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Taiheiyo Cement U.S.A., Inc v. Franchise Tax Board

March 13, 2012

TAIHEIYO CEMENT U.S.A., INC., PLAINTIFF AND APPELLANT,
v.
FRANCHISE TAX BOARD, DEFENDANT AND RESPONDENT.



(Los Angeles County Super. Ct. No. BC422623) APPEAL from a judgment of the Superior Court of Los Angeles County. Abraham Khan, Judge. Affirmed.

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

CERTIFIED FOR PUBLICATION

Taiheiyo Cement U.S.A., Inc. (Taxpayer), appeals from a judgment entered after the trial court granted Franchise Tax Board's (FTB) motion for judgment on the pleadings on Taxpayer's complaint for declaratory relief and refund of taxes, interest, and penalties paid for tax years 1998 and 1999 following FTB's disallowance of enterprise zone sales and use tax credits claimed by Taxpayer under Revenue and Taxation Code section 23612.2 for the purchase of current expense assets.*fn1

Taxpayer contends that the trial court erred in granting FTB's motion for judgment on the pleadings, claiming a plain reading of section 23612.2 authorizes a sales and use tax credit "for all qualified property, whether expensed or depreciated." Taxpayer also contends that the court erred by granting the motion for judgment on the pleadings on the declaratory relief cause of action, arguing that FTB's "unstated policy of imposing a capitalization requirement for tax credits" is an invalid "underground regulation."

Construing Revenue and Taxation Code section 23612.2 narrowly against Taxpayer, which must show it comes squarely within the statute expressly authorizing the tax credit, we conclude that the sales and use tax credit of section 23612.2 is not available in connection with the purchase of current expense assets but only with the purchase of capital assets because the definition of "qualified property" refers to the terms "placed in service" and "basis," which are terms used generally with respect to capital assets. (§ 23612.2, subds. (b)(2)(B) & (D), (e).) Based on our reading of the statute as a whole, as well as the legislative history indicating that qualified property was parenthetically referred to as Internal Revenue Code section 1245 property, we conclude the court did not err in granting FTB's motion for judgment on the pleadings and affirm the judgment.

BACKGROUND

Taxpayer's complaint

On September 28, 2009, Taxpayer filed a complaint against FTB for refund of taxes, interest, and penalties paid for the 1998 and 1999 tax years and for declaratory relief, costs, and attorney fees, alleging as follows. Taxpayer is a manufacturer of hydraulic cement with a manufacturing plant in Colton, which is located in an economically depressed area designated by the Legislature as an "'enterprise zone.'" Taxpayer qualified for enterprise zone sales and use tax credits pursuant to section 23612.2 for tax years 1998 and 1999 because it purchased qualified property within the meaning of section 23612.2, including machinery and machinery parts used for fabricating, processing, assembly, and manufacturing, and placed the property in service in an enterprise zone.

In 2001, FTB examined Taxpayer's 1998 and 1999 tax returns and disallowed the sales and use tax credits claimed by Taxpayer. On December 29, 2004, FTB issued notices of proposed assessment to Taxpayer for tax years 1998 and 1999. Taxpayer timely filed a protest and paid the taxes, interest, and penalties assessed.

Ultimately, the State Board of Equalization issued its final decision sustaining FTB's action, concluding that "currently expensed assets are not 'qualified property' within the meaning of Revenue and Taxation Code section 23612.2, and thus . . . [Taxpayer] was not entitled to the Enterprise Zone sales and use tax credit for purchases of such assets."

In its complaint, Taxpayer sought $4,980,165 in taxes, interest, and penalties paid for tax years 1998 and 1999. The complaint also contained a cause of action for declaratory relief, seeking an interpretation of section 23612.2, asserting that by requiring qualified property to be capitalized, FTB adopted an "'underground regulation[]'" with respect to the sales and use tax credit.

FTB's motion for judgment on the pleadings

FTB filed a motion for judgment on the pleadings, urging that the complaint failed to state facts sufficient to constitute an action against FTB because the sales and use tax credit set forth in section 23612.2 is available only for sales tax paid on the purchase of capital assets, which have a useful life of more than one year. FTB contended that it properly allowed the credit for sales tax paid by Taxpayer on capital assets and disallowed the credit for sales tax paid by Taxpayer on current expense assets, which are consumed within one year.

On July 16, 2010, the trial court granted FTB's motion for judgment on the pleadings "without leave to amend" and entered judgment for FTB and ...


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