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State of California Franchise Tax Board

State to Serve First of Tax Shelter Subpoenas

With less than one week to go for taxpayers to take advantage of the relief program for abusive tax shelters, state tax lawyers today are serving subpoenas to two major insurance companies who may have insured certain abusive tax shelters against government enforcement actions, announced the Franchise Tax Board (FTB).

This action serves as a turning point as the FTB transitions into its enforcement phase to curtail abusive tax shelters. Abusive tax shelters are transactions marketed with the promise of tax benefits with no correlating economic losses.

The subpoenas are demanding names and addresses of all California residents, persons with mailing addresses in California, and businesses doing business in California who were issued insurance policies or who sought to procure policies for tax liability, fiscal event, tax indemnity, or any similar product from 1999 through 2002.

The FTB's subpoenas require the insurance companies to provide documents pertaining to the marketing, sales, and issuance of these tax liability insurance policies, particularly as they may relate to the proliferation of abusive tax shelters.

For taxpayers who have invested in abusive tax shelters, the state is administering a Voluntary Compliance Initiative that runs through April 15. The Voluntary Compliance Initiative is a one-time chance for taxpayers who used abusive tax shelters to come forward and amend their state tax returns before the state starts pursuing the harsher penalties authorized by legislation signed last year (SB 614, Cedillo & Burton; AB 1601, Frommer). To date, this effort has collected $167 million from participating taxpayers.

The FTB is leading an aggressive effort to combat abusive tax shelters that are estimated to cost the state from $600 million to more than $1 billion annually. The new anti-shelter law provides the FTB with more enforcement tools to curtail the use of abusive tax shelters. Besides increasing the time period to conduct audits and greater registration requirements, the new law greatly increases penalties for both investing in and promoting illegal tax shelters.

Interested taxpayers have until April 15, 2004, to amend their returns and fully pay the tax and interest due. To learn more about the FTB's Voluntary Compliance Initiative, visit our Website at

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