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Tycoon Seeks Return of Tax Break for Firm

A bill would restore credits to a troubled venture that Paul Allen says was treated unfairly. Some oppose the idea in a budget crisis.

June 01, 2003|Dan Morain | Times Staff Writer

SACRAMENTO — At a time when California is mired in a multibillion-dollar budget shortfall, one of the richest men in the world is asking the Legislature to throw him a rope.

Billionaire Paul G. Allen, a co-founder of Microsoft Corp., has hired Sacramento lobbyists to press lawmakers for a return of tax credits that were taken from one of his firms last year.

If he succeeds, Allen could pay less in state taxes, although how much is unclear. The Franchise Tax Board estimates that approving the legislation sponsored by Allen's firm, Interval Research Corp., and others would save them -- and cost the state -- $8.75 million over the next five years.

Assemblyman Mark Wyland (R-Escondido), vice chairman of the Assembly tax committee, is carrying the bill to restore the credits. He said he introduced the measure, AB 1622, at the suggestion of lobbyists for its one public proponent, Interval Research, but that he was unaware that Allen owned the Palo Alto multimedia firm.

Although some legislators think Allen was treated unfairly, others argue that restoring tax credits with the state facing a $38.2-billion shortfall would give a break to a rich man who can afford lobbyists -- whom he has paid $185,000 in the last year -- at the same time lawmakers are cutting programs for the poor.

"You're looking at some of the poorer people in California who are fighting to have enough money for basic life, and weighing that against proposals like this," said Assemblyman John Laird (D-Santa Cruz).

Lobbyist Lenny Goldberg of the labor-backed California Tax Reform Assn. said Allen -- estimated by Forbes magazine to be worth $20.1 billion -- is "rich enough that his company ought to be paying taxes."

The story behind Allen's Interval Research begins in 1992. Like so many Silicon Valley start-ups in the '90s, it was high concept, more think tank than business. Its goal was to combine the skills and talents of engineers and artists to create futuristic technology, said media accounts at the time. Through his investment organization -- Vulcan Ventures, Inc. -- Allen pledged to back the venture with at least $100 million.

When the high-tech bubble began to burst, however, Allen announced in April 2000 that Interval Research was closing its doors. The firm had generated 140 patent applications for new technologies, but no profits, Allen's representatives say.

Because it had lost money, the company had accumulated California tax credits created by the Legislature to encourage the development of enterprising firms by freeing them from taxes in their early years. Those credits could be deducted against initial profits, giving start-ups a chance to become grounded.

Last year, however, the Legislature changed the law governing firms like Interval Research and effectively raised their tax rate by 2%. That triggered another law that said: When corporations change designations, their tax credits are automatically stripped away.

Now, Allen's representatives argue that, because Interval Research did not voluntarily alter its corporate designation, it should not have lost its tax benefits.

The firm still exists as a business entity and controls intellectual property that some day could make it profitable.

"The state switched us against our will," said lobbyist Christopher Micheli, a tax specialist working on Interval Research's behalf. "Our bill says we should get those credits back. We want what was rightfully ours. We're talking about what we've already earned."

Los Angeles attorney Elliot G. Freier, who also represents Interval Research, said approval of Wyland's bill could be a step toward helping the Silicon Valley out of its economic eddy.

Whether or not Interval Research regains the tax breaks it lost would affect Allen's decision on "whether to exploit the intellectual property" in California, or in another state that might be more friendly to him, Freier said.

"This is a guy who could invest more in the state," said Freier, of the law firm Irell & Manella. "He may be reluctant to do that, given how he was treated. It is really a matter of fairness, where the rest of the country is looking on."

Unlike most bills that seek to cut taxes, Wyland's measure cleared the Assembly Revenue and Taxation Committee on a 4-3 vote in May.

While it is being held in the Assembly Appropriations Committee, it has won some Democratic support, raising the possibility that it could become part of a final tax package at the end of the year.

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