The Office of Tax Appeals posted 21 opinions September 7, including a pending precedential decision in which the OTA denied a refund for a business that got into tax trouble by relying on inaccurate information posted on the California Department of Tax and Fee Administration’s website.

In the Appeal of Waterford Irrigation Supply Inc., the Office of Tax Appeals upheld the CDTFA’s denial of the taxpayer’s $16,362 claim for refund. The taxpayer is a retailer who sells irrigation equipment and supplies and made sales to farmers that qualified for the partial tax exemption for farm equipment and machinery under Revenue and Taxation Code section 6356.5.

Beginning January 1, 2017, the partial exemption rate decreased from 5.25 percent to 5 percent. The taxpayer was unaware of this rate change and continued to charge and collect tax reimbursement from its customers based on the higher 5.25 percent exemption rate. As a result, the taxpayer failed to collect sufficient tax reimbursement to satisfy its tax liability.

When alerted to the problem, the taxpayer paid the amount owed and filed a timely claim for refund.

According to the OTA, the taxpayer’s “sole argument is that it should be relieved of liability for any reimbursed tax because it detrimentally relied upon outdated information posted on [the CDTFA’s] website indicating that the applicable partial tax exemption rate for the claim period was 5.25 percent.”

The opinion notes that the agency “concedes that it failed to update a portion of its website prior to the 0.25 percent rate change.” However, the CDTFA also stated that “it had notified all sales and use tax accountholders of the change prior to January 1, 2017, either by mail or postcard, and by posting an informational notice on its website.”

“As a matter of law, we note there is no statutory relief provision for taxpayers who detrimentally rely on erroneous or outdated information posted on [CDTFA’s] website,” the OTA ruled.

The OTA added that “misrepresentations of an administrative official will not exempt a taxpayer who relied upon them from the obligation to pay the tax that is rightfully owed to the state” under a prior California Supreme Court Decision, U.S. Fidelity & Guaranty Co. v. State Board of Equalization. Therefore, the OTA concluded, “Regardless of whether appellant received any advance notice from respondent of the rate change, there is simply no legal basis for relieving or refunding the tax under these circumstances.”

The opinion in the irrigation supply company’s appeal was the only precedential decision posted by the OTA this month.

Noteworthy non-precedential opinions included:

OTA Judges Uphold Controversial Precedent but Note Their Disagreement. The Appeal of F. Crow, involving a personal income tax dispute and a request to abate the Franchise Tax Board’s “demand penalty,” is the first to cite the controversial precedent in the Appeal of R. Jones (the 2-1 decision upholding the FTB’s interpretation of when the “demand penalty” can be imposed – and contradicting numerous 3-0 and 2-1 decisions that rejected the FTB’s interpretation).

OTA Administrative Law Judges Teresa Stanley, Sara Hosey, and Amanda Vassigh abated the demand penalty on the basis of reasonable cause – citing the taxpayer’s dementia – but said they instead would have abated it on the grounds of improper application had it not been for the Jones precedent.

The three ALJs explained in a footnote:

“The majority of this panel does not agree that an NPA issued in 2016 for taxable year 2014 meeting the requirements of California Code of Regulations, title 19, section 19133(b), which states that the Demand must have been issued during the four years preceding 2016 (2012, 2013, 2014, or 2015); however, because there is controlling law on this issue set forth in the Opinion in Appeal of Jones, 2021-OTA-144P, we must find that the penalty was property imposed.”

The OTA has not publicly described its process for deciding which opinions are deemed precedential, or why the split decision in the Appeal of R. Jones, issued March 4, was selected as a precedent.

In a June 2 letter asking the OTA to withdraw the precedential status, CalTax and the Family Business Association of California wrote:

“Since 2019, when the OTA first ruled against the Franchise Tax Board’s interpretation of the demand penalty regulation (18 CCR §19133), there have been at least 21 cases involving the specific issue of interpreting the FTB’s imposition of the demand penalty reviewed by at least 25 different administrative law judges (ALJs). More than 76 percent of these cases have been decided in favor of the taxpayer and against the FTB’s interpretation of the demand penalty regulation. … Of the ALJs who have thoroughly examined this specific issue by reading the briefs and listening to the arguments raised by both sides, 72 percent have consistently interpreted the regulation at issue in a completely different manner than the Jones opinion. It would be improper for the OTA to establish a precedent that would result in the opinions of two ALJs in the recent case to overrule the legal analysis of the 18 ALJs – including current OTA Assistant Chief Counsel Jeff Angeja and several ALJs who are former FTB attorneys – who believe the two ALJs in Jones got it wrong.”

The Jones precedent ultimately was a moot point for Crow, as the OTA found that he established reasonable cause for failing to respond to FTB notices.

“Appellant provided doctors’ letters signed under penalty of perjury that confirm his medical conditions and inability to make decisions of any kind,” the ALJs noted.

The FTB accepted the taxpayer’s diagnosis but proposed to abate the demand penalty only if Crow filed his 2016 tax return. The ALJs took issue with this condition, writing:

“We disagree with FTB’s proposal to abate the penalty only after appellant files his return. Abatement of penalties is unrelated to whether a taxpayer must still file his or her tax return for a particular year.”

While the taxpayer prevailed on the demand penalty – and the FTB conceded a late-filing penalty during the appeals process – he did not convince the OTA that to waive the proposed tax liability for 2016, nor the interest and filing enforcement cost recovery fee.

Doctor’s Opinion Discounted by OTA. As in the Crow appeal above, the taxpayers in the Appeal of W. Hansen Jr. and M. Hansen presented testimony from a doctor that medical problems made it impossible to file a timely return. In this case, however, the OTA did not accept the doctor’s opinion.

“The partial medical records indicate that appellant husband suffered a series of strokes beginning on or about January 30, 2018, but they do not prove that appellant husband could not have arranged for the timely filing of a return,” Administrative Law Judges Michael Geary, Nguyen Dang, and Elliott Scott Ewing wrote. “Although the primary care physician’s … letter states, ‘Confusion commonly seen in stroke victim has made it impossible for [appellant husband] to predictably stay [abreast] of deadlines,’ the doctor does not explain the factual basis for this opinion, which, even if correct, does not show that it was practically impossible for appellants to timely file their 2017 return. The doctor’s opinion also seems inconsistent with the doctor’s statement in that letter that appellant husband gradually returned to his normal schedule over the months following his first stroke. Medical records confirm appellant husband’s return to teaching within a month, the late February incident (involving transitory aphasia and persistent facial droop) having occurred while appellant husband was giving a class lecture. … Although the doctor’s second letter dated November 20, 2020, refers to ‘chronic debilitating difficulties requiring long-term therapy’ and opines that appellant husband was ‘unable to attend to his personal business affairs due to serious medical issues throughout 2018’ and that his health issues ‘contributed to the delinquency in tax filing,’ these are conclusory statements and, again, the doctor does not explain what those difficulties were or how they prevented appellant husband from hiring someone to file the return.”

The OTA additionally opined that “there is no evidence that appellant wife was incapable of arranging for the timely filing of a return ….”

The OTA also found that the taxpayers were less than truthful in their testimony. The opinion explained:

“In their first brief, appellants state that they have always filed their return on time. … It appears that their intent is to show that prior to their medical disabilities in 2018, appellants were able to ‘regularly attend to their personal financial and business affairs,’ at least implying that, but for their disabilities, they would have timely filed the return. However, the evidence indicates just the opposite. … [A]ppellants rarely filed timely returns, at least since 1994.”

The appellant husband filed timely returns just twice during a period of 24 years, the OTA found.

Taxpayer Loses, but Wins. The Appeal of G. Tang, the FTB initially assessed tax liability based on the IRS’ upward revision of taxable income. The taxpayer paid the California liability and filed for a refund, while also protesting the federal action. While the matter was pending at the OTA, the taxpayer convinced the IRS to repeal its revision. The FTB accepted the decision and agreed to refund more than $310,000.

After the changes, the amount in dispute before the OTA dropped to just $135 plus fees and interest, at which point the taxpayer quit responding to the OTA and didn’t schedule a conference on the amount still at issue. The opinion thus sustains the FTB’s action and includes the ominous-sounding holding that “Appellant has failed to show that additional adjustments are warranted,” but the taxpayer will receive the six-figure refund plus interest, minus $135 and change.