Friday, August 27, 2009
Income Tax Refund Suits Triable by Jury, Court of Appeal Rules
By KENNETH OFGANG, Staff Writer
A suit for a state income tax refund is triable by jury, but a suit by the state to collect tax penalties is not, the First District Court of Appeal ruled yesterday.
Div. Five partially granted a petition by the Franchise Tax Board for a writ of mandate striking a jury demand in a suit by the estate of an Internet entrepreneur who paid millions of dollars in taxes the estate claims were never owed. The writ allows a jury to decide whether the estate is entitled to a claimed refund of more than $15 million in taxes, but leaves it to a judge to determine whether the estate must pay penalties for late payment of the taxes if the jury decides they were actually owed.
Thomas J. Gonzales II was 35 when he died of cancer in December 2001. He and his father co-founded Commerce One Inc., a pioneering business-solutions Internet company in the East Bay community of Pleasanton.
The younger Gonzales left an estate estimated in news reports at $90 million. The estate, administered by his father, became embroiled in a dispute with the tax board over whether certain losses for which deductions were taken on his 2000 return arose from abusive tax shelters.
In 2004, the estate agreed to participate in the California Voluntary Compliance Initiative, under which it agreed to pay over $15 million in taxes it allegedly owed in exchange for a waiver of penalties. When the estate sued for a refund, the state filed a cross-complaint for about $2.5 million in penalties.
San Francisco Superior Court Judge John Kennedy Stewart denied the state’s motion to strike the jury demand. The appellate panel said the trial judge was correct as to the refund claim but that the cross-complaint must be tried to the bench.
Justice Mark Simons explained yesterday that tax refund claims are considered “legal,” rather than equitable, and thus are triable by jury under the state Constitution. Prior court decisions, he explained, have treated such actions as being “in the nature of an action for assumpsit,” that is for money had and received.
“That the relief sought is monetary, rather than equitable, is further confirmation that [Gonzales’] tax refund action is an action at law,” the jurist wrote, adding that at common law, taxpayers were allowed to seek refunds by suing the tax collector, who lacked sovereign immunity.
“Accordingly, the historical analysis shows that at the time of adoption of the California Constitution in 1850, there was a long history of common law actions for money had and received against tax collectors, which actions included a right to jury trial,” Simons concluded.
The justice distinguished cases holding that a defendant in a tax collection suit has no right to jury trial, saying the state was making “a misplaced analogy” for which there is no authority.
As to the cross-complaint for penalties, however, the justice said it was “clear that Gonzales is not entitled to a jury trial on that claim, because there was no common law right to a jury in a proceeding to collect taxes, including tax penalties.”
The case is Franchise Tax Board v. Superior Court (Gonzales), A122723.
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