BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION 5901 Green Valley Circle, Room 270 Culver City, California REPORTER'S TRANSCRIPT JUNE 16, 2010 FINAL ACTION ITEM B1 (Heard on June 15, 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 Barbara Alby Acting 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 Board of Equalization Staff: Amy Kelly 16 Appeals Division 17 ---oOo--- 18 19 20 21 22 23 24 25 26 27 28 2 1 Culver City, California 2 June 16, 2010 3 ---oOO--- 4 MS. YEE: Good morning. Let's call this Board 5 of Equalization meeting to order. Our first item is an 6 item that we put over from yesterday's agenda and it is 7 Item B1 from yesterday, Annabell M. Palmer. And I 8 think, Members, we wanted to sleep on this one. 9 MR. HORTON: Yes. 10 MS. YEE: And -- 11 MS. STEEL: Are motions still alive? 12 MS. YEE: Yeah, let me see if -- let me 13 entertain a motion then I would like to open it up for 14 further discussion. 15 May I have a motion, please? 16 MS. STEEL: I -- I thought our motion was still 17 alive. No? 18 MS. YEE: Actually I -- 19 MS. STEEL: We have to make new motion? 20 MS. YEE: -- we rescinded the motion -- the 21 vote -- 22 MS. STEEL: Okay. 23 MS. YEE: -- so we could put this over. 24 Okay. 25 MS. ALBY: I move on behalf of the Appellant. 26 MS. STEEL: Second that. 27 MS. YEE: Okay, motion by Ms. Alby to -- 28 MS. STEEL: Grant it. 3 1 MS. YEE: -- rule in favor of the Appellant, 2 to grant the appeal. Second by Ms. Steel. 3 Discussion. 4 MR. HORTON: Madam Chair. 5 MS. YEE: Mr. Horton, yes. 6 MR. HORTON: First, Madam Chair, thank you very 7 much for an opportunity just to look this over. 8 I wanted to sort of take a look at the 9 chronology of the activity and try to ascertain at what 10 point did the taxpayer have enough information in order 11 to determine that the theft had occurred with reasonable 12 certainty. 13 And so, when I looked at the chronology it -- a 14 lot of activity took place in 2002. They issued a 15 promissory note in 2002 for $6.8 million. And then in 16 August of 29 the attorney sent a demand letter to 17 Hiroshi -- Hiro -- Herisko, making a formal demand for 18 the promissory note and this sort of set the groundwork 19 for the ultimate filing of the lawsuit. 20 And then they asked -- and hired an 21 investigator to investigate the financial stability and 22 found that there were no funds. And then they -- 23 interacting with the FBI, the FBI concluded that they 24 were -- did not have access to the funds and the FBI 25 decided to discontinue any activity. 26 And this occurred in 2003. Herisko pled -- 27 pled in 2000 -- April of 2003. Judgment was filed 28 against him in August 13th of 2003 and the Palmers 4 1 learned of the conviction in 2003, further indicating 2 that, it seems to me -- that all was lost for the most 3 part. And that the taxpayer had reasonable certainty in 4 2003 to say that this -- that the money was lost and so 5 they took the action that any reasonable person would 6 take, and that would be to file the lawsuit in order to 7 protect their interest in the event that something 8 happens somewhere down the road. 9 The fact that the lawsuit judgment didn't 10 take -- wasn't finalized until 2005 was further evidence 11 in my mind that they were right in 2003 when they 12 decided with reasonable certainty that they would not be 13 able to collect on the debt. 14 So therefore I would -- I would be supportive 15 of the motion to grant the appeal and would like to hear 16 from my colleagues in that regard. 17 MS. STEEL: Thank you. 18 MS. YEE: Thank you, Mr. Horton. 19 Ms. Steel. 20 MS. STEEL: Thank you very much. We had 21 exactly same case a couple of years ago and at the 22 same -- at that time Franchise Tax Board told us that 23 taxpayer can deduct a loss when the judgment came. And 24 yesterday that Franchise Tax Board is changing their 25 mind that when discovery has to be done then that day 26 that they -- that year that they can do the loss. 27 So we have to make it very clear about this 28 because we want to be consistent here that, you know, 5 1 how we going to rule this. 2 So I want to know that, you know, what's -- 3 exactly how -- it seems like Franchise Tax Board has 4 been changing their mind, it depends on how they can 5 charge to the taxpayers and how can they take -- you 6 know, collect more taxes at this point. 7 So I really want to make sure that, you know, 8 what's the law here. I totally support for this 9 taxpayers because if -- I mean when two years ago that 10 taxpayer lost that case because three to two votes 11 because they say judgment has to come out. And 12 yesterday now that they change their minds so we have to 13 be consistent. 14 So I want to know that how Appeals, you know, 15 Department that, you know, how you going to interpret 16 this law. Because I don't want to keep changing with 17 the same cases. 18 MS. YEE: Okay. Ms. Kelly. 19 MS. KELLY: Right. I think you're referring to 20 the Chung case. 21 MS. STEEL: Yes. Right. 22 MS. KELLY: And that was a worthless stock and 23 bad debt deduction, slightly different. The tests are 24 somewhat similar. That was a very factually intensive 25 case. 26 MS. STEEL: Well, it's a lot of side issues but 27 forget about the side issues. I just want to know the 28 facts that, you know, it's -- it's the same thing and 6 1 same case except little different, you know. 2 MS. KELLY: Uh-huh. And -- and, right. The -- 3 the tests are similar and here what's required -- the 4 Treasury regulation requires objective evidence when the 5 taxpayer is abandoning a claim for reimbursement. 6 So, again, it's very factually intensive here. 7 It comes down to whether or not the Board is persuaded 8 by the evidence here that the Appellant correctly 9 ascertained that there was no reasonable certainty that 10 reimbursement would be received. 11 And so, it's simply a factual determination 12 here whether or not Appellant was correct in making that 13 determination in 2003. 14 MS. MANDEL: Madam Chair. 15 MS. YEE: Yes, Ms. Mandel. 16 MS. MANDEL: I'm -- I'm often a big proponent 17 of -- of sleeping on the decision, particularly when 18 it's so factually intensive and there's such a sort of 19 variant view. And here Franchise Tax Board even had 20 changed its position from where it had stood at protest 21 and audit to what it was advocating on appeal when it 22 started to advocate in -- in Franchise Tax Board's view 23 the importance of the filing of the lawsuit against 24 Herisko, which was really done, as Mr. Horton alluded to 25 and the taxpayer said yesterday, just to -- to -- on a 26 kind of wing and a prayer in case Herisko came into some 27 money to reduce the note that he had signed to judgment 28 so they'd be sort of one step ahead in trying to enforce 7 1 something should there ever be some money. 2 So I -- I don't think that the lawsuit -- 3 that -- that the lawsuit was really going after any 4 identifiable pot of money or any pot of money that they 5 even really thought was out there. I think it was 6 very -- it was not -- it was speculative in terms of the 7 possibility of recovery on the lawsuit. They did have a 8 note so reducing the note to judgment maybe wasn't that 9 speculative, but certainly the issue is would they be 10 able to recover, was there really a hope of recovery. 11 And I think that that was speculative. So, the lawsuit 12 doesn't really send me on to the FTB side. 13 And yesterday when I talked about UBS a little 14 bit, the thing was that what carried the taxpayer from 15 2002 to 2003 was the taxpayer's view that the -- that 16 the UBS transaction that Herisko had gotten her involved 17 in was very similar factually to the other transaction 18 where the government had come in and found a pot of 19 money at that bank and had already been telling her that 20 she would be able to recover something, they didn't know 21 how much. 22 But in 2003, as the time line shows, that's 23 what carried her from '02 to '03 on UBS. But then in 24 2003 when the FBI comes in and tells her no, and Herisko 25 is convicted of a very similar fraud offense with 26 respect to another sort of bank, her whole reason for 27 thinking in '02 that she might still have a chance of 28 recovery of those funds really kind of disappeared. 8 1 And so, that's -- that's why it -- on, you 2 know, further reflection it does appear that '03 is -- 3 is an appropriate year for her, as she claimed. 4 MS. YEE: Other discussion? 5 Let me pose a question. I know the reliance by 6 the Franchise Tax Board on the Johnson decision, and I 7 want to just get some clarification with respect to any 8 difference between the Johnson decision and what we have 9 before us. 10 The Johnson matter involved some partial 11 recovery -- I'm still stuck on kind of this -- 12 MS. MANDEL: Frame. 13 MS. YEE: -- kind of verifiable, you know, kind 14 of -- 15 MS. KELLY: In -- in Johnson -- in Johnson part 16 of the recovery was expected and -- and carved out. And 17 I think what the Court was commenting on is that you 18 can't -- you can't claim the remainder until there's 19 been a settlement and you know exactly what you're going 20 to receive and what -- what the remainder is going to 21 be before you claim it on your return. 22 And so it's different factually in that regard. 23 Here there was no amount of the theft that was 24 expected to be reimbursed. 25 MS. STEEL: But is that that, you know, when 26 you transfer $4 million and when you, you know, file the 27 lawsuit means that, you know, they were expecting 28 something to recover? 9 1 I mean, how can you say that, you know, there's 2 nothing to recover and then you file a lawsuit because 3 you try to get something out of it? That's the reason 4 that they did it. 5 So, I think it's -- it's a thin line there 6 that, you know, you can push it that it's different case 7 or it's the same case. Its depends on that how you 8 interpret the law there. 9 So, you know, for this, when you lose -- I mean 10 this naive taxpayer that, you know, who transferred the 11 money without any documents -- yesterday Franchise Tax 12 Board Board attorney said that when she transferred the 13 money without signing any documents you can even deduct 14 from 1990 -- whatever, is it '8, that the transfer until 15 2004 why we exclude 2003 out of that? Because that's 16 the way exactly that the Franchise Tax Board attorney 17 explained yesterday. 18 MS. KELLY: Right. And -- 19 MS. STEEL: So -- 20 MS. KELLY: -- and as -- as Appellant 21 explained, the filing of the lawsuit he alleged was 22 speculative to reduce the -- 23 MS. STEEL: I understand that part. That's 24 what attorney was saying. But, you know, when you are 25 the one losing party -- I mean losing money party then, 26 you know, you do whatever you can to recover that. So 27 you cannot really say there's nothing to recover but I 28 just filed a lawsuit. It doesn't really work that way. 10 1 MR. HORTON: Madam Chair. 2 MS. YEE: Mr. Horton, yes. 3 MR. HORTON: It -- it appears to me that there 4 is -- there are several logics in filing the lawsuits in 5 these types of cases. One is in the Johnson case they 6 had identified a potential for resources, actual money 7 existed. And so, the determination in the process of 8 adjudication was to see how much could we get out of 9 those funds that were identified. 10 And then another reason which seems to be 11 closer in line to this case for filing a lawsuit is to 12 get a stipulated judgment against a guy who was 13 convicted of a felony. The FBI said that they no longer 14 could pursue the collection of -- of funds for 15 restitution purposes probably, so the FBI had concluded 16 in 2003 that they weren't going to get any restitution. 17 And the taxpayer had no access to the funds. He -- and 18 was a third party to the case. 19 And the other interesting part about the facts 20 was is that evidently the taxpayer had some faith in 21 this guy even though he was a crook. She continued 22 to -- to work with him. 23 And so I could see that the facts would 24 indicate that at some point she might think at some 25 point he might get out of jail, he might start 26 committing fraudulent activities again, and at that 27 point if I'm the only one in line with a stipulated 28 judgment and he gets caught again and there's funds, my 11 1 stipulated judgment puts me first in line to be able to 2 collect the funds. 3 So that appears to be what the logic -- I mean 4 the facts seem to support that logic which lends itself 5 to supporting that there was reasonable -- that the 6 taxpayer had reasonable certainty in 2003 that unless 7 something unusual happens this felony, this guy who's 8 been convicted of a felony, happens to get out of jail 9 or happens to get free somehow, and happens to be able 10 to get his hands on some funds other than the funds that 11 they have allocated for -- other than the funds that he 12 stole from them, some additional funds and somehow she 13 could enforce the stipulated judgment, at that point she 14 might be able to -- to -- to receive a portion of her 15 funds back. 16 So that's a lot of uncertainty in my mind. 17 That's just -- and the filing of the lawsuit is -- seems 18 to be or certainly seems to be routine in many ways in 19 that a good attorney is going to advise you when all 20 else fails spend the $25 -- $30 to file a lawsuit, get a 21 stipulated judgment just in case. He's not dead. He 22 might come back. So just in case. 23 And I think that's where we are with this 24 case. 25 MS. YEE: Thank you, Mr. Horton. 26 Other questions? 27 I -- I guess I'm still troubled by the timing 28 of the claiming -- of when the deduction was claimed 12 1 and -- and the lawsuit. And I -- and I appreciate the 2 observations offered with respect to the myriad of 3 reasons for filing a lawsuit. 4 And I guess let me ask this question, did -- 5 did Ms. Palmer have consistent representation throughout 6 this entire matter in terms of what counsel she may have 7 gotten with respect to her tax situation and all the way 8 through the lawsuit? 9 MS. KELLY: I don't think so. I think she had 10 a different CPA. I'm not positive. 11 MS. YEE: Okay. Okay. Other questions, 12 Members? 13 Ms. Alby. 14 MS. ALBY: I think we have the votes to support 15 this taxpayer so when your motion is going to carry you 16 shouldn't say too much and just be quiet, I guess. 17 But what I would say, those -- anybody who's 18 ever been through this process, I mean this was an 19 elderly woman who was dependent and believed in the 20 person that she had retained for years to make her 21 investments for her. 22 And when you are suffering as she did 23 ultimately in this, it doesn't begin with an awakening 24 that you've been cheated. It generally starts with a 25 suspicion, usually late into the transaction and down 26 the road you start, even at her age, probably thinking 27 something is wrong here. 28 So for us to say that she knew this in 2002, 13 1 those that have been through this can probably say you 2 cannot -- you don't have of certainty of that. What we 3 do have certainty of is when the FBI said, "This is 4 over," she certainly had certainty. And -- and that's 5 why I think -- and I appreciate Mr. Horton's comments, 6 this is one of those cases that's tragic. 7 And at least we can see that she acted 8 appropriately and I appreciate the support. 9 Thank you. 10 MS. YEE: Thank you, Ms. Alby. 11 Okay. We have a motion before us, Members, to 12 grant the appeal. Motion by Ms. Alby, second by Ms. 13 Steel. 14 Please call the roll. 15 MS. OLSON: Madam Chair. 16 MS. YEE: Regrettably, no. 17 MS. OLSON: Ms. Alby. 18 MS. ALBY: Aye. 19 MS. OLSON: Ms. Steel. 20 MS. STEEL: Aye 21 MS. OLSON: Mr. Horton. 22 MR. HORTON: Aye. 23 MS. OLSON: Ms. Mandel. 24 MS. MANDEL: Aye. 25 MS. OLSON: Motion carries. 26 MS. YEE: Okay. Thank you very much. 27 Thank you, Ms. Kelly. 28 MS. KELLY: Thank you, Madam Chair. 14 1 ---oOo--- 2 REPORTER'S CERTIFICATE 3 4 State of California ) 5 ) ss 6 County of Sacramento ) 7 8 I, BEVERLY D. TOMS, Hearing Reporter for the 9 California State Board of Equalization certify that on 10 June 16, 2010 I recorded verbatim, in shorthand, to the 11 best of my ability, the proceedings in the 12 above-entitled hearing; that I transcribed the shorthand 13 writing into typewriting; and that the preceding 14 14 pages constitute a complete and accurate transcription 15 of the shorthand writing. 16 17 Dated: August 7, 2010. 18 19 20 ____________________________ 21 BEVERLY D. TOMS 22 Hearing Reporter 23 24 25 26 27 28 15