In October 2012, a California Court of Appeal held that taxpayers could, under the Multistate Tax Compact, elect to apportion income using an equally weighted, three-factor method instead of the standard double-weighted sales method or single-sales factor method (the Gillette Election).1 The FTB appealed the decision to the California Supreme Court. In December 2015, that court reversed the Court of Appeal decision, thereby denying taxpayers the right to make the Gillette Election.2 Now, the FTB has begun to issue assessments to taxpayers who made the election.3 In addition, the FTB is also imposing the LCUP on taxpayers who made the election. In our view, as explained in this alert, the FTB’s assessment of penalties, including the LCUP, is contrary to law.
To understand why the FTB’s imposition of these penalties is contrary to law it is necessary to examine the period leading up to the Court of Appeal decision. At that time, the California Legislature made an attempt to eliminate the Gillette Election by repealing the Multistate Tax Compact.4 Also, as part of that effort, the Legislature determined that tax elections must be made on an original return.5 Thus, as we wrote in our October 4, 2012, and August 15, 2014, alerts, taxpayers faced a dilemma: They were forced to choose between making a valid Gillette Election on an original return (and potentially face penalties) or make the Gillette Election after filing the original return and face the possibility that the election was invalid. Taxpayers who made the election on original returns are now being penalized by the FTB.