The California Office of Tax Appeals (“OTA”) officially began operations on January 1, 2018. One year later, we review the OTA’s accomplishments in its first year and the progress the OTA has made towards its mission to provide taxpayers and the state with a tax appeals process that is “fair, transparent, consistent, equitable, and impartial.”1

(This is a republication of Law360’s January 29 installment of Reed Smith’s California Tax Takes monthly column.)


In June of 2017 the California legislature passed Assembly Bill 102 (“A.B. 102”). The bill, among other things, created the OTA. The OTA was tasked with issuing decisions “in a transparent fashion, relying on well-established precedents in tax law, providing open public access and choice of representation, and building a record that both taxpayers and tax administration agencies can rely upon.”2 The legislation vested with the OTA “all of the duties, powers, and responsibilities of the State Board of Equalization (“BOE”) necessary or appropriate to conduct appeals hearings.”3

Specifically, A.B. 102 called for the creation of tax appeal panels, each consisting of three administrative law judges (“ALJs”).4 Each ALJ is required by statute to have been an active member of the State Bar of California for at least five years immediately preceding his or her designation to the OTA and possess knowledge and experience with tax law.5The legislation also required the OTA to adopt regulations to “carry out the [OTA’s] duties, powers, and responsibilities.6

OTA regulations

On December 26, 2017, the OTA adopted emergency regulations (the “Emergency Regulations”), which governed the OTA’s 2018 proceedings. While the Emergency Regulations provided some guidance, inconsistencies in the treatment of cases originating from the Franchise Tax Board (“FTB”) as opposed to those originating from the California Department of Tax and Fee Administration (“CDTFA”) and lack of clarity regarding when the OTA would apply the Administrative Procedure Act’s (“APA”) formal8 and informal9hearing procedures left taxpayers and tax practitioners with numerous concerns.

The OTA addressed these concerns by promulgating its permanent regulations (the “Permanent Regulations”). The Permanent Regulations went into effect, on January 2, 2019 and resolved many of the inconsistencies present in the Emergency Regulations. For example, the Permanent Regulations removed the Emergency Regulations double chapter format10 and provided some guidance on when the APA’s informal and formal hearing procedures apply. Unless the OTA states otherwise, the APA’s informal procedures govern when an oral hearing is not requested or is waived.11 When an oral hearing is requested, the OTA will use the APA’s formal procedures.12 The Permanent Regulations also outline procedures for discovery,13 protecting privileges,14 presenting exhibits and witnesses at an oral hearing,15 and filing motions prior to the oral hearing.16 While the Permanent Regulations provide more guidance, they still grant the OTA and its ALJs a significant amount of procedural discretion. Because there were very few hearings in 2018 (and all were conducted under the Emergency Regulations), it is unknown how the ALJs will exercise that discretion.

2018 OTA hearings and opinions

The OTA began holding hearings in January of 2018. Three ALJs, also known as a Panel, preside over each OTA appeal and issues its determination via a written opinion. These written opinions must include “findings of fact, a statement of the legal issue(s) presented, applicable law, analysis, the holding of the Panel, and the names of adopting ALJ’s.”17 By the end of the year, the OTA held a total of 38 hearings18 and published a total of 178 opinions.19 Of these opinions 158 dealt with appeals from the FTB, 1 dealt with an appeal from the CDTFA, and 19 were petitions for rehearing from the BOE. The sections below take a closer look at taxpayer wins, dissenting opinions, and the OTA’s precedential decisions.

(a) Taxpayer Wins

In 2018, the OTA granted 5 taxpayer refund claims in full20 and 1 taxpayer request for rehearing.21 In a handful of other opinions, the OTA abated portions of penalties imposed on taxpayers.22 For example, in Satview Broadband, Ltd. the OTA held that Satview was not liable for 2011 and 2012 non-qualified, suspended, or forfeited (NQSF) penalties. Under the California Revenue and Taxation Code, the FTB may impose a $2,000 penalty per tax year “when a foreign corporation whose rights, and privileges have been forfeited” is (1) “doing business” in California (within the meaning of section 23101)23 and (2) fails to make and file a return within 60 days after the FTB sends the taxpayer a notice and demand to file the required return. The OTA held that “[m]erely pointing to the fact that [Satview] held a non-managing minority interest in an LLC that was doing business in this state does not, standing alone, satisfy the requirement that FTB show a rational basis for its determination.”24 It also found that Satview’s 25 percent interest in its instate pass-through entity, an LLC, qualified as a minority interest.25

The low number of taxpayer wins in 2018 may be attributable to the types of cases that went before the OTA. The OTA created a system to rank cases by difficulty with less complex cases moving through the system more quickly than complex cases. The OTA uses a 1 to 5 scale of difficulty, with Level 1 cases representing the least difficult appeals. Level 1 appeals are assigned directly to the ALJs for review, while appeals rated between Level 2 and 5 are referred to OTA staff attorneys for further factual or legal development, which can take an additional 75 to 100 days. Due to this system, the OTA’s published opinions last year dealt with less complex cases that generally involved refund claims to abate penalties and interest and personal income tax cases with small dollar amounts at issue. Additionally, the majority of taxpayers in these appeals did not have representatives. For the 178 opinions issued last year, approximately 65 percent of taxpayers represented themselves pro se, while the remaining 35 percent were represented by CPAs, attorneys, or legal aid programs, such as the Tax Appeals Assistance Program.

(b) Dissenting Opinions

While unanimity is not required for a Panel’s opinion, two of the three Panel members “must concur”26 to an opinion’s holdings. In 2018, the OTA issued two non-precedential dissenting opinions in appeals from the FTB.27 One of these dissents appeared in Kyle G. Larsen, an appeal that dealt with income sourcing. The majority and dissent disagreed on whether the FTB met its initial burden to show why its assessment was reasonable and rational. The undisputed facts were that in 2014 (the year at issue) Larsen resided in Idaho, performed services exclusively in Idaho, and received $46,400 of non-employee income from a California corporation, INFOSEND. The FTB argued that Larsen’s receipt of a Form 1099 from INFOSEND was sufficient to trigger application of regulation28 251362. The majority disagreed because the FTB had failed to make “the initial threshold showing required by regulation 179514( c), that [Larsen] conducted ‘a unitary business, trade, or profession within and without’ California.” Accordingly, the majority found that the FTB’s “evidence [was] insufficient to satisfy [its] burden of proving that there [was] a reasonable and rational basis for its determination that [Larsen] was engaged in a unitary business within and without California.”

Unlike the majority, the dissent opined that the FTB had established a reasonable and rational basis for its determination. It noted that the FTB had sent Larsen a Request for Tax Return after it learned that INFOSEND, a California company, had sent Larsen a payment. Larsen failed to file a California tax return or explain why he was not required to file a return. Absent any evidence to the contrary, the FTB determined that Larsen was operating a unitary business within and without the state and that the benefit of the services provided was in California. The dissent found that “at a minimum, the California address of the payor [INFOSEND] . . . provide[d] a reasonable basis for concluding that the benefit of appellant’s services was received in California.”

(c) Precedential Opinions

An opinion becomes final 30 days after it is issued, unless a party files a petition for rehearing.29 The OTA publishes all final opinions on its website and indicates which opinions are precedential. The Chief Counsel of the OTA, or his or her designee, determines whether an opinion is precedential, but the Director of the OTA, or his or her designee, may veto the Chief Counsel’s decision.30 In 2018, the OTA issued 15 precedential opinions. Although the OTA ruled against the taxpayer in each instance, the opinions provide guidance on a variety of topics, including when the OTA may impose a frivolous appeal penalty31 and whether penalties imposed under sections 19172.5,32 19131,33 19132,34 1913635 may be abated.

The OTA’s precedential opinions also established that a complaining party’s dissatisfaction with the outcome of their appeal is not good cause for a rehearing.36 Rather the petitioner must prove the existence of certain circumstances, such as “an irregularity in the proceedings that prevented the fair consideration of the appeal” or an “insufficiency of evidence to justify the decision,” and show that her rights are “materially affected.”37For example, in Ernest P. Graham and Janice P. Smith the OTA found that the taxpayer’s petition for rehearing set forth arguments and facts that they made previously to the BOE. The BOE considered the petitioners’ arguments at length and issued their written decision, which gave appropriate consideration to the evidence and arguments presented. Because the petitioners’ failed to demonstrate that there was insufficient evidence to justify the BOE’s decision or that the BOE’s decision was contrary to law, the OTA determined the petitioners did not establish good cause for a rehearing.

Looking forward

As the OTA begins its second year of operations, taxpayers and tax practitioners can look forward to OTA opinions covering more complex and technical legal issues, and also more information regarding how the OTA will implement the APA procedures detailed in the Permanent Regulations.

Other updates:

On December 3, 2018, Assembly Constitutional Amendment No. 1 (“ACA 1”) was introduced in the California Legislature by Assembly Member Cecilia Aguiar-Curry (D). ACA 1 proposes a California constitutional amendment to exempt certain special local taxes and local government bonds from the constitutional two-thirds super-majority vote requirement. Instead, ACA 1 proposes a 55 percent voter approval requirement. Special local taxes that would qualify for the reduced 55 percent voter approval requirement include sales and use or transaction and use taxes, and ad valorem taxes, incurred to fund the construction, rehabilitation, or replacement of public infrastructure or affordable housing.

The constitutional super-majority vote requirement that ACA 1 is proposing to amend is at the center of an active dispute over whether the two-thirds super-majority vote requirement applies to Proposition C, a controversial measure on the San Francisco ballot that established a special gross receipts tax geared toward generating revenue for the city’s homelessness crisis. The City of San Francisco’s special gross receipts tax was approved on November 6, 2018 by a simple majority.