1 BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION 2 450 N STREET 3 SACRAMENTO, CALIFORNIA 4 5 6 7 8 9 10 11 12 13 REPORTER'S TRANSCRIPT 14 August 23, 2011 15 CORPORATE FRANCHISE AND PERSONAL INCOME TAX HEARING 16 APPEAL OF 17 DAVID A. LUBECK & MABEL C. McNALL-LUBECK 18 NO. 557788 19 AGAINST PROPOSED ASSESSMENT OF 20 ADDITIONAL INCOME TAX 21 22 23 24 25 26 27 REPORTED BY: Kathleen Skidgel 28 CSR NO. 9039 1 1 P R E S E N T 2 3 For the Board Jerome E. Horton of Equalization: Chairman 4 Michelle Steel 5 Vice-Chairwoman 6 Betty T. Yee Member 7 George Runner 8 Member 9 Marcy Jo Mandel Appearing for John 10 Chiang, State Controller (per Government Code 11 Section 7.9) 12 Diane G. Olson Chief, Board Proceedings 13 Division 14 15 For Board of Equalization Mai Tran Staff: Appeals Division 16 For Franchise Tax Board: Suzanne Small 17 Tax Counsel 18 Karen Smith Tax Counsel 19 For Appellant: David A. Lubeck 20 Taxpayer 21 ---oOo--- 22 23 24 25 26 27 28 2 1 450 N STREET 2 SACRAMENTO, CALIFORNIA 3 AUGUST 23, 2011 4 ---oOo--- 5 MR. HORTON: Ms. Olson, what's our next matter? 6 MS. OLSON: Our next matter is B2, David A. Lubeck 7 and Mabel C. McNall-Lubeck. 8 Please come forward. 9 MR. HORTON: Ms. Tran. 10 MS. TRAN: Good morning. 11 MR. HORTON: Good morning. Welcome. 12 Would you please introduce the issues in this case. 13 MS. TRAN: Mr. Chairman, Members of the Board, my 14 name is Mai Tran, representing Appeals Division. 15 The issues in this appeal are, one, whether 16 appellants have demonstrated any error in respondent's 17 proposed assessment; whether appellants have established 18 reasonable cause to support abatement of the notice and 19 demand penalty; and three, whether the Board should impose 20 a frivolous appeal penalty under Rev and Taxation Code 21 Section 19714. 22 MR. HORTON: Thank you very much. 23 As the taxpayer gets settled, uh, you will have 10 24 minutes to make your presentation. Please commence with 25 your introduction. We'll then go to the Department and 26 return to you for a five-minute rebuttal. 27 MR. LUBECK: Thank you. Good morning. I'm David 28 Lubeck, and I'm representing myself and my wife Mabel 3 1 McNall-Lubeck. 2 Bear with me. Get my papers out here. 3 Um, the first issue has to do with, uh, 4 demonstrating any errors in the proposed assessment. And 5 as we presented in -- at the hearing that we had, and also 6 in our initial appeal, the first item on the proposed 7 assessment and the notice of assessment is the California 8 taxable income as reported or revised in an amount of 9 $4,080. 10 This amount is a mystery to us. We don't know 11 where it came from. And it appears, as I say, both on the 12 proposed assessment and on the notice. Uh, maybe it's 13 related to the withholding; we had a withholding amount for 14 the year of $5422. But I have nothing from the Franchise 15 Tax Board telling us what this amount is. And I don't feel 16 it's reasonable that we should accept a mystery amount, 17 what amounts to be a mystery amount on the assessment. 18 Um, that also leads to the understanding that the 19 withholding that we had, the $5422, also does not show up 20 anywhere on the proposed assessment or on the notice of 21 action. And our withholding amount certainly should be 22 reflected in a subtraction from the tax due amount. 23 The next item is the standard deduction. On the 24 original proposed assessment, the standard deduction wasn't 25 deducted, it was added. It was over in the left-hand 26 column and added to the total income and not subtracted. 27 And then on the notice of action, it's -- it doesn't appear 28 at all. It's just not there. So if we have a standard 4 1 deduction that applies, it should appear on the action. 2 Um, in my haste to get started, I neglected to take 3 a moment to thank you very much for your attention and your 4 time to hear this matter and give us an opportunity for a 5 face-to-face appeal. 6 Um, we hold no argument against the income tax. 7 And our sole purpose here is to see that the law is upheld. 8 And the sole purpose for issuing our 2008 return was to 9 claim a refund. And that's our sincere desire, is to see 10 that there's compliance with the law among all parties. 11 And, uh -- 12 Now, let's see, where was I? Thank you. The, 13 um -- yeah, the standard deduction is gone. I don't know 14 how it's accounted for. It would be nice to have it show 15 up. 16 The next issue are the items of income from the 17 County of Santa Clara, a W-2 was issued, and Village Square 18 Realty and Charles Schwab issued 1099s to me. 19 These -- these information returns that the Tax 20 Board is relying upon are erroneous. The, uh -- when I 21 went back through to study the issue of the reporting 22 requirements and withholding requirements, I found -- and 23 it's included in our reply, uh, in our reply brief -- that 24 under California statute and the federal statutes and 25 regulations, the withholding requirements and reporting 26 requirements specify the particular class of persons that 27 are subject to reporting withholding and identify 28 reportable payments and issues that should be reported. 5 1 The, uh -- it's clear that -- that specification is 2 very clear in the law. It's, uh -- it defies 3 misunderstanding. Our facts and our situation, uh, don't 4 line up with the law. Uh, when we discovered this, we 5 realized that the -- that the withholding was done in error 6 and outside the law, and that the reporting was also -- 7 these were not reportable payments according to the statute 8 and the regulations. 9 We went back to figure out, how did this happen? 10 And we realized that when we signed withholding 11 certificates, that that was improper. We're not required 12 to sign those withholding certificates because we don't -- 13 we are not in that class of persons that are identified and 14 specified in the law. 15 Uh, we took steps to correct the record. We've 16 each prepared an affidavit that declares our status and 17 also very clearly revokes our signatures on those 18 certificates now that we understand that they're improper. 19 When -- when you cause a problem, you clean it up. That's 20 what we taught the kids. You make a mess, go figure it 21 out, go clean it up and get it right. 22 Uh, this is really the bottom line. The, uh -- the 23 other issue that we have that's in contention were the 24 documentation that we added with our initial return. And 25 the Franchise Tax Board, though we requested, and I 26 included in hearing exhibits -- let's see, okay -- that I 27 brought up last week, that you -- I appreciate you having 28 taken the time to take a look at all this and had a chance 6 1 to see, for myself and for Mabel, Exhibit A from the 2 hearing exhibits, the three-page statement and affirmation 3 from her employer that states that, uh, she is not the 4 person specified. And it specifically states that her job 5 does not include having control or receipt, custody, 6 disposal, or payment of any item of income of a foreign 7 person and that she is a U.S. citizen. 8 And that includes her -- her passport which 9 identifies her as a -- nationality as the United States of 10 America. And then they also included an eligibility form 11 for the DHS. And I also included a copy of my passport 12 identifying myself as a United States of America 13 nationality and my driver's license. 14 So this -- this particular aspect is really the 15 bottom line. Um, the statutes and regulations that the 16 Franchise Tax Board is to follow clearly identify the class 17 of persons who are required to report and collect, and the 18 aspect and the class of persons of what they're supposed to 19 be reporting. And it's the bottom line. Anything else, I 20 think, just pretty much trumps the other argument. 21 The other difficulty that we have, though, is with 22 regard to the initial return and the initial frivolous 23 determination. When we first got the letter in 2009 from 24 the Franchise Tax Board telling us that they'd made a 25 frivolous determination, we sent -- we sent letters back. 26 And I included my wife's letter in the hearing exhibits. 27 And it is -- there we go -- Exhibit D, in which she very 28 respectfully asks for information. 7 1 We believe our tax returns are correct. We do 2 everything we can to submit correct returns. And we would 3 like to know what the basis is of your determination. And 4 the, uh -- the Tax Board, we didn't get an answer back from 5 them. And we didn't -- they actually did not disclose the 6 nature of their determination until they had to file their 7 response brief. And at that point we were able to -- to go 8 back and take a look specifically at what -- how they had 9 made -- what they had made their determination, what it was 10 to be. We compared it to the information that we had, that 11 we submitted with our -- uh, with our -- at the hearing, 12 when we had our hearing with them, and also with the, um -- 13 with our reply brief. 14 MS. OLSON: Time has expired. 15 MR. LUBECK: And that's D. 16 Okay. Thank you. I apologize for being so 17 long-winded. 18 MR. HORTON: Um, we will return to you -- 19 MR. LUBECK: Yes, thank you. 20 MR. HORTON: -- and give you an opportunity to 21 continue. 22 MR. LUBECK: Thank you. 23 MR. HORTON: Now we'll go to the Department. You 24 have ten minutes to make your presentation. Please 25 commence with your introduction. I would ask that you, to 26 the extent possible, address the specific concerns or the 27 questions delineated by the taxpayer. 28 MS. SMALL: Good morning, Chairman Horton, Members 8 1 of the Board. My name is Suzanne Small. With me is Karen 2 Smith. We're representing the Franchise Tax Board. 3 In the case before you, the appellants filed an 4 invalid return for the 2008 tax year. They reported 5 negative $3,000 as their income. According to W-2s filed 6 by Mrs. Appellant's employer, she had received wages of 7 $179,000. Mr. Appellant had various income from retirement 8 and other 1099s. None of that was reported on the return. 9 And, in fact, those amounts on W-2s were zeroed out and 10 crossed out by the appellants when they filed their tax -- 11 their Form 540. 12 With regard to his assertions regarding the NPA, 13 they're not entitled to a standard deduction based on the 14 fact that they made so much money that year. It phases out 15 at certain income amounts. And at the amount of income 16 that they earned that year, they're not entitled to a 17 standard deduction. 18 I will take the NPA back and look at his concerns. 19 But at this point there was nothing raised in their appeal 20 regarding the NPA as to the numbers, and we had done our 21 best estimate to guestimate his appropriate tax liability 22 based on the information we received from the employer and 23 from the IRS. 24 Uh, if you have any other questions regarding this 25 matter, I'll be happy to address them. 26 MR. HORTON: Thank you very much. 27 On rebuttal. 28 MR. LUBECK: Yeah. Well, again, the uh -- the 9 1 information returns and the information that the Tax Board 2 is relying on are erroneous based on the specifications 3 related to the withholding and reporting requirements 4 within the tax law. 5 Let's see if I can continue here now. Boom. 6 Um, the frivolous determination, honestly, I 7 believe a careful and objective reading of the memorandum 8 of law, that Appendix D that we included, when you compare 9 it to the frivolous argument that they claim that we make, 10 a careful and objective reading of both of them and 11 comparing them you can see that they're not different -- 12 they're not the same, they're different. 13 They have similar aspects. In looking at it, I can 14 see how they would come to the conclusion that this was a 15 frivolous argument. But they're -- they're different 16 enough that -- they're simply not the same. 17 Uh, the claim in the frivolous argument claim is 18 that people assert that only government employees are 19 subject to the income tax. And this just simply isn't the 20 case. If that -- if it were true -- if that were true, 21 then the withholding requirements applying to a particular 22 class of persons, foreign persons and so on, would -- would 23 trump that. So we're not making that assertion. 24 The, um -- it's been a little irritating. Um, 25 normally when a conflict arises in daily life, you get a 26 chance to sit down with a person and get the issues out and 27 talk about them and sort them out. The Franchise Tax Board 28 has been a brick wall. And that's how the frivolous -- I 10 1 guess the frivolous tax argument provisions and the way 2 they operate, that's how they operate. It's just been 3 irritating and frustrating as well. 4 Uh, we did some additional research regarding the 5 frivolous, uh, arguments in the provisions and discovered 6 California Revenue and Taxation Code Section 19180, which 7 places the burden of proof on the Tax Board when there's 8 any question as to the appropriateness of the -- of a 9 penalty, if a penalty has been, boom, it's right. And, 10 uh -- 11 Has it been ten minutes? It's my privilege to read 12 it to you, but basically it says the burden of proof 13 regarding an issue of a penalty -- for a frivolous penalty 14 is on the Franchise Tax Board. That tells me that they 15 ought to come to me and tell me exactly how they came to 16 their determination so that we would have an opportunity to 17 discuss it and resolve it. 18 I found no record of the reporting and withholding 19 requirements, uh, being questioned within the -- over the 20 years, the Board's formal decisions. I went through and 21 looked at all of the -- the, uh -- under the frivolous 22 heading, the Board's formal decisions. And the Board, over 23 the years, has had to deal with a lot of monkey business. 24 There's a lot of misunderstanding about the income tax out 25 there. And, uh, so I can understand the interest in 26 dealing with and trying to contain these frivolous 27 arguments. 28 The -- again, the bottom line is the law clearly 11 1 states what class of persons -- payments are subject to the 2 tax. And we're simply not in that class of persons. And, 3 as I say, we've added the -- the statement from Mabel's 4 work place that clarifies her situation. 5 I know I have more. I've got all my papers in 6 front of me. I'm trying to find it. Um, we hope that 7 we've given you enough information here to chew through 8 this and understand what's going on and realize that we -- 9 we have no liability. We're not subject to the tax. And I 10 know that's an argument that people just go, "Oh, I'm just 11 not subject to it." Well, it's in black and white in the 12 law. And we're simply asking that -- that all parties 13 comply with the law. 14 We have no argument -- we have no constitutional 15 argument, moral, religious. That was one of the other 16 conclusions that it appeared that the Tax Board jumped to. 17 The only time we raised a issue -- an issue as to 18 constitutionally protected rights was when we felt we 19 weren't being listened to and we felt we weren't getting a 20 fair hearing. We raised those as a plea for a fair and 21 open hearing with the -- with the Tax Board. 22 Otherwise -- that was it. I mean, that's limited. 23 And that's not -- you know, a remedy for that is not 24 something that's within your jurisdiction to hear, uh -- to 25 hear, and I understand that. We're not asking for a remedy 26 there. I just raise it as a point. 27 There's also one good piece that -- 28 MS. OLSON: Time has expired. 12 1 MR. LUBECK: Okay. Thank you. 2 MR. HORTON: Thank you very much. 3 MR. LUBECK: Ask me about that piece when you ask 4 questions. I'd love to give it to you. Thank you. 5 MR. HORTON: Thank you very much. 6 Discussion, Members? 7 Hearing none, is there a motion? 8 MS. YEE: Move to take the matter under 9 submission. 10 MR. HORTON: It's moved by Member Yee to take the 11 matter under submission. Second by Ms. Steel. 12 Without objection, Members, such will be the order. 13 Sir, thank you so very much for appearing before us 14 today. The Board will take your matter into consideration 15 later on this evening and send you a written report of our 16 decision. 17 MR. LUBECK: Thank you. I look forward to hearing 18 from you. I appreciate it. 19 ---oOo--- 20 21 22 23 24 25 26 27 28 13 1 REPORTER'S CERTIFICATE 2 3 State of California ) 4 ) ss 5 County of Sacramento ) 6 7 I, KATHLEEN SKIDGEL, Hearing Reporter for th 8 California State Board of Equalization certify that 9 on August 23, 2011 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 pages 1 13 through 13 constitute a complete and accurate transcription 14 of the shorthand writing. 15 16 Dated: September 7, 2011 17 18 19 20 ____________________________ 21 KATHLEEN SKIDGEL, CSR #9039 22 Hearing Reporter 23 24 25 26 27 28 14