First District, Division One Finds Revenue and Taxation Code section 19717 is Not the Exclusive Means of Recovering Attorney's Fees in a Tax Refund Case.
Okay, for those tax practitioners representing California state taxpayers, we have a post of interest to you on a recent published decision coming out of the First District, Division One.
Revenue and Taxation Code section 19717 provides that a party who brings a civil proceeding against the state to recover franchise taxes may recover reasonable litigation costs, including attorney's fees, if these requirements are met: (1) the suit is brought in a California court; (2) the party exhausted its administrative remedies under applicable tax laws; (3) the party establishes that the position of the state was not substantially justified (judged from an objective reasonable person standard, with the burden on the Franchise Tax Board); and (4) the party substantially prevails. (Lennane v. Franchise Tax Bd., 51 Cal.App.4th 1180, 1183-1184 (1996).)
In contrast, Code of Civil Procedure section 1021.5—the private attorney general statutory provision—allows a successful party to obtain fees in an action resulting in the "enforcement of an important right affecting the public interest," conferring a "significant benefit …on the general public or a large class of persons."
Northwest Energetic Services, LLC v. Franchise Tax Bd., 159 Cal.App.4th 841, 869-875 (2008), rev. denied, decided by the First District, Division Five, held that section 19717 is not the exclusive means of recovering attorney's fees in a tax refund suit. Alternatively, the successful taxpayer might be able to recoup fees if the taxpayer can satisfy the requisites of section 1021.5 (and the common fund doctrine).
Northwest's holding on this issue was followed by Division One of the same district in Ventas Finance I, LLC v. California Franchise Tax Bd., Case Nos. A116277 and A117751 (1st Dist., Div. 1 Aug. 11, 2008) (certified for publication). There, a limited liability company obtained a tax refund of $29,450 and a postjudgment award of $215,016 in attorney's fees (1.5 multiplier applied to a $143,343.75 lodestar) under section 1021.5. Division One, in a 3-0 decision authored by Justice Stein, reversed a portion of the refund order and remanded for a redetermination of fee eligibility and (if eligibility was found) amount. However, it also held that "section 19717 is not the exclusive means of obtaining attorney fees in a tax refund suit, and that fees may be awarded pursuant to Code of Civil Procedure section 1021.5, if the criteria specified therein are otherwise established," following the rationale of Northwest. (Slip Opn., at pp. 2, 29-30.) This alternative choice of fee entitlement bases was important to the winning taxpayer in Ventas Finance I, because it apparently did not file an appeal to the State Board of Equalization—a potential failure to exhaust administrative remedies that would render the taxpayer ineligible for relief under section 19717(b)(1).
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