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.

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My Experience before the Office of Tax Appeals

My Experience before the Office of Tax Appeals

If you dispute an income tax matter with the Franchise Tax Board (FTB), and timely file a protest, you may find yourself before the Office of Tax Appeals (OTA).

Prior to 2018, your appeal would have been heard by the Board of Equalization (BOE).  Now, as of January 1, 2018, these appeals are heard by the OTA.

The OTA is an “independent body created by the Taxpayer Transparency and Fairness Act of 2017. Its mission is to provide a fair, objective and timely process for appeals from California taxpayers.”

This past week I had a hearing before the OTA.  I was careful to review the Emergency Regulations prior to the hearing, but many issues, as one might imagine, are not covered by the Emergency Regulations.  The Government Code provides some additional assistance, but also does not cover every issue that we encountered.

In said instances, the California Evidence Code (CEC) was referred to.  For example, an evidence issue came up during the hearing with respect to whether a witness could refer to her notes to refresh her recollection, and the CEC was consulted.

During the hearing, the Appellant was given the opportunity to give an opening statement.  The Respondent (FTB) then made its opening statement.  Following the opening statements, witnesses were called by Appellant.

Appellant had an opportunity to direct examine the witnesses, and Respondent had an opportunity to cross-examine the witnesses.  Thereafter, the panel of three judges did their own cross-examination of the witnesses.  After the panel of judges questioned the witnesses, both Appellant and Respondent were given opportunities to ask follow up questions.  Basically, everyone was allowed to continue to ask questions until all questions were exhausted.

I have concerns about how the witnesses were examined, since OTA is supposed to be an independent body.  It did not seem right to have the panel of judges do their own cross-examination.  Also, there were some questions from the judge’s panel in which a witness was asked to speculate about documents they did not prepare.

It would seem more appropriate that Respondent do their own cross-examination, and that Respondent’s arguments be considered only in contrast with Appellant’s arguments.

In any event, after the witnesses were called, Appellant was given an opportunity to make a closing statement.  The judge’s panel requested that we address approximately 6 or 7 different points in our closing.  Respondent was then given an opportunity to make a closing statement, and Appellant had one final statement in rebuttal.  Then the matter concluded.

The hearing started promptly at 9 AM, but it did not conclude until nearly 5 PM.

The judge’s panel indicated we would receive a decision in no time at all – only 100 days or less….

Mendes Weed, LLP is one of the only law firms that has had an opportunity to go before the newly formed OTA.  To date, there have been less than ten oral hearings before the OTA.  If you dispute your tax liability, we can assist you with the protest and hearing.

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.

Mendes Weed, LLP is here to help you if you have any questions.  (925) 390-3222.

 

The tips and materials provided on this page are for informational purposes only, offered as public service. No information on this website should be considered legal advice or used as a substitute for legal advice. For legal advice, you should contact an attorney directly.

SuperLawyers-RisingStars
Best of the East Bay Attorneys
Lisa Janine MendesReviewsout of 5 reviews
Walnut Creek Chanber of Commerce logo
Christina Weed - Taxation Law Specialist
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