Agnew v. State Bd. of Equalization

• Decision Date: 07 December 2005
• Docket Number: No. B177558.,B177558.
• Court: California Court of Appeals Court of Appeals
• Parties: Dan J. AGNEW, Plaintiff and Appellant, v. STATE BOARD OF EQUALIZATION, Defendant and Respondent.

36 Cal.Rptr.3d 464

134 Cal.App.4th 899

Dan J. AGNEW, Plaintiff and Appellant, v. STATE BOARD OF EQUALIZATION, Defendant and Respondent.

No. B177558.

Court of Appeal, Second District, Division 7.

December 7, 2005.

Mandel & Norwood, S. Jerome Mandel, Santa Monica, and Lilly Lewis, for Plaintiff and Appellant.

Bill Lockyer, Attorney General, W. Dean Freeman, Lead Deputy Attorney General, Raymond B. Jue and Felix E. Leatherwood, Deputy Attorneys General, for Defendant and Respondent.

JOHNSON, J.

In this sales tax refund case a taxpayer who prevailed in litigation against the State Board of Equalization appeals from the court's denials of his requests for costs and attorney fees. We conclude the taxpayer is entitled to his costs as the prevailing party under Code of Civil Procedure section 1032, subdivision (b). Accordingly, we reverse the portion of the judgment which denies him an award of costs under Code of Civil Procedure section 1032, subdivision (b), as possibly augmented by Code of Civil Procedure section 998, and remand for further proceedings. We affirm the judgment and post judgment orders in all other respects.

FACTS AND PROCEEDINGS BELOW

Appellant Dan J. Agnew is a resident of Washington State. In 1981 Agnew bought a thoroughbred yearling in Kentucky he named Desert Wine. Before Desert Wine had ever raced, Agnew sold a one-half interest in the horse to Fred Sahadi. They agreed Agnew would manage Desert Wine's racing career and, if Desert Wine was successful enough to have stallion prospects, Sahadi would then manage the horse's breeding career at his Cardiff Stud Farm in California.

Desert Wine's racing career was very successful. Given the horse's success and future prospects, Agnew and Sahadi decided to syndicate Desert Wine, combining elements of both racing and breeding syndications.

After syndication, ownership of Desert Wine was represented by 40 "fractional interests" — 30 initially owned by Agnew and Sahadi as tenants in common, 5 owned by Agnew and 5 owned by Sahadi. Of these 30 fractional interests, 26.5 were eventually sold to outside investors or shareholders. Of the 26.5 fractional interests sold 11 were sold while Desert Wine was outside California in Washington State; 14.5 were sold while Desert Wine was in California; and one share was sold in 1985.

Agnew did not file a California sales or use tax return regarding the Desert Wine transactions. However, respondent State Board of Equalization (Board) discovered the syndication in a 1986 sales tax audit of Sahadi's Cardiff Stud Farm. Sahadi provided the Board with one copy of the syndication agreement pertaining to one of Sahadi's five individually owned fractional interests in Desert Wine. However, because the Board was auditing Sahadi and the agreement stated the fractional interest identified in the agreement ("Fractional Interest No. 37 of 40") belonged to Sahadi, the Board did not concern itself with Agnew at the time, and Agnew had no knowledge of the Board's action regarding Desert Wine.

The Board did not contact Agnew about his potential California tax liability on sales of syndication shares in Desert Wine until 1992. In April 1992, the Board served Agnew with a Notice of Determination assessing sales tax in the amount of $516,750 "for unreported taxable syndication shares of the race horse Desert Wine" plus interest of $516,590 — an amount nearly equal to the tax itself — for a total of $1,033,340. Agnew challenged the determination through administrative proceedings. He filed a petition for redetermination, requested an appellate conference, and sought a formal hearing before the Board when his earlier efforts were unsuccessful.

In 1995, the Board issued a new Notice of Determination concluding Agnew had been properly assessed $516,750 in sales tax on all 26.5 fractional interests sold plus $708,649 in interest which had continued to accrue. The Board granted Agnew relief from a $51,000 penalty.

Agnew paid the sales tax of $516,750 under protest and filed a claim for refund. He did not pay the interest amount claimed to be due. Because the Board maintained he was required to pay both the tax and interest in order to pursue his refund claim, Agnew filed a declaratory relief action to challenge the validity of the Board's policy of requiring payment of interest as well.¹ Agnew appealed from the trial court's dismissal of his action after it sustained the Board's demurrer. This court reversed, finding neither constitutional nor statutory authority for the Board's policy of requiring payment of both tax and accrued interest as a prerequisite to pursuing a claim for refund. The California Supreme Court granted review.²

In the meantime, in 1996, Agnew filed an action seeking a refund of the $516,750 sales tax he had paid. The trial court again dismissed Agnew's complaint, finding he had failed to exhaust his administrative remedies by failing to prepay the accrued interest on the assessed tax deficiency.³ On Agnew's appeal, this court again reversed for the reasons stated in Agnew I. The California Supreme Court granted review in Agnew II as well.⁴

While both cases were pending before our Supreme Court, the Board levied on Agnew's account at Santa Anita Race Track and collected $8,025. Because the Board had obtained a number of other liens Agnew paid another $645,792 in satisfaction of the total interest amount (because Sahadi had paid $60,000 which was applied to the interest liability on the Desert Wine transaction).⁵

In October 1998, Agnew submitted a claim for refund of the entire amount paid. The Board failed to act on this claim. In August 1999, our Supreme Court affirmed our decision in Agnew I. The Supreme Court held payment of accrued interest on a tax deficiency is not a prerequisite to either an administrative refund claim or a subsequent action for refund of taxes.⁶ In light of its decision, the Supreme Court dismissed review of Agnew II and remanded the case to this court. We entered a remittitur and our decision became final.

On remand, the trial court awarded Agnew over $77,000 in attorney fees under the private attorney general doctrine.⁷

In light of the Supreme Court's decision, Agnew requested the Board to refund immediately the full amount of interest he had paid. When the Board refused, Agnew filed an amended complaint, seeking to recover the $516,750 sales tax assessment plus the entire amount of interest the Board retained.

After a five-day bench trial, the trial court entered a decision and judgment in the Board's favor. The trial court found Agnew was liable for sales tax on the sale of all 26.5 syndication shares.

Agnew appealed from the judgment. We affirmed the judgment in part, reversed in part, and remanded with directions. On appeal, as he had in the trial court, Agnew argued sale of syndicate shares of Desert Wine was not a taxable event. We disagreed. We rejected Agnew's argument shareholders or investors acquired only tax exempt intangible contract rights to share in racing profits and the future right to name a mare for breeding. We found under existing law as well as the syndication agreement, syndicate shareholders acquired ownership to tangible property and thus transfer of title to this tangible personal property created a taxable event. We also rejected Agnew's alternative arguments transfer of a syndicate share should be treated as the equivalent of a nontaxable transfer of intangible personal property comparable to an investment contract interest, a limited partnership interest or the sale of a service. We similarly rejected Agnew's argument sale of a single horse to a single syndicate qualified as a tax-exempt "occasional sale."

On the other hand, we found other of Agnew's arguments had merit. We found Agnew had been improperly taxed on Sahadi's receipts. We also found the Board had improperly assessed a sales, rather than a use, tax on the 11 shares purchased while Desert Wine was out of state in Washington. In light of the Board's concession it had never assessed or determined a use tax to be owing we found Agnew was thus entitled to a refund of the tax paid on those 11 shares. Moreover, we found the Board knew or should have known its policy of requiring payment of interest as a prerequisite to pursuing a claim for refund was invalid, once the Supreme Court's decision in Agnew 1 became final. We thus concluded Agnew was entitled to be restored to the position he would have been in had the Board not retained the interest portion of Agnew's payments after the date the Supreme Court's decision became final. We remanded the matter for the trial court to calculate the amounts due and owing to Agnew in accordance with our opinion. We also directed the trial court to decide the remaining unresolved issues whether Agnew was properly taxed on the first two sales in the series, on the half-share sold for resale, and on the share sold in 1985 and outside the tax year in question. We ordered each side to bear its own costs on appeal.

On remand, the parties reached an agreement just prior to the scheduled trial date. The parties stipulated to a judgment in favor of Agnew for $1,074,280, or nearly 90 percent of the over $1,200,000 he had paid in tax and interest. On May 3, 2004 the parties recited the terms of their stipulated agreement on the record in open court. The court ultimately signed and entered judgment on the parties' stipulation on May 29, 2004.

On May 28, 2004 Agnew filed a memorandum of costs seeking $51,760.49 in costs, including $45,917 in expert witness fees.⁸ On the same date Agnew filed a noticed motion seeking approximately $400,000 in attorney fees under the authority of Revenue and Taxation Code section 7156.⁹ In his motion Agnew argued he was the "prevailing party" in the action against the Board because he had established the statutory criteria of (1) having "substantially prevailed with respect to the amount in controversy" and by (2) showing the...