BILL ANALYSIS
AB 2195
Page 1
Date of Hearing: April 19, 2010
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Anthony J. Portantino, Chair
AB 2195 (Silva) - As Introduced: February 18, 2010
VOTE ONLY
Majority vote. Fiscal committee.
SUBJECT : Taxation: Franchise Tax Board and State Board of
Equalization: burden of proof.
SUMMARY : Transfers the burden of proof from the taxpayer to the
taxing agency in all court and tax administrative tax
proceedings, in conformity with the federal statute.
Specifically, this bill :
1)Requires that, in any civil proceeding to which the State
Board of Equalization (BOE) is a party, BOE has the burden of
proof by clear and convincing evidence to sustain a penalty
proposed for intent to evade or fraud against a taxpayer, with
respect to any factual issue relevant to ascertaining the
liability of the taxpayer. Specifically:
a) Provides that a taxpayer will still have to substantiate
any item on a return or claim filed with BOE.
b) Does not subject a taxpayer to unreasonable search or
access to records in violation of the United States (U.S.)
Constitution, the California Constitution, or any other
law.
c) Defines "taxpayer" to include a person on whom fees
administered by BOE are imposed.
2)Shifts the burden of proof from taxpayers to BOE and the
Franchise Tax Board (FTB) in any court or administrative tax
proceeding with respect to a factual issue regarding the tax
liability of a cooperating taxpayer. Specifically:
a) Defines "cooperating taxpayer" as a taxpayer that has
done all of the following:
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i) Complied with all relevant statutory, regulatory, or
case law requirements to substantiate any item on a
return or claim filed with BOE or FTB;
ii) Maintained all records as required and, upon a
reasonable request by BOE or FTB, has provided those
records to the state agency; and,
iii) Submitted credible evidence to BOE or FTB with
respect to any factual issue relevant to ascertaining the
tax liability of the taxpayer.
b) Defines "taxpayer" to include a person on whom fees
administered by BOE are imposed.
c) Defines "tax liability" as any tax or fee assessed or
determined by BOE or FTB, including any interest accrued or
penalties levied in association with the tax or fee.
d) Defines "administrative tax proceeding" as either of the
following:
i) Oral hearing before the members of BOE for disputes
concerning taxes or fees collected by BOE; or,
ii) Oral hearing before the members of BOE for disputes
concerning taxes collected by FTB.
e) Establishes the burden of proof evidentiary standard
imposed on FTB and BOE as a preponderance of the evidence,
unless otherwise provided.
f) Does not apply to an adjustment proposed and made to a
taxpayer's federal income tax return by the federal
government.
g) Does not apply to an appeal filed with BOE subject to
the provisions of existing law regarding the burden of
producing additional information when a taxpayer is
challenging an information return.
h) Do not subject a taxpayer to unreasonable search or
access to records in violation of the U.S. Constitution,
the California Constitution, or any other law.
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i) Applies only to court and administrative proceedings
involving assessments or notices of determination issued on
or after the date on which this act becomes operative.
j) Applies to court and administrative proceedings
involving assessments and notices of determination issued
on or after January 1, 2011.
EXISTING FEDERAL LAW places the burden of proof on the Internal
Revenue Service (IRS) in any "court proceeding" involving a
factual issue, if the taxpayer introduced credible evidence with
respect to the factual issue relevant to ascertaining the
taxpayer's tax liability [Internal Revenue Code (IRC) Section
7491]. Specifically, the burden of proof shifts to the IRS if
the taxpayer (a) complies with all the substantiation
requirements of the IRC; (b) maintains all the records required
by the IRC; (c) cooperates with the IRS' reasonable requests for
witnesses, information, documents, meetings, and interviews, and
(d) meets the net worth requirement ($7 million or less) if the
taxpayer is a partnership, corporation, or trust.
EXISTING STATE LAW establishes a general burden of proof
evidentiary standard of preponderance of the evidence, thus,
placing the burden on the person controlling the facts. This
burden is imposed on the taxpayer for most items where
the taxpayer disputes a proposed assessment or claims a refund
of tax. Limited exceptions to this general burden of proof
standard exist, primarily in the imposition of penalties or, in
pursuit of, criminal convictions. For example, the evidence
standard needed to establish civil tax fraud is clear and
convincing, and that burden rests with the tax agency.
In modified conformity with the federal law, FTB, in connection
with appeals before BOE, has the burden of producing reasonable
and probative additional information to prove the correctness of
an assessment that is based upon third-party information returns
if the taxpayer sets forth a reasonable argument regarding the
disputed income, appeals FTB's action, and fully cooperates with
FTB.
FISCAL EFFECT : BOE staff states that if this bill leads to
reduced reporting, department audit programs would be adversely
impacted, resulting in lost revenues. However, the magnitude of
any resulting loss is difficult to determine. FTB
staff estimates that this bill will result in revenue losses, as
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summarized in the table below:
Estimated Revenue Impact of AB 2195
Operative for Assessments and Notices of determination issued on
or after January 1, 2011
($ in Millions)
--------------------------------------------------------------
| | 2010-11 | 2011-12 | 2012-13 |
|---------------------+------------+-------------+-------------|
| | | | |
|Unsustained | | -$95 | -$250 |
|assessments | | | |
|---------------------+------------+-------------+-------------|
| | | | |
|Reduced audit | -$60 | -$90 | -$115 |
|revenue | | | |
|---------------------+------------+-------------+-------------|
| | | | |
|Decreased | Unknown | Unknown | Unknown |
|Self-compliance* | Loss | Loss | Loss |
| | | | |
--------------------------------------------------------------
*A rule of thumb estimate is that for every 1% decrease in
self-compliance under the Personal Income Tax and Corporate Tax
Laws caused by this bill, approximately $600 million in tax
revenue would be lost.
COMMENTS :
1)Author's Statement . The author states, that "Unlike most
other proceedings, where one is considered "innocent until
proven guilty," California's tax system currently places the
burden of proof on the accused.
"Despite previous efforts to conform the state to the federal
law, California's Board of Equalization and the Franchise Tax
Board have not yet been compelled to maintain this standard.
This means that taxpayers before BOE or FTB proceedings must
prove their innocence.
"Apart from the stress and intimidation of challenging the
bureaucracy, the taxpayer is not enjoying his or her right to
due process. AB 2195 will protect taxpayers by requiring the
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state to properly substantiate their accusations and bear the
burden of proof."
2)The purpose of this bill . According to the author, the
purpose of this bill is to shift the burden of proof to the
state tax agency consistent with the federal model approved
for federal purposes in the IRS Restructuring and Reform Act
of 1998.
3)Arguments in Support. Proponents believe that "it should be
the responsibility of the revenue-collecting agency to explain
why it is entitled to the revenue" and this bill will make the
tax system more fair for the taxpayer. Proponents note that
this shift occurs only after the "cooperating taxpayer" has
complied with all substantiation requirements and has
maintained all records. According to the sponsor, "this bill
will keep responsible taxpayers from being forced to assume
increased tax liability when the dispute may not be their
fault." Finally, the sponsor notes that the intent of this
bill is not to make it "more challenging for government to
collect the revenue it is entitled to, but instead to force
them to work diligently by having expanded hearings and more
intensive audits."
4)Arguments in Opposition. Opponents state that the shift in
the burden of proof to the tax agency would cause disruption
in tax collections and could benefit the underground economy.
Opponents refer to a comment by the Tax Executives Institute,
an organization that monitors federal tax issues, that the
shift in burden of proof would either make the IRS more
intrusive, or the tax system less effective, neither of which
is a desirable outcome.
5)Standard of Proof in BOE civil tax fraud cases .
a) BOE staff states that one of the provisions of this bill
(the elevated burden on BOE for claims of intent to evade
or fraud) is consistent with BOE's current practices as
well as case law. Specifically, the California Court of
Appeals in Marchica v. State Board of Equalization (1951)
107 Cal. App. 2d 501, determined that the standard of proof
in civil tax fraud cases was the clear and convincing
evidence standard. The Ninth Circuit Court of Appeals,
relying on the Marchica decision, concluded that "clear and
convincing evidence must be shown to establish civil tax
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fraud under California law." California State Board of
Equalization v. Renovizor's (2002) 282 F.3d 1233.
Effective January 9, 2003, BOE amended its Regulation
1703(c)(3)(C) to clarify that the agency's existing
standard of proof in the case of fraud or intent to evade
is the clear and convincing evidence.
b) BOE staff states that it is appropriate that the
standards for asserting penalties for fraud or intent to
evade be the same at both the administrative and judicial
levels. This bill would codify the Marchica decision and
BOE's Regulation 1703(c)(3)(C) to provide that, in the case
of civil tax fraud, the standard of proof is the clear and
convincing evidence and that BOE has to prove fraud or
intent to evade in those cases.
c) BOE staff also notes that this bill would shift the
burden of proof to BOE and FTB, instead of a cooperating
taxpayer, in all court and administrative tax proceedings,
regardless of the taxpayer's size. The proposed burden of
proof provisions are broader than the federal provisions
for which consistency is sought. The federal shift is
limited to taxpayers with less than $7 million in net worth
and is intended to benefit small taxpayers rather than
large businesses that are more capable of defending
themselves in court.
d) If a taxpayer has complied with all substantiation
requirements and provided all records, it is unclear how
there would be any factual dispute. It appears that the
decision with respect to this issue would determine the
outcome of the hearing or trial.
e) Existing BOE regulations require taxpayers to maintain
and make available for examination on request by BOE or its
authorized representative, all records necessary to
determine the correct tax liability under the Sales and Use
Tax (SUT) Law and all records necessary for the proper
completing of the SUT tax return. BOE would be required to
amend the regulation to specify the kinds and types of
records that a taxpayer must maintain in order to be deemed
a "cooperating taxpayer".
6)FTB Concerns . The FTB staff analysis of this bill identifies
numerous implementation concerns. Among those concerns are:
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a) Currently, there are no statutes or regulations that
require a California taxpayer to maintain specific records,
with the exception of water's-edge entities. FTB is not
authorized to require most taxpayers to keep records or
other evidence necessary to determine the tax. Additional
statutes would be required to create sufficient
record requirements to permit a taxpayer to meet the
definition of cooperating taxpayer and authorize the FTB to
issue regulations establishing record-keeping requirements.
b) This bill is silent on who will make a determination as
to whether the taxpayer is a "cooperating taxpayer." It is
recommended that the FTB is allowed to determine whether
the taxpayer is a "cooperating taxpayer."
c) Taxpayers could assert they are "cooperating" without
providing sufficient information to conduct a complete
audit. As a result, FTB will be faced with an extremely
difficult deficiency determination process, which will
result in more time-consuming and intrusive audits
involving third-party interviews, credit report requests,
review of other agencies' returns, and/or searches for any
available relevant documents maintained by the taxpayer
and/or others.
d) This bill states that the burden of proof will shift to
FTB when the cooperating taxpayer "has provided credible
evidence to FTB with respect to any factual issue". The
timing of when the burden of proof will
actually shift from the taxpayer to FTB is unclear with
regard to the phrase "has provided credible evidence to FTB
with respect to any factual issue". A
taxpayer could submit credible evidence to the FTB the day
of the BOE hearing and argue that the burden of proof has
shifted to the FTB. It is suggested that this bill be
amended to require a cooperating taxpayer to submit
credible evidence within a specified period - such as
during audit or protest. In addition, this phrase could be
interpreted to shift the burden of proof on all factual
issues if the taxpayer introduces credible evidence of only
one factual issue. The FTB staff suggests revising the
language to shift the burden of proof to the FTB with
respect to a factual issue only if the taxpayer introduces
credible evidence of that factual issue.
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e) Currently, taxpayers may waive their rights to an oral
hearing before BOE, and thus, it is not clear whether this
bill would apply to appeals where the taxpayer waived that
right. Does FTB still have a burden of
proof in the case where the taxpayer waived his/her right
to an oral hearing? A substantial majority of taxpayers
waive that right, but FTB staff learns whether there will
be an oral hearing after opening briefs are prepared and
filed. If it is the author's intent that this bill apply
to all appeals before the BOE, the author may wish to
clarify the language to state that the shift in the burden
of proof would apply to taxpayers that waive the right to
an oral hearing before the BOE.
f) This bill states that it will only apply to court or
administrative tax proceedings involving assessments or
notices of determination issued on or after the operative
date of this bill. It is unclear if the author's intent is
to exclude matters related to a claim for refund.
g) This bill states that a "cooperating taxpayer," upon a
reasonable request by the state agency, should provide the
requested records. During protest, a taxpayer often
asserts a new issue or argument to support their position.
Consequently, an information request issued by the FTB
during audit, but prior to protest, does not include a
request for documents supporting a subsequently raised
issue or argument. FTB staff argues that a shift of the
burden of proof should not apply in those circumstances or,
alternatively, FTB should be permitted to seek additional
supporting records for such new issues.
h) This bill does not require a taxpayer to meet the
minimum threshold of providing evidence with respect to a
factual issue in dispute. FTB staff argues that, if a
taxpayer is not required to meet the minimum threshold of
credible evidence, it may be difficult in many cases for
the taxing agency to meet its burden of proof because the
taxpayer has control of the records and documents necessary
to ascertain the taxpayer's tax liability.
7)Committee staff notes the same implementation concerns and
policy issues that were raised in our analysis of AB 1387
(Tran), introduced in the 2009-10 Legislative Session.
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Specifically:
a) The shift in the burden of proof at the federal level
occurs only in proceedings before the U.S. Tax Court and
only after the taxpayer produces credible evidence with
respect to any factual issue relevant to ascertaining the
taxpayer's liability. This bill's attempt to shift the
burden in administrative proceedings is not consistent with
the federal action.
b) The author of AB 2195 desires to raise the standard of
proof and responsibility in all civil proceedings where tax
is involved. It is important to note the difference
between actions that deprive a person of liberty and those
that deprive a person of tax dollars. The current burden
for tax crimes is on the state, just as it is for all
crimes. In civil tax fraud cases, the burden of proof is
imposed on the tax agency at a standard (clear and
convincing evidence) higher than that imposed on the
taxpayer with respect to the facts surrounding the
deficiency (preponderance of the evidence).
c) The shift in the burden occurs only with a cooperating
taxpayer, which is defined as someone that has complied
with all substantiation requirements and has maintained all
records as required. This definition on
its own might cause litigation by creating additional legal
challenges, such as, "Does the taxpayer meet the
"cooperating taxpayer" definition?" and
"What is credible evidence?"
d) Committee staff questions whether this bill would
undermine the efforts of the state to close the tax gap
during this critical fiscal period.
8)Committee staff notes similar measures introduced in prior
legislative sessions:
AB 1387 (Tran), introduced in the 2009-10 Legislative Session,
is almost identical to this bill. AB 1387 was held in this
Committee.
AB 1600 (La Malfa) and AB 2727 (La Malfa), both introduced in
the 2007-08 Legislative Session, would have shifted the burden
of proof from a taxpayer to the agency collecting taxes in
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certain situations. AB 1600 and AB 2727 failed to pass out of
this Committee.
SB 633 (Dutton), introduced in the 2005-06 legislative session,
similarly to AB 2727 and AB 1600, would have shifted the
burden of proof from a taxpayer to the tax agency. SB 663 was
never heard in Committee.
SB 1222 (Knight), introduced in the 1999-2000 legislative
session, would have shifted the burden of proof to FTB in
court proceeding for factual issues, penalties, and
adjustments to income based on statistical information,
but not for issues resulting from federal changes. SB 1222
died in this Committee.
AB 436 (McClintock), introduced in the 1999-2000 legislative
session, would have added the Taxpayer's Rights Act that
included taxpayer rights provisions including shifting the
burden of proof to taxing agencies in any legal action
contesting the validity of any tax. AB 436 was never heard in
this Committee.
SB 1478 (Rainey), introduced in the 1997-98 legislative session,
would have declared legislative intent to conform to the IRS
Restructuring and Reform Act of 1998, including
shifting the burden of proof to state agencies collecting
taxes in any court or administrative proceeding under certain
conditions. SB 1478 was held in the Senate Revenue and
Taxation Committee.
AB 1631 (Sweeney), introduced in the 1997-98 legislative
session, would have declared legislative intent to conform to
the federal law relating to shifting the burden of proof
in connection with income taxes paid by California
taxpayers. AB 1631 was held in the Assembly Appropriations
Committee.
SB 1166 (Hurtt), introduced in the 1997-98 legislative session,
would have shifted the burden of proof from taxpayers to the
"board" in court proceedings under certain conditions and
declare legislative intent to conform to the then pending
federal taxpayer bill of rights' legislation. SB 1166 failed
to pass out of this Committee.
REGISTERED SUPPORT / OPPOSITION :
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Support
Howard Jarvis Taxpayers Association (sponsor)
Opposition
The American Federation of State, County and Municipal Employees
(AFSCME), AFL-CIO
Analysis Prepared by : Oksana Jaffe / REV. & TAX. / (916)
319-2098