FTB Urges Taxpayers to Resolve Their Accounts and Avoid Costly Penalties

Released June 6, 2008

The Franchise Tax Board (FTB) announced that taxpayers who filed a state income tax return or an amended return that included a state tax benefit from transactions referred to as either “bogus optional basis” (BOB) transactions or certain “employee stock ownership plan” (ESOP) transactions may qualify for relief from the noneconomic substance transaction (NEST) penalty.

Eligible California taxpayers have from June 23 to September 12, 2008, to resolve certain transactions that may be subject to the NEST penalty. To participate, taxpayers must submit a signed and completed closing agreement (FTB Notice 2008 - 4) on or before September 12, and pay all tax, penalties, and interest relating to the conceded tax benefits in full.

If a taxpayer previously received a Notice of Proposed Assessment (NPA) that included a 40 percent NEST penalty, FTB’s Chief Counsel will use his authority under the tax code to reduce the NEST penalty from 40 percent to 20 percent. To receive the penalty reduction, the taxpayer must pay the revised penalty amount in full when submitting the closing agreement.

For taxpayers who paid a 40 percent NEST penalty prior to the date of this notice, FTB’s Chief Counsel will reduce the penalty to 20 percent and refund any overpayment that is within the applicable statute of limitations. The taxpayer must fully comply with the terms of FTB Notice 2008–4.

If the taxpayer previously received an NPA that included a 100 percent interest-based penalty, FTB will abate the penalty if the assessment is still pending.

Taxpayers who have not been mailed an NPA for a BOB or ESOP transaction, whether they are under audit or not, should comply with the requirements of FTB Notice 2008–4. For taxpayers who comply, FTB will assess a 20 percent accuracy related penalty and will not assess the 100 percent interest-based penalty and will be relieved of other potential penalties relating to their participation in the eligible transactions including penalties under Revenue and Taxation Code Sections 19164(c), 19164.5, 19772, 19777, 19778, and former 19773.

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

For more information or the closing agreement, please visit FTB’s website www.ftb.ca.gov.

Editor’s Note: For definitions of ”BOB” and “ESOP” visit www.irs.gov.

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