California FTB To Permit Section 25137 “Net Receipts” Position On Original Return Under Microsoft Decision

On September 28, 2006, the California Franchise Tax Board ("FTB") issued Notice 2006-3 ("Notice") regarding the effect of the recent decision by the California Supreme Court in Microsoft Corp. v. FTB on Notice 2004-5. Notice 2004-5, issued by the FTB in August 2004, generally stated that where a taxpayer took a position in its original return that was based on Revenue and Taxation Code section ("section") 25137, without the prior approval of the FTB, that taxpayer could have been subject to the accuracy-related penalty under section 19164 (based on IRC sections 6662-6665).

The Court’s August 17, 2006 decision in Microsoft, ___4 Cal.4th ___ (petition for rehearing pending) held (in part) that the total amount realized on the redemption of marketable securities as part of a business’s treasury function constitutes "gross receipts" for sales factor purposes. The Microsoft decision had raised issues for taxpayers that are about to file returns, many due on October 15, 2006, regarding