Below I am reprinting the fine article written by Laura Mahoney of BNA regarding the status of the Dicon v. FTB case I discussed earlier. The article appeared in BNA’s “Daily Tax Report” on 11/1/2007 and was titled “Taxpayer Appeals Dismissal of Suit Challenging FTB’s Tax Credit Voucher Policy.”
Reproduced with permission from Daily Tax Report, No. 211 (Nov. 1, 2007) pp. K-2 – K-3. Copyright 2007 by The Bureau of National Affairs, Inc. (800-372-1033) (http://www.bna.com)
SACRAMENTO, Calif.–A corporate taxpayer Oct. 23 appealed a trial court judge’s decision to dismiss its case against the Franchise Tax Board in which the company claims the board does not have the authority to audit tax credit vouchers it received from local government agencies for hiring workers in designated enterprise zones (Dicon Fiberoptics Inc. v. Franchise Tax Board, Cal. Ct. App., No. B202997, notice of appeal filed 10/23/07).
In a case of first impression, Los Angeles County Superior Court Judge Mel Red Recana Oct. 3 formally dismissed the lawsuit filed by Dicon Fiberoptics Inc. almost two months after sustaining FTB’s demurrer to the company’s complaint.
The company’s appeal makes it the lead case challenging a 2003 change in FTB policy through which the agency is auditing 500 taxpayers and expects to deny about $1 billion in claimed EZ hiring credits.
In sustaining FTB’s demurrer Aug. 17, Recana said he agreed with FTB’s argument that it may, under the Revenue and Taxation Code, “for purposes of administering its duties, including ascertaining the correctness of any return, demand taxpayers to provide information or make available for examination or copying any books, papers, or other data which may be relevant to that purpose.”
Dispute Over Documentation, Scope of Authority
The judge agreed with FTB, which argued that Dicon failed to state a cause of action because the board is not required by law to accept the EZ hiring credit vouchers, issued by local vouchering agencies, and has the authority to require Dicon to provide documentation to support the $1.1 million in claimed credits before allowing them.
Dicon, based in Richmond, Calif., argued that state law giving local agencies the authority to issue the EZ hiring credit vouchers requires only that the taxpayer receiving the voucher provide a copy to FTB. The agency exceeded its authority when it demanded documentation that Dicon was not required to keep once it received the voucher from the local agency, and that was outside Dicon’s possession, custody, and control, according to the company.
Recana rejected Dicon’s argument, saying FTB properly denied the credits after the company did not provide documentation it requested.
At a hearing on the case in August before he sustained the demurrer, Recana suggested to lawyers for FTB and Dicon that they take the case to the Court of Appeal because it is the lead case on the issue. “What’s important is that we have good guidance from the court of appeal,” Recana said, according to a court transcript of the hearing.
Dicon filed its appeal Oct. 23 in the California Court of Appeal, Second District, in Los Angeles. Marty Dakessian, an attorney in Glendale, Calif., representing Dicon, declined to comment to BNA Oct. 31 on the case except to say he disagrees with Recana’s dismissal.
Other Voucher Cases
A spokeswoman for FTB also declined to comment because the case is pending.
Dicon filed its lawsuit in May, five months after the State Board of Equalization issued a formal opinion in a dispute between FTB and Deluxe Corp. on the same issue of whether FTB can examine EZ hiring credit vouchers. SBOE ruled in favor of FTB, saying both tax agencies have the authority to “look behind” the vouchers issued by local agencies (243 DTR H-2, 12/19/06 ). Dakessian represented Deluxe in that case.
Deluxe Corp. also has filed a lawsuit in state trial court challenging FTB’s ruling in that case (Deluxe Corp. v. California Franchise Tax Board, No. CGC 07-462305). A trial is scheduled for April 21, 2008. Deluxe is represented by Amy Silverstein and Edwin Antolin of Silverstein & Pomerantz in San Francisco.
The Deluxe case was the first to reach SBOE on appeal as a result of a change in FTB policy in 2003. From 1994 until 2003, FTB issued EZ tax credits without questioning the vouchers. But the agency changed its policy after a 2003 state audit of the Oakland EZ showed that many hiring credit vouchers may have been issued improperly.
As a result, FTB has audited or is in the process of auditing more than 500 taxpayers on the question of the EZ hiring credit, and expects to deny about $1 billion in credits.
Several other cases have reached SBOE on appeal, and the board ruled most recently in August and September in two other cases involving different enterprise zones credit issues (158 DTR H-1, 8/16/07 ; 181 DTR H-3, 9/19/07 ).
By Laura Mahoney
