BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION 450 N Street, Room 121 Sacramento, California REPORTER'S TRANSCRIPT MAY 24, 2011 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 Jerome E. Horton of Equalization: Chairman 5 Michelle Steel 6 Vice-Chairwoman 7 Betty T. Yee Member 8 George Runner 9 Member 10 Marcy Jo Mandel Appearing for John Chiang 11 State Controller (per Government Code 12 Section 7.9) 13 Diane Olson, Chief Board Proceedings Division 14 Board of Equalization 15 staff: Grant Thompson Legal Department 16 Anthony Epolite 17 Legal Department 18 Deborah Cooke Legal Department 19 David Levine 20 Appeals Division 21 22 --oOo--- 23 24 25 26 27 28 2 1 ITEM B1 2 Sacramento, California 3 May 24, 2011 4 ---oOO--- 5 MS. OLSON: Our next item is B1, Royal Housing, 6 Incorporated. 7 MR. HORTON: Members, are there any questions? 8 Discussion? 9 Is there a motion? 10 MS. YEE: Move -- 11 MS. STEEL: Grant the petition. 12 MR. HORTON: It's been moved by Ms. Steel to 13 grant the petition, second by Ms. Yee. 14 MS. YEE: No, I'm not -- 15 MR. HORTON: Oh, strike that. 16 Moved by Ms. Steel to grant -- oh, grant the 17 petition. Moved by Ms. Steel to grant the petition, 18 second by -- 19 Without a second the motion -- 20 MR. RUNNER: I'll second -- excuse me, I'm 21 second -- I'll second it. 22 MR. HORTON: Okay. Second by Mr. Runner. 23 Discussion, Members? 24 Objection, Members? 25 MS. YEE: Objection. 26 MR. HORTON: So noted. 27 Ms. -- Ms. Olson, please call the roll. 28 MS. OLSON: Mr. Horton. 3 1 MR. HORTON: No. 2 MS. OLSON: Ms. Steel. 3 MS. STEEL: Aye. 4 MS. OLSON: Mr. Runner. 5 MR. RUNNER: Aye. 6 MS. OLSON: Ms. Yee. 7 MS. YEE: No. 8 MS. OLSON: Ms. Mandel. 9 MS. MANDEL: No. 10 MS. OLSON: Motion fails. 11 MR. HORTON: Subsequent motion, Members? 12 MS. YEE: I move to sustain the Franchise Tax 13 Board. 14 MR. HORTON: It's been moved by Ms. Yee to 15 sustain. Second by Ms. Mandel. 16 Objection, Members? 17 MS. STEEL: Objection. 18 MR. RUNNER: Objection. 19 MR. HORTON: So noted. 20 Discussion, Members? 21 MR. RUNNER: Yeah, just a quick -- you know, 22 I'd -- I think I could find myself somewhere in between 23 here, especially given the example that was given here 24 with the Ringgold case where the Court actually found 25 some middle ground. 26 It seems to me that there was some -- some 27 circumstances, although not all agreed on, in regards to 28 the -- the property -- or the val -- excuse me, not the 4 1 property but the value asset and so I think -- we have a 2 motion or -- no second on that? 3 MR. HORTON: Yes. 4 MR. RUNNER: Was there a second? 5 MR. HORTON: Yes. Well -- 6 MS. MANDEL: Well, for -- for purposes of 7 discussion, certainly. 8 MR. HORTON: For purpose of discussion. 9 MR. RUNNER: Well, okay, let me try this then, 10 maybe -- I'd like to do a substitute motion, and lower 11 the assessment to $40,000. 12 MS. YEE: And the basis of that? 13 MR. RUNNER: In the example of the -- that we 14 saw in the -- in the Ringgold case was just the -- that 15 the case -- the Court took a number of issues that we're 16 trying to bear down on the value of -- of that -- 17 MR. HORTON: Members, let me just clarify 18 something real quick. There's a motion on the table, a 19 second. That has to be discussed or the maker of the 20 motion could accept a friendly amendment to that motion. 21 That doesn't seem to be the case. We have to dispense 22 with that one. 23 But considering this is a Board of Equalization 24 we should probably just discuss it and then decide how 25 to move forward. 26 MR. RUNNER: Okay. 27 MR. HORTON: All right. 28 MR. RUNNER: Yeah, I -- I -- yeah, I think 5 1 it's -- there's no doubt that it's arbitrary in the 2 sense that as the Court in the -- in the Ringgold case 3 found, did not find on the full sale value and had other 4 issues attached to it, it seemed to me that we had some 5 other considerations in terms of the value. 6 And so, again, certainly there was in that case 7 some credence to the sale but it certainly did not set 8 the tax value. 9 And so, I -- you know, I just think that, you 10 know, the issue of -- of fairness in trying to bring 11 into those -- those discussions warrant a smaller amount 12 and I think $40,000 is more than half. 13 MS. STEEL: That's the tax assessment. 14 MR. RUNNER: That would be the tax assessment. 15 MS. STEEL: From 76,200. 16 MR. RUNNER: Uh-huh. 17 MS. STEEL: I can go for that. 18 MS. MANDEL: I -- I think what the Court did in 19 Ringgold was it analyzed the various valuations that it 20 had in front of it -- 21 MS. YEE: Right. 22 MS. MANDEL: -- and decided on a value figure 23 for the assets, which then according to how it would go 24 for what the built-in gains might be, I think that's 25 how -- I don't -- I don't think you'd pick a tax figure 26 but if you thought there was problems with -- and the 27 reason FTB stuck with their 2.7 was that they thought 28 the valuations that were done for the taxpayer's side -- 6 1 they thought they had reasons to completely dismiss 2 those valuations. 3 The taxpayer said that they had a problem with 4 the 2.7 that the FTB was using because they believed 5 that there was events that occurred after the valuation 6 date of 1-1-03 that they asserted would not have been 7 foreseeable on 1-1-03 so they thought that that was what 8 bumped up the number. 9 But as Mr. Horton did point out that there was 10 some information that negotiations were pretty tight to 11 that number before negotiations fell apart just prior to 12 1-1-03. 13 So, it's -- but I'm -- I'm -- I don't think you 14 can -- I'm not just pick a tax number unless you've done 15 all the -- 16 MS. YEE: Yeah. 17 MS. MANDEL: -- math. 18 MR. RUNNER: Was that -- is that -- I guess let 19 me ask Legal. We're required to -- there's not a -- 20 we -- we -- we don't have the ability to adjust that 21 number? 22 MR. THOMPSON: Well -- well, what the Court did 23 in Ringgold -- 24 MR. RUNNER: No, no, I didn't ask that. I said 25 what -- do we have the ability to adjust the number? 26 MR. THOMPSON: You do have the ability to 27 adjust the number. I think -- 28 MR. RUNNER: Okay. 7 1 MR. THOMPSON: -- you'd want to be supported -- 2 MR. RUNNER: Okay, but I just -- 3 MR. THOMPSON: -- so, yeah. 4 MR. RUNNER: -- just to clarify, we do have the 5 ability to adjust the number. It could be the fact that 6 we find that we adjust the number because the two 7 disagree and we just find some middle ground. That 8 could be our justification, correct? 9 MR. THOMPSON: Well, like -- I hesitate only 10 because I -- I don't think you should settle it. But it 11 sounds like if you -- you know, you look at the record 12 and you see -- 13 MR. RUNNER: I guess I didn't ask you what you 14 think. I asked -- 15 MR. THOMPSON: Right. 16 MR. RUNNER: I asked if indeed -- if indeed we 17 can find a number that we -- and we justify that number 18 saying that the State feels it's this much, the -- the 19 taxpayer thinks it's this much, and we choose a number 20 in between based upon the arguments that we heard, we 21 can do that, right? 22 MR. HORTON: Yes. 23 MR. THOMPSON: Yes. 24 MR. HORTON: Taking all the extenuating 25 circumstances -- 26 MR. RUNNER: Yeah. 27 MR. HORTON: -- under consideration. 28 MR. RUNNER: Okay, thanks. 8 1 MS. YEE: Mr. Chairman -- 2 MR. HORTON: Member Yee. 3 MS. YEE: I think in light of the Courts at 4 least recognizing that we can establish a reasonable 5 determination of the value of these assets, if they were 6 dispensed with within a reasonable time frame of the 7 "S" Corporation election date and looking at the 8 provisions that were contained in the stipulated 9 judgment and the Settlement Agreement, both of which 10 pre-dated the "S" Corporation election date and the 11 stipulated judgment I believe was the one that 12 essentially dismissed all claims and cause actions that 13 were pending at the time, I do think it's reasonable 14 that we look at the 2.7 million as the value. 15 I -- I -- I would agree the Franchise Tax Board 16 in terms of the -- the flawed valuation that the 17 Appellants were putting forth in that it didn't really 18 reflect the value of the notes, themselves, but of the 19 related stock. 20 So, all that put together I think the 2.7 21 million is reasonable as the basis upon which we 22 calculate the built-in gains tax. 23 MR. HORTON: Thank you. 24 MS. STEEL: But there's -- this taxpayer hired 25 two experts and Franchise Tax Board never did that. And 26 2.7 million was September of 2003. We are looking for 27 actually market value -- fair market value of January of 28 2003. Under the litigation what kind of people is going 9 1 to buy that kind of company that knows that it is under 2 the litigation? 3 So 2.7 million was after they found out that 4 San Martin property -- I believe that was San Martin 5 property, that they found out they can get more money, 6 that's the only reason that they negotiated down to 2.7 7 million. 8 So I don't think that's really fair to the 9 taxpayer for January of 2003 fair market price was 2.7 10 million because they found out on May of 2003 that San 11 Martin property was valuable at that point, so their 12 negotiations started back. 13 If their negotiation on 2002 went through with 14 2.7 million I totally understand that, but that really 15 dismissed at that point so we cannot really calculate 16 that as the fair market value. 17 MS. YEE: Yeah, they had some indication on the 18 San Martin property, though, even prior to that May '03 19 date that they were going to -- it could be sold under 20 pretty favorable terms. 21 So I -- I think -- I mean there was an 22 indication prior to when the sale actually took place. 23 And, as Mr. Horton observed, even prior to the "S" 24 Corporation election date there -- there was starting to 25 be a sense that this 2.7 million had some -- had some 26 basis of reality. 27 MS. STEEL: I can't believe 270,000 to 2.7 28 million -- it has to be between that, but not for 2.7 10 1 million. That's -- 2 MR. HORTON: Members, the challenge I had, 3 which I attempted to sort of articulate, the market 4 value as the appraiser looked at the -- the property, I 5 mean the asset and its evaluation was focused on market 6 value in determining what would, you know, a person pay 7 given the restrictions on the property. 8 Well, I mean if you own a piece of property and 9 there's a lis pendens on the property they're not going 10 to pay you anything but the property still has value. 11 And the evaluation of the value occurred in two 12 or three different transactions. The first transaction 13 was in September of 19 -- September 19, '02 when there 14 was a tentative settlement that took place and the 15 valuation, two parties got together and for a pretty 16 lengthy time, considering the length of time of the 17 transaction, decided it was 2.7. 18 And then there's another valuation and which is 19 the ultimate value of the asset, which they would have 20 received had they held onto the asset, which was 21 somewhere around $8.6 million just allowing the asset, 22 itself, to mature. 23 Arguably ten years down the road maybe they 24 wouldn't have been able to sell it but they certainly 25 would have been able to recoup 8.6 million of which 26 their 33 percent share probably would have came out to 27 2.7, as well. 28 And then they entered into renegotiations at 11 1 some point between January 1st and May 1st, which is 2 pretty close. And in the Ringgold case there was --- 3 the appraisal took all of these factors into 4 consideration and that's why it had value and it was 5 considered meritorious in the assessment, because not 6 only was it the appraisal taking near the transaction 7 but it took all the extenuating circumstances in -- into 8 consideration. 9 The appraisal that was performed by the 10 Appellant in this case seems to look strictly at market 11 value, not the actual value of the asset, the 8.5 12 million, the potential settlement value as of September 13 19th, which is 2.7. 14 And then the variables that would have taken 15 place between January and May, once they determined that 16 it had a greater value, at some point it appeared that 17 it had a greater value than even the 2.7 million. It's 18 just that they couldn't hold out and defend the case 19 because all of a sudden San Martin came into play and it 20 had a $400,000 -- the 400 million -- $400,000 value. 21 And that's not enough to get close to the 2.7 but that 22 is enough to tell a -- a -- a -- a buyer or a seller or 23 negotiator that possibly the rest of it has a value, as 24 well. 25 So, that -- that was the challenge that I had. 26 I sort of started out saying, you know, let's just split 27 the baby and I agree with Mr. Runner, I think there are 28 situations where we -- we're forced to do that when we 12 1 take in consideration all of the variables. 2 But every one of the arm's length negotiations 3 indicated a value either at 2.7 or a value greater than 4 2.7. 5 MR. RUNNER: Well -- 6 MR. HORTON: I never really got down to the -- 7 and he never really said where the 250,000 number came 8 from. 9 So -- and then the other challenge that I have 10 then I'll relinquish, Mr. Runner, is that it's difficult 11 for me to -- to defend a case without the Appellant 12 defending themselves, and a putting forth -- at least 13 enough evidence that we can kind of make some 14 determination in their favor, especially when we're 15 soliciting it. I mean, we're asking -- I mean I -- I -- 16 I was seeking information that would allow us to make an 17 adjustment. 18 Mr. Runner. 19 MR. RUNNER: Well, I was going to say, yeah, I 20 guess the -- the difference is that in terms of that 21 discussion as you went through values is -- is that I -- 22 I would take into consideration those appraisals and -- 23 and done in two -- two different methodologies. And the 24 fact that even if there was a -- a tentative agreement 25 in the fall of that previous year, the fact is that 26 agreement didn't work. It wasn't consummated. 27 And so now to all of a sudden apply a value on 28 a -- on a -- on an agreement -- a settlement that was 13 1 never consummated, it doesn't seem to make a lot of 2 sense because at that point -- 3 MS. MANDEL: I think -- I think offers are 4 sometimes taken in terms of considering value of -- 5 MR. RUNNER: What's that? I'm sorry. 6 MS. MANDEL: I think offers are sometimes 7 looked at in terms of -- of potential value for real 8 property. 9 MR. HORTON: They are but ultimately it was 10 consummated in September of '2 -- 11 MR. RUNNER: Well, after -- but, yeah, after I 12 think -- after the taxpayer paid $800,000 in legal 13 bills. 14 You know, so it wasn't -- it certainly was not 15 the same deal I guess is what I would say. 16 MR. HORTON: So, you want to give him the legal 17 bills back? 18 MR. RUNNER: No, I'm only willing to go to 19 about $36,000. 20 MR. HORTON: Further discussion, Mr. Runner? 21 MR. RUNNER: Again, I'm -- I'm not sure where 22 we are with a motion any more right now. 23 MR. HORTON: There's a -- 24 MR. RUNNER: Can we -- can we clarify? 25 MR. HORTON: There's a -- 26 MS. YEE: I think you made a substitute motion, 27 Mr. Runner. We're waiting for a second. 28 MS. STEEL: Second. 14 1 MR. HORTON: I know we don't have a Sergeant of 2 Arms but if -- my understanding is there's a motion on 3 the table and that subsequent action would have to be a 4 friendly amendment that you'd have to accept. 5 But, you know, help me out here somebody. 6 MS. YEE: I -- I -- 7 MS. MANDEL: Because the substitute didn't -- 8 because the substitute didn't come in before the second, 9 is that -- 10 MR. HORTON: Before the second and it wasn't 11 resolved. If there was a motion and then a substitute 12 then we could take the substitute under consideration. 13 But there was a motion, a second, we put it on 14 the floor, which means at that point it becomes a 15 friendly amendment and it's up to the maker of the 16 motion to accept the friendly amendment or we have to 17 dispense of it. 18 I'm just guessing here -- dispense of it and 19 then take up a subsequent motion. 20 MS. OLSON: We could defer to Ms. Cooke -- 21 MR. HORTON: Okay. 22 MS. OLSON: -- if you'd like. 23 MS. COOKE: Deborah Cooke -- Deborah Cooke with 24 the Legal Department. 25 MR. HORTON: We can't hear you. 26 MS. COOKE: Sorry. Okay. It depends on the 27 nature of the -- the second motion and whether or not 28 it's actually technically a friendly amendment. I 15 1 didn't hear the -- the specific language of the -- the 2 friendly amendment motion. But the first motion would 3 need to be withdrawn. If it was seconded already it 4 would need to be withdrawn by the maker in order to 5 accept the next one. 6 But if it was technically a friendly amendment 7 then the maker of the original motion can accept it as 8 such. But if there were substantive revisions made to 9 the initial motion it would not technically be 10 constituted as a friendly amendment. 11 MS. YEE: Okay. 12 MR. RUNNER: Can -- can I get -- 13 MR. HORTON: Everything we do is friendly up 14 here. 15 MR. RUNNER: Yeah, I just -- I guess I had -- I 16 had assumed that there was a second of that motion, 17 which is why I didn't make a motion, I voted -- my 18 motion was a substitute motion. 19 Now, I -- I guess I've always bought that you 20 have to dispense of the motions in the order to which 21 then they came, starting with the -- with -- with the 22 last. So if a substitute motion is made I thought under 23 Roberts Rules of Order or I don't know what we operate 24 here under -- that you deal with that motion and then 25 you go back to the main motion. 26 MR. HORTON: No. 27 MS. YEE: We -- we've done that in the past. I 28 think we've been inconsistent, Mr. Runner. 16 1 MR. RUNNER: Why is that? 2 MS. YEE: We -- we've done that in the past. 3 MR. RUNNER: Yeah, I think that -- 4 MR. HORTON: Yeah. But I mean the logic of 5 that -- I mean Robert Rules of Order does -- does not 6 provide for that. And -- and the reason is because then 7 when you have opposing parties you would make a 8 subsequent, the opposing party would make a subsequent, 9 the other one would make a subsequent and then it would 10 be up to the Chair to say let's dispense of all of this. 11 And -- and move the first motion and then move the 12 second one if it's still -- or move the motion whichever 13 we happen to think might ultimately pass. And the 14 reason we're doing this is because it's an interesting 15 discussion. 16 MR. RUNNER: Yeah. Well, I -- 17 MR. HORTON: Okay. 18 MR. RUNNER: -- I'll do however the Chair wants 19 but I'd like it clarified for us in the future because I 20 believe the way that you operate is that the substitute 21 motion has precedence over the previous motion and that 22 you have to dispense with the motion that's on -- before 23 you on the table first. 24 MS. YEE: That -- that's what we previously 25 have done, so with that we should get some clarification 26 for consistency in the future. 27 MR. HORTON: Okay. I -- I understand what 28 the -- Ms. Cooke said so I'm going to follow that for 17 1 now if you guys don't mind. 2 So there's a motion on the table. There's a -- 3 there's a second. 4 Is there a desire to withdraw the second? 5 Hearing none -- 6 MS. MANDEL: Which motion are we -- 7 MR. HORTON: There's a -- 8 MR. RUNNER: The motion -- 9 MS. YEE: The motion on the table is which one? 10 MR. HORTON: The motion on the table was to 11 adopt staff recommendation. I believe it was somewhere 12 2 -- 13 MS. YEE: Oh. 14 MR. HORTON: -- 2.7. 15 MR. RUNNER: If you go back to Ms. Yee's -- 16 MS. YEE: Yeah. Yes -- 17 MR. RUNNER: -- original motion that would 18 be -- 19 MS. YEE: -- to sustain the Franchise Tax 20 Board, okay. 21 MR. HORTON: Sustain the Franchise Tax Board. 22 Mr. Runner made a friendly amendment to split the 23 difference. That's still up in the air. 24 MS. MANDEL: Right, but he -- and he was on the 25 tax -- taking the tax amount. 26 MR. HORTON: The tax amount. 27 MS. YEE: Right. 28 MR. HORTON: So now I hear from the maker of 18 1 the motion. 2 MS. YEE: I'm going to remain with the main 3 motion. 4 MR. HORTON: Okay. 5 MS. YEE: It's a substantive difference that I 6 don't support. 7 MR. HORTON: Believe to be a substantive 8 difference. And, Ms. Olson -- further discussion, 9 first, Members? 10 MR. RUNNER: No, not -- and that's clear that 11 we're -- we're voting on Ms. Yee's motion for the -- for 12 the full amount -- 13 MR. HORTON: Yes. 14 MR. RUNNER: -- at that point? Yes. 15 MR. HORTON: Further discussion, Members? 16 It's been moved and -- moved by Ms. Yee, second 17 by Ms. Mandel. 18 Ms. Olson, please call the roll. 19 MS. OLSON: Mr. Horton. 20 MR. HORTON: Aye. 21 MS. OLSON: Ms. Steel. 22 MS. STEEL: No. 23 MS. OLSON: Mr. Runner. 24 MR. RUNNER: No. 25 MS. OLSON: Ms. Yee. 26 MR. HORTON: Aye. 27 MS. OLSON: Ms. Mandel. 28 MS. MANDEL: Aye. 19 1 MS. OLSON: Motion carries. 2 MR. HORTON: Ms. Olson. 3 MS. OLSON: Our next item is B2, Estate of -- 4 MR. HORTON: One second, Ms. Olson. 5 MS. YEE: May I make -- make a comment about 6 this case and maybe -- 7 MR. HORTON: Yes. 8 MS. YEE: -- ask Appeals if we have similar 9 cases that come up in the future. I thought what was 10 really missing in terms of a document that may have 11 helped us was a time line. I mean, it kind of speaks 12 to, Mr. Runner, where you started your inquiry, the time 13 line and kind of what was in place at that particular 14 point in time that would help us determine kind of a 15 value. 16 MR. RUNNER: Uh-huh. 17 MS. YEE: And -- and what information did we 18 know at that particular time that could help instruct, 19 you know, how we determine a value. So -- just for 20 future reference. 21 I know -- because you made the comment about 22 the parties talking over each other, but I think if we 23 actually could follow the chronology of what happened 24 that could help the discussion. 25 MR. THOMPSON: Thank you. 26 MS. YEE: Okay, thank you. 27 MR. HORTON: Okay. 28 ---oOo--- 20 1 ITEM B2 2 MR. HORTON: Ms. Olson. 3 MS. OLSON: Our next item is B2, Estate of Eva 4 M. Lindskog. 5 MR. HORTON: Is there a motion, Members? 6 MR. RUNNER: Move to grant. 7 MR. HORTON: It's been moved to grant. Is 8 there a second? 9 MS. STEEL: Second. 10 MR. HORTON: Moved to grant by Mr. Runner, 11 second by Ms. Steel. 12 MS. YEE: Objection 13 MR. HORTON: Objection noted. 14 MS. STEEL: I think -- 15 MR. HORTON: Discussion? 16 MR. RUNNER: I think the compelling issue for 17 me was the fact that at the end of the day that the -- 18 the estate had to come back together that all of the -- 19 that the loan had to be considered at the end of the -- 20 at -- at -- as the estate came back that the -- the -- 21 the first family was not objecting to the distribution 22 of those dollars, and certainly they would if that $2 23 million, I believe, would have been not within that 24 estate. 25 And so, it seems to me that indeed the $2 26 million was brought back into the estate, that it was a 27 loan, if only indicated by the fact that it was paid, 28 you know, at that point. I guess you could get into 21 1 dis -- disgreements as I -- I'm sure in terms of how it 2 is that it could have been paid or wouldn't have been 3 paid in terms of how the property was secured. But 4 ultimately it seems to me that the individual who -- who 5 took out the loan was indeed saying on their behalf that 6 it was a promissory note to them -- or by them and 7 ultimately it was repaid. 8 So that's why I feel comfortable in -- in 9 finding for the taxpayer. 10 MR. HORTON: Thank you, Mr. Runner. Further 11 discussion? 12 Yeah, this was a -- I mean, this is a case 13 where the argument that you needed a -- you needed to 14 have payment of the loan, you needed to have this other 15 criteria, I don't think any of that was true. 16 And so, it appeared to be a loan on its face. 17 It wasn't until we got into the debate about whether it 18 was paid back or not and how the estate moved the funds 19 around -- at best, because you have shared ownership 20 that may have been 50 percent or whatever the allocation 21 of ownership was, and ultimately paying it back because 22 you're paying it back with your funds and your resources 23 that you own 50 percent interest in or whatever the 24 percentage was. 25 And so that's what blew it off. Another one of 26 those situations where the taxpayer sort of presented 27 evidence that was contrary to his position -- I mean to 28 his best interest. 22 1 Further discussion, Members? 2 Hearing none, Ms. Olson. 3 MS. OLSON: Mr. Horton. 4 MR. HORTON: No. 5 MS. OLSON: Ms. Steel. 6 MS. STEEL: Aye. 7 MS. OLSON: Mr. Runner. 8 MR. RUNNER: Aye. 9 MS. OLSON: Ms. Yee. 10 MS. YEE: No. 11 MS. OLSON: Ms. Mandel. 12 MS. MANDEL: No. 13 MS. OLSON: Motion fails. 14 MR. HORTON: Subsequent motion. 15 MS. YEE: Move to sustain the Franchise Tax 16 Board. 17 MR. HORTON: Been moved to sustain. Is there a 18 second? 19 MS. MANDEL: Second. 20 MR. HORTON: Second. 21 Discussion, Members? 22 Ms. Olson. 23 MS. OLSON: Mr. Horton. 24 MR. HORTON: Aye. 25 MS. OLSON: Ms. Steel. 26 MS. STEEL: No 27 MS. OLSON: Mr. Runner. 28 MR. RUNNER: No. 23 1 MS. OLSON: Ms. Yee. 2 MS. YEE: Aye. 3 MS. OLSON: Ms. Mandel. 4 MS. MANDEL: Aye. 5 MS. OLSON: Motion carries. 6 Our next item -- 7 MR. HORTON: You guys should know I held back 8 "Horton aye." 9 ---oOo--- 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 24 1 ITEM B5 2 MS. OLSON: Our next item -- 3 MR. HORTON: Ms. Olson. 4 MS. OLSON: -- is B5, Michael Reznitsky. 5 MR. HORTON: Is there a motion, Members? 6 MS. MANDEL: Can -- 7 MS. YEE: Oh, go ahead. 8 MS. MANDEL: Can we just get a clarification on 9 one thing that I'm not so sure was accurately stated -- 10 MR. HORTON: Mr. -- 11 MS. MANDEL: -- about -- 12 MR. EPOLITE: Yes. 13 MS. MANDEL: -- under -- you know what I'm 14 talking about -- 15 MR. EPOLITE: Yes, I do. 16 MS. MANDEL: -- because you're a mind reader. 17 Can you let us know. 18 MR. EPOLITE: No, there was a question posed by 19 Ms. Steel to the Franchise Tax Board this morning and 20 there is a specific exception to Internal Revenue Code 21 Section 104(a)(2) which provides that if there is some 22 portion of damages paid for medical care attributable to 23 emotional distress that portion of the damages would be 24 excludable from income. 25 MS. STEEL: Thank you for clearing up. 26 MR. EPOLITE: Sure. 27 And, Mr. Horton, I would note that the 28 Franchise Tax Board noted in their document that they 25 1 would provide for the cancellation of the 2 accuracy-related penalty 3 MS. YEE: (Inaudible). 4 MR. HORTON: Yes, so noted. 5 MS. MANDEL: And -- and we don't -- we don't 6 have specific information, I don't think, about payments 7 to doctors that he might have made. 8 MR. EPOLITE: No, there's -- there does not 9 appear to be the facts here to provide for such. 10 MS. MANDEL: Okay. 11 MS. STEEL: But didn't he say that he still 12 goes to the doctors because of that? He has more -- 13 MR. EPOLITE: Yeah, but the settlement 14 agreement, itself, does not -- 15 MR. HORTON: Pay for it. 16 MR. EPOLITE: -- provide for any such type of 17 payment. 18 MS. STEEL: So those medical expenses we 19 talking about is before the settlement that occurred? 20 MR. EPOLITE: We don't know. 21 MS. STEEL: No, I'm talking about the -- by the 22 law. The law says that when you get the settlement 23 today the medical expenses before it was -- 24 MR. EPOLITE: The settlement? 25 MS. STEEL: Right. 26 MR. EPOLITE: Correct. 27 MS. STEEL: Okay, so -- 28 MR. EPOLITE: So that you would have the 26 1 settlement provide for the reimbursement of such -- for 2 such expenses incurred. 3 MS. STEEL: Okay. So, do we have any -- did we 4 receive anything from the taxpayer's side, that any 5 receipts or anything? 6 MR. EPOLITE: No. 7 MS. STEEL: Okay. I wish I got the right 8 answer at that time so I could not to ask that taxpayer 9 that he really had or not. Because we are just assuming 10 at this point. 11 MR. EPOLITE: Yes. 12 MR. RUNNER: He was -- at least in the 13 discussion I heard it was pretty clear that the 14 termination -- or the -- the settlement issue or the -- 15 the Court issue there was all around the wrongful 16 employment treatment. And there was not in the 17 settlement, itself, provided any issue or any discussion 18 in regards to depression and the issue as to which now 19 at least the argument that the taxpayer was making. Is 20 that -- 21 MR. EPOLITE: That's -- that's correct. 22 MR. RUNNER: Okay. 23 MR. HORTON: Okay. Further discussion, 24 Members? 25 With that clarification, is there a motion? 26 MS. MANDEL: Oh, this is -- 27 MR. HORTON: Quick -- quick question, if I may, 28 Ms. Mandel. 27 1 MS. MANDEL: Sure. 2 MR. HORTON: Mr. Epolite, and I'm just trying 3 to -- trying to remember something, so help me here. 4 The payment for the medical costs associated 5 with stress or distress or -- emotional distress, 6 wouldn't it even then have to be directly associated 7 with physical or not? 8 MR. EPOLITE: No, it would not have to be. 9 MR. HORTON: Okay. That's good. 10 We got a law that we -- that I like. 11 MR. RUNNER: I think -- can I clarify that? So 12 I -- I thought that the issue in regards to the law was 13 that -- is that physical did not include -- is that -- 14 is that -- do I have that note wrong? 15 MR. EPOLITE: No, you are correct. 16 MR. RUNNER: Oh. Then I guess -- 17 MR. EPOLITE: But if there's -- but if there 18 has been specific expenses paid perhaps for therapy, for 19 example -- 20 MR. RUNNER: Right. 21 MR. HORTON: Yeah, yeah. 22 MR. EPOLITE: -- for the emotional -- 23 MR. RUNNER: Maybe we're asking dif -- two 24 different questions then. 25 MR. HORTON: We were but -- 26 MR. RUNNER: Okay. 27 MR. HORTON: -- yeah, I get it now. You pay it 28 out of the settlement. 28 1 MR. EPOLITE: Right. 2 MR. HORTON: The Court actually ordered the 3 payment -- 4 MR. EPOLITE: Yes. 5 MR. HORTON: -- as a reduction to -- 6 MR. EPOLITE: Right. 7 MR. HORTON: -- his settlement and that's why 8 we say it's not taxable. Got it. 9 MR. RUNNER: Right. 10 MS. MANDEL: Oh, and I guess his -- his -- his 11 great concern at the end was he had this 1040 12 quick-finder handbook for the 2007 tax year, which is 13 the tax year at issue, which it appears they were 14 looking at maybe something else or prior law where 15 they're excluding emotional distress payments. 16 That's what he was really relying on -- 17 MR. EPOLITE: Right. 18 MS. MANDEL: -- in the end. 19 MR. EPOLITE: Yes. 20 MR. HORTON: Good work, Ms. Steel. 21 MS. MANDEL: Yeah. Okay. 22 MR. HORTON: Is there a motion, Members? 23 MS. MANDEL: I guess on what we have before us 24 it would be to sustain the Franchise Tax Board. 25 MS. YEE: I'll second -- 26 MR. HORTON: It's been moved to sustain the 27 Franchise Tax Board by Ms. Mandel, second by Ms. Yee. 28 Objection, Members? 29 1 MS. STEEL: What -- that's the abate the 2 proposed assessment -- 3 MS. MANDEL: Right, with the error -- 4 MR. HORTON: With the abatement of the -- 5 MS. STEEL: Okay. 6 MS. MANDEL: Right. 7 MR. HORTON: Objection? 8 Hearing none, such will be the order. 9 ---oOo--- 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 30 1 ITEM B6. 2 MS. OLSON: Our next item is B6, Dennis E. 3 Maddix and Martha Maddix. 4 MS. YEE: Motion, Members? 5 MS. YEE: Move to sustain the Franchise Tax 6 Board. 7 MR. HORTON: Been moved by Ms. Yee to sustain 8 the Franchise Tax Board. Second by - 9 MS. MANDEL: Second. 10 MR. HORTON: -- Ms. Mandel. 11 Objection, Members? 12 Hearing none, such will be the order. 13 ---oOo--- 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 31 1 ITEM C1. 2 MS. OLSON: Our next item is C1, Orasure 3 Technologies, Incorporated. 4 MR. HORTON: Is there a motion, Members? 5 MS. YEE: Move to adopt the staff 6 recommendation. 7 MR. HORTON: It's been moved to adopt the staff 8 recommendation by Ms. Yee. Second by -- Mr. Horton for 9 discussion. Discussion, Members? 10 MS. STEEL: Just objection. 11 MR. HORTON: There's an objection? 12 MS. STEEL: Uh-huh. 13 MR. HORTON: Any further discussion, Members? 14 MR. RUNNER: Let me -- let me ask again, if 15 indeed -- again, not -- not going down the path that 16 says that this is a kit that's non-taxable, but 17 identifying that the unique use of this kit requires 18 control by the provider of the kit, so you're not 19 dissert -- you're not -- you're not just saying the kit 20 is non-taxable but you're -- we're working through a 21 small wedge of an issue which says because the control 22 cannot always -- cannot go to the -- to the person who 23 has the kit, it seems to me in the point we're -- we're 24 not going down the path of the fact that we're making 25 a -- we're changing law or changing the issue in regards 26 to whether something is taxable or not. What we'd be 27 doing is saying that the unique application of this kit, 28 because it requires an interaction because of the 32 1 sensitive nature of this kit, should not make this kit 2 disadvantaged as a taxable item. 3 That -- you know, it seems to me I'm -- you 4 know, I'm kind of splitting the baby at that point but 5 we're not going all the way back, we're -- we're at 6 least finding why it is in a unique way -- why this kit 7 may -- may not be taxable because the control -- because 8 the nature of the kit needs that control, I guess. I'm 9 not asking for opinion, I'm just -- I'm just trying to 10 deal with the fact that we are not then -- we are 11 finding our unique space at that point as opposed to 12 saying, hey, there's no longer -- all these are not 13 taxable. We're finding a unique issue in regards to why 14 this particular issue is not taxable. 15 MR. HORTON: Yeah, I -- if I may, Members -- 16 MR. RUNNER: Uh-huh. 17 MR. HORTON: I was going in the same direction 18 and that there was a temporary relinquish of control and 19 possession. And when there was transfer to the patient 20 anad the patient administered it on themselves and 21 then -- and then they in turn gave it back. And so 22 that's kind of how it was going until I asked the 23 question about possession and the Appellant indicated 24 that they never relinquish possession -- and for a 25 number of reasons they retain possession of the -- and 26 one of the elements of transferring title is not only 27 control but you got to have possession and all the 28 rights that go along with it. 33 1 Up until there I was trying to kind of do the 2 same thing. 3 MR. RUNNER: Yeah, but -- and what I'm trying 4 to do is stay you -- stay -- stay sensitive to the 5 unique use of the kit that requires then the -- the -- 6 the -- kind of the integration of that. It's a complete 7 package which includes then the issue of -- of the -- of 8 the counseling and the oversight. Because of the unique 9 nature of that kind of a kit. 10 MR. HORTON: Member Yee. 11 MS. YEE: Thank you, Mr. Chairman. I -- I 12 understand where you're trying to go, Mr. Runner, and 13 I'm sympathetic. I guess here's kind of my thought. We 14 may think this is unique but I have a feeling once we 15 start delving into there -- there are other kinds of -- 16 MR. HORTON: Oh, yeah. 17 MS. YEE: -- medical kits that are going to 18 fall into this category, whether they're, you know, kind 19 of dietary kits for medically necessary conditions or 20 whatever it is. 21 I guess I want to just suggest this. I -- I 22 truly believe that if we're going to look for some sort 23 of an exemption here to apply to this type of a 24 situation that it does require a statutory change. 25 What I'd like to do is to see whether we can 26 have a broader, more thorough look at potentially 27 authorizing an exemption as you've described, Mr. 28 Runner, with having a more thoughtful discussion process 34 1 through the Business Taxes Committee process because I 2 do think it opens up -- I think it will open up -- 3 itself up to a number of other situations that take 4 place in kind of a medical setting that involves other 5 types of kits for which there are other services 6 provided integral to the provision of the kits. 7 This is an unfortunate situation because we 8 obviously all care about the services that the L. A. Gay 9 and Lesbian Center are -- is providing. But I just 10 found that there were a lot of contradictions with 11 respect to not just the the claimant's contentions about 12 these various devices and kits, but also with respect to 13 the claimant as the manufacturer and how the center 14 provides its services. 15 So I'm -- I don't feel equipped to really try 16 to carve out anything on the fly here, today. 17 MR. RUNNER: In -- in the pro -- again, I'm -- 18 and let me just ask in terms of the process of how -- 19 how that could be done because it seems to me there was 20 an issue that was I think before the Board a couple of 21 years ago dealing with -- what was it called? -- 22 collo -- cochial implants -- 23 MS. YEE: Cochlear implants. 24 MR. RUNNER: There was a discussion in regards 25 to -- 26 MS. YEE: Yeah. 27 MR. RUNNER: -- to what's taxable, the ear 28 versus the -- the -- they -- 35 1 MS. YEE: Yes. 2 MR. RUNNER: -- and -- and -- and it seemed to 3 me at that point the Board found in favor, and then at 4 that point what they did, they didn't go after statute, 5 what they did is they came back and asked the staff to 6 come back with the regulatory aspect to narrow it. 7 MS. YEE: Yeah, we actually -- 8 MR. RUNNER: To make sure it was narrow. 9 MS. YEE: Yeah. 10 MR. RUNNER: And so I'm wondering, is -- I 11 mean, is -- is that a -- isn't that a safe middle ground 12 at that point so that we -- 13 MS. YEE: Well, I think in that case was 14 actually -- the statute actually was much broader to 15 where the regulation didn't interpret the statute as 16 broadly; we had some room to move to do that within our 17 existing authority. 18 And, Mr. Levine, maybe correct me if I'm wrong 19 but I think we felt like we could do that. 20 MR. LEVINE: That's exactly correct, it was 21 a -- whether it was part of the same unit or not -- we 22 concluded it wasn't, the Board disagreed. That was 23 basically it. It was still covered by the statute given 24 the factual conclusion. 25 MS. YEE: Right. So we were able to move there 26 without further legislative authority. 27 MR. RUNNER: But the staff -- hold on a moment. 28 The staff disagreed with that. 36 1 MR. LEVINE: Well, that -- 2 MR. RUNNER: The Board found -- 3 MR. LEVINE: -- brought it to the Board in the 4 first place. 5 MR. RUNNER: Yeah, the Board found -- yeah, the 6 staff felt that it was under statute, two different 7 pieces of -- 8 MR. LEVINE: Right, it was a factual finding of 9 whether it's part of the same unit. 10 MR. RUNNER: Right. 11 MS. MANDEL: Kind -- 12 MR. LEVINE: This -- this is -- 13 MS. MANDEL: Kind of like a factual finding of 14 whether there's a gift or not. 15 MR. LEVINE: Yeah, it's a -- 16 MR. RUNNER: So -- so couldn't you -- 17 MR. LEVINE: -- sliding slope. I mean, there's 18 always some relationship -- 19 MR. RUNNER: Right. So -- 20 MR. LEVINE: -- but that was very close. 21 MR. HORTON: Very -- 22 MR. RUNNER: So -- so the Court -- the point 23 could be, though, and I guess under my scenario is we 24 would have to do a factual finding that the counseling 25 is a required part of this issue because of the nature 26 of this -- this. So there the connection, that would be 27 there but that would be -- 28 MR. HORTON: Well, with the counseling being a 37 1 required part you would create the taxable situation. 2 But, I mean I think Member Yee's recommendation 3 is an excellent one and possibly what we -- at least 4 gives us an opportunity to discuss it. 5 We could possibly provide some clarity 6 prospectively and say that as it relates to transferring 7 of control that in fact if they created a contractual 8 relationship, they sign some document relinquishing 9 control to the product and then therefore that is 10 sufficient. 11 The challenge with that, we run into this whole 12 Health and Safety Code issue because I really think it's 13 an issue where they cannot relinquish control. They 14 have to maintain control pursuant to other sections of 15 the law besides Sales Tax and so they're in a Catch-22. 16 MS. MANDEL: They have to keep it on their 17 premises, is what you're saying? 18 MS. YEE: Right. 19 MR. HORTON: Yes. And so, I think they're in a 20 Catch-22. And it was good because I learned that from 21 them. I mean, they actually are the ones who educated 22 us about that and unfortunately subsequent testimony and 23 education kind of clarifies the taxability. 24 But, Mr. Levine, I see you -- 25 MR. LEVINE: Yeah, just for clarification I 26 think you hit the nail on the head. There is no 27 exemption here. The only -- 1570 is an exemption for a 28 type of circumstance -- 38 1 MS. YEE: Right. 2 MR. LEVINE: -- not for a sale or use of a 3 particular type of property. And the only exemption off 4 the top of my head I can think of that this would come 5 under is medicines. But it can't under existing law and 6 certainly the regulation, but just under existing law. 7 So if you said that the transaction here isn't 8 taxable it moves it up the line. Because many -- there 9 are many kits that are used by doctors -- 10 MS. YEE: Uh-huh. 11 MR. LEVINE: -- to provide and you get 12 possession. When they collect specimens sometimes they 13 give you the -- the Dixie cup and they're relinquishing 14 at least part, and they're still the consumer unless it 15 qualifies as a medicine. 16 So unless there's some exemption I'm not 17 thinking that's what you'd have to find, that it's a 18 medicine that comes within that exemption. 19 MR. HORTON: Yeah. Further discussion, 20 Members? 21 MS. OLSON: We have a first and a second. Ms. 22 Yee, and than Mr. Horton seconded. 23 MR. HORTON: Objection, Members? 24 MR. RUNNER: Yes. 25 MR. HORTON: So noted. 26 Ms. Olson, please call the roll. 27 MS. OLSON: Mr. Horton. 28 MR. HORTON: Aye. 39 1 MS. OLSON: Ms. Steel. 2 MS. STEEL: No. 3 MS. OLSON: Mr. Runner. 4 MR. RUNNER: No. 5 MS. OLSON: Ms. Yee. 6 MS. YEE: Aye. 7 MS. OLSON: Ms. Mandel. 8 MS. MANDEL: Aye. 9 MS. OLSON: Motion carries. 10 ---oOo--- 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 40 1 ITEMC2 2 MS. OLSON: Our next item is C2, Parminder Kaur 3 Walia and Surenderpal Singh Walia. 4 MR. HORTON: Discussion, Members? 5 Is there a motion? 6 MS. YEE: Move to adopt. 7 MR. HORTON: Hearing none, Ms. Olson, please 8 call the roll. 9 Just kidding. 10 MS. YEE: I'll move to adopt the staff 11 recommendation. 12 MR. HORTON: It's been moved by Ms. Yee, second 13 by Ms. Mandel. 14 MS. MANDEL: Sure. 15 MR. HORTON: Objection, Members? 16 Hearing none, such will be the order. 17 MS. STEEL: How -- how long it takes to get a 18 refund from the -- 19 MR. LEVINE: I can't give you a specific day 20 but I think under the circumstances -- 21 MS. STEEL: When they signed it. He signed it 22 today then what happen? 23 MR. LEVINE: I don't think he's going to get it 24 today, but I think the staff understands that they 25 should expedite it. 26 MR. RUNNER: Check's in the mail. 27 MR. LEVINE: I can't give you specific time. I 28 think -- 41 1 MS. STEEL: Are we going to give them interest? 2 MR. LEVINE: Probably if -- certain amounts 3 have to be, I think, processed through the Controller 4 but I don't think that this is large enough for that. 5 MS. STEEL: Okay. Thank you. 6 MR. HORTON: Thank you very much. 7 ---oOo--- 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 42 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 May 24, 2011 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 42 13 pages constitute a complete and accurate transcription 14 of the shorthand writing. 15 16 Dated: June 2, 2011. 17 18 19 ____________________________ 20 BEVERLY D. TOMS 21 Hearing Reporter 22 23 24 25 26 27 28 43