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201107199H

SOAH DOCKET NO. 304-11-3226.26 CPA HEARING NO. 104,430 RE: ************* TAXPAYER NO.: ************* AUDIT OFFICE: ************* AUDIT PERIOD: May 1, 2007 THROUGH September 30, 2009 Limited Sales, Excise, And Use Tax/RDT BEFORE THE COMPTROLLER OF PUBLIC ACCOUNTS OF THE STATE OF TEXAS SUSAN COMBS Texas Comptroller of Public Accounts JACK ARVIN Representing Tax Division ************* Representing Petitioner COMPTROLLER’S DECISION The Texas Comptroller of Public Accounts (Comptroller) assessed personal liability against ************* (Petitioner) alleging that he is liable for a sales and use tax debt of ************* (COMPANY). Petitioner disagrees with the assessment and requested redetermination. In his Proposal for Decision, the Administrative Law Judge (ALJ) recommends that the assessment be dismissed, because Comptroller Staff (Staff) failed to provide clear and convincing evidence to demonstrate that Petitioner took an action or participated in a fraudulent scheme or fraudulent plan to evade the payment of taxes. I. PROCEDURAL HISTORY, NOTICE & JURISDICTION On February 11, 2011, Staff referred the above-referenced matter to the State Office of Administrative Hearings (SOAH), and issued a Notice of Hearing by Written Submission that contained a statement of the nature of the hearing; a statement of the legal authority and jurisdiction under which the hearing was to be held; a reference to the particular sections of the statutes and rules involved; and a short, plain statement of the matters asserted, as required by the Administrative Procedure Act. SEE TEX. GOV’T CODE ANN. Section 2001.052. The Comptroller has jurisdiction over this matter pursuant to TEX. TAX CODE ANN. ch. 111, and SOAH has jurisdiction over the hearing, including the authority to issue a Proposal for Decision, pursuant to TEX. GOV’T CODE ch. 2003.

Petitioner represented himself. Staff was represented by Assistant General Counsel Jack Arvin. ALJ Victor John Simonds closed the contested case record on April 14, 2011. II. CONTESTED CASE A. Evidence Submitted Petitioner did not submit any evidence. Staff submitted the following documents: 1. Texas Notification of Personal Liability for Fraudulent Tax Evasion; 2. Comptroller Section 111.0611 personal liability worksheets; 3. Texas Sale & Use Tax Permit Application, June 2006; 4. COMPANY Sales Tax Returns and accompanying checks for the following months: July 2006, August 2006, September 2006, January 2008, March 2008, and January 2009; 5. Texas Renewal Application for Cigarette, Cigar & Tobacco Permit; 6. Texas Notification of Audit Results issued to COMPANY; and 7. Sales and Use Tax Audit summary pages, COMPANY. Staff also submitted the pleadings filed by the parties while this case was pending before the Comptroller. Each of the listed documents is admitted to the record without objection. B. Staff Agreed Adjustments Staff did not agree to make any adjustments to the audit. C. Facts Established by the Evidence & Issues Presented On or about June 1, 2006, Petitioner submitted an application to obtain a sales and use tax permit for COMPANY, a Texas corporation. Petitioner signed the application as corporate president. Subsequently, Petitioner signed sales tax returns and checks remitting sales taxes collected by COMPANY. In 2008, Petitioner submitted a tobacco permit renewal application on behalf of the company and indicated that he was the corporate president when he signed the application. In the audit period June 1, 2006, through September 30, 2009, COMPANY operated a convenience store in CITY, Texas. The Comptroller’s auditor determined that COMPANY underreported taxable sales. For example, for the month ending July 31, 2006, the convenience store reported $************* in tax due. The auditor determined $************* in additional tax was due for the period. COMPANY remitted $************* for August 2006, and $************* for March 2008; the audit assessed additional tax in the amount of $************* and $************* respectively. The audit determined that there was similar underreporting for each period within the audit. On April 28, 2010, the Comptroller issued a Texas Notification of Audit Results assessing COMPANY tax, a 10% late penalty, an additional 50% penalty, and interest accrued as of the statement date. The jeopardy determination totaled

$*************, and the notice stated that the assessment was final on May 18, 2010, unless COMPANY requested redetermination. COMPANY requested redetermination of the audit assessment through a letter sent by United States Postal Service Express Mail showing a U.S.-metered postage payment on May 14, 2011. Approximately one month after the notification against COMPANY was issued, on May 25, 2010, the Comptroller issued a Texas Notification of Personal Liability for Fraudulent Tax Evasion assessing personal liability against Petitioner for the COMPANY sales tax debt related to the period May 1, 2007, through September 30, 2009 (the assessment period). The assessment against Petitioner consists of the tax, 10% late penalty, 50% additional penalty, and interest accrued through the date of the notice. The assessment against Petitioner totaled $*************. Petitioner requested redetermination. D. Analysis and Recommendation Effective June 15, 2007, an officer, manager, or director of a corporation, association, or limited liability company or a partner of a general partnership, or a managing general partner of a limited partnership or limited liability partnership who as an officer, manager, director, or partner, took an action or participated in a fraudulent scheme or fraudulent plan to evade the payment of taxes is personally liable for the tax and any penalty and interest due. SEE TEX. TAX. CODE Section 111.0611(a). There is no evidence in this case of a final Comptroller’s Decision against COMPANY that shows the sales tax, penalties, and interest assessed in the Notification of Audit Results became a final determination or was “due.” SEE TEX. TAX. CODE ANN. Section 111.0611(a). With respect to whether Petitioner took an action or participated in a fraudulent scheme or fraudulent plan to evade the payment of taxes, the following actions may indicate the existence of a fraudulent scheme or fraudulent plan to evade payment of taxes: 1. Filing, or causing to be filed, a fraudulent tax return or report with the comptroller on behalf of the business entity; 2. Intentionally failing to file a tax return, report, or other required document with the comptroller when the business entity is under a legal obligation to file; 3. Filing, or causing to be filed, a tax return or report with the comptroller on behalf of the business entity that contains an intentionally false statement that results in the amount of the tax due exceeding the amount of tax reported by 25 percent or more; and 4. Altering, destroying, or concealing any record, document, or thing, presenting to the comptroller any altered or fraudulent record, document, or thing, or otherwise engaging in fraudulent conduct with the intent to affect the course or outcome of a comptroller audit or investigation, a redetermination hearing, or another proceeding involving the comptroller. TEX. TAX. CODE Section 111.0611(b). Staff contends Petitioner signed and filed sales and use tax returns that contained intentionally false underreporting that exceeded the amount due by 25 percent or more. Because the contention is based on a willful or fraudulent

failure to pay tax, Staff must provide clear and convincing evidence. SEE 34 TEX. ADMIN. CODE Section 1.40(1)(B). The Comptroller has held that gross underreporting of taxable sales, particularly when there are other factors or no plausible explanation, is sufficiently indicative of intent to evade the tax to warrant the assessment of a fraud penalty under Tax Code Section 111.061(b). SEE COMPTROLLER’S DECISION NOS. 44,599 (2005); 43,136 (2004); and 43,248 (2004). Thus, documentary evidence presented in a personal liability assessment under Section 111.0611 might be similar to that which is presented in an assessment based on Tax Code Section 111.061(b). The evidence in the record clearly and convincingly establishes that Petitioner was president of COMPANY, and that he signed returns and checks that included gross error. Staff makes various factual assertions about audit findings and Petitioner’s actions in its pleadings and in the Notice of Hearing, but such assertions are not evidence. SEE COMPTROLLER’S DECISION NO. 47,034 (2006). Therefore, the ALJ finds that Staff failed to clearly and convincingly demonstrate that Petitioner took an action or participated in a fraudulent scheme or fraudulent plan to evade the payment of taxes due under Tax Code Section 111.0611. CF. COMPTROLLER’S DECISION NOS. 44,599 (2005); 43,136 (2004); and 43,248 (2004). Therefore, the ALJ recommends that the assessment be dismissed. III. FINDINGS OF FACT 1. On or about June 1, 2006, ************* (Petitioner) submitted an application to obtain a sales and use tax permit for COMPANY. Petitioner signed the application as corporate president. 2. Petitioner signed sales tax returns and checks remitting sales taxes collected by ************* (COMPANY). In 2008, Petitioner submitted a tobacco permit renewal application on behalf of the company and indicated that he was the corporate president when he signed the application. 3. In the audit period June 1, 2006, through September 30, 2009, COMPANY operated a convenience store in CITY, Texas. 4. The Texas Comptroller of Public Accounts’ (Comptroller) auditor determined that COMPANY underreported taxable sales. For example, for the month ending July 31, 2006, the convenience store reported $************* in tax due. The auditor determined $************* in additional tax was due for the period. COMPANY remitted $************* for August 2006, and $************* for March 2008; the audit assessed additional tax in the amount of $************* and $************* respectively. The audit determined there was similar underreporting for each period within the audit. 5. Information in sales tax reports Petitioner signed contained gross error. 6. On April 28, 2010, the Comptroller issued a Texas Notification of Audit Results assessing COMPANY tax, a 10% late penalty, an additional 50% penalty, and interest accrued as of the statement date. The jeopardy determination totaled $*************, and the notice stated that the assessment was final on May 18, 2010, unless COMPANY requested redetermination. COMPANY requested

redetermination, and there is no evidence of a Comptroller’s Decision or other document showing the audit assessment against COMPANY is final or due. 7. On May 25, 2010, the Comptroller issued a Texas Notification of Personal Liability for Fraudulent Tax Evasion assessing Petitioner with personal responsibility for the COMPANY liability related to the period May 1, 2007, through September 30, 2009 (the assessment period). The assessment against Petitioner consists of the tax, 10% late penalty, 50% additional penalty, and interest accrued through the date of the notice. The assessment against Petitioner totaled $*************. 8. Petitioner requested redetermination. 9. Comptroller Staff (Staff) referred the case to the State Office of Administrative Hearings (SOAH) for a written submission hearing. 10. On February 11, 2011, Staff issued a Notice of Hearing that contained a statement of the nature of the hearing; a statement of the legal authority and jurisdiction under which the hearing was to be held; a reference to the particular sections of the statutes and rules involved; and a short, plain statement of the matters asserted. 11. The Administrative Law Judge (ALJ) closed the contested case record on April 14, 2011. IV. CONCLUSIONS OF LAW 1. The Comptroller has jurisdiction over this matter pursuant to TEX. TAX CODE ANN. ch. 111. 2. SOAH has jurisdiction over matters related to the hearing in this matter, including the authority to issue a proposal for decision with findings of fact and conclusions of law pursuant to TEX. GOV’T CODE ANN. ch. 2003. 3. The Comptroller provided proper and timely notice of the hearing pursuant to TEX. GOV’T CODE ANN. ch. 2001. 4. Effective on June 15, 2007, an officer, manager, or director of a corporation, association, or limited liability company or a partner of a general partnership, or a managing general partner of a limited partnership or limited liability partnership who as an officer, manager, director, or partner, took an action or participated in a fraudulent scheme or fraudulent plan to evade the payment of taxes is personally liable for the tax and any penalty and interest due. SEE TEX. TAX. CODE ANN. Section 111.0611(a). 5. A personal liability assessment based on Tax Code Section 111.0611 must be supported by clear and convincing evidence. 34 TEX. ADMIN. CODE Section 1.40(1)(B). 6. Factual assertions in Staff’s pleadings are not evidence. SEE COMPTROLLER’S DECISION NO. 47,034 (2006). 7. Staff failed to clearly and convincingly demonstrate that Petitioner took

an action or participated in a fraudulent scheme or fraudulent plan to evade the payment of taxes due. TEX. TAX. CODE ANN. Section 111.0611. 8. Based on the foregoing Findings of Fact and Conclusions of Law, the ALJ recommends that the assessment against Petitioner be dismissed. Hearing No. 104,430 ORDER OF THE COMPTROLLER On April 15, 2011, the State Office of Administrative Hearings’ (SOAH) Administrative Law Judge (ALJ), Victor Simonds, issued a Proposal for Decision in the above referenced matter. The parties were given fifteen days from the date of the Decision to file exceptions with SOAH. No exceptions were filed. In addition to minor technical and typographical changes, the Comptroller has determined that the ALJ’s Proposal for Decision should be adopted with changes in accordance with TEX. GOV’T CODE ANN. Section 2003.101(e)(1)(A), because the ALJ did not properly apply or interpret applicable law. Specifically, the ALJ did not properly apply or interpret TEX. TAX. CODE ANN. Section 111.0611. Accordingly, the following Findings of Fact and Conclusions of Law are modified as follows and for the following reasons: *Finding of Fact No. 6 is corrected to reflect that there was no evidence that COMPANY, audited sales tax delinquency, penalties, and interest reached a final determination or was otherwise “due,” a requirement under Tax Code Section 111.0611(a). *Conclusion of Law No. 7 is corrected to add the word “due” with respect to imposing personal liability “for the taxes and any penalty and interest due” under Tax Code Section 111.0611(a). *The Decision’s Analysis section is modified to delete the intent element cited by the ALJ under 34 Tex. Admin. Code Section 1.40(1)(B) and Tax Code Section 111.0611(a) and (b) as it is inapplicable when applying the facts of this case. The ALJ properly discusses that the gross underreporting of taxable sales, particularly when there are other factors or no plausible explanation, is sufficient evidence to warrant the assessment of a fraud penalty. The above Decision resulting in Petitioner's liability as set out in “Attachment A,” which is incorporated by reference, is approved and adopted in all respects. This Decision becomes final twenty days after the date Petitioner receives notice of this decision. If either party desires a rehearing, that party must file a motion for rehearing, which must state the grounds for rehearing, no later than twenty days after the date Petitioner receives notice of this Decision. Notice of this Decision is presumed to occur on the third day after the date of this Decision. Signed on this 12th day of July 2011. SUSAN COMBS Texas Comptroller of Public Accounts

by: Martin A. Hubert Deputy Comptroller

ACCESSION NUMBER: 201107199H SUPERSEDED: N DOCUMENT TYPE: H DATE: 07/12/2011 TAX TYPE: SALES