A New Dimension for LLCs in California

By Kathleen K. Wright, CPA, J.D., MBA, LL.M.

Editor: Karen M. Nakamura, CPA

California enacted legislation in 2007 to address the unconstitutional aspects of the California limited liability company (LLC) fee based on gross receipts assessed on LLCs doing business in California.1 That legislation amends CA Rev. & Tax. Code §17942, effective for tax years beginning on or after January 1, 2007, to limit the amount of gross receipts subject to the fee to only those gross receipts generated from California sources.2

The legislation also adds CA Rev. & Tax. Code §19394 to limit the amount of refunds that may be claimed for fees assessed in prior years. Specifically, §19394 provides that refunds with respect to suits filed on or after October 10, 2007, and those filed before October 10, 2007, that were not final as of October 10, 2007, are limited to the portion of the fee that is unconstitutional. What this means is that the refund will be limited to the amount by which the fee paid, plus any interest assessed, exceeds the amount of the fee that would have been assessed if the fee had been determined under §17942, as amended in 2007.

This column discusses the California Court of Appeal decision Northwest Energetic Services v. Franchise Tax Board,3 which upheld a trial court decision that struck down the fee assessed on LLC gross receipts as unconstitutional. It also analyzes the 2007 legislation enacted in response to Northwest Energetic Services and similar matters and gives practitioners a perspective on what to expect regarding application of the 2007 legislation to LLCs doing business in California.

Historical Background

Facts: Northwest Energetic Services (NES), an LLC organized under the laws of the state of Washington, provided explosives and explosives-related services to customers located outside California. NES had no business activity in California, as measured by property, payroll, or sales. However, it registered with the California secretary of state and qualified to do business in the state for the years 1997–2001. As an entity qualified to do business, NES was required to pay the minimum tax of $800 for the years in question plus the LLC fee based on gross receipts. NES paid the $800 minimum tax (assessed under CA Rev. & Tax. Code §17941) but did not pay the LLC fee (assessed under §17942).

When NES sought to cancel its registration with the state, the California Franchise Tax Board (FTB) notified NES that outstanding fees for prior years, plus interest and penalties, were due, and the FTB issued an assessment for $27,458.13. NES paid the assessment to obtain a California Tax Clearance Certificate (which was required in order to dissolve) and filed a claim for refund of the LLC fees, penalties, and interest paid. The FTB denied the refund claim, and NES challenged the FTB’s action before the California State Board of Equalization, which ruled in favor of the FTB. NES then appealed the issue to the California Superior Court, challenging the constitutionality of the fee.

FTB arguments: At trial, the FTB stated that at the time the fee was enacted the state’s economic welfare was at stake because 43 states had already enacted LLC legislation and the California LLC legislation was necessary to provide an attractive business environment in California.4 In addition, the FTB argued that the LLC fee was enacted under California’s police power, which it defined as the “inherent reserved power of the state to subject individual rights to reasonable regulation of the general welfare.” The FTB also argued that the fee was not a tax, but rather a voluntary payment—i.e., it is required to be paid only if the taxpayer elects to organize as an LLC. A tax, the FTB proffered, is an involuntary payment that is compulsory, with the purpose of raising revenue. In contrast, a fee is paid voluntarily in ex-change for a specific benefit conferred or a privilege granted.

The FTB made a valiant effort to identify benefits received in exchange for the fee. Those benefits included the LLC’s ability to use the state courts to defend itself in any legal action, the protection of its business name, the legal right to enforce agreements in state court, and limited liability protection for its members. The FTB conceded that placing a precise value on these benefits would not be possible; instead, such benefits are equal to the entire value of an LLC’s business.

Taxpayer’s arguments: NES argued in response that the fee was a tax and not a fee, based on the reasoning of the California Supreme Court in Sinclair Paint.5 In that case, NES noted, the court identified an important criterion in determining whether an assessment is a fee rather than a tax, i.e., that the amount assessed and paid must not exceed the reasonable cost of providing the related service for which the fee was charged. Based on Sinclair Paint, the assessment did not serve a specific regulatory purpose and bore no relation to the cost of services provided to or benefits received by an LLC, NES argued. NES further pointed out that the LLC fee was not intended to reimburse the state for costs associated with regulating or providing services to LLCs. Notably, the secretary of state charges separate filing fees to cover those costs, and the total LLC fees collected in the years at issue were more than half of and in some years exceeded the secretary of state’s budget and far outweighed the cost of processing LLC filings.

NES went on to argue that the fee was a payment for the right to do business in California. Payment of the fee provided access to the same benefits granted to C corporations, S corporations, limited partnerships, and limited liability partnerships that are also taxed in various ways under California’s tax law. Accordingly, if the LLC fee was meant to do anything, it was meant to reimburse the state for the loss of revenue the legislature thought would occur if businesses were allowed to form LLCs. The perceived revenue “loss” came from the fear that businesses that might otherwise form as C corporations would form as LLCs. Since most start-up businesses incur losses, the loss to the state would result from the flowthrough nature of the LLC, which would allow certain losses to be de-ducted currently against the members’ income (and not trapped at the entity level).

The court’s decision: The court recognized another attribute of the levy’s tax characteristics: the payment was deposited in the state’s general fund and was used to fund general government needs. In addition, the court noted unequivocally that the payment bore no relationship to benefits received by the payor or burdens imposed on the state. The court went on to note that NES received no services and sought no particular benefits from the state; it was subject to the fee even though it created income entirely outside California.

The court dismissed the arguments in the FTB’s brief that the fee was related to the benefits of doing business in California. The court stated that these benefits were not quantified and therefore the FTB did not satisfy the burden of proof necessary to justify the payment as a fee. The court also failed to see how the fee itself was related to promoting public peace, health, or safety (i.e., related to the state’s police power). The court stated that even if it could accept some regulatory purpose, the record still contained no evidence of any costs associated with the purported regulatory activities.

Having found the levy to be a tax, the court ruled the tax unconstitutional.6 The levy, as enacted, could not constitutionally be applied to the taxpayer because it represented an unapportioned tax, in violation of the Commerce Clause of the U.S. Constitution and the Due Process Clauses of both the California and the U.S. Constitutions. A fundamental constitutional principle governing state taxation is that a state tax must be fairly apportioned—i.e., it must be calibrated to the level of activity in the state.7 According to the court, the fair apportionment requirement means that the tax must meet both an internal and an external consistency test.8

Consistency tests: Internal consistency means that businesses in interstate and intrastate commerce bear the same burden. The court found that the LLC gross receipts fee failed this test because it was assessed on worldwide gross receipts, so if all states did what California did, NES (and other LLCs similarly situated) would pay the fee many times while LLCs operating in a single state would pay it only once.

External consistency requires that the economic justification for the tax be related to the portion of value that is fairly attributable to economic activity taking place within the state. The court found that the LLC fee failed by definition because it was not adjusted in any way based on the level of California activity. Failing both tests of fair apportionment, the Superior Court held that the unapportioned assessment violated the Commerce Clause and the Due Process Clause.

Decision on appeal: The Court of Appeal upheld the Superior Court decision9 and determined that the fee assessed under CA Rev. and Tax. Code §17942 violated the Commerce Clause of the U.S. Constitution and that NES was entitled to a refund. (The court did not address the due process issue.) The court went on to state (and the FTB agreed) that the amount of the refund should be the entire amount of the LLC fees paid because none of the taxpayer’s total income was derived from California sources. The court did comment in dicta that, as a general matter, only the portion of the levy that ex-ceeds Commerce Clause limits must be refunded.10 This indicates that the Court of Appeal would accept a partial refund as an acceptable remedy if part of the taxpayer’s business activities were in California.11

The FTB has announced that it will not challenge the appellate court’s decision on the substantive issue of the LLC fee’s constitutionality, but it will appeal the award of attorneys’ fees.12 The FTB notice states that refund claims for situations identical to NES will now be processed. In other words, the FTB will pay refund claims only for LLCs that registered with the secretary of state and paid the gross receipts fee but never did any business in California. LLCs that had income attributable to activities within and outside California will not be eligible for refund until there is a final decision in Ventas Finance I, LLC. 13 This case is pending the scheduling of oral argument.

New Legislation

During 2007, it became increasingly clear that budget deficits were going to become a major issue for the state. Therefore, the legislature proceeded to limit its liability exposure related to the fee by limiting refunds when it enacted CA Rev. & Tax. Code §19394, which limits refunds to only the excess paid on account of unfair apportionment. California is not alone in its refusal to issue full refunds when a state statute has been declared unconstitutional. Cases discussed in this section show a tendency of both the administrative agencies and the courts to actively defend the fiscal stability of the states.

In the case of California’s unconstitutional LLC fee, the revenue estimates of a full refund of the un-constitutional fees paid for prior years—placed at approximately $1.4 billion14—could not be ignored in a time when the state is already facing a $16 billion deficit for the upcoming fiscal year budget.15 Under CA Rev. & Tax. Code §19394 the refund would be limited to $155 million, resulting in a potential general fund savings of $1.2 billion.

Sourcing Gross Receipts

For tax years beginning on or after January 1, 2007, “total income” for purposes of the fee will be based on income derived from activity in California rather than worldwide income.16 If the LLC does business wholly within California, total gross receipts are assigned to California. If the LLC conducts business within and outside the state, the LLC must assign its total income, item by item, to California based on the rules for assigning sales to the numerator of the sales factor in the apportionment formula.17

The special industry rules used to source sales under CA Rev. & Tax. Code §25137 apply, with an exception for the provisions that exclude receipts from the sales factor. For example, 18 CA Code Regs. §25137(c)(1)(A) excludes certain receipts from the sales factor if they are substantial, arise from an occasional sale, and are distortive. In addition, 18 CA Code Regs. §25137(c)(1)(B) excludes certain receipts from the sales factor if they are insubstantial and arise from an incidental or occasional transaction. These exclusion rules do not apply for purposes of computing the LLC’s gross receipts.

Other than the new sourcing rules, the fee’s structure did not change. The fee schedule is set forth in Exhibit 1.18

See Exhibit 1

Small LLCs with total gross receipts of less than $250,000 pay no fee. In addition, if an LLC owns another LLC, the gross receipts of the lower-tiered LLC are not counted in computing the fee of the “parent.”19

Sourcing rules: CA Rev. & Tax. Code §17942 now refers to §§25135 and 25136 (and the related regulations) for purposes of determining the sourcing rules applied to gross receipts, which are summarized here:20

  • Total income from sales of tangible personal property (i.e., inventory) with a destination in California is attributable to California if the property is delivered or shipped to a purchaser within California regardless of the freight-on-board point or other conditions of sale. Total income from sales of tangible personal property shipped from California is as-signed to California unless the seller is taxable in the destination state. Special rules apply to sales to the U.S. government.
  • Total income from sales, other than sales of tangible personal property, is attributable to California if either of the following applies:
    1. The income-producing activity related to the sale is performed wholly within California.
    2. A portion of the income-producing activity is performed outside California, but a greater portion is performed within California than in any other state, based on costs of performance.
  • Special rules:
    1. Total income from the rendering of personal services by em-ployees or the use of tangible and intangible property by the LLC in performing a personal service is attributable to California to the extent that the personal services are performed within California. When personal services are performed within and outside California, usually the services performed in each state will constitute separate income-producing activities. In such cases, the personal service total income is measured by the ratio of time spent within California versus the time spent performing services everywhere (i.e., the time-spread method).
    2. Total income from the sale, rental, leasing, licensing, or other use of real property is attributable to California if the real property is located within California.
    3. Total income from the rental, leasing, licensing, or other use of tangible personal property is attributable to California if the property is located within California.

Nonbusiness Income

These general guidelines will answer many questions but will also leave taxpayers in situations in which the rules do not provide guidance. Many LLCs hold portfolio or investment assets (such as stocks and bonds) that are managed by members located in several states. In addition, many businesses operating as LLCs earn nonbusiness income that is not sourced under the sales factor rules. “Sales” for purposes of the sales factor means all gross receipts not allocated under CA Rev. & Tax. Code §§25123–25127.21 In other words, only business income goes in the sales factor (and is sourced under CA Rev. & Tax. Code §§25135 and 25136).

Nonbusiness income such as interest and dividends (which comprises the bulk of the income for investment LLCs) is not addressed under these rules. Generally, nonbusiness interest and dividends for a multistate entity are allocated to the state of commercial domicile.22 Presumably this is the sourcing rule that best fits the LLC holding nonbusiness assets, but it raises another question regarding location of commercial domicile when there is no board of directors but rather a small group of managing members who may be located in several states. CA Rev. & Tax. Code §25120(b) defines commercial domicile as the principal place from which the trade or business of the taxpayer is directed or managed. The LLC managed by members may provide multiple commercial domiciles based on location of members.

Example 1: XYZ LLC, organized in California, holds only investment securities through a brokerage firm located in Philadelphia. The investments are handled by managing members who live in multiple states (New York, California, Connecticut, and Florida). The income from the portfolio is $700,000.

According to the FTB’s Limited Liability Company Tax Booklet for 2007 (pp. 11–12), the managers’ activities are personal services, and the total income from these services is split based on the time the managers spend performing their services for XYZ. Thus, if the manager in California contributes 35% of the total time spent on managing the portfolio, 35% of $700,000, or $245,000, would be includible for purposes of computing the fee. The location of the investment advisory firm is not taken into account because income-producing activity does not include activities performed on behalf of an LLC, such as those conducted by an independent contractor (see 2007 FTB LLC Tax Booklet, p. 11). In this case XYZ would not owe a fee to California because the total California sourced gross receipts are less than $250,000.

Example 2: ABC LLC owns an apartment complex in Nevada. The managing members are located in California and maintain a bank account in that state, which they use to deposit checks and pay bills for the apartment complex. They make decisions about major renovations and improvements from California and hire a local CPA to prepare the tax return. They employ a property management company in Nevada to take care of day-to-day maintenance and to manage the rental process of advertising available units and showing the property to prospective tenants.

Although under recent administrative case law the level of activity conducted in California may have created nexus with the state,23 the rental income from the apartment building is sourced to Nevada and is not subject to the fee. Since the LLC may have nexus with California, the LLC owes the $800 minimum franchise tax.

The interest on the California bank account is more interesting because it relates to an income-producing activity located entirely outside California. Using that analysis, the interest on the bank account would be sourced outside California. However, the FTB could take the position that because the account and the managing member are state residents, the interest would be treated as California income and would be included in the base for purposes of computing the fee.

Line-by-Line Analysis

If the LLC conducts business within and outside California, the LLC must assign its total income, item by item, to California based on the rules described above. The LLC does not compute an apportionment percentage but rather sources each type of income and then determines the total California gross receipts. A new Limited Liability Company Income Worksheet included in the FTB LLC Tax Booklet (p. 21) is used to determine the California sourced income and should be attached to the LLC’s return.

Example 3: ABC LLC is organized in California and sells computer software. ABC is located in San Jose, California, where it owns a building and has 50 employees. It has three managing members, two in California and one in Arizona. ABC sells database software, which is generally sold with installation service and warranty contracts. This portion of the income is personal service income and will be sourced using the time-spread method. Therefore, employees performing this service must keep time sheets that record where they spent their time. The software is reduced to a tangible medium (i.e., a CD) and its sale is assumed to be the sale of tangible personal property. The software is sold to customers located primarily on the West Coast.

ABC has nexus with California and Arizona and therefore sales to other states will throw back to California. The warranty contract covers any on-site software maintenance that may be required, plus software updates (and onsite installation), for two years. The company also has an investment portfolio that is handled by the managing member in Arizona and generates interest and dividends that will be used in the trade or business. The investments are held in a brokerage account in Arizona. The broker is in Arizona and the trades are taken and placed in that state. In 2007, ABC sold its building in San Jose for a total sales price of $10 million (gain of $8 million). ABC’s gross receipts sourced to California for purposes of computing the fee are calculated as in Exhibit 2.

ABC’s sales factor for purposes of the apportionment formula is 18% ($1,120,000 California receipts 3 $6,100,000 total receipts). The gain on the sale of the California building is omitted from the apportionment formula computation because it is distortive (CA Rev. and Tax. Code §25137). This same income is included in the computation of gross receipts for purposes of computing the fee, and it is the “net gain” that is reportable. Total income subject to the fee based on gross receipts includes gross income as defined by CA Rev. & Tax. Code §24271, which in turn refers to Sec. 61. Regs. Sec. 1.61-6 states that gross income includes gain realized on the sale or exchange of property, which has been interpreted to mean that the net gain on sales is the amount included in the LLC fee computation. Note that ABC still has to compute its overall apportionment percentage for out-of-state members to use to determine what portion of their LLC income is reportable to California.

See Exhibit 2

Refunds

As discussed above, CA Rev. & Tax. Code §19394 retroactively limits the refund of LLC fees previously paid on worldwide gross receipts to only the portion that relates to the receipts that had been unfairly apportioned to the state. Many taxpayers have already filed protective refund claims in anticipation of refunds of the full amount of the fee paid in the event that the fee is ruled unconstitutional. The provision applies to refund claims that are filed after October 10, 2007, and claims filed before that date that are not final as of that date. CA Rev. & Tax. Code §19394 results in a retroactive change in the law. The constitutional issues that accompany retroactive taxes have been raised previously in California with mixed success.

Retroactive Application Allowed

In Macy’s Department Stores,24 the taxpayer challenged the San Francisco business tax, arguing that it discriminated against interstate commerce. The case involved the constitutionality of the tax, assessed from 1970 to 2001. During those years, city ordinances required businesses to calcu-late their liability under two different methods and then pay the higher of the two. Businesses would pay the higher of the payroll tax (assessed at 1.5% of all salaries, wages, and commissions paid to all individuals who worked in San Francisco) or the gross receipts tax (0.15% of all receipts from goods sold or services performed in San Francisco). The result of this tax scheme could be that a business operating in multiple cities might pay more than a business operating only in San Francisco.

In April 2001, San Francisco repealed the gross receipts measure of the business tax, seeking to cure the constitutional issues, and made the repeal effective retroactive to January 1, 2000. Going forward, San Francisco no longer taxes the greater of the two assessments but instead taxes all business taxpayers based on payroll alone. In addition, the new law recalculated all business taxes for the year 2000 based on the payroll tax and established a refund provision that returned to taxpayers the amount by which their 2000 business tax liability exceeded what it would have been under the payroll tax.

In January 1999, before the change in the law, Macy’s filed claims for refund of the business taxes it had paid since 1995 under the tandem tax scheme. The trial court awarded Macy’s a full refund of all business taxes paid during the contested period, but the Court of Appeal reversed, limiting the refund to the amount sufficient to negate the discriminatory effect of the tax. That decision was appealed to the California Supreme Court, which denied the petition on January 17, 2007. The case was then appealed to the U.S. Supreme Court, which also denied the petition on June 25, 2007.

The Court of Appeal decision relied heavily on the U.S. Supreme Court decision in McKesson,25 which involved the refund of an unconstitutional liquor excise tax. Florida agreed to change its law prospectively but did not provide any refund of the previously collected unconstitutional tax. The U.S. Supreme Court overruled the Florida Supreme Court and held that

[t]o satisfy the requirements of the Due Process Clause, . . . the State must provide taxpayers with not only a fair opportunity to challenge the accuracy and legal validity of their tax obligation, but also a “clear and certain remedy,” for any erroneous or unlawful tax collection to ensure that the opportunity to contest the tax is a meaningful one.26

The Court concluded that when a tax is held unconstitutional, the taxing authority retains flexibility in responding to this determination and may reformulate the tax during the contested tax period in any way that treats the taxpayer and its competitors in a manner consistent with the dictates of the Commerce Clause. The Court went on to state that having done so,

[t]he State may retain the tax appropriately levied upon the taxpayer pursuant to this reformulated scheme because this retention would deprive the [taxpayer] of its property pursuant to a tax scheme that is valid under the Commerce Clause. . . . More specifically, the State may cure the invalidity of the [tax] by refunding to the [taxpayer] the difference between the tax it paid and the tax it would have been assessed were it extended the same reductions that its competitors actually received.27

The California Court of Appeal concluded that Macy’s was not entitled to a full refund of all business taxes paid between 1995 and 1999. Such a refund would place Macy’s in a more favorable position than a local taxpayer during the same period and increase discrimination among other taxpayers.

Retroactive Application Denied

The Macy’s decision virtually ignores the 2005 Court of Appeal decision in City of Modesto28 in which the city imposed a business gross receipts tax under an ordinance that did not distinguish between in-city and out-of-city business activities. The tax was held to be unconstitutional, and the Court of Appeal (citing Carlton)29 stated that to comply with due process, retroactive application of tax legislation must be supported by a legitimate legislative purpose furthered by rational means.

The U.S. Supreme Court in Carlton established a two-prong test to analyze retroactive taxes. First, the legislative purpose cannot be either illegitimate or arbitrary; second, the legislative body must act promptly and establish only a modest period of retroactivity. In addition, California courts have upheld the retroactive application of tax laws only where such retroactivity was limited to the current tax year.30

In City of Modesto, the Court of Appeal found it necessary to add an apportionment provision to cure the constitutional defects of the business license tax to meet the first prong of the Carlton due process test. However, the court found that the retroactive application of the tax legislation did not meet the second prong of the test. The court held that the period of retroactivity was not modest (up to eight years) and that upholding the retroactive assessment would require National Med, Inc. (NMI) to compute its city gross receipts based on documentation that the taxpayer was never required to maintain. If NMI could not produce the documentation, its assessment would remain the same as under the unconstitutional tax. The court went on to hold that this placed an undue burden on NMI that would violate due process.31

Conclusion

Allowing taxing authorities to engage in discriminatory taxation without being subject to penalty invites those authorities to implement unconstitutional assessments for as long as they can get away with it.32 Litigation is expensive, and limiting recovery discourages taxpayers from challenging unconstitutional assessments. California has allowed LLCs since 1994, and since that time LLCs have paid the fee computed on worldwide gross receipts without apportionment. Most of these years are now closed under California’s four-year statute of limitation. As a result, California has reaped the benefit of collecting unconstitutional fees for approximately eight years.

The remedy of a partial refund for only the open years does not compensate for the extent of the injury. States should face a penalty when legislation is held to be unconstitutional, but that is not going to be the result in this case. Further, the limited refund for the unconstitutional portion of the fee is going to be slow in coming. Currently, the FTB is processing refund claims only for LLCs that did no business in California but were otherwise required to pay the gross receipts fee.

Ms. Nakamura is the chair, and Prof. Wright is a member, of the AICPA Tax Division’s State & Local Taxation Technical Resource Panel. For more information about this column, contact Prof. Wright at kwright@fullerton.edu.


EditorNotes

Karen M. Nakamura, Director of Tax Knowledge Management at PricewaterhouseCoopers LLP in Washington, DC

Ms. Nakamura is the chair, and Prof. Wright is a member, of the AICPA Tax Division’s State & Local Taxation Technical Resource Panel. For more information about this column, contact Prof. Wright at kwright@fullerton.edu.


Notes

 

1 As added by Ch. 381 (A.B. 198), Laws 2007.

2 Income from California sources is determined using the sales factor sourcing rules under CA Rev. & Tax. Code §§25135 and 25136.

3 Northwest Energetic Servs., LLC v. Franchise Tax Bd., 71 CalRptr3d 642 (Cal. Ct. App. 2008).

4 FTB’s Opening Trial Brief, January 23, 2006, p. 5.

5 Sinclair Paint Co. v. State Bd. of Equalization, 937 P2d 1350 (Cal. 1997).

6 Northwest Energetic Servs., LLC v. Franchise Tax Bd., Dkt. No. CGC-05-437721 (Cal. Super. Ct. 4/13/06).

7 Citing Complete Auto Transit, Inc. v. Brady, 430 US 274 (1977).

8 Citing Oklahoma Tax Comm’n v. Jefferson Lines, Inc., 514 US 175 (1995).

9 Northwest Energetic Servs., LLC v. Franchise Tax Bd., 71 CalRptr3d 642 (Cal. Ct. App. 2008).

10 Id. atn. 16 (citing Macy’s Dept. Stores, Inc. v. City and County of San Francisco, 143 CalApp4th 1444 (Cal. Ct. App. 2006)).

11 Two additional cases are also pending in the courts on the same issue: Ventas Finance I, LLC v. Franchise Tax Bd., No. CGC-05-440001 (Cal. Super. Ct., San Francisco, filed 11/7/06); and Bakersfield Mall, LLC v. Franchise Tax Bd.,No. CGC-07-462728 (Cal. Super. Ct., San Francisco, filed 4/25/07). Trial for the Bakersfield Mall case was set for April 3, 2008.

12 FTB Notice 2008-2 (4/14/08).

13 Ventas Finance I, LLC v. Franchise Tax Bd., No. CGC-05-440001 (Cal. Super. Ct., San Francisco, filed 11/7/06).

14 FTB Committee on Budget, “Limited Liability Company Fee/Remedy for Final Court Decisions,” Assembly Bill 198 Revised Analysis (9/11/07).

15 Halper, “California’s Budget Gap at $16 Billion,” Los Angeles Times, February 21, 2008.

16 CA Rev. & Tax. Code §17942(b)(1)(B).

17 CA Rev. & Tax. Code §§25135 and 25136.

18 CA Rev. & Tax. Code §17942(a).

19 CA Rev. & Tax. Code §17942(b)(1)(A).

20 See also the instructions in FTB, Limited Liability Company Tax Booklet (2007).

21 CA Rev. & Tax. Code §25120(e).

22 CA Rev. & Tax. Code §25126.

23 See, e.g., In re Mockingbird Partners, LLC,No. 306061(Cal. SBE Summ. Dec. 5/17/06), and In re Destino Props., LLC, No. 339961 (Cal. SBE Summ. Dec. 2/1/07).

24 Macy’s Dept. Stores, Inc. v. City and County of San Francisco, 142 CalApp4th 1444 (Cal. Ct. App. 2006).

25 McKesson Corp. v. Division of Alcoholic Beverages and Tobacco,496 US 18 (1990).

26 Id. at 39 (citation omitted).

27 Id. at 40.

28 City of Modesto v. National Med, Inc.,128 CalApp4th 518 (Cal. Ct. App. 2005).

29 Carlton, 512 US 26 (1994).

30 See generally Gutknecht v. City of Sausalito, 43 CalApp3d 269 (Cal. Ct. App. 1974). However, note that in 1996 the (federal) Ninth Circuit Court of Appeals held that there was no due process violation for federal legislation applying retroactively for approximately three years because the legislation was supported by a legitimate legislative purpose furthered by rational means (Montana Rail Link, Inc., 76 F3d 991 (9th Cir. 1996)).

31 See also General Motors Corp. v. City and County of San Francisco, 69 CalApp4th 448 (Cal. Ct. App. 1999) (degree of retroactive computations involved 17 years).

32 See Fallon and Meltzer, “New Law, Non-Retroactivity, and Constitutional Remedies,” 104 Harv. L. Rev. (1991): 1731.

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