1 BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION 2 5901 GREEN VALLEY CIRCLE 3 CULVER CITY, CALIFORNIA 4 5 6 7 8 REPORTER'S TRANSCRIPT 9 NOVEMBER 17, 2015 10 11 12 13 14 15 16 FINAL ACTIONS 17 18 19 20 21 22 23 24 25 26 27 REPORTED BY: Kathleen Skidgel 28 CSR NO. 9039 1 1 P R E S E N T 2 3 For the Board Jerome E. Horton of Equalization: Chairman 4 5 Sen. George Runner (Ret.) Vice Chair 6 7 Fiona Ma, CPA Member 8 9 Diane L. Harkey Member 10 11 Yvette Stowers Appearing for Betty T. 12 Yee, State Controller (per Government Code 13 Section 7.9) 14 Joann Richmond 15 Chief Board Proceedings 16 Division 17 For Staff: Lou Ambrose 18 Tax Counsel IV Legal Department 19 Anthony Epolite 20 Tax Counsel IV Legal Department 21 Grant Thompson 22 Tax Counsel IV Legal Department 23 24 ---oOo--- 25 26 27 28 2 1 5901 GREEN VALLEY CIRCLE 2 CULVER CITY, CALIFORNIA 3 NOVEMBER 17, 2015 4 ---oOo--- 5 MR. HORTON: Ms. Richmond. 6 MS. RICHMOND: That concludes our 7 administrative session. Would you like to take 8 those items that were pulled for submission? Or 9 would you like to go into closed session? 10 MR. HORTON: Let's go into closed session. 11 MS. HARKEY: Let's take the items, and then 12 we can -- 13 MR. HORTON: Okay. Pleasure of the Board. 14 Okay, Members, we will go to the items to 15 be finalized. 16 Ms. Richmond, what's our first item for 17 consideration? 18 MS. RICHMOND: The first item that was 19 taken under submission is B1 Robert H. Lowe and 20 Sheryl L. Berkoff. 21 ---oOo--- 22 ITEM B1 23 ROBERT H. LOWE and SHERYL L. BERKOFF 24 NO. 571973 25 ---oOo--- 26 MS. HARKEY: Move to grant the appeal. 27 MR. RUNNER: Second. 28 MR. HORTON: Member Harkey moves to grant 3 1 the appeal, second by Member Runner. 2 Discussion, Members? 3 Members, as I shared earlier, I wanted to 4 go back and take a look at this whole notion of the 5 capitalized funds. 6 In the briefing provided by the taxpayer, 7 the -- the -- the lawyer for the taxpayer 8 acknowledged that the capitalized/noncapitalized 9 interest was actually claimed on the -- on the tax 10 return. So if that amount is not deductible, then 11 we would be allowing an amount that is just not 12 deductible that was actually claimed on the return. 13 So, I would go to Appeals just to give us 14 some oversight as it relates to the law. 15 MR. AMBROSE: Okay. Mr. Chair, we took a 16 look at it and we determined that under Treasury 17 Regulation 1.266-1(b)(1) the capitalized or 18 construction interest, construction loan interest 19 may be capitalized and added to basis. But that is 20 an election that must be made in the year in which 21 the interest is paid. 22 So, for instance, you know, if they took 23 the loan out in '98 and they paid the interest on 24 it, they would have to make that election on their 25 '98 return in order to then, you know, upon sale, 26 claim that as an addition to basis. 27 And we don't have -- I mean, at this point 28 we don't have their '98 return. We don't know 4 1 whether they made that election. 2 MS. HARKEY: So, it could (inaudible). 3 MR. AMBROSE: So it's -- you know, it's 4 basically -- to us, it's -- you know, theoretically 5 it could be an addition to basis, but we just don't 6 have enough information. 7 MR. HORTON: So, um -- 8 MR. AMBROSE: And -- and -- and -- I beg 9 your pardon, sir. But with respect to the mortgage 10 interest, that would not be deductible for this type 11 of property. That is only -- or not "deductible." I 12 beg your pardon. That would not be -- 13 MR. HORTON: Cap -- 14 MR. AMBROSE: -- capitalized and added to 15 basis because this is an improved prop -- improved 16 rural property; that is only an addition or a 17 capitalized item for unimproved, unproductive 18 property. That's the only time that's allowed. 19 MR. HORTON: See, therein is my -- my 20 concern, Members, is that the loan documents seem -- 21 the loan docs seemed to indicate that the actual 22 loan amount, the interest on the loan amount is 23 somewhere around $718,000, which leaves about 24 1.8 million of non -- nonconstruction loan 25 capitalized interest if we were to even presume, 26 which the evidence isn't here, that that was 27 accounted for properly and timely, then the $708,000 28 might very well be subject to being capitalized. 5 1 But clearly, the 1.8 is not. 2 The other concern that I have, aside from 3 all these estimates, which just seems to be 4 everywhere, was that the accountant indicated that 5 the documents that he provided to the Department, 6 which included expenses that were not subject to be 7 capitalized, were included in the original tax 8 return as the capitalized amount. That amounts to 9 somewhere around $62,000, certainly not -- not -- 10 just the -- on the numbers that we were able to 11 receive the actual documents. 12 The numbers we weren't able to receive the 13 documents, which is about $6 million, and 14 documentation that just was never provided to the -- 15 to the Board or to the Agency because they were lost 16 by the accountant, lost by the taxpayer, and none of 17 the vendors who they purchased these items from had 18 lost them as well and couldn't provide the actual 19 documentation. 20 But if we were to computer percentage of 21 error and project that percentage of error over that 22 $6 million, assuming that similar error was made 23 over those amounts, assuming that those amounts are 24 actually under the Cohan Rule, are evident as a 25 result of our visual observation as well as the 26 testimony of Mr. Williams and others, that would 27 bring us to a -- a -- I have to do that over -- do 28 that percentage of error, but that would bring us to 6 1 a calculation which would take the 1.8 2 noncapitalized interest, which was presumably 3 claimed according to Mr. Marks previously, the fact 4 he didn't change his testimony until today, and 5 according to the briefs, according to the taxpayers' 6 accountant and so forth. 7 So, therein is my challenge, but -- and why 8 I would not be supporting that motion. 9 Member Harkey. 10 MS. HARKEY: Well, I would just like to 11 say, because of the Cohan Rule, we're supposed to 12 pick an estimate and we had a variety of 'em; they 13 were all over the place. And I think that these 14 taxpayers in particular did an extremely amazing job 15 of gathering together what they had. And they did 16 it over a long course -- a long period of time. 17 They were put off another three months 18 because we -- we reviewed additional documentation. 19 So we had documentation, documentation and more 20 documentation. And the Szabo estimate came back 21 amended, Craig Szabo. He was the initial, and he 22 was the one that did the breakout by basically going 23 through what he had and memory, and then he 24 corrected that. 25 And so what we're back with is really, Was 26 there anything better than what the taxpayer had 27 submitted to begin with? And I don't think that 28 there was. I think that -- you know, I think the 7 1 Department made a great case, but they kept coming 2 in that $4 million mark, which truly wasn't. And 3 so -- wasn't -- wasn't the amount for that house. 4 And I think that we've had a lot of -- a 5 lot of support for just taking the tax -- I mean, if 6 we don't have anything better, just accept the tax 7 return. It's been a long time. A long hard slug 8 for everybody, and it's not that -- but the 9 Department would not come off that $4 million 10 number, which, to me, indicates there was really 11 probably no big effort to try to justify anything 12 more. So -- 13 MR. HORTON: Just -- just to provide the 14 Members with the number, I think I'm -- 15 First, I'm looking at the taxpayers' 16 records. I'm not looking at the estimate. And the 17 Cohan Rule only requires us to look at these 18 estimates and appraisals when the actual documents 19 aren't available. The actual tax returns are 20 available, the actual -- which indicates the 21 noncapitalized interest. The actual testimony is 22 available from Mr. Marks, was the attorney for the 23 taxpayer. The actual statement, documentation from 24 the taxpayers' accountant is available. 25 So we're minus to look at the actual 26 numbers, which takes us down to about $11 million in 27 adjustments, not accounting for the potential error. 28 As also reflected in the documents, as far as 8 1 claiming expenses, this should not have been -- been 2 capitalized. It appears to have been capitalized. 3 Mr. Runner. 4 MR. RUNNER: Yeah. I, um -- at least I'm 5 trying to remember the testimony that I heard. I 6 think I heard that they weren't sure what they had 7 done with that, with that interest. And I think 8 that -- I think -- and I think actually that -- that 9 they made it pretty clear that it would be the 10 assumption at that point that they use the -- the 11 construction interest in terms of helping to 12 establish -- was established in the basis. 13 So, you know, again, I think we just had a 14 variety of opinions going on all over the place. 15 And, you know, I think at that point it was up to 16 the FTB to make the argument in regards to what they 17 had found. I don't think they did it well. I think 18 that they had issues when actually it was built, 19 quite frankly, on the testimony of their expert, a 20 lot of it. 21 You know, and when I asked the expert 22 whether or not he could construct that house at that 23 rate, he could -- said he couldn't. So it makes it 24 very difficult for me then to find credibility with 25 the FTB. 26 And then I get worried about if we -- if -- 27 if they're making the argument, that's the 28 government making the argument, and the taxpayer 9 1 believes that they have the documents and have made 2 their argument, I have trouble then finding our 3 place to try to, you know, identify a nuance, you 4 know, a host of other opinions in terms of trying to 5 find the right one. 6 So, at this point that's why I'm convinced 7 that it's the -- created the path that makes the 8 most sense to me, is to go with the taxpayer. 9 MS. STOWERS: Chairman. 10 MR. HORTON: Member Stowers. 11 MS. STOWERS: Okay. A couple of things. 12 As far as the tax return number and the number being 13 correct, keeping -- this is how I'm seeing it. 14 When they filed the tax return in 2006, 15 they had already asserted that the majority of the 16 records were lost. So I've been questioning how 17 they come up with the initial number of 12.9 18 million, the number that the first accountant gave 19 to the second accountant. And all that they 20 provided in their exhibits to us is just that number 21 and not the backup. 22 And I have repeatedly asked for the backup 23 to the 12.9, and we have not received it. But yet, 24 that's the number that's -- along with the purchase 25 of the land, the number that's on their tax return. 26 When you go through -- when they went 27 through the protest and Szabo is now representing 28 them on protest, he's the one that indicated that 10 1 the basis included mortgage interest and capitalized 2 interest and so forth, and it's their own Schedule 3 that was part of the Appellant's Exhibit 64 that 4 detailed that amount. 5 And then FTB did address it in their 6 exhibits on what it was and why it was not 7 qualified. In their exhibits that they submitted in 8 August, they identified the amounts and said there's 9 no basis in law to include it in the basis. 10 So, there along I know that there's errors 11 in the tax returns. So, I cannot say we can accept 12 the tax return as filed. 13 With respect to the Cohan Rule and 14 estimates, I do agree that we -- we do need to 15 estimate the basis since we do not have records. 16 But Cohan tells us that you estimate weighing 17 heavily against the taxpayer, not a hundred percent 18 of what was reported on the tax return. 19 And I agree that FTB initially started out 20 with $4 million to produce the property. But they 21 have since said we're going to look at the 22 comparables that Mr. Williams provided to us and go 23 with that square footage to get to the cost. 24 Now, they were using 438 because they were 25 going back and indexing it to the 1999 calls, and I 26 think the taxpayer had made it really clear that 27 they continued to do construction after 1999. So 28 using the 1999 calls may not be accurate. But FTB 11 1 did agree to $600 per square foot. 2 So I'm thinking either the $600 per square 3 foot or this percentage of error that Mr. Horton is 4 talking about, to get to the estimated total basis. 5 In addition, I'm -- in addition to 600 per 6 square foot, I'm also going to pick up the 7 governmental fees that Mr. Williams identified in 8 his report. He had 599. So at the bottom -- I'm at 9 10.2 in total basis. 10 MR. HORTON: Members, let me just clarify 11 something. From my perspective relative to the 12 cons -- our constitutional obligations, as well as 13 our legal obligation as a trier of fact, the facts 14 that are presented to the Board are to be taken 15 under consideration. It's when facts aren't 16 presented that the Board is -- even then, the Board 17 can actually take facts that haven't even been 18 presented to us under consideration if we find 19 additional evidence. So I think it's incumbent upon 20 us to do that. 21 Second, I think it's important to note that 22 I'm not really making an estimate. I'm just relying 23 on the actual factual evidence that's been presented 24 by the taxpayer. I'm not relying on the evidence 25 presented by the Department. This is evidence that 26 has been presented by the taxpayer in their -- in 27 their briefs, as well as the documentation that 28 they've provided. 12 1 I'm not presuming that it didn't exist. I 2 don't believe I can do that. I believe once the 3 evidence has been presented relative to the 4 capitalization of the loans, relative to the amounts 5 that have been claimed, if there's an error in the 6 actual documentation. 7 The second, on the Cohan Rule, I concur 8 that, you know, the Cohan Rule says that we have to 9 lean in the Department. I'm not necessarily even 10 doing that because I believe that the Department 11 has -- has a certain obligation to -- to -- to vet 12 out all of the facts. And so coming to a conclusion 13 that we ultimately came to, some adjustments for 14 various different categories of items, it's just the 15 amount within those adjustments was different, but 16 the fact that they were legally adjustable, coming 17 to that conclusion should have occurred at a more 18 timely fashion earlier, I think, in this process. 19 And so, to the actual documentation, the 20 actual evidence that's before us says that the 21 return was wrong. To what degree it was wrong is 22 where we get into the Cohan assessment. But the 23 factual evidence that they did claim capitalized 24 interest and, at best, $718,000, which is their loan 25 documents which reflect the capital interest, would 26 have been the amount, at best, had they properly 27 accounted for, that they would not have been 28 entitled to. 13 1 Now, whether or not we should -- we should 2 give consideration to the time that the taxpayer, 3 you know -- time it took us to get here, that's just 4 the process. Sometimes it's longer than not. This 5 seems to have been a reasonable amount of time in 6 that regard. 7 Anyway, there's a motion to -- 8 Member Ma? 9 MS. MA: Yes. To Appeals, can -- can you 10 repeat again? So, construction period interest 11 would have been deductible in the year the interest 12 was paid if they made the election on the tax 13 return. 14 MR. AMBROSE: If they made the election on 15 the tax return in the year that it was paid, it 16 would have been -- well -- 17 MS. MA: Allowable. 18 MR. AMBROSE: Yeah. It would have either 19 been deductible as, you know, an expense -- 20 MS. MA: Right. 21 MR. AMBROSE: -- or they could -- or -- 22 or -- 23 MR. HORTON: They could have capitalized. 24 MR. AMBROSE: -- or they would have 25 capital -- 26 I mean in this case, if they had made the 27 election in the year they paid the interest to 28 capitalize it, then they could have added it to 14 1 basis. And then when they sold the property, you 2 know, that's considered in the basis. 3 MS. MA: But we don't know whether they 4 made the election in 19 -- 5 MS. HARKEY: We're assuming. 6 MS. MA: -- 99, '98. 7 MR. AMBROSE: '98/'99 when they were paying 8 the interest -- 9 MS. MA: Okay. 10 MR. AMBROSE: -- we don't know that. 11 MS. MA: And then tell me about the 12 capitalized mortgage interest. 13 MR. AMBROSE: That would not be -- they 14 could not capitalize and add that to basis for this 15 type of property. 16 MS. MA: So they would have -- it would 17 have just been disallowed. 18 MR. AMBROSE: Yes. 19 MS. MA: Would they have been able to take 20 it as a deduction? 21 MR. AMBROSE: Oh, yeah, certainly. Yeah. 22 MS. MA: On their tax return. 23 MR. AMBROSE: Yeah, which most likely they 24 did. I mean up to the -- I guess it's the 25 million-dollar limit. But, yeah. 26 MS. MA: Mm-hmm. So, um -- I don't know. 27 I mean, you know, I think this document Ms. Stowers 28 produces shows that as part of their work papers 15 1 they did add into their basis the construction 2 period interest, which I'm willing to say, you know, 3 we don't have the documents, I'm willing to say that 4 let's give 'em the benefit of the doubt. But 5 clearly the capitalized mortgage interest is not 6 allowable to be added into basis, which is that 7 1.3. 8 MR. AMBROSE: Correct. 9 MS. MA: So, I mean, I'm willing to -- 10 since this is the taxpayers' own information that 11 they submitted and they added into basis, I would 12 agree with the Chairman that they're not allowed to 13 add it into basis -- 14 MR. AMBROSE: Right. 15 MS. MA: -- legally. So I would be 16 comfortable deducting the 1.358792 of capitalized 17 mortgage interest out of their -- 18 MS. HARKEY: I thought the capitalized 19 mortgage interest was 718,000. 20 MR. HORTON: Loan. 21 MR. AMBROSE: No. The number -- actually 22 the -- the correct number is about 740 -- 739099 for 23 the construction loan interest. And the capitalized 24 mortgage interest is, as Ms. Ma just said, 25 1 million 358792. 26 MS. HARKEY: So then that gets us to a 27 revised capital gain of what? 28 MR. AMBROSE: Well, less -- or more -- it 16 1 would be the 1 million 358792 added to the cap -- to 2 the gain, right? 3 MR. EPOLITE: Yeah. 4 MS. HARKEY: And what were they reporting 5 was their -- 6 Does anybody have this for me? 7 MS. STOWERS: Give me a minute. Can I have 8 that? 9 MS. HARKEY: I still like my motion. 10 MS. MA: It's 15 percent. 15 percent 11 capital gains rate that year. 12 MR. AMBROSE: I'd have to go dig through -- 13 okay, the reported gain of 10 million 139773. 14 MS. HARKEY: And you want to add 1358792? 15 MR. AMBROSE: Correct. 16 MS. HARKEY: Okay. So -- 17 MS. MA: Times 15 percent, right? 18 MS. STOWERS: (Inaudible). 19 MS. HARKEY: Oh. Yeah. I'm kind of 20 overcounting. Okay. 21 MS. STOWERS: So -- 22 MS. HARKEY: That's -- that's basically -- 23 okay, let me just explain. That is basically the 24 same exact thing using, I think, Szabo's first -- 25 Yeah. It is. So I take it that I don't 26 have three votes for my motion. I have a motion and 27 a second. So let me do a substitute motion. 28 Okay. I have an alternate motion prepared 17 1 just in case. Okay. I'm going to move to find a 2 reasonable adjusted basis estimate under Cohan Rule 3 of 11 million 368562, which consists of the original 4 purchase price of 2 million 854959, plus estimated 5 construction costs of 8 million 433506, plus 6 purchase expenses of 3,167, plus refinance fees of 7 14,420, plus landscaping of 62,510. And I'm going 8 to move to abate the failure to furnish penalty. 9 MR. RUNNER: I think they -- 10 MS. STOWERS: They already did that. 11 MS. HARKEY: Oh, they did. That's right. 12 That's already been done. 13 MS. STOWERS: Ms. Harkey, can you say 14 that -- those numbers to me again, please? 15 MS. HARKEY: Here you go. I will deliver 16 them to you. 17 MS. MA: She basically just took out this 18 amount. 19 MS. STOWERS: Twenty-three -- 20 MR. RUNNER: So basically -- I mean, I 21 understand, no matter what that list is, that it is 22 a net amount of the -- of the amount, minus -- or 23 it's minus the mortgage interest -- 24 MS. MA: Capitalized. 25 MR. RUNNER: -- capitalized. And we don't 26 know at this point whether they took it as a 27 deduction in that -- in that year. 28 MS. HARKEY: We don't know. 18 1 MR. RUNNER: We don't know that. 2 MR. AMBROSE: No. 3 MS. HARKEY: We don't know anything. But 4 we don't have three votes. 5 MR. RUNNER: Okay. 6 MS. MA: Wait. But capital mortgage 7 interest is not deduct -- is not -- 8 MR. AMBROSE: Capitalized. 9 MS. MA: You can't add it -- you can't add 10 it to basis anyway. 11 MR. AMBROSE: Right, whether they've taken 12 it or not. 13 MR. RUNNER: But we don't know if they took 14 it as a regular deduction in their -- on the other 15 side. Yeah, they might have took it in the wrong 16 place is what I'm saying. But it doesn't make a 17 difference. That's all. 18 MS. MA: That's the work papers that their 19 people -- 20 MR. HORTON: Lawyer. 21 MS. MA: -- whoever provided. So -- 22 MS. HARKEY: Okay. I made a motion. Do I 23 have a second? 24 MR. RUNNER: Second. 25 MS. STOWERS: I'm still studying it. Give 26 me just one -- 27 MS. HARKEY: Well, it's going to be 28 maybe -- what -- a hundred bucks here or there? 19 1 MS. MA: Just take out this one. 2 MR. HORTON: Let me -- let me see if I can 3 codify the motion, and then we'll direct staff to 4 come up with the actual number, with your 5 permission, Members. 6 MR. AMBROSE: I didn't catch the first -- 7 the land value and the construction cost. 8 MR. RUNNER: Isn't it just the number minus 9 the -- 10 MS. MA: Mortgage? 11 MS. HARKEY: This is my motion, and it was 12 all legally done, figured out for me, in case we had 13 to do that. 14 MR. HORTON: Okay. These -- Member 15 Harkey's motion is to adjust the adjusted basis 16 under the Cohan Rule to be 11368.562, not -- which 17 is maybe 70, $80 -- I mean $70,000 or so off, just 18 adjusting the interest. So I think we all sort of 19 get there, that number. But -- and I think the 20 Members have stipulated their position relative to 21 the adjust -- not allowing the mortgage interest. 22 And so I think it's on record and we've got a number 23 and we've got a second, I'm presuming. 24 MS. RICHMOND: Yes. 25 MS. STOWERS: A clarification. Sorry. 26 Excuse me. Clarification. The 8 million 433506, 27 Ms. Harkey, is that what you're saying as your 28 estimated construction costs? 20 1 MS. HARKEY: Right. 2 MS. STOWERS: And then you have all the 3 other numbers that the parties agreed to. 4 MS. HARKEY: Right. So the total adjusted 5 basis under Cohan, of 11 million 368562. 6 MS. STOWERS: Second -- no, no. I withdraw 7 the second. I take that back. I'm sorry. 8 MR. HORTON: Okay. I think we have a 9 motion by Member Harkey. Second by Member Ma. 10 We have a clarification that my affirmative 11 vote is -- is to adjust the mortgage interest out, 12 the actual documentation of that. 13 MR. AMBROSE: Yes. 14 MR. HORTON: And that the other errors, the 15 Department -- no evidence was even brought before us 16 that there should be an adjustment there. So, 17 therefore, I'm prepared to assume in the favor of 18 the taxpayer in that regard. Second by -- 19 Is there objection, Members, to these 20 motions and no other clarifications? 21 MS. HARKEY: You'll be okay. 22 MS. STOWERS: I -- I -- I -- 23 MS. HARKEY: Trust me, you'll be fine. If 24 you're not, you got to blame Jay. 25 MS. STOWERS: I hate to belabor the 26 point. 27 MR. HORTON: Okay. Well, that's why we're 28 here. Take your time. 21 1 MS. STOWERS: Can -- Ms. Harkey, can you 2 give me a little background on how you got to the 3 8 million? 4 MS. HARKEY: Sure, I can. I believe it was 5 right here. It is right here actually. 6 MR. RUNNER: Can I -- while you're doing 7 that, can I ask Appeals real quick? 8 MR. AMBROSE: Sure. 9 MR. RUNNER: Isn't the -- is the number the 10 same as if we just removed the, uh -- the mortgage? 11 MR. HORTON: They're close. They're close. 12 MR. AMBROSE: To -- to -- to add to the -- 13 to reduce the basis? 14 MR. RUNNER: By the -- by the mortgage 15 interest that was deducted? 16 MR. AMBROSE: Right. Yeah. Sure. 17 MR. RUNNER: Is that what the num -- is 18 this -- is that the same number? 19 MR. AMBROSE: It is the same number. 20 MR. RUNNER: Okay. 21 MR. AMBROSE: It should be. 22 MR. HORTON: You would add back to the 23 claim. 24 MR. RUNNER: Isn't that a simpler way to 25 make the motion? 26 MS. STOWERS: It's not the same -- it's not 27 the same number though. 28 MS. HARKEY: It's not -- it's not exactly 22 1 the same number. 2 MS. MA: It's close. 3 MS. HARKEY: This is from the -- my number 4 is from -- we had assumed when we went back and 5 looked at all of this, that given that we couldn't 6 find for the taxpayer -- which I think we should 7 have -- that probably the best estimate to use was 8 Szabo because he was doing this pre-audit, going 9 from memory, doing the best that he could to derive 10 information. And that's where you find that there 11 was interest included they shouldn't have. 12 So we've used the funds disbursement 13 initiated; the direct payments by the Lowes to 14 various vendors; funds paid direct by Lowes to 15 general contractor Bruce Sweet; second payment 16 directly by Lowe to contractor Bruce Sweet; third 17 payment funds paid directly by Lowes to contractor 18 Bruce Sweet. 19 So we've got 512243, 414029, 117307; those 20 are all Bruce Sweet numbers. And then completion 21 costs as of September 30th, 276299. And that comes 22 to eight thousand -- or 8 million 433506, which is 23 the Szabo report that had the detail. 24 MR. AMBROSE: And I had that number, too, 25 written down here in my notes -- 26 MS. HARKEY: See. 27 MR. AMBROSE: -- that total. 28 MS. HARKEY: We agree. 23 1 MR. HORTON: On the number. 2 MS. HARKEY: Yeah. Well, it's okay. 3 That's probably all -- that's probably all we have 4 to agree on is the number because Szabo was the one 5 that had the -- 6 MR. RUNNER: How we get there is 7 important. 8 MS. HARKEY: Well, it is. That's how we're 9 getting there, by all of the information that 10 they've got that Szabo had that he reported to them. 11 So this all came from the same report. And that's 12 the number that they have and there's a reason for 13 it because it was what was disclosed. 14 MR. HORTON: Okay. Oh. You want to see 15 it? 16 MS. STOWERS: Just real quick. 17 MR. HORTON: Yeah, of course. 18 MS. HARKEY: Yeah. 19 MR. HORTON: Take your time. 20 MS. STOWERS: Oh, this is the same. I got 21 that one. Directed payments by Lowes. 22 MR. HORTON: Members, while -- while we're 23 looking at it, let me just clarify, from my 24 perspective. The -- the evidence is clear, to me, 25 that there were additional errors made in the tax 26 return, that the accountant made a number of 27 different errors in interpreting the law. 28 The $62,000 in reporting repairs that 24 1 shouldn't have been claimed, which is not atypical. 2 I mean it's not untypical that you get expenses 3 claimed as capitalized deductions. 4 And so, if I was to -- but there was no 5 evidence necessarily presented that that document -- 6 wasn't an argument, but I think there was 7 evidence -- but an argument that those expenses were 8 actually claimed on the return. But if they were, I 9 would probably be closer to that error, or those 10 sequence of errors would amount to somewhere around 11 $900,000 in additional amounts that would be 12 deducted. 13 But that's where I am. This is not one of 14 those situations where -- this is a situation where 15 it requires three votes to get things done. So I am 16 comfortable with the adjustment downward -- or 17 upward, if you will, to 11.368562 because my number, 18 after adjusting for the nonqualified interest, would 19 have came up to 11.428. So, you know. 20 And there's a -- there's a second by Member 21 Runner, for various reasons as well. 22 And further discussion, Members? 23 MS. STOWERS: There is a first and a 24 second. I don't agree with the number because the 25 3.8 Szabo numbers direct payments by the Lowes, some 26 of those direct payments were based on declarations 27 that the various vendors submitted that the 28 Franchise Tax Board did look at and determine that 25 1 some of them were duplicate. They did allow a large 2 percentage of them, but they did not allow all. 3 But that's just one girl's opinion. 4 MR. HORTON: That's a -- 5 MR. RUNNER: Yeah. Here's the challenge. 6 MR. HORTON: -- right opinion, Members -- 7 MR. RUNNER: Here's the challenge -- 8 MR. HORTON: -- which every Member's 9 entitled to. 10 Mr. Runner. 11 MR. RUNNER: Yeah. I mean I get -- and the 12 numbers are about the same. I struggle with how 13 we're getting to the number. 14 I have a much easier time, quite frankly, 15 and, again, looking at the idea of using the 16 taxpayer number minus the adjustment on the -- on 17 the -- on the interest, on the mortgage interest 18 issue. That, to me, is a very clear path in terms 19 of why -- how we get to the number we're going to. 20 And so I, you know -- 21 MS. HARKEY: So that gets us to what -- 22 what adjusted basis? 23 MR. RUNNER: I think we had that number. 24 What was the adjusted basis if we go ahead and use 25 the -- 26 MS. HARKEY: I want to be specific so we 27 don't get a surprise. 28 MR. RUNNER: Right. 26 1 MR. AMBROSE: Oh. I'm sorry. 2 MR. RUNNER: The adjusted basis if we just 3 go ahead and adjust it and take out the mortgage 4 interest. 5 MR. AMBROSE: Which adjusted basis number, 6 though? 7 MR. RUNNER: Using the taxpayer's 8 numbers. 9 MR. AMBROSE: Okay. 10 MR. RUNNER: Removing just that portion of 11 it. 12 MR. AMBROSE: Okay. 13 MR. RUNNER: What is the number of their 14 basis? 15 MR. HORTON: We're actually adding back to 16 the claim basis. So it's in addition not 17 subtraction. 18 MR. RUNNER: We're going to subtract -- 19 they're going to have a greater liability, than what 20 they believe. 21 MR. AMBROSE: Well, I mean, their -- their 22 numbers bounced around. I mean -- 23 MS. HARKEY: Their tax return. 24 MR. AMBROSE: Oh, on the return. 25 MS. HARKEY: Start with the tax return. 26 MR. AMBROSE: What they reported, okay. 27 MS. STOWERS: I'm sorry. 28 MR. HORTON: Let's Mr. Runner, then we'll 27 1 go to Ms. Stowers. 2 MR. AMBROSE: I will -- I don't know off 3 the top of my head, I'm sorry. 4 MR. RUNNER: Okay. 5 MR. HORTON: While you're looking at it -- 6 Ms. Stowers. 7 MS. STOWERS: Okay. It's an estimate. 8 Estimates are estimates. 9 I can live with Ms. Harkey's number that 10 she gave before I made my big speech, which gives a 11 total adjusted basis of 11 million 368202. And that 12 was her second motion, I believe. 13 MR. RUNNER: Mm-hmm. 14 MR. HORTON: What? 15 MS. HARKEY: 11 million 368562. 16 MR. HORTON: Okay. So we got a -- we got a 17 motion to adjust the basis 11 million 368562, second 18 by Member -- 19 MS. MA: Runner. 20 MR. RUNNER: Mm-hmm. 21 MR. HORTON: Harkey actually. 22 MS. STOWERS: Wait a minute. 23 Mr. HORTON: Second by Member -- 24 MS. STOWERS: Who made the motion? 25 MS. HARKEY: I made the motion. 26 MR. HORTON: Member Harkey made the motion, 27 Member Runner seconded the motion. 28 Without objection -- none noted -- such 28 1 will be the order. 2 MS. HARKEY: Such is the order. You guys 3 want this? 4 MR. AMBROSE: Please. 5 MR. RUNNER: You guys all clear on the 6 Section 40 piece; did you get it right? 7 MR. AMBROSE: Too many numbers. 8 MS. HARKEY: You'll get your prize in the 9 mail. 10 MR. AMBROSE: Okay. Thank you. 11 ---oOo--- 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 1 MR. HORTON: Okay. Ms. Richmond, our next 2 matter. 3 MS. RICHMOND: Our next matter is B2 Maria 4 Phillips and Michael Del Campo. 5 ---oOo--- 6 ITME B2 7 MARIA PHILLIPS (SANTAMARIA-DEL CAMPO) and 8 MICHAEL DEL CAMPO 9 NO. 741179 10 ---oOo--- 11 MS. HARKEY: Oh, dear. Oh, dear, dear, 12 dear. That's a troublesome one. Where's my -- my 13 sheet? 14 MR. RUNNER: I'm sorry. Which one was that 15 one? I'm sorry. 16 MS. RICHMOND: B2. 17 MR. RUNNER: B2, thank you. 18 MS. HARKEY: B2. 19 MR. THOMPSON: This is the innocent spouse 20 matter. 21 MR. HORTON: Members, this is the one where 22 the husband testified that his wife was liable? 23 MS. STOWERS: Mm-hmm. 24 MR. HORTON: Okay. 25 MR. RUNNER: Right. 26 MS. HARKEY: Does anyone want to make a 27 motion? 28 MS. STOWERS: I move to sustain the 30 1 Franchise Tax Board. 2 MS. MA: Second. 3 MR. HORTON: Member Stowers move to sustain 4 the Franchise Tax Board, second by Member Ma. 5 Without objection, Members, such will be 6 the order. 7 ---oOo--- 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 31 1 MR. HORTON: Ms. Richmond. 2 MS. RICHMOND: Our next item is B5a William 3 R. Dobkin and Donya Dobkin, and B5b Deborah M. 4 Dobkin. 5 ---oOo--- 6 ITEM B5a 7 WILLIAM R. DOBKIN and DONYA DOBKIN 8 NO. 728014 9 ITEM B5b 10 DEBORAH M. DOBKIN 11 NO. 725828 12 ---oOo--- 13 MS. HARKEY: I'll move to sustain the 14 FTB. 15 MS. MA: Second. 16 MR. HORTON: Member Harkey moves to sustain 17 the -- 18 MR. RUNNER: That's as adjusted, right? 19 MS. HARKEY: As adjusted. 20 MR. HORTON: Okay. 21 MS. HARKEY: As adjusted. 22 MR. HORTON: Member Harkey moves to modify 23 FTB's assessment based on a cost basis to 3706. 24 MS. HARKEY: Whatever -- whatever you 25 accepted. You accepted some things -- 26 MR. HORTON: Okay. As accepted. 27 MS. HARKEY: -- by Schedule and on the 28 land. 32 1 MR. HORTON: Second by Member Ma. 2 Without objection, Members, such will be 3 the order. 4 ---oOo--- 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 33 1 MS. RICHMOND: Our last item is C1 Ronald 2 J. Blomquist. 3 ---oOo--- 4 ITEM C1 5 RONALD J. BLOMQUIST 6 NOS. 467934, 565903 (FH) 7 ---oOo--- 8 MS. HARKEY: I will move to send this to 9 Offers in Compromise. 10 MR. RUNNER: Well, we actually -- 11 MS. HARKEY: Do we have to sustain the 12 Department? 13 MR. HORTON: Member Harkey moves to deny 14 the petition. 15 MR. RUNNER: Right. 16 MR. HORTON: Second by Member Runner, and 17 recommends that we move this to Offer in Compromise. 18 MR. RUNNER: Yeah. 19 MR. HORTON: Objection, Members? 20 Hearing none, such will be the motion. 21 MR. ANGEJA: For clarification, that's with 22 the revised adjustment? Obviously -- 23 MS. HARKEY: With revised adjustment, yes. 24 I'm sorry. Thank you. Yeah, revised adjustment, 25 sustain the Department, and move to OIC. 26 ---oOo--- 27 28 34 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 November 17, 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 34 constitute 14 a complete and accurate transcription of the 15 shorthand writing. 16 17 Dated: November 23, 2015 18 19 20 ____________________________ 21 KATHLEEN SKIDGEL, CSR #9039 22 Hearing Reporter 23 24 25 26 27 28 35