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California Disclosure Obligations for Taxpayers and Material Advisors

The Franchise Tax Board (FTB) recently issued Notice 2011-1, Abusive Sales Factor Manipulation, listing this transaction for California purposes only. Taxpayers that have participated in a transaction or arrangement identified in FTB Notice 2011-1, as well as material advisors, have FTB disclosure requirements.

Taxpayers

Form 8886

R&TC Section 18407, which incorporates by reference IRS Section 6011 and the regulations there under, requires taxpayers who participate in a reportable transaction, including a listed transaction, to disclose certain information with respect to the reportable transaction on the taxpayer's return.

Treasury Regulation Section 1.6011-4(d) requires a taxpayer to file a complete disclosure statement on IRS Form 8886, Reportable Transaction Disclosure Statement, (in accordance with paragraph (d) of the federal regulation and the instructions to the form) for each reportable transaction in which the taxpayer participated. Treasury Regulation Section 1.6011-4(e)(1) provides that the disclosure statement is due when the taxpayer files an original or amended return for each year that reflects the taxpayer's participation in a reportable transaction. In addition, upon disclosing a reportable transaction for the first time, the taxpayer must separately file Form 8886 with the IRS Office of Tax Shelter Analysis (OTSA).

The general rule for California purposes is that Form 8886 must be attached to the taxpayer's original or amended tax return for each taxable year for which the taxpayer participates in a reportable transaction, including listed transactions. Additionally, only for Form 8886s filed for the initial year of participation, the taxpayer must also mail a copy of that disclosure to FTB's Abusive Tax Shelter Unit (ATSU) at the address shown below. It does not matter whether the taxpayer files a paper return or e-files. California listed transactions entered into prior to September 2, 2003, are not required to be disclosed unless the transaction meets one of the other categories of reportable transactions defined under Treasury Regulation 1.6011-4(b).

Special Disclosure Filing Rules for California Listed Transactions

  • For transactions entered into on or after September 2, 2003, and before August 3, 2007:

    If a transaction becomes listed after the filing of the taxpayer's return reflecting the taxpayer's participation in the listed transaction, the taxpayer is required to file the Form 8886 with the next filed California return after the transaction is listed, regardless of the year the taxpayer participated in the transaction.

  • For transactions entered into beginning August 3, 2007:

    The taxpayer must file Form 8886 with the FTB within 90 calendar days of the date listing the transaction in the FTB notice. Mail Form 8886, Reportable Transaction Disclosure Statement, to the address shown below.

    Failure to file the required Form 8886 or filing an incomplete form may result in the assessment of the failure to include information on reportable transactions penalty under R&TC Section 19772.

Material Advisors

Form 8918

R&TC Section 18628, which conforms to IRC Section 6111, requires a material advisor to send a duplicate of the federal return, if applicable, or the same information required on the federal reportable transactions return for California reportable transactions, including listed transactions, to the FTB by specified dates. This requirement applies to any material advisor, with respect to any reportable transaction defined in IRC Section 6707A(c), who satisfies any one of the following requirements:

  • Is organized in this state.
  • Is doing business in this state.
  • Derives income from sources in this state.
  • Provides any material aid, assistance, or advice with respect to organizing, managing, promoting, selling, implementing, insuring, or carrying out any reportable transaction, with respect to a taxpayer who is either organized in this state, does business in this state, or derives income from sources in this state.

For any transaction entered into on or after September 2, 2003, that is specifically identified at any time by the FTB notice for California income or franchise tax purposes as a listed transaction, the material advisor must file the required return by the later of 60 days after entering into the transaction or 60 days after the transaction becomes listed.

Material advisors are required to complete IRS Form 8918, Material Advisor Disclosure Statement, on a California-only basis if there is a filing requirement under California law but not under federal law.

Failure to file the required Form 8918 or filing an incomplete form may result in the assessment of the failure to furnish information penalty under R&TC Section 19182.

List of Advisees

A material advisor of transactions identified by the FTB as listed transactions for California income or franchise tax purposes must also provide the list of advisees to the FTB if both the following requirements apply:

  1. The transaction is entered into on or after September 2, 2003.
  2. The material advisor meets any of the following criteria:
    1. Is organized in California.
    2. Does business in California.
    3. Derives income from California sources.
    4. Provides any material aid, assistance, or advice with respect to organizing, managing, promoting, selling, implementing, insuring, or carrying out any reportable transaction, including listed transaction, to a taxpayer that is organized in California, does business in California, or derives income from California sources.

The material advisor must provide the list to the FTB by the later of 60 days after the investor enters into the transaction or 60 days after the transaction becomes listed. Failure to provide the list of advisees may result in the assessment of the failure to maintain list of advisees under R&TC Section 19173.

Where to Mail

Mail IRS Form 8886, Reportable Transaction Disclosure Statement, and/or Form 8918, Material Advisor Disclosure Statement, and the list of advisees to:

US Mail

Tax Shelter Filing
ATSU 398 MS F385
Franchise Tax Board
PO Box 1673
Sacramento CA 95812-9900

Private Carrier Services

Tax Shelter Filing
Franchise Tax Board
Sacramento CA 95827

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