- California OTA holds the research credit can reduce corporate AMT: In Appeal of Medivation, Inc., the OTA reaffirmed NASSCO and denied the FTB's request for rehearing.
- Reasoning may reach other credits: The OTA read the word "tax" in Cal. Rev. & Tax. Code §23036(d)(1) to include the AMT, so other listed credits might also offset California corporate AMT.
- Possible refund opportunities: The FTB's Form FTB 3523 instructions still say the research credit cannot reduce AMT, so corporations that followed them could have overpaid.
These Key Takeaways were generated by AI and reviewed by a BDO professional.
The California Office of Tax Appeals (OTA) has found that the state’s research credit can be used to reduce a corporation’s alternative minimum tax (AMT), rejecting the Franchise Tax Board’s (FTB’s) request to overrule 15-year-old precedent and denying rehearing.
Because the instructions for the relevant FTB form still say the research credit cannot be used to offset AMT, corporations that followed them may have paid AMT they did not owe.
Summary and Import of the Decision
In January, the OTA held in Appeal of Medivation, Inc., No. 2026-OTA-532P, that the California research credit under Cal. Rev. & Tax. Code §23609 can be used to reduce a corporation’s AMT. The unanimous three-judge panel reversed the FTB and declined the FTB’s request to overrule or remove the precedential status of the State Board of Equalization’s decision in Appeal of NASSCO Holdings, Inc., No. 2010-SBE-001. The OTA also denied the FTB’s petition for rehearing (Medivation, No. 2026-OTA-533).
The decision has immediate practical significance. The FTB’s 2025 instructions for Form FTB 3523, “Research Credit,” continue to state that the research credit cannot reduce corporate AMT. Because many corporations prepared their returns accordingly, they may have refund opportunities for open years. Moreover, because the OTA’s reasoning turns on the list of credits in Cal. Rev. & Tax §23036(d)(1) as a whole, the decision is not limited to the research credit.
Background
Medivation, Inc., a San Francisco biopharmaceutical company, filed a California worldwide unitary combined report for the 2015 tax year. The combined group’s regular tax was $4,800, consisting of the $800 minimum franchise tax for each of six taxpayer members. One member, Medivation Prostate Therapeutics, Inc. (MPT), had a tentative minimum tax of $122,869, which produced AMT of $122,069 after subtracting MPT’s regular tax of $800. MPT fully offset that amount with research credits it had generated, and the group reported no AMT.
On audit, the FTB disallowed the use of research credits against the AMT, proposed $122,069 of additional tax, and sustained the assessment on protest. Before the OTA, the FTB argued that the term “tax” in Cal. Rev. & Tax §23036(d)(1) has a plain meaning that excludes the AMT, and that NASSCO was wrongly decided and should be overruled.
The OTA heard the appeal (No. 220410165) in October 2025.
The Statute and Precedent
Cal. Rev. & Tax. Code §23036(d)(1) generally provides that a credit may not reduce tax below the tentative minimum tax. The statute then lists credits excepted from that rule, including the research credit under Cal. Rev. & Tax. Code §23609. The question presented was whether “tax” in §23036(d)(1) includes the AMT. If it does, a listed credit may reduce the AMT itself, not merely the regular tax.
In NASSCO, the Board of Equalization found the term “tax” ambiguous and relied on legislative history to hold that the enterprise zone hiring credit and manufacturer’s investment credit could offset the corporate AMT. The FTB responded with FTB Notice 2011-02, which, as quoted in Medivation, states that NASSCO “only applies to corporations liable for the corporate AMT.” The FTB has since treated the decision as limited to those two credits.
The OTA Decisions
Main Opinion
The OTA declined either to overrule or distinguish NASSCO, holding that “tax” as used in §23036(d)(1) includes the AMT. The panel relied on four principal grounds.
First, the OTA said stare decisis “carries enhanced force when the decision interprets a statute” because the legislature remains free to amend the statute if it disagrees with the interpretation. Second, the legislature has amended §23036(d)(1) eight times since 2010 without overriding NASSCO, and bill analyses have described listed credits such as the advanced strategic aircraft credit as usable against the AMT.
Third, the OTA noted that the FTB’s own guidance undercut its position. FTB Notice 2011-02 explained how to apply NASSCO, including how to recompute credit carryovers, and never suggested that the statute was “inoperable” under that reading, as the FTB argued at hearing.
Fourth, the research credit statute defers to §23036. A 1988 amendment (S.B. 1801) removed §23609’s express bar on using the credit against the AMT, and that section has since looked to §23036 to determine which taxes the credit may reduce.
Rehearing Denied
In its petition for rehearing, the FTB argued that the research credit differs from the credits at issue in NASSCO because Cal. Rev. & Tax. Code §23609 refers to the definition of “tax” in §23036. The OTA rejected that argument, noting that the research credit and NASSCO credits appear in the same list in §23609(d)(1) and that the FTB offered no persuasive reason why “tax” should carry different meanings for different credits on that list. The panel also said it found NASSCO “to be properly decided, consistent with the law, and precedent to be followed.”
Finding that the FTB failed to show that Medivation was not contrary to law so as to materially affect its rights, the OTA denied the board’s motion for rehearing.
The FTB’s Form Instructions Remain Contrary
Despite the ruling in Medivation, the FTB’s 2025 instructions for Form FTB 3523 continue to state that the research credit cannot reduce corporate AMT. Corporations that prepared their returns in reliance on the instructions would have left research credits unused against the AMT, and that population of taxpayers is the most likely to have refund claims.
BDO Insights
- Medivation presents a meaningful refund opportunity for corporations that paid California AMT and carried research credits forward. Because California research credits carry forward without expiration and can sit unused for years, a successful claim converts part of that carryforward into cash now.
- Taxpayers should do the following:
- Identify potentially affected taxpayers. Corporations with significant research and development activity and combined groups that paid California AMT while carrying forward research credits are the most likely candidates. That includes companies in life sciences, software, semiconductors, medical devices, and advanced manufacturing. Particular attention should be paid to years when regular tax was low but tentative minimum tax was not, such as years in which net operating losses or other items reduced regular tax more than tentative minimum tax. As Medivation illustrates, a group paying only the minimum franchise tax could still have a member with AMT.
- Look beyond the research credit. Because the OTA’s reasoning turns on the credits listed in §23036(d)(1), it should extend to other listed credits, including the low-income housing credit (§23610.5), the California Competes credit (§23689), and the motion picture and television production credits (§§23685, 23695, and 23698).
- Understand the decision’s limits. Although the opinion is designated “pending precedential,” which means it has not yet been given full precedential value, the OTA is likely to vote to give it that weight. It addresses the corporate AMT under the Corporation Tax Law but does not address the individual AMT, which FTB Form 3523 instructions also say the credit cannot reduce.
- Taxpayers also should keep in mind that the FTB did not dispute the amount of the research credits in Medivation. A refund claim could prompt the FTB to examine the underlying credit computation, so credit documentation should be in order before filing for a refund.
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