Judge: Anne Richardson, Case: 22STLC05484, Date: 2023-05-15 Tentative Ruling

Case Number: 22STLC05484    Hearing Date: May 15, 2023    Dept: 40

Superior Court of California

County of Los Angeles

Department 40

Background

Plaintiff Matthew Stibbe sues Defendant State of California pursuant to a March 6, 2023 Second Amended Complaint alleging two claims against the State of California: (1) Refund of Personal Taxes [Rev. & Tax Code § 19382]; and (2) Reckless Disregard of Published Procedures [Rev. & Tax Code § 21021]. The claims are premised on various allegations, as follows.

In March 2015, Plaintiff filed his California and federal tax returns for 2009 and 2010. In August 2015, California’s Franchise Tax Board (FTB) verbally informed Plaintiff that he had a credit of $11,587.95 for tax years 2009 and 2010 (Credit or Refund), but, after not paying the Credit, four months later, in December 2015, the FTB informed Plaintiff that the Credit had passed the statute of limitations and Plaintiff would only receive a refund of $5,957.63 (Reduced Refund), leading Plaintiff, within 60 days, to file a responsive protest and claim for refund (First Protest).

Meanwhile, sometime in 2016, the Internal Revenue Service (IRS) claimed it had never received Plaintiff’s federal tax returns for 2009 and 2010, with the IRS preparing tax returns for Plaintiff for those years based on information available to it (IRS Prepared Returns) and finding that Plaintiff owed taxes of $100,000. In November 2016, Plaintiff filed a new set of federal tax returns for 2009 and 2010, including expense information offsetting his tax liability and showing a tax owing of approximately $11,600 (Plaintiff’s IRS Returns). Shortly before this, in or about July 2016, because of the issues related to the IRS Prepared Returns, $100,000 owing, and Plaintiff’s IRS Returns, the FTB decided that the Refund would be disallowed. Sometime in 2018, Plaintiff’s IRS Returns were accepted by the IRS, showing no taxes owed by Plaintiff (IRS Review). At some point thereafter, the FTB informed Plaintiff that it would follow IRS guidance, but that Plaintiff would undergo an audit to review the IRS matters.

In June 2019, the FTB issued a letter informing Plaintiff that his 2009 and 2010 claims for a refund were not accepted because, while federal laws allowed a “Net Operating Loss Carryback” (NOL Carryback), California did not have a similar law for those tax years. In January 2020, the FTB denied Plaintiff’s First Protest. In July 2020, Plaintiff inquired with the FTB into the status of his claims, at which time the FTB informed Plaintiff that his claim had been denied and directed Plaintiff to take up questions with the Audit Department. Later in July 2020, Plaintiff filed a Second Protest with the Audit Department. (As of March 2023, the FTB had not updated Plaintiff on the status of this protest.) Finally, in August 2020, Plaintiff received the NOL Carryback letter and the First Protest denial when the FTB emailed them to him upon request following a phone call, at which time the FTB informed Plaintiff that the denial was based on California only implementing carrybacks in 2013.

Plaintiff alleges that he never claimed or applied for NOL Carrybacks in the 2009 and 2010 tax returns that he filed in March 2015. Plaintiff sued the State of California on the grounds that the refusal to refund to Plaintiff the entire Credit/Refund is erroneous, illegal, and without authority of law for the reasons stated in the First Protest, Second Protest, and resolution of the IRS matters resulting in zero taxes owed, as well as for reasons related to the FTB’s conduct in its audit of Plaintiff.

Plaintiff also alleges that he reached out to a Mr. Soto with the FTB three times—before preparing Plaintiff’s IRS Returns and after submitting them in 2016, and after the IRS’s resolution of the IRS matters in 2018—to ask whether Plaintiff should amend his 2009 and 2010 tax returns, only to be told by Mr. Soto in 2016 that amendments were not necessary because the FTB would follow the IRS’s course of action and/or result and that the FTB would wait for the IRS’s review of Plaintiff’s IRS Returns, and to be told in 2018 that filing amendments would result in confusion to the system and delays.

Based on these facts and the FTB Audit Department’s alleged failure to follow its own procedures, Plaintiff claims $30,648 in monetary relief, interest on that sum from and after August 19, 2015, reasonable attorney’s fees, costs of suit, and other relief as the court deems appropriate.

The original Complaint and FAC—filed on August 18, 2022 and November 28, 2022 respectively—only alleged the Reckless Disregard of Published Procedures claim against the State of California. Plaintiff filed his SAC on March 6, 2023 after the Court granted a stipulation between the parties permitting its filing.

On March 29, 2023, the State of California demurred to the SAC’s two causes of action on the ground of insufficiency in pleading and moved to strike portions of the SAC.

On April 25, 2023, Plaintiff opposed the demurrer and motion to strike.

On May 3, 2023, the State of California replied to Plaintiffs’ oppositions.

The demurrer and motion to strike are now before the Court. 

Request for Judicial Notice

The Court DECLINES to take judicial notice of the Government Claim form issued by the California Department of General Services (DGS) pursuant to Government Code section 910.4 because such notice is not necessary for the disposition of the demurrer. (Demurrer Reply, RJN, p. 2, Ex. A; Evid. Code, § 453, subd. (c), 453.)

Demurrer: SUSTAINED, With Leave to Amend.

Demurrer Sufficiency Standard

A demurrer for sufficiency tests whether the complaint states a cause of action. (Hahn v. Mirda (2007) 147 Cal.App.4th 740, 747; see Code Civ. Proc., § 430.10, subd. (e).) This device can be used only to challenge defects that appear on the face of the pleading under attack or from matters outside the pleading that are judicially noticeable. (Blank v. Kirwan (1985) 39 Cal.3d 311, 318.) “To survive a [general] demurrer, the complaint need only allege facts sufficient to state a cause of action; each evidentiary fact that might eventually form part of the plaintiff’s proof need not be alleged.” (C.A. v. William S. Hart Union High School Dist. (2012) 53 Cal.4th 861, 872.) In testing the sufficiency of the cause of action, the demurrer admits the truth of all material facts properly pleaded. (Aubry v. Tri-City Hospital Dist. (1992) 2 Cal.4th 962, 966-67.) A demurrer, however, “does not admit contentions, deductions or conclusions of fact or law.” (Daar v. Yellow Cab Co. (1967) 67 Cal.2d 695, 713.) When considering demurrers, courts read the allegations liberally and in context. (Taylor v. City of Los Angeles Dept. of Water and Power (2006) 144 Cal.App.4th 1216, 1228, disapproved on other grounds, Jones v. Lodge at Torrey Pines Partnership (2008) 42 Cal.4th 1158, 1162.) The face of the complaint includes exhibits attached to the complaint. (Frantz v. Blackwell (1987) 189 Cal.App.3d 91, 94.) If facts appearing in the exhibits contradict those alleged, the facts in the exhibits take precedence. (Holland v. Morse Diesel Intern., Inc. (2001) 86 Cal.App.4th 1443, 1447, superseded by statute on other grounds as stated in White v. Cridlebaugh (2009) 178 Cal.App.4th 506, 521.)

SAC, First Cause of Action, Refund of Personal Income Taxes [Rev. & Tax. Code § 19382]: SUSTAINED, With Leave to Amend.

Except as provided in section 19385 of the Revenue and Tax Code, after payment of a tax and denial by the Franchise Tax Board of a claim for refund of that tax, any taxpayer claiming that the tax computed and assessed is void in whole or in part may bring an action, upon the grounds set forth in that claim for refund, against the Franchise Tax Board for the recovery of the whole or any part of the amount paid. (Rev. & Tax Code, § 19382; see also Cal. Const., art. XIII, § 32 [“No legal or equitable process shall issue in any proceeding in any court against this State or any officer thereof to prevent or enjoin the collection of any tax”; “[a]fter payment of a tax claimed to be illegal, an action may be maintained to recover the tax paid, with interest, in such manner as may be provided by the Legislature”].)

The SAC’s first cause of action is pleaded against the State of California based on the conduct of the FTB and alleges that the tax computed and assessed on Plaintiff Stibbe for the years of 2009 and 2010 was excessive and required, per the FTB’s own instruction in 2015, a refund of $11,587.95, with Plaintiff filing a claim for these monies and the FTB denying the claim and failing to pay Plaintiff this Refund based on an error related to NOL Carrybacks, supporting monetary relief in the amount of $30,648. (See SAC, ¶¶ 4-20, Prayer for Relief, First Cause of Action, ¶ 1.)

In its demurrer, the State of California argues that this claim is insufficiently pleaded because the SAC, on its face, pleads at paragraph 26 that the State of California assessed tax liability against Plaintiff for the year 2009 in the amount of $7,236 and for the year 2010 in the amount of $7,832, which, per the pleadings, remains outstanding, therefore failing to meet the “pay first, litigate later” rule set out in by section 19382 of the Revenue & Tax Code and section 32 of Article XIII of the California Constitution. (Demurrer, p. 10.)

In opposition, Plaintiff Stibbe argues that the SAC instead alleges that the FTB, by its own admission in 2015, owes Plaintiff his Refund for the 2009 and 2010 tax years, as alleged in paragraph four of the SAC. (Opp’n to Demurrer, p. 4.)

In reply, the State of California argues that Plaintiff’s reference to paragraph four of the SAC ignores subsequent allegations in the SAC, including those at paragraphs 7, 9, 12 to 16, and 26, as well as Exhibits 1 and 3 to 5 attached thereto, which show, collectively, pleadings to the effect that subsequent to 2015, the FTB determined that, not only was Plaintiff not entitled to the Credit/Refund, he in fact owed additional taxes for 2009 and 2010. (Demurrer Reply, p. 4.)

The Court agrees with the State of California.

Paragraph 26 of the SAC alleges that the FTB is demanding that Plaintiff pay outstanding tax liability for the year 2009 in the amount of $7,236 and for the year 2010 in the amount of $7,832. While paragraph 26 of the SAC also alleges that as of June 20, 2020, the FTB has collected $9,530 of the taxes allegedly owed for the year 2009, such a pleading does not change the fact that this paragraph alleges that the FTB is still demanding tax liability payments from Plaintiff for the years 2009 and 2010. Thus, based on the SAC’s own pleading, the FTB is asserting that Plaintiff has not paid his taxes for 2009 and 2010, for which reason, as pleaded, the first cause of action fails to meet the requirements of the “pay first, litigate later” rule set out in by section 19382 of the Revenue & Tax Code and section 32 of Article XIII of the California Constitution.

The State of California’s demurrer to the SAC’s first cause of action is therefore SUSTAINED, With Leave to Amend.

SAC, Second Cause of Action, Reckless Disregard of Published Procedures [Rev. & Tax. Code § 21021]: SUSTAINED, With Leave to Amend.

If any officer or employee of the board recklessly disregards board published procedures, a taxpayer aggrieved by that action or omission may bring an action for damages against the State of California in superior court. (Rev. & Tax. Code § 21021.)

The SAC’s second cause of action is pleaded against the State of California based on conduct of the FTB and alleges that the FTB failed to comply with procedures set forth by this entity in its own FTB Publication 985 Audit, Protest, Appeals the Process (Pub 985). (See SAC, ¶¶ 22-25.) Specifically, the SAC alleges that between approximately August 13, 2018, and continuing through the filing of this SAC, FTB Audit employees repeatedly informed Plaintiff that (i) he was under audit review, (ii) he was referred to audit, (iii) his account is in audit, (iv) his account is currently being reviewed in audit, and many similar references to Plaintiff’s account being under audit, conduct which recklessly disregarded numerous procedures set forth in Pub 985, including, but not necessarily limited to: (a) providing Plaintiff with an initial contact letter that explained the FTB selected Plaintiff’s tax return for audit, that identified the issues under examination, and that provided the names and phone numbers of the auditor, supervisor, and manager; (b) providing Plaintiff with an audit plan; (c) informing Plaintiff that Plaintiff may request an opening conference; (d) providing Plaintiff with an audit issue presentation sheet; and (e) holding a closing conference. (SAC, ¶¶ 22-25.)

I. Reckless Disregard Claim as Circumvention of the Bar on His Refund Claim

In its demurrer, the State of California first argues that the second cause of action is insufficiently pleaded because “Plaintiff cannot, as a matter of law, seek to recover the Disputed Taxes under the guise of his Damages Claim under RTC section 21021,” which is impermissible per California case law, and that the attorney’s fees sought in this claim are not recoverable because “Plaintiff would need to prove that, as he contends, [the] FTB collected taxes that were ‘never owed.’” (Demurrer, pp. 10-13.)

In opposition, Plaintiff Stibbe argues that his second cause of action does not attempt to collect damages for his Refund claim through a Reckless Disregard claim, but instead alleges that he overpaid his taxes, leading to an audit that did not follow procedures established in Pub 985, with a component of Plaintiff’s damages involving Defendant’s failure to refund Plaintiff’s tax credits, and where the State of California cites no authority that Plaintiff is denied the benefit of a reckless disregard of procedures claim where a component of the damages sought involve the refund at issue in the first cause of action. (Opp’n to Demurrer, pp. 4-7.)

In Reply, the State of California argues that it has in fact cited in its demurrer many cases supporting the conclusion that Plaintiff is denied the benefit of a reckless disregard claim where a component of the damages sought involve the refund at issue, including cases stating unequivocally that “‘the sole legal avenue for resolving tax disputes is a postpayment refund action’” and that “‘[t]he power of a state to provide the remedy of suit to recover alleged overpayments as the exclusive means of judicial review of tax proceedings has long been unquestioned.’” (Demurrer Reply, p. 5.) The State of California also appears to argue that insofar as the second cause of action seeks damages that would, in essence, invalidate the 2009 and 2010 tax assessments by the FTB as to Plaintiff Stibbe, case law holds that the pursuit of a cause of action invalidating an assessed tax without first meeting the requirements of section 32 of Article XIII of the California Constitution is not authorized. (Demurrer Reply, pp. 5-8.)

The Court agrees with the State of California.

The first and second causes of action pray for the same monetary relief: $30,648. (Compare SAC, Prayer for Relief, First Cause of Action, ¶ 1, with SAC, Prayer for Relief, Second Cause of Action, ¶ 1.) While Plaintiff argues that the refund sought in the first cause of action is only “a component of Plaintiff’s damages” alleged in the second cause of action (Opp’n to Demurrer, p. 7), the Court finds that this argument is undercut by the fact that both claims seek the same amount of monetary relief, which, as framed by the first cause of action, are monies owed to Plaintiff as a refund for overpaid taxes in the years 2009 and 2010. Based on this complete overlap in monetary relief sought, the Court agrees with the State of California that Plaintiff is utilizing Revenue and Tax Code section 21021 to circumvent and obtain the same relief contemplated by the SAC’s first cause of action but without first meeting the “pay first, litigate later” rule set out in by section 19382 of the Revenue & Tax Code and section 32 of Article XIII of the California Constitution. The Court also agrees that such a short-circuiting of the “pay first, litigate later” rule is prohibited. (See California Department of Tax and Fee Administration v. Superior Court (2020) 48 Cal.App.5th 922 (Kintner) [the use of a statute affording a taxpayer certain relief—e.g., declaratory relief as to the validity of a particular regulation—does not exempt the requirement that a taxpayer comply with section 32 in cases where the taxpayer seeks relief that would invalidate a tax assessment by the State of California].)

The State of California’s demurrer to the SAC’s second cause of action is thus SUSTAINED, with leave to amend.

II-III. Claims Presentation Requirement and Timeliness of Claim Presentation

Because the Court has sustained the State of California’s demurrer to the SAC’s second cause of action on another ground, the Court need not discuss to whether the second cause of action fails, as pleaded, for failure to meet the claim presentation requirement or failure to meet the timeliness requirements of claim presentation. (See Demurrer, pp. 13-18; Demurrer Reply, pp. 8-11.)

Motion to Strike: GRANTED, in Part; DENIED, in Part.

Legal Standard

The court may, upon a motion or at any time in its discretion and upon terms it deems proper: (1) strike out any irrelevant, false, or improper matter inserted in any pleading; or (2) strike out all or any part of any pleading not drawn or filed in conformity with the laws of California, a court rule, or an order of the court. (Code Civ. Proc. § 436, subds. (a)-(b).) For the purposes of a motion to strike pursuant to Sections 435 to 437 of the Code of Civil Procedure, the term “pleading” means a demurrer, answer, complaint, or cross-complaint, (Code Civ. Proc., § 435, subd. (a)), and an immaterial allegation or irrelevant matter in a pleading entails (1) an allegation that is not essential to the statement of a claim or defense, (2) an allegation that is neither pertinent to nor supported by an otherwise sufficient claim or defense, or (3) a demand for judgment requesting relief not supported by the allegations of the complaint or cross-complaint (Code Civ. Proc., § 431.10, subds. (b)(1)-(3).)

Order Granting Striking Portions of ¶ 26 from the SAC: DENIED.

While the Court recognizes that the second cause of action, as currently pleaded, was found to be an attempted circumvention of the requirements of the “pay first, litigate later” rule set out in by section 19382 of the Revenue & Tax Code and section 32 of Article XIII of the California Constitution (see Demurrer, Second Cause of Action discussion supra), the portions of the 26th paragraph that the State of California seeks to strike are background allegations supporting the cause of action. (See Strike Mot., pp. 7-8.) The Court is reluctant to strike these allegations because it is possible that, without amending paragraph 26 of the SAC, Plaintiff can reallege this claim to ensure that the monetary relief sought therein is not comprised of an attempt to recover the refund amount alleged in the first cause of action, thus curing the insufficiency of the second cause of action. In this sense, the allegations that the State of California seeks to strike from paragraph 26 of the SAC are not irrelevant or improper.

The State of California’s motion to strike portions of the 26th paragraph in the SAC is thus DENIED.

Order Granting Striking of Monetary Relief from SAC’s Prayer for Relief: GRANTED.

Because both causes of action have failed on demurrer (see Demurrer discussion supra), there are no allegations in the SAC to support the monetary relief prayed for in the SAC’s Prayer for Relief for the first and second causes of action. (See Strike Mot., p. 8.)

The State of California’s motion to strike the monetary relief prayed for in the SAC’s Prayer for Relief is thus GRANTED, with leave to amend. 

Conclusion

Defendant State of California’s Demurrer to Second Amended Complaint is SUSTAINED, with leave to amend, because the State of California has advanced convincing arguments that led the Court to conclude that the SAC’s two causes of action are insufficiently pleaded.

Defendant State of California’s Motion to Strike Portions of Second Amended Complaint is GRANTED, in Part, with leave to amend, and DENIED, in Part, as follows:

(1) DENIED as to striking the challenged portions of paragraph 26 of the SAC because the background allegations challenged by the State of California are not irrelevant or improper to the second cause of action; and

(2) GRANTED as to the monetary relief prayed for vis-à-vis the SAC’s first and second causes of action because such monetary relief is not supported by allegations in the SAC.