Judge: Margaret L. Oldendorf, Case: 22BBCV00170, Date: 2023-05-05 Tentative Ruling

Case Number: 22BBCV00170    Hearing Date: May 5, 2023    Dept: P

SUPERIOR COURT OF THE STATE OF CALIFORNIA

FOR THE COUNTY OF LOS ANGELES

NORTHEAST DISTRICT

          I.        INTRODUCTION

          In this action Janelle Polk (Polk) sues Defendant California Franchise Tax Board (FTB) for a refund of taxes. In the tax years 2011, 2014, and 2015, the FTB assessed “frivolous return” and/or “frivolous submission” penalties on Polk and collected the penalties via an Earnings Withhold Order for Tax (EWOT). Polk filed claims for refunds for the tax years 2011, 2014, and 2015, which were denied. The California Office of Tax Appeals denied Polk’s appeal and this action followed.

          Polk’s Complaint consists of three causes of action, one for each of the tax years for which she seeks refunds. In each cause of action, Polk alleges that penalties were wrongly imposed because the returns and protests were not frivolous. She also alleges that the assessments were unlawfully made without supervisory approval; that her due process rights were violated because FTB failed to mail notices and demands for payment before collecting; and that its use of EWOT to collect was wrongful because she was not given a chance to protest.

          The FTB moves for summary judgment on the grounds that it properly assessed frivolous return penalties for tax years 2011 and 2015, and frivolous submission penalties for tax years 2011, 2014, and 2015. It also seeks summary adjudication on the third cause of action concerning tax year 2015 on the basis that the claim is barred by the “pay first, litigate later” rule. In a separate action (22BBCV00511) the FTB moved for summary judgment on the same basis as to tax year 2015. That motion was heard and granted in the FTB’s favor on May 4, 2015; thus it renders this part of Polk’s motion moot.

          The FTB presents undisputed evidence establishing proper grounds for the penalties it assessed. It also presents sufficient evidence that all notice requirements were met, and that the use of EWOT to collect the penalties was proper. Polk offers no evidence in opposition, and her objections to FTB’s evidence lack merit. Consequently, the FTB is entitled to summary judgment in its favor.

II.       LEGAL STANDARD

A. The Law Governing Summary Judgment

Summary judgment is appropriate where a defendant establishes it is entitled to judgment as a matter of law. Code Civ. Proc. §437c(c). A defendant moving for summary judgment has met its burden of establishing that a cause of action has no merit if it shows that one or more elements of the cause of action cannot be established. Section 437c(p)(2).

B. The Law Governing Actions Based on a Claim for Refund

          “The claim for refund delineates and restricts the issues to be considered in a taxpayer's refund action. (Citation.) The trial court and this court are without jurisdiction to consider grounds not set forth in the claim. (Citation.)” Atari, Inc. v. State Bd. of Equalization (1985) 170 Cal.App.3d 665, 672.

          “Except as provided in Section 19385, after payment of the tax and denial by the Franchise Tax Board of a claim for refund, 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.

III.     EVIDENCE

Jarrod Reiser offers testimony on behalf of the FTB. Based on the information provided in paragraphs 1 and 2 of his declaration, Reiser is qualified to authenticate Exhibits 1through 12. In ¶3, Reiser states his familiarity with FTB’s customary mailing practices. He avers that notices are mailed to taxpayers by first verifying the last known address before being placed in an outgoing mail bin where a post office employee picks it up. He further states that copies of all such notices are stored in FTB’s archives.

Exhibit 1 – Polk’s 2011 tax return, dated October 7, 2014.

Exhibit 2 – Polk’s Protest of 2011 Notice of Proposed Assessment

Exhibit 3 – Polk’s Claim for Refund for 2011 Frivolous Penalty

Exhibit 4 – Polk’s Protest of 2014 Notice of Proposed Assessment

Exhibit 5 – Polk’s Claim for Refund for 2014 Frivolous Submission Penalty

Exhibit 6 – Polk’s 2015 tax return

Exhibit 7 – Polk’s Protest of 2015 Notice of Proposed Assessment

Exhibit 8 – Polk’s Claim for Refund 1 for 2015 Frivolous Penalties

Exhibit 9 – Polk’s Claim for Refund 2 for 2015 Frivolous Penalties

Exhibit 10 -April 8, 2022 Notice of Proposed Assessment for 2015 tax year

Exhibit 11 – August 24, 2022 State Income Tax Balance Due Notice of 2015 tax year

Exhibit 12 – Declaration of Renee Thresher prepared by Warner Bros. in response to an administrative subpoena issued by the FTB seeking information about Polk’s employment.

          Polk’s objections to Exhibits 1-11 are overruled. These exhibits are relevant and are adequately authenticated. All objections to the Reiser Declaration are also overruled. Reiser’s testimony about mailing practices is based on personal knowledge. Reiser’s testimony about actions the FTB took are not conclusory and are based on personal knowledge.

The Declaration of Douglas Beteta, counsel for FTB, authenticates Exhibits 13 (December 22, 2006 offer letter from Warner Bros. to Polk), 14 (FTB’s subpoena to Warner Bros.), and 15 (custodian of records declaration authenticating offer letter). Polk’s objections to this evidence are overruled.

          The Declaration of Royce Larson, Senior Compliance Representative with the FTB provides sufficient evidence of personal knowledge to authenticate Exhibits U through Y, CC, and DD. In ¶16 Larson testifies to the steps taken to verify last known mailing address prior to mailing and the process for placing each notice in the outgoing mail. This declaration is dated May 11, 2022, and was clearly prepared for a purpose other than this litigation as it predates the filing of the complaint. That fact does not make the evidence inadmissible. Polk’s objections to the Larson Declaration and attached exhibits are overruled.

In ¶14, Larson states that each of his determinations of Frivolous Submission Penalty were approved by his supervisor Lisa Mellor. The Declaration of Lisa Mellor confirms this. Mellor also authenticates Exhibit PP. Objections to the Mellor Declaration are overruled. There is no need for the Larson and Mellor Declarations to be listed in the compendium of exhibits for them to be considered. All objections to the Larson and Mellor Declarations are overruled. Their evidence is relevant and is based on personal knowledge. The evidence they present is not hearsay.

Exhibit U – FTB’s Notice of Frivolous Return Determination and Demand for Tax Return dated July 7, 2016, for the 2011 tax year.

Exhibit V – FTB’s Notice of Frivolous Return Determination and Demand for Payment dated October 19, 2016, for the 2011 and 2015 tax years.

Exhibit W – Frivolous Submission Notice dated March 8, 2017, for the 2011 tax year.

Exhibit X – Frivolous Submission notice dated May 10, 2017, for the 2011 tax year.

Exhibit Y – Frivolous Submission Penalty dated September 15, 2017 for 2011 tax year.

Exhibit CC – Frivolous Submission Notice dated May 10, 2017 for 2014 tax year.

Exhibit DD – Frivolous Submission Penalty dated September 15, 2017 for 2014 tax year.

Exhibit PP – Notice of Frivolous Return Determination and Demand for Tax Return dated July 7, 2016 for 2015 tax year.

IV.     DISCUSSION

          A. Frivolous Returns (2011 and 2015)

The FTB provides a legal discussion of what is meant by a “frivolous return.” Rev. & Tax Code §19179 provides that a penalty shall be imposed for filing a frivolous return. The penalty is to be determined in accordance with Internal Revenue Code §6702. That section is as follows:

26 U.S.C. §6702

          (a) Civil penalty for frivolous tax returns.--A person shall pay a penalty of $5,000 if--

(1) such person files what purports to be a return of a tax imposed by this title but which--

(A) does not contain information on which the substantial correctness of the self-assessment may be judged, or

(B) contains information that on its face indicates that the self-assessment is substantially incorrect, and

(2) the conduct referred to in paragraph (1)--

(A) is based on a position which the Secretary has identified as frivolous under subsection (c), or

(B) reflects a desire to delay or impede the administration of Federal tax laws.

          (b) Civil penalty for specified frivolous submissions.--

(1) Imposition of penalty.--Except as provided in paragraph (3), any person who submits a specified frivolous submission shall pay a penalty of $5,000.

(2) Specified frivolous submission.--For purposes of this section--

(A) Specified frivolous submission.--The term “specified frivolous submission” means a specified submission if any portion of such submission--

(i) is based on a position which the Secretary has identified as frivolous under subsection (c), or

(ii) reflects a desire to delay or impede the administration of Federal tax laws.

(B) Specified submission.--The term “specified submission” means--

(i) a request for a hearing under--

(I) section 6320 (relating to notice and opportunity for hearing upon filing of notice of lien), or

(II) section 6330 (relating to notice and opportunity for hearing before levy), and

(ii) an application under--

(I) section 6159 (relating to agreements for payment of tax liability in installments),

(II) section 7122 (relating to compromises), or

(III) section 7811 (relating to taxpayer assistance orders).

(3) Opportunity to withdraw submission.--If the Secretary provides a person with notice that a submission is a specified frivolous submission and such person withdraws such submission within 30 days after such notice, the penalty imposed under paragraph (1) shall not apply with respect to such submission.

(c) Listing of frivolous positions.--The Secretary shall prescribe (and periodically revise) a list of positions which the Secretary has identified as being frivolous for purposes of this subsection. The Secretary shall not include in such list any position that the Secretary determines meets the requirement of section 6662(d)(2)(B)(ii)(II).

           . . . [additional subparts omitted]

          The FTB presents legal authority to the effect that tax returns reflecting zero income are frivolous. Rev. Rul. 2004-34 (I.R.S. March 22, 2004) 2004-1 C.B. 619, 2004-12 I.R.B. 619, 2004 IRB LEXIS 93, at p.*1; Lemieux v. United States (D. Nev. 2002) 230 F.Supp.2d 1143, 1146 [where Form W-2 showed income of “considerably more than zero,” and Form 1040 was submitted showing zero income, the tax returns were “substantially incorrect and frivolous”]. Polk counters that a frivolous penalty must be determined from the face of the return.  She notes that in Lemieux the taxpayer included the W-2 with the return, whereas in 2011 she did not.

Section 6702 (a) provides two bases for a frivolous return: (A) does not contain information on which the substantial correctness of the self-assessment may be judged, or

(B) contains information that on its face indicates that the self-assessment is substantially incorrect. FTB argues in its reply memorandum that, by failing to attach the W-2 to her 2011 return, Polk submitted a return that did not contain information on which substantial correctness of the self-assessment could be judged.  This argument is well taken.

          Polk’s 2015 return is different. On that one she attached the W-2, but zeroed out the income. This is on its face frivolous pursuant to Lemieux.

          In her protests, Polk has argued that her returns showing zero income were correct and therefore not frivolous. Polk explains that the W-2s submitted by Warner Bros. were erroneous. This is so, she urges, because a W-2 is limited to reporting “trade or business” payments, which are defined in Rev. & Tax Code §17020 to “include [] the performance of the functions of a public office.” This argument -- that because she did not perform the functions of a public office she did not earn income -- is one the IRS and the FTB have determined to be frivolous. Notice 2010-33 (I.R.S. April 7, 2010) 2010-1 C.B. 609, 2010-17 I.R.B. 609, 2010 IRB LEXIS 207, at pp. *3 [itemizing frivolous arguments, at item (7) identifying the frivolous the argument that, “Only certain types of taxpayers are subject to income and employment taxes, such as employees of the Federal government”].

          Similarly, the FTB argues that Polk’s position that she does not fall under the Ins. Code §13004 definition of “employee” is frivolous for the same reason. The word “includes” does not limit income to only certain types of wage earners.

          Finally, with regard to Polk’s argument that no taxes were owed because she is not a United States citizen, the FTB points to the same IRS Notice. Notice 2010-33 (I.R.S. April 7, 2010) 2010-1 C.B. 609, 2010-17 I.R.B. 609, 2010 IRB LEXIS 207, at pp. *3 [identifying at item (3) the frivolous argument that “A taxpayer’s income is excluded from taxation when the taxpayer rejects or renounces United States citizenship because the taxpayer is a citizen exclusively of a State”].

          B. Frivolous Submissions (2011 and 2014 Protests)

          The protests raise the same objections discussed above.

          C. Lack of 30-Day Notice

          Polk alleges that the frivolous return penalties and frivolous submission penalties were wrongful because the FTB did not provide her with 30 days’ notice to either file a valid return or withdraw her protest. The FTB argues that it was not required to provide notice because Rev. & Tax Code §19179(c)(1)(E) is remedial only; it contains no requirement that it provide notice. Even if there were a requirement, the FTB argues, it met that requirement by providing Polk with notice prior to issuing each penalty.

          Rev. & Tax Code §19179(c)(1)(E) provides that if the FTB provides a person with notice that a submission is frivolous and the person withdraws that submission within 30 days after the notice, the penalty imposed under Section 6702(b)(1) of the Internal Revenue Code does not apply with respect to that submission. Subdivision (e) provides that the Chief Counsel of the FTB may rescind all or any portion of any penalty.

          Polk’s contention as to why the Earnings Withholding Order for Taxes (EWOT) orders were improper is that Code Civ. Proc. §706.072(b) provides her with an opportunity to protest penalty assessments prior to the EWOT issuing. The FTB argues Polk has misconstrued this statute. What Section 706.072(b) provides is that a withholding order may only be issued under one of two circumstances: (1) the existence of tax liability appears on the face of the taxpayer’s return; or (2) the tax liability has been assessed or determined as provided by statute and that taxpayer “had notice of the proposed assessment or determination and had available an opportunity to have the proposed assessment or determination reviewed by appropriate administrative procedures.” It goes on to provide that if the taxpayer is given notice of the proposed assessment but does not make a timely request for review, the state may issue a withholding order for taxes.

The FTB is correct that Code Civ. Proc. §706.072 is not a tax statute. Rather, it provides that an EWOT may issue where the taxpayer has had the opportunity for appropriate administrative procedures. Those administrative procedures are supplied in Rev. & Tax Code §19179(c)(1)(E) and (e): taxpayers may withdraw their frivolous submissions within 30 days, and ask FTB’s Chief Counsel to review the penalty.

          On the issue of notice, Polk cites Rev. & Tax Code §18416(b), which provides that “any notice mailed to a taxpayer shall be sufficient if mailed to the taxpayer’s last known address.” As discussed, infra, the evidence presented demonstrates exactly that.

          D. The FTB Has Established That Polk’s Claims Lack Merit

          In Undisputed Material Facts (UMFs) 1-5 FTB establishes that Polk (who was then going by the name of Janelle Roberts) was hired by Warner Bros. in January 2007, and worked there during the years 2011 through 2015. The evidence offered in support of these UMFs is admissible and Polk does not oppose these UMFs with contrary evidence.

          FTB offers Polk’s claims for refund in evidence (Exhibits 3, 5, 8, and 9) and then explains why the arguments she raises lack legal merit.

          Tax Year 2011

          Exhibit 1 is Polk’s 2011 tax return. On it, she claims $0 wages.

          Exhibit 2 is Polk’s protest of proposed assessment for tax year 2011. In it, Polk argued that she was not required to file a return in 2011 because she lacked sufficient gross income. She argued that this is so because she was not involved in a “trade or business” for which she performed government service, she earned no wages pursuant to Ins. Code §13004, and she was not a “United States person.” These are all grounds determined to be frivolous, as discussed above.

          Exhibit 3 is Polk’s Claim for Refund for Tax Year 2011. In it, she urges that the frivolous return and frivolous submission penalties were unwarranted for essentially the following reasons: (1) they were not frivolous; (2) Polk never received the notice requiring withdrawal of the demand in 30 days; and (3) the FTB collected $11,554.47 towards the penalties via EWOTs without giving her the opportunity to protest the penalties, which she was entitled to pursuant to Code Civ. Proc. §706.072. Polk’s Complaint adds another argument to support a claimed refund: lack of supervisory approval for the penalties. Rev. & Tax Code §19187(b)(1). Although the pleading is limited to matters that were included in the claim for refund, the FTB addresses the lack of supervisory approval contention as well.  

          The FTB presents the following evidence to rebut each of these claims.

          In 2011 Polk earned $61,007.4 (UMF 5) but filed no tax return (UMF 6). In February 2013, the FTB requested that she do so. UMF 7. On October 14, 2013, Polk filed a tax return for 2011, reporting that she had received zero income. UMF 8. She has yet to file a tax return for 2011 that accurately reports her income. UMF 9.

          On July 7, 2016, the FTB issued and mailed a notice requesting that Polk file a valid return within 30 days or a $5,000 penalty would be imposed; this notice was not returned as undeliverable. UMF 11.

          On October 19, 2016, the FTB issued a notice imposing the frivolous return penalty and demanding payment; it was mailed to Polk’s last known address and not returned for failure of delivery. UMFs 12, 13. Mellor, Larson’s supervisor, provided written approval for the penalty. UMFs 10, 14.

          On December 23, 2016, Polk protested both the proposed assessment and the frivolous return penalty. UMF 15.

          On March 8 and May 10, 2017, the FTB notified Polk that her 2011 Protest was a frivolous submission which, if not withdrawn in 30 days, would result in a $5,000 frivolous submission penalty. To date Polk has not withdrawn it. UMFs 16, 17.

          On September 15, 2017, the FTB issued a notice of a frivolous submission penalty, with supervisor permission, which was mailed to Polk’s last known address and not returned. UMFs 18, 19, 20.  

          On June 18, 2018, Polk submitted a request to the FTB’s chief counsel to relieve her of the 2011 frivolous submission penalty. That request was denied. UMFs 21, 22.

          On November 13, 2018, Polk filed an administrative claim for refunds for both the frivolous return and frivolous submission penalties for the 2011 tax year. UMF 23. The FTB denied the 2011 claim for refund. UMF 24.

          The UMFs discussed here are all supported by admissible evidence. Polk has not offered any evidence in opposition that would demonstrate the existence of a triable issue of material fact.

          Based on this undisputed evidence, the FTB has established that Polk’s claim for a refund for tax year 2011 lacks merit. It does this by establishing that her tax return and protest were frivolous; that the FTB complied with applicable notice requirements; and that its collection of the penalties through an EWOT was not improper.

          Tax Year 2014

          Exhibit 4 is Polk’s protest of the 2014 proposed assessment. In it, she argues that the W-2 is incorrect as she was not involved in a trade or business as defined by Rev. & Tax Code §17020 (i.e., she was not a government employee); she argues she did not receive wages pursuant to Ins. Code §13004; and she argues she was not a United States person. Each of these arguments have been legally determined as frivolous, as discussed above.

          On January 27, 2017, Polk filed a protest of the FTB’s notice of proposed 2014 assessment. UMF 25. On May 10, 2017, the FTB notified Polk that her protest was frivolous and if not withdrawn would result in a $5,000 penalty; the notice was mailed pursuant to the FTB’s customary practice and was not returned for failure of delivery. UMF 26. To date Polk has not withdrawn her protest. UMF 27.

          On September 15, 2017, the FTB issued a notice, with supervisory approval, imposing a frivolous submission penalty and demanding payment; this notice was mailed pursuant to the FTB’s customary procedures and was not returned. UMFs 28, 29, and 30.

          On June 18, 2018, Polk submitted a request for the FTB’s counsel to relieve her of the 2014 frivolous submission penalty. UMF 31. The Chief Counsel denied that request. UMF 32. On November 7, 2018, Polk filed claim for refund for the frivolous submission. UMF 33. The FTB denied the claim. UMF 34.

          Each of these UMFs is supported by admissible evidence. Polk offers no evidence to contradict them. As the evidence establishes the 2014 protest was a frivolous submission, Polk’s claim for refund lacks merit.

          Tax Year 2015

          Polk’s challenges to tax year 2015 were the subject of a related motion heard on May 4, 2023.  That motion for summary judgment was granted in FTB’s favor on the ground that claims for refunds may only be litigated “once paid.” Cal. Const., art. XIII, § 32; Rev. & Tax Code §§ 19381, 19382; State Bd. of Equalization v. Superior Court (1985) 39 Cal.3d 633, 638.

          In this action, the FTB presents evidence establishing that Polk has not paid all amounts owed for 2015. UMFs 48- 52. Based on this admissible and undisputed evidence, Polk’s claim for a refund lacks merit.

          Additionally, Polk’s 2015 tax return indicates she earned $0; the attached W-2 contains “corrected” information indicating that though her wages had been reported as $89,477.48 they were in fact $0. Exhibit 6. Her protest and claims for refund (Exhibits 7-9) raise the same three legally frivolous arguments about not being a government worker, not earning wages pursuant to the Insurance Code, and not being a United States person.

          In UMFs 35-47, the FTB sets forth evidence supporting adjudication in its favor as to Polk’s 2015 taxes. These include her filing of a $0 wage tax return; the FTB mailing a notice requesting she file a valid return within 30 days; her failure to do so; and the mailing of a notice of frivolous return (with supervisor approval). The FTB also presents evidence of issuing a notice of proposed assessment, Polk’s protest, the FTB’s notice that the protest was a frivolous submission, Polk’s failure to withdraw it, and the resulting imposition of a penalty. The FTB presents evidence that in June 2018, Polk requested of FTB’s Chief Counsel that she be relieved of the penalty and evidence that in response the Chief Counsel partially abated it, and that Polk thereafter sought a refund.

          Based on this undisputed evidence, the FTB has established that Polk cannot prove she is entitled to a refund for 2015 because the tax return and protest were frivolous.

V.       CONCLUSION AND ORDER

           The FTB has established through undisputed evidence that Polk’s claims lack merit and that it is entitled to judgment as a matter of law. Consequently, summary judgment is granted in favor of the FTB and against Polk. The FTB is ordered to lodge and serve an appropriate proposed Judgment within 10 days.

          The FTB is ordered to give notice of this ruling.

Dated:                                                              _______________________________

                                                                              MARGARET L. OLDENDORF

                                                                       JUDGE OF THE SUPERIOR COURT