Judge: Mary H. Strobel, Case: 19STCP05426, Date: 2022-10-04 Tentative Ruling

Hon. Mary H. Strobel

The clerk for Department 82 may be reached at (213) 893-0530.

Case Number: 19STCP05426    Hearing Date: October 4, 2022    Dept: 82

            Respondents California Franchise Tax Board (“FTB” or “Board”) and Ahsan Jiddi (“Jiddi”) (collectively “Respondents”) generally and specially demur to the petition for writ of mandate of Petitioners Hollywood Bar Association (“HBA”), William W. Palmer (“Palmer”), and Brian D. Boydston (“Boydston”; collectively “Petitioners”).    

Judicial Notice

Respondents’ RJN Exhibits 1-16 – GRANTED.  No objection has been received.  Respondents submit a declaration of a custodian of records. 

Petitioners’ RJN Exhibits A-U – GRANTED as to the existence and contents of these documents.  Respondents do not object to judicial notice on that basis.

Respondents’ objections to Petitioners’ interpretation of Exhibits H and I, and to the truth of Exhibits C, S, T, and U, are SUSTAINED.  The court does not judicially notice the truth of any statements in these exhibits or the truth of any particular interpretation of these exhibits.  (See Joslin v. H.A.S. Ins. Brokerage (1986) 184 Cal.App.3d 369, 374 [“Taking judicial notice of a document is not the same as accepting the truth of its contents or accepting a particular interpretation of its meaning.”].)

Background

Franchise Tax Law

Under California law, a nonprofit corporation is not automatically exempt from franchise tax. Such exemptions are governed by Revenue and Taxation Code section 23701, which states that “[o]rganizations which are organized and operated for nonprofit purposes [specified in the tax code] . . . are exempt from taxes . . . if both of the following occur: (1) An application for exemption is submitted in the form prescribed by [FTB]. (2) [FTB] issues a determination exempting the organization from tax.” (Rev. & Tax Code § 23701(a).) Thus, a nonprofit corporation “is technically not tax-exempt unless and until the forms are submitted, the fee paid, and the determination issued by the FTB.” (Friends of Shingle Springs Interchange, Inc. v. Cty. of El Dorado (2011) 200 Cal.App.4th 1470, 1496.) Once FTB issues an exemption determination, “the organization cannot be made to pay taxes for the period during which it is determined to have been exempt therefrom.” (Id. at 1497.)

“Any taxpayer which has suffered the suspension or forfeiture provided for in Section 23301 or 23301.5 may be relieved therefrom upon making application therefor in writing to the Franchise Tax Board and upon the filing of all tax returns required under this part, and the payment of the tax, additions to tax, penalties, interest, and any other amounts for nonpayment of which the suspension or forfeiture occurred, together with all other taxes, additions to tax, penalties, interest, and any other amounts due under this part, and upon the issuance by the Franchise Tax Board of a certificate of revivor.”  (Rev. & Tax. Code § 23305.)

Any corporation whose nonprofit exemption has been revoked must reapply for exemption. (Rev. & Tax. Code § 23778(a)(1).)  

Before FTB may grant a certificate of revivor, the corporation must first file all delinquent returns and pay all taxes, interest, and penalties due, including the minimum franchise tax if the corporation is not exempt. (Rev. & Tax. Code, §§ 23305, 23776.)  As an exception to the requirement that the corporation pay in full all amounts due, FTB has discretionary authority to grant revivor “if it determines that the revivor will improve the prospects for collection of the full amount due.” (Id., § 23305b.)  As a condition to granting revivor prior to payment in full, FTB may require the taxpayer to furnish “an assumption of liability, or a bond, deposit, or other security for taxpayer’s liability.” (Id., § 23305.2.)

HBA’s Application for Tax-Exempt Status, Request for Revivor, and Related Proceedings

            HBA was formed in 1938 and was active until about April 3, 1972.  (Third Amended Petition (“TAP” ¶ 19.)  Petitioner was “a not-for-profit business entity overseen by the California Attorney General throughout that time period.”  (Ibid.)  According to its original Articles of Incorporation, HBA’s primary purpose was “[t]o promote the administration of justice; advance the science of juris prudence; uphold the honor of the profession of Law; encourage cordial intercourse among its members and to correlate its activities with those of the State Bar of California and the American Bar Association in the interest of the Legal Profession and for the public welfare.”  (Ibid.) 

The two attorneys representing Petitioner in this action—William W. Palmer and Brian D. Boydston—are also Petitioner’s co-petitioners in this action. (TAP ¶¶ 5-6.) Palmer is Petitioner’s current Chief Executive Offer (CEO), and Boydston is Petitioner’s former CEO. (Ibid.; id. at p. 27.)

“On or about September 16, 2014, the HBA filed Form No. 3500 with the FTB to revive this corporation as nonprofit.”  (TAP ¶ 21.)  According to the application, HBA was “being reactivated solely for the purposes of concluding business.” (Resp. RJN Exh. 1 at 9.) HBA was not currently or planning to conduct activities, but instead “intend[ed] to marshal its assets, which includes unclaimed property, and pay off any liabilities.”  (Id. at 14.)

On or about October 14, 2014, FTB sent a letter to Petitioner requesting documentation substantiating HBA’s nonprofit operations.  The letter explained: “An organization must be ORGANIZED and OPERATED for exempt purposes to be granted an exemption from tax. An inactive organization is not entitled to exemption. If you have been operating but have not had any financial activity, provide documentation substantiating operations during the years for which you are requesting exemption, specifically 1972 to current. For example, board of director meeting notes detailing actions taken, correspondence in pursuit of your primary purpose, explanation of research undertaken related to securing grants, copies of rental or sales contract securing a location, employment or volunteer agreements for individuals working for your organization, publications announcing upcoming events your organization held, etc.”  (Resp. RJN Exh. 2; TAP ¶ 44(b).)

On May 12, 2015, FTB denied HBA’s application.  (TAP ¶ 40, Exh. E.)  Respondent Ahsan Jiddi and Ronald Maddox signed the denial letter on behalf of FTB.  (Ibid.) In its denial letter, FTB cited to Title 18, California Code of Regulations section 23701 (Regulation 23701), which governs exemption applications under section 23701. (Id., Ex. E at p. 3.) FTB’s letter explained that HBA had “not provided any supporting documents to show activity for years 1972 and after.” (TAP Exh. E.) In addition, FTB referenced HBA’s statement in its application and correspondence that the sole purpose of reactivating the corporation was to collect money that was owed to HBA and to wind down its affairs.  Because FTB found that HBA failed to show that it was in operation and operated for its purported nonprofit purposes in the years for which it sought an exemption, FTB denied HBA’s application for tax-exempt status.  (Ibid.) 

On January 14, 2016, Palmer sent FTB a request for public records under the California Public Records Act (“CPRA”), which sought documents and information relating to FTB’s requirements for nonprofit/tax-exempt status under section 23701 (the “CPRA Request”).  (SAP Exh. A.)  In connection with the CPRA Request, Palmer was put in contact with FTB Tax Counsel IV, Dennis Haase.  (Resp. RJN Exh. 7 at 89.)

On May 2, 2016, Palmer sent an email to Haase and other FTB employees suggesting the possibility that FTB grant “discretionary revivor” to HBA so that it could collect unclaimed funds before paying the taxes owed to FTB.  Palmer’s email stated, inter alia: “We suggest that this case is a perfect candidate for discretionary revivor. Once the Hollywood Bar Association is granted the revivor, its Board will submit executed documents and claim forms for the release of the suspended funds. Recovery time should be approximately six (6) months, with the value of the subject property, which is most likely between $300,000 to $400,000, more than enough to cover the outstanding tax liability and to help fund nonprofit activities. Once revived, these funds will allow for the payment of all … of the outstanding taxes. The Hollywood Bar Association will consent to the FTB (or Department of Corporations) placing a lien on the subject property, which is the only asset of the Hollywood Bar Association, in order to secure repayment of the delinquent corporate taxes, as determined by the FTB.”  (Resp. RJN Exh. 7 at 82-83; TAP ¶ 44(o).) 

In the demurrer, Respondents state that “on June 7, 2016, Palmer filed an Application for Certificate of Revivor – Corporation (Form 3557) signed by HBA’s Chief Financial Officer (CFO) Patrick Michela, requesting relief from HBA’s suspension.”  (Dem. 12:12-15, citing Resp. RJN Exh. 9 at 129.)  Respondents rely on FTB’s Accounts Receivable Collections System (ARCS) Case Transcript for Petitioner HBA’s account, which was authenticated by a custodian of record of FTB.  The ARCS transcript states, in pertinent part: “Received package from William Palmer (POA) that included: FTB 3557 signed by Patrick Michela (CFO) on 05/31/16.”  (Resp. RJN Exh. 9 at 129.) 

In contrast with these judicially noticeable records and also the guarantee discussed below, Petitioners allege that they “never filed Form FTB 35507 [sic] entitled ‘Application for Certificate of Revivor – Corporation’ for revivor of the HBA as ‘a taxable entity.’”  (TAP ¶ 23; see also Id. ¶ 31, fn. 3.) 

On or about July 21, 2016, Petitioner Palmer submitted to Haase and FTB, by email, a signed “Franchise Tax Board … Guarantee”.  The guarantee is attached to the TAP as Exhibit F.  This guarantee provides as follows:

I, William W. Palmer am the president of the Palmer Law Group, a professional law corporation, which is the attorney for the Hollywood Bar Association (“HBA” or “Corporation”), and I have the legal authority to personally guarantee the following:

1. The Hollywood Bar Association, a non-profit corporation, believes in good faith that it is the true owner of assets that are being held in the custody of the State Controller’s Office (“SCO”) Unclaimed Property Division. If the Franchise Tax Board (“FTB”) grants a discretionary revivor to the HBA, the HBA agrees to file claim(s) with the SCO to recover the assets. Concurrently with the SCO claim filing, HBA will immediately provide copies of the claim form(s), which are verified under penalty of perjury by the President of the Corporation to the FTB. The SCO claim forms will designate our law firm address as the location where any payment is to be received from the SCO.

2. Once we receive the payment from the SCO on behalf of our client the HBA, our firm will deposit the payment in our law firm’s attorney-client trust account, we will provide all information to the FTB regarding the firm’s attorney-client trust account, along with a copy of the client instructions for payment of all taxes owed in favor of the FTB, and to pay FTB the lesser of the amount it receives from the SCO, or the balance due of any taxes, penalties and interest as of that date, as directed by the FTB.

3. If the Corporation is either unsuccessful in recovering the assets from the SCO, or does not pay the balance due to the FTB, we understand that the FTB may suspend the Corporation for failing to comply with this agreement.

4. Ultimately the Palmer Law Group and I are responsible for mechanics of this transaction and the initial handling of funds, and should we and/or the Corporation recover assets from the SCO, but fail to pay the FTB the lesser of the balance due or the value of the assets recovered from the SCO, then both the Palmer Law Group and I will be personally responsible for and will assume the Corporation’s tax liability for the transaction up to the value of the assets that were received by the Corporation from the SCO that were not paid to FTB.

(TAP ¶¶ 10, 44(r) and Exh. F.)[1]

In or about August 2016, FTB issued a “Certificate of Revivor” to Petitioner HBA.  (TAP ¶¶ 31, 44(t); see also Resp. RJN Exh. 9 at 127-128 and Exh. 12.)  Petitioners characterize the revivor of HBA as follows: “FTB did an astounding thing. Rather than simply let the HBA remain dormant and inactive based upon this arbitrary and capricious refusal to revive the HBA in its non-profit status, on its own the FTB declared the HBA ‘revived,’ but as a for-profit entity, and on the basis of this mysterious ‘for profit revivor,’ then processed the imposition of 40-years’ worth of back corporate taxes against the re-incorporators and the guarantor.”  (TAP ¶ 31.)

Starting in 2016, FTB began to issue tax bills to Petitioners.  (TAP ¶ 44(w)-(cc); see Pet. RJN Exh. H, I.)  The parties characterize the amount of the tax liability differently, an issue this court need not and does not decide for this demurrer.  (See Dem. 13; Pet. RJN Nos. 8 and 9; Objection to Pet. RJN.)  As relevant here, it is undisputed that Petitioners have not paid all taxes assessed and claimed due by FTB. 

HBA’s corporate powers were suspended in 2018 for failure to pay taxes.  (Resp. RJN in support of Dem. to SAP Exh. 1, 2; see also Resp. RJN in support of Dem. to TAP Exh. 12.) 

On April 2, 2019, FTB issued Notices of Proposed Assessment to Petitioner Boydston, providing notice of FTB’s intent to assess HBA’s remaining tax liability against Boydston as transferee of HBA’s assets pursuant to Revenue and Taxation Code sections 19071-19074. (TAP ¶ 44(cc), Exh. G.)

On May 31, 2019, Petitioner Palmer sent a letter to FTB’s Protest Section.  The protest was made on behalf of HBA and attempted to challenge FTB’s Final Denial of HBA’s application for tax exemption. (TAP ¶ 44(dd), Exh. D.)

On June 27, 2019, FTB issued Notices of Action on Proposed Assessment affirming the proposed assessment against Boydston as transferee for HBA’s unpaid taxes. (TAP ¶ 44(ee); Resp. RJN Exh. 10.)  The notices stated that FTB’s “records indicate that Brian D Boydston withdrew $71,500.00 of company assets in the 2016 tax year, and this withdrawal left the Corporation unable to fulfill its tax obligation. You have provided no evidence to refute this position.”  (Resp. RJN Exh. 10.)  The notices stated that if Boydston disagreed with the action, he could file an appeal with the Office of Tax Appeals within 30 days.  (Ibid.) 

On July 24, 2019, an appeal was submitted to the Office of Tax Appeals (“OTA”).  On August 15, 2019, Petitioners received an “OTA letter … detailing Appeal cannot be processed because the Respondent FTB contacted the OTA and informed the OTA that the corporation is suspended.”  (TAP ¶ 44(ff) and (gg).) 

Writ Proceedings

            On December 12, 2019, Petitioners filed the original petition for writ of mandate.

            On November 12, 2020, Petitioners filed the first amended petition for writ of mandate and a complaint for declaratory relief and for relief under 42 U.S.C. section 1983 (“FAP”). 

            On September 2, 2021, after a hearing, the court sustained with leave to amend Respondents’ special and general demurrers to the petition for writ of mandate.  The court did not rule on the demurrer to the first and second causes for declaratory relief and violation of the Fifth and Fourteenth Amendments pursuant to 42 U.S.C. section 1983. The court stayed these causes of action pending resolution of the writ causes of action. (LASC Local Rules 2.8(d) and 2.9.)

On September 28, 2021, Petitioners filed the second amended petition for writ of mandate and a complaint for declaratory relief and for relief under 42 U.S.C. section 1983 (“SAP”). 

On February 22, 2022, after a hearing, the court sustained Respondents’ demurrer without leave to amend to the petition under the California Public Records Act.  The court sustained the demurrer with leave to amend as to the petition seeking to compel FTB to characterize HBA as a tax-exempt entity.

On March 15, 2022, Petitioners filed the operative, third amended petition. 

On May 16, 2022, Respondents filed a demurrer to the TAP, motion to strike, and meet and confer declaration.  The court has received Petitioners’ oppositions and Respondents’ replies.

Analysis

A demurrer tests the sufficiency of a pleading, and the grounds for a demurrer must appear on the face of the pleading or from judicially noticeable matters.  The demurrer admits all material facts properly pleaded.  (CCP 430.30(a); Blank v. Kirwan (1985) 39 Cal.3d 311, 318.)  “A demurrer tests the pleadings alone and not the evidence or other extrinsic matters.”  (Hahn v. Mirda (2007) 147 Cal.App.4th 740, 747.) 

Petition for Writ of Mandate to Compel Tax-Exempt Status of HBA and Related Writ Relief

            In the TAP, Petitioners seek a writ of mandate directing FTB “to categorize HBA as a non-profit entity” and “revive HBA as a non-profit corporation.”  (TAP pp. 23-24.)   As Respondents point out, whether a corporation is a nonprofit or for-profit entity depends on how it is organized and operated; it does not depend on an FTB determination. (Dem. 18, fn. 7; see Resp. RJN Exh. 13 [“Nonprofit Does Not Mean Tax-Exempt”]; Friends of Shingle Springs Interchange, Inc. v. Cty. of El Dorado (2011) 200 Cal.App.4th 1470, 1496 [same].)  Petitioners fail to address this point in opposition.  The court interprets these prayers for relief as seeking a writ to compel FTB to characterize HBA as tax-exempt, rather than as a “non-profit corporation.”  (See Rev. & Tax Code § 23701.)

For the first time in the TAP, Petitioners also seek writs (1) “invalidating Respondent’s revival of HBA as a for-profit corporation”; (2) “invalidating the FTB’s imposition of retroactive corporate taxes on HBA for the time period during which HBA was inactive, from April 3, 1972 forward to the present”; and (3) “ordering the FTB to refund the funds seized from various HBA accounts including the Unclaimed Property Account held in the name of the HBA and the private bank account on the basis that the HBA is a for-profit bar association.”  (Ibid.)

            HBA’s Capacity to Sue

Respondents contend that HBA is a suspended corporation and therefore lacks capacity to sue to compel Respondent to grant HBA tax-exempt status or seek any other writ relief.  (Dem. 16.)  CCP section 430.10(b) states that a special demurrer may be brought on the grounds that “the person who filed the pleading does not have the legal capacity to sue.” 

The “corporate powers, rights and privileges” of any domestic corporation may be suspended for failure to pay taxes. (Rev. & Tax. Code § 23301.) A corporation whose powers have been suspended “lacks the legal capacity to prosecute or defend a civil action during its suspension.” (Casiopea Bovet, LLC v. Chiang (2017) 12 Cal.App.5th 656, 662.) Once the delinquent taxes are paid, the corporation’s powers are restored, “reviving” its capacity to sue and defend. (See Rev. & Tax. Code § 23305a.)

As the court ruled for the prior demurrers, HBA’s corporate powers have been suspended since 2018 for failure to pay taxes.  (Resp. RJN in support of Dem. to SAP Exh. 1, 2; see also Resp. RJN in support of Dem. to TAP Exh. 12.)  Petitioners have not alleged any change in HBA’s status in the TAP.  Absent some exception to the rule stated in Casiopea, HBA’s failure to pay its delinquent taxes precludes it from bringing suit.

In opposition, Petitioners argue in a heading that “Petitioners Have Capacity and Standing to Bring this Action,” without any explanation or argument about how HBA has legal capacity to sue notwithstanding its suspended status.  (Oppo. 10.)  By failing to make argument, Petitioners concede the point.  (See Sehulster Tunnels/Pre-Con v. Traylor Brothers, Inc. (2003) 111 Cal.App.4th 1328, 1345, fn. 16 [failure to address point is “equivalent to a concession”].)  Petitioners have failed to show legal capacity of HBA to sue in opposition to three demurrers.  Petitioners have no probability of successful amendment with respect to HBA.  Accordingly, leave to amend with respect to HBA will be denied.

            The special demurrer to the writ petition of HBA for lack of legal capacity to sue is SUSTAINED WITHOUT LEAVE TO AMEND. 

Court’s Jurisdiction; Exhaustion of Administrative Remedies; and Injunction Against Collection of a Tax

            Respondents contend Petitioners’ petition seeking to compel FTB to characterize HBA as a tax-exempt entity and related writ relief constitutes a prepayment challenge to HBA’s tax liability, and that the court lacks jurisdiction over such claims.  (Dem. 16-19.)  The argument has merit, and Petitioners fail to respond persuasively in opposition. 

“[T]he sole legal avenue for resolving tax disputes is a postpayment refund action.  A taxpayer may not go into court and obtain adjudication of the validity of a tax which is due but not yet paid.” (State Bd. of Equalization v. Superior Court (1985) 39 Cal.3d 633, 638.) The California Constitution allows a judicial challenge to a tax liability only after the tax has been paid in full and the taxpayer has followed the procedures specified by the legislature for seeking a tax refund. (Cal. Const., art. XIII, § 32 [“No legal or equitable process shall issue . . . to prevent or enjoin the collection of a tax. After payment of a tax claimed to be illegal, an action may be maintained . . . in such manner as may be provided by the Legislature.”]; Rev. & Tax. Code § 19381 [same].)  The Revenue and Taxation Code requires that a taxpayer both pay the disputed tax and complete an administrative claim for refund before seeking judicial review. (Rev. & Tax. Code § 19382 [refund action available “after payment of the tax and denial by the Franchise Tax Board of a claim for refund”]; Shiseido Cosmetics (Am.) Ltd. v. FTB (1991) 235 Cal.App.3d 478, 488.)

The prohibition against prepayment judicial action applies to suits for injunctive relief, as well as actions for declaratory relief or mandamus. (Calfarm Ins. Co. v. Deukmejian (1989) 48 Cal.3d 805, 838.) Significantly here, the prohibition against prepayment judicial action applies where the relief sought would have the effect of restraining assessment and the collection of tax, regardless of how the action is framed. (First Aid Services of San Diego v. CUIAB (2006) 133 Cal.App.4th 1470, 1480- 1481 [medical staff registry precluded from challenging decision that EMT was employee prior to payment of unemployment contribution]; California Logistics, Inc. v. State of California (2008) 161 Cal.App.4th 242 [section 32 barred claim for declaratory relief relating to  determination by agency that delivery drivers used by company were employees rather than independent contractors, which determination resulted in additional tax liability].) 

Here, Petitioners allege that “[t]he instant action was triggered by the FTB’s failure and steadfast refusal to acknowledge prior non-profit standing and the inability of Petitioners to receive revivor as a non-profit business entity.” (TAP ¶ 12.)  Petitioners seek “to properly caption HBA as a non-profit business entity so that the lawyers and non-lawyers may serve the public without fear of being taxed.”  (Id. ¶ 15.)  Petitioners seek a writ of mandate directing FTB “to categorize HBA as a non-profit entity.”  (TAP pp. 23-24.)  In the writ petition, Petitioners challenge and seek to reverse FTB’s denial of an application for tax-exempt status.   As noted, Petitioners also now seek writs (1) “invalidating Respondent’s revival of HBA as a for-profit corporation”; (2) “invalidating the FTB’s imposition of retroactive corporate taxes on HBA for the time period during which HBA was inactive, from April 3, 1972 forward to the present”; and (3) “ordering the FTB to refund the funds seized from various HBA accounts including the Unclaimed Property Account held in the name of the HBA and the private bank account on the basis that the HBA is a for-profit bar association.”  (TAP pp. 23-24.) 

All of these requested remedies would have the effect of restraining assessment and the collection of tax or would require this court to order a tax refund.  Because “granting the relief sought would have the effect of impeding the collection of a tax,” these writ claims are barred by section 32. (California Logistics, Inc., supra, 161 Cal.App.4th at 248.)  Petitioners do not allege that they have exhausted administrative remedies or paid the disputed taxes.  Moreover, the writ petition is not a tax refund action. 

In the TAP, Petitioners allege a new legal theory.  They contend that FTB unilaterally “declared the HBA ‘revived,’ but as a for-profit entity, and on the basis of this mysterious ‘for profit revivor,’ then processed the imposition of 40-years’ worth of back corporate taxes against the re-incorporators and the guarantor.”  (TAP ¶ 31.)  Petitioners seem to raise a claim of arbitrary, capricious, or unauthorized action by FTB. 

These allegations conflict with Petitioners’ own exhibits and the judicially noticeable record and do not plead an excuse from section 32 and the doctrine of exhaustion of administrative remedies.  Judicially noticeable records, the timeline alleged at paragraph 44 of the TAP, and exhibits to the TAP, including the guarantee signed by Petitioner Palmer, show that FTB revived HBA because Petitioner HBA requested “discretionary revivor” and submitted an application to FTB to be revived.  These same records show that Petitioner HBA agreed to pay its tax liability upon revivor and Palmer guaranteed HBA’s payment of the taxes.  (See Resp. RJN Exh. 7-9; TAP ¶ 44; TAP Exh. F.) 

Petitioners have not objected to Respondents’ request for judicial notice.  Nor does the TAP or opposition dispute that Palmer wrote FTB on May 2, 2016, and stated: “We suggest that this case is a perfect candidate for discretionary revivor. Once the Hollywood Bar Association is granted the revivor, its Board will submit executed documents and claim forms for the release of the suspended funds…. Once revived, these funds will allow for the payment of all … of the outstanding taxes.”  (Resp. RJN Exh. 7 [bold italics].)  On or about July 21, 2016, Petitioner Palmer submitted to FTB a signed “Franchise Tax Board … Guarantee” indicating that HBA was requesting “discretionary revivor” and would pay back taxes due to FTB.  (TAP ¶¶ 10, 44(r), Exh. F.)  Palmer agreed to “assume the Corporation’s tax liability for the transaction up to the value of the assets that were received by the Corporation from the SCO that were not paid to FTB.”  (Ibid. [bold italics added].)  These judicially noticeable records and facts alleged in the TAP completely undermine Petitioners’ claim that FTB unilaterally and improperly revived HBA.  (Gentry v. eBay, Inc. (2002) 99 Cal.App.4th 816, 824 [on demurrer, “any allegations that are contrary to the law or to a fact of which judicial notice may be taken will be treated as a nullity”].)

In their claim of improper revivor, Petitioners seem to misapprehend the franchise tax law as applied to HBA.  HBA was liable for the minimum franchise tax for the years HBA was inactive, just like any other non-exempt corporation. (Rev. & Tax. Code, § 23153; Cal. Code Regs., tit. 18, § 23151.) FTB had no obligation to treat HBA as an exempt entity, notwithstanding its incorporation as a nonprofit, because a nonprofit corporation “is technically not tax-exempt unless and until . . . the [tax-exempt] determination [is] issued by the FTB.” (Friends of Shingle Springs Interchange, Inc. v. Cnty. of El Dorado (2011) 200 Cal.App.4th 1470, 1496; Rev. & Tax. Code, § 23701; see Resp. RJN, Exh. 13 [“nonprofit does not mean tax-exempt”; “[a]ll corporations even if organized on a nonprofit basis, are subject to California corporation franchise tax or income tax until [FTB] grants tax-exempt status to the organization”].)  Thus, once HBA applied for discretionary revivor, as the TAP concedes that it did, a consequence of such action would be tax liability to HBA if FTB declined to grant tax-exempt status for past years.  FTB did not grant tax-exempt status to HBA, and Petitioners challenge that determination in this writ action in violation of section 32 and the doctrine of exhaustion of administrative remedies. 

Petitioners allege that they “never filed Form FTB 35507 [sic] entitled ‘Application for Certificate of Revivor – Corporation’ for revivor of the HBA as ‘a taxable entity.’”  (TAP ¶ 23; see also Id. ¶ 31, fn. 3.)  That allegation conflicts with the judicially noticeable record and the guarantee signed by Palmer.  (Resp. RJN Exh. 9 at 129 and TAP Exh. F.)  Petitioners have not alleged sufficient facts to support a theory that HBA did not apply for discretionary revivor, despite the contrary statements in Palmer’s May 2, 2016, email and July 21, 2016, guarantee.  In ruling on demurrer, the court cannot ignore the undisputed judicially noticeable record and exhibits to Petitioners’ TAP that conflict with Petitioners’ allegations.  (Gentry v. eBay, Inc. (2002) 99 Cal.App.4th 816, 824.)  While the ARCS Transcript appears to be a reliable, official record, to which Petitioners have not objected, the court need not rely on statements in the ARCS Transcript to rule on the demurrer in light of other statements showing that HBA applied for revivor.  (Resp. RJN Exh. 9; see Id. Exh. 7-8 and TAP Exh. F.)  

In opposition, Petitioners fail to address section 32 or the cases discussed above.  (Oppo. 10-15.)  Instead, Petitioners contend “[a] party is not required to exhaust the available administrative remedies when those administrative procedures are the very source of the asserted injury.”  (Oppo. 14.)  Petitioners acknowledge that “[t]his rule is merely another facet of the inadequate administrative remedy exception to the exhaustion rule.”  (Ibid.) 

As the court ruled for the prior demurrer, exceptions to the exhaustion doctrine do not apply here because “the constitutional source of legislative power to control tax refund suits require[s] strict adherence to the administrative procedures set forth by the Legislature before a court action could be filed.” (Shiseido Cosms. (Am.) Ltd. v. Franchise Tax Bd. (1991) 235 Cal.App.3d 478, 488, citing Patane v. Kiddo (1985) 167 Cal.App.3d 1207.)  As the Court of Appeal has explained:

The doctrine of exhaustion of administrative remedies was evolved by the courts to promote comity between coequal branches of government and to relieve overburdened courts from the need to deal with cases where effective administrative remedies are available…. The judicially developed rule and, perforce, its exceptions, have no application to an action to recover a tax paid. Although exhaustion of administrative remedies is prerequisite to such an action, it is compelled not by the judicially created doctrine of comity and convenience but by the constitutional grant of power to the Legislature to prescribe the manner of proceeding in such cases…. We are not at liberty to alter the constitutionally authorized process by engrafting onto it exceptions borrowed from the judicially fashioned doctrine of exhaustion of administrative remedies. The authority to make such changes is confided in the Legislature by article XIII, section 32, of the Constitution, a provision which, we have recently been reminded by our high court, ”means what it says.”  (Patane, supra, at 1214.) 

In opposition, Petitioners fail to address Shiseido, Patane, or other published cases holding that exceptions to the exhaustion doctrine do not apply to actions seeking a refund of taxes or that challenge a tax liability.  None of the cases Petitioners cite in their opposition involve a challenge to a tax liability or implicate section 32, so they are inapposite.  (Oppo. 13-14.) 

While unclear, Petitioners seem to argue that allegations of “discriminatory” conduct by FTB, Jiddi, and Maddox constitute an excuse from the exhaustion requirement and confer jurisdiction for a prepayment judicial action.  (Oppo. 14.)  Petitioners cite no authority in support of that proposition.  Even if Petitioners’ discrimination allegations were relevant to the writ petition, that would not change the effect of the writ petition – Petitioners seek a ruling with respect to an administrative decision of FTB that would have the effect of impeding the collection of a tax.

The special demurrer for lack of jurisdiction and general demurrer for failure to pay the disputed taxes or exhaust administrative remedies is SUSTAINED WITHOUT LEAVE TO AMEND with respect to the petition seeking to compel FTB to characterize HBA as tax-exempt and related writ relief.  (See TAP, Prayer ¶¶ 1-6.) 

Elements of CCP Section 1085

Respondents contend that the TAP alleges “no facts showing that HBA satisfied the requirements for nonprofit status under section 23701 and Regulation 23701 or otherwise refuting FTB’s determination that HBA’s application failed to show it was in operation for its purported nonprofit purposes in the years for which it sought an exemption.”  (Dem. 20.)  Respondents contend that “[w]rit relief is also not available to challenge the validity of HBA’s tax liability because petitioners have a remedy at law—a claim for refund followed by a suit for refund.”  (Ibid.) 

There are two essential requirements to the issuance of an ordinary writ of mandate under Code of Civil Procedure section 1085: (1) a clear, present, and ministerial duty on the part of the respondent, and (2) a clear, present, and beneficial right on the part of the petitioner to the performance of that duty. (California Ass’n for Health Services at Home v. Department of Health Services (2007) 148 Cal.App.4th 696, 704.) “An action in ordinary mandamus is proper where … the claim is that an agency has failed to act as required by law.” (Id. at 705.)  Moreover, “it has long been established as a general rule that the writ will not be issued if another such remedy was available to the petitioner. . . . The burden, of course, is on the petitioner to show that he did not have such a remedy.” (Phelan v. Superior Court (1950) 35 Cal.2d 363, 366.)

While the TAP seeks a writ of mandate compelling FTB to characterize HBA as a tax-exempt entity, it does not include a separately numbered cause of action alleging the grounds for that relief under section 1085, as required by Court Rule.  (See TAP ¶¶ 16-60; Cal. Rules of Court, Rule 2.1112.)  This method of pleading makes it difficult for the court and Respondent to determine the grounds upon which Petitioners challenge FTB’s decision.  In its ruling on the demurrers to the FAP and SAP, the court instructed Petitioners to clearly and separately label and number each cause of action for writ of mandate.  Petitioners did not do so. 

The court agrees with Respondents that the TAP alleges no facts showing that HBA satisfied the requirements for tax-exempt status under section 23701 and Regulation 23701 or otherwise refuting FTB’s determination that HBA’s application failed to show it was in operation for its purported nonprofit purposes in the years for which it sought an exemption. (See TAP ¶¶ 16-60.) 

Petitioner HBA also has a sufficient remedy at law in a tax refund action.  Petitioner HBA has not pleaded any reason that its challenges to the FTB tax-exempt determination could not be raised in the administrative process and then in an action for tax refund.  When an action’s legality may be tested in a tax refund suit, there is an adequate remedy at law and, therefore, writ relief is not available. (Schoderbek v. Carlson (1980) 113 Cal.App.3d 1029, 1037–38, disapproved on other grounds in Woosley v. State of California (1992) 3 Cal.4th 758.) “Because the remedy at law is deemed to be adequate, courts have refused to order mandamus relief even though the taxpayer’s underlying claim is found to have merit.” (Nast v. State Bd. of Equalization (1996) 46 Cal.App.4th 343, 347 [affirming dismissal without leave to amend petition for writ challenging tax assessments where petitioner paid the taxes but missed the statutory deadline to file a tax refund action; “this does not mean the remedy of a refund action is inadequate; it simply means [petitioner] failed to timely pursue it”].)

Because this writ cause of action is defectively pleaded for other reasons, the court need not determine whether Petitioners have alleged sufficient grounds for writ relief under section 1085 as a result of allegedly discriminatory statements by Maddox or Jiddi.  (TAP ¶¶ 35-40.) 

The special and general demurrers to the petition for writ of mandate seeking to compel FTB to characterize HBA as a tax-exempt entity and related writ relief are SUSTAINED WITHOUT LEAVE TO AMEND. (See TAP, Prayer ¶¶ 1-6.) 

Petition for Writ of Mandate Ordering FTB to Cease Efforts to Collect Money from “Unrelated 3^rd Parties Who Did Not Guarantee the Taxes of the HBA as a For-Profit Business Entity” 

For the first time in the TAP, Petitioners now seek a writ directing FTB “to cease efforts to collect money from unrelated 3rd parties who did not guarantee the taxes of the HBA as a for-profit business entity.”  (TAP Prayer ¶ 7.)  It appears that this prayer refers to claims of Petitioners Palmer and Boydston that FTB has improperly sought to levy taxes of HBA against them individually.  (TAP ¶¶ 10-11.) 

Petitioners Palmer and Boydston allege that FTB began to pursue back taxes of HBA against them after FTB “arbitrarily revived the HBA as a ‘for-profit’ business entity.”  (TAP ¶ 10.)  For the same reasons discussed above, this legal theory that FTB revived HBA arbitrarily is completely undermined by the judicially noticeable record and exhibits to the TAP.  (See Resp. RJN Exh. 7-9; TAP ¶ 44; TAP Exh. F.)  Furthermore, Petitioners confuse the non-profit status of a corporation as a business entity with a determination by FTB of tax-exempt status.  As discussed, a nonprofit corporation “is technically not tax-exempt unless and until . . . the [tax-exempt] determination [is] issued by the FTB.” (Friends of Shingle Springs Interchange, Inc. v. Cnty. of El Dorado (2011) 200 Cal.App.4th 1470, 1496; Rev. & Tax. Code, § 23701.)  In this writ action, Petitioners challenge FTB’s determination to not grant tax-exempt status to HBA in violation of section 32, as discussed above. 

In opposition, Petitioners contend that “[a]n administrative tax hearing will not remedy the unconstitutional misconduct” against Petitioners Palmer and Boydston.  (Oppo. 10.)  Petitioners contend that “a target of unconstitutional misconduct does not need to wait until his Constitutional rights are violated before enjoining the prohibited action” and “Petitioners Palmer and Boydston do not need to wait until their bank accounts are seized to pay for the HBA’s back taxes.”  (Oppo. 12, citing Ex parte Young, 209 U.S. at 159-160 (1908).)  These contentions are not persuasive.  Palmer and Boydston have the same rights as every other taxpayer in California: they can pay the taxes, exhaust their administrative remedies, and file a suit for refund. (Rev. & Tax. Code, § 19382.) Palmer and Boydston do not explain why their rights would be any different for tax assessments brought against them individually based on a guarantee or as a transferee of HBA’s assets.  Ex parte Young has no apparent relevance to Respondents’ argument that Petitioners must pay the disputed taxes and exhaust administrative remedies before filing a petition to compel FTB to characterize HBA as a tax-exempt entity or other to enjoin FTB from collecting a tax.

In the TAP, Petitioners do not dispute that Palmer signed a guarantee in which he agreed to “assume the Corporation’s tax liability for the transaction up to the value of the assets that were received by the Corporation from the SCO that were not paid to FTB.”  (TAP ¶¶ 10, 44(r), Exh. F [bold italics added].)  Petitioners do not allege that Palmer or HBA paid all back taxes that FTB has assessed against HBA.  Petitioners develop no legal argument, and cite no authorities, suggesting that Palmer’s liability from the guarantee is any different than the tax liability of HBA or some other tax liability assessed against Palmer.  The court concludes that Cal. Const., art. XIII, section 32 and the doctrine of exhaustion of administrative remedies apply to FTB’s efforts to collect taxes from Palmer.  (See TAP ¶ 10.)  Thus, the analysis for the demurrer with respect to Palmer is largely the same as outlined above with respect to HBA.

Petitioners allege that “Petitioner Boydston received no notice of a right to appeal a claim that had not yet been made against him for all unpaid taxes of the HBA as a ‘for-profit corporation.’”  (TAP ¶ 11.)  In opposition, Petitioners similarly state that they “learn[ed] for the first time [from the demurrer] that the FTB targeted Brian Boydston because it wrongly believed that he had withdrawn corporate funds as an officer for his personal use” and that the tax claim against Boydston as transferee “is absolutely false.”  (Oppo. 1.)  These allegations of lack of notice to Boydston are contradicted by the TAP and judicially noticeable record. (See TAP ¶ 44(cc), Exh. G [notices of proposed assessment]; TAP ¶ 44(ee); Resp. RJN Exh. 10 [notices of action on proposed assessment].) 

In the TAP and opposition, Petitioners fail to develop any legal argument under which Cal. Const., art. XIII, section 32 and the doctrine of exhaustion of administrative remedies do not apply to the tax assessment against Boydston as transferee of HBA’s assets pursuant to Revenue and Taxation Code sections 19071-19074. (TAP ¶ 44(cc), Exh. G.)  Petitioners do not discuss the statutory scheme under which a transferee may be held liable for taxes of a business entity.  To obtain judicial review of FTB’s assessment against Boydston, Petitioners must pay the taxes and file an administrative claim for refund. (Cal. Const., art. XIII, § 32; Rev. & Tax. Code, §§ 19381-19382; see Cal. Dep’t of Tax & Fee Admin. v. Superior Court (Kintner) (2020) 48 Cal.App.5th 922, 927, 932 [holding that section 32 barred prepayment challenge to tax assessment against corporate officer for corporation’s unpaid taxes].)

            The special demurrer for lack of jurisdiction and general demurrer for failure to pay the disputed taxes or exhaust administrative remedies are SUSTAINED WITHOUT LEAVE TO AMEND with respect to the petition seeking to compel FTB “to cease efforts to collect money from unrelated 3rd parties who did not guarantee the taxes of the HBA as a for-profit business entity.”  (TAP Prayer ¶ 7.) 

Non-Writ Claims: First Cause of Action for Declaratory Relief; and Second Cause of Action for Violations of the Fifth and Fourteenth Amendments Pursuant to 42 U.S.C. Section 1983

Pursuant to the local rules which designate that Department 82 is a specialized Writs and Receivers department and not a general civil department, only those special proceedings stated in the rule (including for writ of mandate) are properly assigned to this department.  (LASC Local Rules 2.8(d) and 2.9.)  Local Rules 2.8(d) and 2.9 do not include a claim for declaratory relief or a cause of action pursuant to 42 U.S.C. section 1983 as special proceedings assigned to the writs departments.  

While not clear, Petitioners may seek writ relief based on allegations made in the cause of action under section 1983.   (TAP ¶¶ 53-60.)  As discussed above, the TAP does not include a separately numbered cause of action alleging the grounds for such relief under section 1085, as required by Court Rule.  (See Cal. Rules of Court, Rule 2.1112.)  This method of pleading makes it difficult for the court, and Respondents, to determine the grounds upon which Petitioners challenge FTB’s decision. 

To the extent Petitioners do seek writ relief based on allegations made in the section 1983 cause of action, the writ part of such claim is not sufficiently pleaded for the same reasons discussed above.  Specifically, HBA lacks capacity and the writ petition appears to constitute a prepayment challenge to Petitioners’ tax liability in violation of Cal. Const., art. XIII, § 32. 

At the hearing, Counsel should address whether the court’s ruling on demurrer resolves all issues in Petitioners’ causes of action for declaratory relief and for relief under 42 U.S.C section 1983.  If those non-writ causes of action are not resolved by the ruling on demurrer, they will be transferred to Department 1 for reassignment to a general civil department.  

Leave to Amend

A demurrer may be sustained without leave to amend when there is no reasonable possibility that the defect can be cured by amendment.  (Blank v. Kirwan (1985) 39 Cal.3d 311, 318.)  Courts generally allow at least one time to amend a complaint after sustaining a demurrer.  (McDonald v. Superior Court (1986) 180 Cal.App.3d 297, 303.)  In assessing whether leave to amend should be granted, the burden is on the complainant to show the court that a pleading can be amended successfully.  (Goodman v.  Kennedy (1976) 18 Cal.3d 335, 348-349.) 

This is the courts third ruling on demurrer.  Petitioners have had four opportunities to plead a cause of action for writ of mandate and have shown no reasonable probability of successful amendment in a subsequent pleading.  Accordingly, leave to amend will be denied. 

Motion to Strike Jury Trial Demand

            Respondents move to strike the jury trial demand in the TAP with respect to all causes of action.  Petitioners do not oppose the Respondents’ motion as to the mandamus cause of action and “equitable claims” but oppose the motion as it applies to the claims raised in the Declaratory Relief and 42 U.S.C. § 1983 causes of action. 

            Based on the arguments made in the motion, the court agrees that Petitioners are not entitled to a jury trial for the writ causes of action. 

As discussed above, the causes of action for declaratory relief and for other relief pursuant to 42 U.S.C. § 1983 are not writ or other special proceedings properly assigned to Department 82.  (LASC Local Rules 2.8(d) and 2.9.)  The TAP includes a single jury trial demand that applies to the entire TAP.  The judicial department properly assigned such non-writ claims should determine whether a jury trial demand is appropriate.  Accordingly, because the jury trial demand applies to the non-writ causes of action as well, Department 82 does not rule on the motion to strike. 

Conclusion

The special and general demurrers to the petition for writ of mandate of all Petitioners seeking to compel FTB to characterize HBA as a tax-exempt entity and related writ relief are SUSTAINED WITHOUT LEAVE TO AMEND. (See TAP, Prayer ¶¶ 1-6.) 

The special and general demurrers to the petition for writ of mandate of all Petitioners seeking to compel FTB “to cease efforts to collect money from unrelated 3rd parties who did not guarantee the taxes of the HBA as a for-profit business entity” are SUSTAINED WITHOUT LEAVE TO AMEND.  (TAP Prayer ¶ 7.) 

Department 82 does not rule on a demurrer to the first and second causes for declaratory relief and violation of the Fifth and Fourteenth Amendments pursuant to 42 U.S.C. section 1983.  (LASC Local Rules 2.8(d) and 2.9.) 

The parties should discuss whether the ruling on the writ resolves all non-writ causes of action.  If not, the matter will be transferred to Department 1 for assignment to a general civil department.    

Department 82 does not rule on the motion to strike, as it pertains to a jury trial demand for non-writ causes of action.  (LASC Local Rules 2.8(d) and 2.9.)   However, the court confirms that Petitioners are not entitled to a jury trial for the writ causes of action.