BILL ANALYSIS
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THIRD READING
Bill No: SB 401
Author: Wolk (D)
Amended: 5/28/09
Vote: 21
SENATE REVENUE & TAXATION COMMITTEE : 5-2, 4/22/09
AYES: Wolk, Alquist, Florez, Padilla, Wiggins
NOES: Walters, Runner
NO VOTE RECORDED: Ashburn
SENATE APPROPRIATIONS COMMITTEE : 7-5, 5/28/09
AYES: Kehoe, Corbett, DeSaulnier, Hancock, Leno, Oropeza,
Yee
NOES: Cox, Denham, Runner, Walters, Wyland
NO VOTE RECORDED: Wolk
SUBJECT : Administration of taxes: potentially abusive
tax avoidance t
SOURCE : Author
DIGEST : This bill provides a single, consistent
definition for abusive tax shelters, which will be referred
to as an abusive tax avoidance transaction, and adopts the
federal reportable transaction category for "transactions
for interest."
ANALYSIS : Existing law imposes various taxes and fees,
and certain penalties in connection with tax avoidance and
abusive tax shelters, including reportable transactions.
CONTINUED
SB 401
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Abusive tax shelters (ATS) are transactions intended evade
income taxes through a transaction that generates a paper
loss with no business or economic substance. Sophisticated
taxpayers use these transactions to evade taxes; they are
increasingly difficult to detect due to the customization
of these shelters and the fact that they are hidden within
the tax forms. The author's office states that the purpose
of this bill is to curtail the use of abusive tax shelters
with no economic purpose except to evade taxes in this
state. Five years ago the state launched the most
successful program in the nation to curtail abusive tax
shelters. Since that time taxpayers, both individuals and
corporations, have found ways around the state's laws by
filing amended returns before a penalty could be assessed
or using inconsistencies in state laws to avoid fully
reporting questionable transactions. The intent of this
bill is to ensure that the state understands the
transactions that are in fact abusive with no business or
economic purpose not only so that the state can stop these
transactions from occurring but also so it can warn other
taxpayers of the consequences.
This bill discourages tax avoidance and the use of ATS 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 EFFECT : Appropriation: No Fiscal Com.: Yes
Local: No
According to the Senate Appropriations Committee:
Fiscal Impact (in thousands)
Major Provisions 2008-09 2009-10
2010-11 Fund
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ATS definition consolidation ($2,500)
($6,300)($8,800) General
(penalty revenue gain)
ATS-use penalty reduction ($1,000)$9,900$10,500
General
and avoidance
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 will increase penalty assessments by
$10 million annually, based on a workload of 250 cases each
year. These penalties will likely be collected over a
three-year period because of delays due to the protest
process. FTB estimates that half of this amount will be
collected in the first calendar year. The Senate
Appropriations Committee staff noted, that providing a
single, consistent definition for abusive tax shelters
would also create administrative efficiencies, enabling FTB
staff to pursue additional tax shelter caseload.
The consolidated definition of "an abusive tax avoidance
transactions" would apply to the eight-year statute of
limitations for filing deficiency assessments related to
tax avoidance schemes, the specified 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.
SUPPORT : (Verified 5/29/09)
Franchise Tax Board
California School Employee's Association
California Tax Reform Association
OPPOSITION : (Verified 5/29/09)
California Taxpayer's Association
California Chamber of Commerce
California Banker's Association
Tech America
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ARGUMENTS IN SUPPORT : Supporters argue that this bill
clarifies state tax laws that apply to potentially abusive
tax avoidance transactions and improves the effectiveness
of the abusive-tax-shelter-use penalty. They argue that
the state not only needs to improve collections but also
act as an example to the rest of the nation in curtailing
abusive tax shelters as it did in 2003.
ARGUMENTS IN OPPOSITION : The opposition argues that the
measure is overly punitive and broad and that legal tax
structures such as LLCs and S-Corporations could be
penalized for their existence.
DLW:do 5/29/09 Senate Floor Analyses
SUPPORT/OPPOSITION: SEE ABOVE
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