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 JUNE 24, 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 ---OOO--- 16 For the staff: David Levine Tax Counsel 17 Appeals Division 18 19 20 21 22 23 24 25 26 27 28 2 1 5901 GREEN VALLEY CIRCLE 2 CULVER CITY, CALIFORNIA 3 JUNE 24, 2011 4 ---o0o--- 5 MR. HORTON: Ms. Olson? 6 MS. OLSON: Our first matter that was taken 7 under submission is C12, Lona Marie Lee. 8 ---o0o--- 9 C12 LONA MARIE LEE 10 NO. 390217 (AA) 11 ---o0o--- 12 MR. HORTON: Is there a motion, Members? 13 MS. MANDEL: This was one that we asked staff 14 to go talk to Mr. McCutcheon. So, can we find out if 15 there was -- 16 MR. LEVINE: Yes. 17 MS. MANDEL: -- any kind of result? 18 MR. LEVINE: Initially -- I think there was a 19 little confusion. 20 I think the Department made a concession that 21 was -- or indicated that there could be a change, which 22 there wouldn't because -- they were taking about the -- 23 and I will get what they found, this is just explaining 24 what happened. 25 The -- he was arguing that -- or there -- the 26 Department indicated, well, maybe the cost of goods sold 27 he reported on his federal income tax returns may have 28 included mixes or supplies. But, if so -- if they did 3 1 not include mixes and supplies, then the taxpayer got a 2 benefit because the Department accounted for mixes and 3 supplies in its segregation test. 4 And, so, when it applied the results of that 5 segregation test to cost of goods sold on the federal 6 income tax returns, if those costs of goods did not 7 include mixes and all, then the segregation test would 8 have still allowed for them and taken them out. 9 Anyway, that wasn't discussed. He did not -- 10 he said, yes, he can show that that number is wrong, but 11 that's what he wanted to discuss. He wanted to discuss 12 doing a segregation test for a different period, which 13 he didn't have the information. 14 I believe that's what -- I was talking to the 15 Department when my ten minutes ran out -- I believe that 16 he was going to come back. 17 But the Department's position is that the 18 segregation test that it did was correct and there's no 19 reason for a delay. And they're not -- they don't agree 20 to any adjustment. 21 And I agree that taxpayer hasn't established 22 any basis for adjustment or further review. 23 MR. HORTON: Thank you, Mr. Levine. 24 MR. RUNNER: The other item was this -- the 25 idea if there was some kind of an overestimate in 26 regards to the -- the karaoke at the time, right, 27 overestimated and during the amount of time -- 28 MR. LEVINE: I didn't hear any discussion about 4 1 that. 2 MR. HORTON: The taxpayer didn't -- I mean, 3 they did -- 4 MR. RUNNER: I'm sorry, what? Come on up. 5 MS. MANDEL: He can tell Mr. Levine. 6 MR. HORTON: Members, why don't we do it this 7 way, I don't want to take further testimony from the 8 Department. 9 MR. RUNNER: I think it was to a question I 10 asked. 11 MS. YEE: I want you to address Appeals. 12 MR. LAMBERT: I can -- 13 MR. LEVINE: Our -- no. 14 Our basic policy is that without one party, the 15 other party shouldn't -- shouldn't address you directly. 16 MR. RUNNER: Okay. 17 MR. LEVINE: It's at the Board's discretion, 18 but that's how we try and -- 19 MR. RUNNER: Okay. I -- well, I appreciate not 20 taking any testimony without the -- without the 21 Appellant being here. 22 I certainly think that's the right thing to do. 23 I guess I specifically asked the issue in regards to 24 just an opinion as to whether or not we may have 25 overestimated and a discussion that I asked to take 26 place, to see if there was a discussion in regards to 27 whether or not we overestimated the amount of time where 28 it is that they may have collected the 25 cent cover 5 1 charge. 2 So, I don't know the answer to that. 3 MR. LEVINE: Can you give just a -- can you 4 discuss -- 5 MR. HORTON: Well, no, no, no, I'm not going to 6 do that. 7 Mr. Levine, can you give a -- your perception 8 of what impact that would have, based on the evidence 9 that you've heard today? 10 MR. LEVINE: If the Department used a figure 11 for the higher priced drinks during karaoke, then it's 12 correct, then the assessment would have been a little 13 bit high. 14 But I don't know if there is any basis for -- 15 MR. RUNNER: Let me just -- 16 MR. LEVINE: -- for that. 17 MR. RUNNER: -- get clarification for the 18 future. 19 I guess my assumption was that as we had them 20 here with us and we asked them to work with the staff on 21 that, to come back to us, that it was pretty clear that 22 the staff would be coming back with a report on the 23 specific item that the Board had asked for. 24 MR. HORTON: No. First, it's incumbent upon 25 the taxpayer to articulate the issues that they want to 26 discuss. 27 And if the debate doesn't take place and it's 28 not shared through Mr. Levine, it will never get back to 6 1 us. 2 MR. RUNNER: Well, no, let me ask Mr. Levine, 3 is that -- is that -- I mean -- 4 MR. LEVINE: I didn't have -- I didn't finish 5 the discussion and I didn't talk directly to 6 Mr. Lambert, only Mr. Hanks. 7 MR. HORTON: Why don't we put this over for a 8 few minutes, we'll go to the next item. 9 MR. RUNNER: You guys have a little 10 discussion. 11 MR. HORTON: Have that discussion. 12 MR. RUNNER: Thank you. 13 ---o0o--- 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 7 1 MR. HORTON: Ms. Olson, take us to the next 2 item. 3 MS. OLSON: Our next item is D1, George 4 Alfonos Youssef. 5 ---o0o--- 6 D1 GEORGE ALFONOS YOUSSEF 7 NO. 354991 (ET) 8 ---o0o--- 9 MR. HORTON: Is there a motion, Members? 10 MS. YEE: Move to adopt the staff 11 recommendation. 12 MR. HORTON: Moved by Member Yee to adopt staff 13 recommendation. 14 Is there a second? 15 Second by Ms. Mandel. 16 Discussion? Hearing none. 17 Objection? 18 Hearing none, such will be the order. 19 ---o0o--- 20 21 22 23 24 25 26 27 28 8 1 MR. HORTON: Next item?. 2 MS. OLSON: Our next item is D3, Hassan 3 Antonios Mahfood. 4 ---o0o--- 5 D3 HASSAN ANTONIOS MAHFOOD 6 NO. 351999 (ET) 7 ---o0o--- 8 MR. HORTON: Is there a motion? 9 MR. RUNNER: Yeah, I would -- let's see, I'm 10 trying to figure out how to make this -- this -- 11 structure this motion, but I think I would like -- I 12 would move that we would recalculate the unreported cost 13 based upon the 25 shipments that were -- 24, excuse me, 14 24 shipments that were received and identified then by 15 an employee of the taxpayer. 16 MR. HORTON: So moved. Mr. Runner moves to 17 adjust the audit to reflect the shipments not received 18 by the taxpayer; is that correct? 19 MR. RUNNER: Well -- 20 MR. LEVINE: The 24 shipments that there's a 21 definitive record that were shipped to the taxpayer's 22 store? 23 MR. RUNNER: Right, that would be correct. 24 MR. HORTON: All right. The motion is on the 25 floor, is there a second? 26 MS. STEEL: Second. 27 MR. HORTON: Second by Member Steel. 28 Objection? 9 1 I'm going to object to that, only because, 2 Members, I would just simply share that the evidence of 3 purchases from the vendor that they were purchasing the 4 merchandise from, that -- those records were destroyed, 5 by the testimony, and those are the mere records that 6 would have actually supported their contention that 7 these items were never received. 8 And, so, the basis of them never receiving it 9 -- you know, the basis of us saying that the items were 10 never received is -- or at least part of it is that they 11 were actually purchasing the merchandise from 12 somewhere. 13 MS. MANDEL: Mr. Horton? 14 MR. HORTON: Yes, Ms. Mandel? 15 MS. MANDEL: Yeah, that -- that part's a little 16 troubling to me. And I think that they didn't think of 17 the question. 18 I don't know if they'd be able to get the 19 information from Coremark at this point. I think they 20 were so focused on trying to show that they never bought 21 from the one store and they thought, well, since once we 22 started sending the brother up there to watch over the 23 store because, I guess, he must have had some other 24 suspicions of something, started sending the brother up 25 there that then there was no more record of any 26 purchases from House of Oxford. 27 And I think they thought that's how they were 28 showing that it couldn't really have been the legitimate 10 1 store owner who was doing the purchases. I think it 2 just didn't -- never occurred to them that -- that they 3 ought to maybe show that they had purchases from 4 Coremark for the store during the period. 5 MR. HORTON: Did -- the question that I asked 6 wasn't really new. I mean, the same question was asked 7 during the D & R and throughout the entire process when 8 it was brought to their attention in 2006, 2007, 2008, 9 2009, 2010. 10 So -- 11 MS. MANDEL: Okay. 12 MR. HORTON: -- that presents -- 13 MS. MANDEL: I hear what you're saying. 14 MR. RUNNER: I think -- my observation was, I 15 think, looking at the nature of the business operations, 16 that at least we were hearing from, in regards to the 17 fact that this seemed to be so out of character in 18 regards to how the rest of the business was run, you 19 know, it was -- indeed, there was even a previous audit 20 that was clean -- that all those things just led me to 21 believe that there seemed to be something askew here 22 that -- I understand why we made the assumption that it 23 was received in the store, especially on the 24. 24 But on the other ones, it just seems to me -- 25 especially when the taxpayer's the one who turned over 26 the records -- and I think that -- I think their focus 27 was on the fact that they just believed they were -- 28 that this was a mistake and they were going to get 11 1 through this. 2 Because the evidence was -- their opinion was 3 that we didn't -- we didn't -- we didn't -- we 4 didn't have these -- we didn't sell these products. 5 And I don't know in their mind -- I think 6 hindsight's probably, obviously, 20/20 here -- they 7 would have said, yeah, if we could have used those then 8 and used that as part of our arguments, I don't think 9 they ever thought that as part of their argument in 10 terms of having to show that they had the -- that they 11 had actually bought product and, therefore, showed 12 invoices to show that they had, you know, similar 13 products. 14 So, you know, at least it seems to me that the 15 taxpayer has done a lot of things to try to indicate 16 that this was outside their business behavior, doesn't 17 match up with their other stores. 18 And, you know, it would be observation why I 19 think it's worthy of being adjusted. 20 MR. HORTON: The nature of the question itself 21 is actually to help the taxpayer. And, so, the question 22 occurred somewhere around 2006, within the period of 23 time that the taxpayer testified that they retained the 24 records. 25 And, so, in an effort to help the taxpayer, the 26 Appeals officer said, well, can you give me these 27 documents? And then, had they provided that at the 28 Appeals level, it would have never reached us. 12 1 But that's what it is. There is a motion on 2 the floor and a second. 3 Ms. Olson, please call the roll. 4 MS. OLSON: Mr. Horton? 5 MR. HORTON: No. 6 MS. OLSON: Ms. Steel? 7 MS. STEEL: Aye. 8 MS. OLSON: Mr. Runner? 9 MR. RUNNER: Aye. 10 MS. OLSON: Ms. Yee? 11 MS. YEE: No. 12 MS. OLSON: Ms. Mandel? 13 MS. MANDEL: No. 14 MS. OLSON: Motion fails. 15 MR. HORTON: Subsequent motion, please? 16 MS. YEE: Move to adopt staff recommendation. 17 MR. HORTON: Move to adopt staff recommendation 18 by Ms. Yee. Second by Ms. Mandel. 19 Without objection -- objection, Members? 20 MR. RUNNER: Objection. 21 MR. HORTON: Objection noted. 22 Ms. Olson, please call the roll. 23 MS. OLSON: Mr. Horton? 24 MR. HORTON: Aye. 25 MS. OLSON: Ms. Steel? 26 MS. STEEL: No. 27 MS. OLSON: Mr. Runner? 28 MR. RUNNER: No. 13 1 MS. OLSON: Ms. Yee? 2 MS. YEE: Aye. 3 MS. OLSON: Ms. Mandel? 4 MS. MANDEL: Aye. 5 MS. OLSON: Motion carries. 6 ---o0o--- 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 14 1 MR. HORTON: Next item? 2 MS. OLSON: Our next item is D4, Zartosht, 3 Incorporated. 4 ---o0o--- 5 D4 ZARTOSHT, INC. 6 NO. 554941 (ET) 7 ---o0o--- 8 MR. HORTON: Is there a motion, Members? 9 MS. YEE: Move to adopt the staff 10 recommendation. 11 MR. HORTON: Moved by Ms. Yee to adopt staff 12 recommendation. Second by Ms. Mandel. 13 Objection, Members? 14 Hearing none, such will be the order. 15 ---o0o--- 16 17 18 19 20 21 22 23 24 25 26 27 28 15 1 MS. OLSON: Our next item is D5, Egyptian 2 Company, LLC. 3 ---o0o--- 4 D5 EGYPTIAN COMPANY, LLC 5 NO. 562693 (ET) 6 ---o0o--- 7 MR. HORTON: Is there a motion, Members? 8 MS. YEE: Move to adopt the staff 9 recommendation. 10 MR. HORTON: Move to adopt staff recommendation 11 by Ms. Yee, second by Ms. Mandel. 12 Without objection, Members, such will be the 13 order. 14 ---o0o--- 15 16 17 18 19 20 21 22 23 24 25 26 27 28 16 1 MS. OLSON: Our next item would be D12, but they haven't had an opportunity to speak yet, so, would 2 you like to go to go to the first admin item? 3 MR. HORTON: The next item would be D12? 4 MR. LEVINE: C12? 5 MS. OLSON: C12, I'm sorry. 6 ---o0o--- 7 C12 LONA MARIE LEE 8 NO. 390217 (AA) 9 ---o0o--- 10 MR. RUNNER: Oh, C12. 11 MS. OLSON: Yeah, they haven't had the 12 opportunity to -- 13 MS. MANDEL: David has been -- 14 MS. YEE: David was going to -- 15 MR. HORTON: Well, let's go back to -- 16 MS. YEE: -- they haven't had a chance -- 17 MR. LEVINE: We need to just take a couple 18 minutes to talk to the -- 19 MR. HORTON: Okay, let's take -- do that. 20 MR. LEVINE: We could have a stand up break for 21 two minutes. 22 MR. HORTON: Okay, no worries, no worries. 23 (Whereupon there was a break in proceedings.) 24 MR. HORTON: Mr. Levine? 25 MS. OLSON: Back to C12, Lona Marie Lee. 26 MR. LEVINE: The bottom line conclusion is I 27 don't think there is any basis for adjustment. 28 MR. HORTON: Okay. 17 1 MR. LEVINE: The representative was focused on 2 things have changed. And he also, in his discussions 3 with the Department, was saying that's just a point in 4 time. But that point in time was close to -- closer to 5 the audit and, based what I heard, was consistent what 6 what they were doing. 7 The taxpayer's rep did his own test based on 8 recent events without Tuesday and another day and only 9 to 11, even though we know she went to 12. And he added 10 up, even with all those adjustments, 30 percent. The 11 Department used 37 and a half, which was halfway between 12 the 35 to 40 percent she estimated. And it really would 13 make a pretty small difference anyway, but the 14 Department's methodology sounds to me the most valid 15 MR. RUNNER: Thank you. 16 MR. HORTON: Thank you. 17 Is there a motion, Members? 18 MS. YEE: Move to adopt the staff 19 recommendation. 20 MR. HORTON: It's moved by Member Yee to adopt 21 staff recommendation. 22 Is there a second? 23 MS. MANDEL: Second. 24 MR. HORTON: Second by Mr. Runner. 25 Without objection, Members, such will be the 26 order. 27 ---o0o--- 28 REPORTER'S CERTIFICATE 18 1 2 State of California ) 3 ) ss 4 County of Sacramento ) 5 6 I, JULI PRICE JACKSON, Hearing Reporter for the 7 California State Board of Equalization certify that on 8 JUNE 24, 2011 I recorded verbatim, in shorthand, to the 9 best of my ability, the proceedings in the 10 above-entitled hearing; that I transcribed the shorthand 11 writing into typewriting; and that the preceding pages 1 12 through 18 constitute a complete and accurate 13 transcription of the shorthand writing. 14 15 Dated: JULY 5, 2011 16 17 18 ____________________________ 19 JULI PRICE JACKSON 20 Hearing Reporter 21 22 23 24 25 26 27 28 19