County of San Diego (the County) appeals from a judgment ordering it, pursuant to Revenue and Taxation Code section 4985.2, subdivisions (a) and (b), to cancel and refund penalties paid by First American Commercial Real Estate Services, Inc. (First American), for late payment of real property taxes.
The County assesses annual real property taxes to the owners of real property in the County (§ 405), and collects tax payments from real property owners in semiannual installments due on November 1 and the following February 1. (§§ 2605, 2606.) For the second installment, taxes not paid by the end of the statutory grace period on April 10 incur a 10 percent penalty. (§§ 2702, 2705.)
The County reciprocal tax accounting (CORTAC) program allows lenders or other entities to make bulk payments of real property taxes—through a wire transfer to the County's bank—on behalf of the real property owners who are assessed property tax by the County. As we understand the CORTAC program, at least one of its uses is to allow lenders to transmit to the County the real property tax payments borrowers remit with their mortgage payments, which the lenders hold in impound accounts until the taxes become due. (Cf. ZC Real Estate Tax Solutions Ltd. v. Ford (2010) 191 Cal.App.4th 378, 380-381 [119 Cal.Rptr.3d 85] (ZC Real Estate Tax Solutions) ["Property owners often are required to (and sometimes do so voluntarily) pay a portion of their real estate taxes with each monthly mortgage payment. The lender holds these monthly tax payments in an escrow account until it is time to make tax payments to the local taxing authority."].)
First American provides tax services, including consolidated mass tax payment services, to banks, mortgage companies and other commercial loan servicers. First American services a number of clients in San Diego by coordinating their property tax payments to the County through the CORTAC program. First American acted as the tax service company for 14 clients with respect to the second installment of the 2007-2008 fiscal year property taxes in the amount of approximately $60 million owed to the County on 2,561 different real property parcels. Among First American's clients was Bank of America Capital Market (Bank of America), which retained First American as the tax service company to coordinate the payment of property taxes in the amount of $6,309,406
As required by the CORTAC program, First American sent the County an electronic file identifying the 2,561 real property parcels for which it would
Between April 4 and April 9, 2008, the County received 13 separate wire transfers of the property tax payments for 13 of First American's clients. However, First American failed to transmit the $6,309,406 payment on behalf of Bank of America by the April 10, 2008 payment deadline. According to First American, it failed to transmit Bank of America's payment by April 10, 2008, because of an internal error in formatting a spreadsheet used in making the wire transfers. Because of the formatting error, the amount that it was to transfer for the Bank of America payment was "inadvertently `hidden,'" and therefore, the payment was overlooked.
When the County had not received a wire transfer of Bank of America's payment by the close of business on April 10, 2008, it e-mailed First American to notify it of the missing payment. The next morning, on April 11, 2008, First American wired $6,309,406 to the County for the Bank of America payment. Because the payment arrived after the April 10, 2008 deadline, the County imposed a 10 percent penalty in the amount of $594,942 as required by section 2705.
First American then attempted to obtain cancellation of the penalty pursuant to section 4985.2. That provision states:
"Any penalty, costs, or other charges resulting from tax delinquency may be canceled by the auditor or the tax collector upon a finding of any of the following:
"(a) Failure to make a timely payment is due to reasonable cause and circumstances beyond the taxpayer's control, and occurred notwithstanding the exercise of ordinary care in the absence of willful neglect, provided the principal payment for the proper amount of the tax due is made no later than June 30 of the fourth fiscal year following the fiscal year in which the tax became delinquent.
"(c) The cancellation was ordered by a local, state, or federal court." (§ 4985.2.)
In its first formal step toward seeking cancellation, First American sent a letter to the County's treasurer/tax collector on April 25, 2008, requesting that the penalty be cancelled under section 4985.2, subdivision (b) because of "an inadvertent error in the amount of payment made by the taxpayer." On April 28, 2008, First American met with the County to discuss cancellation of the penalty under section 4985.2, subdivisions (a) and (b). On May 9, 2008, the County's chief deputy tax collector notified First American in writing that cancellation was not appropriate because neither subdivision (a) nor subdivision (b) was applicable.
First American remitted payment for the penalty "under protest" on May 9, 2008, by wire transfer.
On February 5, 2009, First American filed this action against the County to obtain cancellation of the penalty pursuant to section 4985.2. As First American acknowledges, "[t]he correct procedure to assert a claim [in court] for cancellation and refund of tax penalties pursuant to Section 4985.2 is, admittedly, unclear." Therefore, First American filed a pleading containing three alternative procedural approaches: (1) a cause of action for "Refund of Tax Penalties,"
The County filed an answer, and the trial court held a bench trial based on stipulated facts, declarations and exhibits, together with the parties' trial briefs and in-court argument.
First, the trial court stated that although the Legislature did not identify the procedure by which taxpayers may challenge the denial of an application for cancellation of penalties under section 4985.2, a taxpayer may challenge such a denial either through a petition for a traditional writ of mandate (Code Civ. Proc., § 1085 et seq.) or an action for refund brought pursuant to Revenue and Taxation Code section 5140 et seq.
Second, the trial court determined that although First American was not the taxpayer, it had paid the penalty imposed by the County and thus had standing to bring a refund action under section 5140 and to file a petition for a writ of mandate as "the party beneficially interested" (Code Civ. Proc., § 1086).
Third, the trial court concluded that First American was entitled to cancellation of the penalty under both subdivisions (a) and (b) of section 4985.2. According to the trial court, although subdivision (a) of section 4985.2 requires that "[f]ailure to make a timely payment is due to reasonable cause and circumstances beyond the taxpayer's control, and occurred notwithstanding the exercise of ordinary care in the absence of willful neglect..." (ibid.), those requirements were met because (1) First American's error in formatting its spreadsheet "occurred notwithstanding its exercise of ordinary business care"; (2) a "failure to accomplish an intended wire payment because of the unintended and erroneous computer spreadsheet customer designation constitutes `circumstances beyond the taxpayer's control'"; and (3) there was no willful neglect. The trial court also concluded that there had been "an inadvertent error in the amount of payment made by the taxpayer" as required by subdivision (b) of section 4985.2. Specifically, it explained that there was an inadvertent error in the amount that First American had transmitted on behalf of its 14 clients. According to the trial court, under the "unique procedure" of the CORTAC program, "[t]he inadvertent nonpayment of a portion of the total amount payable by a CORTAC participant [(i.e., First American)] falls within section 4985.2[, subdivision ](b)."
The trial court issued a writ of mandate directing the County to cancel the $594,942 penalty and refund it to First American (with interest calculated pursuant to § 5151), and it also ordered the same relief pursuant to section 5140 et seq.
The County appeals from the judgment.
Whether reviewing an order issuing a writ of mandate or a ruling in a tax refund action, our standard of review in this instance is the same.
The statutory language contains four separate requirements: the delay in payment (1) was "due to reasonable cause," (2) was due to "circumstances beyond the taxpayer's control," (3) occurred "notwithstanding the exercise of ordinary care," and (4) occurred "in the absence of willful neglect." (§ 4985.2, subd. (a).) If any of these requirements are missing, First American is not entitled to cancellation of the penalty under subdivision (a) of section 4985.2.
As we will explain, we conclude as a matter of statutory interpretation that the clerical error that caused First American to make a late payment on behalf
It is undisputed that First American failed to timely transmit the tax payment because it made a mistake in formatting a spreadsheet that listed the entities on behalf of which it needed to initiate wire transfers. The line on the spreadsheet listing Bank of America was inadvertently formatted so that it was hidden. Whether these circumstances are "beyond the taxpayer's control" within the meaning of section 4985.2, subdivision (a) is a matter of statutory interpretation, to which we apply a de novo standard of review. (Jackson, supra, 105 Cal.App.4th at p. 970; Raytheon, supra, 159 Cal.App.4th at p. 34.)
The only case to consider the meaning of the term "circumstances beyond the taxpayer's control" in section 4985.2, subdivision (a) is ZC Real Estate Tax Solutions, supra, 191 Cal.App.4th 378. In that case, a tax services company
First American's error in formatting its spreadsheet which it used to initiate the wire transfers is very similar to the error in ZC Real Estate Tax Solutions of misaddressing an envelope. Both are clerical errors that were plainly inadvertent, but which were within the parties' control and avoidable. In this case, the payment would have been timely if First American would have acted differently in formatting its spreadsheet, in designing its processes for initiating wire transfers or in taking additional steps to confirm wire transfers before the payment deadline. Following ZC Real Estate Tax Solutions, supra, 191 Cal.App.4th 378, 385, we conclude that First American's failure to timely transmit the tax payment was not due to a circumstance beyond its control.
"`Reasonable cause or circumstances beyond the person's control' includes, but is not limited to, any of the following:
"(A) The occurrence of a death or serious illness of the person or the person's next of kin that caused the person's failure to make a timely remittance.
"(B) The occurrence of an emergency, as defined in Section 8558 of the Government Code that caused the person's failure to make a timely remittance.
"(C) A natural disaster or other catastrophe directly affecting the business operations of the person that caused the person's failure to make a timely remittance.
"(D) The board failed to send returns or other information to the correct address of record, that caused the person's failure to make a timely remittance.
"(E) The person's failure to make a timely remittance occurred only once over a three-year period, or once during the period in which the person was engaged in business, whichever time period is shorter.
"(F) The person voluntarily corrected errors in remitting sales tax reimbursement or use tax collected that were made in previous reporting periods and remitted payment of the liability owed as a result of those errors prior to being contacted by the board regarding possible errors or discrepancies."
First American argues that we should rely on this definition to interpret the term "reasonable cause and circumstances beyond the taxpayer's control" in section 4985.2, subdivision (a). Specifically, First American points to the provision referring to a "failure to make a timely remittance" that "occurred only once over a three-year period" (§ 6597, subd. (b)(1)(A) & (E)). According to First American, because there is no evidence that it "previously failed to timely transmit a tax payment on behalf of its clients," we should rely on
First American also suggests that we look to the case law interpreting a federal income tax statute—title 26 United States Code section 6651—to inform our analysis of whether "circumstances beyond the taxpayer's control" gave rise to the late tax payment at issue here. That provision states: "In case of failure—[¶] (1) to file any return required under [specific provisions] ... on the date prescribed therefor (determined with regard to any extension of time for filing), unless it is shown that such failure is due to reasonable cause and not due to willful neglect, there shall be added to the amount required to be shown as tax on such return [a specific penalty]." (26 U.S.C. § 6651(a), italics added.) First American contends that the case law interpreting this provision is useful here because "[t]he phrase `reasonable cause' as used in this section has been interpreted to include circumstances outside a taxpayer's reasonable control which result in a delinquent tax filing." (See, e.g., Boyle, supra, 469 U.S. at p. 248, fn. 6 [discussing federal regulations implementing
Both parties contend that the legislative history of section 4985.2 supports their position. We have reviewed the legislative history materials obtained from the parties, as well as through our own research, but have not found those materials to be particularly instructive. As ZC Real Estate Tax Solutions observed in its review of the legislative history of section 4985.2, the most relevant statement concerning the meaning of the phrase "circumstances beyond the taxpayer's control" is the statement by the legislation's sponsor that "`[t]he thrust of the measure is aimed at people who are hospitalized or quite ill and cannot make a timely property tax payment due to the circumstances.'" (ZC Real Estate Tax Solutions, supra, 191 Cal.App.4th at p. 383.) The legislative history contains no support for First American's position that circumstances beyond the taxpayer's control should be found to exist in any situation in which the taxpayer exercised ordinary care and avoided willful neglect.
The second issue is whether, as the trial court concluded, subdivision (b) of section 4985.2 provides a ground for cancellation of the penalty paid by First American.
First American acknowledges that there was not an inadvertent error in the amount of payment made on behalf of Bank of America or on behalf of the taxpayers who were Bank of America's borrowers. On the contrary, no payment whatsoever was made on behalf of those entities by the statutory deadline. Thus, on its face, subdivision (b) of section 4985.2 does not apply here.
However, First American argues that a different rule should apply in the context of the CORTAC program. It argues that because a tax services company operating under the CORTAC program sends the County a single electronic file identifying all of the parcels and all of the clients for which it will be transmitting payment by wire transfer, an error in the amount of the total payments made by the tax services company on behalf of its clients for a specific tax period should be considered "an inadvertent error in the amount of payment made by the taxpayer" within the meaning of section 4985.2, subdivision (b).
We reject First American's argument under the facts of this case. As described in the record, some tax services companies participating in the CORTAC program send a single wire transfer encompassing all of their clients, but First American is not among them. Although we do not decide the issue, it may be plausible to argue that an inadvertent omission of one client's payment amount from a single wire transfer is an inadvertent error in the amount of payment. That argument is plausible because the tax services company would be making a single payment, and that payment would be in the wrong amount. Here, however, First American did not make a single consolidated payment for all of its clients. Each client paid by separate wire transfer. Bank of America's separate payment was not in the wrong amount; it was simply not made in any amount by the statutory deadline. Therefore, subdivision (b) of section 4985.2 does not apply regardless of the fact that the payment was made through the CORTAC program.
We therefore conclude that neither subdivision (a) nor subdivision (b) of section 4985.2 is applicable to the facts of this case, and the trial court erred
The judgment is reversed.
Huffman, Acting P. J., and McDonald, J., concurred.
