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ASK THE CALIFORNIA EMPLOYMENT TAX AND PAYROLL TAX ATTORNEY – THE FTB DENIES A REFUND EVEN WHEN THE TAXPAYER DID NOT OWE THE TAXES IN THE FIRST PLACE

 By Robert S. Schriebman

2020

Introduction

Sometimes there is not enough justice to go around. This happened when the FTB refused to grant a refund even when it was shown that the taxpayer did not owe the taxes in the first place. The Office of Tax Appeals (OTA) backed up the FTB and further denied the claim as untimely. This is what happened in the case of Benemi Partners, L.P. decided by the OTA on February 27, 2020 (2020-OTA-144P). Here is the story.

Benemi Partners, L.P is a limited partnership located in Florida. Between 2006 and 2018 it owned about 2% each in four California-based entities. The ownership percentage was so small that Benemi could exercise no management or control in their four California investments. The FTB sent Benemi a letter demanding that it file tax returns because its investments constituted doing business in California. In response to the FTB’s demand and collection notices Benemi filed its 2009-2012 California tax returns and paid the minimum annual tax for limited partnerships. Between December 5, 2013 and December 5, 2014, Benemi fully paid its taxes.

On November 26, 2017 Benemi filed a claim for refund due to a 2017 court decision known as “Swart.” On January 12, 2017, the California Court of Appeals issued a decision stating that an out-of-state corporation’s passive holdings of a 0.2% ownership interest in a manager-managed LLC that was doing business in California, with no right of control over the business affairs of that LLC, was not itself doing business in California. (Swart Enterprises, Inc. v. Franchise Tax Bd. (Swart, supra, 7 Cal.App.5th at p. 500). On November 26, 2017 Benemi filed its refund claim. The FTB turned down the claim as being filed too late.

The OTA’s Benemi Decision

The Revenue and Taxation Code, Section 19306, sets forth 3 time limits for filing a Claim for Refund.

  1. 4 years from the due date the return was filed, if the return was timely filed pursuant to an extension of time to file;
  2. 4 years from the due date for filing a return for the year at issue (determined without regard to any extension of time to file); or
  3. 1 year from the date of overpayment.

Whichever period expires later.

The taxpayer has the burden of proof that the claim was timely filed. Because of this burden, it is very important to show proof of timely mailing of the claim such a USPS round stamp, or tracking history from Fed Ex, UPS, etc.

There is no reasonable cause or equitable basis that will suspend the running of the above statutes of limitations. This was decided by the US Supreme Court in 1997. United States v. Brockamp ((1997) 519 US 347). “This is true even when it is later shown that the tax was not owed in the first place.” (US v. Dalm (1990) 494 US 596).

The OTA held that the 4-year refund statute expired for each year as follows:

  • For 2009 – April 15, 2014
  • For 2010 – April 15, 2015
  • For 2011 – April 15, 2016
  • For 2012 – April 15, 2017

The Swart was issued on January 12, 2017, but the refund claim was not filed until November 26, 2017. At that time, the only statute open was for the year 2012. The Benemi partnership cried “foul.” They argued that the statute for refund, in all fairness, should have started after the Swart case was issued. The OTA acknowledged that the Swart case meant Benemi had no filing or payment requirements. Nevertheless, the OTA shot Benemi down, stating, “…though appellant may not have had a filing requirement, there is no authority to equitably toll the statute of limitations on that basis.”

Conclusion

The California refund statute R&TC § 19306 says it all. There is no concept of fairness or the tolling of the statute because a court ruled that the taxes were not owed in the first place. Don’t look for fairness. Sometimes it’s true what they say, “There is not enough justice to go around.” Some doctrines of equity have historically been brought about by court decisions. Other times specific statutes provide tolling and equitable relief.

***

 Robert Schriebman has a successful practice in the Rolling Hills Estates area of Los Angeles County serving clients throughout California and the United States. He has successfully dedicated more than 40 years to helping individual taxpayers, business owners, CPAs, Enrolled Agents, and tax attorneys navigate the complicated tax systems of the federal and state governments. Mr. Schriebman is in private practice. He is not affiliated in any way with the EDD and he is not employed by the EDD or any other agency of the State of California.

Robert Schriebman has written the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See “California Tax Collection Practice and Procedures” and “California Taxation Practice and Procedure,” both published by Commerce Clearing House.

Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, “IRS Tax Collection Procedures – A Manual for Practitioners” published by Commerce Clearing House.

Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, “IRS Tax Collection Procedures – A Manual for Practitioners” published by Commerce Clearing House in addition to the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See “California Tax Collection Practice and Procedures” and “California Taxation Practice and Procedure,” both published by Commerce Clearing House.

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