Background
The general parameters for California’s alternative apportionment petition process are contained in Regulation 25137. California has adopted a unique process for deciding alternative apportionment petitions, both those initiated by taxpayers and those initiated by the Franchise Tax Board (the “FTB”). Petitions may be reviewed and decided by FTB staff (which may include review by an auditor, protest hearing officer, or by a special “25137 Committee” housed within the FTB (collectively, FTB Staff) or may also be decided by the three members of the FTB (after a decision by FTB Staff).1
While the process in California is complex, historically the procedural guidance on the process has been sparse. The current regulatory language merely states that in cases deemed appropriate by the Board, it may elect to hear and decide a Section 25137 petition in addition to consideration by FTB Staff. Petitions to the Board are considered in open sessions at a regularly scheduled Board meetings. Due to the ambiguity about the petition review process, the FTB began an informal rulemaking process in June of 2017, and has since held several interested-parties meetings to discuss drafts of proposed revisions to Regulation 25137.
The Twenty-day notice
On December 29, 2020, the FTB issued a twenty-day notice for purposes of soliciting public comment for its proposed amendments to Regulation 25137. Written comments are due by January 18, 2021.
Following the close of this twenty-day comment period, FTB Staff intends to present the newly revised proposed draft regulation language to the Board to request permission to proceed with the formal Administrative Procedures Act regulatory process.
The FTB’s proposed revisions to Regulation 25137 include the following:
- Filing deadlines: A taxpayer seeking review of a Section 25137 petition by the Board or appealing an adverse Section 25137 decision made by FTB staff, must file a petition with the FTB Chief Counsel within:
- 60 days from the date of an adverse written Section 25137 decision by FTB staff;
- 120 days from the date of filing a refund;
- 5 days from the date of an appeal filed with the Office of Tax Appeals;
- 60 days from the date of written rejection by the FTB Settlement Bureau; or
- 60 days from the date that the revisions to Regulation 25137 become effective, if outside of the above timeframes.
- Notice of receipt; Briefing Schedule: Within 60 days of the date of the petition:
- the Executive Officer of the FTB shall notify the Board of the receipt of a taxpayer’s petition;
- The Chief Counsel shall, within 60 days from the date of the petition or the date of the FTB staff’s determination, whichever is later
- notify the taxpayer of its receipt of the petition; and
- include a briefing schedule. There are page and formatting requirements for these briefs.
- The taxpayer’s opening brief is due to Chief Counsel within 60 days from the date of the notice;
- The FTB staff’s opening brief is due 30 days after the taxpayer’s opening brief; and
- The taxpayer’s reply brief shall be due 30 days after the FTB staff’s opening brief.
- FTB staff decision: Once a petition is filed with the Board, the FTB’s Chief Counsel will ensure that the FTB staff makes a determination to meet the abovementioned timelines, before Board review.
- Deferral of proceedings at the Office of Tax Appeals: If the taxpayer has filed an appeal with the Office of Tax Appeals (“OTA”) that includes taxable years in which alternative apportionment is relevant, the taxpayer and FTB staff will jointly request to defer proceedings with the OTA pending a decision by the Board.
- Extension of statute of limitations for assessment: If a notice of proposed deficiency assessment has not been mailed to the taxpayer with respect to the taxable years covered by the petition, the taxpayer shall agree to extend the statute of limitation for 180 days after the Board makes its decision.
- Hearings: Upon completion of briefing, the Board may schedule a hearing during its regularly scheduled meetings to consider the petition. Each party has 20 minutes to present their positions, with the taxpayer receiving an additional 10 minutes for reply. Either party seeking to have an expert or witness testify at the hearing must notify the other party in writing no later than 15 days after filing of the taxpayer’s reply brief.
Takeaway
While the proposed revisions to Regulation 25137 provide some guidance for taxpayers on the inner workings of the Section 25137 petition process, the petition process outlined in the proposal remains complex. For taxpayers, it will be crucial to think strategically about when to raise an alternative apportionment claim and how to approach the process, because how those issues are addressed could impact the chronology of a case (e.g., how quickly the case is resolved). In addition, any information presented to the Board in an open, public session in support of an alternative apportionment petition may impact subsequent judicial proceedings.
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The Reed Smith State Tax team includes several lawyers focused exclusively on California state tax matters. The Reed Smith team handles California tax matters of all types, from audit defense to appeals and litigation.
- The three-members of the FTB Board are referred to herein, collectively, as the “Board”, while the agency as a whole is referred to herein as the “FTB”.
Client Alert 2021-008