California Office of Tax Appeals Addresses Out-of-State Residency

 Posted on December 08, 2025 in Taxation Law

There are some situations where taxpayers may believe that taxes or penalties were assessed incorrectly, and they can take steps to contest the amounts that they may be required to pay. However, the correct procedures must be followed when doing so. If a taxpayer fails to demonstrate that the assessment of taxes or penalties was incorrect, their appeals may fail. This issue was illustrated recently in a decision by California’s Office of Tax Appeals (OTA). 

When challenging taxes or penalties at the state or federal level, it is important to make sure all legal requirements are met. An attorney who has experience handling tax issues with the IRS and with California state tax authorities can provide the legal guidance and representation needed to help improve the outcome in these cases.

Taxpayer Fails to Resolve Issues Involving California Residency

The OTA recently addressed a case in which a taxpayer contested taxes and penalties that were assessed, claiming that he was not a California resident. The case of In the Matter of the Appeal of: J. Lunt concerned an assessment of income taxes by the California Franchise Tax Board (FTB) for the 2018 tax year. In this case, the taxpayer had failed to file a state tax return for that year. The FTB issued a Notice of Proposed Assessment (NPA) based on the taxpayer’s California taxable income, requiring him to pay over $12,000 in taxes, as well as a late filing penalty of over $3,000.

The taxpayer contested the assessment in 2022, stating that he was a resident of Montana rather than California. He claimed that California state taxes had been erroneously withheld from his income and reported on his Form W-2, and his income should have been taxed in Montana. While he submitted a California Nonresident or Part Year Resident Income Tax Return (Form 540NR) reporting that he had no California income for 2018, the FTB deemed this return incomplete and requested a complete return, as well as documentation regarding the number of days the taxpayer resided in California and Montana during that year, any income received from the rental of the taxpayer’s property in California, and any income earned in California in 2018. The taxpayer never responded to these requests.

Residents of California are taxed on all income they earn, regardless of the source. The state of California will only tax nonresidents on income derived from California sources. If the gross income of a person who may be required to pay California income taxes exceeds a certain threshold, they are required to file a state tax return. If they fail to do so, the FTB can estimate their net income and propose an assessment of taxes and penalties. 

In cases where a taxpayer contests an assessment by the FTB, the burden of proof is on the FTB to show that the assessment was reasonable and rational. If it meets this requirement, the burden of proof shifts to the taxpayer, who will need to show that the assessment was erroneous. In this case, the OTA determined that the FTB met its burden of proof, since its assessment was based on the information reported on the taxpayer’s Form W-2. However, the taxpayer did not meet his burden of proof, since he did not provide the requested information demonstrating residency in Montana or showing that his income was not earned in California. The OTB ruled in favor of the FTB, requiring the taxpayer to pay the taxes and penalties that had been assessed.

This case demonstrates the importance of following the correct steps when contesting assessments of taxes and penalties. Because the taxpayer did not provide the required documentation, did not respond to the FTB’s requests, did not make the correct arguments to demonstrate that taxes were assessed in error, and did not demonstrate reasonable cause for the abatement of penalties, his appeal failed.

Contact Our San Jose, CA Tax Appeals Attorney

When filing tax appeals at the state or federal level, legal representation from an experienced attorney can be essential. At John D. Teter Law Offices, our San Jose tax lawyer has a comprehensive understanding of the tax laws that apply to California residents and nonresidents and the requirements that must be met to successfully appeal erroneous taxes or receive penalty abatement. He can advise the taxpayer as to compiling the required documentation, and he will follow the correct procedures during an appeal, advocating on behalf of a taxpayer and working to minimize their financial burden. To set up a consultation and get help with tax-related matters, contact our firm at 408-866-1810.