1 BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION 2 450 N STREET 3 SACRAMENTO, CALIFORNIA 4 5 6 7 8 REPORTER'S TRANSCRIPT 9 APRIL 13, 2010 10 CORPORATE FRANCHISE AND PERSONAL INCOME TAX HEARING 11 APPEAL OF 12 HARVINDER SINGH PAHAL AND SATVINDER KAUR 13 NO. 487053 14 AGAINST PROPOSED ASSESSMENT OF 15 ADDITIONAL INCOME TAX 16 17 18 19 20 21 22 23 24 Reported by: Juli Price Jackson 25 CSR No. 5214 26 27 28 1 1 P R E S E N T 2 For the Board Betty T. Yee of Equalization: Chair 3 Jerome E. Horton 4 Vice-Chair 5 Barbara Alby Acting 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 Jenni Harmon Equalization Staff: Staff Counsel 15 16 Amy Kelly Tax Counsel 17 18 For Franchise Tax Jozel Brunett Board: Tax Counsel 19 Todd Bailey 20 Tax Counsel 21 For Appellants: Matt Staub 22 Representative 23 ---oOo--- 24 25 26 27 28 2 1 450 N STREET 2 SACRAMENTO, California 3 April 13, 2010 4 ---oOo--- 5 MS. YEE: Let us reconvene the meeting of the 6 Board of Equalization. 7 Ms. Olson, what's our next matter? 8 MS. OLSON: Our next matter is B2, Harvinder 9 Singh Pahal and Satvinder Kaur. 10 MS. YEE: Okay, very well. 11 Appeals? 12 MS. HARMON: Good morning, Madam Chair and 13 Members of the Board. My name is Jenni Harmon and I 14 represent the Appeals Division. 15 The issues on appeal are, first, whether the 16 Board has jurisdiction to determine the Appellants' tax 17 liability for 2004 has been discharged in bankruptcy; 18 second, whether the Respondent should be estopped from 19 assessing the proposed tax and/or related interest 20 pursuant to the doctrine of equitable estoppel; and, 21 third, whether, in the alternative, Appellants have 22 shown the proposed assessment is erroneous. 23 MS. YEE: Thank you very much. 24 Good morning. 25 MR. STAUB: Good morning. 26 MS. YEE: Thank you for your patience. 27 If you'll introduce yourself for the record, 28 you have ten minutes for your presentation. 3 1 MR. STAUB: Good morning, Madam Chairman -- 2 woman, Members of the Board, my name is Matt Staub, here 3 today to represent Harvinder Pahal and Satvinder Kaur, 4 who, for personal reasons, cannot make it today. 5 Appellants timely filed their 2004 return. FTB 6 then issued an NPA on October 26th, 2007, which 7 Appellants protested on December 15th, 2007. 8 Appellants then filed for Chapter 7 bankruptcy 9 on September 3rd 2008. And their debt was discharged on 10 December 15th, 2008. Included on the list of creditors 11 for Appellants' bankruptcy was the State of California 12 Franchise Tax Board. FTB then issued an NOA on March 13 30th, 2009. 14 Appellants understand and do not dispute that 15 the Board does not have jurisdiction to determine 16 whether their tax liability has been discharged in 17 bankruptcy. Rather the Appellants rely on the doctrine 18 of equitable estoppel, which is satisfied when the party 19 to be estopped is advised of the facts, the party to be 20 estopped intended that its conduct be acted upon, the 21 party asserting estoppel is ignorant of the true facts 22 and the party asserting estoppel shows detrimental 23 reliance. 24 Now, applying those elements to the facts here, 25 the FTB is advised of the facts as it has had and 26 continues to have full actual knowledge of Appellants' 27 bankruptcy proceedings. The FTB was included on the 28 list of creditors for Appellants' bankruptcy discharge 4 1 and the FTB knew Appellants wanted to and believed they 2 successfully did discharge their debt with the FTB. 3 The FTB intended that its conduct acted upon. 4 The NPA did not mention that if Appellants chose not to 5 protest the NPA, Appellants' tax assessment would become 6 final and dischargeable as a result of the bankruptcy 7 proceedings. 8 It was reasonable for Appellants to believe 9 that the NPA issued by the FTB, California tax 10 collector, was intended to be acted on. Specifically, 11 Appellants believed that they must protest the NPA or 12 else they'd forced to pay the liability. 13 Third, Appellants were ignorant of the true 14 facts. Appellants were not represented by a tax 15 attorney when the FTB issued the NPA. Appellants did 16 not know their protest to the NPA would not allow the 17 debt to be become nondischargeable. Appellants merely 18 believed that their tax liability was discharged after 19 bankruptcy proceedings as the FTB was included on their 20 list of creditors. 21 And, lastly, detrimental reliance, which is 22 present when FTB's actions caused Appellants to take 23 action which leads to increased tax liability. And here 24 FTB's issuance of the NPA without mentioning 25 repercussions of protesting resulted in Appellants 26 protesting and, thus, making their tax debt 27 nondischargeable. And, consequently, Appellants would 28 be in a better position today had they not protested the 5 1 NPA. 2 What this comes down to is a lapse of 3 communication, a lack of notice by the FTB to the 4 Bankruptcy Court. If the FTB can provide notice to the 5 taxpayer, a notice of proposed tax to the taxpayer, FTB 6 should be responsible for providing notice to the 7 Bankruptcy Court that there is a pending protest on 8 a tax claim that would possibly be dischargeable. 9 Appellants here did any -- did what a 10 reasonable taxpayer would do when they got the NPA. 11 They Didn't believe they owed the debt, so, they 12 protested it. And then they included the FTB on their 13 list of creditors and successfully discharged their debt 14 in bankruptcy, which is why the inequity exists here 15 today because if Appellants would have just outright 16 ignored the NPA, their tax debt would have been 17 discharged. 18 And it's fundamentally unfair to require 19 Appellants -- taxpayers who are aware of the time 20 limitation to protest the NPA and seeking due process to 21 pay a tax here when a similarly situated taxpayer who 22 just ignored the NPA would not have to pay. 23 And this is just furthering an inequitable 24 precedent and incentive to ignore NPAs for similarly 25 situations because in a situation similar to this, when 26 the taxpayer protesting the NPA, FTB can just sit there 27 and say, "The assessment's not final, so, we don't need 28 to do anything about it." 6 1 But then soon as the debt is discharged in 2 bankruptcy, the FTB can come in and issue the NOA, 3 knowing that the debt is not final and is not 4 dischargeable. 5 The Appellants should not be penalized for 6 protesting where in bankruptcy there is many debts that 7 a debtor may protest and just in the end they want all 8 those discharged. 9 And it's for these reasons that equity must 10 prevail and Appellants' appeal must be dismissed. 11 MS. YEE: Thank you very much. We'll give you 12 time on rebuttal. 13 MR. STAUB: Thank you. 14 MS. YEE: Franchise Tax Board? 15 MS. BRUNETT: Yes, good morning. My name is 16 Jozel Brunett and with me is Todd Bailey and we 17 represent the Franchise Tax Board. 18 This is an appeal for the 2004 year arising out 19 of a bank deposits audit that we conducted on 20 Mr. Pahal's Schedule C business. 21 We examined three sets of his bank statements 22 and determined that there was unreported income of 23 $77,294. We requested substantiation as to the basis of 24 this income to determine whether or not to show it was 25 taxable. And, unfortunately, he was not able to provide 26 any such documentation. 27 Regarding the statements about the estoppel, 28 Franchise Tax Board did not act in any such way as to 7 1 cause any detrimental reliance by the taxpayers in this 2 matter. When the NPA was issued, there was no 3 bankruptcy pending. And, in fact, after the Notice of 4 Action was issued and at the time he filed the appeal, 5 our records show that he called the Franchise Tax Board 6 bankruptcy and spoke with someone there in and they 7 informed him at that time it was not, in fact, 8 discharged because it was not final. 9 And, so, he was aware at the time that he filed 10 his appeal that it was not discharged. 11 And the Appellant has conceded the jurisdiction 12 issue. So, I don't have anything further unless your 13 Board has any questions. 14 MS. YEE: Okay, thank you very much, 15 Ms. Brunett. 16 You have five minutes on rebuttal, Mr. Staub. 17 MR. STAUB: Thank you. 18 I'd just add that there -- right now in 19 California there's a growing number of bankruptcies. 20 So, Franchise Tax Board should just provide some sort of 21 notice to the Bankruptcy Court. And if that would have 22 happened here, the Franchise Tax Board notifies the 23 Bankruptcy Court, the Bankruptcy Court can inform the 24 taxpayer, obviously his protest -- since he protested 25 the NPA, so, his assessment then didn't become final, 26 but if the taxpayer knows this information, they can 27 just get a final billing and delay the filing of their 28 bankruptcy and wait the 240 days and then their tax debt 8 1 would be dischargeable. 2 MS. YEE: Okay. 3 MR. STAUB: Thank you. 4 MS. YEE: Thank you very much. 5 Questions, Members? 6 Ms. Steel? 7 MS. STEEL: Just one question -- 8 MS. YEE: Yes? 9 MS. STEEL: -- for taxpayer, that when 10 Franchise Tax Board send NPA, that was right amount? 11 MR. STAUB: Well, the -- obviously, the 12 taxpayers aren't here today. 13 They did dispute the amount. They said that 14 those were -- the deposits in their accounts were not 15 income but were rather just loans from friends and 16 family that they had received. 17 MS. STEEL: Did you verify that, like from 1099 18 or other forms or how did we got that NPA amount? 19 MS. BRUNETT: Right, what we have -- how we got 20 the NPA amount was we examined their bank statements -- 21 and I provided exhibits to show the three statements 22 that we examined. We were able to trace amounts that 23 were transferred between accounts. Those were not 24 included in the income. We were able to trace amounts 25 that were from the wife's wages and the husband's wages, 26 his 1099, and those were taken out. 27 We were left with the remainder. And at that 28 point we subtracted the unemployment compensation, all 9 1 other types of things, to arrive at the amount of the 2 77,000, which is how we determined that amount was 3 unreported. 4 MS. STEEL: So, do we have any paperworks 5 regarding that that was a loan from other people? 6 MR. STAUB: I don't. 7 MS. STEEL: You don't have any? 8 MR. STAUB: I don't have any. 9 MS. STEEL: Because I wish you emphasize on 10 that then, you know, than just blaming Franchise Tax 11 Board to give the taxpayer notice. 12 MR. STAUB: I tried to contact the taxpayer 13 and -- 14 MS. BRUNETT: Yes, Ms. Steel, we were trying to 15 work with the to try to get that information. They had 16 given us statements during the protest but, 17 unfortunately, from two individuals, but they weren't 18 signed under penalty of perjury. So, I was trying to 19 get that information. 20 And we had been working together, but he had 21 not been able to make contact. 22 MS. STEEL: So, if you had a little more time, 23 do you think you can get those paperworks? 24 MR. STAUB: Yeah, I believe so. 25 MS. STEEL: I have a motion. 26 MS. YEE: Ms. Steel? 27 MS. STEEL: 30-30-30. 28 MS. YEE: Do a 30-30-30 on this. 10 1 Okay, is there a second? 2 MR. HORTON: Second. 3 MS. YEE: Second by Mr. Horton. 4 Further discussion? 5 Hearing none, without objection, okay, that 6 motion carries. 7 So, we will give you additional time to pursue 8 that. 9 MR. STAUB: Thank you. 10 ---o0o--- 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 11 1 . 2 REPORTER'S CERTIFICATE 3 4 State of California ) 5 ) ss 6 County of Sacramento ) 7 8 I, JULI PRICE JACKSON, Hearing Reporter for the 9 California State Board of Equalization certify that on 10 April 13, 2010 I recorded verbatim, in shorthand, to the 11 best of my ability, the proceedings in the 12 above-entitled hearing; that I transcribed the shorthand 13 writing into typewriting; and that the preceding pages 1 14 through 11 constitute a complete and accurate 15 transcription of the shorthand writing. 16 17 Dated: June 10, 2010 18 19 20 ____________________________ 21 JULI PRICE JACKSON 22 Hearing Reporter 23 24 25 26 27 28 12