Los Angeles County Superior Court Judge Jane L. Johnson on February 23 finalized her earlier ruling that the State Board of Equalization could not hold corporate officers and shareholders personally liable for cigarette and tobacco taxes during a period of corporate suspension. The judge entered judgment in favor of the plaintiffs, ordering the BOE to pay $69,762 in refunded taxes, plus interest and legal fees. No damages were sought or awarded.
Judge Johnson also formally ruled against the BOE on all issues raised by the agency in a cross-complaint that sought $113,856 in taxes, penalties and interest. The BOE has until May 4 to file an appeal.
As reported in the December 19, 2008, issue of Cal-Taxletter, the trial involved the Santos Agency Inc., which was suspended by the FTB from 1992 to 1995 for failure to submit paperwork. The corporation continued to sell cigarettes and tobacco products during this period. The BOE never issued a "Notice of Determination" to Santos prior to the statute of limitations. Instead, the BOE attempted to collect a $69,762 tax liability from officers and shareholders, after the eight-year statute of limitations for collecting from the corporation had expired.
The plaintiffs argued that while the Legislature has explicitly imposed personal liability in connection with other types of taxes, such express authority did not exist with respect to tobacco taxes. The BOE argued that during a period of suspension, a corporation could not act, and that therefore the plaintiffs were automatically liable for the taxes since they were running the business at the time.
Judge Johnson noted that "corporations do continue to exist while they are suspended." She further noted that in United States v. Standard Beauty Supply Stores, the U.S. Court of Appeals for the Ninth District held that the responsibility for acts done in the name of a corporation remain with the corporation. In the Standard Beauty case, the court held that "any corporation which enacts business while suspended is subject to the franchise tax for the period."
"Because Defendant Board did not assess the tax against the appropriate taxpayer, Santos, prior to the expiration of the statute of limitations, no tax is owing whatsoever," Judge Johnson ruled.
The judge further ruled: "While Defendant Board contends that it has been its longstanding policy to impose personal liability on officers, directors, and shareholders of a suspended corporation … (t)his longstanding policy is based on a misinterpretation of corporate law. If Defendant Board intends to properly pursue this policy, it should seek legislative action, or at the very least, comply with the Administrative Procedures Act in order to impose personal liability properly and openly."
The case is Ashok Parmar v. California State Board of Equalization, Los Angeles County Superior Court Case No. BC379013. Attorneys for plaintiffs Ashok Parmar, Purnima Parmar and Mahinder Parmar were Marty Dakessian and Aleen L. Khanjian. Deputy Attorney General Ronald Ito represented the BOE.
Cal-Taxletter, March 6, 2009
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