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'.

EDMUND G. BROWN JR.Attorney General of CaliforniaWILLIAM L. CARTERSupervising Deputy Attorney GeneralJILL BOWERSDeputy Attorney GeneralState Bar No. 186196

1300 I Street, Suite 125P.O. Box 944255Sacramento, CA 94244-2550Telephone: (916) 323-1948Fax: (916)327-2247E-mail: [email protected]

, Attorneys for RespondentFranchise Tax Board

^/ ci P!pi/F^flrioi?^Pn1 IB LOU/ lL 1X100 Saw taJ

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^ APR -^ 2009 //

Ry T. ROSALfe't ̂ — ^DEPUTY CLERK II

v

SUPERIOR COURT OF THE STATE OF CALIFORNIA

COUNTY OF SACRAMENTO

CALIFORNIA TAXPAYERS' 34ASSOCIATION,

MPetitioner, Al

R]v. B<

F(VI

CALIFORNIA FRANCHISE TAX BOARD, UNet al., Dl

Respondents. D:TiD<Ju

TrAc

-2009-80000168

EMORANDUM OF POINTS ANDLJTHORITIES IN SUPPORT OFESPONDENT FRANCHISE TAXDARD'S DEMURRER TO PETITION)R WRIT OF MANDATE ANDERIFIED COMPLAINT FORf JUNCTIVE RELIEF ANDECLARATORY JUDGMENT

ite: April 24, 2009me: 11:00 a.m.jpt: 29dge The Hon. Timothy M. Frawley

ial Date May 8, 2009;tion Filed: February 17, 2009

Memorandum of Points and Authorities in Support of Demurrer to Petition and Complaint (34-2009-80000168)

From the state tax library of Reed Smith LLP www.reedsmith.com/CAtax for other related documents, please email [email protected]

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Page

Introduction ..................................................................................................................................... 1

Statutory Background and Facts ..................................................................................................... 4

Jurisdictional Statement .................................................................................................................. 5

Discussion ....................................................................................................................................... 6

A. This Court Lacks Subject Matter Jurisdiction over Petitioner'sClaims ......................................................................................................... 6

7 B. Petitioner's Claims Are Barred by the Full Payment Rule ......................... 7

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1 7

TABLE OF CONTENTS

C. Petitioner Lacks Standing to Bring This Lawsuit ....................................... 7

1. Petitioner Is Not the Real Party in Interest in this Case .................. 7

2. Petitioner Lacks Third Party Standing to Assert the Rightsof Its Members ................................................................................ 8

D. Petitioner's Claim Is Barred for Failure to Comply withConstitutionally Required and Statutorily Prescribed ClaimPresentation and Exhaustion Requirements ................................................ 9

E. Petitioner's Challenge to Section 19138 Is Not Ripe for JudicialReview ....................................................................................................... 11

1 . Petitioner' s Challenge to Section 1 9 1 3 8 Is Not Ripe forJudicial Review Because No Penalty Has Been Assessedand No Administrative Determination of Liability to PayHas Been Made ............................................................................. 12

2. Petitioner's Challenge to Section 19138 Is Not Ripe forJudicial Review Because It Has Not Demonstrated that ItHas Suffered or Will Suffer any Direct or Immediate Harmfrom the Potential Assessment of the Penalty ............................... 13

1 O

F. Petitioner's Claim for Traditional Mandamus Relief Must BeDenied because California Franchise and Income Tax Law ProvidesAdequate Legal Remedies to Redress Any Alleged PurelyEconomic Injury Resulting from the Assessment of the AllegedlyIllegal Tax Penalty .................................................................................... 14

21 G. Petitioner's Claim for Attorney's Fees Must Be Denied for Failureto Comply with the Claims Presentation and Exhaustion

22 Requirements of the Government Claims Act .......................................... 15

«- Conclusion .................................................................................................................................... 16

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TABLE OF AUTHORITIES

Page

STATE CASES

Abelleira v. District Court of Appeal(1941) 17 Cal.2d 280 10

Agnew v. State Board of Equalization(1999)21Cal.4th310 passim

Batt v. City and County of San Francisco(2007) 155 Cal.App.4th 65 8, 10

City of Santa Monica v. Stewart(2005) 126 Cal.App.4th 43 11,13

City of Stockton v. Superior Court(2007) 42 Cal.4th 730 4, 15

Killian v. Millard(1991) 228 Cal.App.3d 1601 2, 7

Leffv. City of Monterey Park(1990)218Cal.App.3d674 10

Mystery Mesa Mission Christian Church, Inc. v. Assessment Appeals Board No, 1 for theCounty of Los Angeles(1976) 63 Cal.App.3d 37 3, 6, 14

Novartis Vaccines and Diagnostics, Inc. v. Stop Huntingdon Animal Cruelty USA, Inc.(2006) 143 Cal.App.4th 1284 9

Pacific Legal Foundation v. California Coastal Commission(1982) 33 Cal.3d 158 3, 11, 12

People v. Superior Court of Los Angeles County (Plascencia)(2002) 103 Cal. App. 4th 409 2, 7

PG& E Corp. v. Public Utilities Commission(2004)118 Cal.App.4th 1174 12

Rickley v. County of Los Angeles(2004) 114 Cal.App.4th 1002 passim

Sonleitner v. Superior Court(1958) 158 Cal.App.2d 258 passim



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8(1992) 3 CaUth 758 ............................................................................................................. 2, 8

9FEDERAL CASES

10Abbott Laboratories v. Gardner

(1967) 387 U.S. 136 .......................................................................................... '. ........... 3, 11, 13

TABLE OF AUTHORITIES(continued)

State Board of Equalization v. Superior Court of Los Angeles County(1985) 39 Cal.3d 633 .................................................................................................. 1, 5, 6, 10

Tracfone Wireless, Inc. v. County of Los Angeles(2008) 163 Cal.App.4th 1359 ............................................................................................... 2, 8

Weston Inv. Co. v. State of California(1948) 31 Cal.2d 390 ....................................................................................................... passim

Woosley v. State of California

CEC Energy Co. v. Public Service Commission of Virgin Islands13 (3rdCir. 1989) 891 F.2d 1107 .......................................................................................... 11, 13

1 4 National Park Hospitality Association v. Department of Interior(2003) 538 U.S. 803 .......................................................................................................... 11, 13

STATUTES16

Code of Civil. Procedure§ 367 .......................................................................................................................................... 2, 7§ 430.10 ................................................................................................................................ passim§526 .............................................................................................................................................. 5§ 1060 ................................................... : ........................................................................................ 5§ 1085 ............................................................................................ 1 ......................................... 5, 14

Government Code§905.2 ................................................................................................ '. .................................... 4,15

22Revenue & Taxation Code

§13138 .......................................................................................................................................... 4§ 19138 ................................................................................................................................. passim§ 19382 .............................................................................................................................. 3, 5, 6, 9§19385 ...................................................................................................................................... 5,9§23001 .......................................................................................................................................... 4



1 TABLE OF AUTHORITIES(continued)

2 Page

3 CONSTITUTIONAL PROVISIONS

4 California ConstitutionArticle XIII, §32 passim

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IV



1 INTRODUCTION

2 Respondent Franchise Tax Board demurs to the Petition for Writ of Mandate and Verified

3 Complaint for Injunctive Relief and Declaratory Judgment (Petition and Complaint) filed by

4 Petitioner California Taxpayers Association because this Court lacks subject matter jurisdiction

5 over Petitioner's claims for injunctive and declaratory relief, and Petitioner fails to state facts

6 sufficient to constitute a cause of action for injunctive relief, declaratory judgment, traditional

7 mandamus, or attorney's fees. (Code Civ. Proc., § 430.10, subds. (a), (e).) This Court should

8 sustain Respondent's demurrer without leave to amend.

9 The Court lacks subject matter jurisdiction because Petitioner seeks to enjoin the collection

10 of a tax and such relief is constitutionally barred in California. (Cal. Const., art. XIII, § 32.) The

11 California Supreme Court has construed section 32's proscription "broadly to bar not only

12 injunctions but also a variety of prepayment judicial declarations or findings which would impede

13 the prompt collection of a tax." (State Board of Equalization v. Superior Court of Los Angeles

14 County (1985) 39 Cal.3d 633, 639 [granting Board's petition for writ of mandate requiring the

15 Superior Court to enter an order sustaining the Board's demurrer, without leave to amend, to

16 taxpayer's action for refund, where petition for redetermination was still pending before the

17 Board when the complaint was filed and the tax had not been paid].) Because Petitioner seeks

18 both to enjoin the Board's enforcement of Section 19138 and a declaration that the statute is

19 unconstitutional on its face, Respondent's demurrer to the Petition and Complaint should be

20 sustained.

21 Section 32 also establishes the "full payment" or "pay first, litigate later" rule as a matter of

22 California constitutional law. (Cal. Const., art. XIII, § 32; Rickley v. County of Los Angeles

23 (2004) 114 Cal.App.4th 1002, 1014 [Rickley} [holding that "pay first, litigate later" is the rule for (

24 any taxpayer who disputes that a tax is owed].) It is "well settled in this state that a penalty which

25 is created by statute for failure to pay a tax assessment becomes part of the tax." (Id. at p. 1012, s

26 citing Sonleitner v. Superior Court (1958) 158 Cal.App.2d 258, 263 [Sonleitner}; see Agnew v.

27 State Board of Equalization (1999) 21 Cal.4th 310, 332 [Agnew], citing with approval Weston

28 Inv. Co. v. State of California (1948) 31 Cal.2d 390, 393[Weston].) But Petitioner alleges neither

1



1 that the section 19138 penalty has been assessed against it nor that it has paid such an assessment 1

2 and exhausted statutorily prescribed administrative remedies for a refund or credit. (Rev. & Tax. •

3 Code, §§ 19138, subd. (e), 19382,19385.) Respondent's demurrer to the Petition and Complaint

4 should therefore be sustained. (Code Civ. Proc., § 430.10, subd. (e).)

5 But even if this Court has subject matter jurisdiction over the Petition and Complaint and

6 the action is not barred by the full payment rule, Respondent's demurrer should be sustained

7 because Petitioner is not the real party in interest to the alleged dispute, and "only parties with a

8 real interest in a dispute have standing to seek its adjudication." (Killian v. Millard (1991) 228

9 Cal.App.3d 1601, 1605 [construing Code Civ. Proc., § 367].) Standing is determined by

10 reference to the allegations in a party's complaint. (People v. Superior Court of Los Angeles ' \

11 County (Plascencia) (2002) 103 Cal. App. 4th 409, 420.) Petitioner's allegations cannot support *

12 a determination that Petitioner is the real party in interest for three reasons. First, Petitioner, a

13 non-profit organization, cannot allege that it is "[a] taxpayer subject to the tax imposed under"

14 California's Corporation Tax Law. (Rev. & Tax. Code, § 19138, subd. (a)(l).) Second,

15 Petitioner fails to allege "an understatement of tax in excess of one million dollars ($1,000,000)

16 for any taxable year[.]" (Ibid.) Third, Petitioner fails to allege either that it has exhausted

17 statutorily prescribed administrative remedies for a refund or credit, or that the Respondent has

18 failed "to mail notice of action any refund claim within six months after the claim was filed[.]"

19 (Rev. & Tax. Code, §§ 19138, subd. (e), 19382, 19385.)

20 Petitioner also lacks third party standing to assert the alleged rights of its members. "In

21 general, only one who is beneficially interested in the outcome of a controversy has standing to

22 sue." (Tracfone Wireless, Inc. v. County of Los Angeles (2008) 163 Cal.App.4th 1359, 1364

23 [Tracfone] [citations omitted].) "Beneficial interest means a personal interest in the outcome[,]"

24 which, in the tax context, with limited exceptions not relevant here, "means that the person is

25 barred from seeking a refund of a state tax he or she has not paid." (Ibid.) Petitioner cannot show

26 that its members have suffered a redressable injury in fact, or indeed that any of its members has a

27 ripe claim. For this reason, Petitioner's associational claims are barred by Woosley v. State of

28 California (1992) 3 Cal.4th 758 (barring class-action-type taxpayer lawsuit unless each plaintiff

2

Memorandum of Points and Authorities in Support of Demurrer to Petition and Complaint (34-2009-80000168) ,


1 has first filed an administrative refund claim). Finally, Petitioner lacks prudential third party

2 standing because it cannot prove that some obstacle prevents its members from bringing this

3 action themselves. Respondent's demurrer should therefore be sustained.

4 Just as the allegations in the Petition and Complaint are insufficient to show that Petitioner

5 has standing to bring this lawsuit, so too are they insufficient to support a conclusion that this

6 case is ripe for adjudication: Respondent's demurrer to the Petition and Complaint should be

7 sustained because Petitioner's claims do not present an actual controversy that is ripe for

8 adjudication. Petitioner seeks declaratory, injunctive and traditional mandamus relief against a

9 tax penalty that has not been assessed, and may never be assessed, against it. Where, as here, a

10 legal challenge is brought against an administrative agency's potential application of a statute, the

11 ripeness doctrine may be invoked "to protect the agenc[y] from judicial interference until an

12 administrative decision has been formalized and its effects felt in a concrete way by the

13 challenging parties." (Pacific Legal Foundation v. California Coastal Commission (1982) 33

14 Cal.3d 158, 171 [Pacific Legal Foundation], quoting Abbott Laboratories v. Gardner (1967) 387

15 U.S. 136, 148-149 [Abbott Laboratories])

16 Petitioner has failed to state facts sufficient to constitute a cause of action for issuance of

17 the peremptory writ compelling Respondent to cease enforcing California Revenue and Taxation

18 Code section 19138, for preliminary and permanent injunctive relief from said enforcement, for

19 declaratory relief, or for any relief whatsoever. Petitioner's claims are barred because traditional

20 mandamus does not lie where, as here, there is a plain, speedy and adequate legal remedy. (Cal.

21 Const., art. XIII, § 32; Rev. & Tax. Code, § 19138, subd. (e), 19382, 19385; Mystery Mesa

22 Mission Christian Church, Inc. v. Assessment Appeals Board No. 1 for the County of Los Angeles

23 (1976) 63 Cal.App.3d 37, 40 [Mystery Mesa] [affirming Superior Court order sustaining Board's

24 demurrer, without leave to amend, to taxpayer's petition for writ of administrative mandate

25 because the California Revenue and Taxation Code provided an adequate legal remedy].)

26 Petitioner makes a claim for money against the State in the form of attorney's fees.

27 (Petition and Complaint, p. 15:10.) But Petitioner fails to allege compliance with the claims

28 presentation and exhaustion requirements of the California Government Claims Act.

3



1 (Gov. Code § 905.2 et seq.) In adopting the practice of referring to the claims statutes as the

2 Government Claims Act, the California Supreme Court clarified that the purpose of these statutes

3 is "not to prevent surprise, but to provide the public entity sufficient information to enable it to

4 adequately investigate claims and to settle them, if appropriate, without the expense of litigation."

5 (City of Stockton v. Superior Court (2007) 42 CaUth 730, 738 [City of Stockton].) "It is well-

6 settled that claims statutes must be satisfied even in face of the public entity's actual knowledge

7 of the circumstances surrounding the claim." (Ibid. [Internal quotation marks and citation

8 omitted.]) Claims for attorney's fees, like the contract claim at issue in City of Stockton, "fall

9 within the plain meaning of the requirement all claims for money or damages be presented[.]"

10 (Ibid. [Internal quotation marks and citation omitted.]) Respondent's demurrer should therefore

11 be sustained.

12 This Court lacks subject matter jurisdiction over Petitioner's claims and Petitioner fails to

13 state facts sufficient to constitute a cause of action for injunctive relief, declaratory judgment,

14 traditional mandamus, or attorney's fees. (Code Civ. Proc., § 430.10, subds. (a), (e).) This Court

15 should sustain Respondent's demurrer without leave to amend.

16 STATUTORY BACKGROUND AND FACTS

17 Revenue and Taxation Code, section 19138 ("Understatement of tax in excess of 1 million

18 dollars; penalty; refund or credit; application"), the statute challenged by the Petitioner in this

19 case, took effect on December 22, 2008. The statute imposes a penalty "equal to 20 percent of

20 any understatement of tax" on a corporate taxpayer subject to existing requirements to pay

21 estimated income taxes in installments, "with an understatement of tax in excess of one million

22 dollars ($1,000,000) for any taxable year[.]" (Rev. & Tax. Code, § 13138, subds. (a)(l) and (b).) .

23 Section 19138 defines "understatement of tax" as "the amount by which the tax imposed

24 by" California Corporation Tax Law (Rev. & Tax. Code, § 23001, et seq.) "exceeds the amount

25 of tax shown on an original return or shown on an amended return filed on or before the original

26 or extended due date of the return for the taxable year." (Rev. & Tax. Code, § 19138, subd. (b).)

27 "For any taxable year beginning before January 1, 2008," the statute defines "the amount of tax

28 shown on an original return" to include "the amount of tax paid on or before May 31, 2009, and4



1 shown on an amended return filed on or before May 31, 2009[.]" (Ibid.) The statute further

2 defines "understatement of tax" to exclude "any understatement... attributable to a change in

3 law" occurring after statutorily specified dates. (Rev. & Tax. Code, § 19138, subd. (f)(l).)

4 Section 19138 imposes on Respondent Franchise Tax Board the duty to implement its

5 requirements "in a reasonable manner." (Rev. & Tax. Code, § 19138, subd. (e)(3).) Further, a

6 taxpayer subject to liability under section 19138, after payment of the penalty imposed, may

7 apply for a refund or credit on the grounds that the Board improperly computed the amount of the

8 penalty. (Rev. & Tax. Code, § 19138, subd.(e); Cal. Const., art. XIII, § 32.) A taxpayer

9 dissatisfied with the Board's decision on such a claim, or as to whose claim the Board has failed

10 to mail notice of action within six months after filing, may bring an action against the Board "for

11 the recovery of the whole or any party of the amount paid." (Rev. & Tax. Code, §§ 19382,

12 19385.)

13 Petitioner is a non-profit organization founded "to protect individual and corporate

14 taxpayers from unnecessary taxes and to promote government efficiency." (Petition and

15 Complaint, p.3:3-4.) Petitioner alleges that "[m]any" of its members "pay California franchise or.

16 income taxes in excess of $1 million" but fails to allege that it or any of its members understate

17 their taxes in excess of $1 million. (Petition and Complaint, p. 3:8)

18 JURISDICTIONAL STATEMENT

19 Petitioner alleges jurisdiction pursuant to Code of Civil Procedure, sections 526, 1060, and

20 1085, (Petition and Complaint, p. 3:18-19.) Respondent denies this court has subject matter

21 jurisdiction over Petitioner's claims for injunctive and declaratory relief because those claims are

22 barred by California Constitution, article XIII, section 32. (State Board of Equalization v.

23 Superior Court, supra, 39 Cal.3d 633, 639; Rickley, supra, 114 Cal.App.4th 1002,1012, citing

24 Sonleitner,'supra, 158 Cal.App.2d 258, 263; see Agnew, supra, 21 Cal.4th 310, 332, citing with

25 approval Weston, supra, 31 Cal.2d 390, 393.)

26 Further, Petitioner's mandamus claim is barred because traditional mandamus does not lie

27 where, as here, there is a plain, speedy and adequate legal remedy. (Cal. Const., art. XIII, § 32;

28 Rev. & Tax. Code, §§ 19138, subd. (e), 19382, 19385; Mystery Mesa, supra, 63 Cal.App.3d 37,5



1 40 [affirming Superior Court order sustaining Board's demurrer, without leave to amend, to

2 taxpayer's petition for writ of administrative mandate because the California Revenue and

3 Taxation Code provided an adequate legal remedy].)

4 DISCUSSION

5 A. This Court Lacks Subject Matter Jurisdiction Over Petitioner's Claims.

6 Petitioner asks this Court to enjoin Respondent from enforcing Revenue and Taxation

7 Code, section 19138, which imposes a tax penalty on a corporate taxpayer's understatement of

8 tax liability in excess of $1 million/ (Petition and Complaint, p. 14:19.) Petitioner also asks this

9 Court to declare the statute "void," thus rendering it unenforceable. (Id. at pp. 14:20-15:9.) But it

10 is "well settled in this state that a penalty which is created by statute for failure to pay a tax

11 assessment becomes part of the tax." (Rickley, supra, 114 Cal.App.4th 1002, 1012, citing

12 Sonleitner, supra, 158 Cal.App.2d 258, 263; see Agnew v. State Board of Equalization, supra, 21

13 Cal.4th 310, 332, citing with approval Weston Inv. Co. v. State of California, supra, 31 Cal.2d

14 390, 393.) Therefore the Court lacks subject matter jurisdiction over Petitioner's claims because

15 the relief that it seeks is constitutionally prohibited: "No legal or equitable process shall issue in

16 any proceeding in any court against this State or any officer thereof to prevent or enjoin the

17 collection of any tax." (Cal. Const., art. XIII, § 32.)

18 The California Supreme Court has construed section 32's proscription "broadly to bar not

19 only injunctions but also a variety of prepayment judicial declarations or findings which would

20 impede the prompt collection of a tax." (State Board of Equalization v. Superior Court, supra, 39

21 Cal.3d 633, 639.) Because Petitioner seeks an order both enjoining the Board's enforcement of

22 Section 19138 and declaring that statute void on its face, Respondent's demurrer to the Petition

23 and Complaint should be sustained for lack of subject matter jurisdiction. (Code Civ. Proc.,§ .

24 430.10, subd. (a).)

25 B. Petitioner's Claims Are Barred by the Full Payment Rule.

26 Petitioner's claims are barred by the "full payment" rule established by section 32. (Cal.

27 Const., art. XIII, § 32.) The full payment rule, also known as the "pay first, litigate later" rule,

28 requires a taxpayer to pay the allegedly illegal tax and to exhaust statutorily prescribed

6

, Memorandum of Points and Authorities in Support of Demurrer to Petition and Complaint (34-2009-80000168)


1 administrative remedies before bringing an action in the Superior Court. (Rickley, supra, 114

2 Cal.App.4th 1002, 1014.) As noted above, it is "well settled in this state that a penalty which is

3 created by statute for failure to pay a tax assessment becomes part of the tax." (Id. at p. 1012,

4 citing Sonleitner v. Superior Court, supra, 158 Cal.App.2d 258, 263; see Agnew v. State Board of

5 Equalization, supra, 21 Cal.4th 310, 332, citing with approval Weston Inv. Co. v. State of

6 California, supra, 31 Cal.2d 390, 393.) But Petitioner alleges neither that the section 19138

7 penalty has been assessed against it nor that it has paid such an assessment and exhausted

8 statutorily prescribed administrative remedies for a refund or credit. (Rev. & Tax. Code, §§

9 19138, subd. (e), and 19382.) Respondent's demurrer to the Petition and Complaint should

10 therefore be sustained. (Code Civ. Proc., § 430.10, subd. (e).)

11 C. Petitioner Lacks Standing to Bring this Lawsuit.

12 Even if this Court has subject matter jurisdiction over the Petition and Complaint, and

13 Petitioner's claims are not barred by the full payment rule, Respondent's demurrer should be

14 sustained because Petitioner is not the real party in interest to the alleged dispute. "[O]nly parties

15 with a real interest in a dispute have standing to seek its adjudication." (Killian v. Millard, supra,

16 228 Cal.App.3d 1601, 1605 [construing Code Civ. Proc., § 367].)

1^ 1. Petitioner Is not the Real Party in Interest in this Case.

18 Standing is determined by reference to the allegations in a party's complaint. (Plascencia,

19 supra, 103 Cal.App.4th 409, 420.) Petitioner's allegations cannot support a determination that

20 Petitioner is the real party in interest for three reasons. First, Petitioner, a non-profit organization,

21 cannot allege that it is "[a] taxpayer subject to the tax imposed under" California's Corporation

22 Tax Law. (Rev. & Tax. Code, § 19138, subd. (a)(l).) Second, Petitioner fails to allege "an

23 understatement of tax in excess of one million dollars ($1,000,000) for any taxable year[.]"

24 (Ibid.) Third, Petitioner fails to allege either that it has exhausted statutorily prescribed

25 administrative remedies for a refund or credit, or that the Respondent has failed "to mail notice of

26 action on any refund claim within six months after the claim was filed[.]" (Rev. & Tax. Code, §§

27 19138, subd. (e), 19382, 19385.)

28

7 ,



1 2. Petitioner Lacks Third Party Standing to Assert the Rights of ItsNon-party Members.

2

3 Petitioner alleges that it brings this action on behalf of its members who have a "beneficial

4 interest" in its outcome. (Petition and Complaint, pp. 7:5-9:15.) But Petitioner lacks third party

5 standing to assert the alleged rights of its non-party members, "hi general, only one who is

6 beneficially interested in the outcome of a controversy has standing to sue." (Tracfone, supra,

7 163 Cal.App.4th 1359,1364 [citations omitted].) "Beneficial interest means a personal interest in

g the outcome[,]" which, in the tax context, with limited exceptions not relevant here, "means that

9 the person is barred from seeking a refund of a state tax he or she has not paid." (Ibid.) Petitioner

10 cannot show that its members have suffered a redressable injury in fact, or indeed that any of its

11 members has a ripe claim, because neither Petitioner nor its members have understated their tax

\2 liability by more than $1 million, been assessed the penalty prescribed by section 19138, and filed

13 an administrative refund claim. For this reason, Petitioner's associational claims are barred by

14 Woosley v. State of California (1992) 3 Cal.4th 758 (barring class-action-type taxpayer lawsuit

15 unless each plaintiff has first filed an administrative refund claim).

16 Further, "California has opted to allow class actions in tax refund cases only where

17 specifically authorized by statute." (Batt v. City and County of San Francisco (2007)

18 155 Cal.App.4th 65, 84 [holding that due process permits a taxing authority to limit remedies to

19 persons who have paid the tax and completed the administrative process to recover it].) But

20 Petitioner cites no statute purporting to authorize the class-type claims asserted in its Petition and

21 Complaint. i

22 Finally, Petitioner lacks prudential third party standing for three reasons. First, Petitioner

23 does not allege that it has suffered an injury in fact (that is, been unreasonably assessed the

24 penalty imposed by section 19138). Second, although Petitioner does allege that its members

25 include taxpayers potentially subject to the penalty, it fails to allege that these members have in

26 fact understated their tax liability by more than $1 million dollars, been assessed the prescribed

27 penalty, paid it, and exhausted constitutionally required and statutorily prescribed administrative

28 remedies. Third, Petitioner fails to allege the existence of an obstacle that prevents its members

8



1 from asserting their own rights. (Novartis Vaccines and Diagnostics, Inc. v. Stop Huntingdon

2 Animal Cruelty USA, Inc. (2006) 143 Cal.App.4th 1284, 1297.)

3 Petitioner lacks standing to challenge Revenue and Taxation Code, section 19138.

4 Respondent's demurrer should therefore be sustained. (Code Civ. Proc., § 430.10, subd. (e).)

5 D. Petitioner's Claim Is Barred for Failure to Comply with ConstitutionallyRequired and Statutorily Prescribed Claim Presentation and Exhaustion

6 Requirements.

7 Petitioner alleges that Revenue and Taxation Code, section 19138, imposing a penalty for

8 understatement of tax liability in excess of $1 million, is void and therefore unenforceable

9 because it is unconstitutional. (Petition and Complaint, pp. 9:21-13:13.) But Petitioner fails to

10 allege, as the California Constitution requires, that it was assessed the penalty, paid it, and filed

11 an administrative claim for refund or credit. This failure is fatal to its claim. (Cal. Const., art.

12 XIII, § 32; Rev. & Tax. Code, § 19138, subd. (e), 19382.)

13 As noted above, in California the term "tax" includes a tax penalty. (Rickley, supra, 114

14 Cal.App.4th 1002, 1012, citing Sonleitner, supra, 158 Cal.App.2d 258, 263; see Agnew, supra, 21

15 CaUth 310, 332, citing with approval Weston, supra, 31 Cal.2d 390, 393.) Thus, the

16 constitutionally prescribed full payment rule applies to Petitioner's challenge to section 19138.

17 (Cal. Const., art. XIII, § 32.) Section 32 requires a tax protestant to pay the allegedly illegal tax

18 and then file a claim for refund "in such manner as may be provided by the Legislature." (Ibid.)

19 Subdivision (e) of section 19138 permits a taxpayer to file a claim for a refund or credit.

20 (Rev. & Tax. Code, § 19138, subd. (e).) A taxpayer who is dissatisfied with the Franchise Tax

21 Board's decision on a refund claim may bring an action in the Superior Court. (Rev. & Tax.

22 Code, sec. 19382.) If the Board "fails to mail a notice of action on any refund claim within six

23 months after the claim was filed, the taxpayer may, prior to mailing of notice of action on the

24 refund claim, consider the claim disallowed and bring an action against" the Board. (Rev. & Tax.

25 Code, § 19385.) Further, section 19138 requires the Franchise Tax Board to implement the

26 statute "in a reasonable manner." (Rev. & Tax. Code, § 19138, subd. (f)(3).)

27 The California Court of Appeal has held that a taxing authority may limit remedies to

28 persons who have paid a tax and completed the administrative process to recover it without

9



1 offending due process. (Batt v. City and County of San Francisco, supra, 155 Cal.App.4th 65,

2 84.) The California Supreme Court has identified "[t]he important public policy behind" the

3 requirement that a tax be paid before it is challenged by court action:

4 The important public policy behind this constitutional provision is to allow revenuecollection to continue during litigation so that essential public services dependent on

5 the funds are not unnecessarily interrupted. The fear that persistent interference withthe collection of public revenues, for whatever reason, will destroy the effectiveness

6 of government has been expressed in many judicial opinions.... Any delay in theproceedings of the officer, upon whom the duty is devolved of collecting the taxes,

7 may derange the operations of government, and thereby cause serious detriment to thepublic.

o

The prompt payment of taxes is always important to the public welfare. It may be9 vital to the existence of a government. The idea that every taxpayer is entitled to the

delays of litigation is unreason.10

11 (State Board of Equalization v. Superior Court, supra, 39 Cal.3d 633, 638-639 [internal

12 quotation marks and citations omitted].)

13 Further, where an administrative remedy is provided by statute, relief must be sought from

14 the administrative body and this remedy exhausted before the courts will act. (Abelleira v.

15 District Court of Appeal (1941) 17 Cal.2d 280, 292.) This is a jurisdictional prerequisite, not a

16 matter of judicial discretion. (Id. at p. 293.) The exhaustion requirement applies to actions

17 seeking both ordinary and administrative mandamus. (Leffv. City of Monterey Park (1990) 218

18 Cal.App.3d 674, 680-681.)

19 Petitioner has not—indeed, cannot—allege that it has been assessed a penalty under section

20 19138, paid that penalty, and exhausted an administrative refund claim. Respondent's demurrer

21 to the Petition and Complaint must therefore be sustained. (Code Civ. Proc., § 430.10, subd. (e).)

22 E. Petitioner's Challenge to Section 19138 Is not Ripe for Judicial Review.

23 Just as the allegations in the Petition and Complaint are insufficient to show that Petitioner

24 has standing to bring this lawsuit, so too are they insufficient to support a conclusion that this

25 case is ripe for adjudication: Respondent's demurrer to the Petition and Complaint should be

26 sustained because Petitioner's claims do not present an actual controversy that is ripe for

27 adjudication. Petitioner seeks declaratory, injunctive and traditional mandamus relief against a

28 tax penalty that has not been assessed, and may never be assessed, against it. Where, as here, a10



1 legal challenge is brought against an administrative agency's potential application of a statute, the

2 ripeness doctrine may be invoked "to protect the agencfy] from judicial interference until an

3 administrative decision has been formalized and its effects felt in a concrete way by the

4 challenging parties." (Pacific Legal Foundation, supra, 33 Cal.3d 157, 171, quoting Abbott

5 Laboratories, supra, 387 U.S. 136, 148-149.)

6 The two-pronged ripeness test set out in Abbott Laboratories requires this Court to weigh

7 both (1) the "fitness of the issues for judicial decision" and (2) the "hardship to the parties of

8 withholding court consideration." (Abbott Laboratories, supra, 387 U.S. 136, 148-149.) The

9 fitness prong of the ripeness test considers not merely whether the issues are "purely legal," but

10 also whether the challenged administrative action is final. (Ibid.) Finality of administrative

11 action is compelled in order to safeguard against judicial interference with the agency's decision-

12 making process. (Ibid.) The hardship prong of the ripeness test considers whether the agency

13 action has a "direct and immediate" impact on the "day-to-day business" of the complaining

14 party. (Id. at p. 152.) Neither the possibility of financial loss nor uncertainty over the potential

15 economic impact of the agency's action is sufficient to warrant premature review. (Id. at pp. 190,

16 201; National Park Hospitality Association v. Department of Interior (2003) 538 U.S. 803, 811;

17 CEC Energy Co. v. Public Service Commission of Virgin Islands (3rd Cir. 1989) 891 F.2d 1107,

18 1111.) In other words, the hardship must be "imminent and significant." (City of Santa Monica

19 v. Stewart (2005) 126 Cal.App.4th 43, 64 [citation omitted].) Petitioner has not demonstrated that

20 it has satisfied either of the ripeness factors to merit immediate judicial review of its challenge to

21 Section 19138.

22 i. Petitioner's Challenge to Section 19138 Is Not Ripe for JudicialReview Because No Penalty Has Been Assessed and No

23 Administrative Determination of Liability to Pay Has Been Made.

24 This Court should sustain Respondent's demurrer to the Petition and Complaint on ripeness ;

25 grounds because no penalty has been assessed under section 19138, and no administrative

26 determination of Petitioner's liability to pay has been made. Petitioner, a non-profit organization,

27 is unlikely ever to incur liability under section 19138 because it is not subject to California's

2811



1 Corporation Tax Law. (Rev. & Tax. Code, § 19138, subd. (b).) The Court should therefore

2 decline present review because no "actual controversy" has arisen or is likely to arise.

3 As noted above, Petitioner lacks standing to assert the rights of its absent non-party

4 members. But even if Petitioner has such standing, those non-parties' action is not rooted in the

5 present but is contingent on a series of future events that require this Court to speculate on their

6 possible outcome. "[T]he ripeness doctrine is primarily bottomed on the recognition that judicial

7 decisionmaking is best conducted in the context of an actual set of facts so that the issues will be

8 framed with sufficient definiteness to enable the court to make a decree finally disposing of the

9 controversy." (PG&E Corp. v. Public Utilities Commission (2004)118 Cal.App.4th 1174, 1216,

10 quoting Pacific Legal Foundation, supra, 33 Cal.3d 158,169 [internal quotation marks omitted].)

11 "The basic rational of the doctrine is to prevent the courts, through avoidance of premature

12 adjudication, from entangling themselves in abstract disagreements over administrative policies,

13 and also to protect the agencies from judicial interference until an administrative decision has

14 been formalized and its effects felt in a concerted way by the challenging parties." (Ibid, quoting

15 Pacific Legal Foundation, supra, 33 Cal.3d 158,170 [internal quotation marks omitted].)

16 Before an actual controversy that has a direct and immediate impact on Petitioner's non-

17 party members can even materialize, the following contingent events must first occur: (1) the

18 non-parties must understate their tax liability by more than $1 million; (2) Respondent must

19 assess the penalties prescribed by section 19138; (3) the non-parties must pay those penalties and

20 (4) file a claim for refund or credit; and (5) Respondent must conclude that its assessment was

21 correct and that a notice of action should issue denying the protest (or fail to mail notice of action

22 within six months of the claims filing). Only if Respondent has made a final administrative

23 determination to deny a refund or credit will a potential action by the non-parties described in the

24 Petition and Complaint ripen. And of course the non-parties may avoid liability under the statute

25 altogether by correctly stating their tax liability. Therefore, assuming arguendo that Petitioner

26 has standing to assert the rights of non-parties to this action, this Court should decline review of j

27 the challenge to section 19138 until "an administrative decision has been formalized and its

2812

Memorandum of Points and Authorities in Support of Demurrer to Petition and Complaint (34-2009-80000168) '


1 effects felt in a concrete way by the challenging parties." (Abbott Laboratories, supra, 387 U.S.

2 136, 148-149.)

3 2. Petitioner's Challenge to Section 19138 Is Not Ripe for JudicialReview Because It Has Not Demonstrated that It Has Suffered or

4 Will Suffer any Direct or Immediate Harm from the PotentialAssessment of the Penalty.

*J

6 As noted above, Petitioner, a non-profit organization, is unlikely ever to incur liability

7 under section 19138 because it is not subject to California's Corporation Tax Law. (Rev. & Tax.

8 Code, § 19138, subd. (b).) The Court should therefore decline present review because no "actual

9 controversy" has arisen or is likely to arise. As further noted above, Petitioner lacks standing to

10 assert the rights of its absent non-party members. But even if Petitioner has such standing, this

11 Court should sustain Respondent's demurrer to the Petition and Complaint on ripeness grounds

12 because the non-parties cannot satisfy the hardship prong of the Abbott Laboratories test. (Abbott

13 Laboratories, supra, 387 U.S. 136, 148-149.)

14 The hardship prong of the ripeness test considers whether the agency action has a "direct

15 and immediate" impact on the "day-to-day business" of the complaining party. (Id. at p. 152.)

16 Neither the possibility of financial loss nor uncertainty over the potential economic impact of the

17 agency's action is sufficient to warrant premature review. (Id. at pp. 190, 201; National Park

18 Hospitality Association v. Department of Interior (2003) 538 U.S. 803, 811; CEC Energy Co. v. '

19 Public Service Commission of Virgin Islands (3rd Cir. 1989) 891 F.2d 1107, 1111.) In other

20 words, the hardship must be "imminent and significant." (City of Santa Monica v. Stewart (2005)

21 126 Cal.App.4th 43, 64 [citation omitted].) hi its Petition and Complaint, Petitioner alleges only '

22 the possibility of financial loss and uncertainty over the potential impact of a potential—and as

23 yet unrealized—application of section 19138 to the non-parties. (Petition and Complaint, pp.

24 7:10-9:15.)

25 Further, Petitioner's allegations that the non-parties will suffer irrevocable harm if they fail

26 to file timely amended returns that correctly state their tax liability are of no legal moment. (Cf.

27 Petition and Complaint, pp. 9:11-15 with Rev. & Tax. Code, § 19138, subd. (b).) This is so

28 because Petitioner can cite no law supporting its assumption that persons and entities subject to

13



1 the tax imposed by California's Corporation Tax Law have a legal right to understate their taxes

2 by any amount, let alone an amount in excess of $1 million.

3 Petitioner cannot show that its challenge to section 19138 is ripe for judicial review.

4 Respondent's demurrer to the Petition and Complaint must therefore be sustained. (Code Civ.

5 Proc., §430.10, subd.(e).)

6 F. PETITIONER'S CLAIM FOR TRADITIONAL MANDAMUS RELIEFMUST BE DENIED BECAUSE CALIFORNIA FRANCHISE AND

7 INCOME TAX LAW PROVIDES ADEQUATE LEGAL REMEDIES TOREDRESS ANY ALLEGED PURELY ECONOMIC INJURY

8 RESULTING FROM THE ASSESSMENT OF THE ALLEGEDLYILLEGAL TAX PENALTY.

9

10 Petitioner seeks relief in traditional mandamus. (Petition and Complaint, p. 14:15-16

11 [citing Code. Civ. Proc., § 1085].) The California Court of Appeal has held it "well settled that

12 mandamus, administrative or traditional, does not lie where there is an adequate remedy at law."

13 (Mystery Mesa, supra, 63 Cal.App.3d 37, 40 [affirming Superior Court order sustaining Board's

14 demurrer, without leave to amend, to taxpayer's petition for writ of administrative mandate

15 because the California Revenue and Taxation Code provided an adequate legal remedy].)

16 Petitioners contend in error that California law fails to provide an adequate legal remedy to

17 redress the determination of any penalty assessed under section 19138.

18 California Franchise and Income Tax Law provides adequate legal remedies to redress any

19 alleged purely economic injury resulting from the collection of the allegedly illegal tax penalty.

20 (Rev. & Tax. Code, §§ 19138, subd. (e), 19382, and 19385.) Petitioner is not entitled to

21 mandamus relief. Therefore, Respondent's demurrer to the Petition and Complaint should be

22 sustained. (Code Civ. Proc., § 430.10, subd. (e).)

23 G. PETITIONER'S CLAIM FOR ATTORNEY'S FEES MUST BE DENIEDFOR FAILURE TO COMPLY WITH THE CLAIMS PRESENTATION

24 AND EXHAUSTION REQUIREMENTS OF THE GOVERNMENTCLAIMS ACT.

25

26 Petitioner alleges that it is entitled to attorney's fees against Respondent, a state agency.

27 (Petition and Complaint, p. 15:10.) But Petitioner fails to allege that it has complied with the

2814



1 claims presentation and exhaustion requirements of the Government Claims Act. (Gov. Code,

2 §905.2, etseq.)

3 In adopting the practice of referring to the claims statutes as the Government Claims Act,

4 the California Supreme Court clarified that the purpose of these statutes is "not to prevent

5 surprise, but to provide the public entity sufficient information to enable it to adequately

6 investigate claims and to settle them, if appropriate, without the expense of litigation." (City of

1 Stockton v. Superior Court, supra, 42 Cal.4th 730, 738.) "It is well-settled that claims statutes

8 must be satisfied even in face of the public entity's actual knowledge of the circumstances

9 surrounding the claim." (Ibid. [Internal quotation marks and citation omitted.]) Claims for

10 attorney's fees, like the contract claims at issue in City of Stockton, "fall within the plain meaning

11 of the requirement all claims for money or damages be presented[.]" (Ibid. [Internal quotation

12 marks and citation omitted.])

13 Before filing this action claiming attorney's fees from Respondent state agency, Petitioner

14 was required to comply with the claims presentation and exhaustion requirements of the

15 Government Claims Act, but failed to do so. Respondent's demurrer should therefore be

16 sustained. (Code Civ. Proc., § 430.10, subd. (e).)

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CONCLUSION

For the foregoing reasons, Respondent's demurrer to the Petition and Complaint should be

sustained without leave to amend.

Dated: April 1, 2009 Respectfully Submitted,

EDMUND G. BROWN JR.Attorney General of CaliforniaWILLIAM L. CARTERSupervising Deputy Attorney General

SA200930843130708603.doc

JILL BOWERSDeputy Attorney GeneralAttorneys for Respondent

16



DECLARATION OF SERVICE BY OVERNIGHT COURIER

Case Name: California Taxpayers' Association v. California Franchise Tax Board, et al.

Case No.: 34-2009-80000168

I declare:

I am employed in the Office of the Attorney General, which is the office of a member of theCalifornia State Bar, at which member's direction this service is made. I am 18 years of age orolder and not a party to this matter; my business address is: 1300 I Street, Suite 125, P.O. Box944255, Sacramento, CA 94244-2550. I am familiar with the business practice at the Office ofthe Attorney General for collection and processing of correspondence for overnight mail with theGOLDEN STATE OVERNIGHT. In accordance with that practice, correspondence placed inthe internal mail collection system at the Office of the Attorney General is deposited with theovernight courier that same day in the ordinary course of business.

On April 1, 2009,1 served the attached MEMORANDUM OF POINTS ANDAUTHORITIES IN SUPPORT OF RESPONDENT FRANCHISE TAX BOARD'SDEMURRER TO PETITION FOR WRIT OF MANDATE AND VERIFIEDCOMPLAINT FOR INJUNCTIVE RELIEF AND DECLARATORY JUDGMENT bytransmitting a true copy via electronic mail. In addition, I placed a true copy thereof enclosedin a sealed envelope, in the internal mail system of the Office of the Attorney General, forovernight delivery, addressed as follows:

Amy L. Silverstein, Esq.55 Hawthorne Street, Suite 440San Francisco, CA 94105

E-mail Address:asilverstein@sptaxlaw. com

I declare under penalty of perjury under the laws of the State of California the foregoing is trueand correct and that this declaration was executed on April 1, 2009, at Sacramento, California.

L. TalaniDeclarant Signature

SA2009308431

30699102 doc


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