California's NEST penalty.

• Position: CalCPA News

California's noneconomic substance transaction understatement (NKST) penalty imposes a 20 percent penalty for understatements attributable to noneconomic substance transactions (CA Rev. & Tax Code Sec. 19774). The penalty increases to 40 percent for transactions that are not adequately disclosed.

A transaction lacks economic substance either because it lacks an economic benefit or there is no bona fide, non-tax California business purpose for entering into the transaction.

In cases where your client has received a final federal audit report, the FTB may assess the NEST penaltyin lieu of the...