When a taxpayer disagrees with a finding by the Franchise Tax Board (FTB), such as a proposed tax assessment or penalty following an FTB tax audit, he or she may dispute the decision by filing a petition for redetermination, leading to an appeals conference and – hopefully – a favorable Appeals Bureau decision. However, if the taxpayer disagrees with the Appeals Bureau decision, he or she can take the case even further by timely filing an appeal with the OTA, or California Office of Tax Appeals. (As the OTA explains on its official website, “Taxpayers may file an appeal once the Franchise Tax Board… issues a Notice of Action or Appeals Bureau Decision,” providing they file before the provided “appeal-by” date.) Though complicated, this process can be well worth the effort, as demonstrated by a recent case in which the OTA sided with the taxpayer against the FTB, fully reversing the FTB’s decision and finding the taxpayer – an out-of-state limited liability company (LLC) – not subject to certain California taxes. “Accordingly,” found the OTA, “the appellant is due a refund of all taxes, penalties, and interest paid, plus applicable interest.”
According to the OTA opinion, the basic facts of the case are as follows: the appellant, Jali, LLC, which was based in the state of Washington, filed California state tax returns with the Franchise Tax Board, which administers California’s personal and corporate income taxes, for the five tax years 2012 through 2016. Jali, LLC subsequently filed refund claims seeking FTB refunds in the following amounts, for the tax years specified: for 2012, a refund of approximately $1,445; for 2013, a refund of $863; for 2014, a refund of $800; for 2015, a refund of $864; and for 2016, a refund of $870. When the FTB denied the appellant’s refund claim, Jali, LLC took its case to the OTA, seeking (and successfully finding) a reversal of the FTB’s decision. Let’s take a closer look at some of the relevant caselaw and facts that shaped the OTA’s decision in favor of the taxpayer.
In 2012, Jali, LLC acquired a Delaware-based LLC, Bullseye Capital Real Property Opportunity Fund, LLC, which was “registered with the California SOS, and conducted business in California for all disputed years.” The appellant’s interest in Bullseye fluctuated during the years at issue, ranging from a low of 1.12% (for tax years 2014 through 2016) to a high of 4.75% (for the tax year 2012). The FTB, citing these figures, “determined [that the] appellant had a filing obligation” in the state of California because it was doing business in California. In defense of its position, the FTB pointed to a previous decision in which one out-of-state entity was found to be doing business in California with an ownership interest of just 0.2% – much lower than the appellant’s ownership interest in this case.
After receiving “a Demand for Tax Return for the 2012 tax year,” Jali, LLC filed California tax returns for years 2012 through 2016, subsequently filing “refund claims for all amounts paid on the basis that it was not doing business in California.” After such claims were denied by the FTB, Jali, LLC filed an appeal with the OTA, which proved successful. The OTA found that, because Jali, LLC lacked the ability to control or affect either the day-to-day operations or overall management of the California entity (which was manager-managed) – and moreover, had “no interest in any specific property of Bullseye” – the appellant “was not doing business in California… and therefore is not subject to the annual $800 LLC tax.” Thus, the OTA reversed the FTB’s original decision, ordering the FTB to issue the taxpayer a refund for taxes, interest, and penalties paid.
Tax litigation, though not always appropriate, is sometimes an effective strategy for protesting improper tax assessments, penalties, and interest. If you wish to appeal an FTB audit or other California state tax audit, work with an experienced California tax attorney to ensure that your rights are protected throughout the process. Our California tax audit lawyers have over 20 years of experience representing individuals and business entities against the FTB and other state tax agencies, including more than a decade of public auditing experience. To set up a reduced-rate consultation regarding an FTB, CDTFA, or EDD audit in California, contact our firm online, or call the Tax Law Office of David W. Klasing at (800) 681-1295 today.
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