States have become creative with tracking down their missing revenue. Naming and shaming continues to be the name of the game with over 20 states—among them California—publishing tax debtor shame lists. The California Franchise Tax Board’s (FTB) top 500 list published under Cal. Rev. & Tax Code § 19195 has been a cause of intrigue with celebrities such as O.J. Simpson and Burt Reynolds making it in past years.
However, Cal. Bus. & Prof. Code § 494.5 adds an additional punch to inflict some real pain by suspending the occupational, professional, and even driver’s licenses of those on the list. Recently, California attorney, Ernest J. Franceschi Jr., who made the list for failing to pay taxes in nearly 20 years, sued the FTB, claiming the statutory schemes violated his due process and equal protection rights. The U.S. District Court for the Central District of California dismissed the case and following his appeal, the U.S. Court of Appeals for the Ninth Circuit said on Apr. 11 that California can suspend Franceschi’s driver’s license without violating his constitutional rights.
Here is a brief breakdown of Francheschi’s constitutional claims:
Procedural Due Process
Franceschi’s procedural due process argument consisted of two parts: 1) that Cal. Bus. & Prof. Code § 494.5 doesn’t provide an adequate opportunity to be heard; and 2) that Cal. Bus. & Prof. Code § 494.5’s provisions for a payment plan and financial hardship exemptions are “illusory.” The Ninth Circuit explained that a procedural due process claim must allege two elements: 1) a deprivation of a constitutionally protected liberty or property interest; and 2) a denial of adequate procedural protections. Franceschi had received notice of proposed deficiency assessments for years 1995 through 2012, in which he failed to file returns. The court found that he had ample opportunity to contest the validity of assessments at that time. Further, the court noted that other courts have held pay first, litigate later procedures satisfy due process. After Franceschi received notice of his license’s revocation, he could have paid the tax and filed a refund claim to challenge the original assessment.
Substantive Due Process
Next, Franceschi argued that both California statutes violated his substantive due process rights by burdening his chosen profession. According to the Ninth Circuit, the Due Process Clause protects certain individual liberties, specifically those that are deemed fundamental liberty interests, “such as marriage, procreation, contraception, family relationships, [and] child rearing.” The court found that a right to drive doesn’t resemble any of the fundamental liberty interest categories. While stating that a general right to choose one’s profession is subject to reasonable government regulation, the court also noted that revocation of Franceschi’s license didn’t completely prohibit his ability to practice law since he still had access to public transport, taxis, and Ubers. The court applied rational basis review because there wasn’t an infringement on a fundamental right and concluded that California laws were related to a legitimate state interest—collection of revenue.
Because revocation of Franceschi’s driver’s license wasn’t an infringement on a fundamental right and subject to only rational basis review, the Ninth Circuit looked to whether there was a rational basis for the scheme. Franceschi argued that both statutes singled out people whose tax debt exceeded $100,000 and led to unequal treatment amongst similarly situated taxpayers and was thus unreasonable and arbitrary. While referring to Franceschi as a “major tax delinquent,” the court noted that failure to pay “unusually large amounts” of back taxes for nearly 20 years supplied a rational basis for California’s response. Thus, the court easily reached the conclusion that singling out 500 taxpayers with the largest tax deficiencies via Cal. Rev. & Tax Code § 19195 and imposing sanctions through Cal. Bus. & Prof. Code § 494.5 is rationally related to California’s legitimate interest in prompt collection of tax revenue.
Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: Should your state revoke the driver’s licenses of its worst tax offenders?
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