OFFICE OF TAX APPEALS:
New Batch of Opinions Includes Two Wins for Taxpayers

The Office of Tax Appeals released 25 opinions September 5, including two that were decided in favor of the taxpayers – the first complete wins by taxpayers since the OTA was created at the beginning of this year.

The opinions included two other “firsts”: the first split decision (one of the cases in which the taxpayer prevailed) and the first decision involving the California Department of Tax and Fee Administration (a minor case in which the OTA denied a retailer’s petition for the return of seized tobacco products).

To date, the OTA has issued 91 opinions, but has not released any opinions relating to sales/use tax appeals.

Of note in the 25 opinions released this week:

Taxpayer Prevails in Appeal of Accuracy-Related Penalty. The OTA voted 3-0 to grant the Appeal of Fukuko H. Okada (opinion dated July 25), in which the taxpayer – a self-taught interior designer with no formal training in real estate or tax matters – sought abatement of an accuracy-related penalty imposed by the Franchise Tax Board.

The taxpayer sold property in 2008, and her tax preparer advised her that it was part of a nontaxable Internal Revenue Code Section 1031 exchange. After reviewing the sale, the FTB said the taxpayer failed to report a capital gain, and sent her a notice of proposed assessment and accuracy-related penalty (initially $19,005, reduced to $6,794 after the FTB agreed to reduce the amount of additional tax owed). The taxpayer did not dispute that she owed additional tax, but said it was unjust for the FTB to penalize her for an error made by her tax preparer.

The OTA agreed, writing:

“[T]he undisputed facts are that appellant had no real estate or tax expertise, and she relied upon the advice of a tax professional to whom she provided all relevant information and documentation. The professional’s advice concerned a substantive and complex issue of law (i.e., the tax reporting of sale of a property that had been the subject of an IRC section 1031 exchange), and his advice certainly would have sounded reasonable to a reasonably diligent taxpayer with appellant’s education and expertise.”

The five-page, nonprecedential opinion continued:

“Further, we reject FTB’s assertion that [the tax preparer] never honestly believed that an IRC section 1031 exchange took place because he did not include a federal Form 8824 with appellant’s federal return. First, the mere lack of the form does not substantiate the FTB’s assertion of dishonesty. Second, and more importantly, FTB’s assertion is misplaced because the question is appellant’s good faith in relying on her tax professional’s advice, not her tax professional’s good faith in providing it.”

The opinion was written by Administrative Law Judge Jeffrey Angeja, with concurrence by ALJs Daniel Cho and Nguyen Dang. The taxpayer waived her right to an oral hearing, so the case was decided based on the written record.

Taxpayer Wins Split Decision in Income-Sourcing Appeal. The OTA voted 2-1 to grant the Appeal of Kyle G. Larson (opinion dated July 25), with the majority ruling that Larson – a resident of Idaho – did not have any taxable income from a California source in 2014, and thus did not owe tax and was not subject to penalties for not filing.

Denial of Petition for Rehearing Released on Same Day as Original Decision. The OTA has been following a policy of releasing its opinions in batches, during the first week of each month, often long after the opinions were officially issued. This resulted in an odd situation this week, when the OTA released an opinion on a tax appeal and, on the same day, an opinion on a petition to rehear the appeal.

In the Appeal of Majid Ghaboosi and Nadereh Ansari (opinion dated May 9), the OTA unanimously rejected the taxpayers’ claim that the FTB’s assessment of additional tax for the 2010 tax year was barred by the statute of limitations. In the opinion on the taxpayers’ petition for rehearing (dated August 13), the OTA ruled 3-0 that the appellants did not show good cause for a new hearing.

 

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