1 BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION 2 450 N STREET 3 SACRAMENTO, CALIFORNIA 4 5 6 7 8 REPORTER'S TRANSCRIPT 9 MAY 28, 2015 10 11 12 13 14 15 FINAL ACTIONS 16 (CASES HEARD MAY 27, 2015) 17 18 19 20 21 22 23 24 25 26 27 REPORTED BY: Kathleen Skidgel 28 CSR NO. 9039 1 1 P R E S E N T 2 3 For the Board Jerome E. Horton of Equalization: Chairman 4 5 Sen. George Runner (Ret.) Vice Chairman 6 7 Fiona Ma, CPA Member 8 9 Diane L. Harkey Member 10 11 Yvette Stowers Appearing for Betty T. 12 Yee, State Controller (per Government Code 13 Section 7.9) 14 Joann Richmond 15 Chief Board Proceedings 16 Division 17 For Staff: Randy Ferris 18 Chief Counsel Legal Department 19 Anthony Epolite 20 Tax Counsel IV Legal Department 21 Grant Thompson 22 Tax Counsel IV Legal Department 23 Lou Ambrose 24 Tax Counsel IV Legal Department 25 26 ---oOo--- 27 28 2 1 450 N STREET 2 SACRAMENTO, CALIFORNIA 3 MAY 28, 2015 4 ---oOo--- 5 MS. RICHMOND: Our next matter are our 6 final actions. We have items that were taken up 7 from yesterday. 8 So our first item is B1 Patrick Missud. 9 ---oOo--- 10 PATRICK MISSUD 11 NO. 845292 12 ---oOo--- 13 MS. HARKEY: Move to sustain the FB -- 14 FTB. 15 MS. STOWERS: Second. 16 MR. HORTON: Member Harkey moves to sustain 17 FTB. 18 MS. MA: Can we take a roll call? 19 MR. HORTON: Objection -- roll call request 20 by Member Ma. 21 MS. RICHMOND: Mr. Horton. 22 MR. RUNNER: Can we -- can we have a 23 discussion on that? If there is a concern, I'd like 24 to hear the thought. 25 MS. STOWERS: Okay. We have a sec -- I did 26 second it. 27 MS. MA: Yeah, you want to -- 28 MR. HORTON: There's a motion. Second. 3 1 It's on the floor. 2 MS. HARKEY: Yeah, so now it's on the 3 floor. 4 MR. HORTON: Let's discuss it. 5 MR. RUNNER: Yeah. 6 MR. HORTON: Member Ma. 7 MS. MA: So, number one, the decision by 8 the FTB was based on an estimate of an attorney. He 9 clearly was not working. He admitted he was not 10 working. He received one 1099 from an insurance 11 company; he said he paid out most of the proceeds to 12 the client and that's all the income he had. 13 He also listed that he was married, he has 14 a wife. We didn't have a chance to ask whether the 15 wife has been filing tax returns or joint tax 16 returns. But clearly, if they're married, I would 17 assume that the Franchise Tax Board would also be 18 looking at her taxes as well. That was one question 19 that came up after the case. 20 So I don't believe that the taxpayer 21 actually made $85,000 and should not be taxed 22 according to an estimate. 23 MR. RUNNER: Can -- okay. 24 MS. STOWERS: Just kind of respond to that. 25 Yes, they did estimate his income based on 26 having a valid license. It was a valid enforcement 27 and it's something that they do. They will send out 28 a letter to taxpayers who have not filed if they 4 1 have information that show that they may have 2 income. And they generally ask them, you know, "Did 3 you have a filing requirement? If so, please file. 4 If not, explain why." 5 And throughout that process, he could have 6 said, "No, I didn't have any income," and that he 7 could provide backup, "I survived on my wife." He 8 didn't do that. He didn't say anything to me until 9 the hearing that he admitted that he did have the 10 license and he admitted that he did work. 11 As far as the wife, procedure-wise, if they 12 had filed a joint return, FTB would definitely know 13 that and they wouldn't be pursuing him. If she has 14 filed, most likely she's filed married filing 15 separate. Or if she has not filed and FTB, again, 16 knows that she has a license, they'll be sending a 17 separate notice to her. Because when they do file 18 enforcements, they do not assume that they want to 19 file jointly. They just do each individual 20 separately. And then when the individuals do file a 21 tax return, they would make the adjustments 22 accordingly. 23 So, for me, he didn't provide any evidence 24 to show that he did not earn the income. He made an 25 assertion, but he didn't back it up. And he could 26 have done that throughout the process. 27 So that's why I second the motion. 28 MR. RUNNER: Can I -- 5 1 MR. HORTON: Mr. Runner. 2 MR. RUNNER: Question -- question to -- to 3 Appeals. 4 MR. HORTON: Appeals. 5 MR. RUNNER: Again, I -- I am -- I am 6 concerned about the fact the assignment -- the 7 amount of money that was assigned. 8 You know, I do believe that there was 9 probably income made; in fact, he actually said 10 there was income made during that year, and he still 11 hasn't filed. 12 But do -- do we have the ability to -- to 13 reduce the assumption of income that was made? 14 MR. EPOLITE: The -- the estimated amount? 15 MR. RUNNER: Yeah, the estimated income? 16 MR. EPOLITE: Yes, you do. I mean, you 17 would have to find some basis. The FTB, under the 18 authority of law -- 19 MR. RUNNER: The basis could be his 20 testimony? 21 MS. HARKEY: Or his 1099. 22 MR. EPOLITE: Yes. 23 MR. RUNNER: Okay. Because that's what 24 troubles me. What troubles me is the -- is -- is -- 25 MS. HARKEY: The amount. 26 MR. RUNNER: Again, I -- I'm concerned 27 about, again, the taxpayer still not filing. But I 28 am concerned about the fact that we're about ready 6 1 to go final here on him and I still think I have a 2 question in regards to believability, if he actually 3 earned that amount of money. And I get why they do 4 that, and I guess I don't necessarily oppose why 5 they do that. It's just unusual then to have a 6 taxpayer who then doesn't say, "Woops. Time out. I 7 didn't earn that much." 8 And why he didn't do that, I don't know. 9 But at the same time, I'm not convinced that he 10 earned that kind of income in that particular 11 year. 12 MS. HARKEY: Would you like -- 13 MR. RUNNER: Do we -- do we have another 14 thought here -- 15 MS. HARKEY: -- an alternate motion? 16 MR. RUNNER: -- coming? 17 MR. EPOLITE: Well, you still -- the burden 18 still remains with appellant to establish what 19 his -- 20 MR. RUNNER: What his income -- 21 MR. EPOLITE: -- income was, to file his 22 own return, provide evidence to the contrary of a 23 different amount. And he failed to meet that burden 24 because he had the opportunity here yesterday to do 25 that and he didn't take advantage of that 26 opportunity. 27 In the absence of such, the only thing the 28 Board has in front of them to consider is the 7 1 estimate provided by the Franchise Tax Board. 2 MR. RUNNER: But we could still choose to 3 not -- we could -- I mean, again, an estimate's an 4 estimate. 5 MR. EPOLITE: Right. 6 MR. RUNNER: So I mean just because they 7 came up with an estimate, that doesn't keep us from 8 saying, "Yeah, you do owe the tax, but you owe the 9 tax on a smaller amount"? 10 MR. THOMPSON: Grant Thompson for the 11 Appeals Division. 12 If I might add, the first step of inquiry 13 would be is the FTB's assessment -- does it have a 14 rational basis? If you find that it has a rational 15 basis, which is a fairly minimal standard, then you 16 would sustain, unless he carries his burden to show 17 error. 18 As an example of what constitutes a 19 rational basis, average income statistics over the 20 entire United States has been used to establish a 21 rational basis. 22 So we would view as estimating income based 23 on a license as a rational basis even if one might 24 reasonably estimate a different amount. 25 MR. RUNNER: Okay. 26 MS. MA: Um -- 27 MR. HORTON: The -- the challenge I would 28 have, Members, is that -- I mean the simplicity of 8 1 refuting this is -- is -- is relatively easy. I 2 mean if the taxpayer wants to file the return, that 3 would certainly refute it, could provide any 4 contemporaneous documents necessary. 5 This has been going on since 2012. I'm 6 sure we -- you know, I mean as the Appeals has 7 indicated, we could, you know, arbitrarily, without 8 any contemporaneous evidence or any support of 9 verbal statements, arbitrarily come up with, but I 10 just can't find the basis. 11 I mean I concur that -- with the census -- 12 consensus here, but I just find it difficult that 13 it's our responsibility to provide evidence on 14 behalf of the taxpayer or make a conclusion without 15 them even arguing that. You know, that -- but, you 16 know. 17 MR. RUNNER: I'm going to try to be careful 18 about how I say this, but I'm actually concerned 19 about the state of the mind of the taxpayer in terms 20 of that. So that's part of my concern in regards to 21 whether or not he -- 22 MR. HORTON: I would -- I would -- yeah. 23 MS. STOWERS: Yeah. 24 MR. HORTON: I don't know if we could do 25 that either, but -- 26 MR. RUNNER: Well, no. I'm just saying why 27 I think that maybe that income couldn't be earned. 28 MS. MA: Well, I also got -- I don't know 9 1 if everyone -- 2 MR. HORTON: Oh. 3 MS. MA: -- got this (indicating). He 4 actually did fill out some document right before -- 5 MR. HORTON: The hearing? 6 MS. MA: -- the hearing, and he signed it, 7 and he said he supported himself by drawing on his 8 retirement funds. You know, total amount of wages 9 negative. Interest and dividends, zero. Income you 10 earned for services performed, question mark. Total 11 all other income, negative, very negative. Do you 12 have a final requirement, no. 13 I mean he filled out something. I'm 14 just -- 15 MS. HARKEY: He's saying then that he did 16 not file because he didn't have a requirement? 17 MS. MA: He didn't have to file because it 18 was lower than the -- 19 MS. STOWERS: Did he give that to the 20 Franchise Tax Board? 21 MS. MA: I mean we got it by email -- 22 didn't we -- in the office. 23 MR. HORTON: Mm-hmm. 24 MR. RUNNER: Well, he hasn't filed 25 anything, did he? 26 MR. HORTON: Maybe, Members -- 27 MS. HARKEY: He didn't have to file. 28 MR. HORTON: -- we could ask the Franchise 10 1 Tax Board to take this under consideration, move a 2 30/30/30, let it come back and let them take it 3 under consideration. 4 I'm always very, very cautious about 5 micromanaging the process and conducting an audit 6 from this position, as much as I enjoyed doing that 7 for 23 years. But -- but Member Ma brings up and 8 excellent point. I have not seen this. Let the 9 experts take a look at it and see what they have to 10 say about it, I don't know. 11 MR. EPOLITE: Well, I would note to the 12 Members that based on the two 1099s that were issued 13 to appellant that totaled almost $13,000, that it 14 exceeded the adjusted gross income threshold for the 15 year, requiring him to file a return. 16 MR. HORTON: Oh, okay. 17 MR. RUNNER: And his 1099s were $13,000? 18 MR. EPOLITE: 12,000 for California State 19 Automobile Association and 957 from First Clearing 20 LLC. And the adjusted gross income requirement was 21 12,352. 22 MS. HARKEY: Okay. Is it -- isn't it 23 adjusted gross income net of expenses though? Isn't 24 that -- 25 MR. EPOLITE: No, that's prior to. 26 MS. HARKEY: Prior to? 27 MS. MA: He also said he paid out about -- 28 MS. HARKEY: Yeah, it's gross. I'm sorry. 11 1 Gross income. I'm sorry, I wasn't -- 2 MR. RUNNER: So a rational basis could be 3 based upon his 1099s? 4 MR. EPOLITE: Absolutely. 5 MR. RUNNER: I mean I would actually be 6 okay dealing with his -- with his -- with his 7 adjusting -- I mean, I think he needs to file. I 8 don't want to give -- I think he's got a 9 responsibility there. But at the same time I'm 10 concerned about the estimate. 11 I'm actually probably okay with just going 12 with the 1099 income as a -- an amount of income for 13 that particular year and then adjusting the 14 liability to that. 15 MS. HARKEY: Okay. 16 MR. HORTON: Yeah, I would probably be a no 17 vote, only because a 30/30/30 would allow him to at 18 least file the return. I mean I hate to set a -- I 19 mean I'm okay with the amount, but he can file 20 whatever he wants to file and get close to somewhere 21 in the middle. 22 This rational basis determination allows 23 him flexibility, as well as us some flexibility. 24 Even if he came in, split it 50/50 or something, but 25 file a return. 26 But, you know -- 27 MR. RUNNER: Let me do -- let me -- just to 28 get us at least in a direction, let me make a 12 1 substitute motion to adjust the, um -- the -- what 2 do we say -- adjust the earnings to the amount of 3 the 1099s issued in that year? 4 MR. EPOLITE: Okay. 5 MR. RUNNER: Does that make sense? That -- 6 as a rational approach? 7 MR. THOMPSON: Just to clarify, it's not -- 8 the question is whether, in the first instance, 9 whether FTB's approach is rational. 10 MR. RUNNER: Okay. 11 MR. THOMPSON: It's not that any rational 12 approach -- 13 MR. RUNNER: Okay. 14 MR. THOMPSON: -- is okay. 15 So the first finding legally the Board 16 would make is that FTB's proposed assessment is 17 irrational. 18 MR. RUNNER: Okay. 19 MR. THOMPSON: All right. Now if that's 20 the finding, then you can substitute your own 21 evidentiary determination. 22 MR. RUNNER: Okay. Okay. So, I mean, I 23 guess in making that, we would be determining that 24 their -- that their -- that their estimate was not 25 rational, by substituting something else. 26 MR. THOMPSON: If that's your finding. 27 MR. RUNNER: Yeah. That would be my 28 motion, as substitute. 13 1 MR. HORTON: Okay. Let me see if I can -- 2 MR. RUNNER: Well, if there's not a second, 3 you don't have to worry about it. 4 MR. HORTON: Oh, yeah. 5 MS. HARKEY: Fiona, it's all up to you. 6 The ball's in your court. 7 MR. HORTON: Further discussion, Members? 8 MS. HARKEY: We have a motion and we have a 9 substitute motion. 10 MR. HORTON: We're -- just for the record, 11 we're back on the original motion. 12 MR. RUNNER: Mm-hmm. 13 MS. HARKEY: I -- 14 MR. HORTON: And the request to call for 15 the roll. Ms. -- 16 MS. HARKEY: I would -- I would like to -- 17 I'm sorry. I'm going to -- I'm going to withdraw my 18 first motion, and I'm going to suggest that I -- I 19 move to sustain the FTB but not impose the 20 first-time frivolous appeal penalty of 750. 21 MS. STOWERS: Well, that's still a second 22 for me then. 23 MR. HORTON: Okay. 24 MS. HARKEY: Okay. 25 MR. HORTON: There's a motion -- there's a 26 motion to sustain the FTB, not to impose a 27 first-time frivolous penalty. 28 Objection, Members? 14 1 MS. MA: I'd like a roll call. 2 MR. HORTON: Ms. Richmond, please call the 3 roll. 4 MS. RICHMOND: Mr. Horton. 5 MR. HORTON: Aye. 6 MS. RICHMOND: Ms. Harkey. 7 MS. HARKEY: Aye. 8 MS. RICHMOND: Mr. Runner. 9 MR. RUNNER: No. 10 MS. RICHMOND: Ms. Ma. 11 MS. MA: No. 12 MS. RICHMOND: Ms. Stowers. 13 MS. STOWERS: Aye. 14 MS. RICHMOND: Motion carries. 15 ---oOo--- 16 17 18 19 20 21 22 23 24 25 26 27 28 15 1 MS. RICHMOND: Our next item is B2 ConAgra 2 Foods, Inc. 3 ---oOo--- 4 CONAGRA FOODS, INC. 5 NOS. 597512, 785058, 799162 6 ---oOo--- 7 MS. HARKEY: Move to grant the petition. 8 MR. HORTON: Member Harkey -- I mean Member 9 Ma. 10 MR. RUNNER: Fast on the mic. 11 MS. HARKEY: I'm fast. 12 MS. MA: I'd like to make a motion to split 13 the two issues between Swift and Pilgrim; to grant 14 the Pilgrim Pride stock transaction having to do 15 with the chicken sale, but then to deny the Swift 16 transaction for the fresh beef and pork. 17 MS. STOWERS: Second. 18 MR. HORTON: Member Ma moves to sustain the 19 FTB as it relates to the Pilgrim case and to deny 20 FTB as it relates to the, uh -- what was the name of 21 the other one? 22 MS. STOWERS: But you got it reverse. 23 MS. MA: Reverse. 24 MR. HORTON: Reverse it. 25 MS. MA: To grant Pilgrim. 26 MR. HORTON: To grant Pilgrim and deny -- 27 MS. MA: And deny Swift. 28 MR. HORTON: -- Swift. Yeah, that's right. 16 1 MS. HARKEY: Can we split the voting? 2 MR. HORTON: Second by Member Stowers. 3 Discussion? 4 Member Harkey. 5 MS. HARKEY: I would like to split those, 6 if we could, on the voting. 7 MR. HORTON: Okay. Members, let's take up 8 the Pilgrim first -- strike that. 9 Back to the motion, maker of the motion, is 10 that okay? 11 MS. MA: Yes. 12 MR. RUNNER: Mm-hmm. 13 MS. MA: So I'll make two motions. 14 MR. HORTON: Maker of the motion makes a 15 motion to -- 16 MS. HARKEY: Bifurcate? 17 MR. HORTON: -- bifurcate the items and 18 to -- 19 MS. MA: To -- 20 MR. HORTON: Pilgrim? 21 MS. MA: Yes. To grant -- 22 MR. HORTON: To grant -- 23 MS. MA: -- Franchise Tax Board for the 24 Pilgrim. 25 MR. HORTON: -- Pilgrim case. Second by, I 26 believe, Ms. Stowers. 27 Objection? 28 MS. HARKEY: No. 17 1 MR. HORTON: No objection. Such will be 2 the order. 3 To item -- to item number two, Swift. 4 MS. MA: Yes, to deny. 5 MR. HORTON: There's a motion to -- 6 MS. MA: It should be backwards, right? 7 The second one should be -- 8 MS. STOWERS: Yeah, withdraw your motion. 9 MS. MA: -- for the Franchise Tax Board. 10 MS. STOWERS: I'll make it for you. 11 MS. MA: Okay. Why don't you make it for 12 me. 13 MR. HORTON: All right. 14 MS. STOWERS: If you don't mind. 15 MR. HORTON: No. 16 MS. STOWERS: Okay. On the first motion I 17 move to -- 18 MS. HARKEY: Grant. 19 MS. STOWERS: -- grant for the taxpayer in 20 regards to the Pilgrim's Pride stock and the 21 dividend related to it. 22 MR. HORTON: We already did that. 23 MS. STOWERS: And the gain associated -- I 24 know, but you said "FTB." 25 MR. HORTON: Oh, okay. 26 MS. MA: Grant for the petitioner. 27 MR. HORTON: Grant for the -- 28 MS. STOWERS: Grant for the petitioner. 18 1 MS. MA: Grant for the petitioner. 2 MS. STOWERS: For Pilgrim's Pride. 3 MR. HORTON: On the Pilgrim's stock. 4 Motion by Member Stowers. Second by Member Ma. 5 Objection? 6 None noted. 7 Such will be the order. 8 MS. STOWERS: Okay. 9 MR. HORTON: Now to the Swift, Ms. Stowers. 10 MS. STOWERS: On the second motion, I move 11 to sustain the Franchise Tax Board with respect to 12 the Swift transaction, including the note and the 13 interest related to it. 14 MR. HORTON: Second by Member Ma. 15 MS. HARKEY: Objection. 16 MR. HORTON: Objection noted. 17 Ms. Richmond, please call the roll. 18 MS. RICHMOND: Mr. Horton. 19 MR. HORTON: Aye. 20 MR. RUNNER: Yeah, that's right. 21 MS. HARKEY: Yeah, that's right. 22 MS. RICHMOND: Ms. Harkey. 23 MS. HARKEY: No. 24 MS. RICHMOND: Mr. Runner. 25 MR. RUNNER: No. 26 MS. RICHMOND: Ms. Ma. 27 MS. MA: Aye. 28 MS. RICHMOND: Ms. Stowers. 19 1 MS. STOWERS: Aye. 2 MS. RICHMOND: Motion carries. 3 ---oOo--- 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 20 1 MS. RICHMOND: Our next item is B3 Michael 2 D. Rudd and Patricia J. Rudd. 3 ---oOo--- 4 B3 MICHAEL D. RUDD and PATRICIA J. RUDD 5 NO. 794298 6 ---oOo--- 7 MS. HARKEY: May I just make a comment 8 here? 9 MR. RUNNER: Mm-hmm. Yeah, we can talk 10 about it. 11 MS. HARKEY: Before we make a motion. 12 I was really turned around on this and I 13 was really, really working in this area. And I've 14 done -- and my -- I finally came down to one 15 question. If the S corp pays taxes separately in 16 California and then it runs through the taxpayer's 17 return in California, does California allow a credit 18 for what was already paid or is there double 19 taxation here? And I needed the answer to that. 20 MR. HORTON: Appeals. 21 MR. EPOLITE: Okay. The tax that the 22 S corporation paid in this instance -- 23 MS. HARKEY: No, I want to know about 24 California law. 25 MR. EPOLITE: Okay. 26 MS. HARKEY: Okay. Because I know what 27 happens in Kentucky. 28 MR. EPOLITE: Right. 21 1 MS. HARKEY: But we're talking about 2 California taxes. 3 So if an entity pays corporation tax or 4 files a return on an S corp and they pay their 5 taxes, as I was told it happens here in California 6 that way, too, do they in turn then have to pay as 7 if they hadn't paid corporate taxes and pay the full 8 amount personally? Or do we give them a credit for 9 what was already paid? 10 MR. EPOLITE: The amount paid would flow 11 through to the shareholder. 12 MS. HARKEY: So there's a credit on it just 13 like in Kentucky. So we don't -- we don't -- we 14 don't take the full amount and tax it here? 15 MR. AMBROSE: Okay. Ms. Harkey, I think -- 16 so you're asking whether, when the S corp pays the 17 one and a half percent California -- the tax -- 18 MS. HARKEY: In California. 19 MR. AMBROSE: -- in California, whether the 20 shareholders get credit for their flow-through 21 income. No, they don't. 22 MS. HARKEY: Okay. So that's -- 23 MR. AMBROSE: That's a separate tax. 24 MS. HARKEY: -- what I'm saying. So we, in 25 California, we do double tax on that. We don't 26 allow the credit like Kentucky does. 27 MR. AMBROSE: Right. 28 MS. HARKEY: So then I have to make my 22 1 motion to sustain the FTB. 2 MR. HORTON: Member Harkey moves to sustain 3 the FTB. Second by Member Stowers. 4 Without objection, Members, such will be 5 the order. 6 ---oOo--- 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 23 1 MR. HORTON: Ms. Richmond. 2 MS. RICHMOND: Our next item is B4 Clifford 3 L. Marshall and Deanna R. Marshall. 4 ---oOo--- 5 B4 CLIFFORD L. MARSHALL and DEANNA R. MARSHALL 6 NO. 816195 7 ---oOo--- 8 MR. HORTON: Member Runner. 9 MS. MA: Discussion. 10 MR. RUNNER: Yeah, I'm going to ask Chief 11 Counsel to come on up for a moment. 12 You know, I think yesterday we had a pretty 13 full discussion, obviously, on this and obviously 14 concerns about residency and whether or not FTB 15 is -- is too narrow in regards to interpretation and 16 application of -- of -- of residency. 17 I just, from -- I want to know what 18 abilities we have in this case. 19 MR. FERRIS: I think if -- if the Angelina 20 Mike Court of Appeal opinion did not exist and 21 wasn't a binding authority on this Board, I think 22 the Board might have some latitude with respect to 23 how to interpret McClanahan and the effect of the 24 Colville, subsequent U.S. Supreme Court opinion in 25 Colville, there would be some interpretive latitude 26 for the Board there. 27 But the Angelina Mike case that is a -- is 28 a binding authority on the Board reached all of the 24 1 legal issues that the appellant was arguing, and 2 rejected them expressly. And I think that the Board 3 really has very little latitude because of that 4 published Court of Appeal opinion. 5 MR. RUNNER: What -- what about the issue 6 of -- of the definition of income at that point, in 7 that -- the Angelina Mike discussion, I think, was a 8 per capita discussion? 9 MR. FERRIS: Right. 10 MR. RUNNER: And the discussion here was an 11 earned? Could this -- why couldn't we determine the 12 difference based upon that difference in regards 13 to -- 14 MR. FERRIS: I think -- I mean that is a 15 fact that's in the background, that it was per 16 capita or miscellaneous income as opposed to income 17 that they got from a job. That's just a fact in the 18 background. 19 But in Angelina Mike, the Court of 20 Appeal -- and I'll quote from it -- says, this is 21 the issue in this case. So this is how they tee up 22 the issue. They say, "May a State impose income 23 taxes on income received by an enrolled member of a 24 tribe from his or her tribe's reservation activities 25 when that member resides on the reservation of a 26 different tribe?" 27 So there's nothing about a distinction of 28 different kinds of income that is relevant to the -- 25 1 the Court's understanding of the issue, to the 2 Court's analysis of the law, to the Court's holding. 3 There's -- it's never picked up as being anything 4 significant to the Court. The Courts just focused 5 on income received. And it's income received, 6 whether it's earned or whether it's miscellaneous. 7 So I don't think it would be a fair reading 8 of the case to say, oh, we'll just disregard all of 9 the legal reasoning of the Court of Appeal opinion 10 because of this one fact that's in the background 11 that doesn't seem to have a material difference to 12 how the Court understood the issue. 13 MR. RUNNER: I have a couple -- another -- 14 couple other thoughts, but I'll see if other Members 15 have some discussion. 16 MR. HORTON: Member Harkey -- I mean Ma. 17 MS. HARKEY: No. 18 MR. HORTON: My apologies. 19 MS. MA: No. 20 MR. HORTON: No? 21 Member Stowers? 22 Member Runner? 23 MR. RUNNER: Oh, back to me. 24 Let me ask in specific question in regards 25 to this case, in regards to the wife, in regards to 26 the issue of her -- of where her income -- whether 27 it was sourced in the tribe or from the -- from the 28 reservation. And that's the school district 26 1 discussion. 2 MR. FERRIS: Yes. 3 MR. RUNNER: The fact that -- the fact 4 that -- not because of any decision on her part, but 5 because of somebody else's decision, a school is 6 established in one reservation as opposed to the 7 other reservation, but that that school serves the 8 Indians of her reservation and she chooses then to 9 teach in that school. And the money that is -- that 10 is, at least in the discussion yesterday that we 11 had, that was indeed including some federal dollars 12 that were uniquely tied then to education of -- of 13 Native American children. 14 Can't there be a decision -- can't there be 15 a -- a thought made there that -- that the -- 16 because the children of that were of her reservation 17 and that somebody else made -- the school district 18 made a decision to only put one school in. I mean, 19 under that theory, in order for her to be able to 20 qualify, the school would have to put a dis -- a 21 school on every reservation. Clearly that's not a 22 practical process. 23 So you choose to go ahead and go to one. 24 They just happened to choose the other one instead 25 of the one that she was from. Could sourcing of 26 income be based upon the fact that the children were 27 from her reservation where the money was coming to, 28 through the children of her reservation, versus the 27 1 idea of where the school was located? 2 MR. FERRIS: Well, the -- the three factors 3 that the Court articulates in Angelina Mike, the 4 third factor is where the income derives from. 5 MR. RUNNER: Right. 6 MR. FERRIS: And there is no appellate 7 opinion from a court of competent jurisdiction that 8 would suggest that you could say that income earned 9 outside -- outside the reservation somehow derives 10 from the -- 11 MR. RUNNER: Well, it wasn't earned 12 outside. It was earned as a result of teaching the 13 children of the reservation. 14 MR. FERRIS: She -- she went to work at a 15 location other than her tribe's land and earned 16 money there. 17 MR. RUNNER: Right. Only because -- 18 Okay. Okay. 19 MR. HORTON: It -- it might be helpful to 20 know that, at least from my understanding of federal 21 law and tribal governance, as former Chair of the GO 22 Committee overseeing those, is that the tribes 23 themselves, they see them -- they see each 24 reservation as a separate nation. They don't see 25 themselves as one collective nation. 26 And so they themselves conform to the 27 ruling and that they don't combine their income, 28 they don't combine their law, they don't police each 28 1 other. They are within themself, each tribe, each 2 reservation is a totally separate nation which is 3 consistent with the Constitution and somewhat what 4 binds us in this particular case. 5 Is there a motion, Members, to sustain the 6 Franchise Tax Board on the basis that the Board is 7 not authorized to decide a constitutional issue in 8 this case? 9 MS. HARKEY: I make a motion to abstain 10 because there's no appellate case law to support 11 petitioner's argument. 12 MS. MA: I do have one more question before 13 the motion. 14 MR. HORTON: Member Ma. 15 MS. MA: If we are not -- what was the 16 motion, that we're not authorized to decide these 17 cases because of federal? Then why does it come 18 before us? And why does the Franchise Tax Board 19 have any jurisdiction over these cases as well if 20 the appeals process is to us and we don't have 21 jurisdiction? 22 MR. HORTON: Mr. Ferris. 23 MR. FERRIS: Right. You do have 24 jurisdiction over the appeal. What we're saying is 25 that the only -- from your Legal Department's point 26 of view, the only way that you could rule in favor 27 of the taxpayer would be to declare the -- the State 28 income tax statutes that were at issue to be 29 1 unconstitutional as applied to that particular 2 taxpayer and the facts in the case. 3 And under Article III, section 3.5 of the 4 California Constitution, State agencies aren't 5 allowed to make that kind of decision. 6 So there could have been, potentially, some 7 other basis that didn't have to -- that didn't 8 bring -- that isn't based on a constitutional 9 invalidation of a California statute that -- that 10 potentially in a case the Board could decide. You 11 know, the -- the Cutler case, for example, is coming 12 back and there was some constitutional issues, but 13 there were other issues too. So sometimes it's more 14 than just the constitutional issues. 15 Here, the only way that we see that the 16 taxpayer could win would be for you to declare the 17 statute's invalid as violative of the Constitution 18 as applied to this taxpayer. So that's why in this 19 particular case, even though you have jurisdiction 20 over the appeal itself, you -- you're compelled, if 21 you agree with what we're saying about the law, 22 you're compelled to sustain the Franchise Tax 23 Board. 24 MS. MA: So how many cases like this having 25 to do with tribes are we going to have to hear or do 26 we have to hear and then, you know, spend three 27 hours listening and then come to the same 28 conclusion? I'm just wondering if we are going to 30 1 decide that we don't have jurisdiction, then why 2 should we even hear it? Is there another option 3 to -- or we still have to hear it and we still have 4 to come to the same conclusion and, like, we have 5 ten tribe cases like this -- 6 MR. FERRIS: Right. 7 MS. MA: -- a year. 8 MR. FERRIS: You do have jurisdiction to -- 9 to hear the case. And one thing that was -- as part 10 of the discussion yesterday was that perhaps a 11 legislative fix is what is the proper approach so 12 that you don't have to continue to hear cases like 13 this. 14 MS. MA: Okay. 15 MR. FERRIS: Yes. 16 MS. HARKEY: Mr. Ferris, if I may. Is 17 there one other avenue for the petitioner; isn't 18 there something that comes after this that they 19 would be able to do? 20 MR. FERRIS: Right. Yeah, and the -- the 21 way the Board has historically talked about this 22 type of vote that you're taking is, you know, the 23 Board is abstaining from reaching the constitutional 24 issues. And the reason why the Board's abstaining 25 is so that the federal courts can provide the 26 guidance. And so the taxpayer here would have 27 access to the federal courts who are competent to 28 decide these issues. 31 1 MS. MA: So if we abstain, does that mean 2 we are asking them or they're required to pay what 3 they owe, plus interest and penalties, in theory? 4 MR. FERRIS: Correct. And then they could 5 file suit, in court. 6 But you are sustaining the Franchise Tax 7 Board. You're not -- you are voting and you're 8 voting to sustain because you're not reaching the 9 constitutional issues and, therefore, Franchise Tax 10 Board is sustained on the -- on the California 11 statutes. 12 MR. HORTON: I hesitate to put this out 13 here, but we could also say we don't want to hear 14 it. 15 MR. FERRIS: I mean I think they have a 16 statutory right to their hearing before you. And 17 they exercised their statutory right. 18 MR. HORTON: Oh, they did? It wasn't the 19 Franchise Tax Board and they're responding to that? 20 MR. FERRIS: I'm sorry? 21 MR. HORTON: It wasn't the Franchise Tax 22 Board and they're responding to the Franchise Tax 23 Board? It was -- 24 MR. FERRIS: After the Notice of Action, 25 the final action for the Franchise Tax Board -- 26 MR. HORTON: No, no, you're right. You're 27 right. Okay. 28 MR. FERRIS: -- they appealed to you. 32 1 MR. HORTON: My apologies. 2 All right. 3 MS. STOWERS: Is there a motion? 4 MR. HORTON: Is there a motion, Members? 5 MS. HARKEY: I made a motion to abstain 6 because there's no appellate case law to support 7 petitioner's argument. And I have that confirmed 8 time and time over. 9 So I'll just leave that one. 10 MR. FERRIS: Which would be to sustain the 11 Franchise Tax Board on that basis. 12 MS. STOWERS: Okay. Second. 13 MR. HORTON: Semantics, but good ones. 14 MS. HARKEY: Well, that's the reason. 15 MR. HORTON: Okay. 16 Member Harkey moves to abstain. Second by 17 Member Stowers. 18 Without objection, Members, such will be 19 the order. 20 ---oOo--- 21 22 23 24 25 26 27 28 33 1 REPORTER'S CERTIFICATE 2 3 State of California ) 4 ) ss 5 County of Sacramento ) 6 7 I, KATHLEEN SKIDGEL, Hearing Reporter for 8 the California State Board of Equalization certify 9 that on May 28, 2015 I recorded verbatim, in 10 shorthand, to the best of my ability, the 11 proceedings in the above-entitled hearing; that I 12 transcribed the shorthand writing into typewriting; 13 and that the preceding pages 1 through 33 constitute 14 a complete and accurate transcription of the 15 shorthand writing. 16 17 Dated: June 5, 2015 18 19 20 ____________________________ 21 KATHLEEN SKIDGEL 22 Hearing Reporter 23 24 25 26 27 28 34