1 BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION 2 450 N STREET 3 SACRAMENTO, CALIFORNIA 4 5 6 7 8 REPORTER'S TRANSCRIPT 9 OCTOBER 25, 2016 10 11 SALES AND USE TAX APPEAL HEARING 12 APPEAL OF 13 EMAD KAMAL SWEIDAN 14 NO. 710620 15 AGAINST PROPOSED ASSESSMENT OF 16 SALES AND USE TAX 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 For the Board of Equalization: Fiona Ma, CPA 3 Chairwoman 4 Diane L. Harkey Vice Chair 5 Jerome E. Horton 6 Member 7 Sen. George Runner (Ret.) Member 8 Yvette Stowers 9 Appearing for Betty T. Yee, State Controller 10 (per Government Code Section 7.9) 11 Joann Richmond 12 Chief Board Proceedings 13 Division 14 For Board of Equalization Staff: Jeff Angeja 15 Tax Counsel IV Legal Department 16 17 For the Department: Scott Lambert Business Taxes 18 Specialist III Business Tax and Fee 19 Department 20 Kevin Hanks Chief 21 Business Tax and Fee Department 22 Stephen Smith 23 Tax Counsel IV Legal Department 24 For Petitioner: Emad Kamal Sweidan 25 Taxpayer 26 Ahmed A. Ali Representative 27 28 ---oOo--- 2 1 450 N STREET 2 SACRAMENTO, CALIFORNIA 3 OCTOBER 25, 2016 4 ---oOo--- 5 MS. MA: Okay. Welcome back, Members and 6 guests. 7 Ms. Richmond, please introduce the next 8 item. 9 MS. RICHMOND: Good afternoon, Members. 10 The Board Members met this morning in 11 closed session and discussed settlements, pending 12 litigation, and personnel matters. 13 So our first item for this afternoon is 14 Item C, Sales and Use Tax Appeals Hearings; Item C2 15 Emad Kamal Sweidan. 16 Please come forward. 17 MS. MA: And, Ms. Richmond, I just want to, 18 um, add that we had unfinished business at closed 19 session, so we will be going back into closed 20 session after all the, uh, business is done today. 21 MS. RICHMOND: Yes. 22 MS. MA: Okay. 23 MS. RICHMOND: Board Proceedings has 24 received contribution disclosure forms for today's 25 hearings from the parties, participants, and agents. 26 All forms were properly completed and signed and no 27 disqualifying contributions were disclosed. All 28 parties, participants, and agents are on the alpha 3 1 listings provided to your office. 2 Each person sitting at the table will be 3 asked to introduce themselves and, if necessary, 4 their affiliation with the taxpayer for the record. 5 Ten minutes is allocated for the taxpayer's 6 opening presentation, followed by ten minutes for 7 the Department's presentation, and five minutes is 8 allocated to the taxpayer for rebuttal. 9 Ms. Ma. 10 MS. MA: Thank you, Ms. Richmond. 11 Mr. Angeja, please introduce -- introduce 12 the issues in this case. 13 MR. ANGEJA: Good afternoon, Madam Chair 14 and Members. I'm Jeff Angeja on behalf of the 15 Appeals Division. 16 The appeal before you presents one 17 unresolved issue, which is whether additional 18 adjustments to the amount of unreported taxable 19 sales are warranted. 20 MS. MA: Okay, thank you. To the 21 petitioner, welcome to the Board of Equalization. 22 You have ten minutes to make your initial 23 presentation, and then five minutes on rebuttal. 24 Please introduce yourselves for the record 25 and then you may begin. 26 MR. SWEIDAN: Emad Sweidan, the owner of 27 the business, the closed business. And Mr. Ali, 28 Ahmed Ali, my representative. 4 1 MS. MA: Okay. 2 MR. ALI: My name's Ahmed Ali. I represent 3 Emad. 4 We have outlined a few points for the 5 dispute that we never actually owed any -- any in 6 taxes. Our revenue were not taxable from cover 7 charge and rentals. 8 We discontinued selling food items because 9 it was not selling. We closed down in about five 10 years and it came the worst, uh, economic down-turn 11 in the whole country. Uh, we were back in rent and 12 lease. 13 Uh, so I would like to submit these two 14 documents, if possible. It would help understand 15 what it comes from. 16 MS. MA: Okay. We're going to make some 17 copies for the Members. 18 MR. ALI: No, you could keep this. 19 MS. MA: Okay, but we need copies. Do you 20 have enough copies? 21 MS. CICHETTI-BRENNAN: Is this a copy of 22 your presentation that you're making? 23 MR. ALI: Yes. 24 MS. CICHETTI-BRENNAN: They'll hear you 25 speak. 26 MR. ALI: Yes. Yes, it is. 27 MS. MA: Oh, okay. 28 MS. CICHETTI-BRENNAN: Do you want me to 5 1 copy it? 2 MS. MA: Sure. 3 MS. CICHETTI-BRENNAN: I'll be right back. 4 MR. ALI: Thank you. 5 MS. MA: Okay, in the meantime -- 6 MR. ALI: Go ahead, Emad. 7 MR. SWEIDAN: Basically this is a rundown 8 of the business. The nature of this business is, 9 and what we've become basically to conflict is, is I 10 started it with a partner who, two years later, 11 basically ended up robbing the place. 12 I had to borrow money from my family after 13 he was evicted. And this is before the -- the 14 actual start of the audit period. So it might not 15 apply, but it still hinders to the nature of the 16 business. 17 Uh, working it on my own with my wife and 18 basically friends here and there, trying to make 19 ends meet, borrowing money from my parents, 20 borrowing money from my brother-in-law. The only 21 way the nature of the business was basically 22 sustained is through doing events. And those weekly 23 events, which shows in the pattern of revenue that 24 it was generating, was cover charge that we used to 25 do and renting of the business as a hall. 26 Uh, they've claimed that, you know, you 27 rented the hall, that it was including food, that it 28 was including service. I've claimed that it was 6 1 not. I have showed them contracts that I've had 2 with the vendors before who have simply rented the 3 hall just like as a wedding hall. We've had it for 4 birthdays, for sorts of events. 5 You know, promoters will come in, they will 6 do basically events there. I rent it to them clean, 7 they return it to me clean for a fee. And we've 8 claimed that that fee or the rental fee has not 9 been -- you know, it's not sales taxable. Same with 10 the weekly events that we used to have. And they 11 weren't usually on weekends, they were done mostly 12 for college kids. 13 Again, this is a hookah bar. Uh, you know, 14 most of the majority of the funds that were 15 generated were for cover charges, which, again, we 16 argue that have not been sales taxable. They have 17 argued -- 18 I have no way to prove it. There is no way 19 in the paperwork to prove it, that it was and it 20 wasn't, how the breakdown is. 21 The nature of the business and basically 22 the evolution of it that I've had to close it in 23 2012, I've lost, you know, numerous amounts of 24 money, still owe to the bank a ridiculous amount of 25 money. To me, the health of the business and the 26 generation of money based on these papers, if their 27 numbers were accurate or even close enough to being 28 accurate, I would still be in business to this very 7 1 day. 2 Uh, I owe money to a loan that I've taken 3 out to pay the initial fee of the business. There's 4 litigation between me and the landlord, about six 5 months of unpaid rent, that happened directly after 6 I closed the business. 7 Again, the idea is, Why even survive with 8 this losing business? Well, to me it was money 9 well -- you know, first of all, a lot of money first 10 spent. A lot of initial investments that were made 11 by me and by my family members. 12 We've been screwed on it, you know, in more 13 than once. The economy kicked us while we were 14 down. A partner that was taking a lot of money and 15 he walked out, you know, without -- without fighting 16 it even, uh, in fear of litigation for himself. 17 Uh, we've tried to resuscitate a dead body 18 for four years, three years and a half, and nothing 19 has worked. And, you know, the only thing that 20 was -- that I could do was basically shut it down 21 and just walk away. 22 The way that I am right now, it's basically 23 working from reverse and forward. I'm not even 24 starting at point zero. I'm almost 40 years old. I 25 have a wife who works. We're barely making it. 26 This doesn't say that, you know, your 27 calculations are not what they are. If the business 28 had made money, it did and it survived for that 8 1 long. 2 Uh, who benefited? You know, vendors 3 benefited, utility companies benefited. Taxes were 4 paid benefited. I'm the one that was basically the 5 work horse for all these people that have gained 6 from this. 7 Uh, again, my argument is, is the business 8 was sustained by borrowing from my family members, 9 which I've showed deposits of; they didn't recognize 10 most of them. I can't prove that I borrowed money 11 from my mother and say I deposited it on a regular 12 basis, money from my father, I deposited on a 13 regular basis to sustain the business. 14 Again, this was not large sums of money. 15 This was just, you know, bits and pieces here and 16 there to keep it going, to keep it sustaining; with 17 the hopes of eventually selling it, which never 18 happened. You know, it was a dying business. It 19 was a dead business, and we were trying to still 20 work with it. It didn't work to our advantage. 21 Again -- and the only way it was to survive 22 this business and just to make a little bit of money 23 to make ends meet was to do it in that nature. I 24 was doing parties. We were doing it every Thursday 25 night, and Wednesday sometimes, for college kids. 26 They would pay cover charge. 27 When I had 150 people inside the business, 28 about 30 of them would actually spend money on, you 9 1 know, hookah and drinks. I wasn't making any food. 2 I wasn't selling any food. It was going away. And, 3 you know, for the last two and a half years of the 4 business I had stopped making food. You can't even 5 find a French fry in there because it was not -- it 6 was not affordable. 7 The only thing that was affordable was 8 trying to keep this one night alive in the whole 9 week. I would have nights in there that would have 10 no people walk in. And I've had, you know, your 11 basically inspectors come in on weeknights, on 12 Saturday nights, where I'd be the only one in the 13 business and there'd be nobody else. And it stayed 14 like that for a good two and a half years. 15 I've tried to work with it. Again, working 16 alone on a limited budget, borrowing money, was just 17 not possible. I'm glad I got out of it. I was 18 alive and, uh, you know, I have my family now and 19 working back basically from -- from way below zero 20 to get back our life together. 21 It was a lot of time wasted, a lot of 22 energy wasted that could have been somewhere else. 23 And the experience of doing business, you know, it's 24 not the taxes or it's not the laws or it's not 25 anything else, it's just -- you know, it's -- you go 26 into it and it's basically it's -- you know, it's 27 people kicking you from every which way you can and 28 picking on you until there's no more left. And I'm 10 1 glad I got out of it alive. I work as a substitute 2 teacher now, just getting into real estate and 3 hopefully, you know, rebuild our lives together 4 again with my family. 5 MR. ALI: In addition, also, that we 6 actually don't owe any taxes. We didn't have any 7 taxable income that we're trying to, you know, not 8 pay. These numbers that were made up by the auditor 9 were not correct, were not accurate. 10 MS. MA: Okay. 11 MR. ALI: So the bottom line, in addition 12 to Emad's story is we don't owe any taxes. 13 MS. MA: Okay. 14 MR. ALI: Thank you. 15 MS. MA: All right, thank you. 16 Um, to the Department, you have ten minutes 17 to make your presentation. Please introduce 18 yourself for the record and begin. 19 MR. LAMBERT: Good afternoon, Chairwoman Ma 20 and Members. My name is Scott Lambert. I'll be 21 representing the Business Tax and Fee Department 22 today. To my right is Kevin Hanks, also with the 23 Business Tax and Fee Department, and to Mr. Hanks' 24 right is Stephen Smith with the Legal Department. 25 This case involves a hookah lounge with, 26 uh, the sale of food in the first year and sales of 27 alcoholic beverages throughout the audit period. 28 For audit, the taxpayer provided us with 11 1 limited records. There were income tax returns, 2 bank statements, and a monthly sales journal. There 3 was no detail information provided. 4 The taxpayer indicated that the method they 5 used to report was to count the cash in the till at 6 the end of the day and write that number down on the 7 monthly sales journal. Then they also used the 8 figure from the credit cards. They used those 9 figures to report as taxable. 10 So there is no detail information to 11 indicate what any of -- of the sales were. 12 The purchase information was not provided. 13 Therefore, the Department used the deposits into the 14 bank account to account for gross receipts. 15 There was both cash and credit card 16 deposits into the bank account. Those numbers were 17 added together, compared to what was reported, and 18 we came up with a difference. 19 There were adjustments that were allowed, 20 which was cash that went into the bank from the 21 taxpayer loaning cash to himself. There was also a 22 minor adjustment of a thousand dollars for a loan 23 from his mother. And there were adjustments for 24 cover charges and room rentals that were considered 25 to be nontaxable. 26 The figures had to be estimated from the 27 sales journal because there was no detail. The net 28 result was for the room rental cover charges and VIP 12 1 fees that we are now left with a little over $8,000 2 in sales from -- from, uh, that area. 3 The taxpayer reported $150,000 in taxable 4 sales during the audit period. His rent was $4,000 5 a month. So basically the amount of sales comes up 6 fairly close to just what the rent was for the 7 location. 8 The taxpayer also provided bank statements 9 from both his mother and brother-in-law to document 10 that there were cash loans taken out of their 11 respective bank accounts and then deposited into the 12 taxpayer's. 13 Other than the thousand dollars from the 14 mother that I mentioned earlier, we were unable to 15 trace any of the cash loans into the bank account 16 with any amount of certainty. The taxpayer made 17 deposits into the bank account for cash on a 18 sporadic basis; it was generally two to three times 19 a month. 20 It's -- it would be difficult for the 21 Department to confirm that there weren't cash 22 payouts or cash used for other purposes. But in any 23 event, just the cash that was deposited into the 24 bank was used as the amount of taxable revenue. 25 So, the numbers that are -- that were used 26 in the audit are the actual deposits into the bank 27 account. There is no estimating as to gross 28 receipts. Those are the -- the actual figures. 13 1 In -- in regards to the VIP charge or a 2 reservation for tables, the taxpayer hasn't been 3 able to provide us any information in regards to 4 whether food and beverages were connected with those 5 charges. Based on section 6091 with the presumption 6 that all revenue is subject to tax unless shown 7 otherwise, the Department has considered those 8 charges to be subject to tax. 9 With that, the Department concurs with the 10 Appeals Division Decision and Recommendation. 11 MS. MA: Okay. To the appellant, you have 12 five minutes on rebuttal. 13 MR. SWEIDAN: First thing about basically 14 the records that were not provided. There were 15 records that were provided towards the end of this. 16 I showed them statements from the police. 17 I've showed police reports documenting the several 18 amounts of times; it was close to six. There was 19 three within November itself, of the year 2011, of 20 entering -- of breaking and entering where records 21 were stolen, money was stolen, liquor was stolen, 22 options were stolen. I had TV in there and speakers 23 that were stolen, and the police reports showed 24 those. And they -- they have record of them. 25 The period after that, I did submit the 26 records that I had and they have a copy of it. So 27 there's just a brief estimate of it, a brief time 28 estimate of it. 14 1 Uh, the other thing is that, uh, he 2 mentioned the loans from my mother and my 3 brother-in-law -- and I've talked to this on the 4 phone with several people in the Department -- is 5 those were basically monies borrowed from my family 6 members, immediate family members, little bits and 7 changes. 8 I've shown it in the documentation from 9 their bank accounts and the statements. And he said 10 that they were sporadic deposits made monthly; no, 11 they were not sporadic. If you put this on a time 12 sheet and you put it through basically, you know, a 13 sty graphics program, you will see the pattern. 14 I was doing the parties on Thursdays. By 15 the pass of the weekend, by usually Monday or 16 Tuesday a deposit was made. It was always after the 17 weekend the deposit was made, and it was made after 18 every weekend. 19 That deposit included the money that I got 20 from the business, whatever ATM was in there because 21 that's how long it took usually the ATM to get in 22 there, about two or three days, including the cash 23 that I had -- you know, whatever I needed to 24 basically keep the business going from my parents. 25 It could have been a couple hundred bucks, sometimes 26 it was about seven or $8,000. And there was a 27 statement in there from my brother-in-law. 28 Why did they give me money? Because, you 15 1 know, this was the family business. They came and 2 they ate there sometimes. Uh, and this was a 3 business that we had all spent a lot of money on. I 4 had borrowed from my father that needed to basically 5 be resolved. 6 I didn't buy it to lose it. I didn't buy 7 it to, you know, to just to give it up. I bought it 8 to hopefully make money, and that didn't happen. I 9 was very unlucky and I got in with a shark of 10 people, a pool of sharks that all picked at me. 11 I was the only one that survived in that 12 business for five years. And at the end of it, 13 drained, completely drained and owing, you know, 14 more than I'll make in about three, four years if I 15 gave it all back to the bank and to the -- to the -- 16 basically the litigation that I'm going through 17 right now. 18 Uh, he says $150,000 in taxable sales. 19 That is not taxable sales. What I don't understand 20 is the Department already made leeway. We -- we 21 appealed it as a number, or they put in as a number, 22 55,000 or close to 55,000 in, uh -- in all rental 23 fees. 24 Uh, they've taken out 47-plus. To me, it 25 doesn't make sense. It's either black or white. 26 You either agree it's taxable or it's not taxable. 27 The fact that they gave it -- you know, 28 that they gave leeway this, it should all take it 16 1 out. 2 I can't prove the fact that there was cover 3 charge to be paid. But I -- there's no reason to 4 the lie about it, because that's how I made money. 5 I had only so much of things to sell to offer. 6 There was no way I could've sold that many 7 hookahs and, you know, get -- sold that many beers 8 to make this amount of money. 9 Why were -- why were people paying it? 10 Because that's what kids do; they go to a small 11 party, they pay a cover charge, they -- you know, 12 they order water in there. A few people there will 13 make up the rest of the difference and that's how 14 the money was made and that's how money was 15 sustained. 16 The business wasn't attractive for adults. 17 It wasn't attractive as a restaurant. You know, 18 after my partner was gone, I had no cook. I tried 19 cooking myself. It was a bad idea, wasted a lot of 20 money, probably even lost clients. It wasn't my 21 thing. 22 I studied accounting in college, and to go 23 into this type of business was the biggest mistake 24 of my life. And me and my father have had fights 25 about this. 26 But, I did it anyway. Call it a risk. 27 Call it whatever you want to call it. It's -- I 28 regret it to the -- to the first day that I signed 17 1 that piece of paper. 2 You know, the point being right now is the 3 business closed. If I was making this kind of 4 money, I would still have this business, if this 5 was, you know, taxable or nontaxable. 6 We paid a quarter million dollars for that 7 business, me and my partner. What I got out of it, 8 you know, over a period of five years, I wouldn't 9 even say amounted to 10, $20,000, and just me eating 10 there sometimes. It's not even money that I took to 11 the bank or I made money. 12 I took it as a job because I had -- I was 13 working as a substitute in the morning. I thought, 14 okay, this will be a great idea to make money in the 15 evening. It's an existing business, it's running. 16 But when I got in there, it was like a 17 blender and everybody was kicking you from either 18 which side, whether it was the government, you know, 19 utility companies, vendors, everybody, employees 20 back then that we had, and even, you know -- or my 21 partner, which was a close family member. 22 It's -- you know, it's been a downward 23 spiral ever since. And it's still going down. And 24 it's not even going to be over after this audit is 25 over. You know, this audit is just another, you 26 know, kind of kick while I'm down. But there's 27 other bigger fish that I'm still dealing with 28 because of this business. And let alone the time 18 1 that I lost with my family, with my kids. 2 The money -- the bank -- the business made 3 money. That money barely sustained it, and I had to 4 basically put it in. I can't prove it. This is my 5 own money going into my own business. I've shown 6 them all I can. You know, I can't say, "Oh this was 7 the document. I took out $300 on Tuesday from my 8 mother, well I put it in, you know, on Sunday or 9 Monday." 10 If they can't believe my word, it's right 11 there, it's all included together. Again, I'm not 12 going to have a separate deposit made for, you know, 13 my cash loan from my mother and then maybe a couple, 14 you know, bucks there that I put in from the 15 business. It's all included with it. And that's 16 the only justification I have for me surviving as 17 long as I have survived. 18 And I think hopefully I've answered 19 everything that, you know, he was -- rebuttal 20 against everything else. 21 And, again, the stolen records, I've proven 22 it. They've dismissed the negligence fee for not 23 having the records. And they've seen -- I've had -- 24 you know, I gave them six police reports of -- you 25 know, and there was a list of them of the things 26 stolen and some of the things that were gone, that 27 were damaged in the business. 28 Thank you. 19 1 MS. MA: Okay. 2 MR. SWEIDAN: Hopefully that's enough. 3 MS. MA: Questions? 4 Mr. Runner. 5 MR. RUNNER: Yeah. Just a couple followups 6 on -- on some of the discussion. 7 Um, what did -- what -- what was it that 8 you provided to demonstrate that you had family 9 loans? 10 MR. SWEIDAN: I provided them with the 11 statements from my mother and my -- my 12 brother-in-law. And I also gave them their bank 13 statements over the -- you know, over the time that 14 I have highlighted, a bunch of -- all the 15 withdrawals that I have, specific withdrawals that 16 I've had. 17 MR. RUNNER: In the bank statements, these 18 were cash. 19 MR. SWEIDAN: They were cash withdrawals, 20 yes. 21 MR. RUNNER: And -- 22 MR. SWEIDAN: They never gave me checks. 23 MR. RUNNER: And so the bank statements you 24 provided showed these cash withdrawals from their 25 bank? 26 MR. SWEIDAN: Yes. 27 MR. RUNNER: And they were the same amount 28 as what was deposited as cash into your account? 20 1 MR. SWEIDAN: This is the thing is that 2 when I took -- you know, let's assume, for example, 3 I took $500 from my mother. 4 MR. RUNNER: Right. 5 MR. SWEIDAN: I would deposit it along with 6 the money that I had -- 7 MR. RUNNER: Okay. 8 MR. SWEIDAN: -- from the weekend. And it 9 would be all included in there. 10 MR. RUNNER: Okay. 11 MR. SWEIDAN: I couldn't -- there's 12 no way -- they don't separate -- 13 MR. RUNNER: Okay. So there's -- you 14 could -- there's no way to separate that out. 15 MR. SWEIDAN: There is -- unfortunately, 16 there's no way. 17 MR. RUNNER: And what was the total -- what 18 was the total amount of those loans? 19 MR. SWEIDAN: I've approximated about 30 to 20 $40,000 -- 21 MR. RUNNER: Well, that's -- 22 MR. SWEIDAN: -- between them. 23 MR. RUNNER: Again, that's 30 -- there's a 24 $10,000 difference there. So you're not sure -- 25 MR. SWEIDAN: I'm gonna meet you in the 26 middle -- 27 MR. RUNNER: Hold on. 28 So you're not sure how many loans they gave 21 1 you? 2 MR. SWEIDAN: Uh, according to the paper, 3 it's about 35. But, again, there was money that I 4 was -- 5 MR. RUNNER: According to what paper? 6 MR. SWEIDAN: The bank statements, that I 7 provided to the Department. 8 MR. RUNNER: So you did not have a specific 9 list of loans that totaled a total amount that said 10 these are all loans? 11 MR. SWEIDAN: Yes, I did. And they were in 12 the statements, but there was -- 13 MR. RUNNER: Well, then how can it -- how 14 can you not know exactly what that amount is? 15 MR. SWEIDAN: Because I've gotten other 16 loans from my father that happened the year before, 17 in early 2009, when I -- 18 MR. RUNNER: Then did -- why don't you just 19 add those in, too? 20 MR. SWEIDAN: That's -- they're not 21 included in the -- you know, in your, uh -- in the 22 three-year audit period. 23 MR. RUNNER: Well then, why -- why would 24 they -- what difference would those make then? 25 MR. SWEIDAN: They wouldn't. You know, 26 that -- 27 MR. RUNNER: So why can't you -- you don't 28 have a list of specific loans, the dates that they 22 1 gave those to you, and the amounts that that totals? 2 MR. SWEIDAN: The only way I could provide 3 that was through their bank statements. And 4 their -- 5 MR. RUNNER: How do -- how do you that 6 their bank statements were indeed the loans to you? 7 MR. SWEIDAN: I'm -- take my word for it. 8 I have no other way to prove it. 9 MR. RUNNER: Okay, thank you. 10 MR. SWEIDAN: You're welcome. 11 MS. MA: Ms. Harkey. 12 MS. HARKEY: Hi. Thank you. 13 Um, for the appellant. Did, um -- 14 Lost my train of thought on that. 15 Did, uh -- okay. 16 When they loaned you the money, they gave 17 you cash, you deposited with -- 18 Did -- were the, uh, withdrawals from, I 19 guess the bank statements that we had to verify, 20 that you gave the Department to verify that these 21 were actually cash withdrawals, did -- was there a 22 lot of other cash withdrawals on there? Or were 23 they pretty plain and simple, certain times of the 24 month, anything at all that delineated that it was 25 something that you needed on a regular basis? 26 MR. SWEIDAN: I didn't -- I mean I know 27 that I looked for a pattern. But, you know, to me 28 they were kind of consistent. It was just usually a 23 1 couple hundred bucks a month from here. 2 The one time I borrowed from my 3 brother-in-law, and that was because I did him a 4 favor. They were -- they basically lost their house 5 to foreclosure and they stayed at my house for a 6 couple -- for -- in 2008, for a couple of months. 7 And so when I needed money, I asked him. 8 And he was basically working and not having to pay 9 mortgage, and I just asked him for money and he 10 says, "Yeah, it was pleasure." 11 And again, when I say loans from my 12 parents, when my parents give me money, to them it's 13 not a loan. They're giving me money. I mean -- but 14 it's not, you know, business money. 15 MS. HARKEY: It's not business money. 16 MR. SWEIDAN: Yeah. 17 MS. HARKEY: Okay. Um -- 18 MR. SWEIDAN: And my mother's not saying, 19 "Hey, you have to the pay this money back, you know, 20 within this day." This is -- to her, this is 21 willfully given. 22 MR. ALI: And, in addition, he said that 23 that was estimated numbers, uh, because of the 24 limited records. And we showed in the police 25 reports that we have so many break-ins, that things 26 were stolen. 27 Well, here we have bank statements and 28 loans from family and friends, but here's the 24 1 estimation. Um, and if that estimation was correct, 2 why would -- why are we out of business today? Why 3 did we get out? You know, why we didn't pay the 4 rent? And so on and so forth. 5 MS. HARKEY: Okay. The Department, um, you 6 said that you -- including whatever they say is -- 7 are not receipts, it was 150,000 taxable sales 8 throughout the whole, the time frame. 9 MR. LAMBERT: That they reported as 10 taxable? 11 MS. HARKEY: Right. 12 MR. LAMBERT: Correct. 13 MS. HARKEY: Right. And when you looked at 14 rent, it was almost all rent. 15 MR. LAMBERT: Well, um, what I would say 16 is, is that if you looked at -- if you take $4,000 a 17 month times 36 months, it comes up close to 18 $150,000. It's slightly less than that. 19 MS. HARKEY: Okay. Did they have any 20 employees at all? 21 MR. LAMBERT: Well, uh, I'm unclear on 22 that. There -- I heard the taxpayer said they had 23 employees. 24 Um, I would point out on the income tax 25 returns, there's no amount listed for wages on the 26 income tax returns. So, uh -- 27 MS. HARKEY: Probably not. Did -- 28 MR. LAMBERT: Well, I -- 25 1 MS. HARKEY: Did they pay themselves 2 salaries? 3 MR. LAMBERT: Uh, not -- not that I'm aware 4 of. 5 What -- what I would say is, is from just 6 looking at Yelp, um, it appears that you would need 7 more than one person to operate this business. 8 Now, it appears that his wife was also 9 involved with it, and I'm not, um, aware of other 10 people that would be involved. But it would take a 11 few people to run the business, at least on the 12 weekends. 13 MS. HARKEY: Okay. So it would be, kind 14 of, seem obvious that if everything you took in went 15 to rent, that you had to have something else. 16 MR. LAMBERT: Uh, it would -- 17 MS. HARKEY: So -- 18 MR. LAMBERT: It would seem. 19 MS. HARKEY: It would seem that they had to 20 have either fund it themselves, somehow. 21 MR. LAMBERT: And -- 22 MS. HARKEY: (Inaudible.) 23 Did you -- excuse me. Did you pay yourself 24 salaries? Did you have employees? 25 MR. SWEIDAN: Uh, we had employees. We had 26 three employees up until 2009, the beginning of 2009 27 when my partner, me and my partner had dissolution. 28 Uh, after that happened -- and this was 26 1 again, I think February of 2009. And I have the 2 document from him signed and everything -- I 3 basically shut down the business for about a week, 4 and, uh, that's when I got money from my father. We 5 renamed the business. It used to be Habibi Cafe. 6 We named it Jerusalem Cafe. We added on another 7 dba. It still stayed as Habibi Cafe. 8 I think that's actually what instigated the 9 audit is when they came, there was a discrepancy in 10 the name of the business. 11 Uh, I -- since that I have had no 12 employees. It was me and my wife working in there. 13 Again, I tried to do the cooking myself. Me and her 14 would serve. We started -- it was a nighttime 15 business. We opened it for lunch for a while; that 16 didn't work out. 17 Uh, for the night events, I had friends of 18 mine, they weren't really employees. I never really 19 paid them any money. They came in. You know we 20 drank together. I would take them out to Denny's. 21 It wasn't really direct employees. They were 22 helping me out on just those nights. Every other 23 night it was me by myself. 24 MS. HARKEY: Okay. Explain the nature of 25 the, uh, room rental contracts. 26 MR. SWEIDAN: Basically the room rental 27 contracts is, you know, I have, you know, a bunch of 28 promoters. They come up to me, just like, "We would 27 1 like to rent this hall. We would like to do our own 2 event." And I would just rent the hall out. It was 3 like any other, you know, wedding hall or any other 4 type of hall. 5 MS. HARKEY: So you -- 6 MR. SWEIDAN: They would do their own -- 7 MS. HARKEY: -- didn't serve anything 8 with it? 9 MR. SWEIDAN: No. If I did serve anything, 10 if there were sales, that was reported differently 11 than their fees. 12 Now, most of the time when they came in, 13 they would basically bring in their own food. 14 They'd bring in their own, you know, whatever, 15 liquor, entertainment they had, whether it's a 16 wedding, whether it's a graduation, whether it's 17 just a Halloween party. We've had Christmas parties 18 before, Valentine's Day parties. 19 Again, it's promoters that have the people 20 but don't have the location. I would rent them out 21 the business and I would just -- you know, my only 22 stipulation is, "I give it back to you in one 23 condition, you give it back to me in the same 24 condition, cleaned up, ready." And then I would 25 just take a flat fee, whether they make money or 26 they don't make money. 27 MS. HARKEY: Okay. And that's basically 28 what paid your rent? 28 1 MR. SWEIDAN: That and the events we did. 2 The events we did were the weekly events for college 3 kids, and they were done on Thursdays. Because 4 weekends, we couldn't compare with major bigger 5 downtown clubs type. And so we would do them on 6 Thursday nights. Special rates would be given for 7 college students, you know. 8 Again, I've showed flyers of everything 9 that state there is a cover charge. Usually they 10 would kind of, to entice people, they would put it 11 as $5 before 9:00 o'clock -- but nobody ever shows 12 up before 9:00 o'clock -- and it would get up to 10 13 and then after. Most people wouldn't even get there 14 until 11:00. And then we'd have our little event. 15 You know, again, if I had 150 people there, 16 I would say a maximum of 20 to 30 people actually 17 spend money inside on hookah and drinks. Most of 18 them were these college kids. They would pay their 19 $10, go in there, dance, drink free water, and go 20 home. It made the place look busy, people that, you 21 know, can't afford to spend -- they did spend, but 22 you know, the only way to kind of form -- to 23 generate the revenue is to get as many people as you 24 can in there and just make -- you know, make money 25 on the -- on the cover charge. 26 Which, you know, you go to any club 27 downtown right down the street and this is how they 28 do it. You go in there, you know, on a weekend 29 1 night, on a party night, whether it's the park, 2 whether it's all these, you know, clubs, this is how 3 they operate. 4 MS. HARKEY: Okay. 5 MR. SWEIDAN: They don't have a separate 6 receipt for you, "Oh, this is your cover charge fee, 7 this is your --" No, this is -- and, you know, they 8 don't -- I don't think they have records of them. 9 MS. HARKEY: Okay. Back to the Department. 10 Um, you provided room -- the petitioner, I 11 have here, provided room rental contracts totaling 12 $19,500, which did not include any sales of food, 13 beverage or hookah. 14 And I have here that you adjusted the 15 taxable event fees 50 percent, down to 8,224. And 16 so this amount represents reservation fees. 17 What was your thinking, what was the 18 Department's thinking on this? 19 MR. LAMBERT: Okay. On the monthly sales 20 reports that we received, uh, it listed $55,000 in 21 event fees. So that's the total amount that would 22 cover three different areas. One would be the cover 23 charge, the second one would be the room rental, and 24 the third one would be VIP or reservations for 25 tables. 26 Initially, the Department saw some flyers, 27 and on it there was no indication that food or 28 beverages were provided; and, therefore, we 30 1 considered that to be not subject to tax. We 2 estimated 50 percent of the income to be from the 3 cover charges. So we subtracted $27,000. That left 4 us with approximately a little over 27,000. 5 At the appeals conference, the taxpayer 6 provided contracts for the room rentals of 19,500. 7 We considered that to be -- or Appeals considered 8 that not to be subject to tax. And so we subtracted 9 that from the $27,000. And it left us with the 10 $8,224. And that's the amount that we are 11 estimating is from the, um -- I guess you can call 12 it VIP or the reservation of the tables, and that's 13 the only amount from the $55,000 from event fees 14 that are being considered as subject to tax in this 15 audit. 16 MS. HARKEY: Okay, thank you. 17 Can you explain to me -- uh, this is to the 18 appellants. Can you explain to me what the 19 reservation fees were? What did you get for 20 reservation fee? 21 MR. SWEIDAN: Within -- 22 MS. HARKEY: Why would somebody pay them? 23 MR. SWEIDAN: Within the place we had 24 basically a booth area. There was a big long one. 25 If I can describe it as a long hall. Imagine this 26 is the business, and it's a long hall. It's 27 actually longer than this. 28 MS. HARKEY: Right. 31 1 MR. SWEIDAN: On the side, the entrance 2 door was about right here, there was a patio in the 3 front which was on this other side, facing the 4 street. 5 Uh, inside here was basically kind of a 6 private type room. It's basically coming in, 7 there's a big leather booth in there, two tables 8 right there. This fits about 30 people. 9 And there was another booth area that was 10 all leather seats. And again, this is another kind 11 of private area. 12 Uh, those were not general seating. We 13 called them preferred seating, we called them VIP 14 booths. Clubs do them at the time, uh, the same 15 thing. 16 People wanted to sit there. People wanted 17 to reserve a birthday party on one of the event 18 nights, we basically hosted it for that. They paid 19 with either cash or credit card. They paid the 20 cover charge to get in and they also paid that. 21 It's basically, you know, a hype thing. 22 People like to get the attention, especially little 23 kids, especially people with a little bit of money 24 to flash. They preferred the seating there. They 25 made them basically feel more important than the 26 regular customers who sat on the regular wood chairs 27 and regular wood -- 28 MS. HARKEY: Did anything come with that -- 32 1 MR. SWEIDAN: No. 2 MS. HARKEY: -- other than the reservation? 3 Mr. SWEIDAN: We never included anything 4 with that. I couldn't afford -- honestly, it'd be 5 nice. You know, serving this place, if you go to a 6 downtown basically club right now, you say, "I want 7 to reserve a booth for a birthday party," they'll 8 throw in a bottle of Grey Goose and you're paying 9 for that bottle of Grey Goose within the including. 10 I didn't have a full liquor license. Uh, 11 there was no way I could give them like liquor of 12 any kind other than the stuff that we used, which 13 was the -- the diluted alcohol, which it's all 14 wine-based. 15 Uh, we sold beer and we sold, you know, 16 those cocktails. And then the hookahs were 17 basically all the sales. Nothing was ever included 18 in those. It wouldn't have been affordable for me 19 to give anything away. 20 MS. HARKEY: Okay. 21 To the Department, why did you count these 22 reservation fees as taxable? What did you -- what 23 was the assumption? 24 MR. LAMBERT: What was the thought process? 25 The thought process is that this is 26 recorded as income and it was deposited into the 27 bank. And that under section 6091 that it would be 28 subject to tax unless it's shown that it is not 33 1 subject to tax. And the taxpayer has not provided 2 any type of documentation to show whether something 3 was received with this or, um, a flyer or website or 4 anything. 5 MS. HARKEY: The Department didn't find any 6 flyers though -- 7 MR. LAMBERT: We did not. 8 MS. HARKEY: -- that indicated taxable. 9 So here's where -- here's where I'm going, 10 and I know there'll probably be more questions. But 11 I -- I do think it was a -- there's a combination of 12 issues here. 13 I think the Department did a great job of 14 working through these, and I understand the code. 15 But I do think maybe this 8,224 should be not 16 taxable. 17 And so that's kind of where I'm -- where 18 I'm going with this. I think it was a very 19 difficult audit. Um, it's apparent by even our 20 receipts that nobody made any money, and so the 21 story's kind of believable. 22 So, those are my thoughts. 23 Thank you. 24 MS. MA: Anybody? 25 MR. SWEIDAN: Just another note. Just kind 26 of the business in general. I mean this business 27 left a really bitter taste in my mouth about -- 28 MS. HARKEY: Yeah. 34 1 MR. SWEIDAN: -- trying to run any kind of 2 business, anywhere. 3 MS. HARKEY: Okay. That's fine. 4 Thank you. 5 MS. MA: Any other questions? 6 Any other questions? 7 Okay. Seeing no further questions, is 8 there a motion or -- 9 MS. HARKEY: I'd like to move to reduce the 10 unreported taxable sales by the estimated taxable 11 amount of event fees of 8,224, and otherwise adopt 12 staff recommendation. 13 MS. MA: Okay. Is there a second? 14 MR. RUNNER: The basis on the reduction is 15 the reservation fees. 16 MS. HARKEY: Right. Which they couldn't 17 prove up, but all their other items they were able 18 to prove up. Which is why I'm thinking maybe this 19 is just -- and there was no indication that they did 20 serve anything with this. This was just to reserve 21 those special tables. 22 MR. RUNNER: Can I have a question to the 23 staff real quick? 24 Um -- the, um -- what would you have been 25 looking for, for that $8,000, to justify that? And 26 what were you missing? 27 MR. LAMBERT: A flyer or website, uh, 28 something to indicate what that would represent. 35 1 We're not actually sure what the amounts 2 that were charged for the reservation. We didn't 3 find any of that information. 4 So, something that -- I guess the same 5 thing where the customers would know that, uh -- 6 that there was a reservation fee and how they would 7 know. 8 MR. RUNNER: And the -- and the -- and the 9 8,000 is off the total of -- what was the total of, 10 um -- 11 MR. LAMBERT: 55,000, initially. 12 MR. RUNNER: Initial. 13 MR. LAMBERT: Mm-hmm. 14 MR. RUNNER: Okay. I'll second that. 15 MS. MA: Okay. There was a motion and a 16 second to, um -- to reduce the unreported taxable 17 sales by 8,224 but to otherwise accept the findings 18 of the Department. There's a motion and a second. 19 Ms. Richmond, please call the roll. 20 MS. RICHMOND: Ms. Ma. 21 MS. MA: No. 22 MS. RICHMOND: Ms. Harkey. 23 MS. HARKEY: Aye. 24 MS. RICHMOND: Mr. Horton. 25 MR. HORTON: No. 26 MS. RICHMOND: Mr. Runner. 27 MR. RUNNER: Aye. 28 MS. RICHMOND: Ms. Stowers. 36 1 MS. STOWERS: No. 2 MS. HARKEY: I tried. 3 MS. RICHMOND: Motion fails. 4 MS. MA: Is there another motion? 5 MR. HORTON: Move to adopt staff 6 recommendation. 7 MS. STOWERS: Second. 8 MS. MA: Motion to approve staff 9 recommendation by Mr. Horton, seconded by Ms. 10 Stowers. 11 Ms. Richmond, please call the roll. 12 MS. RICHMOND: Ms. Ma. 13 MS. MA: Aye. 14 MS. RICHMOND: Ms. Harkey. 15 MS. HARKEY: No. 16 MS. RICHMOND: Mr. Horton. 17 MR. HORTON: Aye. 18 MS. RICHMOND: Mr. Runner. 19 MR. RUNNER: Aye. 20 MS. RICHMOND: Ms. Stowers. 21 MS. STOWERS: Aye. 22 MS. RICHMOND: Motion carries. 23 MS. MA: I'm sorry. Thank you for coming. 24 ---oOo--- 25 26 27 28 37 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 October 25, 2016 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 37 constitute 14 a complete and accurate transcription of the 15 shorthand writing. 16 17 Dated: November 17, 2016 18 19 20 ____________________________ 21 KATHLEEN SKIDGEL, CSR #9039 22 Hearing Reporter 23 24 25 26 27 28 38