By Zachary Atkins & Prentiss Willson

A California Court of Appeal held that a taxpayer who brought a successful facial challenge against a state taxing scheme met all of the requirements for an award of attorney fees and that the trial court abused its discretion by failing to award the fees. The taxpayer, an individual, sought a $442,000 income tax refund on the theory that Cal. Rev. & Tax. Code §§ 18038.5 and 18152.5 discriminated against interstate commerce by allowing a tax deferral on gains from the sale of qualified small business stock only if the issuing company met certain California property and payroll requirements. The statute was invalidated on Commerce Clause grounds in 2012, Cutler v. Franchise Tax Bd. (2012) 208 Cal.App.4th [146 Cal. Rptr. 3d 244]. However, on remand, the trial court determined that the taxpayer did not meet the elements of California’s “private attorney general” attorney fee statute and could not recover any part of the $685,000 in attorney fees. The appellate court disagreed, holding that the taxpayer met each of the statute’s four requirements. First, the taxpayer’s lawsuit enforced an important right (i.e., the right to operate in interstate commerce free from discrimination) that affected the public interest. Second, the lawsuit conferred a significant benefit on a large class of persons because nondiscriminatory tax statutes that incentivize investment in start-ups benefit the general public. Such investment, the court observed, grows businesses and creates jobs. Third, “the necessity and financial burden of private enforcement” made attorney fees appropriate under the circumstances, specifically, because the taxpayer’s litigation costs greatly exceeded the value of the taxpayer’s refund claim after discounting for the risk associated with obtaining the refund. The court also noted that the taxpayer’s wealth was not a legitimate consideration in determining whether attorney fees were appropriate. Fourth, justice did not require that the attorney fees be paid out of the taxpayer’s recovery.  Cutler v. Franchise Tax Bd. (Sept. 2, 2014, B248270) ___ Cal.App.4th ___ [2014 Cal. App. LEXIS 789]