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Glossary: Abusive Tax Shelters & Transactions

Abusive tax schemes - Transactions promoted for the promise of tax benefits with no meaningful change in the taxpayer's control over or benefit from the taxpayer's income or assets. These transactions typically have no economic purpose other than reducing taxes, or may involve the use of multiple layers of domestic and foreign pass-through entities including: partnerships, S corporations, limited liability companies, and trusts.

Abusive tax avoidance transaction (ATAT) - Is defined as:

  • Tax shelter as defined under Internal Revenue Code (IRC) Section 6662(d)(2)(C),
  • Reportable transaction as defined under IRC Section 6707A(c)(1) that is not adequately disclosed in accordance with IRC Section 6664(d)(2)(A),
  • Listed transaction as defined under IRC Section 6707A(c)(2),
  • Gross misstatement within the meaning of IRC Section 6404(g)(2)(D), or
  • Transaction to which the noneconomic substance transaction (NEST) penalty applies under Revenue and Taxation Code (RTC) section 19774.

High net worth individual - Any individual whose net worth is greater than $2 million immediately before the transaction.

Large entity - Any entity with gross receipts greater than $10 million during the year the reportable transaction occurs or in the preceding taxable year.

Listed transaction - A reportable transaction that is the same as, or substantially similar to, a transaction specifically identified by the IRS or FTB as a tax avoidance transaction.

Material Advisor - Any person who:

  • Provides any material aid, assistance, or advice with respect to organizing, managing, promoting, selling, implementing, insuring, or carrying out any reportable transaction, and
  • Directly or indirectly derives gross income in excess of the threshold amount for such aid, assistance, or advice.

The threshold amount is $50,000 if an individual derives substantially all of the tax benefits. For all other cases, the threshold amount is $250,000.

Noneconomic substance transaction - Means the disallowance of any loss, deduction or credit, or addition to income attributable to a determination that the transaction or arrangement lacks economic substance. A transaction lacks economic substance if the taxpayer cannot demonstrate a valid California business purpose other than tax savings.

Beginning March 24, 2011, the definition of noneconomic substance transaction includes any disallowance of claimed tax benefits by reason of a transaction lacking economic substance under federal law.

Offshore financial arrangement (OFA)- Any transaction designed to avoid or evade California income or franchise tax through the use of: (a) offshore payment cards, including credit, debit, or charge cards issued by banks in foreign jurisdictions, or (b) foreign banks, financial institutions, corporations, partnerships, trusts, or other entities.

Organizer - Any person who discovers, creates, investigates, or initiates the tax shelter investment, devises the business or financial plans for the investment or carries out those plans through negotiations or transactions with others. This also includes, any other person who participates in the organization, sale, or management of the tax shelter.

Potentially abusive tax shelter - Any tax shelter required to be registered under prior federal law or is a reportable transaction under present federal law or state law.

Promoter - Any person who, directly or indirectly, organizes or assists in the organization of a tax shelter or who participates in the sale of any interests in a shelter.

Reportable transaction - Any transaction the IRS or FTB determines as having a potential for tax avoidance or evasion.

Seller - For purposes of the list maintenance requirement, a seller is:

  1. Any organizer, underwriter, broker, or dealer (or other similar person) who transfers any interest in a tax shelter.
  2. Any agent who negotiates the transfer of any interest in a tax shelter for the tax shelter, an organizer, or other person described in (1).
  3. Any investor (not described in (1)) who transfers any interest in a tax shelter, or
  4. Any other person who receives consideration in connection with another person's right to participate in a tax shelter, for services necessary to the organization or structure of such tax shelter (other than services that do not constitute participation in the organization or management of a tax shelter under Treasury Regulation section 301.6111-1T), or for information that is integral to the participation in such tax shelter.

Tax Benefit - Includes deductions, exclusions from gross income, nonrecognition of gain, tax credits, adjustments (or the absence of adjustments) to the basis of property, status and an entity exempt from Federal or State income taxation, and any other tax consequences that may reduce a taxpayer's Federal or State tax liability by affecting the amount, timing, character, or source of any item of income, gain expense, loss or credit.

Tax Shelter - Is a partnership or other entity, any investment plan or arrangement, or any other plan or arrangement, if a significant purpose of the partnership, entity plan, or arrangement is the avoidance or evasion of federal or California income or franchise tax.

Transaction - Includes any series of related steps carried out as part of a prearranged plan.

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