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 SEPTEMBER 27, 2016 10 CORPORATE FRANCHISE AND PERSONAL INCOME TAX HEARING 11 APPEAL OF 12 RICHARD R. BETCHLEY AND KELLIE S. BRUNK 13 NO. 874758 14 AGAINST PROPOSED ASSESSMENT OF 15 ADDITIONAL INCOME TAX 16 17 18 19 20 21 22 23 24 25 Reported by: Kathleen Skidgel 26 CSR No. 9039 27 Jillian Sumner 28 CSR No. 13619 1 1 P R E S E N T 2 For the Board of Equalization: Fiona Ma, CPA 3 Chairwoman 4 Diane L. Harkey Vice Chair 5 Jerome E. Horton 6 Member 7 Sen. George Runner (Ret.) Member 8 Yvette Stowers 9 Appearing for Betty T. Yee, State Controller 10 (per Government Code Section 7.9) 11 Joann Richmond 12 Chief Board Proceedings 13 Division 14 For Board of 15 Equalization Staff: Anthony Epolite Tax Counsel IV 16 Legal Department 17 Lou Ambrose Tax Counsel IV 18 Legal Department 19 For Franchise Tax 20 Board: Susanne Coakley Tax Counsel 21 Adam Sousz 22 Tax Counsel 23 For Appellant: Richard Betchley 24 Taxpayer 25 Kellie Brunk Taxpayer 26 Richard Betchley, Sr. 27 Witness 28 ---oOo--- 2 1 5901 GREEN VALLEY CIRCLE 2 CULVER CITY, CALIFORNIA 3 SEPTEMBER 27, 2016 4 ---oOo--- 5 MS. MA: Good afternoon. We are back, the 6 State Board of Equalization, reconvening, 1:30 p.m. 7 Ms. Richmond, please call the next item. 8 MS. RICHMOND: Our first hearing for this 9 afternoon is Item B5 Richard R. Betchley and Kellie 10 S. Brunk. 11 Please come forward. 12 MR. RUNNER: B5. 13 MS. HARKEY: B5. 14 MR. BETCHLEY: Are we the appellant -- or 15 we're the petitioner. 16 MR. EPOLITE: Yes. 17 MR. BETCHLEY: I'm sorry. What are -- what 18 are -- what are we, Betchley and Brunk? 19 MS. MA: Yep. 20 MR. BETCHLEY: Do we sit here or -- 21 MS. MA: If you could sit in the middle, 22 maybe. 23 MR. SUSZ: Scoot one over? Sure. 24 MS. MA: You sit right there? 25 MR. SUSZ: Absolutely. 26 MS. MA: Is there more people? 27 MR. EPOLITE: Yes. 28 MS. BRUNK: Yeah. 3 1 MS. MA: Oh, okay. Let's -- how many more 2 seats? 3 Okay, we're going to squeeze down. Or you 4 can sit behind and then they can come -- 5 MS. BRUNK: I just want to keep an eye on 6 my daughter so that she doesn't leave. 7 MS. MA: Okay. She can sit with you. 8 MS. BRUNK: Jules, sit right over here. 9 MS. MA: She can move up, next to you. 10 There's an empty chair. 11 MR. AMBROSE: Anthony, do you want to sit 12 here, and somebody can sit there? 13 MS. BRUNK: That's okay. 14 Jules. 15 Where's he going? 16 MS. MA: Just bring an extra chair up. 17 MS. BRUNK: Do you want me to move down, 18 Dick? 19 Thank you. 20 MS. MA: Do you want her to sit over here? 21 MS. BRUNK: I'll keep an eye on her. 22 MS. MA: She can come up and sit. 23 MS. BRUNK: Can we just put a chair by you 24 then? 25 MR. BETCHLEY: Yeah. 26 MS. BRUNK: I just wanted to see her. 27 MR. BETCHLEY: She won't understand. 28 MS. MA: That's okay. 4 1 MS. BRUNK: Thank you. 2 MS. MA: You're welcome. 3 Okay. All right. Mr. Epolite, would you 4 please introduce the issues in this case. 5 MR. EPOLITE: Good afternoon, Chairwoman 6 Ma, Members. Anthony Epolite of the Appeals 7 Division. 8 There are four issues before the Board in 9 this appeal: 10 First, whether appellants have 11 substantiated their claimed capital improvements for 12 the purpose of calculating the capital gain on their 13 sale of their residence for the 2005 tax year; 14 Second, whether Decata Enterprises, Inc. 15 made bona fide loans or dividend distributions to 16 appellant-husband, its sole shareholder, for the 17 2006, 2007 and 2008 tax years; 18 Third, whether appellants calculated their 19 home mortgage interest deduction correctly for the 20 2008 tax year; 21 And fourth, whether appellants have shown 22 reasonable cause for the late filing of the returns 23 for the 2005, six and seven tax years. 24 MS. MA: Okay. To the appellants, welcome 25 to the Board of Equalization. You have been granted 26 additional time to make your opening presentation. 27 You will have 15 minutes to make your initial 28 presentation and then an additional five minutes on 5 1 rebuttal after the Board of Equalization makes the 2 presentation. 3 So please introduce yourself for the record 4 and then you may begin. 5 MR. BETCHLEY: Thank you. My name is 6 Richard Betchley. This is my wife Kellie and my 7 father Richard Betchley, also, a different middle 8 name though. And this is Jules, my stepdaughter. 9 Jules has to be with us; she has mild Down Syndrome. 10 So, my father is here to answer any 11 questions because there are some conduct issues that 12 he has had first-hand experience. 13 I'd like to thank you because it's taken us 14 six and a half years to get in front of an unbiased 15 Board. We have applied for meetings and opportunity 16 to share our documents, have our story, and for six 17 and a half years with the Franchise Tax Board and 18 have not been allowed one meeting, which I 19 understand is some kind of violation. 20 But -- but I -- you probably have all seen 21 the exhibits that we put in two weeks ago that show 22 a lot of data. But two -- two new -- or there's 23 three supplemental exhibits I gave this morning. 24 One is the all -- it's not all, but is nine of the 25 return receipt letters where we attempted to -- to, 26 um -- over the last five years, attempted to meet 27 with the Franchise Tax Board to review these issues. 28 And then two other significant things 6 1 happened since I submitted this: 2 One, was that just last week we received 3 our third set of letters over the last four and a 4 half years from the Franchise Tax Board saying that 5 we owed nothing. The last letters we received were 6 dated September 19th, which is last Monday. We 7 have, in our previous exhibits, I have the other 8 round of letters that we had received over those 9 years; 10 But also, you'll see in this that the 11 Franchise Tax Board never wanted any documentation. 12 They testified under oath they never wanted any 13 documentation; 14 And finally, after -- one of the things 15 they allege is that I pled guilty to three felony 16 accounts, including one that was tax evasion with 17 the State of California. I would like to say that I 18 did not plead guilty and the record clearly shows I 19 didn't. I pled no contest because I had no -- I 20 didn't have 400 to $600,000 to go on to trial. 21 But, given what's gone on with this 22 district attorney and the Franchise Tax Board, a 23 superior court judge stepped in, who did look at the 24 documentation and issued a ruling that did three 25 things: 26 He changed that no contest forced plea to 27 misdemeanors; 28 The second thing he did -- I didn't -- 7 1 didn't ask him to change my plea -- he changed my 2 plea to not guilty and then he dismissed all 3 charges, including the Franchise Tax Board's charge. 4 Now back to what we're here on. I'm truly 5 sorry that we are here taking up your time, but I'm 6 very grateful that you -- you've cared enough. I've 7 read about all your things on your websites and you 8 do stick up for the taxpayer and that's what we 9 were -- we were hoping for. We were told years ago 10 by several members of your staffs that we would end 11 up here, and here we are. I'd like to thank you for 12 all of that. 13 We've tried, as I mentioned, for five and a 14 half years to meet face to face with the Franchise 15 Tax Board. At the suggestion of Franchise Tax Board 16 attorneys and then one of the staff attorneys for 17 one of the Members here -- I'm saying that because I 18 don't know if you want the names in there. I'm glad 19 to give the names of the attorneys because they've 20 sent me emails and all that sort of stuff. 21 We -- they suggested we take this directly 22 to Ms. Stanislaus. We did that. You have copies of 23 nine of those letters. There're actually more. 24 There's three more with Franchise Tax Board counsel 25 Geoffrey Way. 26 But I tell you, one of the things, the 27 first exhibit I gave was just to show how 28 frustrating this is to try and deal with a 8 1 confrontation that started out with a gun in my ear 2 by the Franchise Tax Board. This is all 3 photographed, it's all in court -- it's all official 4 records. 5 I wrote, at the suggestion of one of the 6 Board of Equalization attorneys, to John Chiang and 7 asked him to get involved. We had met him -- you 8 may have seen here -- we had met him socially at a, 9 uh -- at an event for special needs. It was 10 actually for the Israeli Special Needs Olympic 11 Committee and Jules -- at friends of one of our -- 12 one of Kellie's life-long friend's home. And John 13 Chiang was there. We -- we were featured there. 14 And we decided to take the high road and not even 15 mention it to him. But he wanted a picture with 16 Jules, which we provided all of that. 17 But when I wrote to him, because I didn't 18 feel it was appropriate at a social function for 19 special needs, to -- when I wrote to him, at the 20 suggestion of Steve Sims, the then tax advocate, and 21 Marcy Jo Mandel, who was his liaison to the 22 Franchise Tax Board, you'll see under tab one his 23 counsel wrote back that Mr. Chiang had no 24 jurisdiction involving the Franchise Tax Board. 25 So we said, you know, I beg to differ. 26 Right on the website there is "Chairman," his 27 letterhead says "Chairman." But the letter we 28 received back said he had no jurisdiction in the 9 1 Franchise Tax Board. 2 So, we continued to attempt to meet, to 3 give our story, to give our documents, because the 4 way this went down was so violent and so terrible 5 that we ended up, as you saw, getting letters on 6 three multiple occasions saying that we owed 7 nothing, and we in fact had overpaid in two years. 8 In prosecuting me, the District Attorney in 9 the court records -- and that portion of the 10 transcript is included under your Exhibit 3 -- he 11 said that the State advocate had told him -- the 12 State tax advocate had told him we owed $276. 13 The Franchise Tax Board agent who came to 14 our home, full body armor, guns, everything, pulled 15 my wife out of the house, put a gun to my ear, 16 promised me right then and there I would die in 17 prison, he testified under oath that we owed 18 $88,500. I don't know if that's a policy to arrest 19 people for $88,000, with guns and all that and storm 20 their house. That's what they did. 21 But as the truth came out, when we were 22 audited by the -- by the Franchise Tax Board, it 23 turned out that they wrote it was $276. 24 A part of this process that was -- 25 You know, and if I did that, I wouldn't 26 even be in the top 1500 in the State. And I don't 27 think any of the rest of them have been arrested at 28 gunpoint. 10 1 One of the things that just showed how this 2 thing got out of hand, there's a letter in there on 3 Franchise Tax Board letterhead from Tomas Samlik, 4 the investigator who wrote asking for publicity 5 about my arrest before the arrest. He's probably 6 very happy. The article about my arrest was on the 7 newstands before the arrest took place. Of course 8 the article didn't say it was for less than $300. 9 Later on, there were other threats against 10 me. My father was witness to another one, standing 11 right there when Samlik issued one. But what's 12 interesting -- and I'm going to try and speed this 13 up -- but under oath -- because some of this stuff 14 so mindboggling -- under oath, Agent Samlik 15 testified that I had not filed taxes in 18 years. 16 The Franchise Tax Board produced internal 17 reports, which they're not supposed to do, I realize 18 that, but they did, showing that was not the case 19 and my taxes had been filed, credits had been given. 20 And if you don't file taxes, it's a little strange 21 that the Franchise Tax Board would issue checks for 22 overpayment. Nobody seemed to care about that other 23 than the superior court judge. 24 Then Samlik went to the IRS and asked them 25 to audit me, which they did. I had to go in four 26 times to the IRS and they -- and they did audit me. 27 And they found I did make mistakes and they issued 28 me about $8,600 in refunds for overpayment. Copies 11 1 of those checks and of the audit finding are also in 2 here. 3 All my taxes were always prepared by H&R 4 Block, and they do both the Federal and the State 5 returns, same price, all included. So it's kind of 6 strange that I would not file. And even though now 7 the Franchise Tax Board has admitted with their 8 internal reports, I filed for all those years. 9 The -- the gentleman to my left accurately 10 claims the issues. I think those four issues really 11 accurately sum up, you know, why we're here. Let me 12 just kind of do a quick thumbnail and I know I'm 13 going to have to rebut a few things. 14 The documents that were seized from us were 15 all signed for by the same agent who had the gun in 16 my ear, Tomas Samlik. He clearly listed on there 17 the Lafayette property documentation. This is a 18 file that was well known in our family because it 19 was our home for 19 and a half years, it had the 20 build -- the lot costs, the building costs, the 21 improvement costs, all the things that we did, the 22 contracts, the photos, the appraisals through the 23 years that were done, all of that. It was in a very 24 bright blue expandable file. 25 Everybody knew it was there. Multiple 26 Franchise Tax Board people have admitted it was 27 there. They actually even called us to come fly up 28 to Sacramento to get it after Steve Sims demanded it 12 1 be returned to us. 2 That file has disappeared. They say it 3 doesn't exist anymore. But rather than just trust 4 me on that, the interesting thing is that when 5 Samlik was under oath, he testified that we spent 6 $400,000 on property improvements. I mean that was 7 a pretty good guess. It wasn't the right number. 8 It was actually a little higher than what we spent, 9 about two percent higher. But what's interesting is 10 how would he, seven months later, come up with a 11 number that was that close, you know, without the 12 file? It just defies any kind of logic. 13 When we went to pick up the court-ordered 14 return of our documents, that file was not there. 15 The Franchise Tax Board contends that we signed for 16 all of that. You know, as you know how that process 17 works, not only do you have 15 minutes to pick up, 18 as they put, 18,000 pages, including copies of the 19 operating manual for our gas generator, which was 20 copied cover to cover. We -- you don't have time to 21 look at every page. 22 But we did see there was no blue file 23 folder. And we knew that was going to be an easy 24 one to refute. Part of the reason I pled no contest 25 because we thought, well, we'll get out of here, 26 we'll show the file, and we made a note on that. We 27 specifically noted on the receipt that that property 28 improvement file was not there. 13 1 Karen Lees, who was Samlik's supervisor, 2 the supervising agent there, was there and 3 acknowledged that. It's on film. They take photos 4 there in that little room where you go. So, we know 5 that exists. 6 I don't know how else to come up with it. 7 We -- we were asked by the Franchise Tax Board to 8 reconstruct, which we did through photos and calling 9 the county and getting assessments, trying to get 10 appraisals, talking to the banks. It took us 18 11 months to reconstruct that, and we submitted it. 12 The Franchise Tax Board said that wasn't 13 enough, it wasn't acceptable. Unfortunately for 14 them, the IRS did accept it. The IRS did audit it, 15 look at everything, and state that we owed no taxes. 16 And they actually cut those three checks to us. 17 So it's pretty clear that the $400,000, 18 probably Samlik just rounded up from the actual 19 392-something. 20 The other issue is on these loans. What I 21 was doing was trying to set -- I set up a company 22 and the business was just to be an entrepreneur, to 23 try and make some money and have some fun in it. 24 And the bylaws allowed the company to do all sorts 25 of things, including making loans. 26 It did make loans to me. We used the 27 official document from the IRS website. The IRS 28 audited those loans. They declared they're loans. 14 1 And the Franchise Tax Board maintains that 2 I didn't make any payments for nine -- for ten years 3 in their writeup. Well, that's just not true. I 4 mean they didn't -- they -- if you look at when 5 those loans were written and you look at 2009 when 6 they took 'em all from me, took all my 7 documentation -- they didn't take the bank records 8 for the company that took -- that made the loans, 9 interestingly enough. They left that right on my 10 desk. So -- I mean, I wonder why? But that was 11 so -- that was mindboggling. 12 As we got into getting some of these 13 documents back, when they were testifying against me 14 in a preliminary hearing, it came out -- because we 15 couldn't get any documents. We said, "Well, where 16 is all this stuff?" 17 It came out that the lead investigator said 18 that Tomas Samlik -- and this is all -- we have that 19 in here as an exhibit, too -- that Tomas Samlik said 20 they were -- it was too tedious a job to copy our 21 files and give 'em to us, so they didn't do it. 22 That's in there as Exhibit 15. 23 Now they claim they're dividends, not -- 24 not loans. They claim that -- you know, I don't 25 know anybody who repays dividends, repaid dividends. 26 We made loans -- Decata made loans to independent 27 companies that had nothing to do with me. I guess 28 those were dividends to companies that -- I -- I 15 1 don't know how you -- how you do that. I don't know 2 how you return a dividend; I don't think anybody 3 does that. It's interesting the amount repaid 4 really closely approximated -- actually exceeds the 5 amount of interest that was due on the loans. 6 The Franchise Tax Board never wanted to 7 know any of this. So, they never wanted to meet. 8 They denied every -- every request for meeting. 9 So then, a couple of the attorneys for some 10 of your staffs and then Steve Sims, at that time the 11 Franchise Tax Board Tax Advocate, said let's make up 12 a list of your rights that have been violated. 13 When I went to see another one of your 14 staff attorneys and said, "You know, this -- I don't 15 know what to do with this." He says, "Well, they 16 violated just about every one of your rights." And 17 he went through and pointed out in the -- in the 18 taxpayer rights brochures, the website, all of that, 19 how none of these things were adhered to. 20 So Samlik testified, as you saw, or if 21 you've had a chance to, Exhibit 17, he testified 22 under oath, under penalty of perjury, that he never 23 wanted to know the facts. He never wanted the 24 documentation. He didn't want anything, any 25 information regarding allowable tax deductions, 26 under oath. 27 I was arrested, as the El Dorado County 28 D.A.'s Investigator has now gone on the record with, 16 1 at Tomas Samlik's direction. 2 Well, I -- you see, I've tried to take the 3 high road through all this. I've requested the 4 meetings that were my right. I filed every appeal 5 procedure. You guys are the only ones that have 6 been open to really looking at anything. Your 7 staffs have been helpful. 8 But one thing -- the final auditor that was 9 assigned -- the first two auditors that were 10 assigned by the Franchise Tax Board to audit me were 11 members of Tomas Samlik's staff, Elvira Ramos and 12 Julie Wines. That didn't make much sense. But at 13 the end they assigned an experienced auditor named 14 David Matsueda who was extremely kind, extremely 15 personable. 16 The first time I got a call from him where 17 he introduced himself, he said, "This is not going 18 to end here. You're going to end up in front of the 19 Board of Equalization appeals board." He goes, and 20 his quote was, "I've been told to find something. 21 Anything." 22 When he submitted his final report, he 23 called me from his home that night and he provided 24 me a list of deductions that he was not allowed to 25 include because I hadn't thought of them. He 26 thought of a whole bunch -- after looking at this, a 27 lot of deductions that I would have been entitled 28 to; among them, things for special needs, for 17 1 losses. He -- he itemized all that for me. 2 The Franchise Tax Board has acknowledged 3 that every year my tax -- in these letters that 4 you've seen there, and I gave the ones from last 5 week -- every year my taxes have been paid. They've 6 given me refunds for overpayment. So I -- I -- I 7 don't get why I'm -- why I'm here. 8 Well, I should special out -- or single 9 out -- sorry, I'm a little nervous about this 10 because it was very -- it is traumatic to this day. 11 My wife is on anxiety things because they put a gun 12 to her, too. 13 Steve Sims was terrific when he was the tax 14 advocate. He'd -- he'd call on weekends, he'd call 15 from his daughter's games. He was terrific. 16 He wrote to me, he says, "I'm going to take 17 this to Selvi Stanislaus and get this 18 administratively resolved." 19 And then later on one of the attorneys for 20 one of you -- and I'm not afraid to give the names 21 because I have their emails and all that, um -- said 22 that she went to Selvi Stanislaus for a 23 administrative resolution so that it would not be 24 on -- put you guys on notice of this, just be 25 handled. She declined both those offers. 26 I was told to -- you know, I was pretty 27 stressed out over this, had a couple of strokes. 28 You know, that was kind of frightening to my family, 18 1 seeing me carted off like that. 2 I have tried to take the high road with 3 these guys all along. And then Sims wrote to me 4 before he retired. He wrote -- I still have his 5 emails. I have 'em here with me. He wrote that I 6 should be able to get his -- from the Disclosure 7 Office, his full -- and he emphasized -- "unedited 8 report" to me. "Unedited," that's what I was 9 supposed to get from the Disclosure Office. 10 I called, spoke to Tonya Aarons there. She 11 said, "I saw that." We flew up to get the report. 12 She said her management had told us it was an 13 internal document and would not be released to us. 14 MS. RICHMOND: Time has expired. 15 MR. BETCHLEY: He mentioned later, he said 16 that if you don't ask for the unedited report, you 17 will get a redacted one, because when the Franchise 18 Tax Board employees do not follow policy, it's 19 redacted. He was very clear. He wrote to me in the 20 emails; I've got all that. The Franchise Tax Board 21 never wanted to see that. 22 He also brought John Chiang into the 23 picture and asked me to meet with him. I ended up 24 meeting with Marcy Jo -- who was -- Mandel, who was 25 tremendous to us. She told us what was going to be 26 done. She said, "Here's who you need to contact for 27 an internal investigation at the Franchise Tax Board 28 of Samlik." 19 1 We met with somebody. We sent to -- we -- 2 the investigator -- the first investigator was 3 Kristin Yaeger. And she called, she got the 4 information from us and then she called back a week 5 later and says, "They've taken me off this." 6 So then they put another guy on it. We 7 sent him all that. And then we got a letter, very 8 hard to understand the gobbledygook, but the bottom 9 line was -- this was from a guy named Tom McPherson; 10 I guess he was head of enforcement. And he said 11 Samlik had been disciplined, but to go any further 12 in disclosing what happened, would not -- I would 13 not have rights to that and he would not release 14 that and I should be happy. 15 MS. MA: So your time is up at this moment. 16 We're going to have the Franchise Tax Board present. 17 MR. BETCHLEY: Okay, I'm sorry. 18 MS. MA: And then five minutes rebuttal. 19 And I'm sure my colleagues may have some questions 20 for you as well. 21 MR. BETCHLEY: Thank you. 22 MS. MA: So we'll give you additional time 23 to present later. 24 So, please introduce yourself for the 25 record. 26 MS. COAKLEY: Good afternoon, Chair -- 27 Chairwoman Ma and Members of the Board. My name is 28 Susanne Coakley and I am representing Franchise Tax 20 1 Board. Also here is Adam Susz. 2 The appeal before your Board is to 3 determine appellants' civil tax liability. 4 In 2011, Richard Betchley pled no contest 5 to three felony counts of State tax evasion, grand 6 theft and securities fraud. As part of the plea 7 deal, Mr. Betchley, appellant-husband in this 8 matter, was sentenced to one year in jail and 9 ordered to pay $250,000 in restitution. 10 In addition, it was agreed that appellants' 11 civil tax liability would be addressed outside of 12 the criminal proceeding; that is the reason this 13 appeal is before your Board. 14 This appeal concerns four issues: 15 The first issue is whether appellants have 16 substantiated claimed capital improvements to their 17 residence for 2005; 18 The second issue is whether appellants have 19 established that they can take a home mortgage 20 interest deduction for two properties for 2008; 21 The third issue is whether Decata 22 Corporation made bona fide loans to 23 appellant-husband in 2006, 2007 and 2008; 24 And the last issue is whether appellants 25 had reasonable cause for filing delinquent joint 26 returns for 2005, 2006 and 2007. 27 The first issue has to do with basis. In 28 2005, appellants sold their residence and reported 21 1 gain of $196,000 after applying basis of 2 approximately 1.5 million and the 121 exclusion of 3 $500,000. The law provides that basis is the 4 property's initial cost, plus any costs associated 5 with capital improvements. 6 The burden is upon the taxpayer to 7 establish basis. Appellants did not provide 8 credible evidence to support their claimed basis. 9 The Board Hearing Summary noted that appellants have 10 not provided any evidence on appeal related to the 11 disallowed capital improvements. 12 Since appellants did not support their 13 claimed basis, respondent used property tax records 14 to estimate appellants' basis. Prior to the sale of 15 appellants' residence, the property tax records show 16 an assessed value of appellants' home and land of 17 approximately $900,000. 18 Respondent allowed the entire assessed 19 value of the home as basis to account for the 20 original purchase price of the property, as well as 21 construction costs and improvements to the property. 22 The result is that respondent allowed a majority, or 23 60 percent, of appellants' claimed basis. 24 The next issue is the home mortgage 25 interest deduction. Appellants reported a mortgage 26 interest deduction for two separate properties in 27 2008. The law allows the deduction for interest 28 paid on a qualified residence. A qualified 22 1 residence includes the principal residence of the 2 taxpayer and one other residence, as long as the 3 taxpayer owns the property. 4 In 2008, appellants claimed a deduction for 5 their primary residence, as well as a second 6 residence. Respondent disallowed a home mortgage 7 interest deduction for the second residence because 8 appellants did not own the property in 2008. 9 Therefore, respondent determined that appellants did 10 not meet the requirements to take a mortgage 11 interest deduction in 2008. 12 The third issue is whether distributions 13 from appellant-husband's corporation Decata are 14 properly characterized as loans or constructive 15 dividends. 16 Appellant-husband pled no contest to grand 17 theft in the amount of $750,000. Our records show 18 that $700,000 of this income was deposited directly 19 into Decata Corporation's bank accounts. Of this, 20 $200,000 was withdrawn directly from Decata's 21 corporate bank accounts to cover appellants' 22 personal expenses, such as mortgage payments for 23 their personal residence and luxury items. 24 The remaining $500,000 was distributed from 25 Decata to appellants' personal bank accounts. This 26 was not done in one lump sum but, rather, over a 27 three-year period. Appellants allege that all 28 income transferred from Decata to appellants is bona 23 1 fide debt. 2 Courts have reviewed several factors in 3 order to determine whether a distribution is in fact 4 a loan. After reviewing the factors, respondent 5 determined that these transfers of funds were not 6 loans but constructive dividends. 7 For example: 8 Appellant-husband controlled Decata and 9 authorized all transfers of funds from the 10 corporation to his personal bank account which he 11 shared with his wife; 12 Second, appellants failed to pay interest 13 on the income they received from Decata; 14 Third, appellants failed to abide by the 15 terms of their own promissory notes; 16 And last, Decata did not force repayment of 17 the funds it transferred to appellants. 18 In the end, neither Decata nor appellants 19 treated the funds transferred to appellants as 20 loans. This is supported by the Board of 21 Equalization Appeals staff when they provided in 22 their hearing summary that the distributions were 23 not intended to be loans or treated as loans. 24 Based on the law, appellants have failed to 25 prove that the distributions they received from 26 Decata are loans. 27 The last issue in this appeal is whether 28 appellants have established reasonable cause for 24 1 filing late returns. Respondent imposed a late 2 filing penalty because appellants filed a joint 3 return after the due date for 2005, 2006 and 2007. 4 Appellants did not provide reasonable cause for 5 filing delinquent joint returns, therefore 6 respondent cannot abate the delinquent filing 7 penalty. 8 In closing, I respectfully ask your Board 9 to sustain respondent Franchise Tax Board's 10 position. Thank you. 11 MS. MA: Okay. Thank you. 12 So Mr. Betchley, um, you have five minutes 13 on rebuttal. 14 MR. BETCHLEY: Okay. I'll try and do it 15 like bullet points so it's not my usual narrative. 16 The late filing, um, I did make a mistake 17 in filing taxes. I thought when you didn't owe 18 taxes, you didn't have to file. 19 Um, you know, if I'd have known now what I 20 know then, I would have gotten more refunds like 21 I -- they showed me, from the Franchise Tax Board. 22 I didn't file all those for a couple years, 23 for four years, with the Fran- -- with the IRS 24 because I didn't think I owed any taxes. Turned out 25 they owed me, after they audited me. Just like the 26 Franchise Tax Board on their letters to me showed in 27 two of the years that they charged me with tax 28 evasion they actually credited me for overpaying. 25 1 So, the late filing, yes, that -- that's my 2 fault. But, you know, here we are as recently as 3 last week, the Franchise Tax Board has reverified in 4 writing that I owe nothing. A superior court judge 5 has stepped in, looked at all this documentation, 6 stepped in and thrown everything out, apologized to 7 me on the record. 8 I don't -- it's -- they've never wanted to 9 meet, for five and a half years, where I could 10 discuss this, find out if we did anything wrong, 11 what it was. 12 We know that virtually every taxpayer 13 rights that's listed in their brochures and on their 14 website and under the tax advocates has been 15 violated. 16 They would not -- when I talked to Susan 17 Maples, her response in the letters we got back, her 18 response was, "I work for Ms. Stanislaus. There's 19 no way I'm going to get involved." 20 When I talked to Todd Gilman's office, he 21 goes, "This is so hot, I'm not getting involved." 22 We have all these emails and letters. We 23 don't -- we tried to go through every possible 24 attempt to meet, to show the documentation, to show 25 the file, reconstruct -- the things we spent 18 26 months reconstructing with property -- with county 27 taxpayers, with -- or I mean county tax collectors, 28 all of that. We were just looking forward to this 26 1 day when somebody would meet, look at the hard 2 proof. The Franchise Tax Board admitting under 3 penalty of perjury that they never wanted the facts, 4 they never wanted the deductions. 5 They stormed our house, dragged my wife 6 out. I came to the door. I saw them out there all 7 in their battle garb. I came to the door. He put a 8 gun in my ear, and told me he was going to make sure 9 I died in prison. He said the same thing in front 10 of my father when we went up to meet -- when we went 11 up to get our documents back, except they wouldn't 12 return the property improvements. 13 But it defies logic that they would be 14 within $8,000 of the actual improvements made. How 15 would he know that without the file? 16 And then, why did they only copy the cover 17 sheet of our records when we had to defend 18 ourselves? They've admitted all that. 19 So, I don't want to waste any more of your 20 time. I just -- I'm speechless as to -- this is 21 all -- nobody needs to believe me. This is all 22 third-party provided, most of it by the Franchise 23 Tax Board themselves, others by a superior court 24 judge who has looked at all of this. He looked at 25 the Franchise Tax Board's position. I don't know, 26 you know. He issued a ruling. I appreciate it. It 27 cleared everything for me. 28 Everything's been expunged. And I have the 27 1 full transcript of that. I gave you the two pages 2 showing it was an official ruling and giving you 3 where he wiped everything off and declared 4 everything not guilty and eliminated it. 5 The rest of it's a lot of court procedures, 6 but you can have the whole transcript if you want. 7 That was last week -- two weeks ago. 8 Uh, I think I'll stop there. 9 MS. MA: Okay. Thank you very much. 10 Members? Ms. Harkey? 11 MS. HARKEY: I don't recall I raised my 12 hand, but I will have some questions. 13 MS. MA: You're always first. 14 MS. HARKEY: I'm always first. I don't -- 15 I don't mind. 16 Okay. I'm -- I've got just some questions. 17 Now, it says here that you sold a personal residence 18 in Lafayette. 19 MR. BETCHLEY: Yes. That was the one I 20 lived in for 19 and a half years. 21 MS. HARKEY: Right. That's verified here 22 in the file, too. You bought it for 150,000 in 23 1986. Um, in 1988 you built a home on it. And -- 24 MR. BETCHLEY: Finished the home, yes. 25 MS. HARKEY: Finished the home. 26 Did you have -- did you provide any records 27 or keep any of the home improvements? Or what -- 28 what did you have to substantiate your value? 28 1 MR. BETCHLEY: It was -- it was -- we 2 constructed it. So I had the builder's contract, 3 the construction loan appraisal, a schedule of 4 construction loan draws where the bank makes the 5 payment as the builder makes the progress. We had 6 the final inspection report. We had our checks in 7 there. 8 We had photos. As anybody, when you build 9 your dream home, you take photos along the way. We 10 had those in there. 11 Then we had the final appraisal when the 12 permanent loan was put on at the conclusion of 13 construction. 14 The documents, when they're showed -- we 15 spent nine -- I can't remember the number right now, 16 but like 960-something-thousand on improvements 17 building the house, on top of the land price which 18 was 150. And then we spent a little less than 400, 19 even though the Franchise Tax Board testified it was 20 $400,000, we spent 392 and change on pool, 21 driveways, fences, pool house, an extra bedroom, 22 decks. It's all -- all of that stuff is all 23 documented. It was all in subsequent appraisals and 24 in the reassessment, unfortunately, of the property 25 for property taxes. 26 MS. HARKEY: Okay. I'm going to be 27 bouncing back and forth because I -- I want to get 28 the story. 29 1 Okay. Did we request or receive any 2 information substantiating the improvements? Did 3 the FTB? 4 MS. COAKLEY: No, we did not. We requested 5 appellants send information during audit and 6 protest, and we did not receive any documentation. 7 MS. HARKEY: So you requested documentation 8 on this? Because I'm going to take this piece by 9 piece. 10 MS. COAKLEY: Sure. 11 MS. HARKEY: Seems like there are four 12 issues here, so I want to take one at a time. 13 So, how long was the audit and protest 14 time? What was the -- and what was the 15 communication that you had? 16 MS. COAKLEY: Well, during audit there was 17 a document request to appellants specifically asking 18 for any sort of documentation that would 19 substantiate either the construction costs or the 20 claimed capital improvements. 21 MS. HARKEY: And what did you receive? 22 Nothing? 23 MS. COAKLEY: Essentially appellants have 24 argued that there were documents but that the 25 documents were not returned to them. 26 MS. HARKEY: Okay. Let me go back. 27 Mr. Betchley, what -- what documents did 28 you provide the Franchise Tax Board? 30 1 MR. BETCHLEY: Well, they took, as I 2 mentioned, this blue expandable file that had all 3 the receipts and all that. They listed it right on 4 the Evidence Seized Report; that page is in the 5 exhibit. 6 MS. HARKEY: Okay. So -- 7 MR. BETCHLEY: So they took that. 8 MS. HARKEY: When -- when they -- when your 9 property was seized, they took your documentation. 10 And the audit came in, or the request from Audit 11 came in after that time? 12 MS. COAKLEY: The request from Audit was 13 after the criminal proceeding. 14 MS. HARKEY: Okay. 15 MS. COAKLEY: And so it was several years 16 later. 17 MS. HARKEY: So your files were gone. 18 MR. BETCHLEY: They were somewhere at the 19 Franchise Tax Board. 20 And Steve Sims was able to get Tonya Aarons 21 in the Disclosure Office to admit that she had them. 22 That's -- I mean otherwise I wouldn't have flown all 23 the way up to Sacramento from here to get 'em. 24 My father and I went up there to get -- 25 pick up those files. She said she was told by 26 management not to release them. 27 Sims acknowledged the files existed. 28 Matsueda, when he did his final audit, he told us, 31 1 "They exist. They won't give 'em to me." He tried 2 to get it because he could see the paper trail. 3 MS. HARKEY: Okay. I don't want to go -- I 4 don't want to go -- 5 MR. BETCHLEY: Okay. 6 MS. HARKEY: -- into it. 7 So there were no -- there were no files 8 provided. The audit took place after the seizure, 9 and the seizure -- and the seizure, the files were 10 taken and so you did not have them. 11 Were you able to -- at the audit, were you 12 able to ever go back to whoever provided the 13 construction loan? 14 MR. BETCHLEY: What we did -- no, 15 they were -- I don't -- a bank that failed. 16 MS. HARKEY: Okay. 17 MR. BETCHLEY: But what we were able to do, 18 because Sims suggested it, he said, "Go back and 19 talk to everybody, reconstruct from your family 20 pictures and things like that what -- what 21 happened." Because we -- I couldn't remember over 22 19 and a half years all the things you do. 23 And so we all looked at them. We looked at 24 the pictures of the house. We looked at the final 25 pictures when it was built and then when it was 26 listed for sale, and you could see the differences. 27 And that's what really helped us. 28 And then I called the builder who did most 32 1 of the work and he provided the actual numbers for 2 the pool and the pool house and room conversion. 3 And so we -- we reconstructed -- we had to 4 reconstruct it, is what they asked us to do. And I 5 had to explain that to the IRS when they audited me, 6 when the Franchise Tax Board asked the IRS to audit 7 me. And I said, "Here it is and here's how we came 8 about it." And, you know, they said, "Well, there's 9 your listing." 10 MS. HARKEY: Okay. So did you -- was the 11 FTB able to access any reconstructed documentation 12 or verification on the house? 13 MS. COAKLEY: No. The documents that were 14 seized originally as part of the criminal 15 investigation were returned to appellants. The 16 reason we know this is that there was an 17 Acknowledgement of Receipt document which 18 appellant-husband signed, acknowledging that he 19 received all property originally seized on May 27th, 20 2009. 21 In addition to that signature, 22 appellant-husband initialed each and every one of 23 the 49 items that were seized, acknowledging that he 24 indeed received them. 25 MR. BETCHLEY: That's an easy one to 26 address as I did previously. Karen Lees, who is 27 Samlik's supervisor, was required to be with him 28 when the boxes -- they wheel them in, all that. You 33 1 have 15 minutes and you got 18,000 pages of 2 documents. We went right to the blue file. 3 "Where's the blue file?" It wasn't there. 4 The Franchise Tax Board -- I don't -- I 5 don't know if Ms. Coakley's aware or not, but on the 6 cover sheet where you -- where you sign that you've 7 received things -- evidence back, we handwrote in 8 there and initialed, "Have not received the 9 Lafayette property home improvement file." It's 10 right on the cover there. 11 And Karen Lees, she said, "Well you surely 12 should write something else in there," you know, 13 make another note on the applicable page. Well, we 14 saw the page in there. I marked it. I gave it to 15 you here as an exhibit. We were -- you know, you're 16 sittin' there and the guys's threatening your life. 17 You got 15 minutes -- 18 MS. HARKEY: Okay. Okay. We heard -- I 19 heard all of that. I'm trying to keep this 20 focused. 21 MR. BETCHLEY: Thank you. 22 MS. HARKEY: Okay. So where is the example 23 of where you signed, or you said you proved that you 24 signed? You just said, in your -- 25 MR. BETCHLEY: With the Franchise Tax 26 Board. 27 MS. HARKEY: Okay. If you could find 28 something like that for me, Franchise Tax Board, I'd 34 1 appreciate it. 2 Now, the -- the next home mortgage interest 3 claiming it on two properties, who owned -- you 4 owned one home, and who owned the other? 5 MR. BETCHLEY: We -- the second home is one 6 that I'm -- I'm -- I'm not trying to dodge it. One 7 home we owned, our primary residence. If you're 8 talking about the home that we built after we sold 9 the Lafayette residence, we built a home together, 10 the three of us. 11 MS. HARKEY: Okay. 12 MR. BETCHLEY: That was in -- that was 13 ours, in our name. 14 Back then, this was before the recession, a 15 lot of people in the neighborhood wanted to build a 16 spec home. So Decata, the company they're referring 17 to, was asked to be the focal -- the -- the entity 18 that built that home. And neighbors invested money. 19 We invested money. And we went and we hired an 20 architect and bought a lot to build a home. 21 The Franchise Tax Board says -- initially 22 said it was my home. Then they said it wasn't my 23 home. So, I don't know. It wasn't -- 24 MS. HARKEY: Well, it doesn't sound like it 25 was your home. 26 MR. BETCHLEY: It wasn't. I mean -- 27 MS. HARKEY: It doesn't sound like it was a 28 residence or eligible for deduction. 35 1 MR. BETCHLEY: No, it was a business 2 expense by a separate corporate entity. 3 MS. HARKEY: Okay. So we can definitely 4 say that one's a legit, because it wasn't -- it 5 wasn't a residence of yours. 6 MR. BETCHLEY: Right. And as David 7 Matsueda -- as David Matsueda pointed out -- 8 MS. HARKEY: Okay. That's fine. 9 MR. BETCHLEY: -- that would be a loss -- 10 MS. HARKEY: Right. 11 MR. BETCHLEY: -- a tax loss for me. 12 MS. HARKEY: We're fine. 13 Um, now, the next thing is the 14 distributions. You're saying that they were loan 15 repayments. And did you have any notes? 16 MR. BETCHLEY: Yes. And -- and they were 17 even called notes by the Franchise Tax Board on 18 their evidence received. It says "promissory 19 notes." Tomas Samlik received, and it's right -- I 20 had put that in your packet as well. 21 So they called them loans. We called them 22 loans. Then when he testified under oath he said 23 they weren't loans, but he never got into this 24 dividend thing that they have now come up with 25 because he didn't -- he couldn't explain why they 26 weren't loans. 27 MS. HARKEY: Did the -- did the notes have 28 interest? 36 1 MR. BETCHLEY: The notes had an interest 2 rate, a due date, an extension capability, a, uh -- 3 an amount. Yes, they were -- they were -- the 4 actual promissory note -- 5 MS. HARKEY: Okay. And where -- where did 6 the money come that you loaned to begin with that 7 they were paying you back for? 8 MR. BETCHLEY: The -- the money came 9 from -- one of the other things we did was we 10 invested in cars, um, and we made profits on it. 11 The Franchise Tax Board has acknowledged that we 12 made money on that. 13 It also came from my stepson's girlfriend's 14 father was putting together a company and he asked 15 Decata to help raise the money for that company. 16 There -- there was a margin in that from what we 17 had, what we raised, and what we gave to the -- what 18 we negotiated for the buyers. 19 We raised -- Decata went out to people and 20 said, "If you're interested in investing in this 21 company, we can put it together for you." 22 MS. HARKEY: Mm-hmm. 23 MR. BETCHLEY: And we did. And there was 24 a -- there was a gain on that that stayed in the 25 company. That was a source of some of the loans, 26 just as it was a source to loans to that company. 27 MS. HARKEY: Okay. Did you have -- did you 28 have money sitting in a bank -- 37 1 MR. BETCHLEY: Yes. 2 MS. HARKEY: -- that you were able to loan? 3 MR. BETCHLEY: Yes. 4 MS. HARKEY: Was there any verification of 5 that when you -- with the FTB? 6 MR. BETCHLEY: They -- in a -- in their 7 forensic accounting, I didn't -- they clearly show 8 that. There was -- 9 MS. HARKEY: Okay. 10 MR. BETCHLEY: There's a -- there's 11 balances and all of that. 12 MS. HARKEY: Let me go back to the FTB. 13 Were you aware of any cash or availability 14 to make loans of this magnitude? Did you find 15 anything in bank accounts or records of? Did you 16 examine their general ledgers to see, or their cash 17 flow? 18 MS. COAKLEY: Appellants did not provide 19 general ledgers for the Decata Corporation. The 20 funds are a result -- they are stolen funds. They 21 are the result of the grand theft charge of 22 $750,000, of which $700,000 was in the Decata 23 Corporation's bank accounts. That money was 24 characterized as a loan to appellants so that 25 appellants would not to have pay tax. 26 MR. BETCHLEY: The -- I love that number 27 $700,000 because 400,000, the Franchise Tax Board 28 has admitted, was put into Decata to build the house 38 1 for the partners and Decata that had the 2 neighbors. 3 MS. HARKEY: So -- so 400,000 was used for 4 the house that you were claiming as a -- as a 5 deduction for a residence, which you had to later 6 forfeit. 7 MR. BETCHLEY: Well, I think H&R Block put 8 that in there and I signed it, but I don't -- you 9 know, I'm not sure. 10 MS. HARKEY: Okay. 11 MR. BETCHLEY: Yeah. 12 MS. HARKEY: Next question is -- this is 13 maybe for Missus -- why did you change your separate 14 returns then change back and file joint? What was 15 the thinking behind that? 16 MR. BETCHLEY: Well, we -- you know, I -- I 17 was kind of operating -- 18 MS. HARKEY: Because you -- you said that 19 you didn't -- you didn't think you had to file 20 returns. And you were both married, so if you 21 didn't have to file returns, does your wife have 22 separate income? 23 MR. BETCHLEY: She had -- 24 What, family support? 25 MS. BRUNK: Yes. 26 MR. BETCHLEY: Family support. 27 MS. BRUNK: For her. 28 MR. BETCHLEY: For Jules. 39 1 MS. HARKEY: So you were paying -- so it 2 wasn't community property; it was -- it was your 3 separate income. And so you filed -- 4 MR. BETCHLEY: Until we got married. Until 5 we got married. 6 MS. HARKEY: Okay. So, but then I'm 7 assuming when you filed joint returns, you were 8 already married. 9 MR. BETCHLEY: Right. 10 MS. HARKEY: And you went back and refiled 11 for 2000 -- what was it -- six -- five, six and 12 seven, or six, seven and eight? 13 MR. BETCHLEY: Five, six, seven, eight. 14 MS. HARKEY: Okay. So what was the reason 15 for refiling jointly; why didn't you just file 16 jointly to begin with? 17 MR. BETCHLEY: Well, part of that was 18 that I kind of -- I was operating under the -- 19 mentally, under the old tax thing. Remember in the 20 old days where if you sold a house, you had to buy a 21 house or build a house that was of equal or greater 22 value to carry forward your tax, you know, that 23 there was no tax. 24 Well, I didn't know the tax law had 25 changed. And in part of that tax law change was 26 that you now got a $500,000 exemption for being 27 married. So that was new as part of that, when they 28 changed the tax law. 40 1 So when we went into Block -- and the 2 reason we went to Block was the IRS referred us to a 3 lady, a senior auditor at Block who was an ex-IRS 4 agent and she's the one who pointed out, "Well, 5 you're not thinking about the way the tax law is 6 now. Her's what we need to do." 7 MS. HARKEY: I guess that still doesn't 8 answer my question though. You didn't file at all 9 because you didn't think you had to file. And your 10 wife filed separately, married filing separately. 11 It would seem to me that you would just have filed a 12 joint return to begin with, whether or not you went 13 back and made an adjustment. Why did you 14 automatically just decide to -- 15 MR. BETCHLEY: I don't know. I don't know. 16 MS. HARKEY: Okay. 17 MR. BETCHLEY: I can't recall. 18 MS. HARKEY: Okay. The next thing, um, I 19 need to ask is, has the FTB, have you seen these 20 recent documents that were submitted to us? They're 21 dated September 19th, 2016. 22 MS. COAKLEY: Yes, we have seen them. 23 MS. HARKEY: Okay. What -- can you explain 24 why they show total balance zero on -- for multiple 25 years here? What's this about? 26 MS. COAKLEY: Sure. The assessment which 27 is before your Board is not a final assessment until 28 your Board sustains Franchise Tax Board's position. 41 1 Um, if you were to choose to do that, then 2 the assessment would go final after approximately 30 3 days, and then it would show up as a taxpayer 4 liability. So that's why it's not showing. 5 MS. HARKEY: So at this point they owe 6 nothing. 7 MS. COAKLEY: It shows that they don't owe 8 anything because the assessment is not final at this 9 point in time. 10 MR. RUNNER: Because it's being appealed. 11 MS. COAKLEY: It's on appeal. 12 MR. BETCHLEY: Ms. Harkey, that was -- this 13 is for -- 14 MS. HARKEY: Okay. 15 MR. BETCHLEY: -- a tax year that's, what 16 now, 12 years old? 17 MS. HARKEY: Okay. I under -- I understand 18 that. I'm just trying to get some data. 19 I, um -- I have a little understanding or 20 sympathy, shall we say, for the -- for the house in 21 Lafayette and the improvements. I'd like to see a 22 little more information on that, or whatever the FTB 23 has. 24 The second residence, we know that the FTB 25 is correct on that. These distributions seem 26 very -- seem like perhaps there was an issue there 27 on behalf of the -- Mr. Betchley and Ms. Betchley. 28 And the joint returns, going back and forth, I 42 1 haven't had explained. 2 So the only -- the only area that I can see 3 where there'd be any possibility of some kind of 4 legitimate adjustment would be on that piece of real 5 property in Lafayette. And so I would like 6 additional information on that, whatever we can come 7 up with before we're closed. 8 So if you have anything at all on that. If 9 you have anything at all on that, justifying. 10 MR. BETCHLEY: They took all of it. 11 MS. HARKEY: But you said you got your blue 12 folder back. 13 MR. BETCHLEY: Well, we -- we -- we 14 reconstructed the costs. 15 MS. HARKEY: Right. 16 MR. BETCHLEY: And I provided that. 17 MS. HARKEY: And that's -- that's what I -- 18 that's what I would like to see. 19 MR. BETCHLEY: And I provided that. 20 MS. HARKEY: Because the rest of this is 21 not looking good for you. 22 This one area, I understand the value of 23 property there. I know what it was worth back when, 24 and I know what you probably -- what you say you 25 sold it for. That's -- that's believable and may be 26 a case. 27 So, I'm just saying I'd like to see some 28 more data on that, some actual data on that. And if 43 1 we have it in the file, if somebody could get it for 2 me, what we have in file. I mean, do we have a 3 listing, do we show a sale, do we show what the, 4 uh -- what the taxes were when they were living in 5 the house? Because that would be deflated 6 considerably, except for the capital improvements, 7 if they even reported them. Maybe they didn't 8 report those because they probably didn't want their 9 property taxes; we've had that before. 10 Um, what was the assessed value, you know, 11 before they sold the house? So I'm trying to work 12 with this one part because this seems to be the only 13 salvageable point where there might be something 14 here that we could have missed. 15 MS. COAKLEY: Sure. Would you like me to 16 answer that question? 17 MS. HARKEY: Yes. 18 MS. COAKLEY: Okay. Appellants did not 19 provide any documentation to substantiate the 20 construction costs and capital improvements. 21 So what respondent did, they looked at the 22 property tax records for several years and 23 allowed -- in 2004, the assessed value of the 24 property, so this is prior to the sale of the 25 residence, was $878,000 -- $878,571. Respondent 26 allowed the entire assessed value. 27 MS. HARKEY: Yeah, I understand that. But 28 the assessed value for property tax is not 44 1 necessarily the cost of construction and what they 2 could have written off. 3 So I'm asking you, did you have anything 4 else? Was -- what was the, um -- 5 Well, I'll think about it. I'll let the 6 other Members go, but I -- I'd like to see some 7 documentation on that house. 8 MS. MA: So, um, I'm just going to ask you 9 a question, Mr. Betchley. You talked about 10 appraisals. You've had two appraisals -- you had at 11 least two appraisals. 12 MR. BETCHLEY: Of the -- the, um, Lafayette 13 house? 14 MS. MA: Yes. 15 MR. BETCHLEY: More than that, yes, over 19 16 and a half years. 17 MS. MA: And any way to get a copy of the 18 appraisals? 19 MR. BETCHLEY: I -- you know, I don't -- 20 most of those banks -- they were, you know, little 21 local banks -- are not there anymore. I didn't 22 use a big -- I used Lamorinda Bank; they did most 23 all the financing in Lafayette and Orinda, and they 24 are no longer around. The recession wiped out a lot 25 of these people. 26 But the -- you know, to get back to what 27 Miss Coakley says, I mean there's things like she's 28 saying the assessed valuation was eight-something. 45 1 I don't know how all that works. I do know that 2 they never wanted to look at the closing statements, 3 which I had for them. 4 MS. HARKEY: Do you still have those now? 5 MS. MA: Can we see it? Do you have 6 closing statements? 7 MR. BETCHLEY: Yes. 8 MS. HARKEY: We're asking for whatever you 9 have. 10 MS. MA: Yeah. What do you have? 11 MS. HARKEY: Let's see what you have. 12 MR. BETCHLEY: I don't have 14 copies, but 13 this shows when we sold the house. 14 MS. HARKEY: That's okay. 15 MS. MA: They'll make copies. 16 MS. HARKEY: Thank you. 17 MR. BETCHLEY: And they -- we offered that 18 to them. They didn't want -- they never wanted to 19 meet and look at anything. 20 MS. MA: Okay. In the meantime, Ms. 21 Stowers has some questions. 22 MS. STOWERS: To Mr. Betchley, you said 23 that you tried to reconstruct the costs by looking 24 at photos of your home. Did you present the 25 Franchise Tax Board with any of those photos? 26 ---oOo--- 27 28 46 1 ---oOo--- 2 MR. BETCHLEY: We -- we gave them -- um -- 3 I had them and I gave them to the IRS. 4 The -- the Franchise Tax Board -- the 5 sequence of this was they stormed the house, 6 arrested us -- 7 MS. STOWERS: I -- I understand that, sir. 8 MR. BETCHLEY: -- and they never gave us 9 the file. So when we -- 10 MS. STOWERS: I understand. But -- but 11 after the fact -- after the -- the criminal 12 proceedings, and then they started the civil audit, 13 um, and there's -- I know there's a question about 14 what documents was presented, was given back to you. 15 But you're saying that a Mr. Sims instructed you to 16 reconstruct your calls. And you just said earlier 17 that you and your family look back and looked at 18 some old photos. 19 MR. BETCHLEY: Include -- 20 MS. STOWERS: -- and I'm asking you, did 21 you provide those photos to the Franchise Tax Board? 22 MR. BETCHLEY: Yes, they had the -- they 23 had -- and I know we -- we still have some at home, 24 I believe -- the listing which showed all the 25 improve -- listed all the improvements made, you 26 know, when we sold the house. The -- the real 27 estate broker did it, did the photos everywhere, and 28 all that. And that's how we were able to come up 47 1 with the -- the list that we provided to the 2 Franchise Tax Board. 3 MS. STOWERS: I have that list. But 4 I'm -- what I'm trying to get to is some 5 collaborating evidence of what -- what the 6 improvements were so we can make some reasonable 7 estimate on what it would have cost. And for me, a 8 photo would be very helpful. 9 You also commented that you spoke with -- I 10 believe you said you spoke with the contractor, and 11 he gave you, um, some numbers and figures. 12 MR. BETCHLEY: Yes. 13 MS. STOWERS: Did he give that to you 14 verbally or did he put that in writing? 15 MR. BETCHLEY: Just over the phone. He's 16 a -- he's a regional builder there. 17 MS. STOWERS: Okay. So it's not in 18 writing? 19 MR. BETCHLEY: No, I -- nobody asked me for 20 that. At that point they just wanted me to 21 reconstruct it. And I -- you know, I was trying to 22 get this done as quick -- it took 18 months 23 already. 24 MS. STOWERS: Yeah. Yeah. That's the 25 disconnect. It would have been really -- I know, 26 hindsight. But -- 27 MR. BETCHLEY: Well, you know -- 28 MS. STOWERS: Had -- had -- had we had -- I 48 1 think it would be really helpful if when you were 2 reconstructing, and if your contractors sent you an 3 e-mail or at least something we could look at -- 4 MR. BETCHLEY: To be honest -- 5 MS. STOWERS: -- to see how we got there. 6 MR. BETCHLEY: To be absolute -- to be 7 absolutely honest, what I honestly figured, that 8 when the Franchise Tax Board investigator swore 9 under penalty of perjury that there was 400,000 of 10 improvements, that what more do you need? 11 MS. STOWERS: Okay. 12 MR. BETCHLEY: I mean, that's what I kind 13 of thought. Here he is on the stand -- 14 MS. STOWERS: Let's talk about that. 15 I mean, I -- I know -- the criminal case is 16 not before us, so I -- 17 MR. BETCHLEY: Right. 18 MS. STOWERS: And I understand that there 19 may or may not have been conducted properly. I 20 don't know. But from your perspective, you're 21 saying it wasn't. So I want to say on behalf of 22 Controller Yee and the Franchise Tax Board, I do 23 apologize. 24 Let's go on to the, um -- the Lafayette 25 property, and the question of records. 26 Now, I do have FTB's Exhibit B, and it 27 lists the various documents that were seized and 28 returned to you, and I have your signature. And I 49 1 don't see -- I'm going to share with the 2 Members to my left -- I don't see any notation from 3 you that you didn't receive the -- the -- the 4 Lafayette property documents. 5 And I even went a little further, cause I 6 was concerned that, "Wow. They -- they seized his 7 documents, and they didn't give him everything 8 back." 9 So I did, um, do an inquiry to the Board 10 of -- the Franchise Tax Board asking them to explain 11 exactly what documents did they get in the seizure 12 and what documents did they return back. 13 And they're not listing any construction 14 contracts, any loans. They're saying that -- let me 15 pull up my notes -- the documents that they seized 16 and returned to you didn't substantiate the -- the 17 additional capital improvements that you're saying 18 was made. 19 They're saying that they got the -- the 20 settlement statement for the Hood property, they 21 received the settlement statement for the -- excuse 22 me -- settlement statement for the Lafayette 23 property, and the settlement statement for the El 24 Dorado Hills property. Which I think we had come 25 to the conclusion it doesn't meet the definition of 26 a personal residence. 27 And the, um, closing -- the seller's 28 closing statement for the Lafayette property when 50 1 you sold it. And those items are not giving, 2 um,verification of the capital improvements of the 3 400,000, uh, 392,000. 4 And I get what you're saying, you're 5 thinking that you had this on the criminal side, 6 someone testified there was 400,000. He hadn't 7 looked at the records. And I do believe he is 8 saying that that's what you said in an interview. 9 But that's the criminal, and we're not dealing with 10 the criminal side. It's very difficult. 11 MR. BETCHLEY: Yeah. 12 MS. STOWERS: But that's not what's before 13 us. And then you're saying that those charges went 14 away anyway. 15 So I think it would be really, really 16 helpful -- or would have been really, really helpful 17 if there was a little bit more to get to this cost 18 of the -- of your property besides the schedule. 19 MR. BETCHLEY: Right. Yeah. 20 MS. STOWERS: I mean, FTB, did you guys go 21 back to -- when was the construction completed? 22 MR. BETCHLEY: On the Lafayette house? 23 MS. STOWERS: Mm-hm. 24 MR. BETCHLEY: Um, they just, 25 uh -- 1980-something. 26 MS. STOWERS: 1980. 27 FTB, did you guys look at the property 28 records going back -- 51 1 MR. BETCHLEY: She just read -- she read it 2 out -- 3 MS STOWERS: -- to 1980? Did we have 4 anything showing that -- what is it -- the assessor 5 comes out and they take a look at the improvements? 6 MS. HARKEY: 1988. 19 -- 7 MS. STOWERS: Did you guys go back that far 8 to see any changes? 9 MS. COAKLEY: We were -- we were able to 10 get records as far as back as 1999. And at that 11 point in time there was only a two percent increase 12 from '99 to 2004. So the property tax records would 13 then take into account all of the construction cost 14 and any major improvements. 15 MS. STOWERS: Okay. 16 MR. BETCHLEY: If I -- can I have just 17 one -- 18 MS. STOWERS: And then -- one more comment 19 and then I'm -- I'm going to pass to the next person 20 to the left or right. 21 I think Ms. Harkey talked about loans, 22 loans versus constructive dividends. 23 My -- my perspective on that is that we 24 have a constructive dividend and not a loan, 25 because, um, the control, the lack of collateral, no 26 interest, only paying back 32,000 of the 700, and no 27 Realtor scheduled repayment. 28 So under tax rules this -- this shows a 52 1 constructive dividend as opposed to loan. The -- 2 the -- the true substance of it over the form. And 3 so for me, I see that as a dividend subject to 4 income tax. 5 MR. BETCHLEY: Let me reiterate, that 700 6 as they pointed out -- as Franchise Tax Board 7 pointed out included the $400,000 that was 8 neighborhood investment into the property that we 9 were all jointly developing. 10 And they have acknowledged -- the Franchise 11 Tax Board has acknowledged I spent -- Decata spent 12 more than that on that property. That's -- they've 13 acknowledged that in the court records, they've 14 acknowledged it in their write-up. That -- so you 15 take the 400 out right away, because that had 16 nothing to do with me. That was put in by neighbors 17 to buy property. They put it in, we bought the 18 property and went out. 19 The other thing that -- and then I'll back 20 up and deal with your next point. 21 I think it's fairly important to notice 22 that the Franchise Tax Board, when they did all this 23 to me, they admitted they -- they copied the top of 24 every file, the top sheet. They copied nothing in 25 the contents of the sheet. 26 They did that, and seven months later they 27 still had not copied -- while they're giving sworn 28 testimony. It took a year and a court order to get 53 1 them to copy complete files. And that's when -- 2 according to the court records, that's when the 3 property improvement file disappeared. 4 MS. STOWERS: Thank you, sir. 5 MS. MA: Mr. Runner. 6 MR. RUNNER: Yeah, um, walk through with 7 me, um, the IRS audit. 8 MR. BETCHLEY: Okay. What happen -- um -- 9 when this happened and I was arrested, we found out 10 later -- because some people sent us some 11 correspondence they probably shouldn't have sent us. 12 But the IR -- the Franchise Tax Board decided they 13 were going to pile on -- and that's what they -- 14 what they do on these things is they file numerous 15 charges, they just bury you so you can't even think 16 straight. 17 They contacted the IRS, they've admitted 18 that -- 19 MR. RUNNER: Right. (Inaudible.) 20 MR. BETCHLEY: -- and asked them to audit 21 me for the four years. I guess they wanted federal 22 charges on me. 23 MR. RUNNER: We have a -- again, that's 24 typical. 25 MR. BETCHLEY: So I -- So I got -- 26 MR. RUNNER: It's typical in the sense of 27 exchange of information in regards to taxpayers. 28 MR. BETCHLEY: So I got a letter from the 54 1 IRS -- 2 MR. RUNNER: Mm-hm. 3 MR. BETCHLEY: -- saying they wanted to see 4 me. 5 MR. RUNNER: Right. 6 MR. BETCHLEY: I -- there's an IRS office 7 that's right -- not far from -- 8 MR. RUNNER: Okay. 9 MR. BETCHLEY: -- where we are. 10 So I went in there, and they -- the IRS 11 agent was Tamara Waheed. She explained what they 12 were doing, why they were doing it, and asked me 13 what I had. 14 MR. RUNNER: Mm-hm. 15 MR. BETCHLEY: So we would -- we spent that 16 time, you know, reconstructing, calling the property 17 tax people, calling the DMV -- 18 MR. RUNNER: Right. 19 MR. BETCHLEY: -- and getting all those 20 records. 21 MR. RUNNER: Right. 22 MR. BETCHLEY: And I went in, and as I got 23 the stuff -- instead of just putting it all 24 together, I went in. And there was four separate 25 times I went in; twice with their supervisor. And I 26 provided them -- 27 MR. RUNNER: So you provided material -- as 28 a result of the contact with the IRS, you provided 55 1 all the material that they were -- 2 MR. BETCHLEY: The same thing that we -- I 3 had given to -- 4 MR. RUNNER: Okay. Did they get 5 information in which you had given the FTB? 6 MR. BETCHLEY: Exactly the same. 7 MR. RUNNER: Okay. So what happened with 8 the audit? 9 MR. BETCHLEY: So then they say -- you 10 know, they say, "We'll get back to you." 11 MR. RUNNER: Right. 12 MR. BETCHLEY: And -- so they sent me a 13 letter that listed those five years, and -- I think 14 I -- it's in the -- it's in the exhibit. I can't 15 remember the number. 16 MR. RUNNER: Go ahead. Just keep going. 17 MR. BETCHLEY: And they base -- and they 18 said that the case is closed. And when they called 19 my in to talk to me about it, they -- the supervisor 20 was there. I think his name was Brown. And we sat 21 down, and he goes, "You're gonna be getting three 22 refund checks." 23 And over the next six weeks, three refund 24 checks came in. Copies of which are there. And 25 they show the years for the audit right on the IRS 26 check. 27 So it totalled about $8,600. There was a 28 shortage in one year, I think it was like $33. 56 1 MR. RUNNER: That's okay. I don't need 2 any -- 3 MR. BETCHLEY: No. 4 MR. RUNNER: The point was they audited you 5 and gave you refunds during those seven years. 6 MR. BETCHLEY: Yes, and there's copies -- 7 and the proof of that is in the file here, the 8 checks and the letter. 9 MR. RUNNER: And the material that they had 10 is the same material that you believe the FTB had. 11 MR. BETCHLEY: Exactly. 12 MR. RUNNER: Okay. I think I'm gonna go to 13 the FTB. 14 Tell me about his IRS audit. 15 MS. COAKLEY: The IRS did not audit 16 appellants. Appellants filed an amended return 17 claiming a refund, and the IRS issued refunds. But 18 the IRS did not audit Appellants for any of the tax 19 years at issue. 20 MR. RUNNER: They just offered -- they just 21 basically, um -- they amended their returns. 22 MS. COAKLEY: Appellants amended their 23 return. 24 MR. RUNNER: And then -- and provided that 25 information. 26 MS. COAKLEY: And the IRS issued refunds. 27 MR. RUNNER: And they issued a -- and the 28 audit -- and they issued a refund. 57 1 MS. COAKLEY: Mm-hm. 2 MR. RUNNER: Okay. So you weren't actually 3 audited by the IRS? 4 MR. BETCHLEY: They called it that when 5 they called us in there. And then they said to 6 assist in it, that's when they -- the initial agent 7 was Steve Menco, he signed the thing you 8 have in there, the IRS agent. He -- they referred 9 us to this Lavonne Robinson who used to be an IRS 10 agent who now was a senior auditor at H&R Block. 11 They referred us to her and said, "She knows how 12 this works, go see her." 13 We did it with it -- we went over to see 14 her, we sat down, gave them all this stuff, and they 15 filed it. We took it back to the IRS and they cut 16 the checks. 17 You have -- did you see -- you've seen the 18 checks? You've -- 19 MR. RUNNER: Yeah. But the point really is 20 that they would -- again, I'm trying to get through 21 the issue in regards to the checks. They're 22 probably not important at this point. The issue is 23 to whether or not you were actually audited by the 24 IRS. 25 MR. BETCHLEY: Um, I mean, I don't know 26 what it is when they call you in and ask you for 27 everything, you know. And they admitted that the 28 Franchise Tax -- you said that's standard 58 1 practice. 2 MR. RUNNER: Mm-hm. Mm-hm. 3 MS. HARKEY: We share information. 4 MR. BETCHLEY: Right. Right. 5 MR. RUNNER: Did they look at other parts 6 of your -- I mean, did they -- when the -- you said 7 they audited you, did they -- did you have to 8 provide for them all your -- was it -- was it -- was 9 that discussion with them greater than what this 10 particular issue was? Was it all your income, all 11 your costs, all your -- 12 MR. BETCHLEY: All our income -- 13 MR. RUNNER: -- everything? 14 MR. BETCHLEY: -- all our -- even down to 15 the Goodwill receipts for clothing, the church 16 receipts for donations at church weekly. Um, we had 17 to bring every -- the DMVs, because I know not all 18 the DMV fee is deductible. So we had to, you know 19 -- and they cut this last -- we had to provide 20 absolutely everything. And we provided that to the 21 Franchise Tax Board. 22 MR. RUNNER: Let me ask you this -- I mean, 23 it seems -- I'm -- I'm -- what the audit -- what the 24 taxpayer is saying is, again, something similar to 25 what it seems to me I've heard take place. And that 26 is we establish that there could be a liability on 27 part of the taxpayer, we exchange that information 28 then with the -- with the -- with the IRS. And that 59 1 then -- the IRS then initiates their process and we 2 also do that in reverse. 3 Um -- are -- are -- are we saying that we 4 never contacted the IRS? 5 MS. COAKLEY: What I'm saying is that the 6 IRS never conducted an audit of Appellants for the 7 2005, 2006, 2007 or 2008 tax years. We requested 8 information from the IRS to determine whether or not 9 this occurred several times during this appeal. And 10 each time the IRS has confirmed there was no audit 11 for Appellants for the tax years at issue. 12 MR. BETCHLEY: Mr. Runner, what they all 13 say -- 14 MR. RUNNER: Hang on. 15 Maybe -- maybe I guess -- would it be 16 typical for the IRS to -- I'm not asking you, I 17 guess in just your experience from what you know, 18 I -- know -- for us to have communication with the 19 IRS about a concern in taxpayer, the IRS would 20 actually then ask for documents and not conduct an 21 audit, but just basically accept the -- the 22 documents. 23 MR. SUSZ: Senator Runner -- 24 MR. RUNNER: Because it sounds like that's 25 what the taxpayer is describing. 26 MR. SUSZ: Well, I think what I would say 27 is, you know, taxpayers file amended returns 28 frequently, and refunds are issued. Not all those 60 1 returns are examined. So -- 2 MR. RUNNER: So -- so your point would be 3 you don't know whether or not the IRS was actually 4 involved in that -- that -- in those -- in those 5 amended returns or not, or whether or not the 6 taxpayer just sent the -- just did them themselves. 7 MR. SUSZ: That is correct. The only thing 8 we know is from running the federal transcripts is 9 that there were no official IRS audits that 10 occurred. 11 MR. RUNNER: Do you have any documentation 12 that you had conversations or information or 13 meetings with the IRS during this time? 14 MR. BETCHLEY: I had the dates and, like I 15 said, the agent Tamara Waheed, and I provided all of 16 that to Ms. Stanislaus. 17 The other thing that came out of the IRS 18 meeting was when Samlick -- the Franchise Tax Board 19 testified under oath I had not filed taxes for 18 20 years -- I mean, set aside the fact that they've 21 since proven I filed every year with their own 22 internal reports -- I brought that up to the IRS. 23 Because the -- initially the Franchise Tax -- 24 MR. RUNNER: Uh, you're getting -- that's 25 not -- I'm not -- that -- you're kind of going 26 sideways on me here. 27 MR. BETCHLEY: Well, the importance is the 28 IRS immediately produced 18 years of transcripts -- 61 1 they call them transcripts, Franchise Tax Board 2 calls them tax computations. 3 MR. RUNNER: Mm-hm. 4 MR. BETCHLEY: But they produced 18 years 5 of transcripts of filing. So that came out of the 6 meetings with the IRS. Because I was explaining to 7 them, when they told me that the Franchise Tax Board 8 had gone to them, I said, "Well, here's what's 9 happening." I just laid it out. 10 And they said, Well -- and I showed them 11 the transcript where they said I hadn't filed for 18 12 years, and the guy logs onto the computer right 13 there in the office and says, "You filed every 14 year." 15 And he produced the transcripts, which I 16 have. I gave -- 17 MR. RUNNER: Mm-hm. 18 MR. BETCHLEY: -- the four years in 19 question here. 20 MR. RUNNER: Okay. But you don't have 21 anything specific from the, um -- did you say you 22 had a letter from the IRS saying you didn't owe the 23 liability? 24 MR. BETCHLEY: Um -- 25 MR. RUNNER: Where -- where was that? 26 MR. BETCHLEY: No, they don't care about 27 that. 28 The letter -- I just saw the letter here. 62 1 It's in the -- it's in my exhibits to you 2 as well. 3 That's it right there. That's it right 4 there. 5 Yeah, it's in -- 6 MR. RUNNER: Well, you -- I got a lot of 7 stuff here. 8 MR. BETCHLEY: Yeah. Okay. It's -- I 9 prefer to do it in the text, but it's called a 10 Notice of Case Resolution signed by Tamara E. 11 Waheed. The date is -- 12 MR. RUNNER: Notice of Case Resolution. 13 MR. BETCHLEY: That's what the heading on 14 this letter is. It has the date, contact numbers, 15 tax period -- the four tax periods -- these four tax 16 periods, um -- 17 MR. RUNNER: Okay. Let me go back to 18 Franchise Tax Board. 19 Again, I don't have that in front of me. 20 It's probably here somewhere. Maybe somebody can 21 hand -- I don't know. It's probably not important 22 to have it and take a look at it. 23 But let me ask you that, when they -- when 24 they -- when they say case resolution, what are 25 they -- that sounds like it's more than just a -- 26 that somebody just filed an amended return. 27 Or maybe I'm wrong -- what do you think? 28 What -- what's your observation? 63 1 MS. COAKLEY: I mean -- go ahead. 2 MR. RUNNER: Have you seen -- have you seen 3 what that is? Have you seen that? 4 MR. SUSZ: Senator Runner, no, I have not. 5 And I'm not familiar with that term of art, to be 6 honest with you. 7 MR. RUNNER: Well, what -- what -- doesn't 8 it end -- again, you don't -- you don't -- you do 9 not have a copy of that IRS case resolution? 10 MR. SUSZ: I don't believe that I've seen 11 it, but I could -- I could take through -- look at 12 all the documents that were -- 13 MR. BETCHLEY: It's in their -- it's in 14 the -- it's in the packet. 15 MS. HARKEY: If -- if we have -- 16 MR. RUNNER: I'm sure we all -- yeah, I'm 17 sure we all have it somewhere. 18 MR. BETCHLEY: It's in the packet, I can -- 19 MS. HARKEY: And if you have -- 20 MR. RUNNER: Okay. Let me -- let me go -- 21 let me go to Appeals. 22 Let me try you guys. 23 Um, the idea of a -- of a case resolution, 24 does that -- that sounds to me it's more than -- 25 that's more than an acknowledgment that's at -- 26 maybe I'm wrong. But it sounds like it's more than 27 an acknowledgment of just somehow you filed your 28 amended returns. 64 1 MR. EPOLITE: Well, it appears that the 2 notice relates to collection activity regarding 3 Appellants tax years. 4 MR. RUNNER: Okay. 5 MR. EPOLITE: Um, we have -- we have closed 6 your collection case. Based on our records, there 7 are no taxes or tax returns currently due on this 8 case for the tax times and periods listed below. 9 The next paragraph: You don't need to take 10 any action at this time; however, it is very 11 important that you file all future tax returns and 12 pay any amounts you owe on time. 13 So this sounds like -- 14 MR. RUNNER: So the case resolution there 15 sounds like it was just the fact that there 16 was -- that there was not an amount due. 17 MR. EPOLITE: Correct. And then -- 18 MR. RUNNER: Which would be -- which would 19 be consistent with the idea of amended returns 20 with -- with -- with refunds. 21 MR. EPOLITE: Right. And that collection 22 activity had now seized as any remaining liabilities 23 had been paid and collected. 24 MR. RUNNER: Okay. Okay. That makes 25 sense. 26 Okay. Thank you. Thank you. 27 MR. BETCHLEY: I did find some other 28 letters from them, too, showing year by year from -- 65 1 on the IRS for these same four years. They're in 2 that packet as well, but I know you have a lot. But 3 -- 4 MS. HARKEY: Can you -- can we get a copy? 5 MR. RUNNER: Can you -- can you -- can you 6 see that they've got copies of that? Because I -- I 7 just -- 8 MS. HARKEY: Can you see that I get copies? 9 I want to see what you're looking at. 10 MR. RUNNER: Yeah. 11 MS. HARKEY: Because you've got so much 12 stuff, it's hard to -- 13 MS. MA: Okay. I have some questions. 14 MR. RUNNER: Okay. Go for it. Your turn. 15 Go. Go. You try. 16 MR. BETCHLEY: They -- they -- they, one 17 year, said I -- I did owe $1.37. 18 MS. MA: Um, so -- you know, maybe this is 19 also for my colleague Ms. Harkey who's, um, an 20 expert in banking; I am not. 21 I'm looking at your seller's closing 22 statements. And it looks like a majority of the 23 amount from the sale of your Lafayette house went to 24 pay off your Washington Mutual as well as your Wells 25 Fargo bank accounts. 26 MR. BETCHLEY: Yes. 27 MS. MA: Were they both home mortgage 28 accounts on this property, on the Lafayette 66 1 property? 2 MR. BETCHLEY: The first -- the first and 3 the second, yes. 4 MS. MA: The first and the second. 5 So I'm just wondering, obviously, you know, 6 Washington Mutual and Wells Fargo, they're big 7 banks. And they're only going to loan to you based 8 on some sort of equity or value of the house. 9 And I'm just wondering for, you know -- 10 Ms. Harkey, you know, I -- this is, you 11 know, almost, you know, 90 percent or more of the 12 value of the house. I mean, I'm not used to seeing 13 such large payoffs, because I thought normally when 14 banks loan, they loan only a percentage of the value 15 of the house or what they think they're gonna get in 16 case they have to foreclose. So -- 17 MR. BETCHLEY: Two years earlier -- or 18 18 months earlier, this house, when they -- when they 19 made that second mortgage, was appraised at 20 2,800,000. 21 MS. MA: Which one's the second one? 22 Wells? 23 MR. BETCHLEY: The Laf -- the financial -- 24 the Lafayette house. 25 MS. MA: I know, but which one's the -- 26 MS. HARKEY: Wells. Wells. 27 MS. MA: Wells Fargo is the second -- the 28 second -- 67 1 MR. BETCHLEY: Wells Fargo is the second -- 2 MS. MA: Second. Okay. 3 MR. BETCHLEY: -- and Washington Mutual was 4 the first. 5 You know, the market was declining at that 6 point. So when they made the loans, the house was 7 worth two million eight-something. When we put it 8 on the market initially we put it on at two million 9 eight, and then the market kept declining and 10 declining, and we sold it for two million one. 11 MS. HARKEY: It just sold for two four. 12 MS. STOWERS: So -- so -- 13 MR. BETCHLEY: Two -- 14 MS. HARKEY: Google is a wonderful thing. 15 It just should for 2495, um, not too long ago. 16 MR. RUNNER: When they sold it? 17 MS. HARKEY: No. 18 MR. RUNNER: Oh, okay. 19 MS. MA: Um, so -- so does that -- so I 20 don't know, Ms. Harkey, does that, like, have a 21 reflection on the cost -- 22 MS. HARKEY: Yeah, I'm -- I'm -- 23 MS. MA: -- on the house? I'm just not 24 sure. 25 MS. HARKEY: You know, I'm not real 26 sympathetic to the rest of the argument, but I am 27 sympathetic to this one section. And it's because 28 I -- I'm looking at what was written by the FTB, and 68 1 I see the reasons that they disallowed. But when 2 I'm looking at where this house is, and I've Googled 3 it, and I've -- I've got the latest MLS. And I'm -- 4 you know, it gives you the circular view of 5 everything around and all the rooms. And the 6 location is truly one of those, you know, really 7 nice places. And it actually looks like there were 8 a lot of improvements made. 9 And so I would like to -- I really 10 am -- based on what you discovered -- I mean, I 11 really wasn't looking that closely, but you're 12 right. And the 2.8, I understand the way the market 13 went. 14 This house is up in the hills on the other 15 side of Walnut Creek. Um, Berkeley's to the -- to 16 the west. I mean, it's -- it's -- it's in one of 17 those really hillside locations. And I can see it 18 being probably in the high times being 2.8, and 19 then, you know, dropped down again. We had a little 20 bit of a -- a problem. 21 The dot-com crash was up there, and then as 22 well as what just happened. 23 But this is 2005. When we're talking 24 about -- we're talking about 2005. And so it's hard 25 to go back. 26 But I'm looking at an improved house that 27 doesn't look like it's had recent, recent 28 improvements; it may have. But I would like to see 69 1 more data on this house and the improvements that 2 they made, because I do believe they have a case in 3 that area. 4 The rest of it, I'm with the FTB 100 5 percent. I would just like to see more 6 documentation. 7 And what I'd like to do is to segment this 8 2005 item away from the rest of it and allow more 9 time to gather information so that we could see if 10 we can -- because I think -- I think they do have a 11 case for the value. And so I'd -- I'd like to 12 segment the 2005 item. Because I think -- 13 Is that the only item in 2005 that we're 14 really looking at, is the house? 15 So I guess I'll ask Appeals if -- if we 16 were to grant the FTB on all of the other years -- 17 but just not 2005 -- 2006, '07 and '08, is that a 18 possible -- 19 MR. RUNNER: 30/30/30 on the -- 20 MS. HARKEY: And do a 30/30/30 on the 21 2005. 22 MR. EPOLITE: I believe because we're 23 talking about one single appeal for all of the 24 assessments, that the entire -- all of the 25 assessments would be held in abatement until the 26 resolution of the 2005 year has been decided by the 27 Board. 28 MS. HARKEY: Okay. I'd -- I'd really like 70 1 to make that on the 30/30/30. Um, and I'd like to 2 come back and look at it. 3 Because I think you could probably go 4 through a title search and get some of the data that 5 you wanted. Um, and, you know, at least what it was 6 appraised and how much it depreciated. And if you 7 could provide any kind of construction cost, any 8 pictures, anything like that. And, you know, I 9 mean, I think some of that -- I think some of that 10 item is very negotiable. 11 I don't find any -- any -- a way to help on 12 2006, 2007 or 2008. Those are just, um, not a good 13 case for me. But this is a piece of real property 14 that I think if we had more data, we could, um -- we 15 could find some benefit in your favor. 16 So I don't know if there's more 17 conversation on this -- 18 MS. STOWERS: I just have one question. 19 MS. MA: Okay. 20 Ms. Stowers. 21 MS. STOWERS: On the seller's closing 22 statement, Ms. Ma pointed out that we have the two 23 loans, one from Washington Mutual. That's the first 24 trust deed, 1.4 million. And then there's a second 25 for 600,000. 26 Would -- and you said you had just recently 27 got that second -- received that second? 28 MR. BETCHLEY: I honestly don't -- it was 71 1 so long ago. 2 MS. STOWERS: Was it in -- you don't -- so 3 was it -- you don't know when you acquired the 4 second? 5 MR. BETCHLEY: Back -- back then -- no -- I 6 don't know if they still even do it. But back then 7 they were equity lines. 8 MS. STOWERS: Uh-huh. 9 MR. BETCHLEY: And they were used -- when I 10 used that equity line, that was to put in the pool, 11 put in the pool house, add the room, to do, you 12 know, the improvements that are listed there. 13 Because I -- I wanted to be sure I had -- you know 14 -- 15 MS. STOWERS: So you're saying that you 16 used the -- you pulled out a second -- had equity to 17 make the improvements? 18 MR. BETCHLEY: Right. 19 MS. STOWERS: Okay. All right. 20 MS. HARKEY: Frequently that -- I'm sorry. 21 MS. STOWERS: Yeah, I -- I -- I think -- 22 MS. HARKEY: -- that frequently was the way 23 that they would make like a second loan, and -- 24 MS. STOWERS: Mm-hm. 25 MS. HARKEY: -- just, you know, be a 26 revolving line. 27 MS. STOWERS: Yeah, I -- I -- I understand 28 that, too. And I understand from banking, from my 72 1 -- that's how I paid my way through college is doing 2 first and second TDs. 3 So I -- I agree with you, Ms. Harkey. 4 It would be nice if you can go back and do 5 some more reconstruction to see how we can get, um, 6 additional verified basis here. 7 MS. HARKEY: Okay. Then, um -- 8 MS. MA: Hold on. 9 Mr. Horton. 10 MR. HORTON: Thank you, Madam Chair. 11 I just wanted to encourage the Department 12 as well as the taxpayer to -- if the Board does so 13 move a 30/30/30 that the two of you work together. 14 This doesn't necessarily have to come back 15 before the Board. And that the taxpayer is made 16 aware of the interest that continues to accrue until 17 the liability is paid, such that it appears a 18 consensus that there is a liability, and that that's 19 measurable. Possibly the taxpayer may want to 20 consider minimizing their interest liability in this 21 process. Ninety days of interest can be extensive 22 considering the delay that has already occurred. 23 I second that motion, Madam Chair. I 24 thought I heard a 30/30/30. 25 MS. MA: Okay. 26 Any more questions, Mr. Runner, on this? 27 MR. RUNNER: Well, I think -- I think she 28 -- her motion was a 30/30/30, but I think she also 73 1 needs to continue the hearing. 2 MS. MA: Okay. So -- 3 MR. RUNNER: -- (inaudible) conversation 4 here though. In case they don't work it out. 5 MS. MA: Then it will come back to the 6 Board. 7 MR. RUNNER: Then it would come back, yeah. 8 MS. HARKEY: Okay. Um -- do you want to 9 ask another question? 10 MS. MA: I think we're -- 11 One other question? 12 MS. STOWERS: I'm going to punch a number 13 real quick. 14 MS. MA: So, um, let me just ask you, with 15 your Wells Fargo line, if it was indeed 601,299 that 16 you put back into your residence, perhaps you can go 17 to Wells Fargo Bank -- 18 MR. BETCHLEY: Yeah. 19 MS. MA: -- and see whether you can -- 20 MR. BETCHLEY: Whether they have the 21 checks? 22 MS. MA: Or -- or -- or something. And, I 23 mean, at least that's third party verification -- 24 MR. BETCHLEY: Yeah. 25 MS. MA: -- and that's kind of the 26 difference that you're talking about is the 600,000 27 that you put in. 28 MR. BETCHLEY: Yeah. 74 1 MS. MA: So that, I think, would satisfy. 2 MR. BETCHLEY: Thank you. 3 MS. HARKEY: See, it's obvious if they paid 4 150 for the land, then they've got a first of 1497, 5 that there was something put in there. At what 6 time, we don't know. And it could be -- just be 7 appreciation and not actual hard construction. 8 But I'm looking at the house now, and that 9 was 2005, this is now -- I mean, that's a long time 10 ago. There could have been some other improvements 11 made. 12 But, you know, it is -- it does have the 13 pool, it does have -- it doesn't look -- I mean, 14 there's probably been some -- some improvements made 15 by the current owners or the ones that just recently 16 sold it. But it's not -- it's -- it's got nice 17 views. It's got -- 18 What kind of patio did you have around your 19 pool? 20 MR. BETCHLEY: I'm sorry -- what kind -- 21 MS. HARKEY: What sort of patio did you 22 have around the pool? 23 MR. BETCHLEY: The -- the, um -- the house 24 was on a slope hillside. 25 MS. HARKEY: Right. 26 MR. BETCHLEY: The -- the house itself was 27 four pavilions joined at a corner that kind of 28 stepped up and south down the hillside. 75 1 MS. HARKEY: Well, what I wanted to know -- 2 MR. BETCHLEY: And then -- 3 MS. HARKEY: I'm just asking about a few 4 little key features. What sort of -- 5 MR. BETCHLEY: Right. 6 MS. HARKEY: -- patio did you have, did -- 7 what did you have around the pool? 8 MR. BETCHLEY: So when we built the pool, 9 it had to be reinforced on one side because the 10 hillside dropped off. So it had a concrete 11 aggregate patio around three sides of it. And then 12 on the -- on one side there was a pool house, kind 13 of a Japanese style, big -- you see -- you see it -- 14 you see it in the aerial photos. 15 MS. HARKEY: Right. And what was on -- 16 what was the, uh -- the patio? 17 MR. BETCHLEY: The inside of the pool house 18 was, um, paver, you know, the square-like 19 terracotta -- 20 MS. HARKEY: Mm-hm. 21 MR. BETCHLEY: -- concrete squares. 22 MS. HARKEY: Right. 23 MR. BETCHLEY: And the patio around the 24 pool, because of the drains and all that stuff, and 25 the patio around the pool was aggregate concrete. 26 MS. HARKEY: Okay. 27 Do you have any -- 28 Yeah, I just would like to look at that a 76 1 little more. So I don't know if you're ready. 2 Are you ready for a motion? 3 MS. MA: Yes. 4 MS. HARKEY: Okay. I would like to make a 5 motion for a 30/30/30; 30 days for the taxpayer to 6 collect information; 30 days for the FTB to review 7 it with the taxpayer or review it; and then 30 days 8 before you come back here. 9 Because I'd like to see you back at a Board 10 hearing unless you can resolve the issue. 11 Um, I think you know that's my motion. Um, 12 but -- 13 MR. HORTON: Second. 14 MS. HARKEY: Thank you. 15 As a caveat to that, I would like to say 16 the years 2006, 2007 and 2008, I think I would have 17 agreed with the Franchise Tax Board on those and -- 18 and settled with them. 19 So if there's any possible way for you to 20 begin making payments of taxes, you probably will 21 have some. 22 MR. BETCHLEY: May I -- may I ask a 23 question about that? 24 MS. HARKEY: Sure. 25 MR. BETCHLEY: Um, will I be allowed to use 26 the deductions -- 27 MS. HARKEY: Oh, I'm sorry. I -- I 28 shouldn't -- we're in the middle of a motion -- 77 1 MR. BETCHLEY: Oh, I'm sorry. 2 MS. HARKEY: -- and I shouldn't probably go 3 on. 4 But, anyway, I just wanted to let you know. 5 The Department will be back with you and work with 6 you. I'll also probably have maybe one of my staff 7 work so that they know what it is I'm looking for. 8 And, um, so that's my motion; a 30/30/30. 9 It's been seconded. 10 MS. MA: Just on the house, though. 11 MS. HARKEY: Just on the house. But 12 that's -- we -- we -- we have to do the whole -- 13 MS. MA: To Appeals, I think we have to 14 do -- 15 MS. HARKEY: -- the whole case. 16 MS. MA: -- the whole case. 17 So they have to come back, right? 18 MR. EPOLITE: Well, all of the other years 19 essentially are held in abeyance until the 2005 year 20 is resolved. Because it's an appeal -- one appeal 21 for all of the years. 22 MS. HARKEY: Right. 23 MR. RUNNER: But, generally, the -- it 24 sounds like the Board has an interest only in this 25 small -- this part of the -- of the discussion 26 between FTB and the taxpayer. 27 Does that make sense? 28 MS. HARKEY: Right. 78 1 MR. RUNNER: FTB? 2 Taxpayer? 3 MR. BETCHLEY: I -- I'm sorry -- 4 MR. SUSZ: Yes. 5 MR. RUNNER: Okay. 6 MS. HARKEY: Okay. 7 MR. BETCHLEY: May I ask you a question? 8 MS. MA: Um -- okay -- is this -- 9 MR. RUNNER: I think we're in the middle of 10 a -- 11 MR. BETCHLEY: Mr. Horton, you -- 12 MS. HARKEY: We're in a motion -- 13 MS. MA: I think that the motion -- 14 MS. HARKEY: No. 15 MS. MA: -- was seconded. 16 MS. HARKEY: Right. 17 MR. BETCHLEY: Okay. 18 MS. HARKEY: We have a motion and a second. 19 Is there any discussion by Board, I guess 20 -- 21 MS. MA: No. 22 MR. HORTON: Madam Chair, just out of -- 23 MS. STOWERS: Courtesy. 24 MR. HORTON: -- courtesy, if we could open 25 up for discussion. 26 MS. MA: Mm-hm. 27 MR. HORTON: Sir? 28 MR. BETCHLEY: Um, you mentioned that I 79 1 should work with the -- the Franchise Tax Board on 2 this, on which I've been trying to do for 3 six-and-a-half years. So I'm glad to do that. 4 The -- am I -- would -- in that working 5 with them would I be allowed to use these deductions 6 that the Franchise Tax Board auditor said I did not 7 use? Would I be able to use those for those years? 8 MR. HORTON: Sir, um, with the permission 9 of the Chair, it appears that the Board has directed 10 the Franchise Tax Board to look at the -- to 11 review -- I mean, to look at the entire case and 12 provide you an opportunity to provide all the data 13 necessary to resolve your case. And so the entire 14 case is open for consideration. 15 The Board has given you some guidance as to 16 their thoughts relative to the facts before us today 17 in the issues. But if there's additional facts 18 available, that may change that. 19 You certainly are always open to, um -- to 20 provide evidence to support your case. 21 MR. BETCHLEY: And there was one last 22 thing. I'm sorry to drag this on. 23 Um, you'll notice in there, you know -- 24 this is in my presence -- or the package I 25 submitted. I guarantee -- everything I do in 26 business, there's a personal guarantee on it. It 27 forced me, in this case, to lose everything; my 28 home, my cars, everything. We lost absolutely 80 1 everything. 2 The Franchise Tax Board admitted they were 3 auditing my accounts and they were auditing my 4 father's accounts. 5 Um, after I had lost everything, filed 6 bankruptcy, the Franchise Tax Board demanded $50,000 7 from him for their cost to investigate me. 8 And they got the judge to go along with it. 9 That judge has since been removed, and the new 10 superior court judge said that he would -- that he's 11 the one who threw everything out. 12 But they made him -- they -- they -- the 13 Franchise Tax Board wrote that I would go to prison 14 for ten years and four months if my father didn't 15 pay $50,000 investigate -- for their cost to 16 investigate me. And it's in -- right in their 17 records there -- 18 MS. MA: Okay. So, um, why don't we do 19 this, why don't we have Mr. Epolite speak right now. 20 But you're given 30 days, 30/30/30 to come back and 21 to work with the other parties and to come back. 22 So if that's evidence you want them to 23 consider, please work with them. And I'm not sure 24 whether it relates to any of these issues that are 25 before us, but, um -- you know, I -- I -- think our 26 Appeals section will work with you. 27 MR. EPOLITE: Sure. 28 Just to let Appellants know that by the end 81 1 of the week, Appeals Division will send a letter out 2 to the parties requesting documentation and evidence 3 relating to the Lafayette property, and also give 4 Appellants the opportunity to present other evidence 5 as they would so desire for the other issues and tax 6 years as well. 7 Um, and as the Members have requested, 8 we're going to try and keep this on as concise a 9 schedule as possible because of the interest that 10 continues to accrue. So we are going to do this 11 with 30 days. 12 And so when we get back to Sacramento, I 13 will check in with Ms. Harkey's office to make sure 14 that all of the concerns and ideas that she may have 15 for the additional briefing can be addressed. 16 But that the Appeals Division will send out 17 a letter, the -- your appeal file will be managed by 18 the Board Proceedings Division. 19 And we definitely suggest and recommend 20 that during this process that you work with the 21 Franchise Tax Board as much as possible so that when 22 this matter does come back before the Board, as much 23 as possible that can be resolved, has been resolved 24 by the time this returns to the Board for a follow 25 up. 26 MR. RUNNER: Just a quick -- the -- the 27 last thing that was brought up in terms of cost that 28 was given -- 82 1 MR. EPOLITE: That's related to -- 2 MR. RUNNER: -- that's not related to 3 anything that's before us, right? 4 MR. EPOLITE: That's -- that's not before 5 you, that was related to the criminal matter. 6 MR. RUNNER: Right. 7 MR. EPOLITE: We're here only for the -- 8 MR. RUNNER: Correct. So there's nothing 9 we can actually act on and deal with that? 10 MR. EPOLITE: That's correct. 11 MR. RUNNER: Okay. Thank you. 12 MR. HORTON: Madam Chair, if I may? 13 MS. MA: Yes. 14 Mr. Horton. 15 MR. BETCHLEY: One of your attorneys said 16 you can. 17 MR. HORTON: Well -- 18 MR. RUNNER: He's our attorney. 19 MR. HORTON: In that regard, um -- in Mr. 20 Runner's clarification, let me just -- I mean, I've 21 listened to this intensely. And it sounds like 22 there's really a need to spend some time with the 23 taxpayer to sort of bifurcate the criminal actions, 24 civil actions from the case before us, and separate 25 it out so that -- that he's in a better position to 26 understand the type of evidence that can be taken 27 under consideration by this body in order to address 28 his concerns as it relates to the issues before us 83 1 during that process. 2 So, Appeals, you might be in a better 3 position to -- to share that information -- to do 4 that instead of the Department, FTB. 5 MS. HARKEY: Yeah, I think it's real 6 important to keep the taxpayer focused on the house 7 issue, and to get as much documentation on the house 8 issue as you can. And the other is periphery. 9 MR. SUSZ: We will do our utmost. 10 MS. HARKEY: Thank you. 11 MS. MA: Okay. Thank you all for your time 12 and we will see you back here -- or maybe not. 13 MR. RUNNER: Or not. 14 MS. STOWERS: Thank you. 15 MS. HARKEY: Thank you. 16 MR. BETCHLEY: Thank you. 17 ---oOo--- 18 19 20 21 22 23 24 25 26 27 28 84 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 September 27, 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 46 constitute 14 a complete and accurate transcription of the 15 shorthand writing. 16 17 Dated: October 14, 2016 18 19 20 ____________________________ 21 KATHLEEN SKIDGEL, CSR #9039 22 Hearing Reporter 23 24 25 26 27 28 85 1 REPORTER'S CERTIFICATE 2 3 State of California ) 4 ) ss 5 County of Sacramento ) 6 7 I, Jillian Sumner, Hearing Reporter for 8 the California State Board of Equalization certify 9 that on September 27, 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 48 through 84 14 constitute a complete and accurate transcription of 15 the shorthand writing. 16 17 Dated: October 14, 2016 18 19 20 ____________________________ 21 JILLIAN SUMNER, CSR #13619 22 Hearing Reporter 23 24 25 26 27 28 86