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Full title: Supplemental Brief/Memorandum in support of The Objection To Claim No 107 (RE: related document(s)643 Objection to Claim). Filed by Debtor Wave Computing, Inc. (Attachments: # 1 Certificate of Service) (Harris, Robert) (Entered: 05/06/2021)

Document posted on May 5, 2021 in the bankruptcy, 7 pages and 0 tables.

Bankrupt11 Summary (Automatically Generated)

As is explained in greater detail below, Mr. Taylor, who has been 9 retained to represent the Reorganized Debtors’ dispute with the FTB, has been effectively 10 unavailable for most of the past month, due to unexpected circumstances.First, the Objection argued that the FTB erred in refusing to allow the Debtors to 15 use the single-sales factor apportionment method to determine the amount of the Debtors’ allocable 16 Had3 there been no bankruptcy case, upon the issuance of adverse ruling by the FTB’s Protest Unit, the 4 Reorganized Debtors would have had 30 days after the issuance of that ruling (called a “Notice of 5 Action”) to file a further administrative appeal with the California Office of Tax Appeals (“OTA”), 6 which hears administrative appeals from the FTB and other California tax agencies.If 12 the Reorganized Debtors were to not file a timely petition with the OTA, the FTB might assert that 13 the failure to file such a petition somehow prejudices the ability of the Reorganized Debtors to 14 challenge the amount of the FTB’s claim before this Court.For all the reasons set forth above, the Debtors respectfully request that the Court (1) allow 11 time for the Reorganized Debtors to submit a good faith settlement offer to the FTB’s Settlement 12 Bureau, (2) set a further status conference in approximately 90 days, and (3) retain jurisdiction over 13 the pending Objection to the FTB’s Claim.

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1 BINDER & MALTER, LLP Michael W. Malter (SBN 96533) 2 Robert G. Harris (SBN 124678) 2775 Park Avenue, 3 Santa Clara CA 95050 Telephone: 408.295.1700 4 Facsimile: 408.295.1531 Email: michael@bindermalter.com 5 Email: rob@bindermalter.com 6 LAW OFFICES OF A. LAVAR TAYLOR, LLP Lavar Taylor, Esq. (SBN No. 129512) 7 3 Hutton Centre Drive, Suite 500 Santa Ana, CA 92707 8 Telephone: 714-546-0445 x120 Facsimile: 714-546-2604 9 Email: ltaylor@taylorlaw.com 10 Attorneys for the Reorganized Debtors 11 UNITED STATES BANKRUPTCY COURT 12 NORTHERN DISTRICT OF CALIFORNIA 13 SAN JOSE DIVISION 14 In re: ) Case No. 20-50682 (MEH) ) 15 WAVE COMPUTING, INC., et al., ) Chapter 11 (Jointly Administered) ) 16 Debtors.1 ) DEBTORS’ FIRST SUPPLEMENTAL 17 ) BRIEF IN SUPPORT OF THE ) OBJECTION TO CLAIM NO 107 18 ) (RELATED DOCKET NOS. 643, 717, 781) ) 19 ) Date: May 27, 2021 ) Time: 10:00 a.m. 20 ) Place: Via Tele/Videoconference 21 22 DEBTORS’ FIRST SUPPLEMENTAL BRIEF IN SUPPORT OF THE OBJECTION TO CLAIM NO 107 (RELATED DOCKET NOS. 643, 717, 781) 23 24 25 26 27 1 The Debtors in these chapter 11 cases are Wave Computing, Inc., MIPS Tech, Inc., Hellosoft, IncWave Computing (UK) Limited, Imagination Technologies, Inc., Caustic Graphics, Inc., and MIP28

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1 A. INTRODUCTION 2 Wave Computing, Inc. and its debtor affiliates, as reorganized debtors (collectively, the 3 “Debtors” or “Reorganized Debtors”) in the above-captioned chapter 11 cases, hereby submit this 4 First Supplemental Brief in Support of the Objection to Claim No 107 Filed by or on Behalf of the 5 California Franchise Tax Board. The original Objection was filed by the Debtors, prior to the 6 effective date of the Chapter 11 Plan. Since that time, the Chapter 11 Plan has become effective, an7 the Chapter 11 Debtors are now the Reorganized Debtors. The Reorganized Debtors are represented8 by a new set of professionals. As is explained in greater detail below, Mr. Taylor, who has been 9 retained to represent the Reorganized Debtors’ dispute with the FTB, has been effectively 10 unavailable for most of the past month, due to unexpected circumstances. Nevertheless, Mr. Taylor 11 has been able to co-author this First Supplemental Brief. 12 B. NATURE AND STATUS OF THE OBJECTION 13 The Debtors’ Objection to the FTB’s Claim, as filed in November, 2020, focused on the 14 following issues. First, the Objection argued that the FTB erred in refusing to allow the Debtors to 15 use the single-sales factor apportionment method to determine the amount of the Debtors’ allocable 16 California income for purposes of determining its California income tax for the year 2013. The 17 Debtors argued that it made a valid election to use the single-sales factor apportionment method, 18 even though its California income tax return for the year 2013 was filed after the normal deadline fo19 timely filing the return. The Debtors’ argument was based primarily on the “substantial compliance20 doctrine. 21 The FTB, in its response to the Debtors’ Objection, took the position that the Debtors’ 22 election to use the single-sales apportionment method was not valid, because the Debtors’ 2013 23 California tax return was not timely filed and because the substantial compliance doctrine 24 supposedly does not justify treating the Debtors’ election as valid. The FTB did not argue that the 25 Debtors would not have been entitled to use the single-sales apportionment method had the 2013 26 return been timely filed. Nor did the FTB dispute the fact that, if the Debtors are entitled to use the 27 single-sales apportionment method, the Debtors will owe millions of dollars less in taxes to the FTB28

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1 The Debtors, in the alternative, argued that the FTB’s claim is overstated even if the 2 Debtors are not permitted to use the single-sale apportionment method to determine its California 3 income tax liability. Under the alternative method for determining a company’s allocable Californi4 income, the (standard) double-weighted sales apportionment method, the FTB improperly failed to 5 treat the software sold by the company as “tangible personal property” for purposes of the Californi6 income tax laws. Had the FTB properly treated this software as tangible personal property, the 7 FTB’s claim would have been significantly lower than the amount set forth on its proof of claim. 8 The FTB, in response, argued that the software at issue should be treated as intangible 9 property, thereby increasing the amount of its claim for 2013 income taxes. But the Debtors made a10 further alternative argument, namely, that even if the software at issue is treated as intangible 11 property, the FTB’s claim is overstated because the income allocation rules relating to the sale of 12 intangible property are based on the location of the company’s customers and 75% of the company’13 licensees were located outside of California. The FTB disputed this argument as well. 14 Finally, the Debtors argued that the imposition of the late-filing penalty was inappropriate 15 because the Debtors acted in good faith and the failure to timely file the 2013 return was due to 16 reasonable cause and not due to willful neglect. The FTB argued that the imposition of the late-filin17 penalty was appropriate. 18 In its Response, the FTB also suggested that the Debtors’ Objection be dismissed without 19 prejudice to permit the FTB’s Protest Unit an opportunity to issue its ruling on the Debtors’ 20 administrative appeal. 21 After the FTB filed its response, the parties entered into a stipulation regarding further 22 briefing and then stipulated to extend the dates on which the additional briefs would be due. This 23 was done for several reasons, one of which was to permit new tax counsel to become familiar with 24 the case. Unfortunately, Mr. Taylor, the Reorganized Debtors’ new tax counsel, has been unavailabl25 for most of the past month due to reasons beyond his control. Mr. Taylor had a two-week adverse 26 reaction to his second Covid shot. Immediately after this two-week period, the Cloud provider for 27 Mr. Taylor’s office was hacked, which resulted in the shutdown of all of the office systems of Mr.

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1 cumulative effect of these events was to prevent Mr. Taylor from spending meaningful time on this 2 matter during the past month. Nevertheless, Mr. Taylor has had an opportunity to review key 3 pleadings and other documents relating to this matter. 4 For reasons explained below, the Reorganized Debtors believe it is appropriate for the Court 5 to permit the parties to explore the possibility of settlement through the Franchise Tax Board’s 6 Settlement Bureau. At the same time, however, the Reorganized Debtors believe it is appropriate fo7 the Court to retain jurisdiction over the pending Objection to the FTB’s claim. 8 C. THE CONTOURS OF SETTLEMENT WITH THE FTB’S SETTLEMENT BUREAU9 After consulting with new tax counsel, the Reorganized Debtors believe it is prudent for the 10 parties to explore the possibility of settlement, using the FTB’s Settlement Bureau. The Settlement 11 Bureau’s job is to negotiate and, if possible, enter into settlements with taxpayers who are disputing 12 asserted income tax deficiencies. The process is initiated by the taxpayer submitting a “good faith 13 settlement offer” to the Settlement Bureau. The Bureau then decides whether to accept the 14 case into the Settlement Bureau for settlement negotiations. If the case is accepted into the program,15 the parties then engage in settlement negotiations. If a tentative settlement is reached, the settlement16 terms must be approved by a number of officials within the California State government, including 17 the Attorney General’s Office. In this matter, any such tentative settlement would also have to be 18 approved by this Court. 19 The negotiation process typically takes approximately 8 months, and Settlement Bureau mus20 relinquish the case if a tentative settlement is not reached during this general time period. Additiona21 time is allowed if a tentative settlement is agreed to and approval by the appropriate officials is 22 sought. Mr. Taylor has extensive experience in dealing with the FTB’s Settlement Bureau. 23 D. THIS COURT SHOULD RETAIN JURISDICTION OVER THE OBJECTION TO FTB’S CLAIM 24 25 The Reorganized Debtors respectfully request that this Court retain jurisdiction over this 26 Objection to the FTB’s claim, pending the completion of settlement discussions and a journey 27 through the process outlined above. There is no guarantee that the Settlement Bureau will accept thcase into the program; the parties should know within 45 to 60 days after the submission of the goo

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1 faith settlement offer whether the case is accepted into the program. If this case is not accepted into 2 the program, then the Debtors can proceed with the Objection before this Court. It would not make 3 sense to require the Reorganized Debtors to refile the objection to the FTB’s claim under these 4 circumstances, particularly given the 180-day bar date for objections in the confirmed plan. 5 Even if the case is accepted into the program, keeping jurisdiction over the Objection to th6 FTB’s claim and requiring the parties to report back to the Court will allow the Court to more 7 efficiently set a schedule for litigation in the event that a settlement is not reached. In addition, it wil8 be helpful if for any reason one or both parties believe that it will be appropriate to seek the 9 involvement of the Court while the settlement process in ongoing. 10 The FTB’s suggestion that the Court dismiss the Objection to the FTB’s claim pending 11 completion of the administrative appeal process before the Protest Unit is misplaced. First, this Cou12 is perfectly capable of deciding the issues present in this matter in the event the parties are not able 13 to resolve the matter on their own. The issues in the present matter are no more complex, and requir14 no greater “expertise,” than the many complicated issues decided by this Court on a daily basis. 15 Furthermore, if this matter were to be litigated in this Court, this Court would owe no 16 “deference” to the “expertise” of the FTB. This Court would review all legal and factual issues de 17 novo, without giving any deference to the positions of the FTB. See Buffets, Inc. v. Cal. Franchise 18 Tax Bd. (In re Buffets Holdings, Inc.), 455 B.R. 94 (Bankr. D. Del. 2011). 19 The fact is that, if the Reorganized Debtors believed that the FTB was not willing to give an20 ground from its current positions, the Reorganized Debtors would have no reason to further 21 participate in administrative proceedings or settlement discussions and would expeditiously move 22 forward with the pending litigation. The Reorganized Debtors, however, believe that further 23 discussions with the FTB could yield a resolution that is acceptable to the Reorganized Debtors. Th24 Reorganized Debtors believe that the strongest chance for such a resolution lies in presenting a goo25 faith settlement offer to FTB’s Settlement Bureau. 26 /// 27 ///

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1 A dismissal of this Claim Objection without prejudice pending the issuance of a formal 2 ruling from the Protest Unit could place the Reorganized Debtors at a procedural disadvantage. Had3 there been no bankruptcy case, upon the issuance of adverse ruling by the FTB’s Protest Unit, the 4 Reorganized Debtors would have had 30 days after the issuance of that ruling (called a “Notice of 5 Action”) to file a further administrative appeal with the California Office of Tax Appeals (“OTA”), 6 which hears administrative appeals from the FTB and other California tax agencies. A failure to file7 such an appeal would have resulted in the receipt of a bill for the amount of taxes determined to be 8 owed, and the imposition of a finality penalty if prompt payment of the amount owed was not made. 9 If the Protest Unit were to issue its final ruling in this matter, the Reorganized Debtors woul10 face the decision of whether to file a petition with the OTA. The Reorganized Debtors ask the Court11 not to force them to accept such a procedural disadvantage for choosing either course of action. If 12 the Reorganized Debtors were to not file a timely petition with the OTA, the FTB might assert that 13 the failure to file such a petition somehow prejudices the ability of the Reorganized Debtors to 14 challenge the amount of the FTB’s claim before this Court. 15 Similarly, if the Reorganized Debtors were to file a timely petition with the OTA after the 16 Protest Unit issued its Notice of Action, in order to avoid having to deal with possibility that the 17 failure to file such a petition might somehow adversely affect the ability of the Reorganized Debtors18 to litigate the Claim Objection before this Court, the FTB might assert that the filing of such a 19 petition adversely affects the ability of the Reorganized Debtors to litigate the Claim Objection 20 before this Court. Once the FTB issues its Notice of Action, the Reorganized Debtors would enter a 21 procedural terra incognita if this Court were to presently dismiss the pending Objection to the FTB’22 Claim without prejudice. The safer approach is for this Court to retain jurisdiction over the pending 23 Objection to the FTB’s claim, so that there is no doubt that this Court would preside over any future24 litigation between the Reorganized Debtors and the FTB if the parties are not able to resolve the 25 matter short of litigation, whether or not the FTB were to issue a Notice of Action. 26 /// 27 ///

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1 Should the parties proceed to litigation, it will be necessary to conduct discovery and set an 2 evidentiary hearing. Should the Court agree that it is appropriate for the Reorganized Debtors to 3 submit a good faith settlement offer to the FTB’s Settlement Bureau, it will not be necessary to set a4 discovery cutoff date or to set dates for a pre-trial conference or trial. The Court can instead set a 5 further status conference in this matter approximately 90 days from now, with a status report to be 6 filed in advance of the status conference. By that time, it is likely that it will be known whether the 7 Settlement Bureau has agreed to accept the case. The Court can then decide how to further proceed 8 based on future events. 9 E. CONCLUSION 10 For all the reasons set forth above, the Debtors respectfully request that the Court (1) allow 11 time for the Reorganized Debtors to submit a good faith settlement offer to the FTB’s Settlement 12 Bureau, (2) set a further status conference in approximately 90 days, and (3) retain jurisdiction over 13 the pending Objection to the FTB’s Claim. 14 Dated: May 6, 2021 LAW OFFICES OF A. LAVAR TAYLOR, LLP 15 By: A. Lavar Taylor 16 A. Lavar Taylor 17 Attorneys for Reorganized Debtor 18 Wave Computing, Inc. et al. 19 Dated: May 6, 2021 BINDER & MALTER, LLP 20 21 By: Robert G. Harris 22 Robert G. Harris 23 Attorneys for Reorganized Debtor 24 Wave Computing, Inc. et al 25 26 27

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