Office of Tax Appeals

Office of Tax Appeals: New Opinions Include Precedential Case on Definition of ‘Overcollection’


The Office of Tax Appeals posted 36 opinions to its website this week, including one “pending precedential” decision on what constitutes an “overcollection” by the Franchise Tax Board within the meaning of a technical advice memorandum (TAM) issued by the agency in 2007.

This month’s opinions included 32 personal and franchise income tax cases and four appeals of business taxes, all involving common disputes and all decided unanimously in favor of the tax agencies. Most of the opinions have issuance dates from mid-December. Three opinions date back to July, but were posted this month based on the OTA’s policy of holding opinions when petitions for rehearing are filed, and eventually releasing the underlying opinion and the rehearing decision on the same day.

The pending precedential case, in the Appeal of Howard O. Cornbleth, involved a taxpayer who sought a refund of $1,580 for the 2012 tax year on the grounds that it constituted an “overcollection” by the FTB under the terms of TAM 2007-01. The money had been withheld from gambling winnings and sent directly from a casino to the FTB, but the taxpayer and FTB later agreed that it was an overpayment.

However, the taxpayer didn’t file a 2012 return until 2017, by which time the statute of limitations for requesting a refund of the overpayment had expired. The taxpayer argued that the refund still could be issued on the basis that it was an overcollection by the tax agency.

The OTA disagreed, ruling that because the money was withheld by a third party, with no collection actions taken by the FTB, it was an overpayment – subject to the statute of limitations – rather than an overcollection.

In other notable opinions posted this week:

Famed Multi-Level Marketer Loses Appeal. Deciding an appeal filed by taxpayers who have appeared on the Forbes list of the 400 wealthiest people in the world (the Appeal of Rex G. Maughan and Ruth G. Maughan), the OTA ruled that the taxpayers failed to establish that a late-payment penalty should be abated for reasonable cause, nor that interest should be abated.

The taxpayers, who are residents of Utah, argued that they paid their 2017 California income tax liability six months late because they were unable to obtain all of the necessary financial documents needed to determine and pay their taxes by the April 15, 2018, deadline.

The OTA ruled that the taxpayers failed to provide any explanation or evidence indicating what information they lacked, what steps were taken to obtain that information, or how the lack of that information prevented them from making a reasonable estimate of their tax liability.

The OTA added that by “exercising ordinary business care and prudence,” the taxpayers “would have realized, without the need for any further information, that attempting to completely offset over $60 million of income with a NOL deduction would require appellants to pay the [alternative minimum tax].”

Mr. Maughan is the founder and chief executive officer of Forever Living Products, a multi-level marketing company that sells aloe vera-based cosmetics and other products.

The taxpayers waived their right to an oral hearing, so the appeal was decided based on the written record.   

Taxpayer Overpaid $8,488, but Is Barred From Obtaining a Refund. The importance of meeting deadlines was noted in the OTA’s rejection of the Appeal of Gail A. Brown, involving the taxpayer’s unsuccessful attempt to obtain a refund of $8,488.

The taxpayer did not file a 2012 return, but the FTB received information that she paid mortgage interest that year, triggering an assumption that she earned income. The FTB estimated income of $110,238, calculated by multiplying the amount of reported mortgage interest by six – the standard formula used by the agency.

Brown failed to respond to notices until late 2018, when she finally provided information that convinced the FTB to abate the tax assessed for the 2012 tax year. The abatement created the balance of $8,488, but the FTB denied Brown’s claim for refund on the basis that the statute of limitations had expired.

“Federal courts have stated that fixed deadlines may appear harsh because they can be missed, but the resulting occasional harshness is redeemed by the clarity of the legal obligation imparted,” the OTA wrote in its decision.

Dispute Dating Back 20 Years Is Likely to Continue. In the Appeal of David R. Fund and Darlene Funk, the OTA ruled that it does not have jurisdiction to consider whether tax, penalties and interest for the 2000 tax year were discharged in bankruptcy. Bankruptcy courts have exclusive jurisdiction in such cases, the OTA found. The tax, penalties and interest at issue total more than $28,500.