1 BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION 2 5901 GREEN VALLEY CIRCLE 3 CULVER CITY, CALIFORNIA 4 5 6 7 8 REPORTER'S TRANSCRIPT 9 JUNE 18, 2010 10 11 SALES AND USE TAX APPEAL HEARING 12 APPEAL OF 13 K.A.R.E.N. OIL COMPANY, INC. 14 NO. 339357 (MT) 15 AGAINST PROPOSED ASSESSMENT OF 16 SALES AND USE TAX 17 18 19 20 21 22 23 24 25 Reported by: Juli Price Jackson 26 CSR No. 5214 27 28 1 1 2 P R E S E N T 3 For the Board Betty Yee of Equalization: Chair 4 Jerome E. Horton 5 Vice-Chair 6 Barbara Alby Acting Member 7 Michelle Steel 8 Member 9 Marcy Jo Mandel Appearing for John 10 Chiang, State Controller (per Government Code 11 Section 7.9) 12 Diane G. Olson, 13 Chief Board Proceedings 14 Division 15 For Board of David Levine 16 Equalization Staff: Staff Counsel 17 18 For Department: Carolee Johnstone 19 Tax Counsel III 20 Robert Tucker Tax Counsel IV 21 Debra Kalfsbeek 22 Principal Auditor Fuel Taxes Division 23 24 For Petitioner: Herzel Michaeli Taxpayer 25 Duke Peters 26 Attorney 27 28 ---oOo--- 2 1 5901 GREEN VALLEY CIRCLE 2 CULVER CITY, CALIFORNIA 3 JUNE 18, 2010 4 ---oOo--- 5 MS. YEE: Good morning, let's call this Board 6 of Equalization meeting to order. 7 Good morning, Ms. Olson. 8 MS. OLSON: Our first item on the agenda is D1, 9 K.A.R.E.N. Oil Company, Incorporated. 10 Please come forward. 11 Board Proceedings has received contribution 12 disclosure forms for this morning's hearings from the 13 parties, agents and participants. All forms were 14 properly completed and signed. No disqualifying 15 contributions were disclosed. All parties, agents and 16 participants are on the alpha listing provided to your 17 office. 18 Each person sitting at the table will be asked 19 to introduce themselves and, if necessary, their 20 affiliation with the taxpayer for the record. 21 Ten minutes is allocated for the Petitioner's 22 opening presentation, followed by ten minutes for the 23 Department's presentation and five minutes is allocated 24 to the taxpayer for rebuttal. 25 Ms. Yee. 26 MS. YEE: Thank you very much, Ms. Olson. 27 Okay, Members, our first item today is item D1, 28 K.A.R.E.N. Oil Company. I'm dying to know what the 3 1 acronym stands for. 2 Let me have Mr. Levine introduce the issue. 3 MR. LEVINE: Good morning, Madam Chair, 4 Members. David Levine for the Appeals Division. 5 I'm sorry, I don't know what the acronym means, 6 perhaps Petitioner can tell us. 7 The issues in this petition of K.A.R.E.N. Oil 8 Company are whether, despite having issued the 9 determination within the applicable statute of 10 limitations, the Department's determination should be 11 barred because of its failure to inform the Petitioner 12 that it was obligated to file the USTM fee returns and 13 whether the failure to file penalty or interest should 14 be relieved. 15 MS. YEE: Okay, thank you very much, 16 Mr. Levine. 17 Good morning, gentlemen. 18 MR. PETERS: Good morning, Members of the -- 19 Honorable Members of the Board. I'm Duke Peters, an 20 attorney. I'm representing K.A.R.E.N. Oil this morning. 21 And to my right is Mr. Michaeli, the CEO of 22 K.A.R.E.N. Oil. And it is -- K.A.R.E.N. is not an 23 acronym, it is -- Mr. Michaeli's daughter's name was 24 Karen and -- 25 MS. YEE: Okay. 26 MR. PETERS: -- apparently somebody else had 27 used the name, so, he simply put periods after all of 28 the characters. 4 1 MS. YEE: Good, thank you. 2 Please proceed. You have ten minutes for your 3 presentation. 4 MR. PETERS: Thank you. 5 I'd like to point out briefly initially that in 6 neither the decision and recommendation of Mr. Hurley, 7 which was drawn up about a year ago, nor in its brief 8 prepared for this hearing has the legal counsel for the 9 Board ever denied that the conduct of the Board over the 10 period from roughly 1989 forward, when K.A.R.E.N. was 11 doing business as an Arco station in Long Beach and had 12 underground tanks, amounted to laches and estoppel. 13 That is simply not controverted anywhere. 14 What the legal counsel has tried to do is show 15 that it is not appropriate for this Board or for 16 administrative agencies, which do not have judicial 17 authority, to consider laches and estoppel in their 18 decisions. And that is simply not a correct statement 19 of the law. 20 The sole case cited by Mr. Hurley of the 21 Standard Oil versus Board of Equalization is, for 22 reasons we have stated and won't belabor the point, not 23 at all in point. That decision had to do with the use 24 of a writ of certiorari that has really ben superseded 25 by a writ of mandate. And the case had nothing whatever 26 to do with the ability of an administrative agency to 27 consider laches estoppel. 28 It is, in fact, quite well settled now, as we 5 1 have pointed out in our brief, with the Supreme Court 2 decision in Lentz versus McMahon and the bevy of Court 3 of Appeals decisions that it is, indeed, appropriate for 4 administrative agencies to consider questions of laches 5 and estoppel. 6 And a couple of points about the Lentz court 7 that I would like to bring to the Board's attention, 8 first of all, Lentz involved an appeal of a mandatory 9 injunction from the trial court to the administrative 10 agency, the Department of Social Services in that case, 11 to consider laches and estoppel. 12 That was reversed by the Court of Appeals and 13 then the ruling of the trial court reinstated by the 14 State Supreme Court. So, if it is appropriate for the 15 administrative agency to consider principles of laches 16 and estoppel, it's -- it's mandatory. It's not a matter 17 simply of the -- at the discretion of the agency -- 18 maybe we'll consider it, maybe we won't. If the facts 19 warranted it, it is -- must -- it must be -- principles 20 must be applied. 21 Secondly, the Lentz decision cites the case of 22 Canfield versus Prod, 67 Cal App 3d 722, which we had 23 cited in our Appellate conference brief back in 24 September of '08. That case is noteworthy because it 25 involved, as this case did, a failure of the 26 administrative agency to adequately inform a taxpayer of 27 its need to file a tax, in that case it was a welfare 28 recipient and it was tax due on the welfare payments. 6 1 And because the she had not been adequately informed by 2 the agency, they were never paid. And the court held 3 that payment of a tax was barred by principles of 4 estoppel. 5 The only case or authority cited by the 6 legal -- the Board's legal counsel in its reply brief is 7 that of Miller versus Eisenhower Medical Center. I 8 would like to address that briefly. 9 First of all, that case is, by order of the 10 State Supreme Court, not citable, it's superceded by a 11 grant of review, which is not supposed to be cited or 12 discussed. 13 Secondly it involves not an administrative 14 agency but the ruling of a privately run hospital. 15 But that aside, the portion of the opinion that 16 is quoted that laches is a -- primarily a question for 17 the trial court is completely taken out of context. It 18 has nothing to do -- if you look at the opinion -- with 19 the ability of an administrative agency, if we're 20 treating the hospital as an administrative agency, to 21 consider laches or estoppel was talking about the 22 division of labor between the trial court and the Court 23 of Appeals. 24 The Courts of Appeals, as the Board is 25 certainly aware, do not normally engage in fact-finding, 26 they leave that to the trial court. And that's what 27 that was talking about. 28 In fact, if one raised the opinion, the 7 1 disingenuousness of citing it is really apparent because 2 the laches, in that case, didn't even arise until after 3 the decision of the hospital's Board of Trustees. It 4 arose from a 13-month delay from the decision of the 5 Board of Trustees denying a physician a place on the 6 hospital staff until the physician actually filed a 7 petition for a demand date with the Riverside Superior 8 Court, that's what the laches entailed in that case. 9 It wasn't considered by the hospital or 10 administrative agency, if you want to consider it as 11 such because hadn't arisen at that time. 12 Those facts certainly don't apply here. The 13 laches and estoppel we're talking about here arise from 14 really an unreasonable delay of period of 15 years of 15 the Board and its staff inadequately notifying 16 K.A.R.E.N. of its need to file the underground storage 17 fee return. 18 In Mr. Hurley's Decision and Recommendation 19 there was a flat statement that the Board was not aware 20 that he had underground tanks -- that K.A.R.E.N. had 21 underground tanks until mid-2004. Well, that, we think, 22 says it all. 23 As we have cited -- there is a Health and 24 Safety Code provision on point that places upon the 25 State Water Resources Board the duty of gathering all 26 this information about -- from underground storage tank 27 applications, even though they may be filed with local 28 agencies, and compiling them and making them available 8 1 in a database. 2 And it would certainly appear that this Board 3 and its staff, at some point in time over that 15 year 4 period should have interfaced with the State Water 5 Resources Board and looked at that database and said, 6 "Aha, here's a -- there are gas stations for which we 7 have a sales tax permit and all these other types of 8 permits that are paying excise tax on the fuel delivered 9 to the station and we have no underground storage tank 10 return from them on file. Something is amiss here." 11 Certainly 15 years is an unreasonably long period of 12 time. 13 I believe the question has arisen as to whether 14 K.A.R.E.N. was aware of the tax and Mr. Michaeli has 15 previously stated at the Appeals conference that he 16 believed that any taxes attributable to delivery of fuel 17 which were assessed on a per gallon basis were being 18 paid by Arco. And that is because if one looks at the 19 specimen delivery invoice from Arco, which we attached 20 as an exhibit to our brief, it shows that money is taken 21 out of the top for payment of the State fuel excise tax 22 and for the California oil spill tax. And it was 23 assumed that these taxes were simply being paid by Arco. 24 And that is all I have for my presentation. 25 MS. YEE: Okay, thank you very much, 26 Mr. Peters. 27 Mr. Michaeli, do you have any comments you wish 28 to make at this time? 9 1 MR. MICHAELI: No, I think -- I think Mr. Duke 2 described everything. 3 MS. YEE: Okay, very well, we'll give you time 4 on rebuttal then. 5 MR. PETERS: Thank you. 6 MS. YEE: We'll hear from the Department then. 7 Good morning. 8 MS. JOHNSTONE: Good morning, Madam Chair and 9 Members of the Board, I am Carolee Johnstone, Tax 10 Counsel III with the Legal Department. 11 With me today are Debra Kalfsbeek, Principal 12 auditor with the Fuel Taxes Division and Bob Tucker, Tax 13 Counsel IV. 14 We concur with the Appeals Division's 15 recommendation in this case. The Petitioner owned the 16 property on which the USTs were located and operated the 17 service station from 1989 through December 2005. He 18 installed underground storage -- new underground storage 19 tanks on the property in September 1998. 20 Petitioner registered with the Board for a UST 21 fee account over six years later, in December 2004 and 22 closed the account in December 2005, when the property, 23 along with the service station business, was sold. 24 As the owner of the USTs, Petitioner was 25 required to register with the Board and pay a storage 26 fee to the Board for every gallon of petroleum placed in 27 the storage tanks. 28 Petitioner filed returns and paid the fee due 10 1 for the period October 2004 through September 2005. 2 However, when Petitioner failed to file returns and pay 3 the fee for the period October 1997 through September 4 2004, staff issued a jeopardy determination in November 5 2005. Staff subsequently collected the total amount of 6 the fee and interest accrued to that time, plus the $900 7 -- about $900 of the penalty assessed by levy on the 8 Petitioner's bank account and by lien on Petitioner's 9 property through escrow on the sale of the property, 10 leaving a balance still owing of $11,160. 11 Petitioner does not dispute that it owned the 12 property and storage tanks during the period at issue 13 here. Further, Petitioner does not dispute the 14 determination of the amount of fee owned. 15 Petitioner asserts, among other things, that it 16 should not be held liable for the fee for the period at 17 issue because it was not notified in a timely manner of 18 its UST fee obligations and for that reason the Board 19 should be estopped from collecting from Petitioner the 20 amount determined, including not only the interest and, 21 penalty but also the fee. 22 In the Lentz case, which Petitioner has cited, 23 the California Supreme Court determined that for a 24 governmental agency to consider the defense of estoppel 25 in an administrative hearing that appropriate 26 circumstances must prevail -- must be in existence. 27 Every single appropriate circumstance that was in 28 existence for the -- for those case that Mr. Peters has 11 1 cited all involve statutory authority granted to those 2 agencies by the legislature. 3 Under the Underground Storage Tank Maintenance 4 Fee law, the Board's authority to administer and collect 5 the UST fee is solely statutory. As is relevant here, 6 the legislature granted to the Board the authority to 7 relieve a feepayer of liability for fees, interest and 8 penalty if the feepayer failed to make a timely report 9 or payment because the feepayer reasonably relied on 10 written advice from the Board subject to certain 11 conditions that are not present here. 12 No other statute in the law authorizes the 13 Board to relieve a feepayer of fees that have been 14 properly assessed. And Petitioner does not otherwise 15 assert that the fees have not been properly assessed. 16 On the other hand, the legislature has 17 authorized the Board to relieve a feepayer of some or 18 all of the interest that has accrued if the feepayer's 19 failure to the fee is due to an unreasonable delay or 20 error or delay by a Board employee. However, such 21 relief is authorized only if no significant aspect of 22 the delay is attributable to the feepayer and only 23 interest on UST fee liabilities incurred after January 24 1, 2000 may be relieved. 25 Here the Board sent 12 tax information 26 bulletins and notices to holders of sellers' permits 27 between March 1991, when the fee was first imposed, and 28 2004, when Petitioner asserts it first learned of its 12 1 UST fee obligations. 2 Specifically, the June 1994 Important Notice, 3 which is Exhibit 2 to the D & R, was sent to all holders 4 of sellers' permits whose accounts were coded as retail 5 sellers of motor vehicle fuel. As is evident from the 6 exhibit, this notice was targeted specifically at UST 7 owners and described the UST fee and the UST owner's 8 obligations in detail. 9 Petitioner was not only the owner, but also the 10 operator of the service station. And Petitioner does 11 not deny that it received these bulletins and alerting 12 it to its obligations to register with and pay the UST 13 fee to the Board. 14 If, as Petitioner has stated, these TIBs and 15 notices were simply passed on to its accountants, 16 without Petitioner having read them, Petitioner has some 17 culpability in the delay that occurred and Board staff 18 cannot be determined to be negligent in not notifying 19 him. 20 Further, although Mr. Michaeli, Petitioner's 21 owner, apparently did not complete the Water Board's UST 22 permit application himself, he was provided with a copy 23 of the application. Exhibit 1 to the D & R was provided 24 to the Department staff by Petitioner's attorney in 25 January 2006. As is evident in looking at the 26 application, the space provided for the BOE UST storage 27 fee account number is blank. 28 Mr. Michaeli has stated that he was relying on 13 1 the contractor to set up an account with the Board, yet 2 he apparently did not ask the contractor if he had 3 actually done so. 4 And if, as he says, he was relying on the 5 contractor to set up an account with the Board, wouldn't 6 that imply that he knew he needed to have an account 7 with the Board? 8 Further, the contractor did not install the 9 tanks until 1998. Petitioner could not possibly have 10 relied on him for the seven years prior. 11 In any event, Department staff did not have a 12 copy of the permit application until it was provided to 13 staff by Petitioner's attorney. 14 And, further, as we understand it, the Water 15 Board is just now in the process of setting up the 16 database that is required under statute, although it 17 is -- it says that the Water Board may set up this 18 database and, apparently, they are just now doing it. 19 Finally, even if the Board were mandated by the 20 legislature to notify feepayers of their UST fee 21 obligations when the program was enacted, which it was 22 not, there is no evidence that Petitioner -- as 23 Petitioner contends that Department staff intentionally 24 or negligently failed to notify Petitioner of those 25 obligations. 26 In fact, Department staff made numerous 27 attempts to notify potential UST feepayers of their 28 obligations. And a person with a seller's permit who 14 1 operates a gas station is not necessarily a person who 2 owns USTs. 3 For these reasons, the Department recommends 4 that the Board affirm the Appeals Division's 5 recommendation in this case. 6 Thank you. And we are prepared to answer any 7 questions the Board members may have. 8 MS. YEE: Thank you, Ms. Johnstone. 9 Mr. Peters, you have five minutes on 10 rebuttal. 11 MR. PETERS: Yes. First of all, the only 12 reason the Board staff discovered the failure of 13 K.A.R.E.N. to file these returns was because there was 14 an escrow for the sale which began in mid-2004. But for 15 the escrow, but for the escrow officer actually calling 16 the Board and seeking tax clearances, presumably the 17 station would have continued on and -- without having 18 filed this -- this tax. And no one would have 19 discovered it. 20 The contention made that the application of 21 laches and estoppel is purely a matter of statute and 22 that's the Lentz opinion says is not at all correct. 23 Nowhere in the Lentz case or in the Canfield Prod case 24 or any of the cases we've cited involving the 25 application of laches and estoppel by administrative 26 agencies, as I said that these provided for by statute. 27 There is -- it's a simple application of well-developed 28 principles of law, equitable principles, and the State 15 1 Supreme Court has held that the administrative agencies 2 must take these into account. It's not a question of 3 statute -- statutory authority. 4 Thirdly, the contention that estoppel and 5 laches flows simply from the unreasonable delay of the 6 Board staff and detecting this is not correct. The -- 7 there was a detrimental change of position on the part 8 of K. A. R. E. N. Oil. Had it been placed on 9 adequate notice of this tax, it would have priced its 10 fuel accordingly to cover the cost of it. It is highly 11 unfair and inequitable to allow it to go on doing 12 business for 15 years, never having taken this tax into 13 account, and then slamming it with a bill for $160,000. 14 Had it been placed on notice of this tax as it 15 should have been by the Board at an earlier time, it 16 would have priced its fuel accordingly and allowed it to 17 recoup the cost. 18 And the contention that the State Water 19 Resources Board may prepare a database of underground 20 storage tanks is not the law, it is not discretionary, 21 it is mandatory. And if the State Water Resource Board 22 is only getting around to it now, that is the fault of 23 the State agency. That has been the law for -- that 24 Health and Safety Code provision has been in effect for 25 many years. And Petitioner cannot be held responsible 26 for that. 27 In summary, there was an -- unquestionably an 28 unreasonable failure -- a delay on the part of the Board 16 1 in notifying K.A.R.E.N. of its need to pay the tax. It 2 was prejudiced by its lack of knowledge and failure to 3 price its fuel accordingly and, really, is almost a 4 textbook case of laches and estoppel and it is highly 5 appropriate to -- in fact, mandatory, to apply those 6 principles in this case. 7 Again I reiterate what I stated at the outset 8 of my presentation, I did not see any attempt in the 9 Decision and Recommendation of Mr. Hurley or in the 10 brief of the Board to in any way deny that the facts of 11 this case did, in fact, amount to laches and estoppel. 12 The approach taken by the Board staff was 13 simply that because this Board does not have judicial 14 authority, it's quasi-judicial, but not appropriate. 15 And as we have indicated in the Lentz case and the Court 16 of Appeals decisions, that is not a correct statement of 17 the law. 18 Thank you. 19 MS. YEE: Thank very much, Mr. Peters. 20 Mr. Michaeli, anything else? 21 MR. MICHAELI: Yeah, just have to mention 22 something here, that when they say, you know, we got 23 some notification, usually the notification that came 24 from the Board, it was coming with -- as a piece of 25 insert that's that with the return. 26 And, obviously, the return we got, we give it 27 to the accountant and the accountant, the only, 28 basically, job he was doing was filling out this 17 1 information that we give him about sales and stuff. And 2 basically we sending the return. 3 So, always in our mind we never miss any -- any 4 tax -- any sales tax payment. And in my mind usually 5 for the -- you know, the old company, if they collecting 6 3 -- I don't know, precollected sales tax or something 7 like this, they -- the invoices shows there was some 8 kind of spilling -- a spilling oil fee tax or something 9 like this. 10 And in our mind always it was that, you know, 11 we -- we had paid. I wish -- I wish that we knew this 12 before because the margin of -- the margin that we had 13 working in the gas station is so little, it's like 14 between 4 to 5 cents a gallon and now to take a penny 15 or -- a penny or something from the last 10, 15 years, 16 it -- we working, we working very hard when -- for me, 17 it's, you know, it's like all the -- all the retirement 18 plan that we had, it's gone. 19 So, you know, if we knew this before and we 20 knew that there is something there that somebody will 21 alert us and I believe, you know, the Board will alert 22 us, it was great because there wasn't so much margin. 23 We pushing by so many agencies, on one side the BPR is 24 pushing you to pump some gas and they don't let you. 25 You can not gross so much on the margin to make more 26 money. The other side is all this regulation. 27 And then you have to work on the -- we have 28 to -- I took another partner and I couldn't make it 18 1 today. You know, to work so hard for almost 15, 16, 2 sometime even 24 hour, it's 24 hour gas station, and to 3 get slammed by this -- this thing, I think it's -- it's 4 unfair. But I leave the decision. 5 Thank you. 6 MS. YEE: Thank you, Mr. Michaeli. 7 Questions, Members? 8 Ms. Steel? 9 MS. STEEL: Question. You know what, I totally 10 agree with this taxpayer because you know, every gas 11 storage tank fee case coming up and it's like a few 12 years after they retire, then, you know, we going after 13 this taxpayers that after they sold the store a long 14 time, I mean, this is really unfortunate cases that, you 15 know, we've been getting and I'm not really happy with 16 it, you know. Every time they come, I mean, they 17 already closed down long time ago. 18 So, you just said from the Department, the 19 Water Board is setting up the database. How we going to 20 connect that with our, you know, BOE department, and how 21 we going to find out that they have the, you know, the 22 list of people who owned the gas store tank and how we 23 going to, you know, have a connection with them? 24 MS. JOHNSTONE: We recently had a meeting with 25 them and they are putting together a policy letter that 26 will address it to the CUPAs, that they need to provide 27 this information. They -- I am not sure when they hired 28 the contractor to -- to put together this database. 19 1 MS. STEEL: So, we're going use it together, 2 the one database. 3 MS. JOHNSTONE: They are working with us to 4 make certain that that new database that they're putting 5 together will mesh with ours so that we can match up the 6 information that the CUPAs -- that's the local agencies, 7 that's where they fill out the application and the 8 permit application -- 9 MS. STEEL: Right. 10 MS. JOHNSTONE: -- that the information that 11 they gather -- that they put into the database will 12 match up and they can verify -- we can verify that -- 13 whether or not the tank numbers that are provided are 14 valid. 15 And there's also still the discussion that has 16 not been finalized about whether or not the CUPAs will 17 be notifying the Board when -- if a tank number is not 18 provided at all. 19 MS. STEEL: Is there any way possible that now 20 that you can, you know, like period culling every six 21 months or that you call and try to compare the database 22 with them? 23 MS. JOHNSTONE: The database has not yet been 24 completed. I believe that -- 25 MS. STEEL: But they don't eve have database, 26 even -- 27 MS. JOHNSTONE: No. 28 MS. STEEL: -- though they have all these 20 1 license numbers that they are giving out, we are giving 2 out, I mean, you have to pay both taxes. 3 So, they don't even have database? 4 MS. JOHNSTONE: That's as we understand it, as 5 we understand it. I can't say for absolute certain. 6 From the discussions of the last week, I 7 understand that they don't have it yet. 8 MS. YEE: Ms. Steel, could I just ask 9 something? And I'm going to continue with your 10 questions. 11 Are we taking an active role in terms of just 12 weighing in as the database is being developed by the 13 Water Board? 14 MS. JOHNSTONE: Yes. 15 MS. YEE: To be sure that there will be 16 enhanced coordination when all is said and done, so that 17 we're not, at the end of the establishment of the 18 database, kind of stuck in the same position that we've 19 been in? 20 MS. KALFSBEEK: Yes, we've had ongoing 21 discussions with the Water Board and the Cal EPA, who is 22 kind of overseeing it, to insure that, you know, the 23 information that the Board would need was available and 24 also to try to get some other written procedures for the 25 local agency staff, like Carolee mentioned, to contact 26 the Board of Equalization if the number is not on there. 27 So, we are working directly with the Water 28 Board. As you know, they have some funding issues. So, 21 1 you know, they're definitely on board, also trying to 2 get as much to us as possible. 3 MS. YEE: Okay. And I don't want that to be a 4 deterrent. If there are funding issues, I want those 5 issues brought before this Board. And if we have to do 6 something jointly to be sure that this gets resolved, we 7 will do that. 8 But I don't want to be back in this position 9 after the establishment of a database and we haven't 10 fulfilled what we need to have happen with respect to 11 coordination of information. 12 Ms. Steel? 13 MS. STEEL: My question is, without database 14 you cannot find out that -- 15 MS. JOHNSTONE: What we do to verify the tank 16 ownership is we have to actually call the local agency. 17 And it may be the city, the county, the fire district 18 and they actually just go through their files, I mean, 19 and pull -- 20 MS. STEEL: Is that what we are doing right 21 now? 22 MS. JOHNSTONE: We do. 23 MS. STEEL: Is that our practice? 24 MS. JOHNSTONE: Well, we only do hat once we've 25 located a site that we are trying to verify the 26 information. 27 Otherwise, we don't even have information as to 28 where all these underground storage tanks may be located 22 1 within the State. 2 MS. STEEL: Then let's go to this case. 3 It seems like from the Department that I heard 4 that, you know, you send out the bulletin and then 5 that's all what you did. 6 And then they to have responsible. But for 7 this case that this taxpayer had seller's permit and 8 vendor use fuel permit, so, when they have vendor use 9 fuel permit, why we didn't contact this taxpayer for 10 last how many years, until they, this taxpayer, sold 11 this store to, you know, other person? 12 MS. KALFSBEEK: The vendor of use bill permit 13 was actually closed out in June of 1995. And that 14 was -- he -- they had that permit, it was very similar 15 to a seller's permit because it was a use fuel tax 16 permit. And the -- at that time the vending of diesel 17 was conditioned a use fall? 18 MS. STEEL: Right. 19 MS. KALFSBEEK: So, if they were putting diesel 20 into any motor vehicle fuel -- or motor vehicle fuel 21 tank, they had to have that permit. 22 MS. STEEL: But when they closed it, then you 23 know that there's still gas station there. So, you knew 24 something was going on. 25 We -- you thought, you know, even their 26 seller's permit was still active. You thought they 27 already closed down, you know, gas station there or -- 28 MS. KALFSBEEK: Actually, for those vendor use 23 1 fuel permits, they were closed out automatically when 2 diesel was changed from the Use Fuel Tax Program to the 3 Diesel Fuel Tax law. In July of 1995 all those permits 4 were closed out. And those permitees were sent, 5 basically, letters telling them that they needed to 6 register under the new Diesel Fuel Tax law. 7 MS. STEEL: So, there is so many cases out 8 there that somebody who already closed down the vendor's 9 fuel permit, they still have that they didn't know that 10 they had it. They closed down automatically from BOE. 11 So, these are taxpayers they don't have a clue that they 12 have to apply for gas storage tank permit then. 13 So, we still have a lot of cases on the way in 14 because they don't have a clue that they supposed to get 15 those permits. 16 MS. KALFSBEEK: It would be very similar to the 17 sales and use tax permit because it really is a seller. 18 And as we mentioned that it's not always the 19 operator or the seller, it is the owner of the tanks. 20 So, really even if the vendor -- 21 MS. STEEL: It's not always, but there is most 22 of it. 23 MS. KALFSBEEK: I wouldn't -- I wouldn't even 24 say it was most of it. 25 MS. STEEL: What I'm asking is there's still a 26 lot of taxpayers out there that they don't have storage 27 tank permit, that they think that they still have it 28 because it's been automatically closed, first. 24 1 And second, they think they still have it, so 2 they don't have to apply it. 3 So, what I'm saying is we still have a lot of 4 cases on the way in because like this taxpayer didn't 5 have a clue that, you know, he had to have it. 6 And another thing is that he said his 7 contractor built it. Do we have any relationship when 8 they put new storage tank, gas storage tank put in, then 9 any notice goes out to the owner? 10 MS. KALFSBEEK: No, because those are handled 11 with the local agencies also. I mean, they are the ones 12 that permit the underground storage tanks, inspect them, 13 regulate them. 14 It's all done at the local level for the Water 15 Board. 16 MS. STEEL: Then how about seller's permit when 17 they get it? 18 MS. KALFSBEEK: Currently, yes, if they -- if 19 they close out a seller's permit or if they open a new 20 one that is coded as a gas station, they are mailed out 21 letters by the Board. 22 And then the Fuel Taxes Division receives a 23 database, a printout, of that quarterly. And we do 24 review that information. 25 MS. STEEL: So, now change the practice that, 26 you know, what we are doing? 27 MS. KALFSBEEK: Yes, we did that in -- starting 28 in 2000. 25 1 MS. STEEL: Okay. Let me ask taxpayer this, 2 have you ever owned other gas station before? 3 MR. MICHAELI: No. 4 MS. STEEL: So, this was the only first one 5 you -- 6 MR. MICHAELI: (Nods head.) 7 MS. STEEL: Okay. Another thing is, something 8 bothers me is when we levied something and lien on the 9 businesses. I saw a lot of cases in my District too 10 that, you know, when you cannot pay taxes, instead of 11 you let them know before, I guess, there is couple of 12 letters going out, but you just levy them and you put 13 lien on it and they cannot sell it. So, this kind of 14 like a circling around that you cannot sell the store 15 means you cannot pay back the taxes. 16 Our deal is that, you know, we try to collect 17 the tax, what they owe, means you cannot really put lien 18 on it. 19 So, exactly what happened for this case? 20 MS. JOHNSTONE: We have information in the file 21 that indicates that Mr. Michaeli told our collectors, 22 when they were trying to work with him to set up a 23 payment plan, that if he had to pay the fee, he would 24 declare bankruptcy, which was very concerning to our 25 collectors. 26 And that's when they decided to -- and the only 27 asset in the company was the property. And he was in 28 the process of selling that. So, that's why they levied 26 1 the bank account and put the lien on the property. 2 MS. STEEL: But that is exactly happened that 3 you said if -- we going to set up the monthly payment 4 plan that you going to file the bankruptcy? 5 MR. MICHAELI: Really what's happened is that I 6 got a tax -- a tax return from the Board after I 7 called -- I called the Board. 8 And I said, 9 "You know what, I guess, you know, there is 10 some fee that I didn't pay, that's what my 11 understanding from the escrow. So, tell me 12 what to do." 13 They send me application. I fill out. I 14 cooperate with the Board. I think it was after I been 15 in escrow. 16 So, I got stack of paper like this (indicating) 17 from 2000 -- seven, ten years, something like this. And 18 they told me to fill it up and to send payment. 19 You know, to do these, it's -- because I didn't 20 have any information with me, to do these I have to 21 contact BP Arco to get all the gallonage, to get 22 everything. It's taking some time. 23 I called so many times. I cooperate. And I 24 said, "Please give me the time to do it because it takes 25 time." 26 At the same time we didn't have any money even 27 to -- to cooperate in this and try to set up payment 28 plan. 27 1 So, what I said is this, 2 "If somebody will do a levy or somebody 3 do something to me, we'll -- we cannot do 4 anything in the end of the road." 5 And in the end of the road, you know, we -- 6 they levied the account. We bounced about two or three 7 or four checks from Arco and we couldn't sell any gas 8 for almost -- almost a week or 10 days 'til we collect 9 some money. 10 And I want just to mention another thing. We 11 spent almost $300,000. I mortgaged my house, I 12 mortgaged my -- get friends to loan money. In 1998 13 there was a low, the change cost so much money. And now 14 we find, you know what, that's what happened. 15 So, you know what, we did everything that we 16 can to cooperate with the whole situation. And now we 17 find out, you know what, you know, we slammed up with 18 150, 160,000 that we plan to retire with. 19 We sold the gas station for -- the only reason 20 we sold it is because I got sick and my partner got old. 21 So -- 22 MS. STEEL: My question is, did you tell them 23 that if we set up a monthly payment plan that you going 24 to file the bankruptcy so you can not pay for it? 25 MR. MICHAELI: No. 26 MS. STEEL: Okay. I think, Madam Chair, I 27 think we should change our practice, because, you know, 28 our job is collecting right amount of taxes. 28 1 But when you have to give taxpayers little room 2 to work with because a lot of times that I see in my 3 District, I don't know about other Districts, but, you 4 know, you really choke them to death and then you cannot 5 have any wiggle room. They just put lien on it, the 6 store. 7 They cannot even do anything. They start 8 making -- bouncing their checks. They cannot even pay 9 us back. 10 And, you know, you just make those people close 11 down. Instead of close down, give them something to 12 work with so we can collect taxes. That's what, you 13 know, we have to change our practice. 14 MS. YEE: Ms. Steel, I think this could get 15 incorporated into a matter that we heard during our 16 Taxpayer Bill of Rights hearing this week about payment 17 plans. Again that was a concern that was raised by the 18 tax representative about our policies with respect to 19 payment plans. 20 And I would agree with you, it's been -- 21 particularly during this economic downturn, although I 22 know Mr. Michaeli's situation predated that, but it is 23 awfully hard for business owners today. 24 And I think as we look at these issues on a 25 case by case basis, perhaps a little more leniency see 26 would be appropriate. 27 Okay, thank you very much, Ms. Steel. 28 Other questions, Members? 29 1 Ms. Mandel? 2 MS. MANDEL: I have a question that occurred to 3 me in this case and kind of hasn't occurred to me, I 4 guess, before. 5 We have -- except -- my recollection was except 6 generally except when the program very, very first 7 started, the penalty has, you know, generally -- 8 generally been sustained on the grounds that the Board 9 made such efforts to notify taxpayers through all of the 10 bulletins and everything that went with the returns. 11 And what I'm interested in is this taxpayer 12 says that everything that they got would have been an 13 insert with the sales tax returns and that they take the 14 packages and give them to their accountant to handle. 15 And, so, that, you know, broadly read, could be 16 an assertion that they relied on the professional advice 17 of their tax advisor/accountant, who did not advise them 18 of this requirement as an effort to say that they should 19 not have the penalties. 20 So, are you able to address, Department, the 21 potential reliance on professional tax advice in the 22 context of the penalty that we have here? 23 MR. MICHAELI: You know, from my experience, 24 you know from gas stations, that if I was getting a 25 letter, very simple letter to K.A.R.E.N. Oil Company and 26 it says just couple words, "You own -- you own this 27 tank." But not as an insert. 28 MS. MANDEL: Yeah, I understand what you're 30 1 saying, I am asking them to respond. 2 MR. MICHAELI: Okay, I'm sorry. 3 MS. MANDEL: Thank you -- thank you, though, 4 for -- because you just sort of clarified that I did 5 hear you correctly the first time. 6 MS. JOHNSTONE: Just to address what 7 Mr. Michaeli said, of those 12 notices and TIBs that 8 were sent out, one of them was sent by itself in an 9 envelope to K.A.R.E.N. Oil as the holder of the seller's 10 permit and as a seller of motor vehicle fuel. That was 11 the important notice that was sent out in November 1998 12 alerting them to the fact that they needed to make 13 certain their tanks were updated. 14 Mr. Michaeli had updated his tanks just that 15 month, in fact. And, so, he knew of the requirement to 16 update his tanks. 17 As far as his reliance on a professional, the 18 advice and assuming that that person, if they were a CPA 19 or certain accountant, had errors and omissions coverage 20 from their insurer, whether or not he would have an 21 action against the accountant, I couldn't say. 22 MS. MANDEL: Okay. I guess I was more 23 asking -- and maybe Mr. Levine is more familiar with it, 24 it's something that we see probably more on the income 25 tax side where people claim reliance on professional tax 26 advice as reasonable cause that they tried to argue as 27 reasonable cause to excuse certain penalties. And there 28 is some case law on that on the income tax side. 31 1 Are you familiar? 2 MR. LEVINE: I'm not familiar with that. And I 3 don't think we've accepted that. 4 But be that as it may, you don't have to have a 5 specific reason if -- especially in this case if you 6 feel like -- 7 MS. MANDEL: No, no, I am just asking -- 8 MR. LEVINE: But for that specific thing, 9 reliance on -- 10 MS. MANDEL: Yeah, it's -- 11 MR. LEVINE: -- professionals, I think we've -- 12 even negligence we've said, "You're responsible if your 13 company is." 14 And, you know, you can look at it both ways. 15 MS. MANDEL: Yeah, it says -- 16 MR. LEVINE: You can pass it on, but you're 17 responsible. 18 MS. MANDEL: -- it's just for the future you 19 could look at it. It's -- it's United States versus 20 Boyle, it's a Supreme Court case, but the -- basically, 21 it has to be substantive tax advice and generally the 22 filing of a return -- these were late, late -- that was 23 a late -- late filing case. And you could not, you 24 know, rely on your tax advisor for -- you know, "I 25 thought he was going to file and he's my professional," 26 and all that. 27 But where it tends to come up more in the 28 income tax side is substantive tax advice because 32 1 taxpayers, you know, they're not necessarily experts 2 and, so, it's more a reliance on a substantive rather 3 than a filing. 4 MR. LEVINE: We've -- Appeals, we've 5 recommended relief, not necessarily because they got 6 advice, though, it would be the same type of thing, when 7 reasonable -- when it's a confusing area, like 8 certain -- when we think someone has nexus in 9 California, but there is a reasonable basis for them 10 not to agree -- 11 MS. MANDEL: Right. 12 MR. LEVINE: -- and we've concluded that, well, 13 even though we disagree, they weren't being -- they had 14 a reasonable basis, even if we think they're wrong. And 15 we've recommended relief. 16 So, we've gone in that area. And if they had 17 specific advice, that was not -- some specific advice is 18 just unreasonable. 19 MS. MANDEL: Right. 20 MR. LEVINE: But when it's in that ballpark, 21 that's something we would consider -- 22 MS. MANDEL: Yeah. 23 MR. LEVINE: -- at our level. 24 MS. MANDEL: But here we just have the sending 25 of the stuff over to the accountant or bookkeeper or 26 whoever it was. Okay. 27 MR. LEVINE: And I do think that even that 28 special notice, it's been twelve years, but the Board's 33 1 been involved -- the Board Members themselves have been 2 involved and concerned about this since the get-go and 3 we've always had a problem. 4 And I think that specific notice was because 5 the Board said, "Well, at least send a specific notice." 6 So, we've all been -- 7 MS. MANDEL: Right. 8 MR. LEVINE: -- parties to this, trying to get 9 it done and not succeeding. 10 MS. MANDEL: Okay, thank you. 11 MS. YEE: Thank you, Ms. Mandel. 12 Other questions, Members? 13 Ms. Alby, please? 14 MS. ALBY: Thank you Madam Chairman. 15 I've been on this Board as an Acting Member 16 since March. This is deja vu, it's the second time I've 17 heard a case like this. 18 And I must say, starting in 2003 with 19 Mr. Leonard as his Deputy and now serving here, all I've 20 heard -- a great deal that I believed in -- was 21 fairness. We've got to be fair. We're the government. 22 We're the heavy hand of government. We must be fair and 23 we need to help people comply with the law. That has 24 been our two goals. They're honored goals. 25 And I am just really dismayed that the 26 Department does not understand in doing the job and 27 looking at the law, but we are -- seem to be very hard 28 relative to these issues. 34 1 And constitutional standard for due process is 2 notice. And a bulletin is not notice. A bulletin about 3 a myriad of issues is not notice. 4 And I would have really liked to hear, and I'm 5 probably alone in this, but I would have liked to have 6 heard a little more sympathy for the taxpayer and that 7 maybe we could have done a better job. 8 And maybe we need to have a little bit of heart 9 here in this regard because this is a man who's been 10 complying to the best of his ability, the best of his 11 knowledge. 12 And to think -- the other side of this is, 13 coming from the private sector, our people that are in 14 business are not auditors, they're not -- their focus 15 isn't our focus. They're too busy making a living. 16 And that's why the burden, I believe, is on us 17 to make sure that we provide those ways so that they can 18 continue to make that living. They can continue to send 19 the money due because we help them comply. 20 And after all the years that -- when he 21 discovers this -- and he's not unique, this is my second 22 case, there's been others through the years with 23 Mr. Leonard -- I just wish there was more willingness 24 that I could see, "Let's help this taxpayer. Maybe we 25 need to adjust something." 26 So, that's -- I just say that to you with all 27 due respect and this is a -- this is a big issue for 28 this man and for us. 35 1 Thank you. 2 MS. YEE: Thank you, Ms. Alby. 3 Any other comments, Members? 4 Hearing none, may I have a motion, please? 5 MS. MANDEL: Take the matter under submission. 6 MS. YEE: Motion by Ms. Mandel to take the 7 matter under submission. 8 Second by Mr. Horton. 9 Without objection, that motion carries. 10 Thank you both very much for -- 11 MR. PETERS: Thank you. 12 MS. YEE: -- coming forward. 13 We will discuss your matter later today and 14 send you notice of our decision. 15 Thank you. 16 ---o0o--- 17 18 19 20 21 22 23 24 25 26 27 28 36 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 JUNE 18, 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 36 constitute a complete and accurate 14 transcription of the shorthand writing. 15 16 Dated: June 11, 2010 17 18 19 ____________________________ 20 JULI PRICE JACKSON 21 Hearing Reporter 22 23 24 25 26 27 28 37