Bradley partner Bruce Ely was quoted in the Law360 Tax Authority on the California Supreme Court’s recent decision to defer to the California FTB’s regulation in holding an out-of-state trust’s capital gain income subject to California franchise/income tax.
This matter is a cause of concern for many tax professionals and practitioners, who believe that the litigation will have adverse consequences for nonresident partners and shareholders in future tax matters in the state.
Ely said he didn’t have particularly strong feelings on the merit of the case, but he joined many other practitioners in their concern over the courts’ deference to agency regulations rather than enforcing the plain meaning of tax statutes. When nonresident shareholders or partners have challenged the FTB, the issue often came down to whether courts should independently examine an income tax statute governing the sale of intangibles for nonresidents or defer to the FTB regulations.
Ely told Law360, "It's a tough call, but from a due process perspective, there's a problem, because taxpayers should be able to rely on the wording of the statute."
Since it now appears that FTB regulations trump a California personal income tax statute, Ely says he found it interesting that the appeals court “wrapped itself around an alternative argument.” The court held that even if it had followed the personal income tax statute rather than the FTB regulation on apportionment, it would have ruled for the state anyway.
"I just hope that other states don't take this non-ruling ruling as a message that they can replicate this sort of 'fee' on pass-through entities doing business in their states," Ely said.
The original article, “California Justices’ Pass on Agency Deference Concerns Tax Pros,” appeared in Law360 Tax Authority on September 23, 2022.