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BEFORE THE STATE BOARD OF EQUALIZATION OF THE STATE OF CALIFORNIA

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BEFORE THE STATE BOARD OF EQUALIZATION OF THE STATE OF CALIFORNIA
BEFORE THE STATE BOARD OF EQUALIZATION
OF THE STATE OF CALIFORNIA
In the Matter of the Appeal of
BARBARA P. HUTCHINSON
)
1
)
Appearances:
For Appellant:
Barbara P. Hutchinson,
in pro. per.
For Respondent:
Jean Harrison Ogrod
Counsel
O P I N-I- O- NThis appeal is made pursuant to section 18593
of the Revenue and Taxation Code from the action of
the Franchise Tax Board on the protest of Barbara P.
Hutchinson against proposed assessments of additional
personal income tax and penalties as follows:
-308-
Appeal of Barbara P, Hutchinson
1964
1963
Tax
$ 777.66
Penalty - Failure to
Furnish Information
194.42
Penalty - Delinquent
-Filing
Penalty - Fraud
388.83
Total Tax and Penalties $1,?6_0.91
--__._r
$
-1965-
745.68
$2,609.83
186.42
531.36
WV
372.84
$1,304.94
l;!l.lo
1.304.92
$-VT
_I_1----e
The issues for determination.are:
( 1 ) whe.ther
appellant has established any error in respondent's
determination of tax and penalties for failure to fiurnish information and delinquent filing; and (2) whether
appellant is liable for civil fraud penalties for the
years in issue.
Prior to and during the appeal years appellant
was a tax consultant and also prepared tax returns in
San Diego. She also o,wned, in whole or in part, irrterests in dress shops,. a restaurant, a florist shop and a
rabbitry. In 1974 respondent learned that appellant
had filed a petition with the United States Tax Court
contesting federal assessments of tax and civil fr&ud
penalties for the appeal years.' Respondent requested
that appellant provide information concerning the federal
adjustments. When appellant refused to comply, respondent issued deficiency notices reflecting the federal
adjustments. Respondent's proposed assessments for. all
the years also included penalties for delinquent filing
and for failure to furnish information after notice and
demand, as well as the 50 percent civil fraud penalty.
Thereafter, respondent received from the Internal Revenue
Service (IRS) a copy of a stipulated judgment of the tax
court which had been proposed by appellant. By the
terms of the stipulation, appellant agreed to reduced
federal deficiencies and fraud penalties for 1963 through
1965. Respondent.adjusted its proposed assessments in
accordance with the tax court stipulation for the appeal
years and notified appellant accordingly. Appellant
protested respondent's determination. After a hearing, respondent affirmed its determination of tax and penalties
and this appeal followed.
Appellant first contends that respondent is
barred by the statute of limitations from assessing
additional tax for the appeal years. However, the record
on appeal indicates that appellant failed to report to
respondent the fact that adjustments were made by the
-309-
Appeal of Barbara
Hutchinson
--P.
-c-----c-
o
IRS to her federal returns for the years in question as
required by section 18451 of the Revenue and Taxation
Code. Section 18586.2 of the Revenue and Taxation Code
provides that where the taxpayer fails to report such
federal adjustments as required by section 18451, a
notice of proposed deficiency assessment based upon the
federal action may be issued by respondent within four
years after such action. (weal of William G., Jr.,
and Mary D. Wilt, Cal, St. Bd. of Equal., March 8, 1976;
Appeal of Mary R, Encell, Cal. St. Bd. of Equal., April
21, 1959.) Herep appellant was informed of the final
federal determination on or about May 28, 1976. Respondent's initial notices of proposed assessment based on
federal action were issued November 17, 1975, the prior
year. Under the circumstances, appellantDs reliance on
the statute of limitations is untenable.
Appellant also contends that respondent's proposed assessments for the appeal years were improperly
based upon the corresponding federal adjustments for the
same years. We have consistently held that a deficiency
assessment issued by respondent on the basis of corresponding federal action is presumed to be correct, and
that the burden is upon the taxpayer to show that it is
(-of Paritem a.nd Janie Poonian, Cal.
incorrect.
St. Bd..of Equal., Jan,-4, 1972; -al
of J. Morris _a&
_____&
Leila G. Forbes, Cal. St. Bd. of Equal., Aug. 71 1967.)
Appellant's primary attack on the assessments
is based on her assertion that she had no taxable income
during the appeal yearsjp and that the amounts which the
federal authorities determined were unreported income
were actually loans. Xn fact, the IRS did conclude that
substantial amounts of appellant's receipts during the
appeal years were loans and not income. This determination is reflected in the IRS agreement to the substantially reduced settlement proposed by appellant. Appellant
has produced no evidence to indicate that any additional
allowance would be appropriate on this basis.
Appellant also contends that the federal
settlement upon which respondent based its action was
"coerced." Although appellant has offered no proof of
this contention, it is well settled that such a plea has
little bearing on the issue of whether the federal action
was correct.
J. and Eileen Bachrach,
Cal. St. Bd.
-jm_Appeal of Donald D.
and Virginia
Bd. of Equal., Oct. l9,T?zQ,)
-310-
’
11PPea_l Barbara P-",Hutchinson
Since appellant has offered no evidence to
indicate that the federal deficiency assessment is
incorrect, we must conclude that respondent's action
with respect to the deficiency assessments for the.
appeal years was correct,
It is well settled that respondent's determination of penalties for failure to furnish informat.ion
upon notice and demand and for delinquent filing are
presumptively correct, and the burden is upon the
taxpayer to prove them erroneous,, (A eal of Arthur G
Jan.
Horton;.Jr., Cal.. St, Bd. of Equal.,+%K-jL
Since appellant has offered no evidence to suggest that
these penalties were improperly assessed, we must con-elude that respondentOs assessment of these penalties
was proper.
With respect to the fraud penalties assessed
against appellant, a different question is presen&d.
The burden of proving fraud is upon respondent, and it
must be established by clear and convincing evidence.
(Valetti v. Commissioner, 260 F.2d 185, 188 (3d Cir.
lgmppea'l of-Geor xPai_rchild, Cal. St. Bd, of
Fraud impmes bad faith, i.ntenEqual., Ott!. 27, 1971
tional wrongdoing, and a sinister-motive; the taxpayer
must have the specific intent to evade a tax believed to
be owing. (Jones v. Commissioner, 259 F.2d 300, 303
(5th Cir, 19~Powe~~~ist, 252 F.2d 56, 60
(9th Cir. 1958).)mough frau=y be established by
circumstantial evidence (Powell v. Granquist,
supra.),
it is never presumed or ieta, andit will not be
sustained upon circumstances which, at most, create only
suspicion. (Jones v, Commissioner, supra, at 303.)
Respondent's position with respect to the propriety of the civil fraud penalties is based on the fact
that appellant, a tax advisorp proposed and agreed to a
federal settlement for the appeal years which included
civil fraud penalties. Since the California and'federal
civil fraud penalties are similar, respondent argues,
the fact that appellant proposed and agreed to the
.federal fraud penalty, coupled with the information
contained in the federal investigatory report, ahd three
years 'of tax deficiencies is sufficient circumstantial
evidence to sustain the civil fraud penalties. We cannot
agree.
The information contained in the report of the
federal investigation and other circumstances reliefd
upon by respondent do raise some suspicion 'of fraud.
-311-
a
aea.l_of Barbara P. Hutchinson
Mere suspicion of fraud, however, is insufficient.
The record contains
(Jqne.s v. Commiss_i
only the conclusionary report of the federdl investigator and not the various exhibit,s, appendices and
affidavits upon which those conclusions were based. In
addition, the Supplemental Supporting. Statement, which
recommended the acceptance of appellant's proposed settlement for an amount substantially less than the IRS's
original deficiency assessments, expressed concern with
the strength of the federal government's litigating
position. The fact that the settlement containing fraud
penalties proposed by appellant and accepted by the IRS
was substantially less than the IRS's original assessment militates against its use as an admission of fraud
by appellant. In any event, we have previously held
that respondent may not satisfy its burden of establishing fraud by clear and convincing evidence merely by
relying upon a federal,audit report. (See, e.g., A eal
o of William G., Jr., and Mary D. Wa, Cal. St. Bd. -F.kqual., March 8 1976 ) Acctixgly, we cannot conclude
that respondent'has e;tablished by clear and convincing
evidence that the civil fraud penalty contained in section 18685 of the Revenue and Taxation Code was properly'
asserted against appellant for any of the appeal years.
-312-
Appeal of Barbara P. Hutchinson
0
O R D E R
-_I__
Pursuant to the views expressed in the opinion
of the board on file in this proceeding, and good cause
appearing therefor,
IT IS HEREBY ORDERED, ADJUDGED AND DECREE.D,
pursuant to section 18595 of the Revenue and Taxation
Code, that the action of the Franchise Tax Board on
the prote.st of Barbara P. Hutchinson against proposed
assessments of additional personal income tax and penalties for failure to furnish information on notice and
demand and for delinquent filing in the total amounts
of $972.08, $932.10 and $3,262.29 for the years '1963,
1964 and 1965, respectively, be and the same is hereby
sustained, and that the action of the Franchise Tax
Board on the protest of Barbara P. Hutchinson against
proposed assessments of fraud penalties ,in the amounts
of $388.83, $372.84 and $1,304.92 for the years 19163,
1964 and 1965, respectively, be and the same is he:ceby
reversed.
I
Done at Sacramento, California, this 29th day
June
1982, .by the Sta.te Board of Equalization,
Mkbers
Mr. Bennett, Mr. Dronenburg and
with Board
Mr. Nevins present.
of
,William M. Bennett
, Chairman
~-_~-~~~.u~.--.~-.Ernest J.-_Dronenburg, _-_-I_
Jr.
, Member
-_
.Richard Nevins
, Member
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A
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Member
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