Legislative Proposal for Infusing Guaranteed Fairness in Tax Administration by Allowing Partial Prepayment Judicial Review of Ftb-proposed Personal Income and Franchise Tax Deficiencies

• Publication year: 2017
• Author: By Mark Bernsley

Legislative Proposal for Infusing Guaranteed Fairness in Tax Administration by Allowing Partial Prepayment Judicial Review of FTB-Proposed Personal Income and Franchise Tax Deficiencies1

By Mark Bernsley²

EXECUTIVE SUMMARY

In a 2013 ranking of what can be considered a measure of fairness of State tax dispute resolution mechanisms, California tied for dead last. The most obvious feature leading to that ranking was the lack of an independent (i.e., judicial) prepayment review procedure.

This paper proposes legislative changes that would allow partial prepayment (and sometimes no prepayment) access to judicial review for Franchise Tax Board ("FTB") income and franchise tax deficiency determinations otherwise subject to Board of Equalization ("BOE" or "Board") appeals. The new procedure would be available as an alternative, rather than a replacement, to the current, exclusive pre-payment BOE appeals procedure. The proposal would leave the current system intact, providing an optional alternative path. The new procedure would increase fairness by allowing judicial review for, inter alia, taxpayers who are unable to pay the FTB-determined deficiencies in full.

The proposed procedure contemplates that upon issuance of a Notice of Action ("NOA") by the FTB, the taxpayer would have the choice of either using the current procedure of appealing to the BOE (after which the taxpayer could pay the ultimately determined deficiency, claim a refund, and then maintain a refund action in court), or going directly to Superior Court for a redetermination of any proposed action.

The FTB would have the option of requesting the court to order a deposit/prepayment of at least a portion of the tax, the amount of which would presumed to be 25 percent of the asserted deficiency, but would be subject to modification by the court.

It is currently contemplated that other procedures would, at least initially, mimic United States ("U.S.") Tax Court procedures (as interpreted for the Ninth Circuit), as the latter has operated reasonably effectively and there is a body of law upon which to call for guidance.

I. BACKGROUND, CURRENT LAW, AND NATURE OF "THE PROBLEM"

The BOE is the only elected tax commission in the United States. Its history is rooted in the history of California.³

The BOE directly administers numerous taxes in primary categories of property taxes, sales and use taxes, special taxes and fees, and certain special motor carrier taxes.⁴ In addition, the Board serves as an appeal body for income and franchise taxes administered in the first instance by the FTB. It is this last appeal function that this paper addresses.

Currently, a taxpayer wishing to appeal an action of the FTB before an assessment becomes "final," has a couple of paths they may follow. One choice is to appeal the action/assessment to the BOE.⁵ The taxpayer need not pay the tax determined due by the FTB until the BOE action on the appeal is final, at which time, only whatever amount determined due by the BOE must be paid.⁶ In the alternative, or after the foregoing appeal procedure has been played out, the taxpayer may pay the amount determined due (either by the FTB, or by the BOE after the appeal process), claim a refund and, when the refund claim is denied, bring an action in Superior Court for a determination on the propriety of the refund claim.⁷

[Page 21]

Once a determined tax deficiency assessment becomes final, the tax (but not necessarily interest and penalties) must be paid in full before the Superior Court will have jurisdiction to hear a refund claim.⁸ This requirement is generally attributed to its Federal corollary in Flora v. United States⁹, and is frequently (and is here) referred to as the Flora Rule.

The Flora Rule can be problematic and oppressive in California for several reasons. In the Federal context in which the Flora Rule originated, a prepayment procedure and forum to litigate the most common taxes (e.g., income taxes) has long existed in the United States Tax Court. California has had no such prepayment procedure to obtain independent review of proposed tax assessments. Thus, the taxpayer is forced to pay taxes that may not be rightfully due in order to have independent judicial review - and if the taxpayer cannot afford to pay the...