If one goes today to the FTB website and visits the “Law” section, they will see information on “written guidance” in the form of Chief Counsel Rulings, FTB Notices and Legal Rulings. Had one visited that site six months ago, one also would have seen many years of FTB Technical Advice Memorandums (TAMs). This fall, however, the FTB removed the TAMs from its website in reaction to a decision by the San Francisco County Superior Court which invalidated one of FTB’s TAMs as being an unlawful “underground” regulation.

On Dec. 13, 2023, the court held in American Catalog Mailers Association v. Franchise Tax Board, San Francisco Superior Court No. CGC-22-601363, that TAM 2022-01, which addressed Public Law 86-272, was invalid because it had not been issued in compliance with the California Administrative Procedure Act (Act). 

In general, the APA defines a “regulation” as every rule … of general application … to make specific the law enforced or administered by it.… ” The court found TAM 2022-01 was a “regulation” that had not been promulgated properly under the APA (no notice, hearing, formal review/approval, etc.) and was hence “void.” 

The FTB argued, unsuccessfully, its TAMs do not provide binding rules, let alone ones of general application, and were simply a resource provided to FTB auditors and made available to the public, and were not “regulations” required to go through the APA process. However, the court disagreed.

The FTB did not appeal the decision by the San Francisco court. Instead, it responded to the decision by removing from its website all previously posted TAMs, reiterating the TAMs removed were nonprecedential and were provided for informational purposes only.

This removal is a disappointing development because TAMs would inform the public of FTB’s position on a certain issue, e.g., TAM 2022-01 on what FTB believed was the scope of protected activities under Public Law 86-272. 

However, if I was still in FTB Legal (as I was many years ago), this is precisely what I would have done. The position taken by the FTB in the (now secret) TAMs will continue to be their internal position on the issues, but by removing them from the public, the FTB no longer needs to worry about cases such as American Catalog and being sued by taxpayers under the APA on the theory the TAMs are void “underground” regulations. 

The FTB has long made it clear that while positions it takes in the TAMs could be used to support an audit determination, the TAMs themselves were not to be cited by the FTB to a taxpayer as authority for that position. (See 10.4.8 of FTB’s Manual of Audit Procedures. MAP 10 TAX RESEARCH, sec. 10.4.8).

The irony of American Catalog is the court never even reached the merits of the TAM in issue (on PL 86-272) because the merits were not at issue—i.e., the court never invalidated the substantive 86-272 position taken by FTB in the TAM. 

The decision addressed purely a challenge to the process of the FTB publicly releasing that TAM without first going through the APA and having it formally approved as a regulation. All that was accomplished by American Catalog is that the FTB has chosen to remove all the TAMs from public access, denying the public (but not FTB auditors) the benefit of that knowledge.