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California Taxpayers' Association v. Franchise Tax Board

December 13, 2010

CALIFORNIA TAXPAYERS' ASSOCIATION, PLAINTIFF AND APPELLANT,
v.
FRANCHISE TAX BOARD, DEFENDANT AND RESPONDENT.



(Super. Ct. No. 34-2009-80000168-CU-WM-GDS) APPEAL from a judgment of the Superior Court of Sacramento County, Timothy M. Frawley, Judge.

The opinion of the court was delivered by: Butz, J.

CERTIFIED FOR PUBLICATION

Affirmed.

We conclude here that Revenue and Taxation Code section 19138,*fn1 a corporate tax penalty provision for understating such taxes by more than $1,000,000, is just that--a penalty--and therefore not subject to the two-thirds legislative vote requirement for a "state tax" increase as required by article XIII A, section 3, of the state Constitution (enacted as part of Proposition 13 in 1978). We also conclude that this statute, as properly construed, affords due process. Accordingly, we shall affirm the judgment.

PROCEDURAL BACKGROUND

California Constitution, article XIII A, section 3 (hereinafter, article 13A, section 3), requires in relevant part that "any changes in state taxes enacted for the purpose of increasing revenues collected pursuant thereto whether by increased rates or changes in methods of computation must be imposed by an Act passed by not less than two-thirds of all members elected to each of the two houses of the Legislature[.]"

In this lawsuit, a taxpayers' group which represents individual and corporate taxpayers, the California Taxpayers' Association (CalTax), has sued the state Franchise Tax Board (the Board). CalTax claims that section 19138 is unconstitutional under article 13A, section 3, for not meeting this legislative vote requirement, and is also unconstitutional on procedural due process grounds. The trial court disagreed. So do we, exercising our independent review on a matter of legal interpretation (see Sinclair Paint Co. v. State Bd. of Equalization (1997) 15 Cal.4th 866, 873-874 (Sinclair)).*fn2

Section 19138 imposes a "penalty" on corporate taxpayers if they understate their tax liability by over $1 million for any taxable year.*fn3 (§ 19138, subd. (a)(1).) The penalty equals 20 percent of the understatement. (§ 19138, subd. (b).) The understatement constitutes the difference between the correct tax liability and the tax reported on the taxpayer's original return or amended return filed on or before the original or extended due date. (Ibid.)

Section 19138 became effective on December 19, 2008. (See fn. 3, ante.) However, section 19138 applies retroactively to each taxable year starting on January 1, 2003, for which the statute of limitations on assessment has not expired. (§ 19138, subd. (h).) For these prior taxable years, though, a taxpayer may reduce the likelihood of an understatement penalty by filing an amended return by May 31, 2009 (and paying that tax), which will be treated as the amount of tax shown on an original return for those years in determining any understatement. (Id., subd. (b).)

No penalty is imposed where the understatement is attributable (1) to specified changes in law, or (2) to the taxpayer's reasonable reliance on a ruling by the Board's chief counsel. ( 19138, subds. (f), (g).)

The protest and appeal procedures of the Revenue and Taxation Code that govern deficiency assessments do not apply to the assessment or collection of the section 19138 penalty. (§ 19138, subd. (d); see § 19031 et seq.) Furthermore, a refund or credit for any amounts paid to satisfy the section 19138 penalty "may be allowed only on the grounds that the amount of the penalty was not properly computed by the . . . Board." (§ 19138, subd. (e).)

DISCUSSION

I. The Section 19138 Penalty Is Not a State Tax Nor a State Tax Increase Subject to the Two-thirds Legislative Vote Requirement of Article 13A, Section 3

To decide this constitutional issue, we must first set forth the analytical framework by which it will be decided. There is no decision directly on point.

A. Analytical Framework

CalTax looks to the analytical framework employed in a series of decisions involving whether a local government fee is actually an unconstitutional special tax under article 13A, section 4 of the state Constitution. That constitutional provision (which was also enacted in 1978 as part of Proposition 13, like article 13A, section 3, with which we deal) specifies that ...


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