Opinion
D056858 Super. Ct. No. 2008-0094283-CU-MC-CTL
10-21-2011
ASHER SHAITRIT, Plaintiff and Appellant, v. CALIFORNIA STATE BOARD OF EQUALIZATION, Defendant and Respondent.
NOT TO BE PUBLISHED IN OFFICIAL REPORTS
California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.
APPEAL from a judgment of the Superior Court of San Diego County, Timothy B. Taylor, Judge. Affirmed.
Asher Shaitrit appeals a judgment denying his claim for the refund of taxes the California State Board of Equalization (Board) imposed on him for his distribution of cigarettes, and finding for the Board on its cross-complaint for unpaid penalties and interest. Shaitrit contends the court erred by denying his request for a jury trial, and by finding he presented insufficient evidence the Board's assessment was erroneous. We affirm the judgment.
FACTUAL AND PROCEDURAL BACKGROUND
A brief discussion of law on the taxation of cigarettes is required to put the facts in context. California taxes the "distribution" of cigarettes in this state by requiring a "distributor" to either affix a pre-paid stamp on a pack of cigarettes or make payment
directly to the state. (Rev. & Tax. Code, §§ 30101, 30161.) "Distributor" is defined as "[e]very person who . . . within the meaning of the term 'distribution' as defined in this chapter, distributes cigarettes." (§ 30011, subd. (a).) "Distribution" is defined as the "sale of [previously] untaxed cigarettes or tobacco products in this state," the "use or consumption of untaxed cigarettes or tobacco products in this state," and the "placing in this state of untaxed cigarettes or tobacco products in . . . retail stock for the purpose of selling the cigarettes or tobacco products to consumers." (§ 30008, subds. (a)-(c).) "Use or consumption" means "the exercise of any right or power over cigarettes or tobacco products incident to the ownership thereof, other than the sale of the cigarettes or tobacco products or the keeping or retention thereof by a licensed distributor for the purpose of sale." (§ 30009; U.S. v. 4,432 Mastercases of Cigarettes, More or Less (9th Cir. 2006) 448 F.3d 1168, 1186 ["California's use of the term 'the exercise of any right or power over cigarettes . . . incident to [] ownership' is intended to include the act of storage."].)
All further statutory references are also to the Revenue and Taxation Code unless otherwise specified.
A distributor must obtain a California cigarette distributor's license (§ 30140), submit to the Board monthly reports of distributions and purchases of stamps (§ 30182), and submit with each report a remittance for the amount of tax due (§ 30184). A distributor must also report to the Board inventories of stored cigarettes. (Cal. Code Regs., tit. 18, § 4022.) If a distributor fails to submit reports, the Board "shall make an estimate of the number of cigarettes or the wholesale cost of tobacco products distributed by him or her. The estimate . . . shall be based upon any information available to the [B]oard. Upon the basis of this estimate the [B]oard shall compute and determine the amount required to be paid to the state, adding to the sum thus fixed a penalty equal to 10 percent thereof." (Rev. & Tax. Code, § 30221.)
Shaitrit formerly owned a San Diego area business called O.D.A. 99 Cent Store. He sold cigarettes at the store, including a brand called New York New York. In a January 2009 letter, the owner of that brand, The Marketing Group, gave Shaitrit the exclusive right to market it in Israel, Jordan and South America. The letter was signed by Frank Najor, The Marketing Group's president.
All further references to cigarettes are to the New York New York brand.
In May 1999 Shaitrit obtained a California distributor's license from the Board. The license states it is nontransferable, but he allowed Najor to make and retain a copy of it.
In April 2001 the Board investigated Shaitrit and learned he was storing 75 cases of unstamped cigarettes in the vault of a business owned by Ronald Schottland, a friend and partner in a real estate venture. Schottland gave Shaitrit the combination to the vault, and he could access the vault in Schottland's absence. A Board investigator inspected the inventory, and it had no shipping indicia. The last manufacture date on the cases was December 2000.
Shaitrit denied he had purchased the cigarettes or intended to sell them. He told Board investigators that Najor had borrowed $30,000 from him and caused the cigarettes to be delivered to the vault as collateral for the loan. Shaitrit claimed he obtained a distributor's license for the sole purpose of holding the cigarettes as collateral. Shaitrit stated that to ensure the freshness of the cigarettes, he would call Najor every few months to have the inventory rotated. Shaitrit conceded the inventory had been rotated at least twice. No document memorialized the loan, collateralization agreement, or rotation of cigarettes.
The Board obtained a copy of an invoice dated December 22, 1999, by Southland Distributing Co. (Southland), which states it sold 75 cases of cigarettes to O.D.A. 99 Cent Store for $34,875. The Marketing Group faxed the order to Southland, with a notation to send the cases to "99 Store." A copy of Shaitrit's distributor's license was on the fax, with the address of the O.D.A. 99 Cent Store.
On May 4, 2001, Najor retrieved 75 cases of unstamped cigarettes from Schottland's vault and delivered them to Southland. The Board obtained an invoice with O.D.A. 99 Cent Store named as the seller of 75 cases of cigarettes to Southland at no charge. Najor prepared the invoice in his office with Shaitrit present.
Board investigators visited Southland in July 2001. They examined the cases delivered from Schottland's vault and discovered they were not the same ones that were in Schottland's vault the previous April. Nader Fararji, of Southland, advised the investigators that Shaitrit had not paid for the December 1999 delivery of cigarettes, and Southland agreed to the exchange in payment of the debt. Fararji said the cases delivered from Schottland's vault were not the ones sold to Shaitrit in December 1999, and the original delivery would be "no good." The manufacturer advised the Board the shelf life of the cigarettes was about four months.
The Board concluded that between December 1999 and May 2001 Shaitrit had distributed cigarettes without making reports or paying tax. The Board assessed him with $156,600 in unpaid taxes, plus penalties and interest, based on four rotations of 75 cases of cigarettes.
Seventy-five cases of cigarettes contain 4,500 cartons and 900,000 individual sticks. At the relevant time the stamp tax was $8.70 per carton. The board originally assessed $234,900 in unpaid taxes, based on five rotations of 75 cases of cigarettes. Later, the Board reduced the amount on the grounds Southland, rather than Shaitrit, was the distributor of the first 75 cases, and another rotation had been double counted.
Shaitrit petitioned for a redetermination. He submitted declarations to support his theory he did not distribute the cigarettes. Najor also submitted a declaration supporting Shaitrit's story. It states that in December 1999 Najor ordered the 75 cases of cigarettes from Southland and had them delivered to Schottland's vault to secure a $30,000 loan he got from Shaitrit. Further, it states Najor and Shaitrit "agreed I would periodically swap the 75 cases for fresh cigarettes until I repaid the loan," and "Shaitrit could only take possession of the cigarettes if I ever defaulted on the loan to him." The declaration also states, "I would take the older cigarettes from the vault to Sunset Distributor [Sunset], a cigarette distributing company in San Diego." The Board, however, contacted Sunset and it denied it had ever sold unstamped cigarettes or engaged in any transaction with Najor.
The Board found against Shaitrit. He filed another petition for redetermination, which the Board also denied. He paid the principal amount of $156,600, and then he filed a claim for refund. The Board denied his claim.
In October 2008 Shaitrit sued the Board in superior court for recovery of taxes erroneously charged. (§ 30403.) The Board cross-complained against him for $122,520.16 in unpaid penalties and interest.
A bench trial was held in September 2009. After the close of Shaitrit's evidence, the court granted the Board's motion for judgment. (Code Civ. Proc., § 631.8.) The court rejected Shaitrit's and Najor's testimony that the 75 cases of cigarettes were collateral for a loan. The court also explained: "Once [Shaitrit's] story regarding the cigarettes being held as 'collateral' collapsed . . ., it was reasonable for the Board to conclude that what was really happening was a series of disguised and unreported distributions of cigarettes." On the cross-complaint, the court awarded the Board the full amount it sought.
DISCUSSION
I
Jury Trial
Shaitrit contends the court erred by denying his request for a jury trial. He cites article I, section 16 of the California Constitution, which declares that "[t]rial by jury is an inviolate right and shall be secured to all." This guaranteed right "is the right as it existed at common law in 1850, when the Constitution was first adopted, 'and what that right is, is a purely historical question, a fact which is to be ascertained like any other social, political or legal fact.' [Citations.] As a general proposition, '[T]he jury trial is a matter of right in a civil action at law, but not in equity.' " (C & K Engineering Contractors v. Amber Steel Co. (1978) 23 Cal.3d 1, 8.)
Shaitrit relies on United States v. State of New Mexico (10th Cir. 1981) 642 F.2d 397 (New Mexico), in which the court concluded "the right of a taxpayer to a jury trial in refund cases is rooted in the common law and was preserved by the Seventh Amendment." (Id. at p. 401.) The court observed that jury trials were available at common law in actions against tax collectors to recover illegally exacted taxes. (Ibid.)
When the briefing in this case was completed, the issue of whether a taxpayer has the right to a jury trial in a tax refund case in this state was pending before the California Supreme Court. The court has now held in Franchise Tax Board v. Superior Court (2011) 51 Cal.4th 1006, 1018 (Franchise Tax Board), "that article I, section 16 of the California Constitution does not require a jury trial in a statutory action for a state income tax refund." The court explained: "Notwithstanding the Tenth Circuit's opinion in New Mexico, supra, 642 F.2d at pages 400-401, statutory actions for tax refunds from the government have generally not been placed in the same class as the common law right of action against individual tax collectors. Most courts have viewed actions for a refund from the government as new and distinct proceedings, subject to such conditions as the legislative branch sees fit to impose. At common law, sovereign immunity barred actions against the government by way of jury trial or otherwise. [Citations.] The right to a jury trial provided by the Seventh Amendment to the United States Constitution does not apply in statutory actions against the federal government. [Citations.] That rule applies in tax refund actions. [Citation.] Several states have followed the federal example and refused to recognize a state constitutional right to a jury trial in tax refund cases." (Franchise Tax Board, supra, 51 Cal.4th at p. 1012, fns. omitted.)
The court also explained that under California law, the "statutory cause of action [for a tax refund] is fundamentally different in character from the old private right of action against tax collectors. This is not an instance where the Legislature authorized ' "the type of action which was cognizable in a common-law court . . . at the time of the adoption of the Constitution of California." ' [Citation.] Although ' "[t]he constitutional right of trial by jury is not to be narrowly construed" ' [citation], the distinctions between the common law and statutory rights of action for a tax refund are broad." (Franchise Tax Board, supra, 51 Cal.4th at p. 1018, fn. omitted.) The first statute authorizing refund actions was enacted in 1893, after the state Constitution was adopted. (Id. at p. 1014.)
The Franchise Tax Board opinion sets the precedent for this action, as no common law right for the refund of cigarette taxes existed before the state Constitution was adopted in 1850. Rather, such an action was created by statutes enacted in 1959. (§ 30401 et seq., added by Stats. 1959, ch. 1040, § 1, p. 3077.) Accordingly, Shaitrit had no constitutional right to a jury trial and the court's ruling is correct as a matter of law.
Given our holding, we are not required to address the court's factual determination that Shaitrit waived any right to a jury trial by requesting it on the eve of trial.
II
Merits
A
Taxpayer Burden/Standard of Review
"In a suit for tax refund, the burden of proof is on the taxpayer [citation], not only to demonstrate the Board's determination is incorrect, but also to produce evidence from which a proper tax determination can be made. [Citation.] The taxpayer must affirmatively establish the right to a refund of the taxes by a preponderance of the evidence [citation], and cannot simply assert error and shift to the state the burden of justifying the tax." (Paine v. State Bd. of Equalization (1982) 137 Cal.App.3d 438, 442; Honeywell, Inc. v. State Bd. of Equalization (1982) 128 Cal.App.3d 739, 744.)
"Fairness dictates that those persons responsible for paying the tax should maintain sufficiently complete records that the Board . . . can determine if the correct amount of taxes [has] been paid. If the records are so deficient that a proper audit cannot be made, the defaulting record-keeping taxpayer must bear the consequences." (Paine v. State Bd. of Equalization, supra, 137 Cal.App.3d at p. 444.) "The taxpayer . . . creates the transaction which is the subject of inquiry. He has the power to determine the nature of the transaction, to create and retain detailed records or other evidence needed to prove its nature (and proper tax treatment). The taxpayer also has the power to destroy or conceal the records or other evidence which would establish the taxable nature of such transaction. Thus, as a matter of policy, the person having the power to create, maintain, and provide the evidence should carry the burden of proof." (Honeywell v. State Bd. of Equalization, supra, 128 Cal.App.3d at pp. 744-745.)
Again, if a distributor fails to submit reports, the Board "shall make an estimate of the number of cigarettes . . . distributed by him or her. The estimate shall be made for the month or months in respect to which the person failed to make a report or return and shall be based upon any information available to the [B]oard. Upon the basis of this estimate the [B]oard shall compute and determine the amount required to be paid to the state. . . ." (§ 30221, italics added.)
The issue of whether judicial review of the Board's decision on a tax refund claim should be restricted to the administrative record—given the plaintiff's burden of proving the Board erred on the information before it—is not before us. The court allowed live testimony and no objection appears in the record or is raised on appeal.
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The purpose of Code of Civil Procedure section 631.8 is 'to enable the court, when it finds at the completion of a plaintiff's case that the evidence does not justify requiring the defense to produce evidence, to weigh evidence and make findings of fact.' [Citation.] Under the statute, a court acting as trier of fact may enter judgment in favor of the defendant if the court concludes that the plaintiff failed to sustain its burden of proof. [Citation.] In making the ruling, the trial court assesses witness credibility and resolves conflicts in the evidence. [Citations.]"'" (Plaza Home Mortgage, Inc. v. North American Title Co., Inc. (2010) 184 Cal.App.4th 130, 135.)
" ' "The standard of review of a judgment and its underlying findings entered pursuant to [Code of Civil Procedure] section 631.8 is the same as a judgment granted after a trial in which evidence was produced by both sides. In other words, the findings supporting such a judgment 'are entitled to the same respect on appeal as are any other findings of a trial court, and are not erroneous if supported by substantial evidence.'"'" (Plaza Home Mortgage, Inc. v. North American Title Co., Inc., supra, 184 Cal.App.4th at p. 135.) "Our review begins with the presumption the Board's determination as to the amount of tax owed is correct." (Paine v. State Bd. of Equalization, supra, 137 Cal.App.3d at p. 445.)
B
Substantial Evidence
1
Shaitrit contends the court's finding against him lacks evidentiary support. He asserts the court erred by rejecting his explanation that the 75 cases of unstamped cigarettes stored in Schottland's vault were security for a $30,000 loan he made to Najor, and thus he lacked control over them for purposes of tax liability. The court, however, expressly rejected Shaitrit's and Najor's testimony as not credible.
The court disbelieved Najor, the key witness, for a variety of reasons. He had suffered felony convictions for receiving stolen property and a fraud-related offense; the court was unfavorably impressed with his demeanor as a witness over the course of several hours; he "said several things that did not make sense"; his story was inconsistent; and his testimony was impeached.
The record amply supports those findings. For instance, Najor's sworn statement to the Board denied he had been convicted of a crime. He submitted a judgment of discharge in a federal case, dated February 22, 2007, after a jury acquitted him of a three-count indictment. At trial, however, he admitted he was convicted of bank fraud in 2002 and served prison time, and between four and 15 years before trial he pleaded guilty to receiving stolen property. Further, Najor's sworn statement to the Board denied he ever held a California cigarette distributor's license. At trial, however, he admitted he had a license from 1996 "until recently."
Moreover, Najor changed his testimony on what he told Shaitrit about the intended use of the $30,000 loan he purportedly obtained in December 1999. Najor stated: "I told him that I needed $30,000, and I needed to help a friend—I didn't tell him help a friend. I just told him that I needed $30,000 for some cigarette sales." Najor then told the implausible story that he borrowed the money from Shaitrit so he could in turn loan it to Fararji of Southland. Despite the Southland invoice indicating it sold 75 cases of cigarettes to the O.D.A. 99 Cent store for $34,875, Najor testified Fararji gave him the cases at no charge as collateral for the loan. Najor delivered the same collateral to Schottland's safe to secure Shaitrit's loan to Najor. Najor's sworn statement to the Board states he borrowed the $30,000 from Shaitrit as a personal loan. He said nothing to the Board about a supposed loan to Fararji. Shaitrit testified that Najor said he needed the $30,000 "to finish the packaging" of cigarettes for overseas sales.
Additionally, Najor was impeached on his testimony that he obtained replacement cigarettes from Sunset to assure the freshness of the original 75 cases obtained from Southland in December 1999. He admitted he rotated the stock four or five times to keep it fresh and because Sunset sometimes needed particular types of the brand it did not have in stock. William Kimsey, a Board investigator, testified he contacted the person at Sunset who signed its tax returns, Bais Youhana Polis. Polis advised Kimsey that he knew Najor, but Sunset never sold unstamped cigarettes or engaged in any purchase or sale transaction with Najor.
The court also disbelieved Najor's testimony that when Shaitrit agreed to sell his brand of cigarettes, Najor would purchase stamped cigarettes from Sunset and sell them to Shaitrit at no markup just to "build up the brand." The court found "this testimony, coming from a lifelong businessman and shopkeeper, to lack credibility." The court also found dubious Najor's testimony that he had a copy of Shaitrit's California cigarette distributor's license to facilitate the sale of cigarettes overseas.
The record also supports the court's mistrust of Shaitrit's testimony. Shaitrit made several previous loans to Najor which he was slow to repay. Shaitrit testified he nonetheless loaned Najor another $30,000 based merely on the word of Jimmy Lussia, a storeowner and friend of both Shaitrit and Najor, that if Najor defaulted Lussia would, for some unexplained reason, pay off the loan. The court noted: "Najor (and Shaitrit) expected the court to believe there were two $30,000 loans made, involving the same collateral, with no documentation, and that although the borrowed money was outstanding for nearly 18 months, neither lender charged any interest. This story just doesn't add up, and was made more unlikely when plaintiff later testified that there was, in addition to the foregoing unusual verbal agreements, a verbal personal guaranty by another shopkeeper, . . . Lussia, and further that Schottland charged no fee for storage even though the cigarettes were in his vault for over a year."
Further, Shaitrit testified he did not obtain the 75 cases of cigarettes as collateral when he made the $30,000 loan to Najor in December 1999. Rather, Najor offered to put up the collateral two to three months later when Shaitrit dunned him for repayment. The Southland invoice for the original 75 cases is dated December 1999 and Shaitrit submitted no evidence of where the cases went other than to Schottland's vault. Further, in two different sworn statements to the Board, Shaitrit stated he made the $30,000 loan to Najor only after he agreed to collateralize the loan with 75 cases of cigarettes. Shaitrit's testimony also conflicts with a sworn statement Schottland made to the Board, which states: "In December of 1999, at . . . Shaitrit's request, I agreed that 75 cartons [sic] of cigarettes could be delivered to the safe at my premises."
Moreover, Shaitrit conceded it is "absolutely true" that unstamped cigarettes were worthless as collateral because he could not legally sell or otherwise distribute them. The cost of stamps on 75 cases of cigarettes would have been $39,150. Additionally, Najor and Shaitrit would have the court believe the delivery of 75 cases of cigarettes to Southland on May 4, 2001, just after the Board launched its investigation of Shaitrit, was a mere coincidence.
The court may reject the testimony of witnesses it finds not credible, and appellate courts do not reassess credibility. (Combs v. Skyriver Communications, Inc. (2008) 159 Cal.App.4th 1242, 1263; In re Marriage of Balcof (2006) 141 Cal.App.4th 1509, 1531.) " '[T]he Court of Appeal is not a second trier of fact.' " (In re Marriage of Balcof, at
p. 1531.) We defer to the court's assessment of credibility, and conclude substantial evidence supports its rejection of Shaitrit's explanation for storing cigarettes in Schottland's vault.
2
Additionally, Shaitrit contends the court should have found the Board erred by assessing him taxes based on the rotation, or exchange, of the original 75 cases of cigarettes. He asserts that since Southland supplied the original cases and there was no evidence another distributor was involved, the "evidence suggested that Southland . . . must have been the source of the rotated cigarettes." Thus, he argues, Southland is liable for the taxes on the rotated cases just as it was liable for the taxes on the original cases.
Shaitrit's claim, however, is sheer speculation. Further, he attempts to shift the burden of proof to the Board. Shaitrit asserts he "apparently did not know the source of the cigarettes being rotated into the storage facility," but he cannot meet his burden through the absence of evidence. He had control over the stored cigarettes, but as the court observed, his operation "was characterized by a dearth of records."
Shaitrit also complains that the Board's imposition of taxes on four rotations was based solely on an auditor's notation that the cigarette manufacturer advised her the life of an unopened carton is about four months, and the "statement was hearsay upon hearsay and not provided under oath." Shaitrit, however, does not cite the record to show he objected to the evidence. Thus, he has forfeited appellate review of the issue. (Fry v. Pro-Line Boats, Inc. (2008) 163 Cal.App.4th 970, 974; Evid. Code, § 353.) Further, Shaitrit cites no authority suggesting the Board cannot rely on hearsay. Parties must include argument and citation of authority in their briefs, and the absence of these necessary elements allows us to treat an issue as forfeited. (Interinsurance Exchange v. Collins (1994) 30 Cal.App.4th 1445, 1448.)
In any event, under section 30221, when a distributor fails to file reports, as here, the Board is required to estimate the tax liability "based upon any information available to the [B]oard." The Board cites California Code of Regulations, title 18, section 5523.6, subdivision (a), which provides the following rule for a tax appeal: "Any relevant evidence, including affidavits, declarations under penalty of perjury, and hearsay evidence, may be presented to the Board at a hearing. Each party will be permitted to comment on or respond to any affidavits, declarations, or any other evidence admitted."
Moreover, it was Shaitrit's burden to adduce competent evidence there were not four rotations of cigarettes, and he did not do so. In a declaration to the Board in support of Shaitrit's motion for a refund, Najor opined that the shelf life of the cigarettes was between one and two years. At trial, however, he testified that he replaced at least some of the cases "four or five times" to assure freshness. In earlier declarations to the Board, Najor stated, "In order to maintain the value of the collateral, I rotated some of the cigarettes out in exchange for fresh cigarettes," and, "Periodically, I would go to this vault and exchange some of the cigarettes for fresh ones." Najor's company also advertised its cigarettes were certified by the manufacturer to be fresh, meaning fewer than 90 days old. At trial, Shaitrit denied being concerned with freshness, but his declaration to the Board states, "I asked . . . Najor to keep the collateral fresh. He told me he would do so."
Substantial evidence supports the court's finding that Shaitrit failed to meet his burden of showing the Board's assessment of taxes against him was unreasonable. The Board had ample information that the original 75 cases of cigarettes were periodically replaced, and without any records from Shaitrit, it reasonably concluded the inventory turned over every four months to avoid staleness of the product.
DISPOSITION
The judgment is affirmed. The Board is entitled to costs on appeal.
McCONNELL, P. J. WE CONCUR:
HUFFMAN, J.
HALLER, J.