1 BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION 2 450 N STREET 3 SACRAMENTO, CALIFORNIA 4 5 6 7 8 REPORTER'S TRANSCRIPT 9 DECEMBER 18, 2012 10 CORPORATE FRANCHISE AND PERSONAL INCOME TAX HEARING 11 APPEAL OF 12 SCOTT L. STRINGER and IRENE STRINGER 13 609814, 610020 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 John Johnson Equalization Staff: Staff Counsel 15 Anthony Epolite 16 Counsel 17 18 For Franchise Tax David Gemmingen 19 Board: Tax Counsel 20 Ciro Immordino Tax Counsel 21 22 For Appellants: G. Scott Haislet Attorney 23 Scott L. Stringer 24 Taxpayer 25 ---oOo--- 26 27 28 2 1 450 N STREET 2 SACRAMENTO, CALIFORNIA 3 DECEMBER 18, 2012 4 ---oOo--- 5 MS. RICHMOND: Our next item is B, Corporate 6 Franchise and Personal Income Tax Hearings, B1, Scott L. 7 Stringer and Irene Stringer. Please come forward. 8 Board Proceedings has received contribution 9 disclosure forms for today's hearings from the parties, 10 participants and agents. All forms were properly 11 completed and signed. All parties, participants and 12 agents are on the alpha listing provided to your office. 13 Each person sitting at the table will be asked 14 to introduce themselves and, if necessary, their 15 affiliation with the taxpayer for the record. 16 Ten minutes is allocated for the taxpayer's 17 opening presentation, followed by ten minutes for the 18 Franchise Tax Board's presentation and five minutes is 19 allocated to the taxpayer for rebuttal. 20 Mr. Horton. 21 MR. HORTON: Okay. Mr. Johnson, as the 22 taxpayer settles in, would you please introduce the 23 issues? 24 MR. EPOLITE: FTB should be over there. 25 MR. GEMMIGEN: We're actually reversed today. 26 MR. EPOLITE: They're on the wrong side. 27 MR. HORTON: Beg pardon? 28 MR. GEMMIGEN: We're actually reversed as far 3 1 as the seating order. 2 MS. RICHMOND: Yes, would you guys switch, if 3 you don't mind, please? 4 MR. HORTON: Oh -- 5 MS. MANDEL: No, they're -- 6 MR. HORTON: -- I thought I saw a familiar 7 face. 8 MS. MANDEL: -- maybe used to a courtroom, 9 maybe. 10 MR. RUNNER: There you go. 11 MR. HORTON. All right, that's okay. 12 MR. JOHNSON: Good morning, Chairman Horton, 13 Members of the Board, John Johnson with Appeals. 14 The issue presented in this appeal is whether 15 Appellants have shown error in Respondent's proposed 16 assessment based on $3 million in gain from a property 17 transaction based on their contention that the gain 18 should be deferred pursuant to a like-kind transaction 19 under Internal Revenue Code Section 1031. 20 MR. HORTON: Okay, thank you very much. 21 I am a little curious, what section of the Tax 22 Code that deals with seating arrangements? 23 MR. HAISLET: That's 7701. 24 MR. HORTON: 7701, okay. Well, thank you so 25 very much. We certainly -- welcome to the Board of 26 Equalization. 27 We'd ask that you commence with your 28 introduction. You have ten minutes to make your 4 1 presentation. 2 We'll then go to the Department. They will 3 have a similar ten minutes to make their presentation. 4 We will return and allow you five minutes on 5 rebuttal. 6 MR. HAISLET: Good morning. My name is Scott 7 Haislet. I'm attorney for the taxpayer. 8 MR. HORTON: Good morning. 9 MR. HAISLET: The taxpayer Appellant husband is 10 Scott Stringer, seated to my left. 11 MR. HORTON: Thank you. 12 Mr. Stringer, I would ask that you turn the 13 mike your way. 14 MR. STRINGER: Thank you. Good morning. 15 MR. HORTON: Good morning. 16 MR. HAISLET: The fundamental difference 17 between the taxpayer's position and the State's position 18 is that the taxpayer is claiming to have relinquished a 19 property interest and, in doing so rolled over, if you 20 will, that interest into a subsequent replacement 21 property within the meaning of Internal Revenue Code 22 Section 1031 (a)(1), which provides that a gain shall 23 not be recognized if there is a like-kind exchange of 24 property within the other constraints provided by 25 Section 1031. 26 The facts of this case are that the taxpayer 27 had obtained a property interest in or about May 5th, 28 2003 by entering into an agreement with a party named 5 1 Cramer. 2 That agreement matured into a written 3 agreement, a purchase and sale agreement, if you will, 4 by and between an outfit called Monterey Development 5 Group, which is known as MDG, which entered into a 6 purchase and sale agreement on behalf of itself and on 7 behalf of Taxpayer Stringer with the seller of that 8 property, Cramer. 9 The Taxpayer Stringer and MDG, at that point, 10 having many oral arrangements and oral discussions, 11 entered into what amounts to a handshake agreement, not 12 reduced to writing at that point in time, in which 13 Taxpayer Stringer asserted that taxpayer would, in fact, 14 have a property interest in this property and that the 15 ultimate disposition of the property would result in 16 proceeds, notably cash as it ultimately occurred, which 17 would result in an independent disposition from whatever 18 MDG was doing. 19 The contract -- the Cramer contract was 20 supplemented by another contract for contiguous 21 property, sometimes called the Vincent parcel or the 22 Rowe contract. And those two properties were, in fact, 23 combined on the same arrangement by and between MDG and 24 Stringer. 25 In the long run, and ultimately in March 2005, 26 those contracts were conveyed to another independent 27 party called Lyon Homes, which bought the property. 28 And the result of that escrow was that the 6 1 Taxpayer Stringer was entitled to receive $3.677 million 2 for his interest in the property -- the properties, of 3 which $3 million was transferred to a qualified 4 intermediary called 1031 Connection, Inc. under an 5 exchange agreement as provided by 1031 regulations. 6 Taxpayer reported a 1031 exchange and 7 subsequently timely, correctly and properly, acquired 8 replacement property in a 1031 exchange. The 9 replacement property issue is not -- not really at issue 10 in this case. 11 The question between the taxpayer and the 12 Franchise Tax Board is whether the interest in the 13 Cramer and Rowe properties was property that could be 14 exchanged under 1031. 15 And by contrast, Franchise Tax Board asserts 16 that the taxpayer received $3 million in compensation 17 for services rendered under some theories and under some 18 factual misunderstandings that we hope to clarify here 19 today. 20 If I can address the -- the staff comments on 21 page 18 of the -- of the hearing summary, Taxpayer 22 Stringer has the burden of proof. The taxpayer needs to 23 prevail in showing that taxpayer met three requirements 24 for exchange, which would be like-kind property, which 25 would be an exchange and which would mean the qualified 26 use issue within the meaning of 1031 exchange. 27 The taxpayer needs to show that taxpayer owned 28 the rights to Modesto. Taxpayer entered into an 7 1 agreement with the original Cramer seller, then 2 approached MDG and then agreed that the combined forces 3 of MDG and Stringer would, in the long run, develop the 4 property or find a buyer for the property -- whatever 5 the case may be, whatever the ultimate transaction would 6 be -- and the taxpayer would receive 16.67 percent of 7 the value of the contract, which is the property 8 interest in this case. 9 Now it should be noted that the staff comments 10 here incorrectly characterize MDG as an intermediary. 11 The tax regulations provide that a qualified 12 intermediary is an independent party, which basically 13 holds the money on the sale of the property. And in 14 this case MDG was not acting as that. 15 MDG was a co-venturer or another taxpayer 16 related to the property which had its own set of books, 17 which had its own set of circumstances, which, in fact, 18 filed separately with the Franchise Tax Board and 19 Internal Revenue Service. 20 How much time do I have? 21 MR. STRINGER: You're getting there. 22 MR. HAISLET: Okay. 23 MS. RICHMOND: You have four minutes remaining. 24 MR. HAISLET: Thank you. 25 Okay. A couple of things I want to point out 26 that the -- the staff comments here that the -- the 27 taxpayer should be able to demonstrate the fact that 28 it's a property interest. And it cites a case called 8 1 HMS as -- which is a Tennessee case, which is a 2 partnership case, not consistent with the facts in this 3 case. 4 In this situation here MDG and Taxpayer 5 Stringer were separate -- were not consistent. It was 6 not a unified factor. The property itself was unified, 7 but they did not, in fact, have anything more than an 8 interest in getting this property sold. So, it's 9 distinguished from the HMS case. 10 Now in the taxpayer's -- on the taxpayer's 11 behalf we've raised the issue in the Bolker case, which 12 the staff has noted in its -- in its holdings here. 13 And then I want to make one last point about 14 the -- about what the Franchise Tax Board has done in 15 its exam. 16 Now on page 14 of the staff report, the Bolker 17 case fits exactly into this situation here. Taxpayer 18 was -- owned a property interest. Taxpayer had, for 19 reasons -- nothing to do with tax -- had determined that 20 it was better to sell the property, in fact, did sell 21 the property with MDG. 22 And it turns out that it was great move because 23 Lyon Homes ended up losing the property in foreclosure, 24 et cetera. So, it was a business purpose for 25 liquidating the property and then carrying over into the 26 1031 exchange. 27 So, the taxpayer met the fact pattern very 28 clearly in Bolker in that the holding period that the 9 1 IRS had required, which the FTB seems to be requiring 2 here, is not required under the Bolker hearing as well. 3 The other thing I want to mention is that 4 the -- you know, late notice. I filed the -- I filed a 5 letter with the Board yesterday, which I deposited today 6 as an exhibit. The Franchise Tax Board had apparently 7 audited MDG. And MDG had reported the transaction as a 8 -- as an installment sale dating back to 2004. 9 And the Taxpayer Stringer had no idea that they 10 did this, had no idea that the FTB had audited them 11 except for some communications received in -- later in 12 2010 when, apparently, MDG was attempting to get 13 Stringer to sign something that the FTB characterizes as 14 the agreement for consulting services. 15 There was an agreement that was proposed by 16 Monterey Development Group under which Stringer would be 17 a paid consultant in developing this property, for which 18 there would be compensation paid based on a formula. 19 This agreement was never entered. 20 It's not clear to the taxpayer because of such 21 late notice -- we only got this last week -- it's not 22 clear whether Franchise Tax Board has determined that 23 Monterey Development Corp. was the only taxpayer with 24 respect to the property or that they have somehow relied 25 on this agreement or if, perhaps, Monterey Development 26 Group has, in fact, told the Franchise Tax Board that 27 this agreement was ratified. But in fact, it was not. 28 And, so, therefore, it's really not dispositive on the 10 1 outcome of this case. 2 And, furthermore, a last -- the last couple of 3 points I want to make here. The Starker case is in the 4 in the Appellant's papers, the Starker case stands for 5 the notion that a property interest is eligible for a 6 1031 exchange. 7 We have a property interest in this case here. 8 That's what the taxpayer had. That's what the taxpayer 9 gave up. The taxpayer received cash, reported income, 10 rolled over some of the money into the hands of the 11 intermediary and bought replacement property. 12 So, in winding this up, the last point I want 13 to make is that taxpayer's interest was, in fact, 14 reduced to writing in its agreement with MDG, 15 notwithstanding the fact that earlier it had had oral 16 agreements. 17 The custom and practice in this industry for 18 this type of situation is that people trust each other. 19 And the fact that -- it's a little bit surprising that 20 the Franchise Tax Board says that the taxpayer would get 21 a $3.6 million compensation, arguing that Stringer was, 22 perhaps, a broker, which would yield, at most, $300,000 23 of a commission based on the standard real estate 24 commission fees or, in fact, that the -- the value of 25 his services was $3.6 million, when, in fact, you could 26 hire a legal counsel to do the processing for -- as 27 we've noted in our papers -- approximately $132,000. 28 These sums are far, far smaller than the actual 11 1 money that was received on behalf of the taxpayer and 2 deposited into the 1031 exchange. 3 How am I doing? 4 MS. RICHMOND: You are out of time. 5 MR. HAISLET: Okay, thank you. 6 MR. STRINGER: The IRS ratified it. 7 MR. HAISLET: Okay. One -- one last point and 8 then I'll stop talking. 9 It was noted in papers submitted to the Board 10 and the FTB that the IRS has audited this transaction, 11 specifically the 1031, and, in fact, allowed the 12 taxpayer to report a 1031 exchange on the same 13 transaction. 14 Thank you for your time. 15 MR. HORTON: Thank you. 16 The Department will have ten minutes to make 17 their presentation. We ask that you commence with your 18 introduction for the record. 19 MR. GEMMINGEN: Good morning, Members of the 20 Board. I'm David Gemmingen, Tax Counsel with the 21 Franchise Tax Board. 22 With me is Ciro Immordino, who also serves as 23 Tax Counsel for Respondent. 24 First, just -- before I begin my presentation, 25 I'd like to address three misstatements by the -- 26 just -- he just mentioned three items that I feel are 27 very misleading. 28 First is the taxpayer never entered into an 12 1 agreement, binding agreement with the Cramer seller. 2 All the taxpayer ever has provided to any of us is just 3 a nonbinding, fully unexecuted letter of intent, which 4 proposes to engage in a future contract. And that is 5 found at page 4 of the exhibits. 6 And, in addition, the Bolker case is in no way 7 on point with this. Mr. Bolker negotiated independently 8 with the seller of the -- (unintelligible) property. He 9 acquired title to the property. He represented to all 10 third parties that he would sell the party (verbatim). 11 In this case Mr. Stringer never represented to 12 the Lyon Homes, to MG Capital Investors or any other 13 party -- third party out in the public -- that he had 14 any ownership interest in any contract or property 15 whatsoever. 16 Further, the Starker case, while it involved 17 property rights to receive property or cash, the Court 18 actually disqualified two of the properties in that 19 exchange 'cause they were conveyed to Mr. Starker's 20 daughter. 21 So, not only is there a right to obtain 22 property requirement, we actually have to look and see 23 whether the taxpayer received the property. In Starker 24 his daughter received two properties and the exchange 25 was disqualified as to those. 26 Here Mr. Stringer never conveyed. The property 27 was never part of the exchange. 28 The issue before your Board is -- concerns an 13 1 attempt to disguise compensation income for services 2 performed in developing other -- developing another 3 property for sale can best be illustrated by the 4 following example: We're not claiming that Mr. Stringer 5 was an agent. He did perform services in order to 6 promote the sale of property. 7 Imagine if you were to engage a real estate 8 agent to sell your home for a 6 percent commission. And 9 upon successful sale of your home, that commission was 10 paid out of the -- your sales escrow to the agent. And 11 the agent then directed his or her share of those funds 12 to buy real property and then claimed a 1031 exchange 13 based upon the sale of your property in order to attempt 14 to defer the commission income realized from the service 15 performed in selling that property -- the property that 16 the agent had no ownership interest in. That situation 17 is a parallel situation before your Board today. 18 Quite simply, the taxpayer's attempting to 19 improperly disguise compensation income for services 20 rendered after the December 2004 agreement that 21 Mr. Stringer entered into with MDG. And Appellant has 22 absolutely no basis in claiming civil or tax ownership 23 of the Modesto properties. 24 Internal Revenue Code Section 61 (a)(1), in its 25 opening definition of gross income, specifically 26 includes compensation for services, including fees, 27 commissions or similar items into income. And, so -- 28 MR. HORTON: Excludes. 14 1 MR. GEMMINGEN: -- includes them. 2 MR. HORTON: Okay. 3 MR. GEMMINGEN: So, any form of commissions or 4 fees for services is included in gross income. 5 The December 2004 agreement Appellant signed 6 with Monterey Development Group sets forth Appellant's 7 limited profits interest in any profit that MDG or an 8 affiliate might obtain by virtue of MDG's sale of any or 9 all of the Modesto properties to third parties. 10 Appellant had no right to any other property or 11 items in the event that the Modesto properties were 12 never sold or sold at a loss. 13 Appellant acknowledged that he had no right to 14 partition the properties, sell the properties, occupy 15 the properties, determine the price of sale for the 16 properties or the contracts. 17 In fact, MDG itself had not even purchased the 18 underlying Cramer-Rowe properties and the rights, 19 possession of property, rents and other rights to the 20 Modesto properties were held by third parties. 21 Appellant's December 2004 services agreement 22 specifically disclaimed any ownership interest by 23 Appellant in of the underlying real properties of the 24 Cramer and Rowe contracts or the contracts themselves 25 and stated that, "Your --" 26 "Scott Stringer's interests shall consist 27 exclusively and solely of the right to receive 28 a 16.6 percent of the difference between the 15 1 net sales price of the contracts for property 2 and the amounts expended by MDG in connection 3 with the contracts entered the property." 4 Paragraph 5 stated that, 5 "Stringer acknowledged and agreed that 6 Appellant received payment for his interest, if 7 at all, only from the proceeds from the sale of 8 the contracts or properties." 9 Appellant's specifically forbidden -- forbidden 10 from assigning or selling his profits interest. Thus he 11 didn't have any hallmarks, even as to his profits 12 interest, as to an ownership ability, which we look to 13 as ability to sell or encumber. 14 Consequently, Appellant's income in 2005 was 15 expressly limited to MDG's or an affiliate's sale of the 16 Modesto properties and not from an independent, separate 17 sale by Appellant Stringer. 18 Moreover, Appellant did not participate in the 19 signing of any grant deed or cede of consideration for 20 the Modesto properties on the sale to Lyon Homes. 21 No interest of his was acknowledged by any 22 party in the next day flip sale of the Modesto 23 properties on March 3rd to William Lyon Homes for 24 $30 million. In fact, the William Lyon Homes $30 25 million purchase agreement, specifically acknowledged by 26 MDG, that there were no other property interests other 27 than in the -- or contractual interests that potentially 28 encumbered the properties, such as for mechanic's liens, 16 1 other than the four designated consultants and 2 Mr. Stringer was none of them. 3 To put it simply, Appellant possessed from 2003 4 to 2005 absolutely no property rights that he can 5 enforce against any third party other than MDG, which 6 would be respected as real property rights. 7 He's provided nothing to any of us as to any 8 legal title, any agreements or any contracts that give 9 him a recognizable property interest in the contracts or 10 the underlying property. 11 Appellant's use of the extremely limited 12 profits interest is merely a ruse in an attempt to 13 clothe a clearly visible and intended right of 14 compensation for services to a fictitious real property 15 interest. 16 The Tax Court generally considers the following 17 factors in determining the benefits and burdens of 18 ownership as to whether a taxpayer has a property 19 interest in property, whether -- it's roughly eight 20 items: 21 Whether legal title passes. There's no 22 legal -- legal documents to substantiate or indicate 23 that legal title to the properties was ever held by 24 Appellant or -- or conveyed by him. 25 Where the parties treat -- how the parties 26 treat the transaction. Here MDG, LLC deducted its -- or 27 Capital Investors deducted its $3,600,000 payment to 28 Appellant as part of the costs of the Modesto properties 17 1 in computing its gain from the sale. And, so, its 2 understanding of the transaction was that it was a 3 deductible payment by MDC -- MDG to Appellant in return 4 for his services. 5 Whether the purchaser acquires an interest -- 6 an equity interest in the property. Here Appellant only 7 had a profits interest and if the property were sold at 8 a loss, he would not be able to get any of the funds 9 from that sale. So, if the property were purchased for 10 $10,000 and it were sold for $8,000, he would get no 11 proportionate share of that $8,000 amount. He would 12 only get an amount if the property were sold for more 13 than $10,000. 14 If a person had an equity interest or an 15 interest in the property, he should at least get his 16 proportionate share of the sales price of the property, 17 whether sold for a gain or a loss. 18 Whether the sales contract obligates the seller 19 to execute and deliver a deed. Here Appellants were not 20 involved in the conveyance of legal title to Lyon Homes 21 at all on March 3rd, 2005. And they were never 22 mentioned in any contracts. 23 And whether the purchaser is vested with the 24 right of possession. Here the terms of the November 25 2004 nominee interest agreement with MDG, LLC 26 specifically denied Appellant the right of access to or 27 possession or partition of the Modesto properties. 28 And whether the purchaser pays property taxes. 18 1 Here the property's not even owned until the day before 2 it was flipped. 3 Whether the purchaser bears risk of economic 4 loss. Here he was just using other people's money to 5 buy and sell the property. So, he had no economic risk 6 of loss. He had only had an upside potential as far as 7 the profits. And that's what he agreed to. 8 And -- and, so -- there's also a significant -- 9 significant disconnect and lack of consistency in 10 Appellant's position that he participated in MDG's 11 Capital Investors' sale of the Modesto parcels to Lyon 12 Homes. Because in November 2004 there was a sale of 13 those contracts for $18 million. And if he had actually 14 had an ownership interest in those contracts, he should 15 have recognized gain on that November sale because that 16 was a $18 million sale, significant. 17 And, so, if he feels he can participate in a 18 $30 million sale the following year from those 19 contracts, the very same contracts that was -- that were 20 sold in 2004, he should have, likewise, picked up and 21 participated in that 2004 sale from MDG LLC to MDG 22 Capital Investors. MDG Capital Investors is the 23 ultimate party that sold to Lyon Homes. 24 He cannot claim the benefits of a 2005 sale 25 while ignoring a 2004 sale that should have, likewise, 26 resulted in significant income to him, which he not only 27 failed to report, but treated as a sale of his own 28 property. 19 1 And the December 2004 agreement goes on to 2 state that Mr. Springer -- Stringer will perform 3 services after the signing date up until the time the 4 contracts or properties are sold by MDG. 5 And, so, he is still continuing to perform 6 services in return for that profits interest and right 7 to receive 16 percent of MDG's or its affiliates 8 profitable sale of the property. 9 He has no right to any other items from those 10 contracts or property other than that profit. 11 Thank you. 12 MR. HORTON: On rebuttal, please. 13 MR. STRINGER: May I say something? 14 MR. HAISLET: Yes, sure. 15 MR. STRINGER: A lot to answer there too. 16 Let me quickly explain, there's been a vast 17 mischaracterization of the relationship. 18 I'm a 25, 30-year veteran developer. I'm not a 19 broker. I'm not a consultant. We've done -- I've done 20 developments for 30 years. 21 We typically go out, tie up a property and then 22 we capitalize the project. We capitalize it a number of 23 ways -- sometimes with our own monies, sometimes with 24 institutional capital, sometimes with investor capital. 25 Once it's capitalized, we proceed to develop 26 the property through an entitlement process. It could 27 take anywhere from a year or two to -- one took nine 28 years. That's what I do as a profession. 20 1 In this case -- or in past cases -- I've always 2 been a principal with property rights interest and we've 3 always treated all profits as capital gains and we have 4 a 30-year history of that. 5 The -- in this case what occurred, the -- one 6 of the primary companies I did business with for years 7 was called New Cities Development. Their employees 8 spawned out of there and formed Monterey Development 9 Group. So, I have a long term relationship with all 10 these people. We did a lot of our deals at New Cities, 11 as my counsel said, on handshake. We're all very 12 trusting guys. We did business for years together the 13 good old-fashioned way and we respect each other. 14 When MDG spawned out of that -- that group, I 15 had identified and come up with a couple of projects, 16 first one in San Ramon and then the one we're talking 17 about today in Modesto. That's what I do. They don't 18 find projects and come to me to hire me. These are my 19 projects that I seek capitalization for. 20 So, in the case of these projects, I chose -- 21 they were a new company, I chose to try to do business 22 with them. They wanted -- they were very aggressive to 23 do business. So, I approached them to be the capital 24 partner in my project -- co-developer, capital partner. 25 What occurred, which might have been a little 26 sloppy, when they were going to capitalize Modesto, 27 which means provide all of the money to do the 28 entitlement, pay the options and that sort of thing, 21 1 they -- for their protection, they wanted to have their 2 name on the purchase and sale agreement. So, I allowed 3 that, even though the letter of intent was in my name. 4 So, we did the -- so, the conversion was from 5 the letter of intent to the purchase and sale and their 6 name was put in there with me as a co-developer 7 co-owner. That has been verified and overlooked. 8 Later, in what we call the Modesto contracts 9 nominee interests, which we did sign with Monterey 10 Development, and it clearly states in here, it says 11 that, 12 "MDG and you," which means me, "acknowledge 13 and agree that MDG holds on my behalf and for 14 my benefit, as your nominee, a 16.67 percent 15 profits interest in the contracts and the 16 underlying real property." 17 So, I do have a property interest in this deal 18 as stated right here in this agreement (indicating) or 19 certainly -- I'm am not a lawyer, but certainly the 20 intent was that I would have a property -- property 21 interest. That's what that states. 22 So, maybe not handled correctly well, but it's 23 clear by that document the intent of both parties that 24 we were co-developing this. 25 So, I did not work for them. I worked for 26 myself to develop property -- real property in the state 27 to realize profit, if possible. 28 And I would answer the question about a profits 22 1 only -- I negotiated a pretty good deal where they would 2 put the capital and were taking the risk. That's just 3 part of a negotiation sometimes. But, nonetheless, I 4 always -- always had and maintained a property interest 5 in this project. 6 The -- so, when the property was ultimately 7 sold, of course, it was only sold from the then party in 8 contract, MDG, to William Lyon because they were holding 9 my interest as nominee. 10 MR. HAISLET: All right, a couple of other 11 notes here. The -- 12 MR. STRINGER: Thank you. 13 MR. HAISLET: -- the government is focused on a 14 fee simple concept for title, whereas property --- this 15 is a property interest. It doesn't necessarily reduce 16 to fee simple. It's distinguishable, but it's a subset. 17 The State says that a real estate agent 18 capitalizes his 6 percent commission in deferred -- 19 tries to defer the income and the services as a 20 disguise. 21 In this case again it's not 6 percent, this is 22 3.6 million, which speaks for itself in terms of whether 23 or not the taxpayer had a right in this property. It 24 was a property interest that ultimately was worth 25 3.66 million. 26 The State cites several factors that the Tax 27 Court has said. And again we come back to what is legal 28 title? Well, legal title to this interest is 23 1 manifested by this -- by this document where MDG 2 acknowledges that the taxpayer will get some -- get a 3 certain portion of the proceeds from the sale. 4 Certainly the 2002-22 will allow partition 5 waiver as part of a partial interest such as this. 6 And I'm not sure where they're going with this 7 $18 million contract from 2004. One of the hallmarks of 8 a fractional interest in -- in IRC 761, which is a 9 so-called investing partnership on which this is based, 10 it's an exception to the 1031 (a)(2) (d) partnership 11 interest rule, the taxpayer and MDG accounted and 12 reported their transaction separately and distinctly in 13 their own books records, in their own manner. 14 Taxpayer Stringer did not care whether or not 15 MDG reported it as an installment sale, a loss, gain, 16 compensation, whatever, that was completely irrelevant. 17 And their reporting of it is not relevant 18 because the reporting, by virtue of 761, requires that 19 the reporting is not, in fact, unified; in fact that 20 each taxpayer makes its own report of its own income, 21 gain, deductions, et cetera. And that's, in fact, what 22 happened here. 23 And taxpayer, as a cash basis, didn't receive 24 anything until 2005, entering into the exchange at that 25 point, which was at the close of escrow when the cash 26 flowed from the Lyon purchase. 27 MS. RICHMOND: Time has expired. 28 MR. HAISLET: I just wanted to point out those 24 1 in rebuttal. 2 MR. STRINGER: When -- one last comment too 3 about the proceeds, if I may, just so it's clear? 4 The -- my proceeds did not come from MDG My 5 proceeds came from escrow as -- as co-owner would 6 receive. 7 I'm not sure if that's clear or been 8 convoluted, but when the project was -- the transaction 9 was terminated with the closing, as you have the closing 10 statements, I believe, before you, MDG received their 11 share in accordance with our nominee agreement. And I 12 received my share. 13 I did not receive it from MDG. It was 14 disbursed through escrow as co-owners should be 15 disbursed. So, if they claimed it any differently, 16 that's -- that's something they did incorrectly. But I 17 did receive it through escrow. 18 So, it validates what we're saying, that I 19 received a profit share as an owner. 20 MR. HORTON: Thank you. 21 Discussion? Member Runner. 22 MR. RUNNER: Yeah, I'm want to kind of 23 walk through again some of the -- some of the 24 documentation'cause again things -- some -- some things 25 seem to be a little less clear than I think we would 26 prefer to have them in a relationship and who -- what 27 the relationship was. But just because it's not clear 28 doesn't necessarily mean there wasn't a proper 25 1 relationship. 2 So, let me just go first to the -- to the -- to 3 the Modesto contracts nominee interest letter. 4 MR. GEMMINGEN: Okay. 5 MR. RUNNER: Again you characterize the 6 relationship as the same as a real estate agent. 7 MR. GEMMINGEN: Actually, I distinguished it. 8 I said it's not like a -- he's not a real estate agent. 9 MR. RUNNER: Okay. 10 MR. GEMMINGEN: I gave you it as an example, 11 showing how money can be used in an escrow to then be 12 directed to purchase real property as an -- as a 13 situation we're all familiar with as far as it's a 14 common event, selling a home, money's put -- 15 MR. RUNNER: Right. 16 MR. GEMMINGEN: -- in escrow. 17 MR. RUNNER: Yes. 18 MR. GEMMINGEN: That's an event we can all kind 19 of understand. That's -- 20 MR. RUNNER: Yes. 21 MR. GEMMINGEN: -- similar. People can be paid 22 for various types of services under various 23 relationships. 24 But when you receive payment for compensation 25 -- as compensation for services, no matter -- 26 MR. RUNNER: Well, I guess that's what I -- I 27 guess that's what I heard you -- because you believed 28 that this is a payment for compensation, you likened it 26 1 to a real estate agent's commission and being able to 2 move that commission to an another real estate 3 investment. 4 Is that the intent of what you were saying? 5 MR. GEMMINGEN: Yes, that's -- that's the 6 rough -- 7 MR. RUNNER: Okay, okay, okay. And again that 8 would be, obviously, not what the taxpayer believes 9 takes place. 10 They believe that they have a specific interest 11 in the property itself, right? 12 That's the core of the dispute? 13 MR. HAISLET: That's correct. 14 MR. GEMMINGEN: It goes to -- it goes to -- no, 15 there's a number of disputes. I mean, there's one is 16 like-kind property and -- 17 MR. RUNNER: Well, the like-kind property is 18 only because the -- the exchange for services versus 19 property, right? 20 MR. HAISLET: Right. 21 MR. GEMMINGEN: No, we don't believe a profits 22 interest is equivalent to -- 23 MR. RUNNER: Well, that's what I said, okay, 24 the profits interest -- 25 MR. GEMMINGEN: -- the profits interest in and 26 of itself is not equivalent to all of the rights that a 27 person has. 28 MR. RUNNER: -- but that would be because you 27 1 don't believe that he had an interest in the property? 2 MR. STRINGER: Correct. 3 MR. GEMMINGEN: That's right, he -- 4 MR. RUNNER: Okay. 5 MR. GEMMINGEN: -- can say that's -- 6 MR. RUNNER: That's what I said -- the core 7 issue is the interest in the property. 8 If he had interest in the property, all those 9 other issues kind of go away, don't they? 10 MR. GEMMINGEN: No, they still have to satisfy 11 all the steps of the transaction for a valid 1031. 12 You have to have like-kind property. You have 13 to hold it for -- 14 MR. RUNNER: If he had interest in the 15 property, doesn't it satisfy that it was like property? 16 MR. GEMMINGEN: No, it's not. 17 MR. RUNNER: And why would that be? 18 MR. GEMMINGEN: Because real property has 19 various elements, such as right to possession, right to 20 sell, right to encumber. 21 MR. RUNNER: Well, let me ask you about those. 22 Because I could be an investor in a limited partnership 23 and I don't control those issues -- the right to sell, 24 the right to do all those -- all those items, right? 25 I can be an investor -- 26 MR. GEMMINGEN: Right. 27 MR. RUNNER: -- a limited -- a limited 28 investor. I don't control any of those. 28 1 MR. GEMMINGEN: That's right, all you own is 2 the limited partnership interest. 3 MR. RUNNER: Right. 4 MR. GEMMINGEN: And by California law you don't 5 even own that property. The partnership owns that 6 property under California -- 7 MR. RUNNER: But -- 8 MR. GEMMINGEN: -- California statute. 9 MR. RUNNER: -- but my partnership could go 10 ahead and move that money then into a new exchange, 11 correct? 12 MR. GEMMINGEN: If your partnership sells the 13 property and it's been using the property for trade or 14 business purposes -- 15 MR. RUNNER: Right. 16 MR. GEMMINGEN: -- and it obtains like-kind 17 property -- 18 MR. RUNNER: Right. 19 MR. GEMMINGEN: -- and holds that property for 20 trade or business services, yes, it can. 21 MR. RUNNER: Okay. 22 MR. GEMMINGEN: But not you -- you can't -- it 23 can't have the property reconveyed directly to you. 24 It's got to be the same party participating in both legs 25 of the transaction. 26 MR. RUNNER: Okay, let me write that down. 27 So, let me ask you about in item 1 here -- or 28 item 1 in this letter, No. 1, this issue in regards to 29 1 what appears to me to extend some interest -- ownership 2 interest in the property. 3 So, you would not believe that their -- that, 4 for instance, that the issues of item 1 or the nature of 5 the first paragraph there conveys some interest of prop 6 -- ownership to the property? 7 MR. GEMMINGEN: No, I don't. I think that if 8 the property is sold at a loss, he has no right to the 9 loss at all. He is -- 10 MR. RUNNER: Does ownership of the property by 11 definition mean that you have to participate in -- in a 12 loss? 13 MR. GEMMINGEN: It's one of the indicia. 14 There's a number of indicia and times under tax 15 considerations you look at -- this occurs frequently as 16 to whether a leasee or another party is the owner of a 17 building, we run into those, who's entitled to 18 depreciation? Who's the real -- who's the real owner? 19 So, it's an owner indicia you look at. 20 MR. RUNNER: So, you can't structure a 21 contract -- you don't believe you could structure a 22 contract of ownership interest in a piece of property 23 that somehow would protect a portion of that ownership 24 because of when you got it, the nature of the contract, 25 from potential loss? 26 MR. GEMMINGEN: You mean like buying insurance? 27 MR. RUNNER: No, not like insurance, it's just 28 like how it is that you acquired it. It's -- I guess 30 1 it's the agreement you have within -- with -- the 2 agreement within the -- your interest in that property. 3 You can't structure a contract such? 4 MR. GEMMINGEN: Well, are you suggesting like a 5 as a limited partnership you decided to have the 6 partnership buy the property? That's your agreement? 7 MR. RUNNER: I'm just asking you if you can 8 structure such a contract? 9 MR. GEMMINGEN: Well, I'm not sure what type of 10 loss you're referring to. 11 MR. RUNNER: Well, you -- you're the one who 12 brought up the potential loss. There was no loss here. 13 MR. GEMMINGEN: Well, I'm just saying -- 14 MR. RUNNER: You've set that discussion up 15 there. 16 So, I'm just -- that's why I'm asking. There 17 was no loss in this exchange, correct? 18 MR. GEMMINGEN: He -- he had no ability to 19 claim any loss. 20 MR. RUNNER: There wasn't any, though? 21 MR. GEMMINGEN: That's right. 22 MR. RUNNER: Okay. 23 MR. GEMMINGEN: But if he -- if there were a 24 loss, he would have walked away with nothing. 25 He would have had -- 26 MR. RUNNER: Therefore -- therefore, in your 27 opinion, that means that he had no real property 28 interest? 31 1 MR. GEMMINGEN: He had an interest in 2 profits. 3 MR. RUNNER: No, that's not what I asked. 4 I asked in -- in your view, because he could 5 walk away -- 6 MR. GEMMINGEN: I feel that he had -- 7 MR. RUNNER: -- he had no property interest -- 8 MR. GEMMINGEN: -- no real -- 9 MR. RUNNER: -- in terms of loss? 10 MR. GEMMINGEN: -- no real estate real property 11 interest. 12 MR. RUNNER: Okay. Let me ask our folks. 13 Is -- is -- is that clear in law? I mean, in 14 order to -- is it clear that -- that in order to have 15 property interest that you have to -- how would I say 16 that -- in order to have property interest -- real 17 property interest, that you have to always be exposed to 18 potential property loss at the time of a sale. 19 Is there any contract that could be developed 20 in order to still provide you interest in a property? 21 MR. EPOLITE: You would be looking at fee 22 ownership of the property so that you would be equally 23 exposed to potential gain or loss. 24 MR. RUNNER: Is that -- is that required? In 25 ownership of property you have -- does everybody have to 26 have equal exposure to gain and loss? 27 MR. EPOLITE: We believe so because you're 28 going to be a fee owner of the property, having a real 32 1 property interest, which exposes you to potential 2 gain. 3 MR. RUNNER: So, in -- so, again your opinion 4 in order to have -- you have to have equal -- equal 5 exposure to gain and loss in order to have access -- in 6 order to have a property interest? 7 MR. EPOLITE: Correct. 8 MR. RUNNER: Let me ask you guys. 9 Obviously -- 10 MR. HAISLET: Okay. 11 MR. RUNNER: -- it's a key part of this 12 disagreement. 13 MR. HAISLET: Okay. So, let's -- let's back up 14 a little bit. 15 MR. HORTON: Let me just put this on the table, 16 maybe we ought to extract the term "equal" and continue 17 with the discussion? 18 MR. RUNNER: I'm sorry, what's the context of 19 the "equal"? 20 MR. HORTON: Just a suggestion. I'm just 21 suggesting that the term "equal" is not really a 22 condition requirement for ownership or rights. 23 MR. RUNNER: Right, right. You don't have to 24 have equal -- you don't have to have equal interest. 25 MR. HORTON: Has to be an interest, but -- 26 MR. RUNNER: An interest, right, not equal. 27 MR. HAISLET: Okay, let's -- let's -- the State 28 is starting from the wrong point here on this, the 33 1 Franchise Tax Board is -- all of its arguments are 2 conditioned on -- 3 MR. HORTON: Excuse me, let me just caution 4 everyone. We -- I have somewhat allowed the colloquy, 5 but the preference is is to have the Members ask the 6 question and then, to the best of your ability, to 7 answer the Members's question. 8 MR. RUNNER: That's what -- I've asked for a 9 response from the taxpayer based upon what they had 10 heard, right? 11 MR. STRINGER: Interest in -- 12 MR. HAISLET: Yeah, yeah. So -- so, there is 13 a -- there are many different things can be exchanged 14 under 1031. 15 Real estate does not have to be in fee simple. 16 That's not a requirement in the statute. Real estate 17 can be a lot of different things. It's said in law 18 school in property class that real estate is a bundle of 19 rights. 20 For example, in 2009 the IRS issued a private 21 letter ruling where development rights were extracted 22 from one property and attached to another property and 23 that property -- and that property interest, those 24 development rights, qualified as property within the 25 meaning of 1031 (a)(1). 26 And in that transaction, for example, there was 27 no possibility of loss except for the dollars invested. 28 In other words, the taxpayer owned the rights and if 34 1 they went worthless, then they went worthless. 2 But -- but the point I'm making is is that the 3 State starts from the wrong spot. The State -- the 4 State cites all these indicia that property must be in 5 fee simple, real property must be in fee simple. And, 6 in fact, at no point did taxpayer own fee simple, but 7 that's not relevant. 8 The relevance is was there a property interest? 9 The State cites Commission. The State cites all kinds 10 of compensation. We've -- we've answered those 11 questions. 3.67 million speaks for itself as to whether 12 there's a property interest here. 13 A real estate broker or a development 14 consultant do not get 3.6 million. 15 MR. RUNNER: At least from what I'm hearing a 16 little bit here, you're distinguishing the difference 17 between ownership and a fee simple -- 18 MR. HAISLET: Yes. 19 MR. RUNNER: -- and a property interest? 20 MR. HAISLET: That's correct, that's correct. 21 MR. RUNNER: And the arguments that we've heard 22 so far are based upon -- it seems to me from both sides 23 -- is based upon the -- the fact that they were arguing 24 a fee simple ownership? 25 MR. HAISLET: That's correct. 26 MR. RUNNER: Not a property interest? 27 MR. HAISLET: That's correct. 28 MR. STRINGER: That's not required. 35 1 If I may just add one point too about -- 2 MR. RUNNER: Real quick, 'cause I got another 3 follow-up question. 4 MR. STRINGER: Sorry. 5 MR. RUNNER: No, go ahead. 6 MR. STRINGER: Okay. I was just going to day 7 that a lot of times in negotiations, you know, a lot of 8 things happen. 9 The -- I guess that was an artful part of the 10 negotiation. I took less ownership to minimize my risk. 11 A lot of times in these deals you can negotiate any -- 12 you can negotiate -- 13 MR. RUNNER: Right. 14 MR. STRINGER: -- anything you want in the 15 deal. I could have been in a 50-50 arrangement, capital 16 and development entity. 17 In this case I took less ownership. 18 MR. RUNNER: And that's, I guess, what I'm 19 trying to get the bottom of. 20 Is this -- is the nature of this issue of 21 taking profit just basically part of the negotiation? 22 MR. STRINGER: Yes. 23 MR. RUNNER: In order to -- 24 MR. STRINGER: I took -- and minimize my risk. 25 MR. RUNNER: -- in other words, as two people 26 try to negotiate protection is that -- is that just the 27 nature of the argument? 28 MR. STRINGER: Absolutely. 36 1 MR. RUNNER: Let me go back to -- to Appeals 2 real quick and the issue. 3 The distinguish that was just made between fee 4 simple ownership and a property interest, does that -- 5 is that -- when -- when you talked about the ownership 6 aspect of equal exposure, does that change that at all? 7 Or give you greater -- great -- give greater 8 flexibility? 9 MR. EPOLITE: Under the -- under 1031 there are 10 interests other than real property interests that can 11 be -- that can be exchanged. 12 So, in a 1031 analysis you are looking more -- 13 looking at beyond just real property interests. 14 MR. RUNNER: And -- which can be fee simple or 15 other kinds of interest in the property? 16 MR. EPOLITE: Correct. 17 MR. RUNNER: Okay, okay. And that's what you 18 all are arguing, we had a different kind of interest in 19 the property? 20 MR. HAISLET: Yes. 21 MR. RUNNER: Okay. Let me ask this, because 22 again to clarify for me, 'cause this -- what I don't 23 quite understand in -- for the taxpayer's issue here, is 24 what value did you bring in -- when the -- you know, you 25 usually, when you have an interest and you are getting 26 the property, you have brought something into that. 27 You -- you know, you wrote a check, now you own part of 28 the property. 37 1 What interest did you have going into the -- 2 into this deal -- 3 MR. STRINGER: The -- 4 MR. RUNNER: -- that -- that -- that -- that 5 gave you the ability to have an interest in the 6 property? 7 MR. HAISLET: That the original contract with 8 Cramer in May of '03 and brought Cramer and said to 9 MDG, 10 "Go get a contract with them. I'm giving 11 you my interest." 12 That letter of intent, nonbinding letter of 13 intent, that was the inception of the arrangement 14 between Stringer and Cramer. And that matured into a 15 contract with MDG and Cramer for the purchase and sale 16 of that property, which was ultimately liquidated to 17 Lyon in two years hence. 18 MR. STRINGER: I would just add that yet the 19 value I brought -- 20 MR. RUNNER: Yes. 21 MR. STRINGER: -- was the identification of a 22 development opportunity. 23 They're out there everywhere today. Somebody's 24 got to find them. But my job, what I do for a living in 25 development, is identify an opportunity and then create 26 the potential for it to turn into a good investment and 27 make capital. 28 So, by identifying the opportunity, that's what 38 1 I brought to the group. And that's why I can go seek -- 2 MR. RUNNER: So, you brought -- okay, so -- 3 MR. STRINGER: -- I can bring capital in now 4 that I have a property under contract. 5 We did -- I won't bore you, but this is -- this 6 is a business plan for that property. 7 MR. RUNNER: Okay. So, what -- instead of 8 bringing capital in, instead of -- instead of buying in 9 and being -- bringing capital into the deal, you -- you 10 had -- you brought knowledge of the property into the 11 deal? 12 MR. STRINGER: And the ability to develop it. 13 MR. RUNNER: And the ability to develop it. 14 MR. HAISLET: And the ability to contract it. 15 That was the important part. 16 Because the con -- the original contract 17 rights, which were to buy the property -- 18 MR. RUNNER: Right. 19 MR. HAISLET: -- that matured into this 20 contract from July of -- 21 MR. RUNNER: Who had the original contract 22 rights? 23 MR. HAISLET: -- Stringer. 24 MR. RUNNER: Okay. So, you -- okay, so, you 25 actually tied the property up? 26 MR. STRINGER: Yes, yes. 27 MR. RUNNER: So, you actually tied the property 28 up and identified it and that's what gave you then value 39 1 going into the deal? 2 MR. STRINGER: Correct. 3 MR. HAISLET: Yes. 4 MR. RUNNER: Okay, thank you. 5 MR. HORTON: Member Yee. 6 MS. YEE: Thank you, Mr. Chairman. 7 I wanted to just delve a little bit into the 8 question of how the IRS treated this exchange, if I 9 could. 10 And I think through a Board Member inquiry we 11 were able to at least discern that the IRS did request 12 information specific to the exchange. 13 And just from the Franchise Tax Board, what was 14 it that struck you about this, that gave you pause to 15 pursue it given that the IRS did make no change? 16 MR. GEMMINGEN: Well, I think we're assuming 17 IRS action. Because all we know is the taxpayer never 18 responded to the initial IRS request -- request for 19 documents. 20 As -- I have given you a second request in the 21 exhibits. There were never any statements in either 22 taxpayer's counsel or the documents that we have that 23 address at all -- give any affirmation as to any 24 recognition or the propriety of the 1031 transaction. 25 The only IRS documentation are two separate 26 requests for information concerning the establishment of 27 Mr. Stringer's ownership rights and participation in the 28 transaction. So, the IRS did not affirmatively approve 40 1 this transaction. 2 So, what gave us pause was that in reviewing 3 the other side -- another party to this transaction, the 4 determination of its income and the deduction of 5 expenses that it paid to Mr. Stringer and that deduction 6 would only occur in the compensatory fashion because if 7 he were truly an independent acting party, MDG would 8 have never deducted the amounts paid to Mr. Stringer as 9 part of the cost of the sale of the Modesto properties 10 in determining its profit. 11 And, so, the actions and activities of the 12 parties contemporaneous to the time of this sale are 13 very important in looking at the parties' intent. And 14 the parties' intent at this time is one -- the only 15 visible one, because they have absolutely no documents 16 here that show they actually tied up the property -- the 17 only document there is MDG's 2000 -- deduction of the 18 payment, 3,600,000 to Mr. Stringer, which that gave rise 19 to our review of Mr. Stringer's return then after the 20 IRS. 21 So, we found Mr. Stringer's return on our own 22 investigation based upon other parties of the 23 transaction. 24 MS. YEE: Okay. Mr. Haislet? 25 MR. HAISLET: On the last point in particular, 26 I have -- was handed me earlier today a 2004 tax return 27 from Monterey Development Group showing a sale dated 28 11-8 -- 08-04 in which the sale price was $18 million 41 1 and the cost or basis was $16,000. 2 So, this -- this reflects to me that, in fact, 3 Monterey Development Group did not deduct Stringer's -- 4 Stringer's money, that they -- 5 MR. GEMMINGEN: Actually, that is on page 5, 6 though, of that example. 7 MR. HAISLET: Well, all I see is the tax return 8 and I don't see any -- 9 MR. GEMMINGEN: That's a different entity that 10 sold the property, though. It had -- Capital Investors 11 sold it. 12 MR. HORTON: Sir, sir. 13 MR. GEMMINGEN: I'm sorry. Excuse me. 14 MR. HAISLET: Okay, all right. 15 MS. YEE: For clarification -- 16 MR. HAISLET: Again I come back to a couple of 17 points we made in our rebuttal, which was the fact that 18 Stringer was paid separately and independently as 19 reflected in the closing statement in March of 2005. 20 And the second thing was that Stringer's not 21 responsible if -- if MDG, whether it's an LLC or 22 corporation or whatever affiliated group, if they decide 23 to take a deduction and the Franchise Tax Board decides 24 to either allow it or not allow it, that's not 25 Stringer's problem. That's -- that's a matter between 26 the FTB and MDG. 27 Stringer independently has -- has provided, 28 within the rules under IRC 761, reported his transaction 42 1 completely independently of MDG. So, that -- I mean 2 that -- that speaks for itself. That really just speaks 3 for itself. 4 MS. YEE: Okay. 5 MR. STRINGER: We don't know how they accounted 6 for me. This has opened up a lot of questions on our 7 side as well. 8 But if I'm interpreting correctly, they 9 reference that they deducted our cost. They didn't 10 deduct us at all. As the escrow statement shows, I was 11 paid through escrow. There is no deduction. They 12 received their proceeds; I received mine. 13 If they made any attempt to deduct me later on, 14 we're not privy to their tax returns and what they did. 15 I know they had an audit. 16 There's further questions been raised by -- it 17 hasn't come up today, if I may raise it -- they 18 produced -- they produced in evidence an agreement for 19 consulting services, which is floating around. 20 That document was never signed. I don't even 21 know -- the irony of this is that we closed -- I closed 22 a deal with MDG as co- -- co-venturer in '04 for 23 San Ramon and '05 for Modesto. 24 They produced that agreement for consulting 25 services in '07. Sent it to me under their audit and 26 asked me to sign it so they could clarify who I was. 27 And I refused to sign it. And we have 28 presented documentation to you. And they followed up 43 1 and said, 2 "Fine, we understand why you won't sign 3 it. But can you -- can you at least send us 4 a letter for our auditors that identified that 5 you're not an employee?" 6 So, I don't know what they were up to, I 7 honestly don't. But that's just part of what we're 8 finding out on our side here in the last few days. 9 We don't know how they accounted for us. But 10 as my counsel says, it's really clear when you look at 11 the closing statement, X money was made. MDG got their 12 share right from escrow. Stringer got my share right 13 from escrow. 14 So, we each will then account for our proceeds 15 under tax guidelines. 16 MS. YEE: Yeah, I -- 17 MR. STRINGER: So, what they did with us -- 18 they shouldn't have done anything. 19 They're not -- they don't account for me. 20 MS. YEE: Okay. 21 MR. STRINGER: I hope that clears it -- 22 MR. HAISLET: There's one other aspect. 23 MS. YEE: Hold on, let me -- just hold off on 24 that one second. 25 MR. HAISLET: Thank you. 26 MS. YEE: I'm trying to -- 27 MR. HAISLET: Yeah. 28 MS. YEE: -- just understand how to, in my own 44 1 mind, characterize the proceeds that you received. 2 MR. HAISLET: Okay. 3 MS. YEE: And, actually, there were a lot of 4 documents that I found kind of spotty -- either without 5 signature or not really clear about who the sellers 6 were. So, I'm not even quite down that road yet. 7 But from the closing statement -- and this is 8 one that we've made a lot of reference to in terms of 9 really identifying what was going to be paid out -- and 10 I guess I hear that this is another document that 11 doesn't indicate that you were a selling party. 12 But is there -- this is probably a question to 13 Appeals -- is there a distinction to be made between an 14 ownership interest and a profits interest? 15 'Cause it's -- with respect to how -- 16 MR. JOHNSON: Okay. Sorry, and just based on 17 the closing statement information or -- 18 MS. YEE: Yeah. 19 MR. JOHNSON: -- just overall? 20 MS. YEE: Overall. 21 MR. JOHNSON: Okay. For the property interest 22 generally there are certain rights that you have. If 23 it's a right in the real property, there are, of course, 24 as they said, there's mining rights and easements and 25 such like that that you can have. 26 When it came to the property that was sold in 27 this instance, it was purchased March 2nd; sold 28 March 3rd, if -- I believe I have those dates right -- 45 1 to Lyon Homes. 2 And the property interests in those Cramer 3 properties -- Modesto properties were gained on 4 March 2nd based on, you know, title passing. And then 5 they're sold on March 3rd. 6 At the time of -- between March 2nd and 7 March 3rd, it appears that the property itself was held 8 by MDG Capital Investors and then sold by MDG Capital 9 Investors. 10 If we look at the certain documents and see 11 what other encumbrances and rights there were, it seems 12 that Stringer's interest is only represented on the MDG 13 to Stringer document nominee interest letter only that 14 explained what their rights are -- stating that they 15 exclusive rights to profit interest only. 16 MR. HAISLET: With the sale? 17 MR. JOHNSON: If profit interests are a 18 property right, they wouldn't be a real property right 19 in that property. 20 When we're looking at a 1031 transaction, we 21 want to make sure -- and this may be a later question -- 22 to look at like-kind property being exchanged. 23 And the property that they received appeared to 24 be real property that they received in exchange for 25 whatever interest that they had that they gave up. So, 26 they should have real property to give up to get that 27 real property as a like-kind exchange. 28 MR. STRINGER: Confusing, isn't it? 46 1 MS. MANDEL: Trying to hold on to my questions. 2 MR. STRINGER: Just want to -- may I address it 3 real quick? 4 MS. YEE: Please, briefly. 5 MR. STRINGER: Okay, thank you. 6 MS. YEE: Okay. I guess on the -- okay, this 7 nominee interest letter -- even though in the letter, or 8 I guess there is some debate about this -- that the 9 letter provides that MDG and the Stringers -- or the 10 Stringers had ownership interest in the Modesto 11 property, I guess that's -- 12 MR. STRINGER: They stated we did. 13 MS. YEE: -- okay. And it also included, I 14 guess, an agreement in principle, Mr. Stringer, that you 15 also held a profits only interest as tenants in common? 16 MR. STRINGER: Yes. 17 MS. YEE: Correct? 18 MR. STRINGER: Yes. 19 MS. YEE: Okay. And this is where I'm really 20 trying to understand -- you had no rights to possession 21 or occupancy of the property, right? 22 MR. STRINGER: I'm not quite sure what that 23 legally is supposed to mean. 24 Ham -- I shared the same rights MDG had. We 25 did it together. So -- but in contract name, MDG 26 controlled that right. But we did everything in unison. 27 So, if we were going to make any business 28 decision with the property, it was done jointly because 47 1 we were co-developers. You know, a lot of -- a lot of 2 extraneous stuff in that document that some lawyers 3 threw in, but the heart and - intent of it was that they 4 were holding my interest. 5 I think I even submitted a -- in our stuff, a 6 memo from Mr. Merschel, one of the principals of 7 MDG, that clearly states that he's -- that I have equity 8 in the project. 9 There's an e-mail, I believe, in your packet up 10 there. So, further what I think we were trying to do 11 today for your benefit was be sure to make sure what the 12 intent of the deal was. 13 However sloppily we did it, the intent was that 14 we were co- -- co-developers, co-owners and that that 15 nominee document, by definition that's what a nominee 16 is, they're holding somebody's interest. 17 And it states in there my interest in the -- in 18 the underlying property. I mean, that's as clear as I 19 can -- when I read it -- and I'm not a lawyer -- that's 20 what I was relying on, that I had a co -- a continued 21 interest in the property which would uphold my capital 22 gains interest in doing this project. 23 That's how we set up our business plan. 24 MS. YEE: Okay. And part of the reason I asked 25 the question of Appeals was that the letter contemplates 26 that you may not receive any compensation from the sale 27 of the property but that you would receive payment only 28 from the proceeds of the sale, so -- 48 1 MR. STRINGER: Correct. And if the project 2 failed, if I brought -- if I identified and brought in a 3 bad project, then the risk of my time and all the -- my 4 reputation and my time would be at risk and I'd make 5 nothing. So, that is a loss. 6 MS. YEE: Okay. I want to go back to the 7 Franchise Tax Board because the statement was made about 8 kind of equal gain, equal pain. 9 I mean, to have -- to be an owner, you would 10 have to -- 11 MR. GEMMINGEN: That's one of the hallmarks of 12 equity in a project. And he began the discussion 13 earlier this afternoon -- or this morning, by stating 14 he's rather proud of the deal that he -- he negotiated. 15 He said he had no equity interest. A moment 16 ago he just said he had equity interest. This is a very 17 shifting field that's he's presenting to us. 18 And, so, as to the right to participate in the 19 sale of land, that's one of the general rights that one 20 would have is whatever comes -- a third party pays for 21 it, if you have a proportionate interest -- and we're 22 not even sure what he owns, 25 percent or 16 percent -- 23 he should get 16 percent of the amount realized to 24 determine his gain on the sale of that contract. 25 He should have a basis and a -- and then when 26 that property is sold, he should have an amount 27 realized. 28 Here by virtue of his -- his contract, he has 49 1 no amount realized. He's only participating in another 2 party's gain. 3 MR. IMMORDINO: One way of looking at the issue 4 of whether someone has an interest in real property, is 5 in order for the new owner of that property to fully own 6 the property -- either -- that interest in real property 7 has to be transferred, like the rights to develop the 8 land or the rights to possess or occupy the land or that 9 interest in real property has to be terminated, such as 10 an easement. 11 In this case Mr. Stringer had no rights in the 12 property which had to be transferred or terminated in 13 order for the new owner to own the new property. 14 Instead if -- if MDG Capital had not paid 15 Mr. Stringer when the sale happened, the new owner would 16 have owned that land unencumbered and Mr. Stringer would 17 have had to have sued MDG Capital to get his payment. 18 And, so, this profits interest is purely just a 19 timing as to when he gets paid. He gets paid when 20 the -- when the property is sold and based on the work 21 he did. He gets the -- the -- he gets compensation 22 based on the value of the property. 23 That's why we use the example of a commission 24 for a broker, same -- the broker works the same way. If 25 the broker doesn't get paid when the land gets sold, the 26 property gets sold, they don't have rights against the 27 new owner. 28 The new owner of the property didn't have to 50 1 have any of Mr. Stringer's rights transferred or 2 terminated in order to fully own that property. 3 MS. YEE: Okay. Mr. Stringer, did you ever 4 have any ownership interest in MDG that was registered 5 or formalized in any way? 6 MR. STRINGER: The nominee document, they hold 7 my interest. 8 So, when MDG sold to Lyon, they sold my 9 interest with theirs. 10 MS. YEE: Okay. 11 MR. HAISLET: So, the answer to your question 12 is no, no, he wasn't part of MDG. 13 MR. STRINGER: No, I'm sorry. 14 MR. HAISLET: You spoke to the problem. 15 MS. YEE: No, I understand the nominee letter, 16 okay. 17 MR. STRINGER: Okay, thank you. 18 MS. YEE: Okay, thank you. 19 MR. HORTON: Member Mandel. 20 MS. MANDEL: Thank you. And I apologize if I 21 go back over prior ground, but it may be the way I've 22 retained the questions in my head. 23 We have this consulting agreement document that 24 the Franchise Tax Board seems to be relying pretty 25 heavily on. It looks like it's for a property in 26 San Ramon, not for property in Modesto. And this is 27 Modesto property, right? 28 MR. GEMMINGEN: Actually, we're not relying on 51 1 it -- 2 MS. MANDEL: Well -- 3 MR. GEMMINGEN: -- on it very much. 4 But, I mean, it's -- 5 MS. MANDEL: -- just -- 6 MS. MANDEL: -- stop, wait a second. 7 My understanding of it was that it was put in 8 there to support your argument that he was a -- 9 Mr. Stringer was a consultant or was being paid for his 10 services. 11 And I'm just -- I mean, I am just wondering why 12 we were given a San Ramon and -- I mean, if it's -- if 13 you're not relying on it then I don't know -- 14 MR. GEMMIGEN: It was put there -- 15 MS. MANDEL: -- why I have it. 16 MR. GEMMINGEN: -- it was put there for two 17 reasons. 18 One is to the question of why FTB initiated its 19 audit of Mr. Stringer. It's one of those reasons, 20 'cause we received a request last week for IRS 21 documentation. 22 MS. MANDEL: Okay. So, let me -- 23 MR. GEMMINGEN: And also -- 24 MS. MANDEL: -- stop you right there. 25 So, so, you -- so, the consulting agreement was 26 a document that you received during the course of your 27 audit of another taxpayer? 28 MR. GEMMINGEN: Yes. 52 1 MS. MANDEL: Okay. 2 MR. GEMMINGEN: And then the second item was it 3 addresses the 16 percent profits percentage. 4 MS. MANDEL: For San Ramon. 5 MR. GEMMINGEN: For San Ramon, but it's an 6 amount that is also reflected -- 7 MS. MANDEL: Same amount. 8 MR. GEMMINGEN: -- same amount and for the same 9 parties and show -- so -- 10 MS. MANDEL: So, you're using it as suggestive 11 that they probably had the same thing for Modesto? 12 MR. GEMMINGEN: A potential. 13 MS. MANDEL: Potential. 14 MR. GEMMINGEN: Because they -- 15 MS. MANDEL: I understand, I'm sorry, I'm 16 trying to move it along. 17 And -- and what they brought today was -- or I 18 guess it got sent yesterday, but we got it today -- was 19 a memo from Mr. Stringer to Mr. Merschel, June 7th, 20 2007, objecting to the consulting services agreement and 21 that e-mail, also in 2007 on the 18th of July -- so, 11 22 days later -- from someone at Monterey Development Group 23 copying Merschel but sending to Mr. Stringer, saying, "I 24 understand you'd rather not sign it." 25 So, and explaining that -- that they were just 26 trying to establish in their audit that Mr. Stringer was 27 not an employee. 28 So, I'm a little confused about -- and he said 53 1 today he never signed it. 2 So, I'm a little bit confused about whether I 3 should be doing anything with the consulting agreement 4 or not in light of this information and his testimony 5 whether that further explicates for you the consulting 6 agreement. 7 That's kind of the question. 8 MR. GEMMINGEN: Well, it's not dispositive of 9 the issues here as to whether a profits interest is 10 equal to -- 11 MS. MANDEL: Okay, I haven't got to that part 12 yet. 13 MR. GEMMINGEN: -- okay, I'm sorry. 14 MS. MANDEL: But -- 15 MR. GEMMINGEN: But as to -- it shows -- it 16 doesn't have to be whether a party's an employee or not 17 in order to receive compensation. 18 MS. MANDEL: Okay. 19 MR. GEMMINGEN: People can receive compensation 20 for a variety of -- 21 MS. MANDEL: Right. 22 MR. GEMMINGEN: -- a variety of services 23 performed. 24 MS. MANDEL: Okay. So, now let me -- let me 25 move off that'cause that's kind of where you are. 26 Uhmm, can -- can somebody hold property for 27 someone else as a nominee? 28 I understand there's a presumption, the deed 54 1 presumption is the person who's on the deeds, the guy 2 who owns it, but can somebody hold as a nominee for 3 someone else? 4 MR. GEMMINGEN: Yes. 5 MS. MANDEL: Okay. The crux, a little bit, 6 seems to be whether Mr. Stringer held a property 7 interest for 1031 purposes. 8 And I understand you think, even so, that the 9 back end is not the same as the front end and, 10 therefore, he flunks 1031. But let's not go there yet. 11 So, what Mr. Stringer's been describing, if I 12 could put a word on it, is he's describing -- it's a -- 13 he keeps calling it, you know, co-development, 14 co-developers, it sounds like a joint venture without an 15 actual joint venture or partnership agreement. It's 16 sort of the nominee letter. 17 But it's -- it kind of sounds like a joint 18 venture where you're going -- MDG is holding the 19 physical real property, the way they've set it up. 20 Mr. Stringer has brought the opportunity, said, "Hey, I 21 found this thing. We could do this deal." He brought 22 the opportunity and he's -- he's putting in his 23 expertise. He's -- he's the guy who knows how to get it 24 done. 25 And what he's negotiated and what they talk 26 about in one of these documents, maybe it was one of the 27 ones from today, was for your sweat equity, you're going 28 to get the 16 -- yeah, I know, let me finish, 16 -- I'm 55 1 just trying to set it up -- 2 MR. GEMMINGEN: Yeah. 3 MS. MANDEL: -- that 16.67. 4 So, it sounds like, you know, we do have the 5 nominee issue and whether, you know, they really were 6 holding it as a nominee, which would somehow give them 7 rights through to the property -- but this profits 8 interest, which is, you know, the -- the -- it almost 9 looks like what they're saying is that the capital that 10 Mr. Stringer has invested in this deal is what he knows 11 inside his head and being able to get it done. 12 And that the -- that MDG put hard money in and 13 took -- took the deed title to the property -- probably 14 'cause they put hard money in. 15 MR. STRINGER: Correct. 16 MS. MANDEL: And that -- that when the whole 17 thing is set up so that somebody like Lyon Homes can 18 come in and, you know, build tract houses -- I assume 19 that's what they were going to do with it -- that -- 20 that Mr. Stringer -- his return on his capital is going 21 to come, what he's negotiated is his return on his 22 capital is going to come if there's profits. 23 Now presumably he totally expected there was 24 profits. That's their hope and dream, right? But if 25 there's not profits, his losses -- and I know you would 26 say it probably this way -- but his losses, he -- he 27 gets no return on the capital he invested, which is his 28 knowledge and his sweat and whatever he's doing down at 56 1 City Hall to get the entitlements -- that's his sort of 2 profits interest. 3 For 1031 purposes, we all -- I understand, you 4 know, I own the dirt, I exchange it, I get some other 5 dirt. But could that type of interest in a joint 6 venture be a property interest that's exchangeable for 7 1031 purposes? 8 Just -- if we're thinking about the front end, 9 I know you think, well, but he got actual dirt on the 10 back end, but on the front end -- 11 MR. GEMMINGEN: I would say the answer to your 12 question is no because he only has a right to cash -- 13 solely cash. That's all that profits interest 14 represents is cash. No -- that's it. 15 MR. IMMORDINO: The IRS has never ruled that a 16 profits interest -- 17 MS. MANDEL: Thank you. I wanted to ask you, 18 yeah, 'cause I know you. 19 MR. IMMORDINO: -- the IRS has not ruled that 20 the -- that their profits interest equals an interest in 21 real estate. 22 Like Mr. Haislet said earlier, the development 23 rights, there's certain things that constitute, you 24 know, real property. 25 The IRS has ruled these are real property. 26 MS. MANDEL: Right. And those are things that 27 are real property -- real property -- qua real property 28 under State law, mining rights -- 57 1 MR. IMMORDINO: Yeah, but a profits interest, 2 they've never found that to be -- 3 MS. MANDEL: But is there -- 4 MR. IMMORDINO: -- real property. 5 MS. MANDEL: Okay. And is there -- and -- but 6 I sort of heard that it -- does it have to be real 7 property? 8 It could be some other kind of property 9 interest? 10 MR. IMMORDINO: It has to be real property. 11 So, the -- 12 MS. MANDEL: So, 1031 is only real property, no 13 longer -- 14 MR. IMMORDINO: In this exchange. 15 MR. GEMMINGEN: In this exchange. 16 MS. MANDEL: Okay, okay. But I'm saying, let's 17 leave out the back end where he got actual physical 18 dirt, real property. 19 MR. GEMMINGEN: Well, you can exchange trucks, 20 if that's what you're asking. 21 MS. MANDEL: Yeah, okay. So -- so, would this 22 type of interest -- you're saying this type of interest 23 has never been -- IRS has never ruled that this type of 24 interest is a real property interest? 25 MR. IMMORDINO: Yeah, you know, what the 26 taxpayer had was a right to receive cash. When the sale 27 took place, he had the right to receive cash. 28 He could never receive anything else. He 58 1 couldn't receive land. He couldn't, you know, receive, 2 you know, the right to occupy. He could only receive 3 cash at the time of sale. 4 And, so, what would he exchange -- cash for 5 cash? You can't do like-kind exchanges of cash. 6 MS. MANDEL: Has there been any case where -- 7 does your case hinge on this nominee aspect? 8 MR. HAISLET: Well, I would agree that profits 9 interest simply is not real estate, but we have real 10 estate here. 11 MS. MANDEL: So, it hinges on the nominee 12 aspect? 13 MR. HAISLET: Yeah, right, right. 14 MS. MANDEL: And then I saw the 1031 -- there's 15 a 1031 agreement in all these papers somewhere, but that 16 referenced a 25 percent. 17 MR. HAISLET: That was a typo. That was a mere 18 clerical error. 19 MS. MANDEL: I'm not sure where I'm -- if I 20 have a next question yet, so -- 21 MR. HORTON: Member Steel. 22 MS. STEEL: If -- I didn't hear you said and I 23 didn't hear that, I'm sorry -- but I want to ask that -- 24 Member Yee asked that IRS audit that IRS never allowed 25 or you never really saw the papers. 26 I didn't hear from the taxpayer's side. 27 MR. STRINGER: Thank you for asking. 28 MR. HAISLET: Yeah, thanks. We were hoping we 59 1 would get to that. 2 The IRS auditor -- every time the IRS auditor, 3 which would come to my office because I represent people 4 in audits, we were always afraid of her. She was very 5 thorough. And, so -- 6 MS. STEEL: I'm scared of all the tax agencies' 7 auditors. 8 MR. HAISLET: Well, she -- 9 MS. STEEL: And it's not just auditors. 10 MR. HAISLET: -- she was really, really, 11 really, really thorough and aggressive anyway. 12 So, we had a document that was submitted -- 13 this was sent last week, Friday the 7th, I believe -- 14 and included in it was my letter explaining that the 15 IRS, under its request No. 4 dated 3-4-08, had asked 16 for and discussed the deferred gain in the amount of 17 $3 million in like-kind, et cetera, et cetera, 18 et cetera. 19 The -- how this works is that the taxpayer 20 files, of course, form 8824, claims the exchange and 21 then that's subject to the audit. She's asked for all 22 these documents -- documents to verify the basis of the 23 properties in the transaction, escrow documents, 24 substantiate the property transferred was used in the 25 trade or business or held or investment -- that was the 26 Modesto property -- exchange contract establishing the 27 intent -- we showed that, that's the exchange agreement 28 that had the erroneous 25 percent on it -- evidence that 60 1 the like-kind property received is to be used in a trade 2 or business or held for investment -- that's the Fresno 3 Walgreen's property that Mr. Stringer bought -- and then 4 documents to verify your ownership of the properties 5 within this transaction. 6 Now in my experience with this auditor, if 7 these had not been delivered to this auditor, she would 8 have denied the exchange because that's how they do it. 9 If you can't -- if you don't demonstrate it or you don't 10 address their questions as listed here, then they say, 11 no -- no benefit and they make an adjustment in their 12 audit report, the revenue agent report. 13 MS. STEEL: So, what you are saying is they 14 allowed? 15 MR. HAISLET: Correct. 16 MS. STEEL: And you never really look at those 17 papers? 18 MR. IMMORDINO: Well, you know, we did, yeah. 19 The -- the IRS audit was -- was very superficial. They 20 asked for general documents and then it looked like 21 there was no follow-up. 22 MS. STEEL: Okay. They -- 23 MR. IMMORDINO: You know, my -- 24 MR. GEMMINGEN: I want to address your 25 question, if I could. 26 Yes, we did look at the IRS requests and we 27 asked the taxpayer for what the -- he received from the 28 IRS, as well as provided. 61 1 And I provided your office with all of the 2 documents that we received from the IRS. So, we did 3 review and -- but we found no analysis by the IRS at all 4 of the actual transaction itself and, so, we continued 5 to look into the transaction. There was no analysis by 6 the IRS of this transaction for us to review. 7 MR. IMMORDINO: Also, you know -- 8 MS. STEEL: I'm hearing from the same documents 9 and I'm hearing two different answers here. 10 So, according to what I read, I thought IRS 11 allowed, but what you are saying is for specific this 12 property, 1031 exchange was not allowed. It was not 13 mentioned on the (unintelligible) paper is what you are 14 saying? 15 MR. GEMMINGEN: Well, it was not adjusted. I 16 mean, since it was allowed as far as the deferral was -- 17 was allowed to occur on his federal return, but there's 18 no affirmative statements of an IRS review discussing 19 the facts of the transaction, the law. 20 And, so, as far as an analysis by the IRS of 21 the actual transaction, that did not occur. 22 MS. STEEL: Okay. 23 MR. IMMORDINO: It looks like the IRS did not 24 audit, you know, this very deeply. 25 And the reason I mention this is that the 26 escrow statement for the sale, it lists, you know, the 27 money going to Mr. -- Mr. Stringer as going to a 28 qualified intermediary. 62 1 And if a tax agency is not going to do a very 2 deep audit, then it'll see that the money from the sale 3 went to the QI and they're not going to question whether 4 that taxpayer -- 5 MS. STEEL: So, what you're saying is -- 6 MR. IMMORDINO: -- had an ownership interest. 7 MS. STEEL: -- you know what, these attorneys 8 that, you know, you just keep talking and talking. 9 So, what you are saying is IRS did the audit 10 but they didn't do thoroughly. So, what you -- you -- 11 your interpretation of the ruling is not that they 12 didn't put this property into the account. 13 So, you are -- you are saying is they are 14 really not did the right thorough audit for this, but 15 they are -- they allowed it? 16 MR. IMMORDINO: No -- 17 MS. STEEL: That's what you are saying? 18 MR. IMMORDINO: -- well, I think, you know, the 19 IRS auditors -- 20 MS. STEEL: Can you just give me a yes and no? 21 MR. IMMORDINO: -- made a judgment call. 22 MS. STEEL: Just don't go around and just yes 23 or no. 24 MR. IMMORDINO: The auditors have to decided if 25 they want more information of if they're satisfied with 26 what they have. 27 The -- this audit indicates the IRS did not 28 look at the issue of whether the taxpayer owned the 63 1 property. 2 It looks like they looked at the very 3 superficial documents. The escrow statement shows that. 4 MS. STEEL: But during the audit that they 5 really never went after it -- this property exchange, 6 1031 exchange? 7 MR. IMMORDINO: They did not. It looks like 8 they did not -- 9 MS. STEEL: They -- 10 MR. IMMORDINO: -- review it, you know. They 11 reviewed it very superficially and moved on. 12 MS. STEEL: Okay. Then I just -- one moment, 13 just one simple question that, you know, you were 14 talking about that this taxpayer didn't have control 15 over selling or anything about this property. That's 16 why he's not allowed. That's one of the reasons. 17 But it said the limited partnership kind of 18 things that then you don't have any control over the, 19 you know, selling properties and, you know, you really 20 don't have day-to-day -- 21 MR. IMMORDINO: He has a good point, you know. 22 If you're in a limited partnership you have, you know, 23 some rights, not others. 24 If you want to do an exchange, the entire 25 partnership must do an exchange. The individual 26 partners cannot do an exchange. 27 MS. STEEL: Right, right. Oh, I see. So, what 28 you are saying is that whole property -- 64 1 MR. IMMORDINO: Yeah. 2 MS. STEEL: -- that whoever owns it, everybody 3 has to do the same -- 4 MR. IMMORDINO: That's right. 5 MS. STEEL: -- exchange? 6 MR. GEMMINGEN: Well, the partnership would be 7 the party that would do -- conduct the exchange. It 8 would be the partner -- 9 MS. STEEL: But this is not the partnership, 10 though? 11 MR. GEMMINGEN: There specifically is not a 12 partnership. 13 The signee agreement says, 14 "Nothing contained in this agreement 15 shall be deemed to constitute you and 16 MDG as partners or joint venturers. You 17 and MDG expressly disclaim any relationship." 18 So, they're saying they're not a partnership. 19 MS. STEEL: And then one more question is you 20 keep saying like it was commission or something that you 21 got out of it because it was just right to -- right, but 22 it's not like a property rights, interest of a property. 23 So, when you sell the property and then when 24 you get the money directly from escrow company, it's not 25 like a commission they got, but they got the portion, 26 16.67 percent, from the total amount. 27 How you going to explain that? 28 MR. GEMMINGEN: They only -- they did not get 65 1 -- from the total amount, they only received the 16 2 percent from the profits, not from the $30 million. He 3 did not receive 16 percent of $30 million. 4 MR. IMMORDINO: That's the exact same way that 5 a real estate broker gets paid their commission. 6 MR. GEMMINGEN: No, it's not. 7 MR. STRINGER: No, it's not, it's different. 8 MR. GEMMINGEN: But did he not receive from the 9 total amount. 10 MR. STRINGER: I received from the profits, 11 which is we deduct all the expenses. 12 MR. HORTON: Sir. 13 MR. STRINGER: Okay. 14 MR. HORTON: Ms. Steel? Member Runner? 15 MR. RUNNER: Just to clarify a couple of 16 things. 17 I'm unclear exactly what documents did the IRS 18 have that they reviewed? 19 MR. HAISLET: Let me read. 20 MR. RUNNER: Well, let me be more specific. 21 Did they have the documents of this 22 transaction? 23 MR. STRINGER: Yes. 24 MR. RUNNER: And they reviewed the documents -- 25 MR. STRINGER: Yes. 26 MR. RUNNER: -- of this transaction. 27 Okay. Let me go just back then to FTB. If -- 28 if -- I'm trying to think. If, indeed, the IRS reviewed 66 1 his documents, they reviewed documents and they don't 2 ask any questions, doesn't that mean they were 3 satisfied? 4 MR. STRINGER: Yes. 5 MR. GEMMINGEN: We don't -- we don't know what 6 documents they reviewed. I mean -- 7 MR. RUNNER: Well -- 8 MR. GEMMINGEN: -- I mean, we -- 9 MR. RUNNER: Is that true? Is that -- okay, 10 so -- 11 MR. GEMMINGEN: -- we don't -- 12 MR. RUNNER: -- let me, well, let me -- 13 MR. GEMMINGEN: They didn't go further, yes. 14 They did not go further. 15 MR. RUNNER: Well, okay. What -- 16 MR. GEMMINGEN: I mean, nothing's been -- 17 MR. RUNNER: -- do you disagree -- do you 18 disagree with the taxpayer that the -- that the IRS did 19 not have the documents or that they -- the taxpayer is 20 saying that the IRS had these documents. 21 MR. GEMMINGEN: I'm disagreeing with that 22 because we've never seen them. Nobody's seen them. 23 They've never provided them to us. They've never 24 provided them to you. 25 These documents don't exist. 26 MS. MANDEL: Which -- 27 MR. RUNNER: What -- what documents don't 28 exist? 67 1 MR. GEMMINGEN: The ones that the IRS 2 purportedly reviewed. 3 MR. RUNNER: That's not what I'm asking. 4 I am asking of their documents. 5 MR. GEMMINGEN: That's -- that's what -- that's 6 what I'm saying, that these documents of the ownership 7 interest in the Cramer property -- 8 MR. RUNNER: No. 9 MR. GEMMINGEN: -- and the Vincent property, 10 that's what the IRS asked for. 11 MR. RUNNER: And you think -- and, so, you're 12 saying that the IRS asked for them? 13 MR. GEMMINGEN: Yes. 14 MR. RUNNER: And that they -- and you're saying 15 the taxpayer didn't provide them and then -- 16 MR. GEMMINGEN: I'm saying -- 17 MR. RUNNER: -- the IRS walked away from the 18 audit? 19 MR. GEMMINGEN: -- I'm saying -- I don't know 20 whether the taxpayer provided them or not, I'm just 21 saying we don't know what the IRS reviewed. 22 MR. RUNNER: Well, again -- I'm getting hung up 23 with this idea that says -- once again, if the 24 transaction -- if these taxes in these transactions were 25 reviewed by the IRS, I would assume if they had 26 questions, they would ask them. 27 If they didn't have questions, I assume then 28 that the transactions were legitimate, that they 68 1 thought they validated them. 2 Am I wrong there? 3 MR. IMMORDINO: You know, we don't know what 4 documents the IRS was provided. 5 MR. RUNNER: Well, did -- okay. 6 Do we -- okay. So, do -- we don't believe -- 7 again, I guess I don't know how to get around this 8 question then 'cause -- let me go back to the taxpayer. 9 What documents were provided to the IRS to 10 review this exchange? 11 MR. HAISLET: Okay, so -- 12 MR. RUNNER: -- this transaction? 13 MR. HAISLET: -- all right. So, the IRS, in 14 its request was discussing the $3 million deferred gain 15 and the like-kind exchange. 16 They requested documents to verify the basis of 17 the properties in the transaction. This should include, 18 not limited to, sales and purchase contract agreements 19 and escrow documents pertaining to the properties in the 20 like-kind exchange agreement, documents to substantiate 21 that the property transferred was used in a trade or 22 business or held for investment, which is a requirement 23 of 1031. 24 MR. RUNNER: Uh-huh. 25 MR. HAISLET: Exchange contract establishing 26 intent to enter a like-kind exchange, which is the 27 exchange agreement. 28 MR. RUNNER: Okay. 69 1 MR. HAISLET: Evidence of the like-kind 2 property is received, the Fresno Walgreen's -- 3 MR. RUNNER: Uh-huh. 4 MR. HAISLET: -- is to be used in the 5 taxpayer's trade or business held for investment. 6 Documents to verify your ownership of the 7 property. 8 MR. RUNNER: Okay, hang on. That -- okay. 9 So, these are the documents that the IRS asked 10 for? 11 MR. HAISLET: Correct. 12 MR. RUNNER: These are the documents that you 13 gave them? 14 MR. HAISLET: That's correct. 15 MR. RUNNER: Okay. Now is your argument the 16 fact that you don't believe that they gave them these 17 documents? 18 MR. GEMMINGEN: I'm not saying I don't believe 19 they gave them to them, I'm surprised that they didn't 20 share them with us or you if they had them. 21 MR. RUNNER: Well, that's not the -- I'm going 22 back to the IRS issue. 23 So, the issue is, to me, and that is if the IRS 24 has asked for these documents, the IRS then receives 25 these documents. 26 I'm -- I'm at a loss as to why it is that we 27 think somehow that the IRS didn't do a thorough job or 28 that they didn't look at the documents. 70 1 MR. GEMMINGEN: Well, we don't know -- maybe 2 the IRS received the documents. 3 MR. RUNNER: Okay. 4 MR. GEMMINGEN: But as has been admitted here, 5 there's a number of documents that were incorrectly 6 filled out. There was a 25 percent interest. There's a 7 mention in the 8824, which is a taxpayer's like-kind 8 exchange form, that describes the property as being 9 acquired in 2004. In his brief he claims that the 10 property was acquired in 2003. 11 There's a variety of factual discrepancies in 12 the documents the taxpayer has provided. 13 MR. RUNNER: Okay. Can we at least get to the 14 point to where whatever was turned over to the IRS -- 15 whatever it was -- that the IRS reviewed and determined 16 that it was, indeed, in their opinion, a legitimate 17 exchange? 18 MR. GEMMINGEN: I don't think I can agree with 19 that because we don't know about to what extent their 20 inquiry went as far as their -- 21 MR. RUNNER: Well, wouldn't they keep asking 22 questions? I guess, I'm -- 23 MR. GEMMINGEN: You would have certainly 24 thought so, but -- 25 MR. RUNNER: -- I mean, again, I'm kind of 26 getting -- 27 MR. GEMMINGEN: -- sometimes -- 28 MR. RUNNER: -- frustrated here, because if the 71 1 IRS is asking for documents, you provide those 2 documents. 3 The IRS then says, okay, it's clean. Why would 4 we then question that the IRS didn't have their 5 questions answered? 6 MR. GEMMINGEN: 'Cause I don't think they 7 actually said it's clean. They just did not make an 8 adjustment to that transaction. 9 MR. RUNNER: Well -- the IRS never says it's 10 clean, they just stop. 11 MR. GEMMINGEN: I've seen letters where they've 12 reviewed the transaction. 13 MR. RUNNER: Do they always send a letter out? 14 MR. HAISLET: No. 15 MR. GEMMINGEN: As part of their letters when 16 they've described the various things they've audited, 17 they -- they, at times, will say -- not always, but at 18 times, they often -- 19 MR. RUNNER: Okay. 20 MR. GEMMIGEN: -- agree -- 21 MR. RUNNER: Typically -- 22 MR. GEMMINGEN: -- that the transactions -- 23 MR. RUNNER: -- is it typically -- typically 24 when you have an audit, you just exchange the 25 information and then that satisfies the audit. 26 There's not a letter that says, "Well, thank 27 you for all the good information you sent us." 28 MR. GEMMINGEN: I think I can agree that this 72 1 audit was satisfied, yes. 2 MR. RUNNER: Okay. That's all I need. 3 @@ MR. IMMORDINO: What's important to note 4 here though is that --- 5 MR. RUNNER: Thank you. 6 MR. IMMORDINO: -- there's no indication that 7 some of the key documents in this -- in this appeal were 8 ever provided to the IRS. 9 MR. RUNNER: I did not question that. I'm not 10 questioning that. 11 All's I'm saying is -- is -- all's I'm saying 12 is that -- is you were questioning that the IRS was not 13 satisfied. That's what the -- your point was. 14 Now at least I'm hearing you say whatever 15 documents they provided satisfied the IRS. 16 Now we can debate whether they were the right 17 documents, the wrong documents, whether they defrauded 18 the IRS or not. 19 MR. IMMORDINO: This appeal is, you know -- 20 MR. HORTON: Excuse me, sir. 21 MR. RUNNER: Okay, that's all. 22 MR. HORTON: It was -- 23 MR. RUNNER: I am done with that. 24 Let me just follow up on one other quick item. 25 In -- in regards to the question that Member Mandel 26 asked in terms of what you brought to the project, it 27 was -- she described it as -- and again I'm not -- what 28 I -- at least I heard more than your interest that you 73 1 brought into this property was more than your experience 2 and what you had in your head. 3 At least I thought I heard you say you also had 4 some control of property? 5 MR. STRINGER: Yes. 6 MR. HAISLET: Absolutely, right from the get 7 go. 8 MR. RUNNER: Okay. 9 MR. HAISLET: 'Cause that's how MDG was 10 introduced in this. 11 MR. RUNNER: Okay, thank you. 12 MS. MANDEL: That was -- that was the -- the 13 opportunity he described as an opportunity, which was 14 the nonbinding letters of intent. 15 MR. STRINGER: It's still control. 16 MR. RUNNER: Okay. I just wanted to clarify 17 that. 18 MR. STRINGER: We have a meeting of the 19 minds. 20 MR. RUNNER: Okay, thank you. 21 MS. MANDEL: Uhmm -- 22 MR. HORTON: Member Mandel. 23 MS. MANDEL: -- thank you. 24 At the risk of creating more hubbub, so, there 25 is a response letter to Franchise Tax Board in the 26 response to Board Member inquiry from, I guess, 27 Mr. Stringer's CPAs, which references an October 14th, 28 2009 letter from Franchise Tax Board auditor asking for 74 1 documents and says, Your letter," meaning the Franchise 2 Tax Board letter, "asked" -- in the paragraph below the 3 one that says, "your letter," it says, 4 "Both IRS agents reviewed all of the 5 documentation listed in your letter 6 regarding a like-kind exchange." 7 So, just to follow up what Mr. Runner was 8 asking and you're saying that you have different 9 documents, I'm just curious what -- we don't have a copy 10 of the October 14th, 2009 letter from the auditor. 11 I'm wondering what we have -- I mean, 12 they're -- they're asserting in this letter during the 13 FTB audit that IRS got everything you, FTB auditor, in 14 this one letter are asking me for. 15 I'm just -- but you're -- you're following up 16 with, but we have other stuff that we think IRS didn't 17 see. 18 MR. IMMORIDNO: Yes. 19 MS. MANDEL: So, I'm wondering what was list in 20 the letter? And what is the other -- what are the other 21 documents that are -- or the additional information? 22 And I do understand that we can do our own 23 independent audit and, you know, you're not bound by 24 IRS. But you've made this assertion that there is other 25 documents that -- I'm just curious because we don't have 26 a copy of that one letter. 27 MR. GEMMINGEN: Well, if you -- I believe I 28 have it. I don't have it right here. 75 1 MS. MANDEL: Okay. 2 MR. GEMMINGEN: But they're basically also 3 saying, "Don't worry about it, IRS looked at it." 4 MS. MANDEL: No, I understand that. But now in 5 this -- 6 MR. GEMMINGEN: I can look for that. 7 MS. MANDEL: -- discussion back and forth with 8 Mr. Runner, where you wound up saying, 9 "Yeah, okay, IRS didn't write him up 10 for the adjustment. We don't see any 11 analysis of it, but they didn't write him 12 up, so, they must have been satisfied 13 'cause, they, you know, wouldn't have 14 let go if they hadn't got anything." 15 But then you proceeded to say, 16 "But we have other, what I heard was, "but 17 we have other documents we think the IRS didn't 18 see --" 19 MR. GEMMINGEN: Yeah, we -- 20 MS. MANDEL: " -- other information." 21 So, now when I see this letter where the CPAs 22 are writing back saying, 23 "You," FTB auditor, "asked for some 24 documents. We gave all of those documents 25 to IRS." 26 So, I'm wondering, what is the other -- what is 27 the other stuff beyond? I mean, that -- 28 MR. GEMMINGEN: Well, the other -- 76 1 MS. MANDEL: -- doesn't necessarily get to, 2 "Yes, we can do an independent audit 3 and we don't know, you know, IRS was 4 satisfied, but we're not." 5 MR. GEMMINGEN: -- the other documents -- 6 MS. MANDEL: But -- 7 MR. GEMMINGEN: -- would be MDG Capital 8 Investors' deduction of the payment of sale to Mr. -- 9 MS. MANDEL: The way it was treated on the 10 MDG -- 11 MR. GEMMINGEN: -- as well as the -- 12 MS. MANDEL: -- audit? 13 MR. GEMMINGEN: -- nominee agreement. 14 MS. MANDEL: I mean on their return? 15 MR. GEMMINGEN: The nominee interest agreement 16 itself as well. 17 MS. MANDEL: So, do you know that the nominee 18 interest agreement was not a docu -- was not -- I mean, 19 I -- my impression was that this FTB letter like had a 20 list. 21 Now maybe it's not a list of documents, maybe 22 it's the same descriptive IDR like IRS. But I'm just -- 23 I'm just trying to figure out as a follow-up to that if 24 you're -- you're saying, "We know -- we -- we think, 25 looking at all of the documents," I guess part of what 26 you're saying is even if we looked only at the documents 27 that IRS looked at, we came to a different conclusion 28 and we're entitled to come to a different conclusion. 77 1 But since you also said we had stuff that IRS 2 didn't, which I understand, you -- you audited MDG 3 first -- maybe things would have been differently if 4 they audited you first, Mr. Stringer, I don't know -- 5 but they audited MDG first and, so, you had the 6 information of MDG was handling it. 7 But now you're saying the nominee letter and 8 I'm -- I'm just not clear. 9 MR. GEMMINGEN: What was the date of that 10 letter that you're looking at? 11 MS. MANDEL: The letter that the auditor sent 12 is apparently October 14th, 2009. 13 MR. GEMMINGEN: Okay. I have a October 14, 14 2009 letter here and signed by Franchise Tax Board 15 auditor Eileen Palmer. 16 MS. MANDEL: Right. 17 MR. GEMMINGEN: And it says, "This letter," 18 would you like me to read it? It's about three 19 paragraphs long. 20 MS. MANDEL: Okay. 21 MR. GEMMINGEN: It said -- it's addressed to 22 Mr. Baleson, Mr. Stringer's -- 23 MS. MANDEL: That's the CPA, yeah. 24 MR. GEMMINGEN: -- representative. 25 And regards to tax year 2005. It says, 26 "This letter is in response to your 27 letter dated October 5th, 2009 and a 28 follow-up to our letter dated September 28, 78 1 2009. An IRS agent's form 4549 is not 2 attached to your correspondence as you 3 indicated. Please send a copy of the IRS 4 initial contact letter, copies of all IRS 5 information document requests and the IRS 6 audit report for the above tax year. If 7 the issues examined by the IRS are not the 8 same as the issues for which we requested 9 information, then please provide the 10 information in Sections A and B in our 11 letter dated August 18th, 2009." 12 MS. MANDEL: Okay. So then they must be 13 referring back to August 18th. 14 MR. GEMMINGEN: So, we're still asking for 15 copies of the IRS initial contact. 16 MS. MANDEL: Right, but the last paragraph also 17 says about August 18th. 18 I mean, I don't -- I'm -- 19 MR. GEMMINGEN: Uh-huh. 20 MS. MANDEL: -- you think that the IRS didn't 21 have the nominee? 22 MR. GEMMINGEN: I don't know. We've -- they've 23 never provided us with what they gave the IRS. 24 MS. MANDEL: Okay. I thought I might be able 25 to get there by going backward from this letter, but, 26 apparently, it's just creating more pain. 27 MR. IMMORDINO: You'd be surprised. 28 MS. MANDEL: I'm sorry. Mr. Immordino? 79 1 MR. IMMORDINO: Yeah, you know, it would be -- 2 it would be surprising if the IRS allowed it if they had 3 a nominee letter, you know. 4 But, you know, we don't know what they had, 5 but -- you know -- 6 MR. STRINGER: They had to have it to justify 7 my property rights, for gosh sakes. 8 This is getting old. 9 MR. RUNNER: Well, that's a good point. Let me 10 follow up on that real quick. 11 MR. HORTON: Miss Mandel? 12 MR. RUNNER: Oh, sorry. 13 MS. MANDEL: Unless they can quickly find the 14 August letter that she's referring to where she says, 15 "And send me that stuff too." 16 I mean -- I just -- but while he's looking. 17 MR. HORTON: Mr. Runner? 18 MR. RUNNER: Yeah, just real quick -- how would 19 -- if -- if they didn't have the nominee letter, how 20 would they have created -- how would the property 21 interests been established? 22 MR. IMMORDINO: It would have been established 23 with the escrow statement, which showed that the -- 24 MR. GEMMINGEN: It would have been established 25 as to all the indicia of ownership as to -- whether it's 26 on a deed, whether he has a right to possession. 27 MR. RUNNER: No, no, but he didn't have any of 28 those. 80 1 My question is if he -- if the nominee letter 2 wasn't a part of the IRS -- IRS had -- 3 MR. IMMORDINO: Yep. 4 MR. RUNNER: -- how would his ownership 5 interest have been established with the IRS? 6 MR. IMMORDINO: A reasonable auditor could look 7 at the escrow statement and see that the money went to 8 the taxpayer or to taxpayer's QI and use that and assume 9 that they had a proper ownership interest and not 10 question further. 11 MR. RUNNER: Just by the cash coming out that 12 was given to the -- 13 MR. IMMORDINO: Yeah, they could have made that 14 assumption. It's a cost benefit analysis of how deeply 15 -- you can't dig, you know, very deep on every single 16 issue. 17 So that, you know, a reasonable auditor could 18 have seen that, that the money went to a QI on behalf of 19 taxpayer and moved on and kind of checked the box that 20 said she's been satisfied. 21 MR. RUNNER: And -- and again, remind me, was 22 the -- was the -- was the nominee letter in the -- in 23 the list of documents that were provided for the IRS? 24 MR. STRINGER: It had to be. 25 MR. HAISLET: Yes. 26 MR. RUNNER: Was it on that list that they had 27 asked for? 28 MR. HAISLET: I didn't -- I didn't represent 81 1 him in the audit, but I know the CPA -- 2 MR. RUNNER: Was it on that list that was asked 3 for? 4 MR. HAISLET: I have no idea. I don't have it 5 in front of me. 6 MR. STRINGER: I don't believe it was 7 specifically asked for, but any documents that we were 8 asked for to prove the -- 9 MR. RUNNER: Okay. 10 MR. STRINGER: -- chain of that they're talking 11 about -- 12 MR. RUNNER: Okay. 13 MR. STRINGER: -- that has to be in there. 14 MR. RUNNER: Okay. 15 MR. STRINGER: -- so, we would have turned it 16 over. 17 MR. RUNNER: Thank you. 18 MR. HAISLET: Can I -- can I inject one -- 19 MR. RUNNER: Just really very quickly. 20 MR. HAISLET: -- okay. For the FTB to 21 speculate on what a reasonable auditor at the IRS would 22 do is completely inappropriate. 23 I can tell you this lady is an absolute 24 aggressive, thorough person who wouldn't let you off the 25 hook on anything. 26 MR. RUNNER: Okay, thank you. 27 MS. MANDEL: Did you find it? 28 MR. GEMMINGEN: Sorry, I did not. 82 1 VOICE: Had enough. 2 MR. HORTON: Members -- well, let me give it a 3 try. 4 You know there is a saying that there is no 5 time like the present. So, do you have -- do you have 6 the documents? Do you have the nominee -- nominee 7 interest letter and the assignment agreement? Do you 8 have all those documents? 9 MR. HAISLET: They've been submitted. 10 MR. HORTON: We have them? You've seen them? 11 MR. HAISLET: They have them all. 12 MR. STRINGER: They have them all. 13 MR. HORTON: You've had them? You've seen 14 them? 15 MR. GEMMINGEN: The nominee agreement, you mean 16 the December -- 17 MR. HORTON: Yes. 18 MR. GEMMINGEN: -- 2004 agreement? 19 MR. HORTON: Yes. 20 MR. GEMMINGEN: Yes. That's one of the basis 21 for our determination, yes. That's -- 22 MR. STRINGER: They have everything we turned 23 over to the IRS, we gave them the same things. 24 MR. HORTON: And, so, you've reviewed those 25 documents and you see no reason why the 1031 exchange 26 should be allowed? 27 MR. GEMMINGEN: No, I can't state that we've 28 reviewed those documents 'cause again the letter that 83 1 Ms. Mandel mentioned says we're still requesting those 2 documents. 3 MS. MANDEL: That's -- I don't think that's -- 4 MR. GEMMINGEN: It's requesting the documents 5 that they turned over to the IRS. 6 MS. MANDEL: -- I'm not sure -- 7 MR. GEMMINGEN: And IRS auditor's report. 8 MS. MANDEL: -- that's what Mr. Horton -- 9 MR. HORTON: No. 10 MS. MANDEL: -- asked you. 11 MR. HORTON: Let me just maybe take these 12 documents one at a time. 13 You have the escrow documents. You reviewed 14 those. There's no indication of ownership in the escrow 15 documents? 16 MR. GEMMINGEN: Correct. 17 MR. HORTON: You reviewed the assignment 18 agreement. And it seems to be assigning interest in 19 profits and no interest in the property? 20 MR. GEMMINGEN: Well, there's an assignment -- 21 there's several assignment agreements. 22 MR. HORTON: All of them. 23 MR. STRINGER: Do you mean the nominee 24 agreement? 25 MS. MANDEL: He's going to take that one up. 26 MR. HORTON: Yeah, I'm going to go to that 27 next. 28 MS. MANDEL: Hang on. 84 1 MR. STRINGER: Okay. 2 MR. GEMMINGEN: Well, the assignment agreements 3 that we've seen are typically either from Vincent or 4 MDG and M -- and they don't mention Appellants, 5 Mr. Stringer, if that's what your question is. 6 MR. HORTON: At all? 7 MR. GEMMINGEN: At all. 8 MR. HORTON: Okay. And the exchange agreement, 9 have you seen that? 10 MR. GEMMINGEN: I've seen a copy of an 11 unexecuted exchange agreement, yes. 12 MR. HORTON: And does it -- does it indicate in 13 any way that there's a 1031 exchange here? 14 MR. GEMMINGEN: Yes, it does indicate 15 Mr. Stringer is selling 25 percent interest of the dirt 16 and the dust. 17 MR. HORTON: Is there anything that rebuts 18 that? 19 MR. GEMMINGEN: The fact that Mr. Stringer was 20 not participating in the sale to William Lyon Homes and 21 the Lyon Homes contract. 22 In the Lyon Homes contract at Sections 19 at C 23 and L, which was provided to your Board as part of our 24 brief, Exhibit D, both specifically disclaim any other 25 property ownership interest other than the enumerated 26 parties. And he is not listed as a person having an 27 interest in the Modesto properties. 28 MR. HORTON: Okay. Now the nominee letter of 85 1 interest, what are your thoughts about that? 2 MR. GEMMINGEN: It sets out a pure -- pure and 3 sole right to cash. It specifically states he has no 4 right of possession and no right to manage the property. 5 Other than -- he mentioned that he did have the 6 right to manage but the nominee agreement says 7 specifically he does not have the right to manage the 8 property. 9 He has no right to sell it, no right to 10 participate in the sale -- it's just purely a right to 11 cash. 12 MR. HORTON: To the taxpayer's argument that 13 his -- his skills and talents and expertise is a 14 contribution to the acquisition of the property and he 15 exercised rights and control by virtue that he was in a 16 position to determine whether or not the property could 17 be sold or any -- or how the property would be used. In 18 exchange, he received an interest in the property that 19 was measured by profits. 20 MR. GEMMINGEN: He had absolutely no right of 21 control. He's never provided us any documents that 22 encumber either of the two parcels. 23 The first letter -- the only letter that exists 24 at all is the nonbinding letter of intent, which was not 25 signed by the other side. So, he has absolutely no 26 right to go out to any third party or to any court -- to 27 anybody -- and exercise any right to control. 28 MR. HORTON: Question of the taxpayer -- I 86 1 think your testimony was that there were a number of 2 verbal agreements. But were those agreements reduced to 3 writing? 4 MR. HAISLET: They were reduced to writing in 5 the nominee agreement and I think the -- 6 MR. HORTON: The nominee agreement said you had 7 25 percent interest -- 8 MR. HAISLET: No, no, the exchange agreement 9 did, but that was a typographical error by a clerk -- 10 MR. STRINGER: Nominee -- 11 MR. HAISLET: -- it's 16.67, but the -- 12 MR. HORTON: Instead of the 25, it should have 13 been -- 14 MR. HAISLET: Yeah, the 25 percent is not 15 relevant here. 16 The -- the last document's the most important 17 one, which is the $3.677 million that was paid to the 18 taxpayer -- which far exceeds compensation or brokerage 19 fees or any of the like amount. 20 MR. HORTON: That's a matter of opinion, but -- 21 which you're are entitled to. 22 The nominee interest letter and the exchange 23 agreements, they contradict each other. Why? 24 MR. HAISLET: I don't think they contradict 25 each other. The exchange agreement with the qualified 26 intermediary is a regulatory function provided by the 27 1031 regs. 28 The -- the nominee letter is a document that 87 1 evidences property interest, which preceded the exchange 2 agreement. 3 I'm not sure when you say "contradict." 4 MR. HORTON: What if -- what if the transaction 5 went bad? What would have happened? 6 MR. HAISLET: I think Mr. Stringer would have 7 been a one-sixth owner of this thing. 8 MR. HORTON: And he would have had some 9 liability? 10 MR. HAISLET: I think so. 11 MR. HORTON: And what establishes that 12 liability? 13 MR. HAISLET: I think MDG would have thrown it 14 back at him to say -- 15 MR. HORTON: What document would have -- would 16 MDG have used to -- in court, to say, you know, he's 17 liable for one-sixth, as you indicated, of the liability 18 here? 19 MR. HAISLET: It's -- 20 MR. HORTON: Properties go up, people die. 21 MR. HAISLET: -- I believe -- 22 MR. HORTON: -- something happens, something 23 went wrong. 24 MR. HAISLET: -- it's at the top of page 2 of 25 the nominee agreement, there is a -- 26 MR. HORTON: Can you repeat that, please? 27 MR. HAISLET: -- there's a discussion. Let me 28 find it. 88 1 Do you have it there handy? 2 MR. STRINGER: The nominee agreement? Here it 3 is (indicating). 4 MR. HORTON: Section 3? 5 MR. STRINGER: I had it right here. I put it 6 away, sorry. 7 MR. HORTON: You and MDG agree that your 8 relationship -- is that it? 9 MR. HAISLET: No, let me -- let me make sure I 10 got the right -- 11 MR. STRINGER: What did I just do with it? 12 MR. HAISLET: Okay. 13 MR. HORTON: I would ask that the FTB sort of 14 follow along with these documents. 15 MR. STRINGER: Do you have it? 16 MR. HAISLET: Okay, yeah, I found it here. 17 I'm going off of memory 'cause your question 18 caught me off -- a little off guard. 19 The MDG -- 20 MR. HORTON: Are you going off of memory or are 21 you reading the actual document? 22 MR. HAISLET: I am now, yes. 23 Page 2, under Section 3, it says, "you," 24 meaning Stringer, 25 "And MDG agree that your relationship 26 in and to the property and the contracts 27 is that of tenants in common." 28 So, my -- stopping right there. If -- 89 1 MR. HORTON: Keep reading, please, just for the 2 record. 3 MR. HAISLET: Okay. 4 "With your tenancy in common interest 5 consisting of interest to be -- are solely 6 profits participation interest described 7 above, with the balance of interest held by 8 MDG and such other parties that MDG may select 9 it its sole and absolute discretion." 10 So, based on that sentence you asked a question 11 about liability, if -- if they found nuclear waste under 12 the property or if there was some really bad thing that 13 happened to the property and MDG got sued, my guess 14 would be that MDG would point to this tenants in common 15 provision and say, "You're a tenant in common and you 16 have to pay too." 17 MR. HORTON: Wouldn't be limited to the profit 18 participation interest? 19 MR. HAISLET: That's the upside, that's the 20 upside. We're talking about the liability. 21 If you're MDG, wouldn't you want to bring 22 Stringer into the defense? 23 And they would -- they would hang their hat on 24 this tenants in common provision right here 25 (indicating). 26 MR. HORTON: FTB? 27 MR. GEMMINGEN: I'd say that's absurd because 28 everything else is held by MDG by the statement itself. 90 1 If you continue reading that sentence, every other 2 interest is held by MDG. 3 So, it's really only a profits interest that 4 the Taxpayer Stringer holds. And there's only -- and 5 the beginning of the document notes that it's only MDG 6 that executed the contracts of sale. 7 MR. HORTON: They seem to have a -- 8 MR. GEMMINGEN: And it's a sole interest it 9 says as well. 10 MR. HORTON: -- they seem to have a disclaimer 11 in the same section, the last sentence saying, 12 "Nothing contained in this agreement 13 shall be deemed to constitute you, 14 Mr. Stringer, and MG -- MDG as partners 15 or joint venturers and you and MDG hereby 16 expressly disclaim any such relationship." 17 What about that? 18 MR. HAISLET: And your point is? 19 MR. HORTON: I don't know. 20 MR. HAISLET: Okay. If you look at -- if you 21 look at Internal Revenue Code Section 7701 (a)(2), it 22 says that when two or more unincorporated parties, 23 individuals, entities get together it is considered a 24 partnership. 25 So, notwithstanding this document here 26 (indicating), you find a partnership because the two of 27 them emerged from this relationship, both getting paid 28 when the property was sold. So -- 91 1 MR. HORTON: Okay. So -- so, let's -- 2 irrespective of this document, the fact that they both 3 got paid is the basis of the argument of the 4 relationship, not this document any more? 5 MR. HAISLET: No, I wouldn't say that. 6 MR. HORTON: Oh? 7 MR. HAISLET: I wouldn't say that entirely, I 8 mean -- 9 MR. HORTON: What would you say? 10 Mind you, I'm just really trying to understand. 11 MR. HAISLET: I understand, I understand. 12 Stringer got the property. Stringer brings in 13 MDG. They execute a contract with Cramer. It goes 14 through development -- about 22 months of development. 15 And at the end, the property gets sold. 16 MDG, for its part, because it put a lot of 17 money up, agreed that Stringer would be represented, in 18 other words, MDG would be a nominee of Stringer to get 19 money upon sale of the property. 20 And this document is -- reflects a lot of 21 different provisions, but the bottom line is -- 22 MR. HORTON: Which document? 23 MR. HAISLET: -- the nominee document that we 24 just read from. 25 MR. HORTON: Okay. 26 MR. HAISLET: The bottom line is that it's got 27 to be a property interest and not the same kind of thing 28 that the FTB is saying. It's not a fee simple interest. 92 1 Nobody's arguing that. It's a property interest which 2 is liquidated to money which transfers into other real 3 property in the exchange. That's -- that's what the 4 taxpayer's saying. 5 There's nothing in 1031 that requires the 6 interest -- the real property interest to be fee simple. 7 MR. HORTON: True. 8 MR. HAISLET: And it's a contract interest. 9 MR. HORTON: I mean -- I fully understand the 10 intent of the parties. The challenge I have is that the 11 documents are inconsistent with the articulated intent. 12 And, so, what I'm looking for -- even given the 13 distribution of the funds in the escrow agreement, those 14 distributions of funds could be pursuant to the 15 profit-sharing, participation in the profit. 16 And, so, if there -- I'm trying to 17 identify from -- a document that establishes some form 18 of risk associated with the ownership. 19 MR. STRINGER: Can I attempt to address that? 20 MR. HORTON: Sure. 21 MR. STRINGER: Unfortunately, in our business, 22 I don't know that there is a document, but certainly 23 because not only did I bring the opportunity, but as 24 we've testified, I did the majority of the development 25 activity, which brings my intellectual property into -- 26 into being in this project, that by playing that role, 27 that intellectual property is subject to risk or attack 28 if I misrepresented something, if I committed at fault 93 1 -- I missed a report, I didn't get it approved, I -- 2 there's a thousand things I can think of in my business 3 that I could do wrong. We're at tremendous risk every 4 day for litigation. 5 MR. HORTON: Sure. 6 MR. STRINGER: And because I'm the primary 7 player kind of maybe got lost in this, but MDG was the 8 capital, that intellectual property becomes target for 9 lawsuits from outside people, from my partners, if I 10 fail. 11 I'm exposed to all types of downside risk if I 12 don't do my job well. So, to me that's tremendous risk. 13 I could lose more than I made if I did something 14 improperly. 'Cause I'm dealing, as you know, with all 15 types of issues from geotechnical to structural to 16 governmental relations, if I'm -- 17 MR. HORTON: Right. 18 MR. STRINGER: -- misrepresenting something. 19 So, that -- 20 MR. HORTON: I appreciate that. 21 MR. STRINGER: -- I take that very seriously, 22 it's very risky. 23 MR. HORTON: Let me go to the like-kind. 24 FTB, just refresh my memory as to why you feel 25 that there isn't an exchange for like-kind. 26 MR. GEMMINGEN: Earlier I mentioned what's 27 called the GRODT factors, G-R-O-D-T, which are common 28 indicia of ownership where a person may not show up on 94 1 legal title, but their rights to possession, the rights 2 to control the property, encumber the property -- 3 MR. HORTON: So, the March -- 4 MR. GEMMINGEN: -- and otherwise participate in 5 it. 6 MR. HORTON: -- March 2nd, when they acquired 7 the property, and on March 3rd, when they sold the 8 property, what happened? 9 MR. GEMMINGEN: Well, the MDG Capital Investors 10 acquired the property under a con -- a second contract 11 and obligation to sell the property. 12 And, so, it acquired the land, the dirt. And, 13 in turn, based upon a pre-existing contract, sold it to 14 William Lyon Homes. And it represented that it was the 15 sole -- 16 MR. HORTON: What about the argument that 17 MGD was acting as the nominee? 18 MR. GEMMINGEN: If that's the case, then 19 MDG acquired those nominee interests from MDG, LLC in 20 2004 pursuant to a purchase contract. 21 'Cause it could only acquire and sell what it 22 acquired from somebody else -- 23 MR. HORTON: Right. 24 MR. GEMMINGEN: -- 'cause Capital Investors has 25 now the right to sell to Lyon Homes. It would have 26 acquired that nominee interest from MDG, LLC. 27 The taxpayer, in his briefs, states in 2003 and 28 2004 he conveyed to MDG, LLC all his rights to the 95 1 contracts. We'll give them -- for sake of argument. 2 So, MDG controls those rights, the LLC. So, 3 when that LLC sells the property, it should have -- he 4 should have had -- if he's selling as a nominee on his 5 behalf he should -- it wouldn't have recognized the 6 entire gain under reasonable person -- you're 7 never going to recognize gain if you don't have to. 8 It's not a reasonable business practice. 9 They would have attributed his share of the 10 gain back to him, let him know about it, let him pay his 11 tax on his share of that conveyance in November 2004 12 from MDG, LLC to MDG Capital Investors. 13 And, so, it just shows that he wasn't 14 participating in these sales. He had no profits 15 interests. It shows -- I mean no property interest, 16 excuse me, 'cause he's inconsistent. He -- he would 17 have had a gain on the sale at that point in time. 18 MR. STRINGER: That's absolutely incorrect, 19 absolutely incorrect. 20 MR. HORTON: Okay. On rebuttal? 21 MR. HAISLET: The -- 22 MR. STRINGER: The transaction he's talking 23 about for $18 million, he's suggesting that was the 24 entire sale of the property. 25 We have an escrow statement that shows there 26 was a $22 million proceeds. That's what got 27 distributed. 18 million was MDG's share only -- only. 28 So, what -- to say -- to suggest that there 96 1 was -- that was 100 percent of the profit and I wasn't a 2 participant, they have a right to do what they want with 3 their share. 4 They went out, obviously unbeknownst to us, 5 which is a new item, we didn't know that they did an 6 installment sale, but beside the point, the $18 million, 7 if you look at the closing statement, the March 3rd 8 closing statement and the proceeds, it's very clear that 9 they netted -- and I'm estimating, I don't know -- 10 $18 million plus and I got $3.7 million, which totals 11 the $22 million sale. 12 So, what they're referring to is the $18 13 million our installment sale. Of course, they're 14 suggesting that's 100 percent of the sale when it's not. 15 It's their share of the sale, which they're entitled to 16 do what they want with. 17 I could have gone out and done an installment 18 sale for my 16.67 percent share, I did not. 19 So, they just want to make the numbers add. 20 So, what they're suggesting is factually incorrect. The 21 proceeds, if you look at the escrow statement, were 22 about $22 million net, not 18. 23 MS. MANDEL: Dummy -- 24 MR. HORTON: Ms. Mandel. 25 MS. MANDEL: -- when you -- when -- Franchise 26 Tax Board, when you're talking about 18 million, you're 27 referring to this form 6252 on the 2004 year? 28 MR. GEMMINGEN: Yes. 97 1 MS. MANDEL: So, are you saying that this was 2 reflective of a sale by Monterey Development Group, LLC 3 to Monterey Capital -- 4 MR. GEMMINGEN: Investors -- 5 MS. MANDEL: -- Investors? 6 MR. GEMMINGEN: -- Inc., yes, uh-huh. 7 MS. MANDEL: And that they sold it for 18 8 million? 9 MR. GEMMINGEN: The contracts, yes. 10 MR. STRINGER: Their share of the contracts. 11 MR. GEMMINGEN: Well, I'd like to address that. 12 MS. MANDEL: Well, this was in 2004? 13 MR. GEMMINGEN: Right. 14 MS. MANDEL: And the sale that is the subject 15 of the exchange fight is 2005? 16 MR. STRINGER: Correct. 17 MS. MANDEL: So, the escrow statement that 18 taxpayer is referring to is where that property is 19 finally going to, I guess, William Lyon, was $30 million 20 sale price. 21 That seems to be a different escrow thing from 22 whatever is referred in this 2004 form where MDG 23 reported a sale of the contracts in 2004. 24 MR. GEMMINGEN: Well, it -- 25 MS. MANDEL: Right? I mean is that what is? 26 It's different? 27 MR. GEMMINGEN: It's a different sale. 28 MS. MANDEL: And that's -- that's -- that was 98 1 internal from themselves to this other little Monterey 2 Development Capital, whatever it was called, right? 3 That's what you're saying? 4 MR. GEMMINGEN: I'm saying it's a different 5 sale. But MDG Capital Investors can only sell what -- 6 what it owns. 7 MS. MANDEL: When it then sells for $30 8 million -- 9 MR. GEMMINGEN: Right. 10 MS. MANDEL: -- the prior -- 11 MR. GEMMINGEN: There was no other parties to 12 that subsequent sale -- 13 MS. MANDEL: -- and -- 14 MR. GEMMINGEN: -- other than MDG Capital 15 Investors. 16 MS. MANDEL: -- and what -- and -- 17 MR. GEMMINGEN: He's saying it's a partial 18 sale -- 19 MS. MANDEL: -- well -- 20 MR. GEMMINGEN: -- when MDG Capital 21 Investors -- 22 MS. MANDEL: -- I think because there was a 23 little -- because -- because in the 2005 sale the amount 24 due the seller, which is, you know, after stuff's paid 25 that's probably attributable to the seller, they got 20 26 million. 27 So, I think the 18 million, it was -- there was 28 getting a little confusion by Mr. Stringer when you were 99 1 talking about the 18 million because it's so close to 2 the number in 2005. But you're talking about 2004, MDG 3 tax return for -- for -- they reflected somehow a 4 transfer into internal to this other company, which I 5 guess was also them somehow? 6 MR. GEMMINGEN: Well, it's not -- it's a 7 different company. It's a legally distinct company. 8 MS. MANDEL: Well, it's -- I mean, it has a 9 similar name, it's not something Mr. Stringer is 10 associated with by name, right? 11 MDG to MDG Capital Investors? 12 MR. GEMMINGEN: But it was prior to the nominee 13 agreement, yes. 14 MS. MANDEL: And then the nominee agreement was 15 written -- is dated after that? 16 MR. GEMMINGEN: Yes. 17 MS. MANDEL: And, so, MDG, in saying, "We held 18 it as nominee -- we held this part for nominee for you," 19 FTB is saying at that point they held nothing because 20 they had already transferred it to Capital Investors? 21 That's what you're saying, right? Am I 22 understanding what you're saying? 23 MR. GEMMINGEN: Well, it's one of the things 24 I'm saying, yeah. 25 MS. MANDEL: I'm just trying to focus on the 26 trail of the nominee -- 27 MR. GEMMINGEN: Well, I'm going to the nominee 28 interest. If -- if MDG, LLC really held a nominee 100 1 interest -- 2 MS. MANDEL: -- held it as nominee? Held it in 3 trust as -- 4 MR. GEMMINGEN: -- or on his behalf. 5 MS. MANDEL: -- nominee for Mr. Stringer? 6 MR. GEMMINGEN: Right. 7 MS. MANDEL: Then -- 8 MR. GEMMINGEN: Then the 2004 sale would have 9 been partly a sale on his behalf. 10 MS. MANDEL: -- okay. 11 MR. GEMMINGEN: And he should have reported 12 part of that sale. And MDG, LLC would not have reported 13 the entire amount -- 14 MS. MANDEL: Okay, so, now you -- 15 MR. GEMMINGEN: -- as consideration. 16 MS. MANDEL: -- bring me back to the one 17 question that I forgot -- which was one of their points 18 on the whole shebang was they started talking about 19 Internal Revenue Code Section 761. They don't have a 20 formal partnership agreement, but that 761 let's them -- 21 you know, I do my tax return my way, you do your tax 22 return your way and we're cool with it. 23 That's how -- that's my generic irreverent -- 24 it's 1:15 -- description of the argument on 761. 25 And I just haven't heard anything about 761 26 from your side because they're a little perturbed that 27 the MDG tax reporting is being -- for, you know, 2005 -- 28 and I suppose it would be the same argument on 2004 -- 101 1 is being held against them. Because they say 761 let's 2 us go our own way. 3 So, is there an answer on that? 4 MR. GEMMINGEN: I guess I haven't heard them 5 say 761. 6 MS. MANDEL: I thought that's what you said. 7 MR. GEMMINGEN: Well, so are they saying this 8 is a partnership that owns the property now? 9 Because if it's a partnership that owns the 10 property, it's not a 1031 'cause he received the 11 replacement property individually. Different parties 12 engaged in that transaction. 13 MS. MANDEL: Okay. I heard that part. But I 14 did hear something -- 15 MR. GEMMINGEN: It's a whole complete change of 16 facts than he's ever said. 17 I've never heard -- 18 MS. MANDEL: -- that's why I was going to ask 19 about 761 because I didn't remember hearing about 761 20 before. 21 But I did hear them talk about it this morning, 22 which is why I tried to look up something on 761. 23 And they -- 24 MR. GEMMINGEN: It's never been argued in this 25 case. 26 And it's not relevant also because he only is 27 limited to a profits interest anyway. 28 MS. MANDEL: Okay. 102 1 MR. GEMMINGEN: Go back to the question of what 2 did he -- what, at most, could he have given away? A 3 right to cash. 4 MR. STRINGER: A lot of risk. We already 5 answered that question. 6 Part of the -- part of the problem here appears 7 to be -- 8 MR. HORTON: Ms. Mandel. 9 MR. STRINGER: I'm sorry. 10 MS. MANDEL: Okay. You know, I was holding on 11 to the 761 thing for a long time. So, now -- now I 12 don't know what to do with it. 13 My understanding -- so, you're saying 761, it 14 is in the -- 15 MR. GEMMINGEN: It's not a partnership, so that 16 the 761 doesn't apply. And this -- this nominee 17 agreement specifically states it's not a partnership. 18 MS. MANDEL: Okay. And what -- and the answer 19 that I heard, which may or may not -- you know, the 20 answer that I heard when he was asked about that section 21 of the partnership, he didn't say it quite this way, but 22 what I sort of heard him saying was for tax purposes -- 23 under the great general definitions under 7701 -- for 24 tax purposes, it's a partnership, even though, you know, 25 this thing says what it says -- which maybe for State 26 law purposes. 27 That's what I thought I heard. And he's 28 nodding yes. And earlier I heard him, I thought, 103 1 reference 7701 was how he got into 761. So -- and 2 that's when he was talking about it doesn't matter, 3 really, how MDG reported it because 761 let's us do it 4 our way. And we think our way is the right way. 5 Am I -- am I characterizing what you said 6 correctly? 7 MR. HAISLET: Yes, generally, yes. 8 MS. MANDEL: Okay. So, that's what I -- that's 9 what I heard. And I hadn't heard any response, except I 10 guess what you're saying is we don't think it's a 11 partnership because of the document and -- 12 MR. GEMMINGEN: He claims the entire -- through 13 his brief, through everything, to have always done the 14 exchange himself with absolutely no mention of 15 partnership. 16 MS. MANDEL: Okay. So, if -- if 7701 says 17 generally, "I can be a partnership," and if 761, which I 18 don't know 'cause I haven't heard an answer on 761, says 19 "If we're this kind of unincorporated, not formalized 20 partnership, but we get treated as one if we're 761, 21 let's us report things our own way." 22 You know, it's not like a Schedule K. I mean, 23 that's -- I mean, I don't really know this part of the 24 code that well, which is why I'm asking the questions -- 25 MR. GEMMINGEN: Well -- 26 MS. MANDEL: -- well, wait -- 27 MR. GEMMINGEN: -- I'm sorry. 28 MS. MANDEL: -- let me get the rest of my brain 104 1 excised here -- that then they're sort of saying that 2 because of 761, at least my guess is what they're saying 3 is because of 761 letting us go our own way, we can do a 4 1031 even if the other guys are in or even if the 5 partnership isn't -- I -- I -- you know, I don't know. 6 But I haven't heard sort of responses on that. 7 And, so -- 8 MR. GEMMINGEN: Well, there's been no election 9 to elect out of the partnership treatment. And -- and 10 they have never provided anybody -- those -- you have to 11 affirmatively elect out and have that as a -- as a -- if 12 you're -- 13 MS. MANDEL: You have to elect out to be able 14 to use this -- I mean, are the -- 15 MR. GEMMINGEN: You've got to -- 16 MS. MANDEL: -- okay, does 70 -- okay, so, hold 17 on. 18 So, 761 says I can go my way and -- 19 MR. GEMMINGEN: I don't know what it says. 20 This is brand new. This has never been briefed before. 21 This is a complete -- 22 MS. MANDEL: Okay. 23 MR. GEMMINGEN: -- surprise. So, I don't know 24 what -- 25 MS. MANDEL: Do you know, Ciro? 26 MR. IMMORDINO: (Unintelligible). The nominee 27 agreement, it specifically says they're tenants in 28 common. And tenants in common is, you know, 105 1 fundamentally the opposite of being a partnership. 2 You know, that means where you're specifically 3 owning it separately. And, so, the -- that -- that 4 argument is, you know, saying that their argument -- and 5 Mr. Haislet said earlier today that they are a 6 partnership -- you know, they're arguing that they're 7 tenants in common. And, you know, so -- 8 MR. STRINGER: (Unintelligible) -- in common, 9 right? 10 MS. MANDEL: Does -- have I completely confused 11 you Mr. Runner? 12 Do you guys have any reaction or -- 13 MR. EPOLITE: Well, I think there's an inherent 14 conflict when the nominee letter specifically says that 15 they're not a joint venture or a partnership and to now 16 go in that direction -- 17 MS. MANDEL: Okay. Well -- 18 MR. HAISLET: May I add something? 19 MR. HORTON: Member Mandel. 20 MS. MANDEL: Briefly. 21 MR. HAISLET: Okay. The 1031 (a)(2)(d) says 22 partnership interests are not eligible for exchange 23 generally. 24 1031 (a)(2) also provides that if the 25 partnership has a valid 761 election in place, then each 26 of the partners -- Stringer being one -- can treat the 27 asset as if it's his own asset, a fractional share of 28 the asset. And that's the so-called TIC agreement. 106 1 But, nonetheless, it's still a partnership under 7701. 2 761 could be elected expressly under 1 -- in 3 the regulation 761-2 or there's also a deemed election 4 if the taxpayers in the partnership treat their income 5 deductions, et cetera, separately and distinctly on the 6 initial return and do not file a combined return -- in 7 other words, it's 565, in this case -- then they're 8 entitled to take what's election out of -- 9 MS. MANDEL: A combined return, 565 is a 10 partnership return? 11 MR. EPOLITE: That's correct -- which they 12 didn't do. 13 So, by virtue of the fact that they didn't 14 report together, they did, in fact, report separately 15 and took their own treatment, they've made the election. 16 No notice is required. The notice is the 17 return filings themselves, which would be form 540 in 18 this case. And then -- and then for MDG, whatever they 19 filed. 20 MS. MANDEL: Okay. Then here's -- here's the 21 rub -- I can see it in their -- today was the first 22 time -- I mean, I don't remember that I heard about this 23 561 (verbatim) unless I read everything way fast -- I 24 mean 761. 25 MR. HAISLET: Well, the FTB has been on this 26 case about four years. And the FTB has access to the 27 code and everything else. 28 MS. MANDEL: No, I understand that, but -- 107 1 MR. HAISLET: This is -- this is -- this was 2 clearly not a single interest owned by Stringer. This 3 is clearly two people getting together -- MDG and 4 Stringer. 5 So, what's -- what's the surprise here? It's 6 not a surprise. 7 MS. MANDEL: Well, the argument about the 76 -- 8 this -- this -- this surround, this argument, I mean -- 9 and the Board -- you know, the Board gets the briefs. 10 And the -- what the Board here has in front of 11 it is only what's given to the Board for briefing 12 purposes. We don't -- you know, anything that was given 13 to FTB, if it wasn't given to us, we don't have it. 14 And, so, the arguments that I saw in all of the 15 briefs about why reporting on Mr. -- on the Stringers' 16 return was correct, this was the first time that I'm 17 hearing that this -- it -- it presented this way. And 18 with this -- I am going to mess up the number again -- 19 761, so that's -- 20 MR. STRINGER: Well, the code -- 21 MS. MANDEL: -- I understand. 22 MR. HAISLET: But the FTB had their opportunity 23 to raise that issue a long time ago in the initial audit 24 and they never did either. 25 I mean -- 26 MS. MANDEL: Well -- but the -- I -- I hear it 27 today as a defensive issue as to why Mr. Stringer's 28 return is correct. 108 1 MR. HAISLET: I don't think it's defensive at 2 all. 3 MS. MANDEL: I hear it as a -- well, they walk 4 in here having made an adjustment. So, they walk in 5 here basically with a presumption. 6 And then it's the taxpayer's, you know, burden 7 to show -- and that's why we were looking at all these 8 documents -- to what was really going on and do we think 9 that there was the right kind of interest. And do we 10 think that -- that -- that if there was the right kind 11 of interest upfront, do we think that then all of the 12 other pieces of 1031, through the back end of the deal 13 when it gets the other property, do we think all of the 14 documents and everything in his testimony, whatever, 15 support the reporting on his return. 16 And what I heard you say was that there is this 17 other thing that -- that through 7701 and 761, it 18 doesn't matter what MDG did on their return, you -- you 19 know, find out in the course of these proceedings late 20 that it's all about MDG, you know, and their return. 21 And, so, you're trying to combat that and say 77 -- 22 7701, 761, we can do it this way. 23 You're now explaining in some detail about the 24 regulations and how it doesn't have to be, because as 25 Mr. Immordino said -- or Mr. Gemmingen, that there had 26 to be an election. There was no election. You're 27 explaining how, you know, you could have an election, 28 deemed election, just by -- right? 109 1 This is the first time I'm hearing all of this. 2 So, that's why I say it's being raised defensively. 3 And -- and it's a little bit of a struggle, I 4 think, for -- I mean, I don't know if they have -- what 5 their responses are. I don't know. 6 So, you understand what I'm saying, Mr. Horton? 7 MR. HORTON: Yeah, I do. 8 Although we have, you know, somewhat 9 inconsistent arguments here that in of itself they sort 10 of, you know, kind of contradict each other in my mind, 11 to take the -- the documents there where there is no 12 joint partnership, there is no venture capital, you've 13 got tenancy in common, now you have partnership -- which 14 would held a little bit differently -- and so forth and 15 so on. 16 But it's interesting. I mean, I -- I -- I -- I 17 find it interesting just from a -- listening to the 18 debate, if you will. 19 But let me just go back to one other factual 20 area that I want to deal with just for -- back to the 21 case if I could. 22 Qualified purpose -- let's presume that there 23 is a document out there that establishes an interest in 24 the property. Let's presume it does exist. Speak to me 25 regarding the qualified purpose of that presump -- 26 presumed ownership that would have existed at the time. 27 MR. GEMMINGEN: Well, as MDG -- 28 MR. HORTON: Seems to me there's a commonality 110 1 there. 2 MR. GEMMINGEN: -- only bought the property the 3 preceding day that it sold the property under an already 4 existing contract of sale, part of the qualified use is 5 that the taxpayer engaging in 1031 hold the exchange 6 property and use it for trade or business or investment 7 purposes. 8 And in this case, unlike the Bolker case, the 9 taxpayers were already bound to sell the property. And 10 that property's sale was predestined and it was not held 11 for investment, but rather for sale. 12 And there are cases out there, such as the 13 Click case, where property was acquired for the purpose 14 of gifting to the women's children. And that was not a 15 qualifying purpose. 16 And, so, this case was not a -- an intention to 17 hold the property, but rather it sold -- they're just 18 purely a conduit for the secondary and obligatory sale 19 of the property. 20 MR. HORTON: Got it. 21 To the taxpayer on qualifying interests. 22 MR. HAISLET: The day before argument is 23 irrelevant because the taxpayer came into his interest 24 in 2003 when he got into the original arrangement with 25 Cramer. 26 So, with the -- so, it's -- and the Bolker 27 argument doesn't hold water either because the Bolker 28 court was very clear that the time horizon that IRS and, 111 1 of course, FTB have -- have constantly tried to assert 2 that there's some sort of holding period has been 3 rejected because it's not part of the statute. And it's 4 really clear in Bolker. 5 I mean, they even -- even the Board's analysis 6 here reads about -- in the Bolker case and it's sort of 7 just right on point about what the -- what Stringer did 8 in this case -- if I can just find it. 9 MR. GEMMINGEN: May I ask one question? 10 MR. HORTON: Sir, go ahead. 11 MR. HAISLET: Oh -- is this the right paper? I 12 thought I had it marked. 13 I had the Mason case, the court -- the Tax 14 Court allowed a 1031 exchange where the two partners 15 received the partner -- the property in a partnership 16 liquidation then immediately exchanged the property. 17 That -- that runs counter to what he just said about 18 the -- the day before. 19 So, what -- what I hear FTB saying is that 20 they -- MDG Investors got the property on March 2nd, 21 sold it on March 3rd. In the Mason case, taxpayer 22 apparently did exactly the same thing and was allowed to 23 keep its 1031 deferral. 24 The Bolker case specif -- oh, here it is, I was 25 at the page before -- in Bolker, the -- and this is on 26 page 14 of the Board's analysis -- Bolker, the Ninth 27 Circuit expressly dealt with the holding requirement, 28 set forth a legal standard. 112 1 Taxpayer was the sole shareholder -- the Bolker 2 taxpayer was a sole shareholder of a corporation that 3 owned valuable land suitable for development. And with 4 tax -- for tax purposes associated with anticipated 5 development of the land, the taxpayer decided to 6 liquidate the corporation. 7 So, analogous in this case is that the 8 taxpayer, perhaps fortunately, realized that it might be 9 a bad time to try to develop property and decided to 10 sell the property and, in fact, liquidated the property 11 in a preconceived manner. 12 And then in the Bolker case, the -- when the 13 liquidation occurred, the taxpayer entered into a 14 like-kind exchange agreement. So, that's -- the -- the 15 facts are very parallel to the Stringer case here. 16 And for -- and for the -- this business about 17 the one day holding really is irrelevant based on Bolker 18 and also based factually, it's not even accurate. 19 MR. HORTON: I don't know that the one day 20 holding is an issue, but -- or a basis for their -- the 21 conclusion that the FTB has come to. 22 But, you know -- all right. 23 Further discussion, Members? 24 Okay. I think we've covered all these points. 25 Okay, without discussion -- without further discussion 26 is there -- is there a motion, Members? 27 MS. YEE: Move to take the matter under 28 submission. 113 1 MR. HORTON: Moved by Member Yee to take the 2 matter under submission. Second by Member Steel. 3 Without objection, Members, such will be the 4 order. 5 Thank you very much for appearing before us 6 today. We certainly appreciate the discussion. 7 MR. HAISLET: Thank you for your time. 8 MR. STRINGER: Thank you. 9 MR. HORTON: The Board will take your matter 10 under consideration later on this evening and send you a 11 written report of our decision. 12 ---o0o--- 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 114 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 DECEMBER 18, 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 114 constitute a complete and accurate 14 transcription of the shorthand writing. 15 16 Dated: February 19, 2013 17 18 19 ____________________________ 20 JULI PRICE JACKSON 21 Hearing Reporter 22 23 24 25 26 27 28 115