The Franchise Tax Board (FTB) is the government agency responsible for administering California’s personal and corporate income tax laws. (For instance, if you have unfiled California income tax returns, the FTB is the organization that will audit you or your business.) In October of 2019, the FTB’s Legal Division issued a ruling with important California income tax implications for the independent directors of companies that are located outside the state (known as “foreign” entities). If you serve as an independent director on the board of a company domiciled within or outside of California, you should consult the experienced corporate tax attorneys at the Tax Law Office of David W. Klasing to discuss the California income tax requirements that may affect you or your business.
In the FTB’s October ruling, which centered around an unnamed corporation “commercially domiciled outside of California” in an unspecified U.S. state, the Franchise Tax Board sought to answer the following question: “Whether compensation paid to an independent director, who is a nonresident of California, is sourced to California if the Company holds a shareholder meeting or board of directors meeting in California which the director attends.” In plainer words: If (1) a foreign company has a board or shareholder meeting in California, and (2) one of the company’s directors comes to that meeting, then (3) is the director’s income consequently considered California-source income (and thus, subject to California income tax)? Finally, this scenario assumes that (4) the director in question does not live in the state of California.
In answer, the FTB held, simply: “No.” As the ruling elaborated (italics our emphasis), “The… compensation received… by the [entity’s] independent director… for services performed in California will be sourced to where the highest-ranking corporate officers carry out the Board’s directions.” It logically follows that taxpayers should prioritize determining what that location is, which is the first step toward successful tax compliance.
It is important to emphasize, in the foregoing quote, the words “carry out,” which were deliberately chosen as opposed to terms like “debate,” “vote on,” or “consider.” As the FTB explained (italics again our emphasis), “The value of an independent director’s services does not derive from the place… [where] the Board of Directors confers and makes decisions, but rather from… [the] place [where] the decisions and actions of the Board… are executed.” A meeting or conference does not necessarily fit this description unless some sort of action is actually taken or performed.
Of course, as the FTB itself pointed out, its findings in this particular case should not be interpreted as a blanket rule for all taxpayers in all financial scenarios. As the ruling cautioned, not only are FTB decisions necessarily made on a case-by-case basis, but further, that the ruling might become obsolete if there was a “change in relevant legislation, or judicial or administrative case law, a change in federal interpretation of federal law… or a change in the material [i.e. important] facts or circumstances” surrounding the case. Since every tax matter is unique, it is vital to confer with a California tax attorney for tailored, personalized legal guidance.
Whether you are an independent director, the director of a corporation, the owner of a business, an investor, a shareholder, or you have other financial connections to a California or foreign entity, it is in your best interests to obtain the services of a business tax attorney. Effective legal representation is particularly critical if you have been selected for a corporate or personal income tax audit (whether by the FTB or IRS), since either event has the potential to culminate in costly fines – or criminal charges.
Get incisive, proactive legal support from an award-winning corporate tax lawyer serving Northern and Southern California. To arrange a reduced-rate tax consultation, call the Tax Law Office of David W. Klasing at (800) 681-1295, or contact us online.
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