United States: Potential Traps For The Unwary In The California Office Of Tax Appeals Draft Regulations

At a Glance...

The California Office of Tax Appeals (the "OTA"), the new tax tribunal that will be assuming some of the functions of the California State Board of Equalization ("BOE"), has issued its initial set of draft regulations. The draft regulations contain some short deadlines and procedural traps for those who are not closely familiar with them. They also raise concerns for taxpayers regarding hearing and discovery rules, facilitation of settlement discussions, and taxpayer's ability to rely on BOE opinions.

Office of Tax Appeals Draft Emergency Regulations

As we previously covered in a prior alert, as part of Governor Jerry Brown's budget bill, A.B. 102 stripped the BOE of most of its tax administrative functions as of July 1, 2018, and of its role as a tax tribunal starting January 1, 2018. The bill did the following:

  • Created a new agency, the California Department of Tax and Fee Administration ("CDTFA"), which has assumed the BOE's administrative and regulatory functions for sales tax and other business taxes and fees;
  • Created the OTA, which will assume the BOE's adjudicative functions on January 1, 2018. The OTA will be composed of administrative law judges ("ALJs") hearing tax appeals in three-judge panels. These ALJs will be attorneys with experience in tax law; and
  • Left responsibility for overseeing certain property tax assessments, utility tax assessments, and tax assessments on insurers in the BOE.

As part of an accelerated transition process, the OTA has issued a draft of its emergency regulations for public comment prior to opening its doors for appeals on January 1, 2018. The draft regulations are scheduled to be discussed at an informal meeting today, November 6, with written comments due by tomorrow.

The draft OTA regulations incorporate language and features taken from the existing BOE Rules for Tax Appeals, the California Administrative Procedure Act (the "APA"), and the 2006 American Bar Association Model State Administrative Tax Tribunal Act.

Procedural traps for the unwary

For the most part, the draft OTA regulations adopt the same language and retain many of the deadlines, which vary in length, set forth in the existing BOE rules. This is because many of the deadlines are established by statute. There are, however, some changes and additions. These changes include some short deadlines of varying lengths and other procedural traps.

Failure to comply with these deadlines may result in the taxpayer's waiver of its rights to an appeal, to file briefs in support of its position, to an oral hearing, to introduce evidence or witnesses at an oral hearing, or to request a rehearing.

The changes in the draft OTA regulations from the existing BOE rules include, for example:

  • After filing an appeal with the OTA within the statutory deadline, the taxpayer's deadline to "perfect" a franchise tax appeal will be reduced from 90 days to 60 days after the date of notice by the OTA.
  • The deadline for submitting a written request for an oral hearing will change from 30 days from the conclusion of briefing to no later than the date of the appellant's reply brief.
  • Each party will be required to return a response to OTA's notice of oral hearing no later than 15 days from the date the notice is mailed.
  • Prehearing conferences may be requested regardless of whether an oral hearing has been requested.
  • Requests for an oral hearing may indicate whether the taxpayer prefers a hearing in Sacramento, Los Angeles, or Fresno. Before this, hearings were usually held in Sacramento and Culver City.

What if I have a pending appeal at the BOE already and a final decision has not been issued yet?

For taxpayers with appeals pending before the BOE, or who will be filing an appeal prior to January 1, 2018, here are some transition rules included in the draft OTA regulations:

  • If the BOE has issued a decision in an appeal which is not final prior to January 1, 2018, for which a party had submitted a timely petition for rehearing with the BOE before January 1, 2018, it will be treated by the OTA as a timely petition for rehearing.
  • If the BOE issued a decision in an appeal which is not final prior to January 1, 2018, before that decision becomes final, any party may submit a petition for rehearing with the OTA pursuant to the draft OTA regulations.
  • If prior to January 1, 2018, the BOE, OTA, or CDTFA has, in writing, set a briefing deadline of January 1, 2018 or later for an appeal, the briefing deadline will continue to be applicable, unless otherwise directed by the OTA.

Some Concerns about the Draft Emergency Regulations

Despite the attempt by the OTA to add more structure and predictability to the appeal and hearing process, the language of the draft OTA regulations raises some concerns for taxpayers.

  • Deferral of OTA Proceedings due to Settlement Discussions – Under the draft OTA regulations, the OTA will postpone OTA proceedings in business tax appeals for 60 days if notified by the CDTFA that a settlement proposal has been submitted by a taxpayer. That 60-day period will only be extended if the CDTFA (not the taxpayer) requests an extension. However, the draft OTA regulations do not have a similarly worded provision in case of franchise tax appeals. Instead, the OTA may postpone, for an unidentified period of time, the OTA proceedings for "reasonable cause," including if a party is seeking time to settle or otherwise resolve the appeal. We believe parity in standards for deferrals is essential for the OTA.
  • Hearing and Discovery Rules – The draft OTA regulations attempt to introduce actual hearing rules, which the BOE has never had, by merely incorporating by reference the hearing procedures under the APA that "are accessible to non-lawyers." For example, any relevant evidence may be admitted if it is "the sort of evidence on which responsible persons are accustomed to rely on in the conduct of serious affairs" regardless of whether such evidence is admissible in civil actions. However, it is unclear where the line is drawn, as the APA contains rules allowing for the issuance of subpoenas and the taking of depositions. Further, despite the introduction of basic evidence rules, there are no rules addressing the availability of discovery by taxpayers, which might prevent taxpayers from obtaining crucial evidence from the California Franchise Tax Board (the "FTB") or the CDTFA. We believe the OTA regulations should contain more specific guidelines for discovery.
  • Reliance on prior BOE Opinions – There is concern regarding taxpayers' ability to continue to rely on BOE opinions given the OTA's treatment of BOE precedential opinions as "persuasive authority" instead of binding precedent. Of further concern is the ease with which the OTA may, and will, as a matter of course, withdraw the precedential status of a BOE or OTA opinion. Also, "any person" or party may request that the OTA designate a published opinion or portion thereof as precedential or request that the precedential designation of a published opinion be removed. Thus, there is the risk that withdrawal requests may be submitted outside the process of an active appeal. There is also risk that the OTA will withdraw the precedential status of BOE opinions on its own initiative. If the OTA were to make substantive BOE decisions non-precedential outside the adjudicative process, it may exceed its statutory authority. As a matter of consistency and predictability, we believe that OTA should exercise restraint in this area and respect BOE precedent as good law. Of course, precedent may change for the same reasons that the BOE overruled precedent in the past. But we believe any deviations from BOE precedent by the OTA should be done in the context of an active appeal, with the concurrence of at least two of the three ALJs (as required per the draft OTA regulations for each holding in an OTA written opinion), and not based on a mere request of a taxpayer or tax agency.

This article is presented for informational purposes only and is not intended to constitute legal advice.

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