1 BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION 2 450 N STREET 3 SACRAMENTO, CALIFORNIA 4 5 6 7 8 REPORTER'S TRANSCRIPT 9 OCTOBER 6, 2009 10 11 12 13 14 15 FINAL ACTIONS 16 ITEM C1a 17 ITEM C1b 18 19 20 21 22 23 24 REPORTED BY: JULI PRICE JACKSON 25 CSR NO. 5214 26 27 28 1 1 2 P R E S E N T 3 4 For The Board Betty Yee of Equalization: Chairwoman 5 6 Jerome E. Horton Vice-Chair 7 Bill Leonard 8 Member 9 Michelle Steel Member 10 Marcy Jo Mandel 11 Appearing for John Chiang State Controller 12 (per Government Code Section 7.9) 13 Diane G. Olson 14 Chief, Board Proceedings Division 15 16 ---OOO--- 17 18 19 20 21 22 23 24 25 26 27 28 2 1 450 N STREET 2 SACRAMENTO, CALIFORNIA 3 OCTOBER 6, 2009 4 ---o0o--- 5 MS. OLSON: Our next items is C1a, Ali K. 6 Amidy, Rita M. Belus and Fred James Belus, and C1b, Ali 7 K. Amidy. 8 MS. YEE: Okay, Members, we are on item C1a and 9 C1b, Ali K. Amidy, Rita M. Belus and Fred James Belus 10 and Ali K. Amidy. 11 Is there a motion? 12 MS. STEEL: May I -- is it possible we can get 13 30-30-30 and then Department try to find out exactly 14 that, you know, what went on with the escrow double 15 account and, you know, they hold for this amount? 16 It seems like there is like two different 17 accounts there and two different escrow accounts there 18 and they were holding some wrong accounts. I mean, I 19 still not really clear about this case at all. 20 So, hopefully, that if Department could go back 21 and try to figure it out, then, you know, because they 22 were talking about the different number was on the 23 different check for the, you know, additional amount of 24 check that he paid. 25 So, I want to have little more clear for this 26 case. 27 MS. YEE: Do you have a sense? 28 MR. LEVINE: We can certainly delay it and let 3 1 them check it. I don't know if it would affect the 2 conclusion. 3 You could also make your decision and just 4 direct that the Department confirm that all payments 5 were applied correctly. 6 There were two things that I recall on the 7 escrow. The first one, about the 6500 or 6900 and only 8 4900 was paid, that's a matter between the escrow 9 company and Petitioner. It sounds like the escrow 10 company -- 11 MS. STEEL: Petitioner paid for $1200 on an 12 extra check, with the cashier check after that. 13 MR. LEVINE: That's one thing that the 14 Department has to confirm -- 15 MS. STEEL: Right. 16 MR. LEVINE: -- that the payment that was made 17 was applied correctly. 18 MS. YEE: Right. 19 MR. LEVINE: I believe that's the check they 20 said that the number was different. So, we don't show 21 it as credited against his individual account. We only 22 show the 4950 from the escrow company. 23 I assume it's a valid check and it was paid. 24 So, it needs to have been credited to him somehow. And 25 if it applied to another account, I guess -- I doubt the 26 Department would be troubled if he said wanted it 27 redirected, but then he'd owe 1250 more in that other 28 account. 4 1 Of course, if it wasn't applied at all, the 2 Department needs to apply it. 3 MS. STEEL: How about that escrow account that 4 BOE was holding? 5 MR. LEVINE: I'm sorry, which -- 6 MS. STEEL: There was $300,000 and then BOE was 7 holding and there was one letter that goes on the 8 exhibit that -- about like $100,000 has to go to BOE. 9 That was not really clear either. So -- and 10 then our Department said that that was wrong -- I mean, 11 actually -- taxpayer said that was different account 12 than BOE was holding. So, that was not clear either 13 during the hearing. 14 MR. LEVINE: I'm sorry, I didn't understand one 15 word, but the Department was -- 16 MS. STEEL: No. Taxpayer was telling us that 17 there were one escrow account Department was holding for 18 $300,000, they were not releasing it. 19 According to him, there was from the property, 20 that was not from the store. So, I want to make it 21 clear about that too, why Department was holding for 22 land sale, not for the store sales. 23 You know, there is a lot of things are totally 24 confused here and mixed because it seems like there is 25 two different escrows, two different accounts. And it 26 was totally messed up. 27 So, I'd rather have somebody clear things out 28 before we make any motion here. 5 1 MS. YEE: Okay. Do you want additional time or 2 do you want that added on as a direction to the motion? 3 I mean, I guess from my perspective, we've -- 4 MS. STEEL: Either way is fine for -- 5 MS. YEE: -- kind of seen everything. 6 I certainly am not adverse to having the staff 7 go back and be sure that all payments were properly 8 applied. 9 And certainly there was some confusion with 10 respect to the two accounts. 11 But I'm not sure we're going to learn any more 12 by putting it over. But we can certainly have the staff 13 look at that. 14 MS. STEEL: We can do that, my motion. 15 MS. YEE: Yeah, the proper application of the 16 payments. 17 MS. STEEL: Department's going to go out there 18 and clear those -- 19 MS. YEE: Yeah, and he -- 20 MS. STEEL: -- up and make sure those double 21 payments -- 22 MS. YEE: Right. 23 MS. STEEL: -- if there is, and then clear 24 that. 25 And then that the other accounts, that they 26 were holding. 27 And I want to have everything matched and 28 everything cleared before -- I mean, I can make motion 6 1 that, you know, I can just -- 2 MS. YEE: Yeah. 3 MS. MANDEL: Did you understand -- I mean I 4 heard the same thing about some $300,000 that's sitting 5 in an escrow account somewhere, but -- 6 MR. HORTON: Yeah, I heard we had a lien on it. 7 I mean, I thought -- 8 MS. MANDEL: Yeah, that the -- 9 MR. HORTON: -- we had control over the 10 funds. 11 MR. LEVINE: I don't see how that -- that would 12 be wrong because this isn't the final liability. 13 I can't say it didn't happen. I'd be 14 surprised, but mistakes like that happen. 15 But it shouldn't. 16 MS. YEE: Mr. Hanks? 17 MR. LEVINE: The Department can not lien this 18 liability because it's not final. 19 MR. LEONARD: It's either not this liability or 20 it's not this tax agency. 21 MR. HANKS: Right. Kevin Hanks -- 22 MR. LEONARD: He could be accurate. 23 MR. HANKS: Kevin Hanks with the Sales and Use 24 Tax Department. 25 You are absolutely correct, it's not a final 26 liability. And we're not aware of any $300,000 amount 27 that's -- that's been withheld in escrow. 28 We do have the $100,000 plus payment that has 7 1 been applied. And that was an amount that was paid 2 pursuant to a successor liability. 3 I don't think Petitioner is in disagreement 4 with that. The $4900 payment we have accounted for. 5 The other $1200 payment, we can certainly look into 6 that. That doesn't appear to have been credited. 7 The other amount, the other copy of the check 8 payment in his material actually related to a different 9 account than the accounts in question today. 10 MS. MANDEL: Yeah, but what I -- what I heard 11 him say was something about that there was some escrow 12 company that was still holding -- an escrow company 13 still holding $300,000 because of some alleged BOE lien 14 or something. And that was supposedly in his exhibits. 15 That was the part of the escrow that was 16 confusing. 17 That's what you're talking about, right? 18 MS. STEEL: Uh-huh. 19 MR. HANKS: We do know that Petitioner is 20 involved with ten other businesses. So, it could be 21 that he is relating that experience with another 22 business entity, another organization than is in 23 question today. 24 MS. YEE: But nothing else outstanding relative 25 to funds being held relative to this particular account? 26 MR. HANKS: That's correct. 27 MS. STEEL: But could you check? 28 MR. HANKS: We can certainly look into it, 8 1 absolutely. 2 MS. YEE: Okay. 3 MS. YEE: All right, so, given that, is there a 4 motion? 5 MS. MANDEL: What kind of motion is that? Is 6 it a 30-30-30? Is it a staff check? 7 MS. STEEL: It's a staff -- staff 8 recommendation -- 9 MS. YEE: Okay. 10 MS. STEEL: And then staff is going to check 11 before close the account. 12 I don't know what to say about the escrow 13 account and all those questions that it was raised in -- 14 during the hearing. 15 MS. YEE: Okay. 16 MR. LEVINE: And from all payments made -- 17 MS. YEE: Right. 18 MR. LEVINE: -- have been properly accredited 19 and applied. 20 MS. STEEL: Credited. 21 MS. YEE: Yeah. 22 MS. STEEL: And then that $300,000 escrow 23 account that we have to check? 24 MR. LEVINE: There's no money sitting out there 25 that we can get and apply to this account and make 26 everyone happy. 27 MR. LEONARD: Right. 28 MS. YEE: Okay, motion by Ms. Steel. Let me 9 1 second it and then, discussion purpose, Mr. Leonard, 2 Mr. Horton? 3 MR. LEONARD: I support the main part of the 4 motion, for the other reason I don't want more interest 5 to accrue. 6 But I'm still troubled the Department didn't 7 carry its burden of proof as to negligence. This guy 8 does have a lot of businesses. I don't know if any of 9 them are the same nature of this business. It's his 10 first audit. The understatement is quite large, but 11 it's also based on a taxable-nontaxable ratio that he 12 disputed -- I wish he'd provided some more evidence than 13 just the dispute -- but I could see how the number 14 between 53 percent taxable that he said and 75 percent 15 taxable the Department said could easily be plus or 16 minus 10 on both their numbers and still be within 17 margin of error. 18 And it just strikes me that that doesn't rise 19 to the level of negligence and would ask the Board 20 Members for their thoughts on that. 21 MS. YEE: Okay. 22 MR. LEVINE: I'd just make one observation 23 which is, I think, just to reinforce your questions 24 during the hearing is that I think the Department 25 asserted the negligence penalty at first because of its 26 feeling there were lack of records. 27 MR. LEONARD: The records issue. 28 MR. LEVINE: And the percentage of error, but 10 1 we've heard the Department concede that it wasn't a 2 record problem. So, Petitioner was not negligent for 3 lack of records. 4 So, from my perspective, the only basis is the 5 amount of the error. It is substantial. 6 On the other hand, sometimes you feel like you 7 are going to uphold it, but you have some more -- 8 preponderance of evidence that that's the right number, 9 but you're not that comfortable with it, you don't want 10 to assert negligence, that would be a reason not to. 11 For appeals, I think we would have upheld the 12 penalty even if we explicitly were clear on that point 13 that it's solely based on the percentage. 14 But it's certainly -- 15 MR. LEONARD: It's weaker than it was? ` 16 MR. LEVINE: Yeah, it's a question of fact. 17 MS. YEE: Okay. 18 MS. STEEL: What is that, alternate motion? 19 MR. LEONARD: Is the maker of the motion 20 interested in dropping negligence? 21 MS. YEE: That would be Ms. Steel? 22 MS. STEEL: Yeah, I did that. 23 MS. YEE: So, motion is to adopt the staff 24 recommendation, delete the negligence penalty and direct 25 staff to check on the proper crediting and application 26 of the payments. 27 I am going refrain from seconding that motion, 28 is there a second? 11 1 MR. LEONARD: I'll second. 2 MS. YEE: Second by Mr. Leonard. 3 Mr. Horton? 4 MR. HORTON: You know, I sort of share some of 5 the same concerns that Mr. Leonard has, but the degree 6 of penalty -- it seems to me that there was a 7 segregation test that yielded a 75 percent error -- I 8 mean 75 percent taxable ratio compared to a reported 53 9 or 55 percent ratio. 10 And then the other thing was that the time line 11 of the audit, the delay of the audit. It seems a little 12 bit that the auditor could have gotten some additional 13 support from their supervisor in this process that may 14 not have -- may have yielded a different results. 15 So, I'm trying to sort of determine whether the 16 taxpayer was uncooperative, frustrated or just 17 negligent. Apparently, based on the testimony of staff, 18 he was not negligent in recordkeeping. And he was 19 certainly negligent in his liability, but a lot of 20 taxpayers are. 21 So, I am sort of leaning towards -- well, but 22 it's hard. I mean, you have got a taxpayer that is, by 23 his own admission, has several different businesses and 24 should have exercised a little bit more control over his 25 business, admitting to be an absentee owner resulting in 26 this huge liability which just a simple reconciliation 27 between the -- you know, between the source documents 28 and the amount that he reported. That reconciliation 12 1 should take place periodically by somebody, even if 2 you're just balancing the books. 3 So, it seems to me that someone within the 4 organization should have known that there was an error 5 because of the magnitude of the error. 6 Was the taxpayer himself negligent? And to 7 what degree did we participate in the delay of this by 8 not having -- by -- contribute to this as a result of 9 the learning curve of the auditor and the processes? 10 So, I'd like to sort of hear staff's input 11 based on those concerns. 12 MR. LEVINE: The negligence that Appeals would 13 -- recommends upholding is for not paying the proper 14 tax, not what happened afterwards -- which it does seem 15 like there was some confusion. 16 In some cases like this, a taxpayer resisting 17 giving records can indicate -- can support a finding of 18 fraud, which I'm not suggesting here. 19 I think that the evidence isn't clear. It 20 seems like there just wasn't a meeting of the minds 21 between the Department and the taxpayer about what 22 records were necessary. The Department was trying to 23 get the records they needed. They didn't ask for more 24 than they thought they needed. And they -- as the 25 taxpayer came up with disputing the figures, the 26 Department asked for more records to look at, which is a 27 normal process. 28 But that goes to the issue of whether there is 13 1 any basis for relieving interest, which seems to me that 2 it was a normal process of an audit, even if it was 3 unfortunately longer than we would like to see. 4 But as far as the negligence, it's what you 5 said. It's hard to accept that percentage of error 6 would not be found in any negligence on the part of the 7 business. He's responsible for it whether he was 8 absentee or not. That's what the law is. 9 So, he's responsible to make sure his business 10 reports tax properly. And if it's negligent because he 11 didn't have the bookkeeper do a proper reconciliation, 12 then he's liable for the penalty. 13 MS. STEEL: But it was his first audit too. At 14 the same time he got frustrated because Department was 15 asking just portion of those informations. 16 That's another reason. So, when I read that 17 log, it seems like both party were kind of frustrated 18 and both party were kind of like going back and forth. 19 So, I think delay was not exactly that it was taxpayer's 20 fault at this time. 21 So, -- but at the same time that any case is 22 coming out with negligence penalty, that I always get 23 confused that, you know, when we apply it and when we 24 don't. 25 At this point it seems like he paid whatever 26 gas came out because he found out and then that was 27 right. Only the small mart, what they call 28 market that -- 14 1 MR. HANKS: Mini-mart. 2 MS. STEEL: Yeah, the mini-mart -- the price 3 that -- what was taxable and what was not taxable. 4 And, on the top of it, it was first audit. I 5 think we should waive for negligence penalty at this 6 point. 7 MS. YEE: Okay. We have a motion by Ms. Steel 8 to approve the staff recommendation, direct staff to 9 confirm the proper crediting and application of payments 10 and to examine further the alleged 300,000 in the escrow 11 account, as well as to delete the negligence penalty, 12 seconded by Mr. Leonard. 13 Please call the roll. 14 MS. OLSON: Madam Chair? 15 MS. YEE: No. 16 MS. OLSON: Mr. Leonard? 17 MR. LEONARD: Aye. 18 MS. OLSON: Ms. Steel? 19 MS. STEEL: Aye. 20 MS. OLSON: Mr. Horton? 21 MR. HORTON: No. 22 MS. MANDEL: No. 23 MS. OLSON: Motion fails. 24 MS. YEE: Okay. Let me go back to the prior 25 motion, I would move to adopt the staff recommendation 26 with the previously stated directive to staff. 27 MS. MANDEL: I'll second that. 28 MS. YEE: Second by Ms. Mandel. 15 1 Please call the roll. 2 MS. OLSON: Madam Chair? 3 MS. YEE: Aye. 4 MS. OLSON: Mr. Leonard? 5 MR. LEONARD: No. 6 MS. OLSON: Ms. Steel? 7 MS. STEEL: No. 8 MS. OLSON: Mr. Horton? 9 MR. HORTON: Aye. 10 MS. OLSON: Ms. Mandel? 11 MS. MANDEL: Aye. 12 MS. OLSON: Motion carries. 13 MS. YEE: Okay, thank you. 14 MS. STEEL: Is it okay to ask staff exactly 15 when we apply negligence penalty and when it's not? 16 Because we need some line to draw here because 17 sometimes it does and sometimes it doesn't. 18 The first time when we put that penalty to this 19 taxpayer because the -- actually informations and all 20 these receipts were not received, you know, by BOE. And 21 then, later on, it's been all provided by the taxpayer. 22 And then it was done whatever asked. So, I want to have 23 staff to give us that the -- how and when that we apply 24 this penalty to the taxpayers. 25 MR. HANKS: Ms. Steel, it is always a difficult 26 judgment on the basis of staff to determine whether or 27 not the penalty is appropriate. It's all dependent on 28 the facts of each of the cases that we're looking at. 16 1 In this case I think staff was mindful that 2 the -- that they hadn't received records. There was a 3 very large liability and -- 4 MS. STEEL: They got it, end of it. 5 MR. HANKS: They ultimately received the 6 records, but it was only after many, many months of 7 attempting to get these records from the Petitioner. 8 Petitioner told us on numerous occasions that 9 those records had been destroyed. 10 MS. STEEL: That was only first part. And then 11 he started showing up with all of the documents that he 12 was talking about. 13 MR. HANKS: He did. 14 MS. STEEL: He had 36 boxes, whatever it was 15 asked that he was bringing. 16 MS. MANDEL: Mr. Hanks, surely there's some 17 sort of general information that's provided to the 18 Department staff when they're trying to decide about 19 penalties and maybe having -- 20 MR. LEVINE: I think the audit manuel must -- 21 MS. MANDEL: Yeah. 22 MR. LEVINE: -- give some guidance. 23 MR. LEONARD: The audit manual does. 24 MS. MANDEL: Maybe she can look at that and 25 maybe that will help -- 26 MR. HANKS: Yes, absolutely. 27 MS. MANDEL: -- at least so she understands 28 when you're telling -- when the Department is 17 1 telling the Department staff that they should think what 2 factors to take into account? 3 MR. HANKS: Absolutely. 4 MS. MANDEL: And then she might have more 5 questions after that. 6 Do you think? I mean, she's heard the 7 discussion on this case -- 8 MR. HANKS: That's a great idea. 9 MS. MANDEL: -- but she's asking you generally 10 about when negligence gets put on and when it doesn't 11 and are we consistent in doing it. 12 MR. HANKS: Right. We do have a chapter within 13 our field audit manual that discusses the situations 14 that generally call for the application of the various 15 penalties, including the negligence penalty. 16 So, I think that's a great idea. We could 17 supply that information to you and elaborate when we 18 think it's appropriate to apply those penalties. 19 MS. STEEL: Thank you. 20 MR. HANKS: We'd be happy to do that. 21 MS. YEE: Okay, very well. 22 Thank you, Mr. Hanks. 23 ---o0o--- 24 25 26 27 28 18 1 REPORTER'S CERTIFICATE. 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 OCTOBER 6, 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 18 constitute a complete and accurate 14 transcription of the shorthand writing. 15 16 Dated: November 12, 2009 17 18 19 ____________________________ 20 JULI PRICE JACKSON 21 Hearing Reporter 22 23 24 25 26 27 28 19