EZ Policy Blog

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

Cal-Tax is reporting on a new Enterprise Zone related case before the SBOE:

An attempt by the Franchise Tax Board to narrow the scope of the enterprise zone hiring credit by limiting seniors’ eligibility was rejected unanimously in a tax appeal decided by the Board of Equalization on August 19.

In the Appeal of DeVry, Inc., involving a higher-education provider, the Franchise Tax Board contended that the enterprise zone hiring credit for older workers is limited to those who are poor. The taxpayer, represented by Jon Sperring of PricewaterhouseCoopers and attorney Marty Dakessian of the law firm of Akerman Senterfitt, argued that seniors can qualify without income limitations.

Mr. Sperring and Mr. Dakessian also pointed out that the FTB was attempting to limit the number of disabled workers eligible for the credit by claiming the taxpayer failed to file a document that cannot be legally obtained.

Mr. Sperring stated that the FTB was relying on a single Employment Development Department document addressing a specific section of the Job Training Partnership Act eligibility statute which was not applicable to the section at issue in this appeal. He said the directive that the FTB presented specifically stated that it applied to one section, and not the one that was in dispute.

Regardless of the FTB’s assertion that this directive justifies the denial of the credits at hand, Mr. Dakessian also stated that the FTB’s interpretation of the directive conflicts with the EDD form, the instructions to the form, as well as the FTB’s own audit instructions.

Board Chair Dr. Judy Chu said logic doesn’t support the FTB’s position. She observed that there would be no need for a provision separately stating that seniors are eligible if they could qualify for an enterprise zone hiring credit under other provisions as low-income individuals.

DeVry Inc. employs 750 people and has 16 campuses in California.

Thanks to Chris Micheli for the tip.

Last March I reprinted an article from BNA by Laura Mahoney regarding the SBOE decision in the Taiheiyo case.  In the July 11, 2008 edition of BNA Daily Tax Report, Laura reports that the SBOE recently decided to rehear the case.

From the April 2008 FTB Tax News publication:

The November 2007 issue of Tax News included an article regarding the State Board of Equalization (SBE) unpublished decision in the Appeal of Jessica McClintock. Specifically, that article stated that individuals with a documented barrier, as defined under the Job Training Partnership Act (JTPA) 10 percent exception category, could be considered qualified employees for purposes of the enterprise zone hiring credit.Based on information available at the time of the hearing, the SBE determined that “older worker” was a documented barrier for purposes of the JTPA 10 percent exception, regardless of the individual’s economic situation. Since then, Franchise Tax Board (FTB) has obtained Employment Development Department Directive 96-5 that provides program administration information to JTPA administrators, and discusses when an older worker is eligible for JTPA services. This Directive requires that an older worker must be both 55 years or older, and meet low-income guidelines.

FTB has presented this new information to the SBE and requested affirmation that for purposes of the enterprise zone hiring credit, “older worker” as a documented barrier also requires that the individual meet low-income guidelines. We will include information in Tax News on any future updates on this appeal.

Earlier Posts:

• Jessica McClintock - Part 1, August 30, 2007
• Jessica McClintock - Part 2, August 30, 2007
• CAEZ Conference - FTB Updates, October 30, 2007
• FTB on Jessica McClintock Implications, November 5, 2007

Reproduced with permission from Daily Tax Report, No. 46 (Mar. 10, 2008), p. H-3. Copyright 2008 by The Bureau of National Affairs, Inc. (800-372-1033) http://www.bna.com:

A cement manufacturer March 3 asked the State Board of Equalization to reconsider its Feb. 1 decision in which SBOE disallowed enterprise zone tax credits for machinery parts because they were expensed instead of capitalized, but backtracked on adopting a formal opinion that would have set a precedent for other similar cases (Appeal of Taiheiyo Cement USA Inc., No. 332855, petition for rehearing filed 3/3/08).

Jess B. Penilla, director of the Multistate Tax Services Group with Deloitte & Touche in Los Angeles, told BNA March 5 he filed a petition for rehearing with SBOE on behalf of Taiheiyo Cement USA Inc., which is seeking almost $2 million in sales and use tax credits for its plant in Riverside County.

If the board had adopted a precedent-setting formal opinion in the case Feb. 1, it would have marked the first time an adopted opinion included a formal dissent. The two Republicans on the board, Bill Leonard and Michelle Steel, strongly disagreed with the three Democrats on the board who voted to sustain the Franchise Tax Board’s position in the case, and sought to use new SBOE rules to include their dissent in the opinion.

But one of the three Democrats, Deputy Controller Marcy Jo Mandel representing State Controller John Chiang, would not vote for the opinion during the Feb. 1 board discussion. Without Mandel’s vote, neither the majority nor the dissenting opinion could be adopted.

Board Asked for Opinion in September

Mandel had previously voted with the two other Democrats, Judy Chu and Betty Yee, to sustain FTB and seek a formal opinion when the board first considered the Taiheiyo case in September (181 DTR H-3, 09/19/07). In September, the board said it wanted to consider adopting a formal opinion that could be cited as precedent because other, similar cases were pending.

But at the Jan. 31-Feb. 1 board meeting at which it considered adopting the opinion, Mandel said she would not be voting for it.

“The formal opinion may or may not reflect all the reasons why we may have voted that day [Sept. 11],” Mandel also said of the opinion SBOE staff presented to the board for adoption.

Mandel also said the controller does not believe many other cases will be coming before the board, and the issues in the case do not warrant a formal opinion.

The board voted 4-1 Jan. 31 to adopt the opinion and the dissent, with Mandel being the only vote against it, but the board rescinded that vote Feb. 1 after staff members advised them that at least three members needed to be signatories to the opinion. Because Leonard and Steel would be signatories on the dissenting opinion, the votes in favor of the opinion from Yee and Chu were not enough to adopt it.

The board then voted 3-2 to sustain the FTB in the case without adopting a formal opinion.

Leonard, who was attempting to adopt a dissenting opinion for the first time at the board, said he was frustrated that Mandel’s decision not to vote for the majority opinion meant the dissent would also go unadopted.

“Your motion is denying me the right to have my opinion published,” Leonard said to Mandel. “That’s contrary to informing the taxpayers of our opinion.”

Ruling Applies Only to Taiheiyo

Without the formal opinion, the board’s decision applies only to Taiheiyo, and with its petition for rehearing the company is continuing to argue the underlying tax policy disagreement between it and the state.

Central to the case is the meaning of the term “placed in service,” and how it applies to machinery parts that Taiheiyo bought and used within one year. The Revenue and Taxation Code does not contain an explicit requirement that property be capitalized to be eligible for the EZ sales and use tax credit, so FTB and the company came up with opposing views on the issue. So far, SBOE has agreed with FTB.

Taiheiyo, the parent company of Portland Cement, operates the Riverside County plant 24 hours a day, seven days a week. At issue are tax credits it claimed for tax years 1998 and 1999, including carryover credits generated in tax years 1990 through 1996.

Taiheiyo said it maintained a constant inventory of the parts because of continuous operations at the plant, where parts that may typically last three years wore out within one year. The company expensed these parts in the year they were purchased and used. Even though the credit is generally allowed for equipment that is capitalized, or depreciated over several years, the lack of an explicit exclusion for expensed parts in RTC in the context of when an item is “placed in service” allows the credit to apply to expensed property, the company argued.

If the Legislature intended to restrict the definition of qualified property to capitalized assets under the EZ statute, it could have done so, the company argued. Lawmakers have explicitly made such distinctions in other statutes, such as a now-expired law that created a manufacturers investment credit similar to the EZ credit.

Opinion Spells Out Reasoning

The unadopted opinion, provided to BNA by Leonard’s office, spells out in more detail FTB’s arguments and the reasoning behind SBOE’s agreement with it. SBOE agreed with FTB’s argument that parts must be depreciated to be eligible for the credit, based on examination of the legislative history and legal meaning of “placed in service.”

Although the term sometimes refers informally to current expense assets, the specific legal meaning of “placed in service” refers to the date that capitalized assets are in the condition or state of readiness or availability, and the date that depreciation of the capital asset is first allowable.

SBOE concluded that the Legislature’s use of “placed in service” in the law indicates its intent to restrict the definition of qualified property to capitalized assets.

Further, RTC Section 23612.2(e) prohibits the taxpayer from taking a credit for sales or use tax paid and adding that tax to the basis of qualified property, according to FTB’s arguments summarized in the unadopted opinion. The reference to “basis” in the law refers to capitalized assets and prevents taxpayers from receiving both a deduction and a credit for purchase of a capital asset. The law prevents no such double benefit for expensed assets.

Therefore, FTB argued, the prohibition on adding sales or use tax to the basis of qualified property is further evidence that the Legislature intended to restrict the credit to capitalized assets.

SBOE also agreed with FTB’s argument that, if it allowed the EZ credit for current expense assets, taxpayers would be able to “double dip” by deducting the cost of the asset against its net income, excluding sales tax paid, and then receive a credit for the tax on the same asset. On the other hand, capital assets are not currently deductible.

“Such an interpretation would favor currently expensed assets over capitalized assets, creating an incentive for taxpayers to find ways to expense property that otherwise ought to be capitalized, “the unadopted opinion said.

Taxpayers Cannot Research Intent, Dissent Says

In their dissent, Leonard and Steel said the plain language of RTC reveals no requirement that property be capitalized to be eligible for the credit. The taxpayer cannot be expected to research legislative history to speculate about legislative intent in order to use the credit, especially when published guidance available in the years in question gave no reason for Taiheiyo to suspect the law was ambiguous, they said.

“[Taiheiyo] has meticulously followed the statutory language and published guidance in pursuing the EZ SUT credit,” the dissent said. “The State of California can demand no more than that from any taxpayer.”

The dissenters argued that the types of parts at issue would normally be capitalized, but were not because of the unusually demanding way in which they were used. “Even if some legislators had silently intended to limit the enterprise zone sales and use tax credit to capital assets, the machinery parts at issue here were likely to have been the sort of assets that they had in mind,” the dissent said.

Leonard and Steel said the term “placed in service” is not used in the EZ SUT provisions of the state tax law to distinguish between certain types of property, but is used only to limit the tax credit to $20 million a year, and to limit the credit to property in use before the expiration of an EZ designation. The distinction between capital assets and expensed assets is not made.

Term Not in Use During Years at Issue

Further, they argued that “placed in service” was not added to the state law until 1997, which is after the time that most of the credits in the appeal were earned and therefore should not apply.

The dissent also faulted FTB’s argument that the term “basis” in the law can only refer to capital assets. FTB’s argument ignores the fact that all property has a basis that is used to calculate gain when property is sold.

“There is simply no foundation to the assertion that the term ‘basis’ can only be used in reference to capitalized assets, even if the term is frequently used in that context,” the dissent said. “We should affirm that ‘basis’ is a general term that applies equally to expensed assets and capital assets (and to any other conceivable thing that can be sold). [FTB’s] fears about double benefits will only materialize if we adopt [FTB’s] incorrect view that ‘qualified property’ is limited to capitalized assets.”

SBOE will review Taiheiyo’s petition for rehearing, which must include reasons for the request such as arguments that the board made in error of law in reaching its decision or that newly discovered evidence is available. If SBOE denies the petition, the taxpayer has exhausted its administrative remedies and may file suit in state trial court.

By Laura Mahoney

A few weeks ago I reprinted a BNA article by Laura Mahoney discussing the appeal of Dicon v. FTB.   Mahoney contacted me today to alert me to a correction published in relation to that article:

A report on the Oct. 23 appeal of California court decision (Dicon Fiberoptics Inc. v. Franchise Tax Board, Cal. Ct. App., No. B202997), in 211 DTR K-2, 11/1/07, incorrectly stated the amount of credit denials or additional assessments the California Franchise Tax Board is expecting to issue in the process of auditing about 500 taxpayers who have claimed enterprise zone hiring credits. FTB estimated the total to be about $130 million, not $1 billion. As of Dec. 5, FTB estimated the total amount of credit denials and overstatements to be about $60 million, in light of a recent decision striking down the agency’s position that some credits involving economically disadvantaged employees were not allowable. The online version has been corrected.

Mahoney further informed me that the overwhelming majority of that adjustment was due to a math error and not the BOE decision in the Jessica McClintock case.

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

The FTB “Tax News” publication we had been anticipating since Oct. 31 has just been published to the FTB website. It contains this information about the implications of the Jessica McClintock appeal at BOE:

An employer who meets certain requirements may claim an enterprise zone hiring credit. (See R&TC Sections 17053.74 and 23622.7.) One of these requirements is that the employer hires a “qualified employee.” An individual who is eligible for the Job Training Partnership Act (JTPA) public assistance program may be considered a “qualified employee” for purposes of the enterprise zone hiring credit. The JTPA, which expired June 30, 2000, provided training and job placement assistance for qualified individuals who faced significant barriers to employment and suffered an economic disadvantage. The JTPA program also provided that 10 percent of its funds could be used to enroll individuals into the JTPA program if they suffered a barrier to employment but had no corresponding economic disadvantage.

On August 14, 2007, the Board of Equalization held in an unpublished decision, Appeal of Jessica McClintock, that individuals who had a documented barrier as defined under the JTPA 10 percent exception category could be considered qualified employees for purposes of the enterprise zone hiring credit. Accordingly, vouchers issued for employees hired on or before June 30, 2000, under this eligibility category with a documented employment barrier will be accepted as valid vouchers.

The following barriers to employment were recognized under the JTPA Program.

* Addict.
* Alcoholic.
* Basic skills deficient.
* Cash welfare recipient.
* Disabled individuals.
* Displaced homemaker.
* Homeless.
* Limited English language proficiency.
* Offender.
* Older worker.
* Pregnant/parenting youth.
* School dropout.
* Veteran.

The requirements of each of these barriers are set forth within the JTPA statutes and regulations including common documentation used to verify these barriers.

“Tax News” also includes a detailed explanation of how to understand the implications of AB 1550 with regard to the new Enterprise Zones.

CAEZ was lucky enough to have Jeanne Harriman of the FTB available throughout their recent conference. As far as Enterprise Zones go, she’s the closest thing we have to a rock star. The following are some highlights:

1. In September, the Board of Equalization heard the appeal of Taiheiyo Cement and found in favor of the FTB. An official ruling will be issued in the near future. The case dealt with EZ Sales or Use credit and the correct application of “placed in service.” Listen to the audio of the hearing by clicking that little, blue “play” button.
2. FTB will issue a “Tax News” article on October 31 discussing the ramifications of the BOE decision in the Jessica McClintock appeal (see earlier blog posts here and here).
3. Currently pending with the BOE is the appeal of URS Corp. which will deal with documentation requirements for dislocated worker vouchers.
4. Also pending at BOE is an Enterprise Zone Net Interest Deduction case involving Farmers & Merchants Bank.
5. The Economic Development Areas Manual sections on Enterprise Zone will be updated by December.
6. Regarding the 8886 issue, Jeanne conceded, based on arguments previously made here, that it would have been better had they simply asked taxpayers to mail the forms to a P.O. Box rather than to the aggressively frightening Abusive Tax Shelter Unit. However, even though making Enterprise Zone credits an exception seems to be under consideration, it doesn’t sound likely that will happen this year.

One of the updates we received from FTB at the recent CAEZ Conference was that the case of Dicon Fiberoptics Inc. v. FTB (discussed previously here, here and here) was dismissed by the Los Angeles County Superior Court Judge on October 3, 2007. On October 11th Dicon notified the court that they would appeal to the Court of Appeal, Second Appellate District. Attached to that notice is a transcript of the hearing held in Superior Court on August 6th.

The whole transcript is very interesting and neatly summarizes the basic argument for both the Dicon case as well as the Deluxe case that the FTB does not have the statutory authority to override an Enterprise Zone hiring tax credit voucher once issued by a local agency. I’ll reproduce part of the transcript here to show the Court’s reaction to FTB’s argument as well as the judge’s recommendation that this case be sent up to the Court of Appeals (Mr. Freeman is the counsel for Dicon Fiberoptics and Mr. Richelson is the counsel for FTB):

The Court: Okay. Now, how was the statute worded? Why you arrived at this conclusion that they, the local agency, has the final word?

Mr. Freeman: It’s because — the revenue and tax code 23622.7, subpart (c) says that the taxpayer’s required to do the following: “To obtain from,” — and it lists a number of agencies that it’s supposed to obtain a certification from, including — it says, “obtain from the EDD, as permitted by federal law, the local county or city” agencies responsible for the administration of various programs a certification that provides that a qualified employee meets the eligibility requirements specified above in the statute. And the second requirement is that the taxpayer retain a copy of the certification and provide it upon request to the Franchise Tax Board. The only requirement of the taxpayer is to get a certification and to submit it. The only agency that is authorized to make a determination as to whether the employee is qualified are the agencies that are listed. There are a number of local agencies that are listed in that paragraph. It doesn’t say that the Franchise Tax Board can trump their local agency’s decision, which is what would happen if they were able to exercise review over a highly discretionary decision. And that’s also critically important because the legislation was changed in 1994. It used to be that the decision as to whether an employee was qualified was a very black and white test. Either the employee was a participant in certain listed programs or the employee was not listed. The employee was — if the employee was not a participant in the listed programs, the employee would not be — would not be qualified. In 94, the legislature broadened the standard and said the employee doesn’t have to actually be a participant. The employee needs to be eligible for participation. And these local agencies who can certify have the expertise to applying the discretionary standards as to whether the employee is eligible. That involves things like is it likely that this employee would get a job within the area from another employer if his employer–

The Court: What are these local agencies?

Mr. Freeman: well, there are a number of them. And these are basically the local agencies that are responsible for all of these jobs programs and related programs. For instance, I’ll read it to you to give you some idea.

The Court: Yes.

Mr. Freeman: (reading) “Obtain from the Employment Development Department” — that’s the State Department — “as permitted by federal law, the local, county or city Job Training Partnership Act administrative entity, the local GAIN Office or Social Services Agency, or the local government administering the enterprise zone, a certification that provides that a qualified employee meets the eligibility requirements…” So the idea is that you have a number of local agencies who are responsible for administering these programs. They’re the ones with the expertise as to whether somebody meets the requirements for those programs.

The Court: I understand. I’ve read the pleadings. You’re saying their word is the final word.

Mr. Freeman: their word is the final word. And it’s just basically applying the expressio unius. If this was subject to de novo review, if the discretionary determination was subject to that kind of review by the Franchise Tax Board, there would be an indication of it in the statute. It would be simple to do. Instead, the statute expressly delegates to these non-taxing authorities the decision.

The court: But I thought that the legislature should have said, “And we’re aware that the FTB is the taxing authority. However, we have now given the full power or the authority to make this determination and such determination is not subject to review.” But I think that’s not — that is absent from the statute.

Mr. Freeman: Well, two things. One, the carve-out for the local agencies is narrow. It is simply to determine whether a voucher — it’s to certify that the employees are qualified. There could be objective reasons for denying the tax credit, such as the FTB does an audit and determines that the business is not located within the proper confines of the enterprise zone. But making that key decision, it’s an express delegation.

The Court: Okay.

Mr. Freeman: There’s no need to – there’s no need to say — to expressly say, “We delegate authority — we, the legislature, delegate authority to the local agencies.”

The Court: So I take it that the key to this issue really is for the court to make that determination.

Mr. Freeman: Yes.

The Court: Okay. Can I hear – I’m sorry, folks. I have a jury trial at 9:45, so I have to — go ahead, please. Now we are hearing from the Attorney General.

Mr. Richelson: First, I’ll answer the court’s last question directly. That is the issue. Looked at this way, the plaintiff is asking you to imply in the statute the words that the voucher is conclusive proof to tax credit.

The Court: That’s what I’m hearing.

Mr. Richelson: Right. Then they are asking you to imply that because the statute doesn’t say, “And the Franchise Tax Board can audit you,” that the Board’s general authority is negated by implication. So you have two implications, creating a third implication. If you’re talking about — if we talk about judicial legislation, that seems to be it. You’re asking to imply words which create then implied lack of words to revoke the Board’s specific and important power. I just don’t think that makes it. I just don’t think that gets you there, particularly when the case law is clear, federal and state, that exemptions are strictly construed. and if you strictly construe the exemptions, you’re not going to imply words into the statute and then say, “because of those words, we’re going to imply that the board’s power is taken away.” It just doesn’t follow. Next, your honor, I don’t hear anybody saying that the Board can’t audit for fraud. I mean if the Board can’t audit — if the Board can’t audit for fraud, that’s a third implication that they’re asking you to make. But if the Board can audit for fraud, then it’s clear that the statute is not conclusive proof of the exemption. He also says that this is highly discretionary. But there are many highly discretionary functions that agencies do that can be reviewed by the Court for abuse of discretion. And to the extent that we’re talking about discretion, while some sections may have discretion, some of the findings that the vouchering agency makes is to determine if the qualified employee’s commencement of employment with the taxpayer was a person eligible for services under the Job Training Partnership Act. I don’t see the discretion there. “Immediately preceding the qualified employee’s commencement of employment with the taxpayer was a person eligible to be a voluntary or mandatory registrant under the Greater Avenues for Independence Act.” Don’t think that that’s the kind of discretion plaintiff is trying to have you believe exists.

Mr. Freeman: May I respond, Your Honor?

The Court: He’s not finished

Mr. Freeman: I’m sorry.

Mr. Richelson: And I think we just go back – the one other point, Your Honor, is there are many statutes that require certain things to get an exemption or to get proof of an amount to be included on your tax. In all of those sections, Your Honor, there is no specific statement that says that — talking about an audit one way or the other. When you accept a resale permit for — in lieu of sales tax, it doesn’t say the resale permit can’t be audited. And there is no implication that because it doesn’t say the resale certificate can be audited, that it can’t be audited. I think you just — I think you get back to the Court’s original question. You’re asking to imply the words “conclusive proof,” which then gets you to Plaintiff’s theory that because the words “you can audit” aren’t in the statute, the implication is that the Board’s general authority is negated. I think that’s implication on implication on implication. It doesn’t get you there generally and certainly doesn’t get you there when you strictly construe an exemption.

The Court: I’m going to hear your word, whatever you have to say, but I think — are there going to be future claims for refunds similar to your — what you’re asking now, counsel for the plaintiff?

Mr. Freeman: You mean are there going to be — I’m sorry, similar claims by –

The Court: Yes.

Mr. Freeman: — Other plaintiffs?

The Court: Right.

Mr. Freeman: Well, I assume that this would be a precedent — this case is dealing with an issue of statutory interpretation.

The Court: Right, that’s why I was thinking that if you still would like to argue, I’ll listen. But I’ll take this under submission. And maybe, however I go, you should take it up.

Mr. Richelson: I think so, your honor. If I could add a little more to your question.

The Court: Yeah.

Mr. Richelson: It is our understanding this is one of the biggest things before the Board.

The Court: Right.

Mr. Richelson: And that lined up behind — there’s one other case in litigation — we, I think, are the lead case right now — where I had a case in San Francisco.

The Court: This is the lead case.

Mr. Richelson: This is the lead case right now.

The Court: So we’ll take it up however I go.

Mr. Richelson: Right. You can make the law, Your Honor.

The Court: I hope it’s not a reversal on my part. But who cares. What’s important is we have good guidance from the Court of Appeal. Go ahead, sir.

Mr. Freeman: I just want to add a couple things, Your Honor, because I know you’re going to be taking this under submission.

The Court: Yes, sir.

Mr. Freeman: The same provision that I read earlier about what are the local agencies that are going to make this decision, in the same paragraph, that paragraph ends with “The Department of Housing and Community Development shall develop regulations governing the issuance of certificates by local governments pursuant to Government Code 7086.” Now, notice who is issuing the regulations that are guiding the determination about whether an employee is qualified? It’s not the Franchise Tax Board because they don’t have any expertise. It’s the Department of Housing and Community Development. So the notion that a discretionary decision can be made in one stage — you have regulations, you have an express delegation of authority, and then all of a sudden you have the Franchise Tax Board coming in without expertise and saying, “Oh, we want to make our own decision.” And it could be years later. There could be documents that are not available. I also want to point out something that I understand the government could either confirm or deny this, but my understanding is that the practice is that if a voucher — if a certification is rejected at the local level, the FTB will not consider any kind of appeal. Their position is, “That is a decision that is made by the local authorities, and even though you, the taxpayer, claim that you should have gotten a voucher, you should have been certified, we are not going to reconsider a decision denying that made by the local agency.” Well, that implies a certain interpretation of the statute by their conduct, which is that they are not in the business of second-guessing the local agencies.

The Court: Okay.

Mr. Richelson: Thank you, Your Honor.

Mr. Freeman: Thank you, Your Honor.

The Court: Thank you, folks.

(The above proceedings were concluded.)

There seems to be a certain amount of excitement and “buzz” in the Enterprise Zone consulting community regarding the opportunity represented by Jessica McClintock’s appeal victory at the SBOE. It is not my intention to be a killjoy, but my initial analysis of the case is that it does open the floodgates to a torrent of new qualified employees.

If I can succinctly summarize the point of contention, it is whether or not an employee who would have been eligible to receive JTPA assistance prior to hire under JTPA’s 10% exception rule is considered a qualified employee for the Enterprise Zone. Clear?

My understanding is that the FTB agrees that the employee only needs to be eligible and not enrolled in JTPA to be qualified for Enterprise Zone, and that they further agree that the employees in question may very well have been eligible to receive JTPA assistance under the 10% exception rule had they asked for it. But, FTB reasons, being eligible for the 10% exception is two steps removed from Enterprise Zone qualification - either one has to be eligible for JTPA proper (not based on the 10% exception), or one has to actually be enrolled even if they became enrolled by virtue of the 10% exception. How can it ever be determined that an individual who was only eligible for the JTPA 10% exception in potential would have in actuality been part of the 10% of the real JTPA population receiving benefits? Clear?

The taxpayer, on the other hand, argued that the 10% exception represents a full fledged eligibility category in JTPA and that the Enterprise Zone program is not concerned whether or not an individual could have been part of the real 10% JTPA population, only that they had the characteristics of an individual who could.

I can actually see both sides of the argument.

After listening to the audio of the hearing, I don’t think the SBOE members fully grasped the FTB’s position. I think the FTB’s presentation could have been more focused.

Here is why I don’t think the SBOE decision will be a boon for Enterprise Zone taxpayers and their consultants:

1. The whole question pertains to the qualification of vouchers under JTPA. The Federal JTPA program expired on June 30, 2000. All of the vouchers in question in this appeal were for employees hire before 6/30/2000 and anyone interested in taking advantage of this case would also only be able to deal with employees hired before that date.
2. All of the vouchers in question were submitted prior to the implementation of regulations that went into effect on 1/1/2007. These regulations are silent on the issue of JTPA, but the “Final Statement of Reasons” (FSOR) for the regulations makes the following statement, “Because the JTPA program was superseded by WIA and is thus no longer in effect, the regulations exclude voucher applications for employees hired prior to July 1, 2000 who may have qualified under the JTPA. The regulations address the current successor program – WIA. Further, the department’s understanding is that the JTPA program does not allow for “retroactive” determinations of eligibility. Thus, the only employees that would fall into this JTPA category are those who received a determination of eligibility (or were enrolled in JTPA) more than six years ago and have not yet sought a voucher. The department believes that the number of employees falling within this category to be small. However, to the extent that a taxpayer is seeking a voucher under the JTPA for an employee hired prior to July 1, 2000, these regulations do not change the existing documentation and eligibility standards that must be met.” Therefore, at least according to HCD, anyone seeking a voucher now for JTPA would have to show proof of enrollment.

There is probably a fair amount of room for more debate here. Unfortunately, the opportunity for overreaction on the part of the Legislature is very real and the victory on the part of Jessica McClintock’s representatives may turn out to be Pyrrhic.

See also, Part 1.

On August 14 the State Board of Equalization heard the case of Jessica McClintock, Inc. in its appeal of 16 vouchers that the taxpayer had received and the FTB overturned in audit.  The SBOE unanimously found in favor of the taxpayer.

An audio recording of the hearing is available here.  Under the audio player there is a menu called “Select an Index” which you can use to scroll down and choose “B4 Jessica McClintock.”

As Part 1 of my report I have received permission to reprint the following article by Laura Mahoney which originally appeared in BNA’s Daily Tax Report on August 16.  In Part 2 I present some of my analysis of the case and its implications.

Reproduced with permission from Daily Tax Report, No. 158 (Aug. 16, 2007) pp. H-1 - H-2. Copyright 2007 by The Bureau of National Affairs, Inc. (800-372-1033) http://www.bna.com.

Employers Can Get EZ Hiring Credit For Workers Not Economically Disadvantaged

SACRAMENTO, Calif.—An employee hired by an employer in a California enterprise zone does not have to be economically disadvantaged for the employer to be eligible for a hiring tax credit under the program, the State Board of Equalization said Aug. 14 in a case involving dressmaker Jessica McClintock (In re Jessica McClintock and Jessica McClintock Inc. , Nos. 304497 and 304512).

In reversing the Franchise Tax Board’s earlier determination, SBOE unanimously granted McClintock and the S Corporation Jessica McClintock Inc. $312,000 in tax credits for hiring 16 employees who were older workers, veterans, or high school dropouts in tax years 1998 through 2001. At issue in the case was FTB’s interpretation of eligibility for the credit, which is based on eligibility for the federal Job Training Partnership Act.

JTPA and its successor, the Workforce Investment Act, are programs intended for workers who are economically disadvantaged and face barriers to employment. When California first enacted its enterprise zone laws in the 1990s, it copied JTPA eligibility rules as eligibility rules for the hiring credit, which can be up to $30,000 per worker.

At an oral hearing before the board, FTB argued that the company was not eligible for the credits because the employees fell under an exception in JTPA that does not require up to 10 percent of enrollees in the federal program to be economically disadvantaged as long as they are in a group that faces barriers to employment. Those groups include the disabled, homeless, high school dropouts, those on welfare, and several others. Employees must be economically disadvantaged for the employer to be eligible for the credit, FTB Attorney Ann Hodges told the board.

Employee Must Be Enrolled in JTPA, FTB Said

Although in general employees need only be eligible for JTPA to make the employer eligible for the hiring tax credit, under this exception the worker must be enrolled as well in JTPA to make the employer eligible for the credit, she said.

Even if SBOE agreed that the employees at issue were eligible for JTPA by falling under the 10 percent exception, 10 of the workers were not subject to the credit because they were “older workers” more than 55 years old, a category that is not listed under JTPA, Hodges said.

FTB also said the company failed to provide documentation to show that five of the workers were high school dropouts. FTB said it was willing to allow the credit for the final worker, a veteran.

SBOE agreed with the taxpayer, which argued that the 10 percent exception under JTPA is an eligibility category for the program and therefore the hiring of the employees qualifies the company for the EZ credits. In addition, the taxpayer argued that the Department of Labor and state Employment Development Department, which both administered JTPA, as well as FTB’s own manuals and information, clearly state that older workers are in a group facing barriers to employment.

Marty Dakessian, an attorney in Glendale, Calif., representing the California Credits Group, a consulting firm that assisted McClintock and the company in filing amended tax returns through which they sought the EZ hiring credits, told the board that the list of types of workers facing barriers to employment under the statute is not exhaustive. EDD and DOL, in applications and forms for JTPA, have included older workers as a group eligible for the program, he said.

FTB Abandoned Its Position, Taxpayer Said

Jon Sperring of PricewaterhouseCoopers, also representing CCG and the taxpayer, said FTB’s position that the credit is not allowed for older workers abandons the agency’s long-standing position that being an older worker is a barrier to employment.

Sperring said CCG, based in Pasadena, is the largest tax credit consulting firm in the state. In another case before the board recently, CCG represented Deluxe Corp. and unsuccessfully argued that FTB does not have the authority to examine the documentation on which a voucher for the EZ hiring credit, issued by a local EZ authority, is based (243 DTR H-2, 12/19/06 ). Deluxe Corp. filed a lawsuit in state trial court in June challenging FTB’s ruling in that case (Deluxe Corp. v. California Franchise Tax Board, No. CGC 07-462305, first amended complaint for refund of taxes filed 6/27/07).

With little discussion, the five-member SBOE ruled in favor of McClintock for all 16 employees on a motion from Chair Betty Yee (D). Before the vote, members Bill Leonard (R) and Judy Chu (D) questioned FTB’s argument that older workers are not a category of workers eligible for the credit.

Leonard said he was surprised to hear FTB’s “late argument” about older workers, since other cases that have come to the board involving EZ hiring credits have focused solely on the issue of the level of documentation necessary to back up a credit. The categories of eligible workers have not been an issue before, he said.

SBOE will issue a written decision in the case shortly.

By Laura Mahoney

The time-line in the Dicon Fiberoptics v. FTB case so far has been:

3/13/2007: Case filed by Dicon against FTB in Los Angeles Superior Court
(The first EZ Policy Blog post was on 5/9/2007)
5/21/2007: FTB requests demurrer (in essence that the case be dismissed)
(The second EZ Policy Blog post was on 6/11/2007)
6/18/2007: Dicon filed their opposition to demurrer
7/12/2007: FTB filed their response to that opposition

No trial date has been set, but the Court has imposed deadlines of 11/30/2007 for written discovery and 1/31/2008 for depositions.

In its July 12, 2007 “Reply to Opposition to Demurrer,” the Attorney General’s Office of California argues on behalf of the FTB. Regarding Dicon’s assertion that “the statute does not permit the FTB to substitute its judgment for that of an agency expressly authorized to determine employee qualification,” they write:

Plaintiff also argues that the legislative purpose behind the Enterprise Zone Act was “to encourage areas through economic and regulatory incentives.” (Opposition 3:23-26.) But at best, the legislative intent was frustrated. As the Assembly Committee on Revenue and Taxation said in August 1995: “However, the EZ and PA programs appear ineffective at improving employment opportunities within their respective locales.” (Plaintiff RJN, Exhibit A, attachment 4 page 6 of 7).
. . .
Whatever the reason the Legislature had for enacting the Enterprise Zone credits those reasons fail in light of reality. In fact, these credits did not have anything to do with Plaintiff’s business decisions, rather they were simply after the fact attempts to years later lower their tax liability to the state.

Here we have an arm of the State Government, speaking on behalf of the Franchise Tax Board itself, making the statement that the Enterprise Zone program is an abject failure.

I think there are a few problems with the methodology used to reach this assertion:

1. The A.G. quotes a Committee Bill Analysis (for SB 1770, Alquist, 93-94 session) and states that it is a conclusion of the Assembly Committee itself. But Bill Analysis only represents the research and opinion of a Committee staff person and is a tool used by legislators to inform their vote. It is not a conclusive statement of the Committee.
2. The A.G. relies on a study referenced in that Bill Analysis that is over a decade old, that was written before significant legislative changes were subsequently made to the program, and that has been contradicted by multiple, subsequent academic studies.
3. [Oddly, the A.G.’s “Reply to Opposition to Demurrer” states that this was a statement of the Assembly Committee in August 1995, whereas their own “Request for Judicial Notice” document which contains the copy of the Bill Analysis shows that the document is dated August 15, 1994.]
4. The A.G.’s assertion that the Enterprise Zone program “did not have anything to do with [Dicon’s] business decisions,” seems extraordinary. How can they purport to know the motivations and intentions of individual business decisions? This criticism seems to be based on the fact that Dicon made its claim for tax credits after the qualified activity occurred: “In fact, Defendant, Dicon Fiberoptics, Inc. (”Dicon”) did not originally claim Enterprise Zone hiring credits. The claim was made in Dicon’s November, 2003 amended tax return over two tax years after the qualified individuals had been hired.” This is hardly enough evidence upon which to impugn Dicon’s intentions. (See also the explanation I wrote at the end of this post why it is normal to expect a delay in the claiming of the tax credits.) Furthermore, since a qualified employee can generate credits for five years of employment, why is activity two years after the hire date indicative of anything?

I had initially felt that the arguments the Attorney General’s Office made in its motion for demurrer were very compelling. In response, Dicon raised some valid concerns, but, in my lay opinion, did not fully counter the A.G.’s arguments. However, in this response it seems that the A.G. has crossed a line.

On June 12 the judge in Cyntron v. HCD denied Cyntron’s motion for preliminary injunction against the voucher regulations. The seven page document provides a point-by-point argument against virtually all of the positions Cyntron made in its complaint (which originally appeared in EZ Policy Blog back in February). Here is an example of how the judge responded:

Plaintiff identifies various inconsistencies in the second through the twelfth causes of action in the complaint. The Court has reviewed plaintiff’s claims with respect to each regulation and finds no direct conflict with section 22622.7. To the extent that a regulation appears inconsistent, defendant has provided a reasoned explanation. For example, plaintiff contends that a qualified employee under section 222622.7 [sic.] includes eligibility for the Federal Job Training Partnership (”JTPA”) Act or its successor, but that category of eligibility is deleted in regulation 8450.5. However, defendant explains that the JTPA was repealed in 1998, effective July 1, 2000. Thus the regulation focuses on its successor program, the WIA. Plaintiff’s further contention that the regulation unlawfully restricts eligibility to certain categories of WIA services also has a reasonable explanation. Under the WIA, a broader class of employees are eligible to receive services. The WIA categories targeted in the vouchering regulations are limited so as to be consistent with the categories of employees previously eligible under the JTPA.

In sum, plaintiff has not shown a probability that it will succeed in showing that the regulations are so inconsistent and contradictory to the legislative mandate that they must be struck down as invalid.

Plaintiff’s showing of irreparable harm is similarly weak. As the Court understands plaintiff’s argument, plaintiff believes it may not be able to obtain the necessary documentation to support the issuance of a voucher for an employee who would not qualify under the regulations as they now exist but who would qualify if the regulations are held to be invalid. To the extent that plaintiff believes a certain limitation on qualified employees is invalid, plaintiff is free to obtain documentation of the eligibility category that plaintiff believes should be included in the regulation while it maintains its challenge to that regulation….The remaining issues identified by plaintiff, e.g. that it will be required to invade an employee’s privacy rights to obtain the necessary documentation of eligibility, are not persuasive.

Of course, there is a simple response to the JTPA issue raised, which is that Cyntron wants to be able to retroactively voucher employees hired before July 1, 2000. Nevertheless, this seems to be a significant setback for Cyntron’s case.

There was a hearing scheduled for June 28, but that was later postponed until October 15.

Last month I reported on a new Enterprise Zone related lawsuit being brought in Superior Court, Dicon Foberoptics, Inc. v. Franchise Tax Board of the State of California. Here is the crux of Dicon’s complaint that I quoted last time:

Does the California Franchise Tax Board have unfettered authority to retroactively interpret and act upon a construction of the Revenue and Taxation Code that ignores express language concerning the requirements that a taxpayer must meet to receive available tax credits or refunds? Second, does the California Franchise Tax Board deprive a taxpayer of notice and procedural protections when its statutory interpretation creates additional administrative hurdles for taxpayers otherwise eligible to receive credits or refunds? And third, should the law permit the California Franchise Tax Board to deny taxpayers their credit or refunds, in some cases years after approval by an authorized administrative agency specifically tasked to review and certify eligibility for such benefits?

Within the last few weeks, the State has filed a demurrer with the court. Not being a lawyer, I had to look up demurrer. According to the Law.com dictionary, this means:

A written response to a complaint filed in a lawsuit which, in effect, pleads for dismissal on the point that even if the facts alleged in the complaint were true, there is no legal basis for a lawsuit.

Indeed, the Attorney General’s office filed a lengthy “Memorandum of Points and Authorities in Support of Demurrer to First-Amended Complaint for Refund of Amounts Paid.” This Memorandum is an elaborate argument for the FTB’s authority to examine enterprise zone voucher supporting documentation. While it cites the Deluxe case, in my opinion, this argument is even more comprehensive then the one offered there. The State argues that Dicon’s position is so unfounded that they are suggesting the whole thing be dismissed, in other words demurred.

Here are the five headlines for the arguments made to dismiss the case:

1. Overview of tax refund litigation shows that Dicon has not stated a cause of action.
2. The Board [FTB] has authority to demand documentation to administer and enforce the Revenue and Taxation Code and Dicon’s failure to allege that it provided the documents is fatal to its action.
3. Section 23622.7 Subdivision (c), does not limit the authority of the Board to demand substantiation of enterprise zone hiring credits.
4. Section 23622.7 Subdivision (c), does not grant exclusive authority to the agencies designated to review eligibility for enterprise zone hiring credits.
5. Dicon cannot estop or otherwise rely on third party’s determination that it owes no tax.

I’m pretty certain that if this case were offered on pay-per-view there would be some serious interest. Email me if you would like a copy of the complete court document.

It appears that the time-line for the continuation of the case will be as follows: Dicon’s opposition brief is due by 6/18/07, FTB’s reply to that brief is due 7/5/07, and there will be a hearing on the demurrer on 7/12/07.

Dicon Fiberoptics, Inc. has filed a suit in Los Angeles Superior Court against the Franchise Tax Board for denying their claim of Enterprise Zone tax credits. The complaint clearly states an intention to create a precedent setting case, “that could have a significant impact on thousands of taxpayer employers.”

In the complaint filed with the Court, Dicon’s attorneys raise three questions:

Does the California Franchise Tax Board have unfettered authority to retroactively interpret and act upon a construction of the Revenue and Taxation Code that ignores express language concerning the requirements that a taxpayer must meet to receive available tax credits or refunds? Second, does the California Franchise Tax Board deprive a taxpayer of notice and procedural protections when its statutory interpretation creates additional administrative hurdles for taxpayers otherwise eligible to receive credits or refunds? And third, should the law permit the California Franchise Tax Board to deny taxpayers their credit or refunds, in some cases years after approval by an authorized administrative agency specifically tasked to review and certify eligibility for such benefits?

This is essentially the same fundamental issue that has already been decided by the State Board of Equalization in the appeal of Deluxe Corporation. Deluxe Corp., in its BOE appeal, attempted to argue that the FTB had no statutory authority to examine supporting documentation “behind” approved employee vouchers. The BOE decided that the FTB does indeed have that authority. It now appears that Dicon is attempting to have the Courts override that BOE decision.

The Dicon complaint states that in January 2007 they did file an appeal of the FTB’s findings with the BOE, but that on March 1, 2007 that appeal was dismissed. When asked about the reason for the dismissal, the BOE supplied a copy of the dismissal letter which states, in full: “Dear Mr. Dakessian, On February 16, 2007, appellant [Dicon] requested that the above-named appeal for the year ended March 31, 2001 be dismissed. Therefore, the appeal is dismissed.”

The letter of dismissal is addressed to Mr. Marty Dakessian of Dakessian & Associates. Mr. Dakessian is the same attorney involved in the Deluxe appeal (see the case documents linked above). The court documents also connect Dicon to California Credits Group, LLC, who, according to a January 2006 Los Angeles Times article, was the same consulting firm responsible for Deluxe’s credit claims.

Dakessian and California Credits Group are also behind the current case Cyntron Payroll Solutions v. Department of Housing and Community Development in which they are claiming that the state agency improperly propagated vouchering regulations. (I wrote about that case here.)

In two places the Dicon complaint against FTB says, “On March 1, 2007, the SBE dismissed plaintiff’s appeal thereby giving rise to the instant action,” and in one place, “Moreover, plaintiff has exhausted all administrative remedies.” According to BOE Publication 81 it is a normal procedure for an appellant to request an appeal to be dismissed, however, sources at the BOE were not sure if such a dismissal represented an exhaustion of all administrative remedies that would allow a taxpayer to file an action against the FTB in Superior Court.

A complaint has been filed in the Superior Court of California seeking “declaratory and injunctive relief” against the State of California and the Housing and Community Development Department over the recent adoption of regulations related to the Enterprise Zone program. The complaint states, among other things that:

Since the beginning of its administration of this program, HCD has displayed a consistent and disturbing pattern of behavior with respect to (1) its treatment of California employers, the overwhelming majority of whom are small businesses - where such employers are considered enemies - not constituents, and (2) the law itself, which HCD deems a convenience that can be cited when supportive and disregard when not.

The suit is being brought by a California company, Cyntron Payroll Solutions, LLC, and is being represented by attorneys Brain C. Leighton and Marty Dakessian. The following are images of the first pages of the suit:
Click the pictures for larger images.

Marty Dakessian represented the Deluxe Corporation in its much publicized Enterprise Zone voucher related appeal to the Board of Equalization. In that case the BOE ruled against Mr. Dakessian’s assertion that the Franchise Tax Board has no legal authority to examine the supporting documentation “behind” a voucher.

This new case generally cites complaints against the procedure used to adopt the regulations (that 45 day public comment periods should have been offered rather than 15 day periods, for example) as well as several specific claims that provisions in the regulations contradict statute.

Who is Cyntron Payroll Solutions? HCD has noted that they never received any comments from Cyntron during any of the public comment periods. Cyntron’s website displays an address of 234 E. Colorado, Pasadena, CA. This is the same address as displayed on the contact page of Enterprise Zone consulting firm The California Credits Group, Inc. (CCG). A Los Angeles Times article published last year about the Deluxe case (Halper, Evan. “State Tax Break Benefits Companies, Not Workers.” Los Angeles Times. 31 Jan. 2006, Main News, Section A, pg. 1.) stated that CCG was the tax credit consulting firm that “secured the disputed tax breaks for Deluxe…” In addition, another website appears to link the two, CCG-Pay.com. Business license filings also list the same principal for each company.

The following links provide images of the web pages discussed: The Cyntron Payroll Solutions home page, Cyntron’s contact page, the CCG-Pay home page, the CCG-Pay contact page, and the CCG contact page.