Appeal of Electronic Data Systems Corporation & Subsidiaries

Appeal of Electronic Data Systems Corporation & Subsidiaries, 2023-OTA-539P, decided by Administrative Law Judge John O. Johnson, is a precedential Office of Tax Appeals (OTA) opinion addressing when the four-year statute of limitations begins to run for a California assessment following an IRS adjustment to a taxpayer's federal research credit. EDS claimed California research credits of $4,718,556 and federal research credits of $76,261,692 for its 1998 tax year; the IRS later disallowed 20 percent of the claimed federal credit, and the Franchise Tax Board (FTB) proposed a corresponding reduction to the California credit.

The Notice Requirement

Revenue and Taxation Code section 18622 requires a taxpayer to report a final federal correction to FTB within six months, in a manner "sufficiently detailed to allow computation of the resulting California tax change," including the original or a copy of the final federal determination and its supporting data. Where a taxpayer misses that six-month window, section 19060(b) instead gives FTB four years from the date it receives adequate notice of the federal change to issue a notice of proposed assessment (NPA). The dispute here was not whether FTB could adjust EDS's credit, but when the four-year clock started.

EDS's Piecemeal Disclosures Were Insufficient

EDS pointed to communications and documents it provided to FTB as early as 2005 and again on August 6, 2008, and June 4, 2009, arguing that these disclosures gave FTB adequate notice of the IRS's ultimate 20-percent reduction more than four years before FTB's July 16, 2013 NPA. OTA rejected this argument for each date. The 2005 materials reflected the IRS's preliminary position disallowing all or nearly all of EDS's federal credit -- not the final determination, which allowed roughly 80 percent of the credit -- and so could not have notified FTB of the correction actually made. The August 2008 and June 2009 submissions consisted of incomplete, often illegible excerpts of IRS revenue agent reports that did not show whether the disallowed research related to California activity, as required for the California credit, and did not include a full copy of the final federal determination as Regulation section 19059(a) requires. Only EDS's December 31, 2009 submission -- 17 pages of an IRS Form 886A explaining the examined projects, the methodology, and the basis for the $15,241,156 federal adjustment -- gave FTB the detail needed to compute the California impact.

Because FTB's NPA issued on July 16, 2013 fell within four years of the December 31, 2009 notice, OTA held the assessment timely. The opinion rejected EDS's argument that the mere fact FTB ultimately applied the same 20-percent ratio to the California credit proved that any of EDS's earlier partial disclosures were adequate, explaining that a federal percentage reduction does not by itself reveal how much of the disallowed research related to California activity, which California's credit-eligibility rules require FTB to determine independently.

Significance

EDS 2023-OTA-539P is a frequently cited precedent on the interaction between section 18622's federal-change reporting requirement and section 19060(b)'s extended assessment period, and it establishes that partial, illegible, or superseded IRS documents do not start the four-year clock -- only a submission detailed enough for FTB to independently compute the California tax effect will do so.