1 BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION 2 5901 GREEN VALLEY CIRCLE 3 CULVER CITY, CALIFORNIA 4 5 6 7 8 REPORTER'S TRANSCRIPT 9 AUGUST 26, 2015 10 11 12 13 14 15 FINAL ACTIONS 16 17 18 19 20 21 22 23 24 25 26 27 REPORTED BY: Kathleen Skidgel 28 CSR NO. 9039 1 1 P R E S E N T 2 3 For the Board Jerome E. Horton of Equalization: Chairman 4 5 Sen. George Runner (Ret.) Vice Chair 6 7 Fiona Ma, CPA Member 8 9 Diane L. Harkey Member 10 11 Yvette Stowers Appearing for Betty T. 12 Yee, State Controller (per Government Code 13 Section 7.9) 14 Joann Richmond 15 Chief Board Proceedings 16 Division 17 For Staff: Jeff Angeja 18 Tax Counsel IV Legal Department 19 20 ---oOo--- 21 22 23 24 25 26 27 28 2 1 5901 GREEN VALLEY CIRCLE 2 CULVER CITY, CALIFORNIA 3 AUGUST 26, 2015 4 ---oOo--- 5 MR. HORTON: Ms. Richmond. 6 MS. HARKEY: Is that it? 7 MS. RICHMOND: Next are those items that 8 have been taken under submission. 9 MS. HARKEY: Okay. Let me see. 10 MR. RUNNER: Well we don't have too many 11 cases to keep track of. 12 MS. HARKEY: Yeah, we've just got the one 13 that we just did. 14 MS. RICHMOND: Would you like to take up 15 item C2 first, or the order that we heard them? 16 MR. RUNNER: That's right. It was C5, 17 wasn't it? Yeah. 18 MS. HARKEY: Where's C -- what are we 19 doing? 20 MR. HORTON: Let's take it up in the order 21 in which we heard 'em. C5. 22 MS. RICHMOND: So our first item is C5, 23 James Paul Flores and Lydia Pimentel Flores. 24 ---oOo--- 25 ITEM C5 26 JAMES PAUL FLORES and LYDIA PIMENTEL FLORES 27 NO. 585502 (FH) 28 ---oOo--- 3 1 MS. HARKEY: I'm going to try a motion 2 here. I'm going to support staff recommendation, 3 excepting I would like to eliminate the penalty for 4 fraud. 5 MR. HORTON: Member Harkey moves to adopt 6 staff recommendation with the exclusion of the fraud 7 penalty. 8 MR. RUNNER: Can -- can I ask a question? 9 MR. HORTON: Mr. Angeja. 10 MR. RUNNER: Real quick. I -- I may get 11 close to there, but is there -- the issue of -- how 12 about a -- what's the difference between that and 13 negligence penalty in this case? 14 MR. ANGEJA: In terms of the amount? 15 MR. RUNNER: Yeah. 16 MR. ANGEJA: Well, 25 percent fraud 17 penalty, 10 percent negligence penalty; I don't have 18 those numbers. 19 MR. RUNNER: Okay. Okay. I don't need the 20 exact amount, just percentages. 21 MR. ANGEJA: Twenty-five percent is the 22 fraud penalty. Ten percent for negligence. 23 MR. RUNNER: Okay. 24 I would do no negligence -- I mean no 25 fraud, but negligence. 26 MS. HARKEY: Okay. Let me amend my motion 27 because it makes sense to me. 28 I would like to support the staff 4 1 recommendation, removing the fraud penalty of 25 2 percent and attaching a negligence -- 3 MR. RUNNER: Second. 4 MS. HARKEY: -- penalty of ten percent. 5 MR. HORTON: Member Harkey moves to adopt 6 staff recommendation with an adjustment, with the 7 elimination of the fraud penalty and the application 8 of a negligence penalty. Second by Member Runner. 9 Members, can we take the issue of the 10 penalty up? 11 MR. RUNNER: Sure. 12 MR. HORTON: I think that may be an easier 13 issue. 14 Objection? 15 MS. STOWERS: Objection. 16 MR. HORTON: Noted. 17 Members, we're going to take up the issue 18 of whether or not a fraud penalty applies or -- 19 and -- 20 MS. STOWERS: I have a question. 21 MR. HORTON: Question. 22 MS. STOWERS: Clarification. 23 MR. HORTON: Member Stowers, of who? 24 MS. STOWERS: On -- regarding to the 25 penalties. Clarification to Appeals. 26 Can you clarify to me what are the badges 27 of fraud and did the Department in their testimony 28 address any of these badges? 5 1 MR. ANGEJA: We did, and the substantial 2 amount of understatement is one of the factors that 3 we've got, failure to provide the books and records. 4 I believe there was a prior audit where they also 5 failed to provide those Z tapes, and that was also 6 resulted in the imposition of a fraud penalty. 7 So we've got repeated errors from a prior 8 audit to this period, which was fraud in the prior. 9 So that usually is consistent with fraud in the 10 current period. So we find that there's knowledge, 11 that they knew or should have known of the reporting 12 obligations. Error ratio was 201.45 percent. 13 That's what we've got. 14 MS. STOWERS: Okay, thank you. 15 MS. HARKEY: I have a question for Appeals 16 too. 17 MR. HORTON: Member Harkey. 18 MS. HARKEY: Do you have any idea what the 19 difference is in a bankruptcy scenario if you have a 20 fraud penalty versus a negligence? 21 MR. ANGEJA: Yes. And generally -- and I'm 22 not a bankruptcy expert -- but generally in a 23 fraud -- when there is fraud present, that's usually 24 a nondischargeable debt. 25 In this case this debt is still 26 nondischargeable because it's not yet assessed for 27 bankruptcy purposes. So the presence of fraud 28 doesn't change the bankruptcy outcome, for our 6 1 purposes. 2 MS. HARKEY: Right. But it -- okay. 3 MR. RUNNER: Can we clarify -- 4 MS. MA: Can you say it again? In a 5 different way? 6 MR. ANGEJA: If it -- if a debtor's -- this 7 is kind of redundant. If a debtor's debt were to be 8 proven to be the result of fraud -- which I believe 9 they would try to contest it, you'd have an 10 adversary action in the bankruptcy court -- but if 11 the bankruptcy court determined that a debt was due 12 to fraud, it's nondischargeable when they get a 13 bankruptcy discharge. 14 MS. HARKEY: They have to pay it. 15 MR. ANGEJA: In this case it's 16 nondischargeable no matter what because it's not yet 17 assessed. They have a petition which is not yet 18 final. So the bankruptcy was already filed, it 19 would clear dischargeable debts from prior to filing 20 bankruptcy. 21 In this case, it's not yet assessed. So 22 the bankruptcy discharge, if they get one, isn't -- 23 and it's a reorganization, by the way. But the 24 bankruptcy discharge would not affect this debt 25 because it's not yet assessed. 26 MS. HARKEY: So it really makes no 27 difference. 28 MR. ANGEJA: Right. 7 1 MS. HARKEY: Okay. 2 MS. MA: And in this case you said it's a 3 reorganization, so what, the taxpayers are 4 reorganizing -- 5 Is their restaurant still open? 6 MR. ANGEJA: They closed March of 2015. 7 But the debts -- Chapter 13 for individuals 8 is like a Chapter 11 for corporations with -- based 9 on my limited research -- the debts prepetition have 10 to be paid off within three to five years. This one 11 is prepetition and would not be dischargeable 12 because it's not yet assessed. 13 I don't know -- the bankruptcy payment 14 would be less than a hundred percent, depending on 15 the amounts that they've got. So this one would not 16 be discharged. 17 MS. MA: So there's no real difference in 18 our opinion whether it's negligence or penalty, just 19 the amount, whether it's 25 or 10 percent? 20 MR. ANGEJA: Right. And ideally the trier 21 of fact is deciding whether there was fraud or 22 whether there was negligence, not necessarily trying 23 to drive the bankruptcy determination. 24 MS. HARKEY: Let me make this real simple. 25 I'll withdraw my motion and support the Department 26 since there's no difference in the bankruptcy 27 scenario. 28 MR. ANGEJA: That's my understanding, is 8 1 that it doesn't change. 2 MS. HARKEY: Yeah, because that was my 3 concern. 4 MR. ANGEJA: Except to the extent that if 5 this Board reduces the amount that's due, obviously 6 it reduces the amount they need to pay -- 7 MS. HARKEY: Yeah, in bankruptcy. 8 MR. ANGEJA: -- in bankruptcy. 9 MR. RUNNER: It doesn't change their 10 position in bankruptcy. 11 MS. HARKEY: No, I'm fine. I'm fine with 12 the Department's recommendation. 13 MS. STOWERS: Second. 14 MS. HARKEY: I should have asked that 15 question first probably. 16 MR. HORTON: Member Harkey withdraws the 17 motion and submits a motion to adopt staff 18 recommendation. Second by Member Stowers. 19 Further discussion, Members? 20 Objection? 21 Hearing none, such will be the order. 22 ---oOo--- 23 24 25 26 27 28 9 1 MS. RICHMOND: Our next matter is C2, Wing 2 Sang, Inc. 3 ---oOo--- 4 ITEM C2 5 WING SANG, INC. 6 NO. 614232 (AP) 7 ---oOo--- 8 MR. HORTON: Member Harkey. 9 MS. HARKEY: I move to grant the petition 10 of the, uh -- the taxpayer. 11 MR. RUNNER: Second. 12 MR. ANGEJA: Point -- point of 13 clarification. There is a conceded amount of tax 14 that was due of 6,263.91 based on a measure of 65 -- 15 65173 for the unreported cost of purchases of 16 capital assets. 17 MS. HARKEY: Okay. 18 MR. ANGEJA: And that's reflected in the 19 summary. So I just want to clarify, you're granting 20 but not as to that portion, which is -- 21 MS. HARKEY: Yeah, not as to that portion. 22 MR. ANGEJA: Thank you. 23 MS. HARKEY: Whatever's been conceded. 24 MR. RUNNER: Yeah, the -- 25 MS. STOWERS: Second. 26 MR. RUNNER: Yeah. 27 MR. HORTON: Member Harkey moves to grant 28 with the exception of the amount previously conceded 10 1 by the business owners. Second by Member Stowers. 2 Without objection, such will be the order. 3 Members, you know, I thoroughly agree with 4 the Board's decision, but -- 5 I'll just discuss it offline with staff. 6 ---oOo--- 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 11 1 MR. ANGEJA: We do have the matter submitted, Joann. 2 3 MR. RUNNER: The what? 4 MS. RICHMOND: Our last item is Item C6 5 Shri Ranchhod Corporation. This is a waived 6 appearance. 7 ---oOo--- 8 ITEM C6 9 SHRI RANCHHOD CORPORATION 10 NOS. 771276, 775263 (EH) 11 ---oOo--- 12 MR. RUNNER: Oh, a waived appearance. 13 Which number was that, C what? 14 MS. RICHMOND: C6. 15 MR. RUNNER: Move staff recommendation. 16 MS. STOWERS: Second. 17 MR. HORTON: (Inaudible) between 70 and 80 18 percent. 19 MS. HARKEY: Right. 20 MR. HORTON: If they fall within that 21 category, it's good to go. 22 MS. HARKEY: It's good. That's right. 23 MR. RUNNER: We just moved staff 24 recommendation on C6. 25 MS. STOWERS: I seconded. 26 MS. HARKEY: What's C6? 27 MR. HORTON: C6? 28 MS. RICHMOND: C6 was a waived 12 1 appearance. 2 MR. RUNNER: Waived appearance. 3 MS. RICHMOND: That's our last item. 4 MR. HORTON: Oh, okay. My apologies. I 5 was conferring with a Member on item C6. 6 Mr. Runner moves staff recommendation on 7 item C6. Second by Member Stowers. 8 Without objection, Members, such will be 9 the order. 10 Thank you very much, Mr. Runner. 11 MR. RUNNER: Thanks. 12 MR. HORTON: The meeting of the Board of 13 Equalization is hereby adjourned. 14 Thank you, Members. Until we meet again. 15 ---oOo--- 16 17 18 19 20 21 22 23 24 25 26 27 28 13 1 REPORTER'S CERTIFICATE 2 3 State of California ) 4 ) ss 5 County of Sacramento ) 6 7 I, KATHLEEN SKIDGEL, Hearing Reporter for 8 the California State Board of Equalization certify 9 that on August 26, 2015 I recorded verbatim, in 10 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 13 constitute 14 a complete and accurate transcription of the 15 shorthand writing. 16 17 Dated: September 10, 2015 18 19 20 ____________________________ 21 KATHLEEN SKIDGEL, CSR #9039 22 Hearing Reporter 23 24 25 26 27 28 14