People v. Clauson

• Decision Date: 18 December 1964
• Court: California Court of Appeals Court of Appeals
• Parties: PEOPLE of the State of California, Plaintiff and Appellant, v. Ernest L. CLAUSON and Emma S. Clauson, Defendants and Respondents. PEOPLE of the State of California, Plaintiff and Appellant, v. Wendell S. MILLER and Dorothy P. Miller, Defendants and Respondents. PEOPLE of the State of California, Plaintiff and Appellant, v. Roger C. JOHNSON, Defendant and Respondent. Civ. 28056, Civ. 28057, Civ. 28058.

Page 691

41 Cal.Rptr. 691

231 Cal.App.2d 374

PEOPLE of the State of California, Plaintiff and Appellant, v. Ernest L. CLAUSON and Emma S. Clauson, Defendants and Respondents.

PEOPLE of the State of California, Plaintiff and Appellant, v. Wendell S. MILLER and Dorothy P. Miller, Defendants and Respondents.

PEOPLE of the State of California, Plaintiff and Appellant, v. Roger C. JOHNSON, Defendant and Respondent.

Civ. 28056, Civ. 28057, Civ. 28058.

District Court of Appeal, Second District, Division 2, California.

Dec. 18, 1964.

Hearing Denied Feb. 10, 1965.

Stanley Mosk and Thomas Lynch, Attys. Gen., Dan Kaufmann, Asst. Atty. Gen., Neal J. Gobar, James A. Schmiesing, Deputy Attys. Gen., for appellant.

Loeb & Loeb and Jerome L. Goldberg, Los Angeles, for respondents.

ROTH, Presiding Justice.

The three cases before us were separately heard in the trial court. As they present substantially similar facts and issues of law, the appeals from the respective judgments in each respective case have been consolidated in this court.

Each complaint, separately filed in 1963, ¹ alleges two causes of action. In the first cause of action, it is alleged that the corporation, ² engaged in the sale of tangible personal property, incurred a tax liability under the Sales and Use Tax Law, none of which has been paid; and, by amended complaint, that certificates of delinquency pursuant to Rev. & Tax.Code, section 6757, have been filed with the County of Los Angeles. In the second cause of action it is alleged with certain minor factual variations, that the corporations and individuals are one and the same in that the individuals in each case owned substantially all the stock of the specific corporation which they used, and that they formed and used the corporations for the purpose of avoiding debts incurred by them; that they exercised complete and exclusive control over the business of the corporations and owned substantially all the assets in the corporations; that all the acts and obligations of each corporation were continuously from the beginning of incorporation and now are the acts and obligations of the individuals; that each corporation was undercapitalized; that the corporations sold personal property in varying amounts, incurred sales tax liability in varying amounts and did not pay the tax; that each corporation made application to the State for Sales and Use Tax Permit, but no such application was made by the individuals who use the corporate entity as a subterfuge; and that a fraud and injustice will result if the individuals involved in each respective corporation are allowed to avoid the tax liability due.

In each case, the respondents filed a demurrer to the complaint alleging that their personal liability was barred by the statute of limitations set forth in Rev. & Tax.Code, section 6711 and Code of Civil Procedure, sections 338(4), 343 and 359. In each case the demurrer was sustained without leave to amend. In no case, however, did the trial court specify which statute of limitations was considered applicable.

It is trite to state that for the purpose of these appeals, all the allegations in each respective complaint, as substantially outlined above, must be accepted as facts.

Appellant urges and asserts that these are clear cases in which the corporations were respectively used by the individuals involved as their respective alter egos, and that if the doctrine of alter ego does apply, this doctrine establishes equal, primary liability on the individual, that such primary liability is not based on a new or different cause of action against the corporation or individual owners, as the case may be, and that therefore the individuals in each case are subjected to the same procedural rules as is the entity which was in each case used as a subterfuge to defraud the State.

Predicated upon this theory of alter ego, appellant contends that the only statute of limitations applicable to the facts of these cases is that found in Rev. & Tax.Code, section 6711. This statute in pertinent part provides: 'At any time within three years after any tax or any amount of tax required to be collected becomes due and payable and at any time within three years after the delinquency of any tax * * *, or within three years after the last recording * * * of a certificate under Section 6757, the board may bring an action in the courts of this State, * * * to collect the amount delinquent together with penalties and interest.'

Respondents, apparently conceding their alter ego identity for purposes of demurrer, contend that the applicable statute of limitations is Code of Civil Procedure, sections 359 ³ or 343. ⁴ The theory upon which respondents rely is that the present suits are merely an attempt to charge the stockholders with a liability of the corporation within the meaning of section 359. In the alternative, they urge that even if Rev. & Tax.Code, section 6711 is applicable, it does not bind the parties herein. This alternative contention is on the theory that since the only notice received from the state re hearing delinquency or otherwise, was addressed to the respective corporations, the stockholders in each of these cases received no notice of hearing delinquency or otherwise, and that if section 6711 is made to apply to them, they have been deprived of due process.

It is firmly established in this state that when there is a unity of ownership and interest in a corporate entity, and when giving substance to such an entity which in fact has none, works a fraud or injustice on third persons, the separate entity will be disregarded and the individuals operating it will be looked upon as the actual owners. (Minifie v. Rowley, 187 Cal. 481, 202 P. 673; Gordon v. Aztec Brewing Co., 33 Cal.2d 514, 203 P.2d 522; Automotriz etc. De California v. Resnick, 47 Cal.2d 792, 306 P.2d 1, 63 A.L.R.2d 1042.)

The usual application of the doctrine is found in contract and tort cases. However the application of the doctrine to the field of taxation has long been recognized by the federal courts as a necessary concomitant of the privilege of incorporation. (Eisner v. Macomber, 252 U.S. 189, 213, 40 S.Ct. 189, 64 L.Ed. 521; Higgins v. Smith, 308 U.S. 473, 477, 60 S.Ct. 355, 84 L.Ed. 406.) These latter cases hold that prevention of the use of the corporate form to circumvent the revenue and tax laws is the question which is uppermost in the mind of the court.

The application of the doctrine of alter ego is often phrased in terms of 'disregarding the corporate entity.' (Stark v. Coker, 20 Cal.2d 839, 846, 129 P.2d 390; Katenkamp v. Superior Court, 16 Cal.2d 696, 700, 108 P.2d 1; Shea v. Leonis, 14 Cal.2d 666, 669, 96 P.2d 332.) However, it is clear from an analysis of the cases so holding that the courts do not in fact disregard the corporate entity. To do so would ignore the fact of the corporations' otherwise legal existence. Rather, the courts, in order to avoid an abuse of the corporate privilege, 'look through the forms and behind the corporate entities involved to deal with the situation as justice may require.' (Stone v. Eacho, 4 Cir., 127 F.2d 284, 288.) As one commentator has euphemistically noted, 'If the corporation has not really been functioning as a self-serving business organization should function, but has been acting as a jutistic monkey to help pull the stockholders income-chestnuts out of the * * * fire then the court will deal with the stockholder-cat as though it was the corporation-monkey's paw. The results of the interrelated activities will be imputed to the stockholder even though it is admitted that the corporation exists and has acted in its corporate capacity.' ('Disregarding the Corporate Entity in Tax Cases,' 22 Taxes 457, 458.)

The effect, therefore, of applying the alter ego theory is to treat the alter ego and instrumentality as synonymous and not as separate juristic entities in order to avoid inequitable results. (Aladdin Oil Corp. v. Perluss, 230 ACA 656, 667, 41 Cal.Rptr. 239.)

The cases have so held in result, if not in clear language, with the effect that the alter ego is treated as procedurally synonymous with the instrumentality.

In Taylor v. Newton, 117 Cal.App.2d 752, 257 P.2d 68, the plaintiff obtained a judgment against the individual defendant in 1943, renewed the judgment in 1948, and sued the corporate defendant as his alter ego in 1950. The corporation raised the defense of the statute of limitations arguing that any cause of action must be predicated on one which arose in 1938 when the corporation was formed...