Did expiration of the criminal fraud-prosecution deadline also prevent California from imposing a civil fraud penalty?

Plain-English summary

Revenue and Taxation Code section 7154 required prosecution of a Sales and Use Tax Law offense within three years after the offense or two years after discovery. For the audit ending September 30, 1986, counsel conditionally treated a fraudulent return for the last quarter as due by November 1, 1986, making November 1, 1989 the three-year date. He used either the February 23, 1987 fraud recommendation or October 15, 1987 reaudit as possible discovery dates, both producing two-year dates before the November 15, 1989 Board hearing.

That expiration affected criminal prosecution, not the civil tax result. Section 6487's ordinary three-year deadline for a notice of determination expressly did not apply in a fraud case. Tax counsel therefore concluded that criminal prosecution was time-barred while the Board could still redetermine the tax and apply the fraud penalty. The PDF supplies no underlying fraud facts and no prosecution referral, charging decision, court proceeding, appeal, or later outcome.

The live annotation says the Board “may be estopped” from a late prosecution, whereas the supporting memorandum says section 7154 “will preclude” prosecution under its analysis. It omits the conditional return premise, alternative discovery dates, audit, reaudit, hearing, and missing attachments.

Common questions

Did the same limitations rule govern criminal prosecution and the civil fraud assessment?

No. Section 7154 governed prosecution, while section 6487 separately excepted fraud from the civil determination deadline.

Did the memorandum decide whether fraud actually occurred?

The Board had already redetermined the tax and applied the fraud penalty; the memorandum addressed the timing of a possible prosecution.

Citations and references

• California Revenue and Taxation Code section 7154 — quoted for the criminal-prosecution periods; complete text, tolling rules, definitions, procedures, amendments, later history, and current law not supplied
• California Revenue and Taxation Code section 6487 — described for determination-notice periods and the fraud exception; complete text, computation rules, procedures, amendments, later history, and current law not supplied
• 1987 audit, reaudit, and fraud recommendation and November 15, 1989 Board hearing — underlying reports, returns, evidence, amounts, notices, petition, hearing summary, hearing officer report, transcript, exhibits, Board order, and computations not reproduced
• January 30, 1990 Tax Counsel Gordon P. Adelman memorandum — no prosecution referral, charging decision, court proceeding, agency reply, collection result, appeal, or later outcome supplied
• Official Annotation 320.0120's criminal-limit conclusion, civil-penalty distinction, and date — uses “may be estopped” where the letter says “will preclude” and omits the conditional dates, proceeding provenance, attachments, named staff, missing records, later outcome, and reliance status and supplies no additional proceeding record

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: https://cdtfa.ca.gov/lawguides/vol2/suta/320-0000-all.html
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/320-0120.pdf

Original ruling text

State of California

Board of Equalization

Memorandum

To:

Mr. Rick Slater
Supervisor, Collections

From:

Gordon P. Adelman
Tax Counsel

Subject:

M--- A--- G--Account No. SR -- XX-XXXXXX

320.0120

Date:

January 30, 1990

You requested a legal opinion regarding the application of the statute of limitations relating to a possible fraud prosecution involving the above captioned account. The audit period was from July 1, 1983 through September 30, 1986. The Report of Field Audit is dated February 23, 1987, with a reaudit dated October 15, 1987. The District Administrator’s fraud recommendation letter is dated February 23, 1987. The Board hearing on the petition for redetermination was November 15, 1989. Section 7154, Revenue and Taxation Code reads: “Any prosecution for violation of any of the penal provisions of this part shall be instituted within three years after the commission of the offense, or within two years after the violation is discovered.” Application of the statute to the audit period indicates that if a fraudulent return was filed for the last quarter covered by the audit (July – September 1986) the return was due not later than November 1, 1986. Three years from the “commission of the offense” would have been November 1, 1989. Two years “after the violation is discovered” could be interpreted to be from the date of the fraud recommendation which was February 23, 1987, since the violation was “discovered” during the audit. Even using the reaudit date of October 15, 1987 as the discovery date, the twoyear period would have ended October 15, 1989. The Board redetermined the tax as computed by the reaudit dated October 15, 1987 and applied the fraud penalty. The redetermination hearing was November 15, 1989. Although Section 6487, Revenue and Taxation Code, requires the Board to issue a notice of determination within three years after the last day of the calendar month following the quarterly period for which the amount is proposed to be determined or within three years after the return is filed,

Mr. Rick Slater

-2-

January 30, 1990
320.0120

whichever period expires the later, this statute does not apply in the case of fraud. Thus, while a penalty for fraud may attach, Section 7154 cited above will preclude criminal prosecution due to the running of the statute of limitations as indicated above. Attached is a copy of the Board hearing summary and hearing officer report for your information.

GPA:sr
Attach.
cc:

Mr. Dewey Roberts (w/enc.)