FILED IN THE SUPREME COURT OF TEXAS 11 October 14 P7:43 BLAKE. A.

HAWTHORNE CLERK

No. 11-0589
In the Supreme Court of Texas
________________________________ IN RE ALLCAT CLAIMS SERVICE, L.P. AND JOHN WEAKLEY
___________________________________________

Original Proceeding in the Supreme Court of Texas

___________________________________________

BRIEF OF AMICI CURIAE NIKKI LAING, CPA ET AL. IN SUPPORT OF PLAINTIFFS

___________________________________________

Peter A. Nolan State Bar No. 15062600 Jennifer Patterson Rabb State Bar No. 00795469 Anna W. Kana State Bar No. 24070029 Jeff Nydegger State Bar No. 24077002 WINSTEAD PC 401 Congress Avenue, Suite 2100 Austin, Texas 78701 [Tel.] (512) 370-2800 [Fax] (512) 370-2850

Christopher S. Johns Counsel of Record State Bar No. 24044849 DAWSON & SODD, LLP 300 West 6th Street, Suite 1950 Austin, Texas 78701 [Tel.] (512) 215-4078 [Fax] (512) 628-7169 chris@dawsonsodd.com Richard B. Farrer State Bar No. 24055470 YETTER COLEMAN LLP 221 West 6th Street, Suite 750 Austin, Texas 78701 [Tel.] (512) 533-0150 [Fax] (512) 533-0120 rfarrer@yettercoleman.com COUNSEL FOR AMICI CURIAE

STATEMENT OF INTEREST OF AMICI CURIAE Nikki Laing, CPA; Keller Haslett Storage Ltd.; Austin Analytical, LLC; Yacktman Asset Management Co.; NSBMA, LP; Cherry Creek Plaza Partnership Ltd.; Nestle USA Inc.; and the Corporate Housing Providers Association are a diverse group of natural persons and business associations operating in Texas. Some of the amici curiae, such as Ms. Laing, have no financial interest in the Courts decision. Others currently pay the franchise tax or will have to pay it in the near future. And one of the amici is a professional trade association with hundreds of members, including several unincorporated Texas entities that currently pay the franchise tax. Each has an interest academic or monetaryin the franchise tax and the correct interpretation of the Bullock Amendment (TEX. CONST. art. VIII, 24). Ms. Laing is a practicing CPA who was a top-ten scorer on the Texas CPA exam. Currently in her final year of law school, Ms. Laing authored an influential article published in the Baylor Law Review analyzing the franchise taxs constitutionality. Each of the business entities represents the interests of its owners, most of whom receive passthrough tax treatment. The business entitiessome large companies, some smallcome from several different industries. Accordingly, amici are in a balanced position to

explain how the tax actually operates and affects businesses and the individuals who own them. Amici are also deeply concerned about the States arguments in this case. The State proffers a reading of the Bullock Amendment that ignores the Constitutions text. Further, under the States theory, the Legislature could impose any income tax on any
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unincorporated business entity owned by natural personsLLCs, LPs, LLPs, and even sole proprietorshipswithout prior voter approval. That reading is inconsistent with the Constitutions plain text and the will of the voters who adopted the Bullock Amendment. Amici have paid for the preparation of this brief. IDENTITIES OF PARTIES AND COUNSEL Amici adopt the Identities of Parties and Counsel presented by Plaintiffs. See TEX. R. APP. P. 9.7.

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TABLE OF CONTENTS Statement of Interest of Amici Curiae ................................................................................. i Identities of Parties and Counsel ........................................................................................ ii Index of Authorities ............................................................................................................ v Statement of the Case ......................................................................................................... x Statement of Jurisdiction .................................................................................................... x Issues Presented .................................................................................................................. x Introduction ........................................................................................................................ 1 Statement of Facts .............................................................................................................. 3 A. B. C. For over a Century, Texas Has Imposed Some Form of Franchise Tax, But Not on Partnerships or Unincorporated Associations ................... 3 The Bullock Amendment Is Adopted Following Attempts to Tax Partnership and Unincorporated Association Income .................................. 4 The 79th Legislature Imposes a New Franchise Tax ................................... 8

Summary of the Argument ................................................................................................. 9 Argument .......................................................................................................................... 12 I. II. The Supreme Court Has Original Jurisdiction to Decide This Case ..................... 12 Under a Plain-Text Reading of the Bullock Amendment, Taxing a Persons Share of Partnership and Unincorporated Association Income Is Not Permitted Without Voter Approval ................................................................ 16 A. B. The Constitution Restricts Personal Income Taxes on a Persons Share of Partnership and Unincorporated Association Income................ 16 The Franchise Tax Is a Tax on a Persons Share of Partnership and Unincorporated Association Income and Therefore Violates 24 ........... 20 1. The Phrase a Persons Share of Partnership and Unincorporated Association Income Clearly Contemplates Restricting Taxes at the Entity Level .............................................. 20

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2.

From a Tax Perspective, the Including Phrase Restricts Taxing a Persons Distributive Share of Income at the Entity Level ................................................................................................ 24 The Court Should Reaffirm That Taxes Imposed on Unincorporated Businesses Are Characterized According to Their Effect on Individual Owners ................................................. 28 The State Mischaracterizes Allcats Position and Resorts to Weak, Incorrect, and Internally Inconsistent Arguments ............... 30 The Franchise Tax Is a Prohibited Income Tax .............................. 33

3.

4. 5. III.

The Court Should Not Marginalize the Constitution to Save a Flawed Franchise Tax ........................................................................................................ 39

Prayer ............................................................................................................................... 41 Certificate of Service ........................................................................................................ 43

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INDEX OF AUTHORITIES CASES Carter Carburetor Corp. v. City of St. Louis, 203 S.W.2d 438 (Mo. 1947) ........................................................................................ 30 City of Beaumont v. Bouillion, 896 S.W.2d 143 (Tex. 1995) ........................................................................................ 17 City of Louisville v. Sebree, 214 S.W.2d 248 (Ky. Ct. App. 1948) .......................................................................... 30 Commrs of Sinking Fund v. Howard, 248 S.W.2d 340 (Ky. Ct. App. 1952) .......................................................................... 30 Cramer v. Sheppard, 140 Tex. 271, 167 S.W.2d 147 (1942) ......................................................................... 17 Ex parte Hughes, 133 Tex. 505, 129 S.W.2d 270 (1939) ......................................................................... 14 Flint v. Stone Tracy Co., 220 U.S. 107 (1911) ..................................................................................................... 35 Galveston, Harrisburg & San Antonio Ry. v. Texas, 210 U.S. 217 (1908) ..................................................................................................... 35 Gaulden v. Kirk, 47 So.2d 567 (Fla. 1950).............................................................................................. 30 Gragg v. Cayuga Indep. Sch. Dist., 539 S.W.2d 861 (Tex. 1976) ........................................................................................ 29 Helena Chem. Co. v. Wilkins, 47 S.W.3d 486 (Tex. 2001) .......................................................................................... 19 Leander Indep. Sch. Dist. v. Cedar Park Water Supply Corp., 479 S.W.2d 908 (Tex. 1972) ............................................................................ 17, 21, 31 Neeley v. W. Orange-Cove Consol. Indep. Sch. Dist., 176 S.W.3d 746 (Tex. 2005) .......................................................................................... 8 Pope v. Ferguson, 445 S.W.2d 950 (Tex. 1969) ........................................................................................ 14
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R.R. Commn v. Arco Oil & Gas Co., 876 S.W.2d 473 (Tex. App.Austin 1994, writ denied) ............................................ 18 Republic Ins. Co. v. Silverton Elevators, Inc., 493 S.W.2d 748 (Tex. 1973) ........................................................................................ 18 Spradlin v. Jim Walter Homes, Inc., 34 S.W.3d 578 (Tex. 2000) .................................................................................... 17, 21 State ex rel. McKay v. Keller, 191 So. 542 (Fla. 1939)................................................................................................ 30 Stringer v. Cendant Mortg. Corp., 23 S.W.3d 353 (Tex. 2000) .............................................................................. 16, 17, 21 Suburban Util. Corp. v. Pub. Util. Commn, 652 S.W.2d 358 (Tex. 1983) .................................................................................. 28, 29 Travelers Ins. Co. v. Marshall, 124 Tex. 45, 76 S.W.2d 1007 (1934) ........................................................................... 31 CONSTITUTIONAL PROVISIONS, STATUTES & RULES 26 U.S.C. 280A (1998) .................................................................................................... 37 26 U.S.C. 280A(c)(1) ...................................................................................................... 37 26 U.S.C. 702(a) .............................................................................................................. 25 Act of May 2, 2006, 79th Leg., 3d C.S., ch. 1, 24, 2006 Tex. Gen. Laws 1 ............. 15, 16 TEX. BUS. ORGS. CODE 152.003 ...................................................................................... 28 TEX. BUS. ORGS. CODE 152.056 ...................................................................................... 28 TEX. BUS. ORGS. CODE 152.101 ...................................................................................... 28 TEX. BUS. ORGS. CODE 152.102 ...................................................................................... 28 TEX. BUS. ORGS. CODE 152.202 ................................................................................ 23, 25 TEX. BUS. ORGS. CODE 152.206 ...................................................................................... 25 TEX. BUS. ORGS. CODE 152.306 ...................................................................................... 28 TEX. CONST. art. V, 3 ................................................................................................ 13, 16
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TEX. CONST. art. V, 8 ...................................................................................................... 14 TEX. CONST. art. VIII, 1(c) ................................................................................ 4, 7, 18, 19 TEX. CONST. art. VIII, 24 ......................................................................................... passim TEX. GOVT CODE 311.005(13) ................................................................................. 17, 18 TEX. GOVT CODE 311.023.............................................................................................. 17 TEX. R. APP. P. 9.7 .......................................................................................................... ii, x TEX. TAX CODE 141.001 ................................................................................................. 33 TEX. TAX CODE 171.002 ................................................................................................. 34 TEX. TAX CODE 171.101.................................................................................................. 33 TEX. TAX CODE 171.1011................................................................................................ 33 TEX. TAX CODE 171.1012................................................................................................ 33 TEX. TAX CODE 171.1013................................................................................................ 33 OTHER AUTHORITIES Bill Analysis, C.S.H.B. 3, 79th Leg., 1st C.S. (2006), available at http://bit.ly/p37tzZ ......................................................................................................... 8 Bob Bullock, Corporations and Partnerships Should Not Be Taxed the Same, AUSTIN AM.-STATESMAN, Aug. 1, 1991.................................................................... 5, 6 Bob Bullock, Leave Corporations Alone, DALLAS MORNING NEWS, Aug. 4, 1991 .......... 6 Brad J. Brookner & Russell D. Brown, Sweeping Texas Franchise Tax Changes: The Margin Tax, TAX ADVISER, Sept. 2006, available at http://goliath.ecnext.com/coms2/gi_0199-5789316/Sweeping-Texas-franchisetax-changes.html .................................................................................................... 34, 35 Andrew Essington, Texas Margin Tax: The Impact on Investment Real Estate, http://www.ainorthtexas.org/store/Essington.pdf ........................................................ 35 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 (2002)........................................... 14

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ROBERT W. HAMILTON ET AL., 19 TEXAS PRACTICE, BUSINESS ORGANIZATIONS 4.4 (2d ed. 2009) .......................................................................................................... 3 H.B. 1553, 72nd Leg., R.S. (1991) ...................................................................................... 6 H. Res. Org., Spec. Leg. Rep., 1993 Constitutional Amendments: The November 2 Election (Aug. 30, 1993) ................................................................................................ 7 H. Res. Org., Bill Analysis, Tex. H.B. 11, 79th Leg., 1st C.S. (1991)........................ 3, 4, 5 H. Res. Org., Constitutional Amendment Analysis, Prop. 4, 73rd Leg., R.S. (1993) ..... 6, 7 Nikki Laing, An Income Tax by Any Other Name Is Still an Income Tax: The Constitutionality of the Texas Margin Tax as Applied to Partnerships and Other Unincorporated Associations, 62 BAYLOR L. REV. 573 (2010)................. passim Legislative Reference Library of Texas, Election Details, S.J.R. 49, 73rd Leg., R.S., available at http://bit.ly/oSGFJ3 ........................................................................... 7 Ltr. from Comptroller Carole Keeton Strayhorn to Gov. Rick Perry (May 2, 2006), available at http://www.window.state.tx.us/news/60502taxplan.pdf .......................... 35 Ltr. from Comptroller Carole Keeton Strayhorn to the Hon. Greg Abbott, Atty Gen. (Apr. 21, 2006), available at http://www.window.state.tx.us/news/60421letter.html ............................................... 35 Ltr. from Comptroller Carole Keeton Strayhorn to Atty Gen. Greg Abbott (Apr. 21, 2006) .................................................................................................................... 8, 9 Ltr. from Lt. Gov. Bob Bullock et al. to Gov. Ann Richards & Speaker Gibson Lewis (Jul. 23, 1991).......................................................................................... 5, 18, 39 Ltr. from Lt. Gov. Bob Bullock to Gov. Ann Richards (Jul. 19, 1991) .............................. 5 ELLIOTT MANNING, TAX MANAGEMENT PORTFOLIO, PARTNERSHIPS CONCEPTUAL OVERVIEW, No. 710-2nd (A-157) ......................................................... 26 WILLIAM S. MCKEE ET AL., FEDERAL TAXATION OF PARTNERSHIPS AND PARTNERS 9.01[1] (3d ed. 1997)................................................................................ 25 Minutes of the August 2, 2006 Board Meeting on Potential FSP: Texas Franchise Tax, available at http://www.fasb.org/jsp/FASB/Page/08-02-06_texas_ franchise_tax.pdf .......................................................................................................... 34 MERRIAM-WEBSTERS COLLEGIATE DICTIONARY (11th ed. 2003)................................... 34
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Cynthia M. Ohlenforst & Jeff W. Dorrill, Taxation, 45 SW. L.J. 2093 (1992) ................... 6 Jeff Slade, Drilling Down the Texas Margin Tax: A Gusher or Dry Hole of Taxes for the Oil & Gas Industry?, 36 TEX. TAX LAW 28 (Oct. 2008) ................................. 41 RANDOM HOUSE WEBSTERS COLLEGE DICTIONARY (2d ed. 1999) ................................ 21 Senate Res. Ctr., Bill Analysis S.J.R. 49, 73rd Leg., R.S. (1993) ................................... 6, 7 Thanh Tan, Senate Leaders: Fix State Revenue Now or Pay Later, TEX. TRIBUNE, Apr. 5, 2011, available at http://bit.ly/pCFUbJ ........................................................... 42 Tex. Leg. Council, Analyses of Proposed Constitutional Amendments, Nov. 2, 1993, Election (Oct. 1993) ......................................................................................... 6, 7 Treas. Reg. 1.26201(b)(3) ............................................................................................... 37 David A. Vanderhider, A Marginal Tax: The New Franchise Tax in Texas, 39 ST. MARYS L.J. 615 (2008)............................................................................................... 41 WEBSTERS THIRD NEW INTERNATIONAL DICTIONARY (1993) ........................................ 21

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STATEMENT OF THE CASE Amici adopt the Statement of the Case presented by Plaintiffs. See TEX. R. APP. P. 9.7. STATEMENT OF JURISDICTION Amici adopt the Statement of Jurisdiction presented by Plaintiffs and also provide important additional briefing on the topic in Part I of this brief. See TEX. R. APP. P. 9.7. ISSUES PRESENTED Amici adopt the Issues Presented by Plaintiffs. See TEX. R. APP. P. 9.7.

INTRODUCTION This case is critically important, not just to Allcat but also to other business owners and indeed all Texans. For the first time ever, the Court has been asked to construe the Bullock Amendment of the Texas Constitution. That amendment, which Texas voters adopted in 1993, prohibits personal income taxes, including taxes on a persons share of partnership and unincorporated association income. TEX. CONST. art. VIII, 24(a). The Court will construe the text as a matter of law, making it appropriate to consider not only the plain-text arguments offered by Allcat and the State but also those of amici curiae. After all, the Courts final judgment here will impact millions of individual Texansmembers of partnerships, LLCs, and other unincorporated entities faced with paying a tax that many serious scholars and experts believe is unconstitutional. The State has offered a breezy interpretation of the Bullock Amendment that does injustice to the text and to the intent of the voters who adopted it. Citing no authority, the State argues that a tax on a business can never constitute a tax on a natural person. That conclusion is hardly logical, and case law from this Court and others refute the States bald claim. Most important, however, the States theory ignores key words in the text of the Constitution itself: that the restriction on taxing the net incomes of natural persons includes a persons share of partnership and unincorporated association income. Id. (emphasis added). The income in that italicized phrase is partnership and

unincorporated association income, which shows that the text restricts some taxes against an unincorporated entitys income. As the text makes clear, those restrictions apply to the extent that a tax is on a persons share of the entitys income. The State
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reads this whole phrase out of the Constitution and then resorts to interpretations of the amendment that are far-fetched and untrue to its text. The State also ignores economic reality. When individuals own an unincorporated flow-through entity, income taxes imposed on the entity are income taxes on the individual owners. Whether the income tax is imposed on the entity before the income passes through to an owner or after it is in an owners hands, the result is the same. This case presents an opportunity to adopt a plain-language reading of the Bullock Amendment consistent with the intent of the Texans who adopted itand at the same time compel the Legislature to fix a broken franchise tax. Concerned about the

constitutional problems with imposing an income tax on unincorporated businesses, the Legislature enacted a tax regime during a 2006 special session that is riddled with Byzantine rules. The anxiety that lawmakers felt about the franchise taxs

constitutionality led them to declare in Orwellian fashion that H.B. 3 is not an income tax, a conclusion roundly rejected by accounting boards and experts around the country. The States new taxes-on-entities-can-never-offend-24 argument mocks the Legislatures anxiety; according to the State, there was apparently never anything to worry about. But there are reasons to worry about the current tax system. Contorted by the Legislatures well-intentioned but unsuccessful attempt to craft a tax that passes constitutional muster, the current franchise tax is devilishly complex and imposes high compliance costs on businesses. And each year, revenues from the tax have fallen billions short of initial projections, complicating the public fisc.

The Legislature has work to do. No doubt, our leaders are always concerned about revenue shortfalls facing the State. Those concerns were crucial; they remain so today. But a pressing need for revenue is not a valid reason for disregarding the Constitution. Like the ties Odysseus used to bind himself to his ships mast, the Texas Constitution binds us and our political representatives to certain commitments and restraints. This Court has the ultimate responsibility to make sure those commitments are honored. The Constitutions text embodies the will of the people, who decided in 1993 not to permit any tax on a persons share of partnership and unincorporated association income without prior voter approval. We ask the Court to apply that plain text and hold the franchise tax unconstitutional as to partnerships and other unincorporated entities owned by individuals. STATEMENT OF FACTS A. For over a Century, Texas Has Imposed Some Form of Franchise Tax, But Not on Partnerships or Unincorporated Associations.

For over 100 years, Texas has imposed some form of franchise tax on at least some businesses operating in Texas. And by the beginning of 1991, the franchise tax still was paid only by corporations. H. Res. Org., Bill Analysis, Tex. H.B. 11, 79th Leg., 1st C.S. (1991).1 Other forms of business organizations, including . . . partnerships, sole

It was also applied to limited liability companies, but only because the 1991 amendments to the tax defined limited liability companies as corporations for the purposes of the tax. See ROBERT W. HAMILTON ET AL., 19 TEXAS PRACTICE, BUSINESS ORGANIZATIONS 4.4 (2d ed. 2009). That definition disregarded the federal rule that looked to how the LLC actually functioned to determine whether it was a corporation for federal tax purposes.

proprietorships, limited partnerships and joint ventures, were exempt from the tax and had been throughout history of the tax.2 B. The Bullock Amendment Is Adopted Following Attempts to Tax Partnership and Unincorporated Association Income.

Although the Constitution provides the Legislature broad taxing authority, that authority is not unbounded. Indeed, article VIII, 1(c) of the Texas Constitution provides the authority for imposing an income tax but is circumscribed by direct reference to 24 of article VIII, commonly known as the Bullock Amendment. Section 1(c) provides that subject to the restrictions of Section 24, [the Legislature] may . . . tax incomes of both natural persons and corporations other than municipal. TEX. CONST. art. VIII, 1(c) (emphasis added). Section 24 was adopted with overwhelming support in November 1993. Spearheaded by Lieutenant Governor Bob Bullock, 24 prohibits any tax imposed on the net incomes of natural persons, including a persons share of partnership and unincorporated association income, until approved by voters in a special referendum. TEX. CONST. art. VIII, 24(a). The passage of the Bullock Amendment followed attempts in 1991 by the 72nd Legislature to expand the scope of the franchise tax. Faced with a significant revenue shortfall, the 72nd Legislature considered several taxing options during a special session. The House adopted House Bill 11, which proposed expanding the franchise tax to include a tax on income of partnerships, joint ventures, [and] business associations. H. Res. Org., Bill Analysis, Tex. H.B. 11, 79th Leg., 1st C.S. (1991).
2

See H. Res. Org., Bill Analysis, Tex. H.B. 11, 79th Leg., 1st C.S. (1991); Nikki Laing, An Income Tax by Any Other Name Is Still an Income Tax: The Constitutionality of the Texas Margin Tax as Applied to Partnerships and Other Unincorporated Associations, 62 BAYLOR L. REV. 573, 573 (2010).

In July 1991, while the proposed changes to the franchise tax were still pending in the House, Lieutenant Governor Bob Bullock and a majority of the members of the Senate sent a letter to Governor Ann Richards and House Speaker Gibson Lewis stating that we will not consider any revision of the franchise tax that contemplates the inclusion of all forms of doing business in the state. Ltr. from Lt. Gov. Bob Bullock et al. to Gov. Ann Richards & Speaker Gibson Lewis (Jul. 23, 1991) (App. 16 to Allcat Br.). A tax on partnerships and non-corporate businesses, the letter explained, is really a tax on personal income that only applies to some persons, and [a] narrow income tax on independent business men and women is no more acceptable to the public than a broad based income tax. Id. (emphasis omitted). Bullocks contemporaneous memorandum to Governor Richards sheds additional light on his opposition to the tax: A corporate tax applied to non-corporate businesses would actually tax the incomes of Texans in business for themselves. Ltr. from Lt. Gov. Bob Bullock to Gov. Ann Richards (Jul. 19, 1991) (App. 17 to Allcat Br.). In the weeks that followed, Bullock also authored an op-ed on these same issues, which major newspapers across the state published. Bullock explained there as well that [a]

corporate tax applied to non-corporate businesses would actually be the same as an income tax on Texans in business for themselves. Bob Bullock, Corporations and Partnerships Should Not Be Taxed the Same, AUSTIN AM.-STATESMAN, Aug. 1, 1991 (App. 18 to Allcat Br.); Bob Bullock, Leave Corporations Alone, DALLAS MORNING NEWS, Aug. 4, 1991 (App. 19 to Allcat Br.).

H.B. 11 and similar attempts by the 72nd Legislature to expand the franchise tax to reach all business entities ultimately failed. Cynthia M. Ohlenforst & Jeff W. Dorrill, Taxation, 45 SW. L.J. 2093, 2103 (1992); see also H.B. 1553, 72nd Leg., R.S. (1991). In the very next legislative session, Bullock and other senators opposed the 72nd Legislatures attempts to expand the franchise tax to include partnerships and other unincorporated businesses; those Senators authored Senate Joint Resolution 49, which proposed an amendment to the Texas Constitution prohibiting a personal income tax without voter approval.3 As S.J.R. 49s analysis explained, Texas prides itself as being one of seven states that does not impose a state personal income tax. Senate Res. Ctr., Bill Analysis, S.J.R. 49, 73rd Leg., R.S. (1993). Thus, although previous legislatures were able to seek new methods of financing the state budget, there remained the possibility that [f]uture legislatures may find it necessary to seek new methods of financing, including a state personal income tax. Id. S.J.R. 49s purpose was to require[] the submission to the voters of a constitutional amendment prohibiting a state personal income tax without voter approval. Id.4 S.J.R. 49 was put to the voters in the November 1993 election as Proposition 4. The ballot language, like the language of S.J.R. 49s caption, reflected a proposed

Tex. Leg. Council, Analyses of Proposed Constitutional Amendments, Nov. 2, 1993, Election, at 23 (Oct. 1993); see also H. Res. Org., Constitutional Amendment Analysis, Prop. 4, 73rd Leg., R.S., at 17 (1993) (noting that the proposed amendment would require approval by a statewide referendum of any statute that imposed a state personal income tax). 4 See also H. Res. Org., Constitutional Amendment Analysis, Prop. 4, 73rd Leg., R.S., at 17 (1993); Tex. Leg. Council, Analyses of Proposed Constitutional Amendments, Nov. 2, 1993, Election, at 23 (Oct. 1993).

prohibition against a personal income tax without prior voter approval. H. Res. Org., Spec. Leg. Rep., 1993 Constitutional Amendments: The November 2 Election 17-18 (Aug. 30, 1993). Texas voters overwhelmingly approved Proposition 4, and the Bullock Amendment became part of the Texas Constitution.5 As approved by the voters, the Bullock Amendment provides in pertinent part: A general law enacted by the legislature that imposes a tax on the net incomes of natural persons, including a persons share of partnership and unincorporated association income, must provide that the portion of the law imposing the tax not take effect until approved by a majority of the registered voters voting in a statewide referendum held on the question of imposing the tax. TEX. CONST. art. VIII, 24(a). Proposition 4 also included changes to article VIII, 1(c) of the Constitution, which now provides: Subject to the restrictions of Section 24 of this article, [the Legislature] may also tax incomes of both natural persons and corporations other than municipal. TEX. CONST. art. VIII, 1(c). C. The 79th Legislature Imposes a New Franchise Tax.

The temptation to address revenue shortfalls with an income tax soon arose again. In the grips of another statewide revenue shortfall, and facing the June 1, 2006 deadline to reform the public school finance system set by this Court in Neeley v. West OrangeCove Consolidated Independent School District, 176 S.W.3d 746 (Tex. 2005), the 79th Legislature met in special session starting on April 17, 2006. The Legislature considered a proposal in House Bill 3 to revise the franchise tax in order to raise[] state revenue to
5

See Legislative Reference Library of Texas, Election Details, S.J.R. 49, 73rd Leg., R.S., available at http://bit.ly/oSGFJ3.

fund a significant property tax reduction, which would resolve concerns from Neeley and simultaneously address public school funding.6 On April 26, 2006, in the midst of the Legislatures consideration of H.B. 3, Texas Comptroller Carole Keeton Strayhorn sent a letter to General Abbott, requesting an official opinion on the constitutionality of H.B. 3. Ltr. from Comptroller Carole Keeton Strayhorn to Atty Gen. Greg Abbott (Apr. 21, 2006) (App. 10 to Allcat Pet.). Strayhorn noted that H.B. 3 raises obvious and fundamental questions and concerns to the extent it is proposed to be applied to any type of unincorporated association. Id. She further noted: [T]he partnership/unincorporated association proviso of the Bullock Amendment refers plainly and simply to a persons share of the income of an unincorporated association as triggering the referendum. Whether the tax is directly on an entity is irrelevant if the only inquiry is whether there is ultimately a tax levied on a persons share . . . . Id. Notwithstanding the Comptrollers concerns, the Legislature approved H.B. 3 a scant two-and-a-half weeks after the start of the special session. The Governor signed the bill into law on May 19, 2006, less than a month after the special session commenced. The Attorney General never issued an opinion addressing Strayhorns concerns. H.B. 3 expanded the scope of the previous franchise tax to include entities that had never before been subject to the tax, and it made significant alterations with respect to how the tax is calculated. Nikki Laing, An Income Tax by Any Other Name Is Still an Income Tax: The Constitutionality of the Texas Margin Tax as Applied to Partnerships and Other Unincorporated Associations, 62 BAYLOR L. REV. 573, 573 (2010). The bill
6

Bill Analysis, C.S.H.B. 3, 79th Leg., 1st C.S. (2006), available at http://bit.ly/p37tzZ.

expanded the tax base by applying the tax to unincorporated associations, including LLPs, PAs, LLLPs, and LPs. The relevant provisions of H.B. 3 went into effect January 1, 2008, having never been submitted to Texas voters. SUMMARY OF THE ARGUMENT The Court has jurisdiction to hear this case and need not rely exclusively on the bases for jurisdiction discussed in the merits briefs from Allcat and the State. The parties have largely overlooked that the 1980 amendment to article V, 3 of the Texas Constitution provides the Court with all the judicial authority of the State, except as otherwise expressly limited by the Constitution. As former Chief Justice Joe Greenhill noted, the amendment means that barring a specific constitutional prohibition on the exercise of jurisdiction, the Legislature can specifically charge the Court to decide certain issues, as it did in 2006 in H.B. 3. The Court has both constitutional and statutory authority to hear this case as an original proceeding. The plain text of the Bullock Amendment prohibits an income tax on natural persons, including on a persons share of partnership and unincorporated association income. The average Texas voter in 1993 would have understood this to mean that, for the purposes of the amendment, income taxes on an unincorporated business are prohibited to the extent they tax a persons share of the businesss income. The State wrongly assumes that a tax on a business can never be an income tax on a natural person. That interpretation of 24 reads the words a persons share of partnership and unincorporated association income completely out of the Constitution. Share is

commonly understood to mean a part of a whole or a portion allotted or assigned to

someone, and so the use of the word share in the amendment denotes that there is a restriction on taxing a persons share of something. That something, the amendments text explains, is partnership and unincorporated association incomeincome at the entity level allocated to a partner or owner. The States purported plain-text reading of the amendment, in short, cannot account for the amendments actual text. Further, the States argumentthat any income tax on an entity is permissiblewould allow income taxation of sole proprietorships and general partnerships. The voters in 1993 did not authorize this unprecedented power grab, and the Constitutions text does not support it. The plain-text reading of the amendment is further confirmed by applying basic tax principles. There is only one thing that, from a tax perspective, constitutes part of a natural persons net income and is also a persons share of partnership and unincorporated association income: a partners distributive share of income in the hands of the entity. The States contention that taxing a partnership distribution is all that is prohibited by the amendment fails to appreciate that partnership distributions do not necessarily have any relationship at all to a partners income, as distributions can be made from sources other than income, such as loan proceeds. Thus, the only plausible reading of the amendment is that a persons share of partnership and unincorporated association income refers to a partners distributive share of income held at the entity level. The State also argues that a persons share of partnership and unincorporated association income should be understood simply to mean the distributions actually received by a partner or owner, and that the including clause was intended merely to
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provide an example of a type of income that could contribute to a natural persons net income. Those readings, which unjustifiably downplay the entire including clause, are strained and have unacceptable consequences. The States understanding of the

amendment would permit it to impose a tax on any source of incomeor even a natural persons gross incomeso long as the tax were not based on net income calculations. Allcats interpretation of the amendment gives meaning and significance to the including clause, which answers a serious question: whether a tax on a persons share of unincorporated-entity income is a personal income tax. It also gives meaning and significance to the Bullock Amendment as a whole. Finally, considerations of policy weigh in favor of holding the franchise tax unconstitutional as applied to partnerships and other unincorporated businesses owned by individuals. The tax presents a labyrinth of provisions that make compliance

unjustifiably complex and expensive, and it has failed to accomplish its stated objectives. This case, therefore, presents the Court an opportunity to address a broken franchise tax systemwhile holding the Legislature accountable to the mandates of the Constitution reflected in its plain text. ARGUMENT I. THE SUPREME COURT HAS ORIGINAL JURISDICTION TO DECIDE THIS CASE. As former Chief Justice Greenhill has suggested, the 1980 amendment to article V, 3 of the Texas Constitutionwhich the parties have largely not addressedprovides ample constitutional jurisdiction to hear this case, while 24 of H.B. 3 provides the necessary statutory basis for original jurisdiction in this Court. The States jurisdictional

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argument creates a false dilemma. The State claims the Court must either apply Love v. Wilcox and dismiss the case or, alternatively, overrule Love and open the gates to a flood of original proceedings. But the States argument fails to take into account the 1980 amendment to the Constitution and ignores that special statutory authorization is required for every original proceeding in this Court. Before the 1980 amendment, article V, 3 provided: The Supreme Court shall have appellate jurisdiction only except as herein specified, which shall be co-extensive with the limits of the State. The amendment to article V, 3, however, dramatically changed the scope of the Courts previously limited constitutional jurisdiction: Sec. 3. JURISDICTION OF SUPREME COURT; WRITS; CLERK (a) The Supreme Court shall exercise the judicial power of the state except as otherwise provided in this Constitution. Its jurisdiction shall be coextensive with the limits of the State and its determinations shall be final except in criminal law matters. TEX. CONST. art. V, 3 (emphasis added). The amendment removed the limiting

language appellate jurisdiction only. By replacing that phrase with the statements that [t]he Supreme Court shall exercise the judicial power of the state except as otherwise provided in this Constitution and [i]ts jurisdiction shall be co-extensive with the limits of the State, the people of Texas expanded the Supreme Courts constitutional jurisdiction to the very limits of State power, subject only to express limitations provided in the Constitution. To our knowledge, the Court has never interpreted this amended provision of article V, but rules of construction and the Constitutions textual history indicate that the Legislature may confer on the Supreme Court jurisdictionappellate or originalover any matter where the judiciary could have jurisdiction.
12

The only express constitutional limitation on original jurisdiction is contained at the end of article V, 3: The Legislature may confer original jurisdiction on the Supreme Court to issue writs of quo warranto and mandamus in such cases as may be specified, except as against the Governor of the State. TEX. CONST. art. V, 3. Given the new expansive nature of the constitutional scope of the Courts jurisdiction, it was important to retain that clause in order to ensure that the Courts original jurisdiction to issue writs of quo warranto and mandamus cannot extend to such writs against the Governor. Former Chief Justice Greenhill commented on the change in the Courts constitutional powers: The early Texas constitutions had been interpreted to mean that the supreme courts jurisdiction and power was appellate only. In other words, it had only the specific powers delegated to it, and there are decisions to that effect.7 But of critical importance, Chief Justice Greenhill also noted, The constitutional

amendment . . . made clear that the supreme court had residual powers, which translated into inherent power and that the court has judicial power, limited only by specific provisions of the constitution.8 While the 1980 amendment expanded the Courts constitutional jurisdiction, a litigant still must have explicit statutory permission from the Legislature to bring an

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); see, e.g., Pope v. Ferguson, 445 S.W.2d 950 (Tex. 1969); Ex parte Hughes, 133 Tex. 505, 508-15, 129 S.W.2d 270, 273-76 (1939). 8 Greenhill, supra, at 391-92.

13

original proceeding directly to the Court.9 The people of Texas entrusted the Legislature to permit original jurisdiction only when it is vital to do so. Here, H.B. 3 contains such permission: The supreme court has exclusive and original jurisdiction over a challenge to the constitutionality of this Act or any part of this Act and may 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. By issuing that specific statutory authorization, the Legislature recognized the importance of having the Court exercise original jurisdiction to decide constitutional challenges to the franchise tax on an expedited basis. If constitutional challenges to the tax were brought in any other court, the taxs constitutionality could be in question for years as cases made their way to the Court. During that time, courts could come to conflicting conclusions. And even if there were unanimity among the lower courts, clouds of uncertainty would hang over the revenues generated by the tax until this Court finally spoke. The Legislature reasonably chose to prevent those harms by granting the Court exclusive and original jurisdiction over constitutional challenges to the tax. The State has a compelling interest in knowing whether it can rely on streams of revenue to pay its financial obligationsand the people of Texas have an equally compelling interest in having the Court quickly and finally decide whether their government is imposing an unconstitutional tax.

TEX. CONST. art. V, 8 (giving district courts exclusive and original jurisdiction except in cases where exclusive . . . or original jurisdiction may be conferred by this Constitution or other law on some other court).

14

Article V, 3 of the Texas Constitution grants the Court the judicial power of the state and jurisdiction co-extensive with the limits of the State, and H.B. 3 grants the Court exclusive and original jurisdiction to hear constitutional challenges to the franchise tax. Thus, the Court need not rely exclusively on the Plaintiffs jurisdictional arguments regarding Texas Government Code 22.002(c)10 or on the States arguments about article V, 8. The Constitution and H.B. 3 together provide ample grounds for jurisdiction here. II. UNDER A PLAIN-TEXT READING OF THE BULLOCK AMENDMENT, TAXING A PERSONS SHARE OF PARTNERSHIP AND UNINCORPORATED ASSOCIATION INCOME IS NOT PERMITTED WITHOUT VOTER APPROVAL. Absent voter approval, an income tax assessed against natural persons violates the Texas Constitutionand that restriction includes taxes on a persons share of partnership and unincorporated association income. TEX. CONST. art. VIII, 24(a). That is the plain, common-sense meaning of the Bullock Amendment. An unapproved income tax, like the franchise tax, that is imposed on a partnership, LLC, or other unincorporated association composed of natural persons falls within the prohibition because it taxes a persons share of partnership or unincorporated association income.

Nor need the Court rely exclusively on Government Code 22.002 to properly exercise its jurisdiction within the bounds of article V, 3s grant. Section 3 makes it clear that the Legislature may confer original jurisdiction on the Supreme Court to issue writs of . . . mandamus. TEX. CONST. art. V, 3. The Legislature exercised that constitutional authority when under chapter 1, 24 of H.B. 3 it authorized this Court to exercise original jurisdiction over a challenge to the constitutionality of the franchise tax and to issue injunctive or declaratory relief in connection with the challenge. See Act of May 2, 2006, 79th Leg., 3d C.S., ch. 1, 24, 2006, Tex. Gen. Laws 1, 40.

10

15

A.

The Constitution Restricts Personal Income Taxes on a Persons Share of Partnership and Unincorporated Association Income.

The starting place for the interpretation of a constitutional amendment is its text, which is the best reflection of the intent of the amendments framers and the voters who adopted it. Stringer v. Cendant Mortg. Corp., 23 S.W.3d 353, 355 (Tex. 2000); City of Beaumont v. Bouillion, 896 S.W.2d 143, 148 (Tex. 1995); TEX. GOVT CODE 311.023. The text of the Bullock Amendment in article VIII, 24(a), provides in pertinent part: PERSONAL INCOME TAX; DEDICATION OF PROCEEDS (a) A general law enacted by the legislature that imposes a tax on the net incomes of natural persons, including a persons share of partnership and unincorporated association income, must provide that the portion of the law imposing the tax not take effect until approved by a majority of the registered voters voting in a statewide referendum held on the question of imposing the tax. TEX. CONST. art. VIII, 24(a) (emphasis added). The phrase including a persons share of partnership and unincorporated association income is key. The Court should interpret the words of the amendment as they would have been understood by the average voter at the time of the amendments adoption. Leander Indep. Sch. Dist. v. Cedar Park Water Supply Corp., 479 S.W.2d 908, 912 (Tex. 1972); see Spradlin v. Jim Walter Homes, Inc., 34 S.W.3d 578, 580 (Tex. 2000); Stringer, 23 S.W.3d at 355; Bouillion, 896 S.W.2d at 148; Cramer v. Sheppard, 140 Tex. 271, 167 S.W.2d 147, 152 (1942). The plain reading is that the income referred to in the phrase is partnership and unincorporated association income. So the amendment itself plainly contemplates income taxes on an entity and restricts such taxes to the extent they are taxes on a persons share of an unincorporated entitys income.

16

In everyday speech, including is generally used to explain that something should be considered a part of a class when its inclusion might not otherwise be obvious; it clears up gray areas. The Code Construction Act defines including as a term of enlargement and not of limitation or exclusive enumeration. TEX. GOVT CODE

311.005(13). Texas courts use this same meaning of the word.11 And partnerships had never been taxed in Texas and had never been subject to federal income tax; the income of partnerships was always, without exception, taxed to its partners. Having in mind the flow-through nature of partnership taxation, the Legislature and voters clarified beyond any doubt in the Bullock Amendment that partnership income allocated to a natural person cannot be taxed without voter approval. Thus, to the extent there could be any question whether a persons share of partnership or unincorporated association income should be considered part of an individuals income, the Constitutions text indicates that a persons share of partnership or unincorporated association income is included as personal income that cannot be taxed without voter approval. See Ltr. from Lt. Gov. Bob Bullock et al. to Gov. Ann Richards & Speaker Gibson Lewis (Jul. 23, 1991) (stating that a tax on partnerships and unincorporated businesses is really a tax on personal income). This common-sense reading of the plain text is further bolstered by reading 24 in conjunction with 1(c) of article VIIIthe only provision in the Constitution that refers to 24. Section 1(c) provides: Subject to the restrictions of Section 24 of this article, [the Legislature] may . . . tax incomes of both natural persons and corporations other than
11

R.R. Commn v. Arco Oil & Gas Co., 876 S.W.2d 473, 493 (Tex. App.Austin 1994, writ denied) (It is well settled that the term including is generally employed as a term of enlargement rather than a term of limitation or restriction.); see also Republic Ins. Co. v. Silverton Elevators, Inc., 493 S.W.2d 748, 752 (Tex. 1973).

17

municipal. TEX. CONST. art. VIII, 1(c). Section 1(c) is the only explicit grant of power in the Texas Constitution to tax income, and 24 limits that power by direct reference. Constitutional provisions should not be interpreted in isolation, but should instead be read as complementary parts of a coherent whole. Helena Chem. Co. v. Wilkins, 47 S.W.3d 486, 493 (Tex. 2001). That rubric is even more important where, as here, 1(c) explicitly subjects itself to the restrictions of Section 24. TEX. CONST. art. VIII, 1(c). We can be confident that the Legislature knew about 1(c) when it proposed the Bullock Amendment because the amendment included changes to 1(c). Section 1(c) explicitly acknowledges only two classes of subjects for an income taxnatural persons and corporationsand the Bullock Amendment should be seen as working within that framework. Section 1(c) makes no mention of partnerships or unincorporated associations. Instead of expanding the list of taxable subjects in 1(c) to include unincorporated pass-through entities, the Legislature and voters chose to fit those entities into pre-existing categories. Section 24 refers back to a key term in 1(c): natural persons. It defines the net incomes of natural persons to include a persons share of partnership and unincorporated association income. Thus, the Bullock Amendmentlike 1(c)conceives of two classes of possible subjects for an income tax: natural persons and corporations. The choice not to include partnerships and unincorporated associations in 1(c), combined with its inclusion of shares in those types of entities as the income of natural persons in 24, shows that income taxes on unincorporated pass-through entities are viewed in the eyes of the Constitution as taxes on their partnerswho may be natural persons or corporations
18

because they tax the partners shares of income in partnerships and unincorporated associations. B. The Franchise Tax Is a Tax on a Persons Share of Partnership and Unincorporated Association Income and Therefore Violates 24.

Because the plain text of 24 shows that its restrictions extend to income taxes on a persons share of partnership and unincorporated association income, the next question is whether the franchise tax is such a tax. Under the plain text of the Bullock Amendment, it is. The phrase a persons share of partnership and unincorporated association income is critical. It clearly contemplates a tax on an entity, as a persons share has to be a share of somethinghere, the income of a partnership or the income of some other unincorporated association. The States interpretation of 24 strikes those words from the Constitution, offending first principles of textual analysis. The States other assertions about the amendments text are equally flawed. 1. The Phrase a Persons Share of Partnership and Unincorporated Association Income Clearly Contemplates Restricting Taxes at the Entity Level.

The plain text of the Constitution restricts all taxes on a natural persons income, including a persons share of partnership and unincorporated association income. TEX. CONST. art. VIII, 24(a). Misconstruing what the text actually says, the State reads 24 as prohibit[ing] only a tax on the net incomes of natural persons, not business entities. That reasoningthat taxes on a business entity cannot be taxes on a natural person ignores the text.

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Again, the income in the phrase including a persons share of partnership and unincorporated association income is the income of an unincorporated entity. So

income taxes against an unincorporated entity are restricted every time they tax a persons share of the entitys income. The States suggestion is that this phrase somehow allows taxation at the entity levelbefore the amount is received by the individual. But that interpretation reads a persons share of partnership and unincorporated association completely out of the Constitution, disregarding this Courts instruction to give meaning and effect to each word according to its ordinary meaning as understood by the voters. See Leander Indep. Sch. Dist., 479 S.W.2d at 912; Spradlin, 34 S.W.3d at 580; Stringer, 23 S.W.3d at 355. Dictionary definitions of share also give valuable guidance about what the voters intended in enacting 24. Those definitions support the view that taxes on entities are restricted whenever they tax a persons share of income earned by the partnership or unincorporated entity, even before that income has been distributed. Random House Websters College Dictionary defines share as: a part of a whole, esp. a portion allotted or assigned to a member of a group RANDOM HOUSE WEBSTERS COLLEGE DICTIONARY (2d ed. 1999). Similarly, Websters Third New International Dictionary defines share as: a portion belonging to, due to, or contributed by an individual : the part allotted or belonging to one of a number owning together any property or interest : the undivided interest of any one of a number owning jointly or in common WEBSTERS THIRD NEW INTERNATIONAL DICTIONARY (1993).

20

Those definitions of the word sharefrom dictionaries published at the time of the 1993 vote and shortly thereafterdeal a severe blow to the States theory that the including phrase refers to business income that has already passed through to individuals. Because a share is a part of a whole, the word share in 24 refers to a partners share of income as it exists before it has been hived off from the whole into separate pieces. Likewise, because a share is a portion allotted or assigned to a member of a group, a persons share of . . . income refers to the income allotted or assigned to that person as a member of a group (the unincorporated entity), not after it has passed from the group to the individual. And a share would not be due to a personthe definition provided by Websters Thirdif, as the State argues, it had already been received by a natural person as business income. Resp.Br.22. Further, because a share is a part allotted to one of a number owning together any property or interest or own[ed] jointly, the phrase a persons share of partnership and unincorporated associated income refers to a corpus of income that is still owned togetherwhich happens only at the entity level. Once the income flows through to the partners, it is no longer income owned together or jointly. In short, common dictionary definitions contemplate that a share means a persons piece of a bigger whole, and so the normal, common-sense meaning of the word share means that the Constitution prohibits taxing a share of income even when it is still part of a larger whole. Real-world examples likewise confirm that voters would have understood a persons share as restricting taxation against unincorporated entities. Assume three friends decide to order a large pizza pie with 12 slices. If the three friends contribute to
21

order the pizza and agree to divide it equally, it is perfectly normal for one of the friends to say, I cant wait to get my share of the pizzaeven before the delivery driver arrives and rings the doorbell, and even when the pizza sits in a box on the table. If someone later asks a partner why he got four pieces, a natural response is, Because that was my share. While perhaps grammatically correct to use the present tenseBecause that is my shareeven that statement makes sense only because those four pieces were once part of a larger whole. After the pizza slices have been delivered and doled out, the three friends would no longer talk about owning a share of a pizza pie; they would say they each own four slices of pizza. Thus, both before and after the pizza is passed out, the partners would only talk about their share in relation to the portion of the whole pizza allotted to each. That is how the franchise tax works, as shown in a simple scenario involving a partnership. Assume a Texas partnership owned by two natural persons has income of $1,000. Absent a special profit-sharing agreement, each partners share of the income is $500. See TEX. BUS. ORGS. CODE 152.202(c). If the State imposes a 1% income tax on the $1,000 at the partnership level, the tax reduces the partnerships $1,000 of income by 1% ($10), thereby reducing each partners $500 share of the income by 1% ($5). Before the income tax, each partners share of earnings was $500; after the tax, each partners share is $495. The States argument that the franchise tax is valid because it is aimed at the entity levelrather than at individual partners or LLC membersrests on a distinction that is meaningless for unincorporated entities (such as LPs, LLPs, LLCs, and
22

professional associations) that receive pass-through tax treatment. After all, when a 1% income tax is imposed at the entity level, each partners individual share of the income is also reduced by 1%from $500 to $495. Also, the States interpretation of the amendment would authorize an income tax on any entity, including sole proprietorships. Texas voters could not have intended that. The State hints at a possible limit to its reading, arguing that an entitys enjoyment of limited liability justifies targeting it with the tax. Resp.Br.5. Nothing in the

Constitutions text supports that notion. The States resort to a limitation-of-liability justification shows both that the State is not paying attention to the text and that it does not really believe that the entity concept is the dispositive principle. 2. From a Tax Perspective, the Including Phrase Restricts Taxing a Persons Distributive Share of Income at the Entity Level.

Most of the people who voted on Proposition 4 were not tax professionals. But voters who had real-world experience with partnerships and how they are taxed would have understood that the including phrase is capable of only one meaning. Those voters would have rejected out of hand the States theory that the including phrase refers to distributions that have already passed from an entity to its individual owners. Resp.Br.22. The States reading is wrong as a matter of basic tax principles. The only acceptable interpretation of the including phrase is that it restricts taxing a partners or members share of income in the hands of the entity, consistent with the plain-language analysis above.

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To understand why this is so, one must be familiar with two distinct tax conceptsincome and distributions. Income is the profit that a partnership earns in carrying on its business. 12 Under both state and federal tax law, income is allocated among the partners in the matter agreed by the partners or as provided by law. Section 152.202(a)(2) of the Business Organizations Code requires a partners capital account to be credited with an amount equal to a share of partnership profits, and 152.206(b) requires partnership profits to be allocated to the partners capital account. TEX. BUS. ORGS. CODE 152.202, .206. Under federal income tax law, a partners share of

partnership income is referred to as his or her distributive share. 26 U.S.C. 702(a). Although a distributive share of income is legally considered partnership property and remains in the partnerships possession, it is treated as income to the partner to whom it is allocated, and it is included in the partners individual federal income tax calculation in the year of the allocation.13 A distribution is different. Unlike a distributive share of partnership income, a distribution is not necessarily made from income. Under both Texas and federal tax law, a distribution is simply an amount of money or property transferred from partnership to one of its partners. In contrast to a distributive share of income credited to the partners capital account and held by the partnership, a distribution is transferred

12

Since most unincorporated entities elect partnership (flow-through) tax treatment, we analyze these concepts by referring to a partnership and its partners. Of course, the same principles would apply to LLCs taxed as partnerships (as almost all are). 13 See WILLIAM S. MCKEE ET AL., FEDERAL TAXATION OF PARTNERSHIPS AND PARTNERS 9.01[1] (3d ed. 1997) (Pursuant to 702(a), the partners are required to take into account their distributive shares of partnership profit or loss, determined under 704, regardless of whether the partnership makes actual distributions to them.).

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from the partnership to a partner and becomes the personal property of a partner receiving the distribution. Again, it is critically important to understand that distributions are not necessarily made from a partnerships income (i.e., from its profits). For example, a distribution can be in the form of cash or partnership property and may be made from capital contributions, earnings, or even loan proceeds. The partnership decides how and when to make distributions. A distribution generally is not considered income under federal tax law and is not included in a partners individual federal income tax calculation.14 With these concepts in mind, only one interpretation of the Bullock Amendment is possible. The Bullock Amendment refers to something that is both the net income[] of a natural person[] and a persons share of partnership and unincorporated association income. TEX. CONST. art. VIII, 24. Two options have been suggested: amici argue that the including phrase refers to a partners distributive share of income; the State argues that the phrase refers to a partnership distribution. Resp.Br.22. The problem fatal to the States interpretation is that a partnership distribution does not necessarily have any relationship at all to the net incomes of natural persons, TEX. CONST. art. VIII, 24, because not all distributions are made from a partners share of income. To use the States own analogy (Resp.Br.21), the State is really saying, I like vegetables, including yellow things. But no matter how yellow a lemon is, it is not a vegetable.

See ELLIOTT MANNING, TAX MANAGEMENT PORTFOLIO, PARTNERSHIPSCONCEPTUAL OVERVIEW, No. 710-2nd (A-157) (Although consistent with the pass-through principle, partners generally may receive cash distributions without tax, because they have already paid tax on the income when received by the partnership, a partner may recognize gain for a cash distribution that exceeds outside basis.).

14

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And just as yellow things are not all vegetables, partnership distributions are not all part of the gross incomes of natural persons. Id. In deciding whose interpretation is right, the Court should remember that only a partners distributive share of income held by the partnership satisfies the Constitutions requirement that the net incomes of natural persons include a persons share of partnership income. Id. Other constitutional provisions support this reading. When the voters adopted 24(a), they also adopted article VIII, 24(e), which expressly requires that any income tax be consistent with federal law. TEX. CONST. art. VIII, 24(e). Under federal income tax law, a distributive share of partnership income is taxable as income to a partner whether or not it is distributed, and this distributive share of partnership income is part of the partners individual net income calculation, without exception. A

partnership distribution, in contrast, is not counted as income under federal law, unless the distribution exceeds the partners investment in the partnership, and is not included in a partners individual net income calculation. Thus, to knowledgeable tax professionals, only one reading of the Bullock Amendment is possible. The phrase a persons share of partnership and unincorporated association income refers to a partners or members distributive share of income allocated to the partner or member and credited to his or her capital account held by the entity. By taxing the income of partnerships and other unincorporated entities owned by natural persons, the franchise tax violates the Constitution.

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3.

The Court Should Reaffirm That Taxes Imposed on Unincorporated Businesses Are Characterized According to Their Effect on Individual Owners.

Notwithstanding the States bald and unsupported statement to the contrary (Resp.Br.17), taxes on unincorporated entities are regularly classified according to their real-world effect on the individual owners in the aggregate. The States claim that partnerships and other unincorporated entities have a separate legal existence from their members is correct for some purposesfor example, limitation of liability, enforcement of liability, and property ownership. But the separate legal existence entity theory is not controlling for tax purposes.15 The Business Organizations Code (on which the State bases its argument) deals with liability and property issues, but the State cites no corresponding provision about tax treatment of unincorporated entities. Accordingly, principles of law and equity properly supplement the Code on tax issues. TEX. BUS. ORGS. CODE 152.003. Courts in Texas and around the country have repeatedly held that the entity concept will not nullify the doctrine of substance over form when dealing with tax issues. While the State argues the franchise tax is permissible because only entities, not individuals, sign the tax-bill checks, this Court has rejected that reasoning in favor of enforcing economic reality. In Suburban Utility Corp. v. Public Utility Commission, the Court disregarded the general rule that a corporation is a distinct and separate economic entity from its shareholders. 652 S.W.2d 358, 364 (Tex. 1983). The Court instead aggregated the financial activities of Suburban, a Subchapter S corporation, and the activities of its
15

See, e.g., TEX. BUS. ORGS. CODE 152.056, .101-.102, .306.

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shareholders for purposes of interpreting a law regulating the rates utility companies could permissibly charge their customers. Id. at 363-64. Ordinarily, a utility company is allowed to set rates based on its operating expenses, which generally include the companys federal income tax expenses. Id. at 362. But because Suburban was a flowthrough entity for federal income tax purposes, the company did not pay federal income tax. Instead, Suburbans shareholders each reported his or her share of Suburbans income on his or her individual federal tax return. Id. at 363. The governing agency

disallowed the inclusion of the shareholders federal income tax expenses and ordered Suburban to reduce the rates it charged to its customers. Id. The Court declared that the fundamental inquiry is not limited to technical distinctions, but is determined by practical economic facts. Id. Examining the

relationship between an S corporation and its shareholders, the Court concluded that the income of the Subchapter S corporation is taxable . . . [but] is distributed pro rata to the shareholders who must pay taxes on it as ordinary income. Id. As a result, the Court ruled for Suburban and held that the Commission must allow an S corporation to include in its operating expenses the federal income taxes paid by its shareholders, disregarding the entity and instead looking to economic reality. Id. at 364; see also Gragg v. Cayuga Indep. Sch. Dist., 539 S.W.2d 861, 863 (Tex. 1976) (holding it proper to disregard legal entities and look instead to economic realities when necessary to prevent wrongful use of the agricultural assessment amendment). Thus, it is entirely proper to disregard entities when interpreting tax-related statutes and constitutional provisions to give legal

28

effect to economic realities.16 Here, the result should be the same. Whenever Texass franchise tax imposes an income tax on unincorporated entities owned by individuals, it is in reality an illegal tax on the members or partners who run the business. 4. The State Mischaracterizes Allcats Position and Resorts to Weak, Incorrect, and Internally Inconsistent Arguments.

The State fixates on what the Bullock Amendment supposedly does not prohibit, but fails to offer anything approaching a reasonable interpretation of what it does. Indeed, the States proffered interpretations reduce parts of the Bullock Amendment to empty words. The State, for example, contends that the including phrase 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. Resp.Br.22. That interpretation has insurmountable problems. As discussed above, it does not account for the plain-language meaning of the words a persons share, nor is it correct as a matter of tax law (see sections II.B.1-2, supra). If the Constitution had meant distribution once it is received by a natural person (Resp.Br.22), the use of the word share was a terrible choice: the word share refers to something that is still part of a whole in everyday conversation, and a distribution once it is received by a natural person does not necessarily have any
16

Other courts likewise look to economic realities to characterize supposed entity taxes and alleged non-income taxes as taxes on natural persons. See, e.g., Gaulden v. Kirk, 47 So.2d 567 (Fla. 1950) (privilege tax was an excise tax); State ex rel. McKay v. Keller, 191 So. 542 (Fla. 1939) (license tax was an income tax); Commrs of Sinking Fund v. Howard, 248 S.W.2d 340 (Ky. Ct. App. 1952), affd, 344 U.S. 624 (1953) (occupational license tax was an income tax); City of Louisville v. Sebree, 214 S.W.2d 248 (Ky. Ct. App. 1948) (license fee was an occupation tax); Carter Carburetor Corp. v. City of St. Louis, 203 S.W.2d 438 (Mo. 1947) (earnings tax was an income or an excise tax).

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relationship to a persons net income. In fact, under the States reading, the words a partners share play no real role in the amendment at all; the same result could have been achieved simply by referring to partnership and unincorporated associated income. As described above, the States view also ignores the economic reality of this tax: when imposed on unincorporated entities owned by individuals, the franchise tax is a tax on the incomes of natural persons. Additionally, and critically important, the States reading of the amendment is nonsensical. No one has ever suggested that business income received by an individual as a distribution should be singled out for special prejudicial tax treatment. That concern was never one of the evils to be remedied by the framers of the amendment, nor was it likely to be on the minds of reasonable voters. Travelers Ins. Co. v. Marshall, 124 Tex. 45, 76 S.W.2d 1007, 1012 (1934). The State pitches a secondbut equally implausiblereading of the including phrase: [T]he explanatory phrase is an example of one possible type of income that could contribute to natural persons net income. Resp.Br.20. This interpretation suffers from most of the same problems affecting the States first explanation of the phrase. And it is infected by an additional problem. The phrase including a persons share of partnership and unincorporated association income should be construed as being important and meaningful. See

Leander Ind. Sch. Dist., 479 S.W.2d at 912. It answers a serious question: whether a tax on a persons share of the income of an unincorporated entitya vehicle that almost always allows flow-through tax treatmentis properly characterized as a tax on personal income. In contrast, the State treats the phrase as a throw-away. By speculating that the
30

phrase is merely one factor relevant to calculating net income, the State treats our Constitution as if it were simply a pronouncement from an accounting standards board or a restatement of IRS Tax Topic 407. The Constitution is much more than that. It is the compact we Texans have made with our government, conferring powers on our representatives but also imposing limits on those powers. Under the States reasoning, it would have been just as likely for the Constitution to have read including wages. But this amendment is about much more than cataloging a list of types of incomes for a net income determination. The decision of the framers and voters to include a persons share of partnership and unincorporated entity income was intentional, not random. The text represents the voters will to require a special referendum before the State can levy an income tax on unincorporated entities owned by natural persons. This fits with both the history of the Bullock Amendment and the economic realities of an unincorporated association: the income taxes imposed on such entities flow directly through the entities to the natural persons who own them. Finally, the State argues against the view that the including phrase expands the meaning of natural personsa view that no one has ever advocated. The including phrase does not enlarge the meaning of natural persons, but instead clarifies that the restrictions on income taxes on natural persons apply not only to income in an individuals hands but also to a persons share of partnership and unincorporated association income. Id.

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5.

The Franchise Tax Is a Prohibited Income Tax.

The franchise tax fits well within the traditional understanding of an income tax, whether relying on the Texas Tax Codes technical definition or the colloquial understanding of an average Texas voter in 1993. The Tax Code defines income tax as a tax imposed on or measured by net income including any tax imposed on or measured by an amount arrived at by deducting expenses from gross income. TEX. TAX CODE 141.001 (emphasis added). A break-down of the franchise tax calculation shows that it falls squarely within this description. In order to calculate its taxable margin, a business entity first calculates its total revenue. This is done by adding together the revenue amounts reported in the entitys federal income tax return, including gross receipts from a trade or business, dividends, interest, rents and royalties, capital gains, and other types of income: it is essentially a calculation of the entitys gross income. Id. 171.1011. Then, the entity subtracts certain expenses reported on its federal income tax return, as well as statutorily defined deductions and exemptions. These statutorily defined deductions are based on the

entitys expenses. They include either the cost of the goods sold by the entity or the compensation the company pays to its employees. Id. 171.101(a), .1011-.1013. The taxable margin is, thus, an amount arrived at by deducting expenses from gross income, so it is a type of net income. See Laing, supra, at 577-79. An entitys franchise tax liability is measured using the taxable margin (that is, the entitys net income). The taxable margin is multiplied by the applicable tax rate, and that number is the amount of franchise tax owed. TEX. TAX CODE 171.002(a)-(b). The franchise tax is, consequently,

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a tax . . . measured by an amount arrived at by deducting expenses from gross income; it is an income tax. See Laing, supra, at 577-79. The franchise tax is also an income tax as that phrase would have been understood by the average Texas voter in 1993. Income is a gain . . . usually measured in money that derives from labor or capital, and an income tax is a tax on the net income of an individual or a business. MERRIAM-WEBSTERS COLLEGIATE DICTIONARY (11th ed. 2003). The franchise tax is measured using a companys gains from a trade or business, dividends, interests, rents and royalties, capital gains, and other types of income and then subtracting expenses and deductions. See Laing, supra, at 585. Both accounting experts and government officials have concluded the franchise tax is properly considered an income tax. The Financial Accounting Standards Board, which sets national accounting standards, determined that the Texas Franchise Tax is an income tax because the tax is based on a measure of income. Id. at 581.17 Multiple tax and accounting scholars have likewise noted that the tax should be classified as an income tax. 18 Significantly, the Texas Comptroller of Public Accounts in 2006, Carole Keeton Strayhorn, also questioned the constitutionality of the margin tax as applied to

Minutes of the August 2, 2006 Board Meeting on Potential FSP: Texas Franchise Tax, available at http://www.fasb.org/jsp/FASB/Page/08-02-06_texas_ franchise_tax.pdf. 18 Brad J. Brookner and Russell D. Brown, tax attorneys at Deloitte Tax LLP, explained that [w]hile H.B. 3 states that the modified tax is not an income tax, the current view of the authors firm is that the margin tax is a tax on income. Brad J. Brookner & Russell D. Brown, Sweeping Texas Franchise Tax Changes: The Margin Tax, TAX ADVISER, Sept. 2006, at 550-51, available at http://goliath.ecnext.com/coms2/gi_0199-5789316/Sweeping-Texas-franchise-tax-changes.html 109. Andrew Essington described the margin tax as effectively a state income tax to the ownership entity. Andrew Essington, Texas Margin Tax: The Impact on Investment Real Estate, http://www.ainorthtexas.org/store/Essington.pdf; see also Laing, supra, at 577 n.31 (listing scholars equating the franchise tax to an income tax).

17

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partnerships and unincorporated associations. Her concerns prompted her to request an official opinion from the Texas Attorney General on the question of whether the revised [franchise tax proposed in H.B. 3] will require submission to the voters under Article VIII, Sec. 24(a). Id. at 582.19 The Attorney General never provided a response. The Legislature, also recognizing the potential constitutional problems raised by the franchise tax, attempted to define away the problem. H.B. 3 declares the margin tax is not an income tax. But the substance of the taxthe similarities between it and an income tax, and not simply the label it is given by the Legislaturedetermines what type of tax it is. In Flint v. Stone Tracy Co., the U.S. Supreme Court explained that the mere declaration contained in a statute that it shall be regarded as a tax of a particular character does not make it such if it is apparent that it cannot be so designated consistently with the meaning and effect of the act. 220 U.S. 107, 145 (1911). And in Galveston, Harrisburg & San Antonio Railway v. Texas, the U.S. Supreme Court again stressed that an unconstitutional tax cannot be saved by name or form. 210 U.S. 217, 227 (1908). Justice Holmes, looking past the State of Texass label on a tax, explained: Neither the state courts nor the legislatures, by giving the tax a particular name or by the use of some form of words, can take away our duty to consider [a taxs] nature and effect. Id. In this case, the franchise tax is based on an amount derived by deducting

Ltr. from Comptroller Carole Keeton Strayhorn to Gov. Rick Perry, (May 2, 2006), available at http://www.window.state.tx.us/ news/60502taxplan.pdf; see also Ltr. from Comptroller Carole Keeton Strayhorn to the Hon. Greg Abbott, Atty Gen. (Apr. 21, 2006), available at http://www.window.state.tx.us/news/60421letter.html.

19

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expenses from gross incomeits nature and effect are that of an income tax. See Laing, supra, at 582-84. The State argues that Allcats interpretation of the Bullock Amendment requires that Texas would not be able to lawfully impose any tax on any business entity, including [s]ales tax, motor-fuel tax, severance tax, and hotel-occupancy tax, because doing so would always have an effect on the overall value of the partnership, and ultimately on the partners income. Resp.Br.20. That concern is misguided. Nothing in the Bullock Amendment prohibits imposing taxes generally (such as property taxes or sales taxes), even when those taxes would have the effect of reducing the wealth of the partnership as a whole. Instead, the Bullock Amendment proscribes imposing a tax on the net incomes of natural persons without approval. Taxes on partnership income are also taxes on a partners share of his or her net income. Taxes on property owned by the partnership, in contrast, might reduce the value of the company as a whole, but are not themselves taxes on income. The State does not meaningfully dispute that the franchise tax is an income tax. It claims only that the franchise tax is not an income tax because it must be paid even if an entity actually loses money. Resp.Br.27. That argument is based on the fact that certain expenses might be deductible for the purposes of federal income tax liability, but not for franchise tax liability. In some cases, those extra deductions couldfor federal tax purposesbring the businesss tax base to zero or less, resulting in zero federal tax liability. Resp.Br.28-29 (emphasis added). The State argues that, in these cases, the company would owe[] franchise tax even though it earned no income, suggesting that
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this is an absurd result. Resp.Br.29. But whether a business might show a loss for federal tax purposes is not determinative of whether the franchise tax constitutes an income tax.20 The better understanding is that, while income and loss are defined terms for financial accounting purposes, income tax regimes can and do differ on what counts as an allowable deduction from income. The Legislatures limitation of the expenses that may be deducted from income under the franchise tax does not prevent the franchise tax from being an income tax. If a business experiences a loss for financial accounting or federal income tax purposes but incurs franchise tax liability, that is the case only because the Legislature has limited the deductibility of business expenses under the franchise tax to such a degree that, for some taxpayers, some of the time, franchise taxes will be due even though expenses exceed income. Most of the time, however, a business that has franchise tax liability also has income that exceed expenses. When that is not the case, the business is paying franchise taxes from loans or infusions of capital from its owners, which is unsustainable over a period of time. Such businesses would be taxed out of existence in short order, and the franchise tax would raise little revenue. Since the

The idea of actual loss and gain is undermined by the frequent changes to the federal income tax code. At different times, the federal code has allowed individuals and companies to take advantage of different deductions to determine their gain or loss for tax purposes. For example, in 1999, taxpayers started to be able to claim deductions for home offices when those places were used for administration or management of business. 26 U.S.C. 280A(c)(1). Before 1999, however, deductions were only allowed when the home office was the taxpayers principal place of business. 26 U.S.C. 280A (1998); Treas. Reg. 1.26201(b)(3). Does that mean that, before 1999, individuals might have had to pay taxes on income even though they had actually lost money when expenses for their home office were taken into account? Of course not. Similarly, state and federal income tax regimes sometimes disagree over what expenses should be deductible, so they sometimes come to different conclusions about whether or not an entity has had any gain for the purposes of their own tax regime. That does not mean that one system is an income tax regime while the other is not. The test is not whether all of the same figures are used to calculate revenues and deductions.

20

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franchise tax does raise revenue and does not appear to be taxing businesses out of existence, it clearly is taxing the income of most businesses most of the time. Besides, the States excessively narrow interpretation of a tax on net income leads to bizarre results. Under the States reasoning, for a tax to be an income tax on a persons income, it must offer exactly the same deductions and exclusions as the federal income tax regime. Even more oddly, the States interpretation of the phrase tax on net income entails that Texas could tax gross income freely, without violating the Bullock Amendment. The State explains that, for the Bullock Amendments protections to apply, income must first be distributed to the person, other sources of income must be added, and all deductible expenses must be subtracted. Resp.Pet.6. The State claims that it is this amountand this amount onlythat the State of Texas cannot tax without voter approval. Id. (emphasis added). But if the State is right, then the Legislature could always impose a tax on incomeon any type of income an individual receivesas long as it does so above the line. The reasoning in the States brief would alarm Texans. The Bullock Amendments protections would be meaningless if read to allow a tax on a natural persons gross income as long as the tax were imposed before deductions and exceptions are subtracted and become net income. III. THE COURT SHOULD NOT MARGINALIZE THE CONSTITUTION TO SAVE A FLAWED FRANCHISE TAX. Without doubt, when the Legislature revised the franchise tax, it faced pressing and difficult financial and political challenges. By the time the Legislature met in special session in April 2006, it had just over a month to comply with this Courts directive in

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Neeley and also address a serious revenue shortfall. It is at such times of political and financial adversity that the temptation to pay mere lip service to the guarantees of our Constitution is at its greatest. How the Legislature and the judiciary respond in such crises is what ultimately determines whether our Constitution has any real force as a compact between the citizens and their government. That the Legislature in 2006 faced a vexing and politically difficult decision was no excuse to adopt an unconstitutional solution, no matter how expedient. In adopting the Bullock Amendment, the citizens of Texas announced that, regardless of the waxing and waning of revenue, it is an unacceptable solution to our States funding requirements to resort to an unapproved personal income tax on Texans. Yet that is precisely what the Legislature opted to do. Texas and its citizens are proud of our States refusal to impose an income tax, and we have not hesitated to advertise Texas as a haven from state income taxation. Businesses and individuals have flocked in droves to our state in response to the promise of an environment free from the burdens of a personal state income tax. Yet how many of those who came to Texas or stayed here because of that promise now find themselves victims of a bait-and-switch through which the State in fact imposes a tax on personal income that only applies to some persons? Ltr. from Lt. Gov. Bob Bullock et al. to Gov. Ann Richards & Speaker Gibson Lewis (Jul. 23, 1991) (emphasis omitted) (App. 16 to Allcat Br.). As in 1991, when the Bullock Amendment was in its formative stages, the notion of a narrow income tax on certain Texans is no more acceptable to the public than a broad based income tax. Id.

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It is un-Texan to engage in the kind of marginalizing attack on the Bullock Amendment now advocated by the State in its (mistaken) form-over-substance defense of the franchise tax. Would any ordinary Texan who voted for the Bullock Amendment truly believe that the including phrase stands for nothing more than only a prohibition on an unapproved tax on partnership and unincorporated association income that is lodged after a partners share of income is distributed? Or that the including phrase actually authorized income taxes on partnerships for the very first time in Texas history? Or that the amendment does nothing to prevent income taxes on sole proprietorships? Everyone knew during the 2006 special session that there were serious constitutional questions surrounding the changes to the franchise tax, and that it was doomed to fall if deemed an income tax. Now, years later, the State acts as though those concerns never existed, advocating a supposed plain-text interpretation of the Bullock Amendment under which the serious constitutional questions about the tax were actually irrelevant all along. According to the States brief, the solution to the prohibition in the Bullock Amendment was always quite simple: So long as the State purports to impose the tax on a business entity, regardless of the textual prohibition on taxing a persons share of partnership and unincorporated association income, and regardless of the substantive effect of the tax, there is simply no issue of constitutionality. That argument is no more satisfactory than the 79th Legislatures declaration by fiat that the revised franchise tax is not an income tax, regardless of what it actually does. The States new-found position attempts to side-step serious concerns that have always dogged the franchise tax:
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 What of the serious concerns of the Legislature that motivated it to create special fast-track provisions directing the Texas Supreme Court to decide issues of the franchise taxs constitutionality? What of the States now-all-but-abandoned initial vigorous defense of the tax on the grounds that it is not an income tax?21 What of the serious concerns raised by scholars on this topic?22 What of the [m]any accounting experts [who] consider the margin tax to be an income tax, including the FASB and others?23 Certainly, there will be serious repercussions from a decision finding the tax unconstitutional. But those repercussions are not something to avoid. The franchise tax system is badly broken. Legislators constructed the current franchise tax system knowing that they did so on shaky constitutional ground. As a result, the tax they invented is full of Byzantine rules and arbitrary exemptions bearing little relation to traditional economic concepts, all in an unsuccessful attempt to avoid constitutional problems while still attempting to address other objectives. The tax imposes high compliance costs on Texas businesses. All questions of constitutionality aside, this unfair and inefficient system has not produced the desired results. The franchise tax is not functioning as envisioned. According to the

Comptrollers experts, every year, the new franchise tax brings in billions less than

21

Jeff Slade, Drilling Down the Texas Margin Tax: A Gusher or Dry Hole of Taxes for the Oil & Gas Industry?, 36 TEX. TAX LAW 28, 28 (Oct. 2008) (Although the State of Texas vigorously defends its position that the margin tax is not a net income tax (which would violate the Texas Constitution), for all practical purposes, the margin tax is, in effect, a veiled income tax.). 22 Id.; David A. Vanderhider, A Marginal Tax: The New Franchise Tax in Texas, 39 ST. MARYS L.J. 615, 623-24 (2008) (Despite the legislatures firm stance that the margin tax is not an income tax, many opponents of the margin tax feel that it is an income tax in practical effect.); Laing, supra, at 578 n.32. 23 Laing, supra, at 577 n.31 (collecting numerous sources).

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original projections.24 This case presents Texas with an important opportunity to revisit the franchise tax and adopt a solution that both works and is consistent with our Constitution and the principles that motivate it. The Court is now faced with a plain-text interpretation of the Bullock Amendment proffered by the State that makes a mockery of the text and purpose of that amendment and disregards fundamental concepts of tax law. The Court also has before it a

competing plain-text reading consistent with the common-sense import of the amendments text, other related constitutional provisions, tax law, the amendments purpose, the circumstances surrounding its adoption, and its history. The Court should hold the Legislature accountable to the Texas Constitution and declare the franchise tax unconstitutional as applied to a persons share of partnership and unincorporated association income. PRAYER For these reasons, amici ask the Court to grant the Plaintiffs requested relief.

24

Thanh Tan, Senate Leaders: Fix State Revenue Now or Pay Later, TEX. TRIBUNE, Apr. 5, 2011, available at http://bit.ly/pCFUbJ.

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Respectfully submitted, /s/Christopher S. Johns Christopher S. Johns State Bar No. 24044849 chris@dawsonsodd.com DAWSON & SODD, LLP 300 West 6th Street, Suite 1950 Austin, Texas 78701 [Tel.] (512) 215-4078 [Fax] (512) 628-7169 Richard B. Farrer State Bar No. 24055470 rfarrer@yettercoleman.com YETTER COLEMAN LLP 221 West 6th Street, Suite 750 Austin, Texas 78701 [Tel.] (512) 533-0150 [Fax] (512) 533-0120 Peter A. Nolan State Bar No. 15062600 Jennifer Patterson Rabb State Bat No. 00795469 Anna W. Kana State Bar No. 24070029 Jeff Nydegger State Bar No. 24077002 WINSTEAD P.C. 401 Congress Avenue, Suite 2100 Austin, Texas 78701 [Tel.] (512) 370-2800 [Fax] (512) 370-2850 COUNSEL FOR AMICI CURIAE

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CERTIFICATE OF SERVICE I hereby certify that a true and correct copy of the attached Brief of Amici Curiae Nikki Laing, CPA et al. in Support of Plaintiffs via the Courts electronic filing system and email in accordance with the Texas Rules of Appellate Procedure on this the 14th day of October, 2011. Greg W. Abbott Attorney General of Texas Susan Combs Texas Comptroller of Public Accounts Jonathan Mitchell Solicitor General of Texas Danica L. Milios Deputy Solicitor General David C. Mattax Director of Defense Litigation William J. Bill Cobb III Deputy Attorney General for Civil Litigation Daniel T. Hodge First Assistant Attorney General and Chief of Staff Bill Davis Assistant Solicitor General Kevin Van Oort Deputy Chief, Financial and Tax Litigation Division P.O. Box 12548 Austin, Texas 78711-2548 Counsel for Defendants Susan Combs, Comptroller of Public Accounts of the State of Texas, and Greg Abbott, Attorney General for the State of Texas

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James F. Martens Michael B. Seay Lacy L. Leonard Amanda M. Traphagan MARTENS, SEAY, & TODD 301 Congress Avenue, Suite 1950 Austin, Texas 78701 Counsel for Plaintiffs Allcat Claims Service, L.P. and John Weakly /s/Richard B. Farrer Richard B. Farrer

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