Beamer v. Franchise Tax Board, S.F. 23591

Citation19 Cal.3d 467,563 P.2d 238,138 Cal.Rptr. 199
Decision Date23 February 1977
Docket NumberS.F. 23591
CourtUnited States State Supreme Court (California)
Parties, 563 P.2d 238 Scott BEAMER et al., Plaintiffs and Respondents, v. FRANCHISE TAX BOARD, Defendant and Appellant.

Evelle J. Younger, Atty. Gen., Ernest P. Goodman Asst. Atty. Gen., Edward P. Hollingshead and Charles C. Kobayashi, Deputy Attys. Gen., for defendant and appellant.

Aiken, Kramer & Cummings and John A. Harkavy, Oakland, for plaintiffs and respondents.

MOSK, Justice.

We consider here the deductibility under Revenue and Taxation Code section 17204 1 of certain taxes paid to the State of Texas by respondent taxpayers. To make this determination we must resolve two issues: (1) the proper construction of section 17204, which enumerates those taxes paid to other authorities that are deductible from California personal income tax, and (2) whether the Texas taxes are 'on or according to or measured by income or profits.' (§ 17204, subd. (c)(2).) We conclude that the Texas taxes cannot be characterized as taxes on income, and hence are deductible.

The facts are brief and undisputed. Taxpayers, residents of this state, each own an interest in an oil and gas field located in the State of Texas and receive royalty income from the oil and gas produced. Texas has enacted what it denominates an 'occupation tax' on the business of producing natural gas and crude petroleum; the amount of each tax is a specified percentage of the 'market value' of the oil and gas 'as and when produced,' and it is levied on all producers and purchasers of oil and gas in Texas. It is the deductibility of these taxes under section 17204 which is in issue here.

For the years in question, 1970 through 1972, taxpayers reported the royalty payments they received as income on their California personal income tax returns and claimed deductions under section 17204 for the Texas occupation taxes paid. When the Franchise Tax Board (hereinafter board) disallowed these deductions, taxpayers paid the deficiencies under protest, filed claims for refunds, and, in due time, instituted this refund action. Summary judgment was granted for taxpayers, and the board appealed.


The initial issue for our determination is whether taxes on or measured by income are made deductible by the language of subdivision (a) of section 17204 when incurred 'in carrying on a trade or business' or 'for production of income,' notwithstanding the apparent declaration in subdivision (c)(2) that taxes 'on or according to or measured by income or profits' are not deductible. 2 For purposes of this issue we assume the Texas taxes are 'income' taxes within the meaning of subdivision (c)(2). Taxpayers contend that such taxes are deductible under the literal language of the last clause of subdivision (a), notwithstanding subdivision (c)(2), when incurred as a business expense or for production of income. For convenience we shall refer to the last clause of subdivision (a) as the 'fifth category' of deductible taxes.

The basis for taxpayers' contention is their belief that the latter category, unlike the four which precede it, is not conditioned by the opening caveat of subdivision (a), which declares that 'Except as otherwise provided in this section and Section 17205, the following taxes shall be allowed as a deduction . . ..' Taxpayers maintain the opening caveat does not operate to trigger subdivision (c), which prohibits the deduction of certain taxes including those on 'income,' when the tax to be deducted comes within the fifth category. In making this argument, taxpayers assert that by its literal words the opening caveat applies only to 'the following taxes,' which, according to taxpayers, are only clauses (1) through (4). They seek to buttress this contention by pointing to the language of the fifth category which provides for deductible taxes 'In addition' to the four which precede it. Finally, taxpayers reason that the Legislature would have simply labeled the fifth category as '(5)' if it had intended the opening caveat to modify it.

While subdivision (a) is not a model of statutory clarity, we cannot read it as taxpayers suggest. Rather, for the reasons stated below, we believe subdivision (a) enumerates five categories of deductible taxes, all of which are modified by the provisions of subdivision (c) and by section 17205 if applicable.

To begin with, even were we to accept the view that the fifth category is entirely unaffected by the opening caveat, it would not lead to the conclusion that taxpayers desire. To hold the fifth category severable from the opening caveat would merely create an independent clause in subdivision (a); it would in no way give precedence to that clause over the explicit language of subdivision (c) directing that certain types of taxes, including those on or measured by income or profits, are Not deductible. Thus to accept taxpayers' view would create an inconsistency in the statute: subdivision (a) would purport to allow the very deduction which subdivision (c) expressly denies. Because courts should avoid reading a statute to create internal conflict, if possible, we reject taxpayers' construction of section 17204.

To determine the proper meaning of the section, we must of course read it as a whole. When we do so, it appears to us that subdivision (a) creates four specific categories of deductible taxes and one category which can probably best be described as a 'catchall,' but that all five are modified by the opening caveat and therefore limited by the provisions contained in subdivision (c). We are primarily led to this conclusion by the following reasoning: the caveat would be surplusage unless there were a potential conflict between subdivisions (a) and (c); the only such conflict which appears on the face of the statute is between the fifth category and the income tax clauses of subdivision (c) (i.e., subd. (c)(1), (2), (3)); 3 accordingly, the caveat must apply to the fifth category of subdivision (a). 4

We are confirmed in our reading of the statute by an analysis of its legislative history. As discussed below, such an analysis appears to shed light on the Legislature's intent, which is, as always, our touchstone for the proper construction of a statute. The importance of discerning the Legislature's purpose is not diminished when a tax statute is at issue.

We first note that when enacted in 1943, former section 17305, the predecessor to section 17204, provided generally for the deduction in computing California personal income tax liability of all taxes except those specifically enumerated to be nondeductible. Among those made nondeductible were '(b) Taxes on or according to or measured by income or profits . . . imposed by the authority of (1) The Government of the United States or any foreign country . . . (and) (2) Any State, Territory, county, city and county, school district, municipality, or other taxing subdivision of any State or Territory.' (Stats. 1943, ch. 659, § 1, p. 2364.) The crucial portion of this language has been retained through several revisions and amendments, and is found verbatim in subdivision (c)(2) of the present statute. (Fn. 2, Ante.)

We further observe that when renumbered in 1955, section 17204 was rewritten, adopting verbatim in subdivision (a) the language of its then recently enacted counterpart in the federal tax law, section 164 of the Internal Revenue Code of 1954. There was one significant difference, however, between the California and federal statutes: while federal law allowed, as it still does, the deduction of state, local and foreign income and profit taxes (Int.Rev.Code, § 164(a)(3)), California specifically continued to prohibit the deduction of any taxes on or according to or measured by income or profits. (Stats.1955, ch. 939, § 2, p. 1678.)

The revision of section 17204 which is most significant for purposes of our present inquiry, however, occurred in 1964. Again the Legislature was undoubtedly acting to maintain the conformity of the statute with the language of its federal equivalent, section 164 of the Internal Revenue Code of 1954. In the Revenue Act of 1964 (Pub.L.No.88--272, 78 Stat. 19 (Feb. 26, 1964)), the Congress substantially rewrote section 164, changing its basic format. Where it previously had been a general rule allowing the deduction of taxes except those enumerated, section 164 became an enumeration of the specific categories of taxes which could be deducted. At the same time the Congress added, as a separate sentence of subdivision (a): 'In addition, there shall be allowed as a deduction State and local, and foreign, taxes not described in the preceding sentence which are paid or accrued within the taxable year in carrying on a trade or business or an activity described in section 212 (relating to expenses for production of income).'

The house provided the following technical explanation for the insertion of this language: 'The last sentence of section 164(a) allows as a deduction State and local, and foreign, taxes not otherwise described in section 164(a) which are paid or accrued within the taxable year in carrying on a trade or business or in carrying on an activity described in section 212 of the code (relating to expenses for the production of income). Such taxes which are now deductible under section 164 remain so; Those which are not presently deductible under section 164 are not made deductible by the amendment.' (Italics added.) (H.R.Rep.No.749, 88th Cong., 1st Sess., pp. A41--A42 (1963).)

That our Legislature was closely following the revisions to the federal statute when, in 1964, it rewrote section 17204 in substantially its present form, is evident from the immediate enactment of the same change in format and the verbatim adoption of much of the same language as contained in the federal statute. This parallelism is underscored by the fact the federal language referring to a 'preceding sentence' is carried over to the...

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