1 BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION 2 5901 GREEN VALLEY CIRCLE 3 CULVER CITY, CALIFORNIA 4 5 6 7 8 REPORTER'S TRANSCRIPT 9 OCTOBER 23, 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: Grant Thompson 18 Tax Counsel IV 19 David Levine Tax Counsel IV 20 21 ---oOo--- 22 23 24 25 26 27 28 2 1 5901 GREEN VALLEY CIRCLE 2 CULVER CITY, CALIFORNIA 3 OCTOBER 23, 2012 4 ---oOo--- 5 MR. HORTON: Ms. Richmond, our next item. 6 MS. RICHMOND: Our next item are those matters 7 that have been taken under submission. 8 Our first item is B1, Gerald J. Marcil and 9 Carol L. Marcil. 10 ---oOo--- 11 B1 GERALD J. MARCIL and CAROL L. MARCIL 12 NO. 458832 13 ---oOo--- 14 MS. MANDEL: Uh, move to grant the appeal. 15 MR. HORTON: Moved by Member Yee to grant 16 appeal. 17 MS. STEEL: Second. 18 MR. HORTON: Second by Member Steel. 19 Without objection, Members, such will be the 20 order. 21 MS. YEE: Moved by Ms. Mandel. 22 MR. HORTON: Ms. Mandel. Uh, strike that. 23 Moved by Member -- I didn't actually roll it 24 that fast. 25 Moved -- uh, motion by Member Mandel to -- 26 MR. RUNNER: Grant. 27 MR. HORTON: -- grant -- 28 MS. YEE: Grant. 3 1 MR. HORTON: -- the appeal, um, and second by 2 Member Steel. 3 MS. YEE: Objection. 4 MR. HORTON: Without objection -- 5 MS. YEE: There is objection. 6 MR. HORTON: Objection noted. 7 Uh, wait a minute. 8 MS. YEE: May I pose a question, 9 Mr. Chairman -- 10 MR. HORTON: Yes, please. 11 MS. YEE: -- to Appeals. 12 Um, my concern really relates to the, um, 50 13 percent interest of Mrs. Marcil and whether she in fact 14 did have an interest in the resulting entity. And I 15 know we had some discussion of that during the -- the 16 hearing, but can you clarify? I mean, she wasn't a 17 member of the LLC, and just -- 18 MR. THOMPSON: Yes. Appellant cited, uh, at 19 least two revenue rulings, uh, in which the state law 20 regarding, uh, the actual state law partner ownership 21 was a look behind to look at the real economics. And 22 one of them involved a transferee where the transferee, 23 uh, did not become a partner but succeeded to the 24 economics. 25 And the Court said, you may not be a partner -- 26 or, I'm sorry, the revenue ruling said that you may not 27 be a partner, but, uh -- under state law, but, uh, we're 28 going to look through the economics and, uh -- and, uh, 4 1 treat you as a partner for purpose of federal income 2 tax. 3 And the second one involves, uh, certain states 4 that, uh, not allowed husband and wives to be partners. 5 And, uh -- uh -- and the service looked behind that and 6 said notwithstanding the state law that says for state 7 law purposes you can't be partners, we're going to look 8 at the underlying economics to see, uh, once you're, 9 uh -- to see if you have an interest in the entity, uh, 10 as a matter of fact. 11 And I think, uh, the other, uh, perspective on 12 that, I think it's -- it's valid to certainly look at 13 the ownership percentages. To my mind, what you're 14 looking for there is to see, uh, is there something else 15 going on, uh, besides a contin -- a continuation of the 16 entity? Or is there a cash-out where Mrs. Marcil is, 17 uh, receiving cash or, uh, disposing of the property, 18 uh, for sort of a nonqualified purpose? Uh, or do you 19 just look at that, uh, change in ownership as a change 20 in the form of ownership, and that, uh -- uh, Mr. and 21 Mrs. Marcil just didn't, uh -- just changed their title 22 and form of holding without changing the fundamental 23 economics of the deal. 24 MR. HORTON: Hmm. 25 MS. YEE: So even without any further act, 26 Mrs. Marcil is deemed to have had an interest in -- 27 MR. THOMPSON: Well, I think the issue for the 28 Board is whether, uh, there's enough continuity of 5 1 interest here such that, uh, it's a good 1031. 2 So, is it, uh -- uh, has there been a cash-out 3 of her or an exchange for nonqualified property, um, 4 such that 1031 treatment is not appropriate? 5 MR. HORTON: Hmm. 6 MS. YEE: I guess I'm still troubled with 7 respect to, um, how we treat these partnership interests 8 for tax purposes. And I just didn't see -- there was 9 kind of like nothing legally kind of binding 10 Mrs. Marcil, I guess. 11 MR. THOMPSON: Um, she's not, uh, a nominal 12 partner in MD, LLC; that's correct. 13 MS. YEE: Mm-hmm. 14 MS. STEEL: I think the taxpayer gave us the 15 reason that they were not married when they had the 16 partnership before. And then after that, that they got 17 married. So that's why husband's name was on that 18 partnership, and they didn't put the wife's name on. 19 So -- 20 MR. THOMPSON: That -- that's correct. 21 MS. STEEL: Yeah. 22 MR. THOMPSON: That was the history of it. 23 MS. YEE: That's okay. I'm still troubled by 24 it. 25 MS. STEEL: Okay. 26 MS. YEE: I'm not sure it holds together. I'll 27 just object. 28 MR. HORTON: Hmm. 6 1 MS. MANDEL: But she's in it as community 2 property, and her declaration was she viewed herself as 3 still in it -- 4 MR. THOMPSON: Correct. 5 MS. MANDEL: -- through her husband. Because 6 the way they arranged all their -- 7 MR. THOMPSON: Mm-hmm. 8 MR. RUNNER: Goes back to the fact that she 9 still had the economic interest. 10 MS. STEEL: Right. 11 MR. THOMPSON: Uh, correct. 12 MS. YEE: Well, that just seems so -- just 13 seems like you can kind of game it. I -- I -- I'm not 14 there. 15 That's okay. 16 MR. HORTON: I think you bring up an excellent 17 point, Member Yee. Um -- 18 MS. YEE: I mean, there's a difference between 19 a community property interest and a membership interest 20 and how -- and then the tax treatment attendant to that. 21 And, I mean, if -- if this logic follows, I 22 could just see kind of some opportunities for gaming it. 23 But -- 24 MS. MANDEL: It's the -- 25 MR. HORTON: Maybe the -- 26 MR. THOMPSON: If I can -- if it's any comfort, 27 I -- I see this as, uh, an analysis just in this 1031 28 situation, uh, whether there's been a cashing out and 7 1 whether there's been maintaining an interest in, uh, 2 like-kind property, albeit in a different form. 3 MS. YEE: Mm-hmm. 4 MR. THOMPSON: So, I think, uh, appellant would 5 go too far if appellant would argue that a community 6 property interest is always, uh, equivalent to a 7 partnership interest for tax purposes. I'm not aware of 8 authority to that effect. 9 MS. YEE: Mm-hmm. 10 MR. THOMPSON: I think, uh -- uh, if the Board 11 so rules, I think it would be a more, uh, narrow basis 12 that in this appeal we had a husband and wife where, 13 uh -- at least according to appellant's argument, there 14 was no real change in the economics. It wasn't as if 15 the wife received a cash-out. It was just that when 16 they formed the new partnership, they just didn't list 17 her as a partner. So, it was completely a form issue 18 rather than a substance issue on the facts of this case. 19 Um, and I'm not saying the Board is, you know, 20 bound to find that way. But I just -- I wouldn't see it 21 as a -- a overly broad interpretation that states some 22 sort of a flat rule that would be applied in another 23 context. 24 MS. YEE: Okay. 25 MR. HORTON: And the, um -- in regards to, uh, 26 community property, um, haven't -- hasn't the court 27 ruled in other situations that that's not something, 28 um -- that's not the case? That -- 8 1 MR. THOMPSON: I mean, certainly a community 2 property interest has differences from having actual 3 partnership interests. 4 MR. HORTON: Right. 5 MR. THOMPSON: And, um, I'm not aware of any, 6 uh, court ruling in the 1031 context that, uh, sort of 7 addresses this narrow issue. 8 MR. HORTON: Was -- was there a change of 9 percentage of ownership? 10 MR. THOMPSON: Um, what, uh -- the parties had 11 different views about that. 12 MR. HORTON: Mm-hmm. 13 MR. THOMPSON: What appellant said was the deal 14 changed. And so, uh, initially-- 15 MR. HORTON: The economic essence of the deal, 16 giving weight to her ownership by virtue of community 17 property, did that change? 18 MR. THOMPSON: I -- I don't think it did. 19 MR. HORTON: Yeah. 20 MR. THOMPSON: I mean, I didn't hear FTB 21 arguing that they -- they were arguing a couple things. 22 One, they were troubled she was not still a partner, 23 as -- as -- as Ms. Yee is. And then they were also 24 arguing that, uh, they did not believe that when 40 25 percent of the property -- 26 MR. HORTON: Mm-hmm. 27 MR. THOMPSON: -- went into MD, LLC -- 28 MR. HORTON: Mm-hmm. 9 1 MR. THOMPSON: -- that, uh, appellants 2 represented that because of that 40 percent contribution 3 and because there were relatively nominal capital 4 contributions prior to that, it knocked their percentage 5 interest down to two or three percent or something. 6 And FTB, uh, their argument was that, no, at 7 the time of that, uh, 40 percent went into MD, LLC, FTB 8 owned 50 percent of it -- of the partnership, um, so 9 that the -- you would have expected different 10 percentages in the ultimate entity. 11 Um, I think one issue with the FTB's argument 12 in that respect is I -- FTB didn't bring any evidence, I 13 didn't see any evidence in the record or the books that 14 Mr. Marcil had made a prior contribution interest that 15 would have given him, uh, an interest equivalent to -- 16 to half of that 40 percent interest. 17 Um, and his -- their testimony is the deal 18 changed so that, uh, instead of them each putting in 50 19 percent initially, uh, 40 percent would be put into, uh, 20 the partnership by the third party. And then, uh, the 21 other 60 percent would be put in through H -- through 22 HVA. 23 MR. HORTON: So those changing -- changes in 24 percentages could be perceived as a cashing out by 25 virtue that you're off-setting, uh, the amount that you 26 have to -- 27 MS. MANDEL: They never got -- 28 MS. STEEL: The whole amount of money -- 10 1 MS. MANDEL: They never got any cash out. 2 MS. STEEL: -- went in. They never cashed out 3 anything. So we can -- 4 MR. HORTON: They never got any -- 5 MS. STEEL: -- look at the bigger picture 6 here. 7 MR. HORTON: -- tangible cash out. 8 I -- I'm just asking questions, guys. I'm not 9 really drawing a conclusion at this point. 10 I -- I -- Members, just at the indulgence of 11 the Members, can we put this over? Give me a chance 12 just to kind of look at it, if you will. 13 MR. RUNNER: Okay. 14 MS. STEEL: Okay. 15 MR. HORTON: All right. Thank you. 16 Ms. Richmond. 17 MS. RICHMOND: Our next item is B4 -- 18 MR. HORTON: I mean, put it over until 19 tomorrow, Members. I want to sort of sleep on it. 20 Does that change anything? 21 Okay. 22 ---oOo--- 23 24 25 26 27 28 11 1 MS. RICHMOND: Our next item is B4, Thomas L. 2 Cantor and Cheryl A. Cantor. 3 ---oOo--- 4 B4 THOMAS L. CANTOR and CHERYL A. CANTOR 5 NO. 597487 6 ---oOo--- 7 MS. MANDEL: Sustain the Franchise Tax Board. 8 MS. YEE: Second. 9 MR. HORTON: It's been moved to sustain the 10 Franchise Tax Board -- 11 MS. STEEL: Objection. 12 MR. HORTON: -- by Member Mandel. Second by 13 Member Yee. 14 Objection noted by Member Steel. 15 Discussion, Members? 16 MS. STEEL: Well, taxpayer had a good, uh, 17 payment history of taxes, and late payment was 18 unintentional here. And the large settlement was just 19 once-in-a-lifetime occurrences. And I think, um, that 20 we can go for unusual circumstances at this point. 21 And, you know, even, um, that tax preparer, um, 22 admitted that she made mistakes that, um -- so just -- 23 it's not like other taxpayers that we see that they try 24 to cheat or they never really did the tax return. I 25 think they had a good intention here. 26 So, objection. 27 MR. RUNNER: Yeah. I -- 28 MR. HORTON: Mr. Runner. 12 1 MR. RUNNER: Yeah, I feel like this is not an 2 issue from the taxpayer. But it is an issue for the tax 3 preparer at that point, the CPA. As a result of that, 4 to me, if indeed -- I mean, it seems to me the taxpayer 5 actually has the ability to deal with his -- the CPA who 6 actually didn't understand the law and filed 7 incorrectly. I assume the CPA actually has some kind of 8 malpractice insurance, and I would suggest that be the 9 direction because she clearly understood the law. She 10 knew what to do and she didn't do it. 11 Uh, so -- 12 MR. HORTON: Yeah, therein is the rub, I guess. 13 Lord knows I would love to be able to grant a one-time 14 waiver of -- 15 MS. MANDEL: Yes, unfortunate of the 16 estimated -- underpayment of estimated tax penalty as 17 opposed to like the late filing penalty or late payment 18 penalty. 19 MR. HORTON: Yeah. 20 MS. MANDEL: It's penalty -- 21 MR. HORTON: Certainly could have been some 22 calculations going on. 23 MS. MANDEL: Which she even admitted. 24 MR. HORTON: I think we're all faced with these 25 situations from time to time, and particularly I don't 26 know if most recently, uh, where legal advice and 27 treasurers have advised individuals of certain 28 transactions and so forth. And the -- everyone 13 1 acknowledges that it was an error on the part of the 2 accountant, CPA, lawyers, misinterpretation of the law, 3 ambiguity in the law. Unfortunately, the penalty still 4 held, much to my own personal dismay. 5 Uh, fortunately, I didn't have to pay it 6 because everyone felt that they were the responsible 7 parties. But -- 8 Okay. Objection noted. 9 Ms. Richmond, please call the roll. 10 MS. RICHMOND: Mr. Horton. 11 MR. HORTON: Aye. 12 MS. RICHMOND: Ms. Steel. 13 MS. STEEL: No. 14 MS. RICHMOND: Mr. Runner. 15 MR. RUNNER: Aye. 16 MS. RICHMOND: Ms. Yee. 17 MS. YEE: Aye. 18 MS. RICHMOND: Ms. Mandel. 19 MS. MANDEL: Aye. 20 MS. RICHMOND: Motion carries. 21 ---oOo--- 22 23 24 25 26 27 28 14 1 MR. HORTON: Ms. Richmond. 2 MS. RICHMOND: Our next item is B5, JK Group, 3 LLC. 4 ---oOo--- 5 B5 JK GROUP, LLC 6 NO. 448306 7 ---oOo--- 8 MR. HORTON: Discussion, Members? 9 Is there a motion? 10 MR. RUNNER: Move to grant. 11 MS. STEEL: Second. 12 MR. HORTON: Moved by Member Runner to grant. 13 Uh, second by Member Steel. 14 Objection, Members? 15 MS. YEE: Objection. 16 MR. HORTON: Objection noted. 17 Discussion, Members? 18 Mr. Runner. 19 MR. RUNNER: Yeah, it seems to me that the 20 relevant -- relevant issue here is the fact of who held 21 the franchise. Clearly it was held by -- not by the 22 LLC. 23 Um, and that in, um, the -- the whole 24 discussion about the Secretary of State and liening the 25 LLC, again, those agreements and arrangements were all 26 made through Burger King International, or whoever, not 27 through that. 28 Seems to me I was convinced very easily that 15 1 Coca-Cola or whoever else would just go to the Secretary 2 of State's page and go ahead and decide who to go ahead 3 and lien against or put the lien against, you know, at 4 that point. 5 Uh, so I -- I'm convinced at that point for the 6 taxpayer. 7 MR. HORTON: Okay. Further discussion, 8 Members? 9 Ms. Richmond, please call the roll. 10 MS. RICHMOND: Mr. Horton. 11 MR. HORTON: No. 12 MS. RICHMOND: Ms. Steel. 13 MS. STEEL: Aye. 14 MS. RICHMOND: Mr. Runner. 15 MR. RUNNER: Aye. 16 MS. RICHMOND: Ms. Yee. 17 MS. YEE: No. 18 MS. RICHMOND: Ms. Mandel. 19 MS. MANDEL: No. 20 MR. HORTON: Subsequent -- 21 MS. RICHMOND: Motion fails. 22 MR. HORTON: Subsequent motion, Members? 23 MS. YEE: Move to sustain the Franchise Tax 24 Board. 25 MR. HORTON: Moved by Member Yee to sustain the 26 Franchise Tax Board. Second by Member Mandel. 27 Objection noted. 28 Uh, Ms. Richmond, please call the roll. 16 1 MS. RICHMOND: Mr. Horton. 2 MR. HORTON: Aye. 3 MS. RICHMOND: Ms. Steel. 4 MS. STEEL: No. 5 MS. RICHMOND: Mr. Runner. 6 MR. RUNNER: No. 7 MS. RICHMOND: Ms. Yee. 8 MS. YEE: Aye. 9 MS. RICHMOND: Ms. Mandel. 10 MS. MANDEL: Aye. 11 MS. RICHMOND: Motion carries. 12 ---oOo--- 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 C4, Mordehay 3 Rabinowiz. 4 ---oOo--- 5 C4 MORDEHAY RABINOWIZ 6 NO. 489446(AC) 7 ---oOo--- 8 MR. HORTON: Uh, Ms. Richmond, -- oh, we did. 9 I'm sorry. I was going to ask you about the medical 10 report. 11 Discussion, Members? 12 Is there a motion? 13 MR. RUNNER: Yeah, I'll start. I'll start with 14 at least a discussion. 15 Um, there -- there's a couple troubling issues 16 here for me with this particular case. One is that, um, 17 that there was no observation made. And especially 18 troubling to me in that it was -- this was a -- I'll get 19 it right -- SCOP-initiated process. And SCOP's role in 20 terms of the legislative -- what formed them, was to 21 actually go out and meet with taxpayers, see what their 22 issues are, and try to move them to conformity. 23 It troubles me that that was initiated by this 24 group, and the group never made any contact to observe 25 what was taking place and the kind of things that were 26 taking place in this -- in this particular, um, truck. 27 I think I am convinced, however, that certainly 28 there was some issues of record-keeping and problems 18 1 within the truck itself, and certainly probably selling 2 more taxable food than what it is that they identified. 3 I also am very troubled over the issue of the, 4 uh, the fraud penalty, uh, given the flimsy nature of 5 what it is that we knew, given the fact that we spent a 6 whole seven hours on this issue, um, and the size and 7 what -- and the consequence then of that applied fraud 8 penalty. 9 So, my motion would be this: That we would, 10 uh, remove the fraud penalty, and that we would, um, 11 find that the taxpayer had 50 percent taxable sales, uh, 12 and not the 75. 13 MS. STEEL: That's reasonable. 14 Second. 15 MR. HORTON: There's a motion on the table to 16 strike the fraud penalty and to adjust the taxable food 17 ratio from 75 percent down to 50 percent by Member 18 Runner. Second by Member Steel. 19 Objection? 20 MS. MANDEL: Um, yeah. Objection, and kind of 21 a comment generally on -- I mean, it's been a really 22 long time since I've seen a deletion of a fraud penalty. 23 But I -- and maybe it's, uh -- I don't know if it's 24 appropriate for a question to Mr. Levine. But I thought 25 sometimes the fraud gets reduced to negligence, but -- 26 MR. LEVINE: Had they not convinced us of fraud 27 in this case, we would have substituted negligence 28 because we would have found that he's at least 19 1 negligent. And you certainly can do that. You don't 2 have to if you find he wasn't fraudulent or negligent. 3 MS. MANDEL: Okay. 4 MR. RUNNER: So the option could be -- is the 5 option -- 6 MS. MANDEL: Well, I'm not -- I just -- I -- 7 since it's not happened, that I can remember -- I 8 just -- and you may not -- you know, you may be happy 9 with deleting the fraud. It's just that I, um, 10 remembered that I've seen things where it's been reduced 11 to negligence so I just wanted to mention it. 12 You don't -- 13 MR. RUNNER: Well, I actually would -- well, I 14 would actually -- I think there was negligence going on, 15 too. So, I mean, if -- if -- and I didn't think about 16 that. But I certainly would be fine with replacing the 17 fraud with the negligence if that's the -- 18 MS. MANDEL: I mean, I -- I -- you know, I was 19 just doing my educational thing -- 20 MR. RUNNER: Right. 21 MS. MANDEL: -- Mr. Runner. 22 MR. RUNNER: Yeah. 23 MS. MANDEL: I don't mean to mess you up. 24 MR. HORTON: The, uh -- Members, the scope of 25 the SCOP team -- I just had to say that. 26 MR. RUNNER: Scope, scoop. 27 MR. HORTON: Scope, scoop. 28 Uh, in the -- you know, is to initiate, um, a 20 1 process to allow the taxpayer to provide books and 2 records to support their position. And I believe 3 they've done that. That you -- you -- you can't go 4 beyond, uh, reality and what's available. 5 I mean, the taxpayer never made the books and 6 records available, any substantial books and records 7 available; never provided an opportunity for an 8 observation of any type; um, and then took the position 9 that there were no hot food sales at all, which is a 10 perpetuation of fraud, from my perspective. 11 Um, I mean, had the taxpayer concurred with the 12 evidence that they had previously provided, indicating 13 that there was some taxable information -- uh, sales, 14 50/50 or something of that in nature, but to perpetuate, 15 uh, a position that is inconsistent with the reality 16 presented by themselves causes me to pause on the intent 17 of the taxpayer to evade the tax altogether. 18 MR. RUNNER: I -- I -- I mean I think what you 19 have is a very unsophisticated businessman who did not 20 do his job very well. And that, to me, is a long ways 21 from fraud. 22 Now, in regards to SCOOP or SCOP, no, I believe 23 that -- I believe that the intention of -- my 24 understanding of the legislation that was put in place 25 and what we deal with is -- is that they are to do 26 business visits. They're to actually go out and see the 27 business and to give direction and help to the business. 28 They never did that with this guy. They never 21 1 went to him. And that, to me, is not what it is that 2 SCOP is -- SCOOP is supposed to be doing. They're 3 supposed to be giving direction, helping people move 4 into compliance. That's what the intention of the 5 legislation and the group is. They never did. 6 They did have opportunity to go see him. They 7 were aware of his route. They were aware of those 8 things and they never went to see if indeed he was 9 actually having -- and the nature of that hot food that 10 they think took place. 11 So, I think they did have opportunity. They 12 just didn't do it. And, again, I don't have any problem 13 with the fact that he was probably doing more than he 14 should have and he's an unsophisticated businessman who 15 got caught up in it. But, boy, the issue of fraud, to 16 me, is, I think, the line that I have challenges with. 17 MR. HORTON: Well, just two, uh, responses, I 18 guess. 19 Um, this process has a propensity to educate 20 you about your exposure. And it has a -- there's a 21 likelihood that going through this process of appeals, 22 R&Ds, hearings and so forth, there's certain, uh -- 23 there's an education that takes place. 24 And coming to the table I -- I was actually 25 with you. Uh, I was actually of a mind to adjust this 26 50 percent to allow for a 50/50 ratio on the taxable 27 sales in the absence of evidence to the contrary, to 28 actually be supportive of the position of the taxpayer 22 1 and to presume that the taxpayer was telling the truth, 2 until the position shifted. Uh, which, again, caused me 3 to pause. 4 And without evidence to the contrary, I can 5 only deal with the testimony before me. I can't 6 arbitrarily, uh, presume that the taxpayer's testimony 7 was due to their lack of knowledge or lack of awareness. 8 I have to presume that it's intentional, particularly 9 after going through such a deliberative methodical 10 process. 11 And I think SCOOP did -- SCOP did its job to 12 the extent that it was in a position to do its job. 13 But, um -- 14 MR. RUNNER: Well, I think it's worthy of us to 15 review what SCOP does then. If we -- if we actually do 16 believe as a Board that SCOP does not have -- that the 17 mission of SCOP is not to go out and visit individual 18 businesses, then I would suggest we, as a Board, need to 19 kind of review the role. Because that, to me, is a 20 giant removal of what I understand their job is. 21 So, maybe that's another issue we can come back 22 to in regards to whether or not SCOP can actually go out 23 and identify things, never see the business, and then 24 actually then do almost like a -- well, what was it -- 25 almost a desk audit. What was it called? Not a desk 26 audit, but a -- 27 MR. HORTON: Field billing order. 28 MS. MANDEL: Field billing order. 23 1 MR. RUNNER: With that field audit -- without 2 even going to them and see if that -- if we would 3 actually believe that that's within the realm of what it 4 is that the legislature intended for SCOP to do. 5 So I think that secondarily we need to -- I 6 would hope that we could follow up on that. 7 MR. HORTON: All right. I think that's, uh -- 8 although I think the vote today will articulate the 9 position of the majority of the Board, but I think it is 10 something that whenever a Member has concerns, we should 11 certainly address those. 12 MR. RUNNER: Well, the vote of the Board can't 13 change what the legislation did in terms of what their 14 job is. 15 MR. HORTON: Well, the Board is responsible for 16 interpreting it. And -- but -- I would support us, uh, 17 discussing it, though, Mr. Runner, which, I think, is a 18 win. 19 But, um, again, in defense of SCOOP, SCOP, 20 there are certain criteria to go to heaven; you know, 21 you've got to die first. Something's got to happen. 22 In this case, they got to be available. 23 They've got to provide something. They've got to 24 provide books and records. They've got to defend 25 themselves. They've got to say, uh, "Here are the 26 invoices. Here are my checks. Here's what I paid." 27 MR. RUNNER: But that's an audit. SCOP is 28 not -- see, I agree if they actually did an audit. But 24 1 we never did an audit. 2 MS. STEEL: And the taxpayer provided 20 names, 3 and we never really checked. 4 MR. HORTON: But of the -- 5 MS. STEEL: I had a -- 6 MR. HORTON: Of the actual documentation they 7 provided, each piece of documentation impeached their 8 credibility and their argument. 9 MR. RUNNER: No. I disagree with that. 10 Just -- no, we just didn't believe them. 11 They provided us a list of some items of which, 12 you know, eggs was an example, for instance. And we 13 instantly said, "Oh, well, eggs can't apply." 14 Now, again, I don't have any doubt there were 15 some things that were incorrect, and that's why it is 16 they still should be paying, I believe, the tax on 17 the -- on the 50 percent. 18 That being said, that's a long ways -- that's 19 why I'm okay with the negligent issue. But to go to 20 fraud, to me, is the stretch that we are taking here. 21 Um, they should have done better books. He was 22 negligent in keeping his books. But to say that there 23 was this calculated effort on the part of that man, an 24 unsophisticated businessman with a very small business, 25 to evade tax, I think is a stretch. 26 MR. HORTON: Further discussion, Members? 27 There's a motion on the floor by Mr. Runner -- 28 MR. RUNNER: Mm-hmm. 25 1 MR. HORTON: -- um, to reduce the taxable ratio 2 from 75 percent down to 75 -- 50 percent and to abate 3 the negligence -- I mean the fraud penalty. And second 4 by Member Steel. 5 Uh, Ms. Richmond, please call the roll. 6 MS. RICHMOND: Mr. Horton. 7 MR. HORTON: No. 8 MS. RICHMOND: Ms. Steel. 9 MS. STEEL: Aye. 10 MS. RICHMOND: Mr. Runner. 11 MR. RUNNER: Aye. 12 MS. RICHMOND: Ms. Yee. 13 MS. YEE: No. 14 MS. RICHMOND: Ms. Mandel. 15 MS. MANDEL: No. 16 MS. RICHMOND: Motion fails. 17 MR. HORTON: Subsequent motion, Members? 18 MS. YEE: Move to adopt the staff 19 recommendation. 20 MR. HORTON: Moved by Member Yee to adopt staff 21 recommendation. 22 Is there a second? 23 MS. MANDEL: Second. 24 MR. HORTON: Second by Member Mandel. 25 Objection noted. 26 Ms. Richmond, please call the roll. 27 MS. RICHMOND: Mr. Horton. 28 MR. HORTON: Aye. 26 1 MS. RICHMOND: Ms. Steel. 2 MS. STEEL: No. 3 MS. RICHMOND: Mr. Runner. 4 MR. RUNNER: No. 5 MS. RICHMOND: Ms. Yee. 6 MS. YEE: Aye. 7 MS. RICHMOND: Ms. Mandel. 8 MS. MANDEL: Aye. 9 MR. HORTON: Motion carries. 10 MR. HORTON: Ms. Richmond, what is our next 11 matter? 12 MS. RICHMOND: This concludes our business for 13 today. 14 MR. HORTON: Ooh. That's good. 15 MR. RUNNER: Time to go. 16 MR. HORTON: Uh, Members, we will recess the 17 meeting of the Board of Equalization and reconvene 18 tomorrow morning at 9:30. 19 ---oOo--- 20 21 22 23 24 25 26 27 28 27 1 REPORTER'S CERTIFICATE 2 3 State of California ) 4 ) ss 5 County of Sacramento ) 6 7 I, KATHLEEN SKIDGEL, Hearing Reporter for the 8 California State Board of Equalization certify that on 9 October 23, 2012 I recorded verbatim, in shorthand, to 10 the best of my ability, the proceedings in the 11 above-entitled hearing; that I transcribed the shorthand 12 writing into typewriting; and that the preceding pages 1 13 through 27 constitute a complete and accurate 14 transcription of the shorthand writing. 15 16 Dated: October 30, 2012 17 18 19 ____________________________ 20 KATHLEEN SKIDGEL, CSR #9039 21 Hearing Reporter 22 23 24 25 26 27 28 28