How Much is Owed?

The FTB is trying to figure out exactly how much money is owed to about 24,000 individual tax filers and 3,000 businesses still eligible for refunds, and what it will cost the agency to process those claims, FTB Filing Division Chief Anne Miller told the board at its July 21 meeting:

These two interest calculations may impact a limited number of individuals and business entities that meet a set of specific and rare criteria. The criteria are centered primarily around overpayments being transferred or refunded from one particular tax year followed by an additional tax assessment on that same tax year. As a result, our systems may have overcharged interest.

Due to the complexity of the calculations, it’s been quite a challenge for us to determine the fiscal impacts. We estimate that if work was to be done manually on each of these individual accounts, it could take three hours per account. We have enlisted the help of our experts in the Economics and Statistical Research Bureau to help us with these calculations because they are so complex.

About 1,000 of the individual taxpayers are owed for more than one year, placing the total adjustments around 28,000. That equates to 40 FTB staffers working for a year to do the calculations, based on three hours per adjustment if an automated solution isn’t found.

“[W]e believe the adjustments could range from a very minor amount (a few dollars) to thousands of dollars for each account,” said the FTB in its Aug. 3 Tax News. The total amount owed could be in the millions of dollars, according to the California Taxpayers Association, which brought the problem to the attention of FTB management in March.

“CalTax is aware of millions of dollars in miscalculated interest based on what a limited number of taxpayers have told us,” said Gina Rodriquez, CalTax vice president for state tax policy. She continued:

In one case, the FTB overcharged interest by $1 million, and in another case $2 million.

In some of the cases that were reported to us, taxpayers asked the FTB to adjust the interest before their cases went final, i.e., before the taxpayer’s protest, appeal or settlement went final. Taxpayers who had already paid and subsequently discovered the error had to file refund claims to get the interest back if they already paid their assessments. In all cases reported to us, the FTB made the adjustment for the interest miscalculation without any argument, as they knew their calculations were wrong.

When I met with FTB management in the spring to discuss this issue, the FTB acknowledged that their computer system cannot properly calculate interest for taxpayers that fall into the two affected categories.

Origins of Miscalculation

The main category of miscalculation, potentially affecting 26,000 taxpayers, dates back to a lawsuit that May Department Stores Company won in 1996 against the United States for miscalculation of interest on the company’s tax underpayments a decade earlier. The IRS issued a notice in 1997 acquiescing to the court decision.

The complexity of the situation is evident on an FTB web page, which explains that you may be owed a refund under the May Department Stores ruling if:

• You filed an amended return for additional tax or received a deficiency assessment after the original return was filed for the same tax year, and
• On the original return, you elected an overpayment transfer to the subsequent year’s estimate tax, and
• On the subsequent year, the required first quarter estimate payment was less than the requested overpayment transfer amount. The maximum amount of the adjustment is one year of interest on the additional tax or deficiency amount.

The other miscalculation category, known as “corporation interest netting,” may affect about 1,000 businesses that have made a previous refund or payment transfer, then filed a subsequent deficiency or amended return for additional tax with interest for the same tax year.

Thus far fewer of those overcharged are aware that they are owed money. “We’ve received three written requests for interest adjustments as well as a few visits to our website,” Miller told the board. “But our contact center has not reported any phone calls on this issue.”

Time Running Out

The clock is ticking on taxpayers who want to receive refunds. The statute of limitations runs out four years from the date the return was filed if it was filed within the extension period, or one year from the date a payment was made.

FTB plans to avoid this situation in the future. “In order to better serve taxpayers who may qualify for the interest computation adjustments, we have trained our staff to proactively identify cases that meet this criteria as well as put procedures in place to ensure that cases that do meet the criteria proactively receive proper treatment,” said Miller.

FTB Chairwoman Betty Yee, who is also the state controller, was appreciative of Miller’s work. “Thank you for really responding with such a strong focus on just initially identifying the universe [of affected taxpayers], which I know was quite complex,” said Yee. “And now to try to put a fiscal impact around what’s been identified. We look forward to getting that information in September.”

In her capacity as state controller, Yee directed the FTB on April 8 to review the interest miscalculations. “These rulings deal with complex interest calculations that affect very few taxpayers. However, these taxpayers are entitled to receive refunds of allowed overpaid interest,” Yee said. “As chair of the FTB, I work to ensure the rights of taxpayers are protected.”

FTB Board Member Jerome Horton said, “I want to thank the department for being proactive on this and engaging. It’s very important. As always we have stepped up and done so.”

Miller is scheduled to provide an update at the board’s next meeting on Sept. 22.

By Chris Reed

There’s finally some mainstream media coverage of the astounding decision of the Franchise Tax Board to rewrite a tax break and go after profits accumulated by some business owners that date back to 2008. The U-T San Diego story by Chris Cadelago only makes the money grab seem all the more outrageous in that it is depicted as something that was conceived of and executed solely by FTB bureaucrats, without the knowledge or consent of elected officials.

“SACRAMENTO — About 2,000 small business owners and investors across California are being forced to retroactively pay the state four years of assessments totaling $120 million plus interest, based on a decision by the Franchise Tax Board.

“In December, the state agency that administers personal income and corporate taxes ended a nearly 20-year-old tax incentive designed to spur investment in startup companies and small businesses, citing a court ruling. The benefit allowed small business investors who sold their stock at a gain to exclude half the profits from their income taxes. …

“The decision was made at the staff level, not by the three members of the Franchise Tax Board — John Chiang, state controller; Jerome E. Horton, chairman of the Board of Equalization and Ana Matosantos, state finance director.”

The article notes that Sen. Ted Lieu, D-Torrance, and Assemblyman Jeff Gorell, R-Camarillo, are upset with the FTB and may seek a reversal of the ruling, but where’s Jerry Brown?

For more than a year, our governor has sold himself as a critic of bureaucracy and mindless regulation and a champion of a business-friendly state government. He did so again in his State of the State address.

The FTB money grab is an acid test of whether it’s just more Moonbeamian hot air or whether the governor really believes what he says.

Jan. 18, 2013

By Chris Reed

That California is extraordinarily hostile to business is accepted as a given by just about everyone who is an executive, manager or small-business owner in the state.  But Democrats and some in the media routinely challenge this assumption, and some genuinely seem to believe it’s nothing but a talking point used by business interests to gain undeserved favor.

I once saw a labor official even suggest there was something sinister or rigged about the CEO survey that comes out every year and always ranks the Golden State last in business-friendliness, as if there was a national conspiracy to put California down.

To a degree, Gov. Jerry Brown seems to believe that the business community’s gripes have some merit. So he’s taken to criticizing excessive regulation and to urging bureaucrats to help, not hinder, job creation.

Brown now faces an acid test for his alleged interest in helping the private sector: an insanely capricious and destructive decision by the state’s Franchise Tax Board to impose four years of retroactive taxes on hundreds of businesses because it lost a court fight with one business. It was a fight that started in 2008 over whether the company qualified for a tax break that encourages entrepreneurs — a partial state income tax exclusion on sales of stock of a “Qualified Small Business.”

Tax decree

At xconomy.com, victimized businessman Brian Overstreet shares his horrific story of facing a huge ex post facto tax decree, and explains its genesis:

“The company at issue in that lawsuit did not meet one of the QSB requirements—that it maintain 80 percent of its employees and assets in California. In August of 2012, the California Court of Appeals sided with the plaintiff, ruling that denying him the QSB exclusion based on the ’80 percent requirement’ was an unconstitutional violation of the interstate commerce clause.

“Since the FTB lost the case, you might think that they would strike the unconstitutional requirement and keep the rest of QSB statute intact. Not a chance.

“What the FTB did instead was to take their ball and go home. They decided that since they could not impose the 80 percent requirement, no one would be entitled to the QSB exclusion. They put out an announcement terminating the Qualified Small Business exclusion and retroactively disqualifying all exclusions and deferrals going all the way back to 2008.”

This is bonkers. You don’t get much more anti-business than punishing business owners out of pique over losing a lawsuit that those business owners had nothing to do with.

Overstreet’s takeaway from this assault on sanity:

“1. If you are a business founder or early investor who sold stock since 2008 and took the QSB exclusion: Surprise! You are going to get a bill from the FTB for the 50 percent of the taxes you excluded plus interest plus possible penalties.

“2. If you are a business founder or early investor and have not yet sold stock: Rethink your business and tax planning strategies. Consider whether it’s fiscally prudent to stay in California.

“3. If you a contemplating starting or investing in a California business: Think long and hard. Consider out-of-state alternatives.”

The governor should clean house, right? Well …

If Jerry Brown really means what he says about wanting to help grow jobs in California, here’s what he should do: Clean house at the Franchise Tax Board.

FTB Executive Director Selvi Stanislaus? He should be gone, for starters. And so should everyone at FTB who thought this made sense.

But there’s a little problem with the let’s-clean-house theory. According to the FTB’s website, who are the three members of the agency’s governing board?

1) Ana Matosantos. As in Jerry Brown’s director of finance.

Evidently word of the governor’s desire to help the private sector hasn’t reached his Cabinet.

2) Jerome Horton. As in the former Democratic lawmaker from Inglewood appointed by Brown to the FTB oversight post.

Evidently word of the governor’s desire to help the private sector hasn’t been shared with his board appointees.

3) John Chiang. As in the state controller, elected by the voters.

Evidently breaking trust with job-creating entrepreneurs in such grotesque and extreme fashion isn’t a big deal to the veteran Democrat who fancies himself as governor material.

I look forward to watching this story play out. Most mainstream media in California have little sympathy for business complaints. But everyone can relate to the story of people hit with four years of dubious back taxes because of childishness and stupidity from tax bureaucrats. And their bosses.

Your move, Gov. Brown. Yo, Jerry: Do you think this is fair? Tolerable? Honorable?

We shall see.