State & Local Tax Alert Breaking state and local tax developments from Grant Thornton LLP California Supreme Court Issues Two Separate Cases Addressing Taxpayer Standing On June 5, 2017, the California Supreme Court issued two separate rulings regarding taxpayer standing to file litigation challenging government expenditures or property tax assessments. In Weatherford v. City of San Rafael, 1 the Supreme Court held that individuals are not required to be subject to or pay property taxes in order to have standing to challenge localities for illegitimate spending. In Williams & Fickett v. County of Fresno, 2 the Supreme Court ruled that taxpayers prospectively will not be able to bypass a county s assessment appeals process when requesting refunds on property taxes related to property they do not own. The Court remanded the case in Weatherford because it disagreed with the lower courts interpretation of statutory language, and overruled a long-standing decision in Williams & Fickett that had been overtaken by intervening developments in the law. Weatherford v. City of San Rafael In Weatherford, the California Supreme Court held that an individual was not required to be subject to and pay property taxes in order to have standing as a taxpayer to challenge government expenditures. Background The individual who commenced the action, Cherrity Weatherford, was renting an apartment in San Rafael, California and challenged the constitutionality of impounding cars without adequate notice by the city. Because Weatherford was not personally subject to the impoundment, she relied on Section 526a of the California Code of Civil Procedure 3 to support her standing to sue. This statute provides in relevant part: An action to obtain a judgment, restraining and preventing any illegal expenditure of, waste of, or injury to, the estate, funds, or other property of a county, town, city or city and county of the state, may be maintained against any officer thereof, or any agent, or other person, acting in its behalf, either by a citizen resident therein, or by a corporation, who is Release date August 16, 2017 States California Issue/Topic Property Tax Contact details Michael Boykin Los Angeles T 213.596.8420 E michael.boykin@us.gt.com Dana Lance San Jose T 408.346.4325 E dana.lance@us.gt.com Michael Caruso Irvine T 949.878.3384 E michael.caruso@us.gt.com Jamie C. Yesnowitz Washington, DC T 202.521.1504 E jamie.yesnowitz@us.gt.com Chuck Jones Chicago T 312.602.8517 E chuck.jones@us.gt.com Lori Stolly Cincinnati T 513.345.4540 E lori.stolly@us.gt.com Priya D. Nair Washington, DC T 202.521.1546 E priya.nair@us.gt.com www.grantthornton.com/salt 1 395 P.3d 274 (Cal. 2017). 2 395 P.3d 247 (Cal. 2017). 3 CAL. CIV. PROC. CODE 526a..
Grant Thornton LLP - 2 assessed for and is liable to pay, or, within one year before the commencement of the action, has paid, a tax therein. 4 While Weatherford conceded that she was not a property taxpayer, she claimed that she had paid sales tax, gasoline tax, and other fees and charges imposed by the city and county and, as such, should have standing to sue. A trial court filed a stipulated order and judgment of dismissal. In the stipulated order, Weatherford cited two California Court of Appeal decisions that suggested Section 526a required an individual to pay property taxes to satisfy the taxpayer standing requirement. 5 The parties stipulated to a judgment of dismissal on the ground that Weatherford could not amend her complaint to cure the standing defect. Following Weatherford s appeal of the stipulated judgment, the Court of Appeal affirmed the judgment of dismissal. Acknowledging that some parties might be able to file an action under Section 526a without paying property taxes, the Court nevertheless held that the statute gave standing only to persons who are liable to pay an assessed property tax or those who have paid the property tax within the previous year. Weatherford appealed the decision to the California Supreme Court. California Supreme Court Decision The California Supreme Court granted review to consider whether Section 526a requires an individual to have paid or to be liable for the payment of property taxes in order to have the necessary standing. As explained by the Court, the key issue was how to interpret the phrase who is assessed for and is liable to pay, or... has paid, a tax therein. The California Supreme Court had not previously interpreted this phrase in Section 526a. After acknowledging that Section 526a narrows the category of taxpayers that are able to bring an action to enjoin certain government expenditures, the Court determined that the Court of Appeal traveled a step too far when it held that the statute requires individual plaintiffs to pay a property tax. The Court did not clarify the exact limits of the statute s operation, but was able to conclude with confidence that limiting the [statute s] application to property taxpayers reflects an unduly constrained view of the statute s requirements. According to the Court, Section 526a includes property tax as an assessed tax, but the conclusion that property taxes satisfy the statute s requirement for standing does not mean that only property taxes meet the requirement. Because Section 526a does not confer unrestricted standing to taxpayers, a determination still needs to be made regarding which types of taxes are sufficient to establish standing under the statute. However, the Court s ability to consider this issue was limited by the fact that the parties entered into a stipulated judgment of dismissal in the trial court. Due to the stipulated judgment of dismissal, the parties and the lower courts did not determine and consider the types of taxes the local governments actually imposed, and if Weatherford had paid those types of taxes to the 4 Id. 5 Cornelius v. Los Angeles County Metropolitan Transportation Authority, 57 Cal. Rptr. 2d 618 (Cal. Ct. App. 1996); Torres v. City of Yorba Linda, 17 Cal. Rptr. 2d 400 (Cal Ct. App. 1993).
Grant Thornton LLP - 3 local government. Due to the lack of factual development on this issue, the Court held that it is sufficient for individuals to allege that they have paid, or are liable to pay, a tax directly to the relevant local government. The case was remanded to the Court of Appeal with directions to reverse the stipulated judgment and remand to the trial court. On remand, the trial court will determine if Weatherford had standing to litigate by considering which local taxes were actually imposed and if Weatherford had paid any assessed taxes to the local governments. Williams & Fickett v. County of Fresno On June 5, 2017, in Williams & Fickett, the California Supreme Court held that California property taxpayers generally must first exhaust available administrative remedies before resorting to the courts. Specifically, a claim by a taxpayer that it does not own assessed property is insufficient to invoke the nullity exemption to avoid the assessment appeal process when a taxpayer seeks to reduce a tax assessment. Background The taxpayer, a two-family partnership, was assessed property taxes on farm equipment that it did not own during the relevant tax years. Following an audit, Fresno County imposed assessments based on an assertion that the taxpayer owned certain farming equipment that was not reported, or was incorrectly reported, on its personal property statements. The taxpayer attempted to apply to the assessment appeals board for cancellation of the disputed assessments. However, the board returned the applications unfiled after determining that they were untimely applications for assessment reductions. After paying the disputed taxes, the taxpayer initiated an action in trial court under Cal. Rev. & Tax. Code Section 5140 6 and sought to recover the taxes it had paid. The trial court sustained the county s demurrer because the taxpayer had failed to exhaust its administrative remedies by not filing timely applications with the county board for the reduction of the challenged assessments under Cal. Rev. & Tax. Code Section 1603(a). 7 The Court of Appeal reversed and held that where, as here, the taxpayer claims [an] assessment is void because the taxpayer does not own the [assessed] property, the taxpayer is not required to apply for an assessment reduction under section 1603, subdivision (a), to exhaust its administrative remedies. In support of its claim, the taxpayer relied on Parr-Richmond Industrial Corp. v. Boyd. 8 In the Parr-Richmond case, the taxpayers were allowed an exception to the general rule that taxpayers should exhaust all available administrative remedies before pursuing action 6 Under this statute, [t]he person who paid the tax... may bring an action only in the superior court, but not in the small claims division of the superior court, against a county or a city to recover a tax which the board of supervisors of the county or the city council of the city has refused to refund on a claim. 7 This statute provides that [a] reduction in an assessment on the local roll shall not be made unless the party affected or his or her agent makes and files with the county board a verified, written application showing the facts claimed to require the reduction and the applicant s opinion of the full value of the property. 8 272 P.2d 16 (Cal. 1954).
Grant Thornton LLP - 4 through the courts. The exception, otherwise known as the nullity exception, was limited to taxpayers that were assessed taxes on property they did not actually own. California Supreme Court Decision In Williams & Fickett, the California Supreme Court emphasized that [a]s a general rule, a party must exhaust available administrative remedies as a prerequisite to seeking relief in the courts. As explained by the Court, this case presented the question of whether the nullity exception applies, so that a timely assessment appeal is not required as a first step in the exhaustion process, when an assessment on nonexempt property is challenged on the ground that the taxpayer does not own the property involved. The Court held that a taxpayer in this situation must seek an assessment reduction through the assessment appeal process before a county board, or obtain a stipulation that these proceedings are not necessary, in order to maintain a trial court action under Section 5140 that seeks to reduce the tax. The ruling establishes that the nullity exception will no longer be available when a taxpayer claims that it does not own the assessed property at issue. The Court overruled Parr-Richmond to the extent that it extended the nullity exception to situations where the sole basis for invoking the exception is an assertion of nonownership of nonexempt property. In overruling Parr-Richmond, the Court explained that the decision has been overtaken by intervening developments in the law. However, the Court still permitted application of the nullity exception with regard to the taxpayer s claim in the instant case even though the taxpayer had not petitioned the assessment appeals board prior to commencing judicial proceedings. The Court determined that the language in Parr-Richmond was unequivocal, lending itself to reasonable reliance by plaintiff and others in its position. Because its holding operates only on a prospective basis, the Supreme Court affirmed the judgment of the Court of Appeal. Commentary Weatherford and Williams & Fickett are both notable cases in the area of taxpayer standing in California. In the Weatherford case, although the California Supreme Court overruled the lower courts interpretation of Section 526a, many questions remain unanswered. Currently, there is no additional guidance on what specific taxes can create standing for a taxpayer to challenge the expenditures of a locality or whether Section 526a actually requires that an individual be directly assessed with tax to have standing. While at first blush, Weatherford provides taxpayers additional avenues to claim standing, the full scope of the decision and its application to similarly situated taxpayers will not become clear until the trial court (and possibly appellate courts) evaluate this case more closely upon remand. In the Williams & Fickett case, the Supreme Court s decision firmly enforces the requirement that property taxpayers must exhaust all available administrative remedies provided by a jurisdiction before resorting to litigation. Furthermore, because this case overturned a previous opinion, Parr-Richmond, which made the nullity exception available, the circumstances in which a taxpayer can bypass the assessment appeals process are limited. From the standpoint of judicial efficiency, the Court s decision serves to limit the number of matters that reach the litigation stage, as it requires that taxpayers take full advantage of less costly administrative options in an effort to reach resolution. In addition, to the extent this requirement forces taxpayers to affirmatively act to claim that it does not
Grant Thornton LLP - 5 own assessed property, resolution affords counties the opportunity to identify the true owner of the property and impose assessments that could otherwise be time-barred. The information contained herein is general in nature and based on authorities that are subject to change. It is not intended and should not be construed as legal, accounting or tax advice or opinion provided by Grant Thornton LLP to the reader. This material may not be applicable to or suitable for specific circumstances or needs and may require consideration of nontax and other tax factors. Contact Grant Thornton LLP or other tax professionals prior to taking any action based upon this information. Grant Thornton LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. No part of this document may be reproduced, retransmitted or otherwise redistributed in any form or by any means, electronic or mechanical, including by photocopying, facsimile transmission, recording, re-keying or using any information storage and retrieval system without written permission from Grant Thornton LLP. This document supports the marketing of professional services by Grant Thornton LLP. It is not written tax advice directed at the particular facts and circumstances of any person. Persons interested in the subject of this document should contact Grant Thornton or their tax advisor to discuss the potential application of this subject matter to their particular facts and circumstances. Nothing herein shall be construed as imposing a limitation on any person from disclosing the tax treatment or tax structure of any matter addressed.