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ASK THE EDD ATTORNEY – GETTING A FAIR HEARING BEFORE THE BOARD OF EQUALIZATION – PART 2

By Robert S. Schriebman
October 20, 2016

INTRODUCTION:

This is Part 2 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 Part 1, we discussed how the FTB issues its "Me Too" assessment based upon the results of a prior IRS income tax audit. We discussed the requirements of notifying the FTB after the completion of an IRS audit and the consequences of not notifying the FTB. We also discussed possible conflicts of interests when one tax advisor represents both husband and wife in an IRS and/or FTB audit.

In this Part 2 we will discuss the positions of the FTB and the Jones in their hearing before the BOE. We will see that the FTB does not conduct an independent audit to determine if the penalties assessed by the IRS should also be assessed by the FTB. We will show how the BOE has the FTB’s back when it condones the absence of an independent audit by the FTB. The end result – the taxpayer comes out on the losing end. In other words, as far as the BOE is concerned, it’s "heads we win - tails you lose." Is a level playing field available at the BOE?

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.

The BOE Hearing

When the FTB issues a Notice of Proposed Assessment (NPA) a taxpayer has the right to challenge the proposal by timely filing a Protest. If a Protest is filed the taxpayer is given an FTB hearing to challenge the NPA. If the parties cannot agree the FTB issues a Notice of Action (NA). At that point the taxpayer can appeal the NA and request a hearing before the BOE. The BOE travels all over California and holds hearings in different locations. At the hearing the BOE will be represented by an FTB Attorney. While the hearing itself is informal, one must be prepared as if he or she was going before the Superior Court.

At the hearing the FTB Attorney makes a presentation followed by the taxpayer’s presentation. The Board is free to make comments.

In the case of Thomas and Elaine this is exactly what happened, and I will discuss both positions in this article.

FTB’s Position

The FTB argued that when the Attorney-CPA advisor explained his tax planning strategy to Thomas and Elaine, a "red flag" should have gone up in their minds. The Attorney-CPA tax advisor presented to the Jones extensive charts and diagrams used to explain how taxes would be saved. The FTB argued that the whole process was too complex and too good to be true. The FTB also admitted that its assessment of the negligence penalty merely followed the IRS’s findings and that no independent FTB audit, review, or analysis was involved. The FTB also argued that when it issues any assessment that assessment, by law, is presumed to be correct. The FTB cited the "Appeal of Robert and Bonnie Abney" 82-SBE-104 1982. The FTB also made reference to R&TC sec. 19164 which is the same as IRS negligence penalty set forth in IRC § 6662.

Negligence is described as underpayments due to negligence or to the disregard of rules or regulations and any substantial understatement of income taxes. This is like saying a rose, is a rose, is a rose… The FTB admitted that it did not look further into the reasons why the IRS imposed its negligence penalty. Further, the FTB admitted to the BOE that reliance on professional advice does constitute reasonable cause and good faith for not imposing the penalty. If this is the case, and it was with Thomas and Elaine, why did the FTB feel justified in affirming the assessment of the negligence penalty? At this point it seems that the FTB should have picked up its marble and gone home conceding the negligence penalty should have been removed from its "Me Too" assessment.

To win its argument, the FTB Attorney simply said two things to the BOE:

    • a. The tax savings plan just sounded too good to be true and a "red flag" of caution should have gone up to Thomas and Elaine
    • b. Thomas and Elaine signed a Closing Agreement with the IRS that doomed them with the FTB. The IRS assessed the negligence penalty in the Closing Agreement.

Throughout the argument, the FTB Attorney cited absolutely no authority whatsoever. It is easy to see how the BOE, as a Board, can be sold a bill of goods out of whole cloth.

BOE’s Decision

Essentially the BOE rubber-stamped the FTB’s determination. They held that the FTB assessment is presumed to be correct and the taxpayer must rebut this assumption. What does "rebut" mean in the real world of the BOE? To me rebuttal means to present a case to the point where the FTB is painted in a corner and has no place to go. To overcome the presumption of correctness of the FTB’s penalty assessment the Jones had to provide credible and competent evidence to support their claim of good faith reliance on their Attorney-CPA tax advisor. See Appeal of Winston R. Schwyhart, 75-SBE-035, 1975.

The reliance on the advice of a professional tax advisor does not necessarily demonstrate reasonable cause and good faith. Such reliance must be reasonable. So if the advice sounds too good to be true, it probably is and another advisor’s opinion should be warranted.

To me, the bottom line of the Jones’ case is that the FTB can just play off the IRS findings and has no duty to the taxpaying public to do its own due diligence. This is a disturbing double standard.

Conclusion – A Disturbing BOE Trend

There are several articles on this website that discuss how taxpayers are fairing in BOE hearings. We look for recent cases where taxpayers are seeking relief from the BOE from the assessment of penalties. The BOE, of late, has not been taxpayer friendly and consistently backs up the FTB to sustain its assessment of penalties.

Did Thomas and Elaine get a fair hearing before the BOE? Not in my book.

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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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