BILL ANALYSIS
SB 401
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Date of Hearing: August 19, 2009
ASSEMBLY COMMITTEE ON APPROPRIATIONS
Kevin De Leon, Chair
SB 401 (Wolk) - As Amended: July 15, 2009
Policy Committee: Revenue and
Taxation Vote: 6-2
Urgency: No State Mandated Local Program:
No Reimbursable:
SUMMARY
This bill strengthens laws related to abusive tax shelters. Key
provisions of the bill:
1)Provide a single definition for such transactions (referred to
as "abusive tax avoidance transactions") for purposes of the
application of several statutes aimed at curtailing such
activity.
2)Adopt categories for reportable "transactions of interest"
which are similar to federal law, and provides FTB with
authority to establish additional categories, thereby
broadening and standardizing activities for which the FTB may
seek additional information.
3)Modifies an existing penalty related to abusive tax shelter
activity.
FISCAL EFFECT
1)According to the FTB, the bill would result in net revenue
gains of $6.4 million in 2009-10 and prior years, $0.1 million
in 2010-11, and about $12 million annually in subsequent
years.
2)Over the longer term, FTB indicates there could be additional
revenue increases if the "transactions of interest" provisions
result in higher taxpayer awareness and compliance.
COMMENTS
SB 401
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1)Background . Although many tax related transactions are legal
and represent legitimate utilization of tax laws to reduce tax
liabilities, a subset of these transactions have been found by
the IRS, courts, and state tax collection agencies to be an
abusive use of the tax code. In general, abusive tax shelters
(ATS) are transactions that serve no business purpose other
than reducing taxes and are often promoted with the promise of
tax benefits, predictable tax losses, and no related economic
loss experienced with respect to the taxpayer's income or
assets. An ATS is often cloaked in a series of transactions
to make it appear to have a business purpose or is structured
to create an incidental business purpose.
Current federal and state law place reporting requirements and
restrictions on abusive tax shelters and related "transactions
of interest" (that is, transactions that may signal potential
ATS activity). Uses of, and failure to report, such
transactions are subject to assessment, substantial penalties,
and interest by the FTB up to eight years after the tax return
is filed by the taxpayers.
2)Rationale . According to the Franchise Tax Board, current law
suffers from inconsistencies in definitions among various ATS
provisions, hampering the enforcement of these provisions.
This bill would eliminate these inconsistencies by providing a
single, consistent definition for abusive tax shelters, which
would be referred to as "abusive tax avoidance transactions."
It also adopts a new definition of transactions of interest,
similar to the federal reportable transaction categories, and
provides authority to the FTB to determine additional
categories (thereby enhancing reporting requirements and
enabling the state to seek additional information related to
such transactions).
Abusive tax shelter penalties can currently be avoided if a
taxpayer who has been contacted by the FTB about such
activities files an amended return prior to when FTB issues a
deficiency notice. This bill imposes a reduced penalty, equal
to 50 % of the full penalty, for taxpayers that file an
amended return in these circumstances. The reduced penalty is
aimed at encouraging taxpayers to file amended returns and pay
taxes owed, while at the same time maintaining some penalty on
taxpayers who previously reduced their tax by the use of
SB 401
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abusive transactions.
3)Related Legislation . The provisions of this bill were included
in the package adopted by the Conference Committee on the
Budget and included in SB 75 (Senate Budget and Fiscal Review)
and AB 75(Assembly Budget). The provisions were not, however,
included in the final budget package.
Analysis Prepared by : Brad Williams / APPR. / (916) 319-2081