Franchise Tax Bd. v. Superior Court of San Francisco Cnty.

221 Cal.App.4th 647

164 Cal.Rptr.3d 752

FRANCHISE TAX BOARD, Petitioner,

v.The SUPERIOR COURT of San Francisco County, Respondent;

Quellos Group, LLC, Real Party in Interest.

Franchise Tax Board, Petitioner,

v.The Superior Court of San Francisco County, Respondent;

Quellos Financial Advisors, LLC, Real Party in Interest.

A134734

A134735

Court of Appeal, First District, Division 2, California.

Filed November 20, 2013

See 7 Witkin, Summary of Cal. Law (10th ed. 2005) Constitutional Law, § 623 et seq.

Superior Court of the City and County of San Francisco, Honorable Richard Kramer. (San Francisco County Super. Ct. No. CGC–09–487540) (San Francisco County Super. Ct. No. CG–C010–501299)

Attorney for Petitioner: Kamala D. Harris, Attorney General, Paul D. Gifford, Senior Assistant Attorney General, Joyce E. Hee, Supervising Deputy Attorney General, and Anne Michelle Burr, Deputy Attorney General

Attorney for Respondent: No appearance for Respondent

Attorneys for Real Parties in Interest Quellos Group, LLC and Quellos Financial Advisors, LLC: Steptoe & Johnson, Matthew D. Lerner and Amanda Pedvin Varma.

Richman, J.

The Franchise Tax Board (FTB or the Board) sought penalties against real parties in interest Quellos Group, LLC and Quellos Financial Advisors, LLC (collectively Quellos) for allegedly promoting an abusive tax shelter to a California taxpayer in 2001. Respondent Superior Court of San Francisco ruled for Quellos, and the Board seeks review of a single issue: whether a 2003 amendment to Revenue and Taxation Code ¹ section 19177 increasing the penalty for promoting an abusive tax shelter from $1,000 to 50 percent of the gross income received can be retroactively applied. The financial consequences of the answer are enormous: if the statute is not retroactive, the two promoters here have to write a check for only $2,000, but if the statute is retroactive, the promoters must write a check for almost $27 million, plus a dozen years of interest.

Respondent court concluded that the statute cannot be retroactively applied, and the Board must be satisfied with the $2,000. We reach the same conclusion, relying in large part on an uncodified provision enacted with the 2003 amendments to section 19177, in which the Legislature directed that “this act shall apply with respect to any penalty assessed on or after January 1, 2004, on any return for which the statute of limitations on assessment has not expired. All other provisions of this act shall apply on or after January 1, 2004.” (Italics added.) The FTB acknowledges that the penalty imposed by any version of section 19177 is not a penalty “assessed ... on [a] return.” And what we conclude is dispositive is other language in the uncodified provision, which establishes that the Legislature did address the issue of retroactive sanctions in a variety of contexts, including for promoters, but only authorized retroactive application of a penalty in the case of a specific type of inaction by them. Because the issue of retroactive application was expressly addressed by the Legislature, we cannot expand that application as the Board requests, and we thus deny its petitions for mandate.

BACKGROUND

The Setting And The Statutes

A knowledgeable observer of abusive tax shelters, recognizing that they represent one of the most fertile fields for financially-driven creativity, likens them to pornography in that they “may be easier to recognize than define.” (Bankman, The New Market in Corporate Tax Shelters (June 21, 1999) Tax Notes 1775, 1777.) They are also very much a moving target in that one of their typical characteristics is that “the shelter is likely to be shut down by legislative or administrative change soon after it is detected.” ( Id. at pp. 1777, 1781) Like performance-enhancing drugs in sport, it appears impossible for taxing authorities to anticipate what the latest generations of shelters will look like until they actually appear.

California's primary weapon in the fight against bogus shelters has always been section 19177. The state was following the lead of the federal government, which first legislated on the subject in 1982. When originally enacted, section 6700 of the Internal Revenue Code (26 U.S.C. § 6700) directed that promoters of abusive tax shelters “shall pay a penalty equal to the greater of $1,000 or 10 percent of the gross income derived or to be derived by such person from such activity.” (Pub.L. No. 97–248, § 320(a) (Sept. 3, 1982) 96 Stat. 611.) ² In 1993, California followed with the first version of section 19177, which provided simply: “A penalty shall be imposed for promoting abusive tax shelters. The penalty shall be determined in accordance with provisions of Section 6700 of the Internal Revenue Code.” (Stats.1993, ch. 31, § 26.)

A decade later, California resolved to address the issue in a more systematic fashion.³ In 2003, as part of a multi- faceted approach to halting (or at least slowing) the hemorrhaging of state revenues caused by abusive tax shelters (see fn. 10, post ), section 19177 was amended to read:

“(a) A penalty shall be imposed for promoting abusive tax shelters. The penalty shall be determined in accordance with the provisions of Section 6700 of the Internal Revenue Code, except as otherwise provided.

“(b) Notwithstanding Section 6700(a) of the Internal Revenue Code, if an activity with respect to which a penalty imposed under Section 6700(a) of the Internal Revenue Code involves a statement described in Section 6700(a)(2)(A) of the Internal Revenue Code,⁴ the amount of the penalty imposed under subdivision (a) shall be equal to 50 percent of the gross income derived (or to be derived) from that activity by the person on which the penalty is imposed.” (Stats.2003, ch. 654, § 9; Stats.2003, ch. 656, § 9.) ⁵

An uncodified section in the 2003 enactments provided in pertinent part: “(a) Unless otherwise provided, this act shall apply with respect to any penalty assessed on or after January 1, 2004, on any return for which the statute of limitations on assessment has not expired. All other provisions of this act shall apply on or after January 1, 2004.” (Stats.2003, ch. 654, § 15; Stats.2003, ch. 656, § 15, subd. (a).) ⁶ We shall refer to this language as “ section 15(a)” and the entirety of the uncodified provision as “ section 15.”

The Proceedings Below

Pursuant to this language, and the 2003 version of section 19177, the FTB assessed Quellos $26,954,965 in penalties, this being 50 percent of the $53,909,930 Quellos allegedly received for promoting an abusive tax shelter to a California taxpayer in 2001. In accordance with section 19180, Quellos paid 15 percent of the assessment ($4,043,244.25) to the FTB and then, when their administrative requests were denied, filed separate actions in respondent court for refund. The FTB responded with cross-complaints for the unpaid 85 percent of the assessed penalties.⁷ After the two actions were joined, the parties agreed to a bifurcation whereby they agreed to submit to respondent court the issue of whether the 2003 version of section 19177 applied to Quellos' 2001 transactions.

After hearing argument, and considering the voluminous papers and requests for judicial notice of the legislative history for the 2003 enactments, respondent court filed a tightly-reasoned 16–page statement of decision largely accepting Quellos' view of the matter. The court's conclusion was that “No iteration of Section 19177 supports the imposition of the fifty percent penalty on Quellos' 2001 alleged promotional activities. Instead, the maximum penalty allowed against each is $1,000. The Quellos are each entitled to a refund from the FTB of the amount paid in excess of that maximum.” ⁸

The FTB then commenced these original proceedings, filing a petition for each of the actions against the separate Quellos entities, seeking a writ of mandate “directing respondent superior court to set aside and vacate its Statement of Decision and enter a Statement of Decision holding that the 2003 amendments to section 19177 apply to all promoter penalty assessments issued on or after January 1, 2004, including those assessments that penalize promoter activities that occurred prior to January 1, 2004.” After issuing an order to show cause and receiving Quellos' return, we ordered the two proceedings consolidated for purposes of argument and decision.

REVIEW

The Propriety of Review by Extraordinary Writ Petition

Respondent court's written decision was in effect a ruling on an issue of law in a bifurcated trial, akin to a ruling on an in limine motion. Ordinarily, such an interlocutory ruling is not appealable and must await entry of a final judgment to secure review by an appellate court. (Alan v. American Honda Motor Co., Inc. (2007) 40 Cal.4th 894, 901, 55 Cal.Rptr.3d 534, 152 P.3d 1109; Babb v. Superior Court (1971) 3 Cal.3d 841, 851, 92 Cal.Rptr. 179, 479 P.2d 379; 9 Witkin, Cal. Procedure (8th ed. 2008) Appeal, § 119, p. 183.) ⁹ The ordinary processes of an appeal are therefore not an adequate remedy at this time. ( Code Civ. Proc., § 1086; 8 Witkin, Cal. Procedure, supra, Extraordinary Writs, §§ 116, p. 1009 & 127, p. 1020.) But expedited review is sometimes permitted in exceptional circumstances. Here, the issue is whether Quellos' collective liability is $2,000 or almost $27 million with similar disparities present in the follow-on cases to this case. This, as described by the FTB, presents a strong case for extraordinary interlocutory review:

“The Board has assessed increased section 19177 penalties post–2004 against not just these plaintiffs, but also against numerous entities in the banking, accounting and financial management community who promoted abusive tax shelters to multitudes of taxpayers pre–2004, At least 1525 transactions and $300,000,000 in total penalties are at stake.¹⁰ The trial court's ruling is the first judicial decision on the issue, and it is being closely followed by the Board and other...