Office of Tax Appeals

Office of Tax Appeals: Taxpayer Who Relied on Instructions in FTB Publication Loses Appeal

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The Office of Tax Appeals posted 23 opinions to its website April 7, including a “pending precedential” rejection of an appeal filed by a taxpayer who followed a Franchise Tax Board publication’s instructions with what the OTA termed an “unfortunate” omission.

In the Appeal of Conrad E. Dandridge, the taxpayer challenged the FTB’s disallowance of a mortgage insurance premium deduction on his 2012 return. The taxpayer, who argued his case during a January 2019 hearing, said he relied on guidance from the FTB’s Form 540 Instructions when preparing his return.

The instructions include guidance regarding private mortgage insurance (PMI) deductions, but do not refer to a mortgage insurance premium deduction. The instructions direct the taxpayer to subtract the amount of a deduction for PMI taken on federal Schedule A from line 41 of the California tax return.

According to the instructions, Dandridge argued, one must subtract the amount of any PMI deduction that is shown on the federal Schedule A from total federal itemized deductions, but he did not have PMI to subtract. Dandridge had Federal Housing Administration mortgage insurance, which is not PMI and is not addressed in the 540 Instructions.

“We sympathize with Mr. Dandridge’s position, as he relied on what he reasonably understood to be FTB’s guidance on preparing his 2012 California tax return,” the OTA wrote. “However, the 540 Instructions are not an authoritative source of law. While we recognize Mr. Dandridge’s diligence in presenting his case and his earnest testimony, the question we are faced with is whether California law allows a deduction for a mortgage insurance premium. OTA’s role is to apply the law, and … the law is clear that California does not allow a deduction for a mortgage insurance premium.”

The OTA noted that the FTB instructions also stated that they are a summary of California tax law with “information that is most useful to the greatest number of taxpayers in the limited space available.” The forms clearly state that taxpayers “should not consider the tax booklets as authoritative law,” the OTA added.

The opinion is dated May 9, 2019, but was not released to the public until this month despite its pending precedential status. This is in keeping with the OTA’s practice of holding opinions in cases where a party petitions for rehearing, and releasing the underlying opinion on the same day the opinion on the rehearing is released. In this case, the OTA rejected Dandridge’s petition for rehearing with a 3-0 opinion dated February 14 (Valentine’s Day).

The Dandridge opinion was the only pending precedential opinion posted this month. The remaining cases included 19 franchise and income tax opinions, and four business tax opinions. Seven of the opinions involved petitions for rehearing (all of the requests were rejected). The OTA also changed the designation on three opinions from pending precedential to precedential (the appeals of Alfredo J. Talavera, Michael A. Gorin, and Pehong Chen and Adele Chi.

Additionally, the OTA recently posted its reference guide summarizing every extension due to COVID-19 for appeals originating from the FTB and the California Department of Tax and Fee Administration.

This month’s opinions include:

Fraud Penalty Upheld for Business That Failed to Remit Millions in Sales Tax. California vigorously enforces its laws against tax fraud, as evidenced by the outcome of the Appeal of Roanja Planning Inc. The OTA ruled that the California Department of Tax and Fee Administration’s imposition of a 40 percent penalty against a building supply company was proper, and that the penalty was appropriately doubled for periods in which the company did not participate in an available tax-amnesty program. The OTA additionally upheld a penalty that added more than $500,000 in interest as an additional penalty for not participating in the amnesty program.

In an opinion denying the taxpayer’s petition for rehearing, the OTA wrote: “Excepting the fourth quarter of 2008, appellant failed to report between 92 to 99 percent of its taxable sales for each quarter of the liability period. Appellant also charged and collected sales tax reimbursement with respect to nearly all of its sales, amounting to roughly $8.5 million in unremitted tax reimbursement which appellant retained for its own use. Based on these facts, we not only rejected appellant’s explanation that it had reported its taxable sales in good faith, but we infer that appellant, through its sole officer and owner, was aware of the underreporting. Under these circumstances, we remain firmly convinced that appellant’s underreporting was due to fraud.”

FTB Makes Large Concession During Appeal. The taxpayer in the Appeal of Manish Goel did not technically win, but benefited significantly from filing the appeal. The taxpayer appealed the FTB’s denial of his claim for refund of $12,842 for the 2012 tax year.

In its opening brief, the FTB conceded that based on a certified mail receipt, the taxpayer established the original 2012 return was filed April 13, 2017, which was within four years of the April 15, 2013, due date. The tax agency thus agreed to refund or credit an $11,243 refund claimed on the original return.

However, the appellant did not file an amended return – claiming an additional refund of $1,599 – until August 30, 2017, which was beyond the statute of limitations. The OTA ruled that the FTB properly denied the claim for refund of that amount.

The opinion, dated January 30, does not indicate why the timeliness of the original return was not discovered earlier in the process.

The return included a net operating loss carryback.

FTB Petitions for Rehearing of Appeal of $218 Refund. The OTA issued two opinions in an appeal involving a dispute over $217.97.

In the Appeal of Non-Stop Carriers LLC, the OTA ruled unanimously that the FTB improperly imposed a late-filing penalty for the 2013 tax year (in an opinion dated August 16, 2019). The OTA found “direct evidence of actual delivery of the return to FTB” prior to the due date.

“We have FTB’s acknowledgement that the envelope containing the 2014 estimated tax voucher and payment was received by FTB in February 2014, prior to the due date for the 2013 return, and we have appellant’s statement that the same envelope also contained appellant’s 2013 return,” the OTA wrote. “Although FTB’s instructions for delivery of the 2013 Form 100S (return) and the 2014 Form 100-ES (estimated tax voucher) prescribe delivery to a slightly different zip code, the addresses are otherwise identical, the only difference being the last two digits of the nine-digit zip code. We find it would have been reasonable for appellant to mail the return and estimated tax payment together.”

The OTA additionally noted that the FTB deposited the check that was included in the envelope.

The opinion indicates that the FTB received the taxpayer’s penalty payment plus interest, and a claim for refund of that amount, on November 14, 2016, but did not issue a notice denying the refund until September 23, 2017.

The FTB petitioned for the OTA to rehear the appeal, but the OTA unanimously denied that petition (in an opinion dated February 4). The OTA wrote that the FTB “is correct that the Opinion should have focused on Government Code section 11003,” but found that “the analysis under that section is the same” so the result is the same and the FTB’s rights were not materially affected.”

OTA Denies FTB’s Petition to Rehear Dispute Over Demand Penalty. In the Appeal of Martin M. Deasy, the OTA denied the FTB’s petition to rehear an appeal in which the OTA found that the FTB improperly imposed a “demand penalty.” Both the original opinion and the rehearing opinion were decided on 2-1 votes.

The OTA has repeatedly rejected the FTB’s position on the timing of the penalty, with a majority of OTA administrative law judges ruling that the tax agency improperly stretched the meaning of the phrase “during the preceding four taxable years” to include a longer period of time.

The FTB has continued to petition for rehearings, and has been unsuccessful.

Taxpayer Loses Appeal Over When the Landslide Brought Him Down. The OTA ruled in the Appeal of Joseph Michael to uphold “the uncontested rule that a casualty loss is sustained in the year in which the casualty loss is discovered by the taxpayer, and not the year in which the repair costs were ultimately determined.”

The taxpayer owned property that was impacted by a landslide in 2005. He made an insurance claim that was denied in 2007. The OTA ruled that the casualty loss was sustained in 2007, rejecting the taxpayer’s argument that the loss was properly deductible when the full extent of the damage to the property was determined in 2009.

The taxpayer petitioned for rehearing, but the petition was denied.

OTA Upholds FTB’s Decision to Disallow Waiter’s Claims for Business Expenses. In the Appeal of Sean Goldberg, the OTA upheld the FTB’s disallowance of $40,960 in claimed business expenses and miscellaneous deductions for the 2012 tax year and more than $25,000 for 2011. The taxpayer had two jobs during the period at issue, as a waiter at a chain restaurant and an asset manager for a real estate company.

The unreimbursed employee business expenses claimed for 2011 included vehicle expenses of $4,860 (the taxpayer claimed 9,000 business miles driven, out of 12,000 total miles for his personal vehicle), parking fees of $400, travel expenses of $9,960, business expenses of $500, and meal and entertainment expenses of $3,750. He also claimed additional employee and other expenses on a federal Form 2106, consisting of job travel expenses of $3,200, uniform expenses of $1,200, job education expenses of $500, exercise expenses of $1,600, backpacking expenses of $200, and snowboarding expenses of $1,200.

The OTA ruled that the taxpayer failed to provide evidence that the expenses were legitimately related to business and would not have been reimbursed by his employers if requested.

OTA Upholds “California Method” of Taxing Income. The Appeal of Alan E. Trotter involved a situation in which the FTB initially tried to tax income earned in Texas in 2015 prior to the taxpayer’s move to California. However, the FTB changed course during the appeal.

The taxpayer argued that the FTB cannot tax his gambling winnings that were earned while he was not a California resident. In its opening brief, the FTB conceded that those winnings should not be taxed in California.

Over the taxpayer’s objection, the OTA upheld the use of the “California method” of using out-of-state income for purposes of computing the appropriate California tax rate to apply to income that has a California source.

The calculation of this tax rate is statutorily required, the OTA noted.

Taxpayer Needs a Bigger Boat Value, OTA Rules. The question in the Appeal of Ponek was whether a boat purchased 14 years ago was worth $1, $22,000 or $72,000 for purposes of assessing use tax.

The taxpayers said they purchased the old, heavily damaged vessel in 2006 for $1, citing a bill of sale stating the price as “one dollar and other valuable consideration unless otherwise stated.” The CDTFA (then the State Board of Equalization) calculated the sale price at $72,000, but in 2008 accepted the seller’s statement that the boat sold for $22,000.

To collect use tax, the tax agency tracked down the taxpayers’ bank accounts, under a different spelling of their last name, and in 2014 removed just under $3,300 to satisfy the liability. The taxpayers appealed.

“Appellant’s contention that the Vessel was purchased for a nominal consideration of $1 is unpersuasive,” the OTA wrote, noting the “other valuable consideration” aspect of the bill of sale. The $22,000 value was upheld.

The OTA also opined that it does not have jurisdiction to rule on the taxpayers’ claims that the tax agency acted improperly.

The OTA explained: “Appellant advances a multitude of arguments alleging that for one reason or another, CDTFA’s levy was wrongful. These arguments involving issues pertaining to the identity of the tax debtor and the ownership of the levied account, however, have no bearing on any of the above items over which OTA has jurisdiction. Accordingly, we are unable to address appellant’s contentions concerning the propriety of CDTFA’s levy.”