Office of Tax Appeals

OTA Rules on Dispute Dating Back to President Carter’s Term

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The Office of Tax Appeals posted 21 opinions to its website November 2, including a pending precedential case involving its lack of jurisdiction and a case involving a dispute that dates back to the year Jimmy Carter was elected president of the United States.

The only precedential case, the Appeal of M. Savage, involved a dispute over the appellant’s personal liability for a restaurant’s unpaid taxes, and whether the debt was discharged in bankruptcy proceedings. The OTA unanimously dismissed the appeal, opining that it “lacks jurisdiction to determine whether all or any portion of appellant’s liability was discharged in bankruptcy.”

In the dispute involving taxes from the year George Lucas finished the script for the first “Star Wars” movie (the Appeal of B. Proctor and J. Nicol), the OTA upheld the Franchise Tax Board’s assessment of additional tax.

Proctor and Nicol were married and filed joint returns for the tax years 1976 to 1979. In 1982, the FTB issued notices of proposed assessments reflecting audit findings, adding unreported income from investment in a partnership and disallowing interest expense deductions related to “Kersting tax shelters” (investment programs run by Henry Kersting that came under intense scrutiny by the IRS in the 1980s, and also led to a finding that the IRS committed fraud against the tax court). The taxpayers protested the additional assessments.

During the protest, the FTB obtained information indicating the IRS had disallowed the same interest expense deductions related to the Kersting shelters that FTB disallowed, and that the deductibility of interest expenses involving the shelters was being litigated in U.S. Tax Court. The taxpayers requested a deferral of their FTB protest pending final resolution of the litigation.

In 2010, the Ninth U.S. Circuit Court of Appeals ruled that the taxpayer would have 63.37 percent of the interest deductions related to the shelters allowed and 36.63 percent disallowed.

The FTB adjusted the amounts owed based on the court’s ruling, but the taxpayer still owed additional tax and interest, plus amnesty penalties, for the 1976 through 1979 tax years. The OTA upheld all the proposed assessments, including the interest and penalties, based on its finding that the appellants failed to demonstrate error with the assessments.

According to a footnote in the opinion, the agency has extremely limited jurisdiction to review amnesty penalties. Under section 19777.5 of the Revenue and Taxation Code, the footnote states, “A taxpayer has no right to an administrative protest or appeal of an unpaid amnesty penalty.” The OTA added that “a taxpayer also has no right to file an administrative claim for refund of a paid amnesty penalty, except upon the basis that the penalty was not properly computed.”

However, one of the appellants was granted some relief, as the OTA ruled she is entitled to innocent spouse relief for most of the transactions in question. The appellant was able to demonstrate that “she did not know or have reason to know of the adjustments itemized in FTB’s NPAs for the taxable years at issue, except for the adjustment related to her partnership interest in Westoaks, which affects only the 1976 taxable year.”

In other noteworthy opinions:

OTA Grants Rehearing Sought by CDTFA. In a 2-1 decision, the OTA granted the CDTFA’s petition for a rehearing of the Appeal of Newell Window Furnishings Inc., decided in February in favor of the taxpayer, and stated that the original opinion “misconstrued the law.”

The issue in question is whether the taxpayer’s appeal should have been rejected as untimely, as the CDTFA argues, or was timely based on the CDTFA’s failure to mail notices properly, as the OTA ruled in February. The original ruling concluded that “CDTFA’s service was defective, and therefore appellant’s appeal should be accepted as timely, and thus OTA had jurisdiction to hear the appeal.”

The CDTFA argued that the opinion is contrary to law, and that the OTA erroneously concluded that the law requires CDTFA to mail notices to every taxpayer representative of record in addition to mailing the notice to the taxpayer.

The taxpayer argued that the OTA already considered and rejected the CDTFA’s argument regarding service, and raising the same argument is not a valid ground for granting a rehearing.

In its opinion granting a rehearing, the OTA wrote:

“[W]e conclude that our prior opinion misconstrued the law. R&TC section 6486 requires CDTFA to mail a notice to the taxpayer at its address of record, and service is complete when CDTFA does so. Nothing in that section requires CDTFA to mail additional notices to any and all authorized representatives in order to comply with the statute, and absent a showing that a taxpayer has clearly and concisely designated a representative’s address to replace the taxpayer’s address of record, CDTFA need not do so. … CDTFA’s mailing met the legal requirements of R&TC section 6486, regardless of whether it mailed courtesy copies to one or more representatives. Furthermore, this is a material ground for a rehearing because CDTFA would have prevailed on the appeal had we correctly applied the law.”

The majority opinion was signed by Administrative Law Judges Andrew Kwee and Suzanne Brown.

ALJ Alberto Rosas filed a dissent in which he opined that the CDTFA’s petition for rehearing should not be considered because it was filed before all issues in the appeal have been adjudicated. “I believe the majority is acting in excess of OTA’s jurisdiction” by considering the petition for rehearing at this time, Rosas wrote.

Rosas explained: “Appellant Newell Window Furnishings, Inc., raised two issues in its appeal. The first issue is jurisdictional. The second issue is substantive. The Office of Tax Appeals (OTA) agreed to bifurcate these two issues, and, during the November 19, 2019 oral hearing, OTA heard argument on the first issue only – the jurisdictional issue. In the opinion issued on February 24, 2020, OTA adjudicated the first issue, accepting appellant’s appeal as timely. After adjudicating the first issue in favor of appellant, the next step in terms of proper procedure should have been to schedule and hold an oral hearing on the second, pending issue – the substantive issue. But that did not occur. Instead, respondent California Department of Tax and Fee Administration filed a premature petition for rehearing (PFR), which OTA accepted.”

The OTA’s ruling on the petition for rehearing could have been impacted by a personnel change. The February opinion was written by Jeffrey Angeja, who was an administrative law judge at the time but now serves as the assistant chief counsel of the OTA’s Foundations Division. Angeja’s move resulted in another ALJ being assigned to consider the petition for rehearing.

Tax Agency Makes Large Concessions During Appeals. In the Appeal of R. Peraza and J. Peraza, involving sales of ready-mix concrete, the taxpayers lost on most counts but had their liability reduced significantly during the appeal. A concession made by the California Department of Tax and Fee Administration in response to OTA questions reduced the tax liability by $7,323 and reduced interest by $6,150.

Similarly, the taxpayers in the Appeal of M. Sanchez and M. Angulo benefited despite losing the bulk of the appeal. The dispute involved sales tax on used cars, and whether the CDTFA’s estimate of unreported taxable sales included money that was loaned to the taxpayers, and wasn’t generated through sales. The CDTFA conceded that the estimate should be reduced more than $40,000.