Opinion
No. 2:14-CV-00849-GEB-DAD
02-09-2015
GILBERT P. HYATT, Plaintiff, v. JOHN CHIANG, JEROME E. HORTON, and MICHAEL COHEN, CALIFORNIA FRANCHISE TAX BOARD MEMBERS; BETTY T. YEE, GEORGE RUNNER, MICHELLE STEEL, JEROME E. HORTON, and JOHN CHIANG, CALIFORNIA STATE BOARD OF EQUALIZATION MEMBERS; and DOES 1 through 20, Defendants.
ORDER GRANTING DEFENDANTS' MOTIONS TO DISMISS FOR LACK OF JURISDICTION
Plaintiff asserts in his Complaint that the manner in which Defendants are processing his California administrative tax appeal violates his federal constitutional rights under the due process and equal protection clauses, and seeks an injunction "forbidding Defendants. . . from continuing the investigation and administrative proceedings against" him and "forbidding Defendants . . . from continuing to assess or threaten to assess [Plaintiff], or collect or threaten to collect from [Plaintiff], taxes, penalties or interest." (Compl. Prayer ¶¶ 1-2, ECF No. 2.)
Each defendant seeks dismissal of the Complaint arguing, inter alia, that it should be dismissed with prejudice for lack of subject matter jurisdiction under Federal Rule of Civil Procedure ("Rule") 12(b)(1). Specifically Defendants argue the federal Tax Injunction Act ("TIA") prevents Plaintiff from challenging his California residency-based tax assessment in federal court.
The TIA prescribes: "The district courts shall not enjoin, suspend or restrain the assessment, levy or collection of any tax under State law where a plain, speedy and efficient remedy may be had in the courts of such State." 28 U.S.C. § 1341.
I. FACTUAL BACKGROUND
The following allegations in the Complaint concern the pending dismissal motions. Plaintiff Gilbert Hyatt moved from California to Nevada in 1991. (Compl. ¶ 2.) In 1993, the California Franchise Tax Board ("FTB") commenced an audit to determine whether Plaintiff owed additional California income taxes for the 1991 tax year. (Id.) The FTB initiated a second audit in 1996 to determine whether Plaintiff owed additional California income taxes for the 1992 tax year. (Id.) "The FTB asserts [Plaintiff] . . . became a Nevada resident on April 3, 1992" and owes the following unpaid California income taxes: $1.8 million for the 1991 tax year and $5.6 million for the 1992 tax year. (Id. ¶¶ 11, 21.) For the last six years, Plaintiff's administrative appeal has been pending before the California State Board of Equalization ("SBE"). (Id. ¶ 3.) Neither the 1991 nor 1992 audit has concluded. (Id. ¶ 2.) Plaintiff alleges "the delays . . . fall squarely and primarily at the feet of the FTB" and the SBE. (Id. ¶¶ 23, 26.) Plaintiff further alleges that Defendants "continue to threaten[] [him] with $55 million plus of unconstitutional exactions, specifically the assessed taxes and penalties, for tax years 1991 and 1992." (Id. ¶ 8.)
II. LEGAL STANDARD
Each dismissal motion contains a facial and factual attack on the federal court's jurisdiction under Rule 12(b)(1). "A facial' attack asserts that a complaint's allegations are themselves insufficient to invoke jurisdiction, while a factual' attack asserts that the complaint's allegations, though adequate on their face to invoke jurisdiction, are untrue." Courthouse News Serv. v. Planet, 750 F.3d 776, 780 at n.3 (9th Cir. 2014). Only the facial attacks are reached herein.
"The district court resolves a facial attack as it would a motion to dismiss under Rule 12(b)(6): Accepting the plaintiff's allegations as true and drawing all reasonable inferences in the plaintiff's favor, the court determines whether the allegations are sufficient as a legal matter to invoke the court's jurisdiction." Leite v. Crane Co., 749 F.3d 1117, 1121 (9th Cir. 2014). However, "the tenant that a court must accept as true all allegations contained in a complaint is inapplicable to legal conclusions." Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009).
Federal courts are courts of limited jurisdiction. They possess only that power authorized by Constitution and statute, which is not to be expanded by judicial decree. It is to be presumed that a cause lies outside this limited jurisdiction, and the burden of establishing the contrary rests upon the party asserting jurisdiction.Kokkonen v. Guardian Life Ins. Co. of Am., 511 U.S. 375, 377 (1994).
III. STATUTORY FRAMEWORK CONCERNING APPEAL OF A CALIFORNIA
RESIDENCY-BASED TAX ASSESSMENT
Under California law, a taxpayer seeking to "prevent or enjoin the assessment or collection of" a California residency-based income tax may not file suit in state court without first exhausting the administrative remedies in California Revenue and Taxation Code. Cal. Rev. & Tax. Code § 19381. Two separate administrative processes may be utilized by a taxpayer to contest a tax assessment: a postdeprivation "pay-then-protest" process or a predeprivation process. Exhaustion of either process is a prerequisite to judicial review in a California state court.
Unless otherwise noted, all section references are to the California Revenue and Taxation Code.
A. Postdeprivation "Pay-Then-Protest" Process
The "pay-then-protest" process requires the challenging taxpayer to make "payment of the tax, " following which a refund claim can be filed with the FTB. § 19382. If the FTB "fails to mail notice of action on [the] . . . refund claim within six months after the claim [is] filed, the taxpayer may ... bring an action [in state court] against the [FTB]. . . on the grounds set forth in the claim for the recovery of . . . [the] overpayment." § 19385. If the FTB acts on the challenger's refund claim and denies it, a taxpayer "claiming that the tax computed and assessed is void . . . may bring an action [in state court], upon the grounds set forth in that claim for refund . . . for the recovery of the . . . amount paid" plus interest. §§ 19381, 19382.
B. Predeprivation Process
A taxpayer challenging an assessment through the predeprivation process must "file with the [FTB] . . . a written protest against the proposed deficiency assessment, specifying in the protest the grounds upon which it is based." § 19041. If the protest is denied, the taxpayer may request that the FTB "reconsider the assessment of the deficiency." § 19044. The taxpayer may "appeal[] in writing from the action of the [FTB]... to [the SBE]." § 19045. "The [SBE] . . . shall hear and determine the appeal, " and an unsuccessful taxpayer may "file[] a petition for rehearing." §§ 19047-48. After rehearing before the SBE, a taxpayer may seek review in a California state court. § 19381.
A taxpayer who initially challenges a residency-based income tax assessment through the predeprivation process may elect to use the "pay-then-protest" process at any point by paying the disputed tax. § 19335.
Here, Plaintiff challenged his tax assessments using the predeprivation process and has not used the "pay-then-protest" process.
IV. DISCUSSION
The TIA "limit[s] drastically federal district court jurisdiction to interfere with [the] . . . important . . . local concern" of tax collection. Ark. v. Farm Credit Servs. of Cent. Ark., 520 U.S. 821, 826 (1997). When passing the TIA, Congress "expressed . . . concern regarding the increased costs that states would bear if forced to defend the imposition of state taxes in federal, rather than state courts." May Trucking Co. v. Or. Dep't of Transp., 388 F.3d 1261, 1266 (9th Cir. 2004) (citation omitted). One of Congress' main objectives in enacting the TIA was "to stop taxpayers, with the aid of a federal injunction, from withholding large sums [from the states], thereby disrupting state government finances." Hibbs v. Winn, 542 U.S. 88, 104 (2004) (citation omitted). However, the TIA's limit on federal court jurisdiction has "a narrow exception." Redding Ford v. Cal. State Bd. of Equalization, 722 F.2d 496, 497 (9th Cir. 1983). Congress vested federal courts with jurisdiction to "enjoin, suspend or restrain the assessment, levy or collection of [a] tax under State law where a plain, speedy and efficient remedy may [not] be had in the courts of [the] State." 28 U.S.C. § 1341.
Defendants argue the Supreme Court has held California's "pay-then-protest" process is "a plain, speedy, and efficient remedy." (Not. Mot. & Mot. Dismiss ("SBE Mot.") 9:17-18, ECF No. 15; FTB Mem. P. & A. ISO Mot. Dismiss ("FTB Mot.") 12:6-7, ECF No. 17-1 (citing Franchise Tax Bd. v. Alcan Aluminum, 493 U.S. 331, 338-39 (1990) ("California's refund procedures constitute a plain, speedy, and efficient remedy") and Cal. v. Grace Brethren Church, 457 U.S. 393, 417 (1982) ("Because the appellees could seek a refund of their state unemployment insurance taxes, and thereby obtain state judicial review of their constitutional claims, we hold that their remedy under state law was 'plain, speedy, and efficient' within the meaning of the [TIA], and consequently, that the District Court had no jurisdiction to issue injunctive or declaratory relief.")).
"It has consistently been held . . . that the refund action provided by California Personal Income Tax law is a 'plain, speedy and efficient remedy' such as to invoke the restraints of [the TIA]." Arnoff v. Franchise Tax Bd. of the State of Cal., 348 F.2d 9, 11 (9th Cir. 1965). As the Supreme Court stated in Alcan Aluminum Ltd., 493 U.S. at 338: "To the extent they are available, California's refund procedures constitute a plain, speedy, and efficient remedy."
Plaintiff rejoins even if the "pay-then-protest" process is "plain, speedy and efficient" on its face, the process will not provide him a plain, speedy and efficient remedy. (Pl.'s Mem. P. & A. ISO Consolid. Opp'n Defs.' MTD ("Opp'n") 15:24-16:3, ECF No. 22.)
A. Bait and Switch
Plaintiff contends that the precedent on which Defendants rely is distinguishable from his situation because "[n]one of those cases . . . involves a . . . [tax] assessment in which the taxpayer . . . followed the prepayment administrative process, " and California cannot now force him to "forgo" the predeprivation administrative statutory option he chose by requiring him to use the "pay-then-protest" process before he can "pursue a constitutional claim." (Opp'n 25:21-23; 26:1-3.) Plaintiff argues forcing him to change from the predeprivation process to the "pay-then-protest" process amounts to a "bait and switch" tactic, which the Supreme Court held illegal in Reich v. Collins, 513 U.S. 106 (1994) and Newsweek v. Florida Dep't of Revenue, 522 U.S. 442 (1998). (Opp'n 23:10-12.)
Defendants reply that Plaintiff has not been subjected to the "bait and switch" tactic involved in Reich and Newsweek because "this is not a case where [California's] . . . statutory scheme has changed midstream." (FTB Reply ISO Mot. Dismiss "FTB Reply" 6:5, ECF No. 27). Defendants contend both Reich and Newsweek "concern[:] (1) taxpayers who had paid their taxes, (2) a subsequent finding that the tax was unconstitutional, [and] (3) efforts by the state courts after the tax was paid and found unconstitutional to restrict the application of a previously generally applicable refund statute." (SBE Reply ISO Mot. Dismiss ("SBE Reply") 4:8-12, ECF No. 26.)
In Reich and Newsweek, the taxpayer challengers paid the assessed taxes and then challenged the tax through a refund action; however, after payment, the states changed their laws to prevent the taxpayers from seeking refunds for the already paid taxes. The Supreme Court held that states are not permitted to "reconfigure [their] scheme[s], unfairly, in midcourse—to 'bait and switch'" taxpayers. Reich, 513 U.S. at 111. The Supreme Court further stated: "While [states] may be free to require taxpayers to litigate first and pay [the tax] later, due process prevents [them] from applying this requirement to taxpayers . . . who reasonably relied on the apparent availability of a postpayment refund when paying the [disputed] tax." Newsweek, 522 U.S. at 445.
Plaintiff has not shown that the reasoning of Reich and Newsweek supports his jurisdiction argument; these decisions concern taxpayers who challenged their tax assessment after making payment and then were prevented from seeking a refund by intervening changes in state law.
B. Access to a "Speedy" Remedy
Plaintiff also rejoins the "pay-then-protest" process does not provide him a "speedy" remedy because it "would return [him] to the FTB and its administrative process" before he is able to seek relief in the state court. He contends that if the FTB's investigation lasts longer than six months, and Plaintiff elects to proceed with a state-court refund action [before the FTB investigation concludes], he risks having the state court find that he failed to exhaust the administrative remedies available, " and refuse to consider his claims as happened to the plaintiff in Barnes v. State Bd. of Equalization, 118 Cal. App. 3d 994 (1981). (Opp'n 30:1-12.) However, the plaintiff in Barnes did not file suit in state court until after the SBE denied his claim, and the court did not find his claim waived because the plaintiff filed suit in state court before the administrative process had closed. 118 Cal. App. 3d at 1002 (stating that "the board properly refused and denied the [taxpayer's] claim. . . . Plaintiff then approached the superior court") (emphasis added).
Defendants reply that "the longest [Plaintiff] . . . would have to wait [in order to bring his claim in state court] after switching to the 'pay-then-protest' [process] . . . would be six months," and a six month waiting period does not call into question whether the remedy is speedy. (SBE Reply 8:15-17.)
"Speedy" is a "relative concept." Rosewell v. LaSalle Nat'l Bank, 450 U.S. 503, 518 (1981). A state remedy is "'speedy' if it does not entail a significantly greater delay than a corresponding federal procedure." U.S. West, Inc. v. Nelson, 146 F.3d 718, 725 (9th Cir. 1998) (interpreting an identical exception to 28 U.S.C. § 1342 (public utility rate-payer suits)). "The state remedy need not be the best of all possible remedies, . . . . [and] [a]lthough delay in reviewing a taxpayer's claim may be troubling, . . . nowhere in the [TIA] . . . did Congress suggest that the remedy must be the speediest." Colonial Pipeline Co. v. Morgan, 474 F.3d 211, 218-19 (6th Cir. 2007).
The "pay-then-protest" process requires a taxpayer to file a claim with the FTB "for refund" and "[i]f the FTB fails to mail notice of an action . . . within six months . . . , the taxpayer may . . . bring an action against the FTB" in state court. §§ 19382, 19385.
Plaintiff has not shown how, if he elected to use the "pay-then-protest" process, its timetable "entails a significantly greater delay than a corresponding federal procedure." U.S. West, Inc., 146 F.3d at 725. Therefore, Plaintiff does not prevail on this portion of his jurisdiction argument.
C. Uncertainty
Further, Plaintiff argues the federal court has jurisdiction over his constitutional claims because it is uncertain whether these claims could be presented through the "pay-then-protest" process, and this uncertainty prevents California's state court remedy from being "plain," as the term is used in the TIA. (Opp'n 14:19-24.)
"'[U]ncertainty' surrounding a state-court remedy" prevents it from being plain and "lifts the [TIA's] bar to federal-court jurisdiction." Rosewell, 450 U.S. at 516. The Supreme Court "has not hesitated to declare a state refund provision inadequate to bar federal relief if the taxpayer's opportunity to raise his constitutional claims in the state proceedings is uncertain." Grace Brethren Church, 457 U.S. at 414 n.31.
1. Uncertainty Whether A Claim To Enjoin A Tax Is A Claim To Void A Tax
Plaintiff argues "[b]y its terms. . . [the "pay-then-protest" process only] permits a state-court action for a 'taxpayer claiming that the tax computed and assessed is void,'" and it is unclear whether Plaintiff's attempt to enjoin collection of the taxes assessed against him is an action to void the taxes. (Opp'n 26:20-21) (emphasis added).
Defendants reply that Plaintiff plainly seeks to void the taxes assessed against him since Plaintiff alleges the tax assessments are unconstitutional as applied to him and "a tax assessment that is unconstitutional as applied is every bit as 'void' as an assessment that is unconstitutional on its face." (FTB Reply 8:16-17.)
It is evident that Plaintiff seeks to void the tax or taxes assessed against him. Therefore, Plaintiff has not met his burden of demonstrating that the "pay-then-protest" process fails to provide him a plain remedy.
2. Raising Claims in State Court That Were Not Presented to the SBE
Plaintiff also argues it is uncertain whether the "pay-then-protest" process permits him to raise in state court the constitutional claims he alleges in his federal Complaint because he did present those claims to the SBE, and the Revenue and Taxation Code prevents a taxpayer from raising claims in state court that were not included in an SBE appeal. (Opp'n 29:4-16.)
Defendants rejoin that even assuming Plaintiff is correct, the TIA still prevents the federal court from exercising jurisdiction over Plaintiff's constitutional claims where a plain, speedy, and efficient remedy was available in state court "at some time" even if the chance to utilize it has been lost because of the taxpayer's own action or inaction. (SBE Reply 2:2-4; 3:1-3.)
Application of the TIA "depends on whether a state remedy was available to the taxpayer[,] and the taxpayer's failure . . . to use the remedy . . . does not negate the existence of the remedy." Sacks Bros. Loan Co. Inc. v. Cunningham, 578 F.2d 172, 175 (7th Cir. 1978). "A number of courts have . . . unanimously concluded that failure to utilize a remedy does not render that remedy insufficient under [the TIA]." Aluminum Co. of Am. v. Dep't of Treasury of State of Mich., 522 F.2d 1120, 1125 (6th Cir. 1975). When a plaintiff's own actions foreclose an otherwise "plain, speedy and efficient remedy, " the TIA precludes federal court jurisdiction over the claims. See Jerron West, Inc. v. State of Cal., State Bd. of Equalization, 129 F.3d 1334, 1338 (9th Cir. 1997)(declining to exercise jurisdiction in the face of an "as applied" challenge to TIA's application because "[t]he Taxpayers' failure . . . d[id] not render the[] state remedies ineffective"); Wood v. Sargeant, 694 F.2d 1159, 1160 (9th Cir. 1982) (holding an "inability to pay the tax [to initiate a refund action] does not avoid the [TIA's] jurisdictional bar"). Therefore, even if Plaintiff failed to present his constitutional claims during the state administrative proceeding, that failure has not been shown to justify the federal court exercising jurisdiction over Plaintiff's constitutional claims.
V. CONCLUSION
For the stated reasons, Plaintiff's Complaint is dismissed for lack of subject matter jurisdiction without leave to amend. Further, the Clerk of Court shall close this action. Dated: February 9, 2015
/s/_________
GARLAND E. BURRELL, JR.
Senior United States District Judge