On July 31, 2025, the California Attorney General (AG) issued Opinion No. 23-701 (Opinion) in response to an Office of Tax Appeals (OTA) request regarding the scope of its adjudicatory authority. Specifically, the OTA asked whether it may decline to apply a tax regulation—promulgated by the Franchise Tax Board (FTB) or California Department of Tax and Fee Administration (CDTFA)—if it determines that the regulation, as applied, conflicts with governing state statutes. The AG concluded that OTA does have this authority, so long as the panel gives appropriate deference to the issuing agency. However, OTA’s authority is limited to the matter at hand; it does not have the authority to invalidate a regulation or to enforce its interpretation outside the context of the appeal before it.
Background: From BOE to OTA
Historically, and among its other functions, the State Board of Equalization (BOE) served as the adjudicative body for California tax appeals, including appeals involving taxes administered by the FTB and CDTFA. In that capacity, the BOE routinely heard taxpayer challenges and, at times, arguments asserting that specific regulations conflicted with statutory law. The BOE, in several published decisions, declined to apply tax regulations when it found them inconsistent with statutory authority.
In 2017, the California Legislature transferred the BOE’s adjudicatory function to the newly created OTA as part of a broader reorganization. The OTA was vested with all duties and powers “necessary or appropriate to conduct [tax] appeals hearings.” This included any authority the BOE had to resolve conflicts in deciding the matters before it. While OTA panels operate within the executive branch, their jurisdiction and procedures largely mirror those previously followed by the BOE.
The Janus Appeal and OTA’s Proposed Regulation
In Appeal of Janus Capital Group, Inc. (OTA 2023), the taxpayer argued that a specific FTB regulation, as applied, conflicted with a particular statute in the Revenue and Taxation Code. OTA, holding that it lacked the authority to independently evaluate the validity of FTB regulations, held that it could not decline to apply the regulation. In dicta, OTA further concluded that the regulation was consistent with the statute.
Following Janus and other similar cases, OTA proposed a new regulation in 2023 (Proposed Rule 30104(d)) that would have barred taxpayers from challenging the validity of any tax regulation in an OTA proceeding unless an appellate court had already invalidated it.
The proposed regulation was met with strong opposition from taxpayers and industry professionals, who argued that the rule conflicted with both administrative law principles and OTA’s statutory authority to determine the validity of a regulation as applied to a taxpayer. In response, OTA withdrew the proposed rule and submitted a formal request to the AG for an opinion on the scope of its authority.
The AG’s Opinion: OTA May Decline to Apply Conflicting Regulations
In the Opinion, the AG affirmed that OTA panels may, in the course of adjudicating individual appeals, evaluate whether the application of a tax regulation conflicts with a governing statute and may decline to apply the regulation on that basis. Key points from the Opinion include:
- OTA inherited the BOE’s authority to adjudicate challenges on the basis that a tax regulation conflicts with a governing statute when applied to a particular taxpayer;
- This authority derives from both OTA’s enabling statute and California Government Code § 11342.2, which provides that no regulation is valid or effective if inconsistent with a statute;
- Any such OTA determination would be quasi-adjudicative in nature and would not constitute improper rulemaking under the Administrative Procedure Act;
- OTA must afford appropriate deference to the issuing agency (FTB or CDTFA) when interpreting the regulation, consistent with Yamaha Corp. of America v. State Bd. of Equalization, 19 Cal. 4th 1 (1998); and
- The effect of any decision to disregard a regulation is binding only in the context of the specific taxpayer’s appeal and does not result in the repeal or invalidation of the regulation generally.
The AG rejected OTA’s assertion that such authority violates the separation-of-powers doctrine or the constitutional limits imposed by Article III, § 3.5 of the California Constitution (which bars state agencies from refusing to enforce statutes on constitutional grounds absent a court ruling). Because OTA panels adjudicate statutory—not constitutional—challenges to regulations, the opinion concludes that no constitutional concerns are implicated.
Implications for Future Tax Appeals
The Opinion reaffirms and clarifies the scope of OTA’s authority. While OTA may not invalidate regulations wholesale, the AG has now confirmed that OTA may refrain from applying regulations in certain situations. Panels must still afford appropriate deference to the promulgating agency’s interpretation, but the Opinion confirms that OTA is not merely a rubber stamp when agency rules are at odds with the statutory law as applied in a given situation.
Taxpayers and practitioners considering appeals to OTA should carefully evaluate whether regulations relied upon by FTB or CDTFA are consistent with the governing statutes and be prepared to preserve such challenges in briefing and at hearing.