1 BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION 2 450 N STREET 3 SACRAMENTO, CALIFORNIA 4 5 6 7 8 REPORTER'S TRANSCRIPT 9 SEPTEMBER 1, 2009 10 11 SALES AND USE TAX APPEAL HEARING 12 APPEAL OF 13 JAMES M. HEIM 14 NO. 379939 (CH) 15 AGAINST PROPOSED ASSESSMENT OF 16 SALES AND USE TAX 17 18 19 20 21 22 23 24 25 Reported by: Juli Price Jackson 26 CSR No. 5214 27 28 1 1 2 P R E S E N T 3 For the Board Betty Yee of Equalization: Chair 4 5 Bill Leonard Member 6 Michelle Steel 7 Member 8 Steve Shea Acting Member 9 10 Marcy Jo Mandel Appearing for John 11 Chiang, State Controller (per Government Code 12 Section 7.9) 13 Diane G. Olson, 14 Chief Board Proceedings 15 Division 16 For Board of David Levine 17 Equalization Staff: Staff Counsel 18 Robert Tucker 19 Staff Counsel 20 Kevin Hanks 21 Chief, Headquarters Operations Division 22 23 For Department: Andrew Kwee 24 Tax Counsel 25 For Petitioner: James M. Heim 26 27 28 ---oOo--- 2 1 450 N STREET 2 SACRAMENTO, CALIFORNIA 3 SEPTEMBER 1, 2009 4 ---oOo--- 5 MS. OLSON: Our next item is C5, James M. Heim. 6 Please come forward. 7 MR. LEVINE: The issue in this petition of 8 James Heim is whether he is a liable as a responsible 9 person under Revenue and Taxation Code 6829 for the 10 liabilities incurred by BASIS, Inc. I'd also like to 11 comment on an additional argument that Petitioner, I 12 believe, is raising here that was not considered by the 13 Appeals Division. Based on the conversation I had with 14 Mr. Heim on Friday in his submission today, I believe 15 that BASIS had filed a credit return that was treated as 16 a claim for refund. It was denied. He has argued for 17 about $30,000 that he is seeking an offset against the 18 liability if he is deemed to be responsible. 19 The Appeals Division did not consider this 20 because, as far as I can tell, this argument was not 21 raised before us. Had it been raised, even though the 22 claim was denied, I believe, based on lack of supporting 23 evidence we would have at least considered the argument. 24 Because even if it's final as to the corporation, we 25 treat the liability as subject to argument by a 26 responsible person, but we have not done so here. 27 MS. YEE: Okay. 28 MS. MANDEL: You have not considered the 3 1 argument? 2 MR. LEVINE: That's right. 3 MS. YEE: Very well. Mr. Leonard? 4 MR. LEONARD: Is there a better way to have 5 that argument considered before our hearing? 6 MR. LEVINE: Based on what I see, I don't think 7 we'd have a different result because I don't think -- 8 and I have only looked at this real quick, I haven't 9 heard his explanation -- I don't see supporting 10 evidence. I just see the asserted claim. But I may be 11 missing something. 12 If he had other -- it seems that he tried to 13 find documentation and then he advised the Department 14 that, "That's all the documentation I can find. There 15 is no reason to delay because I can't get any more." I 16 believe because he was perhaps not with the corporation 17 at the time any longer. 18 So, if he has more evidence, we'd be happy to 19 hear it and maybe we'll find out more. 20 MR. LEONARD: Should the Board find the 21 liability as asserted by the Department, is the credit 22 issue still open that he could assert with further 23 proceedings with the Department? 24 MR. LEVINE: I think he's got to assert it 25 here. You may want to send it back to us for further 26 consideration. 27 MR. LEONARD: Okay. 28 MR. LEVINE: But I believe this is his chance. 4 1 The corporation's already had its chance. 2 MR. LEONARD: Got you. 3 Thank you. 4 MS. YEE: Thank you. 5 Good morning, Mr. Heim. If you'll formally 6 introduce yourself for the record? 7 And you just heard Mr. Levine's statement with 8 respect to the credit issue. 9 MR. HEIM: Thank you. My name is James Heim. 10 And I'm here in regards to the issue with BASIS and the 11 State of California. 12 First, I'd like a give you a little background 13 information. During the periods in question, I was the 14 CEO and Chairman of Prologic Management Systems and 15 continued in that role until the spring of 2003. 16 Prologic went public on NASDQ in 1996 and 17 operated four systems integration business operations 18 with up to ten offices in six states with sales in 19 excess of 40 million prior to the dot.com collapse and 20 subsequent 9/11 terrorist attacks in 2001. My primary 21 role was strategic planning and to do work with the 22 investment community and associated financial endeavors 23 related to the acquisitions of target companies, which 24 was the primary component of the business plan. Basis, 25 which operated in the Emeryville and had an office in 26 Portland, Oregon, was one of those acquisitions that 27 occurred in 1996. 28 In February of 2004, GE Access, the primary 5 1 supplier, foreclosed on Prologic and all of its 2 operating assets, including BASIS. 3 The first issue that I'd like to deal with, I'd 4 like to raise, is the crux of the issue, which is 5 whether I'm personally liable as a responsible person 6 for the unpaid liabilities. In the Appeals Division 7 response, it states that, 8 "Petitioner asserts that he is not liable. I 9 am not the person responsible for sales and tax 10 matters and insisted they were handled locally 11 in California by Miss Vivian Magee." 12 It is not correct that I specifically named 13 Miss Magee as the person who is primarily responsible 14 for these matters. While she reported to John Olynick, 15 who was the President of BASIS during the liability 16 periods through the foreclosure. 17 On sales tax reporting, she prepared the 18 reports and forwarded them to Miss Menke, Joyce Menke, 19 who handled the day-to-day cash management functions of 20 the company. 21 This is confirmed by notes and conversations 22 with Miss Magee on July 5th. The same notes confirm 23 John Olynick's role as President of Basis and myself as 24 Chairman of the Board. 25 If you look at Exhibit A, which are notes of 26 phone logs, the State keeps -- you to have read this 27 from the bottom -- you'll see Miss Magee states that, 28 "The person who makes the decision what gets 6 1 paid or not is Joyce Menke, Controller, based 2 in Tucson, Arizona, mother company Prologic, 3 the President of Prologic, John Olynick." 4 She later goes on to say that she signs checks 5 after Joyce Menke approves payments. And further on 6 goes to say that I am Chairman of the Board of Prologic. 7 The Appeals Division correctly asserts I was 8 Treasurer of Basis during the period in question, during 9 this 2000 and the summer of 2001. 10 But what they do not mention is both Miss Magee 11 and Miss Menke were both Assistant Treasurers of Basis 12 from 1999 until foreclosure, 2004, and that Miss Menke 13 was the Treasurer of Prologic, the parent corporation 14 during the entire period. 15 If you look at Exhibit B, you will see an 16 extract of Board meeting, in which you will see that 17 most -- this was precipitated by the resignation of our 18 former Treasurer/Chief Finance Officer, Bill Long. And 19 the formal election -- this is Prologic on the first 20 page of President Dick Metz and later he was succeeded 21 by John Olynick. The Treasurer was Joyce Menke. Again, 22 this is the parent corporation. 23 On the next page you will see an ongoing part 24 of that regular Board meeting was the special meeting of 25 two subsidiaries, one with Great River Systems based in 26 Minnesota. And you can see the Assistant Secretary and 27 Treasurer was Joyce Menke. 28 Second was a special meeting of shareholders, 7 1 BASIS. You'll see that John Olynick was the President. 2 I was the Secretary and Treasurer. And Joyce and Vi 3 Magee were both assigned Assistant Secretaries and 4 Treasurers. 5 I know this looks unusual, but to give you the 6 background on what this -- on what was going on at this 7 point in time, when we hired Miss Menke, this position 8 was at Prologic. And one of her primary and urgent 9 directives was from the Board, which was to consolidate 10 all of the accounting functions, including BASIS, under 11 her control at corporate. This had been a prolonged 12 effort that needed to be completed as directed by our 13 outside auditors, as well as the Board. 14 The primary reason the Board act -- ask that I 15 act as Treasurer. This Treasurer post at Basis was due 16 to prior issues with regard to lack of cooperation with 17 the BASIS subsidiary. 18 The prior CFO/Treasurer resigned at the end of 19 December, in large part due to his frustrations in 20 getting the accounting functions consolidated. This was 21 due, according to this former CFO, primarily due to the 22 lack of cooperation of Miss Magee. 23 Given the fact that Miss Menke was just hired 24 as a result of the CFO's resignation, she was likely 25 face similar problems. The Board asked that I get 26 involved and make sure this did not continue. 27 With very little intervention on my part, 28 Miss Menke successfully completed the consolidation of 8 1 the accounting functions during calendar 2000. She is a 2 very independent, strong-willed individual who was able 3 to take control of the personalities and eventually 4 developed a good working relationship with Miss Magee. 5 Thereafter I worked with Miss Menke on the related SEC 6 filings as well as efforts to secure operational finance 7 from the parent company and operating entities. 8 I want to briefly, from a prior document which 9 was submitted to the State of California, was the 10 private placement that was being put in place in the 11 summer of 2001. 12 And it has a description of Joyce Menke. 13 "Joyce Menke, Treasurer and Controller," this 14 is at Prologic. 15 "Joyce Menke joined the company in 1999 served 16 as its Controller/Treasurer. Miss Menke is 17 responsible for managing the company's 18 corporate and the subsidiaries accounting 19 departments, preparing quarterly and annual 20 consolidated financial statements and 21 overseeing financial -- financing and banking 22 relationships and human resources. During her 23 first six months with the company, Miss Menke 24 successfully reorganized the accounting -- 25 the company's accounting departments, was 26 instrumental in effecting a companywide 27 accounting conversion. Miss Menke has over 28 twenty years of experience in accounting and 9 1 business management positions." 2 I think it's important now -- and I didn't 3 bring an extract of this, but I provided it to the State 4 before. 5 In that same 1999 meeting, the Board of 6 Directors discussions regarding myself and my position 7 with Prologic and, 8 "A discussion ensued regarding an offer to 9 Mr. Heim to retain his positions as Chairman 10 of the Board and CEO, whereby Mr. Heim 11 would continue to work on mergers, acquisitions 12 and strategic business developments." 13 It goes on to say that was -- I was nominated 14 and continued in those roles. 15 But specifically in this matter I was never 16 involved in day-to-day accounting and financial 17 management of Prologic, including any of the 18 subsidiaries, including BASIS. I was not an authorized 19 signer on any checking account of the parent company or 20 subsidiaries and had never seen a sales tax report for 21 any of the ten cities or six states that we were 22 operating in until -- until after the foreclosure in 23 late 2005 when I was working with Board of Equalization 24 refund due that was referred to when we started the 25 meeting. 26 As I've stated to the Appeals personnel, when I 27 became of the aware of the California sales tax 28 situation from Miss Menke in the summer of 2001, I asked 10 1 her if we were behind in any other taxes, payroll or 2 sales taxes for any of our other divisions. She told 3 no. When I asked here why she decided not to pay the 4 California sales tax obligation, yet paid all of the 5 other tax obligations she specifically told me that the 6 California sales tax was the largest obligation and it 7 was better to have one problem account to deal with than 8 ten different delinquencies with ten different agencies. 9 Thereafter I reviewed the situation with GE 10 Access, who had provided ongoing financing. They 11 refused to finance an advance for the taxes due. 12 I met with Board members and developed the 13 installment payment plan with the Board, which through 14 my continued employment 'til the spring of 2003, we 15 basically kept up with. 16 The second part of the issues that I'm dealing 17 with is on the willfulness side. I want to go to 18 page 3, the Appeals Division basically states that my 19 willfulness and -- and I'm basically concerned about 20 this, or my exception to this, is the fact that since I 21 was unaware of the delinquent sales taxes for the fourth 22 of 2000 and the first quarter 2001, until it was brought 23 to my attention by Miss Menke in June of 2001, how could 24 I be responsible to be held willfully not paying taxes I 25 was not aware of? 26 And in this -- Miss Menke, who was the 27 individual responsible for handling payments did not 28 inform myself or other executive management regardless 11 1 of responsibilities do to so. 2 Until that time -- and again Miss Menke had 3 exceeded the expectations of the Board of Directors in 4 here first year and there was no reason to expect her 5 not to continue to do so. 6 Furthermore, it's not practical for me as CEO 7 of Prologic to internally audit each and every tax 8 return for all of the entities, especially since she was 9 the Treasurer of Prologic from 1999 till the 10 foreclosure. 11 Nor was it my responsibility, in my opinion, to 12 do so. 13 I am confident Miss Menke felt she could handle 14 the situation on her own once the market stabilized. 15 This is probably due, in large part, to the relatively 16 small amounts that were due to the State in this period 17 and the fact that in the prior two years BASIS was 18 paying about 2 million a year in California sales tax. 19 I think it was reasonable for her to expect 20 that she would be able to get caught up on that if 21 things improved in the second quarter of 2001. 22 When the this failed to materialize, the 23 problem surfaced. And that's when I got involved. 24 MS. OLSON: Time has expired. 25 MS. YEE: Mr. Heim, let us give you time on 26 rebuttal. 27 MR. HEIM: Okay. 28 MS. YEE: And we appreciate you having this in 12 1 front of us. 2 MR. HEIM: All right. 3 MS. YEE: Department? 4 MR. KWEE: Good -- good morning, Madam 5 Chairwoman and Members of the Board. I'm Andrew Kwee 6 from the Board's Legal Department. 7 And with me today are Bob Tucker, also from the 8 Legal Department, and Kevin Hanks, from the Sales and 9 Use Tax Department. And we will be representing staff 10 today. 11 The petition should be redetermined in 12 accordance with the Appeals Division's recommendation 13 because the Petitioner is a responsible person for the 14 remaining quarters at issue and there is no statutory 15 basis for additional relief. 16 The issue in dispute is whether the Petitioner 17 is a responsible person under Section 6829 and is, 18 therefore, liable for the corporation's unpaid interest 19 and penalties. 20 Upon the termination of the business of a 21 corporation, any officer or other person having control, 22 supervision, or responsibility for the filing of returns 23 or payment of tax or was under a duty to act for the 24 corporation in complying with any requirement of this 25 part, is personally liable for the unpaid taxes and 26 interest and penalties on those unpaid taxes of the 27 corporation for tax liabilities arising during the 28 period that they had such control, supervision or 13 1 responsibility if the officer or other person willfully 2 fails to pay or cause to be paid any taxes due from the 3 corporation. 4 To briefly summarize, there's four requirements 5 that must -- there is four elements required to impose 6 Section 6829 liability: 7 That the corporation collected the tax 8 reimbursement; 9 That it terminated its business; 10 That the dually is a responsible person for 11 the corporation; 12 And the failure must -- the failure to pay 13 must be willful. 14 And I'd like to point out that the -- or 15 specify, make it clear that the corporation at issue is 16 BASIS, not Prologic, the parent corporation. And it is 17 not disputed that the corporation collected sales tax 18 reimbursement from its customers on its self-assessed 19 liabilities for the two quarters at issue. 20 And it is also not disputed that the 21 corporation terminated its business and closed out its 22 seller's permit. 23 Regarding the responsible person, Petitioner is 24 a responsible person because he had the ultimate 25 responsibility and duty to act for the corporation BASIS 26 with respect to use -- sales and use tax matters for the 27 two quarters at issue. The Arizona Corporation 28 Commission's annual report and Certificate of Disclosure 14 1 discloses that Petitioner was the Treasurer of BASIS for 2 the years 2000 and 2001. The Petitioner was also on the 3 Board of Directors and held himself out as a responsible 4 person by negotiating, re-negotiating and signing 5 subsequent IPAs as Treasurer. 6 And, furthermore, as an aside, the Petitioner 7 was the CEO, Chairman of the Board and principal 8 managing financial and accounting officer and director 9 and the single largest shareholder of the parent 10 corporation, which had a 100 percent ownership interest 11 in the corporation at issue, BASIS. 12 Regarding the willfulness, the failure to pay 13 was willful because the corporation BASIS had the 14 ability to remit the tax reimbursement that it 15 collected, but it instead used the tax reimbursement to 16 pay other creditors, such as GE Access. And the 17 Employment Development Department records show that 18 wages of $242,000 were paid to ten employees during the 19 fourth 2000 and $341,000 was paid to 12 employees during 20 the first quarter of 2001, the two quarters at issue. 21 Therefore, the evidence shows that Petitioner 22 willfully caused the corporation to fail to timely pay 23 its tax liabilities by acting -- or by failing to act in 24 a manner that was in reckless disregard to his duty and 25 responsibility to act for the corporation with respect 26 to the payment of taxes being the Treasurer of the 27 corporation. 28 The petition should, therefore, be redetermined 15 1 in accordance with the Appeals Division's 2 recommendation. 3 MS. YEE: Thank you very much, Mr. Kwee. 4 Mr. Heim, you have five minutes. 5 MR. LEONARD: Ms. Yee? 6 MS. YEE: Yes, Mr. Leonard? 7 MR. LEONARD: Could the Department -- before 8 the rebuttal starts -- address this refund issue? 9 MR. TUCKER: At this time we don't have any 10 information. We don't know the validity of the bad debt 11 deduction. 12 And I think we would have to look into the 13 underlying bad debt deduction to determine whether or 14 not -- 15 MR. LEONARD: When and how do you do that? His 16 time is now. 17 MS. MANDEL: And there's a second, only three 18 line long thing under that refund section, on the very 19 last page, which is a separate, an additional refund, 20 tax overpayment that he makes a point about. 21 MR. LEVINE: What I would suggest to find out 22 what documentation -- my just quick look through here 23 was there's a State tax return that refers to something, 24 but we don't have the federal return which shows the 25 deductions and then the Petitioner would have to be able 26 to document that the bad debts were actually allowable 27 taxes paid, they were -- 28 MR. LEONARD: I understand that. 16 1 MR. LEVINE: -- so, if -- 2 MR. LEONARD: Except the allegations are very 3 serious that our Department refused to process the 4 refund application and told him to not even pull out the 5 federal returns to document it. 6 MR. HEIM: The federal return was provided. 7 The problem is the company was foreclosed on, so, all 8 bad debts get consolidated into a loss. There was no 9 receivables and no receivable bad debts accrued into the 10 fiscal year because there was no receivables. 11 So, that part of the request didn't make sense 12 based on accounting. When I asked him, the senior 13 auditor, with what specific information he needed to get 14 this done -- because we had been through the whole 15 series -- and he wouldn't provide me a specific list and 16 he said that because we couldn't come to agreement on a 17 specific list and, therefore, I should abandon this tax 18 refund request -- not a request, a tax refund filed on 19 the final quarterly report by BASIS, which was no longer 20 in existence. 21 I objected to that, saying the company was no 22 longer in existence, I was not an officer, how can I -- 23 what standing do I have to abandon a tax loss? 24 MR. LEONARD: Officially the Department denied 25 a claim for refund from the corporation that he is now 26 wishing to appeal. 27 MR. HANKS: I don't believe that that's what 28 occurred in this case. 17 1 If the Petitioner filed the return that he's 2 distributed to us today and it shows a credit amount, 3 then, certainly, he's initiating, more or less, a refund 4 request at the time that this filed. 5 So, that would have initiated action from our 6 Return Analysis Group. So, it could be that this 7 refund -- excuse me, has already been processed and 8 claimed. But we would have to look in our IRIS system 9 to see if that is the case -- whether we he followed up 10 and requested additional documentation. 11 But it wouldn't be something that we would have 12 ignored. That would not have happened. 13 MR. LEVINE: And, just for the record, there is 14 no appeal of that in this proceeding. It's kind of a 15 parallel situation that, at least from Appeals' point of 16 view, we allow him to argue even the final liability 17 because these are always final liabilities and we always 18 allow the responsible person to argue and document that, 19 perhaps, the liability asserted against the corporation 20 is too high. 21 So, if the corporation did not get a refund for 22 that and that's fine, that would be final as to the 23 corporation. If he could document that the corporation 24 should have been allowed that credit, then that credit 25 would be backed into the corporation to calculate his 26 liability here but he'd still have to provide the same 27 documentation that the corporation would have had to 28 provide to document it. 18 1 MR. HEIM: Which I had no problem doing, I just 2 wanted a definitive list of what he was looking for. 3 And he would not give that to me. 4 And it was like, "Go to storage pull these." 5 I'm the custodian of records -- "Pull all of this 6 information out." 7 And what do you want? And he would not give me 8 a specific list. So, it was like, 9 "Do you want to abandon it? The best thing for 10 you to do is abandon it. If you don't want to 11 get that information. I won't give you a 12 list." 13 You know, it was like where is the finish line? 14 MR. LEVINE: I would suggest -- I don't know 15 about that -- but what we're talking about here is can 16 you get the documentation here, regardless of what 17 happened before? 18 MR. LEONARD: Right. 19 MR. LEVINE: Because now we can give him some 20 relief if he can document it. 21 And I'd suggest we concentrate on what he can 22 document now because he can get that relief. 23 MS. MANDEL: And then there is the last little 24 bit, which was some other overpayments of like 72,000. 25 MR. HEIM: That was related to something that 26 was interesting. 27 You started -- I didn't catch everything when 28 you started the meeting about sales that involved 19 1 taxable and nontaxable activity. And this occurred -- 2 the awareness of this occurred -- I wasn't aware of this 3 until after the company had been foreclosed and 4 everything, but apparently what happened is prior to the 5 acquisition of BASIS, sometime in the early '90s, the 6 Board of Equalization did an audit on BASIS and found 7 them liable for approximately 100,000 in sales tax 8 because they were not charging sales tax, according to 9 Vi Magee, on maintenance contracts. The company was a 10 large reseller of Sun Microsystems. Sun Microsystems 11 typically sells, you know, a $100,000 computer, 20,000 12 of maintenance for three years. That gives you onsite 13 replacement. The parts are under warranty. So, it's a 14 service offering. 15 But after that audit, Vi insisted and directed 16 that everything was taxed in BASIS. Well, in 2002, 17 apparently, they sold a computer system to the State of 18 California Department of Justice. We told them, "No, 19 you can't do this," which precipitated a whole series of 20 events which got back to the State and the State found 21 -- the State Board said that you can't charge sales tax 22 on that. 23 But we have a three year statute of 24 limitations, you can't go back ten, eleven years on 25 this. BASIS apparently prepared claims for 200 plus 26 thousand dollars of refunds for the three years, which 27 were actually not their best years, but it was the three 28 years after they found out about this and 72,000 of it 20 1 was approved because the companies were still in 2 business. 3 Probably during the period we owned BASIS -- 4 and it was a subsidiary from '96 on -- BASIS 5 appropriately collected over a half million dollars in 6 taxes and we made -- they were remitted to the State of 7 California. 8 And there is 72,000 that was approved, I was 9 contacted, asked if we had received a check and never 10 happened, so -- 11 MS. MANDEL: That's according to the documents 12 in Exhibit G. 13 It's -- was for optional maintenance contracts, 14 which are not taxable. 15 MR. HEIM: Yeah, yeah. 16 MR. LEONARD: Would a 30-30-30 -- I don't know 17 how to start the 30 because it sounds like the 18 Department needs to tell Mr. Heim what records they're 19 interested in to actually review where we stand. 20 MR. TUCKER: In the most simplest terms, 21 Mr. Leonard, generally we want to see that there was a 22 taxable sale and then there was a bad debt related to 23 that taxable sale. And that's usually corroborated by a 24 federal income tax return to show the writeoff. 25 That's at the basic level. It's covered under 26 Regulation 1642. So, you could look at that regulation 27 and that would provide more detail. 28 MR. HEIM: Well, then again, the tax -- the 21 1 last tax return was filed by Vi Maggie on January 31 of 2 2004. The company filed bankruptcy two days later and 3 was foreclosed and all of the assets were gone three 4 weeks later. 5 She listed $223,000 of bad debt. My discovery 6 came back and said 68,000 was bad debts and there was 7 three other conditions. 8 One was the amount -- I have listed in here -- 9 that was for resale, sold to a company during the prior 10 quarter, there was a resale certificate. The other one 11 went out of the -- was sold to a company out of the 12 country. 13 And, so, she inadvertently -- and somehow it 14 had to be refiled -- the return would have to be 15 refiled, breaking out bad debt to what really happened. 16 MR. LEONARD: Can you prove the bad debt for 17 the amounts you're talking about? 18 MR. HEIM: From what I was able to find, yes, I 19 was able to get all of the documentation, but -- 20 MR. LEONARD: Can you submit that to the 21 Department within 30 days? 22 MR. HEIM: What I think should be sufficient? 23 MR. LEONARD: Make your list. 24 MR. HEIM: Absolutely, absolutely. 25 But I couldn't get that list from the auditor I 26 was working with. 27 MS. YEE: No. We're going to focus here now 28 on -- I'm kind of letting you know this we need going 22 1 forward. 2 MR. HEIM: Do I need my five minute rebuttal? 3 MS. YEE: I will get to your rebuttal, but I -- 4 let me just try to complete this train of thought with 5 respect to the documentation requested. 6 You believe you can provide that within 30 7 days? 8 MR. HEIM: What I think would be adequate, yes. 9 Yes, for this bad debt deduction that was applied to 10 that return. 11 MR. LEVINE: To be consistent with the two 12 prior hearings, perhaps the Department will meet with 13 him after and -- 14 MS. YEE: Yes. 15 MR. LEVINE: -- go over it? 16 MS. YEE: Let's be clear. 17 We will have our staff -- the Department staff 18 will meet with you. 19 MR. HEIM: Okay. 20 MS. YEE: Just to be very clear about what it 21 is they would need to see. 22 Okay, why don't you take five minutes for your 23 rebuttal, Mr. Heim? 24 MR. HEIM: Again, as was mentioned, we don't 25 have any problem with the fact that BASIS was terminated 26 after the liquidation. So, the entity's not in 27 business. 28 Nor do we have a problem with the sales tax 23 1 that was due and liable and was reported correctly every 2 time. 3 What I take exception with on myself personally 4 was the inference that I had awareness that this was not 5 being paid on time. 6 And from what my understanding is, and I am not 7 an expert in this, but one of the things you look to is 8 who was the person who was actually supervising and in 9 control of the tax returns or making a payment or 10 payments on sales tax? 11 And, clearly, that was not me. I had no 12 signing responsibilities. I was involved with strategic 13 things, raising funds. 14 And just because a person has a title Chairman 15 or CEO, you can't infer that all things underneath him 16 are awareness. 17 And the State's case against me really comes 18 down to do you specifically infer that I had knowledge 19 that these weren't being paid? And I just -- I have a 20 major, major problem with that. I don't think the 21 case -- the case has been made to show that I had 22 knowledge. 23 And the willful side of this, the State makes 24 the arguments that there was cash and checking accounts, 25 payrolls being made. We entered into an installment, a 26 payment program with the State of California after I 27 became aware of it. You had to make payroll to stay in 28 business to make payments. 24 1 In addition, they pointed to bank statements 2 having X amount of dollars in it. There night have been 3 very little funds available after all of the checks 4 cleared for that period of time. So, when you are 5 looking at bank statements, a snapshot, it just means 6 certain checks haven't cleared. 7 But the company did operate during those 8 periods, that's without a doubt, and continued to 9 operate for four -- on a go forward basis to meet the 10 installment plan. 11 The other thing that is a major problem in this 12 type of operation is you had very, very minor margins 13 and you paid tax on an accrual basis. And there was a 14 comment that the State mentioned that there was $500,000 15 was in the checking accounts when the bank -- when the 16 company was foreclosed on. I wasn't involved in the 17 last year of the company's operation. It was profitable 18 when I left and started to get profitable, but during 19 the bankruptcy the judge would not allow the assets out 20 of bankruptcy unless the 20 largest creditors were -- 21 reported -- documented and reported they were notified 22 that, in fact, the bankruptcy court was going to release 23 all of the assets, including all this cash. 24 The officers submitted the twenty largest 25 charges creditors and the State of California should 26 have been the third largest, second behind GE. They -- 27 the State was not on the list nor was the State 28 notified. 25 1 The officers, at that point in time, received 2 severance payments, severance payments from GE. All of 3 the assets slid out, including the 500,000. I am sure 4 if the Board was notified, as they should have been, the 5 State would have been paid out of those funds. 6 Those funds that are sitting there, you know, 7 if you borrow 80 percent from receivables, there is 8 20 percent you haven't collected and that continues on 9 as long as you have a receivables line. It's that 10 20 percent that was sitting there when the assets and 11 the receivables were taken by GE, including sales tax 12 from prior periods. It just continues to roll forward. 13 Accrual sales tax you have to pay it now, even though 14 you haven't gotten the cash availability for it. 15 And there is some more situations with GE in 16 that line that makes it even more tenuous. GE would 17 loan 80 percent of the face value of a loan, however, 18 they would deduct out of that 80 percent the money that 19 was owed to them, which if it was just a hardware sale 20 of computers, we had to pay 90 percent to GE so, we lost 21 money on the sale, on our borrowing base. 22 So, if you look at all those factors, that 23 500,000 at the very end that went out really belonged to 24 the State of California to resolve these taxes. 25 I wasn't there at the time. I was brought back 26 in by the shareholders to see if we could get some 27 litigation back against the officers for wrongful 28 actions and the insurance wouldn't do it. But my 26 1 involvement with the company since then is to see if 2 there was any particular cause of actions against the 3 officers and also to wrap up the business affairs of the 4 company. 5 I want to also note that the State has filed a 6 dual determination against Miss Menke and that she did 7 not file a petition for redetermination. That 8 underscores my statements that I was not involved with 9 this day-to-day and didn't have the knowledge to be 10 willful in not paying these taxes. 11 MS. YEE: Okay. Thank you very much, Mr. Heim. 12 Questions or comments, Members? 13 Mr. Shea? 14 MR. SHEA: Yes, thank you. 15 It seems like we'll probably be, in terms of a 16 motion, ultimately giving more time to try to allow the 17 Petitioner to secure documentation concerning any 18 refunds that maybe were not properly processed by the 19 Department, which will affect the liability at issue 20 here. 21 But we still in this proceeding here, I think, 22 need to reach a determination whether or not we take 23 action on it at this point, at least this is the public 24 hearing where we'll address the 6829 liability. 25 And with respect to that, you posit a standard 26 of actual knowledge of the sales tax liability as being 27 determinative here. 28 And I guess I would -- my question to the 27 1 Department, is it correct? Or would it be that as 2 Treasurer during the 2000-2001 and 2001-2 fiscal years, 3 did Petitioner have the basic responsibilities of a 4 corporate treasurer for financial oversight and cash 5 management, including the payment of sales and use tax 6 and that responsibility which could not be delegated 7 with respect to the liability before us today? 8 MR. KWEE: We believe that as the treasurer he 9 would have had the ultimate responsibility and duty and 10 that even if he had delegated it, without verifying the 11 that the payment of tax was made, he would having been 12 acting in reckless disregard to his duty and 13 responsibility to act to the corporation. 14 And that is the basis of finding the 15 willfulness. 16 MR. SHEA: And then there is this question 17 about the role that GE played. And we have -- I am not 18 going to mention the case, but we did have a case 19 earlier this year that involved a somewhat similar set 20 of facts and also GE acting in a secured creditor 21 arrangement. 22 And what I recall from that case was that there 23 was documentation whereby the Petitioner attempted to 24 secure in that agreement with GE the payment of sales 25 and use tax. The documentation provided for that and GE 26 did not honor that obligation. 27 And if we're going to be trying to uncover 28 additional documentation with respect to the liability 28 1 today, it might be an opportunity to ask the Petitioner, 2 do you have any such contractual documentation with GE 3 that addressed the payment of tax in terms of their 4 custodial arrangement with you? 5 MR. HEIM: The documents at GE Access, which 6 was a $3 billion distributor out of Boulder, Colorado, 7 provided us on receivables financing, had the standard 8 boilerplate, that the borrower was responsible for 9 payment of all sales taxes. 10 However, they never remitted the money to allow 11 us to do so. Most borrowing receivables, banks and 12 stuff like that, will, in fact, advance money for taxes. 13 But when I approached the State -- or GE on the taxes 14 that were due, they said to me -- and this is an 15 absolute quote -- 16 "That although we know we're probably going to 17 be held liable if push comes to shove, we're 18 not going to advance you the money to pay that 19 at this point in time." 20 So, contractually did they have the obligation? 21 No, they specifically put it back on us. However, we 22 never were received the funds to go ahead and pay that. 23 Because, as I said, the borrowing base, they 24 didn't hand us cash, they said, 25 "You can borrow up to 80 percent of your sales, 26 but, by the way, that 80 percent we offset 27 against what you bought." 28 And what -- if what you bought cost 90 cents on 29 1 the dollar, you lost money every time you bought and 2 sold equipment from them. We made -- our real profits 3 came from service -- services and consulting labor, 4 installation integration work. And that was, you know, 5 basically you could get money on that, but you couldn't 6 on hardware. 7 And hardware -- the State of California made 8 more money on the sale of hardware than we did -- very 9 little margin, 5 percent stuff. 10 But getting back to that question, GE was very 11 active with a lot of resellers and they told that other 12 resellers were signing installment agreements and you 13 guys sign one too. 14 GE, by the way, was the largest shareholder of 15 the company. On a fully concluded basis, they were the 16 largest shareholders. We were the only public one that 17 they had in their mix. And they put together a plan and 18 they actually had -- I was out working on acquisitions, 19 which if successful would have resulted in the company 20 being based Raleigh, North Carolina with 30 offices and 21 over 200 million in sales. 22 So, GE was very, very instrumental in how we -- 23 in how we processed our cash. And they would not 24 advance any cash to us unless we gave them a pro forma 25 on what payments we were expected to make. 26 MR. SHEA: Did GE actually collect the sales 27 tax reimbursement? 28 MR. HEIM: The reason -- 30 1 MR. SHEA: Were they the initial point of 2 collection on the sales where the reimbursement was 3 collected by BASIS? 4 Did it first go to GE? 5 MR. HEIM: It went into the GE lockboxes. As a 6 matter of fact, the reason the company got bounced out 7 of bankruptcy so quickly -- usually you go in and ask 8 for the use of cash collateral and the judges always 9 grant that. 10 Well, they had no cash, no collateral because 11 all of the accounts were owned by GE. That's what 12 forced their hand, the management. And they had to go 13 out of bankruptcy very quickly because they couldn't 14 make payroll or anything. 15 MR. SHEA: You can document that the sales tax 16 reimbursement -- 17 MR. HEIM: Yes. 18 MR. SHEA: -- was initially collected by GE? 19 MR. HEIM: Absolutely, everything was. 20 MR. SHEA: Would that be significant, 21 Department? 22 MR. HANKS: Yes, that is a significant factor 23 for us. 24 MR. LEVINE: We weren't aware of that and it 25 would be everything, not the just tax reimbursement 26 because if they had other money, they could pay it 27 with -- but we weren't aware of that. 28 In the other case you are talking about, I 31 1 believe the Department eventually recommended and we 2 agreed to grant. And that was because they had an 3 agreement with GE took control of all assets, had 4 provision for payment of taxes and the responsible 5 person documented that he made good faith efforts to try 6 to get the tax paid. He had something in writing. That 7 was what was -- that is what convinced the Department. 8 So, if we don't have something in writing, I 9 think he's going to have depend on the Board Members to 10 decide because I don't think we would -- especially 11 since we're at the Board hearing, we wouldn't change our 12 recommendation based on that. 13 But that was just be a matter of credibility 14 and recollection. 15 MS. YEE: Mr. Tucker? 16 MR. TUCKER: I was going to say in this case 17 there were other payments that were being made. 18 So, the evidence of a writing would be -- we 19 would need to see something along those lines. And it 20 sounds like the writing says that he was responsible. 21 MS. YEE: Mr. Heim? 22 MR. HEIM: 90 percent of the products that 23 we -- that BASIS resold came from GE and not only for 24 BASIS but for also Solid Systems and Great River 25 Systems, however, there were certain other products that 26 had to be acquired and GE, in some instances, would 27 advance the money to the subsidiaries. Sometimes they 28 would pay directly for that third party components so 32 1 you have the entire systems integration piece. 2 So, there had to be flows going through the 3 company during this period of time and afterwards. But 4 the idea that there wasn't cash in the accounts is not 5 correct, the cash was being provided under the direction 6 of GE. 7 MS. YEE: Okay. 8 MS. MANDEL: And these things would just go to 9 whether this gentleman is a responsible -- 10 MR. LEVINE: Willful -- whether he meets the 11 willful requirement. 12 MS. MANDEL: We're not talking -- I'm back to 13 my -- the market's down a lot, but still $25 in the 14 zone. We're not -- we're not talking about GE? 15 MR. LEVINE: No. 16 MS. MANDEL: Then I will keep sitting here. 17 MR. LEVINE: No, there is no -- I don't think 18 there is any real dispute -- I don't think Petitioner 19 would dispute, but have no doubt that Petitioner was 20 responsible. 21 He's in that category. He is responsible. The 22 focus is on whether he was willful, had the authority, 23 had the money, had the knowledge. 24 MS. MANDEL: Right, but you know what I am 25 asking? 26 MR. LEVINE: Right. This is -- there's been no 27 suggestion -- 28 MS. MANDEL: Okay. 33 1 MR. LEVINE: -- to go after GE. 2 MS. MANDEL: Okay. 3 MS. YEE: All right. 4 MR. LEVINE: If I recall correctly, it was too 5 late in that other case. 6 MS. MANDEL: Okay, thank you. 7 MR. HANKS: Correct. 8 MS. YEE: Okay. Mr. Shea, anything further? 9 MR. SHEA: Well, I -- I would just say that if 10 we're going to be looking for additional documentation 11 in this case anyway, I would afford the Petitioner the 12 opportunity to present that documentation that might 13 adequate on this point. 14 MR. HANKS: Absolutely. 15 MS. YEE: Okay. 16 Do you want to propose a delay? 17 MR. SHEA: So, I would -- let me -- well, we 18 could hold it under submission or just do it right now. 19 I guess if we're going there anyway, I guess 20 maybe we could just do a motion for a 30-30-30. 21 Mr. Leonard, I know you had suggested this 22 earlier, would you like to make the motion? 23 MR. LEONARD: I'll second yours. 24 MS. YEE: Okay. 25 MR. SHEA: Okay, motion for a 30-30-30 to look 26 at additional documentation the Petitioner will produce 27 concerning the bad debt deductions as well as any sort 28 of contractual agreement with GE that would indicate 34 1 that GE was in control of the funds during the period 2 where they took over the assets of the corporation. 3 MS. YEE: Okay, very well. 4 We have a motion by Mr. Shea for a 30-30-30 as 5 specified, second by Mr. Leonard. 6 Without objection, that motion carries. 7 Mr. Heim, if you will spend some time with the 8 Department staff, just so we're clear about what it is 9 that we are expecting from you relative to 10 documentation? 11 We have provided you additional time to furnish 12 those. 13 MR. HEIM: Thank you. 14 MS. YEE: Thank you very much for coming 15 forward. 16 ---o0o--- 17 18 19 20 21 22 23 24 25 26 27 28 35 1 REPORTER'SCERTIFICATE. 2 3 State of California ) 4 ) ss 5 County of Sacramento ) 6 7 I, JULI PRICE JACKSON Hearing Reporter for the 8 California State Board of Equalization certify that on 9 SEPTEMBER 1, 2009 I recorded verbatim, in shorthand, to 10 the best of my ability, the proceedings in the 11 above-entitled hearing; that I transcribed the shorthand 12 writing into typewriting; and that the preceding pages 1 13 through 35 constitute a complete and accurate 14 transcription of the shorthand writing. 15 16 Dated: October 5, 2009 17 18 19 ____________________________ 20 JULI PRICE JACKSON 21 Hearing Reporter 22 23 24 25 26 27 28 36