Taxpayers can use enterprise zone tax credits to reduce the alternative minimum tax, the State Board of Equalization ruled by a 4-1 vote on the marquee case on the agenda at its February 25-26 meeting in Culver City.
While the issue was presented to the board in the Appeal of Nassco Holdings, Inc., the underlying fight was between the Franchise Tax Board and former Assembly Speaker Willie L. Brown Jr. In 1993, Speaker Brown introduced AB 57 to allow taxpayers to use enterprise zones below the AMT. Former Governor Pete Wilson signed the bill into law.
The Senate analysis of the bill said enterprise zone credits could be used to reduce the AMT, as did the legislative counsel.
Representing the taxpayer, Jon Sperring of PricewaterhouseCoopers said the FTB was denying the benefit to the very taxpayers the Legislature was trying to help. At issue were five years of disallowed credits totaling more than $2 million. Also making arguments on behalf of the taxpayer was Gail Morse.
FTB attorney William Gardner argued that the language of the statute did not allow the credits to be used to reduce the AMT.
Board Member Bill Leonard, who was a member of the Legislature when the legislation passed, said the bill was known as the "Taco Bell bill" and its purpose was to allow credits to offset the AMT. He urged the board to use legislative intent in deciding the case.
Voting to support the taxpayers' position were Dr. Judy Chu, Mr. Leonard, Michelle Steel and Marcy Jo Mandel, for Controller John Chiang. Board Member Betty Yee voted "no" on the issue.
The case is Appeal of Nassco Holdings, Inc., No. 317434.
Other developments:
FTB Admits Error, but Taxpayer Still Has to Pay Tax. Andrew Benjamin Aames sent a check to the Franchise Tax Board specifically to be used to pay a notice of proposed assessment. Instead of applying the check to extinguish the tax liability, the FTB sent the payment to Child Support Services to be applied against Mr. Aames' child support obligation. State law required the FTB to first apply payments received to offset tax liability.
FTB attorney Jozel Brunett admitted that the tax agency made a mistake, but said there is no remedy to abate the tax because the tax has not been paid. Mr. Leonard said the taxpayer paid his taxes, but other board members agreed that there is no remedy because the tax has not been paid, and they said Mr. Aames benefited by a payment for child support.
The case is the Appeal of Andrew Benjamin Aames, No. 414599.
Taxpayers Must Use Federal AGI to Determine Cap on State Charitable Contributions. In determining the cap on state charitable contributions, the board, on a 3-2 vote, ruled that taxpayers must use their federal adjusted gross income, despite the fact that federal AGI can be substantially higher or lower than state AGI.
At issue was the interpretation of Revenue and Taxation Code Section 17072(a), which reads: "Section 61 of the Internal Revenue Code, relating to gross income defined, shall apply, except as otherwise provided," as well as Section 17201, which has similar language, including the "except as otherwise provided."
The Franchise Tax Board ignored the "as otherwise provided" language and argued that the statute required the taxpayer to use federal AGI.
Ara Hovanesian, representing taxpayers Haik Arakelian and Alice Arakelian, argued that the language "except as otherwise provided" means that all the state adjustments to federal adjusted gross income must be used to determine state adjusted gross income.
In this case, the taxpayers had a positive state AGI, but a negative federal AGI. As a result, the taxpayers lost all their state itemized deductions.
Voting to sustain the FTB were Ms. Yee, Dr. Chu and Ms. Mandel for Controller Chiang. Opposing the FTB's determination were Mr. Leonard and Ms. Steel.
The case is the Appeal of Haik Arakelian and Alice Arakelian, Case No. 442173.
(Cal-Tax: Why are there lots of state adjustments to federal AGI in general for computing state AGI pursuant to the "except as otherwise provided" language in Section 17072(a), but no adjustments are allowed to Section 17201, which has the same "except as otherwise provided" language?)
Cal-Taxletter, February 27, 2009
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