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MINI
SUPERIOR COURT OF CALIFORNIA
COUNTY OF SAN FRANCISCO
Document Scanning Lead Sheet
Apr-24-2012 3:04 pm
Case Number: CGC-11-515645
Filing Date: Apr-24-2012 3:04
Filed by: WESLEY G. RAMIREZ
Juke Box: 001 Image: 03588693
REPLY
SEHAT SUTARDJA VS. FRANCHISE TAX BOARD, AN AGENCY OF THE STATE
OF
001C03588693
Instructions:
Please place this sheet on top of the document to be scanned.igina
Or
KAMALA D. HARRIS
Attorney General of California
Joyce E. HEE
Supervising Deputy Attorney General
MARGUERITE C. STRICKLIN
Deputy Attorney General
State Bar No. 103161
1515 Clay Street, 20th Floor
P.O. Box 70550
Oakland, CA 94612-0550
FELLER.
wee 24 2012
CLE! \
Telephone: (510) 622-2146 oY: Bapilly Clerk
Fax: (510) 622-2270
E-mail: Marguerite.Stricklin@doj.ca.gov
Attorneys for Defendant
Franchise Tax Board -
SUPERIOR COURT OF THE STATE OF CALIFORNIA
FOR THE CITY AND COUNTY OF SAN FRANCISCO
SEHAT SUTARDJA, Case No. CGC-11-515645
Plaintiff, } FRANCHISE TAX BOARD’S REPLY
BRIEF IN SUPPORT OF DEMURRER
Date:
Time:
Dept:
Judge:
May 1, 2012
9:30 a.m.
302
The Honorable Harold E. Kahn
FRANCHISE TAX BOARD,
Defendant.
Trial Date: Not Set
Action Filed: November 3, 2011
ARGUMENT
Despite his protests to the contrary, Plaintiff Sehat Sutardja (hereinafter “Plaintiff’) has
failed to identify any regulation of the Franchise Tax Board (hereinafter the “Board”) for which
he can obtain declaratory relief under the Government Code. The cases on which Plaintiff relies
all involve situations where a state agency had a regulation, or a written statement of a regulatory
nature, that the agency either used or ignored in the implementation, interpretation, or
enforcement of state law. Having failed to identify any such regulation or written statement by
the Board, Plaintiff has not stated a cause of action for the relief he seeks.
1
FRANCHISE TAX BOARD’S REPLY BRIEF IN SUPPORT OF DEMURRER (CGC-11-515645)N
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Furthermore, contrary to the Plaintiffs arguments, this court has no subject matter
jurisdiction to hear this lawsuit because Plaintiff is actually challenging a tax, has not exhausted
his administrative remedies, and impermissibly seeks to prevent the assessment and collection of
a tax in violation of the California Constitution and the Revenue and Taxation Code. (Cal.
Const., Art. XIII, § 32; Rev. & Tax. Code § 19381.) None of the cases Plaintiff cites support his
contention that, because there has been no final assessment and no tax is currently due, there is no
need to satisfy any jurisdictional requirements
In his opposition to the Board’s demurrer, Plaintiff argues that he seeks only a declaration
that the Board’s “regulation regarding the taxation of discounted stock options is invalid under
governing California stock option law! and also is an ‘underground’ regulation which is not in
substantial compliance with the Administrative Procedures Act (‘APA’).” (Opposition, p. 1.) He
further states that a general policy, the so-called “FTB Stock Option Regulation” that the Board
supposedly adopted, is described in paragraphs 6 through 8, 12, and 17 of the First Amended
Complaint (hereinafter “Complaint”). The Board relies on the statements and arguments set forth
in the points and authorities it filed in support of its demurrer to the Complaint. The Board files
this reply memorandum to respond to Plaintiff's arguments in opposition to the demurrer.
I
PLAINTIFF HAS NOT ALLEGED SUFFICIENT FACTS TO ESTABLISH THAT
THERE IS AN IMPROPERLY PROMULGATED REGULATION FOR WHICH HE
CAN SEEK DECLARATORY RELIEF UNDER GOVERNMENT CODES 11350
Plaintiff erroneously claims that the Board’s demurrer is frivolous because, for purposes of
ruling upon a demurrer, all material facts properly pleaded must be accepted as true. (Opp., p. 2.)
The legal standard for ruling on a demurrer also provides, however, that courts are not required to
accept contentions, deductions, or conclusions of fact, or law. (Berg & Berg Enterprises, LLC v.
' As the Board discussed in its opening points and authorities in support of its demurrer,
and in Argument II below, Plaintiff's arguments regarding the applicability of a tax to his income
is appropriate only in a suit for refund, and this court has no subject matter jurisdiction to hear a
suit for refund at this time because he has not exhausted his administrative remedies and paid the
tax assessment.
2
FRANCHISE TAX BOARD’S REPLY BRIEF IN SUPPORT OF DEMURRER (CGC-1 1-515645)”
&
Boyle (2009) 178 Cal. App. 4th 1020, review denied, (Feb. 3, 2010).) In addition, courts will treat
as a nullity any allegations that are contrary to the law or to a fact of which judicial notice may be
taken. (C.R. v. Tenet Healthcare Corp. (2009) 169 Cal.App.4th 1094, 1102, as modified on
denial of rehearing, (Feb. 3, 2009).) Using this legal standard, Plaintiff has not adequately
alleged that the Board has a general policy that “constitutes a regulation subject to a declaration
of invalidity” pursuant to Government Code section 11350.
Plaintiff claims that Paragraphs 6 through 8, 12 and 17 of the Complaint set forth the
regulation for which he seeks a judicial declaration. (Opp., pp. 7-8.) Plaintiff is mistaken.
Paragraphs 6 and 7 refer specifically to section 409A of the Internal Revenue Code (Title 26
USS.C. § 409A (hereinafter “Section 409A”). Plaintiff cannot seek a judicial declaration as to the
validity of Section 409A because Section 409A is a federal tax statute to which California
conforms, not a state regulation.
Paragraphs 8, 12, and 17 describe what Plaintiff calls a general policy that constitutes the
“FTB Stock Option Regulation,” which is in part evidenced by FTB Notice 2007-1 and the
instructions for that notice. However, as the Board discussed in its opening points and
authorities, FTB Notice 2007-1 and its instructions refer only to a compliance program that
allows employers to pay the taxes of their rank and file employees who are deemed to have
income from exercised stock options under Section 409A. Plaintiff is neither an employer nor a
rank and file employee. Even if he were, the notice and instructions do not impose a tax, or
implement, interpret, or enforce Section 409A. Moreover, Plaintiff has already stated that the
Board “has not issued its own regulations or less formal views interpreting Section 409A as
incorporated in California law, ...” (Req. for Jud. Not., Ex. D, p. 5.) Plaintiff’s contentions
regarding an “FTB Stock Option Regulation” are therefore a nullity.
Should the Court overrule the Board’s demurrer in this case and allow Plaintiff to proceed
on an unsupported so called “FTB Stock Option Regulation,” it will result in opening the
floodgates of litigation with respect to any taxpayer who has a pending tax assessment before the
Board. The Board can envision, for example:
1. A taxpayer who has received a Notice of Proposed assessment because he sold his home
3
FRANCHISE TAX BOARD’S REPLY BRIEF IN SUPPORT OF DEMURRER (CGC-11-515645)0 mo ND HW PF Ww NY
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and did not report the gain could immediately file an action solely for declaratory relief
claiming the Board has a general policy of taxing gains made on the sale of homes; or,
2. A taxpayer who has received a Notice of Proposed Assessment because she owns a
business that was audited and could not justify her expenses could immediately file an
action solely for declaratory relief claiming the Board has a general policy of asking small
business owners to substantiate their expenses.
These taxpayers, without alleging more, could then use the discovery process to try to
determine how much the Board collected, or how many taxpayers received proposed assessments,
in each of these types of tax cases to show that there was, indeed, a general policy in place and
that the policy constitutes a regulation. Plaintiff himself anticipates that "it is not inconsistent
with an underground regulation that there may be nothing in writing about the general policy
being applied by the agency..." (Opp., p. 13, fn. 4) and, in his motion to compel to be heard at the
same time as this demurrer, seeks similar information. (See eg, Pl’s Special Interrogatory Nos. 3
through 11.) The Board urges the court to recognize this case for what it truly is: an end-run to
avoid having to satisfy the prepayment and administrative exhaustion requirements to bring a
proper suit for refund under Revenue and Taxation Code sections 19382 or 19385.
Notwithstanding the fact that the allegations in his complaint are insufficient, Plaintiff relies
primarily on three cases to support his contention that he has identified a regulation for which he
can obtain declaratory relief under Government Code section 11350. (Tidewater Marine
Western, Inc. v. Bradshaw (1996) 14 Cal.4th 557 (“Tidewater”); Californians for Native Salmon
and Steelhead Ass’n v. Dept. of Forestry (1990) 221 Cal.App3d 1419 (“Native Salmon"); Clovis
Unified School Dist. v. Chiang (2010) 188 Cal.App.4th 794 (“Clovis”).) Unlike this case,
however, all three of the cited cases addressed a written statement, rule, or policy that a state
agency either used or ignored in the implementation, interpretation, or enforcement of state law.
These cases do not support Plaintiff's position.
Tidewater involved a written enforcement manual that the Division of Labor Standards
Enforcement prepared for the use of deputy labor commissioners in enforcing Industrial Welfare
Commission Wage Orders.” (14 Cal.4th at p. 562.) The Court of Appeal ruled that the manual
2 Wage Orders are regulations promulgated by the Industrial Welfare Commission
regarding California’s wage and hour laws. (See, Title 8, Cal. Code of Regs., § 11010, et seq.)
4
FRANCHISE TAX BOARD’S REPLY BRIEF IN SUPPORT OF DEMURRER (CGC-11-515645)constituted a regulation that is void for failure to comply with the Administrative Procedures Act.
(14 Cal.4th at pp. 576-577.) Similarly, the Native Salmon and Clovis cases involved a regulation
that the government failed to follow, and a rule that implemented, interpreted, or made a
regulation more specific, respectively. (Native Salmon, supra, 221 Cal.App3d 1419, 1424-1425;
Clovis, supra, 188 Cal.App.4th 794, 797-798. See also, Pacific Motor Transport Co. v. State Bd.
of Equal. (1972) 28 Cal.App.3d 230, 236.)
Pacific Motor Transport Co. v. State Board of Equalization (1972) 28 Cal.App.3d 230
(“Pacific Motor Transport’], presented a true challenge to a tax regulation, in which the plaintiffs
sought declaratory relief regarding a regulation [former § 1432, Title 18, Cal. Admin. Code] and
their rights and duties under that regulation pursuant to Government Code section 11440 (a
predecessor statute to Government Code section 11350). The trial court sustained the State Board
of Equalization’s general demurrer, ruling that it lacked jurisdiction because the case implicated
the determination of, or payment of, a tax in violation of former Revenue and Taxation Code
section 10276 (similar to Rev. & Tax Code § 19381 on which the Board relies in this case).
(Pacific Motor Transport, supra, 28 Cal.App.3d at p. 234.) The Court of Appeal reversed, ruling
that “both statutes may reasonably be given effect without doing violence to either.” (/d. at p.
236). However, the Court of Appeal warned that:
Care must be taken in judicial proceedings under Government Code section 11440
as they relate to such tax regulations, that the relief be limited in the statute's language
to “a judicial declaration as to the validity of” the questioned regulation. (Italics
added.) The relief afforded may not “prevent or enjoin” or otherwise hamper present
or future tax assessment or collection effort against the plaintiff or anyone, as
proscribed by section 10276. It will be presumed that the governmental agency will
respect a judicial declaration concerning a regulation's validity. If it does not the
taxpayer's remedy lies in paying the assessed taxes and then commencing action
based upon such invalidity for their refund.
(Ibid.)
This case presents just the kind of case the Court of Appeal warned us about in Pacific
Motor Transport. Plaintiff has not identified any regulation that the Board has used to interpret,
implement, or enforce Section 409A. Since he has not, the only judicial declaration Plaintiff
could be seeking in this is a declaration as to the validity of Section 409A under California law.
However, since Plaintiff has not exhausted his administrative remedies and paid the proposed tax
5
FRANCHISE TAX BOARD’S REPLY BRIEF IN SUPPORT OF DEMURRER (CGC-1 1-515645)in this case, this court has no subject matter jurisdiction to hear his suit, and should enter an order
sustaining the Board’s demurrer. (State Board of Equalization v. Superior Court of Los Angeles
County (O'Hara & Kendall Aviation, Inc.) (1985) 39 Cal.3d 633, 639.)
I.
PLAINTIFF HAS PROVIDED THIS COURT WITH NO BASIS FOR
EXERCISING JURISDICTION OVER HIS CHALLENGE TO SECTION 409A
Plaintiff erroneously cites to City National Corporation v. Franchise Tax Board (2007) 146
Cal.App.4th 1040 (“City Nationa’) in support of his argument that he need not exhaust his
administrative remedies by “paying the disputed tax before contesting its propriety in superior
court.” However, Plaintiff ignores the operative facts in City National and, apparently,
misconstrues what it means to exhaust his administrative remedies before filing a suit for refund.
In City National, the plaintiff filed amended tax returns for the tax years 1999 through
2002, paid the disputed taxes and interest for those years, and filed claims for a refund for those
taxes. (City National, supra, 146 Cal.App.4th at p. 1043.) The plaintiff also filed an additional
claim for refund for taxes paid for the 2003 tax year, and its claims for refund were deemed
denied when the Board did not take action on them within six months of the claims being filed.
(/bid.) Having exhausted its administrative remedies, the plaintiff in that case was free to file a
suit for refund. (Rev. & Tax. Code § 19385 [“If the Franchise Tax Board fails to mail notice of
action on any refund claim within six months after the claim was filed, the taxpayer may, prior to
mailing of notice of action on the refund claim, consider the claim disallowed and bring an action
against the Franchise Tax Board on the grounds set forth in the claim for the recovery of the
whole or any part of the amount claimed as an overpayment.”]) However, the Board
subsequently issued Notices of Proposed Assessments (NPAs), proposing to assess additional
taxes and penalties for the same tax years but unrelated to the issues disputed and the taxes
plaintiff paid before filing its refund claims. (/bid.) Since the plaintiff had exhausted its
administrative remedies and paid the taxes due with regard to the issues set forth in its claims for
refund, and the subsequently issued NPAs had not become final assessments by the time the
6
FRANCHISE TAX BOARD’S REPLY BRIEF IN SUPPORT OF DEMURRER (CGC-11-515645)plaintiff filed a suit for refund based on the grounds set forth in its claims for refund, the Court of
Appeal appropriately found that the trial court erred in dismissing the complaint. (Jd. at p. 1046-
1047.) The new issues upon which the Board proposed taxes in the most recent NPAs could be
raised as a defense in the suit for refund. (Sprint Communications Co. v. State Bd. of Equal.
(1995) 40 Cal.App.4th 1254, citing, Title Ins. Co. v. State Bd. of Equal. (1992) 4 Cal.4th 715, 732
{“[A] refund case throws open the taxpayer's entire tax liability for the period in question
[citation], and the Board may raise issues unrelated to the basis or theory on which the taxpayer is
seeking a refund in order to defeat the claim.”]) Thus, City National does not support the
argument that, under California law, one need not pay a tax before litigating its validity.
In this case, the administrative process has just begun. The Board has issued a proposed
assessment, but it has not become final, Plaintiff has not paid any tax or filed a claim for refund,
and the Board has not denied any claim. A suit challenging a tax imposed pursuant to Section
409A is therefore premature, and this court lacks subject matter jurisdiction to hear such a
challenge. (State Board of Equalization v. Superior Court of Los Angeles County (O'Hara &
Kendall Aviation, Inc.) (1985) 39 Cal.3d 633, 638-639.)
None of the other cases cited by Plaintiff support his position. For example, Franchise Tax
Board v. Superior Court (1989) 212 Cal.App.3d 1343, was a residency case. Revenue and
Taxation Code section 19381 specifically provides that “No tax based solely upon the residence
of such an individual shall be collected from that individual until 60 days after the action of the
State Board of Equalization becomes final and, if he or she commences an action pursuant to this
section, during the pendency of the action, other than by way of or under the jeopardy assessment
provisions of this part.” Plaintiff has not alleged that his residency status is at issue in this case.
Franchise Tax Board v. Superior Court (1989) 212 Cal.App.3d 1343, therefore has no application
to this case.
In re King (1992) 961 F.2d 1423, similarly involved an issue that has no application here.
That case presented the question whether, under federal law, a bankruptcy discharge injunction
had discharged prepetition state income taxes. (Jn re King, supra, 961 F.2d 1423.) The United
States Court of Appeal for the Ninth Circuit found that the determination of that issue depends on
7
FRANCHISE TAX BOARD’S REPLY BRIEF IN SUPPORT OF DEMURRER (CGC-1 1-515645)nan vA fF WwW N
“when California ‘assesses’ an income tax deficiency, for purposes of rendering the assessment
nondischargeable in bankruptcy.” The Court ruled that, for purposes of the Bankruptcy Code, the
tax at issue was “assessed” on the date it became a final assessment. (/d. at p. 1427.) There are
no Bankruptcy Code issues to construe in this case.
Plaintiff has presented no authority to the court that would allow him, at this juncture, to
challenge Section 409A or any taxes imposed pursuant to its provisions.
CONCLUSION
The Board respectfully submits that the court should sustain its demurrer without leave to
amend.
Respectfully Submitted,
Dated: April 24, 2012
KAMALA D. HARRIS
Attorney General of California
Joyce E, HEE
Supervising Deputy Attorney General
Mlerguck Chea
MARGUERITE C. STRICKLIN
Deputy Attorney General
Attorneys for Defendant
Franchise Tax Board -
OK2011900555
Reply In Supp. of Demurrer
8
FRANCHISE TAX BOARD’S REPLY BRIEF IN SUPPORT OF DEMURRER (CGC-11-515645)DECLARATION OF SERVICE BY U.S. MAIL
Case Name: Sehat Sutardja v. Franchise Tax Board
No.: CGC-11-515645
I declare:
I am employed in the Office of the Attorney General, which is the office of a member of the
California State Bar, at which member's direction this service is made. I am 18 years of age or
older and not a party to this matter. I am familiar with the business practice at the Office of the
Attorney General for collection and processing of correspondence for mailing with the United
States Postal Service. In accordance with that practice, correspondence placed in the internal
mail collection system at the Office of the Attorney General is deposited with the United States
Postal Service with postage thereon fully prepaid that same day in the ordinary course of
business.
On April 24, 2012, I served the attached FRANCHISE TAX BOARD’S REPLY BRIEF IN
SUPPORT OF DEMURRER by placing a true copy thereof enclosed in a sealed envelope in
the internal mail collection system at the Office of the Attorney General at 1515 Clay Street,
20th Floor, Oakland, CA 94612-0550, addressed as follows:
Jeffrey Leon, Esq.
Leon & Leon
1970 Broadway, Suite 1250
Oakland, CA 94612
Attorney for Plaintiff
Glenn A. Smith, Esquire
Law Offices of Glenn A. Smith
459 Hamilton Ave., Suite 207
Palo Alto, CA 94301
Attorney for Plaintiff
I declare under penalty of perjury under the laws of the State of California the foregoing is true
and correct and that this declaration was executed on April 24, 2012, at Oakland, California.
Joy V. Hanek Oot ee
Declarant Signatory
(0K201 1900855
90242595,
Preview
MINI SUPERIOR COURT OF CALIFORNIA COUNTY OF SAN FRANCISCO Document Scanning Lead Sheet Apr-24-2012 3:04 pm Case Number: CGC-11-515645 Filing Date: Apr-24-2012 3:04 Filed by: WESLEY G. RAMIREZ Juke Box: 001 Image: 03588693 REPLY SEHAT SUTARDJA VS. FRANCHISE TAX BOARD, AN AGENCY OF THE STATE OF 001C03588693 Instructions: Please place this sheet on top of the document to be scanned.igina Or KAMALA D. HARRIS Attorney General of California Joyce E. HEE Supervising Deputy Attorney General MARGUERITE C. STRICKLIN Deputy Attorney General State Bar No. 103161 1515 Clay Street, 20th Floor P.O. Box 70550 Oakland, CA 94612-0550 FELLER. wee 24 2012 CLE! \ Telephone: (510) 622-2146 oY: Bapilly Clerk Fax: (510) 622-2270 E-mail: Marguerite.Stricklin@doj.ca.gov Attorneys for Defendant Franchise Tax Board - SUPERIOR COURT OF THE STATE OF CALIFORNIA FOR THE CITY AND COUNTY OF SAN FRANCISCO SEHAT SUTARDJA, Case No. CGC-11-515645 Plaintiff, } FRANCHISE TAX BOARD’S REPLY BRIEF IN SUPPORT OF DEMURRER Date: Time: Dept: Judge: May 1, 2012 9:30 a.m. 302 The Honorable Harold E. Kahn FRANCHISE TAX BOARD, Defendant. Trial Date: Not Set Action Filed: November 3, 2011 ARGUMENT Despite his protests to the contrary, Plaintiff Sehat Sutardja (hereinafter “Plaintiff’) has failed to identify any regulation of the Franchise Tax Board (hereinafter the “Board”) for which he can obtain declaratory relief under the Government Code. The cases on which Plaintiff relies all involve situations where a state agency had a regulation, or a written statement of a regulatory nature, that the agency either used or ignored in the implementation, interpretation, or enforcement of state law. Having failed to identify any such regulation or written statement by the Board, Plaintiff has not stated a cause of action for the relief he seeks. 1 FRANCHISE TAX BOARD’S REPLY BRIEF IN SUPPORT OF DEMURRER (CGC-11-515645)N So em ND KH FF Ww Rw NM NY KR NY N KR NY YD Bee ee ond AA fF BN FF DG OD IY DH FE WN = Furthermore, contrary to the Plaintiffs arguments, this court has no subject matter jurisdiction to hear this lawsuit because Plaintiff is actually challenging a tax, has not exhausted his administrative remedies, and impermissibly seeks to prevent the assessment and collection of a tax in violation of the California Constitution and the Revenue and Taxation Code. (Cal. Const., Art. XIII, § 32; Rev. & Tax. Code § 19381.) None of the cases Plaintiff cites support his contention that, because there has been no final assessment and no tax is currently due, there is no need to satisfy any jurisdictional requirements In his opposition to the Board’s demurrer, Plaintiff argues that he seeks only a declaration that the Board’s “regulation regarding the taxation of discounted stock options is invalid under governing California stock option law! and also is an ‘underground’ regulation which is not in substantial compliance with the Administrative Procedures Act (‘APA’).” (Opposition, p. 1.) He further states that a general policy, the so-called “FTB Stock Option Regulation” that the Board supposedly adopted, is described in paragraphs 6 through 8, 12, and 17 of the First Amended Complaint (hereinafter “Complaint”). The Board relies on the statements and arguments set forth in the points and authorities it filed in support of its demurrer to the Complaint. The Board files this reply memorandum to respond to Plaintiff's arguments in opposition to the demurrer. I PLAINTIFF HAS NOT ALLEGED SUFFICIENT FACTS TO ESTABLISH THAT THERE IS AN IMPROPERLY PROMULGATED REGULATION FOR WHICH HE CAN SEEK DECLARATORY RELIEF UNDER GOVERNMENT CODES 11350 Plaintiff erroneously claims that the Board’s demurrer is frivolous because, for purposes of ruling upon a demurrer, all material facts properly pleaded must be accepted as true. (Opp., p. 2.) The legal standard for ruling on a demurrer also provides, however, that courts are not required to accept contentions, deductions, or conclusions of fact, or law. (Berg & Berg Enterprises, LLC v. ' As the Board discussed in its opening points and authorities in support of its demurrer, and in Argument II below, Plaintiff's arguments regarding the applicability of a tax to his income is appropriate only in a suit for refund, and this court has no subject matter jurisdiction to hear a suit for refund at this time because he has not exhausted his administrative remedies and paid the tax assessment. 2 FRANCHISE TAX BOARD’S REPLY BRIEF IN SUPPORT OF DEMURRER (CGC-1 1-515645)” & Boyle (2009) 178 Cal. App. 4th 1020, review denied, (Feb. 3, 2010).) In addition, courts will treat as a nullity any allegations that are contrary to the law or to a fact of which judicial notice may be taken. (C.R. v. Tenet Healthcare Corp. (2009) 169 Cal.App.4th 1094, 1102, as modified on denial of rehearing, (Feb. 3, 2009).) Using this legal standard, Plaintiff has not adequately alleged that the Board has a general policy that “constitutes a regulation subject to a declaration of invalidity” pursuant to Government Code section 11350. Plaintiff claims that Paragraphs 6 through 8, 12 and 17 of the Complaint set forth the regulation for which he seeks a judicial declaration. (Opp., pp. 7-8.) Plaintiff is mistaken. Paragraphs 6 and 7 refer specifically to section 409A of the Internal Revenue Code (Title 26 USS.C. § 409A (hereinafter “Section 409A”). Plaintiff cannot seek a judicial declaration as to the validity of Section 409A because Section 409A is a federal tax statute to which California conforms, not a state regulation. Paragraphs 8, 12, and 17 describe what Plaintiff calls a general policy that constitutes the “FTB Stock Option Regulation,” which is in part evidenced by FTB Notice 2007-1 and the instructions for that notice. However, as the Board discussed in its opening points and authorities, FTB Notice 2007-1 and its instructions refer only to a compliance program that allows employers to pay the taxes of their rank and file employees who are deemed to have income from exercised stock options under Section 409A. Plaintiff is neither an employer nor a rank and file employee. Even if he were, the notice and instructions do not impose a tax, or implement, interpret, or enforce Section 409A. Moreover, Plaintiff has already stated that the Board “has not issued its own regulations or less formal views interpreting Section 409A as incorporated in California law, ...” (Req. for Jud. Not., Ex. D, p. 5.) Plaintiff’s contentions regarding an “FTB Stock Option Regulation” are therefore a nullity. Should the Court overrule the Board’s demurrer in this case and allow Plaintiff to proceed on an unsupported so called “FTB Stock Option Regulation,” it will result in opening the floodgates of litigation with respect to any taxpayer who has a pending tax assessment before the Board. The Board can envision, for example: 1. A taxpayer who has received a Notice of Proposed assessment because he sold his home 3 FRANCHISE TAX BOARD’S REPLY BRIEF IN SUPPORT OF DEMURRER (CGC-11-515645)0 mo ND HW PF Ww NY RD RM KR NY BY NY NN NY] ewe ewe we Be Be Be ee eI A A BF Bb NH FF SBD we RA ADAH BF WKH SF Oo and did not report the gain could immediately file an action solely for declaratory relief claiming the Board has a general policy of taxing gains made on the sale of homes; or, 2. A taxpayer who has received a Notice of Proposed Assessment because she owns a business that was audited and could not justify her expenses could immediately file an action solely for declaratory relief claiming the Board has a general policy of asking small business owners to substantiate their expenses. These taxpayers, without alleging more, could then use the discovery process to try to determine how much the Board collected, or how many taxpayers received proposed assessments, in each of these types of tax cases to show that there was, indeed, a general policy in place and that the policy constitutes a regulation. Plaintiff himself anticipates that "it is not inconsistent with an underground regulation that there may be nothing in writing about the general policy being applied by the agency..." (Opp., p. 13, fn. 4) and, in his motion to compel to be heard at the same time as this demurrer, seeks similar information. (See eg, Pl’s Special Interrogatory Nos. 3 through 11.) The Board urges the court to recognize this case for what it truly is: an end-run to avoid having to satisfy the prepayment and administrative exhaustion requirements to bring a proper suit for refund under Revenue and Taxation Code sections 19382 or 19385. Notwithstanding the fact that the allegations in his complaint are insufficient, Plaintiff relies primarily on three cases to support his contention that he has identified a regulation for which he can obtain declaratory relief under Government Code section 11350. (Tidewater Marine Western, Inc. v. Bradshaw (1996) 14 Cal.4th 557 (“Tidewater”); Californians for Native Salmon and Steelhead Ass’n v. Dept. of Forestry (1990) 221 Cal.App3d 1419 (“Native Salmon"); Clovis Unified School Dist. v. Chiang (2010) 188 Cal.App.4th 794 (“Clovis”).) Unlike this case, however, all three of the cited cases addressed a written statement, rule, or policy that a state agency either used or ignored in the implementation, interpretation, or enforcement of state law. These cases do not support Plaintiff's position. Tidewater involved a written enforcement manual that the Division of Labor Standards Enforcement prepared for the use of deputy labor commissioners in enforcing Industrial Welfare Commission Wage Orders.” (14 Cal.4th at p. 562.) The Court of Appeal ruled that the manual 2 Wage Orders are regulations promulgated by the Industrial Welfare Commission regarding California’s wage and hour laws. (See, Title 8, Cal. Code of Regs., § 11010, et seq.) 4 FRANCHISE TAX BOARD’S REPLY BRIEF IN SUPPORT OF DEMURRER (CGC-11-515645)constituted a regulation that is void for failure to comply with the Administrative Procedures Act. (14 Cal.4th at pp. 576-577.) Similarly, the Native Salmon and Clovis cases involved a regulation that the government failed to follow, and a rule that implemented, interpreted, or made a regulation more specific, respectively. (Native Salmon, supra, 221 Cal.App3d 1419, 1424-1425; Clovis, supra, 188 Cal.App.4th 794, 797-798. See also, Pacific Motor Transport Co. v. State Bd. of Equal. (1972) 28 Cal.App.3d 230, 236.) Pacific Motor Transport Co. v. State Board of Equalization (1972) 28 Cal.App.3d 230 (“Pacific Motor Transport’], presented a true challenge to a tax regulation, in which the plaintiffs sought declaratory relief regarding a regulation [former § 1432, Title 18, Cal. Admin. Code] and their rights and duties under that regulation pursuant to Government Code section 11440 (a predecessor statute to Government Code section 11350). The trial court sustained the State Board of Equalization’s general demurrer, ruling that it lacked jurisdiction because the case implicated the determination of, or payment of, a tax in violation of former Revenue and Taxation Code section 10276 (similar to Rev. & Tax Code § 19381 on which the Board relies in this case). (Pacific Motor Transport, supra, 28 Cal.App.3d at p. 234.) The Court of Appeal reversed, ruling that “both statutes may reasonably be given effect without doing violence to either.” (/d. at p. 236). However, the Court of Appeal warned that: Care must be taken in judicial proceedings under Government Code section 11440 as they relate to such tax regulations, that the relief be limited in the statute's language to “a judicial declaration as to the validity of” the questioned regulation. (Italics added.) The relief afforded may not “prevent or enjoin” or otherwise hamper present or future tax assessment or collection effort against the plaintiff or anyone, as proscribed by section 10276. It will be presumed that the governmental agency will respect a judicial declaration concerning a regulation's validity. If it does not the taxpayer's remedy lies in paying the assessed taxes and then commencing action based upon such invalidity for their refund. (Ibid.) This case presents just the kind of case the Court of Appeal warned us about in Pacific Motor Transport. Plaintiff has not identified any regulation that the Board has used to interpret, implement, or enforce Section 409A. Since he has not, the only judicial declaration Plaintiff could be seeking in this is a declaration as to the validity of Section 409A under California law. However, since Plaintiff has not exhausted his administrative remedies and paid the proposed tax 5 FRANCHISE TAX BOARD’S REPLY BRIEF IN SUPPORT OF DEMURRER (CGC-1 1-515645)in this case, this court has no subject matter jurisdiction to hear his suit, and should enter an order sustaining the Board’s demurrer. (State Board of Equalization v. Superior Court of Los Angeles County (O'Hara & Kendall Aviation, Inc.) (1985) 39 Cal.3d 633, 639.) I. PLAINTIFF HAS PROVIDED THIS COURT WITH NO BASIS FOR EXERCISING JURISDICTION OVER HIS CHALLENGE TO SECTION 409A Plaintiff erroneously cites to City National Corporation v. Franchise Tax Board (2007) 146 Cal.App.4th 1040 (“City Nationa’) in support of his argument that he need not exhaust his administrative remedies by “paying the disputed tax before contesting its propriety in superior court.” However, Plaintiff ignores the operative facts in City National and, apparently, misconstrues what it means to exhaust his administrative remedies before filing a suit for refund. In City National, the plaintiff filed amended tax returns for the tax years 1999 through 2002, paid the disputed taxes and interest for those years, and filed claims for a refund for those taxes. (City National, supra, 146 Cal.App.4th at p. 1043.) The plaintiff also filed an additional claim for refund for taxes paid for the 2003 tax year, and its claims for refund were deemed denied when the Board did not take action on them within six months of the claims being filed. (/bid.) Having exhausted its administrative remedies, the plaintiff in that case was free to file a suit for refund. (Rev. & Tax. Code § 19385 [“If the Franchise Tax Board fails to mail notice of action on any refund claim within six months after the claim was filed, the taxpayer may, prior to mailing of notice of action on the refund claim, consider the claim disallowed and bring an action against the Franchise Tax Board on the grounds set forth in the claim for the recovery of the whole or any part of the amount claimed as an overpayment.”]) However, the Board subsequently issued Notices of Proposed Assessments (NPAs), proposing to assess additional taxes and penalties for the same tax years but unrelated to the issues disputed and the taxes plaintiff paid before filing its refund claims. (/bid.) Since the plaintiff had exhausted its administrative remedies and paid the taxes due with regard to the issues set forth in its claims for refund, and the subsequently issued NPAs had not become final assessments by the time the 6 FRANCHISE TAX BOARD’S REPLY BRIEF IN SUPPORT OF DEMURRER (CGC-11-515645)plaintiff filed a suit for refund based on the grounds set forth in its claims for refund, the Court of Appeal appropriately found that the trial court erred in dismissing the complaint. (Jd. at p. 1046- 1047.) The new issues upon which the Board proposed taxes in the most recent NPAs could be raised as a defense in the suit for refund. (Sprint Communications Co. v. State Bd. of Equal. (1995) 40 Cal.App.4th 1254, citing, Title Ins. Co. v. State Bd. of Equal. (1992) 4 Cal.4th 715, 732 {“[A] refund case throws open the taxpayer's entire tax liability for the period in question [citation], and the Board may raise issues unrelated to the basis or theory on which the taxpayer is seeking a refund in order to defeat the claim.”]) Thus, City National does not support the argument that, under California law, one need not pay a tax before litigating its validity. In this case, the administrative process has just begun. The Board has issued a proposed assessment, but it has not become final, Plaintiff has not paid any tax or filed a claim for refund, and the Board has not denied any claim. A suit challenging a tax imposed pursuant to Section 409A is therefore premature, and this court lacks subject matter jurisdiction to hear such a challenge. (State Board of Equalization v. Superior Court of Los Angeles County (O'Hara & Kendall Aviation, Inc.) (1985) 39 Cal.3d 633, 638-639.) None of the other cases cited by Plaintiff support his position. For example, Franchise Tax Board v. Superior Court (1989) 212 Cal.App.3d 1343, was a residency case. Revenue and Taxation Code section 19381 specifically provides that “No tax based solely upon the residence of such an individual shall be collected from that individual until 60 days after the action of the State Board of Equalization becomes final and, if he or she commences an action pursuant to this section, during the pendency of the action, other than by way of or under the jeopardy assessment provisions of this part.” Plaintiff has not alleged that his residency status is at issue in this case. Franchise Tax Board v. Superior Court (1989) 212 Cal.App.3d 1343, therefore has no application to this case. In re King (1992) 961 F.2d 1423, similarly involved an issue that has no application here. That case presented the question whether, under federal law, a bankruptcy discharge injunction had discharged prepetition state income taxes. (Jn re King, supra, 961 F.2d 1423.) The United States Court of Appeal for the Ninth Circuit found that the determination of that issue depends on 7 FRANCHISE TAX BOARD’S REPLY BRIEF IN SUPPORT OF DEMURRER (CGC-1 1-515645)nan vA fF WwW N “when California ‘assesses’ an income tax deficiency, for purposes of rendering the assessment nondischargeable in bankruptcy.” The Court ruled that, for purposes of the Bankruptcy Code, the tax at issue was “assessed” on the date it became a final assessment. (/d. at p. 1427.) There are no Bankruptcy Code issues to construe in this case. Plaintiff has presented no authority to the court that would allow him, at this juncture, to challenge Section 409A or any taxes imposed pursuant to its provisions. CONCLUSION The Board respectfully submits that the court should sustain its demurrer without leave to amend. Respectfully Submitted, Dated: April 24, 2012 KAMALA D. HARRIS Attorney General of California Joyce E, HEE Supervising Deputy Attorney General Mlerguck Chea MARGUERITE C. STRICKLIN Deputy Attorney General Attorneys for Defendant Franchise Tax Board - OK2011900555 Reply In Supp. of Demurrer 8 FRANCHISE TAX BOARD’S REPLY BRIEF IN SUPPORT OF DEMURRER (CGC-11-515645)DECLARATION OF SERVICE BY U.S. MAIL Case Name: Sehat Sutardja v. Franchise Tax Board No.: CGC-11-515645 I declare: I am employed in the Office of the Attorney General, which is the office of a member of the California State Bar, at which member's direction this service is made. I am 18 years of age or older and not a party to this matter. I am familiar with the business practice at the Office of the Attorney General for collection and processing of correspondence for mailing with the United States Postal Service. In accordance with that practice, correspondence placed in the internal mail collection system at the Office of the Attorney General is deposited with the United States Postal Service with postage thereon fully prepaid that same day in the ordinary course of business. On April 24, 2012, I served the attached FRANCHISE TAX BOARD’S REPLY BRIEF IN SUPPORT OF DEMURRER by placing a true copy thereof enclosed in a sealed envelope in the internal mail collection system at the Office of the Attorney General at 1515 Clay Street, 20th Floor, Oakland, CA 94612-0550, addressed as follows: Jeffrey Leon, Esq. Leon & Leon 1970 Broadway, Suite 1250 Oakland, CA 94612 Attorney for Plaintiff Glenn A. Smith, Esquire Law Offices of Glenn A. Smith 459 Hamilton Ave., Suite 207 Palo Alto, CA 94301 Attorney for Plaintiff I declare under penalty of perjury under the laws of the State of California the foregoing is true and correct and that this declaration was executed on April 24, 2012, at Oakland, California. Joy V. Hanek Oot ee Declarant Signatory (0K201 1900855 90242595,