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ASK THE EDD ATTORNEY – GETTING A FAIR HEARING BEFORE THE BOARD OF EQUALIZATION – PART 1

By Robert S. Schriebman
October 19, 2016

Introduction

This is Part 1 of a 2 part series in which we will discuss the recent case of the Appeal of Thomas and Elaine Jones in their effort to overturn a Franchise Tax Board (FTB) ruling involving the assessment of the negligence penalty by the FTB. Mr. and Mrs. Jones appealed to the Board of Equalization (BOE) to overturn the FTB ruling against them.

In this article we will discuss how the FTB "piggy-backs" its assessment based upon a prior IRS audit. This is known in the vernacular as a "Me Too" assessment.. We will discuss the requirement of notifying the FTB at the completion of an IRS audit. We will also discuss the appeal process to the BOE and conclude our discussion by asking the question, "Does the BOE give a taxpayer a fair hearing on appeal or does the BOE simply rubber-stamp the FTB's determination?"

For further reference see "In the Matter of the Appeal of: Thomas A. Jones and Elaine A. Jones," Case No. 741988, adopted December 18, 2014. The Jones case was not published until 2016.

Who Are The BOE and The FTB?

  • The BOE: The California Board of Equalization was originally established in 1870. It is this nation's only board of tax officials who are constitutional officers elected to represent specific districts of the state to administer tax programs. The BOE has jurisdiction over Sales and Use Taxes but it also hears appeals from FTB rulings.
  • The FTB: The Franchise Tax Board, created by the Legislature in 1929, administers the State's Personal Income Tax Law, the Bank and Corporation Tax Law, and the Homeowner and Renter Assistance Program.
  • The three-member FTB consists of the State Controller, the Chairman of the State Board of Equalization and the Director of the Department of Finance.

Background

Thomas A. Jones (Thomas) is a medical doctor (MD). He studied music in college and then went to medical school. He served in the U.S. Army as an MD. Thomas has no expertise whatsoever in tax laws or tax planning. Elaine A. Jones (Elaine) was a nurse. She managed her husband's medical practice and was also an independent consultant. The Jones' employed a tax advisor who was a CPA and an Attorney. Their relationship was at least 8 years old at the time the following events occurred.

Thomas and Elaine consulted their tax advisor to reduce their personal income taxes, both IRS and FTB. Their tax Attorney-CPA advisor created a medical corporation for Thomas and a consulting corporation for Elaine. Each corporation also created an ERISA Pension Plan. Their tax advisor drew several charts and diagrams to explain the tax savings projected by the corporations and the pension plans. Their tax advisor was an experienced tax planning professional and Thomas and Elaine relied upon his advice for the past eight years.

Enter the IRS

The IRS audited Thomas and Elaine individually and their corporations. The IRS audit resulted in an increase in income tax as well as the assessment of the negligence penalty pursuant to IRC § 6662. As part of the audit process, and on the advice of their Attorney-CPA, Thomas and Elaine signed A Closing Agreement with the IRS that concluded the examination process. Thomas was not happy with the assessment of the negligence penalty and tried to get the IRS to remove it, but the IRS refused because "a deal is a deal." The signed Closing Agreement could not be renegotiated. We will talk more about the negligence penalty in part 2.

Thomas and Elaine Notify The FTB of The IRS Audit

When the IRS conducts and income tax audit, the statute of limitation for examination by the FTB, remains open, almost indefinitely, unless and until the FTB is notified of the conclusion of the IRS audit. Sadly, the general public, as well as many tax professionals, do not know about the requirement to notify the FTB. Revenue and Taxation Code § 18622(a) is the operative statute. The FTB must be notified of the end results of an IRS audit within 6 months of the audit's conclusion. If so notified, the FTB only has 2 years to issue its "Me Too" Assessment. If notice is given after the 6 month period, the FTB has 4 years to issue its Me Too assessment. Failure to notify the FTB could result in an indefinite statute of limitations for the FTB's audit.

Fortunately Thomas and Elaine timely notified the FTB of the results of their IRS audit and assessment.

Potential Conflict of Interest By Tax Advisor

This is a digression, but it is important and relevant. When the IRS or FTB audits a husband and wife, whether as a result of a joint return, or in a situation like the Jones, one of the spouses may be entitled to apply for Innocent Spouse Relief. So, the tax advisor who is handling the audit may be in a conflict of interest. See the Case of Devore v. IRS (9th Cir 92-1 USTC 50, 258) 1992. Both Thomas and Elaine signed an IRS Closing Agreement at the advice of their CPA-Attorney. This effectively precluded either Thomas or Elaine from relief of income tax liability based upon the defense of innocent spouse. A tax professional, who represents both husband and wife in an IRS or FTB audit, may be in a conflict of interest.

Enter The FTB

The FTB issued its "Me Too" assessment against Thomas and Elaine based upon the results of the IRS audit. The FTB did not conduct a separate independent examination. As part of this assessment the FTB also assessed the negligence penalty as did the IRS. Thomas and Elaine agreed to the assessment of the FTB tax, but disagreed with the FTB's assessment of the negligence penalty. Thomas and Elaine timely filed an Appeal of the FTB assessment by filing a Protest with the BOE, but in the Protest they never offered an explanation why the FTB was incorrect.

Conclusion

In Part 2 we will discuss the BOE hearing and the BOE's rubber-stamping of the FTB's negligence determination.

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Robert Schriebman has a successful practice in the Rolling Hills Estates area of Los Angeles County serving clients throughout California and the United States. He has successfully dedicated more than 40 years to helping individual taxpayers, business owners, CPAs, Enrolled Agents, and tax attorneys navigate the complicated tax systems of the federal and state governments.

Robert Schriebman has written the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See "California Tax Collection Practice and Procedures" and "California Taxation Practice and Procedure," both published by Commerce Clearing House.

Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, "IRS Tax Collection Procedures - A Manual for Practitioners" published by Commerce Clearing House.

Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, "IRS Tax Collection Procedures - A Manual for Practitioners" published by Commerce Clearing House in addition to the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See "California Tax Collection Practice and Procedures" and "California Taxation Practice and Procedure," both published by Commerce Clearing House.

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