December 4, 2020

Volume X, Number 339

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California Proposes Another Reason For Corporations To Move Their Principal Executive Offices To Another State

The California Franchise Tax Board recently proposed a new regulation that will add to the growing list of reasons for corporations to consider moving their headquarters to some other state.  The new regulation purports to “clarify” existing law by establishing a sourcing rule for compensation paid to nonresident, nonemployee, and independent directors.  As proposed, the regulation provides that fees and other compensation for serving on a company's Board of Directors should be sourced to the “commercial domicile” of the corporation, regardless of where the services are performed.  Under current Revenue and Taxation Code Section 25120(b), a corporation’s “commercial domicile” is the “principal place from which the trade or business of the taxpayer is directed or managed”.  In proposing the regulation, the FTB has explained that compensation paid to an independent, nonemployee director, who is a nonresident of California, would not be sourced to the place where the director performs services for the company for which they serve, because the independent director is not, by definition, an employee.   The proposed regulation does not address a taxpayer’s withholding obligations with respect to director compensation.

The FTB is floating this proposal in advance of formal rulemaking under the Administrative Procedure Act.  It is seeking comments by November 5.  Presumably, it will thereafter proceed with formal rulemaking.  In the interim, the FTB may take the position that the regulation merely reflects current law. 

Does anyone else hear the moving truck revving their engines?

© 2010-2020 Allen Matkins Leck Gamble Mallory & Natsis LLP National Law Review, Volume X, Number 301
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About this Author

Keith Paul Bishop, Corporate Transactions Lawyer, finance securities attorney, Allen Matkins Law Firm
Partner

Keith Bishop works with privately held and publicly traded companies on federal and state corporate and securities transactions, compliance, and governance matters. He is highly-regarded for his in-depth knowledge of the distinctive corporate and regulatory requirements faced by corporations in the state of California.

While many law firms have a great deal of expertise in federal or Delaware corporate law, Keith’s specific focus on California corporate and securities law is uncommon. A former California state regulator of securities and financial institutions, Keith has decades of...

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