As previously noted, the CA Supreme Court released its opinion yesterday in the matter of Dicon Fiberoptics, Inc v. Franchise Tax Broad. The Court responded to many of Dicon’s arguments directly, siding with the FTB in every instance. In general, the opinion focuses on the FTB’s authority to audit, and declined to agree with any argument that could construed as challenging that authority.

First, the Court looked to Dicon’s argument that the Enterprise Zone Act limits the FTB’s authority to review the local agency’s determination of if an employee is qualified. The biggest gap in agreement appears here. Dicon originally argued that the FTB has no right to look behind the voucher to check the employee’s eligibility. The FTB, unsurprisingly, argued the complete opposite, that it has the full authority to review the employee’s eligibility. As the Court noted, the court of appeals took the middle ground, claiming the FTB could review the eligibility, but must accept the voucher as prima facie evidence of eligibility.

While looking at previous case law that strongly supported the FTB’s view (“credits are a matter of legislative grace”, “statutes should be construed against the taxpayer and in favor of the FTB when resolving any doubts”, and “the burden of proof is on the taxpayer to prove he is eligible for the refund”), the Court was not able to find any statutory support for the argument that the Enterprise Zone is special and not subject to the FTB’s normal authority. Interestingly enough, the Court does not seem to even consider the argument that the credit is not a refund, despite this being a point of contention in both party’s briefs.

Dicon’s most interesting argument, in my opinion, claims the authority to qualify an employee has been delegated away from the FTB to local government agencies. The Court summarizes this as “the FTB should not be permitted to displace the judgment of a governmental agency with expertise that the FTB lacks.” Once again the Court is unconvinced by any attempt to lessen the FTB’s authority. A bone was thrown to taxpayers noting that the FTB cannot abuse its discretion, but the taxpayer has the burden of proof to show the abuse with clear and convincing evidence. The Court did state that the FTB could audit any voucher where there is a lack of confidence in the local agency. This seems to be on point with the lower court’s decision allowing the FTB to audit vouchers where there is a reason for the suspicion, but not in all cases. However, whether this was an unconscious slip, a showing of misunderstanding of the taxpayer’s arguments, or most likely, a concession that the FTB should not audit every single aspect of the return, the Court still refused to limit the FTB.

As for Dicon’s argument that the statute limits the record keeping burden of the taxpayer, the Court acknowledged that the statute required no additional records to be kept, and it might be reasonable to interpret this explicit statement of what should be kept to mean that no other records are additionally required. But once again, this argument falls short in the eyes of the Court. The Court also found the FTB’s argument that the statute does not limit the taxpayer’s record keeping burden to be reasonable, and since all ambiguity should be resolved in favor of the FTB, the FTB wins.

In the Court’s opinion, Dicon’s strongest argument still fell short. Here, both Dicon and the California Taxpayers’ Association argued that taxpayers will not take advantage of the credit if there is substantial uncertainty surrounding the ability to ultimately claim the credit. To make this argument, Dicon looks to the history of the program and legislative history of the 1994 restructure. It was during this change in the program that vouchering of the employees by local governmental agencies was first introduced. It was also during this change that the program became so broad. Both Dicon and the Court agree that the vouchering scheme was meant to prevent fraud. The Court does not agree that the vouchering scheme was meant to either supplement or supplant the FTB’s authority.

In almost every instance, the Court looked at Dicon’s argument, and wanted proof in the form of a smoking gun. If the gun was not available, then the Court deferred to the FTB. Only in a few situations did the Court try to use rules of construction to determine which party had the right interpretation. The Court time and time again quoted Hospital Service of California v. City of Oakland that a statute must be construed strictly against the taxpayer. Here the Court has taken this to the extreme, refusing to even consider other arguments unless the FTB concedes the point.