1 BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION 2 450 N STREET 3 SACRAMENTO, CALIFORNIA 4 5 6 7 8 REPORTER'S TRANSCRIPT 9 MAY 28, 2015 10 CORPORATE FRANCHISE AND PERSONAL INCOME TAX HEARING 11 APPEAL OF 12 JOHN A. MATTSON AND TARA L. MATTSON 13 (816470) 14 AGAINST PROPOSED ASSESSMENT OF 15 ADDITIONAL INCOME TAX 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 For the Board Jerome E. Horton of Equalization: Chairman 3 4 Sen. George Runner (Ret.) Vice Chair 5 6 Fiona Ma, CPA Member 7 8 Diane L. Harkey Member 9 10 Yvette Stowers Appearing for Betty T. 11 Yee, State Controller (per Government Code 12 Section 7.9) 13 Joann Richmond 14 Chief, Board Proceedings Division 15 16 For Board of Equalization Staff: Mai Tran 17 Tax Counsel III Legal Department 18 19 For Franchise Tax Board: Jason Riley 20 Tax Counsel 21 Cheryl Akin Tax Counsel 22 Craig Scott 23 Assistant Chief Counsel Tax Administration Bureau 24 25 For Appellant: John A. Mattson Taxpayer 26 27 ---oOo--- 28 2 1 450 N STREET 2 SACRAMENTO, CALIFORNIA 3 MAY 28, 2015 4 ---oOo--- 5 MR. HORTON: Ms. Richmond. 6 MS. RICHMOND: Good morning, Chairman and 7 Board Members. 8 Our first item on this morning's agenda is 9 Item B, Corporate Franchise and Personal Income Tax 10 Appeals hearings. Our first hearing is Item B5, 11 John A. Mattson and Tara L. Mattson. Please come 12 forward. 13 Board Proceedings has received contribution 14 disclosure forms for today's hearings from the 15 parties, participants and agents. All forms were 16 properly completed and signed. All parties, 17 participants and agents are on the alpha listings 18 provided to your office. 19 Each person sitting at the table will be 20 asked to introduce themselves and, if necessary, 21 their affiliation with the taxpayer for the record. 22 Ten minutes is allocated for the taxpayer's 23 opening presentation, followed by ten minutes for 24 the Franchise Tax Board's or Department's 25 presentation, and five minutes is allocated to the 26 taxpayer for rebuttal. 27 Mr. Horton. 28 MR. HORTON: Thank you. 3 1 Ms. Tran, please introduce the issues in 2 this case. 3 MS. TRAN: Good morning, Board Members. 4 The issues before this Board are whether Respondent 5 erred in determining that Appellants' rental real 6 estate activities are passive activities. 7 MR. HORTON: Thank you. 8 Welcome to the -- welcome to the Board of 9 Equalization, sir. You will have ten minutes to 10 make your presentation, after which we will go to 11 the Department. The Department will have ten 12 minutes to make their presentation. We'll return 13 and allow you five minutes on rebuttal. 14 At your convenience, please. 15 MR. MATTSON: Okay. Thank you very much 16 and good morning everyone. I want to thank you for 17 the opportunity to come and present my -- our case. 18 Also, I'd like to at least say thank you to the 19 staff for reaching out to us and making this whole 20 process a little more easy to understand and deal 21 with. 22 Because of the limited amount of time, I'm 23 just going to hit the -- kind of the main points at 24 issue and -- and also attempt to answer the 25 questions that were asked by the staff in the, uh -- 26 in the staff briefing. 27 I have supplied three exhibits, one of 28 which is a 14-page kind of narrative with evidence 4 1 included, additional evidence included regarding 2 both the two -- the two issues at hand here are 3 whether we can prove that we -- our rental -- 4 renters stayed on average of less than seven nights, 5 or seven nights or less, and whether we spent a 6 hundred hours or more, and more than anyone else on 7 the property. 8 And so we've provided some evidence 9 regarding the kind of national behavior in terms of 10 renter -- renter nights in ski resorts, which is 11 what this is. And also our -- we -- we've since 12 this, in the last eight months or so, done a time 13 study. We've been back to the property a couple of 14 times and were able to put a much more detailed 15 listing of the activities that we do in order to 16 keep the property up. So that's one exhibit. 17 The second one is a spreadsheet where we 18 took our contemporaneous calendar records which we 19 had previously supplied and put 'em in spreadsheet 20 form to kind of show, on a day-by-day basis and an 21 hour-by-hour basis in some cases, where we were, 22 what we were doing. It helps to explain some of the 23 questions regarding side trips and various locations 24 that we were in. 25 And third is -- one of the questions was 26 regarding if we could provide any additional 27 evidence with -- from our contractors that we worked 28 with on the house, and we did -- we did find some of 5 1 that and supplied that as well. 2 So I'll try to go through and hit some of 3 the main questions that were asked and the main 4 areas at issue. And I think -- we've provided a lot 5 of information regarding the -- both -- both points 6 at issue, the seven nights or less and the hundred 7 hours or more. And it seems that it really comes 8 down to sort of what the standard of proof is and 9 what -- what con -- what consists of reasonable -- 10 proving it by reasonable means and meeting a 11 reasonable standard of proof. And I'll talk more 12 about that. 13 Quite a bit of our data that we provided 14 was contemporaneous from the period. Some of it 15 was, you know, going back and getting both 16 expense -- expenses from receipts and credit card 17 reports, as well as our contemporaneous reservations 18 book and rentals book that we kept at the time. So 19 it's not just us going back and trying to recreate 20 this. We actually did have contemporaneous data. 21 One of the questions that the staff asked 22 was -- during the first period at issue in 2006 we 23 had been using a -- a, uh, rental agency called Blue 24 Ridge Getaways. We did contact them to see if they 25 had any copies of -- of contracts. There weren't -- 26 there weren't any -- we didn't have any contracts 27 with our renters, neither did they. We didn't -- 28 and they confirmed that. 6 1 This is not standard practice in this kind 2 of industry of renting out resort rooms for houses 3 or, you know, places for a few days at a time, which 4 is what we were doing. If someone did do that, it 5 would be for a long-term lease, which is not what we 6 were engaged here -- in here. 7 We also were asked by staff to see if we 8 could contact some of the -- one of the questions 9 that came up from -- in the original protest was, 10 could we -- if we didn't have contracts, could we -- 11 and we said we -- we contacted people via email, 12 texts and telephone, and could we provide any of 13 those emails? And we did try to go back, all 14 through this process, and find emails from 2006 to 15 2009, but we were unable to do that. 16 We were able to contact some of our prior 17 renters and they also did not have emails from six, 18 seven years ago. I don't think that's all that 19 unusual actually, that people don't have 20 seven-year-old emails. They confirmed that they 21 rented with us, but we don't have written 22 documentation of that. 23 And again, I think what we're trying to 24 prove here is that people stayed an average of seven 25 nights or less. We did find some evidence 26 regarding -- which is in this -- in this report we 27 sent in. On page 4 there's something we found on, 28 you know, how long do people stay? They serve at 7 1 eight different ski resorts. 2 The average was, for out-of-state guests 3 which came from a longer distance -- and typically 4 our guests didn't come from that far away, but the 5 average was 3.94 nights. The longest of the eight 6 resorts was a little under five nights. 7 There was also a national ski area 8 association demographic study done in 2005 for the 9 prior three years that said the average was 4.8 10 nights, with a median of four. And that, within 11 that data, people stayed longer. And the longest in 12 resorts in the Rocky Mountains and longer when they 13 came from far away, which makes sense. And -- and 14 also longer in large resorts. And Wintergreen where 15 this property is, is a relatively small ski resort 16 with only 32 trails, compared to much larger resorts 17 in -- in Colorado, etcetera. 18 You know, it seems like if we were trying 19 to say that we -- if -- if the law was that you'd 20 had to prove that people stayed longer than seven 21 nights, then -- then you might be looking for rental 22 contracts. But for seven nights or less, I've 23 stayed in -- I've gone to ski resorts and stayed in 24 people's houses and I've never signed a rental 25 contract. It's all done very much ad hoc, primarily 26 through verbal and -- and occasionally email 27 communication. 28 So I think we've proved as much as we can 8 1 prove in terms of having the contemporaneous 2 information that showed each renter, each period of 3 when they checked in and when they checked out. 4 There were none of them that were more than seven 5 nights. So the average was, of course, much less. 6 The other area of questioning was around a 7 hundred hours material participation. And so we've 8 provided a lot of data up to now, but we've also 9 tried to provide some other additional data. There 10 were a number of cases cited by the staff. I'll 11 come back to this in -- probably in my rebuttal as 12 well. But primarily, it appears to me that all of 13 these cases are where people didn't have any 14 contemporaneous evidence and they were essentially 15 just estimating how long -- how long they had spent. 16 In our case we have the -- we have all 17 these receipts and credit card statements that show 18 pretty clearly where we were and what we were 19 doing -- or not what we were doing, but where we 20 were and what purchases we made. The property 21 itself is very remote. You pretty much have to fly 22 into either Dulles or Norfolk, or in many cases we 23 would fly into Atlanta because it was cheaper and we 24 had -- my parents lived in Greenville, South 25 Carolina which is on the route from Atlanta to -- 26 it's about two hours northeast of Atlanta en route 27 to the property. 28 My father-in-law and several other 9 1 relations lived in the Virginia Beach area, so this 2 was a convenient way for us -- for our children to 3 visit their grandparents, and for us to then leave 4 the children so we could go work on the property. 5 And if there are a lot of questions 6 regarding the side trips, most of them were either 7 related to where we flew into and how we deposited 8 our children and then picked them up again, or trips 9 to buy supplies in Win -- in Charlottesville or in 10 Lynchburg which are the two nearest towns that are 11 both about 45 miles away. And that's where there's 12 places like Home Depot and Lowe's and Costco and 13 places like that, and grocery stores and drug 14 stores. That's where you had to go. 15 And -- and it's interesting that the FTB, 16 when we don't have any receipts -- because if we 17 didn't make a -- a supply trip, we typically didn't 18 have a receipt while we were there. There was 19 really no place to spend money other than if we went 20 to eat at one of the resort restaurants. 21 When we ate at one of the resort 22 restaurants, the FTB claims that we were -- we were 23 there for leisure. When we didn't go -- go to 24 anyplace up there and spend money up there, they 25 claimed that we weren't there. When we went to a, 26 you know, Virginia Beach -- or, I'm sorry, 27 Charlottesville or Lynchburg, they said, oh, well, 28 you were making a side trip so you -- you don't get 10 1 to count your hours worked. It's sort of like no 2 matter which way it goes, the FTB uses it to claim 3 that we weren't working. And, in reality, what we 4 were doing was spending, you know, dawn to dusk, 5 working on -- and beyond dusk, working on the house. 6 It's a very large house. It's got four 7 different levels. We would prefer to, at this 8 point, probably sell it. But, you know, we're using 9 it to make income as best we can and -- because we 10 can't find someone there that we can trust. It's a 11 very nice house with a lot of nice stuff in it. We 12 choose to go and take our vacation time and go work 13 on the house. It's not the way we'd probably like 14 to be spending our time, but it's -- it's what we 15 choose to do to make -- make ends meet economically. 16 So, yes, we fly across country. And we use 17 miles to do that sometimes. Other times we -- we, 18 you know, buy tickets far in advance. We have a 19 very limited amount of time when we're there based 20 on, you know, work, vacation, based on when we made 21 the flights, based on when our kids can be -- could 22 be out of school. Now our oldest child was between 23 17 and 20 during this period, so, you know, they 24 were somewhat self-sufficient. But they -- this was 25 their, kind of, last chances to get to see their 26 grandparents. 27 So we crammed in as much work as we could. 28 You know, we did a time study which is -- which we 11 1 reproduced here. It's about 250 hours a year is 2 what it takes for us to get the house into the 3 condition that we believe it needs to be in. Now, 4 we've detailed exactly what we did. So if we only 5 had a week or ten days, we would basically try to 6 cram as much of that time in as we could and often 7 made two trips a year in order to get the work done. 8 This was -- by no means was this a 9 leisure -- leisure occasion. This is not -- we -- 10 we also have property in Tahoe and it's much easier 11 just to drive there than to fly all the way to 12 Virginia. 13 MS. RICHMOND: Time's expired. 14 MR. MATTSON: I'm sorry? 15 MS. RICHMOND: Time's expired. 16 MR. HORTON: She's indicated that your time 17 has expired. 18 MR. MATTSON: Okay. 19 MR. HORTON: But we'll allow a little time 20 to wrap it up. 21 MR. MATTSON: Okay, thank you. 22 I'll just -- I basically, in here, tried to 23 answer the additional questions. I think I've 24 covered most of it in, uh -- in my commentary. 25 Let's just see if there's any -- 26 The calendar pages that we previously 27 submitted were contemporaneous. They were in 28 software, but they were done at the time. We did 12 1 print them out later on, but they were -- that is a 2 contemporaneous record of our time. 3 What we've done in the spreadsheet that we 4 provided this time is -- is essentially took that 5 information and tried to simplify it and make it a 6 little clearer where we were and what we were doing. 7 The other thing, there's a lot of 8 commentary from the FTB around our -- one of our 9 guests, Kalow, who was there a couple of different 10 occasions. They came every year during that period 11 for the New Year's Eve and the first few days after 12 New Year's. 13 In a couple of cases our time there had to 14 overlap that time. So we let them know that we 15 would be staying in the down -- there's three levels 16 of the main house and then a downstairs which is 17 completely separate. It's like a little apartment 18 down there with a kitchenette and a full bath and a 19 bedroom and access to the crawl space where there 20 was a lot of the kind of mechanics of the house and 21 also the area that needs the most winterization. 22 And so as we detailed in the time study, 23 there was a fair amount of work that needed doing 24 each year, about 60 to 70 hours, in the downstairs 25 and in the outside. And so we worked it out so that 26 when Kalow was coming, if they came in at 6:00 27 o'clock in the evening, we were done by 4:00. You 28 know, we knew when they were coming. We had the 13 1 house ready for them that they were going to stay 2 in, and then we stayed in the bottom part and worked 3 on the bottom part and there was plenty -- and the 4 outside, and there was plenty to do. 5 So I realize if this -- people may think 6 this looks strange, but that's just the way we had 7 to do it. 8 I think that's -- I've covered most of the 9 questions. If there's any additional questions, 10 I'll defer to my rebuttal time. 11 MR. HORTON: Thank you very much. 12 MR. MATTSON: Thank you. 13 MR. HORTON: Members, we'll now go to the 14 Department. The Department has ten minutes -- 15 twelve minutes to make their presentation. 16 I'd ask that the Department has an 17 opportunity to review these additional information 18 or do you need additional time? 19 MR. RILEY: The hearing exhibits, we've -- 20 I mean we've -- we've -- we got them on Tuesday 21 night, so we've -- we've reviewed them. 22 We do have a Power Point presentation -- 23 MR. HORTON: Sure. 24 MR. RILEY: -- for you. 25 MR. HORTON: Okay. 26 MR. RILEY: But you all have it in the -- 27 the black binders as well. So -- 28 MR. HORTON: Okay. At your convenience. 14 1 MR. RILEY: Good morning, Mr. -- Chairman 2 Horton, Members of the Board. Welcome back as well. 3 MR. HORTON: Thank you. 4 MR. RILEY: I'm Jason Riley. This is 5 Cheryl Akin and Craig Scott, and we represent 6 California Franchise Tax Board in this matter. 7 This case is about whether the taxpayers 8 can offset the annual cost of owning a single family 9 home in Virginia against their other income by 10 occasionally renting it. At issue is Appellants' 11 ability to deduct some $391,000 in net losses 12 generated from owning the Virginia home in the '06 13 to '09 tax years. 14 Appellants owned three other vacation 15 properties and treated these properties, as well as 16 the Virginia home, as rental activities on their tax 17 returns. 18 In this case Appellants claimed the losses 19 from all their vacation rentals under the special 20 exception for real estate professionals. However, 21 California does not conform to the special exception 22 and Respondent disallowed Appellants' rental losses. 23 The disallowance was proposed because passive rental 24 losses are not deductible against passive income -- 25 against nonpassive income such as wages from 26 employment. 27 For three of the four rental properties 28 Appellants accepted Respondent's disallowance of the 15 1 losses. However, for the Virginia home, Appellants 2 abandoned their original reporting position; that 3 is, at protest Appellants claimed that their 4 Virginia home was a trader business and not a rental 5 activity and it met an exception to the rule that 6 rentals are per se passive activities. 7 To qualify for the claimed exception, 8 Appellants must demonstrate that the average rental 9 period for the Virginia property is seven days or 10 less. Appellants must be able to provide 11 documentation to support all items on their returns. 12 So Appellants provided copies of a 13 handwritten log book showing the length of renter 14 stays, but Appellants did not provide underlying 15 contracts or rental agreements or renter contact 16 information, so there's no way of verifying the 17 log's accuracy. 18 Yet even if -- yet even if Appellants meet 19 an exception which allows the Virginia mountain home 20 to be treated as a trader business activity rather 21 than per se passive, the inquiry does not end there. 22 Appellants must prove they materially participated 23 in the activity. 24 A taxp -- a taxpayer must meet one of seven 25 tests for material participation in a trader 26 business activity. Here they claim they met Test 3, 27 and the law requires Appellants to have spent more 28 than 100 hours operating the Virginia mountain home 16 1 as a rental and no one else can spend more than -- 2 more time than they did. 3 According to the evidence, Appellants' 4 claimed hours of participation are implausible and 5 do not satisfy any test for material participation. 6 As support for their claimed participation, 7 Appellants provided verbal assertions and 8 self-prepared summaries and calendars estimating the 9 number of hours Appellants spent spring cleaning and 10 maintaining the Virginia home. Appellants have 11 failed to provide information corroborating these 12 self-prepared schedules and, moreover, the verbal 13 assertions conflict with the self-prepared schedules 14 that Appellants provided. 15 Material participation is a determination 16 that must be made separately for each taxable year. 17 The activities alleged performed by Appellants are 18 strikingly similar in description and estimates of 19 time spent and, thus, I'll address them in general. 20 And related to the above, Appellants 21 claimed nine days participation at an average of 14 22 hours per day in 2006, 11 days at an average of 12 23 hours per day in 2007, 13 days at an average of 12 24 hours per day in 2008, nine days at an average of 13 25 hours per day for 2009. 26 Appellants then doubled these estimates at 27 appeal; that is, they now claim an average of 28 28 hours per day in '06, 24 hours per day in '07 and 17 1 '08, and 26 hours per day in '09. I would point out 2 that Appellants provided only self-prepared 3 schedules and unsupported assertions to support this 4 doubled estimate; and, moreover, Appellants' 5 descriptions of the time spent lacked detail, are 6 inconsistent with the facts and are contradicted by 7 their own evidence. 8 The IRS has identified indicators that a 9 taxpayer did not materially participate in a rental 10 activity. Among those relevant to this appeal: 11 Where a taxpayer has a W-2 wage job requiring 40 12 hours plus per week and received significant 13 compensation; where a taxpayer has a number of other 14 investments and rentals absorbing significant 15 amounts of time; where a taxpayer hired a management 16 company; and where the taxpayer resides hundreds of 17 miles from the activity. 18 Please consider the following example which 19 is based on Appellants' claims: 20 Over the 2006 to 2007 holiday season, 21 Appellant-Husband made a high salary as a Cisco 22 marketing executive, working more than 40 hours per 23 week. 24 Appellants and their minor children took a 25 winter holiday trip, flew 3,000 miles from San Jose 26 to Atlanta, drove eight hours from Atlanta to their 27 Virginia mountain home, allegedly worked 14 hours 28 per day for nine days straight, including Christmas 18 1 day and another 12 hours per day on January 1st and 2 2nd, all while a guest paid $1650 to occupy the same 3 property from New Year's Eve to January 2nd. 4 They then claimed to have driven back the 5 eight hours to Atlanta, flown 3,000 miles back to 6 San Jose, and Appellant-Husband returned to, uh -- 7 to his responsibilities as a marketing executive 8 with Cisco Technologies. 9 Based on these IRS indicators and 10 Appellants' evidence, it's simply not feasible that 11 Appellants met the material participation 12 requirement. 13 Appellants hired a management company for 14 2006, Blue Ridge Getaways, which also handled 40 15 percent of the reservations for 2007, according to 16 Appellants' logs. 17 With respect to the contractor, in '07 and 18 '08, Appellants reported $26,500 and $23,000 for 19 repairs. Recall that Appellants claimed that the 20 contractor spent no more than 30 hours at the 21 property. Yet, according to the hearing exhibits, 22 the contractor, Mr. Nelson, spent a significant 23 amount of time at the property in 2007, at least 144 24 hours, and this still leaves roughly $15,000 in 25 claimed repair and labor unaccounted for. These are 26 significant sums and a recognized indicator that 27 someone else worked at the Virginia home more than 28 Appellants. 19 1 Appellants must establish their material 2 participation by reasonable means. Despite now 3 claiming that they submitted receipts for supplies 4 and their credit card statements, Appellants have 5 never submitted -- never provided their actual 6 credit card statements and receipts from the time of 7 the alleged activity or the cancelled checks to 8 verify the rental income. Instead, they created a 9 summary of alleged credit and check purchases 10 related to the Virginia home. 11 Even if the credit card summaries are 12 inconsistent and, uh -- even the credit card 13 summaries are inconsistent and conflicting and 14 placed Appellants hundred of miles away from the 15 Virginia mountain home in Norfolk and Virginia Beach 16 on days they claimed to have worked 12 hours spring 17 cleaning and maintaining the property. 18 The Virginia Beach and Norfolk area is 220 19 miles away and a seven-hour roundtrip via Interstate 20 64. For example, on July 10th -- July 10th, 2008 21 they stayed at a Washington Dulles Airport hotel and 22 claimed six hours working. On July 11th, there's no 23 evidence and they claimed 12 hours working. On July 24 12th they ate at Max and Erma's in Virginia Beach 25 and they claimed 12 hours working. On the 13th they 26 ate at Panera Bread and Surf Rider in Norfolk, 27 Virginia and they claimed six hours working. 28 It's not feasible that Appellants ate their 20 1 meals in Virginia Beach, 220 miles away, on days 2 they claimed to simultaneously be working at the 3 Virginia home for 12 hours per day. And this 4 pattern occurs again and again from 2007 to 2009. 5 There's the renter overlap. While 6 Appellants allege that the -- that the house was 7 available for rent 100 percent of the time, 8 Appellants also claimed to work while they had a 9 paying renter. For example, from December 30th, 10 2007 to January 4th, 2008, Appellants claimed to 11 have worked an average of 13 hours per day at the 12 Virginia home. Appellants also charged a renter 13 $550 per day, a total of $3300 during this same 14 period. It's unlikely that anyone would pay a 15 premium rate while Appellants encroached on the same 16 property for 13 hours every day, for a week 17 straight. 18 Notably, according to their records, 19 Appellants also paid a cleaning service to clean the 20 Virginia home on January 7th; that is two days after 21 the renter checked out and the day -- and the day 22 after Appellants had allegedly spent the previous 23 ten days spring cleaning the Virginia home for a 24 purported 120 hours. 25 The courts have taken a dim -- have 26 repeatedly taken a dim view of self-serving 27 guestimates of time such as the hours Appellants 28 allegedly spent at the Virginia home. 21 1 Courts have denied deductions because the 2 regulations do not allow a post event ballpark 3 estimate of time committed to participation where, 4 rather than provide evidence from the time of the 5 alleged activity, a taxpayer provided schedules 6 prepared for the appeal alleging they worked 7 enormously long hours while they also had full-time 8 salaried jobs; where taxpayers prepared logs years 9 after the fact and with an end result in mind; where 10 taxpayers' time estimates are -- are suspect given 11 that their employment is in a business unrelated to 12 the activity; and where the number of hours reported 13 appeared excessive and not credible in relation to 14 the tasks described; where a taxpayer consistently 15 claimed 10 to 12 hours per day. The case law is not 16 favorable to Appellants' position. 17 In conclusion, Appellants' claim of hours 18 appear unlikely based on the rigors of Appellants' 19 full-time high salaried job; based on the distance 20 from Appellants' California residence to the 21 Virginia home; based on the significant sums paid to 22 the contractor; based on the vague and inac -- vague 23 and inaccurate descriptions of the tasks described; 24 based on the unreasonable means of the inconsistent 25 and conflicting evidence Appellants provided; based 26 on the long hours claimed in after-the-fact ballpark 27 estimates; based on the encroachment and renter 28 overlap; and based on the undocumented expenses and 22 1 credit card summaries placing Appellants hundreds of 2 miles from the Virginia home. 3 Respondent properly treated the Virginia 4 home as a passive activity and denied a current 5 deduction for the claimed $391,000 in losses. And 6 while the losses are not currently deductible, they 7 are carried forward until Appellants either have 8 passive income or they dispose of the vacation home 9 in a fully taxable transaction to an unrelated 10 party. 11 Thank you. 12 MR. HORTON: On rebuttal, please. 13 MR. MATTSON: Thank you. So a number of 14 things. Yes, my wife was and is a real estate 15 professional. She was the one who administered most 16 of the, uh -- the work we're talking about. 17 The other properties we owned, we did have 18 management companies, so this was the one that we 19 didn't. 20 We had bought this home when we lived in 21 the East Coast, prior to coming to California in 22 2002 time frame. So when we first bought this, we 23 were much closer to it. This was going to be our 24 retirement home. We still love the house. We just 25 can never go and use it other than to keep it -- you 26 know, financially my high salary job does not enable 27 me to keep up with the cost of living in the state. 28 And, as I said, we had made real estate investments 23 1 which -- you know, this house has three mortgages on 2 it, the one in Wintergreen. So if we sold it, we 3 would owe money. 4 As far as the information we did or didn't 5 provide, we were never asked for contact information 6 for the renters. Had we been -- had we been asked, 7 we would have been happy to provide that. We still 8 could. That was a new -- new comment. I've never 9 heard that before. 10 Again, I covered rental contracts. 11 The other thing is that we -- when we -- 12 at -- during the protest phase, we supplied the 13 data, showed that we'd spent more than a hundred 14 hours. And in the -- when we supplied the data, we 15 said in the email clearly, and this has been 16 repeated back and forth, that this was our -- both 17 of our hours and that, technically, we could double 18 it because we were both there working. 19 So these were the hours we were there. We 20 were there a hundred and some hours, if you will. 21 Since we were both working, you could double it. So 22 I don't think it's all that stunning that when -- 23 particularly when, after the protest, when it was 24 accepted and then in the appeal process Mr. Riley 25 has contested that we really didn't spend a hundred 26 hours, and so we said, well, let's count both of our 27 hours then. It seems only fair. 28 And so our hours actually added up, along 24 1 with our marketing hours, which are somewhat limited 2 and are explained in our response, to about 250 3 hours a year. So we're not, like, close to missing 4 it. There would be no reason to exaggerate, to make 5 another ten hours. I mean, we're -- we're reporting 6 what -- what we did. 7 Let's see, the contractor, I -- first off, 8 the sheet of paper that I provided was an estimate. 9 My recollection is he didn't spend all -- he didn't 10 spend all of that time in that year, but he may 11 have. But I ended up about 102 hours, not 144. But 12 even -- even if it's 144, in that same year we spent 13 264. So we spent more time than this contractor. 14 Now, the contractor had people working for 15 him. So I don't know what the law is regarding 16 whether it's -- you know, he counts as one person or 17 you have to count the hours of the individual 18 people. He's adding all of that up. 19 As far as the credit card statements, we 20 have provided copies of them prior to this. I 21 brought them with me. We have the originals with 22 us. If Mr. Riley wants to see them, that's -- 23 that's also never been a question until it showed up 24 in the, uh -- the staff appeal and when I spoke 25 to the -- or the staff brief. And when I spoke to 26 the staff members, I said, you know, do you really 27 want me to bring 14 copies of -- of all of that or 28 just -- can I just bring it with me? So I have the 25 1 receipt -- the receipts and credit card statements 2 with me. 3 There was one comment around having a maid 4 clean after we left and after the -- the renter 5 left. That's also a new one. To me, that's kind of 6 logical. We spent the first eight -- say eight 7 days, it's -- it's detailed in our spreadsheet -- 8 working on the upper house, got it ready for the 9 renters. We then spent the last couple of days 10 downstairs, working on the downstairs and working on 11 the outside. 12 We left. The renters were still there. 13 When the renters left, somebody had to the clean up 14 after the renters. We weren't there to do it. So I 15 think there's a lot of assertions being made that 16 just don't really have any -- any relevance in terms 17 of what we did or didn't do. 18 Again, I -- you know, I have -- I get four 19 weeks of vacation a year. I get to save it up. 20 This is, unfortunately, how I ended up having to use 21 a couple of weeks of my vacation. I think that's 22 sort of -- if that's what I have to do economically 23 to -- to make the rent, so to speak, then that's 24 what we have to do. 25 And -- anyway, I think we've been 26 consistent throughout in terms of, uh -- of what 27 we've said. 28 This other time report that was provided, I 26 1 just -- by the way, I had not seen these exhibits 2 until this morning. But I see an exhibit from the 3 FTB that shows a day, in a pie chart. 4 The flight to San Jose departed about 5 midnight. So in reality, while it left on that day, 6 the 2nd, it actually arrived the next day, on the 7 3rd, at 2:00 in the morning or to San Francisco, 8 wherever it was going. So you do gain time going 9 from there to here, and you did -- there was at that 10 time a flight that left right around midnight. 11 So the time actually is consistent and we 12 did work right up to the limit, I agree. We spent a 13 lot of hours. We had a lot of work to get done. My 14 wife is extremely meticulous. She wants to get 15 things very clean, and we -- we spent -- you know, 16 this house does require a lot of upkeep. And we've 17 detailed exactly what we were doing, what it 18 takes -- we went -- we've been back there twice in 19 the last eight months to do what we do every year. 20 We still do it. And this time we actually sat and 21 wrote down everything we did and the hours that we 22 were doing it and reported it here. Had we known we 23 needed to do that back in 2006, we would have done 24 it then. It was -- never occurred to us that we 25 needed to provide that kind of documentation. 26 Thank you. 27 MR. HORTON: Just to make sure that all 28 parties have had an opportunity to review the 27 1 evidence, the evidence before you today seems to be 2 a summary of previous discussions within their 3 briefs. Are you okay with continuing, or do you 4 want time to review those? 5 MR. MATTSON: In terms of the new stuff -- 6 well, the only thing I -- I left out one thing. I 7 guess I'd like to add one comment and then I 8 think I'm okay. 9 MR. HORTON: Just to that question. I just 10 wanted to make sure that -- I'm sure the Members 11 have questions -- 12 MR. MATTSON: Uh-huh. 13 MR. HORTON: -- and they'll provide you 14 with additional time to respond. I just wanted to 15 make sure -- 16 MR. MATTSON: Yeah. 17 MR. HORTON: -- that all the parties have 18 had an opportunity to review what is being alleged 19 as new information and that it is truly new to them. 20 Are you -- are you okay with continuing based on -- 21 MR. MATTSON: Yes. 22 MR. HORTON: To the Department. 23 Department, the taxpayer's indicated that he has 24 provided -- and I'm presuming in the sack before 25 us -- contemporaneous evidence via credit card 26 documents and so forth. You need time to review it? 27 MR. RILEY: I think -- you know, I think 28 that would be most prudent. I mean this is 28 1 something that the -- the audit -- sorry, the 2 protest hearing officer asked for in the initial 3 contact letter. And, you know, the -- the hearing 4 summary, the Board hearing summary also asked for 5 those. 6 And so if -- if your Board sees fit to -- 7 to give us additional time to -- to review those, 8 yeah, it looks -- I don't know if that whole bag 9 is -- is -- is the evidence, but certainly if there 10 are -- if the credit card statements are in there, 11 that's something that I think we need to see because 12 we have not seen them yet. 13 MR. RUNNER: I'll move for a 30/30/30 and 14 continue the hearing. 15 MS. STOWERS: Second. 16 MS. HARKEY: Second. And I'd like to see 17 it back, right? 18 MR. RUNNER: Yeah. 19 MR. HORTON: There's a motion by Member 20 Runner to offer a 30/30/30, second by Member Harkey, 21 to continue. 22 Let me encourage the parties to meet and 23 confer relative to the documentation. I -- I would 24 submit that the request for contemporaneous evidence 25 has been made throughout this entire process, since 26 the beginning of the audit. It's part of the 27 process to request supporting documentation, and 28 particularly of verbal statements. But I would 29 1 encourage the Department to delineate the type of 2 documentation, again, that would be necessary and 3 encourage the Appellant to provide any bank 4 deposits, copies of the funds that have -- that have 5 been alleged to have been received. 6 Thank you very much. 7 MR. RUNNER: I have a quick question, too, 8 on the 30/30/30, just something to look at. And 9 that is, I was unclear as to whether travel time for 10 chasing parts, things like that, was actually 11 included in the hours. And I think that's a 12 consideration that should be made because you just 13 don't all of a sudden have to change out a water 14 heater. You have to go out and buy and it, do that, 15 and sell it -- or get it, purchase it. 16 MR. MATTSON: It was included. 17 MR. RUNNER: Okay. 18 MR. MATTSON: And it -- 19 MR. RUNNER: I think it's included in 20 yours. I don't know if it's included in theirs. 21 So -- 22 MR. RILEY: Well -- 23 MR. RUNNER: -- I think it's a 24 consideration that must be made. 25 MR. RILEY: Okay. 26 MR. RUNNER: So we'll hear it when we come 27 back. 28 MR. HORTON: Um -- 30 1 MR. MATTSON: May I just ask, what does 2 that mean, a 30/30/30? 3 MR. RUNNER: Oh, I'm sorry. 4 MR. HORTON: Yes. Appeals, the -- the 5 individuals to your left will share with you in 6 details. 7 MR. MATTSON: Okay. 8 MR. HORTON: It basically means you have 90 9 days in order to evaluate the -- and provide 10 additional documentation to support your case. The 11 Department has -- you're first 30 days, their 30 12 days, then they have 30 days, so -- but they'll 13 explain all of that. And -- 14 MS. HARKEY: We'll see you back. 15 MR. HORTON: Do you have -- 16 MR. RUNNER: Then the hearing is 17 continued. 18 MR. HORTON: And so you'll come back before 19 us. 20 MR. MATTSON: I have to come back. Okay. 21 MR. HORTON: Have an opportunity to discuss 22 it all over again. And we much, much look forward 23 to that -- to that presentation. 24 MS. HARKEY: You guys could always settle 25 it out, I suppose. Might like that. 26 MR. MATTSON: All it takes is two 27 reasonable parties. 28 MR. HORTON: Your flight's okay? Or do you 31 1 need to talk to them right now? 2 MR. MATTSON: No, I'm -- I drove here. 3 MR. HORTON: You're good? Okay. Thank you 4 very much for appearing before us. 5 MR. MATTSON: Thank you. 6 MR. RILEY: Thank you. 7 MR. HORTON: We look forward to your 8 continuance of this case. 9 MR. MATTSON: Thank you. 10 ---oOo--- 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 32 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 May 28, 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 32 constitute 14 a complete and accurate transcription of the 15 shorthand writing. 16 17 Dated: June 18, 2015 18 19 20 ____________________________ 21 KATHLEEN SKIDGEL, CSR #9039 22 Hearing Reporter 23 24 25 26 27 28 33