Group fights plan to fine tax cheats

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Manufacturing businesses, big financial firms and energy companies are eager for new tax breaks in California -- but not if it means officials will take a harder look at how they claim the credits.

A coalition of corporations is fighting a tax-relief package moving through the Legislature that would offer help to renewable-energy firms and to homeowners forced to shed their houses in a short sale.

An earlier version of this article included a subheadline that implied a tax-relief package that would assist renewable-energy firms and some homeowners would be funded by a 20% penalty on tax credits improperly claimed by corporations and wealthy individuals. The penalty is a separate provision of the tax-relief bill.

Tax credits: An article in the Feb. 21 California section about businesses fighting a proposal in the state that would match certain state tax credits and penalties with those on federal tax returns erred in saying that Congress and the White House were under Republican control when the federal penalties passed in 2007. Democrats had a majority in the House of Representatives in 2007. —

The group is urging lawmakers to kill the bill because of a provision that would impose penalties on corporations and wealthy individuals who take tax credits to which they are not entitled.

State Sen. Lois Wolk (D-Davis), chair of the Senate tax committee, said she is stunned by the coalition’s position, which is jeopardizing the state’s efforts to enact tax breaks that can already be claimed on federal returns.

“The only reason you would oppose this penalty is if you’re cheating on your taxes,” Wolk said.

She noted that the proposed fine -- 20% of any improperly claimed refund -- is already enforced federally. It was passed in 2007, when Congress and the White House were under GOP control.

The California Chamber of Commerce, the Western States Petroleum Assn. and the California Manufacturers and Technology Assn. are lobbying against the bill, SBX8 32. They argue that it would make businesses reluctant to claim tax breaks for fear of making an error.

In a letter to lawmakers, the organizations objected that the penalty would require taxpayers to “be extremely careful to ask for a refund that does not exceed what the [state tax authority] deems to be reason- able.”

Kyla Christoffersen, a lobbyist at the Chamber of Commerce, called the penalty provision “pernicious.”

California already imposes a penalty on tax scofflaws that is the strictest in the nation, she said, and some corporations routinely pay more taxes than they owe so they won’t get caught in that net.

“Taxpayers are already overpaying just to avoid the existing penalty,” she said. “It is unreasonable and unfair the way [the new one] would be applied in California.”

The state’s existing fine, also 20%, applies only to underreported income.

Honest errors are not penalized, noted Lenny Goldberg, executive director of the California Tax Reform Assn., a liberal think tank.

“All this bill says is that if you make a false claim, there is a risk,” he said.

The state Senate passed the bill last week, and the Assembly could act within the month. But the dispute could scuttle the proposal.

Gov. Arnold Schwarzenegger has indicated he would not sign it unless it had support from all the major interests affected by it. He vetoed a similar bill last year because of its penalty provision.

Hanging in the balance are homeowners such as Stockton resident Freddy Barajas. He recently sold his home for $135,000 in a short sale and would benefit if the measure passed.

The bank wrote off the $365,000 it lost on his home. Under existing law, Barajas must pay income taxes on that amount. The pending bill would eliminate that obligation.

“It is difficult enough to lose your home, but being taxed for the amount of the lost value . . . is just financially devastating,” he wrote in a letter to lawmakers.

And renewable energy companies would gain millions under the bill. It would relieve them of income taxes on federal stimulus grants they receive to jump-start solar and other green energy projects.

Several such firms, saying that green projects create jobs, are lobbying for immediate passage.

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