Practitioners and taxpayers must look beyond Federal tax disclosure rules and determine whether any additional filing or reporting obligations are imposed under applicable state law.

Illinois

Illinois was the second state, after California, to enact its own anti-tax shelter legislation. For more details on Illinois’ program, please see http://www.revenue.state.il.us/AbusiveTaxShelter.

New York

New York has recently enacted its own anti-tax shelter legislation. Under this law, enacted in April of 2005, taxpayers must disclose reportable transactions, listed transactions, and “NY reportable transactions” (if targeted and identified by the New York Commissioner of Revenue) with their New York state income tax returns. The penalty for failing to do so could be as much as $50,000.

For promoters and peddlers of tax shelters or other “material advisors”, with nexus to New York, registration may be required (effective September 9, 2005). The penalty for failing to do so ranges from $20,000 to $50,000 or 75% of gross income derived from the shelter.

For firms required to maintain investor lists in accordance with Section 6112, with nexus to New York, they must maintain a duplicate list for New York tax authorities. A failure to provide an investor list to New York tax authorities upon request (within 20 days) could lead to a $10,000 per day penalty.

Similar statute of limitations rules as those enacted by the JOBS Act of 2004 have been put in place in New York. Similar understatement penalty increases will exist with respect to reportable transactions and the aiding and assisting in the filing of fraudulent returns is increased to $5,000.

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).