An overview of California's 2004 tax amnesty legislation.

I. Introduction

As a result of discussions between Governor Arnold Schwarzenegger and the California Legislature as part of the funding of the fiscal 2005 Budget Act, language to implement a tax amnesty program was included in Senate Bill (SB) 1100, which was written by the Senate Budget and Fiscal Committee. Amnesty bills have been pending in the California Legislature for the last several sessions, but none had been enacted, until SB 1100. On August 2, 2004, the Legislature passed SB 1100, which was signed by the Governor on August 16, 2004, as Stats. 2004, Chapter 226. The bill was classified as an "urgency statute," which went into immediate effect when signed by the Governor. (1) According to SB 1100, "tax amnesty is an innovative and responsible way to increase state revenue to preserve vital state programs without proposing new tax burdens on business and working families, as well as to expose tax evaders operating in the underground economy." (2)

The last tax amnesty program in California, which was in 1984-1985, produced $154 million in gross revenues. (3) When enacting the program in the 1980s, the Legislature expressly found that the 1984-1985 amnesty would be a one-time occurrence, not to be repeated in the future on the ground that it would be counterproductive. (4) But times have changed.

This 2004 amnesty legislation comes on the heels of the State's spectacularly successful 2003 tax shelter and abusive tax shelter initiative, (5) which included a Voluntary Compliance program that generated $1.3 billion for the state (as opposed to an estimated $90 million). (6) California's Franchise Tax Board (FTB) has estimated that the new amnesty proposal will have a positive revenue effect of $555 million in 2004-2005, consisting of $200 million in new revenue and $355 million in accelerated revenue. (7) Similarly, the State Board of Equalization (SBE) has projected revenue collections of approximately $82 million in 2004-2006 from the amnesty program. (8)

The new tax amnesty legislation creates a two-month amnesty before the end of the 2004-2005 fiscal year for personal and corporate income taxes administered by the FTB, and for sales and use taxes administered by the SBE. The program applies to tax reporting periods beginning before January 1, 2003, and waives penalties and fees, but not tax or interest, and requires full payment of the tax and interest. The new legislation also increases the penalties for those eligible taxpayers that do not participate in the amnesty and, for the income tax amnesty, denies refunds to those that do participate.

II. Personal and Corporate Income Tax Amnesty

The FTB's personal and corporate income tax amnesty will be conducted during a two-month period beginning February 1, 2005, and ending March 31, 2005. (9) The program will apply to tax liabilities due and payable for tax years beginning before January 1, 2003. (10)

A. Participation Requirements

The income tax amnesty program applies to (1) all eligible participants, (2) who file a completed amnesty application with the FTB, signed under penalty of perjury, electing to participate in the tax amnesty program, and (3) who, within 60 days after the conclusion of the tax amnesty period, file the appropriate original return or amended return for any taxable year eligible for the amnesty program and pay in full any taxes and interest due for each such taxable year(s). (11)

1. Eligibility. While the participant eligibility requirements are not specifically delineated in the applicable statutory provisions, the FTB has indicated that the legislation applies to both individuals and businesses if they did not file the required California tax returns; underreported income on a previously filed tax return; claimed excessive deductions; or did not pay previously assessed taxes, interest, penalties, or fees. (12)

With respect to time periods, amnesty "could" be requested for all tax reporting periods beginning before January 1, 2003. Unlike some state tax amnesty programs, the California income tax amnesty program is not limited to those taxpayers who have not previously been contacted by the tax agency. A taxpayer's having been contacted, or being under audit, or even receipt of an assessment that is being administratively challenged does not preclude the taxpayer from being eligible for this amnesty program.

There are, however, some limits. The income tax amnesty does not apply to any taxpayer who, as of February 1, 2005, (1) is on notice of a criminal investigation by a complaint having been filed against the taxpayer; (2) is under criminal investigation; or (3) has a court proceeding that has already been initiated. (13) In addition, the amnesty does not apply to any non-reported or underreported tax liability amounts attributable to tax shelter items that could have been reported under the FTB's Voluntary Compliance program (commencing with Revenue and Taxation Code Section (14) 19731) or the Internal Revenue Service's Offshore Voluntary Compliance Initiative described in Revenue Procedure 2003-11. (15)

A taxpayer filing for bankruptcy protection under title 11 of the United States Code will only be eligible to participate in the income tax amnesty if an order from a Federal Bankruptcy Court is submitted to the FTB that allows the taxpayer to participate in the income tax amnesty program. (16)

2. Application. In general, taxpayers must file a completed amnesty application electing to participate in the amnesty starting February 1, 2005, and no later than March 31, 2005. (17) The income tax amnesty application will be in the form and manner specified by the FTB. (18) The FTB's "Tax Amnesty Quick Reference" (on its website) states that the amnesty application form will be available by December 22, 2004. (19) In no case "shall a mere payment of any taxes and interest due, in whole or in part, for any taxable year otherwise eligible for amnesty under this part, be deemed to constitute an acceptable amnesty application." (20) Moreover, the application of a refund from one taxable year to offset a tax liability from another year otherwise eligible for amnesty shall not, without the filing of an amnesty application, be deemed to constitute an acceptable income tax amnesty application. (21)

3. Filing of Returns and Payment. Where the taxpayer has not filed the required return for any taxable year eligible for the income tax amnesty, the taxpayer must file a completed original tax return for that year. (22) The FTB has indicated that this includes filing enforcement taxpayers. For taxpayers who have underreported tax liability on a return for any taxable year eligible for the income tax amnesty, the taxpayer must file an amended return for that year. (23) All returns must be filed no later than May 31, 2005. (24)

In order to comply with the full-payment requirement under the statutory provisions, amnesty participants must pay the full amount of tax and interest due for the eligible tax year. The full amount due shall be treated as paid during the amnesty period if "the full amount due is paid within [15 calendar days] ... after the date the Franchise Tax Board mails a notice resulting from the filing of an amnesty application or the full amount is paid within 60 days after the conclusion of the tax amnesty period.... " (25) In addition, amnesty participants who enter into an installment payment agreement with the FTB will also meet the full payment requirement as long as the final payment under the terms of that installment agreement is due and is paid no later than June 30, 2006. (26) Failure to fully comply with the installment agreement will render the waiver of penalties and fees null and void, unless the FTB determines that the failure was due to reasonable cause and not due to willful neglect. (27) In the case of any such failure, the total amount of tax, interest, fees, and all penalties become due and payable immediately. (28)

B. Penalties/Fees Imposed

Two penalty/fee provisions were enacted as a result of the income tax amnesty legislation: an increased accuracy-related penalty and a new 50-percent interest "penalty." These penalty/fee provisions are in addition to any other penalties imposed.

1. Accuracy-Related Penalty. For any proposed deficiency assessment issued after the last date of the amnesty period (March 31, 2005) (29) for any tax year beginning before January 1, 2003, the increased accuracy-related penalty is now 40 percent instead of 20 percent. (30) The increased accuracy-related penalty, however, will not apply to any taxpayer for taxable years in audit, protest, appeal, settlement, or litigation as of the start of the amnesty period (February 1, 2005). (31) This "carve out" for protests, appeals, settlements, and litigation pending as of February 1, 2005 was added as part of the budget negotiations producing SB 1100 as a budget trailer bill.

Accordingly, taxpayers with FTB audits, protests, appeals, settlement negotiations, or litigation pending as of February 1, 2005, need not be concerned with this increased accuracy-related penalty found in section 19164 for taxable years subject to such proceedings. For other FTB taxpayers (not involving tax shelters), the increased penalty applies for any taxable year beginning before January 1, 2003, where the proposed deficiency assessment is issued after March 31, 2005. (32)

2. Interest "Penalty." The income tax amnesty legislation also enacted a new interest "penalty" which is equal to (1) 50 percent of the existing unpaid interest amount on any tax year for a taxpayer that failed to take advantage of amnesty; and (2) 50 percent of the unpaid interest subsequently assessed on deficiency amounts where the taxpayer could have, but failed to take part in amnesty. (33)

Specifically, SB 1100 provides there shall be added to the tax for each taxable year for which amnesty could have been requested (i.e., tax reporting periods beginning before January 1, 2003), for amounts that are due and payable on the last date of the amnesty period (March 31, 2005), 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 (March 31, 2005). (34)

In addition, SB 1100 provides there shall be added to the tax for each taxable year for which amnesty could have been requested (i.e., tax reporting periods beginning before January 1, 2003), for amounts that became due and payable after the last date of the amnesty period (March 31, 2005), an amount equal to 50 percent of the accrued interest payable 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 that tax for the year of the deficiency (determined without regard to extensions) and ending on the last day of the amnesty period (March 31, 2005). (35)

The limitation on the 50-percent penalty ("for which amnesty could have been requested") is extremely narrow, thus providing for a very broad category of taxpayers eligible for the penalty.

In comparison to the increased accuracy-related penalty, there is no "carve out" for audits, protests, appeals, settlements, and litigation pending as of February 1, 2005, with respect to the 50-percent penalty. What this means is that the 50-percent penalty, by its terms, will apply to taxpayers, for taxable years for which amnesty could have been requested, for amounts that are due and payable after the last date of the amnesty period (March 31, 2005), even where audits, protests, appeals, or settlements are pending.

This is a non-waiveable penalty. Taxpayers may not file a claim for refund for any penalty amount paid. (36)

C. Relief Granted

For each taxable year for which tax amnesty is allowed, SB 1100 provides that the FTB shall waive unpaid penalties and fees imposed, as discussed above, "but only to the extent of the amount of the penalty or fee that is owed as a result of previous non-reporting or underreporting of tax liabilities or prior nonpayment of any taxes previously assessed or proposed to be assessed for that taxable year." (37) In addition, unless a taxpayer is on notice of a criminal investigation or under criminal investigation, no criminal action will be brought against the taxpayer for the taxable years for which tax amnesty is allowed for the non-reporting or underreporting of tax liabilities or the nonpayment of any taxes previously assessed or proposed to be assessed.

Once a taxpayer pays any amount in connection with the income tax amnesty, however, "the taxpayer may not file a claim for refund or credit for any [such] amounts...." (38) Moreover, "[n]o refund or credit shall be granted with respect to any penalty or fee paid with respect to a taxable year prior to the time the taxpayer makes a request for tax amnesty for that taxable year pursuant to Section 19733." (39) In other words, there are no refunds allowed on any penalties or fees paid before the start of amnesty for any taxable years that a taxpayer seeks amnesty.

III. Sales and Use Tax Amnesty

Like the FTB's income tax amnesty, the SBE's sales and use tax amnesty will be conducted during a two-month period beginning February 1, 2005, and ending March 31, 2005. (40) The program will apply to tax liabilities due and payable for tax years beginning before January 1, 2003). (41)

A. Participation Requirements

The sales and use tax amnesty program applies to (1) all eligible participants, (2) who file a completed amnesty application with the SBE, signed under penalty of perjury, electing to participate in the tax amnesty program, and (3) who, within 60 days after the conclusion of the tax amnesty period, files the appropriate original or amended return for any tax reporting period eligible for the amnesty program and pays in full any taxes and interest due for each such tax reporting period. (42)

1. Eligibility. While participant eligibility is not specifically delineated in the applicable statutory provisions, it generally includes any taxpayer who (1) has an existing unpaid liability in an eligible tax reporting period, such as a tax return filed without payment or with only partial payment or a notice of determination (whether petitioned or not) ("nonpayment" taxpayers); (2) did not file a return or report tax for a taxable sale or purchase in an eligible tax reporting period ("nonreporting" taxpayers); or (3) underreported sales or purchases in an eligible tax reporting period on a previously filed return ("underreporting" taxpayers).

The sales and use tax amnesty, however, does not apply to any taxpayer who, as of February 1, 2005, (1) is on notice of a criminal investigation or (2) has a court proceeding that has already been initiated. (43) Taxpayers who have filed for bankruptcy protection under Title 11 of the United States Code are eligible to participate in the sales and use tax amnesty. We understand from the SBE that such taxpayers must disclose their bankruptcy case only if it is still open with the bankruptcy court, and, if the taxpayer's amnesty payment requires bankruptcy court approval, the taxpayer must submit with its amnesty application an order from the federal bankruptcy court that authorizes such payment. (44)

2. Application. The sales and use tax amnesty application will be in the form and manner specified by the SBE. (45) The SBE's "Tax Amnesty" guidance (posted on its website) provides that the amnesty application will be available on its website after January 15, 2005. (46)

In no case "shall a mere payment of any taxes and interest due, in whole or in part, for any period otherwise eligible for amnesty under this part, be deemed to constitute an acceptable amnesty application.... " (47) Moreover, the application of a refund from one period to offset a tax liability from another period otherwise eligible for amnesty shall not, without the filing of an amnesty application, be deemed to constitute an acceptable sales and use tax amnesty application. (48)

3. Filing of Returns and Payment. For taxpayers that have not filed the required sales and use tax returns for any eligible period, the taxpayer must file a completed original tax return for that period. (49) For taxpayers that have underreported tax liability on a sales and use tax return for any period, the taxpayer must file an amended return for that period. (50)

In order to comply with the full payment requirement under the statutory provisions, amnesty participants must pay the full amount of tax and interest due for the eligible tax reporting period. (51) The SBE, however, may approve an installment payment agreement in lieu of the complete payment requirement so long as the final payment under the terms of such installment payment agreement is made no later than June 30, 2006. (52) The installment payment agreement must include interest on the outstanding amount due at the rate prescribed by law. (53) Failure to fully comply with the installment payment agreement will render the waiver of penalties null and void, unless the SBE determines the failure was due to reasonable causes. (54) In the case of any such failure, the total amount of tax, interest, and all penalties become due and payable immediately. (55)

B. Penalties Imposed

The penalty provisions under the sales and use tax amnesty are different from the penalty provisions enacted as part of the income tax amnesty. There are two sales and use tax amnesty penalty provisions: a new 50 percent interest penalty, which is comparable to the FTB's interest penalty; and a new "double penalties" penalty provision.

1. Interest Penalty. The sales and use tax amnesty provisions state that there shall be added to the tax for each period for which amnesty could have been requested (i.e., tax reporting periods beginning before January 1, 2003): (1) an amount equal to 50 percent of the accrued interest payable under section 6591 for the period beginning on the date in which the tax was due and ending on the last day of the amnesty period (March 31, 2005) for amounts due and payable on the last day of the amnesty period (March 31, 2005); and (2) an amount equal to 50 percent of the interest computed under section 6591 on any final amount, including final deficiencies and self-assessed amounts, for the period beginning on the date in which the tax was due and ending on the last day of the amnesty period (March 31, 2005). (56)

There are indications that the SBE two-part 50-percent penalty language under section 7074 is intended to be parallel to the FTB's two-part 50-percent penalty language under section 19777.5. The wording used in the two statutes, however, is not parallel, and many key terms in section 7074 are not defined. The SBE is reportedly in the process of addressing the meaning of this section.

As with the FTB's 50-percent interest penalty, there is no express "carve out" for audits, petitions for redetermination, appeals, settlements, and litigation pending as of February 1, 2005, with respect to the 50-percent SBE penalty. As with the FTB 50-percent penalty, this SBE penalty is imposed in addition to any other penalty. (57)

This is a non-waiveable penalty. Taxpayers may not file a claim for refund for any penalty amount paid. (58)

2. Double Penalties. In addition to the new SBE 50-percent interest penalty discussed above, SB 1100 also enacts "double penalties" on certain sales and use tax deficiencies issued subsequent to the amnesty period. Specifically, under section 7073(c), the SBE shall impose penalties "at a rate that is double the rate of penalties described in law" on a "deficiency determination" that is based on (1) any amount that is underreported on a return filed under the amnesty program; or (2) any amount not reported or underreported by any person who could have otherwise been eligible for amnesty. (59)

"Deficiency determination" is not a defined term under the new legislation. The SBE, however, is currently reviewing the issue, and has indicated that this term is intended to be limited to new deficiency determinations (60) issued after the last day of the amnesty period, and should be so interpreted. If the SBE issues a deficiency assessment under this "double penalties" penalty, an extended statute of limitations is provided, and the SBE may do so "within 10 years from the last day of the calendar month following the quarterly period for which in the amount is proposed to be determined." (61) While not explicitly stated in the legislation, the new "double penalties" provisions could arguably apply to the 50-percent interest penalty under section 7074. The SBE has indicated, however, that the new "double penalties" will not be interpreted as applying to the 50-percent interest penalty.

C. Relief Granted

For each eligible tax reporting period for which tax amnesty is allowed, the SBE shall waive all penalties imposed under the new legislation. (62) In addition, unless a taxpayer is on notice of a criminal investigation, no criminal action will be brought against the taxpayer for the eligible tax reporting periods for which tax amnesty is allowed for the nonpayment, nonreporting or underreporting of tax liabilities. (63)

One of the fundamental differences between the income tax amnesty and the sales and use tax amnesty, is that the sales and use tax amnesty provisions do not specifically preclude a taxpayer from filing a claim for refund under section 6901 for amounts of tax and interest paid under an SBE amnesty application. Taxpayers may not, however, file a claim for refund for payment of any 50-percent interest penalty. In addition, "[n]o refund or credit shall be granted of any penalty paid prior to the time the taxpayer makes a request for tax amnesty pursuant to Section 7073." (64) In other words, there are no refunds allowed on any penalties paid before the start of amnesty.

IV. Conclusion

It is difficult to predict how or which taxpayers will benefit from the amnesty legislation. The FTB amnesty requires payment of all the tax and interest in dispute, and then precludes the filing of a claim for refund. Paying 100 percent of the total amount in dispute and then walking away from a case may not be an attractive option to many taxpayers, in light of the protest, FTB Settlement Bureau, SBE appeal, and litigation options that the taxpayer would forgo by participating in the FTB amnesty program. The ability to file a claim for refund under the SBE amnesty certainly makes that program more attractive. The amnesty program at the FTB and the SBE can be viewed as a method to avoid penalties, but the issue here is whether the penalties could be avoided by other means, e.g., a reasonable cause exception, which does not require entering the amnesty program and (on the FTB side) forgoing a claim for refund and any defense on the merits of the underlying liability. (65)

Taxpayers should keep in mind the 50-percent interest penalties really have nothing to do with the amnesty program, because taxpayers who are not the least interested in the amnesty programs must still deal with those penalties. The simplest strategy for dealing with the penalties, without being drawn into the amnesty program, will be to pay the total amount in dispute prior to March 31, 2005, file a claim for refund, and then proceed with the case as before.

One must also be a bit of a fatalist in connection with the penalties. Assume, for example, that as of Mach 31, 2005, a California taxpayer is in the early stages of an IRS audit for taxable year 2002 that may lead first to IRS adjustments and then to RAR adjustments reportable to FTB. Assume further that March 31, 2005, comes and goes with the IRS audit still unresolved. Assume that in January 2006, the IRS audit results in additional tax due, which then leads to an RAR adjustment in California in the amount of $100 of additional tax owing to FTB. Because 2002 is an amnesty eligible year and the taxpayer did not participate in the 2004 FTB amnesty, the taxpayer will owe 50-percent additional interest under section 19777.5 from the due date of the 2002 return until March 31, 2005. There appears to be no exception to the imposition of the penalty under these circumstances, and it is difficult to conceive of how the amnesty program would be of any benefit in these circumstances.

In conclusion, taxpayers with cases pending before the FTB or the SBE, or who anticipate having liabilities with either the FTB or the SBE for tax reporting periods beginning January 1, 2003, should pay close attention to the California amnesty program and, in particular, the new penalties.

(1) SB 1100, [section] 14.

(2) SB 1100, [section] 1.

(3) Id.

(4) FTB Bill Analysis of SB 1100, at 10 (August 4, 2004).

(5) See Eric J. Coffill, "An Overview of California's 2003 Tax Shelter and Abusive Tax Shelter Legislation," 56 Tax Executive 33 (January-February 2004).

(6) FTB Tax News, May/June 2004, http://www.ftb.ca.gov/ professionals/taxnews/tn_04/0506.html#1.

(7) FTB Bill Analysis of SB 1100, at 12.

(8) SBE Bill Analysis of SB 1100, at 10.

(9) Cal. Rev. & Tax. Code [section] 19731; FTB TaxAmnesty Quick Reference, as of Nov. 11, 2004, http://www.ftb.ca.gov/amensty/faq.html.

(10) Id.

(11) Cal. Rev. & Tax. Code [sub section] 19733(a)(1)-(3).

(12) FTB Tax Amnesty Quick Reference, as of Nov. 11, 2004, http: //www.ftb.ca.gov/amensty/faq.html.

(13) Cal. Rev. & Tax. Code [section] 19732(b). The FTB has indicated that the "court proceeding" exception is being interpreted as only applying to a criminal court proceeding.

(14) All section references are to the California Revenue and Taxation Code, unless otherwise noted.

(15) Cal. Rev. & Tax. Code [section] 19732(c).

(16) Cal. Rev. & Tax. Code [section] 19733(a)(5).

(17) Cal. Rev. & Tax. Code [section] 19731.

(18) Cal. Rev. & Tax. Code [sub section] 19733(c)(1), 19735(a).

(19) FTB Tax Amnesty Quick Reference, as of Nov. 11, 2004, http: //www.ftb.ca.gov/amensty/faq.html.

(20) Cal. Rev. & Tax. Code [section] 19733(c)(1).

(21) Id.

(22) Cal. Rev. & Tax. Code [section] 19733(a)(3)(A)(i).

(23) Cal. Rev. & Tax. Code [section] 19733(a)(3)(A)(ii).

(24) Cal. Rev. & Tax. Code [section] 19733(a)(3).

(25) Cal. Rev. & Tax. Code [section] 19733(a)(4).

(26) Cal. Rev. & Tax. Code [section] 19733(b)(1).

(27) Cal. Rev. & Tax. Code [section] 19733(b)(3).

(28) Cal. Rev. & Tax. Code [section] 19733(b)(4).

(29) The FTB's website states that amnesty applications must be postmarked by March 31, 2005. (Since March 31st is a state holiday, the FTB will accept applications postmarked April 1, 2005.) See http://www.ftb.ca.gov/amnesty/faq.html.

(30) Cal. Rev. & Tax. Code [section] 19164(a)(1)(B)(i).

(31) Specifically, Section 19164(B)(ii) states that the increased accuracy-related penalty:

   ... shall not apply to any taxable year of a taxpayer beginning
   prior to January 1, 2003, if, as of the start date
   of the amnesty program period specified in Section 19731,
   the taxpayer is then under audit by the Franchise Tax
   Board, or the taxpayer has filed a protest under Section
   19041, or the taxpayer has filed an appeal under Section
   19045, or the taxpayer is engaged in settlement negotiations
   under Section 19442, or the taxpayer has a pending
   judicial proceeding in any court of this state or in any
   federal court relating to the liability of the taxpayer for
   that taxable year.

(32) Cal. Rev. & Tax. Code [section] 19164(a)(1)(B)(i).

(33) Cal. Rev. & Tax. Code [section] 19777.5.

(34) Cal. Rev. & Tax. Code [section] 19777.5(a)(1).

(35) Cal. Rev. & Tax. Code [section] 19777.5(a)(2).

(36) Cal. Rev. & Tax. Code [section] 19777.5(e).

(37) Cal. Rev. & Tax. Code [section] 19732(a)(1). FTB is expected to post a list of penalties and fees that will (and will not) be waiveable under amnesty on its website in early December.

(38) Cal. Rev. & Tax. Code [section] 19732(e).

(39) Cal. Rev. & Tax. Code [section] 19732(d).

(40) Cal. Rev. & Tax. Code [section] 7071.

(41) Id.

(42) Cal. Rev. & Tax. Code [section] 7073(a)(1)-(3).

(43) Cal. Rev. & Tax. Code [section] 7073(b). The SBE has indicated that the "court proceeding" exception is being interpreted as only applying to a criminal court proceeding.

(44) Cal. Rev. & Tax. Code [section] 7073(a)(4).

(45) Cal. Rev. & Tax. Code [sub section] 7073(e), 7076.

(46) SBE Tax Amnesty--Sales and Use Tax, http://www.boe.ca.gov/ sutax/taxamnesty.htm.

(47) Cal. Rev. & Tax. Code [section] 7073(e).

(48) Id.

(49) Cal. Rev. & Tax. Code [section] 7073(a)(3)(A).

(50) Id.

(51) Cal. Rev. & Tax. Code [section] 7073 (a)(3)(B).

(52) Cal. Rev. & Tax. Code [section] 7073(b).

(53) Id.

(54) Id.

(55) Id.

(56) Cal. Rev. & Tax. Code [section] 7074(a).

(57) Cal. Rev. & Tax. Code [section] 7074(b).

(58) Cal. Rev. & Tax. Code [section] 7074(d).

(59) Cal. Rev. & Tax. Code [section] 7073(c).

(60) Thus, this provision should only apply to a "notice of determination" issued after March 31, 2005.

(61) Cal. Rev. & Tax. Code [section] 7073(d).

(62) Cal. Rev. & Tax. Code [section] 7072(a)(1).

(63) Cal. Rev. & Tax. Code [section] 7072(a)(2).

(64) Cal. Rev. & Tax. Code [section] 7072(c).

(65) In one sense, the decision to enter amnesty is very much like the decision between Option 1 (where all penalties were waived, but no claim for refund could be filed) and Option 2 (where one penalty could still apply but a claim for refund could be filed) of the Voluntary Compliance Initiative for the 2004 FTB tax shelter amnesty. There the determinative issue was often weighing the risk of penalty exposure (which would be completely removed by participating in Option 1) against the strength of the merits of the case (which the taxpayer would forego in Option 1 by the bar against filing a refund claim). See Eric J. Coffill, "An Overview of California's 2003 Tax Shelter and Abusive Tax Shelter Legislation," 56 Tax Executive 33 (January-February 2004).

ERIC J. COFFILL is a partner and CARLEY A. ROBERTS is an associate in the Sacramento office of Morrison & Foerster, LLP, where they practice in the state and local tax group. Mr. Coffill is a frequent contributor to The Tax Executive; this is Ms. Roberts's first article for the magazine.