The California Office of Tax Appeals held the Franchise Tax Board abused its discretion in failing to abate interest for a 248-day delay caused by the FTB’s failure to assign a protest hearing officer to the taxpayer’s protest. Taxpayer wins involving interest abatement requests on appeal are fairly uncommon in California and even more uncommon in precedential opinions. This makes exploring a taxpayer’s recent win before the OTA especially worthy.
The FTB has discretionary authority to abate interest related to a proposed deficiency to the extent the interest is attributable in whole or in part to an unreasonable error or delay by an officer or employee of the FTB in performing a ministerial or managerial act. On appeal, the OTA only reviews FTB’s interest abatement determinations for abuse of discretion. This makes a taxpayer’s burden of proof on appeal much greater than the ordinary preponderance of the evidence standard. The taxpayer must show the FTB exercised its discretion “arbitrarily, capriciously, or without sound basis in fact or law.”
The taxpayer in Appeal of Gorin argued there were three periods of delay during the protest process that required interest abatement despite the FTB’s determination to the contrary. The OTA disagreed with the taxpayer on the first two delays, holding the FTB did not abuse its discretion by denying the taxpayer’s interest abatement request. The first delay was the period from when the FTB received federal audit information until the date the FTB sent a notice of proposed assessment (NPA) to the taxpayer—approximately eight and a half months. The OTA held no interest may be abated for any period accruing before the date the FTB first contacts a taxpayer in writing about the deficiency. In this case, the NPA was the FTB’s first contact, written or otherwise, with the taxpayer. The second delay was the period from when the FTB received the taxpayer’s protest until the date the FTB sent a letter explaining the FTB’s position—approximately eight months. The FTB conceded interest should be abated for the last two months of that eight-month period. However, the OTA agreed with the FTB that six months was a reasonable amount of time for the FTB to have issued a position letter to the taxpayer.
Unlike the first two periods of delay, the OTA agreed with the taxpayer regarding much of the third delay, holding the taxpayer carried its burden to establish the FTB “exercised its discretion without sound basis in fact or law.” The third delay occurred between the time the taxpayer filed its response to the FTB’s position letter and the time the FTB sent a letter to the taxpayer scheduling a protest hearing—approximately 16 and a half months. The evidence established the FTB took 248 days to reassign a new hearing officer to the protest during that period, an act the OTA concluded was “managerial” within the meaning of California’s applicable interest abatement rules.
Relying on federal case law, the OTA cited two critical factors that supported the taxpayer’s contention the FTB’s 248-day delay in performing a managerial act was unreasonable: silence in the administrative record as to any acts taken by the FTB to assign a hearing officer and the FTB’s failure to come forth with evidence to show that employees assigned to the matter or involved in its review were actively working on it. As such, the OTA concluded the FTB abused its discretion in failing to relieve interest that accrued during the 248-day period. Appeal of Gorin, 2020-OTA-018P, Jan. 13, 2020.
Appeal of Gorin is significant given the reported delays in the FTB protest process. According to some stakeholders, the FTB takes about 18 months from the date a protest is filed until a protest hearing officer is assigned. See FTB December 2018 Tax News, Question #3 and Response #3.