Opinion ID: 1205077
Heading Depth: 2
Heading Rank: 5

Heading: is the issue of whether the entire premiums are taxable to the title insurers properly before the court?

Text: The title insurers brought this action seeking a refund of taxes assessed and paid on the claims that the underwritten title companies paid pursuant to the underwriting agreements. The Board argues that, even if its position on the claims issue is incorrect, any possible refund is offset by the fact that the insurers should have paid taxes on the full amount of the premiums received by the underwritten title companies, rather than only on the portion passed on to them by the title companies. The Board did not raise this issue in either the administrative proceedings or in its pleadings in the consolidated action. Rather, it mentioned the issue for the first time shortly before trial, when the Board's counsel informed the insurers' counsel in a telephone conversation that the Board intended to rely on the issue at trial. This conversation appears to have taken place during the time the stipulated facts were being prepared. (7a) The insurers argue that the Board could not properly raise an issue in the superior court that was not raised previously in the administrative proceedings. Alternatively, the insurers argue that, even if it was proper for the Board to raise the issue for the first time in the court action, the Board was required to plead the issue as a setoff in its answer by way of an affirmative defense. Finally, the insurers contend that the Board waived the issue when it agreed in the stipulated facts that the issue in the case concerned whether the claims paid by the underwritten title companies were taxable as income to the insurers. [6] The insurers assert that the superior court lacked jurisdiction to rule on the premiums issue since the Board failed to raise this issue in the administrative proceedings. While it is evident that the taxpayer is limited to those claims pursued in the administrative proceedings (see Rev. & Tax. Code, §§ 13102-13104), the issue of whether similar limits apply to the Board has not been previously addressed. The Board must follow certain administrative procedures when charging the taxpayer with deficiencies. These procedures are delineated in Revenue and Taxation Code sections 12421 through 12435. Under these sections, the commissioner must determine any deficiencies in the taxpayer's return and propose in writing to the Board a deficiency assessment for the difference. (Rev. & Tax. Code, § 12422.) The Board must then make a deficiency assessment on the basis of the proposal submitted by the commissioner. (Rev. & Tax. Code, § 12424.) The code then provides for prompt notice to the taxpayer of any deficiency assessment. (Rev. & Tax. Code, § 12427.) These procedures allow the taxpayer against whom a deficiency assessment is made to petition for redetermination within 30 days after notice  if no petition for redetermination is filed within 30 days, the deficiency assessment becomes final and due and payable. (Rev. & Tax. Code, § 12428.) The taxpayer is entitled to an oral hearing for the presentation of evidence and argument before the Board or its authorized representative. (Rev. & Tax. Code, § 12429.) After the order or decision of the Board upon the petition for redetermination becomes final and the resulting deficiency assessment becomes due and payable (see Rev. & Tax. Code, § 12431), the taxpayer may file an action in the superior court for a refund or credit pursuant to sections 13102 through 13108 of the Revenue and Taxation Code. By claiming that the title insurers should not receive a refund because they should have paid taxes on the total premiums paid by their insureds to the title companies, the Board is essentially assessing a deficiency against the title insurers. However, the Board is charging such a deficiency without following the above mentioned statutorily required administrative procedures. (8) Just as the taxpayer is limited to the claims it may assert in the superior court to those pursued in the administrative proceedings, the Board should be limited in its assertion of setoffs in the superior court action to those deficiency assessments formally pursued under Revenue and Taxation Code sections 12421 through 12435: `Men must turn square corners when they deal with the Government,' it is hard to see why the government should not be held to a like standard of rectangular rectitude when dealing with its citizens. (Annot., Estoppel of State or Local Government in Tax Matters (1983) 21 A.L.R.4th 573, 658, citing Comment, Hobson's Choice and Similar Practices in Federal Taxation (1935) 48 Harv. L.Rev. 1281, internal quotations omitted.) (7b) Because the deficiency assessments in this case were based not on the premiums issue but on the theory that the insurers realize income from discharge of indebtedness when underwritten title companies contribute to payment of claims, we conclude that the premiums issue was not properly before the superior court. Even if we were to determine that the Board was not limited to the issues raised in the administrative proceedings, the Board was required to raise the premiums issue in its answer in the superior court action. A setoff is generally a new matter which must be affirmatively pleaded. (See, e.g., Smith v. Norman I. Fadel, Inc. (1963) 215 Cal. App.2d 13, 16 [29 Cal. Rptr. 839]; Carranza v. Noroian (1966) 240 Cal. App.2d 481, 488 [49 Cal. Rptr. 629].) The Board argues, however, that the rule requiring setoffs to be affirmatively pleaded does not apply in this case because the insurers had the burden of proving that they were entitled to a refund. (See United States v. Janis (1976) 428 U.S. 433, 440 [49 L.Ed.2d 1046, 1052-1053, 96 S.Ct. 3021]; Jimmy Swaggart Ministries v. State Bd. of Equalization (1988) 204 Cal. App.3d 1269, 1276 [250 Cal. Rptr. 891], affd. 493 U.S. 378 (1990) [107 L.Ed.2d 796, 110 S.Ct. 688].) The Board contends that, rather than requiring it to plead the defense affirmatively, we should treat this action as in the nature of an action for money had and received ( Lewis v. Reynolds (1932) 284 U.S. 281, 283 [76 L.Ed. 293, 294-295, 52 S.Ct. 145], mod. Lewis v. Reynolds (1932) 284 U.S. 599 [76 L.Ed. 514, 52 S.Ct. 264]) and apply the pleading rules applicable to common counts. (See Interstate Group Administrators, Inc. v. Cravens, Dargan & Co. (1985) 174 Cal. App.3d 700, 706-709, and fn. 2 [220 Cal. Rptr. 250].) (9) The common count is a general pleading which seeks recovery of money without specifying the nature of the claim.... Because of the uninformative character of the complaint, it has been held that the typical answer, a general denial, is sufficient to raise almost any kind of defense, including some which ordinarily require special pleading. [Citations.] (5 Witkin, Cal. Procedure (3d ed. 1985) Pleading, § 998, p. 422, italics in original; see also Interstate Group Administrators, Inc. v. Cravens, Dargan & Co., supra, 174 Cal. App.3d at p. 706.) However, even where the plaintiff has pleaded in the form of a common count, the defendant must raise in the answer any new matter, that is, anything he or she relies on that is not put in issue by the plaintiff. [7] ( Interstate Group Administrators, supra, 174 Cal. App.3d at pp. 706-707; Carranza v. Noroian, supra, 240 Cal. App.2d 481, 484-486, 488.) (7c) The Board's attempts to analogize the pleadings required in response to the insurers' pleadings to those required in response to a complaint in the form of a common count are not persuasive. The argument ignores the fact that the insurers did not plead in the form of a common count. Thus, their complaints did not have the `uninformative character' of a common count. (See Interstate Group Administrators, Inc. v. Cravens, Dargan & Co., supra, 174 Cal. App.3d at p. 706.) The complaints made the Board aware of the precise nature of the insurers' claims; indeed, the Board was aware that the insurers could only bring their refund action on the grounds set forth in their administrative claims. (See Rev. & Tax. Code, §§ 13103 and 13104.) Therefore, the Board derives no benefit from cases holding that a general denial in response to a common count raises defenses that are otherwise required to be affirmatively pleaded. To accept the Board's position would place an unacceptable burden on taxpayers seeking refunds. As the Board notes, a refund case throws open the taxpayer's entire tax liability for the period in question ( State Bd. of Equalization v. Superior Court (1985) 39 Cal.3d 633, 641-642 [217 Cal. Rptr. 238, 703 P.2d 1131]), 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. (See Owens-Corning Fiberglas Corp. v. State Bd. of Equalization (1974) 39 Cal. App.3d 532, 535-536 [114 Cal. Rptr. 515].) If the Board is not required to plead its defenses to refund claims, taxpayers would be forced to prepare for trial and conduct discovery in ignorance of any possible setoffs or defenses the state might assert. Taxpayers cannot prepare for unknown attacks on their refund claims. The burden would be particularly severe in a case such as this, in which the Board is seeking a setoff based on the taxability of the full premium, which it had never treated as income in the past, and which the insurers could not have expected to be at issue in the case. [8] The insurers' complaints in superior court alleged facts relating to the taxation of the payment on claims made by the underwritten title companies, but did not allege facts relating to the portion of the premium fees that the underwritten title companies passed on to them or whether they paid taxes on such fees. The Board's answers did not allege that the insurers failed to pay taxes on the full amount of the premiums or that this underpayment of taxes would offset or defeat the refund claim. Nor did the Board provide specific information that would allow a court to determine whether the alleged underpayment of taxes on the premiums would in fact offset the entire amount of any refund of taxes paid on the claims payments. In sum, the Board did not raise the issue of the insurers' duty to report the full premium amounts as income. [9] Moreover, the Board stipulated before trial that the issue in the case concern[ed] whether the insurers received income from the claims paid by the underwritten title companies. (10) A court will respect a stipulation limiting the issues in a case. ( Vitale v. City of Los Angeles (1936) 13 Cal. App.2d 704, 706 [57 P.2d 993].) (7d) The Board suggests that the stipulation meant that the issue in the case concerned, but was not limited to, that issue, and that it remained free to raise other issues to defeat the refund claim. We cannot accept this strained reading of the stipulation. A plain reading suggests, rather, that the parties had agreed to limit the issues presented to the trial court and had waived all other issues. The Board should not be permitted to escape the effects of its stipulation. Therefore, because the Board failed to issue a deficiency assessment on the premiums issue, failed to raise the setoff defense in its pleadings, and because the Board agreed to limit the issues in the case, the issue of whether the entire premium amounts can be taxed as the insurers' income was never properly before the superior court.