Hyatt v. Chiang et al

Filing 35

ORDER signed by Judge Garland E. Burrell, Jr on 2/9/15 GRANTING 17 Motion to Dismiss for Lack of Jurisdiction. Plaintiff's Complaint is DISMISSED for lack of subject matter jurisdiction without leave to amend. Further, the Clerk of Court shall CLOSE this action. CASE CLOSED. (Meuleman, A)

1
2
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4
5

UNITED STATES DISTRICT COURT

6

EASTERN DISTRICT OF CALIFORNIA

7
8

GILBERT P. HYATT,

9
10
11
12
13
14
15
16
17

No. 2:14-CV-00849-GEB-DAD

Plaintiff,
v.
JOHN CHIANG, JEROME E.
HORTON, and MICHAEL COHEN,
CALIFORNIA FRANCHISE TAX
BOARD MEMBERS; BETTY T. YEE,
GEORGE RUNNER, MICHELLE
STEEL, JEROME E. HORTON, and
JOHN CHIANG, CALIFORNIA STATE
BOARD OF EQUALIZATION
MEMBERS; and DOES 1 through
20,

ORDER GRANTING DEFENDANTS’
MOTIONS TO DISMISS FOR LACK OF
JURISDICTION

Defendants.

18

Plaintiff asserts in his Complaint that the manner in

19

which Defendants are processing his California administrative tax

20

appeal violates his federal constitutional rights under the due

21

process and equal protection clauses, and seeks an injunction

22

“forbidding Defendants. . . from continuing the investigation and

23

administrative

24

Defendants . . . from continuing to assess or threaten to assess

25

[Plaintiff], or collect or threaten to collect from [Plaintiff],

26

taxes, penalties or interest.” (Compl. Prayer ¶¶ 1-2, ECF No. 2.)

27
28

Each

proceedings

defendant

against”

seeks

him

dismissal

and

of

the

“forbidding

Complaint

arguing, inter alia, that it should be dismissed with prejudice
1

1

for lack of subject matter jurisdiction under Federal Rule of

2

Civil Procedure (“Rule”) 12(b)(1). Specifically Defendants argue

3

the federal Tax Injunction Act (“TIA”) prevents Plaintiff from

4

challenging

5

federal court.

6

his

The

California

TIA

residency-based

prescribes:

“The

district

tax

assessment

courts

shall

in

not

7

enjoin, suspend or restrain the assessment, levy or collection of

8

any tax under State law where a plain, speedy and efficient

9

remedy may be had in the courts of such State.” 28 U.S.C. § 1341.

10

I.

FACTUAL BACKGROUND

11

The following allegations in the Complaint concern the

12

pending dismissal motions. Plaintiff Gilbert Hyatt moved from

13

California

to

14

California

Franchise

15

determine

16

taxes for the 1991 tax year. (Id.) The FTB initiated a second

17

audit

18

California income taxes for the 1992 tax year. (Id.) “The FTB

19

asserts [Plaintiff] . . . became a Nevada resident on April 3,

20

1992” and owes the following unpaid California income taxes: $1.8

21

million for the 1991 tax year and $5.6 million for the 1992 tax

22

year.

23

administrative

24

State Board of Equalization (“SBE”). (Id. ¶ 3.) Neither the 1991

25

nor 1992 audit has concluded. (Id. ¶ 2.) Plaintiff alleges “the

26

delays . . . fall squarely and primarily at the feet of the FTB”

27

and the SBE. (Id. ¶¶ 23, 26.) Plaintiff further alleges that

28

Defendants “continue to threaten[] [him] with $55 million plus of

in

Nevada

whether

1996

(Id.

¶¶

to

11,

in
Tax

1991.
Board

Plaintiff

determine

21.)

appeal

has

For

(Compl.
(“FTB”)

owed

been

2

2.)

pending

six

1993,

an

audit

California

Plaintiff

last

In

commenced

additional

whether

the

¶

owed

years,

before

the

the
to

income

additional

Plaintiff‟s
California

1

unconstitutional exactions, specifically the assessed taxes and

2

penalties, for tax years 1991 and 1992.” (Id. ¶ 8.)

3

II.

LEGAL STANDARD

4

Each dismissal motion contains a facial and factual

5

attack on the federal court‟s jurisdiction under Rule 12(b)(1).

6

“A „facial‟ attack asserts that a complaint‟s allegations are

7

themselves insufficient to invoke jurisdiction, while a „factual‟

8

attack asserts that the complaint‟s allegations, though adequate

9

on their face to invoke jurisdiction, are untrue.” Courthouse

10

News Serv. v. Planet, 750 F.3d 776, 780 at n.3 (9th Cir. 2014).

11

Only the facial attacks are reached herein.

12

“The

district

court

resolves

a

facial

attack

as

it

13

would a motion to dismiss under Rule 12(b)(6): Accepting the

14

plaintiff‟s

15

inferences in the plaintiff‟s favor, the court determines whether

16

the allegations are sufficient as a legal matter to invoke the

17

court‟s jurisdiction.”

18

(9th Cir. 2014).

19

as true all allegations contained in a complaint is inapplicable

20

to

21

(2009).

legal

22

allegations

as

true

and

drawing

all

reasonable

Leite v. Crane Co., 749 F.3d 1117, 1121

However, “the tenant that a court must accept

conclusions.”

Ashcroft

v.

Iqbal,

556

U.S.

662,

678

Federal
courts
are
courts
of
limited
jurisdiction. They possess only that power
authorized by Constitution and statute, which
is not to be expanded by judicial decree. It
is to be presumed that a cause lies outside
this limited jurisdiction, and the burden of
establishing the contrary rests upon the
party asserting jurisdiction.

23
24
25
26
27

Kokkonen v. Guardian Life Ins. Co. of Am., 511 U.S. 375, 377

28

(1994).
3

1

III. STATUTORY FRAMEWORK CONCERNING APPEAL OF A CALIFORNIA

2

RESIDENCY-BASED TAX ASSESSMENT

3

Under California law, a taxpayer seeking to “prevent or

4

enjoin the assessment or collection of” a California residency-

5

based income tax may not file suit in state court without first

6

exhausting the administrative remedies in California Revenue and

7

Taxation

8

administrative processes may be utilized by a taxpayer to contest

9

a tax assessment: a postdeprivation “pay-then-protest” process or

Code.

Cal.

predeprivation

Rev.

&

Code

of

19381.1

either

Two

separate

a

11

prerequisite to judicial review in a California state court.
A.

Exhaustion

§

10

12

process.

Tax.

process

is

a

Postdeprivation “Pay-Then-Protest” Process

13

The “pay-then-protest” process requires the challenging

14

taxpayer to make “payment of the tax,” following which a refund

15

claim can be filed with the FTB. § 19382. If the FTB “fails to

16

mail notice of action on [the] . . . refund claim within six

17

months after the claim [is] filed, the taxpayer may ... bring an

18

action [in state court] against the [FTB]. . . on the grounds set

19

forth in the claim for the recovery of . . . [the] overpayment.”

20

§ 19385. If the FTB acts on the challenger‟s refund claim and

21

denies

22

assessed is void . . .

23

upon the grounds set forth in that claim for refund . . . for the

24

recovery of the . . . amount paid” plus interest. §§ 19381,

25

19382.

26

///

it,

a

taxpayer

“claiming

that

the

tax

computed

and

may bring an action [in state court],

27
1

28

Unless otherwise noted, all section references are to the California
Revenue and Taxation Code.

4

1

B.

Predeprivation Process

2

A

taxpayer

challenging

an

assessment

through

the

3

predeprivation process must “file with the [FTB] . . . a written

4

protest against the proposed deficiency assessment, specifying in

5

the protest the grounds upon which it is based.” § 19041. If the

6

protest

7

“reconsider

8

taxpayer may “appeal[] in writing from the action of the [FTB]...

9

to

is

[the

denied,
the

the

taxpayer

assessment

SBE].”

§

19045.

of

may

the

“The

request

that

deficiency.”

[SBE]

.

.

.

§

the

FTB

19044.

The

shall

hear

and

10

determine the appeal,” and an unsuccessful taxpayer may “file[] a

11

petition for rehearing.” §§ 19047-48. After rehearing before the

12

SBE, a taxpayer may seek review in a California state court. §

13

19381.

14

A taxpayer who initially challenges a residency-based

15

income

16

elect

17

paying the disputed tax. § 19335.

18

tax
to

assessment

use

the

through

the

“pay-then-protest”

predeprivation
process

at

process
any

may

point

by

Here, Plaintiff challenged his tax assessments using

19

the

predeprivation

20

protest” process.

21

process

IV.

and

has

not

used

the

“pay-then-

DISCUSSION

22

The TIA “limit[s] drastically federal district court

23

jurisdiction to interfere with [the] . . . important . . . local

24

concern” of tax collection. Ark. v. Farm Credit Servs. of Cent.

25

Ark., 520 U.S. 821, 826 (1997). When passing the TIA, Congress

26

“expressed

27

states would bear if forced to defend the imposition of state

28

taxes in federal, rather than state courts.” May Trucking Co. v.

.

.

.

concern

regarding

5

the

increased

costs

that

1

Or.

2

(citation omitted). One of Congress‟ main objectives in enacting

3

the

4

injunction,

5

thereby disrupting state government finances.” Hibbs v. Winn, 542

6

U.S. 88, 104 (2004) (citation omitted). However, the TIA‟s limit

7

on federal court jurisdiction has “a narrow exception.” Redding

8

Ford v. Cal. State Bd. of Equalization, 722 F.2d 496, 497 (9th

9

Cir. 1983). Congress vested federal courts with jurisdiction to

10

“enjoin, suspend or restrain the assessment, levy or collection

11

of [a] tax under State law where a plain, speedy and efficient

12

remedy may [not] be had in the courts of [the] State.” 28 U.S.C.

13

§ 1341.

Dep‟t

TIA

14

of

was

Transp.,

“to
from

stop

388

1261,

taxpayers,

withholding

Defendants

F.3d

argue

with

large

the

1266

the

sums

(9th

aid

of

[from

Supreme

Cir.

a

the

Court

2004)

federal
states],

has

held

15

California‟s “pay-then-protest” process is “a plain, speedy, and

16

efficient remedy.” (Not. Mot. & Mot. Dismiss (“SBE Mot.”) 9:17-

17

18, ECF No. 15; FTB Mem. P. & A. ISO Mot. Dismiss (“FTB Mot.”)

18

12:6-7, ECF No. 17-1 (citing Franchise Tax Bd. v. Alcan Aluminum,

19

493

20

constitute a plain, speedy, and efficient remedy”) and Cal. v.

21

Grace Brethren Church, 457 U.S. 393, 417 (1982) (“Because the

22

appellees

could

seek

23

insurance

taxes,

and

24

their

25

state law was „plain, speedy, and efficient‟ within the meaning

26

of the [TIA], and consequently, that the District Court had no

27

jurisdiction to issue injunctive or declaratory relief.”)).

28

U.S.

331,

338-39

constitutional

(1990)

a

(“California‟s

refund

thereby
claims,

refund

of

their

state

obtain

state

judicial

we

hold

that

their

procedures

unemployment
review

remedy

of

under

“It has consistently been held . . . that the refund
6

1

action

2

„plain,

3

restraints of [the TIA].” Arnoff v. Franchise Tax Bd. of the

4

State of Cal., 348 F.2d 9, 11 (9th Cir. 1965).

5

Court stated in Alcan Aluminum Ltd., 493 U.S. at 338: “To the

6

extent

7

constitute a plain, speedy, and efficient remedy.”

provided

by

California

speedy

and

efficient

they

8
9

are

Plaintiff

available,

rejoins

Personal
remedy‟

Income

such

as

California‟s

even

if

Tax
to

law

invoke

a

the

As the Supreme

refund

the

is

procedures

“pay-then-protest”

process is “plain, speedy and efficient” on its face, the process

10

will

11

(Pl.‟s Mem. P. & A. ISO Consolid. Opp‟n Defs.‟ MTD (“Opp‟n”)

12

15:24-16:3, ECF No. 22.)

13

not

A.

14

provide

him

a

plain,

speedy

and

efficient

remedy.

Bait and Switch
Plaintiff

contends

that

the

precedent

on

which

15

Defendants rely is distinguishable from his situation because

16

“[n]one of those cases . . . involves a . . . [tax] assessment in

17

which the taxpayer . . . followed the prepayment administrative

18

process,” and California cannot now force him to “forgo” the

19

predeprivation

20

requiring him to use the “pay-then-protest” process before he can

21

“pursue

22

Plaintiff argues forcing him to change from the predeprivation

23

process to the “pay-then-protest” process amounts to a “bait and

24

switch” tactic, which the Supreme Court held illegal in Reich v.

25

Collins, 513 U.S. 106 (1994) and Newsweek v. Florida Dep‟t of

26

Revenue, 522 U.S. 442 (1998). (Opp‟n 23:10-12.)

a

administrative

constitutional

statutory

claim.”

option

(Opp‟n

he

25:21-23;

chose

by

26:1-3.)

27

Defendants reply that Plaintiff has not been subjected

28

to the “bait and switch” tactic involved in Reich and Newsweek
7

1

because “this is not a case where [California‟s] . . . statutory

2

scheme has changed midstream.” (FTB Reply ISO Mot. Dismiss “FTB

3

Reply” 6:5, ECF No. 27).

4

Newsweek “concern[:] (1) taxpayers who had paid their taxes, (2)

5

a subsequent finding that the tax was unconstitutional, [and] (3)

6

efforts by the state courts after the tax was paid and found

7

unconstitutional

8

generally applicable refund statute.” (SBE Reply ISO Mot. Dismiss

9

(“SBE Reply”) 4:8-12, ECF No. 26.)

to

restrict

Defendants contend both Reich and

the

application

of

a

previously

10

In Reich and Newsweek, the taxpayer challengers paid

11

the assessed taxes and then challenged the tax through a refund

12

action; however, after payment, the states changed their laws to

13

prevent the taxpayers from seeking refunds for the already paid

14

taxes. The Supreme Court held that states are not permitted to

15

“reconfigure [their] scheme[s], unfairly, in midcourse—to „bait

16

and switch‟” taxpayers. Reich, 513 U.S. at 111. The Supreme Court

17

further stated: “While [states] may be free to require taxpayers

18

to litigate first and pay [the tax] later, due process prevents

19

[them] from applying this requirement to taxpayers . . . who

20

reasonably relied on the apparent availability of a postpayment

21

refund when paying the [disputed] tax.” Newsweek, 522 U.S. at

22

445.

23

Plaintiff has not shown that the reasoning of Reich and

24

Newsweek

supports

his

jurisdiction

taxpayers

who

challenged

25

concern

26

making payment and then were prevented from seeking a refund by

27

intervening changes in state law.

28

///
8

argument;

their

tax

these

decisions

assessment

after

1

B.

Access to a “Speedy” Remedy

2

Plaintiff also rejoins the “pay-then-protest” process

3

does not provide him a “speedy” remedy because it “would return

4

[him] to the FTB and its administrative process” before he is

5

able to seek relief in the state court. He contends that if the

6

FTB‟s investigation lasts longer than six months, and Plaintiff

7

elects to proceed with a state-court refund action [before the

8

FTB investigation concludes], he risks having the state court

9

find

that

he

failed

to

exhaust

the

administrative

remedies

10

available,” and refuse to consider his claims as happened to the

11

plaintiff in Barnes v. State Bd. of Equalization, 118 Cal. App.

12

3d 994 (1981). (Opp‟n 30:1-12.) However, the plaintiff in Barnes

13

did not file suit in state court until after the SBE denied his

14

claim, and the court did not find his claim waived because the

15

plaintiff filed suit in state court before the administrative

16

process had closed. 118 Cal. App. 3d at 1002 (stating that “the

17

board properly refused and denied the [taxpayer‟s] claim. . . .

18

Plaintiff then approached the superior court”) (emphasis added).

19

Defendants reply that “the longest [Plaintiff] . . .

20

would have to wait [in order to bring his claim in state court]

21

after switching to the „pay-then-protest‟ [process] . . .

22

be six months,” and a six month waiting period does not call into

23

question whether the remedy is speedy. (SBE Reply 8:15-17.)

would

24

“Speedy” is a “relative concept.” Rosewell v. LaSalle

25

Nat‟l Bank, 450 U.S. 503, 518 (1981). A state remedy is “„speedy‟

26

if

27

corresponding federal procedure.” U.S. West, Inc. v. Nelson, 146

28

F.3d

it

does

718,

not

725

entail

(9th

a

Cir.

significantly

1998)
9

greater

(interpreting

delay

an

than

a

identical

1

exception to 28 U.S.C. § 1342 (public utility rate-payer suits)).

2

“The state remedy need not be the best of all possible remedies,

3

. . . . [and] [a]lthough delay in reviewing a taxpayer‟s claim

4

may be troubling, . . . nowhere in the [TIA] . . . did Congress

5

suggest that the remedy must be the speediest.” Colonial Pipeline

6

Co. v. Morgan, 474 F.3d 211, 218-19 (6th Cir. 2007).

7

The “pay-then-protest” process requires a taxpayer to

8

file a claim with the FTB “for refund” and “[i]f the FTB fails to

9

mail notice of an action . . .

within six months . . . , the

10

taxpayer may . . . bring an action against the FTB” in state

11

court. §§ 19382, 19385.

12

Plaintiff has not shown how, if he elected to use the

13

“pay-then-protest”

14

significantly

15

procedure.”

16

Plaintiff does not prevail on this portion of his jurisdiction

17

argument.

18

C.

19

process,

greater
U.S.

its

delay

West,

timetable

than

Inc.,

a

146

“entails

corresponding

F.3d

at

725.

a

federal

Therefore,

Uncertainty
Further,

Plaintiff
his

the

constitutional

federal

21

uncertain whether these claims could be presented through the

22

“pay-then-protest”

23

California‟s state court remedy from being “plain,” as the term

24

is used in the TIA. (Opp‟n 14:19-24.)
“„[U]ncertainty‟

26

prevents

it

27

federal-court

28

Supreme

from

Court

being

not

this

surrounding
plain

jurisdiction.”
“has

and

and

hesitated
10

uncertainty

a

“lifts

Rosewell,
to

because

450

it

has

jurisdiction

process,

claims

court

20

25

over

argues

is

prevents

state-court

remedy”

the

bar

[TIA‟s]

U.S.

declare

a

at

516.

state

to
The

refund

1

provision

2

opportunity

3

proceedings is uncertain.” Grace Brethren Church, 457 U.S. at 414

4

n.31.

5

inadequate

1.

6

to

raise

to

bar

his

federal

relief

constitutional

if

claims

the
in

taxpayer‟s
the

state

Uncertainty Whether A Claim To Enjoin A Tax Is A
Claim To Void A Tax

7

Plaintiff argues “[b]y its terms. . . [the “pay-then-

8

protest”

9

„taxpayer claiming that the tax computed and assessed is void,‟”
it

process

is

only]

unclear

permits

whether

a

state-court

Plaintiff‟s

action

attempt

to

for

a

10

and

enjoin

11

collection of the taxes assessed against him is an action to void

12

the taxes. (Opp‟n 26:20-21) (emphasis added).

13

Defendants reply that Plaintiff plainly seeks to void

14

the taxes assessed against him since Plaintiff alleges the tax

15

assessments are unconstitutional as applied to him and “a tax

16

assessment that is unconstitutional as applied is every bit as

17

„void‟ as an assessment that is unconstitutional on its face.”

18

(FTB Reply 8:16-17.)

19

It is evident that Plaintiff seeks to void the tax or

20

taxes assessed against him. Therefore, Plaintiff has not met his

21

burden of demonstrating that the “pay-then-protest” process fails

22

to provide him a plain remedy.

23
24

2.

Raising

Claims

in

State

Court

That

Were

Not

Presented to the SBE

25

Plaintiff also argues it is uncertain whether the “pay-

26

then-protest” process permits him to raise in state court the

27

constitutional claims he alleges in his federal Complaint because

28

he did present those claims to the SBE, and the Revenue and
11

1

Taxation Code prevents a taxpayer from raising claims in state

2

court that were not included in an SBE appeal. (Opp‟n 29:4-16.)

3

Defendants

rejoin

that

even

assuming

Plaintiff

is

4

correct, the TIA still prevents the federal court from exercising

5

jurisdiction

6

plain, speedy, and efficient remedy was available in state court

7

“at some time” even if the chance to utilize it has been lost

8

because of the taxpayer‟s own action or inaction. (SBE Reply 2:2-

9

4; 3:1-3.)

10

over

Plaintiff‟s

Application
was

TIA

whether

existence

14

Cunningham, 578 F.2d 172, 175 (7th Cir. 1978). “A number of

15

courts have . . . unanimously concluded that failure to utilize a

16

remedy does not render that remedy insufficient under [the TIA].”

17

Aluminum Co. of Am. v. Dep‟t of Treasury of State of Mich., 522

18

F.2d 1120, 1125 (6th Cir. 1975). When a plaintiff‟s own actions

19

foreclose an otherwise “plain, speedy and efficient remedy,” the

20

TIA precludes federal court jurisdiction over the claims. See

21

Jerron West, Inc. v. State of Cal., State Bd. of Equalization,

22

129

23

jurisdiction in the face of an “as applied” challenge to TIA‟s

24

application because “[t]he Taxpayers‟ failure . . . d[id] not

25

render the[] state remedies ineffective”); Wood v. Sargeant, 694

26

F.2d 1159, 1160 (9th Cir. 1982) (holding an “inability to pay the

27

tax [to initiate a refund action] does not avoid the [TIA‟s]

28

jurisdictional

1334,

1338

bar”).

(9th

Cir.

Therefore,
12

Bros.

the

state

13

Sacks

and

a

failure . . . to use the remedy . . . does not negate the
remedy.”

taxpayer[,]

on

a

12

the

the

“depends

where

remedy

of

to

the

claims

11

F.3d

available

of

constitutional

Loan

1997)(declining

even

if

Co.

to

Plaintiff

taxpayer‟s

Inc.

v.

exercise

failed

to

1

present his constitutional claims during the state administrative

2

proceeding,

3

federal

4

constitutional claims.

that

court

failure

exercising

5

V.

6

For

the

has

stated

not

been

shown

jurisdiction

to

over

justify

the

Plaintiff‟s

CONCLUSION
reasons,

Plaintiff‟s

Complaint

is

7

dismissed for lack of subject matter jurisdiction without leave

8

to amend. Further, the Clerk of Court shall close this action.

9

Dated:

February 9, 2015

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