BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION 5901 Green Valley Circle, Room 207 Culver City, California REPORTER'S TRANSCRIPT APRIL 28, 2009 FRANCHISE AND PERSONAL INCOME TAX HEARING APPEAL OF SHELDON SHERMAN AND SANDRA COULLES (No. 406056) AGAINST PROPOSED ASSESSMENT OF ADDITIONAL TAX Reported by: Beverly D. Toms CSR No. 1662 1 1 2 P R E S E N T 3 For the Board Betty T. Yee of Equalization: Chairwoman 4 Judy Chu 5 Vice-Chair 6 Bill Leonard Member 7 Michelle Steel 8 Member 9 Marcy Jo Mandel Appearing for John Chiang 10 State Controller (per Government Code 11 Section 7.9) 12 Diane Olson Chief, Board 13 Proceedings Division 14 For Board of Amy Kelly 15 Equalization Staff: Staff Counsel 16 17 For Franchise Tax Craig Scott Board: Tax Counsel 18 Jozel Brunett 19 Tax Counsel 20 For Appellant: John Milikowsky 21 Representative 22 Sheldon Sherman Taxpayer 23 24 ---oOo--- 25 26 27 28 2 1 Culver City, California 2 April 28, 2009 3 ---oOo--- 4 MS. OLSON: Our next item and last oral hearing 5 is B10, Sheldon Sherman and Sandra Coulles. 6 MS. YEE: Okay. 7 MS. OLSON: Ms. Kelly will introduce the issues 8 for the hearing. 9 MS. YEE: Okay. Appeals. 10 MS. KELLY: The issues in this appeal are 11 whether the Franchise Tax Board abused its discretion in 12 refusing to abate interest. 13 And whether the Board has jurisdiction to 14 review the Franchise Tax Board's proposed assessment of 15 the post-amnesty penalties. And if so, whether 16 Respondent is estopped from imposing the post-amnesty 17 penalties. 18 MS. YEE: Okay. Thank you very much. Good 19 afternoon, gentlemen. Please introduce yourselves for 20 the record. You have ten minutes for your presentation. 21 MR. MILIKOWSKY: Sure. John Milikowsky 22 representing the Appellants Sheldon Sherman and Sandra 23 Coulles. Mr. Sherman is here today and will be speaking 24 on rebuttal. 25 MS. YEE: Okay 26 MR. MILIKOWSKY: Madam Chairwoman and Members 27 of the Board, this appeal concerns the Appellant's 28 income tax appeals relating to interest and amnesty 3 1 penalties for the years '98, '99 and 2000. It is our 2 understanding that the Franchise Tax Board has withdrawn 3 the Assessment for 2000. So the only issues really 4 on -- on point are going to be for '98 and '99. And 5 there's no dispute from the taxpayer as to the amount of 6 taxes. So we're really just focusing on the interest 7 and amnesty penalties at this point. 8 This appeal concerns a taxpayer who attempted 9 in good faith to file his returns and pay his taxes but 10 could not legitimately comply with his obligation. 11 This appeal is unique for a couple of reasons. 12 It involves a taxpayer whose entire business records and 13 personal records were seized by a Federal and Arizona 14 State law enforcement and held for approximately two and 15 a half years. The Appellant had no access to these 16 records and thus could not produce or file legitimate 17 and accurate tax returns. 18 Mr. Sherman was convicted of failing to file 19 his tax returns and sentenced to three-year probation. 20 The Court also ordered Mr. Sherman to resolve his tax 21 disputes with the IRS within 180 days. 22 Mr. Sherman realizes he made a mistake. He's 23 also intended to do the right thing by working with the 24 IRS and the FTB to file his tax returns and pay, you 25 know, whatever taxes are owed. 26 Mr. Sherman was also under a Court order to 27 file truthful tax returns, which kind of gets to some of 28 the issues that we'll be discussing. And if he didn't 4 1 file truthful returns, then he potentially could violate 2 his probation with the Courts, and subject himself to 3 additional criminal sanctions. 4 So, the time line of the events are pretty much 5 outlined in our reply brief. I'm not going to review 6 them other than just to point out some of the salient 7 facts. 8 Pursuant to the Court order, Mr. Sherman 9 contacted the IRS agent, Bonia (phonetic), shortly after 10 the May 2003 sentencing. Bonia told Sherman that he was 11 unavailable and that -- Bonia is unavailable and that 12 Bonia would contact Mr. Sherman when he was free. 13 Well, the agent didn't contact him until 14 November of '03, which was more than six months later, 15 right at the limit of the Court -- the time the Court 16 required. 17 So, in the interim Appellant didn't want to 18 file an inaccurate tax return. He didn't want to have 19 to, you know, violate his probation. But he also had 20 another issue. He was -- he had sold a home, a 21 personal residence, in 1999, and the IRS informed him 22 that he had to file his returns by October 15th of '03, 23 not -- so that he wouldn't waive the exclusion on 24 capital gains. 25 Knowing that his returns might be inaccurate, 26 he decided to go ahead and file them, even though he 27 hadn't heard from the agent, and so that he would 28 preserve is right to take those exclusions in capital 5 1 gains. 2 Well, afterwards Agent Bonia contacted the 3 Appellants in November of '03, realizing that the 4 Appellants had filed their '99 returns but also 5 instructed the Appellants not to file the 2000 return 6 until he -- Bonia could determine the correct tax 7 liability. 8 Well, another ten months passed after that 9 point and due to the agent's delay in finalizing the 10 audit, and this delay is established in our Exhibit E -- 11 I'm sorry, Exhibit B as in boy, to our reply brief -- to 12 Appellant's reply brief. And in that exhibit it's the 13 interest abatement lead sheet which confirms the Agent 14 Bonia had delayed in getting these issues resolved. 15 Even though the Court order required 180 days I think it 16 took him until December of '04 to resolve those issues 17 and -- and get some kind of an agreement on file. 18 The lead sheet does specify tax years '98, '99 19 and 2000. That differs in some respect to the 20 settlement that was signed by the Appellant and the IRS. 21 IRS chose to apply it only to 2000 for whatever reason, 22 it's not explained. But the lead sheet does establish 23 that there was a delay and it does cover those three tax 24 years. 25 So, in addition, the Appellants also attempted 26 to comply with the amnesty program, but did not want to 27 file returns that were inaccurate and just chose to wait 28 until the end of the amnesty period until they filed the 6 1 2000 tax -- tax return so they would preserve their 2 right to -- to file for amnesty. 3 In addition, the Appellants also paid 4 $6,409.77, which was the full amount at that time that 5 was due before the IRS came back with -- with new 6 assessments. 7 And at this point the settlement agreement was 8 not finalized with the IRS. It wasn't finalized until 9 April 25th of '05, which was after the amnesty period 10 had -- had ended. 11 Revenue and Taxation Code 19104(a)(3) provides 12 that the FTB has the authority to abate interest for the 13 same time periods that the IRS does abate interest for. 14 The interest abatement lead sheet does provide -- 15 provided by Agent Bonia establishes Bonia's delay, 16 stating due to the examiner's other case load priorities 17 a revenue agent wasn't able to meet a commitment to the 18 taxpayer. 19 But the lead sheet also confirms three very 20 important facts. First, that the Appellants were 21 required to submit their tax documents to the IRS within 22 180 days pursuant to the Court order. 23 Second, that Appellants were required to file 24 truthful tax returns for the years '99 -- I'm sorry, 25 '98, '99 and 2000. 26 And third, a condition of Mr. Sherman's 27 probation required him to resolve his tax issues by 28 November 2003. 7 1 Although the IRS did not abate interest for -- 2 for tax year '99, the facts in equity do justify 3 interest -- abating interest from the moment Agent Bonia 4 delayed meeting with the Appellants, which is on or 5 about May of 2003 until September of '04 when Agent 6 Bonia met with the Appellants and attempted to form some 7 type of agreement. 8 The hearing summary states that Bonia's delay 9 did not cause the Appellants to postpone filing their 10 '99 tax returns and that the Appellants had the 11 necessary information to file their '99 California tax 12 returns when they filed their '99 Federal tax returns. 13 But this information is not true because the Appellants 14 had no more information in October of '03 than they had 15 in April of 2000 when the original '99 returns were due. 16 Thank you. 17 MS. YEE: Okay. Thank you. You'll have 18 five -- five minutes on rebuttal. 19 Franchise Tax Board. 20 MR. SCOTT: Yes. Good afternoon, Members of 21 the Board. My name is Craig Scott. And sitting with me 22 is Jozel Brunett, both of us representing the Franchise 23 Tax Board. 24 I wanted to clarify one other thing, that we 25 have withdrawn the 2000 assessment and we have also 26 withdrawn the late filing penalty for the 1999 tax year. 27 So the only thing at issue are the post-amnesty 28 penalties and interest for the '98 and '99 tax years. 8 1 With respect to the post-amnesty penalties, 2 Appellants have argued that they couldn't have avoided 3 the -- the liabilities because they claim that the 4 Federal assessments were not final until after the end 5 of amnesty and they also raise a couple of 6 constitutional arguments. 7 As an initial matter, the penalties have not 8 been paid. And -- the only way for the Board to have 9 jurisdiction for a post-amnesty penalty is for the 10 Appellant to pay the post-amnesty penalty, file a claim 11 for refund, again on the limited grounds that the 12 Franchise Tax Board has computed the penalty 13 incorrectly, and then on -- on that basis they can 14 appeal to the Board. That has not been done here. And 15 therefore in the context of this appeal again the 16 Appellant here does not have -- or the Board does not 17 have jurisdiction to consider the post-amnesty 18 penalties. 19 Even if the Board did have jurisdiction to 20 consider the post-amnesty penalties, I believe that the 21 facts do not support the claims that Appellants have 22 made here. They claim that there was no way for them to 23 satisfy amnesty for the additional proposed assessments 24 based on the Federal adjustments because those 25 liabilities were not final until after the end of 26 amnesty, and they could not have estimated their 27 liabilities to be able to even make estimates to satisfy 28 amnesty. 9 1 Although taxpayers had to apply for amnesty 2 between February 1, 2005 and March 31, 2005, for those 3 that did apply they had until May 31, 2005 to file 4 original or amended returns and then to pay the tax 5 liabilities. 6 In this case, Appellants applied for amnesty 7 for only the '99 and 2000 tax years. And on December 8 16, 2004 Appellant signed an agreement as to final 9 determination of tax liability with the IRS that gave 10 proposed assessments for the '98, '99 and 2000 tax 11 years. 12 The IRS approved that agreement on April 25th 13 of 2005 and advised appellants in a letter dated May 2, 14 2005 that the IRS had approved the assessments. 15 Because Appellant signed this document on 16 December 16, 2004 Respondent believes that they had a 17 pretty good idea of their liabilities for the '98 and 18 '99 tax years such that they could have satisfied 19 amnesty or avoided the amnesty penalties. 20 For the 1998 tax year Appellants didn't apply 21 for amnesty even though they were in audit with the IRS 22 and knew that there were going to be additional 23 liabilities. What they could have done was first 24 applied for amnesty for the '98 tax year, but they also 25 could have paid an estimated amount to avoid the 26 penalties. 27 This was our protective claim process that we 28 had and many, many taxpayers took advantage of this 10 1 procedure to pay estimated amounts because they were in 2 audit with the IRS and knew that they were going to owe 3 additional tax to the Franchise Tax Board, and therefore 4 paid estimated amounts to avoid the post-amnesty 5 penalty. Appellants failed to do this even though they 6 had signed a document in December of '04 with the 7 proposed assessments. 8 For the 1999 tax year for which they applied 9 for amnesty, they had until May 31, 2005 to file amended 10 returns and pay the additional tax. The IRS signed the 11 final determination letter on April 25, 2005. So, we 12 would assume that Appellants knew that the amount was 13 final and that they would have those numbers to be able 14 to file an amended return and pay the additional 15 liability for the '99 tax year. 16 I think something that should be noted is the 17 Appellants filed their 2000 tax return with the 18 Franchise Tax Board on March 29, 2005. So, in other 19 words, they must have felt comfortable enough with the 20 proposed assessments that they had signed in December of 21 2004 sufficient to file their 2000 return prior to the 22 IRS signing it in April of 2005, yet they say that 23 that's not sufficient enough to have been able to 24 estimate their liabilities and pay the amounts due to 25 avoid the amnesty penalty for the '99 and -- and '98 tax 26 years. 27 With respect to the constitutional arguments 28 the Board is precluded from determining these and those 11 1 are best suited for the Courts. 2 With respect to interest, the FTB then charged 3 interest on the late paid tax. It's mandatory and 4 there's no grounds for abating it except where 5 authorized under law. They have made no allegation of 6 error or delay on the part of the Franchise Tax Board 7 and still instead they're looking at error or delay on 8 the part of the IRS. 9 And under Section 19104(a)(3) of the Revenue 10 and Taxation Code, the Franchise Tax Board may abate 11 interest when there has been error or delay on the part 12 of an IRS employee and we will abate it for the same 13 period that the IRS abated. 14 We have looked at the Federal transcripts and 15 the IRS did not abate interest for the 1998 or '98 tax 16 year. And in the stipulation of settled issues which 17 the Appellants provided to your Board it specifically 18 states that the IRS is not going to abate interest for 19 the '98 and '99 tax years but will only abate interest 20 for the 2000 tax year. 21 MS. YEE: Thank you very much. You have five 22 minutes on rebuttal. 23 MR. SHERMAN: Thank you very much, and good 24 afternoon. 25 In response to just the specific factual 26 issues, the interest lead abatement sheet concerned all 27 three tax years, 1998, 1999 and 2000. It just did not 28 concern the 2000 tax year. When I appealed to the IRS 12 1 concerning a rebate of interest it was for all three 2 years, which is obviously why all three years are 3 mentioned in the stipulated settlement. Both '99 -- 4 all -- '98, '99 and 2000. 5 The settlement was exactly that. It was a 6 compromise. The amount of interest that would have been 7 abated for both the years '99 and 2000 was roughly the 8 same. And rather than crossing over and making a 9 determination as to how much of '99 or a portion of '99 10 and a portion of 2000 was going to be abated, the 11 agreement that was entered into simply said, fine, we'll 12 take this year since it's about the same amount of money 13 and we'll give you back that much if you agree to 14 withdraw your appeal for this year. 15 And that's why it's called a stipulated 16 settlement and we were set for Tax Court the following 17 week and we just worked out this agreement where 18 basically it was split down the middle 50-50. 19 And the fact the IRS agreed to any abatement 20 whatsoever absolutely falls within the realm of the 21 statute. The delay was clearly caused by Agent Bonia. 22 He wrote that lead sheet. Was not supposed to provide 23 me a copy of it, but did anyway because he felt that the 24 superior -- his superiors were not going to approve the 25 agreement that had been entered into between myself and 26 him in 2004 because he had abated the late filing 27 penalty and he wanted to abate some interest and his 28 concerns were that his superiors in Laguna Nigel were 13 1 not going to approve what he had recommended in terms of 2 both the tax as well as the abatements that he had 3 recommended. That is why I did not go ahead and 4 estimate for my State taxes based upon that agreement 5 because he specifically told me not to do anything 6 concerning that until there was a final approval by his 7 bosses as to what his recommendations were. 8 The only reason I went ahead and filed my 2000 9 return on March 29 of 2005 was because the FTB employee 10 told me that in order to qualify for amnesty for the 11 year 2000 that I had to have a tax return on file. That 12 tax return for the year 2000 was not based upon any of 13 the additional income that turned out was later reported 14 to the FTB, but was solely based upon the information 15 based upon what I had filed the Federal tax return on 16 that the agent and I had worked upon. 17 So this idea that I had sufficient information 18 at that point simply is not true. And the suggestion by 19 the FTB -- I mean, look at the situation at the time. I 20 was on Federal probation for a tax violation. And their 21 solution to this problem was that I go ahead and guess 22 and then submit a document under penalty of perjury as 23 to how much money that I was going to owe. Obviously 24 the last thing I was going to do at that point was to 25 file any further documentation concerning tax returns 26 until I had all the information available, which did not 27 happen until after the amnesty appeal -- period ended. 28 And -- and talking about the amnesty penalty, I 14 1 understand this Court or -- this Court, the Board 2 probably does not have jurisdiction as -- as the FTB has 3 said. But let me just say that the only thing a 4 taxpayer received during this amnesty period was a 5 letter stating that if you take advantage -- if you sign 6 this letter and take advantage of the amnesty then 7 you're going to receive a break on the interest. There 8 is no other explanation at all that was given. 9 You cannot call the FTB and get any 10 information, whatsoever. I mean, forget about that. So 11 I took the time and the effort to go down to the FTB 12 office in San Diego for the specific purpose of talking 13 to the representative to find out what my options were 14 at that time because I had just entered into that 15 agreement with the IRS. 16 And I did everything that that representative 17 told me to do. I signed the amnesty agreement. I 18 submitted it. I put in the additional year. I filed my 19 2000 return so that I would be available for amnesty in 20 2000. Not on any single occasion did that individual 21 say to me, if you don't do "x" you're going to be 22 subject to additional penalties. And the answer by the 23 FTB based upon their failure to clearly provide a 24 taxpayer with sufficient information when they send out 25 these amnesty notices is go to the web site and somehow 26 become an expert in amnesty based been reading of the 27 statutes that are available. 28 And I can indicate that I was a criminal 15 1 attorney for 25 years until all these problems happened. 2 And to expect an individual, even an attorney, to read 3 those statutes and come away with some kind of knowledge 4 and become some genius as to what amnesty happened and 5 what wouldn't happen if you didn't pay on time is an 6 absolute ridiculous suggestion. 7 MS. OLSON: Time has expired. 8 MR. SHERMAN: Thank you. 9 MS. YEE: Okay. Thank you very much. 10 Questions? 11 Dr. Chu. 12 DR. CHU: So, why didn't you file for the 1998 13 year for amnesty? 14 MR. SHERMAN: Frankly, I didn't think I had to 15 file for the '98 return -- for amnesty because I had 16 filed a California return and a Federal tax return for 17 that year. Had the FTB employee -- because I told the 18 FTB employee there is going to be additional tax for 19 these three years, what do I need to do? 20 And not -- and not on any occasion did she say 21 to me because you're going to claim addition -- or 22 there's going to be additional income claimed for '98, 23 you need to put down on that form 1998, as well. 24 She did tell me that because I had not filed my 25 2000 return that I -- that I could put down on the form 26 the year 2000 and to make sure I got the form in -- or 27 the tax return in before March 30th of 2005. And that's 28 why you will see on the amnesty application that I did 16 1 that I handwrote the year 2000 on the application. 2 MS. YEE: Okay. Other questions? 3 Okay. Seeing none, is there a motion? 4 DR. CHU: Move to take the matter under 5 submission. 6 MS. YEE: Motion by Dr. Chu to take this matter 7 under submission. Is there a second? 8 MS. MANDEL: Second. 9 MS. YEE: Second by Ms. Mandel. Without 10 objection, that motion carries. 11 Thank you very much, gentlemen. We will 12 discuss your matter later this afternoon. 13 ---oOo--- 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 17 1 REPORTER'S CERTIFICATE. 2 3 State of California ) 4 ) ss 5 County of Sacramento ) 6 7 I, BEVERLY D. TOMS, Hearing Reporter for the 8 California State Board of Equalization certify that on 9 April 28, 2009 I recorded verbatim, in shorthand, to the 10 best of my ability, the proceedings in the 11 above-entitled hearing; that I transcribed the shorthand 12 writing into typewriting; and that the preceding 17 13 pages constitute a complete and accurate transcription 14 of the shorthand writing. 15 16 Dated: October 26, 2009. 17 18 19 20 ____________________________ 21 BEVERLY D. TOMS 22 Hearing Reporter 23 24 25 26 27 28 18