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 OCTOBER 28, 2011 10 11 12 13 14 15 FINAL ACTIONS 16 17 18 19 20 21 22 23 24 25 26 27 REPORTED BY: Kathleen Skidgel 28 CSR NO. 9039 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 10 Chiang, State Controller (per Government Code 11 Section 7.9) 12 Diane G. Olson Chief 13 Board Proceedings Division 14 For the Staff: David Levine Tax Counsel 15 16 ---oOo--- 17 18 19 20 21 22 23 24 25 26 27 28 2 1 5901 GREEN VALLEY CIRCLE 2 CULVER CITY, CALIFORNIA 3 OCTOBER 28, 2011 4 ---oOo--- 5 MR. HORTON: Ms. Olson. 6 MS. OLSON: Our next item is C4.a, Hye Ock Im 7 and C4.b, Pyung Soon Im. 8 ---oOo--- 9 Hye Ock Im 10 No. 435812(AA)+ 11 Pyung Soon Im 12 No. 446413(AA)+ 13 ---oOo--- 14 MR. HORTON: Mr. Levine. 15 MR. LEVINE: We'd ask for a 30/30/30. There 16 was some -- um, the Department has agreed to use 18 17 months of the schedule, which reduces the percentage of 18 new dress-making to about 21-and-a-half percent. Uh, 19 the taxpayer has agreed and the Department has agreed to 20 do an observation test. 21 And to also -- the taxpayer raised the 22 argument, I think for the first time, that, uh, some of 23 the deposits which were treated as gross receipts, that 24 there should be additional things treated as loans and 25 stuff. And the Department agreed that it would look at 26 whatever taxpayer provided. 27 So what that means is the Department would do 28 an observation test which could be higher or could be 3 1 lower, but the percentage of alterations will be higher, 2 which means there's more possibility of no tax because 3 all of the dress-making is taxable and only part of the 4 alterations. 5 So the Department is agreeing to move part of 6 the percentage into the "alteration" category. 7 MS. STEEL: That's Department recommendation? 8 MR. LEVINE: For 30/30/30. 9 MS. STEEL: Right. 10 MR. LEVINE: And that will be the basis of the 11 recalculation as an agreement. 12 MS. STEEL: I want to have -- I have different 13 motion. 14 MS. MANDEL: And the taxpayer agreed with that 15 and they understood? 16 MR. LEVINE: Yes. The Department had 17 suggested -- you know, I think they suggested, what, 18 about a 15 percent reduction, would that be 19 sufficient -- of the deficiency, and the taxpayer did 20 not want to agree to that. They wanted an observation 21 test. 22 MS. STEEL: Can I make motion? 23 MR. RUNNER: Can I just clarify that real quick 24 then? So what the Department offered was a 15 percent 25 reduction. 26 MR. LEVINE: They asked -- 27 MR. RUNNER: Okay. 28 MR. LEVINE: -- if they agreed to a 15 percent 4 1 reduction, would that -- would that work. 2 MR. RUNNER: And the taxpayer said, no, thank 3 you. 4 MR. LEVINE: That was not going to work. 5 MR. RUNNER: If that's what we're going to do 6 we'd just as soon go through this process of a -- 7 MR. LEVINE: Right. 8 MR. RUNNER: Okay. I just want to clarify that 9 there, like, wasn't an agreement to go ahead and go 10 forward at that point. It was based upon that as the 11 alternative. 12 MR. LEVINE: Well, I think the -- the 13 Department probably suggested that as an alternative; by 14 the way, what about just skipping all that extra work 15 and just 15 percent? And they didn't want to do that. 16 MS. MANDEL: And what was the percentage the 17 dress-making you think goes down to? 18 MR. LEVINE: 21.5, 21.4. Basically using that 19 schedule for 18 months rather than six. 20 MS. MANDEL: But they still think that there 21 may be something in it that's too much? 22 MR. LEVINE: I think that -- my 23 understanding -- and we'll write it up clearly, but my 24 understanding is the Department's just going to accept 25 the schedule. 26 MS. MANDEL: Oh. 27 MR. HORTON: Yeah. Um, you know, my, uh -- in 28 looking at the data and, uh -- the extraction of the May 5 1 report, reported errors, four errors, acknowledgement of 2 just one error, uh, as I mentioned earlier was prepared 3 to actually extract that altogether -- 4 MS. YEE: Yeah. 5 MR. HORTON: -- and say no errors and -- 6 MR. LEVINE: I think that's what the Department 7 is going with. 8 MR. HORTON: And then go in and offer -- and 9 propose -- and then if you look at the differential in 10 the operation and the type of business, specifically, 11 uh, wedding and -- and those types of ceremonial types 12 of events, was prepared to say probably a 20, 25 percent 13 adjustment on the taxable measure. 14 However, in light of the new information 15 relative to the deposits, we weren't able to take into 16 consideration, um, and that the taxpayer's desire 17 evidently, uh, to have an opportunity to eliminate the 18 liability altogether given the potential adjustment. 19 MR. LEVINE: I don't -- I think my 20 understanding is the taxpayers agree that there's an 21 understatement. It's -- they had conceded 3,000. And 22 so they -- they agree there's some understatement. So 23 it's not going to eliminate it, but I think they're 24 looking for a much bigger reduction. 25 MR. HORTON: Reduction. Okay. 26 I mean, it's going -- I mean, it's one of those 27 cases where we're interjecting or asked to interject 28 information that's not available to us, facts that's not 6 1 available to us. 2 MS. MANDEL: But the -- the concurrence on the 3 tax that you say they agree to 3,000, that's already 4 taken into -- that's already off the top of the numbers. 5 When we talked at the hearing about how much they would 6 owe when we clarified that, does -- 7 MR. LEVINE: No. The total amount that we 8 gave them -- 9 MS. MANDEL: Oh, I see. Okay. 10 MR. LEVINE: -- is the total amount they owe -- 11 MS. MANDEL: Yeah, yeah, yeah. 12 MR. LEVINE: Based on the current 13 determination. 14 MS. MANDEL: Yeah, yeah. Yeah. So the 17 nine 15 is the total tax and interest, or the taxes, 11,006. 16 They agree to 3,000 of that. 17 MR. LEVINE: That's my -- that's what we 18 understand. 19 MR. HORTON: They -- so we're somewhere 20 between -- 21 MR. LEVINE: 3,000 and -- 22 MR. HORTON: 3,000 and 17. Okay. 23 MR. RUNNER: It's 17, correct? 24 MR. LEVINE: Well, yeah, 17 is -- 25 MS. MANDEL: That's with the interest. 26 MR. LEVINE: Well, 17 is with interest. Just 27 looking at -- 28 MR. RUNNER: So we're between 3,000 and 7 1 15,000. 2 MR. LEVINE: 3,000 and 11,600 in tax. 3 MR. HORTON: Yeah. 4 MS. MANDEL: Yeah, it's easy -- and -- and the 5 deposits issue -- 6 MR. LEVINE: Plus interest. 7 MS. MANDEL: David, the deposits issue is only 8 with respect to the numbers that the Department had, and 9 they're not going to use those? 10 MR. LEVINE: The gross receipts. It would be 11 gross receipts. 12 MS. MANDEL: Gross receipts. 13 MR. LEVINE: So I think it takes it off the top 14 or -- well, it doesn't take it off the top because they 15 multiplied the numbers. But if there is, like, $2,000 16 worth of reduction, it will be -- I'm not sure how much, 17 but it will be over a thousand, maybe 1500. It would -- 18 I think the -- 19 MS. MANDEL: Oh, I see. 20 MR. LEVINE: The higher percentage is taxable. 21 MS. MANDEL: I see. 22 MR. LEVINE: All the dress-making, the tuxes, 23 and the -- 24 MS. MANDEL: Yeah, I see. So it's still -- 25 it's still part of the number that's in play, even when 26 they use the charts. 27 MR. LEVINE: Then they apply the percentage. 28 But most of it will be -- most, if any, reduction they 8 1 can show in gross receipts will reduce their liability 2 substantially. 3 MR. HORTON: So, Mr. Levine, on the 30/30/30 4 the taxpayer would have an opportunity to present the 5 facts as they see them, uh, and the Board will still 6 have an opportunity to rule on this, uh, and take those 7 matters under consideration. 8 MR. LEVINE: Certainly. If you're not happy 9 with the -- I mean, if they agreed, you'd probably 10 accept it. And if they didn't, then -- and you didn't 11 think it was low enough, you would -- 12 MR. HORTON: All right. 13 MR. LEVEIN: -- make the decision you thought 14 was appropriate. 15 MR. HORTON: Um, there's a motion on the floor, 16 um, I believe. 17 MS. STEEL: No motion. 18 MR. RUNNER: No. 19 MR. HORTON: No motion? 20 MS. STEEL: No motion. 21 MR. HORTON: Oh, okay. How did I let you guys 22 get this far? Anyway -- 23 MR. LEVINE: She was going to make a motion. 24 MR. HORTON: So be it. Um, is there a motion, 25 Members? 26 Members, I would move the 30/30/30 to allow the 27 taxpayer an opportunity to present the facts and for the 28 Board to consider the facts; at which time I would ask 9 1 that the Department brief us on the issues and allow us 2 an opportunity, again, only -- I mean, primarily because 3 of the, um -- I believe the language barriers created a 4 problem -- 5 MS. MANDEL: Mm-hmm. 6 MR. HORTON: -- in understanding the complexity 7 of the testing. Um, not necessarily the new versus 8 used, but the complexity of the testing. And what 9 happens is, often times, is that you respond to the 10 question in front of you, not the totality of the 11 question. And the question can have certain unintended 12 consequences. And if you don't understand what the real 13 essence of the question is, you answer it as honestly as 14 you can. And that sometimes works against you. 15 So, I think we ought to provide them an 16 opportunity to have that discussion; not only for this 17 case, but for future practice in reporting. And at the 18 time that it comes back, if in fact, uh, we see this -- 19 the facts different than the Department, there's not a 20 concurrence, we can act upon it at that time. 21 MS. YEE: Are we confident about the 30/30/30, 22 given the location of the son? 23 MS. STEEL: Yeah, that's my concern. 24 MR. LEVINE: My understanding is that they will 25 make available for the observation test during the 30 26 days of the taxpayer's period, and then the Department 27 will have the time to respond. So my understanding is 28 they don't have a problem with that. 10 1 MS. STEEL: Okay. So Mr. Levine -- 2 MR. LEVINE: I assume because they had a chance 3 to talk about it. 4 MS. YEE: Okay. 5 MS. STEEL: So we going to do other observation 6 test there. I thought, um, son was talking about that 7 his mom was getting enough, uh, the stress or, you know, 8 burden for this without speaking English. So he 9 actually made it very clear before he left that, you 10 know, he wants just talk about it and he wants to get 11 over. 12 So I want to make substantive motion. You said 13 that -- so they agreed that they were under, uh, 14 reported for $3,000; is that what you are saying? 15 MR. LEVINE: That's -- that's what we have 16 here. 17 MS. STEEL: So, okay. I want to make motion 18 that, um, they pay taxes on that $3,000 and just grant 19 the petition other than that. That's going to be my 20 substantive motion. Because, you know, son is going to 21 be gone. Son's the one figured everything out, and 22 then, you know, he has to have a conference calls. 23 And I -- I -- I think the beginning, you know, 24 audit between auditor and this taxpayer, you know, their 25 conversation, I don't think they really understand each 26 other for other matters than they agreed for 27 understate -- under reported. 28 So that's my motion. 11 1 MR. RUNNER: I'd -- I'd -- I'd second that, and 2 I'll speak to it real quick. 3 MR. HORTON: Okay. It's moved and second. 4 Discussion, Members. 5 MR. RUNNER: Yeah. I -- I -- I would agree. I 6 mean at this point I'm concerned in regards to -- there 7 seemed to be concerns on multiple issues. Um, and it 8 seems to me that trying to put them through now this 9 additional process, knowing that it also has this issue 10 in regards to a son that's -- that's, you know, half a 11 world away, uh, just is -- is a challenge. 12 So it seemed to me that if -- you know, if the 13 taxpayer said, hey, I'm in, I'm in for the 3,000, I 14 assume everything would be applied in regards to all the 15 penalties and all the other issues appropriate to 16 that -- to that amount of tax, um, it seems to me that 17 that would -- getting this off our plate and off our 18 staff's plate and getting these people back to work to 19 focus on their business would be in the best interest. 20 MS. STEEL: And then now actually she changed 21 her practice that she's asking, uh, her customers that 22 it's new or used. So that's good. 23 And second thing is I want to instruct 24 Department that, reach out to alteration shops too, not 25 just dry cleaners. 26 MR. HORTON: Okay. Further discussion, 27 Members? 28 There's a motion, uh, to adjust the liability 12 1 down to $3,000. Second by Mr. Runner. 2 Objection, Members? 3 Hearing none, such will be the order. 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 13 1 MR. HORTON: Ms. Olson. 2 MS. OLSON: Our next item is C9, Asmaa I. 3 Shalaby. 4 ---oOo--- 5 ASMAA I. SHALABY 6 No. 489020(AS)+ 7 ---oOo--- 8 MR. HORTON: Is there a motion, Members? 9 MR. RUNNER: Let's see. This one. 10 MS. YEE: Oh, yeah. Move to adopt the staff 11 recommendation. 12 MR. HORTON: Moved by Ms. Yee to adopt the 13 staff recommendation. Second by Ms. Mandel. 14 Objection, Members? 15 MR. RUNNER: Yeah, I object. 16 MS. STEEL: Objection. 17 MR. HORTON: Objection noted. 18 Ms. Olson, please call the roll. 19 MR. RUNNER: Can we discuss on this one real 20 quick. 21 MR. HORTON: Okay. Discussion, please. 22 MR. RUNNER: I'm sorry. 23 MR. HORTON: No worries. 24 MR. RUNNER: I just -- the issue for me is 25 that -- is that, uh, again, the low rate of error. I 26 realize the amount of money is large, but again, it 27 seems to me that the -- the error rate was certainly not 28 proportioned compared to other ones that we deal with. 14 1 I know the amount of money was large, but it seems to me 2 our focus here should be on the, uh -- on the, uh -- on 3 the, uh -- on the -- on the, um -- on the percentage of 4 ratio. And, again, what we're dealing with here is 5 only, only the issue of the, uh, penalty. And, uh, so 6 that's why I object. 7 MR. HORTON: Thank you. 8 Member Yee. 9 MS. YEE: Uh, thank you, Mr. Chairman. 10 It seems to me that, um, there was some 11 selective furnishing of records. And that's what I'm 12 having a problem with. And there were other records 13 that could have been, um, sought and made available that 14 weren't forthcoming. 15 So I'm, uh -- I'm, uh, not partial to this. 16 MR. HORTON: Further discussion, Members? 17 I just want to say for the record that I really 18 don't see the percentage of error as a basis for a 19 negligence penalty, to have it or not to have it. It's 20 certainly a indication possibly, uh, but the negligence 21 in record-keeping, negligence in reporting, uh, 22 negligence in, uh, filing are issues when, in fact, 23 there was consistency on the federal income tax, causes 24 pause. 25 Ms. Olson, please call the roll on the 26 motion. 27 MS. OLSON: Mr. Horton. 28 MR. HORTON: Aye. 15 1 MS. MANDEL: Are you trying to remember what 2 the motion was? 3 MR. HORTON: Aye. Aye. 4 MS. OLSON: Ms. Steel. 5 MS. STEEL: No. 6 MS. OLSON: Mr. Runner. 7 MR. RUNNER: No. 8 MS. OLSON: Ms. Yee. 9 MS. YEE: Aye. 10 MS. OLSON: Ms. Mandel. 11 MS. MANDEL: Aye. 12 MS. OLSON: Motion carries. 13 MS. STEEL: Let me ask just for offer in 14 compromise. 15 MR. HORTON: Uh, yeah. 16 MS. STEEL: Okay. 17 MR. HORTON: Ms. Steel has requested that a 18 discussion take place relative to an offer in 19 compromise. 20 MR. LEVINE: I'm sorry. On the last one, 21 Shalaby? 22 MR. HORTON: Yes. 23 ---oOo--- 24 25 26 27 28 16 1 MR. HORTON: Ms. Olson. 2 MS. OLSON: Our next item is C17, Ifeanyi 3 Obiekea. This was a no appearance. 4 ---oOo--- 5 IFEANYI OBIEKEA 6 No. 462256(AS)+ 7 ---oOo--- 8 MR. HORTON: Is there a motion, Members? 9 MS. YEE: Move to adopt the staff 10 recommendation. 11 MR. HORTON: Moved by Member Yee to adopt staff 12 recommendation. Second by Member Mandel. 13 Without objection, hearing none, such will be 14 the order. 15 ---oOo--- 16 17 18 19 20 21 22 23 24 25 26 27 28 17 1 MR. HORTON: Ms. Olson. 2 MS. OLSON: Our next item is C18, Housewares 3 International, Incorporated. 4 ---oOo--- 5 HOUSEWARES INTERNATIONAL, INC. 6 No. 464830(AA)+ 7 ---oOo--- 8 MR. HORTON: Is there a motion, Members? 9 MS. YEE: Move to adopt the staff 10 recommendation. 11 MR. HORTON: Moved by Member Yee to adopt staff 12 recommendation. Second by Member Mandel. 13 Is there objection, Members? 14 Hearing none, such will be the order. 15 ---oOo--- 16 17 18 19 20 21 22 23 24 25 26 27 28 18 1 MS. OLSON: Our next item is C19, Shantilli, LLC. 2 ---oOo--- 3 SHANTILLI, LLC 4 434838(UT)+ 5 ---oOo--- 6 MR. HORTON: Is there a motion, Members? 7 MS. YEE: I'm going to move to adopt the staff 8 recommendation, but I wanted to ask some questions. 9 MR. HORTON: Moved by Member Yee to adopt staff 10 recommendation, discussion purposes. Second by 11 Ms. Mandel. 12 Discussion, Members. 13 MS. YEE: Yeah. I -- I -- this case was 14 slightly different from some of the other vehicle cases 15 that we've seen, I think, from the perspective that 16 we're dealing with, um, the petitioner who was not a 17 California resident. And I -- we didn't get into it 18 during the hearing, but, um, in terms of the 19 presumption. I mean, I guess I'm just -- and there were 20 a lot of issues, uh, certainly embedded in the -- in the 21 appeal. 22 But, uh, I just wanted to note that it was 23 different from many of the ones that we've seen. But, 24 um, ought we be looking at it any differently, 25 Mr. Levine, than what -- how we have? 26 MR. HORTON: If I may, Member Yee, just to add 27 a caveat to that, you know, it's a shift of the burden 28 of proof. And so we come with the presumption, or at 19 1 least with the discussion, with the presumption that the 2 burden of proof is on the taxpayer. Um, just for your 3 consideration and your response. 4 MR. LEVINE: Most of these cases come down to 5 credibility. If you believed what petitioner said, you 6 would grant. We would have granted if we believed him. 7 And to be quite frank, my understanding looking this up 8 is it's actually legal in Montana to set up these LLCs. 9 It would not be legal in California, but he didn't do it 10 in California. 11 So, he didn't do anything illegal. But still, 12 he bought it for his use, he set up an LLC to attempt to 13 legally avoid tax. And my personal view when I look at 14 these, I say, you had better prove it. You had better 15 jump through all the hoops. Don't expect me to trust 16 you like I might trust someone else. So that's how I 17 personally look at these. 18 MR. RUNNER: Well, I'll go a long ways to help 19 the taxpayer in that and make some assumptions. But at 20 this point I think you're right, this comes down to 21 credibility. And, for me, I was not convinced. 22 MR. HORTON: Okay. So there's a motion and a 23 second. 24 Objection? 25 Hearing none, such will be the order. 26 ---oOo--- 27 28 20 1 MS. OLSON: Our next item is C20, Michael Joseph Pompura. 2 3 ---oOo--- 4 MICHAEL JOSEPH POMPURA 5 No. 473931(EH)+ 6 ---oOo--- 7 MS. OLSON: This was a -- 8 MR. HORTON: Is there a motion, Members? 9 MS. OLSON: -- waived appearance. 10 MR. HORTON: Waived appearance, all right. 11 MS. YEE: Uh, move to adopt the Appeals staff 12 recommendation. 13 MR. HORTON: Moved by Member Yee to adopt staff 14 recommendation. Second by Member Mandel. 15 Discussion, Members? 16 Is there an objection? 17 Hearing none, such will be the order. 18 ---oOo--- 19 20 21 22 23 24 25 26 27 28 21 1 MR. HORTON: Ms. Olson. 2 MS. OLSON: Our next item is C21, Juan B. 3 Garibo. 4 ---oOo--- 5 JUAN B. GARIBO 6 No. 513023(AS)+ 7 ---oOo--- 8 MR. HORTON: Is there a motion, Members? 9 MS. YEE: Move to adopt the staff 10 recommendation. 11 MR. HORTON: Moved by Member Yee to adopt staff 12 recommendation. Second by Member Mandel. 13 Objection, Members? 14 Hearing none, such will be the order. 15 ---oOo--- 16 17 18 19 20 21 22 23 24 25 26 27 28 22 1 MS. OLSON: Our next item is C22.a, Karen Lee 2 Miller and Lawrence Joseph Miller. 3 ---oOo--- 4 KAREN LEE MILLER and JOSEPH MILLER 5 NO. 461286(AA)+ 6 LAWRENCE JOSEPH MILLER and CLIFF WILLIAM MILLER, 7 No. 461281(AA)+ 8 ---oOo--- 9 MR. HORTON: Is there a motion, Members? 10 MS. YEE: Let's see, C22. 11 MS. OLSON: This includes C22.b also. 12 MS. YEE: Move to adopt the staff 13 recommendation. 14 MR. HORTON: Move to adopt staff 15 recommendation. Second by Member Steel. 16 Is there objection? 17 Hearing none, such will be the order. 18 ---oOo--- 19 20 21 22 23 24 25 26 27 28 23 1 MS. OLSON: Our next case is C22, Armenak 2 Lakisyan. 3 MS. YEE: C23? 4 MR. HORTON: C twenty -- 5 MS. MANDEL: Three. 6 MR. HORTON: -- three. 7 MS. OLSON: Excuse me, C23. 8 ---oOo--- 9 ARMENAK LAKISYAN 10 No. 486896(AC)+ 11 ---oOo--- 12 MR. HORTON: Is there a motion, Members? 13 MS. YEE: Move to adopt the staff 14 recommendation. 15 MR. HORTON: Motion to adopt staff 16 recommendation. 17 Is there a second? Second by Mr. Runner. 18 Objection? 19 Hearing none, such will be the order. 20 ---oOo--- 21 22 23 24 25 26 27 28 24 1 REPORTER'S CERTIFICATE 2 3 State of California ) 4 ) ss 5 County of Sacramento ) 6 7 I, KATHLEEN SKIDGEL, Hearing Reporter for the 8 California State Board of Equalization certify that on 9 October 28, 2011I 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 24 constitute a complete and accurate 14 transcription of the shorthand writing. 15 16 Dated: November 8, 2011 17 18 19 ____________________________ 20 KATHLEEN SKIDGEL, CSR #9039 21 Hearing Reporter 22 23 24 25 26 27 28 25