The Office of Tax Appeals released 62 opinions January 5, including three precedential decisions – two relating to the same couple’s residency dispute and whether the OTA has jurisdiction to determine that the Franchise Tax Board violated the U.S. Constitution’s Indian Commerce Clause and used an apportionment methodology that is unenforceable because it constituted an underground regulation.
The FTB prevailed in the two residency disputes (the Appeal of R. Garcia and M. Garcia on Severed Issues and the Appeal of R. Garcia and M. Garcia on Second Severed Issue) and partially prevailed in the other precedential case, involving $1,540 in taxes and penalties imposed on a single-member limited liability company (the Appeal of APlusLives LLC).
The residency appeals involved an enrolled member of the San Manuel Band of Mission Indians, a federally recognized tribe that made per-capita payments of gaming income to its members, including one of the appellants. During the years at issue, the taxpayer owned a home located on his tribe’s reservation and also maintained homes outside the reservation – some in California and one in New York City. On their tax returns, the couple deducted the gaming income from their California income, reasoning that it was not taxable because the state law in effect for the relevant years prohibited taxing income earned by a tribal member on that tribe’s reservation if the member lived on the reservation. (Subsequent changes to the law expanded the exemption by removing the requirement that the taxpayer reside on his or her own tribe’s reservation, instead requiring that the taxpayer reside within any “Indian country,” as defined, in California.)
The FTB determined that the income from the gaming revenue was taxable, arguing that under the case law in effect for the years at issue, California may tax all of the taxable income, including reservation-source income, of a tribal member who resides outside of his or her tribe’s reservation.
In the appeal, the taxpayers argued:
- The assessment of tax based on the taxpayer’s per-capita gaming revenue is unconstitutional because it fails to apportion the income and violates the Indian Commerce Clause.
- The federal Indian Gaming Regulatory Act, and regulations and authorities established pursuant to the act, preempt California’s authority to tax the gaming income.
- The FTB did not tailor its income tax to reflect that the taxpayer resided both on and off the reservation, and therefore the imposition of the tax is prohibited in its entirety under precedents involving federal constitutional and preemption issues.
- The FTB’s proposed apportionment methodology is unenforceable because it constitutes an underground regulation.
In its first opinion, dated December 6, 2021, but not released to the public until this week, the OTA held that it has no jurisdiction over the constitutional issues, federal preemption, apportionment, or underground regulation arguments, so its review would be limited to the single issue of whether the income was subject to California tax – specifically, whether the taxpayer resided on his tribe’s reservation during the years at issue.
In the second opinion, dated October 27, 2025, the OTA ruled that the appellants didn’t successfully rebut the FTB’s presumption that the recipient of the gaming revenue didn’t reside on his tribe’s reservation. The OTA cited the taxpayer’s “significant lack of physical presence on the Reservation,” adding:
“The available record is limited, and some factors are mixed or consistent with appellants’ contention that appellant-husband resided on the Reservation. However, it is clear that appellant-husband spent the vast majority of his time outside of the Reservation and that his business and property interests were centered outside of the Reservation. It is not insignificant in this analysis that appellants spent the vast majority of the years at issue in New York, even while appellant-husband’s university was not in session, and that the couple of weeks they did spend back in California each summer was still split between residences on and off the Reservation.”
In the remaining precedential case, the OTA ruled that the single-member LLC owes $800 in tax for a year when it was registered to do business in California, but does not owe a per-partner late-filing penalty. The OTA wrote that “it is unclear whether the per-partner late filing penalty can be imposed on an SMLLC, which is neither a partnership nor an LLC classified as a partnership.” The OTA rejected the FTB’s argument that the OTA should follow a precedential decision involving a demand penalty that was imposed on an SMLLC, ruling that the precedent does not apply.
In other notable opinions:
Taxpayer Who Paid Millions in Tax Is Penalized $220,000 for Paying by Check. The Appeal of G. Haas illustrates why many Californians question the FTB’s description of taxpayers as “customers.” In this case, the customer in question was penalized more than $220,000 for making a $22 million tax payment by check rather than electronically – after an FTB employee verbally advised his accountant that paying by check would be okay.
When the customer sought a refund of the penalty, the FTB would not back down from its position that since he previously was required to pay electronically, he must continue to do so unless the FTB grants a waiver. The FTB refused to grant such a waiver, and additionally argued that the verbal advice did not constitute a waiver and did not qualify the customer for any relief. The existing rules allow some leniency for taxpayers who reasonably rely on formal written advice from the tax agency, but not verbal advice in any instance.
The OTA upheld the FTB’s position on all counts. While the accountant provided call logs to support his contention that he repeatedly was assured that he could send a check and a letter explaining how to apply the payment, the OTA concluded: “Appellant has not shown reasonable cause for abatement of the e-pay penalty. … Additionally, to the extent appellant infers that FTB granted a waiver by allegedly informing appellant that a check would be accepted, this is not persuasive. R&TC section 19011.5(d) provides that if FTB grants a waiver, it must be in writing. There is no evidence of a written waiver in the record.”
The total amount of taxes paid by the customer is not disclosed in the OTA’s opinion. The opinion describes, however, that the customer overpaid his taxes for the 2020 tax year by $44.7 million and received a refund of that amount. When he later sought to have $22 million of the refund applied to the 2021 tax year, the FTB informed his accountant that since the refund already had been directly deposited in the customer’s bank account, the best way to apply half of it to an estimated tax payment for 2021 would be to simply send a check.
Taxpayers Establish Reasonable Cause for Missing Filing Deadline. The OTA granted the Appeal of M. Swanson and B. Swanson, a rare case in which the taxpayers were able to prove to the OTA’s satisfaction that they had reasonable cause for missing a filing deadline.
“[T]he record shows that appellants did more than delegate the filing of their return to a return preparer,” the OTA wrote. “Appellants took corrective action when they learned that their tax return had not been filed or taxes paid. Appellants repeatedly attempted to contact their return preparer, Ms. Higby, when they learned their taxes had not been paid when expected. They proactively contacted and made an appointment with the IRS when they were unable to reach Ms. Higby. Within days of learning that their federal return had not been received, appellants proactively contacted FTB, made an appointment, and filed their tax return. Accordingly, OTA finds that appellants exercised ordinary business care and prudence and have shown reasonable cause to abate the late-filing penalty.”
It was not a complete win for the taxpayers, however, as the OTA ruled that they did not establish a legal basis to abate interest for the time that their taxes went unpaid while they were sorting out the problems with their tax preparer.
OTA Rules on Dispute Dating Back to 1999 Tax Year. The most notable factor in the Appeal of A. Varela and J. Varela was that it related to tax years dating back more than 25 years. The OTA upheld the FTB’s imposition of a variety of penalties, including noneconomic substance transaction (NEST) penalties and interest-based penalties for the 1999 tax year and similar penalties for 2000, 2001, 2003, and 2004.
The OTA’s 30-page opinion describes numerous complex transactions involving an employee stock ownership plan (ESOP), profit-sharing agreements, and stocks.
The FTB’s notice of proposed assessment for the 1999, 2000, and 2001 tax years was issued in 2008, which was after the expiration of the general statute of limitations for NPAs. However, the OTA agreed with the FTB that the NPAs were timely under a specific, longer statute of limitations relating to abusive tax avoidance transactions. This determination hinged on the OTA agreeing with the FTB that a specific ESOP structure did not have a business purpose or economic substance.
OTA Says it Doesn’t Have Jurisdiction Over Claim That CDTFA Violated Federal Law When Taxing Ship’s Alcohol Sales. In the Appeal of Lil’ Man In The Boat, Inc., dba Just Dreaming Yacht Charters, the taxpayer argued that the CDTFA violated federal law when it imposed tax on the sales of alcoholic beverages aboard a commercial charter boat, but the OTA declined to consider the argument, concluding that it doesn’t have jurisdiction.
The taxpayer argued that the $17,218 in taxes it collected and remitted to the CDTFA for the sale of alcoholic beverages during voyages must be refunded based on federal preemption. The taxpayer cited Title 33 of the United States Code, section 5 (the Rivers and Harbors Act), which prohibits the levying of taxes “or any other impositions whatever” upon vessels, watercraft, or their passengers or crew, by “any non-Federal interest, if the vessel or water craft is operating on any navigable waters subject to the authority of the United States.”
To try to navigate around the OTA’s jurisdiction limitation, the taxpayer cited appellate court decisions from Illinois, Tennessee, and Alaska, and said that since the California Constitution doesn’t limit the OTA from considering appellate court decisions from jurisdictions outside of California, the office has jurisdiction and should adopt the same findings.
“There is nothing implicit in the constitutional or statutory scheme that empowers OTA to find jurisdiction for itself based on case law that does not directly address R&TC section 6051 [the state law that imposes sales tax on retailers based on a percentage of their gross receipts from retail sales of tangible personal property in California],” the OTA concluded. “To do otherwise would be a bridge too far. OTA regulations make it clear that a federal or California appellate court must determine that a California statute is invalid or enforceable. … Consequently, the cases upon which appellant relies do not prohibit CDTFA from applying R&TC section 6051 and collecting sales tax from alcoholic beverage sales, nor do they provide OTA with jurisdiction to determine whether R&TC section 6051 is invalid or enforceable.”
In a footnote, the OTA added that “even if appellant prevailed in this matter and excess tax reimbursement were returned to appellant, appellant would not be entitled to keep the returned amounts.” Rather, the business would be required to refund the excess tax reimbursement to customers who paid the tax, or to the state if the customers could not be located, the OTA stated.
Taxpayer Relied on Erroneous Advice From FTB, but Not During the Relevant Time, OTA Rules. The OTA found that “it is undisputed that FTB erroneously advised [the taxpayer in the Appeal of L. Ostarello] that she had until July 15, 2024, to file a 2019 return,” but not during a time that would allow the taxpayer to obtain relief for missing the deadline to file a refund claim.
“OTA finds that FTB was aware of the facts, intended appellant to rely on its oral advice, and appellant relied on that advice,” the opinion stated. “OTA also finds that appellant called FTB after the statute of limitations deadline had passed, and therefore, FTB’s advice could not have induced appellant’s filing after the statute of limitations period expired because it had already expired.”
The OTA additionally wrote that despite the erroneous advice provided over the phone, the FTB provided accurate advice in writing, so “the doctrine of equitable estoppel does not apply in these circumstances.”