BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION 450 N Street, Room 121 Sacramento, California REPORTER'S TRANSCRIPT NOVEMBER 17, 2009 ITEM H2 TAX PROGRAM NONAPPEARANCE MATTERS - ADJUDICATORY FRANCHISE AND INCOME TAX MATTERS Reported by: Beverly D. Toms No. CSR 1662 1 1 2 P R E S E N T 3 4 For the Board Betty Yee of Equalization: Chair 5 Judy Chu 6 Vice-Chair 7 Bill Leonard Member 8 Michelle Steel 9 Member 10 Marcy Jo Mandel Appearing for John 11 Chiang, State Controller (per Government Code 12 Section 7.9) 13 Diane Olson Chief, Board 14 Proceedings Division 15 16 ---oOo--- 17 18 19 20 21 22 23 24 25 26 27 28 2 1 INDEX 2 3 PAGE 4 PUBLIC SPEAKER: LAURA LEE GEORGE 4 5 SUB-ITEM 1 8 6 SUB-ITEM 2 9 7 SUB-ITEM 3 13 8 SUB-ITEM 4 17 9 SUB-ITEM 1 RECALLED 18 10 ---oOo--- 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 3 1 Sacramento, California 2 November 17, 2009 3 ---oOO--- 4 MS. YEE: Okay. Next item. 5 MS. OLSON: We have public speakers on H2. 6 MS. YEE: Actually, let me do this, Members. 7 We have -- our next items on the agenda are the 8 nonappearance matters. But in deference to our 9 appellants who have been waiting most of the day what 10 I'd like to do is to skip to item H2, sub-item 2. We do 11 have a public speaker. And I would ask her to come 12 forward and then we will resume the oral hearings and 13 take up the rest of the nonappearance calendars after 14 that. 15 MS. STEEL: Oh. 16 MS. YEE: Okay. So I believe we have Laura Lee 17 George who is here today. Please come forward. 18 Good afternoon. We are -- if you'll introduce 19 yourselves for the record and we'll give you three 20 minutes for your presentation, and there may be 21 questions after that. 22 MRS. GEORGE: Okay. Laura Lee George, 23 taxpayer. And I have my husband, Mervin George, a 24 taxpayer, with me, although he won't be speaking. 25 MS. YEE: Great. Thank you. 26 MRS. GEORGE: Good afternoon, Board Members. 27 We -- we respectfully request a rehearing of our case 28 based on two items, two -- 4 1 The first item is at our last hearing there was 2 a -- irregularity in the Board's practice where one 3 Board Member was not here to hear the arguments. And 4 the vote came down 2 -- 3-2 with that Board Member being 5 the swing vote against us, that did not hear my 6 testimony nor most of the rebuttal. 7 The second reason for a rehearing is that the 8 Board's decision was not reported by the evidence or was 9 contrary to the law. I do have some handouts here for 10 the Board that are key facts and points on the legal 11 points that have been missed by the Franchise Tax Board 12 attorneys, if you wish to receive them. 13 MS. YEE: Sure. Let me have Board Proceedings 14 furnish copies to us. 15 MRS. GEORGE: Within the three minutes I will 16 summarize through these, the key facts and legal points 17 regarding reservation Indians. My husband, there is no 18 dispute that he is an Indian of the Hoopa Valley Indian 19 reservation. The dispute is with me. I am a Karok 20 tribal member, and under a -- the McClanahan vs. State 21 Tax Commission of Arizona, which was heard by the U. S. 22 Supreme Court, and also under the U. S. Court of 23 Appeals, the Short versus United States and the 24 Hoopa-Yurok Settlement Act, I have presented evidence 25 that I am a reser -- an Indian of the Hoopa Valley 26 Indian reservation. 27 There is also issues of the source of my income 28 when I worked on the reservation. It's interesting that 5 1 when I went to the Franchise Tax Board -- there is a web 2 site with the Franchise Tax Board tax workshop that 3 states that the source of income is where the work was 4 performed. And that's in -- also Internal Revenue 5 Service source of income is determined by where the 6 services are performed. So the Franchise Tax Board was 7 in error in trying to say that my income was not tribal 8 sourced. So they're changing the definition of source. 9 Also another point is the retirement income 10 exemption under PL 10495. The Franchise Tax Board 11 argued that since Indian tribes were not listed with 12 states that it did not apply. However, when I go to the 13 definitions of "state" within that 10495, it does 14 include states -- Indian reservations as states. 15 Therefore I'm going to address the application of the 16 abstention doctrine. 17 We argue that the State Board of Equalization 18 does have the authority to rule in our case as issues in 19 question have already been ruled on by an Appellate 20 level or higher Federal Court. 21 On the Indian reservation -- Indians of 22 reservation, McClanahan was ruled on by the U. S. 23 Supreme Court. My being an Indian of the reservation 24 was ruled on by the U. S. Court of appeals and a 25 Congressional act. 26 Under PL 10495 regarding retirement income, 27 this was already litigated by the State of California. 28 The issue is in reading and applying the definition of 6 1 State that is included in the law. 2 MS. OLSON: Time has expired. 3 MS. YEE: Okay. Let me have you stop there, 4 Ms. George. Are there questions, Members? 5 MR. LEONARD: You're one point short. Anything 6 you want to add to point number five? 7 MRS. GEORGE: Yes. 8 MR. LEONARD: -- question. 9 MRS. GEORGE: Regarding the income source, we 10 argue that the State Board of Equalization does have 11 authority over the Franchise Tax Board to follow 12 well-established FTB definitions of "source" that are 13 also consistent with IRS publication 519, that the 14 source of income is determined by where the services are 15 performed. 16 MR. LEONARD: Okay. 17 MS. YEE: Thank you. Questions? 18 Hearing none, Ms. George, thank you very much 19 for coming before us and providing additional 20 clarification. 21 We will take your petition for rehearing under 22 consideration when we get to that matter later on in the 23 agenda. 24 MRS. GEORGE: Thank you. 25 MS. YEE: Okay. Thank you. 26 MR. GEORGE: Thank you. 27 MS. YEE: Thank you very much. 28 ---oOo--- 7 1 SUB-ITEM 1 2 MS. OLSON: Our next item is H2, Franchise and 3 Income Tax Matters - Adjudicatory. 4 MS. YEE: Okay. We are now on item H2, 5 Franchise and Income Tax Matters. Let's take these up 6 one at a time. 7 We have sub-item 1, Gregory E. Mudwilder and 8 Patricia A. Mudwilder. 9 Is there a motion? 10 MS. MANDEL: We're on H -- 11 MS. YEE: H2, sub-item 1. 12 MR. HORTON: Move to sustain the Franchise Tax 13 Board with instruction to recalculate the 14 accuracy-related penalty. 15 MS. YEE: Okay. 16 MS. MANDEL: That's the staff recommendation, 17 is it? 18 Okay. Second 19 MS. YEE: Okay. We have a motion by Mr. Horton 20 to sustain the Franchise Tax Board -- 21 MS. MANDEL: With the -- 22 MS. YEE: -- with the recalculation -- 23 MR. HORTON: With the recalculation. 24 MS. YEE: -- of the accuracy-related penalty. 25 Seconded by Ms. Mandel. 26 Without objection, such will be the order. 27 ---oOo--- 28 8 1 Sub-item 2. 2 MS. YEE: Okay. Next sub-item is sub-item 2, 3 Melvin L. George, Senior, and Laura Lee George. 4 Is there a motion? 5 MS. MANDEL: This -- this had been pulled off 6 the consent calendar. Was there -- was it just because 7 the taxpayers wanted to come and speak? Do you recall? 8 I think -- you had pulled it, but I'm not -- 9 MS. YEE: We did. It actually related to some 10 comments that were made. 11 MS. MANDEL: Oh, something else? 12 MS. YEE: Right. It was not -- yeah. 13 MR. HORTON: Did the Petitioner present any 14 additional information? 15 MS. KELLY: The arguments are the same -- 16 MR. HORTON: Same argument. 17 MS. KELLY: -- arguments. 18 MR. HORTON: Oh, move to deny. 19 MS. YEE: Okay. We have a motion by Mr. Horton 20 to deny the petition for a hearing. 21 Is there a second? I will second that motion. 22 Discussion? 23 MS. KELLY: Ms. Yee. 24 MS. YEE: Yes, Ms. Kelly. 25 MS. KELLY: May I clarify? There -- there is a 26 new argument, and it has to do with Dr. Chu stepping 27 away from the dais -- 28 MS. YEE: Right. 9 1 MS. KELLY: -- temporarily. 2 MS. YEE: Right. But sub -- 3 MS. KELLY: But the -- the substantive 4 argument's the same. 5 MS. YEE: Remain the same. Okay. 6 Other comments? 7 Okay, please call the roll. 8 MS. OLSON: Madam Chair. 9 MS. YEE: Aye. 10 MS. OLSON: Mr. Leonard. 11 MR. LEONARD: No. 12 MS. OLSON: Ms. Steel. 13 MS. STEEL: No. 14 MS. OLSON: Mr. Horton. 15 MR. HORTON: Aye. 16 MS. OLSON: Ms. Mandel. 17 MS. MANDEL: I'm trying to remember this. I 18 understand that it's the same arguments and I -- and -- 19 MR. LEONARD: You want a reminder of the case 20 or -- 21 MS. MANDEL: Yeah. You know, the part that -- 22 the -- the one part that I'm trying to remember is 23 the -- and, you know, I looked at this a little while 24 ago, was the -- the question of -- of living on the 25 reservation when - the -- it's the Hoopa-Yurok issue. 26 MR. LEONARD: Right. 27 MS. MANDEL: You know, it's not quite -- I'm 28 not sure -- I don't -- I don't recall if it was 10 1 presented as though it was simply like Angelina Mike, 2 but that Yurok-Hoopa is -- that's the part that I was 3 trying to recall. 4 MS. KELLY: I think we can distinguish this one 5 because this is not reservation-sourced income. I mean, 6 that's -- that's disputed by the Appellants and 7 essentially the Board abstained because of the 8 Constitutional question presented by the Appellants. 9 MS. MANDEL: With respect to -- and -- and that 10 was also true with respect to her school teaching 11 income -- 12 MS. KELLY: Exactly. 13 MS. MANDEL: -- even though the school was 14 on -- located within -- 15 MS. KELLY: Exactly. 16 MS. MANDEL: Okay, I remember. 17 MS. KELLY: Whether or not that's reservation 18 source income. 19 MS. MANDEL: Okay, I remember this now better. 20 There was -- sometimes there's so many of them for the 21 meeting that they circulate in my brain and I get them a 22 little confused. 23 So that was a motion for the staff 24 recommendation. 25 MS. YEE: Right. 26 MS. MANDEL: Is that what the motion was? 27 MS. YEE: Yes, it was to deny the petition. 28 MS. MANDEL: Yes. Sorry, I should think of 11 1 those questions earlier. 2 MS. YEE: Okay. That motion carries. 3 MS. OLSON: Motion carries. 4 MS. YEE: Okay. 5 ---oOo--- 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 12 1 SUB-ITEM 3. 2 MS. YEE: Next item, sub-item 3, Marc 3 Pretscher. Is there a motion? 4 MS. MANDEL: The staff recommendation. 5 MS. YEE: Okay. Motion by Ms. Mandel to adopt 6 the staff recommendation. Is there a second? 7 MR. HORTON: Second. 8 MS. YEE: Second by Mr. Horton. 9 Discussion? 10 MR. LEONARD: Yes. 11 MS. YEE: Mr. Leonard, please. 12 MR. LEONARD: I'm okay with frivolous appeal 13 penalties, but I am just asea in the logic for how we 14 apply the dollar numbers. This seems high for this guy, 15 although not his lawyer, as compared to some of the 16 others that we have that I think have been very 17 frivolous in their appeals. And I -- I just -- is there 18 any rationalization for how staff picked out this 19 number? 20 MS. KELLY: Right. Well, we have two years 21 on appeal before us. We have -- the third appeal is for 22 the 2003 year. And the recommended frivolous appeal 23 penalty is 3,000. That's for the third appeal. And 24 then the fourth appeal before us -- before the Board 25 here today is the 2002 year, and 5,000 is proposed. 26 Now, for the first appeal, the 700 -- the Board 27 imposed $750 of the frivolous appeal penalty. The 28 Appellant filed a petition for rehearing that was 13 1 denied. He then filed his second appeal and the Board 2 imposed a frivolous appeal penalty of $1500. 3 And so the ones before you today are basically 4 increasing based on the continued filing of -- of 5 frivolous appeals. 3,000 and then 5,000. 6 MR. LEONARD: Did the 2002 year appeal come 7 after the 2003 year appeal? 8 MS. KELLY: Yes. 9 MR. LEONARD: No, it doesn't. 10 APPEALS: They're not in order. They're not in 11 order. And the difference is about a week or so. 12 So as they come in that's the number of the 13 appeal. 14 MR. LEONARD: So they're literally simultaneous 15 appeals? 16 MS. KELLY: They're different notices of action 17 and the appeals came in on different days. They're 18 about a week or so apart. 19 MR. LEONARD: Well, in terms of -- if our 20 appeal -- frivolous appeal penalty is to deter bad 21 behavior, the $5,000 one came -- how do I say it? The 22 $3,000 one he didn't know about before he had already 23 apparently incurred the $5,000 one. It -- 24 MS. KELLY: Well, he filed the -- his appeal 25 number three on March 17, 2008. That's the one that -- 26 the proposed penalty is $3,000. And then he filed his 27 fourth appeal on March 24, 2008, and that's the $5,000. 28 And he's -- he's familiar with the frivolous 14 1 appeal penalty, it's been imposed twice before for two 2 previous appeals. 3 And I also notice that in -- on this particular 4 appeal, I think it's the 2002 year -- might be the 2002, 5 possibly both, he argued that they were violations of 6 the Information Practices Act. And FTB sent him a lot 7 of information on that, including referencing him to the 8 document about what types of arguments are frivolous 9 arguments. 10 He's -- he's quite familiar with what the -- 11 MR. LEONARD: Like I say, I'm okay with the 12 penalty. I just -- the logic of these amounts, I think 13 I'd rather arrest one of these guys and put him in 14 Federal prison and let all taxpayers know that you 15 just -- don't get away with this than levying these 16 penalties that who knows if we'll ever collect, and then 17 have them and -- I mean they doubled every time except 18 the last time. 19 I mean they're -- to me they're just -- it 20 would be nice to have a table and to have some kind of 21 logic of how we're -- how we're deciding how serious the 22 violation is of our rules. 23 And this just doesn't fit that. 24 MS. KELLY: Well, we do have the regulation 25 that sets forth the factors for determining the amount. 26 Under the statute, you know, it's an amount up to 27 5,000 -- 28 MR. LEONARD: Right. 15 1 MS. KELLY: -- whatever the Board determines is 2 appropriate. 3 MR. LEONARD: Right. 4 MS. KELLY: Right. 5 MR. LEONARD: I know that much. But I don't 6 know how we get to each of these numbers. 7 MS. YEE: Okay. We have a motion by Ms. 8 Mandel, second by Mr. Horton to adopt the staff 9 recommendation. 10 Please call the roll. 11 MS. OLSON: Madam Chair. 12 MS. YEE: Aye. 13 MS. OLSON: Mr. Leonard. 14 MR. LEONARD: Pass. 15 MS. OLSON: Ms. Steel. 16 MS. STEEL: Aye. 17 MS. OLSON: Mr. Horton. 18 MR. HORTON: Aye. 19 MS. OLSON: Ms. Mandel. 20 MS. MANDEL: Aye. 21 MS. OLSON: Mr. Leonard. 22 MR. LEONARD: I'm abstaining. 23 MS. YEE: Okay, that motion carries. 24 MS. STEEL: Is that 3 and 4 together? 25 MS. YEE: What's that? 26 MS. STEEL: Is it 3 and 4 together? 27 MS. YEE: That was just 3. 28 MS. STEEL: Just 3. 16 1 ---oOo--- 2 SUB-ITEM 4 3 MS. YEE: And then sub-item 4, Marc Pretscher. 4 MR. HORTON: Substitute the roll call. 5 MS. YEE: Okay. Motion? 6 MR. HORTON: So moved. 7 MS. YEE: Motion by Mr. Horton. 8 MS. MANDEL: Second. 9 MS. YEE: Second by Ms. Mandel. 10 Call the roll. 11 MS. OLSON: Madam Chair. 12 MS. YEE: Aye. 13 MS. OLSON: Mr. Leonard. 14 MR. LEONARD: Abstain. 15 MS. OLSON: Ms. Steel. 16 MS. STEEL: Aye. 17 MS. OLSON: Mr. Horton. 18 MR. HORTON: Aye. 19 MS. OLSON: Ms. Mandel. 20 MS. MANDEL: Aye. 21 MS. OLSON: Motion carries. 22 MS. YEE: Thank you. 23 ---oOo--- 24 25 26 27 28 17 1 SUB-ITEM 1 RECALLED. 2 MS. YEE: I'm sorry, Members, I recorded an 3 inaccurate vote with respect to one sub-item in this 4 item, sub-item 1, Gregory Mudwilder and Patricia A. 5 Mudwilder. 6 I think the motion was to sustain the Franchise 7 Tax Board with the correction to the accuracy-related 8 penalty. 9 I did want to be recorded as a "no" on that. 10 So, if we need to expunge the record to do that or if we 11 can just note it -- 12 MS. OLSON: Yes, we do. 13 MS. YEE: Okay. Is there a motion to expunge 14 the record? 15 MR. HORTON: So moved. Which item? 16 MS. YEE: Motion by Mr. Horton. Item H2, 17 sub-item 1. This is Mudwilders. 18 Okay. Motion by Mr. Horton to expunge the 19 record. Is there a second? 20 MR. LEONARD: Sure. 21 MS. YEE: Second by Mr. Leonard. 22 Without objection. 23 And then -- 24 MS. MANDEL: And then -- 25 MS. YEE: And then just same motion, if -- 26 motion by Mr. Horton, second by Ms. Mandel, and just 27 record Yee as a no -- as a "no." 28 Thank you. 18 1 MR. HORTON: Does that change that outcome? 2 MS. YEE: No. 3 MS. OLSON: No. Motion carries. 4 ---oOo--- 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 19 1 REPORTER'SCERTIFICATE 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 November 17, 2009 I recorded verbatim, in shorthand, to 10 the 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 19 13 pages constitute a complete and accurate transcription 14 of the shorthand writing. 15 16 Dated: December 7, 2009. 17 18 19 20 ____________________________ 21 BEVERLY D. TOMS 22 Hearing Reporter 23 24 25 26 27 28 20