J. H. McKnight Ranch, Inc. v. Franchise Tax Board

In 1995, the Franchise Tax Board (Board) informed the J. H. McKnight Ranch, Inc. (McKnight) that it had underpaid state taxes by approximately $97,000. McKnight protested without success, then paid the disputed tax and filed a refund claim. In discussions with McKnight, the Board reiterated the view that the tax was owed, but offered to deny the refund claim summarily so that McKnight could proceed in court. McKnight accepted the offer and filed suit.

The Board now concedes that under the contested liability doctrine, no tax was ever owed. It nevertheless suggests that because of its summary denial of McKnight’s refund claim, McKnight failed to exhaust its administrative remedies and the Board should be allowed-to retain the excess tax.

Equity does not allow such a result. The common law rule that the government could not be estopped was abandoned in California more than a century ago. Where equity requires it, as where a government agent’s actions have induced noncompliance with procedural requirements, the government may be estopped from asserting those procedural bars against a citizen’s recovery. We affirm the trial court’s grant of judgment in favor of…