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 APRIL 25, 2012 10 11 SALES AND USE TAX APPEAL HEARING 12 APPEAL OF 13 GUILLERMO MEMO ESTRADA 14 NO. 437729 (AR) 15 AGAINST PROPOSED ASSESSMENT OF 16 SALES AND USE TAX 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 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 Joann Richmond 14 Chief Board Proceedings Division 15 16 For Board of David Levine 17 Equalization Staff: Tax Counsel IV 18 19 For the Department: Erin Dendorfer Tax Counsel 20 Robert Tucker 21 Tax Counsel IV 22 Kevin Hanks Chief, Headquarters 23 Operations Division 24 For Petitioner: Guillermo Memo Estrada 25 Taxpayer 26 27 ---oOo--- 28 2 1 5901 GREEN VALLEY CIRCLE 2 CULVER CITY, CALIFORNIA 3 APRIL 25, 2012 4 ---oOo--- 5 MR. HORTON: Ms. Richmond. 6 MS. RICHMOND: Our next item is C9, Guillermo 7 Memo Estrada. 8 Please come forward. 9 MR. HORTON: Mr. Levine, as the taxpayer comes, 10 would you please introduce the issues in this case. 11 MR. LEVINE: Yes. 12 The issue in this petition is whether 13 Petitioner is personally liable, pursuant to Revenue and 14 Taxation Code Section 6829 for the tax debts incurred by 15 Sound Executives Corporation. 16 MR. HORTON: Thank you very much. 17 Taxpayer will have 10 minutes to make their 18 presentation. We would ask that you commence with your 19 introduction for the record. 20 MR. ESTRADA: Uh, thank you very much, Members 21 of the Board. 22 Uh, my name is Guillermo Estrada. 23 Um, I don't know how to introduce myself 24 there, so I -- I brought a copy of, uh, basically some 25 of the facts that, I don't know, have been distributed 26 to you? 27 MR. HORTON: Yes, it has. 28 MR. ESTRADA: Uh, it's addressed "Members of 3 1 the Board". I'm just going to read off, uh, what -- 2 MR. HORTON: Sir, could you bring the 3 microphone -- pull the microphone -- 4 MR. ESTRADA: Sure. 5 MR. HORTON: -- just a little closer. 6 MR. ESTRADA: Is that better? 7 MR. HORTON: Yes, sir. 8 MR. ESTRADA: Okay. 9 So, I'm just going to read off, uh, what is 10 stated there. 11 With regards to the unresolved matters, I do 12 not feel that I'm personally liable for the taxes. I 13 did not willfully or intentionally not pay for them. 14 The corporation did not have the funds for them during 15 this time or any time thereafter. 16 Uh, the only reason why, uh, we paid rent was 17 part of the agreement with the franchisor to take back 18 the store and relieve our debts with them. Uh, we had 19 to keep the doors open. We did not want them to keep -- 20 we did not want to keep them open, as every day we were 21 losing money. 22 Um, to that extent there, I also brought a copy 23 of, uh, our tax returns for the corporation. And I 24 brought copies of that. Uh, they could show the -- the 25 revenue gained and lost, uh -- and we can speak more on 26 that later, if needed. 27 Uh -- uh, so we had also taken out credit 28 cards, uh, paying for the inventory, as we couldn't 4 1 afford even to buy it. 2 So, as I mentioned, there's the tax returns. 3 Uh, we also got rid of, uh, the store manager 4 and worked in the store ourselves, with no pay for this. 5 Uh, we had to keep the installers as we did not know how 6 to install the equipment ourselves. 7 We ran an, uh, installation company of, uh, 8 stereo equipment. 9 When we met with our lawyer and debt 10 negotiation -- negotiator, we told him that the taxes 11 were due, along with our other debts. We gave them a 12 complete list of everything that the corporation owned. 13 Um, and he advised us at the time what we should 14 negotiate. 15 And our determination of what to pay and what 16 not to pay was based on his advice. We trusted his 17 legal opinion to guide us correctly. He told us not to 18 pay the taxes; after a certain amount of time they 19 would fall off, and he would be -- and we would not be 20 responsible for them. 21 We continued with the debt negotiations 22 based on his advice. We did not have any written 23 documents showing his advice, but we can provide 24 witnesses who were there at the time. My partner, 25 Travor Dandridge, uh, was at the meeting as well, and my 26 wife Sara Estrada. 27 I have more on that aside. Uh, even though I 28 feel I'm not personally liable, uh, as there was no 5 1 willful unpayment, the tax amounts that the Board came 2 up with, I feel, are not correct. 3 First, it is showing us as running through the 4 store -- running the store through June 30th, 2005, and 5 we only ran it until May 20th, 2005. 6 Second, it is basing the tax amount on two of 7 our highest quarters, and at the time of unpaid taxes 8 were not nearly that high. 9 Per our 2005 tax returns, we had a gross 10 receipts of $147,312. This includes the installation 11 charges which are not taxable. Uh, typically, they were 12 25 percent of our sales, which would mean that only 13 110,484 would actually be taxable sales. 14 In turn, this means that we collected roughly, 15 uh, 7,468 in sales taxes. With those figures, we would 16 estimate our total collected tax for fourth quarter, uh, 17 of '04, first quarter '05, second quarter of '05 to be 18 roughly $11,202. 19 Uh, also, it states in the report that the 20 Board sent us a Notice of Determination on December 16, 21 2005. However, we didn't -- we never received this. 22 And it also states that we were sent a letter dated, uh, 23 July 14th, 2011 with the penalty relief form to fill out 24 and send back by July 29th, 2011, which we never 25 received, uh, either. 26 Another important note is that it states that 27 the Board issued, uh, a timely Notice of Determination 28 to me on January 28th, 2008. And I do not know where 6 1 they sent it, but I never received that either. 2 The first thing that I received from the State 3 Board of Equalization was at the end of 2009. Per 4 Footnote 2, it's a timely -- it's timely notice if 5 issued within three years of the date that the 6 corporation ceased operating. 7 We ceased operation -- operating on May 20th, 8 2005 and they did not issue anything to us within three 9 years of that. I would request proof of receipt. 10 Um, with all this data provided, uh, to the 11 Board, I respectfully request that you see that I'm not 12 personally liable for the taxes owed by Sound 13 Executives, as to there was no willful failing to pay or 14 cause to be paid taxes due. 15 Respectfully, Guillermo Estrada. 16 MR. HORTON: Thank you, sir. 17 We'll now go to the Department. The Department 18 will have 10 minutes to make their presentation. I 19 would ask that you begin with your introductions for the 20 record. 21 MS. DENDORFER: Mr. Chairman and Members of the 22 Board, I'm Erin Dendorfer from the Board's Legal 23 Department, along with Robert Tucker and Kevin Hanks 24 representing staff. 25 We concur with the recommendation of the 26 Appeals Division with respect to all issues in this 27 matter. 28 Petitioner is liable under Section 6829 for the 7 1 liabilities of Sound Executives Corporation for the 2 period of October 1st, 2004 through June 30th, 2005. 3 This amount was adjusted to account for the business 4 closing on May 20th, 2005. 5 Of the four elements necessary for personal 6 liability to attach under Section 6829, only willfulness 7 is in dispute. 8 A failure to pay is willful if the person had 9 knowledge that the taxes were not being paid and had 10 authority to pay the taxes or caused them to be paid but 11 failed to do so. 12 Petitioner does not dispute that he had 13 knowledge that the taxes were not being paid. 14 Petitioner also concedes he had authority to pay Sound 15 Executives' tax liabilities because he was CFO. 16 Further, evidence shows that Sound Executives 17 paid over $35,000 in rent payments during the period at 18 issue and that Petitioner signed several of the rent 19 checks during the liability period. 20 Sound Executives had funds with which to pay 21 its tax liabilities and used those funds to pay others 22 but failed to pay the Board. 23 Accordingly, we request that the petition for 24 redetermination be denied. 25 Thank you. 26 MR. HORTON: Thank you very much. 27 On rebuttal, please. 28 MR. ESTRADA: Sure. Uh, with regards to the, 8 1 uh, willingness there, uh, I went under legal, uh, 2 counsel to go ahead and negotiate the debt, as far as I 3 did not know how to close a business properly, or 4 at all. 5 Uh, while I've never closed a business, never 6 had to do that, so I went under the recommendations of 7 my -- my tax, uh, and debt negotiator, which, uh, I 8 followed his advice. And so, unfortunately, later on, 9 to find out that, uh, this had not been taken care of as 10 far -- 11 So willingness there, uh, I was under the 12 assumptions that my -- you know, that I was to follow 13 this negotiator's, you know, direction. 14 So -- and as far as paying debts goes, uh, per 15 my agreement with the franchisor, they had asked us in 16 order for them to go ahead and forgive our debts, as 17 stated in the note, uh, sent out, that we had to keep 18 the doors open so they can maintain their goodwill. 19 And so we kept on paying, uh, the -- we had to 20 keep the store itself so that the landlord would not go 21 ahead and, uh, close the doors. 22 Um, in the -- if you're looking at the, uh -- 23 the Appeal's Board Hearing Summary -- okay, uh -- I'm 24 going to refer to -- okay, I'm going to refer to -- I'm 25 looking for the page number. Um, it's under Issue 1. 26 Uh, I don't have a page number on this, but it is line, 27 uh, 12. 28 Petitioner's retail location was owned by Al & 9 1 Ed's Autosound, the franchisor, which leased the 2 location to Petitioner as franchisee, which is 3 incorrect. 4 Uh, we actually had a, uh -- we had the lease 5 under our name. And we were paying for that, not the 6 franchisor. So, in order to keep the facility and keep 7 our agreement with the -- with the franchisor, we had to 8 keep the doors open, continuing to pay, uh, the rent on 9 the property itself. 10 And we also had to maintain goodwill, which is 11 to keep the doors open, keep the customers as well. So 12 we had to continue to pay product, even though it was, 13 you know, coming out of our personal pockets. 14 So most of the money that was being paid for 15 was through our personal, um, our personal funds and not 16 the corporation's. 17 That's all. 18 MR. HORTON: Thank you very much. 19 The, uh -- we'll now go to the Department. The 20 Department will have, uh -- uh, strike that. No. 21 MS. MANDEL: I have a question if you want to 22 go there. 23 MR. HORTON: No, here's what I'd like to do -- 24 my apologies. I had the Department on the brain here. 25 Um, the taxpayer's presented new evidence, uh, 26 that questions the audit liability. Can you speak to 27 that? 28 MS. DENDORFER: We just received this as I was 10 1 coming up here, so -- 2 MS. MANDEL: I -- I can ask some questions 3 because I looked at it. And then you can probably look 4 at it, too. 5 MR. HORTON: Okay. 6 MS. MANDEL: That's where my questions were, 7 Mr. Horton, if you don't mind. 8 MR. HORTON: Sure. 9 MS. MANDEL: Um, but -- just, one question 10 that also goes to that, for the taxpayer. 11 This is the 2005 tax return. Do you have a 12 copy of your 2004 as well? 13 MR. ESTRADA: No. Unfortunately, I did not 14 retain those records there. My partner had a storage 15 facility that we had to give up, and all the -- all the 16 stuff was lost. 17 MS. MANDEL: Okay. Okay. I was just asking 18 because part of the -- we have the third -- the last 19 quarter of '04 and then the first two quarters of '05. 20 Um, for the Department, um, I looked at the 21 Footnote 7, on page 6 of the D&R, which talks about how 22 you came up with the measure, um -- and I don't know 23 if this is before or after the adjustment, to take it 24 only to May 20th. But I added what you have for the 25 first quarter and second quarter of '05. You had 26 67,896 and 68,650. And if my math was right, that was 27 136,546. 28 And he's showing on the, um, return, a gross, 11 1 uh -- gross receipts, less returns and allowances, of 2 147,312 for 2005. But part of his testimony was that 3 installation -- and maybe you have to speak to 4 installation -- would be about 25 percent. 5 Um, so, just a little -- that was what I was 6 starting to look at, to try to see how the income tax 7 return, which you did not have in doing the, um, 8 determinations, played into what numbers you guys did 9 come up with. 10 And, again, I don't know if Footnote 7 11 accounts, includes the, uh, reduction that you -- that 12 you made. In which case, if it does not, it'd be still 13 less. 14 So that's where I was on reviewing the tax 15 returns. 16 MR. HANKS: Ms. Mandel, of course we're just 17 looking at this now, but -- but I'd agree that what we'd 18 like to do is -- is to take a look at the -- the income 19 tax returns. 20 Certainly the -- the income tax returns are 21 going to include installation labor, which would be 22 exempt from tax. Those wouldn't be amounts -- 23 MS. MANDEL: Okay. 24 MR. HANKS: -- that would be subject to 25 projection. 26 MS. MANDEL: Okay. And with respect to the 27 2004, the last quarter where you have, according to this 28 footnote, 69,405, um, I don't know if this is 12 1 necessarily better or worse for the taxpayer. 2 I don't know if -- if he doesn't have that 3 return anymore, um, I don't know if FTB would have the 4 line item that you would be looking at, which would be 5 the gross receipts. And, you know, because his 6 earlier -- if 2004 was similarly -- that last quarter, 7 if he was already -- if the business was already going 8 down. 9 MR. HANKS: Right. There's a possibility 10 that -- that we could obtain gross receipts information 11 from FTB. Um, it's going back a number of years, so 12 I -- I don't know if that information is still 13 available. But it's certainly something that -- that we 14 could check our records to -- to see if we could locate 15 it. 16 MS. MANDEL: Okay. Because that's -- that's 17 what I saw quickly, that on its -- just on its face, it 18 looked like the numbers might be a little high compared 19 to the tax return and installation. 20 MR. HANKS: Right. That's what it appears. We 21 agree. 22 MS. MANDEL: That -- that's where my questions 23 were. 24 MR. HORTON: Uh, thank you. 25 Member Steel. 26 MS. STEEL: Um, do you have any record that -- 27 your sales really went down before you closed on May 28 20 -- 13 1 MR. ESTRADA: Mm-hmm. 2 MS. STEEL: -- of 2008. Do you have any record 3 for that, sales journal or something? 4 MR. ESTRADA: No. What -- what happens with 5 the franchisor, they actually do all of the -- the 6 sales, the point of sales. So they maintain all the 7 records. 8 And I've, uh, gone back numerous times 9 throughout the years to try to get records for them. 10 Uh, and we didn't leave on good terms. 11 MS. STEEL: Mm-hmm. 12 MR. ESTRADA: So they're resistant on giving me 13 what I need. 14 MS. STEEL: But you are the one making sales 15 there, so you don't have any record? 16 MR. ESTRADA: No. No. 17 MS. STEEL: Okay. 18 MR. ESTRADA: Because they have all the 19 software. 20 MS. STEEL: Okay. 21 MR. ESTRADA: They have a proprietary software 22 and they -- you have to have log-in codes and 23 everything. 24 MS. STEEL: So your cash register, uh, is, um, 25 connected? 26 MR. ESTRADA: Correct. It's connected -- 27 MS. STEEL: Right. 28 MR. ESTRADA: -- to the corporate offices. 14 1 MS. STEEL: Okay. 2 We -- then we have to do the further adjustment 3 of those sales, because on May 20th it must be -- when 4 they closed down, they must be zero that. So it's 5 gradually it went down, so we really have to work on 6 that first. 7 And then second, could you help this taxpayer 8 to fill out the, uh, Relief of Penalty Form? 9 MR. HANKS: Yes, we -- 10 MS. STEEL: I think that's -- yeah. Okay. 11 MR. HANKS: Ms. Steel, we'd be happy to do 12 that. 13 MS. STEEL: Thank you. 14 MR. HANKS: And perhaps this would be a good 15 case to -- 16 MS. STEEL: Oh, I see. 17 MR. HANKS: -- to conduct a 30/30/30 -- 18 MS. STEEL: Oh, too? 19 MR. HANKS: -- where we'll have an opportunity 20 to look at additional information -- 21 MS. STEEL: Okay. 22 MR. HANKS: -- to the extent the Petitioner can 23 supply it. We can look at our FTB terminals, as well, 24 and try and develop additional information on the gross 25 receipts. 26 MS. STEEL: Okay. 27 MR. ESTRADA: I don't understand what a 28 30/30/30 -- 15 1 MR. HORTON: Uh -- uh -- one second, sir. We 2 will explain it. 3 MR. ESTRADA: Sorry. 4 MR. HORTON: Unless there's further discussion? 5 MS. STEEL: If there's no discussion -- 6 MR. HORTON: Hearing none. 7 MS. STEEL: --- then I make a motion for 8 30/30/30. 9 MR. HORTON: It's been moved by Member Steel 10 for a 30/30/30. Second by Member Yee. 11 Without objection, uh, such will be the order. 12 Mr. Levine, would you please. 13 MR. LEVINE: Yes. 14 First 30 days is for you to provide additional 15 information. Though I think the Department will contact 16 you during that period to help you know what it wants to 17 see. 18 MR. ESTRADA: Mm-hmm. 19 MR. LEVINE: Including helping you complete a 20 Request for Relief of Penalties Form. It sounds like 21 you might have a basis, but you haven't submitted the 22 form yet, which we need to -- the Board will need to 23 consider it. So the Department will help you with that. 24 The Department will then have 30 days to, uh, 25 complete its submission and its recommendation. And 26 then the package will come to Appeals Division. We will 27 make our recommendation to the Board. And then the 28 Board will make its final decision. 16 1 MR. ESTRADA: Got it. Got it. Thank you for 2 that. 3 MR. HORTON: Okay. Uh, I would also ask that 4 the Department, uh, confer with the taxpayer today, to 5 the extent they can, and give him some idea as to what 6 he can do to prepare himself for this 30/30/30. 7 MR. ESTRADA: Thank you. 8 MR. HORTON: Okay. 9 ---oOo--- 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 17 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 April 25, 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 17 constitute a complete and accurate 14 transcription of the shorthand writing. 15 16 Dated: May 8, 2012 17 18 19 ____________________________ 20 KATHLEEN SKIDGEL, CSR #9039 21 Hearing Reporter 22 23 24 25 26 27 28 18