BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION 450 N Street, Room 121 Sacramento, California REPORTER'S TRANSCRIPT JANUARY 26, 2011 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 Jerome E. Horton of Equalization: Chairman 5 Michelle Steel 6 Vice-Chairwoman 7 Betty T. Yee Member 8 Senator George Runner 9 (Retired) Member 10 11 Marcy Jo Mandel Appearing for John Chiang 12 State Controller (per Government Code 13 Section 7.9) 14 Diane Olson Chief, Board 15 Proceedings Division 16 Board of Equaliztion Staff: Lou Ambrose 17 Tax Counsel 18 David Levine Tax Counsel IV 19 20 ---oOo--- 21 22 23 24 25 26 27 28 2 1 2 ITEM B4 3 Sacramento, California 4 January 26, 2011 5 ---oOO--- 6 MR. HORTON: Ms. Olson, what is the next 7 scheduled matter? 8 MS. OLSON: Our next item are those matters 9 that have been taken under submission. The first one 10 B4, Kevin E. Jones. They waived appearance this 11 morning. 12 MR. HORTON: Discussion, Members? 13 Hearing none, is there a motion? 14 MS. MANDEL: Move to -- 15 MS. YEE: Oh. go ahead. 16 MS. MANDEL: Move to sustain the Franchise Tax 17 Board. 18 MS. YEE: I second that motion. 19 MR. HORTON: It's been moved by Ms. Mandel, 20 second by Ms. Yee to sustain the Franchise Tax Board's 21 motion. 22 Further discussion? 23 Any objections? 24 Hearing none, such will be the order. 25 ---oOo--- 26 27 28 3 1 ITEM B5. 2 MR. HORTON: Next matter, Ms. Olson. 3 MS. OLSON: Our next item is B5, Closus -- 4 Clovus M. Sykes. 5 MR. HORTON: Discussion, Members? I mean, is 6 there a motion, Members? 7 MS. YEE: I'll move to sustain the Franchise 8 Tax Board and also to impose a $2500 frivolous appeal 9 penalty. 10 MR. HORTON: It's been moved by Ms. Yee -- 11 SEN. RUNNER: I have a question on -- on -- 12 MR. HORTON: Let us get it on the floor, Mr. 13 Runner. 14 SEN. RUNNER: Yeah. 15 MS. MANDEL: I'll second. 16 MR. HORTON: Second by Ms. Mandel. 17 Mr. Runner. 18 SEN. RUNNER: Yeah, it has -- it has to do with 19 the issue again in helping me understand the process in 20 regards to the -- the frivolous appeal penalty. 21 Is there a schedule to that, in regards to the 22 amounts? I notice that they had been applied in the 23 past, but at a lower amount and it seemed like it was 24 progressively larger. 25 Is there -- is there a normal schedule for that 26 or is -- I just -- 27 MS. YEE: Yeah, I mean I think Mr. Ambrose can 28 comment also but there's a rough schedule and this is 4 1 not the first appeal; we had multiple appeals from this 2 appellant. And I think, you know, certainly one of the 3 considerations is just the amount of staff time that 4 goes into, obviously, going through these appeals. 5 But I think the prior penalties that have been 6 imposed we had had at lower amounts and -- but the 7 sim -- similar arguments contained have come before the 8 Board. So it's -- generally for the first -- for the 9 first appeal there will be a frivolous appeal penalty I 10 think of $750, is that -- 11 MR. AMBROSE: Yeah, that's typical. 12 MS. YEE: Okay. 13 MR. AMBROSE: 750. 14 MS. YEE: 750. And then -- 15 MR. AMBROSE: Well, the Board will typically -- 16 if it's a -- if it's similar circumstances, same party, 17 generally double that to 1500. And then a third appeal 18 can be anywhere -- 3500 to 5,000, I'd say. 19 SEN. RUNNER: Okay. 20 MS. YEE: Yeah. 21 SEN. RUNNER: Okay, that's good. 22 MS. YEE: Okay. 23 SEN. RUNNER: Thank you. 24 MR. HORTON: Okay. Any further discussion? 25 MS. OLSON: Okay, we have a motion by Ms. Yee. 26 MR. HORTON: The item's been moved and 27 second -- moved by Ms. Yee, second by Ms. Mandel. 28 Any objection, Members? 5 1 Hearing none, such will be the order. 2 ---oOo--- 3 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 6 1 ITEM C1. 2 MR. HORTON: Ms. Olson, next item, please. 3 MS. OLSON: Our next item is C1, Victor S. 4 Baglio, Junior. 5 MR. HORTON: Is there a motion, Members? 6 MS. YEE: Move to adopt the staff 7 recommendation. 8 MR. HORTON: It's been moved by Ms. Yee, second 9 by me. 10 Discussion, Members? 11 MS. STEEL: Just objection. 12 MR. HORTON: There's an objection. 13 Any other discussion? 14 There's a motion and a second. Ms. Olson -- 15 Ms. Olson, please call the roll. 16 MS. OLSON: Mr. Runner. 17 MS. YEE: I -- 18 MS. STEEL: I believe it's Chair -- it's Chair. 19 MS. YEE: I think we're -- 20 MR. HORTON: Oh, okay. 21 MS. OLSON: Have you -- 22 MR. HORTON: I'll go first. 23 MS. OLSON: You'll go -- okay. Mr. Horton. 24 MR. HORTON: Aye. 25 MS. OLSON: Mr. Runner. 26 MR. HORTON: Ms. -- Ms. Steel. 27 MS. YEE: I think Ms. Steel. 28 MR. HORTON: Ms. Steel. My apologies. 7 1 MS. OLSON: Okay. 2 MR. HORTON: We should have communicated that 3 to you. Not that we made a decision, Ms. Steel and I 4 should have just communicated to you. 5 SEN. RUNNER: This is to help me. 6 MR. HORTON: Ms. Steel. 7 MS. OLSON: Okay, Ms. Steel. 8 MS. STEEL: No. 9 MR. HORTON: Mr. Runner. 10 SEN. RUNNER: No. 11 MR. HORTON: Continue, Ms. Olson. 12 MS. OLSON: Ms. Yee. 13 MS. YEE: Aye. 14 MS. OLSON: Ms. Mandel. 15 MS. MANDEL: Aye. 16 MS. OLSON: Motion carries. 17 MR. HORTON: Motion carries. All right, thank 18 you. 19 ---oOo--- 20 21 22 23 24 25 26 27 28 8 1 ITEMC2 2 MR. HORTON: Next item, Ms. Olson. 3 MS. OLSON: Our next item is C2, David Harold 4 Johnson. 5 MR. HORTON: Is there a motion, Members? 6 MS. YEE: I'm going to move the Appeal staff 7 recommendation. 8 MR. HORTON: It's been -- the Appeal staff 9 recommendation has been moved by Ms. Yee. Is there a 10 second? I'd second that. 11 Discussion, Members? 12 SEN. RUNNER: Yeah, Mr. -- Mr. Chair. 13 MR. HORTON: Mr. Runner. 14 SEN. RUNNER: This -- this goes back to the 15 discussion that we had earlier in regards to the fact 16 that there was a previous Notice of Determination that 17 was done on -- on Ms. Saito, and so my question then is 18 I guess in regards to priority of collection. 19 My -- at least my observation is that there was 20 a decision made previously that both of these should 21 move forward, that you shouldn't treat Ms. Saito in a -- 22 in a disproportional way until this particular claim had 23 gotten taken care of or -- or acted on. 24 Now that it has and in light of the fact that 25 this particular individual had also made a number of 26 payments, I would -- I don't get -- know what the 27 process is but I think the priority of collection should 28 be able to move to the other party that's already been 9 1 deemed responsible but had been put off until this 2 particular item had moved to the Board. 3 So as a point of discussion I'm not -- again, 4 not sure how that goes but -- but again I -- it seems to 5 me it's wrong to -- it would be unfair to go continue 6 aggressively after an individual first when it is that 7 somebody else had been waiting until this particular 8 item was brought before the Board. 9 MR. HORTON: Okay. Mr. Runner, are you 10 presenting that -- why don't we do this. There's a 11 motion and a second. Why don't Mr. Levine sort of speak 12 to the -- the possibilities of what can happen and then 13 share with Mr. Runner or the Board how that would be -- 14 SEN. RUNNER: Sure. 15 MR. HORTON: -- that would have been a motion. 16 SEN. RUNNER: Thank you. 17 MR. LEVINE: Okay, two -- two things. 18 Technically, all we have is the claim for refund and 19 he's not disputing that that should be denied. 20 We also have the two bonus things that we 21 considered that we'd like your action on, which is the 22 penalties. And he's asked for a little tweaking to the 23 amnesty relief penalty. Basically, our standard 24 condition is payment within 30 days or entering into an 25 installment agreement within 30 days and finishing it in 26 13 months. 27 He doesn't want to have to enter -- pay or 28 enter into an agreement to pay in 30 days because he's 10 1 hoping the Board will go after Ms. Saito. So, that's 2 something that if you were going to direct some specific 3 collection action against her you might want to consider 4 modifying the basic conditions that we've recommended 5 for the amnesty penalty. 6 As far as the priority, one factor that is 7 common, and I'm not 100 percent certain of ownership, 8 but he was the CEO -- if he was the hundred percent 9 owner it might feel more fair that he has to pay 10 everything. 11 On the other hand, if she was a -- and I'm 12 sorry, I don't have that information off the top of my 13 head, but if she was an owner, also, then that makes 14 things a little bit different. Just something for you 15 to consider. 16 As far as how you can do the order, I would 17 just -- if you're going to direct priority, the only 18 glitch on the motion on the table is the amnesty 19 interest penalty. 20 So I would suggest that if you wanted to direct 21 priority you either incorporate that into a single 22 motion and modify the amnesty relief provision or -- I 23 mean, that would be the easiest way to do it. 24 MS. STEEL: Mr. Levine, is -- 30 days and 13 25 months is from today, final decision? 26 MR. LEVINE: No, it would be the notice of 27 denial of the claim. 28 MS. STEEL: All right. 11 1 MR. LEVINE: The official notice which will go 2 out -- I think it has to go out within 45 days. It 3 won't be within a couple days -- 4 MS. STEEL: From the date -- from today to 45 5 days? 6 MR. LEVINE: Yes, I think that's it. But they 7 try and get it out as soon as possible. But that would 8 be the official time. It's the notice of the Board 9 decision, is what our standard policy is. And that's 10 the official notice. 11 SEN. RUNNER: And if we don't -- and if we 12 don't modify the motion and deal with the issue of -- of 13 the amnesty then that in essence then creates a conflict 14 with the ability to prioritize Ms. Saito? 15 MR. LEVINE: I'm sorry, if you don't modify the 16 motion -- no, it doesn't at all, it just means that if 17 you were, for example, to direct us to go after Ms. 18 Saito first -- 19 SEN. RUNNER: Uh-huh. 20 MR. LEVINE: -- and then otherwise just adopt 21 that motion, he would still have to make a decision 22 within 30 days of paying or agreeing to pay in order to 23 get relief of amnesty. 24 Now, if we happen to collect everything from 25 Ms. Saito, including the amnesty penalty, he won't care. 26 SEN. RUNNER: Well, then it does conflict a bit 27 with that. 28 MR. LEVINE: Yes. 12 1 SEN. RUNNER: Okay. Right, right, there's a 2 time -- all of a sudden it does conflict with that 3 because if we don't waive or deal with the issue of the 4 amnesty then -- then basically he only has 30 -- we only 5 have 30 days to collect from Ms. Saito. If we don't 6 then in 30 days he has to make payment or he loses the 7 amnesty amount. 8 MR. LEVINE: Right. 9 SEN. RUNNER: Okay. So they are -- 10 MR. LEVINE: Whoever is going to have to pay 11 will have to pay that. Bear in mind that amnesty 12 interest relief is again to the corporation. So, if 13 you -- if there's amnesty relief it inures to the 14 benefit of both Ms. Saito and Mr. Johnson. 15 So they're both in it together and -- 16 SEN. RUNNER: And what ability do we have -- 17 what ability do we have in terms of dealing with that 18 amnesty item? 19 MR. LEVINE: That's your discretion. That's 20 the standard Board policy. We proposed it when we first 21 had this. The Board agreed. So that's the -- the 22 condition that -- barring something really unusual we 23 will always include that condition. But it's not in the 24 statute, it's just your policy. It's not in a reg. or a 25 -- 26 SEN. RUNNER: So, you could delay the amnesty 27 impli -- issue for -- 28 MR. LEVINE: You could say six months -- 13 1 SEN. RUNNER: -- a year, six months, forever, 2 whatever? 3 MR. LEVINE: Right. 4 SEN. RUNNER: Okay. 5 MR. LEVINE: You could relieve the amnesty 6 penalty without the condition all together. It's up 7 to -- to the Board. There's nothing in the law that -- 8 it's just a discretionary thing. 9 SEN. RUNNER: And there's been no attempt up to 10 this point to do collection in regards to Ms. Saito? 11 MR. LEVINE: No, because that was the Board 12 order. 13 SEN. RUNNER: Okay. 14 MS. YEE: Yeah, that was our directions. 15 SEN. RUNNER: Okay. I think -- again, I'm -- 16 what I would at least suggest is that we at least 17 postpone the amnesty issue for a period of time. And, 18 again, you're going to help me -- help me structure a 19 motion here in this way, for a -- for a period of time 20 in order to give the ability for the -- for the agency 21 to collect from Ms. Saito and not put the amnesty amount 22 in danger. 23 Is -- is two years unreasonable? Let me ask my 24 Board Members, is two years unreasonable in order to -- 25 to deal with that, in order for collection against 26 Ms. Saito? I just don't know what the collection 27 process is and how -- what -- how much time that allows 28 in order for the agency to do that. 14 1 MR. HORTON: Mr. Runner, the relativity of 2 the -- the period of time to allow is a condition 3 subsequent to the finding that they're not personally 4 liable. 5 If we find that both parties are liable for the 6 debt then the Board should proceed to collect from 7 them -- from both parties expeditiously simultaneously. 8 And then if we -- if we find that the -- that there is 9 some -- the amnesty flexibility want to provide some 10 flexibility, that that goes to the corporation and not 11 Mr. Johnson. 12 So, in effect what we're saying is, is that the 13 corporation has somewhat acted to some degree in some 14 good faith or some measure that has caused the body to 15 need to determine that they should be lenient. One, the 16 taxpayer in the collection to the liability to the 17 State. 18 I for one don't necessarily see that they've 19 done anything. They're liable. The debt is there. The 20 liability has been incurred. I am sympathetic to -- to 21 the fact that the collection activity did not cause the 22 corporation to make any payments, but for some reason 23 the CEO who is mutually liable and to some degree 24 principally liable by virtue that he had ultimately 25 control over the decision whether or not to pay the 26 liability, so as a representative of the corporation. 27 Ms. Mandel. 28 MS. MANDEL: Yeah, I think -- it's -- I think 15 1 we got a little confused when we talked about the 2 amnesty penalty as a penalty against the corporation. 3 Because the corporation is gone, right? Is the 4 corporation gone? 5 MR. LEVINE: Yes, the corporation is gone. 6 MS. MANDEL: So -- 7 MR. LEVINE: That is actually -- 8 MS. MANDEL: Okay. 9 MR. LEVINE: -- why we recommended the relief. 10 MS. MANDEL: Of the penalty -- the corporation 11 was gone way before amnesty even existed? 12 MR. LEVINE: That's correct. 13 MR. HORTON: Right. 14 MS. MANDEL: And so the two people we'd be 15 collecting from are -- are Mr. Johnson, who was here 16 today, who was the CEO of the company and owned stock in 17 the company, and then Ms. Saito, who was the -- I think 18 she was the controller, CFO on the outside, did the 19 taxes and all that kind of stuff. 20 And -- and you remember that often why we like 21 to have the cases come together when we can, you know, 22 if they're both at the hearing, is a lot of times 23 there's -- you know, it's his responsibility, it's her 24 responsibility kind of thing. But she was a -- or she 25 was actually, I think, a nonappearance matter a couple 26 of years ago -- 27 MR. HORTON: Right. 28 MS. MANDEL: -- when it came. 16 1 MR. LEVINE: That's correct. 2 MS. MANDEL: So, I guess what I hear you 3 saying, Mr. Horton, is maybe you don't -- you prefer to 4 leave it to Collections to -- to do the collection. And 5 sometimes it's a question of sometimes the Members feel 6 that somebody, based on hearing all of the stories from 7 all the parties involved that somebody may be more -- 8 culpable is not really the right word but, you know -- 9 MR. HORTON: Yeah, if there was -- 10 MS. MANDEL: -- than the other, but -- 11 MR. HORTON: If there was some evidence that -- 12 that either of the parties or one of the parties was 13 more liable than the other, let's say it that way, 14 then -- then the Board -- then possibly, you know, I 15 would be of a mind to try to give Collection some 16 direction other than exercising their fiduciary 17 responsibility to protect the interest of the State of 18 California. 19 I don't necessarily hear that. The distinction 20 between the two is one has made a payment of some sort 21 and the other has not. And the Board took the position 22 of listening because of that and -- and in fact gave -- 23 gave Mr. Johnson some discretion to say, well, let's 24 hear from Mr. Johnson, he seems to be very cooperative 25 and maybe -- maybe we will find some additional 26 evidence, hear some additional evidence that will deal 27 with the liability issue. But we heard nothing relative 28 to whether or not he was liable. 17 1 In fact, he admitted that he is equally liable 2 and mutually liable. So therefore I don't -- 3 MR. LEVINE: Just to -- I have found he is the 4 sole shareholder. And in all honesty, I think what 5 happened is Mr. Leonard had pulled this off consent and 6 I'm only guessing, but I think what happened is he saw 7 that we had Mr. Johnson, who was sole shareholder and he 8 pulled it off, I think, so he could add that 9 restriction, don't collect against her because it looked 10 on the face of it that Mr. Johnson was more liable, he 11 was the sole shareholder. 12 I think that's why the Board directed that. 13 SEN. RUNNER: Okay. So, just for clarification 14 then, the fact is that now that we've had both of them 15 before us that does not necessarily mean that equal -- 16 each of them are equally liable -- are liable for that? 17 MR. LEVINE: Well, legally, yes, they're 18 equally liable. The Board can go after either one. 19 This -- we're now in the area of your discretion to 20 decide who you feel the Department should go after. 21 Normally -- I'm not sure, but I think the 22 Department would -- they would go after everyone and 23 they are going to collect against the person who's -- 24 SEN. RUNNER: Easy to collect from. 25 MR. LEVINE: That's right. That's right. 26 So they're not normally -- they're not normally 27 in a position to have the luxury of deciding who is -- 28 who they should go after. That's for you. 18 1 So -- but it's all in your discretion. Legally 2 they're both fully liable. 3 MS. YEE: I have a motion, Mr. Chair. 4 MR. HORTON: Okay. In -- 5 MS. MANDEL: The motion -- 6 MR. HORTON: There's a motion and a second. Is 7 there any further discussion? 8 Mr. Runner, you're good? 9 SEN. RUNNER: Well, yeah. 10 MR. HORTON: All right. 11 Any objections, Members? 12 Without objection, such will be the order. 13 Thank you. 14 ---oOo--- 15 16 17 18 19 20 21 22 23 24 25 26 27 28 19 1 ITEM C3a, C3b and C3c. 2 MR. HORTON: Ms. Olson. 3 MS. OLSON: Our next and last item for the day 4 is C3, Smoke Rings; C3b, Rami Michell Darghalli; and 5 C3c, Rami Michell Darghalli and Faiz Mohamed Munassar. 6 MR. HORTON: Thank you, Ms. Olson. 7 Discussion, Members? Is there a motion? 8 MS. YEE: Move to adopt the staff 9 recommendation. 10 MR. HORTON: It's been moved by Ms. Yee to 11 adopt the staff recommendation. Is there a second? 12 MS. MANDEL: Second. 13 MR. HORTON: Second by Ms. Mandel. 14 Discussion, Members? 15 I will just share such that I did ask about the 16 rebates and when they were, when they did occur and when 17 they did not occur, and offered to take a look at it. 18 The adjustment would not have made a difference in my 19 mind. 20 So that bit of information would not have 21 changed my decision as to when and where it would occur. 22 So there's a motion and a second. 23 Any discussions, objections, Members? 24 Hearing none, such will be the order. 25 MS. OLSON: That concludes our business for 26 this afternoon session. 27 MR. HORTON: Members, we will continue the 28 meeting to tomorrow at -- 20 1 MS. YEE: 9:30. 2 MR. HORTON: -- what time, Ms. Olson? 3 MS. OLSON: 9:30. 4 MR. HORTON: 9:30. Thank you very much, 5 Members. 6 ---oOo--- 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 21 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 February 26, 2011 I recorded verbatim, in shorthand, to 10 the best of my ability, the proceedings in the 11 above-entitled hearing; that I transcribed the shorthand 12 writing into typewriting; and that the preceding 21 13 constitute a complete and accurate transcription of the 14 shorthand writing. 15 16 Dated: February 9, 2011. 17 18 19 ____________________________ 20 BEVERLY D. TOMS 21 Hearing Reporter 22 23 24 25 26 27 28 22