California Form 3726 - Deferred Intercompany Stock Account (Disa) And Capital Gains Information - 2013 Page 2
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1
2Instructions for Form 3726
Deferred Intercompany Stock Account (DISA) and Capital Gains Information
References in these instructions are to the Internal Revenue Code (IRC) as of January 1, 2009, and to the California Revenue and Taxation Code (R&TC).
General Information
occurrence of a triggering event. Failure to disclose the
REC – Recipient is no longer in the combined report
LLC – Distributor converts into a limited liability
existing DISA balances for any taxable year may result
In general, for taxable years beginning on or after
in current recognition of the capital gain (see Cal. Code
company (LLC) taxed as a partnership
January 1, 2010, California law conforms to the
SML – Distributor converts into a single member LLC
Regs., tit. 18 section 25106.5-1(j)(7)). The corporation
Internal Revenue Code (IRC) as of January 1, 2009.
(distribution recipient) completing this form is the
(disregarded LLC)
However, there are continuing differences between
OTH – Other triggering event not listed above
corporation that received the distribution.
California and federal law. When California conforms
When filing a group tax return (see Cal. Code Regs.,
Line 1, column (d) – DISA balance. A DISA balance
to federal tax law changes, we do not always adopt
tit. 18 section 25106.5-11), and there is more
is the amount of deferred capital gains realized
all of the changes made at the federal level. For
by a recipient for a specific taxable year for each
than one corporation that has a DISA account, a
more information, go to ftb.ca.gov and search for
separate form FTB 3726 must be completed for each
distributor.
conformity. Additional information can be found
corporation and attached to Form 100, California
in FTB Pub. 1001, Supplemental Guidelines to
Line 1, column (e) – Recognition ratio. Use the
Corporation Franchise or Income Tax Return, or
California Adjustments, the instructions for California
following schedule to compute the recognition ratio.
Form 100W, California Corporation Franchise or
Schedule CA (540 or 540NR), and the Business Entity
Income Tax Return — Water’s-Edge Filers.
(a)
(b)
(c)
tax booklets.
Post-event
Pre-event
Recognition ratio
If the Franchise Tax Board (FTB) has not contacted
The instructions provided with California tax forms
percentage
percentage
1 – [column (a)/(b)]
the corporation for an audit and the corporation
are a summary of California tax law and are only
needs to disclose DISA information for a prior
intended to aid taxpayers in preparing their state
taxable year, see FTB Notice 2009-1.
income tax returns. We include information that is
most useful to the greatest number of taxpayers
Complete form FTB 3726, Part I and Part II to fulfill
in the limited space available. It is not possible to
the annual DISA disclosure requirements. Complete
include all requirements of the California Revenue
Part III to report the current year DISA capital gains
Column (a) – Post-event percentage. Enter the
and Taxation Code (R&TC) in the tax booklets.
recognized. Note: Taxpayers may elect to recognize
percentage of ownership immediately after the
Taxpayers should not consider the tax booklets as
the IRC Section 332 liquidation gain over a 60 month
triggering event occurs. If the ownership percentage
authoritative law.
period. Attach any additional sheets as needed.
in column (a) is less than 50%, the recognition ratio
Note, as of the date of the publication of this form,
is 1.
Specific Line Instructions
there are pending proposed amendments to Cal.
If the post-event ownership percentage of the
Code Regs., tit. 18 section 25106.5-1 that may
Part I – Prior Years DISA
distributor is less than 50%, the DISA balances
affect the reporting requirement of this form. For
associated with that distributor are fully recognized
Information
updated information, go to ftb.ca.gov and search for
as a taxable capital gain in the taxable year of the
regulation 25106.5-1.
DISA account balances must be disclosed annually
triggering event, since the distributor will no longer
on the taxpayer’s tax return. The FTB, at its discretion,
Cal. Code Regs., tit. 18 section 25106.5-1
be included in the combined report.
may require the amounts of undisclosed DISA
provides detailed rules relating to the treatment of
Column (b) – Pre-event percentage. Enter the
accounts to be taken into account in part or in whole
intercompany transactions between members of a
percentage of ownership immediately before the
in any taxable year the taxpayer fails to properly
combined reporting group. These regulations apply
triggering event occurs.
disclose this information. See Cal. Code Regs., tit. 18
to intercompany transactions that occur on or after
section 25106.5-1(j)(7) for more information.
Column (c) – Recognition ratio. Divide column (a) by
January 1, 2001. In general, the regulations adopt
column (b). Subtract the result from 1.
the treatment of intercompany transactions for
Column (a) – Name of distributor. The distributor
federal consolidated return purposes. (Treas. Reg.,
is the corporation that paid the distribution to the
Line 1, column (g)
Section 1.1502-13.) R&TC Section 25106 allows
recipient.
Box A – Check Box A if the gain is a short-term
for the elimination of dividend distributions between
Column (b) – Year of deferral. Enter the taxable
capital gain.
members of the combined report. Distributions
year that the distribution was paid and the DISA was
Box B – Check Box B if the sale was only a partial
are dividends to the extent that they are paid out of
created.
sale of the total owned stock.
earnings and profits (E&P). Once the current year E&P
Column (c) – Ownership percentage at time of
and accumulated E&P have been depleted, additional
Line 2 – Short-term DISA capital gains. Add all
distribution. Enter the ownership percentage of
distributions will reduce the shareholder’s stock
amounts in column (f) where column (g), Box A is
the distributor when the original distribution was
basis. Distributions in excess of current year E&P,
checked. Enter here and on Forms 100 or 100W,
received.
accumulated E&P, and the shareholder’s stock basis,
Side 6, Schedule D, Part I, line 1, column (f). When
are then treated as a capital gain.
Column (d) – Current ownership percentage. Enter
entering this amount on Schedule D, write “DISA”
the current taxable year ownership percentage of the
before the description required in column (a).
Cal. Code Regs., tit. 18 section 25106.5-1(f)(1)(B)
distributor.
provides that for transactions occurring on or after
Line 3 – Long-term DISA capital gains. Add all
January 1, 2001, the capital gain may be deferred,
Column (e) – DISA balance. A DISA balance is
amounts in column (f) where column (g), Box A is
but must be tracked in a Deferred Intercompany
the amount of deferred capital gains realized by
not checked. Enter here and on Forms 100 or 100W,
Stock Account (DISA). Under Cal. Code Regs.,
a recipient for a specific taxable year for each
Side 6, Schedule D, Part II, line 5, column (f). When
tit. 18 section 25106.5-1(b)(8), the balance of each
distributor.
entering this amount on Schedule D write “DISA”
DISA must be disclosed annually on the taxpayer’s
before the description required in column (a).
Part II – Current Year DISA
tax return. The capital gain is deferred until either
Example: Corporation A owns 100% of
Information
the distributor or recipient is no longer included
Corporation B. Corporation A has a $100,000 DISA
in the combined report, or the occurrence of any
balance from 2003. In 2013, Corporation A sells 10%
Complete Part II to calculate the current taxable year
other triggering event. See Cal. Code Regs., tit. 18
of Corporation B to an outside entity. Corporation A
DISA balances that are required to be disclosed.
section 25106.5-1(f)(1)(B), for more information. If
is required to report the amount of the DISA balance
there is a partial stock sale of the distributor outside
Part III – DISA Capital Gains
associated with the 10% sale of Corporation B. In
of the combined reporting group and the distributor
Recognized This Taxable Year
this case use the following formula to calculate
remains in the combined report after the stock sale,
the capital gain to be recognized {DISA balance X
then a portion of the DISA balance will be taxable to
Line 1, column (c) – Type of triggering event. Enter
[1-(post-event percentage/Pre-event percentage)] or
the extent of the stock sale.
the following codes for the type of triggering event:
$100,000 X [1-(90/100)]= $10,000.}
Purpose
PS – Partial sale of distributor
LIQ – Liquidation of distributor into recipient
Use form FTB 3726, Deferred Intercompany Stock
PAR – Liquidation of recipient into distributor
Account (DISA) and Capital Gains Information, to
DIS – Distributor is no longer in the combined
disclose the annual requirements of each DISA balance,
report
and to report the capital gains from a DISA due to the
FTB 3726 Instructions 2013 Page 1
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