Menu
Tax Notes logo

California's Ability to Toll Statutory Deadlines During COVID-19

Posted on June 1, 2020

Timothy A. Gustafson is a partner and Annie E. Rothschild is an associate in the Sacramento, California, office of Eversheds Sutherland (US) LLP.

In this installment of A Pinch of SALT, the authors discuss the California Franchise Tax Board’s legal authority to toll the statute of limitations and other statutory deadlines during the COVID-19 emergency.

On March 4 California Gov. Gavin Newsom (D) declared a state of emergency in response to the global COVID-19 outbreak. Since then, the governor has issued over 25 executive orders containing COVID-19 related measures and guidance. In the executive orders, Newsom directed state agencies to take emergency actions to curb the spread of the coronavirus and to assist citizens whose lives are disrupted by the pandemic.

One executive order directed most of California’s tax agencies to provide taxpayers affected by COVID-19 emergency measures with numerous tax-related extensions. In response, the Franchise Tax Board, which administers the state’s income and franchise taxes, extended the due date for tax returns and payments. Shortly thereafter, the FTB also announced that it would toll the statute of limitations and other statutory deadlines for some tax assessment and appeal-related activities. This article explores the FTB’s legal authority to take these actions during the COVID-19 state of emergency.

Background

Newsom Orders Tax Agencies to Provide Relief

In addition to enabling California to mobilize its pandemic response, Newsom’s March 4 proclamation ordered state agencies to use their resources and perform all activities consistent with direction from emergency response and public health authorities.1

Then on March 12, he issued Executive Order N-25-20,2 which included two directives to tax agencies to assist taxpayers affected by COVID-19. For taxes administered by the California Department of Tax and Fee Administration (CDTFA), the order suspended the requirement that taxpayers file a statement when they pay tax or file returns late.3 It also directed four tax agencies — the FTB, the CDTFA, the State Board of Equalization, and the Office of Tax Appeals (OTA) — to “use their administrative powers where appropriate to provide those individuals and businesses impacted by complying with a state or local public health official’s imposition or recommendation of social distancing measures related to COVID-19 with the extensions for filing, payment, audits, billing, notices, assessments, claims for refund, and relief from subsequent penalties and interest.”4

On March 30 Newsom issued Executive Order N-40-20,5 which contained additional directives to the CDTFA. First, it allowed the CDTFA to temporarily suspend the requirement that taxpayers request an extension and file a statement under penalty of perjury for those filing a return for less than $1 million in tax.6 Next, it extended by 60 days the statute of limitations for taxpayers to file refund claims with the CDTFA.7 Last, it extended by 60 days the limit for taxpayers to appeal CDTFA determinations to the OTA.8 This order made no specific directives to the FTB or California’s other tax agencies.

Interestingly, Executive Order N-40-20 provided more detailed directives to the CDTFA than Executive Order N-25-20 provided to the FTB and the other tax agencies in general. While the order to the CDTFA included specific rules and extensions, the earlier order gave the tax agencies more deference by simply instructing them to use their administrative powers to provide tax-related extensions. As will be discussed in further detail, the FTB responded to the governor’s directive by tolling a number of tax-related statutory deadlines.

FTB Tolling Specific Deadlines

FTB Notice 2020-02,9 issued March 30 in response to the governor’s COVID-19 emergency declaration, postpones time-sensitive tax-related acts based on “the Governor’s declared State of Emergency, Executive Order N-25-20, [and] California Revenue and Taxation Code ([C]RTC) section 18572,” which according to the FTB gives the agency “the authority to postpone the time sensitive acts outlined in [the] Notice.”10

First, the notice extends the time for taxpayers to file claims for refund. If the statute of limitations for filing a timely claim for refund11 expires between March 12 and July 15 (hereinafter, the postponement period), the FTB will consider the claim timely if filed on or before July 15.

Similarly, the notice provides taxpayers with the same July 15 extension for filing a timely protest of a notice of proposed assessment (NPA),12 which normally would have a deadline during the postponement period. Next, the notice provides taxpayers with the July 15 extension for filing a timely appeal of a notice of action (NOA)13 or petition for rehearing14 with the OTA.

Finally, the notice provides the FTB an extension of time to issue an NPA for additional tax. Where the statute of limitations for issuing a timely NPA15 expires during the postponement period, the FTB has an extension until July 15 to timely issue an NPA.

Overview of the Law

Governor Has Broad Executive Order Power

The California Constitution vests the “supreme executive power” of the state in the governor.16 During a state of emergency, the governor’s executive power is broadened. Specifically, the governor may suspend any regulatory statute or any statute prescribing the procedure of conduct of state business, or the rules of any state agency in which the governor determines that strict compliance with any statute or rule would in any way hinder mitigation of the emergency.17

Further, the governor has complete authority over all state agencies during a state of emergency.18 The governor may exercise the state’s police power to effectuate this authority by issuing orders and regulations as he deems necessary. These orders and regulations must be in writing and would take effect immediately, having the force and effect of law.19

FTB’s Statutory Authority to Toll Statutory Deadlines

After the governor has declared a state of emergency, the FTB has the authority to toll numerous tax-related deadlines.20 California Revenue and Taxation Code (CRTC) section 18572 adopts IRC section 7508A, allowing the FTB to postpone a number of enumerated tax-related deadlines for taxpayers that the board determines have been affected by a state of emergency.21

IRC section 7508A provides that for taxpayers affected by a federally declared disaster, the treasury secretary may specify a period of up to one year that may be disregarded in determining whether some tax-related acts are performed timely.22 These acts include filing tax returns, paying taxes, filing a petition with the tax court for redetermination of a deficiency, filing a claim for refund, assessing tax, giving notice or demand for payment of any tax, and “any other act required or permitted under the internal revenue laws specified by the Secretary.”23

Analysis

FTB Has Legal Authority for the Extensions Provided in Notice 2020-02

Because of the current state of emergency, the FTB has the authority to toll the statutory deadlines announced in Notice 2020-02. The FTB’s tolling power was authorized by CRTC section 18572 upon the governor’s declaration of a state of emergency.24 Then, Executive Order N-25-20 directed the FTB to use its power to provide relief to all California taxpayers.

Executive Order N-25-20 instructed the FTB to use its administrative powers to provide individuals and businesses affected by complying with COVID-19 measures with “extensions for filing, payment, audits, billing, notices, assessments, claims for refund, and relief from subsequent penalties and interest.”25 Based on the governor’s extensive executive power and broad statutory authority over state agencies during a state of emergency, the executive order appears to be within the governor’s authority — hence properly executed.

While some of the tax-related extensions in Notice 2020-02 were directly authorized by the governor’s executive order, others were not. For example, the notice provides taxpayers an extension of time for filing claims for refund; this was directly authorized by the governor’s order explicitly directed the FTB to provide extensions for claims for refund.26 Conversely, the notice also allows the FTB additional time to issue NPAs; however, the governor’s order does not appear to authorize this because it only directs the FTB to provide relief to individuals and businesses affected by COVID-19. Nevertheless, the FTB has statutory authority under CRTC section 18572 to toll numerous tax-related deadlines after the governor declared a state of emergency on March 4. For taxpayers the FTB determines are affected by the COVID-19 state of emergency, the board may specify a period of up to a year that may be disregarded in determining whether various tax-related actions are completed timely.27 For instance, the statute authorizes the FTB to toll the deadline for issuing an assessment of tax; in Notice 2020-02, the board used this authority to allow itself additional time to issue NPAs.

Further, the FTB has statutory authority to toll the deadline for “filing a petition with the Tax Court for redetermination of a deficiency, or for review of a decision rendered by the Tax Court.”28 In California’s tax administrative appeal process, this authority likely would be the equivalent of filing an appeal of an FTB determination with the OTA or filing a petition for rehearing of an OTA decision. Moreover, the FTB’s authority for any of the extensions provided in Notice 2020-02 could stem from the statute’s catch-all provision, allowing extensions for “any other act required or permitted under the internal revenue laws specified by the Secretary.”29

FTB’s Tolling of Statutory Deadlines Not Unprecedented

On a number of occasions, the FTB has used its statutory authority to provide taxpayers with tax-related extensions during a state of emergency. Most recently, in October 2019, the FTB provided filing deadline extensions to taxpayers affected by the state of emergency declared in Los Angeles and Riverside counties because of rampant wildfires.30 For affected taxpayers in those counties, the FTB used its authority under CRTC section 18572 to provide tax return filing extensions, cancel interest, and waive any late filing or late payment penalties that would otherwise apply. While the FTB’s use of its authority to extend statutory deadlines during a state of emergency is not unprecedented, the board generally has limited the relief to a specific group of affected taxpayers, rather than extending relief to all taxpayers statewide.31

Other California Tax Agencies Have Provided Similar Extensions

The OTA also tolled several deadlines for tax appeals in response to the state of emergency. On March 18 it issued OTA Legal Notice 2020-01 to implement Executive Order N-25-20’s directive to provide individuals and businesses affected by COVID-19 measures with extensions.32 Notice 2020-01 gives automatic 60-day extensions for all appeal briefing deadlines falling between March 1 and May 18, 2020.

Similarly, the governor’s executive orders have provided a number of extensions for taxes administered by the CDTFA.33 For instance, taxpayers have a 60-day extension to file claims for refunds or file appeals with the OTA that would otherwise need to be filed by July 31.

Conclusion

In these extraordinary times, both the governor and state agencies have additional power to temporarily modify some statutory requirements. While many of these actions would be prohibited in ordinary times, during a state of emergency the governor has immense power over state agencies and can suspend specific statutes. The FTB also has greater authority to toll many tax-related statutory deadlines.

The FTB’s motivations for Notice 2020-02 are admirable: The agency aims to provide relief and assist taxpayers during the COVID-19 crisis. The board’s leadership has reiterated this by publicly stating that the agency will do whatever it can to help taxpayers. The automatic deadline extensions for all California taxpayers in the notice demonstrate the FTB’s efforts to provide taxpayers with some relief during this time.

However, it is possible that taxpayers facing assessment could challenge the FTB’s tolling of the statute of limitations for issuing NPAs. For instance, taxpayers who receive an NPA during the postponement period but after the four-year statute of limitations period expires might contest the FTB’s authority to toll this statutory deadline. Such a challenge seems unlikely to succeed because the FTB appears to have explicit statutory authority for this action during a state of emergency.34

Ultimately, the additional time provided in Notice 2020-02 offers much-needed relief to taxpayers who want to exercise their rights to tax refunds, protests, and appeals during these uncertain times.

FOOTNOTES

1 Office of Gov. Gavin Newsom, Proclamation of a State of Emergency (Mar. 4, 2020).

2 Newsom, Executive Order N-25-20 (Mar. 12, 2020).

3 Id. at para. 5.

4 Id. at para. 6. Notably, the order did not address the Employment Development Department, which administers California’s payroll taxes.

5 Newsom, Executive Order N-40-20 (Mar. 30, 2020).

6 Id. at para. 4.

7 Id. at para. 5.

8 Id. at para. 6.

9 California Franchise Tax Board, FTB Notice 2020-02 (Mar. 30, 2020).

10 Id.

11 Claims for refund must be made within the later of: four years from the date the tax return was filed, four years from the original due date of the tax return, or one year from the date of overpayment. See Cal. Rev. & Tax. Code section 19306.

12 Taxpayers have 60 days from the NPA’s mailing date to file a written protest. See id. at section 19041.

13 For an NOA on a taxpayer’s protest of an unpaid assessment, the taxpayer has 30 days from the NOA’s mailing date to file a written appeal. For an NOA denying a taxpayer’s refund claim, the taxpayer has 90 days from the NOA’s mailing date to file a written appeal. See id. at sections 19045, 19324; see also Cal. Code Regs. tit. 18, sections 30203(a), 30204, 30205.

14 Taxpayers or the FTB have 30 days from the OTA’s determination to file a petition for rehearing. See Cal. Rev. & Tax. Code section 19048; see also Cal. Code Regs. tit 18, sections 30505, 30602.

15 The FTB must mail an NPA to the taxpayer within four years after the tax return was filed, except in the case of a false or fraudulent tax return. See Cal. Rev. & Tax. Code section 19057(a).

16 Cal. Const. Art. V, section 1.

17 Cal. Gov’t Code section 8571.

18 Id. at section 8627.

19 Id. at section 8567(b).

20 See Cal. Rev. & Tax. Code section 18572(b).

21 The statute provides that IRC section 7508A “shall apply to a taxpayer determined by the Franchise Tax Board to be affected by a state of emergency declared by the Governor.” Cal. Rev. & Tax. Code section 18572(b) (emphasis added).

22 See IRC section 7508A; see also id. section 7508(a)(1).

24 The governor’s declaration of a state of emergency is the only prerequisite required to give the FTB statutory authority to toll tax-related deadlines. After a state of emergency is declared, the FTB then has authority to toll tax-related deadlines for taxpayers it determines are affected by the state of emergency. See Cal. Rev. & Tax. Code section 18572(b). Even though FTB Notice 2020-02 cites both the state of emergency and Executive Order N-25-20 for the agency’s authority to toll tax-related deadlines, only the declaration of a state of emergency is necessary to trigger this authority.

25 See Executive Order N-25-20, supra note 2, at para. 6.

26 See id.; see also FTB Notice 2020-02, supra note 9.

27 See Cal. Rev. & Tax. Code section 18572 (adopting IRC section 7508A); see also IRC section 7508(a)(1).

28 See Cal. Rev. & Tax. Code section 18572; see also IRC section 7508(a)(1)(C).

31 See FTB, “List of Disasters” (last updated Apr. 8, 2020).

32 California Office of Tax Appeals, Legal Notice 2020-01 (Mar. 18, 2020).

33 California Department of Tax and Fee Administration, “COVID-19 State of Emergency.”

34 Also possible, yet extremely unlikely, is a third party challenging the notice’s taxpayer-friendly provisions by seeking an injunction to prevent the FTB from allowing refund claims that have been filed outside the statute of limitations under California Code of Civil Procedure section 526a. That provision prevents the “illegal expenditure of, waste of, or injury to” the FTB’s funds. Cal. Code Civ. Proc. section 526a(a). Again, any such challenge seems destined to fail given the FTB’s authority under CRTC section 18572.

END FOOTNOTES

Copy RID