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Objection To Franchise Tax Board’s Claim For Unpaid Taxes Is Overruled.
August 26, 2007
Patricia Vignola filed for Chapter 13 bankruptcy, and the California Franchise Tax Board (“FTB”) filed a claim for $51,770.99 for tax years 1991 and 1993. Vignola objected to the claim, but the Chapter 13 petition was dismissed before resolution of the claim objection.
Vignola later filed a second Chapter 13 petition, and the FTB filed a second claim in the full amount originally owed to it, even though Vignola had in the interim paid some of the taxes due. This time, Vignola did not object to the FTB claim, and did not object when the Trustee paid the tax claim in full. After discharge, Vignola’s motion to reopen the case was granted and she objected to the FTB claim. The Court ordered the return of the overpayment that represented collection of more than was due (and more than FTB agreed to accept in a post-collection agreement).
The remaining question was, when does interest on unpaid state income taxes begin to accrue? Interest is paid on any amount of unpaid tax. Vignola argued that tax liability did not accrue until she received notice of the deficiency assessment. The Court rejected this argument and found that interest began to accrue from the due date of the tax, April 15, 1992, whether or not the tax was a deficiency assessment.
Interest on tax deficiencies at the federal level is treated similarly as that under California law. It is paid from the last date the tax is due. Cal. Rev. & Tax. Code §19101(a). The last date for tax payment is determined by Cal. Rev. & Tax Code §19101(b) and was due April 15, 1992. Interest accrued from that date.
Vignola argued accrual of interest does not occur until the deficiency is created. If the tax is not paid, interest is assessed to compensate the government for its loss, no matter what the reason is for the late payment. See Suffness v. United States, 974 F.2d 608, 610 (5th Cir.1993).
Taxes assessed 240-days pre-bankruptcy petition have priority status. 11 U.S.C. §507(a)(8)(A). In this case, the tax was assessed within that 240-day pre-petition period when the notice of deficiency became final. Interest on the FTB’s claim accrued from nearly four years before the deficiency notice became final. Vignola argued that FTB could not have priority status from the date the deficiency notice became final and calculate interest from the 1992 due date. Under that argument, if the notice of deficiency had been timely filed, the entire FTB claim would be too old for priority status.
The Court disagreed. FTB’s claim maintained priority status. The Court agreed with Vignola that it is unfair to give priority status to both the claim, which has the effect of stating the claim is only 240 days old, and charge interest for the prior four years. But the Court determined that interest is a mandatory component of the tax owed, not an independent liability. Additionally, there is no statutory authority for abatement of mandatory interest.