HILL v. FRANCHISE TAX BOARD OF STATE

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Court of Appeal, Second District, Division 7, California.

Barbara A. HILL, Plaintiff and Respondent, v. FRANCHISE TAX BOARD OF the STATE of California, Defendant and Appellant.

No. B076440.

Decided: December 19, 1994

Daniel E. Lungren, Atty. Gen., Edward B. Mamer and Diane Spencer Shaw, Deputy Attys. Gen., for defendant and appellant. Thomas C. Mundell, Mundell, Odlum & Haws, San Bernardino, for plaintiff and respondent.

Plaintiff Barbara A. Hill filed suit against defendant Franchise Tax Board of the State of California (FTB) seeking a refund of personal income taxes she paid for the tax years 1985 through 1987.   The trial court ordered the taxes refunded.   FTB appeals from the judgment on the ground that as to the 1985 and 1986 taxes Hill's action was barred by the statute of limitations.   FTB does not challenge the judgment as to the 1987 taxes.

We have concluded the doctrine of equitable tolling applies to the statute of limitations on an action for refund of taxes and substantial evidence supports the trial court's application of the tolling doctrine to Hill's claim for a refund of the 1985 and 1986 taxes.   Therefore, we affirm the judgment.

FACTS AND PROCEEDINGS BELOW

Prior to January 1985, Hill lived in Apple Valley, California.   However in January 1985, shortly after her husband passed away, Hill moved to Albuquerque, New Mexico.   The same accounting firm which handled her husband's business and personal tax matters continued to handle Hill's tax returns after her husband's death.

Unaware Hill was residing permanently in New Mexico, the accounting firm continued to prepare California income tax returns on her behalf for the years 1985 and 1986 as if she were a California resident.   As a result, on October 15, 1986, and October 15, 1987, Hill filed income tax returns for the 1985 and 1986 tax years respectively as a California resident and paid taxes accordingly.   Because she was a resident of New Mexico in 1985 and 1986, Hill overpaid her 1985 California income tax in the amount of $60,164 and overpaid her 1986 taxes in the amount of $80,411.

In 1988, Hill's accounting firm learned Hill had become a permanent resident of New Mexico three years earlier.   The accountant in charge of Hill's affairs, Peter Mann, concluded Hill needed to file amended returns with the State of California showing she was a nonresident, and file resident returns with the State of New Mexico.   He prepared the appropriate returns for Hill.

In November 1988, Hill filed returns with New Mexico paying $39,589 in taxes for 1985 and $63,465 in taxes for 1986.

In December 1988, Hill filed amended returns with the State of California seeking a refund of the California taxes she mistakenly paid for 1985 and 1986.

On July 29, 1991, two years and seven months after Hill's request for a refund of taxes she had mistakenly paid to California, FTB mailed a notice to Hill informing her it was denying her claim for refund on the ground she was a California resident and her absence from the state was for a temporary or transitory purpose.

As a result of the FTB's ruling, Hill was faced with having paid double taxes for the years 1985 and 1986 and was concerned time was running on her right to file for a refund in New Mexico.   On August 23, 1991, Hill began the administrative refund process in New Mexico by writing to the Taxation and Revenue Department of the State of New Mexico informing it of California's ruling on her residency, stating an intention to recover the New Mexico taxes she had paid, and asking for information on how to proceed.   The department responded with the requested information and, in November of 1991, Hill filed forms with the New Mexico Taxation and Revenue Department seeking a refund of the New Mexico taxes she had paid on the ground she was a California resident during the tax years in question.   New Mexico denied Hill's refund claim in December 1991.

In February 1992 Hill appealed New Mexico's denial of a refund.   Simultaneously, Hill sent a letter to California's State Board of Equalization appealing the FTB's denial of her claim for refund.   The New Mexico authorities held a hearing in September 1992 and upheld denial of her request for a refund.   The State Board of Equalization wrote to Hill stating her appeal from the denial of taxes paid to California was not timely.1

Hill filed this suit for refund of California taxes on July 30, 1992.

Prior to trial, the FTB and Hill stipulated Hill was a resident of New Mexico during 1985 and 1986 and that she was entitled to recover judgment on her refund claims for those years to the extent her action was not barred by the statute of limitations.   As discussed more fully below, the applicable statute of limitations, Revenue & Taxation Code section 19384, provides in relevant part an action for a tax refund must be filed:  (1) within four years from the last date prescribed for filing the return, or (2) within one year from the date the tax was paid, or (3) within 90 days after notice of action by the FTB upon the claim for refund, whichever is later.

The case was tried to the court.   After hearing the evidence on the timeliness of Hill's notice to the FTB, the good faith and reasonableness of her conduct and the prejudice to the FTB, the trial court found the statute of limitations should be tolled while Hill was pursuing her administrative remedies for a refund from New Mexico and, therefore, this action was timely filed.   Accordingly, based on the stipulations by the parties, the court awarded Hill a refund of taxes paid to California for the years 1985 and 1986.

DISCUSSION

I. THE APPLICABLE STANDARD OF REVIEW ON APPEAL IS THE SUBSTANTIAL EVIDENCE TEST.

 In the present case the FTB did not request a statement of decision.   Under these circumstances all intendments favor the judgment, and we must assume the trial court made whatever findings necessary to sustain the judgment.  (Marriage of Ditto (1988) 206 Cal.App.3d 643, 649, 253 Cal.Rptr. 770.)   Our task is to ascertain whether the judgment could rationally rest upon any of the grounds advanced by Hill in the trial court.   If the record contains substantial evidence supporting any of Hill's theories below, the judgment must be affirmed.  (Michael U. v. Jamie B. (1985) 39 Cal.3d 787, 792–793, 218 Cal.Rptr. 39, 705 P.2d 362.)

As explained below, we conclude Hill introduced evidence at trial sufficient to sustain a finding in her favor on the theory of equitable tolling of the 90–day limitation period.

II. THE DOCTRINE OF EQUITABLE TOLLING APPLIES TO TAX REFUND CASES.

 The equitable tolling doctrine operates to protect the claim of an injured person who has several legal remedies and, reasonably and in good faith, pursues one.  (Elkins v. Derby (1974) 12 Cal.3d 410, 414, 115 Cal.Rptr. 641, 525 P.2d 81.)   As discussed more fully below, application of the doctrine requires “timely notice, and lack of prejudice, to the defendant, and reasonable and good faith conduct on the part of the plaintiff.”   (Addison v. State of California (1978) 21 Cal.3d 313, 319, 146 Cal.Rptr. 224, 578 P.2d 941.)  (For a more thorough discussion of the policies and prerequisites of the equitable tolling doctrine, see our opinion in Collier v. City of Pasadena (1983) 142 Cal.App.3d 917, 922–926, 191 Cal.Rptr. 681.)

 It is well settled the doctrine of equitable tolling applies to suits against public entities.   Indeed, the seminal case on equitable tolling, Addison v. State of California, supra, applied the doctrine to toll the statute of limitations in a tort action against the state and a county.   In Addison, the court acknowledged case law holding “ ‘[t]he prescribed statutes of limitations for commencement of actions against the state ‘are mandatory and must be strictly complied with․’ ' ”  (21 Cal.3d at p. 316, 146 Cal.Rptr. 224, 578 P.2d 941.)   The court held, however, these statutory procedures do not preclude the application of the equitable tolling doctrine, “the purpose of which is to soften the harsh impact of technical rules which might otherwise prevent a good faith litigant from having a day in court.”  (Ibid.)  The court rejected the state's argument equitable tolling should not be applied to public entities because it would delay the prompt resolution of disputes necessary for orderly fiscal planning.   The court observed, “As with other general equitable principles, application of the equitable tolling doctrine requires a balancing of the injustice to the plaintiff occasioned by the bar of his claim against the effect upon the important public interest or policy expressed by the Tort Claims Act limitations statute.”  (21 Cal.3d at p. 321, 146 Cal.Rptr. 224, 578 P.2d 941.) 2

In cases following Addison, California courts have recognized the doctrine of equitable tolling in actions against governmental agencies for a variety of claims including a refund of taxes.  (Bendix Corp. v. City of Los Angeles (1984) 150 Cal.App.3d 921, 926, 198 Cal.Rptr. 370;  see also Jones v. Tracy School Dist. (1980) 27 Cal.3d 99, 108, 165 Cal.Rptr. 100, 611 P.2d 441 [employment discrimination];  Loehr v. Ventura County Community College Dist. (1983) 147 Cal.App.3d 1071, 1084, 195 Cal.Rptr. 576 [wrongful termination—doctrine held inapplicable on the facts];  Collier v. City of Pasadena, supra, [disability claim].)

The FTB contends, however, the doctrine of equitable tolling cannot constitutionally be applied to the statute of limitations on a suit for a tax refund.   The FTB argues the California Constitution leaves it to the Legislature to prescribe the procedures governing tax refund suits.  (Cal. Const., art. XIII, § 32.) 3  Because the Legislature did not enact the equitable tolling doctrine as part of the Revenue and Taxation Code, the trial court could not apply the doctrine in the present case to toll the statute of limitations for a refund suit.

The cases relied on by the FTB hold the constitutional power to control tax refund suits requires strict adherence to the administrative procedures set forth by the Legislature before a court action can be filed.  (Shiseido Cosmetics (America) Ltd. v. Franchise Tax Bd. (1991) 235 Cal.App.3d 478, 488, 286 Cal.Rptr. 690 [court could not excuse exhaustion of administrative remedies on ground remedies were futile];  Patane v. Kiddoo (1985) 167 Cal.App.3d 1207, 1214, 214 Cal.Rptr. 9 [same].)   These cases are inapposite because here it is undisputed Hill exhausted her administrative remedies.4

III. THE TRIAL COURT PROPERLY APPLIED THE DOCTRINE OF EQUITABLE TOLLING IN THIS CASE.

The statue of limitations applicable to tax refund suits is Revenue and Taxation Code Section 19384 which provides:  “The action ․ shall be filed within four years from the last date prescribed for filing the return or within one year from the date the tax was paid, or within 90 days after (a) notice of action by the Franchise Tax Board upon any claim for refund, or (b) final notice of action by the State Board of Equalization on an appeal from the action of the Franchise Tax Board on a claim for refund, whichever period expires later.”

Hill's action filed on July 30, 1992, does not, on its face, fall within any of the described time limits.   It was filed approximately four-and a-half years after Hill filed her 1986 California tax return and paid her 1986 taxes.   Moreover, the action was filed nearly a year after the FTB notified Hill it was denying her claim for refund.   If, however, the 90–day time period following notice of action by the FTB on Hill's claim was equitably tolled while Hill pursued her claim for refund with the New Mexico tax authority then Hill's suit was timely filed.   The FTB notified Hill of its action on July 29, 1991.   The trial court impliedly found Hill commenced her claim for a refund from New Mexico on August 23, 1991, well within 90 days from notice of the FTB's action.   New Mexico did not deny Hill's claim until September 1992.   By then, Hill had filed this action.

A. The 90–Day Period Is Subject To Equitable Tolling.

 “[W]hen the plaintiff has several alternative remedies and makes a good faith, reasonable decision to pursue one remedy in order to eliminate the need to pursue the other, the doctrine of equitable tolling will suspend the running of the statute of limitations if it becomes necessary to pursue the alternative remedy.”  (Mitchell v. Frank Howard Memorial Hospital (1992) 6 Cal.App.4th 1396, 1407, 8 Cal.Rptr.2d 521.)   Here, Hill's accountant paid taxes on Hill's behalf as a California resident for the tax years of 1985 and 1986.   Upon discovering Hill was not a California resident but a resident of New Mexico beginning January of 1985, the accountant, as Hill's agent, paid taxes on her behalf to New Mexico for the same years.   As a result, Hill paid double taxes as a resident of both California and New Mexico.

When the FTB took the position Hill was a resident of California, she turned to New Mexico in an effort to resolve the double taxation problem.   Under the circumstances, it is clear Hill, faced with dual taxation, had a choice of pursuing a refund from California or New Mexico and made “a good faith, reasonable decision to pursue one remedy in order to eliminate the need to pursue the other.”  (Ibid.)  Therefore, equitable tolling is applicable here to the extent the 90–day period within which Hill could challenge the FTB's denial of her refund claim in court should be tolled while Hill pursued an alternative remedy in New Mexico.

As our Supreme Court has explained:  “Procedural rules should engender smooth and functional adjudication.   A procedural practice is neither sacred nor immutable.   It must be able to withstand the charge that it is inequitable, burdensome or dysfunctional.   We think duplicative filing succumbs to all three charges.   We also believe that respect for our legal system ․ is hardly enhanced by an incongruent procedural structure which causes an injured party simultaneously to allege before different tribunals propositions which are mutually inconsistent.   Absent a tolling rule, this is precisely the strategy to which a party unsure of his remedy must resort in order to protect his right to recovery.”  (Elkins v. Derby, supra, 12 Cal.3d at p. 420, 115 Cal.Rptr. 641, 525 P.2d 81.)

It would be counterproductive and inefficient to force a taxpayer simultaneously to allege mutually inconsistent propositions before the taxing authorities of two different states.   Indeed, Hill's accountant testified the issue of alleging mutually inconsistent positions was a concern in this case.   Mann explained he did not feel Hill could take inconsistent positions in two different states on the residency issue.

B. The Facts in This Case Support the Application of the Doctrine of Equitable Tolling.

 At trial, Hill argued the 90–day period within which she could file suit against the FTB should be tolled in order to allow her to timely bring her tax refund action.   In order to affirm the judgment on this ground we must determine whether the record contains substantial evidence to support tolling the 90–day limitations period.

 As we explained in Collier v. City of Pasadena, supra, 142 Cal.App.3d at page 924, 191 Cal.Rptr. 681, there is a three-pronged test for the invocation of the doctrine of equitable tolling:  (1) timely notice to the defendant in filing the first claim;  (2) lack of prejudice to defendant in gathering evidence to defend against the second claim;  and (3) good faith and reasonable conduct by the plaintiff in filing the second claim.   Substantial evidence in the record supports a finding Hill satisfied all three prongs of the test.

“The timely notice requirement essentially means that the first claim must have been filed within the statutory period.”  (Collier, supra, 142 Cal.App.3d at p. 924, 191 Cal.Rptr. 681.)   Here, the 90–day period began to run on July 29, 1991—the date the FTB notified Hill it was denying her claim for refund.   The evidence showed Hill began the administrative refund process in New Mexico in August 1991, well within the 90–day period, by writing to the Taxation and Revenue Department informing them of her intentions to recover the New Mexico taxes she had paid.   Thus, the trial court could properly conclude the first claim was filed within the statutory period.   It does not matter the proceeding in New Mexico was administrative in nature.   The doctrine of equitable tolling is not limited to cases involving alternative lawsuits.   (See Dillon v. Board of Pension Commrs. (1941) 18 Cal.2d 427, 116 P.2d 37 [plaintiff's administrative claim tolled statute of limitations applicable to subsequent civil action].)

We also noted in Collier, as a general rule, “the filing of the first claim must alert the defendant in the second claim of the need to begin investigating the facts which form the basis for the second claim.”  (142 Cal.App.3d at p. 924, 191 Cal.Rptr. 681.)   Although commencing administrative proceedings for a tax refund in New Mexico would not put the FTB in California on notice of the need to begin investigating the facts which might form the basis of a claim for refund of California taxes, such notice is not necessary where the defendant in the second claim is already aware of the facts.  (Cf. Tu–Vu Drive–In Corp. v. Davies (1967) 66 Cal.2d 435, 436–437, 58 Cal.Rptr. 105, 426 P.2d 505 [third party claim to release property from wrongful execution provided notice to attorney defendant who caused the wrongful execution].)   Here, the FTB had ample notice of Hill's claim for a refund of her 1985 and 1986 California taxes.   Hill filed for a refund in 1988 and corresponded with the FTB for over two years concerning the merits of her claim.   The FTB thus had sufficient opportunity to gather evidence and build its file on the matter.

 The fact Hill commenced her administrative efforts in California leading to the present suit before the New Mexico proceedings had concluded does not preclude the application of equitable tolling.   In both Addison v. State of California, supra, 21 Cal.3d at p. 317, 146 Cal.Rptr. 224, 578 P.2d 941 and Appalachian Ins. Co. v. McDonnell Douglas Corp. (1989) 214 Cal.App.3d 1, 36–42, 262 Cal.Rptr. 716, the plaintiff voluntarily dismissed the first action and subsequently filed a second action after the statute of limitations had expired.   The courts in both cases held that where the equities were on the side of the plaintiff, the statute of limitations applicable to the second action could be deemed tolled during pendency of the first.

The FTB introduced no evidence of prejudice at trial.   As stated above, the FTB had investigated Hill's claim for over two years and was aware that she wanted her money back.   Furthermore, the FTB stipulated to the fact Hill overpaid her taxes for years 1985 and 1986.   Therefore, the trial court could properly find FTB did not suffer any prejudice in gathering evidence to defend against the Hill's claim for a tax refund.

Finally, the evidence supports a finding Hill acted reasonably and in good faith.   She diligently pursued her administrative remedies in California and fully cooperated with the California authorities.   As Mann's testimony explained, Hill was acting in good faith in pursuing an administrative remedy in New Mexico before filing suit in California.   Hill did not want to assert contradictory positions regarding her residency arguing to the FTB she was a resident of New Mexico while at the same time arguing to New Mexico authorities she was a resident of California.   Hill further demonstrated her good faith in this matter by paying taxes to both states and then proceeding to determine which state owed her a refund.

“[A]pplication of the equitable tolling doctrine requires a balancing of the injustice to the plaintiff occasioned by the bar of his claim against the effect upon the important public interest or policy expressed by the ․ limitations statute.”  (Addison, supra, 21 Cal.3d at p. 321, 146 Cal.Rptr. 224, 578 P.2d 941.)   The trial court applied this balancing to the case at bench, stating:  “The inquiry here is the prejudice to Hill versus the ․ public policy ․ of having matters heard in a timely fashion, given staleness and surprise.   And I balance that in favor of the taxpayer, Hill, in this case, and I will order a refund.”

There is substantial evidence in the record to support the trial court's finding Hill satisfied the elements for equitable tolling and its implied conclusion the 90–day period for filing suit was tolled.   We need not address Hill's other arguments in support of the judgment.

DISPOSITION

The judgment is affirmed.

FOOTNOTES

1.   Hill, however, was not required to exhaust her appeal to the State Board of Equalization in order to file a suit for a refund.   (Rev. & Tax Code §§ 19331, 19385.)

2.   In the present case, the FTB does not contend Hill's delay in filing suit disrupted its orderly fiscal planning.   It could hardly do so given the fact it delayed more than two-and a-half years before denying her claim.

3.   Article XIII, section 32 provides in relevant part, “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.”  [Italics added.]

4.   These cases would also seem to be inapposite because they base their holdings on California Constitution, article XIII, section 32 which applies to recovery of taxes claimed to be “illegal.”  (See fn. 3, supra.)   Hill does not claim the taxes she paid were illegal;  merely that she paid them by mistake.

JOHNSON, Associate Justice.

LILLIE, P.J., and FRED WOODS, J., concur.