Sklar v. Franchise Tax Board

Opinion

Today we consider whether taxpayers can obtain mandamus to compel the State Franchise Tax Board (Board) to adopt certain specific procedures to control the use of alcohol entertainment expense as a business deduction on state income tax returns. We conclude that mandamus will not lie to direct the manner in which the Board shall exercise its delegated authority to administer the state income tax laws.

Plaintiffs alleged in their amended petition that they are citizens and taxpayers of various counties in Northern California who commenced this action “individually and on behalf of all taxpayers of the State of California” for the purpose of compelling the Board “to collect income taxes lawfully due the State that have eluded collection because of the Board’s total failure to enforce provisions of the tax statutes.” Relying on various statutes (e.g., Health & Saf. Code, §§ 11760.2 & 11760.4), plaintiffs asserted that “it is the clearly defined, articulated policy of the State to promote temperance in the use and consumption of alcoholic beverages.” The Board, as an agency of the state, has an important and “affirmative role in alleviating problems related to the inappropriate use of alcoholic beverages.” Contrary wise, “there is no declared policy of the State to promote the. purchase, consumption or use of alcoholic beverages.”

According to plaintiffs, “owners, officers, partners, executives and professionals in corporations and other business organizations consume substantially all the alcohol purchased by corporations, or other business organizations, or individuals, that is subsequently deducted from state income taxes .... Said persons would reduce their consumption of alcohol if it could not be deducted on state income tax returns.”^[1] “In excess of $1,500,000,000 is annually spent in California by corporations, partnerships, unincorporated associations and other business organizations, and individuals for alcohol. Such expenditures are deducted as having a business purpose under the California income tax laws .... Said deductions reduce state collections” by approximately $216 million per year in plaintiffs’ estimation.^[2]

Citing Revenue and Taxation Code sections 17201, 24343, and 24444,^[3] plaintiffs alleged: “Alcohol is deductible on income tax returns only if it is both an ‘ordinary’ and ‘necessary’ business expense. Alcohol is neither an ordinary nor necessary business expense, because its effects are deleterious and adverse to the conduct of business” in that it “impairs business and professional judgment and befuddles the mind, reducing mental acuity, productivity and job performance.” “These effects mandate treating alcohol as unnecessary to the conduct of business, except where exceptional circumstances are documented and substantiated by the taxpayer as a prerequisite to claiming the deduction.” (Emphasis in original.) Even where expenses are “ordinary” and “necessary,” they are not deductible if they are either “personal, living, or family expenses” or if “generally considered to constitute entertainment, amusement or recreation.” “Except in rare circumstances, alcohol consumption is a personal, living or family expense” and “generally considered to be entertainment, amusement or recreation.” In plaintiffs’ view, to qualify for deduction, “the expense must be directly related to or associated with the active conduct of business, not merely ‘ordinary’ and ‘necessary.’ The connection must be affirmatively established by the taxpayer. In addition, the taxpayer must substantiate with documentary evidence the amount of the expense, the time and place, the business purpose served thereby and the business relationship to the person entertained.”

The Board “is aware that substantially all deductions taken for drinking expenses are either not ordinary business expenses, or are unnecessary for the conduct of business, or are personal and entertainment expenses improperly deducted, or are not directly connected to the active conduct of business, or cannot be adequately documented or substantiated.” In spite of having a “mandatory duty to administer and enforce the income tax laws,” the Board “has taken no action of any kind specifically in regard to taxpayers’ unlawful deductions of drinking expenses. ” Plaintiffs specifically mentioned the Board’s failure to “(a) require any form or schedule to identify individual taxpayers’ deductions of drinking expenses; (b) enforce the statutory presumptions against deductions of drinking expenses, and disallow those drinking expenses that cannot be deducted; (c) require any documentation or substantiation of drinking expenses at the time said expenses are deducted; (d) audit or investigate returns specifically for taxpayers who deduct drinking expenses; (e) promulgate any rules or regulations which define the bounds of when drinking expenses are both ordinary and necessary to the conduct of business; and; (f) carry out the duty and role it shares with other state agencies to alleviate the problems related to inappropriate alcohol use.”

Plaintiffs concluded by alleging that the Board’s “inaction” amounts to “a policy of blanket affirmance of all deductions for drinking expenses” entailing “a waste of, and injury to, public funds . . . that is harmful to the economic well-being of the State.”

In the prayer of their amended petition plaintiffs sought the following relief:

“ 1. For a judgment declaring that:

“a. expenditures made by California taxpayers for alcoholic beverages are presumed to be non-deductible, and cannot reduce any taxpayer’s gross income for the purpose of determining . . . income tax owed;

“b. commencing with the first tax year (whether calendar or fiscal) following the entry of the final order of this Court, no such deductions will be allowed, unless the taxpayer supplies documentation of the expenditure indicating the precise circumstances of the expenditure, which substantiates the exclusively business-related nature of the claimed deduction.

“2. [For] a peremptory writ of mandate . . . compelling respondent to:

“a. collect the statutory tax on all taxpayers’ gross income, reduced by such deductions as are allowed by law, but not including any expenditures made for alcoholic beverages, unless such expenditures are supported by the required documentation;

“b. immediately create and provide to all California taxpayers a document substantially similar in form and content to Appendix G[^[4] ] ... for use in the first tax year (whether calendar or fiscal) following the entry of a final order of this Court, so that taxpayers will provide to respondent all necessary information regarding the amount and justification of deductions for alcoholic beverage expenditures;

“c. immediately commence such administrative action as is necessary to prescribe such rules or regulations as are necessary to carry out the writ

The Board’s general demurrers to the amended petition were sustained by the trial court, which granted plaintiffs leave to amend. Plaintiffs elected to stand on their complaint, whereupon a judgment dismissing it was entered. This timely appeal followed.

We review the judgment according to familiar rules, with the goal of determining whether plaintiffs’ amended petition suffices to state a cause of action for mandamus.^[5] (Glaire v. La Lanne-Paris Health Spa, Inc. (1974) 12 Cal.3d 915 , 918 [ 117 Cal.Rptr. 541 , 528 P.2d 357 ]; Surina v. Lucey (1985) 168 Cal.App.3d 539 , 541 [ 214 Cal.Rptr. 509 ]; Curran v. Mount Diablo Council of the Boy Scouts (1983) 147 Cal.App.3d 712 , 719 [ 195 Cal.Rptr. 325 , 38 A.L.R.4th 607 ].) The Board’s demurrer is treated as admitting all facts properly alleged in the petition, but not contentions, deductions, or conclusions of either fact or law. (Blank v. Kirwan (1985) 39 Cal.3d 311 , 318 [ 216 Cal.Rptr. 718 , 703 P.2d 58 ]; Gruenberg v. Aetna Ins. Co. (1973) 9 Cal.3d 566 , 572 [ 108 Cal.Rptr. 480 , 510 P.2d 1032 ]; Serrano v. Priest (1971) 5 Cal.3d 584 , 591 [ 96 Cal.Rptr. 601 , 487 P.2d 1241 ].) The latter qualification means that the Board’s demurrer did not admit the truth of various argumentative allegations relative to the legal construction, operation, and effect of specified statutory provisions, as well as allegations that the Board is allowing “impermissible” and “improper” deductions and that such action is “arbitrary and capricious, contrary to law, and an abuse of discretion.” (Faulkner v. Cal. Toll Bridge Authority (1953) 40 Cal.2d 317 , 329 [ 253 P.2d 659 ]; Women Organized for Employment v. Stein (1980) 114 Cal.App.3d 133 , 135 [ 170 Cal.Rptr. 176 ]; 4 Witkin, Cal. Procedure (3d ed. 1985) Pleading, §§ 337-338, pp. 389-392.) The conclusions plaintiffs draw from the appendices attached to their petition are likewise to be disregarded. (See Weitzenkorn v. Lesser (1953) 40 Cal.2d 778 , 785-786 [ 256 P.2d 947 ]; Cohen v. Ratinoff (1983) 147 Cal.App.3d 321 , 327 [ 195 Cal.Rptr. 84 ].) Because the Board’s demurrer was not sustained without leave to amend, we do not follow the rule that “[a]lso taken as true are facts that may be implied or inferred from those expressly alleged.” (Kiseskey v. Carpenter’s Trust for So. California (1983) 144 Cal.App.3d 222 , 228 [ 192 Cal.Rptr. 492 ]; see Terhell v. American Commonwealth Associates (1985) 172 Cal.App.3d 434 , 438 [ 218 Cal.Rptr. 256 ]; Service Employees International Union v. Hollywood Park, Inc. (1983) 149 Cal.App.3d 745 , 757 [ 197 Cal.Rptr. 316 ].) Instead, it must be presumed

(1858) 9 Cal. 341 , the issue was whether mandamus would issue to compel the State Treasurer to make disbursements for judicial salaries in the absence of an appropriation by the Legislature. The Supreme Court, concluding that it would not, stated: “It is within the legitimate power of the judiciary, to declare the action of the Legislature unconstitutional, where that action exceeds the limits of the supreme law; but the Courts have no means, and no power, to avoid the effects of non-action. The Legislature being the creative element in the system, its action cannot be quickened by the other departments. Therefore, when the Legislature fails to make an appropriation, we cannot remedy that evil. It is a discretion specially confided by the Constitution to the [Legislature]. . . . We must trust to the good faith and integrity of all the departments. Power must be placed somewhere, and confidence reposed in some one.” (Id., at p. 349 [italics in original]; see California State Employees’ Assn. v. State of California (1973) 32 Cal.App.3d 103 , 109 [ 108 Cal.Rptr. 60 ].)

It may be conceded for purposes of argument that the Board has a mandatory duty to prescribe rules and regulations (see §§ 16, 19253, 26422; Women Organized for Employment v. Stein, supra, 114 Cal.App.3d 133 , 139) and that it has not done so with regard to the deductibility of alcohol-related expenditures. Notwithstanding our previous discussion as to the difficulties entailed in the discretionary exercise of this power, the Board’s failure to make any regulations might appear to present an appropriate instance to apply the rule mentioned above that mandamus would not lie because the Board would in effect have been ordered to exercise its discretion in a particular manner in order to reach a particular result. (State of California v. Superior Court, supra, 12 Cal.3d 237 , 247; Hollman v. Warren, supra, 32 Cal.2d 351 , 355; Women Organized for Employment v. Stein, supra, 114 Cal.App.3d 133 , 140.)^[6] Further, because the trial court lacked jurisdiction to order such action by the Board (Johanson v. City Council, supra, 222 Cal.App.2d 68 at p. 72), plaintiffs failed to state a cause of action in mandamus.

It is true, as plaintiffs contend, that “mandamus will lie to correct an abuse . . . occurring by virtue of a failure to exercise discretion.” (Betancourt v. Workmen’s Comp. App. Bd. (1971) 16 Cal.App.3d 408 , 413 [ 94 Cal.Rptr. 9 ].) An examination of this contention establishes that it is a