1 BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION 2 5901 GREEN VALLEY CIRCLE 3 CULVER CITY, CALIFORNIA 4 5 6 7 8 REPORTER'S TRANSCRIPT 9 FEBRUARY 23, 2016 10 11 12 13 14 ITEM H 15 TAX PROGRAM NONAPPEARANCE MATTERS - ADJUDICATORY 16 ITEM H2 17 FRANCHISE AND INCOME TAX MATTERS 18 2. ROBERT H. LOWE AND SHERYL L. BERKOFF, 571973 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 18 ---oOo--- 19 20 21 22 23 24 25 26 27 28 2 1 5901 GREEN VALLEY CIRCLE 2 CULVER CITY, CALIFORNIA 3 FEBRUARY 23, 2016 4 ---oOo--- 5 MR. HORTON: Ms. Richmond. 6 MS. RICHMOND: Our next matter is item 7 H2.2, case heard not decided, Robert H. Lowe and 8 Sheryl L. Berkoff. 9 MR. HORTON: Members, the Board has decided 10 not to take any testimony on this. So we open it 11 for discussion. 12 Member Ma. 13 MS. MA: Thank you. Thank you, Members. 14 I'd like to start with the motion that was 15 made in this case at the November 17th, 2015 16 hearing. It was my intention, and I believe the 17 intention of the majority of the Board, to deduct 18 the $1,358,792 in capitalized mortgage interest from 19 the Lowes' reported basis of $13,526,000, but 20 otherwise accept the return as filed. Therefore, 21 the adjusted basis should be $12,167,208. 22 However, the minutes reflected that the 23 Board adopted an adjusted basis in the property of 24 11,368,562, which I believe was incorrect. 25 Therefore, I move to modify the action of the 26 Franchise Tax Board by determining an adjusted basis 27 of the property of 12,167,208 as computed by 28 deducting the 1,358,792 in capitalized mortgage 3 1 interest from the Lowes' reported basis of 2 $13,526,000. 3 MR. RUNNER: Second. I think that was a 4 long motion, wasn't it? 5 MR. HORTON: Yeah. 6 MS. MA: I repeated it again just in case. 7 The minutes were, you know -- 8 MR. HORTON: Motion as articulated by 9 Member Ma, second by Member Runner. 10 Members, I -- the -- the motion made by 11 Member Harkey was clear to me, and I really don't 12 have any issue with it, was not confused by it. 13 The issue before us is a situation where 14 the Board of Equalization is faced with trying to 15 determine what the proper amount of tax is where 16 $4.6 million in deductions are not accounted for. 17 There are no records for them, there are no 18 receipts. The accountant doesn't have any records. 19 The taxpayer doesn't have any records. The vendors 20 have not been able to provide any records to support 21 this. 22 And so -- but yet we do have documentation 23 that indicates that the numbers, as prepared by -- I 24 believe the gentleman's name was Mr. Szabo -- seems 25 to be the closest numbers that we can come to in 26 determining what the liability was as documented. 27 Relative to the construction loan interest 28 and so forth not being deductible, I think we're all 4 1 in concurrence with that, as well as the mortgage 2 interest. But there is documentation that there are 3 a number of other transactions that were expensed 4 that should not have been expensed; these are actual 5 documentation. And so I believe that those numbers 6 should be adjusted as well. 7 And once we made those adjustments and then 8 extrapolate it over -- over the period of time or 9 the documents, or the lack thereof of documents, of 10 four-point-some-million dollars, we would come up 11 with a number that is much -- very close to the 12 number provided by Member Harkey in her estimate. 13 And I believe those numbers were inclusive to a 14 great degree. 15 To provide any further adjustment, in my 16 mind, would be a gift of public funds and I'm not 17 prepared to do that. 18 MS. STOWERS: Mr. Chairman. 19 MR. HORTON: Member Stowers. 20 MS. STOWERS: To the maker of the motion, I 21 want to make sure I understand. You're removing the 22 1,358,792 from the basis. 23 MS. MA: Yes. 24 MS. STOWERS: Which on the evidence of the 25 record it was labeled as capitalized interest -- 26 MS. MA: Right. 27 MS. STOWERS: -- was the excess mortgage. 28 But you're including the 739,099, which was labeled 5 1 as construction period interest. 2 MS. MA: Yes. 3 MS. STOWERS: Okay. Thank you. 4 I object to the motion as well. Although 5 the law allows for a taxpayer to make an election 6 for the construction period interest, there's 7 nothing in the record to support that they made the 8 election. We have over 4,000 pages and nowhere did 9 the appellants even make a statement or declaration 10 that they made the election. 11 In addition, the CPA and financial planner 12 who was in charge of their bookkeeping at the time, 13 he -- although he initially raised the issue of the 14 construction period interest, he also conceded that 15 it was not something that should be included in the 16 basis. 17 So I disagree to allow it and believe there 18 would be insufficient evidence to allow this 19 construction period interest and would be basically 20 an error in the law. 21 MR. HORTON: Okay. There's a motion and a 22 second. Objection noted. 23 Ms. Richmond, please call the roll. 24 MS. RICHMOND: Mr. Horton. 25 MR. HORTON: No. 26 MS. RICHMOND: Ms. Harkey. 27 MS. HARKEY: Aye. 28 MS. RICHMOND: Mr. Runner. 6 1 MR. RUNNER: Aye. 2 MS. RICHMOND: Ms. Ma. 3 MS. MA: Aye. 4 MS. RICHMOND: Ms. Stowers. 5 MS. STOWERS: No. 6 MS. RICHMOND: Motion carries. 7 MR. HORTON: Thank you. Next matter, Ms. 8 Richmond. 9 ---oOo--- 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 7 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 February 23, 2016 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 7 constitute 14 a complete and accurate transcription of the 15 shorthand writing. 16 17 Dated: March 18, 2016 18 19 20 ____________________________ 21 KATHLEEN SKIDGEL, CSR #9039 22 Hearing Reporter 23 24 25 26 27 28 8