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December 17, 2012
New Prescription for California's BOE: Good Diagnosis but Questionable Cure

Full Text Published by Tax Analysts®

by Jennifer Carr

Jennifer Carr is a legal editor of State Tax Notes.

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On September 29 California Gov. Jerry Brown (D) signed AB 2323 into law. The provision, which takes effect on January 1, 2013, will require in any case in which the amount in controversy is $500,000 or more that the State Board of Equalization make a written, formal opinion containing findings of fact, applicable law, analysis, and the names of adopting board members. The opinion must be available online within 120 days of the BOE decision. AB 2323 also authorizes board members who disagree with an outcome to write a dissenting opinion. Although AB 2323 is a reasonable solution for a troubling drop in formal BOE opinions and has the laudable goal of increasing transparency regarding the board's decision-making process, it also has some potential problems, including the setting of a fairly arbitrary threshold for publication. A different approach would have been a better means for resolving the Legislature's concerns about the board's recent publication practices.

Under current law the BOE is authorized to determine what sort of opinion it will issue and whether those decisions will have precedential value. Most BOE matters are resolved in a letter decision or summary decision. A letter decision is "a written decision that contains a short explanation of the reasons for the board's decision on an appeal."1 A summary decision is "a written decision that contains findings of facts and conclusions of law that form the basis of the board's decision on appeal."2 Neither a letter decision nor a summary decision may be cited as precedent.

Some BOE decisions may be cited as precedent, however. Memorandum opinions are formal business tax opinions, and are issued in limited numbers.3 Finally, there are the formal opinions that are the subject of AB 2323. A formal opinion is "a written decision that contains the findings of fact and conclusions of law that form the basis of the board's decision on appeal and which is intended to set precedent."4 Formal opinions may be cited as precedent unless they have been depublished, overruled, or superseded. When deciding whether to issue a formal opinion, the board is to consider factors such as whether the opinion would establish a new rule of law, whether the opinion would resolve or create an apparent conflict in the law, or whether the opinion would make a significant contribution to the law.5 With the enactment of AB 2323, those factors will be irrelevant in cases in which the amount in controversy is more than $500,000 because the statute removes any discretion from the board about what type of opinion to issue in those cases.

The Controversy

AB 2323 was not an especially controversial bill in the Legislature. It passed pretty easily, on votes of 22 to 14 in the Senate and 47 to 19 in the Assembly. However, the bill has not been without opposition. The strongest case for enacting AB 2323 was laid out in a Senate Governance and Finance Committee report that was published in May. In it, the committee states that AB 2323 was warranted because it would "promote taxpayer confidence" about BOE activities. The report notes that in the 1980s the board published 161.5 formal opinions per year, but that number had dropped to an average of 3.2 between 2000 and 2010. The report discusses the case City of Palmdale v. Board of Equalization, in which both the trial court and court of appeal discussed a BOE sales tax allocation decision in harsh terms.6 In the opinion, the Second Appellate District quoted the trial court's statement that the board's decision "does not even hint at the reasons for the decision" and forced the court to dig through the record to see if there was any credible evidence supporting the board's ultimate determination. The committee report does not assert that such failures by the board are common and does not clarify precisely how the case supports AB 2323. Presumably, however, it shows the board is failing to provide proper analysis in and support for its decision-making.

Also, the committee report asserts AB 2323 is particularly important because the board is unique as the nation's only elected tax appeals board. Thus, according to the committee, the board's members are susceptible to political influence in a manner that could be counteracted by a more transparent decision-making process. And, according to the report, without AB 2323 the BOE provides "little to no guidance for either taxpayers or tax enforcement agencies on the correctness of tax positions."7 That echoed a claim made by practitioners that AB 2323 "would yield consistency in the BOE's decision-making authority with respect to the appeals it decides and over time will restore the taxpayer confidence that has been missing for so many years."8

Unsurprisingly, some interested parties, primarily members of the BOE, were not quite as pleased with AB 2323 as lawmakers were. Before the governor signed the bill, BOE member George Runner (R) sent him a letter urging a veto on grounds that the $500,000 threshold was arbitrary and bad public policy. Runner also said the bill would cost taxpayers up to $600,000 per year, and "if the BOE is going to spend taxpayer dollars on publishing opinions, cases should be published on their individual merits, not automatically because an appeal is above an arbitrary dollar amount."9 The board's legislative bill analysis echoed those concerns and said that even if there had been a decrease in the number of formal opinions, the BOE had made strides in transparency in other areas, including video streaming of BOE meetings, increasing available documents on its website, and publishing over 250 hearing summaries in the most recent fiscal year.10 The analysis also argued that AB 2323 could delay resolution of the affected appeals because summary decisions and letter decisions allow the board to rule quickly. Finally, the analysis claimed that AB 2323 raises confidentiality concerns because the BOE may be required to publish information obtained from the IRS that could conflict with the federal agency's privacy guidelines and lead to reduced future cooperation from taxpayers.

A transcript from the board's October 23 meeting provides an interesting look at its concerns now that the provision has been enacted. For example, one big question in the board's discussion is what the Legislature intends for the BOE to do once the bill takes effect. Randy Ferris, chief counsel of the BOE's legal department, described interactions with members of the Legislature who said they thought the requirements of AB 2323 could be fulfilled by taking what the board typically produces and "cutting and pasting and adding a little more interstitial language just to tie it all together."11 Ferris said that when he raised concerns about the added workload, legislators responded that his concerns were not justified and that it was not intended to be a new workload.12 That is apparently contrary to what board Chair Jerome E. Horton (D) thought AB 2323 would entail, as he stated he would have supported the law had he thought it was only "administerial." Horton added that the Legislature presumably would not enact a statute to ask the board to do something it has always done. Ferris also raised an implementation question about what "amount in controversy" meant for purposes of AB 2323. Runner asked: "Is that the tax itself? Is it tax plus penalties? Is it tax plus penalties and interest?"13

The Right Direction?

AB 2323 appears to be a good idea generally, but the $500,000 figure is problematic. Also, if the legislators described by Ferris in the BOE meeting minutes are representative, it appears the Legislature underestimated the significant work product increase AB 2323 represents. Clearly anything that results in greater transparency regarding BOE processes and decision-making is a positive for the state and its taxpayers. Taxpayers with business before the board should be able to see that their tax position was carefully considered and to understand the basis for the board's decision. And all taxpayers should be able to trust that if they have a similar tax situation, it will be handled by the BOE in a similar manner. That can happen only if they have access to BOE opinions. Also, taxpayers should be able to rely on applicable BOE opinions as precedent. Those are qualities of a transparent, efficient tax system. And despite apparent improvements elsewhere, the significant decline in formal, precedential opinions from the BOE is troubling. The statute rightly seeks to reverse that practice.

Despite the noble goals of AB 2323, it is problematic in some respects. Most notable, of course, is the $500,000 threshold. It is good that there is some mechanism for excluding most decisions from the full formal treatment. Publishing opinions on every board matter, including those with small amounts in controversy and settled law, would be a tremendous waste of resources. But the arbitrary $500,000 figure creates other problems, primarily in that it forces the board to issue opinions regardless of whether they are merited, perhaps at the expense of cases in which there is a lower amount at stake but a much more interesting point of law. Granted, nothing would prevent the BOE from publishing formal opinions in matters in which the amount is less than $500,000 but the legal question is new and relevant. But when state budgets generally, and California budgets specifically, are tight, it is likely the BOE will opt to not issue formal opinions on important matters with low stakes because its scarce resources are being used to comply with AB 2323.

There is also the budgetary question whether the bill as a whole is more expensive than the additional transparency benefits justify. In the October meeting discussing AB 2323, the board voted for a budget change proposal for $455,000 to fund 2.5 positions to cover the additional work created by AB 2323 publication requirements. That may not be the best use of scarce funds. Clearly more transparency is almost always preferable to less, but there are other considerations. To borrow an analogy from Horton, one wonders if this is a Cadillac solution to a problem that could just as easily be solved by a Volkswagen.14 The Volkswagen in this case would be encouraging more published formal opinions through other means and without the strict monetary guidelines of AB 2323.

Finally, there is the question of what constitutes an "amount in controversy" for purposes of AB 2323, particularly whether that should include just the tax figure or interest and penalties, which in California are often substantial. AB 2323 does not define what constitutes an amount in controversy and there does not appear to be any generally accepted definition for the term in California in a tax context. The California cases containing the phrase mostly address either attorney fees or jurisdiction. There does not appear to be any guidance for purposes of applying this statute.

Other states that have addressed the question do not have uniform definitions. For instance, in the West Virginia Office of Tax Appeals' rules for small claims cases, amount in controversy "means the total amount of tax and any additions or penalties, but excluding interest, for any one taxable year that is in controversy."15 In Delaware tax appeals may be removed to superior court from the tax appeals board if the amount in controversy exceeds $50,000. For that purpose, amount in controversy means the tax on the notice of proposed assessment or notice of disallowance of refund plus interest and penalty as reflected in the notice. Finally, at least one federal publication defines amount in controversy to include "additions to tax, additional amounts, and penalties," but it does not include interest "unless the amount of the interest is in dispute."16

The question then is which of those options, if any, or perhaps something else entirely, best reflects the intent of the Legislature in enacting AB 2323. First, given that the purpose of the statute was to require the BOE to issue more formal opinions, it is consistent with that purpose to calculate the amount broadly. Second, the most reasonable interpretation of would include all amounts that taxpayers would have to pay if ruled against or that would be refunded should they prevail. Fundamentally, the phrase means the amount at stake. If penalties are at stake, they would be in controversy as the phrase is most commonly understood. And all three definitions above include penalties in their calculation -- the only difference is over interest. Penalties are a relatively easy choice to include but interest is more difficult. It can be considered in controversy because if it is statutorily required, it will be added to the payment or refund. But interest could also be thought of as payment for use of the amount that is actually in controversy during the litigation. It is not part of the controversy itself but is a separate charge.

When the BOE decides how it will calculate the amount in controversy, penalties should be included but interest could go either way. However, given the overall purpose of the provision and the fact that the Legislature did not define the amount in controversy to exclude interest, the board should err on the side of expansive, rather than limited, implementation of the provision. It is unlikely there will be many cases in which the $500,000 threshold is met only because of the interest, but regardless, it should be included. In the board meeting minutes, Ferris said that a chief counsel memorandum on AB 2323 is likely to be issued some time in December that will address implementation of the statute, including the amount in controversy provision. It will be interesting to see the chief counsel's take on the matter.


Overall, the goals of AB 2323 are admirable even if the execution is flawed. The great decrease in formal board opinions is troubling and the Legislature was correct to try and reverse that practice. This appears to be a mediocre means of doing so, however, because it does not guarantee that the matters that need formal opinions will receive them, and may even result in some important cases being excluded because board resources are being consumed elsewhere.

What would have been a better approach? Two potential solutions come to mind. First would be a statute requiring a formal opinion in all cases unless the board issues a statement regarding why an opinion is not warranted. The statement would not have to be lengthy, because that would essentially make it an opinion. However, it would have to refer to the major facts of the case and identify any prior decisions, case law, or statutes conclusively resolving any questions of law. Second would be a statute requiring formal opinions on a specific percentage of cases heard by the board each year -- probably somewhere around 5 percent. Although the board may not believe that 5 percent of its cases merit formal opinions, by using that standard the members could at least choose which they believe are most important and not be bound by the arbitrary $500,000 figure. Regardless, neither of those approaches was taken by the Legislature, and as of January 1, 2013, the BOE will be bound by AB 2323 in whatever form it eventually takes.


1 Cal. Code Regs. Title 18, section 5450(a).

2 Cal. Code Regs. Title 18, section 5251(a).

3 Cal. Code Regs. Title 18, section 8010(i).

4 Cal. Code Regs. Title 18, section 5452(a).

5 Cal. Code Regs. Title 18, section 5452(c).

6 No. B23833, Cal. App. 2d (May 23, 2012). (For the opinion, see Doc 2012-11210 or 2012 STT 102-10.)

7 Committee Report, p. 6.

8 Sutherland Salt Shaker, Vol. 3, No. 4, Sept. 2012, p. 8.

9 Letter from Sen. George Runner (Ret.) to Gov. Jerry Brown, In re: Request to Veto AB 2323, Aug. 30, 2012.

10 State Board of Equalization, Staff Legislative Bill Analysis, May 25, 2012.

11 Meeting transcript, at 8.

12 Id. at 12.

13 Id. at 19.

14 Id. at 17.

15 W.Va. CSR section 121-1-110.

16 IRS Publication 3319 (rev. 5-2012), LITC Low Income Taxpayer Clinics: 2013 Grant Application Package and Guidelines.


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