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 MARCH 22, 2011 10 11 12 13 14 15 FINAL ACTIONS 16 17 18 19 20 21 22 23 REPORTED BY: JULI PRICE JACKSON 24 CSR NO. 5214 25 26 27 28 1 1 P R E S E N T 2 3 For The Board Jerome E. Horton of Equalization: Chairman 4 5 Michelle Steel Vice-Chairwoman 6 7 Betty T. Yee Member 8 9 George Runner Member 10 11 Marcy Jo Mandel Appearing for John Chiang 12 State Controller (per Government Code 13 Section 7.9) 14 15 Diane G. Olson Chief, Board 16 Proceedings Division 17 18 For the Board: Anthony Epolite Tax Counsel 19 20 21 22 ---OOO--- 23 24 25 26 27 28 2 1 5901 GREEN VALLEY CIRCLE 2 CULVER CITY, CALIFORNIA 3 MARCH 22, 2011 4 ---o0o--- 5 MS. OLSON: Our next items are those 6 matters that were taken under submission. 7 Our first matter is B1.a, Pacific Southwest 8 Container, Incorporated; B1.b, Donald J. Mayol; B1.c, 9 John Mayol and Tami Mayol; B1.d, James Mayol and Birgitt 10 Mayol; and B1.e, Lois M. Mayol. 11 ---o0o--- 12 B1.a PACIFIC SOUTHWEST CONTAINER, INCORPORATED 13 No. 473587 14 B1.b DONALD J. MAYOL 15 No. 474114 16 B1.c JOHN MAYOL AND TAMI MAYOL 17 No. 474120 18 B1.d JAMES MAYOL AND BIRGITT MAYOL 19 No. 474107 20 B1.e LOIS M. MAYOL 21 No. 474108 22 ---o0o--- 23 MR. HORTON: Okay. Thank you, Ms. Olson. 24 Members, discussion? 25 MR. RUNNER: Mr. Chair? 26 MR. HORTON: Yes, Mr. Runner? 27 MR. RUNNER: I move to grant 100 percent of the 28 claimed refund. 3 1 MR. HORTON: Motion by Mr. Runner to grant 2 100 percent of the refund. 3 MS. STEEL: Second. 4 MR. HORTON: There's a second by Ms. Steel. 5 Discussion, Members? 6 MS. YEE: Mr. Chairman? 7 MR. HORTON. Ms. Yee? 8 MS. YEE: I'm not sure how to articulate this, 9 maybe it's some sort of training or orientation, but I 10 really feel like we've got some disconnects here in 11 terms of how to look at, you know, what Appellant's 12 going to bring forward relative to documentation. 13 And I always try to put myself in the shoes of 14 the taxpayers and the Appellants to just kind of get a 15 sense of what their understanding may be in terms of the 16 rules that they're working with. 17 And it just seems to me with respect to the 18 guidance that was available to them, certainly for 19 federal purposes, albeit, IRS didn't delve into it 20 through an audit or anything, but I just found kind of 21 what was stark with respect to this case was the amount 22 of documents that were available. 23 And I understand in terms of what the Franchise 24 Tax Board needs to see, although, as I mentioned 25 earlier, in this case it was so much in contrast to 26 prior R & D cases that we've seen, there was just so 27 much there that it's hard to not, at least, come to the 28 conclusion that there certainly was experimentation 4 1 involved in the projects that were identified, or 2 certainly the ones that we had documentation on and that 3 we had the opportunity to look at. 4 But I know we have a lot of R & D cases that 5 are preparing themselves to come before this Board, 6 but -- and I'll probably be able to articulate what I 7 think may be required after thinking about it some more, 8 but I just feel like there was a little bit of, I guess, 9 lack of clarity about how to really kind of examine 10 documents, the types of documents, how we come to, you 11 know, kind of draw the conclusion about whether there 12 was experimentation involved. 13 One question I neglected to ask earlier was, 14 you know, out of the 1100 that got winnowed down to the 15 400 that really constituted projects for which there was 16 a great deal of R & D and experimentation, what the 17 other 700 looked like? That might have provided some 18 sort of a contrast, but I guess it just -- I feel a 19 little lack of confidence with respect to kind of moving 20 forward. 21 I am supportive of the motion, but it's with 22 that -- with a little reluctance. I don't have the 23 confidence that Franchise Tax Board did kind of fully 24 examine the documents and really could make a better 25 case, at least to me, about why the analysis wasn't 26 embedded in what was provided. 27 MR. HORTON: Further discussion, Members? 28 MR. RUNNER: Just real quick on that point. 5 1 I agree. And I think part of the problem is 2 that there seemed to be this confusion in regards to, 3 you know, the cost center versus project accounting and 4 then what was interpreted there. You know, clearly it 5 seems to me that what FTB was struggling with was the 6 whole issue of the -- the interviews as to the validity 7 of the interviews and then not recognizing then the 8 backup documents that were available as again the -- 9 the -- what's my phrase? 10 What was the phrase extemporaneous documents? 11 MR. AMBROSE: Contemporaneous. 12 MS. YEE: Contemporaneous. 13 MR. RUNNER: Contemporaneous documents that 14 need to be done. 15 And, actually, for that reason I think there 16 ought to be consideration once we do this -- 17 MR. HORTON: You're in contempt Mr. Runner. 18 Just kidding. 19 MR. RUNNER: There ought to be -- we ought to 20 be considering the issue of actually publishing this 21 particular decision -- 22 MS. YEE: No. 23 MR. RUNNER: -- because I think it would give 24 clarity in regards to future R & D issues in regards to 25 cases for taxpayers out there to know exactly what the 26 rule and the standard is. 27 MR. HORTON: Okay. I am not supportive of 28 publishing this decision. 6 1 MS. YEE: Neither am I. 2 MR. HORTON: I just want to make that clear. 3 There is so much confusion in this. I mean, I 4 believe that the -- the audit manual is clear. I 5 believe the law is clear. And I'm very comfortable with 6 that. 7 I think that the -- the Internal Revenue just 8 failed to impeach the records that were before them 9 and/or how they -- some basis upon which to reject what 10 the taxpayer has presented to us. 11 The interviews may have been lacking, but we 12 should have proven that that was the case. 13 The sample test may not have been 14 representative. The 35 may have been reflective of the 15 smaller transactions and may not have been 16 representative of the entire test. But we needed to -- 17 we needed to support that. We needed to prove that. WE 18 needed, at a minimum, to say that it was wrong and 19 particularly when the law allows this type of testing. 20 So, I think the Franchise Tax Board and the 21 taxpayer were in concurrence that there was qualified 22 activity. The question was, how do we measure that 23 qualified activity? 24 Whether or not the administrative portion 25 should have been 83 percent or 30 percent or not, the 26 challenge I had was -- is that we looked at it, came to 27 a conclusion and didn't have that discussion to 28 determine if our conclusion was valid. 7 1 Because our conclusion or the Franchise Tax 2 Board's conclusion could have very well been invalid if 3 supported by additional information. Or it could have 4 been validated if supported by additional information. 5 And we arbitrarily went into a test that is 6 based on hypothetical information. 7 And that's just a little concerning, but it's 8 for those reasons that I would not publish this case, 9 because I don't think it's reflective of the work that 10 the Franchise Tax does in this particular area. 11 And it gives me a little bit of pause. And I 12 don't think it's incumbent upon this body to conduct the 13 audit. 14 And, so, now we're faced with having to make to 15 a decision based on information that is here and it's 16 clear that, you know, quite a bit of work has been done 17 to establish this test process and, so, just wanted to 18 respond to the notion of publishing it. 19 Any further comments, Members? 20 Hearing none, Ms. Olson, is -- there's a motion 21 on the floor by Mr. Runner, second by Ms. Steel, to rule 22 in favor of the taxpayer. 23 Objection, Members? 24 Without objection, such will be the order. 25 ---o0o--- 26 27 28 8 1 MS. OLSON: Our next item is B2, Robert M. 2 Newell, Jr., and Judith A. Newell. 3 ---o0o--- 4 B2 ROBERT M. NEWELL, JR. AND JUDITH A. NEWELL 5 No. 506927 6 ---o0o--- 7 MR. HORTON: Discussion, Members? 8 Hearing none, is there a motion? 9 MS. YEE: Move to sustain the Franchise Tax 10 Board. 11 MR. HORTON: Second by -- 12 MS. MANDEL: Second. 13 MR. HORTON: -- Ms. Mandel. 14 Objection, Members? 15 Without objection, such will be the order. 16 ---o0o--- 17 18 19 20 21 22 23 24 25 26 27 28 9 1 MR. HORTON: Ms. Olson? . 2 MS. OLSON: Our next item is B7, Aurelio 3 Serrano and Haidee Serrano. 4 ---o0o--- 5 B7 AURELIO SERRANO AND HAIDEE SERRANO 6 No. 519860 7 ---O0O--- 8 MR. HORTON: Motion, Members. 9 MS. YEE: Mr. Chairman? 10 MR. HORTON: Discussion? 11 MS. YEE: I think there may have been some -- 12 is it the W-2 that gave rise to the Franchise Tax Board 13 wanting to go back and verify, I think, the question of 14 the withholding amount? 15 MS. MANDEL: The question -- I'm sorry, what? 16 MR. EPOLITE: That is correct. 17 MS. YEE: Okay. 18 MR. EPOLITE: At the hearing the taxpayers 19 brought forward their two W-2s for 2005. The one W-2 20 reflects State income tax withheld of $99.51, rounded up 21 to $100, which reflects the withholding that was 22 reported on the original return. 23 And then during the amended return process the 24 taxpayer claimed additional withholding of 1,060 or $61. 25 And on the second W-2 that was presented today from the 26 employer, Oxnard Building Materials, the State income 27 tax amount on that W-2 reflects State withholding of 28 $1061.44, which would equate to the amount on the 10 1 amended return. 2 However, according to the Franchise Tax Board's 3 records, the W-2 that they received with the return -- 4 the original return for 2005, for Oxnard Building 5 Materials shows zero State withholding. 6 So, the Franchise Tax Board has told Appeals 7 that they would like to go back to their records and 8 confirm whether there was any State income withholding 9 relating to the Oxnard W-2 and then follow up with 10 Oxnard Building Materials as well. 11 MS. YEE: Okay. 12 MR. EPOLITE: To see if the taxpayer was 13 entitled to withholding credits for those wages. 14 MR. HORTON: Motion, Members? 15 MS. YEE: I'll move a 30-30-30 for that 16 purpose. 17 MR. HORTON: So moved. Second by Mr. Runner. 18 Without objection, Members, such will be the 19 order. 20 ---o0o--- 21 22 23 24 25 26 27 28 11 1 MR. HORTON: Ms. Olson? 2 MS. OLSON: Our next item is B8, Patrick T. 3 Mead and Melissa A. Mead. 4 ---o0o--- 5 B8 PATRICK T. MEAD AND MELISSA A. MEAD 6 No. 520063 7 ---o0o--- 8 MR. HORTON: Discussion, Members? 9 Is there a motion? 10 MS. YEE: Move to sustain the Franchise Tax 11 Board. 12 MR. HORTON: Moved by Ms. Yee to sustain, 13 second by Ms. Mandel. 14 MS. MANDEL: Yes. 15 MS. STEEL: I have objection. 16 MR. RUNNER: Objection. 17 MR. HORTON: Objection. 18 MS. STEEL: Letter went out to the last known 19 address. This taxpayer didn't have to get into trouble 20 for this. 21 And 2007's been already granted by FTB, right? 22 MS. YEE: Yes. 23 MS. STEEL: Okay, 2006? 24 MR. HORTON: Mr. Runner? 25 MR. RUNNER: Yeah, I object too 26 (unintelligible). 27 MR. HORTON: Ms. Olson? 28 MS. OLSON: Mr. Horton? 12 1 MR. HORTON: Aye. 2 MR. HORTON: Ms. Steel? 3 MS. STEEL: No. 4 MS. OLSON: Mr. Runner? 5 MR. RUNNER: No. 6 MS. OLSON: Ms. Yee? 7 MS. YEE: Aye. 8 MS. OLSON: Ms. Mandel? 9 MS. MANDEL: Aye. 10 MS. OLSON: Motion carries. 11 ---o0o--- 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 13 1 MS. OLSON: The next item is B9, Marna M. 2 Skaar.. 3 ---o0o--- 4 B9 MARNA M. SKAAR 5 No. 520443 6 ---o0o--- 7 MR. HORTON: Discussion, Members? 8 Is there a motion? 9 MS. YEE: Move to sustain the Franchise Tax 10 Board. 11 MR. HORTON: Moved by Ms. Yee to sustain. 12 Second by Ms. Mandel? 13 MS. MANDEL: Yes. 14 MR. HORTON: Discussion, Members? 15 MR. RUNNER: I object. 16 MR. HORTON: Objection, Mr. Runner, Ms. Steel. 17 Ms. Olson, please call the roll. 18 MS. OLSON: Mr. Horton? 19 MR. HORTON: Horton, aye -- aye. 20 MS. OLSON: Always throws me off. 21 Ms. Steel? 22 MS. STEEL: Aye -- no. 23 What did I say? 24 MR. HORTON: So recorded. 25 MS. STEEL: You really throw me off, yeah. 26 No. 27 MS. OLSON: Mr. Runner? 28 MS. STEEL: I get confused. 14 1 MR. RUNNER: No. 2 MS. OLSON: No. 3 Ms. Yee? 4 MS. YEE: Aye. 5 MS. OLSON: Ms. Mandel? 6 MS. MANDEL: Aye. 7 MS. OLSON: Motion carries. 8 ---o0o--- 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 15 1 MR. HORTON: All right, Ms. Olson? . 2 MS. OLSON: Our next item is B10.a, Michael 3 Calderon; B10.b, Steven Ertelt; B10.c, Steven Olmos; and 4 B10.d, Demeris Parks. 5 And this was a waived appearance. 6 ---o0o--- 7 B10.a MICHAEL CALDERON 8 No. 523035 9 B10.b STEVEN ERTELT 10 No. 527234 11 B10.c STEVEN OLMOS 12 No. 518961 13 B10.d DEMERIS PARKS 14 No. 524781 15 ---o0o--- 16 MR. HORTON: Waived appearance, Members. 17 Is there a motion? 18 MS. MANDEL: Move to sustain the Franchise Tax 19 Board with the penalties as suggested by -- what? 20 MS. YEE: Appeals? 21 MR. EPOLITE: I don't believe we suggested 22 any. 23 MS. MANDEL: Oh, you don't? 24 MS. YEE: Oh, okay. 25 MS. MANDEL: I thought I had notes that there 26 was numbers in the -- 27 MR. HORTON: Is the Department -- 28 MS. MANDEL: -- write up. 16 1 MR. HORTON: -- prepared to make a suggestion? 2 Is this first, second, third? 3 MS. YEE: I believe we had recommendations. 4 MS. MANDEL: I thought I -- I don't think made 5 up these numbers myself. I thought they were in here. 6 They were in what I was looking at on page 7 of the -- 7 MR. EPOLITE: Yes, I apologize. 8 MS. MANDEL: -- hearing -- 9 MS. MANDEL: Okay. 10 MR. HORTON: Okay, apology accepted. 11 MR. EPOLITE: I was looking at the bold. 12 MS. MANDEL: Yes, at the bold. 13 MR. HORTON: So, move to sustain with the 14 imposed frivolous penalty -- 15 MS. YEE: Second. 16 MR. HORTON: -- as recommended, second by 17 Ms. Yee. 18 Without objection, Members? 19 MS. STEEL: Question. 20 MR. HORTON: Question, Ms. Steel? 21 MS. STEEL: Is that per person or all the cases 22 together? 23 MS. YEE: Well, that was per person -- well, 24 there was different amounts. 25 MS. MANDEL: There were different amounts. 26 MS. STEEL: Oh, I see. 27 MS. MANDEL: On -- so, on Calderon, the amount 28 they have is 750, that was a first appeal. 17 1 Ertelt, they have 750 listed. 2 Olmos, they have 5000. There was a series of 3 other appeals on that one before. 4 And Parks they have 2500. 5 MR. EPOLITE: For Parks it's the second appeal 6 and for Olmos it's the fourth appeal. 7 MR. HORTON: Okay, further discussion, Members? 8 Hearing none, without objection, such will be 9 order. 10 ---o0o--- 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 18 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 MARCH 22, 2011 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 18 constitute a complete and accurate 14 transcription of the shorthand writing. 15 16 Dated: March 30, 2011 17 18 19 ____________________________ 20 JULI PRICE JACKSON 21 Hearing Reporter 22 23 24 25 26 27 28 19