More Could Follow First Precedential Opinion From California SBOE in Five Years


Reproduced with permission from Daily Tax Report 128 DTR H-3 (July 6, 2015). Copyright 2015 by The Bureau of National Affairs, Inc. (800-372-1033)

Taxpayers can expect more guidance from the California State Board of Equalization in tax appeal decisions like the precedent-setting opinion the board adopted in a case involving a like-kind exchange, several board members told Bloomberg BNA.

The formal opinion the five-member elected board adopted June 23 with a 3-2 vote marked the first time in five years the board approved a written ruling that other taxpayers can cite as precedent. In the 13-page opinion, the board explained the reasoning behind its ruling that Rago Development Corp. had properly executed a like-kind exchange under Internal Revenue Code Section 1031 (In re Rago Development Corp., 2015-SBE-001).

The board members who voted in favor of the opinion—Diane Harkey (R), Fiona Ma (D) and George Runner (R)—told Bloomberg BNA July 1 they set a precedent with the case partly to help a backlog of more than 50 similar cases working their way to the board on appeal.

They also said they won’t hesitate to adopt more opinions in future cases when appropriate, reversing a trend in which the annual number of precedential opinions has dropped from hundreds in the 1980s to zero in the past five years.

More Motivated. Harkey and Ma, former state Assembly members, joined the board in January after winning elections in November 2014.

“This board is much more motivated to publish opinions,” Runner told Bloomberg BNA July 1. Runner is a former state senator who was re-elected to a second four-year term in November.

Board Chairman Jerome Horton (D) and Deputy Controller for Taxation Yvette Stowers, representing State Controller Betty Yee (D), objected to adoption of an opinion in the case. Before the vote, Horton said the facts in this case can’t be applied to others.

Horton is a former Assembly member and also is in the first year of his second term on the board. Yee was a member representing one of four districts on the SBOE for 10 years before winning statewide office, through which she continues to serve on the board.

Written Decisions Required. The lack of written rulings and formal opinions in recent years prompted the Legislature to pass a law in 2012 requiring the board to explain its taxpayer appeal rulings in writing if at least $500,000 is at issue.

The board has adopted 24 other written decisions under the law since it took effect Jan. 1, 2013, but all of them have been so-called summary decisions that can’t be cited as precedent in other cases. Tax practitioners hungry for more insight into the board’s decisions have been disappointed by the continued lack of formal opinions.

Harkey, who made the motion to adopt the Rago ruling as a formal opinion, told Bloomberg BNA the precedent provides guidance to investors involved in similar transactions. The facts of the Rago case clearly showed it was a legitimate transaction and an opinion was appropriate, she said.

“This new board is trying to retain business in California,” she said. “We want to work with them to create more taxpayers, not shoot them out of the state.”

Ma said a precedential opinion issued in writing helps future boards as much as it helps other taxpayers with appeals. As a new board member, she said she can’t rely on board decisions in previous cases if an opinion or written decision explaining those decisions doesn’t exist.

“I don’t have a problem having all of them be precedential,” she said.

Harkey, Ma, and Runner also said they consider the facts of each case, and pointed out that the same day they voted in favor of Rago Development and rejected the Franchise Tax Board’s arguments in the case, they voted in favor of the FTB in another appeal involving a Section 1031 exchange that didn’t satisfy rules for such transactions.

Good News for Taxpayers. More guidance is good news for practitioners and taxpayers who run into resistance from the Franchise Tax Board when they try to rely on board decisions that aren’t precedential during audit or protest, Joon Cha, senior manager for state and local tax at Moss Adams LLP in Sacramento, told Bloomberg BNA July 1.

“It’s exciting to see what this board is going to do, and to have a tax authority care about fairness,” he said.

Cha said he has seen the board stop short of adopting formal opinions in recent months when they weren’t appropriate, either because the facts of a case were too specific or the legal issue was a constitutional one on which the board lacked authority, showing restraint when appropriate.

Property Shifted to LLC. In the Rago case, two groups of investors sold properties and entered into like-kind exchanges with the same third party to buy a shopping center and two adjacent undeveloped parcels as tenants in common.

After seven months, they transferred the properties to a single-purpose limited liability company because a lender required them to do so, according to the opinion. The investors were the only shareholders in the LLC.

The board rejected the FTB’s arguments that the transaction wasn’t a like-kind exchange because the investors exchanged property for an intangible interest in the LLC.

“The later contribution of the property to the wholly owned LLC altered the form of appellants’ ownership but did not alter appellants’ fundamental objective to hold the property for investment,” the opinion said.

The board also found that the investors didn’t artificially structure the transaction for tax avoidance purposes.

At issue in the case was $974,932 for tax year 2003.

To contact the reporter on this story: Laura Mahoney in Sacramento, Calif., at

To contact the editor responsible for this story: Cheryl Saenz at

The formal opinion is available at

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