In re Franchise Tax Bd. Ltd. Liab. Corp. Tax Refund Cases

• Decision Date: 18 July 2018
• Docket Number: A140518
• Citation: 235 Cal.Rptr.3d 692,25 Cal.App.5th 369
• Court: California Court of Appeals Court of Appeals
• Parties: IN RE FRANCHISE TAX BOARD LIMITED LIABILITY CORPORATION TAX REFUND CASES

25 Cal.App.5th 369

235 Cal.Rptr.3d 692

IN RE FRANCHISE TAX BOARD LIMITED LIABILITY CORPORATION TAX REFUND CASES

A140518

Court of Appeal, First District, Division 4, California.

Filed July 18, 2018

Silverstein & Pomerantz LLP, Amy L. Silverstein, Edwin P. Antolin, San Francisco, Edward J. Beeby, San Mateo, Calvo Fisher & Jacob LLP, William N. Hebert, San Francisco, for Plaintiffs and Appellants.

Attorney General of California, Kamala D. Harris, Senior Assistant Attorney General, Paul D. Gifford, Supervising Deputy Attorney, Joyce Hee, Deputy Attorney General, Marguerite C. Stricklin, for Respondents.

REARDON, J.

This coordinated litigation involves the remedies available to certain limited liability companies (LLCs) that paid a levy pursuant to section 17942 of the Revenue and Taxation Code which was later determined by this District to be unconstitutional. (See Northwest Energetic Services, LLC v. California Franchise Tax Bd. (2008) 159 Cal.App.4th 841, 71 Cal.Rptr.3d 642 ( Northwest ); Ventas Finance I, LLC v. Franchise Tax Bd. (2008) 165 Cal.App.4th 1207, 81 Cal.Rptr.3d 823 ( Ventas ).)¹ After two separate actions seeking class treatment for the payment of refund claims were coordinated into this proceeding, the trial court addressed and rejected a jurisdictional argument from the Franchise Tax Board (FTB) that the LLCs had failed to adequately exhaust their administrative remedies as a class and thus could not proceed on a classwide basis. The court, however, went on to deny the motion for class certification before it on multiple other grounds, including lack of ascertainability, numerosity, predominance, and superiority. While we agree with the trial court's exhaustion determination, we believe its class certification analysis was fundamentally flawed. Indeed, we deem this matter eminently suitable for treatment on a classwide basis and therefore reverse.

I. BACKGROUND

Former section 17942 was enacted in 1994 as part of the Beverly-Killea Limited Liability Company Act (LLC Act), which authorized—for the first time—the formation, operation, and regulation of LLCs within California. (Ventas , supra , 165 Cal.App.4th at p. 1217, 81 Cal.Rptr.3d 823 ; Northwest , supra , 159 Cal.App.4th at p. 852, 71 Cal.Rptr.3d 642.) The LLC Act requires any LLC that does business in California, or even registers with the California Secretary of State, to pay both an annual minimum tax as set forth in section 17941 and a levy in accordance with section 17942. ( §§ 17941, 17942.) Under subdivision (a) of former section 17942, the annual levy was equal to specified dollar amounts based on "the total income from all sources reportable to this state for the taxable year."² (Stats. 1996, ch. 952, § 19, p. 5390; Stats. 2002, ch. 664, § 203, p. 4008.)

In Northwest , supra , 159 Cal.App.4th 841, 71 Cal.Rptr.3d 642, a Washington State LLC with locations in Washington and Oregon challenged the constitutionality of the levy. "Northwest had no operations, property, inventory, employees, agents, independent contractors or place of business in California. Nor did it solicit customers in California or make any deliveries to customers in California." ( Id. at p. 849, 71 Cal.Rptr.3d 642.) However, since Northwest had registered as an LLC with the California Secretary of State, it was subject to the levy pursuant to section 17941, subdivision (b), and former section 17942. ( Id. at pp. 849-850, 71 Cal.Rptr.3d 642.) Under these circumstances, Division Five of this District concluded that the levy "more closely resemble[d] a tax" than a fee, given its general revenue raising purpose. ( Id. at pp. 852-861, 71 Cal.Rptr.3d 642.) It further determined that the levy—as applied to Northwest—violated the commerce clause of the United States Constitution (Commerce Clause) because it was not " ‘fairly apportioned’ " under the test set forth in Complete Auto Transit, Inc. v. Brady (1977) 430 U.S. 274, 97 S.Ct. 1076, 51 L.Ed.2d 326, given that an LLC incurred the levy based on its total worldwide income merely by registering with the state, even if it did no business in California. (Northwest, supra, 159 Cal.App.4th at pp. 862-864, 71 Cal.Rptr.3d 642.)³ Northwest was thus entitled to a refund, and the FTB agreed that the refund in that particular case should be "the entire amount" of the LLC levy at issue. ( Id. at p. 868, 71 Cal.Rptr.3d 642.)

Northwest was followed by Ventas , supra , 165 Cal.App.4th 1207, 81 Cal.Rptr.3d 823, which concluded—in reliance on the analysis set forth in Northwest —that former section 17942 also violated the Commerce Clause as applied to Ventas Finance I (Ventas), a Delaware LLC, "to the extent that it fails to provide a method of fair apportionment." ( Ventas , supra , 165 Cal.App.4th at pp. 1213, 1222, 81 Cal.Rptr.3d 823.) Ventas differed from Northwest in that it actually conducted a portion of its business in California. ( Ibid. ) Under these circumstances, it could arguably have been required to pay a portion of the levy without running afoul of the Commerce Clause had former section 17942 included a method for fairly apportioning an LLC’s levy obligation. Thus, the novel issue in Ventas was the question of the appropriate remedy for LLCs that had operated both within and without California while being subjected to the unconstitutional levy.

The Legislature was aware of this issue and thus—while Northwest and Ventas were pending—it enacted Assembly Bill No. 198 (AB 198), which amended former section 17942 for taxable years beginning on or after January 1, 2007, and added section 19394. (Stats. 2007, ch. 381, §§ 2-4, pp. 3562-3564.) The amendment to former section 17942 changed the language on which calculation of the levy was based from "total income from all sources reportable to this state" to "total income from all sources derived from or attributable to this state." (Stats. 2007, ch. 381, § 2, p. 3562, italics added; see Ventas , supra , 165 Cal.App.4th at pp. 1216-1217, 81 Cal.Rptr.3d 823.) For levies assessed prior to January 1, 2007, section 19394 "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." ( Ventas , supra, 165 Cal.App.4th at p. 1216, 81 Cal.Rptr.3d 823 ; see § 19394.) AB 198 further provides that section 19394 "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" and that any such refunds "shall be limited to the amount by which the fee paid, and any interest assessed thereon, exceeds the amount that would have been assessed" under newly amended section 17942. (Stats. 2007, ch. 381, § 4, p. 3564.)

Under these circumstances, the FTB argued in Ventas that "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 [the] 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." ( Ventas , supra , 165 Cal.App.4th at p. 1222, 81 Cal.Rptr.3d 823.) The FTB further claimed that, in any event, this type of apportioned refund was now mandated by new section 19394. ( Ventas , supra , 165 Cal.App.4th at p. 1222, 81 Cal.Rptr.3d 823.) Ventas, in contrast, asserted that judicial reformation was not appropriate because it was inconsistent with the legislative intent at the time former section 17942 was enacted. ( Ventas, supra , 165 Cal.App.4th at p. 1223, 81 Cal.Rptr.3d 823.) Ventas further claimed that retroactive application of section 19394 violated due process and that, regardless, the changes effected by AB 198 constituted a new tax that had not been approved by a two-thirds vote and were therefore invalid. ( Ventas , supra , 165 Cal.App.4th at p. 1223, 81 Cal.Rptr.3d 823.) Ventas argued that the Commerce Clause violation at issue required refund of the entire amount paid. ( Id. at pp. 1228-1229, 81 Cal.Rptr.3d 823.)

The appellate court agreed with Ventas that judicial reformation was inappropriate on these facts. ( Ventas , supra , 165 Cal.App.4th at pp. 1223-1226, 81 Cal.Rptr.3d 823.) However, it further determined that a complete refund was not required under the specific circumstances of the case. Instead, the court concluded that an apportioned remedy for the Commerce Clause violation at issue was permissible "so long as the remedy it affords comports with federal due process." ( Id. at pp. 1226-1233, 81 Cal.Rptr.3d 823.) Applying this general rule to the case at hand, the court concluded: "Using FTB's measure of the refund does not create any procedural or practical burden for Ventas that would undermine the clarity or certainty of the remedy in a manner inconsistent with due process. The parties have already stipulated to Ventas's California apportionment percentage for each of the years in issue using California's apportionment methodology for corporations. Therefore, allowing the FTB to recalculate the levy for the years in issue will not require Ventas to bear any burden to prove the appropriate apportionment percentage, or to produce documentation in support of the calculation that it might not have retained." ( Id. at pp. 1232-1233, 81 Cal.Rptr.3d 823.) The court cautioned, however, that "[o]nly 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...