1 BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION 2 450 N STREET 3 SACRAMENTO, CALIFORNIA 4 5 6 7 8 REPORTER'S TRANSCRIPT 9 NOVEMBER 14, 2012 10 SALES AND USE TAX APPEAL HEARING 11 APPEAL OF 12 ANN L. DILEY 13 NO. 416784 (OH) 14 AGAINST PROPOSED ASSESSMENT OF 15 SALES AND USE TAX 16 17 18 19 20 21 22 23 24 25 26 Reported by: Kathleen Skidgel 27 CSR No. 9039 28 1 1 P R E S E N T 2 For the Board Jerome E. Horton of Equalization: Chairman 3 4 Michelle Steel Vice-Chairwoman 5 6 Betty T. Yee Member 7 8 George Runner Member 9 10 Marcy Jo Mandel Appearing for John 11 Chiang, State Controller (per Government Code 12 Section 7.9) 13 Joann Richmond 14 Chief Board Proceedings Division 15 16 For Board of David Levine Equalization Staff: Tax Counsel IV 17 18 For the Department: Scott Claremon Tax Counsel 19 Bradley Heller 20 Tax Counsel IV 21 Kevin Hanks Chief, Headquarters 22 Operations Division 23 For Petitioner: Jesse W. McClellan Representative 24 25 ---oOo--- 26 27 28 2 1 450 N STREET 2 SACRAMENTO, CALIFORNIA 3 NOVEMBER 14, 2012 4 ---oOo--- 5 MR. HORTON: Ms. Richmond, our next item. 6 MS. RICHMOND: Our next item is C11, Ann L. 7 Diley. 8 Please come forward. 9 MR. HORTON: As the taxpayer comes, Mr. Levine, 10 would you please introduce the issues in this case? 11 MR. LEVINE: The issues in this claim are 12 whether the Board's levy was invalid; whether the claim 13 should be granted based on claimant's being an innocent 14 spouse; whether the levied funds were claimant's sole 15 and separate property; whether the Homestead Act is 16 relevant; and whether the underlying liability of 17 Mr. Diley is invalid. 18 MR. HORTON: You did say "Homestead Act"? 19 MR. LEVINE: Yes. Arizona Homestead Act. 20 Sorry. 21 MR. HORTON: I'm there. 22 The taxpayer will have ten minutes to make 23 their presentation. We would ask that you commence with 24 your introduction. 25 Please be advised that we will return and allow 26 you five minutes on rebuttal. 27 MR. McCLELLAN: Thank you, Mr. Chairman and 28 Members of the Board. My name is Jesse McClellan, and 3 1 I'm appearing on behalf of the petitioner, Ann L. 2 Diley. 3 For the purposes of this discussion, I'm going 4 to refer to her by her first name. And if I do refer to 5 her husband, who is Douglas Diley, I will refer to him 6 by his first name. No disrespect intended. It's for 7 clarification purposes. 8 With respect to the issues, I, uh -- the issues 9 can actually be narrowed to this: Um, whether or not 10 the levy was of Ann's sole and separate property; and, 11 if so, we ask that the money be returned to her. 12 We believe that the undisputed facts support 13 that it was Ann's sole and separate property, at least 14 to the extent of the $30,000 amount. There's -- that's 15 a -- that's a rough figure, but it's -- it's 16 approximately $30,000. 17 We would stipulate to the roughly $7,000 figure 18 that could not be directly traced as coming from a sole 19 and prep -- a sole and separate property source, uh, and 20 ultimately request that the $30,000 that was levied upon 21 her account be returned to her. 22 And -- and the basis of that request follows: 23 Um, to our knowledge, there's no dispute that the levy 24 was placed upon Ann's sole and separate bank account; 25 and that the funds that were taken from that bank 26 account have been traced back to her sole and separate 27 property; and that there was a loan taken from that real 28 property which generated these funds. 4 1 I think it's a well settled rule under 2 Community Property Law that the rents, issues and 3 profits generated from one spouse's sole and separate 4 property remain that spouse's sole and separate 5 property, subject to potential commingling. 6 There was no commingling here. Ann has always 7 maintained separate accounts. She treats her money as 8 her own; her husband does the same. 9 The -- there is an allegation that's been made 10 by the Department that the transfer of the home to Ann 11 as her sole and separate property was a fraudulent 12 conveyance should therefore be set aside and that the 13 loan was actually made of property that was that of the 14 community, and therefore, the levied-upon funds would be 15 community property and reachable for the debt of Ann's 16 husband. 17 The -- the evidence presented in support of 18 that allegation was a letter drafted in 2011, number 19 one, which is four years after the levy was served. And 20 it's a letter that's presented in the -- the 21 Department's summary, Exhibit 3, page 30 of 30. And 22 it's drafted by the U.S. Department of Justice, by a 23 woman named Mary C. VanGaard, and she's a financial 24 litigation agent. 25 It does say in that letter that the transfer of 26 the property was, uh, fraudulent and that it was a 27 fraudulent conveyance. It's an allegation. An 28 allegation is not sufficient to make a finding. 5 1 Uh, with respect to establishing fraud, the 2 burden is upon the -- the agency, or in this case the 3 Department, to establish fraud by clear and convincing 4 evidence. 5 In an effort to gather some more information on 6 this particular document and the allegation made, I 7 spoke with my client. My client had no knowledge of 8 this claim, and they had no knowledge of any proceeding 9 against them under this claim. 10 I also contacted the U.S. Department of Justice 11 and tried to reach Ms. VanGaard. I wasn't able to do 12 so, and I wasn't able to get any information with 13 respect to this. 14 Um, it appears to us that, because this claim 15 wasn't followed up on, that actually there was no 16 evidence, uh, to establish that there was a fraudulent 17 conveyance, which means that the conveyance that took 18 place was valid. It transferred property, previously 19 held by the community, to Ann's sole and separate 20 property, which is perfectly proper so long as it's a 21 valid to agreement between both spouses and when the 22 loan was taken out from that property, it was her sole 23 and separate funds. 24 She had no participation or dealings with her 25 husband's endeavors that ultimately created the 26 outstanding obligation. Uh, she is, because of being 27 married to Mr. Diley, is not his property, and her own 28 separate property is not subject to collection to 6 1 satisfy his debt. And for that purpose, we ask that the 2 $30,000 sum be returned to her. 3 MR. HORTON: We'll now go to the Department. 4 The Department has ten minutes to make their 5 presentation. I ask that you commence with your 6 introduction for the record. 7 MR. CLAREMON: Good afternoon, Chairman Horton 8 and Members of the Board. I'm Scott Claremon with the 9 Legal Department. With me are Bradley Heller and Kevin 10 Hanks representing staff. 11 At the outset we would agree to the stipulation 12 that the 7,000 -- the approximately $7,000 is not in 13 dispute if that's what, uh, the taxpayer is saying -- 14 the claimant's saying. Excuse me. 15 As to the remaining funds, we concur with the 16 recommendation of the Appeals Division that claimant is 17 not entitled to a refund with the funds obtained via 18 bank levy. 19 Claimant's spouse Douglas Diley pled to felony 20 criminal sales and use tax evasion related to the 21 out-of-state purchase of gasoline for resale in 22 California without the payment of California tax. 23 Mr. Diley was also issued a Notice of 24 Determination which, including a fraud penalty, became 25 final and collectible on January 14th, 2006. 26 Shortly after the determination went final, on 27 April 7th, 2006, Mr. Diley quit-claimed his community 28 interest in their home to claimant. Then, on September 7 1 25th of that year, claimant borrowed against the 2 property and ultimately deposited a portion of the 3 proceeds in a Wells Fargo bank account. 4 Finally, in February 2007, the Board mailed a 5 Notice of Levy to Wells Fargo Bank for all money in its 6 possession belonging to Mr. Diley, including any 7 community property funds that were held in claimant's 8 accounts. As a result, Wells Fargo remitted 9 approximately $37,000 to the Board, a portion of which 10 can be traced back to the refinancing loan. 11 The Board's Notice of Levy was properly served 12 in compliance with the Revenue and Taxation Code and the 13 Board's policy and procedures. 14 Further, Board staff believes that the 15 quit-claim transfer of property meets the definition of 16 a fraudulent conveyance because it was done with the 17 apparent purpose to hinder or delay collection action by 18 the Board which, as you can see from this timeline, had 19 its determination go final right before the transfer was 20 made, and as -- and also to the other creditors, like 21 the Department of justice. 22 Um, accordingly, claimant has not provided 23 evidence to establish that Mr. Diley does not have 24 an interest -- did not have an interest in the funds 25 remitted by Wells Fargo Bank. And in that regard, this 26 isn't a fraud action. This isn't being done under a 27 fraud statute. This is to determine whether the 28 claimant is entitled to a refund and inherent in that 8 1 it's to determine whether the claimant can show that it 2 was not community property. Um, and then within that 3 framework, uh, we believe the evidence shows that the, 4 uh -- that the evidence doesn't show that that transfer 5 made it separate property. 6 So, therefore, the claim for refund should be 7 denied. Thank you. 8 MR. HORTON: Thank you. 9 On rebuttal. 10 MR. McCLELLAN: Thank you. If I understand 11 what the Department is saying is that -- that it hasn't 12 been shown that the property was transferred to Ann's 13 possession as her sole and separate property. Um, if 14 that is the allegation, the documents within the Board 15 hearing summary demonstrate that it was, in fact, 16 transferred to her as her sole and separate property. 17 Now, if -- if the Department claims that that 18 was done so fraudulently and thinks that it can levy 19 that allegation against a person and then place the 20 burden on them to prove their innocence, then I think 21 that that's misguided, if that's what is being suggested 22 here. 23 Ultimately, uh, one -- at least one relevant 24 point that should be said is that Doug considered his 25 obligation to the Board to be satisfied through a 26 restitution payment to the court where he points to 27 language in the court transcript which says that any 28 dispute of this restitution payment must be brought in 9 1 court. 2 Now, ultimately, um, I don't necessarily agree 3 with his interpretation, but I do agree or believe 4 that -- that he thinks or thought that his obligation to 5 the Board of Equalization had been satisfied through 6 that restitution payment. 7 And with respect to the timing, the Department 8 of Justice letter that the Department relied upon to 9 find that this was a fraudulent conveyance, suggested a 10 lien was placed in 1999 and that because of that date, 11 uh, the conveyance was fraudulent. 12 Really, what I hear is conclusions being made 13 and I don't see any evidence to support those 14 conclusions because there hasn't been a showing by clear 15 and convincing evidence that this person has acted 16 fraudulently to -- to hinder any collection action 17 against her husband. And because the property has been 18 demonstrated by documentary third-party evidence that it 19 was her sole and separate property, we ask that it be 20 returned to her. 21 Thank you. 22 MR. HORTON: Thank you. 23 Discussion, Members? 24 Member Steel. 25 MS. STEEL: Department, that legal transaction, 26 how can you call that a fraud here? 27 MR. CLAREMON: We believe that it meets the 28 definition under California law of what a fraudulent 10 1 transaction is, which is a, um, a transfer to, um, 2 basically the intent to defraud the creditors. And 3 under the statute, you would look at a number of 4 factors. 5 MS. STEEL: So exactly what went on with this 6 taxpayer's case? 7 MR. CLAREMON: Um, we would look to the fact 8 that, um, it was done either -- it was done in 9 anticipation of indebtedness here to the Board, where 10 the Board's determination went final in January and the 11 transfer was made in April. It was done to an insider, 12 to his own wife. He appeared to retain control of the 13 property. I don't think there's any, um, facts that 14 show that he gave up any control of the property. He's 15 still living there with his wife. 16 Um, so, when you look at the checklist of all 17 these things, um -- and -- oh, excuse me, it was also 18 done, um, without any return of compensation on the 19 other side. It doesn't appear that he was paid to 20 transfer his entire, uh, claim in this house. I know 21 there's been an allegation, but there's been no proof 22 that he was actually paid to give up his claim in his 23 house. 24 So, when you look at those factors that's what 25 we look at to determine this meets the definition of a 26 fraudulent conveyance. 27 MS. STEEL: Okay. 28 Mr. Levine, the Arizona Homestead, is that 11 1 protect for, you know, levying from that refinancing? 2 How -- you know, by the law, how it works? 3 MR. LEVINE: I'm not an expert on Arizona 4 Homestead Act. 5 MS. STEEL: How about here, if we had it? 6 MR. LEVINE: I don't think there's anything -- 7 we have $7,000 exemption. I'm not aware of a Homestead 8 Act in California. There may be one, but again, that's 9 not -- I -- I -- 10 They have not presented -- I don't know, 11 perhaps Mr. McClellan -- I didn't hear him argue that. 12 I don't know if that's still his argument, if he wants 13 to pursue that. 14 MS. STEEL: Could you explain? Or you're not 15 arguing that? 16 MR. McCLELLAN: Unfortunately, I can't add much 17 on the Homestead Act. 18 MS. STEEL: But one of the issue here was that 19 that, um -- the, uh, levied funds were protected under 20 the Homestead Act. That's why you were -- 21 MR. McCLELLAN: Well, and I suppose that would 22 go to whether or not the -- the conveyance was, um, 23 intended to hinder or protect the value of the home. 24 I don't know, um, what that law says. But I do 25 know that it provides protection for the homeowner. 26 My understanding is that there wasn't anything 27 the Board could ever do to a home located outside of the 28 State of California anyhow. So to suggest that the 12 1 purpose of the conveyance was to protect the home, I 2 think is -- is without merit. 3 The -- the Board of Equalization, in order to 4 collect upon a debt, uh, to my knowledge, couldn't 5 enforce the sale of the home in the state. I could be 6 wrong. But, um, I'm fairly confident that it wouldn't 7 have the jurisdiction to go into Arizona, enforce the 8 sale of their home. 9 And, frankly, the -- the purpose for the 10 transfer was to satisfy debts between the spouses. 11 And -- and that's their private matters. And it's 12 not their obligation to justify a legal course of action 13 against an allegation, which at this point that's all 14 there is, is an allegation, there's no real evidence. 15 MS. STEEL: Mr. Levine. 16 MR. LEVINE: Actually, Mr. McClellan gave me 17 the key to answer you. There was no action against the 18 house at all. It was against cash. Homestead Act -- 19 MS. STEEL: Refinancing. 20 MR. LEVINE: -- is irrelevant. 21 MS. STEEL: Okay. Thank you. 22 MR. HORTON: Member Yee. 23 MS. YEE: So, um, I guess the focus here really 24 isn't on whether the, um -- isn't on whether the, um, 25 conveyance was fraudulent. This really speaks to the -- 26 what we're trying to determine is the source of the 27 levied funds, right? 28 MR. CLAREMON: That's correct. 13 1 MS. YEE: Okay. Um, and the source of the 2 levied funds, I don't think there's a disagreement 3 about, is there, Mr. McClellan? 4 MR. McCLELLAN: No. 5 MS. YEE: Okay. 6 MR. McCLELLAN: I don't think there is 7 anyhow. 8 MS. YEE: And, uh, what about, uh, your 9 thoughts with respect to whether the, um, property and 10 the proceeds continue to be community property? 11 MR. McCLELLAN: Well, the, um -- I looked up 12 some California law sections. I also reviewed the 13 Arizona Community Property Laws. And what I found was 14 that they're consistent. Um, and I don't claim to be an 15 expert on Community Property Law. 16 But, in any event, Family Code Section 852 17 permits the transfer of community property that's held 18 by the community to either spouse so long as there's 19 agreement between the spouses. It's a perfectly valid 20 process and it's allowed for. 21 Generally you run into community property 22 disputes, or at least the cases that I've seen, where 23 the -- the spouses are disputing whether or not it was 24 community property or separate property because they're 25 splitting up. 26 So long as the spouses agree, they can transfer 27 property to a third party or one of the other spouses. 28 MS. YEE: I guess, uh, in terms of 14 1 Mr. Claremon's checklist of factors, um, there's no 2 disagreement with respect to whether the -- when the 3 property was acquired and the use of the property by 4 both Mr. and Mrs. Diley and the fact that it was 5 quit-claimed to Mrs. Diley with no consideration. 6 What about any evidence to support any 7 repayment of the loan, whether that was from her 8 separate property? 9 MR. McCLELLAN: Well, according to Ann, the 10 transfer was made in order to settle debts between them, 11 the two of them. So in other words, she was owed money 12 from her husband at the time of the transfer. 13 Um, so as far as repayment of the amount, um, I 14 don't know that there would be a repayment. 15 MS. MANDEL: You mean the repayment of the 16 refinancing? 17 MS. YEE: Mm-hmm. 18 MR. McCLELLAN: So in other words, why would 19 the husband do this without being compensated, is the 20 question? 21 MS. YEE: Well, that and then -- yeah, why was, 22 uh -- why was it quit-claimed in the first place? 23 MR. McCLELLAN: Well, again, it was -- it was 24 quit-claimed to settle amounts that Doug owed Ann. 25 They've always maintained, um, their funds separately. 26 And this was done in order to effectuate that repayment 27 and that she ultimately obtain the loan, and those 28 proceeds went into her account. 15 1 MS. YEE: I mean, you kind of see where 2 we're -- well, I don't know. I'm having kind of a tough 3 time understanding where there was sole and separate 4 property of Mrs. Diley when the, um, levied funds were 5 from the home equity line of credit. Uh, it was, uh, 6 against property that was, um, owned and -- acquired and 7 owned, acquired during the marriage. 8 MR. McCLELLAN: Mm-hmm. 9 MS. YEE: And I think where Mr. Diley still 10 continued to live. 11 MR. McCLELLAN: Um, to my knowledge. I don't 12 know for certain. 13 MS. YEE: And it may have -- I'm trying to just 14 figure out how to establish that, in fact, uh, there was 15 separate and sole property of Mrs. Diley, in fact, 16 here. 17 MR. McCLELLAN: Well, the -- if you look at 18 the -- the transfer, um, it -- it says that it's being 19 transferred to Ann as her sole and separate property. 20 So, subsequent to that date, there's a loan 21 that is taken on the home. At the time of the loan, the 22 loan document says that the loan is -- is being made 23 against -- well, to Ann, um, and it's being secured by 24 her sole and separate property. And then it provides 25 the address. 26 MS. YEE: Okay. 27 Department, your contention is, uh, there was 28 no sole and separate property throughout all those 16 1 transactions? 2 MR. CLAREMON: That's correct. 3 MS. YEE: Okay. 4 MR. HELLER: Well, Ms. Yee, if I could just 5 add, California law, at least, I -- you know, we're not 6 a hundred percent familiar with Arizona Community 7 Property Law. But in California, the statute right 8 before the Section 852 of the Family Code regarding 9 transmutations specifically says transmutations are 10 subject to the rules governing fraudulent transfers. 11 So, you can't do a fraudulent transfer to 12 transmute property from community property to separate 13 property. But if it's not a fraudulent transfer, then I 14 think this particular document looks like it's a 15 transfer from -- from -- 16 MS. YEE: Community property. 17 MR. HELLER: -- community property to separate 18 property if it's not otherwise a fraudulent 19 conveyance. 20 MS. YEE: Okay. Thank you, Mr. Heller. 21 Thank you. 22 MR. HORTON: Further discussion, Members? 23 Hearing none, is there a motion? 24 MS. YEE: Move to take the matter under 25 submission. 26 MR. HORTON: Moved by Member Yee to take the 27 matter under submission. Second by Member Mandel. 28 Without objection, Members, such will be the 17 1 order. 2 MR. McCLELLAN: Thank you. 3 MR. HORTON: Thank you very much for appearing 4 before this Board. We'll take your matter under 5 consideration later on this afternoon -- evening and 6 send you a written report of our decision. 7 MR. McCLELLAN: Okay. Thanks. 8 ---oOo--- 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 18 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 November 14, 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 18 constitute a complete and accurate 14 transcription of the shorthand writing. 15 16 Dated: December 3, 2012 17 18 19 ____________________________ 20 KATHLEEN SKIDGEL, CSR #9039 21 Hearing Reporter 22 23 24 25 26 27 28 19