records enumerated in the safe harbor that may be relevant to its business or industry for purposes of determining the components of any unitary business of which the taxpayer might be a part, the apportionment factors of such business, and the classification of any item of income or loss as business or nonbusiness; and determining the attribution of income to the United States or foreign jurisdictions under section 882, Subpart F, or other similar sections of the Internal Revenue Code, including material profit and loss statements that may be relevant for purposes of determining the proper attribution of income between the combined report group and an excluded entity. Accordingly, not every item listed in the safe harbor must be maintained by every taxpayer. A taxpayer that maintains or causes another person to maintain the records listed in subsection (e)(2) that may be relevant to the unitary business of which it is a part and to its transactions with any excluded entity will be deemed to have met the record maintenance requirements of section 19141.6 of the Revenue and Taxation Code.
(B) The ability to use reasonable approximations provided for in Regulation section 25137-6, Title 18 of the California Code of Regulations does not, however, mean that a taxpayer or related party is excused from the duty to maintain the records both of the data upon which such approximations were made and the manner in which they were made.
(d) Other record maintenance requirements.
(1) Indirectly related records.
(A) This subsection (d) applies to records that are directly or indirectly related to transactions between the combined report group of which the taxpayer is a part and any excluded entity to the extent they are relevant to determine the components of the unitary business of which the taxpayer is a part and the proper attribution of income to the United States or foreign jurisdictions. An example of records that are indirectly related to such transactions is records possessed by a foreign subsidiary of an excluded entity that documents the raw material or component costs of a product that is manufactured or assembled by the subsidiary and sold as a finished product by the excluded entity to the combined report group of which the taxpayer is a part.
(B) Records which a taxpayer is required to maintain for purposes of section 6038A of the Internal Revenue Code by the Internal Revenue Service shall be sufficient for purposes of section 19141.6 of the Revenue and Taxation Code to the extent they relate to equivalent transfer pricing issues. In many circumstances, records required to be maintained for purposes of section 6038A of the Internal Revenue Code, except as might otherwise be provided in this regulation, will not satisfy the requirement that a taxpayer maintain; records regarding the determination of the components of any unitary business of which it might be a part, the apportionment factors of such business, or the classification of an item of income or loss as business or nonbusiness.
(2) Foreign related party or third-party maintenance. If records that are required to be maintained under section 19141.6 of the Revenue and Taxation Code are in the control of a foreign related party, the records may be obtained or compiled (if not already in the possession of the foreign related party or already compiled) under the direction of the taxpayer and then maintained by the taxpayer, the foreign related party, or a third party. Thus, for example, a foreign related party may either itself maintain such records outside the United States or permit a third party to maintain such records, provided that the conditions described in subsection (g) are met. Upon a request for such records by the Franchise Tax Board, a foreign related party may make arrangements with the Franchise Tax Board to furnish the records directly, rather than through the taxpayer.
(3) (A) Translation of records. When records are provided pursuant to the Franchise Tax Board's request for production, any portion of such records, except as provided in subsections (B) and (C) of this subsection, must be translated into the English language within 30 days of a request for translation of that portion by the Franchise Tax Board.
(B) There is no requirement to translate records which have already been translated and for which the translation has been or is being provided, or to translate records the substance of which is reflected on ledger sheets or other summary accounting records.
(C) To the extent that
1. any requested records for which translations are requested are identical to records that have already been translated, an explanation of how such records are identical may be provided in lieu of translating the records, or
2. there are numerous records of a similar nature, translation of an appropriate sampling of the records may be offered in lieu of translating all of such records.
The taxpayer may, however, be required to translate all or part of the records described in subsections 1. and 2. if it is determined that such translation is necessary to perform or complete an audit.
(D) An extension of the 30-day time period provided for in subsection (d) (3) (A) of this regulation may be requested under subsection (g) (3). Appropriate extensions will be liberally granted for translation requests where circumstances warrant.
(E) If a good faith effort is made to accurately translate the requested records within the specified time period, the taxpayer will not be subject to the penalties provided for in section 19141.6 of the Revenue and Taxation Code.
(F) For purposes of subsection (e) (2) (A), a taxpayer which prepares audited consolidated financial statements, and which maintains supporting documentation which meets the financial accounting standards of the United States in all material respects, will not be required to translate records described in such subsection other than the audited consolidated financial statements with footnotes, consolidating workpapers by entity, and the summary consolidating data submitted to the parent corporation.
(e) Specific records to be maintained for safe harbor.
(1) In general.
(A) A taxpayer that maintains or causes another person to maintain the records specified in this subsection (e) that are relevant to the unitary business or businesses of which it is a part, and to the attribution of income to the United States or foreign jurisdictions under the provisions of the Internal Revenue Code, including the correct California tax treatment of its transactions with an excluded entity, will be deemed to have met the record maintenance requirements of this section. This subsection provides general descriptions of the categories of records to be maintained; the particular title or label applied by the taxpayer or a related party does not control. Functional equivalents of the specified records are acceptable. Record maintenance in accordance with this safe harbor, however, requires only the maintenance of the types of records described in subsection (e) (2) that are relevant to the determination of the components of any unitary business of which the taxpayer may be a part, the apportionment factors of such business included in the combined report group of which the taxpayer is a part, the classification of an item of income or loss includable in such combined report as business or nonbusiness, and the determination of the attribution of income to the United States or foreign jurisdictions under section 882, Subpart F, or other similar sections of the Internal Revenue Code. Additionally, to the extent the taxpayer establishes to the satisfaction of the Director, Multistate Audit Program Bureau or the Counsel, Multistate Tax Affairs, or a Franchise Tax Board employee designated by the Executive Officer that records in a particular category are not applicable to the above issues, maintenance of such records is not required under this subsection. Except as provided in subsections (e) (1) (B) and (C), record maintenance in accordance with subsections (c) through (g) generally does not require the original creation of records that are ordinarily not created by the taxpayer or any related parties in the ordinary course of business. If, however, a record that is actually created is described in subsection (e), it is to be maintained even if the record is not of the type ordinarily created by the taxpayer or any related parties.
(B) Exceptions.
1. Basic accounting records that are sufficient to document the California tax effects of transactions between related parties must be created and retained, if they do not otherwise exist, and,
2. Records sufficient to produce material profit and loss statements, as described in subsections (e) (2) (B) 1. and (e) (2) (B)1.c., that are relevant for determining the California tax treatment of transactions between the combined report group of which the taxpayer is a part and an excluded entity must be created if such records are not maintained in the ordinary course of business.
3. For purposes of subsection (e) (1) (B) 1., "basic accounting records" are of the type which the Internal Revenue Service would accept for purposes of section 6038A of the Internal Revenue Code.
(C) Storage, retrieval and retention procedures. All record retention procedures and policies in effect for each income year must be retained and provided upon request. All internal records storage and retrieval systems used for each income year must be retained. If an internal records storage and retrieval system is changed or revised and the data relating to prior years is revised to conform to the new system without loss of integrity, the prior systems may be discarded.
(2) Descriptions of categories of records to be maintained. The following records must be maintained in order to satisfy this subsection (e) to the extent they may be relevant to determine the correct treatment of an item or entity for purposes of section 25101 or 25110 of the Revenue and Taxation Code, or the correct California tax treatment of transactions between the combined report group of which the taxpayer is a part and an excluded entity.
(A) Financial and tax data.
1. General. This category includes relevant financial statements, workpapers, and books and records of original entry or their functional equivalents, however designated or labeled. Examples include, but are not limited to, general ledgers, sales journals, purchase order books, cash receipts books, cash disbursement books, canceled checks and bank statements, workpapers, sales contracts, purchase invoices, financial statements with footnotes and consolidating workpapers by entity, summary consolidating data submitted to the corporate parent of a group of a corporations, consolidating journal entries and explanations, cost accounting allocations and workpapers, budgets and cash flow projections, all federal tax filings with supporting schedules and workpapers, tax accrual workpapers, partnership tax returns, and financial statements for any partnership in which the taxpayer or any related party is a partner. Descriptive material to explicate entries in the foregoing types of records, such as a chart of accounts and accounting policy manuals, is included in this category.
2. Exceptions. In the case of a group of related entities which prepare and maintain audited consolidated financial statements, the maintenance of such financial statements with footnotes and consolidating workpapers by entity, the summary consolidating data submitted to the corporate parent by the affiliates, and all federal tax filings with supporting schedules and workpapers, including tax accrual workpapers will satisfy the duty to maintain the records described in this category unless the Franchise Tax Board can demonstrate that there is reason to believe that any of such records are incomplete or might not be accurate.
(B) 1. Profit and loss statements.
a. This category includes records from which the taxpayer can compile and supply, within a reasonable time, material profit and loss statements of the taxpayer and all related parties as defined in subsection (b) (9) that reflect profit or loss of the related party group attributable to U.S.-connected products or services as defined in subsection (e)(6) (A).
b. The determination of whether a profit and loss statement is material is made under the rules provided in subsection (e) (3).
c. The material profit and loss statements described herein must reflect the consolidated revenue and expenses of all members of the related party group. Thus, records in this category include the documentation of the cost of raw materials used by a related party to manufacture finished goods that are then sold to the taxpayer by that related party or another related party. The records should be kept under U.S. generally accepted accounting principles if they are ordinarily maintained in such manner; if not, an explanation of the material differences between the accounting principles used and U.S. generally accepted accounting principles must be made available. The statements need not reflect tracing of the actual costs borne by the related party group with respect to its U.S.-connected products or services; rather, any reasonable method may be used to allocate the related party group's worldwide costs to the revenues generated by the sales of those products or services. An explanation of the methods used to allocate specific items to a particular profit and loss statement must be made available. The explanation of material differences between accounting principles and the explanation of allocation methods must be sufficient to permit a comparison of the profitability of the related party group to that of the combined report group of which the taxpayer is a part that is attributable to the provision of U.S.-connected products or services.
2. Records which a taxpayer is required to maintain for purposes of section 6038A of the Internal Revenue Code by the Internal Revenue Service shall satisfy the requirements of section 19141.6 of the Revenue and Taxation Code to the extent they relate to equivalent transfer pricing issues. In many circumstances, records maintained for purposes of section 6038A of the Internal Revenue Code, except as might otherwise be provided in this regulation, will not satisfy the requirement that a taxpayer maintain records regarding the determination of the components of any unitary business of which it might be a part, the apportionment factors of such business or the classification of an item of income or loss as business or nonbusiness.
(C) Apportionment factor records.
1. This category includes books and records for each separate entity in the combined report group for which apportionment factor numerators and denominators, as defined in sections 25129 through 25137 of the Revenue and Taxation Code, are determined.
2. To the extent apportionment factor data is determined pursuant to the provisions of Regulation section 25137-6, Title 18, California Code of Regulations, which allows for the use of reasonable approximations, the records required to be maintained are those which properly reflect the data and the methods necessary to compute reasonable approximation of the apportionment factors.
3. Examples include, but are not limited to, fixed asset ledgers by location with details of historical cost by year of acquisition; inventory records by location, including details of inventory in-transit at year end; workpapers or other records detailing the asset valuation methodologies, including copies of any independent appraisals in support of asset values; rental and lease agreements with unrelated parties; payroll records, including payroll ledgers by location and California Forms DE-3; sales journals and invoices detailing sales of tangible personal property by shipping point origin and destination; and records documenting the reasonable fair market rental rate for property owned by unrelated parties and used at no charge, or rented for a nominal rate, by the taxpayer and any related party.
(D) Foreign country and third party filings.
1. This category includes financial and other documents filed with or prepared for any U.S. or foreign government entity, any independent commission, or any financial institution.
2. Examples include, but are not limited to, SEC filings; Federal Forms 940/941 and equivalent foreign jurisdiction employment tax return filings; PUC, FAA and similar reports detailing the location of movable assets; and records maintained pursuant to the Hart, Scott, Rodino Antitrust Improvement Act of 1976, 15 U.S.C. Section 1311 et seq.
(E) Ownership and capital structure records. This category includes:
1. records or charts showing the relationship between the taxpayer and all related parties;
2. the location, ownership, and entity status (for example, joint venture, partnership, branch, or division) of the taxpayer and all related parties; a worldwide organization chart;
3. records for non-publicly traded entities and closely held entities showing the names and relationships of all shareholders and their voting record;
4. analyses prepared for, or at the direction of, the Board of Directors or officers of the entity involved or the parent corporation regarding acquisitions, dispositions and reorganizations involving the taxpayer and any related party;
5. agreements regarding acquisitions, dispositions, and reorganizations involving the taxpayer and any related party; and
6. loan documents, agreements, and other documents relating to any transfer of the stock, or other incident of ownership, of the taxpayer or a related party that results in the change of status as a related party.
(F) Management structure.
1. This category includes records showing the management relationship, including any centralized or decentralized services, between the taxpayer and all related parties.
2. Examples include, but are not limited to, for each income year for the taxpayer and all related parties,
a. records detailing the corporate officers, directors, and top management;
b. records or charts showing the management structure;
c. job descriptions of each of the officers of the taxpayer and related parties;
d. minutes of the Board of Directors meetings and meetings of Committees of the Board of Directors or management, or Committees appointed by either, including all exhibits and agendas;
e. personnel files detailing transfers of officers, managers or key technical personnel among members of the related party group;
f. correspondence files of directors and officers and in-house memoranda directed to them, including electronic mail files to the extent reduced to written form or otherwise maintained in electronic media such as tape or disk;
g. employee newsletters subject to formal corporate retention restrictions;
h. manuals, guides, and handbooks providing employees instructions on corporate policy, procedures, training, and other corporate matters; and
i. internal audit reports.
(G) Records of sales transactions.
1. This category includes all records relevant to establishing the extent of, nature of, and appropriate price or rate for transactions between the combined report group of which the taxpayer is a part and any excluded entity to the extent they are relevant to determine either the components of the unitary business of which the taxpayer is a part or the attribution of income between the United States and; foreign jurisdictions.
2. Examples include, but are not limited to,
a. records related to transactions involving the same or similar products or services entered into by any member of the combined report group or an excluded entity with related and unrelated parties;
b. shipping and export records;
c. commission agreements;
d. records relating to production or assembly facilities;
e. third-party and intercompany purchase invoices;
f. manuals, specifications, and similar records relating to or describing the performance of functions conducted at particular locations;
g. intercompany correspondence discussing any instructions or assistance relating to such transactions provided to any member of the combined report group of which the taxpayer is a part by any excluded entity (or vice versa);
h. intercompany and intracompany correspondence concerning the price or the negotiation of the price used in such transactions;
i. records related to the value and ownership of intangibles used or developed by any member of the combined report group of which the taxpayer is a part or any excluded entity;
j. records relating to cost of goods sold and other expenses; and
k. records related to direct and indirect selling, and general and administrative expenses (for example, relating to advertising, sales promotions, or warranties).
3. Records which a taxpayer is required to maintain for purposes of section 6038A of the Internal Revenue Code by the Internal Revenue Service shall satisfy the requirements of section 19141.6 of the Revenue and Taxation Code to the extent they relate, to equivalent transfer pricing issues. In many circumstances, records maintained for purpose of section 6038A of the Internal Revenue Code, except as might otherwise be provided in this regulation, will not limit the duty of a taxpayer to maintain records regarding the determination of the components of any unitary business of which it might be a part, the apportionment factors of such business, or the classification of an item of income or loss as business or nonbusiness.
(H) Records of loans, services, and other non-sales transactions. This category includes relevant records relating to:
1. loans (including all deposits by an excluded entity or member of the combined report group of which the taxpayer is a part with an unrelated party and a subsequent loan by that unrelated party to an excluded entity or member of the combined report group of which the taxpayer is a part that is in substance a direct loan between a member of such combined report group of which the taxpayer is a part and an excluded entity);
2. guarantees by an excluded entity of debts of any member of the combined report group of which the taxpayer is a part, and vice versa;
3. hedging arrangements or other risk shifting or currency risk shifting arrangements involving any member of the combined report group of which the taxpayer is a part and any excluded entity;
4. security agreements between any member of the combined report group of which the taxpayer is a part and any excluded entity;
5. research and development expense allocations between any excluded entity and any member of the combined report group of which the taxpayer is a part;
6. research and development project logs, including details regarding the entities involved in the project and the general purpose of the project;
7. service and other operating agreements and transactions between any excluded entity and any member of the combined report group of which the taxpayer is a part, including, for example, a description of the allocation of charges for management services, with supporting records such as time reporting, telephone, or travel records, or allocation studies;
8. common advertising/marketing agreements, brochures, product catalogs, and other similar records;
9. agreements or other records for shared use of facilities or equipment between or among any related parties;
10. import and export transactions between any member of the combined report group of which the taxpayer is a part and any excluded entity;
11. the registration of patents, trademarks, copyrights and other similar property with respect to transactions between any member of the combined report group of which the taxpayer is a part and any excluded entity; and
12. records regarding lawsuits in foreign countries or the United States that relate to such transactions between any member of the combined report group of which the taxpayer is a part and any excluded entity (for example, product liability suits for U.S. products).
(3) Material profit and loss statements.
(A) For purposes of subsection (e) (2) (B), the determination of whether a profit and loss statement is material will be made according to the following rules.
1. An agreement between the taxpayer and the Director, Multistate Audit Program Bureau or Counsel, Multistate Tax Affairs, or a Franchise Tax Board employee desingated by the Executive Officer, as described in subsection (f), may identify material profit and loss statements of the related party group and describe the items to be included in any profit and loss statements for which records are to be maintained to satisfy the requirements of subsection (e) (2) (B).
2. In the absence of such an agreement, a profit and loss statement will be material if it meets either of the following tests:
a. the existing records test described in subsection (e) (4), or
b. the significant industry segment test described in subsection (e) (5).
(B) An agreement entered into with the Internal Revenue Service pursuant to the authority granted by section 6038A of the Internal Revenue Code shall be accepted by the Franchise Tax Board to the extent equivalent transfer pricing issues are involved.
(4) Existing records test. A profit and loss statement is material under the existing records test described herein if any member of the related party group creates or compiles such statement in the course of its business operations and the statement reflects the profit or loss of the related party group attributable to the provision of U.S.-connected products or services (regardless of whether the profit and loss attributable to U.S.-connected products or services is shown separately or included within the calculation of aggregate figures on the statement). For example, a profit and loss statement is described herein if it was produced for internal accounting or management purposes, or for disclosure to shareholders, financial institutions, government agencies, or any other persons. Such existing statements and the records from which they were compiled (to the extent such records relate to profit and loss attributable to U.S.-connected products or services) are subject to the record maintenance requirements described in subsection (e)(2) (B).
(5) Significant industry segment test.
(A) In general. A profit and loss statement is material under the significant industry segment test described herein if--
1. The statement reflects the profit or loss of the related party group attributable to the group's provision of U.S.-connected products or services within a single industry segment (ass defined in subsection (e)(6) (B);
2. The worldwide gross revenue attributable to such industry segment is 10 percent or more of the worldwide gross revenue attributable to the related party group's combined industry segments; and
3. The amount of gross revenue earned by the related party group from the provision of U.S.-connected products or services within such industry segment is $ 25 million or more in the income year.
(B) Form of the statements. Profit and loss statements compiled for the related party group's provision of U.S.-connected products or services in each significant industry segment must reflect revenues and expenses attributable to the operations in such segment by all members of the related party group. Statements may show each related party's revenues and expenses separately, or may be prepared in a consolidated format. Any reasonable method may be used to allocate the group's worldwide costs within the industry segment to the U.S.-connected products or services within that segment. An explanation of the methods used to prepare consolidated statements and to allocate specific items to a particular profit and loss statement must be made available, and the records from which the consolidations and allocations were prepared must be maintained.
(C) Special rule for component sales. Where the U.S.-connected products or services consist of components that are incorporated into other products or services before sale to customers, the portion of the total gross revenue derived from sales of the finished products or services attributable to the components may be determined on the basis of relative costs of production. Thus, where relevant for determining whether the $ 25 million threshold in subsection (e) (5) (A) 3. has been met, the amount of gross revenue derived by the related party group from the provision of the finished products or services may be reduced by multiplying it by a fraction, the numerator of which is the costs of production of the related party group attributable to the component products or services that constitute U.S.-connected products or services and the denominator of which is the costs of production of the related party group attributable to the finished products in which such components are incorporated.
(D) Level of specificity required. In applying the significant industry segment test of this subsection (e) (5), groups of related products and services must be chosen to provide a reasonable level of specificity that results in the greatest number of separate significant industry segments in comparison to other possible classifications. This determination must be made on the basis of the particular facts presented by the operations of the related party group. The following rules, however, provide general guidelines for making such classifications. First, the related party group's operations that involve the provision of U.S.-connected products should be grouped into product lines. The rules of this subsection (e) (5) should then be applied to determine if any such product line would, standing alone, constitute a significant industry segment when compared to the related party group's operations as a whole. Any significant industry segments determined at the level of product lines should be further segregated, and tested for significant industry segments, at the level of separate products. Finally, any significant industry segments determined at the level of separate products should be segregated, and tested for significant industry segments, at the level of separate models. Similar principles should be applied in classifying and testing types of services. A profit and loss statement reflecting the related party group's provision of any product or service (or group of products or services as classified under these rules) that constitute a significant industry segment will be considered material for purposes of this subsection (e) (5). For definitions of the terms "product," "related products or services," "model," and "product line," see subsection (e) (6).
(6) Definitions. The following definitions apply for purposes of subsections (e) (2) (B) and (e) (5).
(A) U.S.-connected products or services. The term "U.S.-connected products or services" means products or services that are imported to or exported from the United States by transfers between the unitary business of which the taxpayer is a member and an excluded entity.
(B) Industry segment. An industry segment is a segment of the related party group's combined operations that is engaged in providing a product or service or a group of related products or services (as defined in subsection (e) (6) (G) primarily to customers that are not members of the related party group.
(C) Gross revenue of an industry segment. Gross revenue of an industry segment includes receipts (prior to reduction for cost of goods sold) both from sales to customers outside of the related party group and from sales or transfers to other industry segments within the related party group (but does not include sales or transfers between members of the related party group within the same industry segment). Interest from sources outside the related party group and interest earned on trade receivables between industry segments is included in gross revenue if the asset on which the interest is earned is included among the industry segment's identifiable assets, but interest earned on advances or loans to other industry segments is not included.
(D) Identifiable assets of an industry segment. The identifiable assets of an industry segment are those tangible and intangible assets of the related party group that are used by the industry segment, including assets that are used exclusively by that industry segment and an allocated portion of assets used jointly by two or more industry segments. The value of an identifiable asset may be determined using any reasonable method (such as book value or fair market value) applied consistently. Any allocation of assets among industry segments must be made on a reasonable basis, and a description of such basis must be provided. Assets of an industry segment that transfers products or services to another industry segment shall not be allocated to the receiving segment. Assets that represent part of the related party group's investment in an industry segment, such as goodwill, shall be included in the industry segment's identifiable assets. Assets maintained for general corporate purposes (that is, those not used in the operations of any industry segment) shall not be allocated to industry segments.
(E) Operating profit of an industry segment. The operating profit of an industry segment is its gross revenue (as defined in subsection (e) (6) (C)) minus all operating expenses. None of the following shall be added or deducted in computing the operating profit of an industry segment: revenue earned at the corporate level and not derived from the operations of any industry segment; general corporate expenses; interest expense; domestic and foreign income taxes; and other extraordinary items not reflecting the ongoing business operations of the industry segment.
(F) Product. The term "product" means an item of property (or combination of, component parts) that is the result of a production process, is primarily sold to unrelated parties (or incorporated by the related party group into other products sold to unrelated parties), and performs a specific function.
(G) Related products or services. The term "related products or services" means groupings of products and types of services that reflect reasonable accounting, marketing, or other business practices within the industries in which the related party group operates.
(H) Model. The term "model" means a classification of products that incorporate particular components, options, styles, and any other unique features resulting in product differentiation. Examples of models are electronic products that are sold or accounted for under a single model number and automobiles sold under a single model name.
(I) Product line. The term "product line" means a group of products that are aggregated into a single classification for accounting, marketing, or other business purposes. Examples of product lines are groups of products that perform similar functions; products that are marketed under the same trade names, brand names, or trademarks; and products that are related economically (that is, having similar rates of profitability, similar degrees of risk, and similar opportunities for growth).
(f) Agreements regarding record maintenance.
(1) In general. The Director, Multistate Audit Program Bureau or Counsel, Multistate Tax Affairs, or a Franchise Tax Board employee designated by the Executive Officer may negotiate and enter into an agreement with the taxpayer that establishes the records the taxpayer must maintain or cause another to maintain, how and by whom the records must be maintained, and the period of retention for the records in order to satisfy the taxpayer's obligations under this section.
(2) Content of agreement.
(A) The agreement may include provisions that vary the rules contained in these regulations relating to the authorization of agent requirement (subsection (n)), the record maintenance requirements (subsections (c) through (g)), and the production (subsections (g) (2) and (3)) and translation (subsection (d) (3)) time periods.
(B) In addition, an agreement may include provisions for the calculation of reasonable approximations for purposes of Regulation 25137-6, Title 18, California Code of Regulations, and the records necessary to support such calculations
(C) The Director, Multistate Audit Program Bureau or Counsel, Multistate Tax Affairs, or a Franchise Tax Board employee designated by the Executive Officer shall generally require a taxpayer to maintain or cause another to maintain only those records specified under the safe harbor provisions of subsection (e) that permit an adequate audit of the franchise or income tax liability of the taxpayer and to provide such authorizations of agent that permit adequate access to such records. In most instances, required record maintenance for a particular taxpayer under a negotiated agreement will be less than the broad range of records described under the safe harbor provisions. For example, to the extent specific items such as apportionment factor data are determined pursuant to the provisions of Regulation section 25137-6 of Title 18 of the California Code of Regulations, which allows for the use of reasonable approximations, a taxpayer may negotiate a record maintenance agreement that limits the records required to be maintained with respect to those items to only those records which the Director, Multistate Audit Program Bureau or Counsel, Multistate Tax Affairs, or a Franchise Tax Board employee designated by the Executive Officer agree are relevant and necessary to enable the determination of reasonable approximations.
(D) A provision specifying the effective date and the expiration date of the agreement that may vary the effective date of the regulations may be included.
(E) A taxpayer is entitled to rely upon the agreement to the extent therein provided, or until it is notified that the agreement is being terminated. Termination by notification shall only apply with respect to income years beginning subsequent to the date of notification.
(3) Circumstances of agreement. The Director, Multistate Audit Program Bureau or Counsel, Multistate Tax Affairs, or a Franchise Tax Board employee designated by the Executive Officer generally will enter into an agreement under this subsection (f) upon written request by the taxpayer when it is believed that the Franchise Tax Board has or can obtain sufficient knowledge of the business or industry of the unitary business of which the taxpayer is a part to limit the record maintenance requirement to particular records.
(4) Federal agreement on transfer pricing issues. If the Internal Revenue Service has entered into an agreement pursuant to the authority granted to it under section 6038A of the Internal Revenue Code with respect to record maintenance requirements involving transfer pricing issues which are equivalent to issues presented to the Franchise Tax Board, such an agreement shall be accepted by the Franchise Tax Board. In most circumstances, such an agreement with the Internal Revenue Service, except as might otherwise be provided in this regulation, shall not limit the duty of a taxpayer to maintain records regarding the determination of the components of any unitary business of which it might be a part, the apportionment factors of such business, or the classification of an item of income or loss as business or nonbusiness.
(g) United States maintenance of records.
(1) General rule. Records that must be maintained under this section must be maintained within the United States, unless the conditions described in subsection (g) (2) are met.
(2) Non-U.S. maintenance requirements. A taxpayer may maintain or cause another to maintain outside the United States records not ordinarily maintained in the United States but required to be maintained in the United States under this section.
(A) However, the taxpayer must either:
1. Deliver to the Franchise Tax Board the original records (or duplicates) requested within 60 days of the request by the Franchise Tax Board for such records and provide translations, subject to the provisions of subsection (d) (3) of this regulation, of such records within 30 days of a request for translations of specific records; or
2. Within 60 days of the request of the Franchise Tax Board for such records, move the original records (or duplicates) requested to the United States, provide the Franchise Tax Board with an index to the requested records, the name and address of a custodian located within the United States having control over the records, and the address where the records are located. The taxpayer shall continue to maintain the records within the United States throughout the period of retention described in subsection (i). (For subpoena or subpoena duces tecum procedures with respect to records that have been moved to the United States, see sections 19141.6(d) (2) (A) and 19504 of the Revenue and Taxation Code.)
(B) With respect to any material profit and loss statements required to be created (either under subsection (e) or under an agreement with the Director, Multistate Audit Program Bureau Counsel, Multistate Tax Affairs, or a Franchise Tax Board employee designated by the Executive Officer, unless otherwise specified, "120 days shall be substituted for "60 days" in subsection (g) (2), and labels and text with respect to such statements shall be in the English language.
(3) Scheduled production for high volume or other reasons. Upon a written request, for good cause shown, the Director, Multistate Audit Program Bureau or Counsel, Multistate Tax Affairs, or a Franchise Tax Board employee designated by the Executive Officer may grant an extension of the time for the production or translation of the requested records. Such requests should be made within 30 days of the request for records by the Franchise Tax Board. If an extension is needed because of the volume of records requested or the amount of translation requested, the Director, Multistate Audit Program Bureau or Counsel, Multistate Tax Affairs, or a Franchise Tax Board employee designated by the Executive Officer may allow production or translation to be scheduled over a period of time so that not all records need be produced or translated at the same time.
(4) Required U.S. maintenance. The Director, Multistate Audit Program Bureau or Counsel, Multistate Tax Affairs, or a Franchise Tax Board employee designated by the Executive Officer, with the concurrence of the Chief Counsel of the Franchise Tax Board, may require, for cause, the maintenance within the United States of any records specified in subsection (e). Such a requirement will be imposed only if there exists a clear pattern of failure to maintain or timely produce the required records. The assessment of a monetary penalty under section 19141.6(c) of the Revenue and Taxation Code and this regulation for failure to maintain records is not necessarily sufficient to require the; maintenance of records within the United States.
(h) Examination and copying of records.
(1) Records shall be sorted and labeled to correspond to the categories of records which have been requested or shall be produced in the form in which they are kept in the usual course of business.
(2) Records which are compiled, stored or maintained on computers or electronic media may be provided in either printed or electronic form. If records are provided in electronic form, a taxpayer must comply with the procedures specified in Revenue Procedure 91-59, Cumulative Bulletin 1991-2 841, and provide such records on a medium which includes both the data and the program which the party maintaining the record uses to compile and analyze the data and instructions for the use of such program.
(3) Records shall be produced for examination and copying at the District Office of the Franchise Tax Board which is performing the audit of the taxpayer, at the headquarters of the taxpayer, or at any other location within the United States which is convenient to both the taxpayer and the Franchise Tax Board. Production will occur during normal business hours unless the parties mutually agree to production at other hours.
(4) Large record productions.
(A) For large record productions, a taxpayer may request reimbursement for the cost of copying records, at a rate not to exceed the cost at which the Franchise Tax Board can contract for the services of a third-party copying service, if the Franchise Tax Board will not copy, or arrange for the copying of, the records at the place of delivery.
(B) A large record production is a record production involving the copying of in excess of 1,000 pages of records provided that the auditor for the Franchise Tax Board has been allowed to examine all of the records and designate those records which are to be copied.
(5) Records which are copied for purposes of complying with the United States maintenance or records required under the provisions of subsection (g) of this regulation do not constitute a large record production.
(i) Period of retention.
(1) Except as provided in subsection (4) of this subsection, records for any income year shall be retained for the longer of:
(A) the period of time in which the taxpayer's income or franchise tax liability to this state may be subject to adjustment, including all periods in which additional income or franchise taxes may be assessed, but not to exceed eight years from the due date or extended due date of the return,
(B) the period of time during which a protest pursuant to section 19041 of the Revenue and Taxation Code with respect to such income year is pending,
(C) the period of time during which an appeal to the State Board of Equalization pursuant to sections 19045 through 19048 of the Revenue and Taxation Code with respect to such income year is pending, and
(D) the period of time during which a lawsuit for the refund of franchise or income taxes paid with respect to such income year is pending in the courts of this state or of the United States.
(2) The period of time during which a matter is pending includes the period of time between when the action is taken on a matter and when that action is final.
(3) Examples.
(A) Taxpayer A files its return for the income year ended December 31, 1994, on October 17, 1995. A does not execute any waiver of the statute of limitations with either the Franchise Tax Board or the Internal Revenue Service. The period of time for which A must maintain the required records ends on October 17, 1999.
(B) Taxpayer B files its return for the income year ended December 31, 1994, on October 17, 1995. B executes a waiver of the statute of limitations with the Internal Revenue Service which extends the date for assessing California franchise or income tax until December 15, 2004. The period of time for which B must maintain the required records ends on October 17, 2003, eight years from the extended due date of the return.
(C) Taxpayer C files its return for the income year ended December 31, 1994, on October 17, 1995. C does not execute any waiver of the statute of limitations with either the Franchise Tax Board or the Internal Revenue Service. The Franchise Tax Board issues a timely notice of proposed assessment for the income year which C protests. After the protest is denied on November 15, 2000, C files an appeal with the State Board of Equalization and then pays the tax, converting the appeal from a denial of a protest to a claim for refund. The State Board of Equalization decides C's appeal on December 15, 2004. C files a timely petition for rehearing which is acted upon on June 15, 2005. C does not file a suit for refund from the denial of its appeal. The period of time for which C must maintain the required records ends on September 14, 2005, the day after the time period in which it could file a suit for refund pursuant to section 19384 of the Revenue and Taxation Code.
(4) A taxpayer need not maintain records described in subdivision (a) of section 19141.6 of the Revenue and Taxation Code for any period beyond that specified in subsection (i) (1) (A) of this regulation, to the extent that the records are not relevant to the subject matter of a dispute existing at the end of that period as evidenced by a pending protest, appeal, claim for refund, or suit for refund filed by the taxpayer or any member of the combined report group of which it is a member.
(j) Monetary penalty.
(1) Imposition of monetary penalty.
(A) In general. If a taxpayer fails to maintain or cause another to maintain records as required by this regulation, or, in the case of records maintained outside the United States, fails to meet the non-U.S. record maintenance requirements within the applicable time prescribed in subsection (g), a penalty of $ 10,000 shall be imposed for each income year with respect to which such failure occurs, subject to the approval of a majority of the Franchise Tax Board, itself.
(B) Calculation of monetary penalty. If a taxpayer fails to maintain or cause another to maintain records as required by this regulation for multiple related parties, the monetary penalty may be imposed for each failure to maintain records with respect to each related party. The monetary penalty, however, shall be imposed on a taxpayer only once for an income year with respect to each related party for a failure to maintain or cause another to maintain records, or for a failure to comply with the non-U.S. maintenance requirements described in subsection (g). Thus, unless such failures continue after notification as described in subsection (j) (4) (A), the maximum penalty under subsection (j) with respect to each related party for all such failures in an income year is $ 10,000. Each member of a unitary business that is a taxpayer shall be jointly and severally liable for any monetary penalty that may be imposed under this section.
(2) Reasonable cause.
(A) In general. Certain failures, including not maintaining or causing another to maintain records as required by this regulation, and not complying with the non-U.S. maintenance requirements described in subsection (g), may be excused for reasonable cause. If an affirmative showing is made that the taxpayer acted in good faith and there is reasonable cause for a failure; that results in the imposition of the monetary penalty, the period during which reasonable cause exists shall be treated as ending not earlier than the last day on which reasonable cause existed for any such failure. Additionally, the beginning of the 90-day period after mailing of a notice by the Franchise Tax Board of a failure described in subsection (j) (4) (A) shall be treated as not earlier than the last day on which reasonable cause existed.
(B) Affirmative showing required.
1. In general. To show that reasonable cause exists for purposes of subsection (j) (2) (A), the taxpayer must make an affirmative showing of all the facts alleged as reasonable cause for the failure in a written statement containing a declaration that it is made under penalties of perjury. The statement must be filed with the Director, Multistate Audit Program Bureau or Counsel, Multistate Tax Affairs, or a Franchise Tax Board employee designated by the Executive Officer. The Director, Multistate Audit Program Bureau or Counsel, Multistate Tax Affairs, or a Franchise Tax Board employee designated by the Executive Officer, as appropriate, shall determine whether the failure was due to reasonable cause, and if so, the period of time for which reasonable cause existed. If records have been maintained as required by subsections (c) through (g), except for an omission of, or error with respect to, some of the records required or a record to be maintained, the omission or error shall not constitute a failure for purposes of section 19141.6(c) of the Revenue and Taxation Code if the taxpayer establishes to the satisfaction of the Director, Multistate Audit Program Bureau or Counsel, Multistate Tax Affairs, or a Franchise Tax Board employee designated by the Executive Officer that it has substantially complied with the requirement to maintain records under section 19141.6 of the Revenue and Taxation Code and this regulation.
2. Small corporations. The Director, Multistate Audit Program Bureau or Counsel, Multistate Tax Affairs, or a Franchise Tax Board employee designated by the Executive Officer shall apply the reasonable cause exception liberally in the case of a small corporation that had no knowledge of the requirements imposed by section 19141.6 of the Revenue and Taxation Code, has limited presence in and contact with California, and promptly and fully complies with all requests by the Director, Multistate Audit Program Bureau or Counsel, Multistate Tax Affairs, or a Franchise Tax Board employee designated by the Executive Officer to furnish books, records, or other relevant materials. A small bank or corporation is an entity whose gross receipts or net assets for an income year are $ 50,000,000 or less.
3. Facts and circumstances taken into account. The determination of whether a taxpayer acted with reasonable cause and in good faith is made on a case-by-case basis, taking into account all pertinent facts and circumstances, including the actions of related parties. Circumstances that may indicate reasonable cause and good faith include an honest misunderstanding of fact or law that is reasonable in light of the experience and knowledge of the taxpayer. Isolated computational errors or errors in transcription generally are not inconsistent with reasonable cause and good faith. Reliance upon an information return or on the advice of a professional (such as an attorney or accountant) does not necessarily demonstrate reasonable cause and good faith. Similarly, reasonable cause and good faith is not necessarily indicated by reliance on facts that, unknown to the taxpayer, are incorrect. Reliance on an information return, professional advice or other facts, however, may constitute reasonable cause and good faith if, under all the circumstances, the reliance was reasonable.
4. Determinations of members of a combined report group. In determining whether reasonable cause exists for the failure to maintain records with respect to the determination of the combined report group of which the taxpayer is a member, the apportionment factors of such group and the business or nonbusiness income characterization of the receipts of such group, due regard will be given to the facts and circumstances nature of the determination. A consistent filing position from year to year, especially where the taxpayer's filing position has been reviewed and accepted at audit or subsequently, shall be a factor to consider in determining reasonable cause.
5. Reasonable cause includes, but is not limited to, destruction as a result of theft, riot, war or by an act of God, such as earthquake, fire, flood, tsunami, or similar natural disaster.
(C) Review of finding of no reasonable cause. A taxpayer, in addition to the right to seek a review of whether reasonable cause existed through administrative or judicial proceedings, may file a petition for review of the determination with the Franchise Tax Board, itself, not more than 60 days after it has been notified by either the Director of the Multistate Audit Program Bureau or the Counsel, Multistate Tax Affairs, or a Franchise Tax Board employee designated by the Executive Officer that reasonable cause did not exist for its failure to maintain records.
(3) Failure to maintain records or to cause another to maintain records. A failure to maintain records or to cause another to maintain records is determined by the Director, Multistate Audit Program Bureau or Counsel, Multistate Tax Affairs, or a Franchise Tax Board employee designated by the Executive Officer upon the basis of the taxpayer's and its related parties' overall compliance (including compliance with the non-U.S. maintenance requirements under subsection (g) (2)) with the record maintenance requirements. It is not an item-by-item determination. Thus, for example, a failure to maintain a single or small number of items may not constitute a failure for purposes of section 19141.6(c) of the Revenue and Taxation Code, unless the item or items are essential to the correct determination of the components of the unitary business of which the taxpayer is a part, the apportionment factors of such business, the classification of an item of income or loss as business or nonbusiness, or the determination of the attribution of income to the United States or foreign jurisdictions under section 882, Subpart F, or other similar sections of the Internal Revenue Code. The Director, Multistate Audit Program Bureau or Counsel, Multistate Tax Affairs, or a Franchise Tax Board employee designated by the Executive Officer shall notify the taxpayer in writing of any determination that it has failed to comply or failed to cause another to comply with the record maintenance requirement.
(4) Increase in penalty where failure continues after notification.
(A) In general. If any failure described in section 19141.6 of the Revenue and Taxation Code continues for more than 90 days after the day on which the Director, Multistate Audit Program Bureau or Counsel, Multistate Tax Affairs, or a Franchise Tax Board employee designated by the Executive Officer mails notice of the failure to the taxpayer, the taxpayer shall pay a penalty (in addition to the penalty described in subsection (j) (1)) of $ 10,000 with respect to each related party for which a failure occurs for each 30-day period during which the failure continues after the expiration of the 90-day period. Any uncompleted fraction of a 30-day period shall count as a 30-day period for purposes of this subsection (j) (4).
(B) Cessation of accrual. The monetary penalty will cease further accrual if the taxpayer demonstrates compliance with respect to the maintenance of records (in the case of a failure to maintain records) for the income year in which the examination occurs and subsequent years to the satisfaction of the Director, Multistate Audit Program Bureau or Counsel, Multistate Tax Affairs, or a Franchise Tax Board employee designated by the Executive Officer. The monetary penalty also will cease to accrue if requested records, kept outside the United States under the requirements of subsection (g)(2) and not produced within the time specified, are produced or moved to the United States under the rules of subsection (g)(2)(A)2.
(C) Imposition of accrued penalties. A monetary penalty which has accrued under this section may be imposed at any time after it has accrued as long as the taxpayer's return for the income year remains subject to the assessment of additional taxes.
(D) Limitation on amount of accrual. For income years beginning on or after January 1, 1994 and before December 31, 1995, the additional penalty imposed by subdivision (c) (2) of section 19141.6 of the Revenue and Taxation Code for failure to maintain or failure to cause another to maintain records as required by subdivision (a) of section 19141.6 of the Revenue and Taxation Code shall not exceed a maximum of fifty thousand dollars ($ 50,000) per related entity (see subsection (j) (1) (B) of this regulation).
(5) Improper use of threat of penalties.
(A) No member of the staff of the Franchise Tax Board may threaten the imposition of a penalty provided for in section 19141.6 of the Revenue and Taxation Code in an effort to obtain the agreement of a taxpayer to an audit adjustment.
(B) A taxpayer may report any threatened misuse of a penalty provided for in section 19141.6 of the Revenue and Taxation Code to the Taxpayers' Rights Advocate who shall investigate the alleged threat. The findings of the Taxpayers' Rights Advocate shall be presented in writing to the Franchise Tax Board, itself, with the copy provided to the taxpayer reporting the alleged threat.
(C) If it is concluded that the imposition of a penalty proposed under section 19141.6 of the Revenue and Taxation Code was threatened in an effort to obtain an agreement to an audit adjustment, any penalty assessed will be withdrawn and, if paid, will be refunded with appropriate interest.
(D) Negotiations entered into under the authority of section 19442 of the Revenue and Taxation Code which include a penalty or penalties assessed pursuant to section 19141.6 of the Revenue and Taxation Code shall not constitute a threat.
(k) Failure to furnish records.
(1) In general. In addition to costs and any other sanctions or penalties imposed for failure to furnish records or testimony, the rules of subsection (1) may be applied with respect to the determination of the components of any unitary business of which the taxpayer is a part, the apportionment factors of such business, the classification of an item of income or loss as business or nonbusiness, and the determination of the attribution of income to the United States or foreign jurisdictions under section 882, Subpart F, or other similar sections of the Internal Revenue Code (including any transaction engaged in by a partnership that is attributed to the unitary business of which the taxpayer is a part) if a subpoena or subpoena duces tecum is issued to the taxpayer to produce any records or testimony, either directly or as agent for any related party, to determine the correct treatment under Part 10, Part 10.2, and Part 11 of the Revenue and Taxation Code of the above described issues if--
(A) 1. The subpoena or subpoena duces tecum is not quashed in a proceeding, if any, begun under section 19141.6(d) (3) of the Revenue and Taxation Code and is not determined to be invalid in a proceeding, if any, begun under section 19504 of the Revenue and Taxation Code to enforce such subpoena or subpoena duces tecum; and
2. The taxpayer does not substantially and timely comply with the subpoena or subpoena duces tecum, and the Director, Multistate Audit Program Bureau or Counsel, Multistate Tax Affairs, or a Franchise Tax Board employee designated by the Executive Officer has sent by certified or registered mail a notice under section 19141.6(d)(1) (C) of the Revenue and Taxation Code to the taxpayer that is has not so complied; or
(B) The taxpayer fails to maintain or to cause another to maintain records as required by this regulation, and by reason of that failure, the subpoena or subpoena duces tecum is quashed or modified, in a proceeding, if any, under section 19141.6(d) (3) of the Revenue and Taxation Code or in a proceeding, if any, begun under section 19504 of the Revenue and Taxation Code to enforce the subpoena or subpoena duces tecum, or the taxpayer is not able to provide the records requested in the subpoena or subpoena duces tecum.
(2) Enforcement proceeding not required. The Director, Multistate Audit Program Bureau or Counsel, Multistate Tax Affairs, or a Franchise Tax Board employee designated by the Executive Officer is not required to begin an enforcement proceeding to enforce the subpoena or subpoena duces tecum in order to apply the rules of subsection (1).
(3) De minimis failure. Where the taxpayer's failure to comply with the requirement to furnish records or testimony under this section is de minimis, the Director, Multistate Audit Program Bureau or Counsel, Multistate Tax Affairs, or a Franchise Tax Board employee designated by the Executive Officer, in the exercise of discretion, may choose not to apply the noncompliance penalty. Thus, for example, in cases where a particular record or group of records is not furnished upon request or subpoena, the Director, Multistate Audit Program Bureau or Counsel, Multistate Tax Affairs, or a Franchise Tax Board employee designated by the Executive Officer, in their sole discretion, may choose not to apply the noncompliance penalty if they deem the record or records not to have significant or sufficient value in the determination of the correctness of the tax treatment of the components of any unitary business of which the taxpayer may be a part, the apportionment factors of such business, the classification of an item of income or loss as business or nonbusiness, and the attribution of income to the United States or foreign jurisdictions under section 882, Subpart F, or other similar sections of the Internal Revenue Code.
(4) Suspension of statute of limitations. If the taxpayer brings an action under section 19141.6(d)(3) (A) of the Revenue and Taxation Code (proceeding to quash) or section 19141.6 (d) (3) (B) of the Revenue and Taxation Code (review of Franchise Tax Board determination of noncompliance), the running of any period of limitation under section 19057 of the Revenue and Taxation Code (relating to assessment and collection of tax) for the income year or years to which the subpoena or subpoena duces tecum that is the subject of such proceeding relates shall be suspended for the period during which such proceeding, and appeals therefrom, are pending. In no event shall any such period of limitation expire before the 90th day after the day on which there is a final determination in such proceeding.
(5) Imposition of the monetary penalties provided for in this section and the use by the Franchise Tax Board of the powers provided by this section shall not foreclose the Franchise Tax Board from recovering any costs, penalties or sanctions associated with the issuance, enforcement, or defense of a motion to quash the subpoena or subpoena duces tecum which are otherwise recoverable.
(l) Noncompliance.
(1) In general. In the case of any failure described in subsections (k) or (m), provided the requirements of section 19141.6(d) (2) are met, the rules of subsection (1) apply in addition to any other sanctions or penalties imposed. In such a case all of the following may be determined by the Franchise Tax Board--
(A) Subject to the limitations of subsection (l) (2), the components that are a part of any unitary business of which the taxpayer is a part for purposes of determining the income derived from or attributable to this state pursuant to section 25101 or section 25110 of the Revenue and Taxation Code, and
(B) The apportionment factors for purposes of Article 2 (commencing with section 25120) of Chapter 17 of Part 11 of the Revenue and Taxation Code, and
(C) Amounts that are attributable to the classification of an item of income or loss as business or nonbusiness income for purposes of Article 2 (commencing with section 25120) of Chapter 17 of Part 11 of the Revenue and Taxation Code, and
(D) the correct amount of income under section 882, Subpart F, or other similar sections of the Internal Revenue Code.
(2) Limitation on determinations of the components of a unitary business. The Franchise Tax Board shall not exercise its power to determine the components of a unitary business to add an entity or entities which were properly excluded pursuant to an election to report under section 25110 et seq. of the Revenue and Taxation Code.
(3) Determination of the items. The determination of the items described in subsections (l) (1) (A) through (D) shall be made by either the Director, Multistate Audit Program Bureau or Counsel, Multistate Tax Affairs, or a Franchise Tax Board employee designated by the Executive Officer, in the sole discretion, from such knowledge, or from such information as the individual may choose to obtain through testimony or otherwise. The Director, Multistate Audit Program Bureau or Counsel, Multistate Tax Affairs, or a Franchise Tax Board employee designated by the Executive Officer shall consider any information or materials that have been submitted by the taxpayer or a related party. The Director, Multistate Audit Program Bureau or Counsel, Multistate Tax Affairs, or a Franchise Tax Board employee designated by the Executive Officer, however, may disregard any information, documents, or records submitted by the taxpayer or the related party if, in their sole discretion, they are deemed insufficiently probative of the relevant facts.
(4) Separate application. If the noncompliance penalty of this section applies with respect to records of a related party, it will not be applied with respect to any other related parties of the taxpayer solely upon the basis of that failure. Thus, for example, if a unitary business of which the taxpayer is a part engages in transactions with related party A and related party B, and the taxpayer does not comply with a subpoena or subpoena duces tecum for records related to the transactions between the unitary business of which the taxpayer is a part and related party A, the noncompliance penalty imposed as a result of such failure will not automatically apply to the transactions between the unitary business of which the taxpayer is a part and related party B. If a separate subpoena or subpoena duces tecum is issued for records relating to the transactions between the unitary business of which the taxpayer is a part and related party B and the taxpayer does not produce such records, the noncompliance penalty may be applied to those transactions.
(5) Review of determination. A determination made by either the Director, Multistate Audit Program Bureau or Counsel, Multistate Tax Affairs, or a Franchise Tax Board employee designated by the Executive Officer shall be subject to the review of the Franchise Tax Board, itself, conducted in open session. To overcome a determination made by the Director, Multistate Audit Program Bureau or Counsel, Multistate Tax Affairs, or a Franchise Tax Board employee designated by the Executive Officer, a taxpayer must demonstrate that the determination is arbitrary or capricious or is not supported by substantial evidence.
(6) Determination made pursuant to paragraph (d) of Section 19141.6 of the Revenue and Taxation Code may be appealed to the State Board of Equalization, in the manner and at such time, as provided by Sections 19045 and 19324 of the Revenue and Taxation Code, or may be subject of an action to recover tax, in the manner and at such time, as provided by Section 19382 of the Revenue and Taxation Code solely on the basis of whether the determinations were arbitrary or capricious, or were not supported by substantial evidence.
(7) No employee shall discuss with a taxpayer, or otherwise threaten, the potential exercise of the power to redetermine without the express prior written authorization of the Director, Multistate Audit Program Bureau or the Counsel, Multistate Tax Affairs, or a Franchise Tax Board employee designated by the Executive Officer. The power set forth in this subsection (l) shall not be exercised to make a redetermination unless prior to its exercise:
(A) the Executive Officer receives a written recommendation that the power be exercised to make the particular redetermination and the taxpayer is provided a copy of this recommendation prior to delivery to the Executive Officer,
(B) the particular redetermination is expressly approved by the Executive Officer, following notice to the taxpayer as provided in subsection (A) herein, and an opportunity to be heard by the Executive Officer is provided to the taxpayer or its designated representative,
(C) the exercise of the power and the particular redetermination are each supported by written findings of fact accompanied by detailed specifications of the evidence upon which the findings are based,
(D) a copy of the proposed findings and detailed specifications is provided to the taxpayer prior to consideration by the Executive Officer, and
(E) the taxpayer, regardless of whether it has exercised the opportunity to be heard by the Executive Officer, shall thereafter have all statutory rights of review subject to such limitations as otherwise may be established by section 19141.6 of the Revenue and Taxation Code and this regulation.
The power to make a redetermination under Revenue & Taxation Code section 19141.6(d)(1) or (d) (2) (A) (i), (iii), or (iv) shall not be exercised except in full compliance with this regulation.
(m) Failure to maintain.
(1) General. Notwithstanding any other provisions of this regulation, a taxpayer which has not maintained, or caused to be maintained, the records described in subsection (e) shall be required to maintain records in the form, manner, and location, as specifically described or enumerated by the Franchise Tax Board.
(2) Establishing failure to maintain. A failure to maintain, or cause to be maintained, shall be demonstrated by the assessment of the penalty, or penalties, provided for in subdivision (c) of section 19141.6 of the Revenue and Taxation Code. If such penalties are withdrawn, or are not sustained, the taxpayer shall be excused from its duty to maintain the records specifically described and enumerated by the Franchise Tax Board.
(3) Method of notification of duty to maintain. The taxpayer shall be notified of the duty to maintain, or to cause to be maintained, specific records by letter signed by the Executive Officer, the Chief Counsel, or an Assistant Executive Officer of the Franchise Tax Board.
(4) Period of time to which the duty to maintain applies. The duty to maintain specific records shall apply to the first income year of the taxpayer beginning after the date of the letter of notification and shall continue until the Franchise Tax Board notifies the taxpayer that it is no longer specifically required to maintain the records specified.
EXAMPLE: The taxpayer is a calendar year taxpayer. A penalty for failure to maintain records is assessed with respect to the income year 1996 on June 15, 1998. A letter notifying the taxpayer of the duty to maintain specific records is mailed on September 12, 1999. The duty to maintain the specific records exists for the income year beginning January 1, 2000.
(5) Records which can be specifically required to be maintained. The Franchise Tax Board may only require a taxpayer to maintain those records which are ordinarily created in the normal course of business, including the filing of state tax returns. Such records include, but are not limited to, profit and loss statements, balance sheets, financial consolidating workpapers if financial consolidation is a requirement of the Generally Accepted Accounting Principles of the country in which the taxpayer or the corporate owner of the taxpayer is domiciled, records for the determination of the value of each of the apportionment factors and assignment of such values to the numerator of the apportionment factors, records supporting the classification of income as business or nonbusiness, and records of all transactions with affiliates for each separate entity which is a member of the combined report group as determined by the taxpayer or as previously determined by the Franchise Tax Board in its most recent audit of the taxpayer.
(6) Penalty for failure to maintain specified records. A taxpayer which fails to maintain the records specified in the manner, form and location specified by the Franchise Tax Board shall be subject to the monetary penalties provided in subsection (j). A taxpayer may also be subject to the determinations provided for in section 19141.6(d) (2) of the Revenue and Taxation Code if the requirements of section 19141.6(d) (1) are met. A taxpayer may be excused from the penalty if it shows by clear and convincing evidence that such failure was due to reasonable cause.
(7) Review of records required to be maintained.
(A) Franchise Tax Board. A taxpayer may seek a review of the reasonableness of the list of records which it is notified are required to be maintained, the form in which they are to be maintained, and the place where they are to be maintained by petition to the Franchise Tax Board, itself. Such review shall be conducted in a regular meeting of the Franchise Tax Board, itself, conducted in open session and shall be limited only to the extent determined by the Franchise Tax Board, itself. The Franchise Tax Board, itself, shall determine what information or presentations it wishes to have made. Factors which the Board shall weigh in its consideration of the reasonableness of the records required to be maintained shall include the difficulties in obtaining necessary records encountered in prior audits of the taxpayer, the nature and extent of the records required to be maintained, the extent to which such records are normally created and maintained in the regular course of business and the availability of other alternatives. The Franchise Tax Board, itself, may modify the specification of the records to be maintained in any manner which it finds to be proper.
(B) Other review. Nothing in this section shall limit a taxpayer from seeking such other review of the requirement that it maintain specified records in the form and location specified as may be provided in law.
(n) Authorization of agent.
(1) Failure to authorize. The rules of subsection (l) shall apply to the determination of the components of any unitary business of which the taxpayer is a part, the apportionment factors of such business, the classification of an item of income or loss as business or nonbusiness, and the determination of the attribution of income to the United States or foreign jurisdictions under section 882, Subpart F, or other similar sections of the Internal Revenue Code (including any transaction engaged in by a partnership that is attributed to the unitary business of which the taxpayer is a part), unless each related party authorizes (in the manner described in subsection (n) (2)) the taxpayer to act as its limited agent solely for purposes of section 19504 with respect to any request by the Franchise Tax Board to examine records or produce testimony that may be relevant to the tax treatment of the items described above or with respect to any subpoena or subpoena duces tecum by the Franchise Tax Board for such records or testimony. The appearance of persons or the production of records by reason of the bank or corporation being an agent shall not subject those persons or records to the legal process for any purpose other than determining the correct treatment under Part 10, Part 10.2 and Part 11 of the items described in section 19141.6(a) of the Revenue and Taxation; Code.
(2) Authorization by related party.
(A) In general. Upon written request by the Franchise Tax Board, a related party shall authorize the taxpayer as its agent solely for purposes of section 19504 of the Revenue and Taxation Code. The authorization must be signed by an officer of the related party possessing the authority to authorize an agent for purposes of section 416.10 of the Rules of Civil Procedure. The taxpayer will accept this appointment by providing a statement to that effect, signed by an officer of the taxpayer possessing the authority to accept such an appointment. The agency shall be effective at all times.
(B) The authorization shall be submitted in a form pre-approved by the Franchise Tax Board.
(3) Foreign affiliated groups.
(A) In general. A corporation that has effective legal authority to make the authorization of agent under subsection (n) (2) on behalf of any group of foreign related parties may execute such an authorization for any members of the group. A single authorization may be made on a consolidated basis. In such a case, the common parent must attach a schedule to the authorization of agent form stating which members of the group would otherwise be required to separately authorize the taxpayer as agent. The schedule must provide the name, address, relationship to the taxpayer, and California and U.S. taxpayer identification number, if applicable, of each member.
(B) Application of noncompliance penalty adjustment. In circumstances where a consolidated authorization of agent has been executed, if the agency authorization for any member of the group is not legally effective for purposes of section 19504 of the Revenue and Taxation Code, the noncompliance penalty adjustment under section 19141.6(d) of the Revenue and Taxation Code and subsection (l) of this regulation shall apply.
(4) Legal effect of authorization of agent. The legal consequences of a related party authorizing a taxpayer to act as its agent for purposes of section 19504 of the Revenue and Taxation Code are as follows.
(A) Agent for purposes of commencing judicial proceedings. A taxpayer that is authorized by a related party to act as its agent for purposes of section 19504 of the Revenue and Taxation Code (including service of process) is also the agent of the related party for purposes of--
1. The filing of a petition to quash under section 19141.6(d) (1) (A) of the Revenue and Taxation Code or a petition to review a Franchise Tax Board determination of noncompliance under section 19141.6(d) (1) (B) of the Revenue and Taxation Code, and
2. The commencement of a judicial proceeding to enforce a subpoena or subpoena duces tecum under section 19504 of the Revenue and Taxation Code, whether commenced in conjunction with a petition to quash under section 19141.6 (d) (3) (A) of the Revenue and Taxation Code or commenced as a separate proceeding in the Superior Courts of the Counties of Los Angeles, Sacramento and San Diego, or the City and County of San Francisco.
(B) Related party found where taxpayer found. For any purposes relating to section 19504 of the Revenue and Taxation Code (including service of process), a related party that authorizes a taxpayer to act on its behalf under section 19141.6(d) (2) (B) of the Revenue and Taxation Code and subsection (n) may be found anywhere where the taxpayer has residence or is found in California.
(5) Successors in interest. A successor in interest to a related party must execute the authorization of agent as described in subsection (n) (2).
(6) Deemed compliance.
(A) In general. In exceptional circumstances, the Franchise Tax Board may treat a taxpayer as authorized to act as agent for a related party for purposes of section 19504, California Revenue and Taxation Code, in the absence of an actual agency appointment by the related party, in circumstances where the actual absence of an appointment is reasonable. Factors to be considered include:
1. If neither the taxpayer nor the other party to the transaction knew or had reason to know that the two parties were related at the time of the transaction, and
2. The extent to which the taxpayer establishes to the satisfaction of the Franchise Tax Board that all transactions between the taxpayer and the related party were on arm's length terms and did not involve the participation of any known related party.
(B) Reason to know. Whether the taxpayer or other party had reason to know that the two parties were related at the time of the transaction will be determined by all the facts and circumstances.
(C) Effect of deemed compliance. If a taxpayer is deemed under this subsection (n) (6) to have been authorized to act as an agent for a foreign related party for purposes of section 19504, California Revenue and Taxation Code, such deemed compliance is applicable only for that particular transaction and other reportable transactions entered into prior to the time when the taxpayer knew or had reason to know that the related party, in fact, was related. The noncompliance rule of subsection (l) shall apply to any transaction subsequent to that time with the same related party, unless the related party actually authorizes the taxpayer to act as its agent under subsection (n) (1) of this section. In addition, the record maintenance requirements of subsection (g) will apply to all subsequent transactions and, with respect to prior transactions, will apply to relevant records in existance at the time the relationship was discovered.
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