The California Franchise Tax Board Extends Deadline to Participate in Resolution Program Targeting Certain Microcaptive Insurance Arrangements and Syndicated Conservation Easements

The FTB just extended the deadline to participate in its resolution program until January 31, 2024.[1] Previously, the FTB sent letters to taxpayers whom it suspects participated in “Eligible Transactions” involving certain micro captive insurance arrangements or syndicated conservation easements. These letters stated that the FTB believes that these Eligible Transactions are “potentially abusive in nature and subject to significant penalties ranging from 20% to 75%.” The letter then explains that taxpayers who enter a resolution program can come into compliance and reduce their exposure to potential penalties.

The main benefit of the resolution program is that FTB will permanently resolve all tax, penalties, and interest associated with the taxpayer’s participation in an Eligible Transaction, even if there are subsequent federal adjustments.[2] Moreover, the FTB will not impose fraud penalties under RTC section 19164(c) or accuracy-related penalties under RTC section 19164.5 (although in some cases, it will impose an accuracy-related penalty under other RTC sections).[3] The FTB also will not impose increased interest under RTC section 19778.[4] Although the FTB will not relieve taxpayers from previously imposed penalties under RTC section 19772 for failing to include reportable transaction information with a return, the participant can pay the penalty and file a claim for refund and/or request Chief Counsel to relieve the taxpayer of the penalty under RTC section 19772(f)(1).[5] In some instances, the FTB’s Chief Counsel will reduce any NEST penalty to $0.[6]

Eligible taxpayers who wish to participate must submit a complete and signed Notice 2023-02 closing agreement to the FTB, and pay all tax, interest, and reduced penalties related to the Eligible Transactions.[7] Currently, taxpayers have until January 31, 2024, to enter into the resolution program.[8] Unless an exception applies, the closing agreement concedes all previously claimed tax benefits related to the Eligible Transaction(s) and includes the transaction information, information document requests including the identities of other parties to the transactions and detailed transaction information as well as the computation of tax penalties and interest relating to the resolved transactions. Participants who received Notices of Proposed Assessments.[9]

If you have received one of these notices from the FTB or participated in an Eligible Transaction, you should hire tax counsel and have them evaluate and advise you as to whether your transaction makes you eligible for the FTB resolution program. Because of the January 31, 2024, deadline, time is of the essence, and you will need to act quickly so there is sufficient time to evaluate the situation and come up with a defensible strategy.

[1] FTB Notice 2023-03.

[2] FTB Notice 2023-02.

[3] Id.

[4] Id.

[5] Id.

[6] Id.

[7] Id.

[8] FTB Notice 2023-03.

[9] FTB Notice 2023-02.