David R. Doerr, principal contributor
Ronald W. Roach, editor
Governor Pete Wilson last week signed legislation (SB 38, Lockyer, et.al.) that delivers a package of targeted tax cuts, including an increase in the tax credit for research and development.
The governor signed the bill before traveling to the Silicon Valley last Thursday where he touted the measure's virtues in remarks at the offices of Apple Computers. He called it "a wise investment for California's continued economic well-being."
The governor added, "In order to keep the 'California Comeback' moving forward, we must continue to make our business climate attractive for businesses looking to expand and develop new products. SB 38, the Legislature's package of more than two dozen various tax cuts and tax incentives for California's businesses and entrepreneurs, is another step in the right direction."
Senate President Pro Tem Bill Lockyer was chair of the Senate-Assembly conference committee that produced the compromise measure in negotiations with Assembly Speaker Curt Pringle, a co-author, along with other legislative leaders and Governor Wilson.
In Sacramento, Mr. Lockyer's office issued this statement: "The state's coffers have benefitted from California's economic recovery. The taxpayers are entitled to a share of this new revenue. These intelligent, carefully designed changes have been crafted with specific consequences in mind. They will spur economic growth, provide relief to taxpayers, and won't harm schools."
While the bill's 25 elements combine to provide about $279 million worth of relief during the first three years, the bill has 11 provisions, generally conforming with federal law, which raise $202 million over the same period. (See September 2 Caltaxletter for details.)
The R&D credit will increase from 8 percent to 11 percent and the university-based credit will jump from 12 percent to 24 percent, accounting for $55 million of the tax cuts.
The largest revenue-raiser -- $75 million over three years -- eliminates the deductibility of short-haul moving expenses.
Senate Bill 38 is the second major tax relief bill of the year. Earlier, the governor signed AB 3499 (Pringle, et.al.), which reduced the bank and corporation tax rate from 9.3 percent to 8.84 percent. This is worth about $300 million a year to taxpayers when fully effective. (See Caltaxletter of July 15.)
The governor said SB 38 "builds on the tax incentives to promote investment that we passed in 1993 and the additional 5 percent cut in California's bank and corporation tax rate that we passed earlier this year."
Meanwhile, the governor has signed these tax-related bills:
The State Board of Equalization last Wednesday postponed action on proposed amendments to Sales and Use Tax Regulation 1705 to grant taxpayers relief from liability when actions causing liability result from erroneous board advice.
This regulation enables the board to interpret and implement Revenue and Taxation Code Section 6596.
Cal-Tax and several representatives of the electronics industry proposed changes to the drafted regulations which would grant relief from liability for the payment of sales and use taxes, including any penalties and interest added to those taxes. This relief would occur when liability resulted from the failure to make a timely return or a payment and such failure was found by the board to be due to reasonable reliance on erroneous written advice from the board in response to a written inquiry or on erroneous audit advice.
Gerald M. Bonetto, director of government affairs for the Printing Industries of California, sought changes to make more certain that reliance on audit report comments and notations would constitute advice subject to relief.
Robert Strom, chair of the American Electronics Association's Tax Committee, testified that the proposed language was too vague. Instead of the term "may" (constitute discussion of an issue), he urged adoption of the term "will generally" (constitute such a discussion). Supporting Mr. Strom's position were representatives of Sun Microsystems, Advanced Micro Devices, and Tandem Computers Incorporated. Tandem's Keith G. Simeral said audits are reviewed by management and the term "may" is not strong enough.
Vance Hansen, representing Cal-Tax, testified in support of the concept of relief when a taxpayer relies on written advice and also recommended expanding eligibility for relief to include documented audit comments.
Rex Halverson, representing Controller Kathleen Connell on the board, suggested that the item be postponed until October's meeting to allow for review of proposed changes. Member Brad Sherman asked staff to review the language with respect to erroneous written advice to indicate relief for other items outside of an audit. He specified the possibility of erroneous information in board forms and publications.
Other board business:
A 3-2 vote last Wednesday approved the amendments -- with members Ernest Dronenburg and Mr. Sherman dissenting. Included in the exemption are transfers of preliminary art. Persons providing such services are considered consumers of any tangible personal property used in the process. Certain subsequent transfers and uses of such art are, however, subject to tax.
Fielding Lane, attorney for the mining industry, said there could be other issues needing modification when the final version is drafted. Mr. Andal responded that there would be a future public hearing before the final version is adopted.
Dan Forbush, representing the mining industry, proposed that leach pads and settling ponds be treated as "fixtures." BOE staff objected, stating that removal after completion of the mining operation would not damage the land. Mr. Forbush replied that leach pads and settling ponds cannot by law be removed. Sierra County Assessor Bill Copren replied that "land is land and these modifications are not fixtures." Mr. Andal questioned why a declaration as fixtures is of any consequence since Rule 469 overrides a determination of valuation. Mr. Forbush appealed that the items cannot by law be removed even at the conclusion of mining operations and to do so would make some operations economically unfeasible.
Addressing the discount factors to be used for valuing mining properties, Mr. Lane proposed that the manual should use the term "industry standards" rather than designate a mid-year or end-of-year discounting factor. Assessor Copren responded, "Every appraiser has used mid-year factors for over 30 years, and this has resulted in a very consistent treatment throughout the state." He added that the past four sales used mid-year factors to determine the sales price. He said that using end-of-year factors understates the value of the property and that county assessors cannot by law undervalue any property.
BOE staff disagrees that the industry is solely using mid-year factors, but argues that mid-year factors are more accurate as related to income flow. The staff recommends that the manual adopt "industry standards."
Mr. Andal requested the staff, industry representatives and assessors to confer further to attempt resolution of both issues which were scheduled to be presented to the full board last Thursday, after Caltaxletter went to press.
Mr. Dronenburg stated his concern for inequities in the current enforcement and suggested that new regulations would be required to make changes.
At issue was the application of Regulation 1602, "Food Products" as it relates to Regulation 1587 "Animal Life and Feed" in determining whether sales of food products are subject to tax. Specifically at issue are sales of food products to zoos as feed for the animals and the determination of whether an animal is considered a food or non-food animal.
Staff recommended that the recent decisions of the board not be viewed as a new interpretation of the law, but rather specific cases that were granted relief under Sales and Use Tax Law Section 6596.
Zoos and vendors will be advised of their potential tax liability which staff estimated to be about $500,000 annually.
To no one's surprise, the Proposition 217 campaign to raise the top personal income tax brackets from 9.3 percent to 11 percent has been funded almost entirely by public employee unions. Two campaign committees have reported raising more than $980,000 to qualify the initiative for the November 5 ballot. Much of the money was used to pay petition circulators.
According to campaign finance reports on file with the Secretary of State's Office, the Yes on 217 campaign from January 1 through June 30 reported raising $631,820 and spending $624,930. The major contributor to the campaign to qualify the initiative was the California State Council of Service Employees (CSCSE) -- $427,000, including donated services. The California Federation of Teachers kicked in $20,000 and the Los Angeles County Probation Officers Union, $30,000.
Another pro-217 committee, Friends of Local Control, received most ($290,000) of its $352,265 in funding from the CSCSE. Most of the committee's expenditures were to gather signatures for petitions, including $207,521 to Kimball Petition Management.
The opposition campaign, Californians for Jobs, Not More Taxes, reported no funds raised during the first half of the year.
The Franchise Tax Board has issued Legal Ruling 96-6, concluding that the beginning bad debt reserve for foreign banks with California operations must be recalculated on the basis of providing a reasonable addition to a reserve to clearly reflect either U.S. or worldwide income.
The issues: "When a foreign bank with ... California branch operations makes a water's-edge election, what is the correct method of calculating the beginning bad debt reserve balance for U.S. branch operations? When such a bank terminates a water's-edge election, what is the correct method of calculating the foreign bank's beginning bad debt reserve balance for the income years following the termination of the U.S. branch's water's edge election?"
Further, the FTB said in issuing the ruling on September 12: "For a taxpayer making the water's-edge election, the beginning bad debt reserve must be recalculated as if the water's-edge election had been in place for prior years, and the experience of the U.S. branch must be segregated and used to calculate the bad debt reserve in accordance with Reg. Section 24348(b). If the water's-edge election is terminated, the beginning bad debt reserve for income years beginning after the last year of the ... election must be recalculated as if the election had not been in effect, and the experience of the worldwide combined group must be aggregated and used to calculate the bad debt reserve ..."
No adjustment is required when the beginning bad debt reserve balance is recalculated, the FTB concluded, citing Section 24721 of the Revenue and Taxation Code and Internal Revenue Code Section 481.
A state appellate court has rejected a taxpayer's appeal on a property tax assessment, stating that the taxpayer's lawyer tried to deceive the appeals board over the waiver of the two-year hearing rule (Stocker Resources, Inc. v. Assessment Appeals Board, Los Angeles County).
California's Second District Court of Appeal on September 17 affirmed a trial court's refusal to overturn the Assessment Appeals Board ruling that Stocker could not claim that the two-year deadline had passed because of the "intentionally misleading manner in which Stocker's attorney (Timothy R. Greenleaf) had modified the board's standardized waiver from."
The court also awarded costs of the appeal to the board.
According to a board declaration, the difference between the assessor's assessed value and Stocker's valuation was $67,526,748. Had Stocker succeeded in applying the two-year rule, a tax refund of $844,084 would have been due.
Under law, a taxpayer's appeal must be heard within two years or the taxpayer's statement of value is recorded for the property. Stocker's application for reduction in assessed value, filed September 1, 1992, was set to be heard on September 1, 1994, when Mr. Greenleaf was on vacation.
When the hearing was postponed, Mr. Greenleaf said his client would agree to a limited waiver, to December 31, 1994.
In October 1994, the board mailed Mr. Greenleaf a notice of a February 21, 1995 hearing date. This date was outside the two-year period, requiring an unconditional waiver from Stocker. Mr. Greenleaf altered the standard unconditional waiver from in such a way that it went unnoticed by the board, and Mr. Greenleaf then waited until the February hearing to demand benefit of the two-year rule.
The court's 3-0 opinion said, "The evidence of deception is so strong we must infer that Greenleaf was manipulating events so that the board would be forced to adopt his client's opinion of market value ..."
Cal-Tax's 71st Annual Members' Meeting will be held Friday, February 7 at the Sacramento Convention Center in Sacramento. It will include a program of prominent speakers as well as a breakfast session with members of the State Board of Equalization.
For the convenience of members, rooms have been reserved at the Hyatt Regency Hotel in Sacramento (916) 443-1234. Members are urged to make reservations early. The number of reserved rooms is limited, and the deadline for a Cal-Tax special rate is January 13.
For further information, contact Betty Rickard at Cal-Tax (916) 441-0490.
Ordinary negligence does not disqualify a taxpayer owning property damaged by a misfortune or calamity from requesting a reassessment of the property, according to State Board of Equalization Assessor's Letter 96-59.
The board notes that Revenue and Taxation Code Section 170 limits eligibility for reassessments to property damaged without the fault of the taxpayer. There is no statutory definition of "fault."
According to the board, "Where a statutory definition is unclear and the Legislature has not provided any interpretive guidance, statutory language must be given ordinary meaning so long as that meaning is consistent with the scope and purpose of the statute. The common dictionary definition of "fault" as "willful negligence" is consistent with the purpose of 170. This means that disaster relief would be available to a property owner who caused damage or destruction to the property through ordinary negligence. However, relief would be denied to an owner who consciously ignored risks despite the reasonable foreseeability of harmful consequences. The willful negligence standard is also consistent with the federal judicial construction of analogous federal income tax casualty loss statutes."
California's net operating loss (NOL) carryforward deduction primarily benefits small firms, according to Franchise Tax Board data. Beginning in 1987, California generally conformed with federal laws allowing NOL carryforward, but for only 50 percent of the loss for five years. Prior to this time, there were special NOL carryforwards for specific taxpayers, such as those in enterprise zones or small businesses. The NOLs were suspended in 1991 and 1992, (due to the large budget deficit) but again became available for 1993 returns. The carryforward period was extended to make up for the two suspended years.
Actual state revenue losses attributable to the NOL carryforward for the years prior to the suspension were:
1987: $118 million
1988 $160 million
1989: $218 million
1990: $225 million
(Source: Franchise Tax Board, includes both corporate and personal income tax.)
Significant changes were made in California's NOL carryforward provisions in 1993. In general, the law continued the basic NOL carryover provisions allowing 50 percent of losses to be carried over for five years (or 10 years for taxpayers involved in a bankruptcy proceeding before 1994). For new businesses, however, the carryover was raised to 100 percent of losses for specified periods up to eight years starting in 1994. Small businesses were also allowed to carryforward 100 percent of losses for five years.
In SB 38 (Lockyer), passed in 1996, the NOL carryforwards for biopharmaceutical and biotechnology firms awaiting their first FDA approval were extended to eight years.
Based on the pre-1993 law data, most of the tax benefits of the NOL carryforward accrued to firms with $50 million or less in gross receipts. According to an FTB study of NOL usage in 1989, nearly two-thirds of the tax savings benefited these relatively small firms, as follows:
|CORPORATE NOL USAGE IN 1989|
|(Corporations Claiming NOLs)||(NOL Deductions Claimed)|
|Total # of|
|# of Returns|
|% of Tax|
|Under $1||283,115||36,987||13.07%||$403.0||$ 37.5||19.7%|
|1 - 10||79,238||10,554||13.35%||$516.7||$ 48.1||25.3%|
|10 - 50||13,920||1,765||12.70%||$437.3||$ 40.7||21.4%|
|50 - 500||5,119||844||16.48%||$430.3||$ 40.0||21.1%|
|Over 500||1,182||78||6.60%||$254.2||$ 23.6||12.4%|
|NOL SAVINGS AS A PERCENT OF TOTAL TAX|
PAID BY ALL CORPORATIONS, BY SIZE OF TAXPAYER
Computed Tax All Corps
|Before NOL Deductions||NOL Tax Savings of Tax|
of Corps. (Millions)
|NOL Savings as % of|
Tax Paid (Millions)
|1 - 10||$516.2||$48.1||9.32%|
|10 - 50||$463.5||$40.7||8.79%|
|50 - 100||$784.8||$40.0||5.10%|
(Source: Assembly Revenue and Taxation Committee, Franchise Tax Board, excludes unclassified returns.)
With the post-1993 law changes expanding NOL benefits for new and small businesses, it is likely that the benefits of the NOL are even more heavily weighted in favor of small businesses.
Oct. 4: STATE BOARD OF EQUALIZATION MEETING
Location: Senator Nicholas Petris Building, 111 Grand Avenue, Oakland, at 10:00 a.m.
Subject: Issues and concerns regarding the Multistate Tax Commission.
Oct. 8: BOE PROPERTY TAX COMMITTEE MEETING
Location: Room 122, 450 N Street, Sacramento.
Subjects: ATMs: Are they fixtures or personal property? Assessment standard survey changes.
Oct. 9: STATE BOARD OF EQUALIZATION MEETING
Location: Room 122, 450 N Street, Sacramento.
Oct. 14-17: CALIFORNIA ASSESSORS ASSOCIATION ANNUAL CONFERENCE
Location: Cathedral Hill Hotel, San Francisco.
Oct. 17: SACRAMENTO COUNTY TAXPAYERS LEAGUE MEETING
Location: 1832 Tribute Road, 2nd Floor, Sacramento, at 6:15 p.m.
Subject: Decisions on league positions on ballot issues.
Note To Subscribers: The next issue of Caltaxletter, Vol. IX, No. 35, will be published October 14.