Proposal to Amend Revenue and Taxation Code Section 19255 to Avoid Extension of the 20-year Statute of Limitations by Unilateral Action of the California Franchise Tax Board

• Publication year: 2016
• Author: By Andrew D. Allen

Proposal to Amend Revenue and Taxation Code Section 19255 to Avoid Extension of the 20-Year Statute of Limitations by Unilateral Action of the California Franchise Tax Board1

By Andrew D. Allen²

EXECUTIVE SUMMARY

Prior to 2006, California did not have a statute of limitations providing for a specified amount of time to collect a due and payable outstanding tax liability. Apart from limited discretion authorizing certain state agencies to discharge small amounts of taxes, licenses, or fees if the debts were deemed uncollectible, or did not exceed a very low threshold amount, there were no time restrictions placed on the California Franchise Tax Board from collecting stale outstanding liabilities.

In 2005, California passed Assembly Bill 911 which became section 19255 of the California Revenue & Taxation Code.³ In short, Section 19255 prohibits the collection of an outstanding tax liability after the passage of 20 years from the date the tax liability becomes "due and payable."

In a prior matter, the author of this paper resolved a collection case with the Franchise Tax Board ("FTB") that involved a tax liability that had been due and payable for approximately 25 years.⁴ During the administration of that matter, it became apparent that the FTB's interpretation of Section 19255 contradicted the purpose of enacting a statute of limitations prohibiting the collection of outstanding tax liabilities due to the passage of time.⁵ Under the FTB's interpretation, the 20-year statute of limitations could be effectively restarted by the unilateral assessment of an administrative, or collection, fee. Such an interpretation defeats the purpose of a statute of limitations, which is intended to bring closure and finality after the passage of a specified amount of time. By assessing successive administrative or collection fees, the FTB could continue collection activity indefinitely.

This particular case settled favorably, and the author believes the FTB acted appropriately and fairly in abating the liability. Yet, it was not abated on the basis of Section 19255. This issue persists and is ripe for consideration either by the Legislature or the California Franchise Tax Board.

ISSUES PRESENTED

1. What is the plain meaning of Section 19255?
2. Should the unilateral action of the FTB in filing an administration fee or collection fee after the recording of an assessment extend the statute of limitations?

DISCUSSION

I. LEGISLATIVE HISTORY

Section 19255 was introduced as Assembly Bill 911, by Assembly Member Judy Chu, on February 18, 2005. The bill passed the Senate on September 6, 2005, the Assembly on September 8, 2005, and was approved by the Governor on September 29, 2005. The Legislative Counsel's Digest described the importance of enacting a statute of limitations to provide the Franchise Tax Board the ability to extinguish outstanding tax liabilities after the passage of 20 years:

Existing law authorizes the State Board of Control to discharge any state agency or employee from accountability for the collection of taxes, licenses, fees, or money if the debt is uncollectible or the amount of the debt does not justify the cost of its collection. Existing law authorizes a state agency not to collect these moneys if the amount involved is $250 or less and the amount owed is uncollectible or does not justify the cost of collection. This bill would allow the Franchise Tax Board, in addition to its existing authority to place certain taxpayer debts into inactive status, to extinguish an outstanding liability for the payment of any tax, license, fee, or other money deemed uncollectible that is due and owing to the state, if certain conditions are met. Under existing tax law, once a tax liability becomes due and payable, a statutory lien arises for that amount upon all real and personal property belonging to that taxpayer, but no statute of limitations exists on the collection of an income or franchise tax delinquency. This bill, for tax liabilities that are due and payable, as defined, before, on, or after July 1, 2006, would establish a statute of limitations on collections of those liabilities to limit the collection period to 20 years beginning from the last statutory lien date for each taxable year, and would extinguish that liability for that taxable year by abating the underlying tax. ⁶

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II. CURRENT LAW AND REASON FOR PROPOSED CHANGE

Prior to 2006, California did not have a statute of limitations prohibiting the collection of an outstanding tax liability after passage of a specified period of time. Instead, certain state agencies had limited discretion to discharge or place certain outstanding tax liabilities into uncollectible status. In 2005, Assembly Member Judy Chu proposed Assembly Bill 911 to provide for a 20-year statute of limitations on the collection of outstanding tax liabilities. The bill passed the Assembly and Senate, and was signed by the Governor to become Section 19255 in 2006.

Establishing a 20-year statute of limitation on collection is beneficial to both the tax collector and the tax debtor. Few can argue that 20 years is an insufficient amount of time to allow the state to utilize the necessary legal collection resources, including lien, levy, and wage garnishments, to locate and extract outstanding tax liabilities from tax debtors. Moreover, for the occasional tax debtor that avoids payment due to the passage of time, finality is important for both parties to move forward.

By comparison, in most instances, the FTB has double the amount of time to collect outstanding tax liabilities from California tax debtors than the Internal Revenue Service ("IRS") has to collect from tax...