BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION 450 N Street, Room 121 Sacramento, California REPORTER'S TRANSCRIPT APRIL 13, 2010 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 Barbara Alby Acting 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 Staff: Amy Kelly 16 Tax Counsel 17 Lou Ambrose Tax Counsel 18 19 ---oOo--- 20 21 22 23 24 25 26 27 28 2 1 ITEM H6 2 (Ms. Mandel not participating.) 3 Sacramento, California 4 April 13, 2010 5 ---oOO--- 6 MS. OLSON: Our next item are those items taken 7 under submission. 8 MS. YEE: Okay, Members, do you need a break 9 before we launch them? Okay. 10 All right, what's our first item? 11 MS. OLSON: Our first item is H6 -- 12 MS. YEE: Oh, yes. 13 MS. OLSON: -- Special Taxes adjudicatory. 14 MS. YEE: Okay. Members, we are -- we had 15 postponed the vote on item H6. We have one sub-item 16 here. It's a Constitutional function with Deputy 17 Controller Mandel not participating, sub-item 1, Kern 18 Oil and Refining Company. 19 May I have a motion, please? 20 MR. HORTON: Move adoption of staff 21 recommendation. 22 MS. YEE: Okay. Motion by Mr. Horton to adopt 23 the staff recommendation. Is there a second? 24 MR. HORTON: Oh, wait a minute. 25 MS. STEEL: Objection. 26 MS. YEE: It's item H6. 27 MR. HORTON: Yeah. 28 MS. STEEL: This -- 3 1 MS. YEE: This is a penalty relief. Yeah, let 2 me -- hold on one second. 3 We have a motion by Mr. Horton. Let me second 4 the motion for purposes of discussion. 5 Ms. Steel. 6 MS. STEEL: You know, I wish Bill is here, you 7 know, always support for, you know, abate the penalty, 8 especially when they're like one or two days late. 9 This case that this taxpayer has to pay twice a 10 month for paying taxes. It's different than annual, you 11 know, payment of taxes. So they were one day late on 12 2004 and three days late for 2006. So most of people 13 that they pay annually it's going to be 12 times -- I 14 mean one time a year. But they have to pay 24 times, 15 means within two years they were three days late means 16 what, 48 times they been paying -- out of 48 times they 17 are late only for three days. 18 So, I wish we can abate the penalty. That's -- 19 MS. YEE: Okay. Thank you, Ms. Steel. Other 20 comments? Ms. Alby. 21 MS. ALBY: I want to associate my thinking with 22 Ms. Steel's remarks. This is a very good taxpayer. 23 He's -- he's -- they've been very compliant. They've 24 had two little bumps in the road that were very 25 understandable and this just is -- this seems very 26 onerous to me. We always are talking about compliance, 27 how to -- we have our scope teams out there. We've got 28 a lot going on, to try to get the folks that are 4 1 escaping us into the system. 2 These folks never attempt that. They're a good 3 taxpayer and so I would -- I would -- I'm with Michelle 4 on this one. 5 MS. YEE: Okay. Thank you, Ms. Alby. Okay, we 6 have a motion, a second on this item. Please call the 7 roll. 8 MS. OLSON: Madam Chair. 9 MS. YEE: Aye. 10 MS. OLSON: Ms. Alby. 11 MS. ALBY: No. 12 MS. OLSON: Ms. Steel. 13 MS. STEEL: No. 14 MS. OLSON: Mr. Horton. 15 MR. HORTON: Aye. 16 MS. YEE: Okay, motion fails. We will put 17 this matter over. 18 ---oOo--- 19 20 21 22 23 24 25 26 27 28 5 1 ITEM B1. 2 MS. YEE: Okay, next item. 3 MS. OLSON: Our next item is B -- excuse me, 4 B1, Thomas A. Leonardini and Karen M. Leonardini. 5 MS. YEE: Can I -- 6 MR. HORTON: Did she say B1? 7 MS. STEEL: B, boy. 8 MS. YEE: Okay. Members, we're on Item B1, 9 Thomas A. Leonardini and Karen M. Leonardini. May I 10 have a motion, please? 11 MS. STEEL: I'd move for a 30-30-30. 12 MR. HORTON: Second. 13 MS. YEE: Okay. Motion by Ms. Steel to grant a 14 30-30-30. Seconded by Mr. Horton. 15 Discussion? And I guess, Ms. Steel, will you 16 incorporate -- I think my direction to the Appeals 17 Division with respect to working out what may be 18 required relative to documentation of the parties. 19 MS. STEEL: You want me to recite all of 20 them -- 21 MS. YEE: No. No, no, no, no, no. 22 MS. STEEL: -- that we talked about during the 23 Board hearing? 24 MS. YEE: I guess we have a -- 25 MR. AMBROSE: We can listen to the tape. 26 MS. YEE: Ms. Kelly, were you clear when we -- 27 MS. KELLY: Right. My understanding is that 28 we're going to look at the information document request 6 1 that FTB's already made and we're going to reconcile 2 with what requests have already been made and which 3 requests we're repeating. 4 MS. STEEL: It has to be specific, though, not 5 like you were asking -- 6 MS. YEE: Right. And to the extent that we're 7 talking about a specific unique industry here, whether 8 there are some documents that actually may not even 9 exist but for which there might be substitutes that we 10 would be -- 11 MS. KELLY: Right. Right. Okay, and so taking 12 into account the -- the nature of the industry -- 13 MS. YEE: Yes. 14 MS. KELLY: -- whether or not documentation can 15 be provided that will prove -- 16 MS. STEEL: Right. 17 MS. KELLY: -- the qualified activity and the 18 expense. 19 MS. YEE: Exactly. Exactly. 20 MS. STEEL: That's my (inaudible). 21 MS. YEE: Okay. So that's incorporated in Ms. 22 Steel's motion for a 30-30-30. 23 Without objection, that motion carries. Thank 24 you. 25 ---oOo--- 26 27 28 7 1 ITEM C4. 2 MS. OLSON: Our next item is C4, Allyn F. 3 Taylor and Georgetta Taylor. 4 MS. YEE: Okay. We are on Item C4. 5 MR. HORTON: Move to adopt staff 6 recommendation, without adjustment. 7 MS. YEE: Okay, we have a motion by Mr. Horton, 8 is there a second, to adopt the staff recommendation? 9 MS. ALBY: Second. 10 MS. YEE: Second by Ms. Alby. 11 Discussion? 12 MS. STEEL: Can we abate the penalty, because 13 it seems like this taxpayer really believes that it was 14 there. Only thing is he cannot really prove it. So, 15 we -- you know, can we just at least abate the penalty 16 here? 17 MS. YEE: Is the failure to file penalty? 18 MS. STEEL: Right. 19 MS. YEE: Mr. Levine. 20 MR. LEVINE: He did file a request for relief 21 and if you believe it should be relieved you certainly 22 can. 23 MS. YEE: Okay. Mr. Horton, you want to 24 entertain that in your motion? 25 MS. MANDEL: I -- 26 MS. YEE: Or Ms. Mandel. 27 MS. MANDEL: Was the reason -- I mean, he -- he 28 signed the statements that explain -- he signed the 8 1 statements when he got the RV that explained the 2 standard for six months, the 90-day test. But his claim 3 is he's dyslexic, was that the basis that he didn't know 4 what he was reading? I thought that was what his basis 5 was for -- 6 MR. LEVINE: I believe that he must be arguing 7 that had he known he wouldn't have brought it in the 8 State. 9 MS. MANDEL: Yeah. 10 MR. HORTON: I'm not -- 11 MS. STEEL: You know what, I thought that -- 12 that he actually -- if he said that he -- I mean, I 13 believe the taxpayer that, you know, he brought it in 14 for fixing, repairing the RV. Then he was actually 15 in -- outside of California more than 90 days. 16 So, you know, he just couldn't provide all 17 those invoices and he didn't even know that it has to 18 stay outside 90 days but that, you know, just for coming 19 in California for repair for March and May exclude those 20 days. It's still over 90 days. 21 So, I believe him that, you know, he has 22 some -- the sickness that he can read or not, it doesn't 23 really matter here that, you know, his RV was outside of 24 California for more than 90 days. 25 So, you know, I'm not even asking the tax, 26 itself but, you know, penalty is different matter 27 because he didn't have a clue that, you know, what he 28 was getting into. If he knew he could have gone to 9 1 provide all the receipts and he could have gone to save 2 all the receipts. But he couldn't do it. 3 So, I believe the taxpayer, so just asking, you 4 know, penalty waived at least, but he's going to pay the 5 taxes. 6 MR. HORTON: Madam Chair. 7 MS. YEE: Mr. Horton. 8 MR. HORTON: To me I have some flexibility on 9 the penalty but the challenge I must say that the -- the 10 90-day test seeks to sort of codify the intent of usage. 11 And in this case the taxpayer clearly testified that it 12 was his intent to purchase the RV pursuant to his wife's 13 request upon retirement in 2010 -- it was purchased in 14 2004 -- upon retirement in 2010, possibly relocated 15 elsewhere. And that they had done some traveling in 16 California and outside of California, but every time 17 that they used the RV the intent was to return back home 18 in California. 19 So, it seems to me that the intent was to 20 use -- for the vehicle to be stationed in California and 21 that the tax is due and that there was a subsequent 22 assessment somewhere by someone and attempt to justify 23 that assessment to say that, well, if you kept it out of 24 state 90 days then it would be exempt. 25 I didn't really hear any evidence that that -- 26 that occurred or that intent resonated from the original 27 transaction in consideration. I mean, I -- I 28 intentionally asked or tried to ask questions and he 10 1 indicated it was my intent to use it here in California 2 until I retired. 3 But I mean if it's the will of the body 4 otherwise I will certainly withdraw the motion. 5 MS. YEE: Is that your desire? We have a 6 motion to -- 7 MR. HORTON: Not mine. 8 MS. YEE: Okay. Well, let's see what -- let's 9 act on the motion before us. We have a motion by Mr. 10 Horton to adopt the staff recommendation, second by Ms. 11 Alby. Please call the roll. 12 MS. OLSON: Madam Chair 13 MS. YEE: Aye. 14 MS. OLSON: Ms. Alby. 15 MS. ALBY: Aye. 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: Motion carries. 23 ---oOo--- 24 25 26 27 28 11 1 ITEMC5 2 MS. YEE: Next item, please. 3 MS. OLSON: Our next item is C5, Neal O'Gilvy 4 and Deanne O'Gilvy. And this was an appearance waived. 5 MS. YEE: Okay. Item C5, Members, Neal -- I 6 think it's O'Gilvy and Deanne O'Gilvy. May I have a 7 motion? 8 MS. MANDEL: Move the staff recommendation. 9 MS. YEE: Okay. 10 MR. HORTON: Second. 11 MS. YEE: I have a motion by Ms. Mandel to 12 adopt to staff recommendation, seconded Mr. Horton. 13 Discussion? 14 Hearing none, without objection that motion 15 carries. 16 ---oOo--- 17 18 19 20 21 22 23 24 25 26 27 28 12 1 ITEM E1 . 2 MS. OLSON: Our next item is E1a, Alliance 3 Member Services, Inc., and E1b Nonprofits Insurance 4 Alliance of California. 5 MS. YEE: Okay, Members, we have before us the 6 welfare exemption claim matter, item E1a, Alliance 7 Member Services, Incorporated and E1b, Nonprofits 8 Insurance Alliance of California. 9 May I have a motion, please? 10 MR. HORTON: This is -- 11 MS. STEEL: I think this is really unique 12 situation. It's not like other nonprofit organizations, 13 so grant the petition. 14 MS. YEE: Okay. 15 MS. YEE: Motion by Ms. Steel to grant the 16 petition, second by Ms. Alby. Discussion? 17 MS. YEE: Well, let me start. I would agree 18 with you, this is very unique, but I have to say -- and 19 I don't know that we -- there was any disagreement with 20 respect to the effects of not being able to provide 21 the -- the claimants here with the welfare exemption 22 which then would translate into much greater capacity 23 for their nonprofit members to do the charitable work 24 that they do. 25 I don't think there's any dispute about that. 26 The particular concern I have is really the nature of 27 the activity and self-insurance -- self-insurance pools 28 are not a charitable activity. And it just does not 13 1 square up with the welfare exemption statutes. And if 2 we are to grant this, I think it opens the door to other 3 types of activities where we're going to follow suit. 4 I also heard concerns that I had not dealt -- 5 dwelled on previously which had to do with the status of 6 the member organizations and their current status 7 relative to holding the CCs. 8 So I guess for all of those reasons I cannot 9 support the motion. 10 MS. STEEL: But there's only three insurance 11 companies in California and then -- you know, that 12 provides for nonprofit organizations. At the same time 13 there are actually nonprofit exemptions been approved by 14 Franchise Tax Board and IRS. And they are providing 15 with a low premium that helps to these nonprofit 16 organizations being covered by insurance and that goes I 17 think benefited to the community -- 18 MS. YEE: Yeah. 19 MS. STEEL: -- that they serve. And so, you 20 know, for me, that this is very unique situation that we 21 really have to be a little more flexible than, you 22 know -- than what we just draw the line there that this 23 is not really, you know, covered. 24 So for me I believe that, you know, they are 25 really serving for under-served community. 26 MS. YEE: Uh-huh. Ms. Steel, believe me if I 27 felt like we had the flexibility and the authority to do 28 so I would be right there with you, but I don't see it 14 1 in the statutes or in the regulations. 2 MR. HORTON: All right. 3 MS. YEE: Mr. Horton, did you have a comment? 4 MR. HORTON: I actually came in prepared to -- 5 to grant the appeal. Then in listening to the -- to the 6 testimony and kind of going over it, it wasn't 7 specifically provided for in the statute. And so, it 8 was somewhat circumstantial relative to the evidence. 9 And I believe at the time when the Legislature passed 10 it, the bill, it had a benefit to the government. And 11 at that time if this was coming before me I probably 12 would have said let's grant it because at that 13 particular time there was a benefit -- even though it 14 wasn't specifically provided for in the statute, the 15 circumstances surrounding the case would have indicated 16 that there's a direct benefit not only to the 17 government, but a direct benefit to the consumers. 18 Now, many years later, the situation has 19 changed and the -- the -- the conditions have changed 20 and the concern sort of goes to what would happen if we 21 grant the -- the petition in 2010 -- in -- the current 22 petition, the current date before us? Anyone could go 23 out and set this pool up or existing insurance companies 24 that are now providing this -- this -- this insurance 25 for nonprofits could set up a separate division and 26 continue to do exactly the same thing that this 27 Petitioner is doing, and thereby qualify for the welfare 28 exemption credit. 15 1 And I just don't think in this current 2 environment that that's the way that we want to -- to 3 go. I think there's a -- there's a direct and an 4 indirect benefit to nonprofits organizations by reducing 5 the costs. But I think that since it wasn't 6 specifically provided for in the legislation that anyone 7 can set this up. There is no pro -- prohibition from 8 anyone setting up a nonprofit and establishing the same 9 thing specifically for the purpose of getting this 10 exemption. 11 So, that brings about just concerns overall in 12 addition to the concerns expressed by you, Madam Chair. 13 MS. YEE: Okay. Thank you, Mr. Horton. 14 Other comments? 15 And I guess I would say that -- and I know 16 the -- the claimants have been recognized as being tax 17 exempt for other purposes, and those other purposes 18 don't necessarily square up with respect to exempt for 19 property tax purposes. 20 So -- and it's -- it's a tough one. It's a 21 tough one. 22 Other comments? Ms. Mandel, do you have some 23 thoughts? 24 MS. MANDEL: Well, I -- no, I was a little 25 disturbed to hear toward the end of the hearing that 26 staff's waiting on this one to decide another one that 27 may have slightly different facts potentially -- 28 MR. HORTON: Uh-huh. 16 1 MS. MANDEL: -- but -- and I did ask why that 2 wasn't with this one, but that's because that one's 3 not -- hasn't been acted on so it's not in appeal status 4 so it doesn't -- doesn't wind up here with that one. 5 It is true that the -- that the welfare 6 exemption, you know, isn't for -- necessarily for every 7 nonprofit organization. The welfare exemption has its 8 own some might say peculiar -- but peculiar is also the 9 word for particular, right -- requirements of 10 charitable. And the Courts have said charitable is kind 11 of broad and -- but they've also established this 12 community benefit test. 13 And when the benefit is not direct you have to 14 look for this other piece. It's a -- it's a very tough 15 case. 16 MS. YEE: I guess, Ms. Mandel, I want -- let me 17 add on to that. I know there -- County Assessed 18 Properties had alluded to another matter similar that is 19 working its way up. I guess I would err on the side 20 of -- should it get to the Appeals stage, to have it 21 brought before the Board. 22 MR. AMBROSE: That I -- I just heard about it 23 today, as well. 24 MS. YEE: Yes. 25 MR. AMBROSE: So -- 26 MS. YEE: I mean, this is so unique I can't 27 imagine that we're going to see another case kind of 28 quite like it. But I would like to -- 17 1 MS. MANDEL: I mean, they -- they said it 2 was -- they said it was -- you know, there's a lot of 3 different sort of pieces to the arguments and the 4 discussion and it's -- it's not something we've -- you 5 know, that anyone has seen before, which is why it's 6 here. 7 There don't seem to be too many organizations 8 like it. I -- you know, I understand the arguments. 9 I'm not -- but to the extent that -- and I don't know 10 how, you know, big this other organization is and -- and 11 to the extent that House of Rest has potential for being 12 a key, you know that -- that could be different. 13 But it's -- I guess the most argument that the 14 staff had made was about it being attenuated, getting 15 out to the -- 16 MR. AMBROSE: That's -- that's the sense that I 17 got. 18 MS. MANDEL: You know, it's an --- it's the 19 assumption of the community is, you know, the broad 20 community of the entire State that all nonprofits that 21 serve. That's what I heard as where they were really 22 looking as the ultimate sort of benefit. 23 MS. YEE: Mr. Horton. 24 MR. HORTON: You know, I -- generally when the 25 legislation is silent the intent is to rely on the 26 judicial discretion of the legislative body, knowing 27 that circumstances in which the legislation is passed 28 may very well change. That's the part that concerns me 18 1 somewhat. And that the situation has changed. 2 The government, I would argue, is no longer a 3 benefit to the government because for profit entities 4 will provide this risk pool type of arrangement. Cities 5 will provide this type of arrangement. Nonprofit and 6 for profits have come together to create this type of 7 financial arrangement. 8 Therein is the part that sort of concerns me. 9 And once you adjudicate a matter and take a position 10 then you sort of set the rule for the subsequent actions 11 of anyone who wants to move forward. 12 So, there's my concern. Somewhat redundant 13 but -- 14 MS. YEE: No, it's -- this case embeds a lot of 15 issues so I'm actually heartened by the discussion. 16 Other comments, Members? Okay, we have a 17 motion by Ms. Steel to grant the petition, seconded by 18 Ms. Alby. Please call the roll. 19 MS. OLSON: Madam Chair. 20 MS. YEE: No. 21 MS. OLSON: Ms. Alby. 22 MS. ALBY: Aye. 23 MS. OLSON: Ms. Steel. 24 MS. STEEL: Aye. 25 MS. OLSON: Mr. Horton. 26 MR. HORTON: No. 27 MS. OLSON: Ms. Mandel 28 MS. MANDEL: No. 19 1 MS. OLSON: Motion fails. 2 MS. YEE: Okay. May I have another motion? 3 MR. HORTON: Move to adopt staff's 4 recommendation. 5 MS. YEE: Okay. Motion by Mr. Horton to adopt 6 the staff recommendation. I will second that motion. 7 Please call the roll. 8 MS. OLSON: Madam Chair. 9 MS. YEE: Aye. 10 MS. OLSON: Ms. Alby. 11 MS. ALBY: No. 12 MS. OLSON: Ms. Steel. 13 MS. ALBY: No. 14 MS. OLSON: Mr. Horton. 15 MR. HORTON: Aye. 16 MS. OLSON: Ms. Mandel. 17 MS. MANDEL: Aye. 18 MS. OLSON: Motion carries. 19 MS. YEE: Okay. Our next matter. 20 ---oOo--- 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 April 13, 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 21 13 pages constitute a complete and accurate transcription 14 of the shorthand writing. 15 16 Dated: April 21, 2010. 17 18 19 20 ____________________________ 21 BEVERLY D. TOMS 22 Hearing Reporter 23 24 25 26 27 28 21