Patricia Vignola

OCR transcription for search; preserved printed pages are authoritative

Entered on Docket
October 16, 2007

GLORIA L. FRANKLIN, CLERK
U.S BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA

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10} In re ]) Case No. 99-50794-ASW
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BO 14 MEMORANDUM DECISION
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- E 16 Before the Court is the objection by Debtor Patricia Vignola
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> 5 17 | (“Debtor”) to the claim of the California Franchise Tax Board
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A = 18 || (“FTB”). Debtor objects to the FTB’s claim relating to unpaid
: & 19 | California state income taxes for tax year 1991 on the ground that
~ 20 || the claim was improperly calculated. Specifically, the dispute
21 |) involves the computation of interest owing on the 1991 taxes.
22 || Debtor is represented by Susan D. Silveira, Esq. of the Silveira
23 |} Law Offices. The FTB is represented by Deputy Attorney General
24 || Paul D. Gifford.
25 This Memorandum Decision constitutes the Court’s findings of
26 |} fact and conclusions of law, pursuant to Rule 7052 of the Federal
27 |] Rules of Bankruptcy Procedure.
28

AUTHENTICAT
U.S. GOVERNM
INFORMATION

GPO

21

MEMORANDUM DECISION ON DEBTOR’S
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UNITED STATES BANKRUPTCY COURT

For The Northern District Of California

1 I.

2 STATEMENT OF FACTS

3 The relevant facts are undisputed. Debtor filed her California

4} state income tax return for fiscal year 1991 on or about June 15,

5} 1992. The 1991 return was either incomplete or inaccurate, and

6 || resulted in the erroneous issuance by the FTB of a refund of

7% $451.00 to Debtor.

8 On April 15, 1993, Debtor filed an amended return for tax year

9/1991. The amended return showed a balance due of $7,310, plus

10 | interest and penalties for the late filing. The amended return was

11 || not accompanied by payment, and resulted in a balance due of

12 || approximately $6,400.!

13 In approximately 1995, the Internal Revenue Service (“IRS”)

14 || audited Debtor’s 1991 federal income tax return. The IRS audit

15 | resulted in a substantial increase in Debtor’s taxable income for

16 || fiscal year 1991. Debtor failed to report the IRS changes to the

17 | FTB.? The information concerning the IRS audit was eventually

18 | received by the FTB. The FTB reviewed the audit information and

19 || issued a determination regarding Debtor’s 1991 state income tax

20 | liability. On January 8, 1996, the FTB mailed Debtor a Notice of

21 || Proposed Assessment (“NPA”) for 1991 which set forth Debtor’s total

22

23

24

5 "The difference between the amount of tax stated on the
amended return and the balance due after the return was filed,

26 || despite no payment being remitted, is accounted for by the
application of a withholding credit.

77 * A taxpayer must report any change or correction to the

28 || taxpayer’s gross income made by the IRS within six months. Cal.
Rev. & Tax. Code § 18622.
MEMORANDUM DECISION ON DEBTOR'S

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UNITED STATES BANKRUPTCY COURT

For The Northern District Of California

1 |} state tax liability for 1991 as $38,066.37 The NPA separately

2]| identified the amount of the tax liability that was specifically

3 |} attributable to the IRS audit information as $25,342, plus accrued
4} interest and penalties.

5 Debtor filed a Chapter 13 bankruptcy petition on July 15, 1996
6 || (case number 96-33063). On September 10, 1996, the FTB filed a

7 |} claim in Debtor’s bankruptcy case in the amount of $51,770.99,

8 | relating to tax years 1991 and 1993. Debtor objected to the FTB’s
9] claim, but the bankruptcy was dismissed on January 7, 1999 prior to
10 |] any resolution of the claim objection. During the pendency of the
il |] bankruptcy, Debtor paid a total of $8,847.62 on account of the 1991
12 | state income tax liability.

13 Debtor filed the instant Chapter 13 case on February 2, 1999.
14]} In March 1999, the FTB filed a proof of claim in this case,

15 | seeking, in part, $48,916.70 in unsecured priority taxes for tax

16 |) year 1991. On July 6, 2004, the FTB received a payment in the

17 | amount of $48,916.70, the full amount of the FTB’s asserted claim,

18 || from the Chapter 13 Trustee on Debtor’s behalf. Debtor did not

19 |} object to the FTB’s claim or its payment in full by the Chapter 13

20} Trustee. Debtor’s Chapter 13 discharge was issued on August 17,

21} 2004.

22 Debtor reopened this case in March 2005 for the purpose of

23 || objecting to the FTB’s claim. Debtor filed her initial objection

24 |} to the FTB’s claim on April 5, 2005. The FTB requested a hearing.

25

26 IuTf a taxpayer fails to report a change or correction by the
Commissioner of Internal Revenue or other officer of the United

27 | States or other competent authority or fails to file an amended
return as required by Section 18622, a notice of proposed

28 || deficiency assessment resulting from the adjustment may be mailed

to the taxpayer at any time.” Cal. Rev. & Tax Code § 19060(a).

MEMORANDUM DECISION ON DEBTOR'S

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Debtor filed an amended objection to claim on September 16, 2005
(the “Objection”).

On March 19, 2007, the Court entered an Order on Reduction of
Claim of Franchise Tax Board and Return of Overpayment to Debtor
(the “March 19 Order”). This order memorialized an agreement
reached by the parties at the February 26, 2007 status conference

regarding the Objection. ee also Joint Prehearing Statement on

Amended Objection to Claim of Franchise Tax Board, filed October
10, 2006, 1:23-26. The March 19 Order partially resolved the
Objection as follows:

(1) The FTB’s priority claim was reduced to $41,136.02 --
$21,608.96 for taxes owing for 1991 and $19,547.09 for
interest thereon;

(2) The FTB was ordered to promptly release $7,780.65,
plus interest from July 6, 2004, to Debtor. This
amount represents the difference between the
$48,916.70 previously paid to the FTB on July 6, 2004
by the Chapter 13 Trustee and the $41,136.02 reduced
amount of the claim.

If.

ISSUES PRESENTED

The Objection solely involves the computation of interest owing
to the FTB with respect to Debtor’s 1991 tax liability. Debtor
does not dispute the principal amount of the taxes at issue.

Debtor contends that the date used by the FTB for assessing
interest on the unpaid 1991 tax, April 15, 1992, was incorrect.
Debtor argues that the correct date is March 8, 1996 -- the date
the NPA became final. If Debtor is correct, she is entitled to
refund of $12,392.12 from the FTB. The FTB counters that the

interest assessment date was proper, the claim was calculated

MEMORANDUM DECISION ON DEBTOR’S

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correctly, and Debtor is not entitled to any reimbursement.‘

On May 21, 2007, the Court issued an Order Notifying Parties of
Additional Authorities Re Debtor’s Objection to Claim of Franchise
Tax Board (the “May 21 Order”). The May 21 Order brought to the
parties attention a body of administrative decisions by the
California State Board of Equalization that speak to the question
of the proper date for assessment of interest on a tax deficiency.
These administrative decisions, as will be discussed below, support
the FTB’s position that interest on a deficiency assessment accrues
from the date the tax return was due.

In response to the May 21 Order, Debtor has suggested there are

two additional issues that the Court must decide:

“The Court notes that when this matter was first submitted to
the Court for consideration, three separate issues were identified:

(1) What is the proper date for the assessment of interest on
the FTB claim? (“Issue #1");

(2) May Debtor retroactively direct the allocation of payments
made prior to the filing of the present Chapter 13
bankruptcy case? (“Issue #2");

(3) If so, were the pre-petition payments that Debtor wishes
to allocate “voluntary” or “involuntary” under the law?
(“Issue #3").

Order Re Supplemental Briefing on Debtor’s Objection to Claim of
Franchise Tax Board and Rescheduling Hearing, issued by the Court
on December 15, 2006.

Issue #2 and Issue #3 noted above were subsequently resolved
by the agreement of the parties. The $7,780.65 adjustment to the
FTB’s claim memorialized by the March 19 Order, reflects the FTB’s
recalculation of Debtor’s 1991 tax liability after reallocating all
of Debtor’s prepetition payments to the principal amount owed for
Debtor’s 1991 tax liability. The FTB indicates this reallocation
was made as an accommodation to Debtor in hopes of resolving this
dispute, and does not represent the ordinary practice of the FTB.
On March 29, 2007, the FTB sent the State Controller a request to
issue a check to the Debtor for the sums specified in the March 19
Order. Declaration of Cesar Mena in Support of Franchise Tax
Board’s Opposition to Debtor’s Motion for Damages, filed April 13,
2007, G14-6, 12.

MEMORANDUM DECISION ON DEBTOR'S

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(1) Whether the FTB’s claim is entitled to priority
status, based on Debtor’s argument that if the
1991 assessment had occurred in a “timely
fashion” it would have fallen outside the
priority period; and
(2) Whether interest on the FTB’s claim should be
abated, “as it was by the Internal Revenue
Service”, pursuant to Cal. Rev. & Tax. Code §
19104 (a) (3).
Debtor’s Statement of Clarification Regarding Remaining Issues to
be Resolved in Objection to Claim of Franchise Tax Board, filed

June 4, 2007 (“Debtor’s Statement of Clarification”).

II.
JURISDICTION
This Court has jurisdiction over this matter pursuant to
Bankruptcy Code § 505(a) (1), which provides that: “the court may
determine the amount or legality of any tax, any fine or penalty
relating to a tax, or any addition to tax, whether or not
previously assessed, whether or not paid, and whether or not

contested before and adjudicated by a judicial or administrative

tribunal of competent jurisdiction.” 11 U.S.C. § 505(a)(1).
IV.
ANALYSIS
A. Proper Date of Assessment of Interest

The primary issue in this case is whether interest on Debtor’s
unpaid 1991 state income tax began to accrue, as the FTB contends,
on April 15, 1992, or not until March 8, 1996, as Debtor contends.
The parties disagree as to which sections of the California Revenue

and Taxation Code control.

MEMORANDUM DECISION ON DEBTOR’S

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According to the FTB, the applicable provision is Cal. Rev. &
Tax. Code § 19101(a), which states, “If any amount of tax...is not
paid on or before the last date prescribed for payment, interest on
that amount at the adjusted annual rate established under section
19521 shall be paid for the period from that last date to the date
paid.” Section 19101(b) provides:

For purposes of this article, the last date prescribed for
payment of the tax shall be determined under Chapter 4
(commencing with Section 19001), with the application of
the following rules:

(1) The last date prescribed for payment shall be
determined without regard to any extension of
time for payment or any installment agreement
entered into under Section 19008.

(2) The last date prescribed for payment shall be
determined without regard to any notice and
demand for payment issued, by reason of jeopardy
as provided in Article 5 (commencing with Section
19081), prior to the last date otherwise
prescribed for that payment.

(3) In all other cases in which the last date for
payment shall be deemed to be the date the
liability for tax arises (and in no event shall
be later than the date notice and demand for the
tax is made by the Franchise Tax Board).
Cal. Rev. & Tax Code § 19101(b).
Consistent with the directions of Cal. Rev. & Tax Code
§ 19101(b), the “last date prescribed for payment” is to be
determined with reference to § 19001. Section 19001 is entitled
“Due Date” and states, in pertinent part, that:
the tax...shall be paid at the time and place fixed for
filing the return (determined without regard to any
extension of time for filing the return).

The FTB contends that the time for filing Debtor’s 1991 California

state income tax return was April 15, 1992, and therefore, that

MEMORANDUM DECISION ON DEBTOR’S
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date is the “last date for prescribed for payment.” Accordingly,
pursuant to 19101(a), interest is properly assessed from that date.

Debtor concedes that, under ordinary circumstances, interest on
unpaid 1991 state income tax begins to run on April 15, 1992.
Debtor argues, however, that interest on a deficiency assessment
can only accrue from the date the liability for the tax arises.

The parties agree that the tax at issue is in fact a deficiency
assessment. The NPA was issued on January 8, 1996. Pursuant to
Cal. Rev. & Tax. Code § 19042, the NPA becomes final after 60 days,
if no protest is filed by the taxpayer. Debtor, therefore, asserts
that her liability for the tax at issue in this case did not arise
until March 8, 1996.

Debtor contends that the FTB’s reliance on 19101(a) is
misplaced because the tax at issue relates to a deficiency
assessment, and according to Debtor, deficiency assessments are
excepted from the operation of 19101(a) by 19101©. Section 1910106
states:

Except as provided in this article: (1) Interest prescribed
under this article on any tax shall be paid upon notice and
demand, and shall be assessed, collected and paid in the
same manner as taxes. Any reference in Part 10 (commencing
with Section 17001), Part 11 (commencing with Section
23001), or this part (except Article 3 (commencing with
Section 19031), relating to deficiency assessments) to any
tax imposed by Part 10 (commencing with Section 17001) or
Part 11 (commencing with Section 23001) shall be deemed
also to refer to interest imposed by this article on that
tax.

Cal. Rev. & Tax. Code § 19101© (emphasis added).
Debtor argues that the italicized portion of the statute noted
above refers the reader out of § 19101(a) for determining the

appropriate date for assessment of interest when a deficiency

MEMORANDUM DECISION ON DEBTOR'S

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assessment is involved. On its face, Debtor’s reading of 191010
appears to have merit.

Debtor argues that interest on deficiency assessments is not
controlled by Cal. Rev. & Tax Code § 19101(a) and that such
interest may only be assessed from the date the deficiency
assessment becomes final. Debtor asserts that following sections
of the Cal. Rev. & Tax Code support this interpretation: (I) 19105,
(ii) 19104, and (iii) 19114 and 19049 in tandem. Debtor has not
cited any authority applying these code sections in the manner she
suggests. Debtor’s contentions are addressed in turn.

(I) Section 19105

Cal. Rev. & Tax. Code § 19105 provides:

In the case of an individual or fiduciary, the Franchise

Tax Board shall not assess interest charges pursuant to

Section 19101 for the period between 45 days after the date

of final review of an audit determining an additional

amount is owed and the date a notice of proposed deficiency

assessment is sent to the taxpayer.

Debtor’s reliance on this section is misplaced. It is
unquestioned that, in fact, the FTB did not conduct an audit of
Debtor's state income tax return, and therefore the section, by its
express terms, does not apply. In any event, § 19105 speaks only
to a potential 45-day suspension of interest accrual under certain
specific circumstances, and does not provide authority for the

relief sought by Debtor in this case -- which amounts to a request

for abatement of interest for a period of nearly four years.°®

>From April 15, 1992 to March 8, 1996.

MEMORANDUM DECISION ON DEBTOR’S

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year before sending the NPA.

(11) Section 19104

Rev. & Tax Code § 19104 provides, in relevant part, as

(a)

The Franchise Tax Board may abate all or any part of

any of the following:

(b)

(1) Any interest on a deficiency or related to a
proposed deficiency to the extent that interest
is attributable in whole or in part to any
unreasonable error or delay by an officer or
employee of the Franchise Tax Board (acting in
his or her official capacity) in performing a
ministerial or managerial act.

(2) Any interest on a payment of any tax
described in Section 19033 to the extent that any
delay in that payment is attributable to an
officer or employee of the Franchise Tax Board
{acting in his or her official capacity) being
dilatory in performing a ministerial or
managerial act.

(3) Any interest accruing from a deficiency based
on a final federal determination of tax, for the
same period that interest was abated on the
related federal deficiency amount under Section
6404(e) of the Internal Revenue Code, and the
error or delay occurred on or before the issuance
of the final federal determination. This
subparagraph shall apply to any ministerial act
for which the interest accrued after September
25, 1987, or for any managerial act applicable to
a tax year beginning on or after January 1, 1998,
for which the Franchise Tax Board may propose an
assessment or allow a claim for refund.

For purposes of subdivision (a):

(1) Except as provided in paragraph (3), an error
or delay shall be taken into account only if no
Significant aspect of that error or delay can be
attributed to the taxpayer involved and after the
Franchise Tax Board has contacted the taxpayer in
writing with respect to that deficiency or

payment.

Rev. & Tax. Code § 19104.

Debtor asserts that the FTB delayed unreasonably for nearly one

MEMORANDUM DECISION ON DEBTOR'S

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Debtor bases this contention on the

UNITED STATES BANKRUPTCY COURT

For The Northern District Of California

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fact that the IRS assessment on which the FTB based its issuance of
the NPA was issued on February 6, 1995. Therefore, the Debtor
asserts, the Court should exercise its equitable discretion under

§ 105 to abate interest from April 15, 1992 to March 8, 1996.

The Court finds this contention without merit. Initially, the
language of § 19104 is discretionary on the part of the FTB. As an
evidentiary matter, there is no evidence before the Court regarding
when the FTB became aware of the results of the IRS audit, and
therefore Debtor’s assertion of a one year delay by the FTB is not
evident on the record. In addition, the Debtor herself was under a
duty imposed by state law to report the changes made by the IRS to
the FTB, which she failed to do. Cal. Rev. & Tax. Code § 18622.
Accordingly, the Court finds that Debtor herself was responsible
for a significant aspect of the delay, and, therefore, Debtor has

not demonstrated that she qualifies for abatement under § 19104

pursuant to the exception set forth in § 19104(b). Furthermore,
the express terms of § 19060(a) provide that, “[{i]f a taxpayer
fails to report a change or correction by the [the IRS] ...a

notice of proposed deficiency assessment resulting from the
adjustment may be mailed to the taxpayer at any time.” Cal. Rev. &
Tax. § 19060(a) (emphasis added). In any event, the FTB issued the
NPA within the applicable statute of limitations after receiving
the information concerning the IRS audit. The Court finds that, on
the facts of this record, the delay between the time the FTB
received the IRS audit information and when the FTB issued the NPA,

to the extent any delay occurred, was not unreasonable.

MEMORANDUM DECISION ON DEBTOR'S

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(iii) Sections 19114 and 19049

Cal. Rev. & Tax. Code § 19114 states: “Interest prescribed
under this article on any tax may be assessed and collected at any
time during the period within which the tax to which the interest
relates may be collected.” Debtor’s argument regarding this
section presupposes that the tax relating to the January 1996 NPA
could only have been collected beginning on March 8, 1996, the date
the NPA became final under § 19042. Debtor’s support for this
proposition is Cal. Rev. & Tax. Code § 19049, which provides:

When a deficiency is determined and the assessment becomes

final, the Franchise Tax Board shall mail notice and demand

to the taxpayer for the payment thereof. The deficiency

assessed is due and payable at the expiration of 10 days

from the date of the notice and demand.°
Debtor’s argument equates the language of 19049 stating that a
deficiency is “due and payable” with the language in 19114
regarding “the period within which the tax to which the interest
relates may be collected.”

The FTB responds to this argument by asserting that a
deficiency assessment is not treated differently from “the tax” for
purposes of assessment of interest. According to the FTB, Debtor’s
argument rests on the faulty premise that the deficiency notice,
sent January 8, 1996, represents a new and distinct liability.

This premise is incorrect as a matter of law. A taxpayer’s

liability for a deficiency is “part and parcel of his liability for

the total tax. In fact, the word ‘deficiency’ negatives any

° This reflects the language of the section prior to its
amendment in 1997. That amendment changed the time period from 10
to 15 days for notices issued on or after January 1, 1998. Cal.
Rev. & Tax. Code § 19049(b). Since the NPA in this case was issued
before January 1, 1998, the old statute controls.

MEMORANDUM DECISION ON DEBTOR'S

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concepts of a new and distinct liability.” Mudd v. McColgan, 30

Cal.2d 463, 467 (1947).
Courts charged with interpreting an ambiguous statute must

accord great weight to its administrative construction. OQrdlock v.

Franchise Tax Bd., 38 Cal.4th 897, 906 (2006). Administrative
decisions of the California State Board of Equalization of which
this Court is aware support the FTB’s position.’ See Appeal of
Robert and Marilyn Elliott, Case No. 310555, 2006 WL 2056117 (Cal.
St. Bd. Eq. July 18, 2006) (finding that, where the date prescribed
for payment of the tax was April 15, 2004, and the FTB’s first
contact in writing with the taxpayer was a Notice of Determination
sent on October 6, 2004, that interest began to accrue on April 15,
2004). The assessment of interest on a tax deficiency is
mandatory. Cal. Rev. & Tax. Code § 19101(a); Appeal of Amy M.
Yamachi, 77-SBE-095, June 28, 1977). Interest is not a penalty but
is simply compensation for a taxpayer’s use of money after the due
date of the tax. Appeal of Audrey C. Jaegle, 76-SBE-070, June 22,
1976). “[T]here is no statutory authority for the abatement of
mandatory interest that accrued prior to respondent’s first written
contact ... with appellant regarding the tax deficiency.” Appeal
of Monkee Business, LLC, Case No. 317411, 2006 WL 864345, (Cal. St.
Bd. Eq. March 28, 2006).

The Court agrees with the FTB that a deficiency is “part and

parcel” of Debtor’s liability for the 1991 state income tax, the

7 The Court brought these cases to the attention of the

parties in the May 21 Order. Although Debtor responded to the May
21 Order to suggest additional issues to be addressed by the
Court’s decision, Debtor did not provide citations to, or arguments
in favor of, other cases with different holdings. See Debtor’s
Statement of Clarification.

MEMORANDUM DECISION ON DEBTOR‘S

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last date prescribed for payment of which was April 15, 1992.
Accordingly, the Court rejects Debtor’s contentions, finding that

§ 19101(a) controls this issue. In accordance with § 19101{(a),
interest begins to accrue from the due date of the tax, which in
this case is April 15, 1992 -- whether or not the tax at issue is a
deficiency assessment.

The Court’s decision on this issue regarding Debtor’s
California state income tax is also consistent with Federal
treatment of the same issue. The analogous Federal statute is
virtually identical:

If any amount of tax imposed by this title (whether

required to be shown on a return, or to be paid by stamp or

by some other method) is not paid on or before the last

date prescribed for payment, interest on such amount at the

underpayment rate established under section 6621 shall be

paid for the period from such last date to the date paid.

26 U.S.C. § 6601(a). The last date prescribed for payment of a tax
is generally the due date for the return on which the tax is

reported, without regard to any extension of time for filing the

return. See 26 U.S.C. § 6601(b); May Dep’t Stores Co. v. United

States, 36 Fed.cl. 680, 683 (1996).

The Federal treatment of interest on tax deficiencies appears
to be the same as under California law. The Second Circuit has
construed IRC § 6601(a) to mean that “interest shall begin running

when a tax becomes both due and unpaid.” Avon Prods., Inc. v.

United States, 588 F.2d 342, 344 (2d Cir. 1978). When a tax return

indicates an underpayment, “the IRS may assess interest from the
original due date of the return.” May Dep’t Stores, 36 Fed.Cl. at
683. Interest is “not a penalty, but is intended only to

compensate the Government for delay in the payment of a tax.” Avon

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at 343. Interest on a deficiency accrues from the date the
original tax was due, even if the deficiency is not created until a
later adjustment is made -- such as when an corporation receives
approval by the IRS to change its accounting method. Anderson

Columbia Co., Inc. v. United States, 54 Fed.Cl. 756 (2002). In

such instances, where the taxpayer argues the event which later
creates the deficiency should be the trigger for the accrual of
interest, Anderson Columbia explains:

Although plaintiff’s argument has some logical appeal, it
is ultimately unpersuasive because it misconstrues the
purpose of assessing interest on unpaid taxes. “Congress
intended the United States to have the use of the money
lawfully due when it becomes due.” Manning v. Seeley Tube
& Box Co. Of New Jersey, 338 U.S. 561, 566, 70 S. Ct. 386,
94 L.Ed. 346 (1950). If tax is not properly paid, interest
is assessed to compensate for the Government’s loss of use
of the money, irrespective of the reason for the late
payment. See Sufffness v. United States, 974 F.2d 608, 610
(5. Cir. 1993).

Id. at 758. Interest on assessments under the Internal Revenue

Code are mandatory. 26 U.S.C. § 6601; Ghandour v. United States,

37 Fed.cCl. 121, 127 (1997). “Unless a statutory exception applies,
neither the IRS nor the courts have discretion to excuse a taxpayer

from payment of interest.” Anderson Columbia Co., Inc. v. United

states, 54 Fed.cl. at 758 (citing Johnson v. United States, 602

F.2d 734, 738 (6 Cir. 1979)).

Application of the Federal rules can be seen in In re Harker,

286 B.R. 84 (B.A.P. 8th Cir. 2002). Debtors who had pled guilty to
income tax evasion relating to tax years 1985 and 1986 had income
tax deficiencies of $17,080 for 1985 and $135,662 for 1986,
respectively. In Harker, the Eighth Circuit BAP held that Internal
Revenue Code § 6601 provided for interest on tax deficiencies from

the due date until the date of payment and established the basis

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for calculating the interest due as the last date prescribed for
payment until the date paid. The Harker court found that the last
date prescribed for payment of the 1985 tax deficiency was April
15, 1986, and the last date for payment of the 1986 tax was April
15, 1987. Harker, 286 B.R. at 92. Accordingly, the Eighth Circuit
BAP found it proper to assess interest on those deficiencies from
the last date prescribed for payment -- in both instances, from
April 15 of the year following the tax year at issue.® Id.

To the extent that policy considerations are validly taken into
account, the Court’s decision is consistent with sound tax policy.
If the Court adopted Debtor’s position, taxpayers would be rewarded
for filing inaccurate tax returns. For example, assume Taxpayer A
and Taxpayer B owe the same amount of taxes. Taxpayer A correctly
filed her tax return noting an amount owing, but did not pay that
amount when her return was filed. Taxpayer B did not think any
amount was owing but made an honest mistake, which the IRS or FTB
finds. Under Debtor's position, Taxpayer B’s good faith mistake
would allow her to avoid a portion of the interest that Taxpayer A
would have to pay.

Alternatively, perhaps Taxpayer B did not make an honest
mistake, but rather intentionally under-reported her taxes in hopes
of avoiding a portion of her taxes and/or interest thereon. While
there is no indication that Debtor’s error was anything but an
honest mistake in this case, the position advocated by Debtor would
encourage intentional under-reporting. Under Debtor’s position,

the same taxpayer would have a strong incentive to file a return

®* The taxes at issue in Harker were clearly deficiencies, as

are those at issue in this case. See Harker, 286 B.R. at 88.

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indicating that no tax was owing, and wait until the taxing
authority discovers the taxpayer’s error. Even if one tax
authority makes a change or correction to the taxpayer’s gross
income -- as the IRS did here -- the taxpayer would still have a
strong incentive not to report the correction to the other taxing
authorities -- such as the FTB in this case -- even though the
taxpayer is required by statute to do so. The taxpayer would,
under Debtor’s theory, not become liable for interest on the taxes
owing until an NPA issued by each taxing authority became final.

In addition, the taxpayer would benefit from the significant
possibility that the taxing authorities would never discover the
error. This would encourage taxpayer mischief, a result this Court
is compelled to avoid. For the courts to be required to determine
whether taxpayers made honest mistakes or intentionally under-
reported their taxes would require extensive evidentiary hearings
with respect to virtually every tax deficiency claim. This is
simply unworkable. Sound tax policy dictates that the level of
understanding and/or motivations of the taxpayer should not control
the amount of taxes or interest owed.

In either of these scenarios, whether through honest mistake or
mischief, Taxpayer B would be rewarded with an unfair advantage
over Taxpayer A. Allowing Taxpayer B to delay the accrual of
interest “misconstrues the purpose of assessing interest on unpaid
taxes.” Anderson Columbia, 54 Fed.Cl. at 758. With respect to
both Taxpayer A and Taxpayer B, the taxing authority is denied the
use of the funds due with the tax return. “The tax code does not

contemplate the interest-free use of government funds.” Holland v.

United States, 873 F.2d 1321, 1322 (9 Cir. 1989). As noted above,

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“{i]£ tax is not properly paid, interest is assessed to compensate
for the Government’s loss of use of the money, irrespective of the
reason for the late payment.” Anderson Columbia, 54 Fed.Cl. at 758
(emphasis added).

B. Priority Status of FTB’s Claim and Interest Thereon

Taxes assessed within the 240-day period prior to the filing of
the petition are accorded priority status. 11 U.S.C. §
507(a) (8) (A). As a matter of law, the tax in this case was
assessed on March 8, 1996, the date the NPA became final under

State law. In re King, 961 F.2d 1423, 1427 (9th Cir. 1992). Due

to the tolling effects of Debtor’s first chapter 13 filing,’ the
assessment falls within the 240-day period prior to Debtor’s
bankruptcy filing in the instant case, and the taxes at issue are
entitled to priority under 11 U.S.C. § 507(a)(8) (A).

The difficult factual circumstance presented by this case is
that the interest sought as a part of the FTB’s claim accrues from
April 15, 1992 -- nearly four years before the NPA became final on
March 8, 1996. Debtor has argued that the FTB “can’t have it both
ways.” Debtor argues that the FTB cannot rely upon the fact that
the NPA did not become final until March 8, 1996 for the purposes
of achieving priority status for its class, but rely upon April 15,
1992 as the date for assessing interest. Per Debtor’s argument, if
the NPA had been timely issued, then the FTB’s entire claim would
fall outside the priority period and would simply be a general
unsecured claim which could be discharged. Instead, Debtor asserts

she is now unfairly faced with both a priority claim and a sizeable

° Debtor’s first bankruptcy case was pending from July 15, 1996
to January 7, 1999.

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interest component. Debtor argues that only interest that accrued
in the priority period should be paid on that basis.

While Debtor’s arguments are compelling, the law is simply not
in her favor on this issue. As noted above, King dictates that the
FTB’s claim be afforded priority status. While it may seem, and in
fact be, unfair to afford priority status to the interest portion
of the FTB’s claim that predates the finality of the NPA, interest
is a mandatory component of the tax owed -- not an independent
liability that can be afforded separate treatment. Just as a
deficiency assessment is “part and parcel” of the underlying tax
debt, so is the interest on that deficiency.

Cc. Abatement of Interest on FTB’s Claim

Finally, Debtor argues that Cal. Rev. & Tax Code § 19104(a)
requires the abatement of the interest portion of the FTB’s claims
that accrued prior to March 18, 1996, when the NPA became final.
For the reasons states in subsection A above, Debtor’s argument
must fail. As noted by the California State Board of Equalization:
“[T]here is no statutory authority for the abatement of mandatory
interest that accrued prior to respondent’s first written contact

with appellant regarding the tax deficiency.” Appeal of Monkee
Business, LLC, Case No. 317411, 2006 WL 864345, (Cal. St. Bd. Eq.
March 28, 2006).

///
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//

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IV.
CONCLUSION
For the reasons set forth above, Debtor’s Objection to the
FTB‘’s claim is overruled. Counsel for the FTB shall submit an

order so providing, after review by Debtor’s counsel as to form.

Dated: \o\ieley

LD yO
ARTHUR S. WEISSBRODT
UNITED STATES BANKRUPTCY JUDGE

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Court Service List

Office of the U.S. Trustee
U.S. Federal Bldg.

280 S lst St. #268

San Jose, CA 95113-3004

Office of the Chapter 13 Trustee
Devin Derham-Burk, Chapter 13 Trustee
P.O. Box 50013

San Jose, CA 95150

Susan D. Silveira, Esq.

Law Office of Susan Silveira
1177 Branham Lane #420

San Jose, CA 95118

Paul D. Gifford

Deputy Attorney General
P.O. Box 70550

Oakland, CA 94612-0550

Patricia Romano
6559 Turnstone Way
Rocklen, CA 95765

Patricia Vignola

598 Shoal Circle
Redwood Shores, CA 94065-2240

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