FAQs - California Tax Shelter Resolution Initiative (California Initiative)

The California Initiative covers all years where the statute of limitations is open. In order to participate in the California Initiative, you must first qualify to participate in the Internal Revenue Service (IRS) Settlement Initiative and fully complete the terms of the federal initiative described in IRS Announcement 2005-80.

Yes. If you or one of your related entities is already under FTB examination, you can still participate in the California Initiative if you or one of your related entities first qualify to participate in the Internal Revenue Service (IRS) Settlement Initiative and fully complete the terms of the federal initiative described in IRS Announcement 2005-80. If your case is currently in protest or appeals at FTB, you can still participate. Please notify the FTB staff assigned to the case immediately if you choose to participate.

Yes. You must execute a closing agreement with FTB, permanently resolving all tax, interest, and penalty consequences associated with your participation in any transaction listed in IRS Announcement 2005-80. Under the terms of the California closing agreement, you will not be able to file a claim for refund or an appeal for any amounts paid under the California Initiative nor may you further contest any issues for which you elect to participate in this initiative.

Yes. As part of the closing agreement process you will be required to submit an amended return reversing the transaction(s) for which you are making an Election to Participate under the California Initiative and any other requested information, such as marketing materials and tax opinion letters. You will be required to submit the amended return and other information at the time specified in requests from FTB. See Procedures for Participation in California Initiative, FTB Notice 2006-1.

No. If you elected Option 2 under the 2004 Voluntary Compliance Initiative (VCI), you can file a claim for refund for the transaction costs provided the statute of limitations for filing a claim for refund for the affected year(s) remains open and you qualify to participate in the Internal Revenue Service (IRS) Settlement Initiative and fully complete the terms of the federal initiative described in IRS Announcement 2005-80.

If you decide to participate in the California Initiative, you will be required to enter into a closing agreement with FTB waiving your right to file a claim for refund or an appeal for any amounts paid under the California Initiative and to contest issues for which you elect to participate in this initiative. You should file form FTB 638, California Tax Shelter Resolution Initiative Election to Participate in FTB Notice 2006-1, and attach a copy of IRS Form 13750, Election to Participate in Announcement 2005-80 Settlement Initiative, including all schedules (including, but not limited to, Schedules A and B), for each transaction for which you are making an Election to Participate under the California Initiative. This information must be filed with FTB no later than March 31, 2006.

You will be required to submit the amended return and other information at the time specified in requests from FTB.

If you elected Option I under VCI, you cannot file a claim for refund for the transaction costs because you waived all rights to file a claim for refund and appeal.

Yes, as long as the statute of limitations for filing a claim for refund for the affected year(s) is open and you qualify to participate in the Internal Revenue Service (IRS) Settlement Initiative and fully complete the terms of the federal initiative described in IRS Announcement 2005-80. You should file form FTB 638, California Tax Shelter Resolution Initiative Election to Participate in FTB Notice 2006-1, and attach a copy of IRS Form 13750, Election to Participate in Announcement 2005-80 Settlement Initiative, including all schedules (including, but not limited to, Schedules A and B), for each transaction for which you are making an Election to Participate under the California Initiative. This information must be filed with FTB no later than March 31, 2006.

Submitting form FTB 638 without filing a claim for refund attributable to the transaction costs will not suspend the statute of limitations for claiming a refund of the transaction costs. If you fail to submit a timely claim for refund in this situation, and the statute of limitations expires, the FTB will not be able to provide a refund.

Yes. If you already paid the penalty amount you can file a claim for refund so long as the statute of limitations is open and you qualify to participate in the Internal Revenue Service (IRS) Settlement Initiative and fully complete the terms of the federal initiative described in IRS Announcement 2005-80. You should file form FTB 638, California Tax Shelter Resolution Initiative Election to Participate in FTB Notice 2006-1, and attach a copy of IRS Form 13750, Election to Participate in Announcement 2005-80 Settlement Initiative, including all schedules (including, but not limited to, Schedules A and B), for each transaction for which you are making an Election to Participate under the California Initiative. This information must be filed with FTB no later than March 31, 2006.

In lieu of the noneconomic substance transaction understatement penalty and 100% interest based penalty, the FTB will only impose an accuracy related penalty at the percentage rate specified in IRS Announcement 2005-80 for those taxpayers who satisfy all the requirements of the California Initiative.

No. The California Initiative is only for those taxpayers eligible to participate in, and who fully complete the requirements of, the Internal Revenue Service (IRS) Settlement Initiative described in IRS Announcement 2005-80 and who have underreported California tax liabilities due to transactions listed in Section 3 of the federal announcement.

The following is a summary of penalties that may apply to California income and franchise taxpayers involved in abusive tax avoidance transactions. FTB will not impose these penalties on taxpayers who come forward under the Initiative:

• Fraud penalties (RTC section 19164(c), IRC section 6663):
  Where an underpayment of tax is due to fraud, the taxpayer is liable for penalties that essentially amount to 75 percent of the increased tax.
• Noneconomic Substance Transaction Understatement Penalty(RTC section 19774):
  Where an understatement of tax is due to a transaction that lacks economic substance, the taxpayer is liable for penalties of 40 percent of the unpaid tax. If the taxpayer adequately disclosed the transaction on the return, the penalty is reduced to 20 percent.
• Interest Based Penalty(RTC section 19777):
  Where FTB contacts a taxpayer regarding a reportable transaction, listed transaction or gross misstatement and assesses a deficiency, the taxpayer is liable for a penalty amounting to 100 percent of the interest payable.

Yes. Although the California Initiative requires you to fully pay the tax liability, interest and accuracy related penalty for all years you participate in the California Initiative, it is possible to submit a request that includes other payment arrangements acceptable to the FTB.

The California Initiative is only for those taxpayers who qualify to participate in, and who fully complete, the requirements of the Internal Revenue Service (IRS) Settlement Initiative described in IRS Announcement 2005-80 and who have underreported California tax liabilities due to transactions listed in Section 3 of the federal announcement. However, the Franchise Tax Board may consider requests to apply the federal terms under Announcement 2005-80 to taxpayers who are in any of the situations described in question 11. Such requests should be submitted in writing and contain the same information required to be submitted under the federal initiative, including an amended California return. Mail the request to:

TAX SHELTER RESOLUTION INITIATIVE
MAIL STOP - F-385
FRANCHISE TAX BOARD
PO BOX 1673
SACRAMENTO CA 95812-1673

The FTB will generally follow the final federal determination when federal and California law are substantially similar, but penalties unique to California law may be imposed if you did not participate in California's Voluntary Compliance Initiative (VCI).

If the statute of limitations is open and you participated in VCI Option 2 for this transaction, you may file a claim for refund based on the Internal Revenue Services' (IRS) actions and the FTB will follow the final federal determination including assessment of the accuracy related penalty. You must file an amended California return and attach all documents submitted to and received from the IRS. If you participated in VCI Option 1 for this transaction you may not file a claim for refund.

If you did not participate in the California VCI program for this transaction, the FTB will follow the final federal determination, but you may be subject to the California tax shelter penalties, including the noneconomic substance transaction understatement penalty and 100% interest based penalty. If you file an amended California return to reverse the transaction(s), and pay the additional tax and interest, the 100% interest based penalty will not be imposed.