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Cutler v. Franchise Tax Board

California Court of Appeals, Second District, Eighth Division

September 2, 2014

FRANK CUTLER, Plaintiff and Appellant,
v.
FRANCHISE TAX BOARD, Defendant and Respondent.

[DEPUBLISHED BY ORDER]

APPEAL from a judgment of the Superior Court for the County of Los Angeles, No. BC421864 Elizabeth A. White, Judge.

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COUNSEL

Reed Smith, Mardiros H. Dakessian, Margaret M. Grignon, Zareh A. Jaltorossian and Kasey J. Curtis for Plaintiff and Appellant.

Kamala D. Harris, Attorney General, Paul D. Gifford, Assistant Attorney General, W. Dean Freeman, Diane Spencer Shaw and Marta L. Smith, Deputy Attorneys General, for Defendant and Respondent.

OPINION

GRIMES, J.

SUMMARY

In 2012, we held in an earlier appeal in this case that a tax statute discriminated on its face on the basis of an interstate element in violation of the commerce clause. (Cutler v. Franchise Tax Board (2012) 208 Cal.App.4th 1247 [146 Cal.Rptr.3d 244] (Cutler I).) When plaintiff Frank Cutler sought attorney fees under Code of Civil Procedure section 1021.5 (section 1021.5), the “private attorney general” attorney fee statute, the trial court denied his application. The court concluded plaintiff’s lawsuit did not meet two statutory prerequisites: first, it did not confer “a significant benefit, whether pecuniary or nonpecuniary, ... on the general public or a large class of persons, ” and second, the “necessity and financial burden of private enforcement” were not “such as to make the award appropriate....” (§ 1021.5.)

On the first point, the trial court found it was “speculative” that the lawsuit conferred any benefit on the general public or a large class of people. On the second point, the court found an award was not appropriate because plaintiff sought a refund of “a significant sum of money” ($442, 000), so – even though he incurred attorney fees of more than $685, 000 – he had an incentive to bring the litigation, and any benefit he conferred on the public was incidental.

We conclude the court erred on both points. We reverse the order denying attorney fees and remand for a determination of the amount of fees to be awarded.

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FACTS

When plaintiff filed the underlying lawsuit seeking a tax refund, Revenue and Taxation Code sections 18038.5 and 18152.5 allowed an individual taxpayer to defer gains on the sale of qualified small business stock if the taxpayer purchased other qualified small business stock within 60 days. The deferral was available, however, only if the stock sold and purchased was issued by corporations that used 80 percent of their assets in the conduct of business in California and that maintained 80 percent of their payrolls in California.

In 1998, plaintiff sold stock in an internet start-up company and used some of the proceeds to purchase stock in several other small businesses. The stock he sold did not meet the California property and payroll requirement. Plaintiff nevertheless deferred that part of the gain from the sale that he invested in three other small businesses on his 1998 California tax return. The Franchise Tax Board (the Board) disallowed the deferral. Plaintiff filed a protest; the Board denied the protest; and plaintiff appealed to the State Board of Equalization. Plaintiff paid the $442, 000 in tax, penalties and interest that the Board assessed. The State Board of Equalization denied plaintiff’s appeal. In September 2009, plaintiff filed the underlying lawsuit for a refund, claiming the California property and payroll requirement violated the commerce clause. The trial court granted summary judgment in favor of the Board, and plaintiff appealed. (Cutler I, supra, 208 Cal.App.4th at pp. 1251-1252.)

We reversed, concluding the statute was discriminatory on its face and could not stand under the commerce clause. (Cutler I, supra, 208 Cal.App.4th at p. 1261.) We could not determine the amount of the refund that was owed to plaintiff, if any, because there were material disputes over whether plaintiff qualified for the tax deferral for other reasons apart from the California property and payroll requirement. (Id. at p. 1262.) Consequently, the case was remanded to the trial court for further proceedings.

After this court’s decision became final, the Board issued a notice dated December 21, 2012, outlining how it planned to rectify its past enforcement of the unconstitutional elements of Revenue and Taxation Code sections 18152.5 and 18038.5. (In McKesson Corp. v. Florida Alcohol & Tobacco Div. (1990) 496 U.S. 18, 31, 40-41 [110 L.Ed.2d 17, 110 S.Ct. 2238], the high court held a state must provide “meaningful backward-looking relief” for an unlawful tax collection, and identified three ways to do so: by issuing refunds, making retroactive assessments of tax increases, or a combination of the two.)

The Board’s notice stated that, for tax years before January 1, 2008, because of the statute of limitations, “the only way to place similarly situated

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taxpayers in the same position is to allow the exclusion/deferral to taxpayers who meet the requirements of the statutes other than the unconstitutional California property and payroll requirements.” The notice stated that after January 1, 2008, the Board intended to disallow all exclusions and deferrals and thus to issue notices of proposed assessments to taxpayers who had benefited from the discriminatory exclusions and deferrals.

In February 2013, plaintiff filed a motion for attorney fees under section 1021.5. He submitted evidence that he incurred $685, 868 in attorney fees litigating this case for a refund of at most $442, 000 (including interest and penalties). He contended he vindicated a constitutional right of a large class of California taxpayers by obtaining our ruling that ended the discriminatory treatment of taxpayers who invest in small businesses with more than 20 percent of assets or payroll outside California, allowing “a large class of similarly situated taxpayers who, like [plaintiff], invested in multi-state and out-of-state small businesses to request a refund of taxes that were unconstitutionally levied.”

Plaintiff also pointed to a Board analysis in 1993 projecting that the small business stock capital gain exclusion would decrease California tax revenues by more than $250 million between 1998 and 2005, arguing this showed the provisions “have a substantial impact on California investors.”

The Board opposed plaintiff’s motion, contending plaintiff had the resources to prosecute the action, and the statute was not intended to apply to a sophisticated investor who engages in multimillion dollar stock transactions and seeks a $442, 000 refund. The Board argued there was no benefit to California or Californians, because the incentive to invest in small businesses in California had been eliminated; taxpayers for tax years 2008 and ...


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