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Franchise Tax Board:
Taxpayers Given Wrong Advice on Limits of Deductibility of Real Property Taxes

Advice given by the Franchise Tax Board to taxpayers that certain property taxes are not deductible has been undercut by the IRS with an information letter, released this month, that comes to a different conclusion. In effect, the FTB advice was incorrect.

With a new statement by the IRS the deductibility of property taxes, it now is clear that the advice the FTB has been giving may have caused taxpayers to overpay their state income taxes.

On its website, as of April 10, the FTB says: "You cannot deduct any amounts shown on your property tax bill … that are not computed based on the assessed value of your property, regardless of purpose." Under this standard, school parcel property taxes would not be deductible.

The IRS, in Information Letter 2012-0018, states that there is no statutory requirement that a real property tax must be an "ad valorem" based tax to be deductible. The letter specifically states that non-ad-valorem property taxes that are uniform and are for the general public welfare (such as school parcel taxes) are deductible.

California conforms to federal law regarding the property tax deduction, and the IRS advice is controlling. Further, the Internal Revenue Code only limits personal property tax deduction to ad valorem-based taxes. There is no such restriction in the Internal Revenue Code on the deductibility of real property taxes.

CalTax has been telling the FTB repeatedly for the past seven months that there is no ad valorem restriction on the deduction of real property tax, and has urged the agency not to adopt this restrictive view. The agency argued that this is what it thought was the view of the IRS, even though a 2003 IRS chief counsel memorandum stated otherwise.

Since the personal income tax filing deadline is Tuesday, taxpayers do not have much time to correct their returns if they followed the FTB's advice and did not deduct school parcel taxes and eligible Mello-Roos assessments. Amended returns should be filed if the originals already have been filed or cannot be corrected in time.

In an April 13 memo, FTB Executive Officer Selvi Stanislaus said: "Under current law, the deductibility of real property taxes is generally a matter of federal law to which California conforms. As such, the FTB will be waiting to review the revisions to the IRS forms and publications to provide comparable revisions to California tax form instructions. The FTB does not anticipate that these revisions will be made prior to the due date for 2011 tax returns (April 17, 2012). We will remove material from our website that limits the deductibility of real property taxes to taxes imposed on an ad valorem basis. We are also revising our tax form instructions to reflect this update. Once the IRS forms and instructions are revised we will provide revised California forms and instructions that are consistent with the revisions made by the IRS."

April 13, 2012
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