Jibilian v. Franchise Tax Bd.

• Decision Date: 09 February 2006
• Docket Number: No. B175952.,B175952.
• Citation: 136 Cal.App.4th 862,39 Cal.Rptr.3d 123
• Parties: Tony JIBILIAN, et al., Plaintiffs and Appellants, v. FRANCHISE TAX BOARD, Defendant and Respondent.
• Court: California Court of Appeals Court of Appeals

39 Cal.Rptr.3d 123

136 Cal.App.4th 862

Tony JIBILIAN, et al., Plaintiffs and Appellants, v. FRANCHISE TAX BOARD, Defendant and Respondent.

No. B175952.

Court of Appeal, Second District, Division 1.

February 9, 2006.

Law Offices of Tabone and Derek L. Tabone for Plaintiffs and Appellants.

Bill Lockyer, Attorney General, W. Dean Freeman, Lead Supervising Deputy Attorney General, and Elisa B. Wolfe-Donato, Deputy Attorney General, for Defendant and Respondent.

MALLANO, Acting P.J Tony and Dorothy Jibilian appeal from a judgment dismissing their second amended complaint for a tax refund after the trial court sustained the demurrer of defendant Franchise Tax Board (FTB). We affirm the judgment because the Jibilians' wages are taxable and FTB was not required to follow deficiency assessment procedures in order to deny a refund of taxes paid.

BACKGROUND¹

The Jibilians, who describe themselves as "citizens" of the state of California, filed state income tax returns for the years 1999, 2000, and 2001 and paid taxes for those years of $61,542, $56,730, and $90,470, respectively. Notwithstanding their payment of estimated taxes of $75,000 for 2002, they filed a state income tax return for 2002 claiming that the tax owed for that year was zero. The Jibilians asserted that the 2002 return was "a reflection of the Federal [income tax] return filed for the same year, which resulted in a full federal refund of $315,000." FTB deemed the 2002 return to be frivolous and requested a valid return. The Jibilians then filed an amended return, "which was slightly modified with the same amount of tax owed shown to be $0.00." The Jibilians considered the return to constitute a request for a refund for the alleged overpayment of $75,000. FTB did not pay the refund. The Jibilians filed amended state income tax returns for the years 1999, 2000, and 2001. The amended returns requested refunds for all taxes paid for those years, but FTB did not pay the requested refunds.

After two demurrers to their complaints were sustained, the Jibilians filed a second amended complaint asserting the following grounds for the claim that they had no tax liability for the years 1999 through 2002:(1) Whether or not they earned any income, they are not "within the class of people" required to pay income tax under federal or state law. (2) They are not "taxpayers" within the meaning of the Internal Revenue Code, title 26 of the United States Code, or the California Revenue and Taxation Code and have no obligation to file returns or pay a tax based on income. (3) They had no taxable income for federal or state purposes because their earnings were not "gain from capital, labor or both." (4) Their earnings were not includable as gross income under section 861 of the Internal Revenue Code (section 861) and regulations thereunder. (5) No tax is owed because FTB has not made any assessment against them. (6) Because they have no taxable income for federal purposes, they also have no taxable income under the California statutory scheme.

The Jibilians did not attach their returns or amended returns as exhibits to the complaint. But they attached two five-page letters FTB sent to the Jibilians in March 2003 and their reply letter. The letters from FTB stated that FTB was denying the refund requests for the years 1999 through 2001 because it deemed the amended tax returns to be "frivolous and/or invalid." FTB explained that a return may be deemed frivolous if it indicates on its face that the tax self-assessment is substantially incorrect and is due to a position that is frivolous or a desire to impede or delay the administration of the income tax laws.

FTB's letters also stated that "[a]ttempts to portray oneself as a `nontaxpayer,' `sovereign citizen,' or `freeborn and natural individual' with immunity from taxation lack legal support, and are ineffective claims against the proper assessment and collection of taxes." FTB further asserted that "[s]ection 861 and its implementing regulations do not apply to the determination of taxable income under California law. California is not concerned with whether the income of a California resident is from a source within or without the United States — it is all subject to California personal income tax. (See Rev. & Tax.Code, § 17041.)[¶] The attempts to use [section] 861 and its implementing regulations to exclude income of an individual while living and working within the United States, or attempts to apply [section] 861 and its implementing regulations to income for California personal income tax purposes are `groundless and frivolous contentions of the kind being sold by charlatans to both unsuspecting taxpayers and those willing to be duped.'"

In the Jibilians' April 2003 reply letter to FTB, they admitted that their amended returns for 1999, 2000, and 2001 contained all zeros, but "[i]f the law says we have zero income then how would we go about filing without it being deemed frivolous? Zero is a valid number and 0 + 0 = 0 .... These are valid calculations. For us to provide any other numbers based on the current income tax laws would be a fabrication. A zero return is a legal return .... Our return cannot therefore be considered frivolous or invalid using this position."

FTB demurred to the complaint on the ground that it failed to state facts establishing any viable ground for the requested tax refunds, a necessary element of the Jibilians' cause of action. FTB maintained that none of the six grounds set forth in the complaint constituted a valid, legally recognized ground for a tax refund. In opposition to the demurrer, the Jibilians argued that the pleading was sufficient to justify relief and that their entitlement to a refund should be determined by trial and not by demurrer.

In its reply memorandum, FTB pointed out that the opposition to the demurrer specifically addressed only grounds (3), (4), and (5). FTB deemed the Jibilians to have abandoned grounds (1), (2), and (6).

At the hearing on the demurrer, the Jibilians' attorney stated that "in a nutshell" the section 861 argument is that "wages [of United States citizens] from private employment inside the U.S. [are] not [taxable]." After the hearing, the court sustained the demurrer without leave to amend the complaint. The Jibilians appeal from the order of dismissal.²

DISCUSSION

The Jibilians contend that they have pleaded an adequate legal basis for their refund claims.

Notwithstanding their assertion that they do not intend to abandon or waive any of the six grounds for a refund set forth in the complaint,³ the Jibilians nevertheless failed to provide pertinent authority supporting grounds (1), (2) and (6) in the trial court, and fail to do so here. Accordingly, we deem the Jibilians to have abandoned these three grounds. (Smith v. County of Kern (1993) 20 Cal.App.4th 1826, 1829, 25 Cal.Rptr.2d 716 [appellant's burden is to demonstrate the trial court erred in sustaining the demurrer]; Brown v. Professional Community Management, Inc. (2005) 127 Cal.App.4th 532, 537, 25 Cal.Rptr.3d 617 [when an issue is unsupported by pertinent or cognizable legal argument, it may be deemed abandoned].)

The Jibilians also fail to establish that grounds (3), (4), and (5) constitute viable claims for tax refunds.

In ground (3), the Jibilians contend that their wages from private employment were not taxable because the wages were not "gain from capital, labor, or both." Revenue and Taxation Code section 17041, subdivision (a) imposes a tax "upon the entire taxable income of every resident of this state...." Pursuant to Revenue and Taxation Code section 17071, California defines gross income as it is defined by section 61 of the Internal Revenue Code (26 U.S.C. § 61). Under 26 U.S.C. § 61, "income" is defined according to its everyday usage as any gain derived from capital, labor, or both combined. (See United States v. Richards (8th Cir.1983) 723 F.2d 646, 648.) In addition, 26 U.S.C. § 61(a) defines "gross income," from which taxable income is computed, as including compensation for services or wages. (Charczuk v. C.I.R. (10th Cir.1985) 771 F.2d 471, 473.) Thus, wages are "gain from capital, labor, or both." Accordingly, the claim that the Jibilians' wages from private employment in the United States do not constitute taxable income is without merit.

The Jibilians' argument with respect to ground (4) is that wages of United States citizens from private employment inside the United States are not taxable under section 861. Although the source of income (whether within or outside the United States) may be a consideration in determining a nonresident alien's tax liability under federal law (Valentino v. Franchise Tax Bd. (2001) 87 Cal.App.4th 1284, 1294, 105 Cal.Rptr.2d 304), the "determination of where income is derived or `sourced' is generally of no moment to either United States citizens or United States corporations, for such persons are subject to tax under [Internal Revenue Code sections] 1 and ... 11, respectively, on their worldwide income." (Great-West Life Assur. Co. v. United States (1982) 230 Ct.Cl. 477, 678 F.2d 180, 183, italics added.) Accordingly, assuming for the sake of argument that California has adopted the principles of federal law set out in section 861, that provision does not establish a viable ground for the Jibilians' claim for a tax refund.

In ground (5), the Jibilians maintain that they are entitled to a refund because, according to their amended returns for 1999 through 2001 and their 2002 original and amended returns, their tax liability is zero, and in order for FTB to retain their tax payments or estimated tax payments, FTB was required to follow the deficiency assessment procedures in Revenue and Taxation Code section 19033, and it failed to do so.⁴ In essence, the Jibilians contend that taxes or estimated tax payments may not be retained by the government when the taxpayer files an original or amended tax return...