Lead Opinion
Opinion
Thе People of the State of California, acting through the Franchise Tax Board (FTB) have filed a petition for a writ of mandate to compel respondent superior court to vacate its order denying the petition of the FTB for an order to compel compliance with its subpoena duces tecum and to make a new and different order compelling such compliance. We grant the petition.
The Issues Presented
The issues presented in this proceeding are whether an administrative subpoena duces tecum issued by the FTB requiring an insurance company to identify policyholders under its deferred annuity plan and to disclose the
Statement of the Case
On February 25, 1982, the FTB issued a subpoena duces tecum (subpoena) to, and on March 2, 1982, served it on Safeco Life Insurance Company (Safeco).
The subpoena sought the following information: “Names, addresses and social security numbers for each individual with a California address who is, or was, a policyholder in Safeco Life Single Premium Deferred Annuity Program for the period beginning January, 1977 through December, 1980.
“Furthermore, all books, records, statements and/or schedules indicating the amount of interest or other income credited to eаch individual’s custodian account for the period beginning January, 1977 through December, 1980.”
The subpoena was issued after a change in position by the FTB as to the taxability of income accumulated to the custodian accounts of policyholders in the Safeco life single premium deferred annuity program.
In early 1976 the FTB, following the lead of the Internal Revenue Service (IRS), had ruled that income accumulated and credited to an investor’s custodian account during the period of accumulation between the purchase date
The changed position of the FTB differed from that of the IRS in that the change of the IRS would apply only prospectively, but the change announced by the FTB would be retroactive to the date on which the policies were purchased.
The declaration of the representative of the FTB, requesting issuance of the subpoena, stated that FTB had determined “that the income and/or interest received by investors from the Safeco Life Single Premium Deferred Annuity Program is taxable” and that the FTB was requested to issue the subpoena “[i]n order to establish the taxable income of the individual investors.” On its face, the subpoena recited that “The statutory purpose of this subpoena is to determine if the policyholders of Safеco Life Single Premium Deferred Annuity Program have complied with the provisions of the Personal Income Tax Law.”
Contending that the subpoena suffered from statutory and constitutional defects, Safeco did not comply with it.
When Safeco failed and refused to attend and produce the papers as required by the subpoena, the FTB petitioned respondent superior court, pursuant to Government Code sections 11186, 11187 and 11188, for an order compelling Safeco to attend, testify, and produce the papers.
After hearing argument, the court denied the petition of the FTB on January 26, 1983. The FTB filed a notice of appeal from the minute order, which we dismissed on May 2, 1983, without prejudice to the right of the FTB to seek a writ of mandate. (Barnes v. Molino (1980)
Contentions
The court’s minute order recited that it denied the petition of the FTB “. . . for all of . . .” (italics in original) the following reasons: “The petition of the Franchise Tax Board should be denied because the subpoena was not regularly issued by the head of the department as that requirement has been interpreted by the courts of California.
“The subpoena duces tecum issued by the Franchise Tax Board violates the right to privacy of the policyholders as guaranteed by both Article I, Section 1 of the California Constitution and the California Right to Financial Privacy Act.
“The Franchise Tax Board is estopped from rеtroactively changing the method of taxing the investment annuities. Thus the subpoena seeks records which are irrelevant to any valid statutory purpose. Finally, the subpoena is overbroad. It does not relate to a particular taxpayer’s records.” (Italics in original.)
Further, the FTB contends that 1) the writ should issue because it has no plain, speedy and adequate remedy in the ordinary course of law to review the respondent court’s order; 2) the respondent court’s order is a failure of that court to exercise its jurisdiction and an act in excess of its jurisdiction, and that 3) the making of the order granting the relief for which the FTB had petitioned is an act the performance of which the law specially enjoins as a duty resulting from that court’s office, trust and station. (Code Civ. Proc., §§ 1085-1086.)
In support of its contentions the FTB argues, inter alia, that it cannot be estopped or enjoined from the collection of any tax and that the refusal of the respondent court to compel compliance with its subpoena does, in effect, “prevent or enjoin the collection of” personal income tax in violation of California Constitution, article XHI, section 32.
Discussion
Mandamus is the appropriate remedy to compel an inferior tribunal to perform a nondiscretionary act which the law specially enjoins; the writ must be issued in all cases where there is no plain, speedy and adequate remedy in the ordinary course of the law. By issuing the alternative writ we have determined that the FTB has no other adequate remedy and this is a proper case for the exercise of our original jurisdiction. (Code Civ. Proc., §§ 1085, 1086; Lewis v. Barclay (1868)
The Duty and Authority of the FTB to Investigate
The Franchise Tax Boаrd is charged with the duties of administering and enforcing the Personal Income Tax Law.
The Jurisdiction of the Superior Court in a Special Proceeding Under Government Code Sections 11187 and 11188
Respondent court erred in ruling that the subpoena “. . . was not regularly issued by the head of the department as that requirement has been interpreted by the courts of California.” (Italics in original order.)
Sections 11180-11191 statutorily authorize investigations by each department of the executive branch of our state government of all matters under the jurisdiction of the department. As a part of those investigations Government Code, section 11181 authorizes the department to inspect books and records and to “[i]ssue subpoenas for the attendance of witnesses and the production of papers, books, accounts, documents and testimony in any inquiry, investigation, hearing or proceeding pertinent or material thereto . . . .” This authority is substantially the same as that granted specifically to the FTB by Revenue and Taxation Code section 19254, ante (fn. 1).
If a witness refuses to comply with a subpoena issued in connection with such an investigation, section 11187 (fn. 2, ante) authorizes the department to petition the superior court for an order compelling the witness to comply. Section 11188 (fn. 2, ante) provides that upon filing such petition the court shall enter an order to show cause why there has not been compliance, and if it appears to the court that the subpoeha was regularly issued "... the court shall enter an order ...” directing the subpoenaed person to comply. (Italics added.) It is further provided in section 11188 that upon failure to obey the order ”... the person shall be dealt with as for contempt of court.”
In Brovelli v. Superior Court (1961)
“As has been said by the United States Supreme Court, the power to make administrative inquiry is not derived from a judicial function but is mоre analogous to the power of a grand jury, which does not depend on a case or controversy in order to get evidence but can investigate ‘merely on suspicion that the law is being violated, or even just because it wants assurance that it is not.’ (United States v. Morton Salt Co.,
In the case at bench the special proceeding was commenced independently of a pending action, by petition, and in order to obtain special relief in the form of an order compelling compliance with the FTB’s administrative subpoena; it is a remedy in aid of the duty and authority of the FTB to administer and enforce the Personal Income Tax Law and to conduct investigations of all matters within the jurisdiction of the FTB.
In a hearing pursuant to section 11188 the court is limited to determining whether the subpoena conforms to legal and constitutional standards. As the court stated in Fielder v. Berkeley Properties Co. (1972)
The Fielder court pointed out that the hearing on the order to show cause pursuant to section 11188 is not a hearing in the nature of that on a motion to quash. “Such a hearing [as on a motion to quash] is not within the contemplation of the subject administrative inquiry and investigation.” (Id., at p. 40.)
Our Supreme Court also pointed out in Brovelli v. Superior Court, supra,
If a person served with an administrative subpoena, issued by the FTB as authorized by Revenue and Taxation Code section 19254, believes that it was not regularly issued or that the requirements of Brovelli v. Superior Court, supra,
The Subpoena Duces Tecum Was Regularly Issued by the Head of the Franchise Tax Board
We have examined the record and find that the declaration of the FTB representative in support of the subpoena states facts which establish that the inquiry is one which the FTB is authorized to make. Our examination of the subpoena establishes that it is duly signed, that the demand is not too indefinite, and that the information sought is reasonably relevant to the duties of and intended investigation by the FTB. (Brovelli v. Superior Court, supra,
The Subpoena Duces Tecum Issued by the FTB Does Not Violate the Right to Privacy of Safeco’s Policyholders as Guaranteed by Article I, Section 1, of the California Constitution
The basic test of whether there has been a violation of the constitutional right of privacy is whether a person’s personal and objectively reasonable expectation of privacy has been infringed by unreasonable govern
The law requires payors of interest and other determinable income to report to the FTB the information which was sought by the subpoena in this proceeding.
The Subpoena Does Not Violate the California Right to Financial Privacy Act. (Gov. Code, §§ 7460-7493)
The subpoena seeks the identity of those individuals who were policyholders in Safeco’s deferred annuity program during a specified period of time, and the amounts of interest or other income credited to their custodian accounts during that time. As we have pointed out above, the law requires payors of interest and other determinable income to report that very information to the FTB. (Rev. & Tax. Code, §§ 18802-18803, fn. 7, ante.) It is common knowledge that information returns, reporting such payments and credits, have been furnished by the payors thereof to the FTB and the IRS for many years. Neither the payors nor the payees have any reasonable expectation of privacy as to that information.
We also notе that the information sought by the subpoena is expressly excluded from the restrictions of the “Privacy Act.”
The FTB Cannot Be Prevented or Enjoined From the Assessment or Collection of Any Tax
The power to tax is essential to the existence of a government. In order to protect that power the people of the State of California have expressed the fundamental laws governing taxation in our Constitution and statutes. (Civ. Code, §§ 22, 22.1.) California Constitution, article XIII, dealing with taxation, provides in part: Section 31. “The power to tax may not be surrendered or suspended by grant or contract.”
Section 32. “No legal or equitable process shall issue in any proceeding in any court against this State or any officer thereof to prevent or enjoin the collection of any tax. After payment of a tax claimed to be illegal, an action may be maintained to recover the tax paid, with interest, in such manner as may be provided by the Legislature.”
Section 33. “The Legislature shall pass all laws necessary to carry out the provisions of this article.”
For convenience, we will refer to the above provisions as section 31, section 32 and section 33.
Sections 32 and 33 are implemented in the Personal Income Tax Law by Revenue and Taxation Code section 19081, which provides, in part: “No injunction or writ of mandate or other legal or equitable process shall issue in any suit, action, or proceeding in any court against this State or against
As stated by our Supreme Court in Pacific Gas & Electric Co. v. State Bd. of Equalization (1980)
In Pacific Gas & Electric Co. v. State Bd. of Equalization, supra,
The court also noted that section 32 applies only to actions against the state or the officers thereof. (Id., at p. 281, fn. 6, citing Eisley v. Mohan (1948)
Section 32 is a part of the fundamental law of our state, it is a mandate permitting no deviation. All statutes, all courts, and all lawsuits are subject to the Constitution. As our Supreme Court said in Modern Barber Col. v. Cal. Emp. Stab. Com. (1948)
It is also settled that injunctive relief is not available to restrain the collection of any tax even though the tax statute may be unconstitutional and
The Enforcement of a Subpoena Regularly Issued by the Franchise Tax Board in Accordance With Revenue and Taxation Code Section 19254 and Government Code Sections 11180-11188, Is an Integral Part of the Tax Collection Process and Shall Not Be Prevented or Enjoined by the Legal or Equitable Process of Any Court
Safeco argues, in opposition to the FTB’s petition, that the bar of section 32 does not apply in the case at bench because the ruling of the trial court did not prevent or enjoin the FTB from the assessment or collection of any tax but only from obtaining information following the change in its position as to the taxability of income credited to the custodian accounts of some of Safeco’s policyholders. This contention is without merit. Similar theses have been advanced, and rejected by our courts, in analogous situations.
In Modern Barber Col. v. Cal. Emp. Stab. Com., supra,
In Pacific Gas & Electric Co. v. State Bd. of Equalization, supra,
In Helms Bakeries v. St. Bd. Equalization (1942)
And in Hunter-Reay v. Franchise Tax Board, supra,
In the light of such precedents it is apparent, and we find, that the enforcement of a subpoena regularly issued and prosecuted by the FTB, in accordance with Revenue and Taxation Code section 19254 and Government Code sections 11180-11191, is a first step in the collection of a tax and an integral part of the tax collection process, and section 32 mandates that it shall not be prevented or enjoined by the legal or equitable process of any court. The “purpose” of Safeco’s action to prevent enforcement of the subpoena is clearly restraint. Thus the court’s order is barred by sectiоn 32.
The Exclusive Means of Judicial Review of Tax Proceedings in California Is to Pay the Tax and Then Sue to Recover the Alleged Overpayments. This Procedure Is Constitutional and Does Not Deprive the Taxpayer of Due Process of Law
a. Suits for Refunds by Taxpayers
Revenue and Taxation Code sections 19081 and following provide the manner in which a taxpayer may maintain an action to recover a tax paid under the Personal Income Tax Law, with interest, if the taxpayer claims the tax to be illegal.
“The due process clause does not guarantee the right to judicial review of tax liability before payment. The power of a state to provide the remedy of suit to recover alleged overpayments as the exclusive means of judicial review of tax proceedings has long been unquestioned. [Citations.] This is also the law in this state: ‘The prompt payment of taxes is always important to the public welfare. It may be vital to the existence of a government. The idea that every tax-payer is entitled to the delays of litigation is unreason. . . (Id., at pp. 725-726.) (Accord Aronoff v. Franchise Tax Board (1963)
Modern Barber Col. v. Cal. Emp. Stab. Com., supra,
b. The Constitutional Bar of Section 32 Does Not Deny Due Process to Safeco, a Nontaxpayer, Under the Facts of This Case
As we have seen, the decisions of our courts have held that the due process clause does not guarantee the right to judicial review of tax liability before payment. The rationale of those decisions is that the remedy of suit to recovеr alleged overpayments of taxes, or illegal taxes, satisfies the due process requirements of the United States and California Constitutions.
Safeco implicitly contends that constitutional standards require that there be an exception to that rule where one who is not the taxpayer seeks to challenge a tax law or an action of a taxing agency.
Safeco’s contention is that, assuming arguendo it was seeking to estop or enjoin the FTB from the collection of a tax, Safeco cannot be prevented
In an apparent effort to show that it has a sufficient stake in the matter to give it standing to sue, i.e., the right to relief in court (Parker v. Bowron (1953)
The same argument was presented and decided in Investment Annuity, Inc. v. Blumenthal (D.C. Cir. 1979)
The United States Court of Appeal reversed the district court, holding that “. . .in the absence of constitutional impediment. . .’’the courts must
In reaching its decision the Court of Appeal recognized that “. . . when the denial of judicial review rises to the level of a constitutional infirmity . . .” the Tax Anti-Injunction Act (a statute) must yield. (Investment Annuity, Inc. v. Blumenthal (D.C. Cir. 1979)
The reasoning of the court in Investment Annuity, Inc. applies directly to the case at bench. It demonstrates that in a factual situation which is the substantial equivalent of that in the case at bench the seller of the investment annuity policies was not deprived of a property interest cognizable under the due process clause. We find the same to be true as to Safeco in the case at bench.
We also note that in its argument Safeco does not specify what property interest it has been “deprived” of by the action of the FTB, but only that
In further support of its argument Safeco relies on South Carolina v. Regan (1984)
In South Carolina v. Regan, the State of South Carolina contended that a provision of the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) was constitutionally invalid as violative of the Tenth Amendment and the doctrine of intergovernmental tax immunity. The TEFRA provision required that the state’s bonds be in registered, rather than bearer, form to qualify for the federal tax exemption for interest earned on those bonds. This would require the state to pay its bearer bondholders a higher rate of interest, or require the state to issue its bonds in registered form, and thereby destroy the state’s freedom to issue its bonds in the form that it chooses. Thus, the state argued, its power to borrow money was impaired by the TEFRA provision.
The state invoked the Supreme Court’s original jurisdiction and asked leave to file a complaint against the Secretary of the Treasury seeking declaratory, injunctive, and other relief. The secretary objected to the state’s motion on the ground that it was barred by the federal Tax Anti-Injunction Act (fn. 12, ante).
The Supreme Court reviewed the history of the Tax Anti-Injunction Act from the time of its enactment, in 1867, and held that “. . . the indicia of congressional intent [as to] the Act’s purposes and the circumstances of its enactment—demonstrate that . . . the Act was intended to apply only when Congress has provided an alternative avenue for an aggrieved party to litigate its claims on its own behalf. Because Congress did not prescribe an alternative remedy for the plaintiff in this case, the Act does not bar this suit.” South Carolina v. Regan, supra,
The decision in South Carolina v. Regan does not govern the case at bench. It is confined to a determination of the scope and purpose of the federal Tax Anti-Injunction Act. It reaches no farther than to find and declare the intention of the Congress in enacting that law. It does not declare rules of law of general application. It does not by analogy or otherwise define or limit the application of article XIII, section 32 of the California Constitution nor of its implementing statute.
The California Constitution is the organic law of this state, established by the People. It is subordinate only to the Constitution of the United States. Article XIII, section 32, which governs the case at bench, is a constitutional mandate implemented by a statute. (Rev. & Tax. Code, § 19081.) As we have noted, above, ““‘[t]he provision of the California Constitution is much more than a mere declaration of the rules generally applicable in proceedings for injunction, mandamus, or other legal or equitable relief.” ... It follows that cases . . . which discuss the various instances under which an injunction may be available according to the common law rules of equity or under statutes restating them are not relevant here.’ ” (Pacific Gas & Electric Co. v. State Bd. of Equalization, supra,
We conclude that Safeco has not been deprived of a constitutionally cognizable property interest so as to invoke the due process requirements of the Fifth Amendment of the Constitution of the United States and thereby to create an exception to the constitutional bar of section 32.
Estoppel Cannot Be Raised Against the State in Contravention of California Constitution, Article XIII, Section 32
In the leading case of City of Long Beach v. Mansell (1970)
In Mansell, our Supreme Court stated, at page 493: “It is settled that ‘[t]he doctrine of equitable estoppel may be applied against the government . where justice and right require it. (United States Fid. & Guar. Co. v. State Board of Equalization (1956)
In a later decision, our Supreme Court added that: “. . . [N]o court has expressly invoked principles of estoppel to contravene directly any statutory or constitutional limitations.” (Longshore v. County of Ventura (1979)
Thus, estoppel will not be applied against the government if the result would be to nullify a strong rule of policy adopted for the benefit of the public (Mansell, supra,
In the case at bench the application of estoppel to prevent the FTB from complying with its statutory duty and conducting an investigation to determine and collect the liability of Safeco’s policyholders for personal income taxes (Rev. & Tax. Code, § 19254; Brovelli v. Superior Court, supra,
Even if there were no constitutional, statutory or decisional bars to the raising of an estoppel to prevent or enjoin the collection of a tax by the state, an estoppel could not be raised in the case at bench because one of the essential elements of an estoppel is missing.
In the case at bench there is no showing of an injury to Safeco which would justify the raising of an estoppel.
In order to raise an estoppel against the government there must be a clear showing that the private party’s relianсe upon the government’s conduct has caused him to change his position for the worse, that is, that the reliance has caused him to suffer injury. Here there is no showing that Safeco has suffered any injury, nor that Safeco has been deprived of something to which it was entitled as of right. Safeco has lost no property interest nor any legal right, vested or contingent. (Cf. Heckler v. Community Health Care Services of Crawford County, Inc. (1984)
Safeco has cited us to no authority for the proposition that the State of California or its officers can be estopped, prevented or enjoined from the collection of any tax, and in our independent research we have found none.
We have reviewed all of the seven decisions cited in U. S. Fid. & Guar. Co. v. State Bd. of Equal., supra, 47 Cal.2d 384, 389, in support of its declaration that “[t]he government may be estopped in tax matters.” Five of the cases are from the California courts. Each of these five is an action for refund of taxes paid; four of them are for taxes which had been paid under protest and the fifth was for the refund of taxes alleged to have been illegally collected. None of them contravened section 32, which bars only the prevention or enjoining of the collection of a tax and expressly authorizes actions to recover taxes paid which are claimed to be illegal. Furthermore, two of those cases were against the City of Los Angeles and the County of Los Angeles, respectively, and, as we have seen, section 32 bars only actions against the state or its officers. (Eisley v. Mohan (1948)
The California tax cases in which estoppel has been raised, and which have been brought to our attention or which we have found, have been actions for the recovery of taxes paid. The rule of U. S. Fid. & Guar. Co. v. State Bd. of Equal., supra, 47 Cal.2d at page 389, that “[t]he government may be estopped in tax matters,” is very narrowly applied. The decision which points out the proper limitations on that rule is La Societe Francaise v. Cal. Emp. Com. (1943)
The effect of the ruling in La Societe is that where there is a failure to pay a tax because of reliance on an erroneous administrative tax ruling there is no estoppel against the state in the collection of the tax itself; however, the government is estopped from the collection of penalties, interest, and the liability to withhold and pay the taxes of others, such as employees.
In Market St. Ry. Co. v. Cal. St. Bd. Equal. (1955)
We find that the respondent court erred in ruling that the subpoena was not regularly issued and that it violated the right to privacy of Safeco’s policyholders under article I, section 1, of the California Constitution; that the court acted in excess of its jurisdiction in these proceedings by making a judicial review of tax proceeding prior to the collection of the tax by ruling that the FTB is estopped from changing its position retroactively as to the taxability of income on the policies which Safeco has sold; and that the court failed to exercise its jurisdiction by failing to make an order, which the law enjoins, compelling Safeco to comply with the subpoena.
Decision
The alternative writ of mandate is vacated.
Let a peremptory writ of mandate issue commanding respondent court to vacate its order denying the petition of the FTB for an order compelling respondent Safeco to comply with the subpoena duces tecum issued to and served upon Safeco by the FTB and to make an order compelling such compliance.
Klein, P. J., concurred.
Notes
Revenue and Taxation Code section 19254 provides as follows: “(a) The Franchise Tax Board, for the purpose of administering its duties under this part, including ascertaining the correctness of any return; making a return where none has been made; determining or collecting the liability of any person in respect of any liability imposed by this part (or the liability at law or in equity of any transferee in respect of such liability); shall have the power to examine any books, papers, records, or other data, which may be relevant to such purpose.
“(b) The Franchise Tax Board may require the attendance of the taxpayer or of any other person having knowledge in the premises and may take testimony and require material proof for its information and administer oaths to carry out the provisions of this part.
“(c) The Franchise Tax Board may issue subpoenas or subpoenas duces tecum, which subpoenas must be signed by any member of the Franchise Tax Board and may be served on any person for any purpose.”
Government Code sections 11186, 11187, and 11188, relating to investigations and hearings by the executive department, provide:
Section 11186—“The superior court . . . has jurisdiction to compel the attendance of witnesses, the giving of testimony and the production of papers, books, accounts and documents as required by any subpoena. ...”
Section 11187—“If any witness refuses to attend or testify or produce any papers required by such subpoena the head of the department may petition the superior court in the county in which the hearing is pending for an order compelling the person to attend and testify or produce the papers required by the subpoena before the officer named in the subpoena.”
Section 11188—“Upon the filing of the petition the court shall enter an order directing the person to appear before the court at a specified time and place and then and there show cause why he has not attended or testified or produced the papers as required. A copy of the order shall be served upon him. If it aрpears to the court that the subpoena was regularly issued by the head of the department, the court shall enter an order that the person appear before the officer named in the subpoena at the time and place fixed in the order and testify or produce the required papers. Upon failure to obey the order, the person shall be dealt with as for contempt of court. ”
Noting a lapse of almost nine months from the time the appeal of the FTB was dismissed and the petition for writ of mandate was filed, Safeco contends that the petition should be dismissed due to laches. We disagree.
Lapse of time, except where the statute of limitations has run, is never itself a defense; there must be unreasonable delay resulting in prejudice to the party raising the defense. Moreover, prejudice is not presumed but must be affirmatively demonstrated. (Miller v. Eisenhower Medical Center (1980)
The FTB informed Safeco that Safeco would be held liable for any revenues lost as a consequence of delays caused by Safeco resisting the subpoena. Safeco argues that based on this assertion by the FTB there can be no question that the delay in bringing the petition will result in prejudice to Safeco. Safeco’s contention, at most, constitutes mere speculation regarding the uncertain occurrence of future events rather than an affirmative demonstration of prejudice.
Revenue and Taxation Code, division 2, part 10, is known as the Personal Income Tax Law. It includes sections 17001 through 19452 of that code.
In this section of this opinion references to sections 11180 through 11191 are to the Government Code.
The authority of the FTB to investigate and to issue subpoenas under Revenue and Taxation Code section 19254, and under Government Code sections 11180-11191, is substantially identical and we hold that such authority is governed by the same principles and precedents.
JudiciaI remedies are defined and classified in the Code of Civil Procedure as follows: Section 20 “Judicial remedies are such as are administered by the Courts of justice, or by judicial officers empowered for that purpose by the Constitution and statutes of this State.” Section 21 “These remedies are divided into two classes:
“1. Actions; and,
“2. Special proceedings.”
Section 22 “An action is an ordinary proceeding in a court of justice by which one party prosecutes another for the declaration, enforcement, or protection of a right, the redress or prevention of a wrong, or the punishment of a public offense.”
Section 23 “Every other remedy is a special proceeding.”
Revenue and Taxation Code sections 18802 and 18803, a part of the article of the Personal Income Tax Law which authorizes the requirement of information returns, provide, in part, as follows: § 18802. “(a) Every . . . insurance company, . . . engaged in . . . business in this state and making payment in the course of such . . . business to another person, ... of interest. . . dividends, ... or other . . . determinable annual or periodical gains, profits, and income . . . paid or payable during any year to any taxpayer, shall make a complete return to the Franchise Tax Board, . . .
§ 18803. Information returns; . . .
“Such a return may be required, regardless of amounts, in the case of
“(a) Payments of . . . interest on amounts held by an insurance company under an agreement to pay interest thereon; . . .
“(b) Dividends paid by corporations.”
Safeco contends that it is not a payor of interest and thus has no statutory obligation to report the information sought by the FTB. We note that irrespective of Safeco’s status as a payor of interest and any concomitant obligation to report the information pursuant to Revenue and Taxation Code sections 18802 and 18803, Safeco is obligated to produce the information and data as commanded by the subpoena pursuant to the authority of section 19254 of the Revenue and Taxation Code, ante, footnote 1 and Government Code section 11181.
Government Code section 7480 provides, in pertinent part: “Nothing in this chapter [chapter 20, California Right to Financial Privacy Act] prohibits any of the following:
“(e) The disclosure to the Franchise Tax Board of. . . (2) financial records in connection with the filing or audit of a tax return or tax information return required to be filed by the financial institution pursuant to Parts 10 [the Personal Income Tax Law], 11, or 18 of the Revenue and Taxation Code.”
For convenience we will do as did our Supreme Court and refer to all such provisions as section 32.
Similar provisions, implementing article XIII, sections 32 and 33, are found in the Alcoholic Beverage Tax Law, section 32411; the Bank and Corporation Tax Law, section 26101; the Cigarette Tax Law, section 30401; the law governing insurance taxation, section 13101; the Motor Vehicle Fuel License Tax Law, section 8146; the Private Railroad Car Tax Law, section 11571; the Sales and Use Tax Law, section 6931; and the Use Fuel Tax Law, section 9171. All section references in this footnote are to the Revenue and Taxation Code.
The act reads, in pertinent part: “Except as provided in sections ... no suit for the purpose of restraining the assessment or collection of any tax shall be maintained in any court by any person, whether or not such person is the person against whom such tax was assessed.” None of the statutory exceptions is relevant in this case.
Where one of the elements of an estoppel is missing there can be no estoppel. (Hersch v. Citizens Savings & Loan Ass’n. (1983)
Concurrence Opinion
I reluctantly concur in the majority’s holding that binding precedent prevents Safeco’s challеnge to the subpoena in a special proceeding brought pursuant to Revenue and Taxation Code
Safeco has a cognizable property right in its investment annuity contracts which the majority view ignores. If the majority view is left standing, Safeco (and others similarly situated) will be deprived of the due process right to litigate such issues in future proceedings. In taking such position, the majority misreads and misinterprets the holdings of several key federal and state appellate decisions. I do not join in the majority opinion because it contains language which, in my view, offends notions of fairness and justice.
Since this petition addresses a substantial question of first impression which will have a profound and lasting impact on the citizens of this state and members of the bar, I will set forth my reasoning in detail.
I
Pertinent Background
The facts are not in dispute. Safeco is one of several insurance companies that sold the investment annuity contracts (contracts) which are in controversy. Beginning in 1965, the Internal Revenue Service (IRS) issued a series of private letter rulings declaring that the “income generated by the assets held in custodial accounts was taxable to the insurance company, not the policyholder. . . . Sales of the contracts, initially modest, mushroomed when business and financial publications heralded them as permitting taxpayers to avoid taxation on investment earnings while retaining control аnd liquidity. [Fn. omitted.]” (Investment Annuity Inc. v. Blumenthal (D.C.App. 1979)
The IRS eventually reconsidered its position and issued Revenue Ruling 77-85 (I.R.B. 1977-15) in which it reversed its earlier position. The IRS ruled that the policyholders of these contracts must include interest, dividends and other income deposited into the custodial accounts, established in conjunction with the contracts, in their current tax returns as gross income rather than deferred income. Under the authority granted the IRS pursuant to section 7805(b) of the Internal Revenue Code,
Prior to the issuance of Revenue Ruling 77-85, Safeco had sought rulings from both the IRS and the FTB to confirm the position that the income from the investments generated by the contracts would be deferred for tax purposes. It sought these rulings on its own behalf and for its client Earl Fauser with whom Safeco intended to consummate such a contract. Under IRS procedures,
FTB regulations effective during this period provided that in the absence of its own regulations, the Internal Revenue Code and regulations issued thereunder would, insofar as possible, govern the interpretation of conforming state statutes. (See Cal. Admin. Code, tit. 18, § 19253.)
Following the IRS’s issuance of Revenue Ruling 77-85, the FTB informed Safeco that it agreed with that ruling and that it was going to revoke its prior ruling retroactively and tax the income accumulated and credited to the custodial accounts currently.
Subsequently, the FTB wrote Safeco indicating that the FTB was prohibited by law from applying Revenue Ruling 77-85 prospectively to contracts entered into after March 1977 since a prospective application would constitute an unlawful gift of public funds in violation of the California Consti
n
Safeco Has a Vested Right Which Is Entitled to Due Process Protection
Safeco makes a convincing argument that its constitutional due process rights will be violated if it is unable to assert its challenges to the administrative subpoena in these proceedings because it is not a taxpayer who can seek a review of the FTB actions by way of a refund suit.
A. Safeco Has a Vested Right in Its Contracts and Therefore Has Standing to Challenge the Impairment of Such Contracts by Retroactive Revocation of the FTB’s Ruling
The majority’s conclusion that Safeco has no cognizable property interest subject to due process protection is simply erroneous.
It cannot be seriously disputed that the original rulings by the IRS and the FTB were the essential, if not the key, motivating fаctors in Safeco’s decision to sell these contracts and the policyholder’s decision to acquire them. (See Investment Annuity, supra,
As stated by our Supreme Court in Miller v. McKenna (1944) 23 Cal.2d 774, 783 [
In Estate of Gill (1971)
In Union Oil Co. v. Moesch (1979)
In Associated Cal. Loggers, Inc. v. Kinder (1978)
While Associated Cal. Loggers, Inc. v. Kinder is distinguishable on grounds that it deals with insurance matters in which there is no statutory or constitutional impairment against injunctive or declaratory relief, the opinion is authority on the issue of standing of interested third parties to assert a constitutional challenge to an impairment of their contracts.
Finally, in Trans-Oceanic Oil Corp. v. Santa Barbara (1948)
Based upon the foregoing, I conclude that Safeco has demonstrated a vested right in its contracts sufficient to justify standing to challenge the FTB’s retroactive revocation of its ruling.
B. Investment Annuity Is Inapposite to the Facts Presented in This Petition
In concluding Safeco has no standing in any proceeding concerning the FTB’s change of position, the majority relies heavily on Investment Annuity and erroneously concludes that that decision presented a factual situation substantially equivalent to the case at bench.
Investment Annuity concerned an appeal of the federal district court’s order granting various insurance companies a judgment declaring Revenue Ruling 77-85 erroneous and enjoining the IRS from applying it to prospective purchasers of investment annuities after March 9, 1977. Because Revenue Ruling 77-85 “grandfathered” all existing annuities issued pursuant to former IRS’s rulings, there was no reason for the circuit court in Investment Annuity to address the substantive issue of a retroactive application of Revenue Ruling 77-85—the issue with which we are squarely confronted. The majority’s reliance on Investment Annuity is misplaced.
The United States Supreme Court expressed its concern in South Carolina v. Regan (1984)
The Supreme Court stated that “[i]n each of this Court’s subsequent cases that have applied the Williams Packing rule, the plaintiff had the option of paying the tax and bringing a suit for a refund. Moreover, these cases make clear that the Court in Williams Packing and its progeny did not intend to decide whether the [Anti-Injunction] Act would apply to an aggrieved party who could not bring a suit for a refund. [1] For example, in Bob Jones [v. Simon (1974)
The government also urged that South Carolina may obtain judicial review by issuing bearer bonds and urging the purchaser of those bonds to bring a suit contesting the legality of the TEFRA provision. The Supreme Court stated: “First, instances in which a third party may raise the constitutional rights of another are the exception rather than the rule. [Citations.] More important, to make use of this remedy, the State ‘must first be able to find [an individual] willing to subject himself to the rigors of litigation against the Service, and then must rely on [him] to present the relevant arguments on [its] behalf. ’ Bob Jones, supra, at 747 n. 21,
In my view, South Carolina v. Regan is square authority for the proposition that a nontaxpayer has standing to assert a due process claim and challenge the retroactive revocation of a tax statute or ruling.
The majority’s reliance on Pacific Gas & Electric Co. v. State Bd. of Equalization (1980)
The standing of a nontaxpayer to challenge the retroactive revocation of a tax statute or ruling which impairs their contractual rights is a question of first impression in this state. In my view South Carolina v. Regan is on point and provides authority for Safeco’s standing herein.
Public Policy Dictates That Safeco Be Allowed to Pursue a Declaratory Action
A. A Declaratory Action Will Not Conflict With Article XIII, Section 32
Although settled law appears to compel Safeco to comply with the FTB’s administrative subpoena, Safeco may pursue a declaratory action.
As our Supreme Court said in U. S. Fid. & Guar. Co. v. State Bd. of Equal. (1956)
During the last session, the Legislature passed Assembly Bill No. 3338 which, among other things, added a new section 6596 to the Revenue and Taxation Code.
In the court below and in this court, the only explanation offered by the FTB was that a prospective revocation of its ruling would result in a gift of
However, since there was no real opportunity for both parties to present the estoppel question in the court below, a conclusive determination on this question is not possible.
B. The FTB Must Not Abuse Its Discretion Under Revenue and Taxation Code Section 19253
Furthermore, the FTB must demonstrate that the retroactive application of its ruling is not an abuse of its discretion. Revenue and Taxation Code section 19253 provides that “[t]he Franchise Tax Board shall prescribe all rules and regulations necessary for the enforcement of this part [the Personal Income Tax Law] and may prescribe the extent to which any ruling or regulation shall be applied without retroactive effect. ” (Italics added.)
The language in section 19253 is virtually identical to that contained in section 7805(b) of the Internal Revenue Code which the United States Supreme Court had occasion to review in Dixon v. United States, supra,
C. Public Policy Compels a Remedy for Safeco
Two reasons of public policy demand affording Safeco standing in a declaratory action in these circumstances. First, prudent taxpayers and their counsel must be given assurance in complex and uncertain tax situations that they may rely with a sense of security on the FTB rulings, absent mistake or misinterpretations of fact or law.
Secondly, public policy demands that Safeco and other similarly situated persons and business entities be allowed to challenge the FTB’s abuse of the discretion given it under Revenue and Taxation Code section 19253.
It is common knowledge that many citizens of this state invest in IRA accounts with banks, savings and loan institutions and other entities. In
The majority’s reasoning violates the maxim of jurisprudence that “for every wrong there is a remedy.” (Civ. Code, § 3523.)
IV
Conclusion
I would hold that Safeco has standing to assert its constitutional challenges in a proper declaratory action. If successful, I would expect the FTB to respect any final declaratory judgment as binding on any litigation for administrative action concerning an assessment or refund suit by an affected policyholder. (See California v. Grace Brethren Church (1982)
A petition for a rehearing was denied March 6, 1985, and the petition of real party in interest for a hearing by the Supreme Court was denied April 25, 1985. Bird, C. J., was of the opinion that the petition should be granted.
Under Internal Revenue Code section 7805(b), the Secretary of the Treasury or his delegate (usually the Commissioner of IRS) may prescribe the extent, if any, to which any ruling will be applied without retroactive effect.
WhiIe the record is silent on the exact IRS procedure Safeco utilized in obtaining the IRS ruling, Rev. Proc. 80-29 (I.R.B. 1980-26) is instructive. This IRS administrative procedure authorizes the issuance of a ruling by the IRS to a sponsor organization concerning the acceptability of master or prototype pension, annuity, and profit-sharing plans and the status of related trust or custodial accounts. Rev. Proc. 80-29 superseded earlier IRS procedural pronouncements.
The IRS and FTB issuance of rulings to Safeco is evidence that Safeco was entitled to seek and obtain such a ruling in the first instance.
See Revenue and Taxation Code section 17024.5, effective July 28, 1983, which essentially provides for the same reliance on federal tax statutes and regulations.
It is patently clear from the language in Investment Annuity that the circuit court was faced only with a challenge to the prospective application of the ruling when the court stated
The circuit court’s citations in footnote 24 indicate that the court focused on the prospective application of the ruling. Board of Regents v. Roth, supra, held no due process deprivation of property interest in continued employment as a teacher; Bishop v. Woods, supra, held no protected property interest in continued employment as a policeman; and Arnett v. Kennedy, supra, held that a nonprobationary federal employee’s right not to be discharged except for cause only after appropriate procedural protections, did not create an expectation of job retention.
Since this petition presents a question of substantial public concern and since the majority opinion discusses issues beyond the scope of a special proceeding, I will express my views on a declaratory action even though it is not essential to the disposition of the petition. (See Collier v. Lindley (1928)
The court’s decision (47 Cal.2d at pp. 388-389) contains numerous cases involving the question of estoppel. It is not necessary to repeat those citations here.
See Statutes of 1984, chapter 1728.
“Although the Dixon case appears to give the Commissioner broad authority to correct erroneous interpretations of the law, the Commissioner has imposed certain limitations in applying this authority. [Fn. omitted.] [1] ‘Except in rare or unusual circumstances, the revocation or modification of a ruling will not be applied retroactively with respect to the taxpayer to whom the ruling was originally issued or to a taxpayer whose tax liability was directly involved in such ruling if (1) there has been no misstatement or omission of material fact, (2) the facts subsequently developed are not materially different from the facts on which the ruling was based, (3) there has been no change in the applicable law, (4) the ruling was originally issued with respect to a prospective or proposed transaction, and (5) the taxpayer directly involved in the ruling acted in good faith in reliance upon the ruling and the retroactive revocation would be to his detriment.’127” (Italics added.) The court’s footnote 127 provides: “Ibid., section 17.05.” (IRSNational Office Procedures—Rulings, Closing Agreements, The Bureau of National Affairs, Inc., 104-6th (US), pp. A-15 to 16.)
“The purpose behind the granting to the Commissioner of discretion to apply rulings and regulations without retroactive effect is stated in the legislative history accompanying the Revenue Act of 1934: [1] ‘Regulations, Treasury Decisions, and rulings which are merely interpretive of the statute, will normally have a universal application, but in some cases the application of regulations, Treasury Decisions, and rulings to past transactions, which have
“A lawyer must recognize tax consequences and ways of minimizing them before advising a client about a transaction. Sometimes even the most careful tax planning and research wUl not resolve all of the problems or questions concerning a particular transaction. The applicability of statutes and regulations is often uncertain, and precedents will frequently differ materially in their facts from the transaction at hand. In such a situation, the lawyer may want to seek the views of the IRS about a particular transaction, [fl Guidance may be sought by questioning National Office personnel as to matters within their particular jurisdiction. The responsibility for issuing rulings has largely been delegated to the Directors of the Corporation Tax Division and the Individual Tax Division. [1] The main reason for requesting a ruling is usually to ensure that a particular favorable tax consequence will result from a proposed transaction. In some cases the reason for confirming the tax result is due to uncertainties in the tax laws, especially as applied to a particular set of facts. In other cases, although the tax result is reasonably certain, the magnitude of possible adverse tax consequences is great enough to make the additional cost, time, and effort of obtaining a ruling worthwhile. [1] The procedures for obtaining private rulings from the California tax authorities are much more informal than the IRS procedures. The Franchise Tax Board has indicated that the IRS guidelines for rulings can be used as a general guide. (Givner & Fried, Tax Practice in Cal. (Cont.Ed.Bar 1984) Obtaining Tax Rulings and Determinations §§ 3.5, 3.13 and 3.94.)
At 457 U.S. pages 414-415 [