On October 2, 2012, the Court of Appeal issued its decision in Gillette v. Franchise Tax Board. The case revolved around the issue of whether taxpayers could elect to utilize the apportionment formula contained in the Multistate Tax Compact instead of the mandatory double-weighted sales factor methodology contained in Revenue and Taxation Code Section 25128. The trial court had originally dismissed the suit for refund on the grounds that such an election was not available as a matter of law. On October 2, the Court of Appeal reversed the trial court’s judgment of dismissal, finding for the taxpayer, and held that such an election was available.
On October 5, 2012 the FTB issued Notice 2012-01 explaining how a taxpayer that wants to raise the Compact Election Issue should file a protective claim for refund. The Franchise Tax Board (FTB) will treat properly filed protective claims as requests that FTB take no action on the claims, but rather, that the claims are filed so that they will not subsequently be barred by the statute of limitations. The FTB will only take action on the claim once Gillette has been fully resolved.
The FTB Notice provides the following:
The amended return should indicate at the top of the return in red “COMPACT METHOD” and should include a revised Schedule R as well as a computation of the refund amount. An amended return of this nature is necessary for each year in which the taxpayer purports to make such a retroactive election.
If a taxpayer wishes to make such a claim through the use of a letter, the letter must set forth the following:
1. The name, the California corporate number, and the federal identification number for the taxpayer and, if applicable, that the taxpayer is acting on behalf of a combined reporting group for which it is the key corporation for the year or years in issue.
2. That this letter is a protective claim raising the Compact Method election issue.
3. The tax year(s) involved.
4. The amount of the claim for each of the years involved.
5. Schedules showing the computation of the amount of the claim for each of the years involved.