Juanita Diaz, the mother of two young sons whose only support for her struggling family came from a monthly welfare check, reached into her mailbox one day to find a surprise.
It wasn't a check. It was a bill from the State of California for $231 in back taxes plus penalties and interest.
"She was devastated," recalled her lawyer, Therese M. Stewart of San Francisco. "People think that amount of money isn't a big deal. What does that mean to you or me? But to people that have only a few hundred dollars to live on each month it's everything.
"I know the state needs in some cases to save money but why go after the least-endowed people in our society to save a few bucks."
In stern language, the tax board claimed that for three years the Bakersfield mother had illegally collected a $137 renters' refund by designating herself on her state income tax form as the head of household. As a welfare recipient, state officials argued, Diaz was not entitled to that status.
Instead, they argued, Diaz was entitled to a smaller refund.
Today, the State Board of Equalization is scheduled to decide whether Diaz and thousands of other welfare mothers can claim the designation. Because her case and that of another welfare mother from Hayward are the first of their kind to reach the five-member panel that hears appeals from the tax board, they are expected to set a precedent.
For the welfare mothers, a decision in their favor could entitle them henceforth to a yearly $137 cash bonus from the state.
At stake for the state is the potential for millions of dollars in additional costs. Officials say an adverse ruling would force the board to provide refunds each year to an estimated 14,000 welfare recipients at an approximate cost of $1.1 million a year. In addition, recipients could file amended returns seeking refunds for tax years dating back to 1984 at a potential cost to the state of another $4 million.
If the equalization board rules against the mothers, as its staff is expected to recommend, Stewart said the women will pursue a class-action suit in the courts.
The welfare mothers' clash with the state Franchise Tax Board grew out of legislation intended to rectify tax inequities between renters and homeowners. Effective in 1979, it entitled renters to a tax credit of $60 for single people and $137 for married couples, surviving spouses and single heads of households.
Beginning in 1979, Diaz and other welfare mothers filed tax returns as single heads of households and applied for the renters' credit. The tax board routinely paid each one $137. Then several years later, after auditing the returns, the board advised the mothers that they could not qualify as heads of households and therefore were only entitled to the $60 credit allowed single people.
The board billed them for the $77 difference between the $60 they were entitled to and the $137 they actually collected. In Diaz's case, that amounted to $231, plus penalties and interest.
"I do not have the money to pay the tax board. It has been difficult to pay for rent, food and other necessities we have," Constance Watts, the Hayward mother whose case is being considered with Diaz's, wrote her lawyer at the time.
Both women sought aid from lawyers who eventually forwarded their cases to Richard Rothschild at the Western Center on Law and Poverty Inc. in Los Angeles. Rothschild enlisted Stewart's help in challenging the board's position on the head-of-household issue. Since then, additional cases have been filed on behalf of other welfare mothers, but tax board officials said they have no way of tracking how many welfare recipients were actually billed for back taxes.
While Diaz and Watts eventually paid their tax bill by foregoing their renters' credit in later years, they challenged the board's denial of their head-of-household status on behalf of all welfare mothers. The board chose not to take any action on their challenge. Legally, the board's failure to act had the effect of a denial and allowed the mothers to appeal to the State Board of Equalization.
In documents filed with that board, the tax agency, relying on federal case law, contended that head of household was a special tax status created to give single heads of families tax breaks. To qualify, taxpayers had to be able to prove that they furnished over half the costs of maintaining their households. In the case of welfare recipients, state officials argued, the cost of maintaining the household was not provided by the parent but by the state, with the primary purpose being to assist children.
"Welfare recipients don't meet the test," said Jim Reber, a spokesman for the board. "If you're not working you're not providing the support. Someone else is."
Stewart, contending that the board was misreading the law and relying on moldy cases, said welfare mothers bear the same responsibility for managing and sustaining their households as any other single parent.
"That the primary purpose of (welfare) is to assist children does not deprive (the mother) of the discretion to determine how to meet the food, clothing or shelter needs of her children nor render her acts in doing so into passive ones that cannot be considered 'furnishing' those needs," Stewart wrote the tax board.