1 BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION 2 450 N STREET 3 SACRAMENTO, CALIFORNIA 4 5 6 7 REPORTER'S TRANSCRIPT 8 APRIL 15, 2009 9 10 11 H TAX PROGRAM NONAPPEARANCE MATTERS 12 ADJUDICATORY 13 H2 FRANCHISE AND INCOME TAX MATTERS 14 15 16 17 18 19 20 21 Reported by: Juli Price Jackson 22 No. CSR 5214 23 24 25 26 27 28 1 1 2 P R E S E N T 3 4 For the Board Betty T. Yee of Equalization: Chair 5 6 Judy Chu Vice-Chair 7 Bill Leonard 8 Member 9 Michelle Steel Member 10 Marcy Jo Mandel 11 Appearing for John Chiang, State Controller 12 (per Government Code Section 7.9) 13 Diane G. Olson 14 Chief, Board Proceedings Division 15 16 17 ---oOo--- 18 19 20 21 22 23 24 25 26 27 28 2 1 450 N STREET 2 SACRAMENTO, CALIFORNIA 3 APRIL 15, 2009 4 ---oOo--- 5 MS. OLSON: Next item is H2, Franchise and 6 Income Tax matters. 7 ---o0o--- 8 H2 1 THOMAS A. BLADOW 9 No. 374589 10 ---o0o--- 11 MS. YEE: Okay, item H2, Franchise and Income 12 Tax matters, sub item, 1, Thomas A. Bladow. 13 MS. OLSON: Board Proceedings has not received 14 a contribution disclosure for Jonathon Lee, agent. 15 DR. CHU: Okay. Is there a motion on 16 sub item 1? 17 DR. CHU: Move to sustain the Franchise Tax 18 Board. 19 MS. YEE: Okay. Motion by Dr. Chu to sustain 20 the Franchise Tax Board. 21 Is there a second? 22 MS. STEEL: Second. 23 MS. YEE: Second by Ms. Steel. 24 Without objection, that motion carries. 25 ---o0o--- 26 27 28 3 1 ---o0o---. 2 H2 2 MARLENE D. CANTER 3 No. 421269 4 ---o0o--- 5 MS. YEE: Sub item 2, Marlene D. Canter. 6 We have a number of folks in the audience that, 7 I think, are available to address this, if necessary. 8 Appeals, maybe you can refresh our memory as to 9 where we left off here. 10 MS. KELLY: Yes, Madam Chairwoman. 11 We have two motions that were undertaken under 12 the last final action. And we also have the briefing 13 from the parties that was requested for the two 14 calculations under those two motions. 15 And if you like, I'll go ahead and read those 16 motions. 17 MS. YEE: Okay. 18 MS. MANDEL: Well, the motions aren't currently 19 pending, are they? 20 MR. LEONARD: No. 21 MS. MANDEL: I mean, we asked for -- 22 MR. LEONARD: Neither one was -- 23 MS. MANDEL: -- information. 24 MS. YEE: There were two approaches that we had 25 asked for both parties to -- 26 MS. KELLY: Exactly. 27 MS. YEE: -- give. Yes. 28 We can call them approach No. 1 and approach 4 1 No. 2. 2 MS. KELLY: There you go. 3 MS. MANDEL: Okay. 4 MS. YEE: Okay. Do you want to go ahead, 5 Ms. Kelly, and describe maybe the first one? 6 MS. KELLY: Describe motion 1, okay, great. 7 Motion 1 was to reverse Franchise Tax Board 8 with respect to issue 1, the use of the maximum stated 9 amount method of valuation and rule in favor of 10 Appellant for the application of the fair market value 11 method of valuation for purposes of 453 A. The face 12 amount the obligation outstanding as of the close of the 13 taxable year is represented by the fair market valued 14 determined by Appellant's appraisal. That was $29,550, 15 330, less adjustments for payments to Lee Canter owing 16 under the redemption agreement and less banker's fees. 17 Motion 2 was to recognize the installment sale 18 treatment on the underlying transaction; grant the 19 taxpayer's appeal with respect to the use of the fair 20 market method of valuation; the face of the amount of 21 the obligation again being $29,550,330, less adjustments 22 for payments to Lee Canter under the redemption 23 agreement, payments to the key employees under the 24 cancellation continuing obligation agreements and 25 banker's fees. 26 MS. YEE: Okay. 27 MS. KELLY: Now the third thing that the Board 28 Members asked for was response to a question with 5 1 respect to motion 1. 2 And that was whether any resulting reductions 3 flowing from motion 2 and the other tax amounts, 4 representing the 453 A adjustments, on the NPA for the 5 appeals years may allow for increases to the tax table 6 amounts -- in other words, the underlying income tax 7 computation; and whether FTB was prevented from making 8 such adjustments. 9 That was the third component of the request for 10 additional information. 11 MS. YEE: Okay. Questions? Comments? 12 MS. MANDEL: Well, upon sort of reviewing 13 everything, it's still of the view that all of the 14 payments should be reflected in the cap A adjustment. 15 So, that would be the payments to Lee Canter, 16 as well as to the key employees. 17 I don't recall that there was any particular 18 dispute about the banker's fees. 19 MS. KELLY: 900,000, I believe. 20 MS. YEE: All right. 21 MS. MANDEL: In terms of doing the cap A 22 adjustment. 23 MS. YEE: Can I get some clarification on this 24 alternative 2 or approach No. 2? 25 Does this approach assume recognizing 26 installment sale treatment of the underlying 27 transaction? 28 MS. KELLY: Exactly, on motion 2 -- 6 1 MS. MANDEL: If that motion were to be made 2 again? 3 MS. KELLY: -- exactly, if it were. 4 MS. YEE: Okay. All right 5 MS. MANDEL: But, you know, the -- when that 6 motion -- when I made that motion it was because there 7 had been this fuss about FTB saying, "Well, they never 8 reported on an installment basis in the first place," as 9 though that was some objection to how the taxpayer 10 wanted the 453 A calculated. 11 But Franchise Tax Board, apparently, reviewed 12 the income tax treatment and didn't make any changes. 13 And, on reflection, I mean, I had thought it wasn't 14 going to make -- it shouldn't really make any difference 15 in the ultimate tax, that the taxpayer only had a 16 certain amount of gain, you know, had a certain amount 17 of net income, if you will, from the overall transaction 18 and that's -- that would be whatever it was and was 19 reported over all of the years that the, you know, 20 monies were coming in and monies were going out. 21 And maybe not all of those years are before us, 22 but in the grand scheme of things, it would have been -- 23 you know, just thinking about it conceptually, it would 24 have been a timing difference, in what year -- perhaps 25 it would have been a timing difference, that's what you 26 know, could have -- could have come up on audit and that 27 overall, it -- as among all of the years overall, it was 28 only a certain amount of net income, ultimately, to the 7 1 bottom line of the tax return that would generate -- 2 generate tax. 3 But the -- on looking at all of this, you know, 4 paperwork to date, you know, it just seems like a 5 whole -- potentially a whole new issue or there is a 6 whole new issue that the FTB didn't disturb the 7 treatment at audit, perhaps because looking at all of 8 the years, it shouldn't make an overall difference on 9 tax paid on the ultimate bottom line net income. 10 And what they've been fighting about is 11 whether there should be 453 A and how much it should be. 12 So, in looking at the, you know, taxpayer's 13 calculation, as a sort of reasonable calculation -- that 14 they're putting forth as a reasonable calculation -- if 15 you were to do -- you know, switch up the underlying 16 transaction, there's not a -- there's not a change in 17 the ultimate bottom line tax. 18 So, that's why it just seems like it was -- has 19 been before us as a fight on 453 A and maybe just, you 20 know, needs to really stay a fight on 453 A at this 21 point. 22 MS. YEE: Okay. 23 MS. MANDEL: You know, if I -- but that's -- 24 that's why I kind of made that other motion, it was kind 25 of like a reaction to this late -- 26 MS. YEE: Okay -- 27 MS. MANDEL: -- this late charge assertion of, 28 "Well, it was never reported as an installment sale." 8 1 FTB didn't touch it anyway. 2 And if it wasn't an installment sale, there is 3 no cap A, in any event. So, it just -- but for the 4 cap A, you know, the initial comments that we made last 5 time about all of the -- I don't see any distinction to 6 make between the payments to the ex-husband and the 7 payments to the key employees -- 8 MS. YEE: Yeah. 9 MS. MANDEL: -- based on all of the evidence 10 and the testimony. 11 MS. YEE: Yeah, I -- Ms. Mandel, I have had an 12 opportunity to go back and examine the evidence as well. 13 And I think I am persuaded that, you know, given the -- 14 the nature of the sale and the structure of the 15 agreement and the fact that had Miss Canter not assumed 16 sole liability for -- or responsibility for paying the 17 key officers, they probably would not have been involved 18 and certainly would not have resulted in the profit that 19 actually ultimately was realized. 20 So, I think I'm persuaded that there is 21 probably little distinction between the payout to 22 Mr. Canter and to the key officers. 23 So, I'm certainly moved on that point since the 24 last time. 25 MS. MANDEL: Well, if you're prepared for a 26 motion, then I would make the motion, which would be the 27 453 A adjustment accounting for the payments to Lee 28 Canter, as well as the key officers, and that 900,000 of 9 1 banker's fees. 2 And my understanding is that at this point -- 3 am I correct -- that there is no disagreement of what 4 that calculation would be? 5 MS. KELLY: Right. The parties are in 6 agreement on the 453 A charges under motion 2 -- 7 motion 1, I'm sorry, scenario 2. 8 MS. MANDEL: And this is -- right, so that this 9 motion is that piece, the 453 A piece. 10 MS. YEE: Okay. We have a motion by Ms. Mandel 11 to -- let me see if I can -- to basically grant the 12 appeal with respect to the use of the fair market value 13 and to -- less the adjustments for payments made to Lee 14 Canter, the key officers, and the banker's fee. 15 Is there a second? 16 MR. LEONARD: Second. 17 MS. YEE: Second by Mr. Leonard. 18 Please call the roll. 19 DR. CHU: Well, before -- 20 MS. YEE: Dr. Chu? 21 DR. CHU: I would -- I still -- I still would 22 not support the inclusion of the three employees in the 23 adjustment. 24 These were payments that were already reported 25 by the Appellant and accepted by the Respondent as an 26 ordinary and necessary business deduction. And it ends 27 up being a double benefit, I believe. 28 And, in addition, there is a distinction 10 1 between Lee Canter, the stockholder, versus the three 2 employees who had a side agreement, basically. 3 So, I would have to vote no on this motion. 4 MS. YEE: Okay, please call the roll. 5 MS. OLSON: Madam Chair? 6 MS. YEE: Aye. 7 MS. OLSON: Mr. Leonard? 8 MR. LEONARD: Aye. 9 MS. OLSON: Ms. Steel? 10 MS. STEEL: Aye. 11 MS. OLSON: Dr. Chu? 12 DR. CHU: No. 13 MS. OLSON: Ms. Mandel? 14 MS. MANDEL: Aye. 15 MS. OLSON: Motion carries. 16 ---o0o--- 17 18 19 20 21 22 23 24 25 26 27 28 11 1 H2 3 ELIAS ERAZO AND GRISELDA ERAZO 2 No. 441320 3 ---o0o--- 4 MS. YEE: Okay, next sub item, sub item 3, 5 Elias Erazo and Griselda Erazo. 6 MS. OLSON: Board Proceedings has not received 7 the contribution disclosures for the agents in this 8 sub item. 9 MS. YEE: Okay. All righty, thank you. 10 Is there a motion on this? 11 MS. MANDEL: Move the staff recommendation. 12 MS. YEE: Okay. Motion by Ms. Mandel to adopt 13 the staff recommendation. 14 Is there a second? 15 DR. CHU: Second. 16 MS. YEE: Second by Dr. Chu. 17 Without objection, that motion carries. 18 ---o0o--- 19 20 21 22 23 24 25 26 27 28 12 1 H2 4 MARIA THERESAGONZALES 2 No. 304649 3 ---o0o--- 4 MS. YEE: Next sub item, sub item 4, Maria 5 Theresa Gonzales, is there a motion? 6 DR. CHU: 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 I will second that motion. 12 Without objection, that motion carries. 13 ---o0o--- 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 13 1 H2 5 MICHAEL MAURER AND ANNA G.MAURER 2 No. 351807 3 ---o0o-- 4 MS. YEE: Next, sub item 5, Michael Maurer and 5 Anna G. Maurer, is there a motion? 6 MS. OLSON: Board Proceedings has not received 7 contribution disclosures from the parties in this 8 sub item. 9 MS. YEE: Okay. 10 MR. LEONARD: Madam Chair? 11 MS. YEE: Yes, Mr. Leonard? 12 MR. LEONARD: This is the item I pulled off our 13 G offer calendar, I think, in January. 14 I wanted to ask the question of FTB and Appeals 15 whether or not the IRS had received their return, which 16 wasn't in any of the records. 17 They -- although at the hearing, they -- or at 18 some point they said they had mailed them both the same 19 day. It appears now, I am told, that IRS did receive 20 their return in a timely manner. It was filed. And I 21 would argue that some presumptions should be granted to 22 them on that basis, that there be no -- no advantage to 23 the taxpayer to file their federal return and not file 24 their State return, particularly in this matter. 25 And that's why I pulled it off and I'd now be 26 ready to make the motion to grant. 27 MS. YEE: Okay. Motion by Mr. Leonard to grant 28 for the Appellant. 14 1 Is there a second? 2 MS. STEEL: Second. 3 MS. YEE: Second by Ms. Steel, this is on 4 sub item 5. 5 MS. MANDEL: Is this -- this is the one where 6 they said they mailed them at the same time? 7 MR. LEONARD: Yes. 8 And the State one is asking for a refund, which 9 most people have an incentive to send in. 10 MS. MANDEL: Can we hold this one to this 11 afternoon so I can look at the materials? 12 MS. YEE: Sure. 13 MS. MANDEL: Thank you. 14 MS. YEE: Mr. Leonard, we'll take this up this 15 afternoon. 16 Okay, very well. 17 ---o0o--- 18 19 20 21 22 23 24 25 26 27 28 15 1 H2 6 JOSE ARNELVIRAY. 2 No. 361472 3 ---o0o--- 4 MS. YEE: Then last, sub item 6, under this 5 item, Jose Arnel Viray. 6 Is there a motion? 7 MS. MANDEL: Staff recommendation. 8 MS. YEE: Okay, motion by Ms. Mandel to adopt 9 the staff recommendation. 10 Is there a second? 11 MR. LEONARD: Second. 12 MS. YEE: Second by Mr. Leonard. 13 Without objection, that motion carries. 14 ---o0o--- 15 16 17 18 19 20 21 22 23 24 25 26 27 28 16 1 (Whereupon a discussion was had on other 2 matters.) 3 ---o0o--- 4 H2 5 MICHAEL MAURER AND ANNA G. MAURER 5 No. 351807 6 ---o0o-- 7 MS. OLSON: Our final item of the day is H2 5. 8 MS. YEE: Okay, back on the nonappearance 9 adjudicatory calendar, item H2, sub item 5. 10 MS. MANDEL: I went back and looked at this and 11 I'm okay with the staff recommendation. 12 MS. YEE: Okay. Is there a motion? 13 MS. MANDEL: Yes, staff recommendation. 14 MS. YEE: Okay. Motion by Ms. Mandel to 15 approve the staff recommendation. 16 Is there a second? 17 MS. STEEL: That motion was already out there. 18 MS. MANDEL: Yeah, that's why I was hesitating. 19 MS. STEEL: Mr. Leonard already made a motion, 20 right? 21 MR. LEONARD: I know I discussed it. 22 MS. YEE: I think there was discussion, but I 23 don't believe there was a motion made and seconded. 24 So, we have a motion now by Ms. Mandel to adopt 25 the staff recommendation. 26 Is there a second? 27 I'll second that motion. 28 Please call the roll. 17 1 MS. OLSON: Madam Chair? 2 MS. YEE: Aye. 3 MS. OLSON: Mr. Leonard? 4 MR. LEONARD: No. 5 MS. OLSON: Ms. Steel? 6 MS. STEEL: No. 7 MS. OLSON: Dr. Chu? 8 DR. CHU: Aye. 9 MS. OLSON: Ms. Mandel? 10 MS. MANDEL: Aye. 11 MS. OLSON: Motion carries. 12 MS. YEE: Okay. 13 ---o0o--- 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 18 1 REPORTER'S CERTIFICATE 2 3 State of California ) 4 ) ss 5 County of Sacramento ) 6 7 I, JULI PRICE JACKSON Hearing Reporter for the 8 California State Board of Equalization certify that on 9 APRIL 15, 2009 I recorded verbatim, in shorthand, to the 10 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 pages 1 13 through 18 constitute a complete and accurate 14 transcription of the shorthand writing. 15 16 Dated: May 15, 2009 17 18 19 ____________________________ 20 JULI PRICE JACKSON 21 Hearing Reporter 22 23 24 25 26 27 28 19