Income Tax Refund Suit Not Triable by Jury

Tuesday, June 7, 2011

Page 3

Income Tax Refund Suit Not Triable by Jury—Supreme Court

By a MetNews Staff Writer

A suit for a state income tax refund is not triable by jury, a unanimous state Supreme Court ruled yesterday.

The high court overturned a ruling by the First District Court of Appeal’s Div. Five. That panel said a jury could decide whether the estate of an Internet entrepreneur may recover millions of dollars in taxes it claims was never owed.

The Franchise Tax Board not only rejected the claim for more than $15 million, it claims the estate of Thomas J. Gonzales II owes penalties for late payment. The First District ruled that the claim for penalties was not triable by jury, and that part of the ruling was left standing by the high court.

Gonzales 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. But when the estate sued for a refund, the state filed a cross-complaint for about $2.5 million in penalties.

In ruling that the refund claim was triable by jury, the Court of Appeal said that such claims are considered “legal,” rather than equitable, and thus are triable by jury under the state Constitution. The court noted that at common law, taxpayers were allowed to seek refunds by suing the tax collector, who lacked sovereign immunity.

But Justice Carol Corrigan, in her opinion for the high court, explained that the modern statutory action for a refund “is fundamentally different in character from the old private right of action against tax collectors.” Unlike at common law, she noted, there is no requirement that the tax be paid under protest as a prerequisite to a refund suit.

The case is Franchise Tax Board v. Superior Court (Gonzales), 11 S.O.S. 2998.