Proposed California Franchise Tax Board rules on taxpayer appeals seeking alternative apportionment methods for income tax liabilities are moving through the state rulemaking process.
The proposed rules, which were the subject of a November 26 interested parties meeting, seek to more clearly formalize the procedure by which a multistate taxpayer can appeal to the three-member board if the taxpayer's petition for alternative apportionment methods is rejected by FTB staff.
Included in the draft rules is language clarifying that the three-member board has the authority to hear an initial taxpayer petition rather than waiting for the appeal, and that taxpayers have 60 days to file an appeal brief with the board after being rejected by FTB staff. FTB staff then has 30 days to file an opening brief, and taxpayers have 30 days to file a reply, the proposed rules say.
Taxpayers appealing a staff decision must waive statutory confidentiality protections for tax information related to the issues raised in their appeals, and in some cases must agree to an extension of up to 180 days for the FTB to provide a “notice of proposed deficiency assessment” after the appeal is decided. The draft language also includes definitions and rules for briefs, noticing of hearings, use of witnesses, ex parte communications, and other procedural details.
Melissa Williams with the FTB told Tax Notes on November 26 that the board had been discussing clarifications to the existing rules for some time, but that the formal rulemaking process began with the first interested parties meeting in June 2017. Part of the reason for proposing the new rules was anticipation that the state’s 2013 shift to mandatory single-sales-factor apportionment might cause more taxpayers to seek alternative apportionment methods.
“I think the feeling was, now, possibly, we’re going to have more of these,” according to Williams, who is heading up the rulemaking process. She said comments on the draft rules are due by December 26. A second — possibly final — draft is expected within 60 to 90 days and will also be put out for comment. Williams told Tax Notes November 27 that it's unclear whether there will be another interested parties meeting, but she added that if no meeting is held, the staff anticipates proceeding with the formal regulatory process in approximately 120 days.
During the November 26 meeting, stakeholders — primarily tax practitioners — commented on elements of the draft rules, including the proposed deadlines for filing appeals. Marc Aprea of government relations firm Aprea & Micheli Inc., representing PwC at the meeting, argued that the 60-day time limit for filing an appeal of a staff denial “may require the taxpayer to make a decision about a hearing before the audit or protest of other issues” related to their dispute with the FTB are resolved. That lack of resolution often makes it "impossible to determine the true impact" of the staff's decision regarding alternative apportionment, he said, adding that taxpayers need more flexibility regarding timing of appeals.
Aprea also urged the FTB to clarify that appealing to the board won’t restrict a taxpayer from pursuing other remedies, including going through the state’s Office of Tax Appeals.
Carl Joseph of EY asked if the draft language could include a provision clarifying that the 60-day period to file an appeal would be frozen while a taxpayer looks into settling a tax case with the FTB’s Settlement Bureau, which negotiates settlements of civil tax matters. FTB staff said they’d take that under consideration.
Other questions included whether the language requiring taxpayers to waive confidentiality protections could be made conditional on the board deciding to hear an appeal. At the meeting, staff indicated that the board would hear all appeals. Jon Sperring of PwC asked if the waiver could be rescinded before a hearing is publicly announced. Williams replied that staff could look into that option, and also the possibility raised by another commenter of closed hearings in some circumstances when sensitive information is involved.
Among other comments, Eric Coffill of Pillsbury Winthrop Shaw Pittman LLP argued that if staff could issue tentative or proposed decisions, taxpayers would have more flexibility — for example, to consider settlement — before a final staff decision starts the clock and forces taxpayers to choose whether to move forward with a formal appeal to the board.