Dicon Fiberoptics v. FTB Update 2

The time-line in the Dicon Fiberoptics v. FTB case so far has been:

3/13/2007: Case filed by Dicon against FTB in Los Angeles Superior Court
(The first EZ Policy Blog post was on 5/9/2007)
5/21/2007: FTB requests demurrer (in essence that the case be dismissed)
(The second EZ Policy Blog post was on 6/11/2007)
6/18/2007: Dicon filed their opposition to demurrer
7/12/2007: FTB filed their response to that opposition

No trial date has been set, but the Court has imposed deadlines of 11/30/2007 for written discovery and 1/31/2008 for depositions.

In its July 12, 2007 "Reply to Opposition to Demurrer," the Attorney General's Office of California argues on behalf of the FTB. Regarding Dicon's assertion that "the statute does not permit the FTB to substitute its judgment for that of an agency expressly authorized to determine employee qualification," they write:

Plaintiff also argues that the legislative purpose behind the Enterprise Zone Act was "to encourage areas through economic and regulatory incentives." (Opposition 3:23-26.) But at best, the legislative intent was frustrated. As the Assembly Committee on Revenue and Taxation said in August 1995: "However, the EZ and PA programs appear ineffective at improving employment opportunities within their respective locales." (Plaintiff RJN, Exhibit A, attachment 4 page 6 of 7).
. . .
Whatever the reason the Legislature had for enacting the Enterprise Zone credits those reasons fail in light of reality. In fact, these credits did not have anything to do with Plaintiff's business decisions, rather they were simply after the fact attempts to years later lower their tax liability to the state.

Here we have an arm of the State Government, speaking on behalf of the Franchise Tax Board itself, making the statement that the Enterprise Zone program is an abject failure.

I think there are a few problems with the methodology used to reach this assertion:

1. The A.G. quotes a Committee Bill Analysis (for SB 1770, Alquist, 93-94 session) and states that it is a conclusion of the Assembly Committee itself. But Bill Analysis only represents the research and opinion of a Committee staff person and is a tool used by legislators to inform their vote. It is not a conclusive statement of the Committee.
   
2. The A.G. relies on a study referenced in that Bill Analysis that is over a decade old, that was written before significant legislative changes were subsequently made to the program, and that has been contradicted by multiple, subsequent academic studies.
3. [Oddly, the A.G.'s "Reply to Opposition to Demurrer" states that this was a statement of the Assembly Committee in August 1995, whereas their own "Request for Judicial Notice" document which contains the copy of the Bill Analysis shows that the document is dated August 15, 1994.]
4. The A.G.'s assertion that the Enterprise Zone program "did not have anything to do with [Dicon's] business decisions," seems extraordinary. How can they purport to know the motivations and intentions of individual business decisions? This criticism seems to be based on the fact that Dicon made its claim for tax credits after the qualified activity occurred: "In fact, Defendant, Dicon Fiberoptics, Inc. ("Dicon") did not originally claim Enterprise Zone hiring credits. The claim was made in Dicon's November, 2003 amended tax return over two tax years after the qualified individuals had been hired." This is hardly enough evidence upon which to impugn Dicon's intentions. (See also the explanation I wrote at the end of this post why it is normal to expect a delay in the claiming of the tax credits.) Furthermore, since a qualified employee can generate credits for five years of employment, why is activity two years after the hire date indicative of anything?
   

I had initially felt that the arguments the Attorney General's Office made in its motion for demurrer were very compelling. In response, Dicon raised some valid concerns, but, in my lay opinion, did not fully counter the A.G.'s arguments. However, in this response it seems that the A.G. has crossed a line.