1 BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION 2 ONE CIVIC CENTER PLAZA 3 IRVINE, CALIFORNIA 4 5 6 7 8 9 REPORTER'S TRANSCRIPT 10 JULY 28, 2017 11 (Prepared from audio recording) 12 13 14 15 SALES AND USE TAX APPEAL HEARING 16 APPEAL OF 17 SHAWN VICTOR BACHOR, 18 NO. 771334 19 AGAINST PROPOSED ASSESSMENT OF 20 SALES AND USE TAX 21 22 23 24 25 26 27 REPORTED BY: Jillian M. Sumner 28 CSR NO. 13619 1 1 P R E S E N T 2 For the Board of Equalization: Diane L. Harkey 3 Chair 4 Fiona Ma, CPA Member 5 Jerome E. Horton 6 Member 7 Sen. George Runner (Ret.) Member 8 Yvette Stowers 9 Appearing for Betty T. Yee, State Controller 10 (per Government Code Section 7.9) 11 Joann Richmond 12 Chief Board Proceedings 13 Division 14 For California Department of Tax and 15 Fee Administration: Andrew Kwee 16 Tax Counsel Kevin Hanks 17 Legal Division Robert Tucker 18 Legal Division 19 For Appellants: Harold C. Newman 20 Taxpayer Representative Shawn Bachor 21 Taxpayer Pedro Bachor 22 Witness 23 24 ---oOo--- 25 26 27 28 2 1 ONE CIVICE CENTER PLAZA 2 IRVINE, CALIFORNIA 3 JULY 28, 2017 4 ---oOo--- 5 MS. HARKEY: Okay. 6 Welcome. 7 Mr. Angeja introduced the items, right? 8 There we go. I'm sorry. We're kind of off 9 track. 10 MR. ANGEJA: Madam Chair and Members, the 11 appeal before you involves one unresolved issue, 12 which is whether the unreported fabrication labor 13 costs are taxable. 14 MS. HARKEY: Thank you. 15 Okay. Now to the appellants. 16 Thank you very much for your time and your 17 patience. You will have 10 minutes to make your 18 presentation, announce who you are for the record. 19 And then we'll go to the Department, which 20 will also have 10 minutes. 21 And then we'll be back to you on rebuttal 22 for five. 23 Thank you. 24 Introduce yourselves and proceed. 25 MR. SHAWN BACHOR: Okay. My name is 26 Shawn -- 27 MS. HARKEY: Make sure you're speaking right 28 into the microphone. 3 1 MR. SHAWN BACHOR: My name is Shawn Bachor. 2 MS. HARKEY: Okay. Pull the mic closer to 3 you so you don't have to remember. That's fine. We 4 heard you that time. Okay. 5 MR. PEDRO BACHOR: My name is Pedro 6 Bachor. 7 MR. NEWMAN: And I'm Harold Newman, their 8 representative. 9 And thank you for allowing us to present to 10 the Appeals Board our case. 11 As you can see, my client, Shawn Victor 12 Bachor, and his father, Pedro Bachor, are here. 13 My client started his business in the United 14 States as a sole prop. He makes cabinets and 15 installs them into high-end homes and other 16 establishments. He's a true subcontractor. The 17 State Board of Equalization has also agreed that he 18 is a subcontractor. 19 He tried to get a facility in the state of 20 California for staining and cutting the wood for his 21 custom cabinets, and was hitting a ton of roadblocks. 22 One of them is the high EPA standards, in which he 23 found out that he would need to come up with hundreds 24 of thousands of dollars in order to put special 25 filters and regulators and the like just to stain 26 anything or do anything. 27 So in order to get the jobs that he has, he 28 would need -- he has to have this -- this to compete 4 1 with the large cabinet subcontractors in order to 2 stay in business. 3 So he went to Mexico to set the maquiladora 4 to stain and cut his wood, so he can compete against 5 his larger competition. 6 This case has been going on for many years 7 due to, first, the initial auditor retired, then it 8 got reaudited, then, first meeting, the attorney 9 couldn't make a decision. They had to go to many 10 attorneys, as you noted, 18 months of delay. And now 11 my client stands before you with a huge liability 12 that we still believe he does not owe. 13 According to the Appeals Division Board 14 Hearing Summary, this amount is over $570,000 15 including interest. And my client never collected 16 from his clients, because he thought he was a true 17 subcontractor and was doing everything in his power 18 to do it correctly. 19 This amount of sales tax will cause his 20 business in the U.S. and Mexico to close if it's not 21 resolved. Now we stand to see what our fate is. 22 Case has only one issue; is my client one 23 company or two companies? If both of my client's 24 companies were structured and actually in the United 25 States, we wouldn't be here today. 26 Because in this case, my client, a sole 27 proprietor in California, is also a maquiladora in 28 Mexico. But if he was in the United States, 5 1 maquiladora's corporation, sole proprietorship, yes, 2 two distinct entities. 3 But -- so the law in that case would be 4 correct. However, in Mexico, maquiladora must be a 5 corporation, period. In Mexico, to be a sole 6 proprietorship, you must be a Mexican citizen or have 7 Mexican immigration status. Any U.S. citizen cannot 8 be a sole proprietorship in Mexico. 9 I have given you an exhibit on what a 10 maquiladora is. The exhibit is given to me directly 11 by a Mexican attorney in Mexico. And as this exhibit 12 states, in order to be a maquiladora, you must get a 13 IMMEX permit. This permit is not allowed for 14 individuals at all. You have to be a corporation. 15 This company is solely formed for the 16 purpose of receiving raw materials and creating 17 products to be used for the U.S. company. A 18 maquiladora cannot sell anything to Mexico or anyone 19 else other than the parent company in the USA. 20 I feel this particular case is precedential 21 for this state sales tax arena. The way the law is 22 done is only based on what company is set up as in 23 the United States. What it does not take into effect 24 is how a foreign country categorizes how a company is 25 set up in their country. 26 By not considering this factor, a small 27 company like Carmel Mountain Cabinetry is being 28 discriminated against solely because he is not a big 6 1 corporation. If he was a big corporation in the 2 United States, we wouldn't be here. 3 Again, in this hearing, I am bringing up a 4 1975 case. It is Mapo v. State Board of 5 Equalization. Mapo was a U.S. corporation doing 6 business for Walt Disney Productions, which is also 7 another U.S. corporation. 8 In this case, Disney retained all the title 9 to materials, ideas, and completed items done by 10 Mapo. Disney was in charge of all day-to-day 11 operations of Mapo Corporation. And Mapo Corporation 12 did not do any other work for any other company other 13 than Disney. 14 The conclusion on that case was that Mapo 15 was fabricating items for itself through its 16 employees in fact. And, therefore, no sales tax was 17 payable. 18 To me, this case is the same as what my 19 client and his maquiladora are doing. The only 20 difference is that my client has a Mexican company 21 and a U.S. company. 22 In closing, please look at this case based 23 upon what it really is, and the facts in the case. 24 The law is ambiguous to any foreign entity 25 classification, and should be noted on how these are 26 structured, and not their classification in this 27 case. 28 In our mind, the result should be clear as 7 1 to -- whereas dealing with a mutual foreign company 2 is in a classification completely on its own. 3 A -- the word corporation in many countries 4 is not the same. Sometimes a business is also forced 5 into creating a company based on foreign laws, as in 6 my client's case. If he had a choice, he would still 7 be and will be still a sole proprietor in Mexico 8 today. 9 MS. HARKEY: You have more time if you need 10 it. 11 MR. NEWMAN: And, basically, what this case 12 is, is, again, it's one case. It's, is he two 13 corporations? I mean, is he two different 14 businesses? 15 The only reason why the State Board of 16 Equalization is stating that they're two 17 corporations -- and it states clearly in the 18 summary -- the only reason is because the maquiladora 19 is a corporation and he's a sole proprietorship. 20 And in the law, yes. If it was U.S. law, 21 that makes 100 percent sense. However -- and also in 22 the summary it says that he had a choice. But he 23 didn't have a choice. 24 In Mexico, you cannot -- any American 25 citizen cannot be a sole proprietor in Mexico, 26 period. You have to have a Mexican -- one percent 27 Mexican owner in order to become a maquiladora. The 28 only reason why he did this is so he can compete with 8 1 the higher-end cabinet people to do his trade. 2 And, you know, it was just not 3 cost-prohibitive for him, because of all the EPA 4 regulations and everything else in this country here, 5 to be able to satisfy, you know, staining and cutting 6 lumber and so forth. 7 I mean, he does excellent work. Where it's 8 even scribed into the walls. I mean, he does not 9 even use the molding that you see today. So it's 10 a -- he has a custom trade that he does himself. 11 And he has his laborers in Mexico. Some of 12 them have permission, you know, immigration where 13 they can come over and work. And they come with him 14 to help. So they are his employees. 15 He goes to Mexico every few days, correct? 16 Every few days to make sure that the 17 operation is going the same way. And he is the owner 18 of both corp -- both companies. 19 So that's basically our statement. I mean, 20 I can drag it out more and more, but it's -- I think 21 it's cut and dry. 22 MS. HARKEY: Thank you. You'll get an 23 opportunity on rebuttal. 24 MR. NEWMAN: Okay. Thank you. 25 MS. HARKEY: So listen up, here comes the 26 Department of Tax and Fee Administration. 27 Thank you. You have 10 minutes. So please 28 introduce yourself for the record. 9 1 MR. KWEE: Thank you, Madam Chairwoman 2 Harkey and Members of the Board. I am Andrew Kwee 3 with the California Department of Tax -- 4 MS. HARKEY: Can you speak up? I think it 5 gets a little -- there you go. 6 MR. KWEE: I apologize. 7 My name is Andrew Kwee, with the California 8 Department of Tax and Fee Administration. With me 9 today is Robert Tucker, also with the Department, and 10 Kevin Hanks, also with the Department. 11 Petitioner is liable for tax measure based 12 on his cost of cabinets that he furnished and 13 installed in California. 14 As his representative states, the law is 15 clear. The law provides that if any person fails to 16 make a return, the Department shall make an estimate 17 of the total sales price of tangible personal 18 property purchased by the person for the storage use 19 or other consumption of which is subject to use tax. 20 As relevant here, the Revenue and Taxation 21 Code Section 6005 defines a person to be an 22 individual, a partnership, a corporation, or a trust. 23 It defines an individual in a corporation to be two 24 separate persons. 25 Petitioner did not hold a seller's permit or 26 file returns during the audit period. Therefore, the 27 Department billed petitioner as an individual for the 28 tax liabilities petitioner incurred from operating 10 1 his sole proprietorship in California. 2 Petitioner is disputing the liability on the 3 basis that he believes he, as an individual, is the 4 same person for sales and use tax purposes as a 5 Mexican corporation from whom he purchased the 6 cabinets. 7 Petitioner furnished and installed the 8 cabinets as a construction contractor in California. 9 The cabinets are fabricated in Mexico by the Mexican 10 corporation. The Mexican corporation has two 11 shareholders, petitioner and Mr. Victor -- and Mr. 12 Victor Vargas. The corporation is also set up as a 13 limited liability entity in Mexico. 14 Petitioner purchased some of the materials, 15 tax-paid, in California, and then shipped the 16 materials from California to the Mexican corporation. 17 The Mexican corporation then used the materials, for 18 example, wood, to build the cabinets in Mexico, which 19 it then exported to petitioner in California. 20 The corporation also issued invoices to 21 petitioner for the cabinets and did not collect sales 22 tax reimbursement from petitioner on the invoices. 23 At the time of importation, petitioner filed 24 entry documents with the United States Department 25 Entry U.S. Custom Service. The entry documents this 26 petitioner as the importer of record, the invoice 27 number, a description of the merchandise purchased, a 28 value in U.S. dollars, and the weight and quantity 11 1 purchased. 2 The entry documents also include a checkmark 3 in the box stating, "I further declare that the 4 merchandise was obtained pursuant to a purchase order 5 or agreement to purchase, and that the prices set 6 forth in the invoice are true." 7 Copies of the invoices are attached to the 8 U.S. entry documents. 9 In response to the question, report whether 10 that transaction was between related parties, 11 petitioner typed, "not related." 12 The documents are signed by petitioner's 13 attorney. 14 The entry documents also include the Mexican 15 corporations manufacturer ID number, identifies the 16 country of origin for the cabinets as Mexico. And 17 based thereon, the Mexican corporation is able to 18 export the products to petitioner directly. 19 For the tax years in question, petitioner 20 also filed federal income tax returns reporting his 21 income from the cabinetry business in California as a 22 sole proprietor. 23 During the audit, the auditor determined 24 that petitioner's total sales reported for federal 25 income tax purposes was petitioner's bank deposits 26 from his two California bank accounts. 27 Petitioner did not provide bank statements 28 for the Mexican corporations bank accounts, and these 12 1 were not examined in the audit. Petitioner deducted 2 his cash payments to the Mexican corporation and his 3 cash payments to California vendors for the materials 4 as the cost of goods sold for federal income tax 5 purposes. 6 The Mexican corporation, on the other hand, 7 filed separate tax returns as a corporation in 8 Mexico. 9 Petitioner believes that we should disregard 10 the fact that petitioner, from the Mexican 11 corporation, are a separate legal entities, and that 12 they claim federal and international benefits based 13 on their separate legal status. 14 However, the law is clear and defines an 15 individual in a corporation as separate legal 16 entities for California sales and use tax purposes, 17 and must report, file, and pay their respective tax 18 liabilities separately for purposes of the Sales and 19 Use Tax Law. 20 There is new -- there is no statutory 21 authority to combine the sales and use tax liability 22 of these two separate entities, and then to treat 23 them as a single person for sales and use tax 24 purposes. 25 Regarding petitioner's, um -- the case that 26 petitioner cited, the Mapo Inc. v. the State Board of 27 Cali -- the State Board of Equalization, that case is 28 also distinguishable. In that case Mapo was a 13 1 fully-owned subsidiary of the other corporation. It 2 owned no materials, it kept no books and records, and 3 it bore no liability for the products that it made. 4 In other words, it was basically just a corporation 5 in name only. 6 In this case, the corporation from the 7 petitioner purchased the products at issue, had two 8 shareholders, it was limited liability, entity versus 9 the sole proprietorship. In addition, it issued 10 invoices, it had separate bank accounts, it had 11 separate records. And there were, of course, the 12 declarations, too, that this was purchased from, 13 quote, "not related," end quote, entities for the 14 prices stated on the invoices, which are attached to 15 the U.S. entry documents. 16 And I have those available if the Board 17 Members would like to see a copy, for example, of the 18 entry summaries, and an invoice that was submitted 19 with the United States Customs Service. 20 And also regarding interest, we concur with 21 the Appeals Division recommendation by -- the Appeals 22 Bureau's recommendation. 23 Thank you. 24 MS. HARKEY: Thank you. 25 Okay. You have five minutes on rebuttal. 26 MR. NEWMAN: Yeah. Based upon that, you are 27 stating that it is a corporation. It is a 28 maquiladora. We gave you documentation stating that 14 1 it is such. If you go based upon a maquiladora 2 corporation is completely different than another 3 corporation. And, yes, they have to have separate 4 documentation, because they're in separate countries. 5 If they were in the same country, it would be the 6 same, you know. 7 In order to go through the borders, you have 8 to have a purchase order to get things through the 9 border. Otherwise, it's not gonna come through. 10 We gave them boxes and boxes of 11 documentation on both companies. And, again, they 12 had the first auditor in there. And the first time, 13 they're stating that it's a purchase. It's not. 14 They did the reaudit, and they found out and they 15 noted on here that they were a full subcontractor. 16 They are doing the materials, creating the product, 17 bringing parts of the product from Mexico over, and 18 then assembling it in the -- in the U.S. and putting 19 it together. 20 Now, they did pay all sales tax on the 21 lumber and almost every other part that went into 22 these cabinets that went to Mexico. There is a 23 specific double taxation treaty between Mexico and 24 the United States. Hence, the maquiladora. 25 Again, the biggest issue here is, you know, 26 they are stating that it's a single -- he's a sole 27 proprietor, the other is a corporation. That is the 28 distinction. And that, to me, is the only issue 15 1 different in this case. 2 Anything else on that, I mean, the sales 3 tax, we didn't have a sales tax license, again, 4 because we assumed that we didn't need one due to 5 what my client was doing. 6 MS. HARKEY: Okay. 7 Members. 8 Member Ma. 9 MS. MA: Okay. I'll just start. 10 So to the taxpayer, it said that there were 11 two shareholders. Who was the other shareholder? 12 MR. PEDRO BACHOR: It was one of the 13 employees in Mexico. So we put him on for one 14 percent so he could be -- so the corporation could be 15 done in Mexico. 16 MS. MA: Okay. 17 MR. PEDRO BACHOR: Just like the Hilton or 18 Sheraton hotel, they have to have somebody, an 19 attorney or something, have one percent, and they can 20 do a hotel or whatever. It's the same thing for 21 anyone who is going to do a corporation up there. 22 MS. MA: Okay. 23 MR. PEDRO BACHOR: See, the main thing is 24 that all the materials that we buy, they're by United 25 States, and we pay the taxes on the materials, 26 everything. Be a nail to all the lumber. And then 27 it's shipped to Mexico, review the product, and the 28 product comes in parts. 16 1 It's just like a framer in construction. A 2 framer comes and frames. He doesn't pay any taxes, 3 because he's putting it in -- in -- in the -- the 4 walls. We're putting this cabinet -- this is not a 5 fixture. We are not selling tables. This would be 6 taxable. We have a product, and they know it. 7 We -- we -- we gave them all the records of 8 all the installations that we do. We even sent them 9 pictures how the materials, we send them over to 10 United States in bundles and everything, and we have 11 to put them together. We have the laborers here, and 12 they're working to put in materials. 13 So that's not a taxable item. This is -- we 14 don't have a store. We don't show the cabinets like 15 other stores show the cabinets. That's different. 16 Our cabinets are in very high-end homes where we have 17 to apply them right to the wall. There is no 18 scribes. They have to make perfect, custom -- 19 and -- and that's where we're at. Because that's -- 20 that's why we pay all this sales tax up front for all 21 the materials. We know we have to pay sales tax, 22 that's why we do it, for all the materials. 23 The same thing as the framer buys the lumber 24 to build the houses. He pays the material. The 25 rest -- the rest is labor. So we do the labor, and 26 that's why we're disputing this -- this tax that 27 they -- they -- what they had on it. 28 MS. MA: Okay. That was my one question for 17 1 now. 2 MS. HARKEY: Anybody else have any 3 questions? 4 Member Horton. 5 MR. HORTON: Thank you, Madam Chair. 6 Question of the Department. 7 Department indicated -- I mean, the 8 appellant indicated that the product was purchased 9 tax-paid. 10 MR. KWEE: Yes, that's correct. But during 11 the audit, we actually made an allowance for all the 12 tax that was paid. So that amount is not at issue. 13 It reduced as liability. 14 MR. HORTON: And the Department also 15 adjusted for any shipping expenses that would have 16 been exempt shipping if it were. I don't -- I'm 17 asking, actually. 18 MR. KWEE: There were no -- on the invoices 19 that we had, we didn't have separately stated 20 shipping charges. 21 In order to be nontaxable, shipping charges 22 need to be separately stated. But the invoices just 23 listed the price to the materials. 24 MR. HORTON: Is that pursuant to a test 25 period or -- there's no -- 26 To the appellant, in shipping your product 27 to the United States, did the corporation charge the 28 partnership for shipping? 18 1 MR. PEDRO BACHOR: I'm sorry. Again, 2 please. 3 MS. HARKEY: Did the corporation charge the 4 sole proprietor? 5 MR. HORTON: Sole proprietor -- my -- my 6 apologies -- for shipping? 7 MR. PEDRO BACHOR: No, the corporation is 8 the same. He's the sole proprietor in the 9 corporation. He's the same. So we don't -- 10 MR. HORTON: Let me restate my question -- 11 MR. PEDRO BACHOR: We didn't charge each 12 other. We just -- we just pay the drivers, and we 13 pay, you know, the shipping. 14 MR. HORTON: In any of the invoices from the 15 Mexican entity to the California entity, in any of 16 those invoices was there a charge for shipping? 17 MR. PEDRO BACHOR: No. 18 MR. HORTON: Were there -- um, did -- how 19 was the product shipped? 20 MR. PEDRO BACHOR: The product shipping in 21 trucks. 22 MR. HORTON: Your own trucks or a shipper? 23 MR. PEDRO BACHOR: His own truck. 24 MR. HORTON: Own truck. 25 MR. PEDRO BACHOR: Mm-hm. 26 MR. HORTON: Okay. No further questions at 27 this time. 28 MS. HARKEY: Member Runner. 19 1 MR. RUNNER: Yeah. In that -- in that 2 exchange there between the materials coming from the 3 maquiladora was there any -- was there an invoice? 4 MR. PEDRO BACHOR: Well, the -- the 5 maquiladora invoices to cross a material in the 6 border. You have to have -- 7 MR. RUNNER: Is it an invoice, or just a -- 8 is it actually a bill? an invoice? 9 MR. PEDRO BACHOR: No, it's not an 10 invoice. 11 MR. RUNNER: Okay. So what is it? What is 12 it that you have to show when you come across the 13 border? 14 MR. PEDRO BACHOR: It's like a bill of 15 lading you have to show. 16 MR. RUNNER: Okay. 17 MR. PEDRO BACHOR: Because we have to show 18 all the material that's coming into the United 19 States, we have to show it going back. 20 MR. RUNNER: Gotcha. So there is no real 21 invoice. Nobody is being billed for the materials 22 that are coming from Mexico to the U.S. 23 MR. PEDRO BACHOR: Right. 24 MR. RUNNER: And, again, that's under this 25 whole concept that it's all one ownership. 26 MR. PEDRO BACHOR: One ownership. 27 MR. RUNNER: Because you wouldn't bill 28 yourself. 20 1 MR. PEDRO BACHOR: Yeah. 2 MR. RUNNER: You wouldn't create an invoice 3 for yourself. 4 MR. NEWMAN: Yeah, and that's -- 5 MR. RUNNER: So it's under the concept that 6 there's just one ownership, there's no invoicing 7 going on. All the transportation is all within the 8 same ownership. 9 The thing that creates, then, the -- the -- 10 the structure is the fact that it is required under 11 Mexican law for you to have this maquiladora 12 established -- 13 MR. PEDRO BACHOR: Yes, correct. 14 MR. RUNNER: -- which is what is unique 15 about this, which is out of your control. It's just 16 what it is that the Mexican law requires. 17 MR. NEWMAN: Plus, also, if they didn't have 18 it under maquiladora, they would be subject to that 19 tax and all of the Mexican tax, which would be a 20 double taxation. 21 So it is a specific and specifically geared 22 for other countries to invest in for labor in Mexico. 23 MR. RUNNER: Right. And these are all 24 agreements that are -- 25 MR. NEWMAN: This was created by -- 26 MR. RUNNER: -- treaties -- these are all 27 treaties and economic agreements -- 28 MR. NEWMAN: Exactly. 21 1 MR. RUNNER: -- between the United States 2 and Mexico in order to -- 3 MR PEDRO BACHOR: This is under NAFTA. 4 MR. RUNNER: Pardon? 5 MR. PEDRO BACHOR: This is under NAFTA. 6 MR. RUNNER: NAFTA, right. These are all 7 agreements under -- under federal law that allows you 8 to do this. 9 MR. NEWMAN: Yes, that is correct. 10 It's similar to like Pepsi Co. and Pepsi. 11 Same type of function where Pepsi Co. is a foreign 12 Mexico making Pepsi. Or Coke is another one in 13 Mexico. Everything is made there, and it's shipped 14 to the United States. So it's the same type of 15 operation. 16 MR. RUNNER: Okay. To me, it's important 17 to -- I mean, again, the concept to me is ownership. 18 And, clearly, if there was two corporations in the 19 sense that you would have to bill one another, you'd 20 have to have -- you'd have to have record -- you'd 21 have to demonstrate that you're actually changing 22 ownership -- material from one place to another. 23 There'd have to be greater record. 24 But, clearly, the fact that there is none of 25 that is -- seems to me an indicator that it is all 26 clearly under one ownership. 27 MR. NEWMAN: That is correct. 28 MR. RUNNER: Okay. Thank you. 22 1 MR. HORTON: Member Runner -- 2 MS. STOWERS: Madam Chair -- 3 MR. RUNNER: You can ask him what you want. 4 MR. HORTON: No, I just -- you just brang up 5 an interesting point. If there is no document 6 consummating a contractual sale, you know -- I 7 mean -- 8 MS. HARKEY: They're dying to talk. 9 MR. HORTON: I'm going to have to kind of 10 take a look at this. I mean, we're basically 11 imputing the selling price without such a document, 12 and the Mexican corporation could take a loss if they 13 wanted to and sell it for a whole lot less if they 14 wanted to. And how would we dispute or impute a 15 price other than that? And particularly, with it 16 being a foreign country. 17 But I see you guys kind of circling. 18 Mr. Kwee. 19 MR. KWEE: Yes, Member Horton. They 20 actually did issue two invoices for every 21 transaction. One of the invoices was attached to the 22 U.S. entry document. And the entry document stated, 23 again, quote, "I further declare that the merchandise 24 was obtained pursuant to a purchase order, or 25 agreement to purchase, and that the prices are set 26 forth in the invoices are true." And an invoice was 27 attached. 28 In addition to that, there was a handwritten 23 1 invoice that was separately, in addition, prepared 2 for each transaction. And I have copies, and I can 3 provide them to the Board Members. I can provide 4 invoices and entry documents to the Board Members if 5 you would like to review these documents. 6 MS. HARKEY: I would like to see the 7 documents and share them -- share them with the 8 appellants as well. 9 MS. STOWERS: Are you saying you only have 10 two for the entire audit period? 11 MR. HANKS: No, for each transaction, 12 Ms. Stowers. 13 MR. TUCKER: These are examples of each. 14 MR. KWEE: There's two invoices for every 15 transaction, but then we have invoices where -- 16 they're are invoices provided for the entire audit 17 period. 18 MR. HANKS: So just to summarize, CMC does 19 invoice the petitioner for the fabrication labor 20 that's at issue today. 21 Also, some materials are acquired as well in 22 Mexico and used to fabricate the cabinets. So some 23 of those charges are included in these invoice 24 billings, then, to the petitioner's business. 25 MR. HORTON: So -- 26 MR. NEWMAN: There are no materials billed 27 in Mexico. No materials have -- are acquired in 28 Mexico, period. 24 1 MR. HORTON: That's not really the line of 2 questioning. But -- so, um, case is still open. 3 They believe that this is one entity. They 4 operated under the presumption that this is one 5 entity. Under that presumption, they have a right to 6 charge whatever they want to charge. And if the 7 corporation changes its mind and issues a refund for 8 these sales, then that reduces the -- that reduces 9 the selling price, in effect, reduces their liability 10 to the extent that -- and how would we argue that? 11 MR. HANKS: Correct, Mr. Horton. We aren't 12 arguing that -- that there's a sales price in 13 addition to what was charged. What we're just saying 14 is that the amounts that CMC billed to the taxpayer 15 for the assembly labor -- the fabrication labor is -- 16 is what the added -- added taxable component is. 17 That's the charges that are part and parcel to their 18 cost to -- 19 MR. HORTON: Yeah, I -- 20 MR. HANKS: -- perform this construction 21 work. 22 MR. HORTON: I appreciate that. And I think 23 the Department was right in doing so. But given the 24 relationship of the entities, I don't -- under 25 certain circumstances, in the absence of an agreement 26 between the parties, the agency has the right to 27 impute the selling price. 28 But if these parties were to agree to a 25 1 different selling price, um, then what would be 2 the -- what would be the Department's options at that 3 point? 4 I mean, even now -- I mean, even now they 5 can go back and say, "Okay. Well, we weren't two 6 separate corporations." And I know water's edge sort 7 of comes into this. I -- I can't remember exactly. 8 I'm going to look it up while we're talking. 9 But this is a foreign company that we're 10 arguing is not related to the California-based 11 company. And this happened -- the auto dealers back 12 in the 1900s where the auto dealers, the manufacturer 13 was overpricing in order to reduce the profits in 14 California in order to minimize the tax. And then we 15 passed legislation to kind of deal with that. 16 But I don't -- I -- let me just ask the 17 Department their opinion under that circumstance. 18 One, do they have the option -- the right to do that? 19 Of course, I don't know how you say they don't. And 20 if they were to do that, what would -- what would you 21 say? What would be your position? 22 MR. KWEE: Yes, Member Horton. And I would 23 just clarify that during the audit period, the sole 24 proprietorship, petitioner actually made payments to 25 the Mexican corporation. He deducted those payments 26 on his federal income tax returns. He deducted the 27 payments made to the corporation in Mexico. 28 And I'd also clarify that the issue is that 26 1 the law defines a corporation and an individual as 2 two separate persons. 3 MR. HORTON: No, I get that. I get the law 4 defines them as two separate persons. But they're 5 operating in such a way that they can actually 6 control these transactions. 7 And, um, I don't know what their income tax 8 return said. I mean, I don't know if they got losses 9 that they're carrying for. And -- and if they do 10 have those losses, to the extent that they do, they 11 can make an adjustment. 12 I mean, they control these books. We may 13 take a position that they're separate because of 14 form. But as far as reality is concerned, they have 15 complete control over -- appears to have -- or 16 alleged to have complete control over these 17 transactions. And so I don't know why they couldn't 18 just adjust it. 19 MR. TUCKER: Mr. Horton, if they were to 20 adjust, they would need to go back to their income 21 tax returns -- 22 MR. HORTON: I agree. 23 MR. TUCKER: -- claim these payments as 24 costs of goods sold. 25 MR. HORTON: I agree. 26 MR. TUCKER: So they would have to file 27 amended tax returns. 28 MR. HORTON: I agree. I agree. I'm not -- 27 1 I'm not -- I'm not disagreeing. In fact, I actually 2 said that depending on the income tax implication, 3 they had loss -- I don't know. I haven't looked at 4 it. But if they had losses on their income tax 5 returns, and they can make the adjustment or somehow 6 the -- you know, anyway, not my call. I mean, I 7 don't know. I mean, taxpayer then -- 8 Thank you, Madam Chair, for indulging me. 9 MR. NEWMAN: Can I speak to this? 10 As a maquiladora, you cannot have a profit 11 in Mexico. The profits in Mexico are zero as a 12 maquiladora. That's one of the conditions. It's 13 mainly for the labor -- to have the labor in Mexico. 14 When they were paying the maquiladora, it 15 was just to cover the costs that were incurred on the 16 maquiladora only. And if you went through the books, 17 all you would see is monthly, daily checks going to 18 them to cover the cost. 19 So I mean, it's a direct -- you know -- in 20 our mind, it was transparent. 21 MR. HORTON: Mm-hm. 22 In that case, I withdraw my discussion 23 then. 24 MS. STOWERS: Was it to cover the cost -- to 25 cover the cost of what? 26 MR. NEWMAN: The labors in Mexico. 27 MS. STOWERS: The labor -- 28 MR. NEWMAN: And any of the fabricating 28 1 costs themselves in Mexico itself. IE, you know, 2 electrical, their warehouse, you know -- not the 3 warehouse, but their little area where they do the 4 cutting and so forth. That type stuff. It is solely 5 for the continuance of the labors. 6 And also in Mexico they have a very strict 7 employee-type of function that they have to deal 8 with. They have -- I'll let Shawn speak more on the 9 employee side that they are bound by by having 10 this. 11 MS. STOWERS: I would like to hear about the 12 employees. 13 MR. PEDRO BACHOR: I'm sorry -- 14 MS. STOWERS: I would like to hear about the 15 employees. 16 MR. PEDRO BACHOR: Yeah. When you're 17 looking at the invoices, this one right here, these 18 are invoices from our place here sent to Mexico. 19 This is not coming from Mexico here. You can see the 20 invoices, what it says on top is "going to." And 21 what it is, the tax there goes to when we ship in the 22 materials to Mexico. We have to make an invoice of 23 all the taxes and materials coming in. 24 So when they come out, we have to do -- we 25 have to bring all the materials back. Even sometimes 26 the sawdust. Mexico wants you to take it back, 27 because it doesn't belong. Because that's a 28 maquiladora. 29 1 So if he looks at all these invoices, these 2 invoices are bogus. They're not invoices coming out 3 from our -- for us -- for us -- from Mexico to us. 4 This is plywood. If you see them, it says how many 5 sheets of plywood. Those are materials. That's -- 6 that's good. These are -- these are things they're 7 shipping here to the broker, the materials. They're 8 all materials that we sent to Mexico. 9 MR. RUNNER: Can I just -- 10 MS. STOWERS: Go -- no, I was going to hear 11 about the employees. But let's just keep going on 12 the invoices. 13 I'll refer to you, Member Runner. 14 MR. PEDRO BACHOR: Oh, I'm sorry. 15 MS. STOWERS: We'll come back. 16 Go ahead. 17 MS. MA: Well, I -- I -- I had another 18 question. 19 MS. HARKEY: Okay. Who wants to talk about 20 the invoices? 21 Yes, please. 22 MR. RUNNER: Let me just finish up on the 23 invoice, then, so we can get to the conclusion on 24 this particular issue. 25 So this invoice here that we've been -- is 26 it an invoice that came from the maquiladora -- 27 maquiladora to -- to your -- to your Temecula? 28 MR. PEDRO BACHOR: No, it comes from the 30 1 Temecula to the maquiladora. 2 MR. RUNNER: This is -- this is an invoice 3 that you sent with the materials to maquiladora. 4 MR. PEDRO BACHOR: Yes. 5 MR. RUNNER: So there is still no invoice -- 6 MR. PEDRO BACHOR: Right. 7 MR. RUNNER: -- that exists -- 8 MR. PEDRO BACHOR: No. 9 MR. RUNNER: -- once the materials are 10 fabricated or stained -- I shouldn't say 11 fabricated -- stained from maquiladora to the 12 United States, correct? 13 MR. NEWMAN: Right. There's no invoice. 14 MR. RUNNER: Okay. Let me just see what the 15 Department says. 16 MR. KWEE: That should have been the third 17 document. It's the handwritten document that says 18 Carmel Mountain Cabinetry SRL -- 19 MR. RUNNER: You're going to have to speak 20 up closer to the mic, because -- 21 MS. MA: We don't have a third document. 22 MS. HARKEY: I do. 23 MR. KWEE: Well, there should have been a 24 third document with a handwritten -- 25 MS. MA: No, I -- 26 MR. RUNNER: Handwritten document -- I do 27 not -- I have one, two -- none of them are 28 handwritten. 31 1 MS. MA: I have two of the same invoices, 2 022. 3 MS. HARKEY: Here. 4 MR. RUNNER: Okay. Here's a -- okay. I've 5 got a handwritten document now. 6 MR. PEDRO BACHOR: Can I have one of those, 7 please? One copy? 8 MS. HARKEY: Yes, you may. 9 MR. TUCKER: If I could make one other 10 comment. We also have the statement from the 11 representative that the amounts billed were for the 12 labor, in which he regarded this fabrication labor. 13 And that's the amount that's at issue today. 14 MR. RUNNER: Okay. 15 Let me ask -- let me ask what -- so you have 16 this before you now? 17 MS. HARKEY: She's getting it. She's making 18 a copy. 19 MR. PEDRO BACHOR: She's bringing a copy. 20 Thank you. 21 (Inaudible discussion.) 22 MS. HARKEY: It's a different date. 23 MR. RUNNER: It's not related to these 24 things. I don't know what it's related to. That's 25 why we need to -- we can go on with some of their 26 questioning. And then once you get a copy of this, 27 we can -- 28 MS. MA: I have a question. 32 1 MR. RUNNER: -- we can come back to it. 2 MS. HARKEY: Okay. Thank you, Member Ma. 3 MS. MA: Okay. So I have a question. 4 So you buy the wood and the supplies. You 5 pay tax here in the U.S., then you ship them down, 6 you chop them down, you have people that stain it, 7 cut it, um -- cut it, and then you bring them back to 8 your truck, and you install them in -- 9 MR. PEDRO BACHOR: Houses. 10 MS. MA: -- houses. 11 MR. PEDRO BACHOR: In the construction 12 houses. 13 MS. MA: And then who is selling -- so the 14 contractor -- so you work for the contractor? 15 MR. PEDRO BACHOR: Yes. 16 MS. MA: So the contractor's the one that 17 actually sells the cabinet at fair market value, 18 right, to the developer or the owner? 19 MR. PEDRO BACHOR: Yeah. What -- what it is 20 is the homeowner's building a house, there's a 21 general contractor, and we're subcontractors. Just 22 like the framers, the plumbers, electricians. 23 MS. MA: Okay. 24 MR. PEDRO BACHOR: So we supply the 25 cabinets, and we install them. The installing part 26 takes sometimes longer than the building of the 27 product, because it comes in parts. That's why if we 28 were selling cables or cabinets that people will see, 33 1 we'll have a store, and then we have to pay tax on 2 it. 3 MS. MA: Right. Got it. 4 So the contractor's the one that writes the 5 invoice to the homeowner. Like, you never send the 6 homeowner -- 7 MR. PEDRO BACHOR: We -- we -- we -- no, we 8 send an invoice. We send an invoice. 9 MS. MA: To who? 10 MR. PEDRO BACHOR: To the contractor. 11 MS. MA: Right. To the contractor. 12 MR. PEDRO BACHOR: Because that's our 13 contract. 14 MS. MA: Right. 15 MR. PEDRO BACHOR: That's our contract. 16 MS. MA: Right. And that's your services 17 for the cabinet. And then the contractor's the one 18 that sends, bills -- marks it up, bills the owner, 19 and presumably charges the sales tax. 20 MR. PEDRO BACHOR: No. No. What happens is 21 that when it is something that a fixture that you 22 buy -- let's say, for example, a bathtub that the 23 plumber sells, they charge tax because they get it in 24 a store. 25 Like I explained, the framer, he buys all 26 the lumber, he puts it up, he never charges tax. He 27 pays tax on the lumber. 28 MS. MA: Right. 34 1 MR. PEDRO BACHOR: Same as us. 2 MS. MA: No, I get it. 3 MR. PEDRO BACHOR: We pay tax on the lumber, 4 because this is not a fixture. We are installing it 5 in the walls. 6 MS. MA: Got it. But you do not charge the 7 customer. The contractor charges the customer for 8 all of it. You work for the contractor. 9 MR. PEDRO BACHOR: We send an invoice to the 10 contractor -- 11 MS. MA: Right. I get it. 12 MR. PEDRO BACHOR: -- and then he just -- 13 MS. MA: Got it. 14 MR. PEDRO BACHOR: -- vouchers or checks -- 15 MS. HARKEY: We're fine. We understand. 16 You are a subcontractor. 17 MS. MA: I just wanted to make sure that you 18 are truly a subcontractor. 19 MR. PEDRO BACHOR: Truly a subcontractor. 20 MR. NEWMAN: And they do have a 21 subcontractor license, too. 22 MS. HARKEY: Okay. 23 MR. NEWMAN: So we are bound by that as 24 well. 25 MS. HARKEY: Okay. Thank you. 26 Did you have some questions? 27 MS. STOWERS: No, I'm -- 28 MS. HARKEY: I -- 35 1 MS. STOWERS: Um, back to your employees. 2 Talk to me about the Mexican employees. Who is 3 paying them? 4 MR. PEDRO BACHOR: We're paying the 5 employees. 6 MS. STOWERS: The sole proprietor? 7 MR. PEDRO BACHOR: Well, he's paying the 8 company -- what the maquiladora does -- it's just a 9 pay like if it was an employee here. They deduct 10 insurance, they have insurance, they take out the 11 taxes and all that. So this is the moneys where 12 transfer from his account and all the employees get 13 paid in Mexico every -- every week. 14 MS. STOWERS: Every week. 15 MS. HARKEY: If I might -- 16 MS. STOWERS: As if it's still a single 17 entity? 18 MR. PEDRO BACHOR: Yeah. 19 MS. HARKEY: When I was -- long ago I worked 20 for a company -- I was the bookkeeper for a company 21 that contracted maquiladora in Mexico. I guess 22 that's kind of redundant. 23 But they just send an invoice with all of 24 the employees, the dollar amounts, and you, in 25 essence, just pay that invoice for the expenses. And 26 that's kind of the way they're handled. 27 MS. STOWERS: The Department said something 28 about the company was the limited liability entity 36 1 with two owners. And you all said one of the owners 2 had less than one percent ownership. 3 Does anybody know, is that a limited 4 liability entity similar to a limited liability 5 company in the United States where it could be 6 considered disregarded? 7 MR. KWEE: I'm sorry, what was the last 8 part? I didn't hear. 9 MS. STOWERS: Is it similar to the limited 10 liabilities companies that we have here that can be 11 considered a disregarded entity? 12 MS. MA: Yes. 13 MS. STOWERS: Because everything they're 14 saying to us, all of the expenses that have been 15 incurred by this entity, is paid by them as a sole 16 proprietorship. So it's as if it's one. And it does 17 not really exist -- does not seem like it exists for 18 Mexico tax purposes, because you're saying it does 19 not pay any taxes there. 20 MR. TUCKER: No, but they do have to 21 report. 22 MR. KWEE: They did file -- 23 MS. HARKEY: Explain that. 24 MS. STOWERS: You have reporting, but you 25 don't have tax obligations. 26 MR. NEWMAN: Correct. I mean, they just 27 have to report what is going on. They have to report 28 the employees and stuff of that nature. 37 1 MR. PEDRO BACHOR: In -- in Mexico how -- 2 it's called Hacienda, the IRS. And every corporation 3 there buys a -- it goes in the computer, and -- 4 and -- and you buy this program. And it's very 5 expensive, like $5,000. And everything goes -- you 6 have to report. They can go any time for your 7 corporation and look that is straight. 8 It's not like here, like you do the tax and 9 everything. We are just working with -- if he wants, 10 like, the IRS, Hacienda is almost a team. Every -- 11 every week that they put on, they have to put on 12 straight how much work is getting and everything, 13 because it is -- it -- we're not making any profit, 14 so we have to report all that on it. 15 MS. STOWERS: Okay. And reporting is done 16 by the individual. 17 MR. PEDRO BACHOR: Yes. We have to report 18 it about everything. They check everything out, 19 because it's in their computer constantly. It goes 20 through our -- it goes through the IRS, which is 21 called Hacienda. And my accountants, they put it on, 22 they put it on, and that's why everything has to come 23 out even. 24 MS. STOWERS: Okay. Thank you. 25 MR. PEDRO BACHOR: Now, on the invoice here, 26 one of the invoices here is in pesos, 420,000 pesos 27 that is there. The invoice is in pesos. 28 Now, one of the reasons these invoices are 38 1 done is to see what we're projecting on the month, or 2 two months, or three months. And what they do is 3 they send the IRS to our offices here in Murrieta, 4 and we check them out. If we're making any money, or 5 what we're doing and all that, what is coming out. 6 And that's one of the projects of this. 7 This is not a custom invoice. Custom 8 invoice -- if you want something done by custom, it 9 would be sealed, and you will have stamps and 10 everything. This is just for our records. 11 MR. RUNNER: This -- 12 MS. STOWERS: Go ahead. 13 MR. RUNNER: This would be used as kind of 14 an internal control? 15 MR. PEDRO BACHOR: Yes. 16 MR. NEWMAN: Exactly. 17 MR. RUNNER: Within the same ownership? 18 MR. PEDRO BACHOR: Yes. 19 MR. RUNNER: Thank you. 20 MS. STOWERS: And the same thing -- 21 everything they're saying to the Department is that 22 they are treating it as one. They're -- they're 23 covering all the expenses of the Mexican company, 24 they're doing all the reporting of the Mexican 25 company. 26 And this limited liability is very similar 27 to a -- either some kind of pass-through entity. 28 That seems to me that it is a single entity, and you 39 1 don't have a third party. 2 MR. KWEE: Right. And just to clarify, even 3 in California, an LLC and an individual would still 4 be treated as separate entities under the definition 5 provided of a person under the Sales and Use Tax Law. 6 So even if you're not an individual and then an LLC 7 as two separate entities, that still would be 8 considered two separate persons for our purposes 9 here. 10 And then here on the (inaudible) we would 11 further argue, because not only is this an LLC, but 12 it has two shareholders versus one shareholder. And 13 of course they did have documentation recording these 14 transactions. They had separate filings. They filed 15 tax returns in Mexico as a corporation. 16 And, I mean, basically, the way we're 17 looking at it is the law defines a person separately 18 as an individual, as one person, and a corporation or 19 LLC is a separate person. 20 MS. STOWERS: What about a partnership? 21 MR. KWEE: And a partnership also is a 22 separate person from an individual. So even if you 23 had an individual and a partnership doing business 24 with each other, those would be two separate persons. 25 They'd have two separate sales and use tax returns 26 and two separate permits with us. 27 MS. MA: If they were required to have a 28 seller's permit. 40 1 MR. KWEE: If they were required to have a 2 permit, yes. 3 MS. MA: Right. 4 MS. HARKEY: Okay. 5 MS. STOWERS: Back to the invoice. This 6 third invoice, is that what you guys are using to 7 impute the sales? 8 MR. KWEE: So we didn't -- 9 MR. HANKS: We're not imputing sales. I 10 just want to make that clear. So we're not imputing 11 sales. What we're looking at are just the direct 12 costs of the cabinetry that the petitioner is 13 installing in these contracts. 14 So what we've done is identify approximately 15 a million dollars of property that was acquired 16 tax-paid with a lot of credit within the audit for 17 that million-dollars worth of purchases. But there 18 are $5 million in additional costs related to all the 19 cabinetry expenses that the business has incurred 20 from the company in Mexico. 21 And it's those charges that are in question 22 that we're saying tax is owed on that assembly 23 fabrication labor that's performed by that other 24 entity. Whose costs then get passed on to our 25 taxpayer. And our taxpayer is then taking a 26 deduction on their federal income tax returns 27 associated with those $5 million of charges from the 28 Mexican entity. 41 1 MS. STOWERS: And that's -- and that's -- 2 I'm assuming that may be everything we're talking 3 about that you're paying the Mexican -- paying the 4 Mexican entity the labor, the shipping, and where 5 else you have to pay under -- 6 MS. HARKEY: Utilities. 7 MS. STOWERS: -- titillates. So some of 8 that may not be labor. Is it possible that what you 9 picked up or -- to the petitioner, what you reported 10 on the return could be a mixed bag of labor, 11 utilities, shipping, everything else? 12 MR. NEWMAN: Based on this number here, this 13 $4,790,000 in fabricated labor, that's the entire 14 jobs. I mean, on their -- his personal tax return in 15 a five-year period, he didn't make gross a million 16 dollars a year. So I don't know how they're coming 17 up with this labor. I really don't. 18 Can you explain? 19 MR. HANKS: So those are the identified 20 direct costs associated with all the cabinetry work 21 that is conducted by the business. 22 Originally, when the auditor looked at the 23 business, he was thinking that they possibly were 24 retailers of fixtures. It was later determined, no, 25 in fact, they're not making retail sales of those 26 fixtures. In fact, they're the consumer of all the 27 materials and the assembly labor related to the 28 construction of those materials, because they're not 42 1 selling them in a prefabricated condition. 2 So what the law says is that you need to 3 incur tax on any of those associated costs under 4 assembly cost or material costs. These are just 5 material costs associated with all these contracts 6 that we found associated with all the -- the 7 cabinetry work over this three-year audit period. 8 MS. STOWERS: Go ahead. 9 MR. HORTON: Um, that sort of presents a 10 problem -- not necessarily, but let me just ask some 11 questions. 12 MR. NEWMAN: This is basically -- sorry. 13 Go ahead. 14 MR. HORTON: I want to try not to be leading 15 in these questions, so forgive me if I am. 16 Um, the Department picked up all of the 17 expenses. Not, necessarily, in contractual sales 18 price. But the expenses -- is that -- did I hear you 19 correctly? 20 MR. HANKS: These are the actual incurred 21 costs to pay for the associated assembly labor that's 22 performed in Mexico. 23 MR. HORTON: And where did you -- where did 24 you -- how did you determine it was a cause, and 25 where did you get the number? 26 MR. HANKS: So from the invoices that 27 Mr. Kwee presented. I mean, this was just for one 28 contract. But there are numerous invoices, you know, 43 1 that relate to each individual customized contract. 2 MR. HORTON: And -- is that the answer? 3 And -- and so you looked at one invoice and, 4 based on your -- that one invoice, you made the 5 conclusion that these -- all of these -- or did you 6 look at things on an actual basis? I mean, what did 7 you come up with the total number? How did you get 8 to the total number? 9 MR. KWEE: If I may clarify, they had costs 10 of goods sold listed on their federal income tax 11 returns. And then also -- 12 MR. HORTON: So you did use costs of goods 13 sold? 14 MR. KWEE: Yes. We looked at that on their 15 income tax returns, and also on the profit and loss 16 statements that they provided for -- 17 MR. HORTON: Okay. 18 MR. KWEE: -- costs of goods sold. 19 MR. HORTON: So there's an assumption 20 that -- there's an assumption on the part of the 21 Department that costs of goods sold reflects the 22 total fabrication labor, and all the costs associated 23 with fabrication -- 24 MR. HANKS: Correct. 25 MR. HORTON: -- based on your observation of 26 one invoice? 27 MR. HANKS: No, multiple invoices. 28 MR. HORTON: How many invoices? 44 1 MR. HANKS: We -- we've just illustrated one 2 of the invoices for one of the many contracts. 3 MR. HORTON: So I'm -- I'm -- I'm trying to 4 extract how the Department got there. So if you 5 want, you can just tell me. But -- are -- so the 6 Department did a test, right? 7 MR. HANKS: No. 8 MR. HORTON: They didn't do a test? 9 MR. HANKS: No. No test. No test. So 10 basically we're looking at the profit and loss 11 statements in the income tax returns. 12 MR. HORTON: I get that. 13 MS. STOWERS: For all years? 14 MR. HORTON: Let's -- I -- I want to focus 15 on -- I want to focus on the test that the Department 16 did to determine that costs of goods sold reflect -- 17 all of costs of goods sold reflects the fabrication 18 labor from the Mexican entity. Tell me about that 19 test. 20 MR. KWEE: So, to, um, clarify, in the 21 original -- I could go -- originally, in the first 22 audit, the FBO audit, they didn't provide income tax 23 returns or business records, so we used solely the 24 declared import value. And you have a copy, for 25 example, of one. 26 We had a listing of -- they had these 27 declarations for 2007, 8, 9, and 10, but not for the 28 last year of the audit period. And for 2008 to 2010, 45 1 they -- we actually accepted the taxpayer's profit 2 and loss statements that were provided to us by the 3 taxpayer. In addition, we had the supporting 4 invoices. 5 And for 2011 -- 6 MR. HORTON: In addition, we had supported 7 invoices. 8 MR. KWEE: Right. We had the -- the -- 9 MR. HORTON: You didn't look at the invoices 10 on an actual basis, so can you -- can you define what 11 you mean by supporting invoices -- 12 MR. KWEE: Right. So -- 13 MR. HORTON: -- from a quantitative 14 analysis? 15 MR. KWEE: So they had like, basically, 16 three values. There was the cost of goods sold 17 deducted on the income tax return, there was the 18 profit and loss statements, and then they had the 19 declared values on their -- on their import 20 statements. 21 And their profit and loss statements, they 22 actually provided to us where they showed a lower 23 cost than what they deducted on their income tax 24 return. So we gave them the benefit of the doubt and 25 used -- 26 MR. HORTON: I get that. 27 MR. KWEE: -- a lower value. 28 MR. HORTON: I get that. And in the absence 46 1 of -- in the absence of source documents, you issued 2 an FBO, you used the profit and loss, and all the 3 other final documents that they had. 4 What did you look at to determine that all 5 of costs of goods sold should be attributed to a sale 6 between these parties of fabrication labor? 7 MR. HANKS: So we're looking at their -- 8 they have various -- 9 MR. HORTON: What source documents did you 10 look at? What tests did you conduct? 11 MR. HANKS: Profit and loss statements. 12 MR. HORTON: That's it? So you just looked 13 at -- 14 MR. HANKS: Profit and loss statements. 15 They had some federal income tax return information 16 that we could also examine. The profit and loss 17 statements were supported by invoices, purchase 18 invoices. 19 MR. HORTON: You keep going back to the 20 profit and loss statements supported by purchase 21 invoices. Did the Department examine purchase 22 invoices to the -- in all of the expenses, some 23 source documents, to determine that all of costs of 24 goods sold reflects the selling price of fabrication 25 labor between these two entities? 26 MR. HANKS: Yes. We have the categories of 27 cabinet Mexican cash expenses, materials for 28 cabinets, and Mexican wire transfers. And so those 47 1 were the -- 2 MR. HORTON: Tell me what you did. I get 3 you got the categories. Tell me about the tests. 4 Did you do a test of all of it, costs of 5 goods sold? And of that test you determined all of 6 it was fabrication labor? 7 Or did you do -- I mean, use this term -- 8 but it typically is called a segregation test where 9 you take a look at the universe, you kind of 10 segregate it out to see what costs of goods sold is, 11 you develop a percentage, and you say, based on that 12 percentage, based on this test, based on that 13 percentage, costs of goods sold reflects all 14 fabrication labor. And there's no errors in the 15 reported costs of goods sold. 16 MR. HANKS: Right. 17 MR. HORTON: So you verify so you can accept 18 it. Or in the absence of evidence to the contrary, 19 you just accept it. And that's the right thing to 20 do. But I'm just -- 21 MR. HANKS: So typically what happens, and 22 what happened in this case -- 23 MR. HORTON: No, no, no. I try to stay away 24 from hypotheticals even on my side of the fence. 25 What actually happened? 26 MR. HANKS: Right. So in our examination of 27 the taxpayer's accounting records, and most 28 importantly through our communications with the 48 1 taxpayer just to identify what these costs represent, 2 we determined that there were these three component 3 charges that relate to assembly charges performed by 4 the maquiladora. 5 MR. HORTON: Okay. 6 MR. HANKS: And so they led us through the 7 individual invoices that you have in front of you for 8 some of the transactions. 9 Typically, we don't look at every 10 transaction, because we don't have the time to do 11 that. But we trace some of those transactions into 12 the assembly records. That's what was done in this 13 case. 14 MR. HORTON: Okay. 15 MR. HANKS: And then we looked at the 16 importation documents that confirmed the U.S. dollars 17 that were associated with those purchases. 18 So those -- those kind of tie to the profit 19 and loss aggregated cost that -- that we're 20 scheduling in the audit. 21 MR. HORTON: Yeah, I understand what you're 22 saying. It's a long about way of saying without 23 repeating. I get it. 24 Question of the appellant. 25 The expenses that you are -- are you -- are 26 you required in any way to cover these expenses 27 related -- that the Mexican entity has -- 28 MR. PEDRO BACHOR: Yeah. All the expenses 49 1 we have to -- we have to pay. 2 MR. HORTON: You pay all of the expenses? 3 MR. PEDRO BACHOR: I'm sorry? 4 MR. HORTON: You pay all of the -- 5 MR. PEDRO BACHOR: It's one company. So 6 it's just like if you had the company here, you have 7 to pay expenses to the workers, you know, the rental, 8 electricity, water, everything is paid. 9 MR. HORTON: Okay. And on the labor, are 10 you just paying the actual cost of the labor? 11 MR. PEDRO BACHOR: Yes. 12 MR. HORTON: So you're -- what's -- 13 MR. PEDRO BACHOR: In Mexico they have -- 14 they pay in Mexico is the labor, gets the pay. And 15 it's got -- including -- it's called another thing, 16 it's called (inaudible) is for housing for them. And 17 then there's another payment that is the ins, which 18 is the insurance, like the social security. And then 19 they have the vacation's pay, they have a 20 pre-vacation they call it, too. And then they have 21 the end of the year that they get bonuses and all 22 that. And that's required by law, by the Mexican 23 law. 24 It is not -- a lot of people think it's very 25 cheap to do the stuff in Mexico. It is not. It's 26 very tough to work in Mexico. He has to go -- I have 27 to go to a shop and travel 105 miles back and forth, 28 that's 210 miles. 50 1 MR. HORTON: It seems that the Department 2 has taken a position that all of your expenses are -- 3 they're attributing all of your expenses that you are 4 treating as part of your costs of goods sold, because 5 it's part of your cost of operating that company. 6 They're treating all that cost as a sale of 7 fabrication labor. 8 And so if there is within their -- if -- 9 one, if there's an agreement between the parties that 10 the fabrication labor is only to be billed to you as 11 the actual cost of that labor, and that you're 12 somehow expensing the rest of that as some other 13 contractual relationship, then -- and you can 14 distinguish that, then the selling price of the labor 15 is the actual cost, and not all of these other 16 expenses. If that's the case. Again, I don't want 17 to lead you into anything. 18 MR. PEDRO BACHOR: See, the only way, too, 19 that if we were -- if we were selling to a store, 20 then we wouldn't even pay tax on the material that we 21 buy. We'd be tax exempt. And then the store charges 22 tax on it. 23 MR. HORTON: I mean, if both these -- if 24 both these companies were California, the 25 California-based company wouldn't have to charge you 26 for their telephone, for their insurance, for all of 27 that as it relates to the labor. They can choose to 28 either absorb that, or they can choose to charge you 51 1 some other way. Or if you all did wholly owned it, 2 you can choose to expense it off. 3 I don't -- I'm -- I'm asking what happened. 4 I mean, you're in a fortunate position that it 5 doesn't sound as if the Department -- and maybe I'll 6 go back to them and give them an opportunity -- has 7 the Department really scrutinized the total costs of 8 goods sold to determine if all of those costs were 9 attributed to the actual fabrication labor? 10 And we have no evidence to the contrary that 11 the Department is wrong. Other than whatever your 12 testimony is, unless you can present something. 13 MR. NEWMAN: In this particular case, like 14 you stated, if it was two separate companies, that's 15 correct. If it's one company, no. All expenses 16 would be amicable. 17 And I'm looking at this thing here, they 18 keep on going to the first audit. They're not 19 realizing there was a second audit, and there was a 20 true subcontract. 21 If you look at this, on page 3 of the actual 22 summary here, they only reduce it by $316,000 for all 23 of the costs of goods. 24 On assumption, the first audit, they assume 25 that it was two distinct companies. Okay? And then 26 they said, "Oh, no. It's a subcontractor." 27 So you're saying $316,000 for five years is 28 all the profit, all the materials, and every -- and 52 1 all of the labor to install? I don't see it. 2 Because the 5 million is what they made for the 3 whole -- this whole duration of the audit. That is 4 the gross receipts. 5 So I'm not sure where they're getting -- if 6 they're throwing the whole -- costs of goods all as 7 one whole, or how they're coming up with this number. 8 So, like I said, it has gone through many 9 hands. They've had many auditors on this. And 10 that's why we're here today. It's a con -- it's a 11 mess. 12 And, again, our stance is still the same. 13 My client's here, they treat the whole thing as one. 14 If it was an LLC like he's stating, yes, one percent 15 owner is almost a disregarded owner. 16 MR. HORTON: Did -- did the Department look 17 at the income tax returns? 18 MR. HANKS: We did. We looked at costs of 19 goods sold. 20 MR. HORTON: Did -- did the Department 21 find -- was there any expenses on the income tax 22 returns? I mean, was it -- was there a reasonable 23 relationship between the expenses claimed on the tax 24 returns and the cost of goods sold that would have 25 given you some indication that possibly expenses 26 were -- expenses that were not attributed to costs of 27 goods sold were included, and the costs of goods sold 28 as opposed to being expensed out. 53 1 MR. HANKS: There's no indication of our 2 examining that. But I wanted to reiterate what 3 Mr. Kwee had mentioned. 4 We're not taxing all of costs of goods sold. 5 So it's only those three categories that I identified 6 that we're associating with the assembly labor or 7 fabrication labor. So it's the three categories -- 8 MR. HORTON: The testimony was that you 9 picked up all the costs of goods sold and -- 10 MR. HANKS: Well, I mean, virtually -- 11 virtually most of it. I mean, because costs of goods 12 sold, '94 percent of costs of goods sold -- 13 MR. HORTON: Do me a favor -- my apologies. 14 Just tell me what is. Not -- I mean, cause it's -- 15 it's changed. Your testimony is changing. 16 So you found three categories. And if you 17 guys want to meet and confer, I'm okay. You filed 18 three categories. And of those three categories, you 19 determined that all of their -- so tell me -- tell me 20 what happened again. 21 MR. HANKS: All right. Mr. Horton, I 22 apologize for the confusion. 23 MR. HORTON: That's okay. 24 MR. HANKS: So what Mr. Kwee was mentioning, 25 and what I want to reiterate, is that the majority of 26 costs of goods sold do relate to the assembly charges 27 and material costs -- 28 MR. HORTON: How'd you determine that? 54 1 MR. HANKS: -- as you would expect for this 2 business. 3 MR. HORTON: How'd you determine that? 4 MR. HANKS: Because we -- we examined what 5 costs of goods sold was on the income tax returns. 6 We compare those -- 7 MR. HORTON: Just one number on the income 8 tax returns, you have to go back to the source 9 documents to determine that. 10 MR. HANKS: Right. 11 MR. HORTON: So you examined the source 12 documents that went into the purchase journal that 13 went into costs of goods sold. How many source 14 documents did you examine? 15 MR. HANKS: It's not identified how many 16 source documents. 17 MR. HORTON: So you arbitrarily took a 18 number of source documents, reviewed them, and you 19 can't trace that into the purchase journal, and you 20 can't trace from the purchase journal to the costs of 21 goods sold on the return unless you did a period of 22 time on an actual basis. 23 I mean, you can -- I mean, there are a lot 24 of things you can do, but you've got to tell me you 25 did it. Otherwise, you know, I can't take that into 26 consideration. From what you're telling me is that 27 you -- I don't want to -- tell me what you said. 28 MR. HANKS: Mr. Horton, we have three 55 1 categories of manufacturing costs that are related to 2 the work done in Mexico. The three categories I 3 identified, we have individual accounts that identify 4 those accounts. Those charges consist of 94 percent 5 of what the taxpayer's charging as costs of goods 6 sold. 7 MR. HORTON: So what you're saying is that 8 in the purchase journal -- you didn't use costs of 9 goods sold at all. But in the purchase journal, 10 there are three categories that make up the 11 fabrication, the cost of fabricating, and you just 12 picked up from the purchase journal? 13 MR. HANKS: Well, from the profit and loss 14 statements. The figures that we're looking at come 15 from the profit and loss statements which are 16 supported by entries in the purchases journal, which 17 are further supported by the purchase invoices. 18 So we're just saying the majority of costs 19 of goods sold relate to charges for materials and -- 20 and for the associated assembly labor that was 21 conducted in Mexico. 22 MR. HORTON: Yeah. I don't -- 23 MR. HANKS: But we're not taxing all of 24 costs of goods sold. Just those three categories 25 that relate to charges from the maquiladora. 26 MR. HORTON: Well, I -- I'm not necessarily 27 in a position to -- to -- to -- and don't believe in 28 redoing the audit from this position. 56 1 I do want to say, though, that -- and it 2 doesn't appear -- I do want to say that it appears 3 that the numbers you -- that -- it appears that there 4 is some prob -- possibility that using the number 5 that you used could include expenses that were not 6 attributed to the fabrication of these items. And 7 that you have not stated that you've done a test or 8 that you've picked it up on an actual basis, the 9 actual cost on an actual basis. 10 Instead, you picked up, from what you're 11 telling me, the profit and the -- the costs of goods 12 sold on the profit and loss statement, as opposed 13 to -- which may be commingled with other expenses. 14 If you were to say that you did an 15 examination and you verify the costs of goods sold 16 and profit and loss, there were no other expenses 17 included in those numbers that could be attributed 18 to -- to costs that are not associated with 19 fabrication labor based on your tests and your 20 examination. 21 And, fortunately, we're gonna have an 22 opportunity to kind of -- because we're not going to 23 vote on this -- to kind of go back -- 24 MS. HARKEY: We are going to vote on it. 25 MR. HORTON: We are? I mean -- today? 26 MS. HARKEY: Yeah, we're voting on it. 27 We're proceeding based on the advice of our 28 counsel. 57 1 MR. HORTON: Okay. 2 Well, you have the audit there? 3 MR. HANKS: We have the audit working papers 4 here. 5 MR. HORTON: Can I look at it? 6 MR. HANKS: Sure. Sure. 7 There's a statement I just wanted to share 8 with you. In the audit work paper comments, they say 9 the accountant claimed that the total expenses per 10 those three accounts that I mentioned to be the costs 11 of goods sold for income tax purposes. 12 So those are the charges that they're 13 accumulating within the P & Ls, supported by their 14 purchase records. They haven't indicated to us that 15 those include any other charges, you know, that 16 aren't related to the purchases from the maquiladora. 17 And our auditor would have looked for that to just 18 ensure that -- that there weren't utility charges or 19 some other charge. 20 MR. HORTON: And not necessarily the 21 appellant hasn't presented or testified to the 22 contrary. I -- I'm just -- it just doesn't appear -- 23 just based on their testimony, it appears that there 24 are a whole lot of expenses that may be 25 nonfabricating expenses, nonfabrication labor that's 26 included. 27 And it also, given the relationship of the 28 two separate entities, they actually could just sell 58 1 the fabrication, the actual fabrication at their 2 cost. They don't have to impute a markup on it. And 3 they don't have to recognize the markup on it. 4 And I get if they went to their income tax 5 returns, and they did this, and it was on their 6 income tax returns, just -- they don't have to do it 7 in costs of goods sold in order to reduce their 8 profit and loss. They can expense it and then end up 9 at the same spot as far as their taxable income -- 10 their income tax treatment. 11 So -- and the fact that we asked the 12 question of a particular party -- it's always in how 13 you ask the question and the detail of the question 14 that you ask if you're exploring at trying to get to 15 the truth. Which is inherently the problem that 16 we're having with this new process. But it is what 17 it is, and we've got to deal with it. 18 MR. TUCKER: Mr. Horton, if I might add. 19 Those were the amounts that were billed by the 20 Mexican corporation to the individual. So this was 21 simply a billed amount. Those were the amounts that 22 showed up in his record. There was no -- 23 MR. HORTON: Their testimony is they're 24 billing all expenses. 25 MR. TUCKER: They're billing an amount for 26 the fabrication labor. 27 MR. HORTON: That's not their testimony. 28 Their testimony is that they're incurring all 59 1 expenses associated with that factory. And that's 2 what the billing reflects. 3 And based on their relationship with the 4 Mexican country, it appears that that's true, that 5 they have to do that. I mean, if that's part of the 6 requirement of the Mexican government. 7 So that lends credibility to their testimony 8 that all -- they are assuming all of the expenses of 9 that operation down in Mexico, and that they are 10 paying for all of the expenses of that operation down 11 in Mexico. 12 And so if -- if the Department hasn't 13 segregated that out, they can't say with confidence 14 that all of those expenses -- Department, I -- I 15 think you're right, given your position, that you're 16 right to assume. But in -- but we've got other 17 evidence now. 18 MS. HARKEY: I just -- I just like to add 19 that there is a schedule that I -- that is in the 20 file, schedule R1 that has a bunch of other charges 21 that aren't just fabrication labor. 22 And so with that, I think, you know, I'm 23 going to -- we've certainly talked this a whole lot. 24 And I think we have a Member that's ready for a 25 motion. 26 MR. RUNNER: Let me -- I'll try a motion, 27 and we'll go from there. We can see if we -- or we 28 can certainly discuss the motion. 60 1 I would move to grant the petition based 2 upon the findings the maquiladora is the same 3 ownership as the sole proprietorship. And we would 4 acknowledge this as a Section 40 case, and that it be 5 a precedential decision based upon the Board's 6 finding. 7 MS. STOWERS: Precedential? 8 MR. RUNNER: Yes. 9 MS. HARKEY: I will second it. 10 Now we can talk about it. 11 MR. HORTON: Can I see the audit? 12 MS. HARKEY: Why are you asking for 13 precedential? 14 MR. HORTON: I -- I -- I have no issue with 15 the decision being precedential. But -- 16 MS. HARKEY: I do. 17 MR. HORTON: But I don't -- 18 (Inaudible discussion.) 19 MR. RUNNER: Can I speak to the motion real 20 quick? 21 MS. HARKEY: Go ahead. 22 MR. RUNNER: My reason for making it 23 precedential is because I believe there may be other 24 taxpayers who are in similar tax situations where 25 they have a relationship with the maquiladora under 26 the Mexican law, and, therefore, have this 27 requirement. 28 So all's we're doing by saying this is that 61 1 we're setting a standard for other companies who may 2 be in the same situation, where they're a sole 3 ownership like this one, they end up with another 4 business in Mexico. But because the Mexican law, end 5 up with a -- with a -- with a Mexican partner at one 6 percent. 7 So all's I'm saying is this clarifies if 8 similar people are in the same business relationship, 9 then this -- then the -- then the rationale of sole 10 ownership would be the same. 11 MS. MA: Can I ask a question? 12 MR. RUNNER: I can -- I can divide the 13 motion if we'd like. If that makes it easier. 14 MS. HARKEY: Yes, I'd like to divide the 15 motion. 16 MS. MA: Can I ask a question to the 17 taxpayers? 18 If it's not a one percent partner that you 19 have to have -- I mean, is that a minimum one 20 percent? What if it's, you know, 51 you guys, 49 21 someone else? 22 MR. PEDRO BACHOR: It could be any 23 percentage. 24 MS. MA: It doesn't matter. 25 MR. PEDRO BACHOR: Yeah. But we put one 26 percent because we owned it -- 27 MS. MA: I -- I -- I get it. 28 MR. PEDRO BACHOR: If they come to harm us, 62 1 one percent, that's -- 2 MS. MA: Right. 3 MR. PEDRO BACHOR: -- not do anything. 4 MS. MA: Right. But could you have said 5 90 percent, 10 percent -- 6 MR. PEDRO BACHOR: Yes. 7 MS. MA: -- and still done it the same way? 8 MR. PEDRO BACHOR: Yes. 9 MS. MA: 51/49. 10 MR. PEDRO BACHOR: Yes. 11 MS. MA: So that's my problem with having it 12 a precedential, because the percentage may change 13 even though they may have the same tax treatment. 14 MR. RUNNER: Okay. Let me -- we can 15 discuss -- 16 MS. STOWERS: Okay. I actually -- 17 MR. ANGEJA: Then it wouldn't be full 18 ownership like what we're talking about. The reason 19 we are specific 99/1 -- if it was 59/49, then it is a 20 true bonafide complete separate entity, because there 21 is two owners, and most of it would be a Mexican 22 corporation. 23 MS. MA: Okay. What if it's 98/2 percent? 24 MR. NEWMAN: Ours is 99/1. 25 MS. MA: I know. I'm just saying, for 26 another taxpayer that sets it up to be 98 percent and 27 2 percent, could you still -- 28 MR. NEWMAN: But there would be no reason 63 1 for it to do that, because -- 2 MS. MA: No, I'm just -- I know there's no 3 reason. I'm just asking. 4 Let's say you have a husband and wife that 5 work for you, and you want to have it 98 percent, and 6 then 1 percent to the husband, and 1 percent to the 7 wife. You could still report it the same way, right? 8 MR. NEWMAN: Yes. 9 MS. MA: And claim the same thing that 10 you're doing, but instead of 99/1 -- I'm just 11 saying -- we're trying to figure out whether we want 12 to use this case as a precedential case moving 13 forward. But my concern is that the percentages 14 could change. So just because it is a sole 15 proprietor having to organize in Mexico, the 16 percentage may change. And, therefore, I don't want 17 to use it as precedential, because the circumstances 18 may change. 19 MR. RUNNER: That -- that could be the case. 20 So let me just ask Appeals real quick. 21 And that is, if indeed the percentages were 22 different, then the facts would be different, 23 correct? 24 MS. HARKEY: I -- 25 MR. RUNNER: Let him answer. 26 Would that be correct? 27 MR. ANGEJA: You're gonna have the same 28 problem. The question -- do -- yes. The answer to 64 1 your question is yes, you would have different facts. 2 Is two percent sufficiently different? Is three 3 percent sufficiently different? 4 MR. RUNNER: Right. But that would -- that 5 would, then, change as the precedence would then be 6 based upon the facts of this case, correct? Which is 7 one percent. 8 MR. ANGEJA: Yes. 9 MR. RUNNER: So the idea of a future 10 decision being greater would be -- would not apply to 11 the precedence of this case. Someone could try to 12 argue it -- they could try to argue it, but the fact 13 is it is different. So that's why -- so my 14 understanding -- the issue of the precedence of this 15 case is based upon the facts of this case, which is 16 the one percent. 17 Again, I'd be glad to separate the issue. 18 MR. STOWERS: I actually tend to agree with 19 you, Mr. Runner, with them only having one percent 20 ownership. Having 99 percent ownership really 21 demonstrates to me that they're truly controlling 22 that other entity. And in substance, it is one 23 entity. When you start moving that percentage to -- 24 MR. RUNNER: Right. 25 MS. STOWERS: -- 95, 96, the facts do 26 change. And -- 27 MR. RUNNER: Right. That would be my 28 understanding of the case -- of the facts. 65 1 MS. STOWERS: Yeah. 2 MR. ANGEJA: And you can put -- you can 3 direct us to put language in there to limit it to the 4 facts of the opinion that you're -- 5 MR. RUNNER: That would certainly be the 6 intent of the motion that -- is that the facts would 7 be based upon the facts of this case alone. 8 MS. STOWERS: Exactly. And what is also 9 compelling to me is the other expenses that they are 10 paying over, the housing, the insurance, the 11 vacation, the pre-vacation, are all possibly part of 12 this labor cost that was picked up by the Department. 13 So if we don't have a second, I will go 14 ahead and second that motion. 15 MS. HARKEY: I seconded. But you go ahead. 16 Okay. Motion made by Member Runner, 17 seconded by Ms. Stowers. 18 Is there any objection? 19 No. Such -- 20 MR. HORTON: Well -- well -- wait. 21 MS. HARKEY: Come on. Speak up. We've got 22 a motion. We've got a second. 23 Are you objecting to the motion and a 24 second? Then roll with it. 25 MR. HORTON: Okay. Let me just make a 26 statement here. 27 MS. HARKEY: Okay. 28 MR. HORTON: You know, in any other -- I 66 1 mean, we're faced with a situation where we could 2 have explored this. And Appeals is not allowed to 3 supplement the record. We're looking at the evidence 4 as it's presented here. I'm looking at the testimony 5 that's been presented here. And based on the facts 6 here, I'm having a real challenge of objecting to 7 this motion. 8 I mean -- so, um -- I mean, I don't 9 necessarily believe that -- anyway -- all right. 10 I don't have any objection. 11 MS. HARKEY: Is there any objection to the 12 motion? 13 Okay. Such will be the order. 14 Thank you. 15 MR. NEWMAN: Thank you. Thank you very 16 much. 17 MR. PEDRO BACHOR: Thank you very much. 18 ---oOo--- 19 20 21 22 23 24 25 26 27 28 67 1 REPORTER'S CERTIFICATE 2 3 State of California ) 4 ) ss 5 County of Sacramento ) 6 7 I, Jillian Sumner, Hearing Reporter for 8 the California State Board of Equalization certify 9 that from July 28, 2017 audio, I recorded verbatim, 10 in shorthand, to the best of my ability, the 11 proceedings in the above-entitled hearing; that I 12 transcribed the shorthand writing into typewriting; 13 and that the preceding pages 1 through 67 14 constitute a complete and accurate transcription of 15 the shorthand writing. 16 17 Dated: April 24, 2018 18 19 20 ____________________________ 21 JILLIAN SUMNER, CSR #13619 22 Hearing Reporter 23 24 25 26 27 28 68