BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION 5901 Green Valley Circle, Room 207 Culver City, California REPORTER'S TRANSCRIPT JUNE 15, 2010 ITEM B1 FRANCHISE AND PERSONAL INCOME TAX HEARING APPEAL OF ANNABELL M. PALMER (No. 467214) 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 Jerome E. Horton 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 Amy Kelly 15 Equalization Staff: Tax Counsel 16 For Franchise Tax Irina Krasavtseva 17 Tax Board: Tax Counsel 18 Michael Cornez Tax Counsel 19 For Appellant: William Swearinger 20 Attorney at Law 21 22 ---oOo--- 23 24 25 26 27 28 2 1 Culver City, California 2 June 15, 2010 3 ---oOo--- 4 MS. OLSON: Our first on today's agenda is 5 Annabell M. Palmer. Please come forward. 6 Board Proceedings has received contribution 7 disclosure forms for this morning's hearings from the 8 parties, agents and participants with the exception of 9 Annabell Palmer in this case. 10 All forms were properly completed and signed. 11 All parties, agents and participants are on the Alpha 12 listing provided to your office. 13 Each person sitting at the table will be asked 14 to introduce themselves and if necessary their 15 affiliation with the taxpayer for the record. 16 Ten minutes is allocated for the taxpayer's 17 opening presentation followed by ten minutes for the 18 Franchise Tax Board's presentation and five minutes is 19 allocated to the taxpayer for rebuttal. 20 Ms. Yee. 21 MS. YEE: Thank you, Ms. Olson. Let me just do 22 a microphone check. Are the microphones on? 23 MS. KELLY: Yeah. 24 MARK WALKER: There you go. 25 MS. OLSON: Thank you. 26 MS. YEE: Okay. All right, thank you. 27 Very well, Members, our first item is Item B1, 28 Annabell M. Palmer. Let me have the Appeals Division 3 1 introduce the matter. Good morning. 2 MS. KELLY: Good morning, Madam Chair, Members 3 of the Board. The issue in this appeal is whether the 4 Franchise Tax Board properly disallowed Appellant's 5 claimed theft loss deduction for 2003. 6 MS. YEE: Okay. Thank you. 7 Good morning. 8 MR. SWEARINGER: Good morning. I'm Bill 9 Swearinger, I -- William Swearinger, but known as Bill. 10 And I'm Annabell Palmer's lawyer. 11 MS. YEE: Okay. Very well. 12 We'll -- we'll give you ten minutes for your 13 presentation. And if you can speak right into the 14 microphone so we can hear you. 15 MR. SWEARINGER: That's fine. 16 MS. YEE: Okay. 17 MR. SWEARINGER: Good morning, and thank you 18 for your time today, and we've submitted a whole lot of 19 papers, and I don't think a lot of them really have a 20 lot to do with the facts of the case but they had to be 21 submitted. 22 Ms. Palmer is -- or, excuse -- Ms. Palmer is 90 23 years old and couldn't be here this morning or she would 24 be. This matter is of considerable importance to her. 25 We're talking about a lot of money here. 26 As she was getting older she became more and 27 more susceptible to outside influence and things that 28 shouldn't have happened to her, as so many old people 4 1 do. And she trusted a man named William Herisko and the 2 operations that he was part of and probably head of, 3 we're not exactly certain. And essentially gave him 4 and his entities a total of $14 million that -- plus 5 some, another million four to invest for her. 6 It turns out that these were fraudulent schemes 7 that Herisko was perpetrating on her. The fraud became 8 known really in 2002, when Mrs. Palmer's daughter 9 started looking at what was going on with her mother's 10 money, and found out that she had sent -- Mrs. Palmer 11 had sent $4 million to the Swiss bank, sent $10 million 12 to the United States Reservation Bank and Trust, which 13 was an Indian bank that was set up, and another 3 14 million or so to Herisko in various schemes, but those 15 were sent directly to a -- by wire to a dba that Herisko 16 had set up called Invectus Holdings. 17 And in 2002 it became clear that the money 18 was gone. We found out in 2002 that the United States 19 Reservation Bank and Trust had been seized by the 20 government and that they had seized a bunch of money. 21 And we didn't know at that time how much money they had 22 seized in relation to the amount of money that Ann had 23 invested and we didn't know the extent of other -- other 24 investors' investments or anything. 25 So we just knew there was some money -- a pool 26 of money there that she was likely to recover something 27 from based on representations made to her by the 28 government. 5 1 Then -- excuse me, an investigation was 2 solicited by an organization called the Arkin Group. 3 The Arkin Group are former CIA agents or so they hold 4 themselves out to be and theoretically they're -- they 5 have information available that nobody else has. 6 About $30,000 was paid to the Arkin Group for 7 their report which is one of the exhibits to this -- 8 Exhibit 17. And it's a pretty exhaustive report, and 9 what it says is, a, essentially that Herisko's a con 10 man, always has been a con man. He doesn't have any 11 assets. And there's probably not much that's going to 12 happen with respect to getting any money back from 13 Herisko, himself. But at the same time they said, "We 14 will continue to investigate whether there's any money 15 identifiable in the Swiss Bank." And that report is 16 dated December 13th of 2002. 17 A few days later, probably based to somewhat 18 on -- some degree on that report Mrs. Palmer's lawyer -- 19 personal lawyer, Norm Rasmussen, sent her a letter, said 20 that I don't think you're going to receive any money 21 back from Herisko. But in that letter he did not 22 identify or mention or say anything really about the 23 Swiss Bank money. 24 We also knew in 2002 that Ms. Palmer's 25 perception of the UBS, the Swiss Bank, and the USRBT 26 schemes was that they were similar in that she had sent 27 money directly to a bank, there were these -- 28 capitalization and -- and account agreements, and the 6 1 theory was that they were going to lend money out at 2 high interest rates, that she was going to get a good 3 return on her investment. And there's substantial 4 documents that have been submitted, Exhibits 1 through 5 13, which show similarities between those two 6 organizations and what was sent to Ms. Palmer by Herisko 7 and his cohorts. 8 And that's what we knew in 2002. We knew there 9 was a similarity between USRBT and U -- USRBT -- RBT, 10 excuse me, and UBS, and that she was probably going to 11 get some money back from USRBT. So we delayed deducting 12 the $4 million in 2002 because there just wasn't any 13 certainty about it. 14 Jeppsen versus Commissioner is one of the cases 15 that's been bandied back and forth here, and says at 16 page 1418, if the taxpayer's prospect of recovery was 17 simply unknowable at the end of the tax year at issue 18 the taxpayer will not be entitled to take the theft 19 deduction loss that year." And at the end of 2002 the 20 status of the UBS money was simply unknowable. 21 We had spent a considerable amount of money 22 already and energy devoted to finding that out. At the 23 end of 2002 we just didn't have a -- a response yet. 24 Then in 2003 a few things happened. One, the 25 FBI called Ms. Palmer's daughter and talked to her, told 26 her that these were schemes and that there really wasn't 27 any money around and that we should forget about ever 28 receiving anything. 7 1 More importantly, the FBI said they weren't 2 going to help us try to get any money back from the 3 Swiss Bank. 4 Then they indicted Herisko in North Carolina. 5 He pled guilty, and it was a very similar prime bank 6 scheme. Not the USRBT, this was a whole other one, and 7 one in which Ms. Palmer was not connected. But at that 8 point then there was a criminal conviction. We figured 9 Herisko was probably going to go to jail or something. 10 Hopefully would go to jail. 11 And at that point then I was -- I was brought 12 in to see about this, and I had a conversation with 13 Mr. Herisko's lawyer. And Mr. Herisko's lawyer said 14 that Herisko couldn't tell us anything about the status 15 of the Swiss Bank account, he just simply didn't know. 16 And he was unsure or wouldn't tell us or whatever it 17 was. In addition he had First Amendment -- or, excuse 18 me, Fifth Amendment privileges if there was some 19 criminal activity that was involved. 20 And so, he wouldn't talk, which ultimately he 21 did, but that was kind of -- at that point what we knew 22 was, was he wasn't going to talk. 23 So, at that point we have in 2003 then, and 24 fairly early in 2003 -- all this took place in the first 25 three or four months of 2003, now we have information 26 saying that the money is gone, unlikely we're ever going 27 to be able to get it. At that point it was decided not 28 to continue with the Arkin investigation. They wanted a 8 1 lot more money, and it seemed like throwing good money 2 after bad. 3 So that is the -- the difference between what 4 we knew in 2002 and 2003 and was the basis for taking 5 the deduction in 2003 and not taking it in 2002. 6 The respondent in this case makes much of the 7 fact that a lawsuit was filed in 2003 against Herisko 8 seeking to recover the $4 million and the other money 9 that they had sent directly -- that Ann had sent 10 directly to Herisko with the Invectus Holding scheme. 11 And there was a promissory note involved. 12 That lawsuit was purely speculative, as we had 13 information from the Arkin report saying that Herisko 14 had no assets. And with a report that we spent $30,000 15 on saying that Herisko had no assets, then we had no 16 choice but to believe it, essentially. And we filed a 17 lawsuit on the theory that who knows what could happen 18 in the future, there's a lot of money here. Herisko 19 might inherit some money. Maybe he had hidden some 20 money. The government is now investigating him. Maybe 21 the government would find some of the money. And if we 22 had a lawsuit and we ended up with a judgment then maybe 23 we had a better -- were in a better position to claim 24 some of that money. 25 The case that helps us here most is Parmelee, 26 Parmelee Transportation versus the United States. And 27 the Court there said that where there's a substantial 28 sum at stake then a ten percent chance of recovery may 9 1 very well justify a lawsuit. And that was kind of where 2 we were at that point. There was a 4 million -- $4 3 million at stake. 4 And if we had identified some money that 5 Herisko had then we could have gotten punitive damages 6 and interest and a bunch of money in excess of the $4 7 million. 8 MS. OLSON: Time has expired. 9 MR. SWEARINGER: So we filed a lawsuit. Okay, 10 thank you. 11 MS. YEE: Mr. Swearinger, we'll give you time 12 on rebuttal. 13 MR. SWEARINGER: Thank you. 14 MS. YEE: Okay. Thank you. 15 Franchise Tax Board. 16 MS. KRASAVTSEVA: Good morning, Members of the 17 Board. My name is Irina Iskander. I'm a Tax Counsel 18 for Franchise Tax Board. To the right of me is Michael 19 Cornez, also Franchise Tax Board. 20 The issue in this -- before you is the timing 21 of the deduction. It has always been our position that 22 2003 is simply not the year to take the deduction. We 23 do not argue that Appellant is entitled to a deduction 24 and the law on the issue is pretty much settled. 25 The deduction can be taken only when the 26 transaction is closed and completed. It is considered 27 to be closed and completed in the year of discovery, 28 which is 2002 year here, unless there is a claim for 10 1 reimbursement for which there is a reasonable prospect 2 of recovery. 3 Now, the reasonable prospect of recovery 4 usually is -- is a facts and circumstances test and 5 should be assessed in the year of discovery. If it is 6 found that there is a reasonable claim for -- of 7 recovery then the deduction is postponed until it is -- 8 it can be ascertained with reasonable certainty that the 9 reimbursement will not follow. 10 Now, we -- we think that the deduction should 11 be taken either in the year of discovery, which is 2002, 12 when there was -- based on facts and circumstances there 13 was no reasonable prospect of recovering if -- if your 14 Board finds that there is no reasonable prospect of 15 recovering from Herisko personally or it should be taken 16 in '05 or thereafter given the fact that the lawsuit was 17 filed, was proceeded with reasonable diligence. 18 The deposition was taken over two days. We 19 were given excerpts of the deposition yesterday that we 20 didn't have before. It seems that in that deposition 21 Appellant tried to discover whether or not they could 22 actually get any money from the bank, but that 23 deposition was taken in '04, not in '03. 24 So, the real issue is was there any claim in 25 '04 -- in '03 that allows for the deduction or does not 26 allow that. It is our position that it doesn't. 27 And there are several facts to suggest that 28 indeed our position is correct, that '03 is just not the 11 1 year. '02 there is Herisko and there is -- Appellant 2 has several facts showing that the Arkin report suggests 3 that Herisko is possibly judgment-proof. The attorney 4 that Appellant had before also showed -- also stated 5 that based on conversation with Herisko he's probably 6 insolvent and probably wouldn't pay -- would not have 7 the money to pay. 8 There was also personal knowledge of Appellant 9 of Herisko, which is about 20 years. In a period of 20 10 years Appellant has committed significant funds to 11 Herisko where -- at his direction, so that personal 12 knowledge we think is also part of the reasonable person 13 test or whether or not there is a reasonable prospect of 14 recovery in the mind of Appellant as far as 2002 goes. 15 Now, it seems that Appellant argues that 16 although there was no reasonable prospect of recovery 17 from Herisko it's possible they thought there is a 18 reasonable prospect of recovery from the bank and 19 somehow they assimilate the Union Bank of Switzerland 20 transaction to the United States Bank -- Reservation and 21 Trust transaction, which is the Indian Reservation bank. 22 Now, in that transaction, if we're going to go 23 there, that in that transaction there's a direct 24 relationship between the bank and between the Appellant. 25 The bank solicited the money, the -- not the Union Swiss 26 Bank, but the United States Reservation and Trust Bank 27 had solicited the money, issued the Certificate of 28 Deposit, even paid some interest. 12 1 In this transaction there's absolutely no 2 contact other than sending a wire to a bank account. 3 Not her bank account, to a bank account, to Union Bank 4 in Switzerland. In fact, the excerpts on the deposition 5 that were submitted yesterday show that Herisko stated 6 that she refused to sign anything with the Union Bank of 7 Switzerland. She absolutely refused to have a signatory 8 power to the account. She just wired the money. 9 So, given those facts it seems that as early as 10 1998 she knew she could never recover from the bank. 11 But when she discovered the theft was done by Herisko in 12 '02 it seems that -- if she -- if she decided she could 13 not recover from Herisko, then she would not be able to 14 recover from the bank simply because there is absolutely 15 no direct relationship, no representations by the bank. 16 The bank is really an innocent party that Appellant 17 actually states in its Appellate brief, that it is an 18 innocent party, the bank. 19 Now, if your Board finds that in 2002 there was 20 a reasonable -- there was a claim for reimbursement for 21 which there is a reasonable prospect of recovery from 22 the bank or from Herisko then '03 is still not the year. 23 Then it should be pushed when it's ascertained with 24 reasonable certainty that the claim for reimbursement 25 will not be recovered. 26 Based on the deposition that was produced 27 yesterday -- we have never seen the complete deposition, 28 we've only seen seven pages out of 2 -- 200 plus pages. 13 1 So yesterday we've seen some pages that we have not seen 2 before. 3 Well, based on the facts which are in this 4 deposition produced yesterday it seems that in '04, when 5 the deposition was held, it was determined by an 6 attorney for Appellant that UBS is just not the party -- 7 not a possible party to this transaction. It's simply 8 an innocent receiving bank that received some money on 9 the account, and that account was never opened on the 10 name of the Appellant. 11 So, it seems that if she thought -- if you -- 12 if this Board thinks that there is a reasonable prospect 13 of recovery from Herisko based on the lawsuit then we 14 should look at the objective evidence showing that that 15 lawsuit or that claim for reimbursement is no longer 16 recoverable as to the amount. And that was either in 17 '04; now based on this new evidence that's -- the 18 attorney got the evidence that she never signed anything 19 with the bank and he found it -- that fact was 20 apparently only known in the late of '04, not in '03 or 21 in '05, where the lawsuit was terminated and they -- and 22 the judgment was never recovered or if I were -- 23 thereafter, whenever. 24 Now, we simply don't see that '03 is the year. 25 The taxpayer does not lose the benefit of that 26 deduction. It carries over. If they take it in '02 it 27 carries over to '04 and thereafter. If it takes it in 28 '05 then it carries from '05 thereafter and takes care 14 1 of the -- any positive -- any income if there is some. 2 So, it seems that arguing that -- we do 3 understand, however, the position of the Appellant to 4 claim -- to place the deduction in '03 because in '03 5 Appellant's return shows a large capital gains to 6 offset. Some 3 million of capital gains that putting 7 the deduction in '0 -- in '02 -- in '03, I'm sorry, 8 would actually take care of that capital gain and make 9 income a negative. 10 That's -- that seems to be the only reason to 11 place the deduction in '03, is just to offset the gains. 12 But the law does not support taking the deduction to 13 '03. 14 I think I'm done, but if you -- if you have any 15 questions. 16 MS. YEE: Okay, I'm sure we will. Let me give 17 Mr. Swearinger five minutes on rebuttal. 18 MR. SWEARINGER: Thank you. I think it's 19 important to remember that when we're looking at 20 Herisko's deposition he's a felon, convicted of 21 thievery. And he's not exactly the most credible person 22 that there is. 23 He stated in that deposition that he had tried 24 to preserve that that was Ann's money, that that was 25 Ann's account. Ann Palmer. Ann Palmer sent that money 26 to the bank with herself as the beneficiary listed on 27 the wire. 28 The International banking rules and the rules 15 1 of wire transfer show that the -- the beneficiary on a 2 wire should be the holder of the account. She was led 3 to believe by Herisko that it was her account. It's 4 taxpayer's belief in 2002 which is the important part. 5 And the information that she had to go by was the 6 information given to her essentially by Herisko. They 7 were the same kind of documents with respect to the 8 USRBT as the UBS that she had been given and she wired 9 money to an account that she believed was hers. 10 The -- so there is no direct relation in that 11 sense between USRBT and UBS as there is -- excuse me, 12 there's no direct relation tantamount to that of USRBT 13 that -- that Ms. Palmer had with the Swiss Bank, but 14 there were certainly the indicia of the same thing. 15 So it was -- it was her belief that that's 16 what she was -- was doing. And it was our belief at the 17 end of 2002 that maybe that money could be recovered. 18 The -- Herisko's deposition was taken simply to explore, 19 to see if there was any way we could find out anything 20 else about that Swiss Bank account, and we didn't. The 21 deposition was essentially a failure -- failure. The 22 other 200 and some pages were about his other -- other 23 schemes and other things that perhaps might lead us to 24 something in all of his operations. We asked for 25 a significant amount of paper documents from him, and he 26 produced them and most of that was about -- most of the 27 deposition was about those. 28 The money needs to be -- or the prospect of 16 1 recovery needs to be measured. In the Johnson case, 2 which was addressed here, the reason -- the prospect of 3 recovery was very good because the Johnsons had 4 identified several accounts that had been seized by the 5 government that had -- they'd even gotten a seizure of 6 an account in Paris and another one in the Isle of Man, 7 because there was a significant amount of money there. 8 So the Johnson case just doesn't apply to this 9 matter because there's a big factual difference. In the 10 Johnson case there was an amount of money that was 11 identified that the taxpayer had a chance to reclaim. 12 In this case we didn't have anything identified. All we 13 had was essentially a wish. We had speculation and we 14 filed a lawsuit. 15 For that reason it -- its ending in 2004 really 16 meant absolutely nothing. The lawsuit is worthless. It 17 was an exercise we went through to try to safeguard Ms. 18 Palmer's assets. We knew going into it that it was just 19 that and it's turned out to be just simply a waste of 20 time. 21 The FBI -- I believe the FBI a lot more than I 22 believe Herisko, and it was the FBI that told us in 2003 23 that the money at the Swiss Bank was probably lost. And 24 that was essentially the -- the final cap on the 25 decision to deduct the money in 2003. And I think 26 that's pretty good objective evidence. 27 That's all. 28 MS. YEE: Okay. Thank you very much, Mr. 17 1 Swearinger. 2 Let me just ask a question. If I missed this, 3 I apologize. How was the theft deduction treated for 4 Federal purposes? 5 MR. SWEARINGER: The same way. It was treated 6 as a capital loss -- the $4 million was treated as a 7 capital loss. 8 MS. YEE: I guess which year was it allowed? 9 MR. SWEARINGER: In 2003. 10 MS. YEE: Okay. All right. And then I guess 11 to the Franchise Tax Board, could you elaborate a little 12 bit with respect to your reliance on the Johnson case 13 versus the Parmelee case that Mr. Swearinger has 14 referred to. 15 MS. KRASAVTSEVA: Yes, in Johnson case they 16 discovered they invested the money that was a fraudulent 17 investment, similarly as here. They also discovered -- 18 in the year of discovery they found out that -- I mean, 19 there was a year of discovery that they found that the 20 theft -- the investment was actually a theft. They 21 wanted -- they were not allowed to claim a deduction 22 until the case was terminated. So they filed a lawsuit 23 against several parties. 24 The Johnson case before you is actually a 25 motion for summary judgment. Whether or not it could be 26 concluded both parties filed a summary judgment motion 27 to conclude whether or not the deduction could be taken 28 and what's the test that should apply. 18 1 So the -- the Court stated what the test is, it 2 stated that the test is a reasonable prospect of 3 recovery. The year of discovery is the year to claim 4 unless that's a claim for reimbursement is basically 5 interpreted the statute, and it says that -- and it 6 stated that if you did not claim a deduction in the year 7 of discovery then the test should be whether or not you 8 ascertain with reasonable certainty that that recovery 9 was -- that the recovery actually happened in the year 10 subsequent to a year of recovery. 11 So, you go either to the year of discovery 12 based on Johnson case -- and -- and Johnson case didn't 13 really say anything new. It just applied the existing 14 law, the statutes and regulations to the facts. It said 15 if you don't claim it in the year of discovery based on 16 the claim for reimbursement for which there is a 17 reasonable prospect of recovery, then you cannot claim 18 the deduction in a subsequent year unless you ascertain 19 with reasonable certainty shown by either settlement, 20 adjudication or abandonment of a suit, or the claim for 21 reimbursement -- unless you show that you ascertain with 22 reasonable certainty that recovery will not happen. 23 That's all the Johnson case says. 24 And then Johnson case, basically it was not -- 25 the deduction was not allowed until they determined that 26 the ascertained with reasonable certainty test has taken 27 place. 28 MS. YEE: Okay. 19 1 MS. MANDEL: Madam Chair. 2 MS. YEE: Yes. Ms. Mandel. 3 MS. MANDEL: Just to -- just to follow up on 4 that, but the -- the taxpayer doesn't dispute that 5 that's what the law is of what -- the test for what 6 year. He's just saying that on the facts here and what 7 she knew and the actions that she took, and the reasons 8 why she filed a lawsuit to reduce a note to judgment, 9 taxpayers are saying they think that under that legal 10 test it should be 2003. And I think what you were -- 11 and they're -- and they say that they don't think that 12 the Johnson case where the loss was allowed at the end 13 of a lawsuit should govern to say here, it's at the end 14 of the lawsuit. 15 What I understood the taxpayer to say on that 16 was in Johnson there was an identified pool of money 17 that they knew about. And your response to the Chair 18 just addressed, well, Johnson just says what the legal 19 test is. But I don't -- I don't take it that the legal 20 test is disputed. 21 So the question about Johnson really is why are 22 the facts in Johnson relevant to the facts here such 23 that a lawsuit that the gentleman has described as -- as 24 really reducing the note to judgment so that on a 25 speculative basis in the future should this fellow ever 26 have anything they might actually be able to try to 27 enforce a judgment. 28 Why is Johnson factually relevant here? 20 1 MS. KRASAVTSEVA: Well, the facts are actually 2 very similar because there was an investment by false 3 pretenses. There was the money. They discovered later. 4 They filed lawsuits against several parties. 5 Actually, on the motion for judgment that 6 followed a few years after this motion for judgment the 7 Court determined that some of the -- some of the money 8 that they filed suit against were -- some of the claims 9 were abandoned, and that abandonment of the claims 10 allowed for a deduction even though other lawsuits were 11 going. 12 So, again, the -- the Johnson case is very 13 factually similar other than it involves more money. 14 MS. YEE: Isn't there an issue about timing of 15 when there is reasonable certainty of what the recovery 16 will be and when the actual deduction is taken? 17 I mean -- 18 MS. KRASAVTSEVA: Yes, it -- it is about 19 timing. 20 MS. YEE: Because Johnson was looking to uphold 21 the Treasury regulation that speaks to that. 22 MS. KRASAVTSEVA: Yes, it -- yes, it was. But 23 it's also -- it also -- it was a motion for summary 24 judgment. It was not a case deciding what -- when the 25 timing is actually going to take place. But it did -- 26 it did look at -- exactly, it did look at the timing 27 when the deduction could be taken. 28 MS. YEE: Okay. Mr. Swearinger, can you -- do 21 1 you have a view? 2 MR. SWEARINGER: The Johnson case would be 3 applied to our set of facts if we were arguing about the 4 USRBT money. Because in USRBT some money was discovered 5 in 19 -- in 2002. And Ms. Palmer at that point then 6 thought, hey, I might get some money back from that. 7 And the Johnson case would indicate that she 8 couldn't deduct that in 2002, when she knew there was 9 some money that she might get back. She had to wait 10 until she found out how much money she was going to get 11 back. 12 And that turns out to be this year, because 13 this year she just got a letter from the receiver saying 14 you got as much much money as you're going to get, 15 that's it. So in 2010 she's going to make a deduction. 16 She -- it turns out from the USRBT she got 80 17 some percent of her money back. 18 Johnson assumes that there is a fund of money 19 that the taxpayer's found that the taxpayer has a claim 20 of right to. That's the facts on which the summary 21 judgment was based. 22 In our case as to the $4 million from the 23 United -- in the bank -- United Bank of Switzerland we 24 don't know where that money is. We don't know if it 25 still exists. We don't know if it's in the account. We 26 truly think that -- that Herisko doesn't have any 27 assets. 28 So, the Johnson case -- yes, it's law. But it 22 1 just doesn't have anything to do with our case. 2 MS. YEE: Thank you, Mr. Swearinger. 3 Mr. Horton. 4 MR. HORTON: Just a question of the Department. 5 The taxpayer in filing the lawsuit -- the intent of 6 filing the lawsuit seems to be, in my mind, the basis of 7 determining whether or not there was a reasonable 8 expectation of recovery. And was there anything in the 9 documents that indicate that in filing the lawsuit that 10 there was consultation or some advice or something that 11 would have indicated that the taxpayer had a -- some 12 intention of recovery or -- some basis for recovery? 13 I mean, the -- taxpayer's contending that they 14 filed the lawsuit strictly to preserve their right for a 15 future recovery in the event that some future action 16 occurs. 17 MS. KRASAVTSEVA: It seems that the reason -- 18 other than attorney filing a lawsuit I'm assuming that 19 attorney advised the client that -- the taxpayer that, 20 you know, we file a lawsuit with such and such 21 intentions, we do not have any evidence suggesting that 22 there is an opinion letter stating that there's a 23 reasonable claim of recovering this amount from Herisko. 24 Now, it has to be noted that even in appeal -- 25 in Appellate briefs the respon -- Appellant argues that 26 in her mind there was no reasonable prospect of 27 recovering in 2002 from Herisko. It seems that they 28 argue that they thought there was a reasonable prospect 23 1 of recovery from the bank. And if we shift that 2 argument to the bank, okay, if -- if you were to allow a 3 deduction in '03 because they thought there was a 4 reasonable prospect of recovery from the bank, and then 5 in '03 because the FBI said, well, you know, we just 6 don't want to follow the UBS -- you know, we don't think 7 you can recover from it, anyway -- if they think that 8 this is the event that causes the recovery to be -- you 9 know, meets the test ascertain with reasonable . 10 certainty -- if that is the test that applies to the 11 bank in '03, then be it. 12 But it's just -- it seems that Appellant 13 already knew or should have known reasonably speaking 14 back in '02 that she does not have any claim from the 15 bank. 16 And let's say -- given the age of the 17 Appellant, let's say she forgot, that she said I'm not 18 going to sign anything with the bank. Let's say she 19 forgot in 1998 that she said that, "I do not want to 20 have any contact with the UBS. I do not want to sign 21 anything with the UBS. I do not want to have a 22 signatory power over the account to which I may -- to 23 which I sent $4 million," let's say she said it, anyway 24 and let's say she forgot, and attorney on her behalf 25 takes the deposition and finds out in '04 that she does 26 not have any claim against the bank, then that would 27 serve as an evidence that she ascertained with 28 reasonable certainty there is no claim against the bank, 24 1 in '04 2 MR. HORTON: So, Mr. Swearinger, when you filed 3 the lawsuit what was the intended purpose of filing the 4 lawsuit? 5 MR. SWEARINGER: Simply -- simply as a 6 backstop. It was a lot of money there. And -- 7 MR. HORTON: I mean, mindful your earlier 8 testimony said that there was a ten percent chance of 9 recovery with justification -- would justify just the 10 lawsuit. That someone had advised you that there was a 11 ten percent potential of recovery and that in and of 12 itself justified the lawsuit. 13 MR. SWEARINGER: Well, no, that was the words 14 of the case of Parmelee -- Parmelee, excuse me, where 15 the Court said where there's a lot of money if you have 16 a very small chance of actually getting anything back 17 from a lawsuit, that it may very well in the mind of a 18 reasonable person justify filing the lawsuit and trying 19 to obtain a judgment. 20 We knew that Herisko had nothing. And we 21 didn't really expect to get anything from him. But in 22 the event that he came into some money later, he moved 23 with -- you know, he lived fancy, he lived high. And in 24 the event that he came into some money later somehow or 25 other, if we had a judgment then we would be able to go 26 directly to that. 27 And there was also a Statute of Limitations 28 expiring at that point. So we had a Statute of 25 1 Limitations problem, so we had to get it filed if we 2 were going to file it at all. 3 And the timing of the lawsuit was probably 4 controlled more by the Statute of Limitations than 5 anything. 6 As to Herisko's testimony that Ms. Palmer 7 didn't to want to sign papers with the bank directly, I 8 would remind the Board once again that Herisko is a 9 felon and that he simply had another agenda when he was 10 testifying. In fact, she sent several documents. She 11 sent her passport apparently filled out. We have the 12 documents from Global Capital Link, which asked her to 13 send various documents to the bank and she sent the 14 money in her own name with herself listed as 15 beneficiary. 16 MR. HORTON: What was the thought process when 17 the lawsuit was dismissed -- was it dismissed? 18 MR. SWEARINGER: No, it -- just before trial 19 Mr. Herisko agreed at a settle -- excuse me, just before 20 trial the Court held a settlement conference. 21 MR. HORTON: Uh-huh. 22 MR. SWEARINGER: And at the settlement 23 conference presided over by a Judge, Mr. Herisko decided 24 to go ahead and agree to a judgment for exactly what we 25 were suing him for. I don't know the thought process 26 but in a manda -- in a settlement conference with the 27 Court each side goes in separately, and Mr. Herisko went 28 in separately and when I went in with the Judge the 26 1 Judge says, "Herisko will agree to a judgment for 2 exactly what you have sued him for." 3 So, I don't know what his thought process was. 4 MR. HORTON: And what were -- 5 MR. SWEARINGER: But -- 6 MR. HORTON: What was the final settlement? 7 MR. SWEARINGER: It was not a settlement, it 8 was simply a judgment, which is merely a piece of paper. 9 And it was for $4 million -- excuse me, no, for 10 $6,900,000 I think, plus interest. That was the way -- 11 that was what the judgment was for. 12 MR. HORTON: Thank you. 13 MS. YEE: Thank you very much, Mr. Horton. 14 Other questions, Members? Ms. Steel. 15 MS. STEEL: To the Department. So I couldn't 16 understand exactly that you said when taxpayer didn't 17 sign the papers that -- you know, when she wired the 18 money to the bank, you said she already knew that she's 19 going to lose all that money, that -- so you can deduct 20 any time from 1998 till 2004 when deposition was done. 21 That's the way I heard from you. 22 So, can you explain why 2002 -- I know that 23 discovery was done on 2002, that's why you said that it 24 has to be deducted at that year. But you said that it 25 can be if you knew that you were going to lose all that 26 money from 1998 to 2004 that deposition was done. 27 MS. KRASAVTSEVA: No, what I stated was that in 28 1998 when she sent the money to the bank she knew that 27 1 she does not have a contract with the bank in case that 2 money is lost she would not be able to recover, as early 3 as '98. 4 If she -- let's say if she had an attorney and 5 attorney would say, well, you know, make sure you have 6 an account there where you send the money because if you 7 don't have an account and if you send it to an unknown 8 account and you don't have any signatory power, you 9 don't have anything from the bank saying to you in 1998 10 that you have an account, so -- 11 MS. STEEL: So, just give me why 2002 has to be 12 done. 13 MS. KRASAVTSEVA: 2002 because she discovered 14 the theft. She did not know in '98 that she was sending 15 money into nowhere. She did not know in '98 that it 16 was -- 17 MS. STEEL: But they filed a lawsuit even less 18 than ten percent chance to recover money, so that the 19 judgment didn't come in until 2000 -- 20 MS. KRASAVTSEVA: 2002 was the year when her 21 daughters discovered that Herisko was a con man. And 22 that's when they made the conclusion that the money she 23 transferred in 1998 must have been lost. 24 MS. STEEL: Then let me ask you, so you think 25 the taxpayer can still get a deduction in the future? 26 MS. KRASAVTSEVA: Yes. 27 MS. STEEL: Through a loss carryover. 28 MS. KRASAVTSEVA: Yes, they -- they -- yes, 28 1 they can, unless the statute of limitation prohibits, 2 but -- 3 MS. STEEL: What's the statute there? 4 MS. KRASAVTSEVA: Well, if -- if the deduction 5 is in '02, then it carries to '04, to '05. '04 is a 6 closed year and they did not have anything to take. '05 7 is a closed year because counsel never filed an 8 extension or did not file a protected claim for '05. 9 But again there is nothing to claim there. So it would 10 go -- carry to '06, it would carry to '07. '08 and '09 11 is suspended. So just would follow and -- the net 12 operating losses -- yes, they will be able to take the 13 deduction if they have an income to offset it with. 14 MS. STEEL: Thank you. 15 MS. YEE: Thank you, Ms. Steel. 16 Other questions, Members? 17 Okay. Mr. Swearinger, you gave us two packets 18 of exhibits this morning. Did you wish to comment on 19 either of them? 20 MR. SWEARINGER: Only with respect -- I brought 21 the exhibits just because they were asked for in one of 22 the -- one of the handouts. I think the -- just the 23 entirety of the exhibit shows the relationship between 24 USRBT and UBS as far as what was presented to the 25 taxpayer. 26 And shows that the money was directly sent to 27 the bank with a specific account number with the 28 taxpayer listed as the beneficiary of that, which shows 29 1 that in her mind she was sending money to her own 2 account regardless of what -- whether -- and -- and the 3 money was accepted by that -- by that bank regardless of 4 what Herisko said about whether she did or did not send 5 signature cards and other -- and other agreements to 6 them. The bank -- it's enough money that the bank 7 should have taken a look at it, and if there was nothing 8 on file as between Ann and the bank, then I don't think 9 the bank would have accepted the money. They're 10 fiduciaries in any country. 11 MS. MANDEL: Could -- could I ask one more 12 question? 13 MS. YEE: Yes. Ms. Mandel. 14 MS. MANDEL: With respect to the Swiss Bank, 15 can you go over again why 2000 -- and I understand the 16 connections -- you know, I hear what you're saying. 17 I -- I understand the connection that you're making 18 between the -- the native bank, the Indian Bank and the 19 UBS, the connections you're -- you're trying to draw. 20 Can you explain for 2003 again why -- what -- 21 what the facts are for ascertaining no reasonable 22 prospect of recovery of the funds from UBS? 23 MR. SWEARINGER: Yes. Excuse me. The FBI 24 called Ms. Palmer's daughter and at that conversation I 25 think there's -- in the original audit documents there 26 was a letter from her daughter, to Ms. Johnson. And at 27 that point the FBI said, "You're not going to get the 28 money back from the Swiss Bank and we're not going to 30 1 help you." And that the scheme is just the same thing 2 that Herisko's pulled before and that many people 3 pull -- fool many people with all over the country. 4 So, there was the opinion of the FBI agent. 5 Excuse me. Then Herisko was indicted and went in and 6 pled guilty in North Carolina to a very similar scheme, 7 not connected to us directly, but it was the same kind 8 of -- the same kind of case. 9 So now we know that he's a felon with respect 10 to the kind of deal that Ann was involved in in -- with 11 the Swiss Bank. And the conversation with Herisko's 12 lawyer in which I was told that Herisko couldn't give us 13 any information that might lead to making a claim 14 directly against the Swiss Bank or in any way pursuing 15 it. I guess the implication from him was that there 16 probably really wasn't an account standing in Ann's name 17 or that had any money left in it. And he was very -- 18 not exactly deceptive, but he was certainly trying to 19 guard his client's secrets. But essentially telling me 20 that we weren't going to get anything from the Swiss 21 Bank. 22 And those were the -- the three primary factors 23 I think that we relied on in deciding that 2003 was the 24 appropriate year. 25 MS. MANDEL: And -- I'm sorry, this made too 26 much noise. And the -- and not -- not making efforts to 27 contact the Swiss Bank, does that make a difference or 28 is that -- is -- on the basis of those understandings 31 1 from the FBI and different people effectively deciding 2 to abandon trying to make a claim against UBS? 3 MR. SWEARINGER: Well, I wrote a letter to the 4 Swiss Bank and -- I never received any reply to them 5 whatsoever, which is consistent with their secrecy. 6 They just don't respond. 7 MS. MANDEL: Do we -- and -- and when -- when 8 was that? 9 MR. SWEARINGER: In early 2003. 10 It wasn't -- it was not made an exhibit to 11 this. 12 MS. MANDEL: But you have a -- a copy of it? 13 MR. SWEARINGER: Somewhere I think, yes. 14 MS. MANDEL: Somewhere. Somewhere -- 15 MR. SWEARINGER: It's a long time ago. 16 MS. MANDEL: -- in the boxes or files a long 17 time ago. 18 MR. SWEARINGER: Yes. But it was primarily the 19 FBI that, you know, we believed. That was -- and the 20 fact of the indictment. 21 MS. MANDEL: Yeah. To the F -- Franchise Tax 22 Board, does the taxpayer have to -- have to make efforts 23 to make a claim against someone when -- when they -- 24 before they can even -- 25 MS. KRASAVTSEVA: If there is a claim that 26 exists they should make a reasonable discovery. 27 There is a case that was not part of this brief 28 that states that simply letting a statute of limitation 32 1 run against possible claims and not filing those claims 2 does not allow a deduction even after statute of 3 limitation against those possible parties run. So, yes, 4 if they have a claim they have to file that claim. If 5 they have possibility of recovery from the bank you 6 would -- a reasonable person would contact the bank, 7 call the bank, try to contact their branches -- they 8 have a branch in the U. S., as well. 9 And referring to secrecy laws, the secrecy laws 10 applies to third party inquiries. I don't believe a 11 bank would not respond to a holder of an account that we 12 cannot disclose information about your account to you. 13 So we don't have any evidence suggesting that 14 in '03 there was any effort to contact the bank. We 15 just don't have that evidence. And we don't have any 16 evidence stating there is a possibility of recovery in 17 '03 from the bank or there isn't one. There's just no 18 evidence. 19 MS. YEE: Mr. Swearinger, do you? 20 MR. SWEARINGER: In the lawsuit we named -- 21 when you file a lawsuit, a civil lawsuit, you name the 22 person you're really aiming at. And then you also name 23 what are called Doe defendants. It would be John Doe 1, 24 John Doe 2, et cetera. And Doe defendants are used when 25 you don't know who the other person is that you're 26 trying to sue. 27 And it was our intention that if Herisko had 28 given us enough information to be able to identify 33 1 anything that we could have at the bank that we would 2 have then used that lawsuit to bring the bank in as a 3 party. But Herisko wasn't able to give us any 4 information -- we weren't able -- were not able to give 5 us -- develop any information in any other way. So we 6 didn't do that. 7 And we filed the lawsuit within the Statute of 8 Limitations, very specifically, as to Herisko. It was 9 six years. 10 MS. YEE: Thank you. Other questions, Members? 11 Hearing none, may I have a motion? 12 MR. HORTON: Move to take it under submission. 13 MS. ALBY: Second. 14 MS. YEE: Motion by Mr. Horton to take the 15 matter under submission. Second by Ms. Alby. 16 Without objection, that motion carries. 17 Thank you very much, Mr. Swearinger, Franchise 18 Tax Board. We will discuss your matter later today -- 19 MR. SWEARINGER: Thank you very much for your 20 time. 21 MS. YEE: -- and send you written notice of our 22 decision. 23 Thank you. 24 ---oOo--- 25 26 27 28 34 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 June 15, 2010 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 34 13 pages constitute a complete and accurate transcription 14 of the shorthand writing. 15 16 Dated: June 31, 2010. 17 18 19 20 ____________________________ 21 BEVERLY D. TOMS 22 Hearing Reporter 23 24 25 26 27 28 35