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 24, 2012 10 11 12 13 14 15 FINAL ACTION 16 ITEM B1 - HEARD OCTOBER 23, 2012 17 18 19 20 21 22 23 24 25 26 27 REPORTED BY: Kathleen Skidgel 28 CSR NO. 9039 1 1 P R E S E N T 2 3 For the Board Jerome E. Horton of Equalization: Chairman 4 Michelle Steel 5 Vice-Chairwoman 6 Betty T. Yee Member 7 George Runner 8 Member 9 Marcy Jo Mandel Appearing for John 10 Chiang, State Controller (per Government Code 11 Section 7.9) 12 Joann Richmond Chief, 13 Board Proceedings Division 14 For Staff Grant Thompson 15 Tax Counsel IV 16 17 ---oOo--- 18 19 20 21 22 23 24 25 26 27 28 2 1 5901 GREEN VALLEY CIRCLE 2 CULVER CITY, CALIFORNIA 3 OCTOBER 24, 2012 4 ---oOo--- 5 MR. HORTON: Ms. Richmond, what's our next 6 matter? 7 MS. RICHMOND: That concludes our oral hearings 8 for today. 9 Would you like to take those matters that have 10 been taken under submission? 11 MR. HORTON: Members, let's take a -- a 12 10-minute break if we could. 13 MS. STEEL: Okay. 14 MR. RUNNER: Okay. 15 (Recess taken.) 16 MR. HORTON: Welcome back to the meeting of the 17 Board of Equalization. 18 Ms. Richmond, what is our next item? 19 MS. RICHMOND: Our next items are those that 20 have been taken under submission. 21 Our first item is B1, Gerald J. Marcil and 22 Carol L. Marcil, that was put over from yesterday. 23 ---oOo--- 24 B1 GERALD J. MARCIL and CAROL L. MARCIL 25 NO. 458832 26 ---oOo--- 27 MR. HORTON: Okay. 28 MR. RUNNER: Technically, is there still a 3 1 motion on the floor? Yes. Right? 2 MR. HORTON: Uh, no. But, uh, we can put it 3 back on the floor if you want to. 4 MR. RUNNER: Is that right? I don't -- I'm 5 just -- is that right? If the motion is -- if we 6 continue to the next day, the motion that was made is 7 not -- 8 MR. HORTON: Yeah. No, you're right. No, I 9 think if you continue it -- 10 MR. RUNNER: What are we doing? 11 MR. HORTON: And that's pretty much what we 12 did. If we continue in its current structure. 13 MR. THOMPSON: Yeah. 14 MR. HORTON: Yeah. 15 MR. THOMPSON: Yeah, I guess so. Yeah. 16 MR. HORTON: Yeah, makes sense. 17 MR. RUNNER: I would think so. 18 MR. HORTON: Okay. 19 MS. MANDEL: Well, I'm happy to renew it if 20 anyone's concerned. 21 MR. RUNNER: Just trying to not make you do 22 anything over -- 23 MR. HORTON: No. 24 MR. RUNNER: -- that you've already done. 25 MR. HORTON: Okay. Um, first, Members, thank 26 you so very much for allowing me the time to sort of 27 deliberate on this. I was actually up reading this last 28 night 'til about 1:00 o'clock, uh, because I wanted to 4 1 invest the time and see if I can narrow this down in my 2 mind as to, um, the implications, if you will, uh, on a 3 larger, more broader issue and scale. 4 And I also wanted to -- to sort of, uh, 5 contemplate publishing this case if in fact, uh, the 6 majority of the body believes that, uh -- uh, the motion 7 should carry. 8 Uh, whether I agree -- ultimately agree or 9 disagree, I think it's an excellent case that does 10 provide some direction because I don't see a narrow, uh, 11 interpretation of this. I think it's a much broader 12 interpretation relative to, uh, subsequent assessment, 13 evaluation and so forth. 14 Um, the concern I -- I -- I had was, um, 15 interpreting, um, community property in a community 16 property state, um, and anticipating -- in light of what 17 happens in a noncommunity property state, what happens 18 in different areas of the law. And so, if one is 19 looking at a bankruptcy, what would happen? If this was 20 a trustee, what would be the case? How would it be 21 interpreted? Uh, how would community property versus 22 true partnership be interpreted? 23 And so, it seems to me we started out with a 24 partnership of some sort, uh, where an individual -- uh, 25 I don't recall if they were married at the time that the 26 original HVA partnership was consummated. I've sort of 27 presumed that they were not, um -- uh, but don't know 28 that that would have made a huge difference. But the 5 1 partnership started out at 49.5 percent to, uh, 2 Mr. Individual and Mrs. Individual, with a joint 3 ownership of one percent in an LLC. 4 And that partnership, uh, that -- that -- that, 5 um -- that entity owned a piece of property and they 6 owned it as partners. And so -- and we are also a, uh, 7 I forget what the term is, but you can hold the 8 property, uh, tenancy in common or you can hold that 9 property a number of different ways. That wasn't 10 necessarily clear. But at this point, didn't think that 11 it really mattered. 12 Um, then at the end of the day, uh, the wife, 13 uh, her ownership transformed from a partnership, which 14 is a partner, and that the owner -- and the ownership of 15 real -- real property with the rights entitled to equal 16 rights to any other partner was diminished. In fact, 17 her rights, to some degree, when she signed, um -- I 18 forget what the declaration was, but basically, uh, 19 signing over her rights, uh, as a spouse to participate 20 as a partner. And so her rights were diminished and 21 reduced to the distribution of -- of income for income 22 tax basis. But for participation in the partnership, 23 uh, being able to actually make decisions, she had no 24 rights. 25 And so we have a change in similar ownership by 26 virtue of a law that has nothing to do with tax code. 27 Uh, they have -- but from a tax code perspective the 28 ownership has definitely changed and shifted to one 6 1 particular individual now owning 60 percent of a hundred 2 percent and the wife being reduced to community 3 property. 4 Uh, when it all started out, the wife was a 5 partner. And, quite frankly, you know, I sort of 6 consulted with a few, uh, attorneys who happen to be 7 women and they were of the impression that the 8 wife had -- her ownership, her rights had been 9 diminished. 10 Uh, and -- and the unfortunate thing is, is 11 that we don't know what happened in the middle. You 12 know. We only know where you started and where you 13 ended. You know, and as a real estate broker, you know, 14 certainly, you know, I've done several 1031 exchanges 15 and sought to create this straw body somewhere in the 16 middle in order to accomplish the objective. And, 17 theoretically, we end up with the same people owning the 18 same interests and the exchange of like property. 19 And as I interpret the tax code, that same 20 interest means you have the same rights. And by virtue 21 that you're holding -- the asset that you're holding is 22 real estate, takes it even further. And because, uh -- 23 takes it even further relative to the -- the 24 significance of those rights. 25 So, with all that said, it would be a little 26 difficult for me to support the motion on the floor. 27 And I would certainly -- and I shared all that to say 28 that I would certainly encourage the majority of this 7 1 body, uh, to publish that decision if that's the basis, 2 because we really, really ought to communicate to 3 California taxpayers that marriage can, uh -- uh -- in 4 the community state, community property is the same. 5 You hold the same property rights and the same interests 6 from a tax code perspective when you're dealing with a 7 1031 exchange. 8 Member Yee. 9 MS. YEE: Uh, thank you, Mr. Chairman. 10 You know, I struggled with the same issues 11 yesterday. Um, first I'm going -- I just want to thank 12 my staff because I think I had them up all night, uh, 13 with my angst over this case. 14 Uh, the troubling part is that I think, um, I'm 15 not sure that the Franchise Tax Board, um, really, uh, 16 laid out the authorities appropriately. Um, and I'm not 17 sure that I'm going to put all the, um, the 18 responsibility on them because I also thought appellants 19 weren't necessarily the most forthright with respect to 20 providing evidence to support their facts. 21 Uh, now having said that, uh, my focus was 22 exactly that. And that is, uh, what the tax effect of 23 Mrs. Marcil will be -- would be, uh, by virtue of her 24 not being a member of -- being a member/partner of the 25 LLC. And, uh, I think at the end of the day, um, the 26 conclusion I'm coming to is that, uh, there is no 27 authority to tax Mrs. Marcil on half of the deferred 28 gain. 8 1 Uh, we're not sure what happened in terms of, 2 uh -- um, you know, she was not a partner following the 3 merger. We're not sure whether she withdrew from the 4 partnership, uh, in which case there would be no taxable 5 event for withdrawal; whether she abandoned the 6 partnership, uh, in which case there could have been, I 7 guess, an abandonment loss, um -- uh, claimed, although 8 I think that's difficult to prove and probably would be 9 suspect to the taxing agents -- to the taxing agencies; 10 or she could have sold or gifted her partnership 11 interest to Mr. Marcil, right? 12 Um, I don't think there's any evidence as to 13 what actually happened. Uh, certainly no evidence that 14 a sale occurred. So, uh, with no sale, there's no basis 15 to assert a sales price. And, uh -- and if it were 16 gifted to Mr. Marcil, there's no taxable event there 17 either. 18 Um, I -- I -- I'm -- on the issue of 19 publishing, I -- I'm concerned about being sure that 20 we -- whatever we decide in this matter, that it is 21 narrow to just the 1031, um, exchange, uh -- uh, 22 situation. But I'm not sure that this case actually 23 reflects enough relative to the accuracy of the facts 24 with regard to what happened that, uh, would have me 25 comfortable publishing this particular decision. 26 Uh, but I think on the narrow application of 27 whatever we decide, on that question, I would be most 28 comfortable with that. 9 1 Uh, this was a very, very frustrating case. 2 Um, the typical evidence that I would have expected to 3 see that would have been a little bit more illustrative 4 of, uh, the status of Mrs. Marcil throughout this whole, 5 uh -- um, throughout all of these transactions just 6 wasn't there. And, uh, I think it just took us -- uh, 7 certainly, again, I want to thank my staff because it 8 really is, you know, looking at the various authorities, 9 um, upon which we can rely, um, speculating a bit about 10 what happened, uh, with respect to, um, Mrs. Marcil and 11 her partnership status following the merger and given 12 the likely scenarios that, uh, could have occurred, uh, 13 I think I am convinced that there really was no 14 authority to tax Mrs. Marcil on half of the deferred 15 gain. 16 So, I would, uh, support the motion to grant. 17 And -- and can I just do a check-in with 18 Mr. Thompson? Because I -- I don't know if I'm -- I 19 know we -- we could kind of come at it in a number of 20 different ways, but I -- I -- particularly if we're 21 thinking about publishing or -- or providing some sort 22 of guidance here, I just want to see what -- if there's, 23 one, enough here. I think I'm comfortable with just 24 looking at guidance with respect to our decision 25 relative to the narrow application but not with respect 26 to, you know, the -- the facts of the matter. 27 MR. THOMPSON: Right. I -- well, first of all, 28 I do agree there's not a lot of clarity with, uh, what 10 1 happened with her interest. Uh, personally, I think 2 they didn't think about it much. You know, didn't put 3 her on the partnership interest. And, uh, never thought 4 about whether it would be an abandonment or a gift or 5 anything else. 6 Um, and so, it's, uh, unfortunately left the 7 Board in a little bit of a gray area that may be 8 uncomfortable. 9 Um, as to a formal, I, uh -- you know, I would 10 defer to the Board on that obviously. Um, I think there 11 are some important issues here, uh -- uh, I think the 12 state law, do you need a state law merger certificate 13 issue, is something that kind of threw us a curveball 14 early on. FTB said, well, you have to have a merger 15 certificate. And, uh, however, I do think the law on 16 that's pretty clear. So maybe we don't really need a 17 formal. We just need to watch for it more carefully 18 next time. 19 And, uh, also, uh -- but then when you get down 20 to the facts, I share some of what I suspect is all the 21 Members' frustration with a spotty and sort of 22 inconsistent record. And, uh, you know, I -- I'm fairly 23 certain the Board would not want to endorse this 24 particular transaction as a model, not that it would 25 have to. 26 Um, and the other thing I guess that bears in 27 my mind a little bit is I would feel a little better 28 about a formal if we were a little earlier in the 11 1 process. You know, maybe if it had been briefed with 2 that in mind. As it is, we're in the second re-hearing. 3 There's no opportunity for a PFR, and the appeal's been 4 pending for four years. So I -- 5 MS. YEE: That's a good point. 6 MR. THOMPSON: You know, that's just a -- it's 7 a factor in my mind. 8 MR. HORTON: I -- I would concur with the 9 thoughts of the Appeals in that regard. But some 10 clarity to -- even to a limited degree should be 11 provided. 12 Okay. So, there is a, uh, motion to grant by 13 Member Mandel. Second by -- 14 MS. STEEL: Ms. Steel. 15 MR. HORTON: -- Member Steel. 16 Objection noted. 17 Ms. Richmond, please call the roll. 18 MS. RICHMOND: Mr. Horton. 19 MR. HORTON: No. 20 MS. RICHMOND: Ms. Steel. 21 MS. STEEL: Aye. 22 MS. RICHMOND: Mr. Runner. 23 MR. RUNNER: Aye. 24 MS. RICHMOND: Ms. Yee. 25 MS. YEE: Aye. 26 MS. RICHMOND: Ms. Mandel. 27 MS. MANDEL: Aye. 28 MS. RICHMOND: Motion carries. 12 1 REPORTER'S CERTIFICATE 2 3 State of California ) 4 ) ss 5 County of Sacramento ) 6 7 I, KATHLEEN SKIDGEL, Hearing Reporter for the 8 california State Board of Equalization certify that on 9 October 24, 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 12 constitute a complete and accurate 14 transcription of the shorthand writing. 15 16 Dated: October 31, 2012 17 18 19 ____________________________ 20 KATHLEEN SKIDGEL, CSR #9039 21 Hearing Reporter 22 23 24 25 26 27 28 13