Judge: Michael P. Linfield, Case: 21STCV33765, Date: 2023-03-10 Tentative Ruling
Case Number: 21STCV33765 Hearing Date: March 10, 2023 Dept: 34
SUBJECT: Motion for Summary Judgment
Moving Party: Defendant
California Franchise Tax Board
Resp. Party: Plaintiffs Jack Rimokh and Joelle Rimokh
SUBJECT: Cross-Motion for Summary Judgment
Moving Party: Plaintiffs
Jack Rimokh and Joelle Rimokh
Resp. Party: Defendant California Franchise Tax Board
Defendant’s Motion for Summary
Judgment is GRANTED. Plaintiffs’ Cross-Motion for Summary Judgment is DENIED.
Summary judgment is awarded in favor of Defendant and against Plaintiffs.
BACKGROUND:
On September 13, 2021, Plaintiffs Jack Rimokh and Joelle
Rimokh filed their Complaint against Defendant California Franchise Tax Board
pursuant to California Revenue and Taxation Code section 19382.
On October 12, 2021, Defendant filed its Answer.
On December 19, 2022, Defendant filed its Motion for
Summary Judgment. Defendant concurrently filed: (1) Memorandum of Points and
Authorities (“Memorandum”); (2) Declaration of Leslie Yorston; (3) Separate
Statement; and (4) Proof of Service.
On January 11, 2023, Plaintiffs filed their Opposition to
the Motion for Summary Judgment (“Opposition”). Plaintiffs’ Opposition included
their Cross-Motion for Summary Judgment (“Cross-Motion”). Plaintiffs concurrently
filed: (1) Declaration of Joseph A. Broyles; (2) Separate Statement; (3)
Request for Judicial Notice; and (4) Proof of Service.
On February 17, 2023, Defendant filed its Opposition to
the Cross-Motion for Summary Judgment (“Cross Opposition”).
On March 3, 2023, Defendant filed its Reply to the Motion
for Summary Judgment (“Reply”).
On March 3, 2023, Plaintiffs filed their Reply to the Cross-Motion
for Summary Judgment (“Cross Reply”).
ANALYSIS:
I.
Request for Judicial Notice
Plaintiffs
request that the Court take judicial notice of the following items:
(1) Administrative decision of the California
State Board of Equalization in the case of In re Appeal of Carpio, Case
No. 793495, dated June 23, 2015;
(2) California Bill Analysis of Senate Bill 1229,
dated April 21, 1999; and
(3) Franchise Tax Board Publication 1008.
The Court GRANTS judicial notice of these
items.
II.
Legal Standard on Summary Judgment
“[T]he party moving for summary judgment bears
the burden of persuasion that there is no triable issue of material fact and
that he is entitled to judgment as a matter of law[.] There is a triable issue
of material fact if, and only if, the evidence would allow a reasonable trier
of fact to find the underlying fact in favor of the party opposing the motion
in accordance with the applicable standard of proof.” ¿(Aguilar v. Atl.
Richfield Co. (2001) 25 Cal.4th 826, 850.)
“[T]he party moving for summary judgment bears
an initial burden of production to make a prima facie showing of the nonexistence of any triable
issue of material fact; if he carries his burden of production, he causes a
shift, and the opposing party is then subjected to a burden of production of
his own to make a prima facie showing of the existence of a triable issue of material fact.”¿(Id.;
Smith v. Wells Fargo Bank, N.A. (2005) 135 Cal.App.4th 1463, 1474
[summary judgment standards held by Aguilar apply to summary
adjudication motions].)
“On a summary judgment motion, the court must
therefore consider what inferences favoring the opposing party a factfinder
could reasonably draw from the evidence. While viewing the evidence in this
manner, the court must bear in mind that its primary function is to identify
issues rather than to determine issues. Only when the inferences are
indisputable may the court decide the issues as a matter of law. If the evidence
is in conflict, the factual issues must be resolved by trial.” (Binder v.
Aetna Life Ins. Co. (1999) 75 Cal.App.4th 832, 839 [cleaned
up].)
Further, “the trial court may not weigh the
evidence in the manner of a factfinder to determine whose version is more
likely true. Nor may the trial court grant summary judgment based on the court's evaluation of
credibility.” (Id. at p. 840 [cleaned up]; see also Weiss v.
People ex rel. Dep’t of Transp. (2020) 9 Cal.5th 840, 864 [“Courts deciding motions for summary
judgment or summary adjudication may not weigh the evidence but must instead
view it in the light most favorable to the opposing party and draw all
reasonable inferences in favor of that party”].)
III. Discussion of the Motion and Cross-Motion
A. Undisputed Issues of Material Fact
The Parties
do not dispute any of the facts in this matter. (See Plaintiffs’ Separate
Statement.) As will be discussed further below, the Parties only dispute what
is Defendant FTB is required to do by law.
The following
are the undisputed material facts:
(1) Plaintiffs are individuals and were residents
of the State of California for California income tax purposes at all times from
January 1, 2008 to December 31, 2009.
(2) Plaintiffs filed their 2008 California income
tax return (Form 540) on the extended due date of October 15, 2009.
(3) Plaintiffs filed their 2009 California income
tax return (Form 540) on the extended due date of October 15, 2010.
(4) On or about July 9, 2018, the Internal Revenue
Service (IRS) notified Defendant that as a result of audits it conducted of
Plaintiffs’ federal income tax returns, on or about May 25, 2018, it entered
into a Closing Agreement with Plaintiffs which included the 2008 and 2009 tax
years and assessed additional federal income tax in the amount of $6,523,341
for tax year 2008 and $7,153,937 for tax year 2009.
(5) On July 13, 2018, Plaintiffs filed a Form 540X
amended return for 2009 with Defendant, in which Plaintiffs reported additional
income of $18,376,701 and self-assessed additional state income tax for the
2009 tax year of $1,902,610.
(6) On July 15, 2018, Plaintiffs filed a Form 540X
amended return for 2008 with Defendant, in which Plaintiffs reported additional
income of $16,724,266 and self-assessed additional state income tax for the
2008 tax year of $1,722.600.
(7) In or around July 2020, a technician in
Defendant’s Federal/State Special Audit Section conducted an examination of the
changes reported by the IRS for the 2008 and 2009 tax years and, thereafter,
issued in error a Notice of Proposed Assessment (NPA) of a deficiency for
both years.
(8) On September 11 and 14, 2020, Plaintiffs,
through their Counsel, filed a Protest of the NPAs.
(9) On September 23, 2020, Defendant withdrew the
NPAs.
(10) Defendant did not accept or apply any payment
made by Plaintiffs toward payment of the withdrawn NPAs. Payments made by
Plaintiffs were applied to their self-assessed state income tax liabilities
they reported on their original and amended state income tax returns for the
2008 and 2009 tax years, plus interest accrued as a result of the untimely
payment of these tax obligations.
(11) Following withdrawal of the NPAs, Defendant
accepted the self-assessed tax liabilities reported by Plaintiffs in their
initial and amended returns for the 2008 and 2009 tax years as accurate, and
reconciled payments made by Plaintiffs to that point against the self-assessed
tax liabilities stated in their 2008 and 2009 amended returns.
(12) On or about December 28, 2017, Plaintiffs made
payments that left them with zero liability for the 2008 tax year.
(13) On or about July 10, 2018, Plaintiffs made an
excess payment toward the 2008 tax year. On September 17, 2018, the overpayment
was refunded to Plaintiffs.
(14) On December 21, 2020, Plaintiffs made their
final payment that left them with zero liability for the 2009 tax year.
(15) On or about February 14, 2021, Plaintiffs
filed claims for refund for the 2008 and 2009 tax years.
(16) On September 13, 2021, Plaintiffs filed their
Complaint in the Superior Court of California, County of Los Angeles.
(Defendant’s Separate Statement, ¶¶ 1, 9, 14,
21, 23, 24, 31–33, 36–38, 40, 43–46, 48–53.)
B. The Parties’ Arguments
Defendant
moves for summary judgment, arguing: (1) that Plaintiffs are liable for the
self-assessed state income tax liabilities stated in their original and amended
returns; and (2) that Plaintiffs have satisfied their self-assessed tax
liabilities for 2008 and 2009 and that no refund is due. (Memorandum, pp.
10:7–8, 12:23–24.)
Plaintiffs
oppose the Motion and cross-move for summary judgment, arguing: (1) that there
are specific procedures required by statute that Defendant must follow if it
wants to assess a tax resulting from a federal audit and adjustment; (2) that
Defendant did not follow the statutory procedure here; and (3) that Plaintiffs
are entitled to the tax refunds claimed. (Opposition, pp. 12:16–28, 13:1–3.)
Defendant
opposes the Cross-Motion, arguing: (1) that the statute of limitations in
Revenue and Taxation Code sections 19059 and 19060 regarding proposed
deficiency assessments do not apply in this case; and (2) that Plaintiffs’
refund requests were untimely as to installments paid prior to February 14,
2020. (Cross Opposition, pp. 2:10–11, 6:8–9.)
The
Parties reiterate their arguments in their respective Reply and Cross-Reply.
Plaintiffs additionally argue that Defendant may not raise the new issue of
statute of limitations pursuant to Revenue and Taxation Code section 19306 in
the Cross-Opposition. (Cross Reply, p. 4:5–6.)
C. Discussion
1. Statute of Limitations on Plaintiffs’
Complaint
a. Legal Standard
“No credit or refund shall be allowed or
made after a period ending four years from the date the return was filed (if
filed within the time prescribed by Section 18567 or 18604, whichever is
applicable), four years from the last day prescribed for filing the return
(determined without regard to any extension of time for filing the return), or
after one year from the date of the overpayment, whichever period expires
later, unless before the expiration of that period a claim therefor is filed by
the taxpayer, or unless before the expiration of that period the Franchise Tax
Board allows a credit, makes a refund, or mails a notice of proposed
overpayment on a preprinted form prescribed by the Franchise Tax Board.” (Rev.
& Tax. Code, § 19306, subd. (a).)
“The amendments to this section by the
act adding this subdivision shall be applied to all claims and refunds, without
regard to taxable year, for which the statute of limitations has not expired on
the date that this act takes effect.” (Rev. & Tax. Code, § 19306, subd.
(b).)
b. Discussion
Defendant
argues in its Cross-Opposition that Plaintiffs’ refund requests are untimely
pursuant to Revenue and Taxation Code section 19306. Plaintiff argues that this
argument is inappropriately raised.
The Court
does not agree with Plaintiffs’ procedural argument. The statute of limitations
is an affirmative defense that Defendant initially raised in its Answer.
(Answer, p. 2:12–15.) Moreover, Defendant raised this argument in its Cross-Opposition,
not in its Reply, which makes the argument appropriate for the Court to
consider on the Cross-Motion. (As this argument was not raised in the papers
for the Motion, the Court does not consider it regarding the Motion.)
However, the
Court disagrees with Defendant’s substantive argument. It is undisputed that
Plaintiffs filed Form 540X on July 13 and 15, 2018. Revenue and Taxation Code
section 19306, subdivision (a) allows credits and refunds to be made within
four years after a return was filed. Plaintiffs filed claims for refund with
Defendant on February 14, 2021, and Plaintiffs filed their Complaint with the
Court on September 13, 2021. Both actions were well within the four-year
statute of limitations.
The Court
finds that Plaintiffs timely filed their Complaint.
2. Whether a Deficiency Notice was Necessary
a. Legal Standard
“Except as provided by
Article 2 (commencing with Section 19021), the tax imposed under Part 10
(commencing with Section 17001) and Part 11 (commencing with Section 23001)
shall be paid at the time and place fixed for filing the return (determined
without regard to any extension of time for filing the return).” (Rev. &
Tax. Code, § 19001.)
“If any item required to be shown on a
federal tax return, including any gross income, deduction, penalty, credit, or
tax for any year of any taxpayer is changed or corrected by the Commissioner of
Internal Revenue or other officer of the United States or other competent
authority, or where a renegotiation of a contract or subcontract with the
United States results in a change in gross income or deductions, that taxpayer shall
report each change or correction, or the results of the renegotiation, within
six months after the date of each final federal determination of the change or
correction or renegotiation, or as required by the Franchise Tax Board, and
shall concede the accuracy of the determination or state wherein it is
erroneous. For any individual subject to tax under Part 10 (commencing with
Section 17001), changes or corrections need not be reported unless they
increase the amount of tax payable under Part 10 (commencing with Section
17001) for any year.” (Rev. & Tax. Code, § 18622, subd. (a).)
“Any taxpayer filing an amended return
with the Commissioner of Internal Revenue shall also file within six months
thereafter an amended return with the Franchise Tax Board which shall contain
any information as it shall require. For any individual subject to tax under
Part 10 (commencing with Section 17001), an amended return need not be filed
unless the change therein would increase the amount of tax payable under Part
10 (commencing with Section 17001) for any year.” (Rev. & Tax. Code, §
18622, subd. (b).)
“Notification of a change or correction
by the Commissioner of Internal Revenue or other officer of the United States
or other competent authority, or renegotiation of a contract or subcontract
with the United States that results in a change in any item or the filing of an
amended return must be sufficiently detailed to allow computation of the
resulting California tax change and shall be reported in the form and manner as
prescribed by the Franchise Tax Board.” (Rev. & Tax. Code, § 18622, subd.
(c).)
“As soon as practicable
after the return is filed, the Franchise Tax Board shall examine it and shall
determine the correct amount of the tax.” (Rev. & Tax. Code, § 19032.)
“If the Franchise Tax
Board determines that the tax disclosed by the taxpayer on an original or
amended return, including an amended return reporting federal adjustments
pursuant to Section 18622, is less than the tax disclosed by its examination,
it shall mail notice to the taxpayer of the deficiency proposed to be assessed.
In no case shall the determination of the deficiency be arbitrary or without
foundation.” (Rev. & Tax. Code, § 19033, subd. (a).)
b. Discussion
The following
facts are undisputed:
(1) Plaintiffs were California residents and
incurred taxable income during the 2008 and 2009 tax years;
(2) Plaintiffs initially paid their state taxes
for the 2008 and 2009 tax years;
(3) Plaintiffs were audited nearly a decade later
by the IRS, which resulted in an assessment by the IRS that Plaintiffs had a
higher taxable income and higher tax liability;
(4) Plaintiffs subsequently self-reported their
higher taxable income to Defendant;
(5) Defendant initially issued NPAs that Defendant
subsequently withdrew;
(6) Defendant did not issue any further NPAs
regarding the 2008 and 2009 tax years; and
(7) The amounts Plaintiffs subsequently paid in
state taxes for the 2008 and 2009 tax years is the correct amount of state
taxes owed for those tax years.
Further, the
following legal matters are undisputed:
(1) Plaintiffs timely complied with their obligations under Revenue and
Taxation Code sections 18622 and 19001;
(2) Plaintiffs pursued the appropriate procedural avenue for their
cause of action by filing a Complaint pursuant to Revenue and Taxation Code
sections 19382 and 19385; and
(3) Because the assessed amount increased due to the IRS’s audit of
Plaintiffs, if Defendant was required to issue further NPAs (or other
deficiency notices), then Defendant would have been required to comply with
Revenue and Taxation Code sections 19057, 19059, or 19060 (depending on the
facts at hand). (See Ordlock v. Franchise Tax Bd. (2006) 38 Cal.4th 897,
904–12.)
The sole
question at hand is whether Plaintiff is entitled to a tax refund because
Defendant failed to issue further NPAs (or other deficiency notices).
The answer is
no.
Defendant is
required to examine and determine the correct amount of tax owed “as soon as
practicable” after a return is filed. (Rev. & Tax. Code, § 19032.)
Defendant is required to mail notice to the taxpayer of a deficiency proposed
to be assessed if Defendant “determines that the tax disclosed by the taxpayer
on an original or amended return, including an amended return reporting federal
adjustments pursuant to Section 18622, is less than the tax disclosed by
[Defendant’s] examination”. (Rev. & Tax. Code, § 19033, subd. (a).) But
there is no requirement under section 19033, or under any other section of the
Revenue and Taxation Code, that Defendant must send a deficiency notice if the
tax disclosed by the taxpayer on an amended return is the same as the tax
disclosed by Defendant after Defendant’s examination. Moreover, the text of Revenue
and Taxation Code sections 19057, 19059, and 19060 clearly indicate that they
are only relevant when Defendant is required to issue a deficiency notice.
Here,
Plaintiffs filed an amended tax return, which disclosed what Plaintiffs
believed they owed Defendant in taxes. Defendant never audited Plaintiffs’
return; it simply accepted Plaintiffs’ assessment of the taxes that Plaintiffs
believed they owed. Thus, Defendant did not have to issue a deficiency notice.
Further, Revenue and Taxation Code sections 19057, 19059, and 19060 were not
implicated. Since there was no NPA issued, there is no violation of the
applicable Statutes of Limitations.
Plaintiffs are
simply mis-reading the relevant statutes.
Plaintiffs argue:
“R&TC § 19059(a) states that
when a taxpayer or the IRS ‘…does report the change or correction within six
months after the final federal determination,..., a notice of proposed
deficiency assessment resulting from those adjustments may be mailed to the
taxpayer within two years…’ of the date of the notice.” (Opposition and Cross-Motion, p. 7:24-28; see
also p. 8:3-9 for a similar argument regarding § 19060(b).)
This
simply states that, if the FTB issues an NPA, it must be issued within two (or
four) years. But that argument is
irrelevant here because there was no NPA issued. As Defendant argued:
“FTB’s issuance of proposed
deficiency notices for 2008 and 2009 were withdrawn and have no impact on
Plaintiffs’ tax obligations and payments for those tax years. FTB relied on
Plaintiffs' amended tax returns and the tax liabilities they stated therein to
collect the state income tax owed. FTB not only withdrew its proposed
deficiency notices, it was never required to issue any, contrary to Plaintiffs’
arguments.” (Defendant's Opposition to
Cross-Motion for summary judgment, p. 2:21-25.)
The Court agrees with
Defendant: since Defendant FTB was not
required to issue an NPA, the Statute of Limitations regarding the proposed
deficiency assessment “simply does not apply in this case.” (Defendant’s Reply, p. 1:25.)
IV. Conclusion
Defendant’s Motion for Summary
Judgment is GRANTED. Plaintiffs’ Cross-Motion for Summary Judgment is DENIED.
Summary judgment is awarded in favor of Defendant and against Plaintiffs.