MUDD v. McCOLGAN (1946)

The five cases embraced in this appeal were consolidated for trial by order of court. The pleadings and essential facts are the same in all. In the five cases refund is sought of income taxes paid by the respective plaintiffs to the defendant pursuant to deficiency assessments in 1940 applicable to the tax year 1936. In each case the assessment was made more than three years after the taxpayer had filed his tax return.

It is appellants' contention that an indispensable statutory condition to the assessment of such a deficiency was the giving by respondent of notice of his intention so to do within three years after the filing of the taxpayer's return. Respondent contends that he was entitled to give such notice within four years after the filing of the return.

On April 15, 1937, each appellant filed his California Personal Income Tax Return showing his taxable net income for the calendar year 1936. Contemporaneously therewith, the tax calculated by the taxpayer to be due was paid by him to the respondent. It is alleged in the complaints that the amount so paid constitutes the total tax due under the Personal Income Tax Act for said year.

In August and December, 1940, respondent mailed the respective appellants a Notice of Additional Personal Income Tax proposed to be assessed, wherein it was recited that respondent proposed to assess an additional tax under said Act for the year 1936. It is conceded that in all cases said notice was mailed more than three years after the filing of appellants' tax return as aforesaid.

After due protest by each of the appellants against the proposed deficiency assessments, respondent, in each instance, levied an additional tax which was paid. Appellants then filed their respective claims for refund of the amount of said additional tax, which claims were denied. To recover the amount of said additional tax, appellants instituted the actions now before us. In each case judgment was for respondent. From such judgments appellants prosecute this appeal.

The Personal Income Tax Act of 1935 (Stats.1935, p. 1090, Deering's Gen.Laws, Act 8494) imposed a graduated tax on the net income of individuals. It required all persons affected by it to file an annual return showing their gross income, as well as deductions and credits allowed by the Act.

Section 19 of the Act provided: ‘As soon as practicable after the return is filed, the commissioner shall examine it and shall determine the correct amount of the tax. If the commissioner determines that the tax disclosed by the original return is less than the tax disclosed by his examination he shall mail notice to the taxpayer at his last known address of the deficiency proposed to be assessed. The notice shall set forth the details and computation of such deficiency.’

It is further provided in section 19 that: ‘Except in the case of a fraudulent return, every notice of a proposed deficiency tax shall be mailed to the taxpayer within four years after the return was filed and no deficiency shall be assessed or collected with respect to the year for which such return was filed unless such notice is mailed within such period.’ (Emphasis added.)

The foregoing was the law when in 1937 appellants filed their respective returns of 1936 income and paid their taxes thereon.

The Act was extensively amended by the legislature in 1939 (Stats.1939, Ch. 915). Included in the amendments was a substitution of the word ‘four’ in place of the word ‘three’ in the sentence last above quoted from section 19. In other words, the statute, as amended gave respondent commissioner four instead of three years after filing of returns within which to mail notices of proposed deficiency tax.

The aforesaid amendatory statute of 1939 took effect July 22, 1939. In section 23 of the Act it was provided that: ‘This act, inasmuch as it provides for a tax levy for the usual current expenses of the State, shall, under the provisions of section 1 of Article IV of the Constitution, take effect immediately, and shall be applied in the computation of taxes accruing subsequent to December 31, 1938.’ (Emphasis added.)

By their complaints herein, appellants, in the first counts thereof, alleged that the deficiency tax assessed by respondent against them was illegally and erroneously assessed and collected and, is therefore void.

In the second counts of their complaints, appellants adopt all of the averments of the first counts as a ground of invalidity of the tax, and specifically plead the failure of respondent commissioner to give notice of the proposed deficiency tax within three years after the filing of the respective returns.

Upon this appeal it is the position of appellants that:

‘(1) Respondent commissioner was expressly forbidden by statute to assess a deficiency tax without first having given notice of his proposal so to do within three years after the filing of the return.

‘(2) If there be any doubt as to the defendant's authority to assess the deficiency, said doubt must be resolved in favor of appellants.’

The first of these contentions is grounded on the claim that appellants' returns filed April 15, 1937, were for the year 1936, at which time and until July 22, 1939, section 19 of the statute allowed respondent commissioner three years after such filing of the returns within which to give notice to the taxpayer of a proposed deficiency assessment. The notice of proposed deficiency in each of the cases now before us was not mailed by respondent commissioner for more than three years after the filing of the returns.

In further support of their position, appellants assert that the amendatory statute, effective July 22, 1939, extending the period from three to four years, specifically provided in section 23 thereof that ‘This act * * * shall be applied in the computation of taxes occurring subsequent to December 31, 1938.’

Contrary to appellants' contentions, respondent asserts that, because the period within which the commissioner could issue notices of proposed deficiencies was extended from three to four years by the amendment effective July 22, 1939, and since the deficiencies here in question were not proposed until August and December, 1940, respondent commissioner has not attempted to apply the 1939 amendment to deficiencies assessed prior to its effective date. In other words, respondent commissioner urges that at the time appellants filed their tax returns on April 15, 1937, for the taxable year 1936, the law then in effect provided that the commissioner could issue a deficiency assessment with respect to the taxable year (1936) at any time before April 15, 1940 or within three years after filing of the returns (April 15, 1937). That the 1939 amendment extending the period for mailing notice of proposed deficiencies from three to four years, being applicable to existing returns filed within three years of its effective date, would extend the commissioner's authority to propose deficiencies against appellants for the taxable year 1936 to April 15, 1941, or fourt years after the filing of the returns.

Respondent commissioner argues that limitations on the time within which tax assessments may be levied are statutes of limitations; that a person has no vested right in the running of a statute of limitations unless it has completely run and barred the action. That the legislature has absolute power, at any time before the action is barred by the statute to amend it and thereby alter the period of limitations therein prescribed, subject only to the requirement that a reasonable time must be allowed for the prosecution of an action or proceeding after the passage of an amendment shortening the period. That an amendment to a statute of limitations enlarging the period of time within which an action can be brought as to pending causes of action is not retroactive legislation and does not impair any vested right. Lewis v. Reynolds, 284 U.S. 281, 283, 52 S.Ct. 145, 76 L.Ed. 293; Davis & McMillan v. Industrial Accident Commission, 198 Cal. 631, 636, 637, 246 P. 1046, 46 A.L.R. 1095. In answer to the foregoing, appellants insist that in the cases at bar, the restriction upon the time within which the commissioner might give notice of a proposed deficiency is not a statute of limitations but is a condition precedent to the imposition of a deficiency. That compliance with such condition precedent is an indispensable factor in the right to impose and collect a deficiency because of the declaration contained in the statute that ‘No deficiency shall be assessed or collected with respect to the year for which such return was filed unless such notice is mailed within such period.’

It is established by creditable authority that a difference exists between a statute of limitations and conditions which are annexed to a right of action created by statute. 34 Am.Jur., p. 16, sec. 7. Into the latter class may, for instance, be assigned charter provisions requiring the filing of a claim with a municipality within a prescribed time after the happening of an event and before the commencement of an action thereon; a statute which fixes the time within which lands sold at executions may be redeemed, or within which a judgment or lien shall be enforced; or a statute which fixes the time within which writs of error shall be brought. People v. Kings County Development Co., 48 Cal.App. 72, 74, 191 P. 1004. Into the former classification may be placed ‘Such legislative enactments as prescribe the periods within which actions may be brought upon certain claims, or within which certain rights may be enforced.’ (Wood on Limitations 3d Ed., sec. 1; People v. Kings County Development Co., supra, at page 74 of 48 Cal.App., at page 1005 of 191 P.). Section 19 of the Personal Income Tax Act expressly makes the right of respondent commissioner to collect a deficiency tax dependent upon his giving of the notice of proposed deficiency within the time prescribed by the statute. We are, therefore, persuaded that the time provided for the assertion of respondent commissioner's right to collect a deficiency tax is a condition of the right and not a statute of limitations. And the right, not merely the remedy, is lost unless seasonably enforced. The time limitation is a condition precedent to the cause of action and is a requirement that must be fulfilled before a cause of action can arise against which a statute of limitations can run. Therefore, such a time limitation is not in itself a statute of limitations, but is an integral part of the cause of action itself. ‘The time element is an inherent element of the right so created, and the limitation of the remedy is a limitation of the right.’ 34 Am.Jur., 17. (Emphasis added.)

Though it be assumed that the foregoing provisions do constitute a statute of limitations, a more serious question, and, we feel, one that is determinative of the appeals herein, is presented by the provision in section 23 of the act wherein it is ordained that the amendment extending the time from three to four years ‘shall be applied in the computation of taxes accruing subsequent to December 31, 1938.’

What is meant by ‘computation’ of taxes? The Personal Income Tax Act requires the taxpayer to file an annual return showing ‘the items of his gross income and the deductions and credits allowed by this act.’ (Sec. 3). Under section 5 the tax is levied at graduated rates upon the taxpayer's ‘net income’. In section 6 ‘net income’ is defined as ‘the gross income computed under section 7 of this act less the deductions allowed by section 8 of this act’. Thus, in the first instance, the amount of the tax is ‘computed’ by the taxpayer ‘computing’ his gross income, and then ‘computing’ his net income. Sections 7 and 8 of the act direct the taxpayer how his gross and net income shall be ‘computed’. Having completed the ‘computation’ of his gross and net income, the taxpayer applies the prescribed tax rate, calculates his tax, files his return and pays his tax. Examination by us of the act reveals that the ‘computations' therein required are not mere mathematical calculations, but involve the assumbling of all pertinent information regarding items of gross income, allowable deductions, and exercise of the taxpayer's judgment in determining which items to include and exclude.

Section 19 of the act then requires: ‘As soon as practicable after the return is filed, the commissioner (defendant) shall examine it and shall determine the correct amount of the tax. If the commissioner determines that the tax disclosed by the original return is less than the tax disclosed by his examination he shall mail notice to the taxpayer at his last known address of the deficiency proposed to be assessed. The notice shall set forth the details and computation of such deficiency.’ (Emphasis added.)

Thus the act provides for two ‘computations' of the tax—one by the taxpayer and one by the commissioner, to determine whether, in his judgment, the taxpayer's ‘computation’ was correct.

The act further provides that if the commissioner finds that the taxpayer's ‘computation’ is incorrect, he must give the taxpayer notice and opportunity for hearing within the time prescribed by law before the commissioner may finally determine and assess a deficiency tax. Manifestly, this hearing is granted so that the taxpayer may be heard to present his views of how the gross and net incomes should be ‘computed’ in determining the tax liability. It is noteworthy that the words ‘compute’, ‘computed’, and ‘computation’ are used throughout the Personal Income Tax Act and the amendatory act of 1939 in the sense of ascertaining the proper tax base—i. e., the taxable income—and applying thereto the appropriate tax rate, producing a given amount of tax as the end result. It being the rule that a word used in one place in a statute is deemed to be used in the same sense throughout that statute unless a different meaning is indicated (Coleman v. City of Oakland, 110 Cal.App. 715, 719, 295 P. 59) it would seem obvious that the foregoing meaning of the term as used in other places in the statute was the meaning intended by the legislature when it chose the language of section 23, whereby it was ordained that the amendatory act ‘shall be applied in the computation of taxes accruing subsequent to December 31, 1938’. We are persuaded that under the statute now before us, the determination of a deficiency tax necessarily embraces the ‘computation’ of a tax. United States v. Whyel, 3 Cir., 28 F.2d 30; Russell v. United States, 278 U.S. 181, 49 S.Ct. 121, 73 L.Ed. 255. From an examination of the statute, the conclusion seems to be inescapable that section 23 of the amendatory act clearly evidences a legislative intent to make the extended time granted the commissioner applicable only to taxes accruing subsequent to December 31, 1938. It expressly says so. As heretofore pointed out, ‘computation’ of the tax is an integral part of the commissioner's duty in determining the correct amount of gross income and net income before a deficiency tax may be imposed. And in such ‘computation’ the taxpayer has a legal right to be heard in aid of the commissioner's function to correctly ‘compute’ the gross and net income before any deficiency tax is finally levied. While the legislature could have gone back to taxes, the ‘computation’ of which antedated December 31, 1938, had it expressly so stated, under the statute as worded, such was not the purpose or intent. The very language used belies such legislative intent. On the contrary, the language of section 23 of the amendatory act clearly and explicitly provides that effect is not to be given the amendments in the ‘computation’ of taxes accruing prior to December 31, 1938. Were we to hold otherwise, we would be departing from the meaning of language which is free from ambiguity and such a pretended construction would not be construction at all but would be legislation. Courts have no power to legislate. Our power to interpret statutes does not include the power to rewrite a statute to accord with a presumed legislative intent.

We therefore hold that the notice of proposed deficiency tax required by the statute to be given to the taxpayer is an essential part of the process of ‘computation’ as established by the act. Extension in 1939 of the time within which such notice must be given concerned the process of ‘computation of the tax’. By express mandate of the statute, respondent commissioner was forbidden to apply, the alteration in time in the ‘computation’ of any tax accruing prior to December 31, 1938. The taxes here in question having accrued not later than December 31, 1936, respondent commissioner was without authority to levy the deficiency taxes which gave rise to this litigation.

Respondent next directs our attention to the fact that the Attorney General has specifically ruled that the 1939 amendment to the Personal Income Tax Act, extending from three to four years the time within which deficiency assessments may be proposed, is applicable to deficiencies for taxable years ending prior to December 31, 1938, so long as the right to issue such deficiencies was not barred on July 22, 1939 (effective date of the amendment). That prior to the issuance of such opinion by the Attorney General, the Franchise Tax Commissioner, pursuant to the powers granted by the Personal Income Tax Act to prescribe regulations for the application of the act, on February 1, 1940, published a regulation wherein a similar ‘interpretation’ of the act was enunciated. That an identical ruling was announced by the State Board of Equalization. Respondent then argues that, for a period of some seven years, the 1939 amendment to section 19 of the Personal Income Tax Act has been applied uniformly in accordance with the foregoing administrative construction, and that under the rule that administrative construction of a statute long and consistently adhered to should be given great weight by the courts in construing the language of such statute, it should be followed by the courts. This argument is unavailing for two reasons. In the first place, while the interpretation of a statute by an administrative agency, or its legal advisors, will be accorded great respect by the courts and, if not clearly erroneous, will be followed by the courts, nevertheless, if erroneous, such construction will be overthrown where such a question of law is properly presented. Secondly, the clear meaning of the statute cannot be altered by administrative construction. As was said in Dillman v. McColgan, 63 Cal.App.2d 405, 409, 146 P.2d 978, quoting from United States v. Missouri Pacific R. Co., 278 U.S. 269, 277, 278, 49 S.Ct. 133, 136, 732 L.Ed. 322, 376, ‘It is elementary that, where no ambiguity exists, there is no room for construction. Inconvenience or hardships, if any, that result from following the statute as written, must be relieved by legislation * * * Construction may not be substituted for legislation.’

Finally, respondent asserts that since appellants have failed to show that they have paid more taxes than in equity and good conscience should have been paid, they cannot recover in this litigation for refund. In support of this claim, respondent cites the cases of Pacific Fruit Express Co. v. McColgan, 67 Cal.App.2d 93, 96, 97, 153 P.2d 607; DeMille v. Los Angeles County, 25 Cal.App.2d 506, 511, 77 P.2d 905. However, in the cited cases it was conceded that at the time of the assessment the taxing authority was invested with the right to levy an assessment, but the taxpayer contended that his property was overassessed. Obviously, where the taxpayer concedes that his property was subject to taxation, but contends that it was overassessed, and that the assessment levied against it was disproportionate to the vlaue thereof, a court of equity will first require that an offer be made to pay such tax as may be found to be equitably or justly due. The cases of Crossett Lumber Co. v. United States, 8 Cir., 87 F.2d 930, 932, 109 A.L.R. 1348, 1352, and Lewis v. Reynolds, 284 U.S. 281, 283, 52 S.Ct. 145, 146, 73 L.Ed. 293, involve the doctrine of equitable recoupment. The doctrine and cases applying it presupposes two valid claims, one offsetting or diminishing the other. Codified in Code Civ.Proc., sec. 438. The doctrine of equitable recoupment allows the defendant to offset against the claim of the plaintiff a debt of plaintiff to defendant that in equity and good conscience should be paid, although the time within which the defendant might initiate an action to enforce such debt may have expired. In suits to recover refunds and to enforce deficiencies the doctrine has been applied in a number of cases, both in favor of and against federal taxing authorities. 109 A.L.R. 1354, 1363; 130 A.L.R. 838, 845; 154 A.L.R. 1052. Furthermore, a defense of equitable recoupment, which is one species of set-off, is an affirmative defense and must be separately pleaded. Cullinan v. McColgan, 87 Cal.App. 684, 701, 263 P. 353; Williams v. Parker, 30 Cal.App. 71, 75, 157 P. 550; Code Civ.Proc., secs. 437, 438, 439. But in the case now engaging our attention, the assessing officer was without any authority to make the assessments complained of in any amount, and no such usurpation of power can find absolution in a plea of equity.

For the foregoing reasons, the respective judgments from which these appeals were taken are, and each is, reversed, with directions to the court below to enter judgments for the respective plaintiffs as prayed for.

WHITE, Justice.

YORK, P. J., and DORAN, J., concur.