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BNA’s Laura Mahoney on the Dicon Case Decision

Reproduced with permission from Daily Tax Report, 88 DTR K-2 (May 11, 2009). Copyright 2009 by The Bureau of National Affairs, Inc. (800-372-1033) http://www.bna.com.

FTB May Audit EZ Credit Vouchers, But Must Prove Invalidity, Court Says

SACRAMENTO, Calif.—The Franchise Tax Board has the authority to question the validity of tax credit vouchers that local government agencies issue to employers for hiring qualified workers in enterprise zones, but must meet the burden of rebutting a voucher’s prima facie validity to deny the credit, a state appellate court ruled May 7 (Dicon Fiberoptics Inc. v. Franchise Tax Board, Cal. Ct. App., No. B202997, 5/709).

In a case of first impression, the Court of Appeal for the Second Appellate District in Los Angeles reversed an October 2007 decision from the trial court to dismiss the case on the grounds that the plaintiff, Dicon Fiberoptics Inc., failed to state a cause of action (211 DTR K-2, 11/1/07). The three-judge appellate panel sent the case back to Los Angeles County Superior Court, which must now address the question of whether FTB erred in rejecting $1.1 million in EZ hiring credits claimed by Dicon Fiberoptics based on vouchers they received from local agencies. The company’s legal challenge to FTB’s authority to audit EZ tax credit vouchers in the lead case challenges a 2003 change in FTB policy through which the agency is auditing 500 taxpayers and expects to deny about $130 million in claimed EZ hiring credits.

A spokeswoman for FTB told BNA the agency is studying the opinion and does not have a comment. LaShelle Wilson, general counsel for California Credits Group, a consulting firm hired by Dicon when FTB was auditing the company, told BNA the company is pleased with the opinion, but it is not a complete victory for taxpayers.

“Taxpayers need to be careful,” she said.

Audit Authority Extends to Vouchers

In the 14-page opinion, the court agreed with FTB that its overall authority to examine and audit tax returns also permits the agency to audit EZ credit vouchers issued by local agencies and deny credits. It rejected Dicon’s argument that because the Legislature vested local agencies with the authority to issue vouchers when it created the EZ program, FTB cannot overrule or second-guess the validity of the vouchers. Although FTB has the authority to audit the vouchers, the court said the issuance of a voucher from a local agency is prima facie proof that a worker is a qualified employee for purposes of the EZ hiring credit. Once a voucher has been issued to an employer, the burden shifts to FTB to rebut its validity by proving a worker did not meet the criteria to be a qualified employee, the opinion said.

“We do not intend our holding today to restrict FTB’s audit powers, to limit the scope of audits it conducts, or hamstring its authority to gather evidence relevant to the correctness of a return,” the court said in a footnote. “Rather, we direct our holding to the weight FTB must give, in the absence of any other evidence, to vouchers during audits.” Employer Not Required to Provide Documentation FTB cannot base its rejection of a voucher on an employer’s failure to provide documents during an audit that would establish a worker’s circumstances that would make the employer eligible for the credit, the court said.

EZ program rules require the enterprise zone, and not the employer, to maintain documents related to individual employees, mainly based on privacy concerns. A disadvantaged employee may face impediments such as limited literacy or criminal convictions, and that information is not readily shared with an employer, especially years later during an audit.

Wilson said although the ruling shifts the burden to FTB and clarifies that FTB cannot deny a credit based on the failure of an employer to provide supporting documentation, FTB still has broad authority to seek the information.

“That does not mean they’re not going to get it one way or the other,” she said. FTB could demand the information from the vouchering agency or others, and could dispute the validity of a voucher on multiple grounds, she said.

The opinion was authored by Acting Presiding Justice Laurence D. Rubin, with Judge Patricia A. Bigelow and Judge Vincent J. O’Neill concurring. Dicon Fiberoptics is represented by Marty Dakessian of Akerman Senterfitt in Los Angeles and LaShelle Wilson of California Credits Group in Pasadena, Calif. FTB is represented by the office of California Attorney General Edmund G. Brown.

By Laura Mahoney

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