1 BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION 2 450 N STREET 3 SACRAMENTO, CALIFORNIA 4 5 6 7 8 REPORTER'S TRANSCRIPT 9 JUNE 11, 2013 10 CORPORATE FRANCHISE AND PERSONAL INCOME TAX HEARING 11 APPEAL OF 12 EMMIS COMMUNICATIONS CORPORATION 13 NO. 547964 14 AGAINST PROPOSED ASSESSMENT OF 15 ADDITIONAL INCOME TAX 16 17 18 19 20 21 22 23 24 25 Reported by: Kathleen Skidgel 26 CSR No. 9039 27 Juli Price Jackson 28 CSR No. 5214 1 1 P R E S E N T 2 For the Board Jerome E. Horton of Equalization: Chairman 3 Michelle Steel 4 Vice-Chair 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, Board Proceedings 12 Division 13 For Board of 14 Equalization Staff: Lou Ambrose Tax Counsel IV 15 16 For Franchise Tax Board: Ted Tourian 17 Tax Counsel 18 Norm Scott Tax Counsel 19 20 For Appellant: Carley A. Roberts Attorney 21 Timothy Gustafson 22 Attorney 23 Ryan Hornaday Representative 24 25 ---oOo--- 26 27 28 2 1 450 N STREET 2 SACRAMENTO, CALIFORNIA 3 JUNE 11, 2013 4 ---oOo--- 5 MR. HORTON: Members, let us reconvene the 6 meeting of the Board of Equalization. 7 Ms. Richmond, what is our next item? 8 MS. RICHMOND: Our next item is B, 9 Corporate Franchise and Personal Income Tax Appeals 10 Hearings. B2, Emmis Communications Corporation. 11 Board Proceedings has received contribution 12 disclosure forms for today's hearings from the 13 parties, participants and agents. All forms were 14 properly completed and signed. All parties, 15 participants and agents are on the alpha listings 16 provided to your office. 17 Each person sitting at the table will be 18 asked to intro -- to introduce themselves and, if 19 necessary, their affiliation with the taxpayer for 20 the record. 21 Ten minutes is allocated for the taxpayer's 22 opening presentation, followed by ten minutes for 23 the Franchise Tax Board or Department's 24 presentation, and five minutes is allocated to the 25 taxpayer for rebuttal. 26 This taxpayer was granted an additional 30 27 minutes for their opening presentation, for a total 28 of 40 minutes. 3 1 Mr. Horton. 2 MR. HORTON: Um, just for clarification, 3 the 40 minutes will go to the Department as well. 4 Uhm, we would ask Mr. Ambrose to please 5 introduce the issues in this case. 6 MR. AMBROSE: Good morning, Mr. Chairman, 7 Board Members. Uh, this is the appeal of Emmis 8 Communications Corporation, and the issues, uh, are 9 whether the Board proper -- or whether respondent 10 properly excluded $931,119,059 from the sales factor 11 denominator pursuant to California Code of 12 Regulations Title 18, Section 25137(c)(1)(A) as 13 substantial amounts of gross receipts arising from 14 an occasional sale of a fixed asset or other 15 property held or used in the regular course of 16 appellant's trader business. 17 And the second issue is if respondent did 18 properly exclude the gross receipts, whether 19 appellant has shown by clear and convincing evidence 20 that the exclusion pursuant to that regulation 21 results in an unfair representation of its business 22 activities in California. 23 MR. HORTON: Thank you very much. 24 We'll now go to the, uh, taxpayer. But, 25 Members, I'd like to sort of, uh, to the extent 26 possible, first advise the taxpayer that, uh -- this 27 statement is -- has no bearing whatsoever, but to -- 28 and -- and as well as the Department, but it would 4 1 certainly encourage us to try to stay focused in the 2 order of the law, uh, in that we, uh -- uh, try to 3 deal with the transactional test as it relates to 4 business income and then flow to the next item that 5 would be appropriate relative to the order of the 6 law. 7 Just a suggestion by the way. That would 8 be my intent to try to keep us focused and not end 9 up having to bifurcate and discuss items that may 10 not be -- maybe a condition subsequent to the 11 previous item. Okay? 12 With that said, I would go to -- to the 13 taxpayers and ask that they introduce themselves for 14 the record. 15 MR. HORNADAY: My name's Ryan Hornaday. 16 I'm the Senior Vice President of Finance and 17 Treasurer at Emmis Communications. 18 MR. HORTON: Welcome. 19 MS. ROBERTS: Carley Roberts with 20 Sutherland, counsel for Emmis. 21 MR. HORTON: Welcome. 22 MR. GUSTAFSON: Tim Gustafson with 23 Sutherland, counsel for Emmis. 24 MR. HORTON: Thank you. Mr. Gustafson, I 25 don't know if Mr. Ambrose's mike will work for you. 26 But if so, you're certainly welcome to -- to have 27 that readily available to you. 28 MR. GUSTAFSON: Thank you. 5 1 MR. HORTON: We're at your service. 2 MS. ROBERTS: Thank you, Mr. Chairman, 3 Members of the Board. 4 Uh, before I get started, we have a number 5 of exhibits that are physically in front of you. We 6 also will be displaying them on the screen. We 7 understand the screens are small, so we wanted to 8 make sure that you had both physical copies in case 9 you were having a hard time reading the text that's 10 in front of you. 11 So before we move into the arguments, I do 12 want to set the stage for this case. 13 One -- one other procedural item for Ms. 14 Richmond; we would like to, uh, be stopped at 35 15 minutes into our case in chief and we would like to 16 reserve a full 10 minutes for rebuttal. Is that 17 okay? 18 MR. HORTON: Uh, the calculation may be a 19 little off. Stop at 30 minutes to allow 10 minutes 20 on -- on rebuttal. Is that -- or was it 35 adding 5 21 to your previous 5? 22 MS. ROBERTS: We have 40 minutes for the 23 case in chief and five for rebuttal. So I'd like to 24 reserve a full 10 for rebuttal and 35 for the case 25 in chief. 26 MR. HORTON: Okay. 27 MS. RICHMOND: Okay. 28 MS. ROBERTS: Thank you. 6 1 I would like to set the stage before we -- 2 before we dig into the -- the legal arguments here. 3 This is not a Rev. and Tax Code Section 25137 4 appeal. Neither Emmis nor the FTB are here seeking 5 to invoke alternative apportionment under Section 6 25137. 7 Emmis filed its original return for the 8 year in issue using California standard 9 apportionment formula, treating all income as 10 business income, consistent with prior years. 11 This case is about whether California 12 standard formula fairly represents Emmis's activity 13 in California. 14 If we can turn to Exhibit 1. Emmis -- it's 15 a diversified media company. It sold 13 television 16 stations outside California during the year in 17 issue. The sales produced $342 million of income. 18 The balance of Emmis activity for the year in issue 19 produced a loss of 103 million, leaving Emmis with 20 net taxable income of 239 million. 21 We want to make it, uh, clear in the 22 Members' minds as this hearing proceeds that 100 23 percent of the income at issue in this case is from 24 these sales, all of which were outside the State of 25 California. 26 If we can turn to Exhibit 2. This 27 highlights, uh, in red, all of the states where 28 Emmis held media properties during the year in 7 1 issue. As signified by the color red, these 2 properties operated at a $103 million loss during 3 the year in issue. 4 The black broadcasting towers represent 5 states where the 13 media properties were sold, and 6 the gray broadcasting towers represent states where 7 Emmis owned other radio and television stations 8 during the year in issue. This is the entirety of 9 Emmis's business operations. It is a diversified 10 media company. 11 Turning to Exhibit 3. Emmis's business 12 model both before, during and after the year in 13 issue is to acquire underdeveloped media properties 14 in desirable markets, and then to create value by 15 developing those properties to increase their cash 16 flow, and then dispose of those properties when it's 17 appropriate to do so. 18 From 1979, when Emmis was first 19 incorporated, to the present it has acquired 75 20 media properties and has disposed of 48. 21 For the year in issue, on its California 22 return, Emmis treated the income as business income. 23 This is consistent with its treatment of the income 24 stream related to such media properties in prior 25 years. It included the gross receipts from the 13 26 media properties in its sales factor denominator. 27 Nothing in the numerator, since all 13 media 28 properties were outside California. 8 1 In the states where the properties were 2 located, Emmis included the gross proceeds in the 3 numerator of its sales factor to such states. 4 So setting the stage here, we see that 5 Emmis treated all of this income as business income, 6 as it should, in all of the states where the assets 7 were sold outside California. It was properly 8 included in the numerators of those states. 9 FTB, upon audit, and the position it took 10 at protest was that the receipts from Emmis's sales 11 factor must be excluded from its sales factors 12 relating to these 13 sales under FTB Regulation 13 25137(c)(1)(A), the occasional sale regulation. 14 Now, moving to -- we see three arguments in 15 this case. And the first argument really is that 16 Regulation 25137(c)(1)(A) should not apply in the 17 first instance. Equitable relief under 25137 is 18 only invoked where the activities of the taxpayer in 19 California are not fairly reflected by the standard 20 apportionment provisions. This necessarily means 21 that the regulations, the special regulations that 22 are promulgated under 25137, including the 23 regulation in dispute, are premised on distortion. 24 Threshold distortion does not exist in this case. 25 25137(c)(1)(A) is meant to fix distortion 26 of the normal income stream due to one-off sales 27 that dilute the sales factor. 28 I'm a widget manufacturer. I sell widgets. 9 1 I have a normal stream of income. I have a large 2 sale. I sell the factory. It's meant to remedy the 3 situation of where including those gross proceeds in 4 the sales factor are going to skew that normal 5 income stream from the widgets. 6 The circum -- circumstances of 7 25137(c)(1)(A) that they were meant to remedy do not 8 exist in this case. The entire income stream is 9 from the sales that FTB seeks to exclude under the 10 regulation. There cannot be a distortion of income 11 where the activity in question generates the 12 entirety of the apportionable income. 13 This situation brings to mind both 14 Microsoft and Fluor. In both of those cases, 15 there's strong caution that there will be 16 circumstances where the application of 25137 or the 17 accompanying regulations is improper. For example, 18 quote: 19 "The activity in question produces a 20 substantial portion of the taxpayer's 21 apportionable income." 22 The facts of this case are precisely what 23 the court in Microsoft and your Board in Fluor 24 warned against. FTB's application of the regulation 25 in the fist instance is improper. 26 Moving to the second of three arguments. 27 In the event your Board decides that the regulation 28 should apply, we move to whether or not the elements 10 1 of the occasional sale regulation have been 2 satisfied. Section 25137(A) -- (c)(1)(A) provides, 3 "Where substantial amounts of gross 4 receipts arise from an occasional sale of a 5 fixed asset or other property, held or used 6 in the regular course of the taxpayer's 7 trader business, such receipts shall be 8 excluded from the sales factor." 9 "Substantial" is not at issue in this case. 10 Occasional -- "occasional" is the only item that's 11 at issue in this case. 12 If we could turn to Exhibit 4. We want to 13 make clear that the requirements for occasional 14 involve two elements. A sale is occasional under 15 the regulation if the transaction is outside the 16 taxpayer's normal course of business and occurs 17 infrequently. Not one or the other, but both must 18 be met in order for a sale to be occasional. 19 Neither are met in this case. 20 In order -- in an effort to establish that 21 the acquisition and disposition activity is the 22 normal course of Emmis's business, we have with us 23 today Ryan Hornaday. 24 If you can please, Mr. Hornaday, restate 25 your -- your position for the Board. 26 MR. HORNADAY: Ryan Hornaday, Senior Vice 27 President of Finance and Treasurer at Emmis. 28 MS. ROBERTS: And how long have you been 11 1 with Emmis? 2 MR. HORNADAY: I joined Emmis in July of 3 1999; so I've been there almost 14 years. 4 MS. ROBERTS: If you can please describe 5 for the Board Emmis's strategic business model, both 6 historically and currently. 7 MR. HORNADAY: Our business model has 8 always been to acquire underdeveloped media 9 properties, apply our expertise in local programming 10 and local sales, improve the cash flow of those 11 properties and then dispose of them when it's 12 appropriate. 13 MS. ROBERTS: One of the issues in this 14 case that the FTB raises in its arguments is that 15 somehow the activity relating to the sales in issue 16 should be separated from the advertising revenue 17 that is generated by the media properties. 18 Mr. Hornaday, if you could explain for us 19 how Emmis's advertising revenue fits with its 20 acquisition and disposition activity. 21 MR. HORNADAY: So, as a diversified media 22 company, local advertising is the life blood of our 23 business. As we improve the -- the revenues through 24 increased local advertising, that increases the cash 25 flow of the station. The higher cash flow that a 26 station garners, the -- the more value that that 27 station is worth. 28 And then -- 'cause radio stations, uh, 12 1 media properties are bought and sold as a multiple 2 of cash flow; so the more cash flow you have, the 3 more valuable the property is. 4 MS. ROBERTS: So that -- that ties together 5 the advertising revenue and how it fits, directly 6 correlates with the business of Emmis. 7 Uh, from the time that Emmis was 8 incorporated in 1979 through the present, which has 9 been just over 30 years, Emmis has acquired 75 media 10 properties and disposed of 48 media properties. 11 Mr. Hornaday, would you describe this 12 acquisition and disposition activity to be part of 13 Emmis's normal business operations? 14 MR. HORNADAY: Yes. 15 MS. ROBERTS: Could Emmis expect to grow 16 its advertising revenues and maximize shareholder 17 value without regular acquisition and disposition 18 activity? 19 MR. HORNADAY: No. As a diversified media 20 company we have to be willing and able to adapt to 21 changing market conditions and the regulatory 22 environment. 23 That -- we typically, as we improve 24 properties, if -- if the growth dynamics of a 25 specific market have stalled or there's a change in 26 the demographics of the market such that it's no 27 longer an attractive market to us, we look to sell 28 the properties in that market and reinvest that 13 1 capital in media properties in a faster growing 2 market. 3 In both circumstances it would require us 4 to dispose of the media property, and to go and 5 acquire a media property in a new market. On the 6 flip side, there's a -- there's a buyer and a seller 7 of each of those media properties. 8 MS. ROBERTS: Do you -- do you participate 9 in this acquisition and disposition activity? 10 MR. HORNADAY: Yes. 11 MS. ROBERTS: And during your time with 12 Emmis over the last 14 years, how much of your time 13 has been dedicated to this activity? 14 MR. HORNADAY: Uh, roughly half. 15 MS. ROBERTS: Emmis has been in 16 broadcasting since it incorporated in 1979. There 17 are a number of events that happened in the mid 18 1990s. 19 Mr. Hornaday, can you tell us about the 20 Telecommunications Act of 1996 and how it impacted 21 Emmis's broadcasting business? 22 MR. HORNADAY: So the -- the Telecom. Act 23 of 1996 greatly changed the regulatory environment 24 for broadcasting. In particular, prior to 1996 a 25 broadcaster could only own one FM and one AM radio 26 station in any given market. Subsequent to the Act, 27 a broadcaster could own up to eight licenses in a 28 market depending on how many independent radio 14 1 stations there were in any given market. 2 This dramatically changed, uh, the profile 3 of the radio industry in particular. There was 4 rapid consolidation as broadcasters scrambled to try 5 to get to the maximum number of stations in any 6 particular market. 7 That caused radio multiples, or the price 8 that people were willing to pay for radio stations, 9 to -- to increase dramatically. Whereas, prior to 10 1996 radio multiples were somewhere around eight 11 times cash flow, in the late 1990s they skyrocketed 12 up to approaching 20 times cash flow. 13 So it was in that environment that Emmis 14 stepped back and said, it's difficult to acquire a 15 media property or a radio station at 20 times cash 16 flow and generate a return on that investment. So 17 we looked across the -- the whole media landscape 18 and felt that we could apply the -- the local 19 programming, the local sales expertise we had 20 garnered in radio over the prior 20 years, and we 21 knew we could apply that to -- to television 22 broadcasting which is a very similar business. 23 MS. ROBERTS: So this story is -- is 24 encapsulated best probably on Exhibit 5. It depicts 25 Emmis's media property acquisition and disposition 26 activity starting in fiscal year end 1998, 27 continuing up through fiscal year end 2009. 28 This particular chart was prepared in 15 1 direct response to a question from your Board. This 2 12-year period covers immediately before Emmis 3 acquired its first television media property through 4 the disposition of its last television media 5 property. As you can see from this 12-year period 6 on -- on the exhibit, there were 58 media property 7 acquisitions and 32 media property dispositions for, 8 a total of 90 transactions. 9 Mr. Hornaday, Emmis consummated the sales 10 of the 13 television media properties in fiscal year 11 2006. Can you confirm that each of these 13 12 television media properties had separate FCC 13 licenses involving separate applications for the 14 sales? 15 MR. HORNADAY: Yes, the -- the FCC approval 16 process is they look at it FCC license by FCC 17 license. So even in the case, uh, one of the -- of 18 the sales was to a company called Journal 19 Communications, which is another diversified media 20 company that owns radio and television stations. 21 Journal bought one of -- one of the three stations 22 that Journal bought from us was in Omaha. Journal 23 already had radio stations in Omaha, and so they -- 24 they had basically too much market share in Omaha. 25 The FCC approved two of the three licenses 26 and did not approve the third license, which was the 27 one in Omaha, until Journal divested of two of their 28 radio stations. 16 1 So the FCC looks at each license 2 individually in whether it approves the transfer or 3 not. 4 MS. ROBERTS: And the separateness of the 5 FCC licenses goes to the issue of whether or not we 6 have multiple sales here, single transactions. It 7 will be the FTB's position that somehow all of these 8 13 sales constituted one sale, or constituted one 9 transaction despite the fact that the 13 assets were 10 sold to four different unrelated buyers. 11 Mr. Hornaday, what led to Emmis's sale of 12 the 13 television media properties in fiscal year 13 end '06? 14 MR. HORNADAY: Emmis became increasingly 15 concerned about the relationship between the cable 16 and satellite operators and the local television 17 broadcasters. In particular, we were concerned that 18 we would be able to get paid for our content 19 commensurate for -- with the viewing of that 20 content. In a nutshell, that's called 21 retransmission revenue, um, and -- and a lot of the 22 cable networks get paid retransmission fees. Um, 23 local television stations, at the time that we 24 operated the local stations and the mid-2000s, 25 retransmission revenue was not a significant 26 amount. 27 Furthermore, we were concerned with the 28 proliferation of digital video recorders, DVRs, that 17 1 people's ability to skip through advertising, um, 2 commercials on the -- in the local affiliates, that 3 advertisers would begin to pay less and less to 4 advertise on television if people were not going to 5 be watching their commercials. 6 So those two factors caused us to 7 reevaluate, um, our investments in television at the 8 time, and we decided to take some money off the 9 table. 10 MS. ROBERTS: So has Emmis forever 11 abandoned its television media properties? 12 MR. HORNADAY: No. We -- we constantly 13 evaluate the media landscape. Today we actually 14 find television more attractive than radio 15 broadcasting. In particular, our thesis around 16 the -- the retransmission fees and the local 17 affiliates' ability to garner significant 18 retransmission fees from the cable and satellite 19 providers, we were wrong. They are being able -- 20 they are getting significant retransmission fees 21 currently. 22 Sinclair and Nextstar are two of the larger 23 television operators, and they -- they talk in their 24 public reports all the time about a significant 25 portion of their business now is -- is -- is getting 26 the retransmission fees. 27 Also, as we look to get back into 28 the bus -- as we look to reacquire television 18 1 stations, as we realize that our thesis isn't 2 playing out as we originally thought, um, we bid on 3 television stations in April of this year -- it was 4 a -- a nine figure deal. It was a very large deal. 5 We were unsuccessful. 6 We are currently in a bidding process for 7 another group of television assets, and we're 8 evaluating a handful of television-specific media 9 deals because we like the prospects of the -- the -- 10 of television broadcasting. 11 MS. ROBERTS: So for purposes of your 12 Board, between Exhibit 5 -- and we'll turn to 13 Exhibit 6 in just a moment. We -- we had -- we 14 wanted to have everything on one chart, but it was 15 very difficult once you tried to put all of the 16 years up there. 17 But as you can see, you can watch the 18 acquisition and disposition activity during this 19 12-year period, from '98 to '09. And then as we 20 turn to Exhibit 6, it's a continuum, going from '10 21 up to year to date, where you can see that the 22 acquisition and disposition activity of Emmis 23 continues on a normal and regular basis. 24 So that's the -- that is the first 25 requirement under occasional sale, that it be in -- 26 that, in order for a sale to be occasional, it has 27 to be outside the taxpayer's normal business, which 28 this clearly is not. 19 1 The next piece is that it needs to occur 2 infrequently. 3 Mr. Hornaday, when Emmis listed 16 4 television media properties for sale, how many 5 buyers did it anticipate? 6 MR. HORNADAY: We were prepared to sell the 7 16 stations to 16 different buyers. 8 MS. ROBERTS: And can you confirm that the 9 16 television media properties were sold to seven 10 unrelated parties over the course of four years? 11 MR. HORNADAY: Yes. There were four 12 separate purchasers of the 13 stations during the 13 year in issue. And there were three separate 14 purchasers for the other three television stations 15 over the subsequent three years. 16 MS. ROBERTS: So under the plain language 17 of the occasional sale regulation "occurs 18 infrequently," we have 13 sales in a minimum of four 19 transactions during the year in issue, clearly 20 meeting the requirement that it's -- that it's -- 21 it's not meeting the requirement. It's not meeting 22 the requirement that it occurs infrequently. 23 As your Board is aware, this is not a 24 business income case. However, given the complete 25 lack of decisional law, interpreting the occasional 26 sale provisions, the parties have turned to the 27 transactional test standards for determining whether 28 an item of income is business income. 20 1 FTB confirmed in its briefing, and again in 2 its submission last week to your Board, that the 3 standards espoused under California's transactional 4 test for business income are the same ones that 5 should be used to determine whether a sale is 6 occasional. 7 To reiterate, this is not a business income 8 case. We are not talking about the character of the 9 income from the dispositions. Emmis treated the 10 income as business income, consistent with its 11 treatment of the income stream from such assets in 12 prior years. Application of the functional test is 13 not at issue. 14 The only reason that the parties are 15 talking about the transactional test is because the 16 parties agree the standards inform the occasional 17 sale analysis. 18 Under the transactional test income is 19 business income if it arises from transactions and 20 activity in the regular course of the taxpayer's 21 trader business. 22 The California Supreme Court's decision in 23 Hoechst Celanese informs the standards of this test. 24 The focus is on the nature of the transaction that 25 generates the taxable income. Relevant 26 considerations include frequency and regularity of 27 the similar transactions and former practices of the 28 business. 21 1 Ninety transactions -- 58 acquisitions, 32 2 dispositions -- over a 12-year period is evidence of 3 frequency and regularity. Those same 90 4 transactions are evidence that this practice is 5 consistent with Emmis's normal and regular business. 6 In other cases involving application of the 7 transactional test, the FTB has taken the exact 8 opposite position that it takes in this appeal. 9 Most recently in Comcast, and in Sonic before that. 10 Comcast involved the termination fee 11 received by Comcast from a failed merger 12 transaction. The issue is whether the income from 13 the termination fee should be treated as business 14 income or non business income. The FTB took the 15 position that the income should be treated as 16 business income and forcefully argued that position 17 under the transactional test. 18 If we can turn to Exhibit 7. Citing to 19 Atlantic Richfield, another business income case out 20 of Colorado applying the transactional test to 21 proceeds from a forced divestiture. FTB argued 22 Comcast's 30 acquisitions and dispositions over a 23 15-year period met the transactional test. 24 So you have the FTB in Comcast citing to 25 Atlantic Richfield, arguing that it meets the 26 transactional test. Atlantic Richfield had 26 27 transactions over a 22-year period. Comcast had 30 28 transactions over a 15-year period. 22 1 Emmis, this case, we have 90 transactions 2 over a 12-year period. That is more than triple in 3 less the time than either of those other two 4 cases. 5 If we can display Exhibit 8. 6 This inconsistent behavior should not be 7 tolerated by your Board. As recently as December 8 2012, in Microsoft, the FTB was chastised for 9 advancing a position directly contrary to the 10 taxpayer in an unpublished Board of Equalization 11 case, suggesting a result-oriented bias. 12 The irony here is that Emmis was 13 aboveboard. It took a business income position on 14 these 13 sales of television. Had Emmis taken a non 15 business income position, it would be the FTB 16 sitting here today before your Board arguing that 90 17 transactions over a 12-year period assuredly meets 18 the transactional test. 19 This was the normal course of business for 20 Emmis. It has a strategic business model objective 21 of acquiring underdeveloped properties, building 22 value and then selling them when appropriate. The 23 activity did not occur infrequently. 24 Turning to the last argument to be made by 25 the taxpayer, assuming Regulation 25137(c)(1)(A) 26 applies, and assuming your Board finds that the 27 occasional sale definition is met, then it's Emmis's 28 position that it's established by clear and 23 1 convincing evidence that application of that 2 regulation to it results in impermissible 3 distortion. 4 General Mills summed it up best in August 5 of last year. The ultimate goal is assessing 6 whether the standard formula fairly represents the 7 company's business activity in California. The 8 application of the occasional sale regulation does 9 not represent Emmis's activity in California during 10 the year in issue. Application of the standard 11 formula, Emmis's original filing position, fairly 12 represents its business activity in California. 13 By excluding the gross receipts from the 13 14 media property sales, California taxes 100 percent 15 of Emmis's apportionable income with no sales factor 16 representation. This leads to impermissible 17 distortion. 18 If we can turn to Exhibit 9. As you will 19 see from this quantitative distortion analysis, what 20 we tried to do was pick out two of the case law 21 objectives for quantitative distortion. Two of the 22 key metrics involve profit margin and income. 23 Exhibit 9 pertains specifically to profit 24 margin. We pulled a representative sample of the 25 cases that look at 25137 and look at quantitative 26 distortion. The objective here that the courts were 27 doing when they looked at these cases was to look at 28 the profit margin of the activity in question. So 24 1 in all of these cases -- Pactel, Microsoft, General 2 Mills, Limited Stores -- it was either the treasury 3 function or the hedging function of the company. 4 So in looking at that function, what was 5 the profit margin of that particular activity? As 6 you can see, the profit margin in any of those cases 7 was less than one percent for the activity being 8 examined. This is compared to what will be referred 9 to as operational or normal operational income which 10 varied from 6 percent to 46 percent. 11 This case is exactly the opposite. Our 12 profit margin with regard to Emmis is nearly 40 13 percent. And what FTB would like to call the normal 14 operational income was running at a loss. 15 If we could then turn to Exhibit 10. This 16 is the quantitative distortion analysis involving 17 the income measure. So, looking at the same four 18 cases, you look at the activity in question -- 19 again, treasury gross receipts or the hedging 20 function -- and you look at that as a percentage of 21 total income. 22 As you can see in those four cases, less 23 than -- no more than two percent was ever a part of 24 the total income of the business, the total income 25 of the business. Whereas, here, with Emmis, it is 26 100 percent of the income in the case. And it's 27 only seeking to include the appropriate gross 28 receipts, which is 59 percent. 25 1 I think we will -- we will conclude early 2 and save the rest of our time for rebuttal. 3 MR. HORTON: Thank you. 4 We'll now go to the Department. The 5 Department has 40 minutes to make their 6 presentation. 7 MR. TOURIAN: Good morning, Mr. Chairman 8 and Members of the Board. My name is Ted Tourian, 9 and sitting next to me is Norm Scott. We'll be 10 representing the Franchise Tax Board in this 11 matter. 12 Today there are two issues: Whether 13 $931 million of gross receipts resulting from the 14 taxpayer's divestiture of its television division 15 should have been excluded from the sales factor as a 16 substantial and occasional sale; and whether the 17 taxpayer has shown by clear and convincing evidence 18 that excluding the gross receipts from the 19 divestiture of its television division resulted in 20 an unfair representation of its business activities 21 in California. 22 In the late 1990s, the taxpayer was one of 23 the largest radio broadcasters in the United States. 24 In the late 1990s, the taxpayer made a decision to 25 enter television broadcasting. 26 By 1999 -- between 1999 and 2004, the 27 taxpayer purchased 16 television stations. During 28 that period, it did not sell a single television 26 1 station. Then in 2005, the taxpayer made a 2 strategic decision to divest itself completely of 3 its television division. The decision to divest was 4 made primarily for two reasons, as can be found in 5 SEC filings; first, to lower its debt obligations; 6 and second, the taxpayer realized that it could not 7 operate television stations as successfully as other 8 companies that were larger and more focused in the 9 television industry. 10 By February of 2006, the taxpayer had sold 11 13 television stations in four separate 12 transactions. The taxpayer continued to operate the 13 remaining three television stations. In its SEC 10 14 case, income from the operation of these three 15 television stations were characterized as income 16 generated from discontinued operations. 17 The taxpayer had completely divested its 18 television division by February of 2009. 19 Once again, the first issue that needs to 20 be determined is whether gross receipts from the 21 taxpayer's divestiture of its television division 22 should have been excluded as a substantial and 23 occasional sale. 24 Under Regulation 25137(c)(1)(A), this is 25 the standard rule, a substantial sale is defined by 26 whether its exclusion results in a five percent or 27 greater decrease in the taxpayer's sales factor 28 denominator. 27 1 An occasional sale is defined by whether 2 the transaction occurs infrequently and is outside 3 the appellant's -- the taxpayer's normal course of 4 business. 5 With respect to whether these sales were 6 substantial, the taxpayer stipulated that this prong 7 had been met, as discussed on page 10 of its opening 8 brief. In fact, when each of the four transactions 9 were excluded from the sales factor denominator, the 10 sales factor denominator dropped by more than 10 11 percent. 12 An occasional sale is one where the 13 transaction occurs infrequently and is outside of 14 the appellant's normal course of business. Clearly, 15 the divestiture, the ceasing of the taxpayer's 16 television division, is a transaction that does not 17 occur frequently and is outside the taxpayer's 18 normal course of business. 19 Nowhere in the taxpayer's Securities and 20 Exchange Commission, uh, 10-Ks does it provide that 21 the taxpayer's business model is to divest whole 22 segments of its unitary operations. 23 Finally, just to reiterate, when the 24 taxpayer divested its television division, income 25 generated from television broadcasting was 26 characterized as income from discontinued 27 operations. Obviously, the magnitude of divesting a 28 television division clearly fits within the 28 1 parameters of what an occasional sale is. 2 The second issue that needs to be 3 determined is whether the taxpayer has shown by 4 clear and convincing evidence that excluding the 5 gross receipts from the divestiture of its 6 television division resulted in an unfair 7 representation of its business activities in 8 California. 9 As stated by your Board in appeal of Fluor, 10 the burden of proof falls on the party wishing to 11 deviate from the standard rule pertaining to 12 substantial and occasional sales. 13 In this appeal, the taxpayer has not 14 established with clear and convincing evidence that 15 the regulation does not fairly represent the 16 taxpayer's business activities in California. 17 First of all, excluding sales from the 18 divestiture of appellant's television division 19 accurately reflects the taxpayer's economic activity 20 in California. 21 If you would please turn to the exhibit 22 that was provided to, uh, you last week. We can see 23 that the blue line represents the tax from 2003 to 24 2005. We can see the blue line trending upwards, 25 showing that the taxpayer's sales factor percentage 26 in California was going up from 13 to 15 percent. 27 Then in 2006, as shown by the red line, the 28 taxpayer's sales factor dropped to just under -- uh, 29 1 just under 7 percent with the taxpayer, including 2 the gross receipts from this divestiture. By 3 removing the gross receipts from the divestiture, 4 all the -- and -- and applying the standard rule, 5 all the Franchise Tax Board -- all that's happened 6 is that the sales factor has gone back up, along 7 with the blue line, which is consistent with the 8 upwards trending sales factor to 17 percent. 9 In fact, this is all that happened: 10 Franchise Tax Board excluded substantial amounts of 11 gross receipts resulting from the divestiture of a 12 line of business in order to accurately reflect the 13 taxpayer's activities in California. 14 Conversely, if all the television stations 15 had been in California and the gross receipts from 16 the divestiture were included in both the California 17 sales factor enumerator and denominator, this, uh -- 18 California -- uh, the hypothetical taxpayer sales 19 factor would jump up to 66 percent. If that had 20 been the case, the hypothetical taxpayer would be 21 correct to apply Regulation 25137(c)(1)(A) in a 22 consistent manner and remove gross receipts 23 resulting from this divestiture. 24 Second, in order to demonstrate distortion, 25 the taxpayer must show that it would be both 26 qualitatively and quantitatively distorted to 27 exclude sales from the divestiture. In order to 28 demonstrate that the application of the standard 30 1 rule is qualitatively distorted, the taxpayer must 2 show that the divestiture of its television stations 3 is part of its normal day-to-day operations. 4 In this case -- in this situation the 5 taxpayer is a media company. As it already said, 6 the life blood of its company's operations is 7 advertisements. It may intermittently sell media 8 stations here and there, but its business is not in 9 the divestiture of whole segments of its 10 operations. 11 In order to demonstrate that the 12 application of the standard rule is quantitatively 13 distorted, the taxpayer must show that excluding the 14 gross receipts from the divestiture did not reflect 15 the taxpayer's business activities in California. 16 All the taxpayer has demonstrated is that the 17 exclusion of these gross receipts increases the 18 taxpayer's California taxable income. 19 As discussed already, the application of 20 the standard rule brought the sales factor 21 percentage back up to 17 percent. 22 Additionally, and although this is not a 23 case that's citable for precedent, the taxpayer 24 refers to Appeal of Vetco on page 7 of its opening 25 brief, uh, for the proposition that merely providing 26 computations that show a different apportionment 27 factor is not a showing of distortion. However, 28 that's all the taxpayer has done with its 31 1 quantitative analysis. It's basically provided a 2 different apportionment factor if the standard rule 3 had never been applied. 4 Finally, just to reiterate, the purpose of 5 excluding gross receipts under the standard rule is 6 to ensure that an occasional sale does not cause a 7 taxpayer's sales factor to be skewed by a one-time 8 transaction, like a divestiture of one of its lines 9 of businesses. 10 The accumulated appreciation of these 11 television stations occurred over several years. To 12 cause that accumulation to be reflected in a single 13 year's sales factor would result in an inordinate 14 amount of income being sourced to the State where 15 the, uh, assets are located. 16 However, if the unrealized income from the 17 appreciation of these assets were reported every 18 year, that income would be substantially diluted by 19 the apportionment factors in other states and 20 distributed equally to the states in which the 21 taxpayer did business. 22 So, going back to the hypothetical, that if 23 the taxpayer was based in California and all of its 24 television stations were in California, the gross 25 receipts from that divestiture would result in a 66 26 percent California sales factor. This would cause 27 an inordinate amount of income being sourced to 28 California. 32 1 In this hypothetical adding back the sales 2 from the divestiture back to the supposed California 3 taxpayer would not accurately depict their activity 4 in all of the states. 5 In conclusion, the gross receipts from the 6 divestiture of its television division should be 7 excluded from the sales factor; the divestiture of 8 the taxpayer's television division is occasional and 9 not part of the taxpayer's normal course of 10 business. 11 The taxpayer has not shown by clear and 12 convincing evidence that excluding the gross 13 receipts from the divestiture of its television 14 division resulted in an unfair representation of its 15 business activities in California. 16 Thank you. 17 MR. HORTON: On rebuttal. 18 ---oOo--- 19 20 21 22 23 24 25 26 27 28 33 1 ---o0o--- 2 MS. ROBERTS: Thank you, Mr. Chairman. 3 I want to start with where I started to 4 begin with, which is the circumstances of this case 5 are not meant for the application of Regulation 6 25137 (c)(1)(a). 7 The argument presented by Respondent is 8 reflective of the absurdity of the situation caused 9 by the application of this regulation in the first 10 instance. The regulation was meant to remedy a 11 situation where you have a normal stream of income 12 that's being distorted by a one off sale of the 13 taxpayer. 14 That is not happening in this case. 100 15 percent of the income that's being apportioned to 16 California is the normal stream in this case and 17 needs to have sales factor reflection. 18 Respondent makes the point with regard to 19 Emmis and its lines of business. Emmis is a 20 diversified media company. It has a written and 21 public statement in all of its 10ks regarding its 22 strategy. It acquires underdeveloped media 23 properties, not specific types of media properties. 24 It acquires underdeveloped media properties, grows 25 their value to increase their cash flow and then 26 they dispose of them when it's appropriate. That is 27 the business of being a diversified media company. 28 The -- a strategy of divesting entire divisions is 34 1 not in the 10ks because it is not their strategy. 2 Mr. Hornaday, question for you. One of the 3 points that's raised by Respondent is with regard to 4 the reasons for the decision to sell the 16 5 television stations made in 2005. There is 6 reference to paying down debt and that you had 7 competitors that were more suited. 8 Could you please explain for the Board -- 9 reconcile that with the decision -- with the reasons 10 that you articulated earlier? 11 MR. HORNADAY: Sure. So, the disclosure 12 that -- that the Respondent referenced was around 13 our decision to put our television stations up for 14 sale. We make reference to the fact that we thought 15 the television stations would be strategically 16 better aligned with a larger and more singularly 17 focused company that -- it's focused on the 18 challenges of the television industry. 19 What we meant by that -- I go back to my 20 comments earlier -- a larger television company with 21 more affiliates could better negotiate for payments 22 from the cable and satellite providers for 23 retransmission because they have more bulk. I mean, 24 that's -- I think that's the reconciliation of the 25 two points. 26 MS. ROBERTS: Thank you, thank you. 27 Respondent also does not go back and 28 reconcile its argument with the language of the 35 1 occasional sale provision. 2 The regulation specifically talks about 3 substantial amounts of gross receipts arising from 4 an occasional sale of a fixed asset or other 5 property. 6 Respondent has not explained how a decision 7 to sell a pool of assets is a sale, how they have 8 managed to aggregate 13 sales in one year and 16 9 years over a four-year period of time for being a 10 sale. 11 Even if we turn to the transactional test 12 provisions and we're were looking at the transaction 13 that's generating the taxable income, you cannot 14 take all of those sales and put them in together to 15 treat them as one sale or one transaction. 16 We have 16 sales and a minimum of seven 17 transactions spanning seven years. Their argument 18 does not fit within the language of the regulation. 19 Turning to Respondent's distortion 20 arguments, if we could display Exhibit 11? We have, 21 taken the FTB's distortion slide and have made some 22 corrections because their slide, as presented, does 23 not tell the whole story. 24 For starters, the descriptions are 25 inaccurate. The red line reflects Emmis's original 26 filing position using the standard apportionment 27 formula. It does not represent the application of 28 25137. The blue line reflects FTB's application of 36 1 Regulation 25137 (c)(1)(a). 2 The chart also fails to note, as we have 3 said multiple times, that 100 percent of Emmis's 4 activities relating to 100 percent of the California 5 apportionable income occurred outside California. 6 This, naturally, results in a lower sales factor. 7 Also this chart is based on the sales 8 factor. It's actually not looking at the overall 9 apportionment formula. If you look at '03 through 10 '05, Emmis's apportionment formula in California 11 ranged from 11 percent to 12 percent and it 12 decreased to just below 8 percent for the year in 13 issue, if the receipts are included in the sales 14 factor denominator. 15 The magnitude of income earned outside 16 California, along with its related activities, is 17 much greater in the year at issue than in previous 18 years. So, in the previous years we're running at a 19 loss, '03 was a loss of roughly 60 million, '04 was 20 a loss of roughly 50 million and '05 is a loss of 21 roughly 140 million. 22 FTB -- during those years, the State of 23 California was receiving between 11 percent and 12 24 percent of those losses over the years. Emmis was 25 in a loss position in '06, but for these sales. So, 26 if it did not have these sales, FTB would have 27 continued to collect at 11 to 12 percent of a loss. 28 Instead, because you include in the sales factor 37 1 those gross receipts for the activities taking place 2 outside California, California is now receiving 3 nearly 8 percent of an income number, just over 4 $200 million of the income number. You can 5 understand why the red line on the chart goes down. 6 If the FTB believes that the station sales 7 are unrelated to Emmis's business, then a more 8 precise apportionment would be to separate the 9 station sales from Emmis's other operations and 10 apportion them separately. This more precise 11 approach would result in zero income being 12 apportioned to California. 13 Complete Auto comes to mind here. It 14 requires fair apportionment of the activities to 15 fairly reflect the portion of income attributable to 16 California when 100 percent of the income is 17 attributable to increased activities occurring 18 outside of California. This results in a lower 19 apportionment factor being utilized in California. 20 If we can turn to Exhibit 12. This chart 21 accurately reflects Emmis's activities occurring in 22 California. 23 Mr. Hornaday, earlier today and as repeated 24 by Respondent, you referenced the importance of 25 local advertising to your overall business. You 26 said, "As a diversified media company, local 27 advertising is our life blood." 28 How does local advertising affect value of 38 1 a given property? 2 MR. HORNADAY: So -- so, each of these 3 media properties are located in a specific market. 4 So, we'll take, for example, our television station 5 in Green Bay, WLUK, a Fox affiliate. Car 6 dealerships in Green Bay would advertise on WLUK 7 because they wanted to reach the Green Bay audience. 8 They didn't try to reach people in 9 Sacramento as a car dealership in Green Bay because 10 that wouldn't do them any good. 11 So, all of the advertising revenue for 12 that -- that Fox affiliate in Green Bay resulted 13 from local market dynamics, from advertising revenue 14 generated in that market. And that's where the 15 value was created. 16 There's a separate Fox affiliate in 17 Sacramento for a car dealership in Sacramento. It's 18 two different markets and the value's created 19 locally. 20 MS. ROBERTS: It's the -- it's the local 21 nature that drives the value of these properties. 22 Again all 13 of them located outside of California. 23 It should have been Emmis who filed a 25137 24 petition, seeking equitable apportionment in this 25 case, given that even the standard apportionment 26 formula was assigning just under -- under 8 percent 27 of the income from sales to California, despite the 28 fact none of these properties had anything to do 39 1 with California -- all outside the state, all billed 2 by efforts in local markets. 3 By sticking with the standard apportionment 4 formula, as you can see from the green line in this 5 particular chart, Emmis list already meeting the 6 State halfway. 7 With regard to the test for distortion, 8 Respondent makes the point that there is both a 9 qualitative piece and a quantitative piece. Had the 10 taxpayer or the FTB been seeking 25137 alternative 11 apportionment, Appellant would agree that you would 12 have both types of distortion at issue. 13 But in this case Emmis has no ability to 14 argue that the activities are qualitatively 15 different. It is part of its normal course of 16 business. It will never be able to argue that 17 somehow the acquisition and disposition of these 18 media properties are qualitatively different from 19 its operations of those media properties. They are 20 one and the same. And the fact that they had 90 of 21 these transactions over a 12 year period of time 22 drives that point home. 23 In closing, Emmis was and remains a 24 diversified media company. It has consistently 25 treated all items of income and deduction relating 26 to its media properties as business income, 27 including the 13 media properties in dispute. 28 It is asking the FTB and your Board for 40 1 consistency. The facts were not designed for the 2 application of the occasional sale regulation. The 3 income stream that this regulation seeks to protect 4 is 100 percent of the apportionable income in this 5 case and yet there is no factor representation for 6 such income. There is no threshold distortion in 7 the first instance, making the regulation 8 inapplicable. 9 Even if the regulation applies, there are 10 not occasional sales. Emmis regularly engages in 11 acquiring and disposing of media properties. This 12 was and is Emmis's principal business and is 13 consistent with its public filings, demonstrating 14 its longstanding operating strategy of acquiring 15 undeveloped media properties, improving their cash 16 flow and disposing of them when appropriate -- 75 17 acquisitions and 48 dispositions over 30 years, 90 18 of which collectively took place from 1998 to 2009. 19 I would also refer your Board back to the 20 submission that we had last week where we included 21 public statements right from Emmis's 10ks, 22 demonstrating this strategy. It has not changed 23 over time. It is part and parcel with its everyday 24 business. 25 With specific regard to the television 26 media properties, we have 16 separate sales sold to 27 seven unrelated buyers over the course of four 28 years. Under no interpretation of occasional sale 41 1 is this one sale or one transaction. A decision to 2 list these properties for sale does not constitute a 3 sale or a transaction. 4 Thirteen is not infrequent during our year 5 issue and not even four if we look at the four 6 transactions with the four different buyers is not 7 infrequent. 8 Even if the sales are occasional, 9 application of Regulation 25137 (c)(1)(a) leads to 10 gross quantitative distortion, as demonstrated by 11 the record. 12 Again 100 percent of the apportionable 13 income in this appeal has no factor representation. 14 Thank you. 15 MR. HORTON: Thank you for your 16 presentations today. 17 Members, before I open up for questions and 18 discussions, I want to go back to the Department and 19 ask them in regards to the occasional sale then, how 20 do you reconcile the aggregate of the transactions 21 over the entire period of operation and then isolate 22 it to one transaction? 23 It appears that to some degree you are 24 relying on Jim Beam, which speaks to an occasional 25 sale and extraordinary transaction, when the 26 taxpayer's divesting. But there they speak of a 27 complete liquidation and with the total intent of 28 never returning to that activity again. 42 1 MR. TOURIAN: If I may? 2 First of all, we did not aggregate to one 3 transaction. We stated four transactions. So, 4 there were four transactions. 5 Yes, we did analogize to Jim Beam because 6 it is an extraordinary event. 7 MR. HORTON: Let me qualify my question. 8 MR. TOURIAN: Sorry. 9 MR. HORTON: I would include or ask that 10 you that respond to the transactions prior to and 11 subsequent to -- 12 MR. TOURIAN: Oh -- 13 MR. HORTON: -- as well. 14 MR. TOURIAN: -- the transactions prior to 15 and subsequent, they were -- may I? 16 MR. HORTON: Sure. 17 MR. TOURIAN: Appellant provides this 18 chart, their Exhibit 5. In this situation, we 19 agree, they're buying and selling -- they're buying 20 and selling radio property -- properties and 21 television stations. However, in this -- as the 22 taxpayer said, the story can be made in just this 23 one year, 2006. 24 What happened in 2006? Why didn't the 25 taxpayer sell any television stations up until 2006? 26 Why was it only purchasing televisions stations in 27 2006? What happened in this -- in the tax year of 28 2006? 43 1 In that year in -- as per the taxpayer's 2 Securities and Exchange Commission filings, filed 3 under perjury -- filed under penalty of perjury, the 4 taxpayer said, "We're diverting. We're ceasing a 5 line of business." And that's their television 6 division. And that's what the -- that's what the 7 FTB relied on, on their SEC filings. 8 MR. HORTON: Same question of the taxpayer. 9 MS. ROBERTS: A couple of points. 10 One, you can't cease a line of business 11 that doesn't exist. Emmis is a diversified media 12 company. It had assets that were held in both 13 broadcasting and publishing. There is no way to 14 parse off a line of business for television. It 15 would being like splitting hairs. Broadcasting 16 business is one and the same, whether it's for radio 17 or whether it's for television. 18 FTB's reliance on Jim Beam in this case is 19 a red herring. It's completely misplaced. What it 20 quotes from Jim Beam is an exact quote from Hoeschst 21 Celanese defining the standards for the 22 transactional test. 23 Jim Beam, the parties agreed that the 24 complete liquidation, in event in there, the 25 disposition of Taylor Foods, did not meet the 26 transactional test. The transactional test was not 27 in dispute in Jim Beam. The only thing that was in 28 dispute in Jim Beam was whether or not this complete 44 1 liquidation or this exiting a line of business 2 should have a carve-out under the functional test. 3 Jim Beam does not apply in this case or any of its 4 analyses that's set forth in Jim Beam. 5 With regard to why Emmis decided in 2005 to 6 sell the television media properties, it was in a 7 growth mood from '99 to '05. It was in the process 8 of improving its operations and growing. It had to 9 sit back and think about what assets were 10 appropriate to sell at any given time. And it made 11 the decision to do that in 2005. 12 Just like it's sitting back now and it's 13 deciding to get back into the television business. 14 It is constantly assessing and reassessing 15 the market with regard to these media television -- 16 with regard to media properties. 17 MR. HORTON: Okay. Question of the 18 Department -- the Atlanta Richfield case (verbatim) 19 and the Sonic case and Comcast, the taxpayer spoke 20 of those cases and alluded to an inconsistency in 21 their application -- in the Department's 22 application. 23 What's not on point as it relates to those 24 three cases in determining what I believe to be the 25 first factor under the transactional test whether or 26 not we have a situation that is reflective of 27 business income? 28 MR. TOURIAN: If I may? 45 1 With all -- with respect to all three 2 cases, they're distinguishable. With respect to 3 Atlantic Richfield, in Atlantic Richfield the 4 taxpayer merged with another corporation and later 5 was ordered to sell off part of that merged company. 6 It was part -- it was ordered to sell off assets 7 within the merger. 8 This -- in the court in Atlantic 9 Richfield -- 10 MR. HORTON: Uh-huh. 11 MR. TOURIAN: -- stated that this was 12 neither unusual nor unforeseeable. In -- the 13 distinguishing factor is that that was happening 14 over and over again. 15 In this situation the taxpayer, as -- as 16 the record indicates, this was a one time 17 divestiture of a line of business, of its television 18 division. 19 With regards to Sonic Automotive, the -- 20 the record indicates in Sonic Automotive that Sonic 21 Automotive continually acquired, operated and 22 disposed of automotive dealerships. They -- the 23 income that they generated was an assignment fee 24 stemming from transactions that they regularly were 25 part of -- buying, selling automotive dealerships. 26 What happened here was the nature and the 27 scope of the transaction relating to the divestiture 28 of the television division was completely different. 46 1 In Sonic Automotive it was continuously buying and 2 selling auto dealerships. 3 So, again, finally with respect to Comcast, 4 we're -- first of all, we're unsure whether business 5 income in Comcast was generated from the 6 transactional or functional test because we were -- 7 the Board of Equalization didn't provide guidance on 8 that. 9 But assuming it was under the transactional 10 test, Comcast regularly acquired and sold stations. 11 Comcast regularly entered into these types of 12 transactions. 13 So, the Franchise Tax Board argued that the 14 income from the termination fee was business income 15 under the transactional test -- under the 16 transactional test. 17 Now, that's -- so, the income from the 18 termination fee stemmed from a recurrent transaction 19 that was occurring in the taxpayer -- in Comcast's 20 normal course of business. 21 Once again in this situation the income 22 that was generated was part of a cessation of a 23 division, a television division. The size and scope 24 of divesting was completely different than what the 25 taxpayer had been doing at any point, except for 26 when it first entered the television division -- 27 television industry. 28 MR. SCOTT: May, I add a quick point here, 47 1 Mr. Chairman? 2 MR. HORTON: Sure. 3 MR. SCOTT: Thank you. 4 There really is no inconsistency in either 5 the Atlantic Richfield case or the position that was 6 argued with -- by the Department in Comcast because 7 under both of those cases the taxpayers regularly 8 bought and acquired and sold activities. And as 9 we've indicated here, that is not the case. 10 Now the distinction I would like to draw is 11 based upon Mr. Hornaday's testimony, which indicates 12 that as part of the taxpayer's normal media 13 operations they acquired -- they acquired stations 14 from time to time. And if I understood his 15 testimony correctly, they would operate them and/or 16 improve them and then sell them where appropriate. 17 And taxpayer's Exhibit 5 indicates that 18 that activity generated a regular course of 19 transactions in radio stations over the -- over time 20 here. 21 The difference with the television stations 22 is that the -- the purpose for undertaking the sales 23 of the television stations was not in accord with 24 Mr. Hartaday's (verbatim) testimony. They -- they 25 didn't decide -- they didn't buy these stations and 26 operate them and increase their value and then sell 27 them. 28 They decided they needed to reduce their 48 1 debt. And they decided they needed to exit that 2 entire part of the media business. Now I don't 3 think we need to get into whether or not it's a 4 division. That's really not appropriate to the 5 discussion. 6 But the point is, that -- 7 MR. HORTON: Not to interrupt you, but is 8 there a basis for the conclusion that they made a 9 decision? Is there some -- 10 MR. TOURIAN: Which -- 11 MR. SCOTT: Yes, it's in the -- it's in our 12 briefs, it's in their SE -- 13 MR. TOURIAN: -- SEC filings. 14 MR. SCOTT: 10k or 8k filings? 15 MR. TOURIAN: Both 10ks and 8ks. 16 MR. HORTON: Okay. 17 MR. TOURIAN: As provided in the 18 exhibits. 19 MR. SCOTT: And I think that that activity 20 is reflected in -- in Appellant's Exhibit 5. When 21 you look at the course of divestitures leading up to 22 2005, there were no television stations. And then 23 all of a sudden in 2006 there were 13 out of 16, 24 which is over 80 percent of their television 25 stations. 26 So, they were taking the major steps in 27 implementing their shift in corporate strategy here, 28 which was to get out of the television market -- not 49 1 to buy them, operate and sell them when appropriate. 2 So, I think that's the distinction that 3 we're resting on in determining that this is an 4 extraordinary transaction in the corporate life of 5 this taxpayer. 6 MR. HORTON: It still doesn't seem to speak 7 to the aggregate of all of the transactions from 8 1998 up until 2006 wherein, you know, you have 9 acquisitions and dispositions, which speaks to the 10 purpose or the intended purpose of the business 11 model, which takes us back to the transactional test 12 in just determining whether or not the taxpayer's in 13 the business or the activity of acquiring and 14 disposing of these types of assets. 15 MR. SCOTT: It's our belief -- 16 MR. HORTON: And I -- 17 MR. SCOTT: -- I'm sorry. 18 MR. HORTON: -- and I understand Jim Beam 19 and -- and the thought process which isolates 2006. 20 But how can we isolate an occasional sale 21 within the aggregate of the transactions and get 22 past the determination of whether or not they're in 23 the business in regards to the transactional test? 24 MR. SCOTT: Well, that, of course, is a 25 facts and circumstances determination. It always 26 is. 27 And both -- both the Department and your 28 Board, in looking at those kinds of issues, looks at 50 1 the type of activity that the taxpayer engages in 2 over the normal course of its business operations. 3 And it -- to the aggregation question, 4 the -- under the taxpayer's theory of this case, if 5 they had decided to divest and they had sold one -- 6 they had sold all 16 of their stations to one buyer, 7 I think they might concede that that is a 8 substantial and occasional transaction. 9 But if they took those same stations in the 10 same year and the same number of stations were sold 11 except they were to 16 separate buyers, they would 12 say that's not an occasional sale. 13 The problem with that argument is the 14 occasional language of the regulation refers to -- 15 or should be determined with reference to the normal 16 course of the taxpayer's business operations, not 17 the number of transactions in which it's sold. 18 If that were the case, all a taxpayer has 19 to do if they decided they wanted it to be 20 occasional, they could split it up into a certain 21 amount of sales. If they -- or they didn't want it 22 to be occasional, they could -- they could split it 23 up into a certain amount of sales or they -- if they 24 want it to be occasional, they would consolidate it 25 all. 26 Now we think that the language here 27 demonstrates that the taxpayer was interested in 28 selling its stations as quickly as it could. And 51 1 the happenstance that three of those stations 2 weren't sold until a later year doesn't really 3 change the character of this transaction during the 4 year in question because the purpose for which these 5 under -- these transactions were undertaken was to 6 get out of the television business. 7 That didn't change, as evidenced by the 8 fact that in 2007, 8 and 9 they sold as they found 9 buyers for each one of those stations. They 10 completed the plan of action that they first began 11 to implement in 2006, which was to get out of the 12 television business. 13 MR. HORTON: One other question, somewhat 14 of an aside, if you will, the integration aspect of 15 it in that these sales are or the -- the -- the 16 activity of the operation, which is advertising and 17 so forth, the other activity, is so integrated in 18 the acquisition and disposition of the property, 19 would you -- what are your thoughts on that? 20 MR. SCOTT: That would go to the test of 21 whether or not the income is business income under 22 the functional test. The integral relationship 23 between the assets. 24 MR. HORTON: Yeah. 25 MR. SCOTT: But that is not an issue that 26 is appropriate to look at here because the only 27 standard under the regulation is whether the 28 activity is within the normal course of the 52 1 taxpayer's business. 2 So, there is no functional aspect to the 3 application of 25137 (c)(1)(a). 4 MR. HORTON: And both parties have 5 submitted to that, I believe? 6 MR. TOURIAN: Yes. 7 MR. HORTON: Okay. The distortion in 8 reference to Exhibit 11, the issue of distortion, 9 the taxpayer operated at a loss throughout the 10 period in question. 11 And how do we -- how does the Department 12 reconcile the fact that if we were to conclude that 13 this is not business income under the transactional 14 test, then how would the Department treat subsequent 15 transactions, including this transaction? And what 16 would the Department conclude to be the end results? 17 And I understand that there's a difference 18 of opinion from the Department as to the methodology 19 and calculation in Exhibit 11. 20 MR. TOURIAN: So, in this situation, just 21 to be clear, the first point is whether the 22 income -- that there is any distortion because all 23 -- because it was -- without this income being 24 reflected as business income, it would be distorted; 25 is that correct or -- sorry. 26 MR. HORTON: I can't tell you for the 27 record. 28 MR. TOURIAN: Okay, okay. 53 1 What I'm trying to get at is -- the first 2 point is that it's -- that's not at issue here 3 because whether it's business income or not is an 4 issue of whether it's in the base or not. 5 What we're trying -- the apportionment 6 factor -- 7 MR. HORTON: But wouldn't you agree on the 8 transactional test, if it's not -- if it is business 9 income, then it cannot, inversely, be an occasional 10 sale. 11 MR. TOURIAN: If it's -- if it isn't under 12 the trans- -- if it fits under the transactional 13 test, it can't be an occasional sale. 14 MR. SCOTT: I'd say yeah. 15 MR. TOURIAN: Yes. 16 MR. HORTON: So, how is the two not 17 related? 18 MR. TOURIAN: But -- 19 MR. HORTON: Why -- why wouldn't we have to 20 make that determination from the onset? 21 MR. SCOTT: Well, there's a little bit of a 22 difference here because we're using the 23 transactional sale analysis by close analogy. 24 But the actual language of the regulation 25 says, "the normal course of the taxpayer's 26 business." 27 The language of the transactional test is 28 slightly different and I'm not going to say -- I'm 54 1 not prepared to sit up here and say that there are 2 certain instances where -- I am not prepared to sit 3 up here and where every transactional test would be 4 met that it would be in the normal course of 5 business because I -- I just -- I could maybe think 6 of an example, if given time, that that might not be 7 true. 8 But, uhmm, to get to your question, I think 9 there's a fundamental flaw in the taxpayer's 10 argument here, which is that the income arising from 11 these transactions all occurred outside of the 12 State. 13 That's contrary to unitary business theory, 14 which -- and those are arguments which were rejected 15 by the California Supreme Court back in the 1940s, 16 when unitary groups of taxpayers had separate 17 corporations and the corporations out of the State 18 were profitable and the corporations inside the 19 State were not profitable. 20 And the court said that the proper analysis 21 under that -- that situation is that the increase in 22 value here -- and we're talking about the 23 appreciation of value of these stations -- occurred 24 through the operations of the entire unitary 25 business. 26 So, it's legally incorrect to say that that 27 income all arose outside of California because part 28 of the appreciation of those sales accrued on the 55 1 basis of the activities that were taking place 2 within the State, as well as without the State. 3 And to say, well, it only focuses on the 4 locality here ignores -- 5 MR. HORTON: Doesn't that case speak to 6 centralized management and things that -- there is 7 some commonality? 8 And given that it does, wouldn't we -- I 9 would guess that your argument would be is that 10 those items that are in common to all of the 11 operations? 12 MR. SCOTT: Well, we have no argument here, 13 Mr. Chairman, because this is admittedly a unitary 14 business. The taxpayer filed that way. 15 MR. HORTON: Yeah. 16 MR. SCOTT: And, so, the flows of value 17 that are inherent in the unitary business between 18 the various assets or the various operating 19 entities, however you want to describe it, are, by 20 definition, contributing each to the other. 21 And, so, it's simply incorrect to say that 22 all of the income here was -- was -- occurred out of 23 State. 24 So, that's a fundamental flaw in their 25 argument. 26 MR. HORTON: Okay. 27 MS. ROBERTS: May we respond, Mr. Chairman? 28 MR. HORTON: Yes, one last question, 56 1 please. All of these questions I'm going to come 2 back to the taxpayer and ask that they respond as 3 well. 4 Under -- and I know this is a separate body 5 of law -- but under the sales and use tax law when 6 we look at occasional sales, we typically talk about 7 frequency and significance of the transaction. 8 Once you get beyond the determination of 9 being in business and the notion of -- of being in 10 business of -- a particular type of business, what 11 happens -- and this is a leading question, I will 12 admit -- what happens with -- now that you're in 13 business and there is, within that period of time an 14 occasional sale by character occurs, but you're in 15 the business? 16 And if I would draw an analogy of a sale of 17 airplanes and where -- well, airplane, a sale of one 18 would still be considered being in business. But 19 let's just say sales of widgets and gidgets. And, 20 so, you meet the criteria of being in business by 21 virtue of frequency, more than three or two or more 22 and then the volume and so forth and so on now is 23 classified as being in business. 24 So, any subsequent transaction of selling 25 off a division, let's say, to make -- conducts a 26 similar type business or integral type business 27 would -- can you isolate that as not being part of 28 the overall business? 57 1 MR. TOURIAN: If I may? 2 With regards -- I believe you're discussing 3 Regulation 159 -- 1595? 4 MR. HORTON: Yes. 5 MR. TOURIAN: And that -- the purpose of 6 1595 is to see who holds -- who would be -- 7 MR. HORTON: Seller's permit? 8 MR. TOURIAN: -- exactly and who would be 9 able to hold the seller's permit. 10 MR. HORTON: But by definition is in 11 business -- 12 MR. TOURIAN: Exactly. 13 MR. HORTON: -- of doing -- 14 MR. TOURIAN: Well -- 15 MR. HORTON: -- that activity? 16 MR. TOURIAN: -- I think under 1595 (c)(9) 17 there is an exemption when a line of business is 18 being completely divested or liquidated. And I 19 believe that's the situation in this case. 20 And another situation -- another thing is 21 that there is a distinction between sales and use 22 taxes and income taxes with respect -- the point is 23 that 1595 specifically states that it applies to 24 retail sales for tangible personal property, whereas 25 under 25137 (c)(1)(a) it specifically discusses for 26 purposes of this subsection. 27 And, so, there's a -- there would be a 28 disconnect to conflate the two sections. 58 1 MR. SCOTT: I think, Mr. Chairman, if I 2 could just add a quick point? 3 The purpose of the sales and use tax 4 regulation, as you have pointed out, is to determine 5 who's the seller and, therefore, who is in the 6 business. 7 There is no dispute here that this taxpayer 8 is in the business of operating media. So, we're 9 not -- we're not really looking at the same issue in 10 that respect, we're looking at -- 11 MR. HORTON: But the primary question was 12 how do you separate out once a determination that 13 they're in the business of -- in a particular type 14 of business and, therefore, generating income in 15 that particular type of business, then subsequent to 16 that determination, subsequent to that frequency, 17 subsequent to that sale, there is an occasional sale 18 that may occur. 19 How would that occasional sale be perceived 20 once a person is determined to be in that type of 21 business -- and if I take this specific case? 22 And I'm asking a question here, I'm not 23 really -- is that -- if the determination -- if from 24 2001 -- 1998 to -- let's exclude 2006, 2005 -- using 25 those fact patterns and activity that occurred, the 26 acquisition and disposition, just based on that 27 alone, it was determined that the taxpayer was in 28 the business of acquiring and selling these types of 59 1 assets. 2 Then let's say an occasional sale occurred. 3 Would you now be able to isolate that and say, 4 irrespective of what occurred prior to or subsequent 5 to, we can't -- we're going to look at this isolated 6 period, which seems to be a little inconsistent with 7 Jim Beam because the courts ruled that the 8 exceptional aspect of it was that they were 9 completely divesting, liquidating, had no intent of 10 returning and so forth. 11 MR. TOURIAN: With respect to Jim Beam, it 12 also cites Appeal of Triangle, which was -- 13 MR. HORTON: Right. 14 MR. TOURIAN: -- which was decided by your 15 Board. 16 And in Appeal of Triangle, the taxpayer in 17 that situation was divesting several media divisions 18 as well. 19 And Jim Beam characterized the divestiture 20 of those divisions as extraordinary. 21 And -- and that goes to Jim Beam as being 22 consistent with us, with our position that is an 23 occasional type of sale. 24 The taxpayer's SEC filings clearly state 25 this was a divestiture. They wanted to get out. 26 MR. HORTON: Let me to go Appeals. My -- I 27 am totally -- well, can you bring us some clarity? 28 MR. THOMPSON: Well, I wanted to raise one 60 1 question with Jim Beam. 2 Which in looking back at the proceedings at 3 the SBE, it appears to me that FTB conceded that the 4 income would be included in the sales factor. So, 5 that issue didn't arise up to the Appellate Court. 6 MR. HORTON: Okay. 7 My apologies to the taxpayer. I have asked 8 a series of questions here and now I'm going to ask 9 you to respond to all of those. 10 And -- but I did not -- I just wanted to -- 11 I believe they're all integrated, connected, and I'm 12 trying to establish some understanding from my 13 perspective. 14 So, all of those questions are now posed to 15 you. 16 MS. ROBERTS: Thanks. We will see what we 17 can do to make sure we cover all of them. 18 I want to first turn to the statement that 19 there is some fundamental flaw here with regard to 20 Emmis operating a unitary business. 21 There is no question that Emmis is 22 operating as a unitary business. We understand the 23 flows of value and the requisites for -- for 24 unity. 25 MR. HORTON: I don't think the Department 26 said that there was a flaw in that regard. 27 I think they submitted to the fact all 28 parties submit that this is a unitary business, 61 1 but -- 2 MS. ROBERTS: Right. And the issue here is 3 with regard to under Complete Auto, you have to 4 fairly reflect the activities that are generating 5 that income. 6 The point that Emmis was making with regard 7 to the apportionment is that by looking at the sales 8 in question and excluding sales factor 9 representation, you have a mismatch in terms of 10 where those activities are taking place. 11 And really the point was California's 12 getting nearly 8 percent of the sales that took 13 place outside California, driven -- the value driven 14 by local markets, but because Emmis is a unitary 15 business and because it agrees that the income 16 should be treated as business income, it is 17 reporting all of that income in California and is 18 asking for the appropriate sales factor 19 representation. 20 Again we don't think we're in a situation 21 where the regulation should be applying in the first 22 instance because distortion doesn't exist under the 23 normal standard apportionment formula. 24 Turning to one of your first questions, 25 Mr. -- Mr. Chairman, it's with regard to this theory 26 of aggregation. And it's very troubling because 27 Respondent's counsel talks about gaming the system, 28 splitting up sales. 62 1 That is exactly what the last sentence in 2 the regulation is meant to do. It has an 3 anti-avoidance provision. It provides, for purposes 4 of this subsection, sales of assets to the same 5 purchaser in a single year will be aggregated to 6 determine if the combined gross receipts are 7 substantial. 8 First this goes to the issue of 9 substantial. But if we're going to talk about 10 aggregation, then we should talk about what it means 11 in that particular regulation. 12 In the FTB's reply brief that was submitted 13 in February of last year, they attached as Exhibit F 14 a copy of the rulemaking file for this particular 15 regulation. 16 There is a common -- there are a series of 17 comments and responses by the FTB with regard to 18 this exact sentence. This is the response from the 19 FTB. 20 "The last sentence is meant to address 21 transactions which are completed in several 22 steps rather than one transaction." 23 This sentence states that, 24 "For purposes of subsection A, sales of 25 assets to the same purchase in a single 26 year will be aggregated to determine if the 27 combined receipts are substantial." 28 This sentence is not meant to aggregate 63 1 transactions which are unrelated, as is suggested in 2 the comment being addressed. 3 There is nothing in this case to suggest 4 that Emmis gamed the system or that these particular 5 sales had the ability to be gamed. 6 We're talking about seven completely 7 unrelated purchasers. So, we're talking about 8 different purchasers, different transactions -- no 9 ability to break these up, no ability to game the 10 system. 11 So, I want to make sure that we're clear in 12 terms of the inability for aggregation in this 13 context or in theory with regard to this set of 14 facts. 15 There is also discussion with regard to 16 intent. And a comment made by Respondent in its 17 response with regard to the intent behind the sales. 18 If I could ask Mr. Hornaday, with regard to 19 the television stations, did you intend to sell them 20 soon as you could? 21 MR. HORNADAY: So, I want to give a little 22 bit of context here because the -- the disclosure 23 that we were seeking strategic alternatives for our 24 television division was made on May 15th, 2005 -- 25 mid-May 2005. It was disclosed in our 10ks as a 26 subsequent event. 27 On that same day we launched a tender for 28 some of our common stock, which triggered all of the 64 1 tender offer rules. So, you have to make all of the 2 disclosures of your plans and intents and everything 3 that you plan to do. 4 One of the questions in that proxy offer 5 was, "What are your plans with regard to your TV 6 assets?" 7 And our answer to that question was, 8 "We've -- we've announced that we're seeking 9 strategic alternatives." And we say, "We may sell 10 all or part of our television stations." 11 We don't say that we're rushing to sell all 12 of our television stations because we have to get 13 out of television. We say that we're putting them 14 up for sale and we may sell all or part. 15 Furthermore, in May of 20 -- May 31st, 16 2005, that's the end of our first fiscal quarter. 17 Television was still in continuing operations of 18 Emmis. 19 So, we had announced we're seeking 20 strategic alternatives. And then when we make our 21 first public filing after that date, they are still 22 in continuing operations. We had not received any 23 offers yet. We didn't know if we were going to sell 24 all of our television stations. 25 Again we were testing the market to see if 26 somebody else ascribed more value to our television 27 stations than they were being valued inside our 28 portfolio. 65 1 It wasn't until August 31st that we had 2 actually received some offers for our television 3 stations that were -- that were acceptable to us, 4 that we moved the television assets into 5 discontinued operations -- meaning that we -- we 6 think we're going to be able to sell all of these 7 stations. 8 So, to imply that in May of 2005 we made a 9 decision and we're going to rush out of television 10 is just flat out wrong. 11 MS. ROBERTS: Another point I want to 12 circle back to and to emphasize Mr. Hornaday's 13 point, there is nothing in the public statement 14 stating that Emmis will never buy another television 15 media property. 16 To do so would be directly against their 17 stated strategic business model that's repeated 18 again and again and again in its 10ks year over year 19 and is, in fact, exemplified by the fact that they 20 just bid on a recent television property as recently 21 as April. 22 Sorry, Mr. Chairman? 23 MR. HORTON: No, that's -- I was looking at 24 the exhibit and just curious. 25 It -- it appears that -- it indicates that 26 in February of 2014 -- 27 MR. HORNADAY: The fiscal year ended. So, 28 those are each fiscal years. 66 1 So, from March 1st, 2013 through -- you 2 know, it says, "year to date," February of '14 -- 3 so, since March of 2013, that activity has 4 occurred. 5 MR. HORTON: Can you speak to the catalyst 6 or motivating factor of now getting back into the 7 television business? 8 MR. HORNADAY: Sure. 9 MR. HORTON: If that's the case? 10 MR. HORNADAY: Sure, sure. 11 So, again, our thesis of why we though we 12 should sell television stations was because of the 13 dynamic between the local affiliates and the cable 14 and satellite providers, coupled with the 15 proliferation of DVRs and people basically time 16 shifting programming and not watching the 17 advertisements, skipping through the advertisements. 18 That thesis has not played out as we 19 thought it would. Television stations have held up 20 their value very nicely out of the recession -- 21 frankly, better than -- better than radio. 22 And part of that is because they're able to 23 get value from the cable and satellite providers, 24 that the cable and satellite providers know that 25 they have to have the local affiliate on their 26 system or people will switch to a different 27 distributor. 28 If Dish won't pay for the local affiliate, 67 1 then the local affiliate says to all of their 2 viewers in the market, "Here's the number for 3 DirecTv, call them because you can get our 4 programming on -- on DirecTV, a competitor." 5 So, basically, that dynamic and that 6 paradigm has shifted such that retransmission is 7 becoming a more meaningful revenue stream for 8 television, making it even a better business because 9 now it's getting paid for advertising and for its 10 content through the distributors. 11 And then going back to the DVR point, 12 advertisers have basically accepted that people are 13 going to watch time shifted programming. And 14 research shows that people still, by and large, 15 watch the advertisements or at least are exposed to 16 them. And advertisers accept that and continue to 17 buy television advertising. 18 MS. ROBERTS: I want to -- I want to make 19 sure that we turn back and address the questions 20 relative to Respondent's arguments in Comcast and 21 Sonic and the arguments that were laid out in 22 Atlantic Richfield. 23 Our point is not to rely on the holdings of 24 those cases. The issue here is with regard to the 25 transactional test and its ability to help us 26 interpret and apply the occasional sale provisions. 27 Emmis's reliance on those cases is to look 28 at the FTB's position in those cases where it makes 68 1 the argument under the transactional test analysis 2 that the buying and selling activity in those cases 3 is within the normal course of the taxpayer's 4 business in those cases under the transactional test 5 and to take that and put it as a mirror up against 6 the transactions and activity in this case to 7 demonstrate why it is so much more compelling in 8 this case, yet it is arguing an exactly opposite 9 position. 10 We would also point out in Sonic that the 11 FTB even went so far in that case to actually pull 12 the 10ks, like it does in this case, and rely on 13 them and highlight language that is remarkably 14 similar to what Emmis has in its 10ks. 15 One of the quotes from the FTB's brief 16 states, "We also" -- it's pulling directly from 17 Sonic's 10k, 18 "We also intend to acquire dealerships 19 that have underperformed the industry 20 average, but represent attractive 21 franchises that would immediately benefit 22 from our professional management 23 practices." 24 This sounds amazingly similar to the 25 language that's found in the -- in Emmis's 10ks year 26 over year about acquiring underdeveloped properties, 27 increasing their cash flow, their value and then 28 disposing of them. 69 1 And, yet, the point is FTB's inconsistency 2 with regard to these positions. 3 Turning, I think, lastly, to -- to the 4 questions surrounding the seller's permit provisions 5 under 1595, I think it would be helpful to realize 6 that the SIC code here from the -- from the 7 perspective of the industry is the same. There is 8 no parsing off of -- media and television 9 broadcasting is under this same SIC code. 10 So, if we're talking about what Emmis is in 11 the business of, there is no distinction there. 12 ---o0o--- 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 70 1 ---oOo--- 2 MR. HORTON: Okay. Uhm, can you speak to 3 the question that I posed relative to Jim Beam, 4 wherein the courts concluded that it was an 5 exceptional, extraordinary, uh, transaction but, in 6 essence, that the, uh -- what caused the transaction 7 was the -- the notion to liquidate or divest, if you 8 will, uh, pursuant to, I would say, economic 9 factors? 10 MS. ROBERTS: Sure. The -- it's helpful to 11 understand in Jim Beam, first of all, you were 12 talking about a truly diversified business. You had 13 a group of companies that included everything from 14 truck leasing -- leasing, to alcohol sale, liquor 15 sales, to ceramic, uh, manufacturers and sellers, 16 and lastly to Taylor Food, the company that was 17 being disposed of in that case. 18 Jim Beam's position was that the proceeds 19 from that sale of its -- of an entire line of 20 business, no dispute as to that -- we dispute that 21 there's a line of business here -- that those 22 proceeds should be treated as non business income 23 under the functional test. 24 Again, the parties specifically -- this is 25 a quote from Jim Beam: 26 "The parties agree that the income from 27 the sale of Taylor Food is not business 28 income under the transactional test." 71 1 So we never even get to the nature of the 2 frequency or the one-time corporate occurrence. 3 The issue is whether the functional test 4 had a carve-out for a complete liquidation of a 5 business or a once-in-a-lifetime corporate event. 6 And the court held, no, there is no carve-out. And 7 the reason that they -- they distinguish this was 8 looking at all of the case law outside California 9 and everything that the taxpayer there had relied 10 upon looked at the nature of the transaction as 11 opposed to the nature of the property in and of 12 itself. And the court said, no, that's not what 13 Hoescht Celanese said. Hoescht Celanese said that 14 you look to the actual property, the actual asset 15 for the purposes of the functional test. This is a 16 different analysis. 17 MR. HORTON: Okay. Thank you. 18 Member Steel. 19 MS. STEEL: So those acquiring and, um, 20 disposing all these, um, radio stations and TVs it 21 depends on the dynamic of market and, uh, regulation 22 change and all other stuffs; is that the reason that 23 you were selling it? 24 MS. ROBERTS: Yes. I'll let Mr. Hornaday 25 reply. 26 MR. HORNADAY: Correct. So if -- if you 27 want to, um -- to -- to operate in a different 28 market, radio and broadcasting is -- or radio and 72 1 television broadcasting is both -- is all governed 2 by the FCC. There's a limited number of FCC 3 licenses. They don't create new ones. There's not 4 any just sitting on the shelf for you to go up 5 and -- and buy. 6 So you have to have a license to broadcast 7 in a market. You can't build a tower and then start 8 saying I'm operating a radio or television 9 station. 10 So to enter a market you have to acquire an 11 FCC license. To, uh -- to exit a market you have to 12 dispose of an FCC license. And all of those 13 transactions that we've -- we've been talking about, 14 um, are -- is the acquiring or the disposing of FCC 15 licenses. Other than the publications; there's a 16 few magazines in there as well. That would be 17 little bit different. They don't have an FCC 18 license tied to 'em. 19 MS. STEEL: So it's hard to open new ones, 20 and you have to acquire from other companies to open 21 new -- open the stations. 22 MR. HORNADAY: Correct. You have to -- 23 that's correct. You have to purchase an FCC license 24 from someone willing to sell an FCC license to get 25 into a new market and operate a radio or television 26 station. 27 MS. STEEL: Then is this really common for 28 media companies to regularly acquire and dispose of 73 1 media properties? 2 MR. HORNADAY: Yes, it is -- it's entirely 3 commonplace for all diversified media companies to 4 acquire and dispose of FCC licenses, whether they're 5 radio or television. 6 MS. STEEL: So those 13 TV stations, 7 television stations were sold to four different 8 buyers. 9 MR. HORNADAY: That's correct. 10 MS. STEEL: But you are looking for more 11 buyers. If they had more -- what was the reason 12 that you had four buyers, not 12 buyers? Because if 13 it's so much regulated, then, you know, there is 14 more buyers wants to jump in when these are on the 15 market. 16 MR. HORNADAY: Right. So we -- we put all 17 16 up for highest and best offers. It just so 18 happened that some of the larger operators like Lynn 19 Broadcasting, like Journal Communications, wanted 20 packages of certain licenses to fill out some, um, 21 holes that they had in their portfolio of assets. 22 So they bid more, or more than anyone else 23 was willing to offer for some of these individual 24 licenses. Um, as a group, they were willing to pay 25 more than anyone was individually for -- for any 26 of the -- of the licenses. So -- 27 MS. STEEL: So you used the price and the 28 qualifications? 74 1 MR. HORNADAY: I'm sorry. 2 MS. STEEL: Qualifications of those buyers 3 that who has to have this certain qualification. 4 MR. HORNADAY: Correct. They -- they were 5 media companies. So the FCC looks to whether a 6 company already operates FCC licenses to -- to know 7 how their -- what their operating history is, can 8 they trust them with the public airwaves. So that 9 went a long way too, if an operator already owned, 10 uh, radio or television stations, had been 11 preapproved by the FCC and had sufficient financing 12 to close the deal. Those were all considerations. 13 MS. STEEL: Let me ask Franchise Tax Board 14 that, um, the -- you tried to put that TV, uh, 15 television division separated from the radio 16 stations. What was the reason? 17 MR. TOURIAN: The reason was based on the 18 taxpayers's SEC filings which segmented different 19 divisions. And the taxpayer's filings to the 20 Securities and Exchange Commission said we are 21 getting rid of our television division and they 22 decided to sell. 23 MS. STEEL: But isn't that the business 24 practice though? Because, um, it seems like 2014 25 they try to acquire more T -- you know, television 26 stations. 27 MR. TOURIAN: That was eight years later. 28 And we are looking at the -- the evidence that was 75 1 at the time. And these transactions, obviously we 2 don't know what's going to happen in the future. 3 What the taxpayer has provided are bids to 4 television stations. They haven't bought any 5 television stations. 6 In -- at the time when they divested their 7 television station -- televisions stations, they -- 8 the taxpayer said, in their Securities and Exchange 9 Commission, under penalty of perjury, we need to get 10 rid of our television stations. We need to lower 11 our debt obligations. We can't compete with other 12 television broadcasters that are larger and more 13 singularly focused in -- 14 MS. STEEL: But didn't we just heard that 15 that was business practices, that, you know, they 16 were going to sell? 17 MR. SCOTT: That -- excuse me. 18 Ms. Steel, I think what the business 19 practice is, is what Mr. Hornaday described, which 20 is looking at individual stations and occasionally 21 buying one or selling one or two or three. But the 22 difference here is, as -- as he just stated, when 23 they made this decision to exit the television 24 broadcast business and -- they said -- he just said, 25 we put all 16 up for -- for -- for sale. 26 MS. STEEL: Because market's been 27 changed. 28 MR. SCOTT: Well, okay. But our point is 76 1 that -- 2 MS. STEEL: So that's their practice. 3 MR. SCOTT: Yes, and our point is that is 4 the extraordinary transaction, the extraordinary 5 nature of the transaction. 6 We -- we don't doubt that it's within the 7 normal course of -- of broadcast media to buy and 8 sell stations along the way. That -- that is, uh, I 9 don't think, really disputed by the Franchise Tax 10 Board. 11 But I think what we're talking about here 12 is this is a different scope and character of type 13 of transaction than the normal course which is not 14 just looking for properties to buy and improve and 15 operate and then sell when the opportunities come, 16 but a larger shift in strategic position which says, 17 "We don't, at the present time, want to operate any 18 longer these television stations." Uh, and at the 19 time they made that decision there's no indication 20 in any of their filings or recommendations that they 21 intended to get back into the business. 22 Now, again, if they've changed their mind, 23 that's fine. But -- but I believe that that 24 probably doesn't affect what their intent was or the 25 purpose for those transactions were back in 2007. 26 MS. STEEL: So if -- it sounds like the 27 business is, you know, acquiring and disposing all 28 these media companies. So if you are sell -- 77 1 telling us is like if even these radio stations if 2 you sold it, there is -- 2001 there is four and 2005 3 there is another four or three, I'm not really sure 4 here. So if they sold it, all these radio stations 5 in one year and they tried to change the business to 6 TV, then you think it's occasional even that 7 companies sell -- company is -- company's main 8 business is selling and acquiring and disposing. 9 MR. TOURIAN: Well, the key is that, what 10 was the corporate strategy? What was the motivation 11 behind the sales? In this situation there was -- 12 MS. STEEL: How do you know the motivation 13 of the company? You are outsider. What they are 14 saying is, that year, that was their business 15 practice that they want to dispose it. But they're 16 going back in, they didn't say that we have to do it 17 right now. 18 MR. TOURIAN: We know their business 19 motivation because of what they filed with the 20 Securities and Exchange Commission under penalty of 21 perjury. This is what they represented to the 22 United States Government. 23 We're, uh -- we follow what they 24 represented to the United States Government as their 25 intention. And their intention was to leave the 26 television business altogether. 27 MS. STEEL: Can you just go back to 28 Atlantic Richfield, the difference between that and 78 1 for this case. You said, you were talking about the 2 asset they were selling. So can you -- 3 MR. TOURIAN: Oh. 4 MS. STEEL: -- explain just a little more 5 about that? 6 MR. TOURIAN: What happened in Atlantic 7 Richfield was the taxpayer in that situation was 8 merging with another company. 9 MS. STEEL: Right. 10 MR. TOURIAN: However, uh, anti-trust rules 11 would force them to sell off parts of the assets 12 that they had merged with. 13 So let's just say Company A merges with 14 Company B, right? 15 MS. STEEL: Mm-hmm. 16 MR. TOURIAN: But when Company A merges 17 with Company B, it's forced to sell off little parts 18 of B. In this situa- -- you know, little parts of 19 it, in order to avoid anti-trust. This was normal. 20 So that's what happened in that situation. 21 So it didn't sell off. They still merged, 22 but they sold off little segments of Company B in 23 order not to be. So that way they wouldn't violate 24 anti-trust rules with the United States 25 Government. 26 MS. STEEL: Okay, I'm done. Thank you. 27 MR. HORTON: Mr. Runner. 28 MR. RUNNER: Yeah. Let me ask, on a little 79 1 more discussion in regards to again the intent of, 2 uh, divesting and liquid -- liquidating, um, the -- 3 the -- the television stations. 4 Uhm, I'm a little -- just clarify for me, 5 in regards to you used some phrasing in terms of a 6 filing, uhm, where you used some of the phrasing was 7 "may sell," "look at," you know, those kind of 8 issues. What -- what filing was that? 9 MR. HORNADAY: That would have been the 10 2005 tender offer document related to, um, a tender 11 offer for our common shares, which was a -- a -- an 12 SEC filing under penalties of perjury, as respondent 13 likes to say. 14 MR. RUNNER: So that would have been your 15 FCC filing. 16 MR. HORNADAY: An SEC. 17 MR. RUNNER: SEC filing. 18 MR. HORNADAY: SEC, yes. 19 MR. RUNNER: And in that -- and in that 20 filing then, uhm, I'm trying to get through what the 21 language is what I'm hearing from the agency versus 22 what it is that was the actual document. 23 What I'm hearing from the agency is that, 24 boy, it was clear, you -- that the language is very 25 clear, you intended at that point to sell and divest 26 yourself of the television business. 27 MR. HORNADAY: And -- 28 MR. RUNNER: You believe that -- do you 80 1 believe that that's what that document says? 2 MR. HORNADAY: In May of two -- in -- May 3 15th, 2005, absolutely not. 4 The -- the document that the respondent is 5 referring to is our November 30th, 2005 10-Q. I 6 believe that's correct. 7 MR. TOURIAN: Yes. 8 MR. RUNNER: Okay. 9 MR. HORNADAY: So that is six months after 10 we had decided to seek strategic alternatives for 11 our television stations. A lot of things happened 12 during those six months. We got offers for 13 of 13 the television stations. 14 So in November of 2005 it was likely that 15 we were going to be able to sell certainly 13 16 because we had purchase offers on 13. 17 MR. RUNNER: Mm-hmm. 18 MR. HORNADAY: And we were -- we were 19 hopeful we could sell the remaining three. 20 I would also point out in the -- in the 21 2006 10-K, so the one that was filed 90 days later 22 and we had not sold the remaining three television 23 stations, we make a public disclosure that we may 24 not be able to sell the remaining three television 25 stations. 26 MR. RUNNER: Well, let me ask -- again, I'm 27 trying to get to the bottom of the language. The 28 language that's been described is that you were 81 1 getting out of the television business. Is that -- 2 seems to me different than saying, "I'm going to 3 sell these television stations." 4 MR. HORNADAY: Correct. We were -- I -- I 5 agree with you. We were seeking strategic 6 alternatives at the time because we believed the 7 television business was challenged. 8 MR. RUNNER: Right. 9 MR. HORNADAY: That has changed. And we 10 would like -- 11 MR. RUNNER: So I would assume that what 12 that meant, that was a decision at the time, a 13 business decision at the time to sell some part of 14 your -- of your portfolio. 15 MR. HORNADAY: Correct, as a diversified 16 media. 17 MR. RUNNER: As a diversified media. 18 MR. HORNADAY: That portion -- 19 MR. RUNNER: Not a statement that said, "We 20 are no longer going to be in the television 21 business." 22 MR. HORNADAY: Correct. And to -- to -- 23 to further that point, our credit facilities 24 negotiated with our lenders who were providing us 25 funds for acquisitions, expressly allowed us to buy 26 radio or television or publishing. That was 27 reaffirmed when we did a new credit agreement in 28 December of 2012, last year. At the time, again, 82 1 we're not currently operating television stations. 2 MR. RUNNER: Right. 3 MR. HORNADAY: But or lenders specifically 4 provided for us to buy radio or television or 5 magazines. 6 MR. RUNNER: Okay. Let me go back to the 7 Department then. 8 Uh, again, I understand that -- that some 9 of the language you were referring to talks about 10 the fact that they are -- that they are selling 11 their television stations, correct? 12 MR. TOURIAN: The language specifically -- 13 MR. RUNNER: Okay, tell me -- yeah, tell 14 me. 15 MR. TOURIAN: Uh, if you go to the Exhibit 16 D that we provided you -- 17 MR. RUNNER: Mm-hmm. 18 MR. TOURIAN: -- and there -- on page 38, 19 the language specifically states; 20 "Emmis is in the process of divesting 21 all of its television stations. The 22 decision to sell its television stations 23 stemmed from the company's desire to lower 24 its debt, coupled with the company's view 25 that its television stations needed to be 26 aligned with a company that was larger 27 and more singularly focused." 28 MR. RUNNER: Okay. Again, I -- I'm hearing 83 1 something a little different there. I'm -- I'm 2 hearing that they're selling their television 3 stations for a strategic business reason. 4 MR. TOURIAN: Yeah. 5 MR. RUNNER: I don't hear them saying, 6 "We're getting out of the television business." 7 MR. TOURIAN: They said, "We're divesting 8 our television stations." 9 MR. RUNNER: Just means they are selling 10 their television stations, correct? 11 MR. SCOTT: Well, they put -- they put all 12 16 up for sale -- 13 MR. RUNNER: Yes. 14 MR. SCOTT: -- as Mr. Hornaday said. 15 MR. RUNNER: Right. 16 MR. SCOTT: And then within three years 17 they sold them all. In the first year they sold 13 18 and then -- 19 MR. RUNNER: Right. 20 MR. SCOTT: -- in the two years that 21 followed they sold them all. And from that point 22 forward -- 23 MR. RUNNER: Right. But what in there says 24 that they're no longer going to be in the television 25 business the next year if a deal comes through and 26 their -- and the financing is provided that they 27 would buy another one? 28 MR. SCOTT: Well, it doesn't say that. 84 1 MR. RUNNER: What in that filing prohibits 2 them from doing that? 3 MR. SCOTT: Nothing prohibits them from 4 doing that. 5 MR. RUNNER: Well, if they -- again, that's 6 why I'm a little confused. If they're -- if they 7 are clearly able to buy another television station, 8 it certainly is in their total media strategy. At 9 this point in time they're just going ahead and 10 saying, "Right now we're going to sell our 11 television stations." Uh, I assume that meant you 12 would sell them if you got the right price for them, 13 too. 14 MR. HORNADAY: Right. And three of them we 15 didn't during that period -- 16 MR. RUNNER: Uhm -- 17 MR. HORNADAY: -- and we held on to them. 18 MR. RUNNER: And -- and, um -- but that 19 doesn't say, "We are now, um, again, closing down a 20 whole division, no longer to be in the television 21 business," right? I mean, there's nothing in that 22 filing that says, "We're no longer going to be in 23 this business." 24 MR. TOURIAN: With respect to income 25 generated from those remaining three television 26 stations, the 10-Ks provide that the income 27 generated from them are from discontinued 28 operations. What this means is that those 85 1 operations are no longer being continued. That -- 2 MR. RUNNER: For those stations. 3 MR. TOURIAN: No, from the television 4 division. Under the divisions. 5 MR. RUNNER: Okay. 6 MR. TOURIAN: Like income from discontinued 7 operations, it was under that, uh -- that area. 8 MR. RUNNER: Because they were selling 9 those television stations. 10 MR. TOURIAN: Exactly. Because they were 11 divesting their entire television division. 12 When you look at their 10-Ks at the time, 13 each of the -- these properties are under television 14 division, radio division, etcetera. 15 MR. RUNNER: So -- so do you think -- do 16 you believe that it is -- you don't believe it's 17 a -- in terms of being, at least my understanding is 18 a diversified media company; therefore, within a 19 diversified media company you've got a number of 20 different things. My understanding, this company 21 has radio stations AM/FM, uh, US-based, 22 foreign-based, uhm, publishing, uh, and some 23 televisions -- and television. That's -- that's 24 what they -- that's what they were. 25 MR. TOURIAN: They had television, yes. 26 MR. RUNNER: Yes, and they had television. 27 And so now they -- that's what they -- again, 28 broad-based, all those things. They could have had 86 1 billboards, too. They could have had lots of other 2 things, I suppose, but they didn't. They had those 3 things. 4 Uhm, but I think if I -- well, let me ask. 5 Were you in the television business? 6 MR. HORNADAY: No. We were in the -- 7 MR. RUNNER: Were you in -- were you in the 8 radio business? 9 MR. HORNADAY: We're a diversified media 10 company, and that's how -- from '99 to today, that's 11 how we -- 12 MR. RUNNER: Okay. 13 MR. HORNADAY: -- describe ourselves. 14 MR. RUNNER: So, again, they weren't in the 15 radio business. They weren't in the television 16 business. They weren't in the publishing business. 17 They were in the media business. 18 And so if you take a portion of your 19 media -- of what it is, I'm having difficulty in 20 saying -- nowhere are you saying, "We are never 21 going to do television again." You're just selling 22 part of your assets, for whatever reason. You know, 23 that particular part of your portfolio wasn't 24 working the way you thought it should today. Uhm, 25 and the fact that -- and I guess the thing that's at 26 least a little compelling to me is that they are 27 actively now engaged to -- to -- to acquire, go and 28 expand their -- their -- their media business. Or, 87 1 you know, not expand it but go back into buying 2 television as a part of their diversified. 3 Doesn't that -- it sounds to me that that's 4 just part of their nature of their business, going 5 in and out of the business. They needed to sell 6 it -- the wanted to sell it because it was the -- 7 because that part of the portfolio was -- was 8 problematic for 'em at the time. Or not 9 problematic. It was advantageous for them to sell 10 it at the time. 11 Uhm, again, I -- I'm having trouble 12 saying -- seeing where they actually, uhm, divested 13 of a division to which they would never go back 14 and -- and totally left that part of the business 15 behind, never to be revisited again. 16 MR. TOURIAN: We -- we've never claimed 17 that they would never go back. We've never said 18 that. We've never represented that. 19 MR. RUNNER: Does the fact that they're 20 going -- that they are -- let's say, acquiring 21 stations again change any of the view then that -- 22 that -- that FTB has? 23 MR. TOURIAN: Our view is we have to look 24 at the facts and circumstances at the -- at the 25 time, at the contemporaneous time. The facts and 26 circumstances lead us to believe that the taxpayer 27 was divesting itself of its television division. 28 As provided under Exhibit 5 of the Fran- -- 88 1 of the respondent, here we have this -- 2 MR. SCOTT: Appellant. 3 MR. TOURIAN: Of the appellant's Exhibit 5. 4 MR. RUNNER: Mm-hmm. 5 MR. TOURIAN: This tells a story. 6 MR. RUNNER: Right. 7 MR. TOURIAN: He was -- the taxpayer was 8 buying and selling media stations. 9 MR. RUNNER: Right. 10 MR. TOURIAN: So let's see. Um, '99 it 11 bought several. 2000 it buys one television 12 station. 2001 it buys seven more. 2004 it buys one 13 more. 14 Then all of a sudden in 2006 when it says 15 in its 10-Qs and 10-Ks in subsequent years, "We 16 divested our television division." Uh, from 2005 to 17 2009 it didn't buy another television station. It 18 was in the process of getting rid of all of its 19 television stations. 20 Um, in that situation -- 21 MR. RUNNER: Okay. So under -- under 22 theory, just under your theory, just to see if I got 23 this understood, uh, for instance, if it was their 24 publishing portion -- 25 MR. TOURIAN: Yes. 26 MR. RUNNER: -- and they sold this -- and 27 they chose to sell their publishing holdings that 28 they had in the year 2004, and they happen to sell 89 1 all four magazines -- I don't know how many 2 magazines you have -- but if they happened to sell 3 all four, you would see that also in that light? 4 MR. TOURIAN: Not necessarily. 5 MR. RUNNER: And why -- and why would that 6 be? 7 MR. TOURIAN: Well, under the substantial 8 and occasional test, the first prong is whether it's 9 substantial, whether the sales of the gross 10 receipts, if you -- if the transaction -- the gross 11 receipts from the transaction result in a five 12 percent or greater decrease in the denominator. 13 So if it -- if we're assuming that, then 14 yes. Uh, if you look at appeal -- 15 MR. RUNNER: So if we're assuming it did, 16 then the answer would be yes. 17 MR. TOURIAN: And that's based on -- 18 MR. RUNNER: Even though they would have 19 purchased another -- another magazine four years 20 later. 21 MR. TOURIAN: And that's based on -- this 22 is all hypothetical. 23 MR. RUNNER: Right. 24 MR. TOURIAN: And we're assuming that the 25 taxpayer would also say that in their 10-Ks, "Hey, 26 we're divesting our publications." And -- and this 27 is all based on your Board's decision in Appeal of 28 Triangle that -- where the taxpayer in that 90 1 situation was getting rid of several broadcasting 2 portion -- broadcasting divisions. I believe it was 3 the television division, the radio division. And 4 your Board said these are extraordinary events and 5 the income generated from that would -- it's -- 6 would only fall under the -- 7 MR. RUNNER: Let me -- let me have the 8 taxpayer speak to the -- the -- how the -- the 9 application of Triangle in this particular appli- -- 10 in this issue. 11 MS. ROBERTS: Triangle did not get to -- 12 Triangle was the issue of whether or not when you 13 have the application of 25137(c)(1)(A), whether or 14 not the FTB in the first instance should have to 15 establish distortion. 16 Uh, in that -- in that case there was a lot 17 of discussion with regard to whether or not the 18 various, uh, pieces of the business, the taxpayer 19 took the position that various pieces of the 20 business should not be included in the unitary 21 business. And without even going into any analysis, 22 your Board said, no, you're all part of the same 23 unitary business. 24 So, you know, contrary to what -- what 25 respondent is saying, you know, all of that would 26 have been within the same line of business. To 27 split broadcasting between television and radio 28 makes absolutely no sense. It is completely 91 1 contrary to the fact that they're itemized under the 2 same SIC code and it's completely contrary to your 3 Board's long line of case law discussing the same 4 line of business in the context of unity. 5 MR. RUNNER: So the key issue with Triangle 6 is it is the same line of business discussion, that 7 you don't -- would believe that clearly what you are 8 in the diversified busi- -- or media is that is 9 clearly the same line of business. 10 MS. ROBERTS: Again, Triangle didn't go 11 into the analysis. 12 MR. RUNNER: Mm-hmm. 13 MS. ROBERTS: It laid out all of the facts, 14 and then it got down to the end of the facts where 15 the taxpayer was saying, no, these pieces should be 16 part of the unitary business. And without any 17 analysis your Board says, no, and drops right into 18 the analysis of 25137(c)(1)(A). 19 MR. RUNNER: Okay. Thank you. 20 MR. HORTON: Member Yee. 21 MS. YEE: Thank you, Mr. Chairman. 22 I wanted to, uh, just be clear about a 23 couple things. One, uh, in terms of, uh, what the 24 Franchise Tax Board relied on to conclude that there 25 was a divestiture. And, uh, I guess I'm more 26 interested -- we've talked a lot about the SEC 27 filings and, uh, kind of looking at activities, uh, 28 prior and after the, uh -- uh, year in question. 92 1 Uh, were there any other contemporaneous 2 records upon which you rely? 3 MR. TOURIAN: Uh, no. 4 MS. YEE: Okay. And, uh -- and I guess I'm 5 just kind of an outsider looking in. Could you just 6 state again how -- how you think that a divestiture 7 is different from buying and selling these 8 properties? 9 MR. TOURIAN: A divestiture is ceasing a 10 line of business, or a division in this case. 11 Buying and selling is continually buying and selling 12 for instance. 13 Um, like let's just say you're -- you're a 14 gen -- you have a factory, right? You have a 15 factory, it's creating widgets. And so you buy and 16 sell machinery in order to upkeep -- uh, to 17 create -- to generate those widgets. Then all of a 18 sudden you're saying, "I don't want to make these 19 widgets anymore. I'm going to get rid of all of my, 20 uh -- all of those -- all of those, uh, machinery 21 connected to those widgets." 22 That's the difference. One is buying and 23 selling to create widgets. In this case it's 24 getting rid of all of the machinery that was 25 creating those widgets in the first place. 26 MS. YEE: Okay. And then -- thank you. 27 And then I wanted to focus on the second 28 issue here which is, uh, the, uh, exclusion of the 93 1 gross receipts. And, uh, I guess it's a question 2 for both parties. 3 In evaluating whether the, uh, 4 25137(c)(1)(A) resulted in an unfair representation 5 of your business activity in California, uh, what, 6 um, business activities are you considering? So is 7 it essentially those activities and transactions 8 that occurred in your regular course of business, or 9 was it all activities that generated any business 10 income? 11 MS. ROBERTS: For purposes of the 13 sales, 12 it would be the activities that would have been, uh, 13 supporting the 13 sales from a sales factor 14 perspective. The property factor and the payroll 15 factor would not have changed. 16 MS. YEE: Okay. Franchise Tax Board, do 17 you agree with that? 18 MR. TOURIAN: Uh -- 19 MR. SCOTT: Go ahead. 20 MR. TOURIAN: Oh, uh, we believe that 21 25137(c)(1)(A) should not -- should be applied in 22 this situation because, uh, the occasional sales, 23 the divestiture of its television business was 59 24 percent, if you aggregate all four of the 25 transactions. We're not aggregating. We've never 26 represented that we're aggregating all four 27 transactions. 28 MS. YEE: Mm-hmm. 94 1 MR. TOURIAN: But if you were to aggregate, 2 that's approximately 60 percent of all gross 3 receipts made in that time period. 4 Uh, the sales factor -- I mean, the payroll 5 and property factor, which I believe the payroll was 6 five percent and property factor was ten percent, 7 wouldn't change in those years. 8 MR. SCOTT: Ms. Yee, could I, uh, just 9 retrace a minute to the original -- one of the 10 original points of your question which said you 11 wanted to talk about the second issue which is 12 whether the regulation -- whether Regulation 13 25137(c)(1)(A) applies. 14 Um, are you with me? 15 MS. YEE: Actually it's -- 16 MS. MANDEL: That's -- yeah, go ahead. 17 MR. SCOTT: Well, that's -- that's the 18 taxpayer's characterization. But it's our position 19 under your Board's decision in appeal of Fluor 20 Corporation, that if a taxpayer is factually within 21 the confines of a regulation, that regulation is the 22 standard apportionment formula. 23 So our position here is that 25137(c)(1)(A) 24 is the standard apportionment formula on the basis 25 of the factual credits -- predicates for the 26 application of that regulation. Certainly that 27 there's no requirement of distortion to go to 25137 28 because 25137, because the facts mesh up in our 95 1 view, is the standard rule. 2 And then the -- the third issue, which we 3 would say is the second issue, which is whether the 4 application of the standard rule, which in this case 5 is Regulation (c)(1)(A), uh, should be, uh, altered 6 is the general application of Section 25137 as a 7 whole. 8 MS. YEE: Okay. Yeah, I -- 9 MR. SCOTT: Thank you. 10 MS. YEE: -- I understand. 11 Okay. That's it for now, Mr. Chairman. 12 MR. HORTON: Okay. Uhm, question of the 13 taxpayer. I want to go back to 1998 and up until 14 2005 wherein there is the acquisition of radio 15 stations, television stations, and the, uh, sale of 16 various different radio stations, excluding 2006, 17 just to try to get to it. It's rather complicated 18 in the tax administration, and that is, uh, intent 19 as a measurable item when in and of itself it's 20 difficult to -- to -- to -- to quantify. 21 Uhm, tell me about the -- the business 22 model or strategy of -- as it relates to your radio 23 stations. 24 MR. HORNADAY: Uh, it's -- as a diversified 25 media company, any media property that we acquire 26 it's the same goal; and that is to improve the 27 operating performance of that asset. That -- that 28 would be increasing its advertising revenues; that 96 1 would be increasing its ratings in the case of a 2 broadcasting property; it would be increasing the 3 subscriber base in the case of a magazine. 4 Basically making that media property more valuable 5 so that it can be monetized or sold for more than 6 what we paid for it, thereby creating shareholder 7 value and it's basically currency to then go out and 8 acquire more media properties. 9 MR. HORTON: Did you dispose of all of your 10 television properties? 11 MR. HORNADAY: Uh, from 2006 through 2009, 12 yes, that's correct. 13 MR. HORTON: And is there any -- are all of 14 those transactions related to one another or related 15 to the initial, um -- initial posting or advertising 16 of the sale? 17 MR. HORNADAY: Well, there -- there were 18 seven separate purchasers. Um, the -- think 19 about -- the fact that we got 13 sufficient offers 20 and sold 13 of the television stations in 2006 left 21 us with three television stations, none of which we 22 had received a sufficient offer for. 23 We make the public announcement that we may 24 never receive a sufficient offer for these and we 25 may not be able to sell these three television 26 properties. 27 MR. HORTON: What -- 28 MR. HORNADAY: Still, we -- we still -- 97 1 MR. HORTON: What factors were involved in 2 determining a sufficient offer? 3 MR. HORNADAY: So the -- the cash flow of 4 the station that existed at the time that we owned 5 it vis-a-vis where television stations were trading 6 in the public markets, and people said, okay, you've 7 got just three stations left. We're going to give 8 you a lowball offer because we know that you want to 9 unload these television stations. 10 And that wasn't true. We said we're going 11 to operate these and continue to generate cash flow 12 and advertising revenue from these television 13 stations until there's an offer that we believe is 14 full value. That happened once in 2007, once in 15 2008 and once in 2009. 16 MS. ROBERTS: And, Mr. Hor- -- Mr. Horton, 17 if I could -- if I could add to that. 18 There is not an intent requirement in the 19 occasional sale regulation. And by requiring intent 20 and trying to figure out what the future holds, 21 respondent's arguments lay out the difficulty in 22 that. 23 Well, what happens when you change your 24 intent down the road? What happens if Emmis, next 25 month, succeeds in one of its TV bids and in fact 26 over the course of 2013 and 2014 they pick up 30 27 television media properties? They decide and they 28 issue a statement at the end of 2014 that says, 98 1 "Radio's a dying business; we are going -- we are 2 getting rid of all of our radio properties. We're 3 going to phase them out over the next 10 years." 4 By FTB's reasoning and by look -- having to 5 look at intent and looking at the decision to do 6 that, the sale of each radio property over the next 7 10 years is part of the occasional sale. It's 8 somehow one transaction. 9 This is an absurd result. It doesn't 10 matter whether it takes one year or ten years; it's 11 all one occasional sale. It doesn't fit the 12 parameters of the regulation, and it leaves 13 taxpayers in a position of uncertainty. How do they 14 report the sales in any given year? Are you 15 aggregating them each time for substantiality, for 16 tens years? 17 It -- it doesn't make any sense. You have 18 to look at each individual sale. You have to look 19 at each transaction. That's the result that's 20 called for under the regulation. 21 MR. HORTON: Yeah, the -- the question 22 somewhat goes to the definition of whether or not 23 you're in the business, whether or not there's a 24 conscious intent, if you will, to buy and sell these 25 assets for the purpose of generating revenue. Uhm, 26 and it seems -- I don't want to restate your 27 testimony. But therein is what I am trying to get a 28 better understanding of as it relates to, 99 1 uh, subsequent periods. Subsequent periods and 2 periods, uh, subsequent to this transaction and 3 prior to this transaction that were you or were you 4 not in the business? And would you at any point 5 give consideration to an offer for any of your 6 assets that you had built up and created this value? 7 MS. ROBERTS: Absolutely. That's a 8 question for Mr. Hornaday. 9 MR. HORNADAY: Yes. The answer -- would we 10 sell any given media property for the right price? 11 Yes. 12 That's -- we are a public company. We have 13 a fiduciary duty to our shareholders. We -- we 14 cannot -- we would be sued as management if -- if we 15 got an obscene offer for one of our properties and 16 said, "Nope, not going to sell it because we just 17 have to hold on to it." 18 MR. HORTON: Question of Appeals. Once 19 established that it's a -- a business practice of 20 buying and selling and -- but subsequent to -- for, 21 uh -- to give it some substance, if I will, let's 22 start with the first sale which was in February of 23 1998. 24 If at that particular point in time we 25 looked at it, the framework of the transactions at 26 that particular time, and concluded that, okay, 27 there's a business model here of building up a radio 28 station and subsequently for the purpose of 100 1 increasing its value with the intent to sell, 2 depending on market volume. And then we go forward 3 with the subsequent transactions up to 2005 and 4 everything seems to be somewhat consistent in that 5 regard. 6 Um, then let's say once you're in the 7 business of generating income, you have this 8 particular business model, uh, as a part of that 9 activity -- here's where the question is -- uh, you 10 divest and sell off or sell off a significant 11 percentage of your radio stations or your TV 12 stations. Does it really matter relative -- can 13 we -- can we actually isolate that transaction from 14 all the -- all the rest? 15 MR. AMBROSE: Um, I think it'd be 16 difficult. But -- excuse me -- as -- 17 MR. HORTON: And I would call your 18 attention to the language in Jim Beam which seems 19 to -- only because the Department relied on Jim Beam 20 in their -- in their, uh -- in their testimony. Jim 21 Beam seems to speak to an exceptional, one time 22 activity that will never happen again. Not -- not 23 an activity that has ever happened before or will 24 ever happen again. 25 MR. AMBROSE: Yeah. I -- I think that's a 26 good basis for distinguishing Jim Beam from -- from 27 these facts. 28 One thing I did note though is Mr. 101 1 Hornaday, in describing the business model of, um, 2 acquiring radio stations, developing them in 3 underdeveloped markets and then developing them and 4 then increasing their value and then selling them, 5 or, you know, having a gain and then investing that 6 capital in more radio stations. That isn't, to my 7 mind, isn't exactly what happened or what was, uh -- 8 what -- what it was articulated as the reason for 9 selling these television stations. 10 MS. MANDEL: Well -- 11 MR. AMBROSE: In other words -- 12 MS. MANDEL: Okay, go ahead. 13 MR. AMBROSE: I mean, that's what I 14 understood. 15 MS. MANDEL: Well, uh -- Mr. Horton? 16 MR. HORTON: Yes, please. 17 MS. MANDEL: Um, Mr. Hornaday, what I took 18 away and understood from the discussion of the 19 television stations was, um, really quite similar to 20 the description that Mr. Ambrose just gave of radio, 21 which you had given earlier of broadcasting and 22 media properties. Which is buying underdeveloped 23 property, um, work to improve its cash flow, which 24 in the context of developing media properties 25 involved -- whether it was broadcasting, I think you 26 testified about developing programming, improving 27 the programming, uh, and, um -- uh, showing through 28 improved ratings, which comes from the programming, 102 1 um, to your potentially local advertisers. Because 2 you're talking about local affiliates, as I 3 understand it, whether it's, um, radio or TV. 4 That they should be paying, buying air time 5 and paying more for it, presumably that you -- that 6 you would be increasing the cash flow, improving the 7 value of the particular, um, broadcasting property. 8 And then, um, at an appropriate -- if an 9 appropriate, um -- um, offer came in, uh, or if 10 something happened where you thought -- where the 11 company thought -- what I thought I heard you say 12 was where the company thought that it had improved 13 the property to a point, um, which was the optimal 14 point, that you would seek -- seek to sell it. 15 What I heard about the, um -- all of the 16 television stations was, um, that something occurred 17 in the environment, uh, that impacted television 18 broadcasting, particularly I think you talked about 19 cable and satellite, um, providers and 20 retransmission fees. 21 And so what I took from all of that, which 22 has now turned around, I think was your testimony, 23 and what I took from that was that, um -- that at 24 this time, 2005, six, seven, eight, when you were, 25 um, selling, uh, the television properties that you 26 had and you managed to sell 13 of them in the one 27 year, was that this -- this, um, change in the 28 environment that impacted -- if you had only one 103 1 television station it would have impacted one 2 television station. But that -- that it was -- that 3 it was something that, um, meant that these 4 television media properties in your portfolio of 5 broadcasting properties had reached their optimal, 6 uh, value, um, standpoint. You -- you grew them as 7 a company to where you thought you could grow them, 8 and then there was this overlay piece that came out 9 that made the company say, you know what, we've 10 reached the optimal point; it's time to sell. 11 Um, because you had so many, FTB says well, 12 that's -- that's a divestiture of -- of a line of 13 business. But it sounded like what you were 14 describing was that it was, um -- it just happened 15 that there was, uh, something, um, in the 16 environment that affected them all. Is that -- 17 MR. HORNADAY: That -- that's a good 18 summation. From -- from '99 through 2005, 2004, 19 when we acquired our 16th station, we dramatically 20 improved the operating results, the advertising 21 revenue, the cash flow, the -- the ratings position 22 of -- of all 16 television stations. 23 Once we had applied the experience that we 24 had, um, perfected in radio to the television 25 properties, we weren't sure what the next leg of 26 growth was going to be for television given 27 challenges from external forces, including DVRs and 28 the cable/satellite dynamic. 104 1 We still -- at that time, we evaluated all 2 of our properties. And with radio, we still had a 3 direct link from our broadcast tower to the 4 consumer. They dial -- they turn on the radio in 5 the car, there's no middleman taking a toll in 6 between. And that was the fundamental reason why we 7 decided, all right, we're going to continue to 8 operate radio stations because we don't think 9 they're going to have the same challenges that 10 television's going to face. 11 MS. ROBERTS: And I think I would add to 12 that, there's always going to be a trigger point, a 13 momentum for when the company's going to decide to 14 sell a particular asset. 15 So it happened to be that there were 16 outside environmental factors that were causing the 17 decision to sell at this time. But it wouldn't be 18 any different than when they regularly review their 19 portfolio and make a decision that it's appropriate 20 at that time to put the property up for sale. 21 MR. HORTON: Further discussion, Members? 22 MR. RUNNER: Quick -- quick question. 23 MR. HORTON: Mr. Runner. 24 MR. RUNNER: Um, the illustration that -- 25 again, this whole discussion right now, this part of 26 the discussion is about whether or not, um, you can 27 sell a big portion of asset. And -- and that 28 basically means that you have divested yourself, um, 105 1 and no longer in that business. 2 And I want to talk about the analogy that 3 you gave because it was enlightening to me as the 4 analogy that you gave. The analogy you gave was you 5 were a manufacturer and you are manufacturing 6 something, and then you decide that you're no longer 7 going to be in this business so you sell all the 8 equipment that you used to manufacture those 9 widgets. 10 Okay. Clearly, when you do that, you no 11 longer can make widgets because you've just sold all 12 your -- all your -- all your equipment. That's 13 pretty clear. 14 Let me go back to the taxpayer in this 15 case. Uhm, did you sell the management abilities, 16 the skills, the ability for you to not be in the 17 business of running television stations? 18 MR. HORNADAY: No. We still retain the 19 ability to own and operate and improve the operating 20 performance of any broadcasting or any -- 21 MR. RUNNER: So when you're going out and 22 making bids now, you're not having to create a whole 23 'nother, uh, skillset or something in order to go 24 into that business? 25 MR. HORNADAY: That's correct. 26 MR. RUNNER: Okay. See, to me, that's the 27 core issue here. And whether it's part of your 28 regular business or not, I get the illustration and 106 1 I see how that's -- that works. You're going to 2 sell off assets, you're no longer going to be in 3 that business. 4 It seems to me that in this particular 5 issue you are still -- you still have the capacity 6 to be in that business, that you haven't sold off 7 the -- the manufacturing equipment, if you will, to 8 not make what -- to not be in that portion of the 9 business. And, to me, I think that's -- that's the 10 core portion of this discussion. And, uh, I 11 don't -- I'll let you go ahead and defend your 12 analogy, but, uh -- 13 MR. TOURIAN: Well -- oh, for sure. 14 In that situation, you're -- you're 15 basically analogizing that the manufacturer -- in 16 that situation the management is the actual -- the 17 manufacturing equipment. 18 In -- in my situation, you can also make 19 the same argument that the management is also the 20 manufacturing equipment. In this situation, the 21 taxpayer disposed of the equipment which was the 22 television stations, but they didn't dispose of the 23 management. In my situation, same principles apply. 24 Management wasn't disposed, but the management 25 equipment, similar to the television stations, was 26 sold off. 27 MR. RUNNER: Well, okay. I think you're 28 pressing your analogy a bit at that point. Because 107 1 I think the illustration was could you make widgets 2 or not; the answer was not if you sell the 3 equipment. 4 This company here still has the ability to 5 go ahead and go -- and -- and acquire the 6 televisions without -- with -- with the equipment 7 that they still have in place, the business 8 practices, the management and the skillsets. 9 Thank you. 10 MR. HORTON: Further discussion, Members? 11 Hearing none, is there a motion? 12 MS. YEE: Move to take the matter under 13 submission. 14 MR. HORTON: Member Yee moves to take the 15 matter under submission, second by Member Mandel. 16 Without objection, Members, such will be 17 the order. 18 Thank you very much for appearing before us 19 today. The Board will take your matter under 20 consideration later on -- 21 MS. ROBERTS: Thank you. 22 MR. HORTON: -- this evening and send you a 23 written report of our decision. 24 MR. TOURIAN: Thank you. 25 MS. ROBERTS: Thank you. 26 ---oOo--- 27 28 108 1 REPORTER'S CERTIFICATE 2 3 State of California ) 4 ) ss 5 County of Sacramento ) 6 7 I, KATHLEEN SKIDGEL, Hearing Reporter for 8 the California State Board of Equalization certify 9 that on June 11, 2013 I recorded verbatim, in 10 shorthand, to the best of my ability, the 11 proceedings in the above-entitled hearing; that I 12 transcribed the shorthand writing into typewriting; 13 and that the preceding pages 1 through 33 and 71 14 through 108 constitute a complete and accurate 15 transcription of the shorthand writing. 16 17 Dated: July 10, 2013 18 19 20 ____________________________ 21 KATHLEEN SKIDGEL, CSR #9039 22 Hearing Reporter 23 24 25 26 27 28 109 1 REPORTER'S CERTIFICATE 2 3 State of California ) 4 ) ss 5 County of Sacramento ) 6 7 I, JULI PRICE JACKSON, Hearing Reporter for 8 the California State Board of Equalization certify 9 that on June 11, 2013 I recorded verbatim, in 10 shorthand, to the best of my ability, the 11 proceedings in the above-entitled hearing; that I 12 transcribed the shorthand writing into typewriting; 13 and that the preceding pages 34 through 70 14 constitute a complete and accurate transcription of 15 the shorthand writing. 16 17 Dated: July 2, 2013 18 19 20 ____________________________ 21 JULI PRICE JACKSON 22 Hearing Reporter 23 24 25 26 27 28 110