Allcat v Combs, Reply Brief on the Merits - Filed: 10/13/2011

8/3/2019 Allcat v Combs, Reply Brief on the Merits - Filed: 10/13/2011

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No. 11-0589_______________________________________________

In The

Supreme Court of Texas_______________________________________________

IN RE ALLCAT CLAIMS SERVICE,L.P. AND JOHN WEAKLY,

Relators.

RELATORS REPLY BRIEF

James F. [email protected] Bar No. 13050720Michael B. [email protected] Bar No. 24051318Lacy L. [email protected] Bar No. 24040561Amanda M. [email protected] Bar No. 24066208MARTENS,SEAY,&TODD301 Congress Avenue, Suite 1950

Austin, Texas 78701Tele: (512) 542-9898Fax: (512) 542-9899

ATTORNEYS FOR RELATORS,ALLCAT CLAIMS SERVICE, L.P.AND JOHN WEAKLY

FILEDIN THE SUPREME COF TEXAS11 October 13 P4:16BLAKE. A. HAWTHCLERK


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No. 11-0589_______________________________________________

In The

Supreme Court of Texas_______________________________________________

IN RE ALLCAT CLAIMS SERVICE,L.P. AND JOHN WEAKLY,

Relators.

RELATORS REPLY BRIEF

James F. [email protected] Bar No. 13050720Michael B. [email protected] Bar No. 24051318Lacy L. [email protected] Bar No. 24040561Amanda M. [email protected] Bar No. 24066208MARTENS,SEAY,&TODD301 Congress Avenue, Suite 1950

Austin, Texas 78701Tele: (512) 542-9898Fax: (512) 542-9899

ATTORNEYS FOR RELATORS,ALLCAT CLAIMS SERVICE, L.P.AND JOHN WEAKLY


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TABLE OF CONTENTS

TABLE OF CONTENTS ..................................................................................................... i

TABLE OF AUTHORITIES ............................................................................................. vii

SUMMARY OF ARGUMENT ........................................................................................... 1

ARGUMENT ....................................................................................................................... 2

I. This Court Does Not Need to Choose: It May ApplyLove v. Wilcox andAssert Jurisdiction under HB 3s Special and Limited Grant of OriginalMandamus Jurisdiction.................................................................................. 2

A. This Courts Existing Precedent Allows It to Exercise JurisdictionHere. ................................................................................................... 2

B. Article V, Section 8 Provides an Alternative Basis for This CourtsJurisdiction. ........................................................................................ 5

C. This Court Has Exclusive Original Jurisdiction Over Only the RareConstitutional Challenges that Qualify for Mandamus Relief. .......... 6

II. The Revised Franchise Tax Is Imposed on a Persons Share of Partnership. . . Income. Therefore, it Violates the Bullock Amendment. .................... 9

A. The Plain Text of the Bullock Amendment Prohibits a Tax on aPersons Share of Partnership Income, and This Court Should RejectRespondents Request to Ignore It. .................................................... 9

1. Respondents Improperly Construe the Meaning of theIncluding Phrase. ..................................................................... 10

2. This Court Should Reject Respondents Invitation to Reject thePlain Text of the Bullock Amendment in Favor of the BallotLanguage. .................................................................................... 11


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B. The Revised Franchise Tax Burdens a Partners Share of IncomeWhen Earned, Regardless of Whether the Partnership Makes a CashDistribution. ...................................................................................... 13

C. The Revised Franchise Tax Is an Income Tax. ............................ 14D. This Court Should Reject Respondents Straw Man Argument

about Federal Income Tax and Instead Follow Relators Argumentunder Controlling Texas Law. .......................................................... 16

E. Relators Historical Evidence Provides This Court ImportantContext Surrounding the Bullock Amendment and the Intentions ofThose Who Approved It. .................................................................. 20

F. Relators Request Limited Relief. ..................................................... 24III. This Courts Focus Should Be on Relators Bullock Amendment Claim. . 24

PRAYER ........................................................................................................................... 25

CERTIFICATE OF SERVICE .......................................................................................... 27APPENDIX (filed with Original Petition):

1. Act of May 2, 2006, 79th

Leg., 3rd

C.S., H.B. 3

2. Summary of Bill Stages and Actions on House Bill 3

3. Press Release, Office of the Governor, Gov. Perry (April 17, 2006)

4. Bill Summary of House Bill 3

5. Act of June 15, 2007, 80th Leg., R.S., H.B. 3928, 39

6. Affidavit of John Weakly, 7/27/11

A. Relators' Tax Documentsi. Checks for Payment of 2008 Franchise Taxes (p.1-2)ii. Relevant Pages of Allcat's 2008 Form 1065 (p. 3-9)iii. Relevant Pages of Mr. Weakly's 2008 Form 1040 (p. 10-12)iv. Allcat's 2008 Texas Franchise Tax Report (p. 13-14)v. Allcat's 2009 Texas Franchise Tax Report (p. 15-16)vi. Allcat's 2008 protest payment check (p. 17)


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vii. Allcat's 2009 protest payment check (p. 18)

7. Election Details Report regarding Bullock Amendment

8. Letter from Carole Keeton Strayhorn to Rick Perry (May 15, 2006)

9. Letter from Carole Keeton Strayhorn to Rick Perry (May 2, 2006)

10. Letter from Carole Keeton Strayhorn to Greg Abbott (Apr. 21, 2006)

11. BLACK'S LAW DICTIONARY (8th ed. 2004) ("income tax" and "net income")

12. WI Tax Bulletin 156 (April 2008)

13. KS DOR Opinion Letter No. O-2008-004 (Sept. 2, 2008)

14. KS DOR Opinion Letter No. O-2009-005 (Mar. 24, 2009)

15. MO DOR Letter Ruling LR 5309 (Dec. 12, 2008)

16. SC Rev. Rul. 09-10 (Jul. 17, 2009)

17. CA Technical Advice Memorandum 2011-03 (Apr. 13, 2011)

18. Minutes of the August 2, 2006 Board Meeting on Potential FSP: Texas

Franchise Tax

19. Comptroller Letter No. 201008001L, "Franchise Tax and the ConstructionIndustry"

20. Texas Open Records Act Request Response

SUPPLEMENTAL APPENDIX (filed with Relators Brief on the Merits):

1. TEX.CONST.art. VIII, 24

2. TEX.CONST.art. V, 3

3. Tex. Gov't Code 22.002

4. Tex. Tax Code 141.001, art. II

5. Tex. Tax Code 171.101


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9. A&T Consultants, Inc. v. Sharp, 904 S.W.2d 668 (Tex. 1995)

10. Love v. Wilcox, 28 S.W.2d 515 (Tex. 1930)

11. J. Michael Kennedy,Doomsday Budget Shows Texas the Cost of NotRaising Taxes: A Huge Deficit Looms as a Result of Court-OrderedFunding of Social Services. The Unthinkable May Occur: An Income Levy,L.A. Times, May 22, 1991

12. Bullock Details Tax Plan, Income Levy Could Reduce Other State Fees,Proposal Says, Dallas Morning News, Mar. 29, 1991

13. Clay Robison,Income Tax Bill Would Lift Burden From Poor, LegislatorSays, Houston Chronicle, Apr. 24, 1991

14. Mark Tatge, Corporations Brace for State Income Tax, Dallas MorningNews, Mar. 23, 1991

15. Ross Ramsey,House Leaders Study Variety of Possibilities for New TaxPlan, Houston Chronicle, Jul. 31, 1991

16. Ross Ramsey, Taxes for Cigarettes, Gas May Be Increased/HybridCorporate Levy Also Considered, Houston Chronicle, Aug. 8, 1991

17. Ross Ramsey and R.G. Ratcliffe, Grapping with Texas Finances/SenateOKs State Budget, Tax Measure/Deadline Looms Tonight for House toFollow Suit, Houston Chronicle, Aug. 13, 1991

18. Michele Kay, Tax Issue Drawing Little Agreement, Austin American-Statesman, Mar. 24, 1991

19. Franchise Tax on Small Firms Opposed, Dallas Morning News, Jul. 25,1991

20. Tax Reform: Lawmakers Should Revamp the Franchise Tax, DallasMorning News, Jul. 31, 1991


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21. Laylan Copelin, Tax Bill Heightens Old Fears, Austin American-Statesman, Aug. 4, 1991

22. House Committee Report on HB 11, 72nd Legislature, First Called Session,1991

23. Bob Bullock, et. al. to Ann Richards and Gibson Lewis, Jul 23, 1991, BobBullock Collection, Lt. Governor Series, 1991-1992, Correspondence,Elected Officials, Gov. Ann Richards, Baylor Collections of PoliticalMaterials, Baylor University, Waco, Texas

24. Bob Bullock to Ann Richards, Jul. 19, 1991, Bob Bullock Collection, Lt.Governor Series, 1991-1992, Correspondence, Elected Officials, Gov. AnnRichards, Baylor Collections of Political Materials, Baylor University,Waco, Texas

25. Bob Bullock, Corporations and Partnerships Should Not Be Taxed theSame, Austin American-Statesman, Aug. 1, 1991

26. Bob Bullock,Leave Corporations Alone, Dallas Morning News, Aug. 4,1991

27. Ross Ramsey,Legislators OK $34.6 Billion Budget, Houston Chronicle,Aug. 11, 1991

28. Press Release, Office of the Governor, Gov. Perry Names 24-MemberTexas Tax Reform Commission (Nov. 4, 2005)

29. Texas Tax Reform Commission, Tax Fairness: Property Tax Relief forTexans, March 29, 2006

30. Draft legislation proposed by Texas Tax Reform Commission

31. Multistate Tax Commission, Member States

32. Jack P. Friedman, ed.,Barrons Dictionary of Business Terms 429 (2d ed.1994)

33. BLACKS LAW DICTIONARY 1136 (8th ed. 2004)

34. Instructions for Completing Franchise Tax Reports Originally Due on orAfter January 1, 1992 and Before January 1, 2008


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35. Financial Account Standards Board, Summary of Statement No. 109

36. NEV.CONST., art. 10, 1

37. Julia Rathgeber and Richard P. Sanchez, Senate Research Center, to John

Keel, Lt. Governors Office, Apr. 23, 1993, Bob Bullock Collection, Lt.Governor Series, 1993, Issues, Revenue Income Tax, Baylor Collectionsof Political Materials, Baylor University, Waco, Texas

SECOND SUPPLEMENTAL APPENDIX:

1. Defendants Plea to the Jurisdiction and Original Answer,Rent-A-Center,Inc. v. Combs, No. D-1-GN-001059, 250th Judicial Dist. of Travis County,Tex.

2. Paul Neiffer, Think Savings Account for Partners Capital Account, FarmCPA Today, Jul. 11, 2011

3. Senate Research Center Report on Tex. H.B. 3, 73rd Leg., R.S., Apr. 28,2005

4. Transcript of Hearing on Tex. H.B. 3 Before the House Ways & MeansComm., 79th Leg., 3rd Sp. Sess., Apr. 10, 2006)


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TABLE OF AUTHORITIES

Constitutional Provisions

TEX.CONST.art. V, 3 .................................................................................................... 5, 6

TEX.CONST.art. V, 8 ........................................................................................................ 5

TEX.CONST. art. VIII, 1(c) ....................................................................................... 11, 13

TEX.CONST.art. VIII, 24(a) ............... 1, 4, 6, 9, 11, 12, 13, 14, 18, 19, 20, 21, 22, 23, 24

TEX.CONST. art XVI, 1 .................................................................................................... 2

Statutes

26 U.S.C. 170 ................................................................................................................. 15

26 U.S.C. 174(a)(3) ........................................................................................................ 15

26 U.S.C. 174(c) ............................................................................................................. 15

26 U.S.C. 174(m) ............................................................................................................ 15

26 U.S.C. 263 ................................................................................................................. 15

26 U.S.C. 263(A) ............................................................................................................ 15

26 U.S.C. 264 ................................................................................................................. 15

26 U.S.C. 267 ................................................................................................................. 15

26 U.S.C. 274 ................................................................................................................. 15

26 U.S.C. 275 ................................................................................................................. 15

26 U.S.C. 276 ................................................................................................................. 15

26 U.S.C. 279 ................................................................................................................. 15


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Tex. Bus. Orgs. Code Ann. 1.002(68) (West 2009) ........................................... 14, 17, 19

Tex. Bus. Orgs. Code Ann. 152.056 (West 2009) .......................................................... 18

Tex. Bus. Orgs. Code Ann. 152.202(a) (West 2009) ............................. 14, 17, 18, 19, 20

Tex. Civ. Prac. & Rem. Code 37.009 (West 2009) ........................................................ 25

Tex. Govt Code Ann. 311.026 (West 2009) ................................................................. 18

Tex. Gov't Code Ann. 22.002 (West 2009) ...................................................................... 7

Tex. Gov't Code Ann. 22.002(c) (West 2009) ................................................................. 6

Tex. Rev. Civ. Stat. Ann. Art. 6132(b), 1.10(13) ............................................... 14, 17, 19

Tex. Rev. Civ. Stat. Ann. Art. 6132b, 4.01(b).................................................... 14, 17, 19

Tex. Tax Code Ann. 141.001 (West 2009) .................................................................... 15

Tex. Tax Code Ann. 171.1011(g)(3) (West 2009) ......................................................... 25

Tex. Tax Code Ann. 171.1012 (West 2009) .................................................................. 25

Tex. Tax. Code 171.110 (repealed effective Jan. 1, 2008) ............................................. 15

Cases

A & T Consultantsv. Sharp,904 S.W.2d 668 (Tex. 1995) ............................................................................................... 4

Chenault v. Phillips,914 S.W.2d 140 (Tex. 1996) ............................................................................................... 8

Corsicana Cotton Mills v. Sheppard,

71 S.W.2d 247 (Tex. 1934) ......................................................................................... 2, 3, 4

Dawson v. Kentucky Distilleries & Warehouse Co.,255 U.S. 288 (1921) .......................................................................................................... 15

Federal Land Bank v. Bismarck Lumber Co.,314 U.S. 95 (1941) ............................................................................................................ 10


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Galveston, Harrisburg & San Antonio Railway Co. v. Texas,210 U.S. 217 (1908) ......................................................................................................... 15

Hanson v. Jordan,198 S.W.2d 262 (Tex. 1946) ............................................................................................. 10

Hardy v. Hannah,849 S.W.2d 355 (Tex. App.Austin 1992, writ denied) ................................................. 12

Helvering v. F. & R. Lazarus & Co.,308 U.S. 252 (1939) .......................................................................................................... 16

Helvering v. Morgans, Inc.,293 U.S. 121 (1934) .......................................................................................................... 10

INOVA Diagnostics, Inc. v. Strayhorn,166 S.W.3d 394 (Tex. App.Austin 2005, pet. denied) .................................................. 16

Lane v. Ross,249 S.W.2d 591 (Tex. 1952) ............................................................................... 1, 2, 3, 4, 5

Love v. Wilcox,28 S.W.2d 515 (Tex. 1930) ......................................................................... 1, 2, 3, 4, 5, 6, 8

Phelps Dodge Corp. v. N.L.R.B.,

313 U.S. 177 (1941) .......................................................................................................... 10

R.R. Commn v. Sterling Oil & Ref. Co.,218 S.W.2d 415 (Tex. 1949) ............................................................................................. 11

Rylander v. B & A Mktg.,997 S.W.2d 326 (Tex. App.Austin 1999, no pet.) ......................................................... 16

Suburban Utility Corporation v. Public Utility Commission of Texas,652 S.W.2d 358 (Tex. 1983) ............................................................................................. 17

Travelers Ins. Co. v. Marshall,76 S.W.2d 1007 (Tex. 1934) ............................................................................................. 20

Trinova Corp. v. Michigan Dept of Treasury,498 U.S. 358 (1991) .......................................................................................................... 15


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U.S. v. OBrien,391 U.S. 367 (1968) .......................................................................................................... 21

Union Cent. Life Ins. Co. v. Mann,158 S.W.2d 477 (Tex. 1941) ............................................................................................... 4

Winger v. Pianka,831 S.W.2d 853 (Tex. App.Austin 1992, writ denied) ................................................. 12

Other Authorities

Act of May 2, 2006, 79th Leg., 3rd C.S., H.B. 3, 24 ....................................... 1, 2, 3, 5, 8

Act of May 9, 1961, 57th R.S., ch. 158 ............................................................................. 18

BLACKS LAW DICTIONARY 763 (6th ed. 1990) ................................................................. 16

Bob Bullock to Ann Richards, Jul. 19, 1991, Bob Bullock Collection, Lt. GovernorSeries, 1991-1992, Correspondence, Elected Officials, Gov. Ann Richards, BaylorCollections of Political Materials, Baylor University, Waco, Texas .................... 11, 21, 22

Bob Bullock, Corporations and Partnerships Should Not Be Taxed the Same, AustinAmerican-Statesman, Aug. 1, 1991 ....................................................................... 12, 21, 22

Bob Bullock, et. al. to Ann Richards and Gibson Lewis, Jul. 23, 1991, Bob BullockCollection, Lt. Governor Series, 1991-1992, Correspondence, Elected Officials, Gov.Ann Richards, Baylor Collections of Political Materials, Baylor University, Waco, Texas........................................................................................................................... 9, 11, 21, 22

Bob Bullock,Leave Corporations Alone, Dallas Morning News, Aug. 4, 1991 .. 12, 21, 22

Committee Substitute H. B. 11, 72nd Leg., 1st C.S., Article 13 (1991) ............................. 9

Hearing on Tex. H.B. 3 Before the House Ways & Means Comm., 79th Leg., 3rd Sp.Sess. (April 10, 2006) .................................................................................................. 23, 24

Joe R. Greenhill, The Constitutional Amendment Giving Criminal Jurisdiction to theTexas Courts of Civil Appeals and Recognizing the Inherent Power of the Texas SupremeCourt, 33 Tex. Tech L. Rev. 377 (2002) ............................................................................. 5

Letter from Carole Keeton Strayhorn to Greg Abbott (Apr. 21, 2006)............................... 3


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Letter from Carole Keeton Strayhorn to Rick Perry (May 15, 2006) ................................. 3

Letter from Carole Keeton Strayhorn to Rick Perry (May 2, 2006) ................................... 3

Paul Neiffer, Think Savings Account for Partners Capital Account, Farm CPA Today,

Jul. 11, 2011 ....................................................................................................................... 17

Rent-A-Center, Inc. v. Combs, No. D-1-GN-001059, 250th Judicial Dist. of TravisCounty, Tex. ........................................................................................................................ 8

Senate Research Center Report on H.B. 3, 73rd Leg., R.S., Apr. 28, 2005 ...................... 23

Tex. H.B. 278, 72nd Leg., R.S. 53 (1991)...................................................................... 20

Tex. S.J.R. 36, 66th Leg. (1979) ......................................................................................... 5


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SUMMARY OF ARGUMENT

This Court has the constitutional power to hear this case and does not need to

overturn precedent to do so. Both Love v. Wilcox and Lane v. Ross support the

constitutionality of Section 24 of House Bill 3. These cases recognize the Legislatures

well-established power to confer original jurisdiction on this Court to issue writs of

mandamus. Exercising jurisdiction here will not require this Court to exercise

jurisdiction over all challenges to the constitutionality of statutes only those, like this

one, that meet the special requirements to qualify for this Courts original mandamus

jurisdiction.

Upon exercising jurisdiction, this Court should find that the franchise tax violates

the Bullock Amendment. In arguing otherwise, Respondents ignore the controlling text

of the Bullock Amendment, applicable Texas law, and the historical context in which the

Bullock Amendment arose. Instead, they immediately draw the Courts attention away

from the plain text to the ballot language, from which they bootstrap their business

entities argument. And why? Because if this Court follows the Bullock Amendments

plain language, Respondents lose: this tax is imposed on a persons share of partnership

. . . income, which belongs to the partner the moment it is earned.

Further, the revised franchise tax is an income tax. Respondents do not seriously

contest this they instead insist this Court need not decide it. Their only

counterarguments have no legal basis. Respondents do not even bother to address the

numerous authorities and arguments in Relators initial brief establishing that the revised

franchise tax is an income tax. Moreover, they fail to address the financial harm that


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multistate taxpayers will suffer if this Court reclassifies the franchise tax as a tax imposed

on anything other than net income.

ARGUMENT

I. THIS COURT DOES NOT NEED TO CHOOSE: IT MAY APPLY LOVE V. WILCOX

AND ASSERT JURISDICTION UNDER HB 3S SPECIAL AND LIMITED GRANT OF

ORIGINAL MANDAMUS JURISDICTION.

A. This Courts Existing Precedent Allows It to Exercise Jurisdiction

Here.

This Court does not need to overturn its own precedent to exercise jurisdiction

here. BothLove v. Wilcox andLane v. Ross support the constitutionality of Section 24 of

House Bill 3. These cases recognize the Legislatures well-established power to confer

original jurisdiction on this Court to issue writs of mandamus. Both cases also recognize

this Courts correlative power to grant injunctive relief to enforce writs of mandamus.

Consistent with this authority, the Legislature conferred jurisdiction on this Court to grant

mandamus relief here and to enforce it through its injunctive power. This is the precise

relief Relators seek here.

Relators ask this Court to enforce the Comptroller and Attorney Generals

mandatory duty to preserve, protect and defend the Constitution of Texas (TEX.CONST.

art XVI, 1) by enjoining the enforcement of an unconstitutional statute. This Court has

recognized that our executive officers are duty-bound to enforce the Texas Constitution

and refrain from enforcing unconstitutional laws. As this Court wrote in Corsicana

Cotton Mills v. Sheppard, [w]hen a legislative act requires an officer to perform a

ministerial duty, he should perform it if the act is not unconstitutional. If the legislative


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act is in contravention of the Constitution, the officer should obey the Constitution. 71

S.W.2d 247, 251 (Tex. 1934). The enactment of 24 (acknowledging the likelihood of a

constitutional challenge to the revised franchise tax) and its attendant 120-day resolution

period, along with Comptroller Strayhorns contemporaneous comments about the

unconstitutionality of the revised franchise tax, demonstrate that the Comptroller and

Attorney General were on notice that enforcing the 2006 taxing statute may well

contravene the Texas Constitution. (Appx. 8, 9, & 10).

Love v. Wilcox directly parallels this case. In Love, the relator sought a writ of

mandamus compelling the State and County Democratic Executive Committees to desist

and refrain from enforcing certain resolutions adopted by the Committee, which the

relator argued violated the law. 28 S.W.2d 515, 516 (Tex. 1930). This Court agreed and

granted a writ of mandamus commanding the committees to desist and refrain from

enforcing those unlawful resolutions. Id. at 526. TheLove Court wrote that we find no

warrant for saying that the Legislature exceeded its authority in making it possible for

this court to take original jurisdiction to issue the writ of mandamus when there is urgent

necessity for the exercise of the courts authority to maintain and protect the general

rights and the important interests of the state and of the people.Id. at 521. Here, as in

Love, the Legislature granted this Court original mandamus jurisdiction to prevent the

enforcement of an unlawful statute.

Lane v. Ross followsLove. Lane does not hold that a request for injunctive relief

nullifies this Courts jurisdiction over an otherwise-valid mandamus claim. In fact, this

Court confirmed that in cases in which this courts jurisdiction to issue a writ of


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mandamus has attached, the court necessarily has correlative authority to issue a writ of

injunction to make the writ of mandamus effective. Lane v. Ross, 249 S.W.2d 591, 593

(Tex. 1952). Lane stands only for the proposition that this Court does not have original

jurisdiction to issue a writ of injunction when a relator has not otherwise established a

right to mandamus relief. Id. There, the relator had not established a right to mandamus

relief because [a] writ of mandamus will not issue to compel an officer to do that which

he is willing to do and intends to do. Id. (emphasis added). Here, however, Relators

have an established right to mandamus relief: The Comptroller and Attorney General

have clearly demonstrated an unwillingness to comply with the Bullock Amendment, and

Relators seek a writ of mandamus to compel them to do so. Relators seek injunctive

relief only to make this mandamus relief effective.

Thus, contrary to Respondents theory, this Court does not need to overrule Love

and Lane in order to exercise jurisdiction here. In reality, it is Respondents argument

that would require this Court to overrule its own precedent. To adopt Respondents

positions, this Court would have to overruleA & T Consultantsv. Sharp, 904 S.W.2d 668

(Tex. 1995) and the long line of cases it follows holding that this Court alone is the

proper forum when a relator seeks to compel an executive officer to perform duties

imposed by law. This line of cases includes mandamus proceedings compelling the

Comptroller to refund illegally-assessed taxes. Id. at 673 (citing Union Cent. Life Ins.

Co. v. Mann, 158 S.W.2d 477 (Tex. 1941) and Corsicana Cotton Mills v. Sheppard, 71

S.W.2d 247 (1934)).


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Even if this Court thought that exercising jurisdiction here might violate Love and

Lane, the Court would still have jurisdiction. Love and Lane predate the 1980

amendments to Article V, 3 of the Texas Constitution, which broadened this Courts

jurisdiction. Tex. S.J.R. 36, 66th Leg. (1979) (effective Nov. 4, 1980). These

amendments confer to this Court a reservoir of inherent and residual jurisdiction. Article

V, 3 now reads: [t]he Supreme Court shall exercise the judicial power of the state

except as otherwise provided by this Constitution. Previously, it stated that [t]he

Supreme Court shall have appellate jurisdiction only except as herein specified . . .

(emphasis added). The scope of this Courts jurisdiction was expanded by the removal of

the limitation to only appellate jurisdiction in 1980. See Joe R. Greenhill, The

Constitutional Amendment Giving Criminal Jurisdiction to the Texas Courts of Civil

Appeals and Recognizing the Inherent Power of the Texas Supreme Court, 33 Tex. Tech.

L. Rev. 377, 391-92 (2002). Consequently, this Courts original jurisdiction authority is

more expansive now than it was whenLove andLane were decided.

B. Article V, Section 8 Provides an Alternative Basis for This Courts

Jurisdiction.

Relators agree with Respondents that Article V, 8 of the Texas Constitution may

provide this Court with an independent basis to exercise jurisdiction over this case.

Article V, 8 reinforces the Legislatures authority under Article V, 3 to confer

original jurisdiction on this Court. However, this Court need not overruleLove andLane

to exercise jurisdiction in this case, regardless of which constitutional provisions

ultimately permit Section 24s jurisdictional grant.


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C. This Court Has Exclusive Original Jurisdiction Over Only the Rare

Constitutional Challenges that Qualify for Mandamus Relief.

Respondents alarmingly claim that Relators jurisdictional argument has no

limiting principal and would allow future parties [to] bring virtually any constitutional

challenge directly in this court. (Resp. Brf., p. 8). This parade of horribles ignores the

law: Accepting the Legislatures limited grant of original jurisdiction here would not

confer original jurisdiction over every challenge to the constitutionality of a statute.

Article V, 3 of the Texas Constitution and Texas Government Code 22.002(c) allow

this Court to exercise jurisdiction over only those rare constitutional challenges that

qualify for its original mandamus relief. In Love v. Wilcox, this Court stated these

requirements:

1. the claim must not be dependent upon the determination of anydoubtful question of fact;

2. mandamus must be a proper or necessary process for enforcement ofthe right asserted; and

3. there must be some strong and special reason for the exercise of thisextraordinary original jurisdiction, such as questions which are ofgeneral public interest and call for a speedy determination.

28 S.W.2d at 519.

Few challenges to the constitutionality of statutes will satisfy these requirements.

To begin with, most constitutional claims, including the examples Respondents provide,

require factual determinations. Here, no factual determination is required because this

Court must only construe the plain language of the Bullock Amendment and apply that to

the revised franchise taxing statute to determine that the statute violates the Texas


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Constitution. Other constitutional claims would not qualify because the law already

provides an adequate remedy at law. Respondents examples bear this out as well: they

originated in district court because, unlike here, there was no legislative statement

limiting original and exclusive jurisdiction to this Court. Because the Legislature has

clearly mandated that Relators particular constitutional challenge in this limited context

must originate with this Court and must be decided by this Court within 120 days,

Relators have no other adequate remedy at law. Here, an issuance of writ of mandamus

by this Court provides a necessary and proper means of enforcing Relators rights, but

that will not be true in every constitutional challenge.

Other constitutional claims also do not present the pressing need for a speedy

resolution. Respondents examples illustrate this point as well. There is no imminent

pressing need to determine, for example, whether strip club patrons should each pay $5 to

obtain the entertainment they desire. Contrarily, under the specific circumstances

presented here, the Legislature has made clear its intent that the constitutional challenge

brought by Relators, which affects important rights of individuals across the State of

Texas, shall be determined, exclusively and speedily, by this Court.

These limitations have, for several decades, prevented the parade of horribles

threatened by Respondents, and nothing about the Courts exercise of jurisdiction will

change that moving forward. Since Section 22.002 was amended in 1980, this Court has

broadly been conferred original jurisdiction over mandamus (and other compulsory writ)

actions against a confined group of state executive officers. Yet, there has not been a

flood of original matters filed with this Court as predicted by Respondents, and this case


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will not set a precedent for such a flood in the future. Just as this case must satisfy the

constraints espoused inLove v. Wilcox, so too must any other case seeking relief within

this Courts original and exclusive jurisdiction.

Respondents also mischaracterize this Courts decision in Chenault v. Phillips,

914 S.W.2d 140 (Tex. 1996). There, the Court did not hold that it could never have

original mandamus jurisdiction over the constitutionality of a statute. It held only that the

relators did not establish that their particular constitutional challenge fell within the

Courts original jurisdiction. Id. at 142. The difference here is obvious. Unlike the

present case, no statute or constitutional provision in Chenaultlimited jurisdiction to this

Court. Id. at 141. Moreover, the Court found no compelling reason to exercise

original mandamus jurisdiction over the claim. Id. at 142. Other constitutional claims

would be no different. The unique nature of this case presents a compelling reason for

the Court to exercise jurisdiction here. The Legislature recognized this by conferring

original and exclusive jurisdiction on this Court.

And last but not least, Respondents sing a different tune in district court. InRent-

A-Center, Inc. v. Combs, No. D-1-GN-001059, 250th Judicial Dist. of Travis County,

Tex., the Comptroller and Attorney filed a Plea to the Jurisdiction (2nd Supp. Appx 1)

seeking to have the district court action thrown out based on their claim that 24 of HB 3

confers exclusive jurisdiction to this Court over the taxpayers constitutional challenges

to the revised franchise tax.

For the reasons set forth above, the Legislature validly granted this Court original

and exclusive jurisdiction over this proceeding. Relators complied with the legislative


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mandate to initiate its proceeding before this Court. As a result, this Court should

exercise jurisdiction and hear this case.

II. THE REVISED FRANCHISE TAX IS IMPOSED ON A PERSONS SHARE OF

PARTNERSHIP . . . INCOME. THEREFORE, IT VIOLATES THE BULLOCKAMENDMENT.

Respondents ignore the controlling text of the Bullock Amendment, applicable

Texas law, and the historical context in which the Bullock Amendment arose. Instead,

they improperly attempt to shift this Courts focus to the ballot language, to which they

bootstrap their business entities argument. And why? Because if this Court reads the

Bullock Amendment as a whole and follows its plain language, Respondents lose.

A. The Plain Text of the Bullock Amendment Prohibits a Tax on a

Persons Share of Partnership Income, and This Court Should Reject

Respondents Request to Ignore It.

The plain text of the Bullock Amendment prohibits taxation of a persons share

of partnership . . . income without voter approval. While Respondents business

entities position may sound plausible at first blush, it ultimately must fail because it

requires the Court to ignore this plain text and render it meaningless. Texas law and the

applicable legislative history demonstrate that this important phrase was included for the

exact reason Relators allege: to prevent, without a popular vote, the type of legislation

Chairman Hury had proposed in the immediate prior session. His bill would have

imposed the franchise tax on a partnership or association based upon the amount of

income attributable to its partners or members.1

The drafters purposefully added the

1Committee Substitute H.B. 11, 72nd Leg., 1st C.S., Article 13 (1991). The House removed the

quoted language in part because the Senate would not agree with it. See Supp. Appx. 16.


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phrase including a persons share of partnership . . . income to prevent such a tax

without voter approval.

1. Respondents Improperly Construe the Meaning of the Including

Phrase.

In a self-serving effort to have this Court ignore the important meaning of the

phrase including a persons share of partnership . . . income, Relators misapply the

rules of grammar and statutory construction. While Respondents concede that the term

including is generally employed as a term of enlargement rather than limitation or

restriction, they immediately contradict themselves, stating that including does not

expand the meaning of provisions. Yet, one cannot enlarge something without

expanding it. Indeed, the U.S. Supreme Court has noted that the term including does

enlarge the category of the term it modifies. Phelps Dodge Corp. v. N.L.R.B., 313 U.S.

177, 209 (1941); see also Helvering v. Morgans, Inc., 293 U.S. 121, 125 (1934).

Notably, FederalLand Bank v. Bismarck Lumber Co., a case on which the Respondents

rely, cites each of these cases. 314 U.S. 95, 100 (1941).

Respondents urge this Court to ignore the long-standing rule that courts should

avoid construing constitutional provisions in a manner that renders them meaningless or

inoperative. Hanson v. Jordan, 198 S.W.2d 262, 263 (Tex. 1946). This Court should

decline Respondents invitation to write this phrase out of our constitution. Instead, this

Court should give the phrase its clear meaning and purpose to prevent the Legislature

from imposing the tax on a partners share of partnership income by taxing the

partnership itself.


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Further, Respondents construction of this phrase ignores the relevant history. The

drafters of the Bullock Amendment opposed an income tax on partnerships, stating that

such a tax is really a tax on personal income. Supp. Appx. 16. Bob Bullock himself

stated that a tax applied to non-corporate businesses would actually tax the incomes of

Texans in business for themselves. Supp. Appx. 17. Furthermore, when the Bullock

Amendment was passed (in TEX.CONST. art. VIII, 24), it also effectuated changes to

TEX. CONST. art. VIII, 1(c), and those changes cross-reference the Bullock

Amendment. The changes to 1(c) further demonstrate that the Legislature (1)

understood that imposing a tax on a partnerships income would, in fact, impose a tax on

a natural persons share of that income, and (2) intended to prevent imposition of such a

tax without voter approval.

2. This Court Should Reject Respondents Invitation to Reject the Plain Textof the Bullock Amendment in Favor of the Ballot Language.

Aware that the controlling text of the Bullock Amendment conflicts head on with

their position, Respondents ignore it and resort to the ballot language instead.2 This

position is illogical and ignores this Courts precedent. As this Court wrote, [w]e do not

think it would be sound to permit the ballot form to have the effect of limiting the natural

meaning of the language of the amendment itself. R.R. Commn v. Sterling Oil & Ref.

Co., 218 S.W.2d 415, 418 (Tex. 1949). The ballot language simply helps voters identify

2Respondents assert that, When this amendment was presented to the people for a vote, it was

described as proposing a constitutional amendment prohibiting a personal income tax withoutvoter approval and dedicating the proceeds of the tax, if enacted, to education and property taxrelief. (Resp. Brf., pp. 15-16).


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the amendments on which they vote. Under Texas law, [v]oters are presumed to be

familiar with the content of the actual proposed amendment summarized on a ballot.

Hardy v. Hannah, 849 S.W.2d 355, 358 (Tex. App.Austin 1992, writ denied); Winger

v. Pianka, 831 S.W.2d 853, 856 (Tex. App.Austin 1992, writ denied).

Despite this, Respondents suggest that the Texas voters who approved the Bullock

Amendment did so wholly unaware of the actual language or meaning of the amendment.

They want this Court to believe that when Texas voters walked into the voting booths,

they were ignorant of Texas law, ignorant of the Legislatures immediately-prior attempt

to tax partners through their partnerships, ignorant of Bob Bullocks public statement that

taxing partnerships was no different than taxing its partners (Supp. Appx. 18-19), and

were even ignorant of the language of the Bullock Amendment itself. The legal

principles set forth above prevent such assumptions.

Next, Respondents want this Court to believe that this ballot language granted the

Legislature permission to tax natural persons through their partnerships under the label of

a tax on business entities. Respondents argue, based on the ballot language, that the

Bullock Amendment prohibits a tax only on personal income, not business entities.

Thus, they redefine a category of income (personal) into a category of legal forms

(business entities). This Court should reject Respondents invitation to judicially rewrite

the plain text of our constitution and, instead, should apply the law as written and as

intended by our Legislature and our voters.

The Bullock Amendments text never mentions personal income or business

entities. It prohibits a tax on the net incomes of natural persons, including a persons


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share of partnership . . . income. TEX. CONST. art. VIII, 24(a) (emphasis added).

Respondents oversimplify the Bullock Amendment by lumping all business entities

together. However, the Bullock Amendment expressly and intentionally recognizes that

Texas law treats partnership income different from that of other entities: it belongs to the

partners moment it is earned.3

Reading the Bullock Amendment in tandem with the rest of Article 8 of the Texas

Constitution shows that the Legislature and voting public did not draw the business

entities distinction that Respondents draw here. Article 8 recognizes only two

categories of taxable entities, neither of which comport with Respondents business

entities label. It permits the State to tax only the incomes of both natural persons and

corporations other than municipal, subject to the Bullock Amendments limitations.

TEX. CONST. art. VIII, 1(c). This means one of two things: either the Legislature

cannot tax partnerships because the Constitution does not expressly permit it, or that a tax

on a partnership is really a tax on its partners. Such is the case here. The Legislature

may impose a tax on a partners share of partnership income so long as the partner is not

a natural person.

B. The Revised Franchise Tax Burdens a Partners Share of IncomeWhen Earned, Regardless of Whether the Partnership Makes a Cash

Distribution.

The Bullock Amendments plain language protects from taxation a natural

3Dale Craymers comment that Texas already taxed partnerships has no merit. LLCs are not

partnerships and there is no provision under Texas law that would classify them as such. In1997, years after Texans approved the Bullock Amendment, Congress amended the InternalRevenue Code to allow LLCs to elect to report as partnerships for federal income tax purposes.No provision under Texas law has ever provided for such an election.


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persons proportionate share ofincome earned by the partnership, not the amount of any

cash distribution that might be made by the partnership. Respondents conflate the

earning of income with the distribution of cash in a veiled attempt to imply partners do

not receive income until the partnership distributes it to them as cash. This argument

bypasses both reality and the law.

Partnerships earn income, not cash. Partnerships distribute cash, not income.

Under Texas law, incomeearnedby a partnership is vested in its individual partners the

moment it is earned, in accordance with their shares, regardless of whether the

partnership distributes any cash from those earnings at that time. Tex. Rev. Civ. Stat.

Ann. Art. 6132(b) 1.10(13), 4.01(b); Tex. Bus. Orgs. Code Ann. 1.002(68),

152.202(a) (West 2009). Partnership income is earnedby the partnership and, hence,

by its individual partnerswhen the partnership engages in profitable activities. But a

partnerships cash distributions do not occur unless and until the partnership decides to

write checks to its partners. Because the revised franchise tax is imposed on a

partnerships earned income and, as such, on a persons share of partnership . . .

income, it violates the Bullock Amendment.

C. The Revised Franchise Tax is an Income Tax.

Whether the franchise tax is an income tax is highly relevant because it taxes the

incomes of natural-person partners. As we argued extensively in Relators Brief (p. 25-

34), the franchise tax is an income tax.4

4The taxs label as a franchise tax is irrelevant. See Relators Brief at 30-33 (citing to cases

that hold that a taxs label does not control its character.) This tax, like many franchise taxes, is


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Respondents ignore virtually all of the arguments in Relators Brief5

and instead

argue that the tax is not an income tax because a business entity must pay the franchise

tax even if it actually loses money. (Resp. Brf., p. 27). This is not an appropriate

income definition: persons have lost money and still owed the federal income tax. For

instance, the Internal Revenue Code allows a deduction for only half of meal and

entertainment costs. A person with substantial meal and entertainment costs may lose

money but have federal income when his or her meal and entertainment costs are high.

26 U.S.C. 274.6

The same holds true for the former earned surplus tax, which was also a net

income tax. It did not allow a deduction for officer and director compensation. Tex. Tax.

Code 171.110 (repealed effective Jan. 1, 2008). Businesses with substantial officer and

director compensation would lose money but still have to pay the tax.

The U.S. Supreme Court and Third Court of Appeals agree that both taxes are net

an income tax because it is measured by and imposed on income. See Trinova Corp. v. Michigan Dept of Treasury, 498 U.S. 358, 374 (1991) (A tax on sleeping measured by the number of pairs of shoes you have in your closet is a tax on shoes.). A tax on the privilege of doing business in Texas measured by a businesss net income is a tax on net income. Likewise,TTARAs argument that the franchise tax is a fee instead of an income tax contradicts theholdings of the U.S. Supreme Court in Dawson v. Kentucky Distilleries & Warehouse Co., 255U.S. 288 (1921) and Galveston, Harrisburg & San Antonio Railway Co. v. Texas, 210 U.S. 217(1908).5 Most notably, see Relators Brief at 25-30. Respondents never discuss this States statutorydefinition of income tax included in Texas Tax Code 141.001; nor do they explain why thisCourt should not use such a definition in its analysis; nor do they argue that the franchise taxdoes not meet the statutory definition.6

Similar differences arise in the case of depreciation, club dues, certain travel expenditures,capital expenditures, capitalization of inventory costs, certain life insurance premiums, lossesand other expenses incurred when transacting with a related party, certain taxes, charitableexpenditures, political expenditures, business acquision expenses, and so forth. See, e.g., 26U.S.C. 170, 174(a)(3), (c), & (m), 263, 263(A), 264, 267, 275, 276, 279.


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Respondents business entities argument. Instead, underTexas law, the income earned

by a partnership is divided into shares at the moment the income is earned by the

partnership, and each partner is vested with his proportionate share of that income.Tex.

Rev. Civ. Stat. Ann. Art. 6132(b) 1.10(13), 4.01(b); Tex. Bus. Orgs. Code Ann.

1.002(68), 152.202(a) (West 2009). Section 152.202(a) provides:

Each partner is entitled to be credited with an equal share of the partnershipsprofits and is chargeable with a share of the partnerships losses, whether capitalor operating, in proportion to the partners share of the profits.

The partnerships net income remains divided into shares at all times, not just if and when

the partnership decides to distribute cash.7 Consequently, it is impossible to tax the

partnerships income without taxing the partners shares at the same time.

CPAs analogize a partners interest to a savings account.8 With a savings account,

when you put money in, it is a contribution. When you take money out, it is a

distribution. When the account earns income, it is immediately earned by its owner.

The same is true for partnership interests. When you put money in, it is a

contribution. When you take money out, it is a distribution. When the partnership earns

income, it is immediately earned by its partners. Therefore, a tax imposed on a

partnership is a tax imposed on the partners. This is true even when the State collects the

tax directly from the partnership. As this Court recognized in Suburban Utility

Corporation v. Public Utility Commission of Texas, 652 S.W.2d 358, 363 (Tex. 1983),

7This is readily seen when a partner decides to leave the partnership during the year. Her

account is credited with her share of partnership earnings through the day of departure.8 See, e.g., Paul Neiffer, Think Savings Account for Partners Capital Account, Farm CPAToday, Jul. 11, 2011 available at http://www.farmcpatoday.com/2011/07/11/thinks-savings-account-for-partners-capital-account/ (2nd Supp. Appx. 2).


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Texas looks to practical economic realities, not technical distinctions, when

determining the party on whom Texas imposes a tax.

Notably absent from Respondents Brief is any mention whatsoever of the

controlling provision ( 152.202(a)), either by name, description, or citation. Instead,

Respondents repeatedly quote 152.056, implying it writes 152.202(a) out of the

Business Organizations Code. It doesnt.9 Section 152.202(a) remains as a valid law

enacted contemporaneously with the Bullock Amendment and it controls the outcome of

this issue. And even if there were a conflict between these two sections, under Texass

rules of statutory construction, the specific language of 152.202(a) would prevail over

the general language of 152.056. See Tex. Govt Code Ann. 311.026 (West 2009).

The diagram included on page 36 of Relators Brief follows the plain language of

152.202(a). In attempt to discredit Relators illustration of Texas partnership law,

Respondents mischaracterize the diagram as one based on the federal tax treatment of

partnerships. The diagram depicts Texas law. Further, contrary to Respondents claim,

Relators do not argue that the revised franchise tax is imposed on natural persons because

it lowers the amount of cash that may be distributed to a partner. The revised franchise

9When it adopted the Texas Revised Partnership Act, the 73rd Legislature retained those

provisions of the prior Texas Uniform Partnership Act (Act of May 9, 1961, 57th R.S., ch. 158)that establish that a portion of the partnerships income becomes a partners share of the incomeas it is earned. For instance, under the Texas Uniform Partnership Act, A partners interest inthe partnership is his share of the profits and surplus, Act of May 9, 1961, 57th R.S., ch. 158, 26. It defines a partnership interest as a partners interest in a partnership, including thepartners share of profits and losses or similar items.Id. 1.01(12). It establishes that [e]achpartner . . . shall share equally in the profits and surplus remaining after all liabilities, includingthose to partners, are satisfied.Id. 18(1)(a). And it states that [e]ach partner is credited withan equal share of the profits of a partnership. Id. 4.01(b). These provisions all mirror currentTexas partnership law, as embodied in the Texas Revised Partnership Act.


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tax is imposed on natural persons because it taxes a natural persons share of partnership

income, which is immediately vested in that partner (in proportion with the partners

shares) the moment it is earned by the partnership. Tex. Rev. Civ. Stat. Ann. Art.

6132(b) 1.10(13), 4.01(b); Tex. Bus. Orgs. Code Ann. 1.002(68), 152.202(a) (West

2009). This is precisely the point illustrated by Relators diagram. UnderTexas law,

each partners net income includes his or her share of the partnerships net income.

Therefore, Texas imposes the tax on the net income of each partner the moment it taxes

the partnership.

Despite this clear Texas law, Respondents argue that if this Court adopts Relators

construction of the Bullock Amendment, any tax imposed on any business entity,

including corporations, would violate the Bullock Amendment because the tax would

indirectly reduce the value of an interest ultimately owned by a natural person.

Respondents concerns are simply unfounded. We do not argue that the revised franchise

tax violates the Bullock Amendment because it reduces the value of an interest that a

natural person owns. The revised franchise tax violates the Bullock Amendment because

it is imposed on a natural persons share of partnership income. Other taxes, such as

sales taxes, motor fuel taxes, and others listed by Respondents do not violate the Bullock

Amendment because they are not imposed on net income.

Likewise, the Bullock Amendment, by its plain language, does not apply to a tax

imposed on the income of a corporation, LLC, or other corporate entity10 because

10The 72nd Legislature considered LLCs to be corporations, not partnerships. The same bill that

created Texas LLC Act also modified the corporate franchise tax to tax the new entity form. The


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Texass voters and legislators. The Bullock Amendment did not arise in a vacuum, and

Texas voters did not enter their polling places with blank minds. The newspaper articles

and correspondence produced in our appendices show the heated battle regarding Texas

partnership taxation out of which the Bullock Amendment arose. Texans became aware

of this battle through extensive media coverage, and it certainly informed their decision

to vote for the Bullock Amendment.

Respondents suggest that this Court should disregard Relators historical evidence

as remote in time. Yet, Lieutenant Governor Bullock and the 22 Senators wrote their

letters only a year and 9 months before the Legislature adopted what became the Bullock

Amendment. They wrote their letters during a special session immediately preceding

the regular session that adopted what became the Bullock Amendment. (Supp. Appx.

16-19). When one examines the history of the changes to the tax code contemplated by

the Legislature at this time, the letters are highly relevant and contemporaneous. (See

Relators Brief pp. 1-4). The 73rd Legislative session was the very first available

opportunity for Bullock and the Senators to protect partners from the income tax they

narrowly escaped in 1991.

In U.S. v. OBrien, on which the Respondents rely, the U.S. Supreme Court stated

that the Court will look to statements by legislators for guidance as to the purpose of the

legislature. 391 U.S. 367, 384 (1968). Though the OBrien court noted that it would

not void a statute that is, under well-settled criteria, constitutional on its face based on

one legislator [making] a speech or the statement of a single legislator, that is a far

cry from the present situation. See id. The plain text of the Bullock Amendment clearly


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prohibits a tax on a persons share of partnership . . . income. Relators clarifying

historical evidence is more than one legislator [making] a speech or the statement of a

single legislator it is the repeated, clear public statements of the Lieutenant Governor

and half the members of the Texas Senate.

The substance of the letters directly supports Relators argument. There is nothing

oblique about the Senators statements that a tax on partnerships is really a tax on

personal income or Bob Bullocks statement that a tax applied to non-corporate

businesses would actually tax the incomes of Texans in business for themselves. (Supp.

Appx. 16-19). These statements clearly show that Bullock and the Senators believed that

a tax on partnership income is a tax on the incomes of natural persons, and their intention

in passing the subsequent Bullock Amendment was to prevent imposition of such a tax

without majority-voter approval.

To counter Relators extensive historical evidence, the Respondents provide

isolated statements from a few public officials. Respondents first mention a short debate

between Representative Williamson and Chairman Stiles regarding the Bullock

Amendment. During this conversation, Williamson never states whether or not he

believes the amendment affects non-corporate businesses. Stiles merely assumes that

the Legislature could pass a tax on non-corporate businesses. These statements certainly

do not outweigh the overwhelming historical evidence Relators provide.

Further, with all due respect for the insight of former Chief Justice Phillips,

Respondents improperly suggest that he testified about the revised franchise tax that was

enacted in 2006. He did not. He testified instead about an earlier proposal that included


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a payroll tax imposed on employers. See Senate Research Center Report on HB 3, 73rd

Legislature, Regular Session, Apr. 28, 2005. (2nd Supp. Appx. 3). Chief Justice

Phillips believed a tax based partially on payroll costs would be constitutional. Reading

the portion of Chief Justice Phillips comments immediately preceding the portion

Respondents quote makes this abundantly clear:

But the more variation there is, and by having this partial tax on thepayroll, that gives you enough variation and result from what a net incometax would be, then its, I think you avoid a constitutional problem.

(Respondents Appendix B, p. 3) (emphasis added). His comments later in the same

hearing support Relators position that the franchise tax (as enacted) violates the Bullock

Amendment:

If you add some things in and subtract some things, and at the end its allsmoke and mirrors, and basically youre taxing someone on what theirincome has been, then it probably IS an income tax.

(Respondents Appendix B, p. 5) (emphasis in original).

And former Comptroller Sharps statements do not address whether a tax imposed

on partnership income is a tax on a natural persons share of partnership income. Sharps

statements focus solely on whether he thinks the revised franchise tax is an income tax.

In fact, while the Legislature was considering the revised franchise tax in 2006, Sharp

testified before the House Ways & Means Committee that a net income tax on

partnerships would violate the Bullock Amendment. He said:

We looked at taking the current franchise tax [i.e. the earned surplusmethod] and extending it to partnerships. We came to the conclusion thatthat wouldnt work because it would be a violation of the BullockAmendment and because when you extend a net income tax which prettymuch what the current franchise tax is, to partnerships, it would wind up


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being in violation of Bullock Amendment and most likely a personalincome tax.

Hearing on Tex. H.B. 3 Before the House Ways & Means Comm., 79th Leg., 3rd Sp.

Sess. (April 10, 2006) available athttp://www.house.state.tx.us/video-audio/committee-

broadcasts/committee-archives/player/?session=79&committee=490&ram=60410a40

(2nd Supp. Appx. 4).

For the reasons stated above, the revised franchise tax is imposed on a natural

persons share of partnership income. Texas voters never approved the imposition of the

revised franchise tax in a statewide referendum as required by the Bullock Amendment.

Therefore, the revised franchise tax violates the Texas Constitution, and this Court should

declare it invalid.

F. Relators Request Limited Relief.

Relators believe that the Court should tailor the appropriate relief to the specific

constitutional violation. Therefore, Relators propose that the Court limit relief to the

portion of taxes attributable to a natural persons share of partnership income.

III. THIS COURTS FOCUS SHOULD BE ON RELATORS BULLOCK AMENDMENT

CLAIM.

Although Relators have provided this Court with legitimate arguments and

authorities to support a finding of jurisdiction over the equal-protection claims, Relators

also recognize that there are legitimate arguments to be made for finding otherwise. The

essential issue raised by Relators is their challenge to the constitutionality of the revised

franchise tax because it is an income tax imposed on a persons share of partnership

income, which was enacted without the voters approval. Relators desire that this issue


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remain the focus of the mandamus proceeding before this Court. To the extent that this

Court agrees with Respondents that the equal protection and attorneys fee claims are

outside the scope of this Court's jurisdiction, Relators urge the Court to decide that issue

separate and apart from the issues of whether this Court has jurisdiction over the broad

constitutional challenge and the merits of that constitutional challenge.

PRAYER

Relators respectfully request that this Court exercise jurisdiction over this original

proceeding and, within 120 days of the filing of Relators Original Petition, that this

Court issue a mandatory writ:

(1) permanently enjoining Respondents from enforcing, collecting, or assessingthe franchise tax on Allcats natural person partners share of Allcats income;

(2) declaring that the franchise tax found in Chapter 171 of the Texas Tax Codeviolates the Texas Constitution to the extent it is imposed on a natural persons share ofpartnership income;

(3) ordering a refund of the taxes paid on Allcats natural person partners share ofAllcats income;

(4) taxing all costs and reasonable and necessary attorneys fees as are equitableand just, reasonable and necessary, against the Respondents under Texas Civil Practiceand Remedies Code 37.009; and

(5) declaring that the Comptrollers interpretation of Texas Tax Code 171.1011(g)(3) and 171.1012 violates the equal and uniform taxation clause of the TexasConstitution;

(6) awarding Relators any such other and further relief to which they may be justlyentitled at law or in equity.


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Respectfully submitted,

MARTENS, SEAY & TODDJames F. [email protected]

State Bar No. 13050720Michael B. [email protected] Bar No. 24051318Lacy L. [email protected] Bar No. 24040561Amanda M. [email protected] Bar No. 24066208

301 Congress Avenue, Suite 1950Austin, Texas 78701Tele: (512) 542-9898Fax: (512) 542-9899

By /s/ James F. MartensJames F. MartensState Bar No. 13050720

ATTORNEYS FOR RELATORS,

ALLCAT CLAIMS SERVICE, L.P.

AND JOHN WEAKLY


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CERTIFICATE OF SERVICE

I hereby certify that a true and correct copy of Relators Reply Brief has been sent

via ProDoc eFiling and electronic mail on October 13, 2011 to:

Danica MiliosDeputy Solicitor [email protected] DavisAssistant Solicitor [email protected] of the Attorney GeneralP.O. Box 12548 (MC 059)

Austin, Texas 78711-2548

Kevin Van OortDeputy ChiefFinancial and Tax Litigation [email protected] of the Attorney GeneralP.O. Box 12548 (MC 029)Austin, Texas 78711-2548

/s/ James F. MartensJames F. Martens


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0.11-05893Jn \!tbe

~ u p r e m e QCourt of \!texas

IN RE ALLCAT CLAIMS SERVICE, L.P. AND JOHN WEAKLY,Relators.

REI.lATORS' SECOND SUPPI.lEMENTALAPPENDIXJames F. [email protected] Bar No. 13050720Michael B. [email protected] Bar No. 24051318Lacy L. Leonardlleonard @textaxlaw .comState Bar No. 24040561Amanda M. [email protected] Bar No. 24066208MARTENS, SEAY, & TODD301 Congress Avenue, Suite 1950Austin, Texas 78701Tele: (512) 542-9898Fax: (512) 542-9899ATTORNEYS FOR RELATORS,ALLCAT CLAIMS SERVICE, L.P.AND JOHN WEAKLY


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T ABI,E OF CONTENTS1. Defendants' Plea to the Jurisdiction and Original Answer, RentA-Center,

Inc. v. Combs, No. D1-GN-001059, 250th Judicial Dist. of Travis County,Tex.

2. Paul Neiffer, "Think Savings Account for Partner's Capital Account," FarmCPA Today, Jul. 11,2011

3. Senate Research Center Report on Tex. HB 3, 73rd Legislature, RegularSession, Apr. 28, 2005

4. Transcript of Hearing on Tex. H.B. 3 Before the House Ways & MeansCornm., 79th Leg., 3rd Sp. Sess. (April 10, 2006)


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Defendants' Plea to TheJurisdiction and OriginalAnswer,Rent-A-Center, Inc. v.Combs, o. D--I--GN--OOI059,250th Judicial Dist. of TravisCounty, Tex.


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()....-

o

Respectfully submitted,GREG ABBOTTAttorney General ofTexasDANIEL T. HODGEFirst Assistant Attorney GeneralBILL COBBDeputy Attorney General for Civil LitigationDAVID C. MATTAXDirector ofDefense LitigationKEVIN VAN OORThi

IA sistant Attorney Generalate Bar No. 04,410001

Taxation DivisionP. O. Box 12548Austin, Texas 78711-2548(512) 463-2078(512) 478-4013 FacsimileATTORNEYS FOR DEFENDANTS

3


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(J

o

.I " I

I do hereby certify that on th ~ - - ' - - - - day ofApril 2011, a true and correct copy oftheforegoing Defendants' Plea to the Jurisdiction and Original Answer, was sent via CertifiedMail, Return Receipt Requested to Plainti ffs Attorney, Farley P. Katz, Strasburger & Price,

4


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Paul Neiffer, "Think SavingsAccount for Partner's CapitalAccount," Farm CPA Today,Jul. 11,2011


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JUL 11Think Savings Account for Partner's Capital AccountBy Paul Heiffer I Tracl


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Senate Research Center eporton Tex. H.B. 3, 73rd Leg., R.S.,Apr. 28, 2005


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BILL ANALYSIS

Senate Research Center

AUTHOR'S/SPONSOR'S STATEMENT OF INTENT

H.B.3By: Keffer, Jim et al.(Ogden)Finance4/28/2005Engrossed

The property tax costs Texans more than any other state or local tax. In tax year 2003, 3,702local taxing lmits levied almost $29 billion in property taxes, of which school districts accOlmtedfor more than 60 percent, according to the comptroller of public accounts. From 1985-2003, theschool district property tax levy increased by approximately 260 percert. Currently, Texas ranks45th among the states in terms of homeownership levels. The high property tax burden impairsTexans' ability to own their own homes.H.B. 3 raises state revenue to fund a significant property tax reduction for Texas taxpayers.RULEMAKING AUTHORITYRulemaking authority is expressly granted to the comptroller of public accounts in SECTIONlH.Ol (Section 542.405, Transportation Code), SECTION 2.01 (Sections 251.002, 251.0025,251.019, and 251.020, Tax Code), SECTION 2.05 (Section 171.0013, Tax Code), SECTION3B.07 (Section 152.0412, Tax Code), and SECTION 3D.Ol (Section 164.053, Tax Code) of thisbill.SECTION BY SECTION ANALYSIS

ARTICLE 1. PROPERTY TAXATIONPART A LIMITATION ON SCHOOL DISTRICT TAX RATE

SECTION lA.Dl. Amends Section 45.003, Education Code, by amending Subsection (d) andadding Subsections (e) and (t), as follows:

(d) Requires a proposition submitted to authorize the levy of maintenance taxes toinclude the question of whether the governing board or commissioners court may levy,assess, and collect ammal ad valorem taxes for the further maintenance of public schools,at a rate not to exceed the rate, which may not be more than $.997, rather than $1.50, onthe $100 valuation of taxable property in the district, stated in the proposition.(e) Provides that an election held before September 1, 2005, authorizing a maintenancetax at a rate of at least $.997 on the $100 valuation of taxable property in the district issufficient to authorize a rate not to exceed $.997.(t) Authorizes a district permitted by special law on January 1, 2005, to impose an advalorem tax at a rate greater than $1.50, to continue to impose a rate that is $.503 lessthan the rate previously authorized.

PART B. BUY-DOWN OF SCHOOL DISTRICT TAXESSECTION IB.01. Amends Chapter 403, Government Code, by adding Subchapter 0, asfollows:

SUBCHAPTER O. DISTRIBUTION OF INCREASESIN AVAILABLE STATE REVENUE FOR SCHOOL DISTRICT TAX RATE REDUCTION

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Sec. 403.351. DEFINITIONS. Defines "available state revenue" and "increase inavailable state revenue."Sec. 403.352. CERTIFICATION OF INCREASE IN AVAILABLE STATE REVENUE.Requires the comptroller of public accounts (comptroller), in the statement required bySection 49a, Article III, Texas Constitution, to certify the amount, if any, of the increasein available state revenue for the succeeding fiscal biennium and the total amount ofschool district maintenance and operations taxes levied under Section 3(e), Article VII,Texas Constitution, for the tax year beginning in the second year of the current fiscalbiennium.Sec. 403.353. DISTRIBUTION OF AVAILABLE STATE REVENUE FOR TAXRATE REDUCTION. (a) Requires the comptroller, for the fiscal biennium following acertification under Section403.352, to distribute to the school districts in this state for taxrate reduction an amount of available state revenue that is equal to the sum of 15 percentof the increase in available state revenue for the current fiscal biennium certified underSection 403.352 and the amotmt of available state revenue distributed in the precedingfiscal biennium under this section for school district tax rate reduction

(b) Requires the comptroller to distribute the amount required by Subsection (a) inequal amounts in each fiscal year of the fiscal biennium. Sets forth the methodfor determining the apportionment among the school districts.(c) Requires the money received by each school district under this section to beapplied to reducing the rollback tax rate of the district, as provided by Section26.08 (Election to Ratify School Taxes), Tax Code.

SECTION IB.02. Amends Subchapter E, Chapter 42, Education Code, by adding Section42.2518, as follows:Sec. 42.2518. ADDITIONAL STATE AID FOR PROPERTY TAX RELIEF. (a)Entitles a school district, for any school year, to additional state aid to the extent that anincrease in the guaranteed level of state and local funds per weighted student per cent oftax effort under Section 42.302 applicable to that school )ear does not compensate thedistrict for a reduction in district ad valorem tax revenue caused by ad valorem tax ratereduction made pursuant to Subchapter 0, Chapter 403, Government Code.

(b) Provides that a determination by the commissioner of education under thissection is fmal and may not be appealed.SECTION IB.Q3. Amends Sections 26.08(i) and (Ie), Tax Code, as follows:

(i) Includes the state funds for property tax rate relief that will be distributed to thedistrict under Subchapter 0, Chapter 403, Government Code, in addition to the statefunds under Chapter 42, Education Code, in the calculation of the rollback tax rate of aschool district. Makes a conforming change.(Ie) Makes conforming changes. Deletes the references to the 2003 and 2004 tax years.

PART C. MANDATORY SALES PRICE DISCLOSURESECTION lC.Ol . Amends the heading to Subchapter C, Chapter 22, Tax Code, to read asfollows:

SUBCHAPTER C. REPORTS OF POLITICAL SUBDIVISION ACTIONSSECTION lC.02. Amends Chapter 22, Tax Code, by adding Subchapter D, as follows:

SUBCHAPTER D. REPORT OF SALES PRICE

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Sec. 22.61. SALES PRICE DISCLOSURE REPORT. (a) Requires the purchaser orgrantee of real property under a recorded deed conveying an interest in the real property,except as provided by Subsection (b), not later than the 10th day after the date the deed isrecorded in the county real property records, to file a sales price disclosure report with thechief appraiser of the appraisal district established for the county in which the property islocated.

(b) Sets forth the sales and transfers of real property to which this section does notapply.( c) Requires the sales price disclosure report to be signed by the purchaser orgrantee of the real property described in the report.

Sec. 22.62. REPORT FORM. (a) Sets forth the required form for a sales price disclosurereport filed under this subchapter.

(b) Requires the appraisal district to include at the end of the form instructions forthe filing of the form by certain means.(c) Requires each appraisal district to prepare and make available sales pricedisclosure report forms that conform to the requirements of this section. Providesthat no additional information may be required to be included in a sales pricedisclosure report form, except for instructions for the filing of the form.(d) Requires each county clerk's or combined county and district clerk's office toprovide at no charge a sales price disclosure report form to each grantee or agentof a grantee who appears in person and tenders a deed to real property forrecording. Requires the sales price disclosure form to be the form that is preparedand made available by the appraisal district established for the cotmty in whichthe property is located.(e) Requires the county clerk or the combined county and district clerk, at the endof a calendar month in which a deed to real property has been recorded in thedeed records of the county, to provide the appraisal district established for thecotmty with a copy of the grantee index or a report or list of deeds to real propertyfiled for recording in that month.

Sec. 22.63. FILING AND RECEIPT OF REPORT. (a) Sets forth the methods by whicha purchaser or grantee may file a sales price disclosure report with the ch ief appraiser.(b) Requires the chi ef appraiser, on receipt of the report, to provide to thepurchaser or grantee a written acknowledgment of receipt. Requires the chie fappraiser, if the acknowledgment of receipt is mailed, to mail it to the purchaseror grantee at the address provided in the report.

Sec. 22.64. PREPARATION OF REPORT; IMMUNITY FROM LIABILITY. (a)Requires a sales price disclosure report to be prepared by certain persons.(b) Provides that a title insurance company, lender, real estate agent, or attorneywho prepares a sales price disclosure report is not liable to any person forpreparing the report or for any unintentional errors or omissions in the report.(c) Requires the applicable title insurance company, lender, real estate agent, orattorney to provide a sales price disclosure report form and filing instructions toeach purchaser or grantee of real property, unless certain conditions apply.

Sec. 22.65. ACTION TO COMPEL COMPLIANCE. Requires the chief appraiser tobring an action for an injunction to compel a person to comply with the requirements ofthis subchapter. Requires the court, on finding that this subchapter applies and that theperson has failed to comply with its requirements, to order the person to comply andauthorizes the court to assess costs and reasonable attorney's fees against the person.

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SECTION IC.03. Amends Section 23.013, Tax Code, to authorize the chief appraiser to useinfonnation contained in a sales price disclosure report filed under Subchapter D, Chapter 22, indetermining the market value of real property. Prohibits the chief appraiser from increasing themarket value of the real property solely on the basis of the report. Creates a subsection fromexisting text.PART D. CONFIDENTIALITY OF CERTAIN APPRAISAL INFORMATION

SECTION lD.Q1. Amends Chapter 25, Tax Code, by adding Section 25.027, as follows:Sec. 25.027. CONFIDENTIALITY OF PHOTOGRAPHS OF CERTAINRESIDENTIAL PROPERTY. (a) Provides that photographs or floorplans of animprovement to real property that is designed primarily as use as a residence contained inappraisal records are confidential infonnation, only available for the official use ofcertain entities and officials.

(b) Provides that this section does not apply to certain aerial photographs.PART E. TEXAS ECONOMIC DEVELOPMENT ACT

SECTION IE.01. Amends Section 313.051, Tax Code, by adding Subsection (a-I) andamending Subsection (b), as follows:(a-I) Provides that, notwithstanding Subsection (a), if on January 1, 2002, this chapter(Texas Economic Development Act) applied to a school district in whose territory islocated a federal nuclear facility, this subchapter (Limitation on Appraised Value ofProperty in Certain Rural School Districts) continues to apply to the school districtregardless of whether the school district ceased or ceases to be described by Subsection(a) after that date.(b) Requires certain property owners to create only at least 10 new jobs on the owner'squalified property, 10 percent, rather than 80 percent, of which must be qualifying jobs asdefmed by Section 313.021(3) (certain full-time, pennanentjobs with certain salaries andhealth benefit plans).

SECTION IE.02. Makes application of Section 313.05I(b), Tax Code, as amended by this part,prospective.PART F. PROPERTY TAX RELIEF FOR CUL TURALL Y SIGNIFICANT SITES

SECTION IF.01. Amends Section 11.24, Tax Code, as follows:Sec. 11.24. New heading: HISTORIC AND CULTURALLY SIGNIFICANT SITES.Adds structures or archeological sites designated as culturally significant sites to the listof structures and sites that may be exempted from taxation.

SECTION IF.02. Makes the change in law made by SECTION IF.OI prospective to a tax yearthat begins on or after the effective date of this Act.SECTION IF.03. Effective date of this part: upon passage or the 91st day after adjournment.

PART G. INFORMATION ON TAX BILLS RELATING TOPROPERTY VALUES AND TAXESSECTION IG.01. Amends Section 31.01, Tax Code, by amending Subsection (c) and addingSubsection (c-I) , as follows:

(c) Adds Subdivision (11) to require the tax bill or a separate statement accompanying thetax bill, for real property, to state for the current tax year and each of the preceding fivetax years the appraised value and taxable va lue of the property, the total tax rate for theSRC-JGS H.B. 3 79(R) Page 4 of 20


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unit, the amount of taxes imposed on the property by the unit, and the difference,expressed as a percent increase or decrease, as applicable, in the amount of taxes imposedon the property by the unit compared to the amount imposed for the preceding tax year.Adds Subdivision (12) to require the tax bill or a separate statement accompanying thetax bill, for real property, to state the differences, expressed as a percent increase ordecrease, as applicable, in the following for the current tax year as compared to the fifthtax year before that tax year: the appraised value and taxable value of the property, thetotal tax rate for the lmit, and the amount of taxes imposed on the property by the unit.Redesignates existing Subdivision (11) as Subdivision (13) and makes a nonsubstantivechange.( c ~ 1) Requires the tax bill or statement, if information from the preceding six tax yearsrequired by Subsection (c)(U) or (12) to be included in the tax bill or separate statementis not available, to state that the information is not available for that year. Provides thatthis subsection expires December 31, 2011.

PART H. DEPOSIT OF CERTAIN TRAFFIC PENALTIESIN FOUNDATION SCHOOL PROGRAM

SECTION IH.01. Amends Subchapter D, Chapter 542, Transportation Code, by adding Section542.405, as follows:Sec. 542.405. DEPOSIT OF REVENUE FROM CERTAIN TRAFFIC PENALTIESFOR FOUNDATION SCHOOL PROGRAM. (a) Defmes "photographic traffic signalenforcement system. "

(b) Provides that this chapter applies only to the civil or administrative penaltiesrelating to certain violations of traffic laws recorded by certain photographictraffic signal enforcement systems.(c) Authorizes the local authority, of the gross amount received from theimposition of a civil or administrative penalty against the owner of a motorvehicle, to retain $1 and remit the remainder to the comptroller for deposit to thecredit of the foundation school fund.(d) Requires the comptroller to adopt rules and forms to implement and enforcethis section.

SECTION IH.02. Provides that Section 542.405, Transportation Code, as added by this part,applies to revenue received by a local authority unit of this state from the imposition of a civil oradministrative penalty on or after the effective date of this article, regardless of when the penaltywas imposed.

PART 1. SPLIT PAYMENT OF RESIDENCE HOMESTEAD TAXESSECTION II.01. Amends Section 31.03, Tax Code, by adding Subsections (d) and (e), asfollows:

(d) Authorizes the governing body of a taxing unit that collects its own taxes to provide,in a certain manner, that a person who pays one-half of the unit's taxes on the taxpayer'sresidential homestead, as defined in Section 11.13, before December 1 may pay t

Allcat v Combs, Reply Brief on the Merits - Filed: 10/13/2011

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Transcript of Allcat v Combs, Reply Brief on the Merits - Filed: 10/13/2011