Case Summary: For the 1999 and 2000 tax year, plaintiff filed its taxes with a deduction for dividends received from its interest in a California corporation. In 2007, the Franchise Tax Board denied plaintiff’s deduction pursuant to a 2003 California Court Decision holding that the statute which allowed for the deduction violated the United States Commerce Clause. Plaintiff appealed.
In 2003, the California Supreme Court held that the Revenue and Taxation Code Section 24402 violated the United States Commerce Clause because it unfairly burdened out of state corporations by not allowing the out of state corporations to take a deduction for dividends received. Farmer Bros. Co. v. Franchise Tax Bd. (2003) 108 Cal.App.4th 976 (Farmer Bros.). Plaintiff now argues that the entire statute should not be revoked but instead rewritten by removing the unconstitutional language.
In 1929, the California legislature passed Section 24402 to prevent double taxation on California Corporations. Safeway Stores, Inc. v. Franchise Tax Board (1970) 3 Cal.3d 745, 749-750. Previously a Corporation who issued dividends to a Corporation who owns shares, the money issued could potentially be taxed three times. First, the original corporation would pay taxes on all money issued as dividends, second a corporation receiving the funds as a shareholder would pay taxes, then finally as the second corporation later issuing its own dividend would pay taxes. Because Section 24402 favored California corporations by offering a discount while non-California Corporations did not receive such a benefit, the law discriminated based on state and thus violated the commerce clause.
When a statute is deemed unconstitutional, the court may either rewrite the statue to preserve the legal aspect or the court may deem the entire statute void. To rewrite the statute, the remainder must have been adopted by the legislature had the invalid part been removed from the statute. Gerken v. Fair Political Practice Com. (1993) 6 Cal.4th 707, 714. The invalid portion must also be, “grammatically, functionally, and volitionally separable.” Id.
Grammatically separable means that with the removal of the invalid section leaves the valid statute grammatically correct. People’s Advocate, Inc. v. Superior Court (1986) 181 Cal.App.3d 316, 330. Functionally separable means the remaining statute is complete in of itself. Id. at 331-332. Volitionally separable means the legislature would have adopted it had the invalid part been omitted. Santa Barbra Sch. Dist. v. Superior Court (1975) 13 Cal.3d 315, 331.
In 1929, the legislature passed Section 24402 to help protect California Corporations from double taxation from other California taxes. To allow the statute to remain without the language limiting it to California would dramatically change the scope of the statute by offering the tax break to all corporations.
A global tax break might be in the interest of the Legislature, but it is not the place of a court to determine what the legislature should or should not do. This holds true especially in the area of tax where the legislature bears the authority to impose taxes “unless expressly eliminated by the Constitution.” Armstrong v. County of San Mateo (1983) 146 Cal.App.3d 597, 624. The court does not have the power to rewrite a statute and presume the intentions of the legislature. California Teachers Assn. v. Governing Bd. of Rialto Unified School Dist. (1997) 12 Cal.4th 627, 633.
The court does have the power to rewrite a statute to preserve its constitutionality. Kopp v. Fair Pol. Practices Com. (1995) 11 Cal.4th 607, 670. The revision must, however, meet with legislature intent, reform the statute to closely articulate the desire of the legislature, and where the court determines the legislature would rather have the reform instead of the complete elimination of the statute. Id. at 643.
To simply amend the statute as plaintiff suggests would greatly alter the purpose of the statute by providing a tax break to all corporations receiving dividends. Such a dramatic change to the scope of the tax code should be determined by the legislature, not the court. Therefore, since the California Supreme Court ruled that part of the section was unconstitutional and that section greatly alters the impact of the statute, the court holds the entire statute is deemed invalid.