Northern California Record

Tuesday, November 12, 2019

Appeals court reverses lower court in tax case involving limited liability companies


By Charmaine Little | Jul 29, 2018

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SAN FRANCISCO - An appeals court has refused to uphold a ruling that denied a group of limited liability companies (LLCs) the ability to sue as a class in a case involving the Revenue and Taxation Code.

Judge Timothy Reardon presided over the case on July 18, which was heard before the Court of Appeal of the State of California in the First Appellate District for Division Four. 

Acting Judge Jon B. Streeter and Superior Court Judge Ethan Schulman concurred.  

Judge Timothy Reardon | California Courts

At issue were fees paid by the LLCs to the Franchise Tax Board (FTB) for the state of California, under Section 17942 of the Revenue and Taxation Code. The payments were later ruled as unconstitutional. 

The LLCs then sought relief and requested class treatment, which the trial court denied. It also said the LLCs didn’t properly exhaust their administrative remedies. Even though the appeals court agreed with the latter portion, it believed the LLCs should have class status, so it reversed that portion of the trial court’s ruling, according to the ruing.

The appeals court first looked at ascertainability and numerosity and determined the class met requirements for both, according to the filing. 

While the trial court challenged the Claims Database as the method used for establishing the class, the appeals court pointed out each provided “reasonable means of identifying potential class members,” as well as defined the class based on characteristics.

When it comes to numerosity, the trial court first said a class has to be so large that it’s “impracticable to bring them all before the court,” according to the opinion. The appeals court agreed and said it’s clear the class size meets this requirement. It went on to say all LLCs stated they paid the unconstitutional fee and should all get a refund.

The appeals court then looked at predominance, typicality, and superiority. 

Concerning predominance, the appeals court reiterated the FTB asked for claims for the refunds, and the claims were possibly filed in response to that. 

For the typicality requirement, the appeals court said its purpose is to make sure members of the class have suffered same or similar damages. 

The appeals court said all of the LLCs had to pay the same levy and have had similar injuries since the FTB hasn’t issued a refund. 

For superiority, the appeals court said it has not been proven that establishing a class would interfere with the LLCs seeking relief individually. 

The appeals court reversed the trial court’s ruling that denied a class certification.

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