1 BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION 2 450 N STREET 3 SACRAMENTO, CALIFORNIA 4 5 6 7 8 REPORTER'S TRANSCRIPT 9 JULY 28, 2015 10 CORPORATE FRANCHISE AND PERSONAL INCOME TAX HEARING 11 APPEAL OF 12 ROBERT E. VALDEZ AND JUDY M. VALDEZ 13 NO. 819052 14 AGAINST PROPOSED ASSESSMENT OF 15 ADDITIONAL INCOME TAX 16 17 18 19 20 21 22 23 24 Reported by: Juli Price Jackson 25 CSR No. 5214 26 27 28 1 1 P R E S E N T 2 For the Board Jerome E. Horton of Equalization: Chairman 3 4 Sen. George Runner (Ret.) Vice-Chairman 5 6 Fiona Ma, CPA Member 7 8 Diane L. Harkey Member 9 10 Yvette Stowers Appearing for Betty Yee, 11 State Controller (per Government Code Section 12 7.9) 13 Joann Richmond Chief, Board 14 Proceedings Division 15 For Board of William Stafford Equalization Staff: Staff Counsel 16 Lou Ambrose 17 Tax Counsel IV 18 For Franchise Tax Joel Smith Board: Tax Counsel 19 Marguerite Mosnier 20 Tax Counsel 21 Fred Campbell-Craven Tax Counsel 22 For Appellants: Ryan Malloy 23 Representative 24 Edward G. Heiding Attorney 25 Robert Valdez 26 Taxpayer 27 Judy M. Valdez Taxpayer 28 ---oOo--- 2 1 450 N STREET 2 SACRAMENTO, CALIFORNIA 3 JULY 28, 2015 4 ---oOo--- 5 MR. HORTON: Ms. Richmond. 6 MS. RICHMOND: Our next matter's item B3, 7 Robert E. Valdez and Judy M. Valdez. 8 Please come forward. 9 MR. HORTON: Mr. Stafford, as the taxpayer 10 comes forward and settles in, we would ask that you 11 please introduce the issues in this case. 12 MR. STAFFORD: Thank you. 13 The issue in this case is whether the 14 statute of limitations bars Appellants' claim for 15 refund. 16 It's one issue. 17 MR. HORTON: As the taxpayer settles in, I 18 notice that one of your witnesses is in the 19 audience. 20 Will he be speaking during this time? 21 MR. HEIDING: No, I will not, Mr. Chairman. 22 MR. HORTON: Thank you very much, sir. 23 Welcome to the Board of Equalization. 24 Please be advised that you have ten minutes 25 to make your presentation. We will return and allow 26 you five minutes on rebuttal. 27 We would ask that you introduce yourself 28 for the record, at your convenience. 3 1 MR. MALLOY: Thank you, Chair. Good 2 morning, Chair, Members of the Board. 3 My name is Ryan Malloy. I'm a law student 4 representative for the TAAP program. 5 With me today is Judy Valdez and Robert 6 Valdez, who have driven here today from Foster City. 7 Also with me today is Ed Heiding, my supervising 8 attorney for the TAAP program. 9 Mr. and Mrs. Valdez are seeking a refund 10 for overpaid taxes because they remitted taxes to 11 FTB for income that had already been taxed. They 12 discovered this error when they shifted from paper 13 filing to electronic filing. 14 FTB denied their claim for refund based 15 upon the statute of limitations. The Valdezes 16 deserve to receive their overpayment refunded. And 17 this body has, in the past, used the doctrine of 18 equitable recoupment to credit overpayments which, 19 though -- even though the statute of limitations had 20 tolled. 21 The sole issue is whether the statute of 22 limitations should prevent refund. 23 First point, in the Appeal of Wilfred and 24 Gertrude Winkenbach, 1975, this body found relief 25 based on the doctrine of equitable recoupment for a 26 taxpayer whose overpayment was denied based upon the 27 statute of limitations. 28 Previous to that appeal, State agencies 4 1 could not be given judicial power to decide equity. 2 However, the Board recognized that such agencies 3 have been found to have quasi-judicial power and are 4 bound to apply judicially accepted documents. 5 The Board cited that all matters before the 6 Board should be decided in order to avoid 7 unnecessary litigation and expense. 8 The Board held that the doctrine had been 9 limited to two situations. First, the fund of money 10 arising from the same taxable transaction or the 11 event had been taxed twice on inconsistent legal 12 theories of the same taxpayer -- to the same 13 taxpayer, which is applicable to the Valdez case 14 because their overpayment is arising from the over 15 taxation on their Social Security income for the 16 years 2007, 2008, 2009, 2010, 2011, and 2012. 17 In Winkenbach the Board acknowledged that 18 the FTB's position against recoupment, because the 19 Appellant lacked diligence in seeking a refund of 20 overpayments. 21 However, the Board cited US v. Bowcott, a 22 US Supreme Court decision, which stated, 23 "It is apparently not the diligence of 24 the taxpayer as to his legal right which 25 controls, but rather the inequity of 26 holding that while the government's rights 27 under a transaction continue unimpaired. 28 Its adversary rights thereunder are barred 5 1 by limitation." 2 Essentially the court in Bowcott and the 3 Board are explaining that taxpayer ignorance cannot 4 be that which the Board bases its decision on, but 5 rather it bases the decision on the inequity of 6 holding the taxpayer money while the government's 7 rights have been unimpaired. 8 Second point, Mr. and Mrs. Valdez 9 are retired taxpayers with limited tax experience, 10 as evidenced by their paper filings. Mr. and 11 Mrs. Valdez do not have any special training in tax 12 law, nor were they informed of the over remittance 13 at any point. 14 It is not just to hold the ordinary 15 citizens to such a complicated standard of knowledge 16 when the general fund remains unaffected. 17 Third point, the FTB knew, or should have 18 known, about the over remittance. In the vast 19 majority of cases taxpayers are notified when they 20 have failed to pay their taxes. The same standard 21 should apply when taxpayers have inadvertently 22 overpaid. 23 The only reason Mr. and Mrs. Valdez found 24 out about the over remittance is because they were 25 notified by an electronic tax filing software. We 26 should not hold the FTB -- or we should hold the 27 FTB, a government entity, to a higher standard than 28 a private individual. 6 1 It is just that there should be a refund. 2 In any civil case this would be considered unjust 3 enrichment. 4 Fourth point, in many settlements before 5 you the general fund has not been made whole. But 6 in this case the general fund has been unjustly 7 enriched while the taxpayers have been given no 8 recourse to correct the problem. California does 9 not lose anything by returning overpaid money back 10 to the taxpayer. 11 Thank you. 12 MR. HORTON: Further testimony? 13 MR. MALLOY: Anything you'd like to say? 14 MRS. VALDEZ: Well, I'd be happy to answer 15 your questions. 16 MR. HORTON: Thank you, ma'am. 17 We will now go to the Department. The 18 Department has ten minutes to make their 19 presentation. 20 We'd ask that you commence with your 21 introduction -- understandable that the doctrine of 22 equitable recoupment is a new argument, and ask that 23 you address that in your presentation as well. 24 MR. SMITH: Good morning, Mr. Chairman and 25 Members of the Board. My name is Joel Smith. 26 Seated with me are Marguerite Mosnier and 27 Fred Campbell-Craven. And together we represent 28 Respondent Franchise Tax Board. 7 1 On August 2nd, 2013, Appellants filed 2 amended returns for their 2007 through 2011 tax 3 years. These amended returns were considered claims 4 for refund. 5 Respondent allowed Appellants' claims for 6 refund for the 2009, 2010 and 2011 tax years because 7 they were filed within the statutory period. 8 However, Respondent denied Appellants' 2007 9 and 2008 claims for refund because they were filed 10 outside the statutory period. 11 Respondent's denial of these claims is the 12 only issue on appeal today. California law requires 13 the taxpayers file a claim for refund within four 14 years of the due date of the return or one year from 15 the date of payment, whichever is later. The law 16 does not provide for waiver of the statutory period. 17 Unfortunately, Appellants did not file 18 their 2007 and 2008 claims for refund within the 19 statutory period. 20 As far as the doctrine of equitable 21 recoupment, the doctrine of equitable recoupment 22 narrowly applies to situations where a single 23 transaction or taxable event has been taxed twice to 24 the same taxpayer on inconsistent legal theories. 25 In Winkenbach, which was cited by 26 Appellants, income was first taxed to the 27 corporations under the theory that it was corporate 28 income, then it was taxed to the taxpayers as 8 1 individual income. 2 Here no single transaction was taxed twice. 3 Therefore, the doctrine of equitable recoupment does 4 not apply. 5 Respondent respectfully submits that under 6 the law it is barred from issuing refunds to 7 Appellants because the claims for refund were not 8 filed within the statutory time period. 9 However, Respondent notes that if your 10 Board wishes, it could vote to sustain Respondent to 11 refer Appellants to the Government Claims Victims 12 Compensation Board for relief. This has been done 13 in similar situations in the past. 14 I'm happy to answer any questions you might 15 have. 16 MR. HORTON: Thank you. 17 On rebuttal? 18 MR. MALLOY: Thank you. 19 The points that the FTB have made, 20 interesting, but none of them mention justice, 21 equity, fairness. And I'd also like to point out 22 that they were taxed by California. And they were 23 taxed by the IRS as well. They were taxed twice. 24 California wasn't supposed to tax their Social 25 Security income. 26 The Board has found that the taxpayer can 27 be reimbursed upon -- based upon the doctrine of 28 equitable recoupment. 9 1 The Board should not base this decision on 2 a lack of diligence from the taxpayer, but the 3 inequity arising from the withholding the taxpayers' 4 money while the State remains unimpaired. 5 The FTB are tax specialists with a wealth 6 of knowledge, where the taxpayer is not. If the 7 Valdez family had not paid the tax, they would have 8 been met with fines and interest. But when there is 9 an overpayment, they are met with silence. 10 Additionally, when the FTB -- when the -- 11 if the fTB not erred in the instructions they gave 12 to the Valdezes, taxpayer would not have been denied 13 the refund they deserve. 14 Finally, the State has been made whole and 15 the general fund has been unjustly enriched. 16 A rejection of refund would only hurt the 17 taxpayer. Robert and Judy Valdez are not asking for 18 any precedent to be set for all time or to change 19 the status quo; they are merely asking for the Board 20 to adopt for them in this case only. 21 Would you guys like to share your story? 22 MRS. VALDEZ: I would just like to say that 23 it is true that the amendments were filed after the 24 statute of limitations for years 2007 and 8. 25 I didn't become aware of the fact that the 26 Social Security income qualified for a California 27 adjustment until filing the 2012 taxes, which was 28 2013. 10 1 I immediately, when I -- when I realized 2 that -- that that was eligible for adjustment, I 3 realized that in the previous five years I hadn't -- 4 hadn't taken that adjustment. 5 So, I called the FTB. I was advised how to 6 do the amendment process. I was advised that it was 7 an adjustable amount. And I was also advised to 8 wait until the current 2012 filing period was 9 completed, that we had filed, it had been processed 10 and in that particular year we were getting a 11 refund. So, that sounded reasonable to me. 12 I prepared the amendments and waited for 13 the California refund to come. It didn't come. It 14 didn't come. It didn't come. I finally called the 15 FTB again and they told me that they were waiting 16 for or missing a 1099 form -- not from us, but from 17 the investment firm that that should have sent it 18 in. 19 I had a copy of that form. I faxed it to 20 the FTB that same day, and they subsequently 21 released the refund to us. 22 When we got the refund, I took the 23 amendments and I sent them to Sacramento, which is 24 what I had been advised to do by the FTB. 25 The reason I'm mentioning this is because 26 for -- for the year 2008 I would have -- we would -- 27 we have would still been within the statute of 28 limitations had I filed the amendment in April and 11 1 not waited until we got our refund in July. 2 So, I lost that three month period waiting 3 for the -- for the 2012 refund. 4 I did learn about the adjustment, 5 California adjustment, that we were entitled to by 6 using a Cal File electronic system in 2013, which to 7 the best of my knowledge, had been -- not been 8 available prior to that. 9 When I entered the Social Security income 10 into that form, the 540 form online, it immediately 11 took the income out and put it on to the adjustment 12 page. And that's what triggered my -- or gave me 13 then the knowledge that that was an adjustable 14 portion of our income. 15 As I'm sure as all of you know in the 16 federal world, that's not the case. So, we have to 17 pay tax on the Social Security to the IRS -- to at 18 least 85 percent of that income. 19 So, I was going on that basis by not -- and 20 not knowing that it was just adjustable. 21 So, but again I just wanted -- I just 22 wanted to help you understand why the 2008 one 23 wasn't filed in April and not until July. And 24 that -- that one, at least, would have been 25 qualified under the statute. 26 MR. HORTON: Members, I'm going to go to 27 the Department just for clarification on their term, 28 "double taxation" or "double tax" rather. 12 1 MR. SMITH: Yes, it's not our term, it is 2 the term used by the Supreme Court and then also by 3 your Board. 4 And it is -- it is the same entity double 5 taxing the same income. It's not if the IRS taxes 6 something then California can't tax it, that 7 wouldn't make much sense. 8 MR. CAMPBELL-CRAVEN: One example that 9 comes to mind is that a trust is taxed on income, 10 and then later the taxing entity attempts to tax the 11 beneficiary on that same income under a different 12 theory, so, then there is double taxation on the 13 same income. 14 MS. MOSNIER: The case law on this issue is 15 typically related to trusts and inheritance tax, for 16 example, versus income tax. Those would be 17 inconsistent theories of taxation. 18 MR. HORTON: Member Ma. 19 MS. MA: I have a question for the 20 Franchise Tax Board. 21 You know, our computers are pretty 22 sophisticated, and if the taxpayer doesn't report a 23 1099, you'll generate a notice to them very quickly. 24 And I think Social Security is a pretty standard 25 adjustment on the Schedule CA. 26 Do your programs not review for the Social 27 Security adjustments and, you know, generate a 28 notice to taxpayer saying, "Hey, you should have 13 1 taken this adjustment." 2 I mean, Social Security is pretty standard 3 for many older taxpayers who are receiving it. I am 4 just asking as a policy whether our systems actually 5 go through those schedules and flag Social Security? 6 MR. SMITH: So, unfortunately for the 2007 7 and 2008 tax years, all items on Schedule CA are not 8 -- were not automatically captured by our systems. 9 The only way an error would be found was through an 10 audit. 11 Now starting in the 2013 tax year, moving 12 forward, we are capturing items that are on the 13 Schedule CA, including the Social Security benefits. 14 I will note that the instructions for the 15 Schedule CA for the years at issue clearly state 16 that California excludes Social Security benefits 17 from taxable income. 18 So, that is what was available to the 19 Appellants at the time. 20 MS. MA: But they did pay taxes to 21 California all those years on their Social Security 22 income. 23 Thinking that it was a similar law, did you 24 pay on 85 percent or did you pay on 100 percent? 25 MS. VALDEZ: We paid on 85 percent because 26 they used the federal portion. 27 MS. MA: That's it. 28 MR. HORTON: Member Harkey. 14 1 MS. HARKEY: Thank you. 2 This is for the Franchise Tax Board. My 3 notes indicate that for the years in question there 4 were notices sent to the taxpayer of underpayment? 5 MR. SMITH: Correct. There were -- there 6 were two notices sent and they were both related to 7 the -- to Appellants' self-assessed tax. 8 The first -- the first notice was a 9 dishonored payment penalty, and that was abated. 10 And then the second notice was for an estimate tax 11 penalty. Both of those notices were issued based on 12 the self-assessed tax return that Appellants 13 provided. 14 MS. HARKEY: Okay. And how long -- what is 15 the statute of limitations for you to notify a 16 taxpayer they have not paid their taxes in the exact 17 amount? 18 MR. SMITH: Well, it depends on the 19 situation. 20 If there's a federal adjustment, it could 21 be unlimited. There isn't an absolute answer to 22 that, but there is a statute of limitations. 23 MS. HARKEY: There is a statute of 24 limitations for refunds, but not for requests for 25 underpayments? 26 MS. MOSNIER: There's an unlimited period 27 of time to propose an assessment if a taxpayer 28 doesn't file a tax return. 15 1 There are different time periods 2 on imposing -- imposing or assessing tax once the 3 taxpayer does file a return. 4 There's yet another time period for -- or 5 different time periods that come into play for 6 assessing a tax following action by the Internal 7 Revenue Service. 8 So, there are various -- 9 MS. HARKEY: Multitudes -- 10 MS. MOSNIER: -- there are a multitude. 11 And there are various statutes of 12 limitation to claim a refund, in addition to the 13 general statute we have talked about today, the four 14 years from original due date of the return or within 15 one year from date of overpayment. 16 For example, there is a different one if 17 you have a waiver or if you had a waiver with the 18 IRS. There is another one if the IRS made an 19 adjustment that would entitle you, under California 20 law, to claim a credit or refund with California. 21 So, there are a multitude of statutes of 22 limitation going both ways, assessment and refund. 23 MS. HARKEY: Okay. So, what you're telling 24 me is it's a very complex practice, that there's no 25 clear law and that, in fact, it just all depends. 26 MS. MOSNIER: The law is very clear. Once 27 you determine your facts, the statutes of limitation 28 applicable to those facts are clear and are 16 1 absolute. 2 MS. HARKEY: Did you determine in your 3 facts that -- was there anything about the four 4 month delay for the 2008 which -- which the taxpayer 5 is saying they were advised to -- to wait until they 6 got their refund? 7 Was that included in the facts? 8 MS. MOSNIER: Those are facts that are new 9 to the Franchise Tax Board today. We don't have a 10 record of our comment log that we keep. So, I don't 11 have that with us today. So, we are not able to 12 respond in that way. 13 We would -- I would note there is an 14 equitable remedy. It's not equitable recoupment, 15 but there is another equitable remedy that can be 16 available to a taxpayer in the event FTB provides 17 erroneous legal advice. But that has only to do 18 with claiming an assessment. It must be in writing 19 and there are other components in order to effect 20 that equitable remedy that are simply not applicable 21 or found in this particular case. 22 MS. HARKEY: Okay, thank you very much. 23 I just -- I just have a comment. Seems 24 like there's a lot of -- and I find this in just 25 about everything we're doing -- there are a lot of 26 issues that are very unclear for a taxpayer who's -- 27 this is not their sole job is to figure out their 28 taxes, calculate taxes and refunds and whatnot, when 17 1 they're just doing their job as citizens and trying 2 to make the right decisions. 3 But we, as a tax collecting agency and 4 Board, seem to have a lot of latitude. So, I'm 5 just -- I'm just looking -- I think it was explained 6 that we didn't have the ability to check, and 7 Ms. Ma's comments we didn't have the ability to 8 check the Schedule CA for -- back before 2013? 9 MR. SMITH: Correct. 10 MS. HARKEY: And, so, now we -- 11 MR. SMITH: It wasn't automatically 12 captured when the return was filed. It would be 13 checked in the event of an audit. 14 MS. HARKEY: Okay. Well, I -- I'm still 15 confused as to how -- well, I guess I know, we had 16 the underpayment, probably based on some kind of 17 calculation, which just got spit out by the computer 18 somehow? 19 MR. SMITH: The dishonored payment penalty 20 would be as a result of a dishonored payment. 21 And then the estimate penalty would be in 22 relation to the -- that there was no estimate 23 payment made. 24 And those are automatically generated 25 through the system. 26 MS. HARKEY: Right. And now we 27 automatically generate the Schedule CA as well if 28 they're not -- 18 1 MR. SMITH: Correct, starting -- 2 MS. HARKEY: 2013? 3 MR. SMITH: -- the audit -- correct. 4 Those -- just to be clear, they were 5 automatically captured. The automatic return 6 information notices will be starting October of this 7 year. 8 MS. HARKEY: Thank you. 9 MR. HORTON: Member Runner. 10 MR. RUNNER: Yeah, let me just -- a couple 11 of -- the returns that we're talking about were 12 returns that you had -- hand done returns? 13 MRS. VALDEZ: They were hand done returns, 14 yes, prior to 2013 -- 15 MR. RUNNER: Yeah. 16 MRS. VALDEZ: -- CAs, the Cal -- 17 MR. RUNNER: The 2007 and 2008 returns? 18 MRS. VALDEZ: Yes, definitely. 19 MR. RUNNER: And in those returns you 20 included your -- some information on your federal 21 income tax? 22 MRS. VALDEZ: You -- you start with your 23 federal income tax -- 24 MR. RUNNER: Right. 25 MRS. VALDEZ: -- to do your State tax. 26 MR. RUNNER: And you included that in your 27 return? 28 MRS. VALDEZ: Yes. 19 1 MR. RUNNER: Okay, okay. 2 MRS. VALDEZ: And at that time I would have 3 been sending nay documentation -- 4 MR. RUNNER: Right. 5 MRS. VALDEZ: -- as well. 6 MR. RUNNER: So, let me go back to the FTB 7 then. 8 When you get these returns like that, 9 there's input that has to be done on these returns, 10 correct? 11 MR. SMITH: yes. 12 MR. RUNNER: Okay. So, when you're doing 13 these returns and somebody is inputting that and you 14 found -- you find an error, such as overpayment, 15 payment on a -- you know that because you'd know 16 where their income came from because it was a part 17 of their federal income tax return. 18 There wasn't any flag or anything that 19 said, "Oops, this person is paying income tax that 20 they shouldn't pay?" 21 There was no system in place -- I don't 22 mean an automatic one because this is -- this was -- 23 these were handwritten terms. 24 So, somebody was putting them into the 25 information. 26 MR. SMITH: Right. The automatically 27 captured items are from the pages 1 and 2 of the 28 form 540. 20 1 Nothing on the Schedule CA, which is where 2 the adjustments are made, would have been 3 automatically captured at the -- 4 MR. RUNNER: But they would have been seen? 5 MR. SMITH: -- time. 6 I -- I do not think so. There's -- it's 7 impossible to look at every page of every return, 8 which is why there are certain elements that -- 9 MR. RUNNER: Unless -- okay, unless -- oh, 10 well. 11 Let me go to this, let me go down this 12 route too first. 13 The -- the objective of the FTB is to 14 collect the proper amount of tax, right? 15 MR. CAMPBELL-CRAVEN: Correct. 16 MR. RUNNER: That's part of the mission? 17 MR. CAMPBELL-CRAVEN: Yes. 18 MR. RUNNER: And I just kind of sense in 19 this discussion that there's a whole lot more zeal 20 to collect the under tax than there is the over tax 21 in this regard. 22 And I guess part of my question is -- in 23 this regard -- and I guess part of my question is in 24 this regard, I've got to believe this is like a 25 pretty common mistake for people who are confused in 26 regards to tax law if they're doing it themselves, 27 not using a program of any kind. 28 The difference between what the federal 21 1 government treats -- IRS treats Social Security 2 income and the how the State treats it, right? 3 That's pretty common? 4 MR. SMITH: You know, I can't speak to how 5 often this -- 6 MR. RUNNER: Well, let me ask you this -- 7 MR. SMITH: -- situation happens. 8 MR. RUNNER: Does FTB have a list of the 9 most common problems attached to filing for income 10 tax? 11 MR. SMITH: That I cannot speak to. 12 I can say that -- 13 MR. RUNNER: Let me -- let me go to 14 somebody who might help. 15 MR. CAMPBELL-CRAVEN: I believe it does, 16 yes. 17 MR. RUNNER: Okay. And do you know where 18 someone falls in that regard? 19 MR. CAMPBELL-CRAVEN: No, sir, I do not. 20 MR. RUNNER: Okay. Do you know -- does the 21 FTB have any kind of an education program for folks 22 that are, all of a sudden, moving, you know, they're 23 getting ready to collect Social Security income in 24 regards to educating them in regards to the 25 difference between federal income tax and State 26 income tax? 27 MR. SMITH: The instructions on the 28 Schedule CA are provided and -- I mean, the 22 1 Schedule CA's sole purpose is make adjustments that 2 -- from federal AGI and Federal itemized deductions 3 that California does not follow. 4 MR. RUNNER: But no special outreach, just 5 the instructions? 6 MR. SMITH: Right and the instructions 7 clearly state that Social Security benefits are not 8 included in California taxable income. 9 MR. RUNNER: So, it's just the instruction, 10 no outreach? 11 MR. SMITH: Specific outreach for this 12 particular issue? 13 MR. RUNNER: Right. 14 MR. SMITH: I'm not -- I am not aware. 15 MR. RUNNER: It's a pretty -- we know who 16 this group is, right, we know who these people are, 17 individuals, who we've been taking tax returns from. 18 We know when their birthdays are, we know 19 when they're turning 62. 20 So, the potential -- it would be an easy 21 group to just say, "Hey, heads up. You should be 22 aware of this." 23 We don't do anything like that? 24 MR. SMITH: Not to my knowledge. 25 MR. RUNNER: Okay. 26 And I guess part of the issue is because 27 again I go down to what the statement of principles 28 is and it says, 23 1 "Our duty is to correctly apply laws, 2 to perform in fairness and an impartial 3 manner." 4 I just think that part of that must be 5 education. And I guess -- I'm sorry, I don't 6 necessarily look at instructions as an education 7 effort. 8 Maybe I'm wrong there, but that's just -- 9 just instructions, not -- not trying to focus on 10 telling people something, red flagging something. 11 And it's going to be my opinion, I guess, 12 that I'll bet you there are a lot of folks who don't 13 understand the difference here, if they're doing 14 their own income tax, between what the feds do and 15 what -- what the state does. 16 Let me -- let me go to Appeals, real quick. 17 On the -- in the ability of the statute of 18 limitations, if -- if we were to find, for instance, 19 that there was an administrative error on the part 20 of the FTB, does that change the -- the statute of 21 limitations? 22 MR. STAFFORD: No. 23 MR. RUNNER: Not at all? 24 MR. STAFFORD: No, it does not. 25 MR. RUNNER: So, the FTB can make any 26 mistake they want, any mistake they want, and the 27 the taxpayer does not have recourse? 28 MR. STAFFORD: I would -- 24 1 MR. RUNNER: In regards to the statute of 2 limitations? 3 MR. STAFFORD: -- the statute of limitations 4 is pretty clear. There's no exceptions in general 5 to it except the stip by statute and a few -- maybe 6 the Winkenbach, which doesn't apply in this case, 7 'cause it deals with double taxation, as the FTB has 8 said. 9 MR. RUNNER: Is that the only issue? The 10 only issue is the double taxation? 11 MR. STAFFORD: In this -- that's where the 12 Winkenbach decision came down on. 13 MR. RUNNER: Right. 14 MR. STAFFORD: That's where they would have 15 to fall into. 16 They don't fall into that. So, 17 that equitable recoupment -- 18 MR. RUNNER: Right. 19 MR. STAFFORD: -- does not apply in their 20 case. 21 The other exceptions that are applied are 22 only by statute. And, so, they don't come within 23 the financial disability, that argument, which is 24 the exception provided by statute. 25 Other than that, there's really no 26 equitable -- equitable -- 27 MR. RUNNER: What is the other statute 28 for -- for financial -- you say they -- you're 25 1 saying that they don't fit into? 2 MR. STAFFORD: What is it 3 --19316, I 3 think it is. 4 MR. AMBROSE: 19306. 5 MR. RUNNER: And it says? 6 MR. AMBROSE: There's an exception for 7 financial disability wherein the statute is tolled 8 for the period that financial -- that disability -- 9 excuse me, I can't talk -- but they haven't shown 10 that meet any of those exceptions. 11 So, I don't think any of that's been 12 alleged. 13 MR. RUNNER: Financial disability would be 14 defined as the inability to file those kinds of -- 15 what -- what -- how -- how would you -- how would 16 you -- give me a good couple examples of financial 17 disability? 18 MR. STAFFORD: Your inability to manage 19 your financial affairs due to some type of 20 disability, either mental or physical, something 21 like that's continuous -- 22 MR. RUNNER: Uh-huh. 23 MR. STAFFORD: -- substantial disability. 24 That's the one exception provided by statute. 25 MR. RUNNER: Uh-huh. 26 MR. STAFFORD: Other than that, they would 27 have to come under some other theory and there's 28 generally no equitable theories, given -- except for 26 1 maybe -- they've mentioned Winkenbach here, but even 2 under that narrow interpretation by the Board, it 3 only applied for double taxation by California. 4 That didn't happen in their case. 5 MR. RUNNER: Uh-huh. 6 MR. STAFFORD: So, we have a lot of these 7 appeals, you know, where people overpay and, you 8 know, it's just -- that's just the tough way it is. 9 There's not really an equitable exception 10 provided by the code other than specifically set 11 forth in 19316, I think it is -- something like 12 that. 13 So, it's a tough circumstance, but that's 14 what it is. 15 Yeah, we've had numerous appeals come 16 before. 17 MR. RUNNER: Right, right. Right, okay. 18 Well, I'm going to encourage everybody to put their 19 thinking caps on. 20 Thank you. 21 MR. HORTON: Member Stowers. 22 MS. STOWERS: To the Appellant, you said 23 you spoke with the Franchise Tax Board when you were 24 ready to file your amended tax returns? 25 MRS. VALDEZ: I spoke to -- I spoke to them 26 when I became aware of the fact that this was an 27 issue that had been going on for the previous five 28 years. 27 1 MS. STOWERS: Okay. 2 MRS. VALDEZ: So, when I -- when I became 3 aware of fact that the adjustment was available to 4 us, I called the FTB, just to clarify that, to ask 5 what the process was. 6 I was told where to find the forms 7 electronically. And I was advised -- or it was 8 recommended to me -- that we complete the forms, but 9 we not submit them until that current tax year was 10 completed. 11 MS. STOWERS: Because of their processing? 12 MRS. VALDEZ: Because of their processing. 13 And then there was an issue with the 1099 that, 14 unfortunately, further delayed that two years tax 15 processing. 16 Can I just make one comment? 17 MS. STOWERS: Absolutely. 18 MRS. VALDEZ: I -- I can't help but feel 19 like the taxpayer's at the disadvantage and the 20 Franchise Tax Board has all the advantages. 21 I -- no one called me from the Franchise 22 Tax Board to tell me that that 1099 wasn't there, 23 and, therefore, my -- you know, my refund -- our 24 refund was delayed. It wasn't until I called them. 25 The same thing happened with the 26 amendments. I filed the amendments, took months and 27 months and months. I called. One by one they 28 released them, again asking me for more information 28 1 and never told me that 2007 and 8 were even a 2 problem. 3 I called back again and they said, "Oh, 4 those are beyond the statute of limitations." 5 MS. STOWERS: Okay. 6 MRS. VALDEZ: So, I don't know. I just 7 feel like we were at a disadvantage all of the way 8 around. 9 Never was it disputed that we overpaid, by 10 the way. We got the refunds back for the three 11 years, so, obviously, it was -- it was our money. 12 And we got it back. So -- 13 MS. STOWERS: Okay, I understand. 14 MRS. VALDEZ: Yeah. 15 MS. STOWERS: It's sad. 16 To the Department, the conversations she 17 had with the Franchise Tax Board, where she was 18 advised to delay or wait until after the 2012 tax 19 return had posted, if that conversation is 20 documented in your communication log, could that be 21 treated as an informal claim for refund for the 2008 22 year? 23 MS. MOSNIER: No. The requirements for a 24 valid claim for refund, one of them is that a claim 25 must be in writing. 26 So, unfortunately, a verbal statement by a 27 taxpayer that he or she feels that they're entitled 28 to a refund or credit for a particular tax year does 29 1 not constitute a claim for refund under the Revenue 2 and Taxation Code. 3 MR. CAMPBELL-CRAVEN: And, Ms. Stowers, if 4 I may? 5 I'm finding it a little difficult to 6 comprehend that an FTB employee would ever advise 7 somebody to delay filing a claim for refund. 8 I mean, that's -- they're trained to know 9 about the statute of limitations, which is very 10 difficult for me to understand. 11 I can understand delays in processing once 12 it's filed, because maybe we need corroborating 13 information or the file's not complete or something. 14 Or we would go through up to a six-month period of 15 talking with the taxpayer and trying to figure out 16 what was going on, but to actually suggest, "Do not 17 file a claim for refund," I find difficult to -- I'm 18 very confused by that. 19 MS. STOWERS: Okay. 20 MRS. VALDEZ: Well, I didn't say they said, 21 "Do not file." 22 I said he -- he advised me to hold off. He 23 said, 24 "This is the busiest part of the tax 25 season, I would recommend that you -- 26 that you not file until this current year 27 is processed." 28 Those were his words to me. 30 1 MS. STOWERS: Okay, I understand, yeah. 2 Back to the Department, you said something 3 about penalties. 4 Were these penalties cancelled? It was a 5 dishonored check payment penalty or something? 6 MR. SMITH: Correct. That penalty was 7 abated for reasonable cause. 8 And the estimate -- the estimate penalty, 9 that was not -- that was not abated. 10 MS. STOWERS: And these penalties were 11 generated through some kind of automatic system 12 that, during the processing of the return was able 13 to push it out? 14 MR. SMITH: Correct. 15 MS. STOWERS: No human involvement? 16 Now as far as when the returns were 17 actually processed, you're saying certain items on 18 the first two pages of the return that's keyed in by 19 a technician basically came in the -- the income 20 numbers? 21 MR. SMITH: Right, there's -- there's -- 22 just from those first two pages of the 540. 23 MS. STOWERS: Just for those first two 24 pages? 25 So, from those first two pages there is no 26 way to determine that a taxpayer included their 27 Social Security income? 28 MR. SMITH: Unfortunately, no, there was 31 1 not. 2 MS. STOWERS: And then when you to go the 3 California Schedule CA, there is a line there -- the 4 2008 year, the line 20 provides for the subtraction 5 for the Social Security benefits? 6 MR. SMITH: Correct. 7 MS. STOWERS: And I -- I really do feel 8 sorry for you guys. 9 To be quite honest with you, my mom made 10 the same mistake too and I ended up -- I was able to 11 correct them. 12 Now going forward you're saying what? Let 13 me back up. 14 Cal File, did we have Cal File for the 2007 15 and 2008 years? 16 MR. CAMPBELL-CRAVEN: I don't believe so. 17 MS. STOWERS: Okay. But now going forward 18 the Schedule CA will be a keyed item? 19 MR. SMITH: Yes, it was keyed in starting 20 with the 2013 tax year, which -- and then starting 21 this fall RINs will be issued related to errors from 22 the Schedule CA. 23 MS. STOWERS: RIN being a Return 24 Information Notice saying, hypothetically speaking, 25 "You included your Social Security 26 benefits. This is not subject to 27 California tax. We have adjusted your 28 income accordingly." 32 1 MR. SMITH: Correct. 2 MS. STOWERS: Okay. 3 MR. CAMPBELL-CRAVEN: I believe it's part 4 of the EDR project, which is capturing -- 5 MS. STOWERS: Everything is EDR. 6 MR. CAMPBELL-CRAVEN: Yes. 7 MS. STOWERS: I think I -- no further -- no 8 more questions. 9 Oh, one more thing. I'm sorry, 10 Mr. Chairman. 11 MR. HORTON: Sure. 12 MS. STOWERS: I know you guys spoke -- I 13 mean, Mr. Runner asked about outreach and education. 14 And I believe you were speaking from the 15 Legal Division that maybe perhaps the Legal Division 16 doesn't do any outreach? 17 But does the Franchise Tax Board have a 18 taxpayer education outreach service or the taxpayer 19 advocate service or the taxpayer newsletters that 20 would give education like Social Security benefits 21 is not subject to you tax? 22 MR. SMITH: Right. I mean, there are 23 other -- obviously, not within Legal -- but other 24 divisions within FTB. 25 I just -- I can't speak to what particular 26 issues are being focused on at this time. 27 MR. CAMPBELL-CRAVEN: There are taxpayer 28 letters that go -- go out and, yes, public outreach 33 1 to the practitioners and, you know, little articles 2 about these are some common mistakes that we're 3 seeing. 4 And now that I think about it, Senator 5 Runner, I don't believe that this is one of the ones 6 that has been identified. I'm a little hazy on 7 that, but I believe that is correct. 8 And also in this case this was 9 self-assessed. So, we wouldn't have captured that 10 Schedule CA information or looked at that unless an 11 audit were commenced. And in that case there would 12 have been a refund. 13 But this was a self-assessed amongst 14 millions of returns that come in. It's one of those 15 unfortunate situations. 16 It will not happen any more because the 17 system has been changed. It doesn't help the 18 Valdezes, unfortunately, unless, of course, your 19 Board were to sustain and refer to the Victims 20 Compensation Board. 21 MS. STOWERS: I'm finished. 22 Thank you. 23 MR. HORTON: Speaking of the Victims 24 Compensation Board, given the -- the correction by 25 the agency and the timelines in which those 26 corrections took place, where the agency now can 27 track this information, what's the probability of 28 having a favorable outcome from the Victims 34 1 Compensation Board, and particularly with 2 recommendation from the Board? 3 MR. CAMPBELL-CRAVEN: I have no personal 4 knowledge, Mr. Chairman. 5 I would hope it would be good, but I don't 6 know. 7 MR. HORTON: Question of Appeals, I've been 8 trying to -- seems like the Members have really 9 exhausted all of the avenues, but I want to pitch it 10 over to you, and see if you have any other thoughts 11 as to -- within the law -- how this could be 12 addressed. 13 But before then a statement then, the 14 statute of limitations is somewhat of a double-edged 15 sword, in that if there is an assessment and the -- 16 and the Department misses the assessment, they can't 17 go back and collect it after the return has been 18 filed as well. 19 So, relative to the similar circumstances, 20 it actually is pretty equitable on both sides of the 21 fence. 22 The matter of the -- the -- possibly to the 23 Department, we should seek to go back and see if 24 there's a way of looking at any timeline in which 25 the statute is about to run on these particular 26 transactions to see if we make sure that no one else 27 sort of falls into this situation. 28 I know in all of the Members' district 35 1 there are a number of seminars that we conduct, and 2 possibly we can help in that area as well. 3 We were actually looking at having a 4 seniors conference, 'cause not only is Social 5 Security an issue, there are a number of other 6 issues and resources that seniors are not aware of 7 and don't necessarily -- are in a position to take 8 advantage of it. 9 So, to Appeals, any -- any thoughts? 10 Obviously, we want to see if we can help, but -- 11 MR. AMBROSE: The only -- as FTB has 12 proposed -- is contacting the Government Claims and 13 Victims Compensation Board. 14 But as far as, you know, under the Code, 15 there really is no exception that's available. 16 MR. HORTON: Member Harkey. 17 MS. HARKEY: Thank you. 18 This is for Appeals. Overpayment has the 19 statute of limitations. 20 Does over collection have a statute of 21 limitations? 22 MR. STAFFORD: Well, the over collection is 23 a theory proposed by the FTB, and it's not provided 24 for in statute. 25 If the FTB wants to have this theory called 26 over collection and do that, that's their 27 prerogative. 28 But it's not provided by statute and -- 36 1 MS. HARKEY: It might be our prerogative? 2 MR. STAFFORD: Well, there you go. 3 You can do -- I guess, if they want to do 4 that, that's fine. As far as -- 5 MS. HARKEY: Without violating the statute 6 of limitations it could be an over collection? 7 This is my -- my thought process is that we 8 did find that they owed additional taxes for both 9 2007 and 8 and we billed them for them, when, in 10 fact, we owed them a refund. 11 And, so, I would say that the billings 12 would constitute an over collection. And -- and I 13 think we, as a state, perhaps over collected in 2007 14 and 8. And that, I do not believe, has a statute of 15 limitations and might be something that we could use 16 to accommodate. 17 MR. STAFFORD: Based on our billings, 18 you're saying? 19 I'll let the FTB respond to that. I think 20 it's their -- 21 MS. HARKEY: I know the FTB is going to, 22 but -- but I'm just saying -- 23 MR. STAFFORD: Of course, they're saying 24 the taxpayer, you know, made the mistake. 25 And you're saying, "Well, FTB made a 26 mistake also." 27 MS. HARKEY: Yeah, well, the taxpayer made 28 a mistake. 37 1 And had we been in 2013, the taxpayer 2 wouldn't have been billed. And we would have sent 3 them probably a refund for overpayment. 4 But because we're doing 2007 and 8, and we 5 didn't have the automatic, you know, notice -- we 6 didn't find it. 7 And we billed them. And our billings were 8 actually an over collection because they didn't owe 9 us taxes, we owed them. 10 Just something to think about. 11 Thank you. 12 MR. HORTON: I'd like to hear from the 13 Department. 14 MR. SMITH: Regarding over collection 15 versus overpayment? That's what you'd like? 16 MR. HORTON: Yes. 17 MR. SMITH: Okay. So, an over collection 18 occurs when Respondent makes an error. 19 MR. HORTON: No, I know what -- I know what 20 it is. 21 I mean, I'm not asking for -- I understand 22 the law. I'm just asking relative to this circum -- 23 this set of circumstances. 24 MR. SMITH: All right. So -- so, this -- 25 this was a classic overpayment. 26 The notices that were sent were sent as a 27 result of the self-assessed tax and that was the tax 28 that was due, based on the return that was filed. 38 1 This was not an error made by Respondent. 2 So, it does not fall under the under and over 3 collection scenario. 4 MS. MOSNIER: When FTB collects or takes in 5 money that -- that it is legally entitled to at the 6 time it receives those funds, it cannot be an over 7 collection. 8 And, unfortunately, since the taxpayers 9 reported the liability based on including Social 10 Security income, it turns out that they didn't have 11 to, they self-assessed so many dollars in tax for 12 each of the years. 13 They self-assessed and they paid according 14 to what they told us they owed. They established 15 the liability. So, FTB was entitled to receive that 16 entire amount. 17 Similarly, when the billing notices went 18 out for the penalties, FTB was entitled to collect 19 those funds. 20 And, so, when FTB received payments for the 21 penalties, that cannot -- unfortunately, it cannot 22 be considered an over collection. 23 FTB was entitled to receive those funds 24 because it was entitled to the penalties under the 25 law. 26 Subsequently, one was abated, but, 27 nonetheless -- so, unfortunately, I mean, we look at 28 these. When we see that we cannot grant a refund or 39 1 credit based on the statute of limitations, we do 2 consider whether the money we received would 3 constitute an over collection. 4 And, unfortunately, in this case it does 5 not. 6 MR. HORTON: Is there a way for the FTB to 7 determine -- this may very well be the only case of 8 this nature, I don't know -- but, in -- the 9 unfortunate part about what I said earlier is this 10 is a double-edged sword. 11 So, those who owe taxes and the statute 12 have ran and the Board can't collect it, they can't 13 go back, and -- and I'm just curious if -- such that 14 this is 2007, 2008 and that this is an identifiable 15 group of individuals, how many other cases would 16 be -- would this -- would be involved with this? 17 MR. CAMPBELL-CRAVEN: I don't know that we 18 have that information. 19 I don't even know if we could go back in 20 time and try to capture that. 21 I -- it's -- it's just one of those 22 unfortunate situations where, unfortunately with the 23 statute of limitations, it's based on the idea that 24 there needs to be closure, obviously, at some point 25 in time. 26 And sometimes there are harsh results. And 27 if, as you say, it could be a double-edged sword if 28 you were -- if this were to qualify somehow, then 40 1 perhaps that means we'd have to go back and look at 2 deductions on Schedule A's for old years. 3 I don't know. I mean, it just -- there 4 needs to be closure at some point. And sometimes 5 unfortunate results are going to happen, but that's 6 the law we're stuck with. 7 MR. HORTON: All right. Further 8 discussion, Members? 9 Hearing none -- 10 MS. STOWERS: Move to take it under 11 submission. 12 MR. HORTON: -- Member Stowers moves to 13 take it under submission. 14 Second by Member Runner. 15 Without objection, Members such will be the 16 order. 17 Thank you so very much for appearing before 18 us today. 19 The Board will take your matter under 20 consideration and send you a written report of our 21 decision. 22 I also want to thank the young man who is 23 there. You did an exceptional job. 24 MR. MALLOY: Thank you. 25 MR. HORTON: I like the path that you took 26 relative to, you know, the various different cases. 27 You did well. 28 MRS. VALDEZ: Thank you. 41 1 REPORTER'S CERTIFICATE 2 3 State of California ) 4 ) ss 5 County of Sacramento ) 6 7 I, JULI PRICE JACKSON, Hearing Reporter for 8 the California State Board of Equalization certify 9 that on JULY 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 41 constitute 14 a complete and accurate transcription of the 15 shorthand writing. 16 17 Dated: AUGUST 12, 2015 18 19 20 ____________________________ 21 JULI PRICE JACKSON 22 Hearing Reporter 23 24 25 26 27 28 42