California’s NEST Penalty

California’s noneconomic substance transaction understatement (NEST) penalty imposes a 20 percent penalty for understatements attributable to noneconomic substance transactions (CA Rev. & Tax Code Sec. 19774). The penalty increases to 40 percent for transactions that are not adequately disclosed.

A transaction lacks economic substance either because it lacks an economic benefit or there is no bona fide, non-tax California business purpose for entering into the transaction.

In cases where your client has received a final federal audit report, the FTB may assess the NEST penalty in lieu of the accuracy-related penalty assessed on the audit report if:
• The federal adjustment was from a transaction lacking economic substance; and
• Tax benefits from this same transaction were reported on the California tax return.

Unlike California, the IRS does not have a NEST penalty. Learn more.

This entry was posted on Tuesday, September 16th, 2008 at 10:16 am and is filed under CalCPA Buzz. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.