Morris v. Franchise Tax Bd.
| Decision Date | 19 August 1993 |
| Docket Number | No. B065778,B065778 |
| Citation | 22 Cal.Rptr.2d 577,17 Cal.App.4th 1521 |
| Court | California Court of Appeals Court of Appeals |
| Parties | Previously published at 17 Cal.App.4th 1521, 22 Cal.App.4th 1048, 27 Cal.App.4th 1800, 32 Cal.App.4th 1368 17 Cal.App.4th 1521, 22 Cal.App.4th 1048, 27 Cal.App.4th 1800, 32 Cal.App.4th 1368 Mervin G. MORRIS et al., Plaintiffs and Respondents, v. FRANCHISE TAX BOARD etc., Defendant and Appellant. |
Daniel E. Lungren, Atty. Gen., Edmond B. Mamer, Supervising Deputy Atty. Gen., and Richard W. Bakke, Deputy Atty. Gen., for defendant and appellant.
Irell & Manella, Joel Rabinovitz, Martin N. Gelfand and Richard C. Wirthlin, Los Angeles, for plaintiffs and respondents.
Defendant Franchise Tax Board appeals from a summary judgment entered in favor of plaintiffs Mervin G. Morris and others.
In 1954, plaintiff Mervin G. Morris incorporated in California and became the sole shareholder of Mervyn's, a department store. This was a closely held corporation. The principal office of Mervyn's was in San Lorenzo. Through December 31, 1967, Mervyn's had fewer than 500 employees.
A trust agreement executed on November 1, 1967 created share trusts in favor of Diane Linn Morris, Jeffrey Albert Morris, James B. Morris and John G. Morris, the children of Mervin G. Morris. The trusts, which were irrevocable and were to terminate no later than 21 years from the date of the agreement, were funded with gifts of shares of Mervyn's stock.
Initially, the articles of incorporation authorized the issuance of 5,000 shares of common stock. On April 24, 1970, an amendment to the Mervyn's articles of incorporation authorized a common stock split of 267 to 1. Thereafter, a second set of share trusts was created on December 30, 1976 in favor of the same beneficiaries. These trusts were funded with 139,000 shares of Mervyn's common stock.
By April 1971, Mervyn's had 900 full-time and 600 part-time employees working at 7 stores in the San Francisco Bay area. Mervyn's continued to grow in size and wealth. By April 1975, there were 2500 full-time and 1500 part-time employees working at 24 stores throughout California.
Grantor trusts were created for the benefit of James B. Morris and John G. Morris on March 21, 1977. The trusts were to terminate no later than the 35th birthday of the beneficiaries and, as with the other trusts, were irrevocable. As before, these trusts were funded with shares of Mervyn's stock.
On May 28, 1978, Mervyn's merged into Dayton-Hudson Corporation. The shareholders of Mervyn's received .8 shares of Dayton-Hudson stock for each share of Mervyn's stock exchanged. The merger qualified as a tax-free exchange under California and federal tax law. Dayton-Hudson issued a 100 percent common stock dividend on November 30, 1981 and, on July 22, 1983, existing shares of Dayton-Hudson common stock split 2 for 1.
A grantor trust was created on July 20, 1979 in favor of Jeffrey A. Morris. This trust was to terminate no later than 25 years from the date of its creation. It was funded with 9,314 shares of Dayton-Hudson stock and other property.
During 1981 through 1985, plaintiffs sold shares of Dayton-Hudson stock received in the merger. Sales made in 1981 were installment sales; the cash proceeds were not received until 1982. Plaintiffs reported the income from these sales on their tax returns for the years 1982 through 1985, excluding 50 percent of the long-term capital gain from their ordinary income. Plaintiffs treated the excluded gains as tax preference items and paid California preference tax on them.
In the belief that Revenue and Taxation Code section 17063.11 exempts these gains from preference tax, plaintiffs thereafter filed amended tax returns and sought refunds. Defendant denied the refund claims on the ground that the shares of Dayton-Hudson stock plaintiffs had sold did not qualify as small business stock. Plaintiffs appealed the denial of their refund claims to the State Board of Equalization. The instant litigation followed the rejection of their appeal.
Defendant contends the trial court erred in interpreting Revenue and Taxation Code section 17063.11 as applying to all small business stock regardless of the date of acquisition.
Defendant further contends the trial court erred in applying section 17063.11 to the gain from sales of plaintiffs' stock which occurred before the statute's operative date of January 1, 1982.
Defendant asserts the trial court erred in permitting plaintiffs to carry forward the small business stock attributes of the Mervyn's stock to the Dayton-Hudson shares they received in the nontaxable exchange.
Defendant contends the trial court erred in interpreting Revenue and Taxation Code section 17063.11 1 as applying to all small business stock regardless of the date of acquisition. We disagree.
As originally enacted, section 17063.11 2 provided: "For the purpose of Section 17063 [], that portion of capital gains attributable to the sale of small business stock, as defined in Section 18161.5, is not an item of tax preference." Section 18161.5 3 contained only the definitions of "small business stock" (in subd. (a)) and of "nonproductive assets" (in subd. (b)). At that time, section 18162.5 4 provided preferential capital gains exclusions for small business stock and detrimental exclusions for nonproductive assets. Section 4 of Statutes 1981, chapter 534, provided "the provisions of this act shall be applied in the computation of taxes for taxable years beginning on or after January 1, 1982...."
Section 18161.5 was repealed by Statutes 1983, chapter 488, section 64, at which time section 18162.5 was repealed as written 5 and replaced with a substantially similar section 18162.5 6. The definitions of "small business stock" and "nonproductive assets" formerly contained in section 18161.5 It is a cardinal rule of statutory construction that the meaning of a statute must initially be sought in the language of the statute; if that is plain and unmistakable, the courts' function is solely to enforce the statute according to its terms. (Leroy T. v. Workmen's Comp. Appeals Bd. (1974) 12 Cal.3d 434, 438, 115 Cal.Rptr. 761, 525 P.2d 665; County of Sacramento v. Pacific Gas & Elec. Co. (1987) 193 Cal.App.3d 300, 308, 238 Cal.Rptr. 305.) Stated otherwise, when the language of a statute is clear, there is no room for interpretation. (Ibid.; accord, Building Industry Assn. v. City of Camarillo (1986) 41 Cal.3d 810, 818, 226 Cal.Rptr. 81, 718 P.2d 68.)
were incorporated into subdivisions (e) and (f) of section 18162.5. 7 Thereafter, section 17063.11 was amended by Statutes 1984, chapter 938, section 8, to delete "as defined in Section 18161.5" and replace it with "as defined in Section 18162.5."
The language of section 17063.11 could not be more clear: that portion of capital gains attributable to the sale of small business stock, as defined in section 18161.5 and, after its repeal, in section 18162.5, is not an item of tax preference within the meaning of section 17063. The definition of "small business stock," originally found in subdivision (a) of section 18161.5, was transferred without change to subdivision (e) of section 18162.5.
Nonetheless, defendant urges this court to read into the definition of "small business stock" formerly found in subdivision (a) of section 18161.5 and now found in subdivision (e) of section 18162.5 the phrase "if acquired after September 16, 1981." Subdivision (b) of section 18162.5 sets forth the preferential capital gains exclusions applicable to the sale of small business stock. Subdivision (d) provides: "Subdivision (b) shall apply with respect to small business stock acquired after September 16, 1981." It is this provision which provides the foundation for defendant's argument and for the recent decision in Lennane v. Franchise Tax Board (1993) 16 Cal.App.4th 1335, 21 Cal.Rptr.2d 25.
To be sure, courts are not required (County of Sacramento v. Pacific Gas & Elec. Co., supra, 193 Cal.App.3d at p. 310, 238 Cal.Rptr. 305.) The fundamental flaw in defendant's argument, however, is that the phrase "as defined in" cannot, by any stretch of logic, be interpreted as encompassing the contents of subdivision (d) of section 18162.5 as well as those of subdivision (e). Moreover, the structure of the statutes since the enactment of chapter 534 of Statutes 1981 argues against such an interpretation.
The definition of "small business stock" originally was contained in a separate statute, section 18161.5, while subdivision (d) of section 18162.5 provided ab initio that subdivision (b) of that section applied to small business stocks acquired after September 16, 1981. If the acquisition date limitation were intended to be part of the definition of a small business stock, it logically would have been included in subdivision (a) of section 18161.5.
Additionally, if the Legislature intended that the application of section 17063.11 be limited to small business stocks acquired after September 16, 1981, it logically would have added the phrase "if acquired after September 16, 1981" to section 17063.11. Indeed, the Legislature's failure to include Notwithstanding the impossibility of torquing the language of section 17063.11 to encompass the contents of section 18162.5, subdivision (d), and the historical structure of the statutes, the Lennane court undertakes just such a feat of...
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Morris v. Franchise Tax Bd.
...v. FRANCHISE TAX BOARD, Appellant. No. S035238. Supreme Court of California, In Bank. Nov. 10, 1993. Prior report: Cal.App., 22 Cal.Rptr.2d 577. Petitions for review Submission of additional briefing, otherwise required by rule 29.3, California Rules of Court, is deferred pending further or......