STATE BOARD OF EQUALIZATION In the Matter of the Appeal of: NED YAMIN AND HAIDEH YAMIN Representing the Parties: For Appellants: For Franchise Tax Board: Counsel for the Board of Equalization: BOARD OF EQUALIZATION STATE OF CALIFORNIA SUMMARY DECISION Case No. 0 Adopted: September, Gary M. Slavett, Esq. Raul A. Escatel, Tax Counsel III William J. Stafford, Tax Counsel III This appeal is made pursuant to section 0 of the Revenue and Taxation Code (R&TC from the action of the Franchise Tax Board (FTB or respondent on appellants protest against a proposed assessment in the amount of $,.00 in additional tax and a $,0.0 late filing penalty for 0. The issue presented in this appeal is whether appellants have shown reasonable cause for abatement of the late filing penalty. /// This appeal originally was scheduled for this Board s July, oral hearing calendar. At appellants request it was deferred, and rescheduled for this Board s October -, oral hearing calendar. In a letter dated October,, appellants made new arguments regarding the late filing penalty and, this appeal was removed from this Board s October -, oral hearing calendar pursuant to a request of the Appeals Division to conduct additional briefing. The appeal was rescheduled for this Board s August -, oral hearing calendar. Subsequently, when appellants failed to respond to the hearing notice, this appeal was rescheduled to this Board s September -,, nonappearance calendar. As discussed below, on appeal, appellants concede the amount of additional tax. The FTB clarified that the late filing penalty is $,0.0, as set forth in the Notice of Proposed Assessment (NPA not $,. as stated in the Notice of Action (NOA. - -
FINDINGS AND DISCUSSION Background In 0 appellants acquired commercial property in Los Angeles, California ( relinquished property, which they held until its disposition on July 0, 0. The disposition of the relinquished property was structured with the intent to result in a like-kind exchange in which appellants would exchange the relinquished property for another commercial property located in Las Vegas, Nevada ( replacement property. The Internal Revenue Code (IRC section transaction spanned over two tax years i.e., the disposition of the relinquished property occurred in 0 and the acquisition of the replacement property (and the receipt of boot occurred in 0. Appellants Return Appellants filed their joint 0 California Resident Income Tax Return late on February, 0, reporting a federal adjusted gross income (AGI of $0, and a California taxable income of $0,00. On a 0 federal Form (Like Kind Exchanges, appellants reported the following amounts: (i fair market value of like-kind property received of $,0,000; (ii adjusted basis of like-kind property given up of $,0,000; and (iii a deferred gain of $,0,000 from a like-kind exchange under IRC section. Audit The FTB audited appellants 0 tax return to determine whether appellants properly reported the IRC section transaction. After reviewing the matter, the FTB allowed an adjusted basis in the relinquished property in the amount of $0,. During the audit, the FTB determined that appellants had to recognize taxable gain of $,, from the IRC section transaction. Based on the foregoing, the FTB issued an NPA for the 0 tax year on February,, which added $,, to appellants taxable income. The NPA proposed an additional tax of $,.00, a late filing penalty of $,0.0, and an accuracy-related penalty of $0,.0, plus interest. Protest Appellants filed a timely protest, arguing that they were permitted to defer recognition Appellants failed to file a 0 California income tax return by the original due date of April, 0, or the extended due date of October, 0. - -
of gain under IRC section because they acquired like property at a cost higher than the value of the property sold. In addition, appellants argued that the accuracy-related penalty should be abated because they reasonably relied on the advice of their tax attorney, Mr. Michael Singer, in preparing their return. Appellants did not specifically address the imposition of the late filing penalty in their protest letter. After reviewing the matter, the FTB abated the accuracy-related penalty, finding that appellants reasonably relied upon their tax attorney in structuring the IRC section transaction. Later, the FTB issued an NOA on January,, for the 0 tax year, which, among other things, added $,, to appellants taxable income. The NOA proposed an additional tax of $,.00 and a late filing penalty of $,., plus interest. In response, appellants filed this timely appeal. Concessions on Appeal On appeal, appellants concede the amount of additional tax of $,. The FTB states that the late filing penalty is only $,0.0, as set forth in the NPA, not $,. as stated in the NOA. The only issue remaining on appeal is whether appellants have shown reasonable cause for abatement of the late filing penalty. Contentions Appellants Contentions Appellants assert that their California return was filed late because of a conflict between their attorney and their CPA regarding the proper reporting of the IRC section transaction. Specifically, appellants assert that their tax attorney was of the opinion the transaction was a tax deferred transaction while their CPA was of the opinion the transaction was taxable. Appellants contend that they provided their CPA with all the necessary information to file their California return in a timely manner (i.e., before expiration of the extended deadline of October, 0 but their CPA would not complete and file their return until the taxable nature of the transaction was resolved. Appellants state that their tax attorney and their CPA had numerous discussions regarding the taxable nature of the transaction. Appellants contend that by the time of the filing deadline of October, 0, their CPA was still unsure as to whether the transaction was taxable - -
and he told appellants he needed additional time to determine the proper reporting of the transaction. Appellants assert that (i their CPA had no discussions with them regarding a potential late filing penalty if they filed their return after the extended deadline of October, 0, and (ii their CPA did not give them any options regarding the filing of their return other than to wait until he (the CPA could determine the proper reporting of the transaction. Appellants state that between October of 0 and January of 0, their CPA had additional conversations with appellants tax attorney regarding the nature of the transaction, and by the first week of February 0, their tax attorney convinced their CPA the transaction was classified properly as a tax deferred transaction, at which time their CPA completed and filed their return. Appellants also contend, in a general manner, that they frequently requested updates from their CPA and they indicated to their CPA they wanted to file their tax return as soon as possible. In support of their arguments, appellants provide the following documents: An opinion letter dated November, 0, from their tax attorney, who states that the transaction qualifies for non-recognition of income: Since Mr. Yamin is acquiring like property at a cost higher than the value of the property sold, the transaction qualifies for non-recognition of income, even though not all of the boot (cash received is used to acquire the new property. This is so because the basis of the newly acquired property will still exceed the basis of the transferred property. A declaration dated January,, from their CPA who states as follows:. I am a licensed certified public accountant ( CPA in the State of California. I am currently a shareholder at Bamshad & Company, An Accountancy Corporation. My current business address is... Encino, CA.. I am (sic been Ned and Haideh Yamin s (the Yamins CPA for and have prepared their individual income tax returns for over years.. I prepared the Yamins 0 Form 0, California Resident Income Tax Return.. I prepared and filed an extension of time to file the Yamins 0 tax returns. It was common for me to file extensions of time for the Yamins as well as my other clients. I do not recall the - -
exact reason for filing the Yamins extension.. In approximately July/August of 0, I began the process of preparing the Yamins tax returns. By this time the Yamins had provided my office with all of their tax documents necessary to complete the return. I was aware the Yamins had enter [sic] into a Section transaction that was completed in 0. The tax documents included all third party reporting (Forms, s, schedules of income and expenses related to rental properties, documents related to the sale of real property located at... Victory Blvd, Van Nuys, California ( Van Nuys property, and documents related to the purchase of real property located at... S. Pecos Road, Las Vegas, Nevada [(] Las Vegas Property. The documents related to the Van Nuys Property included the Final Settlement Statement. Further, with the tax documents provided by the Yamins was a letter from Attorney Michael Singer regarding the tax treatment of the sale and purchase of the two properties and the application of Internal Revenue Code section.. In approximately August/September 0, during the preparation of the tax return, I entered the information regarding the Section transaction into my tax preparation software. The Amended Settlement Statement for the Van Nuys property (this was the relinquished property contained the information regarding the sale price, fees/commissions paid, as well as the closing date. The cost basis of the Van Nuys property was provided by the Yamins. The Settlement Statement for the Las Vegas Property (this was the replacement property contained the information regarding the purchase price, settlement date, cash received and mortgage assumption.. Upon entering the information regarding the Section transaction, my tax preparation software indicated an issue with the Section transaction. The tax preparation software was indicating a taxable gain, whereby the letter from Attorney Michael Singer advised that there should be no taxable gain.. In approximately September/October 0, I conducted my own research and had discussions with the Yamins and Attorney Singer. By the due date of the return, I was still unclear as to the proper reporting of the Section transaction. I spoke with the Yamins and advised them that I needed additional time to determine the proper reporting of the Section transaction. - -
There was no discussion with the Yamins regarding the consequences of filing the return after the due date. I did not give the Yamins any options; I simply explained I needed additional time to determine the proper reporting of the Section transaction.. Between October 0 and January 0, I had numerous telephone discussions with Attorney Singer and the Yamins, and conducted additional research. The Yamins had requested frequent updates and requested that I file the return as soon as possible.. By the first week of February 0, Attorney Singer had convinced me that his interpretation of Section was correct. At that time I completed the return and it was filed.. These events occurred over years ago. I do not have any documents/e-mails regarding my discussions with the Yamins or Attorney Singer regarding this issue. I believe that the Yamins relied on me as their CPA to determine the course in which their return should be filed. I was concerned about filing an incorrect return and felt that I needed additional time to determine the proper reporting of the Section transaction. Accordingly, I do not believe the Yamins caused the late filing of their return. The FTB s Contentions The FTB states that appellants assert that they believed the return was timely filed by their tax professional as reasonable cause for the late filing. The FTB asserts that appellants have a personal nondelegable obligation to file their tax return by the due date and may not rely upon their agents (such as their CPA and/or attorney to excuse their failure to file in a timely manner, citing Boyle v. United States ( U.S. ( Boyle and Knappe v. United States (th Cir. F.d ( Knappe. The FTB summarizes Boyle, wherein an executor relied on his attorney to prepare and file an estate tax return. The executor contacted the attorney a number of times to inquire as to what progress had been made, and was assured that the return would be filed timely. The attorney, however, missed the filing deadline through a clerical oversight. The Supreme Court held the executor failed to show reasonable cause for filing a late return because he had a nondelegable duty to comply with the filing deadline and could not simply rely on his attorney to do so. (Id. at -. The Court distinguished the facts of case before it, from cases in which a taxpayer relied on the erroneous advice - -
of counsel concerning a question of law, such as whether a liability exist[ed] or whether it was necessary to file a return at all. (Id. at 0-. The FTB states that this Board consistently has applied the holding in Boyle to reach the conclusion that each taxpayer has a personal nondelegable obligation to file his/her tax return and reliance on an accountant or an attorney does not constitute reasonable cause. In this respect, the FTB argues that (a it makes no difference that appellants CPA was unable to reconcile the discrepancy between his tax treatment of the like-kind exchange and what the Opinion Letter from the tax attorney stated because it was appellants duty to ensure the tax return was timely filed, and (b appellants should have hired another accountant to timely prepare the return when they understood, or should have determined their CPA was not able to prepare and file their return by the extended deadline of October, 0. The FTB summarizes Knappe v. United States, supra, wherein the United States Court of Appeals of the Ninth Circuit addressed the issue of whether the executor of an estate could show reasonable cause for filing an estate tax return past the legal deadline because he had received faulty advice from his accountant as to the length of the filing extension. The Court held that the executor failed to show reasonable cause for filing a late return because he had relied upon his accountant s advice about a nonsubstative matter i.e., the length of the filing extension. (Knappe, F.d at. The Court reasoned that the maximum length of a filing deadline extension is not a debatable question as to which reliance on an expert might provide reasonable cause for a late filing. The FTB asserts that appellants position on appeal is even more culpable than that of the taxpayer in Knappe because in that case the taxpayer s failure to timely file a tax return was due to reliance on his accountant to obtain an extension of time and the accountant gave the taxpayer erroneous advice regarding the due date. In comparison, the FTB asserts that in the current appeal, appellants clearly knew the due date for filing their return was October, 0, a fact the FTB asserts is not disputed on appeal. As noted above, appellants assert the following factors, among others, demonstrate reasonable cause for relief from the late filing penalty: (a appellants had no conversations with their CPA regarding the consequences of filing their return late; (b their CPA did not give appellants any - -
options regarding the filing of their return; and (c their CPA stated that he required additional time to correctly determine whether the transaction was taxable. The FTB asserts that the above-listed factors are merely excuses that fail to demonstrate reasonable cause for relief from the late filing penalty because (i appellants took no responsibility for ensuring the timely filing of their return and (ii appellants inaction does not comport with how an ordinary and intelligent businessperson would act in similar circumstances. The FTB contends that appellants assertion they relied upon their accountant is illusory for the following reasons: Appellants knew their return was due by October, 0. Appellants knew that the due date for filing their return included an extension, giving them notice there was no additional time beyond October, 0. Appellants were aware that they had no additional time, as evidenced by the fact that their CPA routinely filed extensions of time on their behalf. Appellants knew that their CPA would not complete their return by the due date, as evidenced by the fact that appellants supplemental brief which states the CPA advised them he required additional time. Appellants never describe the purported inconsistency between their CPA s tax preparation software and the information contained in their tax attorney s Opinion Letter nor have they shown that the alleged inconsistency was material. Appellants failed to exercise prudent business care and inquire as to the consequences of not filing their return by the extended filing deadline. The FTB contends that appellants had to report other items of income for the 0 tax year and, thus, their failure to file a return timely because of the alleged discrepancy over the taxable nature of the transaction does not support a finding of reasonable cause. Specifically, the FTB asserts that appellants received over $00,000 in taxable income that needed to be reported for the 0 tax year, independent of the transaction. In addition, the FTB asserts that their tax attorney s opinion letter shows that the like-kind exchange would result in income recognition of some proceeds, as the letter states that there was gain from the transaction equal to $00,000, plus any cash boot - -
received. The FTB asserts that appellants could have timely filed their return to comply with their duty to file their return by the due date, and once the discrepancy surrounding the like-kind exchange was resolved, whether by their current accountant or another, appellants could have filed an amended return. The FTB contends that instead of doing such, appellants simply ignored the extended due date of October, 0. Discussion California imposes a penalty for failure to file a return by its due date, unless the failure to file was due to reasonable cause and not due to willful neglect. (Rev. & Tax. Code,. To establish reasonable cause, a taxpayer must show that the failure to file timely returns occurred despite the exercise of ordinary business care and prudence, or that cause existed as would prompt an ordinary intelligent and prudent businessman to have so acted under similar circumstances. (Appeal of Howard G. and Mary Tons, -SBE-0, Jan.,. In Boyle, the Supreme Court stated that it is reasonable for a taxpayer to rely on the advice of an accountant or attorney when that accountant or attorney advises a taxpayer as to a matter of tax law; however, the Supreme Court also held that one does not need to be a tax expert to know that tax returns have fixed filing dates and taxes must be paid when due. (Id., at -. In addition, the Supreme Court held that a taxpayer s reliance on an accountant or attorney cannot be a substitute for compliance with an unambiguous statute. (Id. In the Appeal of Philip C. and Anne Berolzheimer (-SBE-, decided on November,, this Board distinguished between relying on a tax professional s expert advice about a matter of substantive tax law and relying on a tax professional merely as an agent to file the return and pay taxes by the deadline. Reasonable cause for late filing might exist where a taxpayer reasonably relied on the expert opinion of a tax professional, even if that expert opinion was later determined to be incorrect. By contrast, relying on an agent merely to file the return and pay taxes on time is not considered reasonable cause for purposes of penalty abatement because taxpayers have a Board of Equalization cases are generally available for viewing on this Board s website (www.boe.ca.gov. - -
personal, non-delegable obligation to file their tax returns and pay their taxes in a timely manner. (Appeal of Thomas K. and Gail G. Boehme, -SBE-, Nov.,. Appellants contend that they have established reasonable cause for the late filing of the return because of the conflict between the CPA and the attorney concerning the proper reporting of the IRC section like-kind exchange transaction. This Board has held that a taxpayer s difficulty in obtaining necessary information, and the complexity and problems in accumulating the information necessary to complete a return, is not reasonable cause for late filing. (Appeal of J.B. and P.R. Campbell, -SBE-, Oct., ; Appeal of Incom International, Inc., -SBE-0, Mar., Furthermore, the correctness of reporting the transaction potentially impacted appellants reported income and tax liability, but not their ability to file a timely return. Appellants have not explained why they were unable to file the return by the extended due date of October, 0, based on the available information, and if necessary file an amended return later. We find that an ordinarily intelligent and prudent business person under similar circumstances would have filed a return, based on an estimation of tax, before or on the due date, to avoid a late filing penalty, and, thereafter, would have filed an amended return if required. Appellants state that the CPA demanded additional time to determine the proper reporting of the transaction. This Board has held that relying on an agent merely to file the return and pay taxes on time is not considered reasonable cause for purposes of penalty abatement because taxpayers have a personal, non-delegable obligation to file their tax returns and pay their taxes in a timely manner. (Appeal of Thomas K. and Gail G. Boehme, supra. Furthermore, appellants have not asserted, and the evidence does not indicate, that their failure to file their return timely was due to reliance on their representative for advice concerning a substantive matter of tax law. Thus, appellants have not demonstrated reasonable cause based on their reliance on their CPA or attorney. Accordingly, appellants have failed to demonstrate that the late filing penalty should be abated. CONCLUSION For the reasons set forth above, the FTB s action is hereby modified, as conceded by the FTB on appeal, such that the late filing penalty of $,., as set forth in the NOA, is reduced to $,0.0, as set forth in the NPA. Otherwise, the FTB s action is affirmed. - -