Cal. Code Regs. Tit. 18, § 25112 - Penalties for Failure to Supply Information or Documents

(a) Penalty for failure to furnish information.

(1) In general. If a corporation making a water's-edge election under Revenue and Taxation Code section 25110 fails to furnish any information described in Revenue and Taxation Code section 25112, subdivision (b), within 60 days of a written request by an auditor or attorney of the Franchise Tax Board, such corporation shall pay a penalty of $1,000 for each taxable year with respect to which such information is not timely furnished. Additional monetary penalties of up to $24,000, for a total penalty of $25,000, may be assessed if the failure to furnish information continues.

(2) Basis for assessing penalty.

(A) Taxable year. The penalty is assessed with respect to each taxable year for which the request is made. A single request for information may apply to several years and a failure to furnish information in response to such request may give rise to a penalty for each taxable year covered by the request. Requests may be made for information for more than one taxable year during a calendar year or twelve-month period. A failure to furnish information may give rise to a penalty for each taxable year in spite of the fact that penalties are assessed for two or more taxable years during a calendar year or twelve-month period.

(B) Failure to furnish. The penalty is assessed for a failure to furnish information, not for each failure to furnish information nor for each item of information or document not furnished. The penalty applies to each individual corporation required to file under the Corporation Tax Law to which the written request is directed. Filing Schedule R-7, Election to File a Single Return, shall not relieve each of the entities upon whose behalf such election is filed from liability for such penalty.

(C) Substantial nature. The failure to supply information must be of a substantial nature which may be demonstrated either by the potential significance or the quantity of the item or items not supplied.

(3) Notice. The corporation must be informed in the written request for information that it is subject to the penalty provided for in Revenue and Taxation Code section 25112, subdivision (a), before the penalty may be assessed. A corporation shall normally only be advised that it may be subject to the penalty provided for in Revenue and Taxation Code section 25112, subdivision (a), if it has previously failed to provide the information requested, whether specifically or generally. The notice shall set forth the basis upon which prior responses have been unsatisfactory.

(4) Increase in penalty for continued failure after notification. If a failure described in subsection (a)(1) of this regulation continues for more than 90 days after the date on which a bureau director or a supervising counsel mails notice of such failure to the reporting corporation, that corporation shall pay a penalty of $1,000, in addition to the penalty imposed by Revenue and Taxation Code section 25112, subdivision (a), and subsection (a)(1) of this regulation, for each 30-day period (or fraction thereof) during which such failure continues after such 90-day period has expired. The additional penalty imposed by Revenue and Taxation Code section 25112, subdivision (c), and described in this paragraph shall be limited to a maximum of $24,000 for the failure for each taxable year.

(5) Reasonable cause.

(A) Time. For purposes of Revenue and Taxation Code section 25112, subdivision (a), the time prescribed for furnishing information under subsection (a)(1) of this regulation, and the beginning of the 90-day period after mailing of notice by the bureau director or supervising counsel under subsection (a)(4) of this regulation, shall be treated as being not earlier than the last day on which reasonable cause existed for failure to furnish the information. Absent a showing by the taxpayer, it shall be presumed that reasonable cause did not exist for failure to submit the requested information as of the date of the request provided for in subsection (a).

(B) Tolling. The sixty-day and ninety-day time periods shall be tolled during the period of time for which the question of reasonable cause is under review.

(C) Showing. To show that reasonable cause existed for failure to furnish information as required by Revenue and Taxation Code section 25112, the reporting corporation must make an affirmative showing of all facts alleged as reasonable cause for such failure in a written statement containing a declaration that it is made under the penalties of perjury. The statement must be filed with the bureau director or supervising counsel who signed the notice of failure. Such bureau director or supervising counsel shall determine whether the failure to furnish information was due to reasonable cause, and if so, the period of time for which such reasonable cause existed. The taxpayer shall be notified of the determination.

(D) Destruction or retention. Destruction of a document, or failure to maintain information, if occurring in the normal course of business, is reasonable cause for failure to furnish information for purposes of penalties asserted under Revenue and Taxation Code section 25112, subdivisions (a) and (c), unless the document or information is otherwise required to be maintained by Article 1.5 of Chapter 17 of the Corporation Tax Law.

(E) Location. Location of a document or information in a foreign country may provide reasonable cause for not supplying the document or information for a period of time not to exceed 90 days.

(6) Other penalties. The information required by Revenue and Taxation Code section 25112, subdivision (b), and which may be requested under Revenue and Taxation Code section 25112 must be furnished even though it may not ultimately affect the amount of any tax due under the Corporation Tax Law. For criminal penalties for failure to file a return and filing a false or fraudulent return, see Revenue and Taxation Code sections 19706, 19701 and 19705.

(7) Manner of assessing.

(A) Initial penalty. The penalty provided for in Revenue and Taxation Code section 25112, subdivision (a), shall be assessed in a manner similar to the assessment of additional tax and all rights, duties and remedies shall apply.

(B) Additional amounts. The additional penalties provided for in Revenue and Taxation Code section 25112, subdivision (c), shall be assessed in a manner similar to the assessment of additional tax except that a notice need not be issued until the full penalty has accrued, or 45 days after the failure to submit has been cured. The protest and pursuit of other remedies provided with respect to the penalty provided for in Revenue and Taxation Code section 25112, subdivision (a), shall not stay the accruing and assessment of penalties pursuant to subdivision (c) of such section. If it is ultimately determined that the penalty provided for in Revenue and Taxation Code section 25112, subdivision (a), should not be assessed, any penalty asserted under Revenue and Taxation Code section 25112, subdivision (c), shall be withdrawn and refunded, if paid, with interest as otherwise required by law.

(b) Exclusion of the documentation for failure to substantially comply with a formal document request.

(1) In general. The superior courts of the State of California for the counties of Los Angeles, Sacramento or San Diego, or for the City and County of San Francisco may, upon motion by the Franchise Tax Board, issue an order prohibiting the introduction by the taxpayer of documentation requested in a formal document request if the taxpayer fails to substantially comply with such formal document request within 90 days of the receipt of such request. The 90-day period is tolled during the pendency of any court proceeding reviewing such request. This sanction is in addition to any other sanction or penalties which might be applied or sought by the Franchise Tax Board. The sanction of nonadmissibility does not arise if the taxpayer establishes that the failure to provide the documentation as requested by the Franchise Tax Board is due to reasonable cause.

(2) Description.

(A) In general. A formal document request is not routine to the beginning of an audit or administrative review, but is to be made after normal request procedures have been unsuccessful in obtaining documentation in the course of an audit. Normal request procedures include those which are similar to those which would subject a taxpayer in noncompliance to the penalty prescribed by Revenue and Taxation Code section 25112, subdivision (a), and must be made in writing. It is not necessary, however, that the penalties otherwise provided by Revenue and Taxation Code section 25112 or any other section of the Revenue and Taxation Code be imposed for the requirement of a normal request procedure to be satisfied.

(B) Form. A formal document request shall:

1. be mailed by registered or certified mail to the taxpayer at its last known address,

2. set forth the time and place for the production of the documentation,

3. set forth a statement of the reason the documentation previously produced (if any) is not sufficient,

4. provide a description of the documentation being sought,

5. set forth the consequences to the taxpayer of the failure to produce the documentation, and

6. shall be signed by the Assistant Executive Officer, Compliance or the Chief Counsel of the Franchise Tax Board.

A formal document request may also include a requirement that an English translation of the foreign documents be supplied if it exists.

(3) Substantial compliance. Whether a taxpayer has substantially complied with a formal document request shall depend upon all the facts and circumstances. For instance, if the Franchise Tax Board presents a taxpayer with a formal document request for 10 items and the taxpayer produces 9 of them but fails (without reasonable cause) to produce one requested document that appears to be significant, the Franchise Tax Board may request that all or any number of the documents be excluded. A court may decide that there has not been substantial compliance and exclude all or any portion of the documents. Such an exclusion might occur if the documents produced by the taxpayer were all favorable to or tended to support its position while the one which was not produced might damage or undermine that position. However, when the Board issues formal document requests in the course of an audit, and when, for example, the taxpayer fails to comply with one particular request for only one document, the taxpayer's timely satisfaction of other requests is one factor (but not the only factor) to be considered in determining whether overall compliance has been substantial. If overall compliance in such a situation has been substantial, the document requested but not supplied could be admissible.

(4) Reasonable cause.

(A) In general. In determining whether there was reasonable cause for failure to produce, a court may take into account, among other grounds, whether the request is reasonable in scope, whether the requested documents or copies thereof are available within the United States, and the reasonableness of the requested place of production within the United States.

(B) Foreign laws. The fact that a foreign jurisdiction would impose a civil or criminal penalty on the taxpayer (or any other person) for disclosing the requested documentation is not reasonable cause unless the Superior Court, after in camera review of the documentation, finds it to be.

(C) Minority status. A determination of whether ownership of less than a majority of the voting stock of an entity which has custody of a document is reasonable cause shall depend upon the facts and circumstances of the case.

(D) Delays. Reasonable cause may excuse delay in production. For example, translation of documents into English pursuant to a request by the Franchise Tax Board may reasonably cause a delay in production of such documents.

(E) Not currently existing. The fact that a document is not otherwise required to be maintained, has not been maintained, or has been destroyed shall not prevent a court from issuing an order providing for the exclusion of a later discovered copy of such document.

(F) Copies. The reasonableness of a demand for the production of the originals of foreign documents rather than copies may be resolved in judicial proceedings to quash the request. If the foreign country makes it impossible to remove the original documents requested not because of secrecy laws but, for example, because of its tax laws or laws as to the rights of creditors, true copies may be sufficient.

(5) Judicial proceedings.

(A) Motion to quash. A judicial proceeding to quash the request may be commenced within 90 days of the mailing of the request. Grounds for an action to quash would include contentions that all or part of the requested documentation is irrelevant to the pertinent tax issue, the place of production is unreasonable, or reasonable cause exists for failure to produce or for delay in production. The reasonableness of requesting documents rather than copies, when, for example, foreign laws prevent their removal, could also be raised in a motion to quash. During the pendency of the action, the 90-day period for compliance with the request is suspended. Moreover, the Franchise Tax Board or the court may extend the period. In any proceeding to quash, the Franchise Tax Board may seek to compel compliance with the request. An order compelling compliance may be issued by the court subject to normal and appropriate conditions.

(B) Motion to prohibit introduction of documents. After the expiration of the 90-day period, the Franchise Tax Board may bring a motion to prohibit introduction of the requested documents in any subsequent judicial or administrative proceeding. The motion may be granted provided the documents requested are likely to be relevant and material and are calculated to serve a legitimate purpose for which the investigation is conducted and the taxpayer's failure to substantially comply is not due to reasonable cause as defined in subsection (b)(4) of this regulation.

(C) Venue. An action to quash or seeking a prohibition on the introduction of documents shall be brought in the superior courts of the State of California for the counties of Los Angeles, Sacramento or San Diego, or for the City and County of San Francisco. An order denying a motion to quash or granting a prohibition on the introduction of documents shall be deemed a final order which may be appealed.

(D) Burden of proof. In any proceeding, the Franchise Tax Board has the burden of showing relevance and materiality of the requested records. In addition, the Franchise Tax Board must show that the audit or administrative inquiry is being or was conducted pursuant to a legitimate purpose, that the information sought is not already within its possession, and that the administrative steps required herein have been followed.

(E) Time to comply. The taxpayer generally has 90 days from the day of mailing to comply with a formal document request. However, the Franchise Tax Board or a court having jurisdiction over a motion to quash the request may extend the period. The court may extend the period in response to a motion to quash or in response to a motion to extend the period that is not part of a motion to quash. For example, a court could find that a taxpayer had reasonable cause for failure to produce an item within 90 days and set a later date for production.

(F) Limitation on use. A court may impose limitations upon the use of any documents produced, including limitations to protect the confidentiality of the documents if necessary.

(c) Suspension of period of limitations. The suspension of the 90-day time period provided for in Revenue and Taxation Code section 25112 of any period of limitation otherwise provided for in the Administration of Franchise and Income Tax Laws, Revenue and Taxation Code section 19031 et seq., by operation of Revenue and Taxation Code section 25112 shall result in a complete suspension of that time period. The time period shall not commence to run again until the suspension is terminated.

EXAMPLE 1:

A formal document request is served on April 30, 1996. The taxpayer brings a motion to quash on June 14, 1996, 45 days into the 90-day period. The 90-day period is suspended. The motion is ruled upon and the ruling is final and nonappealable on December 31, 1996. The 90-day period commences running again on January 1, 1997, and shall expire 45 days later on February 14, 1997.

EXAMPLE 2:

Same facts as Example 1. In addition, the last day for mailing a notice of additional tax proposed to be assessed as prescribed by Revenue and Taxation Code section 19057 is September 15, 1998. The running of the statute of limitations is suspended from June 15, 1997 to December 31, 1997, and the last day for mailing a notice is extended by this six and one-half months' period. The last day for mailing a notice is April 1, 1999.

(d) Make information available and identify individuals. For taxable years beginning on or after January 1, 1994, an otherwise qualified taxpayer shall be subject to the penalties provided for in Revenue and Taxation Code section 25112 if it willfully fails for the period described in subsection (e) hereof to do any of the following:

(1) Income attribution. Retain and make available, upon request, documents and information which are necessary to audit issues concerning the attribution of income between the United States and foreign jurisdictions. Documents and information include questionnaires completed and submitted to the Internal Revenue Service or any state of the United States. The attribution of income is normally examined under Internal Revenue Code sections 482, 861, 863, 902, and 904, and Subpart F of the Internal Revenue Code.

(2) Identify individuals. Identify, upon request, principal officers or employees of the affiliated group who have substantial knowledge of and access to information as of the date of the request on the allocation of costs and profits and the establishment of prices for goods and services. The principal officers and employees would normally be the individuals who would be listed as the three most knowledgeable in response to an interrogatory posed in a suit for refund. The individual does not have to be located within the United States. A former employee or officer may be designated, however, if such an individual will not appear to be deposed, a current employee of the taxpayer or an affiliate must subsequently be designated.

(3) Rulings, etc. Retain and make available all documents and correspondence submitted to or obtained from the Internal Revenue Service or the tax agencies of foreign countries or territories and from competent authority pertaining to requests for rulings, rulings, settlements and competing jurisdictional claims involving assignment of income to the United States. The documents which must be retained and made available are only those ordinarily available to a corporation whose income and factors are included in the combined report required pursuant to the water's-edge election. The documents described include, but are not limited to, ruling requests, rulings on reorganizations involving foreign branch incorporation, and the determination of foreign tax liability, including reports issued by foreign tax administrators. An English translation shall be furnished if available.

(4) Foreign transactions. Retain and make available any forms filed with the Internal Revenue Service to comply with Internal Revenue Code sections 6038, 6038 A, 6038B, 6038C and 6041. The forms required as of January 1, 1988 are Internal Revenue Service Forms 851, 926, 5471, Worksheets A and B to Form 5471, 5471 Schedule M and 5472.

(5) Domestic transactions. Upon request, prepare and make available information similar to that required of foreign corporations under Internal Revenue Code sections 6038, 6038 A, 6038B, 6038C and 6041 for each corporation incorporated within the United States which has 50 percent or more of its stock owned or controlled directly or indirectly by a corporation whose income or factors are required to be included in the combined report prepared pursuant to Revenue and Taxation Code section 25110. The consolidating workpapers used to prepare consolidated financial statements for reporting to shareholders shall normally satisfy this requirement.

(6) State returns. Retain and make available upon request all state (including the District of Columbia) tax returns filed by each corporation whose income or factors are required to be included in the combined report prepared pursuant to Revenue and Taxation Code section 25110.

(7) Information requests. Comply with reasonable requests for information necessary to determine or verify net income and apportionment factors or the geographic source of income under the Internal Revenue Code. Requests for information may be made during an audit or during an administrative review of a notice of proposed assessment or a claim for refund as well as a suit for refund.

(e) Period of retention. The material required to be retained pursuant to Revenue and Taxation Code section 25112, subdivision (b), need be retained only for the period of time during which the taxpayer's franchise or income tax liability may be adjusted. The period of adjustment includes periods during which an appeal is pending before the State Board of Equalization or a lawsuit is pending, as well as the normal period of limitation, including waivers, for assessing additional tax or filing a claim for refund.

Notes

Cal. Code Regs. Tit. 18, § 25112

1. New section filed 1-3-89; operative 1-3-89 (Register 89, No. 4).
2. Change without regulatory effect amending subsections (a)(1), (a)(2)(B), (a)(4), (a)(4)(D), (a)(6), (a)(7)(B), (c) and NOTE and new subsections (d)-(e) filed 6-16-94 pursuant to section 100, title 1, California Code of Regulations (Register 94, No. 24).
3. Change without regulatory effect amending section filed 3-19-2002 pursuant to section 100, title 1, California Code of Regulations (Register 2002, No. 12).

Note: Authority cited: Section 19503, Revenue and Taxation Code. Reference: Section 25112, Revenue and Taxation Code.

1. New section filed 1-3-89; operative 1-3-89 (Register 89, No. 4).
2. Change without regulatory effect amending subsections (a)(1), (a)(2)(B), (a)(4), (a)(4)(D), (a)(6), (a)(7)(B), (c) and Note and new subsections (d)-(e) filed 6-16-94 pursuant to section 100, title 1, California Code of Regulations (Register 94, No. 24).
3. Change without regulatory effect amending section filed 3-19-2002 pursuant to section 100, title 1, California Code of Regulations (Register 2002, No. 12).