Abusive Tax Shelters

California Anti-Tax Shelter Legislation

The state of California already has implemented anti-tax shelter legislation that is wide-ranging in its disclosure, registration and list-maintenance requirements. While the rules in California require disclosure of any transaction for which disclosure is required under Federal tax disclosure rules, taxpayers subject to California jurisdiction must also disclose any transaction that has been identified by the California Franchise Tax Board as a tax avoidance transaction. For example, the California Franchise Tax Board has listed two types of transactions beyond those identified by Federal tax disclosure laws: (1) one involving REIT consent dividends; and (2) one involving deductions by wholly-owned or majority-owned RICs (Regulated Investment Companies).

Taxpayers and practitioners located outside of California must not assume that they are not subject to California's reporting requirements. The California anti-tax shelter legislation require registration and list maintenance for material advisors for tax shelters that have minimal contacts with California, by which taxpayers and advisors may be subject to these rules if they are: (1) organized in California; (2) doing business in California; (3) deriving income form sources in California; or (4) at least one of the investors is located in California. The penalties for failing to comply with these rules are significant. Taxpayers need to understand that these penalties will be severe and imposed strictly, because "as a practical matter, (the California rules on penalties are such) ...that a taxpayer who enters into a reportable transaction (subject to California's anti-tax shelter reporting rules) will need written advice from counsel to establish that he or she relied on advice from a tax advisor" (in order) to avoid penalties; " oral advice cannot meet the requirements." Lipton & Dixon, "Implications of California's Tough Anti-Tax Shelter Rules," Practical Tax Strategies/Taxation for Accountants, WG&L (June 2004).

For information about California's anti-tax shelter rules and registration requirements, please see http://www.ftb.ca.gov .