Tax Agencies Prevail in 54 New Opinions, Including Three Pending Precedents

The Office of Tax Appeals posted 54 opinions to its website this week, involving 46 income tax appeals, five decisions on petitions to rehear some of those income tax appeals (all five petitions were denied), and three sales tax cases involving routine claims that business owners underreported taxable sales. Three of the opinions are labeled “pending precedential” (described below).

In all of the newly posted opinions, the OTA’s administrative law judges unanimously sided with the tax agency, although one case yielded a concurring opinion in which an ALJ expressed concern about the possible interpretation of the majority’s opinion. In the Appeal of Spyglass Realty Partners, Inc., ALJ Andrew Kwee agreed with the other two judges on the panel that the appellant failed to establish a basis for relief of a late-filing penalty, but wrote a separate opinion.

In the appeal, Spyglass Realty argued that its reliance on a tax professional was prudent, and it shouldn’t be punished for the tax preparer’s unintentional failure to file its return. The majority wrote that reliance on an accountant to file a corporation return does not constitute reasonable cause for a late filing.

“I concur in the holding of the majority opinion under the facts of this case,” Kwee wrote. “Nevertheless, I believe the majority opinion may be interpreted as an absolute prohibition on penalty abatement when an agent is involved, regardless of whether reasonable cause exists for reasons unrelated to the hiring of an agent to file a return. … I believe it is not appropriate to adopt a blanket prohibition against finding reasonable cause for a late-filing or late payment penalty based entirely on the fact that the taxpayer hired an agent to file a return.”

The three “pending precedential” opinions also relate to late filing:

The opinions posted this week carry issuance dates ranging from June 6, 2018, to April 12, 2019, with most dated in February, March and April. The OTA did not indicate why the opinions dated many months ago were not posted earlier. The agency typically posts batches of opinions during the first full week of each month.

Other notable opinions:

Marital Split Plus Stock Split Equals Big Tax Bill. The Appeal of Jawfen Chen challenged the FTB’s calculation of the basis of stock the taxpayer received in a 1998 divorce settlement. After the divorce, the taxpayer moved from Connecticut to California, and the stock sat dormant in a brokerage account in Connecticut for many years. During that time, several stock splits were issued to shareholders. Eventually, the stock escheated to the state of Connecticut, which sold it for $32.8 million. In 2011, the taxpayer, still living in California, received the sale proceeds and calculated her capital gain using a tax basis of $10.5 million.

The FTB held that the taxpayer’s claimed basis was not substantiated by evidence, and made its own calculation after going through the history of splits. The agency determined that the basis was only $138,592, thereby increasing the taxable gain more than $10.3 million. “Based on the available evidence, we find that the FTB’s calculations are accurate,” the OTA opined. The OTA also upheld an accuracy-related penalty of more than $656,000.

The opinion is dated August 20, but was not made public by the OTA until this week. In keeping with its practice, the agency held the opinion pending resolution of the taxpayer’s petition for rehearing. The OTA rejected the petition, finding that it did not show good cause for a rehearing, in an opinion dated April 11.

Appeal Pays Off for Appellants Who Didn’t Respond to Hearing Notices. The Appeal of Marvin E. Catchings and Winnie V. Catchings paid off for the appellants, even though they quit participating in the process midway through the appeal and didn’t respond to the OTA’s notice of oral hearing or the subsequent notice that the appeal would be decided on the written record. Although the OTA rejected the taxpayers’ contention that the FTB’s assessment of taxes and interest for the 2005 and 2006 tax years were barred by the statute of limitations, the FTB conceded during the appeal that there was a delay in handling the protests for both years, and abated more than $6,100 in interest. The OTA’s opinion does not indicate why the FTB did not abate the interest earlier in the process. For the 2005 tax year, the statute of limitations argument apparently would have been meritorious had the taxpayers not executed a waiver in 2010 that extended the statute.

Government Worker Claims Government Has No Right to Collect Income Tax. In the Appeal of Andre Jackson, the appellant made typical tax protestor arguments that wages do not constitute taxable income and that he was not a California resident during the tax year in dispute. The case is notable, however, because Jackson is employed by the San Mateo County government, and thus is paid with tax dollars. The OTA rejected his appeal and assessed a $5,000 penalty for filing a frivolous appeal. The OTA’s opinion indicates that Jackson has been assessed $8,250 in frivolous-appeal penalties in the past.

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