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Been doing a bit of troubleshooting.
It has nothing to do with the XOOPS version since I tried changing an avatar on a different server running 2.0.13.2 and there was no problem.
So, that begins to sound like a server permissions problem.
However, XOOPS saves system avatars (as opposed to user-uploaded avatars) in the database. There is a reference in the mySql database, however, to files with the prefix "SAVTxxxxx" which XOOPS saves to the uploads directory. Custom avatars are saved with names like "CAxxx" in the same directory.
The problem is, permissions are all fine in the directories and I can't figure out why system avatars are usable in one installation but not the other.
It has to be a server issue somehow.