California Attorney General Opinion No. 79-621

1 79-621 TO BE PUBLISHED IN THE OFFICIAL REPORTS OFFICE OF THE ATTORNEY GENERAL State of California GEORGE DEUKMEJIAN Attorney General _________________________ OPINION of GEORGE DEUKMEJIAN Attorney General Warren J. Abbott Assistant Attorney General : : : : : : : : : : : No. 79–621 August 30, 1979 SUBJECT: DEDUCTIBILITY OF FEES—Fees imposed by a city or county pursuant to Government Code section 65974 are deductible for state personal income tax purposes if paid directly by the home owner only if the home buyer is legally responsible for the fees and the home buyer incurs the expenses in carrying on a trade or business. The Honorable John A. Nejedly, Senator, Seventh District, has requested an opinion on the following question: Are the fees imposed by a city or county pursuant to Government Code section 65974 relating to interim school facilities deductible for state personal income tax purposes if paid directly by the home buyer? CONCLUSION Fees imposed by a city or county pursuant to Government Code section 65974 are deductible for state personal income tax purposes if paid directly by the home owner only (1) if the home buyer is legally responsible for payment of the fees, and (2) the home buyer incurs the expenses either (a) in carrying on a trade or business, or (b) for the production of income or the management, conservation, or maintenance of property held for the 2 79-621 production of income. ANALYSIS In 62 Ops. Cal. Atty. Gen. 254, we examined the fees imposed under Government Code section 65974 and concluded that they were “special taxes” within the meaning of article XIIIA of the California Constitution (Proposition 13), thus requiring two-thirds vote of the electorate before any city or county imposed such a fee or changed the rate or method of computation designed to increase revenue from such fees. (Id. at 258.) Government Code section 659741 is part of a statutory scheme designed to alleviate 1 Government Code section 65974 provides: “For the purpose of establishing an interim method of providing classroom facilities where overcrowding conditions exist, as determined necessary pursuant to Section 65971, and notwithstanding Section 66478, a city, county, or city and county may, by ordinance, require the dedication of land, the payment of fees in lieu thereof, or a combination of both, for classroom and related facilities for elementary or high schools as a condition to the approval of a residential development, provided that all of the following occur: “(a) The general plan provides for the location of public schools. “(b) The ordinance has been in effect for a period of 30 days prior to the implementation of the dedication or fee requirement. “(c) The land or fees, or both, transferred to a school district shall be used only for the purpose of providing interim elementary or high school classroom and related facilities. “(d) The location and amount of land to be dedicated or the amount of fees to be paid, or both, shall bear a reasonable relationship and will be limited to the needs of the community for interim elementary or high school facilities and shall be reasonably related and limited to the need for schools caused by the development; provided, the fees shall not exceed the amount necessary to pay five annual lease payments for the interim facilities. In lieu of the fees, the builder of a residential development may, at his or her option and at his or her expense, provide interim facilities, owned or controlled by such builder, at the place designated by the school district, and at the conclusion of the fifth school year the builder shall, at the builder’s expense, remove the interim facilities from such place. “(e) A finding is made by the city council or board of supervisors that the facilities to be constructed from such fees or the land to be dedicated, or both, is consistent with the general plan. “The ordinance may specify the methods for mitigating the conditions of overcrowding which the school district shall consider when making the finding required by subdivision (b) of Section 65971. 3 79-621 on an interim basis conditions of overcrowding in schools related to new residential developments. When the appropriate school district has made the requisite findings as to the existence of conditions of overcrowding and the lack of feasible methods of eliminating such conditions (Gov. Code, § 65971), the city or county may not approve an ordinance rezoning property to residential use, grant a discretionary permit for residential use, or approve a tentative subdivision map for residential purposes within the affected school attendance area unless the city council or board of supervisors either adopts an ordinance pursuant to section 65974 or finds there are overriding fiscal, economic, social, or environmental facts justifying the approval of any residential developments that would otherwise be subject to section 65974. (Gov. Code, § 65972.) In simplified terms, a Government Code section 65974 ordinance imposes on one seeking approval of a residential development,2 a requirement of dedicating land providing interim facilities or the payment of fees in lieu thereof as a condition of such approval. The land or fees is to be turned over to the school districts for use solely for the purposes of providing interim elementary or high school classroom and related facilities, pursuant to a schedule prepared by the school district (Gov. Code, § 68976), and the school district must account for and report on the use of the fees. (Gov. Code, § 65978.) The city or county determines whether land or fees shall be exacted, and only fees may be required in subdivisions containing 50 parcels or less. The developer is given the option to provide the facilities. (Gov. Code, § 95974.) If the payment of fees is required, such payment is to be made at the time the building permit is issued. (Id.) The question presented is whether, if the home buyer pays those fees (hereinafter referred to as “school impact fees”) directly to the city or county, the fees are deductible for purposes of the buyer’s state personal income tax. The California Personal Income Tax Law (Rev. & Tax. Code, § 17001),3 enacted pursuant to the authority contained in California Constitution article XIII, section 26, imposes each year a tax on the taxable income of every resident. (§ 17041.) Taxable income is computed by deducting from total gross income certain allowable deductions. (§ 17073.) Only those items specified in the statute may be deducted. (§ 17201; Cal. Admin. Code, tit. 18, § 17201.) Section 17204 allows a deduction for some specified, but not all taxes. “If the payment of fees is required, such payment shall be made at the time the building permit is issued. “Only the payment of fees may be required in subdivisions containing 50 parcels or less.” (As amended by Stats. 1979, ch. 282.) 2 “Residential development” is defined in Government Code section 65973 (c) to mean “. . . a project containing residential dwellings, including mobilehomes, of one or more units or a subdivision of land for the purpose of constructing one or more residential dwelling units. 3 All further references to unidentified code sections are to the Revenue and Taxation Code unless otherwise indicated. 4 79-621 As pertinent here, that section provides: “(a) Except as otherwise provided in this section and Section 17205 [relating to splitting of real property taxes between buyer and seller in a sale during the tax year], the following taxes shall be allowed as a deduction for the taxable year within which paid or accrued: “(1) State and local, and foreign, real property taxes, less any amounts received from the state pursuant to the authorization contained in Section id of Article XIII of the Constitution; “(2) State and local personal property taxes; “(3) State and local general sales taxes; “(4) State and local taxes in the sale of gasoline, diesel fuel, and other motor fuels; and “In addition, there shall be allowed as a deduction state and local, and foreign, taxes not described in the preceding sentence which are paid or accrued within the taxable year in carrying on a trade or business or an activity described in Section 17252 (relating to expenses for production of income). “. . . . . . “(c) No deduction shall be allowed for the following taxes: “(1) Taxes paid or accrued to the state under this part; “(2) . . . [income taxes paid to the United States or any other taxing authority] “. . . . . . “(6) Taxes assessed against local benefits of a kind tending to increase the value of the property assessed, but this does not exclude the allowance as a deduction of so much of the taxes assessed against local benefits as is properly allowable to maintenance or interest charges. “(7) Taxes on real property, to the extent that Section 17205 requires 5 79-621 such taxes to be treated as imposed on another taxpayer. “. . . . . . The first inquiry is to determine whether the taxes in question, assuming they come within section 17204, are deductible by the taxpayer. “In general, taxes are deductible only by the person upon whom they are imposed.” (Cal. Admin. Code, tit. 18, § 17204(a).) This is also the rule as to deduction for taxes under the federal income tax law. (§ 164 of the Int. Rev. Code which is similar to § 17204. See 5 Merrens, Law of Federal Income Taxation (1975) § 27.02.)4 Thus, unless the home buyer in the question presented was legally obligated to pay the Government Code section 65974 fees, he may not deduct them from his gross income. As noted above, Government Code section 65974 requires the school impact fees to be paid “at the time the building permit is issued.” If the home buyer has in fact bought a lot and is building his own home, we would assume he would then be responsible for obtaining the building permit, and we would perceive that he would be legally obligated to pay the school impact fees. If, however, the building permit were the obligation of the developer, and he in turn either required the buyer to advance the fees, or pass them on in the form of a higher price, the home owner would not be entitled to the deduction. In such circumstances, however, the home buyer would normally be allowed to add the fees to his cost of the property for purposes of determining gain or loss on its disposition. (5 Merrens, supra, § 27.03.) Once determining that the home buyer is legally responsible for the payment of the school impact fees, and has in fact paid them, the next question is whether such fees are deductible taxes under section 17204. This requires examination as to whether school impact fees are a local real property tax (deductible) or a special local benefit assessment (not deductible). It is our conclusion that the section 65974 fees are neither. In 62 Ops. Cal. Atty. Gen. 254, supra, our analysis of the school impact fees led to the conclusion that such fees “. . . may be characterized as excise taxes (charges or burdens exacted for the privilege of doing a particular activity) placed upon all persons who wish to have building permits approved for residential development under the specified conditions . . . .” (Id. at 257.)5 We concluded that the fee was a tax, that is: 4 Since much of the California Personal Income Tax Law is based on the Federal Income Tax Law, authorities on the latter are persuasive as to the construction of the comparable California provision. (See 5 Witkin, Summary of Cal. Law (8th ed. 1974) Taxation, § 261.) 5 In that opinion, this office only examined the question of whether the school impact fees imposed by Government Code section 65974 constitute special taxes within the meaning of California Constitution article XIIIA, and examined no other fees or taxes. In this opinion, we examine only the relationship of the school impact fees to the personal income tax law, and have 6 79-621 “. . . a compulsory exaction imposed by legislative power upon persons or property for the purpose of raising revenue to fund a governmental endeavor. (See West Field-Palos Verdes Co. v. City of Rancho Palos Verdes (1977) 73 Cal. App. 3d 486, 495 -496; Associated Home Builders, Etc. Inc. v. City of Newark (1971) 18 Cal. App. 3d 107, 109–111, Date v.Lakeport City Council (1970) 12 Cal. App. 3d 864, 868.) It may be levied to raise revenues for a general or specific purpose and can cover a wide or narrow range of persons, property, or activities.” (Id. at 256.) One characteristic of a property tax in California is that it must be imposed in proportion to the value of the property subject to the tax. (Cal. Const., art. XIII, § 1 (h).) The school impact fees are not, nor do they purport to be, levied on the basis of the value of property. Instead, they are levied against developers and builders and are a condition to obtaining approval of such development. “. . . . Generally speaking, the function of a property tax is to raise revenue. Such a tax does not impose any condition nor does it place any restriction upon the use of the property taxed. A privilege tax, although also passed to raise revenue, and as such is to be distinguished from the license tax or regulatory charge imposed under the state’s police powers, is imposed upon the right to exercise a privilege, and its payment is invariably made a condition precedent to the exercise of the privilege involved. . . .” (Ingels v. Riley (1936) 5 Cal. 2d 154, 159 (discussing motor vehicle license fee and holding it to be a privilege or excise tax).) Under these concepts, we easily conclude that the school impact fees are excise or privilege taxes to raise revenue for school purposes, and are not property taxes.6 For similar reasons, we believe the school impact fees do not constitute special assessments of the type which may not be deducted pursuant to section 17204(c) (6). The Franchise Tax Board regulations relating to the special assessment provision state in part: “. . . [S]o-called taxes, more properly assessments, paid for local benefits, such as street, sidewalk, and other like improvements, imposed because of and measured by some benefit inuring directly to the property against which the assessment is levied do not constitute an allowable not reviewed any other fee or tax. 6 We assume there is no question that these fees are not local general sales tax or local taxes on the sale of gasoline, diesel fuel, and other motor fuels within the meaning of section 17204(a) (3) and (4). 7 79-621 deduction from gross income. A tax is considered assessed against local benefits when the property subject to the tax is limited to property benefited. Special assessments are not deductible, even though an incidental benefit may inure to the public welfare. . . .” (Calif. Admin. Code, tit. 18, § 17204(d); see also 26 C.F.R. § 1.164–4 (1928); and 2 CCH 1979 Stand. Fed. Tax Rep. § 1455 at 19,191; and 4 Merrens, supra, § 27.47.) The school impact fees, of course, are not assessed against any particular property, but as indicated above, are assessed for the purpose of developing residential property. More importantly, the fees are not for the purpose of or measured by any benefit inuring directly to the developed property. They are collected for the benefit of the entire attendance area in which the school district has determined conditions of overcrowding exist. We conclude that the fees are not special assessments within the meaning of subdivision (c) of section 17204. (Cf. Anaheim Sugar Co. v. County of Orange (1919) 181 Cal. 212, 216.) We turn, then, to the last paragraph of subdivision (a) of section 17204 which allows a deduction for state and local taxes other than those described in paragraphs 1 through 4 of subdivision (a) which are paid in carrying on a trade or business or are related to expenses for the production of income or maintenance of income property. If the home buyer in the question presented is legally obligated to pay the school impact fees, and building, buying or selling homes is his trade or business, then, the fee would be deductible as a business expense under section 17202 (“. . . all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, . . .”) (But see §§ 18197–18199, relating to capital gains requirements in the sale of subdivided real property.) If the home buyer-taxpayer is not in the trade or business of building or selling homes, but has purchased the house in question, not for his or her personal residence, but for investment purposes, then the school impact fees could be deducted pursuant to section 17252, which provides in part as follows: “In the case of an individual, these shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year— “(a) For the production or collection of income; “(b) For the management, conservation, or maintenance of property held for the production of income; or 8 79-621 “. . . . . .” See the Franchise Tax Board regulations (Cal. Admin. Code, tit. 18, § 17252) and counterpart federal law (26 U.S.C.A. § 212 and 26 C.F.R. § 1.2 12–1 (1978)) for the precise requirements of qualifying for deductions under this section.7 ***** 7 We have not, of course, examined the activities of any individual to determine whether those activities would qualify the individual taxpayer to take a deduction of the school impact fees as a business expense or allowable nonbusiness expense under section 17252. We would refer such individuals to the Franchise Tax Board and their own tax counsel.