Form 3726 - California Deferred Intercompany Stock Account (Disa) And Capital Gains Information - 2014 Page 2
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22014 Instructions 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).
What’s New
Purpose
Part III – DISA Capital Gains
Recognized This Taxable Year
Use form FTB 3726, Deferred Intercompany Stock
On April 1, 2014, the California Code of Regulations,
Account (DISA) and Capital Gains Information, to
tit.18 section 25106.5-1(f)(1)(B)2 was finalized.
Line 1, column (c) – Type of triggering event. Enter
disclose the annual requirements of each DISA balance,
It provides that if a Deferred Intercompany Stock
the following codes for the type of triggering event:
and to report the capital gains from a DISA due to the
Account (DISA) has been created as the result of an
PS – Partial sale of distributor
occurrence of a triggering event. Failure to disclose the
intercompany distribution, prior to the distribution
LIQ – Liquidation of distributor into recipient
existing DISA balances for any taxable year may result
recipient’s disposition of the distributor’s stock,
PAR – Liquidation of recipient into distributor
in current recognition of the capital gain (see Cal. Code
the DISA will be reduced by any subsequent capital
DIS – Distributor is no longer in the combined report
Regs., tit. 18 section 25106.5-1(j)(7)). The corporation
contributions that the distribution recipient makes to
REC – Recipient is no longer in the combined report
(distribution recipient) completing this form is the
the distributor. For more information, see Cal. Code
LLC – Distributor converts into a limited liability
corporation that received the distribution.
Regs., tit.18 section 25106.5-1.
company (LLC) taxed as a partnership
When filing a group tax return (see Cal. Code Regs.,
General Information
SML – Distributor converts into a single member LLC
tit. 18 section 25106.5-11), and there is more
(disregarded LLC)
than one corporation that has a DISA account, a
In general, for taxable years beginning on or after
OTH – Other triggering event not listed above
separate form FTB 3726 must be completed for each
January 1, 2010, California law conforms to the
Line 1, column (d) – DISA balance. A DISA balance
corporation and attached to Form 100, California
Internal Revenue Code (IRC) as of January 1, 2009.
is the amount of deferred capital gains realized by a
Corporation Franchise or Income Tax Return, or
However, there are continuing differences between
recipient for a specific taxable year for each distributor.
Form 100W, California Corporation Franchise or
California and federal law. When California conforms
Income Tax Return — Water’s-Edge Filers.
Line 1, column (e) – Recognition ratio. Use the
to federal tax law changes, we do not always adopt
If the Franchise Tax Board (FTB) has not contacted
following schedule to compute the recognition ratio.
all of the changes made at the federal level. For
the corporation for an audit and the corporation
more information, go to ftb.ca.gov and search for
(a)
(b)
(c)
needs to disclose DISA information for a prior
conformity. Additional information can be found
Post-event
Pre-event
Recognition ratio
taxable year, see FTB Notice 2009-1.
in FTB Pub. 1001, Supplemental Guidelines to
percentage
percentage
1 – [column (a)/(b)]
California Adjustments, the instructions for California
Complete form FTB 3726, Part I and Part II to fulfill
Schedule CA (540 or 540NR), and the Business Entity
the annual DISA disclosure requirements. Complete
tax booklets.
Part III to report the current year DISA capital gains
recognized. Note: Taxpayers may elect to recognize
The instructions provided with California tax forms are
the IRC Section 332 liquidation gain over a 60 month
a summary of California tax law and are only intended
period. Attach any additional sheets as needed.
to aid taxpayers in preparing their state income tax
Column (a) – Post-event percentage. Enter the
returns. We include information that is most useful to
Specific Line Instructions
percentage of ownership immediately after the
the greatest number of taxpayers in the limited space
triggering event occurs. If the ownership percentage in
available. It is not possible to include all requirements
Part I – Prior Years DISA
column (a) is less than 50%, the recognition ratio is 1.
of the California Revenue and Taxation Code (R&TC)
in the tax booklets. Taxpayers should not consider the
If the post-event ownership percentage of the
Information
tax booklets as authoritative law.
distributor is less than 50%, the DISA balances
DISA account balances must be disclosed annually
associated with that distributor are fully recognized
Cal. Code Regs., tit. 18 section 25106.5-1
on the taxpayer’s tax return. The FTB, at its discretion,
as a taxable capital gain in the taxable year of the
provides detailed rules relating to the treatment of
may require the amounts of undisclosed DISA
triggering event, since the distributor will no longer
intercompany transactions between members of a
accounts to be taken into account in part or in whole
be included in the combined report.
combined reporting group. These regulations apply
in any taxable year the taxpayer fails to properly
to intercompany transactions that occur on or after
Column (b) – Pre-event percentage. Enter the
disclose this information. See Cal. Code Regs., tit. 18
January 1, 2001. In general, the regulations adopt
percentage of ownership immediately before the
section 25106.5-1(j)(7) for more information.
the treatment of intercompany transactions for
triggering event occurs.
federal consolidated return purposes. (Treas. Reg.,
Column (a) – Name of distributor. The distributor
Column (c) – Recognition ratio. Divide column (a) by
Section 1.1502-13.) R&TC Section 25106 allows
is the corporation that paid the distribution to the
column (b). Subtract the result from 1.
for the elimination of dividend distributions between
recipient.
Line 1, column (g)
members of the combined report. Distributions
Column (b) – Year of deferral. Enter the taxable
are dividends to the extent that they are paid out of
Box A – Check Box A if the gain is a short-term
year that the distribution was paid and the DISA was
earnings and profits (E&P). Once the current year
capital gain.
created.
E&P and accumulated E&P have been depleted,
Box B – Check Box B if the sale was only a partial
Column (c) – Ownership percentage at time of
additional distributions will reduce the shareholder’s
sale of the total owned stock.
distribution. Enter the ownership percentage of the
stock basis. Distributions in excess of current year
distributor when the original distribution was received.
Line 2 – Short-term DISA capital gains. Add all
E&P, accumulated E&P, and the shareholder’s stock
amounts in column (f) where column (g), Box A is
basis, are then treated as a capital gain.
Column (d) – Current ownership percentage. Enter
checked. Enter here and on Forms 100 or 100W,
the current taxable year ownership percentage of the
Cal. Code Regs., tit. 18 section 25106.5-1(f)(1)(B)
Side 6, Schedule D, Part I, line 1, column (f). When
distributor.
provides that for transactions occurring on or after
entering this amount on Schedule D, write “DISA”
January 1, 2001, the capital gain may be deferred, but
Column (e) – DISA balance at beginning of taxable
before the description required in column (a).
must be tracked in a DISA. Under Cal. Code Regs.,
year. Enter the DISA balance at the beginning of the
Line 3 – Long-term DISA capital gains. Add all
tit. 18 section 25106.5-1(b)(8), the balance of each
taxable year.
amounts in column (f) where column (g), Box A is
DISA must be disclosed annually on the taxpayer’s
Column (f) – Current year capital contributions.
not checked. Enter here and on Forms 100 or 100W,
tax return. The capital gain is deferred until either
Enter the amount of current year capital contributions
Side 6, Schedule D, Part II, line 5, column (f). When
the distributor or recipient is no longer included
that the distribution recipient made to the distributor.
entering this amount on Schedule D write “DISA”
in the combined report, or the occurrence of any
Column (g) – DISA balance at end of taxable year.
before the description required in column (a).
other triggering event. See Cal. Code Regs., tit. 18
Subtract column (f) from column (e). A DISA balance
section 25106.5-1(f)(1)(B), for more information. If
Example: Corporation A owns 100% of
is the amount of deferred capital gains realized by a
there is a partial stock sale of the distributor outside
Corporation B. Corporation A has a $100,000 DISA
recipient for a specific taxable year for each distributor.
of the combined reporting group and the distributor
balance from 2003. In 2014, Corporation A sells 10%
remains in the combined report after the stock sale,
Part II – Current Year DISA
of Corporation B to an outside entity. Corporation A
then a portion of the DISA balance will be taxable to
is required to report the amount of the DISA balance
Information
the extent of the stock sale.
associated with the 10% sale of Corporation B. In
this case use the following formula to calculate
Complete Part II to calculate the current taxable year
the capital gain to be recognized {DISA balance X
DISA balances that are required to be disclosed.
[1-(post-event percentage/Pre-event percentage)] or
$100,000 X [1-(90/100)]= $10,000.}
FTB 3726 Instructions 2014 Page 1
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