GREGORY v. STATE (1948)

On November 17, 1943, the plaintiff paid under protest $11,295.41 as a gift tax demanded of him, in connection with the transfer of a certain building, under the provisions of the Gift Tax Act of 1939, Stats. 1939, p. 2079. On November 20, 1943, he brought this action for the recovery of the amount paid. At that time sec. 74 of the act provided that no interest should be allowed on any refund made, and that no judgment for a refund should bear interest until and unless payment was refused after the judgment became final.

While this action was pending sec. 74 was amended, Stats. 1945, p. 838, so as to provide (1) that interest should be paid upon any overpayment made without the taxpayer's fault, and that (2) ‘In any judgment of any court rendered for any overpayment, interest shall be allowed at the rate of 6 per cent per annum upon the amount of the overpayment, from the date of the payment or collection thereof * * *.’

On September 11, 1945, a judgment was entered awarding the plaintiff a refund of the $11,295.41 paid, together with interest thereon from November 17, 1943, the date on which it was paid. On appeal, this court held that only a part of the conveyance in question was not taxable as a gift and, which respect to other portions, that the plaintiff was entitled to certain exclusions or exemptions. The judgment was reversed with instructions that the amount recoverable be computed and that the question of interest thereon, if any, be determined. (Gregory v. State of California, 77 Cal.App.2d 26, 174 P.2d 863, 175 P.2d 542.)

Thereafter, the matter was submitted to the trial court on a stipulation providing that the total gift tax payable by the plaintiff in respect to this transfer is $692.88; that the overpayment was not made through any fault of the plaintiff and he is entitled to a refund of $10,602.53; that the plaintiff claims he is also entitled to interest at 6% on the amount of his refund; that the only remaining issue for the court to decide is whether or not the plaintiff is entitled to recover such interest; that the amount of the refund will forthwith be refunded and paid to the plaintiff but without prejudice as to his claim for interest, except that no interest shall be payable after the $10,602.53 has been refunded; that judgment may be entered for the $10,602.53 and also for interest in the event the court decides that interest is allowable; and that the parties waived all right to appeal except with respect to the matter of interest.

On March 17, 1947, the defendant refunded and paid the $10,602.53 to the plaintiff. On April 28, 1947, the court entered its judgment awarding the plaintiff a refund of $10,602.53, which part of the judgment was already satisfied in accordance with the stipulation, and further awarding the plaintiff interest from May 18, 1945, the date of the amendment to sec. 74, until the earlier of the two dates mentioned in subd. (2) of that amendment.

The defendant's appeal is presented on an agreed statement. The sole controversy here is as to whether or not the interest allowed by the court may be recovered by the respondent. The appellant contends that the portion of the judgment allowing interest constitutes an application of the 1945 amendment to this act which is inconsistent with the State Constitution and with other law. It is argued that this amendment allowing interest cannot properly be applied retroactively and that, if so construed and applied here, it violates sec. 31 of art. IV of the State Constitution, which prohibits a gift of public money for private purposes.

In support of the contention that the judgment allowing interest gives an improper retroactive application to the 1945 amendment it is argued that that statute does not disclose an intention that it shall operate retroactively; that the Legislature obviously had in mind solely overpayments which might be made after May 18, 1945, ‘since only by so construing the amendments can they be deemed to operate prospectively’; that by virtue of the decision on the former appeal the appellant became obligated on November 17, 1943, to refund $10,602.53 to the respondent; that appellant would not have been liable for any interest had it refunded this amount prior to May 18, 1945, since the law at that time forbade the payment of interest; and that the statutory change of May 18, 1945, could not apply to the refund here in question since this refund has its inception in this preexisting obligation which originated in 1943. It is argued that the facts of this case bring it squarely within the rule followed in AEtna Casualty & Surety Co. v. Ind. Acc. Comm., 30 Cal.2d 388, 182 P.2d 159, where it was held that a subsequent increase in compensation could not affect existing rights which had become established, since the amending statute expressed no intention to make the change retroactive.

It is further contended that, in any event, the 1945 amendments allowing interest on such a refund cannot be given a retroactive effect without violating the constitutional provision prohibiting the gift of public money to an individual. In this regard appellant relies on Molineux v. California, 109 Cal. 378, 42 P. 34, 50 Am.St.Rep. 49, as being exactly in point and decisive of this case. That case involved certain interest coupons on bonds issued in 1851, which coupons had matured between 1854 and 1856, but had never been paid. The action was filed nearly 40 years later, pursuant to a general statute adopted in 1893, St. 1893, p. 57, permitting the state to be sued on claims disallowed by the board of examiners and providing that any judgment in such an action shall be for the amount actually due from the state ‘with legal interest’ from the time the obligation accrued. The main ground of the decision in that case, as confirmed by the decision in Davis v. State, 121 Cal. 210, 53 P. 555, was that no statute existed under which the plaintiff was entitled to the interest there claimed, that there was therefore no ‘legal interest’ which was authorized by any statute, that the 1893 amendment contained no admission that the state was liable for such interest, and that that amendment was not intended to increase the state's liability on the coupons in question, or to give any additional right other than the right to bring an action which, if brought, must be based upon preexisting rights. As an additional ground, the decision in the Molineux case stated that any retroactive effect to the 1893 amendment, if there given, would violate the gift provision of the constitution. Whether or not this portion of the decision, upon which appellant relies, was dicta, it was applicable only to the facts of that case, where a definite contractual obligation and liability had been created and had existed for many years before the 1893 statute was adopted. In that case, as in the AEtna case above referred to, preexisting rights and obligations had become throughly established before any change in the law was made. The appellant contends that the facts of the instant case are similar to those in the Molineux case; that in each there was appreexisting obligation of the state to make a payment, in the Molineux case since 1856 and in this case since 1943, the date of the overpayment; that in neither was there any statutory provision for interest when the obligation arose; and that in each there was an attempt to provide for interest after the obligation had been created.

Both of appellant's contentions are based on the premise that there was here a preexisting obligation and liability on the part of the state to make this refund, which arose and was created when the overpayment was made on November 17, 1943, and that no subsequent change in the law could affect the obligation thus created, for the reasons thus given. In our opinion, a different situation existed here and we are unable to see that an obligation to return the amount of this overpayment was created or arose at the time this tax was paid, or that any definite obligation or liability has existed since that time. The decision on the former appeal, 77 Cal.App.2d 26, 174 P.2d 863, 175 P.2d 542, if it may be said to have fixed the obligation in any way, was not rendered until long after the 1945 amendment went into effect.

The Gift Tax Act provides that the controller shall make his determination as to the amount of tax due shall give notice thereof. Penalties are provided for the failure to pay the amount of tax demanded. Section 46 provides that the taxpayer may pay the tax under protest; that he may then bring a suit to recover back the amount thus paid; and that in such action the court shall review the determination of the tax and give judgment in accordance with what it finds to be the correct amount of the tax. Sec. 47 provides, ine ffect, that where such a suit is brought the judgment determines the amount of tax which is due. This necessarily establishes any right to a refund and for the first time imposes an obligation or creates a liability upon the state to refund any overpayment. Sec. 74 merely has covered one element, interest, which may or may not, at different times, enter into the amount or extent of the liability when an obligation is determined or comes into existence in accordance with the provisions of the act. The amendment of that section in 1945 did not increase any liability which already existed.

The Gift Tax Act is one provided for the imposition and collection of a certain tax. This interest provision is a part of a plan provided for reimbursing a taxpayer in the event an overpayment is demanded and collected. It cannot be told when a tax is paid whether or not there is an overpayment and there is no obligation or liability on the part of the state to return anything to the taxpayer which arises at the date of payment, or which can arise until the correct amount of the tax is determined. In such a case as this, where the payment was made under protest and an action brought, the correct amount due and the resulting amount of any refund is determined by the judgment, and an obligation or liability for the return of the overpayment then comes into existence. The extent of that liability and the amount to be paid to the taxpayer is fixed by the judgment and, by the 1945 amendment to sec. 74, the Legislature has expressly directed the court to allow interest as one element of that liability. In other words, before any liability has been fixed the state has directed that interest shall be included in the event a possible liability becomes an established one. The right to change the statute, relating to the payment of interest, continued until the obligation became fixed and the liability was created. Before that time, the obligation was unknown and any liability in doubt, and there was no vested right to the continued use of the money without compensation therefor. The freedom from interest which was provided by statute for a time was not a vested right but was a possible privilege which might accrue if and when liability was established, and was one which was subject to change or withdrawal at any time before such liability was fixed in accordance with the provisions of the act.

In a real sense, the application here of sec. 74, as amended, is not to give that amendment a retroactive effect because it involves and applies to future judgments which create an obligation and determine the amount of any refund, and merely provides that a certain element, interest, shall be taken into consideration and allowed in fixing and determining the amount and extent of the liability or obligation. Moreover, if such an application of this amendment be considered retroactive, with respect to the allowance of interest, the statute clearly shows an intention that this shall be done, at least from the effective date of the amendment.

We are here concerned only with the allowance of interest after the amendment went into effect. This was what the court allowed and the respondent has in no way complained of the failure to allow interest from the date the tax was paid. The allowance of interest from the effective date of the amendment is in accord with the usual rule that a statutory interest right, as distinguished from a contractual one, covering a particular period, depends upon the law in effect during the period in question. (Dunne v. Mastick, 50 Cal. 244; Cummings v. Howard, 63 Cal. 503; White v. Lyons, 42 Cal. 279.)

The allowance of such interest under these circumstances was within the discretion of the state, and was not a gift within the meaning of the constitutional prohibition relied on. It is compensation for the use the state has had of money to which it was not legally entitled, as subsequently developed, but which fact was not and could not be known at the time the taxpayer was required to pay it to the state.

The allowance of interest, at least from the date of the amendment as was here done, was in accordance with existing law, the statute in question was a proper exercise of the legislative power, and the judgment as rendered is not subject to the objections here raised.

The judgment is affirmed.

BARNARD, Presiding Justice.

MARKS and GRIFFIN, JJ., concur.