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Dr. Xavier Garcia-Rojas worked as an independent contractor for Stat Radiology Medical Corporation (StadRad) as a radiologist. StatRad provided the radiologist with equipment, which he used from his Texas home to submit reports. Some of the images he studied were from medical facilities in California. The FTB demanded a California tax return in July 2019. “He filed returns for 2018, 2019, and 2020, paid the amounts requested by the Board, and then requested a refund. The Board never responded,” over six years later.[1] Dr. Garcia-Rojas sued in May 2023, and the trial court sided with the FTB’s theory that Dr. Garcia-Rojas operated a unitary business as a sole proprietorship. The Court of Appeal reversed. “[T]he Board did not cite any authority supporting its contention that a sole proprietor that engages in one business activity and receives compensation from one corporation—even when that corporation’s clients are found both in and outside of California—is a unitary business.”[2] There simply has not been a case “apply[ing] the unitary business theory to a single person or sole proprietorship engaging in one business activity.”[3] The Court of Appeal did not start here in Garcia-Rojas v. Franchise Tax Board.

“Unitary business has a long recognized meaning in California—two or more business entities that are commonly owned and integrated in a way that transfers value among the affiliated entities.”[4] Here, the sole proprietorship is solitary and therefore cannot be a unitary business. The court disapproved of Appeal of Bindley, an Office of Tax Appeals (OTA) case.[5] In Bindley a screenplay writer residing in Arizona worked as an independent contractor for two California LLCs, performing all work in Arizona. The OTA held that this was a unitary business, which applies in equal force to sole proprietorships. In considering Appeal of Bindley, the Court of Appeal found that the OTA “ignored that there must be separate business activities to unite.”[6] The Court of Appeal did not mention that the self-employed taxpayer in Bindley worked for two companies.

The Board of Equalization held in 1982 that the taxpayer “bears the burden of proof, i.e., [the taxpayer] must establish by a preponderance of the evidence that the unitary connections present in the case are, in the aggregate, so trivial and insubstantial as to require a holding that a single unitary business did not exist.”[7] This is embedded in the FTB audit manual regarding the unitary business doctrine (at p. 22). Garcia-Rojas did not discuss this burden. Instead, it assumed that the FTB must prove its unitary business theory rather than forcing the taxpayer to disprove it.[8]

Tax treatment of nonresident taxpayers begins with the general rule that “in the case of nonresident taxpayers the gross income includes only the gross income from sources within this state.”[9] But the details are delegated to the FTB. Namely, such income “shall be allocated and apportioned under rules and regulations prescribed by the Franchise Tax Board.”[10] Section 17951-4 functions as a railroad track switch, directing circumstances to more specific statutes or regulations. Situations that are not directed to the Uniform Division of Income for Tax Purposes Act (RTC § 25120 et seq.) are implicitly left behind to be dealt with through the regulations for §§ 17951-17953. These tend to be more favorable to the taxpayer and are more influenced by physical presence. As applicable here, it appears that Dr. Garcia-Rojas would not be taxed by California at all because all of his services were performed outside of California.[11]

The full implications of Garcia-Rojas remain to be seen. Unfortunately, the court disclaimed in its 6-page opinion that “[w]e express no opinion as to whether the Board can tax Garcia-Rojas under a different legal theory.”[12] Nevertheless, the subsequent petition for review filed by the California Justice Department on behalf of the FTB gave some indication of potential changes: “The result could be that the Board would have to instead apply ‘separate’ accounting methods to determine taxable income for all such entities, throwing into question how to account for shared overhead expenses and making it harder to ensure that such taxpayers file tax returns and remit taxes to California.”[13] The filing did not elaborate. However, it appears that the FTB would require businesses within Garcia-Rojas’s scope to track the origin of each dollar they receive if they do not apportion their income.

Garcia-Rojas may be an exercise in Orwellian doublethink, but it simply takes the FTB legal landscape to its logical conclusion. The unitary business doctrine requires multiple businesses or business activities. A simple business performing a sole trade without subsidiary entities cannot be “unitary.” Although Garcia-Rojas regarded sole proprietorships, its reasoning is equally applicable to all entity types. If curious whether Garcia-Rojas can be used to save you from being taxed by California, please contact us at (916) 822-8700.

[1] Garcia-Rojas v. Franchise Tax Bd., 120 Cal. App. 5th 347, 349 (2026). The refund claims for 2018 and 2019 were filed on April 17, 2020.

[2] Garcia-Rojas v. Franchise Tax Bd., 120 Cal. App. 5th 347, 351 (2026).

[3] Garcia-Rojas v. Franchise Tax Bd., 120 Cal. App. 5th 347, 351 (2026).

[4] Garcia-Rojas v. Franchise Tax Bd., 120 Cal. App. 5th 347, 351 (2026)(omitting internal quotation marks).

[5] Appeal of Bindley, 2019 – OTA – 179P.

[6] Garcia-Rojas v. Franchise Tax Bd., 120 Cal. App. 5th 347, 352 (2026).

[7] Appeal of Saga Corporation, 82-SBE-102, June 29, 1982.

[8] However, the court commented that “[t]he party moving for summary judgment bears the burden of persuasion that there is no triable issue of material fact and that he is entitled to judgment as a matter of law,” and the matter before the court was a motion for summary judgment. Garcia-Rojas v. Franchise Tax Bd., 120 Cal. App. 5th 347, 350 (2026)(omitting internal quotation marks). Yet, the dispute here was what the material facts meant for the case, rather than the material facts themselves.

[9] RTC § 17951(a).

[10] RTC § 17954.

[11] “Nonresident attorneys, physicians, accountants, engineers, etc., even though not regularly engaged in carrying on their professions in this State, must include in gross income as income from sources within this State the entire amount of fees or compensation for services performed in this State on behalf of their clients.” 18 CCR § 17951-5(a)(3).

[12] Garcia-Rojas v. Franchise Tax Bd., 120 Cal. App. 5th 347, 349 (2026).

[13] FTB Petition for Review at p. 16 (Not freely available online, but available on request).

As with many facets of tax law, the question of the statute of limitations has a relatively straightforward answer that generally applies with a dozen exceptions. Fraud is one of the 12 exceptions to the 3-year rule. Specifically: “In the case of a false or fraudulent return with the intent to evade tax, the tax may be assessed, or a proceeding in court for collection of such tax may be begun without assessment, at any time.”[1] Whose intent?

            When Ms. Murrin received a notice of deficiency for tax years 1993-1999 in 2019, the decades of delay were justified because their tax preparer committed fraud for these tax years, according to the IRS. For reasons unknown, the parties stipulated that the tax preparer did indeed commit fraud, resulting in underpayment of taxes and associated accuracy penalties. The total amount was $78,382, but interest added another $250,000.

The Third Circuit in Murrin v. Commissioner upheld the Tax Court’s ruling that the tax preparer’s intent qualifies for these purposes. “First, the plain and ordinary meaning of the phrase ‘intent to evade tax’ reveals no taxpayer-only limitation.”[2] Although the tax liability is specific to a person, that specificity is not necessarily transmuted to the intent. The taxpayers are further defeated by the grammatical passive voice. This indicates that “Congress drafted § 6501(c)(1) by focusing on an event that occurs without respect to a specific actor, and therefore without respect to any specific actor’s intent or culpability.”[3] Murrin was particularly influenced by Bartenwerfer v. Buckley,where the Supreme Court explained in the context of bankruptcy law that “[p]assive voice pulls the actor off the stage.”[4] However, the 3rd Circuit refused to “determine the outer bounds of how an ‘intent to evade tax’ applies in every context.”[5]

The taxpayer argued that the most natural reading assigns the intent to the taxpayer whose tax is being evaded and whose return is false. This “argument is a fair one,” the 3rd Circuit conceded. “But the plainest and most straightforward reading of § 6501(c)(1) is that it simply requires an ‘intent to evade tax’ attached to a ‘false or fraudulent return,’ and whether a taxpayer, accountant, lawyer, or tax preparer evinced such intent is beside the point.”[6] The court did not explain why its reading is plainer than the taxpayer’s interpretation. However, the court bolstered its argument by observing that “Congress expressly used the term ‘taxpayer’ in § 6501(a) to define what return is at issue but declined to use the same qualifier in § 6501(c)(1).”[7] The difference in language yields a difference in meaning. The taxpayer’s appeals to other statutory provisions that create individualized responsibility backfired because they only served to prove that Congress is capable of limiting its language to the taxpayer. Contrary to another argument, “our interpretation of § 6501(c)(1) renders nothing superfluous in this statute.”[8]

            Together with the Supreme Court’s command that statutes of limitations must be strictly construed in favor of the IRS, the 3rd Circuit easily found in favor of the IRS despite expressions of sympathy for the taxpayer.[9] Nevertheless, the 3rd Circuit recognized that it created a circuit split with the Federal Circuit, noting that the Federal Circuit’s decision came before the Supreme Court’s grammar lesson in Bartenwerfer. As the 3rd Circuit implied, BASR Partnership v. United States did not discuss the passive voice.[10] However, the 3rd Circuit did not point out that BASR Partnership is weakened by three opinions in a three-judge panel. As the Tax Court explained when it considered Murrin v. Commissioner:

Laying out the scorecard: (1) the author of the majority opinion concluded that section 6501(c)(1) ‘suspends the three-year limitations period only when the IRS establishes that the taxpayer acted with the intent to evade tax,’ (2) the author of the concurring opinion reasoned that “it is the taxpayer (or possibly his authorized agent) who must have the requisite ‘intent to evade tax,’ and (3) the author of the dissenting opinion agreed with our holding in Allen.[11]

In any event, the IRS agreed with both sides in its history. In January 2001, it issued FSA 200104006, which limited the intent to that of the taxpayer. Like the taxpayer in Murrin,the IRS argued that the emphasis on fraud connotes the personal responsibility of the taxpayer. The IRS published FSA 200126019 six months later, completely changing its position. This becomes even more curious because both field service advisories were in response to the same fact pattern and were written by the same individual.

The Supreme Court rejected the taxpayer’s appeal of Murrin’s ruling, leaving the circuit split intact. However, the 9th Circuit has yet to opine in this matter, so Murrin is not necessarily binding on Californians. If you suffered from your tax preparer’s fraud, please contact (916) 822-8700 for assistance.

[1] § 6501(c)(1)(emphasis added).

[2] Murrin v. Commissioner, No. 24-2037, 2025 U.S. App. LEXIS 20972, at *5 (3d Cir. Aug. 18, 2025).

[3] Id. at *6(omitting internal quotation mark and brackets).

[4] Bartenwerfer v. Buckley, 598 U.S. 69, 75 (2023).

[5] Murrin v. Commissioner, No. 24-2037, 2025 U.S. App. LEXIS 20972, at *9 n.7 (3d Cir. Aug. 18, 2025).

[6] Id. at *7.

[7] Id. at *8.

[8] Id. at *8-9 (3d Cir. Aug. 18, 2025). The superfluous argument was not well explained, and the court stated that it did not understand it.

[9] “This Court long ago pronounced the standard: ‘Statutes of limitation sought to be applied to bar rights of the Government, must receive a strict construction in favor of the Government.’” Badaracco v. Commissioner, 464 U.S. 386, 391, 104 S. Ct. 756, 761 (1984).

[10] Basr P’ship v. United States, 795 F.3d 1338, 1356 (Fed. Cir. 2015).

[11] Murrin v. Commissioner (T.C. Memo. 2024-10)(omitting internal citations).

Hough Beck & Baird, Inc. timely filed its Employer’s Quarterly Federal Tax Return (Form 941) and paid $121,003 for the first quarter of 2021. Yet on June 21, 2021, the IRS refunded that amount plus $89 in interest. The taxpayer’s accountant called and was told that the refund was due to “COVID Employee Retention Credits,” which the business apparently did not apply for that period. By May 2023, the IRS demanded that the refund be refunded and made a supplemental assessment of $121,003 plus $12,582 in interest on July 17, 2023.[1]  Hough Beck & Baird, Inc. v. Commissioner ruled that the taxpayer must disgorge the amount because the IRS entered the original assessment as $0 instead of double-posting the payment.

“A tax, once correctly assessed and paid, is extinguished.”[2] Yet, the IRS may “make a supplemental assessment within three years after the return was filed,” and “then collect the tax by levy within ten years after a timely reassessment,” if “the original assessment is ‘imperfect or incomplete in any material respect.’”[3] Neither the Internal Revenue Code nor the Treasury Regulations defines “imperfect or incomplete” for these purposes. However, the Tax Court easily found that negating the entire tax liability made “the original assessment imperfect in a material respect.”[4] Although unusual, this fact pattern is not unique. Both the 7th Circuit and the 9th Circuit addressed substantially the same scenario and concluded that the IRS Commissioner could retract the erroneous refund.[5] The Tax Court found these cases “to be almost directly on point and highly persuasive,” and ruled against the taxpayer.[6] Nevertheless, an erroneous refund is a curious case of form prevailing against function with more nuance than this straightforward application implies.

Receiving a refund in error triggers a race against time.[7] The recipient is not entitled to the refund, but the IRS’s time to recover that refund is limited. The IRS has three tools to do so.[8] The first is a refund suit under § 7405 in a district court. That option’s statute of limitations is 2 years unless “it appears that any part of the refund was induced by fraud or misrepresentation of a material fact,” in which case the statute of limitations is 5 years.[9] The second is an administrative offset, withholding amounts otherwise due to the taxpayer from the federal government, such as payments relating to Social Security and tax credits.[10] This is bound by the same statute of limitations applicable to § 7405 lawsuits, except for refunds for both the same tax year and the same tax.[11] The third option is to treat the errant refund as a tax, a “deficiency,” ultimately allowing for extrajudicial levying to collect it (such as garnishing wages). “Section 6211(a) defines a deficiency with the formula: Deficiency = Tax Imposed – (Tax Reported + Prior Deficiency Assessments – Rebates).”[12] The IRS certainly prefers to treat erroneous refunds as deficiencies, both because it does not need to file suit in court and because it generally enjoys a longer statute of limitations, but such treatment is possible only with erroneous rebate refunds. “[S]ince nonrebate refunds do not fit within the definition of a deficiency provided by section 6211, the Commissioner is limited to a refund suit under section 7405 to recover those refunds.”[13] Therefore, the characterization of a refund as a rebate or a non-rebate can effectively determine whether the IRS can recover an erroneous refund through the operation of the statute of limitations.

The Internal Revenue Code “defines a rebate as a refund issued only ‘on the ground’ that the tax imposed should be lower than the tax reported.”[14] The cause of the error is irrelevant for this dichotomy.[15] Instead, a rebate requires “substantive recalculation of the tax imposed that shows the taxpayer owes less tax than the amount shown on the taxpayer’s return.”[16] Thus, simply “writing a refund check to the wrong person” is a non-rebate refund.[17] O’Bryant v. U.S. demonstrates these rules. There, the IRS mistakenly recorded the taxpayer as paying twice, resulting in the refund of the putatively duplicative payment. This was not a supplemental assessment case because the original assessment was correct. Furthermore, it was not a rebate because it did not substantively recalculate the tax liability. “When a taxpayer mails the IRS a check in the full amount of his assessed tax liability, and the IRS cashes it, the taxpayer’s liability is satisfied, and unless a new assessment is made later on, any erroneous, unsolicited refund that the IRS happens to send the taxpayer must be handled on its own terms, not under the rubric of the assessed liability.”[18]

Hough Beck & Baird, Inc. distinguished itself from O’Bryant by observing that in Hough Beck & Baird, Inc.,“the money petitioner received as a result of respondent’s mistaken assessment is the same money petitioner originally owed. Petitioner’s employment tax liability has not been extinguished and remains outstanding.”[19] Nevertheless, the difference is simply a label. Regardless of whether the error occurred because the assessment was entered as zero or the payment was entered twice, the economic result is still the same. However, the label can determine whether the taxpayer can keep the refund. If you received a refund from the IRS in error, please contact us at (916) 822-8700 for assistance.

[1] Although the IRS can charge interest on the illegitimate refund, it likely cannot charge a penalty for the failure to pay. In Brookhurst, Inc. v. U.S., the IRS did not challenge the district court’s judgment holding that the IRS cannot charge failure-to-pay penalties in these situations. Brookhurst, Inc. v. United States, 931 F.2d 554, 555 n.2 (9th Cir. 1991).

[2] Hough Beck & Baird v. Commissioner, No. 19128-24L, 2026 U.S. Tax Ct. LEXIS 1496, at *7 (T.C. July 8, 2026).

[3] Id.

[4] Id. at *9.

[5] United States v. Frontone, 383 F.3d 656 (7th Cir. 2004); Brookhurst, Inc. v. United States, 931 F.2d 554 (9th Cir. 1991).

[6] Hough Beck & Baird v. Commissioner, No. 19128-24L, 2026 U.S. Tax Ct. LEXIS 1496, at *10 (T.C. July 8, 2026).

[7] If the refund is a check, the statute of limitations begins to run when the check is cleared. United States v. Page, 106 F.4th 834 (9th Cir. 2024).   

[8] “[T]he IRS is not confined to § 7405 to collect erroneous refunds, but may use any method authorized by the Tax Code.” O’Bryant v. United States, 49 F.3d 340, 343 n.4 (7th Cir. 1995).

[9] IRC § 6532(b).

[10] IRM 21.4.5.15.

[11] PG&E v. United States, 417 F.3d 1375, 1380 (Fed. Cir. 2005); IRM 21.4.5.15(5).

[12] El v. Commissioner, No. 15597-23, 2026 Tax Ct. Memo LEXIS 17, at *5 (T.C. Feb. 10, 2026).

[13] El v. Commissioner, No. 15597-23, 2026 Tax Ct. Memo LEXIS 17, at *7-8 (T.C. Feb. 10, 2026).

[14] Id. At *10 n.3.

[15] “[T]he mechanism of the error does not resolve the issue.” Id. at *13(with reference to computer errors).

[16] Id. at *10-11(omitting internal quotation mark).

[17] United States v. Frontone, 383 F.3d 656, 661-62 (7th Cir. 2004).

[18] O’Bryant v. United States, 49 F.3d 340, 347 (7th Cir. 1995).

[19] Hough Beck & Baird v. Commissioner, No. 19128-24L, 2026 U.S. Tax Ct. LEXIS 1496, at *11 (T.C. July 8, 2026)(omitting internal citation).

If you dread calling the IRS, you can meet with them instead at one of their Taxpayer Assistance Centers (TACs) in more than 360 locations. However, the inspector general for the IRS, Treasury Inspector General for Tax Administration (TIGTA), recently warned that TACs may mislead taxpayers with incorrect information. Yet it is an accomplishment to progress that far. Scheduled appointments are recommended, but TACs accommodate visitors without an appointment as resources allow. Standard procedure requires TACs to close an appointment if the taxpayer is 15 minutes late to help taxpayers who walk in without an appointment. This was done only 4% of the time. Instead, TACs routinely kept those appointment times closed to other taxpayers. TIGTA made 91 unannounced visits to 82 TACs. Two visits were preempted due to sudden TAC closure, and 9 were prevented because the security guard refused them entry. For 17 visits, TIGTA was told to make an appointment. For 10 of these incidents, the TACs did not even give a phone number to make an appointment. Two of the 17 visitors were told that an appointment was needed 3 to 5 weeks in advance.

An appointment was available for all 17 visitors within an hour of arrival, but they were still turned away. TACs periodically issue satisfaction survey cards on certain days through statistical sampling, but they failed to do so 86% of the time. Of the visits in which the inspectors received full assistance, the TACs were incorrect nearly half the time (46%). The report did not reveal the full details of this assessment, but TIGTA asked three general commonplace questions.

TACs were particularly deficient in their answers regarding injured spouse relief. Unfortunately, information from a Taxpayer Assistance Center must be verified. To double-check the guidance you received from the IRS, please contact (916) 822-8700 for assistance.

The IRS has administered “First Time Abate” since 2001.[1] This is an administrative waiver of certain penalties if there is at least three years of prior tax compliance. However, the taxpayer (or their representative) needed to request its application. Now, the IRS has made First Time Abate automatic. Effective beginning with the 2025 tax year and the 2026 quarterly returns (so a Form 941 for a quarter in 2025 would not apply), the newly renamed “Automatic Exemption from Penalty” will operate under the same rules as First Time Abate, except that a penalty eligible for automatic exemption would simply not be assessed at all, and without the taxpayer’s intervention.

The waiver is available for individual tax returns, partnership tax returns, S corporation tax returns, C corporation tax returns, and payroll tax returns. To qualify, the taxpayer must have timely filed the return for the prior 3 tax years without a penalty. If so, the failure to file, failure to pay, and the failure to deposit penalty will be waived, as applicable, regardless of penalty amounts. Although the waiver should occur automatically, the IRS makes mistakes and might not always do so. As seen, the Automatic Exemption from Penalty (AEP) is limited to one waiver for every three years. In contrast, a waiver for reasonable cause (generally for extenuating circumstances such as illness) can be made any number of times. So, if both the AEP and the reasonable cause waiver apply, it is better to preserve the AEP and use the reasonable cause waiver instead (which is not automatic). Reasonable cause can generally be used as a defense to far more forms than AEP can as well. AEP notably does not include information returns, regardless of their obscurity. If you received a penalty but had reasonable cause, please contact (916) 822-8700 for assistance.

[1] IRM 20.1.1.3.3.2.1.

The FTB issues its own equivalent of IRS Revenue Rulings, known as Legal Rulings. Unlike Revenue Rulings, Legal Rulings are rare, with only four Legal Rulings since 2022, including the latest one issued on July 7, 2026, Legal Ruling 2026-01.

A trust is taxable by the FTB if it has a resident fiduciary, California-source income, or a resident noncontingent beneficiary. Legal Ruling 2026-01 discusses when a resident is a contingent beneficiary. The regulations provide that “[a] noncontingent beneficiary is one whose interest is not subject to a condition precedent.”[1] The regulations do not define “condition precedent” for these purposes, but the FTB supplied a definition derived from the Bouvier Law Dictionary: “An event or condition that must occur before the ripening of an interest, right, or claim. If the event or condition does not occur, the interest does not vest.” In turn, the FTC defines “vested” from the same dictionary as: “Having become an unconditional and immediate interest or right.”

It would appear that a beneficiary with an interest of less than an unconditional and immediate right to trust income or corpus is a contingent beneficiary. Yet the Legal Ruling attempted to counter that conclusion, asserting that complete trustee discretion results in a contingency and that “[i]n each case, the trust document should be reviewed to determine any limitations on the trustee’s discretion to accumulate income rather than to distribute it to the beneficiary.” This comment was spurred by the Supreme Court’s 2019 narrow ruling in N.C. Dep’t of Revenue v. Kimberley Rice Kaestner 1992 Family Trust that “the presence of in-state beneficiaries alone does not empower a State to tax trust income that has not been distributed to the beneficiaries where the beneficiaries have no right to demand that income and are uncertain ever to receive it.” The three situations reviewed in this Legal Ruling all had a trustee with complete discretion. Consequently, the result was the same regardless of whether there was a potential right to either income or corpus. The contingent beneficiary becomes a noncontingent beneficiary, and therefore taxed, only on the amount actually distributed to them and not on the undistributed trust income or corpus.

Legal Ruling 2026-01’s conclusions seem unremarkable in a comparatively settled area of tax law. Both its point that “[w]here a trustee has absolute discretion to allocate net trust income to the beneficiary, the beneficiary has a contingent interest in the distribution,” and its emphasis on the trustee’s limitations are directly from a prior case, Steuer v. Franchise Tax Board.[2] Legal Ruling 2026-01 is substantially similar, if not fully the same, as TAM 2006-0002, which Steuer drew upon in its opinion. The purpose of Legal Ruling 2026-01 appears to be to restate TAM 2006-002 as a Legal Ruling, because a Superior Court accused the FTB of generating “underground” regulations through Technical Advice Memorandums (TAMs).[3] Seemingly in response, the FTB omitted all TAMs from public view on its website.

Regardless of the reasons for Legal Ruling 2026-01’s issuance, the FTB’s ready reliance on secondary sources for definitions in its analysis undermined the ruling’s implicit message. Instead of a contingent beneficiary primarily occurring only when the trustee has unfettered discretion (which was not explicitly stated), the FTB seemingly and unwittingly provided the premises for the syllogism that a beneficiary is a contingent one whenever the beneficiary lacks limits. Legal Ruling 2026-01 instructs the reader to examine the trustee’s powers when the definitions it endorsed shift the analysis from the trustee’s limits to the beneficiary’s limits. A beneficiary is noncontingent because they have an absolute right to receive the distribution, not because the trustee has absolute power to make the distribution.

[1][1] 18 CCR § 17742(b).

[2] “[W]e review the trust document to determine whether there are any limitations on a trustee’s discretion to distribute income to a beneficiary.” Steuer v. Franchise Tax Bd., 51 Cal. App. 5th 417, 431-32 (2020).

[3] American Catalog Mailers Association v. Franchise Tax Board, San Francisco Superior Court No. CGC-22-601363 (2023).

The IRS normally imposes late filing and late payment penalties. However, the Court of Federal Claims held that tax returns and payments that would ordinarily be due from January 20, 2020, to July 10, 2023, were postponed to July 11, 2023, by operation of 7508A of the Internal Revenue Code. This applies to income taxes, gift taxes, estate taxes, excise taxes, and employment taxes, together with associated returns. According to the National Taxpayer Advocate, this means that the IRS unlawfully imposed penalties on tens of millions of taxpayers during this period. For example, if you paid taxes owed for the 2020 tax year on July 10, 2023, instead of April 15, 2021, the IRS probably assessed a penalty against you. That penalty would be unlawful. However, these penalties will not be automatically refunded. Instead, Form 843 must be filed by July 10, 2026, to claim that amount plus interest compounded daily. This is a new development that most IRS employees are likely unaware of and may dispute. Consequently, a qualified tax practitioner is needed to properly file Form 843 and explain the legal position to the IRS. If you are interested in filing such a refund claim, please contact (916) 822-8700.

On September 19, 2025, President Trump imposed a $100,000 fee for H-1B visa applications. Twenty states filed suit in California v. Mullin,and the U.S. District Court, District of Massachusetts, ruled in their favor on June 8, 2026. The H-1B program was created in 1990 and “allows a U.S. employer to petition the government to hire a nonimmigrant worker in a specialty occupation for a maximum duration of six years.”[1] There is a general limit of 85,000 H-1B visas per year, but “the cap does not apply to (1) an institution of higher education or a related or affiliated nonprofit entity, or (2) a nonprofit research organization or governmental research organization,” which also enjoy other benefits such as the ability to bypass the H-1B lottery.[2]

The administration relied on three provisions of the Immigration and Nationality Act of 1952 (INA) for the fee increase. Section 212(f) of the INA provides that the President may “suspend the entry of all aliens or any class of aliens” as well as impose “any restrictions he may deem to be appropriate.”[3]  Furthermore, Section 215(a) of the INA declares: “Unless otherwise ordered by the President, it shall be unlawful—for any alien to depart from or enter or attempt to depart from or enter the United States except under such reasonable rules, regulations, and orders, and subject to such limitations and exceptions as the President may prescribe.”[4] The President may also set fees “at a level that will ensure recovery of the full costs of providing all such services” regarding visas.[5] Nevertheless, it would appear that the government expended most of its energy in this case arguing against the possibility of judicial review for the fee increase.

Judicial Review

Generally, “the federal courts cannot review an executive officer’s denial of a visa,” according to a judicial rule known as “the doctrine of consular nonreviewability.”[6] Contrary to the federal government’s assertions, this is inapplicable here. “Here, Plaintiffs do not seek retrospective review of an executive officer’s decision to exclude a noncitizen but rather advance a forward-looking challenge regarding the lawfulness of the Policy carrying out the Proclamation.”[7]

“To act ultra vires a government official is either acting in a way that is impermissible under the Constitution or acting outside of the confines of his statutory authority.”[8] The Administrative Procedures Act (APA) is the primary vehicle for challenges to the federal government. Yet “even after the passage of the APA, some residuum of power remains with the district court to review agency action that is ultra vires.”[9] Yet to the administration, “[i]t is doubtful that ultra vires review is available to challenge presidential actions at all.”[10] The court conceded that it might lack the authority to enjoin the President, but it certainly can “enjoin the officers who attempt to enforce the President’s directive.”[11]

Judicial review of the President is either constitutional or statutory, and not “every action by the President, or by another executive official, in excess of his statutory authority is ipso facto in violation of the Constitution.”[12] Where the alleged violation is simply of the statute without any other constitutional concerns, any judicial review is statutory in nature. Sometimes, that characterization precludes judicial review. When a statute “commits decisionmaking to the discretion of the President, judicial review of the President’s decision is not available.”[13] Here, however, “Plaintiffs do not simply claim that the Executive Branch failed to comply with the terms of the INA. Their allegations implicate weighty constitutional concerns regarding the balance of power between the executive and legislative branches.”[14] The government’s repetitive assertions that the fee increase was authorized through Article II of the Constitution fortified the court’s conclusion. Nevertheless, an ultra vires review will not lie “if a statutory review scheme provides aggrieved persons with a meaningful and adequate opportunity for judicial review.”[15] The court suggested that would preclude ultra vires review here, due to the APA, but the government failed to raise that argument and therefore waived it.

APA jurisprudence is in a curious predicament. It applies to final agency actions, yet it does not apply to the President, according to the Supreme Court. “At what point does an agency’s implementation of a presidential directive amount to an exercise of the President’s power (which is unreviewable under the APA) rather than an exercise of agency action (which is subject to APA review)?”[16] The court did not cite any appellate cases to answer this question. However, there have been a string of district court cases relying on a law review article by Justice Kagan written nine years before she became a Supreme Court Justice wherein she reasoned that “[w]hen the challenge is to an action delegated to an agency head but directed by the President,” the President’s actions can be challenged as an agency’s actions.[17] This applied here, and the court found that there was final agency action for this matter.

Ruling on the Merits

The court moved on to the merits, beginning with whether the fee increase usurped the congressional taxing power. A monetary exaction is a penalty if it is a “punishment for an unlawful act or omission.”[18] There must be a negative legal consequence for the conduct incurring the payment beyond the actual payment. Otherwise, it is a tax for constitutional purposes. Here, “[h]iring workers pursuant to the H-1B program is plainly lawful,” and therefore the fee is a tax.[19] The government averred that the fee is not a tax because it was not collected by the IRS, and because the fee (somehow) does not increase total revenue. Both positions were wholly unsupported. Furthermore, the administration offered the “mere ipse dixit” that the fee is “a regulatory payment” and therefore “not the same as a tax.”[20] No authority was proffered for this proclamation, and the court found plenty against it. Claims that the President has the independent constitutional power to condition immigration on fees of any amount also appeared to discredit the government’s position.

The court easily ruled that the “restrictions” permitted by Section 212(f) do not encompass taxes, just as that term (and many synonyms) did not permit tariffs under the International Emergency Economic Powers Act, as Learning Resources determined. A statute delegating the power to tax must be explicit, which also disqualified Section 215(a)’s “limitations.” This was a straightforward application of Learning Resources. However, the court noted that “Defendants’ contrary interpretation regarding the scope of the President’s power under INA § 212(f) offers no perceivable limits. Their position that § 212(f) allows the President to impose any tax so long as it connects to a ‘restriction’ on the ‘entry of aliens’ deviates from the text of the statute. Congress authorized the President to ‘impose on the entry of aliens any restrictions he may deem to be appropriate’ when he finds that the entry ‘would be detrimental to the interests of the United States.’”[21] The court reserved its analysis of the statutory provision that does address fees for the APA portion of its opinion.

The court stressed that 8 U.S.C. § 1356(m)’s fees are limited to administrative cost recovery. Helpfully to the court, the government conceded that the disputed fees do not recover costs. Thus, the court found that the government acted in excess of its statutory authority, one of the grounds for setting aside a final agency action under the APA. The government similarly admitted that there was not any attempt to follow the notice-and-comment procedures. Yet it claimed that it was unnecessary because the executive order bypassed that requirement. Since the executive order was ultra vires, it did not have the force of law, the agency’s actions did. These required compliance with notice-and-comment procedures. The foreign-affairs exception to this requirement was inapplicable because the government did “not offered any evidence of the undesirable international consequences that would have flowed from complying with the APA’s procedural requirements. Nor have they explained any need for the immediate implementation of the $100,000 payment requirement.”[22] Similarly, the government did not articulate any emergency for the purposes of the good-cause exception. Any purported emergency would have been scrutinized by the court and applicable only when publishing that explanation alongside the rule. The government did not do so. APA jurisprudence focuses on whether there was adequate consideration of the costs and benefits in order for a rule to avoid the stigma of being arbitrary and capricious. Again, the government confessed that there was not any consideration, but it did not need to because the directive was a lawful order. Yet the court held that the order was unlawful and “the mere fact that Defendants followed a presidential directive does not grant them free rein to ignore the requirements of the APA.”[23]

Conclusion

            The court vacated the fee increase for the whole nation, finding that Trump v. CASA does not apply to the APA. California v. Mullin is a template for how a government fee can be challenged and how it cannot be defended. It further confirmed that even if there were delegated authority, an executive order does not function as a shortcut excluding the APA.

[1] California v. Mullin, No. 25-13829-LTS, 2026 U.S. Dist. LEXIS 126030, at *8 (D. Mass. June 8, 2026).

[2] California v. Mullin, No. 25-13829-LTS, 2026 U.S. Dist. LEXIS 126030, at *8-9 (D. Mass. June 8, 2026)(omitting internal quotation marks).

[3] In full:

Whenever the President finds that the entry of any aliens or of any class of aliens into the United States would be detrimental to the interests of the United States, he may by proclamation, and for such period as he shall deem necessary, suspend the entry of all aliens or any class of aliens as immigrants or nonimmigrants, or impose on the entry of aliens any restrictions he may deem to be appropriate. 8 U.S.C. § 1182(f).

[4] 8 U.S.C. § 1185(a)(1).

[5] In full:

Notwithstanding any other provisions of law, all adjudication fees as are designated by the Attorney General in regulations shall be deposited as offsetting receipts into a separate account entitled “Immigration Examinations Fee Account” in the Treasury of the United States, whether collected directly by the Attorney General or through clerks of courts: Provided, however, That all fees received by the Attorney General from applicants residing in the Virgin Islands of the United States, and in Guam, under this subsection shall be paid over to the treasury of the Virgin Islands and to the treasury of Guam: Provided further, That fees for providing adjudication and naturalization services may be set at a level that will ensure recovery of the full costs of providing all such services, including the costs of similar services provided without charge to asylum applicants or other immigrants. Such fees may also be set at a level that will recover any additional costs associated with the administration of the fees collected.

8 U.S.C. § 1356(m).

[6] California v. Mullin, No. 25-13829-LTS, 2026 U.S. Dist. LEXIS 126030, at *20 (D. Mass. June 8, 2026)(omitting internal quotation marks).

[7] California v. Mullin, No. 25-13829-LTS, 2026 U.S. Dist. LEXIS 126030, at *22 (D. Mass. June 8, 2026).

[8] California v. Mullin, No. 25-13829-LTS, 2026 U.S. Dist. LEXIS 126030, at *23 (D. Mass. June 8, 2026).

[9] California v. Mullin, No. 25-13829-LTS, 2026 U.S. Dist. LEXIS 126030, at *23 (D. Mass. June 8, 2026)(quoting R.I. Dep’t of Env’t Mgmt. v. United States, 304 F.3d 31, 42 (1st Cir. 2002)).

[10] California v. Mullin, No. 25-13829-LTS, 2026 U.S. Dist. LEXIS 126030, at *23 (D. Mass. June 8, 2026)

[11] California v. Mullin, No. 25-13829-LTS, 2026 U.S. Dist. LEXIS 126030, at *24 (D. Mass. June 8, 2026).

[12] California v. Mullin, No. 25-13829-LTS, 2026 U.S. Dist. LEXIS 126030, at *25 (D. Mass. June 8, 2026)(quoting Dalton v. Specter, 511 U.S. 462, 472 (1994)).

[13] California v. Mullin, No. 25-13829-LTS, 2026 U.S. Dist. LEXIS 126030, at *27 (D. Mass. June 8, 2026)(quoting Dalton v. Specter, 511 U.S. 462, 477 (1994)).

[14] California v. Mullin, No. 25-13829-LTS, 2026 U.S. Dist. LEXIS 126030, at *27 (D. Mass. June 8, 2026).

[15] California v. Mullin, No. 25-13829-LTS, 2026 U.S. Dist. LEXIS 126030, at *29 fn.6 (D. Mass. June 8, 2026)(quoting NRC v. Texas, 605 U.S. 665, 681 (2025)).

[16] California v. Mullin, 2026 U.S. Dist. LEXIS 126030, *43.

[17] California v. Mullin, No. 25-13829-LTS, 2026 U.S. Dist. LEXIS 126030, at *44 (D. Mass. June 8, 2026)(quoting Elena Kagan, Presidential Administration, 114 Harv. L. Rev. 2245, 2351 (2001).

[18] California v. Mullin, No. 25-13829-LTS, 2026 U.S. Dist. LEXIS 126030, at *31 (D. Mass. June 8, 2026)(quoting Nat’l Fed’n of Indep. Bus. v. Sebelius, 567 U.S. 519, 567 (2012)).

[19] California v. Mullin, No. 25-13829-LTS, 2026 U.S. Dist. LEXIS 126030, at *31 (D. Mass. June 8, 2026).

[20] California v. Mullin, 2026 U.S. Dist. LEXIS 126030, *34.

[21] California v. Mullin, No. 25-13829-LTS, 2026 U.S. Dist. LEXIS 126030, at *42 fn.9 (D. Mass. June 8, 2026).

[22] California v. Mullin, 2026 U.S. Dist. LEXIS 126030, *51(emphasis in original).

[23] California v. Mullin, 2026 U.S. Dist. LEXIS 126030, *55-56.