Steuer v. Franchise Tax Bd.

51 Cal.App.5th 417

265 Cal.Rptr.3d 216

Alan STEUER, as Trustee, etc., et al., Plaintiffs and Respondents,

v.FRANCHISE TAX BOARD, Defendant and Appellant.

A154691

Court of Appeal, First District, Division 3, California.

Filed June 29, 2020

Xavier Becerra, Attorney General, Diane Spencer Shaw, Assistant Attorney General, Lucy F. Wang, Karen W. Yiu, and Heather B. Hoesterey, Deputy Attorneys General, for Defendant and Appellant.

Antolin Agarwal, Edwin P. Antolin, San Francisco, Monty Agarwal, and Rachel L. Chanin for Plaintiffs and Respondents.

Jackson, J. Franchise Tax Board (FTB) appeals from a summary judgment order holding (1) a trust's income, even if entirely derived from California sources, is only taxable under residence-based taxation; and (2) the sole beneficiary of the Paula Trust was a contingent beneficiary. The law is well settled that individuals regardless of their residences are taxed on all income derived from California sources. ( Rev. & Tax. Code, § 17041, subd. (i)(1)(B).)¹ The trial court found the Revenue and Taxation Code, however, only imposes taxes on trust income that can be apportioned according to the number of resident fiduciaries, rather than taxing all California source income. ( § 17743.) Thus, Paula Trust was only required to pay tax on one-half of its total California-source income, because out of its two trustees, only one was a California resident.

We reverse, in part, and affirm, in part. Based on our reading of the statute's provisions as a whole, we conclude the Revenue and Taxation Code imposes taxes on the entire amount of trust income derived from California sources, regardless of the residency of the trust's fiduciaries. However, we affirm the trial court's ruling finding the sole beneficiary's interest in the trust income was contingent.

BACKGROUND

Raymond J. Syufy established the Paula Trust for the sole benefit of his daughter Paula Syufy Medeiros (Medeiros), a California resident. The Paula Trust has two cotrustees—a California resident and a Maryland resident, the fiduciaries.

Paula Trust held a limited partnership interest in Syufy Enterprises LP, which in 2007 sold stock to Century Theatres, Inc.; Century Theatre Holdings, LLC; Cinemark USA, Inc.; and Cinemark Holdings, Inc. Some of the capital gain income from the stock sale was allocated to Paula Trust. Paula Trust's 2007 tax return reported gross income in the amount of $2,965,099—$2,831,336 of capital gain including the stock sale—and the trust paid California income tax in the amount of $223,425.

In 2012, however, the trustees filed an amended 2007 California fiduciary income tax return, requesting a refund of $150,655 in allegedly overpaid income taxes. At the time, Paula Trust claimed the capital gain was incorrectly reported as California-source income. The trustees declared they were "required to apportion the stock gain as California source and non-California-source income ... according to the number of trustees resident in California" based on section 17743. (All caps omitted.) Section 17743 provides: "Where the taxability of income under this chapter depends on the residence of the fiduciary and there are two or more fiduciaries for the trust, the income taxable ... shall be apportioned according to the number of fiduciaries resident in this state ...." ( § 17743.) According to the trustees, only one-half of the capital gain apportioned to the California trustee was taxable income, while the other half, apportioned to the Maryland trustee, was not taxable. After an administrative appeal, the Board of Equalization rejected the requested refund, and Paula Trust filed a tax refund suit in 2016.

The trial court granted Paula Trust's motion for summary judgment, and summary adjudication in the alternative, holding both that Medeiros is a contingent beneficiary and that "Paula Trust's California taxable income is determined by apportioning its income pursuant to Rev. & Tax. Code § 17743"—one-half to its California trustee and one-half to its Maryland trustee. The trial court then entered judgment ordering a refund in the amount of $150,655 of tax, plus interest of $68,955.70.

DISCUSSION²

We review the trial court's ruling on the summary judgment motion and statutory construction de novo. ( Regents of University of California v. Superior Court (1999) 20 Cal.4th 509, 531, 85 Cal.Rptr.2d 257, 976 P.2d 808.) Applying a taxing statute to uncontradicted facts is a question of law, and we are not bound to accept the trial court's findings of fact. ( Communications Satellite Corp. v. Franchise Tax Bd. (1984) 156 Cal.App.3d 726, 746, 203 Cal.Rptr. 779.)

I. TAXABLE INCOME OF TRUSTS

Paula Trust contends that under a plain reading of section 17743, the taxable amount of the trust's income depends on the number of trust fiduciaries who are residents of California, regardless of whether the income is derived from California sources. The trial court agreed, determining " Rev. & Tax. Code § 17041(i) and Rev. & Tax. Code § 17951 et seq. , which collectively define taxable income of nonresidents"—and requires taxing all California-source income—"do not apply to trusts because those statutes apply only to nonresidents." The court ruled "in light of the differences between trust [sic ] and individual taxpayers, it is not absurd or unreasonable that the Legislature enacted different tax schemes for each."

We are not persuaded by this interpretation of the statute. Construing a statute requires starting with the statutory language, giving words their ordinary meaning, and applying the language if it is clear and unambiguous. ( Goldman v. Franchise Tax Bd. (2012) 202 Cal.App.4th 1193, 1199, 136 Cal.Rptr.3d 373.) We resort to extrinsic sources, such as legislative history, the statute's purpose, and public policy, to determine legislative intent if the language is ambiguous on its face or permits more than one reasonable interpretation. ( Ibid. ) After engaging in that review here, we arrive at the opposite conclusion.

A. Basis of Taxable Income

Section 17041 articulates two bases for imposing personal income tax in California. First, residents are generally taxed on all of their income, regardless of its source. ( § 17041, subd. (a)(1) ["There shall be imposed for each taxable year upon the entire taxable income of every resident of this state"].) This provision "ensure[s] that individuals who are present in the state, and receiving the benefits and protections of its laws, contribute to it by paying taxes on all income regardless of its source." ( Paine v. Franchise Tax Bd. (2004) 118 Cal.App.4th 63, 67, 12 Cal.Rptr.3d 729.)

Second, nonresident taxpayers are taxed on "gross income ... derived from sources within this state"—California-source income. ( § 17041, subd. (i)(1)(B) ; see § 17951, subd. (a) ["For purposes of computing ‘taxable income of a nonresident or part-year resident’ under ... Section 17041, in the case of nonresident taxpayers the gross income includes only the gross income from sources within this state"].)

Paula Trust contends the definition of "resident"—a term it argues is defined only as "individuals" or "natural persons"—definitively establishes these tax rules on California-source income do not apply to trusts which are simply abstractions. ( §§ 17005, 17014, 17015.) However, the statutory definition for "resident" states that it "includes " individuals who are in or domiciled in this state. ( § 17014, italics added.) It does not expressly limit the definition of "resident" to "individuals" or "natural persons." (Ibid. )

More importantly, Paula Trust's narrow reading of the term "resident" fails to assess that term in context. When harmonized with the additional provisions and statutory framework of the Revenue and Taxation Code, the statute establishes that trusts are taxed on the same basis as individuals. (See § 17002 [statutory definitions govern "[e]xcept where the context otherwise requires " (italics added) ]; see also Lungren v. Deukmejian (1988) 45 Cal.3d 727, 735, 248 Cal.Rptr. 115, 755 P.2d 299 ["the ‘plain meaning’ rule does not prohibit a court from determining whether the literal meaning of a statute comports with its purpose or whether such a construction of one provision is consistent with other provisions of the statute"].)

Revenue and Taxation Code section 17731 incorporates the federal Internal Revenue Code trust provisions, which compute a trust's taxable income "in the same manner as in the case of an individual .... The tax shall be computed on such taxable income and shall be paid by the fiduciary." ( 26 U.S.C. § 641(b), italics added; see Rev. & Tax. Code, § 17731 subd. (a) ["Subchapter J of Chapter 1 of Subtitle A of the Internal Revenue Code, relating to estates, trusts, beneficiaries, and decedents, shall apply, except as otherwise provided"].) Revenue and Taxation Code section 17041, subdivision (e) similarly mandates calculating a trust's taxable income as if the trust were an individual. (See Rev. & Tax. Code, § 17041, subd. (e) ["There shall be imposed for each taxable year upon the taxable income of every ... trust ... taxes equal to the amount computed under subdivision (a) for an individual having the same amount of taxable income"].) Read together, Revenue and Taxation Code section 17041, subdivision (i) directs the taxable income of any nonresident to include income from a California source, and trusts compute taxable income in the same manner as individuals. As a result, trusts are taxed on all California-source income without regard to the residence of fiduciaries.

Even if we were to accept Paula Trust's argument that section 17041, subdivision (e) simply sets equal tax rates for trusts and individuals rather than requires taxing a trust's California-source income, the provision nonetheless requires treating individuals and trusts similarly under the Revenue and Taxation Code. (See Robinson v. Franchise Tax Board (1981) 120 Cal.App.3d 72, 77, fn. 4, 174 Cal.Rptr. 437 [...