State Taxation
6/22/2009 10:50:33 AM EST
Roberts and Gustafson on Exploring California's Controversial 20% Corporate Understatement Penalty
Listen to the LexisNexis® Tax Law Center Podcast featuring Carley Roberts of Morrison & Foerster on Ethical and Constitutional Issues Related to State Tax Amnesty Programs
Of Counsel, Morrison & Foerster; and Associate, Morrison & Foerster, respectively
Difficult economic times sometimes result in states finding new and more creative ways to generate additional revenue. The new California 20% corporate understatement penalty may be just such a case in point. In this Emerging Issues Analysis, Carley A. Roberts and Timothy Gustafson of Morrison & Foerster explore the controversy surrounding the new penalty and its application. They write:
[On October 1, 2008] Governor Arnold Schwarzenegger approved and signed into law California Senate Bill No. 28 (SBX1 28), which enacted the California 20% Understatement Penalty (the Penalty), Cal Rev & Tax Code § 19138, less than two weeks after the bill was introduced and passed by both houses of the California legislature on September 19, 2008. Eschewing historical justifications for the imposition of a civil penalty-- voluntary compliance, deterrence, punishment--the Legislature arguably viewed SBX1 28 as a means to an estimated $1.4 billion end. Needless to say, SBX1 28's existence, content and passage came as quite a surprise to California taxpayers, who often closely monitor relevant proposed tax legislation through the legislative process and readily capitalize on every opportunity for public comment.
What did not come as a surprise was the overwhelming disapproval of the new Penalty that was voiced by industry representatives and tax practitioners alike during the first opportunity for public comment. At an Interested Parties Meeting held on December 5, 2008, many attendees called upon the Franchise Tax Board (FTB) to seek a legislative repeal of the bill, and if unsuccessful, to interpret the language as broadly as possible in favor of the corporate taxpayer. Instead of encouraging affirmative self-assessment, many attendees argued that the new Penalty would lead to deliberate overstatements of corporate tax liability, thereby subjecting the corporations (and the corporate tax preparers) to perjury charges. The debate over the Penalty grew more heated with time, leading to a lawsuit filed in February 2009.
At the center of the firestorm is Cal Rev & Tax Code § 19138. The statute imposes a 20% penalty on any understatement of tax that exceeds $1 million for any taxable year. The phrase understatement of tax is defined as the amount by which the tax imposed by Part 11 (commencing with Section 23001) [Corporation Tax Law] exceeds the amount of the tax shown on an original return or shown on an amended return filed on or before the original or extended due date of the return for the taxable year. The $1 million threshold for imposition of the Penalty applies on an aggregate basis for taxpayers that are required or authorized to be included in a combined report under Cal Rev & Tax Code § 25101 or Cal Rev & Tax Code § 25101.15, respectively. The Penalty applies to each taxable year beginning on or after January 1, 2003, where the statute of limitations on assessment has yet to expire for such taxable year and applies in perpetuity for all subsequent taxable years.
(footnotes omitted)
Subscribers can access the complete commentary on lexis.com. Additional fees may be incurred. (approx. 7 pages)
Listen to the LexisNexis® Tax Law Center Podcast featuring Carley Roberts of Morrison & Foerster on Ethical and Constitutional Issues Related to State Tax Amnesty Programs
Create an account or login to post comments.