CITY NATIONAL CORPORATION v. FRANCHISE TAX BOARD

Filed 1/16/07

CERTIFIED FOR PUBLICATION

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

SECOND APPELLATE DISTRICT

DIVISION FOUR

          APPEAL from a judgment of the Superior Court for Los Angeles County, Aurelio Muñoz, Judge.  Reversed.

          Office of the General Counsel City National Bank and Sherrill Johnson; Quinn Emanuel Urquhart Oliver & Hedges, Timothy L. Alger, David E. Azar and Kenneth R. Chiate for Plaintiff and Appellant.

          Bill Lockyer, Attorney General, W. Dean Freeman, Lead Supervising Deputy Attorney General, Joseph M. O'Heron, Donald R. Currier, and Brian D. Wesley, Deputy Attorneys General, for Defendant and Respondent.

          Plaintiff and appellant City National Corporation (City National) appeals from an order dismissing its tax refund action after the trial court sustained without leave to amend the Franchise Tax Board's (FTB) demurrer to City National's amended complaint.  FTB asserted in its demurrer that the trial court was without jurisdiction to hear City National's claim for a refund because City National had not yet paid approximately $50 million in proposed assessments for the tax years at issue.  City National contends it had paid all taxes that were due at the time it filed its refund action, and that it was not required to pay the proposed assessments because they were not yet due.  City National also contends that, in any event, dismissal of its complaint was improper because:  (1) the proposed assessments issued before the action commenced were withdrawn, and the proposed assessments issued after the action commenced could not divest the trial court of jurisdiction; and (2) if, as FTB contends, FTB is required to litigate in a single action all disputed tax issues for the years at issue, the appropriate course is for FTB to assert the proposed assessments as a defense to City National's complaint.

          City National's first contention is correct:  the proposed assessments were not final, and therefore City National had paid all of the taxes required to maintain an action for a refund.  Accordingly, we reverse the judgment of dismissal.

BACKGROUND[1]

          City National, through a wholly-owned affiliate, created several subsidiaries -- two real estate investment trusts (REITs), a regulated investment company, and two insurance companies -- through which it claimed certain tax benefits for tax years 1999 through 2002.  In December 2003, FTB announced that it intended to disallow tax benefits for certain types of transactions related to REITs, regulated investment companies, and insurance companies.  A Voluntary Compliance Initiative (VCI) was enacted, which allowed taxpayers who participated in those kinds of transactions to amend their tax returns and limit potential penalties.  The VCI provided an option that allowed taxpayers to retain their right to file a claim for a refund.

          In April 2004, City National filed amended tax returns for the tax years 1999 through 2002, paid the disputed taxes and interest for those years (more than $80 million), and filed claims for refund of those taxes.  In November 2004, City National filed an additional claim for refund of taxes paid for tax year 2003.  City National's claims for refund were deemed denied when FTB did not take action on them within six months of the claims.

          On March 22, 2005, FTB issued Notices of Proposed Assessments (NPAs) to City National, proposing to assess additional taxes and penalties (unrelated to the taxes City National disputed in its refund claims) for tax years 1998 through 2003.  Identical NPAs were issued on March 23, 2005.  The numbers assigned to the March 23, 2005 NPAs were the same as the numbers assigned to the March 22, 2005 NPAs.  On March 25, 2005, FTB sent to City National documents entitled â€