BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION 450 N Street, Room 121 Sacramento, California REPORTER'S TRANSCRIPT JULY 13, 2010 ITEM B5a, 5b and 5c FRANCHISE AND PERSONAL INCOME TAX HEARING APPEAL OF GERBER MARITAL TRUST (NON-EXEMPT), (No. 513082) GERBER MARITAL TRUST (EXEMPT), (513083) AND GERBER MARITAL TRUST (EXEMPT), (513084) 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 Barbara Alby Acting 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 17 For Franchise Tax Jane Perez Board: Tax Counsel 18 Craig Scott 19 Tax Counsel 20 For Appellant: Janet L. Everson 21 Attorney at Law 22 23 ---oOo--- 24 25 26 27 28 2 1 Sacramento, California 2 July 13, 2010 3 ---oOo--- 4 MS. OLSON: Our next item is B5a, Gerber 5 Marital Trust, Non-Exempt; B5b, Gerber Marital Trust, 6 Exempt; and B5c, Gerber Marital Trust, Exempt. 7 Please come forward. 8 MS. YEE: Okay, Members, we are on Item B5a, 9 Gerber Marital Trust, Non-Exempt; B5b, Gerber Marital 10 Trust, Exempt; and B5c, Gerber Marital Trust, Exempt. 11 Ms. Kelly, if you could introduce the issues, 12 please. 13 MS. KELLY: Yes. Madam Chairwoman, the issue 14 in this appeal is whether Appellants have shown that 15 they had reasonable cause for late payment of their tax 16 liabilities for 2007. 17 MS. YEE: Very well. Thank you very much. Good 18 afternoon. 19 MS. EVERSON: Good afternoon. 20 MS. YEE: If you'll introduce yourself for the 21 record, you have ten minutes. 22 MS. EVERSON: Okay. Thank you. 23 My name is Janet Everson. I represent the 24 taxpayers, the co-trustees of the Gerber Marital Trusts. 25 MS. YEE: Okay. 26 MS. EVERSON: In sum, this is a clear case of 27 reasonable cause and not wilfully neglect on the part of 28 the taxpayers. The tax laws that apply to these 3 1 particular tax returns are complicated. The 2 calculations associated with deriving the actual tax 3 liability is more complicated. And it would be patently 4 unfair to hold these taxpayers responsible for the 5 errors as a result of them reasonably relying on 6 professionals to give them the information that would 7 have allowed them to properly pay their taxes on time. 8 The decedents are Caroline and Robert Gerber. 9 Their three daughters are the co-trustees for these 10 particular trusts. 11 When their father died in 2006 the lion's share 12 of the trust assets were stocks and they were maintained 13 by Bank of America. The following year the mother died 14 and the stocks were transferred to a new custodian at 15 TCI Wealth Management. And when the mother died the 16 daughters authorized Bank of America and TCI Wealth 17 Management to provide the CPAs all the information that 18 they needed in order to prepare these returns. 19 And the information required to prepare the 20 returns was timely provided to the CPAs. This is not a 21 case where there was insufficient information to the tax 22 professionals, rather there was a significant amount of 23 information with over -- approximately 25 different 24 assets in the trust. And those assets had been sold -- 25 so there was -- there was a difficult time for the tax 26 professionals to track the information that had been 27 provided to them in order to do these complicated tax 28 calculations as required by the complicated statutes 4 1 that applied to these returns. 2 Now, the CPA firm that was hired is Ashley 3 Quinn, CPAs. Jeff Quinn is the principal of this 4 company who oversaw the preparation of these returns. 5 He reviewed them and he signed off on them. And he is 6 responsible for the errors that have been addressed in 7 all the papers to -- to the Franchise Tax Board and to 8 the Board. 9 His firm handles approximately 50 to 70 estate 10 or trust income tax returns annually. He has been 11 licensed in Nevada as a CPA since 1979. He was licensed 12 in California beginning in 1972 and has maintained both 13 licenses current since that time. 14 Now, in terms of the errors, they have been 15 briefed pretty clearly for the Board, for the Franchise 16 Tax Board and -- and I think that the analysis is 17 reflected in the Board's review papers that have been 18 provided to me, so I won't go into too much more detail 19 about it, but I -- I will answer questions if you have 20 them. 21 Essentially, the statutes that apply to these 22 particular returns even reflected in the Board's review 23 of this case are complicated. I mean, they take up 24 several pages. And so the idea of the taxpayer being 25 responsible for not only knowing that these complicated 26 tax laws exist and need to be applied to these returns, 27 and then compounded by having to do the basis 28 calculations on their own or not being allowed to 5 1 reasonably rely on a professional who's been doing this 2 since the '70s is -- is -- is unfair. And that's what 3 this case is about. 4 For the first error, there were adjustments in 5 basis that had to be made for each of the approximately 6 25 stock assets that were held by two different 7 custodians. And the CPAs had to not only track the 8 basis for the sales of these stocks, but they had to 9 determine how to adjust the basis for the stock and if 10 they could even adjust the basis for the stock. That 11 was very complicated and it took a lot of time to do, 12 and there were errors as a result. 13 The CPA's staff, several people who had been 14 working on preparing these returns, had prepared 15 estimated tax liabilities by running the tax returns. 16 Jeff Quinn, who was the responsible principal, reviewed 17 the work and applied the reduction in the -- basis 18 adjustments twice by mistake. And that -- that was the 19 first error. 20 And the idea that the taxpayers should not be 21 able to rely on this professional's complicated 22 calculations as being accurate is -- is really unfair 23 and in this case reasonable cause does require that the 24 taxpayers not be held responsible because the idea that 25 they would catch an error of a million-five when there 26 are assets of over 33 million, it's -- it's just not 27 reasonable to see that they would know that such an 28 error even existed on these returns. 6 1 Now, the second error had to do with valuing an 2 LLC, which we all know is very difficult. There's not 3 an open market so you have to look at all the assets in 4 the LLC. The tax -- the CPA was aware of the 30 percent 5 discount that should be applied to each of the assets in 6 the LLC. And -- and even knowing that information the 7 CPA made an error in creating the estimated tax returns 8 and estimated tax liability and did not include the 9 discount for each of those assets when advising the 10 taxpayers to pay the estimated amount of tax owed at the 11 time of the due dates. 12 Now, the standard is ordinary business care and 13 prudence. And that's how we establish reasonable cause. 14 These taxpayers retained and paid for professional 15 services of a CPA firm that handles these returns all 16 the time and since the '70s. There's really nothing 17 else that they could have done in order to avoid the 18 errors that they are now being penalized for. 19 I understand that there is a difference between 20 simple math calculations versus complicated calculations 21 and complicated tax laws, which -- which gives us the 22 difference of whether we can give these taxpayers a 23 break for reasonable cause or not. And in this 24 particular case, I just -- I don't see how a decision 25 can be made other than reasonable cause existed. 26 The tax laws themselves are complicated. The 27 calculations were very complicated. And I -- and I 28 believe that that information has been presented to the 7 1 Board and to the Franchise Tax Board, and the precedent 2 that is available is not only the case of Boyle with 3 the -- Boyle with the U. S.Supreme Court but also the 4 Board of Equalization has had a case in the past which 5 is reflected in the briefs which supports the finding -- 6 it was the appeal of Philip C. and Anne Berolzheimer -- 7 it supports the finding that if -- if we do find 8 ourselves in a case where the calculations are 9 complicated, it's not just multiplying a tax 10 percentage -- a rate times ordinary income. 11 If you have complicated calculations to be made 12 after reviewing complicated statutes and determining how 13 those statutes apply to the assets at issue then it is 14 appropriate for abatement of the penalties to be 15 granted. 16 MS. YEE: Thank you, Ms. Everson. We're going 17 to give you time on rebuttal. Franchise Tax Board. 18 MS. PEREZ: Good afternoon, Madam Chairman -- 19 Chairwoman, Members of the Board. My name is Jane 20 Perez. And with me is Craig Scott. We represent the 21 Franchise Tax Board in this matter. 22 The issue in these consolidated appeals is 23 whether Appellants have shown reasonable cause that 24 would allow for abatement of the late payment penalties 25 imposed. 26 Appellants filed their 2007 trust returns on 27 October 15, 2008. Each Appellant reported a tax 28 liability on their return greater than the amount of 8 1 estimated tax payments they had made. 2 Respondent accepted these returns and during 3 processing imposed penalties for late payment of tax. 4 The law provides for penalties to be imposed if 5 a taxpayer fails to pay the tax shown on the return on 6 or before the due date of the return to determine 7 without regard to any extension of time for filing the 8 return. 9 In this case each Appellant failed to make 10 adequate payments of their tax liability prior to the 11 April 15th due date, and therefore Respondent properly 12 imposed the late payment penalty. 13 The penalty can be abated if a taxpayer proves 14 that their failure to pay resulted from reasonable cause 15 and not willful neglect. Appellants argue that they 16 relied on their accountant to provide them with their 17 estimated payment amount and their accountant made some 18 errors that resulted in their underpaying of the tax 19 liability. 20 As stated in the United States versus Boyle and 21 numerous other Court decisions, if a taxpayer relies on 22 improper substantive advice of a CPA or tax attorney as 23 to a matter of tax law, such as whether the taxpayer has 24 a tax liability, failing to pay the tax shown on the 25 return by the due date may be considered reasonable 26 cause if certain conditions are met. 27 When a taxpayer relies on a tax professional 28 the general rule is that reasonable cause is not 9 1 established merely because a tax professional completes 2 a tax return but rather will only be established when 3 the tax professional is interpreting substantive tax 4 law. 5 Your Board has discussed the Boyle case in the 6 appeal of Philip C. and Anne Berolzheimer and stated 7 that the instances alluded to in Boyle are those 8 instances wherein a true question of tax law arises. 9 Your Board determined that a computational problem, not 10 legal interpretation, does not rise to the requirements 11 for penalty abatement. 12 Appellants have pointed to errors made by their 13 CPA that caused their tax liabilities for 2007 to be 14 understated. 15 Respondent acknowledges that the preparation of 16 complex trust tax returns may include research and 17 analysis of law and it may be difficult to properly 18 estimate a tax liability. 19 Appellants have not shown that their CPA's work 20 involved interpreting substantive tax law. It appears 21 that the CPA's work involved the computation of income 22 or gain from various transactions and did not include 23 interpreting the various provisions of the law applied 24 to Appellants. 25 Appellants also state that the IRS abated the 26 corresponding Federal penalties. Appellant states that 27 the IRS abated the penalty based on Appellant's timely 28 tax compliance history. 10 1 Generally, Respondent will follow the IRS 2 abatement of penalties if the IRS abated for reasonable 3 cause. Unfortunately, Respondent has no provisions to 4 allow a one-time good history abatement. 5 Since the IRS abated Appellant's Federal 6 penalties under the Federal good history provisions to 7 which Respondent has not conformed the California late 8 payment penalty cannot be abated based on the IRS 9 actions. 10 If you have any questions I'd be happy to 11 answer them. 12 MS. YEE: Thank you very much, Ms. Perez. You 13 have five minutes on rebuttal, Ms. Everson. 14 MS. EVERSON: Members of the Board, I -- I 15 don't know that very much needs to be added to this. 16 The FTB has conceded that the law allows for abatement 17 of these penalties when there is an instance of 18 reasonable cause and not willful neglect on the part of 19 the taxpayers. 20 There is not a smidgeon of evidence that would 21 suggest anything willful by the taxpayers and reasonable 22 cause can be found when there are complicated tax laws 23 at issue that the CPA had to look at and the CPA 24 evaluated and that the CPA missed. And compounding that 25 with complicated calculations it has been suggested by 26 this very Board that that scenario provides for the 27 abatement of penalties. And -- and this case is -- is 28 the exact type of case that would allow this Board to 11 1 make the decision to not hold these taxpayers 2 responsible who did act prudently, who engaged a very 3 experienced CPA to handle these complicated tax issues 4 so that they could pay the right and proper amount of 5 tax timely, and by no fault of their own that CPA failed 6 to give them that -- that proper tax calculation. 7 MS. YEE: Okay. Thank you very much. Let me 8 pose a question. Is the CPA still being retained by the 9 trust? 10 MS. EVERSON: Yes. 11 MS. YEE: Okay. And was there ever any 12 attempt made to try to obtain a statement from the CPA 13 with respect to what he or she may have done with any 14 documents provided? 15 MS. EVERSON: Yes. 16 MS. YEE: And how they were interpreted for 17 purposes of preparing the estimated tax liability? 18 MS. EVERSON: Yes. And based on all of the 19 information that has been -- been provided to the FTB 20 previously and through the appeals, we collectively 21 believe that we had put our best foot forward already. 22 The first appeals to the Franchise Tax Board 23 came directly from that CPA, from that CPA's own -- own 24 letterhead. And -- and there wasn't anything additional 25 that we could provide. Without specifics I suppose -- 26 specific requests than -- than has already been 27 provided. 28 I mean the assets in this estate are -- exceed 12 1 $33 million and they were stock assets. It's not like 2 the sale of a piece of property. I mean, the 3 calculations -- I think it goes without saying that they 4 were complicated in determining how to apply the tax 5 laws, whether you have a 754 election or if you adjust 6 the basis because there are losses. 7 I mean, that's -- that's complicated and I -- I 8 don't see how that can be refuted. 9 MS. YEE: Okay. 10 MS. EVERSON: What other information could be 11 provided that would substantiate that further. 12 MS. YEE: I guess it would be a little bit more 13 compelling if we had the statement from the CPA, him or 14 herself, that speaks to how the tax law provisions were 15 interpreted for purposes of -- of arriving at the 16 liability. 17 But let me turn to the Franchise Tax Board. 18 What -- what -- what would you need to see, I guess, 19 that would indicate that there was I guess a question of 20 substantive tax law in question? 21 MS. PEREZ: Well, in our opening brief and in 22 your Board's hearing summary there were numerous 23 questions proposed that we would like information from 24 the accountant and none of that was provided. 25 MS. YEE: Okay. Ms. Everson, are you aware of 26 those? 27 MS. EVERSON: I am aware of those and I believe 28 the requests asked for certain information either in a 13 1 statement from the CPA or to just be addressed at this 2 hearing by me as a representative, which has been done. 3 I -- I have the -- the document in front of me 4 that had to do with the qualifications of the CPA, what 5 the CPA reviewed, the analysis. 6 I have shared all of that with -- with the 7 Board. 8 MS. YEE: Okay. 9 MS. EVERSON: And as a representative, you 10 know, I'm speaking on behalf of the -- the taxpayers who 11 have authorized me to speak with the CPA and the 12 information that you would be provided from anyone else 13 would not be any different. 14 MS. YEE: Thank you. Ms. Mandel, then Mr. 15 Horton, please. 16 MS. MANDEL: Oh, I was just moving my mike. 17 MS. YEE: Oh, I'm sorry. Okay. 18 MS. MANDEL: It was in my way. 19 MS. YEE: Mr. Horton. 20 MR. HORTON: Question of the Department, the 21 original return -- the difference between the original 22 return and the subsequent adjustments, is the difference 23 the result of a point of law or just a calculation here? 24 MS. PEREZ: The assessment was strictly 25 assessing a late payment penalty. We accepted the 26 return as filed. There were no tax adjustments or 27 anything, it's strictly the penalty. It was imposed 28 based on their self-reported tax return. 14 1 MR. SCOTT: But I think what you're getting at 2 is we look at it as -- from the papers that we consider 3 it to be a computational error. And that's why we went 4 forward with the penalty. 5 So I think you were going at the difference 6 between what was originally reported in tax and then 7 subsequently in tax (inaudible.) 8 MR. HORTON: So what's the answer? 9 MR. SCOTT: Oh, we believe it was a 10 computational error. 11 MS. PEREZ: There was no -- there was no change 12 to income at all. The only thing that was changed from 13 their tax return is the Franchise Tax Board imposed a 14 late payment penalty. 15 MR. HORTON: For not paying it? 16 MS. PEREZ: For not paying on time. 17 MR. HORTON: And the reason it wasn't paid on 18 time? 19 MS. EVERSON: Okay, I think there's some 20 confusion. There were extensions and so as of April 15 21 the CPA had provided estimated tax liabilities for the 22 taxpayers to pay, which they paid. And upon completion 23 of the final returns those tax liabilities changed. And 24 as tax liabilities changed as a result of the 25 complicated calculations that had to be made after 26 reviewing the complicated statutes and there was -- I 27 want to say a million-six more income that had to be 28 reported as a result of adjustments in basis for these 15 1 stocks. 2 MR. HORTON: Let me -- maybe the CPA might be 3 the -- or yourself might be the only one that can 4 actually answer the question. Typically in estimating 5 the liability you still go through a complete 6 computation and analysis to determine what the potential 7 tax will be. Analysis of the law and your various 8 deductions and -- and -- and then there's a -- I mean, 9 it's not a guess. They don't pull the number out of 10 their hat. 11 And so, someone made a computation based on 12 points of law and -- and then took the -- the income and 13 said this income is taxable, it is not taxable, and went 14 through that process. And they came up with an 15 estimate. 16 Is that what happened? If so, what's the 17 difference between the analysis at the point of 18 computing the -- making the estimated payments on April 19 15th, I guess, and what happened subsequent to that? 20 MS. EVERSON: The scenario you described is 21 what happened. In the estimated returns the tax 22 preparers went through all the information and did not 23 make guesses, and they really did go through the 24 information to come up with a bona fide estimate. 25 But what happened is the tax professionals at 26 Ashley Quinn, there was a lot of people working on 27 this -- this voluminous set of returns and after the 28 team prepared the draft returns Jeff Quinn, the 16 1 principal at the CPA firm, reviewed the returns and 2 believed there was an error and reapplied the 3 adjustments in basis a second time. 4 MR. HORTON: What -- what does that mean, 5 reapplied? 6 MS. EVERSON: That means that he reduced the 7 estimated tax owed by a million-five. 8 MR. HORTON: And what -- 9 MS. EVERSON: And that -- that -- 10 MR. HORTON: -- what was the basis for that 11 decision? 12 MS. EVERSON: In calculating twice the 13 adjustments in basis for these various stocks. 14 MS. MANDEL: I think what people are struggling 15 with is they say somebody in doing the original estimate 16 basically just made a mistake in their math, 17 computational error. And so, how do you tie what they 18 were doing originally and what he figured out and fixed 19 when they were filing the returns to some complicated 20 tax thing, whether it was a -- someone looked at the 21 substantive tax law and said, oh, I'm supposed to do "x" 22 and they did "x" and he comes in later and says, you 23 know what, we did "x" because it really ought to be "y" 24 or, you know, how -- how do you tie it back to a 25 substantive tax error or is it enough that, you know, 26 oh, it's just too hard. It's not like subtracting, you 27 know, I paid $10 for my computer and sold it for 30 and 28 I have a gain of 20. You know, we're trying to follow 17 1 what he did and why it happened. 2 MS. EVERSON: I understand what you're saying. 3 And, you know, I -- I will argue to the Board that 4 the -- the statutes, themselves, were complicated and 5 had to be reviewed twice, but at the end of the day the 6 decision of how to treat these assets was the same. 7 So, it would be difficult to argue that -- 8 that -- that one set of tax professionals said treat -- 9 treat these assets as "x" and then the CPA who was 10 overseeing the operation came out later and said, 11 actually, no, treat them as "y". That's not what 12 happened. 13 What happened is, it was very complicated tax 14 calculations. And I know from the Board's review, 15 documents that have been provided to all of us, suggests 16 that there is a bona fide argument to be made to 17 establish reasonable cause even in the face of tax 18 calculations because these are not simple tax 19 calculations. They are complicated tax calculations. 20 MR. HORTON: So, I -- 21 MS. YEE: Go ahead, Mr. Horton. 22 MR. HORTON: I mean, is it your position that 23 in order to have reasonable case there need not be an 24 actual point of law that is changed, a mistake in law; 25 that it can actually be a mistake in calculation, and if 26 in fact the calculation is complicated? Is that your 27 argument? 28 MS. EVERSON: Yes. And it is supported by the 18 1 U. S. Supreme Court decision in U. S. versus Boyle, 2 which states that -- that case and -- and Haywood, which 3 is cited by Boyle, which states that reasonable cause 4 may be found when the professional fails to provide the 5 accurate tax liability to the taxpayer. 6 And in this case that is what happened as a 7 result of these complicated calculations derived from 8 complicated statutes. 9 So it's not just that the taxpayer said here's 10 my information, prepare my returns and we're coming back 11 to say the taxpayers acted reasonable and -- and should 12 have these penalties abated on reasonable cause because 13 a CPA prepared the returns. 14 We're saying that it's more than that. The tax 15 liability advised by the CPA to the taxpayers was 16 accurate when it wasn't accurate. And U. S. versus 17 Boyle provides that that can establish reasonable cause. 18 And this Board has actually looked at that as well in 19 the BOE case that I cited previously, where it suggests 20 that if the calculations are not simple computations of 21 math, they're complicated, that you may find reasonable 22 cause. And you should find reasonable cause in this 23 case for that -- that very reason. 24 MR. HORTON: So -- 25 MS. EVERSON: We can't have taxpayers feeling 26 that there's no point in hiring professionals for -- to 27 prepare their returns if they can't reasonably rely on 28 the advice that they're given in the tax liability 19 1 that's provided to them because if we do that then 2 taxpayers aren't going to pay professionals to do these 3 returns and we're going to have a mess with -- with a 4 significant amount of additional errors and improper tax 5 liabilities collected. 6 So, we want to provide them reasonable cause 7 for this reason. 8 MR. HORTON: So in absent -- I mean in -- the 9 invert of that is that every complicated tax return 10 would be subject to a penalty abatement if they 11 understated their tax liability? 12 MS. EVERSON: I am not talking about every tax 13 return. 14 MR. HORTON: No, every complicated. I mean, 15 they -- 16 MS. EVERSON: Well -- 17 MR. HORTON: Every tax return that reaches 18 this level of complexity out there should be -- that 19 the -- the law as you interpret it provides for them to 20 be relieved from a penalty if that -- if the -- if the 21 amount reported is an error? 22 MS. EVERSON: Yes. Tax returns that are 23 complicated to the extent this is -- these returns were 24 complicated, yes. And it is a case by case 25 factually-driven scenario that you have to evaluate. 26 MS. MANDEL: Well, I guess I would say the 27 answer really is no because you don't know on a 28 complicated return what the error was. You could have a 20 1 very, very complicated return where somebody has added 2 the deductions instead of subtracting them and the 3 taxpayer before they sign their return upon reviewing 4 the return hopefully would notice that something was 5 added that should have been subtracted because it says 6 "subtract line 'x' from line 'y'," something. 7 But -- so I think it would still depend on what 8 the error was that -- I think the -- the theory is -- 9 MS. EVERSON: Well, that might be the case but 10 what you have just described is not a complicated 11 computation. 12 MS. MANDEL: No, no, but the return -- the 13 return might otherwise be a complicated return. It 14 might have been the most complicated return on the face 15 of the earth but somebody made a dumb math error on the 16 tax return and the taxpayer has some responsibility for 17 reviewing the return. And what you're -- you're sort of 18 saying is -- 19 MS. EVERSON: Yeah, I -- 20 MS. MANDEL: -- this is the type of -- the 21 error that -- that your guys made is something that you 22 think that -- that is a complicated enough computation 23 under the tax law that -- that a taxpayer reviewing a 24 return, they're not gonna -- it's not gonna be something 25 that they might recognize whether -- 26 MS. EVERSON: Yeah. 27 MS. MANDEL: -- you know, gee, I -- I didn't 28 really have a -- didn't know I had a $50,000 loss, you 21 1 must have added something wrong or done something wrong 2 in the the -- in the paperwork. You're -- you're saying 3 that the com -- this particular -- you're trying to say 4 this particular computation is in and of itself 5 something that requires a tax professional to do. 6 Maybe -- I mean, that's what I'm hearing you 7 try to argue. 8 MS. EVERSON: Yes. And thank you, you've said 9 it much better than I have and that is exactly what I'm 10 trying to say. This is not just an add or subtract 11 situation. 12 MS. MANDEL: And I guess FTB doesn't view this 13 type of -- whatever was done inside the return as 14 something that's complicated enough that a taxpayer 15 would need to -- or be reasonable to rely on a tax 16 professional to do, like the Haywood case talks about. 17 MS. PEREZ: We have not been provided with any 18 information that would show that this was a substantive 19 tax law question, which is what our interpretation of 20 Boyle and your Board's decisions require. It definitely 21 appears that it was a very complex situation, but we 22 have not -- we don't have any information to show that 23 there was substantive tax law that was required. 24 MR. HORTON: Let me frame a question to the 25 FTB. 26 MS. YEE: Mr. Horton 27 MR. HORTON: Madam Chair. This is a very 28 complicated area of the law. And there are a number of 22 1 different segments of the law that could apply to any -- 2 to this -- to this type of return. And in doing -- and 3 in looking at the -- the law, itself, one segment of the 4 law could say you include this, and then when you move 5 on to another section of the tax return that gets 6 carried forward or it doesn't get carried forward, and 7 it has certain treatment, which would affect the 8 mathematical treatment, but it is based on a legal 9 reference how it's added or subtracted, if you will. 10 Included or not included. 11 Is -- could that -- could that have happened 12 and is that what happened? And is there any evidence to 13 indicate that at the onset of determining the estimate 14 somewhere along the lines something was put in that 15 shouldn't have been put in, or is the situation that we 16 started out with the wrong number and ultimately 17 somewhere along the lines we decide -- the taxpayer 18 decided -- concluded that it should be more -- the 19 income should be more or the asset valuation should have 20 been higher or -- I'm trying to get to the crust of 21 the -- of the judgment here, because I can understand 22 the taxpayer's argument that there could be a legal 23 basis for the computation. In law you compute it this 24 way and if it's this then you do it this way, and -- but 25 certainly not for the amounts that the computa -- the 26 basis for the -- the tax. 27 MS. PEREZ: We have -- we have no information 28 showing what the accountant knew as of April 15th when 23 1 they made the estimate versus what they may have done 2 October 15th when the return was filed -- 3 MR. HORTON: Okay. 4 MS. PEREZ: -- with the wrong figures. 5 MR. HORTON: Of the taxpayer, is there -- was 6 there a schedule that was prepared for the estimated tax 7 liability? 8 MS. EVERSON: I believe so. 9 MR. HORTON: And does that schedule delineate 10 the various components of the tax returns and the 11 respective computations and -- 12 MS. EVERSON: Lists the various stocks that 13 are -- 14 MR. HORTON: Right, and how it's -- and how it 15 was treated? 16 MS. EVERSON: I do not believe so. 17 MR. HORTON: It's just a summary where it just 18 included a particular amount based on some factors, and 19 the only thing that really changed was that amount at 20 some point, recognized? Or maybe the -- the taxpayer, 21 themselves said, "Here's additional information that we 22 didn't give you and now that you have this additional 23 information," which often happens, and -- I mean you 24 have an estimated liability -- somewhere down the road 25 before October, whatever that date is, they come up and 26 they sit down and they say, "Well, no, I -- I forgot 27 about this W-2," or just to make it simple, certainly, 28 "Oh, I forgot about these stocks. Here's some 24 1 additional stock that we just didn't give you." And so, 2 oh, okay. Or you had all this but you didn't include 3 this. Why didn't you include it? 4 MS. EVERSON: I -- I know what you're saying. 5 I -- I see that often, but that did not happen in this 6 case. Jeff Quinn, who was the CPA, has already provided 7 the FTB a statement in his original appeal request that 8 says, "All the information has been provide -- was 9 provided to me before the April 15, 2008 deadline." 10 And I am saying again that that was the case. 11 MR. HORTON: The CPA -- CPA had all the 12 information before the -- and the CPA did a schedule 13 to -- to estimate what the tax would have -- would be -- 14 should be and all that information was included in the 15 schedule? 16 MS. EVERSON: Yes, but I don't believe -- I 17 don't believe that that schedule, the detailed -- 18 MR. HORTON: I mean, if I was to take that 19 schedule and compare it to the final return, what would 20 be the difference? 21 MS. EVERSON: The difference would be the 22 million-five that was the adjustment in -- in stock 23 basis. 24 MR. HORTON: And that million-five is 25 attributed to what? 26 MS. EVERSON: To the difference in the stock 27 basis that was applied both by the CPA's staff and again 28 by the CPA. 25 1 MR. HORTON: And how was that basis determined 2 based on -- that the basis was determined based on point 3 of law or some calculation? 4 MS. EVERSON: Based on the point of law in 5 743(b) I believe, which talks about you can either have 6 an election or you can have built-in losses in the 7 stock. And based on the built-in losses then you adjust 8 the basis accordingly. 9 MR. HORTON: I think you got there, maybe. 10 Franchise Tax Board, what's your opinion on that? 11 MS. PEREZ: First of all, I'd like to point out 12 that it's -- in looking at the appeal letter and 13 everything I do not see any statement at all from the 14 accountant. The appeal letter is -- is from Ms. 15 Everson -- 16 MS. MANDEL: Yeah, I think she's talking about 17 what went in -- 18 MR. HORTON: And I -- 19 MS. MANDEL: -- at protest and we might not -- 20 we might not have it here. 21 MR. HORTON: I don't know that that 22 statement -- 23 MS. MANDEL: Yeah. 24 MR. HORTON: -- would matter to me, anyway. 25 MS. PEREZ: Right. 26 MR. HORTON: So, but -- 27 MS. PEREZ: Again it's -- 28 MR. HORTON: -- the taxpayer's representative 26 1 has alleged that there was a 1.5 differential and that 2 was based on how to treat -- how to determine the value 3 of that stock and he made a mistake. 4 MS. PEREZ: It's possible. We have no 5 information showing what that -- what that was. 6 MR. HORTON: So, if they provided you -- 7 MS. PEREZ: We were more than willing to 8 entertain additional information from the accountant 9 to -- and we -- we asked for it, your Board asked for 10 it, and to date we haven't received it. 11 MR. HORTON: So if the accountant could provide 12 you the preliminary schedules that they used to compute 13 the estimated tax liability and therein you would find a 14 $1.5 million calculation that was based on a presumption 15 of law to say here's how you compute the -- the value -- 16 or the base value and make these extrapolations, and 17 then later on you find that they didn't treat it that 18 way, for whatever reason, obviously because of this 19 change of -- change of opinion as to how the calculation 20 should be made, would that suffice? 21 MS. PEREZ: We would definitely entertain that 22 and -- and look at the information. 23 MR. KELLY: Mr. Horton, I would recommend that 24 in addition to the schedule that the CPA provide an 25 explanation of the analysis that went into that 26 estimated tax liability. 27 MR. HORTON: Right. 28 MS. KELLY: Because that's the piece that's 27 1 missing. 2 You know, it looks like it may have been based 3 on his analysis of law, but nothing really pins that 4 down. 5 6 MR. HORTON: How much time would you need to be 7 able to get that information -- or can you? 8 I mean -- 9 MS. EVERSON: Yes, I -- yes, I think it will 10 just be a reiteration of what I've already expressed, 11 but I can do that in a week's time. 12 MS. YEE: Okay. And -- and you understand what 13 we're looking for? 14 MS. EVERSON: I believe so. 15 MS. YEE: Okay. 16 MS. MANDEL: Yeah, from -- from -- from the 17 CPA. And since this is a -- you know, this is a new 18 proceeding, whatever -- whatever he gave FTB before the 19 appeal came here, we don't have that as part of this 20 record. 21 So if he wrote a separate letter to FTB trying 22 to get them to waive the penalty before you filed the 23 appeal here, unless you gave us that letter we don't -- 24 we don't have it in our record here. We get to start a 25 whole new record here. 26 MS. EVERSON: All right. 27 MR. HORTON: Yeah. I mean, I'd like to see the 28 actual schedule, as well. I mean, I would and -- 28 1 MS. YEE: Yeah. 2 MR. HORTON: -- I think Franchise Tax Board 3 would need to see it -- 4 MS. PEREZ: Yes. Yes. 5 MR. HORTON: -- in addition to the explanation 6 as to what is meant there. It sounds like you got 7 there. I mean if that -- if that exists. 8 MS. PEREZ: Might I suggest that any statement 9 be under penalty of perjury? 10 MS. YEE: Yes, absolutely. 11 MS. PEREZ: Thank you. 12 MS. YEE: Okay, from your -- from the CPA. 13 MS. STEEL: The CPA is going to write that kind 14 of letter, though? 15 MS. EVERSON: In this case, yes, the CPA still 16 works for these -- these taxpayers and the CPA 17 acknowledges the error that was made just as I've 18 expressed to this Board. 19 MS. YEE: Okay. Well, if you can get -- 20 obtain the statement I think what we may want to do -- 21 MS. ALBY: Sure. 22 MS. YEE: -- is entertain a 30-30-30. 23 Okay. We'll -- I'll have Ms. Kelly describe 24 what that is, but to have you go back to the CPA, try to 25 obtain the statement under penalty of perjury from the 26 CPA. 27 Mr. Horton is interested in looking at the 28 schedule, but more importantly as to Ms. Kelly's point 29 1 we want to understand the thinking of the CPA in terms 2 of the analysis that went into the calculation that 3 speaks to a reliance on some interpretation of 4 substantive tax law. 5 MS. EVERSON: Thank you. 6 MS. YEE: Okay. 7 MS. KELLY: And you'll receive a letter from 8 the Appeals Division giving you a time line to do that. 9 MS. EVERSON: Oh. 10 MS. KELLY: It will be 30 days out. Then 11 Franchise Tax Board will have 30 days to respond to what 12 you provide and then the briefing will come to the 13 Appeals Division and we'll draft a decision for the 14 Board to consider. 15 MS. YEE: Yes. 16 MR. HORTON: Madam Chair. 17 MS. YEE: Yes, Mr. Horton. 18 MR. HORTON: Every time I hear that 30-30-30 it 19 gets me, but is -- it's not mandatory that you take 20 30-30-30. So -- 21 MS. YEE: If you can do it in a week we would 22 love it. 23 MR. HORTON: If you could get it back to us 24 right away, that would be -- I mean interest is 25 accruing, I guess. 26 MS. PEREZ: No, it's been paid. 27 MS. STEEL: No, it's -- 28 MR. HORTON: It's been waived? 30 1 MS. YEE: Yes. 2 MR. HORTON: Oh, okay. So that's a good thing. 3 MS. PEREZ: It's been paid. 4 MR. HORTON: Been paid. 5 MS. PEREZ: Yes. 6 MR. HORTON: Oh, okay. 7 MS. EVERSON: See how compliant -- 8 MR. SCOTT: It would be accruing on our side. 9 Pay allowed interest 10 MR. HORTON: Yeah, okay. That is -- 11 MS. EVERSON: These taxpayers, they're 12 compliant. 13 MR. HORTON: -- withdraw it, yeah. 14 MS. EVERSON: They want to be. 15 MS. YEE: Uh-huh. 16 MR. HORTON: All right. 17 MS. MANDEL: I so move then. 18 MS. YEE: All right. So a motion by Ms. Mandel 19 to allow a 30-30-30. 20 Is there a second? 21 MS. STEEL: Second. 22 MS. YEE: Second by Ms. Steel. Without 23 objection, that motion carries. 24 Thank you, Ms. Everson. We look forward to a 25 positive outcome here. 26 MS. EVERSON: Thank you. 27 MS. STEEL: Thank you. 28 ---oOo--- 31 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 July 13, 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 31 13 pages constitute a complete and accurate transcription 14 of the shorthand writing. 15 16 Dated: August 3, 2010. 17 18 19 ____________________________ 20 BEVERLY D. TOMS 21 Hearing Reporter 22 23 24 25 26 27 28 32