California FTB ruling interprets financial corporation definition

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November 2018


The California Franchise Tax Board (FTB) has released Chief Counsel Ruling 2018-01 regarding the treatment of certain items of income as ‘financial’ or ‘general’ for the purpose of whether a corporation qualifies as a financial corporation under California Code of Regulations, title 18 (Regulation), section 23138.

The ruling confirms that mortgage servicing revenue earned under a mortgage servicing rights contract does not constitute 'financial' income for purposes of that regulation.  Also, the ruling finds that gains and losses from interest rate hedging contracts are not items of financial income because they are not attributable to dealing in 'money or moneyed capital' as defined in Regulation section 23183(b)(3).

The takeaway

The determination of whether a corporation is a 'financial corporation' for California franchise tax purposes requires a thorough analysis of Regulation section 23183 and related California authorities as applied to the corporation’s specific activities and instruments. Furthermore, as the financial industry evolves and new lending and investing strategies emerge, it is critical to evaluate how California’s interpretation of the rules may impact a corporation’s classification. The consequences of financial classification extend beyond apportionment treatment and also impact the corporation’s franchise tax rate and imposition of local city taxes.

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Peter Michalowski

Peter Michalowski

State and Local Tax Leader, PwC US

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