Taxable Talk

The California Court of Appeals for the First District upheld its earlier ruling in Gillette v. Franchise Tax Board. This means that for tax years from 1993 – 2011 a three-factor formula for apportioning income is valid. Earlier, the same appellate court ruled the same way; this decision clarified the earlier decision.

However, this decision is subject to appeal. The FTB sent an email to tax practitioners this week. Spokesperson Susan Maples sent out this staff opinion:

On October 2, 2012, the Court of Appeal issued its decision in Gillette v. Franchise Tax Board, Calif. First Dist. Ct. App. Dkt. No. A-130803. Questions have arisen regarding whether a taxpayer that chooses to elect the use of the Compact method of apportionment on its taxable year 2011 tax return that is filed by October 15, 2012, runs the risk of having the penalty under Revenue and Taxation Code section19138 (The Large Corporate Underpayment Penalty or “LCUP”) imposed if, after October 15, the decision of the Court of Appeal is vacated or modified by the Court of Appeal, or vacated or overturned by the California Supreme Court.

Staff believes that taxpayers choosing to elect the use of the Compact method of apportionment on a timely filed original return for the 2011 taxable year, that is filed before the decision of the Court of Appeal in Gillette v. Franchise Tax Board is final, will run the risk of incurring the LCUP if that decision is subsequently vacated, reversed, or overturned. The reason is that the decision of the Court of Appeal is not final until November 1, 2012, — 30 days after the decision was issued (Cal. Rules of Court rule 8.264(b)(1)). Because the decision is not final, it should not be treated as the state of the law until November 1, 2012.

Section 19138, subdivision (f), that provides for relief from the LCUP if the penalty is imposed on an understatement due to a change in law occurring after a return is filed, is not applicable to the question raised because the state of the law on October 15, 2012 does not include the decision of the Court of Appeal in Gillette v. Franchise Tax Board, as it has not yet become final. Therefore, there is no “change in law” that will occur should the decision be vacated or overturned after October 15, 2012. The law would be the same as it was at the time the taxpayer filed the return.

So what should multi-state businesses do? One strategy would be to file returns using the California formula (a 3-factor formula with sales doubled), and then file a protective claim for refund based on the Gillette decision.

One other aspect is quite clear: Expect the FTB to appeal. Reading between the lines of the staff opinion, this is fairly clear. Finally, California is no longer a member of the multi-state Compact so for 2012 and future years this is no longer relevant.

Sometimes I read a story and wonder if I’m reading actual news or something from The Onion. Such was the case this morning when I looked at an op-ed in the Wall Street Journal/ on Democrats’ plan to mandate a state retirement plan for private industry. [Pay link to WSJ] Here’s an excerpt that gets at the gist of the story:

The legislation would require employers that don’t already sponsor retirement plans to enroll their workers in state-administered “individual retirement accounts,” but they are really defined-benefit pensions in disguise. Democrats are calling a spade a club in order to skirt the federal Employee Retirement Income Security Act (Erisa), which imposes fiduciary obligations on private employers that sponsor defined-benefit plans. Trouble is, the retirement plan Democrats have conceived has all the trappings of a cash balance account, a breed of defined benefit that guarantees workers a return on their investments.

Do the Democrats in Sacramento really want to drive more employers out of the state? Sure, they can argue that this doesn’t have a direct impact on employers (it will be a mandatory withholding on employees), but that’s just rubbish. It will reduce employees’ take-home pay, create another bureaucracy in Sacramento, and adds another pension plan where the state will be forced to guarantee returns. And that’s before the possible constitutional question of whether ERISA (the federal law on pensions) would make this unconstitutional.

Meanwhile, Democrats in Sacramento are pushing tax increases. The proposal noted above shows that Democrats in the Bronze Golden State still aren’t serious about restoring fiscal sanity in Sacramento

In what is not shocking to me but is apparently shocking to Democrats in Sacramento, Moody’s announced it will be performing a comprehensive review of California municipal finances. So far this year three California cities have declared bankruptcy: Stockton, Mammoth Lakes, and San Bernardino. Many other cities appear to me to have financial difficulties.

The AP story notes that both the California League of Cities and the state treasurer’s office think the story is overblown. I don’t think it is. The underlying problems facing California are two: ridiculously large pensions and spending that has continued to increase while revenue to the state (and local jurisdictions within the state) have not. Unlike the federal government, states and cities can’t print money.

To me, the idea of California spending as much as $100 billion on a train to nowhere is symptomatic of the culture in Sacramento and locally. A story I’ve noted before is on the rather prosaic business of rubbish. When I lived in Irvine, it cost me about $36 a quarter for trash pickup. I had three trash bins: waste, recycling, and green (lawn) waste. My mother resides within the city of Los Angeles; she pays about $36 a month for the same three bins. We both received weekly trash pickup. The one difference? Irvine outsources trash collection; Los Angeles’ trash collection is done by unionized city employees.

Victor Davis Hanson’s piece on California should be read for a better understanding of the Bronze Golden State. He notes an estimated 2,000 upper income Californians are leaving the state each week. California needs to look inward to fix its problems. Unfortunately, I think California will need to hit bottom before doing so.