New California FTB Time Goals For Processing Protests

On October 27, 2006, the California Franchise Tax Board ("FTB") issued two Legal Notices regarding revised time goals for the processing of docketed protests. The first of these was Notice 2006-5, which announced a pilot project allowing certain taxpayers to request a one-year timeline for resolving a docketed protest. The second was Notice 2006-6, which announced a goal under new FTB procedures to complete docketed protests within 24 months or less of the filing date of the protest. These two recent Notices are the latest developments in a long history of efforts to expedite the California protest process.

A protest is the lowest level administrative challenge to an FTB notice of proposed deficiency assessment that is issued to an individual or a corporate taxpayer. California Revenue and Taxation Code section ("section") 19041 provides that within 60 days after the mailing of a notice of proposed assessment, a taxpayer may file a protest with the FTB, specifying in the protest the grounds upon which it is based. Section 19044 provides the taxpayer a right to an oral hearing, if requested in the protest. Apart from these two sections, there are no statutory rules for protests and there are no FTB regulations which address the protest process. The protest proceedings are conducted solely within the FTB, and the same FTB employee acts as both the representative of the FTB and the protest hearing officer. Protests are assigned to one of two tracks. First, they can be assigned to a (non-attorney) hearing officer in the Audit Division. Second, they can be assigned to the Legal Department, with protests assigned to the Legal Department being denominated "docketed protests." There are no hard and fast selection criteria, but the complexity of the case and the issues, the amount of disputed tax, and workload and availability are factors which enter into the decision whether a protest is docketed.

There are no statutory or regulatory limitations upon how long a protest may last. However, FTB has created its own internal guidelines. In early 1999, FTB issued Notice 99-1 - now superseded by Notice 2006-6 - which stated the goal of the FTB was to evaluate the merits of a docketed protest (and any included claims for refund), conduct a hearing if required, and issue a notice of action within 33 months of the filing date of the protest. Notice 99-1 also stated there would be circumstances where some protests were deferred and some would take longer to conclude, but such cases were intended to be the exception rather than the rule.

The two recent Notices are not the first attempt to shorten the 33-month protest period referenced in Notice 99-1. In 2000, the FTB drafted proposed regulations (proposed Regulations 19041 and 19044) addressing protests and protest hearings.1 The efforts were spearheaded by Dean Andal, then a member of both the FTB's three-person Board and the State Board of Equalization's five-person Board. The proposed regulations would have established a 24-month period, subject to specified exceptions, for resolving protests. However, efforts to formally adopt the proposed protest regulations were abandoned later that same year, principally due to concerns over the FTB's ability to process protests under such a time-frame without additional funding. Since that time, there has been no legislative or regulatory activity regarding the protest process.

The FTB historically has had a difficult time completing docketed protests within the formerly prescribed 33-month period set forth in Notice 99-1. Based on a 2004 report by the FTB to the Legislature, only 47% of corporate tax cases for that year were being completed in 33 months or less, and only 52% of such personal income...