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 OCTOBER 23, 2012 10 CORPORATE FRANCHISE AND PERSONAL INCOME TAX HEARING 11 APPEAL OF 12 GERALD J. MARCIL AND CAROL L. MARCIL 13 NO. 458832 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 Joann Richmond Chief 12 Board Proceedings Division 13 14 For Board of Grant Thompson Equalization Staff: Staff Counsel 15 16 17 For Franchise Tax David Gemmingen 18 Board: Tax Counsel 19 Michael Cornez Tax Counsel 20 21 For Appellants: Layton L. Pace Attorney 22 Gerald J. Marcil 23 Taxpayer 24 ---oOo--- 25 26 27 28 2 1 5901 GREEN VALLEY CIRCLE 2 CULVER CITY, CALIFORNIA 3 OCTOBER 23, 2012 4 ---oOo--- 5 MR. HORTON: Good morning -- good morning, 6 Members and guests, let us commence the meeting of the 7 Board of Equalization. 8 Ms. Richmond, what is our first matter? 9 MS. RICHMOND: Good morning, Chairman and 10 Members. 11 Our first item on today's agenda is the item B, 12 the corporate franchise and personal income tax 13 hearings. 14 Our first oral hearing is B1, Gerald J. Marcil 15 and Carol J. (verbatim) Marcil. Please come forward. 16 Board Proceedings has received contribution 17 disclosure forms for this morning's hearings from 18 parties, participants and agents. All forms were 19 properly completed and signed. All parties, 20 participants and agents are on the alpha listings 21 provided to your office. 22 Each person sitting at the table will be asked 23 to introduce themselves and, if necessary, their 24 affiliation with the taxpayer for the record. Ten 25 minutes is allocated for the taxpayer's opening 26 presentation, followed by ten minutes for the Franchise 27 Tax Board's presentation. And five minutes is allocated 28 to the taxpayer for rebuttal. 3 1 Mr. Horton. 2 MR. HORTON: Thank you. 3 Mr. Thompson, would please introduce the issues 4 in this case? 5 MR. THOMPSON: Good morning. The issue in this 6 case is whether Appellants' limited partnership engaged 7 in a qualified 1031 exchange. 8 MR. HORTON: Good morning to the taxpayer. You 9 have ten minutes to make your presentation. We would 10 ask that you introduce yourself for the record. 11 MR. PACE: Good morning. I'm Layton Pace. 12 I'm counsel for the Appellants. 13 This is Gerald Marcil to my left here. He is 14 the Appellant. 15 As just stated, the issue is about whether or 16 not a partnership, Hollywood Vista Associates, HVA, 17 completed a like kind exchange. 18 In a like kind exchange, the gain doesn't go 19 away. The gain is just deferred. So, when the later 20 property is sold, the gain is then taxed. 21 We believe that the issues in this hearing are 22 really legal more than factual. We think many of the 23 factual issues have already been concluded. We think 24 that they've really boiled down to two main factual 25 issues or two main factual transactions. 26 The first transaction was the exchange by HVA. 27 HVA, on November 14th, 2001, sold property that it held 28 for investment. On November 20th it acquired a 60 4 1 percent undivided interest in property called the 2 Manchester property and it completed a like kind 3 exchange. 4 The second transaction is by the end of the 5 year, in particular, on December 15th, 2001, HVA took 6 the property it had acquired and it conveyed that 7 property to another entity, Manchester Development, LLC, 8 or MD LLC. It -- HVA then promptly liquidated by the 9 end of the year. It engaged in this transaction to 10 reduce the number of entities, to save the $800 annual 11 tax that would been imposed if the entities had been in 12 existence at the end of 2002. 13 The Appellants have two legal positions for why 14 the 1031 exchange should be upheld. The first is it's a 15 straightforward application of 1031, that is, that they 16 acquired the Manchester property and held that property 17 for investment. There are a series of cases, two cases 18 in particular, one's a Ninth Circuit case, one's a 19 fully-reviewed Tax Court case, they're called Bolker and 20 Maloney. 21 In Maloney a corporation acquired property on 22 December 28th of 1978. On January 26th of 1979, or 23 within a month, the corporation that bought the property 24 did the exchange, liquidated and distributed the 25 property it acquired. And the court said that is a good 26 1031 transaction, that even though the corporation 27 liquidated, the investment was not liquidated, that the 28 holding purpose of 1031 had been satisfied. 5 1 The second position -- and this is one we've 2 had a lot of debate on -- is that there was a merger or 3 a consolidation that continued HVA, that Manchester 4 Development was itself a partnership and that when you 5 combine two partnerships together, and the larger of the 6 two of them is the one that the owners have more than 50 7 percent of the resulting partnership after the 8 transaction, you have a continuation of the first one. 9 In other words, when the two came together -- 10 when HVA and MD LC (verbatim) came together, HVA 11 survived because the Marcils owned more than 50 percent 12 of it and HVA had a 60 percent piece of the Manchester 13 property and Manchester Development only had the 40 14 percent piece of the property. 15 The Appellants think that the Respondents rely 16 largely on form in trying to attack this transaction 17 because in -- in a prior hearing they admitted that if 18 MD LC (verbatim) had just taken the 40 percent piece and 19 put it into HVA, that there wouldn't have been a 20 problem. 21 So, if you have the same partnership with the 22 same owners and the same property and you just reverse 23 the direction of the transaction, the Franchise Tax 24 Board said they wouldn't have had a problem. 25 Additionally, if the new money had just come 26 in, directly into HVA, and hadn't started off at 27 Manchester LLC, again HVA would have just done an 28 exchange and still held the property. So, the Franchise 6 1 Tax Board is coming up with a very technical argument to 2 try to invalidate the exchange. 3 Much of the debate has been whether or not 4 there had to be a formal State law merger to combine 5 these two entities in order for HVA to continue. The 6 rehearing summary concludes, on page 25, that it's 7 staff's opinion that a State law's test for a merger is 8 not required. You don't to have follow the Corporation 9 Code provisions in order to have the income tax laws 10 treat HVA as being the continuing partnership. 11 The other point that needs to be made is that 12 all that's required for continuation is that the Marcils 13 own more than 50 percent of the surviving partnership 14 after the transaction. They don't have to -- there's -- 15 you'll hear a lot of testimony here from the FTB about 16 what was the percentage interest the Marcils owned 17 before the transaction. The law does not look at the 18 percentage of ownership of the Marcils before the 19 transaction. The law looks at the percentage ownership 20 after the transaction. So, much of their argument 21 doesn't make sense for purposes of applying this -- this 22 provision of the Code. 23 Because of the fact that -- of these arguments, 24 we believe that this Board should hear for the -- for 25 the Appellants and rule that their exchange was a valid 26 exchange. Thank you. 27 MR. HORTON: Thank you very much. We will 28 return and allow you five minutes on rebuttal. 7 1 We'll now go to the Department. The Department 2 will have ten minutes to make their presentation. We 3 would ask that you commence with your introductions for 4 the record. 5 MR. GEMMINGEN: Good morning, Board Members. 6 I'm David Gemmingen, Tax Counsel for the Franchise Tax 7 Board, with me is Michael Cornez. We represent the 8 Department in this appeal. 9 This appeal's a rehearing concerned with the 10 Board's prior confirmation of Appellants' tax 11 contributable to gain derived from a partnership's 12 profitable sale of an apartment complex here in 13 California. 14 First, I'd like to address the misstatement by 15 opposing counsel that the only test required under the 16 regulations is the Marcils' ownership of more than 50 17 percent in the surviving entity. Regulations under 18 708(c)(1) require that there be a weighing and a testing 19 of the fair market value, net of liabilities, to 20 determine which entity contributed the most assets and 21 that's net of liability. So, it's not a -- just a 22 simple ownership test, rather it's a factual test, which 23 Appellants, as I'll demonstrate, failed to establish in 24 the prior hearing. 25 In a recent article on substance over form 26 doctrine in Vanderbilt Journal Transact -- Transnational 27 Law, the article begins, 28 "It would be difficult to imagine how the 8 1 federal tax system in the United States could 2 function without a substance over form 3 principle. Every analysis of the tax treatment 4 of a transaction or transfer must explicitly or 5 implicitly address the question, 'Will the tax 6 law treat this as it appears to be?'" 7 It's demonstrated by Exhibit 10 before you in 8 my hearing book of exhibits. Your Board has expressly 9 sanctioned a step transaction doctrine and Appellants' 10 focus on Section 708 does not override the longstanding 11 principle, the true nature of a transaction may not be 12 disguised by mere formalisms which exist to solely alter 13 tax liabilities. 14 Under the step transaction doctrine, federal 15 tax liability and State tax liability is to be based 16 upon a realistic view of the entire transaction, rather 17 than artificial devices. 18 With respect to the error of law, in Aguilar 19 versus Atlantic Richfield, California Supreme Court 20 explained as a general matter orders granting a new 21 trial are examined for abuse of discretion. The Supreme 22 Court further explained there is no discretion to adopt 23 a reading or make an application on decisional law that 24 is inconsistent with the law itself. Any such reading 25 or application must necessarily be deemed an abuse. 26 Thus, we need to simply find that your Board's 27 prior decision was consistent with principles of law and 28 can be supported by these principles, including the 9 1 substance over form in step transaction doctrines, that 2 the arc of the transactions and facts at issue, starting 3 from MD's -- Manchester Development's formation and 4 independent contractual obligation to buy the Manchester 5 property in May 2001, well before HVA's decision to sell 6 its own apartment building, followed by MD -- Manchester 7 Development's ownership of 100 percent of the Manchester 8 property within a few months supports the finding that 9 the substance of the transaction was that a different 10 legal entity held and operated the Manchester property 11 and as this holder did not relinquish property, the 12 result is that a 1031 exchange did not occur. 13 This matter really is a case about the proper 14 and ordered priorities of applicable legal principles. 15 When one asks, 16 "Why are we having this rehearing?" 17 And taxpayer claims an error of law, we have to 18 look at whether -- whether there's really an error of 19 law or the Appellants themselves are attempting to 20 incorrectly substitute one principle as a governing law 21 while ignoring other established legal principles that 22 clearly take priority in determining whether a compliant 23 1031 exchange took place. 24 Appellants' argument is yet another attempt to 25 reshuffle the facts and law to suit their multiple 26 objectives, which includes civil liability protection 27 obtained by having Manchester Development, LLC hold and 28 operate the Manchester property while abandoning their 10 1 prior ownership documentation in the Manchester 2 Development to fabricated deemed 1031 exchange and 3 merger. 4 Moreover, Appellants failed to estab -- satisfy 5 their multiple burdens of proof to not only establish 6 Respondent's determination of tax liability is 7 incorrect, as well as the correct tax liability, but 8 another, even higher hurdle that an error in law took 9 place with respect to the last hearing. 10 In order to satisfy their initial burdens, as 11 previously noted by your Board in many appeal decisions, 12 Appellants had to provide credible and independent 13 evidence. Appellants failed to do so at the prior 14 hearing. They submitted no credible evidence to support 15 their claim that Mr. Marcil only owned 2 percent of 16 Manchester Development, LLC. 17 Furthermore, your Board has long held that 18 unsupported assertations by an Appellant will not 19 satisfy the Appellants' burden of proof. And that's 20 from the -- your Board decision forty years ago in the 21 Appeal of Camarati. 22 Thus, Mr. Marcil's statement at the prior 23 hearing that he only owned 2 percent of the Manchester 24 Development, LLC fails to overcome this burden to 25 counter Respondent's tax or determination. And it would 26 be error of law to to now find in favor of Appellants, 27 given that they have failed to provide any credible, 28 independent evidence for their unsubstantiated 11 1 contentions. 2 Furthermore, Appellants' argument that HVA is 3 the surviving entity in the deemed merger they maintain 4 is described in the regulations under Section 708, 5 likewise fails their burden and obligation to provide 6 independent evidence. 7 Various articles, Treasury publications and 8 Regulation 708(c)(1) itself require factual 9 substantiation to determine which entity is the 10 survivor. And Appellants provided no evidence to 11 support the required weighing of the fair market value 12 of assets, net of liabilities, they deemed were 13 contributed to surviving entities in order to determine 14 which entity contributed the greatest fair market value 15 of assets. 16 The failure -- Appellants' failure to provide 17 the evidence does not allow them to maintain that an 18 error of law occurred in application of Section 708. 19 Moreover, the substance over form doctrine, by 20 its nature, trumps any rogue application in isolation of 21 Section 708. 22 And in their opening rehearing brief, 23 Appellants claim that John Walsh contributed almost all 24 the funds to Manchester Development to enable it to buy 25 40 percent of the Manchester property. There is 26 regulations that require that we net liabilities and 27 value the property to determine the fair -- the net fair 28 market value contributed for purposes of determining the 12 1 surviving entity. 2 And that's HVA undertook substantial, 3 multimillion dollar debt with respect to its acquisition 4 of the 60 percent interest in Manchester property, as 5 evidenced by Exhibits 8 and 15 of our exhibits. 6 It's impossible, based upon the lack of 7 evidence submitted by Appellants, for them to 8 substantiate which entity contributed property which had 9 the greatest fair market value, net of liabilities. And 10 that failure makes it wrong to apply the 708 regulations 11 that deem HVA the survivor. 12 Finding for Appellants' based upon the faulty 13 application of 708 regulations would be an error in law 14 of itself. 15 Moreover, there may have been no merger at all, 16 as there has been no evidence submitted supporting 17 Mr. Marcil's prior 2 percent interest in MD LLC. And 18 the Manchester Development, LLC might have actually been 19 a single member LLC, prior to the contribution of the 20 property and, thus, been a disregarded entity. And then 21 there would have been no -- there would have been a lack 22 of two partnerships to merge. 23 Once again, Appellants' unsupported 24 assertations will not satisfy the burden of proof and 25 did not do so at the last hearing. 26 The Court of Appeals opinion in Bolker versus 27 Commissioner stated that a taxpayer may satisfy the 28 holding requirement for productive use in trade or 13 1 business or investment by the lack of either intent to 2 liquidate the investment or use it for personal 3 pursuits. 4 In this case, Appellants' use of the HVA sale 5 proceeds to satisfy their personal contribution 6 obligation to Manchester Development is an impermissible 7 use that causes the HVA to fail the holding test as an 8 additional reason to uphold your Board's prior 9 determination. 10 In Carol Marcil's declaration, dated 11 December 12th, 2011, files in exhibit to Appellants' 12 rehearing brief and attached as Exhibit 14 to my 13 exhibits before you, she stated specifically at 14 paragraph 4, 15 "I was aware that Gerald intended to buy 16 real property called Manchester property with 17 John Walsh. I agreed with him that HVA should 18 buy our interest in the Manchester property 19 with the sale proceeds from HVA property." 20 Clearly Appellants admit to using funds from 21 HVA's sale of property for the personal pursuit and 22 their separate and distinct investment in the Manchester 23 Development Limited Liability Company, a violation of 24 the Bolker's holding test. 25 Mr. Marcil clearly -- Ms. Marcil clearly stated 26 that the purchase was for her husband's personal account 27 and not for the partnership in which she was a partner. 28 The doctrine of duty consistency can apply to 14 1 events pertaining to only one year, as summarized in the 2 Ninth Circuit decision in the Estate of Hilda Ashman. 3 The Ashman court noted the United States Supreme Court 4 decision in R. H. Stearns, where a taxpayer had signed a 5 waiver of the statute of limitations, and after the -- 6 when the Commissioner attempted to assess the tax, the 7 taxpayer claimed that the time had expired, but the US 8 Supreme Court upheld that the -- the waiver of statute 9 of limitations. 10 The Ashman court went on to state that, 11 "The duty, consistency and judicial 12 estoppel is a doctrine which precludes a party 13 from taking advantage by taking one position 14 and seeking to take a second advantage by 15 taking an incompatible position." 16 It's a doctrine based upon policies that seek 17 to foster orderly administration of justice, regard for 18 the dignity of judicial proceedings and preclude a party 19 from playing fast and loose with the courts. 20 As the Ashman court further noted, 21 "It's not even necessary that the contrary 22 positions be taken in court, existing positions 23 taken with an insurance carrier or an employer 24 on one hand and a court in the other can result 25 in judicial estoppel." 26 The Appellants' attempt in the prior hearing to 27 substitute the prior 50 percent documented interest in 28 Manchester Development with an assertation that they 15 1 owned 2 percent is such a lack of consistency. 2 So, in conclusion, the fundamental policy 3 behind the substance over form doctrine is that a single 4 event, viewed in isolation, should not dictate or mask 5 the actual complete transaction and the ensuing tax 6 consequences of a series of related actions should be 7 given effect. 8 Do not fall into the simplistic trap proposed 9 by Appellants that we only focus on unsubstantiated 10 Section 708 regulations, rather, as we did before, 11 review the entire sequence of events that began in May 12 2001 when Manchester Development, LLC was formed for the 13 purpose of acquiring 100 percent of the Manchester 14 property, to negotiate the September 2001 on its own for 15 the exclusive purchase of that parcel and can accomplish 16 that goal and owned 100 percent of the property within a 17 few months. 18 The result is only one entity sold the 19 Hollywood Vista Apartment and a different legal entity 20 owned and held the second property. 21 Appellants' reference to Maloney is also 22 mistaken because in Maloney the court first looked to 23 see whether the entity itself properly completed a 1031 24 exchange. And it found that there was an exchange of 25 real property. 26 Appellants' theory is that there was an 27 exchange of property followed by an immediate 28 contribution of that property in return for Manchester 16 1 Development membership interest, which are an intangible 2 personal asset. So, at the end of that transaction, HVA 3 gave up real property and ended up with intangible 4 personal property, which are not like kind properties 5 and fail the like kind test. 6 And, so -- 7 MS. RICHMOND: Time has expired. 8 MR. HORTON: Can you wrap it up in a few 9 minutes? 10 MR. GEMMINGEN: -- and, so, their -- and, so, 11 Appellants are attempting to provide other examples of 12 ways they could have accomplished the result that they 13 didn't take. It's been longstanding law that once -- 14 while taxpayers are free to choose the manner that they 15 wish to structure their affairs, once having done so, 16 they're bound by the tax consequences that they chose, 17 not what they might have otherwise done. 18 Thank you. 19 MR. HORTON: Thank you. 20 On rebuttal. 21 MR. PACE: Well, I -- I need to summarize his 22 statements. He -- he made many, many points of law 23 here. 24 The first is there really was an error on the 25 first hearing. I think that it was clear from the 26 rehearing summary that a State law merger is not 27 required. That was not an original summary of the 28 hearing. The rehearing definitely changes that. 17 1 Two, I think that it was confusing about the 2 2 percent or 50 percent because the law itself for 3 merger only looks at the ownership afterwards. The 4 pre-ownership is irrelevant. And I think that that was 5 an error of law that wasn't followed here. 6 Three, they didn't brief the step transaction 7 doctrine at all in their prior briefs or even set forth 8 how any of it applied. And it had to have been asserted 9 or had to have been followed in order for the Appellant 10 to have lost in the first hearing. 11 So, there really was an error of law at the 12 first hearing. 13 Two, this -- the step transaction doctrine does 14 not apply to this case. These are independent steps 15 that occurred for independent business reasons. It was 16 completely -- the HVA exchange was completed. There 17 wasn't a requirement to step them all together. The 18 time frame that was in the Maloney case was, in fact, 19 indicative of what occurred here. And Maloney is not 20 distinguishable on the facts. 21 I want Mr. Marcil to talk about the declaration 22 of his wife because I think it was an unfair parsing of 23 the words. 24 MR. MARCIL: Well, yeah, I think the State 25 attorney is confused. 26 We -- when we -- he's looking at the original 27 purchase documents. And when you're doing a purchase 28 transaction, sometimes the way that you finance it 18 1 during -- it's a six month escrow -- and when we 2 purchased it, we didn't actually know exactly how we 3 were going to finance it. My partner was short some 4 money and half way through I sold a property in 5 Hollywood called Hollywood Vista Apartments and then was 6 going to do a simultaneous exchange. 7 Instead, the buyer of that property couldn't 8 close on time for that. So, I borrowed a swing loan 9 from the bank, or bridge loan, gave that money to an 10 accomodator, who purchased the property, the entity. 11 All of these documents are in the record and -- 12 MR. PACE: So, there was no personal use or 13 intended personal use of the property? 14 MR. MARCIL: Never was any money ever touched. 15 And the -- the exchange was good. 16 MR. PACE: I need to make sure I have more 17 time, also -- first time -- I've got to cut you off. 18 The first time that was raised about the fair 19 market values of the property, the 60 percent/40 20 percent, the very first time, the returns were filed, 21 the liabilities in these properties were asserted. 22 The closing escrow statements were submitted. 23 The property -- the only asset of HVA was a 60 percent 24 interest. The only asset of MD LLC was a 40 percent 25 interest. All that documentation on the valuation and 26 on the liabilities was submitted. There's -- there's no 27 failure to provide that documentation about the 28 valuations and which was the larger of the two 19 1 partnerships. 2 MR. MARCIL: Yeah. The point I want to make is 3 that -- and maybe my attorney made it -- was that it 4 doesn't matter how many times you change your agreement 5 before the close of escrow or how you -- how many times 6 you change the financing. It is what occurs at the 7 closing and from that point forward, after the closing, 8 not what happened before or how many times. 'Cause we 9 actually had a couple of conversations where we were 10 going to go 55/45, but we didn't end up that way. It 11 ended 60/40. And I'm sure he would have liked to have 12 had all those conversations documented, but it's 13 irrelevant. It only matters how it closes. 14 So, the exchange was good. At that time I had 15 Stewart Title do the title holding through a company 16 they call Asset Preservation, that's Lava Rock. And I 17 had American Express Tax and Business Services do the 18 services -- do the documents. 19 I wanted to sue them, but their attorneys and 20 my attorneys got together and there was no way for me to 21 sue them because everything was done right. It was a 22 legit exchange and there was no substance. 23 I've heard the State attorney say substance 24 over form or form over substance -- there was neither 25 one of those because, otherwise, I would have been able 26 to sue them and I would have -- I wouldn't be here right 27 now or they would have -- 28 MR. PACE: One more statement -- 20 1 MR. MARCIL: -- they would have handled it. 2 MR. PACE: -- one more statement here. 3 In the last hearing it was admitted that HVA 4 did a valid exchange, but for the fact that HVA folded 5 into MD LLC, it was good exchange. In testimony the 6 last time, they stated that. They cannot now come and 7 say that it wasn't a valid exchange. 8 MR. MARCIL: Yeah. It was a valid exchange and 9 then they say, "Well, what happened a month later 10 invalidated it." 11 But the merger of one entity -- or the two 12 entities together doesn't invalidate the exchange nor 13 did I ever take control of any cash. So, it's -- it 14 doesn't invalidate the exchange. 15 And I think my attorney adequately pointed out 16 ad nauseum in all of the previous documents that the 17 larger of the two entities has to survive for tax 18 purposes. Because otherwise people would merge an 19 entity with 99 percent into -- with an entity that was 20 1 percent and -- and then do a merger and say that the 21 99 percent entity didn't survive and get out of carrying 22 forward that -- that entity's tax liability. 23 MR. PACE: What would happen in that case -- 24 MR. MARCIL: My -- 25 MR. PACE: -- is you'd have all the losses that 26 were -- you would be able to cut off the year whenever 27 you wanted to cut off the year of the partnership and 28 have all of the loss or all the gain go for that period 21 1 to those taxpayers so that those taxpayers could save 2 taxes. They would play with the partnership tax year 3 to make income flow into their returns so that they 4 would minimize their taxes. It's not an elective 5 provision. It would be abusive to allow an election. 6 MR. MARCIL: I wouldn't even be here today if 7 I -- if when the accountant asked me which name I wanted 8 to use on the merger that could go forward and I wanted 9 to use Manchester, because the property was on 10 Manchester, instead of Hollywood Vista. 11 MS. RICHMOND: Time has expired. 12 MR. MARCIL: Okay. But had we used Hollywood 13 Vista going forward, it wouldn't have been kicked out of 14 the computer and we wouldn't be here today. 15 But that's okay, but you guys can cut me off 16 anyway, I -- 17 MR. HORTON: Sir. 18 MR. MARCIL: -- that somehow that the -- the 19 documents were inadequate, but then later they said that 20 the merger documents were inadequate because they -- it 21 would destroy their case if the -- completely, if the -- 22 if the merger wasn't adequate. 23 And if the merger was adequate, then the larger 24 entity survives. So, either way, there's -- there's no 25 case. 26 MR. PACE: Thank you. Thank you so much. 27 MR. HORTON: Does that conclude your -- 28 MR. MARCIL: Yeah, the law must prevail, that's 22 1 all. 2 MR. PACE: We appreciate your -- 3 MR. MARCIL: Just the law has to prevail. 4 MR. PACE: -- consideration. We appreciate you 5 having us back again. 6 MR. HORTON: Okay. Thank you very much. 7 I'm going to -- I'm going to go to the -- 8 Members, I'm going to go to Mr. Thompson and just ask 9 him to elaborate on the step transaction doctrine and 10 how it applies or does not apply in this case. 11 MR. THOMPSON: Let's see -- well, I'll leave it 12 up to the Board as to whether the step transaction -- 13 transaction applies. 14 But the general idea is that where you have 15 multiple steps that could have been accomplished in a 16 more direct form, you look through the substance of the 17 transaction to determine what happened. 18 And I -- I would say that both parties here 19 sort of pick and choose in terms of when they apply 20 substance over form or step transaction principles. 21 You know, FTB, on its side, seems to want to 22 parse this is out as two separate transactions. 23 On -- on the other hand, if you step it all 24 together, you know, maybe it looks more like a merger, 25 as Appellants contend. 26 I think Appellants also have been a little 27 guilty of mixing the content that -- the concepts as 28 well because they -- they will, on the one hand, say, 23 1 "Well, it's two separate transactions," then, on the 2 other hand, "We had a merger -- uh, uh -- later." 3 So, there's a -- just saying "step transaction" 4 here doesn't resolve the appeal, I think. It's the 5 question of how -- what do the Members determine 6 actually happened here and does it comply with 1031? 7 MR. HORTON: Thank you very much. 8 Discussion, Members? 9 Member Steel. 10 MS. STEEL: I want to ask Franchise Tax Board 11 that, uhmm, that it's a lack of consistency of the 12 Petitioner, but I want to know that since last hearing 13 that Franchise Tax Board considered some of the part 14 that, you know, you -- what you said at that hearing is 15 different than what here. 16 So, can you just give me just the difference 17 right there -- what considered and then what you really 18 going after? 19 MR. GEMMINGEN: I'm going after -- we've been 20 entirely consistent in our position. And, in fact, the 21 Appellants misstated our position. 22 We stated in our opening brief that the step 23 action -- step transaction applied. And we've said that 24 all along that it's -- the plan was initially for 25 Manchester Development, LLC to all along acquire the 26 Manchester property. And that's what ultimately 27 happened. Within the same year the purchase agreements 28 were consistently negotiated by Manchester Development, 24 1 LLC. And that was the ultimate entity that acquired the 2 properties. 3 We've been entirely consistent that the arc of 4 the transaction from Manchester Development, LLC wanting 5 to buy the property long before HVA ever thought about 6 selling its apartment building and then Manchester 7 Development ended up owning the property. That's the -- 8 the series of events that occurred in this transaction. 9 We've always said that. 10 MS. STEEL: But you were talking about that the 11 Petitioner's wife was not named. 12 What happened to that community property in 13 California side? 14 MR. GEMMINGEN: It's still there but she's not 15 a partner. The rep -- 16 MS. STEEL: Even she's not a partner, she -- 17 MR. GEMMINGEN: -- she -- she was a partner in 18 HVA. But she did not have a partnership interest in 19 Manchester Development. If there had been a merger, she 20 would have emerged as a true partner. 21 The Rev. ruling 79124, which has been provided 22 by both sides to your Board in this hearing, provides 23 that -- an example where a spouse was not a partner and 24 then when the spouse's -- when the partner's spouse 25 died, the survivor did not become a partner. 26 The partnership -- while she's -- that 27 surviving spouse still maintained her community property 28 interest. 25 1 So, there's been an attempt to blur partnership 2 interests with community property interests and they're 3 two distinct items and we've stated that all along. 4 MS. STEEL: But isn't that community property? 5 And then he -- she owns that? 6 It's the same as -- 7 MR. GEMMINGEN: -- it's community property. 8 MS. STEEL: -- as a community property? 9 Can I just ask you one thing about that? 10 MR. MARCIL: Sure. 11 MS. STEEL: You know, you didn't mention your 12 wife's name for that partnership. I think that's 13 biggest problem here. 14 So, can you just explain? 15 MR. MARCIL: Well, I -- my -- my wife is a 16 partner in that property. It's always been reported 17 60/40. We still own it 60/40. And she's -- she owns it 18 in -- as a partner. I don't know what -- how else to 19 tell you. She's -- she's on Exhibit B in the 20 partnership agreement. So -- and if she wasn't, she'd 21 still own it as community property. So, she's a 22 partner, either way. 23 MS. STEEL: But her mention -- her name was not 24 really mentioned on the partnership itself. 25 MR. MARCIL: It was on -- she was a partner in 26 HVA, Hollywood Vista Apartments. 27 MS. STEEL: Not for the Manchester? 28 MR. MARCIL: Not for the original Manchester, 26 1 but, remember, that that's John Walsh, okay, not us. 2 So -- and he said that the -- that we -- that 3 Manchester was going to buy a hundred percent of the 4 property. He's absolutely correct. That's the way the 5 escrow started and that's how it was opened. But that's 6 not what happened. 7 So, regardless of what our original intention 8 was, it only matters how you decide to purchase the 9 property. You can change your terms in escrow a 10 thousand times and it's still legal. It's what happens 11 -- what you decide before escrow closes, how you're 12 going to own it, how you're going to finance it, who's 13 going to -- who's going to put in how much money. 14 And we -- we decided to sell this property to 15 raise the funds because we didn't get enough funds from 16 the purchase loan. So, we decided to sell the property. 17 The purchaser of that property could not close 18 simultaneously, but there was a law that allowed us to 19 do a reverse exchange, which is exactly what we did. 20 And we took a bridge loan and loaned that money 21 to the intermediary, who became -- who ended up buying 22 the property and then later exchanged. 23 MR. PACE: May I also say something? 24 MS. STEEL: Sure. 25 MR. PACE: You can chime in here. 26 I think there actually was a practical reason. 27 HVA was a very old partnership. Carol had owned an 28 interest in it before they got married. And that's why 27 1 her interest was separately stated. 2 And then when they re-did one later on, in 3 2001, they had just titled -- started titling things in 4 his name. 5 Her community property interest was -- on the 6 exhibit to the back of the agreement as the day of 7 submitted to as well as her declaration saying it was 8 community property. So, it was, obviously, community 9 property, but they were just retitling their 10 properties -- as time had passed and they were 11 married -- in his name. 12 MS. STEEL: Okay, thank you. 13 MR. HORTON: Member Yee. 14 MS. YEE: Thank you, Mr. Chairman. 15 I want to see if I can kind of bridge the gap 16 between when this matter was last before us and what 17 we're hearing today -- maybe just posing a couple of 18 questions. 19 So, the question I believe both parties did 20 respond to, I just want to get it clear, about whether 21 federal law does require that mergers comply with State 22 entity law? 23 I think the answer was no, that the -- there is 24 no requirement that that -- that they be in compliance. 25 Franchise Tax Board? 26 MR. GEMMINGEN: That's not an issue in this 27 case. 28 MS. YEE: That's -- that's off the table? 28 1 MR. GEMMINGEN: Yes. 2 MS. YEE: Secondly, whether a merger actually 3 did occur between HVA and Manchester Development, LLC 4 for purposes of California tax law? 5 And I think as we have looked at the facts, 6 some of them, albeit, ambiguous, I think the answer here 7 is yes, but I want to kind of hear is that where we are 8 on that question? 9 MR. PACE: You're -- to me? 10 MS. YEE: Yes. 11 MR. PACE: Yeah, there was a merger under 12 California income tax law. It conforms to the federal 13 law. 14 MS. YEE: Okay. 15 MR. PACE: They did what need -- was necessary 16 for a merger. All the assets moved over and liquidated. 17 It's really kind of part of the same transaction. 18 And the larger was the 60 percent. And they 19 owned the requisite interest after -- right after the 20 transaction they owned more than 50 percent. So, that 21 caused HVA to continue. 22 MS. YEE: Okay. And Franchise Tax Board on 23 that question? 24 MR. GEMMINGEN: No, we believe there is no 25 merger here that occurred that rather the end result was 26 that Manchester Development, LLC owned the property as 27 originally intended and that these proceeds were 28 liquidated and used for Mr. Marcil's own separate 29 1 investment. 2 And that's -- exhibits 3, 5, 7 and 11 all show 3 that the Marcils knew how to admit a partner, terminate 4 a partner, merge an entity, terminate an entity. They 5 knew what they wanted to do. In this case they didn't 6 want to do that. They knew -- every other piece of 7 documentation shows their standard practice of 8 documenting fully what they wanted to do. This is a 9 fabrication. 10 MS. YEE: Okay. Let me -- let me -- just hold 11 that thought. 12 MR. GEMMINGEN: And also this -- there's no 13 factual support to show which is the survivor as well. 14 MS. YEE: Yeah. 15 MR. GEMMINGEN: Okay. 16 MR. MARCIL: Can I -- 17 MR. PACE: No. 18 MS. YEE: Yeah, Mr. Marcil? 19 MR. PACE: Go ahead. 20 MR. MARCIL: Well, it doesn't matter. It's 21 either a matter of law or it isn't. Either the larger 22 entity survives or it doesn't. 23 So, regardless of what he says, I mean, and all 24 due respect, it either is the law or it isn't. It's -- 25 it's that simple. I'm sorry, but it is that simple. 26 MR. PACE: I did state -- and again I 27 apologize for trying to get too much into my five minute 28 rebuttal -- but the returns did show the assets and 30 1 liabilities of both entities. And it was the only asset 2 in each of them, was the 60 percent interest and the 40 3 percent. And they were both subject to the same 4 liabilities. So, the taxpayers have always shown that 5 HVA was the larger of the two of them. 6 MS. YEE: Franchise Tax. 7 MR. MARCIL: We didn't -- we didn't need to 8 merge, it was just to get out of to doing two tax 9 returns and two LLC fees of $800. We've done that in 10 past and we've done it since and other people do it. 11 It's just a way of saving some costs, that's all, on 12 reporting. That's all it was. We didn't need the 13 merger. 14 MR. PACE: That's also why -- 15 MR. MARCIL: That's the only reason. 16 MR. PACE: -- why they put the two of them 17 together by the end of 2001. 18 You know, 2001 was just a date being imposed 19 because of the -- if you went into January or February, 20 went on, you were going to have these additional -- it 21 wasn't just the $800, it was additional tax returns, it 22 was additional ledgers. It was just an additional 23 complication. 24 MS. YEE: Okay. Franchise Tax Board. 25 MR. GEMMINGEN: Well, if you go to Exhibit 4 of 26 our exhibits before you, you'll see a Certificate of 27 Interest dated May of 2001, which sets forth 28 Mr. Marcil's 60 percent in Manchester Development 31 1 Company. 2 And, so, they've later said this is a bogus 3 document, it's not to be followed and that -- so, this 4 was submitted during the audit process as well as other 5 documents. And if they don't want us to admit and 6 accept this document for purposes of determining their 7 ownership interest and the accuracy of documents, why 8 should we give any credence to any other documents in 9 this case? 10 MS. MANDEL: Hmm -- 11 MR. GEMMINGEN: And as, you know, some of us -- 12 I mean, it's a well-known phrase out there, you can 13 trust but you also have to verify. 14 And in this case there's no verification. 15 MR. HORTON: Member Mandel. 16 MS. MANDEL: -- thank you. 17 Your document 4 was a document that was 18 prepared -- at least the way I see it, it appears to be 19 a document that was prepared by a representative at 20 audit or protest. It doesn't appear that it was -- 21 MR. THOMPSON: I think there are several 22 documents. 23 MR. GEMMINGEN: If you go on -- 24 MR. THOMPSON: Which one are you referring to? 25 MS. MANDEL: I don't know what document 26 you're -- 27 MR. GEMMINGEN: -- if you go back a few pages 28 within 4, to the Certificate of Interest, No. 1, should 32 1 be after a green page, it's like the third -- 2 MR. THOMPSON: He's referring to -- I think, to 3 a May 9th, 2001 Certificate of Interest showing a 4 percentage here of 60 percent for Mr. Marcil in MD LLC. 5 MR. GEMMINGEN: -- so, it's like -- 6 MS. MANDEL: Okay. 7 MR. THOMPSON: It's the last document in 8 Exhibit 4. 9 MS. MANDEL: Right. Well, that's what they're 10 saying 60 percent -- 60 -- 60 percent. 11 MR. GEMMINGEN: No, they're saying 2 percent. 12 That's what he swore in the last hearing was 2 percent. 13 He said this is not to be given any credence, 14 even though he signed it in May of 2001. 15 MR. HORTON: I'm so confused. 16 MR. PACE: I can explain if -- if -- if I can 17 interject? 18 MS. MANDEL: Yeah, because part of -- part of 19 what I'm -- part of what I'm hearing, the duty of 20 consistency thing is kind of irritating to me, but part 21 of what I'm -- what I take away from the FTB's argument 22 is that FTB's almost -- I get the feeling like you're 23 trying to say that if somebody hires a different 24 representative later in the process who may be more 25 familiar or may have a -- that they can't -- that they 26 can't make a better argument for a taxpayer. 27 That was the -- 28 MR. GEMMINGEN: They can make better arguments, 33 1 they can't change the facts. 2 MS. MANDEL: -- well, that -- but the sense I 3 was getting was more that they can't make -- that they 4 can't make a better presentation. 5 And, so, I -- anyway, that was the -- that's -- 6 that was kind of the sense I was getting. 7 But can you talk about these documents, 8 Mr. Pace? 9 MR. PACE: Yeah, I'll try to explain this. 10 First of all, we -- we never submitted any 11 bogus documents. These are just the documents that 12 happened to be in existence at the time. 13 These documents -- you to have to look back at 14 page -- and you'll see that effective September 1st, 15 2002 the ownership was reflected as being 60/40. And 16 these certificates, even though they say -- state on the 17 front of them "May 9th," I think they were prepared in 18 2002 to reflect -- to try to go back to the very 19 beginning and make it 60/40. 20 At the start they were going to be 50/50, but 21 they reworked their deal. And Mr. Marcil said that he 22 put in more money. And, so, the original 50/50 became 23 60/40. And it wasn't until 2002 that they actually went 24 through the paperwork and -- and, so, this document that 25 he's showing is really a 2002, after they had done the 26 transactions. It didn't say anything about -- 27 MR. MARCIL: We had other documents besides 28 that showing 60/40 prior to that. Even our tax return 34 1 said 60/40. 2 MR. PACE: -- but it has nothing to do with the 3 two percent or 50 percent in the year in issue. This 4 was just, after the fact, trying to clean up what their 5 problem is is that they didn't do it contemporaneously. 6 When the -- they had rearranged their deal, they didn't 7 get all of the documents at that same time all prepared. 8 And, so, maybe that's -- there is some of the confusion. 9 But they did ultimately do the paperwork. They 10 did ultimately reflect their proper ownership. 11 So, these documents are 2002 documents. There 12 is nothing about the 2 percent or 50 percent. It's just 13 to reflect what their ultimate deal was. 14 MR. MARCIL: But -- but the documents at the 15 time were -- there were enough documents at the time, 16 you know what I'm saying? 17 MS. MANDEL: The deeds were -- 18 MR. PACE: The deeds and -- 19 MR. MARCIL: Yeah, exactly. 20 MR. PACE: -- the escrows and the cash and the 21 capital account credits and everything else was 60/40 in 22 2001. 23 MR. MARCIL: I mean, we spent a lot of money 24 on -- 25 MS. MANDEL: When you say, "60/40 in 2001," you 26 mean HVA and the -- 27 MR. PACE: That's right. 28 MS. MANDEL: -- okay, and the LLC? 35 1 MR. PACE: That's right. 2 MS. MANDEL: The Manchester? 3 MR. PACE: Initially. And then when it got 4 folded together, that was the ownership that was 5 reflected so that the Marcils had more than 50 percent 6 after the combination of two. 7 MR. MARCIL: Yeah, we spent our time and money 8 on getting the documents that made the exchange -- 9 perfected the exchange, made it a good exchange. 10 We went back and changed -- the original 11 partnership agreement was written up as 50-50 and went 12 back and -- 13 MR. PACE: Before there was any money there in. 14 MR. MARCIL: -- yeah, yeah, before -- it's just 15 an opening way that we were going to purchase this 16 property. We had it for -- we were in escrow for six 17 months. 18 It could have ended up at any possible numbers 19 because you can change your -- your escrow. We did -- 20 we did amend the escrow at the end. So, there is an 21 escrow amendment. And all of exchange documents are 22 accurate. 23 And then -- then we went back to the agreement 24 and made that meet all of the other documents. But that 25 document isn't necessary for tax purposes, it's the 26 other documents that are necessary for the tax purposes. 27 MS. YEE: Can we -- 28 MR. HORTON: Member Yee. 36 1 MS. YEE: -- excuse me. 2 On the question of whether Mrs. Marcil was a 3 partner in the resulting partnership, because she was 4 not listed or ever admitted as a member under the LLC 5 agreement, can one conclude that she was not a partner 6 in the resulting partnership? 7 MR. PACE: Can I -- 8 MR. MARCIL: Go ahead. 9 MR. PACE: I think there's a difference between 10 State law and the income tax treatment. And that's 11 where there is some confusion here. 12 'Cause I think that under the LLC act you can 13 have her not be a named member, but under the 14 partnership tax law she's, nonetheless, a partner for 15 tax purposes. She has an economic interest and she 16 reports the income. And the authorities indicate that 17 she doesn't have to nominally be a member, but still be 18 a partner for income tax purposes. So, she cannot -- 19 she -- there -- it can exist where you're not a member 20 signing the operating agreement, but you're still a 21 partner for income tax purposes. 22 MR. CORNEZ: And we would respectfully disagree 23 with that. 24 In fact, there's an example in the regulations 25 involving a two-person partnership where the husband is 26 a partner and the wife is not a partner. She may have a 27 community property interest in the partnership. If the 28 husband dies, the partnership terminates because there's 37 1 only one person now and you have to have at least two 2 people to have a partnership. 3 She -- the estate may continue to have an 4 interest in the partnership until it's wound up. But 5 the partnership terminates. 6 So, she, under community property law may have 7 an interest in -- under property rights in the 8 partnership, but she is not a partner if she is not a 9 named partner. 10 But may I -- may I suggest a bit of a refocus 11 of what's going on? 12 With respect to the termination of the 13 partnership, which partnership terminated? The question 14 under the 708 regulations is because Mr. -- because 15 both -- the partners of MDL and the partners of HVA both 16 had more than a 50 percent interest in the new 17 partnership. That's -- and that's possible the existing 18 -- the original partners of MDL and HVA after the merger 19 had more than a 50 percent interest in the new 20 partnership. 21 So, the question of which partnership legally 22 terminated under the regulations is the question of 23 which partnership contributed the fair market value of 24 assets that was greater. 25 MR. MARCIL: Net of liabilities. 26 MR. PACE: Net of liabilities. 27 That factual question is not answered by the 28 mere fact that Mr. Marcil had more than -- had 60 38 1 percent interest in the new partnership. 2 It's not a question of capital accounts. It's 3 not a question of balance sheets. It's not a question 4 of liabilities. It's fair market value of assets 5 contributed, net of liabilities. That is a fact which, 6 I -- you know, obviously, I've not gone into the files 7 as much as anyone else, but that's -- that's a factual 8 question that needs to be answered -- to know which 9 partnership survived and which partnership was 10 terminated when there was this merger? 11 MR. GEMMINGEN: I'd also like to just address 12 the -- if you don't mind -- briefly the -- the question 13 of the prior concession of the exchange. 14 It was -- the question was at that point was 15 there an exchange? And an exchange requires a review of 16 a number of transactions, both the holding, how the 17 property was held, what kind of property -- is it 18 religious property -- as well as whether there was an 19 exchange, whether the same taxpayers had the exchange 20 and then how the replacement property was held. 21 So, it's a current of time that you have to 22 look at, not a point in time. And, so, while maybe at a 23 point in time it -- it satisfies that point's 24 requirement, you still have the subsequent holding 25 requirement and who's doing the holding and who's doing 26 the operating of that property. 27 So, just a focus on one point in time is -- is 28 incorrect. 39 1 MS. YEE: Are there -- along that course, are 2 there limits in time in terms of how long you can hold 3 the property? 4 MR. GEMMINGEN: Well, gifts, after eight months 5 of holding to a taxpayer's children, were deemed to be 6 insufficient in time. So, there's no white or black 7 letter law as far as division of time between like one 8 year, two years, five years within this regulation. It 9 looks at what's the intent of the parties at the time 10 the property was acquired? What was set up? Other 11 extraneous circumstances -- and in this case we clearly 12 have a -- an entity set up to acquire 100 percent of 13 this property, which that property was funneled over to. 14 MR. PACE: I don't know if I can speak without 15 having a question directed to me? 16 MS. YEE: Mr. Pace. 17 MR. PACE: There were just a couple of points I 18 wanted to clarify. 19 One, in their opening brief they said, 20 "The fatal flaw in the 1031 exchange is the 21 fact that HVA did not hold the replacement 22 property, the Manchester property, for any 23 productive use in a trade or business or for 24 investment." 25 That's -- that's what they stated here. And 26 they go on, it's because HVA went away and did this 27 conveyance in State law, this is what bothers them. 28 So, he made an admission at the last hearing. 40 1 They made an admission in the prior pleadings. I don't 2 know, it seems pretty clear to me that they've conceded 3 that the 1031 exchange was good, but for the fact that 4 HVA got rid of the property too quick in their -- in 5 their minds. 6 MR. GEMMINGEN: Well, HVA also terminated. 7 They couldn't hold the property. 8 MR. PACE: And, secondly, the -- in their 9 exhibits, Exhibit N, they have the capital accounts 10 here, it shows the value of the properties being 11 contributed. And they're 60/40. And those properties 12 came from HVA. 13 So, the numbers show that there was, in fact, 14 the requisite larger fair market value, the assets 15 contributed. 16 MS. YEE: Let -- let me pose my last question 17 to Appeals. 18 We've heard a lot, can you just try to help 19 crystallize our focus here? The issue is whether the -- 20 the partnership satisfied the like kind exchange 21 requirement -- 22 MR. THOMPSON: Right. 23 MS. YEE: -- right? 24 So, given what we've heard from both sides -- 25 MR. THOMPSON: Right. 26 MS. YEE: -- what ought our focus be? 27 MR. THOMPSON: You know, I think I would 28 caution the Board with FTB's statement that we are 41 1 looking at a stream of time. 2 I think in the Bolker case, I think in Maloney 3 as well, they said we're primarily concerned with the 4 time of the exchange. And they may look to other 5 elements to -- to -- to determine what the intent was, 6 and if they -- if there was a prearranged transaction 7 prior, which I think is FTB's point -- that may affect 8 the analysis. But I think that's the key, the intent at 9 the time of the exchange. 10 And I think also the courts have looked at 11 whether there was a cash out of the property and whether 12 the two properties were of like kind. 13 And, you know, Appellants' position here is at 14 bottom they started with an interest in a partnership 15 and they ended with an interest in a partnership -- both 16 holding similar rental property. 17 I appreciate FTB's view here is that, as I 18 understand it, is that, in effect, I think what happened 19 from FTB's view is that HVA exchanged a -- one property 20 for an interest in another partnership, in MD LLC, and 21 -- and you can't -- and that's the substance of it from 22 FTB's perspective. 23 But I think that the courts have focused, A, on 24 the intent and time of the transaction to hold for 25 business or investment purpose and -- and, B, also 26 whether there was any -- uh -- cash out -- uh, that 27 would disqualify from a 1031. 28 MS. YEE: Thank you. 42 1 Thank you, Mr. Chairman. 2 MR. HORTON: Further discussion, Members? 3 Hearing none, is there a motion? 4 MS. YEE: Move to take the matter under 5 submission. 6 MR. HORTON: Moved by Member Yee to take the 7 matter under submission, second by Member Runner. 8 Without objection, Members, such will be the 9 order. 10 Thank you very much for appearing before us 11 today. 12 MR. PACE: Thank you so much. 13 MR. HORTON: The Board will take your matter 14 under consideration later on this evening and send you a 15 written report of our decision. 16 ---o0o-- 17 18 19 20 21 22 23 24 25 26 27 28 43 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 OCTOBER 23, 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 43 constitute a complete and accurate 14 transcription of the shorthand writing. 15 16 Dated: November 27, 2012 17 18 19 ____________________________ 20 JULI PRICE JACKSON 21 Hearing Reporter 22 23 24 25 26 27 28 44