1 BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION 2 1 CIVIC CENTER PLAZA 3 IRVINE, CALIFORNIA 4 5 6 7 8 REPORTER'S TRANSCRIPT 9 JULY 27, 2017 10 CORPORATE FRANCHISE AND PERSONAL INCOME TAX HEARING 11 APPEAL OF 12 RICHARD R. BETCHLEY and KELLIE S. BRUNK 13 874758 14 AGAINST PROPOSED ASSESSMENT OF 15 ADDITIONAL INCOME TAX 16 17 18 19 20 21 22 23 24 25 26 27 Reported by: Kathleen Skidgel 28 CSR No. 9039 1 1 P R E S E N T 2 For the Board of Equalization: Diane L. Harkey 3 Chairwoman 4 Sen. George Runner (Ret.) Vice Chair 5 Fiona Ma, CPA 6 Member 7 Jerome E. Horton 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 David Gau Executive Director 15 For Department of Consumer Affairs: Norine Marks 16 Acting Chief Counsel For CA Department of 17 Tax and Fee Administration: Anthony Epolite 18 Tax Counsel IV Legal Department 19 Lou Ambrose 20 Tax Counsel IV Legal Department 21 For Franchise Tax Board: Craig Scott 22 Bureau Director 23 Susanne Coakley Tax Counsel 24 Adam Susz 25 Tax Counsel 26 For Appellant: Richard R. Betchley Taxpayer 27 28 ---oOo--- 2 1 1 CIVIC CENTER PLAZA 2 IRVINE, CALIFORNIA 3 JULY 27, 2017 4 ---oOo--- 5 MS. HARKEY: Ms. Richmond, please introduce 6 our first item. 7 MS. RICHMOND: Good morning, Members. 8 Our first item on this morning's agenda is 9 Item B Corporate Franchise and Personal Income Tax 10 Appeals Hearings. Item B1 Richard R. Betchley and 11 Kellie S. Brunk. 12 Please come forward. 13 Board Proceedings has received contribution 14 disclosure forms for today's hearings for the 15 parties, participants and agents. All forms were 16 properly completed and signed, and no disqualifying 17 contributions were disclosed. All parties, 18 participants and agents are on the alpha listings 19 provided to your office. 20 Each person sitting at the table will be 21 asked to introduce themselves and, if necessary, 22 their affiliation with the taxpayer for the record. 23 Ten minutes is allocated for the taxpayer's opening 24 presentation, followed by ten minutes for the 25 Franchise Tax Board's presentation. Five minutes is 26 allocated to the taxpayer for rebuttal. 27 And, Member Ma, I need to ask you if you've 28 had any ex parte communications with this taxpayer? 3 1 MS. MA: No. 2 MS. HARKEY: I think you need to speak more 3 into the mic. For some reason we're not picking you 4 up very well. 5 She said "no." 6 MR. RUNNER: If this is part of the new 7 procedure, I have a question. 8 MS. MA: Are you asking everyone? 9 MS. RICHMOND: If you've had any ex parte 10 communication with this taxpayer? 11 MS. MA: I don't think so. 12 MS. RICHMOND: Mr. Runner? 13 MR. RUNNER: Yeah, actually, I have a 14 question, because I knew this was part of our 15 procedure and I was a bit concerned about how it 16 came down. 17 You know, one of the things that we had 18 asked for -- I had asked for, and I think we 19 actually as a Board did, and I did back in the end 20 of June, was a workshop and training for Members on 21 ex parte. So I was particularly concerned with the 22 memo came out that -- 23 MS. HARKEY: At the last minute. 24 MR. RUNNER: -- at the last minute. But it 25 had some interpretation of the law that I believe is 26 incorrect, when it asked us if we had ex parte 27 communication prior to the law being in effect. 28 I don't think that was -- number one, I 4 1 think that's outside the law. 2 The other question I have is, there seems 3 to be a lot of information or discussion in regards 4 to ex parte regarding taxpayers, but very little 5 understanding or discussion in regards to 6 conversations with the Department. 7 So, I'm a bit confused because I would I 8 think ex parte goes both directions. 9 MS. MARKS: You're absolutely right. I -- 10 the ex parte communication would involve any 11 communication with any party to the proceeding, be 12 that the Department or be that the taxpayer. 13 I am not prepared to give you a workshop on 14 ex parte. But my opinion on this is that while the 15 communications prior to July 1, while the parties 16 may not have been restricted on their ex parte 17 communications, the proceeding is still pending. 18 And while the proceeding is still pending, the 19 obligation on the presiding officers, which you all 20 are, are that the decision should not be made with 21 that ex parte communication. 22 So I think the safer course would be to 23 disclose those communications from either party to 24 all parties involved and make those part of the 25 record. 26 So I don't think we need to ask 27 individually whether or not you had communications 28 with the taxpayer. I think prior to the start of 5 1 any one of these proceedings the Members could 2 disclose the communications that they have had with 3 either side. 4 MR. RUNNER: Well, just to clarify, this 5 would be communications by the Members or their 6 offices? 7 MS. MARKS: I -- I don't know exactly how 8 your offices are set up. But I would say that if 9 communications came in that you as the 10 decision-maker did not review in any way, you could 11 disclose that communications came in and they were 12 not reviewed. 13 MR. RUNNER: Well, here's the problem, 14 prior -- we would have -- our offices would have 15 daily conversations with the Department in regards 16 to issues that were coming up on an agenda; you 17 know, impossible to track and articulate. 18 So I -- I -- I find it very difficult for 19 me to talk and make a commitment or make a statement 20 that says that there's been no ex parte. I cannot 21 do that. 22 MS. MARKS: Then I think to the best of 23 your ability the way in which to handle it would be 24 to summarize any of those -- the sum total of those 25 communications. 26 MR. RUNNER: I have no idea what they are. 27 They happen -- they happened quite naturally. 28 MS. HARKEY: Excuse me. Here is -- here is 6 1 the problem -- 2 MR. RUNNER: Okay, let me -- 3 MS. HARKEY: I -- but I -- 4 MR. RUNNER: Let me just finish this 5 conversation. 6 So that's -- so I mean that's the -- that's 7 the conver -- that's the challenge that we have. 8 So to ask me if I've had ex parte 9 conversation, it's impossible for me to answer that 10 question. So I feel compelled to feel like I could 11 be endangering myself if I give a communication that 12 isn't true, because of the definition that has now 13 been given that ex parte applies prior to June 14 30th -- or July 1st. 15 MS. HARKEY: Yeah, I -- I totally agree. 16 I've got some issues with it, too. We're trying to 17 scramble together a memo for a last-minute e-mail 18 that we received telling us now we have to go 19 backwards into time to, uh -- to disclose. 20 And this was all forward-looking as of July 21 1, as I understood it, because it was very much 22 understood that we frequently talked to taxpayers, 23 not just Members but offices. We also communicate 24 with the Department. 25 That's how a lot of these cases got 26 dropped, is communication with the Department and -- 27 and explaining some of the issues that we saw with 28 the case. And they go back and figure it out and 7 1 either they drop, they reach settlement, they do 2 something. That's why these cases drop. 3 We've now got a lot of cases coming before 4 us, and to try to think of a year ago if somebody 5 talked to somebody -- because many times this comes 6 up months in advance. They circle around months in 7 advance, and so it's not an easy thing to disclose. 8 We also do not have -- and I want the 9 staff -- I want everybody in the audience, and I 10 want this on record, we do not have legal counsel 11 for an elected Board right now. And we were told we 12 were going to be able to borrow one from CTDFA, the 13 new department, somebody who had been working with 14 us previously. That's not happened. So we're up 15 here kind of flying blind. 16 And so for legal reasons and for other 17 reasons I feel like we're not protected. I feel 18 like we -- I am personally going to make a 19 suggestion that I am able to hire an outside legal 20 counsel until we get this right. I'm going to -- 21 I've got a budget, so I can't think of anywhere 22 better to spend it than to be sure that I am 23 protected. Because right now, nobody is watching 24 the Board. Nobody is protecting the Members. 25 We're all kind of reading the books and 26 citing the particular statute that may or may not 27 apply. And I do believe that we can't go back 28 retroactively and -- and start to disclose something 8 1 that we didn't have to disclose before. 2 I'm fully able to say at this hearing that 3 I talked with certain people and that my staff may 4 have communicated. But I -- you know, we're going 5 to prepare a letter on one particular because we 6 know that there was. I am aware that there was. 7 But I cannot say on these with clear conscience that 8 nobody at my office has spoken to them or that I 9 haven't. I don't think so. But I am with Member 10 Runner; this puts us in a very, very bad situation. 11 So I just want that on record in case something 12 comes back. 13 It's not the staff that'll be a problem. 14 All of you know elected officers are subject to a 15 much higher criteria, much higher prosecution, 16 issues on small simple things, little mistakes, 17 little hiccups. But if you're elected, you can find 18 yourself in problems with FPPC, with the AG, with 19 everybody in the book. 20 And so I don't want to be there, you know. 21 I mean, if I didn't have anything personally to 22 lose, I might feel a whole lot different and just 23 fly with it. But on the City Council and also when 24 I was elected in the Legislature, we had people that 25 represented and gave us counsel. And that's what we 26 need again. 27 We need somebody that's looking out for the 28 Board. Not just tax policy, but that's looking out 9 1 for the Board. That was our complaint earlier this 2 year and that is still our complaint. 3 We had an RFP out for this purpose, and 4 then we got -- we got our duties diminished. And I 5 know that the Controller has her own attorney. We 6 each either need to be able to hire one on our 7 staff, which I am going to make a request to do, or 8 we need to get somebody in gear from an outside 9 firm, that's used to dealing with elected officials 10 and the issues that we face, as well as -- we've got 11 plenty of policy people. A lot of policy people. 12 What we don't have is anyone to protect us, and 13 that's what we need. 14 MR. RUNNER: Let me -- let me finish now. 15 Let me make this clear from my perspective. 16 Unless we can be assured by counsel that indeed I 17 have no -- my staff, nor I, have any responsibility 18 in terms of ex parte communication prior to the law 19 being put into place, that -- that any conversations 20 in that does not meet ex parte requirements, I will 21 not participate in any of the hearings today or 22 tomorrow. 23 Because I can't -- if the question before 24 me requires me to make a commitment to which I 25 cannot make, I cannot in good conscience and 26 exposure to me and my staff move on with any of 27 these decisions. 28 So my question -- 'cause that's in conflict 10 1 with a memo that I received that then said that I 2 had responsibility for conversations prior to the 3 law being in place. 4 MS. MARKS: Well, first, Ms. Richmond 5 reminded me that I should introduce myself. My name 6 is Norine Marks; I'm from the Department of Consumer 7 Affairs. And I was initially asked to provide 8 advice on Bagley-Keene Open Meetings Act rules. 9 With respect to the ex parte issue, my 10 reading of it is, again, that because the 11 proceedings are pending, I think it is the safer 12 course to disclose those communications to the best 13 of your ability. So even if it were a summary of, 14 "I'm sure my office had communications with respect 15 to this proceeding. I do not recall any of the 16 specifics," at least to give the -- all parties to 17 the proceeding the opportunity -- 18 MR. RUNNER: But isn't that in essence a 19 violation of the ex parte if you say ex parte 20 applied prior to -- prior to July 1st? 21 MS. MARKS: I'm sorry, I didn't catch 22 that. 23 MR. RUNNER: Wouldn't that be a violation 24 of ex parte if all of a sudden I say we may have had 25 conversation? Isn't -- 26 If you're telling me that the law applied 27 prior to July 1st and I make a comment that says we 28 may have had communication, isn't that then in 11 1 essence violation to what you're saying I'm needing 2 to disclose? 3 MS. MARKS: Well, as I said, I don't -- 4 the -- the restriction on the parties to give 5 ex parte communications or to provide ex parte 6 communications prior to July 1 was not the law. 7 The law now is that, while the proceeding 8 is pending, the presiding officers have the chance 9 to cure that. 10 So it's not -- so if you were to say I had 11 communications prior to July 1, I don't think that's 12 the violation. I think the cure then with, I think, 13 the violation would be potentially to make a 14 decision without disclosing. 15 MR. RUNNER: Is the cure -- 16 MS. MARKS: The law gives you the 17 opportunity to cure any of those violations. 18 MR. RUNNER: So the only cure of the -- of 19 the violation is to say that there may have been 20 communication? 21 MS. MARKS: Well -- 22 MR. RUNNER: That is adequate cure without 23 having any exposure? 24 MS. MARKS: The cure is to disclose what 25 those communications are. 26 MR. RUNNER: I don't know what they are. 27 MS. HARKEY: We don't keep track of that. 28 MR. RUNNER: I don't know what they were. 12 1 And, again, the confusing part is there's been no 2 conversation at all in regards to what that -- what 3 that communication requirement is in regards to the 4 Department. 5 Just to make it clear -- I'll go on the 6 record for this, to make it clear for the record, 7 prior to the July 1st, I asked our Chief Counsel at 8 that point to do workshops for Members, as this law 9 was being -- as this law was coming into place. 10 Unfortunately, and as this -- as this department was 11 split apart, that Chief Counsel then went to the new 12 department, leaving us without a Chief Counsel. 13 I then had con -- specific conversation 14 with the Secretary of Government Ops, specifically 15 said we need to have a workshop prior to our hearing 16 so that we can understand what we have exposure to 17 and what the law is going to be and how it's going 18 to be applied. 19 She assured me that we would have that. 20 That has not even taken place. That hasn't even 21 been attempted to take place. In fact, our ED has 22 communicated constantly about what it is that we 23 need and the protection that the Board should have 24 and the concern for replacement which then, as far 25 as I can tell, has been virtually ignored. 26 MS. MARKS: I -- I have no answers for 27 that. I'm sorry. 28 MR. GAU: David Gau, Executive Director. 13 1 I have been, obviously, making -- this 2 has -- I've been trying to communicate to -- 3 MR. RUNNER: Right. 4 MR. GAU: -- the Board Members. A key 5 concern of mine is -- is the lack of legal support 6 for the elected Board. And in particular for the 7 proceedings, the hearings we're having here in the 8 next two days. 9 I was in negotiations, I guess I would call 10 it, with someone who was going to come over and 11 either be loaned or act as the Chief Counsel. 12 That, as of last Thursday, didn't happen. 13 So then I continued the conversation to try to 14 secure someone to help with the proceedings here 15 today, which is -- I want to -- 16 MR. RUNNER: Right. 17 MR. GAU: -- thank Ms. Marks for at least, 18 you know, coming here today. 19 That's where I am. 20 MR. RUNNER: Mm-hmm. 21 MR. GAU: I kind of jump-started before my 22 report this afternoon or whenever it will be. I 23 have another meeting on Monday to try to see about 24 bringing a loan, but that's still to be negotiated. 25 I'm not there yet. 26 So we are where we are right now with 27 Ms. Marks to try to help procedurally today. 28 MR. RUNNER: But again, the frustrating 14 1 part for me, as was described oftentimes by this 2 splitting of the agency that was supposed to be 3 seamless, is anything but seamless, especially when 4 we can't even get good communication. 5 So again, I'm frustrated. I'm still 6 deciding -- I cannot tell you whether or not -- if 7 the question before me is going to be as it was to 8 Member Ma, did I have communication with these, I 9 cannot answer that question. 10 And then at that point I will then have to, 11 again, ask the Chief Counsel -- or ask our attorney, 12 who's, I think, representing us today, I guess, What 13 exposure do I have? What exposure do I have if 14 indeed it turns out later on, in some dispute, 15 some -- some -- any of these could be going then to 16 court in terms of an appeal. What exposure do I 17 have if indeed I had ex parte communication and the 18 interpretation that I currently have in writing says 19 that I'm supposed to disclose things prior to July 20 1st? 21 The thing that would satisfy me would be if 22 indeed we would interpret -- if the Chief Counsel -- 23 or counsel now, would interpret the fact that the 24 law did not apply prior to July 1st, then I don't 25 have an issue. But as long as there's some part of 26 an interpretation that says this applied prior to 27 July 1st, I am really hesitant to make any decisions 28 on these issues. 15 1 MS. MA: And I would agree, too. We just 2 got the memo two days ago and we're, like, 3 scrambling in our office trying to figure out what 4 is it that we're supposed to be giving or 5 disclosing? 6 And, you know, we've been hearing cases 7 for, you know, two and a half years now. Trying to 8 go back to prior e-mails -- I mean, some of these 9 have been on appeal, they're a 30/30/30. You know, 10 we have to go back, I guess, trying to remember the 11 30/30/30s coming back. I mean, that is a lot, you 12 know, to ask for with, you know, the memo just 13 coming out two days ago. 14 So, you know, as I understood, the law 15 applied July 1st, we were ready to comply as of July 16 1st. You know, we have stopped all communication 17 with any taxpayer. If they called us, we basically 18 said, you know, we are not allowed to, you know, 19 talk to you anymore. We get that. 20 But trying to go back -- I mean, we have 21 one 30/30/30 that was, what, a year -- 22 MR. RUNNER: Last year. Yeah. 23 MS. MA: A year ago. And so trying to ask 24 all of our attorneys, "Anybody talked to them? 25 What's the communication?" I mean we just don't 26 document everything like that. I mean it's just 27 going to take time. 28 MS. HARKEY: We -- we couldn't even do it 16 1 with time. 2 MR. RUNNER: Right. 3 MS. HARKEY: And that's the problem we're 4 in. 5 And so we would like, from you, 6 clarification that the law begins July 1. We're all 7 prepared for July 1. No one is prepared to go back. 8 And I think getting this at the last minute 9 was really troubling. And because it's in writing, 10 it is legal advice to us, even though it's just a 11 few little bullet points in an e-mail. You know, we 12 want to be sure we have no liability here. 13 And we can go July 1, but I don't think any 14 of us can go back. And so that's -- that's the 15 dilemma. We don't keep tracking notes of 16 everything. You know, it just doesn't happen that 17 way. 18 We have little conversations. We call the 19 Department. They have conversations. Some of the 20 people that had these conversations probably don't 21 even work for us anymore. So it's, like, this is an 22 impossible situation. 23 We've been here two and a half years doing 24 it the same way. As of July 1 it changed, and we've 25 all changed going forward. But we can't 26 retroactively apply a law that didn't apply. And I 27 think that's the big issue. 28 Yes, Member Horton. 17 1 MR. HORTON: Thank you Madam Chair. 2 MS. HARKEY: I'm sorry, people in the 3 audience. It's just come to this. Thank you. 4 MR. HORTON: Thank you, Members. 5 I somewhat echo the concerns of the 6 Members. But I got a couple questions. 7 Ms. Marks, what is the legal basis for your 8 conclusion that the ex parte communication is 9 basically retroactive for any cases that come before 10 us subsequent to the enactment date? 11 MS. MARKS: The way I read the code is 12 while the procee -- while the proceeding is still 13 pending, that if you've received communications that 14 would otherwise violate it, prior to your start 15 of -- 16 MR. HORTON: I mean, what -- what -- what 17 section of the code? 18 MS. MARKS: It's 11430.40 of the Government 19 Code. 20 MR. RUNNER: But that law wasn't in effect 21 at that time. 22 MS. HARKEY: But the law, it wasn't in 23 effect then. The law was in effect July 1. 24 MR. RUNNER: So, um -- 25 MS. MARKS: The law with respect to the 26 communications being provided was not in effect. 27 But the law with respect to whether or not you're 28 making a decision and received communications -- 18 1 MS. HARKEY: No, we had no ex parte before. 2 No ex parte law applied to this Board. 3 MS. MARKS: I -- I think my suggestion -- 4 MR. HORTON: Given -- given that, um -- I 5 mean my lawyers have looked at this and they 6 disagree with your interpretation. But you are our 7 counsel for the day. 8 And so, I mean, I don't know to what extent 9 you have obligation to the Board as a whole, as a 10 lawyer; can you elaborate on that? I mean, is your 11 obligation to us or Consumer Affairs in this new 12 capacity? 13 MS. MARKS: No. My obligation is to you. 14 I have a copy of the MOU between DCA and BOE. 15 MR. HORTON: So pursuant to the ethic codes 16 the lawyers follow, you're -- you have strict 17 liability and obligation to the Board, to the body, 18 to the individual Members? 19 MS. MARKS: To the best of my ability. 20 MR. HORTON: The, um -- under ex parte 21 communication, my understanding is, is that you can 22 actually have communications with the taxpayer, but 23 you're required to invite both parties; is that 24 true? 25 MS. MARKS: Correct. The idea is that 26 you're not receiving information from one of the 27 sides that the other side does not have an 28 opportunity to comment on. 19 1 MR. HORTON: It's also my understanding 2 that the other side has to -- either side has to 3 waive their opportunity to participate in that 4 communication; is that true? 5 MS. MARKS: I -- I'm not sure I 6 understand. 7 MR. HORTON: So we invite both parties and 8 one of the parties has -- say we invite the 9 Department and we invite the appellant or the 10 taxpayer to a discussion prior to the hearing. If 11 one party waives their right to participate in that, 12 we can continue to have the communication; is that 13 true? 14 MS. MARKS: I haven't looked at that 15 specific type of proceeding. But I would say that 16 if both parties understand that there's an 17 opportunity to give comment to the presiding officer 18 and one side does not show up, then it would be like 19 any other evidentiary hearing. You'd be use -- 20 you'd be receiving -- 21 MR. HORTON: So you fulfilled your 22 obligation as far as ex parte communication. 23 MS. MARKS: I'm sorry. 24 MR. HORTON: If that happens, you've 25 fulfilled your obligation as far as ex parte 26 communication. 27 MS. MARKS: I would -- depending on the 28 circumstances, I would say, yes. If one of the 20 1 sides has the opportunity to comment on the receipt 2 of evidence and does not make use of that 3 opportunity, then there would be no violation. 4 You've not received communications that the other 5 side has not had an opportunity to comment on. 6 MR. HORTON: You indicated "under certain 7 circumstances." What circumstances would that not 8 be the case? 9 MS. MARKS: I don't think I know enough 10 about how your -- your proceedings work. But if you 11 were at a proceeding such as this -- 12 MR. HORTON: No, no. A proceeding wherein 13 they're invited to -- to a discussion with 14 individual Members prior to the hearing. 15 MS. MARKS: I don't know how that would 16 happen, but I -- that would strike me as -- 17 MR. HORTON: Just, we'd send out the 18 invitation -- 19 MS. MARKS: -- as -- that would strike me 20 as then not ex parte because they have the 21 opportunity. 22 Now, if there are documents that are 23 received during that communication, during that -- 24 that kind of proceeding, then I would think that 25 those would be made part of the record and that the 26 other side would eventually have an opportunity to 27 review the entire record. 28 MR. HORTON: If the documents are 21 1 considered part of the existing briefing by the 2 presiding officer, would they be required to 3 disclose it? Under what circumstances would they be 4 required to disclose it, the additional 5 documentation? 6 MS. MARKS: I would think that they would 7 still be required to disclose that. 8 I mean if -- if one of the parties comes 9 and has -- says I have documents, I don't know why 10 those documents would not be provided to the other 11 party. 12 MR. HORTON: No, I -- I'm not asking a 13 logical question. I'm asking more of a legal 14 question. Are they required to -- under what 15 circumstances would those documents be required to 16 be disclosed to the other party? 17 MS. HARKEY: You mean if they were already 18 in the file. If they were part of the file. 19 MR. HORTON: If -- if it was presumed that 20 that evidence was part of the file. 21 MS. MARKS: If the -- if the other party 22 did not have an opportunity to see that that's part 23 of the file, I would say then you would always have 24 an oppor -- the requirement to disclose. 25 MR. HORTON: Okay. Would the party not 26 attending at this point, given that this is somewhat 27 retroactive -- I mean it's being interpreted that 28 these communications, the law applies retroactively 22 1 to communications of the presiding officer hearing 2 the case. Given that, would the nonparticipating 3 party be required to issue a waiver at this point? 4 Because they never had the opportunity to attend 5 these ex parte communications. 6 MS. MARKS: I think at this point the 7 opposing -- the other side would have the 8 opportunity to ask for 10 days to comment on any of 9 the ex parte communications that have been received 10 and disclosed. 11 MR. HORTON: So at this point if we had 12 ex parte communications and disclosed that we've had 13 it, we should give the nonattending party 10 days to 14 respond. 15 MS. MARKS: If they need it. Or if you had 16 copies of those documents now, we could talk about 17 how to give them the opportunity to review any 18 documents that may have been received. 19 MR. HORTON: What would we need to do in 20 order to cover the Board from any exposure in order 21 to cure that problem? 22 MS. MARKS: Mm-hmm. I think this would be 23 my suggestion. As you start to call the cases, if 24 you thought you had either documents or, you know, 25 written communications or oral communications with 26 one side that the other side was not a party to, you 27 can disclose that. If you -- if you don't know, 28 then you can say you don't know. 23 1 If you had either oral or written 2 communications that you can disclose, the other side 3 would have the opportunity to review those and we 4 can talk about whether or not they -- they need a 5 couple minutes, whether or not they need to trail it 6 to the end of the calendar, whatever it is. 7 And then lastly, there would be the 8 opportunity for one of the parties to disqualify one 9 of the presiding officers. 10 MS. HARKEY: See, see this is the problem. 11 We've got two days of Board hearings. We got this 12 memo. I looked at it actually yesterday morning. 13 My staff has been working on one case, but 14 we got everything from the file. We did not get any 15 new information. But did we talk? I'm sure we did. 16 And so, what's that? I mean, you know, 17 does that mean that this case can't be heard or that 18 it can be postponed? Or we can hear it and we can 19 decide on it and then all of the sudden somebody can 20 say, "Oh, well, we weren't party to that, so we are 21 going to reschedule this later on," in essence, 22 after the Board is gone. 23 So I'm just -- I'm just saying this is very 24 confusing. And I think what you -- what you need to 25 do is to just tell us that anything after July 1, 26 follow the law. Prior to July 1, you know, a 27 verbal, maybe, disclosure that had some kind of 28 conversation or whatnot would probably be advisable 24 1 since no one can verify. 2 And, you know, just let us get on with the 3 meeting. 4 MR. HORTON: Madam -- 5 MS. HARKEY: I'm -- 6 MR. HORTON: -- Chair. 7 MS. HARKEY: I'm just not -- I'm not 8 comfortable with the way this is going to where 9 we've got taxpayers here that have been scheduled 10 for hearings, that are coming before us, and all of 11 the sudden they don't know if our decision's going 12 to be real or not real. And we -- we -- you can't 13 seem to tell us because everybody gets to object for 14 something that happened before the law went into 15 effect. 16 MR. HORTON: Madam Chair, if I may -- 17 MS. MARKS: Well, I don't think they would 18 be objecting after the fact. 19 MR. HORTON: Madam Chair, if I may -- 20 MS. HARKEY: July 1 is when the law went 21 into effect, July 1. 22 MR. HORTON: Is there representation from 23 the Department here, Franchise Tax Board? 24 MR. SCOTT: Yes. My name's Craig Scott. 25 MR. HORTON: Mr. Scott, is the Franchise 26 Tax Board willing to issue a blanket waiver of any 27 discussions prior to July 1? 28 MR. SCOTT: I think we would need to go 25 1 back and discuss that. 2 MS. HARKEY: See, there's the problem. 3 MR. HORTON: Okay. 4 MS. HARKEY: And that's why this comes 5 up. 6 MR. HORTON: So we're faced with somewhat 7 of a dilemma here. 8 MR. RUNNER: Can we -- let me make a quick 9 suggestion. 10 MR. HORTON: Sure, Member Runner. 11 MR. RUNNER: I think the path that I could 12 feel comfortable going down, for me -- we'll see how 13 the other Members feel -- is I could proceed with 14 the hearings without any votes. And then at that 15 point then -- and wait -- 16 MR. HORTON: You still -- 17 MR. RUNNER: Hold on, hold on. 18 And wait -- and wait until there's a 19 definitive direction from either the AG's office or 20 the new tax agency, Department or Bureau, whatever 21 it's called. 22 MR. HORTON: Mr. Runner -- 23 MR. RUNNER: Well, hang on just a minute. 24 Or -- or the, uh -- their Chief Counsel or 25 the Chief Counsel for Government Ops, assuring us 26 that the law of ex parte applies after July 1st. 27 At that point, once that assurance is done, 28 then we can bring these back up and vote on them. 26 1 That's how I would at least see that we could 2 proceed. 3 But until that point, I'm not prepared -- 4 especially after this conversation. Because here's 5 my problem. My concern is that as we have a 6 taxpayer that comes forward -- and, again, one -- 7 one issue is with Cal -- the Franchise Tax Board. 8 We know we've had limited conversation because of 9 the procedures that we deal with them. The problem 10 to me is going to be on the -- on the -- on the old 11 BOE side where we would have daily conversations 12 with the Department. 13 Again, a lot of this emphasis seems to be 14 around the taxpayer. But the -- but my 15 understanding is the law applies to the Department, 16 too. And those are, like, daily conversations that 17 could take place regarding a case. 18 And so I -- we're -- we're -- there's no 19 way -- in fact I would probably have to say submit 20 to the fact that we did have conversations, I just 21 don't know when they were or what they were about. 22 And so until I get that assurance, I just 23 cannot move forward on voting on these issues 24 because what could happen, very clearly, is you have 25 a taxpayer who either -- who -- who, say, loses in a 26 decision and then they go ahead and appeal this and 27 go do a court decision, and part of the court appeal 28 is -- the decision-making, is the fact that we 27 1 violated, according to the memo, some aspect of 2 ex parte communication. 3 So that's the concern that I have because 4 of the interpretation of being prior to July 1st. 5 So, that's kind of where I'm at right now. 6 I'm not prepared to vote on any cases until I can be 7 assured that the ex parte application of the law 8 that went into place July 1st, actually applies 9 starting July 1st. 10 MS. MA: That's our understanding, too. 11 MR. HORTON: My counsel has advised me, 12 Mr. Runner, that the mere participation, if there's 13 a violation, doesn't cure the violation. If there's 14 a sense that -- 15 And I have to sort of follow what our 16 counsel -- it is our counsel, so if her 17 interpretation is that there's a violation of 18 ex parte communication if it occurred, then we are 19 participating in the proceedings without curing it 20 somehow is a violation on our part. 21 MR. RUNNER: When you say "counsel," your 22 personal, or did they -- did she say that? 23 MR. HORTON: My personal counsel. So 24 the -- 25 MR. RUNNER: I'd like to -- well, we need 26 to have clarification on that because that would be 27 an important point. 28 MR. HORTON: Well, I've asked for -- I 28 1 mean, hopefully our counsel, Ms. Marks, will provide 2 us with a legal analysis that kind of gives us some 3 direction. And then possibly we can hear from 4 Franchise Tax Board at some point as to what their 5 perspective is on this issue, as well as the 6 Department. I think that would be important. 7 And the waiver that I spoke of would be 8 waiver of any testimony, not the Department, either 9 Department not having access to any testimony that 10 we may have heard; intentionally or unintentionally, 11 we don't know, you know. 12 MR. SCOTT: Does that apply to documents as 13 well? 14 MR. HORTON: Pardon? 15 MR. SCOTT: Would it apply to documents as 16 well? 17 MR. HORTON: It would apply to documents, 18 it would apply to testimony, it would apply to 19 incidental discussions. It could apply to the phone 20 call to the secretary. If in fact the appellant 21 indicated to the secretary that they have certain 22 documents that they wanted to present to the 23 presiding Member, then that's ex parte communication 24 at that point. 25 And so it's not just the Members; at least 26 this is our interpretation. I -- I -- I understand 27 Ms. Marks believes that it's just the Members. But 28 my lawyers are telling me that it's all our entire 29 1 staff. 2 And the other challenge that I have -- and 3 Member Ma may have the same challenge and Member 4 Harkey may have the same challenge -- that as a 5 Member of the Franchise Tax Board, I actually was 6 privy to information on some of these cases. 7 The Hyatt case that's coming up next month, 8 I was privy to certain information as a Member of 9 the Franchise Tax Board that may or may not have 10 been available in these proceedings. So I kind of 11 need to know what that was and whether or not those 12 discussions sort of provided me with some 13 insight that may not have been available. 14 I'm not asking at this point. I'm just 15 giving an example so that when you consider what 16 you're waiving as a Department, that you're -- you 17 know, that you consider all those factors as it 18 relates to me. 19 MR. SCOTT: And -- and I don't know if the 20 memo that you've been discussing is something that 21 is public that would -- something that we would want 22 to look at, also, to see what it is actually that 23 the requirements are and what we would be -- 24 MR. HORTON: That brings up another point. 25 My apologies. 26 Ms. Marks, has your memo been provided to 27 all the parties? 28 MS. MARKS: No. That would be 30 1 attorney-client privileged communication. 2 MR. HORTON: So all the parties now are 3 aware that there are communications to the Board 4 is -- may or may not be in violation of the law. 5 And so they, too, need to either waive or disclose; 6 would that be correct? 7 MS. MARKS: Well, I -- I think the way I 8 would suggest you could proceed is that the Members 9 could disclose to the best of their ability, what 10 they know of, communications that occurred -- 11 MR. HORTON: How would the -- 12 MS. MARKS: -- in the proceeding before 13 them. 14 MR. HORTON: How would the appellant and 15 the Department cure? 16 MS. MARKS: How would they what? I'm 17 sorry. 18 MR. HORTON: How would they cure their 19 discussions in an ex parte communication? 20 MS. MARKS: Well, it is not their 21 obligation to cure. It's the obligation of 22 presiding officers. 23 MR. HORTON: I mean I agree with that. 24 Maybe I asked the question wrong. 25 MS. MARKS: I think they could offer -- if 26 they knew that they had provided documents to one of 27 the Members, those documents could be provided. 28 They could assist the Members in providing those 31 1 documents to the other side. 2 MR. HORTON: So if -- if an appellant 3 provided documents to the Members that they have not 4 provided to the other side, they're under no 5 obligation to provide that information to the other 6 side? 7 MS. MARKS: If they were provided prior to 8 July 1, I would think not because the -- the 9 restriction on actually giving the communication 10 existed -- only existed after July 1. But the, 11 uh -- now the obligation for the presiding officer 12 to -- before a decision is rendered to disclose 13 those to cure any of the potential violations exists 14 now. 15 So I don't -- I don't see why the other 16 side could say, "Hey, you may not remember that I 17 gave you this document, but I know I gave it to 18 them," and you can provide it to the other side. 19 MR. HORTON: But if in a -- if in the case 20 that the appellant did provide information but we 21 did not remember that they provided that 22 information, and later on their argument is that we 23 provided that information to you but you didn't take 24 it under consideration, the other department didn't 25 know, so the case is -- the case itself is somewhat 26 tainted. 27 MR. RUNNER: Or their appeal. 28 MR. HORTON: But as -- as our counsel, 32 1 would you advise us to request the parties to 2 disclose if they provided us any information so we 3 get that on the record? 4 MS. MARKS: You could certainly ask. I do 5 think that the law provides for, at some point, for 6 the matter to be reopened. I'd have to find that 7 particular section. 8 So that is one way in which the proceedings 9 could go forward. You could -- the Members could 10 disclose to the best of your recollection, you know, 11 a summary of what those communications may have been 12 and it can only be to the best of your recollection 13 at this point. 14 The other side would have an opportunity to 15 review any documents. Obviously, if you can't 16 disclose any oral communications, there would be 17 nothing to review. But documents, they would have 18 an opportunity to review and comment on. And then 19 we could deal with how long that would take them at 20 that time. And then the proceeding could go forward 21 and I -- and the presiding officers could be subject 22 to disqualification, but we can see how that goes. 23 MR. HORTON: Can we -- could the Board 24 waive their attorney-client privilege and ask that 25 you disclose your legal opinion to all parties? 26 MS. MARKS: That decision has to be made as 27 a Board. 28 MR. HORTON: So we can do that? 33 1 MS. MARKS: As a body. 2 MR. HORTON: So that brings up another -- 3 MR. RUNNER: Why would we -- 4 MR. HORTON: I mean just on this particular 5 case. But I'm not -- 6 MS. HARKEY: The thing -- the thing that 7 I'm concerned with is I don't agree with the memo. 8 I think it's wrong. 9 MR. HORTON: I mean, this memo -- 10 MS. HARKEY: And so it just kind of adds 11 fuel to the fire. 12 Another question -- 13 MR. HORTON: It's already disclosed 14 though. 15 MS. HARKEY: Well, we know -- we know we 16 have a memo. It is attorney-client privileged memo 17 that we're disagreeing with on ex parte 18 communication. That then the particular point is 19 that it's after July -- it's prior to July 1. 20 I just heard FTB say they're -- they're 21 not -- they don't know what they'll accept and what 22 they won't. 23 And so my question is, why is FTB deciding 24 this? We hear their appeals. Why are they the 25 deciding factor? Or are they not? 26 I think it's up to our legal people to 27 decide what -- how these appeals go forward and to 28 support us, not necessarily the, uh -- the 34 1 respondents. 2 MR. HORTON: Yeah. Disclosure to us 3 wouldn't necessarily prejudice the taxpayer. But it 4 would have some prejudice for the Department if 5 that -- if the Department hasn't had that 6 information. Would you agree? 7 MR. SCOTT: Well, which is why I understand 8 you were asking the question if we'd be willing to 9 waive. 10 MR. HORTON: Right. That's really the 11 reason. 12 MS. HARKEY: Which is what should happen if 13 it's prior to July 1. There should be a waiver, so 14 that we can move forward. 15 I mean, I'm -- I'm fully prepared to say I 16 may or may not and whatnot. What I'm not willing to 17 do -- what I'm not prepared to do is go through each 18 of these cases and say that never had -- I mean, I 19 don't know. 20 Some of these things are old. Some of them 21 are retreads. As a matter of fact the first case, 22 we all heard. And I'm not sure what happened before 23 the first case, before the first time we heard it. 24 So, you know, this is -- this is the 25 problem. So I think it's kind of impending upon you 26 to issue a -- an all-clear prior to July 1, just do 27 the best you can with what you've got, you have no 28 liability. And the FTB is going to need to sign a 35 1 waiver or figure out another solution. 2 Because I think we still have -- we have an 3 obligation to hear hearings until December, and 4 we're trying to do that. We have people sitting out 5 here waiting to be heard. They need to know there's 6 some finality to their appeal. 7 FTB is saying, "Well, we don't know. We 8 might or might not." Why are they controlling the 9 process? Question number one. Number two, what can 10 you do to have, uh -- to put comfort up here so that 11 we can get on with the business? What -- you know, 12 that the law really is in effect as of July 1, and 13 that just do the best -- to the best of your 14 ability, um -- to the best of your ability just, you 15 know, disclose if you think you may have had a 16 conversation. 17 I mean, because I -- I would probably be 18 willing to say I may have had a conversation on 19 every file here, or my office. I don't know. I 20 don't think I did, but who knows? 21 MR. HORTON: Members -- 22 MS. HARKEY: You know. So that's kind of 23 where we're going. 24 MR. HORTON: Members, I mean this is just 25 my own personal perspective, Ms. Marks and Members. 26 If the -- if the FTB is willing to issue a 27 blanket waiver for the cases before us at this time, 28 I would feel comfortable kind of hearing the case. 36 1 I mean I only -- I only had ex parte communication, 2 which I'm willing to disclose, with one party. And 3 I will disclose -- I have disclosed to Board 4 Proceedings in the form of a memo exactly who had 5 that conversation, down to the receptionist, just in 6 case, you know. So I just said everybody had a 7 discussion, and those who had specific discussions 8 that was actually in the meeting during the time, 9 just one of the taxpayers. 10 So the rest of them I have not had ex parte 11 communications with. 12 But, would the Department be willing -- can 13 you, within the next hour or so, talk to somebody 14 and kind of come back with a determination that your 15 department's willing to issue a -- 16 MS. HARKEY: I mean, if there's not new 17 information presented, if the information's from the 18 file -- 19 MR. HORTON: Well, I don't know if 20 there's -- 21 MS. HARKEY: I mean, that's -- I can tell 22 you that I've had no new information that isn't from 23 the file on any of the cases here. It's all in the 24 file. 25 So I think, you know, the fact that we had 26 a conversation five, six months ago, and that we 27 spoke to -- that -- that new file data that the FTB 28 actually received, had a chance to assemble, look at 37 1 and review and actually respond to, um -- 2 MR. HORTON: Well, Ms. Marks, I got a 3 question in that regard, as to what is new 4 information. 5 If we had communications with the appellant 6 and we asked the appellant questions that -- and the 7 response was not part of the record -- for example, 8 do you have information relative to the value of 9 this and this and that? And the response was yes, 10 and here's the information or, yes, and we will 11 provide the information at the hearing, is that 12 considered new information? 13 MS. MARKS: Is that new information, are 14 you asking? 15 MR. HORTON: Is that infor -- strike the 16 term "new." 17 Is that information that is -- if that 18 information is not part of the record, is that 19 considered information supplementing the record? 20 MS. MARKS: I think, if I understood you 21 correctly, if you had a conversation with a taxpayer 22 that said, do you have information, and that person 23 said yes, and -- 24 MR. HORTON: Oftentimes during -- 25 MS. MARKS: -- that I will provide it at 26 the time of the hearing? 27 MR. HORTON: Yeah, oftentimes during the 28 discussion, in the communications, there may be some 38 1 exploratory questions that sort of explores the 2 evidence or additional evidence that could be 3 presented. 4 The discussion about additional evidence 5 that could be presented in the defense of -- for the 6 appellant, would that be considered evidence that 7 supplements the existing record, if it's not part of 8 the record? That question and that response? 9 MS. MARKS: I -- I -- I think the record, 10 as far as I understand it, is you're talking about a 11 file. I imagine that there's a file that exists 12 prior to today, but all the evidence that comes in 13 today is also a part of that record. 14 MR. HORTON: No, the -- oftentimes the -- 15 oftentimes what happens is, is that you have 16 discussions with -- or I won't say "happens." It 17 happened -- has happened in our office in the past. 18 None of the proceedings before us, to my knowledge. 19 But the discussion is about hypotheticals, 20 or the discussion is about probabilities of 21 additional evidence to support the case. And the 22 taxpayer will often respond to those questions, 23 well, do you have -- as it relates to evaluation 24 discussions, for example -- do you have an 25 appraisal? No, I don't have an appraisal, but I can 26 get an appraisal. Or I do have an appraisal, I just 27 got the appraisal, and the appraisal said -- 28 So it's a testimony. We don't necessarily 39 1 see it. The testimony is that the appraisal said 2 something that wasn't part of the original briefing 3 or the original record. 4 Excuse me. I was choking a little. 5 MS. HARKEY: Would the testimony -- would 6 the appraisal have been made part of the record? 7 MS. HARKEY: I think if -- 8 MR. HORTON: No. 9 MS. HARKEY: -- all parties have it -- 10 No. 11 MR. HORTON: Yeah. I mean that's the 12 inherent challenge. I mean we typically, in our 13 office, if we provided additional evidence, we will 14 typically go through Appeals and seek a response to 15 that. 16 But another caveat of this -- of the new 17 legislation is, is that Appeals has advised us that 18 they're not allowed to supplement the existing 19 record. So if we ask Appeals a question that is not 20 part of the record and ask Appeals to go back to the 21 Department to get their response that's not part of 22 the record, Appeals has said they can't do that. 23 So that creates another challenge for the 24 Board and just trying to clarify. So that actually, 25 in the future, just for in the future, I believe -- 26 Madam Chair and Members, I believe that all parties 27 should have far more than just ten minutes to sort 28 of explore those questions. 40 1 MS. HARKEY: Exactly. 2 MR. HORTON: Because the communications and 3 the discussions, which I'm not debating the 4 appropriateness of this at this time, but has to 5 take place in this process. 6 MR. RUNNER: We -- 7 MS. MARKS: With respect to how a record 8 for these kinds of cases is built, I can't answer 9 that and that would have to be, I think, part of 10 your question from your Appeals Bureau. But I can 11 say, I think with the example that you're giving, 12 if -- from an ex parte view, if the taxpayer 13 provided you with an appraisal and that did not 14 go to -- 15 MR. HORTON: Verbal. Verbal. Not an 16 actual document. 17 MS. MARKS: A verbal, okay. Well then, I 18 think then you could disclose either, yes, I got a 19 verbal communication that the appraisal was X, or I 20 got a verbal appraisal that -- or verbal 21 communication that, yes, they could provide an 22 appraisal and would do so at the time of hearing, or 23 would do so and I didn't get one. That could simply 24 be disclosed, yes, they said they had an 25 appraisal. 26 MR. HORTON: But we would have to disclose 27 it. If, uh -- if any of these proceedings end up in 28 court and this becomes an issue, will you represent 41 1 the Board? 2 MS. MARKS: I'm sorry? 3 MR. HORTON: Will you represent the Board 4 in the legal proceedings if they -- if it goes 5 there? I mean who -- who represents the Board if 6 there's litigation that involves the discussions? 7 MS. MARKS: I would imagine that the Office 8 of the Attorney General would provide representation 9 during any litigation in superior court. 10 MR. HORTON: Typically the Office of 11 Attorney General represents us, but our legal 12 counsel actually represents the Board in that 13 process, accumulating information, testimonies, all 14 that other stuff. The AG does an exceptional job 15 and goes in and kind of handles the business after 16 that. 17 Okay. That's -- that -- 18 Thank you, Madam Chair. 19 MR. RUNNER: I have a couple follow-up 20 questions in regards to some of this. 21 First of all, this whole process I think is 22 unfair to taxpayers, we're going through right now 23 as folks move through in a process to which they 24 thought they knew the rules of the game and, 25 unfortunately, the Legislature and the Governor 26 changed them at the last minute, which has created 27 this confusion. 28 This whole process could have been much 42 1 easier done if indeed there was a more methodical, 2 thoughtful process to which these laws and transfers 3 of powers would have taken place. Unfortunately, 4 they chose not to do that, and as a result of that 5 we have these issues of confusion. And, again, ones 6 that we had already identified as potential 7 confusion, that in essence we were ignored. 8 So now we come to today. We come to today 9 when there's a bunch of taxpayers out here wanting 10 to have their due process, and the process that they 11 thought they were in got changed. 12 So I think that's the unfortunate part of 13 this whole process, and that's what happens when 14 government tries to go ahead and monkey around too 15 fast with the issues and without taking clear 16 understanding and guidance of what they're doing. 17 But let me -- let me just ask this specific 18 question, because it has to do with how we can move 19 forward. 20 Member Horton asked or had -- had the 21 opinion from his counsel that if we even hear a 22 hearing, if we even take testimony, that we are 23 therefore participating, even though we may not make 24 a choice on it until we get clarification on this 25 issue. Is that your interpretation, also? 26 MS. MARKS: Could you repeat that? That 27 even participating in the hearing today? 28 MR. RUNNER: If we -- if we, for instance, 43 1 said, okay, let's go ahead and have the testimony, 2 taxpayers are here, let's respect them, let's hear 3 their testimony. And until we get -- and then later 4 on get clarification in regards to the fact that the 5 ex parte did not apply prior to July 1st, then we go 6 ahead and make a decision based upon that 7 interpretation. 8 And so we heard the hearing, we then got 9 the clarification. And then we would make a 10 decision at that point. As opposed to, for 11 instance, where I would be; and that is if indeed we 12 had the hearing, the interpretation was no, indeed 13 these are, um -- the ex parte did apply before July 14 1st and, therefore, you must disclose and, um -- 15 I -- I would not be prepared to make a decision on 16 those cases then because I can't. 17 I just cannot do it in good conscious for 18 me or my staff in regards to what I believe could be 19 exposure. Unless, again, FTB and -- and also, um, 20 you know, the new department, TFA, gave us -- gave 21 us the waiver that protected us at that point. And 22 they then would opine that the -- that the 23 application of ex parte does not apply prior to July 24 1st, then I could go ahead and move forward with 25 those decisions. 26 But until I get that, I'm in this no man's 27 land that I'm really uncomfortable about because of 28 potential legal exposure both personally and also to 44 1 the State, and also, quite frankly, to the 2 taxpayer. 3 MR. HORTON: Yeah. 4 MS. MARKS: I had not done -- 5 MR. HORTON: Let me argue that before you 6 respond, Ms. Marks. 7 Our view was that we would have to recuse 8 ourself from the proceedings. You know, I mean 9 before it even started, I would recuse myself. I 10 mean, if in fact I thought that there was some legal 11 exposure. 12 MR. RUNNER: Can we get the answer specific 13 before we start kind of -- I want to know if indeed 14 that's the case, that we can't even hear a hearing 15 and then make a decision later and violate 16 ex parte. 17 MS. MARKS: That, um -- no, I don't think 18 that's the case. Because I think -- 19 MR. RUNNER: What's the case? 20 MS. MARKS: Because the proceeding would 21 still be pending -- 22 MR. RUNNER: Right. 23 MS. MARKS: -- and you would still have 24 that opportunity to disclose any ex parte 25 communications that occurred. Again, it's going to 26 be to the best of your ability, as it always is. If 27 you needed to do a search for written 28 communications, that could be done. If you needed 45 1 to somehow -- 2 MR. RUNNER: You're not hearing us. It is 3 impossible for us to come up with those documents 4 that you're asking for, especially on the verbal 5 side. For, again, this first hearing was a hearing 6 that was done last year. For us to go back and try 7 to reconstruct what conversations may have taken 8 place between taxpayers, between Department, you 9 know and all that, it's impossible. 10 So -- so those documents cannot be 11 provided. 12 MS. MARKS: My suggestion is you can only 13 do -- you can only do what you can do to the best of 14 your ability with any oral communication, is to give 15 some summary to the best of your knowledge. 16 I do not think it's a violation to go 17 forward today however. 18 MS. HARKEY: The memo that I read applied 19 to Members, not to staff. That's clarification 20 number one. 21 I -- I know -- I know who I talked to and 22 who I didn't that's on file today. But as far as 23 any staff communication, I would not be able to -- 24 nor would my staff, be able to disclose because we 25 don't know and that's very similar to what Member 26 Runner is saying. I don't meet with that many 27 taxpayers myself, so it's easy for me to remember 28 who I met with. 46 1 That being said, we do need some assurance, 2 to go forward with this hearing, that we're not 3 going to be in some personal liability, State's not 4 going to be in liability, the constituents or the 5 taxpayers are not going to have issues, and that 6 what we decide or if we can postpone the actual 7 decision until we get clarification as of July 1, 8 that would actually, I think -- 9 You don't think we have a problem going 10 forward. I'm prepared to hear cases under that 11 advice that you have opined, that we do not have a 12 problem going forward. But we can probably -- if we 13 can take Member Runner's suggestion that we not vote 14 until after we get a final. And -- which you may 15 even be able to provide by the end of the day, quite 16 honestly, I think if you got together with somebody 17 that, uh, our -- you know, some -- some legal 18 counsel that's used to dealing with elected boards 19 and this type of issue. I know you're used to 20 doing, I think, with more of appointed boards and we 21 appreciate you sitting in. This is kind of a whole 22 different animal. And so maybe even our ex Chief 23 Counsel might be able to be of assistance at this 24 point. 25 I think -- I would be willing to go 26 forward, but I would not be -- I'm not really 27 willing to disclose or not disclose at this point. 28 I -- I have one memo that I tried to do the best 47 1 with, just simply because I wanted to. But Mr. 2 Horton has a memo that's very generic. We discussed 3 the case. We -- we think we met. Is that it? Does 4 that provide -- does that provide cover for Member 5 Horton and for the rest of us? 6 MS. MARKS: Let me see if I can answer 7 those questions. 8 First, I'm -- I am not aware of any code 9 section or any case law that imposes personal 10 liability. I have not done that research, but I'm 11 not aware of any. 12 I am aware of the provision that re -- that 13 says that the presiding officer may be disqualified, 14 and that is the extent of my understanding or my 15 reading, research up until now of what the 16 consequences are of a violation. 17 I don't see an issue with going forward 18 today. I think that the Members could, again, 19 respond to Ms. Richmond's initial question about 20 those communications to the best of your ability. 21 The code does provide that -- it says: 22 "The presiding officer has the 23 discretion to allow the party to present 24 evidence concerning the subject of the 25 communication, including discretion to 26 reopen a hearing that has been concluded." 27 And I understand that that -- the Board 28 Members would like to give all parties, particularly 48 1 the taxpayers, some finality. And that may be 2 contrary to the finality that you want to give or it 3 may provide some, you know, sort of confident 4 approach in how to proceed, which is proceed as you 5 normally do, with the understanding that you will 6 provide any written or communication to the best of 7 your ability for each of the proceedings in turn. 8 And then understand that the matter could be 9 reopened, that you have the discretion to reopen a 10 hearing. 11 MS. HARKEY: I think -- I think, though, I 12 would like for you to, you know, by this evening or 13 something, contact someone regarding the July 1st 14 date. 15 I would be willing to go ahead and hear 16 these cases because people are here and they're 17 scheduled. I think that we probably do not vote on 18 them, but we've got a lot of -- lot of things. 19 I've reviewed every case. I would disclose 20 what I am aware of. I don't think the memo you sent 21 out applied to staff. I think it applied to Member 22 communication, presiding officer. My staff is not 23 presiding officer, I am. 24 And so I would be willing to disclose 25 any -- any personal meetings I recollect. But I 26 think if that would suffice for this meeting, I'm 27 ready to go forward with that. But I don't know if 28 that suffices for everyone else up here. 49 1 MR. HORTON: Madam Chair, I think it's -- I 2 think it's important that Ms. Marks kind of explain 3 exactly who this applies to. I mean my 4 interpretation, based on counsel, is that it applies 5 to the entire staff, ex parte communication, anyone 6 that works for you. 7 And then I would like to hear from the 8 Department as to when they think they could get us a 9 waiver of any potential communications of which 10 additional evidence was provided. 11 MR. SCOTT: Well, I think if -- if we were 12 going to consider waiver that we would -- we would 13 want to see the memo that was directed on ex parte 14 communication, to know exactly what it is we are 15 waiving. 16 MR. HORTON: Has the Department -- 17 MR. SCOTT: We would want to look at 18 that. 19 MR. HORTON: Has the Department taken a 20 position on ex parte communication? 21 MR. SCOTT: Well, yes, we have. We do not 22 have ex parte communications with your Board. 23 MR. HORTON: No. Has the Department taken 24 a position on ex parte communications that the 25 Members may have had prior to the enactment and 26 additional information was provided, would it be the 27 Department's view that that additional information 28 should be made available or you should have the 50 1 option of waiving or not? 2 MR. SCOTT: Well, yes, we always think that 3 in the fairness of coming to a correct result we 4 should have all the information that -- you know, 5 given to everybody, all the parties. 6 MS. HARKEY: What constitutes all the 7 information? Document -- not -- anything that's not 8 new documentation -- if there was new documentation, 9 that would be information you should have, correct? 10 MR. SCOTT: And I agree. 11 MS. HARKEY: A phone call here and there, 12 is that all new information to you that you would 13 not be willing to waive? 14 MR. SCOTT: I guess it would depend on what 15 was provided in the conversation. 16 MR. HORTON: Substance of the 17 conversation. 18 MS. HARKEY: Well, we would not know. To 19 the best of our ability, we would not know. So if 20 we -- to the best of our ability, we don't know. We 21 think there may have been, but I am not prepared to 22 answer for my entire staff. 23 MR. HORTON: Ms. Marks, Ms. Marks, it might 24 be helpful if you disclose what the liability might 25 be if we failed to adequately cure and if in fact 26 later on there's dispute as to whether or not the 27 actions taken to cure the violation was sufficient 28 or not. 51 1 And just another question, aside from that, 2 giving us some guidance on our personal as well as 3 the agency's liability. Does the appellant or the 4 Department have the ability to ask that certain 5 Members be -- what's it -- recused? You know, in a 6 five-member board you recuse two, or one, can change 7 the outcome of the -- of the proceedings. 8 MR. RUNNER: Well, can we -- 9 MR. HORTON: First question, our personal 10 liability, the agency liability. 11 Second question, if there is a dispute and 12 a request that Members be recused from proceedings 13 because of ex parte communications, what -- what's 14 our course of action? 15 MS. MARKS: Well, as I said before, with 16 respect to personal liability, I'm not aware of 17 anything in the code that imposes personal liability 18 on the presiding officer, nor am I aware of any case 19 law with respect to that. I'm just not aware. I 20 don't -- I didn't see any when I reviewed the code 21 sections, but I did not research that particular 22 issue. 23 And then with respect to the -- the Board's 24 liability? Is that what -- is that the second -- 25 MR. HORTON: Yes, the agency's. 26 And the third was, um, the recusal of 27 Members or request for recusal of Members by either 28 the Appellant or the Department because of their 52 1 perspective that the violation was not cured. In 2 other words, we're still in violation because 3 evidence was provided. 4 MS. MARKS: Well, I think with respect to 5 that, if one of the parties were to allege that the 6 decision had been made with -- based upon evidence 7 that they did not have ability to comment on, one of 8 the -- as far as I read the code, those proceedings 9 could be reopened to give the parties the 10 opportunity, both parties, the opportunity to review 11 all of the information that was before the presiding 12 officer at the time the decision was made. 13 MR. HORTON: Okay. 14 Madam Chair, I would just -- if we proceed, 15 I would just like an opportunity to ask the, uh -- 16 both the Appellant and the Department to disclose 17 any discussions or any additional information that 18 they think they may have provided to -- to me. 19 Although, you know, to the best of my knowledge, 20 I've disclosed that to Board Proceedings. So many 21 unknowns. 22 MR. RUNNER: I'd like to make a quick 23 motion then to -- for the Board to agree to disclose 24 the memo to all interested parties. 25 MS. HARKEY: I'll second that. 26 Do we have any objection? No objection? 27 Such will be the order. 28 MR. HORTON: Mr. Runner -- 53 1 MR. RUNNER: Yes. 2 MR. HORTON: -- just for clarification, 3 this is the memo from -- 4 MR. RUNNER: I'm sorry. I should've 5 said -- 6 MS. HARKEY: The memo from our Chief -- the 7 memo from our acting counsel. 8 MR. RUNNER: Yeah, the memo that was -- 9 that was given -- that memo specifically we're 10 talking about is the memo that was given to the 11 Board Members regarding the issue of ex parte 12 communication. 13 MR. HORTON: And what's your view of the 14 subsequent analysis? 15 MR. RUNNER: Well, the memo -- you mean the 16 analysis -- 17 MR. HORTON: That is supposed to come 18 forth. 19 I've been advised that there is no 20 analysis. 21 MR. RUNNER: Right, right. And the only 22 thing we're disclosing right now is because I heard 23 FTB ask to see the memo. 24 MR. SCOTT: Yes. We would like to see it 25 before we're asked to waive. 26 MR. RUNNER: So I'd ask to disclose the 27 memo to FTB, to -- to, uh -- I suppose the new tax 28 department hasn't seen it yet. I suppose the public 54 1 hasn't seen it yet. I think taxpayers haven't seen 2 it yet. I think everybody should see it. 3 MS. HARKEY: All God's children -- 4 MR. HORTON: Yeah, with that 5 clarification -- 6 MS. HARKEY: -- need to see the memo. 7 MR. HORTON: -- I'm in support. 8 MS. HARKEY: Okay. Thank you. 9 And, yes, Member Ma? 10 MS. MA: You know, I'm kind of not 11 comfortable until we clarify this issue. And I 12 don't know whether it'd be helpful to take an hour, 13 have the attorneys all from your agency or the new 14 CDTFA, Franchise Tax Board, our attorneys get in a 15 room. 16 Because, you know, hearing a case, not 17 voting on it, rehearing it, opening it up, having a 18 memo come out next week or next month about the 19 cases we just heard because we didn't disclose this 20 or that, I don't think it's helpful until we get 21 clarification from everyone what -- 22 I mean our understanding was the new rule 23 started July 1st. There is not going to be any 24 ex parte communication starting July 1st, which is 25 what it said in the memo. That's all of our 26 understanding. 27 We have done our best to comply with your 28 memo. My attorneys have, you know, submitted 55 1 information to the clerk of the Board. But I'm not 2 comfortable until we get this clarified. And it 3 seems like nobody knows what the rules are. 4 I don't want the taxpayers also to be 5 disadvantaged, you know, based on what happens here 6 today. I don't want the State to be disadvantaged 7 based on, you know, the cases heard today. 8 But there is no clarity in terms of the 9 results, you know, how we rule on this case and then 10 any subsequent, you know, actions that may happen 11 because we have not clarified what it is we can or 12 can't do, what we should or shouldn't be doing, what 13 is our liability or the waivers that are afforded to 14 us for everybody involved. 15 I think it is important and imperative that 16 the attorneys get together and tell us and issue 17 one decision to us. 18 MS. MARKS: I'm -- excuse me. 19 Sounds like you were given prior advice; 20 I'm not privy to that. So that -- whether or not 21 that can be disclosed, if it could be disclosed that 22 might be helpful to me as well. 23 MS. HARKEY: Well, we didn't get any prior 24 advice. We're talking about the legislation that 25 took effect, and the wording in the legislation that 26 no ex parte communications shall take place after 27 July 1. Because that was the -- that was the 28 severing of the two agencies. 56 1 MR. RUNNER: Well, then -- 2 MS. HARKEY: So we are prepared to -- we 3 are prepared to deal with July 1. We're not 4 prepared to deal with retroactive activity, other 5 than maybe a verbal blanket statement saying we may 6 or may not. And we need to know that that blanket 7 statement would be accepted by the agencies and that 8 the taxpayers wouldn't be further subject to a 9 reopening or that the Board would not be suffering 10 liability. 11 MR. HORTON: Well, in the interest of full 12 disclosure, I have received legal counsel, but I'm 13 not prepared to waive my attorney-client privilege 14 in that regard. 15 And I concur that might be a good idea for 16 departments and legal counsel sort of get together 17 and just give us some guidance. 18 MS. HARKEY: Well, let's recess for a half 19 hour. And I'm sorry to do that to everybody, but 20 I'd like to recess for a half hour. Let the 21 counsels get together, figure out the responses. 22 Let us go forward with the -- that would let us go 23 forward with the meeting, with the FTB saying, okay 24 fine, we get it, and with the CDTFA. And let's 25 just -- let's just recess for a half hour until we 26 ferret this out. 27 MS. STOWERS: Before we recess, please, can 28 we clarify the -- the memo, the motion that 57 1 Mr. Runner made? 2 MS. HARKEY: Yes. We had a motion to 3 release this memo, which was to the counsel. It's 4 basically a little short e-mail. There is not a lot 5 of analysis to it, but it just tells us -- you know, 6 sets out certain codes and violation codes, and -- 7 MS. STOWERS: That's the July 25th e-mail 8 from David Gau? 9 MS. HARKEY: Yes. 10 MS. STOWERS: Thank you. 11 MS. HARKEY: Tuesday, July 25th. 12 Okay. We'll be back in a half hour. It is 13 now 10:20. Let's say we'll be back at 10:50. 14 MR. RUNNER: Can we just -- just point of 15 clarification in terms of what we're asking them to 16 talk about. 17 MS. HARKEY: We're asking them to. 18 MR. RUNNER: Well let me see if I can 19 interpret it. 20 I think what I'm hearing the Board say is 21 they want assurance that ex parte communication that 22 took place prior to July 1st is not -- it does not 23 have to -- cannot -- cannot or is not disclosed 24 because the law wasn't in effect at that point. 25 MS. HARKEY: It's not going to affect the 26 hearing. 27 MR. HORTON: And do we have legal 28 representation from the CDTFA? 58 1 MR. EPOLITE: Well, I was just going to 2 request that if you're going to disclose it, is it 3 possible for you to send it to us electronically so 4 we can forward it to our legal counsel back in 5 Sacramento? 6 MR. HORTON: So who is the legal counsel 7 for CDTFA, Appeals or the -- 8 MR. EPOLITE: Well, we have a Chief Counsel 9 in Sacramento that I'd like to forward it, the memo, 10 to. 11 MS. HARKEY: The memo that we received. 12 MR. HORTON: In the proceedings -- just out 13 of curiosity, in the proceedings does Appeals 14 represent the Department or the Appeals -- who does 15 Appeals represent? 16 MR. EPOLITE: Well, Appeals is only here to 17 provide the Board Members with counsel regarding the 18 substantive matters on the appeals before them. 19 MR. AMBROSE: Yeah. Per the Memorandum of 20 Understanding. 21 MR. HORTON: So you're representing the 22 Board. Your legal obligation is to the Board? 23 MR. EPOLITE: Only on the substantive 24 matters before you today. 25 MS. HARKEY: Only on the case issues. 26 MR. AMBROSE: Right. 27 MS. HARKEY: Not on anything broad. 28 MR. AMBROSE: With respect to just the 59 1 cases, right. 2 MR. HORTON: Okay. 3 MR. SCOTT: And I have the same request. 4 If it's in electronic form, I would like to have it 5 so that I can send it to our Chief Counsel up in 6 Sacramento. 7 MS. HARKEY: Sure. Sure. It's pretty 8 simple. It's not -- that's why we've got so many 9 questions. And we're all trying to comply with 10 something that there's no way to comply with. 11 MR. EPOLITE: But if Mr. Gau can e-mail it 12 to me and then I'll forward it to our Chief 13 Counsel. 14 MS. HARKEY: We just -- we want to be sure 15 that the taxpayers have some assurance and that the 16 Department has assurance and all have assurance as 17 Members. 18 MR. RUNNER: So just for -- yeah, for 19 clarification -- 20 MS. HARKEY: Okay. 21 MR. RUNNER: -- this e-mail was to us, this 22 memo was to us, and none of the agencies -- or 23 either of the agencies or departments, or whoever 24 they are referred to these days, are aware of the 25 interpretation of ex parte in regards to us until 26 they see this memo? 27 MS. HARKEY: Right. 28 MR. RUNNER: Is that correct? 60 1 MS. HARKEY: And this is -- this is -- 2 MR. RUNNER: Okay. 3 MS. HARKEY: -- this is brief. 4 So we'll be back in a half hour. Let's 5 just take a short recess and let them ferret this 6 out so that we can give you some finality. 7 MR. SCOTT: So who will be sending it? 8 MS. HARKEY: I think Mr. Gau. 9 MR. SCOTT: Okay. 10 MS. HARKEY: Mr. Gau will be sending it. 11 If he would send it around -- 12 MR. GAU: Just for clarification, I'll send 13 it to Mr. Epolite and Mr. Scott? 14 MS. HARKEY: That's good. 15 MR. GAU: Pardon me? 16 MS. HARKEY: Yeah, that's good. Thank you. 17 MR. SCOTT: Thank you. 18 MS. HARKEY: Alrighty. And we apologize. 19 (Whereupon a break was taken.) 20 MS. HARKEY: We are ready to hear from our 21 counsel. 22 MS. MARKS: So if I could provide a 23 possible framework for moving forward. There's been 24 talk of the requirement to disclose as being 25 retroactive, and I don't quite see it that way. 26 What I -- what I saw -- what I see in the 27 statute is that, as I said, it's not saying that the 28 communications that were received prior to July 1 61 1 violate the statute. It's prospectively. 2 If you apply the provision for disclosure 3 that's -- I'm looking at providing it prospectively, 4 just looking at the language of the statute, which 5 says today if you got it, would it violate the 6 statute and would you need to disclose it? And the 7 answer is -- is yes. 8 So I think prospectively applying it, it 9 puts upon the presiding officers, all the Board 10 Members, the requirement to disclose it. 11 And I think the way to do that is, um, in 12 each of the cases if you can say, um, yes, I know I 13 had communications with this side or that side; it's 14 consistent with what's ever in the record, whatever 15 the brief said; I don't recall anything that's 16 inconsistent with that; and you can ask the parties, 17 do you recall any communications that I didn't 18 disclose or any communications that were outside of 19 what is briefed in the record; and if there -- 20 neither of the sides can, um, disclose anything, 21 then I think you can move forward. 22 If you don't recall, you don't recall. If 23 you can say, "I don't know because I don't recall," 24 I think you can say that. 25 I see no issue with moving forward today 26 at all. Whether or not you would want to put off 27 making a decision today, I think you can make a 28 decision today. If you were to determine that there 62 1 were communications that you failed to disclose, 2 those can be disclosed and the parties would have an 3 opportunity to comment to the point that they could 4 request that the hearing be reopened. 5 Um, I think the -- the idea is that the 6 decision maker is -- is not making the decisions 7 based on information that the other party has not 8 had a response to. Which is one of the reasons why 9 I think that you look at the communications that 10 were provided prior to July 1, I think that the idea 11 is that it would be somewhat inconsistent to say I 12 can make a decision based on any of the evidence 13 that's open to everybody after July 1, but I 14 happened to have in my back pocket information that 15 was not disclosed. And I think that's inconsistent 16 with the statute. 17 The idea is that there's a -- that you are 18 impartial and that you -- that everybody has the 19 same information. 20 So that's what I think I would offer as the 21 way to proceed. Um, you can -- 22 MS. HARKEY: That's a lot of words. Will 23 you make a specific statement as to what you expect 24 us to do? Here and now. 25 Like, we asked you, I asked you, if we 26 disclose that we have had conversations with the 27 taxpayer and the Department and we discussed the 28 issues in the briefing, both by the taxpayer and the 63 1 Department, have we met our obligation, as Board 2 Members? 3 MS. MARKS: If you disclose that you had 4 communications and what the -- at least a summary of 5 those communications or you don't recall anything 6 that's beyond -- 7 MS. HARKEY: The summary is that we 8 discussed the issues in the briefing. 9 MS. MARKS: Then -- then yes, I think you 10 have met your obligation to say there was nothing 11 that I recall that was discussed that's not 12 contained in the briefing. And you can ask the 13 parties, "Do you recall any conversations or 14 communications, written or oral, that we may have 15 had that's not contained in the briefing?" And if 16 they say no, then I think you -- you've done what 17 you're expected to do. 18 MS. HARKEY: Okay. Member Runner has an 19 issue with that. That's -- 20 MR. RUNNER: I can't say that, that I -- 21 that I would say that it had -- that there was -- 22 again, this would be -- it's easy on the Department 23 side. 24 Again, this would be going, not to FTB, but 25 for the -- for old BOE conversations. We probably 26 always, always were discussing things that were 27 in -- in -- in the record. So that's not a problem. 28 The problem is we -- I can't say that 64 1 definitively in regards to the taxpayer. The 2 taxpayer may -- may have given us all kinds of 3 information in a meeting, in a conversation, in a 4 phone call. Uh, so I can't say that definitively 5 that it did not have any, uh -- 6 MS. HARKEY: What about saying to the best 7 of your ability? Can we -- to the best of your 8 ability you -- you know, I mean we just -- we just 9 need some closure to this. 10 MR. RUNNER: Did we not get -- well, I 11 thought the way we had left was that we were asking 12 for a -- the clarification in regards to one of two 13 things: One was the issue of the clarification in 14 regards to communications prior to July 1st, whether 15 or not ex parte applied; and the secondary issue to 16 that was then I guess if it didn't, that there would 17 be a clear waiver then of any expectation reporting 18 of ex parte by both -- by both tax agencies. 19 Did that not happen? 20 MS. MARKS: In my opinion, communications 21 prior to July 1 -- because the proceeding is still 22 pending and you're still operating as presiding 23 officers -- should be disclosed. 24 MR. RUNNER: I think -- 25 MS. HARKEY: We were always presiding 26 officers. From the time this hit appeal, we were 27 the presiding officers. So we have always been the 28 presiding officer. That didn't change as of July 1, 65 1 so -- 2 MS. MARKS: The application changed as of 3 July 1. 4 MR. HORTON: I don't know if that answers 5 Mr. Runner's question, but I prefer -- 6 MR. RUNNER: No. No. Again, I -- I think 7 we're in -- it seems to me we just had this 8 conversation. We took a break to get clarification. 9 So am I understanding that there has been 10 no clarification in regards to whether or not 11 ex parte applied prior to July 1st, outside of what 12 you've already opined? 13 MS. MARKS: My -- my opinion has not 14 changed. My opinion is that -- 15 MR. RUNNER: But we didn't ask your 16 opinion. We stopped asking your opinion. 17 We asked -- we asked for going back to the 18 tax agencies and to get better clarification. So 19 did nothing come -- did we not hear back from GovOps 20 or anybody else? 21 MS. MARKS: I -- I wouldn't -- I'm not sure 22 if someone from the -- 23 MR. HORTON: Well, FTB's here, Mr. Runner. 24 MS. MARKS: -- from the Board or the 25 Department would have spoken to them. 26 MR. SCOTT: Senator Runner, we do have 27 people that're looking at it back at FTB, but we 28 don't have a response yet. 66 1 MR. RUNNER: Okay. So we really don't have 2 an answer to the question. 3 MR. SCOTT: We do not. We're looking at 4 it. 5 MR. RUNNER: Do we have one? 6 MS. MARKS: My understanding is that our 7 Chief Counsel spoke with the Assistant Chief Counsel 8 Amy Kelly and she agreed that that was the 9 application. 10 MR. RUNNER: So -- 11 MS. MARKS: But I did not speak with anyone 12 at, uh -- at the Department. 13 MR. RUNNER: Okay. 14 MR. HORTON: Well, why don't we have the 15 Department go on record as to what their 16 understanding is. 17 MR. RUNNER: Okay. 18 MR. EPOLITE: And I have been told by our 19 legal counsel that the Department of Tax and Fee 20 Administration will not provide the Board with any 21 general legal advice. 22 MR. HORTON: Wait a minute, that's -- 23 MS. HARKEY: No, that's not what we want. 24 We want clarification as to your, your understanding 25 of the ex parte. 26 We didn't ask you for your advice. We want 27 to know how it applies, how your department sees it 28 applies. 67 1 MR. HORTON: Appeals is here to answer our 2 questions, so can you answer it? I mean, you're not 3 representing -- 4 MR. EPOLITE: Well -- 5 MR. HORTON: -- representing the Board, 6 based on your testimony earlier. 7 MS. HARKEY: Okay. It started as of July 8 1; does anyone disagree with that? 9 MR. HORTON: Everyone. 10 MS. HARKEY: That was the legislation. 11 That's the statute. July 1 was the date. 12 If we make a very simple blanket statement 13 that we may or may not have had ex parte 14 communications with both the taxpayers and the 15 Department and we were disclosing to the best of our 16 ability for the purpose of this hearing, that that 17 is the case and that we will get a response from 18 everybody within two weeks that we can circulate 19 amongst us so that we don't continue to get into 20 this quagmire, would that be an acceptable? 21 I would like -- I would like to make a 22 suggestion that our counsel opine if we disclose 23 that we may or may not have had conversations with 24 the taxpayer and the Department and to the best of 25 our knowledge we discussed the issues in the 26 briefing and, uh, we've met our obligation. 27 MR. HORTON: Well, that doesn't solve the 28 problem though. I mean -- 68 1 MS. HARKEY: Well, it doesn't solve the 2 problem. It allows us to move forward with other 3 hearings. 4 MR. HORTON: The challenge would be in 5 the -- in the appellant's situation, if the 6 appellant learns, subsequent to the Members' voting, 7 believes that he -- a Member that voted against him, 8 that he provided certain -- or they provided certain 9 information, can ask that that Member be recused and 10 the case be heard again, based on -- and based on 11 their testimony that additional information was 12 provided, and we don't know. I mean I would have to 13 say, well, I don't know if he's right or wrong. 14 MS. HARKEY: I think what might be the 15 answer to that, if anybody asks that this be reheard 16 it wouldn't come before us, it would come before the 17 ALJs. We quit as of December. 18 MR. RUNNER: They may not allow it to be 19 reheard. 20 MR. HORTON: Yeah. It may end up -- it may 21 end up in a court proceeding. 22 MR. RUNNER: Right. 23 MS. HARKEY: Which it may end up anyway. 24 MR. HORTON: I'm personally prepared to -- 25 let me just clarify. I'm prepared to hear most of 26 these cases because I haven't had ex parte 27 communication with most of them. But I would like 28 to have a waiver from the Department, if I could get 69 1 it, at some point before I go on the record. 2 Even though I -- or an ability to be able 3 to say, make a statement that clarifies that I don't 4 know if there's any additional information. And if 5 any additional information comes about later as a 6 result of a court proceedings or a recollection on 7 the part of the Department or the appellant, then I 8 have the option of recusing myself from that vote. 9 I don't know if I can recuse myself; that's 10 the problem. I don't know if I can recuse myself 11 after hearing the case. 12 MS. HARKEY: Okay. What -- what I'd like 13 to suggest is that we make a blanket statement, that 14 we hear the cases. We maybe don't make any 15 decisions. And that tomorrow, by tomorrow, your 16 department, your department, your department come 17 back with us with a definitive answer before we 18 vote. 19 MS. MARKS: A definitive answer about 20 whether it's sufficient -- 21 MS. HARKEY: A definitive answer as to the 22 July 1 date and any waivers, um -- and, um -- 23 What else is there, Mr. Runner? 24 MR. RUNNER: Well, either the definitive 25 date that it applied or waivers if indeed they 26 interpret it did apply. 27 MS. HARKEY: Yeah. A definitive date being 28 July 1, which is what's in -- what's in the statute, 70 1 the legislation. Is that the definitive date, is 2 that the deciding going forward? Which it should 3 be, because it certainly didn't apply prior to the 4 statute. 5 And then, if not, if you find not, then we 6 want to know from the departments what -- will they 7 provide waivers, or how are they -- how are they 8 specifically handling this in all cases, and the 9 taxpayer, win, lose or draw? Okay. 10 Because I think -- I think it's pretty 11 obvious that, you know -- I mean, it's all about who 12 loses here. If you win the case, you're not going 13 to go forward. If you lose the case for some 14 reason, you're going to try to use this as a little 15 tool, and that's what we're trying to avoid. 16 MS. MARKS: So then on the record before 17 each matter continues, will the Members be able to 18 say, "I recall having conversations" -- 19 MS. HARKEY: We'll just say we -- I'm going 20 to make a blanket statement right now. We had 21 conversations or we believe we probably had 22 conversations with everyone that's appearing today. 23 That being said, there was nothing discussed that we 24 understand or that we recollect that was outside the 25 record. 26 And I feel I've met my obligation. And I 27 don't have to say it for each case. I'm just saying 28 it blanket for the day because that is -- that is 71 1 the truth. 2 We think we've probably spoken to 3 everybody, either myself or my staff. There's no 4 information that was received that's not of the 5 record that we are aware of. And that way we -- I 6 will be willing to hear, to go forward and proceed 7 with the hearing, but I do want, by tomorrow 8 morning -- because if we can get this shoved down 9 our throat in one day, you all can respond pretty 10 quick on your waivers. 11 So everybody needs to kick it up. We have 12 another hearing tomorrow. We can vote at the end of 13 the day tomorrow, but we can't have this -- this 14 discord. 15 I mean it happened to all of us real fast, 16 and nobody benefits by not just having a simple 17 solution and moving forward. Because it's not 18 supposed to be a war here. It's supposed to be 19 getting to the right answer. 20 And so I'm -- that's what I'm -- that's 21 what I'm willing. 22 MS. MARKS: I think the reason why -- and 23 I -- I don't know exactly how these matters proceed, 24 but I think the reason why I would suggest that you 25 do it for each of them is so that the record for 26 that matter is clear. And as repetitive as that 27 sounds, I think that the parties would want a clear 28 record should this ever be challenged. 72 1 MS. HARKEY: Okay. I'll just -- 2 MR. RUNNER: That is the point. 3 MR. HORTON: That is the point. 4 MR. RUNNER: That is exactly the point, 5 that the -- that the appellant could -- could 6 challenge whatever we say and do. 7 MS. MARKS: Well, any one of them can 8 always challenge what you say or do. But I -- the 9 point that I'm trying to make is that if you can 10 state to the best of your ability what you remember, 11 or say "I don't recall anything" and ask the parties 12 "Do you recall anything" or "Do you recall anything 13 other than what I'm disclosing," I think that sets 14 the record pretty clear. And I think you've -- 15 MS. HARKEY: Okay. So before -- 16 MS. MARKS: -- discharged your 17 obligation. 18 MS. HARKEY: Before each hearing we're 19 gonna disclose we may or may not have had, to the 20 best of our recollection. Then we're going to ask 21 each -- each -- the appellant and the Department 22 what? 23 MS. MARKS: I think that you would ask 24 them -- if you say, I know we had conversations, I 25 think they're completely consistent with what's in 26 the briefing and there was nothing discussed that's 27 outside of the briefing, ask them, "Do you recall 28 any other written or oral communications that we may 73 1 have had" -- 2 MS. HARKEY: Okay. 3 MS. MARKS: -- "that are not" -- 4 MS. HARKEY: I would ask that you ask that 5 question before each hearing. Ask that question of 6 the Department and ask that question of the 7 appellant and get it on record. 8 MS. MARKS: I can do that. 9 MS. HARKEY: Okay. Good. 10 Are we ready to go -- 11 And I also want a clear, I want a clear 12 answer before we vote tomorrow on anything else -- 13 what was I talking about? -- on the -- on the, uh, 14 the date. And if the date's not July 1, as we all 15 understand the statute to read, then will the -- 16 will the Department waive? 17 Are you ready to go forward, Members, and 18 hear a case and then just not vote? 19 MR. RUNNER: And -- well, I'll be 20 interested, listening carefully, as to how counsel 21 questions both the Department and the Members in 22 regards to this issue. 23 MS. HARKEY: Okay. Well, let's get 24 on to the first case and figure out how this goes. 25 Okay. Thank you, Members, guests, 26 taxpayers -- or not. 27 Anyway, we already did our pledge. We've 28 had a big discussion. 74 1 Ms. Richmond, please introduce the first 2 item. 3 MS. RICHMOND: Our first item is B1 4 Richard R. Betchley and Kellie S. Brunk. 5 Please come forward. 6 MS. HARKEY: Okay. I will start this out. 7 To the best of my knowledge, we did have -- 8 my -- my office did have conversations with the 9 taxpayer and the Department. We discussed the 10 issues in the briefing, both by the taxpayer and the 11 Department. And that's to the best of my 12 knowledge. 13 MR. RUNNER: I thought -- I thought the 14 counsel was going to ask the question. 15 MS. HARKEY: Well, counsel's going to -- 16 counsel's going to ask the questions of both of 17 these people. 18 MS. MARKS: I think I could ask all of the 19 Board Members to go down the -- down the line -- 20 MS. HARKEY: Okay, thank you. 21 MS. MARKS: -- if you recall receiving any 22 written or oral communications from either party in 23 the proceeding before you that has -- that has not 24 been disclosed prior to now? 25 MS. HARKEY: Have we received any oral or 26 written information by either party that has not 27 been disclosed to either party. 28 MS. MARKS: Correct. 75 1 MS. HARKEY: And I would have to say to the 2 best of my knowledge, no. We did have 3 conversations, but we believe that it was -- we 4 discussed the issues in the briefing, and the 5 briefing is -- is on record. 6 MR. HORTON: Okay. Are we just going to go 7 down the line? 8 MS. HARKEY: Right. 9 MR. HORTON: All right. 10 If I can recall from memory, to the best of 11 my knowledge we've had -- we've had communications 12 with the Appellant, Mr. Richard R. Betcher 13 (verbatim), in regards to the upcoming appeal in the 14 pending appeal before us, case number 874758 15 calendared for today. The following persons were in 16 attendance for the meeting: Myself, Linda Cheng, 17 and Saba Shatara, and Mr. Betcher (verbatim). 18 We also believe that conversations were 19 held with the, uh -- with the secretary or 20 receptionist. To the extent that those 21 conversations were held, we don't know the extent of 22 that, have no knowledge whatsoever. And any other 23 subsequent conversations we may have had, I am 24 not -- I can't recall those conversations in any 25 detail. 26 MS. HARKEY: That's good. 27 MS. MA: Hold on, I'm checking. 28 MS. HARKEY: Okay. 76 1 MS. STOWERS: I'll go. 2 MS. HARKEY: Okay, go ahead. I'm sorry. 3 MS. STOWERS: While this case was under 4 submission -- excuse me, a 30/30/30 in 2016, 5 appellant left a voice message to discuss the case. 6 I did not return the call. 7 Today, July 27th, I spoke with the 8 appellant in the lobby. He confirmed that he did 9 call me, mainly to say thank you. 10 MR. RUNNER: Um, I have not had 11 conversation with this taxpayer, nor the Department, 12 since July 1st when I believe this law went into 13 effect. 14 And I believe any conversations that may or 15 may not have taken place prior to July 1st are not 16 applicable to the law. 17 MS. MARKS: Member Ma? 18 MS. MA: I do not believe that my office or 19 myself has met with the appellants or received any 20 documents or information. 21 MS. MARKS: I would ask the appellants 22 whether or not they recall any communications with 23 any of the Members about this matter other than what 24 has been disclosed? 25 MS. HARKEY: Mr. Betchley. 26 MR. BETCHLEY: Me? I'm sorry. 27 MS. HARKEY: I know. Finally your turn. 28 MR. BETCHLEY: The volume's pretty low. 77 1 Can you hear me okay? 2 MR. RUNNER: Mm-hmm. 3 MS. HARKEY: Yeah. 4 MR. BETCHLEY: You know, to the best -- I 5 don't want to say best of my knowledge because 6 it's -- it's a fact. 7 I have not had any conversations with 8 anybody, sharing any information that hasn't been 9 disclosed to everybody, anywhere, that would listen. 10 I mean I am an open book and everything that I have 11 mentioned has previously gone to the Franchise Tax 12 Board on a minimum of 19 occasions that we have 13 documented. 14 So, now, I did -- if I have to address each 15 Member directly, Ms. Stowers is correct, I just 16 called. 'Cause after eight years of the Franchise 17 Tax Board coming after me, it was finally a year ago 18 I had an opportunity to meet with people who would 19 really listen. 20 Franchise Tax Board denied every one of my 21 rights to meet. And when Ms. Stowers apologized on 22 the record on behalf of the State, I was grateful 23 and I left a message to thank her. 24 Mr. Horton, I -- I had a couple calls with 25 his staff. His previous staff counsel had sent me 26 some information and some ideas, helped me when this 27 was all happening. 28 I had just had two strokes as a result of 78 1 what the Franchise Tax Board had guns to my head -- 2 I'm sure you've seen all of that. 3 So I did get some help as to where can I 4 go, taxpayers' advocates, those sort of things. And 5 I just asked what a normal person would ask of their 6 representatives. 7 In Ms. Harkey's case, I've never 8 communicated to her directly. A couple of attorneys 9 on her staff helped me, probably more than year and 10 a half, two years ago. 11 And in Mr. Runner's case, I only received a 12 call from an attorney on his staff before the last 13 hearing, who had a couple questions about the 14 submission I had sent in, I had submitted for the 15 Board in advance of the hearing, and that was it. 16 And in Ms. Ma's case, I have had no 17 conversations, whatsoever, or exchange with 18 anyone. 19 MS. MARKS: I would ask the representatives 20 from the Board whether or not you have, um -- you 21 need an opportunity to reply to or respond to any of 22 the communications that have been disclosed? 23 MR. SCOTT: I'm not aware of any ex parte 24 communications that we have had with any of the 25 Board Members. 26 MS. MARKS: And do you need an opportunity 27 to respond to any of the communications that have 28 been disclosed? 79 1 MR. SCOTT: No. 2 MS. MARKS: And you're not aware of any 3 communications you have had with respect to this 4 matter? 5 MR. SCOTT: Correct. 6 MS. MARKS: Okay. 7 MS. HARKEY: Okay. We can begin. And 8 thank you very much for your patience. 9 Mr. Betchley, you have ten minutes to 10 present your case -- 11 Oh, excuse me. I'm sorry. I'm off script. 12 Pardon me. 13 Appeals, will you please introduce the 14 items for the record. 15 MR. EPOLITE: Absolutely. 16 Good morning, Ms. Harkey, Members. Anthony 17 Epolite and Lou Ambrose of the Appeals Bureau. 18 There are four issues before the Board in 19 this matter: 20 First, whether appellants have 21 substantiated their claimed capital improvements for 22 the purpose of calculating the capital gain on the 23 sale of their residence in the 2005 tax year; 24 Second, whether Decata Enterprises made 25 bona fide loans or dividend distributions to 26 appellant-husband, its sole shareholder, in the 27 2006, 2007 and 2008 tax years; 28 Third, whether appellants calculated their 80 1 home mortgage interest deduction correctly in the 2 2008 tax year; 3 And fourth, whether appellants have shown 4 reasonable cause for the late filing of their tax 5 returns for the 2005, 2006 and 2007 tax years. 6 This is the continuation of the September 7 27, 2016 oral hearing of this matter. At that time 8 the Board requested additional briefing through the 9 30/30/30 process, seeking documentation relating to 10 the capital improvements made to appellants' 11 Lafayette residence. 12 As the parties have already fully addressed 13 the Board at the September 2016 hearing, the Appeals 14 Bureau requests that the parties focus their 15 discussion today on what was requested of them in 16 the additional briefing letter. 17 Thank you. 18 MS. HARKEY: Thank you. 19 Mr. Betchley, you have ten minutes to 20 discuss the items that were in the additional 21 briefing matter. 22 MR. BETCHLEY: Thank you. I, uh -- thank 23 you again, also, for putting me on the agenda. 24 I don't know if you all -- I don't want to 25 go into that I'm the guy that all this stuff 26 happened to. You probably remember that. 27 The Franchise Tax Board has written to me 28 on numerous occasions that I owed $274. They went 81 1 to the IRS and requested that I be audited. The IRS 2 complied. 3 They were trying to -- the Franchise Tax 4 Board filed felony tax evasion charges again me. 5 They said the amount was $88,000 for over four 6 years. Of course subsequently, as we all know, the 7 way this worked out, finally a superior court judge 8 threw -- reversed everything, completely exonerated 9 me and threw all the charges from the Franchise Tax 10 Board out. 11 But rather -- this was very traumatic for 12 us. I mean, the strokes; I have a special needs 13 child. This has -- it's been a rough -- rough go 14 for us. 15 But one of the clerks -- I shouldn't say 16 "clerks" -- one of the colleagues asked me to 17 address my comments now to exhibits that I brought 18 today, because they -- they're on what the 19 discussion was this morning. 20 I was -- I asked, after the last hearing, 21 that I remember I was asked by the Board to do three 22 things. But one of the byproducts of my stroke is 23 memory loss. So I asked to get the official 24 transcript so I could be sure to comply with 25 everything that was directly requested. 26 But there were a couple things that were in 27 that transcript. First, I -- I -- I received an 28 e-mail from Mr. Epolete -- or Epolite -- I'm sorry 82 1 if I get the name wrong -- who told me the 2 transcript would do me no good. But I did -- I 3 managed to get it through Ms. Richmond's department. 4 But it was interesting that in the official 5 transcript the Franchise Tax Board admitted that I 6 didn't owe anything at that point because my appeal 7 rights had not been exhausted. It was my first 8 appeal, and I didn't owe any taxes. 9 And yet, they've also published on their 10 website that I was a tax evader, filed six tax liens 11 in three counties around the state, which is kind of 12 interesting. But anyway, that is -- that is on page 13 42 of the official transcript. 14 After -- rather, in the last meeting 15 Mr. Runner asked the question about -- and he asked 16 it of Mr. Epolite, that because I produced the 17 evidence in the full IRS audit of checks being 18 issued, that I'd overpaid taxes, even proof that the 19 Franchise Tax Board had paid me back or credited me 20 for overpayment of taxes in one of these years, 21 Mr. Runner asked Mr. Epolite if there was any 22 collection or any activity or any debts due to the 23 IRS. Mr. Epolite said no. That's in the official 24 transcript. 25 And then on seven -- pages 77 and 78, Ms. 26 Harkey asked the Franchise Tax Board to review 27 the -- the disputed information with me within 30 28 days, and stated that the Department, the Franchise 83 1 Tax Board Department, would be back to me to work 2 with me and possibly a member of her staff. 3 On transcript page 80, Mr. Horton states 4 the Franchise Tax Board is to look at the entire 5 case. Because when I was being audited by the 6 Franchise Tax Board auditor, he tried to help me. 7 He found a number of deductions that I was entitled 8 to but I didn't take because I didn't think I owed 9 any taxes, as the letters from the Franchise Tax 10 Board said to me. 11 So I, uh -- excuse me, I'm a little nervous 12 about -- about this. 13 So he asked -- so I asked on the record, 14 the official transcript, I asked the Board if we 15 were going to open this up to a 30/30/30, was I 16 entitled to bring forth these additional deductions 17 that the Franchise Tax Board auditor had told me? 18 He had told me also he's not -- he wasn't allowed to 19 use them because they had directed him to just audit 20 what I had submitted. 21 This -- this question was then asked by 22 Ms. Ma to the Appeals section, if they would work -- 23 work with me. And Mr. Epolite's response on the 24 record is "Sure." 25 Then -- which is -- and this is leading 26 somewhere, I assure you -- on page 82, Mr. Epolite 27 states very directly -- and I have to quote this 28 because it appeals -- applies to the things you were 84 1 talking about this morning. 2 "And we definitely suggest and 3 recommend that during this process that you 4 work with the Franchise Tax Board as much 5 as possible, so when this matter does come 6 back before the Board as much as possible 7 can be resolved and has been resolved by 8 the time" [this Board] -- "this returns to 9 the Board for a follow-up." 10 So why is that important? I mean it's 11 important because after receiving that official 12 transcript and the specific three requests from this 13 panel, I attempted to do just that. 14 I asked for the transcript. I got -- 15 there's a -- the exhibit is attached to that. I got 16 the communication from Mr. Epolite saying the 17 transcript would do me no good. 18 I then wrote to Ms. Coakley at the 19 direction the Board had asked me to do, to ask who I 20 should work with to comply with the Board's request. 21 That -- that e-mail is in your packet as well. 22 Three hours later, on that same day, I got 23 an e-mail from Mr. Epolite stating that I should 24 only address the home issue, none of the other tax 25 issues that were brought up. And he said, quote, 26 specifically requesting that Ms. Coakley not respond 27 to me. 28 That e-mail there is in there, too. 85 1 So this didn't -- it didn't surprise me, 2 you know, after trying for nine years to work with 3 the Franchise Tax Board, I mean declined every 4 meeting with the taxpayer advocate or any meeting 5 with the auditor, or any meeting to -- to go through 6 things and find -- follow this up, that I would get 7 a letter from another staff attorney that said, you 8 know, they're not -- he's directed the Franchise Tax 9 Board not to comply with your -- your orders. 10 That e-mail from him is in that packet as 11 well. 12 I had -- I wrote in January 5th to Mr. 13 Epolite and asked if I -- you know, explaining, you 14 know, that this is what the transcript said, I was 15 just trying to follow through. There's no response 16 to that. 17 And then that same afternoon I wrote to 18 Ms. Coakley to confirm it was her understanding that 19 the Board wanted us to work together about a 20 resolution for the next meeting, but she was out of 21 town and I never received a response. 22 I mean, I have been told through the 23 process that coming to the Board of appeals was 24 going to be a waste of time. But I haven't -- this 25 is the first time in nine years I've been -- nine 26 years, two strokes, the Franchise Tax Board agent on 27 film holding a gun to my head, saying, "I'm going to 28 see that you die in prison." And this was the first 86 1 time I'd ever had an opportunity where somebody 2 would listen and actually look at these documents 3 all produced by the Franchise Tax Board. The 4 letters that said I owed $274. Even the testimony 5 by a District Attorney that said I owed $278. 6 So those -- all those exhibits are -- are 7 enclosed. 8 I really don't think I'm going to need -- 9 need my full ten minutes because the only thing that 10 Mr. Epolite said I could address today, even though 11 the Franchise Tax Board did provide all the 12 deductions that I would be entitled to, that Mr. 13 Horton went on record to being allowed into this -- 14 this discussion, the only thing I'd be allowed to 15 address was the property improvements to my home of 16 19-and-a-half years. 17 And, Ms. Harkey, you were correct at the 18 last meeting, you know, that was, what, 20-something 19 years later and none of the banks had the cancelled 20 checks, none of them had any of the records about 21 the loans. They've all been destroyed. 22 I had the mortgage interest deductions, I 23 had all of that. That was -- that showed that I had 24 those mortgages, those amounts. So the house was 25 clearly worth more than what the Franchise Tax Board 26 said. 27 So the next best thing I could do after 28 contacting the banks that have been merged, banks 87 1 that had closed, all of that, the next best thing I 2 could do is I went to the MLS and I went to the 3 realtors who had all been helping to sell it, we did 4 a history on the house. 5 And believe it or not -- you wouldn't think 6 the county-recorder would be so helpful. The 7 county-recorder pulled all the permits, all the -- 8 all the plans. I had pictures, the different 9 stages, showing different stages in the life, the 10 improvements, and I submitted that. And so you have 11 all of that. 12 I'm sorry it's drafting drawings and all 13 that kind of stuff, but there's also the permits. 14 And the response from the Franchise Tax Board was 15 you don't have cancelled checks, you don't have 16 receipts. And they -- and they -- they just have 17 refused. 18 And I'll remind the panel again that under 19 sworn testimony, under penalty of perjury, the 20 Franchise Tax Board agent who put the gun to my 21 head, told me I would die in prison, he was going to 22 be sure I died in prison, he testified I had not 23 filed any taxes in 18 years. Of course I had. They 24 had issued me refunds for overpayment. And he also 25 testified that the house cost $960,000 and, as he 26 put it, $400,000 of improvements. 27 That's unacceptable to the Franchise Tax 28 Board, apparently, because they're saying it's 88 1 unacceptable. So I don't know how you back your 2 agent under oath and then say, well, no. 3 So it's either perjury one way or the 4 other. I mean I don't know how you have it both 5 ways. But that's their position, is that none of 6 those improvements were made. And then in their 7 submission to you they show cost of the house of, 8 what, $161,000 or something like that in that little 9 table, you know, for a 4200-square-foot house on 10 four-and-a-half acres, which you saw in the 11 materials. And this was 1988, but you can't even 12 put appliances in your kitchen for $31 a foot. 13 So, I'm -- I'm going to stop. I don't 14 think I've used ten minutes, but I'm gonna stop 15 there because I'm sure you'll have questions. 16 And I included also, I should say, the 17 other copies of letters, of e-mails, of the 18 direction I received -- or direction I was told not 19 to go and not to -- not to meet with the Franchise 20 Tax Board. 21 I apparently -- I don't know, I didn't 22 apply for another -- I have been declined three 23 times by the taxpayers' advocate to meet with me. 24 But, apparently, I did it -- I applied again, which 25 I don't know anything about, because I got a letter 26 last month saying they turned me down for any 27 meeting about tax consultation and they would get 28 back to me with an appropriate party in 30 days. 89 1 So my last attachment is not even complete. 2 But this is ten points that the Franchise Tax Board 3 does not deny. Now if they do deny it we can, right 4 here, address every one of those. We have third 5 party independent verification; that being court 6 transcripts, letters from the Franchise Tax Board, 7 medical records, any third party -- 8 They -- they've agreed that virtually every 9 one of my taxpayer rights has been violated in this 10 matter in terms of threats to my life, my freedom, 11 my access to documentation, which you saw in there; 12 they refused to give me all my records. They copied 13 the cover sheet of every file, that's what they gave 14 me. And that's entered into the court transcript, 15 which I have provided previously. 16 They issued a press release about arresting 17 me before I was arrested. It was on the news 18 stands. They have not denied that because that's 19 public record as well. We have the newspapers, we 20 have their press release. 21 They posted their press release on their 22 website. They admitted under oath that they never 23 wanted to know any of my tax deductions before they 24 arrested me. Again, this is directly under oath, 25 sworn testimony from the Franchise Tax Board agent. 26 MS. RICHMOND: Time's expired. 27 MR. BETCHLEY: They wrote on many 28 occasions -- I've produced four separate occasions 90 1 where they've produced letters that they credit -- 2 the amount I owed was less than two hundred -- or 3 less than $300. It was 274.38 if I remember right, 4 and it was paid immediately. And that was even 5 confirmed by a county district attorney in a court 6 transcript, stating -- his comment was that it was 7 $278. 8 The Franchise Tax Board agent clearly 9 wasn't telling the truth on the -- on the, uh -- on 10 the witness stand. I filed a report with the 11 Franchise Tax Board that found its way to a guy 12 named Tom McPherson, who apparently -- I don't know 13 if he still is or was, the Chief of Internal 14 Affairs, I guess the equivalent of it. And he wrote 15 back to me that they had looked into it. They 16 didn't feel that the use of force against me for 17 what they thought was $88,000 -- the gun to my head 18 and dragging me out of the house -- they didn't 19 think that was a violation. 20 But they did discipline him in some way. 21 And they -- they wrote that he was disciplined, but 22 because it was an internal matter they would not 23 divulge it. 24 MS. RICHMOND: Time's expired. 25 MR. BETCHLEY: As I understand it now, 26 superior court judge is probably going to be getting 27 that, that report. 28 MS. HARKEY: Mr. Betchley, your time has 91 1 expired. 2 MR. BETCHLEY: Okay. 3 MS. HARKEY: Do you need a few more minutes 4 to wrap up? 5 MR. BETCHLEY: I'll just -- I won't even 6 take one minute. 7 Just, the last thing is that when I'm 8 reading these submissions from the Franchise Tax 9 Board, they act like a superior court judge believed 10 them. Their response is, well, that was the 11 criminal matter they brought against me, this is the 12 civil matter. 13 I mean, I -- I need to know on the record 14 if the Franchise Tax Board just doesn't care what 15 the IRS, H&R Block, and a superior court judge care 16 about. 17 I will stop. I'm sorry I used the full 18 time. 19 MS. HARKEY: Thank you, Mr. Betchley. 20 That's fine. 21 To the Department, please introduce 22 yourself for the record, and you have ten minutes. 23 MS. COAKLEY: Good morning, Chairwoman 24 Harkey, Members of the Board. My name is Susanne 25 Coakley. Seated next to me is my co-counsel Adam 26 Susz and Craig Scott, and together we represent the 27 Franchise Tax Board. 28 This appeal originally involved four issues 92 1 which were presented before your Board last 2 September. They include whether appellants have 3 substantiated basis of approximately $1.5 million 4 for their home located in Lafayette for 2005; 5 whether appellants have established that they can 6 take a home mortgage interest deduction for two 7 properties for 2008; whether Decata Corporation made 8 bona fide loans to appellant-husband during 2006, 9 2007 and 2008; and lastly, whether appellants have 10 shown reasonable cause for filing delinquent joint 11 returns for 2005, 2006 and 2007. 12 Last September your Board heard oral 13 arguments in appellants' appeal and granted a motion 14 requesting additional information limited to the 15 issue of gain from the sale of appellants' home in 16 Lafayette, California. Specifically, your Board 17 allowed appellants an opportunity to provide 18 additional evidence to support their basis. 19 The issue before your Board today is 20 whether appellants have provided new information 21 which entitles them to an increase in basis in their 22 Lafayette home over the amount of approximately 23 $880,000, which respondent has already allowed. 24 In 2005, appellants sold their home and 25 reported gain of $196,000 after applying basis of 26 approximately $1.5 million, as well as the principal 27 residence exclusion. 28 The law provides that basis is the 93 1 property's initial cost, plus the cost associated 2 with capital improvements. The burden is upon the 3 taxpayer to establish basis. 4 Respondent relied on property tax records 5 to provide an estimate of appellants' basis. In 6 2004, prior to the sale of the home, property tax 7 records show an assessed value of appellants' home 8 of approximately $880,000. As I mentioned before, 9 respondent allowed the entire assessed value of the 10 Lafayette property. 11 After the hearing in September, appellants 12 provided the following items to your Board in an 13 effort to increase their basis; these items include: 14 Permits and plans for construction of their home, 15 plans for a pool, pool house structure and decks, as 16 well as photos of their home and property. 17 After carefully reviewing the information 18 and documents provided by appellants, it is clear 19 that appellants' basis should not be increased 20 beyond the amount already allowed because the 21 construction of their home, pool, pool house 22 structure, as well as decks, were included in the 23 assessed value of the home. 24 According to records from the building 25 inspection division of Contra Costa County, 26 appellants pulled a permit to construct a new single 27 family residence in 1987. Then in 1995 appellants 28 pulled three separate permits to construct a pool, 94 1 pool house structure, as well as decks for their 2 Lafayette home. Then the Lafayette -- I'm sorry. 3 Then the Contra Costa County Tax Assessor's office 4 assessed the value of appellants' home in the amount 5 of $750,000 after the completion of all capital 6 improvements, including the pool, pool house 7 structure and decks. 8 Then from 1996 through 2004, the assessed 9 value of appellants' home increased annually at a 10 rate that did not exceed two percent, as provided by 11 Prop. 13, from $750,000 to approximately $880,000. 12 Respondent allowed the additional amount of $130,000 13 as part of appellants' basis to account for 14 additional costs or improvements which are not 15 documented by permits. 16 In conclusion, it is respondent's position 17 that the evidence provided by appellants are for 18 items already allowed by respondent because the 19 construction of their home, pool, pool house 20 structure, and decks were included in the assessed 21 value of the home, and appellants have not provided 22 new evidence showing that they are entitled to an 23 increase in basis over the amount already allowed by 24 respondent. 25 In closing, I respectfully ask your Board 26 to sustain respondent Franchise Tax Board's position 27 on this issue. 28 Thank you. 95 1 MS. HARKEY: Thank you. 2 Mr. Betchley, you have five minutes to 3 respond. 4 MR. BETCHLEY: I couldn't -- I couldn't 5 hear most of that. But I'm sure it's the same thing 6 that's in their -- their -- their brief. 7 MS. HARKEY: Well, let me -- let me just 8 clarify. What we're basically dealing with is 9 the -- the additional evidence to prove -- that you 10 brought, that prove that your basis of 1.479 is 11 verified versus the FTB's allowed basis of 12 878,571. 13 MR. BETCHLEY: Yeah, that's the original 14 argument. So I guess the only thing I would say in 15 response to that is I tried to do everything we 16 could. There were no Board rec -- or no bank 17 records anymore because so much time had passed. 18 I produced all the additions in terms of 19 permits, in terms of pictures, all those things that 20 were done since the original house was -- was made. 21 There was no way for me to document, you know, the 22 cost of the gate or any of that because I didn't 23 have all those cancelled checks and couldn't get 24 them. 25 So just like before, my main -- I mean my 26 main defense is, I guess, as simple as their agent 27 testified under oath that I had spent that money. 28 So, I -- I don't know. I had previously produced 96 1 the court -- official court transcript under penalty 2 of perjury of what he said. 3 So I -- I tried to do what I could. If 4 that's not enough, you know, I don't know what else 5 to do. 6 You look everywhere -- I think, Ms. Harkey, 7 last time you were looking at Google Earth or 8 something and you were seeing the home, very complex 9 home, very costly to build, cost-to-build home, and 10 you saw what I sold it for and what it was since 11 sold -- offered for before that, and what the loan 12 balance is worth. 13 So it was clearly improved. Those loan 14 balances and everything support the fact that the 15 basis was probably much higher than what I claimed, 16 but I could only -- I could only itemize the 1.4 17 that the Franchise Tax Board auditor testified under 18 oath about. So that's the best way I can do that. 19 In terms of the other deductions, this 20 thing about -- and I'm very grateful to the 21 Franchise Tax Board auditor. He tried to be really 22 fair. He told me what he was told to do and he said 23 he was going to try and help me. And he said, I've 24 gone through all these things. You haven't taken 25 deductions for special needs, your special needs 26 deductions. You haven't taken deductions for loan 27 losses. 28 And he goes, they're going to claim that 97 1 loans you took from the business were income; they 2 were dividends. He said, but they're not 3 claiming -- they're not addressing these other 4 losses, what the loans were used for, which was 5 investing in real estate, and they're not going to 6 address that. And he said, here's where your checks 7 are, here are the numbers, and he ran down it all to 8 me. He said these are allowable losses that will 9 offset what they're claiming or going to claim is in 10 effect dividends. 11 So I offered, as you see from the record, I 12 offered 19 times to Selvi Stanislaus, I offered four 13 times to the tax advocate, I offered to everybody 14 else who would listen, those deductions. And I did 15 send them to Stanislaus, every check number, every 16 amount, the date and all of that, and the fact that 17 I lost it all in the recession. 18 So, that's the only way I can respond to -- 19 to that at this time. 20 MS. HARKEY: Thank you. 21 Okay, Members. Member Ma. 22 MS. MA: So I do have a question. I'm 23 looking at the escrow closing statement in 2005. It 24 showed you sold the house for 2.175. It also shows 25 that you had to pay off a first mortgage loan of 26 1.5 million, a second mortgage loan of 600,000. 27 MR. BETCHLEY: Yes. 28 MS. MA: So that's -- the two of them add 98 1 up to 2.1. 2 MR. BETCHLEY: Well, I -- I don't expect 3 you to remember this because I live it every day and 4 you have so many things. 5 MS. MA: Right. Can you just remind me? 6 MR. BETCHLEY: That house was appraised and 7 I have submitted an appraisal two years before 8 the -- that house had been appraised at 2.8 million. 9 So the loans were based on that, and you have the 10 other appraisal on file, I believe. 11 And so unfortunately, or fortunately, 12 depends on how you look at it, it was mortgaged to 13 80 percent. But then when the property value 14 started to fall, you know, that's -- so that shows 15 the improvements, by the way. 16 MS. MA: Okay. So I'm not a banker, but 17 I'm just wondering, to the banker, how do -- you 18 know, it was two years a loan, two years before, 19 based on an appraisal, obviously, because the banks 20 always require an appraisal before they make the 21 loan. And how -- is it based on the -- I guess the 22 appraisal takes into account the cost that goes into 23 building a house as well as the fair market value 24 that is, um -- 25 MS. HARKEY: Right. 26 MS. MA: The market. 27 MS. HARKEY: The replacement cost. 28 MS. MA: Replacement cost. So the 99 1 replacement cost would be -- 2 MS. HARKEY: That doesn't necessarily 3 justify what was spent at the time, which is the 4 problem because there was inflation and whatnot. 5 And you'd have -- in this case, you know, you would 6 have probably, let's just assume, it would be a 7 lesser expense to construct in, what, '95 or 8 whenever it was. Yeah, 1998 -- or 1988. And then 9 pool in '95 and pool house pavilion in '95. 10 So when you got your appraisal, the cost to 11 replace is probably going to be higher and you also 12 have appreciation of the property, of the land 13 value. All that probably is considerably higher. 14 So the appraisal doesn't necessarily reflect the 15 cost. It includes costs, a cost component, but it's 16 doesn't necessarily reflect the cost at the time of 17 construction. 18 MS. MA: And when you presented the 19 appraisal -- did you give us an appraisal? I don't 20 have the appraisal in there. 21 MR. BETCHLEY: Yes. Yes. In the first 22 go-round of the exhibits. 23 MS. MA: Okay. I don't know if anyone has 24 it, but -- 25 MR. BETCHLEY: And -- and I also gave you 26 the listings from originally, like several years 27 later, and then when it was on -- that showed -- 28 that showed the changes in the house, as well as the 100 1 plans that were submitted. 2 MS. MA: I thought normally in an appraisal 3 there's, like, three different methods to assess and 4 usually one is cost replacement. I don't have 5 the -- 6 MS. HARKEY: Right. Cost to replace. 7 MS. STOWERS: Cost to replace, market 8 value. 9 MS. HARKEY: Market value. And then what's 10 the other one? 11 I'm not an appraiser. So there's -- 12 there's usually three. But we know that there's 13 cost and we know that there's a market value. 14 So, I don't have the appraisal here in my 15 file because we're only just got -- I was just -- we 16 were looking at any additional items that might be 17 produced that might justify changing the allowed 18 basis from 878 to 1.479. 19 Unless the appraisal did include the cost 20 of construction at the time they were made, which it 21 may, but I -- that might be really unusual. I don't 22 think you'd take the original -- well, maybe. He 23 pulled the permits. 24 But then they're stuck with what we've got 25 here. The permits -- the permit value was 132,026 26 on the home in 1988. The pool was 25,000 permit 27 value, and the house pavilion 3,535. So that's what 28 you'd have if you were going back. Unless you 101 1 produced other evidence, which is what we're looking 2 for. 3 MS. MA: And when you pull a permit and it 4 says the pool is 25,000, I know you pull a permit 5 before you actually build. But is -- what happens 6 if the pool costs significantly more? Do they go 7 back, or is the taxpayer supposed to go back and 8 tell the assessor that the pool wasn't 25,000, it 9 was actually 40,000? 10 MS. HARKEY: I do not know that. I was not 11 an appraiser. We're going to get into a lot in 12 property tax assessment. 13 MS. MA: Exactly. 14 MS. HARKEY: But I don't have that answer 15 on this. This is an income tax case. I don't have 16 that answer from my experience. 17 Yes? 18 MS. STOWERS: I'm going to actually ask 19 Appeals, maybe they can speak to that. Because I 20 recall in prior cases when there is substantial 21 improvements, the appraiser -- excuse me, the 22 assessor will come out and do a value once the 23 improvements are completed. And a lot of times 24 that's the starting value. 25 So let's say Ms. Ma's example, they start 26 with a pool and they said job value is 25,000, but 27 it actually ended up being closer to 50,000. Would 28 that be reflected in the assessed value once the job 102 1 is completed. 2 And hopefully Mr. Ambrose, who has some 3 property tax experience, can speak to that. 4 MR. AMBROSE: Well, yeah, it's reflected as 5 new construction. I mean it's an improvement, it's 6 an addition. I mean the house was -- and the 7 property was already there, right? 8 MS. STOWERS: Mm-hmm. 9 MR. AMBROSE: They put a pool in. 10 So yeah, it'd be reflected as new 11 construction. So it would be added to the value, to 12 the adjusted base year value as it stood on the 13 property, you know, before that improvement was put 14 in. 15 So it should be reflected on, as in the 16 assessed value. Well, in the new adjusted base year 17 value. 18 MS. STOWERS: So even if they thought it 19 was going to be 25,000 but it ended up being 50 or 20 60,000, it would be in that -- 21 MR. AMBROSE: Sure, yeah. I mean it's -- 22 yeah, right, cost doesn't equate to fair market 23 value, you know, generally. 24 MS. HARKEY: I guess, the question -- 25 MS. MA: But that's if the assessor comes 26 out. 27 MR. AMBROSE: Pardon me? 28 MS. HARKEY: The question is if the 103 1 assessor comes, what -- what -- or even if the 2 assessor doesn't come out, what do they use to deal 3 with the assessment? The permit? 4 MR. AMBROSE: I think they -- yeah. Yeah. 5 The assessor gets copies of all the permits. And 6 then whether they have somebody come out and do a 7 site inspection, I guess it's up to the office. 8 MS. HARKEY: But they wouldn't necessarily 9 ask for costs; you know, what's your real cost? 10 MR. AMBROSE: I -- you know -- 11 Yes, they would. 12 MS. HARKEY: What's your real cost. 13 MR. AMBROSE: We -- we have an expert in 14 the audience here. 15 MS. HARKEY: Okay. We have an expert in 16 the audience -- I guess we can't. 17 MR. AMBROSE: Yeah, a property tax 18 appraisal expert. And -- and he's nodding and 19 saying that, yes, they would. The assessor would 20 ask for the cost. 21 MS. HARKEY: Okay. 22 MS. MA: And would ask for copies of the 23 check or they said, your permit, your pool was 24 25,000; is that how much it cost? And they would 25 say, show us your invoice, your final invoice on how 26 much it is? 27 MR. AMBROSE: I would think so, yeah, sure. 28 Yeah. But, I mean, whether they -- to some extent 104 1 they might rely on that. I just don't know. Again, 2 I'm not an appraiser. 3 MS. HARKEY: Depends on the due diligence 4 of the assessor. Okay. 5 MR. HORTON: Madam Chair, just a quick 6 question. 7 MS. HARKEY: Yes, Member Horton. 8 MR. HORTON: Thank you, Madam Chair. 9 Question of the Department, or maybe the 10 appraiser can listen in and nod his head one way or 11 another again. 12 The assessor goes out and does an 13 assessment. The valuation of the property is what's 14 perceived to be the market value; is that right or 15 wrong? 16 MS. COAKLEY: Can you repeat your question? 17 I wasn't able to -- 18 MR. HORTON: The valuation, the assessor's 19 value is what they perceived to be the market value. 20 MS. HARKEY: We got a yes coming -- 21 MS. COAKLEY: That's my understanding. 22 MS. HARKEY: -- From up here. Because the 23 market value would be the assessor's value. 24 MR. HORTON: Where's this assessor that you 25 guys are watching for the nodding? 26 MS. HARKEY: Way up at the top. 27 MR. HORTON: Oh, yeah, I see. 28 MS. HARKEY: Under "In God we trust." 105 1 MR. HORTON: All right. I got it. 2 So the -- so the, uh -- the concern that I 3 have is that in the real estate market typically 4 they are improvements that don't really add a real 5 value to the property. You know, your realtor will 6 be very careful to advise you that a pool adds no 7 value whatsoever to the property unless the person 8 actually wants a pool. 9 So the market value of a pool is relative. 10 And there's a -- there's a study that just came out 11 that said basically, in general, the market value of 12 assessed value of a pool is 50 percent of what it 13 actually cost you to put it in. And my neighbor 14 actually had a pool, to my surprise, and filled it 15 up with dirt; that's how much it was important to 16 her. That's the value. 17 So if the Department used the assessed 18 value on these items, did they give consideration to 19 the differential between the assessed value and the 20 actual construction costs based on some analysis in 21 the market as to what -- if you add a -- I mean they 22 say you if add a kitchen, that adds value and you 23 can get one-for-one in the valuation -- or that type 24 of evidence? 25 MS. COAKLEY: Okay. So the -- the 26 information I got from the Contra Costa Tax 27 Assessor's office is as follows -- I called them to 28 get some more information myself. 106 1 They said that copies of all building 2 permits are sent to the assessor's office by the 3 cities and counties. And if the construction is 4 new -- I think we went over this already before -- 5 such as a room addition, a pool, what have you, a 6 re-appraisal is required. And in appraising the new 7 construction, the market value of the addition is 8 determined and then added to the value basis in 9 property. 10 So that is how the tax assessor's office 11 operates. 12 MR. HORTON: Okay. So it doesn't really 13 take in consideration the actual construction value, 14 the actual construction cost. 15 MS. COAKLEY: Not always. 16 MR. HORTON: Okay. Were there -- question 17 of the appellant, were there -- and I know you're 18 not necessarily a real estate agent or appraiser. 19 But we're talking -- 20 Well, back to the Department. Is there an 21 itemized listing of the improvements under 22 consideration by the Board; like pool, pool house? 23 We've got that somewhere, I hope. 24 MS. HARKEY: I have -- I have here 25 $163,455, which is the -- the home construction, the 26 pool, the pool pavilion -- pool house pavilion and 27 the deck. 28 MR. HORTON: Yeah, see, based on my 107 1 experience as a realtor, the pool, the actual 2 construction cost of the pool doesn't really add 3 value to the property. 4 So in that case the construction cost might 5 be higher than the numbers used by the Department if 6 it's a pool, pool house. The more elaborate they 7 get, the less actual value that it adds to the cost. 8 You go in and you put a regular sink in 9 versus a Kohler sink, you're just going to get a 10 valuation on the cheapest sink that you can get from 11 Home Depot. 12 So inherently, the using of the appraised 13 value alone is the -- as it relates to the 14 construction items that I've heard is lower than 15 what the actual construction costs would be because 16 they're using the market value and these items don't 17 really add value, significant value to the market. 18 Or they do, I don't -- generally, my experience is 19 they don't. 20 So, the challenge is, is that unless 21 there's some industry average, we were to take these 22 itemized items and say, what value does it add to 23 the property based on the industry average, the 24 number that I saw for a pool was 50 percent. And so 25 inherently you would get -- the construction costs 26 would be 50 percent higher than the assessor's 27 valuation of the property. 28 Did any -- did the Department take a look 108 1 at this as a potential way of determining the 2 construction value? 3 MS. COAKLEY: No. I mean the problem that 4 respondent had with the situation is that we have no 5 other way to value the pool, or the improvements, 6 because we didn't get any documentation or 7 substantiation from the taxpayer. That's really 8 what we were looking for. That's what would be 9 helpful. 10 MR. HORTON: The courts have sort of ruled 11 that if the Department is aware that a pool was 12 there, they're aware that a pool was there, they can 13 see from the pictures that the pool is constructed 14 and seems to have either expensive tile, cheap tile, 15 whatever -- I mean the basic fundamental structure 16 is the basic fundamental structure, wood and so 17 forth. 18 It is the -- the extras that the Department 19 does which can be reflected in the picture. They 20 said that if you can determine based on the picture, 21 based on the testimony of the appellant, then you 22 are to -- then the respondent is to give value to 23 that, and somewhat an imputed value. Otherwise, 24 we're left with the testimony of the appellant. 25 It's a statement, but I'd like to hear your 26 thoughts on it. 27 MS. COAKLEY: Sure. You seem to be 28 referring to the Cohan Rule. 109 1 MR. HORTON: Yes. 2 MS. COAKLEY: Which is a two-part test -- 3 MR. HORTON: Right. 4 MS. COAKLEY: -- for the costs incurred. 5 And if so, provide a reasonable estimate of those 6 costs. Very heavily against the taxpayer. 7 In this case, respondent's position is that 8 we feel we have applied the Cohan Rule because we 9 know that the costs were incurred, were correct. 10 The only way that we could estimate those costs was 11 to allow the assessed value of the home. 12 MR. HORTON: Based on the -- 13 MS. COAKLEY: Because the assessed value 14 increased once the capital improvements occurred. 15 MR. HORTON: Based on the assessed value, 16 what was the value for the pool? Just as an 17 example. 25,000? 18 MS. COAKLEY: It -- so, according to the 19 Building Inspection Division of Contra Costa County, 20 the job value of the pool in 1995 was $25,000. The 21 Contra Costa Tax Assessor's office made it very 22 clear that the job value and the market value are 23 not always the same. 24 MR. HORTON: What does that mean? In your 25 case, in this case, is that -- 26 MS. COAKLEY: Well, it would be -- 27 MR. HORTON: -- that the -- 28 My apologies for interrupting. 110 1 Does that mean that the county assessor 2 used the market value, or they had evidence as to 3 what the job value, the actual construction cost was 4 and they used that? 5 MS. COAKLEY: My understanding is that the 6 tax assessor's office used the market value. If you 7 look at the job value and you add up all of the job 8 value costs, it comes to about $163,455 of capital 9 improvements. That's including the construction 10 cost of the home and the capital improvements. 11 Franchise Tax Board allowed far more than 12 that, because it was based off of the assessed value 13 of the home. So the tax -- the Contra Costa County 14 Tax Assessor's office allowed far more than the -- 15 than the job value that you have in front of you, 16 which is from the building inspection division. 17 MR. HORTON: Yeah, I have a little bit of a 18 concern. Understanding the Cohan Rule, that given 19 that the actual -- the market, the industry says 20 that, just using the pool as an example, that the 21 assessed value is generally 50 percent less than the 22 actual construction value because it's the market 23 value. And adding a pool and a pool room and a 24 special tile doesn't necessarily add to the market 25 value. 26 So inherently, just using that as an 27 example, without going through each item, the 28 valuation, the assessed valuation of these 111 1 particular construction items is less than what the 2 actual industry would say the construction item was. 3 So was there -- on any party's part, was 4 there any effort to just call the pool or call any 5 individuals and see what the value was at that time? 6 Did the appellant in their attempt 7 to defend -- I'm not saying the Department has the 8 obligation to do that -- did the appellant in the 9 attempt to provide evidence, did you contact -- in 10 using this as an example, did you contact other pool 11 builders to ask what it would cost to build a pool 12 at that time? 13 MR. BETCHLEY: Well, I contacted -- I tried 14 to contact the guys that built the pool, and they're 15 no longer around. But as you saw in the pictures of 16 it -- I can't remember what it was that I submitted 17 to the Franchise Tax Board and the IRS as to what 18 the cost total was. But it was done as a complete 19 project with a pool, cantilever out over the 20 hillside. 21 MR. HORTON: My question is a third 22 party -- is there a third party that can attest to 23 what the value of the pool would have been in 1995? 24 MR. BETCHLEY: Can I assess -- I'm sorry. 25 MS. HARKEY: Is there a third party? 26 MR. HORTON: Is there a third party -- 27 MR. BETCHLEY: A third party? 28 MR. HORTON: -- other than yourself? 112 1 MR. BETCHLEY: Probably. I mean, you know, 2 you saw from the picture it's a very complex pool, 3 cantilever, with a pool house. 4 MR. HORTON: All right. This case has been 5 going on for a while, so I don't know if we can 6 allow more time to get the basic evidence, but 7 that's not my call. 8 But I will say to the Department, under the 9 Cohan case, possibly there should have been some 10 effort to try to establish what the actual 11 construction value would have been given that the 12 assessed value for these particular items is 13 typically quite a bit less than what the -- quite a 14 bit less than what the actual construction value is 15 and that's just standard norm. 16 I see the appraiser up there nodding his 17 head, so that must mean that I'm on track. Okay. 18 MS. HARKEY: Are there any other questions? 19 MR. HORTON: No. I think it's -- I 20 think -- 21 MS. HARKEY: Ms. Stowers? 22 MR. HORTON: -- taxpayers should get 23 something, but I don't know what. I mean for the 24 construction. 25 This is -- really probably should've went 26 to settlement. 27 MS. STOWERS: May I? 28 MS. HARKEY: Yes. 113 1 MS. STOWERS: If I understand what you're 2 saying, Mr. Runner, is that you feel that the cost 3 to construct a pool or the value of the pool is 4 understated in the assessed value? 5 MR. HORTON: If I may speak on behalf of 6 Mr. Runner -- 7 MS. STOWERS: I'm sorry. Did I do that? 8 MR. HORTON: That's all right. 9 I really wasn't trying to isolate just the 10 pool. I was just saying from -- to -- to -- to -- 11 from a methodology perspective, the method of 12 assessing the value using the assessed value is a 13 good method, it's an appropriate method. But when 14 you're faced with items that don't add any market 15 value to the -- to the property, and if that is the 16 case, then you're better off using some industry 17 average as to what the cost of the -- what the 18 actual construction cost would -- would have been. 19 Because the construction cost for a pool is 20 typically, based on -- I can't remember the 21 association, but I'll try to pull it up. It's 22 typically 50 percent less than the market value. 23 So the answer's yes. It's the preacher's 24 way of saying it. 25 MS. HARKEY: Okay. Then probably what 26 you're saying is that we have a $25,000 permit 27 value, but you believe that you could conceivably 28 justify 50,000 for a pool. Are you looking for 114 1 anything for that? 2 I -- I just -- 3 MR. HORTON: Madam Chair, I would say -- 4 I'm just using the pool as example -- but if I was 5 to take the time and itemize each of these items and 6 compare it to the industry average as to what value 7 it adds to the pool, it adds to the market value, I 8 would use the industry average to determine what the 9 construction value was because that's the average 10 construction value. 11 MS. HARKEY: I -- I -- okay. 12 MR. HORTON: It's an inverted way of 13 getting to that. 14 MS. HARKEY: I understand that. We are 15 back here, though, because the appellant was to 16 provide more evidence that what the FTB allowed, 17 which was allowed for the permit values. And they 18 came to -- you came to -- the FTB came to $878,000, 19 which is the 750 assessment and -- what -- what does 20 that include? 21 MS. COAKLEY: So the $878,000 includes the 22 acquisition costs of the initial purchase price of 23 the property, which is $150,000. Then all of the 24 construction costs and capital improvements, which 25 after the completion of all of the capital 26 improvements was $750,000. Then the assessed value 27 of the home increased annually until the time of the 28 sale of the home. 115 1 So there's $130 -- I'm sorry, $130,000 2 cushion there that respondent allowed, which is 3 actually not -- or allowed as part of appellants' 4 basis to account for additional costs or 5 improvements. Because we assume that there were 6 probably additional costs or improvements and wanted 7 to allow for that. 8 MS. HARKEY: Okay. The value here is 9 actually irrelevant. What we're trying to establish 10 is how much Mr. Betchley actually paid. And the 11 assessment may not capture that, but that's why it 12 was impending upon Mr. Betchley to produce his 13 checks, invoices, whatever he had. 14 How long has this case been going on? 15 MS. COAKLEY: The audit started in 2012. 16 MS. HARKEY: In 2012. So it's been a 17 while. 18 MR. BETCHLEY: That's -- that's actually 19 not correct. 20 MS. HARKEY: Okay. 21 MR. BETCHLEY: The case started in May 22 2009. And it started when I heard there might be an 23 issue about taxes with me. And I contacted the 24 Franchise Tax Board and officials and said, "Is 25 there anything you need from me?" 26 And they -- and they've acknowledged that 27 in court transcripts, that yes, they were offered an 28 opportunity to meet and, in essence, see anything 116 1 they wanted. They chose to instead to arrest me and 2 put it on the web and put it in newspapers. 3 MS. HARKEY: Yeah, I -- I understand, you 4 testified to that. 5 I guess what I'm asking is did you bring 6 any additional proof that changes the -- the 7 difference between the 1.479 that you're claiming 8 and the 878 that you were allowed? And you said you 9 brought in some plans. 10 MR. BETCHLEY: I'd answer that two ways. 11 One is just simple common sense. When you look at, 12 they've acknowledged that I paid $150,000 for the 13 lot. They've acknowledged I paid a total 14 construction costs at the time -- at the time the 15 first mortgage was placed on it of $960,000. 16 Then the improvements started. And that's 17 all shown by plans, it's shown by photos, it's shown 18 by the different things that were filed. 19 Then they testified under -- again, under 20 penalty. I don't know if they're now claiming that 21 Samlik, their agent, has committed perjury, but 22 under the -- under the -- 23 MS. HARKEY: Okay. Let -- 24 MR. BETCHLEY: -- penalty of perjury, he 25 said $400,000 was spent on improvements by me. 26 MS. HARKEY: Let me -- let me just ask you, 27 you just made a comment. You said that there was a 28 mortgage that said that there was $960,000 spent. 117 1 MR. BETCHLEY: Yeah. When the house was 2 built, it had a construction -- you know, typical, I 3 bought the land for cash. That became the equity in 4 building the house. 5 MS. HARKEY: Right. 6 MR. BETCHLEY: It was $150,000. 7 The Franchise Tax Board's acknowledged all 8 of this. 9 And then I built the house on top of -- 10 after the 150,000, with a construction loan from a 11 local bank that's now not there. It's one of the 12 banks I tried to get to. They were since acquired 13 by US Bank Corp. But I spent days going through, 14 weeks going through, trying to track down this 15 stuff. 16 And then at the time, when you get your 17 completion and -- your completion notice and your 18 occupancy permit, they can close a first mortgage, 19 as you know. 20 MS. HARKEY: Right. 21 MR. BETCHLEY: And that first mortgage was 22 put on then at 80 percent of the $960,000. 23 Then the improvements started. And the 24 improvements, I think -- there's no reason you would 25 recall this, but most all of the improvements, other 26 than things that were less than $10,000, were all 27 kind of put in -- 28 MS. HARKEY: Okay. That's the first 118 1 comment that really makes a bit of a difference, is 2 that the $960,000 construction cost and the first TD 3 was 80 percent. 4 Is 960 the value of the property that the 5 first TD was based on, or the lot and the house 6 together were a million one? 7 MR. BETCHLEY: No. The lot -- the lot and 8 the house at that time were -- you know, I say 960, 9 It was 960, 980, the two combined together. 10 MS. HARKEY: Okay. Was the construction -- 11 was your construction loan for 960? 12 MR. BETCHLEY: No. No, that was -- 13 MS. HARKEY: What was your construction 14 loan for? 15 MR. BETCHLEY: I think the construction was 16 six-something, 680. 17 MS. HARKEY: Okay. So -- 18 MR. BETCHLEY: It was the difference 19 between that and the 150 cash paid for the lot. 20 MS. HARKEY: Okay. So if the construction 21 loan was six, then see, we're getting back up to the 22 878, thereabouts. So I don't see that that's making 23 a difference here. 24 So, Members, are there any more comments? 25 MS. STOWERS: I just wanted to comment 26 on -- I just want to understand what Mr. Horton was 27 saying regarding the pool. 28 Based what I hear him saying is that the 119 1 assessed value of the pool, the assessed value is 2 going to be lower than the actual cost to construct 3 the pool. 4 MS. HARKEY: But value is -- 5 MS. STOWERS: But we're trying -- but we're 6 trying to get to cost. We're trying to estimate, 7 using the Cohan Rule -- 8 MR. HORTON: If I may. 9 MS. STOWERS: -- the cost of the property. 10 So we, too, as the sitting body could apply 11 the Cohan Rule and give additional cost estimates to 12 that pool if we chose to. 13 MS. HARKEY: We could. We could, but we 14 have point of justification -- 15 MR. HORTON: For clarification -- 16 MS. HARKEY: Excuse me, Mr. Horton. 17 MR. HORTON: Okay. 18 MS. HARKEY: But for the -- you could use 19 the Cohan Rule, but you still, I believe, would want 20 to justify your percentage or whatever. 21 MS. STOWERS: Yeah. 22 MS. HARKEY: That's why I asked the 23 question, so are you saying that the pool value 24 should instead be 25, should be double that? And I 25 got told not necessarily. So, I was trying. 26 Thank you. 27 MR. HORTON: Okay. 28 MS. HARKEY: Member Horton. 120 1 MR. HORTON: Now, just for clarification, I 2 was speaking of the construction value, that the 3 appraised value is typically lower than the actual 4 construction value of a pool, and of many other 5 construction items that may take place. 6 So the utilization of the assessed value is 7 the best way to go in the absence of that. But the 8 Cohan Rule allows you to look at evidence to 9 determine if there are items that are being -- that 10 are within the assessed value, that really don't 11 have to have a less of a market value in comparison 12 to the actual construction value. 13 MS. HARKEY: Okay. But what I'm asking, I 14 guess, is specifics. Does anybody want to 15 contribute that there might be something additional 16 that they would be willing to support in some way? 17 Is there any Member that is volunteering that? 18 I understand -- I understand the rule. I 19 understand the law. The problem is we're down to 20 evidence here and we're not looking at value. We're 21 looking at the evidence to support the cost. 22 MR. BETCHLEY: Do you under -- do you 23 remember the other list of improvements on there, 24 too, that did add value? The extra bedroom, the 25 pool house, the driveway, the extra decks, the -- 26 all the landscaping down, four-and-a-half acres. 27 Those were all itemized. 28 MS. HARKEY: We have -- excuse me. I do 121 1 have this capital improvements. 2 MR. BETCHLEY: Yes. Yes, that's it. 3 MS. HARKEY: Right. 4 MR. HORTON: Over an acre landscape. 5 Landscaping actually has a dollar-for-dollar value 6 according to the real estate market. 7 Replace asphalt driveway. I think the 8 value's 75 cents to one. 9 I mean, that's how I would go about sort of 10 doing this, using the industry average and go down 11 and then come up with a calculation as to what the 12 construction value would be based on industry 13 average. 14 Adding a room is typically the appraised 15 value is the same. 16 Japanese garnet fountain has no value 17 whatsoever as far as valuation. It would have a 18 construction value. 19 Custom gate for courtyard. Depending on 20 the customization, it's just a gate as far as 21 valuation is concerned. But from a construction 22 perspective, it may have an incremental increase in 23 the construction cost. 24 Install living room windows, planters, 25 dollar-for-dollar. 26 Additional lower deck off master and guest 27 bedroom. No real added value to have a lower deck. 28 Deer fence for property -- 122 1 I mean, if -- we're not going to vote on 2 this, so I don't mind -- I'll do the work, I mean, 3 but I think my suggestion is, is that the Department 4 take a look at what the industry -- industry 5 construction value is for these items, compared to 6 what they come up with as to what the appraised 7 market value is, and see if there is any 8 differential. 9 There's data out there that will provide 10 the respondent with a method -- a way of inverting, 11 capitalizing the actual value using that data. I -- 12 MS. HARKEY: Okay. 13 MR. HORTON: The burden of proof, I agree, 14 is not on the Department. But if the appellant was 15 to make that type of computation and present it to 16 me, I would accept it. So I don't care who does the 17 work. 18 MR. BETCHLEY: Member Horton. 19 MR. HORTON: Just trying to get it right, 20 that's all. 21 MS. HARKEY: Construction costs, he has 22 here -- 23 MR. HORTON: Sir? 24 MS. HARKEY: -- 982 -- 25 MR. HORTON: One second, Madam Chair. 26 Respondent? 27 MR. SUSZ: Just, as Ms. Coakley did point 28 out though, we did allow approximately 130,000 of 123 1 basis that has not been substantiated. 2 So we believe that provides that 3 cushion for the things that you've been talking 4 about. 5 MR. HORTON: So it's your testimony that 6 that 130,000 was a result of you taking this into 7 consideration? 8 MR. SUSZ: Well, we -- I think we want to 9 try to be reasonable and have a cushion here for any 10 additional improvements or costs that are not being 11 captured, and we believe that had that result. 12 MR. HORTON: Yeah, I mean I've often said, 13 and I believe this, is that if the Department makes 14 an adjustment and they don't attribute that 15 adjustment to a specific reason, that adjustment has 16 valid. It is valid. It is a valid adjustment. 17 It is not an extra that you just gave away. 18 It is a valid adjustment based on your assessment. 19 So -- 20 And if you were to say that based on your 21 assessment you allowed that because you felt that 22 there was a difference between the construction 23 value and the assessed value as a result of the -- 24 some industry data that you are aware of, then I can 25 give that some consideration. 26 Otherwise, it was appropriately done. It 27 was the right thing to do, and you had a reason for 28 doing it. You didn't just do it just to make it 124 1 safe. 2 That's kind of a question. 3 MR. SUSZ: Well, I think we -- again, 4 giving those Prop. 13 increases just because a 5 property increases in value does not mean that 6 additional improvements were being made. So I'm 7 just pointing out that I believe there is a cushion 8 here. 9 MS. HARKEY: We're still looking at actual 10 cost. 11 Okay, Members, we will take this matter 12 under submission. I'll make a motion. 13 MS. STOWERS: Move to take the matter under 14 submission. 15 MS. HARKEY: Thank you. 16 MR. HORTON: Second. 17 MS. HARKEY: It's been moved to take the 18 matter under submission by Member Stowers. Second 19 by Member Horton. 20 Any objection? 21 Such will be the order. 22 Thank you. We will be deciding this later. 23 Thank you very much. 24 MS. COAKLEY: Thank you. 25 MS. HARKEY: Thank you. 26 ---oOo--- 27 28 125 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 July 27, 2017 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 125 14 constitute a complete and accurate transcription of 15 the shorthand writing. 16 17 Dated: September 8, 2017 18 19 20 ____________________________ 21 KATHLEEN SKIDGEL, CSR #9039 22 Hearing Reporter 23 24 25 26 27 28 126