Tax or Penalty?
The Court stated the following:
To determine whether an exaction is a tax or penalty requires the Court to consider both the intended purposes of the exaction as well as its actual effects.
The difference between a tax and penalty is not always clear. In general, however, taxes are defined as compulsory contributions which raise revenues for general governmental purposes, whereas a penalty is defined as an exaction imposed to regulate conduct by prohibiting, punishing, or discouraging a particular act or omission. Still it is not uncommon for taxes to have the dual purposes of raising revenue and regulating (discouraging) conduct. Likewise, nearly all penalties have the (intended or unintended) effect of raising revenue.
If the primary function of the exaction is to regulate (punish) conduct, it is properly characterized as a penalty; but if the primary function is to raise revenue, it is properly characterized as a tax. Towards that end, there is one important distinction between a penalty and a tax; while a tax raises revenue if it is obeyed, a penalty raises revenue only if some legal obligation is disobeyed.
The Court held in this case, although the exaction clearly will have revenue-raising effects, the primary function of the exaction is to deter and punish understated returns.
COMMENT: if the primary function of the exaction in this case is to deter and punish understated returns, then why isn’t the exaction prospective only? In addition, why was the exaction enacted during a time when the state is in a ‘deep’ financial crisis? To punish or simply raise revenue? I think it could be argued that the primary purpose of the exaction is to raise revenue, not to punish.
Is the Penalty Excessive?
In other words, does the fine violate the Excessive Fines clause of the U.S. Constitution?
The Court held it does not. However, the Court also stated that this is a heavily fact intensive inquiry, and section 19138 may be found to be unconstitutional as applied to a particular taxpayer.
Does the Retroactivity of the Penalty violate Substantive Due Process?
The Court held it does not.
In its defense, the Court stated the Legislature had a rational legislative purpose to make the penalty retroactive to encourage taxpayers who filed returns in which they took “questionable positions” to come forward and amend their returns.
The Court also states, while a period of retroactivity longer than the year preceding the legislative session normally would raise constitutional issues, in this case, the constitutional concerns are allayed by the taxpayers’’ ability to file an amended return, which will be treated as the original return for purposes of determining the penalty. (NOTE: Must be filed by May 31, 2009).
Does the Statute (Penalty) Provide Pre- or Post-Deprivation Relief?
The California Taxpayers’ Association argues the statute does not on the basis that the statute states “a refund or credit for any mounts paid to satisfy a penalty imposed under this section may be allowed only on the grounds that the amount of the penalty was not properly computed by the FTB.”
The FTB argues that the statute does not preclude taxpayers from contesting the validity of the penalty in an action in superior court. Therefore, a constitutionally adequate post-deprivation remedy in the form of a refund suit in superior court is provided.
The Court agreed with FTB’s interpretation. However, the Court did state that if section 19138, subdivision (e) were construed to preclude all pre- or post-payment review, except on grounds that the amount of the penalty was not properly computed by the FTB, the Court would have little difficulty in concluding that the statute is unconstitutional and unenforceable.
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