The phosphorylation state of the C-terminal domain (CTD) of the RNA polymerase II plays crucial roles in transcription and mRNA processing. Previous studies showed that the plant CTD phosphatase-like 1 (CPL1) dephosphorylates Ser-5-specific CTD and regulates abiotic stress response in Arabidopsis. Here, we report the identification of a K-homology domain-containing protein named SHINY1 (SHI1) that interacts with CPL1 to modulate gene expression. The shi1 mutant was isolated from a forward genetic screening for mutants showing elevated expression of the luciferase reporter gene driven by a salt-inducible promoter. The shi1 mutant is more sensitive to cold treatment during vegetative growth and insensitive to abscisic acid in seed germination, resembling the phenotypes of shi4 that is allelic to the cpl1 mutant. Both SHI1 and SHI4/CPL1 are nuclear-localized proteins. SHI1 interacts with SHI4/CPL1 in vitro and in vivo. Loss-of-function mutations in shi1 and shi4 resulted in similar changes in the expression of some stress-inducible genes. Moreover, both shi1 and shi4 mutants display higher mRNA capping efficiency and altered polyadenylation site selection for some of the stress-inducible genes, when compared with wild type. We propose that the SHI1-SHI4/CPL1 complex inhibits transcription by preventing mRNA capping and transition from transcription initiation to elongation.