The Office of Tax Appeals does not have the legal authority to hear appeals previously decided by the State Board of Equalization, BOE Member Jerome Horton said July 20 in a letter to OTA Director Mark Ibele.
“Jurisdiction for any rehearing belongs to BOE, not OTA,” Horton wrote in the seven-page letter, which focuses on the Franchise Tax Board’s petitions to have the OTA hear an income tax dispute with Nevada inventor Gilbert Hyatt that was ruled on by the BOE last year. The tax disputes covered parts of 1991 and 1992, more than 26 years ago.
“It does not appear FTB has met any conditions under Rule of Tax Appeals 5461 to justify the rehearing of this case,” Horton wrote. “To rehear this case without such grounds would establish a precedent that places every FTB case heard and decided by the Board in question and subject to rehearing.”
Last year, after an all-day hearing that was preceded by nine years of briefing from the FTB and Hyatt, the BOE ruled in Hyatt’s favor on most issues. The BOE on August 29 found that Hyatt did not commit tax fraud, was not a resident of California during a period in which the FTB claimed he lived in Southern California, and did not owe tax on California-sourced income for most of the period claimed by the FTB. The FTB petitioned the BOE for a rehearing, but the BOE did not rule on that petition before the end of the year, when its appellate functions were transferred to the newly created OTA.
Earlier this year, the OTA asked Hyatt and the FTB to submit briefs on the request for rehearing. The agency recently announced that it does not plan to accept any more documents from any party, but has not indicated when it expects to decide whether to grant the FTB’s petitions for rehearing.
The OTA should not be involved in the case, Horton said.
“The Rules of Tax Appeals 5461-5465 establish and govern the procedures for a rehearing …,” Horton wrote. “These rehearing procedures were adopted by the elected Board with much public input to ensure that all parties obtain the due process to which they are entitled. They are the appropriate internal appeal mechanism to provide both parties … with a simple, efficient way to address a procedural or evidentiary issue in the Board’s decisions on specific aspects of the facts and law and the qualifications for rehearing. As such, only the elected [BOE] Members have jurisdiction to consider and decide FTB’s Petition for Rehearing under our Rules of Tax Appeals.”
“The fact that the Board Members’ adjudicatory duties were unconstitutionally transferred in the middle of their term of office by the Legislature … on January 1, 2018, to appointed officials in OTA – who were not elected to perform them – does not mean that OTA has jurisdiction in rehearing proceedings …. Members have the right and responsibility to carry out the duties they were elected to perform – including the right to decide and conduct re-hearings in cases they ruled on – and Mr. Hyatt, like any taxpayer, has the due process right to have his case re-heard (if necessary) by the elected Members under the Rules the Members adopted, as opposed to non-elected ALJs under very different rules ….”
The letter was addressed to Ibele, and copied to FTB Executive Officer Selvi Stanislaus, California Department of Tax and Fee Administration Director Nick Maduros, BOE Executive Director Dean Kinnee, BOE Chief Counsel Henry Nanjo, CDTFA attorney Louis Ambrose and Hyatt.
Representatives of the FTB and OTA told CalTax they do not have any comment on the letter.
The purpose of the letter, Horton wrote, is to clarify his intent when voting on various motions in the Hyatt appeal in August. He provides detailed reasons for voting for or against specific motions, and writes that “there were no ‘irregularities in the BOE proceedings that deprived FTB (or Hyatt) from a fair hearing,’ as FTB alleges in its September 28, 2017, Petition for Rehearing.”
In a section on the general conduct at the hearing, Horton wrote:
“Regarding the facts and evidence in this case, I personally reviewed the evidence, documents, affidavits, and testimonies submitted by both sides. As a Board Member for the past nine years, a Franchise Tax Board Member for five years, a legislator, and an auditor, audit supervisor, tax law instructor, district reviewer, and tax advisor to a Board Member for over 30 years, I have been involved in hundreds of residency and sourcing cases and have a thorough understanding of the law. I followed the developments in this matter for over 20 years, including the time I served in the Legislature, and I am convinced the parties had ample time to gather every possible type of evidence. Further, it is my understanding that the Legislature granted FTB a special budget augmentation (BCP) to hire a high-level attorney several years ago to work exclusively on the Hyatt case. The FTB attorneys at the hearing never indicated that they were caught unaware of any ‘surprises or accidents,’ nor did they indicate that they had some compelling new evidence that they could not present at the hearing.”
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