Friday, May 8, 2020
Court of Appeal:
Rule That Taxpayer Must ‘Pay First,’ Then Sue, Can’t Be Skirted
Hoffstadt’s Opinion Declares That Man Assessed With Tax Liability Can’t Maintain Action For Declaratory Relief Which, If It Succeeded, Would Result in Relief From Paying
By a MetNews Staff Writer
The state constitutional rule that a taxpayer contesting an assessment must “pay first, litigate later” cannot be circumvented by bringing a declaratory relief action challenging the validity of an underlying tax regulation, Div. Two of this district’s Court of Appeal held yesterday.
The constitutional provision, Art. XIII, §32, prevails over Government Code §11350(a) which authorizes declaratory relief actions to determine the validity of a regulation, Justice Brian M. Hoffstadt wrote. He said the two provisions can “peaceably co-exist,” with the constructional provision limiting the scope of the statute.
“Section 32’s ‘pay first’ rule governs those declaratory relief claims that have the net result or effect of invalidating an outstanding tax assessment, while section 11350 governs those declaratory relief claims that have no such result or effect, such as claims by (1) persons attacking non-tax regulations or persons attacking tax regulations but having no outstanding tax assessments, such as persons who are not the taxpayer…or (2) persons who are taxpayers facing tax assessments in the future.”
Hoffstadt’s opinion directs the Los Angeles Superior Court to vacate an order by Judge Robert S. Draper overruling the California Department of Tax and Fee Administration’s demurrer to a complaint for declaratory relief filed by Jeremy Daniel Kintner, and to sustain the demurrer without leave to amend.
Kintner controlled operations of a company which had its corporate status suspended by the state in 2009, but continued doing business, failing to collect sales taxes. The plaintiff sought a judicial determination as to the unenforceability of a 1980 Board of Equalization “policy,” which in 2000 became a regulation, that those controlling a closely held suspended corporation are to be held accountable for payment of uncollected sales taxes.
The board asserted that Kintner owed $67,389.53. Most of that amount remains unpaid.
Draper allowed his action to continue based on the 1972 decision by this district’s Court of Appeal in Pacific Motor Transport Co. v. State Board of Equalization. Hoffstadt said that “to the extent language in” that decision “can be read” to authorize an action such as that Kintner brought, “we respectfully disagree with Pacific Motor.”
Sec. 32 provides:
“No legal or equitable process shall issue in any proceeding in any court against this State or any officer thereof to prevent or enjoin the collection of any tax. After payment of a tax claimed to be illegal, an action may be maintained to recover the tax paid, with interest, in such manner as may be provided by the Legislature.”
Sec. 11350(a) says, in part:
“Any interested person may obtain a judicial declaration as to the validity of any regulation ... by bringing an action for declaratory relief in the superior court in accordance with the Code of Civil Procedure.”
Statute Must Yield
Hoffstadt remarked §11350 cannot be construed “as impliedly repealing section 32 due to the canon that statutory provisions must yield to constitutional provisions, not the other way around,” quoting a 2012 opinion as expressing the rule that “Constitutions trump conflicting statutes.”
He cautioned that “reading section 11350 to create a parallel forum for such taxpayers that is exempt from section 32’s ‘pay first’ rule goes far beyond our Legislature’s intent in enacting section 11350 in the first place.”
Sec. 32, he said, “has been a bedrock principle of tax law for over a century because the public policy it effectuates is fundamental to the continued operation of our state” because tax revenues are its “lifeblood.”
The jurist wrote:
“Because plaintiff has not paid the full amount of the sales tax he disputes, his declaratory relief claims are barred by section 32. Through his declaratory relief claims, plaintiff seeks a declaration that the Policy and the Regulation are ‘illegal’ and ‘unconstitutional.’ Because, as plaintiff elsewhere alleges, the outstanding tax assessment against him rests exclusively upon the validity of the Policy and the Regulation, a declaration that the Policy and the Regulation are ‘illegal’ and ‘unconstitutional’ would invalidate them and negate the sole basis of his outstanding and unpaid tax assessment. In short, the net result or effect of plaintiffs declaratory relief claims is to absolve him of tax liability.”
“What is more, the net result or effect of plaintiffs lawsuit does not go away just because he has also alleged that he is a member of the public with a general interest in making sure that the government stays within the lines of its constitutional authority and that he is an officer of a different closely held corporation to which the Policy or Regulation might be applied in the future should both he and that corporation refuse to pay sales tax. Were we to conclude otherwise, taxpayers with outstanding tax assessments could effortlessly evade section 32’s ‘pay first’ rule by alleging that they are also members of the public. Given that this would be true in nearly every case, section 32 would become a dead letter.”
When the Pacific Motor case, relied upon by Draper, was decided by the First District’s Div. One 48 years ago, the authorization for declaratory relief actions contesting regulations now in §11350 was contained in §11440. The issue was whether an action to declare an administrative tax regulation invalid was barred by Revenue and Taxation Code §10276 (now §19381), which said:
“No injunction or writ of mandate or other legal or equitable process shall issue in any suit, action, or proceeding in any court against this State or against any officer of the State to prevent or enjoin the collection under this part of any license tax or other amounts sought to be collected by the board.”
The appeals court pointed out that the Government Code provision permitted a challenge to “any regulation,” observing that “there would seem to be no logical reason for such an exception, for the need of certainty as to the validity of tax regulations is equally strong,” and concluding that “both statutes may reasonably be given effect without doing violence to either.”
Hoffstadt said in yesterday’s opinion:
“Although the language from Pacific Motor could be read expansively to create an exemption from section 32’s ‘pay first’ requirement, there is good reason not to read it so broadly—namely, (1) because Pacific Motor at no point indicated that the plaintiff in that case had any outstanding and unpaid tax assessment, and (2) because Pacific Motor itself narrowed the scope of its holding when it elsewhere ruled that a ‘tax regulation’s validity’ may be ‘determined’ in a declaratory relief claim ‘so long as the tax collector is not hindered in his duties thereby’(…italics added). In its proper context, it is difficult to read Pacific Motor as authorizing declaratory relief claims—such as those with the net result or effect of invalidating outstanding tax assessments— that do hinder tax collection.”
The case is California Department of Tax and Fee Administration v. Superior Court (Kintner), 2020 S.O.S. 2268.
Woodland Hills attorney Mark Bernsley represented Kintner and the Office of Attorney General acted for the department.
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