Reed Smith associates Mike Shaikh and Erin Mariano recently presented proposals for a needed change in California law at the Third Annual Sacramento Delegation. This delegation, which is organized by the Taxation Section of the California State Bar, is an opportunity for tax attorneys from across the state to raise issues before high-ranking representatives of the Franchise Tax Board ("FTB") and State Board of Equalization. The representatives use these proposals as a springboard to effect changes in California law that would benefit both the state and taxpayers.

Mike and Erin's paper, which was coauthored by Reed Smith partner and former FTB Chief Counsel Brian Toman, requested the FTB to expand its current Voluntary Disclosure Program ("VDP") to include all trusts administered outside California, particularly those with a California resident non-contingent beneficiary. The VDP allows non-filers who have a filing obligation with the FTB to come forward and begin paying taxes in exchange for a six-year look-back period to pay back taxes and relief from non-filing penalties. The problem, however, is that the VDP, as currently structured, has a big gap: trusts administered outside of California that must file in California because a non-contingent beneficiary is a California resident cannot participate in the VDP. In light of the Legislative history of the VDP – which indicates that the program was intended for persons susceptible to non-filing – this is an oversight. In contrast, trusts taxable in California because a non-administering fiduciary resides in California may participate in the VDP. There is no reasonable explanation for the different treatment of trusts for purposes of the VDP based on whether their California filing obligation is triggered by the California residency of a fiduciary, as opposed to the California residency of a beneficiary. The proposal put forward by Mike, Erin and Brian would correct this oversight and allow all trusts with a California filing obligation to participate in the VDP.

Mike and Erin plan to continue working with the FTB and the California Legislature to address this oversight. A copy of the paper can be found here.

This article is presented for informational purposes only and is not intended to constitute legal advice.