BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION 450 N Street, Room 121 Sacramento, California REPORTER'S TRANSCRIPT JANUARY 26, 2010 ITEM C2 SALES AND USE TAX APPEALS HEARINGS PETITION FOR REDETERMINATION filed by INTERNET SUPPORT AND SERVICES CORP. (Case No. 426155 KH ) Reported by: Beverly D. Toms CSR No. 1662 1 1 2 P R E S E N T 3 4 For the Board Betty T. 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 Chiang 11 State Controller (per Government Code 12 Section 7.9) 13 Diane Olson Chief, Board Proceedings 14 Division 15 For Board of David Levine 16 Equalization Staff: Tax Counsel IV 17 Cary Huxsoll 18 Tax Counsel 19 Kevin Hanks 20 Sales and Use Tax Department 21 Robert Tucker Legal Department 22 For Petitioner: David Scharlach 23 Attorney at Law 24 Jim Adams Taxpayer 25 Alina Adams 26 Taxpayer 27 ---OOO--- 28 2 1 Sacramento, California 2 January 26, 2010 3 ---oOo--- 4 MS. OLSON: Our next case is Internet Support 5 and Services Corporation. Please come forward. 6 Board Proceedings has received contribution 7 disclosure forms for this afternoon's hearings from the 8 parties, agents and participants. All forms were 9 properly completed and signed. No disqualifying 10 contributions were disclosed. All parties, agents and 11 participants are on the Alpha listing provided to your 12 office. 13 Each person sitting at the table will be asked 14 to introduce themselves and if necessary their 15 affiliation with the taxpayer -- excuse me, for the 16 record. 17 Ten minutes is allocated for the taxpayer's 18 opening presentation followed by ten minutes for the 19 Department's presentation and five minutes is allocated 20 to the taxpayer for rebuttal. 21 Ms. Yee. 22 MS. YEE: Thank you very much. Let me have Mr. 23 Levine introduce the case and then we will have you 24 begin. 25 Good afternoon. 26 MR. LEVINE: Good afternoon. Madam Chair, 27 Members, David Levine for the Appeals Division. The 28 issue in this petition of Internet Support Services 3 1 Corporation is whether petitioner is liable as a 2 successor to Central Valley Business Systems, Inc. for 3 the predecessor's entire remaining liability to the 4 Board. 5 MS. YEE: Thank you every much. Good 6 afternoon. 7 MR. SCHARLACH: Good afternoon, Madam Chair. 8 My name is David Scharlach, and I'm attorney for the 9 petitioners here this afternoon. 10 This is Jim and Alina Adams, and they are the 11 taxpayers. May I proceed with the oral presentation? 12 MS. YEE: Yes, please, you have ten minutes. 13 MR. SCHARLACH: Tax Counsel states in his reply 14 brief that there is, quote, a long-standing 15 interpretation of the Board's Legal Department, "The 16 purchaser successor liability is not cancelled by a 17 subsequent recission of the contract of sale. Counsel 18 is absolutely wrong. Correctly stated the long-standing 19 position is that the successor liability is not 20 cancelled by a rescission of the sale. It can be 21 cancelled by a rescission of the contract, and I will 22 offer an annotation as -- as we proceed. 23 Counsel also asserts that in our case there 24 were two separate and distinct transactions. The first 25 one being the original sale to the Petitioner and the 26 second transaction being the rescission of the sale and 27 the return of the property. 28 Again, we adamantly disagree. Here there was 4 1 no sales transaction in the first place. There was only 2 an unconsummated agreement to sell, and there can be no 3 sales successor liability in the first place if there 4 was no completed consummated sale. There can be no 5 successor liability without the sale. 6 Let's compare this to buying a home for a 7 moment. Most all home purchase and sale agreements 8 require that all prior existing liens be paid off in the 9 home -- before the home is actually sold and title 10 passes. 11 There is typically a diligence period where the 12 home can be inspected and the title searched and the 13 problems corrected. There is no dispute until escrow 14 closes. Either side can with -- there's no dispute that 15 until escrow closes either side can withdraw from the 16 agreement for good cause. 17 Is the sale of a home consummated when the 18 agreement is initially signed with all of all the the 19 sale consummated when the contingencies are satisfied, 20 escrow closes and the title passes? 21 In our case there was a diligence period. It 22 was written into the asset purchase agreement. But 23 there was no escrow. 24 Let's presume for a moment that there was an 25 escrow. A hoard of significant contingencies remained 26 on Mr. Chin's part after the agreement was signed. 27 Things that he agreed to do but did not do include 28 provide a customer list, provide an Accounts Receivable 5 1 list, provide an asset list and bill of sale, and most 2 significantly, remove all liabilities, debts and other 3 obligations that would otherwise have passed on to the 4 Adams. That's found at Section 1.3.2 of the asset 5 purchase agreement. 6 Here there -- had there been an escrow in our 7 case, would title to the business have passed to the 8 Adams with all of these things remaining to be done? 9 With or without escrow, this deal was not consummated, 10 there was no sale, there was no successor liability. 11 The D & R at page 8 offers its best evidence 12 that the sale was consummated, which is of course our -- 13 our argument here that it was not. 14 The Department contends that even if the 15 purchaser did not pay the $40,000 purchase price listed 16 in the agreement, the Petitioner did assume about 17 $10,000 worth of the seller's existing liability and 18 that assumption of the debt supported the sale. 19 But let's look at that $10,000 that's alleged 20 as being assumed. In the seller's letter of September 21 26, which is Exhibit 4 to the D & R -- sorry, the 22 buyer's letter, Ms. Adams itemizes the $10,459, quote, 23 "ISSC has paid per your request," and that statement 24 follows the itemization. 25 Four days later, and this is critical, Exhibit 26 6, Mr. Chin replies, "From my Accounts Payable paid by 27 ISSC after my reviewing them, I would make the choice as 28 to which ones you would pay. You can use my earned 6 1 unpaid commissions to do this or adjust the final 2 balance." 3 Therefore, the Adams did not assume the 4 $10,000, the business debt. Mr. Chin in his letter 5 acknowledged that this was a loan. That it was going to 6 be paid back by him. Well, of course he never did. By 7 the terms of the agreement, the Adams were prepared to 8 buy Mr. Chin's business for $40,000 free and clear, no 9 assumption of liabilities. 10 The deal unraveled when the Adams began to 11 learn that Mr. Chin failed to disclose $70,000 of a 12 $90,000 obligation -- aggregate of obligations in State, 13 Federal and civil liabilities that -- with a tax 14 transaction. 15 Let me state that on more time. Our client -- 16 my client thought that they were going to pay $40,000 17 and what they were getting undisclosed by Mr. Chin was 18 $70,000 of liability. Mr. Chin had disclosed about 19 20,000 of the 90. 20 The Adams said, enough is enough, before we pay 21 you a penny, Mr. Chin, we're terminating this agreement. 22 Good-bye. 23 The Department's reply brief cites Sales and 24 Use Taxation -- Tax annotation 490.0080, decided in -- 25 issued in September of '64. It's the only one that's 26 cited. It is not on point. 27 The purchaser in that matter had taken over the 28 business in its entirety. Had operated it and gained 7 1 profits. The buyer defaulted on the fourth and final 2 installment payment to the seller. 3 Much like the case where the buyer of a home 4 has defaulted on a mortgage payment after taking title. 5 The memorandum makes it clear that it was the 6 sale that was rescinded and not the contract of sale. 7 In our case we're saying the contract of sale was 8 rescinded and not the sale, itself. 9 At the start I promised an annotation that was 10 closer on point. It's 495.0012. And that one was 11 written in April of 1991. The Petitioner was a taxpayer 12 who entered into an agreement to buy -- to sell a 13 business, a bakery. The agreement allowed for the 14 purchasers to take possession immediately and to take 15 over the operations, but there was some contingencies, 16 conditions precedent to the close of -- of that sale. 17 One was that they take over the lease. Well, 18 that one was done. Another one was that the lender for 19 the business would allow the buyers to assume the loan. 20 That was not done. That condition precedent didn't 21 happen. 22 The Sales and Use Tax Department concluded that 23 there was a sale based upon the transfer of possession 24 in exchange for a promise to pay. But the hearing 25 officer asked the very question before you now, quote, 26 "The ultimate question here is whether there was in fact 27 a sale. If there was not a sale obviously there can be 28 no tax." Period, close quote. 8 1 The Hearing Officer answered the question by 2 referring to the fact that the sale was conditioned upon 3 the assumption of the loan. Quote, "This did not occur, 4 thus the sale did not occur." He found for the 5 Petitioner. 6 To determine if a sale took place the Hearing 7 Officer asked if major contingencies were satisfied. 8 And that is the question that we put before you this 9 afternoon. 10 The sale of the business to the Adams fell 11 through because Mr. Chin could not accomplish a key 12 contingency. That is, he could not sell his business 13 free and clear of assets -- of liabilities. The Adams 14 acted quickly to rescind the agreement before it closed. 15 They had received no business assets, no benefits, they 16 assumed no debts. Nothing was paid to Mr. Chin so there 17 was nothing that could have been held back for taxes. 18 Tax Counsel says that this was a consummated 19 sale. That conclusion is contrary to the facts, prior 20 Board decisions and, quite frankly, California Civil 21 code. 22 As the Hearing Officer said in the bakery case, 23 if there was no sale obviously there could be no tax. 24 Thank you for your consideration. 25 MS. YEE: Thank you very much. 26 Do you care to make any comments at this point? 27 No? Okay, you'll have five minutes on 28 rebuttal. Great. Department. 9 1 MR. HUXSOLL: Good afternoon, Madam Chair, 2 Members of the Board. I'm Cary Huxsoll from the Legal 3 Department, along with Robert Tucker and Kevin Hanks 4 representing staff. 5 We concur with the recommendation of the 6 Appeals Division. The Petitioner is liable as a 7 successor for the unpaid liabilities of Central Valley 8 Business Systems, Incorporated. The liabilities are the 9 result of non-remittance returns filed for April 1, 2006 10 through August 15, 2007. 11 When a person with an unpaid Sales or Use Tax 12 liability sells his business or stock of goods, his 13 successor shall withhold sufficient of the purchase 14 price to cover the liability until the seller produces a 15 receipt of tax clearance from the Board. 16 If the purchaser fails to withhold from the 17 purchase price, he or she will become personally liable 18 for the payment of the amount required to be withheld to 19 the extent of the purchase price. A purchaser may be 20 released from the obligation to withhold from the 21 purchase price if a written request is made to the Board 22 and the Board does issue not a clearance or mail a 23 notice of the amount of tax, interest and penalties that 24 must be paid as a condition of issuing the clearance. 25 On August 7, 2007 Petitioner entered into an 26 asset purchase agreement with Central Valley Business 27 Systems, Incorporated for the purchase of tangible and 28 intangible business assets, including inventory, 10 1 goodwill and the trade name Central Valley Business 2 Systems for $40,000. The closing date of the agreement 3 was August 15, 2007. 4 Petitioner states that this was a proposed 5 agreement, it was never consummated. The agreement does 6 provide the Petitioner may terminate the agreement if 7 certain conditions are not fulfilled. However, this 8 termination needed to occur on or prior to the closing. 9 Consistent with Petitioner's purchase of the 10 business, Petitioner contacted the Board on August 17, 11 2007, two days after the closing date, requesting that 12 its dba be changed to Central Valley Business Systems, 13 and that Petitioner's address and telephone number be 14 changed to that of the predecessor effective August 15, 15 2007. 16 The predecessor sent staff a notice of closeout 17 for seller's permit dated August 20, 2007, notifying the 18 Board that Central Valley Business Systems was sold to 19 Petitioner on August 15, 2007 for $40,000. 20 Consistent with the Petitioner's operating of 21 the business, employees that were fired by the 22 predecessor on August 14, 2007 were hired by Petitioner 23 the next day, which was the closing date. There were 24 provisions in the asset purchase agreement for the 25 hiring of these individuals. 26 Petitioner has previously argued that no monies 27 exchanged hands under the agreement. However, during 28 August and September of 2007 Petitioner paid the accrued 11 1 vacation of these -- the predecessor's employees that it 2 had hired and also paid other various preexisting 3 liabilities of the predecessor. These liabilities 4 totalled over $10,000. 5 Finally though Petitioner denies receiving 6 them, an October 1, 2007 letter from the predecessor CEO 7 to Petitioner indicates that the predecessor did provide 8 Petitioner with company contracts, inventory and a 9 prospect list. 10 Furthermore, the letter indicates the 11 Petitioner was the one operating the business for the 12 last 45 days. That being between the time of the 13 closing date and the date of the letter. 14 Petitioner is a successor to Central Valley 15 Business Systems, Incorporated. Petitioner did not 16 request a tax clearance or withhold an amount from the 17 purchase price sufficient to cover this liability. 18 Petitioner is liable as the successor for the 19 unpaid liabilities of Central Valley Business Systems, 20 Incorporated. 21 Thank you. 22 MS. YEE: Thank you, Mr. Huxsoll. 23 You have five minutes on rebuttal. 24 MR. SCHARLACH: Thank you very much, Madam 25 Chair. 26 Tax Counsel relies heavily on the integration 27 language of the asset purchase agreement. He states 28 that the contract was entered into on August 7, 2007 and 12 1 that the matter closed in accordance with the terms of 2 the agreement on August 15, 2007. That's referred to as 3 an integration clause. He's saying that -- I think he's 4 referring to the fact that the contract could not have 5 been amended without another statement in writing signed 6 by the parties. 7 But let's take a look for a moment at the asset 8 purchase agreement, which is Exhibit 1 to the Decision 9 and Recommendation. 10 If -- if you actually physically take a look at 11 it you'll see at the bottom of each page there is a -- 12 an addition date and time. That is that this document 13 was produced on August 13, 2007 at 2:22 in the 14 afternoon. It certainly could not have been executed on 15 August 7 if this was actually produced on August 13. 16 The agreement by its terms is to close on 17 August 15, 2007. That is that sometime late in the 18 afternoon of August 13 my clients were about to commence 19 for the first time the diligence necessary to determine 20 if Mr. Chin was telling the truth. In fact, they went 21 back home and did not get back home until 2:00 a.m. or 22 so that following morning down south, and they are 23 supposed to have done all of their diligence in an 24 afternoon and the following day. It does not make 25 sense. 26 Unfortunately, the Civil Code allows for this 27 and says that the actions of the party can be used to 28 introduce extrinsic evidence, evidence that is outside 13 1 of what is written, to show what the actual facts were. 2 Certainly here there was no close on August 15. How 3 could there possibly have been? 4 But even more important than that, and I -- I 5 am amazed, quite frankly, we spent a lot of time in our 6 opening brief talking about fraud, that we would not be 7 here today unless Mr. -- if Mr. Chin had disclosed all 8 of the obligations to -- to my clients. My clients had 9 $15,000 in cash and the rest that they were going to use 10 in payments over time to purchase a business for 11 $40,000. 12 As they get into this, in the span of the next 13 couple of weeks or so after they started to move into 14 operation, they found out this was one nightmare after 15 another. They didn't even know about this -- the 16 Revenue and Taxation obligations that were owing to the 17 Board of Equalization. They did not know about the -- 18 all -- about 10,000 of the -- of the IRS lien for 19 $30,000. They did not know about EDD's lien. They did 20 not know about the $7,600 judgment against the business 21 that they would have to take over. They did not know 22 that there was a $27,000 lawsuit that had accrued prior 23 to their coming into this contract. 24 They couldn't read Mr. Chin's delight in 25 getting rid of this business and giving it to them. 26 Under the California juris prudence third fraud 27 and deceit. Under the Code of Civil Procedure, quote, 28 "Proof of fraud constitutes an exception to the general 14 1 rule excluding extrinsic evidence. Parol evidence is 2 admissible to prove fraud in the inducement, even though 3 the contract recites that all conditions and 4 representations are embodied therein. 5 Fraud is -- evidence of fraud is admissible, 6 quote, "because it does not go to contradict the terms 7 of the parties, but to show the purported instrument has 8 no legal effect. 9 We have demonstrated in our opening brief 10 considerable evidence of fraud. And that has not been 11 refuted by Tax Counsel. In fact, there has been nothing 12 stated by any counsel on -- with regards to the 13 obligation that is allegedly due that addresses the 14 fraud. 15 Yet fraud is the reason to justify the 16 contract's termination and that was never refuted. And 17 Adams gained nothing in this rescinded transaction. 18 If the Board is to conclude that the Adams and 19 ISSC owe money at all, then the Board is the one and 20 only party to have benefited from this seller's fraud 21 and the Adams will be the one and only party having to 22 pay for it. 23 Thank you. 24 MS. YEE: Thank you very much. Questions or 25 comments, Members? 26 MS. STEEL: Question. 27 MS. YEE: Ms. Steel, please. 28 MS. STEEL: The taxpayer made a down-payment 15 1 or, you know, some of the payments for over $10,000. 2 Did you -- did he get any refund from the seller? 3 MR. SCHARLACH: The 10 -- the sum paid over 4 $10,000 was an effort to keep the business going, to 5 keep it alive as it was being transferred into the hands 6 of the Adams. There was a -- the letters demonstrate, 7 Exhibit 6, particularly, that this was a loan by the 8 seller that would be deducted from the purchase price or 9 simply reimbursed outright. The question is, was 10 that -- did that ever occur? No, Mr. Chin never did pay 11 it back. Was there an expectation by both parties that 12 it would be paid back? Yes. 13 Does that mean that -- that this was an 14 assumption of liability? Absolutely not. 15 MS. STEEL: So you never -- when any e-mails -- 16 it seems like you want to terminate -- cancel it to 17 buying that business that went out the e-mail, so 18 there's any request that, you know, because of I'm 19 canceling this sales -- I mean, buying this business so, 20 you know, I want to get refund. Anything like that or, 21 you know, never went through those? 22 MR. SCHARLACH: No, there -- if I understand 23 the question properly, there was no indication of any 24 expectation that my clients would be assuming any debt. 25 MS. STEEL: But your taxpayer started the 26 business on August 15 as soon as the paper was signed. 27 MR. SCHARLACH: Well, no, and that is our 28 point, Ms. Steel. What we tried to show is that there 16 1 was a contract for sale, which does not necessarily mean 2 that the business was actually transferred. 3 MS. STEEL: The business was never -- 4 MR. SCHARLACH: It was never consummated. All 5 of those things that remained to be done by -- by 6 Mr. Chin, were never -- were never done. And so we 7 have -- I think one of the problems is we're taking a 8 look at the individual trees instead of the forest here. 9 We have to take a look at the big picture. And the big 10 picture was my client saw an ad to take over a business. 11 They wanted to move their family out of the Los Angeles 12 area into the area of Clovis and Fresno, where schools 13 were substantially better, the crime rate was a lot 14 lower. 15 So they came up here on the 13th. And they -- 16 late that afternoon they were presented an agreement and 17 they -- they signed it and then they went back to pick 18 up the rest of their family. 19 They signed an agreement to purchase. They did 20 not purchase the company. The company's purchase was 21 contingent upon all those things that are set forth in 22 the agreement. There are four pages of things Mr. Chin 23 was supposed to do. There were 15 paragraphs of -- one 24 by one he was supposed to present to the Adams. He 25 didn't do it. 26 And as the Adams moved in and they started 27 taking over the business and they started to learn the 28 business from Mr. Chin, who remained there and he was 17 1 showing them ropes, introducing them to the clients, the 2 Adams discovered that what they were getting into was 3 far, far deeper than what they had anticipated. What 4 they found out was that once they had filed the -- the 5 name change that people were coming out of the woodwork 6 looking for money. And those people were elements of 7 the State and Federal government that they had no 8 knowledge of at all. 9 And it was based on that that they decided, "We 10 can't go through with this. This isn't what we 11 bargained for." 12 So they terminated the contract to buy the 13 business. Had they bought it at that time? No, that's 14 what I was trying to explain, was that there was a 15 contingency for this, and they didn't meet it. 16 MS. STEEL: Okay. I have a couple 17 questions -- 18 MR. SCHARLACH: No title passed. 19 MS. STEEL: -- to the Department. 20 MS. YEE: Yes, please. 21 MS. STEEL: The -- you just said that the buyer 22 paid accrued vacation, you know, for employees. Is that 23 include for $10,000 that they made the down-payment? 24 MR. HUXSOLL: Yes, that's included in the 25 $10,000. That's in the -- on the cover sheet of Exhibit 26 4, or the first page of Exhibit 4 breaks down the 27 liabilities assumed. 28 MS. STEEL: There is a dual liability because 18 1 seller and buyer. Seller actually owes this taxes, so 2 are we going after the seller? 3 MR. HUXSOLL: We are continuing to pursue all 4 avenues against the seller. 5 MS. STEEL: So did we get any payments from 6 them or -- 7 MR. HUXSOLL: We had payments totaling approx 8 -- between $2,000 and $3,000 and we are continuing to 9 attempt to collect. 10 MS. STEEL: From the seller? 11 MR. HUXSOLL: From the seller. 12 MS. STEEL: Thank you. 13 MS. YEE: Okay. Ms. Mandel. 14 MS. MANDEL: No, I was just going to help -- 15 MR. LEONARD: Question. 16 MS. MANDEL: -- clarify, but I think she got 17 it -- 18 MS. YEE: All right. Thank you. Mr. Leonard. 19 MR. LEONARD: Mr. Huxsoll, I think you made a 20 reasonable case that there was a -- a functional 21 transfer of operation of the business, but I'm -- I'm 22 hung up on the purchase price. 23 While there -- while the agreement that was 24 never completely fulfilled said 40, the actual 25 out-of-pocket outlay was 10. Why aren't you pursuing 26 for 10,000 against the Adams? It seems -- it's always 27 been the actual number before. This is the first time 28 I've seen it that it was a -- a paper number. It was 19 1 never done. 2 MR. HUXSOLL: Because the law provides for the 3 purchase price and the purchase price in the contract 4 for the business is $40,000. 5 MR. LEONARD: But then that relates to the 6 taxpayer's argument that the contract was -- was never 7 fulfilled. 8 MR. HUXSOLL: The -- the contract itself called 9 for a down-payment followed by installment payments -- 10 MR. LEONARD: Right. 11 MR. HUXSOLL: -- to begin in March of 2008. 12 MR. LEONARD: But it called for other terms, 13 too, which were never adhered to. 14 And my point is I think -- I think functionally 15 they operated the business for a short period of time. 16 And it -- it's too bad they didn't have an escrow and 17 didn't wait, would have been a lot clearer on that. 18 But -- so I'm -- I'm -- I'm ready to give you guys that 19 one, but I'm not sure how you get to the number. 20 Particularly in this type of situation where the 21 number -- if -- if due diligence had really been done in 22 terms of an escrow, there wouldn't have been a $40,000 23 out-of-pocket purchase price because all of these other 24 liens and liabilities would have popped up and the value 25 of the business would have dropped to maybe a negative 26 number. 27 MR. TUCKER: Mr. Leonard, Robert Tucker on 28 behalf of the Legal Department -- in essence we look 20 1 at -- it's based on what would be analogous to the 2 accrual system, we look at the amount that was actually 3 set forth in the agreement. 4 If we only looked at the amount that was paid, 5 that would almost promote that -- not this -- not 6 petitioner, but other parties not to pay. And it would 7 promote failing to pay for their business, because 8 they -- they put out 10,000 -- 9 MR. LEONARD: I'm not buying that. If it was a 10 real contract of sale and there were installment 11 payments, by the time we got to this oral hearing we 12 would have known whether they completed their payments 13 or not. We don't have them that fast. 14 MR. TUCKER: Right. 15 MR. LEONARD: So at that -- I'm not buying 16 that. 17 MR. TUCKER: But in essence then it becomes a 18 civil matter between the parties. I mean -- 19 MR. LEONARD: It already is. 20 MR. TUCKER: Right. It's apparent that it is. 21 But here you -- 22 MR. LEONARD: In terms of our law the extent of 23 the liability of the purchaser is the extent of their 24 out-of-pocket costs. 25 MR. TUCKER: Well -- 26 MR. LEONARD: Or obligations. I mean if you're 27 saying Mr. Chin could sue them for -- for another 30,000 28 and win, I might go along with you, but I'm not seeing 21 1 any Court in the land that would grant that one at this 2 point in time. 3 MR. TUCKER: Except for the fact, Mr. Leonard, 4 that we're stuck by the -- the language of the statute 5 which says that the purchaser is required to withhold 6 from the purchase price. And here the purchase price 7 was stated to be $40,000. 8 And that's what we're faced with at this time. 9 MS. YEE: Regardless of what was paid. 10 MR. TUCKER: Regardless of what was paid. 11 MS. STEEL: But that transaction never 12 happened. That 40,000 was never paid. Only thing is up 13 to 10 -- a little over $10,000. That was the only 14 money. 15 MR. TUCKER: Ms. Steel, I agree, but there was 16 an agreement to pay the 40,000. There were problems 17 that occurred after that agreement was signed. But 18 initially the agreement was to pay $40,000 for the 19 purchase of the business. 20 MR. LEONARD: That -- I guess that's my point 21 is the contract, itself, seemed to allow for the 22 possibility of contingencies, i.e. other liens and 23 liabilities, which would have then lowered the purchase 24 price. 25 It's kind of in the language of almost all 26 asset purchase contracts; if everything you say is true, 27 I'm going to give you 40 grand. But if it's not true, 28 I'm not giving you 40 grand. 22 1 MR. TUCKER: Correct. 2 MR. LEONARD: The fact that they didn't even 3 pay Mr. Chin anything, they just simply paid other bills 4 of his to run the business argues for your argument that 5 they actually ran the business, but it -- it argues 6 against your point that there was a $40,000 purchase in 7 the works. 8 MR. TUCKER: I think our explanation, Mr. 9 Leonard, is based on the fact that the Legislature 10 created these statutes to ensure that the State is paid 11 the money so that -- 12 MR. LEONARD: Absolutely. 13 MR. TUCKER: -- a seller of a business can't 14 walk away and just leave the -- the taxes unpaid. 15 MR. LEONARD: But they also said the statute is 16 the extent of the -- of the successor's -- 17 MR. TUCKER: Right. 18 MR. LEONARD: -- liability, which is usually 19 purchase price, but I think when we get to oral hearings 20 like this is -- is what -- what from the purchaser's 21 point of view was the purchase price, which for their 22 point of view it's their out-of-pocket costs and their 23 ongoing obligations or liabilities. 24 And all I'm seeing is 10 grand. I'm not seeing 25 anything else. 26 MR. HANKS: I think another element to this, 27 Mr. Leonard, is -- is we look at the agreement both in 28 accordance with the -- the regulation that Mr. Tucker is 23 1 quoting, but then also it relieves us of trying to 2 identify when these payments were made, over what time 3 period they were made. The contract of this sale 4 specifies that installment payments are going to be made 5 over time. 6 We don't want to be in a position of having to 7 itemize and account for each of those -- those payments. 8 So I think just from the standpoint of -- of looking at 9 the -- the sales agreement and identifying the value -- 10 the stated value of -- of the sale of the business, it 11 makes it administratively easier for the Department to 12 establish that -- that value. 13 MR. LEONARD: It certainly is, but I -- I -- I 14 wish my memory were better. I thought we had some cases 15 where the paper said 40 grand but there was a 16 gentleman's agreement that they were going to pay 80 17 grand for the business, and you guys found that out and 18 alleged that was the real liability. Because there were 19 other evidence outside the purchase agreement. 20 So you do look behind the contract, itself. 21 MR. HANKS: Well, if there is a promise to pay 22 an amount that's in excess of -- of what's identified in 23 the contract, we would look at that. But we'd have to 24 have that documented. 25 MR. LEONARD: Right. Sure. 26 MR. HANKS: That would need to be documented. 27 MR. LEONARD: Well, here's the other direction, 28 and it is documented. 24 1 MR. HANKS: See, in this case, though, we 2 don't -- we don't know what amounts were -- were paid 3 possibly in addition to this $10,000. We just have a -- 4 a sales -- 5 MR. LEONARD: That's a fair question. 6 MR. HANKS: We just have a sales agreement 7 identifying the value of -- of the assets whole. 8 MR. LEONARD: Can -- can that be determined? 9 Can you determine how much the Adams did pay for either 10 Mr. Chin's liabilities or direct purchase to him? 11 I agree you're relying on their testimony, 12 which I -- 13 MR. HANKS: Right. 14 MR. LEONARD: -- I accept as true. But if you 15 want to -- 16 MR. HANKS: No, I'm not -- 17 MR. LEONARD: Do you want to check further? 18 MR. HANKS: Yeah, no, I'm not suggesting that -- that 19 we look further to see what amounts were paid. 20 MR. LEONARD: Oh, I thought you did. I 21 thought -- 22 MR. HANKS: No, I'm just saying 23 administratively it's -- it's difficult for the 24 Department to do that because oftentimes these -- these 25 payments of course extend into -- to many months, if not 26 years. 27 Administratively, it would be difficult for us 28 to account for all of these payments. So that's -- 25 1 that's why it's -- it's straightforward for the 2 Department to follow the regulation, identify what the 3 promise to pay was, what -- what the contracted price 4 was, and use that -- that stated value. 5 MR. LEONARD: That's why you three are here, to 6 do the difficult ones. 7 MS. STEEL: One more question. 8 MS. YEE: Yes, Ms. Steel. 9 MS. STEEL: To the Department, that seems like 10 seller's making some payments. Did he make some payment 11 plans to fulfill that -- his liability here? 12 Seems like you say you already got paid a few 13 thousand dollars. 14 MR. HUXSOLL: I believe we're trying to 15 continue to collect but the outlook is not promising for 16 getting any more money from the -- 17 MS. STEEL: So this tax amount is not the right 18 amount then because we already got paid? 19 MR. HUXSOLL: No, this takes into account -- 20 MR. LEONARD: He already took it -- 21 MR. HUXSOLL: This is -- 22 MS. STEEL: They already took in account -- 23 MR. HUXSOLL: There has been an adjustment for 24 the amount that has been paid by the predecessor. 25 MS. STEEL: Okay. Third question is that seems 26 like Mr. Chin already sold his telephone numbers, that's 27 very important for their business, to other third party. 28 So is this mean that we're going after that 26 1 third person, too? For successor's liability. 2 He just sold the telephone numbers to another person. 3 He got his telephone number back from Ms. Adams and then 4 he sold it to another person. 5 MR. HUXSOLL: We don't have all the details of 6 the transaction between Mr. Chin and that -- he 7 competitor of Petitioners. 8 MS. STEEL: If you don't have it how can I have 9 it? That's so odd because I got all the information 10 from you. 11 MR. HUXSOLL: We're aware of the sale -- 12 MS. STEEL: -- here. 13 MR. HUXSOLL: -- of the telephone number, but 14 nothing beyond -- 15 MS. STEEL: That's what I'm saying. So if they 16 sold the business, that this business rely on too 17 heavily on telephone numbers and the list of the names. 18 So if they sold the numbers, then that's another party 19 that who is responsible for this taxes, if you are going 20 after Mr. Adams. 21 MS. MANDEL: She's wondering -- 22 MS. STEEL: That's what -- 23 MS. MANDEL: I'm sorry, Ms. Steel. She's 24 asking you whether you have pursued other possible 25 successors to Mr. Chin's business because of the 26 information in this case Mr. Chin has taken his -- what 27 appears to be a business asset and perhaps a prime 28 business asset -- she's saying it's a telephone 27 1 business, and given the phone number. 2 She was -- isn't that what you're asking him -- 3 MS. STEEL: Yeah. 4 MS. MANDEL: -- have they pursued anyone else 5 for successor? 6 MR. HUXSOLL: We have not. 7 MR. HANKS: No. No. 8 MS. STEEL: Thank you. 9 MS. YEE: Thank you. 10 Mr. Horton. 11 MR. HORTON: Madam Chair, just questions of 12 clarification. 13 When do you say the sale was unwind? 14 MR. SCHARLACH: It was unwound by oral 15 agreement in late September, and by written agreement 16 by -- 17 MR. HORTON: September of 2007? 18 MR. SCHARLACH: Yeah. Could you comment on 19 that? Was it October 7, the letter? 20 MR. ADAMS: October 1st, I believe. 21 MR. SCHARLACH: October 1st was a written 22 unwinding. 23 MR. HUXSOLL: I believe it may have been 24 October 12. 25 MR. SCHARLACH: Yeah, Greg's -- Greg's letter 26 of October -- I'm sorry, Mr. Chin's letter of October 27 1st, which is Exhibit 6, tries to renegotiate the terms 28 of the agreement, sets forth clarifications as to how 28 1 the $10,000 -- I think this is the one that actually -- 2 yeah, how the $10,000 would be repaid. 3 So I -- we would put the date as -- the written 4 of it as October 1st and October 12 is the response from 5 Jim Adams. 6 MS. STEEL: Now, September 30th is the one that 7 sent the e-mail out that wants to terminate the 8 agreement there. 9 MR. SCHARLACH: Thank you for that. 10 MR. HORTON: Okay. 11 MS. STEEL: So after August 15 that you took 12 over that exactly when did you find out there is so many 13 liabilities add up to over $90,000? 14 MS. ADAMS: Starting with September 11th. 15 MS. STEEL: So that's why right after -- but 16 you send the e-mail out on September 30th to the seller? 17 MS. ADAMS: Yeah. 18 MR. ADAMS: We knew about the IRS. 19 MS. ADAMS: It was -- we were waiting for the 20 response letter from the Internal Revenue Service where 21 he was going to have the $23,000 readjusted and we 22 received that letter -- 23 MR. SCHARLACH: Yeah. Let me clarify. The 24 Adams believed that they would have a $15,000 obligation 25 to the IRS and no more. They subsequently learned it 26 was 20 from Mr. Chin, and then the IRS was going to be 27 considering whether or not to reduce it to 15. The 28 agreement was that $15,000 would be the maximum amount 29 1 that the Adams would owe the -- the Adams would step in 2 and pay the IRS on behalf of Mr. Chin. 3 Mr. Chin never did make up the difference with 4 the IRS and that was one of the factors that led to them 5 terminating the agreement to sell. 6 MS. ADAMS: And -- and the IRS lien per our 7 contract had to be per his words less than $20,000. And 8 that's what were doing our due diligence, we were 9 waiting for the letter of redetermination, which we -- 10 he received and he gave to us on September 11th. 11 And during that week we also received the 12 letter from the one lady who had the judgment for 13 $7,0000. We received the notice from EDD and another 14 notice from the Internal Revenue Service for another 15 notice to intent to levy of $6900. 16 MR. SCHARLACH: When did you first find out 17 that money was owed to the State of California? 18 MS. ADAMS: It was September 9th when Mr. Paul 19 Doveaue (phonetic) called. He did not release to me the 20 amount and he told me word for word that Mr. Chin has 21 called him and turn us in for operating a business using 22 the resale license of Mr. Chin. Those were his word to 23 me. And I told him that's not true. Internet Support 24 and Services Corporation has had a resale license, we 25 open it for completely different reasons. We've had a 26 resale license since -- for other reasons in the past. 27 And I asked him what -- first of all I told him 28 that there's no contract because at the time we were 30 1 already -- discuss the termination. He said he received 2 the contract from Mr. Chin and, yes, there was -- the 3 business was purchased. And I said, well, I don't know 4 about any amounts, what amount? 5 He told me that information was confidential, 6 he was going to take all my information and submit it to 7 Sacramento and let them decide. And it was actually 8 November 6th the first day that I found out about the 9 State Board of Equalization lien from a letter that I 10 received from the State Board of Equalization. And 11 that's the first time that we found out about the 12 $25,000 amount. I have all the correspondence. 13 MS. STEEL: When did you move from that 14 location to another and when did you change the 15 telephone number? 16 MS. ADAMS: End of September. It was actually 17 September 26th we got the keys and we knew -- 18 MS. STEEL: So before you found out that 19 there's more liabilities? 20 MS. ADAMS: Yes. At -- at the time that we 21 moved, we knew about the IRS 23,000, which we knew from 22 before, which was supposed to be reduced. It was still 23 at 23. We found out about the 6,000. We found out 24 about 7,000 judgment. And then we also found out about 25 the EDD. The Franchise Tax Board -- 26 MS. STEEL: So, if you want to cancel the 27 sales, why you didn't ask for a refund? 28 MS. ADAMS: We contacted an attorney. We -- 31 1 the reason why we didn't was that his list of liens, 2 which are -- as of today all the liens are still there. 3 I went to the Fresno County Recorders office. He also 4 has Franchise Tax Board liens in Tulare County -- 5 they're all in place, they're all the same amount. 6 Not to mention that the corporation is still 7 listed under his name as of today -- 8 MS. STEEL: So you called the Board of 9 Equalization that change the name to your name and it's 10 still under your name. So why you did not change -- 11 MS. ADAMS: It's not under our name. We 12 have -- I have called the State Board of Equalization to 13 change my address in hopes that we were going to 14 purchase the business. He had -- per our contract he 15 had 90 days from the date of closing -- it's actually 16 the first paragraph on -- it's the first page, the 17 bottom paragraph, he had 90 days to actually file an 18 amendment of his Articles of Incorporation and transfer 19 the name. That was part of the goodwill. He never did 20 so. 21 Our name is actually Internet Support and 22 Services Corporation doing. 23 As central Valley Retail and Securities 24 Division. 25 MS. STEEL: It's under different name and 26 different address and different telephone number? 27 MS. ADAMS: That's correct. 28 MS. STEEL: Okay. Thank you. 32 1 MS. ADAMS: And everything has -- yeah. 2 MS. YEE: Thank you, Ms. Steel. 3 Other questions, Members? 4 MR. HORTON: So what's the status of the 5 business now? 6 MR. SCHARLACH: Are you talking about the 7 seller's business, Mr. Horton, or -- or ISSC? 8 MR. HORTON: Both. 9 MS. ADAMS: As far as Mr. Chin I have no idea. 10 As far as our business, Internet Support and Services 11 Corporation has been incorporated over a decade ago. 12 We're a technology company. We're -- we started a new 13 business and we're -- 14 MR. SCHARLACH: Is -- is the business you're 15 doing now the same or similar to the business that Mr. 16 Chin was going to sell you? 17 MS. ADAMS: Well, it has some similarities. We 18 do have our own -- we're a technology company. We dealt 19 with computers and acknowledging the past. We're 20 dealing with computers in Central California now. 21 MR. HORTON: In the asset purchase agreement, 22 did you receive access to his customers? 23 MS. ADAMS: Nope. As you could see from all 24 the documentation, inventory list, customer list, they 25 were both blank. We were hoping to when we were buying 26 the business because that was a benefit. We received no 27 customer list. We received no financial statements. We 28 received no inventory list. 33 1 MR. HORTON: How long did you operate the 2 business? 3 MS. ADAMS: We managed the business for -- I 4 would say till the end -- about the end of September, 5 till we -- 6 MR. HORTON: So you managed the business about 7 a month? 8 MS. ADAMS: Yeah. 9 MR. HORTON: And then what happened? Just 10 closed the doors, walked away? 11 MS. ADAMS: Well, that was his business that we 12 managed. We had our own corporation and our 13 corporation, which was a -- we did service contract, I 14 guess, accounting, point of sale system. That was our 15 background. We opened our own business. 16 MR. HORTON: During that month did you manage 17 the Accounts Receivables, as well? 18 MS. ADAMS: Not -- no, did not have access. 19 His computer was broken. I guess he used Quick Books 20 and for some reason he had an Office Manager who stole 21 his -- 22 MR. ADAMS: Changed passwords. 23 MS. ADAMS: -- changed passwords. We couldn't 24 access any of that. He never -- he said -- he told us 25 he could not get into any of his Quick Books. I had -- 26 I have my own set of books. No, there's no association 27 of any of the accounting or anything else. Never 28 managed any of Mr. Chin's books. I have never seen any 34 1 of his financials -- statements. 2 MR. HORTON: So -- 3 MS. ADAMS: We were waiting for the financial 4 statements in order to -- 5 MR. HORTON: What are you doing to recover? 6 MS. ADAMS: We are -- 7 MR. HORTON: Are you filing a lawsuit against 8 Mr. Chin? 9 MS. ADAMS: The reason why we did not do that 10 per our -- per an attorney recommendation is the fact 11 that by the time we spend more money on attorney fees 12 and Court we're never going to get anywhere because Mr. 13 Chin owes by this time Internal Revenue Service -- I'm 14 not sure how many liens he's got as of today -- 15 Franchise Tax Board, EDD -- there are more liens after 16 September. He also has a judgment from -- $7,000. 17 Another judgment for $26,000 and as last I know, when he 18 moved to Tulare County I know there's several liens 19 filed -- I know the Franchise Tax Board filed liens 20 against him in Tulare County. 21 I do not -- I don't have any access to the 22 Court down there so I don't know what lawsuits. 23 He also -- customers, so I don't know. So by the time 24 we would recuperate $10,000 we would probably be 25 spending a lot more money and -- instead of -- 26 MR. SCHARLACH: If I -- 27 MR. HORTON: Exhibit -- in Exhibit 6, page 1 of 28 1 seems to imply that there's an intent to renegotiate 35 1 the sale. It starts out by, "You asked for my opinion 2 of a new buy-sell agreement between us," and when you 3 read further he seems to be saying, no, the agreement 4 that we have is the agreement that should be in place 5 and I don't think we should change it. 6 Was there anything -- did you respond to this? 7 MS. ADAMS: Sure. The agreement we had could 8 not continue. However, we have tried and it was brought 9 up at our Appeals Conference in Fresno, the attorney, 10 Mr. Kammenson, who put the contract together, Mr. Chin 11 and I met -- actually was Halloween night, October 31st, 12 to try to come to some sort of conclusion considering 13 all the debts and liability and so forth because -- 14 MR. HORTON: I mean, it seems -- excuse me for 15 interrupting. 16 MS. ADAMS: We -- we tried. He was not willing 17 to. He said, "I want 40,000. I'm going to call the 18 other company. I'm going to sell my phone number. And 19 that's all I want. I want 40,000, nothing to do with 20 anything." And he stormed out of there. And the next 21 thing we know, the phone number's published in the phone 22 book with the Blackstone address and the other company. 23 So -- I'm sorry, we -- that's -- 24 MR. HORTON: I mean, it seems to me that you 25 had a negotiated agreement. You attempted to 26 renegotiate the agreement to Mr. Leonard's point, but 27 there wasn't a concurrence on the part of both buyer and 28 seller to renegotiate that amount based on the new 36 1 information that you received relative to the value of 2 the company. 3 Did that ever take place? Was there -- 4 MS. ADAMS: At the time of this letter we were 5 aware of all the Federal tax liens as of that point 6 because I know there's some others after that. EDD and 7 the $7,000 judgment. 8 MR. HORTON: Is there any language in the 9 agreement that allows to adjust the sales price stat for 10 this -- any subsequent discovery of -- 11 MS. ADAMS: No. 12 MR. HORTON: -- liability, debt, inappropriate 13 valuation of assets? 14 MR. ADAMS: Did not see any. 15 MR. HORTON: Nothing in there? 16 MR. SCHARLACH: May I respond to that, Mr. 17 Horton? 18 MR. HORTON: Of course. 19 MS. YEE: Please. 20 MR. SCHARLACH: The -- that is correct, there 21 is no language in that. However, this -- the question 22 suggests a disregard of the requirements of the contract 23 that the parties express their positions truthfully, and 24 the contract is quite clear that the contract expressed 25 all of the liabilities, the debts, and all of the 26 obligations of Mr. Chin. And further said that the 27 Adams would be assuming none of it and that they would 28 be paying up to $15,000 of the IRS lien. And -- 37 1 MR. HORTON: It's more of a civil -- 2 MR. SCHARLACH: Exactly. But I do not believe 3 that -- that the convenience of the administrative 4 process trumps the civil code. And the civil code makes 5 it clear that if there has been a fraud in the 6 inducement to enter into an agreement, there is no 7 agreement. 8 Everything that we hear from Tax Counsel is 9 based upon the -- not only the agreement existing, but 10 that it was consummated. And to believe that to be the 11 case simply disregards that they entered into the 12 agreement and fraud -- based upon fraud in the 13 inducement to do so. 14 MR. HORTON: What do you think the Courts would 15 say about the funds that have already been paid, the 16 $10,000 plus one way or another, and what do you think 17 they would say about Mr. Chin's argument that you still 18 owe him the balance of $40,000? I mean I would 19 speculate that he would put forth that argument that we 20 have an agreement, you owe me $40,000, you didn't 21 exercise due diligence. It's not my fault. 22 A transaction is a transaction. It's required 23 to be in writing. 24 MR. SCHARLACH: With regards to the $10,000, 25 the evidence is stronger -- and we think very strong, 26 and Mr. Chin had the expectation of paying that back 27 either in -- simply paying it back as a reduction in his 28 commissions or as a lessening of the purchase price. 38 1 And that's Exhibit 6. 2 MR. HORTON: In Exhibit 6 it says that he 3 refuses to reduce his commission. Commission, I agreed 4 to a sales commission of 37.5 profit, which is 25 5 percent less than I originally asked for. 6 MR. SCHARLACH: Yeah, let me -- 7 MR. HORTON: Of -- we need to come to an 8 agreement on this as soon as possible. So it -- he sort 9 of implies that he's willing to negotiate the selling 10 price, and that there may be possibly some evidence 11 somewhere that the selling price was not final and that 12 there was subsequent negotiations where the parties 13 agreed. 14 The only evidence that we have is that the 15 parties have agreed to a $40,000 sales transaction. I 16 think I'm asking, this seems to imply that it was open 17 for -- the sales price was open for negotiation. And if 18 there is some intrusive quantitative -- something that 19 says that that occurred, that at some point prior to you 20 walking away from the business, abandoning the phone 21 number, you've been there -- you know, that -- that 22 something happened to renegotiate the sale, I mean the 23 other party would argue that you were there, you 24 operated the business, you actually walked away with my 25 goodwill, you used my phone number -- that in and of 26 itself was the true value of the business and you've had 27 access to my Accounts Receivables, you have access to 28 all this -- I mean they would argue the otherwise and 39 1 they would say you owe them $40,000 for the balance 2 thereof. 3 I'm just trying to find if there's something 4 that we can -- 5 MR. SCHARLACH: Sorry. Go ahead and I'll 6 respond. 7 MS. ADAMS: I was going to say, number one, it 8 was the Internal Revenue Service and -- who basically -- 9 and the EDD who I personally had conversations with who 10 advised me that the Internal Revenue Service said you 11 cannot purchase this business asset because of the 12 liens, because we own the assets. He -- we have to 13 receive either payment or something in order to clear 14 the assets. You cannot purchase this business. 15 That was -- 16 MR. HORTON: You can purchase it. I mean, 17 you -- 18 MS. ADAMS: Yeah, but our -- 19 MR. HORTON: -- but the purchase is subject to 20 the liens. 21 MS. ADAMS: Right. But our contract -- 22 MR. HORTON: And it happens. 23 MS. ADAMS: -- it was very straightforward, 24 free and clear all. And the word "all" is in there. 25 So -- 26 MR. HORTON: That brings out a point. To 27 staff, is there language in the original contract that 28 says free and clear? 40 1 MS. ADAMS: Yes. Every -- several places. 2 MR. HORTON: That the transaction -- the sale 3 is subject to the assets being free and clear of all 4 liens, and encumbrance? 5 MR. SCHARLACH: It's 1.3.2. That's one of the 6 places. It says, "ISSC shall have no obligation with 7 respect to any obligations of CVBS arising prior to the 8 closing date." 9 MR. HORTON: After you look at that and read 10 that, and see if that's a condition subsequent that 11 would indicate a different valuation or -- 12 MS. ADAMS: It's page 7, Section number 7. 13 There is satisfaction due diligence material vers -- 14 ISSC shall be satisfied as sole -- this is basically a 15 closing condition of ISSC. ISSC's obligation to 16 purchase the assets are subject to fulfillment on or 17 prior to a closing date of all the conditions set forth 18 in this Section 7. Satisfactory due diligence material 19 adverse change -- change, ISSC shall be satisfied in its 20 sole discretion that there was presentation warranties 21 made by CVBS in Section 4, above are true or correct as 22 of the closing date. B, that any matters included in 23 this schedule which ISSC deems to be unacceptable which 24 have been specified in writing to CVBS have been 25 remedied to ISSC's satisfaction and, C, with a result of 26 its business, technical, legal and financial review of 27 the books, records, agreements and other legal documents 28 and business organization of CVBS. 41 1 7.2, consents, approvals and waivers. CVBS and 2 ISSC shall have obtained in a manner satisfactory to 3 ISSC and its counsel any and all approvals, consents, 4 permits and waivers and made all filings necessary or 5 appropriate for the sale and transfer of the assets 6 under this agreement. 7 7.3, covenants. All covenants, agreements and 8 condition contained in this agreement to be performed by 9 CVBS on or prior the closing date shall be performed or 10 complied with in all respects. 11 7.4, precedence -- 12 MR. HORTON: Staff, are you reading along with 13 us? 14 MS. YEE: Okay. Yeah, let's -- so this 15 particular section. 16 MS. ADAMS: And basically the last part is tax 17 lien, the amount of Federal tax lien to be paid to cause 18 the lien to be released is known to ISSC and does not 19 exceed $20,000. 20 And as far as they're free and clear, that 21 is -- 22 MR. HORTON: The threshold is $20,000? 23 MS. ADAMS: Right here, Section 4, Title of 24 assets. Section 4.3.1 says, "Good title, CVBS has or 25 shall have at the closing good and marketable title in 26 and to all of the assets, including any patents" and so 27 forth. And all assets and such are not subject to any 28 mortgages (inaudible) lien except as otherwise set forth 42 1 in paragraph 4.9. And that includes the only one known 2 to us, was the Federal tax lien, which we knew was 3 $23,000, which was supposed to be less than 20, and we 4 were going to pay 15 of it straight to the IRS, or 5 whatever was -- 6 MR. HORTON: Staff, I mean on the surface, 7 without reading it and studying it myself, I'll rely on 8 you for that -- it seems to be a term that sets value or 9 establishes value or a condition of value, condition of 10 sales price, sales price shall be subject to free and 11 clear liens -- theoretically that means that the liens 12 are there, the sales price is sort of subject to it. 13 Or would you interpret that that the sales 14 price will remain the same and then they would 15 subsequently be able to deduct that from the sales price 16 if in fact a lien was discovered at some point? Or 17 would it be an adjustment to sales price? 18 MR. HUXSOLL: We would interpret that as the 19 latter, that being that the -- 20 MR. HORTON: So you don't see that as a 21 valuation? 22 MR. HUXSOLL: No. 23 MR. HORTON: How interesting. 24 MR. SCHARLACH: Mr. Horton, 1.3.2, no 25 assumption of liabilities, this agreement does not 26 transfer, ISC does not assume, and ISC expressly 27 disclaims any and all liabilities, costs, debts, claims 28 and obligations of CVBS relating to the assets or 43 1 otherwise. ISSC shall have no obligation with respect 2 to any obligations of CVBS arising prior to the closing 3 date. 4 And we go to what the intent of the buyers were 5 here. And if there was no meeting of the minds, 6 there -- there is no agreement. 7 And, once again, we -- 8 MR. HORTON: I mean it appears that there was 9 a meeting of the minds. I mean, you've got a contract. 10 You're there. You operate it. You had access to 11 something, customers for at least a period of time. It 12 looks to be maybe before you decided to walk. So -- 13 MR. SCHARLACH: Mr. Horton, the -- when I refer 14 to meeting of the minds, I -- I wasn't clear. The 15 Adams, in the Adams mindset they're acquiring a 16 business. In Mr. Chin's mindset he was unloading 17 $70,000 of liability. That's not a meeting of the 18 minds. 19 MR. HORTON: Yeah, that's fraud. That's all 20 the other things that happens in Civil Court. 21 Maybe you can share with me your thoughts 22 relative to establishing the sales price. That possibly 23 there is some intrusive evidence that says or somewhere 24 in the document that says that the sales price is 25 contingent upon this occurring, and if this doesn't 26 occur there's an implication that the sales price would 27 be adjusted in order to address that. 28 MR. SCHARLACH: Yes. 44 1 MR. HORTON: And I tell you, I don't 2 necessarily see it, but I'm hoping that you can shed 3 some light on it. 4 MR. SCHARLACH: It is not -- in the asset 5 purchase agreement there is an additional writing 6 that -- dated October 1st from Mr. Chin, which is 7 Exhibit 6, which says that the sales price -- "per my 8 Accounts Payable paid by ISSC." This is the $10,000. 9 "After my review of them, I would make the choice," this 10 is Chin talking, "as to which ones you would pay. You 11 can use my earned (unpaid commissions) to do this or 12 adjust the final balance." 13 So this speaks to your question and it says 14 that Mr. Chin -- 15 MR. HORTON: (inaudible). 16 MR. SCHARLACH: -- was willing to adjust -- 17 MR. HORTON: Unfortunately, it doesn't. 18 MR. SCHARLACH: -- the final -- 19 MR. HORTON: All right. Thank you, Madam 20 Chair. 21 MS. YEE: Thank you, Mr. Horton. 22 I guess -- I want to see if I can kind of bring 23 some focus back to this. And that is really with -- 24 MR. HORTON: You can try. 25 MS. YEE: -- an emphasis and a focus on the 26 contract, itself. And I guess this is a question to 27 either Mr. Levine or to the Department. Is there ever a 28 case where the rescission of an agreement actually 45 1 results in the successor liability being extinguished? 2 MR. LEVINE: No. I thought -- we've been -- I 3 think we're going off subject by focusing on all these 4 elements. There's a critical date here that's been 5 overlooked or -- it's the closing date. All these 6 obligations were required -- I don't think the 7 Department is going to dispute the Petitioners here got 8 a real bad deal. And -- but the critical date is the 9 closing date. 10 Before the -- before Petitioner -- Petitioner 11 could have avoided the contract because the conditions 12 weren't met. Any time up to the closing date they could 13 have walked away -- it wouldn't mean they wouldn't be 14 sued, but they would have won. 15 Once that closing date passed then we're in 16 breach of contract territory. The contract was 17 affected, the deal was closed, the sale occurred. And 18 once that occurred all these other things are breach of 19 contract between the parties. 20 The liability under 6811 and 6812 is set at the 21 date of purchase. We don't look at what's paid later, 22 and I assure you that if it were only because of the 23 Department's administrative different problems we would 24 ignore that. That's not the reason. 25 It is because the statute requires -- and I 26 don't think Mr. Hanks was saying that, he was just 27 saying that if you went that way it be difficult. But 28 it really is irrelevant because the law sets it at the 46 1 purchase date. And we do have cases -- that's the very 2 reason we got the Knudsen case, which was they were 3 arguing about the assumption of liabilities. We can't 4 even pay it because we don't have it. We just promise 5 to pay. It's another of our harsh collection laws. It 6 is what it is. It says that at the date of sale you 7 value the purchase price, and that sets the limit of 8 liability for successor liability. And here the 9 contract set the purchase price at $40,000. 10 After the closing date, if there was a breach, 11 and there appears to clearly have been breach of 12 contract, had it been worthwhile I don't doubt 13 Petitioners would have sued. They would have been 14 wasting their time, so it sounds like they got good 15 advise from their attorney. But I think they would have 16 won on breach of contract. 17 Whether it's fraud or whatever, the sale was 18 consummated, at least in Appeals' view, as of the 19 purchase -- as of the closing date in mid-August as 20 opposed to later on October when they tried to unwind 21 it. 22 But the -- the simple answer is, no, it's just 23 sales tax. Sales tax would be imposed on a taxable sale 24 at the -- on the date of -- as of the date of sale. If 25 the parties later rescinded it there's no rule for 26 allowance. There's return merchandise deduction that 27 may qualify. That's a statutory mechanism that's 28 basically equivalent to rescission, unwind. 47 1 We don't have that for successor liability. 2 You know, maybe we should, but we don't. 3 MS. MANDEL: Can I -- 4 MS. YEE: Ms. Mandel. 5 MS. MANDEL: The magic of computers. I -- I 6 pulled up the -- the -- actually, what I pulled up was 7 the background document for the annotation that 8 Petitioner's counsel cited, 495.0012, which is not a 9 successor liability but it's the other thing that, you 10 know, often happens when you buy a business, which is 11 the unreported tax on the unreported sale of fixtures 12 and equipment. 13 And the corporation was saying that there was 14 not a sale, even though they had entered into a purchase 15 agreement to sell the business that everybody signed. 16 The buyers went into possession immediately. The 17 seller's lease of the business premises would -- would 18 be assigned, so that suggests they hadn't yet done that. 19 The buyers would assume a loan. And the loan 20 had been made by some Savings and Loan. And they're 21 supposed to get business insurance, no down-payment. 22 The buyers went into possession right away. The lease 23 was assigned. The lessor did accept the assignment of 24 lease. 25 But the bank -- I'm sorry, the Savings and 26 Loan, would not agree to the assumption of the loan. 27 And there was no payments. And the Savings and Loan 28 ultimately foreclosed on it. And there was some civil 48 1 actions, and the Department said that there had been a 2 sale of the fixtures and equipment because of the 3 transfer and possession for the promise to pay. And I 4 think that's why they're pointing to it because it -- to 5 them it sounds a lot like this. 6 And the Department said, well, you know, until 7 you write off the bad debt, you know, there's a sale. 8 And the Hearing Officer -- you know, this was a -- you 9 know, it was like a petition -- concluded that there was 10 no sale, because of the condition -- the contract being 11 based on requiring the approval by the Savings and Loan. 12 And that the buyer had to assume the note. And since 13 the Savings and Loan said no, there was never any sale. 14 And I don't recall this one being discussed, 15 and I know there's a lot of discussion that, well, there 16 was a contract and there was a sale, but can you maybe 17 address why this isn't -- 18 MR. LEVINE: Well, I can point out an 19 irrelevancy. D & Rs aren't supposed to be annotated. I 20 would agree that the -- it's the same -- it is the same 21 concept, if a sale applied for sales tax purposes it -- 22 it applies for successor liability, and the reverse is 23 true, also. 24 I don't know if I agree with that analysis. If 25 the contract set a -- a closing date that was after 26 the -- after the date they terminated it and the 27 condition wasn't satisfied, then that would not have 28 been a sale. If the deal closed and there were still 49 1 conditions that were supposed to be satisfied, normally 2 that would be a sale. 3 Here where it's an extrinsic assumption of 4 liabilities, which is not what we have here, that is a 5 little bit different and maybe that would be a sale if 6 it was -- the sale was not going to occur until you 7 assumed -- formally assumed the liability, and that's 8 not uncommon for a contract to be written like that. In 9 fact, that's normally how it happens. When you move 10 into possession that starts triggering things because 11 normally transfer of possession is -- is the transfer of 12 title. But it's not always, and I -- I don't know if 13 it's this one. 14 And I recall one where there was a specific 15 management agreement. Here Petitioners allege that 16 there was -- that they were managing the business but 17 they did not have an agreement that bifurcated will 18 manage while we're trying to make the deal. And I've 19 seen that -- and those the sale doesn't occur until the 20 contract says it does. 21 MS. MANDEL: Thanks. 22 MR. HORTON: I mean, that's kind of where we're 23 trying to get to. We're asking the Petitioner, there's 24 some evidence that there is something in the contract 25 that ties to a sale. 26 MR. SCHARLACH: Well, the sale -- what is 27 unfortunate is that the contract was entered into barely 28 a day and a half before it was supposed to close. There 50 1 is no dispute what appears on the bottom of the contract 2 is that it wasn't even in existence until 2:20 p.m. the 3 day it was signed. And that it was signed a day and a 4 half prior to the time it was supposed to close. 5 By the operation of the parties, there could 6 have been no search for -- for diligence, no 7 verification until after the time it closed. And, you 8 know, there was -- really, I don't know that there was 9 any dispute that they -- the matter was left open until 10 it was closed. 11 The only ones that are -- are forcing the issue 12 as to the closed date is -- is Tax Counsel. But 13 certainly the actions of the parties indicate that it 14 was not their intention that it's all over, August 15, 15 sorry about that. Too late. That's not what happened 16 here. 17 Incidentally, the annotation I -- is also 18 brought to the Board's attention to show that there can 19 be a condition precedent to the close of a transaction 20 that occurs after the time the agreement to sell was 21 entered into. And that is what we have here. 22 Just as in that bakery annotation, an agreement 23 to sell was signed but there was no transaction closure. 24 There was no consummation because there was a failure of 25 condition precedent. In the bakery case that was 26 assumption of the loan. In this case the failure was 27 the disclosure of all of these things that were required 28 in the agreement. 51 1 MR. HORTON: To that -- to that point, define 2 the closure of this transaction, staff, anyway. 3 I mean, how did it close? Did -- I know escrow 4 didn't close so we probably wouldn't be here. 5 What defines the closing of the transaction? 6 At what point? Why are we saying this is the point in 7 which the transaction was closed? 8 MR. HUXSOLL: The contract provided for a 9 closing on August 15, 2007. It provided for a closure 10 date. And in furtherance of that Petitioner contacted 11 the Board, Petitioner was purchasing, among other 12 things, the business name of Central Valley Business 13 Systems, and they contacted the staff two days later to 14 change their dba to such a name. 15 Also consistent with that, on August 20th, the 16 seller, Mr. Chin, filled out a BOE form 65 informing 17 staff that he was closing out his seller's permit 18 because he had in fact sold the business five days 19 earlier to Petitioner for $40,000. 20 MR. HORTON: So the actions of the parties sort 21 of imply that there was a closing date? 22 MR. HUXSOLL: Yes. 23 MR. HORTON: And that was subsequent to this 24 Exhibit 6 dated October 1, 2007 where they are 25 attempting to renegotiate sale. 26 MR. SCHARLACH: I believe it was prior. 27 MR. HUXSOLL: Prior -- 28 MS. YEE: Yeah. August. 52 1 MR. HUXSOLL: It was prior to. 2 MR. HORTON: This one it says October. 3 MR. SCHARLACH: In addition to that, these are 4 all steps consistent with people that wanted to buy a 5 business. And recall that everything they did, we're 6 taking this over, these are the things that we've been 7 told we have to do, and they do them. And then they 8 find out, my God, what did we get ourselves into. 9 MS. YEE: Okay. Thank you. 10 Other questions or comments, Members? 11 Hearing none, is there a motion? 12 MR. HORTON: Move to take it under submission. 13 MS. YEE: Motion by Mr. Horton to take this 14 matter under submission. Is there a second? 15 MS. MANDEL: Second. 16 MS. YEE: Second by Ms. Mandel. 17 Without objection that motion carries. 18 Thank you very much. 19 MR. SCHARLACH: Members of the Board, thank you 20 for your time. 21 MS. YEE: Thank you. We will discuss your 22 matter later today. 23 ---oOo--- 24 25 26 27 28 53 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 January 26, 2010 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 54 13 pages constitute a complete and accurate transcription 14 of the shorthand writing. 15 16 Dated: February 19, 2010. 17 18 19 20 ____________________________ 21 BEVERLY D. TOMS 22 Hearing Reporter 23 24 25 26 27 28 54