Sheehy v. Franchise Tax Board

Opinion

RYLAARSDAM, J.

Plaintiffs Patrick F. and Arlene Sheehy appeal from a judgment on the pleadings in favor of defendant Franchise Tax Board (Board) in an action alleging that the Board assessed usurious interest on unpaid taxes. Because the penalty assessment for late payment of taxes is neither an assessment to compensate the state for a loan nor for a forbearance, we affirm the judgment.

Facts

Plaintiffs claimed a deduction for an embezzlement and theft loss on their 1985 state income tax return. Six years later, defendant notified plaintiffs the deduction was disallowed, and subsequently informed plaintiffs they owed $7,074 in additional taxes. Defendant also assessed $5,717 in interest up to that date; the interest was computed at a rate of 10 percent compounded daily. Defendant ultimately collected the $7,074 in taxes and $10,179 in interest. Plaintiffs then sued defendant, alleging that the amount of interest charged on the unpaid taxes violated article XV, section 1 of the California Constitution, which limits interest to 7 percent per year. The trial court granted defendant’s motion for judgment on the pleadings.

Discussion

The Legislature authorizes defendant to assess interest on unpaid taxes (Rev. & Tax. Code, § 19104, subd. (a)), in an amount to be determined in accordance with the Internal Revenue Code (Rev. & Tax. Code, § 19521, subd. (a)). During the relevant period, this interest rate was 10 percent, compounded daily (26 U.S.C.A § 6621). With exceptions not relevant here, the California Constitution limits the amount of interest which may be charged on any “loan or forbearance” to 7 percent per year. (Cal. Const., art. XV, § 1.)

In determining whether a particular transaction is usurious, courts look to its substance rather than to its form. The key question is whether the

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transaction has as its true purpose the hire of money at an excessive interest rate.

(Boerner

v.

Colwell Co.