BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION 450 N Street, Room 121 Sacramento, California REPORTER'S TRANSCRIPT APRIL 27, 2011 ITEM C8 SALES AND USE TAX APPEALS HEARINGS PETITION FOR REDETERMINATION filed by EDMOND A. HEINBOCKEL AND LYDIA ROSE HEINBOCKEL (Case No. 354404 UT ) Reported by: Beverly D. Toms CSR No. 1662 1 1 2 P R E S E N T 3 4 For the Board Jerome E. Horton of Equalization: Chairman 5 Michelle Steel 6 Vice-Chairwoman 7 Betty T. Yee Member 8 George Runner 9 Member 10 Marcy Jo Mandel Appearing for John Chiang 11 State Controller (per Government Code 12 Section 7.9) 13 Diane Olson, Chief Board Proceedings Division 14 15 For Board of David Levine Equalization Staff: Tax Counsel IV 16 17 Scott Claremon Tax Counsel 18 19 Robert Tucker Legal Department 20 Kevin Hanks 21 Sales and Use Tax Department 22 For Petitioner: David Harlow 23 Representative 24 Edmond A. Heinbockel Petitioner 25 26 ---OOO--- 27 28 2 1 Sacramento, California 2 April 27, 2011 3 ---oOo--- 4 MS. OLSON: Our next item is C8, Edmond A. 5 Heinbockel and Lydia Rose Heinbockel. Please come 6 forward. 7 MR. HORTON: Mr. Levine, please introduce the 8 issues in this case. 9 MR. LEVINE: The issue in this case is whether 10 Petitioner's use of the subject aircraft qualified for 11 the common carrier exemption. 12 I note another matter to avoid Petitioner 13 taking time from his -- his time to argue about 14 something that I consider irrelevant, but they consider 15 important. 16 The Department filed what we call a say-nothing 17 brief. It literally says nothing except to incorporate 18 the D & R and that they had nothing new to add. 19 Petitioner filed an objection to that because they think 20 it does not satisfy the rules. They wanted the 21 Department to have to refile to follow the rules or to 22 strike the brief. Feel free to strike the brief because 23 it said nothing. But this is a -- we do accept these 24 briefs, they're legitimate briefs. They incorporate the 25 D and R and actually they're filed as a courtesy by the 26 Department to say we've got nothing to say. 27 So, with that -- 28 MR. HORTON: Okay. To the -- will the 3 1 Petitioner introduce themselves for the record. 2 MR. HARLOW: Yes, Mr. Chairman. 3 MR. HORTON: And -- 4 MR. HARLOW: D -- I'm sorry. 5 MR. HORTON: -- you have ten minutes to make 6 your presentation, taking in consideration the 7 information provided by Mr. Levine and such that it did 8 not appear that the Board Members at that point wanted 9 to strike the briefs. 10 Please commence at your leisure. 11 MR. HARLOW: Thank you, Mr. Chairman. I'm 12 David Harlow. I represent the Heinbockels and this is 13 Ed Heinbockel with me on my left here. 14 I'm assuming you each have one of these, is 15 that correct? 16 MS. YEE: Yes, we do. 17 MR. HARLOW: And I believe they've -- they've 18 removed from that our objection to their reply and the 19 basis for our objection for the reply was it did not 20 comply with the statute, which is what I've -- what Mr. 21 Levine has just mentioned. 22 Let me just go to the front of this. One of 23 the concerns we have is that in the summary of the 24 Appeal Division they have said there's just one issue 25 and that has to do with the common carrier exemption. 26 The problem with that is in our opening brief there are 27 three issues. And so I'm not -- it's unclear to me 28 whether or not somehow they waived those issues or 4 1 they -- they're no longer contending that they have any 2 objection to those issues because if we prevailed on 3 those other two issues, since they don't have it in 4 there, then we should -- I don't even know there needs 5 to be a hearing, and we would prevail here. 6 So that's a -- that's a concern to me and 7 that's the relevance of the response we had to the reply 8 because if they have no reply brief -- and then they say 9 in this summary, if you go to the first inside page 10 here -- 11 MR. HORTON: Sir, I'm going to ask the 12 Department to respond to that -- 13 MR. HARLOW: Certainly. 14 MR. HORTON: -- given your presumption that if 15 that was the case this hearing is not necessary. 16 The Department respond to that -- I don't want 17 to call it an allegation but that statement. 18 MR. CLAREMON: Yeah, I believe he's referring 19 to the two issues related to the argument that this is 20 the seller's Sales Tax as opposed to Petitioner's Use 21 Tax and we have not conceded on those issues. 22 MR. HORTON: Okay. Please continue and feel 23 free to address all three issues. 24 MR. HARLOW: Okay, thank you, your Honor. If 25 we could turn to just inside the first cover this might 26 be helpful to sort of walk us through this, if that's 27 all right. 28 Just so we under -- 5 1 MR. HORTON: Ms. Olson, can you start their 2 time over? 3 MS. OLSON: Yes, we can. 4 MR. HORTON: Thank you. 5 MR. HARLOW: Thank you. If we look at this 6 first page within the cover it talks about -- this is 7 the unresolved issue described by Mr. Levine, and then 8 these are the three issues that we feel are still open 9 in front of the Board here. 10 And then below here -- I'm just sort of taking 11 you through an outline of how we're going to -- how 12 these documents are put together to try to address these 13 three issues. 14 The first section before you get to tab 1 15 basically gives the history of where we are. It 16 includes the objection, our opening brief and so on. 17 And I apologize, but there's been some confusion to me 18 since I believe they removed some things from what we 19 have provided here, so I wanted to make sure that -- 20 that we had all of those in exhibits, but apparently 21 they have not provided to you as a group. And that 22 concerns me. 23 Now, if you go to the third -- or after the 24 second pink one there's an August 16th letter here. 25 This is to me from Delora Boring and do you have that in 26 your materials? I'm just trying to understand what you 27 have and what -- 28 MR. HORTON: Sir, I don't think your 6 1 description of the location was -- was inadequate for me 2 to follow. 3 MR. HARLOW: I'm sorry. If you -- if you just 4 go to the second pink -- or second colored thing and 5 right after that -- 6 MR. RUNNER: The second colored thing. 7 MR. HORTON: Sir, they're -- they're marked 8 numer -- numer -- number 1 -- 9 MR. HARLOW: Now, before -- 10 MR. HORTON: -- 2, 3. 11 MS. YEE: Preceding tab 1 I think is what he's 12 referring to. 13 MR. HARLOW: Yes, preceding tab 1. I'm sorry, 14 Mr. Horton. 15 MR. HORTON: Okay. Gotcha. 16 MR. HARLOW: Okay. 17 MR. HORTON: Okay, I'm there. 18 MR. HARLOW: Okay. So if you go past the 19 second colored one -- we got different colors for each 20 of you or you may have different colors, I'm sorry. 21 MR. HORTON: I do. Thank you. 22 MR. HARLOW: Okay, and you have -- is this 23 letter included in the materials you have? Okay, and 24 this -- 25 MS. YEE: Yes. 26 MR. HARLOW: And then after that is the next 27 thing in that, is that Petitioner's objection to their 28 reply? 7 1 MS. YEE: It's blank. 2 MR. HARLOW: Okay. And so that's the one 3 that's missing. I believe that's the only thing they've 4 removed from the exhibits. And that was the issue Mr. 5 Levine -- 6 MS. MANDEL: The -- 7 MR. HARLOW: -- explained. 8 MS. MANDEL: I guess -- I guess -- 9 MR. HORTON: Explained when -- 10 MS. MANDEL: -- it wasn't removed from mine. 11 MR. HORTON: Yeah. 12 MR. LEVINE: Oh, well, that was a mistake. We 13 regard a comment on a brief as a brief, but I've 14 asked -- 15 MR. RUNNER: You're special. 16 MR. LEVINE: -- Ms. Boring to bring it back if 17 the -- at the Board's direction it can be distributed. 18 It says nothing more than we've described. 19 MS. YEE: Yeah. 20 MR. LEVINE: I was trying to save Petitioner 21 time on -- on this but -- 22 MR. HORTON: One second. 23 MR. LEVINE: -- we do have them if -- if you 24 want them. 25 MR. HORTON: Members, I presumed earlier when 26 it was shared that the -- the Members were satisfied. 27 Has that changed? Any desire -- 28 MR. RUNNER: I guess my concern -- let me ask 8 1 Mr. Levine, I'm a little concerned procedurally if we 2 again could be laying out an issue of concern for future 3 appeal -- I just don't know what we've got going here 4 now. 5 MR. HORTON: Wait a minute -- 6 MR. LEVINE: The substantive issues are the 7 substantive issues and we've more than documented the 8 record on this but -- but if you're concerned -- 9 MR. RUNNER: I guess my concern isn't so much 10 the issue of -- of documented and how substantial they 11 are, I'm -- I guess I'm more concerned about the 12 procedural method at this point. And if, indeed, we are 13 open to any kind of procedural issue and challenge is my 14 question. 15 MR. HORTON: Okay. 16 MR. LEVINE: I don't -- 17 MR. HORTON: One second, Mr. Levine, if you 18 will. 19 Ms. Olson, can you have someone make a copy, 20 distribute it to the Members? 21 MS. OLSON: We have those right -- with me 22 right now. 23 MR. HORTON: Thank you. Can they be 24 distributed to the Members? 25 MS. STEEL: Then that will solve the issue, I 26 believe, right? 27 MS. MANDEL: I'll put mine back in the no pack. 28 MR. HORTON: Okay. All right. 9 1 MR. HARLOW: And those are pre-punched, I 2 believe, that -- I believe they're the ones that were -- 3 MS. MANDEL: No, I already have mine, so -- 4 MR. HARLOW: -- passed out earlier, so -- 5 MS. MANDEL: -- don't worry. 6 MR. HARLOW: -- so they should just fit in 7 there if -- if that will work out. 8 MR. HORTON: Yeah. I mean, I -- I would share 9 that -- your five minutes -- I mean your ten minutes, 10 how you use that is entirely up to you. It appears to 11 be the consensus of the Board that that is a non-issue 12 but as I said it's entirely up to you. If you think 13 that's relative -- relative to your case and will make a 14 difference certainly I would encourage you to argue 15 that. 16 MR. HARLOW: I don't want to spend any more time 17 on it. I'm just trying to make the contrast between the 18 one issue and the three issues. That's why it's -- it's 19 significant I believe, your Honor. 20 If we could go now to tab 1, and that's the 21 first page after tab 1, there's a presumption that when 22 you sell an airplane in California the seller is 23 responsible for the tax on it, the Sales Tax on it. 24 That's the presumption and the burden of proving that, 25 that it's not a sale at retail, is on the seller. 26 In this case the seller has not carried that 27 burden and therefore we should win on this issue because 28 the Sales Tax should be paid by the seller, not by the 10 1 Heinbockels. 2 If we look at the first page again, what we 3 have here is the name and address of the purchaser and 4 the dealer certificate that said he had applied to be a 5 dealer. This was a -- when he purchased the airplane. 6 So that information is available. The presumption and 7 the burden is on the seller and that hasn't been carried 8 so we should win on that. 9 If we go to the next part of this and -- and by 10 the way, under this tab I have the specific statutes 11 copied as well as this -- this information when the 12 airplane was purchased. That's -- that's the purpose 13 behind this main sheet. 14 The second thing is here if we look at Code 15 Section 6366 this defines what a common carrier is and 16 it talks -- or the exemption, it says you're exempt if 17 you're buying a airplane for use in common carriage. 18 And then down below in 1593 of the regulation it defines 19 a common carrier. 20 So this is -- we've got some fairly clear rules 21 on how we define a common carrier. And again those are 22 behind that tab. 23 Let's go to tab 2 now if we could. I -- I 24 believe this is -- is -- are you the same Mr. Levine 25 that has written this -- this first one, the -- the -- 26 the 1991 memo? 27 MR. LEVINE: Twenty years ago, yes -- 28 MR. HARLOW: Yes. 11 1 MR. LEVINE: -- probably. I'm the only Levine 2 who's been in Legal during (inaudible). 3 MR. HARLOW: Oh, Mr. Levine, okay. Thank you 4 very much. 5 This is a very helpful memo. This is from Mr. 6 Levine. And it basically says that in trying to 7 determine what a common carrier is we basically use the 8 FAA guidelines under part 135. And if you think about 9 it, the FAA has two major parts that apply here. One is 10 91. If I'm not going to be a carrier carrier I can come 11 under part 91, which is fairly easy to come under. But 12 if I decide I want to be a common carrier I have to 13 qualify under 135. 14 Mr. Heinbockel is here if there are questions 15 about the distinction between those as we go on. He can 16 address those. 17 And so, in order -- as I understand Mr. 18 Levine's memos that are -- again are attached, or memo 19 that is attached, basically you need to do two things. 20 You need to have some authority to act under part 135, 21 or as a common carrier, and the FAA authority provides 22 that, and then secondly you need to operate as a 23 carrier. And that means that the aircraft, itself, has 24 to be inspected. You have to follow certain guidelines 25 and so it could come under part 135. They're more 26 expensive, they're more cumbersome but they're -- 27 they're intended to make it safer and that type of 28 thing. 12 1 So again that's what's -- what's here and then 2 if we look down at the last three highlighted areas here 3 we have a copy of Mr. Heinbockel's 135 certificate that 4 qualifies him. And then if we look at that next section 5 there's a -- 6 MR. RUNNER: When you're saying sections are 7 you taking us to your -- to your tabs? 8 MR. HARLOW: Yes, and I'm just referring to 9 them now without taking you to them but you can refer to 10 them yourselves or I'd be glad to take you to them. 11 I'd like to take you to the third tab, and this 12 is the -- it's after the -- I'm sorry, after the fourth 13 colored tab, if we could look at this. 14 MR. RUNNER: He means section. 15 MR. HARLOW: Yeah, I'm sorry, it's in tab 2 and 16 I'm -- I'm trying to look after the -- the fourth 17 colored sheet. And it says, "FAA Administration moving 18 America Safely," and it's sort of going to the side. It 19 looks like this. I'm sorry for the -- okay. 20 If you go to the FAA website and you look up 21 Collective Flight, that's the business that Mr. 22 Heinbockel uses for the -- the aircraft, this describes 23 the Mooney aircraft we're talking about. It talks about 24 being in business for nine years. He is a qualified 25 pilot under Section 135. The second from the bottom 26 talks about PACs, I believe it's Passengers And Cargo 27 and so on. 28 So this is the FAA sort of saying he's 13 1 qualified and so on and talks about his company that's 2 qualified. 3 And then the things that follow this, there are 4 several of them, but each -- each year the FAA makes a 5 directory of all of the qualified FAA 135 or part 135 6 pilots and the businesses and so on and again I've -- 7 there are four or five years here that I've got, and 8 I've circled the one that has Mr. Heinbockel -- so if 9 you go to that next section down about four or five 10 pages, again we've got Mr. Heinbockel and Collective 11 Flight. And I've included each of the relevant years 12 and so on. 13 So the important thing here is to be a -- under 14 these -- Mr. Levine's -- I keep pronouncing your name 15 differently and I'm sorry, is it Levine? 16 MR. LEVINE: Okay. Yes. 17 MR. HARLOW: Levine. I'll -- I'll try to do 18 better, I'm sorry. 19 Mr. Levine's memo -- again, it talks about two 20 things. You have to qualify under the -- the Federal 21 rules and then you have to -- to use this qualifying it. 22 So these are the -- the support for that. 23 If we go now to section 3 here, this is tab 3, 24 this is an affidavit of Mr. Heinbockel that has been 25 provided. This is in the -- in the petition file and -- 26 and people are familiar with this. The last -- the 27 third page here is a -- a flyer that he has used. One 28 of the distinctions about common carrier, and maybe the 14 1 misunderstandings about it, is that you need to hold 2 yourself out -- I use the example of a bus, you -- if 3 you drive by in a bus and say I'll pick up anyone that 4 is there at the bus stop, that's what a common carrier 5 typically is, as opposed to someone that says, hey, I'm 6 only driving certain private parties. 7 But all you need to do is to hold yourself out 8 to make yourself available to do that. If no one gets 9 on the bus that doesn't destroy your common carriage -- 10 or common carrier identification. 11 This is an example of the flyers that were used 12 in the airport where Mr. Heinbockel was promoting his 13 business as a common carrier. This is a small airplane, 14 a four-seater. Typically you'd have a pilot, two 15 passengers and their luggage, basically, because of 16 the -- the size of the airplane. 17 Als -- 18 MS. OLSON: Time has expired. 19 MR. HORTON: Sir, you will have additional time 20 upon rebuttal and -- 21 MR. HARLOW: Thank you. 22 MR. HORTON: -- I'm sure during the Q and A 23 process you -- 24 MR. HARLOW: Thank you. 25 MR. HORTON: -- will have an opportunity to 26 address some of these issues. 27 MR. HARLOW: Thank you, Mr. Chairman. 28 MR. HORTON: Will the Department introduce 15 1 themselves for the record and please commence your 2 presentation. 3 MR. CLAREMON: Thank you. Good morning, 4 Chairman Horton, Members of the Board. I'm Scott 5 Claremon from the Legal Department. With me is Robert 6 Tucker and Kevin Hanks, representing the staff. 7 We concur with the recommendation of the 8 Appeals Division. On September 24, 2004 Petitioners 9 purchased the aircraft in California and their use of 10 the aircraft is subject to tax. 11 To address Petitioner's first issue, the seller 12 of the aircraft is not a California resident. He did 13 not hold a California seller's permit and all evidence 14 indicates that he was not required to hold a California 15 seller's permit. So the applicable tax in this case is 16 Use Tax. 17 Petitioners reported a total of approximately 18 $8,000 in gross receipts for use on the aircraft on 19 their 2004 and 2005 income tax returns. They also admit 20 that they were -- they were never paid more than that 21 amount for -- for income related to the aircraft. All 22 of these receipts are from a company called Visual 23 Purple, LLC. Petitioner is the President, CEO and 24 founder of Visual Purple, LLC and it appears from the 25 documents that we received today that he also holds 26 greater than a 50 percent membership interest in Visual 27 Purple, LLC. 28 There are several reasons why the common 16 1 carrier exemption does not apply in this case, any one 2 of which would -- would be dispositive. 3 First, Petitioners did not meet the minimum 4 $50,000 yearly gross receipts threshold. 5 Second, Petitioners did not hold themselves out 6 to the public indiscriminately for common carrier 7 operations. Petitioner's only advertisement was a 8 single flyer they claim was posted at the airport, which 9 as stated did not generate a single response. 10 Finally, third, during the first 12 months of 11 use common carriage operations did not constitute more 12 than 50 percent of the total usage of the airplane. 13 The flights by Visual Purple would be 14 considered private carriage and given that it was the 15 only claimed customer no portion of the use was for 16 common carriage, and there's three reasons for this, as 17 well. 18 First, Visual -- Petitioner held greater than 19 50 percent membership interest in Visual Purple. 20 Therefore it's a related entity and flights by the owner 21 of the aircraft or a related entity don't count as 22 common carriage. That's private carriage. 23 Secondly, according to the FAA circular cited 24 by Petitioners common carriage does not include flights 25 that don't include -- involve, excuse me, a holding out 26 to the general public. So even if, as claimed, there 27 was some holding out to the general public, the flights 28 to Visual Purple weren't generated through that, they 17 1 were generated by the fact that it's Petitioner's 2 company. 3 And finally, thirdly, given what Visual Purple 4 actually paid as -- in contrast to what they -- they 5 claim they accrued, they were effectively charged a rate 6 of approximately one-tenth the standard rate they were 7 charging for -- for usage of the aircraft, which would 8 be a preferential rate, which would once again make it 9 private carriage. Thank you. 10 MR. HORTON: Thank you very much. On 11 rebuttal. 12 MR. HARLOW: Yes. Your Honor, if we go to 13 section 4, if we could for a moment, there's confusion 14 on two issues. One is the cash versus accrual question. 15 And the reason that that confusion is -- has arisen is 16 on the actual tax return, on the Schedule C, which is 17 the Collective Flight, you know, business part of the 18 tax return, the accrual item was checked, and so that 19 has created confusion here. It's also created some 20 confusion, a Federal tax audit. This is an affidavit 21 from Thomas Harlow, who's been the tax preparer for this 22 couple for many years. And basically he's saying that 23 there was a clerical error, we should have checked 24 "cash", not "accrual." 25 If we go to the next section of this, this is a 26 couple pages from the things provided to the -- to the 27 Department and if you just look at the second page of 28 that just so we're clear what amounts we're talking 18 1 about, this is the part 135 revenue that is being talked 2 about here for a total of 73,000 during that -- during 3 that period. And that -- again, that's in that next 4 section. 5 And then if we go to the next section after 6 this, this is a worksheet that explains how that number 7 was calculated. So this will show you how that -- the 8 amounts were calculated -- I'm sorry, for the entire 9 year, not just for the test period. So this is the year 10 2005. 11 And then behind that are the various invoices 12 that have been -- that relate to that. Then I'll take 13 you to the next one after the invoices, if we could. 14 This is the actual return filed by Mr. Heinbockel where 15 they've checked accrual, that incorrect checking. And 16 then if you go to the next section, this is an IRS audit 17 of 2005, an exclamation -- explanation of items, you'll 18 notice here that the IRS -- are we all on that last part 19 of 4? I just -- I'm -- I'm sorry, I'm trying to use the 20 time well here -- you'll notice they're asking for an 21 adjustment of $80,000 because they're saying on the 22 accrual method we should have $80,894 added to this 23 adjustment and so on. So, that's what they're -- that's 24 what this has to do with. 25 And the reason I'm presenting these is to give 26 us some perspective. It seems like the three people 27 that know whether there's a cash or accrual basis used 28 are the taxpayers, the tax preparer, the IRS in auditing 19 1 it. So that's the purpose of this part of it. 2 And then the last part here, this has to do 3 with the operating agreement with regard to Visual 4 Purple, and there -- the operating agreement is behind 5 here in its fullness. A -- a Mr. Lee Williams had 6 called me and said he was unclear why we didn't have 7 this information so I'm now including this. The entire 8 operating agreement I don't think has been presented to 9 the -- the Department prior to this. It gives some 10 sense. 11 Basically how the operating agreement works is 12 there were a couple of people that started the company 13 with Mr. Heinbockel. They put money in. And so they 14 said until we get our money out, until we get to what 15 they call parity, we're going to control more than you 16 would think for our percentage. 17 So there are three members -- three managers of 18 this LLC. Those three managers control everything that 19 the company does. Two of those managers were not 20 related to Mr. Heinbockel and he did not have any 21 control of them. In fact, when -- when parity was 22 reached in 2006, if you'll go to the -- it's the third 23 item in that tab, and I'm, by the way, General Counsel 24 for Visual Purple, so I've got some direct familiarity 25 with this -- this -- the next two tabs here. 26 On June 16, 2006 there's a letter sort of 27 complaining because when parity was reached he tried to 28 take control and move the other managers out and replace 20 1 them. This created a dispute that went into a mediation 2 and this is the dispute that the letter is saying, hey, 3 we think you've done these improper actions removing the 4 managers. 5 And then the next letter is basically a demand 6 letter that was eventually resolved by mediation where 7 Mr. Heinbockel bought out the other partners. And the 8 significance at the end of the demand letter are these 9 percentages here that are talked about here, and they're 10 sort of saying we think that Ed Heinbockel owned 11 50.3772, greater than 50 percent, and you think based on 12 these transactions that he owns 70.252. 13 There are two significant issues with that. 14 One is that the Michael -- I'm sorry, the Newt Becker 15 and Eric Garen shares are -- are Class B shares and the 16 rest of them are Class A. Those are the guys that 17 invested the amounts in -- early on. And -- 18 MS. OLSON: Time has expired. 19 MR. HORTON: Thank you, sir. 20 MR. HARLOW: Thank you. 21 MR. HORTON: Discussion, Members? 22 MS. STEEL: Question. 23 MR. HORTON: Ms. Steel. 24 MS. STEEL: To the taxpayer. That first year 25 after purchased this aircraft that how much was the 26 gross income? 27 MR. HARLOW: How much was the gross income? 28 MS. STEEL: Uh-huh. 21 1 MR. HARLOW: In -- in 2005 -- now it was 2 purchased in September I believe 24th -- 3 MS. STEEL: In 2004, right. 4 MR. HARLOW: -- of '04, but in the first full 5 year of '05 there was about $80,000 of -- of gross 6 revenue. 7 MS. STEEL: So that was more than $50,000? 8 MR. HARLOW: Yes. 9 MS. STEEL: Okay. 10 MR. HARLOW: Yes. 11 MS. STEEL: Second question is how you 12 advertise this aircraft isn't? 13 MR. HARLOW: There -- there were three ways 14 that it was advertised -- actually four ways. 15 MS. STEEL: Okay. 16 MR. HARLOW: The -- the one way is the general 17 information with the FAA, which you can look up by -- by 18 location. And that had again Collective Flight in it, 19 the address and so on. So that could tell you. That's 20 one way. 21 The other is in the airport, the requirement of 22 the guidelines for common carriage is that it's within 23 your realm or your scope of -- of authority to operate, 24 and within your capacity or capability. 25 So, for example, other than the general 26 information on the FAA website there's no reason to 27 advertise nationally or internationally, you simply are 28 going to advertise in the area where you think you'll 22 1 get clients, your market. 2 And so the other three areas -- or other three 3 ways they did that was, one, through flyers put 4 throughout the airport. This is a computer -- or a 5 commuter airport in San Luis Obispo area where the -- 6 the airplane is hangared. People come in there -- you 7 may have had this experience, but they may have coffee, 8 they wait for a flight and that type of thing. And so 9 it's advertised there through these flyers. 10 MS. STEEL: Do you have any website or -- 11 MR. HARLOW: No, not a website. In fact, it's 12 interesting with the guidelines they talk about even 13 though -- if I can go to the guidelines briefly that 14 might be helpful. 15 MS. STEEL: That's okay. 16 MR. HARLOW: Oh. 17 MS. STEEL: Just give me yes -- 18 MR. HARLOW: Sure. 19 MS. STEEL: -- or no answers. 20 MR. HARLOW: I'm sorry. So there -- 21 MS. STEEL: You have a -- 22 MR. HARLOW: -- there is -- there are two other 23 ways, I'm sorry. The -- the other -- so, to quickly 24 summarize where I've been, the -- the general website of 25 the FAA, that's sort of a -- a global one with the name 26 and -- and location and so on. Then within the airport 27 these flyers put around. And then from Mr. Heinbockel, 28 himself, talking with others that have flown, 23 1 passengers, other pilots and that type of thing. Often 2 pilots will share information because they may not be 3 able to accommodate the small clients and so are 4 customers. 5 MS. STEEL: So they're -- they're referring to 6 other customers when they cannot do it? 7 MR. HARLOW: Yeah. 8 MS. STEEL: Okay. 9 MR. HARLOW: Excuse me just a second. And then 10 the last way, I'm sorry, Mr. Heinbockel's wife runs a 11 business there in San Luis Obispo, sells very high 12 quality clothes and so on, is -- has a large clientele 13 again trying to encourage the use of the plane through 14 that. 15 MS. STEEL: Okay. 16 MR. HARLOW: If you want to ask Mr. Heinbockel 17 things I can have him respond, too. 18 MR. HEINBOCKEL: Yeah, I was just going to add 19 that point, but -- 20 MR. HARLOW: Oh, I'm sorry. 21 MS. STEEL: I -- I have just one more question. 22 Do you have a flying log? 23 MR. HARLOW: Yes. 24 MR. HEINBOCKEL: Yes. 25 MS. STEEL: Okay. 26 MR. HARLOW: And they've been -- they've been 27 produced and -- and the Department has those. There's 28 detailed -- 24 1 MR. HEINBOCKEL: Down to fuel receipts, 2 everything. 3 MS. STEEL: Thank you. To the Department that 4 I just heard that common carrier has to be less than 50 5 percent ownership of the one person? This aircraft. 6 MR. CLAREMON: Yeah, common carriage does not 7 involve -- include use by the owner of the aircraft or a 8 related -- 9 MS. STEEL: Oh, use by. 10 MR. CLAREMON: -- or a related entity. 11 MR. TUCKER: The gross receipts. 12 MS. STEEL: Okay. 13 MR. TUCKER: The gross receipts. 14 MS. STEEL: Because I -- 15 MR. CLAREMON: Gross receipts, excuse -- 16 don't -- don't include gross receipts from flights where 17 use was by the owner or a related entity to the owner. 18 MS. STEEL: So ownership doesn't matter, that 19 how much usage of the aircraft has to be less than 50 20 percent by the owner, is that what you are saying? 21 MR. TUCKER: It -- I mean, just to correct in 22 case we misspoke, it's gross receipts do not include the 23 use by related persons and one of the ways they look to 24 relate -- 25 MS. STEEL: What is that related persons? 26 MR. TUCKER: I was going to say one of the ways 27 we look to determine who related persons are is we look 28 to the ownership of the business, and if you have more 25 1 than 50 percent ownership of a business you're regarded 2 as a related person. 3 And so that's why the fact that he has 50.3772 4 percent ownership makes him a related person. 5 MS. STEEL: So, it's 50.33 percent so .3 6 percent higher than the rule of the 50 percent? Boy, we 7 really pushed it. 8 Second thing is it's not really general public 9 that let them know, but they were advertising at -- 10 inside of the air -- air -- airport and then referred by 11 other pilots or somebody who owners of the aircraft. 12 How general public -- that advertising is not 13 efficient enough, how you going to draw the line there 14 for it's the common carrier or not? 15 MR. CLAREMON: I don't -- I don't know exactly 16 where the line would be drawn but in this situation 17 where what we've been presented with is one flyer and 18 where there was no response to that flyer, whatsoever, 19 we would not consider that being held out -- evidence 20 that it was held out indiscriminately to the public. 21 MS. STEEL: Well, then how they going to have 22 gross income of almost $80,000 for the first year? 23 MR. CLAREMON: That entire number of claimed 24 gross income is from Visual Purple, the Petitioner's 25 company. 26 MS. STEEL: So, they -- they actually renting 27 these aircraft out. 28 MR. TUCKER: To themselves. 26 1 MS. STEEL: No, no, no, you said it's only 2 50.33 percent, so as long as it's less than 50 percent 3 the owner use then it's okay as a common carrier. So 4 you really draw the line there, .3 percent over so it's 5 not common carrier, that's what I'm listening from 6 Department that you are really pushing the line there. 7 Because that .3 percent, it's depends on how you going 8 to draw the line there. 9 But let me have another question to the 10 Department, the one-tenth of the standard rate is the 11 private carriage. But it's a free country, you can 12 charge whatever you want. I mean, and then one -- one 13 bill here, invoice that they charged for $1,425, I don't 14 think people charging for $14,000, so this is not 15 one-tenth of the rate that I see on the invoice. 16 MR. CLAREMON: To -- 17 MS. STEEL: So not all of them they been 18 charged one-tenth of the regular price. That's what I 19 see it. So, you are overly stating here for this 20 taxpayer is charging much, much less, but I'm looking at 21 one invoice here for 1400, nobody pays $14,000 for, you 22 know, flying for a couple of hours a day. 23 So, it's kind of like exaggerating from the 24 Department side, that's what I see. 25 MR. CLAREMON: The common -- common carriage 26 usage, it does not count as common carriage -- carriage 27 if you're charging a preferential rate to one customer 28 as opposed to another. 27 1 And what I was talking about, when I said the 2 one-tenth number was what was actually paid as opposed 3 to what was charged. So, effectively what they actually 4 paid was a rate that was one-tenth what they actually 5 charged, which is what we assumed to be the -- 6 MS. STEEL: But when business is down that, you 7 know, usually they charge whatever they -- it's, you 8 know. The -- there's no such thing that certain amount 9 has to be charged because when business slow, you lower 10 your rate, and business is good you can, you know, 11 increase your rate. 12 So we really cannot see here that this was not 13 common carrier because that they were charging much 14 less. I mean, I'm just looking at one by one and then, 15 you know, our Department, is if the -- the owner used 16 this aircraft more than 80 percent I totally get it. 17 But, you know, when I'm looking at from the beginning 18 that what you really explained to us that why that he 19 has to pay it's like really stretching. 20 If I see 55 percent, I understand. But 50.33 21 percent, I mean, we are really stretching here to put 22 this taxpayer inside of the certain square that we are 23 building in. So that's what I'm looking at. And, you 24 know, we are really stretching that charge -- charging 25 the rent -- you know, the rental price plus that, you 26 know, advertising. Everybody has different advertising 27 tactics. So I really don't know that, you know, we -- 28 our Department really did a good job to -- you know, to 28 1 going after this taxpayer. 2 That's -- that was my thought when I was 3 listening to your side. 4 So, thank you. 5 MR. HORTON: Mr. Runner. 6 MR. RUNNER: Just a couple of -- couple of 7 questions. The issue of the 50.3 percent is the 8 ownership of a company. And I assume that that's there 9 because then that would -- the assumption is that if a 10 person owns more than 50 percent they could have control 11 of the company decisions. Is that why -- I -- is that 12 why it's 50 percent? 13 MR. TUCKER: I'm sure that would be one reason 14 why. It's -- it was simply established in the 15 regulation that when they have ownership of more than 50 16 percent then those -- 17 MR. RUNNER: They own the company? 18 MR. TUCKER: Right. And then they're not -- 19 MR. RUNNER: Regarding control of the company. 20 MR. TUCKER: -- regarded as gross receipts. 21 MR. RUNNER: Let me just ask, in regards to 22 the -- in regards to the -- the invoices, who -- who -- 23 were there passengers on these flights? Where were 24 they -- yeah, where were they going? There's an invoice 25 in there, yeah, one month is a very large amount. 26 Clearly that was more than just a few hours flying 27 around at 300 and some odd dollars an hour. 28 MR. HEINBOCKEL: Yeah, I'd be happy to -- 29 1 MR. RUNNER: Yeah. 2 MR. HEINBOCKEL: -- happy to answer that for 3 you. 4 The aircraft that we're talking about here was 5 literally flown all over the country. The business 6 Visual Purple that we've been talking about, and looking 7 at some of the details regarding this company, is a 8 company that builds simulation training primarily for 9 the U. S. Government. And clients include -- in fact, 10 when this aircraft was purchased we looked at this 11 and -- and built a business model around the San Luis 12 Obispo market in terms of the carriage -- if you will, 13 the carriage retail market in terms of higher wealth 14 individuals and those that cannot afford jets to fly 15 out -- a friend of mine has a company there that runs 16 jets out of there, and we determined there was this nice 17 gap that the public wasn't being served. So -- for 18 shorter flights, and what they call mission profiles. 19 So coupled with that and looking at the 20 business where we -- we -- we won a contract with 21 Department of Homeland Security for training first 22 responders. And that was in Anniston, Alabama. So I 23 flew to Anniston, as an example. 24 MR. RUNNER: So you were the only -- you were 25 the only person on that flight? 26 MR. HEINBOCKEL: No. Well -- well, I -- I'd 27 have to look at the logs. There are flights where I 28 would take programmers around, project managers. We'd 30 1 work with -- 2 MR. RUNNER: These would all be employees of 3 Visual Purple? 4 MR. HEINBOCKEL: Most were employees. Some 5 were contractors. 6 MR. RUNNER: Okay. 7 MR. HEINBOCKEL: Yeah. But all -- all related 8 to the business. 9 MR. RUNNER: And again, this was a company at 10 that time that you had over 50 percent ownership of, 11 even though it -- the management structure was shown a 12 little differently, but -- 13 MR. HEINBOCKEL: Yeah, I didn't have control 14 but -- 15 MR. RUNNER: You didn't have control but you 16 had -- 17 MR. HEINBOCKEL: No. 18 MR. RUNNER: -- you had over 50 percent 19 ownership of the company. 20 MR. HEINBOCKEL: Correct. 21 MR. HARLOW: Could I add something here because 22 I -- 23 MR. RUNNER: Sure. 24 MR. HARLOW: -- I think it may be relevant. 25 If we just look at the last page here, which I 26 didn't get to it, and I'm -- I'm sorry I didn't, but if 27 you look at the spreadsheet that I prepared -- 28 MR. RUNNER: Is it helping me where I'm going 31 1 with my questions? Are you -- 2 MR. HARLOW: Yes. 3 MR. RUNNER: Okay. 4 MR. HARLOW: I hope so. 5 MR. RUNNER: Okay. 6 MR. HARLOW: If it doesn't, you can slap me and 7 I -- 8 MR. RUNNER: Okay. 9 MR. HARLOW: -- I won't -- won't keep going 10 there. But I think we've got a misconception of this 11 over 50 percent of the ownership because when there are 12 two classes of stock you have to analyze the ownership 13 with -- with each class. And so if we look here, for 14 example, these are Class A and B, and what I'm trying to 15 illustrate here is that when this dispute came up, you 16 know, in this mediation dispute they said we own 70 17 percent or Mr. Heinbockel did, and that -- that he 18 should have only owned this 50.377, just barely over -- 19 MR. RUNNER: Right. 20 MR. HARLOW: -- but if you look to the -- the 21 right of that, because that's the combined shares -- 22 MR. RUNNER: Okay. 23 MR. HARLOW: -- if you look at Class A and 24 Class B, what that would say if you take that 70.2532 25 percent divided by the 94 percent that are Class A 26 shares, that means that Mr. Heinbockel owns 73 percent 27 of the Class A and zero percent of the Class B. 28 And so if you look at that you say if you -- 32 1 even dividing that by two it's 36 percent. 2 MR. RUNNER: Well, again, here you're going to 3 have to help me, may -- maybe it's Legal or somebody is 4 going to help me out. I did -- it's -- to me the issue 5 is who -- who owns enough stock or ownership of the 6 company to make company decisions. 7 MR. HARLOW: Clearly he doesn't because he 8 doesn't control the Board here -- the man -- the 9 three-manager Board because the Class B people have a 10 preference in -- in getting the managers on the -- on 11 the Board and you can't take them off unless you have a 12 major -- 13 MR. RUNNER: Okay. 14 MR. HARLOW: Yeah. 15 MR. RUNNER: So the Class B stock owners 16 control the company? 17 MR. HARLOW: Yes. 18 MR. RUNNER: And -- and then -- and control the 19 Board of Directors? 20 MR. HARLOW: Well, the way to say it is two of 21 the three Board members, to start with, the three that 22 control the company, one was Ed and two were these 23 other -- the Class B people that they'd appointed there. 24 And you couldn't get them out without a two-thirds vote, 25 okay, of -- of -- by class, and the Class B people could 26 keep one in all the time. They had that authority to 27 keep one. You need two-thirds to get the others out. 28 So -- and even going to the 50 percent ownership, not 33 1 just the control issue -- 2 MR. RUNNER: Right. Right. 3 MR. HARLOW: -- and that's what I'm trying to 4 address -- 5 MR. RUNNER: Sure. 6 MR. HARLOW: -- with their argument in the -- 7 in the mediation, again we have zero Class B and we have 8 53 maybe percent of the other. So you divide that in 9 half or a third or however you do it, it's still under 10 50 percent. So -- 11 MR. RUNNER: Okay. Let me go back to staff 12 then. 13 MR. HARLOW: -- even though -- 14 MR. RUNNER: In regards to the issue of common 15 carrier and the issue of 50 percent ownership, because I 16 would assume that the ownership aspect of it is about 17 control. But clearly at least as stated under here 18 there was lack of control, there was not full control 19 then of company decisions based upon how the stocks were 20 divided and therefore also how the decisions were made 21 to put people in the Board, they were not in control by 22 the -- by the taxpayer. 23 What -- is there -- what is the room in the 24 assumptions then to be a common carrier, or is it just 25 this flat 51 -- 50 percent plus ownership? 26 MR. TUCKER: For the purposes of this 27 regulation, if they had simply wanted to focus on 28 control, it's -- it's used in other regulations where we 34 1 look to who has a controlling interest. 2 Here they were looking strictly at ownership. 3 Perhaps it was to provide a bright line; I'm not sure 4 why and how this figure was reached. 5 But they did come up with a bright line that 6 says 50 percent or more. 7 MR. RUNNER: But isn't it the assumption that 8 the 50 percent or more is about control? Isn't that the 9 whole theory behind the idea of the -- if it's about 10 control, it's about somebody not making decisions, you 11 know, about the control of the decision; for instance in 12 this case, who's going to -- where this airplane is 13 going to go or who's going to pay for -- who's going to 14 hire this airplane? 15 It's about the fact that you can't appear to be 16 having a -- your own private airplane and then calling 17 it common carrier and you certainly can't do that if 18 indeed you then have a controlling interest in decisions 19 that -- that are -- that are made. 20 Does that -- 21 MR. TUCKER: That's one argument that could 22 have been made, and perhaps that's one -- I mean, that's 23 something you could consider in a -- in an amendment -- 24 MR. RUNNER: Right. 25 MR. TUCKER: -- to the regulation. 26 MR. RUNNER: Right. 27 MR. TUCKER: Unfortunately we're stuck with -- 28 MR. RUNNER: Okay. 35 1 MR. TUCKER: -- the regulation as it was 2 adopted. 3 MR. RUNNER: Okay. Okay. 4 MR. HARLOW: May I -- 5 MR. RUNNER: Just to clarify real quick and 6 I'm -- then I'm done. 7 MR. HARLOW: Sure. On the -- on the 8 regulation, that's a rebuttable presumption. And, 9 again, our contention is there isn't over 50 percent 10 ownership because they talk about a 50 percent -- more 11 than a 50 percent or -- hold one half or more interest. 12 Again, because we got two classes of -- of shares they 13 don't hold that. 14 But even that it's a rebuttable presumption 15 under this Regulation 1593. And so whether you want to 16 amend it or not for control that's obviously not -- you 17 know, outside of the scope of this discussion, but it's 18 a rebuttable presumption. And the control issue clearly 19 falls into that -- 20 MR. RUNNER: Okay. Let me ask you about rate 21 real fast. 22 MR. HARLOW: Sure. 23 MR. RUNNER: Was -- was -- was there a 24 differen -- the rate as advertised -- 25 MR. HARLOW: 375 an hour, which is a pilot and 26 the -- 27 MR. RUNNER: And is that the rate that was paid 28 in invoice? 36 1 MR. HARLOW: Yes. 2 MR. RUNNER: So let me ask, when we say a 3 discounted rate, help me understand where we came up 4 with a discounted rate. 5 MR. CLAREMON: As we understand it, that was 6 the amount charged but that was not the amount that was 7 paid. 8 MR. RUNNER: Okay. Help me understand that. 9 Was there an amount paid that -- equal to the amount 10 charged? 11 MR. HARLOW: I'm sorry. No, there are still 12 amounts outstanding or there have been, but that is a 13 charge that is -- will be paid as cash flow becomes 14 available. 15 And what's happened over the years -- well, 16 maybe I could have Mr. Heinbockel expand on this, but 17 let me explain just generally what's happened. 18 There was a big FBI contract when these 19 investors got in, and they put the company together. 20 MR. RUNNER: Well, let me ask this, is there -- 21 is there -- is your accounting show Accounts Receivable 22 for the difference? 23 MR. HARLOW: Are -- are you asking me? 24 MR. RUNNER: Yes. 25 MR. HARLOW: Yeah. 26 MR. RUNNER: Oh. 27 MR. HARLOW: I think they've got -- it does not 28 show an Account Receivable for that specific amount. 37 1 MR. RUNNER: Why would that not be if it's -- 2 if it's -- if it was due to be paid and you charged that 3 much, you couldn't pay that much and so there's a 4 receivable out there. On your books it would seem to me 5 you would show a receivable -- or a payable that you 6 would -- that you would be -- that you would -- 7 MR. HARLOW: You go ahead and -- 8 MR. HEINBOCKEL: Yeah, I was just going to jump 9 in, if I may. Government contracting is a very lumpy 10 business, and working for the government you probably 11 are aware of that. 12 So there's feast and famine, and we've been in 13 the famine mode for a while. So that has not been put 14 on the books -- I probably should have put it on the 15 books -- 16 MR. RUNNER: Well, you can understand -- 17 MR. HEINBOCKEL: -- several years ago. 18 MR. RUNNER: -- why it's important at this 19 point -- 20 MR. HEINBOCKEL: But -- but -- 21 MR. RUNNER: -- because what -- what the 22 argument here is, is that you were -- that you were 23 discounting, you were not -- you -- you were - you 24 were -- in essence it's part of the argument of the 25 common carrier, you had a discounted fee. It was not 26 changed -- it was not the same as for everybody. 27 And so staff has looked at that and said, hey, 28 they've gotten a preferential charge. 38 1 MR. HEINBOCKEL: Yeah. 2 MR. RUNNER: Now, they've gone to your books 3 and have found a preferential charge. They found 4 nothing on this other side that says that you're owed 5 the money from Visual Purple as -- as a -- as a 6 receivable. 7 MR. HEINBOCKEL: Well, we have the invoices. 8 Let me fill in a little bit. 9 MR. RUNNER: Well, the invoices aren't 10 meaningful, right? 11 MR. HEINBOCKEL: Well, they are -- they are in 12 the context -- and I'll tell you why they're meaningful. 13 Because now that I control the company -- okay, we did 14 the mediation, I bought out the other investors, I have 15 controlling interest in the company now and controlling 16 equity in the com -- in the com -- in the company, and 17 I've been putting money into the company to keep the 18 money -- company going, keep it afloat through these 19 hard times. Now we're getting more contracts. 20 So I do have a light at the end of the tunnel 21 where I'll be able to pay what I put into the company, 22 that the company is holding currently as notes -- 23 MR. RUNNER: How do you pay something that 24 you're not holding as a -- as -- 25 MR. HEINBOCKEL: Because I have the invoices. 26 And -- and I'm -- I'm -- we're honestly answering this, 27 I technically have not had my finance manager put these 28 invoices on the books yet. 39 1 There's no impact on this. 2 MR. RUNNER: On how long ago? 3 MR. HEINBOCKEL: Several years ago. We've been 4 through quite -- quite frankly -- 5 MR. RUNNER: But this audit was through what 6 time? 7 MR. TUCKER: The purchase was in September 8 2004. 9 MR. RUNNER: So these are -- these are the -- 10 these -- these are invoices from 2004 that you 11 haven't -- 12 MR. HEINBOCKEL: Absolutely. 13 MR. RUNNER: -- put on your books yet? 14 MR. HEINBOCKEL: Absolute -- absolutely, yeah. 15 MR. RUNNER: Okay. Thank you. 16 MR. HARLOW: May I -- 17 MR. RUNNER: No, I'm finished. 18 MR. HORTON: Further discussion, Members? 19 Hearing none, is there a motion? 20 MS. YEE: Move to take the matter under 21 submission. 22 MR. HORTON: It's been moved by Ms. Yee, second 23 by Ms. Mandel to take the matter under submission. 24 Without objection, Members -- such will be the 25 order. 26 Thank you so very much for appearing before us 27 today. We will take your matter under consideration 28 later on this evening and send you a written report of 40 1 our decision. 2 MR. HARLOW: Thanks all of you. 3 MR. HEINBOCKEL: Thank you, appreciate it. 4 ---oOo--- 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 41 1 REPORTER'S CERTIFICATE. 2 3 State of California ) 4 ) ss 5 County of Sacramento ) 6 7 I, BEVERLY D. TOMS, Hearing Reporter for the 8 California State Board of Equalization certify that on 9 April 27, 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 41 13 pages constitute a complete and accurate transcription 14 of the shorthand writing. 15 16 Dated: May 19, 2011. 17 18 19 ____________________________ 20 BEVERLY D. TOMS 21 Hearing Reporter 22 23 24 25 26 27 28 42