Limitations Proposed on Tax Refunds

On September 5, 2007, AB 1546 (Calderon) was amended to limit remedies for ALL TAXPAYERS that are currently challenging or will challenge an unconstitutional, discriminatory fee, tax deduction, credit or exclusion codified in the Personal or Corporate Income Tax Laws. Before the hostile amendments, the bill was intended to fix the unconstitutional LLC Fee statute prospectively to avoid additional state revenue loss resulting from litigation challenging the fee for not being apportioned.

Unfortunately, many people do not understand the magnitude of these amendments. Cal-Tax, along with the Chamber of Commerce, is leading a coalition effort to oppose these recent amendments and is lobbying to try to stop the bill from advancing. Attached is the coalition letter sent to the Assembly Floor. Cal-Tax also has drafted suggested amendments as an alternative to the language currently in the bill.

Key Points of Concern:

Senate Amendments to AB1546 (Calderon) dated September 5, 2007 deprive taxpayers of rights under all personal and corporate tax laws - not just LLC law

• Violates the rights of all taxpayers. Although the bill, as introduced, was limited to a prospective revision of the LLC tax, the new amendments greatly expand AB 1546 to restrict legal remedies in ALL taxpayer challenges of personal and corporate taxes, not just the LLC tax, including any taxes, fees, deductions, credits or exclusions. The newly amended AB 1546 attempts to permanently pre-determine in statute the legal remedy in every case, rather than leaving that determination to the court’s discretion on a case-by-case basis.
• The new amendments retroactively restrict remedies in numerous pending cases. AB 1546 expressly applies to any litigation that is pending at the time it is enacted, even cases that have been pending for numerous years. This constitutes a restriction of the full legal remedy that California taxpayers in pending cases were entitled to seek at the time they commenced the litigation. This mid-stream change is a gross interference with taxpayer rights. California’s tax system, which is predicated on voluntary compliance by taxpayers with the understanding that taxpayers are entitled to post-payment remedies, would be seriously undermined if the Legislature could deprive taxpayers of their remedies on a retroactive basis.
• The new amendments are premature. The newly amended AB 1546 attempts to preemptively strike worst-case tax remedy scenarios for the state that have not yet happened and may never happen. For example, in currently pending LLC tax cases, the California Court of Appeal has not yet decided whether the current LLC tax is unconstitutional, and if so, the appropriate remedy – a refund of all or only a portion of the tax. Since the litigation may not be final for several years, and there are a number of possible outcomes to the pending litigation, the appropriate course is to allow the Court to exercise its judicial discretion to fashion the appropriate remedy, if any. Indeed, FTB’s analysis of the newly amended AB 1546 “is based on the assumption that the fees will ultimately be upheld [in court]” – in other words – a favorable outcome for the state.
• The new amendments set a dangerous precedent for legislative interference in taxpayer recovery in all challenges of unconstitutionally enacted taxes and fees. When a tax law is unconstitutional, taxpayers should have the right to seek court reversal of the entire law and full refunds of the unconstitutional tax imposed upon them, though a court ultimately decides the appropriate remedy. When the Legislature passes unconstitutional laws, it should accept the consequences, including respecting the right of taxpayers to seek all of the remedies available to them in court.
• The new amendments violate the policy process. Earlier this year, an interested parties meeting was held at the Franchise Tax Board in which taxpayers were invited to provide input on an appropriate LLC fee treatment. Unfortunately, the new amendments renege on that process. They go above and beyond what is required to “fix” the LLC fee. Moreover, the new amendments dramatically change the tax system, yet were presented for the first time in print to taxpayers and the public on Thursday, September 6, 2007. The just-released FTB analysis of the new amendments further underscores the lack of appropriate vetting. FTB’s finding of "no fiscal impact" is highly questionable given that it is inconsistent with the argument by proponents that the new amendments are needed to prevent high liability exposure on the part of the state.