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Dicon v. FTB Dismissed

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.)

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