Milhous

In this tax case plaintiffs and respondents paid taxes assessed by defendant and appellant Franchise Tax Board (the FTB) on income from a covenant not to compete. After paying the assessed taxes, plaintiffs brought this action for a refund. The trial court found that the covenant not to compete had no value in California and produced no income attributable to California.

For the first time on appeal, the FTB argues that because plaintiffs did not pay the interest due on the assessed taxes, as well as the taxes themselves, the trial court had no subject matter jurisdiction over plaintiffs’ case. While it is tme that in tax cases California has adopted the “pay first, litigate later” rule (see Cal. Const., art. XIII, § 32; Rev. & Tax. Code, § 19382), that rule does not govern the trial court’s subject matter jurisdiction but instead is a procedural condition on the refund remedy which, if not asserted, is waived. Thus, even if we accept the FTB’s contention that by amendment to the code the Legislature could and did include interest within the taxes which must be paid before a refund action can be commenced, the FTB may not raise this argument for the first time on…