BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION 450 N Street, Room 121 Sacramento, California REPORTER'S TRANSCRIPT FEBRUARY 22, 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 George Runner 9 Member 10 Marcy Jo Mandel Appearing for John Chiang 11 State Controller (per Government Code 12 Section 7.9) 13 Diane Olson, Chief Board Proceedings Division 14 Board of Equalization 15 Staff: Lou Ambrose Appeals Division 16 Anthony Epolite 17 Appeals Division 18 David Levine Tax Counsel IV 19 Appeals Division 20 21 --oOo--- 22 23 24 25 26 27 28 2 1 ITEM B1 2 Sacramento, California 3 February 22, 2011 4 ---oOO--- 5 MR. HORTON: Ms. Olson, what is the next matter 6 before us? 7 MS. OLSON: Our next item will be those matters 8 that have been submitted for decision. 9 C4 was postponed to the May hearing. C5 and C6 10 have waived appearance. 11 MR. HORTON: Okay. Members, do you want to 12 take -- 13 MS. YEE: Let's take a break for a minute. 14 MR. HORTON: -- a five-minute recess? Break. 15 MR. RUNNER: Thank you. 16 MR. HORTON: Okay. 17 (Whereupon a short recess was taken.) 18 MS. OLSON: B1, Tito J. Guerrero. 19 MS. STEEL: What's B1? 20 MR. HORTON: Discussion, Members? 21 MR. RUNNER: Let's see, hang on. Let me find 22 my place. 23 MS. YEE: Mr. Chairman -- 24 MR. HORTON: Yes, ma'am. 25 MS. YEE: -- I wanted to revisit something that 26 came up during the discussion after we heard from both 27 sides on this, and it had to do with the regulation, I 28 guess the interested parties process the Franchise Tax 3 1 Board will be undertaking with respect to consideration 2 of prior filing history. 3 MR. RUNNER: Is that -- 4 MS. YEE: Is that this one? 5 MR. RUNNER: That's B2, I believe, isn't it? 6 MS. YEE: Oh, I'm sorry. Did I not have this? 7 MR. RUNNER: Am I wrong? 8 MR. AMBROSE: No, you're -- you're correct. 9 MR. EPOLITE: I believe that's B2. 10 MS. YEE: Am I -- oh, okay. 11 MR. HORTON: You wish to grant? 12 MS. MANDEL: That's what -- B2 is when they 13 talked about it, I think. 14 MR. AMBROSE: Correct. 15 MS. YEE: Okay. 16 MS. MANDEL: That's when the subject matter 17 came up. 18 MR. HORTON: Mr. McDermott. 19 MS. YEE: Okay. 20 MS. MANDEL: But if it's somehow related in 21 your brain -- 22 MS. YEE: I guess it's related only from the 23 perspective that I think I may have misrepresented the 24 Franchise Tax Board with respect to whether there is 25 already an existing regulation that specifies what 26 constitutes reasonable cause. And I guess I wanted to 27 pose the question to Appeals as to what the existing 28 regulatory authority is relative to reasonable cause. 4 1 MR. EPOLITE: There are currently -- 2 MR. RUNNER: That's an application to this one, 3 also, correct? 4 MS. YEE: Yes. 5 MR. RUNNER: Yes. Okay. Thank you. 6 MR. EPOLITE: There currently is no regulation 7 for reasonable cause. The only provision is what's in 8 Revenue and Taxation Code under 19 --19131 and 132. So 9 that the basis for the Board to reach a determination on 10 reasonable cause would be based on our formal opinions. 11 MS. YEE: Okay. All right. And so I -- I take 12 it there have been prior Board decisions and maybe even 13 some Court decisions that have guided the Franchise Tax 14 Board on how to look at reasonable cause exceptions? 15 MR. EPOLITE: Correct. 16 MS. YEE: Okay. All right. I just wanted to 17 clarify that. 18 MR. RUNNER: Well -- yeah. I'm sorry, go 19 ahead. 20 MS. YEE: No, I was under the impression that 21 there was a regulation that actually kind of spelled out 22 specifically what constitutes reasonable cause -- 23 MR. RUNNER: What's reasonable cause. 24 MS. YEE: -- yeah, in response to your -- 25 MR. RUNNER: Right, right. Which -- which it 26 seems to me then is exactly why we play the role that we 27 do with Franchise Tax Board -- 28 MS. YEE: Yeah, okay. 5 1 MR. RUNNER: -- in regards to making judgment 2 in regards to -- as these issues come before us. I look 3 at this one and I can't think of anything more 4 catastrophic than spending 12 years in prison and then 5 finding out that you are then released based upon the 6 fact that you were -- I'm not sure exactly what his 7 release was, but was certainly released on the basis 8 that he was -- something had changed in regard to his 9 sentencing at that point. 10 MS. YEE: Uh-huh. 11 MR. RUNNER: I'm deeply concerned that, again, 12 potentially the issues that he gave to us under penalty 13 of perjury in terms of his correspondence was not -- was 14 not reflected in terms of anything that Franchise Tax 15 Board then keeps because of the issue of the length of 16 time to which this case has -- has gone, which again the 17 determining factor was he was in prison. 18 MS. MANDEL: I -- I can appreciate the distress 19 over all those factors and I'm just not sure that they 20 go to the -- the question of reasonable -- you know, 21 the -- the late filing penalty. By the time he was in 22 prison he had either filed or not filed. He said that 23 he believed he had filed so it sounded like the 24 correspondence while he was in prison, which was FTB 25 sending collection notices, it was what am I supposed to 26 do, I'm in prison? 27 And I think they probably would have put a hold 28 on his account for collection, but as to whether he had 6 1 reasonable cause to not have filed or for FTB not to 2 have a return in its hands until he was out of prison, 3 that would seem to turn on did -- did he -- did he in 4 fact file and somehow the return never showed up at FTB, 5 which was why he was talking about sort of his practice. 6 So that by the time he went to prison his view was I 7 thought I had filed everything I needed to file. And 8 FTB's -- which is where I think why -- probably why Ms. 9 Yee though of the discussion from the second case -- 10 MS. YEE: Right. 11 MS. MANDEL: -- about the -- you know, did you 12 have a good filing history retain and FTB's sort of 13 comment on did he file or can we say that we thought 14 that he probably did file but that something -- by mail 15 but that something just happened. Their points were 16 that, you know, honestly, like a lot of people, there's 17 no actual documentation proof of the mailing but their 18 other point was it was a return that required a payment 19 and they didn't have a record of payment and -- at that 20 time. You know, so it wasn't like they got the -- a 21 check or whatever. And what we don't have is -- you 22 know, and he -- he said he didn't -- you know, he 23 ultimately wound up saying, well, he didn't -- he 24 couldn't say for sure, he didn't remember specifically 25 filing a specific return except that he did file the 26 Federal and that had been his practice. 27 You know, whether he had paid in a check or 28 something had cleared his account we don't actually have 7 1 information of that. But FTB does say they didn't -- 2 they didn't get the payment. 3 And you'd think if you were paying on a return 4 and something didn't come through your account, I know 5 if a check -- you know, if a check doesn't come through 6 your account you kind of wonder where the -- where the 7 check is. 8 But I'm -- I -- I don't -- personally I don't 9 think that the -- whatever correspondence he might have 10 had once he was in -- incarcerated sort of go to the -- 11 the fundamental issue. There -- there are issues, as 12 Mr. Horton talked about that, you know, gosh, you're in 13 prison 12 years and all this interest runs, but that's 14 kind of the interest issue. 15 MR. RUNNER: You know, it seems to me, and 16 again I -- I know that was in this discussion that, you 17 know, there's been legislation at least to try to deal 18 with that issue of -- of the interest while you're in 19 prison and while -- a lot of things happen down the 20 street that we may wish or wish didn't happen. It seems 21 to me that oftentimes what we get set with is the -- is 22 the action on a specific. And it seems to me we have 23 the ability to make a decision on the specific and here 24 is an individual who -- again, I'm not sure what the 25 level of -- of authority here is in regards to the 26 didn't have documentation but yet swore under penalty of 27 perjury that he indeed did file. And, you know, so I'm 28 not sure whether that is equivalent or not. But it 8 1 seems like it's pretty -- pretty significant. 2 And we have the ability to -- we can wish that 3 the Legislature would have done something but here we 4 have the significant -- we have the ability to go ahead 5 and give him relief even despite the fact that the 6 Legislature chose not to on a specific case. 7 And so, I would -- I would actually -- I'd make 8 a motion for the -- for the taxpayer. 9 MR. HORTON: There's a motion on the table. Is 10 there a second? 11 MS. STEEL: Second. 12 MR. HORTON: Discussion. It's been moved by 13 Mr. Runner, second by Ms. Steel. 14 Discussion, Members? 15 Members, my concern is, you know, I sort of 16 attempted to -- to try to get at the state of mind as a 17 basis for establishing what a reasonable person would 18 have done, and how they would have acted if they were 19 incarcerated, had a life sentence, arrested and in jail 20 and a number of other things that could have occurred 21 prior to. 22 The evidence seems -- the evidence was that the 23 return was due April of 1996, and he was not 24 incarcerated until an entire year later. So, during 25 that entire year by all practical assessments based on 26 the information before us there was no extenuating 27 circumstances at that time until the allegations took 28 place in the original -- his ultimate incarceration took 9 1 place in March of 1997. 2 And so the -- the impact or the -- the taking 3 under consideration the state of mind at a point of 4 incarceration of a life sentence, I'm never going to get 5 out of jail, why should I comply was subsequent to the 6 actual act of filing the Federal tax return and 7 subsequent to a year after filing the tax return, which 8 arguably -- and the taxpayer sort of implied that or 9 indicated that he did not send in the check, which is a 10 much easier thing to verify whether or not a check was 11 cashed or your account was out of balance as a result of 12 a -- what seems to be to him relatively speaking a 13 significant amount. 14 And so, I would have some pause in supporting 15 relieving him for reasonable cause during that period. 16 Very, very supportive once he's incarcerated, trying to 17 figure out if there's something we can do. That's the 18 area that unfortunately we don't have a basis that I can 19 think of for relieving interest because of incarceration 20 or the consciousness while at that particular time. Do 21 we, Mr. Epolite or Mr. -- 22 MR. AMBROSE: No, not as far as we know. But I 23 thought that Ms. Brunett indicated that FTB had 24 voluntarily abated some of that interest. I -- I could 25 be wrong but I -- 26 MS. STEEL: Only just one part. 27 MS. YEE: Yeah, I think that -- 28 MR. AMBROSE: That's what she had said. 10 1 MS. STEEL: The filing enforcement. 2 MR. AMBROSE: Well, they did -- yeah, they did 3 abate the filing -- yeah, the filing enforcement fee. 4 But I -- I can look in the record here, but I -- I -- 5 MS. YEE: I think -- I think she -- 6 MS. MANDEL: Well, it was interest on the 7 penalty -- 8 MR. AMBROSE: Oh, interest on the penalty. 9 MS. MANDEL: -- is what your -- your hearing 10 summary says, abated and refunded the de -- demand 11 penalty plus interest -- 12 MR. AMBROSE: Okay. 13 MS. MANDEL: -- to him. 14 MR. AMBROSE: So it would only have been that. 15 MS. MANDEL: So that might be where you were 16 thinking of interest. 17 MR. AMBROSE: Right. Okay, I'm sorry. Then 18 otherwise now there wouldn't be any basis for it in the 19 statute. 20 MS. STEEL: To me that he did the Federal 21 income tax return filed and then plus -- and that you 22 you have to go through Court system before the 23 incarceration, is much harder than you get into the jail 24 and sit there, you have more time. That's another thing 25 that even he did it. 26 And another thing is Federal tax return was -- 27 he supposed to get refund, so maybe he forgot -- he did 28 the return but he forgot on the tax return that he 11 1 thought he was getting refund on the State, you know, 2 return, too, when he was sending it out. 3 I mean, there is a lot of assumptions that, you 4 know, we can build it here. 5 MR. HORTON: Yeah, I would -- I would 6 actually -- I would actually -- let's say the taxpayer 7 did forget and it still would not provide us reasonable 8 cause, the fact that he forgot. 9 MR. RUNNER: Forgot what? 10 MR. HORTON: Or he -- 11 MS. STEEL: To pay. 12 MR. HORTON: -- he didn't write the check or -- 13 is the fact -- is the incarceration took place a year 14 after and we sought to extract in his testimony his 15 state of mind, at least I did -- his state of mind prior 16 to March of 1997, and he -- he indicated that, no, I was 17 clear up until March 1987 was when the -- you know, when 18 the hammer sort of hit. So -- 19 MR. RUNNER: Isn't the assumption, though, that 20 he wasn't engaged in that conversation because he had 21 thought he had paid, he filed during that time? I mean, 22 that's why -- that's why he wasn't thinking about it up 23 to his incarceration because he -- 24 MR. HORTON: But there again -- 25 MR. RUNNER: -- thought he had filed. 26 MR. HORTON: -- assuming that that's true, 27 giving him the benefit of doubt, it still does not give 28 us a basis for reasonable cause. 12 1 MR. RUNNER: Well, I -- well, is that -- again, 2 I guess I'm looking for that definition of reasonable 3 cause. Is there one? 4 MR. AMBROSE: Well, generally, and I -- I can 5 give you, you know, my take on -- on the Board's formal 6 opinions and the case law, generally there has to be 7 some connection between the event or the facts that are 8 alleged to have, you know, resulted in the delay or the 9 late filing. So -- 10 MS. MANDEL: Right, but the question is if -- 11 if -- if -- if the taxpayer -- if the -- if you believe 12 the taxpayer assuming all of the testimony and the other 13 evidence about -- 14 MR. RUNNER: Assume that the taxpayer -- 15 MS. MANDEL: -- you know, and everything he 16 said which ultimately I think he said, "I'm not really 17 sure" -- 18 MR. RUNNER: Right. 19 MS. MANDEL: But if you -- if you take 20 everything -- if you had a taxpayer who walked in 21 absolutely, "I went to the Post Office," "I did this," 22 you know, what the Post Office did with it or what 23 happened when it showed up in the FTB's Post Office Box 24 if it didn't -- if it didn't show up, as far as I knew 25 from the day I filed my Federal return and I filed my 26 State return, time goes on, of course the deadline 27 passes. And ultimately you get contacted by FTB whether 28 or not you're in prison or not. They -- you're 13 1 contacted by FTB and the taxpayer's argument is, "I 2 mailed it. As far as I knew it was filed. Until I got 3 that notice from you a year and a half or whatever later 4 I had no idea you didn't have it." 5 MR. AMBROSE: Uh-huh. 6 MS. MANDEL: That's I think what Mr. Runner is 7 asking is if that is -- you know, if -- if that -- if 8 that's something to excuse a penalty for late filing. 9 MR. AMBROSE: So you absolutely thought that 10 you had filed it because that's -- 11 MS. MANDEL: Well, there's -- 12 MR. AMBROSE: -- what you do every year? 13 MS. MANDEL: Well, the guy -- 14 MR. AMBROSE: Or -- 15 MS. MANDEL: -- if -- I mean the Board -- if 16 the Board believes that he did in fact do it, file it -- 17 MR. AMBROSE: That he did do it. 18 MS. MANDEL: -- but it's just some -- 19 MR. AMBROSE: Okay. 20 MS. MANDEL: -- something -- I mean, that's 21 what I hear Mr. Runner saying. 22 MR. RUNNER: Right. And the -- and the -- and 23 the reasonable -- and the other issue is and then he's 24 in prison. 25 MR. AMBROSE: Well, if -- if you're satisfied 26 that he's met his burden of proof that, you know, based 27 on his testimony that he's -- he actually did do it but 28 for some reason, you know, nobody knows why, FTB never 14 1 received it, then -- I would say then -- then -- to me 2 that isn't reasonable cause for late filing because he 3 hasn't late filed. He's actually filed it on time, 4 right? I mean, if you believe that that's in fact what 5 happened. 6 So, I don't -- 7 MS. MANDEL: I mean, I think that was intent 8 that kind of -- I think that's what you were trying to 9 as -- 10 MR. RUNNER: Right, right. 11 MS. MANDEL: -- ascertain. 12 MR. RUNNER: That's the core -- that's the core 13 of the issue. 14 MR. AMBROSE: Uh-huh. So it would be -- right, 15 it would -- if you're satisfied that, you know, based on 16 his evidence that he actually did file on time -- 17 MR. RUNNER: Swearing under perjury -- 18 MR. AMBROSE: Right. 19 MR. RUNNER: -- (inaudible) perjury. 20 MR. AMBROSE: Then -- right, then penalty would 21 not be appropriate. 22 MR. RUNNER: Right. Thank you. 23 MR. HORTON: Discussion, Members? 24 There's a motion and a second on the floor. 25 Ms. Olson, please call the roll. 26 MS. OLSON: Mr. Horton. 27 MR. HORTON: No. 28 MS. OLSON: Ms. Steel. 15 1 MS. STEEL: Aye. 2 MS. OLSON: Mr. Runner. 3 MR. RUNNER: Aye. 4 MS. OLSON: Ms. Yee. 5 MS. YEE: No. 6 MS. OLSON: Ms. Mandel. 7 MS. MANDEL: No. 8 MS. OLSON: Motion fails. 9 MR. HORTON: Is there a a subsequent motion? 10 MS. YEE: Move to sustain the Franchise Tax 11 Board. 12 MR. HORTON: It's been moved to sustain by Ms. 13 Yee, second by Ms. Mandel. 14 Ms. Olson, please call the roll. 15 MS. OLSON: Mr. Horton. 16 MR. HORTON: Horton aye. I don't know why I do 17 that, sorry. Aye. It's that old State Assembly thing. 18 Aye. 19 MS. OLSON: Ms. Steel. 20 MS. STEEL: No. 21 MS. OLSON: Mr. Runner. 22 MR. RUNNER: No. 23 MS. OLSON: Ms. Yee. 24 MS. YEE: Aye. 25 MS. OLSON: Ms. Mandel. 26 MS. MANDEL: Aye. 27 MS. OLSON: Motion carries. 28 ---oOo--- 16 1 ITEM B2 2 MS. OLSON: Our next item is B2, Noel C. 3 McDermott and Lynnet C. McDermott. 4 MR. HORTON: Discussion, Members? 5 Hearing none, is there a motion? 6 MS. YEE: Motion to sustain the Franchise Tax 7 Board, and this incorporates the modifications as 8 conceded to by the Franchise Tax Board, canceling the 9 estimated tax penalty and reducing the late filing 10 penalty. 11 MR. HORTON: It's been moved by Ms. Yee, second 12 by -- 13 MS. MANDEL: Second. 14 MR. HORTON: -- Ms. Mandel. 15 Discussion, Members? 16 Without objection? 17 MS. STEEL: Objection. 18 MR. RUNNER: Objection. 19 MR. HORTON: Objection. Ms. Olson, please call 20 the roll. 21 MS. OLSON: Mr. Horton. 22 MR. HORTON: Horton aye. I did it again. Aye. 23 MS. OLSON: Ms. Steel. 24 MR. RUNNER: Three votes. 25 MS. STEEL: No. 26 MS. OLSON: Mr. Runner. 27 MR. RUNNER: No. 28 MS. OLSON: Ms. Yee. 17 1 MS. YEE: Aye. 2 MS. OLSON: Ms. Mandel. 3 MS. MANDEL: Aye. 4 MS. OLSON: Motion carries. 5 ---oOo--- 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 C1. 2 MS. OLSON: Our next item is C1, Berkeley 3 Patients Group Incorporated. 4 MR. HORTON: Discussion, Members? 5 MS. YEE: Mr. Chairman. 6 MR. HORTON: Ms. Yee. 7 MS. YEE: I'm prepared to make a motion in this 8 matter but I really do want to just add a little bit 9 more with respect to some direction to staff with 10 respect to the Offer-in-compromise program, but my 11 motion would be to redetermine in this matter and direct 12 staff to work with the Petitioner with respect to the 13 Offer-in-compromise program. And I would say with a 14 little bit more expansive thinking and latitude with 15 respect to what kind of offers to entertain here. 16 Obviously the Board members can't be involved in that 17 process but this is one where I think it really just hit 18 to the core of the issue for me with respect to how the 19 expanded program really does work under Offer in 20 Compromise where you have a business that's still 21 operating. This particular type of business has a lot 22 of pressures on its -- on its cost of doing business as 23 well as, you know, the income that is derived from the 24 business. So I just want to be sure that there's due 25 consideration given to the uniqueness of dispensaries in 26 that regard. 27 So I would move to redetermine and direct staff 28 to work with Petitioner to apply for an Offer in 19 1 Compromise. 2 MR. HORTON: The motion is redetermine and to 3 give direction to staff. Is there a second? 4 MR. RUNNER: Second. 5 MR. HORTON: Mr. Runner seconds the motion. 6 Discussion, Members? Further discussion? 7 MS. STEEL: I just want to have a statement to 8 make. 9 MR. HORTON: Ms. Steel. 10 MS. STEEL: Same as last case that marijuana is 11 Federal illegal and I don't think State should charge 12 Sales Tax on the illegal drugs even though the State may 13 use -- accept it as a medicine. But I vote for the 14 staff recommendation because I am bound to uphold 15 California law. 16 MR. HORTON: Thank you, Ms. Steel. 17 Discussion, comment, Members? 18 Okay, it's been moved and second. Without 19 objection, such will be the order. 20 ---oOo--- 21 22 23 24 25 26 27 28 20 1 ITEM C2. 2 MS. OLSON: Our next item is C2, Greg L. 3 Moylan. 4 MR. HORTON: Discussion, Members? 5 Hearing none, is there a motion? 6 MS. YEE: I'll move the staff recommendation. 7 MR. HORTON: It's been moved to adopt staff 8 recommendation. Is there a second? 9 MS. MANDEL: Second. 10 MR. HORTON: Second by Ms. Mandel. 11 Without objection, Members? 12 MS. STEEL: Offer in Compromise. 13 MS. YEE: Yeah, direct them to OIC, as well. 14 This is -- 15 MR. HORTON: Okay. 16 MS. YEE: Yeah. 17 MR. HORTON: We'll incorporate that as 18 direction from the Board. There's a motion and second. 19 Without objection, such will be the order, giving 20 consideration to the direction provided by the Board 21 relative to an offer in compromise. 22 Next item. 23 ---oOo--- 24 25 26 27 28 21 1 ITEM C3. 2 MS. OLSON: Next item is C3, David Anthony 3 Montanez. 4 MS. MANDEL: Same motion. 5 MS. YEE: Uh-huh, I'll second. 6 MR. HORTON: Same motion as -- motion by Ms. 7 Mandel, second by Ms. Yee. 8 Objection, members? 9 Hearing none, such will be the order. 10 Next matter. 11 ---oOo--- 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 22 1 ITEM C5. 2 MS. OLSON: Our next item is C5, Harjap Singh. 3 And this was a waived appearance. 4 MR. HORTON: They waived appearance. 5 Discussion, Members? 6 MS. STEEL: I have a question to Mr. -- Mr. 7 Levine. 8 MR. HORTON: Question, Ms. Steel. 9 MS. STEEL: We didn't give any pilferage or 10 self-consumption to the taxpayer for this case. Is that 11 any reason why? 12 MR. LEVINE: I can't answer that off the top of 13 my head. 14 MS. STEEL: Can -- can I make a motion? 15 Somebody already did? 16 MR. HORTON: No. 17 MR. RUNNER: No. 18 MS. STEEL: Can I move to adopt the staff 19 recommendations but recalculate and giving taxpayer one 20 percent self-consumption plus one percent pilferage? 21 MS. MANDEL: I think Appeals looked at that, 22 too. 23 MS. YEE: Yeah, I thought so. 24 MR. LEVINE: I'm sure we did but I don't have 25 that off the top of my head. 26 MS. MANDEL: Yeah. 27 MR. LEVINE: So -- 28 MS. STEEL: If we didn't give them, give -- 23 1 MS. MANDEL: Well, yeah, I think that there was 2 not, but my recollection was that there were some other 3 things perhaps that Appeals found errors and thought it 4 was gonna wash -- wash out or not be -- 5 MS. YEE: Possibly -- 6 MS. MANDEL: -- favorable. So that was why 7 Appeals didn't go back and -- 8 MR. LEVINE: That sounds right. 9 MS. STEEL: Then I want to hear about it, that 10 why we didn't. And what was the reason for this case. 11 I see a lot of them sitting right down there -- Mr. 12 Hanks. 13 MR. HANKS: Yes, Ms. Steel. Kevin Hanks with 14 the Sales and Use Tax Department. I think it was an 15 oversight in this case that that type of allowance 16 wasn't made. Typically that type of allowance is made 17 for this type of business, so I can only guess that it 18 was just an oversight on our part. 19 MR. HORTON: No, there -- 20 MS. YEE: Well, no, I thought there was 21 specific discussion about errors that were identified 22 that could increase or decrease the deficiency and 23 that -- 24 MS. MANDEL: There -- 25 MR. HANKS: That's -- 26 MS. YEE: -- and there was -- 27 MR. HANKS: That's true, as well. There -- 28 there were -- 24 1 MS. YEE: And that that could potentially 2 offset any adjustment for pilferage -- let me just look. 3 MS. MANDEL: Yeah, I -- Mr. Hanks may have been 4 referring to the actual audit. 5 MS. YEE: Yeah. 6 MR. LEVINE: For example, fountain drinks 7 weren't included and -- 8 MS. YEE: Right. 9 MR. LEVINE: -- those are always -- 10 MS. YEE: Right. 11 MR. LEVINE: -- very large markup. 12 MR. HANKS: Actually, Mr. Lambert probably has 13 more details regarding those adjustments that -- 14 MS. MANDEL: Yeah, Mr. Lambert's not ready. 15 MR. HANKS: -- that weren't made. I think 16 there were a couple of problems. One related to the -- 17 the markups -- the relatively low markup that was used 18 to estimate sales of -- of mini-mart sales. And then 19 the other part of that was a miscalculation in 20 calculating taxable sales -- taxable sales rate. 21 MS. YEE: The -- yeah. 22 MS. MANDEL: Right. Because I -- I had the 23 same question as Ms. Steel when I was just reading this, 24 where was the pilferage and where was the 25 self-consumption and why weren't they made. But then I 26 do recall reading that Appeals had -- 27 MR. HORTON: Okay, let's hear from Mr. Lambert. 28 MR. LAMBERT: Yeah, Scott Lambert with the 25 1 Sales and Use Tax Department. 2 The one percent pilferage was an oversight. 3 But -- and there -- there were a couple of other errors 4 that were made, as well. In regards to using a 5 quarterly average for the second, fourth and first -- 6 second quarter of 2004, fourth quarter of 2006 and the 7 first quarter of 2007 there was an error of about 8 750,000 a quarter on those, as well. 9 In terms of the self-consumption, they did take 10 a look at that and they considered it to be minimal. 11 Mr. Singh has several other locations and that 12 he -- he doesn't generally stay at this particular 13 store. So, he has a General Manager that -- that 14 oversees his -- his operations and -- and that's why 15 there was an adjustment made for self-consumption. 16 MS. STEEL: Okay. Then if he's not over -- 17 he's not managing that store then you have to give 18 additional pilferage because other staff are working 19 there. 20 So, explain to me about pilferage. 21 MR. LAMBERT: Okay. Well, that there wasn't 22 any evidence that it was more than one percent. But -- 23 MS. STEEL: You didn't even give that one 24 percent. 25 MR. LAMBERT: We did not give the one 26 percent -- 27 MS. STEEL: Right. 28 MR. LAMBERT: -- and that was a mistake -- 26 1 MS. STEEL: That's what I'm asking. 2 MR. LAMBERT: -- on our part. 3 MS. STEEL: Okay. 4 MR. LAMBERT: Part of the problem here is, is 5 that they did not file a timely petition. 6 MS. STEEL: Oh, that's totally different 7 matter, though. That's why we are asking them to pay 8 for additional taxes here. 9 MR. LAMBERT: Right, but -- 10 MS. STEEL: So, pilferage and self-consumption 11 is totally separate matter. You cannot really mix these 12 with that non-filing -- I mean under -- 13 MR. LAMBERT: Well -- 14 MS. STEEL: -- reporting taxes plus 15 self-consumption and pilferage. It's not really right. 16 MR. LAMBERT: Right. 17 MS. STEEL: Usually we just make it very clear 18 about that underreported taxable amount that how much 19 this taxpayer owes us plus that we always deduct that 20 some of -- that, you know, one to three percent. I've 21 never seen any cases -- some cases we even give three 22 percent for pilferage. 23 MR. LAMBERT: Right. 24 MS. STEEL: It's depends on the location. 25 So if he's not -- he has -- he owns so many 26 stores understandable because self-consumption may be he 27 is taking from other stores. But for pilferage it's 28 different because if owner is not looking at those 27 1 stores then pilferage has to go up. 2 MR. LAMBERT: I -- I agree with you. The -- 3 the point that I was trying to establish is that when 4 the -- when the taxpayer didn't file a petition they -- 5 they -- it was accepted -- the protest was accepted 6 administratively. They have paid off the liability but 7 they have failed to file claim for refunds. And so 8 subsequently what has happened is, is that none of the 9 periods are open to statute in order to allow a refund 10 to be given to the taxpayer. 11 So even though your argument in terms of 12 pilferage is correct, I would say there are other 13 offsets which Ms. Mandel mentioned in the D & R that 14 more than offset those particular -- the pilferage 15 items. Namely, in terms of the soda fountain wasn't 16 taken into account into the markup for the soda. The -- 17 the single item sales of soda, they were all allowed as 18 six-packs when there was no evidence of that. And in -- 19 in terms of the Sales Tax on the gasoline -- 20 MS. YEE: A wrong rate, yeah. 21 MR. LAMBERT: -- there was a wrong rate that 22 was given. 23 And so when you take all of that into 24 consideration, the errors made in the taxpayer's favor 25 offset the errors that were made against the taxpayers, 26 but I guess my point is even taking all that into 27 account it's basically a moot point because the 28 taxpayer -- at this point there's no avenue to allow 28 1 them to obtain a claim for refund -- or to obtain a 2 refund because of the statute. 3 MR. HORTON: Well, we tried. 4 MS. STEEL: Well, my motion still -- 5 MR. RUNNER: Let me just ask, again I'm -- let 6 me be the new guy here, just ask questions. 7 So help me understand. So, if indeed there was 8 a motion that would grant the taxpayer some amount of 9 money back because of pilferage there -- it is 10 impossible for us to write a check to him? 11 MR. LEVINE: Yes, it -- basically nothing would 12 happen. And I'm sorry I didn't mention that right off. 13 He didn't show up at the conference. He's waived this 14 hearing. And if you granted this outright I'm not sure 15 what shows on the system but I think probably nothing 16 happens, we would send the notice but we would have to 17 explain also that -- 18 MR. RUNNER: So we would send the notice 19 saying -- 20 MR. LEVINE: You won. 21 MR. RUNNER: -- you won -- 22 MR. LEVINE: You can't get it back. 23 MR. RUNNER: -- $1300 but we don't have any way 24 to pay you? 25 MR. LEVINE: Pretty much. 26 MR. HORTON: Well, it would be a little more 27 elaborate, that the statute has run and so forth and so 28 on. 29 1 But I mean the other matter, I think, is 2 equally compelling, and that if we did have a hearing 3 and we were asked to adjudicate the matter on its 4 entirety, the other factors would sort of wash it away 5 and ultimately if we -- rightfully so we should allow 6 the one percent pilferage and the one percent 7 self-consumption, but we would also at that time had 8 adjusted on the other errors that were made by -- that 9 were made. And those might have been offsetting. In 10 fact, the taxpayer arguably could have ended up with a 11 larger liability had we started making these various 12 adjustments. 13 But I -- but I think -- I mean, part of what -- 14 part of what I'm hearing or part of what, you know, I'm 15 thinking is that the Department has to be proactive in 16 providing the taxpayer the adjustments that are normal 17 or at least having that discussion about items that are 18 potential adjustment areas that are normal. 19 You put us at a disadvantage in having to look 20 at the totality when in fact that should have been done 21 prior to arriving here for a hearing. 22 But -- okay. 23 Further discussion, Members? 24 Ms. Steel, are you -- 25 MS. STEEL: I still have an objection. 26 MR. HORTON: Motion is withdrawn. Is there a 27 subsequent motion? 28 MS. YEE: Move to redetermine. 30 1 MR. HORTON: It's been moved to redetermine by 2 Ms. Yee, second by Ms. Mandel -- 3 MS. MANDEL: Second, yeah. 4 MR. HORTON: Objection, Members? 5 MS. STEEL: Objection. 6 MR. HORTON: And some objection. 7 Ms. Olson, please call the roll. 8 MS. OLSON: Mr. Horton. 9 MR. HORTON: Horton aye. 10 MS. OLSON: Ms. Steel. 11 MR. HORTON: Did it again. 12 MS. STEEL: Steel no. 13 MS. OLSON: Mr. -- Mr. Runner. 14 MR. RUNNER: Aye. 15 MS. OLSON: Ms. Yee. 16 MS. YEE: Aye. 17 MS. OLSON: Ms. Mandel. 18 MS. MANDEL: Aye. 19 MS. OLSON: Motion carries. 20 ---oOo--- 21 22 23 24 25 26 27 28 31 1 ITEM C6 . 2 MS. OLSON: Our last item for this afternoon's 3 session is C6, Classique Raphy's, a California 4 Corporation. And I believe Appeals has a revised 5 recommendation. 6 MR. LEVINE: Yes. In -- in this case the 7 Department has been proactive in reviewing the reaudit 8 and discovered an error, and I'm happy to explain it to 9 you but the bottom line is a reduction in the measure of 10 tax from 271,798 to 246,507, which is a reduction in tax 11 from 22,423.38 to 20,336.83. And we agree. We 12 recommend that. 13 MS. STEEL: Thank you, Mr. Levine, you made my 14 day. That amount is not much, but thank you. 15 MR. HORTON: It's been moved by Ms. Steel. 16 MS. YEE: Second. 17 MR. HORTON: Second by Ms. Yee. Without 18 objection, Members, such will be the order. 19 MS. OLSON: And that concludes our business for 20 today's hearings. 21 MR. HORTON: Board of Equalization hearing is 22 hereby adjourned. 23 MS. YEE: Recessed. 24 MS. MANDEL: Recessed. 25 MR. HORTON: Recessed. Strike that, recessed 26 until tomorrow. Recessed, that's right. 27 ---oOo--- 28 32 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 22, 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 32 13 pages constitute a complete and accurate transcription 14 of the shorthand writing. 15 16 Dated: March 1, 2011. 17 18 19 ____________________________ 20 BEVERLY D. TOMS 21 Hearing Reporter 22 23 24 25 26 27 28 33