On Aug. 11, the California Franchise Tax Board (FTB) held the latest Interested Parties Meeting (IPM) in its three-year long project to amend the state’s alternative apportionment petition regulation. The meeting covered changes in the latest proposed regulation language (PDF) and provided taxpayers with the opportunity to voice concerns regarding potential gaps and ambiguities with the draft language. Once finalized, the regulation will help settle significant uncertainty regarding how taxpayers can preserve their rights and privacy during the alternative apportionment petition process.

Project Background

California Revenue and Taxation Code Section 25137 and FTB Regulation 25137 allow for relief where the standard apportionment formula does not result in a fair representation of a corporate taxpayer’s business activity in California (typically an unusual situation). However, neither the statute nor the current regulation offer taxpayers any guidance on the process for petitioning for such relief.

On June 30, 2017, the FTB held its first interested parties meeting to discuss potential amendments to Regulation 25137 to provide more guidance regarding the Section 25137 Petition process. Follow-up meetings were held on Nov. 26, 2018 and Dec. 4, 2019. The meeting held on Aug. 11 was the latest IPM in this years-long process, but signaled progress in clarifying a few significant taxpayer concerns.

Key Takeaways from the Latest Section 25137 Petition IPM

Highlights from the IPM include:

  • Confidentiality: Regulation amendments clarify that the California Public Records Act and the Bagley-Keene Act apply to the decision of the three member FTB board (“the FTB, itself”), and records submitted to the FTB, itself, by the taxpayer or the FTB staff. Accordingly, the decision and any such records are subject to public disclosure. Records that are not submitted directly to the FTB, itself, remain subject to the confidentiality provisions of Cal. Rev. & Tax. Code § 19542.
  • Right to a Hearing: The FTB clarified that nothing entitles a taxpayer to a Section 25137 Petition hearing. The decision whether to conduct such a hearing remains with the FTB, itself.
  • Outstanding Exhaustion Issues: A subsequent iteration of the regulation may address whether taxpayers need to go to the FTB, itself, before filing an appeal to the Office of Tax Appeals. Similarly, a taxpayer at the IPM requested a “deemed denial” provision that would allow taxpayers to appeal the FTB’s inaction on a Section 25137 Petition.
  • Notice Concerns: One taxpayer voiced concern regarding the lack of a requirement to notify a taxpayer of a Section 25137 Petition hearing. A FTB representative said that taxpayers will be notified 30 days before any hearing before the FTB, itself, but more notice is impracticable given the sporadic nature of board meetings.

For an in-depth look at California’s alternative apportionment process and the FTB’s efforts to amend the Section 25137 Regulation, please see the recent 3-part series in Bloomberg Tax by Eversheds Sutherland SALT partner Timothy A. Gustafson and associate Justin T. Brown: