Cannot negate redstone torch placed on observer

This is because Observers output a pulse that's too short for the Redstone Torch to turn off, as such this is working as intended.

No, it is because observers, like glass and glowstone, are not opaque blocks so redstone current does not pass through them.

Actually, Oskar's response seems to be more correct because if you place a torch on a redstone block, it will unpower and if you place a redstone on the output side of an observer it will turn on.

Anyhow, this is working as intended.