The Office of Tax Appeals (OTA) recently ruled in favor of Microsoft in its dispute with the California Franchise Tax Board (FTB) concerning the treatment of qualifying dividends in the sales factor denominator. Microsoft filed a refund claim, arguing that the gross amount of dividends received should be included in the denominator, leading to a potential $100 million refund. The OTA agreed with Microsoft, stating that the FTB’s legal ruling was not consistent with the law and that there was no basis for excluding qualifying dividends from the denominator.
This decision could have significant implications for corporate taxpayers in California and nationwide. While the case involved dividends from the Section 965 inclusion regime, it has broader implications for all types of dividends. Taxpayers may now have a position to include all dividends in the denominator, even if they are subject to a deduction from the tax base. It is important for taxpayers to review the statutory language in their state to determine how income is treated, as this could impact what is included in the denominator.
Overall, the OTA’s ruling in the Microsoft case is a significant win for taxpayers and sets a precedent for how dividends should be treated in the sales factor denominator. It is important for corporate taxpayers to be aware of this decision and consider similar claims in their own tax disputes. By understanding the implications of this ruling, taxpayers can potentially seek refunds and adjustments to their tax liabilities based on the inclusion of all dividends in the sales factor denominator.
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