1 BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION 2 450 N STREET 3 SACRAMENTO, CALIFORNIA 4 5 6 7 8 REPORTER'S TRANSCRIPT 9 MARCH 20, 2012 10 11 SALES AND USE TAX APPEAL HEARING 12 APPEAL OF 13 DAVID A. BARTEL 14 NO. 518470 (KH) 15 AGAINST PROPOSED ASSESSMENT OF 16 SALES AND USE TAX 17 18 19 20 21 22 23 24 25 Reported by: Juli Price Jackson 26 CSR No. 5214 27 28 1 1 P R E S E N T 2 For the Board Jerome E. Horton of Equalization: Chairman 3 4 Michelle Steel Vice-Chairwoman 5 6 Betty T. Yee Member 7 8 George Runner Member 9 10 Marcy Jo Mandel Appearing for John 11 Chiang, State Controller (per Government Code 12 Section 7.9) 13 Diane G. Olson, 14 Chief Board Proceedings 15 Division 16 For Board of David Levine Equalization Staff: Staff Counsel 17 18 For Department: Andrew Kwee Tax Counsel 19 Robert Tucker 20 Legal Department 21 Kevin Hanks 22 Chief, Headquarters Operations Division 23 24 For Petitioner: David A. Bartel Taxpayer 25 Abe Golomb 26 Representative 27 R. Todd Luoma Attorney 28 ---O0O--- 2 1 450 N STREET 2 SACRAMENTO, CALIFORNIA 3 MARCH 20, 2012 4 ---oOo--- 5 MR. HORTON: Ms. Olson? 6 MS. OLSON: Our next item is C1, David A. 7 Bartel. 8 Please come come forward. 9 MR. HORTON: Mr. Levine, would you please 10 introduce the issues in this petition? 11 MR. LEVINE: Good afternoon, Chairman Horton, 12 Members, David Levine for the Appeals Division. 13 The issues in this petition of David Bartel are 14 whether the Petitioner's personally liable for the tax 15 debts of Tracy Chevrolet under Section 6829 and whether 16 the payment from escrow, which was applied to the 17 corporation's liability for the third quarter 2007 18 should have instead been applied to the liability for 19 the fourth quarter 2007. 20 I note also that Petitioner's not submitted a 21 request for relief of the penalties that were imposed on 22 the corporation. 23 MR. HORTON: Okay. Is there a reason you have 24 not submitted a request? 25 MR. GOLOMB: Yes. 26 MR. HORTON: Okay. 27 MR. GOLOMB: We don't believe that this person 28 is personally liable. 3 1 And in discussing that with Mr. Bartel, we 2 decided not to submit a request. 3 MR. HORTON: Okay. You have ten minutes to 4 make your presentation. We would ask that you commence 5 with your introductions for the record. 6 MR. GOLOMB: Okay. I'm Abe Golomb with Sales 7 Tax Reduction Specialists. 8 MR. LUOMA: I'm Todd Luoma, attorney at law. 9 MR. HORTON: Okay. 10 MR. GOLOMB: We have a fairly complicated case 11 and we bifurcated our presentation. I will briefly 12 discuss the pertinent facts, then Todd Luoma will 13 explain how the law and court cases apply to those 14 facts. And then follow up in our rebuttal if we don't 15 cover everything in our presentation. 16 Basically, David Bartel and another individual 17 started Tracy Chevrolet, Inc. The other individual 18 became very ill and Mr. Bartel purchased his interest. 19 After a period of time, he sold 25 percent of his 20 interest -- his 100 percent interest -- to Stephen 21 Kraut, who happened to be an employee of the dealership. 22 After another subsequent period of time he sold 23 Mr. Kraut another 25 percent. So, both Mr. Kraut and 24 Mr. Bartel were 50 -- equal shareholders in the 25 corporation. 26 In 2001, actually sometime in 2001, Mr. Bartel 27 withdrew from active day-to-day involvement in the 28 corporation. Subsequent to that, he rarely came to the 4 1 business. Mr. Stephen Kraut was the -- took over 2 day-to-day operations, made all management and financial 3 decisions from that -- from that time forward. 4 Mr. Bartel, as a 50 percent shareholder, 5 received monthly financial statements from the 6 corporation -- or from the dealership showing the 7 financial situation in the dealership. None of those 8 financial statements ever indicated there was a problem. 9 In April 2005, First Hawaiian Bank purchased 10 the flooring loan agreement from Citibank. And in 11 October 2006 they renewed the flooring agreement and 12 increased it from $11 million dollars to $13 million. 13 When they did that, they never reviewed Tracy 14 Chevrolet's records. They just went ahead and increased 15 it at Mr. Kraut's request. In about October 2007 the 16 dealership reached the maximum $13 million flooring loan 17 agreement and tried to get an increase. 18 First Hawaiian Bank refused. And then in -- at 19 the end of October, or towards the end of October 2007, 20 reviewed Tracy Chevrolet's records for the first time 21 and discovered that, in the parlance, that they were out 22 of trust. In essence, First Hawaiian Bank had loaned 23 more money to Tracy Chevrolet than Tracy Chevrolet had 24 sold cars for. 25 First Hawaiian Bank then sent a letter to 26 Mr. Bartel and also to Mr. Kraut explaining that there 27 was a problem based on their review of the records. 28 That letter went out sometime in early November 2007. 5 1 In late November 2007, Mr. Kraut, Mr. Bartel and a 2 representative of First Hawaiian Bank met. During that 3 meeting, Mr. Kraut freely admitted that he had been 4 embezzling money from the dealership and that this 5 embezzlement had been going on for a number of years and 6 that he had falsified the financial information that he 7 was providing both to Mr. Bartel and to First Hawaiian 8 Bank. 9 At that point in time, First Hawaiian Bank 10 realized that they would probably not get paid the 11 $13 million that was owed them from the dealership. 12 They then accelerated the payment requirement of that 13 loan. And on December 7th, took over the operation. 14 On December 6th, Mr. Kraut left. Also on 15 December 7th Mr. Bartel came in to try to help resolve 16 the problem. Now on December 7th there were a number of 17 car deals that were in process that hadn't yet been 18 finished. Mr. Bartel went ahead and finished those 19 deals and reported and paid the tax due on those deals. 20 The dealership remained open for another 13 days. It 21 closed -- or I should say the dealership ceased all 22 sales activity on December 20th, 2007. 23 Now the bank was very interested in recovering 24 as much money as they could from the dealership. The 25 only way to do this is to have the franchise be sold and 26 to also sell the remaining inventory. Now, if they had 27 closed the dealership, the franchise would have 28 automatically reverted to General Motors. So, they had 6 1 to keep that dealership open. And they did. 2 Ultimately, they sold the business to the 3 buyer -- to a new buyer. The new buyer, as one of his 4 requirements, asked for a tax clearance from the Board 5 of Equalization. The Sacramento District Compliance 6 staff negotiated with the bank and -- for the issuance 7 of the tax clearance, requested a payment of $200,000, 8 which was made from escrow in March 2008. 9 The balance of the monies that were received 10 from the sale of the business all went to First Hawaiian 11 Bank. Mr. Bartel received no monies from any of the 12 sales proceeds. He did this to try to make things 13 right. 14 Now when the Board received the $200,000, they 15 continued to send all correspondence to the former 16 business address of Tracy Chevrolet in Tracy. Now, the 17 new buyers decided to keep the dba Tracy Chevrolet. 18 They were receiving all this correspondence. Mr. Bartel 19 never received any of it. 20 I am now going to turn over the presentation to 21 Mr. Luoma. 22 MR. HORTON: Thank you. Welcome, sir. 23 MR. LUOMA: Mr. Chairman, Members of the Board, 24 this case is a responsible person case. Generally every 25 state in the federal government has a responsible person 26 type of statute to be able to, essentially, pierce the 27 corporate veil, to be able to go after a person who is 28 responsible in some way for some sort of tax liability 7 1 that was not paid by the entity. So, they're looking 2 for those responsible persons. 3 In California the Board of Equalization has a 4 responsible person statute. The Employment Development 5 Department has a responsible person statute. The 6 federal government has a responsible person statute. 7 And virtually all of these responsible person statutes 8 are identical. What they are looking for is to 9 determine who is the party that's responsible for 10 failing to pay the tax and did that person knowingly, 11 willfully fail to pay that tax? 12 And for that person, for responsibility, what 13 the statutes look for is what is -- you know, what is 14 the the status of the person? What were the duties of 15 the person? And what kind of control did they exert? 16 And as far as willfulness, the statutes go to 17 did the person, when they knew of the liability, did 18 they prefer other creditors? So, that's the basic 19 structure of the statute. 20 In California there are very few cases, either 21 in the Employment Development Department -- although 22 there are some decisions in the California Unemployment 23 Insurance Appeals Board and in the Board of Equalization 24 that really discussed this. 25 The federal responsible person statute, 26 however, has a significant case law development of what 27 it means to be a responsible person who willfully failed 28 to -- to pay the tax. 8 1 In California, the Unemployment Insurance 2 Appeals Board has accepted the federal law as a basis 3 for determining who's responsible and did they act 4 willfully. 5 And I urge that the Board of Equalization, as 6 we mentioned in our brief, that the Board also adopt the 7 federal law in determining who the responsible people 8 are in situations like this and whether or not they 9 acted willfully. 10 In this case we have a fact pattern that is 11 very close to a decision that was made in the United 12 States Supreme Court, Slodov versus United States. In 13 fact, it's virtually identical. And I've attached a 14 copy of the Slodov decision that went in with our last 15 brief. 16 Essentially, the responsible person enters into 17 a business part way through a quarter. And in this case 18 that's what happened with Mr. Bartel. He was not 19 involved early on. He may have been a part owner, but 20 he did not become involved until December 7th, which is 21 partially through the fourth quarter. 22 The creditor in this case, First Hawaiian Bank, 23 and in the Slodov case, had a security agreement that 24 locked up all assets, including deposit accounts and all 25 hard assets as well as accounts receivable. And that 26 was the case here and that was found in the Decision and 27 Recommendation at page 8 by the Appeals function. 28 Also the responsible person continues the 9 1 business activity, as did Mr. Slodov in the Supreme 2 Court case, as did Mr. Bartel. The purpose for 3 Mr. Bartel, as Mr. Golomb has indicated, was to be able 4 to sell the franchise, the GM franchise, the Chevy 5 franchise, so that it could be used -- the funds could 6 be used to pay all debts, including to the Board of 7 Equalization. 8 MS. OLSON: Time has expired. 9 MR. HORTON: Sir, can you conclude in a few 10 minutes -- well, in a minute, sorry. 11 MR. LUOMA: Yes, I will. 12 In any event, in the Slodov case -- this is 13 virtually exactly the case that you have here. In fact, 14 the Appeals attorney who wrote the Decision and 15 Recommendation started down that path, made the 16 determination that -- that Mr. Bartel was not liable for 17 the third quarter, even the though the Department had 18 originally found him liable for the third quarter, but 19 did not complete the journey down that path in dividing 20 that liability at December 7th through December 20th, 21 when he was a responsible person. And that liability he 22 paid. 23 And on the basis is of the Slodov case, 24 Mr. Bartel was not liable because he did not act 25 willfully, as the Slodov Supreme Court decision found. 26 MR. HORTON: Thank you. 27 Department has ten minutes to make their 28 presentation. Please commence with your introductions. 10 1 MR. KWEE: Good afternoon, Chairman Horton. 2 MR. HORTON: Good afternoon. 3 MR. KWEE: Members of the Board, I am Andrew 4 Kwee on behalf of the Board's Legal Department. And 5 with me today are Bob Tucker, also from the Legal 6 Department and Kevin Hanks from the Sales and Use Tax 7 Department and we'll be representing staff. 8 Basically, Petitioner is a responsible person 9 within the meaning of Section 6829. Of the four 10 elements required to impose responsible person 11 liability, Petitioner disputes that he was responsible 12 and that he was willful. 13 So, Petitioner was responsible for the sales 14 and use tax matters because the facts establish that he 15 has signed the sales and use tax return at issue. As 16 noted in Exhibit 1 to the D & R, Petitioner reported to 17 the press that he took on the role of Managing Partner 18 at the end of November 2007. It's not disputed that the 19 business partner, Mr. Kraut, left the business in early 20 December 2007. And Petitioner had also signed the 21 application for sales and use tax permit as Vice 22 President. 23 So, regarding the second element, willfulness, 24 willfulness is basically established when a person -- a 25 responsible person has knowledge that the taxes are not 26 being paid, the authority to pay the taxes or to cause 27 them to be paid and payments are made or caused to be 28 made to others while the taxes are not being paid. 11 1 And regarding willfulness, in this particular 2 case the Petitioner was an authorized signer in the 3 corporate bank account. Also employees responsible 4 for -- former employee, Sara Call, who is responsible 5 for the accounts payable and payroll, submitted a 6 statement signed under penalty of perjury, stating that 7 the Petitioner had instructed her and other employees 8 that no checks or payments would be signed or sent out 9 unless they were to be approved by Petitioner. And this 10 was corroborated by statements by other employees. 11 And, finally, payments exceeding $700,000 were 12 made during the fourth quarter of 2007 and the first 13 quarter of 2008. And Petitioner had been signing checks 14 on these payments up through -- and continuing through 15 the close of escrow. These payments were made to pay 16 the usual expenses associated with keeping the business 17 running and operated -- and operating until it was sold 18 on March 28th, 2008. And these payments were made, for 19 example, for rent, utilities, wages, electricity, gas 20 and to pay various other creditors, such as the CPA. 21 Regarding the Petitioner's other point about 22 applying the federal law or federal case law to 23 Section 6829, basically the Regulation 1705 -- 1702.5 in 24 the Revenue and Taxation Code provide for the proper 25 application of the sales and use tax law, which is at 26 issue here. The interpretation by federal courts of the 27 Internal Revenue Code are not controlling. And they're 28 also not directly on point. The Internal Revenue Code 12 1 cited at issue imposes a penalty for willfully failing 2 to collect or collecting but willfully failing to pay 3 certain employment withholding taxes. These cases are 4 not applicable because the character of the taxes 5 covered by the Internal Revenue Code are different from 6 California sales and use tax. And they're actually 7 stated, per statute, to be held in trust for the United 8 States government. 9 Finally, we'd also note that Appeals Division, 10 as noted in the D & R, they did contact the bank manager 11 that had met with the Petitioner and the bank manager 12 confirmed that they did not exercise control over the 13 finances and that Petitioner did not run by what 14 payments would be made to the bank. 15 So, with that being said, we concur with the 16 Appeals Division's recommendation. 17 MR. HORTON: Thank you very much. 18 On rebuttal, please? 19 MR. LUOMA: Yes, the question on the -- the 20 writing the checks to pay the various expenses that 21 incurred after December 7th, the funds that are at 22 issue -- and this where the Slodov case goes into a 23 great point -- is that if there were unencumbered funds 24 available, then the use by a responsible person to 25 prefer other creditors, those unencumbered funds would 26 then be appropriately -- you'd find the person acting 27 willfully. 28 But in this case and in the Slodov case, there 13 1 were no unencumbered funds. The financing agreement 2 that was entered into that's referred to in the Decision 3 and Recommendation, and which was part of the basis for 4 the Appeals Division's determination that the Appellant 5 was not liable for the third quarter of 2007, there were 6 no unencumbered funds. Everything was locked up by the 7 First Hawaiian Bank. 8 Indeed, the Board had to negotiate with First 9 Hawaiian Bank to get the $200,000 out. They could have 10 requested more out of escrow on the sale of the -- but 11 they didn't do it. They negotiated with the bank 12 because the bank had a superior position. And that's 13 why only 200,000 was paid out from -- from escrow. 14 MR. GOLOMB: One other point is for the fourth 15 quarter, the liability at issue occurred for sales of 16 vehicles from October 1st through December 6th. Those 17 funds that are at issue here were embezzled by 18 Mr. Kraut. When Mr. Bartel walked in the door, there 19 was very little funds in the account. 20 Now, to run this business, the minimum fixed 21 overheard monthly was a quarter of a million dollars. 22 They couldn't stay alive more than a few days just to 23 wrap up the few deals that were outstanding. 24 The other key point is the bank admitted for 25 every day from December 7th on, 'til the business was 26 sold, they had one person there. And many times they 27 had two of their employees there sitting and watching 28 everything going on. They weren't there just warming 14 1 chairs, they were insuring that their position and their 2 assets were being protected. And the bank admitted to 3 this. The bank is not stupid. They're not going to 4 admit to the phone -- in a phone call from the tax 5 counsel that they ran the business. 6 But they did run the business. They told 7 Mr. Bartel what to do. Here we have a situation where 8 Mr. Bartel tried to do the best thing. And the Board is 9 taking the position that no good deed goes unpunished. 10 That is not the intent of the law. 11 Also he tried to have the $200,000 payment that 12 was applied to the third quarter, moved to the fourth 13 quarter. He was willing to pay the difference and walk 14 away, even though he has no -- he doesn't feel he has 15 any liability. The Board staff moved the money and then 16 subsequently moved it back. 17 I have, over the years, been representing many 18 taxpayers and I've had the Board staff move money 19 constantly, even years later, without any problem. Yet 20 in this case, there is a problem. So, I don't see what 21 the problem is. 22 Mr. Bartel has tried to resolve this case 23 satisfactorily. And he has made a reasonable offer that 24 has been refused by the staff. 25 Thank you. 26 MR. HORTON: Thank you very much. 27 Discussion, Members? Member Mandel. 28 MS. MANDEL: Well, I guess there's sort of two 15 1 points that I'd like to hear a little from staff or, 2 perhaps, one of them from Mr. Levine. 3 The one is this idea that of -- from December 7 4 on that when Mr. Bartel came into -- back into the 5 dealership and he's -- the idea of what funds -- what 6 unencumbered funds did the dealership have at that time? 7 And if there were none, that any -- that goes to the 8 sort of willfulness, if maybe that could be addressed? 9 But I did have a question for the taxpayers on 10 the application of the escrow payment. Was there a 11 written request by the Petitioner on behalf of Tracy 12 Chevrolet of how to apply -- because this is a payment 13 to Tracy Chevrolet? The escrow is to Tracy Chevrolet? 14 Was there a written request that -- around the time of 15 the escrow or did that come later? 16 Can you -- I don't have a copy of it. 17 MR. GOLOMB: Let me explain that. The $200,000 18 payment was a payment from escrow for the sale of the 19 franchise and the inventory. 20 MS. MANDEL: And who -- if -- leaving aside the 21 bank, you know -- 22 MR. GOLOMB: Yes. 23 MS. MANDEL: -- because the bank's going to get 24 all the money. 25 MR. GOLOMB: Gets the balance, yes. 26 MS. MANDEL: But -- but -- who -- who would 27 have gotten that -- who would the escrow been paid out 28 to? Was that Tracy Chevrolet's money or was that 16 1 Mr. Bartel's money, leaving aside the bank? 2 MR. GOLOMB: As I understand it, it was Tracy 3 Chevrolet's money 'cause they sold the franchise -- 4 MS. MANDEL: Tracy Chevrolet? 5 MR. GOLOMB: -- and the inventory. 6 MS. MANDEL: Okay. 7 MR. GOLOMB: Tracy Chevrolet, Inc. 8 MS. MANDEL: Okay. So, then can you explain 9 then who made the request and how was the request made? 10 MR. GOLOMB: Okay, I'll explain that. 11 MS. MANDEL: Okay. Maybe staff has a copy of 12 the written request and then I can just -- 13 MR. GOLOMB: We do -- there is a copy and it's 14 floating around, but I can get it to you after the 15 hearing. 16 Only -- only after we became aware -- after 17 Mr. Bartel became aware that the Board had applied that 18 $200,000 to the third quarter and we became aware of 19 that when we received the D & R. 20 And as I explained to you, all mail continued 21 to be mailed to their former address and the new owners 22 also were called Tracy Chevrolet. They received the 23 mail. He never received anything. 24 Once he became aware that the $200,000 was 25 applied to the third quarter, he wrote a letter to the 26 Board requesting that it be reapplied to the fourth 27 quarter. And they did that. 28 MS. MANDEL: Okay. 17 1 MR. GOLOMB: And then they took that money and 2 moved it back again to the third quarter. 3 MS. MANDEL: Okay. And Tracy Chevrolet -- 4 Tracy Chevrolet took over -- the current Tracy 5 Chevrolet, they took over the business? 6 MR. GOLOMB: Yeah, they -- that's the dba. I 7 don't know what their corporate name is. 8 MS. MANDEL: Okay. So, they might not respond 9 because they might -- they might -- 10 MS. STEEL: They just probably threw the 11 letters away. They don't have anything to do with that. 12 MS. MANDEL: I don't know if they're in a 13 successor position or not. 14 MR. GOLOMB: No, they just bought the business, 15 they got the tax clearance, they're -- you know, they're 16 home free. 17 What we're talking about -- and if the money is 18 moved, there's approximately 30,000 remaining. 19 MS. MANDEL: Right, right, I understand the 20 benefit to your client of moving the money. 21 I was just trying to figure out if -- what he 22 sent in under all of the sort of facts and circumstances 23 could be said to have been effectively a request by 24 Tracy Chevrolet? 25 MR. GOLOMB: He signed it as the Vice President 26 of Tracy Chevrolet. 27 MS. MANDEL: Yeah. 28 MR. GOLOMB: He was the Vice President. 18 1 MS. MANDEL: When -- okay. 2 Perhaps -- maybe I need to look for some -- do 3 you understand what I'm -- 4 MR. LEVINE: Yes. 5 MS. MANDEL: -- the two things that I'm curious 6 about? 7 MR. LEVINE: I don't know what the Department's 8 policy is with moving money around and what happened in 9 this case. 10 It's my opinion that if the money is applied 11 properly, which includes when it's paid if the person 12 making the payment, here the taxpayer, directs payments, 13 we follow those instructions and, otherwise, as a 14 creditor, we can apply it any way we want. 15 And the way we want is expressed in our 16 manuals. If the Department has done, as instructed when 17 paid or, in lieu of that, in accordance with our 18 policies, I think it should stay there. And I certainly 19 don't think that whether it helps or hurts the taxpayer 20 it should be moved later. 21 If the Department has a policy of helping 22 taxpayers moving it around at their request that's still 23 a little bit different here because we're talking about 24 long after the company -- I assume it was long after the 25 company terminated. And the company didn't really even 26 exist any more. 27 I don't know the time frame that they're 28 talking about his direction, but the fact that he signed 19 1 it as Vice President, arguably, there's no one left to 2 speak for the taxpayer. So, someone should be able to. 3 But it was still a request to benefit themselves, not 4 the tax -- the corporation. 5 MS. MANDEL: Okay. And what about the -- were 6 there unencumbered funds December 6th? 7 Is that the sort of thing that -- for sales 8 tax? 9 MR. LEVINE: I don't know how much sales tax 10 was coming in. But certainly it would be my view that 11 they cannot encumber any sales tax reimbursement that's 12 collected in any way, now matter what their agreement 13 says. 14 MS. MANDEL: Okay. So, if they were making 15 sales after December 6th? 16 MR. LEVINE: Right. 17 MS. MANDEL: And getting sales tax? 18 MR. LEVINE: Right. 19 MS. MANDEL: Okay. 20 MR. LEVINE: As far as the rest of it, we 21 addressed it in the D & R, why we thought that it was -- 22 MS. MANDEL: Anything that was collected and 23 absconded with or whatever, prior to December 7th? 24 So that when Bartel came in, it wasn't there? 25 MR. LEVINE: If it wasn't there, it wasn't 26 there. 27 MS. MANDEL: And I think -- 28 MR. LEVINE: I'm just saying that if there was 20 1 an outstanding agreement that said everything that comes 2 in from the bank, if the agreement was, "Everything that 3 comes in is ours, you can't touch it," I'd say it 4 doesn't matter what the agreement says with respect to 5 sales tax reimbursement. 6 MS. MANDEL: Okay. But I think part of what 7 they're saying is that there were sales during the 8 fourth quarter through December 6th. Bartel walks in 9 the door on December 7th, maybe -- I don't know $100, I 10 don't know how much money was there, but I think what 11 they're saying is that just because he signs the return 12 then for the fourth quarter and because there may have 13 been payments of others -- whatever sales tax may have 14 been collected or should have been collected and paid 15 through December 6th, if there's zero and he walks in 16 the door on December 7th. And he has encumbered -- and 17 no subsequent sales, so you don't have that issue. 18 Is he -- is -- is it still willful, you know, 19 for all the stuff that happened before if there was no 20 money in the till when he walked in the door? 21 That's, I think, what they're saying, that 22 there was -- maybe there was some money, but, 23 essentially, if there's no money in the till when he 24 walks in the door, everything is encumbered, but for 25 subsequently collected sales tax, because we would say, 26 "Well, you can't encumber that," how -- where does the 27 willfulness come in for the money that's not there? 28 MR. LEVINE: If everything was literally 21 1 encumbered and you found that -- that the -- that Tracy 2 Chevrolet could not take that money and there was 3 nothing else, then I'd agree there's nothing else, 4 subject to one proviso -- and you've had this type of 5 situation before where -- where a responsible person -- 6 and I don't remember the timeline, he was responsible 7 before and then he wasn't. 8 MS. MANDEL: Uh-huh. 9 MR. LEVINE: If someone signs a contract or is 10 a party to the contract, it puts money out of the hands, 11 then we expect a little bit more from that person than 12 from someone who walked in on the situation. 13 So, if he had nothing to do with the original 14 agreement -- 15 MS. MANDEL: With the bank? 16 MR. LEVINE: -- right, that encumbered the 17 funds, and he walks in and there's literally nothing 18 that they can contractually take away from existing 19 money, then I'd -- I'd agree. 20 MS. MANDEL: Okay. And it sounded like where 21 Appeals went in the D & R was, "Well, we talked to the 22 guy from the bank and he said that he didn't tell him 23 what to do." 24 And, so, then I guess the theory is if there 25 was some money, even if it wasn't enough money to pay 26 everything from before December 6th, you'd still say he 27 was liable for the whole thing because it's not a 28 question of how much money is going through the business 22 1 at that point. 2 I'm just trying to figure out -- a lot of times 3 we have people who are there the entire time period and 4 this is a guy that -- he's not liable for the third 5 quarter, he's liable for the fourth quarter because he's 6 liable at the time of the prepayment return in December 7 and he's liable at the time -- he's responsible, I'm 8 sorry, responsible at the time of the return for the 9 fourth quarter, that's the responsible officer -- that's 10 the responsible party. 11 But then it's like, well, but for what? For 12 how much? 13 That's -- because when he -- you know, being 14 responsible doesn't necessarily mean you have the last 15 tag of willful. 16 MR. LEVINE: Right. There has to be funds 17 available to pay it. And if we're talking about an 18 ongoing business, we generally find for Appeals 19 Division, that's normally enough. 20 If we're talking about an ongoing business that 21 has funds coming in and out, even though the common 22 argument is, "We needed to use the funds to pay the 23 flooring and whatever to stay in business." And that 24 makes sense. But still, legally there is funds there. 25 MS. MANDEL: Okay. So, legally there's funds 26 there and even if the funds that are there never rise to 27 the level of -- it doesn't -- 28 MR. LEVINE: There has to be -- the -- the 23 1 liability can't exceed the amount of funds that were 2 available to pay it. 3 So, if there was not enough funds to pay it, 4 they would be liable under 6829 to the extent of the 5 funds. It's the authority and ability to pay and the 6 ability is how much money is there? 7 MS. MANDEL: Okay. So, we do limit it to how 8 much money there -- is there? 9 MR. LEVINE: Right. We wouldn't hold someone 10 liable for more money than the corporation had. 11 MS. MANDEL: Okay. I'm -- now I'm just -- I'm 12 confused. 13 They look a little -- I don't know. Is that -- 14 is that -- because I thought when the 6829 cases come 15 it's the company owed X dollars in tax, plus, you know, 16 then there's interest and then there's penalties and 17 whatever, and then -- then that all gets on the 18 shoulders of the responsible officer. 19 And I don't think I ever heard a discussion 20 about how much money did the company have that went 21 elsewhere that could have gone to this that didn't, so, 22 that's what we're going to limit the guy's liability to. 23 Is that what I -- 24 MR. LEVINE: I don't think we normally have a 25 situation before the Board where that argument is 26 available to the taxpayer. 27 MS. MANDEL: Okay. But it -- okay. 28 It sounds like it might be available. It 24 1 sounds like that's what you're saying? 2 MR. LUOMA: That's exactly right. And not so 3 much just funds available, it's the unencumbered funds. 4 In the Decision and Recommendation the Appeals 5 attorney indicated -- read from -- quoted in the 6 Decision and Recommendation the flooring agreement about 7 the collateral that was required in order to have this 8 $13 million flooring arrangement. The lender takes a 9 security interest in all accounts, contract rights, 10 chattel paper, deposit accounts, instruments, letter of 11 credit rights and general intangibles, all machinery, 12 furniture, fixtures and other equipment of every type, 13 all proceeds of any above described personal property. 14 Now we talked about -- or Mr. Levine talked 15 about you can't encumber sales taxes. Well, that sounds 16 like you're imposing a trust. That's -- that's what a 17 trust is. 18 But, in any event, in this case, Mr. Bartel, 19 when he collected those sales taxes, after he came in on 20 December 7th, between December 7th and December 20th, 21 when he was there, he collected sales taxes on any 22 transaction that took place and he paid those taxes. 23 There were no unpaid taxes for the period after he 24 became a responsible person on December 7th. 25 All of the liabilities that were unpaid were 26 before he appeared. And everything that came in, 27 according to the Appeals attorney who wrote the Decision 28 and Recommendation, that -- that everything was locked 25 1 up because there were no unencumbered funds. 2 MS. MANDEL: Okay. Let me just ask the 3 original thing that Mr. Levine said. Who -- was 4 Mr. Bartel involved in the transaction with First 5 Hawaiian Bank in setting up the contract and the 6 flooring agreement and all that? 7 MR. GOLOMB: Mr. Bartel, at the Appeals 8 conference, explained to the staff counsel when they 9 renewed the agreement in October 2006, you know, they 10 increased the line of credit from 11 million to 13 11 million, the paperwork had to be resigned. And he 12 indicated that his signature was forged on one of those 13 documents or several of those documents. 14 In fact, Mr. Bartel is sitting in the audience 15 and, if necessary, I can have him come up and he can 16 explain that further. 17 But when the -- you know, the flooring 18 agreement was increased, Mr. Kraut or someone at his 19 direction, forged Mr. Bartel's name to the paperwork. 20 MR. LEVINE: If I may just add? 21 We've covered this in -- in prior things. We 22 expect -- when there's a flooring agreement, no matter 23 how massive the encumbrance, the bank expects the 24 company to stay in business and pay bills. So, the bank 25 doesn't come in and say, "You can't pay your bills," 26 because the bank knows that the company is going to go 27 out of business. And we expect the responsible person 28 to make good faith efforts to get the tax paid, which 26 1 means asking the bank for permission to pay. And you've 2 had at least one case where we recommended granting 3 where we found that the responsible person -- that the 4 funds were encumbered and the -- the creditor was in 5 control of everything. And the responsible person 6 established to our satisfaction that he had made a good 7 faith effort to ask -- to tell them it was due, to ask 8 for permission to pay it and it was refused and we 9 accepted that. So, that's the type of standard we've 10 imposed -- 11 MS. MANDEL: Okay. 12 MR. LEVINE: -- for us to recommend. 13 MS. MANDEL: Leaving aside what funds were 14 available on the 6th or 7th of December, you would say 15 that -- that -- that for the prepayment that was due at 16 the end of December, at those times when they're sending 17 in a nonremittance something or other, they should have 18 said, "Let me pay this money."? 19 MR. LEVINE: Yes. 20 MS. MANDEL: And if there were -- and there's 21 not necessarily an indication that over that December 22 6th to December 20th there wasn't -- what the funds 23 coming in. 24 So, that's -- that then becomes the key in 25 Appeals' mind, whether they asked when they had to file? 26 MR. LEVINE: They asked and the bank had the 27 power to refuse and did refuse, then, yes, that would be 28 critical. 27 1 MS. MANDEL: We haven't -- we haven't heard 2 information on that? 3 MR. GOLOMB: I could have Mr. Bartel, who's 4 sitting in the audience, come up and address that. He 5 and I spoke about that. He indicated to me very clearly 6 that he was not at liberty to pay anybody he wished to 7 pay. 8 MR. HANKS: Ms. Mandel, if I could add a 9 comment too that's pertinent to this discussion? 10 It appears as though Mr. Bartel admitted that 11 there was an inventory valuation of approximately 2 and 12 a half million dollars in vehicle property when he came 13 on the scene in early December, December 3rd of 2010 was 14 the date of his letter acknowledging that. 15 Now, at the end of the month, at the end of 16 December of 2007, the Certified Public Accountant valued 17 that inventory at approximately $1.3 million. So, the 18 difference in those two figures is approximately 19 $1.1 million. So, it indicated at least $1.1 million 20 worth of vehicle inventory was sold in that -- that 21 single month's period. 22 So, we know that at least that volume of sales 23 occurred in the month where Mr. Bartel was on the scene. 24 The second comment that I note is that we have 25 a copy of the flooring agreement that's dated August 1 26 of 2007 and which is signed by Petitioner, or allegedly 27 signed by Petitioner. The agreement contains his name. 28 We don't know if it was forged, you know, by another 28 1 individual, but Mr. Bartel's -- 2 MS. MANDEL: But -- 3 MR. HANKS: -- name appears on that. 4 MS. MANDEL: -- there were other forgeries, 5 which is part of why Appeals was there. 6 MR. HANKS: Correct, correct. 7 MS. STEEL: What was the date? 8 MR. HANKS: So, that was dated August 1st of 9 2007. 10 MS. STEEL: Okay. 11 MR. HORTON: Member Steel. 12 MS. STEEL: For the -- when escrow was closed? 13 MR. LUOMA: When? 14 MS. STEEL: Uh-huh. 15 MR. LUOMA: That was in April. 16 MR. BARTEL: No, that was March, approximately 17 March 20th. 18 MS. STEEL: Okay. So, escrow company sent 19 directly money to BOE and you didn't know where it was 20 applied? 21 MR. BARTEL: Correct. 22 MS. STEEL: And then when you find out, then 23 you ask BOE to transfer that to fourth quarter instead 24 of third quarter? 25 MR. BARTEL: Yes, when I found out. 26 MS. STEEL: Okay. To the Department that, you 27 know, when this taxpayer asked that, you know, money 28 gets in from escrow company, so, it was not from the 29 1 from the taxpayer himself and then asked -- taxpayer 2 asked to transfer that, apply to fourth quarter. So, 3 BOE did that and then went back to third quarter. Why 4 is that? 5 Because that was the request and if this 6 taxpayer knew that money was going in and then, you 7 know, applied at that point, if taxpayer was doing by 8 himself, you know, understandable. But it was coming 9 from the escrow. So, he tried to correct that, so, 10 asked BOE to apply it on fourth quarter. So, we did 11 that by taxpayer's request. 12 But you redid it and to third quarter, why is 13 that? 14 MR. KWEE: Yes, just to clarify. At the time 15 that we received the payment, the $200,000 payment was 16 negotiated by all parties and it was specified to cover 17 the AR, account receivable, the AR balance for the sales 18 tax but it didn't specify between the two quarters. So, 19 the Department applied it, consistent with our published 20 CCPM guidance, to the third quarter of 2007. 21 And it wasn't until more than three years later 22 after, the Decision and Recommendation came out stating 23 that -- deciding that Petitioner wasn't responsible for 24 the third quarter of '07 and that's when Petitioner 25 first sent in a request to the Return Analysis Section 26 asking that the payment be reapplied to a different 27 quarter. And he had stated that this payment went -- 28 had initially been applied incorrectly and was applied 30 1 without his consent or without asking -- without asking 2 for it -- clarify -- correction from the taxpayer. 3 But, basically, now more than three years have 4 passed. To reapply the payment now would be after the 5 close of the statute of limitations period with respect 6 to the underlying liability. And with respect to the 7 period, the payment at issue, we don't believe that 8 under these facts that the payment should be reapplied 9 because it was applied correctly at the outset, with our 10 -- consistent with our policies. 11 MR. HANKS: Ms. Steel, also if I could also 12 elaborate on that? 13 I know Mr. Golomb had indicated that the 14 Department frequently moves payments when there is -- is 15 a specific request, taxpayer request, that a payment be 16 directed toward a particular liability, an amount, be it 17 tax, interest or a penalty, then, of course, we'll abide 18 by those instructions. 19 In this case we didn't have any specific 20 instructions relating to how that amount should be 21 applied. Now IRIS rules that are written at the time 22 applied the amount to the oldest liability. And that's 23 consistent, actually, with -- with collectors 24 receiving -- receiving payments for as long as I've been 25 around. 26 Typically the payments, if they are not 27 directed by -- by the taxpayer, ordinarily those amounts 28 are applied against tax and the oldest tax. So, it 31 1 reduces any further accrual of interest on old tax 2 liabilities. 3 MS. STEEL: But you're not answering my 4 question, though, because Department already transferred 5 back to fourth quarter, applied it and then brought it 6 back, right? 7 MR. HANKS: It did that within a period of 8 three days when our Return Analysis Section was asked by 9 the taxpayer -- 10 MS. STEEL: Mr. Tucker has an answer. 11 MR. HANKS: -- to redirect -- redirect the 12 payment. 13 MS. STEEL: He seems really excited. 14 MR. TUCKER: No, I -- 15 MS. STEEL: Your face there that -- 16 MR. TUCKER: -- I'm sorry, I was just going to 17 give you a timeline, just so you can have an idea and 18 maybe that will help just lay these things out. 19 We have a liability that was established, a 20 6829 liability that was established on December 3rd, 21 2009. The D & R was -- let's step back a second. 22 The payment was first applied on March 18th in 23 2008. And that was to pay against the previous 24 liability. About a year later, on December 3rd, 2009, 25 we have a 6829 liability that was established. 26 Thereafter, on -- I think it was February 28th, 2011, 27 the D & R comes out. And at the time that the liability 28 was established, it was for third quarter and fourth 32 1 quarter. In the D & R they said, you are no longer 2 liable for the third quarter. 3 And it was only about a month after the D & R 4 came out that they said, in essence, since we're no 5 longer liable for the third quarter, apply that payment 6 to the fourth quarter. 7 So, it wasn't brought up prior to that point. 8 It -- when the billing was received, there was no 9 mention of applying it to the different period. It was 10 only after the individual's no longer liable for the 11 liability in the third quarter that it was then asked 12 that it was -- be moved. 13 And here's what I -- staff moved it on 14 April 1st, 2011 and then realized they'd made a mistake 15 and corrected it on April 4th, 2011. 16 MS. STEEL: That really bothers me, though, 17 because it was transferred by the taxpayer's request. 18 It really doesn't matter, two days or three days, but, 19 you know, that really bothers me. 20 Mr. Levine, can you tell me about this when 21 escrow was ready to close that there's a negotiation 22 done for $200,000. What exactly happened for 23 successor's liabilities here? 24 It seems like when we did the negotiations, it 25 cannot be waived all of them? Why we are not going 26 after the people who do business after that, then why we 27 stick this with the officers here, especially for this 28 taxpayer didn't do the business for few years? 33 1 MR. LEVINE: Well, again, this person was part 2 of the business that -- that incurred the liability and 3 I believe -- 4 MS. STEEL: Only for the fourth quarter because 5 he came back on December 7th -- 6 MR. LEVINE: Okay. 7 MS. STEEL: -- that he found out that his 8 partner was cheating him. 9 MR. LEVINE: Right. 10 MS. STEEL: Yeah. 11 MR. LEVINE: And that's the only liability 12 left. And as between him and the successor, I know my 13 view would be you'd go after the 6829 person, but as far 14 as the successor liability in the certificate, it was a 15 collection decision that the Department made. 16 I don't know the facts, but I can tell you, I 17 think I can get right on that the Department decided 18 that if they don't accept the 200,000 and get the 19 certificate, that no money would be paid and the 20 business wouldn't continue making sales subject to sales 21 tax. -- 22 And the Department decided to settle for what 23 it could get and keep the business operating under 24 different ownership. That's my best guess. 25 MS. STEEL: So, when you get the $200,000 -- 26 MR. LEVINE: And I don't think -- 27 MS. STEEL: -- after negotiation, isn't that 28 the tax liability is done deal or -- 34 1 MR. LEVINE: -- that's -- only relates to the 2 successor's liability. The Department -- 3 MS. STEEL: -- portion? 4 MR. LEVINE: -- basically, let the successor 5 off the hook for that amount of pay down of the tax -- 6 MS. STEEL: So, after October, we can go after 7 whoever? 8 MR. LEVINE: Whoever else is liable, which, of 9 course, is Tracy Chevrolet, to extent that that would be 10 the No. 1 choice and then any responsible person. 11 MS. STEEL: Okay. Let me ask taxpayer just one 12 thing, that when you came in on December 7th, that bank, 13 Hawaiian -- that whatever bank here -- First Hawaiian 14 Bank, you said that you didn't have any control over the 15 what to pay, what not to pay. That -- what kind of 16 control that they had? 17 I mean I totally understand because this 18 company owed 13 -- over $13 million, I know that bank 19 is -- you know, wants to control that. How much control 20 did they have? 21 MR. BARTEL: Well, their desire was to see the 22 sale through more from the standpoint of not -- not what 23 they would get out of the sale of the business or the 24 franchise, but more that they could sell the existing 25 vehicles that were inventory to the next dealer. So, 26 that was the motivation of the bank to allow the 27 business to continue, even in the cursory manner that it 28 was. And it was -- obviously, you know, it had a 35 1 negative net worth of over $10 million. 2 I did want to just address one thing that I 3 think was a little confusing, perhaps, and that's about 4 the number of invent -- of vehicles that were sold 5 between the time I got there in December and early 6 January. 7 What -- whatever vehicles were sold were, for 8 the most part, owned by -- not for the most part, almost 9 all were owned by First Hawaiian Bank under a security 10 agreement. In other words, a flooring agreement. They 11 had a lien on everything. And a lot of the vehicles 12 that were sold to reduce -- which they wanted the 13 inventory reduced as much as possible -- and the 14 business wholesaled them, in essence, sold them from one 15 dealer to another, not a taxable event. 16 MS. STEEL: So, when First -- 17 MR. BARTEL: And that's the money that they're 18 referring to came through the business. 19 MS. STEEL: -- okay, when First Hawaiian Bank 20 took over and then when they told you that don't pay 21 tax, but pay this, and how much control that they had? 22 I didn't get that answer from you. 23 MR. BARTEL: They didn't say -- they didn't 24 tell me not to pay tax. They said, "Pay the things that 25 it takes to get this thing to close." Because if they 26 turn off the lights, I think it's more than 72 hours, 27 the franchise then reverts back to the manufacturer. 28 So, they wanted to keep the lights on, which virtually 36 1 all -- was all that was happening. 2 So, there -- yes, there was rent paid and there 3 was lights paid, heat. 4 MS. STEEL: Okay. Just last question to 5 Franchise Tax Board, when you decide to go after 6 officers instead of successor's liability that, you 7 know, for other than $200,000 the negotiation was done, 8 what was the reason here? 9 Because they are keeping the business. They 10 going to run the business. There is money out there 11 that somebody who continuing the business with the same 12 name. So, I see a lot of cases like this then we are 13 really going after successor's liabilities. So, they 14 have to close down. Actually, I saw a couple of stores, 15 that, you know, flower shop, they had to close down. 16 So, why -- why is that? Do you know? 17 MR. HANKS: I think Mr. Levine answered -- 18 answered the question much like we would. I think that 19 there was a meeting of minds between the parties that 20 that $200,000 was -- was the amount that was negotiated 21 that was sufficient to allow a security clearance, a tax 22 clearance, to be issued in that case. Because we want 23 the business to continue as well. 24 But we're mindful of the outstanding tax 25 liability that's owed. I think from our perspective 26 we're looking at the State's interest as well as the 27 business owner's interest, the successor as well as the 28 primary operators. 37 1 But I think we're also mindful that -- that the 2 majority of of the taxes are being collected, were 3 tax -- were collected by the individuals that we're 4 seeing today and by their predecessors, the other -- the 5 other individuals that ran the business. They were 6 collecting the the sales tax reimbursement when they 7 were selling their -- their vehicles. So, we were 8 looking at them as primarily responsible for -- for 9 payment of -- of that sales tax. 10 And that's why we're looking at the responsible 11 person liability primarily. 12 MS. STEEL: Okay. Can I ask just one thing? 13 Have you ever seen anything that it was -- negotiation 14 was done during the escrow and then whatever tax money 15 was -- the tax measure was there, if it was, for 16 example, $500,000 but you could -- BOE couldn't collect 17 more than $200,000, but we waived the rest of it. Did 18 we have those cases? 19 MR. HANKS: I think probably every case is 20 going to be looked at in a unique way. I think if we 21 look at it and determine that those are the only funds 22 available and not -- 23 MS. STEEL: Then you can be happy, that's what 24 I'm asking. Because this is really odd that I'm looking 25 at this case. 26 MR. HANKS: Right. I think that we're probably 27 looking at -- at this case from the standpoint of 28 what -- what is going to really benefit the State of 38 1 California, you know, in this instance? 2 What are the available funds that we can 3 collect through escrow? And I think what -- what we 4 determined was that we could safely collect $200,000, 5 apparently nothing the excess of that, but then issue 6 the tax clearance, allow the successor operation to 7 hopefully continue. 8 But, hopefully, assist our taxpayer as well in 9 paying a portion, anyway, a large portion of the tax 10 liability that was -- that was owed to Board of 11 Equalization. 12 MS. STEEL: Thank you. 13 MR. HORTON: Mr. Runner. 14 MR. RUNNER: Yeah, just a couple of 15 clarifying -- to clarify it just bit. 16 In the relationship between the bank and their 17 involvement then with the decisions that were made as to 18 what would get paid, I'm trying -- what you had said was 19 they expected the things to get paid that would keep the 20 doors open through the -- through the escrow. Is that 21 basically what I heard you say? 22 MR. BARTEL: Yes. 23 MR. RUNNER: Okay. What would have happened if 24 you would have paid the sales tax? 25 MR. BARTEL: There wasn't enough money to pay 26 the sales tax. 27 MR. RUNNER: The bank account did not have 28 enough money in it to pay the sales tax? 39 1 MR. BARTEL: That is correct. 2 MR. RUNNER: Okay. 3 MR. BARTEL: And every check that came in was 4 looked at by the First Hawaiian Bank to make sure that 5 if it was a check for a vehicle that they had floored, 6 they took that check or they made -- you know, put it 7 into the bank and made us immediately write a check to 8 make sure that we weren't continuing to sell out of 9 trust -- which is the term for selling vehicles that 10 they have advanced monies on, whether it be new or -- 11 MR. RUNNER: Did you have any conversation with 12 the -- with the bank, saying, "Hey, look we've got this 13 tax liability. This is money that Californians have 14 given to pay the State of California."? 15 I mean what -- did they -- 16 MR. BARTEL: I had lunch -- 17 MR. RUNNER: -- was that a conversation you 18 ever had? 19 MR. BARTEL: -- I had lunch practically every 20 day with the -- with the bank officers. 21 MR. RUNNER: Uh-huh. And they -- they were 22 well aware of the tax liability that was due? 23 MR. BARTEL: I think they were well aware of 24 the tax liability that was due, yes. 25 MR. RUNNER: And they were choosing then to 26 make sure that they were able to receive the money off 27 the sale of that flooring rather than the obligation to 28 the State? 40 1 MR. BARTEL: That's correct. I had not 2 operated that dealership for over ten years. So, if you 3 think of the dynamic -- 4 MR. RUNNER: Uh-huh. 5 MR. BARTEL: -- of coming into a situation 6 where your partner has -- has defrauded a bank that 7 you've signed on the paperwork, you know, for an amount 8 of money over $10 million, knowing at the end of the day 9 that that bank is going to want that money. 10 MR. RUNNER: Let me ask you this, at what point 11 did you find out that -- when did you find out that you 12 had -- that the -- that the BOE had identified you as a 13 responsible party? 14 MR. BARTEL: December of 2008. 15 MR. RUNNER: And when did you ask -- what was 16 the date of the request for that escrow payment to be 17 made -- to be credited during the time in which you did 18 have the the control? 19 MR. BARTEL: I would -- sometime in 2011. 20 MR. RUNNER: Why wouldn't you have asked when 21 you found out you were going to be a responsible party 22 for this tax, for that -- for -- for those escrow 23 dollars to be applied in order to kind of get you off 24 the hook? 25 MR. BARTEL: I never realized what quarter it 26 was applied to until then. 27 MR. RUNNER: 'Til -- 'til -- 28 MR. BARTEL: "Til 2011. 41 1 MR. RUNNER: But you knew you were a 2 responsible party back in 2008? 3 MR. BARTEL: Well, I knew that I was a 4 responsible party for the third and fourth quarter. 5 MR. RUNNER: Okay. 6 MR. BARTEL: Or at least -- yeah, for all of 7 the sales tax that was left owing. 8 MR. RUNNER: But at that point you didn't think 9 that the best way to kind of clear your issue would be 10 to help direct that money back at that time to the 11 quarter to which -- 12 MR. BARTEL: To be honest with you, I didn't 13 know that I had the ability to direct it one way or the 14 other. I had no guidance in that area. 15 MR. RUNNER: Okay. Let me -- back to the 16 question with regard to the sales that were made during 17 that a one month. 18 The implication I got is that there were sales 19 going on and taxes not paid. Is that -- that's not -- 20 that's not -- that's not what I'm hearing from -- from 21 the -- from the taxpayer. 22 He's saying that the sales were made that were 23 tax exempt sales, they were made selling flooring from 24 one dealership to another, is that not our 25 understanding? 26 MR. HANKS: No, I think what the -- the 27 Petitioner is saying is that there were certain flooring 28 obligations that needed to be paid. So, as soon as he 42 1 sold -- let's say he purchased a car for $19,000 and 2 sold it for $20,000 and then he collected sales tax 3 reimbursement of $1600 on that transaction. What he's 4 saying is that when that vehicle was sold there was a 5 reasonable expectation that the bank was -- was going to 6 be paid the $19,000 that they had extended to him to 7 acquire that automobile. 8 But I think what we're saying is that -- that 9 that's definitely the case and that's how flooring 10 arrangements work. But there are additional funds, the 11 $1600 in sales tax collection that took place in this 12 case -- 13 MS. MANDEL: And that's the money that they're 14 saying they paid. 15 MR. HANKS: Right. 16 MS. MANDEL: Anything sold once he walked back 17 into the business or the sales tax, they're saying they 18 paid that sales tax. 19 So, in your example, it would be the spare 20 $1,000, if all Hawaiian Bank needed to get was exactly 21 19? 22 MR. HANKS: Correct. What -- what we're saying 23 is that -- is that they would be obligated to pay that 24 $1,600. 25 MR. RUNNER: But apparently -- I think -- I 26 think what I've heard them say is that they paid all 27 sales tax due for that -- for that month. 28 Is that -- 43 1 MR. LUOMA: That is correct. 2 MR. RUNNER: And then we don't believe they 3 did? 4 MR. HANKS: There was a deficiency remaining 5 after that fourth quarter return. 6 MS. MANDEL: Right, because December 6th 7 through December 20th is not the entire fourth 8 quarter. 9 MR. RUNNER: Right. So, the deficiency would 10 have been -- the deficiency would have been not -- would 11 be prior to the December of when he took over the 12 business, not while he had the business. 13 Is that -- is that -- let me ask the taxpayer, 14 is that -- is that -- my understanding of what I'm 15 hearing. 16 MR. BARTEL: That's absolutely correct. 17 And if I can just clarify one thing further? 18 You're talking about a business that runs -- you know, 19 that runs through 250,000 a month. 20 In order for the State Board -- in order for me 21 to have closed the sale on the -- on the 20th or the 22 18th of March and to have that escrow pay out to the 23 State Board the 200,000 that it did, or an amount that 24 the State Board had negotiated with -- with -- with 25 First Hawaiian Bank for more, if it had been more, in 26 order for me to do that, I needed that $1600 to pay 27 heat, light and power and some rent and a few salaries 28 until that point in time. 44 1 MR. RUNNER: Let me just follow up on one other 2 item. 3 MR. HORTON: Mr. Runner, if I -- if I may 4 just -- I just want to clear up some confusion that -- 5 that I'm having -- 6 MR. RUNNER: Go ahead. 7 MR. HORTON: -- and some inconsistencies in the 8 question, if I may? 9 MR. RUNNER: Go ahead. 10 MR. HORTON: The taxpayer just testified that 11 he actually used the 1600 to pay heat and other things 12 in order to keep the facility open. 13 We had earlier testimony that there was no 14 sales tax collected and whatever was collected was 15 actually reported. 16 And I have yet to hear from the Department 17 whether or not they believe that to be true based on 18 their records. 19 I mean, when you refer to 1600, that's the 20 amount of the sales tax? 21 MR. BARTEL: I did pay all the sales tax due. I 22 meant if there was any profit. 23 I didn't collect sales tax that I didn't pay 24 during the time that I was -- 25 MR. HORTON: Okay, all right, I just wanted to 26 make sure. 27 MR. BARTEL: Okay, I want to make that very 28 clear. 45 1 MR. RUNNER: Okay. Let may just -- just for my 2 own information kind of get an idea when it is that we 3 were -- we were involved with that negotiation in terms 4 of the escrow and how much money then would be able to 5 be applied then to a -- to a sales tax deficit? 6 Is that -- 7 MR. BARTEL: We must have been if we got a 8 clearance. 9 MR. RUNNER: Okay and we -- right, we -- and, 10 so, at that point, help me understand how that works. 11 So -- so, we have -- we have -- we have a 12 collector that's engaged in that part of the 13 negotiation, they're making a decision, they're looking 14 at that -- at the sale and they're kind of deciding 15 who -- whether or not this is -- if we go for the 16 full -- full 400, we're going -- the sale's going to go 17 down or we're going to lose the business. 18 How does that -- who -- who -- who does that? 19 Do we have people who do that and have the ability to 20 look at the sale good enough to determine what the -- 21 what the -- kind of that breaking point is for the sale 22 and when the sale goes south and -- I just wonder how we 23 come up with 200,000 on the liabilities. 24 MR. BARTEL: 400. 25 MR. TUCKER: I'll just say, my understanding is 26 this would be highly unusual. 27 Mr. Hanks would know for sure or he would know 28 better, but, typically, we look just to see what's the 46 1 amount of the outstanding liability. 2 But in this circumstance this sounds like this 3 was highly unusual, so -- 4 MR. RUNNER: I guess what confuses me a little, 5 not only did we -- not only did we decide on the number, 6 but then we decided also then as to how we were going to 7 kind of collect the rest of it through -- through some 8 kind of responsible person party process. 9 I mean, is that the -- is that the thinking 10 that went on, well, we'll get our 200,000 here, we'll 11 get the balance through a responsible party? 12 MS. HANKS: No. 13 MR. TUCKER: I would find -- 14 MR. RUNNER: No? 15 MR. TUCKER: -- I don't think so, Mr. Runner. 16 It's -- typically they would look to the 17 successor and the predecessor. 18 MR. RUNNER: Okay. 19 MR. TUCKER: And here we're looking to collect, 20 we're -- we have circumstances in which Rev. and Tax 21 Code allows us to collect from the successor unless they 22 the tax is either paid or they receive a clearance from 23 the Board of Equalization. 24 MR. RUNNER: Right, right. 25 MR. TUCKER: They a file and request that 26 clearance. 27 My -- I can only imagine they would expect to 28 collect that from the predecessor. I do not believe 47 1 they would have thought we would collect this from a 2 responsible person. 3 There would have been no investigation. There 4 would have been nothing done at that time to even know 5 that -- who that responsible person might be. 6 MR. RUNNER: So, they thought they'd go ahead 7 and get 200 in escrow and then go after -- 8 MR. TUCKER: Tracy Chevrolet -- 9 MR. RUNNER: -- Tracy Chevrolet. 10 MR. TUCKER: -- for the balance. 11 MR. RUNNER: -- for the balance? 12 And that would have been -- what was this value 13 of the sale? 14 MR. BARTEL: 870,000 total. 15 MR. RUNNER: Okay. I just think it's kind of 16 -- I'm trying to get my arms around the idea that we've 17 got negotiators out there deciding how much money we're 18 going to get here and then we're going go after somebody 19 else later on, you know, whether it's a predecessor or 20 whatever, as opposed what I -- what I would think would 21 happen is, hey, we have a $400,000 liability, looks the 22 best we're going to get out of this 200. We're done, 23 you know, and -- as opposed to just trying to figure out 24 what the back door way is to get more. 25 MR. HANKS: Mr. Runner, I don't have the 26 details regarding those conversations, but, of course, 27 what Mr. Tucker is describing is absolutely accurate. 28 And these conversations are going to to be rolled back 48 1 in time. We're not going to be considering personal 2 6829 liability. We're actively engaged in 3 communications with that corporation. 4 And, so, we're talking to them about 5 installment payment agreements, about what's reasonable, 6 what can they afford to pay to the Board. 7 And, so, we would have had those types of 8 discussions with the taxpayer. 9 MR. RUNNER: It would have been this taxpayer, 10 right? 11 MR. HANKS: Absolutely. 12 MR. RUNNER: So, this -- 13 MR. HANKS: Or -- 14 MR. RUNNER: -- so, we're having this 15 negotiation with this taxpayer? 16 MR. KWEE: Yes. There were -- 17 MR. RUNNER: And then -- and I would assume 18 that then this taxpayer is thinking this is all getting 19 wound up together and this is what the liability is and 20 this is how it's going to be paid. 21 And then, all of a sudden, we come back and 22 say, "Oh, by the way, there's some more." 23 I mean, I'm wondering if the taxpayer realized 24 if, indeed, he was going to be hit with another 200,000 25 if he would have said, "Hey, let's re-negotiate this 26 sale a little differently." 27 I don't know. I think I would have. 28 MR. BARTEL: I absolutely would have, had I 49 1 been given that opportunity. I absolutely would have. 2 MR. RUNNER: And, so, I'm just thinking that, 3 you know, here he is negotiating the sale, you're 4 already dealing with him. He thinks this is all going 5 to be taken care of because the sale has been okayed and 6 the buyer has now gotten this certificate and is never 7 told in the process, kind of like, "We may be coming 8 after you after -- when this is all done." 9 MR. HANKS: I don't know when that conversation 10 would have taken place, but -- but our -- 11 MR. RUNNER: Should it have been? Should it -- 12 MR. HANKS: -- our collectors would probably 13 advise the taxpayer, yes, that that's -- 14 MR. RUNNER: You think -- I mean, I would 15 assume -- 16 MR. HANKS: -- a possibility. 17 MR. RUNNER: Yeah, I would assume we should 18 have had that conversation with the taxpayer -- 19 MR. HANKS: Yes. 20 MR. RUNNER: -- and say, "Hey, look, here's how 21 we can do this. We can do this by you going ahead and 22 getting $200,000 here and then we're going to have to 23 come back and find the rest of the money somewhere. It 24 may or may not be you, but we're going to find 25 somebody," so that he knows whether or not if it's him 26 he would negotiate a different deal at that point so 27 that doesn't have this future liability hanging over his 28 head. 50 1 I mean, I -- I mean, I'm kind of putting myself 2 in the taxpayer's feet here as a business person, but am 3 I -- am I off base on that? 4 MR. BARTEL: You're totally accurate. 5 MR. RUNNER: Okay, thank you. 6 MR. HORTON: Okay. Couple of questions of the 7 taxpayer. 8 Am I correct that you -- you negotiate -- you 9 helped negotiate the sale? 10 MR. BARTEL: Yes, I did. 11 MR. HORTON: And at the time you negotiated the 12 sale were you aware of the tax liability? 13 MR. BARTEL: Yes, I was. 14 MR. HORTON: And during the negotiations did 15 you advise the parties to pay the tax liability -- that 16 they should consider paying the tax liability? 17 MR. BARTEL: I told my attorney certainly that 18 this tax liability existed. 19 MR. HORTON: So, do you feel you exercised good 20 faith in trying to assure that the tax liability was 21 paid? 22 MR. BARTEL: I think I did everything within my 23 power to get as much money for all concerned as I 24 possibly could, sir. 25 MR. HORTON: During the period subsequent to 26 this, did -- were there any taxable transactions? 27 MR. BARTEL: Subsequent to? 28 MR. HORTON: When you start operating the 51 1 business and you had the -- subsequent to the flooring 2 agreement? 3 MS. MANDEL: I think they sold the business. 4 MR. HORTON: It was sold? 5 MR. BARTEL: Yeah, the business was sold in 6 March of -- 7 MR. HORTON: During the time that you were 8 considered a responsible person, did you receive any 9 compensation? 10 MR. BARTEL: No, sir. 11 MR. HORTON: Okay. 12 MR. RUNNER: Let me just -- one quick -- real 13 quick, did you assume that you were in a negotiation of 14 settlement with the BOE through this negotiation? 15 MR. BARTEL: Yes, sir. 16 MR. RUNNER: Thank you. 17 MR. HORTON: What caused that assumption? 18 MR. BARTEL: Because that's what I was -- 19 that's the indication that I got from my attorney. 20 MR. HORTON: Okay. Thank you. 21 Is there a motion? Further discussion, 22 Members? My apologies. 23 Is there a motion? 24 Moved by Member Yee to take the matter under 25 submission, second by Mr. Runner. Without objection, 26 such will be the order. 27 Thank you very much for appearing before us. 28 The Board will take your matter under consideration 52 1 later on this evening and send you a written report of 2 our decision. 3 ---o0o--- 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 53 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 MARCH 20, 2012 I recorded verbatim, in shorthand, to the 10 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 53 constitute a complete and accurate 14 transcription of the shorthand writing. 15 16 Dated: May 10, 2012 17 18 19 ____________________________ 20 JULI PRICE JACKSON 21 Hearing Reporter 22 23 24 25 26 27 28 54