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May 2009 - Large Corporate Understatement Penalty Payments and Amended Returns for the 2003-2007 Taxable Years

We are continuing to set forth guidance on procedural issues related to the payment of tax and filing of amended returns under California Revenue and Taxation Code (R&TC) Section 19138, subdivision (b).

SBX1 285 recently added R&TC Section 19138 effective December 19, 2008, and operative for taxable years beginning on or after January 1, 2003, for which the statute of limitations on assessment had not expired as of December 19, 2008.

The penalty applies to taxpayers subject to tax under Part 11 of the R&TC, primarily corporations, where the taxpayer has an understatement of tax in excess of $1 million. The penalty is 20 percent of the entire amount of the understatement, which is measured by the difference between the correct tax liability and the tax reported on the original return or an amended return filed on or before the extended due date.

The penalty will not be imposed to the extent the understatement of tax is attributable to a change in law that is enacted, promulgated, issued, or becomes final after the earlier of the date the taxpayer files the return or the extended due date of the return for the taxable year for which the change is operative. In addition, the penalty will not be imposed to the extent that the understatement of tax is attributable to the taxpayer's reasonable reliance on a legal ruling by our Chief Counsel. The penalty is payable upon notice and demand, and claims for refund of amounts paid in satisfaction of the penalty may be allowed only if the penalty was computed incorrectly.

For the 2003-2007 taxable years, a taxpayer can file an amended return and pay the tax shown on the amended return by May 31, 2009, in order to treat the tax shown on this amended return as tax shown on the original return for purposes of this penalty. This action will increase the taxpayer's self-assessed tax base against which the understatement of tax is measured to reduce the likelihood of receiving this penalty for those years.

5Stats. 2008, 1st Ex. Sess. 2007-2008, Ch. 1