1 BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION 2 450 N STREET 3 SACRAMENTO, CALIFORNIA 4 5 6 7 8 REPORTER'S TRANSCRIPT 9 SEPTEMBER 20, 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 17 For the Staff: David Levine Tax Counsel 18 19 20 21 22 23 24 25 26 27 28 2 1 450 N STREET 2 SACRAMENTO, CALIFORNIA 3 SEPTEMBER 20, 2011 4 ---o0o--- 5 MR. HORTON: Miss Olson, our next matter? 6 MS. OLSON: Our next item are those matters 7 that have been taken under submission. 8 Our first one is B1, Pac Bell Telephone Company 9 and Affiliates. 10 ---o0o--- 11 PACIFIC BELL TELEPHONE COMPANY AND AFFILIATES 12 NO. 521312 13 ---O0O--- 14 MR. HORTON: Members -- 15 MR. RUNNER: Let me catch up here. 16 MR. HORTON: -- let's take a moment or two to 17 catch up. 18 MR. RUNNER: Thank you. 19 MR. HORTON: Okay, Members. 20 MS. YEE: Mr. Chairman? 21 MR. HORTON: Yes, Member Yee? 22 MS. YEE: I guess for starters I'd like to 23 request we bifurcate the issues. 24 MR. HORTON: Split the issues? 25 MS. YEE: Obtain a motion on each separately. 26 MR. HORTON: Business non-income issue and the 27 money market mutual fund issue? 28 MS. YEE: Yes. 3 1 MR. HORTON: So be it. 2 Without objection Members? 3 Hearing none. 4 Members, I am going to take up the money market 5 mutual fund matter first. 6 Is there a motion? 7 Move to sustain Franchise Tax Board. 8 MR. HORTON: It's been moved to sustain the 9 Franchise Tax Board. 10 Second by Member Steel. 11 Objection Members? 12 Hearing none, such will be the order. 13 Business, non-business -- 14 MS. STEEL: Wait, what was the motion? Sorry, 15 I didn't hear that. 16 MR. HORTON: Okay. It's -- be careful when you 17 mumble. 18 MS. STEEL: Sorry. 19 MR. HORTON: It's been moved -- it's a motion 20 to sustain the Franchise Tax Board on the money market 21 mutual fund issue. 22 MS. STEEL: Can I withdraw my motion? 23 MR. HORTON: Second withdrawn. 24 MR. RUNNER: And I would object. 25 MR. HORTON: And there is objection Mr. Runner. 26 Is there a second? 27 MS. MANDEL: I'll second. 28 MR. HORTON: Second by Ms. Mandel. 4 1 Noting the objection, Ms. Olson, please call 2 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: No. 9 MS. OLSON: Ms. Yee? 10 MS. YEE: Aye. 11 MS. OLSON: Ms. Mandel? 12 MS. MANDEL: Aye. 13 MS. OLSON: Motion carries. 14 MR. HORTON: Second matter, is there a motion? 15 MS. STEEL: Grant. 16 MR. HORTON: Discussion? 17 It's been moved by Member Steel to grant the 18 petition. 19 Second by Mr. -- Mrs. -- 20 MS. YEE: I'll second. 21 MR. HORTON: Second by Member Yee. 22 MS. YEE: Mr. Chairman? 23 MR. HORTON: Discussion, please? 24 MS. YEE: Yes. I wanted to revisit my earlier 25 suggestion. 26 Mr. Thompson, I think, is going to thank me 27 profusely for not giving him the assignment. I had 28 hoped that we could look at just kind of all of the 5 1 different authorities, but I think the focus that the 2 Appellants were able to put on this case, at least in my 3 mind, did bring up the relevant case law to bear here. 4 And I want to just kind of qualify my second 5 and support for the motion as being specific to the 6 facts of this case, the specific investments that are 7 the subject of this case. 8 But, in the future, I would just like to have 9 Appeals kind of keep an eye with respect to just being 10 sure when there is such an extensive reliance on case 11 law and certainly the numerous citations that were made, 12 that we have kind of the needle threaded a little bit 13 better. 14 MR. THOMPSON: Okay, I understand, thank you. 15 MS. YEE: Yeah, I really had a tough time but 16 certainly the focus and, Mr. Chairman, to your credit, 17 that you gave to the hearing at least gave me some 18 comfort with respect to being able to grant for the 19 Appellant on the first issue. 20 MR. HORTON: Thank you, Member Yee. 21 Further discussion, Members? 22 Hearing none, we have a motion by Member Steel, 23 second by Member Yee. 24 Objection, Members? 25 Hearing none, such will be the order. 26 ---o0o--- 27 28 6 1 MR. HORTON: Ms. Olson, next item? 2 MS. OLSON: Our next item is B2, Jerry Jones, 3 which was a waived appearance. 4 ---o0o--- 5 JERRY JONES 6 NO. 547938 7 ---O0O--- 8 MR. HORTON: Is there a motion, Members? 9 MS. MANDEL: Move to sustain the Franchise Tax 10 Board. 11 MR. HORTON: Moved by Member Yee -- 12 MS. YEE: Second. 13 MR. HORTON: -- to sustain. 14 MS. YEE: Ms. Mandel. 15 MR. HORTON: Moved by Ms. Mandel -- Member 16 Mandel to sustain, second by Member Yee. 17 Objection, Members? 18 Hearing none, such will be the order. 19 ---o0o--- 20 21 22 23 24 25 26 27 28 7 1 MR. HORTON: Ms. Olson? 2 MS. OLSON: Our next item is C1, Dawit Dagne 3 Stokehold. 4 ---o0o--- 5 DAWIT DAGNE Stokehold AND HELEN YOHANNES 6 NO. 491568 (CH) 7 ---o0o--- 8 MR. HORTON: Discussion Members? Is there a 9 motion? 10 MS. STEEL: Adopt the staff recommendation, but 11 waive the negligence penalty -- abate the negligence 12 penalty. 13 MR. RUNNER: Second. 14 MR. HORTON: Members, under the circumstances 15 there's a 35 percent markup that was established and 16 doesn't appear to be impeached by a 35.92 markup and 17 neither was the 97 -- 89 percent taxable ratio. 18 Given the unverified variables, I'm of a mind 19 to make an adjustment to that extent, reduce the markup 20 to 35 percent, reduce taxable purchase ratios down to 89 21 percent and sustain the balance. 22 But a motion is on the floor. 23 MR. RUNNER: Can I -- 24 MS. STEEL: I want to do like 35.95 -- 92 -- to 25 35 percent and 90.34 to 89 percent. 26 MR. HORTON: I'd reduce the markup to 35 27 percent instead of the 35.92 and the taxable ratio to 28 89 percent and allow for -- giving an allowance for the 8 1 various variables there, which is the taxable ratio 2 based on subsequent data and -- 3 MS. STEEL: Mr. Levine, how much is that? 4 MR. RUNNER: Anybody have an estimate on that? 5 MR. LEVINE: No, I don't have a figure, but I 6 can't imagine it would be much. 7 MR. HORTON: It's not. 8 MS. STEEL: It's not fair. 9 MR. HORTON: Okay. There's a motion on the 10 floor -- there's a motion on the floor to move to 11 sustain with the exception of the penalty. 12 Objection, Members? 13 Hearing none, motion is second, moved by 14 Member Steel, second by Member Runner. 15 Hearing, no objection -- 16 MS. MANDEL: Well -- 17 MS. YEE: No. Call the roll on that, 18 Mr. Chairman. 19 MR. HORTON: Objection noted by Member Yee. 20 Ms. Olson, please call the roll. 21 MS. OLSON: Mr. Horton? 22 MR. HORTON: No. 23 MS. OLSON: Ms. Steel? 24 MS. STEEL: Aye. 25 MS. OLSON: Mr. Runner? 26 MR. RUNNER: Aye. 27 MS. OLSON: Ms. Yee? 28 MS. YEE: No. 9 1 MS. OLSON: Ms. Mandel? 2 MS. MANDEL: No. 3 MS. OLSON: Motion fails. 4 MS. MANDEL: Mr. Horton, and your motion was -- 5 bringing your audit experience to bear? 6 MR. HORTON: Yeah, I would -- I would -- I 7 mean, I think it would be somewhat significant. I mean 8 there is a -- well, I would reduce the taxable purchase 9 ratio down to the 89 percent, which has been established 10 by a substantial test, subsequent test, even though it's 11 a condition subsequent, and accept the markup of 12 35 percent, which was used by the taxpayer, and that the 13 markup that we came up with wasn't sufficient enough to 14 impeach that markup. 15 MR. RUNNER: So, are you saying I'd interpret 16 that as a 1 percent drop? 17 MS. STEEL: Yeah. 18 MR. RUNNER: Is that -- 19 MS. STEEL: 1.34 percent. 20 MR. RUNNER: -- is that what I'm seeing there? 21 MR. HORTON: You would have a 1 percent drop on 22 the markup. 23 MR. RUNNER: Right. 24 MR. HORTON: And a -- 25 MS. STEEL: .92 percent. 26 MR. HORTON: -- .92 percent -- 27 MS. STEEL: Actually, markup -- 28 MR. HORTON: -- on the purchase ratio, 10 1 somewhere around, overall -- 2 MS. STEEL: 1.34. 3 R. HORTON: -- 2 percent adjustment, maybe 3 4 percent adjustment. 5 MS. MANDEL: Okay. 6 MR. HORTON: Little self consumption in there. 7 I am just trying to get to reality. When we 8 deal with these estimates and you have data that you can 9 rely on, the Board's first step is to impeach the 10 existing data. 11 And, so, failure to do that gives more credence 12 to the actual data. And that's really all I'm doing, 13 I'm not really dealing with the net results, I'm dealing 14 more with the merit of the law, the merit of the policy 15 and process and so forth and the equity there. 16 So, I really didn't give much thought to the 17 dollar value. 18 MS. MANDEL: Well, I appreciate it because we 19 do have these -- these audits that are based on 20 projections a lot of time and based on estimates and 21 based the best thing that staff feels they had to work 22 with. 23 And then taxpayer comes in and tells a story 24 and, you know, you have that audit background too. And, 25 so, you know, sometimes there is room in the estimates 26 to get to what you think is a more appropriate number 27 under all of the circumstances. 28 MR. HORTON: Thank you. 11 1 So moved. Second by Ms. Mandel. 2 Objection, Members? 3 Hearing none, such will be the directions to 4 the staff. 5 ---o0o--- 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 12 1 MR. HORTON: Ms. Olson? 2 MS. OLSON: Our next item is C2, Santona 3 Enterprises, Incorporated. 4 ---o0o--- 5 SANTONA ENTERPRISES, INC. 6 NO. 513819 (EH) 7 ---o0o--- 8 MS. YEE: Move to adopt the staff 9 recommendation. 10 MR. HORTON: It's moved to adopt staff 11 recommendation by Member Yee. Second by Ms. Mandel. 12 Objection by -- is there an objection? 13 MS. STEEL: Objection. 14 MR. HORTON: Member Steel. 15 Discussion, Member Steel? 16 MS. STEEL: This markup for 40 percent is very 17 high. We just give 35 percent for the other customer -- 18 I mean the other taxpayer and their beers sales was more 19 than 50 percent of their sales. 20 So, if auditor didn't look at that markup 35 -- 21 I mean 40 percent is way too high for this store. 22 MR. HORTON: Further discussion, Members? 23 Hearing none, Ms. Olson? 24 MS. OLSON: Mr. Horton? 25 MR. HORTON: Aye. 26 MS. OLSON: Ms. Steel? 27 MS. STEEL: No. 28 MS. OLSON: Mr. Runner? 13 1 MR. RUNNER: No. 2 MS. OLSON: Ms. Yee? 3 MS. YEE: Aye. 4 MS. OLSON: Ms. Mandel? 5 MS. MANDEL: Aye. 6 MS. OLSON: Motion carries. 7 MR. HORTON: Ms. Olson? 8 MS. OLSON: That concludes our business for 9 today. 10 MR. HORTON: The Board is in recess until 11 tomorrow morning at -- 12 MS. OLSON: 9:30. 13 MS. STEEL: 9:30. 14 MR. HORTON: 9:30. 15 ---o0o--- 16 17 18 19 20 21 22 23 24 25 26 27 28 14 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 14 constitute a complete and accurate 14 transcription of the shorthand writing. 15 16 Dated: September 28, 2011 17 18 19 ____________________________ 20 JULI PRICE JACKSON 21 Hearing Reporter 22 23 24 25 26 27 28 15