Office of Tax Appeals

OTA Rejects Taxpayers’ Claim That Error Occurred Only Because of FTB’s Electronic Payment Mandate


The Office of Tax Appeals has rejected a personal income tax appeal based on an argument that a late payment occurred solely because of the Franchise Tax Board’s electronic payment mandate.

In the Appeal of K. Raza and S. Raza, the taxpayers argued that if they had been allowed to pay by check, their accountant would not have made the typing error – entering “$130,002” instead of “$13,002” – that kept their electronic payment from being processed, and their record of paying on time would have remained intact.

The OTA ruled that the underpayment “was the result of an oversight and lack of due diligence” by the taxpayers, writing that they “did not check their bank account to ensure that the payment had been made” until several months after it was due.

The opinion was one of 17 posted to the OTA’s website for August. The opinions included 14 decisions on income tax disputes and three business tax decisions, all involving unreported taxable sales at restaurants. None of the August opinions are precedential, and most involve routine disagreements.

Notable opinions include:

OTA Judges Disagree on Whether They Overstepped Their Authority by Ordering FTB to Provide a Refund. The Appeal of T. Auchter, on the issue of whether the Franchise Tax Board improperly imposed a “demand penalty” and whether the OTA had authority to order the FTB to refund the penalty, accounted for three of the 17 opinions posted for August.

The OTA posted an April 21, 2020, opinion that was superseded, a petition for rehearing that was granted April 28, 2021, and the June 23, 2021, opinion that concluded the proceedings. In the original opinion, the OTA ruled 3-0 that the FTB improperly imposed the demand penalty, and the disposition stated: “The demand penalty shall be abated and refunded to appellant, with interest as appropriate ….”

The FTB petitioned for rehearing, arguing that the OTA’s interpretation of the demand penalty was contrary to law and that the OTA went too far by ordering a refund. On the latter point, the FTB argued that the issue in the appeal was simply whether the demand penalty should be sustained, not whether it should be abated and refunded, because it was not an appeal from a denial of a claim for refund (it was an appeal from a notice of action on a proposed deficiency assessment).

The same administrative law judges who issued the original opinion granted a portion of the petition for rehearing. In a 2-1 decision, the judges ruled that the underlying issue of the propriety of the demand penalty was decided correctly and would not be reconsidered, but a rehearing would be granted on the narrow issue of the refund order. The majority stated that the OTA “lacked jurisdiction to abate any assessment because respondent has not yet made an assessment,” and “also lacked jurisdiction to grant (or order) a refund because there was no claim denial before us.”

In a dissent, Administrative Law Judge Tommy Leung argued that the petition for rehearing should have been denied in its entirety. Leung wrote that the taxpayer paid the disputed amount while the appeal was pending, and more than six months elapsed without the FTB returning the money, so the appeal must be treated as a claim for refund or an appeal from the denial of a claim for refund.

The final opinion came from a panel that included only one of the three ALJs from the original opinion and rehearing decision. This panel issued a 3-0 ruling vacating the order that the FTB refund the penalty, stating that “under the circumstances that existed when OTA issued the Opinion, it was error to hold that respondent must refund the demand penalty.” In a footnote, the OTA added: “It remains our understanding that a refund will be forthcoming at the conclusion of this appeal.”

None of the opinions referred to the OTA’s precedential opinion in the Appeal of R. Jones, a 2-1 decision in which the majority agreed with the FTB’s interpretation of when the demand penalty can be imposed. That precedent, which reaches a conclusion that had been rejected by a majority of ALJs in numerous other appeals, is dated March 4, 2021, almost a year after the original opinion was issued in the Auchter appeal.

FTB Concedes Five Years’ Worth of Interest Due to Unreasonable Delay. The FTB prevailed in the Appeal of L. Malin and F. Malin, relating to additional tax and penalties sought by the FTB based on IRS adjustments to the taxpayers’ income, but the taxpayers won a large concession from the FTB during the appeal process. The FTB conceded interest from November 10, 2014, through March 4, 2019, acknowledging that there was unreasonable delay in processing the taxpayers’ protests.