The Office of Tax Appeals posted 63 opinions to its website April 7, including 42 relating to income tax and 21 on business taxes. None of the opinions is designated as precedential.
Most of the opinions involve routine issues of missed filing deadlines, underreported taxable sales by small business owners, and income tax refunds that were denied by the Franchise Tax Board because the claims were filed after the statute of limitations expired. Several appellants sought mercy based on illness or problems created by the pandemic, but the OTA panels ruled that these factors did not constitute reasonable cause for not complying with the tax laws and deadlines.
Illustrating the tenor of the decisions, 13 of the 42 income tax opinions (30.9 percent) included some version of a citation to this statement from a precedential opinion: “Although the result of fixed deadlines may appear harsh, the occasional harshness is redeemed by the clarity imparted.” Perhaps surprisingly, one of the appeals that cited this precedent was granted in its entirety and another resulted in a partial win for the taxpayer.
In the Appeal of S. Lothrop and M. Lothrop, the OTA overturned the FTB’s denial of a refund of more than $31,000 for the 2018 tax year.
The Lothrops filed their original 2018 tax return by the April 15, 2019, original filing deadline, triggering the four-year statute of limitations that expired April 15, 2023. The couple filed an amended 2018 tax return on October 25, 2023, which the FTB treated as a claim for refund that was filed after the expiration of the statute of limitations.
The OTA ruled that while this normally would have been the correct course of action, the couple lived in a county that had been declared a disaster area, and the deadline for filing the return/refund claim had been extended by the IRS and FTB.
“In a news release, FTB stated that it conformed to IR-2023-189, which extended the federal deadline for those affected by the 2023 California winter storms to November 16, 2023,” the OTA wrote. “In that same news release, FTB also stated that ‘FTB generally conforms to IRS postponement periods for presidentially declared disasters.’ Therefore, appellants timely filed their claim for refund within FTB’s postponement period, which postponed the four-year statute of limitations to timely file a claim for refund to November 16, 2023.”
The partial win in a “harsh” case was registered by the taxpayers in the Appeal of V. Randall and R. Randall, who sought a refund of approximately $7,900 and were granted approximately $1,400. The approved portion was based on the FTB’s concession, during the OTA process, that it took filing enforcement and collection action despite the taxpayers’ timely protest of a notice of proposed assessment. “As a result, FTB agrees to refund all remaining payments received pursuant to those collection actions,” the OTA wrote.
In other notable opinions:
OTA Judge Has Conflict Because Spouse Works for the CDTFA, Appellant Argues. One of the petitions for rehearing rejected by the OTA sought a rehearing on the grounds that Administrative Law Judge Michael Geary, the lead judge on the OTA panel hearing the original dispute, had a conflict of interest because his spouse is employed by the CDTFA.
The petition was denied – by another panel in which Geary served as the lead. In the opinion, the OTA wrote:
“OTA’s record contains a February 10, 2022, Notice of Tax Appeals Panel, which properly disclosed the fact that the lead judge’s spouse was (and remains) an employee of respondent. The disclosure informed the parties that the lead judge affirmatively represented to the parties that his spouse had not represented respondent’s interests in connection with this appeal and had no personal interest, financial or otherwise, in the outcome of this appeal. He further affirmatively represented to the parties that he had no knowledge regarding the facts of this appeal other than that acquired from the briefs and evidence presented by the parties therein, and that he would make findings impartially, without bias for or against either party, and based only upon such evidence.”
The OTA noted that there is no right to a peremptory challenge of a panel member, but any party to an appeal may file a motion to disqualify a panel member for cause.
“There is nothing in OTA’s file to indicate that appellant requested that Judge Geary be removed from (or not be appointed to) the panel …,” the OTA wrote. “There is nothing in the petition or anywhere in the record that establishes grounds for disqualification of the lead judge, and there is nothing in the Opinion to suggest that the lead judge was biased, prejudiced, or had an interest in the outcome of this appeal. For these reasons, the appointment of Judge Geary to the panel did not constitute an irregularity in the appeal proceedings that prevented fair consideration of the appeal.”
The ruling was made in one of the six opinions (three original opinions and three opinions denying the appellants’ petitions for rehearing) involving fraudulent underreporting of sales at Subway restaurant locations operated by entities associated with a single taxpayer, Ava Beri (the Appeal of Ava Beri Restaurants Group Inc. illustrates the issues raised in the coordinated appeals). The OTA upheld the California Department of Tax and Fee Administration’s 40 percent fraud penalty, among other liabilities, penalties, and interest.
“A consistent pattern of underreporting over several years and involving multiple ownership entities owned by appellant’s owners evidence a willingness to file fraudulent [sales and use tax returns],” the OTA concluded.
Sales Were Taxable, Even if the Proceeds Were Seized in Raids, OTA Rules. In the Appeal of The Fruitful Tree, dba The High Way, a cannabis dispensary in Whittier argued, in part, that it didn’t owe sales tax for sales because the proceeds were confiscated by law enforcement agencies during multiple raids. The OTA did not find that argument persuasive, writing:
“Appellant is mistaken in regard to its assertion that because cash was seized during the alleged raids, there would be no sales to tax. There is no exemption or deduction for loss of cash from sales for sales tax purposes because tax is measured by sales. Thus, the seizure of cash (or other loss such as theft or embezzlement) from a taxable sale does not relieve appellant of the tax liability or otherwise negate the sale.”
New Business Owner Responsible for Previous Owner’s Large Tax Debt. The Appeal of St. Blue Garden Corp., dba Upland Auto Body, illustrates the importance of checking tax records carefully before buying a business. The appellant purchased an auto body shop for $480,000 in 2017. The escrow company used in the transaction requested a tax clearance from the California Department of Tax and Fee Administration, but the sale was completed before any tax clearance was provided.
At that point, the new owner became liable for more than $60,000 in tax debt owed by the old owner, the OTA ruled. The new owner argued that the CDTFA did not provide proper notice, but the OTA found that argument unpersuasive.
The good news for the buyer is that the CDTFA went after both parties and successfully collected more than $41,000 of the $60,000 debt from the seller before that company quit making payments under a settlement agreement it had reached with the tax agency. The OTA noted that the CDTFA was “still actively pursuing payment” from the seller at the time of the hearing, so its ruling applies to whatever unpaid tax liability remains.
Failure to Update Bank Account Information Is $18,600 Mistake. The issue in the Appeal of Luminello Inc. was whether the taxpayer had reasonable cause for making a tax payment that was dishonored by the bank. The FTB imposed a penalty of $18,600 when the payment was dishonored, and this alerted the taxpayer to the fact that it had inadvertently attempted to pay from a closed account.
The taxpayer urged the OTA to abate the penalty, arguing that it had sufficient funds to cover the payment but, due to a “significant business transaction,” was forced to change bank accounts and forgot to cancel or revise the previously scheduled payment. The taxpayer argued that it made a corrective payment immediately upon learning of the dishonored payment and conducted internal training to prevent the mistake from happening again.
The OTA upheld the penalty, ruling that the taxpayer “provides no evidence to support its claims” and that the contentions “do not establish reasonable cause for abating the penalty because they fail to address what steps, if any, appellant took to ensure that the payment would be successful.”