BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION 5901 Green Valley Circle, Room 207 Culver City, California REPORTER'S TRANSCRIPT FEBRUARY 25, 2009 FINAL ACTIONS Reported by: Beverly D. Toms No. CSR 1662 1 1 2 P R E S E N T 3 4 For the Board Betty Yee of Equalization: Chair 5 Judy Chu 6 Vice-Chair 7 Bill Leonard Member 8 Michelle Steel 9 Member 10 Marcy Jo Mandel Appearing for John 11 Chiang, State Controller (per Government Code 12 Section 7.9) 13 Diane Olson Chief, Board 14 Proceedings Division 15 16 ---oOo--- 17 18 19 20 21 22 23 24 25 26 27 28 2 1 ITEM A1 2 Culver City, California 3 February 25, 2009 4 ---oOO--- 5 MS. OLSON: Our next items are final actions. 6 A1, Sydell Dublin. 7 MS. YEE: Okay, we have first item, item A1, 8 Sydell Dublin. Is there a motion? 9 DR. CHU: I would move to sustain the Franchise 10 Tax Board. 11 MS. YEE: Okay, motion by Dr. Chu to sustain 12 the Franchise Tax Board. Is there a second? 13 MS. MANDEL: Second. 14 MS. YEE: Second by Ms. Mandel. Without 15 objection, that motion carries. 16 ---oOo--- 17 18 19 20 21 22 23 24 25 26 27 28 3 1 ITEMB2 2 MS. OLSON: Our next item is B2, Norman C. 3 Turley. 4 MS. YEE: Okay. Item B2, Norman C. Turley. Is 5 there a motion? 6 DR. CHU: I move to sustain the Franchise Tax 7 Board. 8 MS. YEE: Motion by Dr. Chu to sustain the 9 Franchise Tax Board. 10 Is there a second? 11 MS. MANDEL: Second. 12 MS. YEE: Second by Ms. Mandel. 13 Without objection that motion carries. 14 ---oOo--- 15 16 17 18 19 20 21 22 23 24 25 26 27 28 4 1 ITEM B4. 2 MS. OLSON: Our next item is B4, Nassco 3 Holdings, Inc. 4 MS. YEE: Okay. Next item is B4, Nassco 5 Holdings, Incorporated. Is there a a motion? 6 MS. STEEL: Move to grant. 7 MS. YEE: Okay. Motion by Ms. Steel to grant. 8 Is there a second? 9 MR. LEONARD: I'll second. 10 MS. YEE: Second by Mr. Leonard. Discussion? 11 Comments? 12 Please call the roll. 13 MS. OLSON: Madam Chair. 14 MS. YEE: No. 15 MS. OLSON: Mr. Leonard. 16 MR. LEONARD: Aye. 17 MS. OLSON: Ms. Steel. 18 MS. STEEL: Aye. 19 MS. OLSON: Ms. Yee. 20 MS. YEE: No. 21 MS. OLSON: Ms. Mandel. 22 MS. YEE: I think -- 23 MS. OLSON: Excuse me, Ms. -- Dr. Chu. 24 I am so sorry. 25 Dr. Chu. 26 DR. CHU: Aye. 27 MS. OLSON: Ms. Mandel. 28 MS. MANDEL: I'm sorry, could you -- what was 5 1 the -- I'm sorry, I got confused. 2 MS. YEE: We voted "no" once. 3 MS. MANDEL: I didn't have enough food today. 4 MS. YEE: I -- I am. 5 MS. MANDEL: My jerky -- I maybe -- maybe have 6 to eat the jerky soon. And I apologize for all you 7 sitting out there that you don't have your own snack 8 bag. Could you -- could you -- 9 MS. OLSON: Yes. Ms. -- Ms. Yee is a "no" 10 vote. Mr. Leonard is a "yes" vote. Ms. Steel is a 11 "yes" vote. Dr. Chu is a "yes" vote. 12 MS. MANDEL: Okay. And the motion was to 13 grant? 14 MS. OLSON: Yes. 15 MS. MANDEL: Yes. 16 MS. OLSON: Motion carries. 17 MS. YEE: Okay. 18 ---oOo--- 19 20 21 22 23 24 25 26 27 28 6 1 ITEM B5. 2 MS. OLSON: Our next item is B5, Randolph C. 3 Read. 4 MS. YEE: Okay. Item B5, Randolph C. Read. I 5 think we had some adjustments potentially here. Yes? 6 Appeals, can you refresh our memory? 7 MS. KELLY: We have some -- well, first of all, 8 Issue One was conceded by FTB and so that will be 9 reflected in the letter decision. 10 MS. YEE: Okay. 11 MS. KELLY: Also, FTB conceded some amounts 12 with respect to alimony payments, and I think that's 13 just for 2001. 14 MS. YEE: Correct. And I think -- 15 MS. KELLY: And the amounts -- the amounts 16 are -- this will take just one moment, I'm sorry. 17 MS. YEE: Okay. 18 MS. KELLY: Here they are. Okay, let's see. 19 It looks like FTB was conceding -- I think it was seven 20 payments of 13,500. Let me confirm that. 21 Ms. Mandel, did you -- 22 MS. MANDEL: Well -- 23 MS. KELLY: -- get a different number? Was it 24 8 or 7? 25 MS. MANDEL: I -- what I wrote down was 13-5 26 times 8 plus 22. 27 MS. KELLY: That's the number. I wasn't sure 28 what the 22 was. 7 1 MS. MANDEL: The 22 was his testimony about two 2 $11,000 payments. 3 MS. KELLY: All right. Right. And so what we 4 have are the payments supported by the exhibit 5 declaration as signed, plus the -- the check amounts, 6 the cancelled checks. So, that's one set of amounts. 7 And then plus the 2200 which is from the declarations. 8 So, all together -- I need to get a calculator, 9 don't I? 10 So, 13-5 times 8 -- 11 MS. YEE: 108,000? 12 MS. STEEL: It's 118,000. 13 MS. KELLY: -- is 108,000. 14 MS. STEEL: Plus 22. 15 MS. KELLY: Plus 2200. 16 MS. STEEL: Yeah. 17 MR. LEONARD: Thousand. 18 MS. MANDEL: 22,000. 19 MS. STEEL: 22,000. 20 MS. YEE: 22,000, yeah. 21 MS. KELLY: 130,000 is the total. 22 MS. MANDEL: Right, that's the other number I 23 wrote down, like you said. 24 MS. YEE: Okay. Very well. 25 So, is there a motion reflecting -- noting 26 those adjustments? 27 DR. CHU: Noting the adjustments I move to 28 sustain the Franchise Tax Board. 8 1 MS. YEE: Okay. Motion by Dr. Chu. Is there a 2 second? 3 MR. LEONARD: Second. 4 MS. YEE: Second by Mr. Leonard. Without 5 objection, such will be the order. 6 ---oOo--- 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 9 1 ITEM B6. 2 MS. OLSON: Our next item is B6, Douglas A. 3 Shiepe. 4 MS. YEE: Okay. Item B6, Douglas A. Shiepe. 5 Is there a motion? 6 DR. CHU: I move to sustain the Franchise Tax 7 Board. 8 MS. YEE: Okay. Motion by Dr. Chu to sustain 9 the Franchise Tax Board. Is there a second? 10 I will second that motion. 11 Discussion? Comments? 12 Without objection, such will be the order. 13 ---oOo--- 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 10 1 ITEM B8 . 2 MS. OLSON: Our next item is B8, Andrew 3 Benjamin Aames. 4 MS. YEE: Okay. Item B8, Andrew Benjamin 5 Aames. Is there a motion? 6 DR. CHU: I move to sustain the Franchise Tax 7 Board, noting the adjustment down to $431. 8 MS. YEE: Okay. 9 MS. MANDEL: Second. 10 MS. STEEL: With interest? 11 DR. CHU: I think there was a small -- 12 MS. STEEL: That $47. 13 DR. CHU: There was -- there was just a small 14 amount of interest. 15 MS. YEE: Yeah. 16 DR. CHU: But -- but they had -- 17 MS. STEEL: You're not happy with those 18 interest, either. 19 DR. CHU: I think there -- 20 MS. STEEL: There was just -- 21 MS. YEE: It was -- 22 MS. STEEL: Yeah. 23 MS. YEE: Yeah. For a certain period, right. 24 MS. STEEL: Okay. 25 MS. YEE: But noting those -- the liability and 26 interest adjustment -- motion by Dr. Chu to sustain the 27 Franchise Tax Board so noting those adjustments. Is 28 there a second? 11 1 MS. MANDEL: Yes. 2 MS. YEE: Second by Ms. Mandel. 3 Without objection? 4 MR. LEONARD: Oh, I object. 5 MS. YEE: Okay, please call the roll. 6 MS. OLSON: Madam Chair. 7 MS. YEE: Aye. 8 MS. OLSON: Mr. Leonard. 9 MR. LEONARD: No. 10 MS. OLSON: Ms. Steel. 11 MS. STEEL: Aye. 12 MS. OLSON: Ms. Yee. 13 DR. CHU: Aye. 14 MS. OLSON: I'm sorry, Dr. Chu. I am so 15 sorry. 16 DR. CHU: And I answer to it. 17 MS. OLSON: Well, I'm sorry. I have it written 18 down wrong. 19 DR. CHU: Aye. 20 MS. OLSON: Ms. Mandel. 21 MS. MANDEL: Aye. 22 MS. OLSON: Force of habit. That is so sorry. 23 I apologize. 24 Our next item -- 25 MS. YEE: Okay, that motion carries. 26 MS. OLSON: -- is B9, Matt Ward. 27 ---oOo--- 28 12 1 ITEM B9. 2 MS. YEE: Okay, item B9, Matt Ward. Is there a 3 motion? 4 DR. CHU: I move to sustain the Franchise Tax 5 Board. 6 MS. YEE: Motion by Dr. Chu to sustain the 7 Franchise Tax Board. 8 Is there a second? 9 MS. MANDEL: Second. 10 MS. YEE: Second by Ms. Mandel. 11 MR. LEONARD: Question. 12 MS. YEE: Mr. Leonard, yes. 13 MR. LEONARD: I guess I need to clarify the 14 motion. Is -- is the motion to sustain the Franchise 15 Tax Board as to the IRAs being distributed and therefore 16 taxable? 17 It -- it seemed to me the Franchise Tax Board 18 was saying that if we ruled that way then -- then 19 there's still a separate issue as to the deduction that 20 might be able to be taken for the worthless stock 21 certificates that remain, which -- there's -- I think 22 they concede it, but I don't want to speak for them. 23 You can't -- we can't do both. 24 If they remain in the IRA they can't be 25 deducted, but if they're outside then it's -- it's his 26 individual stock certificates which became worthless and 27 therefore he could file a personal return amendment to 28 them. 13 1 So, is -- is that the motion? Is it limited to 2 ruling that the IRAs did not roll over and they were 3 distributed and are therefore taxable? 4 DR. CHU: You mean because you're saying that 5 he could subsequently file something? 6 MR. LEONARD: Right. 7 DR. CHU: Yeah, okay. I -- 8 MR. LEONARD: It would seem a logical way -- 9 DR. CHU: I -- I would agree with that, yeah. 10 MR. LEONARD: -- we could give kind of one or 11 the other. 12 DR. CHU: Right. 13 MR. LEONARD: But not both or neither. 14 DR. CHU: Okay. Okay. Well, Appeals can help 15 us on this. 16 MR. LEONARD: Aren't I right, Appeals? 17 MS. YEE: Mr. Thompson. 18 MR. THOMPSON: The -- in general a motion to 19 sustain without more I would just regard it as a motion 20 to sustain the -- the Notice Of Assessment. So -- 21 MR. LEONARD: That's why I asked my question, 22 because it came to me as briefed on three issues. But 23 as I go through it, it struck me that the -- the three 24 issues were not cumulative. It was -- you make one 25 choice, you basically decided the second choice. And 26 I -- I'm -- I want to make -- that's what I want to 27 clarify, is that's -- 28 MR. THOMPSON: Well, I think -- yeah, if I 14 1 understand you correctly, you're saying for you, if 2 you -- 3 MR. LEONARD: I support Dr. Chu's motion to -- 4 to declare that he personally took the IRAs and did not 5 roll them over, because he's been able -- unable to 6 prove that. 7 MR. THOMPSON: But in your -- but flowing from 8 that for you is the idea that they should get a 9 worthless stock deduction, is that -- 10 MR. LEONARD: That he -- they should have an 11 opportunity to amend his return to prove that. I mean, 12 there was still a question of how much -- how many 13 shares he owed and -- owned and whether -- and how many 14 shares he had already taken a worthless stock deduction 15 upon. 16 MS. KELLY: I think you may be proposing that 17 the decision is split, which is problematic for purposes 18 of the petition for rehearing. 19 So if you're interested in further briefing, I 20 think that -- I recommend not deciding part of the 21 appeal and requesting further briefing on another part 22 of the appeal. It makes it difficult for the parties to 23 know when the petition for rehearing period begins to 24 run. 25 MR. LEONARD: Well, that's my -- I thought 26 Franchise Tax Board agreed that if we ruled with them on 27 the lack of rollover, that it -- the Issue Three went 28 away. There was -- there was -- there would be the 15 1 possibility of a worthless stock deduction. 2 MS. KELLY: The possibility -- 3 MR. LEONARD: But he couldn't have both. 4 MS. KELLY: Oh, I see what you're saying. In 5 other words, that they -- well, that's -- that's 6 difficult because if you sustain FTB then FTB for all 7 intents and purposes is free to collect on the entire 8 notice of action and they're compelled whatsoever to 9 look at any additional documentation on it. 10 MR. THOMPSON: Unless -- they could -- I 11 suppose they could file a refund claim but -- 12 MS. KELLY: Right. 13 MR. THOMPSON: -- you have to pay it first. 14 I -- I mean, if you think that they may be able 15 to substantiate the worthless stock deduction then I 16 think the cleanest route would just be to get additional 17 briefing on that issue and either bring it back for a 18 hearing or -- or otherwise. 19 MR. LEONARD: It's more than thinking. He's -- 20 he testified that he had not yet claimed a worthless 21 stock deduction on the stock that was in -- one time had 22 been in the IRA. Franchise Tax Board wasn't certain 23 what the actual share numbers were, but a pre -- 24 appeared to agree in principle that he probably hadn't 25 taken that deduction because he was arguing that they 26 were in an IRA and therefore not -- not ripe to take the 27 deduction. 28 So I think there's an agreement on -- on the 16 1 status that what's still out there is the facts of how 2 many shares remain to be declared worthless. 3 I guess we also agree they're all worthless. 4 So, how many shares that he owned at one time has he yet 5 to have taken the worthless stock deduction. Because 6 they were caught up in his IRA at one time. And 7 that's -- that I -- I think Dr. Chu's motion covers 8 that, but I -- I mean, that's why I'm raising it. 9 MS. KELLY: I think that the -- a motion to 10 sustain FTB disposes of that -- disposes of that issue. 11 In favor of FTB. 12 MR. LEONARD: In favor -- so -- 13 MR. THOMPSON: I'm sorry, could we -- we have 14 just a second? 15 MR. LEONARD: Yeah, that -- 16 MS. KELLY: I think I may have misunderstood. 17 One moment. 18 MR. LEONARD: Can -- can we split the issues 19 and make a motion like we've done before? 20 MR. THOMPSON: No -- no, I'm sorry, Amy's 21 exactly right. The only avenue I would see would be 22 paying the tax and coming -- and then having a claim for 23 refund. 24 MR. LEONARD: Why -- why can't the motion be 25 on -- on the -- on the IRA rollover we find for 26 Franchise Tax Board; and on the issue of the worthless 27 stock deduction we give leave for the taxpayer to amend 28 his return? 17 1 MR. THOMPSON: We could do that. Only -- I 2 guess we could do that. 3 I -- it's not going to be final I think until 4 we reach a determination on the second issue, in any 5 event. And if, you know, someone comes up with 6 something or someone changes a view, to me it's cleaner 7 just to say, look, we'd like additional briefing on this 8 issue, if you think it might be productive and get the 9 evidence regarding the number of shares in the return 10 and then let's -- we'll bring it back. And, you know, 11 the parties heard the Board's tentative views and they 12 can listen to this. And then you can decide whether to 13 sustain the NOAs or deny it or sustain it in part and 14 deny it in part. 15 MS. YEE: Yeah, I -- 16 MR. LEONARD: Dr. Chu, would you be willing to 17 limit your motion to the issue of the IRA distribution 18 being taxable and the early distribution penalty being 19 applicable? 20 DR. CHU: It seems to me you're saying they 21 have to be together. Is that you're saying? 22 MS. KELLY: Right, a decision on -- on the 23 issues needs to be made at the same time in order for it 24 to be clear when the Board's determination was made and 25 when the petition for rehearing period begins to run. 26 MR. THOMPSON: Yeah, the pet -- we'd want to 27 get a petition for rehearing on the first issue while we 28 got briefing going on on the second issue. 18 1 There's some mechanics -- 2 DR. CHU: Yeah. 3 MR. THOMPSON: -- that get involved. 4 MS. YEE: Yeah, I -- I think -- 5 MR. THOMPSON: It's complex. 6 MS. YEE: -- putting this over for further 7 briefing on the worthless stock issue is appropriate and 8 it seemed to me the taxpayer was willing to pursue that 9 issue further, because he had not even really put proper 10 time into that issue. 11 MR. LEONARD: Well, and the FTB was willing to 12 consider it further. So, I mean, there appears to be 13 some consensus as how do we get there. 14 MS. YEE: Yeah. And I think just given the 15 mechanics of when our determination would go final, we 16 probably want to consider all the issues at the same 17 time, and allow more time for further briefing on the 18 worthless stock issue. 19 MS. KELLY: Uh-huh. 20 MS. YEE: So -- 21 MS. STEEL: So, we are asking FTB to 22 recalculate. That if -- 23 MR. THOMPSON: Can I propose just -- 24 MS. STEEL: -- that is taxable -- 25 yeah. 26 MR. THOMPSON: -- we ask the parties for a 27 30-30-30 on the worthless stock issue with the briefing 28 and evidence, and we bring it back for a hearing. If 19 1 it -- if that's the view of the Board. 2 I mean, the Board could -- could -- could 3 determine they haven't shown the worthless stock issue 4 and -- and rule on that basis. I'm not -- you know, I'm 5 just providing alternatives. 6 MS. KELLY: I think -- I think the question is 7 whether or not you want it to come back for another oral 8 hearing or to come back on the consent calendar after 9 further briefing. 10 DR. CHU: I think that's better. 11 MS. YEE: Yeah. 12 DR. CHU: On a nonappearance calendar. 13 MS. YEE: Yeah, let's give the parties 14 additional time to brief on the worthless stock issue 15 and then have it come back on a nonappearance calendar. 16 MS. KELLY: Okay. 17 MS. YEE: Okay. 18 MS. MANDEL: Is that the motion and the second? 19 MS. YEE: Yeah, I'll -- I'll so move. 20 MS. STEEL: But let's find out that, you know, 21 he deducted over $3 million that year so he had enough 22 income to deduct on the top of it. Because he had over 23 $3 million -- 24 MR. LEONARD: Either he did or didn't. 25 MS. STEEL: -- loss that year, so we -- if he 26 has it then, you know, we can -- I mean he can deduct 27 more -- 28 MR. LEONARD: He either did or didn't. 20 1 MS. STEEL: -- but if he made a loss that year, 2 I mean, he filed the income tax return as a loss, then 3 there's nothing to deduct any more. 4 MS. YEE: And I think part of the briefing is 5 to really -- as we look at this issue, is to what extent 6 we can allow the worthless stock deduction -- 7 MS. KELLY: Exactly. 8 MS. YEE: -- based on, yeah. 9 MR. THOMPSON: Yeah. 10 MS. KELLY: Yeah. 11 MS. STEEL: Okay. 12 MS. YEE: Okay. Motion by Yee, second by Chu 13 to allow a 30-30-30 on -- on this matter to allow 14 further briefing on the issue of the worthless stock 15 deduction. 16 Is there objection? 17 Hearing none, such will be the order. 18 ---oOo--- 19 20 21 22 23 24 25 26 27 28 21 1 ITEM B10. 2 MS. OLSON: Our last item today is B10, Haik 3 Arakelian, excuse me, and Alice Arakelian. I'm sorry, 4 I'm tired. I apologize. 5 MR. LEONARD: You didn't get lunch, either, did 6 you? 7 MS. OLSON: No. 8 MS. YEE: Okay. We are on item B10, Haik 9 Arakelian -- Arakelian. 10 MS. OLSON: Somebody started something. 11 MR. LEONARD: Arakelian. 12 DR. CHU: Arakelian. 13 MS. YEE: Arakelian. Okay, excuse me. 14 Okay, is there a motion? 15 MS. STEEL: I want to move to grant the 16 petition because taxpayers have shown that Federal AGI 17 should not be controlling on whether or not they make -- 18 they may take a charitable contribution deductions in 19 this case for year 2003 tax year. 20 MS. YEE: Okay. Motion by Ms. Steel to grant. 21 Is there a second? 22 MR. LEONARD: Second. 23 MS. YEE: Seconded by Mr. Leonard. 24 Please call the roll. 25 MS. OLSON: Madam Chair. 26 MS. YEE: No. 27 MS. OLSON: Mr. Leonard. 28 MR. LEONARD: Aye. 22 1 MS. OLSON: Ms. Steel. 2 MS. STEEL: Aye. 3 MS. OLSON: Dr. Chu. 4 DR. CHU: No. 5 MS. OLSON: Ms. Mandel. 6 MS. MANDEL: No. 7 MS. YEE: Okay, that motion -- 8 MS. OLSON: Motion fails. 9 MS. YEE: -- fails. Is there another motion? 10 DR. CHU: I move to sustain the Franchise Tax 11 Board noting the adjustment to 1,636. 12 MS. YEE: Okay. Motion by Dr. Chu to sustain 13 the Franchise Tax Board, noting the adjustment to -- of 14 the assess -- 15 MS. OLSON: Yes. 16 MS. YEE: -- noting the adjustment to $1,636. 17 Is there a second? 18 MS. MANDEL: Second. 19 MS. YEE: Second by Ms. Mandel. 20 Please call the roll. 21 MS. OLSON: Madam Chair. 22 MS. YEE: Aye. 23 MS. OLSON: Mr. -- Mr. Leonard. 24 MR. LEONARD: No. 25 MS. OLSON: Ms. Steel. 26 MS. STEEL: No. 27 MS. OLSON: Dr. Chu. 28 DR. CHU: Aye. 23 1 MS. OLSON: Ms. Mandel. 2 MS. MANDEL: Aye. 3 MS. OLSON: Motion carries. 4 That concludes our business for today. 5 MS. YEE: Okay. We are recessed until 9:30 6 tomorrow morning. Thank you everyone for your patience. 7 ---oOo--- 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 24 1 REPORTER'S CERTIFICATE. 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 24 13 pages constitute a complete and accurate transcription 14 of the shorthand writing. 15 16 Dated: March 18, 2009. 17 18 19 ____________________________ 20 BEVERLY D. TOMS 21 Hearing Reporter 22 23 24 25 26 27 28 25