Instructions for 2023-02 Closing Agreement

Instructions for Completing FTB Notice 2023-02 Closing Agreement

The Notice 2023-02 Closing Agreement (sometimes hereinafter referred to as "the Agreement") is only for the use of taxpayers participating in FTB Notice 2023-02, Resolution of Micro-Captive Insurance Transactions and Syndicated Conservation Easement Transactions. Please refer to FTB Notice 2023-02 and FTB Notice 2023-03 for eligibility and participation requirements. FTB Notice 2023-03 extended the period for participating in FTB Notice 2023-02 to January 31, 2024.

The FTB Notice 2023-02 Closing Agreement must be completed in its entirety, including Schedules I, II, III, and their related attachments. Taxpayers who fail to submit an FTB Notice 2023-02 Closing Agreement and pay the additional taxes, penalties if any, and interest, (or apply for an acceptable payment arrangement) January 31, 2024 are not eligible to participate and may be subject to all penalties otherwise applicable.

You may type information directly onto the electronic version of the Agreement. Once you have completed the Agreement electronically, you will need to print it and mail it to the address listed below under "Where to File." Alternatively, you may print the Agreement, complete it, and mail it to the address listed below under "Where to File."

These instructions cover the paragraphs of the Agreement that require you to enter information. The language of the Agreement may not be modified or changed. Modified or changed Agreements will not be accepted by FTB.

Who Should File

Each Eligible Taxpayer who claimed state tax benefits and/or transaction cost benefits attributable to an Eligible Transaction(s) and who desires to participate in FTB Notice 2023-02 must file a separate FTB Notice 2023-02 Closing Agreement.

You may participate in FTB Notice 2023-02 even if not all of the participants in the Eligible Transaction file a FTB Notice 2023-02 Closing Agreement. For example, if you are a shareholder in an S corporation that participated in an Eligible Transaction, you may file FTB Notice 2023-02 Closing Agreement regardless of whether the S corporation or any other shareholders file a FTB Notice 2023-02 Closing Agreement.

Who Should Sign

Sign and date FTB Notice 2023-02 Closing Agreement on the appropriate lines under Execution of Agreement. If the Eligible Taxpayer filed a joint tax return, both taxpayers must sign the Agreement. If the Eligible Taxpayer filed an FTB Form 100, Schedule R-7, an officer of the key corporation should sign the Agreement. Complete the Statement of Authorization if you are a corporate officer or you are an authorized representative of the person who is entering into this Agreement and you are signing the Agreement for the taxpayer.

Payment

Provide full payment of all additional taxes, penalties, and interest due for each taxable year of participation in accordance with FTB Notice 2023-02 Closing Agreement or request an installment payment arrangement with FTB by January 31, 2024. FTB will not execute an Agreement absent payment in full for all taxable years included in the Agreement or the presence of an acceptable payment arrangement.

If you are unable to pay the entire amount due, you may request on the Agreement to enter into an installment payment arrangement with the FTB to complete payment of the full liability for additional taxes, any applicable penalties, and interest over a period not to exceed 12 months.

If you are required to make electronic payment or choose to make your payment electronically, select the payment category "Pending Audit Tax Deposit Payment" when making electronic payment. If you do not choose the proper payment category for electronic payment, your payment may not be processed properly. In addition, you must make a separate payment for each taxable year at issue covered by the Closing Agreement.

Where to File

Send your completed FTB Notice 2023-02 Closing Agreement, including all schedules and attachments, to:

ABS 389 Notice 2023-02 Coordinator - MS F340
Franchise Tax Board
PO Box 1673
Sacramento, CA 95812-9900

If using a private carrier, please address as follows:

ABS 389 Notice 2023-02 Coordinator – MS 340
Franchise Tax Board
Sacramento, CA 95827-1500

Additional Information

For more information about FTB Notice 2023-02 Closing Agreement, refer to FTB Notice 2023-02, FTB Notice 2023-03, and the related frequently asked questions from our Abusive Tax Shelters page. You may also contact our FTB Notice 2023-02 Hotline at 916-845-3030 or email your questions to taxshelter@ftb.ca.gov.

Assistance for Persons With Disabilities

We comply with the Americans with Disabilities Act. Persons with hearing or speech limitations please call California Relay Service: 711 or 800.735.2929.

Specific Instructions for Completing the Agreement

Enter your name(s) and your Taxpayer Identification (TPID) number(s) in the spaces in the first paragraph of the Agreement. TPID number may be your social security number (SSN), employer identification number (EIN), or California corporation number (CCN), as applicable. If you filed Schedule R-7, Election to File a Unitary Taxpayer's Group Return and List of Affiliated Corporations, use the key corporation's name and TPID as designated in the Schedule R-7. For taxpayers that are members of a unitary group that did not elect to file a group return, use the name of the entity that participated in the Transaction(s).

Paragraph A Tax Returns Filed

Identify the taxable years included in the Agreement by completing the table provided. For all Taxable Years at Issue enter the Form Number and Date Return Filed for the original return (or amended return if the amended return was filed prior to “contact” as defined in Paragraph F of the Agreement) that claimed tax benefits and/or transaction costs from Eligible Transactions. If the Agreement covers more than 12 taxable years, include information on a separate attachment to this Agreement. The separate attachment should reference Paragraph A.

Paragraph B.1 Check the appropriate box or boxes for the type of transaction.

Paragraph B.3 Complete the table for tax benefits claimed. If you have several items to report for a single tax year, identify each tax benefit on a separate line. Failure to report all tax benefits will result in your Agreement being rejected or revoked under Paragraph 9.4.1. If additional space is needed, include information on a separate attachment to this Agreement. The separate attachment should reference Paragraph B.3.

Paragraph B.4 Complete the table for transaction costs. If you have several items to report for a single tax year, identify each transaction cost on a separate line. Failure to report all transaction costs will result in your Agreement being rejected or revoked under Paragraph 9.4.1. If additional space is needed, include information on a separate attachment to this Agreement. The separate attachment should reference Paragraph B.4.

Paragraph D California Voluntary Compliance Initiative

Check the box if applicable.

Paragraph E Pending Actions

Check the appropriate box.

If you checked E.3, list the Taxable Years at Issue for which appeals are pending. If additional space is needed, please include information on a separate attachment to this Agreement. The separate attachment should reference Paragraph E.3.

Paragraph F FTB Notices or Contacts

Check the appropriate box or boxes and enter the Taxable Years at Issue applicable for each box. If you checked F.1, please include the NPA Number. If additional space is needed, include information on a separate attachment to this Agreement. The separate attachment should reference Paragraph F.1, F.2 or F.3, as applicable.

Paragraph G Final Federal Determinations

Check the appropriate box. If you checked G.2 or G.3, include the Taxable Years at Issue and Eligible Transaction type.

Paragraph G.4.a Enter the description and the amount of tax benefits allowed per the final federal determination for each Taxable Year at Issue related to the MCI Transactions. Enter the form and line number of the return where the allowed tax benefits were reported. Separate lines must be used if you were allowed tax benefits on more than one form or line of the tax return for a single taxable year. If additional space is needed, include information on a separate attachment to this Agreement. The separate attachment should reference Paragraph G.4.a.

Paragraph G.4.b Enter the description and the amount of tax benefits allowed per the final federal determination for each Taxable Year at Issue related to the SCE Transactions. Enter form and line number of the return where the allowed tax benefits were reported. Separate lines must be used if you were allowed tax benefits on more than one form or line of the tax return for a single taxable year. If additional space is needed, include information on a separate attachment to this Agreement. The separate attachment should reference Paragraph G.4.b.

Paragraph G.5.a Enter the description and the amount of transaction costs allowed per the final federal determination for each Taxable Year at Issue related to the MCI Transactions. Enter form and line number of the return where the allowed transaction costs were reported. Separate lines must be used if you were allowed transaction costs on more than one line of the form for a single taxable year. If additional space is needed, include information on a separate attachment to this Agreement. The separate attachment should reference Paragraph G.5.a.

Paragraph G.5.b Enter the description and the amount of transaction costs allowed per the final federal determination for each Taxable Year at Issue related to the SCE Transactions. Enter form and line number of the return where the allowed transaction costs were reported. Separate lines must be used if you were allowed transaction costs on more than one line of the form for a single taxable year. If additional space is needed, include information on a separate attachment to this Agreement. The separate attachment should reference Paragraph G.5.b.

Agreement

Paragraph 1. Intent of Parties

Check the appropriate box.

Paragraph 4. Tax

Check the method(s) of payment by which you are making payment. Check the box for "Installment Agreement" if you are requesting a payment arrangement for part or all of the additional taxes. (See payment instructions above.)

Complete the table provided. Use one line per taxable year. "Total Tax Per Return" is the amount you reported to FTB on an original or amended return for the tax year, or the amount as previously revised by FTB. "Total Tax Per Agreement" is the amount after adjustments for removal of MCI or SCE tax benefits and transaction costs previously claimed on your tax return, with the exception of tax benefits or transaction costs allowed pursuant to a final federal determination. "Additional Tax Per Agreement" is the difference between "Total Tax Per Return" and "Total Tax Per Agreement." The "Total Tax Per Return" amount should be the same as what is reported on Line 13 of Schedule III. The "Total Tax Per Agreement" amount should be the same as what is reported on Line 12 of Schedule III. The "Additional Tax Per Agreement" should be the same as what is reported on Line 14 of Schedule III.

Paragraph 5. Penalties

Check the method(s) of payment. Check the box for "Installment Agreement" if you are requesting a payment arrangement for part or all of the penalties. (See payment instructions above.)

For paragraphs 5.1 through 5.6, check each box that applies for any Taxable Year at Issue. Below Paragraph 5.6, Eligible Taxpayer will complete the Paragraph 5 Penalties Table.

Paragraph 5.1. Check this box if Eligible Taxpayer listed any taxable years in Paragraph F.1 and FTB imposed the Noneconomic Substance Transaction Understatement Penalty (NEST) and/or Interest Based Penalty (IBP) on the NPAs issued for such taxable years. Eligible Taxpayer should not include any penalty imposed under RTC section 19772 with respect to the Eligible Transactions at issue, as this penalty is not relieved and not affected by this agreement.

Paragraph 5.2. Check this box if Eligible Taxpayer listed taxable years in Paragraph G.2 that Eligible Taxpayer also listed in Paragraph F.1. Eligible Taxpayer should not include any penalty imposed under RTC section 19772 with respect to the Eligible Transactions at issue, as this penalty is not relieved and not affected by this agreement.

Paragraph 5.3. Check this box if Eligible Taxpayer listed any taxable years in Paragraph F.2.

Paragraph 5.4. Check this box if Eligible Taxpayer listed any taxable years in Paragraph F.3.

Paragraph 5.5. Check this box if Eligible Taxpayer listed any taxable years in Paragraph G.2 that Taxpayer did not also list in Paragraph F.1.

Paragraph 5.6. Check this box if Eligible Taxpayer listed any taxable years in Paragraph G.3.

Paragraph 5 Penalties Table Complete the table provided. Use separate lines for each penalty for each return/taxable year. Mark all appropriate penalty category boxes applicable to the penalty on each line. The "Penalty Amount" should be the same as what is reported on Line 15 if applicable and Line 16 or Line 17 of Schedule III. (See instructions for Line 15, Line 16, and Line 17 of Schedule III below.)

Paragraph 6. Interest

Check the method(s) of payment. Check the box for "Installment Agreement" if you are requesting a payment arrangement for part or all of the interest. (See payment instructions above.)

Execution of Agreement

If married filing jointly both the primary and secondary taxpayer must sign the agreement.

If Taxpayer Representative signs on behalf of the taxpayer(s), Taxpayer Representative must complete the Statement of Authorization.

Business entities and trusts sign "Taxpayer (other than an individual)". The title of the person signing must be included. If multiple trustees refer to the trust agreement to determine who should sign. An officer signing on behalf of a taxpayer that is a business entity must complete the Statement of Authorization.

Schedule I – Description Of Transaction

Micro-Captive Insurance Transactions

Check all boxes that apply and complete the applicable tables.

Paragraph 1.a Complete table 1.a if you are a partner or shareholder of an entity involved in the MCI transaction. "Taxpayer Name" should be the name of the Insured Entity.

Paragraph 1.b Complete table 1.b if you are the insured entity involved in the MCI transaction. "Taxpayer Name" should be the name of the Insured Entity.

Paragraph 2.a Check this box if you are the beneficial owner of the Insured Entity and you and/or related persons directly or indirectly own a micro-captive insurance company.

Paragraph 2.b Check this box if you are the insured entity signing the Agreement and your beneficial owner(s) directly or indirectly own a micro-captive insurance company.

Paragraph 3.a Check this box if the micro-captive insurance company entered into contracts directly with the Insured Entity.

Paragraph 3.b Check this box if the micro-captive insurance company entered into contracts with an intermediary who entered contracts with an Insured Entity. Complete the table and include the name of the intermediary company with which a contract was entered.

Syndicated Conservation Easement Transaction(s)

Check all boxes that apply and complete the applicable tables.

Schedule II – Information Document Request (IDR)

In responding to this IDR, you are required to make a diligent search of your records and documents and furnish all requested information and documents that are in your possession, custody or control, or to which you have the right of possession, custody or control. This includes information and documents in the possession of attorneys, accountants, affiliates, advisors, representatives, or other persons directly or indirectly employed by you, hired by you, or connected with you or your representatives, and anyone else otherwise subject to your control. In responding to the document requests, you are required to produce a document only one time. However, if a document has any change, notation, and/or modification, you are required to produce each version. Each non-identical copy is a separate document. In addition, you are required to produce generic documents that do not relate to any particular person. Further, you are required to make a reasonable inquiry and obtain readily ascertainable information.

Requests for information and documents should be construed expansively rather than narrowly. Thus, when searching for information and/or producing documents responsive to these requests and a choice may be made among narrow and broad interpretations, employ the broad interpretation for purposes of locating and producing information and documents. Any use of the singular includes the plural and vice versa.

Each IDR item should be separately answered, and documents should be clearly identified as to the IDR item or items to which it is responsive using the number in the left column. If a document is responsive to more than one request, provide only one complete and legible copy and indicate all IDR items by number for which it is responsive. Remember to indicate on the face of Schedule II whether or not an item is attached.

If you are unable to locate documents or records, then state with specificity the efforts you made to locate the documents or records and the reasons such documents or records are unavailable. If the requested records or documents do not exist, please state so. If the requested records or documents exist but are not available to you, state where such documents are located and provide the name, current address, and telephone number of the custodian. If you have disposed of any responsive documents, state when such document was disposed of, the reason for such disposition, and who, if anyone, may have possession of a copy of such document. Please include information on a separate attachment to this Agreement.

Schedule III – Additional Tax And Penalty Computation

Line 1. Enter tax year(s) affected by the Transaction(s) included in the Agreement. Attach additional pages if needed.

Line 2. "Taxable Income as Reported or Previously Revised" is the amount you reported to FTB on an original or amended return for the taxable year, or the amount as revised by FTB. For apportioning taxpayers this is net income before state adjustments. If you received an NPA for the Eligible Transaction(s), as indicated in Paragraph 5.1 or 5.2 of the Agreement, use the taxable income as reported on the original or amended return, or the taxable income as revised by FTB.

Line 3. "Increase due to MCI or SCE Transactions" is the amount of MCI or SCE tax benefits previously claimed on your tax return, i.e., the amount entered in the table under Paragraph B.3., less any amount(s) allowed pursuant to a final federal determination as entered in Paragraph G of the Agreement. (For example, if you claimed $100 in charitable deductions on your California original or amended return with respect to an SCE Transaction and you were allowed $20 in charitable deductions with respect to an SCE Transaction pursuant to a final federal determination, then report the "increase" as $80.)

Lines 4 through 7. Enter the amounts that are affected by the removal of MCI or SCE tax benefits previously claimed on your tax return.

Line 8a. "Revised Taxable Income" is your taxable income after adjustments for reversal of MCI or SCE tax benefits previously claimed on your tax return.

Line 8b. "Apportioning Taxpayers" must submit a revised Schedule R, "Apportionment and Allocation of Income". After completion of Schedule R and its sub schedules R-1 through R-6, transfer the net income (loss) for California purposes to line 9b of the Closing Agreement.

Line 9. "Revised Tax" is the amount of tax due on your "Revised Taxable Income."

Line 10. "Allowable Credits" are credits that may be applied against your "Revised Tax."

Line 11. "Other Taxes" include your revised alternative minimum tax (AMT), which must be recalculated based on your "Revised Taxable Income," and other taxes such as the Mental Health Services Tax.

Line 12. "Total Tax Liability" is your "Revised Tax" minus "Allowable Credits" plus "Other Taxes." This is the amount entered in the table Paragraph 4 of the Agreement, in the "Total Tax Per Agreement" column.

Line 13. "Less: Tax Previously Assessed" is the amount of tax that was shown on the original or amended tax return plus any changes to the tax pursuant to a final assessment. This is the amount entered in the table under Paragraph 4 of the Agreement in the "Total Tax Per Return" column.

Line 14. "Additional Tax" is your "Total Tax Liability" minus "Less: Tax Previously Assessed." This is the amount entered in the table under Paragraph 4 of the Agreement, in the "Additional Tax Per Agreement" column. For Taxpayers with NPAs, this amount should match the amount of the "Additional Tax" on the NPA. If the amounts do not match, please attach a detailed written explanation of the differences.

Line 15. "Delinquent Filing Penalty". The delinquent penalty is imposed if any taxpayer fails to file a return by the due date of the return, including extensions. The penalty is imposed from the due date of the return, without regard to extension or late payments, until the file date of the return. The delinquent penalty is computed on the total tax due less timely payments and credits. The basic penalty is five percent per month, or fraction of a month, up to a maximum of 25 percent.

Line 16. "Accuracy Related Penalty". If you checked the box for Paragraph 5.3 of the Agreement the 20% Accuracy Related Penalty (ARP) applies and is determined by multiplying the "Additional Tax" (Line 14 above) by 20 percent. If you checked the box for Paragraph 5.5 of the Agreement the ARP is assessed at the same rate as provided in the IRS settlement initiative offer letter. If you checked the box for 5.6 of the Agreement you may be subject to the ARP pursuant to the terms under Paragraph 5.3. This is the amount entered in the table under Paragraph 5 of the Agreement in the "Penalty Amount" column.

Line 17. "Interest-based Penalty" (IBP). If you checked the box for Paragraphs 5.1 or 5.2 include the amount of the IBP assessed on the NPA. If you received a final federal determination where the federal adjustment is less than the amount on the FTB NPA, you may need to revise the IBP. This is the amount entered in the table under Paragraph 5 of the Agreement in the "Penalty Amount" column.

Line 18. "Total Additional Tax and Penalties" add lines 14, 15, 16 and 17 and enter the amount for each year.