Summary
finding declaratory judgment appropriate where taxpayers' future liability for income taxes depended upon statute's construction
Summary of this case from Board of Ed., Sch. Dist. 1 v. BoothOpinion
No. 27753
Decided April 16, 1979. Rehearing denied May 14, 1979.
Declaratory judgment action by taxpayers seeking to have Colorado Department of Revenue's regulation 138-1-6 declared invalid as inconsistent with surtax statute, section 39-22-106(1), C.R.S. 1973. The district court held this regulation void and director of Department appealed.
Affirmed
1. TAXATION — Undistributed Taxable Income — Corporation — Dividends — Surtax — Regulation — Void. Regulation of Colorado Department of Revenue was void insofar as it declared undistributed taxable income of Subchapter S corporation to be dividends subject to surtax.
2. DECLARATORY JUDGMENT — Rights — Affected by Statute — Determination. One whose rights are affected by a statute may have its construction or validity determined by declaratory judgment.
3. Purpose — Speedy — Inexpensive — Means — Determining — Controversies. The primary purpose of the declaratory judgment procedure is to provide a speedy, inexpensive, and readily accessible means of determining actual controversies which depend on the validity or interpretation of some written instrument or law.
4. Taxpayer's Liability — Income Taxes — Regulations — Interpretation of Statute — Purpose. Where taxpayers' liability for income taxes turns on the construction of a statute and the validity, or invalidity, of regulations purporting to interpret that statute, such case is well within the purpose of declaratory judgment.
5. Rule — Statute — Remedial — Relief From Uncertainty. Both the rule (C.R.C.P. 57(k)) and the statute (section 13-51-102, C.R.S. 1973) are remedial in nature and should be liberally construed to afford relief from uncertainty and insecurity with respect to rights, status, and other legal relations.
6. TAXATION — Declaratory Judgment — File — Correct Tax Returns — Procedure — Appropriate. Where taxpayers, without the declaratory judgment procedure would have no way of knowing how to file correct tax returns for future years, held, under such circumstances, declaratory judgment was especially appropriate.
Appeal from the District Court of El Paso County, Honorable Hunter D. Hardeman, Judge.
Murray, Baker Wendelken, for plaintiffs-appellees.
J. D. MacFarlane, Attorney General, David W. Robbins, Deputy, Edward G. Donovan, Solicitor General, Chris J. Eliopulos, Special Assistant, for defendant-appellant.
[1] The appellees-taxpayers are shareholders of Westland Theatres, Inc., a Colorado corporation, which has elected to be taxed under Subchapter S of the Internal Revenue Code, sections 1371-1379. Pursuant to C.R.C.P. 57, and sections 13-51-101, et seq., C.R.S. 1973, the taxpayers sought, in the El Paso County District Court, a declaratory judgment that the Colorado Department of Revenue's regulation 138-1-6 is invalid as inconsistent with the surtax statute, section 39-22-106(1), C.R.S. 1973. Regulation 138-1-6 purports to apply the Colorado surtax to the undistributed taxable income of Subchapter S corporations. The district court held this regulation void insofar as it declares the undistributed taxable income of a Subchapter S corporation to be dividends subject to surtax. We affirm.
[2,3] At the threshold we are met by the contention that this is not an appropriate case for a declaratory judgment. We hold that declaratory judgment is a proper remedy under these circumstances. One whose rights are affected by a statute may have its construction or validity determined by declaratory judgment. C.R.C.P. 57(b); section 13-51-106, C.R.S. 1973. The primary purpose of the declaratory judgment procedure is to provide a speedy, inexpensive, and readily accessible means of determining actual controversies which depend on the validity or interpretation of some written instrument or law. C.R.C.P. 57(k); Colorado State Board of Optometric Examiners v. Dixon, 165 Colo. 488, 440 P.2d 287 (1968); Inter-Church Temperance Movement v. Baker, 133 Colo. 398, 297 P.2d 273 (1956).
[4,5] In the instant case the taxpayers' liability for income taxes turns on the construction of a statute and the validity, or invalidity, of regulations purporting to interpret that statute. The case, therefore, is well within the purpose of declaratory judgment. Both our rule and statute are remedial in nature and should be liberally construed to "afford relief from uncertainty and insecurity with respect to rights, status, and other legal relations . . . ." C.R.C.P. 57(k); section 13-51-102, C.R.S. 1973.
The taxpayers filed their Colorado income tax returns for 1973 and 1974 showing their proportionate shares of undistributed corporate earnings as subject to regular income taxes but not subject to surtax. Even though the Department of Revenue had adopted the regulation which stated that the shareholder's proportionate share would be subject to surtax, the Director made no deficiency assessment. Because there was no assessment it was impossible for the taxpayers to settle the legal issues involved by following the statutory procedures to contest an assessment. Section 39-21-101, et seq., C.R.S. 1973.
[6] Although the taxpayers had risked substantial deficiency assessments, interest and penalties by not following the Department's regulation, without a deficiency assessment they could not contest the validity of the regulation in issue. Without the declaratory judgment procedure, they have no way of knowing how to file correct tax returns for future years. Thus declaratory judgment was especially appropriate here.
Our opinion in Cohen v. Department of Revenue, 197 Colo. 385, 593 P.2d 957 (1979) governs the substantive issue in this case, i.e., the validity of regulation 138-1-6. Following Cohen, the judgment of the district court is affirmed.
MR. JUSTICE PRINGLE does not participate.