The California Office of Tax Appeals (OTA) sustained an assessment of franchise tax, interest and penalty against an S corporation (taxpayer) because the taxpayer failed to prove that the assessment was erroneous. In this matter, the taxpayer filed a California S corporation return for the tax year, using a California address, but reported no franchise or income tax due. The Franchise Tax Board (FTB) issued an assessment of minimum franchise tax, underpayment of estimated tax penalty and late-payment penalty, plus interest. The taxpayer challenged the assessment on the grounds that its business failed and was dissolved within its first year and that it was incorrectly advised by its accountant that it was exempt from the annual minimum tax. It further argued that it was not incorporated in California, nor registered with the California Secretary of State, and therefore was not liable to pay the tax.

Upon review, the OTA dismissed the taxpayer’s claims. First, the OTA noted that the taxpayer had indicated on its return that it was doing business in California, which formed a reasonable basis for the assessment. Furthermore, a taxpayer is not exempt from the minimum tax simply because it is not incorporated in California and is not registered with the California Secretary of State. Finally, the taxpayer was not eligible for an abatement of penalties or interest. The taxpayer failed to establish that its reliance on its tax professional’s advice was reasonable or that the tax preparer had competency in California tax law. Accordingly, the FTB’s action was affirmed. Digital Marketing Strategy, California Office of Tax Appeals, No. 20086555, February 15, 2022, released May 2022