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 12 13 SALES AND USE TAX APPEAL HEARING 14 APPEAL OF 15 RANDY CHRISTOPHER IRVINE 16 NO. 855188 17 AGAINST PROPOSED ASSESSMENT OF 18 SALES AND USE TAX 19 20 21 22 23 24 25 26 27 Reported by: Jillian Sumner 28 CSR No. 13619 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 15 For Board of Equalization Staff: Jeff Angeja 16 Tax Counsel IV Legal Department 17 For Department: Monica Silva 18 Tax Counsel 19 Lawrence Mendel Tax Counsel III 20 Legal Department 21 Kevin Hanks Chief 22 Business Tax and Fee Department 23 For Petitioner: Jason Manning 24 Representative 25 Randy C. Irvine Taxpayer 26 27 ---oOo--- 28 2 1 450 N STREET 2 SACRAMENTO, CALIFORNIA 3 OCTOBER 25, 2016 4 ---oOo--- 5 MS. RICHMOND: The next item is C4, Randy 6 Christopher Irvine, please come forward. 7 MS. MA: Okay. 8 Mr. Angeja, please introduce the issues in 9 this case. 10 MR. ANGEJA: Madam Chair and Members, the 11 appeal before you presents two unresolved issues, 12 which are whether Petitioner is personally liable 13 under Section 6829 for the unpaid tax liabilities of 14 Missouri Station Market, and whether relief of the 15 late-payment penalty is warranted. 16 MS. MA: Okay. Thank you. 17 To the Petitioners, you'll have ten minutes 18 to make your initial presentation, and then five 19 minutes on rebuttal. 20 If you would please introduce yourself for 21 the record, and you can begin your presentation. 22 MR. MANNING: Good afternoon, Madam Chair 23 and Honorable Members of the Board. My name is 24 Jason Manning. I'm a law student at Lincoln Law 25 School, and I'm participating in the Board of 26 Equalization's Tax Appeals Assistance Program. 27 MR. IRVINE: And my name is Randy Irvine. 28 MS. MA: Okay. 3 1 MR. MANNING: And this is -- excuse me -- 2 a Section 6829, responsible person case. 3 And I wanted to start giving a little 4 history of the Missouri Station Market. 5 It was open in 1991 by Mr. Irvine. It was 6 a sole proprietorship initially. In '98 the market 7 was incorporated and remained open for just one 8 quarter shy of 22 years. The entire time paying its 9 employees, paying vendors, and paying its taxes. 10 While it was open -- the market sits on 11 Missouri Flat Road in Placerville. And while it was 12 open, it derived a significant portion of its income 13 from construction workers. 14 That Missouri Flat Road is a significant 15 throughfare. So a lot of people who lived in 16 Placerville driving out to the outskirts would stop 17 by and fill up their gas tanks, get gasoline, or 18 get -- get donuts, get coffee, and then get beer on 19 their way home. 20 And up until 2007 we had quite a bit of new 21 construction. In 2007 the new construction spending 22 was approximately $215.8 million. Compare that in 23 2011 when Market finally closed, the new -- new 24 construction -- construction spending in El Dorado 25 County had dropped down to about 25 percent of that, 26 to just $54.4. 27 In addition to that, in 2007 the 28 unemployment rate in California had finally hit six 4 1 percent. By 2011 when the market closed, the 2 unemployment was up to 12.2 percent. 3 So with the rising unemployment, decrease 4 in construction, the -- the entire business started 5 to -- to fall dramatically. 6 Also, to compound things, during the last 7 three years the business was open from the height of 8 the recession to the start of the recovery there 9 were six new gas stations opened up within about a 10 three-mile area from the business. 11 And the -- the final capstone on the 12 business was mid December, the Air Resources Board, 13 um, required a mandatory pump upgrade. It would 14 cost -- would cost $7,500. And Mr. Irvine was 15 unable to get loans for it. He contacted Hunt & 16 Sons, who delivered the propane. He contacted the 17 landlord; couldn't get the money for it. 18 And at that point it had been, you know -- 19 it had been a long recession. So mid December the 20 pumps were red-tagged, and the gas station could no 21 longer sell gasoline. 22 So New Years Eve 2011 the market finally 23 had its last day and shut its doors. Like I said, 24 after almost 22 years, due to the increased 25 competition, decreased sales, expensive upgrades, it 26 was finally forced to shut its doors. 27 Mr. Irvine, initially, his intent was, 28 after the market closed, to sell it. The -- so that 5 1 after, he would be able to pay all of his bills. 2 He tried to work with the landlord, but 3 they were unable to cooperate with each other -- or 4 the landlord was unwilling to cooperate with Mr. 5 Irvine and Market, the store. 6 So it remained unsold until finally 7 after -- after every attempt to sell the market, pay 8 off his creditors had failed, Mr. Irvine and his 9 wife were forced to file a Chapter 7 bankruptcy in 10 September of 2012. 11 At the time they filed the bankruptcy, 12 according to the BOE summary analysis, there were 13 $95,025 in available assets. 14 The bankruptcy closed effective January 15 18th of 2013, which was a full year after the 16 business had closed. 17 In April of '15, which we get just under 18 the statute of limitations, the petition section 19 finally reviewed and approved the Petitioner for 20 duel determination. And, unfortunately, at that 21 point the 95,000 were no longer available. 22 And on March 10th of this year we attended 23 the Appeals conference. 24 And I have three -- or we have three main 25 arguments against the 6829 liability. 26 And the first one is -- is -- you -- 27 essentially, an equity argument. 28 When Mr. Irvine claimed bankruptcy, at the 6 1 time of the bankruptcy, the BOE was owed 2 approximately $16,000. I think it was 3 15,100-something. 4 And the Board records indicate that there 5 were assets available in the amount of $95,000. The 6 BOE was listed on the bankruptcy, and the BOE 7 had -- had -- had notice of the bankruptcy. They 8 had knowledge and they had the ability to 9 participate. 10 But the Board chose to wait. Board staff 11 waited three years from the time the business was 12 closed, two years from the time of the filing of the 13 bankruptcy, to finally come after Mr. Irvine. 14 So in that -- in that weight, they probably 15 wasted the entire value of this case and taxpayer 16 money, and -- in the attempt to collect. 17 God knows how many -- or -- no one knows 18 how many staff hours, you know, all the conferences, 19 the reports, the approvals. And now we're at a full 20 Board Hearing. This could have been -- we believe 21 this could have been taken care of at the 22 bankruptcy. 23 So, like I said, now we're here, Mr. Irvine 24 is here, and the whole Board is here, but the -- 25 that money is long gone. 26 So Board staff waited, essentially, for 27 administrative ease until Mr. Irvine lost 28 everything. And now, due to that weight, they -- 7 1 the State may recover nothing -- or the State may 2 recover just fractions of what its owed. 3 In the meantime, Mr. Irvine has already 4 lost everything. He's -- no longer has asset -- has 5 access to that money. 6 And so, essentially, we're asking for a 7 double payment out of Mr. Irvine. Because he lost 8 all those available assets, and now in 2016 you're 9 coming after him for another 15-plus thousand 10 dollars. 11 Oh, and we brought this up at the Appeals 12 conference. The BOE assertions or the staff member 13 assertions were it was a no-asset bankruptcy. But 14 the facts are that the assets were scheduled, the 15 BOE knew about them, and didn't -- didn't file a 16 claim, didn't come after them. 17 They said it wasn't cost effective to 18 collect during the bankruptcy. But I think it's -- 19 it's kind of a wild assertion to say that it's more 20 cost effective to do it this way. 21 And then, finally, they said it wasn't cost 22 effective to seize the assets. And it's hard to 23 imagine that it's not cost effective to satisfy a 24 $15,000 debt with a $95,000 worth of assets. 25 So Mr. Irvine has already lost, um -- 26 already lost almost everything. Staff wasted the 27 opportunity, and at this point, shouldn't be 28 entitled to force Mr. Irvine to pay again. 8 1 And then my second argument is on the -- 2 the ability, Mr. Irvine's ability to pay. 3 And we already talked about how the -- the 4 bank -- the market went out of business. And this 5 one kind of comes down to, as the market was 6 failing, especially at the end of December, and 7 everything was collapsing all around him, he was -- 8 you know -- and Mr. Irvine was paying bills as they 9 came due, and just trying to -- you know, trying to 10 take care of his employees, trying to take care -- 11 take care of his vendors, trying to take care of the 12 fuel sales. 13 Um, and he spent all the money that he had 14 trying to keep the doors open long enough to -- to 15 basically satisfy all of his -- all of his bills. 16 By the time the doors closed, there was just no more 17 money. 18 If Mr. Irvine had been available -- had 19 been able to pay you, he would have. But just the 20 -- the economic times and everything that happened 21 made it so that money was spent as quickly as it 22 came in. 23 And when it -- when the -- when the tax 24 bill came due a month after the business closed, 25 there just wasn't the money for it. 26 He did pay his employees right up until the 27 business closed. It was the end of the Christmas 28 season and the beginning of the New Year, right when 9 1 mortgages are due and right when rents are due. 2 Um, and he did pay his small vendors. He 3 owed him -- basically he did -- at great personal 4 expense to himself, he did what everyone would hope 5 that someone would do. You know, it's what -- if my 6 employer goes out of business, I pray that they pay 7 me -- give me my final paycheck before they shut the 8 doors. 9 You know, he protected all of the people 10 who are most vulnerable to a financial insult. And 11 in doing it, he depleted all his personal finances, 12 he destroyed his own credit, and ultimately forced 13 himself into bankruptcy by 2012. 14 And I think, you know, when all the parties 15 have an equal claim on a prize, the courts generally 16 protect the most vulnerable. And the -- the law 17 usually recognizes the protection of the people who 18 are most vulnerable. 19 So this $15,000 is an incredibly small 20 portion of the State's operating budget. But for an 21 employee, it was 100 percent of their operating 22 budget. 23 So, Mr. Irvine -- you know, in effect, 24 we're punishing him for doing the right thing. He 25 did -- like I said, he did what most people -- most 26 good people would do, and he did what -- what most 27 of us would hope our employers would do. 28 So -- and then we brought that up -- we 10 1 also brought that up at the Board conference -- or, 2 I'm sorry -- at the Appeals conference. And what I 3 was told was that in the absence of legislative 4 intent, the statutory language and construction 5 should rule that the statute is clear and complete, 6 and it should be honored. 7 As told, you can't add anything to the 8 statute that's not there. And the -- in 9 interpreting this statute, they -- interpreting the 10 statute, it doesn't allow for a just or an equitable 11 argument. The statute is black and white and needs 12 to be honored the way it is. 13 So, um -- so in the -- but in the statutory 14 interpretation, the statute -- and this is the -- 15 the -- the push in my third argument, is that we've 16 misinterpreted the statute. The statute requires 17 that the corporation is closed, that the corporation 18 collected the tax reimbursement, and that the 19 corporate officer with control and ability to pay 20 taxes, willfully did not pay. 21 The statute does not make that 22 reimbursement immediately to the property of the 23 State, and it doesn't require that that 24 reimbursement for tax debt to be held in a separate 25 fund. It doesn't require that that money be held in 26 trust. 27 Um, so the -- sorry -- the statute also 28 defines willfully as a result of an intentional 11 1 conscious and voluntary course of action. 2 Voluntary is generally described as -- or 3 generally defined as free of outside influence 4 without consideration, without outside interference. 5 And the -- by putting in the term -- and the 6 Legislature indicates that all the conditions have 7 to be met. 8 So when the Legislature wrote this, if we 9 use this statutory construction, we're looking for 10 intentional, conscious and voluntary. And if we're 11 missing one of them, we haven't met -- we haven't 12 satisfied that definition. 13 So Mr. Irvine's definition -- Mr. Irvine's 14 decision was a challenging one. There was not a 15 good choice. No matter what he chose to do with the 16 remaining money they had left as the business 17 closed, he was hurting somebody. 18 He was -- if he didn't pay the State, he's 19 going to hurt himself because he knows they're going 20 to come after him. If he doesn't pay his vendors, 21 the guys he's been working with for 22 years, he's 22 gonna damage them. And if he doesn't pay 23 employee -- his employees, he's going to hurt them, 24 because they're not going to be able to pay their 25 rent, they're not going to be able to do, basically, 26 what's required to live. 27 In addition thing -- in addition to this, 28 it's sort of common knowledge that federal law 12 1 protects fed -- federal law requires that we 2 actually pay our employees. And the Revenue and Tax 3 Code Section 6756 give our employees priority over a 4 state claim. 5 So Mr. Irvine's decision that he had to 6 make, it -- it wasn't a voluntary one, free of 7 outside interference and free of compulsion. He was 8 forced to choose between several wrongs. 9 The analogy that I gave when I was 10 discussing with some of the staff members is, it's 11 similar to a police officer who has to decide what 12 felon to chase. He would run off chasing the more 13 dangerous one. 14 And if we use the definition the way it is 15 here, that police officer's made an intentional, a 16 conscious, and a voluntary choice to willfully allow 17 the other one to go free. 18 And I don't -- 19 MS. RICHMOND: Time is expired. 20 MS. MA: Okay. Thank you. 21 You'll have five minutes on rebuttal -- 22 MR. MANNING: Thank you. 23 MS. MA: -- or should there be questions. 24 To the Department, ten minutes. 25 MS. SILVA: Thank you. 26 Good afternoon, Chairwoman Ma and Members. 27 My name is Monica Silva. With me today, Mr. 28 Lawrence Mendel and Kevin Hanks representing the 13 1 Department. 2 The Department is in agreement with the 3 recommendation of the Appeals Division that 4 Petitioner is personally liable for the unpaid tax 5 liabilities of Missouri Station Market for the 6 fourth quarter of 2011, resulting from a 7 self-assessed non-remittance return. 8 Four conditions must be met for personal 9 liability to attach under Section 6829. The 10 corporation must be terminated, it must have 11 collected sales tax reimbursement, Petitioner must 12 have been responsible for the payment of the sales 13 and use tax, and Petitioner's failure to pay the tax 14 liabilities must be willful. 15 There's no dispute as to the first three 16 conditions. Missouri Station Market seized 17 operations on December 31st, 2011, sales tax 18 reimbursement was added to its taxable sales, and 19 Petitioner was responsible for payment of the sales 20 and use tax. 21 Petitioner disputes the fourth requirement 22 that he was willful. A failure to pay is willful if 23 the person had knowledge of the taxes not being 24 paid, had the ability to pay, or cause to be paid 25 the taxes when they became due, but failed to pay 26 them. 27 Petitioner has conceded that he knew the 28 taxes were not paid, that he had the authority to 14 1 pay the taxes, and there were available funds to pay 2 the taxes, but he failed to pay them. Petitioner 3 was, therefore, willful. 4 The language of Section 6829 provides that 5 willfully failing to pay means that the failure was 6 the result of an intentional, conscious and 7 voluntary course of action. 8 Regulation 1702.5 adds that a person can be 9 willful even though there was no bad purpose. 10 Petitioner has stated that he did not pay 11 the taxes owed because he paid other debts of 12 Missouri Station Market, and, therefore, he needed 13 to use the sales tax reimbursement. 14 There's no statutory or regulatory 15 authority, nor any other legal support for such 16 defense to personal liability under Section 6829. 17 The sales tax reimbursement was collected 18 from Missouri Station Market customers for the 19 purpose of paying its sales tax liability. The fact 20 the Petitioner chose to pay others instead of paying 21 tax liabilities owed to the Board does not mean that 22 Petitioner's failure to pay was not willful. It's 23 actually the opposite. 24 The evidence of Petitioner's admitted 25 decision to use available funds, including sales tax 26 reimbursement to pay others, which included paying 27 himself and his wife $40,000 instead of paying tax 28 liabilities to the Board, clearly establishes that 15 1 his actions were willful under the requirements of 2 Section 6829. 3 Further, there's no merit to Petitioner's 4 argument that the Legislature did not intend to 5 extend responsibile person's liability to 6 individuals who did not abuse the corporate 7 structure for self-enrichment. 8 The plain language of Section 6829 contains 9 no language regarding a person's motive, only that 10 the failure to pay the tax be an intentional, 11 conscious, and voluntary course of action. 12 And as I noted, Regulation 1702 repeats 13 that language and adds that a person is willful even 14 if there's no bad purpose or motive. 15 There is no language in the statute or the 16 regulation to support Petitioner's argument. 17 Petitioner made an intentional, conscious and 18 voluntary decision to not pay to the Board the sales 19 tax reimbursement that was collected from Missouri 20 Station Market's customers. 21 There's also no merit to Petitioner's 22 argument that his personal bankruptcy keeps the 23 Board from collecting from him. 24 Petitional's [sic] bank -- Petitioner's 25 bankruptcy filed with his wife was a Chapter 7 26 liquidation, and was basically a no a -- no-asset 27 bankruptcy. 28 The filing provided that Petitioner and his 16 1 wife estimated that after property is excluded and 2 administrative expenses paid, there would be no 3 funds available for distribution to unsecured 4 creditors. 5 In fact, the bankruptcy trustee filed a 6 report of no distribution. The report provided that 7 there were no funds for distribution to creditors. 8 Additionally, at the time of the filing of 9 the bankruptcy, there was no liability established 10 for Petitioner to file a claim. 11 However, the Department did file a lien for 12 Missouri Station Market in case any of its assets 13 listed in the bankruptcy were some -- were somehow 14 sold. 15 Although I do note that while there were 16 listed $95,000 in assets, it also listed $400,000 in 17 corporate liability. 18 Petitioner appears to be attempting to make 19 a laches argument, that somehow the Board waived its 20 right to collect from Petitioner by not filing a 21 claim in Petitioner's personal bankruptcy. 22 Laches is an equitable defense to bar those 23 who have neglected to assert their rights in a 24 timely manner. 25 There's no evidence to show that the 26 Department acted in an untimely manner. The notice 27 of determination was filed timely. There was no 28 requirement to file in Petitioner's bankruptcy, and 17 1 in actuality, there were no assets to distribute to 2 creditors. 3 The record is clear, the four required 4 statutory elements for Petitioner's personal 5 liability under Section 6829 have been established. 6 Missouri Station Market was terminated, sales tax 7 reimbursement was collected from customers, 8 Petitioner was responsible for payment of those 9 sales and use taxes. 10 And Petitioner's failure to pay the taxes 11 was willful because Petitioner knew the taxes were 12 owed, he had the ability to pay those taxes, and he 13 chose not to pay the Board. 14 The Department, therefore, submits that 15 this petition be denied. 16 MS. MA: Okay. 17 To Mr. Irvine and Mr. Manning, you have 18 five minutes on rebuttal. 19 MR. MANNING: I'll try to be more timely 20 this time. 21 The Board staff says that if there's any 22 choice made, it was not a voluntary one. And 23 Mr. Irvine and I are contending that when there -- 24 that choice is not voluntary if you have to choose 25 whom to hurt. 26 And I've heard over and over again there's 27 no statutory support for that. But, actually, there 28 is. Statute 6756 talks about the State's priority 18 1 on statutes, and it says that the preference given 2 to the State, and -- it -- it establishes that the 3 State have priority. 4 But it says the preference given of the 5 State by this section shall be subordinate to the 6 preferences given to claims for personal services by 7 Sections 1204 and 1206 of the Code of Civil 8 Procedure. 9 1204 of the Code of Civil Procedure 10 excludes specifically or gives priority to the 11 wages, salaries, or commissions, including vacation, 12 severance and sick-leave pay earned by an 13 individual. 14 So there is some statutory support for 15 Mr. Irvine having an outside compulsion to pay his 16 employees. It's actually Statute 6756 and 1204 of 17 the Code of Civil Procedure. 18 It also -- I want to -- you had mentioned 19 again it was a no-asset bankruptcy with $95,000 20 worth of assets. And at the time, you -- the 21 Board's correct, there was no liability at the time 22 of the asset. 23 But the government has been -- the 24 government gets special claims -- or a special 25 ability to file the -- in -- um -- in Section 26 507(a), the State's claims are given a priority 27 status regard even if they arise after. The same as 28 if such claim had arisen before the date of the 19 1 filing of the petition. So that the time that they 2 filed, it was still a corporate debt. But had the 3 State worked quickly, they could have turned that 4 corporate debt into a personal debt, and then filed 5 for it even after the -- even after the filing date. 6 And because it was listed as a no-asset 7 bankruptcy, there was essentially no time -- there 8 was no time bars. Any time before the bankruptcy 9 closed on January 13th, they could have filed a 10 claim. 11 And the -- they -- they speak of laches, 12 and I've heard this a couple times that laches 13 doesn't require -- laches has less to do with the 14 time that the opponent spent and more to do with the 15 prejudice that's caused by the time. 16 And laches specifically beats the statutes 17 of limitations in several different -- in -- in -- 18 in several different cases. 19 So I think they -- they -- the argument 20 that the only requirement is to meet the statute of 21 limitations is -- is kind of a shoveled one. That 22 laches -- laches trumps the statute of limitations 23 in a court of equity, when the -- when the person 24 that the claim is being asserted against has been 25 seriously prejudiced by the claim or by the passage 26 of time. And the prejudice is more important than 27 the time that's gone by. 28 MS. MA: Are you finished? 20 1 MR. MANNING: Yes, ma'am. 2 MS. MA: Okay. 3 Questions? 4 Ms. Harkey. 5 MS. HARKEY: I have often thought -- and 6 I'll start this with a general comment -- that these 7 taxes are collected and kind of -- and held -- if 8 they are collected by the patrons, and they are held 9 in what, quite honestly, should be like a trust fund 10 account, they're not part of cash flow. 11 Unfortunately, the State does not require 12 that, which I've always wondered why not. 13 On other transactions, other areas, other 14 businesses where we have an obligation to have trust 15 funds account and real estate and other things, and 16 I just didn't -- I never have understood why these 17 were allowed free-flowing into general -- general 18 cash. 19 And I think probably the reason is small 20 businesses can't afford all these bank statements. 21 But quite honestly, that's what should -- they are 22 trust funds. 23 The code section that you cited was 24 salaries needed to be paid, is that -- is that 25 assumed with any moneys available, or is that 26 assumed with anything remaining? 27 Because these, to me, are moneys that 28 should be set aside. They should not be -- I 21 1 wouldn't think they could be ultimately used to pay 2 salaries, or should have been. 3 MR. MANNING: I believe that it's any 4 money. 5 MS. HARKEY: You cited 12 -- oh, 1204 Civil 6 Procedure, what's -- 7 MR. MANNING: The -- let me read it again 8 before I answer so I don't contradict myself. 9 It's any proceeding and insolvency, um -- 10 and it has -- it has more to do -- excuse me -- with 11 after the business has gone insolvent comparing the 12 unsecured claims of creditors. 13 And then it lists the following claims have 14 priority in the following order: security claims, it 15 gives -- it gives a dollar amount, 4300 for each 16 individual corporation earned within 90 days. 17 And then it says you have specifically 18 the -- it lists as one of those claims, wages, 19 salaries or commissions, including vacation, 20 severance or sick pay. 21 MS. HARKEY: Okay. Maybe -- maybe this is 22 for Appeals. 23 Does that -- the -- the section that he's 24 reading, is that any and all moneys available, or is 25 that truly moneys from the corporation? 26 Because as I say, this is, like, not -- 27 this is not -- it's not their money to begin with. 28 MR. ANGEJA: I don't know the code section 22 1 that he's reading, but that sounds like it's a 2 listing of priority claims in bankruptcy -- 3 MS. HARKEY: In bankruptcy. 4 MR. ANGEJA: -- which is inapplicable to 5 6829. 6 MS. HARKEY: Okay. I'm just -- I'm just 7 trying to -- applicable to the business practice is 8 what I'm trying to go to. 9 Also, for the Department, um, there was a 10 liquor license that was sold in 2012 for almost 11 $10,000. Why didn't we nab that? 12 MS. SILVA: The, um, liquor license was 13 under the name of Petitioner and not under the 14 corporation. And it was, in fact, sold prior to 15 notice to the Board that the corporation had 16 terminated. So we didn't even know that the liquor 17 license had been sold. 18 MS. HARKEY: Is there any timing difference 19 there that you dispute? 20 MR. IRVINE: As far as when the license was 21 sold? I'm -- I'm not exactly sure when it was. It 22 was after the business was closed. 23 MS. SILVA: The bankruptcy filing showed 24 that it was sold on April 12, 2012. 25 MR. IRVINE: That sounds about right. 26 MS. HARKEY: And I thought the business 27 closed at the end of 2011 or -- '12. 28 MS. SILVA: The end of 2011. But the Board 23 1 was not made aware of that until June of 2012. 2 MS. HARKEY: Thank you. That clarifies for 3 me. Thank you. 4 MS. MA: I have some questions. 5 So when you say the Board wasn't notified, 6 how is the Board notified normally? 7 MS. SILVA: There could be a variety of 8 ways. In this particular case, the return was not 9 filed for the fourth quarter of 2011. So looking at 10 the ACMS notes, it looks like staff started to 11 inquire as to why that return wasn't paid, and there 12 were -- telephone call to Petitioner; Petitioner 13 returned that call and notified staff that the 14 business had closed on December 31st, 2011. 15 MS. MA: So by the time we got notice that 16 the business was closed, the bankruptcy was filed, 17 that was when we got notice? 18 MS. SILVA: No, we were -- we were notified 19 in June of 2012. They filed their personal 20 bankruptcy in September of 2012. So just a few 21 months after they notified us of the termination 22 they filed their personal bankruptcy. 23 MS. MA: So once a taxpayer notifies us 24 that they are going into bankruptcy or that their 25 business is closed -- 26 MS. SILVA: Sometimes we are notified that 27 they're going into bankruptcy. But there's no 28 indication that we knew that they were going into 24 1 bankruptcy, at least in the notice -- notes of the 2 telephone call from the taxpayer. 3 The taxpayer called and notified that the 4 business had been closed, we notified the taxpayer 5 that a tax return still needed to be filed, and that 6 was the end of that conversation at that point. 7 MS. MA: I see. But if we're notified that 8 there is a bankruptcy being filed, then we would 9 presumably move quicker and file our -- 10 MS. SILVA: I think it -- I think it would 11 depend on -- 12 MS. MA: -- file our -- make sure we're in 13 the bankruptcy list. 14 MS. SILVA: We did know that that -- that 15 their personal bankruptcy was filed. But at that 16 point, we -- it had only been, what, two or three 17 months that we even knew that the business had 18 closed. And we had not determined a 6829 liability 19 at that point. 20 We were attempting to pursue the 21 corporation to see if the corporation had any 22 assets. We always try to do that first before doing 23 any 6829. So there wasn't a whole lot of time. 24 We did notice there were assets reported of 25 the corporation in that personal bankruptcy. We did 26 notice that. So we did file a lien in case those 27 assets were sold. But we never were able to 28 retrieve any money off the sale of those assets. I 25 1 don't know what happened to those assets. 2 But I did note while they claim $95,000 in 3 corporate assets in their personal liability -- 4 excuse me -- bankruptcy, they also noted $400,000 in 5 corporate liability to that $95,000. 6 MS. MA: Right. And were we listed in that 7 400,000? 8 MS. SILVA: Yes. 9 MS. MA: And what date was the lien filed? 10 MS. SILVA: The lien was filed on, um, 11 October 3rd. 12 MS. MA: 2012? 13 MS. SILVA: Yes. 14 We filed a couple liens and a couple levies 15 also. But that -- that first lien, based on seeing 16 the bankruptcy, bankruptcy was filed October 3rd. 17 MS. MA: And this is just a question on the 18 aside. 19 So when we file a lien, we are filing it on 20 what? 21 MS. SILVA: We filed it for the 22 corporation, because it was a corporation liability 23 in the counties where we -- where the corporation 24 is, or where we think that these assets may be 25 sold. 26 MS. MA: So Placer? 27 MS. SILVA: Yeah, I think it was filed in 28 Placer -- 26 1 MR. MENDEL: El Dorado. 2 MS. SILVA: Oh, El Dorado. 3 MS. MA: El Dorado County. 4 MS. SILVA: And I think maybe Sac County we 5 also filed it in, but -- 6 MS. MA: And so -- but yet when you do a 7 personal bankruptcy the counties are not notified? 8 I'm just trying to figure out -- we're 9 filing liens, yet nobody notified us or we filed it 10 too late. 11 MS. SILVA: No, no. We filed -- we 12 actually filed, probably, what is considered an 13 early lien for us. 14 MS. MA: Okay. 15 MS. SILVA: But because we knew of the 16 personal liability, and in that personal liability 17 they listed corporate assets, we -- 18 MS. MA: We thought we would -- 19 MS. SILVA: -- we would get ahead of it -- 20 MS. MA: -- get rid of the -- 21 MS. SILVA: -- and just in case some assets 22 were sold -- 23 MS. MA: Okay. 24 MS. SILVA: -- from the corporation, we 25 filed a lien. And then we continued to pursue 26 collection. We -- we weren't successful, but we 27 tried to pursue collection on the corporation. 28 And then, as that doesn't -- doesn't work 27 1 out, we turned it into the -- look to the 6829 to 2 see if there is the ability to collect under -- 3 under 6829. 4 MS. MA: Okay. So in the meantime when the 5 taxpayer filed the personal bankruptcy what happened 6 to all the corporate liability? Was not -- was it 7 not part of the personal bankruptcy or not? 8 MS. SILVA: Well, they listed the corporate 9 assets and liabilities in their personal liability. 10 MS. MA: Okay. 11 MS. SILVA: But the bankrupt -- the 12 corporation, I don't know what happened to the 13 corporation. They never filed bankruptcy. We don't 14 know where any of the assets went. 15 They were, ya know, filing returns with 16 pretty large sums of gross receipts. We -- we don't 17 know where the money went. 18 MS. MA: Okay. So -- maybe the tax -- 19 MR. MENDEL: I just wanted to explain. The 20 corporation liabilities were listed because they 21 were 100 percent shareholders, but the bankruptcy 22 didn't discharge any corporate liabilities because 23 it was their personal bankruptcy. It wasn't the 24 corporation's bankruptcy. 25 MS. SILVA: Correct. 26 MS. MA: So, um -- I -- I -- I'm not a 27 bankruptcy expert, so what does that mean? 28 So the taxpayer files a personal 28 1 bankruptcy, um -- deals with the personal 2 liabilities, the corporate liabilities are still 3 here on the books, 400,000, and presumably what? 4 Everything just goes away? Do they not have to file 5 some corporate bankruptcy, or it's just gonna hang 6 out there? 7 I don't know. Our lien is out there 8 forever. I mean, I -- I'm just trying to figure out 9 how you close these things out. 10 MS. SILVA: I'm not a bankruptcy attorney 11 either, so I don't know the exact question of what 12 to do with a corporate bankruptcy. 13 What the Board is doing is looking at a 14 final liability of a corporation and trying to find 15 funds to pay off that liability. That's what the 16 Board is doing. 17 And there was no discharge of any liability 18 in this case, whether it be personally or for the 19 corporation, the liability remains. 20 MR. MENDEL: The -- the corporation never 21 filed the bankruptcy. And although we liened the 22 corporation's property, however the property was 23 disposed of, it wasn't disposed of in any manner 24 that -- that triggered the lien. 25 We don't -- we don't know what happened to 26 all of those corporate assets. They seem to have 27 been simply abandoned and never sold. 28 So because they were never sold, the liens 29 1 never had anything to attach to. 2 MS. MA: Okay. 3 I guess to the taxpayer, maybe you can 4 explain. Because -- 5 MR. IRVINE: I would love to. 6 MS. MA: -- 93,000 -- 7 MR. IRVINE: They're sitting there right 8 now at the gas station being used by the new tenant. 9 The landlord has some control of them. 10 I don't know if they're worth $95,000 11 anymore, but they're underground storage tanks. 12 There are six M -- they're called MPDs, multiple 13 product dispensers, which can fuel 12 cars at a 14 time. There's doors and things on the inside. 15 And it's ironic to me that when I filed my, 16 uh, Chapter 7, I asked if the Bankruptcy Court was 17 going to sell those to pay off some of these 18 obligations that I had. "Oh, no, it's not worth us 19 going after it." 20 And now they're saying -- they are saying 21 the same thing. They say it's not worth going 22 after. And so now my landlord has unjustly enriched 23 himself with all this property that's underground or 24 attached above surface in the form of multiple 25 product dispensers, the gasoline pumps. He's the 26 one that's benefited from the whole thing. 27 MS. MA: So, um, where did you get your 28 $93,000? 30 1 MR. IRVINE: That was an estimate for 2 bankruptcy. But I do know I had a hard number on 3 the pumps, because just before we closed down I was 4 trying to find a buyer for the pumps. That was the 5 easiest thing to sell. The underground storage 6 things are pretty hard to remove, and -- 7 MS. MA: Right. 8 MR. IRVINE: -- have any value. They -- 9 they have value to the site, but not when you remove 10 them and try to use them somewhere else. 11 So I found a, uh -- broker of pumps, and he 12 was willing to give me $23,000 in cash just for 13 those pumps. 14 And so I told my fuel supplier, "Take these 15 pumps, you can get 23,000." I owed him over 16 $100,000. "Take these pumps, you can get 23,000." 17 He didn't want to get in the middle. Those pumps 18 are sitting there being used by the landlord to this 19 day. 20 There's no liens on them, because I had to 21 buy those pumps about 10 years ago, maybe 15 years 22 ago, as an upgrade -- a required upgrade. 23 I got those pumps with a $75,000 loan from 24 my HELOC, my home equity line of credit. Nobody has 25 a lien on them, nobody has any rights to them, now 26 my landlord does. They're sitting there. The 27 Bankruptcy Court and these people did not want to, 28 uh -- it wasn't worth it to them to go after it, I 31 1 guess. 2 MS. MA: So I guess in your Chapter 7, how 3 much did you pay to your employees and your vendors? 4 MR. IRVINE: How much did I pay? 5 MS. MA: Uh-huh. 6 MR. IRVINE: They were paid -- so they 7 weren't listed as creditors. The only vendor that 8 was listed as a creditor was the gas line supplier. 9 The employees were paid in full, landlord was paid 10 in full, and the small vendors were paid in full. 11 And, by the way, those small vendors are 12 the reason that there is any sales tax to collect. 13 Without their product going through my store, there 14 would be no sales tax. 15 I know that there's supposed to be this 16 trust that I'm holding the money in, but if 17 anybody's entitled to that money, it's those 18 vendors. I'd been with them -- they'd been with me 19 for 22 years. And I felt I had an obligation to 20 them. 21 It was mentioned that we paid ourselves 22 $40,000. That's true. We paid ourselves $40,000 23 for one year, 20,000 each, my wife and I, working 60 24 plus hours a week. We were making less than our one 25 full-time employee that was still with us at the 26 end. Our combined salary was less than hers on an 27 hourly basis. 28 MS. MA: So I guess my question to you was 32 1 that in that last quarter ending December 31st, 2 2011, did you file a sales tax return? 3 MR. IRVINE: I did file one, but apparently 4 it was late. 5 MS. MA: Okay. But you still filed it, and 6 you still collected sales tax? 7 MR. IRVINE: That's correct. 8 MS. MA: Right. 9 MR. IRVINE: We collected sales tax in the 10 final quarter. 11 MS. MA: Right. So -- so that's kind of 12 the problem is you collected sales tax and you put 13 it in your bank account -- 14 MR. IRVINE: Mm-hm. 15 MS. MA: And like Ms. Harkey said, it's not 16 your money. 17 MR. IRVINE: Well, you know, I liken it to 18 the -- it's interesting to me that, uh -- I'm sure 19 the State Board of Equalization collects more in 20 sales taxes than the lottery, but we're required to 21 have those funds for sale of lottery be swept from 22 our account on a weekly basis. Blows my mind that 23 the State Board of Equalization doesn't have 24 something similar to that if this is like a trust. 25 MS. MA: Well -- and -- and I agree with 26 you, and I agree with Ms. Harkey, you know. That's 27 what I was saying about all this other money that's 28 out there is why can't people just pay their sales 33 1 tax and, you know, either daily, weekly? Why do 2 they have to keep it for a quarter? Which is what I 3 think we're all saying is that if it's the State's 4 money, the State should sweep the funds out earlier 5 or have taxpayers pay it. 6 And I believe this new CROS system that 7 we're putting in is going to enable taxpayers to do 8 that. Because that is something that I have been 9 wondering as well, that if you're paying your sales 10 taxes weekly, you can take out -- so it gets it out 11 of your bank account, right -- 12 MR. IRVINE: Right. 13 MS. MA: -- so you don't actually think you 14 have more money than you have. 15 MR. IRVINE: I agree. 16 MS. MA: Um -- yes. 17 MR. IRVINE: But in all honesty, the sales 18 tax is usually due after everything else. I -- I 19 paid my vendors. I didn't pay them in advance, I 20 paid them on time. So they were all paid by the end 21 of the year. 22 MS. MA: Right. 23 MR. IRVINE: And I paid my employees. 24 MS. MA: Right. 25 MR. IRVINE: And what was left was, of 26 course, I had the large vendor for gasoline, and I 27 had the State. 28 MS. MA: Yes. 34 1 MR. IRVINE: And, honestly, I think those 2 little vendors need it more than the State. 3 MS. MA: Right. Well, we understand your 4 thinking. 5 Okay. 6 MS. HARKEY: Your philosophy. 7 MS. MA: Yes. 8 Mr. Horton. 9 MR. HORTON: Thank you, Madam chair. 10 Um, I -- I certainly appreciate the -- the 11 conversation and concur with my colleagues, um, and 12 believe that we should possibly introduce 13 legislation to establish a constructive trust for 14 this reason and a number of other reasons at the 15 time that the transaction is consummated. 16 But I'm a little concerned that the gap 17 between existing law and the taxpayer perception is 18 so wide as to whether or not during the appeals 19 process was it explained to the taxpayer that there 20 is no priority relative to the taxes? 21 These are taxes collected by -- collected 22 by -- collected from the consumer. 23 Ms. Jones, little old lady down the street, 24 paid taxes with the intention of it going towards 25 the education of her kids, healthcare, police, 26 public safety, and that vendors and -- have no right 27 to this money at all. 28 Was that explained in this -- 35 1 MS. SILVA: The deci -- 2 MR. HORTON: -- in this process? 3 MS. SILVA: The decision and recommendation 4 does go through the requirements, and that 5 payment -- payment is owing to the Board for those 6 sales tax reimbursement that's been collected. It's 7 laid out in the decision and recommendation. 8 MR. HORTON: All right. Thank you very 9 much. 10 MR. SILVA: I would note the 40,000 they 11 paid themselves, they paid themselves in the fourth 12 quarter of 2012. So they made the decision to pay 13 themselves rather than pay the Board with the same 14 money in the same quarter. 15 MR. HORTON: Well, I'm not really 16 discussing the, um, personal priorities established 17 by the Petitioner. I believe he's also entitled to 18 make whatever decision that he makes. 19 But, um -- just -- because there is such a 20 big difference here in perception. There is a 21 perception that vendors and -- vendors and employees 22 and -- and owners have a right to the taxes paid by 23 California consumers . 24 MR. HANKS: Mr. Horton, just to -- just 25 for clarification, I think that was the Petitioner's 26 argument that that was the case, that there should 27 be some equity. 28 MR. HORTON: No, no, I -- 36 1 MR. HANKS: -- in terms -- in terms of 2 theirs. 3 MR. HORTON: I know. I -- my apologies for 4 interrupting, but I -- I know. I'm just concerned 5 about it being explained to the taxpayer. I mean, 6 so that they clearly understand. 7 I mean, if they're going to, you know, 8 probably open up another business -- as well as to 9 the taxpayer's representative -- that they both 10 clearly understand what the law says and what the 11 philosophy is behind that. 12 Anyway, I'm -- that's -- that's -- I'm 13 good. 14 Thank you. 15 MS. MA: Yes. 16 Ms. Harkey. 17 MS. HARKEY: I just want to say another -- 18 another point of clarification. It's, you know -- I 19 feel real sympathetic here. The problem is, is just 20 like when you collect payroll taxes, and then you 21 submit those. If you don't submit those, you know, 22 I mean, they're not -- they're not -- they're not 23 for your -- your, uh -- they're not to fluff up your 24 accounts, they are to be remitted to the State. 25 And this is kind of the same thing. And I 26 just -- I feel really bad about all of this. And I 27 think you've probably made some tough decisions. 28 But the reality is the taxes were collected for 37 1 remittance. 2 MR. IRVINE: And also the reality is that 3 there -- there are assets available right there. 4 They were available. In the bankruptcy, the Court 5 felt, the Bankruptcy Court said, "It's not worth our 6 time and effort to sell those assets to pay bills." 7 And that's what we're seeing here too, it's 8 not worth their time and effort. And so my 9 landlord, he wins, I guess. 10 MS. MA: Yeah. Well, I -- I -- I think the 11 Department is saying it wasn't not worth their time 12 and effort, but they did try to file a lien on the 13 corporate side. And not -- I mean, knowing that you 14 were doing your personal bankruptcy, but also 15 thinking that there was gonna be some sort of 16 corporate filing as well. 17 So I think that's what -- the BOE was 18 trying to protect their assets since the assets were 19 in your corporate name and not in your personal 20 name. 21 So I don't think it wasn't really worth 22 their time. They said they did try to file a lien 23 as soon as they found out the business was closed, 24 and they knew that you were filing personal 25 bankruptcy, so to protect themselves. 26 So I think it's, you know, two avenues 27 going; they thought corporation was going to be, you 28 know, filing bankruptcy or selling assets, and 38 1 meanwhile, you know, you were handling on this side 2 thinking it's a corporate asset so let them deal 3 with it. 4 So I don't think either of you are 5 necessarily wrong in your thinking. But, you know, 6 the reality is we are here where we are. 7 Okay. Members, is there a motion? 8 MS. HARKEY: Move to adopt staff 9 recommendation. 10 MS. STOWERS: Second. 11 MS. MA: Okay. There's a motion to 12 adopt -- adopt staff recommendation with a second; 13 Ms. Harkey moved, Ms. Stowers seconded. 14 I think it's without objection. 15 Members? 16 Without objection. 17 I'm sorry. 18 ---o0o--- 19 . 20 . 21 . 22 . 23 . 24 . 25 . 26 . 27 . 28 . 39 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 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 39 14 constitute a complete and accurate transcription of 15 the shorthand writing. 16 17 Dated: November 8, 2016 18 19 20 ____________________________ 21 JILLIAN SUMNER, CSR #13619 22 Hearing Reporter 23 . 24 25 26 27 28 40