1 BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION 2 450 N STREET 3 SACRAMENTO, CALIFORNIA 4 5 6 7 REPORTER'S TRANSCRIPT 8 SEPTEMBER 20, 2011 9 ITEM F PUBLIC HEARINGS 10 ITEM F1 11 BUSINESS TAXPAYERS' BILL OF RIGHTS HEARINGS 12 13 14 15 16 17 18 19 20 21 22 Reported by: Juli Price Jackson 23 No. CSR 5214 24 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 5 Michelle Steel Vice-Chairwoman 6 7 Betty T. Yee Member 8 9 George Runner Member 10 11 Marcy Jo Mandel Appearing for John 12 Chiang, State Controller (per 13 Government Code Section 7.9) 14 15 Diane G. Olson Chief, Board 16 Proceedings Division 17 18 For the Board: Todd Gilman Taxpayers' Rights 19 Advocate 20 Mark Sutter Taxpayers' Rights 21 Advocate Office 22 23 24 ---oOo--- 25 26 27 28 2 1 2 INDEX OF SPEAKERS 3 4 NAME PAGE 5 Jesse McClellans 4 6 Joseph Griesa 7 7 Dan Davis 11 8 9 ---o0o--- 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 3 1 450 N STREET 2 SACRAMENTO, CALIFORNIA 3 SEPTEMBER 20, 2011 4 ---oOo--- 5 MR. HORTON: Miss Olson, what's our next 6 matter? 7 MS. OLSON: The Business Taxpayers' Bill of 8 Rights Hearings. 9 MR. HORTON: Thank you. 10 Mr. Gilman. 11 MR. GILMAN: Good afternoon, sir. 12 Mr. Chairman, Members of the Board, Todd 13 Gilman, Taxpayers' Rights Advocate with the Board of 14 Equalization. 15 The purpose of the hearings is to provide 16 individuals an opportunity to present their ideas, 17 concerns and recommendations regarding legislation, the 18 quality of agency services and other issues related to 19 the Board's administration of its tax programs, 20 including sales and use tax, environmental fees, fuel 21 taxes and excise taxes and any other problems identified 22 in the Taxpayers' Bill of Rights and to report. 23 We'll start with business taxes. Our first 24 speaker is Mr. Joseph -- or Jesse McClellan -- pardon 25 me, Mr. McClellan. 26 ---o0o--- 27 JESSE MC CLELLAN 28 ---o0o--- 4 1 MR. MC CLELLAN: Thank you, Todd. 2 MR. HORTON: Sir, would you please introduce 3 yourself for -- 4 MR. MC CLELLAN: Yes, Mr. Chairman and Members 5 of the Board, my name is Jesse McClellan. Thank you for 6 providing the opportunity to address -- 7 MR. HORTON: You can promote yourself as well, 8 Jesse McClellan, partner with -- 9 MR. MC CLELLAN: Jesse McClellan of McClellan 10 Davis LLC, partner. 11 MR. HORTON: There you go. 12 MR. MC CLELLAN: Okay. I wanted to address the 13 burden of proof that applies to sales and use tax issues 14 to audits, that applies to establishing factual issues. 15 It's the preponderance of the evidence. 16 Evidence Code 115 establishes that a preponderance 17 standard applies unless it's otherwise provided by law. 18 It's not otherwise provided by law. And we 19 think the case law makes it clear that in civil cases, 20 like the cases that are handled by the Board of 21 Equalization, like the issues that are addressed at 22 audits, the preponderance standard clearly applies. 23 It -- it came to our attention that it really 24 isn't stated anywhere. It's not stated in the Audit 25 Manual. It's nowhere to be found in regulation. 26 And what we're seeing is that, depending on the 27 person that you're working with, you potentially get an 28 inconsistent application of a standard -- different 5 1 standards are applied by different individuals. 2 You find that in property tax regulation they 3 do state the preponderance is the standard. In sales 4 and use tax you find the clear and convincing evidence 5 standard is stated in Regulation 1703, as it applies to 6 fraud. 7 It's also thoroughly addressed in the audit 8 manual. But, again, nothing on preponderance of the 9 evidence. 10 So, what we'd like to do is use today as an 11 opportunity to present this issue, bring it to the 12 Board's attention and then, hopefully, to engage the 13 Sales and Use Tax Department to address the issue as 14 well. 15 We think that it would provide a meaningful 16 step towards increasing the consistency with respect to 17 the administration of tax, with respect to the audit 18 program and the Appeals process as well. 19 And if it can be stated somewhere and then the 20 meaning can be explained, then auditors would have a 21 guidepost to look to when they're dealing with the wide 22 array of issues that they deal with on a day in and day 23 basis. 24 MR. HORTON: Thank you, excellent. 25 Are there any other witnesses, Mr. Gilman? 26 MR. GILMAN: We have the one more speaker for 27 business taxes signed up. 28 MR. HORTON: Okay. I'm am going to ask that 6 1 you stay. 2 And bring the other speaker forward as well. 3 MR. GILMAN: Okay, Mr. Joseph Griesa. 4 Mr. Griesa, you can sit right there 5 (indicating). 6 ---o0o--- 7 JOSEPH GRIESA 8 ---o0o--- 9 MR. HORTON: Welcome, sir. 10 MR. GRIESA: Good afternoon, Chairman. 11 I'm not as well versed as Mr. McClellan, or an 12 an attorney, but represent general contractors out of 13 Yuba City and Marysville. 14 I work for a company called Yuba-Sutter 15 Telephone Service. It's more of a mom and pop business. 16 A friend of mine from college has owned the place for 16 17 years. They gross about 300,000 a year and had a very 18 successful business up until the downturn in the 19 economy. 20 But following the downturn in the economy and a 21 divorce, he no longer had people who were watching out 22 for his best interests, particularly his bookkeeping. 23 And, so, tax returns were not filed. 24 I came to the company six months ago in hopes 25 of trying to help him. And in the process of doing so, 26 what I found was that the Internal Revenue Service, EDD, 27 local tax agencies were all willing to work with this 28 man because of what he had been through and his long 7 1 term -- his long good standing term in the community. 2 The agency, though, that has continued to kind 3 have been a thorn in his side has been BOE. Now prior 4 to this I had worked for a company where we had 70 5 employees and we grossed about 4 million a year and I 6 had a really good relationship with all government 7 agencies. But now I'm having to try to get a debt 8 consolidation loan through the bank to pay this guy's 9 back sales taxes off. And we're constantly being 10 harassed and being told that criminal prosecution is to 11 follow. And yet I've got payment plans arranged with 12 every other agency except for BOE. 13 Upon filing his returns, we went from a sales 14 tax deficit -- or a sales tax amount of around 32,000 15 down to about 18,000, 13 in principal before interest 16 and penalty. We've been paying $1,000 a month on the -- 17 on this process. 18 But, again, the way that we've been treated is 19 almost as if we're dealing with a loan shark. And, in 20 fact, that was the term that I -- I have gone to -- one 21 of the local banks in the area trying to get a debt 22 consolidation loan to help this businessman out. 23 And this is a guy that owns his own building, 24 owns his own equipment, has a ten employees. And, like 25 I said, I've got a payment plan with the IRS and he owes 26 the IRS $50,000 in back taxes. He's making his payments 27 and he's fine. 28 But BOE is constantly calling, threatening 8 1 criminal prosecution. And this is in -- this is after 2 we've been working with them on a consistent basis and 3 going -- and I got all the returns filed. I came in and 4 made payments. But they won't put a payment plan 5 together. And, as I said, they continue to call and 6 harass and threaten criminal prosecution. 7 I just don't understand how a small business 8 can get out from underneath this. 9 MR. HORTON: Okay. 10 MR. RUNNER: Mr. Chair -- 11 MR. HORTON: Thank you very much. 12 Mr. Runner, I'm am going to ask Mr. Gilman, 13 has he -- is he aware of this situation? 14 MR. RUNNER: Well, actually, we have just found 15 out about it. He's a constituent of ours. 16 MR. HORTON: Yeah, I know. 17 MR. RUNNER: okay. And, so, we're -- we've, I 18 think, just made contact in regards to our office. 19 MR. HORTON: Mr. Gilman -- I mean, has not 20 engaged prior to this? 21 MR. GILMAN: We just found out about it -- 22 MR. HORTON: Okay. 23 MR. GILMAN: -- just about an hour ago, 24 Mr. Horton. So, we're working with the taxpayer now. 25 We provided him with some information about our 26 office, but we would like you to engage our office to 27 see if we can help you resolve the payment arrangement 28 issue that you have. 9 1 MR. RUNNER: Well, actually -- 2 MR. HORTON: Mr. Runner. 3 MR. RUNNER: -- we would just as -- well, we'll 4 be glad for him to do that, but we'd like him to also 5 contact our office. 6 MR. GILMAN: Oh, yes, sir. 7 MR. RUNNER: And, so that we can help with the 8 constituent to make sure that we can find a solution. 9 We'll certainly work with the Taxpayer 10 Advocate's Office in that process. 11 MR. GILMAN: Yes, sir. 12 MR. GRIESA: And I apologize. I was in BOE's 13 office on Friday making a payment when I saw your 14 pamphlet up and I was like, "Hey, this is step outside 15 the box and get smarter time." 16 MR. HORTON: No apology necessary. 17 Thank you very much for coming. 18 MR. GRIESA: Thank you. 19 MS. STEEL: That's good. 20 MR. GILMAN: I'm going to get with these two 21 gentlemen. 22 MR. HORTON: Someone will get with you. 23 MR. GILMAN: I have staff here and Mr. Runner 24 has staff here. 25 We'd be more than happy to meet you right 26 after -- actually, as you leave the seat, I'm sure there 27 is people waiting to talk to you. 28 MR. HORTON: All right. Thank you very much. 10 1 MR. GRIESA: Thank you. 2 MR. RUNNER: Walk carefully. 3 MR. HORTON: Hi, Sean. 4 MR. GILMAN: Mr. Chairman, I was informed that 5 we also have another speaker, Mr. McClellan's partner, 6 Mr. Dan Davis would like approach the dais and make some 7 comments. 8 MR. HORTON: Mr. Davis, are you here? Please 9 come forward, sir. 10 As he comes, Mr. Gilman, can you speak to us 11 his concern? 12 MR. GILMAN: I haven't been provided any 13 information on this, so, I am finding out right now. 14 MR. HORTON: Okay, very good. 15 That's why we're here. 16 ---o0o--- 17 DAN DAVIS 18 ---o0o--- 19 MR. DAVIS: Good afternoon, Mr. Chairman, Board 20 Members. 21 MR. HORTON: Good afternoon. 22 MR. DAVIS: I appreciate this opportunity. 23 I'm -- I just want to talk briefly about, actually, the 24 same Department, but two different sections of that 25 Department. And I've had kind of diametrically opposed 26 results with these Departments or Sections, rather, and 27 I'd like to address that. 28 And this is the Settlement Section and 11 1 Offer-in-Compromise program. I'd like to start by 2 complimenting the Settlement Section. It's recently -- 3 it was always decent to work with, but recently it has 4 really been improving in its case analysis, its 5 negotiation procedures, general professionalism. In the 6 last few months we've noticed a greater understanding of 7 the issues involved in each case and willingness to 8 apply the understanding in a reasonable manner. 9 These people are clearly doing their homework 10 and they're clearly up to their assigned tasks. Doesn't 11 mean we always get what we want, but we are confident 12 that the cases we take to Settlement are going to get 13 thoroughly reviewed and analyzed and that any arguments 14 against our position are at least going to be fair and 15 rational and that there is a better than even chance 16 that we'll be able to come to a reasonable settlement on 17 behalf of our clients. 18 So, I am very happy with them. And I wanted to 19 take the opportunity to say something nice about 20 somebody at the Board. 21 MR. HORTON: Thank you. 22 MR. DAVIS: Usually we're bumping heads. 23 However, our dealings with the 24 Offer-in-Compromise Section have been quite a bit 25 different. I believe it's probably a training issue. 26 The staff we've encountered there seem to be incapable 27 of analyzing complex financial information. 28 And when they're in doubt, which seems to be 12 1 most of the time, they simply deny the taxpayer's 2 application. 3 I don't know what standards are being applied 4 for considering taxpayer's offers, mainly because I 5 haven't seen one offer accepted or negotiated to 6 acceptable level. 7 The staff's typical response is to ask for more 8 and more paperwork, whether or not that paperwork is 9 relevant or even exists. 10 Eventually, they conclude that the taxpayer's 11 capable of paying an amount that is very close to or 12 right at the original liability. And they're generally 13 not able to clearly explain their reasons for not 14 negotiating further. 15 For example, I've offered the argument -- or 16 I've been offered the argument from them that the 17 taxpayer can pay more because he or she owns properties 18 like a home, a couple of rental properties, two decent 19 cars. 20 And I have to point out that, yeah, each piece 21 of real estate is substantially underwater. I've had 22 one, in fact, where the guy's home had been foreclosed 23 already and the cars are worth less than the loans 24 against them. 25 The staff doesn't seem to take credit card debt 26 into consideration when they're considering the guy's 27 income. You know, they're suspicious that he had some 28 other source of income and if they looked at this credit 13 1 cards, they would see that he's living off credit cards. 2 They seem reluctant to analyze the liability 3 side of balance sheets in general. So, generally, the 4 assessment gets returned for collection of the original 5 liability. The taxpayer ends up being harassed for an 6 indefinite period. And the State ends up recovering 7 less than it would have if the offer been accepted. 8 My suggestions are pretty basic. I think 9 either provide staff training in financial analysis and 10 maybe some of the economics of business failure or, you 11 know, provide a higher level of staff in dealing with 12 these -- with these documents. 13 And try to establish some policies that 14 encourage them to make reasonable settlements rather 15 than searching for reasons to turn people down. 16 I know it's possible because the IRS has such 17 policies and they are pretty good -- I have dealt with 18 them before in Offers-in-Compromise -- and they're 19 pretty reasonable. So, I know it is possible to address 20 this issue. 21 And I would just hope that, perhaps, you'd take 22 a look at the situation. 23 And that's all I have to say. 24 MR. HORTON: Thank you very much. 25 Mr. Gilman. 26 MR. GILMAN: Thank you. I appreciate Mr. Davis 27 coming forward today. I think you brought forward some 28 interesting concerns and we'll certainly work with the 14 1 Offers-in-Compromise Section and insure that we improve 2 upon our current policy. 3 And the training issue as well is something we 4 can certainly work with our Offers-in-Compromise Section 5 to improve on that process. 6 MR. HORTON: Thank you very much. 7 Member Yee. 8 MS. YEE: Some question for the speaker, are 9 the problems -- are you able to differentiate between 10 the two OIC programs in terms of where the problems seem 11 to be occurring more, the one for businesses that have 12 actually terminated as opposed to those that are still 13 in operation? 14 MR. DAVIS: I'm not sure I understand your 15 question. 16 MS. YEE: There is Offers-in-Compromise 17 programs available for businesses that have either 18 terminated from which liability was -- was incurred and 19 also available for those businesses that are still in 20 operation, in which case the business did not collect 21 sales tax reimbursement or they may have inherited a 22 liability as a successor, you know, that type of thing. 23 But do you know where you're having problems? 24 What types of clients are you bringing into the program 25 where you're experiencing these problems? 26 MR. DAVIS: Actually, it's both types. I've 27 had both businesses that have terminated and businesses 28 that are still in operation. 15 1 My gut feeling is the ones that are still in 2 operation are probably a little harder, in general. 3 MS. YEE: That's my sense too. I think it's a 4 different assessment to make with respect to, you know, 5 how to fashion an offer. We're still trying to make 6 sure the business will be viable going forward, so -- 7 MR. DAVIS: Yeah. And in these cases, a couple 8 of the situations, business is going Forward and we're 9 essentially dead men walking. 10 And my -- I was encouraging them actually to 11 shut down, declare bankruptcy because it's really all 12 they could do and work out something with the 13 Offer-in-Compromise Section. 14 And we went back and forth for months, sending 15 more documents. They were very buried in paper and 16 never could come to a reasonable conclusion. They -- 17 they seem to be afraid that they're -- it's almost like 18 they think they're going to get in trouble if they 19 settle for -- shouldn't use "settle" because I like the 20 Settlement Section -- but if they do settle for lower 21 amounts. 22 MS. YEE: Okay. Well, Mr. Chairman, I'd like 23 for Mr. Gilman to take a look. And maybe it's a 24 resource issue, maybe it's a training issue, but 25 certainly to the extent this Board, you know, refers a 26 lot of parties to that program, I definitely think we 27 need to examine that. 28 MR. HORTON: Okay. 16 1 MS. YEE: Thanks. 2 MR. HORTON: Further discussion, Members? 3 Okay, thank you very much -- 4 MR. GILMAN: Thank you. 5 MR. DAVIS: Thank you. 6 MR. HORTON: -- for your comments today. 7 MR. DAVIS: Thank you for the the opportunity. 8 To the issue of preponderance of evidence, any 9 thoughts, Mr. Gilman? 10 MR. GILMAN: I certainly think Mr. McClellan's 11 concept is certainly something worth looking at. 12 I'd like to -- I mean, this is the first we've 13 had a chance to find out about it this morning and I 14 hadn't really had an opportunity to meet with the Sales 15 and Use Tax Department, but I'd like to insure or work 16 with Mr. McClellan to make sure that the Sales and Use 17 Tax Department has the opportunity to respond back to 18 some of the concerns he's brought forward today. 19 MR. HORTON: Okay. 20 MR. GILMAN: So, this is kind of a working -- 21 there is a few moving parts to this, but we want to keep 22 moving forward, so -- 23 MR. HORTON: Okay. Let's report back to the 24 Board at our next meeting some direction based on that 25 discussion. 26 MS. YEE: Could I also just ask -- 27 MR. HORTON: Ms. Yee. 28 MS. YEE: -- Mr. Gilman, to the extent that 17 1 this may require a statutory change or some legislative 2 action, will you also include that in your discussion? 3 MR. GILMAN: Yes, ma'am. 4 MS. YEE: Thank you. 5 MR. MC CLELLAN: I can -- I intend to also make 6 a submission as well. 7 For some reason we weren't aware that these 8 hearings were going to be held until Friday and I just 9 haven't have had an opportunity put something together 10 that I'd be willing to share and be proud of. 11 But we will make a submission which will 12 provide some background on what the law is. I don't 13 think that any legislative action would be necessary at 14 all because the law is in place. 15 But, in any event, I can share that and my 16 position on that. 17 MS. YEE: Thank you. 18 MR. HORTON: Okay. Thank you very much for 19 your presentation. 20 MR. MC CLELLAN: Thank you. 21 MR. HORTON: We appreciate that. 22 Mr. Gilman. 23 MR. GILMAN: Okay. With your permission, 24 Mr. Chairman, if there is anyone in the audience that 25 would like to come forward now and speak to the business 26 tax -- 27 MR. HORTON: Of course. 28 MR. GILMAN: -- portion of the hearing? 18 1 MR. HORTON: Please introduce yours -- no, 2 you're not? 3 With the agency, okay. 4 MR. GILMAN: He's with me. 5 MR. HORTON: All right. 6 MR. GILMAN: We have no written submissions for 7 business tax either. 8 So -- 9 MR. HORTON: You know he was back there 10 agreeing with the taxpayer. And that's why I thought he 11 was -- 12 MR. GILMAN: Oh, yeah, behind my back -- being 13 behind my back. 14 MR. HORTON: Can he change sides in the midst 15 of this? 16 MR. GILMAN: Okay. 17 MR. HORTON: Just kidding. 18 MR. GILMAN: Okay. 19 MR. RUNNER: Advocate's Office. 20 MR. HORTON: I said he's doing the right 21 thing. 22 MR. SUTTER: I can come up on that side, if 23 you'd like. 24 MR. HORTON: No, no, no. 25 MR. GILMAN: Okay. 26 ---o0o--- 27 28 19 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 SEPTEMBER 20, 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 19 constitute a complete and accurate 14 transcription of the shorthand writing. 15 16 Dated: October 22, 2011 17 18 19 ____________________________ 20 JULI PRICE JACKSON 21 Hearing Reporter 22 23 24 25 26 27 28 20