Consolidation: Tax Collection Agencies

• Cal-Tax Board of Directors Calls on Business Community to Support California Tax Commission
• Article by Board of Equalization Member Bill Leonard
• Joint Letter of Support for California Tax Commission Recommendation
• California Performance Review recommendation for a California Tax Commission

Caltaxletter, Commentaries, and Press Reports:

• Assembly Tax Policy: California Tax Commission Measure Advances as reported in Caltaxletter, May 13, 2005.
• Discussion of Tax Agency Consolidation and Simplified Sales Tax Highlight "Breakfast with the Board" as reported in Caltaxletter, April 8, 2005.
• Tax Agency Consolidation Discussion Highlights BOE Meeting as reported in Caltaxletter, April 1, 2005.
• Tax Administration: Legislative Efforts Surface to Create Tax Commission as reported in Caltaxletter, March 11, 2005.

History of Unfair Actions by Staff of Franchise Tax Board:

There are dozens of examples of problems resulting from tax agency fragmentation and lack of accountability. The following examples provide an idea of the unfairness and instability created by staff of the Franchise Tax Board:

• FTB Staff Delays Resolution of Tax Protest and Hits the Taxpayer for Interest for the Delay (2004)
  In the Appeal of Richard and Lori Randall, it was disclosed that FTB staff, after the taxpayers' oral protest hearing, delayed a decision for 18 months and is proposing charging interest for the delay. Jeanne Sibert, FTB staff attorney, said interest cannot be waived because the delay was caused by an FTB managerial decision, rather than an FTB ministerial decision. She said FTB management pulled staff from this case and assigned the auditor to another case, causing delay. Mr. Leonard, who was not impressed, said this had the same result as if management told staff to lose the file.
  
  He lost an effort (on a 2-3 vote) to waive interest for this 18-month period (Leonard and Parrish: yes, Mandel, Chiang, Yee: no).
  
  At issue in this case is whether the state could source all of a non-residents disqualified option gains to California. The case was put over so the taxpayer could provide more information on the time the taxpayer worked in California. (See Caltaxletter of December 17, 2004.)

• FTB Staff Denies a Bad Debt Deduction Allowed by the IRS (2004)
  In the Appeal of Paul and Peng Van Etten, it was disclosed that FTB staff disallowed a bad debt deduction allowed by the IRS. FTB counsel argued the taxpayer continued to collect the debt after taking the deduction. Ms. Mandel noted that IRS has ruled that efforts to continue to collect a bad debt are not fatal to bad debt deductions. The BOE voted to deny Mr. Van Etten's appeal. (See Caltaxletter of December 17, 2004.)

• Message to FTB Staff: Don't Ask for Rehearings on Small Amounts of Money (2004)
  In making a motion to deny a Franchise Tax Board staff petition for rehearing of the board's decision in the Appeal of Shirley I. Niles, Mr. Leonard said he wanted to send a message to the FTB staff. He said FTB staff should not ask for rehearings in cases involving small amounts of money. In the Niles case $137 was involved in the request for rehearing. Mr. Leonard said the costs to all parties to process the request is more than the amount at issue and it wastes BOE members' time. His motion was approved 5-0. (See Caltaxletter of December 17, 2004.)

• BOE Provides Relief from FTB Demand Penalty (2004)
  After hearing from Stanley A. Posey about the extraordinary circumstances causing his failure to respond to an FTB demand, the board voted 4-1 (Yee: no) to relieve Mr. Posey from the demand penalty imposed by FTB staff.
  
  According to Mr. Posey, there was "reasonable cause" for the failure. He said he married a Singapore resident and, just before the tax return was due, his wife was denied entrance to the United States because she tested positive for HIV. Mr. Posey said he immediately left for Singapore and didn't see any demand letter. After awhile, the situation was resolved when it was proved that the tests were wrong. He said he paid his taxes when he got back.
  
  FTB Counsel Suzanne Small argued this set of facts was not "reasonable cause" because Mr. Posey was often out of the country and he had attached a copy of the demand letter with his appeal, showing he got it. Mr. Posey said he attached a copy that he got later from the FTB for the appeal. (See Caltaxletter of December 17, 2004.)

• FTB Staff Administrative Decisions Rile Taxpayers (2004)
  Several recent Franchise Tax Board staff administrative actions have some taxpayers upset. According to reports reaching Caltaxletter, FTB staff adopted the following policies without taking the issue to the board itself: (See Caltaxletter of December 3, 2004.)
  • MIC Credit: Save Mart Decision. On audit, FTB staff is disallowing the manufacturers' investment tax credit to bakeries in grocery stores. The State Board of Equalization, in its 2002 Save Mart decision, ruled that a taxpayer could claim the MIC credit for equipment purchased for a bakery within a store. According to sources, FTB staff is denying the MIC to taxpayers in similar circumstances.
  • Enterprise Zone Hiring Credit. FTB staff is taking the position that it can question and invalidate hiring credit vouchers that taxpayers have received from the Department of Housing and Community Development to claim the enterprise zone hiring credit.
  • Enterprise Zone Sales Tax Credit. The FTB staff, in an apparent change in position, is allowing the enterprise zone sales tax credit for purchases of qualified property only to taxpayers that qualify for the MIC.
  • Farmer Bros. Decision. FTB staff is unwilling to sever the portion of the corporate dividend received deduction that the courts have held to be unconstitutional (see Farmer Bros. case) and allow taxpayers to continue to claim the deduction. The court has held that the dividend deduction, which is allowed only for dividends from income taxed in California, discriminates against interstate commerce. Taxpayers contend that there is statutory direction to the FTB to sever.
  • Amnesty Program. According to reports, FTB staff is telling taxpayers that "netting" will not be allowed in administering the interest and penalty provisions of the new tax amnesty program. In other words, if a taxpayer has an underpayment of $50,000 in one year and $100,000 overpayment in another, the two amounts cannot be "netted out" to prevent the amnesty program interest and penalties on the $50,000.

• Another Attempt to Narrow Definition of a Unitary Taxpayer (2004)
  Despite the 1990 FTB action and a number of court cases trashing the FTB staff position, staff in 2004 proposed a regulation to narrow the definition of strong centralized management for unitary purposes. Staff initially had intended to present the issue at the June 2004 board meeting, but it was taken off calendar at the last minute. Business continues to strongly oppose such changes, and court decisions are very clear on the issue. (See Caltaxletter of June 11, 2004.)

• Tried to Keep Taxpayer from Getting a Refund Although it Agreed No Tax was Ever Owed (2003)
  Although admitting no tax was ever owed, the FTB staff went to great lengths to deny a taxpayer a refund, an action overturned by the First District Court of Appeal on July 22, 2003.
  
  In 1995, FTB staff informed the J.H. McKnight Ranch (a Butte County rice farm) that it owed $97,000. FTB staff offered to deny the ranch's refund claim summarily so the dispute could go to court. According to the court, "The board now concedes that under the contested liability doctrine, no tax was ever owed. It nevertheless suggests that because of its summary denial of McKnight's refund claim, McKnight failed to exhaust its administrative remedies and the board should be allowed to retain that excess tax." The court said, "Equity does not allow such a result."
  
  The FTB lost this case at the superior court level and, in its zeal to keep taxes that were not owed, appealed the decision to the court of appeals. (See Caltaxletter, July 25, 2003.)

• State Auditor: FTB Staff Not Measuring Cost-Benefit of New Auditors Correctly (2003, 2004)
  In a May 13, 2003 report, State Auditor Elaine Howle questioned the cost-benefit of new auditors hired by FTB staff. She said FTB staff does not try to measure the marginal cost and benefit of new auditors. Rather than use an incremental approach of the revenue generated by each auditor, the staff justifies a new auditor's position by averaging the total audit assessments (See Caltaxletter of May 16, 2003). In a February 2004 follow-up report, the Auditor states that FTB staff has delayed making any changes that will show the marginal costs of new auditors. (See Caltaxletter of March 19, 2004.)

• Court Thwarts FTB Staff Attempt to Make Confidential Tax Returns Public (2002)
  An FTB staff attempt to make confidential tax returns public was quashed by the Sacramento County Superior Court in late 2002. The court said that the preservation of confidentiality constitutes an overriding interest that overcomes the right of public access. Cal-Tax General Counsel Greg Turner said the decision protects taxpayers against FTB staff efforts to threaten taxpayers with disclosure of confidential information to induce taxpayers to drop legal challenges against FTB assessments. (See Caltaxletter of December 20, 2002.)

• Devised a Costly E-Filing Program Few Taxpayers Use (2002, 2003)
  Over the strong objections of the business community, FTB staff pushed for authority to design an e-filing portal where taxpayers could file on-line with the FTB doing the math. Staff spent considerable sums of money on this project despite the fact that the service was being provided free by private enterprise to the same select group of taxpayers. The board adopted such a program in October 2002. By April 15, 2003, only about 12,000 taxpayers used the FTB's portal, at a cost to the state of $22 per return. (See Caltaxletters of October 11, 2002 and May 2, 2003.)

• Staff Refuses to let Business-Proposed Ceridian Regulation Go to Board (2002)
  Under current law, taxpayers have the right to propose regulations under the Administrative Procedures Act. FTB staff acted to prevent one such regulation from going to the board. The regulation proposed to clarify the Ceridian decision's impact on the deduction of dividends received from insurance company subsidiaries. Staff rejected the proposal and did not bring it to the board. The staff view was upheld by Sacramento County Superior Court Judge Ron Robie, although he said he was a little startled by how much discretion FTB staff has. (See Caltaxletter of December 21, 2001.)

• Held Ceridian Decision Voided Insurance Dividend Deduction (2001-04)
  FTB staff took the position that the Ceridian decision, that held that the deduction for dividends paid by insurance affiliates domiciled in California to their parent companies was unconstitutional, voided the entire statute. The business community argued that provisions that were unconstitutional could be reversed and the exemption could still stand. Cal-Tax called the staff position a retroactive tax increase on California taxpayers.
  
  The issue was finally resolved by legislation in 2004 (AB 263, Oropeza) that allows an 80 percent deduction for 1998 through 2003 dividends and an 85 percent deduction for subsequent years. (See Caltaxletter of May 4, 2001 and October 1, 2004.)

• Undermined Protest Regulation (2000-01)
  The Franchise Tax Board in March 2000 approved a 24-month limit on protest proceedings, responding to a call from Dean Andal, Board of Equalization chair and FTB member, for reforms that could result in $1.3 billion in additional revenues for the state (Caltaxletter, April 10, 2000). Some taxpayers had complained that they had been held by staff in protest limbo for up to 10 years and have been unable to pursue their appeals to the BOE. Others said the FTB staff works the protest process to punish taxpayers who challenge FTB audits by saying if you protest, you get reaudited. However, FTB staff continued to resist the changes (Caltaxletter, May 15, 2000). The Davis Administration killed the regulations. (Caltaxletter, March 12, 2001.)

• Staff Regulatory Plans for 2000 and 2001 are a Bust (2000)
  At the Franchise Tax Board meeting of December 18, 2002, it was disclosed that of 13 regulations in the staff's 2000 work plan, only nine had been completed and OAL had rejected seven. In addition, of the 12 regulations in the 2000 plan that were to be completed in 2001 all were abandoned by December, 2000.
  
  As a result, the board rejected the staff's regulatory work plan for 2001 and 2002. (See Caltaxletter of January 15, 2001.)

• CFO Magazine Criticizes Tax Administration (1996, 2000)
  California's tax agencies, mainly because of audit aggressiveness, received the least-friendly-to-business rating among all states in 1996 and 2000, according to CFO magazine surveys of business tax executives. (See California Tax Machine, page 291, Caltaxletter, September 18, 2000.) FTB unitary audits are "very intrusive and go on forever," said an Ernst & Young LLP official.

• Sought Unfair Telecom Regulation (1997-98)
  FTB staff advocated through a proposed regulation (25137-13) that an alternative apportionment formula be adopted for telecommunication corporations. The business community voiced strong objections to the regulation, arguing telecom companies should be treated the same as other companies. On February 4, 1998, the board voted the staff proposal down and told the staff not to even think about reviving it. (See Caltaxletter of February 9, 1998 and California Tax Machine, page 293.)

• Proposed Regulation to Deviate from Formula Apportionment by Excluding from Sales Factor Net Gains from Intangible Sales (1997-98)
  FTB staff promoted a regulation to exclude from the sales factor for formula apportionment the net gains from the sales of intangibles, except those relating to a company's treasury function. Business opposed the regulation because it was a fundamental deviation from the formula apportionment system and violated state statutes. The board directed the staff at an August 6, 1998 meeting to drop the proposal. (See Caltaxletter of August 17, 1998 and California Tax Machine, page 293.)

• Claimed Right to Commit Illegal Acts in Residency Audit (Hyatt case) (1996-2003)
  In a huge legal defeat for the California FTB, a unanimous U.S. Supreme Court ruled that the income tax collection agency can be sued in other states for alleged intentional abusive audit tactics. FTB staff had argued that it was immune from Nevada laws in the commission of alleged intentional torts against a former California resident (Caltaxletter, April 25, 2003). In a residency audit of inventor Gil Hyatt, a number of examples were given to the court alleging harassment of the taxpayer.

• Tried to Impose MTC's Nexus Regulations (1996)
  The high-tech industry objected to the FTB staff-initiated adoption in 1995 of Multistate Tax Commission Bulletin 95-1 as guidelines for nexus (Caltaxletter, February 5, 1996). The state's tax regulatory agencies, with little discussion or opportunity for public comment, had endorsed the staff-supported bulletin. The document said nexus was created when an out-of-state company signed an agreement with an in-state company for warranty repairs. In September of 1996, FTB rescinded the adoption. (See California Tax Machine, pages 301-302.)

• Proposed Manufacturing Credit Regulations Inconsistent with Statute (1994-96)
  Despite business community arguments that it was a more limited definition than in existing law, the FTB staff proposed regulations limiting capitalized labor costs to only those that qualified as direct costs in claiming manufacturers' investment tax credits and tried to narrow the credit substantially. In 1994, a clean-up bill (SB 676, Alquist) had to be passed to narrow the issues in dispute. Other remaining issues were settled when the board adopted regulations in 1996. (See California Tax Machine, pages 265-266.)

• Opposed Dynamic Revenue Estimating (1994-95)
  After fighting what they believed were flawed estimates by FTB staff on the revenue estimates of the manufacturers' investment credit, the business community in 1994 launched an effort to force state agencies to use a dynamic forecasting model. FTB staff tried to erect road blocks to prevent dynamic forecasting. In a 1994 report, FTB staff cited four problems it said are "significant impediments to accurately estimating feedback effects." Fortunately, Senator Tom Campbell did not take no for an answer. His SB 1837 was approved, and Cal-Tax said it was "a major breakthrough in improving fiscal management."

• Imposed Massive Record-Keeping Regulation on Business (1994-95)
  FTB staff in 1994 sought to impose massive record-keeping requirements on California business. A broad coalition of business voiced opposition to the overly-burdensome and vague recording-keeping requirements. On October 30, 1995, the board, over the objections of the business community, adopted the regulation that was only slightly better than the staff version. The regulation requires taxpayers not only to keep, but to translate, a very broad category of documents. (See Caltaxletters of October 17, 1994 and November 13, 1995.)

• Sought to Tax Credit Unions Contrary to Legislative Intent (1994)
  FTB staff, despite legislation to the contrary, sought to impose a tax on transactions between member credit unions. In a letter in the August 19, 1994 Assembly Journal, Assembly Leader Tom Hannigan, Republican Assembly Leader Jim Brulte, Revenue and Taxation Committee Chair Johan Klehs and Vice Chair Charles Quackenbush chastised FTB staff for seeking to tax state-chartered credit unions contrary to legislative intent. (See Caltaxletter of August 29, 1994.)

• Gave Technical Support to Proposition 167 Split Roll Effort (1992)
  The FTB gave staff authority to spend unprecedented extra time to help prepare a split-roll proposal by Senate President Pro Tem David Roberti that qualified for the November 1992 ballot as Proposition 167. Board policy was to limit board staff to 16 hours on an initiative, but Roberti aide J. Fred Silva said 30 to 40 hours would be needed (Caltaxletter, January 20, 1992). This extraordinary FTB staff review enabled the proponents to get the $5 billion tax-hike initiative into eleventh-hour circulation and barely qualify for the November 1992 ballot, where it was soundly rejected by voters. It was disclosed that FTB staff, at the request of an initiative sponsor, rewrote a legal memo describing a provision of the measure. An earlier FTB memo was being used in the Cal-Tax argument against the initiative. (Caltaxletter, March 23, 1992, March 30, 1992, and April 6, 1992.)

• Aggressively Pursued Taxing Non-Residents with California Pension Income Until Stopped by Congress (1991-96)
  By 1991, FTB staff had developed and aggressively pursued the theory that a "source tax" should be applied to non-resident former government employees getting a California pension.
  
  Congress stepped in and prohibited the practice and President Bill Clinton signed HR 394 in 1996. FTB staffers said they were "disappointed." (See California Tax Machine, pages 305-306.)

• Instituted Independent Contractor Withholding (1991-92)
  Taxpayers urged the FTB to end the independent contractor withholding program for out-of-state taxpayers that had been instituted by administrative actions in 1991. After taxpayers and the Legislature had agreed to a compromise removing independent contractor withholding from the 1991 tax bill, FTB staff ignored Legislative intent and imposed withholding for out-of-state independent contractors. The board took no action. (Caltaxletter, December 14, 1992.)
  
  As this provided a disincentive for corporate directors to come to California for their annual meetings, the Legislature passed SB 298 (Campbell) in 1995 to stop the withholding in such cases. (See California Tax Machine, page 299.)

• Tried to Tax Non-Resident Military (1991-92)
  In December 1991, the staff issued guidelines for when military personnel become residents of California and subject to tax. Among other criteria, FTB staff said if they get a driver's license or register a car in California, they would be subject to state tax. U.S. Department of Defense officials said the action was contrary to federal law. At a March 10, 1992 meeting, the board turned down staff request to prepare a regulation on military residency and told the staff to follow existing guidelines. (See Caltaxletter of March 16, 1992; also San Diego Union story on February 14, 1992.)

• Ruled Contributions in Aid of Construction Taxable Retroactively (1991)
  When the 1987 major conformity bill was passed, FTB staff published statements that contributions in aid of construction received by regulated public utilities would continue to be excluded from California tax. In 1991, the staff, despite its own Legal Ruling 362, said such contributions would be subject to tax retroactive to 1977. (See FTB Notice 91-2.) The Legislature rejected this new theory by approving AB 1757 (Klehs), signed by the governor as Chapter 604. (See Caltaxletter of June 3, August 26, and October 21.)

• Adopted Regulations without Bringing Them to the Board (1990)
  In 1987, 1988 and 1989, FTB staff adopted 11 of 24 regulations without bringing them to the board. The board on May 8, 1990 instructed staff to bring any regulation to the board, if a taxpayer so requested. This policy was codified by SB 1898 (Garamendi) of 1990, which was introduced at the request of Cal-Tax. (See Caltaxletter of May 14, 1990 and California Tax Machine, page 235.)

• Tried to Restrict Taxpayers from Using Accounting Methods Different than Federal (1990-91)
  FTB staff in 1990 started prohibiting taxpayers from making changes in accounting methods that are different from the taxpayer's federal methods. FTB staff attorney Bruce Langston said that in 1990 staff began denying accounting changes unless the same change was approved by IRS. He also said "that with most audit programs, no public announcement was made that the FTB would begin this program." Taxpayers called the action "unwarranted" and said the action would have prevented taxpayers from using the R&D Credit more fully. The board reversed the staff action at a January 1991 board meeting. (See Caltaxletter of January 20, 1991.)
  
  This issue was fought out again in the Legislature in 2002 as SB 656 (Scott) and AB 1122 (Corbett) tried to require taxpayers to make the same state elections as federal. Taxpayers strongly opposed these efforts. By April, the effort was dropped. (See Caltaxletter of April 19, 2002.)

• Tried to Narrowly Interpret Taxpayer's Bill of Rights (1989)
  An FTB staff attempt to narrow the interpretation of the newly enacted taxpayer's bill of rights was rejected by the board. BOE Chair Conway Collis had criticized the staff proposal, and the board said taxpayers receiving "opinion letters" as well as chief counsel letters qualify as advice relieving taxpayers of additional taxes, penalties and interest. The board also deleted a staff attempt to require taxpayers to furnish a legal analysis and conclusion for advice. (See Caltaxletter of April 3, 1989.)

• Screwed Up Initial Administration of Water's Edge Election (1988-1993)
  The Franchise Tax Board staff's administration of the water's edge election provisions (as an alternative to unitary worldwide combined reporting) for the 1988 income year was severely criticized by board members at their December 16, 1992 meeting. After hearing how the staff has made mistakes in implementing the law and then setting up a mitigation program that excluded specified taxpayers, Controller Gray Davis said, "I have a quarrel with your attitude. It gives the state a terrible name when you use technical reasons to deny some taxpayers the same benefit allowed others. You don't have a credible position."
  
  Later he added, "If you keep acting like this, you'll have no taxes to collect," referencing the fact that California has a reputation of having a bad business climate.
  
  What happened is this: For the 1988 income year, the first year the election was available, there were errors in the FTB's forms and instruction booklets, according to FTB attorney George McLaughlin. As a result, of 3,000 taxpayers who checked the box signifying they were making a water's edge election, only 800 filed all the additional paperwork necessary to qualify. To rectify the problem, FTB staff, without consulting the board, decided to allow a grace period permitting taxpayers to perfect their 1988 water's edge election. However, staff denied a handful of taxpayers, who signified their intent to make a 1988 water's edge election, the opportunity to correct their errors in filing. These were taxpayers who happened to file for the 1988 election on a 1989 form, which had been corrected, rather than on the 1988 form. (See Caltaxletter of December 27, 1993.)

• Tried to Undermine Water's Edge Election (1987-1990)
  At the urging of the country's trading partners, California accepted the international standard for sourcing incomes by adopting a water's edge election, allowing taxpayers to apportion, for California tax purposes, only income earned in the USA. FTB staff tried to undermine the water's edge election in several ways form 1987 through 1990. For most of 1988, FTB staff and the business community battled over regulations to implement the change. FTB said its job was to construe the bill narrowly. Some of the more onerous FTB staff positions were rejected in a 1988 clean-up bill and by rejection by the board in 1988. Another FTB staff interpretation in 1989 nearly undermined the viability of making water's edge elections for many taxpayers. FTB staff said that if an audit results in a non-electing taxpayer being combined with a water's edge group, the election is void. This view was reversed by legislation enacted in 1989 (SB 647, Dennis Brown).
  
  FTB staff counter-attacked in 1990 by amending into SB 2177 (Alquist) provisions voiding a water's edge election if a taxpayer did not include within the unitary group certain non-electing affiliates that, on audit, were determined to be part of the unitary group. Cal-Tax pointed out that this action undermined the provisions of AB 647. The proposal was deleted from the bill. The FTB staff then proposed severe penalties when a non-electing affiliate, not a part of the unitary group, was found by FTB staff to be "unitary" on audit. This too was deleted after protests. (See California Tax Machine, pages 218-219.)

• Tried to Impose Preference Tax on Certain Small Business Stock Capital Gains (1986-1994)
  FTB staff unsuccessfully attempted to impose a preference tax on gains from the sales prior to September 16, 1981 of qualified small business stock. In 1986, the BOE clearly rejected the FTB position that only stock acquired after September 16, 1981 qualified for a legislative exemption. (See Appeal of Magnus F. and Denise Hagen.) The BOE reaffirmed this decision in April of 1993, in the Appeal of Brian and Phyllis Harvey. Despite the Hagen decision, FTB staff continued to deny the exemption for pre-September 16, 1981 stock for eight more years. Finally on December 28, 1994 the California Supreme Court, in Lennane v. Franchise Tax Board, told FTB to stop and ruled against its position. (See Caltaxletters of March 4, 1992 and January 9, 1995.)

• Bankruptcy Court Finds FTB "Willfully Violated" Automatic Stay (1986-1994)
  The U.S. Bankruptcy Appellate Panel of the Ninth Circuit on December 9, 1994 held in the case of Franchise Tax Board v. Charles and Evelyn Roberts that FTB staff "willfully violated" an automatic stay of collection activities when a bankruptcy petition was filed by the taxpayers.
  
  According to the court, the FTB improperly 1) offset the debtors' tax refund; 2) instituted a third garnishment; 3) sent the debtors a final notice before levy, and 4) during the pendency of the debtors' contempt motion, paid over sums due the debtors to the IRS. (See Franchise Tax Board v. Charles V. Roberts and Evelyn J. Roberts, 1994.)

• Tried to Impose Limits on Unitary Combination (Diverse Business Regulations) (1986-1990)
  From 1986 to 1990, Franchise Tax Board staff fought a quixotic battle with the business community (most major unitary corporations) in an attempt to exclude from a unitary combined report affiliates that were part of the unitary group based on the strong centralized management criterion. The FTB staff position was advanced in proposed regulations known as the "Diverse Business Regulations." The effect of the FTB staff position would have been to deny affected taxpayers the opportunity to deduct the losses of diverse business affiliates from the profits of another affiliate, among other things. The cost of the battle to the corporate community was substantial in terms of time and money. Finally in 1990, the three-member board declined to adopt the staff proposal, and the BOE adopted a resolution saying that it would include diverse business in the unitary group when hearing taxpayer appeals of FTB actions.
  
  Finally, beginning with Mole-Richard Company v. FTB, the California appellate courts handed down a number of decisions that totally rejected the FTB staff position. (See California Tax Machine, pages 232-235 for a more complete account of this epic struggle.)

• Imposed a Worldwide Combination Apportionment Scheme Without Public Notice (1966-1986)
  Sometime in the late 1960's FTB staff decided to impose a "worldwide combination" apportionment scheme without going through the regulatory process, without getting board approval and without informing taxpayers. This action caused consternation among businesses throughout the world, hurt California's business climate (as foreign companies avoided California investments) and caused years of legislative debate. Finally in 1986, the Legislature pulled the plug on this apportionment scheme by allowing taxpayers to elect a "water's edge" apportionment (SB 85, Alquist). Lingering problems over it's administration were resolved in SB 671 (Alquist) in 1993.
  
  FTB staff still considers the "water's edge election" a tax expenditure and reported it as such in a 2003 report. (See California Tax Machine, pages 372-417, and Franchise Tax Board Report, "California Income Tax Expenditures, September 2003, pages 21-23.)

Go Back to Library Main Page

© 2007 California Taxpayers' Association. All Rights Reserved.
For more information about Cal-Tax or this website, send a message to Karl Hirai.

Home | Members | Current Taxpayer Issues | Publications | About Cal-Tax