State Anti-Tax Shelter Rules

Practitioners and taxpayers must look beyond Federal tax disclosure rules and determine whether any additional filing or reporting obligations are imposed under applicable state law.


Illinois was the second state, after California, to enact its own anti-tax shelter legislation. For more details on Illinois' program, please see

New York

New York has recently enacted its own anti-tax shelter legislation. Under this law, enacted in April of 2005, taxpayers must disclose reportable transactions, listed transactions, and "NY reportable transactions" (if targeted and identified by the New York Commissioner of Revenue) with their New York state income tax returns. The penalty for failing to do so could be as much as $50,000.

For promoters and peddlers of tax shelters or other "material advisors", with nexus to New York, registration may be required (effective September 9, 2005). The penalty for failing to do so ranges from $20,000 to $50,000 or 75% of gross income derived from the shelter.

For firms required to maintain investor lists in accordance with Section 6112, with nexus to New York, they must maintain a duplicate list for New York tax authorities. A failure to provide an investor list to New York tax authorities upon request (within 20 days) could lead to a $10,000 per day penalty.

Similar statute of limitations rules as those enacted by the JOBS Act of 2004 have been put in place in New York. Similar understatement penalty increases will exist with respect to reportable transactions and the aiding and assisting in the filing of fraudulent returns is increased to $5,000.

A voluntary compliance program may be implemented by the Department of Taxation and Finance. For more details, please see Pakenham & Mulvey, Tax Analysts Doc. 2005-9111, State Tax Notes Today, May 16, 2005. See also,

California Anti-Tax Shelter Legislation

The state of California already has implemented anti-tax shelter legislation that is wide-ranging in its disclosure, registration and list-maintenance requirements. While the rules in California require disclosure of any transaction for which disclosure is required under Federal tax disclosure rules, taxpayers subject to California jurisdiction must also disclose any transaction that has been identified by the California Franchise Tax Board as a tax avoidance transaction. For example, the California Franchise Tax Board has listed two types of transactions beyond those identified by Federal tax disclosure laws: (1) one involving REIT consent dividends; and (2) one involving deductions by wholly-owned or majority-owned RICs (Regulated Investment Companies).

Taxpayers and practitioners located outside of California must not assume that they are not subject to California's reporting requirements. The California anti-tax shelter legislation require registration and list maintenance for material advisors for tax shelters that have minimal contacts with California, by which taxpayers and advisors may be subject to these rules if they are: (1) organized in California; (2) doing business in California; (3) deriving income form sources in California; or (4) at least one of the investors is located in California. The penalties for failing to comply with these rules are significant. Taxpayers need to understand that these penalties will be severe and imposed strictly, because "as a practical matter, (the California rules on penalties are such) ...that a taxpayer who enters into a reportable transaction (subject to California's anti-tax shelter reporting rules) will need written advice from counsel to establish that he or she relied on advice from a tax advisor" (in order) to avoid penalties; " oral advice cannot meet the requirements." Lipton & Dixon, "Implications of California's Tough Anti-Tax Shelter Rules," Practical Tax Strategies/Taxation for Accountants, WG&L (June 2004).

For information about California's anti-tax shelter rules and registration requirements, please see

Other States

The IRS and the various states are coordinating efforts and sharing information in trying to stop the proliferation of abusive tax shelters. Practitioners and taxpayers must continue to monitor the developments in this area with regard to all of the states to determine if additional reporting and disclosures are required in any state. At the Tufts Law Firm, we will assist taxpayers who come to us and express an interest in trying to comply with Federal tax law disclosure rules to also learn about and comply with any applicable state law disclosure and reporting requirements, working in conjunction with local advisors in these states.

Multistate Tax Shelter Voluntary Compliance Program

To encourage taxpayers who have entered into abusive tax shelters to disclose their participation and amend their returns, 23 states have established a multi-state tax shelter voluntary compliance program. Hosted by the MTC, the program allows taxpayers to unwind abusive tax shelters in exchange for a state benefit, usually full abatement of penalty. The program runs from May 1 until October 1, 2007.

Definition of Abusive Tax Shelter: An Abusive Tax Shelter is a common name for a “tax avoidance transaction” or “abusive tax avoidance transaction.” A tax avoidance transaction (or abusive tax avoidance transaction) means any plan or arrangement devised for the principal purpose of avoiding state or federal income tax (and similar business activity taxes), and includes, but is not limited to, Listed Transactions as defined by the U.S. Internal Revenue Service (IRS). A Listed Transaction is a transaction that is the same or substantially similar to one that the IRS has determined to be a tax avoidance transaction and is so identified by IRS notice or other form of published guidance. An Abusive Tax Shelter may be, but is not necessarily, a “Reportable Transaction” as defined by the IRS. In addition, an Abusive Tax Shelter may affect only state taxes and would therefore be unaddressed by the IRS. See Instructions to IRS Form 8886 for information about Listed Transactions and Reportable Transactions.

Definition of Tax Shelter Voluntary Compliance Program: The MTC Multistate Voluntary Compliance Program (VCP) is a joint effort of participating states to offer taxpayers a single point of contact and a substantially uniform procedure with which to disclose participation in an Abusive Tax Shelter and to file amended returns (or initial returns if the failure to timely file was due to participation in an Abusive Tax Shelter) in exchange for a benefit, usually waiver of penalty. It is not voluntary disclosure, which is offered only to non-filers. It is not amnesty because it is limited to Abusive Tax Shelters.

Forms, rules, procedures, and a list of participating states may be found at

For more information, contact the Multistate Tax Commission by email at; by telephone at (202) 624-8699; or by writing to the Voluntary Compliance Program c/o Multistate Tax Commission, 444 North Capitol Street, Washington, D.C. 20001.

States participating in the voluntary compliance program include: Alabama, Alaska, Arizona, Arkansas, Colorado, Connecticut, Georgia, Iowa, Indiana, Massachusetts, Missouri, Montana, New Jersey, Oklahoma, Oregon, Rhode Island, Texas, Utah, Vermont, Washington, and Wisconsin.

The Multistate Tax Commission is a compact of state governments working to promote equitable and efficient administration of tax laws that apply to multistate and multinational enterprises.


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