1 BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION 2 450 N STREET 3 SACRAMENTO, CALIFORNIA 4 5 6 7 8 REPORTER'S TRANSCRIPT 9 MARCH 25, 2015 10 11 12 13 14 15 FINAL ACTIONS 16 17 18 19 20 21 22 23 24 25 26 27 REPORTED BY: Kathleen Skidgel 28 CSR NO. 9039 1 1 P R E S E N T 2 3 For the Board Jerome E. Horton of Equalization: Chairman 4 5 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 T. 12 Yee, State Controller (per Government Code 13 Section 7.9) 14 Joann Richmond 15 Chief Board Proceedings 16 Division 17 ---oOo--- 18 For Staff: Randy Ferris 19 Chief Counsel 20 Lou Ambrose Tax Counsel IV 21 Grant Thompson 22 Tax Counsel IV 23 Anthony Epolite Tax Counsel IV 24 25 ---oOo--- 26 27 28 2 1 450 N STREET 2 SACRAMENTO, CALIFORNIA 3 MARCH 25, 2015 4 ---oOo--- 5 MS. RICHMOND: Next are those matters that 6 were taken under submission earlier today. 7 Our first matter is B1 Esther Korman. 8 ---oOo--- 9 B1 ESTHER KORMAN 10 NO. 680322 11 ---oOo--- 12 MS. MA: Hold on. 13 MR. RUNNER: I think we got to get to those 14 pages. 15 MS. HARKEY: Yeah, hold on. 16 These are -- these are familiar names. 17 Hang on. 18 MR. RUNNER: That's right. What was that 19 about? No. 20 MS. HARKEY: Okay. Esther Korman. 21 MS. STOWERS: So many pages. 22 Ready? 23 MS. HARKEY: I'm not going to make a motion 24 here. 25 MS. STOWERS: Discussion? 26 MR. HORTON: Discussion, Members? 27 MS. HARKEY: No. Somebody else. 28 MS. STOWERS: Chairman. 3 1 MR. HORTON: Ms. Stowers. 2 MS. STOWERS: On this 1031 exchange, I see 3 that the partnership took constructive receipt of 4 the funds, which is in violation of the 1031 rules. 5 I understand their argument that one of the 6 partners went out, but the partnership instructed 7 the exchanger to release the funds. And, for me, 8 that violates the rules. 9 So my motion would be to sustain the 10 Franchise Tax Board for this. 11 MR. HORTON: Member -- 12 MS. MA: Second. 13 MR. HORTON: Member Stowers moves to deny 14 the appeal, second by Member Ma. 15 Objection? 16 Without objection, such will be the order. 17 ---oOo--- 18 19 20 21 22 23 24 25 26 27 28 4 1 MR. HORTON: Ms. Richmond. 2 MS. RICHMOND: Our next matter is B2 Peter 3 St. Geme and Polly Plumer St. Geme. 4 ---oOo--- 5 B2 PETER ST. GEME and POLLY PLUMER ST. GEME 6 NO. 693089 7 ---oOo--- 8 MS. HARKEY: I move to grant the 9 petition. 10 MR. RUNNER: Second. 11 MR. HORTON: Member Harkey moves to grant 12 the petition. Second by Member Runner. 13 MS. STOWERS: Objection. 14 MS. MA: Not the petition. You mean grant 15 for the appellants, right? 16 MR. HORTON: Grant for the appellant. 17 Objection? 18 MS. STOWERS: Yes, objection. 19 MR. HORTON: Objection noted. 20 Ms. Richmond, please call the roll. 21 MS. RICHMOND: Mr. Horton. 22 MR. HORTON: Aye. 23 MS. RICHMOND: Ms. Harkey. 24 MS. HARKEY: Aye. 25 MS. RICHMOND: Mr. Runner. 26 MR. RUNNER: Aye. 27 MS. RICHMOND: Ms. Ma. 28 MS. MA: Aye. 5 1 MS. RICHMOND: Ms. Stowers. 2 MS. STOWERS: No. 3 MS. RICHMOND: Motion carries. 4 ---oOo--- 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 6 1 MR. HORTON: Ms. Richmond. 2 MS. RICHMOND: Our next item is B4 Johnnie 3 F. Lau and Gay L. Lau. 4 ---oOo--- 5 B4 JOHNNIE F. LAU and GAY L. LAU 6 NO. 739838 7 ---oOo--- 8 MR. AMBROSE: Mr. Chairman, if I may. 9 MS. RICHMOND: Lau. 10 MR. AMBROSE: I received word from the 11 Chief Counsel of the Franchise Tax Board and she 12 respectfully requests that the Board order a 13 30/30/30 to allow time for FTB to review the recent 14 calendar and supporting documents filed by the 15 appellants. 16 MR. HORTON: I'm presuming that this may 17 all go away after that? 18 MR. AMBROSE: I think that seems 19 reasonable. 20 MR. RUNNER: I'll move a 30/30/30 and 21 continue the hearing. 22 MR. HORTON: It's been moved by Member 23 Runner-- 24 MS. STOWERS: Second. 25 MR. HORTON: -- for a 30/30/30 with a 26 continuation. Second by Member Stowers. 27 Without objection, Members, such will be 28 the order. 7 1 MS. RICHMOND: Our next item is B5 Ehud 2 Yuhjtman and Dalia Yuhjtman. 3 ---oOo--- 4 B5 EHUD YUHJTMAN and DALIA YUHJTMAN 5 NO. 772960 6 ---oOo--- 7 MS. HARKEY: I move to grant the petition. 8 MS. STOWERS: Wait a minute. 9 MR. HORTON: Member Stowers moves to -- 10 MS. STOWERS: Oh, no, no, no, no. 11 MR. HORTON: Strike that. 12 Member Harkey moves to grant the 13 petition. 14 MR. RUNNER: Second. 15 MR. HORTON: Second by Member Runner. 16 Objection noted. 17 MS. STOWERS: Objection. 18 MR. HORTON: Discussion, Members? 19 MS. STOWERS: Give me a second, please. 20 Which one is this again? Starting to get 21 old. This is -- 22 Oh, this is the accuracy-related penalty. 23 MR. RUNNER: Accuracy-related penalty. 24 MS. STOWERS: Yes. I want to correct 25 myself. There is no such policy or regulation about 26 not assessing the penalty on residency. It's 27 another issue, so I want to say that. 28 Now with respect to the penalty itself, 8 1 they -- in my opinion, they had the duty to look at 2 their tax return and clearly see on that Schedule CA 3 where their representative had clicked that they did 4 not own property in California and that they had 5 left California. That was clear on the Schedule CA, 6 the second page of the tax return. And had they 7 looked at that -- and they admitted in their briefs 8 that they failed to look at it. But had they looked 9 at that, then they could have corrected their -- 10 their return. And for that reason, I do not support 11 to grant the appeal -- to grant the appeal. 12 MR. HORTON: Objection noted. 13 Member Ma. 14 MS. MA: I feel that the taxpayer actually, 15 when he was notified that the tax return was 16 prepared incorrectly, he did immediately pay the 17 balance due. 18 And, you know, as the State Board of 19 Equalization, I think we're in the business of 20 collecting fair and accurate taxes, not necessarily 21 assessing penalties, especially to those that are 22 trying to do the right thing and, you know, filing 23 on time, going to a tax professional, you know, 24 sitting with them, reviewing the tax return with the 25 tax professional. 26 In this case he was, you know, trilingual, 27 went over all of the issues, thought he was filing 28 it right. But when it was found out he wasn't, he 9 1 immediately paid. And I think that's due cause for 2 a responsible taxpayer versus someone who just 3 blatantly doesn't file, doesn't want to pay, just 4 ignores, you know, letters, etcetera, from the 5 Franchise Tax Board. 6 MS. STOWERS: I withdraw my objection. 7 MR. RUNNER: There you go. 8 MS. HARKEY: There you go. Okay. 9 MR. RUNNER: Very persuasive. 10 MS. HARKEY: That was good. That was -- 11 that was my reason, too. 12 MR. HORTON: Okay. There's a motion and a 13 second. 14 Without objection, such will be the order. 15 ---oOo--- 16 17 18 19 20 21 22 23 24 25 26 27 28 10 1 MR. HORTON: Ms. Richmond. 2 MS. RICHMOND: Our next item is B6a Rago 3 Development Corporation; B6b Frederick M. Wooster 4 and Mary L. Wooster; B6c Paul H. Verriere and 5 Patricia R. Verriere; B6d Michael J. Smith and Lynn 6 M. Smith; B6e Louis Rago and June E. Rago; B6f 7 Martin Bramante and Estate of Velia Bramante; B6g 8 Frank Sabella; and B6h Louis La Torre Family Living 9 Family Trust, Louis La Torre Trustee. 10 ---oOo--- 11 B6a Rago Development Corporation 12 No. 735761 13 B6b Frederick M. Wooster and Mary L. Wooster 14 NO. 727483 15 B6c Paul H. Verriere and Patricia R. Verriere 16 NO. 727493 17 B6d Michael J. Smith and Lynn M. Smith 18 NO. 725834 19 B6e Louis Rago and June E. Rago 20 NO. 725839 21 B6f Martin Bramante and Estate of Velia Bramante 22 NO. 632713 23 B6g Frank Sabella 24 NO. 633944 25 B6h Louis La Torre Living Family Trust, Louis La 26 Torre Trustee 27 NO. 6330028 28 ---oOo--- 11 1 MR. RUNNER: Move to grant. 2 MS. HARKEY: Second. 3 MR. HORTON: Member Runner moves to grant. 4 Second by Member Harkey. 5 Objection? 6 Hearing none, such will be the order. 7 ---oOo--- 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 12 1 MR. HORTON: Ms. Richmond. 2 MS. RICHMOND: Our last item is B7 Kamaldip 3 S. Ghei. 4 ---oOo--- 5 B7 KAMALDIP S. GHEI 6 NO. 796875 7 ---oOo--- 8 MS. HARKEY: Sustain the FTB. 9 MR. HORTON: Member Harkey moves to sustain 10 the FTB. Second by Member Ma. 11 Without objection, Members, such will be 12 the order. 13 MS. STOWERS: Chairman. 14 MR. HORTON: Member Stowers. 15 MS. STOWERS: Is it possible, with respect 16 to like-kind exchange, to get some type of legal 17 memo from our attorneys, outlining the various 18 cases; the Magneson case, the Atkinson case, and 19 everything else so that we can look at it as one 20 document? 21 I mean we had a lot of cases coming up over 22 the past two weeks outside of the normal briefing 23 period. It was really difficult for me to take it 24 all in. But I would like to see the entire -- the 25 big picture. 26 MS. HARKEY: I -- 27 MR. HORTON: I be- -- I be- -- this is 28 Section 40. One of the cases is Section 40. 13 1 MS. STOWERS: I mean a separate -- not with 2 this case. Separate, outside of this case. 3 MR. HORTON: Outside of Section 40. 4 MS. HARKEY: She just wants an analysis -- 5 MR. HORTON: Sure. 6 MS. STOWERS: Yeah. 7 MS. HARKEY: -- of all of the 1031s. 8 MS. STOWERS: I just want an analysis of 9 the law, outside of this case. 10 MR. HORTON: Yeah. 11 MS. HARKEY: I would like -- I would like 12 to move to, uh -- that the Board's opinion be 13 published as a formal precedential opinion and to 14 include the following finding -- let me turn my 15 page. 16 "The Internal Revenue Code 1031 17 like-kind exchange is valid, 18 notwithstanding the subsequent change in 19 form of ownership because the exchange was 20 properly executed and the replacement 21 property was at all times held for 22 investment purposes." 23 MS. STOWERS: Ms. Harkey, I think that 24 would be helpful if once -- for me, and once I saw 25 the legal analysis with all the cases. That's why I 26 was thinking if we could dispose of this case and 27 then get this legal analysis so if we have the 28 opportunity in the future to deal with another 14 1 like-kind exchange, we would at least be starting 2 with that legal analysis. And at that time if the 3 Board did choose to do a formal, at least for me I 4 would have a solid ground. 5 MR. HORTON: Well, as a -- just as a matter 6 of recommendation, the process is such that staff 7 will develop a -- 8 MS. HARKEY: An opinion. 9 MR. HORTON: Maybe -- why don't I -- 10 instead of me saying it, why don't I ask the Chief 11 Counsel to come forward. 12 MR. RUNNER: Yeah. 13 MR. HORTON: Just speak to the process. 14 But, in essence, I believe it will give the Board an 15 opportunity, not only to consider that variable 16 articulated by Member Harkey, but all the other 17 variables relative to a -- relative to this 18 particular case and come up with an all-inclusive 19 statement. At that time the body can decide to make 20 it precedential if they will. 21 MR. FERRIS: Uh, yes. Randy Ferris, Chief 22 Counsel. 23 The default rule in our regulation is, 24 without specific direction from the Board, staff 25 prepares what's called a summary decision. So it 26 would start out as -- as nonprecedential. But at 27 the time that the Board considers that -- and that 28 opinion would typically be linked to the PAN and 15 1 would be available for the public to observe as 2 well. 3 If the Board was convinced that the draft 4 summary decision was worthy of being a formal 5 opinion, our rules would allow for the Board to make 6 that decision at that time. 7 MS. HARKEY: May I just state that the 8 reason I suggest this is because I understand that 9 on this one particular item that there is quite a 10 bit of subsequent changing into LLCs and that the -- 11 and the taxpayers, the businesses would -- and 12 individuals would like some clarity of that. And I 13 think that would solve a lot of our problems. 14 There's other things that would be included 15 in the -- the nonpublished opinion or whatever -- 16 I'm sorry, I don't have the terms right here. But 17 that this one particular item, I would like that to 18 kind of stand alone. 19 And if we don't want to publish the 20 precedential or we don't want to authorize it right 21 now, I would still like this to be a stand-alone 22 item because I think if we start combining items, 23 we'll never -- we won't establish a precedential 24 opinion on it. 25 MR. FERRIS: Yeah. In any case, there will 26 be a published opinion on this. But the Board does 27 have the discretion to wait and see if there's 28 sufficient consensus that there should be a 16 1 precedential decision published in this case when 2 they see the opinion. 3 MS. MA: How long will it take? 4 MR. HORTON: I think what -- 5 MR. FERRIS: Yeah. 6 MS. MA: How long will it take for your 7 opinion, draft opinion? 8 MR. FERRIS: 30 days from today -- 9 MR. HORTON: It's sort of prescribed by 10 law. 11 MR. FERRIS: -- there will be an 12 opportunity for the Franchise Tax Board to file a 13 petition for re-hearing. 14 If they do not file a petition for 15 re-hearing within that 30-day period, after the -- 16 so in 150 days. There's 120 days after the initial 17 30-day period. 18 So we would endeavor to get it before the 19 Board as soon as possible. Probably -- 20 What? Are you thinking May, June? 21 MR. THOMPSON: We have a very heavy April 22 and May calendar. We're already in progress on 23 April. We have three Section 40s on the calendar 24 today. 25 So I would respectfully request that we 26 have until June, if that would be possible. 27 MR. FERRIS: Right. So -- so the opinion 28 would be -- typically be coming back in June for the 17 1 Board to, uh -- to approve and to consider whether 2 or not it should be precedential. 3 MR. HORTON: With that said -- I think -- 4 and -- and please correct me if I'm wrong, Member 5 Harkey -- her desire is to bifurcate out this issue, 6 separate out this issue and have some -- some legal 7 opinion from the Board to give direction, which is 8 something that we can accomplish separate from the 9 case as well as Section 40 process. 10 MR. FERRIS: Well, the -- 11 MR. HORTON: If I got the desire. 12 MS. HARKEY: I want it both ways. 13 MR. RUNNER: All right. 14 MR. FERRIS: I don't -- I don't believe the 15 Board has authority to, you know, issue -- 16 MR. HORTON: A legal opinion. 17 MR. FERRIS: -- a legal opinion outside of 18 its summary decision and formal opinion 19 procedures. 20 MS. HARKEY: Well, then let me ask you, can 21 we, when you issue your summary opinion, can you 22 have a segment of that that is -- that is clearly 23 delineated in addressing this particular issue? And 24 if that's possible, then at that point could the 25 Board authorize that that particular section become 26 precedential and authorize that? 27 MR. FERRIS: Right. So if a majority of 28 the Board voted for the specific findings that you 18 1 identified in -- in response to your motion, then 2 the summary decision would be prepared to reflect 3 that. And then at that time when the Board was 4 considering the summary decision, if the Board felt 5 that the opinion was -- was persuasive and 6 comprehensive enough that it should be binding, 7 precedential authority, the Board could make that 8 decision at that time. 9 MR. RUNNER: Can I -- just to clarify the 10 process here a little bit. Again, what you're -- 11 you're -- I think what I'm hearing you say is your 12 default position and the Board's position has been 13 to go back and now provide for us a summary 14 decision. 15 MR. FERRIS: That's what our regulation 16 says. 17 MR. RUNNER: Okay. And at that point when 18 the summary decision is presented, the Board can 19 then choose at that point to instead to have a 20 summary decision that is published one way, to have 21 a precedential decision that would be published a 22 different way. 23 MR. FERRIS: Correct. 24 MR. RUNNER: Okay. 25 MR. FERRIS: It would be the same opinion, 26 it would just be -- it would not -- a summary 27 decision has a footer on it that says: "This cannot 28 be cited as precedent." 19 1 MR. RUNNER: Right. Right. 2 MR. FERRIS: Formal opinion -- 3 MR. RUNNER: Right. 4 MR. FERRIS: -- is saying: "This is 5 precedent." 6 MR. RUNNER: Right, right. So what you're 7 saying is at that point that's when we can make that 8 decision at that point. 9 MR. FERRIS: Correct. 10 MR. RUNNER: Once it is -- and that -- and 11 that -- and that will be based upon the facts of 12 this case that we just decided. 13 MR. FERRIS: Correct. 14 MR. RUNNER: Okay, thank you. 15 MS. STOWERS: Okay. So, Ms. Harkey, are 16 you asking for this to -- 17 MR. HORTON: She got what she -- 18 MS. HARKEY: Yeah. 19 MR. HORTON: Both ways. 20 MS. HARKEY: Yeah, I'm -- I -- I want -- 21 what I wanted, issue the summary opinion -- 22 MS. STOWERS: Uh-huh. 23 MS. HARKEY: Let's look at it. But have at 24 least -- I mean it may cover multiple areas. 25 And so what I'd like to have is this 26 particular area addressed, because it seems to be a 27 major bone of contention. 28 MS. STOWERS: Which particular area? 20 1 MS. HARKEY: The -- the area of -- of the 2 like-kind for like-kind and then later transferring 3 it into an LLC or some other form of ownership. 4 MS. STOWERS: Okay. Okay. 5 So the like-kind for like-kind, the TIC for 6 X amount of months and then changing it into the 7 LLC. 8 MS. HARKEY: Right. I'd like an opinion on 9 that. 10 MS. STOWERS: Okay, okay. 11 MS. HARKEY: That's my -- 12 MS. STOWERS: I understand. 13 MR. RUNNER: And again, when we do a 14 published opinion, it's based upon the facts of that 15 case, correct? Let me -- 16 MS. HARKEY: So this -- 17 MR. FERRIS: Right. 18 MR. RUNNER: When we do -- when we do it, 19 if we were to move forward with a -- with a 20 precedential opinion, of an opinion that creates 21 precedence that we'd move forward, it's going to be 22 based upon the facts of that case. 23 MS. HARKEY: Right. 24 MR. FERRIS: Correct. And Mr. Thompson was 25 bringing up some other nuances. This is a -- 26 there's a lot of -- 27 MR. RUNNER: Right. It's good for us to 28 talk through this. 21 1 MR. FERRIS: -- moving parts to this. 2 Other -- other things to consider here are 3 if -- if you go with the default rule, there would 4 be a summary decision, right. Then the Board would 5 be deciding the case today and it would become final 6 30 days from now if FTB does not file a petition for 7 re-hearing. 8 Whereas, if the Board were to take an 9 alternate path, which would be to say, let's do a -- 10 let's start out with a formal opinion, we can change 11 or mind later and say we're going to shift it to a 12 summary decision when we -- when we see it. In that 13 case, if that's the path the Board were to take, the 14 Board's decision would not become final until such 15 time as the Board adopts that opinion. So it 16 would -- 17 MS. HARKEY: Just fraught with peril, isn't 18 it? 19 MR. FERRIS: Yeah. 20 So in a sense it does -- and what that -- 21 and to get to Ms. Ma's point, it -- you know, when 22 does it become final and when do we have to post it 23 on our website? When you're dealing with a formal 24 opinion in the franchise and income tax, it -- 25 basically the Board has an indefinite period of time 26 to approve that precedential formal opinion. And 27 then once it -- and that becomes the place where the 28 Board makes its decision on that case. And then 22 1 from that point the Board has 120 days -- 2 MR. RUNNER: See, I -- I -- 3 MR. FERRIS: -- to put it on its website 4 which would be very easy because the thing will be 5 written. 6 MR. RUNNER: I thought -- I thought our 7 process was -- and, again, this is new and this is 8 good for all of us to talk through. 9 I thought our default position was to -- on 10 these Section 40s was to go the summary. And then 11 if we chose not to go to the default position, we 12 would actually make the motion at the time we heard 13 the case in order to provide a -- a precedential 14 decision in order then to instruct then the 15 Department to go through the process for what is 16 necessary and how that would then proceed as a 17 precedential case. 18 MR. FERRIS: Correct. That -- that is what 19 is envisioned in our regulation. 20 MR. RUNNER: So -- so -- so we really are 21 not -- it seems to me, if indeed the Board's 22 decision right now, as I think was articulated by 23 Member Harkey, was to make this a precedential case, 24 that would need to be the motion today. 25 MR. FERRIS: Well, I don't -- I don't 26 believe that our regulation precludes the Board from 27 at a later time -- you know, starting on a path with 28 a summary decision and -- and then later deciding 23 1 that they want it to be formal. I don't -- 2 Does anyone disagree with what I'm saying? 3 MR. THOMPSON: No. If the Board goes that 4 route, then I would -- the Board might wish to hold 5 the finality of its vote in abeyance. So if it does 6 a formal -- given the importance of a formal opinion 7 that's precedential over other taxpayers, they have 8 an opportunity to change their vote if they wish or 9 they can take a look at the formal. 10 MR. RUNNER: Yeah, that was always the 11 confusing issue in this. When we do a precedential 12 decision, the formal decision that we make is based 13 upon when we adopt the formal -- the -- the 14 precedential decision. 15 MR. THOMPSON: Right. 16 MR. RUNNER: Which, in essence, it 17 allows -- and it's weird, I guess. 18 MR. FERRIS: Yeah. 19 MR. RUNNER: -- it seems to me -- which 20 really allows whatever vote we took here -- 21 MS. HARKEY: To be the record. 22 MR. RUNNER: -- to be kind of like 23 direction. But ultimately, the final vote of the 24 precedential direction is when it is that we adopt 25 the opinion. 26 MR. THOMPSON: Correct. 27 MR. FERRIS: Ultimately, yeah. And to 28 really -- 24 1 MS. HARKEY: Okay. So that affects the 2 taxpayer, does it not then? Right now we don't know 3 if we do go? 4 MR. FERRIS: Right. And it really, in a 5 sense, the most -- the party potentially most 6 affected by the decision the Board makes on which 7 path to take is FTB. Because if -- if you say 8 summary decision today, right, then the decision 9 will become final 30 days from now. 10 FTB may not know whether or not -- it won't 11 have seen -- if you, at a later time, say we're 12 going to go precedential, FTB in a sense won't have 13 the opportunity to file a petition for re-hearing to 14 that -- that formal precedential opinion. Whereas, 15 if you say today we're going to start down the path 16 going towards a formal opinion, as Mr. Thompson is 17 saying, the Board won't decide the case until it 18 adopts the decision. 19 MR. RUNNER: Right. 20 MR. FERRIS: And then at that point the 30 21 days for filing a petition for re-hearing would then 22 start for FTB. And they would have more potential 23 skin in the game because they know this is a 24 precedential decision and so if they have an 25 objection to it, they -- they might be more -- they 26 would have an opportunity to file the -- 27 MR. RUNNER: But that would be the same 28 case if we decided to go with a -- with the summary 25 1 decision now and later changed it. All's we do is 2 we still create that issue, don't we, into the 3 future and I mean just extend the -- 4 MR. FERRIS: I don't think so. Because it 5 will become final if -- if the Board does -- this 6 begins on the summary decision path -- 7 MR. RUNNER: Okay. 8 MR. FERRIS: -- the Board's decision will 9 be final 30 days from today. 10 MS. HARKEY: I'm for that. 11 MR. FERRIS: If FTB doesn't file a 12 petition. 13 MS. HARKEY: I'm for that, and then go for 14 the rest later. I -- you know, because I want to be 15 sure that the -- the people that were here before us 16 understand that we support this, that the FTB 17 understands we support this and that, you know, 18 regardless of what happens we've made a decision 19 here and it should send kind of a warning or a -- or 20 a -- 21 MR. HORTON: Advisement. 22 MS. HARKEY: -- advisement to the parties 23 involved, on the taxpayer as well as -- as well as 24 the Department that we -- we support this 25 position. 26 MR. RUNNER: And, just to clarify, in doing 27 that today, we do not then hamper our ability and it 28 would be a normal process then when this comes back 26 1 to us to then at that point decide that we would 2 want to go ahead and -- and further make this a 3 precedential decision. 4 MR. FERRIS: Correct. 5 MR. RUNNER: Opinion. 6 MR. FERRIS: And -- but FTB would be 7 precluded from filing a petition for re-hearing. 8 MR. RUNNER: If we do it that way. 9 MR. FERRIS: If you do it that way. 10 MR. RUNNER: Okay, thank you. Got it. 11 MS. HARKEY: Okay. 12 MS. MA: Making a motion? 13 MS. HARKEY: I'm making a motion to do 14 the -- what? 15 MR. RUNNER: Well, no. 16 MR. FERRIS: Summary decision. 17 MS. HARKEY: Summary -- 18 MR. RUNNER: We've already done that. 19 MS. HARKEY: Okay. 20 MR. RUNNER: We've already done that. 21 MR. FERRIS: Yeah, that's the default 22 rule. 23 MS. HARKEY: Yeah, the default. 24 MR. FERRIS: But you have made a motion 25 about a specific finding that you want -- 26 MS. HARKEY: Yes. 27 MR. FERRIS: -- in that, and that motion 28 hasn't been seconded. 27 1 MR. RUNNER: Well -- 2 MS. HARKEY: Okay. Is that motion to -- to 3 address, you know, that specific finding? Do I have 4 a second on that? 5 MR. RUNNER: Well, I'm sorry, I guess I 6 need to understand exactly what the finding is that 7 we're trying to go with. 8 MS. HARKEY: Okay. Let me find my page. 9 MR. RUNNER: To me, I think the facts of 10 the case present the -- the argument. So I -- I 11 need to -- 12 MS. HARKEY: Well, my fear -- 13 MR. HORTON: Mr. Ferris, would you 14 articulate the -- the motion as previously 15 discussed? 16 MR. FERRIS: Well, I -- I believe Ms. 17 Harkey was -- was reading and it was fairly 18 detailed. 19 MR. HORTON: Oh. 20 MS. HARKEY: Yes, it is, and I can provide 21 it to you. 22 MR. HORTON: All right. 23 MS. HARKEY: Okay. I -- I was -- I moved 24 that we have a formal precedential opinion. But 25 I'll move that the opinion be a -- 26 MR. FERRIS: Summary decision. 27 MS. HARKEY: -- summary decision. And I 28 would like to include special -- I would like you to 28 1 address, in particular, the IRC Section 1031 2 like-kind exchange that's valid, notwithstanding the 3 subsequent change in form of ownership because the 4 exchange was properly executed and the replacement 5 property was at all times held for investment 6 purposes. 7 MR. RUNNER: Let me ask a question real 8 quick because we've actually already voted on this 9 issue. Now that you've heard some of the rationale 10 as to how it is and the concern that should be in 11 the opinion, would that reflect how you would write 12 the opinion now? 13 Or do we need a subsequent motion now to 14 ask that that be included in the opinion? 15 MR. THOMPSON: The -- the language sounds 16 on point to me. I mean, you know, you hate to make 17 a decision like that on the fly. But I think that 18 language would be fine if it's fine with the other 19 Board Members. 20 MR. FERRIS: They'll have to adopt it 21 later. 22 MR. THOMPSON: Yeah, it'd have to be 23 adopted later. 24 MR. FERRIS: You'll be voting on this later 25 if you don't like the draft. 26 MR. HORTON: Yeah. I mean, I'd like to see 27 it come back to the Board. 28 MR. RUNNER: It will come back. 29 1 MS. HARKEY: It will come back. 2 MR. HORTON: And I mean the motion as I 3 heard it, my initial inclination is not to agree 4 with it by virtue that the form, the subsequent form 5 in my mind had really nothing to do with the 6 decision in that it was a like-kind, that it was -- 7 that it was -- 8 MS. HARKEY: That was the whole decision. 9 MR. HORTON: -- was -- was finalized upon 10 the transfer to the tenants in common. And the 11 decision was is that the subsequent activity had 12 nothing to do with that. In fact, if it did have 13 something to do with it, all of a sudden the step 14 transaction does come into play in -- in the 15 decision. 16 So I mean that's why I ruled in favor of 17 the -- of the taxpayer because I said the step 18 transaction doesn't apply by virtue that there was 19 no contemplation, the form -- the subsequent form 20 and the LLC had nothing to do with this 1031 21 exchange and, therefore, it qualified. I mean if we 22 say it did have something to do with it, then I -- I 23 wouldn't have supported it. 24 MS. HARKEY: No, it -- it did. I think the 25 point -- the point is is that when you have a 26 transaction that's in one form and you continue and 27 complete the transaction in that same form, that 28 qualifies. And what we heard testimony was it 30 1 didn't matter if it was seven days, two days, three 2 days, as long as it was closed and completed in that 3 time. 4 In this particular instance, it was seven 5 months, but I believe we heard court cases where it 6 was a -- there was something that was like seven 7 days and the court had ruled. I -- I can't quote 8 them right now. 9 MR. THOMPSON: If I might, you know, I 10 think it's risky to try to go too far in drafting 11 it, you know, here late in the evening. 12 So I guess you might consider just return 13 it to staff. You know, we've heard what everybody 14 has to say and we've heard the discussion. And, you 15 know, we can return it to you and we would normally 16 draft it pretty narrowly, tailored to the facts. 17 And then, you know, the Board then of course will 18 decide, you know, whether it's too broad or too 19 narrow and you know it hits the -- the necessary 20 points. 21 MR. HORTON: All right. 22 MS. HARKEY: Okay. I guess I have to say 23 okay. I'm tired. 24 MR. RUNNER: Wore you down. 25 MS. HARKEY: I don't care. But I'm going 26 to be watching it; just know that. 27 MR. RUNNER: That's clear. 28 MS. HARKEY: Very clear direction here. 31 1 MS. STOWERS: I guess I don't get my memo 2 then, huh? 3 MS. HARKEY: My memo, I want -- 4 MS. STOWERS: I don't get my memo? 5 MR. HORTON: No, I think -- 6 MS. STOWERS: I still want that memo. 7 MR. RUNNER: Oh, that's right. 8 MS. STOWERS: I'm not sure -- 9 MR. RUNNER: This all started with a memo. 10 MS. STOWERS: And I'm not giving you a 11 timeframe. 12 MS. HARKEY: It started with a memo. 13 MR. HORTON: Ms. Richmond. 14 MS. STOWERS: I would like to get that 15 analysis. 16 MR. FERRIS: The Chief Counsel agrees that 17 you will get that memo. 18 MS. STOWERS: Thank you. 19 MS. HARKEY: Thank you. 20 MR. HORTON: Ms. Richmond. Ms. Richmond. 21 MS. RICHMOND: I'm just -- I was just 22 questioning whether or not we need a second on Ms. 23 Harkey's request. 24 MR. HORTON: No, no, no. 25 MS. RICHMOND: Okay. 26 MS. HARKEY: We're all cool. 27 MS. RICHMOND: So we are finished with our 28 business for today. 32 1 MS. HARKEY: We're tired. We're cool. 2 MS. RICHMOND: We are finished with our 3 business for today. 4 MR. HORTON: All right. Members, the 5 Board -- the meeting of the Board of Equalization is 6 hereby recessed until tomorrow. We would notify 7 everyone that there's a high probability that we 8 will convene tomorrow and then recess for an hour to 9 allow discussions and the legislature on issues 10 before the legislature. 11 ---oOo--- 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 33 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 March 25, 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 33 constitute 14 a complete and accurate transcription of the 15 shorthand writing. 16 17 Dated: April 9, 2015 18 19 20 ____________________________ 21 KATHLEEN SKIDGEL 22 Hearing Reporter 23 24 25 26 27 28 34