A case before the State Board of Equalization at its April 28 meeting in Culver City brought to light a practice by the Franchise Tax Board of applying the 50 percent amnesty interest penalty (enacted in 2004 with SB 1100, by the Senate Budget and Fiscal Review Committee) to the repayment of erroneous tax refunds.
Susanne Webber filed her 2002 tax return with the FTB in April 2003 and claimed a $205 tax refund. On May 28, 2003, the FTB issued her a tax refund of $5,138. Ms. Webber said there was no indication of what the amount was for. She said she tried to call the FTB to find out why the refund was sent to her, and she could not get through to the board. She said she held the check for three weeks and asked others what it might be for. Since her husband had just died, she thought it might be a death benefit, as her husband had worked for the state, so she cashed the check.
Almost eight months later, the FTB asked for the money back. At that point, Ms. Webber, who was facing major health and financial problems, said she didn't have the funds to repay the amount. She said she was the sole caregiver for her elderly mother, two aunts and her husband before he died. She added that they had been the victim of identity theft (costing them $18,000) just before her husband died, and that took two years to resolve. Ms. Webber says she now is permanently disabled. The FTB started the interest clock running three months after its demand for repayment.
Subsequently, Ms. Webber paid the FTB the amount equal to the excess tax refund, but asked that the interest and penalties be dropped. When the FTB refused, an appeal was filed. At issue is $594.09, which includes interest, a collection cost recovery fee, and also includes the imposition of the amnesty interest penalty.
The imposition of the amnesty interest penalty was the principal issue during discussion of the case by board members. BOE Member Dr. Judy Chu said the board does not have jurisdiction to review the amnesty penalty, except to determine if it is correctly computed. Board Member Bill Leonard said that's precisely the point – he argued that the penalty was incorrectly calculated, and the amount should be zero dollars and zero cents. He also said the amnesty interest penalty was never intended to be used to apply to repayment of erroneous refunds.
The board upheld the FTB on a 3-2 vote, with Mr. Leonard and Board Member Michelle Steel voting "no."
(Cal-Tax: We believe the amnesty interest penalty has been misapplied by the FTB in this case. The amnesty program was set up to encourage taxpayers to file correct tax returns if they had not done so, and to impose penalties if they didn't file by the magic date. Ms. Webber had filed a correct tax return and paid the correct amount of tax. There was no reason for her to file another tax return.
We have a number of other concerns about the case:
1. Refund checks should indicate what they are for.
2. The FTB should be more accessible to callers.
3. Taxpayers are losing money on this case, as the cost to process the appeal is more than the $594 at issue.)
Other developments at the Culver City meetings held April 28, 29 and 30:
"Tae Bo" Exercise Routine Developer Prevails in Income Tax Appeal. Billy Wayne Blanks, widely known for his development of the "Tae Bo" exercise routine, prevailed in an income tax appeal on April 28. At issue were proposed assessments in 1998 and 1999 for income from an installment sale for the exclusive right to market "Tae Bo." The two issues in the appeal are:
· Whether the installment sale of the exclusive rights to market and sell "Tae Bo" took place in 1998 and 1999. On this issue, Thomas Houston, attorney for Mr. Blanks, who was in Iraq entertaining troops, said the agreement was signed and dated August 31, 1999, and was made retroactive to 1998. He noted that an agreement signed this month and made effective for 2008 would not exempt a sale from the sales tax increase. The board agreed that the 1999 date should be used.
· How should the deferred obligation be valued for tax purposes? The FTB said it should be valued by the full principal amount of the installment obligation. The taxpayer said it should be valued by either the "wait and see" method or the "fair market value" approach. The board upheld the fair market value calculation, less $11.66 million. Mr. Leonard asked if this is the same as the taxpayer's position, and staff said it is.
Indian Case. In the Appeal of Cecile R. Miguel-Ruiz, Keith Shibou, a Palm Springs CPA representing Ms. Miguel-Ruiz, argued that she was exempt from state income tax because she is an American Indian, even though she did not live on reservation land. The Palm Springs area is divided in a checkerboard fashion, so every other square mile is Indian land. Ms. Miguel-Ruiz resides in a non-Indian square mile on Salem Road in Cathedral City. Mr. Shibou said she is exempt because she lives on land surrounded by Indian land, which he called "Indian Country."
The FTB said the "outermost boundaries of the reservation are considered to be the outermost boundary of the sections described in the checkerboard tracts, not a boundary drawn around all of the sections."
The board voted 5-0 to deny the appeal, consistent with the board's "abstention doctrine," as the issue of what is Indian country is a federal issue.
Taxpayers KO'd by Statute of Limitations. Two taxpayers who had overpaid their taxes
could not get their money back, as the board upheld tax agency staff arguments
that refunds were barred by the statute of limitations.
In the Appeal of Roger Anderson and Maren Olson Anderson, the taxpayer is a former U.S. Marine
who served in Vietnam and later worked 20 years for the Los Angeles County Sheriff's
Department, before retiring in 1996 due to a cardiac event. He thought the
retirement should be classified as disability-related. However, the Los Angeles
County employees retirement board initially said it
was not service-related.
If the retirement
was service-related, the retirement income would not be subject to tax. Mr.
Anderson appealed the retirement board's verdict. He contacted the FTB and was
told he should file his income tax return with the retirement income as
taxable, as he would be subject to penalties, interest and possible criminal
action if he failed to pay and then lost his appeal.
He was told he could
file for a refund if he won his case. Ten years later, in September of 2006,
Mr. Anderson won his case and his retirement was based on a work-related
disability. He filed for refunds for the years he paid taxes on the income, as
he had been advised by the FTB. But the FTB denied $11,500 in refunds for years
1997 through 2001, claiming the refunds were barred by the statute of
limitations.
Jaclyn Appleby, a UC
San Diego law student representing Mr. Anderson, who has undergone nine
operations in the last three months, said the doctrine of "equitable estoppel" should apply to allow the state to return to
Mr. Anderson taxes he paid but did not owe. The FTB argued that the taxpayer
had the burden to prove "equitable estoppel,"
but had not done so. The board agreed. The state keeps the money.
In the Appeal of D.R. Systems, Inc., there were
reporting errors resulting in overpayment of sales tax. At issue was whether a letter
from the taxpayer could be interpreted as a claim for refund. Board staff
argued it could not, and that therefore, no refund could be made, as the
statute of limitations had expired. The board agreed on a 3-2 vote (Mr. Leonard
and Ms. Steel disagreeing). The state keeps the $283,000 the taxpayer did not
owe.
Was a Taxpayer Punished for Filing a Tax
Appeal? In the Appeal of A Realty
Publications, the issue was a negligence penalty. Tax and interest had been
paid. Attorney Paul Shimoff, representing the
taxpayer, said BOE staff imposed a negligence penalty after the taxpayer had
filed an appeal on the underlying tax issue. He called this "particularly
disturbing." Board staff said it was just an "oversight" not to
impose the penalty earlier.
Mr. Leonard said applying
the penalty after the appeal was filed "looks bad." He added, "It
does look like a punishment for pursuing your rights as a citizen."
Originally, the
taxpayer and board staff had a disagreement over whether books bought by the
taxpayer and furnished to students as part of real estate correspondence
courses should be taxed on their purchase price by the school or when furnished
to students. The taxpayer had taken the former position, and the board staff the latter.
For the next audit
period, before the settlement of the above issue, board staff imposed a
negligence penalty for that period because the taxpayer did not file based on
the board staff's view (which the taxpayer was disputing).
Board staff said the
taxpayer should have known that its filing position was wrong, because it was so
advised by the BOE staff during the dispute.
"Why should
taxpayers pay a tax in excess of their filing position?" Mr. Leonard
asked. "It's not negligence if you still think you're right." He
suggested that the negligence penalty should not be imposed for returns during
this period, but found no takers for his suggestion.
Mr. Shimoff said the state ultimately settled the tax dispute
for years when the negligence penalty was imposed on the basis that two-thirds
of what the state was attempting to tax was wrong. He said a taxpayer "should
not be bullied in that fashion."
A motion to uphold
the staff position failed on a 2-2 deadlock, with Ms. Yee and Dr. Chu voting "aye"
and Mr. Leonard and Ms. Steel voting "no." Deputy State Controller
Marcy Jo Mandel, representing Controller John Chiang, did not vote, as the
controller recused himself from participating due to
a disqualifying contribution.
Jarndyce v. Jarndyce. In an 1852-53 novel "Bleak House,"
Charles Dickens wrote disparagingly of a case in the British legal system, Jarndyce v. Jarndyce, that had gone on for years. Among the modern-day
equivalents are cases coming out of the Franchise Tax Board that are decades
old.
The BOE heard one
such case on April 28, where the dispute initially was over $12,000 for the
years 1983 and 1984 (the Appeal of George
Dadanian and Barbara Dadanian).
The board agreed to reduce the 1984 amount from $6,197 to $3,862.
The Dadanians argued that the FTB's
notices of proposed assessments are barred by the statute of limitations. The
FTB argued that the proposed assessments, which are based on federal
adjustments, are not barred by the statute of limitations.
The taxpayers asked
for the files and were told they had been destroyed. The taxpayer also said
there is no information that the statute of limitations had been extended. The
taxpayer lost. (Cal-Tax: This case
is troubling in a number of respects. There should not be 30-year-old cases in
administrative tax appeals. If the taxpayer appeals, it could be 40 years
before it becomes final – almost a working lifetime. Can you imagine having a
possible tax liability hanging over your head for this long? How does the
taxpayer prove a negative – that there was no waiver of a statute of
limitations? Finally, the statute of limitations seems to close quickly when
taxpayers seek to get refunds of taxes they do not owe – see
cases above – but never closed on a $12,000 tax liability.)
Interest for Unreasonable Delay Can't Be Abated
for Unlimited Delay Prior to Sending an NPA. In 2001, the IRS informed Kathy Marshall that she owed additional tax
on a capital gain on the sale of a residence (she had not purchased a new one within
two years). She said she could not purchase a house due to a divorce and default
on alimony. She did not report the change to the FTB, adding that she was
relying on an accountant to handle the matter. In April 2006, the FTB learned
of the IRS change, and in June 2007, the agency issued a notice of proposed
assessment of $17,000 for 1995. Mr. Leonard asked why it took the FTB 14 months
to send out an NPA based on the IRS notice, and suggested she be given seven
months off on the interest computation. He was told that the FTB could delay
the NPA forever after receiving a federal adjustment, and could charge interest
on the amount. The abatement of interest for FTB delay comes only after the
issuance of an NPA. The board voted 3-2 to sustain the FTB, with Mr. Leonard
and Ms. Steel opposed. (Cal-Tax: Here
is a situation where the law clearly needs changing. FTB should not be allowed
to run the interest clock on taxpayers for an unlimited period prior to issuing
an NPA from a federal change.)
Taxpayer Rights Suggestions. At the board's taxpayer rights hearings,
several suggestions were made.
Attorney Marty Dakessian urged board staff to respect the California
Supreme Court's 1999 decision in Agnew v.
BOE, allowing taxpayers to appeal interest levies in court without first
paying them. He cited a recent action where a taxpayer paid the tax after an
appeal, but did not pay the interest. He said board staff did not wait the 180
days before initiating collection activities for the interest, before knowing
if the taxpayer would appeal. He also said board staff levied a bank account of
the taxpayer's wife and brother to which the taxpayer was not a party.
Cheryl Miller, a
homeowner in Van Nuys, urged that the change-of-ownership exemption be extended
to transfers between siblings. She said one-third of her house was assessed to
fair market value when one brother died. She said she had gone into debt, can't
afford the increased taxes and will be forced out of her home.
Francisco Wilson, a
mobile-home owner, said he found out when he wanted to transfer his home to a
sibling that he owed back taxes for the year 1990. He maintains he paid the
tax, has never been notified of the back taxes, and the back taxes did not
appear on the tax bill. He suggested that the tax bill contain such notice,
instead of allowing it to drag on for 20 years, as neither he nor the county now
has any record of the original tax bill.
For Barter Payments, Sales Tax Is Based on
Stated Posted Price, Not Full Cash Value. Taxpayers are being required to remit sales tax based on a stated price
that is more than the actual cash they receive from a sale.
In determining the
amount of sales tax to be remitted to the state, board staff says that when
barter payments are received, they must be valued at their posted price, not
the full cash value of the bartered item.
In the Appeal of Gary Becker Company, Inc., the
taxpayer sold furniture to Clear Channel Communications for cash and barter
(advertising space on the company's billboards). In dispute was $31,000,
because BOE staff said the sales tax should have been based on the posted price
of the barter at the time of sale, and the taxpayer said the sales tax should
be based on the cash actually received when the advertising space was sold to a
third party. The board unanimously agreed with staff.
(Cal-Tax: We think this is an illogical
and ill-advised result. The taxpayer didn't get the stated price for the
furniture, but something less. If you sell something for $15,000 in cash, plus
$15,000 in vouchers that aren't worth $15,000, you have actually sold the
property for less than $30,000. If a hotel bought the furniture with vouchers
for stays in hotel rooms, would the sales tax be based on the rack rate or the
cash the taxpayer would get for renting the rooms? Conversely, the board staff
position gives a great opportunity for tax planning. A taxpayer could sell
tangible personal property for a bartered item with a low stated price that is
actually worth a lot more – for example, a Super Bowl ticket. Since the board
policy is to use the stated price, this type of transaction would minimize the sales
tax.)
Redesigned BOE Website on the Way. The BOE's website
is about to undergo a facelift, according to a notice on the existing site.
According to the board, "The site will be easier to navigate and features
a more streamlined look with intuitively named links geared more toward our
customers' needs." The site is scheduled to be unveiled May 11.
Cal-Taxletter, May 1, 2009
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Association.
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