1 BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION 2 450 N STREET 3 SACRAMENTO, CALIFORNIA 4 5 6 7 8 REPORTER'S TRANSCRIPT 9 MAY 28, 2015 10 11 SALES AND USE TAX APPEAL HEARING 12 APPEAL OF 13 E.W. INTERNATIONAL TRADE, INC. 14 NO. 719634 (BH) 15 KOBE GSW, INC. 16 NO. 720777 (BH) 17 AGAINST PROPOSED ASSESSMENT OF 18 SALES AND USE TAX 19 20 21 22 23 24 25 26 27 Reported by: Juli Price Jackson 28 CSR No. 5214 1 1 P R E S E N T 2 For the Board Jerome E. Horton of Equalization: Chairman 3 Sen. George Runner (Ret.) 4 Vice-Chairman 5 Fiona Ma, CPA Member 6 Diane L. Harkey 7 Member 8 Yvette Stowers Appearing for Betty Yee, 9 State Controller (per Government Code Section 10 7.9) 11 Joann Richmond Chief, Board 12 Proceedings Division 13 ---oOo--- 14 Chief Counsel Randy Ferris 15 ---o0o--- 16 For Appeals Division: Lisa Burke Business Taxes 17 Specialist III 18 Jeff Angeja Tax Counsel IV 19 For Board: Nenita DeLaCruz 20 Hearing Representative 21 Brian Manuel Business Taxes 22 Administrator III 23 Stephen Smith Tax Counsel IV 24 25 For Petitioner: Charles Herb Representative 26 Mario West 27 Representative 28 ---oOo--- 2 1 450 N STREET 2 SACRAMENTO, CALIFORNIA 3 MAY 28, 2015 4 ---oOo--- 5 MR. HORTON: Welcome back, Members and 6 guests. Let us reconvene the meeting of the Board 7 of Equalization. 8 Ms. Richmond, what is our next matter? 9 MS. RICHMOND: Our next matter is item C, 10 Sales and Use Tax Appeals Hearings. 11 As Item C4 has waived appearance, our next 12 item is C5a, E. W. International Trade, Inc. and 13 C5b, Kobe GWS, Inc. (verbatim). 14 Please come forward. 15 MR. HORTON: Thank you. 16 Ms. Burke, will you please introduce the 17 case as taxpayers come forward. 18 MS. BURKE: Good afternoon, Mr. Horton, 19 Members. I'm Lisa Burke for the Appeals Division. 20 The issues in both of these matters are the 21 amounts of unreported taxable sales and the 22 negligence penalty. 23 In the case of E. W. International Trade 24 there is also the issue of unreported sales of 25 fixtures and equipment. 26 MR. HORTON: Thank you very much. 27 Welcome to the Board of Equalization. 28 Please be advised you have ten minutes to make your 3 1 presentation. We will return and allow you five 2 minutes on rebuttal. 3 At your convenience, please. 4 MR. WEST: Good afternoon, Mr. Horton and 5 the rest of the Board Members. 6 My name is Mario West. And this is my 7 partner, Charles Herb. We are here representing 8 Jackie Callo, of Kobe GSW, Inc., and in connection 9 with E. W. International, Inc. 10 Ms. Callo basically was a manager of E. W. 11 International, Inc. that operated a Japanese 12 restaurant in Foster City. She eventually purchased 13 the restaurant. And we're concerned about the 14 successor liability from E. W. International to Kobe 15 GSW, Inc. 16 We feel that her position with E. W. 17 International was as a manager only, and she was 18 never listed, per Secretary of State records, to our 19 knowledge, as a corporate officer. And we would 20 basically see her as just an employee of the 21 corporation, E. W. International, Inc. 22 There was a sales and use tax audit that 23 was conducted concurrently with her corporation, 24 Kobe GSW. And we would talk about that at a later 25 time. 26 Go ahead, Charles. 27 MR. HERB: The reason why we're making the 28 position of -- of there is no successor liability is 4 1 because the audit report infers that the Kobe GSW, 2 Inc. is a successor entity of E. W. International 3 Trade, Inc. And this is what we're here to attempt 4 to disprove. 5 We had requested information or 6 documentation or evidence from the -- from the 7 auditor with respect to the reasoning behind 8 coupling -- her coupling the two entities together. 9 And we never received any evidence thereof. 10 MR. HORTON: Just in the interests of 11 preserving your time relative to the issues before 12 us, I want to get clarification from Appeals as to 13 whether or not the 6829 issue is an issue in this 14 case, from the Department's perspective. 15 MS. BURKE: 6829 is not in issue because 16 we're outside of the statute of limitations for 17 issuing a billing under 6829. 18 There was a billing issued to Kobe GSW on 19 December 29th, 2014 for successor liability for the 20 liability of E. W. International Trade. And that 21 liability went final on January 28th, 2015. 22 MR. HORTON: And the Department will so 23 stipulate? 24 MR. HERB: So, therefore, the -- that's why 25 we filed the -- 26 MR. HORTON: You win on that issue, I mean 27 by default. 28 So, you want to -- so, the other -- 5 1 MR. HERB: -- all we want to do is contest 2 the successor liability. 3 Mr. Angeja? 4 MR. ANGEJA: I'd like to clarify as well. 5 The only two appeals in front of us are the 6 direct liability incurred by each corporation. 7 The successor liability is not in front of 8 us, and there is no 6829 individual liability. 9 MR. WEST: So, I'm confused. Was it billed 10 or wasn't it billed? 11 MR. ANGEJA: Successor liability was 12 billed. That Notice of Determination has gone 13 final. 14 But these appeals are only the direct 15 liability of each corporation for the periods that 16 they operated. 17 There is no successor liability. There is 18 no 6829 liability at issue in these appeals today. 19 MR. HERB: Okay. Does that preserve our 20 rights to appeal the successor liability at a later 21 date? 22 MR. HORTON: Where is the timing on that? 23 Appeals. 24 MR. ANGEJA: If successor liability is a 25 final, it would be in the Department's discretion to 26 accept an administrative protest. 27 One hasn't been filed yet. 28 MS. HARKEY: You have to do that. 6 1 MR. HERB: Understood, okay. 2 Okay. So, if that's the case, then let's 3 continue with the concurrent audit between E. W. 4 International and Kobe GWS, Inc. 5 As far as our contentions regarding this -- 6 MR. HORTON: We just -- all this, just for 7 clarification, in the interests of the taxpayer, 8 we're going to wind back, start all over, you have 9 five minutes -- ten minutes, at least. 10 And to the issue at hand, please. 11 MR. WEST: So, talking about the issues at 12 hand in our concurrent audit, we feel that we would 13 request an abatement of the 10 percent negligence 14 penalty since it is a first time audit for the 15 taxpayer, and, two, would like to know if we still 16 have an opportunity to go to settlement, basically, 17 because Ms. Callo inherited an accountant from the 18 E. W. International Trade, Inc. that was later sued 19 for malpractice. 20 And we feel that she always supplied the 21 records under Kobe GWS (verbatim) to report her 22 sales correctly, but her accountant did not report 23 the sales correctly. 24 MR. HORTON: For clarification purposes, 25 I'm going to go back to Appeals -- just to share 26 with your rights as it relates to settlement and 27 this process. 28 MR. ANGEJA: My understanding is if the 7 1 liability were to go final, they could go to Offers 2 and Compromise. 3 I think because we're at the Board hearing, 4 settlement isn't an option at this point. 5 MR. HORTON: Randy. 6 MR. FERRIS: Further clarification. 7 Randy Ferris, Chief Counsel. 8 Right now the Board can't refer it to 9 settlement. 10 MR. HORTON: We didn't plan on it. 11 MR. FERRIS: Right, but I'm just saying, it 12 can't be referred to settlement right now. 13 But if you were to receive an adverse 14 result from this hearing, you could file a petition 15 for rehearing and then you could go into settlement 16 at that point. 17 MR. HORTON: And what would happen, 18 Randy -- I mean, Mr. Ferris, if we put it over 19 30-30-30 and decide to concurrently -- 20 MS. STARKEY: Fix it. 21 MR. FERRIS: I think that once you're 22 engaged in this process, you need -- there needs to 23 be a decision. 24 MR. HORTON: All right, okay. So, is that 25 helpful? 26 MR. WEST: Yes. Then it would be our 27 position to request a chance to offer in a 28 settlement and also request an abatement of that 10 8 1 percent negligence penalty. 2 MR. HORTON: Okay. 3 MS. HARKEY: You have to -- 4 MR. HORTON: Here's -- here's what I'm 5 going to suggest, Members, with your permission, is 6 that we take up the negligence. 7 I am hearing a concurrence on the 8 liability, disagreement on the negligence penalty. 9 MR. WEST: That's correct. 10 MR. HORTON: And, so, tell us why you 11 disagree with the negligence penalty. 12 MR. WEST: We feel that once again it was 13 her first time audit. She did take on the same 14 accountant that E. W. International had. 15 I believe we provided exhibits to the Board 16 regarding the malpractice suit that she filed and 17 she did win that lawsuit. 18 She always provided all of the sales 19 records to the accountant and relied on his 20 expertise and knowledge to report sales correctly, 21 but, unfortunately, the audit revealed that recorded 22 sales weren't reported correctly. 23 MR. HORTON: Further testimony? 24 MR. HERB: Just that the -- that our client 25 did, in fact, you know, file the -- a lawsuit 26 against her former accountant, as well as her former 27 attorneys, with respect to, amongst other things, 28 their breach with respect to reporting appropriate 9 1 sales. 2 MR. HORTON: We have copies of the lawsuit? 3 MR. HERB: Yes, you do. 4 MR. HORTON: And taxpayer, the Appellant is 5 party to the lawsuit or the potential 6596 person? 6 Ms. Kim -- 7 MR. HERB: Callo. 8 MR. HORTON: -- Callo? 9 MR. HERB: So, she received bad information 10 by her professionals, thus, you know, she went into 11 the litigation with them and to -- this is the -- 12 this is the claim against them. 13 MR. HORTON: Okay. 14 MR. HERB: So, we believe good cause may 15 exist with respect to the negligence penalty. 16 MR. HORTON: Thank you. 17 To avoid interjecting, I'm going to -- if 18 that concludes your testimony, I'm going to let the 19 Department deal with that. 20 To the Department, you have ten minutes to 21 make your presentation. We ask that you restrict 22 your discussion to the issues at hand, given the 23 stipulation to the audited taxable measure. 24 At your convenience, please introduce 25 yourself for the record as well. 26 MS. DE LA CRUZ: Good afternoon, Chairman 27 Horton and Members. My name is Nenita De La Cruz 28 and I will be representing the Sales and Use Tax 10 1 Department today. 2 To my right is Brian Manuel, also with the 3 Sales and Use Tax Department, and to Mr. Emanuel's 4 right is Stephen Smith with the Legal Department. 5 I understand that the taxpayer agrees with 6 the tax measure from the audit that was obtained by 7 comparing the reported taxable sales to the recorded 8 taxable sales from the sales journal. 9 So, the issue at hand, at this point, is 10 only the negligence penalty. So, that's the only 11 thing we'll be discussing at this time, okay. 12 Okay. Although it is their first audit, 13 they had records to report the correct amount of 14 taxable sales based on their sales journal, but 15 understated the taxable sales by a substantial 16 amount, incurring an a error rate 236 percent for 17 International -- E. W. International, and 151 18 percent for Kobe SC (verbatim). 19 And it's my understanding that the penalty 20 that they are contesting has to do -- the negligence 21 penalty has to do with Kobe, more than 22 International. So, the negligence penalty for 23 Kobe -- for International is accepted already; is 24 that right? 25 MR. HERB: Would you repeat that? 26 MS. DE LA CRUZ: Is my understanding -- 27 MR. HORTON: Sorry, please make your 28 presentation. 11 1 They will be able to respond. 2 MS. DE LA CRUZ: Oh, okay, I'm sorry. 3 Okay, the Petitioner cannot explain the 4 source of their reported sales figures and they do 5 not have an explanation for the discrepancy. 6 Because of this and the significant 7 understatement, the Department found that the 8 Petitioners have been negligent and, therefore, the 9 negligence penalty has been applied. 10 Therefore, the Department concurs with the 11 recommendation of Appeals and we believe that the 12 negligence penalty should stand. 13 MR. HORTON: Okay. On rebuttal. 14 Just wanted to make sure that the taxpayer 15 understands that the parties involved here is the 16 corporation, not the individual who filed the 17 lawsuit. 18 And the successor liability issue is 19 something that we will deal with later. 20 MR. HERB: Okay. 21 MR. HORTON: And, so, your rebuttal would 22 be pursuant to why the corporation failed to provide 23 the books and records, you know, report the taxes 24 and so forth. 25 On rebuttal. 26 MR. HERB: Okay. So, within the -- within 27 the -- within the lawsuit it does state that the -- 28 that Jackie did, in fact -- the taxpayer did, in 12 1 fact, give the appropriate books and records to the 2 accountant, which then did not report the 3 appropriate amount of taxes for the corporation. 4 So, all -- what we're contending is that 5 because she gave it to a professional, that the -- 6 the abatement of the negligence penalty should be 7 considered. 8 That's it. 9 MR. HORTON: Okay, discussion? 10 Member Harkey. 11 MS. HARKEY: I am quite honestly ready to 12 to waive the negligence penalty based on what's just 13 a first audit, and we have heard a lot of 14 explanation here as to how it came about. 15 So, I would like to make a motion to do 16 that. 17 MR. HORTON: Mr. Runner. 18 MR. RUNNER: I'm -- I'm going to get there, 19 but I'd like to -- I'm still confused a bit over 20 this issue of the successor liability coming up 21 later. 22 Under what is the -- what is the path for 23 the successor liability to come back to us later? 24 MR. ANGEJA: Currently there -- it would 25 have to be an untimely petition, untimely protest 26 would have to filed, which has not yet been filed. 27 And then it would need to be accepted by 28 the Department as an administrative protest. 13 1 It's currently not before us. There is no 2 path unless and until they try to protest that 3 determination. 4 MR. FERRIS: Or they pay it and file a 5 claim for refund. 6 MR. ANGEJA: Yes, pay and file a claim for 7 refund. 8 MR. HERB: May -- may I interject? 9 MR. HORTON: Mr. Runner? 10 MR. RUNNER: Yeah, go ahead. 11 MR. HERB: Okay. We got into this audit 12 scenario fairly late in the game. The original 13 representative was a gentleman by the name of Abe 14 Golomb, who took it quite far. And, unfortunately, 15 he passed away in the midst of the audit. 16 Maybe you've dealt with Mr. Golomb before 17 or not, but we inherited the case and have been 18 attempting to rebuild as much as we could. 19 If there wasn't a petition filed with 20 respect to the successor liability, I believe that, 21 'cause that -- that's a big question for us. 22 And we just -- we've not ever seen any 23 evidence from the Department that successor 24 liability, in fact, does exist from the Secretary of 25 State's office or from the duties of the -- of 26 Jackie Kim-Callo we're talking about. 27 So, we believe that it's -- as what 28 Mr. Runner says, it's an important question that we 14 1 would like to deal with at a later date, if not 2 today. 3 And, so, I think the aide is saying that we 4 need to file an untimely petition, that can or 5 cannot accepted by the -- by the Board; is that 6 correct? 7 MR. ANGEJA: Or pay and file a claim for 8 refund. 9 MR. HERB: Okay. 10 MR. RUNNER: So, the -- so, again to 11 clarify, the -- the liability that is shown here in 12 regards to E. W. International, that is right now 13 assigned to this taxpayer, correct? 14 MR. ANGEJA: It's assigned to E. W. -- as I 15 said earlier, each corporation -- today what's 16 before you is the direct liability of each 17 coroporation for the period that it operated the 18 business. 19 So, the liability asserted against E. W. is 20 only as against E. W. 21 MR. RUNNER: Okay. 22 MR. ANGEJA: The liability against Kobe 23 right now is only what Kobe incurred for its period 24 of operation. 25 There is a successor liability 26 determination which is not before us -- 27 MR. RUNNER: Okay. 28 MR. ANGEJA: -- that has asserted EW's 15 1 liability also against Kobe, but that's not in front 2 of us today. 3 MR. RUNNER: Gotcha. 4 Okay. So, what is before us is not only 5 the negligence penalty, but also then the liability 6 of Kobe. 7 And it's my understanding you are conceding 8 that? 9 MR. HERB: We're conceding the first three 10 quarters of 2011, yes. 11 MR. RUNNER: So, is that the total amount? 12 MR. ANGEJA: Today, yes, that's asserted 13 against them. 14 MR. RUNNER: Okay, okay, thank you. I got 15 it. 16 I will second the motion. 17 MS. STOWERS: I wanted to -- 18 MR. HORTON: Members, before -- I 19 appreciate the questions that are lining up. 20 There just seems to be a lot of confusion 21 around this case. And, so, it might be in the best 22 interests of the taxpayer -- given the desire to 23 entertain a settlement, it might be in their best 24 interests if we voided this hearing, as if it didn't 25 occur. That would you allow you time to expedite 26 it. 27 I'll tell you my concern is that if we -- 28 if we -- if we rule and it goes final, then there 16 1 are a couple of hurdles you got to get over in order 2 to get into settlement. A lot of people got to 3 agree with what you want to see happen. 4 This way it is entirely up to you. Let me 5 ask Chief Counsel, your thoughts on that? 6 MR. FERRIS: I think with the taxpayer's 7 consent, you could treat the hearing as void and 8 then postpone it. 9 And, you know, just issue a postponement of 10 the hearing, which would then put it back into our 11 normal rules where you can go into administrative 12 settlement prior to the engagement of the hearing 13 itself. 14 MR. HORTON: Now this is entirely up to 15 you. We're not giving advice here. 16 But if you were to stipulate such, the body 17 just might be -- 18 MR. WEST: We -- we concur with that. 19 MR. HERB: Yeah. 20 MS. HARKEY: I'll withdraw my motion. 21 MR. RUNNER: Do we have to take an action 22 to void or does the taxpayer just decide to do that? 23 MR. HORTON: Well, we need the Department 24 to sign off on it as well. 25 You are good with this? 26 MR. MANUEL: Well, I don't see how we can't 27 not be. 28 MR. HORTON: All right. So, all parties 17 1 have agreed -- 2 MR. ANGEJA: If you'd like to postpone it? 3 MR. FERRIS: The Chair would need to take 4 action to postpone. 5 MR. RUNNER: Okay, thank you. 6 MR. HORTON: -- all right, such will be the 7 case. 8 We'll postpone this hearing for -- when are 9 we next here in Sacramento? 10 MR. FERRIS: Well, there's a -- there's a 11 75 day -- Board Proceedings has its procedures. 12 MR. HORTON: Oh, their normal -- okay, 13 good. 14 The hearing is hereby postponed until 15 further notified by Board Proceedings. 16 Thank you so very much for appearing before 17 us today. 18 My apologies for not providing -- 19 MR. HERB: Thank you. 20 MR. WEST: Thank you. 21 MR. HORTON: -- this information prior to 22 this time and for the confusion that occurred. 23 My apologies. Hopefully, this additional 24 time will allow for clarification and for all of us 25 to get on the same page. 26 I encourage the Department to meet and 27 confer with the taxpayer and avail them of all their 28 rights. 18 1 MR. WEST: Thank you, Board Members. 2 MR. HERB: Thank you. 3 4 REPORTER'S CERTIFICATE 5 6 State of California ) 7 ) ss 8 County of Sacramento ) 9 10 I, JULI PRICE JACKSON, Hearing Reporter for 11 the California State Board of Equalization certify 12 that on MAY 28, 2015 I recorded verbatim, in 13 shorthand, to the best of my ability, the 14 proceedings in the above-entitled hearing; that I 15 transcribed the shorthand writing into typewriting; 16 and that the preceding pages 1 through 18 constitute 17 a complete and accurate transcription of the 18 shorthand writing. 19 20 Dated: JULY 7, 2015 21 22 23 ____________________________ 24 JULI PRICE JACKSON 25 Hearing Reporter 26 27 28 19