BILL ANALYSIS                                                                                                                                                                                                    




                   Senate Appropriations Committee Fiscal Summary
                           Senator Christine Kehoe, Chair

                                           401 (Wolk)
          
          Hearing Date:  05/28/2009           Amended: 04/28/2009
          Consultant: Mark McKenzie       Policy Vote: Rev&Tax 5-2
          _________________________________________________________________ 
          ____
          BILL SUMMARY:   SB 401 would discourage tax avoidance and the  
          use of abusive tax shelters by defining a "potentially abusive  
          tax avoidance transaction" as: (1) a tax shelter; (2) an  
          undisclosed reportable transaction; (3) a listed transaction;  
          (4) an entity, investment plan or arrangement, or other plan or  
          arrangement that has the potential for tax avoidance or evasion,  
          as identified by the Secretary of the Treasury or the Franchise  
          Tax Board; (5) a gross misstatement; or (6) a transaction  
          subject to the noneconomic substance transaction understatement  
          penalty, as specified.  
          _________________________________________________________________ 
          ____
                            Fiscal Impact (in thousands)

           Major Provisions         2008-09      2009-10       2010-11    Fund
           ATS definition consolidation      ($2,500)    ($6,300)   
          ($8,800)General
           (penalty revenue gain)

          ATS-use penalty reduction         ($1,000)    $9,900     
          $10,500General
           and avoidance
          Staff notes that the fiscal impact does not account for  
          potential increases in tax collections by preventing the use of  
          abusive tax shelters. 
          _________________________________________________________________ 
          ____

          STAFF COMMENTS:  SUSPENSE FILE.  AS PROPOSED TO BE AMENDED.
          The consolidated definition of "potentially abusive tax  
          avoidance transactions" would apply to the eight-year statute of  
          limitations for filing deficiency assessments related to tax  
          avoidance schemes, the specified abusive-tax-shelter (ATS) use  
          penalty, interest suspension rules that apply to certain  
          taxpayers that have been contacted regarding an ATS, and the  
          authority to issue subpoenas to prevent the marketing of an ATS.











          The Franchise Tax Board (FTB) estimates that modification of the  
          definition of a "potentially abusive tax avoidance transaction"  
          and its application in various provisions that limit tax  
          avoidance would increase penalty assessments by $10 million  
          annually, based on a workload of 250 cases each year.  These  
          penalties would likely be collected over a three-year period  
          because of delays due to the protest process.  FTB estimates  
          that half of this amount would be collected in the first  
          calendar year.  Staff notes that providing a single, consistent  
          definition for abusive tax shelters would also create  
          administrative efficiencies, enabling FTB staff to pursue  
          additional tax shelter caseload. 

          Under current law, the ATS-use penalty applies if FTB contacts a  
          taxpayer regarding a deficiency that results from the use of an  
          undisclosed reportable transaction, a listed transaction, or a  
          gross misstatement.  The penalty is 100 percent of the interest  
          payable up to the date that a notice of proposed deficiency is  
          mailed by FTB.  Because the ATS-use penalty is based on the  
          amount of interest on a deficiency, a taxpayer may avoid the  
          penalty by filing an amended return prior to FTB issuing a  
          deficiency notice.  SB 401 
          Page 2
          SB 401 (Wolk)

          would modify the ATS-use penalty by imposing 50 percent of the  
          penalty on taxpayers who file an amended return prior to the  
          issuance of a deficiency notice.

          FTB currently receives approximately $17 million annually in  
          accelerated revenues from taxpayers that file amended returns to  
          specifically avoid the ATS-use penalty.  FTB estimates that some  
          taxpayers would not voluntarily file an amended return because  
          SB 401 allows 50 percent reduction in the penalty.  The ATS-use  
          penalty reduction would result in collection of only half of  
          what is currently collected, and a delay in revenue collections  
          of approximately $8.5 million beginning in 2010-11.  The full  
          amounts would eventually be collected upon completion of audits  
          in future years.

          FTB anticipates that some taxpayers currently under audit would  
          file an amended return in the period between the enactment of  
          the bill and the January 1, 2010 operative date in order to  
          avoid the ATS-use penalty.  This would accelerate approximately  
          $5 million from audits that would have been completed over the  
          next few years into the first year.











          This bill would also specify that a legal tax structure of an  
          LLC or an S corporation shall not by itself be "potentially  
          abusive" solely because of the choice of entity.  Finally, SB  
          401 would adopt the federal reportable transaction category for  
          "transactions of interest" for California purposes, and provide  
          similar authority to FTB for determining transactions of  
          interest for California income or franchise tax purposes.


          Proposed amendments would:
           Revise the definition of a California transaction of interest  
            to conform to the federal definition.
           Make clarifying changes to remove the term "potential" from  
            references to "abusive tax avoidance transactions."