BEWLEY v. FRANCHISE TAX BOARD (1993)

Respondents Ross and Marilyn Bewley and the Trust for Short–Term United States Government Securities successfully sued the Franchise Tax Board for a refund of income taxes.   The board appeals, contending that its application of a 50 percent asset threshold requirement was proper.   We conclude that our decision in Brown v. Franchise Tax Bd. (1987), 197 Cal.App.3d 300, 242 Cal.Rptr. 810 prohibiting the tax imposed was the applicable law for the tax year in question;  that the 1988 amendment to Revenue and Taxation Code section 17145, subdivision (a) imposing an asset threshold requirement did not apply to the 1987 tax year;  that the board's attempt to apply such a threshold requirement was improper;  and that the tax was, therefore, unauthorized.

I. FACTS

Respondent Trust for Short–Term United States Government Securities, a Massachusetts business trust, is a federally regulated mutual fund.   It is a financial intermediary that invests trust funds provided by its shareholders and returns the dividends to them.   Since the beginning of the 1987 tax year, the trust has invested its assets exclusively in United States government securities and repurchase agreements of United States government securities.   Of the total assets invested, approximately 32 percent represented direct investments in United States government obligations and approximately 68 percent represented investments in repurchase agreements collateralized by federal obligations.

Respondents Ross and Marilyn Bewley are shareholders in the trust.   In the 1987 tax year, they received distributions from the trust, which they reported as taxable income.   They paid $23,930 in taxes on them.   In 1989, the Bewleys filed a timely claim for refund of this sum.   Appellant Franchise Tax Board denied their claim, maintaining that the repurchase agreements did not constitute direct ownership of federal securities for purposes of satisfying the 50 percent asset threshold requirement of Revenue and Taxation Code section 17145 (hereafter section 17145).

In November 1989, the Bewleys and the trust brought a complaint for refund of income taxes and for a declaratory judgment.   The first two causes of action sought a refund on the ground that the tax violated federal statute.   (See 31 U.S.C.A. § 3124(a).)   In 1990, the board agreed to refund $9,706.58, leaving $14,223.42 in dispute.   The Bewleys and the trust moved for summary judgment and/or summary adjudication of issues.   Summary judgment was denied, but summary adjudication was granted on the first two causes of action on the basis of Brown v. Franchise Tax Bd., supra, 197 Cal.App.3d 300, 242 Cal.Rptr. 810.   In 1992, the parties stipulated that judgment would enter on those two causes of action and the remaining causes of action would be dismissed.   Judgment and dismissal were entered accordingly.

II. PREEMPTION

 The board makes a number of specific arguments in support of its imposition of the tax.  (See U.S. Const., art. VI, cl. 2;  Cal. Const., art. III, § 1;  31 U.S.C.A. § 3124(a);  § 17145, subd. (a).)  We need not reach most of these issues, because we conclude that state law did not authorize the application of a 50 percent asset threshold requirement in order for dividends flowing from federal obligations to qualify for exemption during the 1987 tax year.

In tax year 1987, state law exempted income dividends distributed by management companies that invested at least 50 percent of their assets in tax exempt state obligations.  (Former § 17145, subd. (a) [Stats.1988, ch. 11, §§ 14, 95, pp. 57, 112].)   There was no provision in state law for exemption when the investment involved federal obligations, and no provision, therefore, for exemption if a 50 percent asset threshold were met.   If we were to ignore our decision in Brown, as the board apparently has, the contention that income is taxable absent an exemption would have some merit.  Brown, however, provides the exemption by clearly and expressly holding that imposition of a tax on distributions of income originating in federal securities “runs afoul of the federal statutory immunity.”  (Brown v. Franchise Tax Bd., supra, 197 Cal.App.3d at p. 306, 242 Cal.Rptr. 810.)

 Brown was decided in December 1987.   The decision applies to the 1987 tax year at issue here, and represents the applicable law.   After the decision in Brown (petn. for review denied March 24, 1988), the Legislature, in 1988, amended section 17145 to impose a 50 percent asset requirement for investments in federal obligations, similar to the provision relating to state obligations.  (See § 17145, subd. (b)(1) [Stats.1988, ch. 671, § 1, p. 2269].)   The amendment did not take effect until August 1988.  (See Stats.1988, ch. 671, § 2, p. 2270;  see also Gov.Code, § 9600, subd. (b).)  The amendment does not apply retroactively to the 1987 tax year, and the board concedes inapplicability of the amendment on this appeal.   The board contends, however, that it had administrative authority to impose the asset threshold requirement to dividends received in 1987.   We disagree.

We are unaware of any authority, and cited to none, that would authorize the board to impose a tax without any legislative authorization and in a manner that violates federal law as set forth in our Brown decision.   In the absence of any applicable statutory law for the 1987 tax year covering the subject dividends, Brown controls and invalidates the tax.¹

The trial court, following Brown, properly granted the motion for summary adjudication.²

III. CONCLUSION

Judgment affirmed.

FOOTNOTES

1.   Much of the board's argument is premised on its contention that Brown was wrongly decided.   We decline its invitation to reconsider Brown.

2.   Since the 1988 amendment to section 17145 does not apply to the tax year in question, we are not required to decide whether the asset threshold requirement “runs afoul of the federal statutory immunity.”   (Brown v. Franchise Tax Bd., supra, 197 Cal.App.3d at p. 306, 242 Cal.Rptr. 810.)

REARDON, Associate Justice.

ANDERSON, P.J., and POCHÉ, J., concur.