Tax News

CCH (cch.taxgroup.com) reports:

  Sec. 19138, Rev. & Tax. Code, which imposes a 20% penalty on any taxpayer with an understatement of California corporation franchise or income tax in excess of $1 million for any taxable year beginning after 2002, does not violate state or federal constitutional provisions, according to a California superior court. A nonprofit organization, which includes among its members more than 200 corporations subject to California corporation franchise and income tax laws, filed suit challenging the constitutionality of Sec. 19138, alleging that the statute (1) violated Art. XIIIA, Sec. 3 (Proposition 13), of the California Constitution, because the penalty was in effect a tax or a change in state taxes that was not passed by at least two-thirds of the members of each house of the Legislature; (2) violated Art. IV, Sec. 8(b), of the California Constitution, because S.B. x1 28, which enacted the provision, was not printed and distributed to members of the Assembly and Senate before it was passed, and/or because the Senate dispensed with the constitutional reading requirement by resolution without a two-thirds roll-call vote; (3) was facially unconstitutional under the Excessive Fines Clause of the Eighth Amendment to the U.S. Constitution because the amount of the penalty was grossly disproportionate to the gravity of the offense; (4) violated substantive due process guarantees of the Fourteenth Amendment to the U.S. Constitution because the statute was vague and retroactive; (5) violated procedural due process rights because Sec. 19138(e) afforded no pre- or post-payment review, except on the grounds that the penalty was not properly computed by the Franchise Tax Board (FT; (6) violated the Commerce Clause of the U.S. Constitution because the statute disproportionately burdened interstate commerce; and (7) was unconstitutional under the Equal Protection Clause of the U.S. Constitution because the statute discriminated against interstate businesses in favor of similarly situated intrastate businesses.