Opinion
California’s Franchise Tax Board (FTB) appeals from a judgment ordering a refund to Ventas Finance I (Ventas), a limited liability company (LLC), of $29,540, the entire amount it paid pursuant to former 1 Revenue and Taxation Code 2 section 17942 for the years 2001, 2002, and 2003, and a postjudgment order awarding attorney fees to Ventas in the amount of $215,016 pursuant to Code of Civil Procedure section 1021.5.
The trial court ordered the refund based upon its conclusion that, as applied to Ventas, the levy imposed by former section 17942 violated the commerce clause of the United States Constitution (U.S. Const., art. I, § 8, cl. 3)
In its postjudgment order awarding attorney fees, the court rejected FTB’s contention that section 19717 is the exclusive means of obtaining fees in a tax refund suit. It further ruled that Ventas was the successful party within the meaning of Code of Civil Procedure section 1021.5, and that Ventas met the remaining criteria for an award of fees. In calculating the amount of reasonable fees, the court applied a 1.5 multiplier to a lodestar figure of $143,343.75.
We shall uphold the trial court’s determination that former section 17942, as applied to Ventas, violates the Commerce Clause because it is not fairly apportioned, and that the court properly denied FTB’s request that it judicially reform former section 17942 by rewriting it to include an apportionment mechanism. We shall also conclude, however, that neither federal due process nor any principle of California law requires FTB to refund the entire amount Ventas paid. The refund should be limited to the amount Ventas paid for the years in issue that exceeds the amount it would have been assessed, without violating the Commerce Clause, using a method of fair apportionment. 3 We therefore shall reverse the judgment in part, and remand with directions to redetermine the amount of the refund. In all other respects, we shall affirm the judgment.
We shall also hold that section 19717 is not the exclusive means of obtaining attorney fees in a tax refund suit, and that fees may be awarded pursuant to Code of Civil Procedure section 1021.5, if the criteria specified therein are otherwise established. In light of the partial reversal of the underlying judgment, however, we cannot say with certainty that the court would exercise its discretion in the same manner. We therefore shall also reverse the postjudgment order awarding attorney fees, and remand with directions that the court may redetermine eligibility and the amount of reasonable fees in fight of our partial reversal of the judgment.
1. The Suit for Refund.
Ventas was formed in 2001 as a limited liability company under the laws of the State of Delaware. It is wholly owned by Ventas, Inc., a Delaware real estate investment trust, and was formed to obtain financing secured by certain skilled nursing facilities to which Ventas held title. From 2001 to 2003, Ventas owned 39 to 40 facilities, three of which were located in California. Ventas had no other property, employees, or representatives working on its behalf in California.
On November 19, 2001, Ventas registered as a foreign LLC with the California Secretary of State, and remained registered through 2003. In 2001, 2002, and 2003 Ventas paid the $800 minimum tax imposed under section 17941. It also paid the following amounts imposed under former section 17942 based upon its “total income from all sources reportable to this state for the taxable year” (former § 17942, subd. (a)): 2001—$6,000; 2002— $11,790; 2003—$11,790. In accordance with FTB’s interpretation of former section 17942, Ventas reported its total income from all geographic sources to calculate the amount owed without apportionment to California sources. It was stipulated that if the apportionment methodology California uses for corporations (see § 25128 et seq.) were applied, Ventas’s California apportionment percentage would have been only 8.06 percent, 8.34 percent and 6.94 percent, respectively, for these years.
On January 4, 2005, Ventas filed a timely claim for refund on the ground that former section 17942 contained no method for apportioning the levy to the proportionate amount of income earned, or attributable to economic activity, in California and therefore violates the Commerce Clause and the due process clause of the United States Constitution. On February 24, 2005, and again on March 1, 2005, FTB informed Ventas that it had denied the refund claim. Although Ventas did not file an appeal to the State Board of Equalization, it did exhaust its administrative remedies for the purpose of filing a suit for refund, and timely filed its complaint seeking a refund.
After a trial based upon stipulated facts, the court held that former section 17942 is a tax and, as applied to Ventas, violates the Commerce Clause and due process, because it is based upon all income unapportioned to activities
2. The Motion for Attorney Fees.
Ventas thereafter filed a motion seeking attorney fees pursuant to Code of Civil Procedure sections 1021.5 and 1032, subdivision (b). The case was accepted on a contingency fee basis. Based upon standard billing rates, the attorney fees actually incurred through November 2006 would have totaled $143,343.75. Ventas sought $30 million in fees.
This request for a substantial upward adjustment of the lodestar figure was largely predicated upon the theory that this case was the second of two filed by the same attorneys for different plaintiffs that, if upheld, would entitle tens of thousands of LLC’s registered in California to obtain refunds estimated to total as much at $1.4 billion, and no less than $300 million.
In the first case,
Northwest Energetic Services, LLC v. Franchise Tax Bd.
(Super Ct. S.F. City and County, 2006, No. CGC-05-437721), the same attorneys who represented Ventas had already obtained a judgment ruling that former section 17942 was unconstitutional as applied, and an award of $3.5 million in attorney fees.
5
The plaintiff LLC in that case, however, did not earn any income that could be sourced to California, and there had been no dispute that it was entitled to a refund of all amounts it had paid. Ventas argued the instant litigation was necessary to address FTB’s position that only those LLC’s that had no income attributable to California sources were entitled to a full refund. In all other cases, FTB maintained that the appropriate remedy was to refund the difference between the amount the LLC paid and the amount it would have paid if former section 17942 included a fair apportionment mechanism. Ventas reasoned that this litigation conclusively resolved issues left unresolved after the
Northwest
trial by establishing
FTB, on the other hand, estimated the amount of potential refunds as a result of the Northwest trial and this case was closer to $215 million. FTB based its much smaller estimate on its determination that approximately 93 percent of LLC’s earned all of their income from California sources. It reasoned that, as applied to these LLC’s, former section 17942 would not violate the Commerce Clause. FTB argued that the decision following the Northwest trial and in this case therefore only applied to 7 percent of registered LLC’s that had no income from California sources, or, like Ventas, had income from both inside and outside California. These two categories of LLC’s together paid 21.5 percent of the levy paid annually under former section 17942.
The court found both estimates to be somewhat speculative, but concluded that the economic benefit secured by this case was “at least the $215 million” in refunds “due to California LLCs with activities within and without California.” The court relied upon this estimate both as a factor in concluding that the litigation had produced considerable pecuniary benefits for a large class of persons, and as a factor in applying an upward adjustment to the lodestar figure, albeit a much more modest increase than Ventas had sought. 6
In selecting a multiplier of 1.5, the court weighed the additional benefits conferred by the litigation, including “the preservation of valuable resources, both public and private, and particularly those of the judiciary, by obviating the need for duplicative litigation; and the vindication of important constitutional rights under the Commerce and Due Process Clauses of the United States Constitution, particularly the right to engage in interstate commerce without undue burdens.” The court also considered the skill of Ventas’s lead counsel, the fact that compensation was contingent and that no one else in the last 10 years had been prepared “to take on this litigation.” Against these factors, the court weighed the fact that the work involved was not “wholly” novel because except for the issue of reformation and the related issue of the measure of the refund, this litigation was duplicative or “substantially similar” to the issues litigated in the Northwest trial.
3. Postjudgment 7 Legislation.
On October 10, 2007, the Governor signed into law Assembly Bill No. 198 (2007-2008 Reg. Sess.), amending former section 17942 for taxable years beginning on and after January 1, 2007, and adding section 19394 (Stats. 2007, ch. 381, § 3). The amendment changed the language of former section 17942, subdivision (a) from “total income from all sources reportable to this state” to “total income from all sources derived from or attributable to this state.” It also added the following language: “ ‘total income from all sources derived from or attributable to this state’ shall be determined using the rules for assigning sales under Sections 25135 and 25136 and the regulations thereunder, as modified by regulations under Section 25137, other than those provisions that exclude receipts from the sales factor.” (§ 17942, subd. (b)(1)(B).)
Assembly Bill No. 198 (2007-2008 Reg. Sess.) also added section 19394, which specifies that if the levy under former section 17942 is “finally adjudged” to be unconstitutional, the remedy shall be for the FTB to recompute it “only to the extent necessary to remedy the discrimination or unfair apportionment,” and refund the difference.
Section 4 of Assembly Bill No. 198 (2007-2008 Reg. Sess.) further provides as follows:
“SEC. 4. (a) The Legislature is aware of pending litigation challenging the validity of the fee imposed pursuant to Section 17942 of the Revenue and Taxation Code.
“(b) The amendments made by Section 2 of this act to Section 17942 of the Revenue and Taxation Code, if enacted, shall apply to taxable years beginning on and after January 1, 2007.
“(c) Section 19394 of the Revenue and Taxation Code, as added by Section 3 of this act, shall apply to suits for refunds filed on or after the date of enactment of this act and suits for refunds filed before that date that are not final as of that date.
“(d) Refunds of fees payable as a result of the litigation described in subdivision (a) shall be limited to the amount by which the fee paid, and any interest assessed thereon, exceeds the amount that would have been assessed if the fee had been computed in accordance with subparagraph (B) of paragraph (1) of subdivision (b) of Section 17942 of the Revenue and Taxation Code, as added by the amendments to that section made by Section 2 of this act.
“(e) It is the intent of the Legislature that no inference be drawn in connection with the amendments made by this act to Section 17942 of the Revenue and Taxation Code for any taxable year beginning before January 1, 2007.” (See § 19394.)
Analysis
L
Constitutional Validity of Former Section 17942 As Applied to Ventas
Former section 17942 was enacted in 1994 as part of the Beverly-Killea Limited Liability Company Act (LLC Act), 8 which authorized the formation, operation, and regulation of LLC’s within California. The LLC Act requires any LLC that registers with the Secretary of State to pay the annual minimum tax set forth in section 17941, and to pay a levy pursuant to former section 17942. Subdivision (a) of former section 17942 provides that in addition to the minimum tax, “every limited liability company subject to tax under Section 17941 shall pay annually to this state a fee equal to” specified amounts based upon the amount of “the total income from all sources reportable to this state for the taxable year.”
FTB first asks us to determine whether application of the levy under former section 17942 to the income of Ventas, wherever earned and without apportionment according to the percentage of business or income attributable to activities within California, violated the Commerce Clause. We shall conclude that it did, and that former section 17942 is unconstitutional as applied to Ventas. We therefore need not, and do not, decide whether former section 17942 is unconstitutional on its face or whether it violates due process. 9
FTB contends that former section 17942 is not a tax, but a regulatory fee, and that as such the appropriate Commerce Clause analysis is the three-part balancing test outlined in
Pike v. Bruce Church, Inc.
(1970)
FTB further contends that, even if the levy imposed by former section 17942 is a tax, it still does not violate the Commerce Clause under the four-part test set forth in
Complete Auto Transit, Inc.
v.
Brady
(1977)
FTB also contends that the levy imposed by former section 17942 is distinguishable from other state taxes found to violate the Commerce Clause because under the LLC Act, an LLC that registers in California may elect to be taxed as a corporation pursuant to a statutory scheme that does provide a method of apportionment. (§ 23038, subd. (b)(1).) Ventas instead elected to be subject to the levy under former section 17942. FTB asserts this election ameliorates the burden imposed on interstate commerce, and constitutes a waiver, or estops Ventas from challenging the constitutional validity of former section 17942. 12
All of the foregoing arguments were carefully considered, thoroughly analyzed, and rejected by Division Five of this court in
Northwest, supra,
The court rejected FTB’s argument that the internal consistency test was inapplicable and that Northwest had to demonstrate by some other means that the tax burdens interstate commerce. It explained that the case upon which FTB relied,
American Trucking Assns., Inc. v. Michigan Pub. Serv. Comm’n
(2005)
The court further observed that, as is also the case here, FTB advanced no argument addressing external consistency.
(Northwest, supra,
Finally, the court rejected FTB’s voluntary choice arguments based upon the fact that Northwest could have elected to be taxed as a corporation, under a statutory scheme that, unlike former section 17942, provided a method for apportionment and thereby avoided taxation under former section 17942. The-court declined to characterize Northwest’s decision as consent to be taxed on all income without apportionment, or as a voluntary choice, because an election “to be taxed as a corporation rather than as a passthrough LLC would have more dramatic consequences. Among other things, such an election would require Northwest to make the same election with the Internal Revenue Service, thus changing the manner in which Northwest and its members would be taxed at the federal level, with likely similar changes in all the other states in which Northwest did business. Avoiding the double-taxation aspect of a corporation (by which the entity is taxed on profits and its members on distributions) is one of the hallmark benefits of an LLC. Indeed, in passing the LLC Act, our Legislature recognized this facet of LLC’s as one of the major reasons for such interest in LLC’s in the first place. The FTB now would have LLC’s surrender this advantage not only in California, but in all other states in which the LLC pays taxes and on its federal tax returns as well, simply so California can impose a tax based on income generated
outside of
California. The idea that this could somehow ameliorate the burdens on interstate commerce, or insulate the Levy from scrutiny under the Commerce Clause altogether, is simply untenable. Nor do we think that LLC’s—which our Legislature wanted to
attract
to California in passing the LLC Act—should be forced to endure an unconstitutional assessment merely because they proceeded under the auspices of a California statute (former § 17942).”
(Northwest, supra,
The court concluded that, as applied to Northwest, former section 17942 violated the Commerce Clause and that Northwest, “which conducted no business in California, is entitled to a refund of the amounts it paid under former section 17942.”
(Northwest, supra,
II.
Remedy
FTB next raises two issues concerning the appropriate remedy that were not raised in
Northwest, supra,
In light of the foregoing facts, FTB argues that instead of ordering a refund of the entire amount of tax Ventas paid for the years in issue, the court should either: (1) judicially reform former section 17942 to preserve it against constitutional invalidity and apply it as reformed to Ventas; or (2) limit the amount of the refund in this case to the difference between the amount Ventas actually paid and the amount Ventas could have been taxed without violating the Commerce Clause using a method of fair apportionment. FTB asserts that the amount Ventas could have been taxed for the contested years using a method of fair apportionment can easily be determined by using the allocation and apportionment provisions of the Uniform Division of Income for Tax Purposes Act set forth in sections 25120 to 25139 and the applicable regulations. The parties have already stipulated that Ventas’s California apportionment percentage, would have been 8.06 percent, 8.34 percent and 6.94 percent, respectively, for the years in issue. FTB further contends that this measure of the refund is, in any event, now mandated by the new section 19394 added by Assembly Bill No. 198 (2007-2008 Reg. Sess.). Section 19394 specifies that if the levy under former section 17942 is “finally adjudged” to be unconstitutional, the remedy in any suit for refund that is not final shall be to recompute the tax in accordance with the apportionment methodology added to former section 17942 by Assembly Bill No. 198, and refund the difference.
We shall conclude that FTB fails to establish the limited conditions that would support exercise of the power of judicial reformation, and shall decline to reform former section 17942 in the manner FTB suggests. We, however, also conclude that a refund of the entire amount Ventas paid pursuant to former section 17942 is not compelled by the due process clause, or by any principle of state law. A refund of the difference between the amount Ventas paid and the amount it would have paid based upon income derived from or attributable to California sources, using a method of fair apportionment, would fully cure the Commerce Clause violation. This remedy does not place an unreasonable burden on Ventas because the parties have already agreed what Ventas’s California apportionment percentage would have been for the years in issue, if this apportionment methodology were used. We shall therefore reverse and remand to the trial court for further proceedings to determine the amount of the refund. In light of this disposition, we need not reach the question whether application of the changes made by Assembly Bill No. 198 (2007-2008 Reg. Sess.) after the judgment in this case was entered would violate the due process clause.
1. Reformation.
FTB argues that former section 17942 can and should be judicially reformed to cure the constitutional invalidity by requiring an LLC’s income be sourced to California using the allocation and apportionment provisions of the Uniform Division of Income for Tax Purposes Act set forth in sections 25120 to 25139. It urges this court to judicially reform former section 17942 to so provide. The proposed reformation would essentially rewrite former
“ ‘[A] court may reform—i.e., “rewrite”—a statute in order to preserve it against invalidation under the Constitution, when we can say with confidence that (i) it is possible to reform the statute in a manner that closely effectuates policy judgments clearly articulated by the enacting body, and (ii) the enacting body would have preferred the reformed construction to invalidation of the statute.’ ”
(Ceridian Corp. v. Franchise Tax Bd.
(2000)
In the context of cases involving tax statutes that violate the Commerce Clause, the courts have consistently declined to exercise the power of judicial reformation to cure the constitutional violation. For example, in
Ceridian,
the court declined FTB’s request that it judicially reform a tax provision that violated the Commerce Clause by, among other things, allowing a deduction for insurance subsidiary dividends only to corporations domiciled in California. FTB suggested the court could reform the challenged statute by rewriting it also to allow non-California corporations to take the deduction. The court explained that the suggested reformation was not appropriate because the plain language of the deduction provision stated that it applies only to corporations “ ‘commercially domiciled’ ” in California.
(Ceridian, supra,
Nonetheless, FTB asserts that judicial reformation of former section 17942 is possible, without encroaching upon the legislative function, because the phrase “reportable to this state” as used in former section 17942 is, at least arguably, susceptible to the interpretation that it describes only “total income from all sources derived from or attributable to this state.” Therefore, FTB reasons, the proposed reformation is not necessarily at odds with the plain language of former section 17942, and would be consistent with the legislative policy judgment underlying this legislation. FTB further suggests that if the Legislature knew that an unapportioned LLC tax would be declared unconstitutional, the Legislature would certainly have chosen to include an apportionment mechanism, because collection of some revenue would always be preferable to none.
We cannot say with confidence that the proposed reformation would be consistent with the legislative policy judgment underlying former section 17942, because the legislative history reflects that the Legislature actually considered, and rejected, a version including precisely the language the FTB now suggests. This rejected version based the tax imposed on “gross receipts . . . derived from or attributable to sources within this state.” (Sen. Bill No. 469 (1993-1994 Reg. Sess.) § 15, as amended Sept. 10, 1993.) As the court in
Northwest
observed, it is not clear why this language was changed, but “[g]iven the oft-stated legislative desire to maintain revenue neutrality, a reasonable inference is that legislators were concerned that the revenue generated from a fee based only on receipts derived from or attributable to sources within this state would not be sufficient. In other words, California would lose money unless the ‘fee’ was imposed on non-California business.”
(Northwest, supra,
2. Measure of Refund.
FTB alternatively contends that the court erred by requiring it to refund the entire amount Ventas paid pursuant to former section 17942 for the years in issue. It argues that no principle of federal due process or of state law compels it to refund the entire amount Ventas paid for the years in issue. Instead, FTB argues that Ventas is only entitled to a refund of the difference between the amount it paid pursuant to former section 17942 and the portion that could have been collected consistent with the dictates of the Commerce Clause by apportioning the tax to income derived from or attributable to California sources. Ventas, on the other hand, asserts that in
McKesson Corp. v. Florida Alcohol & Tobacco Div.
(1990)
The appropriate remedy for collection of a tax in violation of the Commerce Clause is, in the first instance, a matter left to the state so long as the remedy it affords comports with federal due process.
(McKesson, supra,
The court explained that where the tax is not invalid “in its entirety,” but, as in the case before it, was unconstitutional only insofar as it operated in a manner that discriminated against interstate commerce, the state “retains flexibility in responding to this determination. Florida may reformulate and enforce the Liquor Tax during the contested tax period in any way that treats petitioner and its competitors in a manner consistent with the dictates of the Commerce Clause. Having done so, the State may retain the tax appropriately levied upon petitioner pursuant to this reformulated scheme because this retention would deprive petitioner of its property pursuant to a tax scheme that is valid under the Commerce Clause.” (McKesson, supra, 496 U.S. at pp. 39-40.) Therefore, the court held that Florida could, consistent with due process, provide a remedy for the Commerce Clause violation of the excise tax in several ways. It could (1) refund to the taxpayer “the difference between the tax it paid and the tax it would have been assessed were it extended the same rate reductions that its competitors actually received,” (2) “assess and collect back taxes from petitioner’s competitors who benefited from the rate reductions during the contested tax period, calibrating the retroactive assessment to create in hindsight a nondiscriminatory scheme,” or (3) fashion a remedy consisting of “a partial refund to petitioner and a partial retroactive assessment of tax increases on favored competitors, so long as the resultant tax actually assessed during the contested tax period reflects a scheme that does not discriminate against interstate commerce.” (496 U.S. at pp. 40-41.)
Ventas argues that
McKesson, supra,
Ventas’s argument is based upon a misreading of the discussion in
McKesson, supra,
We conclude that, although
McKesson, supra,
We therefore look to several California decisions that have addressed the question of the appropriate measure of a refund in a tax refund suit when the tax collected is found to violate the Commerce Clause, or equivalent provisions under the state Constitution. 18
In
Macy’s Dept. Stores, Inc. v. City and County of San Francisco
(2006)
The Court of Appeal reversed. It held that the remedy the city proposed, consisting of a partial refund in an amount sufficient to remedy the hypothetical discrimination, effectively placed Macy’s in the same position as a local taxpayer, and that no principle of due process or state law required that the city instead refund the entire amount Macy’s had paid.
(Macy’s, supra,
143 Cal.App.4th at pp. 1451-1454.) Division Three correctly stated that this court’s decision in
General Motors, supra,
The court concluded that the measure of the refund the city proposed satisfied all the state and federal requirements of due process. “Macy’s is entitled to be placed in a position equivalent to that occupied by local taxpaying businesses so it will have paid a valid measure of taxes. [Citation.] In this way, the City may limit Macy’s tax refund to the amount necessary to remedy any discrimination from the City’s former tandem tax. [Citation.] Macy’s is not entitled to a full refund of all business taxes paid between 1995 and 1999. Such a refund would place Macy’s in a more favorable position than a local taxpayer during the same period.” (Macy’s, supra, 143 Cal.App.4th at pp. 1454-1455.)
Finally, in City of Modesto, the court indirectly addressed some of these same due process principles, in a procedurally different context, when it declined to judicially reform a municipal tax ordinance to include a method of fair apportionment. The ordinance had been amended to cure the constitutional invalidity by adding a'method of fair apportionment, but the court had found that the amendments applied prospectively only. The court explained that due process concerns were among its reasons for declining to judicially reform the ordinance to include a fair apportionment mechanism like the one added by the amendments: “Although here the disputed tax has not yet been collected, the amended ordinance places the burden on [the taxpayer] to prove which gross receipts should be excluded based on out-of-city activities. Thus, if we were to retroactively validate the tax by applying the apportionment provisions, we would be requiring [the taxpayer] to produce documentation from up to nine years ago that it otherwise was never required to maintain. If [the taxpayer] were unable to document its claimed out-of-city activities, the assessed deficiency would remain the same as it was under the unconstitutional tax. This is not a ‘clear and certain remedy’ but, rather, places an unreasonable and unfair burden on [the taxpayer].” (City of Modesto, supra, 128 Cal.App.4th at pp. 529-530.)
Due process concerns similar to those identified in
General Motors, supra,
We conclude that the court erred by ordering that Ventas was entitled to a full refund of the entire amount of tax it paid pursuant to former section 17942 for the years in issue. The court should instead have ordered a refund of the difference between the levy actually paid and the amount that could be collected without violating the Commerce Clause using a proper method of apportionment. Accordingly, we shall reverse the judgment to the extent that it orders FTB to refund the entire amount of taxes Ventas paid for the years in issue, and remand to the trial court for further proceedings to redetermine the amount of the refund, in accordance with the view expressed in this opinion.
in.
Attorney Fees
The foregoing disposition, reversing the judgment to the extent that it ordered a refund of the entire amount Ventas paid pursuant to former section 17942, requires that we also reverse the postjudgment award of attorney fees pursuant to Code of Civil Procedure section 1021.5, because we cannot say with certainty that the court would exercise its discretion the same way had Ventas not prevailed on its contention that it was entitled to a full
We also briefly address FTB’s contention that section 19717 is the exclusive means of recovering attorney fees in a tax refund suit, because if FTB were correct, Ventas would be ineligible for fees in any amount since it failed to file an appeal to the Board of Equalization. (§ 19717, subd. (b)(1).) 22 We therefore would simply reverse, rather than remand for further proceedings to allow the court to exercise its discretion pursuant to Code of Civil Procedure section 1021.5.
In
Northwest, supra,
159 Cal.App.4th at pages 869-875, the court carefully considered and rejected each of the arguments FTB raises here in support of its contention that section 19717 is the exclusive means of recovering attorney fees in a tax refund suit. The court in
Northwest
ultimately concluded: “Attorney fees are not recoverable under Code of Civil
For the foregoing reasons, we shall also reverse the order granting attorney fees pursuant to Code of Civil Procedure section 1021.5, and remand to allow the court to again exercise its discretion in light of our partial reversal of the underlying judgment. Nothing we have said should be construed as an expression of an opinion as to how that discretion should be exercised.
Conclusion
The judgment is affirmed in part and reversed in part. We affirm the court’s determination that, as applied to Ventas, former section 17942 violates the Commerce Clause, and that judicial reformation is not an appropriate remedy. We reverse the judgment only with respect to the amount of the refund due, and remand with directions to redetermine the amount, limiting the refund to the difference between the amount Ventas paid pursuant to former section 17942, and the amount Ventas would have been required to pay had the tax been fairly apportioned, as more fully described in this opinion.
Each party shall bear its own costs on appeal.
Marchiano, P. J., and Swager, J., concurred.
Respondent’s petition for review by the Supreme Court was denied November 12, 2008, SI66870. Baxter, J., Chin, J., and Corrigan, J., were of the opinion that the petition should be granted.
Notes
We refer to the version of Revenue and Taxation Code section 17942 at issue in this appeal as former section 17942, because in 2007, after the judgment was entered, and after the court entered a postjudgment order awarding attorney fees, the Legislature amended Revenue and Taxation Code section 17942. (Stats. 2007, ch. 381, § 2; see, post, at pp. 1216-1217.)
All subsequent statutory references are to the Revenue and Taxation Code unless otherwise indicated.
In light of this disposition we shall not reach the question whether the newly enacted section 19394, which specifies a method for calculating the amount of refunds in the event that former section 17942 is finally adjudged to violate the Commerce Clause, may be applied to this case or whether any principle of due process would preclude its retroactive application.
We deferred ruling on FTB’s request that we take judicial notice of a September 2007 legislative committee analysis and reanalysis of Assembly Bill No. 198 (2007-2008 Reg. Sess.), which added section 19394, and Ventas’s request that we judicially notice the complete bill history. We do not reach any of the issues relating to the application of section 19394 and therefore deny these requests for judicial notice.
This statement of facts is based primarily upon a “Joint Stipulation of Facts” and “Joint Stipulation Regarding Documents.”
FTB appealed that judgment and attorney fee order, and on January 21, 2008, Division Five of this court filed its opinion in the consolidated appeals
Northwest Energetic Services, LLC
v.
California Franchise Tax Bd.
(2008)
FTB does not dispute that Ventas demonstrated the cost of private enforcement exceeded the potential benefit to any individual LLC. Ventas submitted an expert declaration below explaining that one of the reasons former section 17942 had not been challenged was that the maximum refund for any LLC would be $11,790 per year, and that the cost of litigating the Commerce Cause issue would far exceed that amount.
The notice of entry of judgment in this case was filed on December 14, 2006, and FTB filed a timely notice of appeal on December 19, 2006. The notice of entry of the order awarding fees and costs was filed on May 1, 2007, and FTB filed a timely notice of appeal of this postjudgment order. Ventas filed a cross-appeal of the attorney fee order, but states in its brief that it has withdrawn the cross-appeal.
The LLC Act was codified as new title 2.5 of the Corporations Code (Corp. Code, § 17000 et seq.) with conforming amendments to the Revenue and Taxation Code and other codes.
A statute should be found facially unconstitutional only if there are no circumstances under which it can be validly applied. (See
United States v. Salerno
(1987)
“Internal consistency is preserved when the imposition of a tax identical to the one in question by every other State would add no burden to interstate commerce that intrastate commerce would not also bear.”
(Oklahoma Tax Comm’n v. Jefferson Lines, Inc.
(1995)
“External consistency . . . looks ... to the economic justification for the State’s claim upon the value taxed, to discover whether a State’s tax reaches beyond that portion of value that is fairly attributable to economic activity within the taxing State.”
(Jefferson Lines, supra,
We deferred ruling on Ventas’s motion to strike the waiver argument, and other arguments from FTB’s reply brief, on the grounds that the arguments were new issues raised for the first time in the reply. The motion to strike is hereby denied.
Division Five further held that even if former section 17942 were a regulatory fee, it would violate the Commerce Clause under the balancing test articulated in
Pike, supra,
The court in
Northwest, supra,
The amendments and new section added by Assembly Bill No. 198 (2007-2008 Reg. Sess.) leave no doubt that the Legislature now intends to impose the tax only upon income derived from or attributable to California sources. FTB does not argue that this subsequent legislation sheds any light upon the Legislature’s intent when it deleted this language from former section 17942, and we therefore express no opinion on that issue.
We note that the distinction between taxes that are invalid because they are not fairly apportioned and those that are discriminatory can also be elusive because “[a] tax that unfairly apportions income from other States
is a form of discrimination
against interstate commerce.”
(Armco Inc. v. Hardesty
(1984)
The tax in
O’Connor, supra,
“Despite the absence of a specific ‘commerce clause’ in the California Constitution, the requirements of equal protection and due process proscribe local taxes that operate to unfairly discriminate against intercity businesses by subjecting them to a tax that is not fairly apportioned to reflect the percentage of the business actually taking place within the taxing jurisdiction.”
(City of Modesto, supra,
When the court in
Macy’s, supra,
Only Ventas’s refund claim is before us, and our holding is based upon the particular facts in this case. Accordingly, we express no general opinion regarding the appropriate remedy in other cases. Since we are concerned here only with Ventas’s refund claim, the possibility that the remedy FTB proposes could impose an unreasonable burden on a hypothetical taxpayer whose California apportionment percentage is less readily ascertainable, does not preclude application of the remedy in this case, where it is stipulated.
The court relied upon FTB’s lower estimate of the amount of potential refunds, but even FTB’s estimate assumed LLC’s that had some income attributable or derived from California sources would nonetheless be entitled to a refund of all tax paid pursuant to former section 17942.
We hereby grant FTB’s request that we take judicial notice of an excerpt from a federal Joint Committee on Taxation report describing Internal Revenue Code section 7430 as an exclusive provision for an award of litigation costs. For the same reasons stated by the court in
Northwest, supra,