1 BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION 2 450 N STREET 3 SACRAMENTO, CALIFORNIA 4 5 6 7 8 REPORTER'S TRANSCRIPT 9 DECEMBER 19, 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: Kathleen Skidgel 26 CSR No. 9039 27 Juli Price Jackson 28 CSR No. 5214 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 Equalization Staff: Tax Counsel IV 17 18 For the Department: Monica Silva Tax Counsel III 19 Stephen Smith 20 Tax Counsel IV 21 Kevin Hanks Chief, Headquarters 22 Operations Division 23 For Petitioner: R. Todd Luoma Attorney 24 25 ---oOo--- 26 27 28 2 1 450 N STREET 2 SACRAMENTO, CALIFORNIA 3 DECEMBER 19, 2012 4 ---oOo--- 5 MR. HORTON: Ms. Richmond, what is our next 6 item? 7 MS. RICHMOND: Good morning, Chairman and 8 Members. 9 MR. HORTON: Good morning. 10 MS. RICHMOND: Our first item on today's agenda 11 is Item C, Sales and Use Tax Appeals Hearings; Item C5, 12 David A. Bartel. 13 Please come forward. 14 Board Proceedings has received contribution 15 disclosure forms for today's hearings from the parties, 16 participants and agents. All forms were properly 17 completed and signed. All parties, participants and 18 agents are on the alpha listing provided to your office. 19 Each person sitting at the table will be asked 20 to introduce themselves and, if necessary, their 21 affiliation with the taxpayer for the record. 22 Ten minutes is allocated for the taxpayer's 23 opening presentation, followed by ten minutes for the 24 Department's presentation, and five minutes is allocated 25 for the taxpayer for rebuttal. 26 Mr. Horton. 27 MR. HORTON: Mr. Levine, would you please 28 introduce the issues in this case. 3 1 MR. LEVINE: Good morning, Chairman Horton -- 2 MR. HORTON: Good morning. 3 MR. LEVINE: -- Members. David Levine with the 4 Appeals Division. 5 This is a rehearing in the petition of David 6 Bartel. The original Board hearing was held in March 7 2012, after which the Board upheld petitioner's 8 liability under Revenue and Taxation Code Section 6829 9 for the tax debts of Tracy Chevrolet, incurred during 10 the fourth quarter 2007. 11 Petitioner filed a petition for rehearing, in 12 response to which we recommended that the Board revise 13 its prior decision to remove the liability for amounts 14 incurred by the corporation prior to December 7th, 2007 15 on a prorated basis and to otherwise deny the petition 16 for rehearing. 17 The Board declined our recommendation and 18 granted the rehearing. 19 The issues are whether petitioner is liable for 20 any portion of the liability incurred by the 21 corporation, and, if so, how much. 22 I note that the Department has concluded that, 23 based on the Appeals Division analysis for the petition 24 for rehearing, the $600 prepayment penalty should be 25 removed. 26 MR. HORTON: Duly noted. 27 The taxpayer has ten minutes to make their 28 presentation. We would ask that you commence with your 4 1 introductions for the record. 2 MR. LUOMA: Thank you, Mr. Chairman. 3 Mr. Chairman, Members of the Board, I am Todd 4 Luoma. I'm an attorney here in Sacramento, and I 5 represent the taxpayer, David A. Bartel. 6 Uh, we are in agreement in -- primarily with 7 the recommendation of the Appeals Section except in two 8 respects: One was the computation of the tax; and then 9 the other is the penalty that still remains, uh, against 10 Mr. Bartel and, of course, against the -- the 11 corporation. 12 With regard to the computation of the amount of 13 tax between December 7th and December 20th, uh, this was 14 a corporation that was -- since Mr. Kraut, the original, 15 uh -- the person who had, uh, stolen money from, 16 embezzled money from the -- the corporation, uh, had 17 basically run the corporation into the ground. 18 Mr. Bartel came back December 7th. He was a 19 50-percent owner and had been out of, uh, daily 20 activities with the corporation for a number of years. 21 The corporation, uh, effectively was winding 22 down as of December 7th when he came back on and 23 effectively closed on December 20th. 24 The method used by the, uh, Appeals Section in 25 calculating the amount of tax, roughly 34,000, was a pro 26 rata over the entire period, as if sales in that 27 two-week period would have been the same as sales in any 28 other two-week period during the course of the quarter. 5 1 And that makes no sense. 2 Uh, now, I tried to obtain documents from a 3 variety of sources to identify specific sales that were 4 made during that time. I contacted Tracy Chevrolet, 5 the -- the new Tracy Chevrolet that had acquired. They 6 did not have records from December of 2007. 7 I checked with the DMV and they could not 8 access records from December of 2007. I checked with 9 Chevrolet, and they did not have records. But I was 10 able to locate some records with the FBI that had been 11 seized from Tracy Chevrolet in connection with the 12 prosecution of Stephen Kraut. 13 Uh, late yesterday I obtained some documents 14 from December of 2007. Unfortunately, they were 15 incomplete and did not give me specific information 16 about the actual sales that took place during that time 17 period. 18 But under 6829 the burden of proof is on the -- 19 on the Board to determine that taxes were collected and 20 not paid over. Uh, and it's Mr. Bartel's position, as 21 he had stated during the original hearing, that the 22 $10,000 he paid, he felt covered the amount of sales tax 23 that was incurred during that two-week period. 24 And on that basis, we request that the Board 25 determine that the 34,000 is an overstated amount and 26 that the correct amount was the 10,000 paid by, uh, 27 Mr. Bartel when he was, uh, with the -- during that 28 two-week period that he was with the corporation. 6 1 Second issue, uh, involves the penalty. Now, 2 the Board has not heard anything on the penalty as of 3 yet. A request for the relief from penalty was not 4 filed until after the original Board hearing. However, 5 the, uh, Appeals staff did include it in its analysis, 6 uh, that was submitted prior to the September hearing. 7 Uh, and it was included again prior to this hearing. 8 Stephen Kraut was convicted and sentenced last 9 March for eight years, with a requirement to reimburse 10 for $450,000 restitution, uh, to those who were harmed; 11 that does not include Mr. Bartel. He is not 12 participating in any of that restitution. 13 Uh, his actions -- Mr. Kraut's actions when 14 Mr. Bartel was not on the premises, when other people 15 were not on the premises, were nothing less than fraud 16 and embezzlement. 17 Effectively, what he did was disable the -- the 18 corporation from being able to comply with the sales tax 19 law by the -- by -- by reason of his embezzlement. 20 There are cases that were cited that are in your 21 materials that address that. Those are all federal 22 cases because those are the cases that have addressed 23 these types of issues. Where a corporation has been 24 disabled, the penalty should not be visited on the 25 corporation. And -- and when we submitted the request 26 for relief of penalty it was on behalf of the 27 corporation and, by extension, for Mr. Bartel since that 28 liability still, uh, exists. 7 1 So, we are requesting that the Board, uh, 2 consider the request for relief of penalty from the 3 corporation and grant that relief, thereby granting 4 Mr. Bartel relief as well. 5 And I'm prepared to answer any questions that 6 the Members may have. 7 MR. HORTON: Thank you. 8 We'll now go to the Department. The Department 9 will have ten minutes to make their presentation. We 10 would ask that you commence with your introductions for 11 the record. 12 MS. SILVA: Thank you. I'm Monica Silva, and 13 with me are Steve Smith and Kevin Hanks, representing 14 staff this morning. 15 Um, we are in concurrence with the Appeals 16 Division with the revised recommendation. It appears, 17 based on petitioner's argument, that we have two 18 outstanding issues: The computation of tax and, um, the 19 penalty. 20 The computation of tax, we're in agreement with 21 Appeals. Um, the Appeals Department used the fourth 22 quarter '07 return to come up with a prorated daily 23 amount of sales tax collected. There were no records. 24 The most reasonable records to look at would be the 25 fourth quarter self-reported, uh, self-assessed 26 return. 27 Uh, petitioner argues that the $10,000 that, 28 uh, was made as a partial remittance on that return, um, 8 1 was the amount of tax collected. But, again, there are 2 no records for that. And when you use that figure as 3 the sales tax collected, you come up with a daily 4 average tax of $714.25, which doesn't seem reasonable in 5 light of previous sales during that quarter. 6 And while, um -- as Appeals noted, while we 7 understand that the business was winding down, we're in 8 agreement that it's more likely that more sales may have 9 been made, or at least a consistent amount of sales 10 towards the end. 11 Given that there aren't any better way of 12 coming up with a reasonable amount, uh, the prorated 13 amount based on the reported fourth quarter return, um, 14 is the appropriate amount of liability in this case. 15 With respect to the penalty, um, as noted by 16 Appeals, uh, we have conceded the relief for the penalty 17 for the failure to file, which leaves the late filing 18 penalty. And as petitioner mentioned, a letter was, um, 19 received in July, um, submitting the request for relief 20 of penalty, petitioner arguing that he was entitled to 21 relief of it due to, um, Mr. Kraut's embezzlement. 22 The penalties under 6829 may be relieved only 23 if there's reasonable cause to relieve, um, Tracy 24 Chevrolet of those penalties. However, the petitioner 25 hasn't provided a reasonable cause for Tracy Chevrolet's 26 failure, um, to make a timely return. 27 As such, there is no basis for relief, um, for 28 relieving the penalty, uh, for the late filing. 9 1 MS. MANDEL: Is late filing -- 2 MR. HORTON: Um -- 3 MS. SILVA: Yeah, there's a, uh -- 4 MS. MANDEL: Or late payment? 5 MS. SILVA: -- penalty for late payment. 6 MS. MANDEL: Okay. 7 MS. SILVA: Late payment of return. 8 MS. MANDEL: Okay. 9 MS. SILVA: Yes. 10 MS. MANDEL: I think of that as different than 11 late filing. 12 MS. SILVA: Oh. 13 MS. YEE: Right. 14 MS. SILVA: Sorry. 15 MS. MANDEL: Thank you. 16 MR. HORTON: On rebuttal. 17 MR. LUOMA: Uh, Mr. Chairman, the, uh -- the 18 request for relief of penalty was submitted on behalf of 19 the corporation. Uh, Mr. -- uh, Bartel was the most 20 recent vice president prior to the time that it was sold 21 and, uh, went out of business. 22 But the relief was, in fact, requested and the 23 facts that were presented and the law that was, uh, 24 addressed in the request for relief dealt specifically 25 with the disabling of the corporation. In other words, 26 the actions of the president of the corporation, by 27 embezzling the funds, did, in fact, disable the 28 corporation, made it impossible for the corporation 10 1 itself to pay the liabilities. And to visit, on the 2 corporation, the penalty for the acts of the president, 3 uh, is inappropriate as laid out in the law that -- that 4 was submitted, uh, with the request for relief of 5 penalties. 6 And that disability is what is -- that 7 generates the reasonable cause that is appropriate for 8 relief of penalties in this case. And we request that 9 the Board grant that relief to the corporation, which by 10 extension would grant relief to Mr. Bartel. 11 MR. HORTON: Thank you. 12 Discussion, Members? 13 Member Runner. 14 MR. RUNNER: Yeah, let me just ask a little bit 15 about the nature of the business during those last two 16 weeks. Uh, because I guess that's really the core of 17 the computation. Um -- 18 MR. LUOMA: That's correct. 19 MR. RUNNER: When -- when Mr. Bartel stepped in 20 on December 7th, um, was it known at that time that that 21 is -- that the business was going to be winding down and 22 closing? 23 MR. LUOMA: Yes, because it was -- at that 24 point it was $10 million upside-down. 25 MR. RUNNER: Okay. Um, what was happening, 26 um -- for instance, was there advertising going on 27 during that time? 28 MR. LUOMA: I don't know whether there was 11 1 advertising at that time. They -- they continued 2 operating the business because they needed -- in order 3 to maintain the, um, the dealership, the franchise, they 4 had to maintain and keep the doors open, up until the 5 time they at least began the negotiations for the sale. 6 That began December 20th. They effectively stopped, uh, 7 any activity at that point, uh, other than to maintain 8 the dealership in such a way that they could sell it. 9 MR. RUNNER: From the 7th to the 20th, or from 10 after the 20th? 11 MR. LUOMA: Starting -- as of the 20th. 12 MR. RUNNER: Okay. 13 MR. LUOMA: There was no -- no transactions or 14 business that was conducted. It was a matter of just 15 maintaining the dealership so that they could complete 16 the sale. 17 MR. RUNNER: After the 20th? 18 MR. LUOMA: That's correct. 19 MR. RUNNER: Okay. But the discussion -- the 20 time period we're trying to deal with here is the 7th 21 through the 20th; correct? 22 MR. LUOMA: That's correct. 23 MR. RUNNER: Okay. 24 Um, in terms of the operation, I mean, why -- 25 if -- if -- if indeed the business was to be running as 26 normal, why would the, uh -- why would the sales be 27 different during the 7th through the 20th if -- I mean, 28 again, I was -- you know, I mean, again, I was looking 12 1 to see if advertising stopped or other kinds of things 2 would have stopped which would have then changed the 3 nature of people coming in the door and buying? 4 MR. LUOMA: Well, there was a significant 5 change because -- 6 MR. RUNNER: And what caused that change? 7 MR. LUOMA: Well, that change was because there 8 were no funds available. They were upside-down by 9 $10 million. They had no cash available to -- to 10 essentially do the trade-in business. 11 MR. RUNNER: Okay. 12 So it's trade-ins? Okay. That's what I'm 13 trying to get to. 14 What -- what operational differences took place 15 between the 7th and 20th that was different than how the 16 business operated in the beginning of the third -- of 17 the fourth quarter. 18 MR. LUOMA: And that, the primary change, uh, 19 that really made the difference was the inability to 20 take trade-ins. 21 MR. RUNNER: Okay. Okay. 22 So -- so no trade-ins -- so in terms of a 23 change of operation, different from the first part of 24 that quarter to the last part of that quarter, was you 25 could not take trade-ins. 26 MR. LUOMA: That's right, because they could 27 not afford -- they had no cash to pay off the trade-ins 28 to be able to then market those -- 13 1 MR. RUNNER: Were they taking trade-ins in the 2 first part of that quarter? 3 MR. LUOMA: Yes. 4 MR. RUNNER: Okay. 5 Um, how about just the normal business cycle of 6 car sales in the -- in a fourth quarter? Is the two 7 weeks -- is this -- would the -- would the last three 8 weeks or two weeks of the quarter, um, just in a normal 9 car business, be different than the, uh -- than October? 10 I mean, I don't know. 11 MR. LUOMA: Well -- 12 MR. RUNNER: I don't know. People buy cars 13 less the week before Christmas, uh, or is it the same? 14 I -- I'm just trying to get an idea as to whether or not 15 we assumed a cycle that doesn't exist. 16 MR. LUOMA: Well, as you see the advertising, 17 uh, today about trying to sell a variety of cars for 18 Christmas, uh, I think that is an indication that they 19 try to bump up their -- their sales -- 20 MR. RUNNER: Okay. 21 MR. LUOMA: -- during that time period. 22 Uh, but with -- with Tracy Chevrolet at that 23 time, they had no ability to really go out and market to 24 say, "We'll take in your trade-in, pay it off, and then 25 you drive away in your new car." 26 MR. RUNNER: How important are trade-ins to the 27 car business in order for people to buy a car? 28 MR. LUOMA: Well, I have not done a survey of 14 1 that, but it's, uh, most -- most transactions involve 2 trade-ins. And whether the company -- the car 3 dealership actually maintains the, uh -- and sells the 4 used car that it takes in or whether it shops it out to 5 a -- another used car saler or wholesaler, uh, you know, 6 those are various activities that they participate in. 7 MR. RUNNER: Okay. 8 MR. LUOMA: But it's -- it's important to 9 the -- to the functioning of any new car dealership to 10 be able to take in trade-ins. 11 MR. RUNNER: Okay. 12 Did we -- and let me go to the Department. Did 13 we calculate in the fact or observe that the business 14 then had to operate differently, um, during those two 15 weeks as opposed to the previous quarter or previous 16 days in that quarter, like, for instance, with a lack of 17 trade-ins? Would that enter into our calculation 18 at all? 19 MS. SILVA: I -- I'm not sure about the lack of 20 trade-ins. But I think our view is that, in this 21 particular situation, at the end of the year when people 22 probably are buying more cars and this -- this 23 dealership needed to sell cars, that there was 24 probably -- maybe more emphasis in just selling cars. 25 What -- 26 MR. RUNNER: Why do we think that? 27 MS. SILVA: They had all this inventory. The 28 more they could -- they could sell, the better it would 15 1 be for this company. The bank was there. 2 MR. RUNNER: Mm-hmm. 3 MS. SILVA: They wanted these cars sold. They 4 wanted the money for these cars. 5 So what -- 6 MR. RUNNER: Do we -- okay. 7 MS. SILVA: I mean, this is just what we're 8 thinking. But without -- 9 MR. RUNNER: Well, okay. I appreciate that's 10 what we're thinking. I just don't think we're in the 11 car business. Uhmm -- 12 MR. HANKS: Mr. Runner -- 13 MR. RUNNER: Let me ask you this then; if 14 that's what we were thinking there, did we -- do we have 15 any thought to the fact of how not taking trade-ins 16 affects the car business? 17 MR. HANKS: Mr. Runner, I don't think that -- 18 that we necessarily looked at -- at, uh, their ability 19 to take in trades during this particular time. I think 20 what we were concentrating on is -- is how can we 21 approximate what the sales tax obligation would have 22 been for this 14-day period. 23 And I think the best information available were 24 the self-assessed returns that were filed by the 25 business that declared what those taxes collected were. 26 MR. RUNNER: For the whole quarter. 27 MR. HANKS: For the entire quarter. 28 MR. RUNNER: Right. 16 1 MR. HANKS: Now, at the same time, um, we're 2 also mindful, just given our knowledge of the industry, 3 that typically the fourth quarter of -- of any year are 4 high sales quarters. 5 As -- as we read the papers today, I think we 6 see probably more vehicle advertisements than -- than 7 ever. I think the biggest -- 8 MR. RUNNER: Do we know if they were 9 advertising during this time? 10 MR. HANKS: Uh, no, we don't have that 11 information -- 12 MR. RUNNER: Okay. 13 MR. HANKS: -- in front of us. But it's very 14 typical for most dealerships to heavily advertise, um, 15 especially in November and December. Those are the -- 16 the large selling periods for -- for any automobile 17 dealership. 18 Um, I think November, in particular, is very 19 high. But it continues through December as well. 20 MR. RUNNER: Okay. And -- and -- and I -- 21 that's why I'm trying get if there's a cycle, I don't 22 know. I do know there's a lot of advertising. The 23 question with advertising in businesses, are you 24 advertising in order to get more sales? 25 MR. HANKS: Sure. Sure. 26 MR. RUNNER: Or are you advertising in order to 27 keep your sales constant through the year? 28 MR. HANKS: Right. 17 1 MR. RUNNER: Um, you know. So I don't know if 2 we're -- I don't know if we're expert enough to know the 3 business cycle of car sales -- maybe we are -- um, in 4 order knowing that the fourth quarter is normally higher 5 than the second quarter or first quarter. 6 MR. HANKS: Right. Right. We do. That's -- 7 that's our historical knowledge. 8 MR. RUNNER: But -- but my question is, okay, 9 we took -- we took that into our knowledge base in 10 regards to calculating the tax for the last -- for the 11 last two weeks or for the 7th through the 21st. Did we 12 take into our knowledge base any studies or any thought 13 in regards to how taking -- not being able to take in 14 trade-ins during that period of time would negatively 15 affect the sales? 16 MR. HANKS: That particular element wasn't 17 considered. 18 MR. RUNNER: Do we think -- 19 MR. HANKS: Um, I don't know that that would 20 necessarily impact, uh, the -- the businesses as the 21 petitioner's describing, their ability to -- to take in 22 trades. Um, I don't know what their -- their situation 23 was in November and December. 24 But it is typical for people to -- to take in 25 trades. Some people do that. Other people sell their 26 own cars. Other people retain their cars and just buy 27 new cars outright. 28 Um, so I don't know their ability to -- to take 18 1 in trades would necessarily influence their -- their 2 ability to sell these cars. 3 MR. RUNNER: You don't think it makes -- okay. 4 What I'm hearing you say is you don't believe it makes 5 any difference to a car dealer whether or not they have 6 the ability to take in trades or not. 7 MR. HANKS: No. I think what -- what I'm 8 saying is that -- that I don't know how their cash flow 9 necessarily had any impact on their ability to take in 10 trades. Because -- 11 MR. RUNNER: You think their -- 12 MR. HANKS: -- they're typically flooring these 13 automobiles and they're going to be paid -- paid, um, 14 for these automobiles as they're sold. As they're 15 documenting their sales, they're cross-receiving funds 16 from -- from the purchaser, but they're also receiving 17 funds from the person that's -- that's financing the 18 transaction. 19 So I think irrespective of whether or not 20 there's a trade-in involved, they're -- they're still 21 going to be receiving gross receipts from the sale of 22 that vehicle. 23 MR. RUNNER: So your opinion is that the 24 operation of a car dealership is the same in terms of 25 the financing exposures and needs for financing whether 26 you take in a trade or whether you don't take in a 27 trade, that should not have any effect in regards to how 28 it is that the cash flow operates within a car business? 19 1 MR. HANKS: I wouldn't say that it doesn't have 2 any impact. I would say that -- 3 MR. RUNNER: Well, we have -- we decided it 4 didn't because we didn't give it anything. 5 MR. HANKS: Well, we don't have any information 6 relating to their ability to take in trades. The 7 information that -- that we have in the absence of any 8 accounting records for this time period is their 9 self-reported amounts that declare these are the amounts 10 of sales tax collected during this period. 11 MR. RUNNER: Right. 12 MR. HANKS: There's no other information for us 13 to use to -- to estimate the -- the taxable transactions 14 within this pertinent period based on any other data, 15 really, other than the pro rata data that -- that's been 16 calculated. 17 MR. RUNNER: Okay. Let me just go back then to 18 the -- to the taxpayer representative then. 19 Um, again, do we have any documentation or do 20 we know for sure that trade-ins were not being able to 21 be taken in during this period of time? 22 MR. LUOMA: During the original hearing 23 Mr. Bartel testified that he could not take trade-ins. 24 He also stated that most of the vehicle sales of the 25 inventory were wholesale, uh, to other dealers because 26 he needed to clear the lot. 27 MR. RUNNER: Liquidate. 28 MR. LUOMA: And, of course, the wholesale 20 1 transactions are not subject to sales tax because they 2 were not sold at retail. They're sold at retail by the 3 dealers who acquired those. But that was Mr. Bartel's 4 testimony. 5 MR. RUNNER: So most of the sales that -- 6 during his period of time, so seven days, he had a 7 greater number of sales that were wholesale or to sell 8 for resale than previous to when he had -- when he took 9 over? 10 MR. LUOMA: That's correct. Because normally 11 they wouldn't wholesale the, uh -- the, uh, new car 12 inventory because a functioning company would want to 13 sell those because that's where they're going to make 14 their profit. 15 Uh, but the company was -- was winding down, it 16 was going to go out of business. And all he was trying 17 to do was to be able to sell the dealership. That was 18 his focus at the time he came in because, uh, Bank of 19 Hawaii had a complete lockdown on all of the assets of 20 the company and would not fund the money to acquire, to 21 be able to pay off the trade-ins. 22 If there were trade-ins without payoffs, yeah, 23 that transaction could have taken place. I don't know 24 how many, if any, there were. But most trade-ins have a 25 debt on those and they have to have cash to be able to 26 pay those off so that they can take title to the -- to 27 the vehicle and then be able to either sell it 28 themselves or to shop it to a wholesaler. 21 1 MR. RUNNER: Okay. Thank you. 2 MR. HORTON: Member Yee. 3 MS. YEE: Um, thank you, Mr. Chairman. 4 I may have missed this point, but, um, a 5 question for the Department. Uh, I thought that there 6 had been a reference in the case materials about, um, 7 the Board having possession of the vehicle sales 8 contracts for, um, the period of time from July 5th 9 through November 24th of '07. 10 MS. SILVA: We -- yes, we did have, um -- I did 11 go back and look to see if we could use that 12 information. But the contracts were, um, from as early 13 as July 5th, um, and as late as November 24th. 14 MS. YEE: Mm-hmm. 15 MS. SILVA: But there were only a total of 15 16 contracts. 17 MS. YEE: Oh, okay. Okay. 18 So even though you have those contracts in 19 their entirety it was only 15? 20 MS. SILVA: It wasn't enough to use. And I 21 think that's why we -- without any other specific sort 22 of realistic information, we used the self-assessed 23 fourth quarter return -- 24 MS. YEE: Okay. 25 MS. SILVA: -- to come up with the prorated 26 amount. 27 MS. YEE: Gotcha. Great. Thank you. 28 MS. MANDEL: Question. 22 1 MR. HORTON: Member Mandel. 2 MS. MANDEL: Um, First -- First Hawaiian Bank, 3 were they the -- like the floor financier for the -- I'm 4 trying to figure out if there might be any information 5 that they might have in terms of car sales. 6 MR. LUOMA: First Hawaiian Bank was the -- did 7 provide the floor. And they had people onsite during 8 this time period. 9 MS. MANDEL: Um, so they would -- money from 10 sales, they would take, presumably to pay on their floor 11 finances. 12 MR. LUOMA: Pursuant to their security 13 agreement, that's correct. 14 MS. MANDEL: And, um, presumably they're not -- 15 you're not taking in new inventory from Chevrolet during 16 this time period? 17 MR. LUOMA: That's correct. 18 MS. MANDEL: Just wondering if, um, you know, 19 it's still -- I'm just wondering -- excuse me -- if the 20 bank or the things that you -- people you contacted -- 21 and it's been a while so I don't know what the bank 22 would have. But I'm just wondering if the bank would 23 have information of the receipts that they were getting 24 in during this time period? 25 MR. LUOMA: It's possible. That was one source 26 I did not pursue. Didn't think of it actually. 27 MS. MANDEL: Okay. And, um, is there -- is 28 there, uh -- I wonder, is there any -- if he was getting 23 1 ready to sell the dealership -- which happened some 2 point after December 20th, or that was when it was sold. 3 I don't remember. 4 MR. LUOMA: No, the -- it closed in, I believe 5 it was mid-March of 2008. 6 MS. MANDEL: Okay. Um, I was trying to think 7 if there was any -- just straight inventory record of 8 what was in inventory, um, at the different points? 9 MR. LUOMA: There would be if I had access to 10 complete records. 11 MS. MANDEL: Right. 12 MR. LUOMA: Again, what I recovered from the 13 FBI was -- was not a complete record. There were some 14 journals, uh, but it wasn't helpful in determining 15 exactly what transactions took place. 16 MS. MANDEL: Right. I was thinking more in 17 terms of not -- not necessarily -- for inventory 18 wouldn't necessarily have dollars assigned to "I sold 19 this car. I sold this car. I sold this car." But 20 something that might show when the other guy left or 21 right when this guy came in, December 7th, something 22 that might show we had, um -- I don't know how big a 23 place this was. But, you know, we had -- we had 50 cars 24 on the lot of, you know, these different types, would be 25 even more detail. We, um -- you know, never got more. 26 And December 20 when we shut down, we still had, like, 27 six that we hadn't been able to unload. Or we unloaded 28 them all and then that just -- then what's left is 24 1 wholesale versus not. 2 I mean then in terms of, you know, if we had, 3 um -- I don't know what Chevrolet makes. Oh, my God. 4 If we had such-and-such cars on the lot -- 5 MS. SILVA: Corvette. 6 MS. MANDEL: -- and, you know, then they sell 7 for, I don't know, six grand or something. Whatever 8 they sell for, thirteen -- 50 grand. 9 MR. HORTON: Mm-hmm. 10 MS. MANDEL: I'm just trying to think of things 11 that -- other types of things then, each specific sale 12 that might give some sense of how many cars there 13 actually were. 14 I mean, I hear that it's only $715 of tax a 15 day. Um, I don't know if -- I mean, that's selling cars 16 every single day. I don't know -- I -- I don't have a 17 sense of what $10,000 -- you know, I haven't done the 18 math fast and how many retail sales that would be of 19 cars on average. How many cars versus when you take 20 into account the wholesales. 21 But I was just kind of thinking of this 22 inventory start and stop, if there -- 23 MR. LUOMA: I don't think that was part of 24 Mr. Bartel's thought process when he came in, is to 25 determine what do I have left and what do I -- what can 26 I sell? You know, whatever was on the lot was on the 27 lot. And he either had to sell it or, what his primary 28 focus was, to sell the dealership so at least he could 25 1 save as much out of it as possible. 2 I don't think the thought process was, uh, to 3 determine, for sales tax or other purposes, uh, you 4 know, what's the state of it -- you know, beginning and 5 ending, starting December 7th versus, uh, December 20th. 6 I think his -- his picture, what he was looking 7 at, was the big picture which was to sell the 8 dealership, stop the bleeding, uh, and try to recover as 9 much as possible. And then, uh -- and, of course, as a 10 part of the -- the sale transaction, the Board of 11 Equalization was involved in that. 12 MS. MANDEL: Right. 13 MR. LUOMA: Which you'll recall from the 14 original hearing. They were involved in the 15 negotiation. And -- and the Board received $200,000 out 16 of that, uh -- out of that, uh, negotiation that 17 concluded in March of 2008. 18 MS. MANDEL: Okay. Um, this is for the end of 19 2007. I mean, um -- um, based on -- based on the -- the 20 allocation that's been made -- 21 MR. HANKS: Mm-hmm. 22 MS. MANDEL: -- um, what is that in terms of 23 gross sales? Do you guys know, staff? Do you have a 24 sense? 25 MR. LEVINE: It's about a half million dollars 26 measure at eight percent, just a rough calculation. 27 Which is, like, under two cars per day if they were 20 28 to 25,000. 26 1 MR. RUNNER: Mm-hmm. 2 MS. MANDEL: Um, and you haven't -- you haven't 3 checked with the bank yet to see? 4 MR. LUOMA: No. 5 MS. MANDEL: Um -- and is -- dollars off the 6 car sales probably, is that pretty much what they'd be 7 getting other than -- I mean, that -- 8 MR. LUOMA: Well, there would be the carve-out 9 for the sales tax of course. Um -- 10 MS. MANDEL: Right. I'm just -- if you wanted 11 to see whether the bank had information about how much, 12 um, receipts they were pulling in from the car 13 dealership during this limited period of time to see if 14 it's less than the -- whatever he said, 500. 15 What -- 16 MR. HANKS: Ms. Mandel. 17 MS. MANDEL: What, Mr. Hanks? 18 MR. HANKS: Yes. If I could -- if I could just 19 comment on that. I think that's an excellent idea, uh, 20 because we hadn't thought of that either. I think it 21 would give us a clearer indication of -- of what those 22 sales were of new vehicles during that time period. 23 What it wouldn't cover, however, are any of the 24 used car sales that -- that he had on the lot that he 25 also sold during that time period. 26 MS. MANDEL: Well, and it doesn't get you to a 27 wholesale -- well, unless they were -- the sales tax 28 would not go there. So -- 27 1 MR. LUOMA: That's correct. 2 MS. MANDEL: So the bank records actually would 3 not get you the wholesale/retail split. So it might not 4 be that helpful. 5 MR. LUOMA: And if I could comment on the -- on 6 the sale of the used cars on the lot. Uh, the bank had 7 a security agreement, security interest in everything, 8 uh, including all assets, accounts, and everything else. 9 And so they would have recovered, uh, monies from the 10 sale of used cars as well pursuant to their security 11 agreement. 12 But, again, I don't know if the bank would have 13 accounted for them transaction-by-transaction to be able 14 to come to an estimate of some sort on the sales tax. 15 MS. MANDEL: The actual retail, yeah. 16 MR. HANKS: That's correct. 17 MS. MANDEL: So it might not be helpful. Let 18 me, um, ask about something else. 19 My understanding from the Appeals 20 recommendation on the penalty is, um -- oh, I don't know 21 what a polite word is -- sort of ducking -- that's not a 22 polite word -- the, um, embezzlement aspect. Because 23 once the conclusion was that Mr. Bartel's not 24 responsible until December 7th when he's in there and 25 doing this -- you know, when he's responsible, then 26 the -- as to Mr. Bartel, the penalty falls off and is 27 only there for the -- with respect to tax during -- you 28 know, and sales made during his time. 28 1 So, I guess, um, my sense is that, as to the 2 company with respect to the sort of embezzlement, fraud 3 aspect of Mr. Kraut, that the view likely was, well, 4 that aspect is taken care of vis-a-vis Mr. Bartel, um, 5 because of the split. And that, um, I guess what 6 they're sort of saying is, even though it is a penalty 7 relief request on behalf of the corporation, that 8 somehow -- that somehow that pre Mr. Bartel period for 9 the corporation and their penalties, not really before 10 us in that sense; is that right, Mr. Levine, or not, 11 right? Or -- 12 MR. LEVINE: In a sense. But we concluded 13 that, at least as to the amount that remains at issue, 14 the corporation was not entitled to relief for that very 15 reason because we're talking about penalty on an amount 16 of tax that for which reimbursement was collected, 17 otherwise petitioner wouldn't be liable. So we don't 18 think that the corporation should be relieved of that. 19 And as far as the portion of the penalty for 20 the period before, we don't need to decide it. 21 MS. MANDEL: We don't need to decide it 22 because -- 23 MR. LEVINE: The corporation isn't before us. 24 We only need to decide it to the extent that it affects 25 our taxpayer here. 26 MS. MANDEL: Okay. So then it really comes 27 down to -- 28 MR. LEVINE: Exactly what you said. 29 1 MS. MANDEL: -- whether the 10,000 is the right 2 number or the -- I mean, can you address the -- is there 3 anything to address as to the penalty -- 4 MR. LUOMA: I realize that the penalty is -- is 5 now a significantly lesser number than it was before we 6 started this process. Uh, but since I'm here and 7 appearing -- 8 MS. MANDEL: Yeah. 9 MR. LUOMA: -- I'm going to argue that. 10 MS. MANDEL: Right. 11 MR. LUOMA: Even though it may be a -- only a 12 3,000, $3400 number. 13 MS. MANDEL: Right. 14 MR. LUOMA: But it's appropriate, I think, 15 given the circumstances, uh, even for the corporation, 16 that relief be granted because the corporation was the 17 one that was harmed by Mr. Kraut's actions. And by 18 extension, of course, it harmed Mr. Bartel. And to hold 19 Mr. Bartel responsible for a penalty for which he had -- 20 for which he was also, uh, defrauded by Mr. Kraut, had 21 no idea until he showed up on December 7th. Or at least 22 there were indications that there was a problem and 23 that's why he came back in on December 7th. 24 MS. MANDEL: Right. But what about for the 25 period December 7th to the 20th, how does -- does the -- 26 Mr. Kraut's fraud affect that part once he's out, or the 27 bank? I mean, with -- as Mr. Levine said, what Mr. -- 28 once Mr. Bartel's in there, um, and collecting, doing 30 1 the sales and collecting the sales tax and being 2 responsible -- and I know Mr. Bartel's view is, "I paid 3 over, with my 10,000, all the sales tax for transactions 4 during that period." 5 But how -- how does the argument about the 6 penalty apply to that period once he comes back in? 7 MR. LUOMA: Well, arguably because the -- the 8 action taken by Mr. Kraut didn't just have no 9 consequence after December 7th. The consequence was 10 that when Mr. Bartel came in, they had a negative net 11 worth of $10 million. And the ability to fix that -- 12 and again, his -- his focus on fixing it was to sell 13 the -- to stop the problem, sell the dealership and try 14 to fix everybody, make everybody whole as much as 15 possible, including the Board of Equalization, which 16 agreed to a $200,000 payment, uh, when the -- when the 17 dealership was sold, when the transaction closed in 18 March of 2008. 19 Um, and arguably, that should have been, uh, 20 the resolution for whether or not the penalty should 21 apply to Mr. -- uh -- Mr. Bartel. He took actions to 22 try to make everybody whole, including the Board of 23 Equalization. He thought he had made them whole when 24 they participated in the transaction, uh, that sold the 25 dealership by agreeing to take 200,000. 26 The Board could have taken all of the money 27 if -- if they chose to do so because they had a position 28 that, arguably, may have been ahead of everybody else. 31 1 But, in any event, that's the, uh -- he took 2 action, uh, to resolve the liabilities, not only to, uh, 3 the Board of Equalization as well as to the, uh -- to 4 the bank and to all other creditors. Unfortunately, it 5 fell short. 6 But his actions should not be penalized for any 7 failures. It was all driven by Mr. Kraut. And because 8 Mr. Kraut was no longer there on December 7th does not 9 mean there wasn't an impact on the corporation. 10 MS. MANDEL: Okay. 11 MS. STEEL: I just have -- 12 MR. HORTON: Further discussion, Members? 13 MS. STEEL: -- question. 14 MR. HORTON: Member Steel. 15 MS. STEEL: I thought this taxpayer had a good 16 intention and paid $10,000, uh, tax for, uh, partial 17 taxes on fourth quarter of 2007. 18 And we prorated that amount for the whole four 19 quarters. What was the basis of that? 20 MS. SILVA: The proration of the -- 21 MS. STEEL: Yeah. 22 MS. SILVA: -- entire return, or the $10,000? 23 MS. STEEL: $10,000. 24 MS. SILVA: To give credit. 25 MS. STEEL: Right. 26 MS. SILVA: Because the $10,000 was a -- as we 27 were prorating it, was an amount towards the entire 28 liability. So he should have credit for the prorated 32 1 amount of the $10,000, was our thinking, towards the -- 2 MS. STEEL: Right. 3 MS. SILVA: -- the liability, the prorated 4 liability. 5 MS. STEEL: But when he took over December 7th, 6 that he paid it during that time means that at least 7 that has to be covered for during his period of, you 8 know, responsible period, that 2000 -- December 7th 9 to -- what was the last day -- December 20th -- 10 MS. SILVA: Mm-hmm. 11 MS. STEEL: -- 2007. 12 So, when you think just, um, as a reasonable 13 way that this taxpayer tried to cover something on 14 behalf of himself, not somebody that who, you know, 15 messed up the business and tried to take the tax away. 16 So, when I was reading this class -- I mean 17 case, you know, I was thinking, he tried to show good 18 faith here to pay taxes. But at least that has to be 19 going to credit to his portion of it. That's the way I 20 thought. 21 So -- 22 MS. SILVA: And -- and our position is he was 23 given credit for the portion that he was prorated for 24 off the $10,000 that went into the return and the -- and 25 the partial payment for the corporation. There was 26 nothing, when the $10,000 came in, to apply it, you 27 would actually probably apply it to the earliest 28 liability. But in this case, in order to try to be as 33 1 fair as possible, it was prorated against his prorated 2 liability to give him credit, some amount of credit for 3 the $10,000 that was paid to the corporation. 4 MS. STEEL: So that's our practice when you 5 just pay it, Mr. Levine? So -- 6 MR. LEVINE: No. Ms. Silva is correct. 7 Probably should have just applied it to the earlier. 8 It was paid on behalf of the corporation, not 9 on behalf of him personally. I think we can all accept 10 that he wasn't thinking about personal liability at that 11 time. No one does. 12 MS. STEEL: Well, he tried to cover whatever he 13 can, so -- 14 MR. LEVINE: Right. 15 MS. STEEL: Right. 16 MR. LEVINE: But he reported for the whole 17 quarter, and he paid a payment which was for the whole 18 quarter. Didn't specify "Only pay for the period once I 19 became responsible." And technically, it should have 20 probably gone to the earliest portion. But in our 21 recommendation, as Ms. Silva said, we tried to be fair 22 and say, "Well, let's just prorate it." 23 MS. STEEL: So if taxpayer wrote it that this 24 is from December 7th through December 20th, then we 25 apply it for those dates? 26 MR. LEVINE: Yes, I think we would. That's 27 what the CPPM says. And if they're making a partial 28 payment, they can designate. 34 1 MS. STEEL: The date. 2 MR. LEVINE: And, unless there's some reason 3 not to do it, I think we'd accept it. 4 MS. STEEL: Okay. Thank you. 5 MS. MANDEL: Um, question. 6 MR. HORTON: Member Mandel. 7 MS. MANDEL: She reminded me of my other 8 question. 9 Um, I know you have a records issue. Um, were 10 there -- I don't know if I should ask this. 11 What was the state of the funds for the company 12 when he came back in? 13 MR. LUOMA: Well, there was the negative -- 14 MS. MANDEL: Negative net worth. 15 MR. LUOMA: -- $10 million, net worth. Uh, and 16 there was no indication that there was any cash that was 17 available. All cash that came in after the fact were 18 from those transactions, uh, that did take place, 19 whether they were wholesale or retail. 20 MS. MANDEL: Okay. So that, um -- so if there 21 was no cash when he came in, and any cash that was paid 22 to the Board with the return was from funds generated -- 23 was from funds generated during his responsible period. 24 Um, I understand that the payment wasn't 25 designated when it came on the return, um -- and 10,000 26 is a nice round number which one might not normally 27 expect for sales tax. But if there were no funds when 28 he came in, um, would that -- it kind of sounds like it 35 1 might affect, um, where the money could get allocated. 2 Do you have a -- 3 MR. LEVINE: Yeah, I don't agree. Um -- 4 MS. MANDEL: I didn't -- 5 MR. LEVINE: I don't even think that he had any 6 intent -- I'm just guessing, that's all we can do. I 7 don't think he had any intent that this is only for my 8 share. He reported the whole quarter and he made a 9 payment of what he -- 10 MS. MANDEL: No, no. I understand. I 11 understand he reported the whole quarter and that he 12 didn't think he -- you know, 6829 liability is probably 13 not something that anyone thinks about until they've had 14 the problem. 15 Um, but I'm just -- what I'm saying is that -- 16 that -- his -- his argument here under 6829 is, I should 17 get -- I should get the full 10,000 credited to whatever 18 it is you guys think I'm liable for, for that last 19 period. I think it should only be ten grand, but if you 20 think it's this other number, I still think I should get 21 the -- the -- the full amount. 22 And, um, I understand he didn't designate the 23 funds at the time. Um, he was just trying to, you know, 24 put in the return with the amount. What I'm saying is, 25 if there was no funds available when he came in and the 26 only funds were funds that were generated from sales 27 during -- when he had -- when he had control and was 28 selling cars and getting sales tax reimbursement, to the 36 1 extent that he was selling retail cars, and he sends ten 2 grand with the knowledge of those, um -- with -- with 3 that information, and he's saying it really should be 4 all, um, put to -- to this time period, that's -- I know 5 he didn't designate it at the beginning. 6 MR. LEVINE: I'd accept it's more likely than 7 not that the -- that money was generated once he became 8 responsible. I'd accept that. 9 Um, and, of course, if the Board wants to 10 direct otherwise, it wasn't our recommendation, for the 11 reasons stated in the analysis, and I've explained, but 12 of course the Board can direct. 13 MS. MANDEL: Well, yeah. I -- I -- I had not, 14 uh, noticed before, and that's why I had the question in 15 my materials about whether there were any funds 16 available when he came in. But that was why I -- I had 17 the question. 18 Is there -- 19 MR. HANKS: We -- we would also just add to -- 20 to what Mr. Levine spoke about is that, to our 21 knowledge, the dealership never -- never closed their 22 operations and turned off the lights. And so, to our 23 knowledge, they were continuing to -- to pay for 24 utilities or continuing to pay for -- for rent at their 25 space or paying their salaries and such. 26 So it appears as though there -- there were 27 sufficient resources to -- to pay other obligations 28 during that time period. 37 1 MS. MANDEL: When you say during that time 2 period, what time period? 3 MR. HANKS: During December. During -- during 4 that particular time -- 5 MS. MANDEL: Well -- 6 MR. HANKS: -- in December. 7 MS. MANDEL: -- and that's part of why he's 8 being held responsible for December, for -- during that 9 last -- well, I guess that's most of December, the 7th 10 through the 20th. 11 MR. HANKS: Right. Right. 12 MS. MANDEL: But the question is -- is he paid 13 $10,000 with the return. Part of his argument is, 14 "That's all the tax that was owed during my time, so go 15 home." 16 But, the other thing that he has asked for, 17 which is what Ms. Steel was pursuing that made me 18 remember my question, was, even if you're going to hold 19 me liable for whatever the dollar amount is you're going 20 to hold me liable for -- and, you know, here it's 21 whatever it is. 22 MR. HANKS: Mm-hmm. 23 MS. MANDEL: You know, the staff 24 recommendation's still at 39,000. Even if you're going 25 to hold me liable for that much tax, the 10,000 should 26 be wholly allocated to that 39. 27 So -- 28 MR. HANKS: Right. 38 1 MS. MANDEL: -- it doesn't have -- necessarily 2 have to do with whether they were paying other things 3 during the time period December 7th to the 20th, because 4 that's the basic, "Are you liable?" You know, the 5 willfulness thing. 6 It's really just the payment that was made to 7 the Board, how should the Board put it? 8 MR. HANKS: Right. Right. 9 MS. MANDEL: And it's been allocated throughout 10 the whole quarter and he's getting credit for some. And 11 I'm just saying, if -- if there were no funds and if all 12 the funds were generated from the sales during the time 13 that Mr. Bartel is liable, I understand why the -- with 14 the payment coming without a designation, that, you 15 know, whatever the normal rules are, or Appeals may feel 16 that they were nice to spread it out and give him some 17 recognition of it on a pro rata basis. 18 But if there were no funds available when he 19 came in, so it's not like, you know, somebody took sales 20 tax that was reimbursement that had been collected and 21 was there and maybe, you know, used it for some other 22 purpose in the business during the time that he was 23 there. 24 But if there was no funds available and 25 everything was generated from sales during the time, 26 that Mr. Bartel acknowledges and that the Board had 27 found and everybody -- you know, that he was 28 responsible, why, with that information, wouldn't it be 39 1 credited to whatever his liability turns out to be? 2 That's -- 3 MR. HANKS: Right, right. 4 MS. MANDEL: So it's really about the credit -- 5 MR. HANKS: Right, right. Exactly. 6 MS. MANDEL: -- which is kind of in your 7 department a little bit. 8 MR. HANKS: Right. Right. 9 Um, I would, again, also have to agree with 10 Appeals. In using the pro rata allocation, I think 11 because the -- the amounts weren't directed, they 12 weren't identifiable to any particular part of -- of 13 that quarter, I think we'd -- we'd come to the same 14 conclusion that we should do a pro rata. 15 But then secondarily -- and this is something I 16 should have mentioned before -- I know that Mr. Bartel 17 had indicated to us that early on in December when he 18 came on the scene, that there was an inventory valuation 19 done of -- of the vehicles at the dealership. And I 20 think that valuation was approximately two-and-a-half 21 million dollars. 22 Now, at the end of December, during this -- 23 this single one-month period, a CPA came onsite and did 24 a secondary valuation of -- of all the inventory and 25 found that that inventory valuation, um, was 26 approximately -- what was it -- $1.3 million. 27 So it indicated to us that at least 28 $1.1 million worth of inventory was sold during that 40 1 time period. And that just reflects the cost of -- of 2 those vehicles. Doesn't reflect any market. 3 MS. MANDEL: So that -- that doesn't go to my 4 allocation of the $10,000, does it? 5 MR. HANKS: No, but it's -- 6 MS. MANDEL: That's just additional info that 7 you're trying to toss in there. 8 MR. HANKS: Well, it's -- it's -- it's further 9 to our -- our discussion earlier about whether or not 10 there were resources. 11 MS. MANDEL: Right, right. But I was asking 12 you about the $10,000 allocation. That was a neat 13 trick, but I was asking you about the $10,000 14 allocation. That might go to whether he wants to -- you 15 know, whatever. 16 But about the $10,000 allocation, you're just 17 on the -- the what came in with the return and it's not 18 designated, so we -- we are -- we think, we were kind of 19 fair to prorate it. 20 MR. HANKS: Correct. And -- and it appears as 21 though there were other resources. 22 MS. MANDEL: The other resources were -- 23 MR. HANKS: -- that could have been paid. 24 MS. MANDEL: -- hard physical assets of cars. 25 MR. HANKS: Well, the cars that -- the 26 inventory valuation indicates to us that over a million 27 dollars worth of vehicles were sold. So, presumably, 28 that was converted to -- to cash. 41 1 MS. MANDEL: Right. 2 MR. HANKS: (Inaudible.) 3 MS. MANDEL: That -- okay, that still doesn't 4 really -- that still -- however many cars were sold 5 during the period that Mr. Bartel was responsible, it's 6 still cash that's being generated during when he was 7 responsible, where the premise was not having cash funds 8 available when he walked in the door on December 7th. 9 And that everything being generated that made the 10 $10,000 was generated during the time he was there. But 11 I guess you're not moving off, yes. 12 MR. LEVINE: Well, also, just because there's a 13 negative credit doesn't mean -- 14 MS. MANDEL: There's not cash. 15 MR. LEVINE: -- there's not money flowing 16 through the bank. Like the, uh, few bucks from the sale 17 yesterday is still in the bank today. So -- 18 MS. MANDEL: Well, what -- what, um -- do we 19 have -- I mean, I don't remember. Did he testify about 20 not having any cash? 21 MR. LUOMA: I don't recall that he stated 22 specifically what cash, if anything, was available other 23 than that when he walked in the door it was a negative 24 $10 million. 25 And the bank was on the premises. The bank 26 controlled the funds. And that was all consistent with 27 the security agreement that they had entered into. 28 MS. MANDEL: And Mr. Kraut had embezzled what 42 1 he could. 2 MR. LUOMA: Yes. He -- he -- he maximized his, 3 uh -- his crime. 4 MR. RUNNER: His opportunity. 5 MS. MANDEL: Okay. All right. Thank you. 6 MR. HORTON: Mr. Runner. 7 MR. RUNNER: Real quick. Just a couple -- 8 just, again, trying to get this idea that what happened 9 in this business activity in those last few -- in those 10 last two weeks. 11 Employment, sales force, how did that -- how 12 was that affected in their last two weeks? 13 MR. LUOMA: Well, they lost their jobs on the 14 20th. 15 MR. RUNNER: But how -- was there a difference 16 in regards to how many people worked there selling 17 vehicles December 7th? 18 MR. LUOMA: I don't know the numbers, whether 19 they dropped or not. 20 MR. RUNNER: Okay. 21 Um, do we know, um -- again, there were sales 22 during that time. Do we know what percentage of what it 23 would have been, uh, sales for resale versus -- 24 MR. LUOMA: No. Unfortunately, the records 25 that I had, that I was able to get from the FBI, did not 26 give me a breakdown on -- on, uh -- there just wasn't -- 27 the records weren't complete. So we couldn't really 28 determine, uh -- 43 1 Now, I wasn't aware that a -- that a valuation 2 had been done. But even if a million dollars worth of 3 inventory had been sold, a lot of that would have been, 4 uh, wholesale. 5 MR. RUNNER: Well, that's what my point was 6 going to be. Yeah, because there's -- there's $800,000 7 worth of liability during that period of time. If 8 three-quarters of them were for wholesale, then the 9 number's a smaller number than what we're doing -- 10 dealing with. 11 So, that's kind of where I was wanting to go if 12 indeed you had the ability to know. 13 MR. LUOMA: But, unfortunately -- 14 MR. RUNNER: Okay. 15 MR. LUOMA: -- the records aren't there. 16 MR. RUNNER: Okay. 17 Let me -- and then real quickly on the other 18 issue. I happened to double-check with some of my 19 friends that are in the car business. And they've let 20 me know that, uh -- that 90 percent of their sales have 21 evolved with a trade-in. 22 Um, now, of course some of those trade-ins have 23 liability and some don't. I think the indication is 24 that actually most do and, therefore, a trade-in that 25 doesn't have any value or that doesn't have to be paid 26 off, then the bank -- then that doesn't affect -- you 27 don't need money for that. 28 MR. LUOMA: Right. 44 1 MR. RUNNER: If you've got a trade-in and that 2 has a thousand dollars on it, now all of a sudden you've 3 got a problem because you can't pay that thousand 4 dollars, right? 5 MR. LUOMA: That's correct. 6 MR. RUNNER: So, and at least my indication is 7 that, you know, that the majority of them end up with 8 some kind of liability against them. 9 Um, if we were -- if it was to be clear that 10 trade-ins were not available during that period of time, 11 and as a result of that, many of those -- and as a 12 result of that, trade-ins -- most of those trade-ins 13 would require -- and if indeed most of the trade-ins 14 would require the ability to pay off something, so 15 therefore that trade-in couldn't be done, therefore, in 16 business you would -- I mean, this is like cutting your 17 business by 90 percent. So let's assume that some of 18 them are paid off and so, you know, it cuts your 19 business by -- by 50 percent. 20 Um, would that change -- why wouldn't that help 21 change at least our calculation in regards to the nature 22 of the business during those last two weeks? 23 MR. HANKS: It wouldn't necessarily change the 24 calculation because I think the numbers that -- that 25 we've got are probably the -- the best estimate of -- of 26 what was owed during that -- that -- 27 MR. RUNNER: Quarter. 28 MR. HANKS: -- two-week time period that's so 45 1 important. 2 MR. RUNNER: During the quarter. 3 MR. HANKS: Now -- right. 4 MR. RUNNER: During the quarter. 5 MR. HANKS: Well, I'm looking at -- I'm looking 6 at just the -- the two-week period in which Mr. Bartel 7 is responsible. So I think -- 8 MR. RUNNER: Well, we don't have any specific 9 information about those two weeks, do we? 10 MR. HANKS: Well, we do in terms of inventory 11 valuation. So the inventory valuation figures, I think, 12 are pertinent because it identifies that -- that we've 13 got, um -- 14 MR. RUNNER: But we don't know -- again -- 15 MR. HANKS: 1.3. 16 MR. RUNNER: Yeah. It's 1.2 difference delta. 17 MR. HANKS: Right. 18 MR. RUNNER: But -- but we don't know, again, 19 if indeed there was a -- again, if the goal was to just 20 keep the doors open, not make -- not make money on 21 sales, is that a fair -- at least -- 22 MR. LUOMA: Yes. 23 MR. RUNNER: Um, and so you're just trying to 24 move inventory out. Um, and so therefore a lot -- you 25 know, two-thirds of them -- again, the trouble is we 26 can't demonstrate it. 27 MR. HANKS: Right. 28 MR. RUNNER: But yet we don't know whether it's 46 1 true -- we're -- we're, uh -- to wholesale, you know, 2 sold out to -- to -- for other retail -- 3 MR. HANKS: Right. 4 MR. RUNNER: -- to another retailer. 5 MR. HANKS: Right. 6 MR. RUNNER: Then the valuation isn't very 7 helpful to us, right? 8 MR. HANKS: The valuation, I think, is helpful 9 though in the sense that -- that we've identified at 10 least a million dollars worth of -- of inventory was 11 sold during that -- that time period. 12 Now, um, the amounts that -- that we're holding 13 Mr. Bartel responsible for are valued at approximately 14 $500,000, which is less than -- than half of the $1.1 15 million that was sold in -- in December. 16 So I think, in looking at those two valuations, 17 we're recognizing that -- that there were lots of 18 transactions that -- that were sold at the wholesale 19 level. 20 MR. RUNNER: We're guessing. We don't know, 21 right? I mean, you decided that it's about half that. 22 MR. HANKS: Well, no, no. I'm not guessing. 23 It's -- it's based on what the liability is. The 24 liability here is $43,000 -- 25 MR. RUNNER: Right. 26 MR. HANKS: -- in tax. 27 MR. RUNNER: Right. 28 MR. HANKS: Which equates to approximately half 47 1 a million dollars in -- 2 MR. RUNNER: No, no, no. What I'm saying is 3 you're guessing -- when you said -- you said you already 4 gave them credit for half of them being out for -- 5 for -- for resale, right? 6 MR. HANKS: Right, right. 7 MR. RUNNER: You said the liability's twice as 8 much and, therefore, it's been -- it's been identified 9 down to -- to the 39, which is half as much, right? 10 MR. HANKS: Right. 11 MR. RUNNER: But that -- we don't have any -- 12 we've just decided that. We don't have any -- we 13 don't -- we don't have any demonstrative evidence that 14 it is half or a third or 75 percent, right? 15 MR. HANKS: Well, I think -- 16 MR. RUNNER: It's a line that we just 17 decided. 18 MR. HANKS: I think what we're looking at is -- 19 is just this -- this valuation. We know that $1.1 20 million worth of -- of inventory was sold during that 21 time period. And so, because we're holding -- holding 22 this gentleman responsible for sales comprising 50 -- or 23 $500,000 in sales, what we're assuming is that there 24 were at least $600,000 in that inventory that was sold 25 that is not subject to tax. 26 MR. RUNNER: My point is, why didn't we assume 27 it was 800,000? 28 MR. HANKS: Because we're looking at -- at the 48 1 self-assessed amounts that were reported during that 2 quarter. And -- and that's the best estimate as to -- 3 to what the taxable sales were. 4 Irrespective -- 5 MR. RUNNER: Hold it. 6 MR. HANKS: Irrespective of all the wholesale 7 sales that may have been generated during that quarter, 8 we know that the self-assessed amounts of -- of tax 9 were -- were X dollars. 10 So we know that there were taxable transactions 11 of -- of a given sum that we know occurred during that 12 three-month period. 13 MR. RUNNER: For the whole quarter. 14 MR. HANKS: Correct. 15 MR. RUNNER: Again, see, I think my frustration 16 is we're moving, again, what we know for the whole 17 quarter and we're applying that to those last -- to 18 those last, you know, 10 -- what -- 21 days, or 20 19 days -- 14 days, excuse me, 14 days. 20 MR. HANKS: Right. 21 MR. RUNNER: Um, so I get what we're trying to 22 do. But we really are just then -- I mean, we're just 23 extrapolating that out. We don't have any evidence 24 that -- of anything that -- that's different or not 25 different about those last 14 days, right? 26 MR. HANKS: Correct. We're using a pro rata 27 calculation. 28 MR. RUNNER: Okay. 49 1 MR. HANKS: Correct. In the absence of better 2 information. 3 MR. RUNNER: And the only thing I guess I'm 4 asking for is then if indeed your business was going to 5 be significantly altered because you could not take 6 trade-ins, why wouldn't that change our assumptions in 7 those last 14 days? 8 MR. HANKS: It wouldn't change my assumption 9 because I think that -- that if you're not accepting 10 trade-ins, then -- then you're not making -- you're not 11 making sales to -- to folks that necessarily have debts 12 owed on the vehicles that they're trading in. Or, 13 even -- even the people that do have debts on the 14 vehicles that they're trading in, I think that there are 15 probably sufficient resources to -- to pay off those 16 debts. 17 MR. RUNNER: Well, hold it. 18 MR. HANKS: And certainly -- 19 MR. RUNNER: How do we know -- 20 MR. HANKS: -- there's new funding -- 21 MR. RUNNER: Let me stop you there. Why do we 22 assume that there were debts -- there was money 23 available to pay off the debt on retail -- on cars that 24 were coming in that had a lien against them? Why -- 25 what evidence do we have that demonstrates that's the 26 case? 27 MR. HANKS: Because we've -- we've got a 28 valuation in excess of a million dollars of -- of sales 50 1 of vehicles that occurred during that time period. 2 MR. RUNNER: Hold it. Hold it. That's apples 3 and oranges. That doesn't have anything to do with the 4 trade-in aspect of whether or not -- what you said is 5 you believe that they had cash in the bank in order to 6 pay off liens against cars for trade-in. 7 So my question is, what evidence do we have 8 that says that? 9 MR. HANKS: The evidence that we've got just 10 indicates that -- that the business was actively engaged 11 in making sales during that month. And that we've -- 12 MR. RUNNER: Well let me ask you this way; do 13 we have any evidence that they had cash in the bank in 14 order to pay off somebody's lien that they were trading 15 in if there was a lien on a car? Do we have any 16 evidence that says there was? Do we have a bank 17 account, a balance, anything, anything that shows that 18 they had money? 19 MS. SILVA: I don't believe that we have a bank 20 account balance. But as, um, was stated earlier, we do 21 know that they -- they spent money on keeping the doors 22 open to the tune of $250,000 a month. 23 They paid wages. We do have the EDD amounts of 24 wages that were paid. So we do know amounts were paid 25 other than the $10,000 to the Board. But we don't have 26 any exact figures of what the bank account had. 27 MR. RUNNER: Okay. Let me ask then the people 28 in the business, normally when a trade is made in does 51 1 that come out -- is that part of the banking finance 2 aspect of paying off the trade, or is that coming out 3 of -- out of normally the operator's cash that they have 4 in their -- in their -- in their -- in their general 5 operation? 6 MR. LUOMA: Well, cash is fungible, and of 7 course whether it's part of the financing arrangement or 8 through cash available, it still needs to be paid off in 9 order to do so. 10 And, again, First Hawaiian Bank was, uh -- they 11 were on the premises, they were interested in collecting 12 what debt was owed to them. They weren't interested in 13 paying debt that was owed to some other financing -- 14 MR. RUNNER: So in that -- in that ex -- in 15 that, uh, discussion, you do not believe the bank would 16 have allowed them to use the money that they had in 17 their bank account to pay off somebody's trade-in? 18 MR. LUOMA: That's correct. 19 MR. RUNNER: Okay, thank you. 20 ---oOo--- 21 22 23 24 25 26 27 28 52 1 ---o0o--- 2 MR. HORTON: Member Yee. 3 MS. YEE: I had asked the Department earlier 4 about the vehicle sales contracts that we do have on 5 file, which is just a small number of them. But -- 6 uhmm, I guess the reason I'm so focused on those 7 contracts is because they capture a time period, I think 8 the latest one being around November 24th of '07, which 9 I think suggests to me that, you know, we're heading 10 into December and things were definitely slowing down at 11 the dealership to where there were employee layoffs. 12 And I think even by news accounts there was 13 statements made about not taking on new orders but just 14 really completing existing orders. And, so -- and this 15 was really the beginning of what we saw in terms of auto 16 dealerships, you know, shuttering throughout the State. 17 Is there anything with respect to those vehicle 18 sales contracts that could be instructive in terms of 19 how we could look at this period? I just think that's 20 kind of the real deal. And if we can extrapolate from 21 that, I'm -- I'm sympathetic then to what was reported 22 on the return. 23 But it's -- there was just a lot going on in 24 that period. And, as we know, the economy really 25 started to take a turn. But even on news accounts that 26 appeared in December, the end of December, which 27 suggested that employees were laid off, you know, as 28 early as four weeks ago. And, so, I think there was 53 1 really a change in the -- in the pace and tenor of the 2 business. 3 MS. SILVA: The -- uhmm, I did a -- a rough 4 total of the fifteen contracts. 5 MS. YEE: Uh-huh. 6 MS. SILVA: And they added up to $440,000. Six 7 of the contracts fell in the fourth quarter and added up 8 to about 153,000. 9 And those were dated the -- October 31st 10 through November 24th. 11 MS. YEE: Uh-huh. 12 MS. SILVA: But there was only six contracts -- 13 MS. YEE: Okay. 14 MS. SILVA: -- for those dates. 15 The other nine, which were dated previously, 16 totaled 291,000. 17 What caused a problem for me in trying to work 18 with these numbers was that the fourth quarter return 19 reported $4 million worth of sales. 20 MS. MANDEL: Total sales? 21 MS. YEE: Total sales. 22 MS. SILVA: Total sales for the fourth quarter. 23 So, it's such a small representation of any amount of 24 sales for the corporation to use it. 25 I mean, if we had something better to use, we 26 would use it. But at this point we have the fourth 27 quarter return on a prorated basis -- 28 MS. YEE: Right. 54 1 MS. SILVA: -- which seemed the most fair in 2 light of the argument that the amount of tax collected 3 was $10,000. 4 MS. YEE: Okay. 5 MS. MANDEL: What was the -- 4 million total 6 sales, what was the -- it might be in here somewhere -- 7 but what was the -- 8 MS. SILVA: Here's the return. 9 MS. MANDEL: -- deduction for taxable sales, I 10 guess? 11 And then I can figure out the deduction. 12 MR. HANKS: We've got reported total sales of 13 approximately $4 million and then $1 million are 14 represented as -- as exempt sales. 15 MS. MANDEL: That's on the -- that's the fourth 16 quarter return? 17 MR. HANKS: Right, right. 18 MR. SMITH: Leaving 3 million in taxable sales. 19 MR. HANKS: Right, correct. 20 MS. MANDEL: Okay. And the testimony was that 21 they didn't really -- that -- oh, exempt sales, there is 22 no breakout, right, between types of exempt sales? 23 MR. SMITH: Not that we have before us. 24 Presumably it's mostly sales for resale. 25 MS. MANDEL: Right, okay. That's what I was 26 thinking. 27 And he testified he -- he didn't really do 28 wholesales before and was doing wholesales after? Or 55 1 what was the -- 2 MR. LUOMA: Well, no, to -- to conclude what he 3 had on the lot, he -- all that went wholesale after, you 4 know, December 20th was the end date of the activity. 5 And I don't know if there were even -- there 6 was inventory that was a part of the dealership sale. 7 MS. MANDEL: Right. Here's what I'm really 8 kind of asking, before he came in, do we know whether 9 there was wholesale activity or if the -- because we 10 heard about all this car inventory. 11 I don't even know if the two inventory 12 valuations were done by the same guy and using the same 13 method or not, but -- 14 MR. LUOMA: I don't know. 15 MS. MANDEL: -- they're at about a million 16 dollars and here we've got a million dollars for the 17 quarter of exempt sales. So -- 18 MR. LUOMA: I don't know the extent of what the 19 wholesale sales would have been through -- throughout 20 the quarter. 21 There are other aspects, of course, of the -- 22 of the company. They did sales and service and the 23 parts, over-the-counter parts. 24 MS. MANDEL: Oh, so, they might have had -- 25 MR. LUOMA: So, there would be some and I -- 26 and again I don't know what that -- that -- you know, 27 what the volume of that is. 28 MS. MANDEL: But there's a significant amount 56 1 of exempt sales reported on the return as well. 2 MR. LUOMA: Yeah. If they had the third 3 quarter return, which was also a part of this case, that 4 might show a relative amount of of exempt sales to 5 overall sales. 6 But I -- I don't have that third quarter 7 return. 8 MR. HANKS: I'm just looking at other quarters 9 in which the taxpayer filed returns and not that 10 particular quarter, but probably the numbers are fairly 11 comparable. 12 Looks like approximately 25 percent of the 13 exempt sales reflect exempt labor. So, I would guess 14 that $250,000 of the million reported exempt sales 15 during that quarter relate to labor -- installation 16 labor; 750,000 then reflecting sales for resale. 17 MS. MANDEL: But exempt sales -- I'm almost 18 afraid to ask -- but exempt sales as a dollar figure? 19 I mean, it's -- how did these -- 20 MR. HANKS: It's a million dollars -- a million 21 dollars total and, uhmm -- 22 MS. MANDEL: Well, in the fourth quarter? 23 MR. HANKS: -- deducted exempt sales, correct. 24 MS. MANDEL: Right. 25 MR. HANKS: Right. 26 MS. MANDEL: And I'm not going ask about prior 27 quarters. 28 MR. HORTON: Okay. Further discussion, 57 1 Members? 2 The self reported taxable sales for the fourth 3 quarter, who computed those sales? 4 MR. LUOMA: That would have been done by the -- 5 by Tracy Chevrolet. 6 MR. HORTON: The taxpayer -- I'm trying to 7 remember, but I have notes here that indicate that the 8 taxpayer had stated that they chose to pay the utility 9 bills and other expenses to keep the business operating 10 instead of the sales tax? 11 MR. LUOMA: No. His testimony was that he 12 believed that he -- he -- what he calculated the 10,000 13 was the sales tax that was generated from the 14 transactions that he did. 15 But that, yes, he used funds in order to keep 16 the operation open. And that's the issue of the 17 responsibility that -- the Board has determined that 18 he's responsible for that two-week period. 19 MR. HORTON: There seems to be an ongoing 20 concern. There's a successor? Am I correct? 21 MR. HANKS: Well -- 22 MR. HORTON: Someone took over the business? 23 MR. HANKS: -- correct (inaudible). 24 MR. HORTON: And what was the transition 25 period? Did the business actually shut down? Or did 26 the successor come in and take over and they 27 transitioned the inventory? 28 MS. SILVA: The business was sold to the 58 1 successor. 2 MR. HORTON: I know the term -- the term "sold" 3 seems to imply that there was a gap between -- I mean, 4 this -- the predecessor disappeared and then the 5 successor came in with new cars and -- and a completely 6 new operation. 7 All the inventory was dispensed of? Is that 8 what happened? 9 MS. SILVA: I'm actually not sure. But I think 10 there was something about the inventory, I'm not sure 11 exactly what happened with the inventory. 12 But they did cease -- Tracy ceased doing 13 business of sale on the 20th. 14 MR. LUOMA: That's correct. 15 MS. SILVA: And then the actual sale didn't 16 occur until March of the next year -- 17 MR. LUOMA: That's when it closed. 18 MS. SILVA: -- when it -- when it actually 19 closed. 20 And then the new business purchased it. And I 21 believe continued to be doing business as Tracy 22 Chevrolet -- 23 MR. LUOMA: That's correct, it was a new 24 corporation that -- 25 MS. SILVA: -- as a dba. 26 MR. LUOMA: -- held onto the name, Tracy 27 Chevrolet. 28 That was a part of the agreement on the sale. 59 1 MR. HORTON: Was the sale a stock acquisition 2 or -- 3 MR. LUOMA: No. 4 MR. HORTON: -- asset purchase agreement? 5 MR. LUOMA: No, it was a -- it was an asset 6 purchase. It was a straight cash deal. 7 MR. HORTON: So, they purchased all of the 8 assets, including the inventory? 9 MR. LUOMA: I don't know what the inventory was 10 left at that point. But if there was inventory, they 11 would have acquired it at that time. 12 MS. MANDEL: Because they are not successor 13 liability. 14 MR. HORTON: No, no, I'm just -- 15 MR. LUOMA: No, there was a tax clearance 16 because the -- the Board was involved in the 17 negotiations. And the Board agreed to accept the 18 $200,000. 19 And if you recall, the original hearing 20 testimony from Mr. Bartel was that his expectation was 21 that the deal was done. There was nothing more. 22 And he was quite surprised when the 6829 23 determination was made. 24 MR. HORTON: Okay. First Hawaiian Bank -- it 25 sort of seems to me that it would have been in their 26 best interests to continue the practice that the 27 automobile industry in financing cars to actually 28 finance the downpayment are for the trade-in. 60 1 What -- 2 MR. LUOMA: Well, it -- 3 MR. HORTON: -- why -- I mean, was there a 4 policy change? 5 I mean, I've -- I've audited car dealers for 6 years and certainly don't have the same experience as 7 the Department. But they typically finance -- it's part 8 of the finance agreement. 9 MR. LUOMA: That would be -- 10 MR. HORTON: And on occasions -- on occasions, 11 very rare, but on occasions, the dealer will actually 12 cash it out. But it's typically part of an entire 13 financing arrangement. 14 Is -- is -- is there something different that 15 happened here? 16 MR. LUOMA: Well, in this case, of course, 17 First Hawaiian Bank lost $16 million. Their intent was 18 to close the business and take what they could get 19 because of Mr. Cross's theft. 20 MR. HORTON: Right. 21 MR. LUOMA: And, so, that was -- that was the 22 game changer on how any conduct of any business was 23 going to take place. 24 And ultimately, when Mr. Bartel came back, it 25 was two weeks' activity concluded, the -- the sale of 26 the dealership occurred -- closed in March of 2008. 27 Hawaiian -- First Hawaiian Bank got some monies back. 28 Board of Equalization got $200,000. And Mr. Bartel 61 1 received nothing. 2 And the First Bank of Hawaii went after 3 Mr. Bartel for funds as well. 4 MR. HORTON: Okay. I still don't see the 5 inconsistency. 6 I mean, the -- I mean, there's a presumption 7 that First Hawaiian Bank financed all of the sale of the 8 new cars. But there's also the probability that the 9 local credit union financed a car or the local back 10 financed a car. 11 Okay. I was just trying to sort of flesh out 12 that trade-in discussion. 13 Any further discussion, Members? Hearing none, 14 is there a motion? 15 MS. YEE: Move to take the matter under 16 submission. 17 MR. HORTON: Moved by Member Yee to take the 18 matter under submission. Second by Member Mandel. 19 Without objection, Members, such will be the 20 order. 21 Thank you very much for appearing before us. 22 The Board will take your matter under consideration and 23 send you a written report of our decision. 24 Thank you. 25 MR. LUOMA: Thank you. 26 ---oOo--- 27 28 62 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 December 19, 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 52 constitute a complete and accurate 14 transcription of the shorthand writing. 15 16 Dated: January 28, 2013 17 18 19 ____________________________ 20 KATHLEEN SKIDGEL, CSR #9039 21 Hearing Reporter 22 23 24 25 26 27 28 63 1 REPORTER'S CERTIFICATE 2 3 State of California ) 4 ) ss 5 County of Sacramento ) 6 7 I, JULI PRICE JACKSON, Hearing Reporter for the 8 California State Board of Equalization certify that on 9 DECEMBER 19, 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 13 53 through 62 constitute a complete and accurate 14 transcription of the shorthand writing. 15 16 Dated: JANUARY 18, 2013 17 18 19 ____________________________ 20 JULI PRICE JACKSON 21 Hearing Reporter 22 23 24 25 26 27 28 64