Chen v. Franchise Tax Bd.

• Decision Date: 19 June 1998
• Docket Number: No. B113296.,B113296.
• Citation: 90 Cal.Rptr.2d 268,75 Cal.App.4th 1110
• Court: California Court of Appeals Court of Appeals
• Parties: Roy CHEN et al., Plaintiffs and Respondents, v. FRANCHISE TAX BOARD, Defendant and Appellant.

90 Cal.Rptr.2d 268

75 Cal.App.4th 1110

Roy CHEN et al., Plaintiffs and Respondents, v. FRANCHISE TAX BOARD, Defendant and Appellant.

No. B113296.

Court of Appeal, Second District, Division 5.

June 19, 1998.

Certified for Partial Publication.^*

Review Dismissed October 27, 1999.

[90 Cal.Rptr.2d 269]

[75 Cal.App.4th 1113]

Daniel E. Lungren, Attorney General, David S. Chaney, Supervising Deputy Attorney General, and Herbert A. Levin, Deputy Attorney General, for Defendant and Appellant.

Riordan & McKinzie, Angelo C. Falcone, Robert N. Duran, Los Angeles, Gina M. Calvelli, San Francisco, and Karen Meckstroth, Los Angeles, for Plaintiffs and Respondents.

TURNER, Presiding Justice.

I. INTRODUCTION

The Franchise Tax Board (board) appeals from a judgment partially refunding corporate franchise taxes, penalties, and interest paid by Roy Chen on behalf of Valuable Properties, Inc. (VP). The judgment was in favor of Mr. Chen as the successor in interest to VP, a dissolved corporation.¹ Prior to its dissolution, Mr. Chen was the president and a shareholder of VP. At issue was a deduction by VP for a compensation expense on its 1981 tax return, which was filed in 1984. The matter was tried by the court without a jury on stipulated facts, oral testimony, and documentary evidence. The board contends Mr. Chen was required to pay, in full, the accrued interest as well as the tax itself as a condition precedent to judicial review of his refund claim. Further, the board contends the expense in question was deferred compensation and therefore was not deductible by VP until it was paid. In the published portion of the opinion, we conclude payment of interest is not a jurisdictional prerequisite to judicial review of a tax refund claim brought before the board. Further, in the unpublished portion of the opinion, we reject the board's remaining contention concerning deferred compensation. Accordingly, we affirm the judgment.

II. DISCUSSION

A. The Trial Court had Jurisdiction to Adjudicate this Refund Action

The board contends the superior court had no jurisdiction to adjudicate the viability of VP's deduction because Mr. Chen did not pay the tax penalties, and interest in full prior to seeking relief. We conclude that payment of the accrued interest was not a jurisdictional prerequisite in this case to judicial consideration of Mr. Chen's refund action. Therefore, the trial court had jurisdiction to adjudicate this matter. We do not reach the question whether penalties must be paid in addition to the tax as a prerequisite to a refund action. This is because, as noted above, Mr. Chen paid the tax and penalties prior to bringing this action. We turn to the issue of whether payment of interest on the tax was a jurisdictional prerequisite to Mr. Chen's refund action.

1. Background

The following facts were undisputed. VP accrued and deducted on its tax return for the fiscal year ended September 30, 1981, a compensation expense in the amount of $951,000. The return was filed with the board on January 26, 1984. On May 24, 1985, the board disallowed the deduction and proposed to assess against VP tax and penalties of $118,293 plus accrued interest. VP filed a protest of the proposed assessment with the board. The board denied the protest. VP appealed the denial of its protest to the State Board of Equalization. The State Board of Equalization affirmed the denial. On March 31, 1994, Mr. Chen, on VP's behalf, paid the tax and penalties totaling $118,293 to the board. He did not pay the accrued interest. Mr. Chen then filed with the board a claim for a refund of the amount paid. The board denied the refund claim. Mr. Chen timely commenced the present action for a refund of corporate franchise taxes assessed and paid. On June 12, 1996, the board levied upon Mr. Chen's bank account and collected $21,575 in partial payment of the accrued interest.

2. Standard of Review

The application of constitutional provisions and statutes to stipulated and undisputed facts presents a question of law. (International Engine Parts, Inc. v. Feddersen & Co. (1995) 9 Cal.4th 606, 611, 38 Cal.Rptr.2d 150, 888 P.2d 1279; Southern California Edison Co. v. State Board of Equalization (1972) 7 Cal.3d 652, 659, fn. 8, 102 Cal.Rptr. 766, 498 P.2d 1014; Souza v. Lauppe (1997) 59 Cal.App.4th 865, 871, 69 Cal.Rptr.2d 494.) This court is not bound by the trial court's conclusions. (Souza v. Lauppe, supra, 59 Cal. App.4th at p. 871, 69 Cal.Rptr.2d 494; Harbor Fumigation, Inc. v. County of San Diego Air Pollution Control Dist. (1996) 43 Cal.App.4th 854, 859, 50 Cal.Rptr.2d 874.)

3. The Full Payment Rule Under Article XIII, Section 32 of the California Constitution

Under California law, a taxpayer may not obtain judicial review of the validity of a tax which is due but has not been paid. (Cal. Const., art XIII, § 32;² State Bd. of Equalization v. Superior Court (1985) 39 Cal.3d 633, 638, 217 Cal. Rptr. 238, 703 P.2d 1131.) The underlying reason for this rule is that the prompt collection of tax revenue is vital to the functioning of government and the provision of essential public services. (State Bd. of Equalization v. Superior Court, supra, 39 Cal.3d at p. 638, 217 Cal.Rptr. 238, 703 P.2d 1131; Pacific Gas & Electric Co. v. State Bd. of Equalization, supra, 27 Cal.3d at p. 283, 165 Cal.Rptr. 122, 611 P.2d 463; Modern Barber Col. v. Cal. Emp. Stab. Com. (1948) 31 Cal.2d 720, 731-732,192 P.2d 916.)

The relevant restriction of a taxpayer's remedy to a postpayment refund action is set forth in article XIII, section 32, which states: "No legal or equitable process shall issue in any proceeding in any court against this State or any officer thereof to prevent or enjoin the collection of any tax. After payment of a tax claimed to be illegal, an action may be maintained to recover the tax paid, with interest, in such a manner as may be provided by the Legislature." (Ibid., italics added.) The Supreme Court has held that article XIII, section 32 establishes: "[T]he sole legal avenue for resolving tax disputes is a postpayment refund action. A taxpayer may not go into court and obtain adjudication of the validity of a tax which is due but not yet paid." (State Bd. of Equalization v. Superior Court, supra, 39 Cal.3d at p. 638, 217 Cal.Rptr. 238, 703 P.2d 1131.) In State Bd. of Equalization, the Supreme Court held that a taxpayer who received a deficiency notice for $187,576.92 owed in sales tax and interest could not, by paying $250 toward that obligation, avoid the effect of article XIII, section 32. The court held, "[W]here such partial payment is made and accepted by the taxing authority, an action for refund may not be maintained until the full amount claimed due for a given reporting period is paid." (Id. at pp. 642-643, 217 Cal.Rptr. 238, 703 P.2d 1131, fn. omitted.) The issue presently before this court was neither presented nor decided in State Bd. of Equalization. The taxpayer in that case paid only a portion of the taxes assessed. By contrast, Mr. Chen paid the taxes in full. In State Bd. of Equalization, there was no discussion of the interest separate and apart from the tax. (Accord, Faix, Ltd. v. County of Los Angeles (1976) 54 Cal. App.3d 992, 1003-1004, 127 Cal.Rptr. 182 [plaintiff who had paid part but not all of the real estate taxes assessed had not met the requirements for accrual of a refund cause of action].)

Article XIII, section 32 also expressly provides that the Legislature may prescribe the manner in which actions for tax refunds must be brought. (Woosley v. State of California (1992) 3 Cal.4th 758, 789, 13 Cal.Rptr.2d 30, 838 P.2d 758; Cod Gas & Oil Co., Inc. v. State Bd. of Equalization (1997) 59 Cal.App.4th 756, 759, 69 Cal.Rptr.2d 366.) As the Supreme Court explained in Woosley: "This constitutional limitation rests on the premise that strict legislative control over the manner in which tax refunds may be sought is necessary so that governmental entities may engage in fiscal planning based on expected tax revenues. (See State Bd. of Equalization v. Superior Court[, supra,] 39 Cal.3d [at p.] 638 [217 Cal.Rptr. 238, 703 P.2d 1131].)" (Woosley v. State of California, supra, 3 Cal.4th at p. 789, 13 Cal. Rptr.2d 30, 838 P.2d 758.)

4. Statutory Authorization for Franchise Tax Refund Actions

Revenue and Taxation Code sections 18401 et seq. govern the administration of franchise tax laws.³ Section 19381 restates the first sentence of article XIII, section 32, as follows: "No injunction or writ of mandate or other legal or equitable process shall issue in any suit, action, or proceeding in any court against this state or against any officer of this state to prevent or enjoin the assessment or collection of any tax under this part...." Section 19382 authorizes a lawsuit against the board to obtain a postpayment refund of franchise taxes and states: "Except as provided in Section 19385 [where the board fails to mail notice of action on a refund claim], after payment of the tax and denial by the [board] of a claim for refund, any taxpayer claiming that the tax computed and assessed is void in whole or in part may bring an action, upon the grounds set forth in that claim for refund, against the [board] for the recovery of the whole or any part of the amount paid." (Italics added.)

5. The Franchise Tax Board's Position

The use of the word "tax" in article XIII, section 32, and section 19382 has recently given rise to a controversy as to whether full payment of accrued interest, as well as the tax, is a jurisdictional prerequisite to a refund action. From at least January 1977, until June 1997, the board took the position that full payment of the tax and penalties assessed, not including any accrued interest, was a prerequisite to both a refund claim and a judicial determination of an alleged tax overpayment. (California Franchise Tax Board, Legal Ruling No. 402 (January 27, 1977) [1971-1978 Transfer Binder] Cal. Tax Reports (CCH) ¶ 89-526, pp....