1 BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION 2 450 N STREET 3 SACRAMENTO, CALIFORNIA 4 5 6 7 8 9 REPORTER'S TRANSCRIPT 10 DECEMBER 13, 2017 11 (Prepared from audio recording) 12 13 14 15 SALES AND USE TAX APPEAL HEARING 16 APPEAL OF 17 ROBERT WARREN ROSENBAUM, 18 NO. 532193 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 Sen. George Runner (Ret.) 6 Member 7 Yvette Stowers Appearing for Betty T. 8 Yee, State Controller (per Government Code 9 Section 7.9) 10 Joann Richmond Chief 11 Board Proceedings Division 12 For California 13 Department of Tax and Fee Administration: Kevin Smith, 14 Legal Division Kevin Hanks, 15 Legal Division 16 For Appellants: Stephen L. Labiak, 17 Attorney 18 19 ---oOo--- 20 21 22 23 24 25 26 27 28 2 1 450 N STREET 2 SACRAMENTO, CALIFORNIA 3 DECEMBER 13, 2017 4 ---oOo--- 5 MS. RICHMOND: Our next item for today's 6 meeting is Item C, Sales and Use Tax Appeals 7 Hearings; Item C10, Robert Warren Rosenbaum, please 8 come forward. 9 Board Proceedings has received contribution 10 disclosure forms for today's hearings from the 11 parties, participants and agents. All forms are 12 properly completed and signed, and no disqualifying 13 contributions were disclosed. All parties, 14 participants, and agents are on the alpha listing 15 provided to your office. 16 Each person sitting at the table will be 17 asked to introduce themselves, and, if necessary, 18 their affiliation with the taxpayer for the record. 19 Ten minutes is allocated for the taxpayers 20 opening presentation, followed by ten minutes for the 21 Department's presentation. And five minutes is 22 allocated to the taxpayer for rebuttal. 23 Chairwoman Harkey. 24 MS. HARKEY: Thank you. 25 Let's let the gentleman get himself 26 situated. 27 MR. LABIAK: It's gonna be a couple minutes, 28 please. 3 1 MS. HARKEY: Sure. No problem. It's an 2 automobile audit, there would be a lot. 3 MR. LABIAK: A lot of trees were killed to 4 make this presentation. 5 I'm good. 6 MS. HARKEY: Okay. Thank you very much. 7 Mr. Angeja, please introduce the items on 8 this appeal. 9 MR. ANGEJA: Good morning, Madam Chair and 10 Members. I'm Jeff Angeja on behalf of the Appeals 11 Bureau. 12 The appeal before you involves five 13 unresolved issues, which are: 14 First, whether additional adjustments to the 15 unreported taxable sales are warranted. 16 Second, whether further adjustments to the 17 measure of disallowed claimed bad debts are 18 warranted. 19 Third, whether petitioner is entitled to 20 relief based on alleged erroneous written advice. 21 Fourth, whether petitioner was negligent. 22 And, fifth, whether further relief of 23 interest is warranted. 24 MS. HARKEY: Thank you. 25 Welcome to the State Board of Equalization. 26 You will have ten minutes to present your case. The 27 Department will have ten minutes. You'll have 28 another five minutes on rebuttal, and there's always 4 1 questions. 2 So if you would introduce yourself for the 3 record, please begin. 4 MR. LABIAK: Thank you. 5 Good afternoon. My name is Steven Labiak, 6 representing Robert Rosenbaum, also known as Carr 7 Bazaar. 8 Two main topics for me to cover in my time, 9 and if time allows, some smaller ones. But the first 10 main topic is the unreported sales. 11 The BOE claims there's $720,853 in 12 unreported sales; however in the Chin D&R of 1-28-16, 13 the number per footnote three or footnote eight of 14 BOE's brief is $714,889. I do not understand why the 15 change in these numbers has occurred from the BOE. 16 The BOE has asked repeatedly for 17 explanations for unreported sales, and these have 18 been provided repeatedly. 19 Most common is a person bought a car and 20 then brought it back for mechanic or financial 21 reasons. Person wants a car, and Rosenbaum wanted to 22 sell them a car, so he put them in a different car. 23 There are some examples attached as provided 24 in the Exhibit A. Rosenbaum didn't want to refund 25 the money, which is no different than the BOE. 26 However, you do end up with a sales jacket that does 27 not represent a sale. 28 It's no different than if you went to a 5 1 country store, bought some beans, you came back to 2 exchange them, they just told you to put them on the 3 shelf, grab a different can and go home. BOE seems 4 to think you owe two different sales taxes on two 5 full transactions, when in reality, there was only 6 one full transaction. 7 The jackets do exist to help track what has 8 happened with the car. If you look at BOE 9 statements, it states repeatedly the car was repoed 10 and resold within the quarter. This is almost half 11 of the category. But BOE expects two full payments 12 on cars that were repoed and resold in the same 13 quarter. 14 The car is repossessed in the sense that 15 Rosenbaum has to take it back, but there was no 16 completed sale to begin with. The funds were 17 typically used on another purchase or refunded in a 18 few cases. 19 BOE states to relieve Rosenbaum of liability 20 per Chin, and on their brief, on page 10 line 7, to 21 provide, and I quote, "documentary evidence of the 22 subsequent resales of these vehicles, to relieve 23 Mr. Rosenbaum of the liability as a reason to show 24 that the undocumented sa -- undocumented sales did 25 not occur." 26 The BOE could not even bother to look at 27 their own notes and their own work to remove what 28 they claim are unreported sales. 6 1 See Exhibit N of my original brief and BOE 2 spreadsheets. Exhibit O of this brief showed a 3 consolidated version. We satisfied their 4 requirements, yet it was ignored even being BOE's own 5 work. 6 Other examples we've showed, the tax was 7 paid to the DMV. And we included the DMV sheets. 8 But BOE thinks two taxes should be paid. The car was 9 stolen, a bad check given to Rosenbaum, yet BOE 10 thinks Rosenbaum should pay 100 percent of the tax to 11 the BOE when he got zero dollars for the car. 12 Unsalvaged vehicles, note 12 of the BOE 13 brief states that BOE did not attempt to verify 14 proof. This was in the jackets and in these binders, 15 all provided to BOE, yet they were ignored. 16 Two entire quarters were just assumed. I 17 can't provide an argument to that. I can't rebut an 18 argument when something was just assumed. 19 If there's other questions, I'm more than 20 happy to answer them on unreported sales. 21 The second main issues is the bad debt. 22 Exhibit B from today shows the earliest example of 23 what BOE requested, that both Rosenbaum amend his 24 returns to show a specific bad debt deduction, and if 25 done so, the BOE would accept the bad debt subject to 26 proof. Even though my client had been taking the bad 27 debt off the gross, and the BOE and the IRS had no 28 problems in the past. And in the future, Rosenbaum 7 1 required -- complied with the BOE request and filed 2 and had it accepted, his amended returns for 2003 to 3 2006. 4 Now the BOE refuses to accept these amended 5 returns. It should be noted that in 2011 and 2012, 6 Exhibit C, BOE accepted his amended returns. But not 7 in this case. 8 Regulation 1642 states that for bad debt 9 that it has to be taken on the taxes and for the 10 return to be filed and accepted. There can be no 11 dispute that the returns have been filed and 12 accepted. 13 With that explicit stating, maybe BOE thinks 14 the statute of limitation applies. It does not. The 15 statute of limitations acts as a defense for not 16 paying money out as BOE raised on this issue in our 17 request for refund. It does not prevent the filing 18 and accepting of the facts behind the request, only 19 the erroneous raising of this defense. The same 20 applies to the IRS. 21 Rosenbaum made no changes to the net, just 22 added the bad debt to the gross and listed a bad debt 23 line. No net changes. He followed the law, and now 24 BOE's refuses to accept its own advice and the law. 25 The potential of bad debt sought these four 26 years is 3.9 million, which is in excess to the bad 27 debt sought on this appeal. As to the bad debt 28 amounts, there's two different categories. The first 8 1 is charge-offs. This is provided by third-party 2 companies. It only took eight years for the BOE to 3 actually agree to this, even though this number is 4 provided by other parties. Mostly this has been 5 agreed to; however, there is still a slight 6 difference. 7 The first is because of the category called 8 LDW, which stands for Loss Damage Waiver. This is 9 another category of charge-offs that was listed this 10 way for insurance reasons. The same total was 11 provided to BOE on this, but they were not questions, 12 and they were just ignored. 13 The second is the timing of the bad debts. 14 Rosenbaum cannot put all his bad debts in the same 15 quarter they come in. He has one month to prepare 16 returns. By the time he gets the information, the 17 value of the vehicles and does the paperwork, it's a 18 different month or even a different year. 19 In 2011 and '12, he took bad debt years 20 earlier than the audit period, and the BOE had no 21 issues. BOE had only taken a couple months. And 22 this is another reason for the difference. 23 The second and most significant reason for 24 the difference is buy-back repossessions. For each 25 and every vehicle, as requested by BOE in e-mails 26 starting in Exhibit D and regulations 1642, Rosenbaum 27 did a bad sheet debt sheet. 28 This is all the work my client did on these 9 1 bad debt sheets as requested by BOE. I know it's a 2 lot. It is basically what is Appendix 1, and they 3 were ignored. I think BOE wanted Mr. Rosenbaum to 4 follow Appendix 2, but Rosenbaum did Appendix 1 of 5 Regulation 1642. He followed the law, but BOE 6 ignored his work. 7 But even if -- is ignored, the total should 8 be the same. But they are not. So why the 9 difference? It's because the BOE failed to follow 10 the law and left off the finance charge calculations 11 which would have benefited the taxpayer. They also 12 left off the cost of the smog certificates. 13 The second is the issue of the value of the 14 vehicles. Detailed some in my brief, which the BOE 15 has been informed of for years, yet still insists 16 that repossessed vehicles magically go up in value. 17 But there are others. 18 Exhibit E is Sam Rodriguez. Rosenbaum paid 19 $2,750 to this vehicle. When repossessed, Kelley 20 Blue Book, around the time, says 3,475. BOE had this 21 vehicle valued at $3,890, and Rosenbaum valued it at 22 1,250. So who is correct? 23 Regulation 1642(f)(4) states to use the 24 wholesale price and to adjust if not in average 25 condition. The car was impounded, numerous 26 repairs -- as provided in the exhibit -- were needed, 27 as a steering column was destroyed and this vehicle 28 was likely stolen. 10 1 This is in the average. This is clearly way 2 below average, not in a sellable-wholesale condition. 3 However, BOE believes a stolen vehicle with a broken 4 steering column is worth more than the Blue Book. 5 BOE believes a broken steering column car in 6 impound is above average. Rosenbaum gave the correct 7 value, as he is the expect. His value takes into 8 account the damages done and gives a fair value for 9 the vehicle. 10 Pamela Logan, Exhibit G. And I apologize, 11 it's a bit out of order. It's a classic '97 Ford 12 Escort, Blue Book at 2,900; BOE at 2,299 -- a very 13 exact number. Not 2,300; not 2,298. Rosenbaum at 14 $450. This car was driven 31,000 miles and had 15 repairs totaling $2,087, which included a blown 16 engine. So Blue Book minus repairs, and the 31,000 17 miles leaves a value of zero. However, Rosenbaum was 18 fair and put a scrap value of $450. BOE is of the 19 opinion that a '97 Ford Escort with a blown engine is 20 worth $2,299. This number has no basis in reality. 21 BOE has never offered an explanation as to 22 where their car values come from. Clearly, they are 23 not following the law, while Rosenbaum follows the 24 law. 25 Exhibit F, Thomas Lopez. Kelley Blue Book 26 of 10,500; Rosenbaum, only 500. Why? Because the 27 car was in an accident and severely damaged as the 28 exhibit shows. The proof is in there. It does have 11 1 scrap value. So what is BOE's value? There isn't 2 one. It's not in BOE's records. 3 I do have to admit an error on my part. I 4 had always gone from BOE's spreadsheet to my boxes to 5 check cars. I have 20 boxes in my office with all 6 the files, some of which I brought with me if you'd 7 like to see them. 8 Exhibit H shows two more missing files. 9 Shirley Berts and Thomas Williams. Altogether, these 10 three files total 30,000 of missing bad debt that is 11 not on BOE's records. This is only one box. They 12 claimed to have gone through the files, but evidently 13 missed a few. Add three files per box times 20 boxes 14 that I have to go through, that would be 600,000 of 15 missing bad debt that the BOE admitted. 16 Rosenbaum followed the law, and his bad debt 17 numbers are fair and accurate and fully accounted for 18 in numbers. I have ideas where BOE gets their 19 values, but I'll save that for the rebuttal if they 20 wish to opine on it. 21 The smaller issue is the district tax. And 22 we only bring this up because we think it shows how 23 BOE actually did not do the work. BOE states that 24 they went by the front cover of the sales jacket. 25 This does not list a city of sale. Just because a 26 jacket says Clovis, does not mean a person lives in 27 the city of Clovis. 28 I personally have a Clovis address. I do 12 1 not live in the city. I'm in the country. Where we 2 live there are a lot of country and county islands. 3 All have Clovis addresses, many are not in the city 4 of Clovis. 5 BOE has never stated that they actually 6 looked to verify if the person was in the city of 7 Clovis. BOE just claims Clovis, it's a city, and for 8 Rosenbaum to pay. 9 We will not pay, as BOE has not actually 10 done the work or will attest to being accurate. They 11 just made an assumption. And over the 6,000 12 involved, it is really not worth our time and effort 13 to clean up BOE's mess. 14 We ask for the Board to help clean up this 15 mess and find for the taxpayer on this and all the 16 other issues, and that a potential refund is owed. 17 Thank you. 18 MS. HARKEY: Thank you. 19 To the Department, you have ten minutes. 20 Please introduce yourself for the record. 21 MR. SMITH: Thank you. 22 Good morning, Chairwoman Harkey and Members 23 of the Board. I am Kevin Smith from the California 24 Department of Tax and Fee Administration's Legal 25 Division. With me today are Steven Smith and Kevin 26 Hanks, also from CDTFA. 27 We concur with the Appeals Bureau 28 recommendation. California imposes sales tax on a 13 1 retailer's resale -- retailer's resales of sales of 2 tangible personal property, measured by the 3 retailer's gross receipts, unless the sales 4 specifically exempt or excluded from taxation by 5 statute. 6 All of the retailer's gross receipts are 7 presumed subject to tax unless the retailer can prove 8 otherwise. 9 When the Board is not satisfied with the 10 accuracy of the tax returns filed, he may base this 11 determination of the tax upon the facts contained in 12 the return or upon any information that comes within 13 its possession. 14 Here the Department reviewed petitioner's 15 actual sales contracts, his sales journals, and the 16 amounts reported on his sales and use tax returns, 17 noting a number of transactions represented by sales 18 contracts that were not reported as taxable sales. 19 Petitioner has not provided any other 20 additional documentation to show that there are many 21 other reported taxable sales pertaining to sales 22 transactions that were never completed. Or to show 23 that his customers remitted the tax directly to the 24 DMV. Thus, we have no basis on which to recommend 25 adjustments. 26 Turning to the disallowed bad debt 27 deduction. A retailer's relief from liability for 28 sales tax to become -- became due and payable in so 14 1 far as the measure of the taxes represented by 2 accounts and found to be worthless and charged off 3 for income tax purposes by the retailer. Or if the 4 retailer is not required to file income tax returns, 5 charged off in accordance with generally accepted 6 accounting principles. 7 A retailer may claim a bad debt deduction 8 provided that the sales tax has been paid to the 9 state on such bad debt accounts, and a bad debt 10 deduction may be claimed only with respect to the 11 unclaimed amount upon which tax had been paid. 12 For the audit, petitioner claimed bad debt 13 deductions totaling approximately 3.6 million, which 14 he determined by multiplying his total buy-backs and 15 charge-offs by 73.5 percent. In addition, he only 16 charged off $9,750 of bad debts on his income tax 17 returns. 18 Pursuant to re-audit, the Department 19 reviewed additional documentation provided by the 20 petitioner and increased an allowance for bad debts 21 by $2,071,914, reducing the disallowed claimed bad 22 debts from $3,653,707 to $1,581,793. 23 Petitioner is still in disagreement with the 24 measures established in the re-audit, but has not 25 provided any additional documentation or evidence 26 that would warrant further adjustments to the measure 27 of disallowed claimed bad debts; thus, we have no 28 basis for which to recommend any additional 15 1 adjustments. 2 Accordingly, we ask that you deny the 3 petition. 4 Thank you. 5 MS. HARKEY: You have rebuttal time. Five 6 minutes, if you choose. 7 MR. LABIAK: Yes, I do. 8 The DMV brought up the issue of the taxes 9 paid on the DMV. That's a total of about 8,000 of 10 the over almost 700,000 that the Board has issue 11 with. So I'm not concerned about that one way or the 12 other. 13 My client prepared all the bad debts sheets 14 I've shown; however, the Board's numbers come from 15 only from their own spreadsheet. None of their 16 numbers comes from the work my client did. It was 17 ignored. They went by their own spreadsheets. 18 If they had taken into account my client's 19 work he did and submitted, then there would not be 20 the issues with the conflicts with the values of the 21 vehicles and the missing columns. 22 As to how much the BOE has moved, originally 23 they wanted to allow my client $9,000 in bad debt. 24 They wanted him to pay taxes on over $4 million, when 25 they clearly knew that that was not realistic. But 26 they made the demand anyway, and that is why this 27 process started. 28 Through all their work they've admitted 16 1 they've been wrong by almost half of that number, and 2 we're not done fighting. 3 My client wishes he could be here today to 4 give this next speech sort of on his own. But 5 unfortunately his house suffered a busted water pipe, 6 and that's why he's not here today. So this kind of 7 comes from him. 8 He no longer sells used cars anymore. He'd 9 been doing this for over 20, almost 30 years before 10 he stopped. 11 In that time, as the BOE has pointed out, 12 he's been under numerous audits. He's been in front 13 of this Board before and lost, and then went to court 14 and they settled for nothing. Which means BOE 15 100 percent agreed with my client. 16 This is the audit for -- the entire audit 17 for 2011 and a quarter of 2012. So I think five 18 quarters total, maybe three quarters of an inch. 19 This audit covering three-and-a-half years 20 is 20 banker's boxes. He's tired of fighting you 21 guys, to be honest with you. That is one of the 22 reasons he's done selling cars. It's no fun to try 23 to make a living and then have to shell out to pay 24 brilliant attorneys like myself tens of thousands of 25 dollars just to try to keep your hard-earned money. 26 He's not out to rip off the BOE; he's not 27 out to rip off his customers. He has no problems 28 paying what is owed. 17 1 And I admit, I found the one car where, you 2 know what, he charged the sales tax and he messed up. 3 He owes 20-some-odd dollars in tax. I don't think he 4 should have to pay two different attorneys $30,000 to 5 come to that conclusion. 6 Only a month ago was the fist time that the 7 BOE ever contacted me regarding that magic car that 8 went up in value and was repossessed. I brought that 9 to their attention. 10 And whether you believe me or not, that was 11 the first car I looked at when I first got this case. 12 It was just a coincidence that it happened to be the 13 one that I put in to show what had been going on. 14 You can believe me, or you can't. I can't help that 15 at this point. But that's the truth. 16 And I told them about this, "Hey, you've got 17 problems." And it's been repeatedly submitted. And 18 even now they won't admit they're wrong. They've 19 only moved so far on the same information that's been 20 presented years ago, not even by me. This -- where 21 they -- a lot of what they moved on was by my 22 client's old attorney. So this is not new 23 information. 24 It's only now that they've decided to change 25 what their standard is on the original tax returns, 26 and say, "Okay. Well, now instead of having a bad 27 debt deduction, we're just gonna make it anything we 28 want." They insisted we had to have a bad debt 18 1 deduction. We did what they asked. Now it's, "Well, 2 you don't need that, but we're not accepting the 3 amended returns." And I had repeatedly asked for an 4 explanation, a ruling on it, and they won't ever tell 5 me. 6 I finally got the answer in an informal 7 conversation with one of the auditors. I asked, "Why 8 won't you accept the amended returns?" And the 9 response was, "Is because it's self-serving." And if 10 that's the standard, even though this isn't criminal 11 court, we're guilty. Everything we're doing here is 12 self-serving. Everybody here is self-serving, 13 because I'm assuming everybody's getting paid. So 14 everything we're doing is self-serving. 15 But that's not the law. That doesn't even 16 make sense. But that's the reason they won't accept 17 the amended returns. 18 And I would ask that you accept the amended 19 returns, you accept the work and look at it, please, 20 and give us a ruling in our favor. 21 And I'm more than happy to answer any 22 questions you have. We've been at this almost ten 23 years, and we would like a ruling. 24 Thank you. 25 MS. HARKEY: Members, are there any 26 questions? 27 I will start. There's none. And I think 28 there will be some once we start. 19 1 MR. LABIAK: As long as we're out of here by 2 12:00. 3 MS. HARKEY: I have here that petitioner 4 originally claimed bad debts totaling 3,663,457 on 5 sales tax returns. 6 What were those comprised of? What were the 7 bad debts comprised of? Can you just elaborate, even 8 if you've already said, please -- 9 MR. LABIAK: I think originally the number 10 came from -- as they have said, it was based on an 11 estimate. And in -- 12 MS. HARKEY: Your customer -- your client 13 gave an estimate on his bad debts? 14 MR. LABIAK: Well, yeah. There's always an 15 estimated portion to it. Because when he gets 16 the -- he basically has the total sales, you know, 17 thousands of cars that can be across the audit 18 period. And he does have some that come back. And 19 then he has a portion of that, you know, where the 20 down payment was paid/where the down payment wasn't 21 paid. So instead of going and figuring out each and 22 every individual car, he says, "Okay. Based on past 23 history, based on what the BOE and my client had 24 agreed to in previous audits, it's a percentage." So 25 he said, "Okay. I'm going to apply the percentage." 26 Okay. The number changed, but not very much 27 when we've gone through and done the individual 28 totaling everything up. The number still changes a 20 1 little bit, because the numbers -- that percentage 2 I'm talking about, we used a number. I think it was 3 13.7 percent. 4 BOE's latest -- and this is for the -- for 5 the buy-backs, the charge-offs from the third-party 6 financiers, BOE had a lower number of around I think 7 9 percent. It varied a little bit. So I said, Okay. 8 Well, I'm going to use their number, and I'm going to 9 remove some of the months we were taking -- or my 10 client had originally took, I should say, from the 11 bad debt in quarters that were outside the audit 12 period. 13 So that's why the number changes a little 14 bit. I said, "Look, their number is close to what we 15 want. I'm not going to, you know, fall on my sword 16 for an arguable point. Let me adjust our figures to 17 kind of match theirs." And that's what we submitted 18 on. So that's why there's a little bit of 19 variability in there. 20 MS. HARKEY: Okay. I have a schedule here, 21 because I think this is -- this is an important point 22 is the bad debts. And it's difficult for me to see, 23 because it's from the -- it's an adjustment made to 24 the audit working papers. 25 In -- okay. Did the Department allow the 26 adjustments from the amended tax return? 27 MR. SMITH: They allowed the adjustments 28 from -- 21 1 MS. HARKEY: Did they allow -- where'd they 2 take -- where'd they get bad debts from? 3 MR. SMITH: They got it from the original 4 returns. 5 MS. HARKEY: From the original returns. 6 Okay. Original returns are filed. 7 Do you happen to know the law on bad debts, 8 how they're supposed to be calculated? Is there a 9 difference between actual and GAAP? 10 MR. LABIAK: Okay. I looked through the -- 11 in my original -- not this brief, my original brief 12 to the Appeals Division. I included as an exhibit 13 the specific laws on what the IRS requires. And it 14 was an attachment of the exhibit. I don't remember 15 off the top of my head what it was. And in three of 16 the years there was no specific mention of how a 17 person is supposed to take bad debt. 18 On the fourth, there is a mention of, "Well, 19 you should maybe take a bad debt line." What my 20 client had been doing is basically saying, "Well, 21 look, I have sales of a million dollars, I have bad 22 debts of 200,000. Okay. I didn't actually sell a 23 million dollars. I did not receive a million 24 dollars. I only actually received about 800,000. 25 The other 200,000 was the bad debt I never received." 26 This is a very simplified version. 27 So he says, "Okay. I'm only going to list 28 800,000 on my gross, on my taxes. And then I owe my 22 1 other deductions; electricity, employees, whatever." 2 Been doing that for years. I don't see how 3 that doesn't conform with accounting principles. Why 4 would you include income you didn't receive? ]. 5 If you want a very famous case of people 6 including income they haven't received yet, that is 7 what Inlam (phonetic) was doing. They were booking 8 forward years of income all into the current year. 9 What the position is of the BOE, I guess, is 10 that, well, my client should book forward all of that 11 income into that year and then take a bad debt 12 deduction. Well, it's income he hasn't received. So 13 I don't see how not booking income you haven't 14 received does not comply with accounting 15 principles. 16 MS. HARKEY: Okay. Well, I have a memo 17 here, old as it might be, September 20th, 1995 from 18 the State Board of Equalization. It's kind of like a 19 form letter. 20 It says that bad debt deduction was added by 21 the legislature in 1957. These statutes, 1957 22 Chapter 733, at that time the deduction was limited 23 to accounts which had been found to be worthless and 24 actually charged off for income tax purposes. 25 In 1970, the Legislature amended Revenue and 26 Tax Code 6055 and 60 -- 6203.5 to allow the deduction 27 for accounts which have been found to be worthless 28 and charged off for income tax purposes. Or if the 23 1 retailer is not required to file an income tax, 2 charged off in accordance with generally accepted 3 accounting principles. 4 So you can use GAAP principles, and I'm 5 assuming -- I would assume that's what -- why -- how 6 were the amended tax returns completed? 7 MR. LABIAK: I -- can you be a little more 8 specific on your question? 9 MS. HARKEY: Well, you went and you -- you 10 stated that you amended tax returns, that your client 11 amended the tax returns and gave them to the BOE, and 12 the BOE has refused to allow that number. 13 So do you have any information? I have here 14 that the total audited bad debts of 2,541,245. This 15 is from schedule -- gosh. 16 MR. LABIAK: I'm familiar with the number. 17 MS. HARKEY: Okay. It's from -- it's from a 18 schedule from the audit by Angie Underwood. And I 19 think it's a Schedule 12(d) -- R(1)12(d). 20 MR. SMITH: R(1)12(d). 21 MS. HARKEY: R(1)12(d). 22 Total bad debts -- the bad debts 2,541,245 23 for GAAP. But then the total bad -- bad -- bad debts 24 by the income tax return was 2,167,990. And I guess 25 so the Department made an adjustment to that and made 26 an allowable bad debt of 2,061,660 or 081. It's hard 27 for me to see. It's real tiny. 28 Um, so what I'm -- what I'm thinking is the 24 1 Department -- I don't think they have to take just 2 what's in the federal income tax. I think they 3 can -- they can record their bad debts according to 4 GAAP. And I just read a letter that they could 5 according to GAAP. 6 Why weren't those allowed? 7 MR. SMITH: So they had -- according to the 8 statute, if you are required to file returns, federal 9 income tax returns, then that's the -- that's the 10 number you need to use. It says unless you have -- 11 unless you don't -- you're not required to file, then 12 you can use GAAP. 13 MS. HARKEY: So they were required to file. 14 MR. SMITH: Right. 15 MS. HARKEY: Okay. Okay. But you 16 computed -- audited bad debts -- the Department 17 computed audited bad debts of 2,541,245, but only 18 allowed bad debt deductions totaling 2,081,664. 19 Why would you compute bad debts and then 20 only allow bad debts of half a million less? 21 MR. SMITH: So the number that they -- we 22 ended up computing was from the, um, income tax 23 returns, and it was for a category called returns and 24 allowances. And that was the number. That was 25 basically our sealing on bad debts. 26 MS. HARKEY: I think these were quarterly. 27 These were quarterly. And income tax return, I don't 28 know if that would -- I wish this were bigger print 25 1 so I could read what it is my staff -- hang on just a 2 second. I have some extra magnifying glasses. This 3 is really timely. 4 UNKNOWN SPEAKER: If you'd like to use my 5 computer, I have it pulled up. 6 MS. HARKEY: Okay. Well, I have notes -- 7 UNKNOWN SPEAKER: Okay. Well, I don't -- 8 MS. HARKEY: -- from my staff that are way 9 too small. It's like this. If anybody can read that 10 even with young eyes, then I give you all the kudos 11 in the world. I don't know why I get this so small. 12 But it says -- here we go. Yeah, these are -- this 13 is better. 14 The audited bad debt deduction in Column F 15 was calculated by reviewing the bad debt files, 16 vehicle sales folder, using the spreadsheet format 17 noted in Appendix 2 of Regulation 1642 titled, 18 "Consolidation of allowable bad debt deductions for 19 multiple repossessed vehicles using a pro rata 20 method." 21 And if I can have my staff blow up this that 22 I'm reading please, and bring it here so that 23 everybody can see it. Because I don't think it will 24 stick in anyone's head if I read it. 25 But additional bad debts were calculated 26 from lender worksheets, Column G and H. The taxpayer 27 used two lenders that had recourse and maintained 28 reserve accounts. The auditor was unable to 26 1 determine the taxable versus nontaxable ratios of the 2 lender bad debts; therefore, it was assumed the ratio 3 was the same as computed on R1-12(e) to R1-12(g). 4 Bad debts cannot be written off in excess of 5 what was claimed for the federal income tax return 6 unless the taxpayer can show that they have been 7 properly written off using generally accepted 8 accounting principles. 9 So that's the point I'm getting to, I guess. 10 The allowable amount of bad debts correspond with the 11 amounts written off as returns and allowances which 12 was reported on the original tax returns. 13 And the amounts reported as bad debts, no 14 additional amounts can be allowed unless the taxpayer 15 can show they were written off under guidelines of 16 GAAP. 17 So hopefully this is coming, so that 18 everybody can examine this. 19 Normally there may be a nontaxable portion 20 included in the amounts reported on the federal 21 income tax returns for returns and allowances on bad 22 debts, such as registration, smog certificates. The 23 auditor was unable to determine a taxable percentage. 24 The auditor discussed with his or her supervisor -- 25 there's a (inaudible) Hansen -- and it was decided to 26 allow the whole portion of returns and allowances of 27 bad debts as this would be an advantage to the 28 taxpayer. 27 1 But why wasn't it? So -- 2 MR. LABIAK: Can I address a couple things 3 you just brought up? 4 MS. HARKEY: Sure, please. 5 MR. LABIAK: Well, first of all, they still 6 haven't said why they won't accept the amended tax 7 returns. The law says filed and accepted; we filed 8 and accepted. So the issue of the original returns 9 and the amended returns should be moot as per cap of 10 what they had. 11 And if you look in the original e-mail I 12 submitted in the exhibits, it said we have to list 13 specific bad debts. And now their positions, if you 14 look at that text box you read, it says, "Well, now 15 it's whatever we can figure out." 16 So the BOE has changed their standard, but 17 never informed my client they were changing the 18 standard. 19 And once again, also that box shows that the 20 BOE ignored my client's work that he submitted to the 21 BOE on the bad debts. The BOE went with their 22 numbers. And if you break down what they did, about 23 1.5 million comes from -- from the BOE's perspective 24 comes from the third-party financiers. That's from 25 Lobel and CFS. So that's numbers that shouldn't 26 really be arguable, and that's where we kind of 27 agree. Like I said -- and I pointed out where the 28 disagreement comes from, it totals about 300,000. 28 1 So that means that on the balance -- this is 2 the BOE's position, as I take it -- on the balance of 3 the bad debt allowed, they're allowing only 500,000 4 for all those vehicle returns, and that's where their 5 missing vehicles are at. It's when they overprice 6 the value of the vehicles when they come back. It's 7 when they leave out things that are advantageous. 8 That's the reason for the difference in our numbers. 9 I would love to know why they refuse my 10 client's work when they asked for it. So -- 11 MS. STOWERS: Okay. Madam Chair. 12 MS. HARKEY: Yes. 13 MS. STOWERS: To the Department, two things, 14 Regulation 1642, regards to bad debt, I'm reading it 15 and it says that you looked to the, um, tax returns 16 first. And then the language is that you go to GAAP 17 only if they are not required to file a tax return. 18 MR. SMITH: Correct. 19 MS. STOWERS: So then since it's clear that 20 they were required to file a tax return, there's no 21 provision to look to the GAAP recording on this. 22 MR. SMITH: Correct. 23 MS. STOWERS: And with respect to the 24 returns that the -- the federal tax returns, the 25 federal tax returns only claimed, what, 9,000 in bad 26 debt? 27 MR. SMITH: Yeah, it was about 9,000. 28 MS. STOWERS: And then to your argument and 29 1 your presentation here, sir, is your client filed 2 amended tax returns -- 3 MR. LABIAK: Yes, that's correct. 4 MS. STOWERS: -- claim additional bad debts? 5 MR. LABIAK: Sorry for interrupting. Yes, 6 that is correct. 7 MS. STOWERS: These tax returns, did they 8 result in requesting a claim for refund? 9 MR. LABIAK: No, they did not. Because that 10 would have been committing fraud. Because my client 11 had taken the bad debt numbers off the gross. 12 So basically what my client did was he said, 13 Okay. I have a gross of a million dollars. I 14 previously listed only 800,000 to the IRS. I had 15 200,000 in bad debt. So he said, Well, I have 16 200,000 in bad debts. I'm going to add it to the 17 gross of a million dollars, and then I'm going to 18 list a bad debt deduction on the tax returns of 19 $200,000. 20 MS. STOWERS: He just changed the numbers. 21 MR. LABIAK: Yeah, he just changed the 22 numbers. He increased his gross -- 23 MS. STOWERS: He increased his gross and 24 then added deduction. 25 MR. LABIAK: That is why they put the note 26 in there to the IRS saying, Hey, we're submitting 27 amended returns. And the reason we're doing this is 28 because basically the BOE says we have to do this so 30 1 we can take our bad debt deduction in sales tax 2 court. 3 MS. STOWERS: I follow that. So was the 4 returns filed within the federal three-year statute 5 of limitation? 6 MR. LABIAK: No, it was not. But the 7 statute of limitation only applies if you're seeking 8 a refund. 9 MS. STOWERS: I realize that. I -- I 10 realize that. I just wanted to make sure that -- I 11 just wanted to get that on the record that they were 12 filed after the three-year statute of limitation. 13 To the Department, is the petitioner right 14 that once the bad debt -- can basically be filed on 15 an original scheduled tax return, may be filed on a 16 amended federal tax return, is there any restrictions 17 to say that the return of revenue service must 18 accept, audit those returns? Can -- just can you 19 elaborate here? 20 MR. SMITH: I don't think there's any 21 requirement. We would allow if you amended your 22 return with the IRS and filed it. But the big 23 concern here is we're not sure if they were actually 24 filed with the IRS. 25 MS. STOWERS: We don't have copies of the 26 IRS transcripts -- 27 MS. HARKEY: We should have. 28 MS. STOWERS: -- showing the amended returns 31 1 were filed? 2 MR. SMITH: No. 3 MS. HARKEY: We should have. Why don't we 4 have them? 5 MR. SMITH: We haven't requested them. 6 MS. HARKEY: Well, that's your problem. 7 MR. LABIAK: May I speak to this point? 8 We -- I provided as an exhibit with my 9 original brief the tracking -- that the proof that 10 they were sent and delivered to the IRS. And I 11 believe in Ms. Chin's -- if she was here, in her 12 brief she did state that, you know, we agreed that 13 they were filed and accepted. 14 So I can't believe this is an issue. If you 15 want -- I believe it was Exhibit -- Exhibit D is the 16 amended -- this is in my original brief. Exhibit D 17 was the amended tax return. Exhibit E was the proof 18 of filing. So that has been submitted to the 19 Board. 20 MS. HARKEY: Can we have copies of Exhibit E 21 and Exhibit D, please? I mean, I don't -- I can't 22 dig it up right here. 23 MR. LABIAK: Is that a request for me? I'm 24 sorry. 25 MR. RUNNER: Is this the one you just handed 26 out today? 27 MR. LABIAK: No. This is -- this is my 28 brief I sent to the Board. Exhibit D is the amended 32 1 return, Exhibit E is the proof of filing. 2 MS. STOWERS: I do recall reading a comment 3 in the D&R that Ms. Chin acknowledged the federal tax 4 returns were filed. 5 Department, do you agree with that? 6 MR. SMITH: Yes, she did say that in the 7 D&R. But when they did the re-audit, they didn't 8 take that as an instruction is my understanding. 9 But I did want to point out that even if we 10 were to accept that higher number, the number that 11 the Department calculated as the highest amount of 12 bad debts possible would be in Column "I" of what you 13 just received. It's about two-and-a-half million. 14 MS. HARKEY: Right. 15 MR. SMITH: So even if we were to accept 16 that higher -- the amended returns as being filed, we 17 would still be limited to that 2.5. 18 MS. HARKEY: Yeah, I understand that. 19 MR. SMITH: Not the 3.8 or -- 20 MS. HARKEY: We didn't allow that, though. 21 So that may be a point for an adjustment. 22 Okay. Is there -- 23 MR. RUNNER: Question -- 24 MS. HARKEY: -- any other -- 25 Yes, Member Runner. 26 MR. RUNNER: Yeah. I -- again, let me just 27 clarify at least what I think I heard. That we were 28 aware that there were amended returns, but we didn't 33 1 request a copy of the amended returns from the IRS? 2 MR. SMITH: Correct. 3 MR. RUNNER: Any particular reason? 4 MR. HANKS: I'm not certain why the district 5 didn't request a copy of the amended returns. I 6 think they more or less accepted that given the 7 nature of the business, it would appear as though 8 they had substantial numbers of bad debts. 9 The testimony was that they had filed the 10 amended returns with the IRS. So I think they just 11 accepted that information and then looked at the bad 12 debt folders that were recited. 13 MR. RUNNER: They didn't make the 14 adjustments accordingly, did they? 15 MR. HANKS: But they have. Yes, they 16 have. 17 MR. RUNNER: They've given the whole -- the 18 2.5 million? 19 MR. HANKS: So the district offered an 20 adjustment of just over $2 million. 21 MR. RUNNER: Mm-hm. Right. 22 MR. HANKS: So the adjustment's over 23 $2 million. And it was based on the fact that, for 24 instance, for 2003, we've only got two of the four 25 quarters within that time period. So there is an 26 allowance made for that. 27 And also just based on the nature of the 28 amounts that they reported on those amended returns, 34 1 that was the sealing that the district used to 2 calculate the $2,081,000 allowance. 3 MR. RUNNER: The sealing that they came up 4 with was what? 5 MR. HANKS: So it was based on the amended 6 income tax return -- 7 MR. RUNNER: Right. 8 MR. HANKS: -- filed amounts. 9 MR. RUNNER: Right. 10 MR. HANKS: It was also based on an 11 adjustment for and recognition that we're not looking 12 at full tax years for 2003, for instance. 13 MR. RUNNER: Let me ask the taxpayer 14 representative about that calculation. 15 MR. LABIAK: The total for the four years of 16 tax returns filed is 3.9 -- about 3.9 million. I'm 17 not using the exact numbers, just some quick math. 18 The bad debt we're seeking is 3.6 million. And he's 19 correct, there's not two quarters involved. So if 20 the potential is 3.9, and we're claiming 3.6, that's 21 300,000 we're not counting. 22 MR. RUNNER: And tell me again your 23 justification for going from the -- from at least 24 what we understand as being the cap, even if we use 25 the 3.54. 26 MR. LABIAK: The reason that the -- 27 MR. RUNNER: How do you get to the 3.6 in 28 terms of what the law requires? 35 1 MR. LABIAK: Okay. So two different 2 categories. The first is the bad debt deduction from 3 the third-party financiers. We're claiming 4 approximately 1.8 million. BOE is right now at about 5 1.5. 6 MR. RUNNER: Mm-hm. 7 MR. LABIAK: The reason for the difference 8 is if you look on the sheets, and it basically -- it 9 says repeatedly over and over, charge-off, 10 charge-off, charge-off. You add up all those numbers 11 that just say charge-off, you get 1.5 million in only 12 the audit period. So strictly the 14 quarters 13 involved. 14 Okay. There is a second category. And on 15 each sheet there's a total at the bottom that says, 16 you know, 34,000 for charge-off. And then there's a 17 second number that probably say about -- on average 18 about 6,000 per sheet. And that's for LDW. That 19 stands for Loss Damage Waiver. 20 What that is is a person finances the car, 21 they get into an accident, they're supposed to have 22 insurance that covers the value of the loan. I'm 23 going to be honest with you, if you're spending 24 $6,000 on a $2,000 car, you're not going to carry 25 that much insurance. So they don't have enough 26 insurance to cover the loan. 27 So instead of putting charge-off, they just 28 put LDW. But it's still a charge-off. It's just a 36 1 different category. 2 MR. RUNNER: But what -- isn't that all bad 3 debt? 4 MR. LABIAK: It is all bad debt. 5 MR. RUNNER: So why wouldn't that all have 6 been included in the -- in the amended returns? 7 MR. LABIAK: It is -- it is all included in 8 the amended returns. That's how we get to our 3.6 9 million. That's 1.8 of that is the charge-offs and 10 LDW. 11 MR. RUNNER: Then help me -- again, help me 12 get to the point to where they're basically saying 13 the amended returns is 3.5 -- or 2.5, you're saying 14 it's 3.6, and that's reflected on the amended 15 returns. 16 MR. LABIAK: The amended returns total 3.9. 17 You can ask -- I -- get them out, I'll add them up 18 again. That's strictly the bad debt number. If you 19 add up all four numbers. 20 MR. RUNNER: Let me go back to the 21 Department then. 22 How did he come up with 3.9 amended returns, 23 and you came up with -- 24 MR. SMITH: Okay. So based on the amended 25 returns, my math comes out to 356818. 26 MR. RUNNER: Okay. 27 MR. SMITH: Because I -- it's only half the 28 year, so I just divided by two. 37 1 MR. RUNNER: Okay. Three five six. 2 MR. SMITH: Right. 3 So the difference is based on our audit. So 4 you see Column F. We did -- the auditor looked at 5 every jacket and added up with Appendix 2 the 6 allowable bad debt deduction. And then also allowed 7 the write-offs for Lobel and County Wide. 8 MR. RUNNER: Right. 9 MR. SMITH: And that comes up with the 10 2.5 million. And we just don't have evidence above 11 that to show -- to indicate that there's more bad 12 debts there. That's our number. 13 MR. RUNNER: Okay. But I thought this was 14 about the fact the sealing was based upon what was -- 15 what was reported in the -- in the income tax. 16 MR. SMITH: Right. So we go by the sealing 17 in the original filed income tax returns. 18 MR. RUNNER: No, no, no, no. How about 19 going to the amended returns? 20 MR. SMITH: So the amended returns would 21 allow the sealing to go up to 3.5 million. 22 MR. RUNNER: Okay. That's where we needed 23 to get to. And if you use the amended returns, the 24 sealing goes up to 3.5. 25 MR. SMITH: But we only think 2.5 is -- is 26 justifiable. 27 MR. RUNNER: Okay. But the amended 28 returns -- again, going to what was allowed under -- 38 1 under -- under -- under a statute, it would be 3.5. 2 MR. SMITH: Correct. Assuming we -- 3 MR. RUNNER: Okay. Okay. I gotcha. I 4 gotcha. 5 MR. HANKS: The other factor we have to 6 consider is there's a portion that relates to the 7 taxable sale of the vehicle itself. Certain other 8 charges were not taxable, so to the extent that the 9 write-off includes those amounts, those aren't 10 eligible for write-off. So there's been an 11 adjustment. 12 MR. RUNNER: Let me ask about the local tax 13 issue. You know, we've gone through with local tax 14 issues. I've -- we've met in my office about my 15 concern with DMV and how they dealt with local tax 16 issues, that oftentimes were lazy and did not use 17 proper addresses in order to do that. 18 At least that's what I'm hearing we did 19 rather than identify an address in regards to what 20 the local tax amount was. We instead used a zip code 21 or a city boundary. Is that a -- is that -- what did 22 you find in this? 23 MR. HANKS: So what we found is that there's 24 actually a schedule that calculates a district tax 25 owing with respect to sales to customers residing in 26 Clovis. It's Schedule R I'm looking at -- 27 MR. RUNNER: Mm-hm. 28 MR. HANKS: -- R1 12A-1. And we note that 39 1 there's six sales that are identified on a schedule. 2 We've looked at our GIS coding, and I've been able to 3 identify that the district tax was owing on all of 4 those transactions with the exception of one. 5 MR. RUNNER: Okay. 6 MR. HANKS: One transaction that represented 7 a sale to a customer residing outside a city -- of 8 that city. Right. So we do have sales contract that 9 allowed us to look at the individual addresses for 10 those customers. 11 MR. RUNNER: Right. 12 MR. HANKS: There's another listing of 13 transactions that -- that we deem as unreported 14 sales. There are 65 transactions on that schedule. 15 We don't have the corresponding customer addresses 16 for those transactions. So there's a potential that 17 some of those sales, you know, might not be subject 18 to that district tax -- 19 MR. RUNNER: Okay. Okay. 20 MR. HANKS: -- potential. But we only noted 21 that the one sale actually related to sale outside 22 that district. 23 MR. RUNNER: So one sale out of -- 24 MR. HANKS: Of the six. 25 MR. RUNNER: -- of six. And the six sales 26 that you pulled out were all -- were just the Clovis 27 ones? 28 MR. HANKS: Yes. Yes. 40 1 MR. RUNNER: That was the extent of the 2 sales to Clovis? 3 MR. HANKS: Yes. 4 MR. RUNNER: How prevalent do you believe 5 the local tax issue is? 6 MR. LABIAK: I'm going to be honest with 7 you, it involves $6,000. 8 MR. RUNNER: Okay. Okay. I gotcha. 9 MR. LABIAK: It's -- 10 MR. RUNNER: I just wondered. It's okay. 11 MR. LABIAK: So the only reason we bring it 12 up is it shows that just now they did the work to 13 actually check to see if the address was in city 14 boundaries. And -- I think that's what they said. 15 But I don't know if they said -- 16 MR. RUNNER: Mm-hm. 17 MR. LABIAK: -- they actually checked back 18 10 years ago. It's been 10 years, almost 15 on some 19 of these cases, these jackets. 20 MR. RUNNER: Yeah. And actually, I've got a 21 question about that. Why is this audit so old? I 22 mean, this is -- this is 10 years old. 23 MR. LABIAK: Is that a question to me or to 24 them? 25 MR. RUNNER: Well, let me ask them, and then 26 I'll go back to the taxpayer. 27 MR. SMITH: It looks like there was a -- you 28 know, the first audit, then they did a revised audit. 41 1 I know that it went to an appeal's conference, and 2 then the appeal's conference holder was out for some 3 time. Then they called another appeal's conference. 4 But then as a representative -- they changed reps. 5 But I do think they provided some interest relief 6 because of all this. 7 MR. RUNNER: I'm sorry, did I miss some of 8 that? Maybe -- 9 MR. SMITH: The 31 months of interest. 10 MR. RUNNER: I see that -- I see that now in 11 my notes. Okay. Thank you. 12 MR. LABIAK: I -- yeah, two things. And 13 more if you'd like. I'd like to jump back on one 14 thing they've said earlier. 15 As to why -- honestly, from my point of 16 view, I spent years trying to get them to acknowledge 17 the bad -- the potential for bad debt. It does me no 18 good to say, Well, there's 3.6 million in bad debt, 19 but you're only allowing $9,000. I can win and say, 20 Yup, there's 3.6 million, but we're not accepting the 21 amended returns. Even today they won't accept the 22 amended returns. 23 So it -- that's been my primary fight. I 24 called it getting in the door. And I've tried 25 stipulations, agreements, asked for rulings, and have 26 never gotten that. So that's been our fight just on 27 that. So once we finally started to win that fight 28 and get them to come up from $9,000, then kind of the 42 1 the process kept starting over and over. 2 Another thing that kind of dragged this out, 3 I think, another year -- and I'm gonna throw your 4 office a little bit under the bus, Mr. Runner. 5 When -- this is my only sales tax case. 6 This is probably only gonna be my only ever sales tax 7 case. 8 MR. RUNNER: Mm-hm. Mm-hm. 9 MR. LABIAK: And we were doing a response on 10 something. I think it was -- this is about three 11 years ago in 60 days. And it was around January 12 (inaudible.) So I called your office, you know, 13 after I'm not making progress with -- 14 MR. RUNNER: Mm-hm. 15 MR. LABIAK: -- BOE. And I said, "Hey, you 16 know, what should I do? Can you help me out?" And 17 this was all legal at the time. They hadn't changed 18 the law yet. So he wasn't breaking any laws. 19 And as soon as I did that, pardon my 20 language, but all hell broke loose. And all of the 21 sudden everything is going under new audits, new 22 checks. They say they're rechecking everything. 23 They didn't come up with any different numbers. But 24 that tacked on almost a year to the time. 25 It doesn't explain all nine years. But alls 26 I know is as soon as I -- and I'm not accusing your 27 office of doing that, I'm just letting you know what 28 happened. It went from, hey, my client wants this 43 1 done. He's not, you know -- the money's sitting in a 2 bank account just, you know, waiting to be taken care 3 of. 4 And basically what I was told is well, 5 you -- you, the taxpayer, have to comply with the 6 deadlines. If we, the BOE, don't, well, so what. 7 And that's not the language they used, but that was 8 basically the gist of the conversation. There is no 9 penalty to the BOE if they take a year to respond, 10 but as soon as they respond, interest starts day one 11 to the taxpayer. And all the sudden we have to jump 12 and analyze everything on day one that they give it 13 to us. Even after they've waited a year too long. 14 And then we have to go back and fight to get 15 the interest relief for that year that they waited 16 when they only should have had 30 to 60 days. 17 MR. RUNNER: Mm-hm. 18 MR. LABIAK: And one thing he said, and I 19 want to point this out, and this is why I've got all 20 the boxes behind me. BOE -- he just stated that they 21 looked at every jacket. 22 Here are the three jackets that I pointed 23 out in the exhibits. I just gave you the highlights, 24 because, quite frankly, they're dirty. And I could 25 have photocopied all this, it ain't gonna come 26 through. 27 If they looked at all three jackets, then 28 why aren't these bad debt jackets in their 44 1 spreadsheets? You can take these jackets, you can 2 pull up the names on the spreadsheet, search them. 3 That's what I've done repeatedly. They're not there. 4 This is one box -- I now have 20. Originally it was 5 18. 6 I'm going to be honest with you, over age of 7 years of boxes being stored in the country, they have 8 started to fall apart after, you know, 15 years some 9 of them. So it's gone from 18 to 20. 10 One box, three missing files. If they had 11 actually looked, these would be in there. All the 12 evidence on the value of the vehicles is in there. 13 So if they looked, how could they value a vehicle 14 with a blown engine at what they valued it at? How 15 could they value a vehicle above Kelley Blue Book if 16 the steering column is busted out? 17 Now, I don't know if BOE -- I've been in the 18 used-car business -- around the used-car business 19 most of my life because of my family. I can look at 20 a repair order and probably tell you what's wrong 21 with the car. And maybe BOE can't tell you by the 22 parts. 23 And that means the car had been -- broken 24 steering column, which means it had been stolen. You 25 know, it's in impound. It's just screaming, broken 26 steering column in impound. The car is stolen. 27 Now, I, fortunately, never had my car 28 stolen, but I can't imagine that car thieves treat 45 1 the cars and return them in sellable wholesale 2 condition above be -- above Kelley Blue Book value. 3 If BOE went through the files and looked at 4 them like they claimed, how do they get higher 5 numbers than Kelley Blue Book? 6 There's four different ways I think that BOE 7 came up with the value of cars. And nobody's asked 8 them how they've done it. And I really wish somebody 9 would ask that question to them. 10 The first way where we agree is zero. If 11 the car was not returned, if it was stolen and never 12 recovered, my client put zero, the BOE put zero. We 13 agree on that number. 14 The second way they got the value of the 15 vehicles, and I only recently figured this out, is 16 they would look at the front of the sales jackets, 17 and my client will put how much he's into the car 18 for. So if he paid $2,00 and put $500 into the 19 vehicle, it will say $2,500. That's what my client 20 has spent on the car. That's not what it's worth. 21 It's just -- that's what he's into it for. And he 22 needs to know that because he's got to, you know, use 23 that calculation for selling it and for getting the 24 down payment. 25 On occasion you'll see that BOE uses round 26 numbers, 2850 I think is the one I picked out. And I 27 just happened to notice this. BOE went and said, 28 "Well, what did Mr. Rosenbaum put into the car? 46 1 That's the value we're going to use when it was 2 repossessed." 3 These numbers don't match. There's no -- 4 there's no reason what my client put into the car 5 should be the value of the car. Because if it's been 6 driven, obviously it goes down. 7 At the time, the IRS mileage reimbursement 8 was, I think, around 36 cents a mile. So every 9 thousand miles they drove it, that's $360 the value 10 of that car you could legally write down. 11 If it comes back damaged, that's more money 12 he's got to put in. But that doesn't take into 13 account. 14 So if you see an even number, that's what it 15 is. 16 The other way we think -- and I haven't been 17 able to figure out the formula yet -- is that it's 18 calculated. And this is how you end up with numbers 19 like 2399. 20 Kelley Blue Book, at the time, only valued 21 vehicles in five-dollar increments. They did not go 22 to specific individual dollars like it does now. 23 So provided the Kelley Blue Book change -- 24 and you can look at all of them, they all end in 25 five-dollar increments. So it's obvious Kelley Blue 26 Book wasn't used. And I can't imagine they used NADA 27 back then. 28 So they didn't use Blue Book, but what we 47 1 think they did is they basically said, "Well, what 2 does -- what is owed on the car?" And they applied a 3 formula. By doing that, that is how you get a car 4 that is repossessed, repeatedly going up in value. 5 Because if the car is repossessed in the beginning, 6 has a small loan left, BOE gives it a low value. 7 If the car is repossessed, my client resells 8 it, but then it's repossessed quickly. Now it has a 9 large loan value. Well, BOE decides to value that 10 vehicle a lot higher, not because of the value of the 11 vehicle, but because the value of the loan. 12 This makes no sense. The value of the loan 13 has nothing to do with the value of the vehicle. My 14 client has to mark these vehicles up three times to 15 get to the -- to be able to sell them and make a 16 living. 17 MR. RUNNER: Let me just -- let me ask in 18 regards to -- what is the normal process in regards 19 to valuing a vehicle like that? 20 MR. HANKS: So ordinarily we would look at 21 the taxpayer's records that would document what that 22 value is, or we would look at Kelley Blue Book 23 evaluations to determine that evaluation. 24 I'm just looking at one of our schedules, 25 it's Schedule 12(e), where we're determining what the 26 repo value was on certain vehicles. I've got one 27 transaction that shows a net contract balance of 28 nearly $5,000. The repo value the auditor determined 48 1 was $1,500. 2 In another instance we've got a contract 3 balance of $8,000 and a repo value of $4,400. 4 So the one instance with which we've got a 5 percentage of, what, 30 percent, and another we have 6 a percentage of a little bit more than 50 percent. 7 So the auditor was not using a standard allowance to 8 calculate the repossession value. Ordinarily, we 9 would rely on the taxpayer's information to identify 10 that. And lacking that information, go to Kelley 11 Blue Book values. 12 MR. RUNNER: Okay. Thank you. 13 Yeah, I'm some -- I think that there's some 14 room for some additional bad debt in terms of some of 15 that -- some of the assumptions that are made that 16 should have been carried over. So that's where I'm 17 at right now. 18 MS. HARKEY: Thank you. 19 I would also like to address the negligence 20 penalty and potential for abatement of it. The Board 21 records shows petitioner was audited on four prior 22 occasions dating back to April of 1988. And 23 according to the 414-Z that I have right here, it 24 says the start of the audit was delayed. The prior 25 audit was in appeals with bad debt computations being 26 an issue. 27 So I think it's kind of fair to say the 28 petitioner had no time to reasonably correct any 49 1 prior audit errors. And bad debts for car 2 dealerships are complicated as we've heard. 3 And so I'm not so sure there's negligence 4 here. I don't think there's negligence. I think 5 it's just audit upon audit upon audit, as we've kind 6 of heard. 7 MR. LABIAK: Can I make a comment to that, 8 if you don't mind? 9 MS. HARKEY: Certainly. 10 MR. LABIAK: My client did the same exact 11 thing in '11 and '12 as what he did in 2003 to '06, 12 another audit. As I showed. That's the entire 13 audit. And it was 100 percent accepted by the BOE. 14 The exhibit I provided today has the same 15 bad debt sheets, it has the same bad debts by third 16 parties, it's different third-party financiers now. 17 But he did nothing different in 2011 and '12. He 18 just sent in the paperwork, and BOE had no problem 19 accepting his car values, what the third-party 20 financier said. 21 I don't know what changed between '06 and 22 2011, but he didn't change anything. But evidently 23 it was good enough while this audit was going on for 24 what he did. But for some reason what he did in 2003 25 wasn't good enough. 26 MS. HARKEY: We did get copies of Exhibit D, 27 which are the amended returns, and also a 28 verification that they were received. 50 1 So, Members, we're down to two issues. I 2 think the bad debts and the negligence penalty. 3 MR. RUNNER: I'll make a motion to increase 4 the bad debt amount to 3.5 million, and, um -- and, 5 um, remove the negligence penalty. 6 I can separate that into two if that's -- 7 MS. STOWERS: Before we get a second, let me 8 be clear. 9 Two point -- 3.5, you're saying? 10 To the Department, what have you already 11 allowed on the re-audit? 12 MR. SMITH: We allowed 2,081,660. 13 MS. HARKEY: I will second that under one. 14 If we need to bifurcate -- 15 MS. STOWERS: I'm going to object. So you 16 can keep them together, if you'd like. 17 MS. HARKEY: Do you want to separate 18 anything? 19 MR. RUNNER: Is there a number -- 20 MS. HARKEY: Okay. Is there a number 21 that -- we have a second and a motion. I will -- 22 let's just run that one. There's an objection. 23 So let's vote on that. Or do you want to 24 offer a substitute? 25 MR. RUNNER: Well, if there's a substitute 26 motion, that would be appropriate. 27 MS. MA: Obviously, there's a lot of back 28 and forth. But the auditors did give the taxpayer 51 1 2.5 originally in bad debt deductions. So that would 2 be my motion. I will accept 2.5. 3 MS. HARKEY: 2.5 for one -- 4 MS. MA: Yeah, as the bad debt deduction. 5 And remove the negligence penalty. 6 MR. LABIAK: Can I -- I don't know if I'm 7 out of line -- no, I can't? Oh, okay. 8 MS. STOWERS: Okay. So -- so remove the 9 negligence penalty, basically, only, but uphold the 10 bad debt the Department has allowed. 11 MR. RUNNER: No, there are two -- I think 12 the Department is at two point -- 13 MS. HARKEY: The Department's at 2.167 14 and -- 15 MS. STOWERS: Ms. Ma is going -- 16 MS. HARKEY: Ms. Ma is going 2.541245. 17 MR. RUNNER: Mm-hm. 18 MS. STOWERS: And to remove the negligence 19 penalty? 20 MR. RUNNER: Yeah. 21 MS. HARKEY: Yes. 22 MS. STOWERS: Second. 23 MS. HARKEY: Okay. There's a motion and a 24 second for that. 25 MR. RUNNER: I'll remove my motion. 26 MS. HARKEY: Okay. So the substitute motion 27 stands. 28 Is there any objection? 52 1 No? 2 Thank you. 3 The other one would have been two-two, no 4 action, and you would have lost it all -- 5 MR. LABIAK: My -- my question. 6 MS. HARKEY: Just for clarification. 7 MR. LABIAK: I understand. But my -- for 8 clarification, could we postpone the motion until 9 Mr. Horton could have voted? 10 MS. HARKEY: He did not request so. If you 11 want to put this over, I'm not sure you'll get a 12 better result. I'm just saying I -- you know. 13 MR. LABIAK: And what about any of the other 14 issues? 15 MS. HARKEY: This -- the motion is as the 16 motions is, to allow the bad debt of 2.541245 and 17 remove negligence penalty. 18 MR. RUNNER: And I'm sure the staff can 19 inform you on terms of rehearing. 20 MS. HARKEY: Rehearing would be with the 21 Office of Tax Appeals after the first of the year. 22 But -- 23 MR. LABIAK: Thank you. 24 MS. HARKEY: Uh-huh. 25 26 27 28 53 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 December 13, 2017 audio, I recorded 10 verbatim, in shorthand, to the best of my ability, 11 the proceedings in the above-entitled hearing; that I 12 transcribed the shorthand writing into typewriting; 13 and that the preceding pages 1 through 53 14 constitute a complete and accurate transcription of 15 the shorthand writing. 16 17 Dated: March 30, 2018 18 19 20 ____________________________ 21 JILLIAN SUMNER, CSR #13619 22 Hearing Reporter 23 24 25 26 27 28 54