Opinion
Certified for Partial Publication.
Pursuant to California Rules of Court, rules 976(b) and 976.1, parts I, II(A), and III of this opinion are certified for publication.
Review Granted Aug. 26, 1998.
Previously published at 64 Cal.App.4th 1335
Daniel E. Lungren, Attorney General, David S. Chaney, Supervising Deputy Attorney General, and Herbert A. Levin, Deputy Attorney General, for Defendant and Appellant.
Riordans&s McKinzie, Angelo C. Falcone, Robert N. Duran, Los Angeles, Gina M. Calvelli, San Francisco, and Karen Meckstroth, Los Angeles, for Plaintiffs and Respondents.
TURNER, Presiding Justice.
I. INTRODUCTION
The Franchise Tax Board (board) appeals from a judgment partially refunding corporate franchise taxes, penalties, and interest paid by Roy Chen on behalf of Valuable Properties, Inc. (VP). The judgment was in favor of Mr. Chen as the successor-in-interest to VP, a dissolved corporation. Prior to its dissolution, Mr. Chen was the president and a shareholder of VP. At issue was a deduction by VP for a compensation expense on its 1981 tax return, which was filed in 1984. The matter was tried by the court without a jury on stipulated facts, oral testimony, and documentary evidence. The board contends Mr. Chen was required to pay, in full, the accrued interest as well as the tax itself as a condition precedent to judicial review of his refund claim. Further, the board contends the expense in question was deferred compensation and therefore was not deductible by VP until it was paid. In the published portion of the opinion, we conclude payment of interest is not a jurisdictional prerequisite to judicial review of a tax refund claim brought before the board. Further, in the unpublished portion of the opinion, we reject the board's remaining contention concerning deferred compensation. Accordingly, we affirm the judgment.
The respondent's brief on appeal is filed on behalf of Roy Chen and Valuable Properties, Inc. However, the judgment names only Roy Chen, as successor-in-interest.
II. DISCUSSION
A. The Trial Court had Jurisdiction to Adjudicate this Refund Action
The board contends the superior court had no jurisdiction to adjudicate the viability of 1. Background
The following facts were undisputed. VP accrued and deducted on its tax return for the fiscal year ended September 30, 1981, a compensation expense in the amount of $951,000. The return was filed with the board on January 26, 1984. On May 24, 1985, the board disallowed the deduction and proposed to assess against VP tax and penalties of $118,293 plus accrued interest. VP filed a protest of the proposed assessment with the board. The board denied the protest. VP appealed the denial of its protest to the State Board of Equalization. The State Board of Equalization affirmed the denial. On March 31, 1994, Mr. Chen, on VP's behalf, paid the tax and penalties totaling $118,293 to the board. He did not pay the accrued interest. Mr. Chen then filed with the board a claim for a refund of the amount paid. The board denied the refund claim. Mr. Chen timely commenced the present action for a refund of corporate franchise taxes assessed and paid. On June 12, 1996, the board levied upon Mr. Chen's bank account and collected $21,575 in partial payment of the accrued interest.
2. Standard of Review
The application of constitutional provisions and statutes to stipulated and undisputed facts presents a question of law. (International Engine Parts, Inc. v. Feddersens&sCo. (1995) 9 Cal.4th 606, 611, 38 Cal.Rptr.2d 150, 888 P.2d 1279; Southern California Edison Co. v. State Board of Equalization (1972) 7 Cal.3d 652, 659, fn. 8, 102 Cal.Rptr. 766, 498 P.2d 1014; Souza v. Lauppe (1997) 59 Cal.App.4th 865, 871, 69 Cal.Rptr.2d 494.) This court is not bound by the trial court's conclusions. (Souza v. Lauppe, supra, 59 Cal.App.4th at p. 871, 69 Cal.Rptr.2d 494; Harbor Fumigation, Inc. v. County of San Diego Air Pollution Control Dist. (1996) 43 Cal.App.4th 854, 859, 50 Cal.Rptr.2d 874.)
3. The Full Payment Rule Under Article XIII, Section 32 of the California Constitution
Under California law, a taxpayer may not obtain judicial review of the validity of a tax which is due but has not been paid. (Cal. Const., art. XIII, § 32 ; State Bd. of Equalization v. Superior Court (1985) 39 Cal.3d 633, 638, 217 Cal.Rptr. 238, 703 P.2d 1131.) The underlying reason for this rule is that the prompt collection of tax revenue is vital to the functioning of government and the provision of essential public services. (State Bd. of Equalization v. Superior Court, supra, 39 Cal.3d at p. 638, 217 Cal.Rptr. 238, 703 P.2d 1131; Pacific Gass&sElectric Co. v. State Bd. of Equalization, supra, 27 Cal.3d at p. 283, 165 Cal.Rptr. 122, 611 P.2d 463; Modern Barber Col. v. Cal. Emp. Stab. Com. (1948) 31 Cal.2d 720, 731-732, 192 P.2d 916.)
All further references to article XIII, section 32, are to the California Constitution. The Supreme Court has noted, "Since 1910 there have been ... constitutional provisions [similar to article XIII, section 32,] which have been subject to numerous minor revisions and renumberings." (Pacific Gass&sElectric Co. v. State Bd. of Equalization (1980) 27 Cal.3d 277, 280, fn. 3, 165 Cal.Rptr. 122, 611 P.2d 463.) By Proposition 8, passed by the voters of this state on November 5, 1974, former article XIII, section 15, of the California Constitution was repealed, and the provisions of that section were placed in separate section 32 and amended to its present form. (Id. at p. 281, fn. 5, 165 Cal.Rptr. 122, 611 P.2d 463.)
The relevant restriction of a taxpayer's remedy to a postpayment refund action is set forth in article XIII, section 32, which states: "No legal or equitable process shall issue in any proceeding in any court against this State or any officer thereof to prevent or Article XIII, section 32 also expressly provides that the Legislature may prescribe the manner in which actions for tax refunds must be brought. (Woosley v. State of California (1992) 3 Cal.4th 758, 789, 13 Cal.Rptr.2d 30, 838 P.2d 758; Cod Gass&sOil Co., Inc. v. State Bd. of Equalization (1997) 59 Cal.App.4th 756, 759, 69 Cal.Rptr.2d 366.) As the Supreme Court explained in Woosley: "This constitutional limitation rests on the premise that strict legislative control over the manner in which tax refunds may be sought is necessary so that governmental entities may engage in fiscal planning based on expected tax revenues. (See State Bd. of Equalization v. Superior Court [, supra,] 39 Cal.3d [at p.] 638 [217 Cal.Rptr. 238, 703 P.2d 1131].)" (Woosley v. State of California, supra, 3 Cal.4th at p. 789, 13 Cal.Rptr.2d 30, 838 P.2d 758.)
4. Statutory Authorization for Franchise Tax Refund Actions
Revenue and Taxation Code sections 18401 et seq. govern the administration of franchise tax laws. Section 19381 restates the first sentence of article XIII, section 32, as follows: "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 this state to prevent or enjoin the assessment or collection of any tax under this part...." Section 19382 authorizes a lawsuit against the board to obtain a postpayment refund of franchise taxes and states: "Except as provided in Section 19385 [where the board fails to mail notice of action on a refund claim], after payment of the tax and denial by the [board] of a claim for refund, any taxpayer claiming that the tax computed and assessed is void in whole or in part may bring an action, upon the grounds set forth in that claim for refund, against the [board] for the recovery of the whole or any part of the amount paid." (Italics added.)
All further statutory references are to the Revenue and Taxation Code unless otherwise noted.
5. The Franchise Tax Board's Position
The use of the word "tax" in article XIII, section 32, and section 19382 has recently given rise to a controversy as to whether full payment of accrued interest, as well as the tax, is a jurisdictional prerequisite to a refund action. From at least January 1977, until June 1997, the board took the position that full payment of the tax and penalties assessed, not including any accrued interest, was a prerequisite to both a refund claim and a judicial determination of an alleged tax overpayment. (California Franchise Tax Board, Legal Ruling No. 402, January 27, 1977, Cal. Tax Rptr. (CCH)
The board's position was called into doubt when, on February 28, 1997, Division Three of the Court of Appeal for this appellate district issued its opinion in Garg v. People ex. rel. State Bd. of Equalization (1997) 53 Cal.App.4th 199, 204-212, 61 Cal.Rptr.2d 376. As will be noted, we respectfully disagree with only a small piece of obiter dictum in Garg. It is that dictum which serves as the basis for the board's present position. Garg was an action by a taxpayer to invalidate an offset of attorney's fees he was awarded in defense of an action to collect sales and use taxes. The trial court deemed the lawsuit to be in effect an action for a tax refund. (Id. at p. 204, 61 Cal.Rptr.2d 376.) The State Board of Equalization asserted the court had no jurisdiction to adjudicate the propriety of the tax collection until the plaintiff paid the claimed tax in full. (Id. at p. 206, 61 Cal.Rptr.2d 376.) In Garg, the Court of Appeal stated "that the California Constitution forbids a court from adjudicating the validity of a tax before the tax, together with interest and penalties, has been paid in full." (Id. at p. 208, 61 Cal.Rptr.2d 376, italics added.) The court did not cite any authority for that proposition. However, in a later footnote to the opinion, the following appears: "In addition to the cases discussed in this opinion, the Board has cited People v. Pacific Employers Ins. Co. (1973) 36 Cal.App.3d 296 [111 Cal.Rptr. 350], Sonleitner v. Superior Court (1958) 158 Cal.App.2d 258 [322 P.2d 496], Horack v. Franchise Tax Board (1971) 18 Cal.App.3d 363 [95 Cal.Rptr. 717] and several federal cases in support of its jurisdictional argument. Pacific Employers and Sonleitner stand for the proposition, not contested in this case, that interest and penalties are a part of any tax claim, which must be paid before the taxpayer may litigate the validity of the tax. ( [People v. Pacific Employers Ins. Co., supra,] 36 Cal.App.3d at p. 300 $111 Cal.Rptr. 350]; [Sonleitner v. Superior Court, supra,] 158 Cal.App.2d at p. 263 [322 P.2d 496].) Horack stands for the proposition that, except where a taxpayer's wages are sought to be levied upon, the federal Constitution is not violated by a scheme of tax assessment which provides for judicial review only after full payment of the tax, interest and penalties. ( [Horack v. Franchise Tax Board, supra,] 18 Cal.App.3d at p. 370 [95 Cal.Rptr. 717].) The federal cases cited by the Board simply duplicate the rules that are stated in the California cases." (Garg v. People ex. rel. State Bd. of Equalization, supra, 53 Cal.App.4th at p. 211, fn. 12, 61 Cal.Rptr.2d 376, italics added.) As that footnote makes clear, the proposition that interest, as well as the tax and penalties, must be paid in full prior to bringing a refund action was uncontested in Garg; therefore, the opinion is not conclusive authority on that issue. (Adoption of Kelsey S. (1992) 1 Cal.4th 816, 828, 4 Cal.Rptr.2d 615, 823 P.2d 1216; Security Pacific National Bank v. Wozab (1990) 51 Cal.3d 991, 1003- Further, the cases cited in the Garg footnote, People v. Pacific Employers Ins. Co. (1973) 36 Cal.App.3d 296, 300, 111 Cal.Rptr. 350, Sonleitner v. Superior Court (1958) 158 Cal.App.2d 258, 263, 322 P.2d 496, and Horack v. Franchise Tax Board (1971) 18 Cal.App.3d 363, 370, 95 Cal.Rptr. 717, do not support the proposition that interest must be paid under the provisions of article XIII, section 32 or section 19382 in order to commence refund litigation. People v. Pacific Employers Ins. Co., supra, 36 Cal.App.3d at page 298, 111 Cal.Rptr. 350, was an action to enforce a surety's liability for sales and use taxes, including interest and penalties, incurred by the principal. At issue was the surety's liability for penalties and interest assessed after cancellation of a statutory sales tax bond. The potential liability was based on unpaid taxes in connection with sales transactions which occurred prior to the cancellation of the bond. (Id. at p. 299, 111 Cal.Rptr. 350.) The court held the surety was liable for the penalties and interest as well as the taxes. (Id. at p. 300, 111 Cal.Rptr. 350.) In so holding, the court relied on the proposition that penalties and interest are treated as part of the tax arising from the sales transactions. (Ibid.) The question in Sonleitner v. Superior Court, supra, 158 Cal.App.2d at pages 259-260, 322 P.2d 496, was whether a jury trial was required in an action by the State Board of Equalization to collect motor vehicle fuel license taxes together with penalties and interest. The Court of Appeal held there was no right to a jury trial. (Id. at p. 263, 322 P.2d 496.) The Court of Appeal then stated: "Furthermore, petitioner cannot bolster his claim by asserting that this is partially an action to collect a penalty. It is well settled in this state that a penalty which is created by statute for failure to pay a tax assessment becomes part of the tax. [Citations.]" (Ibid.) Finally, Horack v. Franchise Tax Board, supra, 18 Cal.App.3d at pages 366-370, 95 Cal.Rptr. 717, held, in a case involving a jeopardy assessment against a taxpayer's contraband, that California's postpayment refund action remedy did not violate due process. None of these decisions involved an interpretation of article XIII, section 32 or section 19382 in the context of whether interest must be paid as a precondition to the commencement of a tax refund action.
We are aware that courts have stated in varying circumstances that penalties are a part of a tax. (E.g., County of Los Angeles v. Morrison (1940) 15 Cal.2d 368, 373, 101 P.2d 470 [whether penalty should be imposed against executor personally or against the estate]; Carpenter v. Peoples Mut. Life Ins. Co. (1937) 10 Cal.2d 299, 303-304, 74 P.2d 508 [penalty for default in the payment of state insurance company taxes "is as much a part of the tax as the principal amount"]; Long Beach City School Dist. v. Payne (1933) 219 Cal. 598, 600-601, 28 P.2d 663 [dispute between public entities as to which should receive penalties for delinquent taxes]; County of Los Angeles v. Ballerino (1893) 99 Cal. 593, 595-596, 32 P. 581, 34 P. 329 [Act of April 23, 1880 contemplated that additional 5 percent incurred by reason of the default in payment of taxes "shall be collected at the same time and in the same manner as the delinquent tax" and is not "imposed as a penalty or punishment" but "is only a mere incident to the cause of action arising upon the statutory liability to pay the taxes duly levied upon property which has been assessed in accordance with law."]; Camden Fire Ins. Assn. v. Johnson (1941) 42 Cal.App.2d 528, 531, 109 P.2d 447 [taxations on insurance companies levied upon the privilege of doing business in the state was a revenue tax adopted for the purpose of raising funds for the state, and the penalties imposed for nonpayment of such taxes become part of the tax]; State of California v. Hisey (9th Cir.1936) 84 F.2d 802, 805 [whether penalty was lien on property held by On June 2, 1997, in response, in part, to the Garg decision, the board withdrew Legal Ruling 402. (California Franchise Tax Board Notice, No. 97-4, June 2, 1997, Cal. Tax Rptr. (CCH), p 402-923.) Three months later, on September 4, 1997, the board issued a further notice on this subject. (California Franchise Tax Board Notice, No. 97-8, September 4, 1997, Cal. Tax Rptr. (CCH) p 402-940.) That notice stated: "Pending a final, controlling appellate judicial decision: [p] For purposes of consideration of administrative claims and appeals to the State Board of Equalization, the [board] will continue to accept refund claims that meet the criteria of ... section 19322 [in writing, signed by taxpayer or authorized representative, stating specific grounds] and are filed together with or after an amount equal to the tax principal, additions to tax and penalties (but not interest) has been paid in full. Statutory interest will continue to compound daily on any unpaid interest amount under ... section 19521(b). [p] In refund actions filed in court, if all such amounts (including interest) have not been paid in full at the time the action is filed, [the board] will raise as a jurisdictional issue the failure to pay in full all such amounts. [p] Taxpayers may avoid uncertainty in this area by making payment of all amounts, including interest, together with or before a refund claim is filed." (Ibid., italics added.) The board's conduct in the present case, undertaken in good faith, is consistent with its June 2, 1997, notice.
The board stated in relevant part: "[Garg ] held that the California Constitution forbids a court from adjudicating the validity of a tax before the tax, together with interest and penalties, has been paid in full. [p] Shiseido Cosmetics (America), Ltd. v. Franchise Tax [Bd.] (1991) 235 Cal.App.3d 478, 486-489 [286 Cal.Rptr. 690], held that satisfaction of the essential statutory criteria of prepayment and a contemporaneous or subsequent clear written statement that a claim was being sought must first occur for a valid refund claim to exist. [The board] had no power to authorize as valid a purported refund claim that failed to meet these essential statutory criteria. [Shiseido Cosmetics (America) Ltd. v. Franchise Tax [Bd.], supra, 235 Cal.App.3d at page 489 [286 Cal.Rptr. 690], held that a taxpayer seeking a refund of franchise taxes paid under protest, and based on a challenge to the constitutionality of the tax assessment, was not excused from filing an administrative refund claim, and the failure to exhaust administrative remedies barred the action at law.] See also State [Bd.] of Equalization v. Superior Court (1985) 39 Cal.3d 633, 642 [217 Cal.Rptr. 238, 703 P.2d 1131] [no refund action could be maintained upon a partial payment of taxes due]; Masi v. Nagle (1992) 5 Cal.App.4th 608[, 611-613, 7 Cal.Rptr.2d 423] [taxpayers assessed under the Unemployment Insurance Code could not predicate refund action on payment of entire tax for one reporting period out of a multiple-reporting-period assessment; applicable statute (Unemp. Ins.Code, § 1178, subd. (d)) provided taxpayer " 'may file a claim for refund upon payment of the amount of the assessment, including interest and penalties, and thereafter may pursue all administrative and judicial review rights....' "]; Farrar v. Franchise Tax [Bd.] (1993) 15 Cal.App.4th 10 [, 14, 18 Cal.Rptr.2d 611] [would-be class representatives were required to strictly comply with statute authorizing administrative income tax refund claims filed on behalf of a class of taxpayers; doctrine of substantial compliance could not be invoked.] [p] The [board] will continue to consider the effect of the cases cited above. Legal Ruling 402 is hereby withdrawn." (California Franchise Tax Board Notice, No. 97-4, June 2, 1997, Cal. Tax Rptr. (CCH) p 402-923.)
6. Application of the General Rules of Constitutional and Statutory Construction Support the Conclusion "Tax" Means Tax
The general rules governing the construction of words in a statute or constitution are Both article XIII, section 32, and section 19382 provide that payment of the tax is a prerequisite to a refund action. In its plain, ordinary, and common sense meaning, tax means tax. It does not mean interest. If the Legislature meant to include accrued interest as well as tax, it would have said so. (Compare, e.g., Unemp. Ins.Code, § 1178, subd. (d) ["Following a final decision denying a petition for reassessment pursuant to Article 11 ... the employing unit ... may file a claim for refund upon payment of the amount of the assessment, including interest and penalties, and thereafter may pursue all administrative and judicial review rights...."]; § 23305 ["Any [corporate] taxpayer which has suffered ... suspension or forfeiture ... may be relieved therefrom upon making application therefor in writing to the [board] and upon the filing of all tax returns ... and the payment of the tax, additions to tax, penalties, interest, and any other amounts for nonpayment of which the suspension or forfeiture occurred, together with all other taxes, additions to tax, penalties, interest, and any other amounts due under this part ...."]; italics added.)
7. The Statutory Definition of "Tax" Applicable to section 19382 Confirms that Tax Means Tax
Moreover, the statutory scheme contains a definition of tax which is consistent with the conclusion just stated. Section 23036, which defines "tax," applies to section 19382 pursuant to section 18402. Section 23036 defines "tax" as the tax imposed under various sections of the Revenue and Taxation Code: the franchise tax imposed pursuant to section 23101 et seq.; the tax on net income not taxable under franchise tax imposed pursuant to section 23501 et seq.; the franchise or
Section 18402, subdivision (a), a provision of Part 10.2, Administration of Franchise and Income Tax Laws, states: "Except where the context otherwise requires, the general provisions and definitions provided in Chapter 1 (commencing with Section 17001) of Part 10 [Personal Income Tax Law] and in Chapter 1 (commencing with Section 23001) of Part 11 [Bank and Corporation Tax Law] shall apply to this part." Section 23036, defining "tax" is contained in Chapter 1 of Part 11.
When the language of a statute is defined by reference to a definitional provision, the express definition should not be disturbed to reach an implicit, not readily apparent, or convoluted result. (Lennane v. Franchise Tax Bd., supra, 9 Cal.4th at pp. 270-271, 36 Cal.Rptr.2d 563, 885 P.2d 976.) The normal reason for the definition as in a body of legislation is that certain provisions elsewhere in the enactment use the term defined. Further, the definition clarifies the term's meaning as thus used. (Disableds&s Blind Action Committee of Cal. v. Jenkins (1974) 44 Cal.App.3d 74, 82, 118 Cal.Rptr. 536.) The Court of Appeal has held: " 'When a legislature defines the language it uses, its definition is binding upon the court even though the definition does not coincide with the ordinary meaning of the words. If, however, the definitions are arbitrary, result in unreasonable classifications or are uncertain, then the court is not bound by the definition.' (1A Sutherland, Statutes and Statutory Construction (5th ed. 1992) The Structure of a Statute, § 20.08, p. 90; fns. omitted.)" (Cory v. Board of Administration (1997) 57 Cal.App.4th 1411, 1423, 67 Cal.Rptr.2d 763.) As Sutherland points out, "Where a definition clause [in a statute] is clear it should ordinarily control the meaning of words used in the remainder of the act because of its authoritative nature. But the courts are not bound to follow a statutory definition where obvious incongruities in the statute would thereby be created, or where one of the major purposes of the legislation would be defeated or destroyed. Where a definition is not clear then the court should use all intrinsic and extrinsic aids available to determine the legislative intent. The presumption should be that a fair interpretation of the meaning of words as defined in the definition section should control." (1A Sutherland, Statutes and Statutory Construction (5th ed. 1992) Interpretive Statutes, § 27.02, p. 467; fns. omitted.)
The express definition of "tax" as a tax imposed pursuant to statute (§ 23036) is clear and controlling. Its application should not be disturbed to reach the conclusion, not readily apparent, that the word "tax" in section 19382 means tax plus accrued interest. (Lennane v. Franchise Tax Bd., supra, 9 Cal.4th at pp. 270-271, 36 Cal.Rptr.2d 563, 885 P.2d 976.) Applying the statutory definition does not create incongruities in section 19382. Nor does the application of the statutory 8. Conclusion
We conclude that given the plain language of article XIII, section 32, and section 19382, and the statutory definition of "tax" in section 23036 as one imposed pursuant to statute, payment of accrued interest is not a jurisdictional prerequisite to an action for a refund of franchise taxes paid. We do not reach the question whether penalties must also be paid before a refund action will lie. That issue is not before us. Mr. Chen, on behalf of VP, paid the penalty in full prior to commencing this action.
III. DISPOSITION
The judgment is affirmed. Roy Chen, as successor-in-interest to Valuable Properties, Inc. (dissolved), is to recover his costs on appeal from the State of California, Franchise Tax Board.
GRIGNON and ARMSTRONG, JJ., concur.
** See footnote *, ante.