1 BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION 2 450 N STREET 3 SACRAMENTO, CALIFORNIA 4 5 6 7 8 REPORTER'S TRANSCRIPT 9 APRIL 26, 2011 10 11 12 13 14 15 FINAL ACTIONS 16 17 18 19 20 21 22 23 REPORTED BY: JULI PRICE JACKSON 24 CSR NO. 5214 25 26 27 28 1 1 P R E S E N T 2 3 For The Board Jerome E. Horton of Equalization: Chairman 4 Michelle Steel 5 Vice-Chairwoman 6 Betty T. Yee Member 7 George Runner 8 Member 9 Marcy Jo Mandel Appearing for John Chiang 10 State Controller (per Government Code 11 Section 7.9) 12 Diane G. Olson Chief, Board 13 Proceedings Division 14 15 For Appeals Division: David Levine Tax Counsel 16 17 18 19 20 ---OOO--- 21 22 23 24 25 26 27 28 2 1 450 N STREET 2 SACRAMENTO, CALIFORNIA 3 APRIL 26, 2011 4 ---o0o--- 5 MS. OLSON: Okay. Our next item is to take 6 those matters that were submitted for decision. 7 And our first item is B1, David Jones and Jamie 8 Jones. 9 ---o0o--- 10 B1 DAVID JONES AND JAMIE JONES 11 NO. 525089 12 ---o0o--- 13 MR. HORTON: Thank you, Members. 14 Is there a motion? 15 Okay, why don't we take -- give it a few 16 minutes here? 17 Members, we are returning to take up the 18 matters -- all of the matters we have taken under 19 consideration to take up for a discussion, commencing 20 with B1, David Jones and Jamie Jones. 21 MS. YEE: I will move to sustain the Franchise 22 Tax Board. 23 MR. HORTON: It's been moved to sustain the 24 Franchise Tax Board. 25 Is there a second, Members? 26 MS. MANDEL: Second. 27 MR. HORTON: Second by Ms. Mandel. 28 Discussion, Members? 3 1 Hearing none -- 2 MS. STEEL: Objection. 3 MR. HORTON: -- objection by Ms. Steel. 4 Ms. Olson, please call the roll. 5 MS. OLSON: Mr. Horton? 6 MR. HORTON: Horton, aye. 7 MS. OLSON: Steel? 8 MR. HORTON: Sorry. 9 MS. STEEL: No. 10 MS. OLSON: Ms. Steel? 11 MS. STEEL: No. 12 MS. OLSON: Mr. Runner? 13 MR. RUNNER: No. 14 MS. OLSON: Ms. Yee? 15 MS. YEE: Aye. 16 MS. OLSON: Ms. Mandel? 17 MS. MANDEL: Aye. 18 MS. OLSON: Motion carries. 19 ---o0o--- 20 21 22 23 24 25 26 27 28 4 1 MS. OLSON: Our next item is C1, Glen Eugene 2 Pearson, III and Stephen Terrance Pearson. 3 ---o0o--- 4 C1 GLEN EUGENE PEARSON III AND STEPHEN TERRANCE PEARSON 5 NO. 406221 (KH) 6 ---o0o--- 7 MR. RUNNER: Move to grant. 8 MS. STEEL: Second. 9 MR. HORTON: There's a motion by Mr. Runner to 10 grant, second by Ms. Steel. 11 Is there discussion, Members? 12 I'm going pass just for a minute because I just 13 want to get my notes on this. 14 But Ms. Olson, go ahead and call the roll, I'm 15 going to pass. 16 MS. OLSON: Okay, Ms. Steel? 17 MS. STEEL: Aye. 18 MS. OLSON: Mr. Runner? 19 MR. RUNNER: Aye. 20 MS. OLSON: Ms. Yee? 21 MS. YEE: No. 22 MS. OLSON: Ms. Mandel? 23 MS. MANDEL: No. 24 MS. OLSON: Mr. Horton? 25 MR. HORTON: No. 26 MS. OLSON: Motion fails. 27 MR. HORTON: Move to adopt staff -- is there a 28 motion, Members? 5 1 I should -- I'm the Chair, I forget. 2 MS. YEE: Yeah, I will move to -- 3 MR. HORTON: It's been moved by Ms. Yee to 4 adopt staff recommendation. Second by Ms. Mandel. 5 Without objection, Members -- 6 MS. STEEL: Objection. 7 MR. HORTON: Ms. Olson, please call the roll. 8 MS. OLSON: Mr. Runner? 9 MR. HORTON: I didn't pass this time. 10 Aye. 11 MR. RUNNER: She's fooling us. 12 MR. HORTON: Okay, Mr. Runner, go ahead. 13 MS. OLSON: I'm sorry. 14 MR. HORTON: Go right ahead, Mr. Runner. 15 MS. OLSON: Okay, Mr. Horton, please? 16 I am so sorry. 17 MR. HORTON: I defer to Mr. Runner. 18 Aye. 19 MS. OLSON: Ms. Steel? 20 MS. STEEL: No. 21 MS. OLSON: Mr. Runner? 22 MR. RUNNER: Still no. 23 MS. OLSON: Ms. Yee? 24 MS. YEE: Aye. 25 MS. OLSON: Ms. Mandel? 26 MS. MANDEL: Aye. 27 MS. OLSON: Motion carries. 28 ---o0o--- 6 1 MS. OLSON: Our next item is C2, Hall's Window 2 Center, Incorporated. 3 ---o0o--- 4 C2 HALL'S WINDOW CENTER, INC. 5 NO. 486260 (KH) 6 ---o0o--- 7 MR. HORTON: Is there a motion, Members? 8 MR. RUNNER: Move to grant. 9 MS. STEEL: Second. 10 MR. HORTON: Move to grant by Mr. Runner, 11 second by Ms. Steel. 12 Objection, Members? 13 MS. MANDEL: Yeah. 14 MS. YEE: Yes, objection, regrettably. 15 MR. HORTON: Ms. Olson, please call the roll. 16 MS. OLSON: Mr. Horton? 17 MR. HORTON: No. 18 MS. OLSON: Ms. Steel? 19 MS. STEEL: Aye. 20 MS. OLSON: Mr. Runner? 21 MR. RUNNER: Aye. 22 MS. OLSON: Ms. Yee? 23 MS. YEE: No. 24 MS. OLSON: Ms. Mandel? 25 MR. HORTON: Is there a subsequent motion? 26 MS. MANDEL: No on the motion and, yes, it's a 27 motion to adopt the staff recommendation. 28 And as some of you have heard this -- this is 7 1 the type of thing that that's near and dear to my heart. 2 But the -- where taxpayer comes in and says, 3 "They had to have seen it, they had to have seen it," 4 because, as you've heard me say, I had that case before 5 the Board of Equalization. 6 And then the regulation was changed so that 7 written advice would include the audit work papers. But 8 the way the Board wrote the regulation, work papers -- 9 you got to see that they really saw the issue and 10 handled the issue. 11 So, that's why it's a sustained staff 12 recommendation. 13 MR. HORTON: Members, I've done these material 14 accountability tests. And when you -- you don't go in 15 to do a material accountability test, you start off with 16 the premise that there could be a 10 percent margin. 17 And when you have within your -- within the 18 category of resources you have a source that represents 19 1 or 2 or 3 percent of the total revenue, a material 20 accountability test with that 10 percent -- it's a 10 21 percent margin that the Board just gives. 22 We could be off by 10 -- give or take 10 23 percent. You're just not going to catch some of these 24 things as you go through that process. And you're going 25 to end up looking at the broader picture. 26 So, I could see how the auditor could have 27 actually been in a position to -- of giving that advice. 28 The second thing is that they have a -- they 8 1 have a requirement under the FAM that they actually 2 disclose the various different things that they did 3 test. 4 And, so, when I went back, I just couldn't see 5 it. I really wanted to get there, to be honest with 6 you, but I just couldn't get there. 7 MS. MANDEL: So, that motion is to sustain -- 8 support the staff. 9 MR. HORTON: So, it's been -- I thought there 10 was a second. 11 MS. MANDEL: I didn't -- I wasn't sure. 12 MR. HORTON: Is there a second? 13 MS. YEE: I second. 14 MR. HORTON: It's been seconded by Ms. Yee. I 15 presume objection. 16 Ms. Olson, please call the roll. 17 MS. OLSON: Mr. Horton? 18 MR. HORTON: Aye. 19 MS. OLSON: Ms. Steel? 20 MS. STEEL: No. 21 MS. OLSON: Mr. Runner? 22 MR. RUNNER: No. 23 MS. OLSON: Ms. Yee? 24 MS. YEE: Aye. 25 MS. OLSON: Ms. Mandel? 26 MS. MANDEL: Aye. 27 MS. OLSON: Motion carries. 28 ---o0o--- 9 1 MS. OLSON: Our next item is C3, Matthew Howard 2 Rokes. This was a waived appearance. 3 ---o0o--- 4 C3 MATTHEW HOWARD ROKES 5 NO. 301819 (KH) 6 ---o0o--- 7 MS. YEE: Move to -- 8 MR. HORTON: Is there a motion, Members? 9 MS. YEE: -- move to adopt the staff 10 recommendation. 11 MR. HORTON: Moved to adopt staff 12 recommendation, second by Ms. Mandel. 13 Discussion, Members? 14 MS. STEEL: Can I just ask Mr. Levine, there's 15 a negligence penalty. Is this second, third audit or 16 first audit? 17 MR. LEVINE: It was the first audit, but we 18 recommend sustaining the negligence penalty because the 19 records really were not there. 20 MS. STEEL: But did they provide it? Did they 21 provide later on that -- 22 MR. LEVINE: Those are -- 23 MS. STEEL: -- taxable sales were outside of 24 California and they were not residents of California? 25 MR. LEVINE: They provided after the fact 26 records, which are not the type of -- when they claim 27 these as nontaxable, they're required to keep 28 contemporaneous records and documentation to support 10 1 their claimed exemptions and nontaxable -- and claimed 2 nontaxable receipts. 3 And this taxpayer did not do that. And the 4 documentation that he obtained after the fact had 5 inconsistencies in them that he admitted. 6 So, he did not use due care in keeping his 7 records is what we think. 8 MR. HORTON: Mr. Levine, just by way of a 9 recommendation, the regulation in defining negligence, 10 provides different -- not different levels of 11 negligence, but different areas in which you can be 12 negligent. 13 And being negligent in more than one of those 14 areas certainly compounds the overall negligence, if you 15 will. 16 And, so, maybe it might be beneficial if we 17 adopt the policy that the agency -- and I know they -- I 18 thought they currently do this, but it doesn't seem to 19 come before us, just -- that would clarify or would 20 delineate the degree of the negligence that exists -- 21 negligence in recordkeeping, negligence in computing the 22 liability, negligence in omission-type errors -- it 23 varies, but it's now sort of codified in the regulation. 24 That might be helpful -- certainly would be 25 helpful to me and might be helpful as these penalties 26 sort of go through the process. This is their first 27 time audit and had the taxpayer appeared here and been 28 able to provide some clarity and their side of what -- 11 1 of why their records were not adequate, we may have been 2 able to remove the penalty. 3 In the absence of that, all we have is what the 4 Department is sharing. 5 MR. LEVINE: That's correct. The taxpayer -- 6 MR. HORTON: That's not -- 7 MR. LEVINE: -- didn't show up. 8 We do always try and delineate the two basic 9 areas, recordkeeping and the degree of liability. 10 That's why we normally -- and I don't know if we have 11 it, here but especially when there is a definite 12 percentage of error, we include that because that is 13 what you're getting to, that's the degree of error that 14 factors into whether it looks likes negligence or not. 15 MR. HORTON: -- well, from what I have heard 16 over the short time that I've been on the Board, is that 17 taxpayer's cooperation or willingness to cooperate 18 has -- has also been a consideration. 19 But -- anyway, we are where we are, hopefully 20 we can -- 21 MR. LEVINE: That goes on the close cases where 22 someone has cooperated, the Department will also give 23 the benefit of doubt when someone's improved, even 24 though it technically doesn't undo the negligence from 25 the prior period, but when we see the taxpayers's made 26 an effort and is improved, we give the benefit to the 27 taxpayer. 28 MR. HORTON: Okay. 12 1 MS. STEEL: Can I just say one thing about -- 2 MR. HORTON: Sure. 3 MS. STEEL: -- this taxpayer, that he never 4 owned the business, before that was the first one. 5 He's a disability retired deputy sheriff that 6 -- who never had tax training, did not fully understand 7 the tax laws. 8 And then he actually provided the Excel sheet 9 to the Department, but Department couldn't read the 10 right, so, he had the record, but he didn't know how to 11 keep it, that's the only thing. 12 So, you know, that's the reason that I asked 13 that why negligence penalty was on it because he had 14 something that nobody understood. But he -- he really 15 tried. 16 So, that's what I was looking at. 17 MR. HORTON: So, is there -- is there -- is 18 there a motion? 19 MS. YEE: Yeah, I made a motion to adopt the 20 staff recommendation. 21 MS. STEEL: Subsequent motion. 22 MR. HORTON: Okay. There is a second to adopt 23 the staff recommendation? 24 MS. MANDEL: Yeah, there was a motion. 25 MS. YEE: Yes, Ms. Mandel seconded. 26 MR. HORTON: Okay. All right, thanks for the 27 reminder. 28 I presume that there's an objection? 13 1 MS. STEEL: Uh-huh. 2 MR. HORTON: Ms. Olson, please call the roll. 3 MS. OLSON: Mr. Horton? 4 MR. HORTON: Aye. 5 MS. OLSON: Ms. Steel? 6 MS. STEEL: No. 7 MS. OLSON: Mr. Runner? 8 MR. RUNNER: Aye. 9 MS. OLSON: Ms. Yee? 10 MS. YEE: Aye. 11 MS. OLSON: Ms. Mandel? 12 MS. MANDEL: Aye. 13 MS. OLSON: Motion carries. 14 ---o0o--- 15 16 17 18 19 20 21 22 23 24 25 26 27 28 14 1 Continued C1 2 ---o0o--- 3 MS. MANDEL: Could I -- I just realized that 4 there was a piece of paper handed out in that C1 that 5 wasn't talked about, which is signed with respect to the 6 underlying penalties. 7 And I don't know if this -- 8 MR. HORTON: I don't know if there's anything 9 that we can do at this time except for -- 10 MR. RUNNER: We could rescind the vote. 11 MR. HORTON: -- let me ask it this way, do you 12 feel -- I've seen it, Ms. Mandel. 13 Do you feel -- 14 MS. MANDEL: Well, usually -- what I had meant 15 to do was ask to see if staff had a recommendation on 16 it. And I had so many pieces of paper that it was 17 shoved in the side. 18 MR. HORTON: So, does it raise to the level 19 that you want to revisit the item and rescind the vote? 20 MS. MANDEL: Yeah, if I can -- if that's -- 21 MR. HORTON: Okay. 22 MS. MANDEL: -- the way I need to to get an 23 answer to that question. 24 MR. HORTON: Okay. I think we can get an 25 answer to the question without that. 26 MR. LEVINE: This is a -- this is a case with 27 the rep who doesn't bring his taxpayer. 28 And, personally, I want to see the whites of 15 1 his eyes. I want to ask him some questions. 2 That being said, that is a statement that if 3 you accept it on its face is probably sufficient. I 4 like -- it depends on the circumstances, but some of the 5 things on the main case -- 6 MS. MANDEL: Make you concerned? 7 MR. LEVINE: -- yes, the taxpayer wasn't here. 8 MS. MANDEL: I'm sorry I didn't ask before. 9 MR. HORTON: Okay, I think Ms. Mandel is -- 10 asked and answered. 11 ---o0o--- 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 16 1 MR. HORTON: Okay, Ms. Olson? . 2 MS. OLSON: Our next item is C4, Juan Manuel 3 Gallardo. 4 This is a waived appearance. 5 ---o0o--- 6 C4 JUAN MANUEL GALLARDO 7 NO. 466120 (BH) 8 ---o0o--- 9 MR. HORTON: Motion, Members? 10 MS. MANDEL: Move the staff recommendation. 11 MR. HORTON: Move to adopt staff recommendation 12 by Ms. Mandel. 13 Second by Ms. -- 14 MS. YEE: I'll second. 15 MR. HORTON: -- Yee. 16 Without objection, Members? 17 MS. STEEL: I have a question to -- 18 MR. HORTON: Question? 19 MS. STEEL: -- Mr. Levine. This is the 20 restaurant we did the partial day audit for two times. 21 And both days went only half day and they came out with 22 really different numbers. 23 First question is why we did two partial days? 24 And then second day, when we came out, totally different 25 numbers, then how we calculate it? 26 MR. LEVINE: I believe that the analysis was 27 done to just create a credit card ratio. This taxpayer 28 reported less gross -- taxable gross receipts than his 17 1 credit card deposits, which were basically all he 2 deposited. 3 So, the -- the Department did an observation 4 test to figure out how much of the business was credit 5 card and how much was cash and then used that figure to 6 apply to the credit card to calculate total gross 7 receipts. 8 We had thrown out one of the days because of 9 discrepancies with it and we just recalculated based on 10 the other two days. 11 They are 40 percent and 28 percent. We think 12 the average of those two days is a good number. But any 13 test like this is an estimate because it's used as a 14 substitute for the actual. 15 MR. HORTON: Further questions, Members? 16 There is a motion and a second. Any objection, 17 Members? 18 MS. STEEL: I do have objection. 19 MR. HORTON: Ms. Olson, please call the roll. 20 MS. OLSON: Mr. Horton? 21 MR. HORTON: Aye. 22 MS. OLSON: Ms. Steel? 23 MS. STEEL: No. 24 MS. OLSON: Mr. Runner? 25 MR. RUNNER: Aye. 26 MS. OLSON: Ms. Yee? 27 MS. YEE: Aye. 28 MS. OLSON: Ms. Mandel? 18 1 MS. MANDEL: Aye. 2 ---o0o--- 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 19 1 MS. OLSON: Our last item for today is C5, 2 Jarmail Singh.. 3 MS. YEE: We already did that one. 4 MS. MANDEL: We did it. That was the payment 5 plan. 6 MS. OLSON: I am sorry. 7 MR. LEVINE: We're going to make you decide it 8 again on a concession. When there's a concession, you 9 guys decide it twice. 10 MR. HORTON: Make it three years. 11 MR. RUNNER: Three years. 12 MS. OLSON: That's our last item for today. 13 MR. HORTON: Members that concludes our 14 business for the day. Board of Equalization meeting is 15 hereby continued to tomorrow. 16 MS. OLSON: The Board will recess and reconvene 17 tomorrow at 9:30 a.m. 18 Thank you. 19 ---o0o--- 20 21 22 23 24 25 26 27 28 20 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 APRIL 26, 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 20 constitute a complete and accurate 14 transcription of the shorthand writing. 15 16 Dated: May 3, 2011 17 18 19 ____________________________ 20 JULI PRICE JACKSON 21 Hearing Reporter 22 23 24 25 26 27 28 21