On Friday I posted the Cal-Tax update regarding the BOE’s recent Enterprise Zone related decision. Laura Mahoney at BNA’s “Daily Tax Report” published a more detailed account of the case yesterday. Thanks to the folks at BNA for allowing its reproduction here.
Reproduced with permission from Daily Tax Report, No. 165 (Aug. 26, 2008), pp. H-2 – H-3. Copyright 2008 by The Bureau of National Affairs, Inc. (800-372-1033) http://www.bna.com.
SACRAMENTO, Calif.—The State Board of Equalization Aug. 19 rejected the California Franchise Tax Board’s attempt to revisit the issue of whether newly hired older workers must be economically disadvantaged for employers to be eligible for a tax credit under the state’s enterprise zone program, one year after deciding against FTB in a similar case.
In the Matter of the appeal of Devry Inc. (No. 357029), the board rejected by a 5-0 vote Aug. 19 FTB’s argument that a 1996 directive from the Employment Development Department, which FTB did not present as evidence a year ago in arguing the case of Jessica McClintock Inc., together with a new declaration from an EDD manager, supported its argument that older workers must also be economically disadvantaged for an employer to qualify for the EZ hiring credit. By raising the arguments again in the Devry case, FTB was seeking to change state policy following McClintock.
The board’s decision was consistent with its unanimous decision in the McClintock case, in which it found that up to 10 percent of newly hired older workers can be eligible for the EZ hiring credit even if they are not poor (158 DTR H-1, 8/16/07).
Taxpayer Claimed Credits in Amended Returns.
The taxpayer in the case, Devry Inc., is a for-profit provider of higher education based in Illinois. In amended returns it filed for tax years 1998 through 2001, it claimed $1.2 million in EZ hiring credits for its campus in Long Beach, Calif. On audit, FTB allowed about $700,000 of those credits and disallowed about $500,000. FTB has since conceded to the taxpayer on some of those credits, leaving 36 at issue in the appeal before the board. Of those 36, 31 were credits for hiring older workers, two were credits for hiring disabled workers, and three were credits for hiring workers who were displaced, for a total of $230,937.
As it was in McClintock, the fundamental issue in the Devry case was FTB’s interpretation of eligibility for the EZ hiring credit, which was based during the tax years in question on eligibility for the federal Job Training Partnership Act. JTPA no longer exists, but while it did, the EZ hiring credit eligibility requirements mirrored those of JTPA.
FTB Tax Counsel Ann Hodges said that since the board decided the McClintock case, the agency has become aware of EDD Directive 96-5, which outlined barriers to employment that made an individual eligible for JTPA services. She said the directive supports FTB’s argument that all older workers must also be poor to qualify for the EZ hiring credit.
FTB Relied on Declaration.
Hodges also pointed to an Aug. 12, 2008, declaration from Michael Evashenk, deputy chief of the Workforce Services Division at EDD, that it was his understanding and belief that older workers only qualified for JTPA if they also earned less than 125 percent of the poverty level.
The older workers hired by Devry were primarily displaced aerospace workers who received well-paid jobs as instructors at the school, according to the company. Hodges argued that because they were not poor, the employer was not eligible for the EZ credit.
Attorneys for Devry and California Credits Group, which prepared the amended returns for Devry in which it claimed the credits, argued that FTB’s position was inconsistent with the 1996 directive and a 1998 directive on a similar subject from EDD, the JTPA application form and instructions that accompanied the form, and FTB’s own instructions to auditors.
Marty Dakessian, an attorney with Akerman Senterfitt in Los Angeles, representing CCG, said FTB’s argument amounted to a “fundamental misunderstanding” of JTPA and therefore of eligibility for the EZ hiring credit.
Income Limit Did Not Apply to Everyone.
He and two other attorneys who argued the case pointed to JTPA eligibility requirements, under which up to 10 percent of those eligible must have faced a serious barrier to employment but were not limited by their income. The rules stated also that up to 35 percent of individuals who were eligible must have earned incomes below the federal poverty level, and at least 65 percent could have earned incomes up to 125 percent of the federal poverty level if they also faced serious barriers to employment such as age, disability, layoff, or lack of education.
Older workers who earned less than 125 percent of the federal poverty level were eligible for JTPA under the 65 percent category, the lawyers said. But the credits at issue in the case fell under the so-called “10 percent window,” in which people with barriers to employment did not have to be poor to qualify.
On the EDD form for JTPA assistance in use during the years at issue, one check-off box listed “older worker” as a category under the heading “10 % Window (for non-economically disadvantaged only).” A separate check-off box listed those who were eligible under the federal Older Americans Act as falling under the heading “Economically Disadvantaged,” which would be the 65 percent category of those eligible for JTPA, the attorneys said.
The forms and instructions were written this way because the underlying law allowed older workers who were not poor to qualify for JTPA in the 10 percent window, the attorneys said.
Board Members Questioned FTB’s Logic.
Before voting to grant the taxpayer’s appeal, several board members questioned FTB’s logic in denying the credits.
Members Bill Leonard (R) and Judy Chu (D) both pointed out that the forms and instructions clearly show at least 10 percent of older workers did not face an income requirement to qualify.
“I’d like to ask how you could determine there’s an income requirement on a form that said there is no income requirement,” Leonard said to Hodges.
They also questioned FTB’s reliance on the recent declaration from the EDD manager to bolster its position. “Do you follow the memory of this person who had the affidavit after the fact or the actual handbook that people followed as they were filling out these forms?” Chu said.
“For this man at EDD to say ‘that’s what everybody knew back then’ really defies explanation,” Leonard said. The board also ruled for the taxpayer on the credits dealing with the hiring of disabled and displaced workers. They agreed with the taxpayer that FTB was seeking documentation from Devry that was difficult, impossible, or in the case of the disabled, potentially illegal for the taxpayer to obtain.
Dakessian and LaShelle Wilson, general counsel for California Credits Group, represented CCG. Jon A. Sperring of PricewaterhouseCoopers represented Devry. FTB was represented by Tax Counsel Ann Hodges.
By Laura Mahoney
