BILL ANALYSIS
SENATE REVENUE & TAXATION COMMITTEE
Senator Lois Wolk, Chair
AB 2195 - Silva
Amended: April 21, 2010
Hearing: June 23, 2010 Fiscal: Yes
SUMMARY: Codifies Regulations that Place the Burden of
Proof on the State Board of Equalization to Prove
a Taxpayer Committed Fraud or Intended to Evade
Taxes by Clear and Convincing Evidence.
EXISTING LAW generally provides that except provided by
law, the burden of proof in a civil case requires proof by
clear and convincing evidence.
EXISTING LAW allows the State Board of Equalization (BOE)
to assess civil penalties and criminal sanctions for
persons committing fraud and or with intent to evade the
tax. While a burden of proof is not specifically listed in
the Revenue and Taxation Code, the BOE has operated under
the clear and convincing evidence standard due to case law.
Generally, both BOE and the Franchise Tax Board (FTB), can
dispute taxes paid only in taxable years that are not
precluded by a statute of limitations absent fraud or
intent to evade, in which the tax agencies can seek to
collect tax for any taxable year.
THIS BILL states that in a civil proceeding to which the
BOE is the party, the BOE bears the burden of proof by
clear and convincing evidence in sustaining its assertion
of a penalty for intent to evade or fraud against a
taxpayer with respect to any factual issue relevant to
ascertaining the liability of the taxpayer. The measure
AB 2195 - Silva
Page 4
provides that nothing in its contents should be construed
to override any requirement for a taxpayer to substantiate
any item on a return or claimed filed with the BOE, or
subject a taxpayer to unreasonable search or access to
records in violation of the United States Constitution, or
any other law. The bill applies to BOE's fee programs too.
FISCAL EFFECT:
BOE states that AB 2195 does not affect state
revenues.
COMMENTS:
A. Purpose of the Bill
The author provides the following statement:
"This bill conforms the state law to federal law which
provides that a taxing agency - not the taxpayer -
shall have the burden of proof with respect to factual
issues used to determine the liability of a
cooperating taxpayer. This measure codifies existing
Board of Equalization (BOE) regulations.
B. Practice Makes Perfect
AB 2195 codifies a long standing policy that places
the burden of proof on BOE to prove fraud or intent to
evade by clear and convincing evidence. The evolution of
the policy began in 1951, when the Second Appellate
District of the Court of Appeal of California rejected
BOE's position that the taxpayer had the burden of proof to
rebut its assertion of a penalty for fraud in Marchica v.
State Board of Equalization (1951) 107 Cal.App.2d.501. The
Court pointed to several previous decisions, and to 1928
amendments to the federal Revenue Act of 1924 which placed
the burden of proof in fraud cases on the IRS Commissioner.
AB 2195 - Silva
Page 4
The Court stated:
"Fraud is odious. It is never presumed, but must be
established by proof. The presumption is always in
favor of good faith, innocence, honesty, and fair
dealing, except, perhaps where confidential relations
are involved. The presumption has been held to
approximate in strength that of innocence in a crime.
It is to be noted that any person who renders a false
or fraudulent return is guilty of a misdemeanor. One
asserting fraud, except perhaps where confidential
relations are involved, has the burden of proving it."
Fifty years later, the Ninth Circuit Court of Appeals
extended the "clear and convincing evidence" standard to
cases in which BOE asserted that the taxpayer committed
fraud of intended to evade taxes in the California State
Board of Equalization v. Renovizor's, Inc. 282 F.3d 1233.
The Ninth Circuit overruled the Bankruptcy Court, which
held that BOE need only prove fraud based on the
"preponderance of the evidence," an easier standard to
meet, reasoning that Marchica's references to "clear" proof
and "clear and convincing evidence" better fit Renovizor's
facts because it was a tax case instead of the cases cited
by the Bankruptcy Court, which pointed to civil fraud cases
that did not address tax issues. The Ninth Circuit also
pointed to BOE practice, which was to apply the higher
threshold. In 2003, the BOE amended its regulations to
insert the clear and convincing evidence threshold.
C. Hands Off
As introduced, AB 2195 would have shifted the burden
of proof from the taxpayer to BOE or FTB with respect of
ascertaining the liability of a "cooperating taxpayer,"
contradicting almost 100 years of federal and state law and
jurisprudence. Both the federal and the California tax
systems are based on the general principle that there is a
rebuttable presumption in favor of the tax agency that the
AB 2195 - Silva
Page 4
action of the tax agency was correct, and that the burden
of proof to show the correct tax liability of the taxpayer,
with respect to most issues, was placed on the taxpayer.
The burden of proof was placed on the taxpayer rather than
the tax agency because the taxpayer creates the
transaction. The taxpayer determines the nature of the
transaction, 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.
Credits/Deductions : It is well settled by the courts that
credits and deductions are a matter of legislative grace
and the taxpayer bears the burden of establishing
entitlement to claimed credits. (Deputy v. du Pont (1940)
308 U.S. 488, 493; New Colonial Ice Co. v. Helvering (1934)
292 U.S. 435, 440; Segel v. Comm'r (1987) 89 T.C. 816, 842,
citing to Interstate Transit Lines v. Commissioner (1943)
319 U.S. 590, 593.)
Assessments based on federal action : (This is a case where
the IRS has adjusted the taxpayer's tax and the FTB follows
the IRS adjustment.) Unless the taxpayer provides
documentation or other evidence to establish an error in
the federal adjustment or change, FTB's assessment that is
based on the federal adjustments is presumed correct.
(Appeal of Frank J. and Barbara D. Burgett, 83-SBE-127,
June 21, 1983; Appeal of Freemon and Dorothy Thorpe,
87-SBE-072, October 6, 1987, citing Todd v. McColgan (1949)
89 Cal.App.2d 509 [201 P.2d 414].)
Penalties : When the FTB imposes a penalty, the law presumes
that the penalty was imposed correctly. (Todd v. McColgan
(1949) 89 Cal.App.2d 509, 201 P.2d 414; Appeal of J.B. and
P.R. Campbell, 85-SBE-112, October 9, 1985.) The burden of
proof is on the taxpayer to show that reasonable cause
exists to support abatement of the penalty. (Appeal of
M.B. and G.M. Scott, 82-SBE-249, October 14, 1982; Appeal
of Roger W. Sleight, 83-SBE-244, October 26, 1983.)
AB 2195 - Silva
Page 4
Claim for Refund/Overpayment : It is the taxpayer's burden
of proof to show entitlement to an overpayment. The
United States Supreme Court defined an overpayment as the
"excess of that properly due." (Jones v. Liberty Glass
Company (1947) 332 U.S. 524, 532.) A claimed overpayment
of income tax may not be refunded where a correct
computation shows the amount paid does not exceed the
amount of tax, which might have been properly assessed and
demanded. (Lewis v. Reynolds (1932) 284 U.S. 281, 283;
Rev. Rul. 81-87, 1981-1 C.B. 580.)
Professor Leo P. Martinez, University of California,
Hastings College of the Law,
explains the development of the burden of proof in 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).
AB 2195 - Silva
Page 4
Support and Opposition
Support:Howard Jarvis Taxpayers Association (sponsor);
California Chamber of Commerce; American Council of
Engineering Companies
Oppose:None received.
---------------------------------
Consultant: Colin Grinnell