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Dicon Fiberoptics, Inc. v. Franchise Tax Board

May 7, 2009


APPEAL from a judgment of the Superior Court of Los Angeles County. Mel Red Recana, Judge. Reversed and remanded. (Los Angeles County Super. Ct. No. BC 367885).

The opinion of the court was delivered by: Rubin, Acting P. J.


Dicon Fiberoptics, Inc., appeals from the trial court‟s judgment sustaining without leave to amend the demurrer of the Franchise Tax Board to Dicon‟s complaint seeking refund of a tax credit for employing disadvantaged workers. To receive the credit, Dicon submitted vouchers to the board certifying Dicon had employed disadvantaged workers. After auditing the vouchers, the board partially denied the tax credit to Dicon. Dicon contends the board has no legal authority to audit its vouchers, a contention we reject. We nevertheless conclude Dicon states a cause of action that the board exercised its audit power improperly, and therefore the trial court erred in sustaining the board‟s demurrer. Accordingly, we reverse and remand.


Certain areas and localities in California suffer from persistently high unemployment, poverty, and anemic economic growth and activity. Hoping to remedy these problems, the Legislature enacted Government Code section 7070 et seq., which is known as the Enterprise Zone Act (Act). The Act‟s purpose is to reduce obstacles the Legislature believes impede private investment and business in economically depressed areas in California. (See Gov. Code, § 7071, subd. (a).) The Act permits city and county governments containing depressed regions within their jurisdictions to apply to the Department of Housing and Community Development (DHCD) for designation of those regions as "Enterprise Zones." (Gov. Code, §§ 7072, subd. (a), 7073, subds. (a), (b).) Businesses operating within an Enterprise Zone that hire certain categories of disadvantaged workers -- known as "qualified employees" -- earn tax credits for the wages they pay those workers. (Rev. & Tax. Code, § 23622.7.) Depending on the length of time of employment, the tax credit is between 10 and 50 percent of a worker‟s wage. (Id., subd. (a).)

In 1994, the Legislature expanded the categories of qualified employees covered by the Act from participants in certain economic assistance and job programs to those eligible to participate in those programs.*fn1 (Assem. Com. on Revenue and Taxation, Analysis of Sen. Bill No. 1770 (1993-1994 Reg. Sess.) as amended June 2, 1994.) Lawmakers anticipated that because a worker‟s eligibility to participate in a job or assistance program involved standards less black-and-white than confirming actual participation, the Legislature‟s expansion of the types of workers whose employers could receive a tax credit increased the risk of tax abuse. Thus, administrative regulations governing the credit required the local entity operating an Enterprise Zone to establish a vouchering program to certify a worker satisfied the statutory criteria of a "qualified employee." (Cal. Code Regs., tit. 25, § 8463, subd. (a)(1).) Depending under which job or assistance program a worker was deemed a "qualified employee," a vouchering program required a variety of documents to prove the worker met the statutory criteria. (Rev. & Tax. Code, § 23622.7; Cal. Code Regs., tit. 25, §§ 8463, 8466.) Following a vouchering program‟s receipt of documents proving a worker was a "qualified employee," the business employing the worker could receive a voucher from local authorities identified by the program.*fn2

Appellant Dicon Fiberoptics does business in an Enterprise Zone. Dicon alleges it complied with all requirements for earning the tax credit for employing qualified employees in an Enterprise Zone. Among those requirements, it obtained vouchers from any one of several state or local entities who certified Dicon‟s employees fit within categories of workers covered by the Act. (Rev. & Tax. Code, § 23622.7, subd. (c).)*fn3 In November 2003, Dicon submitted a claim for refund of taxes for the taxable year ending in March 2001. Submitting vouchers showing it had employed qualified workers in the 2000-2001 tax year, Dicon sought a credit of more than $3.6 million. Almost three years later in October 2006, respondent Franchise Tax Board (FTB) denied $1.1 million of the requested refund. Dicon alleges FTB‟s denial was improper because FTB wrongfully refused to accept some of Dicon‟s vouchers. FTB demanded instead that Dicon provide the documents underlying the local agencies‟ issuance of the vouchers.

Dicon appealed to the State Board of Equalization, which dismissed the appeal in March 2007. Dicon thereafter filed the lawsuit at issue in this appeal. Seeking recovery of the $1.1 million credit, Dicon alleges FTB improperly rejected its vouchers. Dicon alleges it did not have the documents FTB demanded because they related to the personal circumstances of Dicon employees that made them "qualified employees," such as a criminal record and other impediments to employment, that were private to employees and beyond Dicon‟s custody and control.

FTB demurred to the complaint. It argued that Revenue and Taxation Code section 23622.7 governing the tax credit and vouchers did not vest local employment or social service agencies with exclusive authority to certify a worker as a "qualified employee." Thus, the statute did not obligate FTB to accept vouchers from local agencies, and did not prohibit FTB from asking Dicon for the documents on which the local agencies based their decisions. Because Dicon had not supplied the documents FTB demanded, FTB asserted Dicon failed to state a cause of action. The trial court agreed and sustained the demurrer without leave to amend. The court entered judgment for FTB, and this appeal followed.


Dicon contends the court erred by sustaining FTB‟s demurrer to Dicon‟s complaint for failing to state a cause of action. According to Dicon, the statute‟s plain language vests local employment and social services agencies with sole authority to issue vouchers.*fn4 Such authority would be meaningless, Dicon reasons, if FTB could second-guess the agency by auditing the voucher. Consequently, Dicon asserts its complaint states a cause of action for a tax refund by alleging FTB lacked authority to reject its vouchers.

Dicon also contends the trial court compounded its error by sustaining the demurrer without leave to amend. According to Dicon, even if FTB had the authority to audit vouchers, the court erred in denying Dicon leave to amend its complaint to allege FTB mishandled its audit of the vouchers and wrongfully denied the tax credit.

We agree the court erred in sustaining FTB‟s demurrer. A complaint states a cause of action if it alleges facts that entitle the plaintiff to relief under any theory. In reviewing the trial court‟s order sustaining a demurrer, we disregard the complaint‟s legal theories and conclusions. (TracFone Wireless, Inc. v. County of Los Angeles (2008) 163 Cal.App.4th 1359, 1368.) Instead, we look to whether the complaint states facts that support a cause of action under any theory. (Blank v. Kirwan (1985) 39 Cal.3d 311, 318; Mills v. U.S. Bank (2008)166 Cal.App.4th 871, 884.) We know of no authority that imposes a higher pleading standard for a cause of action for a tax refund than other causes of action. (Accord McHugh v. County of Santa Cruz (1973) 33 Cal.App.3d 533, 544 ["The complaint in an action to recover taxes paid under protest must allege sufficient specific facts to support a conclusion that assessments complained of were excessive or invalid. [Citations.] The allegations must be liberally construed with a view to substantial justice as required under a general demurrer . . . ."].) The complaint need not establish the statute, case law, or legal rule that the taxing authority violated, but need only allege that the authority erred. (Jibilian v. Franchise Tax Bd. (2006) 136 Cal.App.4th 862, 866, fn. 3 [court reviewing demurrer disregards complaint‟s erroneous legal conclusions].) It follows, therefore, that a taxpayer‟s complaint states a cause of action for a tax refund if it alleges the plaintiff paid the tax, filed a tax return, requested the refund, and the tax authority denied the refund. Here, Dicon contends FTB lacked the authority to reject Dicon‟s vouchers certifying Dicon‟s workers were qualified employees. That contention is a legal conclusion that we may disregard. For reasons we will explain, we conclude FTB may in fact audit vouchers. But even when we disregard Dicon‟s mistaken legal contention, its complaint nevertheless alleges facts sufficient to state a cause of action for a tax refund. Accordingly, the court erred in sustaining FTB‟s demurrer.

We hold alternatively that if a cause of action for a tax refund must identify the taxing authority‟s particular legal error in denying the refund, the trial court erred here in denying Dicon leave to amend its complaint. Dicon‟s opposition to FTB‟s demurrer requested leave to amend, and its opening brief on appeal describes the proposed amendments.*fn5 Those amendments allege that even if FTB had the authority to audit the vouchers, it did so incorrectly here. For example, Dicon alleges FTB applied an unlawfully demanding standard of proof in auditing the vouchers. Dicon also alleges FTB improperly refused to ...

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