FTB Set to Issue Costly Tax Shelter Penalties

Released: August 21, 2007

FTB Urges Participants to Quickly File Disclosure Statements

The Franchise Tax Board (FTB) today urged taxpayers who failed to file or filed incomplete disclosure statements (IRS 8886) regarding their reportable or listed transactions to take action before October 1, or face the possibility of stiff penalties.

“It is important that taxpayers pay their fair share to ensure that California has the resources to provide the public safety, education, health, and transportation services our residents expect and deserve,” said State Controller and FTB Chair John Chiang. “Highly sophisticated taxpayers will not be allowed to use illegitimate shelters to avoid reporting and paying their fair share.”

Federal tax law and regulations require taxpayers that have participated in these highly sophisticated “reportable” and “listed” transactions to disclose certain information on the taxpayer's return. California law follows federal treatment. A “reportable” transaction is any transaction the IRS or FTB determines has the potential for tax avoidance or evasion. There are six major categories of “reportable” transactions that, for example, involve certain types of tax losses that exceed certain thresholds and transactions with contractual protection where fees paid by the taxpayer to the promoter are contingent on the taxpayer's realization of tax benefits from the transaction.

A “listed” transaction is one that the IRS or FTB has determined to be structured for the significant purpose of tax avoidance or evasion. Examples of “listed” transactions are the “Son of Boss,” (IRS Notice 2000-44), which describes transactions generating losses resulting from artificially inflating the basis of partnership interest and inappropriate deductions for payments made through a partnership. Penalties for each failure to provide a disclosure statement are $15,000 for reportable transactions and $30,000 for listed transactions.

FTB estimates that abusive tax shelters cost California $500 million in lost tax dollars each year. FTB will continue to aggressively pursue those taxpayers who use, and the promoters who recommend these tax shelters.

Taxpayers who filed incomplete disclosure statements (see FTB Notice 2007-3) have until October 1, 2007; to file complete disclosure forms for each taxable year the taxpayer participated in a reportable transaction, or face penalties. The disclosure statement is due when the taxpayer files an original or amended tax return for each year the taxpayer participates in a reportable transaction. For disclosure statements filed for the initial year of participation, FTB requires the taxpayer to mail a copy to FTB's Abusive Tax Shelter Unit (ATSU) at:

US Mail: For Courier Service Delivery or Private Courier Mail:

A taxpayer filing a disclosure statement in accordance with this Notice need only file the statement with ATSU and need not file an amended return. Taxpayers should write in red on the top of IRS Form 8886, “FTB Notice 2007-3.”

Participants in FTB's 2004 Voluntary Compliance Initiative and in the 2006 California Tax Shelter Resolution Initiative (FTB Notice 2006-1) are not subject to these penalties for transactions that were disclosed through those initiatives. To learn more, visit the FTB's Website.

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