BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION 5901 Green Valley Circle, Room 207 Culver City, California REPORTER'S TRANSCRIPT JUNE 21, 2011 ITEM B8 FRANCHISE AND PERSONAL INCOME TAX HEARING APPEAL OF SEAN S. NIKNAFS and SIMA MIRHASHEMI (No. 529770) 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 Jerome E. Horton of Equalization: Chairman 4 Michelle Steel 5 Vice-Chairwoman 6 Betty T. Yee Member 7 George Runner 8 Member 9 Marcy Jo Mandel 10 Appearing for John Chiang State Controller 11 (per Government Code Section 7.9) 12 13 Diane Olson, Chief Board Proceedings Division 14 15 For Board of Lou Ambrose Equalization Staff: Appeals Division 16 17 For Franchise Tax Adam Susz Board: Tax Counsel 18 Bill Hilson 19 Tax Counsel 20 For Appellant: James G. LeBloch 21 Attorney at Law 22 23 ---oOo--- 24 25 26 27 28 2 1 Culver City, California 2 June 21, 2011 3 ---oOo--- 4 MR. HORTON: Ms. Olson. 5 MS. OLSON: Our next item is B8, Sean S. 6 Niknafs and Sima Mirhashemi. 7 MR. HORTON: Mr. Ambrose, please introduce the 8 issues in this case. 9 MR. AMBROSE: The issue before the Board is 10 whether appellants converted their home into property 11 held for the production of income in May of 2004 so that 12 their mortgage interest deduction on that home from May 13 of December to 2004 is not subject to the mortgage 14 interest limitation for a qualified residence pursuant 15 to Internal Revenue Code Section 163. 16 MR. HORTON: Thank you very much. The 17 appellant will have ten minutes to make your 18 presentation. Please begin with your introduction for 19 the record. 20 MR. LeBLOCH: Thank you, Chairman Horton and 21 the other Board Members. My name is Jim LeBloch and I 22 represent Sean and Sima Niknafs. 23 The issue in this case has slowly migrated from 24 an issue as to the deductibility of expenses based on 25 property held to generate income from -- and -- and this 26 is important, the actual adjustment that we see in this 27 case is a 163(h) adjustment. It is a limitation on the 28 amount of residential interest that my clients are able 3 1 to deduct based on the debt limitations in 163(h). 2 I believe the FTB is migrating their arguments 3 to the fact that this was not property held for the 4 production of income because their -- their position as 5 to whether 163(h) was truly violated is substantially 6 weakened as -- as time has gone on. 7 In order for the FTB to reach the limitations 8 in 163(h) they have to claim that a second property was 9 a second residence of my clients. And I don't think 10 that they meet the criteria within the regulations to -- 11 to meet that criteria. 12 The 163(h) starts out by saying that the -- the 13 interest limitation relates to a taxpayer's principal 14 residence. And the regulations go on to say that a 15 taxpayer can only have one principal residence. 16 Now, the facts in this case are fairly simple. 17 My -- my clients owned a home in Tustin and they bought 18 a new home in Newport Beach. They vacated the old home 19 on the 11th -- May 11th of '04 and immediately vacated 20 and moved all of their furniture into their new home in 21 Newport Beach and at that point in time they -- they 22 took the Tustin property and put it up for either rent 23 or -- or sale. And ultimately it was sold at a profit 24 in -- in November. 25 And the issue here is, and -- and the position 26 that FTB is taking is -- is that Tustin property was a 27 second residence and they then used the debt -- the 28 mortgage, if you will, on that property in the 4 1 calculations of the 163(h) limitation, and it's only 2 through the use of that second property that they're 3 able to get to that limitation. 4 Now, if you look at the regulations, the 5 regulations have this general rule that you have your 6 principal residence and that's what the interest 7 limitation is based on. They then say, yes, it is 8 possible to have a second residence but there are severe 9 restrictions on -- on whether a second residence is 10 going to be considered for purposes of 163(h). 11 And most significantly -- I want to start with 12 the code, the other residence of the taxpayer which is 13 selected by the taxpayer for purposes of this 14 subsection, that's the Internal Revenue Code, the 15 regulations go on and they clarify that and make it 16 clear that it is at -- only at the taxpayer's 17 election -- and this is stated in 1 -- 1.163-10T(p)3 -- 18 4 -- 4ib, and specifically it states -- and this is a 19 requirement for -- to -- to -- to -- for -- for you to 20 have a second residence treated for purposes of the 21 interest limitation. If the prop -- if -- if property 22 that was the taxpayer's principal residence, Tustin was, 23 initially, during the taxable year ceases to qualify as 24 the taxpayer's principal residence, which it did, they 25 vacated and moved to Newport Beach, the taxpayer may 26 elect -- this isn't something FTB can impose, this is 27 something that the taxpayer can elect, that this 28 property -- the taxpayer may elect that -- that property 5 1 as the taxpayer's second residence as of the date that 2 the property ceases to be the taxpayer's principal 3 residence. 4 So this is a -- this is a taxpayer election, 5 not something that can be -- our position is it's not 6 something that can be imposed by the FTB on -- on the 7 taxpayer. 8 But furthermore there are two other 9 requirements before you can have a second residence 10 treated for purposes of the interest limitation under 11 163. 12 The -- the second requirement deals with the -- 13 the use of the residence. And here in -- in 14 163-10T(p)3i it makes it clear that if a property is 15 held out for rental it -- and -- and it meets the 16 requirements -- and -- and this goes to -- to Section 17 280, the vacation kind of rental, if -- if a property 18 is -- is held for rental it is not going to be treated 19 as a residence for purposes of 163(h) unless those 20 vacation rules are met. 21 And basically what that means is the property 22 has to be occupied by the taxpayer for -- at least 14 23 days during the taxable year. 24 It is clear -- the record is clear, when my -- 25 when my clients vacated the Tustin property they never 26 came back. They never lived in that property, they 27 moved their furniture out, they moved to Newport Beach. 28 There never was an occupation of that property. 6 1 The record is equally clear that that property 2 was held for rental or for sale. And in fact it did 3 sell, it wasn't rented, and it was -- it was sold at a 4 profit. 5 So, our position is that the -- the basis of 6 the adjustment that we see under 163(h) based on -- on 7 this proposition that the second property was a second 8 residence just does not hold up. 9 Now, that's what's caused, I think, the FTB to 10 shift their emphasis here and challenge whether this 11 second property, the Tustin property, was property held 12 for the production of income. And I want to speak to 13 that just very briefly. 14 Initially they bought that property in 1990. 15 They had significant amounts of improvement. We proved 16 up with substantiation over $150,000 of improvements, 17 all of that being done with the -- the goal of earning a 18 profit on this -- on this property. 19 As a point in fact the property was sold in 20 November, it was sold at a profit. 21 The FTB cites to the Newcombe case. That 22 Newcombe case can be distinguished from our case. First 23 of all, Newcombe was sold at a loss. That tainted the 24 entire transaction from the -- from the Court's 25 perspective, in my view. 26 In our case the property was sold at a profit. 27 So, in determining whether property is held for -- to -- 28 to earn a profit obviously in Newcombe it was sold and 7 1 they earned a loss, it tainted that entire analysis. 2 And -- and then second, in terms of 3 differentiating Newcombe, the property in Newcombe was 4 never held for rental. And our property was. 5 If you look at Exhibit A you will see a flyer 6 which is -- indicates that this property is for sale or 7 for rent. And there's a lease attached as Exhibit B 8 that was used by the realtor in terms of trying to sell 9 this property. 10 So, given all of that I think that my clients 11 deserve an interest deduction related to this -- the 12 Tustin property. It should not be factored into the 13 interest limitation under 163(h). And we would hope 14 that your consideration would -- would rule that that is 15 the case for my clients. 16 Thank you. 17 MR. HORTON: Thank you very much. Would the 18 Department please commence with introducing yourself. 19 You have ten minutes to make your presentation. 20 MR. SUSZ: Good afternoon, Mr. Chairman and 21 Members of the Board. My name is Adam Susz. To my 22 right is Bill Hilson. We represent the Franchise Tax 23 Board in this matter. 24 The issue in this appeal is whether in taxable 25 year 2004 the appellants were entitled to deduct 26 mortgage interest they paid on their two homes in excess 27 of the qualified residence interest limitation set forth 28 by Internal Revenue Code Section 163, subdivision 8 1 (h)(3). 2 The facts of this case are as follows: 3 The Appellants purchased their home in Tustin, 4 California in February of 1999 for approximately 5 $697,000. Approximately five years later, in May of 6 2004, the appellants purchased a second home in Newport 7 Coast, California, for $3,224,000. 8 Approximately six months after purchasing the 9 second home in Newport Coast, in November of 2004, the 10 appellants sold their first home in Tustin for 11 $1,575,000. 12 In October of 2006 Franchise Tax Board began an 13 audit of the Appellants's returns for taxable years 2004 14 and 2005. 15 At the conclusion of the audit Franchise Tax 16 Board determined the appellants had deducted mortgage 17 interest in excess of the qualified residence interest 18 limitation and therefore issued proposed assessments 19 denying the deduction of the excess mortgage interest 20 for those two taxable years. 21 The appellants have already conceded they were 22 not entitled to deduct the excess mortgage interest in 23 taxable year 2005, and that is why the taxable year 2004 24 is the only year before your Board in this appeal. 25 In regards to the 2004 tax year that is now 26 before your Board the appellants raise two different 27 arguments for why Franchise -- Franchise Tax Board's 28 assessment is incorrect. 9 1 The appellants's first argument is that a 2 taxpayer cannot have more than one principal residence 3 and therefore the appellants contend they did not deduct 4 mortgage interest in excess of the qualified residence 5 interest limitation for taxable year 2004. This 6 argument has been raised by appellants during the entire 7 audit and protest process as well as throughout briefing 8 in this appeal process. 9 When making this argument in their briefing the 10 Appellants only cited to a portion of the applicable 11 Internal Revenue Code section and corresponding Treasury 12 regulation. However, a complete reading of the entire 13 code section clearly provides that the term "qualified 14 residence" not only applies to a taxpayer's principal 15 residence, but also to one other residence of the 16 taxpayer. 17 And consistent with the code section and 18 supplements a thorough reading of the Treasury 19 regulation also clearly provides the term "qualified 20 residence" applies not only to a taxpayer's principal 21 residence but also to one other residence of the 22 taxpayer, which it refers to as the taxpayer's second 23 residence. 24 Board staff appears to agree with Franchise Tax 25 Board inter -- Franchise Tax Board's interpretation in 26 that the hearing summary states the following: "Staff 27 questions appellants's statement that the qualified 28 residence interest limitation set forth by IRC Section 10 1 163, subdivision (h)(3) only applies to a principal 2 residence. As noted above, for purposes of this section 3 a qualified residence includes the taxpayer's principal 4 residence and one other residence of the taxpayer or 5 spouse. 6 To conclude, the Appellants's argument is 7 erroneous as it is a misreading of the applicable code 8 section and Treasury regulation. The plain language of 9 the applicable code section and Treasury regulation 10 clearly provides that a taxpayer can have one principal 11 residence and one additional residence for purposes of 12 the qualified residence interest limitation. 13 Now I will move on to addressing appellants's 14 second argument for why Franchise Tax Board's assessment 15 for taxable year 2004 is incorrect. The appellants's 16 second argument is that they're not subject to the 17 qualified interest limitation because they contend they 18 converted the Tustin home from a personal residence into 19 property held for the production of income. 20 In making the second argument the appellants 21 are now taking a different position from what they 22 reported on their 2004 California return. 23 Specifically, the appellants filed a joint 24 California return for taxable year 2004 and claimed a 25 mortgage interest itemized deduction on line 10 of 26 Schedule A of their joint Federal return in the amount 27 of approximately $208,000 for mortgage interest they 28 paid on their homes in Tustin and Newport Coast. Now 11 1 the appellants assert mortgage interest they paid on 2 their home in Tustin is not mortgage interest paid on a 3 qualified residence as they had reported on their 2004 4 return, but instead represents ordinary necessary 5 expenses for -- for the production or collection of 6 income. 7 However, in a sit -- situation like this where 8 the property has been acquired or used as the taxpayer's 9 personal residence it must first be converted to a use 10 related to the production of income in order for 11 taxpayers to become entitled to deduct expenses. The 12 key question in these types of conversion cases is what 13 the purpose or intention of the taxpayer was in light of 14 all facts and circumstances. 15 Five factors have been identified by Courts in 16 deciding whether a personal residence has been converted 17 into property held for the production of income. The 18 Courts have made clear that no one factor is 19 determinative and all facts and circumstances must be 20 considered. 21 Only three of the five factors are applicable 22 to the facts of this case. The first applicable factor 23 is the length of time the Tustin home was occupied by 24 the appellants as their personal residence before 25 placing it on the market for sale. 26 The appellants purchased the Tustin home in 27 1999 and held it as their personal residence for over 28 five years. Five years is considered to be a 12 1 substantial period of time by the Courts for purposes of 2 this factor. 3 This factor is significant in the analysis 4 because occupying the Tustin home for a substantial 5 period of time indicates the personal nature of the home 6 to the appellants. 7 The second applicable factor is whether the 8 appellants offered the home for rent or actually rented 9 the home. In this case the appellants contend they did 10 offer the Tustin home for rent and simply were unable to 11 find a tenant. However, the appellants have not 12 provided the types of substantiation one would expect to 13 show that they attempted to rent the home. 14 For example, the appellants did not provide a 15 formal listing agreement for the attempted rental of the 16 home. 17 The appellants also did not provide newspaper 18 advertisements offering the home for rent. 19 Additionally, Courts have held the taxpayers 20 cannot simply convert personal use property to property 21 held for the production of income by either merely 22 renting it for a short period of time or offering to 23 rent it for a short period of time. 24 In this case the appellant sold the Tustin home 25 approx -- approximately six months after they alleged 26 they put it up for rent. 27 Moreover, the overriding concept is an offer to 28 rent the home to a tenant or even actual rental of the 13 1 home to a tenant will not convert a home from personal 2 use property in a property held for the production of 3 income if the attempted rental or actual rental was 4 ancillary to a non-qualifying purpose. 5 In our case the appellants sold the Tustin home 6 six months after they abandoned it and moved into the 7 second home in Newport Coast. Thus, even if your Board 8 determines that the appellants substantiated they did 9 attempt to rent the Tustin home, the appellants's 10 attempt to rent the home does not convert it from 11 personal use property into property held for the 12 production of income because the period of time that 13 appellants contend that they offered to rent the home is 14 too short a period of time, and the attempted rental of 15 the home was ancillary to the primary purpose of 16 attempting to sell the home quickly. 17 Finally, the third applicable factor is sale of 18 the Tustin home. Courts have held that when a home was 19 sold for post-conversion appreciation such a finding may 20 support a finding that the home was converted into 21 income-producing property. However, the key language to 22 focus on here is post-conversion appreciation. 23 The term "post-conversion appreciation" refers 24 to the appreciation that accumulated after the taxpayer 25 moved out of the home. In our case the appellants 26 immediately put the Tustin home up for sale after they 27 abandoned it and moved into the second home in Newport 28 Coast. They sold the Tustin home six months later, 14 1 which supports a finding that the Tustin home was not 2 converted to income-producing property. 3 In conclusion, the key inquiry in conversion 4 cases like this is the -- is the taxpayer's intent in 5 light of all facts and circumstances. Here the facts 6 and circumstances indicate the personal nature of the 7 home to the appellants and the fact that the -- the 8 appellants did not intend to hold the home for 9 production of income. 10 Instead, the appellants held the Tustin home 11 for over five years as personally used property and it 12 simply took them six months to sell the home. 13 Accordingly, respondent respectfully requests 14 that your Board sustain this action. 15 Thank you. 16 MR. HORTON: Thank you very much. On rebuttal, 17 sir. 18 One second, please. 19 MR. LeBLOCH: Well, I think I've made it clear 20 we understand that a second residence is -- is 21 permissible under 163(h) with significant restrictions. 22 And you'll note that the FTB has not mentioned the 23 section that I cited, which indicates that one of those 24 restrictions is that there be an election made by the 25 taxpayer to treat that second residence as a second 26 residence for 163(h) purposes. 27 So from that standpoint the FTB is missing -- I 28 believe that -- that -- that second residence, the 15 1 Tustin residence, the mortgage on that property it's not 2 permissible to add that mortgage in determining the 3 interest limitation because it was not technically a 4 second residence. 5 Now, with respect to their second line of 6 attack, which is -- deals with the issue of this 7 property not being held for the production of income, 8 you have to I believe look at the -- the sum total of 9 the facts here. It -- it was my client's intention 10 to -- when they bought this property in 1999, I've 11 already indicated they put in over $150,000 of 12 improvements, their intention was always to sell that 13 property at a profit. 14 The fact that not only did they list the 15 property for sale, but they also listed through a real 16 estate agent the property for rent after they vacated 17 the premises, I think clearly shows that this property 18 was being held for the production of the income. 19 And in terms of substantiation of that, we -- 20 as I've said previously, Exhibit A has a flyer. There 21 was a real estate agent, albeit my client's brother, but 22 he is a licensed real estate agent. 23 There was a real estate commission paid to that 24 individual when the property was sold. And -- and that 25 individual actively tried to sell or rent the property 26 during that six-month period of time between May and 27 November. 28 I just don't think there's any doubt that this 16 1 property -- this was property held for the production of 2 income during that period of time. 3 And I further believe that -- that the FTB is 4 wrong in terms of their arithmetic calculation of the 5 163(h) pro -- limitation based on the -- the second 6 residence issue. 7 So, I would -- I would hope that you'd rule in 8 favor of my clients. Thank you. 9 MR. HORTON: Thank you very much. I'm going to 10 ask the FTB to just respond to the disputed 11 interpretation of the law and then we'll go into 12 discussion, members. If you will. 13 MR. SUSZ: We raise the principal residence 14 argument in this opening statement because in briefing 15 counsel simply said that a taxpayer can only have a 16 principal residence -- present -- principal residence. 17 He did not say that you can have a second residence. So 18 that's why we felt the need to clarify it. 19 In terms of an election to treat the Tustin 20 home as a second residence we contend they did that when 21 they filed their return and they claimed mortgage 22 interest on both of those homes. You can only claim 23 mortgage interest on a qualified residence and the code 24 section clearly provides a qual -- the definition of a 25 qualified residence is either a principal residence or a 26 second residence. 27 So therefore it is our position that they made 28 that election when they filed their return and they 17 1 claimed the mortgage interest on both of the homes. 2 MR. HORTON: Okay. Discussion, Members? 3 Member Steel. 4 MS. STEEL: Just a question that, you know, you 5 said that one of that rental property has to be 6 advertised on the newspapers. But I see one of the 7 newspaper here and then -- then you said it has to be 8 the longer term. They said here that available for at 9 least one year or longer term. 10 And then a lot of times that, you know, when 11 they cannot rent it out then they sell it. But right 12 now that it's your assumption that they tried to cheat 13 on the taxes. That's the only -- the -- the interest 14 deductions, that's the only reason that they put this on 15 it. 16 But if you don't want to rent it why they have 17 to put advertising like this. And then they said one 18 year or longer. Because a lot of times that when you 19 cannot rent it and then some buyer wants to buy it, of 20 course you're going to sell it. 21 So this is just assumption that you have, not 22 the facts here. 23 MR. SUSZ: I'm not sure if -- if I have the 24 document that you're holding there, but -- 25 MS. STEEL: You don't have this one? 26 MR. SUSZ: Is it -- is it a newspaper 27 advertisement? 28 MS. STEEL: It's a flyer. 18 1 MR. SUSZ: Yeah, I -- I have -- 2 MS. STEEL: I think it is a flyer. 3 MR. SUSZ: I have seen the flyer and I've never 4 seen a newspaper advertisement. I -- I was just -- 5 MS. STEEL: Well, it has -- who said that it 6 has to be -- 7 MR. SUSZ: Oh, there -- 8 MS. STEEL: -- newspaper advertisement? 9 MR. SUSZ: -- there is no requirement. I was 10 just trying to give your Board -- 11 MS. STEEL: Okay. 12 MR. SUSZ: -- a couple of examples of the type 13 of substantiation we would expect to see. 14 I would say, though, even if your Board 15 determines that the appellants did attempt to rent the 16 home the case law in this area has made clear that in 17 terms of that factor, which is one of multiple factors 18 to consider, you know, selling the home shortly 19 thereafter means that they only put it up for rent for 20 six months. 21 And, in addition, we would argue that the 22 primary focus was sale of the home as evidenced by the 23 fact that they did sell the home within six months. And 24 so, therefore, we believe that factor is in our favor. 25 MS. STEEL: But when you have a second home and 26 then you don't have rental income for six months if it's 27 me then I try to sell it, too. If you cannot rent it 28 you going to sell it. I think that was the case in 19 1 here. 2 MR. SUSZ: In -- you know, the Courts look at 3 multiple factors. One factor is whether the taxpayers 4 held that home as a personal residence for a substantial 5 amount of time. In this case they held the home for 6 over five years, which means -- which basically 7 evidences the personal nature of the home to the 8 appellants. They raised their family in that home for 9 five years. 10 And then -- you know, we've discussed the 11 rental issue, but another issue is sale of the home, and 12 Courts have made clear that, you know, you just look at 13 the post-conversion appreciation that would have 14 occurred. Well, you're talking about a six-month period 15 of time, you know, that -- that elapsed from the -- you 16 know, the time that they moved out of the home into 17 second home in Newport Coast. 18 MS. STEEL: So you mean original home, that if 19 you live such a long time and you raised your family it 20 cannot be really converted to the rental home? 21 I mean, what I'm hearing from you is like, yes, 22 there's some people try to cheat on, so they do that. 23 But for this case that I see the advertising 24 and then on the advertising that they said lease has to 25 be longer. That's what they expected. 26 And of course you buy second home and then you 27 want to rent this one out, and for six months if they 28 couldn't rent it out and then they have buyer comes, of 20 1 course you sell it. 2 So, you know, I really don't understand -- I 3 mean, I really don't know where to draw the line here to 4 say yes or no. There's -- it's -- I think it's totally 5 gray area. And then, you know, you're assuming a lot of 6 things that this taxpayer tried to cheat on it and -- or 7 tried to deduct more for the interest, over a million 8 dollars. That's the reason maybe, you know, doing it. 9 But what I see the facts here that, you know, 10 looking at the advertising and then on the inside of the 11 advertising that how long they want to have a lease, I 12 totally understand on the taxpayer -- I mean taxpayers' 13 side. 14 So that's -- that's my statement. 15 MR. SUSZ: I -- I do agree with you that we 16 have a -- 17 MR. HORTON: I'm sorry, sir, that was a 18 statement, not a question. 19 Further discussion, Members? 20 MR. LeBLOCH: Ms. Steel -- Ms. Steel, could I 21 respond -- 22 MR. HORTON: Excuse me. Sir. 23 MR. LeBLOCH: -- to your concern about the -- 24 MR. HORTON: Sir. Sir. 25 Mr. Runner. 26 MR. RUNNER: Yeah, just to follow up, yeah, it 27 seems to me that this whole thing kind of circulates 28 around this idea of the intention of the -- of the home. 21 1 And I -- and I've got this flyer in front of me, too. 2 And -- 3 MR. LeBLOCH: By -- by the way, it's in color. 4 MR. RUNNER: Okay, good. I appreciate that. 5 I'm struggling with the idea that a home that 6 was a $1.5 million home that you're trying to find a 7 lease on, there isn't more documentation other than a 8 flyer. 9 For instance, normally I would assume that 10 oftentimes property like this you go in and especially 11 if it's your -- your -- your lease is -- is advertised 12 through a real estate company, you are assuming that 13 they are the property managers for you. And so you go 14 into that, you use them because they're going to help 15 not only find you the person but they're going to then 16 qualify the person, they're going to -- then you have an 17 agreement with them, so there's usually an -- a property 18 management agreement that's signed at the time, too. 19 Was there such a document? 20 MR. LeBLOCH: I think the only reason there 21 isn't one, Ms. -- Mr. Runner is that this was his 22 brother, who's a licensed realtor. And we did provide 23 checks that were actually paid to his brother in terms 24 of commissions. 25 MR. RUNNER: For the sale -- 26 MR. LeBLOCH: I think -- 27 MR. RUNNER: For the sale. 28 MR. LeBLOCH: For the sale. 22 1 MR. RUNNER: Right. Yeah, I'm not worried 2 about the sale, I get that. 3 MR. LeBLOCH: Well, I think -- you know, I 4 think this was brother to brother and I think some of 5 the formalities may have gone by the wayside in terms of 6 what you would normally expect in terms of, you know, 7 documentation of a relationship. 8 But he was very active in -- in the -- in the 9 sales activity. 10 MR. RUNNER: I -- I get the issue of the 11 activity in the sales issue. The problem is that's not 12 what this discussion is about, right? The issue of this 13 discussion is really about the rental aspect of it. 14 MR. LeBLOCH: Well, he -- 15 MR. RUNNER: And so what I'm trying to -- 16 MR. LeBLOCH: -- he was responsible for renting 17 and sale. 18 MR. RUNNER: Right. But I mean I'm sure -- for 19 instance, I can go back and I'm sure we can find 20 listings of the property and all those issues in the -- 21 you know, that were done on it. 22 MR. LeBLOCH: Yes, you can. 23 MR. RUNNER: But, again, what I'm trying to 24 find is something substantial that shows there really 25 was an intent from the beginning to actually go into 26 the -- into a lease or rental, other than a one-page 27 flyer. 28 Again -- normally, again, what I'm exposed to 23 1 in most places, especially with people as sophisticated 2 as buying this kind of property, moving on to another 3 piece of property, normally would use a property manager 4 in order to do all the process because, you know, they 5 don't want to go through the -- you know, how do -- who 6 would I give my check to? When do I do it? 7 MR. LeBLOCH: Sure. 8 MR. RUNNER: How do -- doing all the 9 qualification stuff and -- and right now because of the 10 relationship it was the brother there was nothing like 11 that in -- in any of the contract. 12 MR. LeBLOCH: You know, frankly, Mr. Runner, 13 I've never really questioned my client regarding what 14 his intentions would be if it was rented; whether he 15 would take on the task of being the property manager. I 16 never asked him that and that's -- 17 MR. RUNNER: Okay. 18 MR. LeBLOCH: -- a very good question. 19 But I do think some of the documentation was -- 20 is missing because it is a brother-to-brother 21 relationship. 22 MR. RUNNER: Okay. Thank you. 23 MR. HORTON: Was there ever a time that you 24 contemplated selling, as well? I mean, the brother was 25 a realtor in the business of selling and actually -- 26 actually sold the home. 27 MR. LeBLOCH: That is correct. 28 MR. HORTON: When the initial agreement was 24 1 entered into did they contemplate the possibility of 2 selling the home? 3 MR. LeBLOCH: Yes, the -- the arrangement was 4 rent or sell. 5 MR. RUNNER: It was listed in the beginning. 6 MR. LeBLOCH: And it -- and it was a long-term 7 rental from my standpoint, one year -- one year or more 8 is I think long term. So they were willing to accept 9 that. 10 MR. HORTON: And so it was whichever came 11 first? 12 MR. LeBLOCH: That's correct. 13 MR. HORTON: And the rental didn't come to 14 fruition? 15 MR. LeBLOCH: That's correct. 16 MR. HORTON: Never happened? 17 MR. LeBLOCH: That's correct. 18 MR. HORTON: Okay. Further discussion, 19 Members? Hearing none, is there a motion? 20 MS. YEE: I'll move to take it under 21 submission. 22 MR. HORTON: Moved by Ms. Yee to take the 23 matter under submission. Second by Ms. Steel. 24 Without objection, Members, such will be the 25 order. 26 Thank you very much for your presentation -- 27 MR. LeBLOCH: Thank you. 28 MR. HORTON: -- here today. We will take your 25 1 matter under consideration later on this evening and 2 send you a written report of our decision. 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 26 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 June 21, 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 26 13 pages constitute a complete and accurate transcription 14 of the shorthand writing. 15 16 Dated: July 11, 2011. 17 18 19 ____________________________ 20 BEVERLY D. TOMS 21 Hearing Reporter 22 23 24 25 26 27 28 27