Over the strong opposition of the California Taxpayers' Association and the Consumer Attorneys of California, the State Board of Equalization voted 3-2 on June 9 to sponsor legislation to prohibit awards of attorney fees under the private attorney general statute (Code of Civil Procedure Sec. 1021.5).
Awards can be made under this section only if the decision confers a significant benefit on the general public. The proposed legislation would limit the awarding of legal fees under the Revenue and Taxation Code for "special taxes" (taxes on cigarettes, gas, etc.) to $150 per hour, and would allow such awards only if the board's losing position is "not substantially justified."
The board's legal staff, sponsors of the legislation, had proposed to make the regulation retroactive and to set the attorney fees at $75 per hour. However, an amendment by Board Chair Betty Yee removed the retroactivity provision and increased the attorney fee compensation to $150 per hour. Board attorney Robert Lambert said, "If a reasonable decision is made and reasonable minds differ, I think the policy of both the federal and state government is not to permit the recovery of attorneys' fees."
Cal-Tax General Counsel Michele Pielsticker said current law provides protection for taxpayers against the board taking unconstitutional positions in tax cases. She added that taxpayers may not be able to challenge unconstitutional BOE actions without the award of fees under the private attorney general statute. Ms. Pielsticker also countered the staff's argument that this is conformity with sales tax provisions – in fact, provisions repealing awards under the private attorney general statute go way beyond conformity.
Lea Ann Tratten, representing the Consumer Attorneys of California, said that without Section 1021.5 awards, taxpayers will lose an avenue for justice. She added that this has not been a bonanza for attorneys, as there have been few Section 1021.5 awards to date.
BOE Member Bill Leonard spoke against the proposal, and called the staff's effort to make the bill retroactive "un-American."
Voting to support the legislative proposal were Ms. Yee, Dr. Judy Chu and Deputy State Controller Marcy Jo Mandel, representing Controller John Chiang. Mr. Leonard voted against supporting the proposal, as did BOE Member Michelle Steel.
Other BOE developments:
Unusual Closed Session Held. There was a very odd development during the board consideration of one agenda item during the June 9 meeting in Sacramento. The board abruptly recessed into closed session, although no closed session was indicated on the agenda for the item. There was no explanation why a closed session was invoked on a sales tax conflict-of-interest provision.
Here is the chronology of events:
· The board's agenda item M-1 was: "Procedures relating to Revenue and Taxation Code Section 7056. Discussion and possible board action and direction." There was no mention of closed session on this item, nor was there any explanation of the item. The online agenda did not include a link to click for back-up information (most of the other items had such links).
· Jean Ogrod, from the board's legal staff, presented the item. She explained the provisions of Section 7056, allowing local officials and their agents to access confidential BOE records. She particularly highlighted the conditions that non-local employees (their agents) must meet.
· One provision of Section 7056 prohibits agents of local governments from access to confidential records unless they are prohibited by their contract with a local government "from performing consulting services for a retailer during the term of the contract" (Section 7056 (b)(1)(c)). (Cal-Tax: This is a perfectly reasonable prohibition to prevent someone working for a retailer to snoop into the confidential records of other retailers.)
· Ms. Ogrod said, "The board is interested in hearing comments on (b)(1)(c)." Of particular focus was whether this prohibition applies in all instances. (Cal-Tax: It most certainly does.) Ms. Yee asked if anyone was present to comment, and nobody responded with comments. (Cal-Tax: This is not surprising, because no one knew in advance what was to be discussed.)
· Ms. Yee then said this relates to a matter that the board wants to discuss in executive session.
· The board then recessed on the spot for a closed session.
(Cal-Tax: It is difficult to understand why an issue relating to the conflict of interest of local agents examining confidential state records is an issue that is allowed to be discussed in closed session.)
No-Win Appeal Process for Taxpayers. Current law allows the board to seize cigarettes and other tobacco products that do not have the proper tobacco tax stamps. To protect due process, taxpayers have the right to appeal on the grounds that the products were seized in error.
However, in most instances, this is likely to be a no-win appeals process, because even if the taxpayer wins, they likely will get back a worthless product.
During the appeal of a seizure of tobacco products (Appeal of Liston B. Bevard), it was disclosed that the board seized cigars on November 13 from O'Sullivan Cigars in Walnut Creek. Mr. Leonard asked how the seized products were stored. Staff said they were stored in a warehouse in Sacramento County, and not in a humidor. While the taxpayer said the cigars could be restored, they would not be returned in the same condition as when seized, and some may be worthless. (Cal-Tax: Is a taxpayer really afforded "due process" if he wins an appeal and gets back a worthless product?)
Major Disruption Coming at BOE's Woeful Headquarters Building. During a discussion of the ongoing problems at the board's "white elephant" headquarters building, the Department of General Services said each floor of the building will be closed from 30 days to 60 days as the department does a floor-by-floor remediation. The fourth floor already has been evacuated, and employees stationed there have been moved to the 22nd floor (at least they get a better view for their troubles). Efforts will be made to have 400 to 500 employees relocated outside the building during the remediation period.
As of last Saturday, the elevators will be inoperable on weekends for four to five weeks, so workers can fix problems in the elevator shafts. Employees will have to use the freight elevator or stairs.
The board also heard a recap of a report by Steven Davis, of the consulting firm LaCroix Davis, on a building assessment done early this year. Upon questioning from Mr. Leonard, it was revealed that the investigators from LaCroix Davis did not have access to quite a few rooms that were locked, and they could not obtain keys to open the rooms. There was no explanation why. (Cal-Tax: Skeletons in the closets?)
Is FTB Formula for Determining Income When No Return Is Filed Still Valid? Taxpayers who have gross income below $25,145 (single) or $47,715 (joint) are not required to file income tax returns, according to the Franchise Tax Board's website. At issue in the appeal of Santa Cruz County resident David Smith was whether the formula used by the FTB to impute income to a taxpayer when no return was filed is reasonable in light of current economic conditions.
The FTB will assume that your income is four times your mortgage payment. Mr. Smith challenged this formula, saying it does not take into account current conditions – the collapse of the housing market, people losing jobs, people paying mortgage from savings, etc. He said he was paying his mortgage from the proceeds from a $200,000 equity loan. He said that in 2005, H&R Block said he didn't need to file, and he submitted a return signed by H&R Block that showed he was under the threshold, but he refused to formally file it, because he wanted to make the point that he was under the filing threshold. He added, "FTB's formula is simply a guess based on what banks did years ago." Finally, he revealed that his mortgage is in default and his home is scheduled for foreclosure, and said it is "preposterous to allow the FTB to call up a foreclosure victim who lost his job and say 'why didn't you file?'"
Jane Perez, an FTB attorney, said the 4-to-1 ratio represents an industry standard of the amount of income needed to qualify for a mortgage.
Mr. Leonard asked the FTB representatives if they have a document from the financial industry showing that in 2005, the 4-to-1 standard was reasonable. Ms. Perez said the agency has used the ratio for a number of years, and would get back to Mr. Leonard.
Ms. Mandel said she had talked to FTB about this issue and was told that they were looking into it. She added that she didn't know the result of that examination. The board ruled in favor of the FTB in this case.
Timber Harvest Values Approved. The board approved timber harvest values, to which the timber yield tax applies, for the last half of 2009. The values were recommended by board staff with concurrence from the Timber Advisory Committee. The tax on Christmas trees (bah, humbug!) under the timber yield tax will range from 1.8 cents to 4.5 cents per linear foot. The sales tax also will be applied to the price of the Christmas tree.
Cal-TaxReports, June 15, 2009
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