Legal ruling 1996-3

July 3, 1996

Subject: Revenue and Taxation Code Section 21015--Relief from Penalty Imposed Under Section 19141.5(a) Form 5472/Record Maintenance Penalty)

Issue

What are some examples of situations in which the Franchise Tax Board (FTB) will or will not use Revenue and Taxation Code §21015 to refrain from imposing or waive the penalty imposed under Revenue and Taxation Code §19141.5(a)?

Facts

Situation 1: Taxpayer has not timely filed copies of federal forms 5472 with FTB.

Situation 2: Same as Situation 1 except the taxpayer writes to FTB explaining that the reason copies of the federal forms 5472 were not timely filed was because the taxpayer was not aware of the California filing requirement for copies of federal forms 5472 when the return was filed. The taxpayer filed the copies of the federal forms 5472 immediately upon learning of the California filing requirement and has taken steps to ensure the situation does not recur by adding the filing requirement to the "Tax Compliance Tracking System" it maintains to monitor tax filing requirements. Taxpayer submits this explanation and the required copies of federal forms 5472 within six months of the filing of the return and prior to FTB needing the forms for audit selection purposes.

Situation 3: Same as Situation 2 except the taxpayer did not submit the required copies of federal forms 5472 prior to FTB needing the forms for audit selection purposes. The failure to file the copies of the federal forms 5472 was discovered during the course of an audit of the tax returns. At the auditor's request, the taxpayer submitted the forms. The audit adjustments ultimately proposed by the auditor did not relate to the intercompany transactions reported on the copies of the federal forms 5472.

Situation 4: Same as Situation 2 except that the taxpayer has repeatedly failed to timely file copies of the federal forms 5472.

Law and Analysis

Under Revenue and Taxation Code §21015, the Franchise Tax Board has discretionary authority, effective January 1, 1996, to either refrain from imposing or to waive penalties authorized under §19141.5(a). The determination must be made, "on a case-by-case basis, that the failure to comply did not jeopardize the best interests of the state and is not due to any willful neglect or any intent not to comply." This authority is limited to penalties that may be or were assessed or imposed on or after January 1, 1995.

Under Revenue and Taxation Code §19141.5(a), a penalty is required to be imposed for failure to furnish information or maintain records as provided in Internal Revenue Code §6038A . The penalty is $10,000 for each failure to timely file copies of federal forms 5472 and for failure to maintain or cause another to maintain the required records. (Treasury Regulation §§1.6038A-2 and 1.6038A§3.)

Certain failures may be excused for reasonable cause for failure to furnish the information or maintain the records. (Internal Revenue Code §§6038A(d)(3); Treasury Regulation §1.6038A-4 (b).)

Holdings

Revenue and Taxation Code §21015 will be applied to the above factual situations as follows:

Situation 1: Here, there is not enough information to determine the reason for the failure. Consequently, the penalty will be imposed.

Situation 2: Because ignorance of the law does not constitute reasonable cause, the penalty would not be waived for reasonable cause. However, because the taxpayer submitted the forms prior to FTB needing them for audit selection purposes and demonstrated an intent to comply by taking steps to ensure that the situation will not be repeated in the future coupled with immediate compliance upon learning of the filing requirements, the penalty will be waived under §21015.

Situation 3: As noted in the Holding for Situation 2, ignorance of the law does not constitute reasonable cause to waive the penalty. Furthermore, in this situation, no relief from the penalty will be granted under §21015. Although the taxpayer has indicated that it would take steps to ensure the situation would not recur, the fact that copies of the federal forms 5472 were not filed at the time the return was reviewed for audit selection purposes impeded the auditor's ability to effectively determine the audit potential of the return.

Situation 4: As noted in the Holding for Situation 2, ignorance of the law does not constitute reasonable cause. Furthermore, in this situation, no relief from the penalty will be granted under §21015. Continued failure to timely file copies of the federal forms 5472 does not demonstrate an intent to comply with the statutory requirements. The taxpayer has a duty to comply with the statute.

Drafting Information

The principal author of this notice is Karen D. Smith of the Franchise Tax Board Legal Branch. For further information regarding this notice, contact Ms. Smith at the Franchise Tax Board Legal Branch, P.O. Box 1720, Rancho Cordova, CA 95721-1720.