1 BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION 2 5901 GREEN VALLEY CIRCLE 3 CULVER CITY, CALIFORNIA 4 5 6 7 8 REPORTER'S TRANSCRIPT 9 FEBRUARY 2, 2012 10 CORPORATE FRANCHISE AND PERSONAL INCOME TAX HEARING 11 APPEAL OF 12 LEO R. BOESE 13 NO. 547667 14 AGAINST PROPOSED ASSESSMENT OF 15 ADDITIONAL INCOME TAX 16 17 18 19 20 21 22 23 24 Reported by: Juli Price Jackson 25 CSR No. 5214 26 27 28 1 1 P R E S E N T 2 For the Board Jerome E. Horton of Equalization: Chair 3 Michelle Steel 4 Vice-Chairwoman 5 Betty T. Yee Member 6 George Runner 7 Member 8 Marcy Jo Mandel Appearing for John 9 Chiang, State Controller (per Government Code 10 Section 7.9) 11 Diane G. Olson Chief 12 Board Proceedings Division 13 14 For Board of Anthony Epolite Equalization Staff: Staff Counsel 15 16 For Franchise Tax Ann Hodges Board: Tax Counsel 17 Bill Hilson 18 Tax Counsel 19 20 For Appellant: Jay Larsen Representative 21 Victor Kawana 22 Representative 23 Leo R. Boese Taxpayer 24 25 ---oOo--- 26 27 28 2 1 5901 GREEN VALLEY CIRCLE 2 CULVER CITY, CALIFORNIA 3 FEBRUARY 2, 2012 4 ---oOo--- 5 MR. HORTON: Members, let us reconvene the 6 meeting of the Board of Equalization. We're going to 7 commence with the -- asking Miss Richmond to do a 8 summary of what's left on the calendar for the benefit 9 of those who are in the audience, as well as the 10 Board -- make sure that everyone's still here with us. 11 MS. RICHMOND: Thank you, Mr. Chairman. 12 The items remaining on the calendar are B3, Leo 13 R. Boese; B4, Donald L. Maxted and Jan E. Maxted; and 14 B8, Citation Development Company. 15 MR. HORTON: Okay. What is our -- what is the 16 first item for this afternoon, just -- the afternoon? 17 MS. RICHMOND: Our next item on the agenda is 18 B3, Leo R. Boese. 19 Please come forward. 20 MR. HORTON: Mr. Epolite, as they come, would 21 you please introduce the issues in this case? 22 MR. EPOLITE: Good afternoon, Mr. Chairman, 23 Members. Anthony Epolite with the Appeals Division. 24 The issue before the Board in this case is 25 whether Appellant has shown that Respondent erred in 26 denying his claim for refund, based upon an asserted 27 qualified small business stock transaction. 28 MR. HORTON: Thank you. We would ask that the 3 1 Appellant introduce themselves for the record. You have 2 ten minutes to make your presentation. 3 Then we'll go to the Department. They too will 4 have ten minutes. We'll return to you for five minutes 5 on rebuttal. 6 MR. LARSEN: Jay Larsen. 7 MR. HORTON: Welcome. Sir? 8 MR. KAWANA: Vic Kawana. 9 MR. BOESE: Leo R. Boese. 10 MR. HORTON: Welcome. 11 MR. LARSEN: Mr. Chairman and Board, Mr. Boese 12 is here today because he amended a 2007 tax return in 13 which he claimed a small business qualified stock 14 deduction. 15 The relevant facts are fairly straightforward 16 and when we look at the California Revenue and Taxation 17 Code 18152-5. I've included that and I'm assuming the 18 Board members have received this this morning in 19 Tab 1 -- and highlighted the relevant sections that I 20 will be discussing. 21 The law allows for an exclusion from gross 22 income, 50 percent of any gain from the sale or exchange 23 of qualified small business stock held for more than 24 five years. 25 The following requirements must be met as 26 defined by the California Revenue and Taxation Code in 27 order to qualify as a small business: First one is, the 28 corporation is a C corporation; second, is date of the 4 1 original issuance of the stock it must be issued after 2 August 10th, 1993; the purchase of the stock was at its 3 issuance. 4 I'll refer you to Tab 2, which shows the 5 original stock issuance of the 17,000 shares for Mr. 6 Boese. The C corporation, it's always been a C 7 corporation as recorded by the Franchise Tax Board as 8 well as I have got a copy of Tab 3, the original filed 9 tax return in 2000. 10 In addition, the corporation was a qualified 11 small business as of the date of issuance. The 12 aggregate gross assets at all times must be -- must not 13 exceed $50 million. And immediately after issuance, the 14 gross assets do not exceed $50 million. In any case, 15 that never happened. 16 Finally, at least 80 percent of the 17 corporation's payroll, as measured by total dollar 18 value, is attributable to employment in California. The 19 entity that we are referring to is a Toyota dealership 20 in Manhattan Beach, California. 21 They -- the Franchise Tax Board has never 22 argued that it did qualify under those provisions. At 23 substantially all times during the stock holding period, 24 80 percent of the value of the corporate assets, again, 25 are in California and, again, it's in Manhattan Beach, 26 California. And substantially all of the payroll is in 27 California. 28 As per the Franchise Tax Board's briefs, they 5 1 seem to have zeroed in on the facts of the transaction 2 and acquisition of the assets by Leo -- I am sorry, Lebo 3 Automotive and not the issuance of the stock in its 4 initial capitalization. 5 Again the requirements that I just read to you 6 are for the initial issuance of the stock. In viewing 7 the requirements outlined above under the statute, the 8 primary consideration here is the initial issuance of 9 the stock and the subsequent gross assets and whether or 10 not the business was more than 80 percent related to 11 California, or attributable to California through 12 payroll. 13 If you read the Franchise Tax Board briefs, 14 they never once challenge the underlying facts of Lebo 15 Automotive stock. That is the following, Lebo 16 Automotive was incorporated in the State of Delaware on 17 June 20th, 2000. Lebo Automotive filed to do business 18 in the State of California on July 13th, 2000. And I'll 19 refer to you Tab 2 for evidence of that. 20 Lebo Automotive issued 17,000 shares of stock 21 to Leo Boese on that date in 2000 for $1.7 million. 22 Again the stock was issued, original issuance, to 23 Mr. Boese for $1.7 million in cash. This amount is 24 represented as the common stock of the company 25 throughout its existence. 26 Again I refer you to Tab 3, the Lebo Automotive 27 2000 corporate tax return and its balance sheet and it 28 shows you common stock of $1.7 million. 6 1 The stock certificate lists the issuance of 2 those 17,000 shares as original issue -- I'll refer you 3 to the left side of the stock certificate. 4 In addition, Lebo Automotive issued 3, 508,000 5 shares of preferred shares to Toyota for the same dollar 6 amount, $3,508,000. That stock would have been reduced 7 throughout the existence of the corporation and paid 8 back from the profits of the corporation to Toyota. 9 Now the point that I want you to remember here 10 is that the stock that Mr. Boese sold and claims the 11 qualified business -- small business stock exclusion is 12 the Lebo Automotive stock. That is the stock that must 13 be qualified under the statute. 14 These are the only statutory qualifications 15 that are of significance here dealing with the acquiring 16 of the stock of the corporation. Quite simply, the 17 stock must be originally issued and be bought with money 18 or property and that business must substantially be a 19 California business in order for it to be qualified 20 small business stock. 21 When Lebo Auto -- or Leo Boese was originally 22 audited, he was sent a letter from the Franchise Tax 23 Board and that letter, which is shown in Tab 7, lays out 24 the requirements for qualified small business stock. 25 And in that letter they outline all of the 26 items that I just outlined. There's nothing in there 27 about how did you acquire the assets afterwards, but 28 simply, how did you acquire the stock of Lebo 7 1 Automotive? 2 All companies start with a stock and major 3 capitalizations to huge capitalizations. In the instant 4 case of the capitalization, Mr. Boese is the owner, 5 having agreed to purchase assets, primarily the 6 intangible assets of goodwill, which is the right to 7 sell Toyota vehicles. He acquired those stock -- those 8 assets after he had acquired the stock of Lebo 9 Automotive. Once those assets were acquired or once he 10 had acquired the stock, he entered into a transaction to 11 acquire those assets -- that goodwill, that right to 12 sell Toyotas. 13 The Franchise Tax Board wants to you believe 14 somehow that disqualifies the Lebo Automotive stock from 15 being small business qualified stock. 16 Mr. Boese himself put in $1.7 million and 17 borrowed an additional 3 and a half million dollars from 18 Toyota to purchase assets for this business. He took a 19 financial risk. He created a business. 20 The Franchise Tax Board believes that because 21 Mr. Boese personally entered into a stock purchase 22 agreement dated April 14th, 2000, that somehow that 23 invalidates the transaction and the stock purchase that 24 he made and disqualifies the stock. The reason he 25 entered into that purchase agreement, stock purchase 26 agreement, was to acquire the asset of goodwill, the 27 intangible asset, the franchise rights. 28 Once he knew that he could get that, he formed 8 1 the corporation that he needed to form in order to put 2 that asset in there and conduct business within the 3 State of California. 4 It is the Franchise Tax Board's contention that 5 the manner of the acquisition of the assets for Lebo 6 Automotive is irrelevant for the application of the 7 statute. Remember the statute states that the 8 requirements be met to be considered a small business 9 qualified stock -- or qualified small business stock. 10 The statute is detailed in its requirements that must be 11 met in order to be qualified small business stock. The 12 legislature, in drafting these requirements, certainly 13 had the opportunity to add statutory language adding 14 additional requirements that the Franchise Tax Board 15 seems to now want to impose upon Mr. Boese additional 16 requirements that are simply not a part of current 17 statutory scheme. 18 I ask you to review the statute and you'll see 19 that it is clear, the requirements for small business 20 stock. The Franchise Tax Board somehow reads into the 21 statute that there is some requirement that the newly 22 formed company must somehow acquire its assets in a 23 certain manner, a manner different from which the 24 taxpayer acquired its assets. 25 I ask you to look at the statute, look at the 26 exhibits that I've presented. You'll see it meets the 27 statutory requirements to be qualified small business 28 stock. 9 1 With that I will end my time. 2 MR. HORTON: Thank you very much. We will 3 return to you on a rebuttal for five minutes. 4 MR. LARSEN: Sure. 5 MR. HORTON: The Department will have ten 6 minutes to make their presentation. Please commence 7 with your introductions for the record. 8 MS. HODGES: Good afternoon, Chairman Horton 9 and Members of the Board. My name is Ann Hodges and I'm 10 representing the Franchise Tax Board. 11 To my right is Bill Hilson, also representing 12 the Franchise Tax Board. 13 The taxpayer is not entitled to the claimed 14 small business stock exclusion for two reason. First, 15 the taxpayer has not provided the documentation to show 16 that he met the technical requirements of the statute, 17 that is, that he acquired the stock at issue from the 18 corporation in an original issuance in exchange for 19 money or other property. In fact, the documentation he 20 has provided suggests that he obtained the stock at 21 issue in an exchange for other stock, which is 22 specifically prohibited by the statute. Secondly, the 23 basic intent of the statute is to provide an incentive 24 for creating new businesses. Allowing the taxpayer the 25 exclusion would allow him to do something indirectly 26 which he cannot do directly and that is get the benefit 27 for purchasing the stock of an existing company and 28 continue to operate that same company. 10 1 This is what happened in the case. The 2 taxpayer, as a individual, entered into a written 3 agreement in which he agreed to purchase an existing 4 Toyota dealership, Manhattan Beach Motors. This 5 agreement provided that the taxpayer, as an individual, 6 would purchase 100 percent of the stock of Manhattan 7 Beach Motors for more than $5 million. And as 8 taxpayer's acknowledged, he received a significant 9 portion of this financing from Toyota Motor Sales USA, 10 Inc. 11 Although the agreement -- the amended agreement 12 was unsigned, it did provide for an effective date. 13 After the effective date of the agreement, the 14 corporation for which the taxpayer is claiming this 15 small business stock exclusion, Lebo Automotive, was 16 incorporated in Delaware. 17 A couple of months after Lebo Automotive was 18 incorporated, the California Secretary of State's 19 records show that Manhattan Beach Motors was merged into 20 Lebo Automotive. According to prior representatives, 21 this was the type of merger where the taxpayer exchanged 22 his Manhattan Beach Motor stock for the stock of Lebo 23 Automotive, which is specifically prohibited by the 24 statute. 25 After the exchange of stock, the taxpayer was a 26 minority owner of Lebo Automotive. The majority was, 27 again, Toyota Motor Sales with 67 percent of the stock. 28 Despite the fact that the taxpayers previously 11 1 argued that the transaction occurred as I described, 2 he's making a different argument that he argues allows 3 him the benefit of the exclusion. 4 The taxpayer asserts that Lebo Automotive, a 5 corporation, was actually the purchaser of the Manhattan 6 Beach Motor stock for $5 million, despite the lack of 7 any documentation to that effect. 8 In this kind of complex business transaction, 9 there have to be documents regarding who did what, how 10 it was done, et cetera. The assertion in Lebo 11 Automotive's tax return reporting that it purchased the 12 stock are not amendments to the purchase and sale 13 agreement that prove who paid what, for what or how the 14 actual transaction occurred. 15 Even if Lebo Automotive could somehow be 16 considered the purchaser of the Manhattan Beach Motor 17 stock, the taxpayer is still not entitled to the 18 exclusion. At the time of the purchase Manhattan Beach 19 Motors had been in existence approximately ten years. 20 When all was said and done, you had a Toyota dealership 21 operating in the same location under substantially the 22 same name. 23 To allow the exclusion for the purchase of an 24 existing business would be contrary to the legislative 25 intent of the statute and allow the taxpayer to do 26 something indirectly what he couldn't do directly, that 27 is, get the benefit for purchasing the stock of an 28 existing business. 12 1 For those reasons, the Franchise Tax Board's 2 determination should be upheld. 3 MR. HORTON: Thank you very much. 4 On rebuttal, please? 5 MR. LARSEN: Administratively if I have 6 Mr. Boese speak, does he have to be sworn in? 7 MR. HORTON: Unless it's your desire, we can, 8 it's not necessary. 9 MR. LARSEN: At this point I want to begin my 10 rebuttal. I want Mr. Boese to speak as to the amount of 11 money that he put into the dealership, besides the 12 initial $1.7 million and what he spent that money for. 13 Leo. 14 MR. BOESE: The $1.7 million I put in was my 15 life savings. And in addition to that I borrowed money, 16 contrary to what the counsel for the tax Board says. 17 The business used to contain -- the location 18 used to contain two businesses, Manhattan Motors, dba 19 Manhattan Toyota, Manhattan Motors, dba Manhattan Ford. 20 When I bought the transaction, I was going to buy the 21 Ford and the Toyota store. The Ford exercised their 22 right of first refusal. And I bought the Toyota store 23 only. 24 The Toyota store was in a very small building 25 on the side of the property. The Ford franchise 26 represented the larger side of the property. The monies 27 I borrowed, 1.3 million, I did to renovate the Ford 28 building, to change it to a Toyota facility. In 13 1 addition to that, I spent the money buying all new 2 furniture, new computer system, putting in 21 new lifts. 3 When I bought the store, the Toyota store had 27 4 employees, the Ford store had 187 employees. Those Ford 5 employees went by the way. All the Toyota employees 6 were terminated and I rehired them, along with about 117 7 additional employees. The -- that's the money I put in 8 and the money I put -- borrowed. 9 One other thing I wanted to add is this has 10 been going on for four years now. I go six, seven 11 months without hearing anything. Every time I turn 12 around they're asking for something different. I don't 13 know how to respond to that. Everything that I've been 14 asked for, I've provided. 15 The stock of the -- the stock -- the way the 16 transaction was structured was between AutoNation and 17 Toyota. The -- 18 MR. LARSEN: Wait, let me -- let me interrupt. 19 I want to answer specifically that we did meet the 20 technical requirements. Again, the Lebo Automotive 21 stock is what must meet the technical requirements. It 22 must be original issue. It was original issue. It was 23 purchased by Mr. Boese for $1.7 million. It -- the 24 aggregate gross receipts were -- gross assets were less 25 than $50 million. It was a C corporation. It met the 26 requirements. 27 Everything that happens after the stock is 28 purchased from -- the manner of the statute and the 14 1 qualification is all but irrelevant -- how you acquire 2 the assets avenue the fact to create your business, in 3 order to facilitate your business. They're trying to 4 bring in the action afterwards, the acquiring of the 5 goodwill and the -- and some of the physical assets 6 somehow taints the transaction that the stock wasn't 7 originally issued, it wasn't again -- lost my train of 8 thought there. I will stop at that. The intent to 9 create a new business, they say "intent." Well, the 10 statute says what the statute says. 11 Now if I -- I want these attorneys to be here 12 next time I come back here and I've have got an S 13 corporation that I'm trying to claim the stock -- 14 small -- qualified small stock exemption for because I'm 15 going to say, 16 "Well, the intent was that we created a new 17 business. Forget the fact that it doesn't meet 18 the other requirements, but the intent even is 19 there." 20 Well, irregardless of the intent of the 21 legislation, the fact is the statute is written as the 22 statute is written. And even if you believe that there 23 is intent to create new business, as you heard from 24 Mr. Boese, he did create new business. He hired over 25 100 employees. He spent millions of dollars rebuilding 26 the facility. He created tax funds for the State of 27 California, for Manhattan Beach, California. 28 The fact that Toyota has an interest in the 15 1 dealership is irrelevant. The fact that the Lebo 2 Automotive stock qualifies -- qualifies on its own face, 3 there is no part in the statute that says there can be 4 only one owner. That is also an owner with a different 5 stock ownership, a preferred stock ownership, not a 6 common stock ownership. Mr. Boese was in 100 percent 7 control of that dealership and that business through his 8 100 percent ownership of the common stock. 9 The taxpayer, again, purchased the business 10 with his own money -- I'm sorry, purchased the stock 11 with his own money. That is the No. 1 requirement of 12 the qualified small business stock qualification. 13 With that, I'll rest. 14 MR. HORTON: Thank you very much. 15 Discussion, Members? 16 Mr. Runner. 17 MR. RUNNER: Remind me again what the 18 relationship was to the -- to the automobile stores that 19 were there prior to the -- to the purchase? 20 MR. BOESE: The original -- the original 21 transaction was to buy Manhattan -- Manhattan Motors. 22 MR. RUNNER: Uh-huh. 23 MR. BOESE: Dba Manhattan Toyota. 24 MR. RUNNER: Uh-huh. 25 MR. BOESE: And Manhattan Motors, dba Manhattan 26 Ford. 27 MR. RUNNER: Okay. 28 MR. BOESE: Ford Motor Company, as all car 16 1 companies do, have a first right of refusal. They were 2 looking to relocate the dealer in Hawthorne to Rosecrans 3 and the 405 freeway, which is about three miles away. 4 And they used the opportunity of the transaction that I 5 was trying to put together as their trigger mechanism, 6 if you would, to exercise their first right of refusal. 7 So, then -- 8 MR. RUNNER: So, your interest in either of the 9 two of those? 10 MR. BOESE: I had no interest in either of 11 them. 12 MR. RUNNER: In either of those? 13 MR. BOESE: Never. 14 MR. RUNNER: Okay, I may follow up with 15 somebody else. I'm done. 16 MR. HORTON: Ms. Steel. 17 MS. STEEL: I will follow up with Franchise Tax 18 Board that he had to acquire the original stock. 19 MS. HODGES: Correct. 20 MS. STEEL: And you said -- what did you say 21 about it? 22 MS. HODGES: What I said is the only 23 documentation that's been provided indicates that 24 Mr. Boese, as an individual, purchased the Manhattan 25 Beach Motor stock. 26 The -- in addition, the other information in 27 the case is consistent with the argument that the prior 28 reps made that Manhattan Beach Motors was then merged 17 1 into Lebo Automotive. 2 MS. STEEL: Right. 3 MS. HODGES: In a merger where -- the type of 4 merger where Mr. Boese exchanged his stock in Manhattan 5 Beach Motors for stock of Lebo Automotive. And the 6 statute specifically prohibits that type of transaction. 7 MS. STEEL: Can you -- 8 MR. LARSEN: Yeah, that's factually incorrect. 9 The facts of the matter are -- again, you have to go 10 back to Lebo Automotive stock, that's what the deduction 11 is being taken for. 12 And Lebo Automotive was purchased by and 13 capitalized by Mr. Boese for $1.7 million. After that 14 was done, he then acquired the assets of the other 15 Manhattan Toyota through a transaction, whether it was a 16 stock merger or through a stock merger that was treated 17 as a Section 338 stock -- I mean asset purchase -- 18 MS. STEEL: Right. 19 MR. LARSEN: -- is really irrelevant to the 20 factual underlying basis of the original purchase of the 21 stock. 22 Once you purchased the stock, then you've got 23 to start your business. And businesses have to go out 24 and buy assets and acquire assets. And what the 25 Franchise Tax Board is asserting is because he went out 26 and purchased those assets -- 27 MS. STEEL: Personally. 28 MR. LARSEN: -- personally or through a stock 18 1 merger and acquired those assets, that somehow that 2 taints the original purchase of Lebo Automotive stock. 3 It simply doesn't. 4 I'd like to make one other comment in reference 5 to her saying that we never provided -- the document -- 6 everything that's in here has been provided to the 7 Franchise Tax Board -- that I've provided to you, either 8 the prior accounts, KB Parrish, or Kruse Mennillo 9 itself. So, I'm a little -- I'm not quite sure where 10 they're saying that we haven't provided any 11 documentation. As Mr. Boese says we've sent them pretty 12 much everything that's in here (indicating). 13 MS. STEEL: So, what you're saying is Mr. Boese 14 put his own personal money to buy the stock. 15 MR. LARSEN: Yes. 16 MS. STEEL: And then he opened -- he opened the 17 business with that money? 18 MR. LARSEN: He acquired the assets. 19 MS. STEEL: Acquired the assets. 20 MR. LARSEN: The corporation acquired the 21 assets after it had been capitalized. 22 MS. STEEL: I got that part. 23 So, Franchise Tax Board is saying is that 24 that's not from the original stock. He didn't acquire 25 original stock from there because he transferred that to 26 his own personal name and then -- 27 MS. HODGES: Our argument is based on the 28 documentation that I have -- 19 1 MS. STEEL: Uh-huh. 2 MS. HODGES: -- not as they are describing the 3 transaction. I don't have that documentation for the 4 transaction they're describing. 5 The documentation I have is a written purchase 6 agreement entered into as an individual, where he 7 purchased 100 percent of the Manhattan Beach Motor 8 stock. 9 In addition, what I have is the prior 10 representative saying that Manhattan Beach Motors was 11 subsequently merged into Lebo Automotive and that's how 12 he received his stock. 13 And that's what I'm saying, he received it in 14 exchange for stock and the statute specifically says 15 that you cannot acquire the stock in exchange for other 16 stock. It has to be for money or other property. 17 MS. STEEL: So, what document -- what document 18 you are asking for? 19 MS. HODGES: Any type of documents that would 20 substantiate -- 21 MS. STEEL: Okay. Do you have that? 22 MS. HODGES: -- the transaction as they say it 23 happened. 24 MR. BOESE: What documents specifically? 25 MS. STEEL: Franchise Tax Board? 26 MR. HILSON: If I may try to help out here? 27 What -- what we -- what we were given suggests 28 that the way this happened was Mr. Boese went out and 20 1 expended his money to purchase the Manhattan Motors 2 Toyota stock. 3 MS. STEEL: Right. 4 MR. HILSON: And that thereafter he formed the 5 Lebo and merged Manhattan into Lebo in a stock for stock 6 basis -- 7 MS. STEEL: Right. 8 MR. HILSON: -- which the statute prohibits. 9 If the original transaction was amended to be 10 the transaction that they are now representing, in a $5 11 million deal we believe there should be documents 12 showing that the transaction was changed from a 13 Transaction A to Transaction B. 14 MS. STEEL: Right. 15 MR. HILSON: If -- if they can provide us that 16 stuff, we're more than happy to take a another look at 17 it. 18 MS. MANDEL: I have a question. 19 MS. STEEL: I just want to ask one thing, that 20 do you have that documents? 21 MR. BOESE: I guarantee we have that document. 22 MS. STEEL: Oh, okay. 23 MR. BOESE: Because there is no car 24 dealership -- 25 MS. STEEL: Without documents? 26 MR. BOESE: -- that has ever been sold where it 27 isn't sold to the individual that's starting the 28 negotiation, but that individual always put into the 21 1 buy-sell agreement -- 2 MS. STEEL: Okay. 3 MR. BOESE: -- that it is -- it is -- it is the 4 position is being transferred to a company or 5 corporation. 6 In this case, I was being driven by Toyota. 7 Toyota wanted to make sure that they were investing in a 8 new company -- 9 MS. STEEL: Right. 10 MR. BOESE: -- with new stock. 11 MS. STEEL: So, you have those documents? 12 MR. BOESE: Unequivocally, one million percent. 13 MS. STEEL: Okay, good. 14 MR. KAWANA: What I want to add is -- 15 MR. HORTON: Sir, please pull the mike a little 16 closer. 17 MR. KAWANA: With a new car franchise and with 18 the agreements with the factory, excuse me, they appoint 19 an authorized dealer. And that has to be an individual. 20 That's a requirement of the factory. 21 And, so, a lot of these agreements are written 22 that way. 23 MR. HORTON: Okay, thank you. 24 Ms. Mandel. 25 MS. MANDEL: I just want to make sure I 26 understand the facts as the taxpayer is asserting them 27 and then -- so, the agreement to -- the agreement that 28 was entered into to purchase the -- I'll just call it 22 1 the dealership -- is entered into by the individual. 2 At some point -- as I understand it, at some 3 point after that initial agreement was signed -- it 4 hasn't closed, but after it was signed, he knows that 5 they're willing to give him a dealership -- he forms 6 Lebo Automotive as a separate company. 7 And the way I understand what the taxpayer's 8 saying is that -- that he put a million seven cash into 9 Lebo to capitalize Lebo and get the stock. And that's 10 what he's saying is the first issue. 11 And then that -- when there's the later merger 12 of -- I guess the purchase of the dealership was -- 13 actually, you end up getting the stock of whatever that 14 company was, right? 15 Is that what it was? 16 MR. LARSEN: You're factually correct right up 17 to there. 18 MS. MANDEL: Okay. 19 MR. LARSEN: Once -- once the Lebo Automotive 20 stock was acquired by Mr. Boese, there was a legal 21 merger between the old Manhattan -- 22 MS. MANDEL: Right. 23 MR. LARSEN: -- dealership and his Lebo 24 Automotive. 25 MS. MANDEL: Right. Okay, that's what I 26 understood. 27 MR. LARSEN: And that's how the assets were 28 acquired by Lebo Automotive. 23 1 MS. MANDEL: Right, because the -- that's how 2 I -- that's -- okay, so, that's how I understood what 3 you were saying, that Lebo Automotive was capitalized on 4 a first issue stock. That's their argument. And that 5 there was a -- so, now Mr. Boese holds Lebo Automotive 6 stock and he holds Manhattan whatever Toyota stock. 7 And then he does a merger of Manhattan Toyota 8 into Lebo. So that Lebo is the surviving company and 9 Lebo winds up with whatever assets and goodwill or the 10 franchise or whatever. 11 MR. LARSEN: You're -- I'll make one other 12 point there. 13 He never legally held the Manhattan Toyota 14 stock personally. He could not have held it personally 15 and there be a merger. 16 The merger was between the stock owner of 17 Manhattan Toyota, which was AutoNation. They held that 18 stock. And it was merged into Lebo Automotive. 19 Because what had happened was once the 20 agreement was drawn up and he signed everything 21 personally, then those rights to purchase or to merge 22 were acquired by Lebo Automotive. 23 MS. MANDEL: Okay. So, that's the 24 documentation that FTB's looking for, because -- 25 MR. HILSON: That's the deal we cannot verify. 26 MS. MANDEL: Okay. 27 MR. LARSEN: Well, your -- the Franchise Tax 28 Board's the one that sent me all of the merger 24 1 documents, the filings and the State -- from Florida, 2 from AutoNation. 3 MS. MANDEL: So, which -- okay, let me stop you 4 right there. 5 So, the piece that the Franchise Tax Board 6 thinks it's missing is the piece that takes the 7 agreement that Mr. Boese signed to purchase and turns 8 that into a -- that Lebo's going to get all the rights 9 by merger? 10 MR. HILSON: Whether it's by an assignment of 11 the contract from Mr. Boese to Lebo Automotive or 12 whatever, what we've been shown suggests that the 13 original piece in this transaction was a direct stock 14 acquisition of the -- of the AutoNation and Manhattan 15 Toyota, Step 1; then formation of Lebo; then a merger or 16 stock for stock. 17 MS. MANDEL: Okay. And the way they're 18 describing it, the formation of Lebo in is the middle, 19 sounds like. 20 MR. HILSON: And there appears to also be a 21 negating of the individual acquisition of the Toyota 22 stock. 23 MS. MANDEL: Okay. I think I'm following you. 24 So, you just need -- you need the documents to 25 close up the loop? 26 MR. LARSEN: Well, that's the point I'm making 27 is if you go to Tab 7, their Respondent briefs, they're 28 the ones that sent us the California Secretary of State 25 1 history of Manhattan Beach Motors. 2 And if you look -- it's in Exhibit G on -- 3 MS. MANDEL: Yeah, I'm on Exhibit G, that was 4 magic. 5 MR. LARSEN: -- the March 10th, 2011. 6 And if you look at that, the corporate filing 7 for Manhattan Beach Motors, Inc., down at the second 8 page of that, it says, 9 "Filing history -- merger outgoing merged 10 into qualified Delaware Lebo Automotive, Inc." 11 Now that has a date of 10-5-2000 on there. I'm 12 assuming that the filing -- that was the date the 13 filings were actually made with the State of Delaware. 14 And, so, they -- the Franchise Tax Board's the 15 one that provided this. So, they're aware that it was 16 merged -- that stock of Manhattan Toyota was merged into 17 Lebo Automotive. 18 And Lebo Automotive had to be in existence at 19 that time in order for a merger to happen legally. And 20 when I said that the Lebo Automotive was -- if you look 21 at the corporate formation documents -- was formed on 22 June -- I think it was June 13th, 2000 and then the 23 transaction happened after the formation of that. It 24 had already been capitalized. That's how it acquired 25 those assets. 26 MR. HILSON: But if it was done the way we were 27 originally told, it's still a stock for stock merger. 28 MR. LARSEN: It's irrelevant. 26 1 MS. MANDEL: Hold on a second. 2 It's a stock -- it's a -- their contention is 3 that it's first issue stock because he put the dollars 4 in. 5 You're saying stock for stock because you 6 understood that he never -- somehow never held Lebo 7 stock until after this merger -- as a consequence of the 8 merger, right? 9 MS. HODGES: Correct. He obtained the Lebo 10 Automotive stock in exchange for the Manhattan Beach 11 Motor stock. 12 MS. MANDEL: Well, just trying to make sure 13 everybody knows what everybody's saying. 14 MS. HODGES: That's what we were told. 15 MS. MANDEL: That's what you were told 16 originally? 17 MS. HODGES: And that was -- 18 MS. MANDEL: So, you -- 19 MS. HODGES: -- the written purchase agreement 20 is consistent with. 21 MS. MANDEL: And the written purchase 22 agreement's consistent with that. 23 And, so -- but you know in the -- okay. 24 MR. LARSEN: I'll make a point on it. First of 25 all, the purchase agreement, the Lebo Automotive wasn't 26 even created at that point in time. 27 So, the original purchase agreement could not 28 have Lebo Automotive because that purchase agreement was 27 1 drafted April 14th, I believe, 2000. 2 MS. MANDEL: So -- okay. So, do you need then 3 -- are you looking for the formation information on 4 Lebo? 5 Because that's where they're saying they put a 6 million seven into Lebo and got the first issue. 7 MS. HODGES: I'd like to see -- we're looking 8 for two things: One that -- Lebo Automotive was the 9 ultimate purchaser of the Manhattan Beach Motors. 10 MS. MANDEL: Right and that's what we were 11 taking about before. 12 MS. HODGES: And, secondly, I'd like to see 13 some documentation of that original 1.7 million -- 14 MS. MANDEL: Going in to Lebo? 15 MS. HODGES: Yes. 16 MS. MANDEL: And him getting the stock. 17 MS. HODGES: Yeah. 18 MR. BOESE: That's the easiest thing in the 19 world to do. 20 MR. LARSEN: Yes. 21 MR. BOESE: Very simply, let's just use some 22 common sense. 23 I'm putting a million seven into the business. 24 My financial partner on three different levels is Toyota 25 Motor Sales. They're willing to lend me 3.5 million, 26 plus give me a $12 million flooring line, plus give me 27 money to help renovate the facility. 28 Believe me, I can get them documents because 28 1 Toyota had me sign everything from my first born to my 2 fifth grandchild. 3 MR. HORTON: Well, that sounds like a closing 4 statement to me. 5 Further discussion, Members? 6 MR. RUNNER: Well, at least what I'm hearing is 7 that the taxpayer would be able to provide that 8 information over the next number of days as we're -- if 9 we're to -- 10 MR. BOESE: I'll be on the phone with Toyota 11 tonight. 12 MR. RUNNER: Okay. 13 MR. BOESE: Yeah, I guarantee. Because Toyota 14 wouldn't have invested in it unless it was a new 15 company. 16 MR. RUNNER: Okay, thank you. 17 MR. BOESE: They just wouldn't have done it. 18 MR. RUNNER: Okay thanks. 19 MR. LARSEN: And again, as further evidence, if 20 you look at the balance sheets, the capitalization, the 21 1.7 is there for the 17,000 shares that were issued. 22 MS. MANDEL: Yeah, but it's all in the same 23 year, so -- 24 MR. LARSEN: Yeah, the year 2000. 25 MS. MANDEL: -- that makes it kind of -- 26 MR. LARSEN: Yeah. And like I said, I included 27 that tax return in here to show that balance sheet. 28 MS. MANDEL: Okay. 29 1 MR. HORTON: Okay. Looks like the Department 2 wants to make a statement. 3 MS. HODGES: We would like to request some 4 additional information about the end of the Ford 5 dealership and the creation of the new Toyota dealership 6 in conjunction with our argument that the intent of the 7 statute was to create a new business. 8 And it looks right now just like he bought an 9 existing business and continued to operate that an 10 existing business. 11 MS. MANDEL: Well, can I ask -- 12 MR. HORTON: One minute -- Ms. Mandel. 13 MS. MANDEL: It sounds like he bought a 14 dealership -- he bought a location. You know, he bought 15 a location and he bought franchise rights to the 16 location. And it sounded like there were some buildings 17 and land, perhaps, that were -- 18 MR. BOESE: In actuality, it would be -- it 19 would be wrong for me to let the Board believe or for me 20 to let the State franchise tax authority believe, I 21 didn't buy the franchise. 22 Okay, I entered into an agreement to buy the 23 assets of an existing dealership. I then applied for 24 the franchise. You can't buy a car franchise, right. 25 The manufacturer could have -- could have said 26 no after I had the agreement done. "We don't want you 27 as a dealer." 28 Ford, in fact, did that -- not because of Leo 30 1 Boese, Ford had other marketing conditions. So, they 2 decided to buy that the dealership out. What they paid 3 AutoNation, it's only hearsay on my -- my point, but 4 they closed that dealership out. 5 Once I got the rights from AutoNation to agree 6 to sell me their assets and they would give up their 7 right to the franchise, if I qualified for a franchise, 8 that's how the transaction took place. 9 So, I didn't buy the franchise. I bought the 10 assets and goodwill. 11 MS. MANDEL: Okay. 12 MR. BOESE: Blue sky. 13 MS. MANDEL: And my question was kind of if 14 you -- when I think of buying an existing business, it's 15 -- you know, we have an ongoing business and you go and 16 retire or something fabulous like that. 17 And it's -- the description that Mr. Boese gave 18 before sounded somehow a little different in the sense 19 that, yeah, there was a Toyota guy there before and he's 20 a Toyota guy, but he's -- you know, all these employees 21 are gone and some employees move over. He changes 22 location from one part to another. It sounded like he 23 bought other stuff. 24 I mean, I don't know how -- is there something 25 that's at a level of -- are you looking for him to 26 describe everything that he did coming in at some point? 27 Is it never a new business in your mind because it was 28 Toyota and there's still a Toyota guy there? 31 1 I mean, it's -- I don't know what the standard 2 is. 3 MR. HILSON: If I may? 4 The -- A lot of -- a lot of what we've heard 5 today we've heard for the first time. 6 MS. MANDEL: Okay. 7 MR. HILSON: We were unaware of the involvement 8 of Ford at that location as a prior -- as a prior 9 occupant. 10 And, yes, to the extent that -- you know, we're 11 concerned about doing indirectly what you can't do 12 directly, obviously, we're very interested in what 13 Mr. Boese reported about Ford terminating and employees 14 being laid off. And he -- he subsequently expanding and 15 starting a new business there, obviously, we're 16 concerned about that and we'd like to know what happened 17 there. 18 You know, we're not trying to be onerous here, 19 but it's -- it's new and we -- we'd like to be thorough. 20 MR. BOESE: Could I ask one thing then? 21 MR. HORTON: Ms. Mandel? 22 MS. MANDEL: Sure. 23 MR. BOESE: I'm sorry. 24 MS. MANDEL: No, that's -- that's fine. 25 It's -- I mean sometimes, you know, cases get a little 26 more complicated as they go through the system because 27 people are trying to do them, you know -- 28 MR. BOESE: The only thing I would say is, on 32 1 my behalf and I may be wrong and if I am, I apologize 2 publicly. 3 I believe I provided everything that was asked 4 of me. I have numerous correspondence where, in my 5 opinion, right or wrong, the benchmark keeps moving. 6 I am willing to provide anything but I would 7 like to know clearly what is required of me because this 8 will about eighth or ninth time I've provided 9 information that I was asked for. And now it's changing 10 again. 11 So, I'll do anything. And if I don't qualify 12 after I do it, I'll take my lumps and walk away. 13 But if you -- somebody could say in writing, 14 "This is what you need," I believe I can get it. There 15 is no doubt in my mind. 16 MR. HORTON: Ms. Mandel. 17 MS. MANDEL: Yes, I think that would be good. 18 And I think that often -- and certainly in this case -- 19 the people whose business it is and who did it know the 20 facts of their business better than their representative 21 sometimes. 22 And, so, if it's useful to explain what you 23 did, you know, the documents are one thing and they'll 24 have to sort of explain in writing what it is that 25 they're looking for in terms of the documents to tie up 26 the transaction. 27 But in terms of what you did when you came in 28 to change out the business and really establish it as a 33 1 new business and kind of a new location, I'm just 2 suggesting that a -- that talking to them and explaining 3 that can be useful. 4 Did you have something to add, Mr. Epolite? 5 MR. EPOLITE: Well, just to agree with what you 6 just said, but also that, hopefully, we can have the 7 parties have a conversation and that Appeals would 8 then -- with the Board's direction -- engage in further 9 briefing to allow Appellant to provide the additional 10 documents and evidence and arguments and then allow the 11 Franchise Tax Board to then respond to that. 12 MR. HORTON: Let's make sure we have clarity. 13 I'm going to ask the Department to clarify the exact 14 documents that they need in order to make a decision. I 15 would also share that what the Appellant is articulating 16 is consistent with the innate essence of a transaction 17 of acquiring a new dealership. 18 You don't really -- Toyota, Ford, they're not 19 going to give you a dealership just straight out --, 20 outright. 21 So, can you help us? 22 MR. HILSON: I think the starting point, sir, 23 is the acquisition documents. 24 I mean, what was provided to us is an unsigned 25 document, in the first place, which purports to be a 26 stock acquisition agreement direct between Mr. Boese and 27 the corporation. 28 MR. HORTON: Mr. Boese is referring to that as 34 1 an asset purchase agreement. 2 MR. BOESE: Yes, sir. 3 MR. HORTON: Okay. And do you believe -- 4 MR. LARSEN: Stock purchase. 5 MR. HORTON: Pardon? 6 MR. HORTON: It's called a Stock Purchase 7 Agreement. 8 And then we received the representations that 9 it ended up being -- you know, that was the first step, 10 that that -- that that transaction was consummated and 11 then Lebo Motors was incorporated and then we end up 12 with a stock for stock. 13 And if the deal -- if as we're hearing today 14 what happened was that first document is signed to tie 15 it up so that you can then go forward with the planning 16 and do what you've got to do to get the business where 17 you want it to be, I'm willing to accept that, but I 18 don't know what the deal was. 19 So, I think really what we're asking for is to 20 be provided with the transaction documents incorporating 21 the -- the -- whether it was a stock purchase in the 22 first place or whether it was just a, you know, a 23 placeholder and then ultimately the way it goes down 24 with the franchise agreement so that we know what 25 happened. 26 MR. HORTON: Okay. The Appellant -- is that 27 clear? 28 MR. LARSEN: Yeah, we will provide it. 35 1 MR. HORTON: Okay, all right. 2 Further discussion, Members? 3 Hearing none, is there a motion? 4 MS. STEEL: 30-30-30. 5 MR. HORTON: Moved by Member Steel to allow 6 30-30-30. Second by Member Yee. 7 Without objection, Members, such will be the 8 order. 9 Thank you very much for appearing before us 10 today. 30-30-30 allows you an opportunity, time to 11 accumulate the data and then additional time to meet 12 with the Department and then some resolution time -- 13 resolution. 14 At the same time we would ask that the Appeals 15 Department sort of codify all of this, if you will, so 16 that we make sure that all parties are on one page and 17 nothing new happens from this point forward. 18 MR. BOESE: Thank you so much. 19 MR. HORTON: Okay. 20 MR. LARSEN: Thank you. 21 ---o0o--- 22 23 24 25 26 27 28 36 1 REPORTER'S CERTIFICATE. 2 3 State of California ) 4 ) ss 5 County of Sacramento ) 6 7 I, JULI PRICE JACKSON, Hearing Reporter for the 8 California State Board of Equalization certify that on 9 FEBRUARY 2, 2012 I recorded verbatim, in shorthand, to 10 the 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 pages 1 13 through 36 constitute a complete and accurate 14 transcription of the shorthand writing. 15 16 Dated: February 17, 2012 17 18 19 ____________________________ 20 JULI PRICE JACKSON 21 Hearing Reporter 22 23 24 25 26 27 28 37