1 BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION 2 5901 GREEN VALLEY CIRCLE 3 CULVER CITY, California 4 5 6 7 8 REPORTER'S TRANSCRIPT 9 JUNE 30, 2009 10 CORPORATE FRANCHISE AND PERSONAL INCOME TAX HEARING 11 APPEAL OF 12 B1 DANIEL V, INC. 13 NO. 342609 14 AGAINST PROPOSED ASSESSMENT OF 15 ADDITIONAL INCOME TAX 16 17 18 19 20 21 22 23 24 25 26 27 Reported by: Juli Price Jackson 28 CSR No. 5214 1 1 P R E S E N T 2 For the Board Betty T. Yee of Equalization: Chair 3 Judy Chu 4 Vice-Chair 5 Bill Leonard Member 6 Michelle Steel 7 Member 8 Marcy Jo Mandel Appearing for John 9 Chiang, State Controller (per Government Code 10 Section 7.9) 11 Diane G. Olson Chief 12 Board Proceedings Division 13 14 For Board of Charles Daly Equalization Staff: Staff Counsel 15 16 17 For Franchise Tax William Gardner Board: Tax Counsel 18 Craig Scott 19 Tax Counsel 20 For Appellant: Marty Dakessian Attorney 21 David Keligian 22 Attorney 23 24 ---oOo--- 25 26 27 28 2 1 5901 GREEN VALLEY CIRCLE 2 CULVER CITY, California 3 JUNE 30, 2009 4 ---oOo--- 5 MS. YEE: Good morning, Members. We will call 6 this Board of Equalization meeting to order. 7 Ms. Olson, our first case? 8 MS. OLSON: Our first case is Daniel V, Inc. 9 Board Proceedings has received contribution 10 disclosure forms for this morning's hearings from the 11 parties, agents and participants. All forms were 12 properly completed and signed. No disqualifying 13 contributions were disclosed. All parties, agents and 14 participants are on the alpha listing provided to your 15 office. 16 The oral hearings will be announced in the 17 order presented on the agenda. Please come forward and 18 take a seat at the table and place the microphone 19 directly in front of you. 20 A Legal Appeals Division staff member will 21 introduce your case, stating the issues for the hearing. 22 Each person sitting at the table will then be asked to 23 introduce themselves and, if necessary, their 24 affiliation with the taxpayer for the record. 25 Ten minutes is allocated for the taxpayer's 26 opening presentation, followed by ten minutes for the 27 Franchise Tax Board's presentation, and five minutes is 28 allocated to the taxpayer for rebuttal. 3 1 Ms. Yee? 2 MS. YEE: Thank you very much. 3 Appeals? 4 MR. DALY: Good morning, Madam Chair, Members 5 of the Board. 6 My name's is Charles Daly. I'm an attorney in 7 the Franchise and Income Tax Section of Appeals in the 8 Legal Division. 9 On October 28th, 2008, the Board considered 10 Appellant's petition for a hearing and concluded that 11 the petition set forth good cause for a new hearing. 12 The Board limited the scope of the rehearing to 13 the issues of whether the accuracy-related penalty and 14 the late filing penalty imposed by Respondent should be 15 abated. 16 MS. YEE: Very well, thank you much. 17 Good morning, gentlemen. 18 MR. DAKESSIAN: Good morning. 19 MS. YEE: If you'll introduce yourselves for 20 the record, you have ten minutes for your presentation. 21 MR. DAKESSIAN: Good morning, Madam Chairwoman, 22 Members of the Board. My name is Marty Dakessian and 23 I'm with the Law Firm of Akerman Senterfitt. I 24 represent the taxpayer, Daniel V. 25 Seated to my right is my co-counsel David 26 Keligian of the Busch firm in Orange County. 27 Daniel V is entitled to relief from both the 28 accuracy-related and late filing penalties. 4 1 Regarding the accuracy-related penalty, there 2 are three independent grounds for relief in this case: 3 One, the taxpayer's position was based upon 4 substantial authority; 5 Two, there is reasonable cause for relief from 6 the penalty due to good faith reliance upon the advice 7 of a professional tax advisor; 8 And, three, Daniel V adequately disclosed the 9 position it was taking with respect to commercial 10 domicile on its California tax return. 11 Regarding substantial authority, what we are 12 essentially asking this Board to do here is to look at 13 the position Daniel V took in this case regarding 14 commercial domicile based on a different evidentiary or 15 legal standard than what was required in the underlying 16 case. 17 In the underlying case, I think we can all 18 agree, that the standard of proof was by preponderance 19 of the evidence, 51 percent. In other words, was it 20 more likely than not that Daniel V had a Nevada 21 commercial domicile? The Board has already decided that 22 question. 23 Here we know, in this case, with respect to 24 relief from penalties that the standard for relief for 25 the accuracy-related penalty is significantly lower. 26 Obviously, substantial authority does not only mean the 27 winning argument. It means that there is substantial 28 authority supporting the position taken. In fact, the 5 1 regulations say that there may be substantial authority 2 for more than one position with respect to the same 3 item. 4 So, this is what we are operating under. And 5 the standard under which the Board must decide whether 6 penalties apply. 7 We have discussed in our briefing papers about 8 how Appeal of Vinnell and Appeal of Rajaw Realty were 9 published decisions of your Board. Each of those cases 10 had factors that your Board considered in determining 11 the commercial domicile of the taxpayer in question. We 12 looked to the factors -- to those factors in concluding 13 Daniel V appropriately -- was appropriately domiciled in 14 Nevada. 15 They include the followingDecisions in Board 16 meetings were not in California. 17 Daniel V had no California officers, payroll or 18 property. 19 None of its corporate records were located in 20 California. 21 There was control over daily operations in 22 California. 23 And no one with signatory authority or control 24 over the purse strings that was located in California. 25 We presented independent third party evidence 26 regarding control being exercised in Nevada. 27 So, I urge your Board not to look at this case 28 with a preponderance standard in mind, but to consider 6 1 the facts of this case under a lower substantial 2 authority standard. 3 In the underlying case your Board sustained the 4 FTB by a 3 to 2 vote. And I'm sure that the different 5 Members of the Board each had their own reason for 6 casting their respective votes. But, no matter how this 7 Board got to its ruling against the taxpayer in the 8 underlying case, it does not change the fact that there 9 are published decisions of this Board that support the 10 taxpayer's position in this case. 11 This is, indeed, what the regulations mean by 12 substantial authority. If you read the FTB's briefs, 13 you will see that their only counter argument to the 14 substantial authority exception is their position that 15 substantial authority only is available in so-called 16 highly factual cases. There is no elaboration as to 17 what the standard actually means, what is "a highly 18 factual case, a moderately factual case, a slightly 19 factual case, a pure legal case." There is no real 20 elaboration as to that. 21 But, in any think case, this singular argument 22 is totally unsupported by any legal authority. And if 23 you actually look at the FTB's brief, you will see that 24 there really are no statutes, regulations or cases cited 25 which support this proposition. 26 But it is simply an absence of authority that 27 defeats the FTB's position. I would point out that the 28 Treasury regulations contradict the FTB's argument. 7 1 Regulation 1.6662-4 D3, little 2, states that, 2 "An authority that merely states a conclusion 3 ordinarily is less persuasive than one that 4 reaches its conclusion by cogently relating the 5 applicable law to pertinent facts." 6 This excerpt contemplates substantial authority 7 standard applying to factual cases. So, not only is the 8 FTB's argument without citation to any authority, it's 9 just flat out wrong, based on the regulation. 10 There is substantial authority for the 11 taxpayer's position in this case, as we have discussed. 12 On to the good faith reliance argument. The 13 accuracy-related penalty may also be relieved if the 14 taxpayer can show good faith reliance on the advice of a 15 professional tax advisor. Well, it's our position that 16 there is a particularly strong case with respect to 17 Daniel V's reliance on its tax advisors. Again, the 18 standard of proof here, as set forth in the appropriate 19 regulations and cases, is only by a preponderance of the 20 evidence. In other words, all Daniel V needs to show 21 this Board is that it is more likely than not that it 22 relied upon the advice of its professional tax advisors 23 in good faith. 24 In determining this, federal authorities have 25 generally looked to the following three-prong test: 26 One, was the advisor a competent tax 27 professional? 28 Two, was all of the relevant information 8 1 provided? 2 And, three, did the taxpayer actually rely upon 3 the advice in good faith? 4 The first element, whether the advisor was a 5 competent tax professional, is satisfied. Here the 6 Busch firm is a reputable law firm and the individuals 7 involved in providing tax advice to Daniel V, David 8 Keligian and Gregory Busch, among others, are seasoned 9 tax professionals. 10 In addition to his law degree, Mr. Keligian, 11 has a CPA license and an MBA and has been practicing law 12 since 1980. 13 Mr. Busch is a CPA, licensed for 25 years, with 14 extensive experience in tax planning and return 15 preparation. 16 The second element, whether the taxpayer 17 provided all of the relevant information is also 18 satisfied. Here we have a declaration under penalty of 19 perjury from David Hehn, Daniel V's President, which we 20 submitted with our brief dated December 15th, 2008 21 stating that he provided all relevant tax records to the 22 Busch firm for return preparation purposes. 23 The third element, whether the taxpayer 24 actually relied in good faith upon the advice provided 25 is also satisfied here. Again we have declarations 26 under penalty of perjury to this effect from three 27 individuals -- David Hehn, David Keligian and Gregory 28 Busch. 9 1 Mr. Keligian states that he advised Daniel V 2 with respect to the commercial domicile issue and told 3 Daniel V that, based on your Board's decisions, 4 commercial domicile should be in Nevada. He says this 5 under penalty of perjury. 6 I would also remind the Board that the Busch 7 firm, a law firm, signed the tax returns in question. 8 And we know from federal tax law that there is an 9 inference, for purposes of relief from the 10 accuracy-related penalty, that when a professional signs 11 the return, that professional believes in the return and 12 the accuracy of it. 13 But if she prepares the return, yet refuses to 14 sing it, the contrary inference can be drawn. 15 Since these three elements are met, Daniel V is 16 entitled to relief from the accuracy-related penalty. 17 The FTB's only counter argument is again a weak 18 one. Apparently, the FTB believes that there is a 19 fourth element to obtaining relief, that Daniel V must 20 waive attorney-client privilege in the middle of active 21 litigation and divulge the most sensitive 22 attorney-client communications and documents by giving 23 the FTB access to Daniel V's file maintained by the 24 Busch firm. 25 This is an unreasonable request. And the FTB 26 makes it, even though there is no authority cited for it 27 and even though we have not been able to find a single 28 statute, case, regulation or any guidance that requires 10 1 it. 2 The FTB essentially disregards the directions 3 under penalty of perjury signed by three different 4 individuals and the fact that the tax return was 5 actually prepared and signed by the Busch firm and 6 insists that documents containing written advice from 7 the Busch firm to Daniel V be disclosed. This is 8 totally unnecessary. 9 The standard of proof here, again at the risk 10 of repeating myself, is by a preponderance of the 11 evidence. 12 Is it more like than not that Daniel V relied 13 on the advice of the Busch firm in good faith? Based on 14 the evidence provided, Daniel V has met its burden. 15 The FTB requests are unreasonable and not 16 required by law. 17 Here the taxpayer made more than a sufficient 18 effort to determine the correct liability, as the 19 federal regulations require, by hiring sophisticated tax 20 professionals, both lawyers and CPAs, to advise them. 21 David Hehn, Daniel V's President, does not have 22 a background in tax. Daniel V relied, in good faith, on 23 the advice of its advisors. 24 I'll close by reminding this Board that its own 25 staff, when asked about the merits of this case, said in 26 a public meeting of your Board, 27 "The problem with this case is there is 28 probably -- is probably enough evidence in 11 1 the record to support either position, but 2 there is nothing in the record to compel a 3 result." 4 I understand those remarks were candid. And I 5 understand that they were in response to questions from 6 the Board. But I do think that that is significant. 7 And it speaks, I think, to the existence of reasonable 8 cause in this case and why relief from penalties is the 9 right result in this case. 10 We will save the balance of our remarks for 11 rebuttal. 12 MS. MANDEL: Excuse me? 13 MS. YEE: Yes? 14 MS. MANDEL: Were you going to address the late 15 filing penalty now or -- 16 MR. DAKESSIAN: On rebuttal, if it's okay? Or, 17 if you'd like, we can address it now. 18 MS. YEE: You still have time, do you want to 19 address it briefly? 20 MR. DAKESSIAN: Sure. 21 MR. KELIGIAN: As far as the late filing 22 penalty, what you have is an admittedly very 23 extraordinary situation where a return preparer who the 24 corporation had always relied upon to file its tax 25 returns, had done so on a timely basis, had personal 26 issues that were very unforeseen, that could not be 27 predicted that occurred right around the time that the 28 return was due. 12 1 In this situation everything that was necessary 2 for the returns, actually, the original records of the 3 taxpayer had been forwarded to Mr. Krug. David Hehn 4 made follow-up calls shortly before the return was due. 5 He could not get a hold of Mr. Krug. 6 We found out later why that was. But, the 7 point was that at that point in time it was too late to 8 do anything to file a timely return. 9 It goes beyond the situation where some of the 10 cited cases simply have a return preparer who 11 miscalendared something or, you know, doesn't do what 12 they're supposed do as a nonextraordinary circumstance 13 that occurred in this case. And it was very 14 extraordinary, could not have been foreseen. 15 And nothing the taxpayer could have done in 16 this case could have prevented that. 17 MS. YEE: Very well. Thank you very much. 18 MS. MANDEL: Thanks. 19 MS. YEE: We'll give you time on rebuttal. 20 Thank you. 21 Franchise Tax Board? 22 MR. GARDNER: Good morning, Madam Chairwoman 23 and Members of the Board, my name is Bill Gardner. I 24 represent the Franchise Tax Board in this matter. 25 The issues in this matter are two penalties 26 imposed, including the -- following the assessment of 27 additional tax. This additional tax is assessed 28 following the determination that Daniel V' corporate 13 1 domicile was located in California; that intangible 2 investment income was properly allocated to California. 3 In determining whether -- where a 4 corporation -- a company is domiciled involves asking 5 what does the company do and where does it do it? 6 As discussed in Norton Simon, an investment 7 company is domiciled in the place where the investment 8 decisions are made. Here control over the investment 9 decisions was held and exercised by Ron Lane from 10 California. 11 This conclusion was determined following an 12 audit and review of the investments made, the expenses 13 of Daniel V and the circumstances of Daniel V's 14 operations. 15 Looking at these facts, we found that 16 Daniel V's nominal president was the office manager of 17 the Nevada office of the Busch firm and it was paid only 18 $6600 over a two year period to allegedly manage an 19 investment company generating almost $10 million of net 20 income. 21 We also found that there were unexplained 22 payments totaling $10,000 to Ron Lane's California 23 employee, Fran Spurlock. 24 We saw numerous billings related to property 25 outside of Nevada being billed to Ron Lane in 26 California. We saw payments for Ron Lane's travel 27 during months when there were no Board of Directors' 28 meetings being held. But we found no expenses for Ron 14 1 Lane's travel expenses when there were Board of 2 Directors' meetings being held. 3 We found numerous professional costs incurred 4 by California CPAs and California law firms being billed 5 to Ron Lane in California. One of those billing 6 statements indicated the CPA was working with Fran 7 Spurlock to close the books for Daniel V. 8 We found duplicative broker statements 9 addressed to Ron Lane in California. We found loans to 10 Ron Lane, loans to Ron Lane's son, loans to Daniel VII, 11 which is owned by Ron Lane. 12 But we didn't find any due diligence by 13 Mr. Hehn, the alleged President of Daniel V, regarding 14 such loans. 15 We found numerous investments in California 16 properties, many of which Ron Lane or entities owned by 17 Ron Lane had invested in. But we found no due diligence 18 performed by Mr. Hehn, nor indication of how Mr. Hehn 19 learned of those investments. 20 We also see investments -- documents being 21 forwarded by Ron Lane to Nevada and then faxed back to 22 Mr. Lane in California prior to the investment. 23 Based on these and many other facts, the FTB 24 determined -- and your Board sustained -- that 25 Daniel V's corporate domicile was in California, not in 26 Nevada. 27 Now, based on this determination and 28 assessments of additional tax, two penalties were 15 1 automatically assessed. These penalties were 2 mandatorily imposed under California law. And they are 3 such, unless there is cause for abatement. 4 The only issue today is whether those penalties 5 should be abated. 6 Joining me today is Craig Scott, who is a 7 subject matter expert on those penalties and he will 8 discuss the available defenses and grounds for 9 abatement. 10 MR. DAKESSIAN: We were not aware Mr. Scott was 11 going to be there, for the record. 12 MS. YEE: Okay, please proceed. 13 MR. SCOTT: Good morning, Members of the Board. 14 For the first matter, with respect to the 15 accuracy-related penalty, I think it's helpful to get a 16 little bit of a policy background behind the penalty. 17 Prior to the accuracy-related penalty based on 18 a substantial understatement of tax, which this -- these 19 penalties were based upon, taxpayers could -- were 20 taking positions that were unreasonable on the return 21 without really any downside risk if there was no fraud 22 or negligence. 23 So, if the IRS did not review the return, then 24 the taxpayer had an absolute reduction in tax without 25 any risk. If the IRS did review the return and found an 26 understatement, then all the taxpayer had to do was pay 27 the additional tax and interest. There was no penalty 28 associated with it if there was no fraud or negligence 16 1 involved. 2 They changed the law in 19 -- Congress changed 3 the law in 1982 to impose an accuracy-related penalty 4 based solely upon a substantial understatement, without 5 having to find any fraud or negligence. If there was a 6 substantial understatement that met the threshold 7 amounts, then the accuracy-related penalty was 8 applicable. And in this case, the threshold amounts 9 were clearly met and exceeded. 10 As has been stated, the defenses to the 11 accuracy-related penalty are substantial authority, 12 adequate disclosure with reasonable basis and reasonable 13 cause. 14 And I'd like to -- those are all outlined in 15 detail in Treasury regulations. And, in addition, the 16 taxpayer, when they raised the defenses, has the burden 17 of proof. 18 And I do not dispute with any of the standards 19 that have been outlined here before. 20 With respect to reasonable cause as an initial 21 matter, the taxpayer needs to act in good faith. And we 22 believe that the facts that Mr. Gardner just briefly 23 outlined here and the facts that are on record in this 24 case show that the taxpayer did not act in good faith 25 when it claimed domicile in Nevada. 26 Appellant argues that reasonable cause can be 27 established by reliance on a tax professional. And this 28 is true, but there are certain standards that have to be 17 1 satisfied to be able to do that. 2 The advice must be based upon all pertinent 3 facts and circumstances and then the law as it relates 4 to those facts and circumstances. 5 The taxpayer cannot satisfy this requirement if 6 the taxpayer fails to disclose a fact that it knows or 7 reasonably should know to be relevant to the proper tax 8 treatment of the item or if the taxpayer, or the advice, 9 rather, is based upon representations or assumptions 10 that the taxpayer knew or reasonably should have known 11 to be unlikely -- unlikely to be true. 12 We believe that in this case the taxpayer 13 cannot not establish reasonable cause based upon a 14 reliance on his tax professional. For one thing, we 15 haven't really seen the facts that the advice was based 16 upon and believe that some of the advice was based upon 17 presumed facts. 18 The attempt to satisfy the standard by 19 submitting a couple of declarations detailing events, 20 many of which happened 11 to 16 years ago, and we 21 believe that, unfortunately, these statements conflict 22 with the facts that are on record in this case. 23 One of the statements from Mr. Keligian 24 provides that his firm originally advised Daniel V on 25 the commercial domicile issue when it was giving advice 26 concerning Daniel V's election to be treated as a C 27 corporation in California. 28 What the declaration doesn't state is that that 18 1 particular advice was happening back in 1993, well 2 before the events that took place leading to a finding 3 of commercial domicile in California. It was based on 4 the advice or the factors that Mr. Keligian outlined in 5 his statement that it did -- Daniel V did not conduct 6 any business in California. It did not have an office 7 in California. It did not have employees in California. 8 It maintained its sole office in the State of Nevada, 9 conducted its Board meetings in Nevada and its sole 10 officer made decisions for the corporation located in 11 Nevada. 12 Those may have been the factors that they 13 looked at in 1993, when they originally were giving 14 advice on domicile for Daniel V. Or they could have 15 been even assumed facts in 1993. But they certainly 16 were not the facts that were evident in 1997 and 1998 17 that this Board relied upon in finding commercial 18 domicile in California. 19 Mr. Keligian then states in his declaration 20 that when his firm was asked to prepare the '97 and '98 21 returns, that he examined the facts, quote, "known to us 22 that were pertinent to the commercial domicile 23 determination." 24 He does not go into what those facts were and 25 we do not know if he considered all of the facts that 26 this Board was presented with and considered when it 27 determined that commercial domicile was in California as 28 opposed to Nevada. 19 1 Tax advice is only as good as the truth of the 2 underlying facts upon which it is given. And here we do 3 not believe that all of the facts were provided and that 4 the advice was given based upon the facts that were 5 actually evident in this case that this Board 6 considered. 7 With respect to substantial authority, it's an 8 objective standard. It's a weighing of the authorities. 9 And in this case, it's a highly factual case. And it's 10 our position that because the facts are so 11 overwhelmingly in favor of finding commercial domicile 12 in California, that there could not be authority that 13 would be contrary to the position if the facts were 14 closely analogous or identical to the facts in our case. 15 We also believe that the facts -- or the cases 16 that Appellants have relied upon, the Vinnell case, the 17 Rajaw case and several others that they presented in 18 exhibits -- are factually distinguishable and the 19 Treasury regulations provide that cases that are 20 materially distinguishable are not substantial authority 21 for the position presented. 22 We also believe that some of these exhibits 23 that are the cases that they rely upon that they 24 presented in exhibits to the Board are not completely 25 accurate. For example, in Exhibit 1, citing to the 26 Southern Pacific case, Appellant asserts that Mr. Hehn 27 exercised day-to-day management over Daniel V and that 28 Daniel V did not have any operations in California. 20 1 We believe the facts completely dispel this 2 claim. The evidence shows that investment decisions 3 were controlled and managed by Ron Lane in California, 4 and that Mr. Hehn, the nominal President of Daniel V, 5 who allegedly managed the day-to-day affairs of Daniel V 6 and its multimillion dollar investments, was only paid 7 nominal fees of 4600 in '97 and less than $2,000 in 8 1998. 9 MS. OLSON: Time has expired. 10 MS. YEE: Okay. I'm sure we'll have questions 11 for you. 12 MS. MANDEL: Since I -- 13 MS. YEE: Ms. Mandel? 14 MS. MANDEL: Are they going to address the 15 penalties -- 16 MS. YEE: Are you going to address the -- 17 MS. MANDEL: -- late filing penalties, since I 18 asked them? 19 MR. SCOTT: The late filing? 20 MS. YEE: Yes. 21 MR. SCOTT: I guess I can. 22 MS. YEE: Okay. Why don't you take some time 23 to -- 24 MR. SCOTT: Okay. 25 MS. YEE: -- address that briefly? So we have 26 that. 27 MR. SCOTT: Just briefly, the State return was 28 filed in January, on January 13th, 1999. Their federal 21 1 return was due on March 15, 1998, with the extended due 2 date of September 15th, 1998. 3 The exhibits that they have provided show that 4 their preparer started having problems in October of 5 1998. The federal return was not filed until October of 6 1998. So, it was filed late. 7 It seems that if the Appellants would have been 8 aware that the federal return was not filed by the 9 extended due date of September 15th, 1998, it would have 10 been on notice that there was something wrong with their 11 preparer and getting the return on file. 12 That would have given them a month time to get 13 their State return filed by the extended due date of 14 October 15th, 1998. 15 For some reason, they got their federal return 16 filed by October 23rd, '98 and then waited until January 17 of 1999 to get their State return filed. 18 So, we don't believe there could be reasonable 19 cause established based upon the filing of the federal 20 return and when it was actually due. 21 MS. YEE: Very well, thank you very much. 22 You have five minutes on rebuttal, gentlemen. 23 MR. KELIGIAN: Okay. Let me start by saying 24 that the explanation of facts provided by the Franchise 25 Tax Board seems very one-sided. And the record does not 26 show that, in fact, the statement was made that there 27 was control that was shown to have occurred in 28 California. 22 1 I'd like to remind this Board in this very room 2 that counsel for Franchise Tax Board made the statement 3 that they had faxes which showed direction and control 4 coming from California. They were asked to produce 5 those faxes. There was a delay. And they had one fax 6 that did not show control at all. 7 What we have in this case is we have Members of 8 this Board making an inference from certain facts. 9 There was no direct evidence. There was an inference 10 because of things like loans to the shareholder, what 11 some Members of the Board felt were inadequate salary, 12 things like passive investments made in California in 13 entities that Mr. Lane, the shareholder, had an interest 14 in. 15 But I would like to point out that there was 16 also countervailing evidence. And I think that's what 17 is important when it comes down to the penalty issue. 18 The countervailing evidence was the fact that most of 19 the income of Daniel V was due to stock trading 20 activity. Mr. Lane was not a signatory on the account. 21 There was third party evidence from a broker who handled 22 the account who said it clear to her that David Hehn 23 made on the spot decisions, was deciding things without 24 consulting with anybody, and was going ahead on his own 25 authority in making major decisions which accounted for 26 the bulk of the corporation's income. 27 So, I think this notion that the evidence all 28 tilts in one side, all I can do is remind the Board of 23 1 Mr. Daly's statement, which was not a legal conclusion, 2 obviously, but was an impression based upon the facts as 3 a whole, I think that impression should be that the 4 taxpayer did, in fact, have some strong facts in their 5 favor. 6 The next point I would make is that if we're 7 going to follow this idea of making inferences from 8 facts, the record is very clear, the Franchise Tax Board 9 even cited it right now in their arguments, that there 10 was an affiliation with the Busch firm, that David Hehn 11 was affiliated with the Busch firm. We are a law firm. 12 We had an office in Nevada. We had an office in 13 California. But I think that the critical point is, why 14 is it so hard to infer that a tax return that this law 15 firm itself prepared would not reflect our advice? 16 I think that inference is very logical and 17 happens to be true. And there is nothing in the 18 declarations under penalty perjury that I submitted that 19 contradicts that in any way. We did look at the issue 20 when they made their California C election. We looked 21 at the issue because there was no use to making the C 22 election unless they did not have a California 23 commercial domicile. 24 And we looked at the issue again and the facts 25 did not change. 26 Marty? 27 MR. DAKESSIAN: Yeah. I think the only other 28 thing I would add is that we did have a decision of this 24 1 Board what the specific grounds were or what the 2 specific factual findings were is not at all apparent. 3 So, I think it's a little bit inaccurate to say that the 4 Board decided this case and came to a certain conclusion 5 when we don't -- we don't have a published decision in 6 this case. We don't even have a summary decision in 7 this case. 8 So, what we do know is that the Franchise Tax 9 Board's position was sustained, that's what we do know. 10 In terms of, you know, the specific conclusions 11 that the Board drew, it's not, in my view, apparent, 12 unless there's some information that I don't have. 13 You know, I -- I would also add that -- I mean, 14 the Franchise Tax Board's position regarding the advice 15 from a professional tax advisor, does that mean that in 16 every case that comes before this Board for relief from 17 the accuracy-related penalty where the taxpayer says, 18 "I relied on the advice of my professional 19 tax advisor," 20 that the attorney-client documents need to be 21 disclosed? Is that -- because I don't know of a 22 requirement for that. 23 I think it's like so many of the issues that 24 this Board decides, it's on a facts and circumstances 25 basis. It's not ipso facto, you don't provide the 26 advice between attorney and client, that you don't get 27 relief. 28 I don't know of a rule that says that. I 25 1 think, as David said, the inferences here support that 2 the return reflects the advice of the Busch firm. We 3 have declarations under penalty of perjury from three 4 different individuals, including the President of the 5 company, who says that all pertinent records were 6 provided. 7 So, I understand the Franchise Tax Board's 8 point in one respect, but, on the other hand, that can't 9 be the rule. 10 Because if that's the rule, no one ever 11 qualifies and they're forced to waive privilege. 12 MS. OLSON: Time has expired. 13 MS. YEE: Okay, thank you very much. 14 Let me follow up on that point before I open it 15 up for questions. 16 On the issue of, I guess, reliance on a 17 professional advisor, I will tell you the thing that I 18 was troubled by when we first heard this case is I felt 19 like there were lot of gaps with respect to the facts 20 and -- but I've got to think that when we do place 21 reliance on a professional advisor that we have enough 22 information to at least determine whether such advice 23 that was provided to the client was reasonable. 24 And I think -- I mean you're suggesting that, 25 at best, what the Franchise Tax Board is spotty, and -- 26 but it -- you had declarations that were provided in 27 terms of everything that was available, was provided. 28 And, I mean, I don't know how we make a 26 1 determination about whether the advice that was relied 2 upon was reasonable, given that we don't have any idea 3 what -- what underlying -- what underlies that advice. 4 You know, whether the assumptions made were reasonable, 5 whether the advice was based on facts which may be true 6 or may be incomplete. 7 Maybe -- I mean, this case has been troubling 8 from that perspective for me. In that I feel like there 9 have been gaps. And, so, to the extent that the advice 10 came back from the professional who certainly provided 11 advice in this instance, I don't think there was enough 12 there for us to really make a conclusion -- for me, 13 anyway, to make a conclusion that the advice was 14 reasonable. 15 So -- and I don't know that I have seen any 16 more since we originally heard the case. So -- but 17 that's where I'm troubled and I just wanted to put that 18 out there for the record. 19 Questions or discussions, Members? 20 Dr. Chu? 21 DR. CHU: Well, on your different arguments, 22 first, the substantial authority question, you're 23 relying on these BOE formal opinions in the Appeal of 24 Vinnell Corporation and Rajaw Realty Company, but -- to 25 the FTB -- what takes precedence, those formal opinions 26 or the court case of Southern Pacific Company versus 27 McColgin, which said that the commercial domicile is 28 determined by consideration of all of the factors which 27 1 give the greatest protection and benefit to the 2 corporation? 3 MR. SCOTT: The regulations talk about a 4 weighing of authorities, but they also say that the 5 jurisdiction that you are in does not have a bearing on 6 the significance of the authority. 7 So, I think you could look at each of those for 8 considering what the proper, you know, rule to apply 9 here in the case. I don't think one has more precedence 10 over another. 11 DR. CHU: How about on the adequate disclosure 12 and reasonable basis issue? 13 The Appellants gave basically tax returns, but 14 also not did advise the tax agency of the possible 15 controversies, which I believe that they are supposed to 16 do. 17 What information should they have filed with 18 the FTB to constitute adequate disclosure? 19 MR. SCOTT: The regulations talk about two 20 forms of adequate disclosure. 21 The first is the filing of a form 8275. That 22 has a section on it called "Detailed Explanation," and 23 the instructions to the form 8275 provide that the 24 taxpayer must provide detailed facts regarding the 25 controversies or the item that it is questionable on the 26 return. And, so, we would expect to have facts 27 explaining the underlying issue regarding the domicile. 28 The other way to disclose on a return under the 28 1 Treasury regulations is pursuant to annual revenue 2 procedures. And we provided two of those for the '97 3 and '98 tax years as exhibits and those really aren't 4 applicable to the issue here in this case. 5 So, really, the only way that they could have 6 disclosed would have been through the filing of the 8275 7 form in order to meet the requirement of adequate 8 disclosure for the accuracy-related penalty. 9 DR. CHU: Now, they're saying that there is no 10 California form that is comparable. 11 So, how could they have dealt with that? 12 MR. SCOTT: Well, we use 8275. We conform to 13 the federal law. We conform to 6662 in the Internal 14 Revenue Code, under Section 19164 of the Revenue and 15 Taxation Code and also under Section 17024.5d, it 16 provides that regulations are applicable to California 17 to the extent that they don't conflict with California 18 law. 19 So, the regulations that Counsel has been 20 citing to are applicable for California purposes. And 21 those regulations have two forms of disclosure, the form 22 8275 or pursuant to the annual revenue procedures. 23 DR. CHU: So, they should have used the form 24 straight out and that would have been acceptable to the 25 FTB? 26 MR. SCOTT: That's the requirement of -- under 27 the Treasury regulations. 28 DR. CHU: And on the reasonable cause, good 29 1 faith exception, Daniel V is using a number of penalty 2 of perjury statements, but why is it that the David Hehn 3 declaration is undated? 4 I'd like to ask the appellants that. 5 MR. DAKESSIAN: You know, I apologize for that. 6 I don't know why it's undated. 7 But it was contemporaneously produced, I can 8 tell you that, with the filing of our brief on December 9 15th, 2008. 10 MR. KELIGIAN: More than likely my oversight 11 not putting you a date on it. 12 DR. CHU: Okay. Then on the late filing 13 penalty, why is it that if the -- why is it that -- that 14 the return was filed so late, considering the facts that 15 were just explained, which is that it was due 16 September 15th. And if your preparer had a breakdown 17 October 10th, then you did have that month. 18 And one would think that you would ask how this 19 return is coming along by -- prior to September 15th 20 since you know -- you have to know that you'd review the 21 return and then have to sign it. 22 MR. KELIGIAN: Well, what actually happened is 23 he was arrested on October 10th. His -- he was arrested 24 on October 10th, not -- you know, we believe, we don't 25 know because he's still incarcerated -- but we believe 26 his difficulties started way before because David Hehn 27 was trying to get a hold of him before the due dates of 28 the return to see what was going on. 30 1 As far as, you know, an apparent gap between 2 when the federal return was filed and when the State 3 return was filed, the federal return was filed late 4 anyway. I would think that the information for the 5 State return, because Schedule R does require a detailed 6 allocation and apportionment, that could have been the 7 reason it took more time. 8 I do know that both Greg Busch and David Hehn 9 said a lot of records need to be reconstructed in order 10 to file the return because Krug had a lot of the 11 original source documents. 12 So, I guess, long story short, we believe he 13 was having issues before the due date of the return. He 14 wasn't responding to phone calls. It was shortly 15 afterwards that -- or right around that time that David 16 Hehn contacted Greg Busch to get to work on the return. 17 DR. CHU: So, you -- you're claiming that 18 you -- you actually called the accountant to find out 19 what was going on with the return? 20 MR. KELIGIAN: I did not, David Hehn said that 21 he did. David Hehn said that he called several times 22 trying to get a hold of him. 23 DR. CHU: Now, let me ask the FTB if you were 24 in a situation where you couldn't get return phone 25 calls, what could a taxpayer do in that situation? 26 MR. SCOTT: Well, I believe there was another 27 preparer that was involved, that they were looking at 28 records, I am not -- is that correct, Bill? 31 1 MR. GARDNER: Well, included in the exhibits, 2 you'll see there was another CPA that was working with 3 Daniel V on the books. 4 I think it's -- in my opening brief, you'll see 5 that as Exhibit R. It was a small amount it states that 6 he was working on closing the books for Daniel V with 7 Fran Spurlock in the notations for the billing 8 statement. -- 9 But your question was more directed to what 10 would -- what would the Franchise Tax Board consider in 11 this respect for being late? 12 DR. CHU: Well, let's just say your tax 13 preparer really did have a mental breakdown -- 14 MR. GARDNER: Right. 15 DR. CHU: -- say a month before your return was 16 filed and you actually did do due diligence in terms of 17 inquiring, "Hey, what's going on with my tax return?" 18 What alternatives would you have to still 19 comply with the law? 20 MR. SCOTT: Dr. Chu, what we normally recommend 21 to taxpayers is that they get a return on file, get it 22 filed by the due date. 23 Then if they have to go back and amend, then 24 they go back and do that. But doing that, they would, 25 at least, avoid the late filing penalty. 26 DR. CHU: I see. 27 MS. MANDEL: But what would they do if they 28 didn't have their records because they were with the 32 1 accountant? 2 MR. GARDNER: I would point out that they filed 3 their federal return by October 23rd and, therefore, 4 they did have some information with respect to the 5 business. 6 MS. MANDEL: Okay, I don't know if I have 7 enough information yet about the federal return. So, 8 just -- yet -- what would -- I mean, who filed the 9 federal return? Who signed it? Do we know? 10 MR. GARDNER: Well, the federal return that was 11 attached to the California return was not a signed copy, 12 but it appears, at least by the signature block that was 13 filled out, but not signed, that it -- that the same 14 firm that completed the California return. 15 MS. MANDEL: The Busch firm? 16 MR. GARDNER: The Busch firm filed it. 17 MR. KELIGIAN: If you're asking who would have 18 signed, it was David Hehn on both of those. 19 I am taking at face value the transcript 20 shows that it was, because I couldn't read. I was 21 trying to figure out, but, I mean, I note that 22 October 23rd is late. It's over a month late. 23 As I said, I am not saying this is the answer, 24 but the California return is a lot more complicated 25 because you have to break out the allocation, the 26 apportionment and so forth. 27 I do know the records had to be recreated 28 because Krug had them and there no way to file a return 33 1 without them. 2 MS. YEE: Mr. Gardner? 3 MR. GARDNER: I just wanted to point out, the 4 federal return is the return that's due on 5 September 15th. 6 The federal -- excuse me, the California return 7 is due on October 15th. There's an extra month of time 8 and that's kind of why we're -- we're noting this -- 9 this gap of time. 10 The federal return having been filed on 11 October 23rd, according to the IRS, it would appear to 12 us that they had -- that they were -- would have been on 13 notice with respect to the difficulties of their tax 14 return preparer. 15 I mean, in general, I think that if there 16 are -- there has to be a situation in which a tax return 17 preparer -- where his failure to file would probably 18 result in adequate cause. We just don't think it's this 19 case. 20 When the return itself -- when they were 21 basically on notice as of September 15th, when the 22 federal return was not filed, they -- even though they 23 were on notice, they still did not file their California 24 return until January of 1999. And for us that's the big 25 gap. 26 MS. MANDEL: So, if -- -- 27 MR. GARDNER: That's the difficulty. 28 MS. MANDEL: -- you're saying that the federal 34 1 return appears to have been prepared by the Busch 2 firm -- 3 MR. GARDNER: Yes, ma'am. 4 MS. MANDEL: -- which wasn't in the habit of 5 preparing Daniel V's return until they got the call that 6 there was a problem with the outside CPA, Krug? 7 MR. GARDNER: Yes. 8 MS. MANDEL: The federal return was due in 9 September? 10 Daniel Hehn from -- 11 MR. GARDNER: David. 12 MS. MANDEL: -- David Hehn from Daniel V is -- 13 apparently made calls, Mr. Keligian has said. 14 And, so, the only way that the Busch firm would 15 have then been filing the federal return, albeit late, 16 was that Hehn was unable to get to Krug because Krug 17 was -- whatever was happening with Krug, something was 18 happening, and he finally winds up being arrested 19 October 10th. 20 But somewhere between before the -- if Hehn was 21 worried about filing the California return, presumably 22 he was worried about filing the federal return. And the 23 Busch firm winds up preparing both. 24 But then, I guess, the question is between the 25 federal return and the California return, which is late 26 October to mid-January? 27 MR. SCOTT: It's signed January 13th. 28 MS. MANDEL: What -- what happened in that 35 1 period and what -- what -- although by that point, even 2 by the time they managed to file the federal return, 3 they would have been late. 4 MR. GARDNER: Well, the October 23rd was the 5 received date by the IRS. I don't know when they would 6 have mailed it. 7 MS. MANDEL: And there's -- there's no -- I 8 have a hard time reading these things to from the 9 feds -- was there no penalty for the late filing on the 10 federal end? 11 MR. GARDNER: For federal tax return purposes, 12 they're an S corporation. 13 MS. MANDEL: Oh, that's right, okay. 14 MR. GARDNER: And there's no tax on an S 15 corporation at the federal level. 16 MS. MANDEL: So, there'd be -- 17 MR. GARDNER: No penalty. 18 MS. MANDEL: -- no penalty resulting. 19 Okay. So then, what's -- what do we have 20 between the federal return and the -- between the 21 federal return and the California return is an assertion 22 of what? 23 Reconstructing -- needing to reconstruct books? 24 Is that what we have? 25 MS. YEE: Mr. Keligian? 26 MR. KELIGIAN: Well, our records don't show 27 that the federal return was filed in October. I'm still 28 trying to figure out the transcript. 36 1 But I do know we were contacted before the due 2 date of either return because Hehn had already figured 3 out there was a problem because he was not getting 4 return phone calls and couldn't get a hold of him and 5 that it took at least from that time, around 6 September 15th to October, to, you know, to maybe file 7 the federal return. 8 But, I mean, our records indicate that they 9 were both filed later in January the following year. 10 So, I guess the only point I'd make is they 11 were already late by the time -- that I shouldn't even 12 say that. It was already too late to timely file the 13 return, even though Hehn contacted us right before the 14 due date of the federal return, because we didn't have 15 the records. 16 And Greg Busch had go in, reconstruct a lot of 17 things before he could file a tax return. By that time, 18 it was just -- there was no way to file a timely return, 19 at least a timely, accurate return. 20 MS. YEE: Dr. Chu, do you want to raise 21 anything? 22 DR. CHU: That's it. 23 MS. YEE: Other questions or comments, Members? 24 Mr. Leonard? 25 MR. LEONARD: Thank you, Madam Chair. 26 I appreciate the questions from my colleagues 27 on the late filing. I think enlightening to me because 28 I couldn't figure out the timetable or application. 37 1 I wanted to go to the accuracy-related because 2 I -- first of all, I don't understand the law, the 3 supposition that you made, Mr. Scott, that that -- no 4 taxpayer -- any taxpayer could afford the risk to be 5 inaccurate in their return because there's no downside 6 just strikes me as just bad reasoning on the part of 7 somebody who enacted that. 8 IRS and FTB charge above market interest rates. 9 So, if a taxpayer deliberately underpays their taxes and 10 then gets billed for it, gets an interest that's above 11 risk. They do pay. Let alone, I assume it draws them 12 totally into an audit situation and other things that 13 taxpayers find quite risky. 14 So, the idea that we need an accuracy-related 15 penalty because somebody makes an error, but it's not 16 fraudulent, I first have a problem with that. 17 Secondly, I don't know what our standard is. 18 What is an accuracy-related problem that is not a 19 penalty? 20 If I owe a million dollars in taxes and I leave 21 off the "1" and just pay 100,000, is that -- and it's 22 simply a math error, does that generate a penalty? 23 By what you said, it's mandatory. So, I would 24 assume that all math errors generate accuracy-related 25 penalties on top of it, yet I -- I don't remember a lot 26 of our income tax cases that have had that. 27 So, I -- I don't know what our standard is at 28 the Franchise Tax Board for accuracy-related penalties, 38 1 which you said it was mandatory. 2 So, I -- I hear you say that, but I -- I don't 3 see them every time. So, I assume there's -- they've 4 been relieved earlier in the -- before they come to us 5 or there is -- or they haven't been applied in the first 6 place. 7 And then, thirdly, there ought to be some place 8 in the accuracy-related penalty law that says if the 9 taxpayer thinks they're doing it right and makes an 10 argument that they're doing it right, then there's -- 11 there's a supposition applied to that that they thought 12 they were accurate. 13 I mean, I think your point you're making is 14 that they were inaccurate kind of on purpose, that they 15 took a risk. They knew better, but they figure it's 16 worth the risk. And I don't see that here. I think 17 they still believe they're right. 18 And, if nothing else is the standard, the fact 19 that this Board before us today was itself divided seems 20 to me to be conclusive that nobody really knows, that 21 there was real differences of opinion between the 22 taxpayer, Franchise Tax Board and even between this 23 Board as to what the proper application was of the 24 domicile of the corporation, which let's me say nobody's 25 made the threshold yet of an accuracy-related penalty 26 problem to be added on to it. 27 So, if you have to -- I'm not sure what the 28 question is, because you already said it's mandatory, 39 1 yet I know that's not accurate. 2 So, how -- how does -- if FTB relieves those 3 penalties, what's their threshold for mandatory on that? 4 And do they give any consideration to the fact that the 5 appeal, as it goes forward, develops real issues of 6 controversy, gray areas of the law, questions of 7 evidence of a corporate domicile that could be 8 interpreted more than one way? 9 MR. SCOTT: Well, it is, in a sense, a 10 mandatory penalty in the sense that if there is a 11 substantial understatement that meets the dollar 12 threshold, then the -- then the penalty is applicable. 13 MR. LEONARD: And the dollar threshold is? 14 MR. SCOTT: For these years, it was the greater 15 of 10 percent of the tax required to be shown on the 16 return or $10,000. 17 So, it -- it's relatively a low threshold, 18 really, for -- 19 MR. LEONARD: Doesn't sound that way. 20 MR. SCOTT: -- this. So, it does attach if 21 there is a substantial understatement of tax. 22 And Congress -- I did read things on what 23 Congress was looking at when they enacted the 24 substantial understatement aspect to the 25 accuracy-related penalty, and they did feel that there 26 was not a substantial or a sufficient penalty for 27 taxpayers that were taking positions that were 28 questionable on the returns that didn't amount to 40 1 negligence or fraud. 2 And, so, there was some thought and -- into 3 that when they enacted the change in the law in 1982. 4 I look at lot of accuracy-related penalties at 5 the Franchise Tax Board. We've have given training to 6 all of the auditors on accuracy-related penalties and 7 gone over all of the defenses with them and tried to 8 make sure that they understand the defenses with respect 9 to substantial authority, a substantial understatement, 10 anyway, that there's substantial authority, accurate 11 disclosure with reasonable basis and reasonable cause. 12 And I am often asked to look at those and look 13 to see if any of those defenses have been satisfied. 14 And we -- we do recommend abatement in a number of those 15 because we feel that the standards have been met, the 16 defenses have been met for this penalty that's imposed 17 just for meeting dollar thresholds. 18 So, when -- that's probably why you don't see a 19 lot of them. When you do see them, they have gone 20 through review and a lot of consideration by those of us 21 in Legal that look at these penalties. 22 MR. LEONARD: And the last question was, do 23 you recognize the Board of Equalization's votes? 24 MR. SCOTT: Say that again? Pardon? 25 MR. LEONARD: This Board was split 3 to 2. 26 Does that make any difference to you as to whether or 27 not the taxpayer might have had a sincere belief that 28 they were not purposely understating the tax? 41 1 MR. SCOTT: I looked at this case. And I have 2 looked at a lot of accuracy-related penalty cases. 3 And this was not -- for me, this was not a 4 close call case. 5 MR. LEONARD: That's not the question. 6 MR. SCOTT: I know it was a close call for you 7 to consider it for the Board with a 3-2 vote, but we 8 looked at it, I guess, fresh. 9 And then we're going to leave it to the Board 10 to determine if you think that the penalties are 11 applicable or not. 12 MR. LEONARD: As it should be. Thank you. 13 Thank you, Madam Chair. 14 MS. YEE: Thank you, Mr. Leonard. 15 I guess -- let me just follow up on a question 16 to the Franchise Tax Board. 17 The substantial authority exception, are these 18 typically the types of cases that you would look to 19 applying such an exception to? 20 I mean, the reason I ask is there -- it just 21 seems to me that the underlying facts here really -- I 22 mean for me, as I mentioned earlier -- are spotty, at 23 best. 24 And I would disagree with my colleague, 25 Mr. Leonard, we did have, certainly, different 26 perspectives among us on the Board, but in some 27 respects, how we each interpret the facts, doesn't seem 28 to me to be kind of squarely relevant with respect to 42 1 this substantial authority exception. 2 MR. SCOTT: Well, the substantial authority 3 defense is looking at the law and then applying the law 4 to the facts. So, the facts do play heavily in how 5 applicable the defense of substantial authority plays. 6 And the cases that have looked at substantial 7 authority, and there aren't a lot, the Tax Court cases, 8 federal cases, have kind of grappled with the issue when 9 it's kind of an all or nothing type case with the facts. 10 When the fact are so overwhelming in favor of 11 one position can there ever be substantial authority for 12 any contrary position? 13 And they have grappled with that problem. 14 MR. DAKESSIAN: Can I -- can I respond to that? 15 MS. YEE: Mr. Dakessian? 16 MR. DAKESSIAN: Yeah. 17 Again, you know, I don't know why this case 18 appears so one-sided to the Franchise Tax Board, only 19 because if you look at the published decisions of this 20 Board and the factors that are set forth in those 21 decisions, I understand that, you know, certain Members 22 feel that there are gaps in terms of the information 23 that was provided. 24 But the fact is that if you take this case and 25 you line it up with Vinnell, you line it up with Rajaw 26 Realty, you line it up with Wheeling Steel and these 27 other cases, there are a lot of facts on the side of the 28 taxpayer in this case. 43 1 MS. YEE: But they're not your facts. 2 MR. DAKESSIAN: What -- 3 MS. YEE: They're not the facts here 4 (indicating). 5 MR. DAKESSIAN: -- well, but there are tests 6 set forth in those opinions in terms of what the Board's 7 going to look to determine commercial domicile and many 8 of those facts are the same with respect to what we have 9 here. 10 So, I mean, I understand, you know, where you 11 are coming from, Madam Chairwoman, but it's our view 12 that there were a lot of facts supporting our position 13 in this case based on the decisions of your Board. 14 MS. YEE: Okay, very well. 15 Other questions or comments, Members? 16 MR. LEONARD: Madam Chair? 17 MS. YEE: Mr. Leonard? 18 MR. LEONARD: Just a joinder to your -- I 19 understand the Franchise Tax Board's predicament because 20 they started out in a position and they have to defend 21 it. 22 But I do think at some point the votes of this 23 Board are recognized. Should this case go to court, I 24 think the fact that this Board itself was split -- and I 25 voted for the accuracy-related penalties, it's not some, 26 "I just don't believe in them," kind of thing. 27 I look at the facts of the case and the facts 28 of how they apply and it does seem to me that a court 44 1 would give weight to even the minority votes on this 2 Board. 3 MS. YEE: Ms. Mandel? 4 MS. MANDEL: Yeah, just a little more pain on 5 the late filing penalty. 6 I'm looking at the -- because Mr. Keligian said 7 he didn't see it, I'm looking at the transcript that the 8 Franchise Tax Board put in and I -- usually you guys 9 circle or highlight and if you highlight, it doesn't 10 come through in our photocopying, then, you know, that's 11 an issue. 12 But I take it that the bottom left column where 13 it says, "RET RCVD DT-10231998 is where you say the 14 IRS -- that's where they put the return received date? 15 Is how that gets translated? Is that the right reading 16 of that? 17 MR. GARDNER: That's how it was explained to 18 me, yes, ma'am. 19 MS. MANDEL: Okay. Then I guess the other 20 issue between -- I understand that by the time the 21 federal return was filed, the California return was 22 late, in any event. 23 But -- and there's the assertion that it's -- 24 that there was some complications. Presumably, if you 25 had to reconstruct some records to do the federal 26 return, you might have had to reconstruct them to do 27 the -- did I say California -- to do the California 28 return, you might have had to reconstruct them to do the 45 1 federal return. 2 There's the assertion that the California 3 return may be a little more complicated because of 4 schedules. 5 But I also notice that Mr. Keligian's statement 6 says -- and this -- this, you know, I think, was offered 7 in the context of the accuracy-related penalty probably, 8 but it does say that you -- in connection with preparing 9 the returns, and one of those returns being the '97 10 return that has the late filing penalty, you -- you had 11 to consider -- go through and consider the facts and 12 circumstances to try to determine commercial domicile 13 for purposes of filing the return. 14 And, so, I was wondering -- it's been a long 15 time, but can you -- you know, that examination would 16 not be relevant to the federal return. And, so, do you 17 have any recollection of timing and what went -- what 18 wept on in terms of -- because I'm just trying to 19 understand the gap between when IRS has the federal 20 return and when you have the federal return -- I mean 21 the California return. 22 And I understand that California return still 23 would have been late, but the penalty builds up each 24 month. You know, it starts at like 5 percent and it 25 builds up each month. So, if you'd been able to file it 26 around the time of the federal return, at least the time 27 IRS has the federal return in, it wouldn't -- you know, 28 the penalty wouldn't be as big. 46 1 So, I'm just curious about -- really curious 2 about -- if you couldn't tell how curious I was -- about 3 what went on in that interim period. 4 MR. KELIGIAN: Well, I don't know. I don't 5 remember a lot specifically. 6 I do know I looked at that return, I looked at 7 the Schedule R. 8 Maybe as far as why there was no urgency, our 9 feeling was that because there was no tax due in 10 California other than the $800 that, you know, our 11 concern was not of a penalty piling up, because we did 12 not believe that Daniel V had a commercial domicile and 13 there would be anything more than the $800, which had 14 already been paid. 15 MS. MANDEL: Okay. 16 MR. KELIGIAN: But I mean I can tell you our 17 advice was reflected in the preparation of the return. 18 Because why would we not follow our own advice 19 in doing a return we prepared? 20 MS. MANDEL: Okay, thank you. 21 I don't have any other questions. 22 MS. YEE: Okay, very well. 23 Hearing no other questions, is there a motion? 24 DR. CHU: Move to take the matter under 25 submission. 26 MS. YEE: Motion by Dr. Chu to take this matter 27 under submission. 28 Is there a second? 47 1 MS. MANDEL: Second. 2 MS. YEE: Second by Ms. Mandel. 3 Without objection, that motion carries. 4 Thank you very much, gentlemen and Franchise 5 Tax Board. 6 MR. KELIGIAN: Thank you. 7 MS. YEE: We'll discuss your matter later today 8 and send you written notice of our decision. 9 ---o0o--- 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 48 1 REPORTER'S CERTIFICATE 2 3 State of California ) 4 ) ss 5 County of Sacramento ) 6 7 I, JULI PRICE JACKSON Hearing Reporter for the 8 California State Board of Equalization certify that on 9 JUNE 30, 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 pages 1 13 through 48 constitute a complete and accurate 14 transcription of the shorthand writing. 15 16 Dated: July 17, 2009 17 18 19 20 21 22 ____________________________ 23 JULI PRICE JACKSON 24 Hearing Reporter 25 26 27 28 49