BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION 450 N Street, Room 121 Sacramento, California REPORTER'S TRANSCRIPT JULY 13, 2010 FINAL ACTIONS 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: Lou Ambrose 16 Appeals Division 17 Amy Kelly Appeals Division 18 Anthony Epolite 19 Appeals Division 20 ---oOo--- 21 22 23 24 25 26 27 28 2 1 ITEM B1 2 Sacramento, California 3 July 13, 2010 4 ---oOO--- 5 MS. YEE: All right. And let's see, are we 6 now, Ms. Olson, back to the items taken under 7 submission? 8 MS. OLSON: That's correct. 9 MS. YEE: Okay. And, let's see. So our first 10 item would be Item B1, Hank Feenstra and Catherine 11 Feenstra. 12 Members, is there a motion on item B1, Hank 13 Feenstra and Catherine Feenstra? 14 MS. ALBY: Let's see. I move to grant the 15 taxpayers' petition. 16 MS. YEE: Okay. Motion by Ms. Alby to grant 17 for Appellants. Is there a second? 18 MS. STEEL: Second. 19 MS. YEE: Second by Ms. Steel. 20 Discussion, please. 21 MS. STEEL: Well, you know, this case that IRS 22 already granted for that R & D credit and FTB was 23 talking about that Congress intent and using Federal 24 government regulations and then, you know, coming out 25 that why IRS granted but, you know, we are not doing it 26 because those -- that was research and experimenting was 27 research. And I think they was R & D and only thing 28 that I was not clear was base year, 1984 to 1989 so they 3 1 had to guess. But at the same time if they are not that 2 2001 there is other regulation that we can give them 3 three percent. 4 So that's what I heard. Is that right? For 5 R & D, when you cannot really figure it out, your R & D 6 cost. 7 MS. KELLY: Right, that was Appellant's 8 argument -- 9 MS. STEEL: You are using 1.3 -- 1.6 or 10 whatever percent. So I grant the petition. 11 MS. KELLY: And, Madam Chair -- 12 MS. YEE: Yes. 13 MS. KELLY: -- as a component of this motion I 14 think the -- part of it should be -- address 2004 -- 15 MS. YEE: Yes. 16 MS. KELLY: -- which is the jurisdiction issue. 17 So if there's a motion to grant the appeal the -- I 18 think it should be included whether or not that's -- 19 MS. STEEL: That's -- 20 MS. KELLY: -- going to cover 2004. 21 MS. STEEL: -- wait, yeah. 22 MS. YEE: Right. And then 2000 -- 23 MS. STEEL: Adjust it, yeah. 24 MS. YEE: Right. Okay. 25 All right. Other discussion, Members? 26 MR. HORTON: Yes. 27 MS. YEE: Mr. Horton. 28 MR. HORTON: Members, there seems to be that 4 1 there is some research and development going on here. 2 The taxpayer has not met the burden of supporting what 3 that is. It sounds as if though they actually developed 4 a number of tools that are unique to -- to the process 5 and to the industry in order to help facilitate the 6 utilization of this product. 7 And it could be some argument, although we 8 don't know and by the own -- by the testimony at FTB 9 they would have to actually go back and take a look at 10 the specs for the specs of the particular product. 11 In this case there are two products. The one 12 that -- on the front end of the process and the one on 13 the back end of the process. 14 So, I don't know why -- I guess maybe the 15 taxpayer took a position all or nothing and in that case 16 I would have to say nothing. But it seemed that both 17 parties agree that there's some element of R & D that 18 took place here. And it's just a question at this point 19 whether or not we can actually identify what that was. 20 MS. STEEL: Mr. Horton -- 21 MS. YEE: Ms. Steel. 22 MS. STEEL: -- you want me to withdraw my 23 motion and give 30-30-30 so they can have a little more 24 conversation and go through they have to look for? 25 MR. HORTON: I would like to hear from our 26 colleagues as well as staff if in fact what I'm -- what 27 I have -- my understanding of what was being said here 28 by both parties has some -- is consistent with what 5 1 everyone else heard. And let me just reiterate, if I 2 could, as briefly as I could, the Franchise Tax Board 3 conceded that the auditor identified an element of R & 4 D. Subsequent appellant actions, they discounted that 5 and then later on the Franchise Tax Board conceded that 6 they would not have to apply the 80 percent rule to the 7 entire period or an entire transaction; they could in 8 fact based on law and the Court cases look at the 9 individual transaction, if you will -- in this case 10 let's just take the development of the tool, that they 11 went through a process of developing this tool in order 12 to be able to drill certain -- a certain depth into the 13 wood without cracking the wood and so forth. That they 14 could take that in and of itself, that transaction, and 15 determine if the 80 percent rule applied to that 16 transaction as opposed to the entire transaction and 17 thereby say that that in itself, whatever labor is 18 associated with that or whatever the cost associated 19 with that would be R and D. 20 And then the Franchise Tax Board indicated that 21 they no evidence on whether or not we had a co -- a 22 combination of processes that in and of themselves 23 existed but the actual combining of that was never 24 anticipated by the manufacturer of the chemical. 25 I quite frankly think it was, but the evidence 26 wasn't there. 27 So, even if it is infinitesimal or -- or 28 immaterial in amount that's not up for me to decide. 6 1 That decision is up to the taxpayer, whether they want 2 to provide the documentation to support certain aspects 3 of what they do, was -- can be attributed to actual 4 research and development with the end results being a 5 brand new process or brand new part. 6 It seems that it's there. And so, -- but the 7 other challenge is I don't know if we get there with a 8 30-30-30. 9 MS. KELLY: Right. And then there's also the 10 question of the fixed base percentage. 11 MS. YEE: Right. 12 MS. KELLY: In order -- I mean, because we -- 13 if you assume that there's qualified research activity 14 and have shown the expenses that tie to that, then in 15 order to calculate the credit, you know, you need to 16 know the fixed base percentage. And that leads to the 17 argument that there was an alternate, that perhaps they 18 were a startup, and that whole argument I think was new 19 here at the oral hearing. And I think that would 20 probably need to be briefed by the parties. Because it 21 seems to me that as an alternative taxpayers are arguing 22 that altern -- you know, we can't demonstrate the fixed 23 base percentage. 24 But you get the same result using the -- the -- 25 how much was it? 26 MR. HORTON: Three percent. 27 MS. YEE: Three percent. 28 MS. KELLY: Three percent, right, as a startup. 7 1 Right, it comes to the same result. And that -- that 2 FTB hasn't had an opportunity to respond to that 3 argument in briefing, anyway. It was -- it was 4 discussed here at the oral hearing. 5 So there's a question of how would you 6 calculate the percentage. 7 MS. STEEL: No, actually that three percent 8 comes out that it's not going to be the same percentage. 9 MS. KELLY: Okay. 10 MR. HORTON: Or -- or if in fact that you -- 11 you're really entitled to it. I mean, this is really 12 a -- a startup R & D activity, not a startup business. 13 But there was an initial beginning point as far as 14 R & D. I mean, eventually we may actually come down to, 15 well, the R & D was incidental to the manufacturing 16 process or the quality control process. I don't know, 17 the facts aren't -- weren't there. 18 But at a minimum, we might want to ask the -- 19 ask that both sides sort of brief these two concerns and 20 take another look at it. But there again you've got a 21 situation where the taxpayer hasn't asked for it. And 22 so -- you know, I don't want to be in a position of 23 defending or not defending. I want to be as objective 24 as I can. 25 And objectively speaking, based on the evidence 26 that we have here, there's no basis. 27 MS. YEE: Yeah. Mr. Horton, I don't have any 28 objection to allowing more time, and I do think this 8 1 concept about being a startup is something that we heard 2 for the first time today. But I guess I have a more 3 fundamental problem, and that is how do we engage the 4 two parties with respect to what the nature of the 5 activity actually was. 6 I appreciated the powerpoint presentation today 7 but I don't know that I was any more clear after seeing 8 the presentation with respect to whether there was 9 qualified research activity or whether it really was all 10 part of, you know, routine manufacturing and quality 11 control. 12 And if we are to allow more time for the 13 appellants to provide additional clarification to us, 14 how would we even pose that question given the Franchise 15 Tax Board has been relative to characterizing the nature 16 of the activity? 17 Any thoughts on that, Ms. Kelly, or Appeals? 18 And then from there I would agree that the 19 fixed base percentage, we need something. I mean, I 20 just -- we have nothing really to -- 21 MR. AMBROSE: Well, with respect to the 22 qualified activity, it seems like it -- as -- as they 23 were -- you know, the discussion was going on I was 24 thinking, you know, it seems like there might be like a 25 continuum, you know, one end you have quality control 26 and manufacturing then it sort of moves over into 27 something that would, you know, approach or become 28 research activity. 9 1 So, you know, and it looks like they're on 2 opposite ends of the continuum. Although I did -- as 3 Mr. Horton indicated, I was hearing FTB sort of 4 conceding that they might be able to show, you know, 5 that some of this was -- that they actually conducted a 6 process of experimentation in the -- developing the 7 incisor machinery and the -- and the staining procedure. 8 MS. YEE: Hmm-hmm. 9 MS. ALBY: Madam Chair. 10 MS. YEE: Yes, Ms. Alby. 11 MS. ALBY: I just -- it's amazing what we -- 12 each of us hear different things. It's just amazing to 13 me. 14 I heard -- what I heard is these folks were -- 15 if they -- they had to rely on the Osmose or whatever 16 that product was that they talked about. That they -- 17 because of regulation changes and what not, what it did 18 to the wood that we have here on the West Coast, they 19 could not go forward in their business. 20 So as a result of that they really were 21 pioneers in developing this new treatment process here 22 on the West. Which other businesses have spun off of. 23 So, because of that research I -- I have a 24 problem. I don't know why we don't think there wasn't 25 some sort of research and development in this. 26 MS. YEE: Well, I guess it's less of an 27 argument if there was research to the extent that they 28 did rely on Osmose. And so, I mean there wasn't 10 1 anything new that was pursued and -- and if Cal Cascade 2 actually followed the guidelines of Osmose I think it 3 kind of weakens the case. But that's -- 4 MS. ALBY: Even the FTB though said that 5 there -- conceded, as you said, something happened here 6 in the -- in the -- what they did with this wood so that 7 it would absorb the proper chemicals. 8 So there was -- they did concede there was 9 something. So, at the very minimum I would hope that we 10 can put them back together, allow more time to see if we 11 can put -- that they could work this between taxpayer 12 and FTB. 13 MS. YEE: So -- so it sounds like with respect 14 to looking at what, if any, qualified research activity 15 occurred that it really is based on this notion of 16 experimentation. 17 So, maybe that's the way to couch the question 18 back to appellants is, you know, what -- what of your 19 activities consisted of some degree of experimentation. 20 Does that make sense? 21 MS. KELLY: It does. 22 MR. HORTON: What I -- Madam Chair, if I may. 23 MS. YEE: Yes, Mr. Horton 24 MR. HORTON: I think the taxpayer is going to 25 argue that all of it was experimentation. 26 MS. YEE: Well, not to the extent that they 27 rely on -- 28 MR. HORTON: Osmose. 11 1 MS. YEE: -- Osmose. 2 MR. HORTON: If I may augment that -- 3 MS. YEE: Uh-huh. 4 MR. HORTON: -- I don't know how to phrase it, 5 I probably could figure it out, but if there was -- if 6 there was an end result different than what was 7 anticipated by Osmose, an end product, something was 8 developed, in this case it seems to me that they were 9 going through -- trying to determine a quality -- to 10 answer a quality issue. Can we maintain the quality and 11 how do we go about doing that? 12 And so, that was the experiment related to 13 quality and manufacturing. If there was research that 14 yielded a different process or yielded a different tool, 15 widget, gidget, something that in and of itself could be 16 patent, we -- it doesn't necessarily have to have been 17 but could -- is new and could be used by the entire 18 industry, the mere fact that it enhances the quality 19 doesn't really matter. I mean, that's the goal of 20 research and development, is come up with a better 21 product. 22 So, in this process that they show -- shown us, 23 I saw them exchanging widgets and creating tools of some 24 sort. And some thought and experiment went into 25 developing those tools. I would say that that's some 26 research and development. 27 I also heard them ultimately come up with a new 28 process. I just wasn't able to ascertain whether or not 12 1 that new process was actually called for by the 2 manufacturer of the chemical, in itself. 3 And particularly when the manufacturer of the 4 chemical actually manufactures the stain as well as the 5 absorption chemical. And so, they could have very well 6 anticipated in advance but no one could answer that 7 question. 8 I don't know if -- and so, if staff believes 9 that there's some way that they can participate in this 10 process and make sure that we don't -- they don't come 11 back with the same arguments and their perspective that 12 the entire amount is research and development -- I don't 13 believe the entire amount is research and development. 14 I think a small amount at some point there was an 15 element of research and development and I'm not in a 16 position nor am I required to determine what that is. 17 The burden of that proof is on the taxpayer. 18 MS. YEE: Okay. Thank you, Mr. Horton. 19 Other comments? 20 MS. MANDEL: Oh -- 21 MS. YEE: Ms. Mandel, please. 22 MS. MANDEL: Just with respect to the comment 23 about IRS, I think there -- there was -- I mean, the -- 24 the company owner was so adamant that he was audited by 25 IRS and that the credit was allowed. 26 FTB said they didn't see it in the IRS 27 transcripts, but the gentleman was so adamant and -- I 28 mean, if they have an IRS audit report, I mean I know 13 1 that we can say, oh, well, IRS didn't really look at it 2 or we had facts IRS didn't have or whatever. But -- 3 MR. HORTON: Is -- 4 MS. MANDEL: -- that's -- you know, if they 5 have the information of -- that IRS looked at it and -- 6 and did something, even if it's 2004, that would be 7 useful information if you were getting additional 8 information. 9 But I wouldn't be prepared at this point to say 10 I'm doing something on the basis of -- that IRS did it 11 because I don't know that I actually have anything 12 tangible in my hands about IRS doing something. 13 MR. HORTON: The taxpayers' representative 14 conceded that the IRS test was not that thorough, 15 complete. 16 MS. MANDEL: Uh-huh. 17 MR. HORTON: I mean, they actually said that 18 that wasn't the case. I mean, they seemed to have used 19 that as a point of argument to distract the reality, I 20 guess. I don't know, I think we -- 21 MS. MANDEL: Well, I -- maybe that's -- yeah, I 22 mean, I'm not going to make a decision based on IRS did 23 something -- 24 MR. HORTON: Yeah. 25 MS. MANDEL: -- unless I see, you know, what 26 IRS -- 27 MR. HORTON: I mean, they even went as far as 28 to say that it could have been a no change or, you 14 1 know -- 2 MS. MANDEL: Yeah. 3 MR. HORTON: You know, so -- 4 MS. YEE: Okay. Other comments, Members? 5 Appeals, do you have a sense of what we might 6 be looking for? 7 MR. AMBROSE: I think so. 8 MS. YEE: Okay. So, are we looking at a 9 30-30-30 then? Okay. 10 MS. STEEL: A 30-30-30. 11 MS. YEE: Motion? 12 MS. STEEL: Yeah. 13 MS. ALBY: Yes. 14 MS. YEE: Motion by Ms. Steel. Okay. So 15 let's -- so the prior motion has been rescinded then, 16 Ms. Alby, Ms. Steel? 17 MS. STEEL: Yes. 18 MS. YEE: Okay. Motion by Ms. Steel, second by 19 Ms. Alby, grant a 30-30-30. 20 Without objection, that motion carries. 21 Thank you very much. 22 ---oOo--- 23 24 25 26 27 28 15 1 ITEM B2. 2 MS. YEE: Okay. Next item is item B2a, Felix 3 Lin and Betty Lin; item 2 -- B2b, Linus Upson; item 2Bc, 4 Rafael Weinstein. 5 May I have a motion, please. 6 MS. MANDEL: You know, on -- on this one, I 7 would really like to see if they can tie down that 8 monthly thing -- 9 MS. YEE: Yes. 10 MS. MANDEL: -- because now -- you know, I just 11 did my quickie math, but at -- you know, assuming it's 12 22 weeks in each of those years, I kind of said, well, 13 okay, 22 weeks if it's four and a half weeks a month, 14 you know, does that -- what does that give them. 15 And if that gave them seven more months each 16 year with 80 percent -- meeting the 80 percent test, 17 then based on the months that each of them had a holding 18 period I think there -- you know, don't hold me to my 19 quickie math, but I think that -- that all -- all three 20 of them could bump over the 85 percent and then you'd -- 21 you know, some of them by the skin of the skin, but then 22 you don't even have to worry about whether it should be 23 80 percent for substantially all or 85 percent. 24 And, you know, maybe it's in the materials and 25 I, you know, missed it but I don't -- because I -- I 26 have so much materials to read for these Board meetings, 27 but I -- I really came in here with the idea that FTB 28 wasn't going to go for a month by month. So -- 16 1 MR. HORTON: That was surprising to me, too. 2 MS. MANDEL: Yeah. So, I -- do you have a -- 3 MR. EPOLITE: Well, I don't know if I know the 4 calculations would get everybody over the 85 percent 5 mark. 6 MS. MANDEL: Yeah, but if it doesn't get them 7 over the 85 percent then you have to come back and 8 figure out what you think about the substantially all. 9 MR. EPOLITE: But it looks like at least 12 10 months probably will get everybody at 80 percent or 11 somewhere between 80 to 85 percent. 12 So -- 13 MS. MANDEL: Yeah. See, and I was thinking 14 that -- that it's possible that if it's only 22 weeks 15 were each year that they pick up -- each of them picks 16 up an additional 14 months, and then that kicks them 17 over the 85. 18 But -- but I don't remember that there's 19 paperwork -- 20 MR. EPOLITE: Each of them have a different 21 holding period. 22 MS. MANDEL: Yeah. 23 MS. YEE: Yeah. 24 MS. MANDEL: So that -- yeah. 25 MR. EPOLITE: So it's going to be -- it would 26 be close. 27 MS. MANDEL: It's going to be close. And then 28 if it's -- if they're between 80 and 85 then you have to 17 1 decide what you think about the substantially all test. 2 MR. EPOLITE: Correct. 3 MS. MANDEL: But I -- all I'm saying is I -- 4 you -- I don't remember seeing in the paperwork 5 something to make the ties to necessarily make all those 6 judgments right now about the 22 -- on a monthly basis. 7 MR. EPOLITE: No. And -- 8 MS. MANDEL: Okay. 9 MR. EPOLITE: And most of Appellant's argument 10 was focused only on the one year, 2002. They did not 11 provide anything for 2000 -- for 2001, which was the 12 other year in which all 12 months were eliminated. 13 MS. YEE: Uh-huh. 14 MS. MANDEL: Yeah. Okay, well -- 15 MS. YEE: This is information that -- how much 16 time would we need to kind of get a sense of what Ms. 17 Mandel is looking at? 18 MS. KELLY: Well, it would give the 19 taxpayers -- the Appellants 30 -- 30 days to provide 20 what they have. They indicated they had limited 21 information on the payroll. 22 MS. YEE: Yes. 23 MS. KELLY: That's what concerns me. 24 MS. YEE: Right. 25 MS. KELLY: They basically had I think year-end 26 figures. They had the SEC filings demonstrating the 27 severance pay, I think. So they had totals possibly -- 28 1 don't know -- 18 1 MS. MANDEL: Right. But they might not have 2 the actual -- you know, the -- we -- they might not -- 3 the key was that if severance pay was paid in a limited 4 period of time, it doesn't really matter how much the 5 severance pay was, because it's the severance pay that's 6 skewing everything. 7 So, if they have other available documentary 8 evidence from which you can make the inference that 9 severance pay was not paid in January, February, March, 10 April -- was not paid in, you know, November, December 11 and -- what -- October, November and December, but was 12 paid in the other months in that year, you don't -- it 13 doesn't matter what the dollar figure is of the 14 severance pay, because then you're like from whatever 15 they have, whether it's SEC filings, press releases, you 16 know, somebody's sued them for naughty severance and 17 alleged when they were fired, or let go or whatever the 18 polite term is, downsized, you know, they would have 19 other information that, as the gentleman was testifying 20 about, what his recollection was of when they were 21 letting people go and when the severance went in or -- 22 you know, if they -- you know, they let these people go 23 so they're not going to -- the people aren't going to 24 talk to them, probably -- but, you know, if they had 25 other information from which you could infer what the 26 period of time is when severance was being paid then 27 those months fall out of the calculation as not 80 28 percent months, presumably. And you're left with what 19 1 remains. 2 Yes. 3 MR. EPOLITE: But even if you can break it down 4 to monthly totals the trick is still to pull out the 5 California portion out of the total payroll for each of 6 those months. 7 MS. MANDEL: Well, yes, in a sense, if you're, 8 you know, totally focused on numbers. But if -- if the 9 entire picture of this company without -- you know, if 10 they just chugged along and didn't sever anybody, the 11 picture before, the picture after, the picture of their 12 operations was they had so many employees in all these 13 different areas, almost -- you know, more than 14 substantially all the employees were in California. 15 Their payroll for all of the periods before they ever 16 started letting people go and downsizing, they had more 17 than 80 percent payroll in California. 18 Afterwards they had more than 80 percent 19 payroll in California. It really sounds like the only 20 time they didn't have 80 percent in California was when 21 they were paying these large severance payments. 22 MR. EPOLITE: Well, in 2000 it was 86 percent 23 for California and in 2003 90 percent for California. 24 MS. MANDEL: Right. So, I mean, you know, one 25 of the -- it just gets to be a question of, you know, 26 what -- what is enough evidence to make you believe the 27 fact that they had more than 80 percent payroll in 28 particular months in the State of California and 20 1 their -- the argument would -- would be or that the way 2 that you would look at it is if it's the severance pay, 3 and I'm repeating myself -- if it's the severance pay 4 that's messing up the 80 percent -- 5 MR. EPOLITE: Uh-huh. 6 MS. MANDEL: -- if -- and if there -- there 7 was, you know, all those years when they didn't have the 8 severance pay they were over 80 percent. 9 So, if -- in the first three months of the year 10 everything is kicking along happy and they haven't let 11 anybody go, the inference presumably is they meet the 80 12 percent. Based on all of the facts of their operation 13 and payroll numbers. Unless you think they hired some 14 guy in January of that year in the UK at some exorbitant 15 payroll. 16 But without information I mean, you know, you 17 got to go with -- 18 MR. EPOLITE: Sure. 19 MS. MANDEL: -- based on all the evidence that 20 they can produce to say whatever it is they're going to 21 say. 22 And it may be that they come back and it may be 23 that they are able to segregate the severance pay period 24 or the inference can be made that there's a severance 25 pay period in this minimal part of time and that FTB's 26 response is, oh, but we don't know such and such about 27 these miscellaneous other months where they weren't 28 paying severance pay, and then the Board will have to 21 1 decide what it thinks the answer is based on all 2 available evidence and which way they're going to go. 3 But that -- I mean, I understand that they may 4 not have -- you know, if they could -- if they had the 5 payroll by the month they certainly would have brought 6 that forward and she did say that they, you know -- 7 MS. YEE: Mr. Horton, please. 8 MR. HORTON: I think we first have to answer -- 9 even though the Franchise Tax Board conceded that you 10 could make this calculation on a month-to-month basis, I 11 don't know that -- I don't know that to be true. 12 So that may be the first step, is to determine 13 if that could occur. And as opposed to having to be 14 consistent with some type of reporting period. I don't 15 know. But that would be -- because -- and then if so, I 16 mean I happen to believe that the severance pay is part 17 of employment, not part of termination. You know, it's 18 what you get because you were an employee, not because 19 you quit. 20 If so, I would sign up and quit the next day so 21 I can get that severance pay. But I'm sure there's 22 more -- more entitlement relative to that. So, -- 23 MS. YEE: Thank you, Mr. Horton. 24 Other comments, Members, here? 25 MS. ALBY: I have a comment. 26 MS. YEE: Yes, Ms. Alby, please. 27 MS. ALBY: I have a question for staff, 28 actually. Not -- I don't really know where we're going 22 1 on this yet. Maybe the -- give some more time to the 2 taxpayer. 3 But my question is this, whatever the final 4 outcome is, and this is a very, very complicated case, 5 and is it worth publishing once we -- when we do have a 6 final outcome? It will give -- I mean, severance pay, 7 termination costs, there are going to be common issues 8 in those things. Is it -- won't it give good -- you 9 know, good value to taxpayers that have similar 10 circumstances? What's your opinion relative to maybe 11 publishing this particular case? 12 MR. HORTON: I can give it a shot. 13 MS. YEE: Uh-huh. Mr. Horton. 14 MS. KELLY: Well -- 15 MR. HORTON: I mean, I -- I think these are 16 contractual relationships. And the outcome will be 17 inherent on the contract in and of itself. I mean in 18 this case I mean you could have -- I don't know if 19 anyone would have, but you certainly could have 20 attribute -- you could have created a contractual 21 relationship that would have caused the severance pay 22 not to be part of your employment. That could have 23 happened. 24 And so, in light of that the circumstances and 25 the facts can change. And existing law is -- and Court 26 cases are relatively clear -- I certainly always 27 entertain further clarification if we go through a 28 process of, you know, providing -- what -- what is 23 1 that -- public comments and so forth. It would be kind 2 of lengthy but we may end up right back where we are. 3 These are contractual relationships and it will always 4 be dependent upon the evidence. So -- 5 MS. KELLY: And I think it depends in part on 6 how the Board decides this appeal. So, if the 7 appellants bring forth enough information that they 8 demonstrate that they meet the 80 percent test -- 9 MS. ALBY: Right. 10 MS. KELLY: -- then it makes it a lot less 11 interesting because other issues would not be reached. 12 We wouldn't have to reach the other issues. 13 MS. ALBY: Well, if it stays interesting 14 maybe -- 15 MS. KELLY: Then the Board could direct -- if 16 it stays interesting then the Board could direct Appeals 17 after it decides the case for a formal. 18 MR. HORTON: I needed that. 19 MS. YEE: It is interesting. All right. 20 MS. MANDEL: So, then I guess I'd move the 21 30-30-30. 22 MS. YEE: All right. We have a motion by Ms. 23 Mandel to grant 30-30-30 on this matter. Is there a 24 second? 25 MS. STEEL: Second. 26 MS. YEE: Second by Ms. Steel. And, Appeals, 27 you have enough direction here? 28 MR. EPOLITE: Yes. 24 1 MS. YEE: Okay. Very well. Without objection, 2 that motion carries. Thank you. 3 ---oOo--- 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 25 1 ITEM B4. 2 MS. YEE: Our next item is item B4, Kevin E. 3 Gertner and Berta Martinez. May I have a motion, 4 please? 5 MR. HORTON: Oh, okay. 6 MS. YEE: Uh-huh. 7 MR. HORTON: Wow. (inaudible) 8 MS. MANDEL: Sustain Franchise Tax Board. 9 MS. YEE: Okay. I have a motion by Ms. Mandel 10 to sustain the Franchise Tax Board. I will second that 11 motion. 12 Discussion? 13 Mr. Horton. 14 MR. HORTON: Thank you, Madam Chair. I 15 actually came in with the -- after looking at -- prior 16 to the testimony and subsequent information, prepared to 17 grant the appeal. And then it seemed to become evident 18 that there was -- there was -- there was a value 19 established prior to at the consummation of the deal and 20 the escrow was subsequently created. And then the only 21 thing that would ultimately determine would be the value 22 and that value would be set based on whether or not -- 23 or a number of different factors, but yet still it -- it 24 occurred in California. 25 And -- but he ultimately paid so -- it was a -- 26 I even wanted to sort of bifurcate the two and say, 27 okay, well here's a -- here's a point in time that it 28 had absolutely no value and if the -- the contract 26 1 terminated -- but if the contract terminated due to his 2 death or withdraw of employment there's still a value to 3 the stock and that value would have been determined 4 based on vesting and than all of the other activities 5 whether or not the product was working and whether or 6 not the market was viable and even, so -- anyway I 7 support the motion at this point. 8 MS. YEE: Okay. Thank you, Mr. Horton. Other 9 comments, Members? 10 Yeah, I think to the -- the degree that there 11 wasn't any correlation between the timing and the 12 amounts of the payments to the vesting schedule or just 13 any other suggestion of any kind of contingency to the 14 transaction was compelling for me. So -- other 15 thoughts? 16 Okay. A motion by Ms. Mandel, seconded by Yee 17 to sustain the Franchise Tax Board. 18 Without objection, that motion carries. 19 ---oOo--- 20 21 22 23 24 25 26 27 28 27 1 ITEMB7 2 MS. YEE: Okay. Our next item is -- 3 MS. OLSON: B7. 4 MS. YEE: Okay. 5 MS. OLSON: Clovus M. Sykes. 6 MS. YEE: Okay, item B7, Clovus M. Sykes. May 7 I have a motion, please. 8 MS. ALBY: Move to sustain. 9 MR. HORTON: Second. 10 MS. YEE: Okay. Is there any more to the 11 motion? 12 MS. MANDEL: A penalty. 13 MR. HORTON: That includes a penalty? 14 MS. YEE: Ms. Alby, do you want to -- does that 15 include a frivolous appeal penalty? 16 MS. ALBY: Oh, yeah, that was a little high, I 17 thought. Let me go back. 18 MR. HORTON: Well, I could make an argument for 19 the taxpayer. Seems to be a misunderstanding of the -- 20 of the law. I mean, he's clearly believing what he -- 21 what he's advocating. That in and of itself, and the 22 return was filed, so now we're determining the amount of 23 the return, the amount of the liability. 24 So, I don't know. I certainly would defer to 25 Ms. Alby, though. Just my comments. 26 MS. ALBY: I think I'd prefer 750 as the 27 penalty, rather than -- 28 MS. MANDEL: This is the second appeal -- 28 1 hearing, we just saw, recently? 2 MS. YEE: Yes. 3 MS. KELLY: Yes, the -- the first one was -- 4 MR. HORTON: The first one we -- 5 MS. KELLY: -- a consolidated hearing and -- 6 MS. YEE: It was two years. 7 MS. KELLY: -- the Board imposed $375 for each 8 year, so it was a total of 750 for his first appeal. 9 MS. YEE: Okay. 10 MS. ALBY: I'm -- 11 MS. YEE: Ms. Alby -- 12 MS. ALBY: -- 750, I think -- 13 MS. YEE: Okay, then the motion incorporates a 14 $750 frivolous appeal penalty. 15 Without objection, such will be the order. 16 Okay, Ms. Olson, that's all I have for today. 17 MS. OLSON: That's it. 18 MS. YEE: Did I miss anything? 19 MS. OLSON: That's right. That concludes our 20 business. 21 ---oOo--- 22 23 24 25 26 27 28 29 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 29 13 pages constitute a complete and accurate transcription 14 of the shorthand writing. 15 16 Dated: July 27, 2010. 17 18 19 ____________________________ 20 BEVERLY D. TOMS 21 Hearing Reporter 22 23 24 25 26 27 28 30