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Outline

The California 3725 form is an essential document for corporations involved in transactions between a parent corporation and its insurance company subsidiary. This form is used to report the transfer of assets, particularly appreciated properties, and to calculate any deferred capital gains or losses associated with those transfers. It includes sections that require detailed information about the properties transferred, such as their fair market value at the time of transfer, and whether the insurance company actively uses these assets in its business operations. The form also addresses the tax implications of these transactions, specifying when gains must be recognized as income. For example, if the transferred property is no longer owned by the insurance company or is not used in its active trade, the gain must be reported. The California Revenue and Taxation Code Section 24465 governs these transactions, providing clarity on how to handle capital gains from appreciated properties. Understanding the nuances of this form is crucial for compliance and for optimizing tax outcomes.

Sample - California 3725 Form

FTB 3725 2012 Side 1
7431123
Assets Transferred from Parent Corporation
to Insurance Company Subsidiary
CALIFORNIA FORM
3725
TAXABLE YEAR
2012
Parent corporation name California corporation number
FEIN
Part I Assets Transferred from Parent Corporation to Insurance Company Subsidiary
Section A – Information on Properties Transferred
1 Were appreciated properties transferred to an insurance company subsidiary?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ฀฀ Yes ฀ No
If “Yes,”
enter the company’s name, California corporation number, and/or FEIN (see instructions), then continue with line 2. If “No,” do not
complete this form.
Insurance company name California corporation
number
FEIN
2 Does the insurance company use the assets it received from its parent corporation in active conduct of a trade
or business of the insurer?
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ฀฀ Yes ฀ No
If “Yes,”
continue with Section B. If “No,” go to Part II.
Section B – Deferred Capital Gains. Use additional sheets if necessary.
(a)
Taxable year
(b)
Description of
property
(c)
Location of
property
(d)
Date transferred
(mo., day, yr.)
(e)
Fair market value at
date of transfer
(f)
Cost or
other basis
(g)
Amount of gain
deferred under R&TC
Section 24465
(e) less (f)
3
Part II
Assets Transferred from Insurance Company to Other Companies
Section A – Information on Disposition of Properties
4 Does the insurance company still use the assets listed in Part l, Section B, in its active conduct of trade or business? . . . . . . . . . ฀฀ Yes ฀ No
If “Yes,”
corporation is not required to complete Part II, Section B or Section C. If “No,” go to line 5.
5 Did the insurance company dispose of any assets received from the parent corporation?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ฀฀ Yes ฀ No
If “Yes,”
go to line 6. If “No,” gain is taxable, go to Section B or Section C.
6 Did the insurance company sell the assets to another company within the combined reporting group? . . . . . . . . . . . . . . . . . . . . . ฀฀ Yes ฀ No
If “Yes,”
gain is non-taxable. If “No,” gain is taxable, go to Section B or Section C.
Section B – Short-Term Capital Gains and Losses-Assets Held One Year or Less. Use additional sheets if necessary.
(a)
Taxable year
(b)
Description of
property
(c)
Date of disposal
(mo., day, yr.)
(d)
Fair market value
or gross sales price
(e)
Cost or
other basis
(f)
Gain (loss)
(d) less (e)
7
8 Short-term capital gains (losses). Total amounts in column (f). Enter here and on Form 100 or Form 100W, Side 5,
Schedule D, Part I, line 1, column (f) or Schedule D (100S), Section A or Section B, Part I, line 1, column (f).
See instructions
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Attach to Form 100 or Form 100W.
Side 2 FTB 3725 2012
7432123
Section C – Long-Term Capital Gains and Losses-Assets Held More Than One Year. Use additional sheets if necessary.
(a)
Taxable year
(b)
Description of
property
(c)
Date of disposal
(mo., day, yr.)
(d)
Fair market value
or gross sales price
(e)
Cost or
other basis
(f)
Gain (loss)
(d) less (e)
9
10 Long-term capital gains (losses). Total amounts in column (f). Enter here and on Form 100 or Form 100W, Side 5,
Schedule D, Part II, line 5, column (f) or Schedule D (100S), Section A or Section B, Part II, line 4, column (f).
See instructions
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General Information
A Purpose
Use form FTB 3725, Assets Transferred from
Parent Corporation to Insurance Company
Subsidiary, to track the assets transferred from
a parent corporation to an insurance company
subsidiary. In addition, use this form to figure
capital gains (losses) if the parent corporation
transferred assets to an insurance company
subsidiary beginning on or after June 23 2004.
California Revenue and Taxation Code (R&TC)
Section 24465 provides that when a parent
corporation transfers appreciated property
to an insurance company subsidiary, the
gain is deferred if the property transferred to
the insurer is used in the active conduct of
a trade or business of the insurer. The gain
must be recognized as income if any of the
following apply:
• The transferred property is no longer owned
by an insurer in the taxpayer’s commonly
controlled group (or a member of the
taxpayer’s combined reporting group).
• The property is no longer used in the active
conduct of the insurer’s trade or business (or
the trade or business of another member in
the taxpayer’s combined reporting group).
• The holder of the property is no longer held
by an insurer in the commonly controlled
group of the transferor (or a member of the
taxpayer’s combined reporting group).
R&TC Section 24465 applies to transactions
entered into on or after June 23, 2004.
B Definitions
1. Appreciated property – Appreciated property
means property whose fair market value
(FMV), as of the date of the transfer, exceeds
its adjusted basis as of that date.
2. Commonly controlled group – Commonly
controlled group exists when stock
possessing more than 50% of the voting
power is owned, or constructively owned,
by a common parent corporation (or chains
of corporations connected through the
common parent) or by members of the
same family, see R&TC Section 25105.
Also, a commonly controlled group includes
corporations that are stapled entities,
see R&TC Section 25105(b)(3). Special
rules are provided in R&TC Section 25105
for partnerships, trusts, and transfers of
voting power by proxy, voting trust, written
shareholder agreement, etc.
Specific Line Instructions
Part I – Assets Transferred
from Parent Corporation to
Insurance Company Subsidiary
Section A – Information on
Properties Transferred
Line 1 – Enter the insurance company’s California
corporation number or federal employer
identification number (FEIN). If the insurance
company does not have one of these numbers,
enter “not applicable” and continue with line 2.
Section B – Deferred Capital Gains
Line 3, column (b) – Description of property.
Describe the assets the parent corporation
transferred to an insurance company subsidiary.
Line 3, column (e) – Fair market value at date of
transfer. FMV is the price that the property would
sell for in the open market.
Line 3, column (f) – Cost or other basis. In
general, the cost or other basis is the cost of
the property plus purchase commissions and
improvements minus depreciation, amortization,
and depletion. Enter the cost or adjusted basis of
the asset for California purpose.
Part II – Assets Transferred
from Insurance Company to
Other Companies
Section B – Short-Term Capital Gains
and Losses- Assets Held One Year or
Less and
Section C – Long-Term Capital Gains
and Losses-Assets Held More Than
One Year
Report short-term or long-term capital gains
(losses) based on the length of time the parent
corporation held the assets.
Line 7 and Line 9, column (b) – Description of
property. Describe the assets that the insurance
company sells to another company; or the
transferred assets that the insurance company
does not use in its active trade or business.
Line 7 and Line 9, column (d) – Fair market
value or gross sales price. Enter the FMV of the
assets as of the date that the insurance company
no longer uses the assets in its active trade or
business. Or, enter the gross sales price of the
assets if the insurance company sells the assets
to another company.
Line 8 – Short-term capital gains (losses). Total
amounts in column (f). Enter total short-term
capital gains (losses) here and on Form 100 or
Form 100W, Side 5, Schedule D, Part I, line 1,
column (f) or Schedule D (100S), Section A or
Section B, Part I, line 1, column (f). Write on
Schedule D, under column (a) Description of
property: “FTB 3725” and attach a copy of form
FTB 3725 to the tax return.
Line 10 – Long-term capital gains (losses).
Total amounts in column (f). Enter total long-term
capital gains (losses) here and on Form 100 or
Form 100W, Side 5, Schedule D, Part II, line 5,
column (f) or Schedule D (100S), Section A or
Section B, Part II, line 4, column (f). Write on
Schedule D, under column (a) Description of
property: “FTB 3725” and attach a copy of form
FTB 3725 to the tax return.
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Form Information

Fact Name Fact Description
Purpose The California 3725 form is used to track assets transferred from a parent corporation to an insurance company subsidiary.
Governing Law This form is governed by California Revenue and Taxation Code (R&TC) Section 24465.
Deferred Gain Gains from transferred appreciated property are deferred if the assets are used in the active conduct of the insurer's trade or business.
Appreciated Property Appreciated property refers to assets whose fair market value exceeds their adjusted basis at the time of transfer.
Commonly Controlled Group A commonly controlled group exists when a parent corporation or family members own more than 50% of voting power in multiple corporations.
Transfer Date The form must be used for transactions involving asset transfers that occur on or after June 23, 2004.
Sections The form includes sections for both assets transferred to an insurance company subsidiary and assets disposed of by the insurance company.
Tax Implications If transferred property is no longer owned or used by the insurer, the gain must be recognized as income.

Detailed Guide for Filling Out California 3725

Filling out the California 3725 form is an important step in reporting the transfer of assets from a parent corporation to an insurance company subsidiary. Once you have completed the form, it should be attached to either Form 100 or Form 100W as part of your tax return. Here are the steps to guide you through the process of filling out the form:

  1. Start with Basic Information: At the top of the form, enter the name of the parent corporation, its California corporation number, and the Federal Employer Identification Number (FEIN).
  2. Section A – Properties Transferred: Indicate whether appreciated properties were transferred to the insurance company subsidiary by checking "Yes" or "No." If you select "Yes," provide the insurance company’s name, California corporation number, and/or FEIN.
  3. Active Use of Assets: Answer whether the insurance company uses the transferred assets in its active trade or business. Select "Yes" or "No." If "Yes," proceed to Section B; if "No," skip to Part II.
  4. Section B – Deferred Capital Gains: List each asset transferred in the designated columns. Include the taxable year, description of the property, location, date transferred, fair market value at the date of transfer, cost or other basis, and the amount of gain deferred.
  5. Part II – Assets Transferred to Other Companies: In Section A, indicate if the insurance company still uses the assets listed in Part I. Select "Yes" or "No." If "Yes," you do not need to complete the following sections.
  6. Disposition of Assets: Answer whether the insurance company disposed of any assets received from the parent corporation. Select "Yes" or "No." If "Yes," continue to the next line.
  7. Sale of Assets: Indicate if the assets were sold to another company within the combined reporting group. Select "Yes" or "No." If "No," proceed to Section B or Section C.
  8. Short-Term Capital Gains and Losses: For assets held one year or less, provide the taxable year, description of the property, date of disposal, fair market value, cost or gross sales price, and calculate the gain or loss.
  9. Long-Term Capital Gains and Losses: For assets held more than one year, repeat the process by filling in the taxable year, description, date of disposal, fair market value, cost or gross sales price, and calculate the gain or loss.
  10. Totals: Sum up the short-term and long-term capital gains or losses and enter the totals in the appropriate sections of Form 100 or Form 100W.

Once you’ve completed these steps, ensure all information is accurate. Attach the California 3725 form to your tax return, and you’re ready to submit. It's always a good idea to keep a copy for your records.

Obtain Answers on California 3725

  1. What is the purpose of the California 3725 form?

    The California 3725 form is used to track assets transferred from a parent corporation to an insurance company subsidiary. It helps in calculating capital gains or losses resulting from these transfers. This form is particularly important for transactions that occur on or after June 23, 2004, as specified by California Revenue and Taxation Code (R&TC) Section 24465.

  2. When should I complete the California 3725 form?

    You should complete this form if your parent corporation has transferred appreciated properties to an insurance company subsidiary. If no appreciated properties were transferred, there is no need to fill out the form. Additionally, if the insurance company does not actively use the assets received from the parent corporation, you may need to complete specific sections regarding capital gains.

  3. What information is required in Part I of the form?

    Part I requires details about the assets transferred from the parent corporation. You must indicate whether appreciated properties were transferred, provide the name and identification numbers of the insurance company, and confirm if the assets are used in the active conduct of the insurer's trade or business. If the assets are actively used, you will continue to Section B for deferred capital gains.

  4. How do I report capital gains or losses?

    Capital gains or losses are reported in Part II of the form. You will need to specify whether the assets are short-term or long-term based on how long they were held. Enter the fair market value or sales price, cost or other basis, and calculate the gain or loss accordingly. The totals should then be transferred to the appropriate lines on Form 100 or Form 100W.

  5. What happens if the insurance company no longer uses the assets?

    If the insurance company no longer uses the assets in its active trade or business, you must report any gains as taxable. You will need to determine if the assets were sold to another company within the combined reporting group, as this may affect the taxability of the gain.

  6. Are there any specific definitions I need to know?

    Yes, two key definitions are crucial. First, "appreciated property" refers to property whose fair market value exceeds its adjusted basis at the time of transfer. Second, a "commonly controlled group" is a group of corporations with a common parent that owns more than 50% of the voting power. Understanding these terms will help ensure accurate reporting on the form.

Common mistakes

Filling out the California Form 3725 can be a straightforward process, but there are common pitfalls that can lead to mistakes. Understanding these mistakes can help ensure that your form is completed accurately and efficiently.

One common mistake is failing to provide the correct identifying information for both the parent corporation and the insurance company subsidiary. This includes the California corporation number and the Federal Employer Identification Number (FEIN). Omitting or incorrectly entering this information can delay processing or lead to complications down the line.

Another frequent error occurs when individuals do not properly assess whether the assets transferred were indeed appreciated properties. If you answer "Yes" to the question about appreciated properties but fail to provide the necessary details, it can result in confusion and potential penalties. Always ensure you understand the definitions provided in the form instructions.

In Section B, where deferred capital gains are reported, many people mistakenly enter inaccurate values for the fair market value and the cost or other basis of the assets. It's essential to accurately calculate these values based on the guidelines provided. If the fair market value is not correctly determined, it can lead to incorrect tax calculations.

Another mistake is skipping the follow-up questions in Section A regarding the active use of assets. If the insurance company does not actively use the transferred assets, it is crucial to answer these questions correctly. Misunderstanding this section can lead to misreporting gains or losses.

Some individuals also overlook the importance of record-keeping. Failing to maintain adequate documentation of the assets transferred can complicate matters if the form is audited. Keeping detailed records ensures that you can substantiate the information provided on the form if needed.

Additionally, people often neglect to review the instructions for reporting short-term and long-term capital gains accurately. Entering these amounts incorrectly can impact your overall tax liability. Always double-check the specific lines where these totals should be reported to avoid mistakes.

Lastly, failing to attach the completed Form 3725 to the appropriate tax return can lead to significant issues. Ensure that you follow the instructions regarding attachments carefully. Not doing so can result in your form being overlooked, which may lead to penalties or additional scrutiny from tax authorities.

By being aware of these common mistakes, you can approach the completion of California Form 3725 with greater confidence and accuracy, ultimately ensuring compliance and reducing the risk of complications.

Documents used along the form

The California 3725 form is essential for tracking assets transferred from a parent corporation to an insurance company subsidiary. However, it is often used in conjunction with other forms and documents that provide additional context and information. Below are four important documents that frequently accompany the California 3725 form.

  • Form 100: This is the California Corporation Franchise or Income Tax Return. Corporations use it to report income, calculate taxes owed, and claim any credits or deductions. It's essential for ensuring compliance with California tax laws.
  • Form 100W: This form is the California Corporation Franchise or Income Tax Return for Water's Edge Filers. It applies to corporations that elect to file on a water's edge basis, which affects how income is reported and taxed, particularly for multinational corporations.
  • Schedule D: This is a supplemental form used to report capital gains and losses. When completing the California 3725, corporations must summarize their short-term and long-term capital gains or losses on this schedule, linking it back to the assets reported on the 3725.
  • Form FTB 3805Q: This form is used for reporting the Qualified Small Business Stock (QSBS) exclusion. If any of the assets transferred qualify as QSBS, this form is necessary to claim the exclusion and reduce tax liability on capital gains.

Each of these documents plays a crucial role in ensuring accurate reporting and compliance with California tax regulations. Using them in conjunction with the California 3725 form helps to provide a complete picture of asset transfers and their tax implications.

Similar forms

  • California Form 100: This is the California Corporation Franchise or Income Tax Return. Like Form 3725, it is used by corporations to report income and calculate tax liabilities. Both forms require details about assets and capital gains.
  • California Form 100W: This form is specifically for corporations that qualify as S corporations. Similar to Form 3725, it deals with asset transfers and capital gains but is tailored for S corporations' tax reporting needs.
  • California Form 100S: This is the California S Corporation Franchise or Income Tax Return. It shares similarities with Form 3725 in that it addresses capital gains and losses, particularly for S corporations, focusing on asset transfers.
  • California Form 5471: This form is used for reporting information on foreign corporations. While it serves a different purpose, it also requires detailed information about assets and can involve capital gains reporting, akin to Form 3725.
  • California Form 8886: This is the Reportable Transaction Disclosure Statement. Similar to Form 3725, it requires disclosure of certain transactions that may have tax implications, including asset transfers.
  • IRS Form 8889: This form is used for Health Savings Accounts (HSAs). While its primary focus is different, it requires reporting of transactions and asset values, similar to the asset tracking in Form 3725.
  • IRS Form 4797: This form is used for reporting the sale of business property. It is similar to Form 3725 in that it deals with capital gains and losses from asset sales, emphasizing the importance of accurate asset reporting.

Dos and Don'ts

When filling out the California 3725 form, it's essential to approach the process carefully to ensure accuracy and compliance. Here’s a list of things to do and avoid:

  • Do read the instructions thoroughly before starting.
  • Do provide accurate information about the parent corporation and the insurance company.
  • Do check the dates and values of the assets being transferred.
  • Do ensure you understand the definitions of terms like "appreciated property."
  • Don't leave any required fields blank; incomplete forms can lead to delays.
  • Don't ignore the importance of calculating fair market value correctly.
  • Don't forget to attach any necessary additional sheets if you have multiple assets to report.
  • Don't submit the form without reviewing it for errors or inconsistencies.

Misconceptions

There are several misconceptions regarding the California 3725 form that can lead to confusion. Here are seven common misunderstandings:

  • Only large corporations need to file the form. This is incorrect. Any parent corporation transferring assets to an insurance company subsidiary must complete the California 3725 form, regardless of size.
  • The form is only for assets that have increased in value. This is a misconception. The form is used to report all assets transferred, but it specifically addresses appreciated properties for tax purposes.
  • Filing the form is optional. This is not true. If a parent corporation transfers assets to an insurance company subsidiary, filing the California 3725 form is mandatory to comply with tax regulations.
  • All transferred assets result in immediate tax liability. This is misleading. Gains can be deferred if the assets are used in the active conduct of the insurer's business, as specified in the California Revenue and Taxation Code.
  • The form is only relevant for California-based companies. This is inaccurate. While it is a California form, it applies to any corporation that meets the filing requirements, regardless of where the parent corporation is based.
  • Once filed, the information does not need to be updated. This is incorrect. If there are changes in the use of the assets or their ownership, the form may need to be updated to reflect these changes.
  • The California 3725 form is the same as federal forms. This is a misconception. The California 3725 form has specific requirements and guidelines that differ from federal tax forms, so it is essential to understand the distinctions.

Key takeaways

When dealing with the California Form 3725, there are several important points to keep in mind to ensure proper compliance and accurate reporting. Here are four key takeaways:

  • Purpose of the Form: The California Form 3725 is designed to track assets transferred from a parent corporation to its insurance company subsidiary. It is essential for calculating any capital gains or losses associated with these transfers, particularly if the assets were transferred after June 23, 2004.
  • Deferred Gains: If appreciated properties are transferred to the insurance company and are actively used in its trade or business, the gain from the transfer may be deferred. However, if the property is no longer owned by the insurer or is not used in the active conduct of business, the gain must be recognized as income.
  • Detailed Reporting: Accurate descriptions and valuations of the transferred assets are crucial. The form requires information such as fair market value at the date of transfer, the cost or other basis of the property, and the gain or loss incurred. This information must be reported clearly to avoid potential issues with tax authorities.
  • Short-Term vs. Long-Term Gains: The form distinguishes between short-term and long-term capital gains based on how long the assets were held. It is important to categorize these gains correctly, as they have different tax implications. Properly reporting these amounts on the appropriate lines of Form 100 or Form 100W is necessary for accurate tax filing.