Incentives Watch: Tax Consultants Question California Contingency Fee Disclosure

As the deadline looms for another round of California Competes tax credit applications, demand is certainly going to outpace the supply of available credits. With recently issued final regulations for the credit, taxpayers have new considerations in submitting their applications, including a divisive requirement that applicants must disclose contingency fee arrangements.

The California Competes tax credit, first available to taxpayers in 2014, is aimed at fostering business relocation and expansion in California, and replaces the Enterprise Zone Tax Credit in California, which has been phased out. It gives credits to businesses based on several criteria, including job creation. For the most recent application period that closed Feb. 2, the California Competes program received 253 applications, requesting a total of $289 million. Unfortunately for applicants, the Governor’s Office of Business and Economic Development (GO-Biz) will only award $75 million in tax credits during the February application period. California will also award $31.1 million in credits, plus any unallocated funds from previous applications periods, for the final round of applications, which are being accepted starting March 9.

In the January application round, GO-Biz received 286 applications requesting $329 million in credits. Ultimately, 56 companies received $31 million in tax credits. This brought the total amount of credits awarded through the program up to $60 million.

In February, final regulations governing the California Competes credit took effect. Although the final regulations are similar to emergency regulations adopted last year, there are a few changes, including a provision that allows companies to apply for the credit multiple times, provided they meet additional investment and employment requirements, according to a Daily Tax Report story by Laura Mahoney.

One of the more controversial regulations is the requirements regarding contingency fee arrangements between applicants and third parties that prepare the credit application. Not only are applicants required to disclose these fee arrangements, but the arrangements will be reviewed by GO-Biz to ensure that fees are reasonable. This regulation led to a lawsuit by Ryan LLC, a tax services firm headquartered in Dallas, Texas, challenging the contingency fee disclosure requirements.

This is not the first time that California has tried to restrict contingency fees. According to the complaint in the Ryan case, California has twice introduced legislation that restricts contingency fee arrangements in tax-related matters, but neither was enacted into law. On the federal level, the DC District Court, in Ridgely v. Lew, invalidated the I.R.S. Circular 230 contingency fee ban on tax practitioners.

The Ryan complaint alleges that GO-Biz abused their rulemaking powers by adopting regulations which conflict with California law. The complaint alleges that California law specifies the factors used in determining which businesses receive California Competes credits and that consideration of the contingency fee arrangement imposes an additional condition on tax credit applicants. California issued an answer to the complaint on Feb. 20.

Continue the discussion on LinkedIn:  Should contingency fee arrangements be a factor considered in awarding tax credits?

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