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 MICHAEL J. BILLS and MARY E. BILLS 13 (610028 and 782397) 14 AGAINST PROPOSED ASSESSMENT OF 15 ADDITIONAL INCOME TAX 16 17 18 19 20 21 22 23 24 Reported by: Juli Price Jackson 25 CSR No. 5214 26 Kathleen Skidgel 27 CSR No. 9039 28 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-Chairman 5 6 Fiona Ma, CPA Member 7 8 Diane L. Harkey Member 9 10 Yvette Stowers Appearing for Betty Yee, 11 State Controller (per Government Code Section 12 7.9) 13 Claudia Lopez 14 appearing for Joann Richmond 15 Chief, Board Proceedings Division 16 17 For Board of Lou Ambrose Equalization Staff: Tax Counsel IV 18 19 For Franchise Tax Christopher Haskins Board: Tax Counsel 20 Natasha Page 21 Tax Counsel 22 Ron Babcock Tax Counsel 23 24 For Appellants: Jeffrey M. Vesely Attorney 25 Annie H. Huang 26 Attorney 27 Michael J. Bills Taxpayer 28 ---oOo--- 2 1 450 N STREET 2 SACRAMENTO, CALIFORNIA 3 MAY 28, 2015 4 ---oOo--- 5 MS. RICHMOND: Our next item is B6, Michael 6 J. Bills and Mary E. Bills. Please come forward. 7 MR. HORTON: Mr. Ambrose, please introduce 8 the issues in this case. 9 MR. AMBROSE: Okay. Good morning, 10 Mr. Chair, Members of the Board. This is the appeal 11 of Michael J. Bills and Mary E. Bills. And the 12 questions before the Board are -- whether Appellants 13 have established error in the Franchise Tax Board's 14 determination that Appellants were domiciled and 15 residents of California through April 23rd, 2005 16 and, therefore, taxable on income from all sources 17 until that date. 18 And then, secondly, whether Appellants have 19 shown that payments received upon Appellant's 20 husband's withdrawal from a partnership for tax 21 years 2005 through 2009 was California sourced 22 income. 23 MR. HORTON: Thank you very much, 24 Mr. Ambrosa (verbatim). 25 Once the taxpayers have settled in, I'd ask 26 that -- let's see, we'll get situated here. We want 27 our guests to be as comfortable as possible. So, 28 feel free to scoot over a little bit. 3 1 There you go. You're good? 2 Okay. Welcome to the Board of 3 Equalization. You have ten minutes to make your 4 presentation. We would -- we would also advise you 5 that we will return and allow you ten minutes on 6 rebuttal, after the Department's had an opportunity 7 to make their presentation. 8 At your convenience. 9 MR. VESELY: Thank you, Chair -- Chairman 10 Horton and welcome back. 11 My name is Jeffrey M. Vesely from Pillsbury 12 Winthrop Shaw Pittman. To my immediate left is my 13 partner, Annie Huang, from Pillsbury Winthrop Shaw 14 Pittman. And to my far left is Mr. Bills -- 15 Mr. Michael Bills. 16 MR. HORTON: Welcome. 17 MR. VESELY: We're going to divide up the 18 oral presentation into two pieces. The first part 19 will be on the residency issue. Ms. Huang will 20 handle that. 21 And then I will do the sourcing issue in 22 the second half. 23 So, thank you. 24 MS. Huang: I'll take this one. 25 Mr. Chairman and Members of the Board, on 26 the residency issue the disagreement between the 27 parties is really only about 3.5, three and a half 28 months. We're talking about January 11th versus 4 1 April 23rd, 2005. 2 Mr. and Mrs. Bills have provided 3 substantial and uncontroverted evidence that they 4 changed their domicile and residency to Washington 5 on January 11th, 2005. 6 As noted in the timeline provided to the 7 Board as Hearing Exhibit 1, Mr. and Mrs. Bills 8 formulated their intent to change their domicile to 9 Washington throughout 2004, which culminated with 10 the purchase of the house in Friday Harbor in 11 November 2004; the purchases they made; and the work 12 they did in November and December of 2004 to get 13 their house ready for immediate occupancy; and 14 followed by Mr. Bills' retirement on December 31st; 15 and, finally, the move itself on January 10, 2005. 16 It should also be noted that ten years 17 later they still live in the same house today. 18 While the facts and the laws have been 19 fully vetted in our briefs, I'd just like to take a 20 few minutes to briefly summarize the key points. 21 Mr. and Mrs. Bills were long time Wisconsin 22 residents. In 1997 Mr. Bills moved to California 23 for his employment with Brandes Investment Partners. 24 Mrs. Bills did not follow until the 25 following year, in mid-1998. They planned their 26 stay in California for -- only for the duration of 27 his employment with Brandes. 28 So, after more than six, you know, very 5 1 high-paced and stressful years, Mr. Bills decided 2 that it was time for retirement. So, in November of 3 2003, he notified Brandes of his intent to withdraw 4 from the partnership effective December 31st 2004. 5 So, during 2004 Mr. and Mrs. Bills were 6 looking for a place for their post retirement years. 7 They knew they wanted to retire out of state. So -- 8 and then they focused on the San Juan Islands, off 9 the coast of Washington as their first choice. 10 The reason they focused on those islands is 11 because back in the 1990s, when they were still 12 Wisconsin residents, they had visited the -- you 13 know, visited their long time friends, who were also 14 former Wisconsin residents who had moved to one of 15 the islands. So, they visited them in the 1990s and 16 learned to appreciate the unique island lifestyle. 17 So then beginning about July 2004, Mr. and 18 Mrs. Bills became -- you know, started reviewing 19 approximately 50 residential properties on the 20 islands. 21 The criteria that they had were: One, it 22 had to be on the ocean or adjacent to it; and, two, 23 it had to be of sufficient size to accommodate 24 visitors. 25 So, by 2000 -- October 2004 they had 26 narrowed the properties down to three. And in 27 November 2004 they purchased a fully furnished 5600 28 square foot house on ten-acre lot located in Friday 6 1 Harbor for $2.8 million. And the escrow closed on 2 December 1st, 2004. 3 And again provided us here in Exhibit 2 is 4 the listing brochure for the Friday Harbor house, 5 with color pictures so you can see the property. 6 So, in November and December 2004, Mr. and 7 Mrs. Bills began making arrangements to get their 8 new home ready for them. 9 They secured property and casualty 10 insurance coverage. They established accounts for 11 local utilities and propane services. They also 12 purchased linens, beddings, oriental rugs in the 13 amount of $137,000, $20,000 for art pieces from a 14 local art gallery. 15 They engaged an individual to provide 16 caretaker services for the home. They also 17 contacted well, landscape and construction 18 contractors on the island and arranged meetings in 19 January 2005. 20 Although Mr. Bills had been transitioning 21 his workload over to other Brandes partners since 22 November 2003, he tendered an official written 23 notice to withdraw on December 22nd, 2004. And on 24 December 31st he then withdraw from Brandes. 25 As of that day, December 31st, 2004, 26 Mr. Bills no longer had any business connections to 27 California. 28 During the first week of 2000 -- January of 7 1 2005, Mr. and Mrs. Bills continued to take steps to 2 get their Washington home ready for immediate 3 occupancy. They purchased plates and silverware, 4 made two trips to the postal annex to ship personal 5 items, including clothing, to Friday Harbor. They 6 also activated phone service at their new residence. 7 On January 10, 2005, they moved to Friday 8 Harbor. Upon arrival, they registered -- they spent 9 over $3,000 on household items at Costco. They also 10 purchased groceries at a local market. 11 They purchased from a local art galley 12 additional artwork of about $16,000. They also met 13 with various contractors for house and landscape 14 services. 15 In addition, in January 2005, they 16 registered their cars in Washington, which was 17 required, by the way, by their insurance company, 18 since they -- Washington was now their state of 19 residency. 20 Mr. Bills obtained a Washington driver's 21 license and surrendered a california one. And both 22 of them, you know, registered to vote as Washington 23 residents. And they have voted in local, state and 24 national elections as Washington residents since 25 then. 26 So, in all, their evidence is clear that as 27 of January 11, 2005 Mr. and Mrs. Bills had 28 established a new domicile in Washington. All of 8 1 the facts support a conclusion that as of that date 2 they have the present intention of making the Friday 3 Harbor house their permanent home. In fact, like I 4 noted before, they still live there today. 5 Finally, the fact that Mr. and Mrs. Bills 6 spend time in California after January 16, 2005 does 7 not change that result, since their presence in 8 California was for temporary or transitory purposes, 9 i.e., rest and vacation, medical appointments. 10 Indeed, after December 31st, 2004, their 11 ties to California were minimal. They had no minor 12 children living in the state, no business interests 13 or other professional ties, and they had no social 14 ties. 15 None of the traditional key connections 16 existed with California. Washington was now their 17 permanent home. And Rancho Santa Fe became their 18 vacation home, just as their New York condo was 19 their vacation home as well. 20 So, in closing, we respectfully submit that 21 the evidence overwhelmingly supports the conclusion 22 that they changed their domicile and residency as of 23 January 11, 2005. 24 Thank you. 25 MR. VESELY: Mr. Chairman and Members of 26 the Board, good morning. The second issue in this 27 appeal is whether any of the payments Mr. Bills 28 received in connection with his withdrawal from the 9 1 Brandes partnership was California sourced income. 2 And the short answer is that none of the 3 payments that he received in 2005 through 2009 4 should be considered California sourced income since 5 the income was from intangible personal property, 6 that is, the liquidation of his limited partnership 7 interest under Internal Revenue Code Code Section 8 736 (b), as in boy. 9 And since he was a non-resident of 10 California when he received each payment under 11 Revenue and Taxation Code Section 17952, the income 12 is sourced to the state of his residency, the State 13 of Washington. 14 Now under subchapter K of the 15 Internal Revenue Code, to which California fully 16 conforms, there is a special set of rules under 17 736 (b), which dictate the tax treatment of payments 18 from a partnership to a retiring or withdrawing 19 partner. 20 Under 736 (b), the transaction's considered 21 to be a liquidation of the retiring partner's 22 partnership interest and not a sale of that 23 interest, which is covered by Internal Revenue Code 24 Section 741. 25 The FTB concedes that no sale of Mr. Bills' 26 limited partnership interest occurred in this case. 27 In this case it's uncontroverted that the payments 28 were exchanged for Mr. Bills' equity interest in the 10 1 Brandes property. As such, they fall directly under 2 736 (b). The payments were not a distributive share 3 of Brandes net income. And under the Brandes 4 partnership agreement it is explicitly provided that 5 the payments made to a retiring partner, like 6 Mr. Bills, were 736 (b) payments and were to be made 7 over a five-year period. 8 Further, the remaining Brandes partners 9 were not permitted to deduct any of those 736 (b) 10 payments made to Mr. Bills. Indeed, no deduction 11 was taken in this case by the remaining Brandes 12 partners for any of those payments. 13 When Mr. Bills retired there was no 14 guarantee that he was going to receive any 15 withdrawal payments. Indeed, nothing was fixed. 16 Nothing was determinable. Indeed, his payments 17 fluctuated each year. 18 Notably in a recent conversation we had 19 with Brandes finance personnel, we learned that 20 subsequent to Mr. Bills' retirement, a number of 21 other Brandes partners who retired have not received 22 all five of their withdrawal payments. 23 In fact, there is one unfortunate Brandes 24 partner who has -- in year five of his retirement 25 right now, has received nothing under the same 26 agreement -- these are all under the same agreement 27 Mr. Bills was. 28 The calculation of the withdrawal payments 11 1 are provided in the partnership agreement. Under 2 the agreement, the value of Mr. Bills' equity 3 interest in the Brandes property was determined 4 under an income or earnings approach, a common 5 valuation technique, endorsed by the IRS and much 6 like what is done in property tax matters. 7 Under the agreement, a six times multiple 8 of Brandes gap net earnings for the prior year was 9 used. A six times multiple -- plainly a current and 10 active partner would not receive a six times 11 multiple of his or her current distributive share as 12 a current income distribution. 13 When Mr. Bills retired at the -- excuse me, 14 at the end of 2004, he ceased being an active 15 partner under local law. However, he remained a 16 partner for tax purposes until his last withdrawal 17 payment in 2009, when his entire partnership 18 interest was finally liquidated. 19 He received K-1s from Brandes for 2005 to 20 2009. And the payments were noted to be a, quote, 21 unquote, equity payout, unquote, not a current 22 income distribution. 23 For the Board's convenience we have 24 attached as Exhibit 4 to the hearing exhibits a copy 25 of Mr. Bills' final K-1 for 2009. As a cash basis 26 taxpayer, like most individuals, Mr. Bills realized 27 income on receipt of each payment. 28 Since he was a non-resident of California 12 1 when he received each withdrawal payment, the 2 question arises as to how much income or how should 3 that income be sourced. 4 Both this Board and the California courts 5 apply a two-step sourcing methodology. The first 6 step is to determine the character of Mr. Bills' 7 income under subchapter K of the Internal Revenue 8 Code and the California counterparts thereto. 9 As -- and as noted earlier, Mr. Bills' 10 income falls under IRC Section 736 (b) and 11 considered payments for the liquidation of his 12 limited partnership interest, tangible or 13 intangible. 14 The second step under the methodology is 15 then to apply California sourcing rules under 17952 16 since the character of Mr. Bills' income is from 17 intangible personal property, the partnership 18 interest. 19 Under Section 1792 (verbatim), the income 20 from intangible personal property is sourced to the 21 state of the residency of the non-resident, in this 22 case, Washington, and is not sourced to the State of 23 California unless it can be shown that Mr. Bills' 24 partnership interest itself somehow had a business 25 situs in the State of California. 26 Here none of the ways in which a business 27 situs may arise under Regulation 17952 (c) apply. 28 As this Board held in the appeal of Ames, the mere 13 1 fact that Brandes had business activities in the 2 State of California does not create a business situs 3 for Mr. Bills' partnership interest. 4 In closing, none of the payments Mr. Bills 5 received in 2005 through 2009 in connection with the 6 withdrawal from Brandes were California sourced 7 income. 8 We'd be happy to answer any questions. 9 Thank you. 10 MR. HORTON: Thank you very much. We'll 11 now go to the Department. The Department has ten 12 minutes to make their presentation. 13 We'd ask that you commence with your 14 introduction for the record. 15 MR. HASKINS: Thank you, Chairman Horton. 16 Chairman Horton, Members of the Board, I am 17 Christopher Haskins representing the FTB. I am 18 joined to my right by Natasha Page and Ron Babcock. 19 As with Appellant, we will be splitting up 20 the discussion of the various issues. But I wanted 21 to give you a summary. 22 So, let's start with the sourcing issue. 23 We agree that in this case subchapter K, Section 736 24 would apply. And we agree that the source of those 25 payments would be determined under California law, 26 Revenue and Tax Code Section 17951 and/or 17952. 27 Now a little history. Mr. Bills retired or 28 turned in his retirement notice on December 22nd, 14 1 2004. The partnership that he turned in the notice 2 to was an asset management service firm. Didn't 3 sell anything. Solid, had no inventory. So, it 4 charged fees and received fee income. Mr. Bills was 5 admitted to the partnership in 2002. He had worked 6 there since 1997. 7 Now under IRC Section 736 (a)(1), 8 "Payments made in liquidation of the 9 interest of a retiring partner shall, 10 except as provided in subsection (b), be 11 considered as a distributive share to the 12 recipient of partnership income if the 13 amount thereof is determined with regard to 14 the income of the partnership." 15 Over the five years following retirement, 16 Appellant husband received payments from the 17 partnership for partnership interest. 18 Under the partnership agreement, Article 19 13.3, these payments were calculated based on the 20 income of the partnership. 21 And that was the position of Appellants at 22 the protest hearing and at audit and in their 23 opening brief. They used the word "liquidation of 24 his partnership interest," the words, I'm sorry. 25 Thus, they were using Internal Revenue Code 736 26 (a)(1) language, which would make the payments a 27 distributive share. 28 Under that characterization the payments 15 1 would be taxable by California under 17951 and 17 -- 2 California Reg 17951-4a. 3 Appellants alternatively argued that the 4 payments were and always have been 736 (b) payments, 5 for the liquidation of Appellant husband's interest 6 in the partnership's property. 7 They not had mentioned that line before, 8 and in our reply we replied, IRC Section 736 (b) 9 states, 10 "Payments made in liquidation 11 of the interest of the retiring partner 12 shall, to the extent such payments are 13 determined to be made in exchange for the 14 interest of such partner in partnership 15 property, be considered a distribution 16 and not a distributive share." 17 Even under that characterization, the 18 payments are still taxable by California as they 19 represent California sourced income. 20 The mobilia doctrine instructs us, as 21 Mr. Vesely said, that when considering intangible 22 personal property, we look at the residency of the 23 owner at the time of the property transfer. And if 24 he or she is a non-resident at the time, California 25 can only tax the income from the transfer if the 26 property has developed a business situs in 27 California. 28 So that's the question. Here the 16 1 partnership's property, the asset, was some desks, 2 some computers. And the partnership held a 99 3 percent interest in an asset management firm where 4 the partners worked at. And that's it. 5 As I said, it was a service firm. It had 6 no inventory. What it sold was asset management 7 services. 8 Thus, the intangible personal property, or 9 capital has it been referred to and was in the Ames 10 case was always in use by the investment firm. It 11 was used to pay bills, pay employees, pay partners, 12 and generally operate the business. 13 And one thing to be mindful of, I think, is 14 that in the example and section that Mr. Vesely 15 cited, that is simply an example. That is not the 16 only way that a person's intangible personal 17 property can develop a business situs, it's just one 18 example. 19 It seems clear that the Appellants' 20 intangible property have become so entangled into 21 the operation of the partnership's business that the 22 possession and control of the intangible property 23 had been localized in connection with the business 24 in this state, such that substantial use and value 25 attached to it and became an asset of a business in 26 this state. 27 Under the exception to the mobilia doctrine 28 found in California Revenue and Tax Code Section 17 1 17952 and the accompanying regulations, the property 2 Appellant husband liquidated had a business situs in 3 California. Therefore, it was taxable and is 4 taxable by California. 5 After conferring with my colleagues and 6 upon further reflection, it's also apparent that the 7 transfer of the Appellant's partnership interest was 8 actually fully complete in 2004. 9 The payments were to be paid over the 10 following five years. But once the deal was done, 11 nothing else needed to happen for Appellants to 12 realize their income. It was all realized in 2004. 13 The deal was done while they were California 14 residents and domiciliaries. So, the later received 15 and recognized income is California-sourced income. 16 The turn in of the retirement letter, per 17 the agreement, locked in all of the terms necessary 18 for the exchange of Appellant husband's property for 19 cash in 2004. 20 This is an instance of deferred 21 recognition. Thus, all five years of payment under 22 the contract were taxable by California under 23 Revenue and Tax Code Section 17951 and its 24 accompanying regulation, 17951-4. 25 Let's talk about residency and domicile. 26 As stated, we don't necessarily disagree with some 27 or all of the facts. It's the interpretation of 28 those facts. 18 1 Appellants were domiciliaries and residents 2 of California until April 23rd, 2005 under the legal 3 principles very familiar to your Board. They had -- 4 Mr. Bills moved here in '97, Ms. Bills moved here in 5 '98. They lived here. They worked here. So, they 6 were domiciliaries and residents of California. 7 Now they had begun to make a change in 8 domicile and residence in late 2004 and early 2005. 9 They didn't complete that change until April 23rd, 10 2005. 11 As noted, a house was purchased in November 12 of 2004, and in January of 2005 the Appellants made 13 a short seven-day trip to Washington to that house. 14 They contracted with local contractors for extensive 15 landscaping and not so extensive home improvements 16 with local contractors. 17 They changed three car registrations to 18 Washington but none of those cars were moved to 19 Washington or garaged in Washington at any time in 20 2005. 21 They registered to vote. And Appellant 22 husband obtained a Washington driver's license. 23 Now one thing that wasn't mentioned is 24 this, Appellants also changed the mailing addresses 25 of their bills and statements to the Washington 26 house address. But they also placed a forwarding 27 order to have all that mail sent to their California 28 post office box in Rancho Santa Fe, near their 19 1 California residence. 2 After this short seven-day stay, they 3 returned to their California residence, as planned. 4 This was a planned seven-day trip to the Washington 5 house with a return to California. 6 And from there they took some -- they took 7 the vacation that Mr. Vesely and Ms. -- sorry, his 8 associate mentioned. These had been planned before 9 they left for Washington. In other words, they 10 planned when they left to return to California on 11 January 16th, take some vacations ending on 12 April 7th, 2005 and otherwise live in their Rancho 13 Santa Fe residence until sometime after that date. 14 That intent, according to Appeal of 15 Addington, 82 SBE-001, tells us that an intent to 16 return to one's current domicile prevents the 17 acquisition of a new domicile. Thus, no change of 18 their domicile is shown in this case. 19 On April 23rd, after returning from their 20 last planned vacation, Appellants, "left California 21 on 4-23-05 with an automobile packed with personal 22 items." That's from a letter that Appellant husband 23 wrote to FTB on December 28, 2009. 24 We also received two letters from 25 Appellants' representative in 2011 clarifying that 26 the items were the Appellants' clothing. 27 And that makes sense, I don't know if it 28 was mentioned, but the house is a unique design 20 1 house it was fully furnished because the furniture 2 matched the design of the house. So, in order to 3 live in it, all they needed to do was to take their 4 clothes and a few personal items with them. 5 In total, though, the Appellants had spent 6 six days out of 104 days between January 10th and 7 April 23rd in Washington. The -- in no way can a 8 six-day stay in another state, versus a total of 64 9 days in your current state of residence and domicile 10 constitute a change of residence and domicile. 11 Their stay in Washington was really no 12 different than their travels abroad that they made 13 during their vacations. They were all temporary and 14 transitory. And they all were in intended -- at the 15 end of them it was an intent to return to 16 California. 17 No change of residence is shown under these 18 facts. Again under the controlling law, no change 19 in domicile is shown nor is any change of residence 20 shown until after April 23rd, 2005 when the 21 Appellants left California with intent to not 22 return. 23 MS. RICHMOND: Time's expired. 24 MR. HASKINS: Thank you. 25 MR. HORTON: Do you need additional time? 26 MR. HASKINS: No, I was simply going to 27 finish with, FTB asks that our determination be 28 sustained. 21 1 MR. HORTON: Okay. On rebuttal? 2 MR. VESELY: Thank you. 3 Take the sourcing issue first. Mr. Haskins 4 refers to 736 (a)(1) of the Internal Revenue Code 5 and the reference to the term "liquidation" in that 6 statute. 7 Well, the same term, "liquidation" appears 8 in 736 (b). We're talking about a liquidation of a 9 partnership interest. 10 Mr. Haskins also likes to latch on to the 11 fact there is a reference to income, determined in 12 connection with income under 736 (a)(1). However, 13 as I indicated before, that under 736 (b) to value 14 the Brandes property an income approach was used 15 here. It is a common valuation technique done 16 for -- we pointed out Revenue Ruling 68609. We've 17 pointed out also in the property tax area and other 18 things, it is a common approach to use income. 19 And also really the most important thing is 20 that if you look at a Treasury regulation under 21 736 (b), it's 1.736-1 (b)(7), example 2, which 22 provides that under that set of facts in that 23 example the retiring partner got paid their 736 (b) 24 payments as a percentage of annual income. That's 25 in the example itself. The fact that it's a 26 percentage of annual income does not make it 27 anything other than a 736 (b) payment, much like for 28 Mr. Bills here. 22 1 Mr. Haskins does -- has not ever responded 2 to that particular regulation. 3 With respect to the business situs issue, 4 the business situs issue is a focus on his, 5 Mr. Bills', partnership interest, not on Brandes 6 activities because it's really all about the 7 non-resident, whether they've used that -- bid that 8 partnership interest and localized that interest in 9 connection with a business within the State of 10 California, like Mr. Haskins indicates. 11 Well, the interesting thing is, after 12 12-31-04, Mr. Bills was retired. He conducted no 13 business activity in California or anywhere else 14 since that date to the current date. So, there is 15 no business in California that has been localized. 16 And he certainly didn't pledge any partnership 17 interest in California in connection with a 18 nonexistent business. 19 This concept about the transaction being 20 complete at the end of 2004 that is -- they have 21 argued internally inconsistent approaches here. 22 They talked about him being an active partner until 23 the end of 2009. They also talked about a sale at 24 12-31-04. They talked about lots of things here. 25 And I don't know where the deferred 26 recognition comes in at all because I'm not sure 27 there is any authority that's ever really been cited 28 that that would apply to this particular situation. 23 1 Mr. Bills was a cash basis taxpayer until 2 he received -- like you or me or Ms. Huang or 3 Mr. Bills actually received some cash on this thing, 4 there is no realization. He realized nothing as of 5 12-31-04. There was nothing fixed. 6 Need I just refer to one more time the 7 poor, unfortunate Brandes partner who has received 8 zero under the same agreement under the withdrawal 9 payments? 10 I'll let Ms. Huang handle the residency 11 question. 12 MS. HUANG: Thank you. 13 Well, the first one I'd like to address is 14 Mr. Haskins has noted that the time Mr. and 15 Mrs. Bills spent in Washington in January 2005 is no 16 different than their travels abroad. 17 That seems a little -- I am not questioning 18 where that comparison came from because, as noted 19 before, they had shipped their clothing over there. 20 They had shipped their personal items there. 21 They bought linens, bedding, silverware. 22 They bought art pieces. They bought Oriental 23 rugs -- over $100,000. They set up utilities -- all 24 the stuff to get a house ready for their immediate 25 move in. 26 And, so, you know, Mr. Haskins also noted 27 that, well, they registered their cars, but they 28 didn't move any. 24 1 Well, as has been explained through audit, 2 through protest and even in our -- in our briefs on 3 appeal, that they didn't move the cars because they 4 were being used by their children, their adult 5 children who were graduate students at the time. 6 There is no law saying that you cannot have 7 cars left in the state -- in the State of California 8 after you have changed your domicile and your 9 residency. 10 And in terms of the -- the extensive 11 landscape and construction work, what was done -- 12 the construction work that Mr. Haskins kind of 13 implied was really just cabinet work. It's not -- 14 the house was completely ready for move in. And 15 they did move on January 11, 2005. 16 I mean, the previous owners when they left, 17 all they took was the art that they had and their 18 personal items. Everything else was left as it was 19 and they lived there until they moved out, so, when 20 the -- you know, Mr. and Mrs. Bills bought the 21 house. 22 And in terms of, you know, the intent to 23 return to California, well, as I noted, Mr. Bills 24 had a very high-paced stressful job. So, when he 25 retired they planned, in 2004 as they were planning 26 everything else, they planned for all of these 27 trips. So, he returned to California as part of 28 this vacation. 25 1 Again Respondent does not argue that you 2 can return to California, even after you left, to 3 vacation here. I mean in California we have the 4 snowbird rule. You can own a house here. You can 5 even have a bank account here. If you're domiciled 6 in a different state, you can be here up to six 7 months and be a -- considered non-resident. 8 So, I'm not quite sure why the vacation 9 here in California is a big problem for Respondent, 10 unless Respondent is taking a position that once you 11 move out of the state, you've got to stay out for a 12 certain period of time before you can vacation 13 in California. 14 MS. LOPEZ: Time has expired. 15 MS. Huang: And, if I may, just one last 16 point? 17 In terms of the mail forwarding, Mr. Bills 18 can explain that a little bit more. And as I -- as 19 we noted before, because they knew they were going 20 on vacation, obviously, they would -- they would, 21 you know, forward the mail. 22 And it's not like a standing order as 23 Mr. Haskins has implied in his brief, it is simply 24 something that is -- you tell the post office in 25 Friday Harbor where you're going. 26 If they were going to New York, they would 27 forward it there. Wherever they vacation, they 28 forward it. So, this is not an indication that they 26 1 didn't move to Washington in January '05. 2 Thank you. 3 MR. HORTON: Just a point of clarification, 4 Mr. Ambrosia (verbatim), would you share with us 5 your thoughts on what the court concluded in the 6 Ames and Valentino case as it relates to 736 (a)? 7 And, uhmm, there has been some discussion 8 relative to income, the use of income and making a 9 calculation -- maybe some clarification on what that 10 term sort of means or signifies. 11 MR. AMBROSE: Okay. Okay, well, in 12 Valentino -- I'm going to have to get up to speed 13 here. I mean -- 14 MR. HORTON: I can always come back if you 15 like. 16 MR. AMBROSE: Sorry. 17 MR. HORTON: I can always come back. 18 MR. AMBROSE: Oh, would you please? 19 MR. HORTON: Yes. 20 MR. AMBROSE: Thank you. 21 MR. HORTON: Of course. 22 Discussion, Members? Member Runner? 23 MR. RUNNER: Let me -- let's start with 24 some residency discussion in terms of -- in terms of 25 the taxpayer, the intent. 26 I think the representative for the taxpayer 27 said that there would be some explanation in regards 28 to the mail forwarding. 27 1 Take this time to go ahead and explain 2 that. 3 MR. BILLS: Sure, of course. 4 In terms of the mail forwarding function, 5 as Ms. Huang said, we typically split our year in 6 terms of location -- a portion of the year in Rancho 7 Santa Fe, a portion of the year in New York City and 8 the balance of the year in the Friday Harbor 9 location. 10 So, when we're in Rancho Santa Fe, we've 11 arranged to have mail forwarding for a specific 12 period of time, typically two to three months at a 13 time. 14 Similarly when we go to New York -- and our 15 pattern has in the past been to spend two to three 16 months in the fall in New York -- we would have our 17 mail forwarded for the specific time period in 18 question. 19 So, it's as simple as that in terms of the 20 mail forwarding issue. 21 You've essentially -- as an opportunity to 22 use either one of two methods in terms of 23 forwarding, just a general forwarding order with the 24 post office, which is free, or you can do premium 25 forwarding, which is a little faster and one in 26 which the post office bundles your mail for you and 27 sends you a package. 28 But we've used this for all of the period 28 1 of time that we have lived in Washington and it has 2 worked like a charm. 3 MR. RUNNER: Okay, thank you. 4 Just -- again, I'm trying to get my head 5 around the fact that, obviously, the concept is that 6 you are a resident in the State of California, 7 domicile -- residence -- domicile's in the State of 8 California. 9 And then what you need to do then in order 10 then to change that -- that domicile then to the 11 other state. And we have a list of items that were 12 accomplished by the taxpayer to do that. And, you 13 know, I was -- just voter registration, driver's 14 license, registration of cars, mail -- and then the 15 mail was forwarded, which is kind of an interesting 16 part of the discussion. 17 But, nevertheless, those things were done 18 then by the taxpayer in order to, in their mind, 19 establish domicile in the State of Washington. 20 The question I have -- one of the issues I 21 have in regards to the comment that -- one of the 22 things that I think under -- at least what I've 23 heard from FTB that undermines then that whole issue 24 was they -- they had their intent to return. 25 Now, how -- what confuses me a little bit, 26 if they've always had the intent to keep that other 27 house as a vacation purpose, they will have always 28 had their intent to return. 29 1 So, how does the intent to return then 2 enter in when, in fact, the plan all along was to 3 convert the house in California to a vacation home? 4 MR. HASKINS: Well, you're exactly on 5 point, Senator. 6 In this case the question to ask is how did 7 they demonstrate that they changed domicile? 8 MR. RUNNER: Right. 9 MR. HASKINS: And the cases are legion that 10 say that what you have to have is a union of act and 11 intent. And intent is to be found by objective 12 facts. 13 MR. RUNNER: Right. 14 MR. HASKINS: In this case, they didn't 15 simply move back to California. They, in fact, 16 planned to come back to their domicile and residence 17 in Rancho Santa Fe after visiting the Washington 18 house. 19 MR. RUNNER: As a vacation home. 20 MR. HASKINS: No, as a -- to live there. 21 Because they didn't -- they took some vacations, 22 but -- 23 MR. RUNNER: How do we know that they came 24 there with -- how do we know their intent was to 25 come to that as their domicile as opposed to their 26 vacation home? 27 How do we know that? 28 MR. HASKINS: Because they didn't just take 30 1 vacations, they lived there. 2 MR. RUNNER: Again -- 3 MR. HASKINS: Vacations are -- 4 MR. RUNNER: -- help me understand. Help 5 me understand how it is that that house could not 6 convert itself in the taxpayer's planning to a 7 vacation home? 8 How -- 9 MR. HASKINS: Once they established 10 domicile somewhere else, then it could be used as a 11 vacation home. 12 MR. RUNNER: Well, we're getting into a 13 circular argument. 14 They believe they did. They believe they 15 established their domicile in Washington. And at 16 that point then that California home became a 17 vacation home. 18 So, what I'm asking is why -- what is it 19 that we know that took place that would not validate 20 that then as a vacation home, based upon the change 21 of the establishment of the domicile to Washington? 22 What -- what did they do other than they 23 went back and vacationed there? 24 MR. HASKINS: That would be the 25 disagreement. They didn't go back and vacation 26 there. They -- 27 MR. RUNNER: And how do we know that that's 28 what they didn't do? 31 1 MR. HASKINS: -- because they went there 2 and lived. They bought groceries. 3 MR. RUNNER: Of course they lived there, it 4 was a vacation home. 5 MR. HASKINS: No, no. They didn't live in 6 Washington. So, you have to have a union of -- 7 MR. RUNNER: And the -- and we know they 8 didn't live in Washington because? 9 MR. HASKINS: Because a seven-day stay does 10 not establish any kind of residency. 11 MR. RUNNER: Is that true? 12 MR. HASKINS: Yes. 13 MR. RUNNER: Is that law, seven-day resi -- 14 I mean, the fact is that you went, you stayed there 15 seven days and then you went somewhere else, you 16 know -- but you did change your driver's license and 17 all those other things to that location, that does 18 not make -- allow them to be a resident of that 19 state? 20 MR. HASKINS: Not for -- in this case with 21 these facts, because they -- 22 MR. RUNNER: And these facts are the fact 23 that they went back to California? 24 MR. HASKINS: -- that they returned to 25 their California residence and then -- 26 MR. RUNNER: Okay, I think we're getting 27 circular here because, again, I -- it seems to me 28 that -- that again I think an individual has the 32 1 right to determine where they -- where their 2 domicile is. 3 And then I think they have the right then 4 to demonstrate and prove that up. And it seems to 5 me that you do a series of things to do that. 6 Now the fact that makes this a little more 7 confusing is they didn't sell that house. They 8 didn't -- but they kept that house, I don't know if 9 they still have that. 10 Do you still have the house? 11 MR. BILLS: We do. 12 MR. RUNNER: Okay. So, they still have 13 that house. So, the intent along was to keep that 14 home, but change it from a domicile -- from their 15 domicile to a vacation home. 16 Now, you know -- and I -- so, I guess we're 17 going to get in circular arguments, I think, in 18 terms of how -- how do we prove that, because it 19 seems to me they feel like they've done their things 20 that said, "Hey, this is where we -- this is where 21 our domicile was, even though we did come back to 22 California, but that was now converted to our 23 vacation home." 24 MR. HASKINS: That is what they say. 25 MR. RUNNER: Okay. 26 MR. HASKINS: And statements -- 27 MR. RUNNER: And the only reason -- 28 MR. HASKINS: -- statements alone, without 33 1 objective facts to support them, do not change 2 domicile. 3 MR. RUNNER: And the objective facts that 4 you are rejecting are the driver's license, the 5 regis -- the car registration, the voter 6 registration, right? 7 MR. HASKINS: Not rejecting them, just 8 putting them in their proper place. 9 You don't know -- 10 MR. RUNNER: You're not -- you're not 11 giving credit to them of establishing domicile? 12 MR. HASKINS: -- as the cases have said, 13 the case of Joe and Gloria Morgan, that regis -- 14 that changing the registration of where you vote is 15 not controlling. 16 The Widow case points out that residents, 17 actually living in -- 18 MR. RUNNER: I don't know what the other 19 facts of those cases were, so, I don't know exactly 20 what -- what other conditions were a part of those 21 facts, but I am just looking -- 22 MR. HASKINS: Just for the principle of the 23 case, but Joe and Gloria Morgan -- Joe Morgan, of 24 course, was a Cincinnati Reds player. He lived here 25 and in Cincinnati and claimed that his domicile was 26 in Cincinnati, but -- and registered to vote there. 27 And this Board, in analyzing that case, 28 said that -- that that fact shouldn't -- isn't 34 1 controlling, you have to take a complete -- 2 MR. RUNNER: Right. 3 MR. HASKINS: -- look at the facts -- 4 that's all the facts that circumstances. 5 And, so, they did change the car 6 registrations but they didn't move the cars there. 7 MR. RUNNER: Let me ask about the cars. 8 Were the cars then all in San Diego? 9 MR. HASKINS: Yes. And according to the 10 new table that they have produced, pursuant to a 11 question that was asked, two of the cars they 12 registered never were moved to Washington. 13 One was a 1936 car, it was an antique. It 14 was registered in Washington but always stayed in 15 Rancho Santa Fe. 16 Another car was never moved to Washington, 17 although it was registered there. And that was used 18 by one of their children. 19 Now, one of the things that Ms. Huang said 20 was that there's no law that says you can't leave a 21 car in California -- 22 MR. RUNNER: Right, right. 23 MR. HASKINS: -- if it's registered in 24 another state. 25 MR. RUNNER: Right. 26 MR. HASKINS: That's not true. The 27 California Vehicle Code requires that if you are 28 going to have the vehicle here, after 30 days you 35 1 have to register it here. 2 And, unfortunately, I know that because I 3 got a ticket for it when I moved here. So, that's 4 simply not true. 5 If you're going to leave the cars here and 6 use them on the roads of California, then you should 7 contribute to the upkeep of the roads and stuff -- 8 other infrastructure of California. 9 So, it's -- it's -- unfortunately, it's an 10 appearance of a change of domicile, not actually a 11 change of domicile and that's our determination. 12 MR. RUNNER: Okay, okay. Let me ask you 13 about the car registration, that issue, just 14 follow up on that just a moment. 15 MR. BILLS: Uh-huh. 16 MR. RUNNER: Were the cars -- the cars were 17 -- at least I thought I heard some of the testimony 18 that the cars were in use by somebody else? 19 MR. BILLS: Yes. In preparation for moving 20 to Washington, our car insurance -- our property and 21 casualty insurance is AIG. 22 MR. RUNNER: Uh-huh. 23 MR. BILLS: I contacted AIG to indicate 24 that with our move to Washington, some of the 25 automobiles that we owned were going to be used in 26 Washington, some would stay in California. Do we 27 have to have separate insurance coverage in 28 California versus Washington? 36 1 Their response is, 2 "Our policy is, you have to have 3 insurance coverage for the -- in the state 4 in which the cars are registered. They all 5 must be registered wherever your domicile 6 is." 7 So, that's why we registered the cars in 8 Washington. Three of the cars remained in 9 California, a 2002 Passat, used by my adult 10 daughter; a 2005 Passat, used by an adult son; and a 11 2005 Prius, that was used by my daughter-in-law. 12 All three of those people were full-time 13 graduate students from fall of 2005 to the spring of 14 2007. 15 MR. RUNNER: Were those cars parked at 16 domicile in -- 17 MR. BILLS: The latter two cars that I 18 mentioned, the 2005 Passat and 2005 Prius, were in 19 the Bay area. My youngest son and daughter lived in 20 Berkeley while going to graduate school. So, those 21 cars were there. 22 The 2002 Passat, which is used by my adult 23 daughter, was in San Diego. 24 MR. RUNNER: Does she live at the house? 25 MR. BILLS: She did. When we -- she moved 26 from New York City, after working in Europe for five 27 years, to Rancho Santa Fe in May of 2005, as we were 28 transitioning back to Washington. 37 1 And she had -- she lived in the Rancho 2 Santa Fe house on a part-time basis, went to 3 graduate school at the University of Wisconsin in 4 Madison. And then when she finished her MBA -- 5 MR. RUNNER: So, she lived at the house and 6 was finishing school? 7 MR. BILLS: Right. 8 MR. RUNNER: And she -- she had the house 9 -- or the cars, but cars were owned by you? 10 MR. BILLS: Right. 11 MR. RUNNER: And then, therefore, you felt 12 because of what the insurance company told you you 13 needed to then change? 14 MR. RUNNER: To Washington -- 15 MR. RUNNER: Okay. 16 MR. BILLS: -- registration. 17 Just one more clarifying comment -- 18 somewhat in a different approach or factual 19 presentation than Mr. Haskins has made. 20 Three of the cars that we've owned have 21 been used in Washington, a 2004 Prius, a 2006 Prius 22 and a 2003 Porsche. 23 MR. RUNNER: Okay. Just let me -- let me 24 go now to the issue of the - income distribution and 25 the issues in that regard. 26 How did the partnership handle -- how 27 did -- how was the taxation from the partnership 28 side handled in regards to this -- in regards to 38 1 this retirement revenue? 2 MR. VESELY: Right. Under the law there is 3 a distinction here that's very interesting. 4 It's if the payments are under 736 (a)(1), 5 like Mr. Haskins would like them to be, they are 6 then ordinary income to the recipient. And the 7 partnership and the partners that are still there 8 get to essentially take a deduction or reduce their 9 income for that. 10 On the opposite side, if they're 736 (b) 11 payments, the income to the retiring partner is 12 capital gain income and the remaining partners are 13 not allowed to take the deduction for the 736 (b) 14 payments. So, the partnership and the remaining 15 partners could not take those deductions. 16 And, indeed, in this case we have presented 17 evidence that says that's exactly what did happen. 18 The partnership agreement specifically says that 19 these payments were going to be 736 (b) payments, 20 Article 13 of that -- of the document, partnership 21 document. 22 And, indeed, what we've had, if you really 23 look at it, is you've got all these remaining 24 partners of Brandes who have, if Franchise Tax 25 Board's correct, overpaid their taxes. They should 26 have taken deductions. 27 But, no, they -- there was no gamesmanship 28 here. It was basically treated consistently by the 39 1 partnership as by Mr. Bills. 2 MR. RUNNER: Okay. Let me ask FTB then. 3 If, indeed, we find for the case, did we 4 actually overcollect from the partnership? 5 MR. BABCOCK: We have no knowledge of that. 6 If the other partners -- 7 MR. RUNNER: We have knowledge that we 8 overcollected or how they filed? 9 MR. BABCOCK: -- how they filed. That has 10 not been presented to us. If -- you know, we'd 11 actually like to see how the other partners filed 12 and then that would help. 13 MR. RUNNER: Help -- 14 MR. BABCOCK: But we have not seen -- 15 MR. RUNNER: -- in what ways? 16 MR. BABCOCK: -- it would make the 17 determination if they did deduct it or if they 18 didn't deduct it. 19 MR. VESELY: Mr. Runner? 20 MR. RUNNER: Yes. 21 MR. VESELY: We've presented evidence in 22 the declaration of Mr. Eramora (verbatim), sworn 23 under oath, that that's exactly what happened. 24 MR. RUNNER: Wouldn't it -- in dealing with 25 this case, wouldn't that be something that you would 26 have looked at to make sure -- in terms of how it 27 was consistently applied? 28 MR. BABCOCK: That's a difficult question 40 1 because when you start snooping into other people's 2 tax returns, there's -- we have a duty of 3 confidentiality. 4 And if they wanted to present us that 5 evidence, we'd look at it, I don't think we would go 6 snooping in other taxpayer's tax returns. 7 MR. RUNNER: Go ahead. 8 MR. VESELY: Mr. Runner, we had presented 9 that evidence from day 1 in this case. It is not 10 new stuff whatsoever. 11 MR. RUNNER: Is that -- 12 MR. HASKINS: They've never produced the 13 income tax returns of the other partners. 14 MR. RUNNER: Hold on. 15 Okay. Let me ask you this, if, indeed, you 16 saw how it was treated, would that -- would that 17 influence how it is that you look at this case? 18 MR. BABCOCK: Yes. What 736 -- and there's 19 no dispute that -- 20 MR. HORTON: My apologies, you might want 21 to clarify your "yes." 22 MR. BABCOCK: The question again? 23 MR. HORTON: I don't think that that's 24 answering the Members -- certainly not answering 25 the -- 26 MR. BABCOCK: I apologize, sir. 27 MR. HORTON: -- question from our 28 perspective. 41 1 MR. RUNNER: Well, the -- the question was, 2 I mean, if, indeed, you saw that, would that change 3 how it is that you would be looking that this case? 4 MR. BABCOCK: Yes. 5 MR. RUNNER: Okay. 6 MR. BABCOCK: Yes, it would. 7 'Cause that -- we would look at it 8 differently and the reason is -- I wanted to -- 9 MR. RUNNER: Go ahead and tell me the 10 reason. 11 MR. BABCOCK: -- offer the explanation. 12 MR. RUNNER: Tell me why it would make you 13 look at the case differently. 14 MR. BABCOCK: Okay. Section 736 -- and 15 there is no dispute between the parties that that's 16 the applicable section -- because Mr. Bills -- I 17 mean I'm sure that Mr. Vesely's not going to like 18 it, but he sold his entire partnership interest to 19 the partnership. 20 What -- what the retirement or liquidation 21 means is he sold his entire interest. If he sold 22 only a part of that interest, 736 would not apply, 23 another section of the Code would. 24 So, it tells us that he sold his entire 25 interest, and after that point was no longer a 26 partner in the partnership for local law purposes. 27 He had to remind -- 28 MR. RUNNER: Have we not established that? 42 1 Did we believe -- do you believe he still was? 2 MR. BABCOCK: No. 3 MR. RUNNER: Okay. 4 MR. BABCOCK: And -- and the consistency, 5 you know, we never argued that he was an active -- 6 MR. RUNNER: Okay. 7 MR. BABCOCK: -- partner in the 8 partnership. 9 MR. RUNNER: Okay. 10 MR. BABCOCK: 736 does three things: It 11 characterizes the income; it determines the amount 12 of the income; and it determines when that income 13 will be recognized. 14 It does all three of those things. So, if 15 it goes into -- if it gets classified as a 736 (a) 16 payment, then that's treated as ordinary income, 17 whether he does anything -- in fact, he can't do 18 anything because the requirement of 736, he has to 19 no longer be a partner. 20 MR. RUNNER: Uh-huh. 21 MR. BABCOCK: And, so, 736 would not apply, 22 you know, if he was a partner. 23 So, you know, we're saying he was not a 24 partner -- 25 MR. RUNNER: He was not partner. 26 MR. BABCOCK: -- after he entered into this 27 agreement -- 28 MR. RUNNER: Right. 43 1 MR. BABCOCK: -- and settled up his 2 interest. 3 MR. RUNNER: Okay, I'm still a bit -- 4 MR. BABCOCK: So, all he -- 5 MR. RUNNER: -- foggy in regards to -- 6 MR. BABCOCK: -- my answer is -- 7 MR. RUNNER: -- you told me yes, and 8 then -- 9 MR. BABCOCK: Yes. 10 MR. RUNNER: -- you went through this long 11 discussion. 12 MR. BABCOCK: -- okay. The thing is -- 13 MR. RUNNER: And I'm not sure what is 14 concluded. 15 MR. BABCOCK: -- under 736, you take and 16 classify payments as 736 (a) payments or 736 (b) 17 payments. 18 MR. RUNNER: Right. 19 MR. BABCOCK: If we have evidence that 20 they're not 736 (a) -- 21 MR. RUNNER: Right. 22 MR. BABCOCK: -- then that establishes 23 they're 736 (b) payments. 24 MR. RUNNER: Right. 25 MR. BABCOCK: And then that's -- a 26 different approach applies to that. 27 MR. RUNNER: Okay. So, if, indeed, you saw 28 that the partnership handled these as 736 (b) 44 1 payments -- 2 MR. BABCOCK: Yes. 3 MR. RUNNER: -- that would then -- that 4 would then have to make -- have you take a new look 5 at this? 6 MR. BABCOCK: Yes. 7 MS. PAGE: The net result in this case, 8 however, is that the reason that it looks like we've 9 been inconsistent is actually because we have 10 alternate theories. 11 If it's determined that these are 736 (a) 12 payments, then they are sourced in a certain way. 13 If they are 736 (b) payments, they are 14 sourced in a different way. 15 MR. RUNNER: Uh-huh. 16 MS. PAGE: And that's what Mr. BABCOCK is 17 explaining. 18 MR. RUNNER: Yes. 19 MS. PAGE: However, the net result they 20 would, in both cases, end up being sourced to 21 California under different theories. So, the net 22 result is that the tax being assessed still remains 23 the same. 24 MR. RUNNER: And if they were done then 25 under a 736 (b), which is what the taxpayer 26 believes, we would have overcollected on the balance 27 of the partnership? 28 MS. PAGE: No. 45 1 MR. RUNNER: Why not? 2 MS. PAGE: Because, as he's stating, they 3 would -- they already -- they're asserting that they 4 already treated it as 736 (b). 5 MR. VESELY: Yes. 6 MR. RUNNER: Go ahead, from the taxpayer. 7 MR. VESELY: If, it indeed is a 736 (b) 8 payment, which is what we contend -- 9 MR. RUNNER: Uh-huh. 10 MR. VESELY: -- the partnership and the 11 remaining partners do not get to deduct those 12 payments. 13 So, they pay more tax -- 14 MR. RUNNER: Right. 15 MR. VESELY: -- to the State of 16 California. 17 If Franchise Tax Board's correct and says 18 this is really a -- 19 MR. RUNNER: I get you. 20 MR. VESELY: -- 736 (a), okay. 21 MR. RUNNER: Okay. 22 MR. HASKINS: Can I respond? 23 MR. RUNNER: Go ahead, keep going real 24 quick. 25 MR. VESELY: I think that this comment by 26 Mr. BABCOCK that this is a quote, unquote, "sale" is 27 just absolutely astounding to me one more time. 28 At last count I have six different 46 1 positions, alternate positions, like Ms. Page has 2 indicated, that they've taken in this case. 3 They initially said there was a sale of the 4 partnership interest. And I'm talking -- I am going 5 back to audit all of the way through this case. Now 6 when they went and said it's a sale of the 7 partnership interest. 8 They then talked about it as being No. 2, a 9 sale for a fixed and determinable amount. Well, as 10 you can see on the amount of payments that Mr. Bills 11 received, nothing was fixed and determinable. 12 MR. RUNNER: Right. 13 MR. VESELY: And, as I indicated as well, 14 the poor joker -- pardon me, they call him that -- 15 the fifth -- the fifth year of his retirement has 16 nothing under the same agreement. 17 Position No. 3 was it was an installment 18 sale, that it was somehow an installment sale. 19 Well, they've backed off throughout the 20 case in the briefs until Mr. BABCOCK now talks about 21 there's a quote, unquote "sale," that there is no 22 sale here of the partnership interest. 23 To have a sale of the partnership interest 24 you don't sell it to the partnership, you sell it to 25 you, Mr. Runner, or Mr. Haskins or to some other 26 third party. You don't sell it to the partnership. 27 That's the big difference between a 28 liquidation of a partnership interest, which is a 47 1 transaction between the partnership and the retiring 2 partner, and a sale, which is a transaction between 3 the partners. 4 MR. RUNNER: Let me ask -- let me go back 5 to Appeals real quick on that issue. 6 Can you create a sale to the existing 7 partners? Is that a sale or is that a -- 8 MR. AMBROSE: No, I think as it was 9 structured here, as Mr. Vesely notes, it was a 10 liquidation -- 11 MR. RUNNER: Okay. 12 MR. AMBROSE: -- and a withdrawal of a 13 partner. 14 MR. RUNNER: Okay, not a sale? 15 MR. AMBROSE: That's -- yes, that's how 16 we're seeing it. 17 MR. RUNNER: Okay, I'm done for now. 18 MR. HORTON: I saw all heads nodding. All 19 parties stipulate this was not a sale? 20 MR. BABCOCK: The nomenclature -- 21 MR. RUNNER: It was his word. 22 MS. HARKEY: Two-thirds. 23 MR. BABCOCK: -- the nomenclature under 736 24 uses liquidation and retirement. 25 But practitioners commonly use redemption, 26 withdrawal. It would apply to withdrawal. 27 And, so, we're looking at the practical 28 effect of what happened. He transferred his 48 1 partnership interest to the partnership in exchange 2 for an arrangement to make payments to him. 3 You -- whatever you call it, that's what 4 happened. 5 MR. RUNNER: Okay. 6 MR. VESELY: Mr. Horton, may I respond to 7 that? 8 MS. HARKEY: Just I'm going to let you have 9 your chance. 10 MS. HARKEY: Okay. Here's -- here's my -- 11 I just have a few questions. 12 MR. VESELY: Sure. 13 MS. HARKEY: So, we agree that this is 14 736 (b)? 15 MR. BABCOCK: We don't have the evidence. 16 I mean, again, Mr. Runner said to us if we 17 had that evidence, might that change our 18 determination? 19 We don't have that evidence. It might be 20 (a), it might be (b), but under either scenario, we 21 think that Mr. Bills is subject to tax in 22 California. 23 MS. HARKEY: I believe I heard earlier that 24 736 (b) was going to be the governing factor on 25 this. I think I did and I see kind of a nod from 26 the -- 27 MS. PAGE: I can give you each of the 28 arguments so that you can understand both sourcing 49 1 arguments, and we can read the Code, and you can 2 make a determination whether they're (a) or (b). 3 However, I feel confident that under either 4 theory they will be sourced to California. 5 MS. HARKEY: Right. Because you believe 6 they were residents here? 7 MS. PAGE: No. 8 MS. HARKEY: No? Okay, so then clarify why 9 under either theory. 10 MS. PAGE: Okay. We're dealing -- the 11 residency issue only has to do with 2005. 12 MS. HARKEY: Right. 13 MS. PAGE: The sourcing is really critical 14 'cause we're dealing with 6, 7, 8 and 9 also. 15 So, let's first talk about 736 (b), because 16 that is the one that Appellants agree applies, so 17 that it's the simplest one to analyze. 18 You heard Mr. Vesely say that this was a 19 liquidation, and not a sale. He asserts that 20 736 (b) applies. 21 One thing that he said that is not correct 22 in this situation is he said there is a two-step 23 sourcing rule. However, that applies under a 24 distributive share analysis. So, that would 25 actually be a 736 (a) analysis. So, we're going to 26 set that aside. 27 So, if we read 736 (b), you'll see that it 28 says that, 50 1 "Payments made in liquidation of an 2 interest in a retiring partnership are 3 treated as if the payments to the partner 4 are for partnership property." 5 Now this is really important because you 6 also heard Mr. Vesely talking about it being a sale 7 or a liquidation of Mr. Bills' limited partnership 8 interest. 9 However, 736 (b) actually makes us look at 10 the interests held by that partnership. So, if you 11 visualize it for a minute, Mr. Bills owns the LP. 12 The LP owns an LLC, as well as desks, computers, 13 copy machines, all kinds of assets. 14 736 (b) operates so that when Mr. Bills is 15 receiving his payments from LP, the upper 16 partnership, it's being treated as if he's being 17 paid for his 3 percent interest in all of the assets 18 of the partnership. 19 This is critical because that's why the 20 business situs rule comes into play. We are not 21 arguing that Mr. Bills' limited partnership interest 22 gained a business situs in California. We are 23 arguing that the LLC interest has a business situs 24 in California because it is owned by LP. 25 Mr. Bills only owns a 3 percent interest in 26 any of these assets. So, to argue that this LLC 27 interest is actually located in Washington would be 28 to stretch the mobilia -- excuse me, the mobilia 51 1 doctrine which says that intangible property is 2 located where the owner of the property is. 3 So, ordinarily, we would look and say, 4 "Where are the assets of the partnership?" 5 So, you could do a simple analysis and say, 6 "Well, the LP is located in 7 San Diego. It does all of its work 8 there. It's entirely located in 9 California. So, of course, its holdings, 10 the LLC, are also located in California. 11 All of the assets of LP are located in 12 California." 13 Therefore, the location of the 736 (b) 14 property is California. Therefore, the payments 15 under 736 (b) are sourced to California because they 16 are all for California property. 17 If you want to argue that it's intangible 18 property and for some reason that intangible 19 property should be sourced up straight to Mr. Bills, 20 then you have really a classic example of the 21 business situs exception. 22 That limited liability company is so 23 entangled into the limited partnership that it has 24 grained business situs in California. It is not 25 located where Mr. Bills is located. He only owns 3 26 percent of it. It is entangled where that LP does 27 business. So, it's a classic business situs 28 exception, even if you were to argue somehow that we 52 1 were to look where the -- Mr. Bills was located to 2 situs where the LLC interest is located. 3 So, that is the 736 (b) analysis. 4 I'll let you ask questions about that, but 5 I'm happy to do a 736 (a) analysis, which would 6 take place -- which we would do if we thought that 7 these payments should be instead treated as more of 8 a distributive share of partnership income. 9 MR. BABCOCK: Could I add one more point on 10 736 while we're still on that? 11 MR. HORTON: Member Harkey? 12 MS. HARKEY: You're talking to me. 13 MR. BABCOCK: Would that be okay if I -- 14 MS. HARKEY: That would be just fine. 15 MR. BABCOCK: -- okay. 16 The realization rules that Mr. Haskins 17 alluded to would be the same whether it was a sale 18 under Section 741 or a liquidation under 736. What 19 it requires is a binding bilateral contract. 20 The recognition rule for that is contained 21 in Treasury Regulation 1.736-1(b). It says, 22 "Gain or loss with respect to 23 distributions under 736 (b) in this 24 paragraph will be recognized to the 25 distributee to the extent provided under 26 Section 731 and, where applicable, 741." 27 And then Treasury Regulation 1.736-1(a)(5), 28 it says, 53 1 "The amount of payments under 2 736 (a) shall be included in the income." 3 And it's got a special rule, but I'll go to 4 Section 736 (b), 5 "On the other hand, payments under 6 736 (b) shall taken into account, --" 7 That's another term for recognition. 8 "-- by the recipient for his taxable 9 year in which the payments are made." 10 So, the recognition rules are contained in 11 Section 731. The realization rules are longstanding 12 law that goes back to a case decided by Earl Warren. 13 MS. HARKEY: Your turn. 14 MR. VESELY: Thank you. 15 A couple of things. I think that the 16 reference to "sale" in this particular case is again 17 just completely off base. There is a special 18 statute in the Internal Revenue Code 741 that deals 19 with sales. 20 736, which I think Franchise Tax Board is 21 now conceding does apply, applies to retiring or 22 withdrawing partners, like Mr. Bills. 23 The question of 736 (a) or 736 (b), you 24 know, our position, as I have indicated, is that 25 these are 736 (b) payments. They were treated 26 consistently by the partnership and by the remaining 27 partners as explicitly provided in the partnership. 28 The declarations we've provided as well 54 1 under oath by Mr. Eramora (verbatim), the Director 2 of -- Vice President of Finance, I believe his 3 position is there, are very explicit. There's 4 nothing contradicting what exactly happened here. 5 It's all in the record right now. There's nothing 6 more to look for. 7 It's kind of interesting, the Franchise Tax 8 Board has a manual that they put out called "A 9 Partnership Technique Manual." And I'll read 10 just -- it's a interesting, we cited it, it's an 11 exhibit to our opening brief. 12 But there is a provision in here where they 13 talk about, 14 "The partnership cannot deduct 15 736 (b) payments made to a withdrawing 16 partner." 17 Well, that's exactly what happened here. 18 They did not -- Franchise Tax Board certainly 19 recognized, at least for purposes of this manual, 20 and from that standpoint they also look at the 21 distinctions between (a) and (b) that we talked 22 about. 23 Did Mr. Bills get paid his retirement 24 payments or withdrawal payments for his share of the 25 property in Brandes? The answer is yes, that's 26 exactly what it is. 27 How was that valued? Well, the valuation 28 was, as I indicated, an income approach. It was the 55 1 GAAP net earnings times six multiple in this 2 particular instance. 3 It's kind of interesting in looking -- 4 MS. HARKEY: So, let me just stop you -- 5 MR. VESELY: Sure. 6 MS. HARKEY: -- because, you know, you're 7 getting really detailed for me. 8 MR. VESELY: Okay. 9 MS. HARKEY: And what I can -- 'cause I'm 10 trying to stick like -- okay, I think we've kind of 11 established this can be 736 (b). 12 MR. VESELY: Okay. 13 MS. HARKEY: And I've had the 14 representative from the FTB go through all of the 15 ways it's established that way and why they still 16 think it had to be sourced to California. 17 We've ruled out that it's not because of 18 residency. 19 MR. VESELY: Right. 20 MS. HARKEY: But it's because of the 21 treatment of this and that the intangible property 22 located where owner is and the assets of the LP are 23 in California. 24 How do you respond to that? 25 MR. VESELY: Well, I think the thing is 26 that what Franchise Tax Board continues to do in all 27 of this is to mix up the interests that we're 28 talking about. 56 1 What we're saying is does Mr. Bills' 2 partnership interest -- whether it's 1 percent or 99 3 percent, makes no difference, there's a mention of 3 4 percent, that's irrelevant in this whole thing -- 5 was that partnership interest localized in 6 California in connection with a business that 7 Mr. Bills was conducting in the State of California? 8 And we're talking about it after 12-31-04, 9 when he retired. Mr. Bills can testify, if you 10 like, that since 12-31-04 he has done no business in 11 California, no consulting in California, no business 12 anywhere. 13 He was luckily retired is what he was. So, 14 there's no business to connect that with in 15 California to create a business situs for the 16 partnership interest. 17 This Board's decision in the Appeal of Ames 18 dealt with the sale by a non-resident of a 19 partnership interest that conducted -- in 20 California, that the partnership, excuse me, 21 conducted business in the State of California, much 22 like Brandes did. 23 And this Board concluded that the mere fact 24 that that partnership conducted business in 25 California, much like what Ms. Page was just talking 26 about, is irrelevant for focusing in on the 27 partnership interest itself, which is the intangible 28 that we're talking about here. 57 1 That -- that's the partnership -- that 2 partnership interest is what was liquidated. That's 3 the intangible that was liquidated. And, therefore, 4 that's why we're looking at this from the standpoint 5 of saying, 6 "Well, how do you treat income from an 7 intangible under the California sourcing 8 rules?" 9 And that's 17952. 17952 specifically says 10 you source it to the state of residency or the 11 non-resident unless you can find a business situs 12 has been created. 13 No business situs has been created in 14 connection with the partnership interest. 15 Otherwise, it makes no sense in this whole thing. 16 The partnership does business in California, 17 therefore, you're automatically deemed to have a 18 business situs here because your partnership 19 interest is in a partnership that does business in 20 California? 21 That's not what the Ames case says. That's 22 a sale case. Not -- that's not -- that's a -- 23 that's really no difference in that point, though. 24 MS. HARKEY: I think we've established it's 25 not -- wasn't a sale. 26 So, thank you. Thank you for clarifying 27 that. 28 So, we are differing on the situs issue as 58 1 to whether there is a business situs issue or not? 2 And you're saying there isn't? 3 MR. VESELY: Right. 4 MS. HARKEY: FTB is saying there is because 5 of the way payments came through. 6 But you -- you're sourcing 17952? 7 MR. VESELY: Yes. 8 MS. HARKEY: Which -- is that federal or 9 State, 175 -- 10 MR. VESELY: That's the California Rev. 11 and Tax Code section. 12 MS. HARKEY: That's California Rev. and Tax 13 Code? 14 I would have like that part analyzed for 15 me, if me if I could. I'd like to know what -- what 16 the deal is. 17 MR. AMBROSE: I -- 18 MS. HARKEY: Or maybe one of the other 19 Members will go into that. 20 I just -- okay, I -- I understand -- I mean 21 I'm comfortable with the fact it was 736 (b). I 22 think it was and I believe you when say the partners 23 reported as such. They'd have no -- no reason not 24 to. We'd be coming after them probably if this not 25 all working properly. 26 I can't believe that we don't have some way 27 of just verifying that without giving -- you know, 28 without dealing with confidential issues. 59 1 I think we have the ability to dig into 2 anything, we just don't print it and spread it 3 around. So, I think that probably is where it is. 4 The situs issue would be an issue, but 5 you're citing 17952, the source of the state -- 6 source to the res -- state of the residence. So, 7 that's how we get into the residence. 8 The -- the partners -- why did -- just 9 explain to me simply, very simply, why do -- why did 10 the remaining partners not receive a distribution, 11 or whatever it was that they -- you were talking 12 about one gentleman that it was five years and still 13 hasn't received anything. 14 What is the difference between the two 15 agreements? Is his -- is his based on the income at 16 the time? You said six times? 17 ---oOo--- 18 19 20 21 22 23 24 25 26 27 28 60 1 ---oOo--- 2 MR. VESELY: Yeah, the -- the -- it's the 3 same partnership agreement that he's under, that 4 Mr. Bills was under. 5 MS. HARKEY: Right. 6 MR. VESELY: So it's the same one that you 7 have before you. It's just that under that 8 calculation of what the withdrawal payments were, 9 they were linked to the prior year gap net earnings 10 of the partnership. 11 MS. HARKEY: Okay. 12 MR. VESELY: There was some other 13 calculations in there, depending on when you became 14 a partner and things like that. So there was a 15 floor and stuff like this. 16 What happened with it was that, because 17 the -- really, Brandes' activities went down 18 dramatically after Mr. Bills retired because of 19 financial crisis, among other things. And as a 20 result, this poor individual has not gotten 21 anything. Talking to the Brandes people just last 22 week, they're hoping that he's going to get 23 something in his fifth payment. 24 MS. HARKEY: It's kind of like a defunct 25 pension plan then, right? 26 MR. VESELY: Well, it's kind of like 27 that. 28 MS. HARKEY: You got yours. You're out of 61 1 there -- 2 MR. VESELY: It's something like that. 3 MS. HARKEY: -- but everybody else is left 4 behind. I under -- okay, I understand. That's 5 really what it is, you know. Only -- only there's 6 no -- there's no State backstop for it. 7 MR. VESELY: No, there's not. 8 MS. HARKEY: Okay. I'm going to -- I'm 9 going to wait. 10 MR. BILLS: If I could -- if I could just 11 add something -- 12 MS. HARKEY: Sure. 13 MR. BILLS: -- to clarify Jeff's comment on 14 Brandes' financial performance. 15 When I retired at the end of December 31st, 16 2004, Brandes had a $100 billion under management. 17 With the market slowdown and crash in 2008/2009, how 18 quickly things can reverse. Brandes went down to 19 24 billion under management. So they lost 76 20 percent of their revenue base between 2005 and 2009. 21 To their credit, they built back up and 22 they're about 50 billion under management now. But 23 that relates to why a retiring partner, later in a 24 cycle, is not receiving anything now in terms of 25 withdrawal payments. 26 MS. HARKEY: Yeah. Thank you very much for 27 clarifying that. I kind of -- I got to that. That 28 was an excellent clarification. See what you did by 62 1 leaving? 2 No, I'm just -- I'm making a bad -- a 3 poorly placed joke here. 4 But, no, I think -- I think it's very -- it 5 was very common in all the financial industry to 6 have assets that were like this (indicating) shrink 7 down to here (indicating). 8 MR. VESLEY: Mm-hmm. 9 MS. HARKEY: And that was the same with 10 every bank. 11 MR. VESLEY: Right. 12 MS. HARKEY: And that's why the federal 13 government backstopped them -- 14 MR. VESLEY: Right. 15 MS. HARKEY: -- under TARP because nobody 16 had anything left. All funny money. 17 Thank you. 18 MR. HORTON: Member Stowers. 19 MS. STOWERS: Okay, I'm next. 20 Let's stick with the sourcing since we're 21 in that vein. FTB, can you kind of just quickly 22 explain to me this partnership tier level under the 23 theory that it's a 736(b) payment; and then which 24 statute are you saying it's sourced under, 17951 or 25 952? 26 MS. PAGE: Okay. That's very important 27 because, again, Mr. Vesley is saying that he's -- 28 it's about the limited partnership interests, but 63 1 it's not. 2 He liquidated his limited partnership 3 interest, but it's very critical that under 736(b) 4 that that is treated as if he is liquidating or 5 receiving payments for partnership property. So 6 it's really the LLC because that is the largest 7 asset that we're talking about. 8 It is also desks and everything, but 9 it's -- 10 MS. STOWERS: So wait, wait a minute. 11 MS. PAGE: The tier is -- 12 MS. STOWERS: So there's a tier. 13 MS. PAGE: Yes. 14 MS. STOWERS: So we have Mr. Bills as a 15 partner in the LP. 16 MS. PAGE: Right. 17 MS. STOWERS: And the LP is a partner in 18 the -- 19 MS. PAGE: LL -- it owns the LLC. 20 MS. STOWERS: LLC? 21 MS. PAGE: It owns about 99 percent -- 22 MS. STOWERS: Okay. 23 MS. PAGE: -- of the LLC. So -- so 24 Mr. Bills is being treated as if he is receiving 25 payments for the asset of the LLC, the LLC asset. 26 So that's one of the reasons why Ames is 27 not applicable, and that is one of the reasons why 28 it's important that we are not viewing this as 64 1 Mr. Bills having done something to localize his LP 2 interest. That is not the argument we're making. 3 His LP interest does not have a business 4 situs in California, and that is not the argument 5 we're making. He did not do anything to localize 6 his ownership in the partnership. 7 What has a business situs in California is 8 the LLC. It's owned by the San Diego partnership. 9 It has a business situs in California under all 10 theories because it is directly owned by the LP, 11 which is in California. 12 But even if we were to pretend under this 13 fiction of 736(b) that these payments are for an 14 intangible asset, the LLC, then we would look to 15 17952 which is the California Rev. and Tax Code 16 section for sourcing of intangible property. 17 So we would say, okay, Mr. Bills, you're 18 receiving a payment for the LLC property. So 19 ordinarily that would be sourced under the mobilia 20 doctrine, which we would say that goes to the State 21 of residence of the owner. So we're having a 22 fiction that he owns the LLC because of 736(b). But 23 that -- there's an exception to that rule and that's 24 the business situs exception. 25 This is a clear case of the business situs 26 exception. Because that LLC is so entangled in that 27 LP, in fact it is owned by the LP, and that LP -- 28 Mr. Bills cannot sell it, he can't do -- it is only 65 1 three percent owned by him. It is the major asset 2 of a California partnership. It is localized in 3 connection with a lot -- with a California 4 partnership such that its location is connected with 5 that limited partnership. 6 So even if we take the fiction of trying to 7 locate it under 17952 under the mobilia doctrine, it 8 must fall into the exception of the business situs. 9 So we are not locating his limited 10 partnership interests. We are locating the asset of 11 the limited partnership as demanded by 736(b). 12 MR. VESELY: Can I respond? Or -- 13 MS. STOWERS: Yes, yes, yes, please. 14 MR. VESELY: Let me -- let me -- I mean, 15 what we continue to do -- I mean, I hate to say 16 this, but I think this is argument number seven that 17 they've put forth. Because before when they've 18 talked about business situs, they've looked at 19 Mr. Bills' partnership interest. That's all we're 20 talking about here. That's -- that's what's 21 liquidated. And it's -- that's the intangible. 22 When we look at the regulations under 23 17952, it says: 24 "Income of nonresidents from intangible 25 personal property such as shares of 26 stock" -- much like a partnership 27 interest -- "in a corporation, bonds, 28 notes, bank deposits is taxable as income 66 1 from sources within the State only if the 2 property" -- that is the partnership 3 interest, the intent -- "has a situs for 4 taxation in this State ..." 5 We have to focus on Mr. Bills' partnership 6 interest itself. That's -- that's the intangible 7 property that he is earning income from. Without 8 the liquidation of that, over the five-year period, 9 he gets payments for five years, he was lucky enough 10 to get 'em for every year under the -- under the 11 calculations. But to now talk about another tier, 12 etcetera, that's kind of blurring up -- that's just 13 noise. That's smoke in the water here. Because it 14 is his partnership interest that we're focusing on 15 because that's what's being liquidated. That's the 16 intangible here. 17 MS. STOWERS: Okay. Okay. I don't know if 18 it's noise or not. I know it's a lot to take in; 19 that much I can guarantee you. 20 Appeals -- 21 MR. AMBROSE: Well, I -- 22 MS. STOWERS: -- was this argument 23 addressed in the briefs, this tier partnership? 24 MR. AMBROSE: We -- in our comments, we 25 did. We asked FTB to explain it at the hearing, as 26 they have. 27 But to -- to -- to 17952, and I think Ms. 28 Harkey's question, I -- in our view, in Appeals 67 1 Division's view, the -- the statute and the 2 regulation make a distinction, make a pretty clear 3 distinction between the intangible property, such as 4 the partnership interest, and the operations of the 5 partnership and for business situs or for situs 6 purposes. 7 So, for FTB to be arguing that because the 8 partnership owns this LLC which conducts business or 9 substantial amount of its business in California, 10 I -- I think is not, in our view, consistent with 11 what 17952 is -- is directing us to look at. 12 For example, in the regulation 17952 sub 13 (c), it gives us example of a nonresident pledging 14 stocks, intangible personal property as security for 15 payment of indebtedness, taxes, etcetera, incurred 16 in connection with business in the State. 17 So, in that example, I mean the intangible 18 property itself is being used for some business 19 purpose within California and, thus, that's 20 established as its situs here. 21 MS. STOWERS: Okay. Let's stop talking 22 about sourcing for a minute. 23 MS. HARKEY: Appeals agrees with the 24 taxpayer. 25 MS. STOWERS: Let's go back to the change 26 of domicile. I don't know why, but let's -- 27 MR. RUNNER: Shift -- shift to residency. 28 MS. HARKEY: Yeah, shift to residency. 68 1 MS. STOWERS: Let me find my questions. 2 Okay. Let's just first start with my -- my 3 inquiry. Just kind of -- just make sure I 4 understand as far as the cars. 5 There were three cars registered in 6 Washington State in January 2005; and that was the 7 1936 Ford, the antique, a 2003 Porsche, and a 2002 8 Volkswagen. 9 MR. BILLS: Correct. 10 MS. STOWERS: And just for clarification, I 11 think we're all clear that those three cars never 12 left California. 13 MR. BILLS: The exception would be the 2003 14 Porsche; that has been driven in Washington. 15 MS. STOWERS: Okay. The note that I have 16 here, that this car was driven to Washington in July 17 2007. 18 MR. BILLS: That's correct. 19 MS. STOWERS: Okay. So when we're trying 20 to -- well, at least for -- in my head, trying to 21 say do I give that car any weight in determining a 22 change of domicile because it was registered in 23 Washington State in January 2005, but it didn't get 24 there until 2007, kind of goes against -- at least 25 that particular car. 26 MR. BILLS: If you're focusing solely on 27 2005 with your question -- 28 MS. STOWERS: Yes, I am. 69 1 MR. BILLS: -- the only automobile that was 2 driven in Washington in 2005 was the 2004 Toyota 3 Prius. 4 MS. STOWERS: The 2004. That's the one 5 that you had problems with the title? 6 MR. BILLS: We tried to register it in 7 January of 2005. There was a title cloud on it. We 8 had a new title issued and we registered it in 9 Washington in May of 2005. 10 MS. STOWERS: Okay. Got it, clear. 11 And so those other cars that you referenced 12 earlier that -- with your adult children or 13 daughter-in-law, those were all registered after 14 January as well. My notes are showing June 2005, 15 May 2005, and May 2006. 16 MR. BILLS: Yeah. 17 MS. STOWERS: Okay. 18 MR. BILLS: The 2002 Passat registered in 19 January, but that stayed in California with my 20 daughter. 21 MS. STOWERS: Okay. 22 MR. BILLS: The 2005 Prius and the 2005 23 Passat were registered in May of -- and June of 24 2005. 25 MS. STOWERS: Okay. 26 MR. BILLS: But, again, those cars were 27 located in Berkeley, California. 28 MS. STOWERS: Okay. Okay. 70 1 Let's talk about physical location. Can't 2 find the note now. This is what happens when you're 3 trying to be so smart. 4 Okay. Must be my schedule. Give me a 5 second. 6 Okay. I got it now. So I think we all 7 agree that on January 10th through January 15th the 8 appellants were in Washington State. 9 MS. HUANG: 16th. 10 MR. BILLS: 16th. 11 MR. HASKINS: Ma'am, the 16th. 12 MS. STOWERS: The 16th? The 16th, okay. 13 Which equals seven days. 14 MR. HASKINS: It does. 15 MS. STOWERS: Okay. And then we agree that 16 on -- my schedule's off then. On January 17th 17 through February 2nd they were in California. 18 MR. BILLS: That is correct. 19 MS. STOWERS: Okay. And then on February 20 3rd to February 13th, Mrs. Bills was in Costa Rica. 21 And there's a new update on when Mr. Bills was in 22 Las Vegas. 23 MS. HUANG: Correct. 24 MS. STOWERS: My schedule I grouped them in 25 there for 11 days. 26 MR. BILLS: Only three. 27 MS. STOWERS: And it's now my understanding 28 it was only three days. 71 1 MR. BILLS: Only three. 2 MS. STOWERS: And after your Las Vegas 3 trip, you were back in California? 4 MR. BILLS: I was. 5 MS. STOWERS: And after your wife's trip, 6 she was back in California? 7 MR. BILLS: We stayed in California until 8 we left for our Asian trip, yes. 9 MS. STOWERS: Okay. That's the one March 10 15th through April 6 -- 11 MR. BILLS: April 7th. 12 MS. STOWERS: -- 7th, okay. I'm off one 13 day. 14 And I understand that your -- these trips 15 were planned before January, so your flight was 16 coming out of California. 17 MR. BILLS: Correct. 18 It was a bit unique in the sense that the 19 Asian trip, we had a very unique ticketing situation 20 with American and Qantas that gave us a very 21 attractive price. But it was a nonrefundable ticket 22 and it required, for one -- some strange reason, 23 that departure and return had to be through 24 Los Angeles airport. 25 MS. STOWERS: Okay. 26 MR. BILLS: But you're right, the Costa 27 Rica trip, the Asian trips were all planned in 28 December of 2004. 72 1 MS. STOWERS: Okay. And I understand the 2 wife was in Boston for a while as well. 3 MR. BILLS: She had a three-day trip on 4 a -- for a board meeting for an organization that 5 she works with. 6 MS. STOWERS: And then we have a trip 7 starting April 23rd that included a couple of stops 8 throughout California, with the final destination 9 being Washington State. And that's when you got 10 there and you saw that you were having problems with 11 your well? 12 MR. BILLS: Right. We took a week to drive 13 from San Diego to Friday Harbor, arrived in Friday 14 Harbor on April 30th. And that well problem had 15 been developed as part of this landscaping issue 16 that was going on. It really came to the forefront 17 that -- that week, the week that we arrived. 18 So the well essentially was dry. The house 19 could not be inhabited. So we chose to return to 20 California while it was being repaired, and we flew 21 back to California on May 4th. 22 MS. STOWERS: You flew back to California 23 on May 4th, or you flew back to -- 24 MR. BILLS: No, flew back to San Diego on 25 May 4th. 26 MS. STOWERS: Oh, okay. 27 MR. BILLS: Yeah. 28 MS. STOWERS: April 30th to May 4th. Got 73 1 it. 2 So my schedule -- now my days are slightly 3 off -- I did not have a lot of presence in 4 Washington State. I had six days. It looks like 5 maybe it should be seven days, and sixty-four days 6 in California, and I don't know how many days in 7 other locations. 8 And which, for me, I think this is what FTB 9 said, and I'm going to come to you guys, when you 10 guys talked about when you're changing your domicile 11 I think you quoted a case. 12 MR. HASKINS: Addington. 13 MS. STOWERS: Addington, thank you. 14 So now that I have a clear understanding on 15 the days in and out from California to Washington, 16 and the trips internationally, I do want to go back 17 to Franchise Tax Board. And I would like for you to 18 one, give me the cite for the Addington case because 19 I didn't see it -- 20 MR. HASKINS: And I can give you some of 21 the facts of that case. 22 MS. STOWERS: And then I want you to talk 23 about the facts of the case as well. 24 MR. HASKINS: Okay. The cite for Addington 25 is 82-SBE-001. The date is January 5th, 1982. And 26 the cite in the opinion that I am referring to, the 27 page is actually page 3. 28 MS. STOWERS: Don't go anywhere. Don't say 74 1 anything. 2 Okay. Go ahead and talk about the case. 3 MR. HASKINS: Mr. Addington was a 4 California resident and domiciliary, along with his 5 wife. And, um -- and let me preface this by saying 6 under today's employment, safe harbor, I don't think 7 the result would be the same. But this concept has 8 remained. 9 He got a -- he got asked by his employer to 10 go to London and operate the office out of London. 11 Originally, it was going to be for three years. And 12 so, again, under today's safe harbor rules, I think 13 we probably would agree that, okay, you left and you 14 were not a resident because when you left you 15 intended to be there for three years. But that was 16 not in place in 1982. 17 So Mr. Addington is in London for a while 18 and the home office here in California calls him and 19 says, hey, we want to promote you to vice president, 20 come on back. And so within just a few months of 21 moving to Los Angeles -- sorry, Los Angeles -- 22 London, he moved back to California. And his claim 23 was that the money that he earned while in London 24 was earned as a nonresident and nondomiciliary. He 25 wasn't domiciled here and he wasn't a resident here 26 because he had moved and was going to stay there for 27 three years. 28 Your Board analyzed the issue and stated on 75 1 page 3 that an intent to return to one's current 2 domicile prevents the acquisition of a new domicile. 3 In -- in his intent to go to London for three years, 4 he also had an intent to come back to California. 5 And that played a feature in the Board's analysis, 6 but it was also a residency determination. 7 And so, your Board also said, well, you 8 were only there for a few months. You couldn't -- 9 under residency we look at contacts. How many 10 contacts did you establish with the alleged new 11 residence location? And your Board said that 12 contacts with California -- because his wife stayed 13 here, his kids were going to school here, he had 14 kept a California license, a variety of things like 15 that. Your Board said the contacts are greater in 16 California throughout that entire period, so your 17 Board found that he didn't change domicile and he 18 did not change residency. 19 And so that -- that citation is applicable 20 here because they had a similar intent. They 21 intended, as you asked and it was confirmed, they 22 made these plans in 2004 and the plans were to fly 23 in and out of LAX. So they planned to come back 24 here and fly in and out. 25 And the days that you cited, one thing that 26 I would want to add to that is that once they got 27 back on April 7th, they didn't then get in their car 28 and go immediately to Washington. They stayed here 76 1 for another two weeks. They lived here for two 2 weeks. And in the period between February 14th and 3 March 9th, they also were here living. 4 The days that they went to -- that 5 appellant-wife went to Costa Rica and Boston and the 6 few days that Mr. Bills went to Las Vegas were 7 clearly temporary or transitory trips from their 8 then residence and domicile California. 9 Nothing had changed. They hadn't 10 established a new domicile in Washington State 11 because the -- the contacts that they had made and 12 the connections they had made to it were not 13 connections that reflected an intent to make a 14 permanent change and not return to California. And 15 that's one of the requirements of a change of 16 domicile. 17 The seven-day stay was always intended to 18 be a short seven-day stay. They intended to go 19 there, contract with some folks for some repairs. 20 Again, these repairs were intended to be completed 21 in the first quarter of 2005. So I think the logic 22 of it tells us that they didn't intend to live there 23 in the first quarter of 2005 in any event. And 24 that's why April is an important time frame. They 25 went there in April and, as you noted, there was a 26 well problem and they had to come back. But we 27 didn't punish them and say no, no, no, you 28 actually -- your domicile was here until June. 77 1 We said, when you left in April, it seems 2 clear that at that point in time you had developed 3 an intent to not return to California on a permanent 4 basis. Obviously they have; not on a permanent 5 basis. They use it as another vacation home. But 6 on that date is when all of the facts and 7 circumstances, taken together, indicated to FTB that 8 that's when domicile changed and residence changed. 9 And so -- 10 MR. HORTON: People -- my apologies. 11 MS. STOWERS: April 23rd? 12 MR. HASKINS: April 23rd, 2005, yeah. 13 MS. STOWERS: One more question and I'll go 14 to you guys. 15 You said something about these repairs were 16 to take place over the first quarter of 2005. Where 17 are you getting that from? 18 MR. HASKINS: From Mr. Bills' letter to 19 FTB. I believe that was the December 28th, 2009 20 letter written in his own handwriting. 21 MS. STOWERS: Okay. Okay. 22 Then keep it brief. Appellant, what are 23 your -- what's your thoughts about this case 24 Addington? 25 MS. HUANG: Well, I think Addington, the 26 way -- excuse me, Mr. Haskins described it just now 27 shows that it's inapplicable to the case -- excuse 28 me -- to our case. 78 1 First of all, like Mr. Haskins said, you 2 know, the taxpayer in that case kept all the 3 connections to California. He was meant to go on a 4 three-year stint and then he was going to come back. 5 In our case there's no such thing. As we 6 noted many, many times over, as of December 31st, 7 2004 Mr. Bills and Mrs. Bills had actually no 8 connection to California other than their vacation 9 home in Rancho Santa Fe, and actually another -- 10 another apartment in San Diego County which they 11 also kept. 12 So here we have -- what do we have? 13 December 31st, 2004, no business connections, no 14 professional connections, no minor children, no 15 social ties. 16 And as we noted at the start of this appeal 17 hearing, is the only reason they came to California 18 was for Mr. Bills' employment with Brandes. So no 19 ties to California once his employment with Brandes 20 terminated. And so there's no intent to return to 21 California other than -- you know, Mr. Runner had 22 mentioned earlier about, you know, when Mr. Haskins 23 said what -- why do you -- you know, the intent to 24 return to a vacation home. They never meant -- they 25 never wanted to sell Rancho Santa Fe. Washington's 26 a lovely place. California has great weather in the 27 winter months. You know, they also went to New 28 York. 79 1 So the -- the -- it was a vacation home 2 when they moved to Washington on January 11, 2005. 3 So what you have, you know, Mr. Haskins talked about 4 well, they lived here, you know, they lived here 5 during that time. I think there's -- you know, I 6 think Mr. Runner was -- was correct in that it's a 7 circular argument. How do you know they lived here? 8 The only thing they did here was vacation; they 9 rested here, which is completely allowed under 10 Regulation 17014(b), for the definition of temporary 11 or transitory purpose. 12 So they were vacationing here, you know. 13 So they didn't live here in a sense that, you know, 14 this was a residence. They moved to Washington. 15 They vacationed in California. They could have 16 vacationed in New York, you know. 17 So -- so the difference was they came to 18 California. They vacationed. And as Mr. Bills 19 mentioned, they flew out of LAX for these trips. 20 Plans were made in 2004. And during the months and, 21 you know, Mr. Haskins had mentioned, well, when they 22 returned from their Asian trip, they stayed in -- 23 they stayed in Rancho Santa Fe for another two weeks 24 before they drove up. 25 You know, as you noticed in our briefs, 26 we -- and then we also stated many times, it's a 27 seven -- seven-day trip. So they -- they went 28 through, you know, California and they went to 80 1 Yosemite. They went through Ashland, Oregon for the 2 Shakespeare festival; Mr. Bills is a big theater 3 fan. And so, you know, they -- he goes to New York 4 for these film festivals as well. 5 So it's -- it's -- it's consistent with a 6 vacation. It's a long-term vacation, as Mr. Runner 7 suggested, that it was simply when they moved to 8 Washington, they returned to California for a 9 vacation, just like they would go to New York for a 10 vacation. 11 So that's the difference here. I think 12 that Addington is completely inapplicable to this 13 case because there was no intent to return to 14 California other than as a vacation home. 15 And so in terms of -- and I mentioned ties 16 to California, that kind of stuff. And Mr. Haskins 17 said that the seven-day -- the seven days that he 18 spent in Washington in January was always intended 19 to be seven days; he has no proof of that. 20 You know, Mr. -- Mr. Bills and Mrs. Bills 21 went up to Washington to set up their new residence 22 before they started on their very well-deserved 23 vacation. In 2004, while he was transitioning his 24 work, Mr. Bills worked an inordinate amount of 25 hours. He was ready for a vacation. He was ready 26 to do nothing. You know, he was retired. He wanted 27 to do nothing. 28 He wanted to rest. And he chose to rest, 81 1 you know, in -- in California part of the time. You 2 know, and domestic and international trips. So 3 that's what it was. 4 And then in terms of repairs, you know, the 5 repairs was -- yeah, Mr. Bills can explain this a 6 little more if you're interested. Like I said, 7 cabinet work, maybe all the doorknobs in the house, 8 landscape. They planted some trees, you know, like 9 the irrigation for those, for the landscaping, you 10 know, affected the well. 11 And so it wasn't like it wasn't livable. 12 They could live there, and so it was just. They 13 wanted -- it seems like, you know, Mr. Haskins said, 14 you know, that, well, they didn't punish the -- the 15 taxpayers for the well problem. But if you recall 16 throughout the brief, they actually bring up matters 17 past April 23rd, 2005. They talked about his adult 18 daughter Jane living in -- in Rancho Santa Fe past 19 2005 -- May 2005 and saying that because of that, 20 that isn't -- an indication that he still had ties 21 to California during January and April 2005. It's a 22 little odd. 23 So -- so all these things were thrown at 24 you. But really the question, I think the main 25 question really is this -- when they moved up to 26 Washington on January 11, 2005, Rancho Santa Fe 27 became a vacation home. There's no indication that 28 it did not. 82 1 Mr. Haskins was asked repeatedly by 2 Mr. Runner, "What makes you think it wasn't a 3 vacation home?" And he has -- response repeatedly 4 was that they lived there. But he has nothing to 5 point to. 6 There's no ties to California at this 7 point. They kept a house then. They still have the 8 house now. They vacationed in California then. 9 They still vacation there now. 10 So there's -- there's no difference in that 11 regard. But I think if -- if -- 12 MS. STOWERS: Yes, please. 13 MR. BILLS: I -- I would just make one 14 comment. 15 Mr. Haskins is correct that once we had 16 accomplished our objectives in going to Washington 17 in January, we intended to return to California. 18 I'm a huge fan of San Juan Island and 19 Friday Harbor; it's a great place to live. But the 20 reality is the weather is much better in San Diego 21 in January and February. 22 So, we did come back to try to enjoy better 23 weather than Washington afforded in the 24 January/February period and to accomplish the 25 completion of the trips that we had scheduled and 26 planned for in November and December of 2004. 27 MS. STOWERS: Okay. 28 MR. BILLS: Nothing more than that. 83 1 MS. STOWERS: Nothing more than that. 2 No further questions. Thank you very much. 3 Thank you very much. 4 MR. HORTON: Member Ma. 5 MS. MA: Okay. I'm going to be -- I'm 6 going to try to be short. I'm not going to ask any 7 more questions. 8 I'm just going to say, you know, I think we 9 have to look to the partnership document in terms of 10 whether this is 736(a) or (b). And I think everyone 11 conceded that in the partnership document -- and you 12 guys have it, right? 13 MR. VESELY: Mm-hmm. 14 MS. MA: The article section -- 15 MR. VESELY: Thirteen, roman number XIII. 16 MS. MA: Roman numeral XIII says that these 17 deductions, these withdrawal payments are under 18 736(b), payments to Mr. Bills. 19 So the K-1s were reported correctly. They 20 were reported as an equity payout and not in the 21 guaranteed payment line. So -- 22 MR. VESELY: Right. 23 MS. MA: -- I -- I find that that's where 24 we -- where I go in terms of, you know, how this is 25 classified. 26 I don't agree with the Franchise Tax Board 27 on the business situs exception because I do believe 28 this is a liquidation of a partnership interest, 84 1 which I believe the BOE also feels like it's an 2 intangible and, therefore, sourced to where the 3 taxpayer lives. 4 So then we go to intent. What is the 5 intent of the taxpayer, right? Well, he obviously 6 retired. He gave notice on December 31st, '04. He 7 doesn't have anymore business interests in 8 California. He does have ties to California 9 because, you know, he still has a home here. He 10 still has his kids who he clearly helped support 11 through, you know, his cars. 12 He likes to travel; him and his wife go 13 around and travel. He's retired; good for you. You 14 know, likes to go to New York, you know, in the 15 fall. California, San Diego, you know, in -- in the 16 winter months. I'm not really swayed by the number 17 of days in a State. 18 But then, you know, what is the intent? 19 What is his intent? And as a tax accountant, you 20 know, good tax planning does not mean tax evasion. 21 You know, when we advise our clients to move to 22 Nevada or to Washington to other States, you have to 23 prove the intent, right? What is the intent? Was 24 his intent to come back? Did he, you know, have, 25 you know -- well, I guess in this case, you know, he 26 moved his drivers licenses. He, you know, moved his 27 insurance. He re-registered in Washington. He 28 voted in Washington, right? I mean obviously that 85 1 could be a voter fraud thing, right, I guess. We've 2 seen that before. 3 And, you know -- basically, you know, he, 4 in my opinion, you know, his intent was to move to 5 Washington. Whatever, for the home, the weather, 6 tax planning purposes, I don't really feel like his 7 intent was to come back. He still owns the home. 8 He still owns all his homes still. But, I mean, 9 that is kind of where I'm leaning on this issue. 10 MR. HORTON: Further discussion, Members? 11 Looks like FTB wants to respond. Let me 12 just ask you a question. But let me share that I 13 would concur that the origin of the transaction sort 14 of is very -- weighs very heavily in determining the 15 intent pursuant to a partnership agreement that was 16 established prior to all the other activity as it is 17 in a number of other cases and certainly encourage 18 FTB -- although I'm not a fan of the Braggs test -- 19 to be able to sort of articulate what establishes 20 domicile once activity has occurred to change 21 domicile in another State. 22 So, if you want to respond to that, but 23 especially in light of -- and then I would want to 24 give the taxpayer an opportunity to respond to -- 25 Adkinson (verbatim) was subsequently appealed which, 26 if you're in a position to respond to that, 27 certainly do so to bring just clarification. At 28 this point I'm just asking for the purpose of the 86 1 record more than anything else. 2 Department? 3 MR. BABCOCK: On the residency, I think 4 that -- that he would be better suited to address 5 that. 6 MR. HASKINS: I was going to. 7 Let's start with -- 8 MR. HORTON: This is not a mandate. You 9 don't have to do this. 10 MR. HASKINS: Well -- 11 MR. HORTON: Seems like you guys are 12 juggling a little bit here. 13 MR. HASKINS: No, no, no. I'm handling 14 residency and domicile. 15 MR. HORTON: Go right ahead. Go right 16 ahead. 17 MR. HASKINS: Ms. Page is handling 18 sourcing. 19 MR. HORTON: Oh. 20 MR. HASKINS: And Mr. Babcock is handling 21 partnership. 22 MR. HORTON: Okay. 23 MR. HASKINS: Okay. So when I review the 24 Board's decisions, and Bragg is one of them, and 25 also the Court decisions that relate to subjects 26 such as domicile and residence, I'm necessarily 27 guided by the decisions in those cases. 28 So, in this case -- 87 1 MR. HORTON: I don't know if I like the 2 implication that we're not, but -- 3 MR. HASKINS: No, no, no. What I mean is 4 I -- I follow your decisions. 5 MR. HORTON: Please continue. 6 MR. HASKINS: I mean, you know -- 7 So your decisions are -- are guide -- 8 are -- you know, they are precedent for us. 9 So, you know, I look at the Bragg case. I 10 look at the Dobbs case. I look at cases that are 11 cited by the Court -- by the Court, by your Board; 12 in particular, Whittell versus FTB. And one that 13 wasn't cited or hasn't yet been cited by your Board 14 is Homer Noble versus Franchise Tax Board; it's a 15 2004 California Appellate Court case. And if you 16 want the cite, it's 118 Cal. App. 4, 560. And the 17 point cite is page -- is 568. 18 MR. HORTON: I'm familiar with it. 19 MR. HASKINS: You are? 20 MR. HORTON: Yeah. 21 MR. HASKINS: Okay. 22 The interesting thing about the Noble case 23 is Mr. Noble lived in Rancho Santa Fe, and Mr. Noble 24 and his wife were moving out of California, or at 25 least that's the claim. They had bought a house in 26 Colorado. And as was said earlier, much like the 27 Bills, they were readying that house for occupancy. 28 But in that case the Appellate Court looked 88 1 at all the various codes that might apply, including 2 the Government Code and some of the political codes 3 and stuff such as that. And the statement from the 4 Noble case is: 5 "Our courts have held that two elements 6 are indispensable to accomplishing a change 7 of domicile: actual residence in the new 8 locality plus the intent to remain there." 9 Mr. Bills has just told us that they did 10 not have an intent to remain there. 11 Now, the -- the Bragg case cites Whittell 12 versus FTB and it states that, to the extent 13 residence and domicile depend upon intent, that 14 intention is to be gathered from one's acts, 15 actions, acts. And says physical presence in this 16 State, the claimed State of new domicile, has been a 17 factor of greater significance than the mental 18 intent or outward formalities of ties to another 19 State. 20 So when I read those and I see that, yes, 21 cars were registered but they were not garaged 22 there. They were not moved there. They weren't 23 used there. They were used here. I see that -- 24 that voting registration, that they registered to 25 vote. But in the time frame that we're discussing, 26 no votes were made and couldn't be. There was no 27 election. I checked. There was no election for 28 them. Although Mr. Vesely mentioned that they voted 89 1 afterwards, but then also Ms. Huang mentioned that 2 anything that occurred after April 23rd should not 3 be considered, so I'm not sure what their point 4 is. 5 They -- they bought a lot of artwork and 6 put it in. They bought $3,000 worth of stuff at 7 Costco. But clearly, because they knew they were 8 coming back, those things bought at Costco were not 9 perishable items. I can't imagine the smell if you 10 bought something in January, knowing you weren't 11 coming back until April, that would be present if 12 you spent that much money on perishables and left 13 them in the house, i.e. groceries. 14 Now, they said that he's -- that they spent 15 $143 at groceries -- on groceries. That was their 16 week's worth of groceries, and then they left as 17 they had planned to leave. 18 So reading the cases, reading this Board's 19 statements and decisions is the basis for saying 20 that they didn't change domicile or residence until 21 April 23rd when all the vacations were over, when 22 all the other things that they were accomplishing 23 were done -- were done, they got into their car, 24 with their clothing, clothing that they would have 25 needed to take on these trips. If you think about 26 it, that makes sense. You can't take a trip to 27 Costa Rica with no clothing. Well, you could, 28 but -- you can't -- you can't take a trip to -- 90 1 MR. HORTON: But, I mean -- 2 MR. HASKINS: -- the Pacific Rim without 3 any clothing. So clearly -- 4 MR. HORTON: My -- my apologies. But if we 5 submit to your argument, then it takes us back to 6 the situs question which takes us back to the 7 intangible property issue. 8 MR. HASKINS: Well, the -- 9 MR. HORTON: Which gets us back to -- 10 MR. HASKINS: Those are not my issues. 11 MR. BABCOCK: Yeah. I'd like to address -- 12 MR. HORTON: -- where we are. So I 13 think -- I think I've had -- unless you want -- 14 MR. VESELY: I'd like to comment on his 15 last thing, the last thing Mr. Haskins just said. 16 MR. HORTON: No. 17 MR. VESELY: We'll make it quick. 18 MR. HORTON: No. But if you want to speak 19 to the appeals of Addington, anything like that. 20 MR. VESELY: Well, I think that -- on which 21 issue do you want me to speak to? The Addington 22 issue? 23 Well, I think it's really important to talk 24 about what kind of intent is the key here. 25 MS. HARKEY: I wouldn't say anything. 26 MR. VESELY: You change your domicile, you 27 change your domicile, you have the intent to make 28 this new location your permanent home. It is not 91 1 the intent to never go back to where you just came 2 from. That's not the law. 3 It's -- I mean the whole idea -- the 4 statute talks in terms of having a domicile outside 5 of California and you're back in the State for other 6 than temporary or transitory purposes. 7 MR. HORTON: No, no. I'm good. 8 MR. VESELY: You understand all that. But 9 the point is they're mixing up intent here that they 10 can never return to the State of California, and 11 that's just not true. 12 MR. HORTON: I'm good. I thought you were 13 going to -- I thought you were going to argue that 14 in the Noble case it was quite different; in fact 15 the taxpayer had -- 16 MR. VESELY: Well, they were -- 17 MR. HORTON: -- membership in a club, his 18 kids -- 19 MR. VESELY: Well, that's exactly right. 20 MR. HORTON: I mean a whole kind of 21 activity. So to use that case has -- 22 MR. VESELY: Absolutely. And I mean Noble 23 case, that's fine. But you got to look at the facts 24 in each of these cases as we well know and there 25 were a heck of a lot more connections. 26 MR. HORTON: I'm good. 27 MR. VESELY: Okay. 28 MR. HORTON: Further discussion, Members? 92 1 Hearing none, Member Ma moves to take it 2 under submission. Second by Member Runner. 3 Without objection, Members, such will be 4 the order. 5 Members, let's take a break -- 6 MR. HASKINS: And thank you very much for 7 your patience. 8 MR. HORTON: -- for about an hour. 9 Thank you so very much for appearing before 10 us today. The Board will take your matter under 11 consideration later on this evening and send you a 12 written report of our decision. 13 MR. RUNNER: So an hour; quarter after? 14 MR. HORTON: We'll come back at a quarter 15 after. 16 ---oOo--- 17 18 19 20 21 22 23 24 25 26 27 28 93 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 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 60 constitute 14 a complete and accurate transcription of the 15 shorthand writing. 16 17 Dated: June 16, 2015 18 19 20 ____________________________ 21 JULI PRICE JACKSON 22 Hearing Reporter 23 24 25 26 27 28 94 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 61 through 93 14 constitute a complete and accurate transcription of 15 the shorthand writing. 16 17 Dated: June 10, 2015 18 19 20 ____________________________ 21 KATHLEEN SKIDGEL 22 Hearing Reporter 23 24 25 26 27 28 95