Irritated and emotionally drained by a drawn-out battle with Franchise Tax Board staff, a retiree from Redondo Beach brought his complaints before the Board of Equalization during the BOE's February 23 meeting in Culver City. While there was no vote on the issues raised by Willard M. Christine, BOE members criticized the FTB's handling of his case, which related to confusion on how part of his Social Security benefits are handled in computing California tax.
At issue was a proposed assessment of $374 to Mr. Christine's 2004 tax returns based on the taxpayer's confusion on how social security is excluded from California taxable income.
Mr. Christine said he followed FTB instructions that say Social Security benefits are not subject to California taxes; however, the board was told that taxpayers cannot rely on FTB instructions. The FTB sent Mr. Christine a notice of understatement, and Mr. Christine paid the requested amount, plus interest. Then, he got his check back – this refund was a mistake, the FTB said during the hearing.
After receiving the refund, Mr. Christine still believed that the matter was not settled, and he took his case to a state protest hearing officer and again overpaid the disputed tax, as well as what he estimated would have been the additional interest.
In his testimony to the BOE, Mr. Christine said: "The state of California has persisted in extending this comedy of errors till today. This case is microcosmic of why the state is in a fiscal morass that has gripped its taxpayers in recent years. Malfeasance and incompetence. Wheel-spinning and duplicity. There are many words, fancy and otherwise to describe what has gone on. There is an old vaudeville skit with the recurring punch line, 'Pay the two dollars.' Comedy imitates life and vice-a-versa." (Cal-Tax: The skit in question involves a man who is fined $2 for spitting in a subway station, and he goes to great lengths to challenge the fine, resulting in a variety of additional punishments.)
Mr. Christine noted that he filled out paperwork for the FTB and BOE several times. Regarding the BOE's contribution disclosure form, he said: "I mailed it to Sacramento. I faxed it to Sacramento. I did everything but hand-deliver the blasted thing."
Still, he said, he received more letters from the tax agencies, followed by phone calls. Mr. Christine noted that several tax agency staffers contacted him, and when he told the caller that he already had been contacted, the tax agency representative was unaware of other attempts by staff to contact him. He said he has not heard from the callers since, and he commented, "That may be a blessing."
Mr. Christine said: "To sum it up, from what I see of the tax-collecting structure in California, if this were a business in the private sector, it would be out of business before not too long. … My wife has an expression: 'When we're wrong we pay the penalty. But, when they're wrong, what's their penalty?' Indeed. But let's let bygones be bygones. If California ever balances its books, the Christines can say they did their part. We've paid the two dollars – we've paid the two dollars twice, as a matter of fact."
FTB attorney Mark McEvilly said the whole problem stemmed from an internal error. FTB staffers said they normally do not have taxpayers file payments so quickly, and when Mr. Christine filed his payment, there was no record of his understated liability, so they refunded his original check. Later records showed that he had not filed his payment, so the FTB charged him additional interest.
Board Member Michelle Steel said: "The process of how this was handled by the FTB is not acceptable. I understand why the taxpayer is here. He wants us to understand what went on with his life. It's a nightmare to try to work with the tax agencies."
FTB staff agreed with Ms. Steel, acknowledging their errors, and noted that Mr. Christine was not at fault. FTB staff also said that they have reached an agreement with Mr. Christine, and the BOE concurred with the FTB's agreements.
Board Member Bill Leonard advised FTB staff to revise their instructions on how to report Social Security income.
In other action from this week's BOE meetings in Culver City:
BOE Sides With Camp Operator in Dispute Over Sales Tax on Meals Served at Summer Camp. Representatives from a summer camp in the Sierra Nevada foothills alleged that for the first time, the BOE is asking the camp to pay sales tax on meals served to campers.
The camp in question is Woodleaf, a property owned and operated by Young Life, a non-denominational Christian organization whose volunteers build relationships and mentor high school students.
Revenue and Taxation Code Section 6363 exempts food sold to students from sales taxes. Further, Regulation 1506(g) allows food served at summer camps to be exempt from sales taxes if the camp conducts regularly scheduled classes, requires attendance and has qualified instructors. A BOE auditor said Woodleaf failed to meet these tests.
Terry L. Polley, an attorney representing Young Life, said: "The purpose of camp is to teach young people how to live life well." Mr. Sherrill noted that the camp, through group discussions and instructional time, campers are taught theology, leadership and self-confidence.
Roger Williams, a camp director and spokesman for the American Camps Association, which represents more than 100 camps in California, said that as camp fees increase, student access to camps decrease. Mr. Williams noted that the children who benefit most from experiences at summer camp – those in gangs, and kids whose parents are incarcerated or are from low-income backgrounds – would be least able to afford additional costs created by taxation of meals.
Board staff disputed the arguments presented by the camp. They claimed that if the regulation were to be read too broadly, all summer camps would qualify for the exemption. BOE staff said that while their audit's conclusions were subjective, they believed the camp was used primarily for recreational purposes.
BOE members opposed staff's recommendation and voted to grant the exemption to the summer camp. They also asked staff to consider changes to the regulations to clarify what constitutes a "class session." One board member suggested that the matter may require clarification through legislation. The vote was unanimous.
Board Rules That Taxpayer Purchased America's Cup Yacht for Use in California. A San Diego-based company purchased a yacht in Rhode Island to compete in America's Cup, a distinguished sailing regatta held in international waters. Then, the California tax bill arrived.
The company, Team Dennis Conner Corporation, was told by BOE staff that its pricy vessel was in fact purchased for use in California, and the purchase was subject to use taxes under Revenue and Taxation Code Sections 6201 and 6202.
The taxpayers pointed to Rev & Tax Code Section 6368, which provides an exemption from sales and use taxes if vessels are used for "interstate or foreign commerce involving the transportation of property or persons for hire."
The Conner team said the yacht was never sailed in California waters. Whenever the sailing team used the vessel for training, the vessel was towed into international waters and then used for training. The taxpayer said California's demand for taxes is a violation of the Commerce Clause of the U.S. Constitution, because the yacht was used by corporations for advertising purposes in America's Cup.
The BOE disagreed, and said corporate advertisements on the sails of a yacht, which are later signed and given to the sponsors, do not constitute transportation of property.
Prior to ruling on the matter, Board Vice Chair Jerome Horton said: "It appears that the intended purpose of the vessel was that it was acquired for use in California." He continued: "It is hard for me to reach the argument that this is a form of interstate commerce for transportation of products."
BOE counsel said the principal purpose of the boat was to win races, not to carry a sail that provided corporate sponsorship.
In a 4-1 vote, with Ms. Steel in opposition, the BOE ruled that no exemption applied to the company's purchase.
(Cal-Tax: On February 14, Larry Ellison, owner of Oracle, won two yacht races off the coast of Valencia, Spain, to bring the America's Cup back to the United States for the first time since 1995. Based on custom, the next America's Cup challenge – which is a very big deal in the world of sports – should be held in San Francisco Bay. The New York Times wrote February 20 that Mr. Ellison said his first choice was to defend the cup in the Bay Area, but he wanted sailing teams around the world to help in the decision. Will the ruling to impose sales tax on Dennis Conner's yacht impact this decision?)
Cal-TaxReports, March 1, 2010
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