1 BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION 2 5901 GREEN VALLEY CIRCLE 3 CULVER CITY, CALIFORNIA 4 5 6 7 8 REPORTER'S TRANSCRIPT 9 JUNE 23, 2015 10 11 12 13 14 15 FINAL ACTIONS 16 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 Chair 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: Grant Thompson 18 Tax Counsel IV Legal Department 19 20 ---oOo--- 21 22 23 24 25 26 27 28 2 1 5901 GREEN VALLEY CIRCLE 2 CULVER CITY, CALIFORNIA 3 JUNE 23, 2015 4 ---oOo--- 5 MR. HORTON: Members and guests, let us 6 reconvene the meeting of the Board of Equalization. 7 Ms. Richmond, what's the first matter for 8 our consideration? 9 MS. RICHMOND: Our first matter that was 10 taken under submission is item B2 Noreen B. 11 Schneider Rucinski and Fred Rucinski. 12 ---oOo--- 13 B2 NOREEN B. SCHNEIDER RUCINSKI and FRED RUCINSKI 14 NO. 789657 15 ---oOo--- 16 MS. HARKEY: Move to grant the petition. 17 MR. RUNNER: Second. 18 MS. STOWERS: Objection. 19 MR. HORTON: Objection noted. 20 Discussion? 21 MS. STOWERS: Chairman? 22 MR. HORTON: Member Stowers. 23 MS. STOWERS: I wanted to ask Appeals a 24 couple of questions first. 25 On the federal site, on their transcript 26 there's a thing called "substitute return." Could 27 you please explain what that is? 28 MR. THOMPSON: Right. A substitute return 3 1 would be a return prepared by the IRS where the 2 taxpayer has not filed a return but it appears that 3 a return would be required, and the IRS will take 4 available information and prepare what's -- what's 5 known as a substitute return. 6 MS. STOWERS: Okay. And that's the one -- 7 when I looked at the transcript, I saw that date 8 being March 2010. Which, for the Members, is why I 9 object to the motion. It seems like, why would the 10 IRS prepare a substitute return if one was already 11 filed? 12 My next question to Appeals is, do you know 13 the IRS procedure when a tax return is filed but 14 it's missing a signature? 15 MR. THOMPSON: I think the general 16 procedure would be they would send some sort of a 17 written form to the taxpayer requesting both 18 signatures. That's what the Internal Revenue manual 19 reflects. And, you know, I don't know if that 20 occurred here or not. But I think, generally, 21 that's what the Internal Revenue manual 22 contemplates. 23 MS. STOWERS: Okay. 24 I understand that we have a motion and a 25 second to grant, but I just kind of wanted to walk 26 through everything; and especially the package of 27 information that the Appellant provided in response 28 to the Board Member inquiry and then when she 4 1 provided us another copy today. And in looking 2 at -- and although some of the documents was taken 3 out of order, it's clear that this -- the tax 4 returns that she provided to us were copies that FTB 5 either sent to her or sent to her attorney, or the 6 judge was asking for the returns. 7 And when I just put them in order and 8 looking at the numbering at the bottom margin, you 9 can see, starting with the 2005 return, that this 10 return came from the Franchise Tax Board, it has a 11 signed date of March 2010, and then you would think, 12 well, maybe she did -- maybe they did actually file 13 because it's signed that date. 14 However, when I continue to flip through 15 the package and keeping them in order, I note that 16 included in that package was a copy of the federal 17 return and taxpayers are required to attach the 18 federal return when they have certain schedules, and 19 she did attach the federal return. And that federal 20 return has a signed date of April 27, 2010. 21 Which I questioned, you know, if it was 22 really sent to the Franchise Tax Board in March, the 23 state and federal return sent in March, why do we 24 have a copy of the federal return in the Franchise 25 Tax Board's records showing that it was signed on 26 April 27th? So there's a little confusion, at least 27 for me, on when the returns were sent. 28 However, when you go back and you look at 5 1 both the Franchise Tax Board internal accounting, 2 their IMF and their return display, I find them to 3 be valid. And I find that the California return was 4 received on May 15th, 2010 and the IRS federal 5 return, based on their IRS records, was received on 6 May 3rd, 2010. And those dates line up with when 7 the federal return -- copy return was signed and 8 most likely submitted. 9 And for that reason, I do object to 10 granting. I find that the return was sent to the 11 State of California after the statute of limitation 12 for requesting a claim for refund. 13 MR. HORTON: I, uh -- 14 Member Ma. 15 MS. MA: I disagree, but I don't want to go 16 through it again, so -- 17 MR. HORTON: Yeah. 18 MS. HARKEY: I -- I -- yeah. 19 MR. HORTON: I, um -- there are some 20 inconsistencies, and those inconsistencies do cause 21 me to have some pause. 22 The return that was filed -- the check that 23 was provided in payment by -- to add up for filing 24 the return on March 5th, $250, March 6th payment 25 to -- a thousand dollars to McDaniels for reviewing, 26 the inconsistency being 250 to file the return, then 27 on a subsequent -- a day later, a thousand dollar 28 payment to review, seems to imply that greater work 6 1 than just reviewing the tax returns may have been 2 done. 3 And then the testimony wherein testifier 4 testified that the Internal Revenue agent actually 5 called to provide advice as to how they filed their 6 tax returns, inconsistent with not only the Internal 7 Revenue, also inconsistent with the Franchise Tax 8 Board, Board of Equalization, to call and provide 9 advice over the telephone relative to the filing of 10 a return that has been filed. And so -- and 11 definitely inconsistent with the Internal Revenue 12 policies and procedures. 13 Typically, they actually return the return 14 and you file an amended return; and along with that 15 return, they actually send you a letter saying so. 16 The absence of the letter and relying on the -- on 17 the word of, uh -- of the Internal Revenue with -- 18 ultimately end up with the filing of two returns 19 which would ultimately cause some confusion. One of 20 those returns would ultimately have to be destroyed; 21 Internal Revenue wouldn't be the party to do that. 22 The other inconsistency was, is that the 23 return allegedly filed on March 6th had the singular 24 signature of the Appellant before us, but the return 25 that was received by the Franchise Tax Board on May 26 15th had both signatures. 27 So one would have to conclude that the 28 return was received by the Franchise Tax Board, and 7 1 the Franchise Tax Board has no record of it. The 2 circumstances, at least from my perspective, seems 3 to indicate that the facts don't seem to support 4 that the return was received by the Franchise Tax 5 Board prior to, on the March 6th date, or even 6 prepared and subsequently sent. 7 And I would think that the records of the 8 Internal Revenue, since they collaborate the records 9 of the Franchise Tax Board to independent bodies 10 that really don't have a reason or a basis to -- 11 to -- to -- to misrepresent the facts or to put the 12 taxpayer at any disadvantage, seem to collaborate 13 that the Internal Revenue received theirs on March 14 3rd, the returns, and the Franchise Tax Board 15 received it on May 15th. 16 MR. RUNNER: Mr. Chair? 17 MR. HORTON: I -- I would have -- and, I 18 don't know, I would have liked to have seen -- 19 My apologies, Mr. Runner. 20 MR. RUNNER: Go ahead. 21 MR. HORTON: I would have liked to have 22 seen the checks to have been -- cancelled checks, 23 or, even though the Internal Revenue did stipulate 24 that they received the -- they only received the tax 25 returns on May 15th, I believe was their 26 stipulation, that they did not receive a -- which, 27 you know, conversely means that they did not receive 28 a return prior to May 5th. And what they did 8 1 receive, they actually prepared themself, which was 2 a substitute return which was prepared March 6, 3 which is even after the statute of limitations. 4 Even if that was imputed to be -- concluded to be a 5 return, would not have been one. The supplement 6 return is just a document that the Internal Revenue 7 filed saying this is what we think you owe. 8 Mr. Runner. 9 MR. RUNNER: I think I was -- I'm compelled 10 by the -- by the -- I think the affidavit by the 11 preparer. And especially, I think, in terms of the 12 detail. 13 I was not persuaded at all by the FTB's 14 view, and maybe the preparer got it wrong, 15 especially when the preparer was so specific in 16 regards to signing the envelope, you know, recalling 17 all those kinds of events that took place. 18 And I was really not impressed by FTB's 19 then interpretation of the taxpayer's sticky notes 20 in regards to trying to use that as some kind of an 21 interpretation as to when things were filed. 22 So those were the issues. And I think -- I 23 think it's like in a lot of other cases, you know, 24 it's -- there's an interesting argument on all sides 25 here. But that's what at least got me there. 26 MS. HARKEY: There -- there's just one 27 thing I'd like to enter for the record, is that I 28 think because the burden of proof is on the taxpayer 9 1 and the FTB itself had destroyed records, that the 2 fact that the taxpayer went back and exhumed so much 3 really speaks highly in their favor. 4 They tried. They dug around things from 5 2005 and six and ten. And I mean, you know, and 6 that's very, very difficult for most people to do if 7 they're not assuming they're going to need this 8 stuff forever. 9 And so on that alone, I have to say that I 10 thought, you know, it was a herculean job of trying 11 to put things together for which the FTB really 12 didn't have any documentation. And they were 13 relying on a report that just merely stated a few 14 lines from the IRS but didn't -- you know, they 15 were -- they were working it, too. It was just -- 16 it was just a -- it's a -- it's a hard deal. 17 But I do think the taxpayer deserves the 18 benefit of the doubt here for having put together so 19 much. 20 MS. HARKEY: So I made the motion. 21 MR. HORTON: There's a motion to grant by 22 Member Harkey, second by Member Runner. Objection 23 noted. 24 Ms. Richmond, please call the roll. 25 MS. RICHMOND: Mr. Horton. 26 MR. HORTON: No. 27 MS. RICHMOND: Ms. Harkey. 28 MS. HARKEY: Aye. 10 1 MS. RICHMOND: Mr. Runner. 2 MR. RUNNER: Aye. 3 MS. RICHMOND: Ms. Ma. 4 MS. MA: Aye. 5 MS. RICHMOND: Ms. Stowers. 6 MS. STOWERS: No. 7 MS. RICHMOND: Motion carries. 8 ---oOo--- 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 11 1 MR. HORTON: Next item. 2 MS. RICHMOND: Our next item is B3 Robert 3 Carpiro and Virginia Carpiro -- Carpio. 4 ---oOo--- 5 B3 ROBERT CARPIO and VIRGINIA CARPIO 6 NO. 793495 7 ---oOo--- 8 MS. STOWERS: Move to sustain the Franchise 9 Tax Board. 10 MS. MA: Second. 11 MR. HORTON: Member Stowers moves to 12 sustain the Franchise Tax Board, second by Member 13 Harkey. Without -- 14 MS. MA: Ma. 15 MR. HORTON: -- Ma. 16 God, I don't know why I keep doing that. 17 It must be those blue shoes. 18 MS. HARKEY: I would like to consider a 19 substitute motion for this and see -- see what you 20 all think. 21 The FTB had an accuracy penalty, assessed 22 an accuracy penalty. This isn't another old case. 23 I do believe that the Carpios have an issue 24 here and so I want to sustain the FTB, and I believe 25 it was the $15,000 tax. But I would like to waive 26 the accuracy penalty because the FTB claimed that 27 they had really assessed it based on what the IRS 28 assessed. There wasn't really a firm background for 12 1 it other than the IRS had assessed one and they had 2 as well. I didn't see that it was well supported, 3 and I specifically asked the question at the 4 hearing. 5 So that would be my substitute motion is to 6 waive the accuracy penalty and otherwise sustain the 7 FTB. 8 MR. RUNNER: I'll second that, but I'd like 9 a question -- I have a question to Appeals. 10 MR. HORTON: Okay. 11 MS. STOWERS: Well -- 12 MR. HORTON: Members, there's a motion on 13 the floor with a second and a subsequent motion 14 governs. 15 Subsequent motion is now on the floor. 16 Discussion, Member Runner. 17 MR. RUNNER: To Appeals, in regards to 18 the -- the, um -- some -- some guidance -- 19 MR. HORTON: (Inaudible) 20 MR. RUNNER: -- with regards to the, um, 21 the accuracy penalty. What are our abilities at 22 that -- at that point? 23 MR. THOMPSON: It appears, based on the 24 income adjustment, that there is a substantial 25 understatement which would establish an initial case 26 for imposing the accuracy related penalty. 27 So the taxpayer would have the burden of 28 showing that reasonable cause existed, reasonable 13 1 cause and good faith to abate the accuracy related 2 penalty, or that another exception to the imposition 3 of the penalty would apply. 4 MS. STOWERS: Mr. Chairman? 5 MR. HORTON: Member Stowers. 6 MS. STOWERS: To show that reasonable cause 7 was applied -- should apply, did they make an 8 argument for reasonable cause? 9 MR. THOMPSON: No, they did not. It was 10 something we raised as a possibility in our staff 11 comments, that if they wished to raise one, they 12 should do that. But I don't think we heard a 13 reasonable cause argument. 14 MS. HARKEY: I'll withdraw my motion. I 15 will. I'll withdraw my motion. I didn't hear one 16 either and -- and I respect Ms. Stowers' motion. 17 MR. RUNNER: I'll withdraw the second. 18 MR. HORTON: Okay. Here's where we are. 19 MR. RUNNER: We're back to the first one. 20 MS. HARKEY: We've got the first one. 21 MR. RUNNER: Back where we started. 22 MS. STOWERS: So now what? 23 MS. HARKEY: Now the motion on the floor is 24 to sustain the FTB. 25 MS. STOWERS: Okay. Sustain FTB and -- 26 MR. HORTON: Member Stowers moves to 27 sustain FTB, second by Member Ma. 28 Without objection, Members -- 14 1 MS. STOWERS: One comment? 2 MR. HORTON: Yeah. 3 MS. STOWERS: Real quick. Just encourage 4 all parties to see about offer and compromise 5 considering their age and ability to pay. 6 MR. RUNNER: Uh-huh. 7 MR. THOMPSON: We will definitely do 8 that. 9 MR. HORTON: And -- and I have to encourage 10 the Department, the Franchise Tax Board, when a 11 Member makes an inquiry relative to any item, no 12 defense is not a defense. There should have been 13 some defense put forth as to the distinction between 14 the negligence penalty and the accuracy penalty, 15 despite the fact that the apparent evidence that may 16 have been there and considered by the Board, to that 17 extent, you know, I believe Member Harkey's motion 18 had merit. 19 Given that there's a motion on the table, 20 second, without objection, Members, such will be the 21 order. 22 ---oOo--- 23 24 25 26 27 28 15 1 MR. HORTON: Ms. Richmond. 2 MS. RICHMOND: Our next item is B4 Michael 3 I. Cohen. 4 ---oOo--- 5 B4 MICHAEL I. COHEN 6 NO. 795873 7 ---oOo--- 8 MS. HARKEY: I move to grant the petition. 9 My reasoning is -- is that I don't believe that 10 there was a -- that -- I don't believe there was 11 negligence on his part. I think that there was some 12 undue stress. 13 We heard a lot of testimony on this. In 14 essence, he has a penalty for not requesting his 15 refund on time. And he had paid the taxes. He had 16 made every effort and he was missing documentation. 17 So I do believe that this is an unusual case and 18 that the petition should be granted. 19 MR. HORTON: Discussion, Member Ma? 20 MS. MA: Yeah. So, you know, I understand 21 that the taxpayer took pride in filing his own tax 22 returns. But, had he hired a tax preparer when the 23 demand notice came, I believe the tax preparer would 24 have told him that he should file his return and 25 then he can amend it when he got his K-1. 26 I -- I don't think, you know, ignoring the 27 Franchise Tax Board and waiting for the K-1, which 28 eventually, you know, they did hire a CPA to do, is 16 1 reasonable cause for not filing when the notice was 2 received, so -- 3 MS. HARKEY: I'd just like to clarify that 4 this is for a demand penalty, that the FTB did waive 5 the late filing penalty and they did refund the 6 overpaid tax. So if that makes any difference. 7 MR. HORTON: Is there a subsequent motion? 8 MS. STOWERS: Move to sustain the Franchise 9 Tax Board. 10 MS. MA: Second. 11 MR. HORTON: Member Stowers moves to 12 sustain the Franchise Tax Board, second by Member 13 Ma. 14 Objection? 15 Without objection, such will be the case. 16 Ms. Richmond. 17 MS. HARKEY: Oh, I'm objecting. 18 MR. HORTON: Objection noted. 19 MS. HARKEY: Yeah, I'm objecting. I made a 20 motion. I'm a "no." 21 MR. HORTON: Discussion may have changed 22 your mind. 23 MS. HARKEY: No. 24 MR. HORTON: Ms. Richmond, please call the 25 roll. 26 MS. RICHMOND: Mr. Horton. 27 MR. HORTON: Aye. 28 MS. RICHMOND: Ms. Harkey. 17 1 MS. HARKEY: No. 2 MS. RICHMOND: Mr. Runner. 3 MR. RUNNER: Aye. 4 MS. RICHMOND: Ms. Ma. 5 MS. MA: Aye. 6 MS. RICHMOND: Ms. Stowers. 7 MS. STOWERS: Aye. 8 MS. RICHMOND: Motion carries. 9 ---oOo--- 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 18 1 MR. HORTON: Ms. Richmond. 2 MS. RICHMOND: Our next item is B5 Gary 3 Mellinger and Christa Mellinger. 4 ---oOo--- 5 B5 GARY MELLINGER and CHRISTA MELLINGER 6 NO. 811123 7 ---oOo--- 8 MS. HARKEY: I move to -- 9 MR. HORTON: Discussion Mem -- 10 MS. HARKEY: I move to support the FTB. 11 MR. HORTON: Member Harkey moves to sustain 12 FTB. 13 MS. STOWERS: Second. 14 MR. HORTON: Second by Member Stowers. 15 Without objection, Members, such will be 16 the order. 17 ---oOo--- 18 19 20 21 22 23 24 25 26 27 28 19 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 June 23, 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 19 constitute 14 a complete and accurate transcription of the 15 shorthand writing. 16 17 Dated: June 29, 2015 18 19 20 ____________________________ 21 KATHLEEN SKIDGEL, CSR #9039 22 Hearing Reporter 23 24 25 26 27 28 20