Honorable Robert S. Calvert Opinion NO. ~-424

Comptrollerof Public Accounts State Capitol Building Re: Whether penalties for Austin. Texas late oavment of taxes

Dear shouldbe assessedwhen the check in payment of taxes. is dishonoredby the drawee bank through Mr. Calvert: no fault of the taxpayer.

Your opinion request reads, in part, as follows:

“Two banks, each in a ,different city in this State, have recentlyhad occasion to freeze the accounts,ofsome or all of their depositors. This became necessary, in each case, due to difficultiesnot involvingthe depositors in question, and the accountswere rendered frozen suddenly, without warning or notice being given to these depositors.

“Prior to the action by the banks, several depositorsplaced in the U. S. Post Office quarterly sales tax reports and enclosed therewith checks drawn upon their accountswith one of the above banks in payment of the tax due as reported.
“Followingtimely receiptby this office of the quarterlyreports and ch@cks, one of the above banks, upon presentment,failed and refused to accept the checks, and the same were dishonored, with the explanationthat the depositor’saccount would be frozen for a time due to bank difficulties of an internalnature.

“It is expected that the same situationwill
occur with regard to the secondbank. Correspondence from the bank and two depositors leads us to this conclusion. i++

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"Your official opinion is requestedas to whether the statutorypenalty for late payment,under Article 20.05(H), supra,must be assessed the taxpayerwhose check was not honored by his bank when presentedby this office."

By supplementalletteryou have also advised us:

"In regard to the recent request for en opinion concerningthe return of checks written In payment of sales taxes, please be advised that such request was made based upon our assuming that the checks in questionwere executed prior to the depositor'sknowledge of his account being frozen, and that at the time the checks
were executed there was sufficientfunds on deposit with the bank to cover the same and at the time of presentmentby this office to the bank there still remained sufficientfunds to pay the checks."

For purposes of this opinionwe are assuming as true the the same facts that you have assumed as true.

It is the opinion of this office that under the facts submittedno penalty shouldbe assessed for late payment, provided that the checks are paid within a reasonabletime after being dishonored,or the taxpayersmake actual payment in money, either with or without use of the checks in question, within a reasonabletime after notificationthat the checks have been dishonored.

The backdrop for this opinion Is the well-settledrule that penaltiesand forfeituresare to be strictly construed against the State, and that doubts or ambiguitiesin this field will be resolved against the State by the courts. It has also been held that a penalty will not be~inflicted where the failure la occasionedby circumstances beyond the control of the party or where the particularevent causing the failure could not reasonablyhave been foreseen and guarded against. See 

### 45 Tex.Jur.2d 

### 5, Penalties g Warehouse Cornpane 104 Tex. 496 2; eth v. Hamilton 1 0 cm4 1911 * itfield V. Terrill Compress Cimpan App. 1901, error ref.); Conley v. .w. 1L ( ;x.civ. Sh%nan S. & S. R. Company,

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### (~-424)

90 Tex. 295, 

### 38 S.W. 519 (1897);Bloom v. Texas State Board of Pharmacy 390 S.w.2d 252 (T S

. 19b5)' and Chesapeakeand Ohio Railway Company ?'B%rd lOO'W.Va. 222 130 S ti 524 (1925) Th 1 t it d ca:e holds thai where'failureof performLc?wai czused by the interventionof a via major or Act of God, a recovery for penalty will be denied.

The leading case on this subject is Muldrow v. Texas Frozen Foods, 299 S.W.2d 27.5(Tex.Sup.1951). There, the mat a check for taxes delivered to the collecting official on the last day allowed for payment and thereafterreturnedunpaid by the drawee bank does not constitutea timely payment of taxes, even though the check
was dishonoredsolely because of a mistake on the part of the bank end was paid when presenteda second time. The court held that under our Constitutionand statutespayment of taxes must be in money and that no official can obligate the State to accept a check as either absolute or conditional payment. Since a check cannot be accepted as conditional payment of taxes, the court rejected the general doctrine of relationwhich is that when a check is accepted as conditional payment and the condition is satisfiedwhen the check is paid, it is proper to treat the payment as having been made at the time the check was received. However, the court further held that if a check Is given for purposes of paying taxes and is promptlypaid when first presented in due course to the drawee bank, then for all practicalpurposes the funds are as readily available to the taxing authorityas If payment had been made in money, and that, therefore,such a check would be the legal equivalentof money and the taxes would be consideredas paid when the check was receivedby the collectingofficial. Thus, although a check can never constitutepayment or conditional payment of taxes, the court neverthelessapproved a limited form of the "relationback" doctrine, limited to checks paid when first presented in due course. The Muldrow case is in any event distinguishable from the situatme presented wherein apparentlyneither the taxpayernor his agent, the bank, is at fault, and payment was delayed due to circumstances beyond his control.

In 1961, after the Muldrow decision, the Legislature enactedArticle 1.13, ,Title 3.2&I Taxation-General, Vernon's Civil Statutes,and it was smendgd in 1967. The 1961

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enactmentwas in substancewhat is now Section (a) of Article 1.13. Then in 1967, Sections (b) through (g)
were added. It will be noted that Section (c) is not limited to the provisionsrelatingto the time a report is placed in the United Statesmail. Section (c) deals with standardsof care required of a taxpayer in making timely payments and with situations where paymentswill be deemed to have been timely filed. Therefore,the helm Muldrow must now be interpretedend applied in the lighmch statute.

Article 1.13 (a) and (c) are as follows:

"(a) Any report, requiredby any provision of this Title to be filed or made
on or before a specificdate shall be deemed timely filed if said report, shall be placed in the United State Post Office or in the hands of a common or contract carrierproperly addressed to the Comptrollerof Public Accounts on or before the date required for such payment, report, annual report, return, declaration,statement,
or document to be filed or made. *** "(c) The person making the report shall be deemed to have substantially compliedwith ~thefiling requirements as to timeliness if he exercised reasonablediligence to comply and :. through no fault of his own the reportswere not timely filed."

Section (f) of Article 1.13 provides that:

'The term 'report'shall include any payment, report, annual report, return, declaration, statementor other document requiredby any provision of this Title to be filed with the Comptroller."

Therefore, the word "payment"can properly be substituted for the word "report" in Section (c), making it read as follows:

(c) The person making the "payment"shall be deemed to have substantially compliedwith

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the filing requirements as to timeliness if he exercisedreasonablediligence to comply and throughno fault of hfs own the "payments"were not timely filed.

We do not view Article 1.13 as altering the mode of paying taxes; however,because payment is computed from the time provided for filing of the tax reports,a substantial compliancerule for reports logicallygoverns in connectionwith the time determinativefor payment. The delivery of money continuesto be the only mr,thod of effectingpayment of taxes. It follows that the "in fact" time of payment is always when money is delivered,never before. However,Article 1.13 altered the rule as to when payment shall be~deemed as having been timely made insofar

as penalty assessmentsare concernedon1 The question of timelinessnow denends on the dearee of liaence exercised by the taxpayerand the presence-orabsence Gf fault on his part.

Under the Muldrow decision if the money is readily availableto the taxing authority,then the time of payment should be related to the time of the receipt of the check by the taxing authority. Our interpretation of Muldrow in the light of Article 1.13 is that if the taxpayemsed reasonablediligence to make the funds time1.y and readily available,and if they are unavailablethroughno fault of his, then the eventualpayment of the check within a reasonable time is related to the time the Comptrollerreceives the check.

We cannot accept the concept that reasonablediligence
as to timely payment csn only be exhibitedby the timely delivery of money or by the timely delivery of a check which is paid when first presented in due course.

If actual payment in money, either by use of the check
or otherwise, is not receivedwithin a reasonabletime after the taxpayer is notified that the check has been dishonored, then the taxpayerwill not have exercised reasonablediligence so as to excuse an untimely payment, and the time of actual payment cannot be deemed to relate to any previous time.

Our interpretation necessarily involves fact questions dealingwith reasonablediligence, taxpayer'sfault, and reasonabletime. These fact questionsmust first be determined

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by the Comptrollerand finallyby the courts in the event of a dispute between the taxpayer and the Comptroller.

In many cases the issues of reasonablediligence, fault and reasonabletime will be matters about whjch reasonableminds can differ, depending on the facts of the particular case. However, in our opinion, the facts stated in your request reveal reasonablediligenceand lack of fault on the part of the taxpayersto the time of the dishonoring of the checks, as a matter of law. The fact question of whether such payment in money is actuallymade within a reasonabletime is open and must be determinedas stated above.

We conclude that, under the facts stated In your request, if the checks in question are paid, within a reasonabletime after they were first dishonoredby the bank or ,if payment in money is otherwisemade by the taxpayerswithin a reasonable' time after notice that the checks were dishonored,then the time of such payment will relate to the time of the receipt of the checks by the Comptroller.

SUMMARY

Under Article 1.13 of Title 122A, TaxationGeneral,Vernon's Civil Statutes,no penalty should be assessed for late payment of taxes under circumstances where the taxpayer'sreturn and check In payment of the taxes are timely filed with the Comptrollerand where the taxpayer had sufficientfunds in the drawee bank to pay the check but where the check was dishonored when presented for payment solely because the bank account, after receipt of the check, was suddenly frozen for a time due to internaldifficultiesin the bank which did not involve the taxpayer and over which he had no control,provided that the check is paid within
a reasonabletime after being dishonoredor the taxpayermakes actual payment in money, either with or without use of the check, within
a reasonabletime after notificationthat the check has been dishonored. The fact question of whether such payment in money is made within

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a reasonabletime must first be determinedby the Comptrollerand later by the courts in the event of a dispute between the taxpayer and the Comptroller. ,r)

AW:dc
Preparedby Alfred Walker Assistant Attorney General

APPROVED: OPINION COMMITTEE

Kerns Taylor, Chairman George Kelton, Vice-Chairman

'James Broadhurst Louis Neunan Sam Kelley Malcolm Qxick

Hawthorne Phillips ExecutiveAssistant

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