in re allcat, defendants' brief on the merits (tex. oct. 3, 2011)

8/4/2019 In re Allcat, Defendants' Brief on the Merits (Tex. Oct. 3, 2011)

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No. 11-0589

In the

Supreme Court of Texas

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

Original Proceeding

DEFENDANTSBRIEF ON THE MERITS

GREG ABBOTTAttorney General of Texas

DANIEL T. HODGEFirst Assistant Attorney General

BILL COBBDeputy Attorney Generalfor Civil Litigation

DAVID C. MATTAXDirector of Defense Litigation

JONATHAN F. MITCHELLSolicitor General

DANICA L. MILIOSDeputy Solicitor GeneralState Bar No. 00791261

BILL DAVIS

Assistant Solicitor GeneralState Bar No. 24028280

KEVIN VAN OORTDeputy Chief,

Financial and Tax Litigation DivisionState Bar No. 20449890

OFFICE OF THE ATTORNEY GENERAL

P.O. Box 12548 (MC 059)

Austin, Texas 78711-2548[Tel.] (512) 936-1700[Fax] (512) [email protected]

COUNSEL FOR DEFENDANTS

FILEDIN THE SUPREME COF TEXAS11 October 3 P6:23BLAKE. A. HAWTHOCLERK


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IDENTITY OF PARTIES AND COUNSEL

Plaintiffs:

Allcat Claims Service, L.P. and

John Weakley

Counsel for Plaintiffs:

James F. Martens

State Bar No. [email protected]

MARTENS,SEAY,&TODD

301 Congress Avenue, Suite 1950Austin, Texas 78701

Tel.: (512) 542-9898Fax: (512) 542-9899

Defendants:

Susan Combs, Texas Comptrollerof Public Accounts andGreg Abbott, Attorney General for the

State of Texas

Counsel for Defendants:

Danica L. MiliosDeputy Solicitor GeneralState Bar No. 00791261

[email protected]

Bill DavisAssistant Solicitor GeneralState Bar No. 24028280

[email protected]


P.O. Box 12548 (MC 059)Austin, Texas 78711-2548Tel.: (512) 936-1700Fax: (512) 474-2697

Kevin Van OortDeputy Chief,Financial and Tax Litigation DivisionState Bar No. 20449890

[email protected]


P.O. Box 12548 (MC 029)Austin, Texas 78711-2548Tel.: (512) 463-8897

Fax: (512) 477-2348


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TABLE OF CONTENTS

Identity of Parties and Counsel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i

Index of Authorities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . v

Statement of the Case . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xi

Issues Presented as Directed by the Court . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xii

Statement of Facts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

Summary of the Argument . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Argument . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

I. The Court Has Two Viable Choices: Apply Love v. Wilcox andDismiss This Case, or OverruleLove and Assert Jurisdiction. But theCourt Should Reject Plaintiffs Limitless Jurisdictional Argument

Under 22.002(c) of the Texas Government Code . . . . . . . . . . . . . . . . . . . 7

A. If the Court Construes Article V, 3 of the Texas ConstitutionAccording to Precedent, 24 of House Bill 3 Steps Beyond theBounds of Article V, 3 and Is Unconstitutional . . . . . . . . . . . . . . . 8

B. If the Court Is Inclined To OverruleLove andLane, However,It Might Look to Article V, 8s Grant of General Power to theDistrict Courts as a Reservoir of Authority for the EntireJudiciary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

C. The Court Should Reject Plaintiffs View of Texas GovernmentCode 22.002(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

II. The Franchise Tax Is Not Imposed on Natural Persons, and ThereforeDoes Not Violate the Bullock Amendment . . . . . . . . . . . . . . . . . . . . . . . . 14

A. The Plain Text of the Bullock Amendment Prohibits TaxesImposed Without a Vote on Natural Persons, Not BusinessEntities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15


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B. The Franchise Tax Burdens Partnership Taxable MarginRegardless of What the Partnership Distributes to a Partner inthe Form of Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

1. Texas law treats partnerships as entities, not as the

aggregate of their partners . . . . . . . . . . . . . . . . . . . . . . . . . . 17

a. Texas has fully adopted the entity theory ofpartnerships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

b. Plaintiffs graphic illustration is wrong andirrelevant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

2. The term including does not enlarge the meaning of

the term natural persons. . . . . . . . . . . . . . . . . . . . . . . . . . 20

3. The extraneous and non-contemporaneous comments oftwenty-two Senators, Lieutenant Governor Bullock, andformer Comptroller Strayhorn do not inform the Courts

interpretation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

C. Plaintiffs Contention That the Franchise Tax Is an IncomeTax Is Beside the Point and Wrong. The Court Need NotAddress That Question To Decide This Case . . . . . . . . . . . . . . . . . 27

D. The Relief Requested by Plaintiffs Is Overly Broad . . . . . . . . . . . 29

III. Plaintiffs Equal-and-Uniform-Taxation and Attorneys-Fees ClaimsAre Beyond the Scope of House Bill 3s Grant of Original Jurisdictionand Should Be Dismissed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

A. Plaintiffs Equal-and-Uniform-Taxation Claim ChallengesComptroller Action, Not the Constitutionality of the FranchiseTax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

B. Plaintiffs Claim for Attorneys Fees Likewise Falls Outside theScope of the Courts Grant of Jurisdiction . . . . . . . . . . . . . . . . . . . 32


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Prayer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35

Certificate of Service . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37


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INDEX OF AUTHORITIES

Cases

A & T v. Consultants, Inc. v. Sharp,

904 S.W.2d 668 (Tex. 1995) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11, 12

Andrade v. NAACP of Austin,345 S.W.3d 1 (Tex. 2011) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

AT & T Commcn of Tex., L.P. v. Sw.,186 S.W.3d 517 (Tex. 2006) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

Badouh v. Hale,

22 S.W.3d 392 (Tex. 2000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

Cent. Power & Light Co. v. Sharp,919 S.W.2d 485 (Tex. App.Austin 1996, writ denied) . . . . . . . . . . . . . . . . . . . 29

Chenault v. Phillips,

914 S.W.2d 140 (Tex. 1996) (per curiam) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

Chien v. Chien,759 S.W.2d 484 (Tex. App.Austin 1988, no writ) . . . . . . . . . . . . . . . . . . . . . . 18

Combs v. Tex. Entmt Assn,No. 09-0481, 2011 WL 3796572 (Tex. Aug. 26, 2011) . . . . . . . . . . . . . . . . . . . . 13

Destec Energy, Inc. v. Houston Lighting & Power Co.,966 S.W.2d 792 (Tex. App.Austin 1998, no pet.) . . . . . . . . . . . . . . . . . . . . . . 18

Dubai Petroleum Co. v. Kazi,12 S.W.3d 71 (Tex. 2000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

Fed. Land Bank v. Bismark Lumber Co.,

314 U.S. 95 (1941) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

Gragg v. Cayuga Indep. Sch. Dist.,539 S.W.2d 861 (Tex. 1976) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15


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Holland v. Wal-Mart Stores, Inc.,1 S.W.3d 91 (Tex. 1999) (per curiam) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

In re Smith,

333 S.W.3d 582 (Tex. 2011) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

Intercontinental Group Pship v. KB Home Lone Star L.P.,295 S.W.3d 650 (Tex. 2009) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32

Lane v. Ross,176 S.W.3d 746 (Tex. 2005) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9, 10, 11

Love v. Wilcox,28 S.W.2d 515 (Tex. 1930) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8, 9, 10, 11, 12, 13

Neeley v. W. Orange-Cove Consol. Indep. Sch. Dist.,176 S.W.3d 746 (Tex. 2005) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1, 2, 13

Ojo v. Farmers Group, Inc.,

No. 10-0245, 2011 WL 2112778 (Tex. May 27, 2011) . . . . . . . . . . . . . . . . . . . . 22

Republic Ins. Co. v. Silverton Elevators, Inc.,493 S.W.2d 748 (Tex. 1973) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

Seidman & Seidman v. Schwartz,

665 S.W.2d 214 (Tex. App.San Antonio 1984, writ dismd) . . . . . . . . . . . . . . 18

State v. Ferguson,125 S.W.2d 272 (Tex. 1939) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

Strayhorn v. Raytheon E-Sys., Inc.,101 S.W.3d 558 (Tex. App.Austin 2003, pet. denied) . . . . . . . . . . . . . . . . . . . 33

United States v. OBrien,391 U.S. 367 (1968) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

Walker v. Packer,827 S.W.2d 833 (Tex. 1992) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14


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Constitutional Provisions, Statutes, and Rules

34 TEX.ADMIN CODE 3.557(24) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

TEX.BUS.&COM.CODE 15.16 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34

TEX.BUS.ORGS.CODE 152.056 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18, 19

TEX.CIV.PRAC.&REM.CODE 37.007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

TEX.CIV.PRAC.&REM.CODE 37.009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4, 32

TEX.CIV.PRAC.&REM.CODE 37.010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

TEX.CONST. art. I, 28 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

TEX.CONST. art. II, 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

TEX.CONST.art. IV, 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8, 12

TEX.CONST. art. V, 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xii, 9

TEX.CONST. art. V, 3(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13, 32

TEX.CONST. art. V, 6 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

TEX.CONST. art. V, 8 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9, 10, 14

TEX.CONST. art. V, 16 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

TEX.CONST. art. V, 19 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

TEX.CONST.art. VIII, 1(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

TEX.CONST. art. VIII, 1(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

TEX.CONST. art. VIII, 24(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xi, xii, 14, 15, 19, 27

TEX.GOVT CODE 22.002(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8, 11, 12, 13, 14


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TEX.GOVT CODE 311.005(13) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

TEX.GOVT CODE 552.3215(d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34

TEX.GOVT CODE 552.353(b)(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34

TEX.GOVT CODE 2001.038 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34

TEX.INS.CODE 541.405(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34

TEX.NAT.RES.CODE 33.171(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34

TEX.NAT.RES.CODE 61.019(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34

TEX.TAX CODE 171.0002(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

TEX.TAX CODE 171.0002(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

TEX.TAX CODE 171.001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

TEX.TAX CODE 171.001(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2, 3

TEX.TAX CODE 171.002(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4, 28

TEX.TAX CODE 171.002(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4, 28

TEX.TAX CODE 171.002(d)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

TEX.TAX CODE 171.101 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

TEX.TAX CODE 171.101(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

TEX.TAX CODE 171.1011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

TEX.TAX CODE 171.1011(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3, 28

TEX.TAX CODE 171.1011(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3, 28

TEX.TAX CODE 171.1011(g)(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31


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TEX.TAX CODE 171.1012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31

TEX.TAX CODE 171.1016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

TEX.TAX CODE 171.1032 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

TEX.TAX CODE 171.106 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3, 4, 28

Other Authorities

Act of May 31, 1993, 73rd Leg., R.S., ch. 917, 1993 Tex. Gen. Laws 3887 . . . . . . . . . 18

Act of May 7, 1999, 76th Leg., R.S., ch. 184, 2, 1999 Tex. Gen. Laws 651 . . . . . . . . . . 4

Act of June 2, 2003, 78th Leg., R.S. ch. 209, 31, 2003 Tex. Gen. Laws 979(amended 2006) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2, 20

Act of May 2, 2006, 79th Leg., 3d C.S., ch. 1, 1-27, 2006 Tex. Gen. Laws 1 . . . . . 1, 2

Act of May 2, 2006, 79th Leg., 3rd C.S., ch. 1, 2, 2006 Tex. Gen. Laws 1 . . . . . . . . . 28

Act of May 2, 2006, 79th Leg., 3rd C.S., ch. 1, 5, 2006 Tex. Gen. Laws 1 . . . . . . . . . 20

Act of May 2, 2006, 79th Leg., 3d C.S., ch. 1, 24, 2006 Tex. Gen. Laws 1 . 7, 30, 32, 33

Act of May 2, 2006, 79th Leg., 3d C.S., ch. 1, 24(a), 2006 Tex. Gen. Laws 1 . . . . . 1, 32

Act of May 2, 2006, 79th Leg., 3d C.S., ch. 1, 24(b), 2006 Tex. Gen. Laws 1 . . . . . . . . 1

Act of May 2, 2006, 79th Leg., 3d C.S., ch. 1, 27, 2006 Tex. Gen. Laws 1 . . . . . . . . . 32

Allcat Claims Serv., L.P. v. Combs, No. D-1-GN-11-002294,

201st Judicial Dist. of Travis County, Tex. Aug. 1, 2011 . . . . . . . . . . . . . . . . . . . 4

BLACKS LAW DICTIONARY 763 (6th ed. 1990) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27


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Dave McNeely,Bullocks Tax Idea Renewed, PORT ARANSAS SOUTH JETTY,June 6, 2008, http://www.portasouthjetty.com/news/2008-06-26/Opinion/013.html . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

Debate on Tex. SJR 49, Floor of the House, 73rd Leg., R.S. 37 (May 21, 1993) . . . . . . 25

LEGIS.REF.LIBRARY OF TEX., http://www.lrl.state.tx.u/legeLeaders/members/membersearch.cfm (search 73rd (1993) . . . . . . . . . . . . . . . . . . . . . . . . 23

Paul Burka, Perils of Politics, TEX.MONTHLY, July 1991, available athttp://books.google.com/books?id=pisEAAAAMBAJ&pg=PA120&lpg=PA120&dq=bullock+1991+income+tax&source . . . . . . . . . . . . . . 23

Peggy Fikac, Income Tax Is a Loaded Label for Business Levy,

Houston Chronicle Austin Bureau, Aug. 10, 2006, available at

http://www.chron.com/default/article/Income-tax-is-a-loaded-label-for-business-levy-1911627.php . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

S.J. of Tex., 73rd Leg., R.S. 1001 (1993) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

S.J. of Tex., 79th Leg., 3rd C.S. 103 (2006) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

Tex. H.B. 3 Before the Senate Comm. on Finance, 79th Leg., R.S. 3(May, 2, 2005) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

Tex. S.J. Res. 49, 73rd Leg., R.S., 1993 Tex. Gen. Laws 5770 . . . . . . . . . . . . . . . . . . . . 16


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STATEMENT OF THE CASE

Nature of the Case: This is an original petition challenging the validity of the Texas franchise tax, Chapter 171 of the Texas Tax

Code, as it applies to limited partnerships, as a violationof Article VIII, 24(a) of the Texas Constitution (theBullock Amendment). The enacting legislation, 24of House Bill 3 of the 2006 third called legislativesession, confers exclusive and original jurisdiction on

the Court to rule on constitutional challenges to thelegislation and sets a deadline of 120 days for the Courtto rule on the challenge.

Plaintiffs: Allcat Claims Service, L.P.John Weakly

Defendants: Susan Combs, Comptroller of Public Accounts

Greg Abbott, Attorney General of Texas


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1. Plaintiffs Issue 2 is whether the Comptrollers interpretation of the provision allowing deductionsfor the real estate industry, as applied to Allcat, violates the constitutional requirements of equal and uniformtaxation by treating Allcat differently from other similarly-situated taxpayers. Plaintiffs Issue 3 is whetherit is just and equitable for Relators to recover their costs and their reasonable and necessary attorneys feesincurred to pursue this declaratory judgment action. Orig. Pet. at ix.

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ISSUES PRESENTED AS DIRECTED BY THE COURT

1. Whether the grant of original jurisdiction in 24 of House Bill 3 is valid under ArticleV, 3 of the Texas Constitution.

2. Whether the Texas franchise tax violates Article VIII, 24(a) of the TexasConstitution (the Bullock Amendment) to the extent it is imposed on a limitedpartnership.

3. Whether Plaintiffs Issue 2 and Issue 3 are beyond the scope of the jurisdictional grant

in 24 of House Bill 3.1


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No. 11-0589

In the

Supreme Court of Texas

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

Original Petition

DEFENDANTSBRIEF ON THE MERITS

TO THE HONORABLE SUPREME COURT OF TEXAS:

InNeeley v. West Orange-Cove Consolidated Independent School District, the Court

ordered the Legislature to overhaul the States system of school finance, concluding that the

system then in effect imposed an unconstitutional state property tax. 176 S.W.3d 746,

797-98 (Tex. 2005). The Court set a deadline of June 1, 2006, for the Legislature to remedy

the system. Id. at 799. Part of the Legislatures fix was House Bill 3, which restructured the

States franchise tax and broadened the base of business entities subject to it. Act of May 2,

2006, 79th Leg., 3d C.S., ch. 1, 1-27, 2006 Tex. Gen. Laws 1, 1-41.

Anticipating challenges to the newly structured tax, the Legislature included in House

Bill 3 a provision granting this Court exclusive and original jurisdiction to consider

challenges to the constitutionality of the tax, or any part of it, id. 24(a), along with a 120-day

deadline for the Court to issue its decision, id. 24(b).


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2

Plaintiffs suit purports to trigger the start of the Courts 120-day clock. Plaintiffs ask

the Court to hold that the Legislatures revision of the franchise tax in response to West

Orange-Cove runs afoul of Article VIII, 24(a) of the Texas Constitution (the Bullock

Amendment), by imposing a tax on the net incomes of natural persons. Orig. Pet. at 5-12.

If the Court determines that House Bill 3s grant of original jurisdiction is valid, it

should reject Plaintiffs claims and uphold the constitutionality of the franchise tax. The

Court should reject Plaintiffs Bullock Amendment claim (Issue 1) because the franchise tax

is imposed on business entities, not natural persons. The Court should dismiss the other

claims identified in Plaintiffs original petition (Issues 2 and 3) because they fall outside the

scope of House Bill 3s grant of original jurisdiction.

STATEMENT OF FACTS

When the Legislature was confronted in 2006 with the task of remedying the

deficiencies in the school-finance system, its goal was plain: to raise more taxes to fund

Texass system of free public schools. To accomplish its mission, the Legislature passed

House Bill 3 to expand the tax base and implement a new tax structure. Act of May 2, 2006,

79th Leg., 3d C.S., ch. 1, 1-27, 2006 Tex. Gen. Laws 1, 1-41.

The franchise tax is imposed on business entities in Texas for the privilege of doing

business in the State. TEX.TAX.CODE 171.001(a). Before the 2006 revision, the franchise

tax applied only to corporations and limited-liability companies. Act of June 2, 2003, 78th

Leg., R.S., ch. 209, 31, 2003 Tex. Gen. Laws 979, 987 (amended 2006) (current version at


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2. The franchise tax excludes sole proprietorships and general partnerships directly and whollyowned by natural persons that are not also registered as limited-liability partnerships. TEX.TAX CODE171.0002(b).

3. Section 171.1011 contains various additional exclusions from revenue, most of which relate tospecific types of transactions or are industry specific. TEX.TAX CODE 171.1011.

4. Because the tax is imposed on the entitys margin, the franchise tax is known colloquially asthe margin tax. However, Chapter 171 of the Texas Tax Code establishes a franchise tax, not a margintax. TEX.TAX CODE 171.001(a). Defendants will refer to the tax as a franchise tax.

3

TEX.TAX CODE 171.001(a)). House Bill 3 extended the tax to other business entities such

as professional associations, joint ventures, and partnerships (as well as others). TEX.TAX

CODE 171.0002(a).2

The tax is calculated by first determining the business entitys total revenue, which

is based on amounts reportable by the entity to the Internal Revenue Service as income, and

then subtracting certain categories of receipts, such as royalties and dividends from foreign

sources. TEX.TAX CODE 171.1011(a), (c).3 The entity then computes taxable margin,

which is the lesser of 70% of total revenue, or an amount computed by subtracting either cost

of goods sold or wages and compensation paid to the employees during the reporting period.

Id. 171.101(a).4

A percentage of the entitys taxable margin is then apportioned to Texas. The ratio

of the entitys business done in this State divided by the entitys entire business, both of

which are measured by gross receipts. TEX.TAX CODE 171.106. That portion of the margin


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5. The apportionment formula applicable to the current franchise tax, TEX.TAX CODE 171.106, issubstantially the same as the apportionment formula applicable under the prior franchise tax, Act of May 7,1999, 76th Leg., R.S., ch. 184, 2, 1999 Tex. Gen. Laws 651, 652.

6. The Tax Code also provides an alternative tax computation method and tax rate, the E-ZComputation and Rate, for entities whose total revenue is$10 million or less for the period. TEX.TAXCODE171.1016.

4

is subject to tax.5 The tax rate is 0.5% for qualifying retailers and wholesalers and 1.0% for

all other taxable entities. Id. 171.002(a), (b).6

Plaintiffs ask, in this original action, for the Court to strike down the franchise tax on

the ground that the tax violates the Bullock Amendment to the Texas Constitution. They also

seek a ruling that the Comptrollers application of the franchise tax is unconstitutional under

the equal-and-uniform guarantee of the Texas Constitution, TEX.CONST.art. VIII, 1(a), and

an award of attorneys fees under the Uniform Declaratory Judgments Act, TEX.CIV.PRAC.

&REM.CODE 37.009. Additionally, Plaintiffs have filed a separate original action in state

district court raising these challenges. Orig. Pet.,Allcat Claims Serv., L.P. v. Combs, No.

D-1-GN-11-002294, 201st Judicial Dist. of Travis County, Tex. Aug. 1, 2011.

SUMMARY OF THE ARGUMENT

In what was surely a well-intentioned attempt to streamline the judicial process to

quickly resolve constitutional challenges to its franchise-tax overhaul, the Legislature stated

that such constitutional challenges must be heard as an original matter in this Court on an

expedited basis. But, as the Court has recognized, that grant of original jurisdiction may run

afoul of Article V, 3 of the Texas Constitution. Indeed, strict adherence to its precedent


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5

would lead the Court to conclude that House Bill 3s grant of original jurisdiction exceeds

the constitutional limits of Article V, 3. Nonetheless, should the Court choose to overrule

its precedent, it could read the Legislatures power to confer original jurisdiction on Texas

courts more broadly and uphold House Bill 3s grant of jurisdiction here.

Should the Court determine that House Bill 3 validly confers original jurisdiction on

this Court to consider Plaintiffs constitutional claims, it should conclude that the franchise

tax is constitutional because it is not imposed on the net income of a natural person. The

Bullock Amendment requires that a tax imposed on the net incomes of natural persons,

including a persons share of partnership and unincorporated association income, cannot

take effect until approved by a majority of the registered voters voting in a statewide

referendum. The provision prevents the Legislature from imposing a tax on an individual

persons net income without a vote of the people. It does not, however, prevent the

Legislature from taxing business entities that enjoy the liability-limiting protections of Texas

law by virtue of their business structures. And it does not prevent the application of the

franchise tax to partnerships simply because a natural person has an ownership interest in the

business.

Even though the franchise tax is not imposed on natural persons, but only on business

entities, Plaintiffs assert that it runs afoul of the Bullock Amendment anyway because

imposition of the tax effectively decreases the value of a partnership. And because

partnership income is treated as income to the partner forfederal tax purposes, Plaintiffs


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6

claim that the franchise tax effectively taxes the income of the natural-person partner for

Texas tax purposes.

Plaintiffs assertion that a tax on a business decreases its overall value may be true.

But it is entirely beside the point. Every tax on a business entity ultimately reduces the

amount of income that its owners earn or could earn in a given year. Thus, under Plaintiffs

theory, the State of Texas could not impose any tax on any business entity that is ultimately

owned by natural persons. The Bullock Amendment does not hamstring the Legislature in

that manner. It protects natural persons, not the business ventures of natural persons. The

Court should uphold the Texas franchise tax against Plaintiffs Bullock-Amendment claim.

The remainder of Plaintiffs claims (Issues 2 and 3the equal-and-uniform claim and

the claim for attorneys fees) are beyond the grant of original jurisdiction in House Bill 3.

House Bill 3 confers on the Court original jurisdiction to consider constitutional challenges

to the statute, not challenges to the Comptrollers application of the statute. And nothing in

House Bill 3 authorizes an attorneys fees award against the State. Thus, however the Court

resolves the over-arching jurisdictional question, the Court is without jurisdiction to consider

Plaintiffs Issues 2 and 3, and the Court should dismiss them.


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7

ARGUMENT

I. THE COURT HAS TWO VIABLE CHOICES: APPLYLOVE V.WILCOXAND DISMISS

THIS CASE, OR OVERRULELOVE AND ASSERT JURISDICTION. BUT THE COURT

SHOULD REJECT PLAINTIFFS LIMITLESS JURISDICTIONAL ARGUMENT UNDER

22.002(C) OF THE TEXAS GOVERNMENT CODE.

The Courts briefing request identifies a threshold issue: is the grant of original

jurisdiction in 24 of House Bill 3 valid under Article V, 3 of the Texas Constitution? This

question asks whether the Texas Constitution prohibits the Legislature from conferring on

this Court the exclusive and original jurisdiction over a challenge to the constitutionality of

[House Bill 3] or any part of [it] and the power to issue injunctive or declaratory relief in

connection with the challenge. Act of May 2, 2006, 79th Leg., 3d C.S., ch. 1, 24, 2006

Tex. Gen. Laws 1, 40. Defendants explain the Legislatures authority to define the Courts

jurisdiction in response to that request.

Ultimately, the power to construe the Texas Constitution lies with this Court. That

power extends to Article V, 3, the provision defining the Courts jurisdiction. But the Court

does not write on a blank page. The Court has already held that Article V, 3 limits the

Legislatures authority to confer original jurisdiction on the Court to two specific writs: quo

warranto and mandamus. Section 24 of House Bill 3 appears to go beyond the jurisdictional

boundaries established by the Court in that precedent.

Certainly, the Courts construction of Article V, 3 is its own to overrule. If the Court

chooses to do so, it might look beyond the text of Article V, 3 to Article V, 8s grant of

jurisdiction to the district courts. The latter provision could be broadly construed to authorize


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7. The state officials comprising the Executive Department of the State are the Governor,Lieutenant Governor, Secretary of State, Comptroller of Public Accounts, Commissioner of the General LandOffice, and the Attorney General. TEX.CONST.art. IV, 1.

8

the Legislature to confer original jurisdiction on all subdivisions of the Texas judiciary,

including this Court.

In no event, however, should the Court adopt Plaintiffs construction of Texas

Government Code 22.002(c). Plaintiffs stretch the Courts mandamus power to include any

imaginable challenge to the constitutionality of a statute, so long as a plaintiff sues one of the

state officials enumerated in Article IV, 1.7 Plaintiffs theory has no limiting principle. If

Plaintiffs are correct that 22.002(c) authorizes their suit, future parties could bring virtually

any constitutional challenge directly in this Court. Regardless of whether the Court accepts

jurisdiction over this case, it should reject Plaintiffs ill-conceived view of the Courts

mandamus power.

A. If the Court Construes Article V, 3 of the Texas Constitution According

to Precedent, 24 of House Bill 3 Steps Beyond the Bounds of Article V,

3 and Is Unconstitutional.

Article V, 3 creates and circumscribes the Legislatures authority to confer original

jurisdiction on this Court. The provision authorizes the Legislature only to confer original

jurisdiction on [this Court] to issue writs of quo warranto and mandamus in such cases as

may be specified, except as against the Governor of the State. The Court has construed that

language to limit the Legislatures authority to grant the Court original jurisdiction to the two

writs specified by the Constitution. Love v. Wilcox, 28 S.W.2d 515, 522 (Tex. 1930).


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8. The limited grant of power to confer original jurisdiction on this Court is in contrast to the broadgrant of power to confer original jurisdiction on other Texas courts. SeeTEX.CONST. art. V, 6 (grantingpower to courts of appeals to exercise all jurisdiction as may be prescribed by law), 8 (granting exclusive,appellate, and original jurisdiction of all actions, proceedings, and remedies, except in cases where exclusive,appellate, or original jurisdiction may be conferred on another body), 16 (granting county courtsjurisdiction as provided by law), 19 (granting justice-of-the-peace courts original jurisdiction as may beprovided by law).

9

InLove, the Legislature attempted to confer upon the Court the power, or authority,

or jurisdiction, to issue the Writ of Mandamus, or any other Mandatory or compulsory Writ

or Process to compel the performance of various political-partypersonnel to take action in

accordance with the laws of the State. Id. at 521-22. Noting that this purported grant of

authority attempted to confer power upon [the Court] to issue writs under its original

jurisdiction other than mandamus and quo warranto, the Court held that the grant (as to the

powers listed beyond mandamus) was void because the Legislature is without power to

confer original jurisdiction on the [Court] for the issuance of writs or process other than quo

warranto and mandamus. Id. at 522. The Court upheld the Act only as to its grant of

authority to issue mandamus, as that power is plainly enumerated in Article V, 3. Id.

The Court later noted inLane v. Ross, another election case, that [i]t is well settled

that this [C]ourt has no original jurisdiction to issue a writ of injunction. Nor can the

Legislature, in violation of the constitutional provision, confer such power upon this [C]ourt

as relators claim. 249 S.W.2d 591, 593 (Tex. 1952) (citing, inter alia, TEX.CONST. art. V,

3;Love, 28 S.W.2d at 519, 522).8


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10

Based on the Courts long-standing interpretation of Article V, 3, the Legislature

exceeded constitutional limits on its authority in attempting to confer on this Court the power

to consider the constitutionality of the franchise tax in an original proceeding. If the Court

adheres to this precedent, it should dismiss Plaintiffs claims for lack of original jurisdiction.

B. If the Court Is Inclined To OverruleLove andLane, However, It Might

Look to Article V, 8s Grant of General Power to the District Courts as

a Reservoir of Authority for the Entire Judiciary.

If the Court decides to reconsider Love andLane, another provision of the Texas

Constitution could be construed to provide the Court with a basis to find jurisdiction in this

case. Article V, 8 states that

District Court jurisdiction consists of exclusive, appellate, and original

jurisdiction of all actions, proceedings, and remedies, except in cases where

exclusive, appellate or original jurisdiction may be conferred by this

Constitution or other law on some other court, tribunal, or administrativebody.

TEX.CONST.art. V, 8 (emphasis added).

Article V, 8 establishes a default reservoir of jurisdiction, assigning the district courts

of the State exclusive, original jurisdiction for all actions, unless the constitution or law

confers such jurisdiction on another tribunal. See Dubai Petroleum Co. v. Kazi, 12 S.W.3d

71, 75 (Tex. 2000) (discussing scope of Article V, 8s grant of original jurisdiction). The

authority to confer this broad grant of original jurisdiction on some other court could be

read to authorize the Legislature to confer original jurisdiction on this Court to issue writs

other than quo warranto and mandamus. Arguably, then, Article V, 8 may authorize the


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11

Legislature to confer on this Court the power to consider, as an original matter, the

constitutionality of House Bill 3 and to issue injunctive and declaratory relief in conjunction

with its review.

If the Court determines that Article V, 8 supplements the Legislatures authority

under Article V, 3, the Court could overrule Love andLane and uphold 24s grant of

original jurisdiction as an exercise of that broader authority.

C. The Court Should Reject Plaintiffs View of Texas Government Code

22.002(c).

Plaintiffs incorrectly suggest that 24 of House Bill 3 invokes the Courts mandamus

authority as set out in Texas Government Code 22.002(c). That provision grants this Court

the exclusive authority to

issue a writ of mandamus or injunction, or any other mandatory or compulsorywrit or process, against any of the officers of the executive departments of the

government of this state to order or compel the performance of a judicial,ministerial, or discretionary act or duty that, by state law, the officer or officersare authorized to perform.

TEX. GOVT CODE 22.002(c). Plaintiffs attempt to dress their Bullock-Amendment

claima challenge to the constitutionality of a statutein the guise of a mandamus action

asserting that Defendants have refused to exercise a ministerial duty. Pls. Br. at 10-20; e.g.,

A & T v. Consultants, Inc. v. Sharp , 904 S.W.2d 668, 671-72 (Tex. 1995) (issuing mandamus

to compel the Comptroller to release documents in compliance with the Public Information

Act). Plaintiffs claim that the Comptroller and the Attorney General had an independent duty

to assess the constitutionality of the franchise tax and, under Plaintiffs view, to refuse to


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9. The cases cited by Plaintiffs do nothing to support their theory that a state official is subject tomandamus for failing to disregard an allegedly unconstitutional statute. See Pls. Br. at 11-20. InA & T, 904

S.W.2d at 672, the Court recognized its exclusive power to compel the Comptroller to comply with the PublicInformation Act; inIn re Smith, 333 S.W.3d 582, 585 (Tex. 2011), the Court ordered the Comptroller tocomply with the wrongful-imprisonment statute; inLove, 28 S.W.2d at 516, the Court ordered the Secretaryof State toplace a candidate on the ballot in compliance with state law; and in State v. Ferguson, 125 S.W.2d272, 277, 279 (Tex. 1939), the Court issued a writ of mandamus vacating the trial courts invalid temporaryrestraining order. None of these cases holds that state officials are subject to mandamus for not refusing toenforce statutes duly enacted by the Legislature and never stricken by a court. The cases (with the exception

12

enforce it because it is allegedly unconstitutional. Pls. Br. at 13, 18. Defendants failure to

unilaterally negate the Legislatures work, Plaintiffs argue, constitutes an abuse of discretion.

Id. Plaintiffs go so far as to assert that 24 of House Bill 3 falls into the preexisting authority

of 22.002(c)which would render 24 of House Bill 3 superfluous because the Court

would have had the power to consider the constitutionality of the franchise tax as an original

matter under 22.002(c) in any case. Pls. Br. at 18.

There are several problems with Plaintiffs view of mandamus. First, while there is

no dispute that 22.002(c) grants the Court the exclusive authority to issue a writ of

mandamus against any of the officers of the executive departments of the State, including the

Defendants here, TEX.CONST. art IV, 1, to compel compliance with a ministerial duty, this

is no such case. Defendants have not failed to comply with a ministerial duty. To the

contrary, they have complied with and enforced the law as enacted by the Texas Legislature.

The Texas Constitutions separation of powers strongly suggests that they must continue to

do so unless and until this Court holds the franchise tax unconstitutional. TEX.CONST. art.

I, 28 (No power of suspending laws in this State shall be exercised except by the

Legislature.)9; TEX.CONST. art. II, 1 (The powers of the Government of the State of


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ofFerguson, which does not concern a state official under 22.002(c)) establish the rather unremarkableprinciple that a state official may be subject to mandamus for refusing to comply with state law.

10. Putting aside the obvious strain Plaintiffs theory would place on the Courts scarce resources,the theory also runs headlong into Article V, 3(b)s prohibition on this Court finding facts, except asnecessary for the proper exercise of its jurisdiction. TEX.CONST. art. V, 3(b); see Love, 28 S.W.2d at 519(noting that mandamus shall not be dependent upon the determination of any doubtful question of fact

13

Texas shall be divided into three distinct departments, each of which shall be confided to a

separate body of magistracy. . . .).

Second, the Court has already rejected this purported use of 22.002(c). In Chenault

v. Phillips, 914 S.W.2d 140, 142 (Tex. 1996) (per curiam), the Court rejected plaintiffs

characterization of mandamus in the context of a challenge to the constitutionality of the

attorney occupation tax. The Court held that a suit challenging the constitutionality of a

statute cannot be brought as an original mandamus proceeding in this Court, but must follow

the path of any ordinary lawsuit by starting in district court and proceeding to the Court for

review (if at all) in the exercise of its appellate jurisdiction. Id.

Third, there is no conceivable limit to the claims that could be filed in this Court as

original matters under Plaintiffs theory. Lawsuits like the school-finance litigation, W.

Orange-Cove Consol. Sch. Dist., 176 S.W.3d at 746, the first-amendment challenge to the

sexually oriented business fee, Combs v. Tex. Entmt Assn, No. 09-0481, 2011 WL 3796572

(Tex. Aug. 26, 2011), and the challenge to the States paperless voting machines,Andrade

v. NAACP of Austin, 345 S.W.3d 1 (Tex. 2011), could all be brought as original actions in

this Court under Plaintiffs theory. If Plaintiffs view is correct, one wonders why anyone

would bother filing suit in district court at all.10


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(citation omitted)).

14

Fourth, even if their constitutional challenge could be framed as a mandamus action,

Plaintiffs could not show a clear abuse of discretion for which there is no adequate remedy

at law. Walker v. Packer, 827 S.W.2d 833, 839-40 (Tex. 1992). There can be no clear

abuse of discretion in enforcing a statute that no Court has held unconstitutional. And

Plaintiffs will have an adequate remedy at law if the Court holds 24 of House Bill 3

unconstitutional by proceeding with their currently pending lawsuit in district court.

Ultimately, the scope of the Legislatures power to confer original jurisdiction on this

Court is an issue for this Court alone. If the Court holds to its precedent, 24 of House Bill

3 is unconstitutional. If the Court decides to forge a new path, Article V, 8 may provide an

avenue to do so. But the Court should reject Plaintiffs proposal to expand its mandamus

authority to include constitutional challenges to claims brought under Texas Government

Code 22.002(c). Doing so would alter the very substance of mandamus relief and open the

Courts doors to virtually all constitutional challenges to state statutes.

II. THE FRANCHISETAXISNOT IMPOSED ONNATURALPERSONS, AND THEREFORE

DOES NOT VIOLATE THE BULLOCK AMENDMENT.

Plaintiffs challenge the constitutionality of the franchise tax under Article VIII, 24

of the Texas Constitutionthe Bullock Amendment. That provision does not, however,

protect business entities such as Allcat Claims Services. It prohibits taxes on the net

incomes ofnatural persons. TEX.CONST. art. VIII, 24(a) (emphasis added). Urging the

contrary conclusion, Plaintiffs misconstrue the text of the Bullock Amendment, misstate


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15

several aspects of partnership law, look to extrinsic evidence of the provisions meaning,

and misdirect the Court to several irrelevant definitions of the term income tax.

The text of the provision speaks for itself. It prohibits only a tax on the net incomes

of natural persons, not business entities. The Bullock Amendment does not prevent the

imposition of the franchise tax on partnerships. The Court should reject Plaintiffs attempt

to rewrite the text of the Bullock Amendment to protect business entities.

A. The Plain Text of the Bullock Amendment Prohibits Taxes Imposed

Without a Vote on Natural Persons, Not Business Entities.

When construing constitutional provisions, the Courts duty is to ascertain and give

effect to the plain intent and language of the framers of a constitutional amendment and of

the people who adopted it. Gragg v. Cayuga Indep. Sch. Dist., 539 S.W.2d 861, 865-66

(Tex. 1976) (citations omitted). The Court should begin with the text of the provision, in

concert with the text of the Senate Joint Resolution that proposed the amendment to the

voters of the State.

The Bullock Amendment states:

A general law enacted by the legislature that imposes a tax on the net incomesof natural persons, including a persons share of partnership andunincorporated association income, must provide that the portion of the lawimposing the tax not take effect until approved by a majority of the registeredvoters voting in a statewide referendum held on the question of imposing the

tax.

TEX.CONST. art. VIII, 24(a). When this amendment was presented to the people for a vote,

it was described as proposing a constitutional amendment prohibiting apersonal income tax


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11. Indeed, Texas has retained the power to tax the incomes of both natural persons andcorporations other than municipal, subject only to the limitations of the Bullock Amendment. TEX.CONST.art. VIII, 1(c).

16

without voter approval and dedicating the proceeds of the tax, if enacted, to education and

property tax relief. Tex. S.J. Res. 49, 73rd Leg., R.S., 1993 Tex. Gen. Laws 5770, 5770

(emphasis added). Plainly stated, the drafters of the amendment and the people of Texas

intended to protect Texans from the imposition of a tax on their personal net income without

voter consent.11

The franchise tax is not imposed on natural persons. It taxes the taxable margin

of business entities. TEX.TAX CODE 171.001, .101. The franchise tax does not, therefore,

run afoul of the Bullock Amendment.

B. The Franchise Tax Burdens Partnership Taxable Margin Regardless of

What the Partnership Distributes to a Partner in the Form of Income.

Plaintiffs contend that even though the Bullock Amendment does not directly prohibit

application of the franchise tax to business entities, its explanatory clause, including a

persons share of partnership and unincorporated association income, implicitly transforms

taxation of a partnership into taxation of a natural person. Their logic is as follows: a natural

person is a partner in a partnership. The franchise tax decreases the value of the partnership,

and thus the partners share of it. Therefore, Plaintiffs claim, the franchise tax is a tax on the

partners net income and violates the Constitution because it was not approved by the voters.

Pls. Br. at 34-47.


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17

Plaintiffs ignore the entity nature of partnerships under Texas law. And their textual

argument is wrong as a matter of grammar and the longstanding common-law meaning of

the term including. Nonetheless, they attempt to counter the correct meaning of the term

including by referencing non-contemporaneous legislative statements that do not actually

support their contention and non-contemporaneous, non-legislative opinions of a former

Comptroller. These uninformative sources are not proper legislative history. The Court

should construe the Bullock Amendment as written.

1. Texas law treats partnerships as entities, not as the aggregate of

their partners.

Plaintiffs contend that, becausefor federal income tax purposesthe income of a

partnership is attributed to the partners, a tax on a partnership is a tax on the net income

of its partners. Pls. Br. at 35-37. And, because the individual partner will ultimately realize

less income from his or her partnership when the State taxes it, the tax is really imposed on

the individual partner, not the partnership. Id. at 44-47.

Plaintiffs are wrong. The entity theory of partnerships makes partnerships distinct

from their partners for all state-law purposes. There is no support for the notion that

partnerships in Texas continue to operate as an aggregate of their partners for state tax

purposes. And the fact that the partner ultimately feels the impact of the tax cannot be the

deciding factor. If it were, Texas could never tax partnerships at all.


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12. And Destec Energy, Inc. v. Houston Lighting & Power Co., 966 S.W.2d 792, 795 (Tex.App.Austin 1998, no pet.) (cited in Plaintiffs Brief at 42), did not reject the entity theory of partnerships,but rather rejected the appellees attempt to avoid application of the entity theory, pausing only to note thatone article in the Texas Bar Journal (not scholars, as Plaintiffs suggest) states that the aggregate theory isstill in use for federal income tax purposes. Destec does not advance Plaintiffs argument.

18

a. Texas has fully adopted the entity theory of partnerships.

Since the adoption of the Texas Revised Partnership Act in 1993, Texas law has

expressly recognized partnerships as entities, not as the aggregate of their partners. TEX.

BUS.ORGS.CODE 152.056 (The Texas Revised Partnership Act) (A partnership is an entity

distinct from its partners.). It is noteworthy that the 73rd Legislaturethe very Legislature

that passed the joint resolution for the Bullock Amendmentpassed the Texas Revised

Partnership Act. Act of May 31, 1993, 73rd Leg., R.S., ch. 917, 1993 Tex. Gen. Laws 3887.

The 73rd Legislature could have adopted a hybrid version of the entity theory as Plaintiffs

suggest. But it did not. It issued the fundamental statutory pronouncement that Texas treats

partnerships as legal entities separate from their partners. TEX.BUS.ORGS.CODE 152.056.

Plaintiffs erroneously claim that the entity theory recognizes a partnerships ability to

own property and be sued but does not recognize a partnership as a business entity that can

be taxed. Pls. Br. at 42-43. Nothing in the Business Organizations Code limits the contexts

in which partnerships are considered entities. And, the cases Plaintiffs cite for this notion

predate the 1993 adoption of the Revised Partnership Act. See Pls. Br. at 42 (citing Chien

v. Chien, 759 S.W.2d 484, 489 (Tex. App.Austin 1988, no writ); Seidman & Seidman v.

Schwartz, 665 S.W.2d 214, 218 (Tex. App.San Antonio 1984, writ dismd)).12


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19

Plaintiffs assertion that partnerships are not separate entities that can be taxed, id. at

43, ignores reality. Texas partnerships are entities separate from their partners. TEX.BUS.

ORG.CODE 152.056. Partnerships have expenses and financial obligations that are paid by

the partnership out of partnership resources. Tax obligations are no different.

b. Plaintiffs graphic illustration is wrong and irrelevant.

Plaintiffs attempt to graphically illustrate their argument that imposition of the

franchise tax on a partnership is really a tax on the net income of its partners. They argue

that the franchise tax lowers the income that may be distributed to a partner, so the tax must

be a tax on the net incomes of a natural person. Pls. Br. at 36. Plaintiffs chart is both

wrong and irrelevant.

It is wrong because, as explained above, the franchise tax is imposed on the

partnership as an entity, not the partner. It is a natural persons net income that the State of

Texas cannot tax without voter approval. TEX. CONST. art. VIII, 24(a). The Bullock

Amendment does not exempt all partnership income, as a category, from taxation.

Plaintiffs illustration is irrelevant because it emanates from the fact that partnership

income is allocated (passed through) to the partners for federal income tax purposes. But

federal treatment of partnerships for federal tax purposes is not binding on Texass

construction of its own tax laws, much less its constitution. Texas has chosen to treat

partnerships as distinct business entities, not as the aggregate of the partners. TEX.BUS.

ORGS. CODE 152.056. It is therefore immaterial that a partner is credited with the


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13. Equally unavailing is Plaintiffs citation of Comptroller Rule 3.557(24), 34 TEX.ADMIN CODE3.557(24), and the now repealed Tax Code 171.1032, Act of June 2, 2003, 78th Leg., R.S., ch. 209, 35,2003 Tex. Gen. Laws 979, 988, repealed by Act of May 2, 2006, 79th Leg., 3rd C.S., ch. 1, 5, 2006 Tex.

Gen. Laws 1, 19. Pls. Br. at 43. Those provisions had nothing to do with the entity theory of partnershipsor with partner (or partnership) income generally. They related to the calculation of gross receipts frombusiness done in Texas for purposes of apportioning earned surplus (the then-applicable tax base) to Texas,relative to earned surplus that would be apportioned to other States. Simply put, these provisions directedthat partnership distributions received by a corporation would be treated for apportionment purposes asthough the corporation had directly earned the receipts, rather than according to the location of thepartnership. Nothing about this bit of historical tax law is relevant to the Courts decision here.

20

partnerships held income for federal tax purposes because Texas is not bound by that

determination.

On a very basic level, Plaintiffs argument must fail because, if Plaintiffs are right and

any tax imposed on a partnership is an indirect tax on the net income of the partners, the State

of Texas cannot lawfully impose any tax on any business entity, including a corporation.

Sales tax, motor-fuel tax, severance tax, and hotel-occupancy tax (to name just a few) are

paid by business entities and could all have the effect of lowering the value of an entity. All

business entities are ultimately owned by natural persons. But that does not mean that the

franchise tax is imposed on the net incomes of the owners of each business entity. It is

imposed on the business entity itself.13

2. The term including does not enlarge the meaning of the term

natural persons.

Plaintiffs reliance on the including phrase to alter the intended beneficiary of the

Bullock Amendment misconstrues the term. As a matter of grammar, the explanatory phrase

is an example of one possible type of income that could contribute to a natural persons net

income, not, as Plaintiffs suggest, its own category of income that cannot be taxed without


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14. Plaintiffs cite 311.005(13) of the Code Construction Act, TEX.GOVT CODE, 311.005(13),for their argument that the term including can expand the meaning of the Bullock Amendment. Pls. Br.at 45. While the Code Construction Act is informative to the extent it is based on the common-lawunderstanding of the term including, it is not controlling in this constitutional interpretation case.Moreover, the term including does not expand the meaning of provisions. Rather, it is used to indicatea non-exclusive, explanatory list. SeeFed. Land Bank, 314 U.S. at 100.

21

voter approval. See Fed. Land Bank v. Bismark Lumber Co., 314 U.S. 95, 99-100 (1941)

(the term including . . . connotes simply an illustrative application of the general

principle). Plaintiffs construction would improperly alter the core meaning and intent of

the Bullock Amendment, which was to prohibit the imposition of a personal income tax

without a vote.

Although including is generally employed as a term of enlargement rather than

limitation or restriction,Badouh v. Hale , 22 S.W.3d 392, 395 (Tex. 2000);Republic Ins. Co.

v. Silverton Elevators, Inc., 493 S.W.2d 748, 752 (Tex. 1973), it cannot change the character

of the subject it modifies.14 Thus, when the term including is used along with one or two

illustrative application[s] of the general principle, Fed. Land Bank, 314 U.S. at 100, the

examples do not limit the application of the principle, but rather help to define it. For

example, if a person says that she likes vegetables, including peas, her statement would not

limit her list of preferred vegetables to peas. She could be said to enjoy other vegetables,

such as carrots and broccoli. But her statement could not be construed to say anything about

her preference for bananaswhich are beyond the definition of the term vegetables.

The phrase including apersons share of partnership or unincorporated association

income similarly does not expand the subjectnet incomes of natural personsto


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include the income ofbusiness entities. The phrase recognizes that individuals frequently

have multiple sources of income, often in the form of partnership distributions. By using the

phrase including a persons share of partnership or unincorporated association income, the

Bullock Amendment ensures that the Legislature cannot reclassify a partnership distribution

once it is received by a natural person as business income in an attempt to tax it. But it

does not create a new category of income that the Legislature may not tax without a vote.

The Court should not construe the explanatory phrase to add meaning to the provision.

And, contrary to Plaintiffs contention, the Court would not render the phrase surplusage

by giving the phrase the correct interpretation. The Bullock Amendment limits legislative

power to tax the net income of natural persons from whatever source, but does not limit the

Legislatures ability to tax partnerships as entities.

3. The extraneous and non-contemporaneous comments of twenty-

two Senators, Lieutenant Governor Bullock, and former

Comptroller Strayhorn do not inform the Courts interpretation.

Perhaps because the text of the Bullock Amendment directly contradicts Plaintiffs

claim, they rely heavily on the letter correspondence of some members of the Texas Senate,

Lieutenant Governor Bullock, and former Comptroller Strayhorn to make their case that the

provision was meant to prohibit a business tax on partnerships. While legislative history can

provide the Court with context in certain circumstances, see Ojo v. Farmers Group, Inc., No.

10-0245, 2011 WL 2112778, at *11-13 (Tex. May 27, 2011) (Jefferson, C.J, concurring), the

legislative history offered by Plaintiffs does not make the cut. It is remote in time, not


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15. Plaintiffs portrayal of Lieutenant Governor Bullock as the protector of the public against a stateincome tax misrepresents history. It is well known that just two years before the Bullock Amendmentwas adopted, Lieutenant Governor Bullock vigorously advocated a personal income tax on Texas citizensas the preferred way to balance the budget and save the school-finance system. It was onlyafter he realized the political folly of his suggestion that he backed down and flippedhis policy position, advocating against the imposition of a personal income tax, absent voter approval.Dave McNeely, Bullocks Tax Idea Renewed, PORT ARANSAS SOUTH JETTY , June

26, 2008, http://www.portasouthjetty.com/news/2008-06-26/Opinion/013.html. See also Paul Burka,P e r i l s o f P o l i t i c s , T E X . M O N T H L Y , Ju ly 1991 , a t 120-122-24 , a v a i l a b l e a t http://books.google.com/books?id=pisEAAAAMBAJ&pg=PA120&lpg=PA120&dq=bullock+1991+income+tax&source.

16. See, LEGIS.REF.LIBRARY OFTEX., http://www.lrl.state.tx.u/legeLeaders/members/membersearch.cfm(search 73rd (1993) Legislature; then follow search hyperlink).

23

representative of what the Legislature intended as a body, and is undermined by other

(equally unenlightening) comments by other representatives and scholars.15

The letters of the 22 Senators and Lieutenant Governor Bullock issued two years

before the Bullock Amendment was even conceived, Pls. Supp. Appx. 16, 17, do not speak

to what the Legislature intended when it voted on the amendment and passed it to the people

for a vote. As the U.S. Supreme Court noted in United States v. OBrien, [w]hat motivates

one legislator to make a speech about a statute is not necessarily what motivates scores of

others to enact it, and the stakes are sufficiently high for us to eschew guesswork. 391 U.S.

367, 384 (1968). See alsoAT & T Commcn of Tex., L.P. v. Sw., 186 S.W.3d 517, 528 (Tex.

2006) (But the statement of a single legislator, even the author and sponsor of the

legislation, does not determine legislative intent.). And of the twenty-two Senators who

signed the letter, only fourteen remained in the Senate two years later to vote for the Bullock

Amendment.16


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Even the substance of the letters does not command the result that Plaintiffs desire.

Neither letter states that the Bullock Amendment would (eventually) prohibit the imposition

of a tax on partnerships. Both express concern with the perceived unfairness of taxing

partnerships because they do not have the legal protections afforded corporations. While the

letters obliquely suggest the view that a tax on a partnership would ultimately tax the income

of a partner, that view says nothing about whether such a tax would be a tax on the net

incomes of natural persons.

Just as the letters of the twenty-two Senators and Lieutenant Governor Bullock do

nothing for Plaintiffs case, neither does the 2006 opinion of former Comptroller Strayhorn,

Pls. Appx. 8-10. Her opinion is not evidence of what the 73rd Legislature intended when

it drafted and proposed the Bullock Amendment for adoption into the Texas Constitution.

Because the text of the Bullock Amendment plainly applies only to taxes imposed on

natural persons, and not those imposed on business entities, the Court need not delve into the

extraneous information offered by Plaintiffs. But if the Court is inclined to do so, it should

also consider what Plaintiffs leave out. To begin, of the twenty-eight Senators who voted to

pass the Bullock Amendment out of the Senate and to the House for approval, S.J. of Tex.,

73rd Leg., R.S. 1001 (1993), five also voted for the 2006 franchise tax revision, S.J. of Tex.,

79th Leg., 3rd C.S. 103 (2006) (listing Armbrister, Harris, Madla, Shapiro, and

Wentworthall of whom voted for the Bullock Amendmentas voting for the revisions to


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the franchise tax). One must question whether those five Senators had a change of heart or

just never thought that the Bullock Amendment applied to partnerships in the first place.

Moreover, a conversation during the debate on the House floor demonstrates that at

least two House members, Chairman Stiles and Representative Williamson, believed that the

Bullock Amendment would not prevent a business tax on a partnership. The conversation

went like this:

MR. WILLIAMSON: This Amendment is addressed as a personal income tax;is that correct?

CHAIRMAN STILES: Thats correct.

MR. WILLIAMSON: Now is there a prohibition, or will there be a prohibitionon a business income tax?

CHAIRMAN STILES: Itll be okay with me.

MR. WILLIAMS. No, but I mean, is that part of the Amendment?

CHAIRMAN STILES: Thats not on there, no.

MR. WILLIAMSON: Okay. So in your mind, with 76 votes, we can still levya straight-up business income tax on corporate or non-corporate businesseseven if this passes?

CHAIRMAN STILES: Thatsyou know, with a franchise tax, probably theway it is, its pretty close to what youve got now, Mr. Williamson.

MR. WILLIAMSON: But the franchise tax doesnt affect non-corporatebusiness?

CHAIRMAN STILES: I understand. So I would assume that, yes, 76 Peoplecould do that and a majority of the Senate with the signature of the Governor.

Debate on Tex. SJR 49, Floor of the House, 73rd Leg., R.S. 37 (May 21, 1993) (App. A).


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17. Chief Justice Phillips stated: You know, I mean to me the classic example was ClaytieWilliams, in 1989, who lost money, if under this scheme, he would have paid the franchise tax because ofthe amount of his payroll; whereas, he paid no income tax because he had more losses than gains. . . . Thoseare two very different taxes. Hearing on Tex. H.B. 3 Before the Senate Comm. on Finance, 79th Leg., R.S.3 (May, 2, 2005) (App. B).

Speaking of the difference between an income tax and the franchise tax, Chancellor Sharp explainedthat with an income tax: If you lose money, you dont have to pay the tax. That is the one thing that a netincome tax does that no other tax does. But as to the revised franchise tax, Chancellor Sharp clarified,

businesses will have to pay Texass new tax regardless. Peggy Fikac, Income Tax Is a Loaded Label for Business Levy, Houston Chronicle Austin Bureau, Aug. 10, 2006, available athttp://www.chron.com/default/article/Income-tax-is-a-loaded-label-for-business-levy-1911627.php. In thatsame Houston Chronicle report, Chief economist Dale Craymer of the business-based Texas Taxpayers andResearch Association said, [t]his is one of those things where it may be considered an income tax forfinancial reporting purposes, but that doesnt necessarily mean that its an income tax for the purposes of theTexas Constitution. They have different definitions. Id.

26

And former Comptroller Strayhorn is not the only public figure to comment on the

Bullock Amendments possible application to partnerships. Both Chief Justice Phillips and

former Comptroller, now Texas A & M Chancellor, John Sharp have publically stated that

the franchise tax would notrun afoul of the Bullock Amendment.17

Defendants do not contend that this additional, extraneous information means that the

Bullock Amendment does not apply to taxes imposed on partnerships. To the contrary, all

of these sourcesincluding the documents that Plaintiffs highlightare ultimately irrelevant

to the constitutional question presented. If this information does anything it demonstrates

exactly why the Court should notground its interpretation of the Bullock Amendment in

extraneous matter. The text alone should control.


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C. Plaintiffs Contention That the Franchise Tax Is an Income Tax Is

Beside the Point and Wrong. The Court Need Not Address That Question

To Decide This Case.

Plaintiffs insist that the franchise tax is an income tax. But the Court need not decide

that question to resolve this case. The Bullock Amendment limits the imposition of a tax on

the net incomes of natural persons; it says nothing about the Legislatures authority to tax

business entities. TEX.CONST. art. VIII, 24(a). Because the franchise tax is not imposed

on natural persons, but only on business entities, it does not offend the Bullock Amendment.

The Court need not decide whether the franchise tax is functionally equivalent to an income

tax to resolve this case.

If the Court turns to the nature of the franchise tax, it should conclude that it is not an

income tax for the simple reason that a business entity must pay the franchise tax even if it

actually loses money. Plaintiffs gloss over this fact and argue that because the tax allows

some deductions of indirect expenses, it should be considered an income tax. Pls. Br. at 27-

30 (citing various dictionary definitions of income tax). But an income tax is imposed on

income. And income is commonly understood to bepositive gain , not total revenue less some

deductions. BLACKS LAW DICTIONARY 763 (6th ed. 1990) (defining income as return

in money from ones business . . . gains, profits . . .); see also id. at 764 (defining income

tax as a tax on the annual profits arising from property, business pursuits, professions,

trades, or offices). A tax, such as the franchise tax, that is imposed on the privilege of doing


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18. For taxable entities with total revenue of less than a certain threshold amount, no tax is imposed.For the years relevant to this lawsuit, 2008 and 2009, the amount is $300,000. Act of May 2, 2006, 79thLeg., 3rd C.S., ch. 1, 2, sec. 171.002, 2006 Tex. Gen. Laws 1, 6-7. For report years 2010-2013, the amountis $1 million. TEX. TAX CODE 171.002(d)(2). In 2014, the amount will go down to $600,000. Id.Additionally, if the taxable entitys tax liability computes to an amount that is less than $1,000, that entitydoes not owe tax for that report year. Id. 171.002(d)(2).

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business, and regardless of whether a business entity actually makes any income, cannot be

considered an income tax.

The calculation of the franchise tax illustrates this point. A business entity begins its

franchise-tax calculation by adding amounts reportable as revenue on Internal Revenue

Service forms and subtracting certain categories of receipts that are available to all entities

to arrive at an amount the franchise tax calls total revenue. TEX.TAX CODE 171.1011(a),

(c); Pls. Br. at 28. From total revenue, the business may elect to subtract either costs of

goods sold or compensation as defined by the Tax Code or compute its tax base as 70%

of total revenue. TEX.TAX CODE 171.101; Pls. Br. at 29-30. The resulting figure is the

tax base, to which the tax rate of 1% or 0.5% (depending on the type of business) is applied

(after apportionment, TEX. TAX CODE 171.106), to reach the businesss franchise-tax

liability. Id. 171.002(a), (b).18

A business entity may, however, have other deductible expenses for purposes of its

federal income tax liability, such as office rent, interest expense, and selling costs. When

those expenses are factored into the calculation of tax due for federal income tax purposes,

it may be determined that the business had no income. While deduction of those expenses

couldfor federal tax purposesbring the businesss tax base to zero or less, resulting in


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19. The Court need not be concerned with the perceived parade of horribles that Plaintiffs claim willbe unleashed if it determines that the franchise tax is not an income tax. See Pls. Br. at 33-34. What theFederal Accounting Standards Board (FASB) may have concluded about the Texas franchise tax is irrelevant

and does not control this Court or the Texas Legislature. As the Austin Court of Appeals has noted, FASBoperates without reference to any legislative purpose, and it does not make its pronouncements in order tofulfill or effectuate any statute. Cent. Power & Light Co. v. Sharp, 919 S.W.2d 485, 492 (Tex.App.Austin 1996, writ denied). And whether FASB would change its view of the franchise tax based onthis Courts decision is entirely unknown. The Court should not be concerned with Plaintiffs vagueassertion that a determination that the franchise tax is not an income tax would cause many Texasbusinesses . . . to make significant adjustments to their financial statements. Pls. Br. at 33.

29

zero federal tax liability, this hypothetical business will still owe the franchise tax as

calculated above. In other words, it owes franchise tax even though it earned no income.

The Court should reject Plaintiffs attempt to shoe-horn the Texas franchise tax into

the income-tax mold. Regardless that the franchise tax is calculated by subtracting some

deductions from revenue, Pls. Br. at 28-30, it cannot reasonably be called an income tax

because it is imposed regardless of whether income is earned.19

D. The Relief Requested by Plaintiffs Is Overly Broad.

In sum, the Bullock Amendment does not limit the Legislatures plenary authority to

tax businesses. See supra Part II.A-C. The Court should uphold the franchise tax against

Plaintiffs Bullock-Amendment claim because the franchise tax is imposed on business

entities, not natural persons.

But if the Court agrees with Plaintiffs contention that the franchise tax cannot

constitutionally apply to partnerships, the relief Plaintiffs seek is overly broad. They cannot

obtain invalidation of the tax in all applicationsonly natural persons can claim the benefit

of the Bullock Amendment. Thus, even if the Court agrees with Plaintiffs that the franchise


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30

tax is invalid as to partnerships, it should grant declaratory and injunctive relief to prevent

the application of the tax only to a natural persons share of partnership income, not

invalidate the statute in all applications.

III. PLAINTIFFSEQUAL-AND-UNIFORM-TAXATION AND ATTORNEYS-FEES CLAIMS

ARE BEYOND THE SCOPE OF HOUSE BILL 3S GRANT OF ORIGINAL JURISDICTION

AND SHOULD BE DISMISSED.

If the Court determines that 24 of House Bill 3 is a proper grant of original

jurisdiction, it should nonetheless dismiss Plaintiffs Issues 2 and 3. Under the special grant

of jurisdiction, the Court is authorized to rule on a challenge to the constitutionality of House

Bill 3 or any part of it. Section 24 does not authorize the Court to consider claims that the

Comptrollers implementation of the franchise tax violates the Constitution, nor does it

contemplate an award of attorneys fees. Both claims should be dismissed.

A. Plaintiffs Equal-and-Uniform-Taxation Claim Challenges Comptroller

Action, Not the Constitutionality of the Franchise Tax.

Plaintiffs erroneously contend that their equal-and-uniform-taxation claim falls within

the grant of original jurisdiction conferred by House Bill 3 because the grant contains no

limitation on the type of constitutional challenge that may be brought. Pls. Br. at 48.

Plaintiffs argument ignores entirely the text of the jurisdictional grant, which grants the

Court the power to consider, as an original matter, a challenge to the constitutionality of

[House Bill 3] or any part of [it] and the power to issue injunctive or declaratory relief in

connection with the challenge. Act of May 2, 2006, 79th Leg., 3d C.S., ch. 1, 24, 2006

Tex. Gen. Laws 1, 40. That grant of original jurisdiction does indeed limit the Courts


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authority to consider claims regarding the constitutionality of thefranchise tax itself, not the

Comptrollers application of the tax.

Plaintiffs equal-and-uniform claim challenges the Comptrollers interpretation of

171.1011(g)(3) and 171.1012 of the Tax Code that (1) treats claims adjusters, such as

Plaintiffs, differently from general contractors and (2) denies certain deductions to Plaintiffs,

while allowing them to general contractors. Orig. Pet. at 12-14. Every allegation in

Plaintiffs petition references Comptroller policy, decisions, or actions taken in her

implementation of the franchise taxnot the statute itself. See id. at 12 (The Comptrollers

interpretation of Texas Tax Code 171.1011(g)(3) and 171.1012, as applied to Allcat,

violates the equal and uniform taxation clause of the Texas Constitution.); id. (The

Comptroller violates Article VIII by treating Allcat and its partners differently from a large

class of similarly-situated taxpayers by assessing a greater amount of franchise tax on

Allcats claims-adjustment business in an arbitrary and discriminatory manner.); id. at 13

(Despite this similarity, Comptroller policy allows general contractors to exclude payments

to subcontractors from their revenue, while claims-adjusters like Allcat cannot.); id. at 14

(Therefore, the Court should declare that the Comptroller violated Allcats constitutional

right to equal and uniform taxation . . . .).

Plaintiffs claim is only that the Comptroller should construe the franchise tax

differently in this respectnot that the tax is unconstitutional. Because Plaintiffs equal-and-

uniform claim does not challenge the constitutionality of the franchise tax or any part of it,


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20. Dismissal of the equal-and-uniform claim from this action would not leave Plaintiffs withoutan avenue for seeking a remedy, as Plaintiffs can proceed with the claim in district courtas, in fact, theyhave already done. See Orig. Pet. at 2-11.

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the claim does not fall within the Courts limited grant of original jurisdiction. Act of May

2, 2006, 79th Leg., 3d C.S., ch. 1, 24(a), 2006 Tex. Gen. Laws 1, 40.

Moreover, and as demonstrated by the sample of allegations cited above, the equal-

and-uniform claim is a fact-based challenge to Comptroller action. If the Court were to allow

Plaintiffs to pursue those claims in this proceeding, the Court would be forced to preside over

discovery matters and disputes, a role the Court is constitutionally prohibited from playing.

TEX.CONST.art. V, 3(b). The Court should dismiss Plaintiffs equal-and-uniform claim.20

B. Plaintiffs Claim for Attorneys Fees Likewise Falls Outside the Scope of

the Courts Grant of Jurisdiction.

Attorneys fees are available only if authorized by statute or contract.Intercontinental

Group Pship v. KB Home Lone Star L.P., 295 S.W.3d 650, 653 & n.7 (Tex. 2009).

Plaintiffs rely solely on the Uniform Declaratory Judgments Acts (UDJA) statutory

authorization of attorneys fees. Pls. Orig. Pet. at 4, 14, 15 (citing TEX.CIV.PRAC.&REM.

CODE 37.009). They claim that the Legislature should be understood to have incorporated

the UDJA into its grant of original jurisdiction by using the phrase, injunctive or declaratory

relief. Pls. Br. at 49 (referring to 24 of House Bill 3, Act of May 2, 2006, 79th Leg., 3d

C.S., ch. 1, 24, 27, 2006 Tex. Gen. Laws 1, 40-41).

But this is not a UDJA action. It is an original proceeding under 24 of House Bill

3. Orig. Pet. at viii (citing Act of May 2, 2006, 79th Leg., 3d C.S., ch. 1, 24, 2006 Tex.


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Gen. Laws 1, 40, as the sole basis for this Courts jurisdiction). Section 24 authorizes the

Court to issue declaratory or injunctive relief, but it does not authorize a fee award. For that

reason, fees are unavailable. See Holland v. Wal-Mart Stores, Inc., 1 S.W.3d 91, 95-96 (Tex.

1999) (per curiam).

Although Allcat appears to contend that original UDJA actions may be filed in this

Court, there are several problems with that contention. First of all, it would require the Court

to install a jury box in its courtroom. See TEX.CIV.PRAC.&REM.CODE 37.007. The Court

would also have to face the prospect of reversal by a court of appeals. See id. 37.010.

In any event, any UDJA claim in this proceeding would be barred because another

statute24 of House Bill 3allows Allcat to seek substantive relief, and the UDJA could

only be a vehicle for seeking attorneys fees. See, e.g., Strayhorn v. Raytheon E-Sys., Inc.,

101 S.W.3d 558, 572 (Tex. App.Austin 2003, pet. denied). Allcats assertion that its

putative UDJA claims are not redundant to its request for a full refund of the franchise taxes

paid in protest, Orig. Pet. at 14, refers to requests made in its separate trial-court suit. See

id. at 2-11. Although those refund requests might not be redundant of a constitutional

challenge authorized by House Bill 3, the Bullock-Amendment claim and putative UDJA

claims in this suit are identical. Citations to the UDJA were added only in an attempt to

recover attorneys fees without legislative permission, and the Court should not allow that

tactic to succeed.


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Allcats position would render meaningless the other statutes in which the Legislature

has provided for declaratory relief separate from the UDJA without an award of attorneys

fee, like it did in House Bill 3. See TEX.BUS.&COM.CODE 15.16 (declaratory judgment

regarding prohibitions contained in the Act); TEX. GOVT CODE 2001.038 (declaratory

judgment regarding validity or applicability of an agency rule); id. 552.3215(d) (declaratory

judgment for open records violation); id. 552.353(b)(3) (declaratory judgment to obtain

relief from Attorney General open records decision); TEX. INS. CODE 541.405(a)

(declaratory judgment on the validity or applicability of a rule promulgated by the

Department of Insurance);TEX.NAT.RES.CODE 33.171(a) (declaratory judgment against

the State regarding the acts provisions); id. 61.019(a) (declaratory judgment against the

State regarding littoral ownership of public beach). If those declaratory-judgment statutes

do not authorize declaratory relief without attorneys fees, their language will be rendered

mere surplusage.

The Court lacks jurisdiction over Plaintiffs claim for attorneys fees. It should

dismiss the claim.


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PRAYER

If the Court determines that 24 of House Bill 3 is a proper grant of original

jurisdiction, it should hold that the Texas franchise tax is constitutional and dismiss

Plaintiffs equal-and-uniform-taxation claim and request for attorneys fees. Alternatively,

if the Court concludes that the franchise tax violates the Bulloc

in re allcat, defendants' brief on the merits (tex. oct. 3, 2011)

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