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District Court of Appeal, Second District, Division 1, California.


Civ. 17763.

Decided: March 19, 1951

Fred N. Howser, Atty. Gen., James E. Sabine, Deputy Atty. Gen., Irving H. Perluss, Deputy Atty. Gen., for appellant. Arthur A. Armstrong, Los Angeles, for respondent.

The Franchise Tax Commissioner allowed and paid the respondent taxpayer corporation's claim for refund of its overpayment of taxes in the amount of $31,688.34, but he improperly disallowed and failed to pay interest on the overpayment amounting to $4,404.04. The only question presented for decision is whether the respondent is barred upon recovering the interest, which should have been paid to it, merely because it failed to institute its action within 90 days after the mailing of the notice of the Commissioner's action.

The respondent taxpayer during the years 1943 and 1944 was engaged in the business of ‘loading’ ammunition, for the most part apparently, under contracts it had with the federal government. For those years it correctly made and filed returns of the net income it had made, including therein the profits it had derived from its government contracts. On the returns thus made it paid the franchise tax due to the State. Subsequently the federal government ‘renegotiated’ the contracts and as a result respondent was required to repay to the government approximately two-thirds of the net income it had reported to the Franchise Tax Commissioner for the two years in question.

The Constitution of this state (Article XIII) provides that ‘All property in the State except as otherwise in this Constitution provided, not exempt under the laws of the United States, shall be taxed in proportion to its value, to be ascertained as provided by law, or as hereinafter provided.’ By section 16, subd. 2, of the same article the Constitution provides that ‘The Legislature may provide by law for the taxation of corporations, their franchises, or any other franchises, by any method not prohibited by this Constitution or the Constitution or laws of the United States.’ The same article further provides that after the levy and payment of any tax imposed under the provisions of the article, the taxpayer may maintain an action ‘to recover, with interest’ in such manner as may be provided by law, any tax claimed to have been illegally collected.' (Art. XIII, sec. 15.) Purporting to act in accordance with these provisions of the Constitution the legislature enacted the so-called Bank and Corporation Franchise Tax Act, Gen.Laws, Act 8488, § 1 et seq. Under the provisions of that act it is expressly provided that a taxpayer may file with the Commissioner a written claim for a refund of any overpayment he had made in respect to taxes. ‘If, in the opinion of the commissioner, * * *, there has been an overpayment of tax, penalty or interest by a taxpayer * * *, the amount of such overpayment shall be * * * refunded to the taxpayer * * *.’ (Italics supplied.)

If the Commissioner allows the claim for overpayment in whole or in part the taxpayer is entitled by statute to interest at the rate of 6% on the amount allowed unless the overpayment is occasioned ‘because of an error or mistake on the part of the taxpayer’. Gen.Laws, Act 8488, § 27. If the Commissioner does not allow the claim for overpayment or allows it in part only the taxpayer may within 90 days of the mailing of notice from the Commissioner to that effect institute an action to have refunded to him the amount of the overpayment.

The Commissioner in the instant case as stated allowed the claim for overpayment in full and what is more paid it, but he declined to allow interest therein because of certain alleged errors or mistakes on the taxpayer's part. It is unnecessary here to set these forth as the Commissioner concedes he lacked justification therefor and hence should have paid the claim with interest. Nevertheless, he is here contending that the taxpayer may not now recover the unpaid interest on the sole ground that it failed to sue therefor within 90 days after the mailing of the notice of the disallowance of the interest. The contention is based on Section 30(b) of the Franchise Tax Act which will shortly be considered, but which we pass for the moment in order to restate certain fundamental principles of law which are here applicable and controlling.

The Constitution expressly grants to the legislature the power to impose a franchise tax on corporations, but it also expressly gives to a taxpayer who has paid such a tax the right to sue to recover so much of the tax as has been illegally collected ‘with interest’ thereon. This latter provision of the Constitution is self-executing and requires no legislation for its enforcement. In the absence of statute the common law remedies prevail and are adequate. It is not necessary where the Constitution gives a right and plainly by its language, as here, authorizes a suit against the State that it should spell out the remedy to be invoked. Rose v. State of California, 19 Cal.2d 713, 123 P.2d 505.

While the legislature was given the power to impose a franchise tax on corporations it was not given the power to prohibit a taxpayer from bringing suit to collect an illegal tax which he had paid and it was not given the power to exclude a recovery by him of interest on the tax that was illegally collected. The legislature, however, is invested with the power to impose a reasonable time limitation upon the taxpayer suing the State upon a right created by the Constitution. We assume, without deciding, that the legislature, despite the constitutional provision in favor of the taxpayer, had the power to require the taxpayer to file with an administrative officer a claim that the State had illegally collected a tax, as a condition to instituting an action therefor in the courts.

Turning to the Franchise Tax Act we find as has already been stated that the legislature has expressly provided that where the administrative officer finds that there has been an overpayment of a tax that the amount of the overpayment shall be refunded to the taxpayer with interest, unless the overpayment is occasioned ‘because of an error or mistake on the part of the taxpayer’ in which case interest is not to be allowed. Whether the exception is permissible under the Constitution we have no occasion to decide, as the Commissioner concedes there was no error or mistake on the part of the taxpayer and that under the statute he should have allowed not only the overpayment, but interest thereon. In the case before us then it was not only the statutory but the constitutional duty of the Commissioner when he allowed the overpayment to have allowed interest thereon. In short, the allowance of the overpayment carried with it as a matter of course interest upon it.

Turning again to the statute, we observe that if the Commissioner does not allow the ‘overpayment’ (the tax, with any penalty or interest thereon) in full, but only in part or not at all that the taxpayer is required by Section 30(b) of the Act to file his action in court within 90 days after the mailing of the notice of the disallowance. But in the instant case there was no disallowance of the overpayment claimed—it was allowed in full. To be sure there was a refusal to pay interest on the overpayment, but such interest was no part of the ‘overpayment’ which the taxpayer had made. Section 30(b) of the Act1 it is plain, from a reading of its language, has no application to such a situation. If the Commissioner had allowed the overpayment and interest on it and the State had refused to pay one searches the Act in vain to find therein a remedy or a limitation thereon. Accordingly, in such a case the taxpayer is relegated to his common law remedy and the limitation upon its exercise is the general three-year statute of limitations. (Code Civ.Proc. sec. 338.)

Accordingly, the action for interest on the ‘overpayment’ having been instituted within three years, it was timely.

Judgment affirmed.


1.  Sec. 30(b): ‘Within 90 days after the mailing of the notice of the commissioner's action upon any refund claim, * * *, the taxpayer may bring an action against the commissioner on the grounds set forth in such claim for the recovery of the whole or any part of the amount claimed as an overpayment.’

HANSON, Justice Pro Tem.

WHITE, P. J., and DRAPEAU, J., concur.

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