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706 Deductions calimed on CA Form 541

December 15, 2016 • Brenda Zavalla • Log In to Post Comments

For Federal you can only take certain deductions on Form 706 or Form 1041, not both.  But since there is no California estate tax can you take the deductions claimed on the 706 on the California Form 541 income tax return?  


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Brenda:

My first guess would have been that you could probably take them on California, however after digging in I think there is a problem.  IRC 642(g) says you can't take an income tax deduction for anything that was deducted under IRC 2053 or 2054.  That's the prohibition against double deduction that you reference.  Unfortunately, Revenue and Taxation Code 17731 says that subsection K of the IRC is adopted except with the exceptions listed.  I went through the exceptions and didn't find any for 642(g).  So since you did deduct under 2053 or 2054, I don't think that it matters that California doesn't have an estate tax.  You'd prohibited from deduction under 642(g) and California appears to adopt that section intact. Unfortunate result.

Hi, 

In the most recent issue of the California Society of CPA's magazine, there is a Q&A with the FTB. One of the questions addresses administrative expenses claimed on form 706. For Federal tax purposes, you generally have a choice in claiming such expenses on form 706 or form 1041, but not both. Most of us thought the state required you to follow the Federal election. The FTB seems to indicate that you can claim the expenses on form 541 regardless of what is done for Federal purposes. Can you confirm if this is the case or not? Thank you, Josh Levy

Hi Brenda, we finally got confirmation from the FTB. You may claim a deduction on Form 541 if it was claimed on IRS form 706. Here's what the FTB says. Thank you for your patience.

While IRC section 642(g), to which California conforms, precludes at the federal level an estate claiming these expenses on both the estate tax return and income tax return, for state purposes there is no California estate tax.  As a result, the “anti-double-dipping rule” of IRC section 642(g) would not apply. Instead, under general R&TC section 17024.5 principles, which permit state elections to be different from federal elections, a taxpayer is entitled to claim these expenses on their California Form 541. 

Here is the blurb from the CalCPA magazine: "As CA no longer has an estate tax, the question was raised whether admin expenses that were deducted on the Form 706 can be deducted on the Form 541. CA conforms to IRC Sec 67. As long as administrative expenses are deductibel under IRC Sec 67 the admin expenses may be deducted on the Form 541 whether the expenses were deducted federally on Form 1041 or Form 706". 

Any feedback on this would be greatly appreciated.

-Josh

We are checking with FTB legal staff.

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