TAXLITIGATOR – Tax Controversy (Civil & Criminal) Report

On June 15, 2017, the California state Legislature voted to pass a comprehensive reform of the State Board of Equalization (BOE), known as the Taxpayer Transparency and Fairness Act of 2017 (AB 102).[i]  As passed by both the Assembly and Senate, this legislation was signed by Governor Jerry Brown on June 27, 2017 as part of the 2017-18 budget trailer package.

The Taxpayer Transparency and Fairness Act of 2017 strips the BOE, which currently administers over thirty tax and fee programs, of most of its powers and instead establishes a new agency: the California Department of Tax and Fee Administration (DOT).   The new DOT will be under the control of a director appointed by the Governor and subject to Senate confirmation.  This is a change from the BOE, which is governed by five elected Board members and is the nation’s only elected tax commission.[ii]

The enactment of this new legislation comes on the heels of a March 2017 report by the Department of Finance, which performed an evaluation of the BOE, including its sales and use tax resource utilization, outreach activities, and sales and use tax reporting.[iii]  The Department of Finance’s evaluation found that “certain board member practices have intervened in administrative activities and created inconsistencies in operations, breakdowns in centralized processes, and in certain instances result in activities contrary to state law and budgetary and legislative directives.”[iv]  State Controller Betty T. Yee stated on Thursday that the “sweeping reform passed today takes the duties of BOE down to the studs and structurally remodels to ensure more consistent, fair, transparent, and efficient administration of California’s tax laws and appeals.”[v]

Beginning July 1, 2017, the BOE will remain responsible for only (1) the review, equalization, or adjustment of property tax assessments; (2) the measurement of county assessment levels and adjustment of secured local assessment rolls; (3) the assessment of certain pipelines and related responsibilities; (4) the assessment of taxes on insurers; and (5) the assessment and collection of excise taxes on alcohol.

The Taxpayer Transparency and Fairness Act of 2017 also establishes a new Office of Tax Appeals, which will create tax appeal panels, each consisting of three administrative law judges, with offices in Sacramento, Fresno and Los Angeles. Each administrative law judge is required by statute to have been an active member in the State Bar of California for at least five years immediately preceding his or her designation to a tax appeals panel, and possess knowledge and experience with regard to the administration and operation of the tax and fee laws of the United States and of California. As such, the administrative law judges must be active, experienced tax lawyers in the state of California.

The Office of Tax Appeals will handle all appeals currently handled by the BOE (other than those relating to the responsibilities retained by the BOE), including petitions for redetermination, administrative protests, claims for refund, and appeals from an action of the Franchise Tax Board. The new Office of Tax Appeals will begin conducting appeals on or after January 1, 2018.

The tax appeals panels are required to publish a written opinion for each appeal decided by each tax appeals panel within 100 days after the date upon which a tax appeals panel’s decision becomes final. Taxpayers may be represented on an appeal by any authorized person or persons, at least 18 years of age, of the person’s choosing, including, but not limited to, an attorney, appraiser, accountant, bookkeeper, employee, business associate, or other person.

Decisions of the tax appeals panel are appealable to the California Superior Court subject to a de novo standard of review. In most California tax disputes (other than for determinations regarding a taxpayers residency status), the underlying liabilities are required to be paid and matters proceed to Superior Court litigation on the basis of a complaint for refund.

Internally, the BOE has a Settlement Section and the FTB has a Settlement Bureau, that were created to provide an administrative resolution of tax disputes on a “hazards of litigation” basis in a manner somewhat similar to the IRS Office of Appeals. Most experienced practitioners would likely conclude that these settlement procedures led to a realistic resolution of an administrative tax dispute often overcoming the need to present a matter to the members of the BOE.

It remains to be seen how this transition will impact taxpayers with cases currently pending before the BOE. Procedurally, although transfer of the administrative duties of the BOE is to occur by July 1, those duties will mostly be handled by the current administrative personnel of the BOE. As such, one might anticipate some, but not much, of an interruption in the examination and collection of taxes from California taxpayers.

Whether six months is a sufficient amount of time for the selection and training of qualified administrative law judges for the Office of Tax Appeals will remain to be seen. However, the requirement for published decisions should be helpful in the administration of future tax disputes within the settlement functions of the DOT (assuming the BOE Settlement Section is to continue) and the FTB. Historically, practitioners were disadvantaged by the inability to determine how other similarly situated tax disputes were resolved and how similar, or not, certain decisions of the BOE may be to an underlying dispute. Transparency in the administration of tax law is, from every perspective, is good for all.

LACEY STRACHAN – For more information please contact Lacey Strachan at Strachan@taxlitigator.com. Ms. Strachan is a senior tax attorney at Hochman, Salkin, Rettig, Toscher & Perez, P.C. and represents clients throughout the United States and elsewhere in complex civil tax litigation and criminal tax prosecutions (jury and non-jury). She represents U.S. taxpayers in litigation before both federal and state courts, including the federal district courts, the U.S. Tax Court, the U.S. Court of Federal Claims, and the Ninth Circuit Court of Appeals. Ms. Strachan has experience in a wide range of complex tax cases, including cases involving technical valuation issues. She routinely represents and advises U.S. taxpayers in foreign and domestic voluntary disclosures, sensitive issue civil tax examinations where substantial civil penalty issues or possible assertions of fraudulent conduct may arise, and in defending criminal tax fraud investigations and prosecutions. Additional information is available at http://www.taxlitigator.com.

[i] AB-102 The Taxpayer Transparency and Fairness Act of 2017: California Department of Tax and Fee Administration: Office of Tax Appeals: State Board of Equalization.(2017-2018), available at https://leginfo.legislature.ca.gov/faces/billCompareClient.xhtml?bill_id=201720180AB102.

[ii] http://www.boe.ca.gov/info/about.htm.

[iii] http://www.dof.ca.gov/Programs/Osae/documents/Board_of_Equalization_Evaluation_March-2017.pdf

[iv] Evaluation, California State Board of Equalization Sales and Use Tax Reporting Retail Sales Tax Fund Adjustment, prepared by Office of State Audits and Evaluations, California Department of Finance, March 2017 at iv.

[v] Press Release, “CA Controller Cheers Passage of Tax Board Overhaul,” 6/15/2017, available at http://sco.ca.gov/eo_pressrel_18545.html.