California Follows IRS Tax Shelter Initiative.

SACRAMENTO, Calif. -- The Franchise Tax Board (FTB) today issued FTB Notice 2006-1, announcing that it will follow the IRS tax shelter settlement initiative as outlined in IRS Announcement 2005-80, effectively creating the California Tax Shelter Resolution Initiative to run alongside the federal initiative.

"Today, we're going to raise $400 million for the budget without raising a nickel in taxes," Controller Westly said. "Too many in Sacramento think the only ways to find money for the budget are to raise taxes or cut services. There's a better way. The state is owed $6.5 billion that it doesn't collect every year. We should be collecting it."

"Past initiatives have made it difficult for California taxpayers to settle with the government when only one tax authority offers a settlement plan. This program provides an incentive for many taxpayers who were steered towards flaky shelters to come clean, " said Board of Equalization Chair and FTB Member John Chiang.

The California Initiative includes the 21 transactions eligible for the IRS program described in the FTB Notice. Only those taxpayers who are qualified to participate in the IRS Initiative and who fully complete the requirements of the program are eligible for the California program. Participants can avoid most California tax shelter penalties, including the non-economic substance transaction understatement penalty. In 2003, California enacted some of the most stringent tax shelter penalties in the nation (SB 614-Cedillo/Burton; AB 1601-Frommer).

To participate in the California Initiative, taxpayers will be required to sign a closing agreement with the FTB relinquishing all appeal and refund rights. Participants are required to pay 100 percent of the taxes owed, interest, and the applicable accuracy related penalty, which ranges from 5-20 percent. Participants are allowed to deduct their out-of-pocket promoter fees and transaction costs as an ordinary loss. The California Initiative runs through March 31, 2006. Taxpayers wanting to participate must file FTB Form 638, California Tax Shelter Resolution Initiative Election to Participate in Notice 2006-1. Taxpayers who do not participate are subject to California's stiff abusive tax shelter penalties.

Estimates show California loses approximately $500 million in tax money annually through abusive tax shelters. Abusive tax shelters are transactions marketed with the promise of tax benefits with no correlating risk of economic losses. These transactions typically have no economic purpose other than reducing taxes.

"The FTB estimates this program will raise $400 million," said Director of Finance Michael C. Genest. "We will watch this program closely and update the governor's May revised budget as appropriate."