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FTB Notice 2008-4 offers substantial penalty relief

Taxpayers have an opportunity to resolve their tax liability from Bogus Optional Basis (BOB) transactions or certain Employee Stock Ownership Plan (ESOP) transactions. As announced last month, this resolution allows taxpayers to enter into an FTB closing agreement between June 23, 2008 and September 12, 2008 to resolve their tax liability. You can find a description of the BOB and ESOP transactions that are eligible for resolution under Section 4 of the Notice.

If your clients are eligible to participate and already paid the 40 percent non-economic substance transaction (NEST) penalty on the understatement attributable to an eligible transaction, the FTB Chief Counsel will reduce the NEST penalty to 20 percent. Also, FTB will refund any overpayment if you fully comply with all the requirements of the Notice and the statute of limitations is still open for the amounts you previously paid. If you received a Notice of Proposed Assessment (NPA) adjusting the tax benefits claimed from an eligible BOB or ESOP transaction prior to June 6, 2008, the date of FTB Notice 2008-4, and have not paid the tax shown on the NPA, you will be required to pay a 20 percent NEST penalty as reduced by the FTB Chief Counsel. FTB will not impose the 100 percent interest-based penalty under RTC Section 19777. If the NPA is not finalized, FTB will abate the 100 percent interest-based penalty assessed. If you have not received a NPA, you will be required to pay a 20 percent accuracy-related penalty.

The following example illustrates an individual's tax savings in penalties based on an increase in taxable income of $1,075,269 from a BOB transaction with a corresponding understatement amount totaling $100,000 (the amount of increase in taxable income due to the proper tax treatment of the BOB transaction minus the tax treatment shown on the return multiplied by 9.3 percent, the highest tax rate). The understatement from the BOB transaction is multiplied by 40 percent or 20 percent in the determination of the NEST penalty.

FTB Notice 2008-4[1]
TY 2001
TY 2001
Tax Savings
Understatement from BOB transaction $100,000 $100,000 $     -
Non-economic Substance Transaction Penalty $20,000 $40,000 $(20,000)
Interest-based Penalty $     - $43,544 $(43,544)
Interest $43,544 $43,544 $     -
Net interest and penalties due $63,544 $127,088 $(63,544)
Total tax, interest, and penalties due $163,544 $227,088 $(63,544)

This taxpayer saves $63,544 in penalties by participating in FTB Notice 2008-4.

To participate, you must submit a complete, signed FTB 2008-4 Closing Agreement, including Schedule I, Schedule II, Schedule III, and all other information required under the Notice, and pay the tax, interest and penalty by September 12, 2008. Taxpayers who may have participated in a transaction described in FTB Notice 2008-4 are encouraged to consult a tax advisor who was not involved in the formation, promotion, or sale of the transaction to obtain an independent recommendation on the benefits of participating in the program.

If you are interested in finding out more information you can visit FTB’s website, and search for BOB. 


[1]Assumes that the taxpayer's original file date is 4/15/02 and the NPA issue date of 05/01/08 is not finalized as the date of FTB Notice 2008-4.