EZ Policy Blog

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