How does a taxpayer petition the Franchise Tax Board for alternative apportionment?
Edvin Givargis Published 12 minute read
The short answer
By filing a written petition addressed to the Chief Counsel of the Franchise Tax Board under Revenue and Taxation Code section 25137 and Cal. Code Regs., title 18, section 25137, showing that the standard apportionment formula does not fairly represent the taxpayer's business activity in California and proposing a specific substitute method. Section 25137 runs in both directions: the taxpayer may petition for alternative apportionment, or the Franchise Tax Board may require it, whenever the standard three-factor result is distorted. After a rulemaking process that stretched from 2017 to 2023, the mechanics are no longer built entirely on informal notices. The FTB adopted amended petition-procedure regulations at section 25137(d), and a petition now runs on fixed filing deadlines tied to the taxpayer's procedural posture, page-limited briefing, a right to an oral hearing before the three-member Board, and an ex parte communications ban once the petition is pending. The party asking for the departure, whether that is the taxpayer or the FTB, carries the burden of proving both that the standard formula is not a fair representation and that the proposed alternative is reasonable, and it must do so by clear and convincing evidence.
The standard: fair representation and distortion
Section 25137 is California's version of the escape clause built into the Uniform Division of Income for Tax Purposes Act. The standard property, payroll, and sales formula is presumed to produce a fair result, and section 25137 exists for the cases where that presumption breaks down: where the allocation and apportionment provisions "do not fairly represent the extent of the taxpayer's business activity in this state," the taxpayer may petition for, or the Franchise Tax Board may require, one of four remedies: separate accounting, the exclusion of one or more of the standard factors, the inclusion of additional factors that better capture California activity, or any other method that produces an equitable result.
The California Supreme Court gave that language its controlling gloss in Microsoft Corp. v. Franchise Tax Board (2006) 39 Cal.4th 750. The dispute involved gross receipts from the redemption of short-term investments, a treasury function that generated an enormous volume of receipts relative to the income it actually produced. The court held that the full redemption proceeds counted as gross receipts includible in the sales factor under the ordinary statutory rules, a taxpayer-favorable reading on the threshold question, but went on to hold that section 25137 permits departure from that result where inclusion works a genuine distortion. It fixed the standard every alternative apportionment dispute since has used: the party invoking section 25137 bears the burden of proving, by clear and convincing evidence, both that the standard formula's approximation is not a fair representation of business activity and that the alternative method it proposes is itself reasonable. That is demanding on both halves. A showing that the standard formula produces an unusual or unfavorable result is not enough; the party seeking the departure has to prove the formula is wrong, and then has to prove its own fix is right.
General Mills, Inc. v. Franchise Tax Board sharpened the distortion showing itself. The taxpayer's hedging program, futures contracts used to manage commodity price risk in its core food business, generated gross receipts far out of proportion to the income the hedging actually produced. In the first appeal, General Mills, Inc. v. Franchise Tax Board (2009) 172 Cal.App.4th 1535, the Court of Appeal adopted a two-part inquiry drawn from Microsoft: the challenged activity must be qualitatively different from the taxpayer's principal business, and it must quantitatively distort the apportionment formula by a substantial amount, treated not as independent hurdles but as evidence bearing on the single ultimate question of fair representation. The case was remanded for further findings, and on remand, General Mills, Inc. v. Franchise Tax Board (2012) 208 Cal.App.4th 1290 applied that standard to the developed record and upheld the Franchise Tax Board's alternative method. Together, the two decisions are the working template: identify the activity dragging the formula off course, show it is qualitatively unlike the taxpayer's ordinary business, and quantify the distortion in a way that survives the clear and convincing standard.
Two directions: taxpayer-initiated and FTB-initiated petitions
Section 25137's language is symmetrical, and the practice runs both ways. A taxpayer petitions when it believes the standard formula overstates its California activity, typically because some category of receipts or some factor input distorts the result the way the treasury receipts did in Microsoft or the hedging receipts did in General Mills. The taxpayer's petition asks the Franchise Tax Board to accept a substitute method, most often the exclusion of the distorting item from a factor or the substitution of net for gross figures, and the taxpayer carries the full Microsoft burden on that request.
FTB staff can move the other direction, proposing a variance from the standard formula when a return position appears to produce an unfairly low California apportionment percentage. Historically, a staff-initiated variance arrived as a proposed adjustment with limited opportunity for the taxpayer to be heard before it was imposed. FTB Notice 2017-05, issued October 19, 2017, extended an oral presentation option to taxpayers whose own petitions were pending before staff, and FTB Notice 2018-02, issued in 2018, closed the gap on the other side by giving a taxpayer facing a staff-initiated variance proposal the same right to present its opposition orally before the variance is imposed. Both notices operated at the staff level; a Board-level hearing right, discussed below, is now written into the regulation itself.
Whichever direction a petition runs, the burden allocation does not change. The party invoking section 25137 has to prove distortion and prove its proposed fix is reasonable. A taxpayer facing a staff-initiated variance is not required to defend the standard formula; it only has to hold the FTB to its burden.
Petition mechanics under the current regulation
The petition-procedure regulation took years to finish. The FTB ran Interested Parties Meetings toward amending Cal. Code Regs., title 18, section 25137 across 2017 through 2020, working through questions about deemed denials, administrative exhaustion, and notice requirements that had never been resolved by notice alone. That rulemaking record culminated in an adopted amendment to section 25137(d), and the procedure on the books today is considerably more structured than the earlier notice-based practice.
A petition is addressed to the Chief Counsel of the Franchise Tax Board and must explain why the taxpayer's requested alternative method is appropriate, or, where FTB staff has proposed a variance, why that proposed method is not appropriate. The filing window depends on where the matter stands procedurally: a set number of days runs from an adverse variance determination, a longer window runs from the filing of a refund claim, a separate window runs from a protest filing, and a markedly shorter window applies once the matter has been appealed to the Office of Tax Appeals. A petition connected to a Settlement Bureau rejection carries its own deadline as well. Briefing is page- and font-limited, and runs opening brief, FTB staff response, and taxpayer reply on fixed timetables. Where no notice of proposed deficiency assessment has yet issued for the years at stake, the taxpayer must agree in writing to extend the statute of limitations for a period following the Board's decision, which keeps the assessment clock from running out while the petition is pending.
Petition materials that sit with FTB staff remain confidential under the ordinary return-information protections. Once a petition reaches the Board itself, that changes: as a condition of Board consideration, the petitioning taxpayer waives the confidentiality otherwise afforded its return information, and the matter becomes subject to open-meeting and public-records treatment at the Board level. That waiver is a real cost of taking a petition to the Board and belongs in the calculus of whether a petition is worth bringing at all.
None of this displaces the more basic point FTB Notice 2004-5 made years earlier and that remains good law: seeking a variation does not grant it. A taxpayer that files an original return using a non-standard apportionment method without prior FTB approval, rather than filing on the standard formula and petitioning separately, exposes that return position to the accuracy-related penalty under Revenue and Taxation Code section 19164 if the position is not sustained. The notice recognized a handful of situations where advance approval can fairly be treated as already given: the position matches published FTB audit guidance on materially identical facts, it tracks a published court opinion on point, or it is covered by a prior written petition approval or closing agreement that expressly extends to the year in question. Outside those narrow situations, the safer course is the standard formula on the filed return with the alternative position developed through the petition process, not self-help on the return itself.
The hearing and the ex parte rules
The current regulation gives a petitioning party a right to an oral hearing before the Franchise Tax Board's three-member Board, conducted in open session, layered on top of the staff-level oral presentation rights the 2017 and 2018 notices already established. Each side gets a fixed block of time to present its position, with an additional block reserved for the taxpayer's reply, and the presentations are supplemented by whatever written record the briefing schedule has already built. Where the notices got a taxpayer heard before the staff member developing the position, the regulation now gets a petitioning taxpayer heard before the body that decides.
Once a petition is pending, an ex parte communications restriction applies to substantive discussion of the matter with any Board member. Communications about scheduling logistics, involving only one Board member at a time and with notice to all parties, are permitted; substantive discussion of the merits outside the structured hearing process is not, absent notice and an opportunity for every party to participate. Where a communication happens anyway, the regulation requires the Board member involved to document its substance in writing and share it with the other Board members and the parties. The restriction runs from the point the petition is received through the Board's decision, which makes the hearing, not informal contact, the channel through which a petitioning party's position reaches the decision-makers, a real discipline compared to the earlier, largely informal practice.
What wins, what fails, and where a denied petition goes
The pattern across Microsoft and General Mills is consistent. What tends to win is a showing that a specific, identifiable category of receipts or activity is qualitatively unlike the taxpayer's core business and is quantitatively large enough, relative to the income it generates, to swing the apportionment percentage by a substantial margin. Treasury operations generating receipts far out of proportion to the income they produced carried the day in Microsoft on the distortion question; a hedging program with the same lopsided receipts-to-income profile carried the day in General Mills. What tends to fail is a petition built on the argument that the standard formula simply produces an unwelcome number. Distortion is not the same thing as an unfavorable result, and neither Microsoft nor General Mills rewards a petition that cannot connect a specific factor input to a specific, substantial skew.
A denied petition is not a dead end, and it does not create a separate right of appeal apart from the underlying tax matter. Where a taxpayer's own petition is denied, the position falls back into the ordinary assessment and protest track: the resulting notice of proposed assessment is protested through the standard protest procedure, and, if the protest is unsuccessful, the matter proceeds to the Office of Tax Appeals like any other apportionment dispute, market-based sourcing questions included. Where the FTB's own staff-initiated variance is upheld over a taxpayer's opposition, the same path runs the other direction. Section 25137 petitions do not run on a separate appellate track; they run inside the audit, protest, and appeal structure the rest of the Franchise Tax Board's procedure already uses, which is why a 25137 dispute is best planned as part of the audit strategy from the outset rather than as an afterthought once an assessment has already issued.
Practice notes
A section 25137 petition is worth bringing when the fact pattern actually produces the kind of lopsided receipts-to-income profile Microsoft and General Mills describe, not merely when the standard formula produces a result the taxpayer would rather not have. Before drafting a petition, the engagement should quantify the distortion: what share of gross receipts, or what factor weight, the challenged activity contributes, set against the income it actually generates, expressed in terms a Board member can evaluate against the clear and convincing standard in twenty minutes of oral presentation. A petition that cannot state that comparison in a sentence or two is not ready to file.
The confidentiality waiver required to bring a matter before the Board is a real cost, not a formality, and belongs in the initial cost-benefit conversation about whether to petition at all versus developing the same alternative-method argument through the ordinary protest and appeal process without ever reaching the Board. The statute-of-limitations extension required when no notice of proposed deficiency assessment has yet issued is another item to plan around, since it keeps exposure open for a defined period after the Board's decision. And the FTB Notice 2004-5 penalty point remains a live consideration for any taxpayer tempted to file a return on a self-selected alternative method rather than the standard formula: absent one of the narrow situations where prior approval is treated as already given, the safer sequence is standard formula on the return, alternative position developed through the petition. Where a petition ties into a market-based sourcing dispute already under examination, the two issues should be developed together, since the sourcing analysis often supplies the factor evidence the distortion showing needs.
This article states the law as of September 19, 2026
Statutes, rates, thresholds, and agency practice change, and a different set of facts can change the answer. Before acting on anything discussed above, contact G&G State Tax Group to confirm what has changed since this was written and how the rules apply to a specific situation.
G&G State Tax Group, LLC is a state and local tax advisory firm. The firm provides state and local tax consulting and representation in state and local tax controversies. G&G does not prepare or file tax returns, perform attest services, or provide bookkeeping, and is not a CPA firm.