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 11 12 13 14 15 FINAL ACTIONS 16 17 18 19 20 21 22 23 24 25 26 27 REPORTED BY: Kathleen Skidgel 28 CSR NO. 9039 1 1 P R E S E N T 2 3 For the Board Jerome E. Horton of Equalization: Chairman 4 5 Michelle Steel Vice-Chairwoman 6 7 Betty T. Yee Member 8 9 George Runner Member 10 11 Marcy Jo Mandel Appearing for John 12 Chiang, State Controller (per Government Code 13 Section 7.9) 14 Joann Richmond 15 Chief Board Proceedings Division 16 17 For Staff: John Johnson Tax Counsel 18 19 David Levine Tax Counsel IV 20 21 ---oOo--- 22 23 24 25 26 27 28 2 1 450 N STREET 2 SACRAMENTO, CALIFORNIA 3 DECEMBER 18, 2012 4 ---oOo--- 5 MS. RICHMOND: Our next item are those matters 6 that have been submitted for a decision. 7 Our first item is B1, Scott L. Stringer and 8 Irene Stringer. 9 ---oOo--- 10 B1 SCOTT L. STRINGER AND IRENE STRINGER 11 NO. 610020 12 ---oOo--- 13 MR. HORTON: Discussion, Members? 14 Is there a motion? 15 MR. RUNNER: I would move in favor of the 16 taxpayer. 17 MR. HORTON: Mr. Runner moves in favor of the 18 taxpayer. 19 MS. STEEL: Second. 20 MR. HORTON: Second by Member Steel. 21 Objection? 22 MS. MANDEL: Um -- 23 MS. YEE: Objection. 24 MS. MANDEL: Yeah, at this point. 25 MR. HORTON: Objection note -- 26 MR. JOHNSON: Sorry, Mr. Chairman. 27 One point of clarification. There were two 28 actual NOA's on this appeal. The sec -- one issue is 3 1 the 1031 like-kind exchange. The other one is Schedule 2 E income, and the taxpayers have conceded the Schedule E 3 income; it's appeal number 610020. So that matter has 4 been conceded by the taxpayers already. 5 MR. HORTON: Okay. 6 MR. RUNNER: Um, okay. I don't -- I'm sorry, I 7 don't have -- 8 MR. HORTON: Does that -- 9 MS. STEEL: So that's $5,253 that's already 10 conceded. So original amount proposed assessment is 11 $306,390. 12 MR. JOHNSON: Correct. That's the amount still 13 at issue. 14 MR. HORTON: So the issue at hand, the motion 15 remains the same? 16 MR. RUNNER: Yeah. For the issue that's 17 outstanding, yes. 18 MR. HORTON: Okay. With that friendly 19 amendment, um, objection noted. 20 Ms. Richmond, please call the roll. 21 MS. RICHMOND: Mr. Horton. 22 MR. HORTON: No. 23 MS. RICHMOND: Ms. Steel. 24 MS. STEEL: Aye. 25 MS. RICHMOND: Mr. Runner. 26 MR. RUNNER: Aye. 27 MS. RICHMOND: Ms. Yee. 28 MS. YEE: No. 4 1 MS. RICHMOND: Ms. Mandel. 2 MS. MANDEL: No. 3 MR. HORTON: Subsequent motion, Members? 4 MS. YEE: Move to sustain the Franchise Tax 5 Board. 6 MR. HORTON: Moved by Member Yee to sustain the 7 Franchise Tax Board. Second by Member -- 8 MS. MANDEL: Um -- I guess for purposes of 9 discussion. I'm just curious whether there's anything 10 else that -- in terms of briefing or information since 11 there seemed to be some new assertions that would be of 12 any, um -- whether there's anything that might make a 13 material difference. 14 MR. HORTON: There's a motion by Member Yee. 15 Second by Member Mandel, for the purpose of discussion. 16 Uh, discussion, Members, on the issue at hand, 17 to the extent staff can. I don't know if they can bring 18 forth any new information. 19 Uh, any -- question, Ms. Mandel? 20 MS. MANDEL: Um, there just was -- seemed to be 21 so much said that was additional. And I, um, didn't -- 22 I was just curious whether Appeals thought that there 23 was anything new that ought to be briefed, or whether 24 what they said didn't really have a material impact. 25 MR. JOHNSON: One new issue that was brought up 26 that was pointed out during the hearing was the IRC 27 761(a) election. That sort of goes to the duty of 28 consistency argument the respondent was proposing. It 5 1 doesn't necessarily go towards the 1031 transaction from 2 a -- doesn't make a huge difference to the 1031 3 transaction issue that we're deciding today from Appeals 4 Division's point of view. 5 The other material that was -- there was some 6 material that was provided this morning and last week, 7 but it seems to -- doesn't seem to add too much to the 8 appeal, uh, compared with the Nominee Interest Letter 9 and the other items that were provided already on 10 appeal. 11 As far as the discussion that was heard today, 12 it appears that the parties are still mostly sticking to 13 their general arguments. 14 MS. MANDEL: Okay. 15 MR. HORTON: Member Yee. 16 MS. YEE: Question. It's a challenging case 17 because the, uh -- I thought the evidence and 18 documentation was quite sloppy in terms of trying to 19 substantiate what really took place. But I'm wondering 20 if, uh -- if what was stated in the Nominee Interest 21 Letter as it relates to, uh, giving the appellants a 22 tenancy-in-common status in the contracts, whether 23 that -- delving into that a little bit more may speak to 24 the, uh, underlying ownership interest. I mean, I -- I 25 don't know. I'm just kind of looking at where we might 26 be able to get more substantiation. 27 On the one hand, there are provisions of the 28 letter that are very, um, explicit that I'm just 6 1 wondering if that TIC status may suggest that there 2 was a -- 3 MR. JOHNSON: The Modest contract Nominee 4 Interest Letter does point out -- or does state in its 5 terms that there is a tenancy-in-common relationship 6 between the two parties. 7 MS. YEE: Mm-hmm. 8 MR. JOHNSON: However, the rest of the terms 9 explicitly extract any kind of property rights in the 10 actual property or the contracts from appellants. 11 MS. YEE: Mm-hmm. 12 MR. RUNNER: When you -- well, let me follow up 13 on that. 14 When you say "extract," you mean, um -- limit? 15 MR. JOHNSON: Well, in the general 16 tenancy-in-common, uh, the members of that 17 tenancy-in-common will have undivided rights to the 18 property at issue -- 19 MR. RUNNER: All the time? 20 MR. JOHNSON: -- or the contract at issue. 21 MR. RUNNER: All the time? 22 MR. JOHNSON: That's the -- the general 23 tenancy-in-common suit law. 24 MR. RUNNER: You can't -- you can't have a 25 contract that limits? 26 MR. JOHNSON: When it limits this much, it 27 almost destroys any kind of tenancy-in-common. 28 Basically you're just saying the only right that you 7 1 have is the right in the profits if there is profits, 2 once the contracts are executed and sold. 3 MR. RUNNER: So you would assume then that this 4 would -- has incorrectly given him a, um -- a, uh, 5 position of, um -- of property entitlement at that 6 point? That this contract did not successfully do 7 that. 8 MR. JOHNSON: There are a few issues with the 9 Nominee Interest Letter. First of all, if it's from -- 10 between, uh -- or from MDG to the appellants, and at the 11 time it's written MDG had already sold its contract 12 rights to MDG, Capital Investors, Inc., so that it 13 doesn't actually hold the contracts anymore, that it is 14 purporting to give an interest to the appellant's end. 15 The interest in this Nominee Interest Letter is 16 for the rights in the contract, should they ever be sold 17 or activated by purchasing the land. Land's not even 18 purchased yet. So the interest given here doesn't seem 19 to be any kind of real property interest or any interest 20 associated with real property, just in the contracts and 21 profit interests in property should it be purchased and 22 sold at a future time. 23 MR. RUNNER: If it's simply -- if the -- if the 24 phrase, um, "profits" was taken out of that, and it just 25 referred to this 16 percent and all the other things in, 26 is it -- is it -- is it the concept that it's the 27 profits that is becoming the key issue there? 28 So if the phrase -- if that phrase was removed 8 1 out of that contract and it was just -- you just had 16 2 percent, then would that -- would that end up solving 3 that problem? I know it doesn't, but I'm just trying to 4 make any own head try and get around that. 5 MR. JOHNSON: Right. In sub item one of the 6 Nominee Interest Letter where it states 16.67 percent 7 profits interest in the contracts, if we remove that 8 "profits interest" -- 9 MR. RUNNER: Uh-huh. 10 MR. JOHNSON: -- I don't think it's going to 11 make a difference because if you look at the next 12 sentence, it specifically states "your interest consists 13 exclusively of and solely of the right of" and then it 14 says "net sales price minus cost" which is profit again. 15 So it goes further. 16 MR. RUNNER: Well, I guess -- let me rephrase 17 it. If it was just -- if the kind -- if that's -- if 18 those -- if the concept was not there, everything else 19 in the contract was the same, and it was just not 20 delineated to the interest on the profits side -- 21 MR. HORTON: There would be no income. 22 MR. RUNNER: No, there would be income. It 23 would be -- it would be on the whole thing. It wouldn't 24 just be on the profit. 25 Would that -- would that then be a correct -- 26 I'm just trying to understand that. Would that be a 27 correct, you know, nominee interest? If -- if all 28 the -- you know, if it was -- based upon the whole, you 9 1 know, the 16 percent was on the original property, the 2 whole bit, you didn't worry about the profit side, would 3 that become a legitimate interest -- or nominee 4 interest? 5 MR. JOHNSON: It would be hard to say since 6 that is the crux of the case. 7 MR. RUNNER: The reason I ask you is -- the 8 reason I ask is because you went on to say that there 9 are lots of other things that strip property rights 10 away. And so that's why I'm wondering if -- if, indeed, 11 the issue is those other items that are listed in 12 this -- in this, or is it the fact that it only referred 13 to the -- to the issue of the profit? 14 MR. JOHNSON: I think both factors go 15 against -- 16 MR. RUNNER: Okay. 17 MR. JOHNSON: -- the actual property 18 interest. 19 MR. RUNNER: Okay. 20 MR. HORTON: Mindful, even hypothetically, um, 21 if there was an interest, we still have the variables of 22 a 1031 exchange, like-kind qualified purpose and so 23 forth and so on, which creates a challenge for the 24 taxpayer. 25 Further discussion, Members? 26 Hearing none, there's a motion on the floor to 27 adopt staff recommendations as it relates to the item 28 1031 exchange. 10 1 And objection? 2 MS. STEEL: Objection. 3 MR. RUNNER: Objection, yeah. 4 MR. HORTON: Objection noted. 5 Ms. Richmond, please call the roll. 6 MS. RICHMOND: Mr. Horton. 7 MR. HORTON: Aye. 8 MS. RICHMOND: Ms. Steel. 9 MS. STEEL: No. 10 MS. RICHMOND: Mr. Runner. 11 MR. RUNNER: No. 12 MS. RICHMOND: Ms. Yee. 13 MS. YEE: Aye. 14 MS. RICHMOND: Ms. Mandel. 15 MS. MANDEL: Aye. 16 MS. RICHMOND: Motion carries. 17 ---oOo--- 18 19 20 21 22 23 24 25 26 27 28 11 1 MR. HORTON: Ms. Richmond, our next item. 2 MS. RICHMOND: Our next item is B2, Estate of 3 Charles W. Mosser, deceased, and Annabelle Mosser. 4 ---oOo--- 5 B2 ESTATE OF CHARLES W. MOSSER (DEC'D) 6 AND ANNABELLE MOSSER 7 NO. 600452 8 ---oOo--- 9 MS. YEE: Move to grant for the appellant. 10 MR. HORTON: Member Yee moves to grant. Member 11 Steel seconds. 12 Objection, Members? 13 Hearing none, such will be the motion. 14 ---oOo--- 15 16 17 18 19 20 21 22 23 24 25 26 27 28 12 1 MR. HORTON: Ms. Richmond. 2 MS. RICHMOND: Our next item is C1a, Awad and 3 Rasheed, Inc., C1b, Ahmad Abdul Rasheed, Abed A. Awad, 4 Gamella A. Awad, Basima A. Rasheed. 5 ---oOo--- 6 C1a AWAD AND RASHEED, INC. 7 C1b AHMAD ABDUL RASHEED, ABED A. AWAD, 8 GAMELLA A. AWAD, BASIMA A. RASHEED 9 NO. 553801 (CH) 10 ---oOo--- 11 MS. STEEL: Can we give one percent 12 self-consumption and abate the negligence penalty? 13 MS. MANDEL: Uh -- 14 MS. STEEL: Fifteen percent error rate there. 15 MS. MANDEL: This -- well, I understand what 16 you're saying about self-consumption, but it is a -- one 17 percent's the standard self-consumption and it is a 18 liquor store. 19 MS. STEEL: Well, it's water. 20 MS. MANDEL: Right. But it is a liquor store 21 as the main business. And if they don't drink liquor, I 22 don't know if one percent. 23 MS. STEEL: Well, he -- the attorney said they 24 smoke. They don't drink, but they smoke. 25 MR. HORTON: Do we know what the total 26 percentage of purchases represented cigarettes? 27 MR. LEVINE: I don't remember exactly what it 28 was, but it's not large. 13 1 MR. HORTON: Phenomenal? 2 MS. MANDEL: I have it here. Twenty-nine 3 percent, I have. Twenty-eight, twenty-nine percent. 4 MS. STEEL: So it's -- yeah, 28.96 percent. 5 MR. HORTON: Oh, so -- 6 MS. STEEL: So that's -- 7 MR. HORTON: -- one percent takes it to 24. 8 MS. MANDEL: Well, the one -- the one percent, 9 when you do the self-consumption, it gets applied 10 against all purchases, right? 11 MR. LEVINE: Unless you state differently. 12 MS. MANDEL: Unless you -- 13 MR. LEVINE: One percent on self-consumption 14 without more would be everything. 15 MS. STEEL: So you want say one percent of 16 cigarette? 17 MR. RUNNER: Is that a motion? 18 MR. HORTON: Seems like a consensus. 19 MS. STEEL: Okay. 20 How about water and soda then? And milk? 21 MR. LEVINE: I believe sales of water are 22 exempt, sales of milk are exempt. Sales of Diet Coke, 23 which is all I care about, are definitely taxable. 24 MS. STEEL: You're sitting in wrong spot there, 25 Mr. Levine. That bothers me. 26 MR. LEVINE: Sorry. I'm trying to be 27 efficient. They were blocking the access. 28 MR. HORTON: Is there a motion, Members? 14 1 MS. STEEL: Yeah, that's my motion. 2 MS. YEE: What's the motion again? 3 MS. STEEL: One percent of 28.98 percent 4 whatever -- 28.96 percent of cigarette products, 5 self-consumption and waive negligence penalty. 6 MS. YEE: Okay. I'm going to object to the 7 negligence penalty. 8 MS. STEEL: Okay. Then I just go for one 9 percent of 28 point -- 10 MR. RUNNER: I'll second that. 11 MS. STEEL: Something has to be done here. 12 MS. YEE: Okay. Without objection. 13 MS. STEEL: They smoke. 14 MR. HORTON: What was the pilferage? 15 MS. STEEL: It's a bad area. Three percent, 16 but it's a really bad area. 17 MS. MANDEL: That's what -- that's what the 18 Department allowed. 19 MR. HORTON: You want to go four? 20 MS. STEEL: What? 21 MR. HORTON: Member Steel moves adjustment of 22 pilferage to four percent, self-consumption of 23 cigarettes specifically to one percent. 24 Is there a second? 25 MR. RUNNER: Second. 26 MR. HORTON: Second by Member Runner. 27 Objection, Members? 28 Hearing none, such will be the order. 15 1 MS. STEEL: Thank you. It's Christmas. 2 MR. HORTON: For the record, that's not our 3 reasoning. 4 MS. STEEL: Strike that, yeah. 5 ---oOo--- 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 16 1 MR. HORTON: Ms. Richmond. 2 MS. RICHMOND: Our next item is C2, QED 3 Automation, LLC. 4 ---oOo--- 5 C2 QED AUTOMATION, LLC 6 NO. 7 ---oOo--- 8 MR. HORTON: Discussion, Members? 9 Is there a motion? 10 MS. YEE: Move to adopt the staff 11 recommendation. 12 MR. HORTON: Member Yee moves to adopt staff 13 recommendation. 14 Is there a second? 15 MS. MANDEL: Second. 16 MR. HORTON: Second by Member Mandel. 17 Objection? 18 MS. STEEL: Objection. 19 MR. RUNNER: Objection. 20 MR. HORTON: Objection noted. 21 Ms. Richmond, please call the roll. 22 MS. RICHMOND: Mr. Horton. 23 MR. HORTON: Aye. 24 MS. RICHMOND: Ms. Steel. 25 MS. STEEL: No. 26 MS. RICHMOND: Mr. Runner. 27 MR. RUNNER: No. 28 MS. RICHMOND: Ms. Yee. 17 1 MS. YEE: Aye. 2 MS. RICHMOND: Ms. Mandel. 3 MS. MANDEL: Aye. 4 MS. RICHMOND: Motion carries. 5 ---oOo--- 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 18 1 MS. RICHMOND: Our last item is D1, Ashraf 2 Alfonose Youssef. 3 This is a waived appearance. 4 ---oOo--- 5 D1 ASHRAF ALFONOSE YOUSSEF 6 NO. 358704 (ET) 7 ---oOo--- 8 MS. MANDEL: Move the staff recommendation. 9 MS. YEE: Second. 10 MR. HORTON: Member Mandel moves staff 11 recommendation. Second by Member Yee. 12 Without objection, Members, such will be the 13 order. 14 ---oOo--- 15 16 17 18 19 20 21 22 23 24 25 26 27 28 19 1 REPORTER'S CERTIFICATE 2 3 State of California ) 4 ) ss 5 County of Sacramento ) 6 7 I, KATHLEEN SKIDGEL, Hearing Reporter for the 8 California State Board of Equalization certify that on 9 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 19 constitute a complete and accurate 14 transcription of the shorthand writing. 15 16 Dated: December 26, 2012 17 18 19 ____________________________ 20 KATHLEEN SKIDGEL, CSR #9039 21 Hearing Reporter 22 23 24 25 26 27 28 20