BILL ANALYSIS
SENATE JUDICIARY COMMITTEE
Senator Ellen M. Corbett, Chair
2009-2010 Regular Session
SB 1113 (Wolk)
As Amended April 15, 2010
Hearing Date: April 20, 2010
Fiscal: Yes
Urgency: No
TW:jd
SUBJECT
Franchise Tax Board: Tax Administration: Tax Appeals
DESCRIPTION
This bill would authorize the Franchise Tax Board, after a final
decision of the Board of Equalization on a taxpayer appeal, to
bring a civil action against a corporate taxpayer with a tax
discrepancy of more than $1 million or a personal income
taxpayer with a tax discrepancy of more than $100,000.
BACKGROUND
California's tax regulation scheme is antiquated. Dan Simmons,
Professor of Law at UC Davis, opined in his article "California
Tax System: Time for Reform," published in the University of
Santa Clara Law Review, Vol. 48, 2008, as follows:
California's tax collection system has been characterized in
at least one legislative study as duplicative, a financial
waste, a diffusion of activities and responsibilities, and as
a hodgepodge of boards, and elective and appointed officials
not truly responsive to the Governor. The current structure
evolved from mechanisms created in the State Constitution of
1879 in order to equalize property taxes among competing
mining and grazing counties in the state. While both the
California economy and the sophistication of its revenue laws
has grown, the state remains saddled with an antiquated tax
collection system supervised in large part by an elected board
with no particular experience with tax matters.
California has two tax review bodies: the Board of Equalization
(more)
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(BOE) and the Franchise Tax Board (FTB). FTB is responsible for
reviewing income tax returns of California's taxpayers. When
FTB finds an error, they have the authority to revise the
taxpayer's overpayment, refund, or deficiency assessment
amounts. If a taxpayer disagrees with an FTB tax determination,
the taxpayer can appeal FTB's finding. BOE is charged with
reviewing the taxpayer's appeal. When BOE affirms FTB's
findings to the detriment of the taxpayer, the taxpayer can
appeal the BOE decision to the Superior Court. Conversely, FTB
has no redress for an adverse BOE decision.
This bill would allow FTB, after a final determination by BOE,
to file a civil action against a corporate taxpayer with a
disputed tax obligation greater than $1 million or a personal
income taxpayer with a disputed tax obligation greater than
$100,000.
This bill was approved by the Senate Revenue and Taxation
Committee on April 14, 2010, by a vote of 3 to 2.
CHANGES TO EXISTING LAW
Existing law establishes BOE as a five-member board composed of
four members elected by each district plus the State Controller.
(Cal. Const. Art. XIII Sec. 17.)
Existing law establishes FTB as a three-person board comprised
of the State Controller, Director of the Department of Finance,
and Chair of the BOE. (Gov. Code Sec. 15700.)
Existing law provides that a taxpayer may appeal an FTB decision
to BOE. (Rev. & Tax Code Secs. 19324, 19045.)
Existing law provides that BOE's determination of an income or
corporation tax appeal becomes final after 30 days, unless the
taxpayer or FTB files for a rehearing, in which case it becomes
final within 30 days from the time the BOE issues its opinion.
(Rev. & Tax Code Secs. 19048, 19334, 19346.)
Existing law provides that after a taxpayer has exhausted
administrative appeals with BOE, the taxpayer may file a civil
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action for refund against FTB. (Rev. & Tax Code Sec. 19382.)
Existing law provides that a taxpayer's civil action for refund
against FTB may be brought in any city or county in which the
Attorney General maintains an office. (Rev. & Tax Code Sec.
19388.)
This bill would authorize FTB, 90 days after a BOE decision
becomes final, to file a civil action against a taxpayer for
trial de novo in Superior Court.
This bill would allow FTB to bring a civil action against the
taxpayer in any city or city and county in which the Attorney
General maintains an office.
This bill would authorize the taxpayer to file a motion to
change the venue closer to the taxpayer's residence or principal
place of business.
This bill would provide a rebuttable presumption that FTB's
determination of the taxpayer's obligation is correct, and the
taxpayer shall have the burden of proof that the FTB's
determination is incorrect.
COMMENT
1. Stated need for the bill
The author writes:
BOE often makes decisions based on political considerations,
and not the appropriate application of law to the facts as a
Court would do. Decisions are rarely published, leaving
little meaningful precedent to guide both taxpayers or tax
administration agencies, and can often be inconsistent from
case to case, resulting in further confusion. SB 1113 aims to
bring more consistency to BOE decision making in two ways.
First, with both sides of a tax dispute able to appeal, courts
will have additional opportunities to weigh in on disputes and
create meaningful precedent, instead of the current system
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where a Superior Court may only hear cases brought by
taxpayers. Second, the BOE will know as part of its decision
making process that an increased likelihood exists that its
decisions will be subject to the scrutiny of judicial review,
making reliance on precedence and building a record more
important should it have an interest in having its decisions
upheld.
The chairwoman of BOE, Betty T. Yee (Ms. Yee), a supporter of
the bill, states that "BOE hears complex tax matters related to
large taxpayers whose resources match those of the FTB . . . .
Given the expense of litigating tax appeals, it is highly
unlikely the FTB would seek to appeal any but the largest, most
complex tax matters."
2. Bill as amended applies to a narrow group of taxpayers
As introduced, this bill would have allowed FTB, after receiving
an unfavorable decision by the BOE, to sue in civil court all
taxpayers, regardless of income level or amount of tax
discrepancy. Cal-Tax, an opponent of this bill, argues that
low-income taxpayers will not be able to afford the costs of
defending themselves against FTB in civil court. FTB reports
that in 2007, 918 corporations out of 709,937 (.13 percent) had
a tax liability of $1 million or more and only the top one
percent of personal income tax payers had a tax liability
greater than $100,000 based on $1 million of income earned by
the personal income taxpayer. Accordingly, the author amended
the bill to pertain only to corporate taxpayers with a tax
discrepancy greater than $1 million and personal income
taxpayers with a tax discrepancy greater than $100,000.
3. Lack of consistency with BOE decisions
BOE is comprised of the State Controller plus four elected
members who can only serve two terms. Incoming elected members
may or may not have knowledge of prior BOE decisions and
substantial expertise in tax law. As noted above, the author
argues that BOE decisions are rarely published, leaving
taxpayers and FTB with no standard for applying tax law fairly.
With incoming and outgoing members and few published decisions
upon which to rely, consistency within the BOE is lacking.
An example of potential inconsistency is demonstrated by an
appeal reviewed by BOE, wherein a BOE member was disqualified on
the panel due to a conflict of interest - the taxpayer had
contributed to the BOE member's campaign fund. In this
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instance, BOE sided with the taxpayer. Ms. Yee states that "the
potential of an appeal serves to sharpen the decision maker, and
providing all parties with the right to appeal contributes
confidence in the fairness of the BOE's decisions, regardless of
the outcome." By providing the same appeal process to all
parties, this bill would serve to raise the public's confidence
in the tax system and maintain a fair and just tax system.
4. Providing FTB with an appeal process equal to that of
taxpayers
Under current law, if a taxpayer disagrees with the BOE decision
on the tax discrepancy, the taxpayer can take the case to the
superior court to resolve the dispute. However, when BOE makes
a determination against FTB, FTB is left without further
recourse. Cal-Tax, an opponent of the bill, supports existing
law, arguing that allowing FTB to file a civil suit against a
taxpayer "eviscerates [an] important check on FTB action"
because FTB "knows the costs of challenging FTB operate as a
deterrent to the taxpayer's fighting the appeal."
California legislators have attempted to alter the current tax
appeal system. AB 2472 (Wolk, 2004) proposed a Tax Court,
comprised of appointed individuals, which would have replaced
BOE in its review of taxpayer appeals and provided the taxpayer
and FTB the ability to bring their case to the Court of Appeal
for review. AB 2472 died in the Assembly Appropriations
Committee. Conversely, SB 1133 (Wolk, 2010) would abolish FTB
and give those powers to BOE. SB 1133 has been placed on the
suspense calendar in the Senate Revenue and Tax Committee.
Although the Legislature recognizes a need to rework the tax
appeal system, it is unable to do so at this time primarily due
to financial constraints. Thus, allowing FTB to appeal BOE
decisions to the superior court, as proposed in this bill, helps
to strengthen existing law.
5. Rebuttable presumption and shifting the burden of proof onto
the taxpayer is warranted given the nature of the FTB action
The bill would require a rebuttable presumption that FTB's
determination of the tax discrepancy is correct. The author
argues this requirement is reasonable since the taxpayer holds
the original tax records, and FTB merely holds the taxpayer's
overview of income and expenses.
Professor Leo P. Martinez, University of California, Hastings
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College of the Law, explains the development of the burden of
proof in tax refund cases as follows:
As it developed, the burden of proof placed on the taxpayer in
refund suits took on a two-part obligation. First, the
taxpayer was required to show that an assessment was wrong and
second, based on the common-law count for money had and
received, the taxpayer was required to show the correct amount
to which she was entitled. This formulation of the burden of
proof obligation of the taxpayer now is the general rule that
governs all refund suits.
(L. Martinez, Tax Collection and Populist Rhetoric: Shifting
the Burden of Proof in Tax Cases, Hastings L.J. 239, 262 (1988)
(footnotes omitted).) California courts have long-recognized
the need for placing the burden of proof on the taxpayer. In
Todd v. McColgan (1949) 89 Cal.App.2d 509, a taxpayer appealed
the trial court's decision regarding additional personal income
tax assessments levied by the Franchise Tax Commissioner. The
court stated as follows:
The taxpayer cannot merely assert the incorrectness of a
determination of a tax or the method used and thereby shift
the burden to the commissioner to justify the tax and the
correctness thereof. It is the well-established rule that
when the plan of allocation is found to be reasonable and
rational the burden of showing error in defendant's
computation or application is upon the taxpayer.
FTB applies statutory tax analysis to each taxpayer's tax
return. Once FTB determines a discrepancy, FTB notifies the
taxpayer of the discrepancy. The taxpayer is then given an
opportunity to provide documentation to support the tax return.
The taxpayer is then given the opportunity to appeal the
decision with FTB, and then with BOE. Opponents Cal-Tax,
California Chamber of Commerce, California Bankers Association,
and TechAmerica argue that "[u]nder this bill, even though the
taxpayer proved his or her case at the BOE level and won a
favorable position, the taxpayer would have to prove that the
decision [by the BOE] was correct at the trial court level
. . . . Imposing the burden of proof on the taxpayer both before
the BOE and on appeal stacks the deck in favor of FTB and
against the taxpayer."
The FTB's determination of tax obligation remains consistent
throughout the appeal process since it is based on statutory tax
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regulation. On the other hand, the taxpayer determines the
nature of the transaction as applied to the tax return, and the
taxpayer is the party who both created and has access to the
records or other evidence needed to prove the nature and the
proper tax treatment of the transaction. Placing the burden of
proof on the taxpayer also serves to encourage accurate taxpayer
record keeping. The taxpayer can choose to produce or not to
produce evidence as requested by FTB or BOE without any
discovery requirements. Since in a civil suit FTB would
continue to apply statutory tax regulations to determine the
taxpayer's obligation, the superior court should be allowed to
rely on a rebuttable presumption that FTB's calculation is
correct and the burden should shift to the taxpayer to support
the tax return.
6. Equal protection through superior court access will not
force either party to settle
Opponents raise the concern that taxpayers will be forced to
settle tax obligations due to the cost of litigating against FTB
in civil court. On the other hand, the author raises concern
that under current law, FTB is forced to settle its meritorious
claims because it has no chance of appeal beyond the BOE. SB
1113 would even the playing field to allow FTB the same access
to courts that taxpayers currently enjoy.
7. The bill requires the taxpayer to take unequal steps in
defending a civil action
Current law states the taxpayer can bring a civil action against
the FTB in any city or city and county where the Attorney
General maintains an office. (Rev. & Tax Code Sec. 19388.)
This provision affords the taxpayer with the relative
convenience of litigating where the taxpayer resides or works,
and the Attorney General has the ease of assigning litigation
responsibilities to the particular field office. While the
language mirrors the provision for taxpayers, the consequence is
sorely different. A taxpayer would have to first appear in the
city or city and county chosen by FTB and then make a motion to
transfer venue. In the event a venue chosen by the FTB is
inconvenient for the taxpayer, the cost and time burdens on the
taxpayer to defend against an action are greater than those
required of FTB if it was the defendant. For this reason, the
author's office has agreed to the following amendment:
Suggested Amendment :
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1. On page 3, line 27 strike "any" and insert "the".
2. On page 3, line 28 insert after "office" the following:
"that is located nearest to where the taxpayer resides or
maintains a principal place of business. In the event the
taxpayer no longer resides or has a principal place of
business in the State, the Franchise Tax Board may bring
the action in any city or county and city where the
Attorney General maintains an office."
Support : Board of Equalization Chairwoman Betty Yee
Opposition : Cal-Tax; California Chamber of Commerce; California
Manufacturers Technology Association; TechAmerica
HISTORY
Source : Author
Related Pending Legislation : SB 1133 (Wolk, 2010) (See Comment
3.)
Prior Legislation :
AB 2472 (Wolk, 2004) (See Comment 3.)
SB 548 (Burton, 2003), among other things, would have authorized
the Attorney General, independently, or with the approval of the
Executive Director of the Franchise Tax Board or the Director of
Finance, to bring an action for a trial de novo in superior
court to determine the deficiency or carryover amount, the
amount of refund or credit, or allowance of interest that was
the subject of the determination of the State Board of
Equalization. This bill died in the Assembly Revenue and Tax
Committee.
SB 3 (Greene, Ch. 31, Stats. 2003), among other things,
authorized the Board of Equalization to hear appeals by
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taxpayers regarding FTB decisions.
Prior Vote : Senate Revenue and Taxation Committee (Ayes 3, Noes
2)
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