1 BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION 2 450 N STREET 3 SACRAMENTO, CALIFORNIA 4 5 6 7 8 REPORTER'S TRANSCRIPT 9 MARCH 23, 2011 10 11 SALES AND USE TAX APPEAL HEARING 12 APPEAL OF 13 TOM YOUNG CHUNG 14 NO. 470308 (AA) 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 P R E S E N T 2 For the Board Jerome E. Horton of Equalization: Chairman 3 4 Michelle Steel Vice-Chairwoman 5 6 Betty T. Yee Member 7 8 George Runner Member 9 10 Marcy Jo Mandel Appearing for John 11 Chiang, State Controller (per Government Code 12 Section 7.9) 13 14 Diane G. Olson, Chief 15 Board Proceedings Division 16 17 For Board of David Levine Equalization Staff: Staff Counsel 18 19 Robert Tucker Tax Counsel 20 21 Kevin Hanks Chief, Headquarters 22 Operations Division 23 For Department: Scott Lambert Tax Counsel 24 25 For Petitioner: Mel Mitchell Attorney 26 Thomas Chung 27 Taxpayer 28 ---oOo--- 2 1 450 N STREET 2 SACRAMENTO, CALIFORNIA 3 MARCH 23, 2011 4 ---oOo--- 5 MS. OLSON: Our next item is C3, Tom Young 6 Chung. 7 And item C2 has shown up, so, I will call that 8 after C3. 9 MR. HORTON: Thank you, Miss Olson. 10 Mr. Levine, please introduce the case. 11 MR. LEVINE: The issues in this petition of Tom 12 Young Chung are whether adjustments are warranted to the 13 audited unreported sales of gasoline and whether 14 Petitioner was negligent. 15 MR. HORTON: Thank you very much. 16 Petitioners, you have ten minutes to make your 17 presentation, commencing with your introduction. 18 After which time the Board will hear from the 19 Department. And then you'll have five minutes upon 20 rebuttal. 21 Please commence. 22 MR. MITCHELL: My name is Mel Mitchell. I'm 23 acting as attorney for Tom Chung, although I'm a 24 personal friend for 20 years. 25 I am not a tax attorney, so, I ask you to 26 excuse any ignorance I may show. I am an attorney. I 27 practice workers' compensation defense. 28 But I am here to help Tom present his case 3 1 before you. I encourage you to ask questions of Mr. 2 Chung after my presentation because our summary of our 3 position -- our -- was considered a brief this morning 4 and taken from me and not presented to you. 5 So -- so, there is a lot of information that I 6 can't get in in ten minutes that I encourage you to ask 7 any questions you have so that we can present our case 8 since the written version of our presentation was 9 removed by this friendly gentleman to my left. 10 MR. HORTON: One second, the Board has -- does 11 this embody it, Mr. Levine? 12 Can you -- 13 MR. LEVINE: No. 14 MR. HORTON: -- speak to -- 15 MR. LEVINE: There was a brief on top, which as 16 he describes and we removed that. 17 But you have all of the exhibits that were 18 submitted. And, of course, if the Board wants to accept 19 a post hearing brief, you can do that. 20 MR. MITCHELL: I would request that that be 21 done because it's not a brief, it's a summary of our 22 position. 23 It's a factual argument, not a legal argument. 24 That's my understanding of what a brief would be. 25 MR. LEVINE: As I explained to Mr. Mitchell, it 26 won't do you much good today if you're going to decide 27 it today because you're not going to be reading it while 28 he's making the argument. 4 1 MS. MANDEL: Well, I read very fast and -- 2 MR. HORTON: Why don't we -- 3 MR. LEVINE: Well then, you're faster than I 4 am. 5 MR. HORTON: -- yeah, why don't we do this -- 6 why don't staff make a copy of it, make it available to 7 the Members, pending our decision to review it, not to 8 review it, and at which time we may very well have time 9 during lunch or after lunch, depending on how the case 10 goes. 11 MR. LEVINE: Just an added comment. 12 One problem with that is really the Department 13 should have an opportunity to respond, which it's not 14 going to do today, but it's at the Board's option. 15 MR. HORTON: Again, let's let the Members make 16 the decision as to whether or not that should be the 17 case. 18 MR. MITCHELL: Thank you. 19 MR. HORTON: Please continue. 20 MR. MITCHELL: Yes, sir. 21 As you know, the audit period is 1-1-05 to 22 12-31-07. And the reason we're here is because during 23 that time the average gasoline sales was sold at 7.6 24 cents below cost. 25 However, during that entire period his business 26 operated at a net profit. All of the returns show that, 27 including federal income tax returns, because he made 28 substantial to income from other sources in the 5 1 business, including bay rentals, commercial truck 2 parking, vending machines, ATM, vending advertising, 3 auto repairs, convenience store and, in the last year of 4 the audit, 2007, he had a very successful car wash that 5 was built. 6 Now he reported his sales accurately to the 7 penny. The auditors have found no discrepancies 8 whatever in any of the documents he's presented. 9 He provided evidence of the number of gallons 10 purchased, which is very strictly required by the EPA, 11 the AQMD and Exxon Mobil, to make sure there's no 12 leakage going on underground. 13 He's provided income documents -- proof of 14 income from source documents from his cash register, as 15 well as other supporting evidence, which I'll get to in 16 a minute. 17 Now Mr. Chung's been audited on two prior 18 occasions. The last one was for the period 1993, '94, 19 '95. 20 So, the '96 audit resulted in no taxable 21 measure based on the exact same evidence that he 22 provided initially to the auditors here. And they were 23 all accepted. 24 The reason they weren't accepted in this case 25 is because of, obviously, selling gasoline at a loss. 26 And it's understandable that they would ask for more 27 information, which is what they did. 28 But he provided it. And despite time after 6 1 time we provided the information they requested, it was 2 dismissed, or, you know, it was just not given its due 3 weight. 4 I pray that you consider the due weight of the 5 evidence he's provided, the most important of which is 6 the source document. They say he didn't have source 7 documents to support his sales, but that's not true. 8 He provided cash register printouts for every 9 quarter for which he filed a return. They want source 10 documents for the source document, which is the daily 11 printouts. And those are irrelevant to filing a tax 12 return. 13 You'll see in our Exhibit No. 2 printouts from 14 the cash register system, including worksheets and the 15 tax return that he filed. And those are complete in and 16 of themselves. 17 They -- they have trouble accepting that he 18 sold anything at a loss. So, they want -- they want 19 the -- the daily printouts from the register. 20 Mr. Chung kept these daily printouts, recorded 21 them and disregarded them because the information is all 22 he needed. The source document for a tax return on a 23 quarterly basis is the quarterly printout from a cash 24 register system which accumulates every sale and prints 25 it out and those are copied here as an exhibit. 26 Now, clearly, he has to explain reasonably why 27 did he sell at a loss? And the reasons are explained in 28 our summary and can be summarized here. 7 1 He had -- there was a Long Beach redevelopment 2 road construction going on. They started down the 3 street, disrupting traffic and diverting traffic, which 4 caused his sales to dip below the minimum requirement of 5 Exxon Mobil, which was 128,000 gallons a month. They 6 warned him that he has this minimum requirement. 7 When the construction reached in front of his 8 house -- I am sorry, his business, the sales went 9 substantially below the minimum requirement. He lowered 10 his price in order to keep the minimum sales requirement 11 of Exxon Mobil. He could lose his entire franchise if 12 that wasn't met. 13 Then the construction came and also disrupted 14 the business even more, 'cause now it's in front of his 15 business. Now he decided during this time to upgrade 16 his station -- many upgrades, the most important of 17 which was a car wash construction. He borrowed money to 18 keep operating expenses, pay for personal expenses. The 19 auditor said, "Really? Show us your loan documents." 20 And he provided three loan documents for 21 $770,000 that he used for these purposes. Once again 22 every time something's provided, it was dismissed. 23 Our evidence is copied there before you 24 (indicating), the most important of which is item 2, the 25 cash register reports for each quarter. That is a 26 source document. They refused to call it a source 27 document. But it is because it's the same source that 28 they want a source for. 8 1 They want the daily printout, which is 2 irrelevant to a quarterly return. It's the same source, 3 namely, the cash register, which accumulates and prints 4 this information out. 5 They asked for -- "Do you have any credit card 6 receipts?" We provided 24 of them. Why 24? Because 7 there is a six month limit on disputing a cash 8 transaction. After that, they're disregarded. 9 Otherwise you would have storerooms full of cash 10 register receipts. Twenty-four during the audit period 11 were kept because of disputes. Now, 24 is not a lot, 12 but in 720 days of the audit period, it's a very 13 statistically significant sample. It's 3.5 percent of 14 the overall days. And it shows what his pricing was on 15 each of those 24 randomly selected days. 16 They were randomly selected because they 17 weren't selected by anybody except who had a credit card 18 dispute. And they show -- they're entirely consistent 19 with the quarterly reports printed from the cash 20 register and consistent with his return. 21 Now there's a daily journal, item 4. The daily 22 journal is the daily receipts printed out from the cash 23 register system where the gas is divided into, you know, 24 three grades. And it -- it had the total sales. He 25 recorded this in a readable form on his computer, which 26 we also offered to the provide to the Department. They 27 didn't want that, they only wanted the printout version, 28 which he'd already told them he didn't have and that he 9 1 didn't need -- the irrelevant one. 2 Now we also provided the franchise agreement to 3 prove that we -- he was under the threat of termination 4 if he didn't meet his minimum requirement of his 5 franchise. 6 We provided the City of Long Beach 7 Redevelopment Impact Plan. We have provided some 8 analysis of the faulty estimates which the Department 9 chooses to rely on. The selling price and cost analysis 10 are charts, which you can look over, that are 11 self-explanatory. They show the difference between the 12 credit card receipts and the Z reports and how -- how 13 the Department, basically, is estimating based on a 14 survey conducted by the Department of Energy. 15 But they went out to visit his -- his station 16 in '08, after the audit period, and found that he was 17 selling below that -- below the Department of Energy 18 even then. 19 And, so, they -- they went 8 cents below the 20 Department of Energy. And, you know, in our summary 21 there is an argument showing how faulty these figures 22 are because, first of all, the Department of Energy 23 eliminates the top 10 percent and the bottom 10 percent 24 of every sample. They take the mean of the remaining 80 25 percent. 26 If Tom's selling in the lower 10 percent, he's 27 not even part of that sample. Those numbers are just 28 speculation, as compared to printout from a cash 10 1 register receipt. 2 Anyway, it's just unbelievable to me and it's 3 an injustice, in my opinion. 4 The loan documents he presented proved that he 5 took out the loan documents to help maintain the 6 business during this construction and difficult period 7 and to build the car wash. 8 Physical inventory forms are the forms required 9 by the EPA and the AQMD, which -- which are very strict 10 about the number of gallons purchased. So, every gallon 11 that goes in has to be consistent with every gallon that 12 goes out of those tanks. 13 And, finally, after the car wash was built he 14 continued selling at a loss for approximately one year. 15 And the reason is explained in our Exhibit 12, because 16 it shows you that if you sell gas at 10 cent or 8 cent 17 loss and sell a car wash, you make a profit of 300 -- I 18 am sorry, $3.60 per tank. 19 But if you sell gas at a 10 percent profit, 20 which is average for what sales are, you profit 29 21 cents. 22 MS. OLSON: Time has expired. 23 MR. HORTON: Thank you. 24 MR. MITCHELL: So, I encourage you, ladies and 25 gentlemen, thank you for listening, please be fair and 26 consider what is the real evidence. 27 Is it the estimate or is it the actual evidence 28 that we have provided? 11 1 Put them on a scale. I realize that this is 2 not a court of law. 3 MR. HORTON: Thank you. 4 MR. MITCHELL: Please do so. 5 Thank you. 6 MR. HORTON: Will the Department please 7 introduce themselves and commence with their 8 presentation? 9 MR. LAMBERT: Good morning, Mr. Horton and 10 Members. My name is Scott Lambert and I'll be 11 representing the Sales and Use Tax Department today. 12 To my right is Kevin Hanks, also with the Sales 13 and Use Tax Department. And to his right is Robert 14 Tucker with the Legal Department. 15 The crux of this particular audit is the lack 16 of summary or detail records that are being provided. 17 There is no question, as the Petitioner mentioned, that 18 they have summary records that tie out to the figures 19 that were reported on their returns. That is not in 20 dispute. That did happen. 21 And there were two prior audits. In the most 22 immediate audit the auditor was able to -- and this is a 23 quote out of the audit -- it says, (reading) 24 "Auditor traced sales from the computerized 25 cash register tapes to the sales journal. 26 No posting errors noted." 27 In this particular case there is no detailed 28 records. There is just a quarterly summary Z tape, 12 1 which adds up all 90 days on one tape. There is nothing 2 to show if any adjustments were made to that 3 beforehand -- anything to that effect. 4 So, when it comes down to taking a look at the 5 prices that they reported and we take the gallons -- we 6 take the sales prices they reported, divide it by the 7 number of gallons, and we compare that to the LA County 8 average sales for that location, each quarter is 9 anywhere between 46 cents to 80 cents a gallon less than 10 the average. 11 And I believe probably everyone here drives by 12 gas stations, looks at gas stations, most of the time 13 the prices are fairly close. Generally, you'll have, 14 say Arco, which is cash, they'll be on the lower end. 15 You'll have independents on the lower end. And then on 16 the higher end you'll have the name brand stations. In 17 this case it's a Mobil station. 18 So, when you're looking at 80 cents a gallon 19 less than what the averages are paying -- or charging, 20 that's a significant difference. We were able to go out 21 in 2008 and look at two days. Those two days, when we 22 compared them to the averages, were about 8 cents lower 23 than the average. And that's just for the gasoline. 24 If you purchased a car wash with it, the price 25 per gallon lower was about 24 cents. And the only year 26 that's in -- that had car washes was the last year, 27 2007. So, before then, 2005, 2006, there was no car 28 wash. 13 1 So, what the audit did was allow not just the 8 2 cents, in the first year we allowed 14 cents and in 2006 3 we allowed 10 cents -- I am sorry, 12 cents, and in the 4 last year we allowed 10 cents per gallon adjustment. 5 And that's just for the gasoline. 6 As far as the car washes purchased, we allowed 7 24 cents deduction for those car washes. 8 In terms of the taxpayer's argument that they 9 were notified in 2004, I believe he says November or 10 December of 2004, they were notified that, "You're below 11 the 128,000 gallons a month requirement to sell." 12 And if you look at the information that they 13 provided, or actually a similar submission the 14 Department supplied, the first year that it went below 15 was the fourth quarter of '04. And it fell like 5,000 16 gallons below what the average was. 17 So -- so, the whole crux of this why gas is 18 being sold below the average selling price, or actually 19 in this case below cost, selling it below cost, the 20 whole reason was he was going to lose his franchise. 21 He had this plan where he was going to either 22 build a mini -- a mini mart, a bigger one or build a car 23 wash and then this was going to come together. So, he's 24 willing to take a loss for three years to do this. 25 When you take a look at the facts, it doesn't 26 add up. If -- and just from economics, if you lowered 27 price, which he said he did in the first quarter of '05, 28 you would think the gallons would go up, that more 14 1 people would come and purchase from you. 2 And, in fact, what you see is the gallons drop. 3 It doesn't make sense that you lower the price below 4 cost and less people buy your gas. 5 And then in saying that, in the same respect in 6 2008, when you said, "I raised my prices back up," you 7 would think, "Well, your gallons are going to drop." 8 If you take a look in 2008, when he says he 9 does it, it doesn't happen. It -- in fact, the gallons 10 go up. So, you've raised your prices and more people 11 buy. You lower your price and less people buy it. It 12 doesn't make sense. 13 And if you also take a look at the timeline in 14 terms of the loan, he's notified in October of 2003 that 15 they're willing to put a car wash at his facility. 16 That's the time he gets the $100,000 loan because a 17 permit was obtained at that time. 18 And what I'm trying to do is make the 19 connection that if you take a look at the loans and you 20 look at the car wash, they tie right together. 21 October 2003, he's notified they're going to 22 build a car wash. He takes out a $100,000 line of 23 credit. And February 16th of 2006, he takes a $500,000 24 loan against his house. In February of 2006, that same 25 year, they start constructing the car wash. Again in 26 March of 2006 he takes another $100,000 loan, which is 27 right in connection with when the car wash is being 28 built. 15 1 So, my last point is is that when they talk 2 about the car washes, that in 2007 when this plan came 3 together to sell at a loss, at the beginning of 2007 the 4 car wash was put in place and started producing. 5 They're saying, "We sold gas at a loss to make money on 6 the car washes." 7 If you add the selling price of the gas, plus 8 the car washes in 2007, it comes up to less than the 9 cost of the fuel. 10 So, this plan was to get the car wash in shape 11 and still you're losing money for the entire year of 12 2007 after the car wash is in place. 13 So, based on those arguments, the Department 14 feels that -- I am sorry, one last thing -- in order to 15 support the figures that the audit had, we -- the 16 Department purchased figures from a company called 17 Opus.Net. And what they do is they collect selling 18 prices of fuel from different sources. One of them can 19 sometimes be the store owner, it can be the credit card 20 companies, it can be customers, whatnot. 21 We were able to get those figures for 2006 and 22 2007 from them, an independent source. When we took a 23 look at those prices and ran the numbers on those, what 24 they did was support the Department's figures. 25 So, based on that information, the Department 26 concurs with the Appeals decision and recommendation. 27 MR. HORTON: Thank you very much. 28 Rebuttal, please? 16 1 MR. MITCHELL: Yes, I'd like Mr. Chung to 2 respond to some of these points. 3 MR. HORTON: Yes, sir. 4 MR. CHUNG: Thanks the Board Member. 5 First I want to respond point by point before I 6 forget here. 7 First the Department said I have lack of detail 8 records. These are the quarterly Z report that I 9 submitted along with maybe over a hundred pages of 10 source documents to the Board during the audit. 11 And these are the original copies submitted to 12 the auditors, where they look at it and he find there 13 are no discrepancy. 14 And he mentioned that because I am selling at 15 loss he needs more document. That's when we come back 16 and provide more of those (unintelligible) credit card 17 receipts. 18 After they analyze it, he agreed that these 19 credit card receipts is -- is agreeing with our 20 contention that we selling at loss during that time. 21 But their reasoning is because only four is a small 22 sample, it can not represent the whole sale. 23 However, the credit card receipt never intended 24 to support my report. The credit card report only 25 intended to support the Z report that we provided. 26 And as for the LA County survey number, I'd 27 like to explain. These survey number are for greater 28 Los Angeles area. And they are covered 2400 gasoline 17 1 stations. Out of that 2400 gasoline station, the 2 Department of Energy only take 19 samples. From that 19 3 sample, they eliminate the lowest 10 percent, the 4 highest 10 percent. The leftover, the 80 sample, they 5 have a range. They keep the low and high. And their 6 report is the middle number of the range. 7 And also -- they also specify the CV value, the 8 rate itself. 9 Now we all know every gas station that have 10 different prices. And the reason for their prices 11 because they all have different costs. Some of their 12 costs vary because the local tax law is different, some 13 because delivery, distance from the refinery, and some 14 because the oil company divide these into different 15 marketing area and depend on competition. Some of them 16 oil company just lower. Some of them be judging higher. 17 But it all go along with their strategy if they want to 18 maintain the market share or increase the market share 19 or, some cases, helping the particular station under 20 stress if there's a major competition or if there are 21 major construction going on. 22 As far the 128,000 gallon that the Department 23 mentioned, that you can look at the 12 -- determination 24 in No. 5, I do have a chart here. It covered 2003 to 25 2010. 26 And this chart clearly tell you that the first 27 time I ever fall below the minimum sales requirement was 28 in October 2004. That is when the City of Long Beach 18 1 Redevelopment Department starting to construct the front 2 of the street. And also we develop somewhat area 3 because they -- they designate Atlantic Avenue is the 4 gateway to the City of Long Beach. So, there are 5 substantial construction is going on. And the 6 (unintelligible) are aware of the place of the 7 construction here some, some month that it affect us a 8 lot, some month that it doesn't. 9 And at this time then I also receiving a 10 warning from oil company because I fell below the 11 minimum. And it's important for -- you know, very 12 important for me to meet that (unintelligible) because 13 the oil company know in 2006 that they have to spend 14 substantial money to upgrade the station because of the 15 AQMD and EPA require them to do it as part of the 16 dealing upgrade in the gas pump and underground storage 17 tank. 18 And every time that they doing that, they are 19 (unintelligible) assess my sales. Because the oil 20 company does not share my profit. The only thing that 21 they share all the franchise fee on the gas price that 22 they are selling me. So, this is extremely important to 23 them that I am selling at a minimum amount or more. 24 Now why -- why that we continue to sell gas at 25 loss in 2007? In 2007 when the car wash is first 26 opened, that I want to sell it at -- at low price and 27 also big discount for the car wash to build a car wash 28 customer base. Because my business plan for the car 19 1 wash is we want to wash 100,000 cars in our first year. 2 The reason for that is in car wash express 3 there is a rule that people saying that whatever you 4 wash the first month, by the end of the 90 days you 5 double that. Whatever you wash in your first year, by 6 the third year you will double that too. 7 And investor willing to pay top money for a car 8 wash, be able to wash 100,000 cars in the first year. 9 Okay. Now, but they -- they mentioned the 10 Opus.Net. I'd like to point that Opus.Net, the claim 11 that they receiving price information from the station 12 owner, credit card company, but that is not true. I am 13 the station owner. I never reported to them. 14 And there is one thing that I wanted to point 15 out is their report also contradicting what the 16 Department Energy survey. You see, somewhere in the 17 Department summary that it's set, the first quarter of 18 2007, Opus report that my sales price is 10 cents higher 19 than the survey and followed by three quarter lower than 20 survey. That is impossible. 21 The survey -- normally, the number is very 22 rough, however everybody seemed to be synchronized with 23 that price really well. 24 MS. OLSON: Time has expired. 25 MR. CHUNG: Can I add one thing? 26 MR. HORTON: Sure, go ahead, sir. 27 MR. CHUNG: Also in the website of Opus.Net 28 they said they are not guarantee their prices. 20 1 MR. HORTON: Okay. Thank you very much. 2 Discussion, Members? 3 MS. STEEL: Mr. Chair? 4 MR. HORTON: Member Steel? 5 MS. STEEL: So, what you were saying was that 6 quarterly cash register printout was same as what you 7 wrote it down for daily amount that -- from the cash 8 register? 9 So, you put it down in handwritten? This is 10 what here? 11 MR. CHUNG: Mrs. Steel -- 12 MS. STEEL: Just a -- I just want to say yes or 13 no. 14 MR. MITCHELL: No, it's -- it is the same. 15 MS. STEEL: It's the same? 16 MR. MITCHELL: It's not handwritten, it's the 17 daily journal record, No. 4, are kept by a computer. 18 MS. STEEL: Okay, I see. 19 MR. MITCHELL: But they are the same and 20 consistent with the cash register receipts. 21 MS. STEEL: Okay. 22 MR. MITCHELL: The information comes from the 23 same source. 24 MS. STEEL: Okay, good. 25 So, how long that construction was going on? 26 MR. MITCHELL: Tom? 27 MR. CHUNG: The construction, it -- the 28 Exhibit No. 6, it tell you the timeline on it. 21 1 MS. STEEL: Uh-huh. 2 MR. CHUNG: The construction started, actually, 3 the implementation plan of City of Long Beach starting 4 on -- at probably 2004 to 2009. 5 However, the majority that affect my gas 6 station is somewhere from at 12 of 2004 to somewhere 7 about third quarter of 2006. 8 MS. STEEL: Okay. So, after the construction, 9 so how was your business? And how did you put your 10 price up on your gasoline? 11 MR. CHUNG: As soon as the construction 12 premieres or start to finish is somewhere in 2006, the 13 gas sales go up. 14 MS. STEEL: Right. 15 MR. CHUNG: During that time the car wash 16 construction -- 17 MS. STEEL: So, you tried to bring more 18 customers for a car wash so you are still lowering the 19 price, but when you did the -- when you lowered -- I 20 mean, when you put your gas price on average as other 21 stores? 22 MR. CHUNG: How is our price compared to other 23 stores? 24 MS. STEEL: Uh-huh. 25 MR. MITCHELL: When did -- 26 MS. STEEL: When did you -- 27 MR. MITCHELL: -- your price return to normal 28 levels? 22 1 MR. CHUNG: During the 2008, and that's when -- 2 MS. STEEL: So, how long it was since you built 3 your gas station 'til your price was same as other -- 4 MR. MITCHELL: You mean car wash? 5 MS. STEEL: -- average price at car wash, yeah, 6 car wash? 7 MR. MITCHELL: How long after -- from the time 8 you built the car wash until you returned prices to 9 normal levels? 10 How long? 11 MR. CHUNG: Our price never returned to normal 12 level because we decided we make more money by -- 13 MS. STEEL: Car wash. 14 MR. CHUNG: -- offering discount. 15 MR. MITCHELL: That would be Exhibit 12. 16 MS. STEEL: Okay, but it's at -- okay. 17 What the Board of Equalization ask -- telling 18 you is that your prices, your gas price, your selling 19 price is less than what you are bring it in. 20 Most of businesses, they don't survive that 21 way, that's the way that audit -- you know, you got the 22 audit. 23 So, I want to know that you are selling the 24 gas, after you built the car wash that -- when did you 25 start getting the normal price or actually higher than 26 buying price? 27 That's what I'm asking you. 28 MR. MITCHELL: Profit? 23 1 MR. CHUNG: Yeah, that is starting after one 2 year after the car wash open. 3 MS. STEEL: After one year from the car wash? 4 MR. CHUNG: That's correct. 5 MS. STEEL: Okay. 6 MR. CHUNG: It's somewhere about January of 7 2008 because we want a complete year of the car wash and 8 we want to achieve 100,000 cars. 9 MS. STEEL: Okay. So, let me ask Board of 10 Equalization that, you know, you said lack of detailed 11 record, but did you -- did you read all these that we 12 got this morning? 13 MR. LAMBERT: I went through it, yes, ma'am. 14 MS. STEEL: Okay. So, they were recording -- 15 you said that, you know, their lack of detailed, the 16 records, but I said that quarterly fits into 17 computerized printout that daily sales. 18 So, I think that's enough of the documents that 19 they're provided because there's not one cents 20 difference. 21 So, average sales price that, you know, under 22 the construction that they tried to keep the minimum 23 sales, you said that sales went down. 24 Of course, sales went down because the 25 construction. And that's why they put less price. 26 Most businesses, you know, you can not just 27 close down because of the construction. But they have 28 to keep the name of the gas station, that's what most of 24 1 gas stations do, that's why they have the markets and 2 mini marts next to the gas station because they are 3 really are not care much about the gas price, but they 4 try to keep it until construction is done. That's the 5 reason they did. 6 And I heard the reason from this taxpayer today 7 that gas price, plus they want to build the car wash 8 that too -- get the level that what this taxpayer wants. 9 And then price went up, is really reasonable. 10 So, you can not really -- I think, Board of Equalization 11 can not really compare with average price of other gas 12 stations. It's not really fair because they have had 13 the special construction. The City was doing it. So, 14 that was going on. So, we have to put that as a 15 consideration. 16 And second thing is the top -- take top 10 17 percent price out and top 10 percent price bottom, that 18 was not really right because -- for what he put the gas 19 price was totally lower at this point. 20 So, how we can be fair to the taxpayer when you 21 take the lowest amount out, then how you going to 22 calculate that it has to come out much more than what 23 he's selling and with the selling price. 24 So, I don't think that was really fair. So, 25 you know, we really have to look at the -- what's going 26 on, you know. That's why when we have markets and we 27 have pilferage and other stuffs, you know, for these 28 markets when it's bad area. 25 1 That's exactly same thing happened to this 2 taxpayer, that under the construction he didn't have any 3 choice but he has to put the -- lower the price than 4 what he was getting for the gas station. And that's why 5 he made a loan. 6 And then he tried to build this business to 7 better that -- that that's the reason they put the car 8 wash. 9 So, I totally not understand that -- why Board 10 of Equalization was going after the taxpayer that even 11 after you got the reason from this taxpayer that there's 12 a reason that he didn't have any choice but doing. 13 How many people, business owners, wants to lose 14 their money, but didn't have any chance here to survive? 15 MR. TUCKER: Pardon me, Ms. Steel? 16 We agree that -- and I am sure that Mr. Hanks 17 and the Department would agree that it's best not to use 18 estimates or averages. 19 MS. STEEL: But you just used it, though. 20 MR. TUCKER: Because what we would prefer to 21 use would be the actual records themselves. 22 And, in fact, they're required to maintain the 23 daily cash register tapes -- 24 MS. STEEL: It's in here (indicating). 25 MR. TUCKER: -- according to Regulation 69 -- 26 they're required to maintain the daily cash register 27 tapes, the documents of original entry, which would be 28 the individual daily tapes. 26 1 And, unfortunately, they didn't maintain those 2 tapes so that staff could actually go back and look and 3 see the actual selling price on that day. 4 MS. STEEL: Mr. Tucker, I think we are raising 5 our bars all the times because there is some of the 6 markets that they come with a handwritten the daily 7 sales. 8 And then we just had a case in Orange County 9 for the -- those -- what they call, catering trucks, 10 that, you know, we asked them to at least write it down 11 in handwritten. 12 So, what's -- you know, there is if -- there's 13 nothing difference between quarterly sales printout from 14 the cash register amount that that's -- plus that 15 computerized that the input of the daily sales. 16 Then why you asking more that it has to be 17 printout, but there is a quarterly sales printout, that 18 whole amount was fitting with the daily sales here. 19 So, I really don't understand why daily sales 20 makes that much difference because they already did it. 21 MR. TUCKER: One of -- 22 MS. STEEL: If the amount is different -- 23 sorry, Mr. Tucker -- but, you know, it's quarterly 24 printout, amount is different than what they recorded, 25 then it's different. 26 But, you know, you said printout has to be from 27 the cash register. They did the quarterly printout 28 here, that amount fits the daily printout -- I mean 27 1 daily input. 2 MR. TUCKER: Unfortunately, we don't know that 3 it fits to the daily import -- input. 4 And I think that's the complication. 5 MS. STEEL: But can you check it? 6 Because I see that daily input here, the 7 Exhibit 4, and then there is a printout, quarterly 8 printout on Exhibit 2. 9 MS. MANDEL: Mr. Tucker, but what I heard the 10 taxpayer say, which goes to Ms. Steel's point, was that 11 when the auditor asked for the daily thing from the 12 actual cash register, that he offered what's under 13 Tab 2, and which he said was what he put into his 14 computer and he kept his own record of it. 15 And that the auditor didn't want to look at it 16 because it wasn't the original tape from the cash 17 register. 18 And what I hear Ms. Steel saying is that she -- 19 that if the numbers in that printout from his computer 20 tie to the quarterly, then what's the issue? 21 And she made reference to having some people 22 who write it down by hand. He's put it in the journal. 23 Is that where we're at? 24 MS. STEEL: Yes. 25 MR. TUCKER: I apologize, I haven't seen the 26 tab. 27 I think the one thing that would have been able 28 to confirm, first and foremost, would have been the 28 1 selling price of the gas, that would have be -- 2 MS. STEEL: Well, selling price gas, we're 3 talking about that under the constructions. So, you can 4 not really use average sales of other gas stations at 5 this point. 6 MR. HANKS: Ms. Steel, are absolutely right and 7 the Department recognized that too. And I believe 8 Mr. Lambert mentioned that -- that, actually, we used 9 prices that were reduced from the Department of Energy 10 market average prices in recognition of the fact there 11 was redevelopment work and there was construction 12 occurring at the site. 13 And, so, without the car wash being built, 14 actually, the prices for the gas were reduced 14 cents, 15 12 cents and 10 cents from 2005, 6 and 7 in recognition 16 that he sold the gasoline at these reduced prices. 17 And then when they built the car wash in 2007, 18 when you purchased a car wash, actually, we discounted 19 the price even further, 24 cents from the Department of 20 Energy estimates. 21 So, we believe that we did make allowances the 22 reconstruction and redevelopment area. 23 The other item I wanted to just mention is that 24 the reconciliations that are prepared on a quarterly 25 basis wouldn't allow you to calculate the amounts that 26 are owed on a monthly basis. 27 More than likely, the -- well, not more than 28 likely -- the Petitioner was on a prepayment reporting 29 1 basis with the Board. And, so, there is an obligation 2 to report his monthly sales to us as well. 3 So, there needs to be some monthly accounting, 4 not just quarterly accounting, but monthly accounting. 5 And typically we would -- we need to see the daily 6 recordings for sales to see that the monthly register 7 totals are in agreement with the daily recorded 8 amounts. 9 MS. STEEL: Then let me go to the average. 10 How many taxpayers go out there under the 11 construction site that we have to put this price on? 12 I think every stores are so different. That if 13 this owner of the gas station, our taxpayer, wants to 14 put 20 cents below the price that he's buying in, then 15 that's their choice -- try to survive. 16 MR. MITCHELL: May I make a response to 17 something he said? 18 MS. STEEL: You can make it really quick. 19 MR. MITCHELL: All right, very quickly. 20 It's not true that the Department calculated 21 the construction when lowering the price below the 22 survey level. They lowered, if you'll read their 23 documents, you'll see they lowered the price below the 24 survey level because when they went out in '08, after 25 the period, they observed that he was still, at that 26 point, selling below the survey level. 27 So, they calculated the average survey -- the 28 average amount below survey level that he was selling 30 1 and they applied that to the -- to the audit period. 2 But they did not make any further adjustment 3 for the construction. And that's very clear in 4 reviewing their records. 5 So, it's not true that they accounted for the 6 construction. 7 MS. STEEL: You're throwing me out for the 8 second part, so, -- 9 MR. MITCHELL: Okay, okay. They -- there's a 10 survey level, they observed in '08 he was selling an 11 average of 8 cents -- 12 MS. STEEL: I got that. But, you know, I tried 13 to respond to Mr. Hanks' second point. And I been 14 thrown out for that. 15 So, that -- 16 MR. MITCHELL: Sorry. 17 MS. STEEL: -- okay, I'm done. 18 MR. HORTON: Thank you very much. Mr. Runner? 19 MR. RUNNER: Yeah, just a couple quick 20 questions. 21 Atlantic Avenue is a pretty busy street down 22 there in Long Beach. Were there any comparisons? 23 A lot of this seems to have to deal with the 24 idea that we have a lower price because of the -- in 25 order to bring -- in order to keep sales up, in order to 26 bring customers through. 27 Are there any other indications that any other 28 businesses that we -- I mean, we have access to see what 31 1 other businesses did the area during that same period of 2 time. Did we see that kind of impact with that 3 redevelopment project to that -- to the significance 4 that we've gotten in this particular issue? 5 MR. LAMBERT: Not to my knowledge did we have 6 any -- 7 MR. RUNNER: Let me ask you differently then. 8 MR. LAMBERT: Okay. 9 MR. RUNNER: Not to your knowledge, does that 10 mean we looked at it? 11 MR. LAMBERT: I don't believe we did. 12 MR. RUNNER: Okay, okay, 'cause then we don't 13 know? 14 MR. LAMBERT: We do not know. 15 MR. RUNNER: Okay, okay. So, we don't know if 16 it -- if the -- if that particular business was an 17 anomaly, if you will, due to this -- due to this 18 construction issue or whether it was, indeed, something 19 that was happening up and down Atlantic Boulevard during 20 that period of time? 21 MR. LAMBERT: That's correct, no. 22 MR. RUNNER: Wouldn't that be a reasonable 23 issue to look at? 24 I mean, if you're trying to -- if their -- if 25 their argument is, boy, the street has been shut down 26 and, you know, we don't have people coming -- customers 27 coming in the door, wouldn't it reasonable to like check 28 on sales -- sales tax receipts on something across the 32 1 street or down the block to see if, indeed, it's 2 consistent with what's happening in the area? 3 MR. LAMBERT: It may be. In this particular 4 case you are talking about going out and looking at 5 other taxpayer's records in that general area. 6 And how this one got selected was just based on 7 an overview in our headquarters that took a look at the 8 number of gallons and the tax that was being reported 9 and flagged that there was a problem there. 10 When we went out, we were able to identify what 11 the selling price was in 2008. And in that particular 12 case it was consistently 8 cents a gallon below the 13 average. 14 And the average is determined by a government 15 entity, Department of Energy, that provides those 16 averages for the LA area, which are similar businesses. 17 MR. RUNNER: But not in the middle of -- 18 MR. LAMBERT: But not necessarily on that 19 block. 20 MR. RUNNER: Right and not impacted by the 21 construction that's -- 22 MR. LAMBERT: Right. 23 MR. RUNNER: -- potentially going on. 24 MR. LAMBERT: And if we did that, and we might 25 have, I'm not aware of it. And I am -- I'm sorry. I 26 didn't ask that -- I didn't ask that question. 27 MR. HANKS: We didn't look into that question, 28 but I'm just thinking about the Department of Energy 33 1 surveys. Certainly they cast a wide net when they're 2 calculating their averages and there's more than one 3 redevelopment area throughout the state. 4 And, so, I imagine to the extent that that 5 occurs in other areas that that those prices are also 6 calculated in the averages the Department of Energy is 7 calculating. 8 MR. RUNNER: Well, but, Mr. Hanks, I mean, if 9 something's an average across the state is totally 10 different than 100 percent happening to one particular 11 business. 12 MR. HANKS: But the Department of Energy 13 numbers that we're using are localized to this general 14 area where the Petitioner operates. 15 MR. RUNNER: But, again, if -- even if they're 16 a block away from this area and there is no construction 17 going on, it seems to me that that would be difficult to 18 do. 19 Let me just follow up just as -- just as a 20 procedural issue to help me understand. 21 When you say you'd have to go out and get those 22 numbers, wouldn't that be simply reviewing tax records, 23 sales tax records, which we have, right? 24 MR. LAMBERT: Uh-huh. 25 MR. RUNNER: -- you know, on a computer to look 26 at quarter to quarter? Or do we not have the ability to 27 do that when we're trying to compare it with a -- help 28 me out? 34 1 MR. LAMBERT: Yeah, we don't have the ability 2 to do that. 3 MR. RUNNER: Okay. 4 MR. LAMBERT: In other words, we can determine 5 what the -- the purchases of gallons are by any 6 particular taxpayer. But when you take a look at the 7 taxable sales it also includes their mini mart and maybe 8 their -- 9 MR. RUNNER: No, here's my -- that's not my 10 question. 11 For instance, I think there's a Carl's Jr. down 12 the street a little bit. And, so, my interest is -- my 13 question is, do we know, for instance, if there's a 14 Carl's Jr. down -- half a block away, do we know that 15 that Carl's Jr. Then effected sales at that same time to 16 bolster the argument that the taxpayer's saying, "Hey, 17 look, my -- I was really impacted by this." 18 And I just wondered if we -- you know, kind of 19 a third party view, to say, "Hey, yeah, we saw that same 20 dip in this Carl's Jr. that is, you know, down the 21 street." 22 MR. LAMBERT: You would be able to do that by 23 -- well, I'm not sure, because it depends on how they 24 report and -- 25 MR. RUNNER: Okay. 26 MR. LAMBERT: -- you know, when you have a -- 27 and you're saying Carl's Jr., you know, sometimes they 28 have a consolidated return and they might have multiple 35 1 businesses in the same local code. 2 And then you wouldn't be able to tell which one 3 sold what, you just have a single figure, so -- 4 MR. RUNNER: Okay, thank you. 5 MR. HORTON: Further discussion, Members? 6 MS. MANDEL: Mr. Chair? 7 MR. HORTON: Miss Mandel? 8 MS. MANDEL: Just to the taxpayer's 9 representative, I think in your presentation you did a 10 good job of going through all of the exhibits and 11 telling us what was in here and why it was relevant to 12 look at, so -- 13 MR. MITCHELL: I appreciate that. 14 MS. MANDEL: -- I just wanted to say that. 15 MR. MITCHELL: Thank you, I appreciate it. 16 MR. HORTON: Thank you. 17 Further discussion, Members? 18 Just a couple of questions of -- for 19 clarification purposes. During the audit period -- to 20 the Department -- did the -- during the audit period did 21 the taxpayer's reported sales and costs ever reflect a 22 profit? 23 MR. LAMBERT: From gasoline? 24 MR. HORTON: Overall? 25 MR. LAMBERT: They -- no, from the gasoline, 26 no, it was always a loss. 27 MR. HORTON: Okay. 28 MR. LAMBERT: From the mini mart, it was a -- 36 1 there was a profit from the mini mart. 2 MR. HORTON: Okay. And then when the -- when 3 the car wash was opened was a profit generated, in 2007, 4 I believe? 5 MR. LAMBERT: From the gasoline -- from any -- 6 from the gasoline? 7 MR. HORTON: From the car wash and the 8 gasoline? 9 I thought I heard testimony that when you 10 combined the sales from the car wash and the gas 11 sales -- 12 MR. LAMBERT: Right. 13 MR. HORTON: -- there was still a loss? 14 MR. LAMBERT: That is correct. The car wash 15 income for 2007 was $305,000. The sales in the book 16 from the taxpayer's $7,320,000. The cost of that fuel 17 was 7 million 714. So, if you add the 305,000 to the 18 7 million 320 in sales, you come to 7.6 and a quarter 19 million sales, which is below the cost of 7.7 million. 20 So, they lost, during that one year, about 21 $75,000 including the car wash income. 22 MR. HORTON: During the audit period were the 23 audited sales below market per gallon? 24 MR. LAMBERT: 46 to -- between 46 -- 25 MR. HORTON: No, no, audited, not reported, 26 audited sales? 27 MR. LAMBERT: Audited? 28 MR. HORTON: The ultimate audited amount, was 37 1 that -- was there some consideration given to 2 the variables that would have affected the sales, such 3 as construction and so forth? 4 MR. LAMBERT: That is correct, when we -- 5 MR. HORTON: And what did you do to give that 6 consideration? 7 MR. LAMBERT: -- well, we went out on two days 8 in 2008 and took a look at the sales prices of the 9 gasoline during that time period. 10 It came to about 8 cents below the Los Angeles 11 market average. And, so, to give consideration for the 12 construction, because we really didn't know when the 13 construction took place or even how long that it went, 14 other than there was construction in that particular 15 area, how long it lasted, the Department doesn't know. 16 But we gave a consideration. For 2005 we 17 allowed an extra 6 cents a gallon for the construction, 18 plus the 8 cents. And we lowered the average cost 19 14 cents for 2005. 20 For 2006 we allowed 12 cents, which was 4 cents 21 for the construction. 22 And then in 2007 we gave 10 cents, which was 23 2 cents for the construction per gallon. 24 MR. HORTON: Any other stations -- to the 25 taxpayer, any other stations in the area? 26 MR. MITCHELL: I'll let him answer that. But I 27 just wanted to say these -- 28 MR. HORTON: I'll come back. 38 1 Any other stations in the area? 2 MR. CHUNG: No, not across the street is mine, 3 to north of me there is one station and then mine, south 4 of me there is one station. 5 And Mr. Chairman, I'd like to clarify one 6 point. That all three year, the 2005, 2006, 2007, if 7 you add all income from all department from the gas 8 station, every year I made a profit, not loss, like he 9 point out. 10 He only got the car wash and the gas, but he 11 ignore the repair and all the income that I received 12 from other sources by running the station. 13 MR. HORTON: That's helpful. 14 MR. MITCHELL: I also want to point out that 15 when he says, "We allowed this and we allowed that," 16 they're just picking numbers versus cash register 17 printouts and all the other evidence we provided. 18 MR. HORTON: I got that. I think we understand 19 that. 20 Mr. Runner asked was there a survey of the area 21 on selling prices? 22 And I think the response was no? 23 MR. LAMBERT: I believe that, to my knowledge. 24 MR. HANKS: That's correct. 25 MS. STEEL: Mr. Chair? 26 MR. HORTON: A couple of more -- the -- it 27 sounds as if, though, to the Petitioner, it sounds as if 28 though, and I don't want to speculate here, but let me 39 1 ask the question, at any point had you considered 2 selling this operation? 3 MR. CHUNG: Yes, sir. As a matter of fact, in 4 2008, middle of 2008, there was an offer from a 5 well-known businessman come and purchase my business. 6 But I feel the point of selling this not right 7 now because the business is not operating at its peak 8 yet. 9 As soon as it operates at its peak then if we 10 want a sale, yes, that's when I get the maximum price. 11 MR. HORTON: So, part of your goal was -- was 12 part of your goal to increase the marketability of your 13 station by accelerating the quantities of sales 14 activity? 15 MR. CHUNG: One of the -- one of the benefit 16 that the business owner able to get is by operating the 17 business or by selling the business for a big profit. 18 And the only way that you can sell the business 19 for a big profit is every department operating at its 20 peak condition. 21 And that is one of the major reasons that we 22 want to achieve 100,000 in the first of our car wash. 23 And I have some pictures here to show you how 24 we running a car wash in the busy day and you feel free 25 to look at it. 26 And the Department (unintelligible) ask me if 27 my price is low that the gas line would be around the 28 block. I tell you what, I did not see the line go 40 1 around the block, but normally that we have three or 2 four cars waiting all the time. 3 And these pictures will show you how busy the 4 car wash is. 5 MR. HORTON: Okay. 6 MR. CHUNG: And how busy the gas station is. 7 And I also show you under Exhibit 12 why 8 they're selling gas at a discount makes sense to me 9 because I had a little bit more money. As a matter of 10 fact, if I sell gas to -- 11 MR. HORTON: I think we got that. 12 MR. CHUNG: -- to -- 13 MR. HORTON: I hate to interrupt you, sir, but 14 we understood that. 15 My last question then, Member Steel -- 16 hindsight is 20/20. But given the document that 17 reflects the period of time in which the construction 18 was taking place and probably even gives a pretty 19 extensive description of when it actually rotated down 20 to this particular site, did the Department have access 21 to this information? 22 MR. LAMBERT: No. 23 MR. HORTON: Didn't have it at the time? 24 MR. LAMBERT: That's my -- we did not have that 25 detailed information. We had generalized information -- 26 MR. HORTON: Okay. 27 MR. LAMBERT: -- on that project. 28 MR. HORTON: Thank you. 41 1 Member Steel? 2 MS. STEEL: Just the question that there is -- 3 there were two audits before this, first one there is no 4 change and second one, so, both of them didn't have any 5 change at all? 6 MR. LAMBERT: The first was a change and the 7 second one was a no change. 8 MS. STEEL: What was changed first one? 9 MR. LAMBERT: The first one was a change audit. 10 They owed tax on the first audit and the second audit 11 was okay. 12 MS. STEEL: So, the second one, they followed 13 the rules, so, they didn't have any change for that? 14 MR. LAMBERT: That's correct. 15 MS. STEEL: Okay, thank you. 16 MR. MITCHELL: Would the -- would the Members 17 like to view these pictures or not, just to get an idea 18 of what it looks like? 19 MS. STEEL: We already got it. 20 MR. HORTON: Sir -- 21 MS. STEEL: Thank you. 22 MR. HORTON: -- we're good, thank you. 23 MR. MITCHELL: Okay. 24 MR. HORTON: Thank you very much. 25 Further discussion -- further discussion, 26 Members? 27 Is there a motion? 28 MS. YEE: Take the matter under submission. 42 1 MR. HORTON: Moved by Miss Yee to take the 2 matter under submission. 3 Second by Ms. Steel. 4 Without objection, such will be the order. 5 Thank you very much. 6 MR. MITCHELL: Thank you. 7 MR. HORTON: The Department will take this 8 matter under consideration and send you written report 9 of our decision after. 10 MR. MITCHELL: Thank you. 11 ---o0o--- 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 43 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 23, 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 43 constitute a complete and accurate 14 transcription of the shorthand writing. 15 16 Dated: JULY 25, 2011 17 18 19 ____________________________ 20 JULI PRICE JACKSON 21 Hearing Reporter 22 23 24 25 26 27 28 44