BILL ANALYSIS
Senate Appropriations Committee Fiscal Summary
Senator Christine Kehoe, Chair
401 (Wolk)
Hearing Date: 05/11/2009 Amended: 04/28/2009
Consultant: Mark McKenzie Policy Vote: Rev&Tax 5-2
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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.
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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
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STAFF COMMENTS: This bill meets the criteria for referral to the
Suspense File.
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
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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.