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Large Corporate Understatement Penalty (LCUP) Stands

On December 13, 2010, the California Court of Appeal rejected claims that Revenue and Taxation Code (R&TC) Section 19138, a corporate tax penalty provision for understating taxes by more than $1 million, is a tax and not a penalty (California Taxpayers’ Association v. Franchise Tax Board, Court of Appeal of California, Third District, No. C062791, December 13, 2010). In finding California’s large corporate understatement penalty to be just that - a penalty - it is not subject to the two-thirds legislative vote requirement, and therefore is valid. They also concluded that the post-payment refund action provided under the statute afforded taxpayers paying the penalty adequate due process protections.

R&TC 19138 was added by SB X1 28 and became effective December 19, 2008. This statute created a new penalty that applies to corporations for taxable years beginning on or after January 1, 2003, where the corporation has an understatement of tax in excess of $1 million. The penalty is 20 percent of the understatement, which is measured by the difference between the correct amount of tax and the tax reported on the original return or on an amended return filed on or before the extended due date.
For taxable years 2003-2007, a taxpayer could have filed an amended return and paid the tax shown on the amended return by May 31, 2009, to treat the tax shown on this amended return as tax shown on the original return. This one-time increase of self-assessed tax was allowed for corporations to reduce the likelihood of receiving this penalty for these taxable years.

LCUP Current Statistics -

Amended for More:

  • 169 taxpayers filed 448 tax years (2003 to 2007) and reported $2,613,313,829 on their amended for more returns.
  • From our records, it was determined that $2,602,436,448 of the amended for more amount was paid via electronic funds transfer payments and $64,715,030 was transferred from other tax years. This resulted in a total of $2,667,151,518 being applied, by the taxpayers, for the amended for more returns.
  • The payment amount is greater than the reported amount because some taxpayers included interest.

Claims for Refund:

  • Of the 169 taxpayers that filed amended for more returns, 38 of them have filed claims against 90 years. The total amount of claims filed to date is $475,858,277.

Penalties Assessed:

  • FTB has assessed a total of 10 LCUP penalties for $3,800,000.

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