BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION 5901 Green Valley Circle, Room 207 Culver City, California REPORTER'S TRANSCRIPT FEBRUARY 24, 2010 ITEM B2 FINAL ACTION CASE HEARD FEBRUARY 23, 2010 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 Jerome E. Horton 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 Culver City, California 2 February 24, 2010 3 ---oOO--- 4 MS. YEE: Let's call the meeting back to order. 5 Ms. Olson, what I'd like to do is take up the matters 6 under submission. And, Members, are we ready to take up 7 the case that was put over from yesterday? And that 8 would be Item B2, Donald A. Wattson and Christine A. 9 Wattson. 10 Do we have a motion on that matter? 11 MR. LEONARD: Is my motion still before us, 12 Madam Chair, to grant? 13 MS. YEE: Okay, let's -- let's recognize that 14 again then. For Item B2, we have a motion by Mr. 15 Leonard to grant the appeal. Is there a second? 16 MS. STEEL: Second. I thought we already -- 17 MS. OLSON: Ms. Steel has seconded it already. 18 MS. YEE: Oh, I'm sorry. Okay. So it will 19 remain on the table. Thank you. 20 Discussion. 21 Well, let me start. In thinking about this 22 overnight there were a couple of points that just made 23 me a little uncomfortable about this matter. And -- and 24 I'm not sure that we necessarily touched on it with a 25 lot of depth, but the idea that there may have been a 26 discharge of debt in -- in '95 got me to think back 27 about the duty of consistency. And I think there was a 28 lot of information that the Franchise Tax Board probably 3 1 was not necessarily properly informed about until the 2 appeals process started. And with respect to the duty 3 of consistency I think there might be some application 4 here because the appellants did not show that the 5 discharge of debt income -- or didn't reflect the 6 discharge of debt income in 1995 and continued to report 7 Mr. Wattson as a partner and also continued to carry a 8 deficit capital account. And I just my -- my concern 9 about granting for the Appellant is that you kind of 10 can't have it both ways. 11 There was a -- a deficit capital account that 12 did not get restored but there also was a discharge of 13 debt. And so, I'm trying to reconcile those two events 14 and it just seems to me that certainly with the 15 reporting not -- the debt discharge not -- income not 16 having been reported in '95 that the Franchise Tax Board 17 was I think right to assume that the Appellant as a 18 partner continued to have responsibility to pay the 19 partnership's recourse debt. 20 So I don't know if Appeals had any kind of 21 further thought on kind of how to look at this. 22 MR. AMBROSE: Well, I -- I think FTB has 23 recognized that there was a discharge of debt in '95. 24 They chose not to go after that. I guess -- they -- 25 they focused on the -- the negative capital account. 26 So, I -- I suppose and this was never really 27 briefed, but there -- it's clear, I mean the Appellant 28 yesterday I think conceded that there was a -- a relief 4 1 of their liability or their share of the liability in 2 '95 pursuant to that reorg. agreement. But it was never 3 really explained how that -- how they settled accounts 4 with the other partners. And I -- yeah, I'm assuming 5 that it just wasn't -- it wasn't an issue before FTB or 6 wasn't -- it wasn't an issue here because FTB wasn't 7 asserting any sort of tax liability against that as 8 cancellation of debt income. 9 And, again, it just really wasn't explained to 10 us so we -- it certainly, you know, raised questions in 11 our minds but we didn't go down that road. 12 MS. YEE: Uh-huh. Uh-huh. Do you -- 13 MR. AMBROSE: But I agree that it -- it really 14 hasn't been adequate -- adequately explained, you know, 15 to Appeals' satisfaction. 16 MS. YEE: Okay. So you think there might be 17 some opportunity for additional briefing in this area? 18 I mean, I know that the Franchise Tax Board 19 didn't focus on this particular aspect, but it just 20 seems to me that -- 21 MR. AMBROSE: Yeah, I guess my hesitation is 22 because I -- I don't -- I'm just wondering or I guess 23 I'm kind of conjecturing that they -- that FTB didn't go 24 down that road because they figured the statute's closed 25 with respect to that or they couldn't make a duty of 26 consistency argument. I -- I don't mean to -- you know, 27 like I said, I don't mean to conjecture. But I -- I'm 28 just wondering how -- how fruitful further briefing 5 1 might be. 2 MS. YEE: Okay. No, that's fair, and I 3 think -- I guess my thought is that had the Franchise 4 Tax Board had I guess complete notice or proper notice 5 of the Appellant, you know, was relieved of the 6 responsibility prior to the appeals process and -- and 7 now, you know, we've got -- we're in the position of 8 where the Statute of Limitation, as you say, for 9 imposing the tax assessment is now closed. 10 MR. LEONARD: Madam Chair. 11 MS. YEE: Mr. Leonard. 12 MR. LEONARD: I actually share a lot of your 13 concerns. Its even broader than that. For whatever 14 reasons, and they're not before us on the appeal, we 15 have no idea what the other partners did in their 16 filings, nor do we know if Franchise Tax Board pursued 17 anything against or with those other partners related to 18 these transactions from '95 on through the end of the 19 partnership. 20 So, you're right, there's not only 21 inconsistency on all parties there's a lot of 22 information missing and I don't think it ever could come 23 before us. 24 It would be nice to know it to make sure that 25 everybody paid their share of taxes, but certainly to my 26 mind the evidence that the taxpayer presented shows 27 of -- of why he reported the way he did, explains why it 28 was misunderstood by the FTB, and -- and reports what 6 1 the actual end result was his portion of the 2 partnership, which to my mind results in us granting his 3 petition. 4 I wish I could know more. I think I'd be more 5 confident in -- in my motion. Why it wasn't done, I 6 don't know. Why -- why FTB didn't act in '95 and -- you 7 know, well, we don't know if -- we don't even know if 8 they did or didn't actually, against this -- Mr. Wattson 9 or the other partners in the partnership. 10 So, it is -- it's quite incomplete. 11 Nevertheless, that's all we have. 12 MS. YEE: Okay. Thank you. Other comments, 13 Members? 14 Okay. Hearing none, please call the roll. 15 MS. OLSON: Madam Chair. 16 MS. YEE: No. 17 MS. OLSON: Mr. Leonard. 18 MR. LEONARD: Aye. 19 MS. OLSON: Ms. Steel. 20 MS. STEEL: Aye. 21 MS. OLSON: Mr. Horton. 22 MR. HORTON: No. 23 MS. OLSON: Ms. Mandel. 24 MS. MANDEL: No. 25 MS. OLSON: Motion fails. 26 MS. YEE: Okay. That motion fails. Is there 27 another motion? 28 MR. HORTON: Motion to sustain. 7 1 MS. YEE: Okay, motion by Mr. Horton to sustain 2 the Franchise Tax Board. 3 I will second that motion. 4 Any further discussion? 5 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: No. 12 MS. OLSON: Mr. Horton. 13 MR. HORTON: Aye. 14 MS. OLSON: Ms. Mandel. 15 MS. MANDEL: Aye. 16 MS. OLSON: Motion carries. 17 MS. YEE: Thank you. 18 ---oOo--- 19 20 21 22 23 24 25 26 27 28 8 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 24, 2010 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 8 13 pages constitute a complete and accurate transcription 14 of the shorthand writing. 15 16 Dated: March 2, 2010. 17 18 19 20 ____________________________ 21 BEVERLY D. TOMS 22 Hearing Reporter 23 24 25 26 27 28 9