1 BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION 2 450 N STREET 3 SACRAMENTO, CALIFORNIA 4 5 6 7 8 REPORTER'S TRANSCRIPT 9 MARCH 25, 2010 10 11 12 13 14 15 FINAL ACTIONS 16 17 18 19 20 21 22 23 REPORTED BY: JULI PRICE JACKSON 24 CSR NO. 5214 25 26 27 28 1 1 P R E S E N T 2 3 For The Board Betty Yee of Equalization: Chairwoman 4 5 Jerome E. Horton Vice-Chair 6 Barbara Alby 7 Acting Member 8 Michelle Steel Member 9 Marcy Jo Mandel 10 Appearing for John Chiang State Controller 11 (per Government Code Section 7.9) 12 Diane G. Olson 13 Chief, Board Proceedings Division 14 15 ---OOO--- 16 17 18 19 20 21 22 23 24 25 26 27 28 2 1 450 N STREET 2 SACRAMENTO, CALIFORNIA 3 MARCH 25, 2010 4 ---o0o--- 5 C8 KENNETH RICHARD MC LEOD 6 NO. 435025, 504922 (KH) 7 ---o0o--- 8 MS. YEE: Let's reconvene the meeting. We are 9 on the items taken under submission, Members. 10 Our first item is item C8, Kenneth Richard 11 McLeod. 12 Is there a motion? 13 MS. ALBY: Here's that one. 14 MR. HORTON: I move to adopt the staff 15 recommendation and to advise the taxpayer of the 16 Offers-In-Compromise process. 17 The logic behind it, Members, is that -- 18 MS. YEE: You speak into the microphone? 19 MR. HORTON: The logic behind it, Members, is 20 that there is just, you know, evidence by their own 21 testimony that there was a value well beyond the $25,000 22 and that the income tax returns provided for an income 23 for both he and his son beyond $25,000 a year, which is 24 the value is traditionally extrapolated in determining 25 the price. 26 Certainly that's gone down from ten times the 27 gross receipts, probably down to maybe four or five 28 times the gross receipts. 3 1 But in this particular case, even if we use one 2 time the gross receipts, you'd end up with a value 3 somewhere around $200,000 for the business. 4 The testimony was conflicting in the intention 5 to invest 150,000. One, it was personal. Two, it would 6 have stimulated the business and would have been what 7 the business would have needed in order to come back in 8 full strength -- presumably full strength to what was 9 previously recorded on the income tax returns. 10 But the empathy goes to the successor in having 11 to incur a liability of his father. I mean, it's a 12 personal relationship that gave a little bit of empathy, 13 but it also speaks to the ability -- the lack of arm's 14 length negotiations in determining the price because of 15 the relationship. 16 So, these things sort of concern me. 17 MS. YEE: Thank you, Mr. Horton. 18 We have the motion by Mr. Horton to adopt the 19 staff recommendation and to refer Petitioner to the 20 Offers-In-Compromise program. 21 Is there a second? 22 MS. MANDEL: Second. 23 MS. YEE: Second by Ms. Mandel. 24 Discussion? 25 MS. STEEL: I -- 26 MS. YEE: Ms. Steel? 27 MS. STEEL: -- I thought that how can father 28 gave all these liabilities to the son? 4 1 So, I think that the document itself says that, 2 but I don't think that meant to be there. So, I think 3 here for this case successor's liability has to be 4 $25,000, that sale of this pet emporium. 5 That's the way I interpret it, you know, when I 6 heard. 7 MS. YEE: Okay, thank you, Ms. Steel. 8 Ms. Alby, anything? 9 Okay. We have a motion by Mr. Horton, second 10 by Ms. Mandel. 11 Please call the roll. 12 MS. OLSON: Madam Chair? 13 MS. YEE: Let me pass on this one for a moment. 14 MS. OLSON: Ms. Alby? 15 MS. ALBY: No. 16 MS. OLSON: Ms. Steel? 17 MS. STEEL: No. 18 MS. OLSON: Mr. Horton? 19 MR. HORTON: Aye. 20 MS. OLSON: Ms. Mandel? 21 MS. MANDEL: Aye. 22 MS. OLSON: Madam Chair? 23 MS. YEE: I'll be an aye. 24 MS. OLSON: Motion carries. 25 ---o0o--- 26 27 28 5 1 C9a REBECCA ANN SCHERZ 2 NO. 415569 (CH) 3 C9b ERIC BRIAN SCHERZ 4 NO. 401795 (CH) 5 ---o0o--- 6 MS. OLSON: Our next item is C9a, Rebecca Ann 7 Scherz, C9b, Eric Brian Scherz. 8 MS. YEE: Okay. We are on item C9a, Rebecca 9 Ann Scherz and C9b, Eric Brian Scherz. 10 Could I have a motion, please? 11 MS. MANDEL: Move the staff recommendation. 12 MR. HORTON: Second. 13 MS. YEE: Motion by Ms. Mandel to adopt the 14 staff recommendation. 15 Second by Mr. Horton. 16 Discussion? 17 MS. STEEL: Possible we can abate the first 18 quarter of 2004, the late payment penalty only, because 19 their due date was April 30th. 20 Mr. Levine, that -- what day they filed it for 21 this tax? 22 Because the taxpayer signed it on April 16th, 23 but when did we receive that? Because due date is on 24 30th, right? 25 MR. LEVINE: It's not for failure to file the 26 return, they didn't pay. 27 The payment was made -- 28 MS. STEEL: The payment due date is 6 1 April 30th -- 2 MR. LEVINE: April 30th -- 3 MS. STEEL: -- right? 4 MR. LEVINE: -- that's correct. 5 MS. STEEL: When -- 6 MR. LEVINE: It wasn't paid by then. I believe 7 what happened is the successor did pay a successor 8 liability that I believe covered that quarter. And he 9 paid it because he had a successor liability. 10 He got off on the penalty because of the 11 regulation -- 12 MS. STEEL: Right. 13 MR. LEVINE: -- that says he -- that had 14 nothing to do with their agreement, it had to do with 15 his liability to the Board. 16 So, it was not paid on time, it wasn't -- 17 MS. STEEL: So, it's not -- 18 MR. LEVINE: -- filed on time. 19 MS. STEEL: -- paid on April 30th even it was 20 filed on time? 21 MR. LEVINE: The return was filed on time but 22 without the payment. 23 MS. STEEL: They thought that they didn't owe 24 anything because the buyer already paid all of the -- 25 MR. LEVINE: No, he hadn't already paid it. 26 That may be the reason why they didn't pay it with the 27 return, perhaps, because their agreement was that the 28 purchaser would pay the taxes. And he did. 7 1 But as far as we're concerned, the reason the 2 penalty was applied to the -- to the business is because 3 the tax was not paid by April 30th. 4 The return was filed on time. 5 MS. STEEL: But with good reason, though, 6 because buyer already paid it. So, they thought that 7 they didn't owe it. So, they -- that's why payment was 8 not included on the tax. 9 MR. LEVINE: The purchaser did not pay it 10 before April 30th. 11 MS. STEEL: I see. 12 MR. LEVINE: So, it was late. I don't know 13 when the purchaser paid it. 14 I believe that it was after the Board asserted 15 successor liability. 16 MS. STEEL: Okay. 17 MR. LEVINE: So, it was paid later. 18 That may be why -- that may be the very reason 19 why they didn't pay anything with the return. 20 MS. STEEL: Okay. Then I withdraw my 21 comment. 22 MS. YEE: Okay, very well. 23 We have a motion by Ms. Mandel, second by 24 Mr. Horton to adopt the staff recommendation. 25 Without objection, that motion carries. 26 ---o0o--- 27 28 8 1 D1 DFC GAS & WINE, LLC 2 NO. 513008(ET) 3 ---o0o--- 4 MS. OLSON: Our next item is D1, DFC Gas & 5 Wine, LLC. 6 MS. YEE: Okay, D1, DFC Gas & Wine, LLC. 7 May I have a motion? 8 MS. ALBY: Move staff recommendation. 9 MS. YEE: Okay, motion by Ms. Alby to adopt the 10 staff recommendation. 11 Is there a second? 12 MS. MANDEL: Second. 13 MS. YEE: Second by Ms. Mandel. 14 Discussion? 15 MR. HORTON: Just a comment, actually. 16 MS. YEE: Yes, Mr. Horton? 17 MR. HORTON: I must say I was a little -- I was 18 a little concerned that we may have an innocent party 19 here, only because the staff's original testimony 20 relative to verifying that the product itself that was 21 held by the wholesaler was legit. 22 And -- but it's one of those situations where 23 the taxpayer didn't necessarily put forth that argument. 24 So -- but it does concern me overall, in general, that 25 the we might need to make it part of the policy when 26 we're observing these wholesalers to actually do an 27 observation test where we always -- it seems to me that 28 there should have been some uniformity in that 9 1 testimony. It should have been automatic. That's what 2 we do automatically is verify that. 3 And based on the discussions over the last few 4 months on these particular types of accounts, the 5 presumption is is that the taxpayer who comes before us, 6 who may have received product that doesn't comply with 7 all of the requirements may not be liable -- I mean, may 8 be just an innocent bystander. 9 And as we begin to see the say the masterminds 10 behind this activities is shifting a little bit, where 11 organized -- an organized effort -- let's say an 12 organized criminal effort, where the criminal actually 13 owns on the trucking company, owns the wholesaler, has 14 set up various different retailing operations -- it's 15 getting pretty sophisticated out there where an 16 individual could get trapped in all of that and could 17 have honestly just been a bystander to a larger criminal 18 activity. 19 And, so, I want to share that that's kind of 20 troubling for me on this one. 21 MS. YEE: Thank you, Mr. Horton. 22 Ms. Steel? 23 MS. STEEL: Actually, for me too, because this 24 invoice that the company itself was denying that it was 25 theirs, but, you know, I don't know how he got exactly 26 same invoice, maybe trucking and delivery people might 27 use different kind of invoice. 28 So, I have a question -- if we give them any 10 1 credit for this one count as invoice, is that amount is 2 going to be different what taxpayer owes us? 3 MS. CHIU: Do you mean exactly what products 4 will be returned -- 5 MS. STEEL: Right. 6 MS. CHIU: -- if we accept the invoice as 7 valid? 8 MS. STEEL: Right. 9 MS. CHIU: The exact amount that we would 10 return would be 19 Copenhagen, which are long-cut 11 flavored, 6 Copenhagen snuff and 1 Kodiak roll. 12 Not all of the seized products are listed on 13 that invoice. 14 MS. STEEL: So, it's only just part of it? 15 MS. CHIU: That's correct. 16 MS. STEEL: How much we talking about? 17 MS. CHIU: It's an approximate retail value of 18 $520. 19 MS. STEEL: He owes us $595, right? 20 MS. CHIU: Right and the remaining products 21 have a value of almost $75 that are not covered by the 22 invoice. 23 MS. STEEL: So, if we saying that this is a 24 valid invoice, then he owes us only $75? 25 MS. CHIU: No -- 26 MS. STEEL: Is that the other way around? 27 MS. CHIU: -- we'll have $75 remaining in 28 custody. 11 1 MS. STEEL: Remaining. 2 MS. YEE: Right, okay. 3 MR. HORTON: Madam Chair? 4 MS. YEE: Yes, Mr. Horton. 5 MR. HORTON: Help me understand. The product 6 itself -- is the product itself legal? 7 MS. CHIU: Well -- 8 MR. HORTON: I mean, aside from the fact that 9 they didn't have a proper invoice? 10 MS. CHIU: -- by legal what are -- I am not 11 sure what -- 12 MR. HORTON: I don't know? 13 MS. CHIU: If you determine that this invoice 14 is valid, then we'll -- we would accept that these 15 products are tax paid and, therefore, we would return 16 them to the Petitioner. 17 MS. STEEL: That's the $75 worth of it? 18 MR. HORTON: No, that's not what I'm talking 19 about. 20 MR. LEVINE: It's the $520 which is dependent 21 on this invoice. 22 If you conclude that this invoice was a valid 23 invoice, then $520 worth of merchandise will be 24 returned. 25 MS. STEEL: Has to be returned. 26 MR. LEVINE: And the remaining 75 will be 27 retained. 28 As far as, Mr. Horton, your question, my 12 1 understanding is there's no way to tell whether a 2 product is legal. 3 For example, a gray market product or illegally 4 imported, based on looking at the box, all we have to go 5 on is whether it's tax paid, which is documented by the 6 invoice. 7 MR. HORTON: That was part of the challenge in 8 doing the legislation. We just couldn't get to OTP 9 but -- for a lot of reasons. 10 We probably need to -- I mean, it's just the 11 larger concern about -- about the fraudulent activity 12 that could be taking place. 13 And in this particular position you only have 14 the evidence that's before you. So, that's what makes 15 it challenging. 16 I think what I'm probably sharing is more with 17 staff is that we ought to take a look at devising some 18 type of methodology or even making some recommendation 19 from the legislative perspective that gives us the 20 ability to determine if there is some illegal activity 21 taking place with the wholesaler. 22 MS. YEE: Thank you, Mr. Horton. 23 Other comments? 24 The motion before us to adopt the staff 25 recommendation, motion by Ms. Alby, second by 26 Ms. Mandel. 27 Please call the roll. 28 MS. OLSON: Madam Chair? 13 1 MS. YEE: Aye. 2 MS. OLSON: Ms. Alby? 3 MS. ALBY: Aye. 4 MS. OLSON: Ms. Steel? 5 MS. STEEL: No, I think we still have to give 6 them credit for this invoice. 7 MS. OLSON: Mr. Horton? 8 MR. HORTON: Aye. 9 MS. OLSON: Ms. Mandel? 10 MS. MANDEL: Aye. 11 MS. OLSON: Motion carries. 12 MS. YEE: Okay, thank you. 13 ---o0o--- 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 14 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 MARCH 25, 2010 I recorded verbatim, in shorthand, to the 10 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 14 constitute a complete and accurate 14 transcription of the shorthand writing. 15 16 Dated: MAY 1, 2010 17 18 19 ____________________________ 20 JULI PRICE JACKSON 21 Hearing Reporter 22 23 24 25 26 27 28 15