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 JULY 25, 2012 10 11 12 13 14 15 FINAL ACTIONS 16 17 18 19 20 21 22 23 24 25 26 27 REPORTED BY: Kathleen Skidgel 28 CSR NO. 9039 1 1 P R E S E N T 2 3 For the Board Jerome E. Horton of Equalization: Chairman 4 5 Michelle Steel Vice-Chairwoman 6 7 Betty T. Yee Member 8 9 George Runner Member 10 11 Marcy Jo Mandel Appearing for John 12 Chiang, State Controller (per Government Code 13 Section 7.9) 14 Joann Richmond 15 Chief Board Proceedings Division 16 17 For Staff: David Levine Tax Counsel IV 18 19 ---oOo--- 20 21 22 23 24 25 26 27 28 2 1 5901 GREEN VALLEY CIRCLE 2 CULVER CITY, CALIFORNIA 3 JULY 25, 2012 4 ---oOo--- 5 MR. HORTON: Ms. Richmond. 6 MS. RICHMOND: This con -- this concludes our 7 administrative session. 8 Would you like to take those matters that have 9 been taken under submission? 10 MR. HORTON: If that's the pleasure of the 11 Members? 12 Members, yes? Okay. 13 The first item would be, Ms. Richmond? 14 MS. RICHMOND: Our first item taken under 15 submission is C2, Tarun Maitra, Soma Prasad, Partha 16 Sarathi Sinha, and Basudha Sinha. 17 ---oOo--- 18 C2 TARUN MAITRA, SOMA PRASAD, 19 PARTHA SARATHI SINHA and BASUDHA SINHA 20 NO. 473027 21 ---oOo--- 22 MR. HORTON: Okay. Uh, discussion, Members? 23 Is there a motion? 24 MR. RUNNER: Um -- hang on just a minute. Let 25 me just -- I've got some notes here. 26 It -- um -- trying to figure out what an 27 appropriate reduction would be. Um, I think we had 28 concerns. There was discussions in regards to both 3 1 uh -- uh -- the, uh, consumption issue, the pilferage 2 issue, uh, the estimated issue in regards to some issues 3 in regards to assumptions on the tax on the cigarettes. 4 Um -- and so I'm struggling with -- and maybe 5 somebody else has put some thought into that idea in 6 regards to what it is that is maybe some recognition, in 7 general, so we could maybe go through each one of 8 those. 9 MR. HORTON: Mr. Levine, can you recap on the 10 pilferage? And particularly, was there pilferage 11 allowed? 12 MR. LEVINE: I believe this -- 13 MS. YEE: Two percent. 14 MS. STEEL: Two percent. 15 MR. LEVINE: Oh, I'm not sure what the 16 pilferage was. 17 MR. HORTON: I know there was a 18 self-comsumption of two percent. 19 MS. YEE: Both. I think both. 20 MS. STEEL: Both. 21 MR. HORTON: They combined the two? 22 MS. YEE: No, two and two. 23 MS. STEEL: No. Two, two. 24 MR. HORTON: Two and two? 25 MR. RUNNER: Two. 26 I think that -- 27 MR. HORTON: You know, I -- I -- I actually 28 feel that the taxpayer thought that they were somewhat, 4 1 uh, breaking the law by consuming products. Um, and so, 2 therefore, they took a position that it didn't exist. 3 Um, when in fact it innately has to exist, one would 4 think. And whether or not two percent is -- is, uh, 5 sufficient for a family of three, uh, may be 6 questionable. 7 Um, I didn't really see any evidence on the 8 pilferage. In fact, they seemed to have corrected the 9 issue by hiring a security guard and taking measures to, 10 uh, mitigate the pilferage activity. 11 The -- from my perspective, the segregation 12 test that revealed the taxpayer resold credit of 8500, 13 out of the total, 1700 would be problematic, uh, in that 14 it would probably ultimately, in my mind, increase the 15 cost of goods sold and, therefore, ultimately increase 16 the tax liability. Without evidence to support that, 17 uh, I'd probably leave that alone. 18 And so, some adjustment for self-consumption. 19 Um -- I don't know -- four percent? 20 MS. STEEL: I think that's reasonable. 21 How about the cigarette markups for 19 percent 22 that, um, he said he's selling for 12 percent and even 23 we add, um -- 24 MR. HORTON: Mr. Levine. 25 MS. STEEL: -- the rebate, it's going to be 26 another two percent. That's what I heard from 27 Mr. Lambert. 28 MR. HORTON: Did the Department get back to you 5 1 on that discussion? 2 MR. LEVINE: The number -- the percentage was 3 for all tobacco products, not just cigarettes. So, the 4 other tobacco products, my understanding -- 5 MR. HORTON: Higher. 6 MR. LEVINE: -- has a substantially higher 7 markup than regular cigarettes. 8 And I don't think the Department has the 9 specific figure. The guess that I heard was 15 or 20 10 percent tobacco sales. So it wasn't -- as a normal, for 11 this type of business, which wouldn't be a drastic 12 change, but still, it would make a significant rise. 13 And 50 cents is -- seems awfully low to me, just my -- 14 from what I've seen, for rebates for the whole audit 15 period, even if there were some at 50 cents. 16 MR. HORTON: Yeah, the -- the challenge that I 17 think we have as a -- as a Board, it's important that 18 the, uh, Department place on record all of that 19 information during the discussion. 20 Typically when a Member asks a question 21 relative to the markup, they should look at the totality 22 of the issue and -- and then, uh, reflect, uh, their 23 perspective. Otherwise, we're isolating it to just one 24 item. 25 In this case we're isolating it to cigarettes. 26 And even with a conclusion, if I understand you 27 correctly, Mr. Levine, of a markup -- in this case 15 28 percent on the cigarettes, there's another percentage of 6 1 other tobacco products which carries, from my 2 recollection, somewhere around a 23-percent markup. But 3 we have no idea of where to average it. 4 So, um, it makes it difficult. 5 MS. STEEL: Chairman Horton. 6 MR. HORTON: Yes. 7 MS. STEEL: But, uh, Mr. Lambert stated that 8 this 19 percent, comparing to average, industry average, 9 it's still really higher side. That's what he said. 10 MS. MANDEL: And -- 11 MR. HORTON: Member Mandel. 12 MS. MANDEL: And everything I had in the 13 write-up had cigarettes by the Department at 19 percent. 14 And now you're saying that that wasn't just cigarettes, 15 but the whole write-up was that that was cigarettes. 16 So, that kind of adds to Mr. Horton's -- 17 MR. LEVINE: It's -- 18 MR. HORTON: Okay. 19 MS. MANDEL: Yeah. 20 MR. HORTON: Okay. I mean, perspectively, we 21 can only consider the information and the facts 22 presented to us. Unfortunately, the Department failed 23 to provide us that evidence and it is a condition or an 24 action subsequent to our hearing. Uh, therefore, um, I 25 would also accept a reduction in the markup on -- on 26 cigarettes to 15 percent. 27 MS. STEEL: Make a motion? 28 So self-consumption of four percent and markup 7 1 of cigarettes for 15 percent. And, um, to abate the 2 negligence penalty because it's a first store and first 3 audit and he never really owned ARCO station. That's my 4 motion. 5 MR. RUNNER: Second that. 6 So we're not just talking about negligence 7 penalty now? 8 MR. HORTON: Uh, there's a motion to abate the 9 negligence penalty, make an adjustment in the audit for 10 four percent self-consumption, to reduce the markup on 11 the category "cigarettes" down to 15 percent, uh, and to 12 adjust the, uh, reported taxable sale accordingly. 13 Um, discussion, Members? Um -- 14 MR. RUNNER: Yeah. Let me speak real quick to 15 the negligence penalty. 16 MR. HORTON: Mr. Runner. 17 MR. RUNNER: You know, it is -- it is a big 18 error factor. 19 I think, again, the thing that concerned me the 20 most was in the justification as it was created in 21 the -- on the -- on the negligence penalty was based 22 upon and is given to us on -- on some -- some wrong 23 information. Um, that was -- the information that was 24 given to us was the assumption that this individual had 25 actually been the president of a corporation, of a 26 retailer, similar retail prior to this audit. Um, upon 27 looking at the facts more clearly, that was not the 28 case. 8 1 Um, so I guess my concern is -- and I guess 2 this would be a message to staff to -- to -- to a 3 degree, and that is, just give us the information that 4 we really know for sure. Um, you know, and again, I -- 5 I probably -- on the -- on the -- on the outset think 6 that the error's large enough for a negligence. But 7 that ought to be the case then, and let's not use 8 information that we don't know for sure as trying to 9 justify the negligence penalty. 10 And that's why I'm, um, supportive of, in this 11 case, because the basis of which was presented to us as 12 to why a negligence penalty was -- was needed was 13 incorrect. I would support the waiving of negligence 14 penalty. 15 MS. YEE: Mr. Chairman. 16 MR. HORTON: Uh, Member Yee. 17 MS. YEE: Um, I would support the, uh, 18 adjustment on the, uh, self-consumption and the 19 cigarette markup. 20 On the negligence penalty, uh, I think just 21 even based on the petitioner's, um, own testimony today, 22 there was quite, um, intimate knowledge about 23 merchandise purchases, particularly from Sam's Club and 24 perhaps other sources. And I just find it very, very 25 hard to believe that, uh, there wasn't, uh -- uh, just 26 general knowledge about, uh, you know, taxable 27 merchandise purchases that, uh, you know, really was the 28 subject of this appeal. 9 1 It, uh -- it's, uh, a shame that, um, the -- 2 the records weren't, um, in better shape to, um, really 3 try to sway us more towards the, uh, petitioner's 4 thinking. But, uh, I think, given the nature of the 5 business, um, they had to have been knowledgeable about, 6 uh, the inventory and the merchandise purchases and 7 certainly from that what was subject to tax. 8 MR. HORTON: Yeah, my, uh, concern, Members, is 9 that, even though he wasn't the president, he was 10 actively involved. He was the manager, um, and in his 11 own testimony sort of conveyed, uh, as Member Yee has 12 articulated, a, uh, distinct knowledge of the business. 13 And so -- 14 MS. STEEL: Our -- 15 MR. HORTON: And then liability -- 16 MS. STEEL: Oh, sorry. 17 MR. HORTON: -- percentage of error, the 18 liability, lack of records, uh, the cognizant 19 perspective, uh, pretty close to fraud actually, but, 20 uh, understand the negligence as being reasonable. 21 MS. STEEL: Okay. If I -- if all Members think 22 that I pushed a little too far, then I amend the motion 23 and we going to have, uh, self-consumption of four 24 percent and then cigarette markup of 15 percent. 25 MR. HORTON: Okay. 26 MR. RUNNER: Second that. 27 MR. HORTON: Uh, motion on the table, 28 subsequent amendments to the motion to withdraw the 10 1 negligence penalty, uh, and include everything else as 2 previously stated. There's a motion and a second. 3 Uh, without objection, Members, such will be 4 the order. 5 ---oOo--- 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 11 1 MR. HORTON: Ms. Richmond. 2 MS. RICHMOND: Our next item is C3, Bas Food 3 Services, Inc. 4 ---oOo--- 5 C3 BAS FOOD SERVICE, INC. 6 NO. 507142 7 ---oOo--- 8 MR. HORTON: Discussion, Members? 9 Member -- 10 Is there a motion? 11 MS. YEE: Uh, move to adopt the staff 12 recommendation. 13 MR. HORTON: Moved by Member Yee to adopt staff 14 recommendation. 15 MS. STEEL: Objection. 16 MR. HORTON: Second by, uh, Member Mandel. 17 Objection noted by Member Steel. 18 Ms. Richmond, please call the roll. 19 MS. RICHMOND: Mr. Horton. 20 MR. HORTON: Aye. 21 MS. RICHMOND: Ms. Steel. 22 MS. STEEL: No. 23 MS. RICHMOND: Mr. Runner. 24 MR. RUNNER: Aye. 25 MS. RICHMOND: Ms. Yee. 26 MS. YEE: Aye. 27 MS. RICHMOND: Ms. Mandel. 28 MS. MANDEL: Aye. 12 1 MS. RICHMOND: Motion carries. 2 ---oOo--- 3 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 13 1 MR. HORTON: Ms. Richmond, next item. 2 MS. RICHMOND: Our next item is C4, Karlen 3 Antonyan. 4 ---oOo--- 5 C4 KARLEN ANTONYAN 6 NO. 472389 7 ---oOo--- 8 MR. HORTON: Discussion, Members? 9 MR. RUNNER: I'm sorry. Which one is this one? 10 What's the number? 11 MR. LEVINE: Successor liability. 12 MR. RUNNER: What -- what, C -- 13 MR. LEVINE: Successor liability -- 14 MS. YEE: C4. 15 MR. RUNNER: There we go. 16 MR. LEVINE: -- C4. 17 MR. HORTON: Is there a motion? 18 MS. YEE: Uh, I'm going to move to adopt the 19 staff recommendation. Then also direct staff to inform 20 petitioner of the, uh, Offer-in-Compromise Program. 21 MR. RUNNER: Yeah. 22 MR. HORTON: Uh, moved by Member Yee to adopt 23 staff recommendation. Second by Member Runner. Uh, and 24 request staff notify the taxpayer of 25 Offer-in-Compromise. 26 Uh, is -- further discussion, Members? 27 MS. STEEL: Is it possible that we can ask the 28 staff to go after that, uh, bad guy who really owes us 14 1 taxes first? 2 MR. LEVINE: Yes. The Department has been 3 doing that. And they -- from the description, it seems 4 like they're not going to -- squeezing blood out of a 5 turnip. But they've been trying to do that. He is the 6 more culpable party. I don't think there's any doubt 7 about that. But if you want them to try further -- 8 MS. STEEL: Yes. 9 MR. LEVINE: -- whatever the Board directs. 10 MR. RUNNER: Yes. 11 MR. HORTON: Augment to suggest the staff to, 12 um -- uh, continue their investigation and collection 13 activity on the predecessor. 14 MR. RUNNER: Mm-hmm. 15 MS. STEEL: Mm-hmm. 16 MR. HORTON: Without objection, Members, such 17 will be the order. 18 ---oOo--- 19 20 21 22 23 24 25 26 27 28 15 1 MR. HORTON: Ms. Richmond. 2 MS. RICHMOND: Our next item is C9, Imad Elias 3 Mahli and Elias Niman Mahli. 4 This is a waived appearance. 5 ---oOo--- 6 C9 IMAD ELIAS MAHLI and ELIAS NIMAN MAHLI 7 NO. 531323 (EH) 8 ---oOo--- 9 MR. LEVINE: There is a revised recommendation 10 in this one. After reviewing petitioner's recent 11 submission, the Department has recomputed taxable sales 12 made during 2008 based on 2007 average daily purchases, 13 which reduces the measure of deficiency by 23,792 from 14 524,648, to 500,586 -- I'm sorry, 500,856. And we 15 recommend this as our revised adjustment -- 16 MR. HORTON: Okay. 17 MR. LEVINE: -- revised recommendation. 18 MR. HORTON: Uh, let me thank staff for their 19 cooperation and reconsideration of the information. 20 Is there a motion, uh, Members? 21 MS. YEE: Motion to approve the -- adopt the 22 revised staff recommendation. 23 MR. HORTON: Uh, moved by Member Yee to adopt 24 the staff revised recommendation. Second by Member 25 Steel. 26 Without objection, Members, such will be the 27 order. 28 MS. YEE: Mr. Chairman. 16 1 MR. HORTON: Uh, Member Yee. 2 MS. YEE: Let me just go back to C2. Similar, 3 uh, direction to staff to inform the petitioner about 4 the Offer-in-Compromise Program. 5 MR. HORTON: Sure. 6 Um, duly noted, uh, Mr. Levine? 7 MR. LEVINE: Yes. 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 MR. HORTON: Ms. Richmond. 2 MS. RICHMOND: Our next item is C10, Elite 3 Certified Auto Service & Tires, Inc. 4 MS. YEE: We did that. 5 MS. STEEL: We gave a 30/30/30. 6 MR. HORTON: We took that under consideration. 7 MS. RICHMOND: 30/30/30. 8 MR. HORTON: Board has taken action. 9 MS. RICHMOND: Oh, I'm sorry. 10 MR. HORTON: No worries. 11 ---oOo--- 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 18 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 July 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 18 constitute a complete and accurate 14 transcription of the shorthand writing. 15 16 Dated: July 31, 2012 17 18 19 ____________________________ 20 KATHLEEN SKIDGEL, CSR #9039 21 Hearing Reporter 22 23 24 25 26 27 28 19