Chief Counsel Corner August 2021 Tax News

Office of Tax Appeal (OTA) Precedential Opinion Resolves Demand Penalty Regulation Inconsistency

Jozel Brunett, Taxpayers' Rights Advocate.

Jozel Brunett
Chief Counsel

The recent OTA precedential opinion in the Appeal of R. Jones, 2021-OTA-144P, issued on March 4, 2021, resolved a recently-raised dispute regarding the interpretation of the regulatory language for imposition of the Demand Penalty.

Below are answers to frequently asked questions about the individual taxpayer e-Pay requirements and penalty.

Revenue and Taxation Code section 19133 provides that FTB may impose a penalty when a taxpayer fails to file a return or provide information upon FTB's notice and demand to do so. To provide taxpayers clarity as to when this penalty would be imposed, FTB promulgated Cal. Code of Regs., title 18, section 19133 (the Demand Regulation), which indicates that, for personal income taxpayers, FTB will only impose a penalty for failure to file a return upon demand if (1) the taxpayer fails to respond to a current demand, and (2) at any time during the preceding four tax years, FTB issued a Notice of Proposed Assessment (NPA) following the taxpayer's failure to timely respond to a request or demand.

In prior OTA non-precedential opinions applying the Demand Regulation to current appeals, there was a split by OTA Administrative Law Judges (ALJs) in the interpretation of the second prong of the Demand Regulation. This interpretation turned on the meaning of the words "during the four-taxable-year period preceding the taxable year for which the current Demand for Tax Return is issued" in the regulatory language. FTB's interpretation of the regulatory language means that FTB imposes the penalty when a taxpayer received a prior NPA following a request or demand for a tax return for any of the four years preceding the tax year at issue. In several non-precedential OTA opinions, some ALJs interpreted the language to mean that an NPA following a request or demand for tax return had to have been issued by FTB during the four years preceding the tax year at issue. FTB took the position that interpreting the language in the regulation in this alternative manner was inconsistent with Example 2 of the regulation; therefore, the language of the regulation was ambiguous and the principles of administrative deference should apply.

In Jones, a similar fact pattern to Example 2 emerged. There the appellant appealed the imposition of the Demand Penalty imposed for the 2016 tax year. The prior request or demand and NPA for the 2015 tax year were not issued until 2017 - the tax year after the 2016 tax year at issue in the appeal. Using the alternative interpretation found in several non-precedential OTA opinions, the penalty would have been determined to have been improperly imposed because the prior NPA following the request or demand was not issued in the four years preceding the tax year at issue, but rather in the year after the tax year at issue. However, the panel in Jones determined that the penalty was properly imposed because the determining factor is the tax year of the failure to file rather than the timing of the request or demand and NPA. The opinion noted that this interpretation is supported by the intent of Regulation section 19133, which is to impose the Demand Penalty "only upon individual taxpayers who are repeat nonfilers; that is, those taxpayers who received an NPA for previously failing to timely file within any one of the preceding four taxable years." Jones, at page 3.

The precedential Jones opinion resolves the conflict in the interpretation of the regulatory language and, under the concept of stare decisis, this opinion and interpretation of the law within it will be followed for future appeals with similar law and facts, resolving the split of opinions amongst the ALJs.  You can review this precedential opinion (search for Appeal of R. Jones, 2021-OTA-144P) and other opinions issued by the OTA at their website at