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Unintended Consequence of I.R.C. Conformity: California Rules Taxpayer May Disregard Treas.Reg.§1.337(d)-2


While California currently conforms to the Internal Revenue Code (I.R.C.) as of Jan.1, 2009, that conformity may come with some unintended consequences. For example, stock loss partially deductible at the federal level could be completely disallowed for state income tax purposes pursuant to the application of Treas. Reg. §1.337(d)-2 if an affirmative statement is not attached to the return. The California Franchise Tax Board recently addressed this potential trap, ruling that the federal regulation does not apply to members of a California combined reporting group. This article explains the regulation in question and the FTB’s reasoning.

This article was published in Bloomberg BNA, written by Brian J. Sullivan and Michael F. Paxton of Deloitte Tax LLP.

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