California releases guidance on LIFO and preferential ordering for CFC dividends

The California Franchise Tax Board (FTB) issued a technical advice memorandum (TAM) reiterating its position that dividends paid by a partially-included controlled foreign corporation (CFC) of a water's edge filer must be treated as coming first from the current year's earnings until exhausted and then from the most recent years' earnings under the Last-In-First-Out (LIFO) ordering method. However, the FTB abandoned its prior position of "prorating" each year's dividends between included and excluded income, and instead directs staff to treat dividends as paid first from a year's unitary earnings (and therefore eligible for elimination from combined income) until those earnings are depleted, and then from excluded earnings (and therefore may be eligible for a 75 percent dividends deduction) for that year. (FTB TAM 2011-02, 3/15/11)

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