BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION 5901 Green Valley Circle, Room 207 Culver City, California REPORTER'S TRANSCRIPT FEBRUARY 25, 2009 ITEM B9 FRANCHISE AND PERSONAL INCOME TAX HEARING APPEAL OF MATT WARD (No. 431775) AGAINST PROPOSED ASSESSMENT OF ADDITIONAL TAX Reported by: Beverly D. Toms CSR No. 1662 1 1 2 P R E S E N T 3 For the Board Betty T. Yee of Equalization: Chair 4 Judy Chu 5 Vice-Chair 6 Bill Leonard Member 7 Michelle Steel 8 Member 9 Marcy Jo Mandel Appearing for John Chiang 10 State Controller (per Government Code 11 Section 7.9) 12 Diane Olson Chief, Board 13 Proceedings Division 14 For Board of Grant Thompson 15 Equalization Staff: Staff Counsel 16 For Franchise Tax Jeanne M. Sibert 17 Board: Tax Counsel 18 For Appellant: Matt Ward 19 Taxpayer 20 Jeffrey Davine Representative 21 ---oOo--- 22 23 24 25 26 27 28 2 1 Culver City, California 2 February 25, 2009 3 ---oOo--- 4 MS. OLSON: Our next case is B9, Matt Ward. 5 MS. YEE: Okay. Appeals. 6 MR. THOMPSON: Good afternoon. The questions 7 in this appeal are whether Appellant has shown that his 8 IRA distributions in 1999 and 2000 were transferred in 9 non-taxable transactions to a self-directed IRA, and 10 thus should not be included in his taxable income. 11 Second, whether Appellant has proven that the 12 IRA distributions in 1999 and 2000 are not subject to an 13 additional two and a half percent tax that is otherwise 14 imposed on early distributions. 15 And, finally, whether Appellant can obtain a 16 deduction in the 2000 tax year for worthless stock. 17 MS. YEE: Thank you very much. Good afternoon. 18 MR. DAVINE: Good afternoon. 19 MS. YEE: Please introduce yourselves for the 20 record. You have ten minutes for your presentation. 21 MR. DAVINE: Good afternoon. Jeff Davine, 22 D-a-v-i-n-e, on behalf of the Appellant. 23 Madam Chair, we may not need it, but would it 24 be possible to perhaps have an extra moment or two to 25 present our case? 26 MS. YEE: Why don't we proceed with your ten 27 minutes. I'm sure with the followup you'll be able 28 to -- 3 1 MR. DAVINE: Okay. 2 MS. YEE: -- cover all of your -- 3 MR. DAVINE: Okay. 4 MS. YEE: -- issues. 5 MR. DAVINE: The primary issue in this case 6 concerns whether two rollovers, one in 1999 and one in 7 2000, made from one of the taxpayer's individual 8 retirement accounts to another of his individual 9 retirement accounts were taxable distributions. 10 As stated in our papers and as stated in the 11 IRS form 1099-R that was issued to the taxpayer, the IRA 12 to which the rollovers were made was the Matt Ward IRA 13 rollover which was a self-directed IRA. 14 The taxpayer's position is that each rollover 15 was a non-taxable rollover from one IRA to another. As 16 the taxpayer will advise the Board and as set forth in 17 his declaration that we have submitted, he made repeated 18 efforts to obtain paperwork from Bear Stearns, which was 19 the entity that was the Trustee of each IRA, to 20 substantiate that these two IRA transfers were not 21 taxable ones, and also to get Bear Stearns to correct 22 the two IRS forms 1099-R that incorrectly stated that 23 the distributions were taxable ones. 24 Unfortunately, because Bear Stearns 25 substantially contracted its operations that served 26 small brokerage houses after the dot com in 2000, the 27 taxpayer was unsuccessful in these efforts. 28 The FTB's position is that neither distribution was a 4 1 non-taxable rollover from one IRA to another and 2 therefore the taxpayer must recognize taxable income as 3 a result of both of these deemed distributions. 4 If it is ultimately determined that the 5 FTB's -- FTB's position is correct, and each rollover 6 distribution must be included in the taxpayer's income, 7 the taxpayer should be entitled to a loss in 2000 equal 8 to the total amount of the two deemed distributions. 9 Based upon the information contained in the 10 FTB's reply brief which cites several IRS rulings, a 11 taxpayer may claim a deduction attributable to an IRA if 12 two requirements can be met. 13 The first requirement is that amounts in all of 14 the taxpayer's traditional IRAs the aggregate have been 15 distributed or depleted to zero, which is what occurred 16 in this case and, two, the amounts distributed or deemed 17 distributed as a result of the complete depletion of the 18 IRAs are less than the taxpayer's unrecovered basis, 19 which includes the total non-deductible contributions 20 made to the taxpayer's IRAs. Both of these requirements 21 are met in this case. 22 As of the end of 2000 the taxpayer only had one 23 IRA, the one into which both of the rollovers were 24 contributed. The self-directed IRA. 25 The taxpayer's testimony and the declaration 26 that we have submitted is the best evidence that we can 27 offer in this case as it is not otherwise possible to 28 prove a negative. In other words, that the taxpayer 5 1 didn't have any other IRAs. 2 All of the funds in this self-directed IRA 3 where the distributions went were invested in the stock 4 of a company called Direct Web, Incorporated. Direct 5 Web, unfortunately, was one of the many dot com 6 companies that appeared in the late 1990s and then 7 quickly went out of business. 8 As set forth in the documents that we have 9 previously -- previously submitted from the 10 Vice-President and General Counsel of Direct Web as set 11 forth in the declaration from the Vice-President and 12 General Counsel of Direct Web that we submitted today, 13 Direct Web closed its doors and ceased operating prior 14 to the end of 2000. As a result, all of the Direct Web 15 stock that was owned by the taxpayer's self-directed 16 IRA, which again was his only IRA as of the end of 2000, 17 became worthless when Direct Web ceased its operations 18 in 2000. 19 The taxpayer therefore may claim a deduction 20 for his unrecovered basis in his only IRA. His 21 unrecovered basis is equal to the two distributions, one 22 in 1999 and one in 2000 that he is required to take into 23 income if the FTB's position is upheld. 24 And with my remaining time I'd like to ask the 25 taxpayer some questions that I think will provide the 26 Board with some additional background with respect to 27 this case. 28 EXAMINATION OF MATT WARD BY MR. DAVINE 6 1 Q. During 1999 did you maintain an IRA at Bear 2 Stearns? 3 A. I did. 4 Q. And did you -- did you establish another IRA? 5 A. I did. 6 Q. And was this -- was this a self-directed IRA? 7 A. It was a self-directed IRA, yes, correct. 8 Q. And during 1999 did you transfer funds from the 9 IRA at Bear Stearns to this self-directed IRA? 10 A. I did. 11 Q. And what about 2000; did you also transfer 12 funds? 13 A. The remain -- remainder of the funds. 14 Q. So, the remain -- remaining funds in the Bear 15 Stearns IRA were transferred to the self-directed IRA in 16 2000? 17 A. That is correct. 18 Q. And could you briefly just describe for the 19 Board the transactions whereby the proceeds from your 20 Bear Stearns IRA were transferred to that self-directed 21 IRA. In other words, how were the transfers made. 22 A. The transfers were very simple. We contacted 23 operations people at Bear Stearns to do the IRA 24 transfer. 25 Q. And did -- after the funds were transferred 26 from the IRA at Bear Stearns to the self-directed IRA in 27 1999, what was done with those funds in the 28 self-directed IRA? 7 1 A. Those funds were invested in Direct Web. 2 Q. All of them? 3 A. all of them. 4 Q. And after the funds were transferred from the 5 IRA at Bear Stearns to the self-directed IRA in 2000, 6 what was done with the funds? 7 A. The remainder of the funds were invested in 8 Direct Web, as well. 9 Q. Okay. And can you briefly describe what was 10 Direct Web? 11 A. Direct Web was in the business of giving people 12 personal computers, in return signing them up for 13 long-term internet contracts. Seemed like a pretty good 14 business model at the time. 15 Q. I guess, unfortunately, it didn't turn out to 16 be one. What was your relationship with Direct Web? 17 A. I was the largest non-employee shareholder of 18 the company, as well as the primary fundraiser for the 19 company to start their business. 20 Q. And in -- during 2000 how many IRAs did you 21 have? 22 A. In 2000 I had two IRAs, but once the transfer 23 was complete to the self-directed IRA I had one. 24 Q. So, there was nothing left in that Bear Stearns 25 IRA? 26 A. Nothing whatsoever. 27 Q. And did you try to obtain paperwork or other 28 records from Bear Stearns to substantiate the rollover 8 1 from the IRA at Bear Stearns to the self-directed IRA? 2 A. In -- in 2000, quite honestly, I did not at 3 that point in time. The dot com boom was imploding. I 4 was 100 percent invested in dot com companies. 5 I was in the process of salvaging my business. 6 And, quite frankly, my investment in Direct Web was 7 worthless at that time. So, I did not pursue trying to 8 get paperwork to establish that -- you know, the 9 investment in the IRA was worthless. 10 Q. And what about -- what about later on, three or 11 four years later when you got examined? 12 A. Three or four years later, when we had contact 13 with the FTB, we made every effort with Bear Stearns, 14 but the division that they opened up to deal with small 15 brokerage firms that popped up in '98 and '99 was closed 16 by then. And every effort we made to get paperwork to 17 substantiate the -- the rollover, we were getting closed 18 doors because the division was no longer part of Bear 19 Stearns. 20 Q. Couldn't your employer have helped you? 21 A. Well, National Securities no longer used us as 22 a clearing operation when Bear Stearns ceased operations 23 in 2000 and 2001. 24 Q. So, were all of the funds in the Matt Ward IRA 25 rollover, the self-directed IRA, invested in Direct 26 Web? 27 A. All of the funds in the self-directed IRA were 28 invested in Direct Web. 9 1 Q. And -- and as of the end of 2000 was there 2 anything in the Matt Ward IRA rollover, the 3 self-directed IRA, besides the shares of Direct Web? 4 A. There was not. 5 Q. And how do you remember this? 6 A. Well, since 90 percent of my net worth, 7 including 100 percent of my retirement account, was 8 involved in it and I was in touch with the company on a 9 biweekly basis, I was fully aware that, you know, Direct 10 Web was no longer around. 11 Q. I guess that would stick in your memory. 12 A. Yes, it would. 13 Q. When did Direct Web cease operating? 14 A. They ceased operating in the summer of 2000 15 when they weren't able to raise any more capital. 16 Q. And did they declare bankruptcy or formally 17 dissolve? 18 A. Jeff, they came to me to raise some more money, 19 and as they were not able to raise any more money they 20 ceased their operations. 21 Q. So, they just closed their doors? 22 A. They closed their doors. 23 Q. And how -- how do you know this? 24 A. I know this because I was the primary 25 fundraiser for the company and they came to me to raise 26 more money. And when they weren't able to, that's what 27 they did. 28 Q. Did any of your clients invest in Direct Web? 10 1 A. Unfortunately, most of my clients were invested 2 in Direct Web and lost everything right alongside of me. 3 Q. And as of the end of 2000 what was the status 4 of Direct Web stock? 5 A. Worthless. 6 Q. So there was no market, it couldn't be sold to 7 anybody? 8 A. It was a private company that went under. 9 Q. And did Direct Web ever -- Direct Web ever 10 resume operations? 11 A. It did not. 12 MR. DAVINE: Okay. I have no further comments 13 at this particular moment. 14 MS. YEE: Okay, you'll have five minutes on 15 rebuttal, gentlemen. 16 MR. DAVINE: Thank you. 17 MS. YEE: Franchise Tax Board. 18 MS. SIBERT: Good afternoon, Madam Chairwoman 19 and Members of the Board. My name is Jeanne Sibert. 20 And to my right is Terry Collins. And we represent the 21 Franchise Tax Board in this matter. 22 Before I continue I need to clear up a 23 misstatement in the briefings. 24 At first I believe the two 1099 -- 1099-Rs in 25 this case reported an IRA distribution to appellant's 26 IRA. But the form doesn't do that. 27 As both BNA and the form 1099-R instructions 28 state, the purpose of a 1099-R is to report 11 1 distributions made from an IRA. The 1099-R includes the 2 information of the owner of the IRA, including Social 3 Security number, because the owner is responsible for 4 the tax effects of any distributions from his IRA. 5 In this case, FTB's assessments for 1999 and 6 2000 are based on the forms 1099-R issued by the trustee 7 of appellant's IRA that reported his IRA called Matt 8 Ward IRA RO made taxable distributions in both 1999 and 9 2000. 10 The 1099-Rs reported the IRA distributions from 11 this IRA. However, it did not include Matt Ward's name, 12 but used his Social Security number and his mailing 13 address. 14 For the 1999 tax year Appellant received a 15 1099-R which reported his IRA made a taxable 16 distribution of approximately 1.3 million. The 1099-R 17 also reported this was an early distribution with no 18 known exception. 19 For the 2000 tax year Appellant received a 20 1099-R which reported his IRA made a taxable 21 distribution of nearly 970,000. The 1099-R again 22 reported this was an early distribution with no known 23 exception. 24 Although Appellant claims the 1099-Rs were 25 issued in error, because we have a 1099-R for 1999 and 26 one for 2000 this would mean that Bear Stearns erred in 27 two separate -- separate instances in two separate years 28 when it issued these allegedly incorrect 1099-Rs. 12 1 Appellant has not been able to demonstrate that 2 the 1099-Rs were issued in error, and he has not 3 provided any information that shows the distributions 4 should not be taxable. For example, by establishing 5 that either distribution meets the rollover requirements 6 which would make a distribution from one IRA to another 7 IRA non-taxable. 8 FTB began auditing Appellant in 2003 and asked 9 on four separate occasions during the audit for 10 Appellant to provide any documentation showing these IRA 11 distributions were reinvested in another IRA within the 12 time limits. Appellant could not provide this 13 information. 14 Appellant has now provided his declaration of 15 his memory of the alleged transactions. However, 16 Appellant still has not provided -- excuse me, any 17 documentation such as brokerage statements, IRA 18 withdrawal requests or even the dates of when these 19 distributions and the alleged rollovers occurred. 20 In his declaration, Appellant claims the 21 distributions in question were transferred by Bear 22 Stearns from one account to another account. If that 23 was so, that would be a trustee to trustee transfer and 24 a 1099-R would not have been issued. 25 As the owner of the IRA, Appellant is 26 responsible for the taxes resulting from the 27 distribution -- from taxable distributions from his IRA. 28 Additionally, Appellant has not shown that he 13 1 meets any of the exceptions for an early distribution 2 from an IRA. And therefore the additional tax for an 3 early distribution also applies to each distribution. 4 In regards to the question for losses, there's 5 two scenarios I would like to discuss. If the money 6 was -- if your Board finds that the money was 7 transferred to a second IRA but that the rollover did 8 not meet the time requirements, then in order to take a 9 loss in an IRA there's very specific rules, that the 10 taxpayer must demonstrate that all of his IRAs were 11 closed and that he had an amount -- that he had a basis 12 in his IRA from which he could then determine his loss. 13 We do not have that information. 14 Additionally, a loss taken in an IRA would be 15 reported on a Schedule A and limited to those 16 miscellaneous -- miscellaneous itemized deduction 17 limitations. 18 However, if the rollover did not occur and the 19 money remained out of the second IRA, the taxpayer would 20 then be subject to the normal capital loss limitations. 21 However, I want to point out that on his 2000 1040 that 22 the Appellant had already taken approximately $3.1 23 million in losses connected to Direct Web shares and 24 that, you know, we would need the documentation to 25 establish that the distributions which would then be 26 includable in taxable income, that that income -- that 27 amount was used to purchase shares in Direct Web, and we 28 would need proof of that transaction. 14 1 In conclusion, I respectfully request your 2 Board sustain our assessments. Thank you. 3 MS. YEE: Thank you very much. You have five 4 minutes on rebuttal. 5 MR. DAVINE: Thank you. First I wanted to 6 point out with respect to the 1099-R that the taxpayer 7 received, it states quite clearly in the 1099-R the 8 recipient is the Matt Ward IRA rollover. It says it 9 right -- right on the document, itself. 10 Secondly, with respect to the -- the 11 requirements for a loss, I believe that we meet those 12 requirements. The taxpayer has testified he only -- at 13 the end of 2000 he only had one IRA. It was the -- it 14 was a self-directed IRA. 15 And -- and if the -- if the FTB is saying 16 that -- that this is a taxable distribution to him, that 17 the 1999 and the 2000 distributions were taxable to him, 18 in essence I believe what they're saying is the money 19 went to the taxpayer and then got recontributed to 20 this -- this IRA. In which case he's got a basis, he's 21 got a tax basis, in the amounts in that IRA. 22 These were then after tax contributions. 23 As a result, if the IRA became worthless, which 24 it did, which the taxpayer has testified to, and which 25 we have submitted declarations with respect to -- to 26 that fact from both the taxpayer and from Albert Kiak 27 (phonetic), who was the Vice-President and General 28 Counsel of Direct Web -- he's got a tax basis equal to 15 1 approximately -- I guess it would be about $2.2, $2.3 2 million, because that was the amount that the FTB is 3 trying to assert as income. 4 And if the IRA became worthless in that year, 5 which it did, because the Direct -- Direct Web went out 6 of business in 2000, he should be able to claim this 7 loss. 8 With respect to the $3.1 million loss that 9 the -- that the FTB counsel is referring to on the 10 taxpayer's 1040, it's important to keep in mind that the 11 taxpayer had invested his own personal funds outside of 12 his retirement accounts in Direct Web, as well. And if 13 you -- if the Board would -- would review the 14 declaration -- actually, I don't know if it's on the 15 declaration but it's on the -- one of the letters that 16 we submitted previously from Albert Kiak, where he 17 confirmed -- 18 MR. WARD: It's on the declaration, as well. 19 MR. DAVINE: It may be on the declaration, as 20 well, that he confirmed that the taxpayer used both 21 his -- his retirement assets and personal funds outside 22 of his retirement accounts to invest in Direct Web. 23 MS. YEE: Okay. Any other comments? 24 MR. DAVINE: No. 25 MS. YEE: Okay. Very well. Thank you. 26 Questions or comments, Members? 27 Okay, Ms. Steel and then Dr. Chu. 28 MS. STEEL: Do you have any documents that you 16 1 transferred -- you took the money out and then 2 transferred. It has to be transferred to same -- I mean 3 different IRA account within 60 days period. Do you 4 have any statements from the IRA account or anything? 5 MR. DAVINE: We -- we have tried for -- for 6 years since the examination began. 7 MS. STEEL: But don't you get like monthly 8 statements from the company? 9 MR. DAVINE: The -- the problem is that during 10 the -- during this time and -- and perhaps Matt can 11 describe it better than I can, it was -- there was -- it 12 was chaos going on with his business. It was the end of 13 the dot com boom. He was losing all of his money. His 14 clients were losing their money. He had clients 15 screaming and yelling at him. The business was 16 imploding. 17 And back at that point in time he may have 18 received something but -- but because the -- the 19 underlying investment became worthless, this Direct Web 20 stock, we -- 21 MS. STEEL: There's no -- 22 MR. DAVINE: -- we can't find it. 23 MS. STEEL: So, there is no proof at all that 24 he transferred within 60 days period? 25 MR. DAVINE: No. No. I mean, except -- except 26 for his -- for his testimony. 27 MS. STEEL: Okay. We bypass that. Then there 28 is a -- that loss of $3 million he already deducted from 17 1 the tax return. That didn't include that, you know, 2 whatever you lost from -- 3 MR. WARD: It did not. I -- it's -- I invested 4 approximately $4.7 million in Direct Web. 5 MS. YEE: So, you had -- 6 MR. WARD: And the rest -- a big -- a big chunk 7 of that money was from my private -- I think in excess 8 of 5 million. My memory is not 100 percent on this, but 9 I can get the numbers. Part of that was from my 10 personal funds. The other part was all of my money in 11 my retirement account. 12 MS. STEEL: So, you have paperworks of that $3 13 million, whatever you deducted that you can prove that? 14 MR. WARD: I would presume -- 15 MS. STEEL: That plus -- 16 MR. DAVINE: We haven't been asked for that 17 previously. I don't know if we have that any more. I 18 mean, that -- that -- that issue wasn't raised during 19 the examination process. 20 MR. WARD: We can certainly look. 21 MR. DAVINE: We can look and see but quite 22 honestly, I don't know if we have that. 23 MS. STEEL: So, we never really passed from 24 Step One that you -- they couldn't prove within 60 days 25 period transfer, so we never really asked after that 26 that they can be allowed that another tax deductible for 27 over $2 million? 28 MS. SIBERT: We did look at separately in the 18 1 beginning of the audit some of the -- there was another 2 issue related to Direct Web stock. And FTB did examine 3 that and did -- did allow the -- the deduction for the 4 loss -- loss for those Direct Web shares that were on 5 the 1040. 6 There is an oddity in that amount in that on 7 the return it's the 3.1 million and additionally the 8 Appellant also invested $2 million in a partnership 9 which through -- an LLC that also purchased Direct Web 10 stock. 11 So, on his 1040 he shows -- I believe about -- 12 I want to say 7 million shares of Direct Web. Very 13 large. And then he also claimed the amount from -- of 14 pass-through amount from this LLC that had also 15 invested. 16 And during our audit, at some point, and this 17 is something I don't understand, that FTB -- the $2 18 million for the Direct Web loss, FTB did not require 19 proof of those shares and instead FTB said that the loss 20 from the LLC would equal that and that that would be 21 accepted as a loss. A little confusing. 22 MS. STEEL: LLC but not from IRA. 23 MS. SIBERT: Correct. Correct. So, there -- 24 and the only reason I bring up the loss or the direct 25 share webs -- direct share -- Direct Web shares is that 26 in order to determine if there would be any loss 27 connected with this transaction we would need 28 documentation to establish what shares were purchased 19 1 with the IRA funds. 2 MR. WARD: I used -- I pretty much put 3 everything I had into Direct Web. Not only my 4 retirement account, personal funds and there was also a 5 fund that I helped create to invest in Direct Web that 6 also invested in Direct Web. Pretty much everything 7 that, you know, I had was put into Direct Web through 8 all the different vehicles I had. 9 MS. STEEL: You have to show your proof that 10 you transferred within 60 days, then we could move up 11 from that on to another deduction. 12 So, is that anyway possible that you can -- 13 MR. WARD: The only place, Ms. Steel, that I 14 could get that proof is from Bear Stearns. And Bear 15 Stearns -- 16 MS. STEEL: But they're gone. 17 MR. WARD: Bear Stearns -- exactly. Well, the 18 big company Bear Stearns was gone as of last year but 19 they started a separate division to deal with small 20 brokerage firms that were sprouting up in '98 and '99, 21 and when the dot com bust took place and all these small 22 firms went away, they immediately closed that division. 23 And when the FTB came to me to get proof at that point 24 in time, keeping in mind that it was up to Bear Stearns 25 to paper these transactions, I had lost my investment 26 completely. You know, I wasn't too -- at that point in 27 time my primary concern was saving my business, not 28 worried about whether Bear Stearns did their job 20 1 properly or not into an investment that no long -- it 2 was worthless. 3 So, you know, that's where we run into the 4 problem. Now, not only the bigger company Bear Stearns 5 went under last year, but the -- the smaller division 6 that was dealing with small brokerage firms was gone as 7 of late 2000, early 2001. That was the problem in terms 8 of getting that documentation. 9 MS. STEEL: Thank you. 10 MS. YEE: Dr. Chu. 11 DR. CHU: Mr. Ward, in your reply brief you 12 said that as a financial advisor and stockbroker you 13 were very familiar with the tax rules governing the 14 transfer and investment of retirement assets. 15 If so, then why didn't you take further action 16 to ensure that your 1099-R would be a tax-free 17 distribution? 18 MR. WARD: At the -- at the time, ma'am, when 19 we -- when we did the distribution, I was really focused 20 on making sure that, you know, the investment was made 21 at the appropriate time. I had presumed when Bear 22 Stearns -- in the past I had retirement accounts for my 23 clients, as well. And it was Bear Stearns that, you 24 know, papered the transaction. It was all done 25 properly. 26 And at that point in time I was more focused on 27 what was taking place to make money versus whether 28 these -- you know, whether the transaction which, you 21 1 know, took place, was getting papered properly. 2 So, -- that's -- you know, it's not an excuse 3 but that's where my focus was and, you know, it was a -- 4 a time where things were happening fast and furious on 5 on a daily, weekly, monthly basis and, you know, I just 6 presumed that, you know, Bear Stearns had done their 7 part correctly. 8 DR. CHU: And then you did have a December 22, 9 1998 Bank of America statement that showed an IRA 10 distribution. Why didn't you keep any of the other 11 statements related to the two distributions, the two 12 distributions in question? 13 MR. WARD: I don't know which distribution 14 you're -- 15 MR. DAVINE: Was -- is this the $300,000 16 distribution that came out of the IRA to the taxpayer 17 individually? 18 DR. CHU: I'm not sure. 19 MS. SIBERT: I believe so. 20 DR. CHU: Yeah. 21 MR. DAVINE: That sounded -- 22 DR. CHU: Oh, yes, yeah. 23 MR. DAVINE: Yeah, I think -- that was from 24 December of '98. 25 DR. CHU: Yeah, '98. December 22, '98. 26 MR. DAVINE: Yeah. I think, and Matt can 27 probably speak to this better -- better than I can, but 28 I think -- I think what he was -- what he was doing, as 22 1 he has described to me what he was doing, was he would 2 take -- he would take funds out on occasion of -- of the 3 IRAs, purchase these investments such as Direct Web, and 4 then the funds would go back into the IRA. The -- the 5 investment would go back into the IRA. 6 MR. WARD: These were -- this was a private 7 com -- Direct Web was a private company. It was not a 8 publicly traded company. 9 So, you know, it was -- it was money taken out 10 to make an investment in private companies at the time. 11 That's how I was, you know, doing my business, investing 12 in, you know, private dot com companies. 13 DR. CHU: But I guess my question was really 14 about why didn't you keep the Bear Stearns statements? 15 MR. DAVINE: Why didn't he? 16 DR. CHU: Yeah. 17 MR. DAVINE: I've asked that question on 18 several occasions myself. There's no -- there's no real 19 good answer to that one. The only -- the only response 20 is things were -- things were crazy at that point in 21 time with -- with the taxpayer's business and ultimately 22 the investment turned out to be worthless. 23 And so, his -- I -- 24 MR. WARD: Go ahead. 25 MR. DAVINE: His understanding or his feeling 26 was what do I need this stuff for? It's worthless. 27 MR. WARD: When -- when, you know -- Direct Web 28 started and finished in less than nine months and I had 23 1 petty much lost everything that I had -- I had made 2 during the dot com boom in this one investment; I didn't 3 really think to keep statements of -- that had a cost 4 basis of zero having lost everything in my investments, 5 to be very honest with you. 6 MS. YEE: Okay. Other questions or comments, 7 Members? 8 MR. LEONARD: Yes. 9 MS. YEE: Mr. Leonard. 10 MR. LEONARD: I wanted to focus on the 11 worthless stock deduction and your last statement can -- 12 if -- if we -- if we choose to allow you to pursue that, 13 would you be able to show -- what was the total universe 14 of stock you owned in the company by a number of shares 15 or something and then -- and what title it was held, you 16 individually or the IRA, and then -- and then what -- 17 and then which of those particular pieces of stock 18 shares you took the deduction already for as worthless, 19 and then what's remaining. 20 MR. WARD: I -- the only contact, Mr. Leonard, 21 I have is with the Chief Legal Counsel who fortunately 22 happens to be the person on Direct Web's end collecting 23 the funds. So, we can certain -- we were -- we were not 24 pursuing that before but we can certainly pursue that 25 moving forward. 26 MR. LEONARD: Franchise Tax Board, could you 27 help me out. On the proposed assessments that are 28 before us -- 24 1 MS. SIBERT: Okay. 2 MR. LEONARD: -- if we find that there was a 3 distribution from the IRA that's taxable -- 4 MS. SIBERT: Yes. 5 MR. LEONARD: -- and then ask you to re-look at 6 the return as to worthless stock, how much of this 7 assessment is in the IRA distribution that's before us? 8 MS. SIBERT: The entire -- the entire 9 assessment. There is a part of the tax that is 10 connected with the early distribution penalty. 11 MR. LEONARD: Right. 12 MS. SIBERT: So, the 1999 IRA distribution was 13 $1,299,194. Of that we've assessed 153,305 in tax. 14 MR. LEONARD: Right. So, that's all related to 15 the IRA distribution? 16 MS. SIBERT: Yes. 17 MR. LEONARD: So, if we were to redo the 18 returns for those years for the worthless stock 19 reduction -- deduction, that would be separate from 20 these numbers? 21 MS. SIBERT: Yes. 22 MR. LEONARD: Okay. Thank you. 23 MS. SIBERT: May I also add one more thing? 24 MR. LEONARD: Yeah, give me the whole answer. 25 Sure. 26 MS. SIBERT: Okay, is that to allow the loss it 27 would need to be demonstrated for the capital loss that 28 the amounts did not go into a second IRA, which would be 25 1 contradicting what the Appellant has said in his 2 declaration. 3 He is indicating that the amounts were put into 4 the second IRA. If that is true, then he would have to 5 follow the loss rules for taking -- taking a loss in 6 your IRA, which involve the Schedule A limitations and 7 also proving that you no longer have -- you closed all 8 your IRAs. 9 MR. LEONARD: Let me ask it differently because 10 I understand that. 11 MS. SIBERT: Okay. 12 MR. LEONARD: And -- and that would be a 13 contradiction if we were to redo his return. But if we 14 rule that despite what he said that he did distribute 15 it, would he be allowed then to pursue the worthless 16 stock reduction -- deduction as if he were the owner, 17 not his IRA the owner? 18 MS. SIBERT: Yes, if the conclusion is made 19 that that amount was not -- was not rolled over into the 20 second IRA. 21 MR. LEONARD: Correct. 22 MS. SIBERT: Yes. 23 MR. LEONARD: That -- that would be our ruling 24 on that and then he'd be bound by that no matter what 25 his prior statements were. Okay. Thank you. 26 MS. SIBERT: Thank you. 27 MS. YEE: Thank you. 28 Other questions or comments, Members? 26 1 Hearing none, is there a motion? 2 DR. CHU: Move to take the matter under 3 submission. 4 MS. YEE: Motion by Dr. Chu to take this matter 5 under submission. 6 Is there a second? 7 MS. MANDEL: Second. 8 MS. YEE: Seconded by Ms. Mandel. 9 Without objection, that motion carries. 10 Thank you very much, gentlemen. We will discuss your 11 matter later today and send you a written notice of our 12 decision. 13 MR. WARD: Thank you. 14 MR. DAVINE: Thank you. 15 MS. YEE: Thank you. 16 ---oOo--- 17 18 19 20 21 22 23 24 25 26 27 28 27 1 REPORTER'SCERTIFICATE 2 3 State of California ) 4 ) ss 5 County of Sacramento ) 6 7 I, BEVERLY D. TOMS, Hearing Reporter for the 8 California State Board of Equalization certify that on 9 February 25, 2009 I recorded verbatim, in shorthand, to 10 the best of my ability, the proceedings in the 11 above-entitled hearing; that I transcribed the shorthand 12 writing into typewriting; and that the preceding 27 13 pages constitute a complete and accurate transcription 14 of the shorthand writing 15 16 Dated: May 18, 2009. 17 18 19 ____________________________ 20 BEVERLY D. TOMS 21 Hearing Reporter 22 23 24 25 26 27 28 28