Category: Tax Law

A notice of deficiency lands in a Redlands mailbox in early October, and in the corner is a date: the last day to petition the Tax Court. The petition asks whether you want a small tax case and which city you want for trial. Most people answer in seconds, and neither answer is easy to take back.

In September the Court added Sacramento as a trial city. That is a convenience, not new tax law. The decisions around it are what count, and they start with whose law applies.

Why does Ninth Circuit law control a California Tax Court case?

Since Golsen v. Commissioner, 54 T.C. 742 (1970), aff’d, 445 F.2d 985 (10th Cir. 1971), the Tax Court has followed “a Court of Appeals decision which is squarely in point where appeal from our decision lies to that Court of Appeals and to that court alone.” For Californians, that is the Ninth Circuit.

Under 26 U.S.C. § 7482(b)(1)(A), an individual appeals to the circuit of legal residence when the petition is filed, so the trial city you pick does not change it.

The filing deadline is the sharpest example. Organic Cannabis Foundation, LLC v. Commissioner, 962 F.3d 1082 (9th Cir. 2020), held the 90 days in 26 U.S.C. § 6213(a) jurisdictional, so no equitable tolling. The Third Circuit disagreed in Culp v. Commissioner, 75 F.4th 196 (3d Cir. 2023), and the Second, Sixth and Eighth Circuits have since joined it (Buller, Oquendo, Maniktala). A late Pennsylvania filer may get a tolling hearing; a Californian should assume none (my post on missing the 90-day deadline covers what still works).

Two unmarried co-owners argued the mortgage interest debt limits applied to each of them. The Tax Court said no in Sophy v. Commissioner, 138 T.C. 204 (2012); the Ninth Circuit reversed in Voss v. Commissioner, 796 F.3d 1051 (9th Cir. 2015), and the IRS later said in AOD 2016-02 it would follow Voss. On the small-case track, which allows no appeal, they would have lost for good.

A regular-case appeal is noticed within 90 days after decision under 26 U.S.C. § 7483 and argued at a Ninth Circuit courthouse such as San Francisco or Pasadena. To stop collection meanwhile, section 7485(a) requires a bond of up to double the deficiency appealed.

Should I check the small tax case box on my Tax Court petition?

26 U.S.C. § 7463 allows S status when the deficiency in dispute is $50,000 or less for any one year, and section 7463(e) counts penalties in that figure. A $42,000 deficiency with an $8,400 penalty misses. In a collection due process case, section 7463(f)(2) tests the unpaid tax instead.

The Court must concur. Rule 171 lets the IRS oppose with its answer and lets the Court remove the designation before trial, and section 7463(d) allows discontinuance if the amount proves too large. One benefit is easy to overlook. Section 6214(a) lets the IRS seek a bigger deficiency than its notice stated “Except as provided by section 7463,” and section 7463(c) caps an S decision at the limit.

The cost is finality. An S decision “shall not be reviewed in any other court and shall not be treated as a precedent for any other case” under section 7463(b). In exchange, Rule 174(b) admits “any evidence deemed by the Court to have probative value,” and a special trial judge may decide the case under 26 U.S.C. § 7443A(c). For a shoebox-of-receipts case, that informality is worth a lot.

So I turn down S status when a legal question turns on Ninth Circuit authority that helps, since only an appeal fixes a misreading. I also hesitate when a year sits near $50,000 and more adjustments are possible.

Which California city should I request for a Tax Court trial now that Sacramento is on the list?

The Court’s September 8 announcement brought the national total to 79. The revised Form 5 lists five California cities: Fresno, Los Angeles, Sacramento, San Diego and San Francisco. The Court also stopped reserving cities for small cases. Fresno carried that limit on the Court’s older request form, so a regular case can now be set there too.

The request is a separate paper filed with the petition under Tax Court Rule 140(a). Changing it later takes a Rule 140(b) motion, which may be denied as dilatory once the trial notice is out.

From Riverside or San Bernardino, Los Angeles is usually right. The Court has permanent courtrooms in the Roybal Federal Building, and in mid-October its public list showed Los Angeles sessions every month or two into 2027. Sacramento and Fresno have no permanent courtroom and no session posted yet. I look first at where the witnesses and records are. The Court also holds trials by Zoomgov and now posts standalone remote sessions.

Will my Tax Court case go to trial, and what is the new reporting calendar?

Usually not. Under Rev. Proc. 2016-22, IRS Chief Counsel refers a docketed case to Appeals within 30 days after it is at issue, unless Appeals issued the notice, the taxpayer opts out, or Counsel designated it for litigation. In an S case or a regular case at $50,000 or less a year, Counsel may recall it after six months. Unsettled cases get a standing pretrial order; the Court’s small-case sample orders settlement talks and a stipulation of facts as soon as possible.

The pilot starts no earlier than the Fall 2027 term. The Court may place cases on a “reporting calendar” that assigns a judge and a standing scheduling order instead of a trial date, with trial set only if needed. Traditional calendars continue and details are promised later. I expect an assigned judge to push for narrowed issues sooner, which moves preparation earlier.

What does the Franchise Tax Board do after my Tax Court case ends?

Cal. Rev. & Tax. Code § 18622(a) requires you to report a federal change within six months after the final federal determination and “concede the accuracy of the determination or state wherein it is erroneous.” Individuals report only changes that raise California tax. Section 18622(d) dates the final determination from the IRS assessment, not the court decision.

A timely report gives the FTB two years from the report, or its ordinary period if later, under section 19059(a). With no report, section 19060(a) lets it assess “at any time.” The Office of Tax Appeals presumes an assessment built on a federal adjustment correct, as in Appeal of Gorin, 2020-OTA-018P.

The work is in the California differences: state conformity on each adjusted item and California’s own accuracy penalty under section 19164. If the FTB proposes tax from its own audit, you protest within 60 days under section 19041, then appeal to the Office of Tax Appeals within 30 days of the FTB’s action under section 19045. Those clocks run on their own, so both tracks can be open at once.

How would a Redlands couple handle a two-year notice of deficiency?

An illustrative case. A Redlands couple’s notice, mailed October 2, 2026, proposes $38,000 of 2023 tax plus a $7,600 accuracy penalty ($45,600), and $14,000 for 2024. Ninety days runs to Thursday, December 31, 2026, and a petition filed by the date printed on the notice is timely under section 6213(a).

Each year is under $50,000, and since the designation attaches to the case, both years move together. If the dispute is receipts and mileage for her consulting business, I would probably check the box; section 7463(c) also keeps 2023 from growing past the cap. If 2023 turns on a legal question with helpful Ninth Circuit authority, I would leave it unchecked.

Los Angeles, roughly 65 miles away, is the natural trial city. Sacramento would make sense only if a key witness lived up north, and even then a remote appearance may be easier.

Suppose Appeals settles it in spring 2027: 2023 drops to $22,000, the penalty is conceded, and 2024 stays at $14,000. If the IRS assesses on May 10, 2027, the couple must report to the FTB by November 10, 2027, and the state computes its own tax and penalty, with two years from the report to propose more.

Frequently Asked Questions

Can I change my Tax Court trial city after I file?

Yes, by a Rule 140(b) motion stating the reasons. After the trial notice is served, the Court may deny it as dilatory.

Does choosing Sacramento instead of Los Angeles change which law applies?

No. Your legal residence when you file sets the appeals court, so California individuals are in the Ninth Circuit.

Can I appeal a small tax case decision?

No. Section 7463(b) bars review in any other court, for the IRS too. The decision is also not precedent.

Do penalties count toward the $50,000 small case limit?

Yes. Section 7463(e) includes penalties and additions to tax, measured year by year in a deficiency case.

Do I have to tell the Franchise Tax Board about my Tax Court result?

If it raises your California tax, yes, within six months after the IRS assesses it. Without a report, the FTB can assess at any time.

How North Star Law Firm Can Help

North Star Law Firm prepares Tax Court petitions and handles the Appeals and FTB follow-up through its Tax Court and Office of Tax Appeals, tax defense and penalty abatement practices. Phillip Zagotti is a California attorney and a CPA admitted to the U.S. Tax Court.

If your notice has a date circled on it, contact North Star Law Firm or schedule a consultation before you fill out the petition.

You own a small company in the Inland Empire, and an IRS revenue agent has spent most of a year on your 2022 return. She emailed a Form 872 and wants it signed within fourteen days, or she closes the exam on what she has. Your CPA says everyone signs.

Usually that is right, but on Sept. 30, 2026 the Tax Court held that a taxpayer cannot cut a fixed-date Form 872 short, so the version matters. And the IRS letter will not say that your signature also holds open the Franchise Tax Board’s window.

Does a federal Form 872 also extend the California FTB’s deadline?

Yes, automatically. California starts with four years from filing, one more than the IRS gets. Cal. Rev. & Tax. Code § 19057(a). A 25 percent omission gets six years under section 19058, and fraud or a missing return has no limit under section 19087. Under section 19065, once you extend the federal period, the FTB may assess until four years after filing or “six months after the date of the expiration of the agreed period,” whichever is later. No FTB request is needed.

It may ask anyway. Section 19067 authorizes state waivers, and the FTB’s audit manual prefers one even though the FTB “can and will” assess on an open federal consent. The state notice right in section 19067(b) covers refusing or limiting the time, but unlike the federal rule below, not limiting issues.

What does IRS Form 872 do to my audit statute of limitations?

Federally, the IRS normally gets three years from the filing date to assess more tax. 26 U.S.C. § 6501(a). Omitting over 25 percent of stated gross income makes it six years under section 6501(e)(1)(A), and fraud or a missing return leaves the year open indefinitely under section 6501(c)(1) and (c)(3). I check for those first; a consent cannot shorten them.

Section 6501(c)(4)(A) lets both sides agree in writing, before the period expires, to a later deadline. Since the 1998 Restructuring and Reform Act, section 6501(c)(4)(B) has required the IRS to tell you, each time it asks, that you may refuse or “limit such extension to particular issues or to a particular period of time.” IRS Publication 1035 repeats those rights.

Form 872 names a date. Form 872-A names none; under IRM 25.6.22.7.1 and Rev. Proc. 79-22 it ends 90 days after your Form 872-T reaches the IRS, 90 days from the IRS mailing one to you, or following a notice of deficiency. Nothing else ends it, so an 872-A holder needs a calendar entry for that decision.

Can I end a Form 872 early with Form 872-T after Fine v. Commissioner?

No. Barry Fine and Monica Dias signed Forms 872 carrying 2015 to Dec. 31, 2021 and 2016 to June 30, 2021. After Appeals talks failed, their lawyer sent Forms 872-T by fax on Sept. 11, 2020, checking the only box offered, the one for Form 872-A. Notices dated April 15, 2021 proposed $405,943 and $210,003 of tax, seven months after the fax but before the 872 dates.

Judge Ashford held that “Form 872-T does not terminate a properly executed Form 872.” Fine v. Commissioner, 167 T.C. No. 13 (Sept. 30, 2026). The court took from Stange v. United States, 282 U.S. 270 (1931), that a consent is a “voluntary, unilateral waiver of a defense,” not a contract, yet applied contract rules to mutual assent, citing Kronish v. Commissioner, 90 T.C. 684 (1988), and Piarulle v. Commissioner, 80 T.C. 1035 (1983). Open-ended deals end at will; a bargained date binds. Hence “only the passage of time can terminate Form 872.”

California cases appeal to the Ninth Circuit, which is just as strict. Kinsey v. Commissioner, 859 F.2d 1361 (9th Cir. 1988), rejected an implied termination of an 872-A. Kelley v. Commissioner, 45 F.3d 348 (9th Cir. 1995), upheld reforming two 872-A forms to the years the parties meant. A Kelley footnote does describe Form 872-T ending a consent given “by an IRS Form 872 or 872-A”; Fine called it a passing recital of facts. Because Golsen v. Commissioner, 54 T.C. 742 (1970), has the Tax Court follow the circuit of appeal, a Californian could press that footnote. I would not build a case on it.

If you already signed, plan around the date. You can refuse the next extension; the opinion says the Fines could have negotiated “a shorter timeframe or limited the IRS’s examination to certain issues.”

When can the FTB assess after an IRS audit change, and what if I never report it?

Section 18622(a) requires an individual to report a federal change that raises California tax within six months after the “final federal determination,” meaning the date the IRS assesses it under subdivision (d). Report on time, and section 19059(a) gives the FTB two years from the report, or the section 19057, 19058 or 19065 period if later. Report late, and section 19060(b) allows four years from the report. Never report, and section 19060(a) permits an assessment “at any time.”

You can protest a proposed FTB assessment within 60 days under section 19041, and appeal the FTB’s protest decision within 30 days under section 19045 to the Office of Tax Appeals, which inherited that role from the Board of Equalization under Gov. Code § 15672.

How would a Form 872 play out for a Temecula S corporation owner?

An illustrative case: Priya owns an S corporation in Temecula and files a joint 2022 Form 1040 on Oct. 16, 2023. In summer 2026, before the Oct. 16, 2026 federal deadline, Priya signs a Form 872 extending 2022 to Dec. 31, 2027. The 1040 is the return that counts: Bufferd v. Commissioner, 506 U.S. 523 (1993), held that a shareholder’s period runs from the shareholder’s own return.

In spring 2027 the IRS disallows $170,000 of flow-through corporate deductions and proposes about $60,000 of tax. Priya agrees, and the IRS assesses on Aug. 2, 2027. California’s ordinary deadline was Oct. 16, 2027; section 19065 moves it to June 30, 2028. Priya must report by Feb. 2, 2028. At an assumed 9.3 percent rate, California wants about $15,810, plus interest under section 19101 from the original due date. The corporation’s 1.5 percent tax under section 23802 could add $2,550 if its own California year is still open.

File the amended California return in January 2028 and the FTB has until January 2030 under section 19059. Never file it, and 2022 never closes.

Should I sign Form 872, ask for a restricted consent, or refuse?

Refusing is lawful, and Publication 1035 says it carries no penalty and does not shift the burden of proof. But the examiner then closes on her file, and the notice of deficiency rests on it. You get 90 days to petition the Tax Court (a hard deadline, as my post on Kings Road explains), and once the case is docketed, 26 U.S.C. § 6503(a) suspends the statute until the decision is final plus 60 days. Refusing does not run out the clock.

A restricted consent extends the period for named issues and lets the rest expire (IRM 25.6.22.8). The IRS treats this as a right to ask and agrees mainly when few issues remain open and the rest are settled.

I sign when the agent needs time and a notice built on half a record would be worse. I decline when the statute is weeks away and the issues are fully developed, since more time would only invite new ones. The CPA’s workpapers often decide it. If they tie each deduction to an invoice, I want a short restricted consent, because the answers already exist. Thin workpapers mean you need time to rebuild support, yet time lets the agent wander, so I press for issue limits. Then I calendar the federal date and the date six months later, which belongs to the FTB.

Frequently Asked Questions

Do I have to sign Form 872 if the IRS asks?

No. The IRS must tell you that you may refuse or limit it, and refusing carries no penalty. Expect a notice of deficiency soon afterward.

Can Form 872-T cancel a Form 872 I already signed?

Not under Fine v. Commissioner. Form 872-T ends only an open-ended Form 872-A, and a fixed-date Form 872 lasts until its date. You can still decline any further extension.

Does signing a federal Form 872 give the California FTB more time?

Yes. Revenue and Taxation Code section 19065 keeps California’s period open until six months after the federal agreed period expires, if that is later than the normal four years.

How long do I have to tell the FTB about an IRS audit change?

Six months after the IRS assesses the change, under section 18622. If you never report it, section 19060 lets the FTB assess at any time.

Can I limit a Form 872 to certain audit issues?

You can ask for a restricted consent. The IRS usually agrees when the open issues are few and clearly described and the rest are settled, and IRS Counsel must approve the wording.

How North Star Law Firm Can Help

North Star Law Firm represents California taxpayers in IRS and FTB examinations through its tax defense practice, and handles the disputes that follow in the Tax Court and the Office of Tax Appeals. It also seeks penalty abatement when a federal change brings California penalties. Phillip Zagotti is a California attorney and a CPA admitted to the U.S. Tax Court.

If an examiner wants a statute extension, contact North Star Law Firm or schedule a consultation before the current date runs out.

A Roseville founder signs a letter of intent. Her 2020 founder shares will bring about $30 million, and her advisor says federal law excludes $10 million of the gain, with gifts to trusts for her two children adding $10 million each. True enough. What often goes unsaid: California has allowed no such exclusion for any sale after 2012, and the Franchise Tax Board expects tax on all $30 million.

Whether the trusts change that turns on California’s trust residency rules.

How does gifting QSBS multiply the federal exclusion?

Under 26 U.S.C. § 1202(a), a noncorporate taxpayer excludes gain on qualified small business stock, or QSBS: C corporation stock bought directly from the company when issued, while its gross assets sat under a ceiling. S corporation and LLC interests never qualify, so the entity choice at formation matters. Pub. L. 119-21, § 70431, enacted July 4, 2025, gives later-acquired stock a 50 percent exclusion at three years, 75 percent at four and 100 percent at five, and raises the ceiling to $75 million for stock issued after that date. Earlier shares acquired after September 27, 2010 keep the old rule: 100 percent after more than five years.

For a big exit the binding limit is section 1202(b): per issuer, the greater of a dollar limit or ten times the basis of the shares sold that year. The dollar limit is $10 million for stock acquired by July 4, 2025 and $15 million for later stock, indexed after 2026. It belongs to each taxpayer, so a second owner brings a second limit.

Section 1202(h) makes the gift work. A person who receives shares “by gift” is treated as acquiring them the way the donor did and holding them for the donor’s period, so the original-issuance test in section 1202(c)(1)(B) is still met. The donor’s acquisition date carries over too. A child given 2020 shares this year stays under the $10 million limit and the five-year rule.

Which trusts get their own cap, and when will the IRS combine them?

Only a separate taxpayer gets a separate cap. Revocable and other grantor trusts are disregarded for income tax, so their sales use the founder’s limit. A non-grantor trust funded by a completed gift files its own Form 1041 and adds a limit.

The anti-stacking tool is 26 U.S.C. § 643(f): trusts with substantially the same grantor and primary beneficiary are treated as one when a principal purpose is avoiding federal income tax, with spouses counted as one person. The regulation is final, not proposed. Treas. Reg. § 1.643(f)-1 came out in T.D. 9847 (Feb. 8, 2019), minus the 2018 proposal’s definition of “principal purpose” and its examples. I want one trust per child and a written non-tax reason for the design.

One open point: section 643(f) applies “for purposes of this subchapter,” the trust income tax rules, while the cap sits in section 1202. Treating trusts as one trust most naturally means one cap, but I have found no court applying it to QSBS.

Does California allow any QSBS exclusion in 2026?

No. California’s version, Rev. & Tax. Code § 18152.5, required issuers to keep most payroll and assets in the state, and Cutler v. Franchise Tax Board, 208 Cal. App. 4th 1247 (2012), held that this discriminated against interstate commerce. FTB Notice 2012-03 then denied the exclusion for taxable years beginning on or after January 1, 2008. The Legislature’s fix, AB 1412 (Stats. 2013, ch. 546), allowed a 50 percent exclusion for 2008 through 2012 sales without the in-state requirements, waived the related penalties and interest, and let the section expire January 1, 2016.

The FTB’s 2025 Schedule D (540) instructions say California does not conform to section 1202; enter the entire gain. It is ordinary income, taxed up to 12.3 percent plus 1 percent above $1 million under Cal. Rev. & Tax. Code § 17043, now labeled the Behavioral Health Services Tax. Trusts pay the same.

Can a trust outside California avoid California tax on the sale?

Sometimes, but a Nevada trustee alone is not enough. Cal. Rev. & Tax. Code § 17742 taxes all of a non-grantor trust’s income if a fiduciary, or a beneficiary whose interest is not contingent, lives in California, and sections 17743 and 17744 apportion when only some do. In Steuer v. Franchise Tax Board, 51 Cal. App. 5th 417 (2020), the Paula Trust had trustees in California and Maryland. Reading section 17743 with Cal. Code Regs., tit. 18, § 17743, the court held the trust taxable on all of its California-source income regardless of trustee residence. It also held that a beneficiary paid only at the trustee’s sole and absolute discretion is contingent.

Founder stock gets help from section 17952, which treats a nonresident’s stock gain as non-California income unless the stock has a business situs here. A completed-gift trust with out-of-state trustees and purely discretionary terms may owe California nothing at sale. FTB Legal Ruling 2026-01 (July 7, 2026) agrees, with a catch: once the trustee decides to distribute current-year gain to a California beneficiary, the trust is taxable on that amount.

Then the throwback. Section 17745(b) taxes a California beneficiary when income that escaped tax because the interest was contingent is later paid out, as if received ratably over that year and the five before (or a shorter accumulation period). A child who settles in Sacramento and gets the proceeds at 30 pays then. Nobody can promise where a ten-year-old will live.

The incomplete-gift route is closed. Section 17082, added by SB 131 in 2023, taxes the grantor on an incomplete gift nongrantor (ING) trust’s income starting with 2023 tax years. Only a completed gift moves the gain off the founder’s own California return.

What does gifting founder stock cost on the gift and estate side?

The donee takes the donor’s basis under 26 U.S.C. § 1015. Stock held until death instead gets a fair market value basis under section 1014, which California follows, erasing state and federal gain alike. For an older founder with no sale coming, holding can beat any gift.

Section 2010(c)(3) sets the 2026 basic exclusion amount at $15 million, and Rev. Proc. 2025-32 sets the 2026 annual exclusion at $19,000. A gift in trust is usually a future interest outside section 2503(b) unless beneficiaries hold a temporary withdrawal (Crummey) right. I covered the $15 million figure in the A/B trust post.

How would the numbers work for a Roseville founder?

An illustrative case: Dana, single, lives in Roseville. In 2020 she paid $30,000 for founder shares at original issuance. In 2022, with each one-third block appraised near $1.5 million, she gave one block to each of two completed-gift non-grantor trusts, one per child. In December 2026 a buyer pays $30,030,000 for everything, $10 million of gain per block.

Without the gifts, Dana excludes $10 million federally and owes roughly $4.76 million on the other $20 million (20 percent plus the 3.8 percent net investment income tax). With them, Dana and each trust exclude $10 million apiece, wiping out the federal tax if the trusts hold up. On California’s 2025 single and fiduciary schedule, ignoring deductions and credits, Dana alone owes about $3.96 million. If both trusts have a California trustee, each owes about $1.30 million, as does Dana, roughly $3.90 million total. With out-of-state trustees and discretionary terms, Dana owes her $1.30 million and the trusts’ $20 million is reached only on a later California distribution.

Each federal filer uses Form 8949 code Q, entering the exclusion as a negative amount in column (g) per the Form 8949 instructions; Dana’s Schedule D (540), or a California trust’s Schedule D (541), carries the full gain. A seller-financed sale of closely held stock can use 26 U.S.C. § 453; section 453(k)(2) bars only public stock. Keep the stock ledger, issuance papers, gross-assets figures at issuance, gift appraisals, Form 709, and trustee residence and distribution records.

Frequently Asked Questions

Can I give QSBS to my children directly instead of to a trust?

Yes. The federal gift rule covers outright gifts, and each child gets a separate per-issuer cap. A child living in California pays California tax on that share, while a child living elsewhere generally owes California nothing on the stock gain.

Does a grantor trust or a SLAT get its own section 1202 cap?

No. A grantor trust is ignored for income tax, so its sale counts against the founder’s own limit. It can still serve estate planning goals.

What happens if the trustee pays sale proceeds to my child in California?

Distributing current-year gain makes the trust taxable in California on that amount under FTB Legal Ruling 2026-01. Paying out gain accumulated tax-free triggers the throwback, taxing the child as if it arrived over that year and the prior five, or over a shorter accumulation period.

Does the new $15 million cap apply to shares I got in 2020?

No. Stock acquired by July 4, 2025 keeps the $10 million limit and the five-year rule. A donee takes over your acquisition date, so gifting does not convert old shares.

When should I make the gift?

Long before a buyer appears. An early gift is appraised lower and uses less exemption. A gift made mid-negotiation invites the argument that the gain was already fixed when the shares moved.

How North Star Law Firm Can Help

North Star Law Firm models federal and California tax on founder stock sales through its business sale tax structuring practice. When a trust holds the shares, the firm prepares its Form 1041 and Form 541 through its trust and estate tax returns practice, and entity selection planning at the start helps a new company issue stock that can qualify. Phillip Zagotti is a California attorney and a CPA, admitted to the U.S. Tax Court.

If you are thinking about gifting company stock, contact North Star Law Firm or schedule a consultation before the letter of intent is signed.

A balance-due notice arrives at your new house in Temecula. The audit letters and the notice of deficiency went to the Murrieta condo you sold, and the 90 days to go to the U.S. Tax Court ran out while the envelopes sat in a return bin. Some courts now forgive late petitions, but a California address is the worst one to have for that argument. Here is what I would do on day 91.

How does the 90-day clock work if the IRS mailed the notice to an old address?

Under 26 U.S.C. § 6213(a) you have 90 days from mailing to petition the Tax Court, or 150 days if the notice is addressed to a person outside the United States. A weekend or D.C. holiday pushes the last day forward, and a petition filed by the date printed on the notice counts as timely.

Mailing to your “last known address” is enough under section 6212(b). Treas. Reg. § 301.6212-2 uses the address on your latest processed return unless you gave clear notice of a new one, and it can pick up a postal change of address. So I first ask whether the client filed Form 8822 or a forwarding order beforehand. If so, the notice may be invalid, a far better problem than a late petition.

Why is the Ninth Circuit the hardest place to ask for more time?

Equitable tolling excuses a missed deadline for a diligent filer facing extraordinary circumstances, but only if the deadline is not “jurisdictional.” Boechler, P.C. v. Commissioner, 596 U.S. 199 (2022), held the 30-day deadline to petition from a collection due process determination tollable. It did not decide the deficiency deadline.

Since then, Culp v. Commissioner, 75 F.4th 196 (3d Cir. 2023), Buller v. Commissioner, 160 F.4th 266 (2d Cir. 2025), Oquendo v. Commissioner, 148 F.4th 820 (6th Cir. 2025), and Maniktala v. Commissioner, No. 25-1366 (8th Cir. Aug. 11, 2026), allow tolling of § 6213(a). Kyick Holdings, LLC v. Commissioner, No. 25-1429 (1st Cir. Aug. 17, 2026), agreed the deadline is not jurisdictional but held it “mandatory and may not be equitably tolled.”

California is in the Ninth Circuit. Organic Cannabis Foundation, LLC v. Commissioner, 962 F.3d 1082 (9th Cir. 2020), held the deadline jurisdictional against two dispensary businesses whose FedEx petitions arrived one day late. That predates Boechler; the only later Ninth Circuit ruling I found, Atighi v. Commissioner, No. 21-71417 (9th Cir. Nov. 25, 2022), is unpublished and never mentions it. The Tax Court agrees with the Ninth Circuit in Hallmark Research Collective v. Commissioner, 159 T.C. 126 (2022), a California company’s case, and Sanders v. Commissioner, 161 T.C. No. 8 (2023).

Under Golsen v. Commissioner, 54 T.C. 742 (1970), the Tax Court follows on-point law of the circuit hearing the appeal, which 26 U.S.C. § 7482(b) ties to residence. A Michigan taxpayer gets Oquendo; a Temecula taxpayer gets Hallmark. The Supreme Court has not taken up the split.

Is it worth filing a late Tax Court petition anyway?

Often, yes. The filing fee is $60, waivable for hardship. Expect dismissal, but the Ninth Circuit will not revisit Organic Cannabis unless taxpayers keep asking.

That label has an upside. A dismissal fixes the deficiency at the IRS’s number unless it is for lack of jurisdiction (26 U.S.C. § 7459(d)), and section 6512(a) bars a refund suit only after a petition filed “within the time prescribed in section 6213(a).” Organic Cannabis noted that a jurisdictional dismissal keeps the refund route open. In Oquendo the IRS argued that late filers denied tolling lose that route; the Sixth Circuit was unmoved, but the point is unsettled.

What other routes are open to a California taxpayer after day 90?

I reach first for a collection due process hearing. Before levying, the IRS must give you 30 days to request one on Form 12153. Section 6330(c)(2)(B) lets you contest the tax itself if you did not receive the notice, and Treas. Reg. § 301.6330-1(e)(3), Q&A-E2, means “receipt in time to petition the Tax Court.” Losing at Appeals triggers the 30-day petition deadline Boechler made tollable. Later, for the same company, the Tax Court held the lien-hearing request window tollable in Organic Cannabis Foundation, LLC v. Commissioner, 161 T.C. No. 4 (2023).

Audit reconsideration under IRM 4.13.1.2.1 requires a filed return, an unpaid assessment and information the examiner never saw, which fits most people who missed the audit letters (Publication 3598). A doubt-as-to-liability offer on Form 656-L has no fee, but Treas. Reg. § 301.7122-1(b)(1) bars it after a final court decision on the liability.

Or pay and sue. Flora v. United States, 362 U.S. 145 (1960), requires full payment first. Claim within three years of the return or two of payment (26 U.S.C. § 6511(a)), wait six months or for a denial, and sue within two years of the denial (§ 6532(a)(1)) in the Court of Federal Claims or your home district (28 U.S.C. § 1402(a)(1)): the Central District for Riverside County, the Eastern District for Sacramento.

What does Kings Road mean for a California LLC taxed as a partnership?

Partnerships under the Bipartisan Budget Act of 2015 (BBA) audit rules receive a notice of final partnership adjustment (FPA). 26 U.S.C. § 6234(a) allows 90 days to petition. Big Apple Tompkins Realty LLC v. Commissioner, 167 T.C. No. 7 (Aug. 5, 2026), held that deadline nonjurisdictional. Kings Road Property, LLC v. Commissioner, 167 T.C. No. 11 (Sept. 21, 2026), then tolled it for a petition 16 days late.

New counsel pulled a blank transcript, phoned the IRS after the mailing deadline, was told nothing had gone out, and still petitioned protectively; Judge Buch said she “did more than merely watch the mailbox.” Undeliverable packages plus IRS misinformation were the extraordinary circumstance, though returned mail alone might not have been.

One caution: a California partnership’s appeal goes to the Ninth Circuit (§ 7482(b)(1)(E)), which held the old TEFRA deadline jurisdictional in SNJ Ltd. v. Commissioner, 28 F.4th 936 (9th Cir. 2022) and has not ruled on § 6234(a).

The FPA cannot be mailed earlier than 270 days after the IRS’s notice proposing the adjustment (NOPPA) absent a waiver (§ 6231(b)(2)(A)), and it is due by the later of 330 days after the NOPPA or three years after the return (§ 6235(a)). When day 330 controls and nothing was waived or extended, a protective petition filed between days 331 and 360 lands after any timely FPA and before the earliest due date. From day 270, pull transcripts, log calls, fix addresses and revoke stale powers of attorney.

How would the federal and FTB deadlines line up for a Temecula taxpayer?

An illustrative case: Elena filed her 2023 return on April 15, 2024 from Murrieta and moved to Temecula in late 2025 without telling the IRS or the post office. On Monday, March 9, 2026 the IRS mailed a notice of deficiency for $14,200 plus a $2,840 penalty to Murrieta; her 2025 return, filed from Temecula in April, came too late. Day 90 was Sunday, June 7, so the petition was due June 8. An August balance-due notice is her first news.

When the levy notice comes, she has 30 days to request a hearing and contest the tax. Audit reconsideration is open now. If she pays instead, her refund claim is due by April 15, 2027, or two years after payment, with suit in Riverside.

California runs separate clocks. Cal. Rev. & Tax. Code § 18622(a) requires her to report the federal change to the Franchise Tax Board within six months after it becomes final and section 19060(a) lets the FTB assess any time if she never does. A proposed assessment allows 60 days to protest (section 19041), then 30 days after the FTB’s notice of action to appeal to the Office of Tax Appeals (section 19045; Cal. Code Regs., tit. 18, § 30203(a)). I found no OTA decision tolling that window. Partnerships report BBA adjustments under section 18622.5. As with the treaty wins I discussed for foreign nationals, a federal result does not close the FTB file.

Frequently Asked Questions

Can the Tax Court accept a late deficiency petition from a California taxpayer?

Not today. The Tax Court and the Ninth Circuit treat the 90-day deadline as jurisdictional. Filing anyway preserves the argument, but expect a dismissal.

Does the 90-day period start when I receive the notice of deficiency?

No. It runs from mailing to your last known address, usually the one on your latest processed return. A notice addressed outside the United States allows 150 days.

What can I do if I never received the notice of deficiency?

You can usually contest the tax at a collection due process hearing. Audit reconsideration and a doubt-as-to-liability offer are fallbacks, as is paying and suing.

Does Kings Road help my California partnership?

The Tax Court should apply it unless the Ninth Circuit rules otherwise. Tolling still requires proof of diligence and a cause outside the partnership’s control.

If I beat the IRS, do I still have to deal with the FTB?

Yes. California requires reporting federal changes within six months after they become final. The FTB’s 60-day protest and 30-day appeal periods run on their own.

How North Star Law Firm Can Help

North Star Law Firm handles missed-deadline and wrong-address cases for California individuals and partnerships through its Tax Court and Office of Tax Appeals practice, its broader tax defense work and offers in compromise. Phillip Zagotti is a California attorney and a CPA, admitted to the U.S. Tax Court.

If an IRS or FTB deadline has already passed, contact North Star Law Firm or schedule a consultation before the next one does.

California’s automatic extension for 2025 individual returns runs out on October 15, 2026. The question I hear most from ITIN filers this fall is whether a return sent to the IRS puts a home address in front of immigration agents. That deserves an answer built on the statute and the court orders.

This is a tax law post for California ITIN filers, mixed-status families and the employers who hire them. Where a filing choice touches an immigration case, bring in an immigration attorney first.

What did the federal courts decide about IRS address sharing with ICE?

Three cases matter. In Centro de Trabajadores Unidos v. Bessent, No. 25-5181 (D.C. Cir. Feb. 24, 2026), the D.C. Circuit refused to block the April 2025 IRS agreement with the Department of Homeland Security. Its key holding: a mailing address is “taxpayer identity,” which the IRS may release when a request meets every statutory condition.

The second case tested execution. In Center for Taxpayer Rights v. IRS, No. 25-cv-457 (D.D.C.), Judge Colleen Kollar-Kotelly stayed the address-sharing practice on November 21, 2025. Once the IRS admitted its matching routine often checked only for some five- or nine-digit number in the address field, her February 26, 2026 opinion counted roughly 42,695 unlawful disclosures among 47,289 records released on August 7, 2025. On September 8, 2026, the D.C. Circuit affirmed in Center for Taxpayer Rights v. IRS, No. 26-5006, holding that the procedure “indisputably contravenes the requirements of section 6103.”

In Boston, in Community Economic Development Center of Southeastern Massachusetts v. Bessent, No. 1:25-cv-12822-IT (D. Mass. Feb. 5, 2026), Judge Indira Talwani barred ICE from viewing or relying on the data it already had. That order is on appeal (1st Cir. No. 26-1329), with California among the states filing an amicus brief for the plaintiffs.

What does IRC section 6103 protect, and where is the gap?

Under 26 U.S.C. § 6103(a), returns and return information stay confidential unless Title 26 authorizes disclosure. Section 6103(i)(2) lets the IRS release identity information, which section 6103(b)(6) defines to include the mailing address, but not income figures, to a federal agency investigating a non-tax crime. The agency head must ask in writing, giving the taxpayer’s name and address, tax period, criminal statute and a specific reason, and only officers “personally and directly engaged” in that investigation may receive it. ICE cited 8 U.S.C. § 1253(a)(1), which punishes remaining after a final removal order.

So the gap is narrow. A documented, individual criminal request can still produce an address; bulk matching cannot, while these orders stand. Willful violations are felonies under 26 U.S.C. § 7213, and a taxpayer whose information is knowingly or negligently released may recover at least $1,000 per disclosure under 26 U.S.C. § 7431. Still open: these are preliminary rulings, D.C. Circuit rehearing petitions are due October 23, 2026, and Congress can amend subsection (i)(2).

Does skipping a return make a California family any safer?

Rarely, and it creates its own tax problems. The duty to file under 26 U.S.C. § 6012 and Cal. Rev. & Tax. Code § 18501 turns on income, not immigration status. Employers and banks file information returns anyway, so the IRS often has an address regardless.

For someone who owes, the addition under 26 U.S.C. § 6651(a)(1) is 5 percent of unpaid tax per month, up to 25 percent, and R&TC § 19131 mirrors it, with a $135 minimum (or the full tax, if less) after 60 days. And an unfiled year never closes. Section 6501(c)(3) lets the IRS assess “at any time,” and R&TC § 19087 lets the Franchise Tax Board estimate income and bill. A refund family faces little penalty, but refunds expire: section 6511 limits federal refunds to a three-year lookback, and R&TC § 19306 allows four years for California.

What do ITIN filers give up by not filing?

First, the number. Under 26 U.S.C. § 6109(i)(3), an ITIN expires if it is not used on a return for three consecutive years, and renewal means a new Form W-7 with original or certified identity documents.

Second, credits, where federal law changed for 2025. Pub. L. 119-21 rewrote 26 U.S.C. § 24(h)(7) so the Child Tax Credit now requires a work-eligible Social Security number for a parent (at least one spouse on a joint return) as well as the child. Two ITIN parents lose the $2,200 per-child credit even for citizen children, keeping only the $500 credit for other dependents under section 24(h)(4)(C). The federal earned income credit was already closed to them by section 32(m).

California went the other way. R&TC § 17052(p) substitutes an ITIN for the Social Security number, so ITIN filers may claim the CalEITC, up to $3,756 for 2025 on earned income up to $32,900, and the Young Child Tax Credit under section 17052.1, up to $1,189 per return with a child under six. The Foster Youth Tax Credit also accepts ITINs. None of it arrives without a return.

What is at stake for a Moreno Valley family earning $48,000?

An illustration with made-up facts: Ana and Luis of Moreno Valley both use ITINs and have two citizen children, ages 4 and 9. Their 2025 wages total $48,000, with $2,100 federal and $600 California tax withheld. Federally, the $31,500 joint standard deduction leaves $16,500 taxable and $1,650 of tax. Two $500 dependent credits cut that to $650, so they are owed $1,450. With one work-eligible SSN between them, the Child Tax Credit would be $4,400, erasing the tax and adding about $2,750 refundable.

On the 2025 Form 540, the $11,412 standard deduction leaves $36,588 taxable and about $510 of tax, erased by $1,256 of exemption credits, so the full $600 comes back. At $48,000 they exceed the CalEITC limit, and the Young Child Tax Credit requires CalEITC eligibility. Near $30,000 of wages, both would apply in phased-down amounts. Either way, $2,050 is waiting, and the federal share lapses if the return sits past three years.

Can the Franchise Tax Board give California returns to immigration agents?

California’s protection sits in the tax code. R&TC § 19542 makes unauthorized disclosure of return particulars a misdemeanor, and section 19552 confines shared information to tax administration. FTB does exchange data with the IRS under section 19551, but only for tax purposes. A state return is not hidden from the IRS.

What about the California Values Act? Gov. Code § 7284.6 forbids sharing a home or work address for immigration enforcement, but it binds “California law enforcement agencies” as defined in section 7284.4. FTB, a tax agency, is governed by sections 19542 and 19552, and its privacy notice says it honors subpoenas and court orders as the law permits.

What should a California employer of ITIN holders do differently?

Keep Form I-9, the eligibility file, separate from the W-4 and W-2 tax documents. IRS Publication 15 says not to accept an ITIN in place of an SSN; it is not work authorization. If an SSA Employer Correction Request arrives, note its own statement that it does not address immigration status and should not drive adverse action. Lab. Code § 1019.1 penalizes demanding extra I-9 documents (up to $10,000 per violation), section 1019 bars retaliatory threats to call immigration authorities, and section 1171.5 extends state labor protections regardless of status.

Paying cash is the expensive shortcut. Wages still require withholding under Unemp. Ins. Code § 13020, and EDD adds 15 percent penalties for late contributions and unfiled reports (sections 1112 and 1126). Skipping itemized wage statements violates Lab. Code § 226 (section 226.3 penalties run $250, then $1,000, per employee), and sub-minimum pay brings section 1197.1 penalties of $100 or $250 per underpaid employee per pay period. Section 226 accepts an employee number instead of an SSN. Employers already off the books should see our post on the IRS voluntary disclosure redesign and California agencies.

Frequently Asked Questions

Can the IRS still share my address with ICE?

Only in narrow cases. The D.C. Circuit reads IRC section 6103(i)(2) to allow release of an address when a federal agency head makes a written request tied to a specific non-tax criminal investigation. Courts have halted the 2025 bulk matching, but those rulings are preliminary and could change on appeal or through legislation.

Will my ITIN expire if I stop filing?

Yes. Under IRC section 6109(i)(3), an ITIN expires when it has not appeared on a federal return, either as filer, spouse or dependent, for three consecutive tax years. Renewing it requires a new Form W-7 and original or certified identity documents, which can delay a later refund.

Can ITIN parents claim the Child Tax Credit for 2025?

Not unless one spouse has a work-eligible Social Security number. Amended IRC section 24(h)(7) requires an SSN for the parent, or one spouse on a joint return, plus the child. Two ITIN parents can still claim a $500 credit for each child as an other dependent, but it is nonrefundable.

Does the California Values Act stop the Franchise Tax Board from sharing my return?

Not directly. The Values Act restricts California law enforcement agencies. The Franchise Tax Board is a tax agency, and its confidentiality duties come from Revenue and Taxation Code sections 19542 and 19552, which make unauthorized disclosure a misdemeanor and limit shared data to tax administration. FTB does exchange information with the IRS for tax purposes.

Do filed tax returns matter in an immigration case?

They can. The good moral character standard in 8 U.S.C. section 1101(f) has a catch-all, and 8 C.F.R. 316.10(b)(3)(iii) lets officials weigh unlawful acts during the statutory period. Whether a missed return counts depends on the facts, so talk with an immigration attorney before amending old returns or changing how you file.

Can a California employer pay ITIN holders in cash to stay off payroll?

That creates its own liability. California still requires income tax withholding under Unemployment Insurance Code section 13020, and EDD imposes 15 percent penalties for unpaid contributions and missing reports. Missing wage statements violate Labor Code section 226, and minimum wage shortfalls trigger section 1197.1 penalties per pay period.

How North Star Law Firm Can Help

North Star Law Firm helps California households and employers across the Inland Empire, the Sacramento area and the rest of the state bring unfiled returns current, request penalty abatement where the facts support it, and clean up payroll tax and EDD problems before they turn into assessments. Phillip Zagotti is a California attorney and a CPA who represents taxpayers before the IRS, the Franchise Tax Board, the Office of Tax Appeals and the U.S. Tax Court.

If you are weighing whether to file, or you employ workers and want your payroll on solid ground, contact North Star Law Firm or schedule a consultation.

On August 10, 2026, the California Supreme Court decided Tesoro Refining & Marketing Co. LLC v. City of Carson, No. S289952 (Cal. Aug. 10, 2026). A refinery brought the case, but the rule reaches any business paying a city gross receipts tax in Los Angeles or San Francisco, or a license tax nearer home: a city may not force a taxpayer through its own refund process before a Government Claims Act claim and a lawsuit.

The catch is that the statewide rules are strict. When a client in Riverside or Elk Grove brings me a city tax problem, I start with the calendar, because a missed claim date usually ends the case.

What did the Supreme Court decide in Tesoro v. City of Carson?

Carson voters approved an Oil Industry Business License Tax in 2017, charging refinery and petroleum storage operators one quarter of one percent of gross receipts from business conducted in the city (Carson Mun. Code § 63505). Refunds required a request to the finance director within one year of payment, then a further appeal to Carson’s city manager. After an audit covering December 2017 through June 2018, Tesoro paid the deficiency under protest, then presented a claim to the city clerk on Carson’s own form, disputing the timing and the in-city share. Carson won a demurrer because Tesoro had skipped its internal steps.

In a unanimous opinion by Chief Justice Guerrero, the Court reversed. In its view, the Government Claims Act occupies the whole field of how money claims are presented to local agencies, and a refund request is such a claim. Carson’s process was “simply a way to present a claim,” so Municipal Code sections 63515 and 63523 are preempted. Footnote 3 carves out refund procedures set by state statute; footnote 4 limits the holding to mandatory post-payment procedures.

The Court’s minutes through September 11, 2026 show no rehearing or modification order, and under Cal. R. Ct. 8.532(b) the opinion became final 30 days after filing. No official reporter cite has been assigned yet.

How does a Government Claims Act refund claim work for a city tax?

Cal. Gov. Code § 905 requires a claim before suit on money claims against local agencies, but subdivision (a) excepts claims under a statute that prescribes its own refund procedure. McWilliams v. City of Long Beach, 56 Cal. 4th 613 (2013), held that a city ordinance is not a “statute” for that purpose, so city tax refunds stay inside the Act. Ardon v. City of Los Angeles, 52 Cal. 4th 241 (2011), allowed class claims for refunds of Los Angeles’s telephone users tax.

The mechanics fit on one page. Section 910 sets the claim’s contents, and section 915 directs it to the clerk, secretary, auditor or governing body within one year of accrual under section 911.2. The city then has 45 days under section 912.4, extendable only in writing; silence counts as rejection. Section 945.4 bars suit until that point. After a written rejection, section 945.6 allows six months to sue, or two years from accrual if no notice goes out.

Why can’t a late city tax refund claim be rescued?

There is a late-claim procedure, but it does not fit tax refunds. Section 911.4(a) allows an application for leave to file late only for claims subject to the six-month deadline, such as personal injury claims. Refund claims carry the one-year deadline. The court petition in section 946.6 requires a denied section 911.4 application, so it is unavailable too.

The partial safety valve is accrual. Howard Jarvis Taxpayers Ass’n v. City of La Habra, 25 Cal. 4th 809 (2001), treated each collection of an unlawful tax as a new accrual. Read with section 901, each payment generally starts its own one-year clock, so older payments are lost while recent ones can still be claimed.

How do city tax refunds differ from state and property tax refunds?

State taxes follow a pay first, litigate later model. Cal. Const. art. XIII, § 32 bars court orders against “this State or any officer thereof” stopping collection, and permits a refund action after payment as the Legislature provides. Franchise Tax Board and CDTFA refunds follow their own statutes. Section 32 does not mention cities, though a city refund claim follows payment anyway.

Property tax is its own track. Cal. Rev. & Tax. Code § 5097 generally allows a verified claim within four years after payment, and section 5141 requires suit within six months after the board of supervisors or city council rejects it.

Where do city gross receipts overpayments usually come from?

Usually apportionment, not rates. Los Angeles applies its business tax through City Clerk’s Rulings issued under LAMC § 21.15(h). Ruling No. 2 excludes a contractor’s receipts from jobs outside the city, so a contractor with no Los Angeles office owes tax only on Los Angeles jobs. Ruling No. 14 lets a seller with a Los Angeles location deduct capped percentages for selling steps done elsewhere, up to 20 percent for the shipping warehouse. Ruling No. 15 treats 20 percent of out-of-city receipts as taxable for many service and professional firms with a Los Angeles office unless they prove less.

San Francisco has its own allocation rules and its own refund provision, Business and Tax Regulations Code § 6.15-1. The Controller’s claim form allows one year from the later of payment, the return due date, or the Tax Collector’s denial of an amended return or refund request. That optional step can extend the window, consistent with Tesoro.

As a CPA, I want a job-site city field in job costing and a ship-to city on every invoice. The same discipline matters when Riverside or Sacramento measures its license tax by receipts.

What does the calendar look like for a Riverside contractor that overpaid Los Angeles?

Take an illustrative Riverside electrical contractor with no Los Angeles office, booking about $9.5 million a year, $1.5 million from Los Angeles jobs. It reported the full $9.5 million for 2023, 2024 and 2025, paying on February 27, 2024, February 28, 2025 and February 27, 2026. At the current contractor rate ($153 for the first $60,000 plus $1.01 per $1,000 above that), tax on $9.5 million is about $9,687 and tax on $1.5 million about $1,607. That is roughly $8,080 overpaid per year, or $24,240 in total.

The contractor spots the error on October 15, 2026. The windows for the February 2024 and February 2025 payments closed a year after each was made, and section 911.4 cannot reopen them; Los Angeles’s refund policy under LAMC § 21.07 likewise requires a claim within one year of payment. What remains is the February 27, 2026 payment, about $8,080, with a claim due by February 27, 2027. I would file in November 2026 with the City Clerk and the Office of Finance. A rejection mailed January 8, 2027 means suit by July 8, 2027. Silence means deemed rejection after 45 days and a two-year limit running to February 27, 2028.

The trap is the next renewal. A 2026 return filed next February the old way, while talks drag on, creates a new overpayment needing its own claim; the city’s form warns that a refund claim does not stop the lawsuit clock. Fix the return, and put any extension in writing under section 912.4(b).

What if the city audits you and sends an assessment instead?

Footnote 4 matters here: the Court declined to decide whether Tesoro had to appeal the deficiency notice before paying, because Carson had disclaimed that argument below. A Los Angeles assessment under LAMC § 21.16 can be appealed to an Assessment Review Officer within 45 days of service, then to the Board of Review within another 45 days.

Court review of a hearing decision normally comes by writ of administrative mandate under Cal. Civ. Proc. Code § 1094.5, confined to the administrative record, so the evidence must go in at the hearing. If the appeal window is open, I would use it. If it has closed, paying and presenting a claim under the Act, as Tesoro did, is the clearest route.

Frequently Asked Questions

Does Tesoro mean I can ignore my city’s tax refund form?

Not quite. A city can no longer make its own refund request or internal appeal a condition of a Government Claims Act claim or a lawsuit, but its process may still produce a faster refund. The safer practice is to file the city’s form and present a claim to the city clerk within one year of payment.

How long do I have to claim a refund of a California city business tax?

Generally one year from accrual under Government Code section 911.2, which usually means one year from each payment. After a written rejection you have six months to sue. If the city never sends written notice, the outer limit is two years from accrual.

Can I get relief if I missed the one-year claim deadline?

Usually not for that payment. The late-claim application in Government Code section 911.4 covers only claims with a six-month deadline, such as personal injury, and the court petition under section 946.6 depends on that application. Later payments may still be inside their own one-year windows, so a partial refund is often possible.

Does Tesoro apply to property tax or sales tax refunds?

No. The Court said its decision does not affect refund procedures for property taxes, sales and use taxes, or other local taxes whose refund process a state statute prescribes. Property tax refund claims follow Revenue and Taxation Code sections 5097 and 5141, which set their own deadlines.

Can a refund of a city utility users tax be claimed for a whole class of customers?

Often, yes. Ardon v. City of Los Angeles allowed class claims for refunds of the city’s telephone users tax, and McWilliams v. City of Long Beach held that a city ordinance cannot take that option away. A class claim must still satisfy the Act’s content and timing rules.

How North Star Law Firm Can Help

North Star Law Firm works with businesses in the Inland Empire, the Sacramento area and statewide on city tax refund claims and on responses to city audits and assessments, as part of its tax law practice. That work often overlaps with tax defense before state agencies and with sales tax and payroll tax matters. Phillip Zagotti is a California attorney and a CPA, and he represents taxpayers before the IRS, the Franchise Tax Board, the Office of Tax Appeals and the U.S. Tax Court.

If your business may have overpaid a city tax or has received a city assessment, contact North Star Law Firm or schedule a consultation.

A Vancouver couple winters at their house in Temecula. A retired father from Pune stays more than half the year with his daughter in Ontario. Both usually know the IRS day count cold.

California does not use that count, and it does not honor the treaty that may have settled the federal answer. A foreign national can file with the IRS as a nonresident and still owe California tax on worldwide income at up to 13.3 percent, with no credit for tax paid at home.

How does the IRS decide whether a noncitizen is a U.S. resident?

Under 26 U.S.C. § 7701(b)(1)(A), an alien is a resident for the year if he or she held a green card at any time during it or meets the substantial presence test. That test, in section 7701(b)(3), needs 31 days this year and a weighted 183: current-year days count in full, last year’s at one third, the year before at one sixth.

Days as an exempt individual (certain students and teachers, for example) do not count, nor do days someone could not leave because of a medical condition that arose here. Section 7701(b)(2) generally starts residency on the first day of presence in the year the test is met.

The closer connection exception in section 7701(b)(3)(B) requires fewer than 183 days this year, a foreign tax home, and more significant contacts abroad under Treas. Reg. § 301.7701(b)-2(d), claimed on Form 8840. A late form forfeits it under Treas. Reg. § 301.7701(b)-8(d), and section 301.7701(b)-2(f) denies it once a relative files an I-130 for the person.

The other exit is a treaty tiebreaker under Treas. Reg. § 301.7701(b)-7: Form 1040-NR plus Form 8833, with a $1,000 penalty under 26 U.S.C. § 6712 for skipping the 8833. Form 8938 has a treaty carve-out in Treas. Reg. § 1.6038D-2(e), but the FBAR rule in 31 C.F.R. § 1010.350(b) has none, so our FBAR deadline post reaches this group.

How does California decide whether a foreign national is a resident?

Cal. Rev. & Tax. Code § 17014(a) makes a resident of every individual “in this state for other than a temporary or transitory purpose.” Visa type and the IRS count are irrelevant, and section 17024.5(b)(10) makes Internal Revenue Code references to nonresident aliens inapplicable. Section 17016 presumes residency after more than nine months in the year, rebuttable by proof of a temporary purpose.

Conversely, 18 Cal. Code Regs. § 17014(b) treats someone domiciled elsewhere, with a permanent abode there and no more than six months here, as temporary so long as he acts only as “a seasonal visitor, tourist or guest.” Owning a California house does not break that rule. Working from it can.

In between, the state of “closest connection during the taxable year is the state of his residence.” Appeal of Stephen D. Bragg, 2003-SBE-002 (May 28, 2003), lists the objective factors, from residences to phone records, citing Appeal of Berner, 2001-SBE-006-A (2002). Whittell v. Franchise Tax Board, 231 Cal.App.2d 278 (1964), taxed a couple who split each year between Woodside and Lake Tahoe’s Nevada shore, and Noble v. Franchise Tax Board, 118 Cal.App.4th 560 (2004), weighed physical presence above stated intent. Our post on residency audits of Californians who leave covers the mirror problem.

Does a tax treaty protect a foreign national from California tax?

No. Article II(2)(b) of the U.S.-Canada treaty covers “the Federal income taxes imposed by the Internal Revenue Code,” and the U.S.-India treaty reads almost identically. Container Corp. of America v. Franchise Tax Board, 463 U.S. 159 (1983), observed that U.S. treaties “do not generally cover the taxing activities of subnational governmental units such as States,” and FTB Publication 1031 says treaties limited to federal taxes “do not apply to California.”

Section 17041(a) then taxes a resident’s entire income at 2025 rates reaching 12.3 percent, and section 17043 adds 1 percent above $1 million. Section 17024.5(b)(6) and (b)(7) switch off the foreign tax credit and the foreign earned income exclusion. The credit in section 18001 covers tax paid to “another state,” which section 17018 stretches only to the District of Columbia and U.S. possessions. Tax paid in Ottawa buys nothing in Sacramento.

What if you are a federal resident but a California nonresident?

An L-1 manager from Monterrey sent to a Sacramento-area plant for a project with a fixed end date can pass the substantial presence test, file Form 1040, and still be a California nonresident. The regulation treats presence to “perform a particular contract” for a short period as temporary, a fact question every time.

He files Form 540NR and is taxed under section 17951(a) only on California-source income, including wages for days worked here under 18 Cal. Code Regs. § 17951-5, but generally not interest on intangibles under section 17952. If his wife stays in Monterrey, Publication 1031 lets his domicile decide whether his pay is community property.

The CPA’s point is on the rate line. Section 17041(b) sets a nonresident’s rate as if all worldwide income were Californian, so $40,000 of Temecula rent owned by a Vancouver executive is taxed at the average rate his full income would produce.

How does this play out for a Canadian couple in Temecula?

Assume the Vancouver couple own a distribution company there and were in California 170 days in each of 2024, 2025 and 2026, each drawing about $320,000 from the company. The figures are illustrative.

Federally, 170 plus 56.7 (one third) plus 28.3 (one sixth) is 255 weighted days, so they meet the test. At 170 days with tax homes in Vancouver, each can file Form 8840 by June 15, 2027. The Canada treaty’s Article IV(2) is the backstop, and there the Temecula house counts: with a permanent home in both countries, the question moves to the “centre of vital interests,” which is British Columbia.

California’s regulation treats them as seasonal visitors, much like its own example of a Minnesota couple who winter here, but only while they act like visitors. If one of them runs the company by laptop from Temecula, the FTB can say the stays are no longer a guest’s and the pay for those days is California-source anyway.

Using the 2025 schedules in the Form 540 booklet, as nonresidents with no California-source income they owe California nothing. Because 26 U.S.C. § 6013(a)(1) bars a joint federal return and section 18521(a)(1) follows federal status, as residents each would file separately and owe about $25,700 on roughly $314,000 after the $5,706 standard deduction. About $51,000 for the couple, with no credit for Canadian tax.

A variation: a retired father from India on a B-2 visa spends 200 days of 2026 with his daughter in Ontario, living on about $23,000 of Indian pension and interest. At 200 days Form 8840 is unavailable, so he claims India-treaty residence on Form 8833.

In California, 200 days is under the nine-month presumption but over the six-month rule, so connections decide it, and his home and pension are in India. Even if the FTB disagreed, $23,000 is under the 2025 filing threshold of $30,591 for a single filer 65 or older, indexed from section 18501.

What records decide a residency dispute, and what does the estate tax add?

The FTB’s Residency and Sourcing Technical Manual tells auditors to build presence calendars from card and bank statements and airline tickets. Pull your I-94 travel history and keep a calendar as the year happens. Section 19057 gives four years from filing to assess, but section 19087 allows assessment “at any time” when no return exists, so a Form 540NR disclosing the facts starts the clock.

For estate tax, Treas. Reg. § 20.0-1(b)(1) asks about domicile. A Canadian domiciled in Vancouver who dies owning the Temecula house is taxed on U.S.-situs property under section 2103, with only the $13,000 credit in section 2102(b)(1), which shelters $60,000, unless the treaty’s prorated credit applies under section 2102(b)(3)(A). California has had no estate tax for deaths after January 1, 2005.

Frequently Asked Questions

Can I be a nonresident for the IRS and a resident for California?

Yes. The IRS uses a day count and green card status, subject to treaty tiebreakers. California asks whether you are here for other than a temporary or transitory purpose, judged by your closest connections. A Form 8840 or 8833 filed with the IRS does not bind the Franchise Tax Board.

Does the tax treaty with my home country protect me from California tax?

Usually not. Most U.S. income tax treaties, including those with Canada and India, cover only federal income taxes. The Supreme Court has noted that U.S. treaties generally do not reach state taxes, and FTB Publication 1031 says treaties limited to federal taxes do not apply to California.

How many days can I spend in California without becoming a resident?

There is no safe number. More than nine months creates a rebuttable presumption of residency. Six months or less is treated as temporary if you are domiciled elsewhere, keep a permanent home there and act only as a seasonal visitor. Anything in between turns on your closest connections.

Does California give a credit for income tax I pay in my home country?

No. California’s credit for taxes paid covers only other U.S. states, the District of Columbia and U.S. possessions, and California does not follow the federal foreign tax credit or foreign earned income exclusion. A California resident can pay full tax in both countries.

What happens if I never filed a California return?

When no return is filed, the Franchise Tax Board may estimate income and assess tax, interest and penalties at any time under Revenue and Taxation Code section 19087. The four-year assessment period starts only when a return is filed, so a nonresident return that discloses your facts is the safer course.

Does owning a house in California make me a California resident?

Not by itself. A seasonal visitor can own a home here without becoming a resident if the stay is six months or less, a permanent home is kept where the person is domiciled, and the conduct here is a visitor’s. Working from the house can change that.

How North Star Law Firm Can Help

North Star Law Firm advises foreign nationals and their U.S. families across the Inland Empire and the Sacramento area on FTB and IRS residency examinations, unfiled California returns and estate planning for California property. Phillip Zagotti is a California attorney and a CPA admitted to the U.S. Tax Court, who prepares the federal and California positions together.

If you or a family member spends long stretches in California without calling it home, contact North Star Law Firm or schedule a consultation.

Picture a Rancho Cucamonga S corporation with two lines of business. Its trucks haul California freight, and a separate operation distributes in Nevada. A buyer wants the Nevada line. Can California tax part of the gain on a business that never sold anything here?

It depends on whether the Nevada line is part of one unitary business with the trucking company. If it is, the gain is apportioned and California takes its percentage. If it is a separate trade or business, California may get nothing. A June 2026 Office of Tax Appeals opinion sided with a taxpayer on this question, and the winning evidence was mostly accounting evidence.

What did the Office of Tax Appeals decide in Western Distributing?

Appeals of Western Distributing Company, et al., 2026-OTA-467P (OTA Case No. 230914432 et al., issued June 18, 2026), involved a Denver-based S corporation with 14 divisions. The largest were a Colorado beer distributor and an interstate trucking business that picked up and delivered in California. On January 11, 2010, the company sold the beverage division’s assets, mostly distribution rights, and reported $68,180,087 of gain as Colorado income.

The Franchise Tax Board treated all 14 divisions as unitary. The panel reversed, upholding the FTB on unity of operation but finding no unity of use and no dependency or contribution. The label did not win it: the taxpayer conceded on appeal that the gain was business income, and the panel called its nonbusiness reporting erroneous. It won by proving a separate trade or business with no California activity.

Is gain on a division sale business income, and why does your home base matter?

Revenue and Taxation Code § 25120(a) treats income from property as business income when its “acquisition, management, and disposition” are integral parts of regular operations; subdivision (d) makes the rest nonbusiness income. Hoechst Celanese Corp. v. Franchise Tax Bd., 25 Cal.4th 508 (2001), reads subdivision (a) as two independent tests, transactional and functional. Jim Beam Brands Co. v. Franchise Tax Bd., 133 Cal.App.4th 514 (2005), applied the functional test to gain on stock of a unitary subsidiary.

Business income is apportioned, for most taxpayers since 2013 by the sales factor alone under section 25128.7, with service and intangible receipts assigned by market under section 25136 and Regulation 25136-2. Nonbusiness income is allocated under sections 25123 through 25127, and here lies a trap. Section 25125(c) allocates nonbusiness gain on intangibles, including goodwill and customer contracts, to California when the commercial domicile is here, as it is for a company run from Rancho Cucamonga.

What makes two lines of business one unitary business?

Two alternative tests apply. Butler Bros. v. McColgan, 17 Cal.2d 664 (1941), looks for unity of ownership, unity of operation “as evidenced by central purchasing, advertising, accounting and management divisions,” and unity of use in a centralized executive force. Edison California Stores v. McColgan, 30 Cal.2d 472 (1947), asks whether in-state operations depend on or contribute to those outside. Mobil Oil Corp. v. Commissioner of Taxes, 445 U.S. 425 (1980), and Container Corp. of America v. Franchise Tax Bd., 463 U.S. 159 (1983), bar a state from apportioning income of a discrete business.

Regulation 25120(b) confirms one taxpayer can run several businesses; its example is a conglomerate with three independent divisions. Chase Brass & Copper Co. v. Franchise Tax Bd., 10 Cal.App.3d 496 (1970), found unity where a subsidiary bought most of its copper from affiliates. Tenneco West, Inc. v. Franchise Tax Bd., 234 Cal.App.3d 1510 (1991), found none among autonomous subsidiaries. Western Distributing landed near Tenneco: division managers ran operations while the controlling CEO raced professionally.

How does the unitary answer reach an S corporation’s owners?

The S corporation pays California tax at 1.5 percent under section 23802(b), and each shareholder reports a pro rata share. Residents are taxed on entire taxable income under section 17041(a), so for them the fight mostly changes the entity-level tax.

Nonresidents pay only on California-source income under section 17951. Regulation 17951-4(f) treats S corporation shareholders like partners, (d)(1) apportions business income at the entity level, and (b) makes only the in-state income California-source when two businesses are not unitary. The OTA sourced trust shareholders’ goodwill gain by the S corporation’s own apportionment in Appeal of The 2009 Metropoulos Family Trust, 2019-OTA-385P, and taxed a nonresident’s share of a holding company’s gain on selling a unitary operating business in Appeal of Smith, 2023-OTA-069P.

Nonresidents who skip filing add risk, since section 19087 lets the FTB assess at any time when no return was filed; the Western Distributing shareholders drew late filing penalties. If you have left California, see our post on FTB residency audits.

How much can the unitary question cost on a Rancho Cucamonga sale?

Take a Rancho Cucamonga S corporation with a California trucking line and a distribution line in Henderson, Nevada. In 2026 it sells the Nevada assets for a $12,000,000 gain: $10,000,000 for goodwill and customer contracts, $2,000,000 for equipment. Assume a 40 percent California sales factor for the combined business (all figures illustrative).

If unitary, $4,800,000 of gain lands in California and the entity tax is $72,000. A Nevada resident who owns 30 percent picks up $1,440,000 of California-source income; at an assumed 12 percent effective rate, about $172,800 in tax.

If separate, the Nevada line has no California customers, so its factor is zero and neither level pays California tax on the gain. The nonbusiness route would backfire: section 25125(c) sends the $10,000,000 of intangible gain to the California domicile, a $150,000 entity tax. Trucking companies should also model the special formula in Regulation 25137-11, which the FTB applied to all of Western Distributing and the OTA never reached.

What happens to deductions claimed while the company filed as one business?

The FTB’s fallback was the tax benefit rule: if the beverage division was separate, its $5,320,801 of damaged and dated beer expense for 2007 through 2010 should come back. Hillsboro National Bank v. Commissioner, 460 U.S. 370 (1983), requires income when a later event is “fundamentally inconsistent” with an earlier deduction, and IRC § 111 limits the inclusion to deductions that actually reduced tax.

Raising the theory first on appeal put the burden on the FTB, which lost on the numbers: the company had apportioned net losses to California, and for 2010 only $12,666 of the questioned deductions sat inside the $157,000 loss apportioned here.

Before switching a division to separate treatment, recompute every open year both ways. Where separate treatment lowers California tax, file refund claims within the section 19306 period, generally the later of four years from the due date or one year from payment. Where it raises tax, expect a tax benefit or duty of consistency argument.

What records should you build before a sale, and how long can a challenge run?

In Western Distributing, division managers made hiring and purchasing calls, and part of their pay tracked their own division. Intercompany hauling was billed at standard rates and was under one percent of the trucking division’s revenue. The weak spots (a shared primary insurance policy, centralized payroll and benefits) are why unity of operation went to the FTB.

Give each line its own ledger, bank accounts, and financing years before a sale, and bill intercompany work at market. A separate LLC alone will not do it; Edison looked past corporate form. Those division-level books drive the purchase price allocation under IRC § 1060 on Form 8594, or the asset-level numbers behind a section 338(h)(10) election, so one set of records serves both the IRS and the FTB.

Expect years: Western Distributing sold in 2010, the FTB proposed assessments in October 2016, and the OTA ruled in June 2026. A taxpayer has 30 days after a Notice of Action to appeal to the OTA under section 19045, and either side may seek rehearing under section 19048. Under OTA Regulation 30502(e), a pending precedential opinion draws public comment for 30 days, and its status is decided 35 to 60 days after posting in early September 2026.

Frequently Asked Questions

What is a unitary business for California tax purposes?

It is a group of operations connected closely enough that California apportions their combined income as one business. Courts apply the three unities test (ownership, operation, and use) or ask whether the activities rely on and add value to one another. Meeting either test is enough.

Can one S corporation have more than one trade or business in California?

Yes. California regulations recognize that one taxpayer can operate separate trades or businesses, each apportioned with its own factors. In Western Distributing, decided in 2026, a beverage division inside a single S corporation was held not unitary with the same company’s trucking division.

Is the Western Distributing opinion binding precedent?

Not yet. It was posted as pending precedential in September 2026. After a 30-day comment period, the Office of Tax Appeals decides within 35 to 60 days of posting whether it becomes precedential, which would let it be cited in later OTA appeals.

Does reporting the gain as nonbusiness income keep it out of California?

Often not. Under Revenue and Taxation Code section 25125, nonbusiness gain on intangibles such as goodwill is allocated to California whenever the company’s commercial domicile is here, meaning it is managed from California. The stronger position is usually that the division was a separate trade or business.

Do California resident shareholders benefit from winning a unitary dispute?

Less than nonresidents do. California taxes residents on all income, so a resident’s share of the gain is taxable here either way; the savings come through the 1.5 percent entity tax. Nonresidents pay only on California-source income, so a separate-business finding can remove the gain from their California returns.

How far ahead should we prepare before selling a division?

Ideally, start several years out. The unitary analysis looks at how the business actually ran, so separate books, bank accounts, financing, and management need a track record before the sale. The same division-level records support the purchase price allocation on Form 8594.

How North Star Law Firm Can Help

North Star Law Firm advises S corporation and LLC owners in the Inland Empire and the Sacramento area on business sale tax structuring and S corporation planning, and handles FTB protests and appeals before the Office of Tax Appeals. Phillip Zagotti is a California attorney and a CPA, admitted to the U.S. Tax Court.

If your company is weighing the sale of one line of business, or the FTB has proposed an assessment on a sale you already closed, contact North Star Law Firm or schedule a consultation.

A Fontana couple opens escrow in October and the title report comes back with a Notice of Federal Tax Lien recorded in San Bernardino County for $140,000, naming the husband alone, for tax years that closed before the wedding. Can they pay the IRS out of escrow? Sometimes yes. Sometimes it takes less, and sometimes nothing.

Which one happens turns less on the balance than on three things national explainers skip: community property, what California’s homestead exemption does against the United States (nothing), and how title companies clear a federal lien. A recorded lien does not stop the sale. It stops clean title, and the repair is a discharge under 26 U.S.C. § 6325(b) or a subordination under section 6325(d), filed at least 45 days before closing.

Where does an IRS lien come from, and when does recording matter?

The lien is automatic and invisible. Under 26 U.S.C. § 6321, once the IRS assesses and the taxpayer does not pay after notice and demand, the amount becomes “a lien in favor of the United States upon all property and rights to property,” and Section 6322 dates it to the assessment. Recording answers priority: Section 6323(a) leaves the lien invalid against purchasers, lenders, and judgment creditors until notice under section 6323(f) is filed, which Code of Civil Procedure § 2101(b) puts with the county recorder where the land sits.

Refinance lenders misread section 6323(d), which covers only disbursements made before the forty-sixth day after filing under a pre-existing security agreement. And 26 U.S.C. § 6320 requires notice within five business days of filing, then thirty days to request a Collection Due Process hearing reaching collection alternatives and spousal defenses, but not the liability.

Does the lien reach my spouse’s half of a community property home?

California is harder on the non-liable spouse than most states. Cal. Fam. Code § 910(a) says the community estate “is liable for a debt incurred by either spouse before or during marriage,” regardless of who manages it or who signed. Not just debts of the marriage, but debts incurred before it.

The Ninth Circuit applied that to a federal tax lien in Babb v. Schmidt, 496 F.2d 957 (9th Cir. 1974), reaching a wife’s community interest for her husband’s premarital tax debt. State law defines what the taxpayer owns; federal law decides whether it is reachable. Drye v. United States, 528 U.S. 49 (1999). The IRS agrees, putting California among the states where it collects from 100 percent of community property for premarital debts. IRM 25.18.4.

Family Code § 911 shields earnings only while they sit uncommingled in an account the other spouse cannot touch, so it never protected the house. Section 913(b)(1) is the refuge: separate property is not liable for a spouse’s debt. Relief from the liability runs through 26 U.S.C. § 6015 and is tax defense work.

Does California’s homestead exemption stop an IRS lien?

No. Cal. Code Civ. Proc. § 704.730 sets the exemption at the greater of the prior year countywide median sale price, capped, or a floor, adjusted each January for the California CPI. The 2021 amounts were $300,000 and $600,000; inflation has carried them to roughly $371,500 and $743,500 for 2026. None of it binds the IRS.

United States v. Rodgers, 461 U.S. 677 (1983), holds that section 7403 lets a district court order sale of an entire property over a state homestead interest, including a spouse who owes nothing but is compensated from the proceeds. Forced sales stay rare: 26 U.S.C. § 6334(a)(13)(B) exempts a principal residence from administrative levy, and section 6334(e)(1) permits one only on the written approval of a federal district judge or magistrate judge, the highest tier of approval in IRM 5.10.2. The real risk in Fontana is a title report that kills a deal.

Which tool fits: discharge, subordination, withdrawal, or release?

A discharge frees one property and leaves the lien elsewhere. Section 6325(b) gives four routes: (b)(1) double value in what stays encumbered, (b)(2)(A) payment of the government’s interest, (b)(2)(B) a finding that the interest has no value, and (b)(3) proceeds held in escrow. The form is Form 14135, per Publication 783.

Subordination removes nothing; it moves the IRS behind a named lender, either by paying the amount subordinated under section 6325(d)(1) or, under (d)(2), by showing the government realizes more. Form 14134, per Publication 784. Withdrawal under section 6323(j) erases the public notice without touching the lien, and the IRS’s published terms require a direct debit agreement, $25,000 or less, payoff within 60 months, three consecutive payments, and no default. That is Form 12277.

Release under section 6325(a) issues within 30 days once the liability is paid or unenforceable, usually because section 6502(a)(1)‘s ten-year period has run. Bankruptcy is no shortcut: 11 U.S.C. § 522(c)(2)(B) lets a filed lien survive a Chapter 7 discharge, and Chapter 13 pays only the secured piece under 11 U.S.C. §§ 506 and 1325(a)(5). See discharging tax debt.

How early should the application go in, and what does the IRS price?

Publications 783 and 784 both ask for the application at least 45 days before the transaction date. Treat that as a floor, since packages come back for a stale appraisal or a basis that does not fit, and each round trip eats a fixed closing date.

On a (b)(2)(A) discharge the IRS is not asking what you owe. It asks what its lien is worth in this parcel: fair market value, minus senior encumbrances, minus costs of sale, times the taxpayer’s interest in what remains, capped at the balance. In a community property case that interest is the whole community share; where a spouse holds real separate property it shrinks, sometimes to zero, which is what (b)(2)(B) is for. An offer in compromise filed before closing invites the IRS to price that equity into collection potential, so subordination and an installment agreement get built together.

What does a Fontana seller net in a November closing?

Back to the couple, with illustrative numbers. The house sells at $640,000, a 2017 first mortgage pays off at $410,000, and costs of sale run seven percent, about $44,800. That leaves about $185,200 before any tax lien, against a $140,000 notice for 2019 and 2020.

If the home is community property, section 910 and Babb put all $185,200 within reach, so the (b)(2)(A) number is the full $140,000 and the sellers walk with roughly $45,200. The homestead exemption would have shielded that whole equity from a judgment creditor and does nothing here. If the wife instead bought the house before the marriage with traceable separate funds, section 913(b)(1) governs, the application is (b)(2)(B), and the sellers keep all $185,200.

Now assume they keep the house and refinance the same $410,000 from 7.25 percent to 5.75 percent, dropping the payment from about $2,797 to $2,393. Nothing goes to the IRS at closing; the (d)(2) showing is that $404 a month funds a 60-month agreement worth about $24,000 more.

What about the FTB lien and the title company?

Many California taxpayers carry two liens. The state lien arises by operation of law under Cal. Rev. & Tax. Code § 19221 when an amount due and payable goes unpaid, and Cal. Gov. Code § 7171 lets the agency record notice with the county recorder. EDD and CDTFA liens record the same way, so escrow may need three clearances.

The Franchise Tax Board’s published lien procedures run on a different calendar, which is what wrecks closings. Title companies request payoffs through eDemand, processed in three to five business days against twenty-one by mail. The FTB grants a partial release, its analog to a discharge, and a subordination, but wants those by overnight service 21 business days out, and warns recorders can take three months.

In a Riverside or San Bernardino County sale the title company will not insure over a recorded federal notice. It wants a payoff demand or a certificate of discharge, not a promise that one is coming, so the net sheet must show the lien before anyone signs a counteroffer. Sellers ask about the tax basis: for an owner 55 or older, Proposition 19 allows three transfers of the Proposition 13 base year value to a replacement home anywhere in California, which can make buying down beat staying put.

Frequently Asked Questions

Can the IRS take my house in California?

Rarely. Section 6334(a)(13)(B) exempts a principal residence from administrative levy, and section 6334(e)(1) allows one only with written approval from a federal district judge or magistrate judge. The government can still sue to force a sale under section 7403. United States v. Rodgers, 461 U.S. 677 (1983).

Is my spouse’s half of the house protected from my tax lien?

Usually not. Family Code section 910(a) makes the community estate liable for a debt either spouse incurred before or during marriage, and the Ninth Circuit applied that to a federal tax lien in Babb v. Schmidt, 496 F.2d 957 (9th Cir. 1974). Separate property under section 913(b)(1) is the exception.

Does the California homestead exemption stop the IRS?

No. Code of Civil Procedure section 704.730 protects roughly $371,500 to $743,500 of equity for 2026 against California judgment creditors, but it does not bind the United States: state law defines what the taxpayer owns, federal law decides whether it is reachable. Drye v. United States, 528 U.S. 49 (1999).

How far before closing should I apply for a lien discharge?

At least 45 days, which is what IRS Publications 783 and 784 ask for, and that is a floor rather than a target. Applications get returned for a stale appraisal or the wrong basis, so file when the listing goes live.

What is the difference between a discharge and a subordination?

A discharge under section 6325(b) frees one property so a buyer or lender takes clear title, while the lien stays on everything else. A subordination under section 6325(d) frees nothing and moves the IRS behind a named lender so a refinance can close. Discharge uses Form 14135; subordination uses Form 14134.

Does an FTB lien work the same way?

Similar concept, different procedures. A state tax lien arises under Revenue and Taxation Code section 19221, and the Franchise Tax Board records notice with the county recorder under Government Code section 7171. It grants a partial release rather than a discharge, plus a subordination, and wants escrow requests 21 business days out.

How North Star Law Firm Can Help

North Star Law Firm represents Inland Empire and Sacramento-area homeowners whose sale or refinance has stalled on a recorded tax lien, preparing Form 14135 and Form 14134 packages, pricing the government’s interest before a counteroffer is signed, and coordinating the IRS and FTB demands escrow needs, alongside the work in tax defense, offer in compromise, and installment agreements. Phillip Zagotti is a California attorney and a CPA admitted to the U.S. Tax Court and the U.S. District Court for the Central District of California.

If a tax lien stands between you and a closing date, contact North Star Law Firm or schedule a consultation.