2005 California Revenue and Taxation Code Sections 19751-19778.duplicate CHAPTER 9.5. TAX SHELTERS

19751.  (a) The Franchise Tax Board shall develop and administer a
voluntary compliance initiative for taxpayers subject to Part 10
(commencing with Section 17001) and Part 11 (commencing with Section
23001), as provided in this chapter.
   (b) The voluntary compliance initiative shall be conducted during
the period from January 1, 2004, to April 15, 2004, inclusive,
pursuant to Section 19754.  This initiative shall apply to tax
liabilities attributable to the use of abusive tax avoidance
transactions for taxable years beginning before January 1, 2003.
   (c) The Franchise Tax Board shall issue forms and instructions and
may take any other actions necessary, including the use of closing
agreements, to implement this chapter.
   (d) The Franchise Tax Board shall publicize the voluntary
compliance initiative so as to maximize public awareness of and
participation in the initiative.  The Franchise Tax Board shall
coordinate to the highest degree possible its publicity efforts and
other actions taken in implementing this chapter.
   (e) Any correspondence mailed by the Franchise Tax Board to a
taxpayer at the taxpayer's last known address outlining the voluntary
compliance initiative under this chapter constitutes "contact"
within the meaning of Treasury Regulation Section 1.6664-2(c)(3),
relating to qualified amended returns, and paragraph (3) of
subdivision (e) of Section 19773 and Section 19777, regarding
increased interest rate.
19752.  Any taxpayer who meets the requirements of Section 19754 may
elect the application of either, but not both, of the following:
   (a) Voluntary compliance without appeal.  If this option is
elected, then each of the following shall apply:
   (1) The Franchise Tax Board shall waive or abate all penalties
imposed by this part, for all taxable years where the taxpayer elects
to participate in the initiative, as a result of the underreporting
of tax liabilities attributable to the use of abusive tax avoidance
transactions.
   (2) Except as provided in Section 19753, no criminal action shall
be brought against the taxpayer for the taxable years with respect to
issues for which the taxpayer voluntarily complies under this
chapter.
   (3) No penalty may be waived or abated under this chapter if the
penalty imposed is attributable to an assessment of taxes that became
final prior to December 31, 2003.
   (4) Notwithstanding Chapter 6 (commencing with Section 19301) of
this part, the taxpayer may not file a claim for refund for the
amounts paid in connection with abusive tax avoidance transactions
under this chapter.
   (b) Voluntary compliance with appeal.  If this option is elected,
then each of the following shall apply:
   (1) The Franchise Tax Board shall waive or abate all penalties,
except the accuracy related penalty under Section 19164 (as in effect
immediately before enactment of the act adding this section),
imposed by this part, for each of the taxable years for which the
taxpayer elects to participate in the initiative, that are owed as a
result of the underreporting of tax liabilities attributable to the
use of abusive tax avoidance transactions.
   (2) Except as provided in Section 19753, no criminal action may be
brought against the taxpayer for each of the taxable years for which
the taxpayer voluntarily complies under this section.
   (3) No penalty may be waived under this chapter if the penalty
imposed is attributable to an assessment of taxes that became due and
payable prior to December 31, 2003.
   (4) The taxpayer may file a claim for refund under Chapter 6
(commencing with Section 19301) of this part.  Notwithstanding
Section 19331, the taxpayer may not file an appeal to the board until
after either of the following:
   (A) The date the Franchise Tax Board takes action on the claim for
refund for the tax year to which this chapter applies.
   (B) The later of either of the following dates:
   (i) The date that is 180 days after the date of a final
determination by the Internal Revenue Service with respect to the
transaction or transactions to which this chapter applies.
   (ii) The date that is four years after the date the claim for
refund was filed or one year after full payment of all tax, including
penalty and interest was made, whichever date is later.
   (5) The taxpayer shall be subject to the accuracy related penalty
under Section 19164.
   (A) The penalty may be assessed:
   (i) When the Franchise Tax Board takes action on the claim for
refund.
   (ii) When a federal determination becomes final for the same
issue, in which case the penalty shall be assessed (and may not be
abated) if the penalty was assessed at the federal level.
   (B) In determining the amount of the underpayment of tax, Treasury
Regulation Section 1.6664-2(c)(2), as promulgated under Section 6664
of the Internal Revenue Code, relating to qualified amended returns,
shall not apply.  The amount of the underpayment is the difference
between the amount of tax shown on the original return and the
correct amount of tax for the taxable year.  The underpayment amount
shall not be less than the amount of the claim for refund filed by
the taxpayer under paragraph (4) that was denied.
   (C) The penalty is due and payable upon notice and demand pursuant
to Section 19049.  Only after the taxpayer has paid all amounts due,
including the penalty, and the claim is denied in whole or in part,
may the taxpayer file an appeal under Chapter 6 (commencing with
Section 19301), of this part in conjunction with the appeal filed
under paragraph (4).
   (c) A taxpayer's election under this section shall be made for all
taxable years of the taxpayer governed by this chapter.  A separate
election for each taxable year governed by this chapter is not
allowed.
19753.  (a) This chapter does not apply to violations of this part
for which, as of December 31, 2003, any of the following applies:
   (1) A criminal complaint was filed against the taxpayer in
connection with an abusive tax avoidance transaction or transactions.
   (2) The taxpayer is the subject of a criminal investigation in
connection with an abusive tax avoidance transaction or transactions.
   (b) No refund or credit shall be granted with respect to any
penalty paid prior to the time the taxpayer participates in the
voluntary compliance initiative authorized by this chapter.
   (c) For purposes of this chapter, an "abusive tax avoidance
transaction" means a plan or arrangement devised for the principal
purpose of avoiding tax.  Abusive tax avoidance transactions include,
but are not limited to, "listed transactions" as described in
subdivision (a) of Section 18407.
19754.  (a) The voluntary compliance initiative described in this
chapter applies to any taxpayer who was not eligible to participate
in the Internal Revenue Service's Offshore Voluntary Compliance
Initiative described in Revenue Procedure 2003-11, and during the
period from January 1, 2004, to April 15, 2004, does both of the
following:
   (1) Files an amended tax return under this part for each taxable
year for which the taxpayer has previously filed a tax return using
an abusive tax avoidance transaction to underreport the taxpayer's
tax liability for that taxable year.  Each amended return shall
report all income from all sources, without regard to the abusive tax
avoidance transaction.
   (2) Except as provided in subdivision (b), pays in full all taxes
and interest due.
   (b) The Franchise Tax Board may enter into an installment payment
agreement in lieu of the full payment required under paragraph (2) of
subdivision (a).  Any installment payment agreement authorized by
this subdivision shall include interest on the unpaid amount at the
rate prescribed in Section 19521.  Failure by the taxpayer to fully
comply with the terms of the installment payment agreement shall
render the waiver of penalties null and void, and the total amount of
tax, interest, and all penalties shall be immediately due and
payable.
   (c) After April 15, 2004, the Franchise Tax Board may issue a
deficiency assessment upon an amended return filed pursuant to
subdivision (a), impose penalties, or initiate criminal action under
this part with respect to the difference between the amount shown on
that return and the correct amount of tax.  This action shall not
invalidate any waivers granted under Section 19752.
   (d) In addition to any other authority to examine returns, for the
purpose of improving state tax administration, the Franchise Tax
Board may inquire into the facts and circumstances related to the use
of abusive tax avoidance transactions to underreport the tax
liabilities for which a taxpayer has participated in the voluntary
compliance initiative under this chapter.  Taxpayers shall cooperate
fully with inquiries described in this subdivision.  Failure by a
taxpayer to fully cooperate in an inquiry described in this
subdivision shall render the waiver of penalties under this chapter
null and void and the taxpayer may be assessed any penalties that may
apply.
19755.  (a) Notwithstanding Section 19057, with respect to proposed
deficiency assessments related to an abusive tax avoidance
transaction, as defined in subdivision (c) of Section 19753, a notice
of a proposed deficiency assessment may be mailed to the taxpayer
within eight years after the return was filed, or within the period
otherwise provided in Article 3 (commencing with Section 19031) of
Chapter 4 of this part, whichever expires later.
   (b) This section shall apply to any return filed under this part
on or after January 1, 2000.
19772.  (a) Section 6707A of the Internal Revenue Code, relating to
penalty for failure to include reportable transactions information
with a return, shall apply, except as otherwise provided.
   (b) The penalty amounts in Section 6707A(b) of the Internal
Revenue Code shall not apply, and in lieu thereof, the following
shall apply:
   (1) Except as provided in paragraph (2), the amount of the penalty
shall be fifteen thousand dollars ($15,000).
   (2) The amount of the penalty with respect to a listed transaction
shall be thirty thousand dollars ($30,000).
   (c) (1) Section 6707A(c)(1) of the Internal Revenue Code is
modified to include reportable transactions within the meaning of
paragraph (3) of subdivision (a) of Section 18407.
   (2) Section 6707A(c)(2) of the Internal Revenue Code is modified
to include listed transactions within the meaning of paragraph (4) of
subdivision (a) of Section 18407.
   (d) The penalty under this section only applies to taxpayers with
taxable income greater than two hundred thousand dollars ($200,000).
   (e) Section 6707A(e) of the Internal Revenue Code, relating to a
penalty reported to the Securities and Exchange Commission, shall not
apply.
   (f) Section 6707A(d) of the Internal Revenue Code, relating to the
authority to rescind a penalty, shall not apply, and in lieu
thereof, the following shall apply:
   (1) The Chief Counsel of the Franchise Tax Board may rescind all
or any portion of any penalty imposed by this section with respect to
any violation if all of the following apply:
   (A) The violation is with respect to a reportable transaction
other than a listed transaction.
   (B) The person on whom the penalty is imposed has a history of
complying with the requirements of this part and Part 10 (commencing
with Section 17001) or Part 11 (commencing with Section 23001).
   (C) It is shown that the violation is due to an unintentional
mistake of fact.
   (D) Imposing the penalty would be against equity and good
conscience.
   (E) Rescinding the penalty would promote compliance with the
requirements of this part and Part 10 (commencing with Section 17001)
or Part 11 (commencing with Section 23001) and effective tax
administration.
   (2) The exercise of authority under paragraph (1) shall be at the
sole discretion of the Chief Counsel of the Franchise Tax Board and
may not be delegated.
   (3) Notwithstanding any other law or rule of law, any
determination under this subdivision may not be reviewed in any
administrative or judicial proceeding.
   (g) Article 3 (commencing with Section 19031) of Chapter 4
(relating to deficiency assessments) shall not apply with respect to
the assessment or collection of any penalty imposed under this
section.
   (h) The penalty imposed by this section is in addition to any
penalty imposed under Part 10 (commencing with Section 17001), Part
11 (commencing with Section 23001), or this part.
19774.  (a) If a taxpayer has a noneconomic substance transaction
understatement for any taxable year, there shall be added to the tax
an amount equal to 40 percent of the amount of that understatement.
   (b) (1) Subdivision (a) shall be applied by substituting "20
percent" for "40 percent" with respect to the portion of any
noneconomic substance transaction understatement with respect to
which the relevant facts affecting the tax treatment of the item are
adequately disclosed in the return or a statement attached to the
return.
   (2) For taxable years beginning before January 1, 2003,
"adequately disclosed" includes the disclosure of the tax shelter
identification number on the taxpayer's return as required by
subdivision (c) of Section 18628, as applicable for the year in which
the transaction was entered into.
   (c) For purposes of this section:
   (1) The term "noneconomic substance transaction understatement"
means any amount which would be an understatement under Section 6662A
(b) of the Internal Revenue Code, as modified by subdivision (b) of
Section 19164.5 if Section 6662A(b) of the Internal Revenue Code were
applied by taking into account items attributable to noneconomic
substance transactions rather than items to which Section 6662A(b)
applies.
   (2) A "noneconomic substance transaction" includes the
disallowance of any loss, deduction or credit, or addition to income
attributable to a determination that the disallowance or addition is
attributable to a transaction or arrangement that lacks economic
substance including a transaction or arrangement in which an entity
is disregarded as lacking economic substance. A transaction shall be
treated as lacking economic substance if the taxpayer does not have a
valid nontax California business purpose for entering into the
transaction.
   (d) (1) If the notice of proposed assessment of additional tax has
been sent with respect to a penalty to which this section applies,
only the Chief Counsel of the Franchise Tax Board may compromise all
or any portion of that penalty.
   (2) The exercise of authority under paragraph (1) shall be at the
sole discretion of the Chief Counsel of the Franchise Tax Board and
may not be delegated.
   (3) Notwithstanding any other law or rule of law, any
determination under this subdivision may not be reviewed in any
administrative or judicial proceeding.
19777.  (a) If a taxpayer has been contacted by the Franchise Tax
Board regarding a reportable transaction, as defined in Section 6707A
(c)(1) of the Internal Revenue Code with respect to which the
requirements of Section 6664(d)(2)(A) of the Internal Revenue Code
are not met, any listed transaction, as defined in Section 6707A(c)
(2) of the Internal Revenue Code, or a gross misstatement within the
meaning of Section 6404(g)(2)(D) of the Internal Revenue Code, and
has a deficiency, there shall be added to the tax an amount equal to
100 percent of the interest payable under Section 19101 for the
period beginning on the last date prescribed by law for the payment
of that tax (determined without regard to extensions) and ending on
the date the notice of proposed assessment is mailed.
   (b) The penalty imposed by this section is in addition to any
other penalty imposed under Part 10 (commencing with Section 17001),
Part 11 (commencing with Section 23001), or this part.
19777.5.  (a) There shall be added to the tax for each taxable year
for which amnesty could have been requested:
   (1) For amounts that are due and payable on the last day of the
amnesty period, an amount equal to 50 percent of the accrued interest
payable under Section 19101 for the period beginning on the last
date prescribed by law for the payment of that tax (determined
without regard to extensions) and ending on the last day of the
amnesty period specified in Section 19731.
   (2) For amounts that become due and payable after the last date of
the amnesty period, an amount equal to 50 percent of the interest
computed under Section 19101 on any final amount, including final
deficiencies and self-assessed amounts, for the period beginning on
the last date prescribed by law for the payment of the tax for the
year of the deficiency (determined without regard to extensions) and
ending on the last day of the amnesty period specified in Section
19731.
   (3) For purposes of paragraph (2), Sections 19107, 19108, 19110,
and 19113 shall apply in determining the amount computed under
Section 19101.
   (b) The penalty imposed by this section is in addition to any
other penalty imposed under Part 10 (commencing with Section 17001),
Part 11 (commencing with Section 23001), or this part.
   (c) This section does not apply to any amounts that are treated as
paid during the amnesty program period under paragraph (4) of
subdivision (a) of Section 19733 or paragraph (1) of subdivision (b)
of Section 19733.
   (d) Article 3 (commencing with Section 19031), (relating to
deficiency assessments) shall not apply with respect to the
assessment or collection of any penalty imposed by subdivision (a).
   (e) (1) Notwithstanding Chapter 6 (commencing with Section 19301),
a taxpayer may not file a claim for refund or credit for any amounts
paid in connection with the penalty imposed in subdivision (a),
except as provided in paragraph (2).
   (2) A taxpayer may file a claim for refund for any amounts paid to
satisfy a penalty imposed under subdivision (a) on the grounds that
the amount of the penalty was not properly computed by the Franchise
Tax Board.
   (f) Notwithstanding Section 18415, the amendments made to this
section by the act adding this subdivision shall apply to penalties
imposed under paragraph (2) of subdivision (a) after March 31, 2005.
19778.  For any amended return filed after April 15, 2004, and
before the taxpayer is contacted by the Internal Revenue Service or
the Franchise Tax Board regarding a potentially abusive tax shelter,
then, for taxable years beginning after December 31, 1998, with
respect to any understatement of tax related to using reportable
transactions as defined in Section 18407, as added by the act adding
this section, the taxpayer is subject to interest as provided under
Section 19101 but at a rate of 150 percent of the adjusted annual
rate established under Section 19521.