1 BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION 2 5901 GREEN VALLEY CIRCLE 3 CULVER CITY, CALIFORNIA 4 5 6 7 8 REPORTER'S TRANSCRIPT 9 FEBRUARY 24, 2015 10 CORPORATE FRANCHISE AND PERSONAL INCOME TAX HEARING 11 APPEAL OF 12 WILLIAM R. DOBKIN AND DONYA DOBKIN 13 NO. 728014 14 DEBORAH M. DOBKIN 15 NO. 725828 16 AGAINST PROPOSED ASSESSMENT OF 17 ADDITIONAL INCOME TAX 18 19 20 21 22 23 24 25 26 Reported by: Juli Price Jackson 27 CSR No. 5214 28 1 1 P R E S E N T 2 3 For the Board Jerome E. Horton of Equalization: Chairman 4 5 Sen. George Runner (Ret.) Vice-Chairman 6 7 Fiona Ma, CPA Member 8 9 Diane L. Harkey Member 10 11 Yvette Stowers Appearing for Betty Yee, 12 State Controller (per Government Code Section 13 7.9) 14 Joann Richmond 15 Chief, Board Proceedings Division 16 17 For Board of Anthony Epolite Equalization Staff: Tax Counsel IV 18 19 For Franchise Tax David Gemmingen Board: Tax Counsel 20 Michael Cornez 21 Tax Counsel 22 23 For Appellants: Joseph Mudd Attorney 24 William R. Dobkin 25 Taxpayer 26 Deborah M. Dobkin Taxpayer 27 28 ---oOo--- 2 1 5901 GREEN VALLEY CIRCLE 2 CULVER CITY, CALIFORNIA 3 FEBRUARY 24, 2015 4 ---oOo--- 5 MR. HORTON: Ms. Richmond, what is our next 6 matter? 7 MS. RICHMOND: Our last hearing for today 8 is item B11a, William R. Dobkin and Donya Dobkin and 9 B11b, Deborah M. Dobkin. 10 Please come forward. 11 MR. HORTON: Mr. Epolite, would you please 12 introduce the issues in this case as the taxpayer 13 takes their time to settle in, relax and then we'll 14 go to them. 15 MR. EPOLITE: The issue before the Board in 16 this appeal is whether Appellants have substantiated 17 the adjusted basis of their Long Beach home for 18 purposes of calculating the gain on the sale of the 19 property. 20 MR. HORTON: Thank you very much. 21 To the Appellant, welcome to the Board of 22 Equalization. As you settle in, you will have ten 23 minutes to make your presentation. 24 We will then go to the Department. The 25 Department has ten minutes to make their 26 presentation. 27 And we'll return and allow you five minutes 28 on rebuttal. 3 1 At your convenience. The center mike, you 2 might want to pull that just a little bit closer. 3 There you go. 4 Thank you very much, welcome. 5 MR. MUDD: Thank you, Mr. Chairman. To my 6 left is Deborah Dobkin; to my right is Dr. William 7 Dobkin, the owners of this particular piece of 8 property. 9 I'm Joseph Mudd. I'm their attorney. 10 In 1988, Dr. Dobkin and his -- and Deborah 11 purchased two adjoining lots in Lido Lane in Long 12 Beach exclusive Naples neighborhood. 13 They hired and architect, who drew up a 14 plan to build a large, luxury home on this 15 particular property. The planned home was three 16 stories, plus a subterranean basement, which was 17 unusual and no longer allowed that close to the 18 ocean. The subterranean basement contained a 19 three-car garage, wine cellar and a storage area and 20 a darkroom. 21 All three stories were connected. All 22 three stories and the basement were connected by an 23 elevator, counting the 160 square foot wine cellar 24 as living space. According to the 1993 appraisal, 25 that I believe all you have -- that you all have, 26 there was in excess of 7900 square feet of living 27 space. 28 The house was sold in 2006, after a divorce 4 1 by -- between these parties. The basis of the house 2 was reported by Deborah Dobkins (sic) on her tax 3 return using information that she kept and that she 4 provided to the accountant. 5 Up until a few years before 2006 Deborah 6 Dobkin had retained all of the receipts and all of 7 the boxes of records, remodeling and everything else 8 related to the house that supported her 9 calculations. But she disposed of them 15 years 10 later. 11 I'm a tax attorney. And as I think about 12 it, I built a house too and I'm not -- it was built 13 16 years ago and I'm am not sure I could find my 14 original documents any more. 15 The Franchise Tax Board challenged the cost 16 basis on the tax return. And I was hired to help 17 resolve this basis dispute. 18 As part of my representation, I attempted 19 to locate the builder of the home, Mr. William 20 Merrill. I was unable to do that. He apparently 21 was no longer in California. I hired an 22 investigator who spent several months and was unable 23 to do it. 24 I thereafter attempted to locate the 25 architect and then to locate an architect that was 26 familiar with the cost of building a luxury home 27 in '88 and could not find anyone that was willing to 28 touch the subterranean basement or who was willing 5 1 to deal with something that happened 20 years ago. 2 I gave the architects the pictures and we gave them 3 as much as we had. 4 I hired -- at that time, realizing that I 5 was striking out other than what Mr. and Mrs. Dobkin 6 were telling me -- and they seemed very credible -- 7 I hired another private investigator who found the 8 original contractor for the home living in Florida. 9 I contacted the builder. He advised me 10 that he certainly had no records dating back to the 11 building of the Dobkin home. And I thought I was 12 finished, except he said, 13 "I can tell you it was a -- very 14 expensive. And I recall what the square 15 foot price was, if that'll help." 16 He told me that the price per square foot 17 of that home was $350 per square foot. And he had a 18 very clear recollection because it was one of the 19 most expensive houses he had built at that time. 20 We received the declaration of Dr. -- or of 21 Mr. Merrill. That was given to the Board and that's 22 attached as well. 23 He resides in Florida. And he had agreed 24 that he would be available telephonically today, but 25 I doubt if that's -- if he's still expecting a call. 26 The initial cost of construction did not 27 include an extension over the roof, the second -- 28 the second floor decks of that building did not have 6 1 roofs built on. 2 At the time that I was dealing with the 3 Board, they said that there were no building permits 4 for that work. However, I did find -- and I did 5 give to the Board and it's also in your documents -- 6 a Certificate of Occupancy for the extension of the 7 roof over the decks. 8 It's clear that the cost of building the 9 home was far more than the amount allowed by the FTB 10 of some $700,000. Dr. Dobkin (sic) and William 11 Dobkin were ready to go to trial in this and would 12 both testify in great detail. They're here to 13 answer your questions. 14 You have folders. I was told by a Member 15 of the Board that -- or by one of the people working 16 for a Member of the Board that the pictures that you 17 had were not in color. 18 We had given the Franchise Tax Board color 19 pictures. We provided those pictures to you in 20 color so that you actually have a folder with the 21 colored pictures. 22 You have the declaration of -- of 23 Mr. Merrill, the Certificate of Occupancy for the 24 extension of the roof and the appraisal. And I 25 think those are all documents that you probably 26 reviewed earlier. 27 And I would simply ask -- I'll ask 28 Mrs. Dobkin to -- to say what she can about the 7 1 value unless you would rather that I just open it up 2 for questions of either of them. 3 MR. HORTON: It's your call, sir. 4 MR. MUDD: Why don't you go ahead and tell 5 them what you know about the value of the house and 6 the cost of the house -- 7 MS. DOBKIN: Uhmm -- 8 MR. MUDD: -- and the documents. 9 MS. DOBKIN: -- well, unfortunately, I wish 10 this house was -- we were building it right now 11 because I'd have so many records, they'd all be on 12 computer. 13 Back in the '80s, there was no computer. I 14 didn't even have Quicken. So, a lot of this is just 15 going by memory and receipts that I remember looking 16 at. 17 And my ex-husband and I, we -- we sort of 18 put our heads together, what, ten years ago when we 19 sold this house, remembering all of the things that 20 we put in it. 21 And I think that -- I mean, you can look at 22 the pictures and look at what an incredible home 23 this house was. I mean, I could go down and tell 24 you, okay, you know, we spent so much on custom 25 marble flooring that was picked out of a mountain in 26 Italy just for this house. We spent so much on 27 mahogany bookshelves and wine cellar. And I 28 could -- and I could list all those things, but you 8 1 have that list in front of you. 2 The other thing I wanted to point out is 3 that the home is in a really, really special area. 4 It's in a little Naples enclave. And it's -- 5 they're built around canals. And this house, No. 1, 6 it was unheard of for someone to have two lots. 7 And, so, we had -- we had this home built on two 8 lots. 9 And the other part of it, it's on a little 10 section of this island that's called the Gold Close 11 -- excuse me, the Gold Coast. And there's about 12 twenty homes there. And they all face out to the 13 open water. So, that it makes them a little bit 14 more scarce and also more desirable to live in. 15 Other than that, I don't know what else to 16 say other than we spent a lot on the house. 17 MR. MUDD: If I can also add that -- that 18 Mr. Merrill did not -- in the sale of this house at 19 the time, washer and dryer went with it, a 20 television went with it. There were desks built 21 into the kids' bedrooms. There was an expensive 22 chandelier added in the house. 23 Am I correct? 24 MS. DOBKIN: Two. 25 MR. MUDD: Two expensive chandeliers added 26 to the house. Bookshelves were built in separate 27 places. 28 Part of the cost was loan interest that was 9 1 capitalized. There was a loan that was assumed on 2 the purchase of the property and that's shown on the 3 deed. That's why we initially had a problem with 4 the -- with the stamps on the deed. 5 I think they were only for 300,000, but the 6 interest on the loan on the property, until there 7 was a replacement mortgage, had to be -- had to be 8 capitalized, it could not be deducted. 9 Dr. Dobkin will talk about the fact that 10 they had -- after the building of the house, they 11 had a subsequent problem with the doors and they had 12 to replace all of the doors with some doors that 13 would work better near the ocean. 14 Electrical blinds were installed throughout 15 the house. The boat docks were not included in the 16 building of the house. They had two boat docks 17 right adjacent to their property that were their 18 private boat docks -- 25,000 cost of those is not 19 unreasonable. 20 The Dobkins are adamant about the cost of 21 the thing and they've -- they've expended a great 22 deal of money to try to get their case to you. If 23 we had to go further, if we had to go to court, we 24 would probably subpoena Mr. Merrill to be present. 25 And the Dobkins would both testify in detail. And I 26 think that -- that the court would find them to be 27 very honest people. 28 I ask Dr. Dobkin if he would like to add 10 1 anything? 2 DR. DOBKIN: I can just add when I bought 3 the properties, they were two adjacent lots. They 4 were for sale, if I remember, around a million 5 dollars each. And we agreed to buy them for a 6 million 800 and some odd dollars. 7 And I gave them $350,000 to have them carry 8 a million and a half dollar loan for 18 months, 24 9 months. 10 And I put myself in the position -- I was a 11 young neurosurgeon and I had to pay for the house in 12 order to get a mortgage because there was no house 13 there and no one would lend me money until I 14 finished building the house. 15 So, for the next couple years I worked a 16 lot. I worked a lot. We built the house, got to 17 point where we got a Certificate of Occupancy and 18 got probably, I don't know, maybe, 70, 80 percent of 19 the house done. Moved in. 20 My bank, fortunately, actually did things 21 they don't normally do and gave me a loan before we 22 got done. And I was able to pay off those people. 23 And we went on to finish the construction 24 probably for the next couple years. It took me 25 two -- probably three or four years before the city 26 gave me a final inspection. They wouldn't do it 27 until everything was done. So, calculating the cost 28 was difficult. 11 1 My recollection was I used to joke with my 2 ex-wife, just to get -- we had to put shoring into 3 the -- we built in this lot -- in these lots which 4 were subject to liquefaction, so, we had to dig down 5 to the bedrock and then bring back gravel and then 6 build a -- some kind of monolithic concrete slab. 7 It had to shore up all the lots around us. 8 So, I didn't know if we'd ever make it back 9 to the ground before I went broke. So, fortunately, 10 we did. But it was very expensive even doing 11 that -- probably in excess of what the FTB claims 12 the entire house cost. 13 So, I just -- the pictures, you know, I 14 can't -- the pictures speak for themselves. I think 15 the house probably cost two and a half, $3 million 16 at the end of the day. And the lots were probably a 17 million 800,000 plus whatever carrying charges there 18 were. So, when we sold it, we felt there was a 19 net -- net -- no significant capital gains. 20 And then the FTB informed me several years 21 later they wanted money and claimed the house cost 22 -- the lots were $300,000 and the house cost 23 $700,000 to build. 24 And it was so absurd that I, you know, 25 decided just to hire a tax attorney and fight it. 26 MR. HORTON: Thank you very much. 27 Members, we'll now go to the Department. 28 The Department has ten minutes to make their 12 1 presentation. 2 We would then return and allow the taxpayer 3 to rebut. 4 At your convenience. 5 MR. GEMMINGEN: Good evening, Board 6 Members. I'm David Gemmingen, representing the 7 Franchise Tax Board. 8 And with me is Michael Cornez, also with 9 the FTB. 10 As your Board is aware, the Appellants in 11 these appeals sold their Long Beach home at the 12 height of the real estate market in 2006 for 13 $6,300,000. 14 The issue in these appeals is what the 15 taxpayers' adjusted basis in their home was at the 16 time it was sold. 17 As I say, the costs spent in acquiring and 18 constructing it, so that the gain, which is the 19 sales price less adjustment basis can be calculated. 20 The Appellants in these appeals filed their 21 income tax returns separately from one another due 22 to a prior divorce. Notwithstanding their separate 23 reporting, neither taxpayer adequately disclosed the 24 sale of the home. 25 Unfortunately, this appeal has been plagued 26 by mischaracterizations, such as the second sentence 27 of their April 13th appeal to your Board where the 28 taxpayers stated this appeal relates to the 13 1 disallowance of the cost basis as shown on 2 taxpayers' return. Again this was mentioned 3 tonight. 4 In reality, no basis was reported by either 5 taxpayer. And Dr. Dobkin failed to report the sale 6 of the $6.3 million on his tax return at all. 7 Deborah Dobkin failed to include the sales 8 price and the home's adjusted basis on her tax 9 return, which is in your Exhibit A that I provided 10 and -- although she reported those items with 11 respect to other -- several other Microsoft stock 12 sales. 13 Dr. Dobkin did not report the sale of the 14 home at all. Information was requested. And he 15 claimed at protest that the home had a total basis 16 of $6,625,500, an amount more than the home was sold 17 for at the height of the real estate market. The 18 result that he claimed to have suffered a loss in 19 the home's sale. 20 However, when both taxpayers were asked to 21 provide third party documentation, including 22 purchase contracts for the land, construction and 23 contractor contracts and other evidence of 24 expenditures. Taxpayers provided nothing, despite 25 multiple requests by FTB and repeated requests by 26 the taxpayer's representative for more time to 27 respond. 28 Moreover, in 2003 -- during their 2003 14 1 divorce, Appellants agreed in writing to each report 2 one-half of the gain of the anticipated sale of the 3 home. 4 Notwithstanding their prior written 5 agreement in 2003 to pay half the tax, Appellant 6 Deborah Dobkin, in her declaration, said she threw 7 away the basis and cost documentation two years 8 later in 2005. 9 Since the taxpayers failed to provide 10 evidence to substantiate the claimed basis in the 11 property, the auditor utilized Los Angeles County 12 assessment records to estimate the taxpayers' basis 13 and also considered other information provided by 14 the taxpayer. 15 According to the LA County Assessor's 16 records, a copy of which has been provided to you in 17 Exhibit A in the group, Appellants' actual cost in 18 the underlying land was $300,000 for the two lots. 19 The Dobkins later claim -- and did not 20 provide any evidence to substantiate this claim -- 21 that land purchase cost was $2,175,000, a figure 22 seven times higher than that provided by the LA 23 County Assessor's records. 24 There was also mention tonight of two 25 deeds. Those deeds were in 1985, prior to 26 Appellants' acquisition of the property. 27 Internal Revenue Code at Section 1012 is 28 very clear that basis is based on actual cost. 15 1 According to the -- accordingly, the one cost we 2 have evidence of is the $300,000 figure for the land 3 before construction. 4 Basis may be -- then be adjusted and 5 increased for capital expenditures, such as 6 improvements in this case, the cost of building the 7 home. 8 Revenue and Taxation Code Sections 70 and 9 71 require property to be reassessed to full fair 10 market value whenever new construction is completed. 11 After the home's construction in 1988, the 12 home was never reassessed by the LA County between 13 1988 and 2006, other than the 2 percent inflation 14 factor, indicating no reassessment events, such as 15 material alteration, took place within that time. 16 The result that all major property 17 improvements were completed during the initial 18 ownership of the property. 19 Appellant's reply brief confirm that all 20 material construction was completed by 1988. 21 Appellants from their 19 -- from their 22 recent February 9th, 2015 submission, last Thursday, 23 and exhibits today and going back through protest 24 propose a cost basis of over 6 and a half million 25 dollars or an amount of $4 million in excess of what 26 FTB determined. And it's hard to imagine that $4 27 million could be spent without a reassessment on the 28 property. 16 1 It's the taxpayers' burden to substantiate 2 any deduction from income. And as your Board has 3 stated before in prior opinions, the basis assigned 4 to the property by Respondent is presumptively 5 correct. 6 Appellant has the burden of establishing 7 the Respondent's valuation basis is erroneous. 8 Moreover, as your Board noted in its 9 opinion in the Appeal of Frasier, proof of basis is 10 presumably within taxpayer's control. It is -- 11 their failure to provide such proof compels us to 12 sustain FTB's determination. 13 Respondent calculated the gain realized by 14 Appellants in these appeals utilizing the most 15 contemporaneous material that was available. 16 When a taxpayer fails to provide evidence 17 of basis, there is no requirement that basis be 18 assumed or utilized. The Respondent recognized that 19 a home was built and, in good faith, granted the 20 taxpayers a reasonable estimated amount of adjusted 21 basis based on a contemporaneous figure attributed 22 to the overall property by the LA Assessor's office. 23 The Assessor's office reassesses 24 properties for taxation after new construction, such 25 as subsequent construction of Appellants' home, 26 based on fair market value, not cost and can, and 27 often does, reallocate total costs among the land 28 and improvements to reflect unique fair market value 17 1 the particular project -- piece of land may have, 2 such as an improved double beachfront lot. 3 Thus, given that we are concerned with 4 waterfront property on two lots, it should not be 5 surprising that the Assessor's office reallocated a 6 substantial portion of the completed property's fair 7 market value to the land. 8 The aggregate amount of the fair market 9 value is considered to be $2,655,000 by the LA 10 Assessor's office. This figure reconciles and 11 incorporates within it the potential reconstruction 12 cost of $1,540,000. It's computed for 199 -- 1988, 13 based on an inflation adjustment, which is derived 14 from the 1993 loan appraisal, which estimated 15 reconstruction costs of $2 million for improvements. 16 When coupled with the $3 million purchase 17 price for the lots, provides a figure of 18 approximately $1,840,000, which still allows an 19 $800,000 cushion for potential, but largely improven 20 (sic) subsequent improvements to equal the 21 $2,655,000 amount utilized by Respondent. 22 FTB continues to utilize and rely on the 23 $2,655,000 adjusted basis amount. 24 But your Board is free to consider the best 25 and most contemporaneous evidence, which at this 26 time relates to three items: One, the 1987 LA 27 County lot purchase price records of $300,000; the 28 inflation adjusted construction costs of $1,540,000; 18 1 and the LA County Assessor's final fair market value 2 figure of $2,655,000, which was never adjusted at 3 any subsequent date for additional construction. 4 Accordingly, FTB assigned a total adjusted 5 basis of $2,655,000 for the entire property, 6 utilizing the estimate following the Cohen case and 7 utilized this figure in computing the Appellants' 8 taxable gain, reducing taxable gain by taking into 9 account Appellants' sales commissions, escrow costs 10 and the respective $250,000 Section 121, Internal 11 Revenue Code, home sale exclusion allowance. 12 The result that the additional gain for 13 each Appellant was approximately $1,400,000. 14 Appellants are required to provide reliable 15 and precise evidence to show that they incurred 16 alleged improvement expenditures. It is well 17 settled that establishing basis is a factual matter. 18 The fact that basis may be difficult to establish 19 does not relieve the taxpayers from their burden. 20 Treasury Regulation Section 1.6001-1(a) 21 requires taxpayers to keep such permanent books of 22 account and records that are sufficient to establish 23 the amount of gross income, deductions, credits or 24 other matters required to be shown in such person in 25 any return of such tax information. 26 Here Appellants have admittedly not 27 provided any information or records confirming the 28 actual costs of their alleged improvements. As 19 1 such, as a fundamental matter, Appellants have 2 failed to satisfy their twin burdens of proof -- 3 proving Respondent's determination is wrong and the 4 second obligation to establish the correct amount of 5 tax. 6 Accordingly, Respondent's determination 7 must be sustained. 8 Thank you. 9 MR. HORTON: On rebuttal, please. 10 MR. MUDD: Thank you. 11 Once it became clear that the taxpayers 12 were not going to be able to provide any of their 13 documents, the best that they were able to do was to 14 find the builder. 15 The builder gave us the square footage. He 16 gave me the square footage price when he told me, "I 17 don't have any records." 18 I said, "So, you have no recollection of 19 the cost?" 20 He said, "No, I remember what it cost." 21 "And what's that?" 22 And he said, "It's 350 a foot, it was 23 outrageously expensive." 24 The pictures show that this house was built 25 with the best of everything. Even in 1988 the 783 26 improvement assessed value was terribly low. There 27 probably should have been some additional appraisals 28 and assessments by the assessor. 20 1 But the -- based on the Cohen case, it's 2 just -- it's just so abundantly clear that this 3 house could not have been built along with that 4 subterranean basement, elevator, the quality of the 5 construction that -- you've got pictures that show 6 the boat docks that were built and -- and the 7 testimony of the people on what the valuations were. 8 It's reasonable under the circumstances. 9 They spent way too much on the house. But they've 10 given evidence by their testimony and by the 11 declaration of the builder on what the costs were. 12 And I think that -- ask the Board to take 13 that into consideration. 14 MR. HORTON: Discussion, Members? 15 Member Ma. 16 MS. MA: Yes, Mr. Mudd, I think our office 17 contacted you to see if the taxpayers or their 18 company, I assume they probably used a pretty 19 reputable insurance company, could come up with the 20 insurance premium document that they used to pay the 21 home insurance on. 22 MR. MUDD: We attempted to do that. I made 23 some calls and I don't remember which one of the 24 Dobkins attempted to. We weren't able to do it, at 25 least on that short notice. 26 It's possible that we could still get that, 27 but I wasn't able to do it on that -- that short 28 notice. I did attempt to and one of the Dobkins did 21 1 attempt to as well. 2 MS. MA: And do you know who your insurance 3 carrier is? 4 MS. DOBKIN: I don't remember. 5 DR. DOBKIN: I think it was Chubb. 6 MS. MA: I'm sure Chubb probably could come 7 up with something. 8 My second question is the appraisal, 9 appraises for 3.9. And that's the fair market 10 value, right? 11 MR. MUDD: Correct. 12 MS. MA: And, you know, they don't really 13 talk about cost because it's based on fair market 14 value, but I guess the -- you know, the cost 15 approach came up to about four million. And the 16 sales approach comparison came up to 3.9 million -- 17 this was in 1993. 18 MR. MUDD: Yes. 19 MS. MA: I mean, you know, we kind of would 20 like to use some sort of third party verifying 21 document and I -- 22 MR. MUDD: I understand. 23 MS. MA: -- and I haven't met your 24 contractor -- 25 MR. MUDD: I understand, yes. 26 MS. MA: -- and it's kind of hard to, you 27 know, use his recollection. 28 MR. MUDD: We would have brought him to 22 1 testify, if I would -- 2 MR. HORTON: My apologies, sir, but please 3 allow, the Member -- 4 MR. MUDD: Oh, I'm sorry. 5 MR. HORTON: -- to conclude. 6 MR. MUDD: Okay. 7 MS. MA: So, that's where I'm struggling, 8 you know, without some third party verification. 9 And I don't know if, you know, Chubb can 10 get that third party verification. Obviously, you 11 would have insured your home for, you know, the 12 correct replacement cost, which I would assume would 13 have taken into consideration, you know, the costs 14 that you would have put into all of the different 15 material and other improvements that you put into 16 the house. 17 So, that's what I was looking for and, you 18 know, given the time -- 19 MR. MUDD: Until your office requested, I 20 didn't even think about the insurance. 21 I mean, I would be glad to take another 48 22 hours and still attempt to get it, but I just wasn't 23 able to. 24 MS. MA: I'm done. 25 MR. HORTON: Discussion, Members? 26 Member Runner. 27 MR. RUNNER: Yeah, obviously, some 28 documentation, third party documentation, would be 23 1 very helpful. 2 But, obviously, part of the challenge is 3 that this happened a while back and, again, 4 people -- recordkeeping and thinking about how to 5 all of a sudden deal with these issues sometimes 6 becomes very problematic. 7 But, you know, I'm struggling with -- with 8 FTB's assumption is that the improvements on the 9 assessed value of the property was $783,000? 10 MR. GEMMINGEN: No, we never made that 11 assumption at all, sir. 12 MR. RUNNER: Okay. 13 MR. MUDD: 780 -- oh, I'm sorry. 14 MR. GEMMINGEN: We assigned a gross value 15 estimate. 16 MR. RUNNER: Okay, the gross value. So, 17 what did you -- how did you break down your gross 18 value? 19 MR. GEMMINGEN: We -- we weren't -- we were 20 just providing an adjusted basis -- adjusted basis 21 in an aggregate amount. 22 MR. RUNNER: So, how would you break it 23 down? 24 You have property and you have 25 construction. How would you break it down? 26 MR. GEMMINGEN: We would look at it from 27 the initial starting point, which is the $300,000 28 amount that we have. 24 1 MR. RUNNER: 300,000 for what? 2 MR. GEMMINGEN: For the purchase price of 3 the two lots. That's what's provided in the -- 4 MR. RUNNER: 300,000, I thought -- I 5 thought I heard that the purchase price of the two 6 lots was -- 7 DR. DOBKIN: $1,835,000. 8 MR. RUNNER: -- so, how did we -- how did 9 we get 300,000 -- how do we -- why do we have the 10 differences between the values of the properties 11 that were paid for? 12 MR. GEMMINGEN: In the Exhibit D that you 13 have, pardon me, Exhibit A that you have of ours -- 14 MR. RUNNER: Uh-huh. 15 MR. GEMMIGEN: -- there's a -- at Exhibit 16 -- in the group A at Exhibit C -- 17 MR. RUNNER: Yes. 18 MR. GEMMIGEN: -- which was provided to 19 your Board, there is a printout from the LA County 20 Assessor's records which says, 21 "The full sales price for these two 22 lots," two lots are noted there, 24 and 25, 23 "the sales price is $300,000." 24 That's how we got there. 25 MR. RUNNER: Let me ask the taxpayer. 26 How do we get -- how does it -- how does 27 the -- again, I don't know whether that's an 28 assessor's mistake or what the question is. 25 1 But how do you -- how do we -- I guess, 2 part of this issue, I'm just logically thinking here 3 too -- I'm looking at these two lots. And I'm 4 thinking, okay -- and these lots had houses on them 5 at the time, right? 6 DR. DOBKIN: They were vacant. 7 MR. RUNNER: They were vacant? They were 8 vacant houses, okay. 9 They were vacant lots, two lots sitting out 10 there. 11 So, that means these lots would $150,000 12 each? Is that what -- that's the assumption we'd 13 have to be making, right? 14 MR. GEMMINGEN: Well, it's more than an 15 assumption, this is what the -- this is what 16 the documents provide -- 17 MR. RUNNER: Again -- 18 MR. GEMMINGEN: -- that the sales price, 19 the full sales price, is $300,000. 20 When I bought my home, the sales price was 21 recorded and that's what I was assessed for the 22 first year was what my sales price was when made the 23 purchase for the lot. 24 So, this is what -- this is familiar to all 25 of us. 26 MR. RUNNER: I get that, I get that. 27 But I'm also looking at where the lots are. 28 Does that make -- does that -- 26 1 MR. GEMMINGEN: Well, as the doctor 2 mentions, these had subterranean issues with respect 3 to support and the -- 4 DR. DOBKIN: No, that's -- 5 MR. RUNNER: I'll get to it. Go ahead. 6 MR. GEMMINGEN: -- so, that they had -- a 7 person who was going to buy this lot has to invest, 8 if they're going to build on it, additional funds. 9 And, so, that affects value if you're going 10 to try to build a home on that property. 11 DR. DOBKIN: May I respond? 12 MR. GEMMINGEN: And also you'll -- we're 13 working off an estimate. Because if -- this is the 14 best evidence we have of that sales price and 15 purchase price at the time. And -- 16 MR. RUNNER: Everybody -- the challenge is 17 that everybody's trying to work off of historical 18 documents that are very difficult to try to figure 19 out how to get through. 20 Let me ask again, why -- how is it that the 21 assessor could have such a different value in 22 regards to the price of the sale of the property? 23 DR. DOBKIN: If I could buy it for 24 $300,000, I should have gone into real estate. 25 MR. RUNNER: Right. Tell me -- tell me how 26 that -- 27 DR. DOBKIN: I told you, I bought the house 28 for -- there were two people -- it was owned by the 27 1 Chairman of the Board of Long Beach Memorial 2 Hospital, the two lots. He was going to build a 3 house on that, decided not to. 4 MR. RUNNER: And do we have -- 5 DR. DOBKIN: Sold the house. 6 MR. RUNNER: -- any documentation on the 7 price of that that he -- what he sold you? 8 DR. DOBKIN: He sold me the house. So, he 9 -- there were two lots. 10 MR. RUNNER: Yes. 11 DR. DOBKIN: And they were owned by two of 12 my neighbors in the neighborhood, who are probably 13 dead now. 14 One was $935,000, the one that walked -- 15 there was a walkway to the ocean. And the one next 16 to it was $900,000. 17 They agreed. I paid them $350,00. They 18 carried a one and half million dollar loan, I think 19 for 12 percent interest rate for 18 percent -- I 20 mean for 18 months. 21 MR. RUNNER: So, you would believe the -- 22 DR. DOBKIN: So, what they -- 23 MR. RUNNER: -- mistake that was taken up 24 the assessor was what they picked up was the -- the 25 downpayment that was made or -- 26 DR. DOBKIN: Absolutely. 27 MR. RUNNER: -- as opposed to the true 28 total value? 28 1 DR. DOBKIN: You could just -- I mean, they 2 have some responsibility too. They could go look 3 and see what things sold for. 4 MR. RUNNER: I think there's a 5 reasonableness issue here. I mean, I think that 6 that's -- I mean -- 7 DR. DOBKIN: I mean, they work for us too. 8 They should go explore this. 9 MR. RUNNER: Let me ask you this, why 10 wouldn't we use the -- the appraisal in 1993? 11 Didn't that -- that separated out both 12 property and construction, right? 13 MR. GEMMINGEN: That had a reconstruction 14 cost element too, yes. 15 MR. RUNNER: Right. And that was like just 16 under $4 million, right? 17 MR. GEMMINGEN: But the land was $2 million 18 for the purchase price and the construction of the 19 home was $2 million. 20 MR. RUNNER: Okay. So, about four million. 21 Why -- why isn't that -- why wouldn't that be a 22 recognizable value that would -- the basis for value 23 based upon -- again, I'm just trying to get the 24 reasonableness here. 25 MR. GEMMINGEN: Okay. 26 MR. RUNNER: It doesn't seem reasonable to 27 me that those two lots were actually -- 28 MR. GEMMINGEN: Well, with that -- 29 1 MR. RUNNER: -- only sold for that much 2 money. 3 MR. GEMMINGEN: -- Member Runner, you 4 looked at the reasonableness for value. 5 We're not looking at value, we're looking 6 at cost. 7 Those are two distinct items. 8 MR. RUNNER: Right. 9 MR. GEMMINGEN: So, what a property may be 10 valued at after it's built can rise or fall, as we 11 know about today. 12 MR. RUNNER: Right. 13 MR. GEMMINGEN: And, so, when looking at 14 value in 1993, that does not necessarily reflect the 15 cost that the parties expended in 1988, when there 16 was no further expenditures and no reassessments 17 that -- 18 MR. RUNNER: But that still buys into the 19 fact that then the assessor's records are correct, 20 right? 21 I mean, it seems to me that they -- that 22 the -- what the -- what the taxpayer is arguing in 23 regards to what he paid for that property is 24 consistent -- more consistent than what the 25 appraisal that happened a few years later. 26 MR. GEMMINGEN: You say it's more 27 consistent, consistent with what item, please? 28 MR. RUNNER: What he believes -- what he 30 1 paid -- what he says he paid for the lots -- 2 MR. GEMMINGEN: Yes. 3 MR. RUNNER: -- and what it is that the 4 appraisal said that the lots were valued. 5 MR. GEMMINGEN: Five years later, yes. 6 MR. RUNNER: Right, five years later. 7 They seem to be pretty consistent figures, 8 right? They're -- 9 MR. GEMMINGEN: Yeah, the -- yes, they're 10 similar. 11 MR. RUNNER: Okay. So, I'm just trying to 12 struggle with this outlier, which is the -- which is 13 the -- which is the County Assessor's value and at 14 least what -- at least the taxpayers' arguing 15 because they picked up the wrong amount -- they 16 picked up what I paid as a downpayment, not what I 17 ended up paying after eighteen months or whatever it 18 was. 19 MR. GEMMINGEN: Well, this is something we 20 struggle with when we've asked for this 21 documentation for years. 22 And, so, there's usually a paper trail 23 around buying a home. The parties had the records 24 in 2003. 25 MR. RUNNER: And I hope nobody asks me for 26 my property purchases from 1992. 27 MR. GEMMINGEN: Well, she -- she -- they 28 had the records in 2003, when they were going 31 1 through the divorce. 2 MR. RUNNER: You -- 3 MS. DOBKIN: I have them. 4 MR. GEMMINGEN: So, they claimed to have 5 had the records in 2003 -- 6 MR. HORTON: Members -- 7 MR. GEMMINGEN: -- and when they -- when 8 they entered into an agreement to pay the taxes on 9 the anticipated sale of the home, they stated they 10 had the records. 11 They were able to determine their gain. 12 And they -- and then they say that they sold -- 13 threw away the records in 2005. 14 So, the records were there. And if -- this 15 is an issue that we didn't create. This is -- you 16 know, as a result of -- and, so, we've tried to be 17 reasonable in providing an estimated basis and that 18 amount is $2,600,000. 19 MR. RUNNER: In 2005, did -- they thought 20 they would have to be proving up this value? 21 MR. GEMMINGEN: Yes, they did. 22 Because in 2003 they each agreed to pay 23 one-half of the gain of the sale of the home. 24 So, they knew -- they contemplated that 25 home would be sold, that the gain would have to be 26 calculated and that they'd have to report that. And 27 they split the gain between themselves as part of 28 that divorce. 32 1 So, they contemplated it at the time the 2 records were available. 3 MR. RUNNER: Which was in 2006 when they 4 did the sale? 5 MR. GEMMINGEN: They did the sale in 2006. 6 She said she threw away the records in 2005 -- 7 earlier tonight, she said 2006. And they did their 8 divorce in 2003. 9 So, two years before the records were 10 thrown away, they knew they were going to have to 11 report the gain on the sale of that land and report 12 their respective taxable amounts. 13 And they agreed to do that. 14 MR. RUNNER: Let me just ask real quickly 15 in regards to the issue of insurance values, is 16 that -- is that a reasonable issue to which you 17 think you can identify? 18 MR. MUDD: I believe, if I'm given enough 19 time I can -- if nothing else, I can get my 20 investigator to find that for me, who found 21 Mr. Merrill. 22 DR. DOBKIN: Can I make one comment 23 regarding the appraisal? 24 MR. RUNNER: Very quickly. 25 DR. DOBKIN: I -- my recollection was when 26 I refinanced the house then, it was around then, 27 there was like the dearth of the housing market. 28 And what I thought was worth seven or eight million 33 1 was suddenly worth like $4 million. 2 MR. RUNNER: In that cycle? 3 DR. DOBKIN: So, in contradiction to what 4 he was saying, it was like the lowest point it could 5 possibly be. 6 MR. GEMMINGEN: Mr. Horton, may I address 7 that? 8 MR. HORTON: Member Runner? 9 MR. RUNNER: Real quickly. 10 MR. GEMMINGEN: Again the element we're 11 talking about is construction cost, not fair market 12 value cost, not what the value might have been, $7 13 million. 14 We're talking about reconstruction costs. 15 So, that's a different item again. 16 MR. HORTON: Member Harkey. 17 MS. HARKEY: Thank you. 18 Well, I happen to have lived in this area 19 of Long Beach. I have lived in Southern California 20 forever. And I never lived on Lido, but I'm very 21 familiar with it. 22 And I'm very familiar with that time frame 23 because I -- I just remember that time. I had a 24 daughter born in '84. I remember '87. I remember 25 where the market was. I remember what was going on. 26 And, so, you're laughing, but I've lived in 27 Southern California in that area for like 45 years. 28 So, I've moved around. I was young and single when 34 1 I started. And I've been married and in the same 2 place for many, many years. 3 That being said, I do remember this time 4 frame. And I can tell you that these two lots would 5 not have been $300,000. There was no -- absolutely 6 no way. 7 Naples is a separate subsection and then 8 Lido is separate from that. And having lived there 9 and, you know, ridden my bike around that area -- I 10 was a renter, incidentally -- I'm very familiar with 11 that. And I just know that land value is wrong. 12 I'm wondering if the assessor had that land 13 value -- and I understand why you relied on it, 14 but -- I do because it -- it states right here, but 15 I'm wondering if the assessor had the land value 16 based on the way the property was sold under a 17 contract. 18 We used to do some unusual things back then 19 in real estate. And there was kind of like an 20 all-inclusive deed of trust transaction and other 21 things that may have been used that the assessment 22 actually didn't change on the assessor's roll. 23 Can you respond to any of that? 24 MR. CORNEZ: Well, it seems to me that if 25 this was a piece -- this was raw land and we 26 presumed the assessor had some sense of values, 27 especially in specialized neighborhoods like this, 28 and if the value that the assessor recorded as 35 1 $300,000 was completely out of balance to the -- the 2 value of $1.8 million, that the assessor would have 3 looked at that and corrected its assessment rolls to 4 get the proper -- proper amount of property tax. 5 So, I can see there being a potential 6 difference between 300 and $350,000 on an assessment 7 being recorded as full sales price, but it's 8 inconceivable that the assessor would miss a 9 difference of 300,000 to 1.8 million on a piece of 10 land, undeveloped raw land. 11 That's just -- 12 MS. HARKEY: It -- 13 MR. CORNEZ: -- I don't know, it gives -- 14 it tends to suggest the assessor wasn't doing his 15 job. 16 And I don't think there is any evidence of 17 that. 18 MS. HARKEY: -- well, I do believe if that 19 was the assessed value that somebody wasn't doing 20 their job. 21 So, how was this -- my question was more 22 for the taxpayer or the representatation, how was 23 this title taken? 24 How did you -- 'cause you had a note 25 carryback for, what'd you say, about a million five? 26 DR. DOBKIN: One and a half million 27 dollars. 28 MS. HARKEY: One and a half million 36 1 dollars? 2 DR. DOBKIN: One and a half. 3 MS. HARKEY: Right. So, did you -- was 4 there any kind of an unusual real estate transaction 5 that would have somehow not changed the price that 6 looks like these -- your sellers may have paid for 7 it years ago? 8 DR. DOBKIN: I have no idea. I assume they 9 might have reported because it was contingent, you 10 know, I owed them a million and a half dollars and 11 whatever, probably a first mortgage or whatever they 12 had drafted up. 13 I assumed that because they hadn't been 14 paid that money, somehow they deferred saying they 15 they collected. I don't -- I don't have any idea. 16 MS. HARKEY: That's -- that's what I think 17 it is. 18 'Cause if I look at this appraisal from 19 '93, which '93 was really a very bad time, there was 20 a saying in the industry, "If you can stay alive 21 'til '95," in Southern California. 22 And then we found out that, no, you really 23 had to stay alive 'til '97, 'cause it was that bad. 24 That was when our military-industrial 25 complex kind of got shut down. And the whole 26 demographic of Southern California changed. 27 We had -- we had some really hard times 28 then. Northern California was able to keep their 37 1 bases and Southern California got their bases 2 closed. So, we had a whole change. 3 And that's why -- that's why there was such 4 a long downturn. We were, in essence, 5 re-engineering the whole economy from where our 6 staple was, which was the military-industrial area, 7 aerospace. 8 So, I'm wondering if the Board would 9 consider maybe -- maybe the appraisal here as being 10 more of a substantiation? It's not what the 11 taxpayer states that it is, but it's a more 12 reasonable assessment of probably what was going on 13 and it is -- the appraisal was definitely -- in 14 '93 was definitely not a high point with the market. 15 It was probably a low point of the market. 16 So, that would be my question, what do you 17 -- FTB, did you -- have you looked at this 18 appraisal? Did you -- 19 MR. GEMMINGEN: Yeah, we reviewed the 20 appraisal that was provided at audit. And as part 21 of that, we looked at the reconstruction costs. 22 And given the construction costs and given 23 what we had as far as records for the purchase of 24 the land, you know, those numbers fall within -- 25 below the amount we provided. 26 But, obviously, it's unique land. It's on 27 waterfront and we recognize that. You know, we're 28 here in part just because the taxpayers have failed 38 1 to keep their records when they had -- knew they had 2 an obligation to keep them. 3 And, so, we're trying to work off the best 4 available evidence that we have. And we're 5 looking -- that reconstruction cost of -- in 1993 of 6 $2 million, with inflation adjusted backwards, 7 equals roughly $1,500,000. 8 But -- so, if your Board wants to do that, 9 that's fine. But, you know, one thing I think we 10 also need to look at is that -- is at the end of the 11 day, the County assessed this property for its full 12 fair market value when it was completed at 13 $2,655,000. 14 And, so, that doesn't seem to take into 15 account the expenditure of like -- of what the 16 Appellants claiming of over $6 million of 17 improvements to the land. 18 And, so -- or total cost. 19 And, so, there's a disconnect between what 20 they claimed to have spent and what the assessors 21 went out -- there was obviously going to be building 22 inspectors, people in the home all day long. 23 Whenever they go through various items -- putting up 24 wallboard or whatever, the building inspector is 25 going to make sure the plumbing is done, the 26 electric is done. 27 So, they're aware of what's going in 28 quality of the work. So, at the end of the day, the 39 1 County's aware of the type of work and the type of 2 product that was produced at the end of the day. 3 So, it's -- it's odd that the -- the final 4 assessment value would only be $2,655,000 if there 5 was an initial purchase price of $1,800,000 -- 6 especially since it's supposed to be fair market 7 value, it's typically higher than the costs. 8 MS. HARKEY: Right, I agree. And I know 9 you got 300,000 from this report, but I can -- I 10 just -- that is -- that is erroneous. It's just got 11 to be. There's no way it couldn't be. 12 So, I want to go back to the taxpayer or 13 his consultant. The FTB is stating there's 300,000, 14 you're saying a million eight and that makes a 15 difference. 16 The cost of the home was estimated by your 17 contractor to be about $350 per square foot, which 18 is probably reasonable in that time. Do you -- did 19 you -- how did your assessment come up with the -- 20 with the tax assessor, the County assessor, to be 21 2-6? 22 What -- what happened? Did you -- did you 23 report the improvements? Did you -- what did you 24 do? How did that happen? 25 DR. DOBKIN: I don't know the answer. The 26 only recollection I have is that at some point, like 27 I said, we had a Certificate of Occupancy when we 28 moved in, whenever that was -- '88, '90, '89. 40 1 And then we didn't get a final inspection 2 for several years later. So, I don't know what 3 transpired after that. 4 MS. HARKEY: Was the 2-6 -- and I'm not 5 sure who can answer this, was the 2-6 or whatever, 6 was that the assessed value based on a percentage of 7 completion? 8 Like you said, when you finally got your 9 Certificate of Occupancy, you were like, what 70, 80 10 percent complete? 11 DR. DOBKIN: I don't know. I mean, they do 12 their independent thing. I don't know why they do 13 what they do. 14 MS. HARKEY: Can anyone answer that? 15 MR. MUDD: I don't know. I can tell you 16 for the land, I think there was a mistake made 17 because I think on the deed there were $300,000 18 worth of stamps, but it also said, "excluding 19 mortgage." 20 So, I think that -- 21 MS. HARKEY: It did say "excluding 22 mortgage"? 23 MR. MUDD: Yes. 24 MS. HARKEY: Do you have any evidence of 25 that? 26 MR. MUDD: I do. I have that somewhere. I 27 don't know if I have it with me, but the State 28 should have it. 41 1 I did provide it to them. 2 MS. HARKEY: Well, there you go. 3 I mean, I just -- I think that -- just in 4 closing, this appraisal is probably more of a 5 benchmark than this report from the assessor. 6 Because $300,000 isn't reasonable at all. 7 I understand why you got it. And I get it. You 8 know, I'm not -- I'm not saying the FTB was wrong in 9 using it. 10 I'm just saying that it's not a reasonable 11 amount for that neighborhood, that area. And I know 12 that. And I was around in that time. So, I'm -- 13 I've been in Southern California and in the beach 14 areas for a long time. I'm an old lady. And that 15 300,000 -- see, I admit it. 16 MR. HORTON: No, you're not. 17 MS. HARKEY: -- that 300 -- I am. 18 That 300,000 was not reasonable at that 19 time. That was really, really low -- very low. I 20 mean, it was -- it's not accurate, couldn't have 21 been. 22 MR. HORTON: Excuse me, sir. 23 MS. HARKEY: Thank you. 24 MR. HORTON: Member Ma. 25 MS. MA: So, you know, different assessors 26 have different practices over the years. I have sat 27 on the Assessment Appeals Board for probably close 28 to ten years. And I can tell you, we went -- you 42 1 know, some of them do their job and some of them 2 don't. 3 And they don't always go back and recheck 4 what they put in the records unless taxpayers go 5 back proactively and ask them to look at it again. 6 I don't think the Dobkins were in the 7 business of going down and checking their records 8 down at the Assessor's office. 9 So, he said he bought it for $1.8 million. 10 Clearly I don't think two lots of this nature were 11 really 300,000 each, otherwise we all would have 12 been jumping up to buy it, I think. 13 So, you know, for me personally, without 14 some sort of other corroborating document, like an 15 insurance premium, I mean, the best I can do for you 16 is, you know, the appraisal 1993. I know it's not 17 the same year but the appraiser gave you $200 a 18 square foot for replacement costs. 19 You know, I know your contractor said, you 20 know, it cost $3 -- $350 per square foot, but that's 21 kind of the best I can do at this moment unless you 22 come up with something -- some other documents, 23 that kind of third party verification outside of 24 your contractor's recollection. 25 MR. MUDD: I would be happy to try to take 26 48 hours and see if I can find insurance 27 verification. And I would let you know know 28 immediately if I can't and the Franchise Tax Board. 43 1 MR. HORTON: Well, we may be headed towards 2 a 30-30-30. 3 But before we do so, let me ask, in the 4 interests of continuity and concept, the Franchise 5 Tax Board utilized the assessed value of the land in 6 the amount 1.8 when arriving at the cost basis. 7 So, why not use the same thing when it 8 comes to the construction and make the adjustment 9 for inflation, which would bring it to 1.4 of the 10 cost basis of improving, to arrive at a total cost, 11 if you use those two figures and the same 12 methodology, of 3.4? 13 MR. GEMMINGEN: Well, that's certainly one 14 method your Board could use. You know, I think 15 again, we looked at the aggregate figure based 16 upon -- and that -- 17 MR. HORTON: That's not my question. 18 My question is why would you use the method 19 by the assessor relative to the land and not use the 20 same method relative to the construction? 21 MR. GEMMINGEN: Because we weren't using 22 that method for cost for land. The assessor's 23 office will often reallocate -- 24 MR. HORTON: Where did you come up with the 25 1.8? 26 MR. GEMMINGEN: -- beg your pardon? 27 MR. HORTON: Where did you come up with the 28 1.8? 44 1 MR. GEMMINGEN: That's how the assessor 2 came up with the value, fair market value of $2.6 3 million. 4 MR. HORTON: You didn't use that? 5 MR. GEMMINGEN: We used it at the end of 6 the day as the best estimate of what the parties 7 would have probably spent to build a home worth 8 $2,655,000. 9 MR. HORTON: When you testified that you 10 didn't use it, what were you referring to? 11 I mean -- 12 MR. GEMMINGEN: We didn't use the million 13 800,000, we used the total amount. 14 We used -- 15 MR. HORTON: -- the total amount, exclusive 16 of 1.8. 17 MR. GEMMINGEN: -- which is reflective of a 18 finished product, fair market value. 19 MR. HORTON: But the total amount is 20 inclusive of the 1.8? 21 So -- 22 MR. GEMMINGEN: The total amount builds on 23 what -- as I stated, you know, we -- the assessor's 24 records first show the $300,000 amount and then they 25 go to 2 million 6. 26 MR. HORTON: -- no, I mean, this -- this 27 deal with the methodology of determining the 1.8 and 28 the 2. blah, if you are going to accept it in one 45 1 computation and why not just say, "Okay, this 2 methodology is correct"? 3 By accepting even the total value, you're 4 saying that, "We're accepting the value placed on 5 the land." 6 And we're also saying -- and, so, it's 7 clear how they compute the value on the land. So, 8 why not use that same computation as it relates to 9 the construction, just to be consistent? 10 MR. GEMMINGEN: When you say it's clear how 11 they compute the value of the land -- 12 MR. HORTON: It's not clear. I mean the 13 Department has -- I can't say it's clear. 14 I mean the Department has accepted it by 15 virtue that your argument is to use the number 16 before us. 17 MR. GEMMINGEN: Well, I think -- I think my 18 Exhibit D, which you have, which is a letter from 19 the Board of Equalization staff attorney dated 20 August 2nd, 2005 -- 21 MR. HORTON: Uh-huh. 22 MR. GEMMINGEN: -- provided to you. The 23 question there is is what is the assessor's practice 24 with respect to the -- the County Assessor's 25 reallocation of land improvement values for a single 26 family residence when property's substantially 27 renovated within two years of original purchase. 28 And the next page, at page 2, it says, 46 1 "It's the assessor's policy to 2 reallocate most of the purchase price to 3 the land if the property's substantially 4 renovated within two years of the original 5 purchase price -- purchase." 6 And, so, there's an acknowledgement that at 7 times reallocation of value will be pushed over to 8 the land. It doesn't reflect that the purchase 9 price is that amount, but it's just the value that's 10 being pushed over when there is substantial 11 renovation after the original purchase, which is 12 what happened in this -- with what this letter's 13 addressing. 14 And, so, again we are not saying -- it's -- 15 it's certainly plausible and your Board's to 16 consider that's a reasonable fair market value in 17 1988, what he paid for it. 18 But it also is reflective here that there 19 are times, and its the practice of many County 20 Assessors, to push the value over to the land when 21 there's been substanial improvement, especially 22 given that we have double lot here, if this home 23 were in inland California, it wouldn't have the 24 value -- the assessed value necessarily that it has 25 on the beach. Because that's what people are there 26 for, is to be on the beach, the privacy and the view 27 that a double lot provides. 28 And, so, it shouldn't be surprising that 47 1 the value gets pushed over to the land as confirmed 2 by the practice here. 3 MR. HORTON: Mr. Runner. 4 MR. RUNNER: Yeah, I -- I'm -- I'm also -- 5 I find myself, you know -- again the 300,000 lot 6 price is to me not a believeable issue. 7 And I can't explain why. I'd be interested 8 to see if there are actually some -- some -- some 9 information on a deed that would indicate how it got 10 there. 11 But, you know -- and, so, I find myself 12 landing probably closer to that $4 million dollars 13 on the appraisal as a starting point. 14 But at the end of the day, I guess I want 15 to ask the taxpayer, if you think you can provide 16 documentation that would be able to help us get to 17 the higher number? 18 DR. DOBKIN: Well, we have the name of the 19 people that brokered -- sold us -- that broke the 20 house, the lots. The ownership has changed, but the 21 people are still there. 22 I don't know if they have records. We've 23 tried to get records going back to them, but, like 24 everything, it's hard. 25 MR. RUNNER: Do you think more time would 26 help you do that, both -- either with that -- or 27 with the -- or with the insurance information? 28 MR. MUDD: Well, we can try to get the 48 1 insurance information. It was the brokerage that 2 gave me the deed that said what the 300,000 stamps 3 are exclusive of the mortgage assumed. 4 MR. RUNNER: That's a -- that's a pretty 5 substantial piece of information for me. 6 MR. MUDD: I had given it to the Franchise 7 Tax Board. 8 MR. RUNNER: Do we have that? 9 MR. MUDD: If you don't have it, I do have 10 that. I can provide that. 11 MR. RUNNER: But you don't have it with 12 you? 13 MR. MUDD: I don't. I didn't bring my 14 entire file. 15 MR. RUNNER: Okay. Then I'm going to do 16 this, I'd like -- 17 MS. STOWERS: Mr. Chairman, before you do 18 it -- 19 MR. RUNNER: Before doing anything 20 dramatic? 21 MS. STOWERS: -- please, I just want to -- 22 MR. HORTON: One second. 23 Member Runner defers to Ms. Stowers. 24 MS. STOWERS: -- make sure I understand 25 what's going on. 26 It's your testimony that you paid about 27 1.8 million for the two lots? 28 DR. DOBKIN: I paid exactly one million -- 49 1 MS. STOWERS: Is that -- 2 DR. DOBKIN: -- 835,000. 3 MS. STOWERS: And most of that you assumed 4 a mortgage from the owners? 5 And under tax law when you assume a 6 mortgage, that is part of the basis. That's pretty 7 standard. 8 MR. RUNNER: Right. 9 MS. STOWERS: FTB was going with this land 10 assessed value of 1.8 -- that's how I can see it -- 11 which is coming from the County Assessor. 12 And FTB had a lower amount for the 13 improvements based on the County Assessor. 14 There was a Board Member inquiry that 15 raised the issue of the appraisal, that when you 16 factor in inflation, the cost of the improvements 17 value is 1.5. 18 So, it seems to me that when you don't have 19 records, being a former auditor, you either look at 20 the County Assessor records or the appraisal -- or 21 the recent appraisal and make a judgment call on 22 what the call spaces is. 23 And it's -- the question the FTB is 24 focusing on, the assessor, but yet we do have this 25 appraisal and we do have their testimony that the 26 land cost a lot more than $300,000. 27 And I tend to agree with Ms. Harkey, that 28 for that area in Southern California you couldn't 50 1 get a beachfront property property for 300 grand. 2 And I'm also experienced in the mortgage 3 business and understanding how a seller would do a 4 carryback or a wraparound. And that was -- back in 5 the '80s that was very typical. 6 So, I -- I think that we could come to a 7 conclusion here that they paid the 1.8 for the land 8 and then the cost of their improvements was the 1.5 9 when you factor in inflation. 10 MR. HORTON: Is that a motion? 11 MS. STOWERS: Yes, it is. 12 MR. HORTON: Okay. I would -- 13 MS. STOWERS: Let me -- I know you guys 14 want some numbers. 15 Basically you end up giving them an 16 adjusted basis of 3,412 -- 17 MR. RUNNER: I'm not there. 18 MS. STOWERS: -- 500,000 -- 3,412,500. 19 MR. HORTON: All right, okay. 20 Members, let us take that under 21 consideration. 22 Let me also call the FTB's attention to 23 their brief, wherein they've actually accepted 24 the -- they reflected the assessed value at 1.8 and 25 the improvement value of 783 for the total of 2.665. 26 You put it in your brief. You testified to 27 it here. You have -- I mean, you're -- how can you 28 not say you're accepting that as well as -- if you 51 1 accept the 1.8, you are accepting the methodology in 2 which it was computed. 3 And, so, to Ms. -- Member Stowers' 4 argument, I think it's pretty consistent if you 5 apply that method to the improved assessed value as 6 well. 7 With that said, we will go to Mr. Runner. 8 MR. RUNNER: Well, I'm -- I'm still 9 concerned about the fact that the taxpayer feels 10 like they have some -- some other information that 11 could be helpful to them. 12 MR. HORTON: Is that a motion for a 13 30-30-30? 14 MR. RUNNER: It's a -- yeah. I -- 15 actually, here's my motion: I move -- my motion is 16 for a 30-30-30 and continue the hearing. 17 MS. HARKEY: I'll second that. 18 That mean it come back here, right? 19 MR. RUNNER: Yeah. 20 MS. HARKEY: I'll second that. 21 MR. HORTON: Okay. And a 30-30-30, bring 22 it back here on a continuance is the motion by 23 Member Runner, second by Member Harkey. 24 Without objection, Members, such will be 25 the order. 26 Sir, I would ask that Appeals -- that -- 27 will explain -- I don't know what your schedule is, 28 flights and all that other things, we want to make 52 1 sure you understand what just happened. 2 Basically they're going to allow all 3 parties 30 days to come up with documentation; 4 thirty days to review; thirty days to go through the 5 process. 6 And the matter will come back before the 7 Board for continuation and discussion of these 8 issues. 9 Hopefully during that time you can provide 10 additional documentation as it relates to the value. 11 Although, quite frankly, I mean, as an 12 aside, I thought you had a home run. 13 But we'll do it. 14 MR. MUDD: All right, thank you. 15 MR. HORTON: Thank you very much. 16 ---o0o--- 17 18 19 20 21 22 23 24 25 26 27 28 53 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 FEBRUARY 24, 2015 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 53 constitute 14 a complete and accurate transcription of the 15 shorthand writing. 16 17 Dated: APRIL 16, 2015 18 19 20 ____________________________ 21 JULI PRICE JACKSON 22 Hearing Reporter 23 24 25 26 27 28 54