Disclosure and Reporting Requirements: The information presented covers the changes to the disclosure and reporting requirements, made by Assembly Bill 115 (Stats.2005, Ch. 691), for both investors and material advisors of reportable transactions, including listed transactions. It contains the additional information required by the Franchise Tax Board under R&TC Section 18628(b)(2).
Reportable Transaction Disclosure Requirements (R&TC Section 18407)
Who Must Report
California taxpayers participating in reportable transactions must disclose certain information with their income tax return in accordance with provisions prescribed under R&TC Section 18407 and IRC Section 6011. Treasury Regulation Section 1.6011-4 describes six categories of reportable transactions, including listed transactions, which taxpayers must disclose.How to Report
- For tax years beginning on or after January 1, 2005:
Taxpayers with taxable income of more than $200,000 provide a copy of IRS Form 8886, Reportable Transaction Disclosure Statement, to disclose the transaction. Attach the disclosure statement to the taxpayer's tax return or information return (including amended return) for each taxable year the taxpayer participates in a reportable transaction (see IRC Section 6011, Treasury Regulation Sections 1.6011-4(d) and (e)).
Taxpayers must also file a separate IRS Form 8886 for the first time the reportable transaction is disclosed. Mail a duplicate copy of IRS Form 8886 to the address listed below.
- IRS Form 8271
Taxpayers must still file IRS Form 8271, Investor Reporting of Tax Shelter Registration Number, with their California tax return that claims or reports any income or deduction, loss, credit, or other tax benefit from a registration-required tax shelter. For more information, see IRS Form 8271 Instructions and IRS Notice 2004-80 (2004-50 I.R.B. 963).
- e - filers
Taxpayers can file IRS Form 8271, Investor Reporting of Tax Shelter Registration Number, and IRS Form 8886, Reportable Transaction Disclosure, with the California e-file return for tax years 2004 and later. E-filers must also file a separate IRS Form 8886 for the first time the reportable transaction is disclosed. The copy should show exactly the same information, word for word, provided with the electronically filed return. Mail a duplicate copy of IRS Form 8886 to the address listed below.
- IRS Schedule M-3 (Form 1120), Net Income (Loss) Reconciliation for Corporations With Total Assets of $10 Million or More
For tax years beginning January 1, 2005Corporations with assets at the end of their tax year that equal or exceed $10M and who were required to file IRS Schedule M-3 with their federal return were also required to attach a copy of the Schedule M-3 to their California return. If the schedule was filed timely and completed in accordance with Schedule M-3 instructions, the taxpayer is deemed to satisfy the reportable transaction disclosure requirement for transactions with significant book-tax differences defined under Treasury Regulation Section 1.6011-4(b)(6).
For transactions required to be disclosed beginning January 6, 2006Internal Revenue Service Notice 2006-6, Notification of Removal of the Transaction with a Significant Book-Tax Difference Category of Reportable Transaction under Section 1.6011.4, provides that the significant book-tax difference category of reportable transactions is no longer required to be disclosed under Treasury Regulation Section 1.6011-4. Taxpayers are not required to file a disclosure statement solely because the transaction has a significant book-tax difference under Section 1.6011-4(b)(6). California is following IRS Notice 2006-6. For more information, see Frequently Asked Questions, Reporting Requirements, question number 7.
If the transaction meets one of the other five categories of reportable transactions defined under Treasury Regulation Section 1.6011-4, taxpayers must complete IRS Form 8886. The timing of filing and other rules for IRS Form 8886 reporting still apply.
- For high net worth individuals and large entities that invested in a transaction after February 28, 2000, and before January 1, 2004, where that transaction becomes listed at any time:
Provide a copy of IRS Form 8886, Reportable Transaction Disclosure Statement, to disclose the transaction. Attach the disclosure statement to the taxpayer's tax return or information return (including amended return) for each taxable year the taxpayer participates in a reportable transaction.
Taxpayers must also file a separate IRS Form 8886 for the first time the reportable transaction is disclosed. Mail a duplicate copy of IRS Form 8886 to the address listed below.
- California listed transactions entered into prior to September 2, 2003 are not required to be disclosed under the provisions of R&TC Section 18407 unless the transaction meets one of the other five categories of reportable transactions as defined under Treasury Regulation Section 1.6011-4.
For a first time reportable transaction, mail a duplicate copy of IRS Form 8886 to the following address:
US Mail
Tax Shelter Filing
Mail Stop F-385
Franchise Tax Board
PO Box 1673
Sacramento CA 95812-1673Private Carrier Services
Tax Shelter Filing
Franchise Tax Board
Sacramento CA 95827
When to ReportListed Transactions
- For tax years beginning on or after January 1, 2005, taxpayers with taxable income of more than $200,000 report when the tax return is filed.
- For high net worth individuals and large entities that invested in a federal transaction after February 28, 2000, and before January 1, 2004, where that transaction becomes listed after filing the tax return, attach IRS Form 8886 to the taxpayer’s next tax return. A taxpayer can also amend the tax year in which the abusive tax transaction was claimed to disclose the transaction immediately upon the listing of the transaction. The first time a transaction is disclosed, the taxpayer must also mail a duplicate copy of the registration statement to the address shown above.
Listed transactions identified by the IRS or the FTB must be published on the FTB's Website and in FTB notices or other published positions.Effective Date
Penalty
- Taxpayers with taxable income of more than $200,000 are required to disclose their reportable transaction on their California tax returns for taxable years beginning on or after January 1, 2005.
- High net worth individuals and large entities must also disclose federal transactions that are entered into after February 28, 2000, and before January 1, 2004, where that transaction becomes listed at any time.
- Taxpayers are also required to disclose California listed transactions entered into prior to September 2, 2003, if the transaction meets one of the other five categories of reportable transactions defined under Treasury Regulation Section 1.6011-4.
There is a California penalty of up to $30,000 if a taxpayer fails to disclose a reportable or listed transaction on their return. For a description of this penalty, see Failure to Disclose Reportable and Listed Transactions Penalty.
Tax Shelter Reporting Requirements (R&TC Section 18628)
Assembly Bill (AB) 115 (Stat. 2005, Ch. 691) amended R&TC Section 18628 to conform to IRC Section 6111 (relating to disclosure of reportable transactions), except as otherwise provided. Changes to R&TC Section 18628 are effective as of October 7, 2005.
Who must file an information return
A material advisor must file a reportable transactions information return when the advisor meets any of the following criteria:
- Is organized in California;
- Does business in California;
- Derives income from California sources; or
- Provides any material aid, assistance or advice with respect to organizing, managing, promoting, selling, implementing, insuring, or carrying out any reportable transaction, including listed transaction, to a taxpayer that is organized in California, does business in California, or derives income from California sources.
How to file an information return
Material advisors must file IRS Form 8264, Application for Registration of a Tax Shelter, with the FTB until the form is revised or a successor form is issued. A material advisor must complete only Parts I (except item 1(b)), IV and V of Form 8264. IRS Notice 2004-80 (2004-50 I.R.B. 963), asclarified and modified by IRS Notice 2005-22 (2005-12 I.R.B. 756), provides further guidance in filing IRS Form 8264 to comply with the reporting requirements of IRC Section 6111.
If a person filed IRS Form 8264 with the FTB under R&TC Section 18628 before the amendment made by AB 115, that person does not have to file as a material advisor an amended or duplicate Form 8264 for the same transaction. If the information is no longer accurate or if there is additional required information that was not available at the time the information was originally disclosed on the Form 8264, the material advisor must file a new Form 8264 with the FTB.
Mail IRS Form 8264, Application for Registration of a Tax Shelter, to:
US Mail
Tax Shelter Filing
Mail Stop F-385
Franchise Tax Board
PO Box 1673
Sacramento CA 95812-1673Private Carrier Services
Tax Shelter Filing
Franchise Tax Board
Sacramento CA 95827When to file information return
A material advisor must file IRS Form 8264 with the FTB as follows:
- Provide a copy of Form 8264 on the same date the form is required to be filed with the IRS for reportable transactions. Currently, IRS Notice 2005-22 provides that until further guidance is issued, material advisors must file Form 8264 by the last day of the month that follows the end of the calendar quarter in which the advisor became a material advisor with respect to a reportable transaction.
- Complete a Form 8264 on a California-only basis if there is a filing requirement under California law but not under federal law. File the form with the FTB by the last day of the month that follows the end of the calendar quarter in which the advisor became a material advisor with respect to a reportable transaction.
- For listed transactions, the Form 8264 is due by the later of
- 60 days after entering into the transaction, or
- 60 days after the transaction becomes listed.
For more information on when to file IRS Form 8264, see FTB Notice 2005-7.
Penalty Amount
There is a California penalty of $50,000 if a material advisor fails to file a reportable transactions information return. If a material advisor fails to file an information return for a listed transaction, the California penalty is the greater of $200,000 or 50% of the gross income derived from the transaction. For a description of this penalty, see Failure to File Information Return Penalty.
List maintenance requirements (R&TC Section 18648)
Assembly Bill (AB) 115 (Stat. 2005, Ch. 691) amended R&TC Section 18648 to conform to IRC Section 6112, except as otherwise provided. Changes to R&TC Section 18648 are effective as of October 7, 2005.
Who must maintain
A material advisor who is required to maintain a list of advisees for federal purposes (under IRC Section 6112) must also maintain that list for the FTB if the material advisor meets any of the following criteria:
- Is organized in California;
- Does business in California;
- Derives income from California sources; or
- Provides any material aid, assistance or advice with respect to organizing, managing, promoting, selling, implementing, insuring, or carrying out any reportable transaction, including listed transaction, to a taxpayer that is organized in California, does business in California, or derives income from California sources.
How to report
All material advisors must maintain a list of advisees in the same manner as required under IRC Section 6112, including the information described in IRS Form 8264 Instructions under the heading "Keeping Lists of Investors." For reportable transactions, material advisors must provide a list of advisees to the FTB upon request.
If the material advisor is organized in California, does business in California, or derives income from a California source, R&TC Section 18648 requires the material advisor to maintain a list of all advisee's regardless of the advisee's physical address.
For federal and California listed transactions, material advisors must provide the list of advisees within the timeframes listed below to the following address:
US Mail
Tax Shelter Filing
Mail Stop F-385
Franchise Tax Board
PO Box 1673
Sacramento CA 95812-1673Private Carrier Services
Tax Shelter Filing
Franchise Tax Board
Sacramento CA 95827Penalty Amount
If a material advisor fails to maintain a list of advisees, there is a $10,000 penalty for each day they are late providing the list. If the failure to provide an advisee list involves a listed transaction, the California penalty is the greater of $100,000 or 50% of the gross income derived from the activity. For a description of this penalty see Failure to Maintain Advisee List Penalty.Licensed Attorneys
Licensed attorneys, who are material advisors due solely to the practice of law, are not required to maintain a list of investors if a transaction was entered into before January 1, 2004. This applies only to an attorney offering advice in an attorney-client relationship where:
- Legal advice, of any kind, is sought from a professional legal adviser in his or her capacity as a professional legal adviser.
- Communications are made in confidence and relate to that purpose.
- Communications are made or received by the client.
Additional List Maintenance Requirements for Listed Transactions
IRS Listed Transactions
Who must provide list
A material advisor of an IRS listed transaction must automatically provide the list of advisees to the FTB if both the following requirements apply:
- The transaction is entered into on or after February 28, 2000.
- The material advisor meets any of the following criteria:
a. Is organized in California;
b. Does business in California;
c. Derives income from California sources; or
d. Provides any material aid, assistance or advice with respect to organizing, managing, promoting, selling, implementing, insuring, or carrying out any reportable transaction, including listed transaction, to a taxpayer that is organized in California, does business in California, or derives income from California sources.When to provide list
The FTB must receive the list the later of:
- 60 days after the investor enters into the transaction.
- 60 days after the transaction becomes listed.
California Listed Transaction
Who must provide list
A material advisor of transactions identified by the FTB as listed transactions for California income or franchise tax purposes must also provide the list of advisees to the FTB if both the following requirements apply:
- The transaction is entered into on or after September 2, 2003.
- The material advisor meets any of the following criteria:
a. Is organized in California;
b. Does business in California;
c. Derives income from California sources; or
d. Provides any material aid, assistance or advice with respect to organizing, managing, promoting, selling, implementing, insuring, or carrying out any reportable transaction, including listed transaction, to a taxpayer that is organized in California, does business in California, or derives income from California sources.When to provide list
The FTB must receive the list by the later of:
- 60 days after the investor enters into the transaction.
- 60 days after the transaction becomes listed.