California: penalties and other compliance provisions in Assembly Bill 2498 (proposed Amnesty Bill).

August 5, 2010

On August 5, 2010, Tax Executives Institute submitted the following comments to the Committee on Revenue and Taxation of the California State Senate on Assembly Bill 2448, which would impose strict liability penalties on taxpayers participating in so-called abusive tax avoidance transactions, adopt the recent federal codification of the economic substance doctrine, establish a "tax amnesty" program (with attendant penalties), and make other changes affecting taxpayers and practitioners. The letter was submitted under the aegis of TEI's State and Local Tax Committee, whose chair is Cathleen Stevens of Brunswick Corporation. Fellow Committee member Tov B. Haueisen of General Electric Company contributed materially to the preparation of the submission. Daniel B. De Jong, TEI Tax Counsel, is the legal staff liaison to the State and Local Tax Committee and coordinated the preparation of the comments.

Tax Executives Institute urges the California Legislature to reject the proposals in Assembly Bill 2498 including those that would (1) impose strict liability penalties on taxpayers participating in so-called abusive tax avoidance transactions, (2) adopt the recent federal codification of the economic substance doctrine, (3) establish a "tax amnesty" program with heavy-handed penalties and no appeal rights, and (4) unjustifiably put the professional licenses of both certified public accountants and lawyers at risk by encouraging state licensing boards to consider punitive measures for professionals only marginally associated with abusive tax avoidance transactions. These provisions would impose substantial taxpayer burdens without improving tax compliance or administration. They would also undermine the fairness of California's tax system, which is essential more broadly to a functioning self-reporting tax system.

Tax Executives Institute was founded in 1944 to serve the professional needs of in-house tax professionals. Today, the organization has 54 chapters in North America, Europe, and Asia, including five in California. Our 7,000 members represent 3,200 of the largest companies in the world, many of which are either resident or doing business in California. As the pre-eminent association of business tax professionals worldwide, TEI has a significant interest in promoting sound tax policy, encouraging the uniform and equitable enforcement of the tax laws, and reducing the cost and burden of administration and compliance to the benefit of taxpayers and government alike. The Institute is committed to maintaining a system that works--one that builds upon the principle of voluntary compliance and is consistent with sound tax policy. We, along with federal, state, and local governments, have the most at stake in crafting a tax system that is administrable and efficient.

The Need for Transparency

There have been no public hearings on this bill, and none appear to be scheduled. This lack of transparency cannot help but undermine taxpayers' perception of the proposals--and the tax system generally. TEI believes that if A.B. 2498 goes forward, hearings should be held and stakeholders should be invited to provide comments on the proposals.

Expanding the Definition of "Abusive Tax Avoidance Transaction"

Existing California law imposes numerous penalties and reporting requirements designed to discourage over-aggressive tax positions. For example, taxpayers contacted by the Franchise Tax Board (FTB) regarding reportable transactions, listed transactions, or gross misstatements (terms defined in the federal Internal Revenue Code) may be assessed a penalty of 100-percent of the interest attributable to the related...