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Steven J. Goldman et al v. California Franchise Tax Board

January 23, 2012

STEVEN J. GOLDMAN ET AL., PLAINTIFFS AND APPELLANTS,
v.
CALIFORNIA FRANCHISE TAX BOARD, DEFENDANT AND RESPONDENT.



( No. RG09441003) Trial Court: Alameda County Superior Court Trial Judge: Honorable Jo-Lynne Q. Lee

The opinion of the court was delivered by: Siggins, J.

CERTIFIED FOR PUBLICATION

Alameda County Super. Ct.

Appellants Steven Goldman and Azita Etaati (the Goldmans) seek a refund of interest they paid in 2004 on a state income tax deficiency for the 2000 tax year. While they do not contest the tax owed for 2000, which was increased due to their participation in a disallowed tax shelter, they contend the California Franchise Tax Board (FTB) should have suspended the accrual of interest on the deficiency. The trial court found the Goldmans ineligible for interest suspension, denied their motion for summary judgment, and granted summary judgment for the FTB. We affirm.

Resolution of this appeal involves the interplay of two provisions of the Revenue and Taxation Code.*fn1 Section 19116 provides that, with certain enumerated exceptions, the accrual of interest owed on unpaid tax obligations is normally suspended 18 months after a taxpayer files a timely tax return. (§ 19116, subds. (a) and (b)(1).)*fn2 This case deals with an enumerated exception to interest suspension that involves section 18622. Section 19116, subdivision (e) specifies that interest suspension does not take effect for taxpayers affected by a federal audit who are required to report a change or correction to their federal taxes to the FTB pursuant to section 18622, subdivision (a).

Section 18622, subdivision (a) requires taxpayers to report the result of a change or correction to a federal tax return "within six months after the date of each final federal determination," but only if the federal change or correction "increase[s] the amount of [state income] tax payable." Resolution of this appeal turns on construction and interpretation of the last sentence of section 18622, subdivision (a) that says a taxpayer must notify the state of federal changes that "increase the amount of tax payable." As we shall explain, the phrase refers to the effect of a federal audit on a taxpayer's return filed for a given year, and the taxpayer's obligation to notify the state does not turn on whether the taxpayer still owes the state money after the conclusion of a federal audit. Thus, the Goldmans' obligation to provide the state notice was not extinguished because they filed amended returns and overpaid their ultimate 2000 state income tax liability before conclusion of the federal audit, and interest on the amount of their increased state tax liability was not suspended.

BACKGROUND

The Goldmans, a married couple, filed their state income tax return for the 2000 tax year on or about April 15, 2001. Their return reported taxable income of $11,962,859 and a tax liability of $1,109,037. In January 2003, the Goldmans were notified that the Internal Revenue Service (IRS) was going to examine their federal income tax return filed for the 2000 tax year. In August, the Goldmans' accountant requested that the FTB hold its examination of their 2000 income tax return in abeyance until the IRS examination was complete.

In October 2003 the Legislature enacted the Voluntary Compliance Initiative (VCI), which allowed taxpayers who invested in potentially abusive tax shelters to file amended returns that disclosed all income without regard for the effects of the tax shelters, pay the resulting tax and interest and thereby possibly avoid penalties. (§ 19751 et seq.) The VCI was effective from January 1 through April 15, 2004. (§ 19751, subd. (b).) The Goldmans elected to participate in the VCI, and on or around April 15, 2004, before the federal examination of their return concluded, they filed an amended return for the 2000 tax year. Because the amended "VCI return" reversed $82,630,078 in capital losses from a transaction claimed on the Goldmans' 2000 income tax return, it reported increased taxable income of $94,687,041 and an additional $7,693,349 in state tax liability. The Goldmans stated the increased taxable income was due to a change in their federal adjusted gross income reported on line 1b of their state income tax return. The option they selected under the VCI allowed them to seek a refund of amounts reported and paid with the VCI return. They made a payment of $2,000,000 with the VCI return and subsequent installment payments between July 2004 and April 2005 to satisfy the additional tax and interest shown on the VCI return. As of April 2005, the Goldmans paid $1,805,331.64 in interest.

In November 2004, the Goldmans filed a federal "closing agreement" for tax year 2000 with the IRS. The closing agreement reflected federal tax adjustments of disallowed capital losses from the tax avoidance transactions that figured in their state VCI return. The federal adjustments increased the Goldmans' income by $78,749,557 for federal tax purposes, and reflected adjusted gross income of $90,999,902, rather than $94,687,041 as stated in their VCI return.

The Goldmans filed a second amended state tax return for the 2000 tax year on or around April 15, 2005, seeking a refund of excess taxes and interest reported and paid with the VCI return. The refund claim had two components. First, the Goldmans sought a refund of $823,940 in interest they claimed should have been suspended pursuant to section 19116. Second, they claimed a tax refund due to the federal adjusted gross income reflected in the closing agreement that reduced the adjusted gross income reported in their VCI return by $4,466,197.

The FTB agreed the Goldmans were entitled to a refund for overpaid taxes, but it denied their claim for a refund of interest on the ground that they were subject to an exception to interest suspension contained in section 19116, subdivision (f). The State Board of Equalization (SBE) upheld the FTB's ruling in a summary decision.

The Goldmans then filed this action. Following the filing of cross-motions for summary judgment, the trial court granted the FTB's motion for summary judgment and denied the Goldmans' ...


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