Court: Superior County: Los Angeles Judge: Mel Red Recana Los Angeles County Ct.App. 2/8 B202997
The opinion of the court was delivered by: Liu, J.
The Enterprise Zone Act (Gov. Code, § 7070 et seq.) was enacted "to stimulate business and industrial growth" in "areas within the state that are economically depressed due to a lack of investment in the private sector." (Id., § 7071, subd. (a).) Among the incentives available to businesses that operate within an enterprise zone is a hiring tax credit in the amount of a percentage of the wages paid to a "qualified employee." (Rev. & Tax. Code, § 23622.7, subd. (a).) A "qualified employee" is an employee who falls into one of several categories, such as being eligible for the federal Job Training Partnership Act or the Greater Avenues for Independence Act of 1985 (GAIN). To claim the tax credit, the employer must satisfy several requirements, including obtaining from a governmental agency "a certification that provides that a qualified employee meets the eligibility requirements." (Rev. & Tax. Code, § 23622.7, subd. (c).)
Dicon Fiberoptics, Inc. (Dicon) is a California corporation that does business in an enterprise zone. Dicon hired workers for whom it had obtained the required certifications, and it claimed a hiring tax credit. The Franchise Tax Board (FTB) conducted an audit and refused to accept some of the certifications, demanding that Dicon produce documents to establish the workers were "qualified employees." The FTB found that the documents Dicon produced were insufficient, and it denied the requested tax credit in part.
The Court of Appeal ruled that a certification issued by a governmental agency constitutes "prima facie proof a worker is a 'qualified employee.' " The court held that although the FTB may conduct an audit to determine whether an employee actually was "qualified," the FTB bears the burden of rebutting the certification, "typically by proving the worker did not meet the criteria to be a 'qualified employee.' " The Court of Appeal erred in part. As explained below, the FTB may conduct an audit and require the taxpayer to establish that the worker is a "qualified employee" within the meaning of the statute.
On March 13, 2007, Dicon filed in the Los Angeles Superior Court a "Complaint for Refund of Amounts Paid" against the FTB. As later amended, the complaint alleged that in November 2003, Dicon timely submitted a claim for a refund of taxes paid for the taxable year ending March 31, 2001. Dicon's submission included a claim in the amount of $3,157,119 for the enterprise zone hiring tax credit set forth in Revenue and Taxation Code section 23622.7.
Dicon alleged that it had obtained certifications (commonly called vouchers) from "the California agency . . . statutorily authorized to review, process and certify tax credit eligibility." The amended complaint further alleged that, in response, the FTB demanded "documentation that was outside Dicon's possession, custody and control . . . that the Revenue and Taxation Code does not require a taxpayer to keep once certification from an authorized vouchering agency has been obtained and which the vouchering agency had specifically informed Dicon that it was not required to keep." According to the amended complaint, "the documents sought were readily available to the FTB through the vouchering agency that issued the certification." Dicon alleged that "in order to receive the tax credit, only two things are required of an employer: first, the employer must obtain (from an authorized agency) a certification that provides that a qualified employee meets the eligibility requirements; and second, the employer must retain a copy of the certification and provide it upon request to the FTB."
As indicated in the FTB's "Notice of Action" on the request for refund, the FTB "made adjustments based on the field audit schedules dated 07/07/06" and approved an enterprise zone hiring tax credit of $2,052,127, or roughly two-thirds of the amount Dicon claimed. After Dicon's appeal to the State Board of Equalization was dismissed, Dicon sued for the remaining $1,104,992 that the FTB had refused to refund. In its demurrer to the amended complaint, the FTB argued that Dicon had not alleged a cause of action "because the [FTB] was not required to accept the vouchers issued for enterprise zone hiring credit and was authorized by law to require that Dicon provide documentation to support the enterprise zone hiring credit before allowing the tax deduction."
The superior court sustained the FTB's demurrer without leave to amend, concluding that under Revenue and Taxation Code section 19504, the FTB "may, for purposes of administrating its duties, including ascertaining the correctness of any return, demand taxpayers to provide information or make available for examination or copying any books, papers or other data which may be relevant to that purpose." The court further observed that "Rev[.] and Tax[.] Code [section] 19032 requires defendant, as soon as practicable after the return is filed, to examine it and determine the correct amount of tax." The case was dismissed, and Dicon appealed.
The Court of Appeal reversed. It ruled that the superior court erred in sustaining the demurrer because all that Dicon was required to allege in order to state a cause of action was that "plaintiff paid the tax, filed a tax return, requested the refund, and the tax authority denied the refund." In the alternative, the Court of Appeal ruled that "if a cause of action for a tax refund must identify the taxing authority's particular legal error in denying the refund," the superior court erred in denying Dicon leave to amend its complaint to allege that the FTB conducted its audit improperly.
The Court of Appeal then went beyond those rulings to address "the unanswered legal question looming over these proceedings: Does FTB's authority to examine and audit tax returns permit FTB to reject a voucher issued by a local employment or social services agency?" Rather than hold that the FTB has the authority to simply reject a voucher, the Court of Appeal held that "vouchers are prima facie proof a worker is a 'qualified employee,' " and the "FTB bears the burden of rebutting the voucher's prima facie value, typically by proving the worker did not meet the criteria to be a 'qualified employee.' In trying to meet that burden, FTB may not rely on the employer's failure to produce during the audit documents establishing a worker's eligibility to the extent regulations governing the tax credit charge the enterprise zone, not the employer, with the obligation to maintain documents of workers' eligibility."
The FTB did not challenge the Court of Appeal's ruling that the superior court erred in sustaining the demurrer without leave to amend. Instead, the FTB sought review of the portion of the decision that addressed the FTB's authority to reject a voucher, framing the issue as follows: "When an employer seeks a tax refund from the Franchise Tax Board for allegedly hiring a qualified employee under Revenue and Taxation Code section 23622.7, and the employer's only supporting documentation is a voucher issued by an enterprise zone agency, is the voucher prima facie evidence that a worker is a 'qualified employee' that shifts the burden of proof to the Board?" We granted the FTB's petition for review.
For the reasons that follow, we conclude that the FTB may conduct an audit to determine whether a taxpayer is entitled to the enterprise zone hiring tax credit. During such an audit, the FTB may require the taxpayer to establish that the worker is a "qualified employee" within the meaning of the statute. The FTB is not required to accept a certification or voucher as conclusive or prima facie proof that an employee is qualified, nor is the FTB required to establish that the worker is not a "qualified employee" under Revenue and Taxation Code section 23622.7, subdivision (c).
The Enterprise Zone Act (Gov. Code, § 7070 et seq.) was enacted "to stimulate business and industrial growth in the depressed areas of the state by relaxing regulatory controls that impede private investment." (Id., § 7071, subd. (a).) Under specified circumstances, Revenue and Taxation Code section 23622.7, subdivision (a), permits a taxpayer that "employs a qualified employee in an enterprise zone" to claim a tax credit for five years. The amount of the credit is 50 percent of the employee's "qualified wages" in the first year and decreases incrementally to 10 percent of ...