Frequently Asked Questions: FTB Notice 2008-4

FTB Notice 2008-4 covers all years where the statute of limitations is open and you claimed a state tax benefit on an original or amended return from an eligible transaction described in Section 4 of the Notice, Eligible Transactions. Cases involving fraud will have an unlimited statute of limitations.

Yes. If you or one of your related entities is already under examination, or is in protest or appeal with FTB regarding your or one of your related entity´s participation in an eligible transaction, you may obtain resolution under FTB Notice 2008-4. Notify the FTB staff assigned to the case immediately if you choose to participate and be sure to submit the completed and signed FTB Notice 2008-4 Closing Agreement, including Schedules I, II, and III, and any other information identified in the Closing Agreement, by September 12, 2008, to the address provided in the Notice.

No. If you entered into an eligible transaction described in Section 4 of FTB Notice 2008-4 prior to the date of this Notice but have not yet realized the tax benefits from the transaction you are not eligible to participate in the resolution described in this Notice. If you file a return claiming the tax benefits of an eligible transaction at a later date, including benefits derived from an overstated basis, you will be subject to all applicable penalties. Improper basis increases from these transactions should not be claimed at a later date.

No. Unlike the 2006 CAR Initiative, you do not have to file an election form to participate in FTB Notice 2008-4. Instead, you must complete FTB Notice 2008-4 Closing Agreement and submit the signed closing agreement, including Schedules I, II, and III, and any other information identified in the Closing Agreement, by September 12, 2008, to the address provided in FTB Notice 2008-4.

Yes. You must submit a complete and signed closing agreement (FTB Notice 2008-4 Closing Agreement) to FTB permanently resolving all tax, interest, and reduced penalties resulting from the concession of all claimed tax benefits pertaining to the eligible transactions identified in FTB Notice 2008-4. Under the terms of the resolution described in the Notice, no refund or credit of any amounts paid under FTB Notice 2008-4 will be allowed. You also waive any statutory right to appeal or further contest any issues you resolve under this Notice. If the participant in the transaction was a partnership, S corporation, or other pass-through entity, the person or entity that received the tax benefits from the participant should submit the closing agreement. One closing agreement should be submitted per taxpayer. The complete and signed closing agreement must be filed with FTB between June 23, 2008, and September 12, 2008.

No. As part of the closing agreement process you will not be required to submit an amended return reversing the eligible transactions covered by the closing agreements. You will be required to submit FTB Notice 2008-4 Closing Agreement, including Schedules I, II, and III, and any other information identified in the Closing Agreement, between June 23, 2008, and September 12, 2008. Schedule III captures the information that would normally be reported on an amended return. See FTB Notice 2008-4, Section 6. Procedures.

Yes. If you already paid the penalty amount and you participated in an eligible transaction described in FTB Notice 2008-4, the FTB Chief Counsel will reduce the NEST penalty to 20 percent. Also, FTB will refund any overpayment if you fully comply with all the requirements of this Notice and the statute of limitations is still open for the amounts you previously paid. You should submit the completed and signed FTB Notice 2008-4 Closing Agreement, including Schedules I, II, and III, and any other information identified in the Closing Agreement, for each eligible transaction for which you are electing to enter into a closing agreement under FTB Notice 2008-4. This information must be filed with FTB between June 23, 2008, and September 12, 2008.

Yes. If you received an NPA adjusting the tax benefits claimed from the eligible transactions prior to the date of FTB Notice 2008-4, and have not paid the tax shown on the NPA, you must pay the full amount of tax shown relating to those adjustments, a 20 percent NEST penalty as reduced by the FTB Chief Counsel, plus accrued interest up to the date of payment with the submission of the completed and signed FTB Notice 2008-4 Closing Agreement, including Schedules I, II, and III, and any other information identified in the Closing Agreement. FTB Chief Counsel will reduce the NEST penalty to 20 percent in the closing agreement. The 100 percent interest based penalty will be abated if the assessment is not final. The payment and the complete and signed closing agreement, including Schedules I, II, and III, and any other information identified in the Closing Agreement, must be filed with FTB between June 23, 2008, and September 12, 2008.

Yes. You must complete FTB Notice 2008-4 Closing Agreement, including Schedules I, II, and III, and their related attachments. Schedule III is filed in lieu of filing an amended return that disallows all tax benefits relating to the eligible transaction. You must then pay the self-assessed tax, a 20 percent accuracy related penalty, and interest accrued up to the date of payment. The payment and the complete and signed closing agreement, including Schedules I, II and III, and any other information identified in the Closing Agreement, must be filed with FTB between June 23, 2008, and September 12, 2008.

No. If you elect to participate in FTB Notice 2008-4, you cannot deduct, as an ordinary loss or deduction, any transaction costs associated with the eligible transaction. Also, the disallowed transaction costs cannot be added to the basis of any property.

No. Interest suspension does not apply on assessments of additional tax relating to the concession of all claimed tax benefits pertaining to the eligible transactions identified in FTB Notice 2008-4.

No. FTB Notice 2008-4 is only for those taxpayers who participated in an eligible transaction described in Section 4 of the Notice, Eligible Transactions.

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 with respect to amounts paid pursuant to this Notice:

• Fraud penalties (R&TC 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.
• Reportable Transaction Accuracy Related Penalty (R&TC Section 19164.5): Where an understatement of tax is due to a reportable transaction or listed transaction, the taxpayer is liable for penalties of 30 percent of the understatement amount. If the taxpayer adequately disclosed the transaction on the original tax return or qualified amended return, the penalty is reduced to 20 percent.
• Failure to Disclose Reportable Transaction and Listed Transaction Penalty (R&TC Section 19772): Where the taxpayer fails to attach IRS Form 8886, Reportable Transaction Disclosure Statement, to the tax return, or fails to file a complete form disclosing information related to a reportable transaction, the taxpayer is liable for penalties of $15,000 for reportable transactions other than listed transactions. The penalty for failing to file Form 8886 for listed transactions is $30,000.
• Noneconomic Substance Transaction (NEST) Penalty (R&TC 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 understatement amount. If the taxpayer adequately disclosed the transaction on the original tax return or qualified amended return, the penalty is reduced to 20 percent.
• Interest Based Penalty (R&TC 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 equal to 100 percent of the interest payable.

  For taxable years ending on or before December 31, 2004, the interest based penalty applies to taxpayers who FTB contacted regarding a potentially abusive tax shelter. See former R&TC Section 19777.

• Increased Interest (R&TC Section 19778): Where the taxpayer files an amended return reversing the transaction before contact by IRS or FTB, the taxpayer is liable for 150 percent of the interest payable on the understatement of tax related to using a reportable transaction.

Yes. Although FTB Notice 2008-4 requires you to fully pay the tax liability, interest and penalty for all years you participate in the Notice, it is possible to submit a request to enter into an installment payment arrangement with FTB to pay that amount over a period not to exceed 12 months if you have a financial hardship. FTB will not execute a submitted closing agreement absent payment in full or the presence of an acceptable payment arrangement. You must pay in full or apply for payment arrangements by September 12, 2008. See Instructions to FTB Notice 2008-4 Closing Agreement.

• Call our FTB Notice 2008-4 hotline at (916) 845-3030, Monday - Friday, 9:00 a.m. to 4 p.m. (PST).
• Email questions to taxshelter@ftb.ca.gov.