California Court of Appeals, First District, Second Division
Superior Court of the City and County of San Francisco Nos. CG-C010-501299, CGC-09-487540 Honorable Richard Kramer.
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Kamala D. Harris, Attorney General, Paul D. Gifford, Assistant Attorney General, Joyce E. Hee and Anne Michelle Burr, Deputy Attorneys General, for Petitioner.
No appearance for Respondent.
Steptoe & Johnson, Matthew D. Lemer and Amanda Pedvin Varma for Real Parties in Interest.
The Franchise Tax Board (FTB or the Board) sought penalties against real parties in interest Quellos Group, LLC and Quellos Financial Advisors, LLC (collectively Quellos) for allegedly promoting an abusive tax shelter to a California taxpayer in 2001. Respondent Superior Court of San Francisco ruled for Quellos, and the Board seeks review of a single issue: whether a 2003 amendment to Revenue and Taxation Code section 19177 increasing the penalty for promoting an abusive tax shelter from $1, 000 to 50 percent of the gross income received can be retroactively applied. The financial consequences of the answer are enormous: if the statute is not retroactive, the two promoters here have to write a check for only $2, 000, but if the statute is retroactive, the promoters must write a check for almost $27 million, plus a dozen years of interest.
Respondent court concluded that the statute cannot be retroactively applied, and the Board must be satisfied with the $2, 000. We reach the same conclusion, relying in large part on an uncodified provision enacted with the 2003 amendments to section 19177, in which the Legislature directed that “this act shall apply with respect to any penalty assessed on or after January 1, 2004, on any return for which the statute of limitations on assessment has not expired. All other provisions of this act shall apply on or after January 1, 2004.” (Italics added.) The FTB acknowledges that the penalty imposed by any version of section 19177 is not a penalty “assessed... on [a] return.” And whet we conclude is dispositive is other language in the uncodified provision, which establishes that the Legislature did address the issue of retroactive sanctions in a variety of contexts, including for promoters, but only authorized retroactive application of a penalty in the case of a specific type of inaction by them. Because the issue of retroactive application was expressly addressed by the Legislature, we cannot expand that application as the Board requests, and we thus deny its petitions for mandate.
The Setting And The Statutes
A knowledgeable observer of abusive tax shelters, recognizing that they represent one of the most fertile fields for financially-driven creativity, likens them to pornography in that they “may be easier to recognize than define.” (Bankman, The New Market in Corporate Tax Shelters (June 21, 1999) 83 Tax Notes 1775, 1777.) They are also very much a moving target in that one of their typical characteristics is that “the shelter is likely to be shut down by
legislative or administrative change soon after it is detected.” (Id. at p. 1777; see id. at p. 1781.) Like performance-enhancing drugs in sport, it appears impossible for taxing authorities to anticipate what the latest generations of shelters will look like until they actually appear.
California’s primary weapon in the fight against bogus shelters has always been section 19177. The state was following the lead of the federal government, which first legislated on the subject in 1982. When originally enacted, section 6700 of the Internal Revenue Code (26 U.S.C. § 6700) directed that promoters of abusive tax shelters “shall pay a penalty equal to the greater of $1, 000 or 10 percent of the gross income derived or to be derived by such person from such activity.” (Pub.L. No. 97-248, § 320(a) (Sept. 3, 1982) 96 Stat. 611.) In 1993, California followed with the first version of section 19177, which provided simply: “A penalty shall be imposed for promoting abusive tax shelters. The penalty shall be determined in accordance with the provisions of Section 6700 of the Internal Revenue Code.” (Stats. 1993, ch. 31, §26, p. 152.)
A decade later, California resolved to address the issue in a more systematic fashion. In 2003, as part of a multi-faceted approach to halting (or at
least slowing) the hemorrhaging of state revenues caused by abusive tax shelters (see fn. 10, post), section 19177 was amended to read:
“(a) A penalty shall be imposed for promoting abusive tax shelters. The penalty shall be determined in accordance with the provisions of Section 6700 of the Internal Revenue Code, except as otherwise provided.
“(b) Notwithstanding Section 6700(a) of the Internal Revenue Code, if an activity with respect to which a penalty imposed under Section 6700(a) of the Internal Revenue Code involves a statement described in Section 6700(a)(2)(A) of the Internal Revenue
Code,  the amount of the penalty
imposed under subdivision (a) shall be equal to 50 percent of the gross income derived (or to be derived) from that activity by the person on which the penalty is imposed.” (Stats. 2003, ch. 654, § 9, p. 5023; Stats. 2003, ch. 656, §9, p. 5051.) An uncodified section in the 2003 enactments provided in pertinent part: “(a) Unless otherwise provided, this act shall apply with respect to any penalty assessed on or after January 1, 2004, on any return for which the statute of limitations on assessment has not expired. All other provisions of this act shall apply on and after January 1, 2004.” (Stats. 2003, ch. 654, § 15, p. 5037; Stats. 2003, ch. 656, § 15, subd. (a), p. 5064.) We shall refer to this language as “section 15(a)” and the entirety of the uncodified provision as “section 15.”
The Proceedings Below
Pursuant to this language, and the 2003 version of section 19177, the FTB assessed Quellos $26, 954, 965 in penalties, this being 50 percent of the $53, 909, 930 Quellos allegedly received for promoting an abusive tax shelter to a California taxpayer in 2001. In accordance with section 19180, Quellos paid 15 percent of the assessment ($4, 043, 244.25) to the FTB and then, when their administrative requests were denied, filed separate actions in respondent court for refund. The FTB responded with cross complaints for the unpaid 85
percent of the assessed penalties.  After the two actions were joined, the parties agreed to a bifurcation whereby they agreed to submit to respondent court the issue of whether the 2003 version of ...