At the request of the California Office of Tax Appeals (OTA), the California Attorney General (AG) has issued Legal Opinion No. 23-701, stating that the OTA has the authority to adjudicate appeals when tax regulations, as applied to a taxpayer’s specific circumstances, conflict with governing statutes and can decline to apply the regulations to the taxpayer on that basis.
Further, the AG noted that the OTA’s April 2023 proposal, which sought to amend OTA regulations to prohibit taxpayers from challenging the validity of tax regulations in OTA appeals, would have reversed the practice of the California State Board of Equalization (SBE), the OTA’s predecessor. The SBE had historically allowed taxpayers to appeal cases that challenged the application of regulations to their circumstances when the regulations conflicted with governing statutes.
Specifically, the AG said:
When adjudicating a taxpayer appeal, the [OTA] has the authority to issue a written opinion in which it concludes that applying a particular tax regulation to that taxpayer’s circumstances would conflict with governing statutes and to decline to apply the regulation to the taxpayer on that basis. In making this determination, the [OTA] must afford appropriate deference to the agency that promulgated the regulation. The [OTA] has no authority to remove a regulation from the California Code of Regulations, or to enforce its view of a regulation’s validity or applicability outside the context of adjudicating a particular taxpayer appeal.
The AG explained that the California legislature generally conferred on the OTA all the adjudicative authority held by the SBE, and that because the SBE was authorized to hear challenges to tax regulations on administrative appeal, the OTA has that same authority.
Citing In the Matter of the Appeal of Save Mart Supermarkets & Subsidiary, 2002 WL 245682 (Bd. Eq. 2002), the AG observed that the SBE, in concluding that it was necessary to adjudicate the validity of tax regulations, “afforded appropriate deference to the view of the promulgating agency, just as a court would do on judicial review.” However, if the SBE “concluded that a regulation could not be reconciled with the statute in the given circumstances, then it applied the statute and not the regulation in adjudicating the appeal,” the AG added.
Likewise, the AG explained that neither the California Administrative Procedure Act nor the California Constitution bars the OTA from adjudicating challenges to tax regulations.
BDO Insights
- The AG’s opinion provides clarity on a taxpayer’s ability to challenge before the OTA whether California tax regulations, as applied to the taxpayer’s specific facts and circumstances, conflict with the governing statute. Taxpayers should consider raising those arguments in proceedings such as audits, protests, and settlements before the Franchise Tax Board or California Department of Tax and Fee Administration; doing so might strengthen their positions in such cases.
- To ensure that all relevant arguments are raised during administrative controversies and appeals, taxpayers should involve their tax advisors at the outset of tax controversies (e.g., on audit or exam) with the Franchise Tax Board or California Department of Tax and Fee Administration to properly evaluate the consistency of any statutes and regulations as applied to their specific facts and circumstances.
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