BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION 450 N Street, Room 121 Sacramento, California REPORTER'S TRANSCRIPT NOVEMBER 18, 2009 FINAL ACTIONS Reported by: Beverly D. Toms No. CSR 1662 1 1 2 P R E S E N T 3 4 For the Board Betty Yee of Equalization: Chair 5 Jerome E. Horton 6 Vice-Chair 7 Bill Leonard Member 8 Michelle Steel 9 Member 10 Marcy Jo Mandel Appearing for John 11 Chiang, State Controller (per Government Code 12 Section 7.9) 13 Diane Olson Chief, Board 14 Proceedings Division 15 Board of Equalization 16 Staff: David Levine Tax Counsel IV 17 18 19 ---oOo--- 20 21 22 23 24 25 26 27 28 2 1 ITEM C2 2 Sacramento, California 3 November 18, 2009 4 ---oOO--- 5 MS. OLSON: The next item on the agenda are 6 those cases taken under submission. 7 MS. YEE: Okay. 8 MS. OLSON: Our first item is C2, Nickolaos 9 Papadopoulos and Dimitra Papadopoulos. 10 MS. YEE: Okay. Let's return to item C2, 11 Nickolaos Papadopoulos and Dimitra Papadopoulos. 12 Is there a motion? 13 MR. LEONARD: Madam Chair. 14 MS. YEE: Yes, Mr. Leonard. 15 MR. LEONARD: I'm prepared to sustain on the 16 tax but I just wanted to ask the Board for discussion on 17 negligence. I wish -- I really wish we had a sliding 18 scale. 19 Clearly they had some warning after the first 20 audit that there was deficiencies, but what was read to 21 us just is almost no clue as to how they should have 22 changed their recordkeeping behavior or made any 23 differences to be more accurate. And it also -- it 24 was -- I don't know, I'd prefer a more blunt statement 25 that would have forced them to come and talk to the -- 26 talk to somebody at the Board of Equalization about how 27 they should behave differently for the next audit. 28 So, it -- it's not the negligence is unearned, 3 1 it's just -- I'm not sure how much we'll -- you're 2 forgiven and the first audit passed and the second audit 3 hit, I'm not sure this first audit was a real notice of 4 improper recordkeeping. 5 MS. YEE: Okay. 6 MR. LEONARD: I don't know if anybody else 7 shared that sense from this discussion. 8 MS. YEE: Other thoughts on the negligence 9 penalty? 10 I guess I wasn't all that satisfied with what 11 was read to us, either, although I'm not sure that the 12 notes were necessarily indicative of what may have been 13 fully communicated to the taxpayer. And it just brings 14 me back to our discussion about the audit regulation 15 yesterday. I hope that there will be a lot more 16 clear -- 17 MR. LEONARD: And Mr. Ellis apparently wasn't 18 involved at the first audit -- 19 MS. YEE: Right. 20 MR. LEONARD: -- so we have no information as 21 to did they -- did they follow up or what -- did the 22 auditor explain what it meant to say, you should do 23 better next time. 24 I'm often told I should do better next time. 25 Usually I have no idea what that means. 26 MS. YEE: Okay. Other thoughts, Members? 27 Hearing none, is there a motion? 28 MS. MANDEL: Move to redetermine. 4 1 MS. YEE: I have a motion by Ms. Mandel to 2 redetermine. Is there a second? 3 MR. HORTON: Second. 4 MS. YEE: Second by Mr. Horton. 5 Please call the roll. 6 MS. OLSON: Madam Chair. 7 MS. YEE: Aye. 8 MS. OLSON: Mr. Leonard. 9 MR. LEONARD: Aye. 10 MS. OLSON: Ms. Steel. 11 MS. STEEL: Aye. 12 MS. OLSON: Mr. Horton. 13 MR. HORTON: Aye. 14 MS. OLSON: Ms. Mandel. 15 MS. MANDEL: Aye. 16 MS. OLSON: Motion carries. 17 MS. YEE: Okay. 18 ---oOo--- 19 20 21 22 23 24 25 26 27 28 5 1 ITEM C3. 2 MS. OLSON: Our next item, C3, Bruce Arthur 3 Schoen. 4 MS. YEE: Okay. Item number C3, Bruce Arthur 5 Schoen. Is there a motion? 6 MS. MANDEL: Move to redetermine. 7 MS. YEE: Motion by Ms. Mandel to redetermine. 8 Is there a second? 9 MR. HORTON: Second. 10 MS. YEE: Seconded by Mr. Horton. Discussion? 11 And I believe on this one we directed the 12 Taxpayer Rights -- 13 MR. HORTON: Yes, we did. 14 MS. YEE: Okay. Very good. 15 MR. HORTON: I think they met. 16 MS. YEE: Okay. Without objection, that motion 17 carries. 18 ---oOo--- 19 20 21 22 23 24 25 26 27 28 6 1 ITEM C4. 2 MS. OLSON: Our next item is C4, Jeries A. Izaq 3 and Nemeh T. Zarour. And I apologize for killing their 4 name. 5 MS. YEE: Okay. Item C4, Jeries A. Izaq and 6 Nemeh T. Zarour. 7 Is there a motion? 8 MS. MANDEL: Again, move to redetermine and 9 we've already sent them off for -- 10 MS. YEE: Yes. 11 MS. MANDEL: -- discussions about payment 12 plans -- 13 MS. YEE: Yes. 14 MS. MANDEL: -- and Offer in Compromise, right? 15 MS. YEE: Yes, I believe we did. 16 Okay, motion to redetermine by Ms. Mandel. 17 Second by Mr. Horton. 18 Without objection, that motion carries. 19 ---oOo--- 20 21 22 23 24 25 26 27 28 7 1 ITEM C5. 2 MS. OLSON: Our next item is C5, Musleh Saleh 3 Zokari. 4 MS. YEE: Okay. Item C5, Musleh Saleh Zokari. 5 Is there a motion? 6 MR. LEONARD: Madam Chair. 7 MS. YEE: Yes, Mr. Leonard. 8 MR. LEONARD: I guess to the Appeals, I get a 9 sense that the taxpayer and the Department hadn't really 10 reconciled on a lot of the factual evidence regarding 11 the markup. That there's an allegation, I think, 12 that -- is this the one where the wrong size bottle of 13 soda was used for the markup -- 14 MS. YEE: Right. 15 MR. LEONARD: -- price? And -- 16 MS. YEE: Right. 17 MR. LEONARD: -- is this something where -- I 18 hate to do -- I hate to ask for a reaudit, but -- and 19 I'm not sure 30-30-30 would give us much because I don't 20 know if they know what to submit. But I'm -- do you 21 have any thoughts or -- 22 MR. LEVINE: My guess is that there was no 23 misunderstanding but if I heard that argument at an 24 Appeals Conference, I would recommend a reaudit to be 25 absolutely certain. 26 I don't expect the Department to come back and 27 say a mistake was made, but rather than take a chance 28 I'd recommend we have the Department take another look 8 1 to make sure they got the right numbers, talk to their 2 rep. and have him point to where he thinks a mistake was 3 made. 4 MR. LEONARD: That would be my motion. It's -- 5 do you want to -- we call it a reaudit or we just call 6 Department take another look? 7 MR. LEVINE: Yeah, just another look. Give 8 time for the Department to take a look at it. 9 MS. YEE: Okay. Motion by Mr. Leonard to 10 direct the Department to reexamine this Petitioner's 11 markup and sales. 12 Is there a second? 13 MR. HORTON: Second. 14 MS. YEE: Second by Mr. Horton. 15 Without objection that motion carries. 16 Thank you. 17 ---oOo--- 18 19 20 21 22 23 24 25 26 27 28 9 1 ITEM C6. 2 MS. OLSON: The next item is C6, Julie Lynn 3 Cossey. 4 MS. YEE: Okay, item C6, Julie Lynn Cossey. 5 Is there a motion? 6 MS. STEEL: Actually, we got the preparation of 7 tax returns by Board employees, 505.080 that exceptional 8 cases that Board employee can fill out the papers if the 9 taxpayer has difficulty in writing English or is 10 physically incapacitated and unable to write. It seems 11 like the taxpayer was not. So there's no dispute that 12 our employee staff of BOE did it. So I hope that we can 13 move the interest be abated but stay -- sustain with the 14 staff recommendation about the taxes. 15 That's all. 16 MS. MANDEL: Did -- do we know, did the -- the 17 other thing I noticed in that CPPM was they're supposed 18 to write on the return -- 19 MR. LEONARD: Yes, I saw that, too. 20 MS. MANDEL: -- "prepared from unverified data 21 furnished by the taxpayer" and sign it. 22 MS. YEE: Right. 23 MR. LEONARD: We -- we didn't ask and nobody 24 said whether it was done that way or not. 25 MR. LEVINE: I assume it wasn't or there 26 wouldn't have been any dispute. The Department isn't 27 convinced that the tax rep. signed it and taxpayer -- 28 MS. MANDEL: Or filled it out. 10 1 MR. LEVINE: -- taxpayer said they did and -- 2 MR. LEONARD: That's right. 3 MR. LEVINE: -- had that been written, the 4 Department couldn't have any doubt about it. 5 MS. MANDEL: Yeah. 6 MS. YEE: Okay. 7 MR. LEVINE: But after looking at the CPPM I 8 think that the tax rep. didn't follow it in trying to be 9 too helpful, so that's understandable why that wouldn't 10 have been written whether she filled it out or not. I 11 mean if she did fill it out. She probably shouldn't 12 have. 13 MS. YEE: Okay. Ms. Steel, did you -- you want 14 to make a motion? 15 MS. STEEL: That's still my motion. 16 I'm grateful that actually staff tried to help 17 taxpayers out but, you know, before they did it they 18 have to look at it and then they -- even they didn't 19 sign it. 20 MS. YEE: Okay. 21 MR. LEVINE: I would just point -- 22 MS. STEEL: I don't think taxpayers were lying 23 about it. 24 MR. LEVINE: I would just point out that 25 regardless of who put the numbers down, they wouldn't 26 have been any different if the taxpayer did, which is 27 what I hope the tax rep. did, is say, well, if you claim 28 that's the non-taxable portion you put it on line 9 or 11 1 whatever line and claim it as a deduction. 2 MS. STEEL: That's why I sustain with the staff 3 recommendations about the taxes, but just at least 4 remove the interest. 5 MS. YEE: Okay. I have a motion -- 6 MR. HORTON: Do we -- do we have a legal basis 7 to do that? If so, would it -- 8 MR. LEVINE: The -- it's -- under 6593.5 the 9 Board is supposed to file a request under penalty of 10 perjury, but the Board can relieve interest if there is 11 a ministerial mistake by a Board employee. 12 MR. HORTON: That's what we did yesterday. 13 MR. LEONARD: Close enough. 14 MR. HORTON: Boy. 15 MR. LEVINE: It's after. 16 MR. HORTON: You -- you said there -- they have 17 to file a request for this? 18 MR. LEVINE: The statute requires a statement 19 under penalty of perjury. 20 MR. HORTON: Would their testimony here be 21 sufficient? 22 MR. LEVINE: In the past the Board in 6596 has 23 disregarded that, but that's what the statute requires. 24 More recently the Board has required the taxpayer to 25 fill out the form. I mean, you -- I'd recommend you 26 follow the statute, and if you want to grant relief we 27 make it conditional and they just sign a statement 28 saying, yeah, what I said under penalty of perjury. 12 1 But just something so it conforms to the 2 statute. 3 MS. YEE: Okay. We have a motion by Ms. Steel 4 to abate the interest and otherwise redetermine. 5 Is there a second? 6 MR. LEONARD: Second. 7 MS. YEE: Seconded by Mr. Leonard. 8 Please call the roll. 9 MS. OLSON: Madam Chair. 10 MS. YEE: No. 11 MS. OLSON: Mr. Leonard. 12 MR. LEONARD: Aye. 13 MS. OLSON: Ms. Steel. 14 MS. STEEL: Aye. 15 MS. OLSON: Mr. Horton. 16 MR. HORTON: Pass for me. 17 MS. OLSON: Ms. Mandel. 18 MS. MANDEL: No. 19 MR. HORTON: Geez, that was quick. 20 MS. MANDEL: I'm not always that quick. 21 MR. HORTON: Oh, boy. 22 MS. MANDEL: You want to sleep on it? 23 MS. YEE: Yeah. 24 MS. MANDEL: We can always -- 25 MS. YEE: Put it over to tomorrow. 26 MS. MANDEL: -- another day. We do that 27 sometimes. 28 MS. YEE: Yeah. 13 1 MR. HORTON: Yeah, let's do that. I mean, 2 the -- what was -- the staff member has been very 3 conscientious in attempting to try to -- try to assist 4 the taxpayer. My concern is when you start filling out 5 the return what happens logistically is the return gets 6 turned your way. You know, like it's here, taxpayer 7 put -- you actually turn it around facing you, so that 8 means you're -- you're making some type of calculation. 9 We don't know if that took place, but when the 10 evidence came out it really wasn't disputed any more. 11 Yeah, let me -- let me just sleep with this. 12 MS. MANDEL: We -- we can put it till tomorrow. 13 MR. HORTON: Yeah. 14 MS. YEE: Let's put it over to tomorrow. 15 MR. LEVINE: Can I ask for a clarification of 16 the motion in case you want me to -- don't need me to be 17 here tomorrow for this, because I think you're just 18 going to vote, but if it -- if it passes did you want -- 19 MS. YEE: We -- 20 MR. LEVINE: -- is it conditioned on her -- 21 MS. YEE: Yes. 22 MR. LEVINE: -- filing -- 23 MR. HORTON: Yes. 24 MS. YEE: Yes. Yes. 25 MR. LEVINE: Okay. 26 MR. LEONARD: That's the motion and a second. 27 MS. YEE: Okay. We will put this item over 28 till tomorrow for a vote. Okay. 14 1 ---oOo--- 2 ITEM C7 3 MS. OLSON: Our next item and final item is C7, 4 City of Los Angeles, City of San Jose and City of 5 Irvine. 6 MS. YEE: Okay. 7 MR. LEONARD: Move to deny the petition. 8 MS. YEE: Okay. Motion by Mr. Leonard to deny 9 the petition. 10 MS. STEEL: Second. 11 MS. YEE: Is there a second? 12 MS. YEE: Seconded by Ms. Steel. 13 Discussion? 14 MR. HORTON: Yes. 15 MS. YEE: Mr. Horton. 16 MR. HORTON: This concerns me a little bit. 17 There was a test that took place in 1996 which yielded a 18 98 percent allocation in term of sale. There was the 19 testimony or the statement by virtue of the return in 20 '95 for two quarters which yielded a 68 percent. And 21 then there -- this customer is an ongoing customer, so 22 clearly there was some associations that took place. 23 And then the testimony that the other offices are 24 actually sales offices and that the only thing that 25 happens in Merced predominantly is the manufacturing 26 printing. 27 And without, you know, any evidence to the 28 contrary, even though the burden is on the taxpayer, 15 1 we're disputing what the taxpayer has provided. I don't 2 know if the evidence is significant enough just to 3 dispute those two quarters at a minimum. 4 So, what I'm sort of suggesting here without 5 going too far out there is that we accept those two 6 quarters at the 68 percent ratio and then apply the -- 7 or apply the 98 percent to -- to the periods unknown -- 8 MR. LEVINE: For clarification, that would 9 leave -- 10 MR. HORTON: -- if we can -- 11 MR. LEVINE: -- everything the way it is, 12 because that's what happened. They reported -- the tax 13 was allocated based on the returns for those two 14 quarters. The tax was allocated based on the test for 15 all other periods, including a reallocation for a part 16 of the period. 17 MR. HORTON: That's actually what they did. 18 MR. LEVINE: And than if you were to deny the 19 petition without further comment, those two quarters 20 will be reallocated from the 68 percent to a -- to 21 reflect the 98 percent allocation for everything else. 22 But if you say don't make the reallocation for those two 23 quarters, it just leaves everything where it is. And we 24 just walk away, say we're done with it. 25 MR. HORTON: Yeah, I don't know if there's 26 evidence to dispute those two quarters. I mean, there's 27 clearly activity that took place. No one really 28 provided -- the contract on the question was from 1996 16 1 forward. I mean, had they said that the contract 2 existed in 1995 or -- they said a similar contract 3 existed in 1995 but it's kind of hard for me to 4 understand if this is the major customer, why -- it 5 really would have been relatively easy to come in and 6 say in 1995 they had -- in those two quarters a -- the 7 same customer existed in those two quarters and 8 therefore that's a basis of allocation. 9 No one really said that. Even though the 10 burden is on the taxpayer, the taxpayer is actually 11 arguing that that's not the case. So -- anyway, that's 12 my comments. 13 MS. YEE: Mr. Leonard, do you need to clarify 14 the motion, or are you -- 15 MR. LEONARD: Well, my motion was to deny the 16 petition. I'm -- I'm aware that when the petition was 17 filed it regarded -- it resulted in a reallocation in 18 which the Petitioner lost further. If Mr. Horton wants 19 the Board to act to status quo, that is no changes are 20 made to the allocations that were made back when, I 21 could live with that. 22 MS. YEE: Okay. Do you want to revise -- 23 MR. LEONARD: Is that what you wish, Mr. 24 Horton? 25 Okay, that would -- that would be my motion, 26 to -- to deny the petition, instruct the Department to 27 not reallocate. 28 MS. YEE: Okay. 17 1 MR. HORTON: Second. 2 MS. YEE: Second by Mr. -- actually, Ms. Steel 3 had seconded that motion. Do you want to -- okay. All 4 right, we'll have Mr. Horton second that motion. 5 Please call the roll. 6 MS. MANDEL: I'm confused. 7 MS. YEE: Do we need clarification? 8 MS. MANDEL: So that that -- that would set it 9 back to where it was before they filed the petition in 10 the first place and went through the process to 11 management denial? Or is that really the same thing as 12 management denial? 13 MR. LEVINE: It would be the same thing -- 14 MS. MANDEL: I'm just so -- so confused. 15 MR. LEVINE: -- as if you didn't grant the 16 hearing and had regarded this as closed. 17 MS. YEE: Right. 18 MS. MANDEL: Oh. 19 MR. LEVINE: Because the only reason that -- 20 that staff will reallocate -- 21 MR. LEONARD: She likes the word "closed" I 22 think. 23 MS. MANDEL: Back to my original abstention. 24 MS. YEE: Okay. 25 MR. LEVINE: So that's -- it's the same thing, 26 but -- 27 MR. LEONARD: So you won't have to. 28 MR. LEVINE: It's not the same as pre-petition 18 1 because part of the reallocation was because -- part of 2 this was already reallocated. 3 MS. YEE: Right. 4 MR. LEVINE: Not those two quarters. 5 MS. YEE: Right. 6 MR. LEVINE: So -- and that was because of the 7 petition triggered the inquiry to review it. 8 MS. YEE: Okay. All right, we have a motion by 9 Mr. Leonard, a second by Mr. Horton. Please call the 10 roll. 11 MS. OLSON: Madam Chair. 12 MS. YEE: Pass for now. Let me think about 13 this. 14 MS. OLSON: Mr. Leonard. 15 MR. LEONARD: Aye. 16 MS. OLSON: Ms. Steel. 17 MS. STEEL: Aye. 18 MS. OLSON: Mr. Horton. 19 MR. HORTON: Aye. 20 MS. OLSON: Ms. Mandel. 21 MR. LEONARD: You don't vote on it, it's not 22 closed. 23 MR. HORTON: Close. Close. 24 MS. MANDEL: I guess -- I guess that's the 25 original -- that's the original staff view, so I guess 26 an "aye", I guess. 27 MS. OLSON: Madam Chair. 28 MS. MANDEL: And it didn't matter, anyway. 19 1 MS. YEE: I'm going to be a no. Just based on 2 the testimony today I was just very dissatisfied. No, I 3 don't want to move it to tomorrow. It has to do with 4 the interpretation of 1802(a) that just really blew me 5 away. So I'll be a "no" vote. 6 MS. OLSON: The motion carries. 7 And that concludes our business for today. 8 ---oOo--- 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 20 1 REPORTER'S CERTIFICATE. 2 3 State of California ) 4 ) ss 5 County of Sacramento ) 6 7 I, BEVERLY D. TOMS, Hearing Reporter for the 8 California State Board of Equalization certify that on 9 November 18, 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 20 13 pages constitute a complete and accurate transcription 14 of the shorthand writing. 15 16 Dated: December 2, 2009. 17 18 19 ____________________________ 20 BEVERLY D. TOMS 21 Hearing Reporter 22 23 24 25 26 27 28 21