1 BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION 2 450 N STREET 3 SACRAMENTO, CALIFORNIA 4 5 6 7 8 REPORTER'S TRANSCRIPT 9 JUNE 20, 2017 10 CORPORATE FRANCHISE AND PERSONAL INCOME TAX HEARING 11 APPEAL OF 12 PETER S. MAGNUSSON 13 NO. 971924 14 AGAINST PROPOSED ASSESSMENT OF 15 ADDITIONAL INCOME TAX 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 For the Board of Equalization: Diane L. Harkey 3 Chairwoman 4 Sen. George Runner (Ret.) Vice Chair 5 Fiona Ma, CPA 6 Member 7 Jerome E. Horton Member 8 Yvette Stowers 9 Appearing for Betty T. Yee, State Controller 10 (per Government Code Section 7.9) 11 Joann Richmond 12 Chief Board Proceedings 13 Division 14 For Board of Equalization Staff: Anthony Epolite 15 Tax Counsel IV Legal Department 16 17 For Franchise Tax Board: Mira Patel 18 Tax Counsel 19 Marguerite Mosnier Tax Counsel 20 21 For Appellant: Peter S. Magnusson Taxpayer 22 Ronald H. Cohen 23 Representative 24 ---oOo--- 25 26 27 28 2 1 450 N STREET 2 SACRAMENTO, CALIFORNIA 3 JUNE 20, 2017 4 ---oOo--- 5 MS. RICHMOND: Our next item for this 6 morning is item B4 Peter S. Magnusson. 7 Please come forward. 8 MS. HARKEY: Thank you very much. Welcome 9 to the State Board of Equalization. 10 To the appellants, you have ten minutes. 11 Please introduce yourself for the record -- 12 Oh, actually, Mr. Epolite. I keep 13 forgetting you. I'm sorry. 14 Mr. Epolite, will you please introduce the 15 item. 16 MR. EPOLITE: Thank you. Good morning. 17 The issue in this appeal is whether 18 appellant has shown that the notice and demand 19 penalty should be abated. 20 Thank you. 21 MS. HARKEY: Thank you. 22 Okay. Welcome to the Board of 23 Equalization. You have ten minutes. Introduce 24 yourself for the record, please. And then the 25 Department will have ten minutes. You will have 26 five more minutes on rebuttal. 27 MR. COHEN: Thank you. I'm Ron Cohen. I'm 28 a California Certified Public Accountant, practice 3 1 in Fremont, California. 2 My client here is Peter Magnusson, who is 3 the taxpayer. 4 I was the tax return preparer for the 5 return at issue, so I know you've all seen the 6 briefs and I'll just quickly outline it. 7 So this is about the tax year 2013. 8 There's no dispute about the items on the return or 9 the calculation of taxable income. This is all 10 about the demand penalty that was assessed by the 11 Franchise Tax Board. 12 In that 2013 return, the tax that was 13 computed the paid was $125,000, approximately. The 14 return was filed after the due date. The taxes paid 15 were paid in timely. And on that tax return when it 16 was filed showed a final liability due to the 17 Franchise Tax Board of $784,000 -- $784, $784 out of 18 $125,000 liability. That comes out to about 19 six-tenths of one percent of the total liability. 20 Again, he had paid the liability timely. He had 21 simply not filed the return. 22 After filing the return, we received a 23 penalty notice for approximately $31,500. You can 24 imagine our response in that, again, the amount due 25 with the return was $784, receiving a penalty notice 26 for almost 31-and-a-half thousand dollars under 27 section 1933 was 40 times the amount due with the 28 return. 4 1 So, we filed this appeal -- first we filed 2 with the Franchise Tax Board asking for a waiver of 3 the penalty. Again, because while the return was 4 filed late, the tax was paid in, Franchise Tax Board 5 and State of California had their money except for 6 the final $784 which was paid. 7 My taxpayer, my client was not aware of the 8 notices. And when he filed, we filed completely 9 voluntarily and -- and -- and did so, and then 10 became aware that other notices had been sent. 11 So with the penalty of 40 times the amount 12 due, we filed this appeal. As you read in the -- in 13 the appeal writing, I made the comment that it was 14 beyond all moral comprehension as to why 15 31-thousand-and-a-half dollars would be due on an 16 amount due of $784. 17 So, the Franchise Tax Board denied our 18 appeal and then we appealed with the Board here. 19 In making that appeal, as -- in addition to 20 going through just our arguments of what was going 21 on in Mr. Magnusson's life, which he will address 22 here in a few moments, we added -- we talked about 23 the fact that the Eighth Amendment in the Bill of 24 Rights, the U.S. Constitution, talks about cruel and 25 unusual punishment, which we all know of, but the 26 later part of that is a -- is a -- is a prohibition 27 against excessive fines. And to our way of 28 thinking, given the numbers involved and the lack of 5 1 any willful intent, in our way of thinking, we 2 thought this ran into that -- right into that 3 protection. 4 The Franchise Tax Board replied in their 5 brief that this Board can't consider those arguments 6 under Article III, Section 3.5 of the California 7 Constitution. 8 So I'm a CPA, not making a grand legal 9 argument, but at least in our way of thinking, I 10 deal a lot -- I'm in Fremont, I deal with the 11 Fremont Police, always in a positive manner. I deal 12 with City Hall members on political items. I deal 13 with the Register of Voters. And all of them, I 14 assure you, take into account the U.S. Constitution 15 on a daily basis. So we are at least confused as to 16 why that protection shouldn't extend to this matter. 17 Chairman Harkey's office gave us a call and 18 we talked a bit about some understanding about how 19 the statute number 19333 actually worked and how 20 well the term was defined as to how the penalty 21 should be computed. I'll leave that for you to 22 consider. 23 Further, in the Legislature, AB 449 is in 24 committee with the -- under the Revenue and Taxation 25 Code, which is right on point and changes the 26 statute to be rather than 25 percent of the tax 27 liability -- tax -- total tax on the return, to 28 being 25 percent of the final tax due. Which, in my 6 1 client's case, would have been 25 percent of $784, 2 which would be, I'm more than happy to say, 3 completely appropriate. 4 That bill -- I just checked it this 5 morning -- is in committee. I can't get anymore 6 information on its status or its likelihood of 7 passage, but I think it's interesting to note that 8 others have thought that this circumstance my client 9 finds himself in is unjust. 10 Mr. Magnusson, as he'll go into in a 11 moment, I met him back in the late 2000s. He came 12 here from Sweden. He has been involved intimately 13 in the development of some great high tech companies 14 that you all would've known -- would know of if I 15 mentioned the names. And I will just say here that 16 routinely he pays many, many hundreds of thousands 17 of dollars of California state tax on time and 18 continues to do so. 19 As a final point, in this process of 20 getting ready for this hearing, I was contacted by 21 Pro Systems which is our software service provider. 22 We -- I am a CPA. We prepare returns. We send them 23 in. They go through the e-file process, as I'm sure 24 you're all familiar. 25 The, uh -- the, uh, call from the Pro 26 Systems representative said, Mr. Cohen, I've gotten 27 a call on behalf of your client, Mr. Magnusson. The 28 Franchise Tax Board has called us directly and asked 7 1 us for information about whether your client had 2 made earlier attempts to file his tax returns than 3 when we actually filed the final one. 4 Well, I'll leave that up to you to 5 consider. 6 I talked to my senior partners and to 7 lawyers in San Francisco about the situation. I 8 would just express here, pretty much separate from 9 this argument but connected to my outrage in that I 10 had power of attorney on this case, I was the 11 representative. And I have never heard of, nor have 12 either of my partners who've been around since the 13 1960s, of ever the Franchise Tax Board going through 14 our privately contracted software provider to get 15 information on a taxpayer where we indeed have filed 16 power of attorney and we would have happily provided 17 any information if they had just given us a call. 18 They had our name, our phone number, everything in 19 the power of attorney. 20 So separate from the case in that regard, I 21 thought that was worthy of bringing to your 22 attention. 23 Mr. Magnusson here, you know, as I 24 mentioned, feels, and as do I, that the amount of 25 dollars involved for the unpaid liability of $700 is 26 significant and we intend to -- if we're held 27 against here in this hearing, we certainly intend to 28 go to the next level of court. We were advised we 8 1 have to, certainly for your consideration, take the 2 case here first, so we did. 3 Thank you. 4 Am I out of time? Is that what the bell 5 meant? 6 MS. HARKEY: No. 7 MR. COHEN: Oh, okay. Mr. Magnusson would 8 like to say a few words if we have some time. 9 MR. MAGNUSSON: I'll be very brief. My 10 name is Peter Magnusson. Thank you for taking the 11 time to hear the appeal. 12 Yeah, so I'm from Sweden originally, so we 13 like paying taxes. So it's not about not paying 14 taxes. And I'm accustomed to living with high taxes 15 as well. But this isn't -- this isn't the tax 16 issue, right? 17 So at this period of time I'm not going 18 to -- and we don't -- we don't assert that these 19 correspondence to me wasn't happening. But it was 20 an insanely busy period professionally for me. I 21 was going, in that nine-month period, between three 22 pretty separate demanding jobs. 23 And I don't mean that as sort of an excuse 24 for not keeping paperwork in place. But I do know 25 that I was very clear that, make sure that, okay, 26 taxes had been paid but I might be missing 27 paperwork. 28 So I certainly expected that if I had 9 1 miscalculated by -- which we did by 0.6 percent, 2 that there would be some follow-ups and some fees on 3 that. But if we miscalculated by less than $800, it 4 didn't seem to me reasonable, as a hardworking 5 tax-paying citizen, to then be fined a total of over 6 30,000. 7 And that's basically what I felt it came 8 down to. 9 MS. HARKEY: Thank you. 10 Okay. Department, you have ten minutes. 11 Please introduce yourself for the record. 12 MS. PATEL: Good morning, Chairwoman Harkey 13 and Members of the Board. My name is Mira Patel. 14 Sitting to my right is Marguerite Mosnier, and 15 together we represent respondent, the Franchise Tax 16 Board. 17 I would first, just wanted to note that the 18 correct amount at issue is 31,476.25 as noted in 19 footnote two of your hearing summary. 20 Respondent properly imposed the demand 21 penalty for the 2013 tax year and appellant has not 22 established reasonable cause to abate that penalty. 23 When respondent did not receive a timely 24 2013 return from appellant, respondent issued a 25 demand for tax return based on income information 26 indicating appellant made about income of 27 $1.2 million and, therefore, had a filing 28 requirement. 10 1 The demand contained clear language that 2 respondent would impose a demand penalty if the 3 appellant did not respond to the Demand Notice. And 4 when he didn't respond to the Demand Notice, 5 respondent issued a Notice of Proposed Assessment or 6 an NPA. 7 On the NPA respondent imposed a filing 8 enforcement fee, a delinquent filing penalty, and 9 the demand penalty. Appellant did not protest the 10 NPA and the proposed tax and penalties became final 11 liabilities before he filed his return. 12 Appellant then filed his return and 13 respondent processed it and adjusted his account, 14 which including -- which included decreasing the 15 demand penalty according to the amount that he 16 reported on his return. 17 The demand penalty was properly imposed 18 under California law because appellant failed to 19 respond timely to the Demand Notice and there is no 20 reasonable cause established to abate that penalty. 21 Furthermore, as your Board staff noted in 22 the hearing summary, appellant never explained or 23 substantiates why he had reasonable cause not to 24 respond to that notice. 25 Appellant's statement that he was an 26 extremely busy executive in 2014 does not establish 27 reasonable cause because the demand was issued in 28 2015 and his response was also required in 2015. 11 1 Furthermore, appellant's history of not 2 responding to Demand Notices and filing his 3 California returns late does not support appellant's 4 argument for reasonable cause. 5 In short, appellant has not explained why 6 he was unable to respond to the demand between 7 January 13th, 2015, the date the notice was mailed, 8 and February 18th, 2015, the response deadline. 9 Additionally, even if appellant were 10 extremely busy during the time period to respond to 11 the demand, that would not constitute reasonable 12 cause. Your Board has never held that the press of 13 business constitutes reasonable cause. Rather, your 14 Board's decisions are clear that a taxpayer must 15 show he was prevented from responding to the demand 16 in order to establish reasonable cause, and 17 appellant simply has not done so. 18 Appellant also argues that the demand 19 penalty violates the United States Constitution. 20 However, again, as stated in your Board's hearing 21 summary, the Board doesn't determine the 22 constitution validity of California statutes. Such 23 arguments should be made in court or to the 24 California Legislature. 25 With regards to the proposed bill currently 26 standing, it is simply proposed. And even if it 27 were to be the passed, it's only going to be 28 effective and operative after tax year starting 12 1 January 2018. So, therefore, it's not relevant to 2 this appeal. 3 Finally, with regards to appellant's 4 argument about him being contacted by his tax 5 software, respondent ordinarily and regularly 6 verifies with the tax vendor to see whether the 7 appellant made prior attempts to file his return. 8 And we do this for the benefit of the taxpayer, in 9 order to ensure that the penalty was correctly 10 imposed. 11 On the facts and evidence before your 12 Board, respondent respectfully requests that you 13 sustain its position. 14 I'm happy to answer any questions. Thank 15 you. 16 MS. HARKEY: You have five minutes on 17 rebuttal if you wish. 18 MR. MAGNUSSON: I want to comment real 19 quick before Ron. 20 I want to reiterate, at least from my 21 personal perspective, I'm not making a particular 22 excuse about -- I think you spent ninety percent of 23 your commentary iterating on the definition of 24 reasonable cause. I'm not disputing that. 25 What I'm stating is -- that was more for 26 the sort of personal benefit that it was busy. And 27 then digging into whether I was late in other 28 circumstances or not is not the point. The point 13 1 is, regardless of whatever administrative twists and 2 turns of documents that you invent as part of your 3 process, shouldn't have as an end result that 4 missing by 0.6 percent and underpaying by $800 then 5 being fined with over 30,000. That is an 6 unreasonable end result no matter what, and that's 7 basically what I'm contending. 8 MR. COHEN: I don't have any further 9 comments. Thank you. 10 MS. HARKEY: Okay, thank you. I -- I just 11 want to lead this off just quickly. 12 Mr. Epolite, Appeals, is the statute 13 permissive? Does the FTB have to issue the penalty 14 or may they? 15 MR. EPOLITE: It's permissive. However, 16 the FTB promulgated a regulation, and the regulation 17 provides that if within the prior four years an 18 appellant previously was issued a demand or request 19 for return, failed to respond to that demand or 20 request, and an NPA was issued, then a demand 21 penalty will occur. And that criteria occurred in 22 this situation. 23 MS. HARKEY: Okay. So I guess my next 24 question is, is the FTB willing to pursue this in 25 court? 26 I just -- you know, I'm just asking. This 27 seems like this could have been resolved. And I 28 apologize for saying that if I'm speaking out of 14 1 turn. But I do think it could have been resolved. 2 So with that, Members. 3 MS. STOWERS: Madam Chair? 4 MS. HARKEY: Yes. 5 MS. STOWERS: To the -- Hmm. I don't know 6 who. 7 To Appeals, you said that it is permissive, 8 they may impose but they have a regulation. 9 MR. EPOLITE: The criteria was 10 established. 11 MS. STOWERS: If the criteria was 12 established, that they will impose. 13 MR. EPOLITE: Correct. 14 MS. STOWERS: To your knowledge, 15 do you know why that regulation was implemented? 16 Or let me -- let me ask the Franchise Tax 17 Board since it's their regulation. 18 To the Franchise Tax Board -- actually, 19 it's a two-point question. What's the purpose of 20 this demand penalty and why do you have this 21 regulation established? 22 MS. MOSNIER: Thank you. 23 We have the regulation to interpret and 24 implement Section 19133 which is the demand penalty. 25 The statute itself says FTB may impose a demand 26 penalty, and the regulation sets out the 27 circumstances pursuant to which it will be imposed. 28 And as your Board counsel just noted, those 15 1 circumstances have been met in this case. 2 To respond to your second question, the 3 purpose of the demand penalty is to encourage 4 taxpayers to fulfill their tax obligations and 5 either to file returns, explain to FTB that they've 6 already filed them, or explain why they don't have a 7 filing requirement. 8 It is not a penalty related to the amount 9 of the tax liability. If Mr. Magnusson's liability 10 had been fully paid when he filed his return, the 11 penalty would have been imposed. It is unlike the 12 delinquent filing penalty in that way; because, as 13 you would note, the notice on the Notice of Proposed 14 Assessment, both the delinquent filing penalty and a 15 demand penalty were imposed, and after the return 16 was filed and FTB processed it, it abated the 17 delinquent filing penalty which is based on the 18 amount by which tax was underpaid as of the original 19 due date of the return. However, because the demand 20 penalty is not tied to the -- to how much tax was 21 paid when, it -- it was not abated and it was 22 properly imposed. 23 MS. STOWERS: Okay, thank you. 24 So it's my understanding -- this is more 25 commentary. It's my understanding that before the 26 regulation was adopted, there was some inconsistency 27 on when this demand penalty was being imposed. And 28 because of the inconsistency, the Franchise Tax 16 1 Board, three-member board, adopted the regulation 2 that set forth the criteria on when that penalty 3 would be imposed against individuals. 4 It's also my understanding that -- 5 Well, that's pretty much my understanding. 6 That's it. Thank you. 7 MR. HORTON: Madam Chair. 8 MS. HARKEY: Yes. 9 MR. HORTON: I always have a concern when 10 there -- there seems to be misunderstanding of the 11 law. And for this matter to go to court, I think it 12 would be important that the taxpayer understands the 13 conditions under which the respondent would actually 14 waive the penalty as it relates to reasonable cause. 15 And for the purpose of the taxpayer understanding 16 what those issues are, to determine if they existed 17 in his case. I appreciate the argument about the 18 personal challenges that were faced, but, uh -- 19 So I'm going to ask the respondent to 20 clarify what would be considered reasonable cause 21 and would provide for some relief to the taxpayer if 22 in fact that existed. 23 MS. PATEL: So reasonable cause is 24 basically the taxpayer has the burden of showing 25 that an ordinarily intelligent and prudent business 26 person would have acted similarly in the same 27 circumstances. 28 Your Board has held in many cases that this 17 1 is a pretty high standard, and the press of business 2 has never been held to be reasonable cause. 3 There -- the Board has held in certain 4 cases that significant medical or family problems 5 might constitute reasonable cause. And one showing 6 of that is a U.S. tax court case. 7 The facts were very unique. In that case 8 the taxpayer established he had reasonable cause 9 when his children, both his children had pneumonia, 10 his wife had a ruptured appendix, he suffered from 11 mental and physical collapse, and this all occurred 12 within the 5- to 6-month period of report -- or the 13 original tax due date. In addition to all of that, 14 all of his personal records were located in Maine 15 while him and his family were recovering in 16 California. And in those limited circumstances, the 17 court, the tax court found that there was reasonable 18 cause. 19 MR. HORTON: Okay. 20 To the taxpayer, any of that exist? 21 MR. MAGNUSSON: Not at that level, sir. 22 No. 23 MR. HORTON: All right. Appreciate your 24 honesty. 25 To the Appeals Unit, the legislation that 26 currently exists, if in fact that was law, is that 27 legislation -- I hate to ask this question because I 28 don't know if you know the answer and I don't think 18 1 you should have to know it, but is that prospective 2 or retroactive or prospective? 3 MR. EPOLITE: I'm not aware of the 4 legislation, but it would -- 5 MR. HORTON: Taxpayer, you indicated the 6 legislation exists in Rev. and Tax. Do you know if 7 it's prospective or retroactive? 8 MR. COHEN: I believe it's going to be 9 prospective if it passed. 10 MR. HORTON: Okay. So it wouldn't apply 11 even if it was passed. 12 MR. COHEN: Speaks to the intent. 13 MR. HORTON: Intent of the parties. 14 MS. HARKEY: Any other questions? 15 MR. COHEN: May I add -- 16 MR. HORTON: Yes, sir. 17 MR. COHEN: I just wanted to say the -- 18 the -- Mr. Magnusson had a -- not to denigrate it 19 at all -- a trivial matter in 2009. And to think 20 that that is controlling in their regulation to 21 again impose a $30,000 fine on a $780 balance due, 22 is as inappropriate as the law is itself in this 23 matter. So we certainly hope the law is changed and 24 find the result inappropriate. 25 MR. HORTON: Yeah, as much as I would 26 disagree with the equity of the current law and 27 believe that it should be changed to apply to the -- 28 at a minimum, to the balance or at a minimum if a 19 1 significant percentage of the tax has been paid, the 2 state has not been harmed, that the -- should not be 3 a penalty. 4 Unfortunately, without that law being in 5 place, we can't take it under consideration. 6 MS. HARKEY: I have a question. And any of 7 the legal beagles can answer this. Can a regulation 8 be more restrictive than a statute? Which trumps, 9 the statute or the reg? Mr. Epolite? 10 MR. EPOLITE: Well, the regulation has the 11 criteria that's been established to effectuate the 12 statute. 13 MS. HARKEY: Right. But if the regulation 14 is more prohibitive than the statute -- the statute 15 says "may." I guess the reg. says "the conditions 16 under which may exist." 17 MR. EPOLITE: I would not say that the 18 regulation is more restrictive. The regulation is 19 effectuating the statute. 20 MS. HARKEY: I think it's more restrictive. 21 Yes, Mr. Magnusson. 22 MR. MAGNUSSON: Can I ask a question? How 23 am I, as a busy tax person, supposed to know that 24 I'm sort of in this box in risking really, really 25 high fees when it's not even in the law? 26 MS. HARKEY: I guess through a regulation. 27 I don't know. I'm sorry. I -- 28 You know, Members, this is very difficult, 20 1 I think, because I think it's obvious that there's 2 an inequity and I think that's obvious by a variety 3 of causes. 4 I understand the FTB's position. I do 5 think, as I said earlier, that this could have been 6 handled and not have to come to the Board. 7 I think, you know, I would like to -- I 8 would like to grant the appeal except for the amount 9 due on the underreported, which I believe is roughly 10 $196. And I will make a motion to that effect. 11 Because I think the statute would trump. 12 I think, you know, we're kind of mincing 13 words here. And I don't really want to see this go 14 too much further. 15 So I made a motion to grant the appeal 16 except for a hundred -- well, except for the amount 17 due on the deficiency of $784. 18 Do I have a second? 19 MR. RUNNER: We can talk about the motion. 20 Let me give it some input. 21 MS. HARKEY: Do you wish to second for 22 discussion? 23 MR. RUNNER: No. 24 MS. HARKEY: Okay. 25 MR. RUNNER: Just some discussion. 26 You know, I struggle with the issue, too. 27 I do believe my understanding -- at least I 28 understand what our role in regards to the fact is 21 1 that regulation does -- does have the ability to 2 interpret and helps provide guidance for the 3 statute. 4 And so, again, I would have to agree with 5 counsel or appeals in this sense. I don't think 6 it's more restrictive. I think it -- it -- it 7 provides structure around the statute. 8 And so I don't like it. I don't like that 9 it's as restrictive as it is. I think -- I think 10 the interpretation is -- you know, I don't think 11 the -- I don't think the intent -- I mean intent is 12 to try to motivate people to obviously communicate 13 about their taxes. That's the idea. 14 You know, I get the idea that says, boy, I 15 didn't -- you know, if I would have known the 16 outcome would have been the way it is, I would have 17 communicated better. But that doesn't change what 18 it is. And it's probably to our disadvantage in the 19 state at times that we're not clarifying how harsh 20 that penalty could be. 21 But I guess the fact is it is what it is. 22 And so that's kind of where I find myself. Again, I 23 don't think -- I don't think the regulation is in 24 conflict. I think -- 25 MS. HARKEY: Well, my motion died for lack 26 of second. 27 So go ahead, Ms. Ma. 28 MS. MA: So I'm also struggling with this 22 1 as well obviously. It's extremely punitive given 2 the situation. But, like Mr. Runner said, you know, 3 we really are trying to encourage people to file 4 their taxes. 5 It appears the -- Mr. Magnusson received 6 the Notice of Proposed Assessment on July -- March 7 16, 2015, which lists both the delinquent filing 8 penalty and a demand to file penalty on it. So it 9 may not be explained how it was calculated, but 10 clearly it shows the two penalties on here. 11 And so, you know, I hope the legislation 12 does pass because I think obviously, you know, in a 13 situation like this it is clearly extremely high, 14 the penalty, given that Mr. Magnusson has been 15 paying and did try to pay, you know, all his taxes 16 due. 17 But the law is the law and so, you know, if 18 we make excuses or, you know, don't follow the law 19 for Mr. Magnusson, then all the other people who 20 also, you know, ignore notices that are sent to the 21 taxpayer, you know, they're all going to come here, 22 right, and say, well, you know, Mr. Magnusson, 23 you -- you know, you ruled in favor of him, so, you 24 know, we did the same thing, we didn't respond and 25 didn't file on time even though we paid our taxes. 26 So I think we're kind of stuck in this 27 situation at this moment given -- you know, I hope 28 the law does change and the Legislature does change 23 1 the law because clearly, you know, for situations 2 like this where we have good, you know, taxpayers, 3 you know, who want to do the right thing and pay 4 their taxes on time, you know, it is still, you 5 know, the requirement or the state encouraging 6 people to file on time and pay their taxes on 7 time. 8 MS. HARKEY: I think the point I was making 9 is the law is permissive. So the law probably 10 doesn't need to change. What probably needs to 11 change is the reg. 12 And, you know, so 449 passing or not 13 doesn't change my mind. I think the reg is too 14 prohibitive, and I think it's stricter than the 15 statute. 16 MS. STOWERS: Madam Chair? 17 MS. HARKEY: Thank you. 18 Yes. 19 MS. STOWERS: Who's first? You want to go 20 first? 21 MR. HORTON: Yeah. Thank you, Madam Chair. 22 Just for the record, let me -- let me -- 23 let me share that I don't know what the intent of 24 the parties who established the regulation was in 25 1988, 1987, or somewhere around that period of time, 26 if my memory serves me right. But I would question 27 if the intent was actually to fit this exact 28 situation which would -- which would sort of cause a 24 1 pause. Even though I don't believe we have the 2 authority, the Board has the authority to -- to not 3 take that, the existing regulation under 4 consideration given that the Legislature has 5 provided the FTB the authority to interpret the law 6 and the term "may" established that criteria in 7 which it could be. 8 But the courts may be able to do it by 9 virtue that the regulation is not necessarily the 10 intent of the legislation by virtue that the 11 legislation is permissive and does say that they may 12 if there was an argument that the intent of the 13 legislation was not to say that this was the 14 specific -- under these circumstances that it was 15 their intent that it be interpreted that way. But 16 that would have to coincide with a potential change 17 in regulation or change in that process. 18 So maybe the FTB will take that under 19 consideration and look at changing the regulation to 20 address this specific situation. 21 In the absence of that, we're bound by 22 the -- what's before us, unfortunately. 23 MS. STOWERS: Madam Chair. 24 MS. HARKEY: Yes. 25 MS. STOWERS: I have just two quick 26 comments. 27 It's a harsh penalty, I understand that. 28 And I understand the concern about the penalty. 25 1 I have done some research on this because 2 when that new bill was introduced it was just a big 3 change. And my research is indicating that, why we 4 have the statute in the first place is the 5 Legislature was concerned that taxpayers will not be 6 filing their tax returns if there was sufficient 7 withholdings and payments made. And this was a way 8 to have the taxpayers actually file the return. 9 The agency needs to have the return filed 10 in order to make sure it's accurately -- filed 11 accurately and just not having payments on -- on the 12 books. 13 And with respect to the concern regarding 14 the demand penalty being permissive, I agree that 15 the law does say it's a permissive penalty. But my 16 research indicates -- and, Appeals, you can correct 17 me on this -- that the authority of this Board 18 during the appeal process is to determine whether or 19 not it was properly imposed under the law as 20 written. 21 And FTB is in charge, is charged with 22 administering the personal and corporate income tax 23 included in this penalty. And that's why that board 24 established the regulation on saying when the 25 penalty will be imposed, basically saying will only 26 be imposed when there was been a previous request or 27 a demand for a return that is obviously already late 28 and the taxpayer failed to respond to that request 26 1 and demand and the Franchise Tax Board had to issue 2 a Notice of Proposed Assessment. 3 So although permissive, that board has 4 established the policies on when it will be imposed, 5 and I do not believe that this Board can override 6 their policy. We are bound by following the law as 7 written. 8 MS. HARKEY: Interpretations may vary. 9 Okay. Do I have a motion? We've had a lot 10 of talk. 11 MS. STOWERS: Move to sustain the Franchise 12 Tax Board. 13 MR. HORTON: Second. 14 MS. HARKEY: Okay. There's a motion and a 15 second. 16 I object. 17 Please call the roll. 18 MS. RICHMOND: Ms. Harkey. 19 MS. HARKEY: No. 20 MS. RICHMOND: Mr. Runner. 21 MR. RUNNER: Aye. 22 MS. RICHMOND: Mr. Horton. 23 MR. HORTON: Aye. 24 MS. RICHMOND: Ms. Ma. 25 MS. MA: Aye. 26 MS. RICHMOND: Ms. Stowers. 27 MS. STOWERS: Aye. 28 MS. RICHMOND: Motion carries. 27 1 MS. HARKEY: Motion carries, 4-0. 2 Sorry, but such will be the order. 3 MR. MAGNUSSON: Thank you. 4 ---oOo--- 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 28 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 20, 2017 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 28 constitute 14 a complete and accurate transcription of the 15 shorthand writing. 16 17 Dated: July 11, 2017 18 19 20 ____________________________ 21 KATHLEEN SKIDGEL, CSR #9039 22 Hearing Reporter 23 24 25 26 27 28 29