Starting January 1, 2018, the California Board of Equalization’s (BOE) significant appellate responsibilities—including hearing appeals regarding income tax and sales and use taxes—transfer to the newly-created Office of Tax Appeals (OTA) as authorized by the Taxpayer Transparency and Fairness Act of 2017 (the Act). As required by the Act, the OTA must adopt regulations by January 1, 2018, to carry out its responsibilities thereunder. In order to facilitate the transition, the Act permits the OTA to adopt emergency regulations. Accordingly, under notice published December 26, 2017, the OTA released its Final Draft Emergency Regulations, California Code of Regulations, Title 18, Division 4, (Emergency Regulations) on the Rules for Tax Appeals. The OTA intends to submit its Emergency Regulations to the Office of Administrative Law in the coming days.
New Agency, New Rules
While the Emergency Regulations draw heavily from the BOE’s prior Rules for Tax Appeals, California Code of Regulations, Title 18, Division 2.1, some notable differences are present.
- Under the BOE’s rules, formal or memorandum BOE opinions could be cited as precedent in any matter or proceeding before the BOE unless the opinion had been depublished, overruled, or suspended. These precedential BOE opinions still may be cited as precedential authority before the OTA; however, the Emergency Regulations authorize OTA panels to remove, in whole or in part, the precedential status of BOE opinions. The OTA will notify taxpayers of any such removal on its website. Going forward, the OTA may designate its own opinions as precedential based on whether the opinion: establishes a new interpretation of law; modifies or repeals an existing interpretation of law; resolves an apparent conflict in the law; involves a legal issue of continuing public interest; or makes a significant contribution to the law.
- The BOE’s rules contained provisions for closing otherwise public hearings for appeals involving sales and use taxes. The Emergency Regulations, in contrast, outline procedures for closing hearings related to both sales and use taxes and income taxes (as authorized by the Act) and provide that a taxpayer may request to seal the appeal record or a portion thereof. The OTA will grant a request to close a hearing or seal the record based on consideration of objective criteria, including: whether the appeal involves trade secrets or confidential research, development, or other information which would cause unwarranted annoyance, embarrassment, or oppression if disclosed; and whether it is necessary to ensure a fair hearing and provision of due process based on facts and circumstances of the individual case.
- Witnesses were not required to testify under oath or affirmation pursuant to the BOE’s rules but only if directed by the Board Chair or at the request of a Board Member. The Emergency Regulations require all witness testimony before the OTA to be given under oath.
Eversheds Sutherland Observation
The Emergency Regulations leave certain questions unanswered. For instance, the OTA will hold an appeal from an action of the California Department of Tax and Fee Administration (CDTFA) indefinitely upon notification from the CDTFA that it has accepted a settlement proposal for consideration. No corresponding provision exists for appeals from actions of the California Franchise Tax Board (FTB). Instead, the Emergency Regulations provide that such appeals may be postponed for “reasonable cause,” which includes a party seeking time to settle or otherwise resolve an appeal. Furthermore, the Emergency Regulations do not address hearing formalities such as time allocation and general order of the process. Undoubtedly, much will be learned once the OTA begins hearing appeals next month.