The bill is aimed at what its supporters have labeled "abusive tax shelters." However, the bill's broad definition of what constitutes an "abusive tax shelter" could surprise many taxpayers. As stated in the FTB's legislative analysis: "Specifically, this bill modifies existing statutes and enhances penalties to mitigate the attractiveness of these shelters to tax preparers, promoters and participants. Finally, the bill provides a chance for participants to avoid enhanced penalties this bill would create, if the participants pay all tax and interest underpaid from using these transactions." The legislation contains several provisions targeting taxpayers that are deemed to have employed abusive tax shelters or engaged in "tax avoidance." It also provides penalties and reporting requirements for tax preparers and advisors who promote the use of tax shelters or assist taxpayers in effecting them. Additionally, the bill provides a "voluntary compliance" program that allows taxpayers to avoid many of the new penalties if the taxpayer files amended returns reversing the tax benefits sought in prior years by use of a tax avoidance transaction, and if the taxpayer waives the right to protest or seek refunds.
Although the bill contains no express definition for "abusive tax shelter," it does provide a codification of the "economic substance doctrine" ("ESD"), which would be used to determine whether a taxpayer has engaged in an invalid tax avoidance transaction. The legislation's formulation of the ESD would require taxpayers to meet the most stringent application of that doctrine as it is currently applied by some courts. For example, S.B. 614 would require taxpayers to establish both a "meaningful change in economic position," as well as a "substantial non-tax purpose" to avoid application of the ESD. Moreover, the proposed legislation would not allow a taxpayer to establish a meaningful change in economic position with evidence of favorable non-California income tax benefits, such as foreign tax or estate tax planning.
Several other provisions currently in the bill could threaten not only current and future planning, but planning for prior years as well. For example:
We will be watching the bill closely and will report on its status in a future issue. If you have any specific questions regarding S.B. 614, please contact Peter Kanter.