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 FEBRUARY 23, 2011 10 11 SALES AND USE TAX APPEAL HEARING 12 APPEAL OF 13 JILL JAN 14 NO. 406775 (FH) 15 DEBORAH S. WEBER 16 NO. 406773 (FH) 17 AGAINST PROPOSED ASSESSMENT OF 18 SALES AND USE TAX 19 20 21 22 23 24 25 26 27 Reported by: Juli Price Jackson 28 CSR No. 5214 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 Scott Claremon Tax Counsel 20 21 Robert Tucker Tax Counsel 22 23 Kevin Hanks Chief, Headquarters 24 Operations Division 25 26 For Petitioners: Jill Jan Taxpayer 27 Kendrick Jan 28 Attorney 2 1 5901 GREEN VALLEY CIRCLE 2 CULVER CITY, CALIFORNIA 3 FEBRUARY 23, 2011 4 ---oOo--- 5 MS. OLSON: Our next case is C9a, Jill Jan and 6 C9b, Deborah S. Weber. 7 Please come forward. 8 MR. HORTON: Mr. Levine, please introduce the 9 issues in the case. 10 MR. LEVINE: Yes. The issues in these 11 petitions of Jill Jan and Deborah Weber are whether 12 Petitioners are personally responsible for the tax debts 13 of NCompass Systems, Inc., whether the Notices of 14 Determination to Petitioners were timely, whether the 15 penalties, other than the amnesty interest penalty, 16 imposed on the corporation should be relieved. 17 And in the petition of Miss Jan there is also 18 the issue of whether her asserted personal liability 19 under 6829 is discharged as a result of her personal 20 bankruptcy. 21 MR. HORTON: Thank you very much. 22 Thank you for your patience. You have ten 23 minutes in which to make your presentation, commencing 24 with your introduction, at which time -- in the 25 conclusion of which, the Department -- we'll hear from 26 the Department. They'll have ten minutes and then we'll 27 return to you for rebuttal. 28 MR. JAN: Thank you, Mr. Chairman and thank 3 1 you, Board Members. You have remarkable resilience in 2 paying attention to all this throughout the course of 3 the day. 4 My name is Kendrick Jan. I am an attorney. I 5 am also the husband of Petitioner Jill Jan and here 6 representing, also as counsel, Petitioner Deborah Weber 7 is absent. She's home holding her stomach. 8 So, I -- this is a fairly complex matter that 9 involves both legal concerns and factual concerns. And 10 I'd like to take it in -- rather than the order that 11 Mr. Levine has set out, in the order that I have. And 12 then I'll periodically jump back and forth to the D & R 13 and the summary, if that's appropriate? 14 MR. HORTON: Sure. 15 MR. JAN: First I'd like to start with our 16 absent Petitioner Deborah Weber. 17 Debbie was -- and let me give you a tiny bit of 18 factual background. So, I will speak here as if I know 19 a lot about the facts of this case. 20 My wife started this business. And I 21 represented that business as General Counsel. I would 22 work for the company periodically. I would help her in 23 developing of corporate materials and contract concerns 24 and so on. 25 You know, sometimes I'll speak as if I am the 26 guy with all of the insight and knowhow -- that may or 27 may not be the case, but forgive me if I sound too all 28 knowing. 4 1 At any rate, Debbie Weber worked for NCompass. 2 Prior to coming to NCompass, she worked for a bank. 3 She's a very bright woman and had not been accorded the 4 respect she was due when she was working at the bank. 5 We had known her for some years. She had been a banker 6 for me in my capacity as an attorney. And we were 7 chatting with her one day and made an offer for her to 8 come to work for NCompass. 9 MS. MANDEL: Speak into the microphone. 10 MR. JAN: Forgive me, I didn't know -- didn't 11 think I'd have that problem, sorry. 12 At any rate, Debbie came to work with us from a 13 bank. And she was a friend of Jill's. And when she 14 came over, we felt that it would nice for her to have a 15 title. And the bylaws of the corporation provide for 16 three officers. Those are statutory officers only. 17 Statutory officers being President, Treasurer/CFO and 18 Secretary. She fulfilled all three of those statutory 19 officer roles. 20 Debbie, when she decided to come to work for 21 NCompass, was given the title of Vice President of 22 Finance. We worked with a bunch -- they worked with a 23 bunch of kind of macho engineers and Jill felt that was 24 the best way to afford Debbie some respect and regard 25 inside the business. And she was an excellent employee. 26 Debbie, however, as set forth in both Debbie's 27 declaration and Jill's declaration, did not have any 28 independent authority to do anything. Everything she 5 1 did was upon the review and direction of Jill. 2 And we felt bad. We've been pursuing this 3 thing since 2001. And that was the year that -- after 4 five years of diligent effort -- Jill closed the 5 business. And we all get emotional. It drove us into 6 personal bankruptcy and it was a very -- a very 7 difficult time. 8 But, at any rate, Debbie had no personal 9 responsibility for what happened in the business. And 10 whatever responsibility there is as a responsible 11 person, Jill takes herself. 12 Forgive me. 13 At any rate, the declaration -- forgive me that 14 also that I have prepared and, unfortunately, late filed 15 a brief. And accompanying that brief was a collection 16 of exhibits. And those exhibits were numbered. 17 I brought along today some additional items 18 which have been provided to you, but do not have a 19 number attached to them. So, I may make reference, in 20 the course of today's hearing, to certain items, but I 21 have to describe those you, I won't have a number 22 reference. 23 At any rate, with regard to the -- to whether 24 or not Debbie herself is a responsible person, we posit 25 she simply was not. And she's been an unfortunate 26 victim. And we feel like we have subjected her to 27 difficult times as a consequence of other decisions made 28 in the course of the business which are not of her 6 1 making. 2 Next, with regard to the statute of 3 limitations, I -- I am sure that the Board has heard 4 many times the arguments related to the unusual 5 annotation, which was Annotation 170.1850 and the -- 6 after the delisting of an annotation, the opinion in the 7 McKoon matter, and I suppose that I probably don't have 8 an awful lot that is original to offer in connection to 9 those concerns, but I would like to address them, if I 10 could? 11 There is, among the numbered exhibits, a copy 12 of an e-mail which has been highlighted for the Board, 13 from Dave Rosenthal, who is the Annotations Coordinator, 14 Business Taxes Committee and Training Section of the 15 Board. And this was his -- this is his wording, 16 "This annotation was deleted because the 17 application of the statute of limitations as it 18 was applied to corporate officers in the backup 19 letter was incorrect. Once an annotation is 20 deleted, it no longer represent the opinion of 21 the Board's legal staff. And the backup letter 22 is removed from the legal library." 23 That e-mail was sent in response to my request 24 to him that he send me the full text of the decision 25 associated with Annotation 170.1850. And I will tell 26 you that the annotation, the cited annotation, is the 27 only legal authority that was provided to me that 28 allowed the interpretation, which I considered a 7 1 distorted interpretation, that provides for the 2 application of an eight-year statute of limitations to a 3 responsible party in a situation where a tax filing has 4 been made by the corporation. 5 And I can't inquire of the Board, but my guess 6 is you've heard this a number of times. However, if you 7 look at the McKoon -- the language of McKoon itself, 8 which after the delisting and removal of the subject 9 annotation from the -- forgive me that I've forgotten 10 the term, that the list of -- 11 MS. MANDEL: Annotations. 12 MR. JAN: -- the collection of annotations that 13 the Board uses to enforce or interpret code sections. 14 McKoon came through. And McKoon came through 15 and said, the basic premise is that persons -- quote, 16 "Persons who make taxable sales are 17 specifically required to file returns to report 18 their tax liability." 19 Here the responsible person did not make those 20 sales and, to use the McKoon language, shouldn't be 21 specifically required to file a tax return. 22 And if you'll note that in State Board of 23 Equalization, Section 6847 provides the statute of 24 limitations is three years eight years if no return was 25 filed -- not specifying that a responsible person is 26 obliged to file the tax return, but rather that if no 27 return was filed. 28 It's a very complicated matter. I am not a tax 8 1 attorney. And I am -- I am not a bankruptcy attorney. 2 I know I am here talking about those two issues here 3 today, but the bottom line is other than the 4 annotations, which is a bit of a bootstrap way to 5 provide authority for going and doing something that 6 seems inconsistent with the statute itself, there is no 7 authority. That is a misinterpretation to apply 6847 to 8 Petitioner. 9 Now, especially, in light of the fact -- and 10 you have this, I am afraid you have it both in the 11 numbered exhibits and the exhibits provided this 12 morning, that the Annotations Coordinator of the Board 13 says, 14 "We misinterpreted 6847 as applying to 15 corporate officers, effectively as applying to 16 responsible parties or responsible persons." 17 And we took that to mean it's a done deal, we 18 don't have to worry about these things any longer. 19 Our reapplication, where we're under McKoon, or 20 some other interpretation, in my opinion is an ex post 21 facto application of a penalty or assessment against an 22 individual not obliged to file a tax return. 23 Now, quickly, and I apologize for consuming so 24 much time, the -- mcKoon also says -- look, I've talked 25 to literally, I shouldn't say scores, but many, many 26 folks from the BOE -- pardon me. 27 And the Board, whether it's from the Taxpayers' 28 Advocate's Office, to folks at the filings division, 9 1 to -- I can't even recall here, I said, 2 "Look if someone wants to file a return in 3 connection with a corporate liability, a person 4 that is a responsible, a director or an officer 5 and they were to file a return, do you have a 6 form for that?" 7 "No, we don't. We don't have a form for that." 8 And, in fact, whether -- around the time 9 between the delisting of the annotation and the McKoon 10 opinion, or otherwise, they will simply say to you, 11 "In fact, you don't have to file that." 12 I heard that not only between those two dates, 13 between delisting of the annotation and McKoon, but also 14 all prior to that. It was a very, very confusing thing. 15 And I will tell that you everyone I've spoken 16 with, including -- up to including Mr. Hurley, who was 17 our hearing officer, suggested that I bring the matter 18 to you. 19 And, so, I've done that. 20 MS. OLSON: Time has expired. 21 MR. JAN: Oh, geeze, I apologize, I probably -- 22 may I beg the Board, since I'm representing two 23 individuals, one of whom is not here, that I have some 24 additional time allotted? 25 MR. HORTON: Sure. We will give you an 26 additional two minutes. 27 MR. JAN: Oh, great. Willfulness, okay, 28 willfulness quickly. The -- 10 1 MR. HORTON: I mean, be mindful in your 2 presentation that you will have an opportunity to -- 3 MR. JAN: Thank you. 4 MR. HORTON: -- share your thoughts. 5 MR. JAN: I appreciate that. 6 With regard to willfulness, the company 7 operated in the last year on loans. And they -- Jill 8 had allowed an individual who worked for her to set up a 9 computer hardware sales division, sold mostly to 10 governmental entities -- in fact, I think only to 11 governmental entities. 12 Turns out that during the course of his selling 13 these things that he was involved in a lot of -- it's 14 not funny stuff, but I recall one day I went in to take 15 Jill to lunch and a large box was delivered. It was a 16 50-inch flat screen TV that he had just won because he'd 17 sold so darn much hardware. 18 Unfortunately, he was selling at a loss. And 19 the money that came in those sales went to a lock box 20 account managed by a bank and then from that account 21 they went directly to the wholesalers of that equipment 22 on which he was earning those nice little perks like 23 50-inch flat screens. 24 It was a remarkable discovery, but the ultimate 25 fact is that she -- that when money came in, it went to 26 the bank and from that bank it went directly to the 27 wholesaler. They did not have control over that money. 28 They didn't have the capacity to make the sales tax 11 1 payments to the Board. 2 You'll note that in one quarter in 2000, the 3 tax -- forgive me, the tax reported was, I think, $58. 4 They didn't have the money to pay it. 5 And if you look at the D & R and the summary, 6 the suggestion is that if they had money to make 7 payroll, then they had money to make the sales tax 8 payments -- except I will tell you that I went broke in 9 this business, loaning my wife money. And I borrowed 10 money for the last year -- pardon, I'm sorry. 11 It's really a quite remarkable thing that the 12 Board's only -- or Mr. Hurley's suggestion and the 13 summary's suggestion that -- I don't have copies of 14 notes to reflect the debt liability the company had to 15 me and to others in connection with loans made 16 particularly so they could make payroll is farcical. 17 I have to tell the Board also it's been a weird 18 when it rains it pours time for us. Forget the BK, 19 there are references made to our inability to recover 20 documents. We're not concerned about the amount of the 21 tax liability. We -- it's based on her returns, our 22 returns, from the company. We understand there was a 23 tax liability. There's no audit in play here. And 24 we're comfortable that the amount reported is the amount 25 that was owed. 26 Unfortunately, any corporate document, any 27 evidence of debt, any evidence of banking, anything was 28 destroyed in a January 3, 2009 house fire that burned 12 1 our house and all of our NCompass records, whether -- 2 irrespective whether they were related to these returns 3 or otherwise, including, unfortunately, the software 4 that she worked on for six years, the gold copies of the 5 software, and all of the documentation. 6 If you'd like, I'll reserve my comments 7 regarding bankruptcy, which is very technical, to the 8 last five minutes -- it's your preference, or I can 9 delve into it right now? 10 MR. HORTON: Thank you. You will have an 11 opportunity to speak to that on rebuttal. 12 MR. JAN: Thank you. 13 MR. HORTON: To the Department, introduce 14 themselves. 15 You have ten minutes to make your presentation, 16 upon which time we will return to the taxpayer for 17 rebuttal. 18 MR. CLAREMON: Good afternoon, Chairman Horton, 19 Members of the Board. I'm Scott Claremon with the Legal 20 Department. 21 To my right is Robert Tucker from the Legal 22 Department and to his right is Kevin Hanks from the 23 Sales and Use Tax Department. 24 We concur with the recommendation of the 25 Appeals Division that Petitioners are liable under 26 Section 6829 for the unpaid liabilities of NCompass 27 Systems, Inc. for the first, third and fourth quarters 28 of 2000. 13 1 Firstly, these determinations were issued 2 properly under the Board's McKoon decision. There is no 3 dispute as to the first two conditions that must be met 4 for personal liability to attach under Section 6829. 5 Petitioner Jan also does not dispute the third 6 requirement that she is a responsible person. 7 Additionally, Petitioner Weber was the Vice 8 President of Finance. And she did sign tax returns for 9 the first, second and third quarters of 2000. And she 10 did communicate with the Board regarding the tax 11 liability in 2000 and 2001. 12 The only evidence either way is the 13 declarations, as they stated. Unfortunately, neither 14 Petitioner appeared at the Appeals conference, so, there 15 was no ability to determine their veracity. 16 With regard to the fourth requirement, a 17 failure to pay is willful if the person had knowledge 18 that the taxes were paid, had the ability to pay the tax 19 or cause them to be paid but failed to do so. 20 Petitioners had knowledge the taxes were due, 21 as evidenced by their signing the nonremittance tax 22 returns and their extensive communication with Board 23 staff. 24 According to Jan's sworn statement, during this 25 period NCompass paid its creditors, rent, utilities and 26 other business overhead expenses, in lieu of paying the 27 tax. 28 Petitioners have, as stated, not provided any 14 1 documentary evidence that NCompass was contractually 2 obligated to pay these other creditors as claimed. 3 Moreover, they don't contend that they gave up 4 control of these funds to these creditors such that they 5 were unable to direct payment to the Board. 6 In sum, all the requirements for liability 7 under Section 6829 have been met and the petition should 8 be denied. 9 Thank you. 10 MR. HORTON: Thank you very much. 11 On rebuttal, please? 12 MR. JAN: Yes. Regarding willfulness, your 13 Honor, the only comment I am hearing from counsel is 14 that she had the capacity to make those payments and 15 didn't make those payments. 16 She did not. The last three months we were in 17 there -- she was in the rental premises, she didn't pay 18 rent. The last year, my job for her was to either make 19 loans to her myself, out of my own pocket -- I love her, 20 but it was my last $100,000 -- and/or to acquire loans 21 for her from friends and family or employees, most of 22 which, if not all of which, were made by Deborah Weber. 23 One day she came in and said, "This is my 24 last $15,000. You can have it for payroll today." 25 I mean, it -- this is the best evidence you can 26 have -- in the absence of documentary evidence, which 27 does not exist -- at least it no longer exists, this is 28 the best evidence you can have. 15 1 I will tell you that she did not have the 2 capacity. One of the prongs of willfulness is the 3 ability to make those payments. She did not have that 4 capacity. I will guarantee you that. 5 Okay. Now, I'd like to step past willfulness 6 and pick up the bankruptcy issue. As big a crybaby as I 7 am, maybe I'll make it through this one because it's 8 fairly technical. 9 If you pull out U. S. Code Title XI, 10 Section 502 -- I've given you copies of Section 502 and 11 50 -- 5 -- 523, forgive me, it's acknowledged by 12 Petitioner that this is a tax of a type that commonly is 13 afforded a priority status in the bankruptcy hearing, it 14 is ordinarily nondischargeable. 15 As stated in the summary, it is a -- in the 16 Board summary, it is a tax on measured -- forgive me, 17 a tax measured by gross receipts for a taxable year. 18 And then I skipped down, I'm looking at the 19 highlighted portion of 507(a)(8)(A)iii, other than a tax 20 of a kind specified -- other than of a kind specified in 21 Section 523 (a)(1)(B) or 523 (a)(1)(C), not assessed 22 before, but assessable under applicable law. 23 It was not assessed, at least the Petitioners' 24 liability was not assessed prior to filing bankruptcy, 25 but it was assessable prior to filing bankruptcy. 26 So, then you turn to 5 -- 523 (A), (B) and (C), 27 which are the two items cited in 507 and it says, 28 "With respect to which a return or equivalent 16 1 report or notice, if required, was not filed or 2 given, a return or equivalent report or notice 3 was filed or given." 4 Doesn't say by the individual. It says -- "a 5 return filed was" -- everyone, I think, stipulates to 6 the fact it was a corporate filing timely made, "and/or 7 was filed or given after the date of such return," that 8 doesn't apply because it was timely filed, "or 9 respect -- or with respect to a debtor, made a 10 fraudulent return, willfully attempted to in any manner 11 avoid or defeat," doesn't apply. 12 Therefore, we fall within the exception set 13 forth in 507 (a)(8)(A)iii and this is a dischargeable 14 debt in bankruptcy. 15 And I got to tell you, we know that certain 16 debts are not -- taxes are not dischargeable in 17 bankruptcy, but I went directly to bankruptcy counsel 18 and inquired of him in advance of this filing. 19 I went to bankruptcy counsel after I got these 20 notices and inquired again of him and I have this same 21 authority cited to me. This is a somewhat unique 22 situation where there is a filing of a tax return and 23 there is an assessable obligation based on that tax 24 return, a responsible personal liability, and there 25 is -- it's timely made, there is no fraudulent intent, 26 no intent to avoid, and, therefore, we qualify for the 27 exception to the nondischargeability standards set forth 28 in the Bankruptcy Code. 17 1 It's a little complex, and I apologize for 2 that. It's been on my lips and it's a very unusual 3 situation. 4 I hope you guys have a ton of questions because 5 I feel like I am bouncing around here somewhat 6 irresponsibly. 7 The equity estoppel and laches issue with 8 regard to Mr. Rosenthal's item, once the Board has -- 9 once the Board, through its authorized representative 10 has made a representation regarding the enforceability 11 of an annotation, I just feel like stepping back into 12 line with that same enforcement approach, whether it was 13 after McKoon or before McKoon, based on the 14 representation, it just seem somewhat inequitable. 15 MS. OLSON: Time has expired. 16 MR. HORTON: Thank you very much -- 17 MR. JAN: Thank you. 18 MR. HORTON: -- for your presentation. 19 Members, any questions? 20 Mr. Runner? 21 MR. RUNNER: Yeah, let's start with the issue 22 in regards to Deborah Weber. 23 MR. JAN: Yes, sir. 24 MR. RUNNER: So, according to the statement 25 that I read and what was just shared here, Deborah Weber 26 had no -- even though she may she have had a title which 27 indicated that she had some role and responsibility in 28 the finances of that -- of the company, that was a title 18 1 that was given to her to help her do her job, which the 2 finances was not part of her job, in order for her to be 3 successful in her role, but she did go ahead and sign 4 some documents, some filings, some tax filings? 5 MR. JAN: That's correct. 6 MR. RUNNER: Did she have -- let me just ask 7 this, did she -- were these prepared by her? 8 MR. JAN: I don't know if they were prepared by 9 her or not, but they would have been reviewed by Jill. 10 And she would have given specific directive and 11 authorized -- 12 MR. RUNNER: She would not have the authority 13 to -- to prepare, compile, sign and put in? 14 That would not be her authority to do that? 15 She would have had to -- 16 THE WITNESS: Work with me. 17 MR. RUNNER: -- get somebody else's approval -- 18 MS. JAN: Mine. 19 MR. RUNNER: -- in that process? 20 MS. MANDEL: Mr. Runner? 21 MR. RUNNER: Yes? 22 MS. MANDEL: Can I -- I'm interested in this, 23 but I'd like to hear it from Miss Jan because -- rather 24 than from Mr. Jan because that was the issue, really, at 25 the Appeals conference. 26 Mr. Jan was there, but neither Miss Weber nor 27 Miss Jan were there. So, it was hard to -- I'd like to 28 hear her answer those kinds of questions and talk about 19 1 it, if you don't mind? 2 MR. RUNNER: Sure, that would be fine. 3 I think part of what I was doing is just 4 actually reviewing what Miss Jan had signed. 5 MS. JAN: Right. 6 MS. YEE: Right, that was her -- 7 MS. JAN: Right. 8 MR. RUNNER: And, so, I was just kind of 9 reviewing that. 10 But, again, that's -- let me -- why don't you 11 again state what you signed here in regards to Deborah 12 Weber's responsibility and role in your company? 13 MS. JAN: She worked for me, under my 14 directive. And she compiled a lot of the -- got a lot 15 of the information together. 16 We worked on things together, but ultimately I 17 approved it. And she may have -- she may have signed a 18 return, but everything kind of went through me first. 19 MR. RUNNER: Kind of went through? 20 MS. JAN: Well, everything -- excuse me, 21 everything went through me first. 22 So, her authority on all of those things was 23 from me. 24 And I said, "Okay. That's fine, go ahead and 25 sign that off." 26 MR. RUNNER: Okay. Let me skip on over -- back 27 over to Department staff. 28 Given that information, I am struggling as to 20 1 why we have included then Deborah Weber as a responsible 2 party. 3 Help me -- help me get through where we go from 4 that to including her as a responsible party. 5 MR. TUCKER: I think the reason that we -- I 6 know the reason we included her as a responsible 7 party -- that's better -- is just based on the 8 documentary evidence. 9 And I think it's correctly stated. 10 MR. RUNNER: That is -- 11 MR. TUCKER: That she was signing documents, 12 that she -- 13 MR. RUNNER: Okay. 14 MR. TUCKER: -- right, tax returns. 15 I think the critical statement is from the 16 decision and recommendation where they say that, 17 "Since neither Petitioner," meaning Miss Weber 18 nor Miss Jan, 19 "appeared at the Appeals conference, the 20 Appeals Division was unable to assess the 21 credibility in regards to those assertions." 22 MR. RUNNER: Okay. 23 MR. TUCKER: And I think it's more -- at thus 24 point it's up to Board to determine. 25 MR. RUNNER: Okay, okay. 26 So, based upon the fact they only thing you had 27 were the signed documents, a title and, therefore, 28 that's what the conclusion came. 21 1 And since then we've found this other 2 information out? 3 MR. TUCKER: Correct. 4 MR. RUNNER: Okay, that's fine. I just wanted 5 to deal with that issue with Deborah. And I may have 6 some other questions on some of the others, but I just 7 want to walk through the Deborah. 8 MR. HORTON: Okay, thank you very much. 9 Ms. Mandel, just to continue. 10 MS. MANDEL: Yeah, just to conclude that, if 11 Miss Jan -- if you have anything, further details to add 12 about how the financial matters were handled at the 13 company and particularly with reference to sales and use 14 tax and other payments, just how did things operate 15 there? 16 And what did you do specifically? And what did 17 Miss Weber do? And how was it all connected? 18 MS. JAN: Well, with regard to the sales and 19 use tax piece of it, he alluded to or discussed the 20 sales of the hardware. And that's -- what would happen 21 is he would make a sale and he had a contact with the 22 GSA. And he was trying to build up some volume and get 23 some hardware sales so that we could have -- 24 MR. JAN: "He" not being me. 25 MS. JAN: -- oh, yeah, the -- 26 MR. JAN: Sorry. 27 MS. JAN: I'm sorry, yes, the man who was in 28 charge of selling equipment, Mr. Dale was his name. 22 1 And when the funds would come in, it went 2 directly into an account that specifically paid down 3 the -- you know, I don't remember all the details -- but 4 it specifically paid down the receivable against 5 whatever it was that we purchased. 6 So, when we say that I didn't have access to 7 the monies that came in on the equipment sales, that was 8 because it went directly into the particular UCC filing 9 or the bank account where then it was directly paid down 10 to the creditors who financed the purchase of the 11 hardware. 12 MS. MANDEL: Okay. And then what about the 13 preparation of sales tax returns or other payments that 14 the company may have been making? 15 And how -- what Miss Weber's role and 16 responsibilities and abilities were? 17 And you -- and just a little more explanation 18 on that relationship. 19 MS. JAN: Okay. She was -- she was the 20 bookkeeper. I mean, she -- she kind of gathered all the 21 documents pertaining to all of the sales and kind of put 22 it together. 23 And then we worked on it, I worked on it. And 24 I would approve of everything. So, we knew that we had 25 to file the sales tax returns. I mean, we knew that it 26 just had to be done and we had every intention of making 27 the business successful. 28 But we just -- when we couldn't remit the sales 23 1 taxes, we filed it anyway, thinking that we would, at a 2 later date, be able to remit the sales taxes. And 3 that just -- it just never happened. 4 MR. JAN: Ms. Mandel, may I throw something in 5 there as why it is that they persisted through this 6 difficult period? 7 It's evidenced in one of the briefs, but we 8 were promised a $10 million infusion of capital from a 9 merchant bank called Iambic Limited in Washington, D.C., 10 which we struggled and struggled and struggled to get 11 to. It was supposed to come in January or February of 12 '01, with the dump of NASDAQ in January, they withdrew 13 their promise. And we were saddled with all this debt. 14 We did whatever it was going to take to get to 15 that place and then when we got to that place, the other 16 fellows jumped ship. So, I did -- 17 MS. MANDEL: Yeah, I understand the company had 18 tremendous difficulties. I was kind of focusing on 19 trying to -- since Miss Jan was not at the Appeals 20 conference -- trying to hear how it was that 21 Miss Weber -- because your point goes to whether there 22 was any money -- 23 MS. JAN: Right. 24 MS. MANDEL: -- that they could have sent. 25 And I was kind of focusing on -- on 26 Miss Weber's sort of potential responsibility for taking 27 actions with respect to the sales and use tax or her 28 ability or nonability -- and I wanted to hear Miss Jan 24 1 talk more about how things -- you know, Miss Jan's 2 basically saying, "Hey, I was -- I controlled 3 everything. And she couldn't do a thing." 4 And I just wanted to hear more sort of the 5 underlying facts that go to that conclusion. 6 MS. JAN: Well, she compiled everything and 7 brought it to me. And then I looked it all over and 8 said, "Okay, that's fine. Go ahead and send it in. 9 That's fine. We can't send any money, but go ahead and 10 send the return in." 11 So, we worked together on all of those things. 12 And I would have been the one who approved of her simply 13 signing the return and sending it in without a check. 14 MS. MANDEL: If there were company payments to 15 be made, like for rent -- I forget what things were paid 16 during this time. 17 MS. JAN: We had payroll expenses. 18 MS. MANDEL: Right. So, who's -- who's signing 19 those checks and under what -- 20 MS. JAN: Well, we used a payroll service and I 21 would call it in. 22 MS. MANDEL: Oh, okay. 23 MR. HORTON: Ms. Mandel? 24 MS. MANDEL: I'm not sure what else to ask. 25 MS. YEE: Could I -- go ahead. 26 MR. HORTON: Member Steel, then Member Yee. 27 MS. STEEL: Just -- I think I just heard that 28 you said some of the sales went directly to the bank? 25 1 And who was controlling the money? And then 2 that price went out to pay for the hardware. So, who 3 was controlling the money? Who gives authorization to 4 pay out? 5 MR. JAN: It goes into a lock box at the bank 6 and the creditors were people like Pinnacor -- 7 MS. STEEL: Oh, because of the bankruptcy? 8 MR. JAN: No, no, no, forget the bankruptcy. 9 MS. STEEL: Before the bankruptcy? 10 MR. JAN: Pinnacor and two or three other major 11 wholesalers, from whom -- RCC and some others -- from 12 whom Rick was buying and reselling these products, would 13 have direct access to those funds. 14 They had -- there was a line of credit. The 15 bank paid those lines of credit down. 16 MS. STEEL: Oh, so, you don't have any control 17 over that money? 18 MR. JAN: We don't even touch that money. 19 MS. STEEL: But that's not your money either? 20 That's not the sales? 21 MS. JAN: Well, there was supposed to be a 22 profit. 23 MS. STEEL: You just supposed get just profit 24 out of it? 25 So, okay -- so, that profit that you had 26 control over that before the bankruptcy? 27 MS. JAN: Uh-huh. 28 MR. JAN: There was -- 26 1 MS. STEEL: That you get paid, okay. 2 MS. JAN: If there was a profit, it would have 3 come and they have then washed it into our regular 4 account. 5 MS. STEEL: Okay. So, your regular, you had 6 control over? 7 MS. JAN: I had control of that. 8 MS. STEEL: And then you said Miss Weber was 9 not -- I mean, she was not responsible for that at all 10 because you are the one telling her to what do? 11 MS. JAN: Right. 12 MS. STEEL: Okay. Let me ask you about the 13 bankruptcy. 14 So, what we are saying is right now because the 15 bankruptcy was filed by the company, so -- 16 MR. JAN: No, forgive me, the bankruptcy was a 17 personal bankruptcy. 18 MS. STEEL: Personal bankruptcy? 19 MS. JAN: When was that filed? 2002? 20 MS. KELLY: Okay, then -- so, if she filed the 21 personal bankruptcy -- actually that was not my 22 question, but, okay, let me come back to that. 23 Usually that when people file -- company filed 24 the bankruptcy, we still go after the responsible 25 people. But that bankruptcy has closed and then we have 26 240 -- it has nothing to do with this case, I'm just -- 27 so, 240 days to that person after that close that, then 28 that person can file the bankruptcy for -- on that 27 1 responsible amount. 2 MR. TUCKER: I apologize, I am not sure. 3 MS. STEEL: It's not related, so, I'll ask you 4 later a little more clearly. 5 So, this case -- so, this Petitioner filed the 6 bankruptcy, put the Board of Equalization number in it. 7 So, why the list of this tax? 8 Am I -- I mean -- so, why she's here then? 9 MR. TUCKER: Because at the time that the 10 bankruptcy was filed there was no determination that had 11 yet been issued that's a responsible person. 12 MS. STEEL: I see, okay. 13 So, that determination has to be done and then 14 you have 240 days and then you have to file the 15 bankruptcy? 16 It seems like I know more about the bankruptcy. 17 MR. LEVINE: A day more than 240 days. 18 MR. TUCKER: The relevant issue here at the 19 time -- 20 MS. STEEL: It has to finish and then she has 21 to file the bankruptcy? 22 MR. TUCKER: -- at the time that the bankruptcy 23 was filed, the amount due was assessable, but not yet 24 assessed. And because it was not yet assessed, that is 25 why it is not discharged in the bankruptcy. 26 MS. STEEL: Thank you. 27 MR. JAN: May I? 28 MR. HORTON: One second, sir. 28 1 Member Yee? 2 MS. YEE: Thank you. I wanted to -- I have 3 some questions for the Department. This relates to the 4 liability itself. 5 And is this like a self-assessed liability? 6 So, I'm not quite sure like what the loan provisions -- 7 I guess the relevancy of any loan provisions to cover 8 any amounts due. 9 And, I mean, presumably, if it's a 10 self-assessed liability, you have collected sales 11 reimbursement and have funds available to pay a 12 liability? But that -- that's not the case? 13 MS. JAN: It just -- it was -- it just wasn't 14 the case. 15 MS. YEE: Okay. And then to follow up on 16 Ms. Mandel's question, I am curious about the -- I think 17 an important point to pursue since we're talking about 18 responsible persons here with both your petition and 19 Miss Weber's petition, so, Miss Weber had no unilateral 20 authority to approve payments; is that true? 21 MS. JAN: Everything was subject to my 22 approval. 23 MS. YEE: Okay. 24 MR. JAN: Yeah. 25 MS. YEE: Or to issue checks for any purpose? 26 MS. JAN: Everything -- everything was subject 27 to my approval. 28 So, she would say, "Can I pay this?" And I 29 1 would say yes or I would say no. 2 MS. YEE: All right. Okay, but for her 3 title -- 4 MS. JAN: Uh-huh. 5 MS. YEE: -- Vice President of Finance, which 6 may have been misconstrued as her having more 7 responsibilities than what actually occurred? 8 MS. JAN: (Whereupon the witness nods head.) 9 MS. YEE: You approved everything? 10 MS. JAN: Yes. 11 MS. YEE: Okay, thank you. 12 MR. HORTON: Further discussion, Members? 13 Mr. Runner? 14 MR. RUNNER: Just to see if I -- in terms of 15 the bankruptcy and the relationship there, let me see if 16 I get this -- see if I got the order of this 17 correctly -- the fact is that this could not be 18 discharged in the personal bankruptcy because -- because 19 they had not, at this point in time of that bankruptcy, 20 Miss Jan had not been identified as a responsible 21 officer? 22 MR. HANKS: That's correct. 23 MR. RUNNER: And, therefore, it has not been 24 charged to their personally at that point. 25 MR. HANKS: Correct. 26 MR. RUNNER: So, that's an issue of just plain 27 old -- just plain old timing. 28 MR. TUCKER: Right. 30 1 MR. RUNNER: The bankruptcy was done. 2 Meanwhile, the tax was due, but the taxpayer had not 3 been -- hadn't been identified, up to that point, as 4 being personally responsible? 5 MR. CLAREMON: Correct. 6 MR. JAN: And I'm chomping at the bit here 7 to -- 8 MR. RUNNER: Go ahead. 9 MR. JAN: -- because he has stipulated today in 10 the summary and in the D & R -- everyone has stipulated 11 that this is a tax that was not assessed, but assessable 12 at the time of filing -- not assessed but assessable. 13 They -- I've been talking with -- well, that's 14 irrelevant. 15 But the bottom line is everyone agrees that 16 it's not assessed but assessable. If you look at the 17 highlighted provision here it says, 18 "Other than a tax of a kind specified in 19 523 (A), (B) or 523 (a)(1)(C) of this title." 20 Then you turn to 523 (a)(1)(B) and (a)(1)(C) 21 and you find that this is that type of case. 22 So, the fact that it was assessed, but not 23 assessable, this doesn't not apply to us. It applies to 24 other people, perhaps, but it doesn't apply to us. 25 And it says, 26 "Other than a tax of a kind specified in 27 523 (a)(1)(B)." 28 You turn to 523 (a)(1)(B) and it says, gee, if 31 1 they didn't file timely, then they don't -- then they're 2 not subject to discharge. 3 Okay. And 523 (a)(1)(C), if they did it 4 fraudulently or with an intent to mislead, then they 5 don't get discharged. 6 We filed timely. She filed timely. 7 She didn't have an intent to mislead. It 8 wasn't a fraudulent return. It was perfectly consistent 9 with what was owed. 10 So, it says, "Other than that, it's not 11 dischargeable," but it is dischargeable because it is 12 other than that. It goes under -- forgive me, it goes 13 under 523 (a)(1)(B). 14 MR. RUNNER: Well, would we disagree that it's 15 not dischargeable if the -- 16 MR. TUCKER: I think the problem is that he's 17 mixing the corporate entity with the personal entity. 18 MR. RUNNER: Okay. 19 MR. TUCKER: The individual. 20 MR. JAN: Not accurate. 21 MR. RUNNER: Hang on. 22 MR. TUCKER: And that's why he looks to the 23 return that wasn't filed, it's the individual has not 24 filed. 25 MR. RUNNER: But the point would still be the 26 same, see if I get this point, it still would be the 27 same. 28 And that is, if, indeed, the bankruptcy would 32 1 have been in a different order, a little bit later, 2 after we have identified Miss Jan as a responsible 3 party, it could have been dischargeable through the 4 personal bankruptcy? 5 MR. TUCKER: Under certain circumstances, I 6 believe the answer is yes, if it -- 7 MR. RUNNER: Okay. 8 MR. TUCKER: -- it has to meet a number of 9 factors. 10 MR. RUNNER: Other criteria? 11 MR. TUCKER: Yeah. 12 MR. JAN: Your Honor -- 13 MR. RUNNER: Okay, let me just -- let me just 14 ask another question, just to kind of clarify here in 15 regards to again how the business took place. 16 Because I am kind of fascinated by the fact 17 that you got these sales going on here, which they are 18 -- of which the seller is responsible for remitting the 19 sales tax on, you've got the money coming in, it's going 20 directly to a bank. 21 The cost or -- there's payments then for 22 those -- for those products that are being made, again 23 totally outside of the business itself, through the 24 bank. 25 But yet for every one of those sales that's 26 taking place out there, there's a sales tax 27 responsibility being done, right? 28 MS. JAN: Right. 33 1 MR. RUNNER: And, so, every one of those sales 2 out there were not being sold at an amount that was able 3 to be enough to cover this cost of that sale? 4 Even though those buyers, at that point, were, 5 indeed, probably paying a sales tax at the time they 6 made those purchases? 7 Is that -- 8 MS. JAN: I think he was just trying to build 9 the resale business. He had a contact with the GSA. He 10 was trying to get the volume up. 11 MR. RUNNER: Right, okay. But I mean that 12 would be -- 13 MS. JAN: That's -- 14 MR. RUNNER: -- the point, the point would be 15 that those sales are going on, there's a sales tax due 16 on those, and you're selling those at a price that's 17 below the amount that is able to take on all of the 18 requirements? 19 MR. JAN: No. 20 MR. RUNNER: You're talking about the profits 21 that would be washed over into your account? 22 The reality is -- 23 MS. JAN: There weren't any. 24 MR. RUNNER: -- you needed -- you need more 25 than the profits to be washed over there -- 26 MS. JAN: We needed the sales tax. 27 MR. RUNNER: -- you needed some of those other 28 -- you needed -- you needed -- you needed money to wash 34 1 over there in order to just carry on the cost of your 2 business and to cover the sales tax that you were 3 responsible for? 4 MS. JAN: Correct. 5 MR. RUNNER: Okay, thank you. 6 MS. MANDEL: I'm confused now. 7 MR. HORTON: Ms. Mandel? 8 MS. MANDEL: Did you just say that there was a 9 lot sales to the GSA? 10 MS. JAN: Well, I just remember -- 11 MS. MANDEL: Or was -- 12 MS. JAN: -- I just remember that was one of 13 the -- that was -- it was a contact at the GSA who -- 14 who ran -- I can't remember the name. 15 MR. JAN: GSA and school districts. 16 MS. JAN: And school districts. 17 Our -- primarily, we started off to develop 18 software for school districts. So, we had -- the 19 software was the bulk of the business. 20 MS. MANDEL: Right. 21 MS. JAN: And, so, we -- we started the 22 hardware resales division, sort of in hopes of 23 supplementing the other side and it never -- 24 MS. MANDEL: I was just trying to figure out if 25 we were talking about a lot of sales to the US 26 government? 27 MR. JAN: Yeah. Well, some of them were and 28 some were to other entities. 35 1 I don't -- is the point that the US government 2 sales were not taxable? 3 MS. MANDEL: Yeah. 4 MR. CLAREMON: According to the fourth quarter 5 2000 sales -- tax return, it was 190,000 in gross sales, 6 160,000 of which were taxable. 7 In first quarter -- 8 MS. MANDEL: So, that's taken care of in the 9 returns. 10 Okay, you made me nervous there with all these 11 references to GSA. 12 MS. JAN: Oh, sorry. 13 MR. JAN: I think that's why we got the 14 reference to the supporting docs in connection with 15 those returns. 16 We're not troubled by that. 17 MS. MANDEL: Okay. 18 MR. JAN: We're not troubled by that. 19 MS. MANDEL: Thanks. 20 MR. HORTON: Further discussion, Members? 21 MR. JAN: Mr. Horton, forgive me, I would just 22 like to say one thing about the bankruptcy issue. 23 The statement in the summary and the statement 24 in the D & R are inconsistent with the language of the 25 Code. 26 And what counsel cites is what is referenced in 27 the summary and in the D & R. 28 If you look at the Code section, you'll see 36 1 that this is a dischargeable debt. 2 And there is one other small concern with 3 regard to what is -- what should be considered a filing 4 of a return or a Notice of Liability or Nonliability, 5 which is required, purportedly, under McKoon. 6 MR. HORTON: Sir, be conscious, you're starting 7 to be a little bit redundant. 8 MR. JAN: No, forgive me, this is a totally new 9 point. 10 And that is that there is no form. They 11 just -- the point in McKoon is, "Hey, tell us that you 12 don't owe us something and we're good with it." 13 Well, you'll note in the bankruptcy filing, 14 there is a specific statement that there is an 15 obligation to -- with an amount slightly in excess of 16 the reported tax liability and there is a specific 17 statement in there that that liability is a conditional 18 liability of NCompass and the taxpayer. 19 And, so, if all else fails, we would submit 20 that would be sufficient notice to qualify under McKoon 21 and, thereby, providing for a three-year statute rather 22 than eight-year statute. They did not meet that 23 three-year statue. 24 Thank you for your indulgence. 25 MR. HORTON: Thank you very much. 26 Is there a motion, Members? 27 MS. YEE: Move to take te matter under 28 submission. 37 1 MS. MANDEL: Second. 2 MR. HORTON: Been moved by Ms. Yee, second by 3 Ms. Mandel. 4 Objection, Members? 5 Hearing none, such will be the order. 6 Thank you so very much for coming out today. 7 We will take your matter under submission later on this 8 evening -- 9 MS. JAN: Thank you. 10 MR. HORTON: -- and send you a written report 11 of our decision. 12 MR. JAN: Thank you for your courtesies. 13 MR. HORTON: Thank you. 14 ---o0o--- 15 16 17 18 19 20 21 22 23 24 25 26 27 28 38 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 FEBRUARY 23, 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 pages 1 13 through 38 constitute a complete and accurate 14 transcription of the shorthand writing. 15 16 Dated. APRIL 19, 2011 17 18 19 ____________________________ 20 JULI PRICE JACKSON 21 Hearing Reporter 22 23 24 25 26 27 28 39