Source: https://www.reedsmith.com/en/perspectives/2019/01/the-california-office-of-tax-appeals-one-year-later
Timestamp: 2019-04-24 00:17:19+00:00

Document:
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 informal9 hearing 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.
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.
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.
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.”37 For 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.
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.
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. For more information about Proposition C, please refer back to our November edition.
The Taxpayer Transparency and Fairness Act of 2017, A.B. 102 § 2(a).
Id. at § 13, now codified at Cal. Gov. Code § 15672.
A.B. 102 § 13, now codified at Cal. Gov. Code § 15670(c).
A.B. 102 § 13, now codified at Cal. Gov. Code § 15679.
The APA’s formal hearing procedures are in Chapter 5 of the California Government Code. The APA’s formal procedures contain more courtlike procedures, such as discovery and depositions. See Cal. Gov. Code §§ 11507.6, 11507.7, 11511.
Emergency Regulations consisted of two chapters: one that governed appeals from the FTB (Chapter 1), and another that governed appeals from the CDTFA (Chapter 2). The double chapter format created a number of inconsistences regarding how the OTA handled appeals from the FTB and CDTFA. These inconsistencies included different filing requirements, briefing schedules, and procedures for petitions of rehearing.
18 CCR §§ 30211.5, 30214.
As of January 23, 2019, the OTA has issued 11 opinions relating to these hearings.
This figure is based on the OTA’s website, which was last checked on January 23, 2019.
See Kyle G. Larsen, 2018-OTA-073; Fukuko H. Okada, 2018-OTA-072; Salofi Tautua’a and Lovely Tautua’a, 2018OTA096; Ken Duong and Mimi Ngo, 2018-OTA-129; A’MON’s MC LLC, 2018-OTA-149.
See Ranbir Sahni and Rekha Sahni, 2018-OT-A044.
See e.g., Marjori L. McCamey, 2018-OTA-063; Zoubek Consulting, LLC, 2018-OTA-144; Satview Broadband, Ltd., 2018-OTA-121.
Unless otherwise noted, all statutory sections refer to the California Revenue and Taxation Code.
The OTA based its holding on Swart Enterprise, Inc. v. Franchise Tax. Bd., 7 Cal. App. 5th 497 (2017).
Satview’s percentage interest in its LLC was significantly greater than the percentage interest at issue in Swart. In Swart the taxpayer had 0.2 percent nonmanaging interest in an LLC that was doing business in California.
See Kyle G. Larsen, 2018-OTA-073; CLGT Solutions, LLC, 2018-OTA-113.
Unless otherwise noted, all regulation sections are to title 18 of the California Code of Regulations.
See Quality Tax & Financial Services, Inc., 2018-OTA-130P.
See Michael Scanlon and Devon Scanlon, 2018OTA075P; Sidney G. Friedman and Ellen Friedman, 2018-OTA-077P.
See Mathew Mazdyasni and Fereshteh Mazdyasni, 2018OTA049P; Michael Scanlon and Devon Scanlon, 2018-OTA-075P; Sidney G. Friedman and Ellen Friedman, 2018-OTA-077P; Gerald F. Johnson and Barbara G. Johnson, 2018-OTA-119P.
See Sjofinar Masri Do, 2018-OTA-002P; Victoria Joy Le Beau, 2018-OTA-061P; Ernest P. Graham and Janice P. Smith, 2018-OTA-154P.

References: § 2
 § 13
 § 15672
 § 13
 § 15670
 § 13
 § 15679
 v.