1 BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION 2 450 N STREET 3 SACRAMENTO, CALIFORNIA 4 5 6 7 8 REPORTER'S TRANSCRIPT 9 JUNE 26, 2012 10 11 12 13 14 15 16 FINAL ACTIONS 17 18 19 20 21 22 23 24 REPORTED BY: JULI PRICE JACKSON 25 CSR NO. 5214 26 27 28 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 Joann Richmond Chief, Board 14 Proceedings Division 15 16 ---OOO--- 17 For the Staff: Anthony Epolite Tax Counsel IV 18 Appeals Division Legal Department 19 20 William Stafford Tax Counsel III 21 Appeals Division Legal Department 22 23 David Levine Tax Counsel IV 24 Appeals Division Legal Department 25 26 ---o0o--- 27 28 2 1 450 N STREET 2 SACRAMENTO, CALIFORNIA 3 JUNE 26, 2012 4 ---o0o--- 5 MR. HORTON: Let us reconvene the meeting of 6 the Board of Equalization. 7 Ms. Richmond, what is our first item? 8 MS, RICHMOND: Our first item is H1, Legal 9 Appeals matters, H1.1, Eric Anthony Guidice. 10 ---o0o--- 11 H1.1 ERIC ANTHONY GUIDICE 12 NO. 380212 (ET) 13 ---o0o--- 14 MR. HORTON: Discussion, Members? 15 MR. RUNNER: H1? 16 MR. HORTON: Okay. Hearing none, is there a 17 motion? 18 MS. YEE: Move to sustain the Franchise Tax 19 Board. 20 MS. MANDEL: This is -- we're on H1. 21 MR. HORTON: H1. 22 MS. YEE: Oh, I'm sorry. H1, I'm sorry. 23 MS. MANDEL: It's the tobacco -- 24 MS. YEE: Yeah, sorry. 25 I'll move to adopt the staff recommendation. 26 MR. HORTON: Okay. Moved by Member Yee to 27 adopt staff recommendation. Second by Member Mandel. 28 Without objection, Members, such will be the 3 1 order. 2 Ms. Richmond. 3 MS. STEEL: That's the revised determination, 4 it's $5500? 5 MS. YEE: Yes. 6 MS. STEEL: Okay. 7 ---o0o--- 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 4 1 MR. HORTON: Ms. Richmond. . 2 MS, RICHMOND: Our next item is B1, Henry F. 3 Lenartz and Nona M. Lenartz. 4 ---o0o--- 5 B1 HENRY F. LENARTZ AND NONA M. LENARTZ 6 NO. 52471 7 ---o0o--- 8 MR. HORTON: Okay. Let us flip through these 9 pages here a little bit. 10 Discussion, Members? 11 MR. RUNNER: Yeah. 12 MS. YEE: Yes. 13 MR. HORTON: Member Mandel. 14 MS. MANDEL: Oh, no -- 15 MR. HORTON: I thought I heard "Uhm." 16 MS. MANDEL: -- sorry, just moving my hair. 17 MR. HORTON: Oh, okay. 18 MS. YEE: It was me. It was me. 19 MR. HORTON: It's the exhaustion after a while. 20 MS. YEE: It was I. 21 MR. HORTON: Member Yee. 22 MS. YEE: Thank you, Mr. Chairman. 23 I would like to see, regardless of the Board's 24 decision on this, perhaps publishing some guidance in 25 the form of maybe publishing -- depending on how the 26 decision goes, but I think the reliance on the federal 27 Treasury regs and some of the other federal -- related 28 federal statutes on small business stock, even though 5 1 the statutes do make reference -- our statutes make 2 reference -- I'm not sure that it's necessarily all that 3 clear. 4 And I'm wondering if there is a place for us in 5 our decision to try to further clarify that through 6 publishing a portion of our decision, if that's the way 7 the Board should go. 8 MR. HORTON: I would agree that there is some 9 need for clarification and that the decision has been -- 10 relative to the 80, 85 percent, although the majority -- 11 significantly, the majority are pretty consistent and 12 give weight to the language as it relates to the 20 13 percent and, therefore, concluding the 80, there are, 14 from what I've seen, a couple of cases where they 15 actually go down below that. 16 MS. YEE: Uh-huh. 17 MR. HORTON: Any comments from the Department? 18 MR. EPOLITE: Yes, Anthony Epolite from the 19 Appeals Division. 20 I believe that in this situation we have the 21 two terms, "taxpayer's holding period" and 22 "substantially all," that have both created some 23 confusion to taxpayers and that guidance would probably 24 be appropriate here. 25 I would point out to the Board that because of 26 the Cutler litigation -- 27 MR. HORTON: Yeah. 28 MR. EPOLITE: -- out there right now, that it 6 1 is possible that the Board could adopt a formal. And 2 because the 80 percent tests that are being challenged 3 in that litigation, these terms are -- are tied to the 4 80 percent test in subdivision (c)(2)(A) and (e) -- 5 subdivision (e) are tied together, such that in defining 6 these terms in a formal -- and if the Court of Appeal 7 were later to find that portion of the statute -- or the 8 statute in its entirety -- unconstitutional, we might 9 have a formal that at some point in the future we might 10 need to depublish. 11 MS. YEE: Okay. 12 MS. MANDEL: So, are you saying that the -- 13 that these -- are these issues also involved in the 14 pending court appeal? 15 MR. EPOLITE: Well, because the 80 percent 16 tests are being challenged. 17 MS. YEE: Yeah. 18 MR. EPOLITE: And these terms go towards 19 explaining the application of the 80 percent test. 20 MS. MANDEL: The Court of Appeal case is only 21 on constitutionality, not on fighting over what it 22 means? 23 MR. EPOLITE: I believe both. 24 MS. MANDEL: Okay. And, so, the Court of 25 Appeal might be addressing -- 26 MR. EPOLITE: Potentially. 27 MS. MANDEL: -- these questions themselves 28 soon -- relatively soon? 7 1 MR. EPOLITE: I believe briefing was completed 2 a couple of months ago. And that decision is either 3 going to be out later this year or early 2013. 4 MS. MANDEL: Hasn't been set for oral argument? 5 MR. EPOLITE: I don't believe so, no. 6 MS. YEE: Okay. 7 MS. STEEL: So, if we publish it, how about 8 that substantially all, that 85 percent, there is 18 9 cases and 13 counted was over 85, but the other five was 10 67 percent, two-thirds of it. 11 So, how we going to publish that? So, we going 12 to do just only 80 percent part? 13 MS. YEE: No. I think, given Mr. Epolite's 14 comments, I'll withdraw my -- 15 MR. HORTON: Okay. 16 MS. YEE: -- suggestion. 17 MS. STEEL: We going wait? 18 MS. YEE: Yeah, to the extent the Court of 19 Appeals may delve into this area, I'm not sure I want 20 to -- to upset that at this point. 21 But we have a little bit of a cart before the 22 horse situation here, but -- on the matter before us -- 23 Mr. Chairman, I'm prepared to make a -- 24 MR. HORTON: No, I concur. 25 Mr. Runner. 26 MR. RUNNER: How about on the holding period, 27 the five year? 'Cause that seemed to be the other issue 28 that's unclear. 8 1 MR. EPOLITE: Correct. 2 MS. STEEL: Another issue. 3 MR. RUNNER: And would -- would it make sense 4 for us to give some guidance in regards to clarify the 5 issue of the holding period? 6 MR. HORTON: I mean, I think the holding period 7 is a matter of opinion, not necessarily an 8 interpretation of the law. 9 But it's always helpful, you know, to share 10 what -- 11 MR. RUNNER: But we have taxpayers out there 12 making decisions right now based upon that very 13 significant issue. 14 MR. EPOLITE: Correct. 15 MR. RUNNER: And, so, we have the burden of 16 trying to decide whether it's the five-year period or 17 whether it's the whole total time, you know. 18 So, I mean, they're making that decision. And 19 you're right, it's interpretative, but the problem is 20 that taxpayers are making decisions based upon that 21 ambiguity. 22 In fact, I started off asking you guys, "Is 23 there clarity there?" 24 And you said, "No." 25 MR. EPOLITE: Right, relating to the 26 "substantially all" clause. 27 MR. HORTON: No, it's not the -- 28 MR. RUNNER: No, I think -- didn't you -- I 9 1 thought there was. 2 MR. HORTON: They're still here, Mr. Runner, 3 they can actually speak for themselves. 4 MR. RUNNER: Well, they -- yeah, I heard what 5 he said. He said in regards to "substantially all." 6 But I thought my question was also in regards 7 to the five-year period. 8 Is that not -- 9 MR. STAFFORD: I think that -- 10 MR. RUNNER: -- what I asked? 11 MR. STAFFORD: -- you had a comment on that. 12 MR. EPOLITE: Well, the Appeals Division has a 13 clear opinion on the interpretation of that term. And 14 it's from the date the taxpayer purchases the stock 15 until the date it's sold. 16 MR. RUNNER: So, we have a clear opinion? 17 MR. EPOLITE: Yes. 18 MR. STAFFORD: Well, that's the Appeals 19 Division's position. 20 MR. EPOLITE: Yes. 21 MR. STAFFORD: But that is an issue for the 22 Board to decide right here. 23 That matter would decide this appeal for this 24 taxpayer. 25 MR. RUNNER: Right, right. 26 MR. STAFFORD: That is primary -- one of the 27 primary issues you may want to, you know -- 28 MR. RUNNER: Is there -- yeah, we have an 10 1 opinion, but it's not -- it's not clear in the statute. 2 Is that -- I mean, we extrapolate out that -- 3 MR. EPOLITE: Correct. 4 MR. RUNNER: -- correct? 5 MR. EPOLITE: Since it's in the same 6 subdivision (c)(2)(A), that term -- 7 MR. RUNNER: So, you don't think -- you don't 8 think publishing that particular issue would give 9 clarity to taxpayers? 10 MR. EPOLITE: No, absolutely it would. 11 MR. RUNNER: Okay. That's -- that's my point. 12 That's the extent of my point. 13 The point would be -- I'm glad Appeals has a 14 position on it, I'm just not sure how well then that's 15 held up there by the taxpayers in regards to clarity for 16 their own decisionmaking. That's -- that would be my 17 point. 18 So, again I can -- I appreciate the fact that 19 maybe there is some thought, but I would at least say 20 maybe that -- maybe the issue of trying to give clarity 21 is in the five-year period, not in regards to the -- 22 trying to deal with the issue of "substantial." 23 MS. YEE: "Substantially," yeah. 24 MR. RUNNER: In order to at least get some 25 clarity at that point. 26 But, actually, that's -- but to another point, 27 which actually goes to the course of the argument -- and 28 that is -- I want to -- the issue in regards to the -- 11 1 to the options, the stock options. 2 Because that goes to then -- that goes back to 3 the idea of earned while in the State of California and 4 when it is that those stock options are credited, 5 correct? 6 I mean that was -- that's what all that 7 discussion's about? 8 MR. EPOLITE: Yeah. 9 MR. RUNNER: And if, indeed, the company who 10 had those stock options, the original stock -- the 11 original company -- would have honored those stock 12 options, let's say, the month before the merger, then it 13 would be clear -- honored them and paid those stock -- 14 and sold those stock options and those Californians 15 bought them -- it would be clear then that that was 16 California earned income, correct? 17 MR. STAFFORD: Yes. But that -- the -- the FTB 18 measured on a per year basis. Remember, they went 19 through each year separately. 20 MR. RUNNER: Right, right, right, right. 21 MR. STAFFORD: So, if we're talking about that 22 last year, that would -- credit for that last year. 23 But the other years, you know, you would have 24 to see whether they were exercised during those years. 25 MR. RUNNER: Right, right. 26 We'd have to go back and reanalyze. If we -- 27 MR. STAFFORD: Yeah. 28 MR. RUNNER: -- if we honor -- if we recognize 12 1 those as sold, exercised stock options -- 2 MR. STAFFORD: Right, last year -- 3 MR. RUNNER: -- we'd have to go back and 4 analyze that. 5 MR. STAFFORD: -- at least for the last year. 6 But if they met that last year, it was only 7 three months, that's -- that might be an issue there, 8 where the FTB conceded like the first -- different 9 blocks of stock, the first, let's say, many years -- 10 MR. RUNNER: Right. 11 MR. STAFFORD: -- was 100 percent. 12 And then they had the three last years and they 13 said, "Okay, these last years, they didn't meet it." 14 And for one block of stock -- 15 MR. RUNNER: So, you don't -- you don't believe 16 if we -- if the -- 17 MR. STAFFORD: It could affect -- 18 MR. RUNNER: -- so, you think the outcome would 19 be the same if the company -- 20 MR. STAFFORD: We would have to analyze it. 21 MR. RUNNER: Okay. That's -- that would be my 22 point. 23 My point is we -- is that we don't know. 24 MR. STAFFORD: Right. 25 MR. RUNNER: So -- so, the situation we have is 26 the company didn't recognize and let those stock options 27 be exercised? 28 MR. STAFFORD: It's not clear. It appears that 13 1 the company -- 2 MR. RUNNER: Well, normally -- in the normal -- 3 in the normal fashion? 4 MR. STAFFORD: Right, right. 5 MR. RUNNER: Instead what happened was during 6 the sale process there was value given to those stock 7 options? 8 MR. STAFFORD: Yes. 9 MR. RUNNER: And paid out then to those -- 10 those -- those -- those individuals? 11 MR. STAFFORD: It appears so from the S1, it 12 appears, yes. 13 MR. RUNNER: And if, indeed -- so -- so, if, 14 indeed, those -- it was -- that happened, that would be 15 income earned during the holding period, correct? 16 MR. STAFFORD: I would say for the last year, 17 yes, I would answer that yes. 18 MR. RUNNER: Okay. 19 MR. STAFFORD: Uh-huh. 20 MR. RUNNER: Okay. Thank you. 21 I guess that's my point with this issue, it 22 seems to me that we have an open item and that is these 23 stock options that were not exercised normally, that, 24 basically, got dealt with the way that this merger took 25 place, that was outside then the scope of this taxpayer. 26 This taxpayer didn't have any control over that, that is 27 just how this company sold itself. 28 And it seemed to me the very least we should do 14 1 is try to go back and analyze. If we -- if we look like 2 that transition of value was, indeed, in essence, 3 exercising the stock options, because that's where the 4 value came from, and, therefore, created California 5 value, then -- then it seemed to me that that ought to 6 at least be analyzed. 7 I don't know if it'll make any difference. 8 MR. STAFFORD: Right. 9 It may or may not, but you'd also have to 10 decide, it seems, whether "substantially all" is 85 11 percent or 80 percent or whatever number you think that 12 should be. 13 That would be another criteria we'd have to 14 have guidance on to sort of do the math, if we're going 15 to go back and do math as far as stock options go -- 16 unless you see it differently. 17 I'm just commenting. 18 MR. RUNNER: So -- okay. So -- okay. 19 Because -- 20 MR. STAFFORD: Not that you have to have a 21 formal on that, but it just -- you know, you would have 22 to give us some guidance. 23 What is it -- 24 MR. RUNNER: What's Appeals think the number 25 is -- 80 or 85 percent? 26 MR. STAFFORD: Well -- 27 MR. RUNNER: Let me ask you. I mean, you -- 28 you're -- you're -- 15 1 MR. STAFFORD: Right. 2 MR. RUNNER: Is there -- I mean, you, you -- 3 you're the -- you're the unbiased protector here of the 4 taxpayer and us. 5 MR. STAFFORD: Yeah. 6 MR. RUNNER: I mean and us, what's your opinion 7 in regards to it? Is it 80 or 85 percent? 8 MR. STAFFORD: Well, I saw a lot of numbers 9 going back and forth, saying, you know, "Under these 10 other statutes and under the IRC," that, you know, it 11 should be 80 or 85. 12 And I think then argument is is that the -- the 13 85 percent makes more sense here because the small 14 business stock statute was modeled after federal law. 15 And the federal law was adopted at the same time as the 16 other federal provision and for -- what was the other 17 one? 18 MS. MANDEL: Empowerment zone? 19 MR. STAFFORD: What's that? 20 MS. MANDEL: Were you thinking of empowerment 21 zone? 22 MR. STAFFORD: Yes. 23 MS. YEE: Yes. 24 MR. STAFFORD: For the empowerment zone 25 provision, they were adopted the same time and the 26 empowerment provision also talks about 85 percent. 27 So, the appeal -- they appear to go together, 28 that's empowerment zone and the small business stock 16 1 statutes. They were adopted at the same time. They 2 cover a similar type of incentive for small businesses. 3 MR. RUNNER: Okay. 4 MR. STAFFORD: And, therefore, the -- since the 5 federal empowerment zone adopts the 85 percent test, it 6 appears that is somewhat similar and that's what this 7 should be, 85 percent here. 8 The taxpayer had mentioned the 80 percent test, 9 but that's under the -- 10 MR. RUNNER: That's fine. You don't need to -- 11 I just -- 12 MR. STAFFORD: Okay. 13 MR. RUNNER: -- I heard your recommendation and 14 I got it. 15 MR. STAFFORD: Yeah. 16 MR. RUNNER: I guess, for discussion with the 17 Board, I'm comfortable with then taking the staff 18 recommendation of the 85 percent and then asking them to 19 analyze then that -- those -- those -- the stock 20 valuation that took place and -- and see if that changes 21 any liability on the part of the taxpayer. 22 I don't know if it does. But it seems to me we 23 just can't ignore the fact that there were -- there was 24 value given to Californians during that holding period, 25 which is what this test is all about. That's the core 26 of what this legislation is about. 27 MR. STAFFORD: Well, the other issue of the 28 holding period, of course, as you already mentioned, 17 1 depending on your issue -- you know, your decision 2 there, you would never get into the stock option issue 3 or "substantially all," if you decide the whole holding 4 period -- 5 MR. RUNNER: Yeah, I again -- 6 MR. STAFFORD: -- was not valid. 7 MR. RUNNER: -- again if we'd -- I think we 8 could follow the -- at that point, follow the -- the 9 direction or the interpretation of the -- of Appeals in 10 regards to the stock option issue -- or, excuse me, in 11 regards to the holding period. 12 And, so, that we're dealing with while this 13 stock is held. And, so, that -- I -- I certainly don't 14 have any problem going to the staff recommendation, if 15 you will, or the -- or the position of the 85 percent 16 and the whole holding period, not just the five years. 17 MR. STAFFORD: Okay. 18 MR. RUNNER: But my concern is that there needs 19 to be recognition for that value that was created to 20 Californians during that holding period that manifested 21 itself in stock options that were not cashed out 22 normally, only because of the nature of the transaction 23 of the merger. 24 And all that took place while the stock -- 25 while the stock -- while the taxpayer still held their 26 stock, right? 27 MR. STAFFORD: Right. 28 MR. RUNNER: Okay. That gets to the point of 18 1 the discussion? 2 MS. MANDEL: Yeah. 3 MR. HORTON: Sure. 4 MS. MANDEL: It still would have to be 5 compensation or payroll. It would have to constitute 6 compensation or payroll. That's what the -- payroll is 7 what the statute requires, that it constitute payroll. 8 MR. RUNNER: But doesn't exercise -- 9 MS. MANDEL: But whether -- whether somebody 10 wanted to find a way to -- to get you some money for -- 11 for some contingent right that you're currently holding 12 and have -- may or may not have current vesting in, 13 ultimately it still has to constitute payroll. 14 MR. RUNNER: I guess my assumption was that 15 exercised stock options was identified. 16 MR. STAFFORD: Okay, exercised is. If it's 17 exercised and statutory stock options -- 18 MR. RUNNER: Right. 19 MR. STAFFORD: -- it is compensation vested -- 20 MR. RUNNER: Right, we're not talking about 21 vested -- 22 MR. STAFFORD: -- all right. 23 MR. RUNNER: -- we're talking about -- 24 MR. STAFFORD: But here -- 25 MS. MANDEL: But here we have something that -- 26 MR. STAFFORD: -- we have a -- 27 MS. MANDEL: -- that sounds like you're 28 thinking you should treat it as though it were. 19 1 That's what I'm hearing in the conversation. 2 MR. STAFFORD: Right. 3 MS. MANDEL: Treated as though it were because 4 it was a -- a corporate buyout. That's not -- 5 MR. STAFFORD: That issue was not briefed 6 and -- 7 MS. MANDEL: -- and that's -- 8 MR. STAFFORD: -- and no case law has been 9 presented by the -- 10 MS. MANDEL: -- you know, seems different than 11 is it payroll or is not payroll. 12 It sounds like where you're going is treat it 13 as though it were payroll. 14 MR. RUNNER: Yeah, I guess because I guess I go 15 back to what the intent was. 16 What's the intent of the law? The intent of 17 the law was -- in order to try to get people to invest 18 in California. And that's, indeed, what -- 19 MS. MANDEL: Right. But they might not have 20 written it in a way that -- I mean, that's -- I mean, 21 I'm working with the way that they wrote it. 22 And if they said, "You got to use payroll," 23 then what's payroll? And is this payroll? 24 MR. RUNNER: Well, how -- let me ask -- 25 wouldn't these -- wouldn't these -- as the person got 26 that money, I assume it would -- it came -- well, I 27 guess -- I guess I don't know. 28 I assume it came to them in a -- the same a 20 1 cash -- or not cash, but a check or a payout to the 2 individual and if it's -- 3 MS. MANDEL: Well, it was -- I think that was 4 part of the Franchise Tax Board's argument was it wasn't 5 even -- it was -- it was paid by the company that 6 bought -- 7 MR. RUNNER: Right. 8 MS. YEE: Uh-huh. 9 MR. HORTON: Based on -- 10 MS. MANDEL: -- the company that had -- 11 MR. RUNNER: Only because that was -- isn't 12 that only because it was the unique nature of the 13 transaction? 14 MS. MANDEL: But that might go to whether or 15 not it's -- 16 MR. HORTON: That's -- that's -- 17 MS. MANDEL: -- payroll of -- 18 MR. HORTON: -- that's going to -- 19 MS. MANDEL: -- the company whose -- 20 MR. HORTON: -- govern. 21 MS. MANDEL: -- stock that you're -- 22 MR. RUNNER: But the taxpayer -- 23 MS. MANDEL: -- giving up. 24 MR. RUNNER: -- but the taxpayer didn't have 25 control over that. 26 I mean, the taxpayer invested in this company 27 and the -- and the protection for the taxpayer, the 28 benefit, was in order to invest in companies that -- 21 1 small businesses that were working in California, that 2 criteria was all met. 3 The only think that's weird here is we've got 4 this unique payout that wasn't the traditional stock 5 option payout, only because of the nature of the way the 6 merger took place. 7 MR. STAFFORD: Right. 8 MR. RUNNER: Is that fair? 9 MR. STAFFORD: Well, it's fair to the extent 10 that we don't know what would have happened with these 11 options if this merger had not happened. 12 I mean, maybe they would not have vested or 13 maybe they would never have been exercised or, you know, 14 we don't know. 15 We just know what -- it appears from the S1, if 16 you're willing to accept that as, you know, proof here 17 of what happened that the options that were out there, 18 maybe they were vested or not or I don't know what the 19 extent it was, but they -- some people received 20 compensation -- 21 MR. RUNNER: Right. 22 MR. STAFFORD: -- or something like that or -- 23 MS. MANDEL: They received -- 24 MR. STAFFORD: -- money. 25 MS. MANDEL: -- maybe they received money. 26 MR. STAFFORD: Money. 27 MS. MANDEL: I mean, compensation is -- 28 MR. STAFFORD: -- maybe not compensation, yeah. 22 1 MS. MANDEL: That's part of the question, 2 right -- 3 MR. STAFFORD: Yeah. 4 MS. MANDEL: -- whether it's payroll -- I don't 5 know. 6 MR. HORTON: But -- 7 MR. STAFFORD: Or something, let's say. 8 MR. RUNNER: All right. 9 MR. HORTON: -- so, I'm still not necessarily 10 convinced. 11 If the merger agreement, irrespective of that, 12 if it's not an expense, it's not a payroll expense, then 13 it's not going to be included in the equation. 14 The merger agreement requires that the payout 15 be made -- if I'm reading this correctly. 16 So, possibly we need to ask for more 17 documentation. 18 MS. YEE: We need -- yeah. I mean, all we have 19 is the SEC form S1. 20 MR. STAFFORD: Correct. 21 MS. MANDEL: Is that the one you that was 22 withdrawn, right? 23 MR. EPOLITE: That FTB provided us last week. 24 MS. MANDEL: That's not the withdrawn document? 25 That's the actual -- 26 MR. EPOLITE: Uhm -- 27 MR. STAFFORD: "Withdrawn document" meaning? 28 MS. MANDEL: It is the withdrawn document? 23 1 MR. EPOLITE: -- yes, it is, yes. 2 MR. HORTON: But let me ask the question, what 3 if it's not considered a payroll expense to the 4 taxpayer? 5 MR. RUNNER: Right. 6 MR. HORTON: I mean, what if, as the Department 7 has indicated, that the merger required that the Cytek, 8 (verbatim) or however it's pronounced, that they 9 actually pay out whatever the compensation might have 10 been and, therefore, not an expense to the taxpayer? 11 MR. STAFFORD: I would say in that case then it 12 would -- there would be an argument, at least, that not 13 be included in the calculation here, if that's the case. 14 I think what we need to do is find out what the 15 law is. If Appellant wants to brief that or if the FTB 16 wants to get into that, this issue -- 17 MR. HORTON: Okay. Let's do that. 18 Is there a motion? 19 MR. RUNNER: 30-30-30. 20 MR. HORTON: Moved by Member Runner, well -- 21 MS. YEE: Just -- are we taking these up 22 individually? 23 MR. HORTON: -- wait, wait a second here. 24 Mr. Epolite? 25 MR. EPOLITE: Go ahead. 26 MR. RUNNER: You want to clarify the other 27 issues? 28 MR. HORTON: Yeah, let's do that, Members. 24 1 Let's take up the issues. 2 MR. RUNNER: How do we -- 3 MR. HORTON: Let's bifurcate them. And let's 4 take up the -- maybe the holding period issue? 5 What's the desire of the Board? 6 MR. RUNNER: Well, aren't we just -- can we 7 take up an item like that or do we -- or are we taking a 8 case? 9 MS. YEE: Well, there's two issues, right? 10 The one issue with respect to the stock. 11 MR. HORTON: Well, you know, what -- you know 12 what, Members -- 13 MS. YEE: -- which I think is -- 14 MR. HORTON: -- let's just do this, 'cause if 15 we put it out and we're trying -- we're trying to 16 determine this whole payroll issue and certainly that 17 may be a condition subsequent if, in fact, the holding 18 period -- we determined the holding period. So, that 19 may be a non issue. 20 So, Mr. Epolite, any -- your thoughts, please. 21 MR. EPOLITE: Well, I think we're down to the 22 one issue as to what to do with the stock option -- 23 MR. RUNNER: Right. 24 MR. EPOLITE: -- and let the parties brief that 25 issue. 26 Taxpayer's holding period, I think the Members 27 are in agreement, what that term -- 28 MS. MANDEL: I think the question was -- 25 1 MR. HORTON: Well -- 2 MS. MANDEL: -- whether there should be a 3 motion at this point on the holding period. 4 Is that the question or not? 5 MS. YEE: I think that was Mr. Runner's -- 6 MR. RUNNER: The holding period's really not 7 before us, the case is before us. 8 MS. YEE: No, the -- the issue before us is the 9 stock. 10 MR. EPOLITE: Right. 11 MS. YEE: Right? 12 MR. EPOLITE: And if we can ask the parties for 13 additional briefing, I think -- 14 MS. YEE: And I think rather than trying to 15 decide this piecemeal, I think we take that issue back 16 for the further briefing and then we can come back and 17 decide on the totality of the issues. 18 MR. RUNNER: I think that's a better solution. 19 MS. YEE: Yeah. 20 MS. MANDEL: Well -- 21 MS. YEE: Otherwise -- 22 MR. HORTON: One at a time, Members. 23 MS. YEE: I -- I support the motion of 24 additional briefing on the issue of the stock options 25 'cause I think that will answer the main issue of the 26 case. 27 And then it may be that once that's further 28 briefed and we come back, we can, if necessary, take up 26 1 the issue of the holding period and, I think, 2 "substantially all" have decided to not deal with 3 that. 4 MS. MANDEL: And how do want it -- 'cause 5 normally when it comes back, it will come back with 6 something -- 7 MR. EPOLITE: With a recommendation. 8 MS. MANDEL: -- substantially -- 9 MR. HORTON: Recommendation from staff. 10 MS. MANDEL: -- so, is that what you're -- 11 MR. HORTON: We -- we're still -- we can still 12 take it up. 13 MS. MANDEL: Right, you would still -- I just 14 wanted to remind you that -- 15 MS. YEE: Yeah. 16 MS. MANDEL: -- that's how it comes back. 17 MS. YEE: Yeah. 18 MR. EPOLITE: It will come back with a 19 recommendation on the adjudicatory calendar. 20 MS. MANDEL: Right. 21 MS. YEE: Yes. 22 MR. RUNNER: Right. 23 MS. YEE: Yes. 24 MS. MANDEL: Okay. 25 MR. RUNNER: I'm fine, I'm good. 26 MS. YEE: Okay. 27 MR. HORTON: Okay, all right. 28 Moved by Member Runner to put this over to 27 1 allow additional time for briefing, second by Member 2 Yee. 3 And we will -- I don't necessarily see this as 4 a -- what's the best way to accomplish that, gentlemen? 5 30-30-30 is -- 6 MR. EPOLITE: 30-30-30. 7 MR. HORTON: -- is on the floor. 8 Okay. Motion by Member Runner to provide a 9 30-30-30, second by Member Yee. 10 Without objection, Members, such will be the 11 order. 12 The directions to staff is to provide briefings 13 on the stock option issue, bring the other issues back 14 for the Board's consideration. 15 Even though it's on the adjudicatory calendar, 16 we would ask the Board Proceedings to make each Member 17 aware of this discussion, that is an item that we want 18 to bring back -- not that I think that we're going to 19 need that, but just in case. 20 Is that clear? 21 MR. EPOLITE: Do you want us to come back with 22 a recommendation for the Board? 23 MR. HORTON: We don't really have a choice. 24 MR. EPOLITE: Okay. 25 MR. HORTON: Not that I'm not giving you a 26 choice, the process doesn't give you a choice. 27 MR. EPOLITE: All right. 28 MR. HORTON: It's the way you've got to go. 28 1 Okay. Thank you Mr. -- we're good? Everyone's 2 good? 3 Okay. 4 ---o0o--- 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 1 MR. HORTON: Ms. Richmond, our next item?. 2 MS, RICHMOND: Our next items is C1, Rajesh 3 Prakash Sharma and Zarina Ali Sharma. 4 ---o0o--- 5 RAJESH PRAKASH SHARMA AND ZARINA ALI SHARMA 6 NO. 267189 (KH) 7 ---o0o--- 8 MR. HORTON: Members? 9 MS. YEE: Move to adopt the staff 10 recommendation. 11 MR. HORTON: Moved by Member Yee -- 12 MS. YEE: -- and direct staff to inform 13 Petitioner of the OIC program -- the 14 Offers-in-Compromise program. 15 MS. MANDEL: The calvary is coming. 16 MR. RUNNER: Horse calvary. 17 MR. HORTON: We could have used that five 18 minutes ago. 19 Moved by Member Yee to adopt staff 20 recommendation and direct staff to advise the taxpayer 21 of Offer-in-Compromise, second by Member Runner. 22 Without objection Members, such will be the 23 order. 24 ---o0o--- 25 26 27 28 30 1 MR. HORTON: Ms. Richmond. 2 MS, RICHMOND: Our next item is C2, Bruce Sam 3 Chhuth and Bopha Tep. 4 ---o0o--- 5 BRUCE SAM CHHUTH AND BOPHA TEP 6 NO. 401822, 420939 (KH) 7 ---o0o--- 8 MR. HORTON: Members. 9 MS. YEE: Same motion, move to adopt the staff 10 recommendation and direct staff to inform Petitioner of 11 the Offers-in-Compromise program. 12 MR. HORTON: Okay. Moved by Member Yee to 13 adopt staff recommendation and directing staff to inform 14 the taxpayer of Offers-in-Compromise. 15 Second by Member Steel. 16 Without objection, Members? 17 MS. STEEL: I have question to Mr. Levine. 18 There is a gasoline markup of 23.78 percent 19 here and most of gas markup is 6 to 10 percent. 20 They didn't do the audit of the gas itself, 21 that how many gallons they sold, but they went to 22 different way to do it. 23 So, this number is not really correct, I think. 24 MR. LEVINE: That's -- the Department has 25 advised me that the Department's rep thought that number 26 is wrong. 27 It wasn't done on a markup basis. They did it 28 by reducing Department of Energy -- 31 1 MS. STEEL: Right. 2 MR. LEVINE: -- I think it was five cents. 3 MS. YEE: Yeah. 4 MR. LEVINE: And the Department agrees that 5 that's -- 6 MS. STEEL: Could be wrong. 7 MR. LEVINE: -- can't be right. And he thinks 8 that they picked up the wrong number off the computation 9 of the invoices, like the pre-tax number. So, it wasn't 10 the total purchase price. 11 But he doesn't know and he doesn't have that 12 information. He couldn't figure out where the error 13 was. 14 MS. STEEL: Is that -- 15 MS. MANDEL: The Department, if they were here, 16 they would say that they thought it was wrong? 17 MR. LEVINE: Not the deficiency. 18 MS. MANDEL: Oh. 19 MR. LEVINE: The -- the markup was just a 20 number -- well, here's the audited deficiency, let's 21 calculate the markup. 22 So, it was just a number calculated after the 23 deficiency was computed and it doesn't really make 24 sense, especially considering the way they did the 25 computations, which was to -- 26 MS. MANDEL: But it doesn't -- the -- oh, this 27 number is wrong doesn't impact the deficiency? 28 MR. LEVINE: No, it's just -- if it was like a 32 1 negligence discussion -- if we'd used that in 2 negligence -- I don't remember. 3 MR. RUNNER: There is a negligence penalty. 4 MR. LEVINE: Yeah, but I think it was -- it 5 wasn't based on the markup, it was just based on the raw 6 percentage of error. 7 So, that really didn't factor into anything. 8 MR. RUNNER: Is there -- that error, has that 9 been -- when you said, "The Department identified it," 10 has that been corrected then? 11 Did we get notification of that or -- 12 MR. LEVINE: No, this was just today as -- I 13 was notified and it was just a matter of -- I think what 14 happened is the Department rep was preparing for the 15 hearing and he had the same reaction. 16 But it wasn't a number, it was just one of 17 these, in effect, a throwaway number. It was -- we -- 18 they computed the deficiency and then they calculated 19 the markup as an additional number. 20 And, really, it should have been a red flag. 21 Had we paid attention, we would have said, "That seems a 22 little high. Go back and tell us -- " 23 MR. RUNNER: Does that make us vulnerable if, 24 indeed, the material behind this says one thing, but 25 then we know that it's not that and we vote 26 accordingly -- in terms of any kind of an appeal that 27 the taxpayer may take when all of sudden we had 28 information out there, the Department had, and it wasn't 33 1 given to us and what we voted on was the numbers? 2 Again I'm -- I understand that the -- I 3 understand that the deficiency would be the same, I'm 4 just asking a question. 5 Is that -- 6 MR. LEVINE: I don't see how -- I understand 7 your question, but I don't see -- it's unfortunate that 8 we have that mistake and that we didn't get it fixed. 9 But it would just be -- if we had known about 10 and figured out what it was -- 11 MR. RUNNER: So, in your opinion, it's not 12 necessary for us to correct that mistake before we go -- 13 we go ahead and take action? 14 MR. LEVINE: The numbers -- our recommendation 15 would be the same, we would just have the better number 16 to back it up. 17 MR. RUNNER: That's really -- my question isn't 18 whether your recommendation would be the same, my 19 question is whether or not it makes any difference to us 20 in regards to the quality of this decision if we had 21 better numbers versus the numbers that are here? 22 MS. STEEL: I think this depends on the audit 23 because the C1 case that their audit was different 24 method that they used and markup was 6 percent. 25 So, what I want to do is I want to stay the way 26 it is for the motion, but I want Department to re-visit 27 only for markup part and, you know, just sustain the 28 staff recommendations. 34 1 But you have to come up with another number 2 because -- 3 MR. LEVINE: So, you want the Department to 4 figure out what the error -- 5 MS. STEEL: Right. 6 MR. LEVINE: -- is and just -- 7 MS. STEEL: Exactly. 8 MR. LEVINE: -- we'll advise you what it -- 9 MS. STEEL: Yes. 10 MR. LEVINE: -- the real markup was? 11 MS. STEEL: Yeah, thank you. 12 MR. RUNNER: That would be good. 13 MR. HORTON: That's a notification outside of 14 the process directly to the Members. 15 Okay, there is a motion to adopt staff 16 recommendation, disregarding the 23 percent markup, 17 noting that the deficiency is a result of other 18 examinations, irrespective of the 23 percent markup. 19 Second -- moved by Member Yee, second by Member 20 Steel. 21 Without objection, such will be the order, with 22 directions to staff to drill down on what that 23 particular problem is. 24 ---o0o--- 25 26 27 28 35 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 JUNE 26, 2012 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 pages 1 13 through 35 constitute a complete and accurate 14 transcription of the shorthand writing. 15 16 Dated: JULY 5, 2012 17 18 19 ____________________________ 20 JULI PRICE JACKSON 21 Hearing Reporter 22 23 24 25 26 27 28 36