1 BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION 2 450 N STREET 3 SACRAMENTO, CALIFORNIA 4 5 6 7 REPORTER'S TRANSCRIPT 8 DECEMBER 14, 2011 9 FINAL ACTIONS (PM) 10 11 ---o0o--- 12 13 14 15 16 17 18 19 Reported by: Juli Price Jackson 20 No. CSR 5214 21 22 23 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 Marcy Jo Mandel Appearing for John 10 Chiang, State Controller (per 11 Government Code Section 7.9) 12 13 Diane G. Olson Chief, Board 14 Proceedings Division 15 16 17 ---oOo--- 18 For Board Staff: Anthony Epolite Tax Counsel 19 William Stafford 20 Tax Counsel 21 22 23 24 25 26 27 28 2 1 450 N STREET 2 SACRAMENTO, CALIFORNIA 3 DECEMBER 14, 2011 4 ---oOo--- 5 MS. OLSON: B1, Kamleshwar C. Gunsagar and 6 Anita Gunsagar. 7 ---o0o--- 8 B1 KAMLESHWAR C. GUNSAGAR and ANITA GUNSAGAR 9 NO. 484764 10 ---o0o--- 11 MR. HORTON: Discussion, Members? 12 MS. YEE: I'll make a motion. 13 Move to sustain the Franchise Tax Board, which 14 this motion would reflect the concession allowing the 15 2001 worthless deduction for ECS, Incorporated as well 16 as the 2003 gain exclusion from Lara Technology. 17 MS. MANDEL: And that's all the concessions 18 that were made? 19 MR. EPOLITE: It is our understanding from the 20 Franchise Tax Board that after the adjustments and 21 concessions by the two parties, that the revised tax for 22 2001 is $70,037.01 and a penalty of $17,509.25. And for 23 2003, after the concessions, the revised tax liability 24 is $10,820.34 and a penalty of $2705.09. 25 MR. STAFFORD: Excuse me, there were three 26 stocks at issue. 27 MS. MANDEL: I just want to make sure the 28 motion is capturing all of the -- the intent of the 3 1 motion is to capture all of the concessions -- 2 MS. YEE: Yeah. 3 MS. MANDEL: -- that were made by both sides. 4 MS. YEE: Yeah. 5 MR. STAFFORD: So, those reflect -- 6 MS. YEE: Those two pieces, those two elements, 7 right? The 2001 for -- reflected the ECS worthless 8 deduction and the 2003 gain exclusion for -- 9 MS. MANDEL: She's focused on what FTB has 10 conceded. 11 MR. STAFFORD: Correct. 12 MS. YEE: Yeah. 13 MS. MANDEL: Okay. That's all, I just want to 14 make sure everything was in there. 15 MS. YEE: Okay. 16 MR. HORTON: We have a motion including all of 17 the concessions made by the parties. Moved by Member 18 Yee, second by Member Mandel. 19 Objection, Members? 20 MS. STEEL: Just comment. 21 MR. HORTON: Comment, discussion? 22 MS. STEEL: I wish we can remove the furnish 23 penalty, but it's been adjusted, so, I just vote for it. 24 MR. HORTON: Without objection, Members, such 25 will be the order. 26 ---o0o--- 27 28 4 1 MR. HORTON: Ms. Olson? . 2 MS. OLSON: Our next item is B2, Leprino Foods 3 Company. 4 ---o0o--- 5 B2 LEPRINO FOODS CO. 6 NO. 481272 7 ---o0o--- 8 MR. HORTON: Members, why don't we take the 9 assets up separately and -- for discussion purposes and 10 voting purposes? 11 Is that okay with you? 12 MS. MANDEL: Uh-hmm. 13 MR. HORTON: Okay, we'll take up the electrical 14 transformers assets. 15 MS. STEEL: I'll -- 16 MS. YEE: I'm going to make a motion to allow 17 the MIC on these assets. 18 MS. STEEL: I second that. 19 MR. HORTON: It's been moved by Member Yee to 20 allow the MIC on electrical transformers assets. 21 Second by Member Steel. 22 Objection, Members? 23 MS. MANDEL: Uh-hmm -- 24 MR. HORTON: Discussion, Members? 25 Members, currently I'm a no vote on this, but 26 I'm willing to put it over. 27 MS. YEE: I'll make an observation. 28 I do think there was some -- I don't think the 5 1 distinction was clearly made. And I think there was one 2 to be made with respect to manufacturing process and 3 the -- and cheese processing and at what point these 4 assets really were brought to bear. And I do believe 5 that these assets are integral to the entire 6 manufacturing process. 7 Actually, it's a terrible word to use, that 8 the -- that these assets were necessary with respect to 9 manufacturing to take place. 10 MS. MANDEL: I agree. I guess it's a question 11 of when the manufacturing started and -- I mean, I think 12 Sierra Pacific was a very different -- 13 MS. YEE: It was. 14 MS. MANDEL: -- case because of the use of the 15 steam -- 16 MS. YEE: Yeah. 17 MS. MANDEL: -- is my recollection. 18 MS. YEE: And I think -- yeah, and I think, 19 Mr. Chairman, your question about the electricity 20 itself -- I mean, what's hard here is that the -- there 21 was -- these assets were used to -- as they call it -- 22 to step down the voltage. But what we didn't have, 23 unlike I think one of the other cases was you had all 24 this electricity and it had to be stepped down. So, 25 what happened to all of the other -- the rest of it? 26 But I was really focused on the manufacturing 27 process, which at least suggested to me, or I thought 28 that the parties had agreed at a prehearing conference 6 1 about the steps that actually reflected the 2 manufacturing process. 3 And when you looked at kind of the entirety of 4 those 10 or 11 steps that comprised the manufacturing 5 process and when these assets would come to bear, I do 6 believe that they are necessary for the entirety of the 7 process, which is why I kind of went back to Franchise 8 Tax Board because they believed that was a particular 9 point at which the conversion of this electricity took 10 place relative to the cheese processing. 11 So, I think cheese processing and manufacturing 12 processing, that I think there is a distinction there. 13 MS. MANDEL: Yeah, they seemed to think that -- 14 I mean, their view was that it happened before the 15 manufacturing started. 16 That was the sense I was getting. 17 MS. YEE: Cheese processing started. 18 MS. MANDEL: Yeah, they've -- everybody's 19 flipping back and forth between manufacturing and -- 20 MS. YEE: Except the processing does have -- 21 have different definitions, depending on how you look at 22 it -- in what context you look at it, yes? 23 MS. MANDEL: Yeah. Manufacturing, I think, is 24 the -- uses the word process in it. 25 MS. YEE: Yeah. 26 MS. MANDEL: Converting or conditioning 27 property -- 28 MS. YEE: Right. 7 1 MS. MANDEL: -- by changing the form. And you 2 do have to have the electricity all the way -- you know, 3 nothing runs. 4 So, it's -- it's -- I don't think it's really 5 quite the same case that we had in Sierra Pacific 6 because I think the co-gen assets there generated steam 7 that had something to do with keeping the lumber happy. 8 But it's troubling because you -- you know, if 9 you just bought the electricity, you wouldn't have the 10 issue but because you have to use tangible property that 11 steps down the voltage, then you have the issue. 12 MR. HORTON: Members, I had a couple of 13 challenges with this one. 14 I thought it was quite different, as apparently 15 you as well, than the Sierra case. 16 And then the distinction between the Investment 17 Tax Credit and the MIC relative to determining whether 18 or not it's an integral part. The ITC has a broader 19 definition and the determination that's it's an integral 20 part -- I think it has merit relative to the -- to the 21 MIC, but not in and of itself would that necessarily 22 qualify. 23 And, so, in this case I really view the 24 transformer as part of the process of generating 25 electricity. That activity could have been taken -- 26 could have taken place outside of the entire 27 manufacturing processing. It's just that electricity is 28 bought in bulk or comes in bulk and it has an intrinsic 8 1 value associated with the generation of electricity as 2 opposed to for the purpose of the process. 3 So, it was difficult to distinguish the two. 4 And I just couldn't get there based on the testimony and 5 the facts. 6 MS. MANDEL: Yeah. And that's why I was sort 7 of -- well, when did -- when did the process start? 8 And that's why they talked about having to 9 transform electricity throughout the process because the 10 process starts when you bring raw materials in. And it 11 continues on until it's finally packaged. 12 So, that -- but, it's -- 13 MR. HORTON: Okay. 14 MS. MANDEL: -- it's kind of -- it's why I was 15 suggesting -- 16 MR. HORTON: Further discussion, Members? 17 Ms. Olson, please call the roll. 18 MS. OLSON: Mr. Horton? 19 MR. HORTON: No. 20 MS. OLSON: Ms. Steel? 21 MS. STEEL: Yeah -- yes. 22 MS. OLSON: Ms. Yee? 23 MS. YEE: Aye. 24 MS. OLSON: Ms. Mandel? 25 MS. MANDEL: Uh-hmm -- 26 MR. HORTON: Members, we can put this over and 27 vote on it tomorrow, give us a chance to sort of do a 28 little research and process it. 9 1 Ms. Mandel? Members? 2 MS. YEE: Could I ask, Mr. Horton, does. 3 Appeals a -- any other -- 4 MR. EPOLITE: Well, I am actually found 5 Mr. Horton's questions to the taxpayer, when they were 6 asking about the transformer assets, and they said that 7 the assets were there because they needed to step down 8 the electricity for use for the manufacturing equipment. 9 And it sounded like that was more of an 10 economic reason for the purchase of the electricity in 11 bulk than -- as opposed to a manufacturing reason. 12 MS. MANDEL: Does that -- 13 MR. EPOLITE: Because -- 14 MS. MANDEL: Go ahead, keep talking. 15 MR. EPOLITE: -- you located the plant, 16 perhaps, in a rural area where electricity was available 17 in bulk and maybe that's the only means in which 18 electricity was available. 19 MS. MANDEL: But the -- I guess the issue is 20 whether that makes a difference. 21 Because if they're doing manufacturing -- and I 22 thought they were focused on when manufacturing, which 23 involves a process of making cheese, when did that 24 start? 25 And that they focused on that it started when 26 the raw materials are brought into the plant and ends 27 when they have it on the shelf, after it's made and 28 packaged. 10 1 And that during that entire time they're using 2 these tangible assets to -- to step it down, which is 3 why then we got into the whole, is it -- does it have to 4 be something that's physically manipulating the raw 5 material, which was then why there was this going back 6 and forth between manufacturing and processing -- or 7 processing, which isn't the same as the process -- had 8 to do with physically applying things to change 9 characteristics while manufacturing is just a process by 10 which you alter something into -- you know, make 11 something else. 12 And that there was a focus on the time frame, 13 which was why I thought FTB was focusing on the stepping 14 down of electricity they thought was outside the plant 15 and made it prior to when they thought the manufacturing 16 started. 17 But it sounded like it was one whole place and 18 the stuff came there. That's why it got -- that's why 19 it got confusing. It is -- I think it sounds very much 20 like -- I mean I think Sierra Pacific was a little 21 different, Foster Farms was a nonappearance and just -- 22 you know, I think that the use of the word "integral," I 23 think that gets confusing, but I think it's the same -- 24 I think they are talking about the same kind of 25 analysis. But it's when -- when did the -- when -- when 26 under the MIC, under all these circumstances, did the 27 manufacturing process -- where does it start? 28 That was how I was trying to see it. I'm not 11 1 sure I got more clear today than -- 2 MR. HORTON: Members, it's sort of seemed to me 3 that the -- the stepping down of the electricity could 4 have happened separate and apart from the manufacturing 5 process, the -- wasn't a necessary part. 6 It just -- it was a necessary step in the 7 manufacturing process and it was a step that occurred 8 theoretically, intentionally in the process of 9 manufacturing, it's a step that occurred well before any 10 product was introduced to the building. 11 MS. MANDEL: Except that it has to continue -- 12 it sounded like it has to continue on an ongoing basis 13 while you're -- I will call it assembly line -- while 14 your assembly line is running. 15 Because I don't -- 16 MR. HORTON: There's -- there's an ongoing -- 17 MS. MANDEL: -- well, you know -- 18 MR. HORTON: -- creating -- 19 MS. MANDEL: -- you plug into the wall and 20 you're constantly getting electricity, right? 21 MR. HORTON: Uh-huh. 22 MS. MANDEL: I mean, my -- when they kept 23 saying that it's going the whole time, I took that as 24 meaning they're getting high power power coming into the 25 transformer assets and while the -- while the 26 manufacturing is ongoing and all those machines and vats 27 are doing whatever it is that they do, they need 28 electricity to run, but they need it at that lower 12 1 voltage so that it's not like -- like the transformer 2 assets takes giant electricity makes it into little 3 electricity and keeps it somewhere. 4 They made it sound like it's a constant -- 5 MR. HORTON: Yeah and -- 6 MS. MANDEL: -- flow of stepping down and going 7 to the equipment while it's doing its -- making its 8 cheese. 9 MR. HORTON: Yeah, I think it is a continuous 10 process, but it's a process that occurs in every city in 11 the nation. 12 I mean, there is a transformer in every city in 13 the nation that's transforming electricity -- it's 14 coming from various different sources to create 15 electricity, but the intended purpose of that activity 16 is to modulate or control the disbursement of 17 electricity, that is, whether it's in a manufacturing 18 plant, City hall, this building. 19 But further -- let's put it over, Members, and 20 we'll take it up tomorrow. 21 Ms. Olson, next item? 22 MS. OLSON: Our next and last name is C2, 23 Saravana Bhavan. 24 MR. HORTON: I'm sorry, my apologies. 25 Let's go back to this item. 26 Unless there is a desire to put it all over, do 27 you want to discuss the balance of the item, since they 28 will be coming back and voting, or will we have an 13 1 opportunity to discuss tomorrow as well? 2 Ms. Olson? 3 MS. OLSON: You can -- if we put it over to 4 tomorrow, you can discuss -- 5 MR. HORTON: Okay, let's put it all over and 6 we'll discuss it tomorrow. 7 ---o0o--- 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: Ms. Olson?. 2 MS. OLSON: C2, Saravan Bhavan. 3 ---o0o--- 4 C2 SARAVANA BHAVAN, INC. 5 NO. 522442 (BH) 6 ---o0o--- 7 MR. HORTON: Is there a motion? 8 Member Steel? 9 MS. STEEL: All right. Sustain the Department 10 recommendation, but abate the negligence penalty. 11 MR. HORTON: It's been moved to abate the 12 negligence penalty. I'd second that. 13 Discussion Members? Objection, Members? 14 Hearing none, such will be the order. 15 The meeting of the Board of Equalization is 16 hereby recessed until tomorrow morning. 17 ---o0o--- 18 19 20 21 22 23 24 25 26 27 28 15 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 DECEMBER 14, 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 15 constitute a complete and accurate 14 transcription of the shorthand writing. 15 16 Dated: January 4, 2012 17 18 19 ____________________________ 20 JULI PRICE JACKSON 21 Hearing Reporter 22 23 24 25 26 27 28 16