Office of Tax Appeals Hearing – 1031 Exchange

Office of Tax Appeals Hearing – 1031 Exchange

On April 27, 2018, the partners from Mendes Weed, LLP represented a taxpayer before the Office of Tax Appeals (OTA).

As of the date of this blog posting, Mendes Weed, LLP is one of only a handful of firms to have gone before the OTA because the OTA has only been hearing cases since January of 2018.

Last week, we discussed some of the procedural issues that came up during the hearing.  This week, we wanted to address some of the issues before the OTA during our hearing.

The primary issue at the hearing was whether the Franchise Tax Board’s (FTB) disallowance of a taxpayer’s like-kind exchange pursuant to Internal Revenue Code (IRC) Section 1031 should be sustained.

The FTB stated the primary issue was who was the true seller of the real property in issue.  The FTB’s secondary argument was that an assignment of income had occurred.

The Taxpayer argued that intent should control.  The Taxpayer in this case had completed numerous like-kind exchanges in the past, and she clearly had the intent required to complete a like-kind exchange.

Furthermore, there was no assignment of income, which implies some intent to evade tax.  A like-kind exchange is a mere deferral of the recognition of gain, not an evasion of tax.  The taxpayer’s counsel was quoted as saying the FTB was “grasping at straws” with this argument.

Of course, what the FTB is really getting at is that it arbitrarily applies a rule that the property exchanged must be held for a certain period of time.  There is no period of time delineated in the statute or the case law.  This is bad tax policy to apply this arbitrary rule, and it is not the law.

The elephant in the room during the entire hearing was that of the four like-kind exchanges completed by the taxpayer in 2007, the exchange before the OTA was the only property that was transferred out of California and into another state.  The other exchanges all took place outside of California, and none of them were challenged.  The FTB does not like the fact the property was exchanged out of California, but that is not adequate grounds for denying a like-kind exchange to a taxpayer who is entitled to it.

The decision, in this case, could take up to 100 days.  We will keep you posted on the outcome.

You have a right to pay only the correct amount of tax, not a penny more.  If you find that you need assistance, please contact us today.

If you have questions about which business entity might be right for you, you should reach out to a tax lawyer who can assist you with your questions and concerns.

superlawyers logo
Best of the East Bay Attorneys
Lisa Janine MendesReviewsout of 5 reviews
Walnut Creek Chanber of Commerce logo
Christina Weed - Taxation Law Specialist
lawyers of distinction badge 2020