BILL ANALYSIS
SENATE REVENUE & TAXATION COMMITTEE
Senator Lois Wolk, Chair
SB 1113 - Wolk
Amended: April 5, 2010
Hearing: April 14, 2010 Fiscal: Yes
SUMMARY: Allows the Franchise Tax Board (FTB) to File a
Notice of Action for a Trial De Novo in Superior
Court for a Tax Deficiency
EXISTING LAW (California Constitution and Statute),
establishes the BOE as a five-member board composed of four
members elected by each district plus the State Controller.
BOE administers sales and use taxes, excise taxes, special
taxes, and the state's fee programs. BOE also values
property of statewide assessees and sets rules for County
Assessors - its initial function was to "equalize"
assessment practices between counties when it was created
in 1870. Additionally, BOE adjudicates income tax appeals
after exhausting FTB administrative dispute process; if the
BOE denies the appeal, the taxpayer may bring an action in
state court. Only the BOE's property tax duties are
enshrined in the Constitution; all of its other powers are
statutory.
EXISTING LAW creates the Franchise Tax Board (FTB) as
a three-person board comprised of the State Controller,
Director of the Department of Finance, and Chair of the
BOE. FTB administers the Personal Income Tax and
Corporation Tax Law, and collects debts on behalf of state
and local agencies
EXISTING LAW states that the BOE's determination of an
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income or corporation tax case becomes final after 30 days,
unless the taxpayer or FTB files for a rehearing, in which
case it becomes final within 30 days from the time the BOE
issues its opinion. Taxpayers may appeal BOE
determinations to Superior Court, where the state is
represented by the Attorney General.
THIS BILL allows the FTB to file for trial de novo (a
new trial as to law and facts) in Superior Court to
determine a deficiency 90 days after the BOE decision
becomes final. The measure amends three sections of law:
claims for refund, assessments as a result of an audit, and
disallowance of interest on a refund.
THIS BILL provides there shall be a rebuttable
presumption that the FTB's notice of action with respect to
the protest of a proposed deficiency adjustment is correct,
and the taxpayer shall have the burden of proof that the
notice of action is incorrect.
THIS BILL states that the action can be commenced and
tried in any city or city and county in which the Attorney
General maintains an office. The taxpayer may file a
motion to change the venue closer to the taxpayer's
residence or principal place of business. Neither the
Attorney General nor the FTB can contest the motion. FTB
may appeal BOE determinations made on or after January 1,
2011.
FISCAL EFFECT:
FTB estimates no revenue impact until the 2012-13
fiscal year. At that point, the revenue gains would vary
from $0 to $25 million initially, and may grow over time.
COMMENTS:
A. Author's Statement
According to the Author, "Every panel ever assembled
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to consider reforms to California's tax system, from the
1930 to Governor Schwarzenegger's Commission on the 21st
Century Economy, has recommended that California adopt an
independent tax dispute resolution forum. Federal tax
cases and most states similar to California that levy
personal and corporate income taxes use professional,
specialized panels to evaluate and adjudicate tax cases.
Having authored previous efforts to establish a truly
independent tax court, such as AB 2472 in 2004, and
understanding that we live in an era of fiscal limits, I
bring forth SB 1113. This measure brings a modest, but
needed, reform to California's tax system by allowing both
parties in an income or corporate tax dispute to ask courts
to take a fresh look at a tax case. This bill will bring
additional rigor to BOE decisions, and increase certainty
for taxpayers and tax administration agencies by helping to
build a more robust record value of tax course adjudication
in California."
B. Current Dispute Resolution Process
Currently in California, FTB administers the personal
income tax and corporation tax laws according to the
federal and state Constitution and statutes. Disputes are
resolved by the BOE, the only panel of its kind in the
country where elected officials determine the merits of tax
cases. The FTB, usually after an audit or an IRS
adjustment, issues a notice of proposed assessment ("NPA").
If the taxpayer files a protest with FTB, the NPA does not
"go final." If no is protest if filed, the NPA "goes
final" and collection commences. The taxpayer can pay the
tax in full and file a claim for refund. If FTB denies the
claim, the taxpayer can appeal the denial to the BOE.
Briefs are filed with the BOE and the case can be heard for
about 40 minutes by the full five-member board. If the
taxpayer wins, that's it. If the taxpayer loses, the
taxpayer can file a refund action in Superior Court. SB
1113 allows FTB to do the same to determine the amount of
tax due.
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If the taxpayer files a protest with FTB, a protest
hearing is held. If the FTB does not decide in favor of
the taxpayer, the taxpayer may file an appeal with the BOE.
Briefs are filed with the BOE and a 40-minute hearing
before the full five-member board can be requested. If the
board decides in favor of the taxpayer, that's it. If the
board decides against the taxpayer, the NPA goes final and
collection commences. The taxpayer may pay the tax in full
and file a claim for refund with the FTB. If FTB denies
the claim, the taxpayer may file an appeal of the denial of
the claim with the BOE. The taxpayer has a right to a
hearing before the full five-member BOE, but unless
something has changed the BOE will not change its position.
The taxpayer may then file a refund action in Superior
Court. SB 1113 allows FTB to do the same to determine the
amount of tax due.
With respect to all Superior Court refund actions,
either party has a right to an appeal to the District Court
of Appeal. After the decision of the Appeals Court, either
party has a right to file a petition for review with the
California Supreme Court. If a constitutional issue is
present, for example, equal protection or Commerce Clause,
either party may file a petition for a writ of certiorari
with the Unites States Supreme Court. Petitions for review
and petitions for writs of certiorari are discretionary.
C. One of a Kind
Under federal law, taxpayers petition the Tax Court to
review IRS decisions. Many other states follow a similar
model; however, BOE is the nation's only elected tax
dispute resolution board. While reasonable arguments can
be made about the merits of the composition of a tax
dispute resolution board, placing tax appeals powers in the
hands of elected officials inevitably results in political
decision making which may or may not adhere to legal
precedent. As Dan Simmons, Professor of Law at UC Davis
points out:
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"In the context of resolving disputes between
taxpayers and the tax collector, the elective
nature of the Board of Equalization causes an
inherent structural conflict. One can easily
imagine that a campaign slogan for an elected tax
collector would be, "Elect me and I will not
collect taxes from you (even if those taxes are
due under the law)." One member lists as an
accomplishment of his tenure on the Board the
fact that he "is responsible for increasing the
percentage of relief received by California
taxpayers before the Board of Equalization."
While that may be an appropriate position for an
elected policy maker, it illustrates the inherent
conflict between the executive function of the
Board of Equalization, which is to supervise the
collection of numerous taxes (and its concurrent
role in developing tax policy and making
recommendations to the Legislature), and a
judicial function that involves the application
of existing law to the facts of a particular
case.
On the one hand, the job of the tax collection agency
is to protect the State's revenue by collecting taxes
that are due under the laws enacted by the legislature
and signed by the Governor. An individual could
campaign for the Board of Equalization on a position
that big corporations and other big business, along
with wealthy individuals, don't pay enough taxes.
Another individual may campaign for the Board on the
premise that taxes are bad for the California economy
because they stifle investment. As elected officials,
the members of the Board of Equalization have a
legitimate policy role in the structure of the tax
system that may be influenced by these varying
positions. The overall position of the Board of
Equalization could vary with each election cycle as
the philosophy of the majority changes with new
membership. That result is appropriate for the Board
in its executive and policy functions. However, when
these varying and changeable political views are
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brought to the judicial function of deciding
individual cases, the result is an inconsistent
jurisprudence that does not provide guidance, and
therefore certainty, to taxpayers planning
transactions for the future. Current interpretation
of the tax law could change after the next election.
In addition, the application of the elected member's
political philosophy to the decision of individual
cases may lead to results that are unfair either the
taxpayer or to the State of California."
SB 1113 aims to bring more consistency to BOE decision
making in two ways. First, with both sides of a tax
dispute able to appeal, courts will have additional
opportunities to weigh in on disputes and create meaningful
precedent, instead of the current system where a Superior
Court may only hear cases brought by taxpayers. Second,
the BOE will know as part of its decision making process
that an increased likelihood exists that its decisions will
be subject to the scrutiny of judicial review, making
reliance on precedence and building a record more important
should it have an interest in having its decisions upheld.
Chris Wood, in his January 11, 2010 column for Tax
Notes also refers to the political nature of the BOE:
California's five-member BOE has a very tough job.
They are elected, and they have a constituency. They
try to resolve and administer California's tax laws,
and most of
them are not tax professionals. They are not judges,
so it is OK to talk to them ex parte. In fact, it is
common for California tax professionals to seek out
the individual members of the BOE in advance of a
hearing. You can give them a private advance screening
of what your client's case is about and why you think
you should prevail. Much like lobbyists trying to
count on legislator votes on a bill facing an upcoming
vote, you can, well, lobby. You may or may not be able
to obtain a commitment that your client's position is
meritorious. But information, as they say, is power.
And if you find that the tax case in question is going
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to go along party lines (say, Republicans voting for
the taxpayer and Democrats voting for the state), you
may get clear signals (or outright statements) that an
individual BOE member cannot or will not vote for your
client.
D. Of Pudding and Proof
Under current law, the taxpayer bears the burden of
proof to show that the FTB's determination in a notice of
proposed assessment or a notice of action is incorrect for
two reasons. First, taxpayers keep their own books and
records; FTB doesn't, so the taxpayer has possession of the
material necessary to rebut the claim if needed. In the
reverse, FTB can't use the taxpayer's records to rebut the
proposed assessment. Second, tax preferences, such as
deductions and credits, are affirmative actions of
legislative grace, meaning that they are benefits that
taxpayers claim because they are eligible for them, and
should be able to document their eligibility. SB 1113
imports this concept into the trial de novo by assigning
the burden of proof to taxpayers to rebut the FTB's
position.
E. Narrowing the Landscape
The BOE receives as many as 1500 appeals, but resolves
many of them without an oral hearing. BOE heard 49 income
and corporation tax cases last year, but approximately 80
in the prior year, and 120 the year before that. Not all
of these cases pose monumental issues in tax jurisprudence,
nor do they address large amounts of tax in dispute.
Although FTB estimates that less than 10 suits per year
will be filed should SB 1113 be enacted, and given that
California's judiciary system adjudicates thousands of
criminal and civil trials, the Committee may wish to
consider amending SB 1113 to limit FTB's ability to file a
trial de novo on only cases above a certain dollar
threshold amount or to only those issues which pose
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significant issues of first impression for courts.
Support and Opposition
Support:Board of Equalization Member Betty Yee
Oppose:Cal-Tax; California Chamber of Commerce;
TechAmerica: California Manufacturers Technology
Association
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Consultant: Colin Grinnell