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For the first time in 50 years, the California Supreme Court is revisiting the issue of the proper application of the property tax to intangible assets. In Elk Hills Power, LLC v. California State Board of Equalization, Case No. S194121, the court will address whether the California State Board of Equalization (the Board) may assess Elk Hills’ intangible Emission Reduction Credits (ERCs). In Elk Hills, the Board treated the ERCs as “necessary” to put a power plant to “beneficial or productive use” and thus taxable for property tax purposes. Because many businesses use intangible assets that are “necessary” to the conduct of their businesses (e.g., trademarks, trade names, franchises, licenses, customer relationships, patents, and copyrights), the case has attracted attention across a broad spectrum of the California business community.Continue Reading California Supreme Court Considers Case to Allow Property Tax on Intangible Assets

The California Supreme Court reversed the appellate court’s decision regarding the Franchise Tax Board’s (FTB) authority to conduct an audit to determine whether a taxpayer is entitled to an enterprise zone hiring credit. DiCon Fiberoptics, Inc. v. Franchise Tax Bd., Case No. S173860 (Apr. 26, 2012).

California’s Enterprise Zone Act (the Act) permits a taxpayer that employs a “qualified employee” in an enterprise zone to claim a tax credit for five years. To be a “qualified employee,” at least 90% of the employee’s services must “directly relate[ ] to the conduct of the taxpayer’s trade or business located in an enterprise zone,” and the employee must perform at least 50% of his or her services in the enterprise zone. Cal. Rev. & Tax. Code § 23622.7(b)(4)(A). In addition, the employee must fall within one of several categories that demonstrate the employee is disadvantaged or endures some form of employment barrier. Cal. Rev. & Tax. Code § 23622.7(b)(4)(A)(iv). To claim the credit, taxpayers are required under the Act to: (1) obtain from the local zone government authority a certification (or “voucher”) that provides the qualified employee meets the eligibility requirements; and (2) retain a copy of the certification and provide it upon request to the FTB. Cal. Rev. & Tax. Code § 23622.7(c).Continue Reading Franchise Tax Board’s Broad Audit Authority to Review Returns and Ascertain Correct Amount of Tax Underscored in Enterprise Zone Hiring Credit Decision by California Supreme Court

In a reminder that there are limits on the retroactive application of tax laws, a California Superior Court rejected the Franchise Tax Board’s attempt to impose retroactive penalties on a tax shelter promoter. Quellos Fin. Advisors, LLC v. Franchise Tax Bd., Case No. CGC-09-487540 (San Francisco Super. Ct., Tentative Statement of Decision, Oct. 31, 2011).

Quellos was promoting the allegedly abusive tax shelter in 2001. California law tied the amount of the applicable penalty to that in I.R.C. § 6700, which established a maximum penalty of $1,000. Cal. Rev. & Tax Cd. § 19177. In 2003, California amended section 19177 to substantially increase the promoter penalty from $1,000 to 50% of the income derived by the promoter from the tax shelter promotion activity. The FTB assessed the 50% promoter penalty against Quellos in November 2009 for its promotion activities alleged to have occurred in 2001. Quellos argued that the pre-2003 law imposed a maximum penalty of $1,000 and the 2003 amendment could not be applied retroactively to Quellos’s 2001 activities.Continue Reading Promoter Finds Shelter in California Court: Court Rejects FTB’s Retroactive Imposition of Tax Shelter Promoter Penalty

Maryland is known for crabcakes, a beautiful capital city, a mediocre baseball team, a great law school (Jeff Friedman snuck this edit in), and, now, unconstitutional tax laws. A taxpayer won a constitutional challenge to the Maryland personal income tax, which prohibited a credit against the local income tax for taxes paid to other jurisdictions. Brian Wynne v. Md. State Comptroller, Case No. 13-C-10-80987 (June 20, 2011).

Maryland, like most states, permits resident taxpayers a credit for taxes paid to other jurisdictions to offset the state’s personal income tax. Md. Code Ann. § 10-703(a). The Maryland statute, however, only provided a credit against the state income tax and did not provide a credit against county income taxes. The Howard County Circuit Court, reversing the Maryland Tax Court, held that a Maryland statute violated the Commerce Clause because it did not permit the taxpayer to take a credit against the Baltimore portion of the personal income tax for taxes paid to other jurisdictions.Continue Reading A Wynne-Win Situation in Maryland

Recipients of qualified empire zone enterprise (QEZE) tax benefits beware: New York is reviewing your qualifications to receive a QEZE credit. On April 28, 2011, an administrative law judge upheld the Department of Taxation and Finance (Department) denial of the taxpayer’s QEZE credit claims because the taxpayer did not establish the credit for a valid business purpose. In the Matter of the Petition of Ward Lumber Co., Inc., Dkt. Nos. 823209, 823163 (N.Y. Div. Tax App. Apr. 28, 2011).

The taxpayer, Ward Lumber Co., was incurring substantial losses and appeared destined for bankruptcy. In an effort to prevent Ward Lumber, one of Essex County’s largest employers and businesses, from going under, several local officials recommended that Ward Lumber pursue QEZE credits to ease its financial difficulties. One state official told Ward Lumber that it would have to form a new entity to qualify for the QEZE program. Ward Lumber merged with a Delaware corporation in 2001, kept the original business’s name, and qualified for and received QEZE benefits for 2002 through 2004.Continue Reading New York Giveth, Taketh Away

Proposing to significantly overhaul Georgia’s tax code, including an interesting attempt to eliminate sales tax exemptions for “Holy Bibles” and Girl Scout Cookies, H.B. 385 was introduced on February 24. The 127-page bill is intended to be revenue neutral and largely mirrors the recommendations of the Special Council on Tax Reform and Fairness for Georgians (the Council) (see Sutherland Legal Alert, January 10, 2011 for detailed coverage of the Council’s report). H.B. 385 would eliminate most sales tax exemptions and subject certain services to tax, reduce or eliminate most income tax credits and personal deductions, phase in lower personal and corporate income tax rates, and implement a communications services tax. The bill, introduced by the Special Joint Committee on Georgia Revenue Structure (the Committee), is expected to be amended while still in Committee, but will then require an up or down vote when introduced to both houses of the Legislature.Continue Reading Get Out Your Dustpan: Georgia Bill Proposes Sweeping Tax Reform