BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION 5901 Green Valley Circle, Room 207 Culver City, California REPORTER'S TRANSCRIPT JUNE 17, 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 16 Staff: David Levine Tax Counsel IV 17 ---oOo--- 18 19 20 21 22 23 24 25 26 27 28 2 1 ITEM C2 2 Culver City, California 3 June 17, 2010 4 ---oOO--- 5 MS. YEE: Our next item, Ms. Olson. 6 MS. OLSON: Okay, that concludes our oral 7 hearings for this afternoon. 8 And we have those items that have been 9 submitted for decision. 10 MS. YEE: Okay. Member, let's go back to the 11 items that we've taken under submission today, starting 12 with the matters from this morning. 13 MS. OLSON: Our first item is C2, Medison 14 America, Incorporated. 15 MS. YEE: Okay. Item C2, Medison America, 16 Incorporated. May I have a motion, please. 17 MS. MANDEL: Move the revised staff 18 recommendation which was that the measure was 55,750, is 19 that correct? 20 MS. YEE: Yes. 21 MR. HORTON: Second. 22 MS. YEE: Okay. Motion by Ms. Mandel to adopt 23 the revised Appeal staff recommendation, second by Mr. 24 Horton. 25 Discussion? Hearing none, without objection, 26 that motion carries. 27 ---oOo--- 28 3 1 ITEM C3. 2 MS. OLSON: Our next item is C3, Saddleback 3 Recreational Vehicles. 4 MS. YEE: Okay. Item C3, Saddleback 5 Recreational Vehicles. May I have a motion, please? 6 MS. STEEL: I can sustain the Department 7 recommendations except Duncan McNabb that we're going to 8 grant that petition. 9 MS. YEE: Hang on one sec. I think we had -- 10 MS. STEEL: That -- actually that signature was 11 done six months after. I asked attorney that when did 12 you get this signature, it was before the audit or after 13 the audit. They -- he said that it was after the audit 14 but audit started on end of December 2005 but it was 15 signed on March 2005, so that attorney gave us wrong 16 informations. 17 MS. YEE: On the McNabb transaction? 18 MS. STEEL: Yeah, uh-huh. 19 MS. YEE: Hmm. I thought there was still -- I 20 thought the document was still insufficient in terms of 21 information -- 22 MS. STEEL: But it was signed later on for that 23 one. Only that one. And then that's why I asked 24 attorney that when you got this signature and attorney 25 said it was after audit started. But I was looking at 26 the number, audit period end December. So audit started 27 until -- I mean could not have started until 2006 at the 28 earliest. 4 1 So I believe that McNabb can be granted. But 2 others stay. 3 MS. YEE: Mr. Levine, do you have a view on 4 this one? Do we know? 5 MR. LEVINE: Well, the important thing is that 6 it didn't prove what we require it to prove, but it 7 was dated March 11, 2005 seven months after the sale. 8 So, that was the -- wait, that's the 447. The 448 -- 9 MS. YEE: Uh-huh 10 MR. LEVINE: -- same -- same date. And that -- 11 it seems like it did have to be before the audit 12 commenced. 13 MS. STEEL: It was before the audit -- 14 MR. LEVINE: So they -- 15 MS. STEEL: -- was signed. 16 MR. LEVINE: So they tried -- what happened is 17 they tried -- they got some documentation before they 18 were contacted but of course the -- anyway. This was 19 signed before -- had to have been signed before the 20 audit started. 21 MS. YEE: All right. Okay. So, Ms. Steel, 22 your motion is to -- 23 MS. STEEL: Only to grant only that portion. 24 MS. YEE: And the -- 25 MS. STEEL: And all the other ones stays what 26 the -- 27 MS. YEE: The other adjustments that we -- 28 MS. STEEL: Yes. 5 1 MS. YEE: Okay. All right. 2 MS. MANDEL: But you -- there were two -- the 3 ones that the staff has already -- 4 MR. LEVINE: Yes, we've -- 5 MS. YEE: Right, there were two transactions. 6 MR. LEVINE: We've recommended -- 7 MS. STEEL: Oh, yeah. 8 MR. LEVINE: -- reducing the measure by 9 506,994, two accepted transactions. So our revised 10 recommendation is a measure of deficiency of $1,093,601. 11 MS. YEE: Okay. So, motion by Ms. Steel to 12 adopt the revised Appeals staff recommendation and also 13 to allow the McNabb transaction. 14 MS. STEEL: Uh-huh. 15 MS. YEE: Is there a second? 16 MS. ALBY: Second. 17 MS. YEE: Second by Ms. Alby. 18 Further discussion? 19 Without objection, that motion carries. 20 ---oOo--- 21 22 23 24 25 26 27 28 6 1 ITEM C4. 2 MS. YEE: Okay. Next item, please. 3 MS. OLSON: Our next item is C4, Mokhim Rasooli 4 and Malak Sajedeh. 5 MS. YEE: Okay, item C4, Mokhim Rasooli and 6 Malak Sajedeh. 7 May I have a motion, please. 8 MS. STEEL: I have a motion. We going to give 9 the third quarter of 2006 one-third of the total portion 10 of it, plus fourth quarter of 2008 that 84.02 percent 11 taxable, we're going to give two-thirds of the portion. 12 So, total number comes out to taxable portion 13 is 78.99 percent. And even the taxpayer said he didn't 14 have any consumption, but I asked him that he's going to 15 take at least water; he say yes, so we're going to give 16 very moderate number, that $10 consumption a day. I 17 think that's reasonable. 18 MS. YEE: Okay. So, I'm sorry, Ms. Steel, 19 repeat that. So you -- 20 MS. STEEL: So -- 21 MS. YEE: -- want to make an adjustment for -- 22 MS. STEEL: For third quarter of 2006 that came 23 taxable amount is 68.94 percent. And we going to give 24 only one-third of the portion because they have more 25 documents on fourth quarter of 2008. So we going to 26 give two-third of the portion of that to 84 -- 84.02 on 27 fourth quarter of 2008. So that amount comes to taxable 28 portion is 78.99 percent plus $10 a day for consumption. 7 1 MR. LEVINE: Fourth quarter of -- 2 MS. YEE: 2006. 3 MS. STEEL: 2008. 4 MS. YEE: Oh, '8. 5 MS. STEEL: Yeah, it was 84.02. 6 MR. LEVINE: The -- 7 MS. STEEL: 2006, I'm sorry. 8 MR. LEVINE: -- audit period goes through the 9 third quarter -- 10 MS. YEE: The audit period. 11 MR. LEVINE: -- of 2006. 12 MS. STEEL: Fourth quarter of 2006. 13 MS. YEE: Actually, it only goes through the 14 third quarter -- 15 MS. STEEL: Oh, hold on. Hold on. 16 MR. LEVINE: Maybe the fourth -- 17 MS. STEEL: Okay, let's make it -- okay, first 18 segregation test was 68.94 percent. We're going to give 19 him one-third of the total portion. And then second 20 test for 84.2 percent, that one we going to give 21 two-third of the portion. Then average comes out to the 22 78.99 percent. So taxable is -- 23 MR. LEVINE: For -- 24 MS. STEEL: -- 78.99 percent. 25 MR. LEVINE: For the whole audit period -- 26 MS. STEEL: The whole audit period. 27 MR. LEVINE: Okay. 28 MS. STEEL: And then $10 consumption. 8 1 MR. LEVINE: $300 per month? 2 MS. STEEL: Yes. 3 MR. LEVINE: Okay. 4 MS. YEE: $10 a day. Okay. 5 Okay, motion by Ms. Steel. Is there a second? 6 MS. ALBY: Second. 7 MS. YEE: Second by Ms. Alby. 8 Further discussion? 9 Objection? That motion carries. 10 ---oOo--- 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 9 1 ITEM C6. 2 MS. YEE: Okay. 3 MS. OLSON: Our next item is C6, Thomas 4 International Home Furnishings. 5 MS. YEE: Okay. Item C6, Thomas International 6 Home Furnishings. May I have a motion, please. 7 MR. HORTON: Motion to adopt staff 8 recommendation. 9 MS. YEE: Okay. Motion by Mr. Horton to adopt 10 the staff recommendation. Is there a second? 11 MS. MANDEL: Second. 12 MS. YEE: Seconded by Ms. Mandel. 13 Discussion? 14 MS. STEEL: Dis -- discussions. 15 MS. YEE: Yes, Ms. Steel. 16 MS. STEEL: We had two audits and usually when 17 we go out for audits, for especially furniture shops 18 that we always looking at the delivery. 19 We totally missed that. I think with a good 20 faith can we give like ten percent for this tax -- 21 MS. YEE: Yeah. 22 MS. STEEL: I mean something has to be done 23 because, you know, how can we miss that sales taxes on 24 their own truck delivery that -- I -- 25 MR. HORTON: Madam Chair. 26 MS. STEEL: -- this is not really fair -- 27 MS. YEE: Yeah. 28 MS. STEEL: -- after two audits. So -- 10 1 MS. YEE: I am going to concur with your 2 observation. Let me hear from Mr. Horton, then have Mr. 3 Levine comment. 4 MR. HORTON: You know, I tried to drill down on 5 that, but it sounded like there's a possibility that 6 they did not miss it, and that the delivery activity was 7 consummated subsequent to the previous audits. And that 8 they established a separate method of accounting for it. 9 The auditor did a reconciliation of the sales tax 10 accrual account and the spot test and going over it, and 11 so, you know, in the absence of evidence that the 12 taxpayer was affirmatively informed to treat 13 something -- treat the delivery -- a means other than 14 what they did in this particular audit, I don't know if 15 we can say that they were properly notified and could 16 rely on the auditor's omission -- we don't even know if 17 it exists. 18 And that's the unfortunate part is, is that the 19 taxpayer when inquiry didn't really articulate on that 20 didn't take the opportunity to use that to defend 21 themselves. And so -- and an adjustment of ten percent, 22 I -- I would ask Mr. Levine, I mean how do we -- how do 23 we frame that when the issue at hand is delivery, 24 whether or not the delivery is taxable or not? So 25 that's my challenge. 26 MR. LEVINE: I can answer that last question 27 first. I'll use Ernie Dronenburg as an example -- 28 MR. HORTON: Oh, yeah. 11 1 MS. YEE: Sorry you asked. 2 MR. LEVINE: -- who would introduce an -- an 3 adjustment by saying, "Based on my 24" -- I think you 4 can use this one, too -- "Based on my 24 years of audit 5 experience I think." 6 There is no ten percent. If you -- this is 7 the little pregnant example. 8 MS. YEE: Right. 9 MR. LEVINE: There either was reliance that 10 gets relief and they get relief for everything that they 11 reasonably relied on, and I don't see how ten percent 12 fits -- so if you were going that route it would be 13 because you think that the number is ten percent too 14 high. That would be the only way to make that 15 adjustment. 16 As far as the -- what happened, I'll use 17 different words but pretty much is the same thing that 18 Mr. Horton just said, it really does seem that there 19 should have -- first, let me back up a sec. The second 20 audit period, the one in the middle, that one doesn't 21 count. A waived audit can never be a basis for 22 relief -- at least I've never seen anything that comes 23 close. 24 The -- the regulation requires written evidence 25 that the auditor reviewed the issue, and that's really 26 the nub here. We can't be certain that Petitioner was 27 even delivering in their own trucks. Maybe they 28 delivered some even during the current period. I don't 12 1 know if they delivered some things by common carrier 2 that wouldn't have been taxable. 3 But perhaps in the prior period they did and 4 they started using trucks later. I do think -- I would 5 like to think our auditors would look at delivery when 6 it comes to a furniture store, when the invoice shows a 7 delivery spot. 8 And -- but then we have the situation where the 9 taxpayer didn't claim a deduction for delivery. We have 10 a disconnect there. But they claimed it as resales. 11 So, if for whatever reason the auditor didn't 12 connect the invoice with the way they reported then it 13 could be missed. 14 We don't know what the auditor looked at. If 15 there was evidence that the auditor specifically looked 16 at invoices for delivery delivered by Petitioner's own 17 facilities and the auditor knew it, that would 18 definitely -- then we would have recommended relief 19 because that's what we need. That's what we would need 20 to recommend relief, some evidence that the auditor 21 recognized delivery in their own -- their own facilities 22 without payment of tax. 23 MS. YEE: Uh-huh. Well, I -- this is 24 unfortunate. I mean, my sense of hearing about what was 25 looked -- what was reviewed in the prior audit just 26 seemed really insufficient relative to the delivery 27 charge issue. 28 And what I couldn't tell was whether -- I heard 13 1 a couple things. One, that maybe out of all the 2 invoices that were reviewed that there were very few 3 that indicated that, you know, there was merchandise 4 delivered and that wasn't a big part of the -- the 5 activity. 6 On the other hand, I'm just thinking going 7 forward, particularly with our new audit regulation that 8 probably will start to come into effect as we look at 9 the scope of an audit, I'd like to think that the 10 activity of the business drives the the scope of the 11 audit rather than just looking at a sample of invoices 12 and trying to determine what actually took place during 13 the audit period. 14 So I guess what I would like to at least say 15 for the record is to have the Department be mindful of 16 that as we're looking at implementing the new audit 17 regulation. 18 We have the opportunity to kind of memorialize 19 the scope going forward, and I think we need to be 20 mindful of the particulars of specific businesses. 21 But I would -- we have a motion to adopt the 22 staff recommendation before us, and I think I'm 23 comfortable with that, but let's be a little bit more 24 thoughtful and mindful going forward. 25 Ms. Steel. 26 MS. STEEL: Why, if we can go for all the way 27 or zero way then, you know, I would just go for that. 28 But when I came to this Board the first day our former 14 1 Board Member Bill Leonard said that I can do whatever I 2 want here. Because we got elected. 3 That's why I suggested ten percent, because try 4 to show some good faith here. Thank you. 5 MS. YEE: Thank you, Ms. Steel. 6 MR. LEVINE: Just for clarification, what -- 7 what I do is when you ask me how -- you can do 8 anything -- you vote however you want but I will try 9 when you want to vote a certain why, help guide you to 10 make it a way that seems to make sense to fit in. But 11 you don't have to follow that, either. 12 MS. YEE: Okay. Thank you, Mr. Levine. 13 I have a motion by Mr. Horton, second by Ms. 14 Mandel to adopt the staff recommendation. Please call 15 the roll. 16 MS. OLSON: Madam Chair. 17 MS. YEE: Aye. 18 MS. OLSON: Ms. Alby. 19 MS. ALBY: No. 20 MS. OLSON: Ms. Steel. 21 MS. STEEL: No. 22 MS. OLSON: Mr. Horton. 23 MR. HORTON: Aye. 24 MS. OLSON: Ms. Mandel. 25 MS. MANDEL: Aye. 26 MS. OLSON: Motion carries. 27 MS. YEE: Okay. Thank you. 28 ---oOo--- 15 1 ITEM 7a through 7G 2 MS. OLSON: Our next item is C7a through g. 3 They were a no-show today. 4 MS. YEE: And what was the -- 5 MS. OLSON: We -- 6 MS. YEE: -- status of trying to contact them? 7 MS. OLSON: Oh, we failed to contact them. 8 They were scheduled previously at the February Culver 9 City meeting and then requested -- they didn't respond 10 to the hearing notice. And when Board Proceedings 11 contacted them, because we make courtesy calls for those 12 people that don't respond, they said that they would 13 like to go to the June meeting. 14 And we have been trying to contact them to get 15 contribution disclosures from them for the past three 16 weeks with no success. And not today, either. 17 MS. STEEL: But, Mr. Levine, is this the person 18 that -- who got convicted for the fraud? 19 MR. LEVINE: Yes. Yes, and -- 20 MS. STEEL: She's in the jail? 21 MR. LEVINE: -- as I understand the argument 22 she admits her fraud but there were related companies 23 that she was a managing partner in, and I don't know how 24 much ownership -- she may have owned everything, but she 25 was the Manager of, but they are separate, the 26 corporation or LLC from the person and those taxpayers 27 argue they shouldn't be held responsible for the fraud 28 of their managing partner. 16 1 MS. YEE: Okay. 2 MR. LEVINE: We didn't accept that, which is 3 why we recommended denial. 4 MS. MANDEL: And they -- they do have counsel. 5 MS. OLSON: Yes, they do. And we've been able 6 to contact him, also. 7 MS. MANDEL: You -- you have not been able to 8 reach him? 9 MS. OLSON: No. We've left several messages. 10 MS. MANDEL: Okay. 11 MS. YEE: Okay. Mr. Horton. 12 MR. HORTON: Yeah. Motion to adopt staff 13 recommendation and sustain the fraud penalty. 14 MS. YEE: Okay. Motion by Mr. Horton to adopt 15 the staff recommendation, maintaining the fraud penalty. 16 I will second that motion. 17 Further discussion? 18 Hearing none, please call the roll. 19 MS. OLSON: Madam Chair. 20 MS. YEE: Aye. 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: Aye. 27 MS. OLSON: Ms. Mandel. 28 MS. MANDEL: Aye. 17 1 MS. OLSON: Motion carries. 2 MS. YEE: Okay. Thank you. 3 ---oOo--- 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 18 1 ITEM 11 2 MS. OLSON: Our next item is C8 -- excuse me. 3 We took care of that. 4 MS. YEE: That's C11 then. 5 MS. OLSON: Next item is C9, D & H -- 6 MS. YEE: We did that one -- 7 (Voices in unison.) 8 MR. HORTON: We're on a roll. 9 MS. OLSON: How about C11? 10 MS. YEE: That sounds good. 11 MS. OLSON: LJ Corporation. 12 MS. YEE: Okay. Item C11, Members, LJ 13 Corporation. 14 May I have a motion, please. 15 MS. MANDEL: Move to redetermine. 16 MS. YEE: Okay. Motion by Ms. Mandel to 17 redetermine. 18 May I have a second? 19 MR. HORTON: Second. 20 MS. YEE: Discussion? 21 Hearing none, without objection, that motion 22 carries. 23 ---oOo--- 24 25 26 27 28 19 1 ITEM C12 2 MS. OLSON: Our final item for today is C12, 3 Kamal F. Batech and Wafaa Elias Batech. 4 MS. YEE: Okay, item C12, Kamal F. Batech and 5 Wafaa Elias Batech. 6 May I have a motion? 7 MR. HORTON: Move to adopt staff 8 recommendation. 9 MS. YEE: Motion by Mr. Horton to adopt the 10 staff recommendation. Is there a second? 11 MS. ALBY: Second. 12 MS. YEE: Second by Ms. Alby. 13 Discussion? 14 Hearing none, without objection, that motion 15 carries. 16 MS. YEE: Next item. 17 MS. OLSON: That concludes our business for 18 this afternoon. 19 MS. YEE: Okay, Members, thank you. We will 20 recess until tomorrow morning at 9:30. Thank you very 21 much. 22 ---oOo--- 23 24 25 26 27 28 20 1 REPORTER'SCERTIFICATE 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 June 17, 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 20 13 pages constitute a complete and accurate transcription 14 of the shorthand writing. 15 16 Dated: June 28, 2010. 17 18 19 20 ____________________________ 21 BEVERLY D. TOMS 22 Hearing Reporter 23 24 25 26 27 28 21