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Tax Law

State Net Capitol Journal – October 22, 2012

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Budget & Taxes

TAX DODGERS DOGGING CA: California's budget is so in the red that Gov. Jerry Brown (D) has placed a multi-billion tax measure on the state's November ballot to try to avoid having to make deep cuts to education and public safety funding. But one reason the state is in such fiscal trouble is because it has been unable to collect all of the taxes it is owed by individuals and businesses. The outstanding debt currently stands at $8 billion, and some of the debtors have owed the state millions of dollars for years.

The state's Franchise Tax Board began publishing a list of the top tax delinquents - those owing more than $100,000 and having been notified by the agency at least seven times - in 2007. Tax board spokesman Daniel Tahara said the plan was to give the delinquent taxpayers "motivation to get back into compliance." But the agency has collected only $177 million from individuals and businesses on the Top 500 Delinquent Taxpayers list so far.

That may largely be due to the fact that many of the tax debtors have gone bankrupt, leading some to question the value of publicly humiliating them.

"If somebody goes bankrupt, they are already embarrassed," said Mark Gergen, a professor at the UC Berkeley School of Law who studies tax issues. "If you want to have this public disclosure as a way of embarrassing people, you aren't doing a big service by adding them to this list."

Some of those on the delinquent taxpayers list, however, have quietly dissolved their tax-burdened companies and formed new ones under different names or simply continue to conduct business as usual. And the tax board has gotten more aggressive with such offenders by filing liens against their assets or seeking to suspend their professional licenses.


Past Due Notice for Delinquent Taxes

But even that hasn't necessarily produced results. Baldomero De Leon Jr., M.D., a board-certified doctor of internal medicine in Walnut Creek, owes the state more than $4.1 million in corporate income taxes, according to the tax board, and his name has appeared at - where it currently resides - or near the top of the board's delinquent taxpayers list since 2010. But the state can only collect on the lien it has placed on his practice if his assets are sold, and it can't revoke his medical license because it's a personal license and his taxes are owed by his company.

The state hasn't had any better luck with Caresystems Inc., a home health care company in Vacaville. No. 3 on the board's list, with a tax debt of over $1.9 million, the secretary of state's office lists the company as having dissolved. But the company's CEO, Anthony Thekkek, is reportedly running a nursing home company, Thekkek Health Services Inc., at the same address. (BAY CITIZEN [SAN FRANCISCO])

FORECLOSURE SETTLEMENT FUNDS NOT ALL GOING TOWARD HOMEOWNER RELIEF: When states reached a $25 billion settlement in March with five of the nation's largest mortgage lenders over charges they improperly processed foreclosures, it was hailed as the biggest government-industry accord since the multi-state tobacco settlement in 1998. But the states' share of that money hasn't all been going toward helping distressed homeowners, as expected.

Under the terms of the agreement, Ally Financial Inc., Bank of America Corp., Citibank Inc., J.P. Morgan Chase & Co. and Wells Fargo & Co. were required to provide $20 billion in mortgage relief directly to homeowners. The $2.5 billion states received was supposed to be used "to the extent practicable...for purposes intended to avoid foreclosures," among other things.

But according to a report by Enterprise Community Partners, a housing nonprofit, only about $1 billion of the state funds have been allocated for some type of homeowner relief so far, while $1 billion has been funneled into state general funds. Only 14 states are planning to spend their entire allotments on housing aid, while nine plan to spend most of their funds that way, according to the report. And many of the largest states have opted for the general-fund route.

"It's an incredible frustration," said Andrew Jakabovics, who co-authored the report.

The allocation of the foreclosure funds has touched off battles across the country. Consumer advocacy groups sued Arizona over its decision to designate roughly half of its $98 million payout for general fund use.

"Virtually everything in the settlement is about providing relief for distressed homeowners," said Tim Hogan, executive director of the Arizona Center for Law in the Public Interest and an attorney for the plaintiffs in the suit. "I don't see how you can take these funds for something else."

A state judge dismissed the suit this month. But Hogan said he'll appeal that ruling.

In South Carolina, Gov. Nikki Haley (R) vetoed the Legislature's diversion of $10 million from the state's $31 million foreclosure settlement allocation to a campaign to lure out-of-state businesses, which she called both "inappropriate" and a "raid." The Legislature overturned her veto and allocated the remaining $21 million to the state's general fund. (WALL STREET JOURNAL, EAST VALLEY TRIBUNE [MESA], STATE NET)

NY CITIES 'CLOSE TO BANKRUPTCY': Several of New York's largest cities, including Rochester, Syracuse and Yonkers, are "close to bankruptcy," a source close to the mayors of those cities said last week. The mayors have been in secret talks on their financial options in recent weeks, and aides to Gov. Andrew Cuomo (D) are working on a plan to link aid to the cities to "workout plans" that reduce the cities' labor, pension and education costs, the source said.

"The mayors have got to come to the state with a plan that explains what's causing their problems and how they plan to solve it," said a Cuomo administration official. "To come to us year after year for a handout as they have been doing, only to come back next year asking for the same handout, is a nonstarter. It doesn't work."

Creating local control boards for the cities is reportedly another measure being considered. Whatever the changes, however, Albany Mayor Jerry Jennings, who has also been in on the talks, said they'd better be big and come quick.

"There has to be dramatic changes very soon; things are getting worse," he said. (NEW YORK POST)

BUDGETS IN BRIEF: Despite ILLINOIS' fiscal woes, the state has hired 1,203 employees since the start of the fiscal year on July 1, according to records compiled by the state Comptroller's office. Many of the new employees are replacing retiring older workers (QUAD-CITY TIMES [DAVENPORT]). • State revenues in MAINE fell below projections by nearly $27 million in the first quarter, according to the state's finance commissioner. And not a single revenue category met expectations in September (BANGOR DAILY NEWS). • Student-loan borrowers in the college class of 2011 averaged $26,500 in debt, according to the Institute for College Access and Success' Project on Student Debt. That figure is up 5 percent from the $25,350 average for the previous year (NEW YORK TIMES). • VIRGINIA Transportation Secretary Sean T. Connaughton told the state House Appropriations Committee last week that operation of the state's port facilities is "financially unsustainable" under its current arrangement. Connaughton said the state is currently subsidizing the Virginia Port Authority's port operations by $60 million to $70 million per year (RICHMOND TIMES-DISPATCH)

- Compiled by KOREY CLARK

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