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California pre-merger E&P dividends may qualify for elimination

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June 2019


The California Franchise Tax Board (FTB) released Chief Counsel Ruling 2019-01 regarding the treatment of dividends paid between members of a unitary group after a series of mergers involving a target unitary group previously unrelated to the original unitary group.

The ruling confirms that the FTB considers a unitary relationship to be an attribute that carries over in an acquisition to which IRC section 381 would apply. The ruling finds that a dividend paid out of pre-merger earnings and profits (E&P) to an entity that includes the attributes of the pre-merger unitary parent (a dividend that would have qualified for elimination in the pre-merger unitary group) qualifies for elimination in the post-merger unitary group.

The takeaway

The ruling provides additional comfort to taxpayers that the FTB will treat unity as a carryover attribute in acquisitions to which IRC section 381 would apply. As such, dividends following acquisitions that are accomplished via mergers to which IRC section 381 would apply may receive different treatment compared to acquisitions accomplished via taxable stock purchases. Taxpayers should continue to closely evaluate the characteristics of the E&P out of which distributions are made, especially in the context of acquisitions and changing unitary relationships.

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Peter Michalowski

Peter Michalowski

State and Local Tax Leader, PwC US

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