Office of Tax Appeals: New Opinions Include Three Precedential Decisions

The Office of Tax Appeals posted 41 new opinions to its website March 3, including three “pending precedential opinions” decided largely in favor of the tax agencies.

The three pending precedential opinions posted this week:

• • The Appeal of Alfredo J. Talavera, involving a used-car dealer who was found to be personally liable for unpaid sales tax liabilities and appealed for a reduction in the amount owed. The OTA unanimously upheld the California Department of Tax and Fee Administration’s position, and also rejected the taxpayer’s claim that the CDTFA lacks the statutory authority to use a formula that it used to calculate the allowable deduction for the value of a repossessed vehicle. The OTA ruled that it does not have the authority to declare the CDTFA’s regulation invalid, as that authority belongs only to the courts.

• • In the Appeal of Pehong Chen and Adele Chi, the taxpayers alleged that the FTB made errors when it proposed assessments relating to funds received from a Portuguese “sociedade anonima,” a type of taxed C corporation for federal income tax purposes. The taxpayers, acting through a trust, purchased 157 shares of stock from the entity from 2000 to 2004 for almost $3.2 million, and received payments totaling more than $637,000 from 2007 through 2011. They did not report the payments as dividend income in their returns for those years. After the entity closed its business operations in 2011, the taxpayers claimed a large capital loss – a portion of which was disallowed by the FTB on the grounds that the annual payments were non-dividend distributions that reduced their stock basis.
    
    The taxpayers argued on appeal that the payments were dividends that did not reduce their stock basis. The FTB argued that the taxpayers are barred by the duty of consistency, and the distributions must be treated as originally reported – non-dividend distributions that reduced their stock basis.

    
    The OTA agreed with the FTB, writing: “Here, in our view, on their original and amended tax returns for the 2007 through 2010 tax years, appellants essentially represented that the distributions were non-dividend distributions because they did not pay tax on them. Appellants now attempt to recharacterize the distributions as taxable dividends after the statute of limitations has run to assess them additional taxes. … [W]e are not addressing whether the amounts were dividends or non-dividend distributions, but rather whether appellants must continue to treat the amounts as non-taxable distributions under the duty of consistency.”

• • In the Appeal of Michael A. Gorin, the taxpayer argued, among other things, that the FTB’s proposed assessment of additional tax is barred by the statute of limitations. The OTA sided with the FTB on most issues, but ruled that the taxpayer is entitled to interest abatement for some of the period in dispute.
    
    “The evidence shows that … FTB took 248 days to assign a hearing officer to the protest matter,” the OTA wrote. “Specifically, FTB created a computer file for the protest hearing on February 2, 2016, and did not assign a hearing officer until October 21, 2016.”

    
    The OTA found that “there is no apparent basis to support FTB’s determination not to abate interest” during the long wait, which the OTA found to be an “unreasonable delay in the handling of this matter.”

In other cases of note from this month’s posted opinions:

Computer Trainer Was in the Business of Selling Computers, Owes Large Fraud Penalty, OTA Rules. A taxpayer who operated a continuing education center that offered computer courses to employees of major companies – and provided discounted computers to the students – was in the business of selling computers, and should have collected and remitted sales tax on the transactions, the OTA ruled in the Appeal of Mehdi Asgarinejad dba Net Micro.

The appellant argued that he was engaged in educational services, not the retail sale of tangible personal property. The CDTFA argued that his advertising emphasized the fact that students would receive a $1,200 computer for $299, with the remainder of the cost reimbursed by their employers.

The OTA wrote: “Appellant asserts that the computers were used as an integral teaching aid and were only incidental to the educational services. In support, appellant claims that he did not retain the computers because they were disassembled as part of the course and were not suitable for use by new students. However, the fact that 4,350 computers were transferred to appellant’s students strongly suggests that the computers were not inoperable once the course was completed. Therefore, appellant’s uncorroborated arguments fail to establish that computers valued at $1,200 were merely a consumable teaching aid furnished to students for one-time use only.”

The case involved a tax liability of more than $584,000, plus penalties totaling more than $204,000, including a fraud penalty of more than $146,000.

Check-Writing Error Proves Costly. In the Appeal of Arthur D. Fulton, the issue was whether the taxpayer should be relieved of penalties for late payment and underpayment of income tax. The taxpayer’s problems arose when he sent a $15,000 payment via a check that had the numeric designation of “$15,000,” but a written designation of “fifteen and no/100’s.” The FTB treated it as a $15 payment, and penalties ensued.

The OTA denied the taxpayer’s claim for a refund of $1,710 in penalties, ruling that the taxpayer “has not shown that his failure to make a timely payment occurred despite exercising ordinary business care and prudence.” The OTA additionally opined that the taxpayer “does not describe what efforts, if any, he took to ensure that the $15,000 payment was in factor processed” before the relevant deadline.

Cannabis Seller Bogarted Tax Payments, OTA Rules. The OTA ruled in Appeal of Cody Lee Bass that the taxpayer is personally liable for sales tax liabilities incurred by a Sacramento cannabis dispensary. CDTFA determined that the business underreported its gross receipts by more than $4 million during a roughly two-year period, consisting of understated taxable sales of nearly $1.2 million and disallowed claimed nontaxable labor of more than $2.8 million. The president of the corporation that owned the business was determined to be a “responsible person” for purposes of the liability, but the OTA noted that under the law, “this fact by itself has no relevance in determining whether appellant is also personally responsible for the unpaid liabilities of the corporation.”