Setting a CA tax penalty precedent - help please! Issues Beyond Palo Alto, posted by California Citizen, a resident of Another Palo Alto neighborhood, on Aug 16, 2007 at 2:46 am
I had an appeal before the State Board of Equalization, because my husband and I were assessed a very large demand penalty for filing late, even though we had overpaid our taxes on time, and tried requesting extensions throughout. (We have reasonable cause for late filing.)
Yes, believe it or not, even if you are owed a refund, in California, if you file late (even well within the time the IRS allows), the state will still fine you up to 25% of your total tax for that year just for sending you a demand letter.
One of the arguments I made in the case, hoping it would bring the whole issue up and perhaps resolve it for the future (and obviate wholesale riffling through my private life to establish reasonable cause), is that such punitive fines are Unconstitutional, and the Supreme Court has not only made landmark related rulings in recent years, but it has a consistent history of striking down civil fines as punitive when the fines vastly exceed the government's enforcement costs. (In this case the cost of sending the letter is "pennies" according to the FTB; the fine was over $1200.) The fine is also supposed to be relative to the harm done — it's debatable whether the state suffered any harm at all in this case, except for the benefit of the longer use of my money.
The state has actually made recent changes to the late filing penalty rules specifically because of the constitutionality issues — looking at the changes, I wonder if lawmakers even realized there was a separate demand penalty and late filing penalty.
Anyway, in their response the FTB cited a case having to do with Prop 5 in the California constitution, saying issues of constitutionality could not be argued before the board.
However, in 2004 - that's just a few years ago - the California Supreme Court ruled on a case that dealt narrowly with the issue of when that exact law was and wasn't applicable. The ruling specifically says that in cases where the state agency has quasi-judicial powers (as the BOE/FTB do), issues of constitutionality that have been ruled on in higher courts may be argued.
At any rate, at stake here is the possibility to argue against the demand penalty for Californians who have paid their taxes on time, but have to file late, and to get the state to bring the code more in line with the federal (which gives three years to file with no explanation needed if one is owed a refund). Right now, if you have reasonable cause, the only way to collect your money is to go through a really unreasonable process that is hardest on people who need the exception the most. That state has already acknowledged the need to bring the code in line with the IRS code for constitutionality purposes, but somehow overlooked the demand penalty. Lawmakers even in the past proposed getting rid of the demand penalty for taxpayers who are owed a refund, the FTB's own analysts calling it "excessively harsh," but they somehow haven't done it.
Our appeal and request for rehearing were denied; the BOE cited Prop 5 again and its history of not hearing any issues of Constitutionality as a result. They have refused to consider that the California Supreme Court clarified this issue specifically in 2004, saying that that they CAN rule whether the courts have judged something Constitutional or not. In my case, they should have looked at whether I made a good case that the higher courts have ruled on this issue, they should not have refused to consider it.
I feel this is a matter of principle, and I'm hoping the demand penalty can be challenged through this case. The BOE tax clinic took up the petition for rehearing pro bono, but in order to pursue this further, I need someone who can file a case in court.
Please, is anyone interested in taking this matter up as a matter of principle (i.e., pro bono)? I am not a lawyer, and can't afford to hire one for this. I am posting this anonymously; if you are able to help, please let me know your law firm so I can contact you, or if you prefer to maintain confidentiality on both sides on this list, I will post a one-time email contact.
Posted by Bebe, a resident of the Midtown neighborhood, on Aug 16, 2007 at 6:32 am
You seem to know the issues well, and obviously are engaged in the matter enough to spend a lot of time researching the matter.
If you can't fing a lawyer, why don't you do the work yourself. There's no bar to representing yourself in california, and if the facts of the matter are as you state them, you might find a sympathetic judge willing to listen to you.
Posted by Danny Kumano, a resident of another community, on Apr 17, 2008 at 10:55 am
Just wondering if you reach any resolution with this case. I have a similar situation with my client and am looking for a way to argue the "demand penalty" with the FTB. Please email me at email@example.com to discuss. Thanks
Posted by John, a resident of the Midtown neighborhood, on Dec 31, 2011 at 1:19 pm
These situations are inevitable examples of the tyranny of the income tax. Replace the income tax with a consumer tax, paid to the seller, at each purchase...a sales tax at point of sale. Then move on with you life, without any tax worries.
The income tax is an inverse trojan horse, where we allow it through our gates, with the knowledge that it will kill us, one by one, but we agree, because it promises a general welfare.
Posted by KatieJ, a resident of another community, on Jan 5, 2012 at 1:37 pm
I've hunted for the original poster's case but can't identify it. The SBE publishes very few decisions nowadays, and although many unpublished decisions are available on RIA or CCH, and the SBE's hearing agendas for that time frame are available on its web site, I haven't been able to identify the poster's case. She argues that the SBE does have the power to decide constitutional issues because it is a "quasi-judicial" agency. The 2004 California Supreme Court case that she references, I believe, is Lockyer v. San Francisco, 33 Cal. 4th 1055; 95 P.3d 459; 17 Cal. Rptr. 3d 225, Aug. 12, 2004. That's the case in which the court held that Gavin Newsome did not have the authority to refuse to enforce the California Defense of Marriage Act (by directing the county clerk to issue marriage licenses to same-sex couples) because he determined that it violated the federal or California constitution. The decision notes that BEFORE the passage of Proposition 5 in June 1978, quasi-judicial state agencies such as the Public Utilities Commission could make such a determination, based on Southern Pacific Transportation v. Public Utilities Com. (1976) 18 Cal.3d 308, 134 Cal. Rptr. 189. Proposition 5, which added Article III, Sec. 3.5 to the state constitution, was placed on the ballot for the purpose of overturning Southern Pacific. Article III, Sec. 3.5 provides that NO state agency has the power to declare a statute unconstitutional. This is the provision the SBE cites to support its inability to decide constitutional issues, such as the poster's due process argument with respect to Sec. 19133.
So I think the poster misunderstood the court's observation in Lockyer, which is dictum in any case because the court also determined that the mayor was not a "state agency" that would have qualified under Southern Pacific even if it had still been in effect. The bottom line is that if the Sec. 19133 penalty is challenged on due process grounds, it will have to be in court. The only alternative would be to get it repealed through the legislature or an initiative petition.