INTERCITY ELECTRICAL CONTRACTING CORP. - DETERMINATION - 02/29/96

Transcription

1 INTERCITY ELECTRICAL CONTRACTING CORP. - DETERMINATION - 02/29/96 In the Matter of INTERCITY ELECTRICAL CONTRACTING CORP. TAT(H) 93-54(GC) - DETERMINATION NEW YORK CITY TAX APPEALS TRIBUNAL ADMINISTRATIVE LAW JUDGE DIVISION GENERAL CORPORATION TAX - IN THE ABSENCE OF ADEQUATE BOOKS AND RECORDS, THE DEPARTMENT'S COMPUTATIONS OF INTEREST AND PENALTIES WERE PROPERLY BASED ON THE ESTIMATED TAX LIABILITY THAT HAD BEEN COMPUTED IN A RELATED CRIMINAL PROCEEDING. AS THE DEPARTMENT FAILED TO DEMONSTRATE THAT PETITIONER WAS THE ALTER EGO OF A RELATED CORPORATION, PETITIONER WAS NOT RESPONSIBLE FOR THAT OTHER CORPORATION'S LIABILITY. THE DEPARTMENT WAS PRECLUDED BY STATUTE FROM SIMULTANEOUSLY ASSERTING THE FRAUD PENALTY AND THE FAILURE TO FILE PENALTY; IT ALSO COULD NOT ASSERT PENALTIES THAT DID NOT BECOME EFFECTIVE UNTIL AFTER THE PERIOD IN ISSUE. AS THE REMAINING PROPERLY ASSERTED PENALTIES WERE REMEDIAL AND NOT PUNITIVE, THEY DID NOT VIOLATE THE DOUBLE JEOPARDY CLAUSE OF THE SIXTH AMENDMENT OF THE UNITED STATES CONSTITUTION. FEBRUARY 29, 1996

2 NEW YORK CITY TAX APPEALS TRIBUNAL ADMINISTRATIVE LAW JUDGE DIVISION : In the Matter of the Petition : DETERMINATION : of : TAT(H) 93-54(GC) : INTERCITY ELECTRICAL : CONTRACTING CORP. : : Tillman, A.L.J: Petitioner, Intercity Electrical Contracting Corp., rd Street, Brooklyn, New York, 11204, filed a Petition with the Department of Finance for redetermination of a deficiency of General Corporation Tax ("GCT") under Chapter 6 of Title 11 of the Administrative Code of the City of New York for the tax years ended December 31, 1982 through December 31, 1987 (the "Tax Years"). A hearing was held before the undersigned on November 7, 1994, December 22, 1994, January 19, 1995, May 30, 1995, and June 12, Post-hearing briefs were filed by Petitioner and the Department on August 21, 1995 and October 17, 1995, respectively. Petitioner filed a reply brief on November 6, Petitioner was represented by Morris Werner, Esq. The Department was represented at the hearing by Tania Tulcin, Esq. of the Department's Office of Legal Affairs. The Department's posthearing brief was written by Debra Maldonado, Esq. and Frances J. Henn, Esq., Assistant Corporation Counsels.

3 ISSUES I. Whether the amounts of estimated net income used to determine the principal tax liabilities in a related criminal proceeding failed to properly take into account the expenses incurred in earning such income. II. Whether Petitioner is liable for the penalties and interest asserted by the Department with respect to the tax liability of another corporation, the principal amount of which Petitioner agreed to pay as part of a criminal plea agreement. III. Whether the penalties asserted by the Department violated the double jeopardy clause of the Sixth Amendment of the United States Constitution ("Double Jeopardy") because Petitioner was previously punished pursuant to the terms of a criminal plea agreement. FINDINGS OF FACT 1. Petitioner, Intercity Electrical Contracting Corp., and Century Electrical Contracting Corporation ("Century") were engaged in the electrical contracting business in the City. Both corporations performed electrical work for the City during the Tax Years for which they were paid approximately $3,000,000. Only Century appears to have possessed the necessary electrician's license. 2. Neither Petitioner nor Century filed the required City GCT tax returns for any of the Tax Years. A Department of Finance Interdepartmental Memorandum from Paul Giskin, Associate Fraud Investigator, to Assistant Commissioner Bruce Kato, dated March 2, 1989, which was written shortly before the issuance of the Notice of Determination at issue but subsequent to the - 2 -

4 resolution of the criminal proceeding described therein, stated that: After numerous attempts to contact the principals, Carl Weiss (Century) and Label Drebin (Intercity), including subpoenas for tax returns workpapers etc, due to the lack of cooperation and evidence of tax fraud the case was referred to the Manhattan District Attorney's Office for criminal prosecution. 3. The criminal matter was resolved through a plea agreement, dated December 19, 1988 (the "Plea Agreement"), entered into between the Manhattan District Attorney (the "D.A."), Joseph Drebin, Petitioner, and Century. Jacob Lauber (who was the attorney for Label (a/k/a Sol) Drebin, Joseph Drebin, Century, and Petitioner) also signed the Plea Agreement. Carl Weiss, who Mr. Giskin indicated was Century's principal, apparently was not a potential defendant in the criminal matter as was Label (Sol) Drebin. Joseph Drebin signed the Plea Agreement for Petitioner, Century, and himself. Assistant District Attorney Roslynn R. Mundell signed the Plea Agreement on behalf of the D.A. 4. In the Plea Agreement, Petitioner agreed to waive indictment and plead guilty to one count of repeated failure to file New York State ("State") franchise tax returns in violation of section 1803 of the New York State Tax Law, a class E felony, and one count of repeated failure to file City GCT or utility taxes in violation of Code section , also a class E felony. Petitioner further agreed to execute two confessions of judgement acknowledging debts due and owing the State and City in the amounts of $118,372 and $106,625, respectively. Those debts represented the amounts of unpaid State and City tax liabilities for both Petitioner and Century for the Tax Years as determined by the D.A. The Plea Agreement also required Petitioner to pay a criminal fine of $100,000. The Plea Agreement specifically provided that notwithstanding the imposition of the criminal - 3 -

5 fine, the State and City were not precluded from "instituting any civil proceeding to collect outstanding accrued interest, and/or civil penalties, if any." 5. In computing the $106,625 GCT liability provided for in the Plea Agreement, the D.A. looked to the following three amounts in determining the combined gross income of Petitioner and Century: (a) the sum of all bank deposits made by both corporations ("Method 1"); (b) the sum of all payments made by the City's Department of Housing, Preservation and Development ("HPD") to Petitioner and to Century (as listed on Financial Services Information Agency ("FISA" records) ("Method 2"); and (c) the amounts provided by Petitioner's accountant ("Method 3"). The amounts for each method were: Method 1 Method 2 Method $ - $ 236, $ 85, , , , , , , ,105, , ,252, ,010, , , , , , , Total $4,104, $2,962, $4,735, Since the gross income amounts provided by Petitioner's accountant were cumulatively greater than the gross income amounts determined under the other methods, the D.A. accepted Petitioner's computations of gross income for the Tax Years even 1 Methods 1 and 2 were computed on a fiscal year basis. 2 In his March 2, 1989 memorandum, Mr. Giskin indicates that the total amount paid by the City to Petitioner and Century for work contracted by HPD exceeded $3,400, Petitioner's accountant computed Petitioner and Century's gross incomes on a calendar year basis

6 though no supporting documentation or break-down of such figures was provided. The D.A. then allowed a deduction equal to 75% of gross income to account for Petitioner and Century's costs of doing business. The 75% amount was the standard percentage that the costs of doing business bore to gross revenue for electrical contractors doing business in the City during the relevant period 4 as determined by Dun and Bradstreet. Thus, only 25% of the total amount of gross income provided by Petitioner under Method 3 was deemed by the D.A. to constitute the net income of the two corporations for purposes of computing their principal tax liabilities. 6. On January 4, 1989, Petitioner, Century, and Joseph Drebin were arraigned for sentencing before the Honorable John A.K. Bradley, Justice of the Supreme Court. 7. On May 3, 1989, the Department issued a "Consent Determination (Partial)" (the "Consent Determination") indicating the following principal tax deficiencies, for the Tax Years: Periods Principal 1/1/82-12/31/82 $ 1, /1/83-12/31/83 18, /1/84-12/31/84 28, /1/85-12/31/85 22, /1/86-12/31/86 16, /1/87-12/31/87 19, Total Amount Due $106, See the January 13, 1989 letter from Assistant District Attorney Roslynn R. Mundell to Assistant Commissioner Bruce Kato of the Department. 5 Pursuant to the terms of the Plea Agreement, Petitioner agreed to pay a total GCT deficiency in the amount of $106,

7 The Consent Determination states that: Notice is hereby given that the Director of Finance of the City of New York has confirmed the consent and waiver signed by you covering a partial 6 7 General Corporation Tax Deficiency xxxxxxxxxxxxxxxxx amounting to $106, for the periods set forth below. This partial determination, pursuant to the Administrative Code of the City of New York is final and irrevocable and is made pursuant to the terms of said consent and waiver and is without prejudice to the General Corporation tax determination made simultaneously herewith for the periods stated below in the amount of $134, including interest and penalties. (Emphasis added.) The Department did not offer any testimony or produce any documentary evidence indicating that a consent and waiver was executed by Petitioner (as is indicated in the Consent Determination). The only reasonable inference which can be drawn is that the Consent Determination was predicated solely on the Plea Agreement and the attendant confession of judgement. 8. On the same date that the Consent Determination was issued, May 3, 1989, the Department issued a "Notice of Determination (Partial)" (the "Notice") assessing the following interest and penalties attributable to the $106,625 of tax stated in the Consent Determination: Periods Interest/Penalty 1/1/82-12/31/82 $ 4, /1/83-12/31/83 27, /1/84-12/13/84 36, /1/85-12/31/85 27, The words "General Corporation," both here and later in the paragraph, as well as each of the dollar amounts provided, were typed in. The balance of the paragraph was preprinted language. 7 Preprinted language was crossed out here

8 1/1/86-12/31/86 19, /1/87-12/31/87 19, Total Amount Due $134, The Notice was mailed to: Intercity Electrical Contracting Corp. Successor to Century Electrical Contracting Corp. Label Drebin rd Street Brooklyn, New York The Consent Determination was similarly addressed. 9. The Department presented no evidence that Century no longer exists or that it had determined that Century was not in existence prior to issuing the Notice. 10. Max Mulberg, the Department's auditor, testified that checks issued by the City to Petitioner and Century were mailed to Label (Sol) Drebin's address. Mr. Mulberg further testified that, at one point in time, a questionnaire filled out with the City indicated that both corporations had identical officers. None of the documents upon which this testimony was based, however, were offered into evidence. This testimony is therefore merely a description of documents not introduced into evidence which were reviewed by Mr. Mulberg in preparation for his 8 The interest component of the deficiencies (as calculated to December 22, 1988) was $34, The penalty portion of the deficiencies was $100, The name "Label Drebin" was handwritten in a space that appears to have been left available for such addition. 10 The "6" in "1655" was handwritten over what appears to have been a typographical error

9 testimony. Accordingly, this portion of Mr. Mulberg's testimony 11 is afforded little weight. 11. Although Petitioner was afforded the opportunity to do so, it never established what portions of the $4,735,075 of total gross income that its accountant computed and provided (Method 3) were attributable to Century. 12. Pursuant to my request, the Department, through Mr. Mulberg, allocated the asserted deficiencies between Petitioner and Century. It did so in the following manner. Mr. Mulberg first determined the relative percentage that each Corporation's bank deposits bore to the total combined bank deposits under Method 1: Year Century's Deposits Petitioner's Deposits 81/82 $ 583, /83 488, $ 177, /84 753, , /85 370, , /86-738, Total $2,197, $1,907, Relative Percentages 53.5% 46.5% 13. Mr. Mulberg then applied each corporation's relative percentage of total deposits to the amounts of penalties and interest asserted in the Notice: 11 Even if this testimony were given great weight, it would not impact the outcome of this determination The auditor rounded the total to the nearest dollar. Id

10 Century's Petitioner's Penalties and Share Share Interest (53.5%) (46.5%) 1982 $ 4, $ 2, $ 1, , , , , , , , , , , , , , , , The use of an aggregate 46.5% allocation figure applied to each year (instead of a separate allocation percentage for each year) was appropriate because: (a) the bank deposit method (Method 1) was computed on a fiscal (and not calendar) year basis; (b) bank deposit allocations were not available for certain of the years; and (c) the allocation was, in any event, 14 an approximation. Thus, under the totality of the circumstances, the 46.5% allocation is found to fairly and accurately approximate Petitioner's portion of the underlying net income used to compute the deficiencies at issue. STATEMENT OF POSITIONS Petitioner contends that the allowed 75% deduction understated the amount of expenses incurred in earning such income and thus overstated the amount of net income. Petitioner next contends that the Notice of Determination is invalid to the extent that it represents the liability of an independent corporation, Century. Petitioner also contends that the imposition of civil penalties by the Department constitutes impermissible Double Jeopardy since it represents multiple punishment for the same offense. Finally Petitioner contends 14 As the amounts of gross income under Method 3 exceeded the amounts of gross income under Method 1, the total amounts of gross income being divided exceeded the total amounts of income (i.e., bank deposits) used to derive the 46.5% allocation percentage

11 that it is not estopped from challenging the accuracy of the underlying tax liability. The Department asserts that it had a rational basis for using a formula method for computing Petitioner's expenses and that, in any event, Petitioner should be estopped from challenging the asserted liabilities because of the manner in which the related criminal matter was resolved. The Department contends that Petitioner should be liable for the portion of the asserted deficiencies that relates to Century since Century was essentially Petitioner's alter ego. The Department also contends that the imposition of penalties does not constitute Double Jeopardy because the penalties in issue are remedial civil penalties and not additional punishment. Finally, the Department contends that since Petitioner accepted responsibility in the Plea Agreement for the underlying taxes, it is estopped from challenging their accuracy as it applies to the imposition of interest and penalties thereon. CONCLUSIONS OF LAW Petitioner failed to file GCT returns. The Department thus directed the Petitioner to produce GCT returns and/or provide its books and records. Petitioner failed to comply with either request. Accordingly, the Department reconstructed Petitioner's net income using an indirect audit method. Code section (1) (formerly section R ). In order to overcome the resulting deficiency, Petitioner must demonstrate by clear and convincing evidence that the method used by the Department to arrive at the assessment or the manner in which it was applied were erroneous. Matter of Giuliano v. Chu, 135 A.D.2d 893, 521 N.Y.S.2d 883 (3d Dept., 1987). Petitioner has done neither. In determining the asserted deficiencies, the Department used a two-step method of reconstructing Petitioner's income

12 First, it used the gross income figures provided by Petitioner's 15 accountant (Method 3). Next, the Department allowed a formula deduction based upon an authoritative external index to account for the attendant costs of doing business. Petitioner alleges that the allowed 75% deduction understated its actual costs of earning such income. The Department argues that Petitioner is estopped from challenging the accuracy of the underlying tax liability. Petitioner responds that its admission as to the amounts of principal tax liability as part of a criminal plea agreement does not preclude it from challenging the accuracy of those amounts in a subsequent civil tax proceeding. The estoppel issue need not be addressed, however, for Petitioner bears the burden of proof on this issue and it has not met this burden. Code section (formerly section R ). Despite being afforded numerous opportunities to do so, Petitioner has offered no proof as to: (1) what its actual expenses were; or (2) what an appropriate estimation of its expenses would be. Petitioner did assert that the 75% deduction was inadequate because: (1) the jobs performed by it and Century were located in so-called "bad" areas of the City where there were high theft and vandalism rates; and (2) subcontractors received "50% of the gross revenue" for their services. Yet, Petitioner provided no documentation supporting either assertion. Petitioner also asserts that the Dun and Bradstreet survey provided only for costs of goods sold and not for expenses such 15 Petitioner questions but does not actually challenge the accuracy of the gross income figures which its own accountant provided

13 as officer's compensation and overhead. This assertion, however, is without merit. Although the 75% deduction was described in Ms. Mundell's January 13, 1989 letter as a "costs of goods sold" deduction, the letter later makes it clear that the 75% deduction included all costs of doing business: This 75% deduction is based on standards established by Dun and Bradstreet for the cost of doing business for this type of company operating in the New York City area. [Emphasis added.] Ms. Mundell's letter must be viewed in context, bearing in mind that she is an assistant district attorney and not a tax expert. Greater weight must therefore be given to her description of what the 75% deduction represented than to her misuse of technical tax nomenclature. As the Department used Petitioner's own calculation of gross income and then applied an authoritative industry standard to determine reasonable estimated deductions for the costs of doing business, I find the Department's estimates of net income to be rational. Petitioner's vague and unsupported allegations alone cannot overcome such rational and reasonable estimates -- particularly since the need for such estimates arose from Petitioner's criminal conduct and subsequent failure to provide any books and records. Petitioner next asserts that it is not liable for the penalties and interest asserted in the Notice of Determination which are attributable to Century's tax liability and that its liability for such penalties and interest therefore is, at most, 46.5% of the assessed liabilities for each of the Tax Years. I agree

14 Although the record is vague as to this issue, it appears that the Department asserted deficiencies against Petitioner for both it and Century's penalties and interest because: (1) Petitioner agreed in the Plea Agreement to be liable for both corporations' principal tax deficiencies; and (2) the back-up documents necessary to identify the amount of gross income (and thus tax) attributable to each corporation were not within the Department's possession. The Notice, however, indicates that Century's liabilities were asserted against Petitioner because Petitioner was Century's 16 successor-in-interest. Yet the record does not contain any evidence that Petitioner was a shareholder of Century or that Petitioner in any way acceded to Century's business or assets, including Century's electrical license. Moreover, the Department abandoned the assertion that Petitioner was Century's successorin-interest by failing to raise it at the hearing or in its brief. Instead, during this proceeding, the Department's sole basis for holding Petitioner responsible for the penalties and interest relating to Century's net income is that Century was Petitioner's alter ego and that its corporate veil should be pierced. The general rule under New York law is that the "party seeking to pierce the corporate veil must establish" both "complete domination of the corporation" (i.e., that Petitioner had complete domination of Century) and "that the owners, through 16 If the assertion of liability was based upon Petitioner being Century's successor-in-interest, a single notice would not have been appropriate. There would have been two distinct and separate tax liabilities for which Petitioner would have been responsible: its own tax liability and Century's separate tax liability. If, however, Century was Petitioner's alter ego, Century's separate existence would have been disregarded and the tax liability would have been Petitioner's; in which event, a single notice to Petitioner (accompanied by an adequate explanation of the reason for the adjustment) would have sufficed

15 their domination, abused the privilege of doing business in the corporate form to perpetrate a wrong or injustice against that 17 party such that a court in equity will intervene." See, Joseph Morris v. NYS Dep't of Taxation & Finance, 82 N.Y.2d 135, (1993). See also Moline Properties, Inc. v. Commissioner of Internal Revenue, 319 U.S. 436 (1943). In support of its position, the Department cites Typhoon Industries, Inc., 6 B.R. 886, 891 (1980) for the proposition that the depositing of one corporation's funds into the account of another evidences a commingling of identities sufficient to disregard their separate corporate forms. The Department argues that checks payable by the City to Petitioner and Century were mailed to the home of Label (Sol) Drebin. This fact, however, does not constitute a sufficient basis for assuming that the funds were commingled, particularly when there is evidence that each corporation maintained its own separate bank account. The Department next asserts that Petitioner's use of Century's electrical license and its agreement to be liable for Century's principal tax liability was further evidence that Century was Petitioner's alter ego. These actions, particularly Petitioner's agreement to pay Century's principal tax liability, would give credence to the Department's contention that Century was Petitioner's alter ego if the two corporations were owned by the same individuals. However, the sparse available evidence does not establish that Petitioner and Century were owned by the same interests. To the contrary, the interdepartmental memorandum from Mr. Giskin, to Deputy Commissioner Bruce Kato, dated March 2, 1989, issued approximately one month before the 17 See footnote 21, infra, for a discussion of what type of wrong or injustice would warrant piercing Century's corporate veil

16 18 Notice, states that Carl Weiss was Century's principal, whereas 19 Label (Sol) Drebin was Petitioner's principal. Petitioner has admitted to acting in an illegal manner and should not be permitted to avoid its tax liability -- including the imposition of appropriate penalties and interest -- as a result of such conduct. However, the issue in this proceeding is whether Petitioner should be held responsible for the penalties of another corporation. The Plea Agreement and other documentary evidence and testimony produced at the hearing fail to adequately demonstrate either that: (1) Petitioner had complete domination over Century; or (2) Petitioner's owners, through such domination, 18 An inference could be drawn that the Drebins owned all of the interests in Petitioner and Century by the fact that the Plea Agreement referenced only the Drebins and both corporations and that all four were represented by the same attorney. Whatever inference can be drawn from this fact, however, is not sufficient to outweigh the Department's own express conclusion reached immediately prior to issuing the Notice, that the Drebins were not Century's principals; particularly where the Department bears the burden of proof on this issue. Moreover, there are other plausible explanations for the two corporations' actions. For example, Petitioner may have agreed to be liable for Century's principal tax liability because Century lacked the funds required to pay that liability and the D.A. insisted upon full restitution as a condition for the other terms of the Plea Agreement which Petitioner and its principal desired. 19 In its reply brief, Petitioner asserts that Ivon Coleman, and not Label (Sol) Drebin, was its principal. To support the assertion that Mr. Coleman was its principal, Petitioner attached to its reply brief, a letter, dated January 25, 1989, addressed from Abraham Biderman, then Commissioner of the City's Department of Housing Preservation and Development, to Ivon Coleman as Petitioner's "President." Although Petitioner designated this letter as "Exhibit I" in its reply brief, the letter was never introduced into evidence at the hearing nor has Petitioner moved to reopen the record to introduce it. Moreover, the letter only indicates that Mr. Coleman may have been Petitioner's president and does not address the issue of whether Mr. Coleman was a principal of Petitioner

17 abused the privilege of doing business in the corporate form to perpetrate a wrong or injustice against the Department such that a court in equity will intervene. See Morris, supra. As the Department has failed to prove that Century was Petitioner's alter ego, Petitioner is not liable for Century's penalties and interest, but only for the penalties and interest which arose from its own separate tax liability. Petitioner concedes that 46.5% of the underlying tax liability is attributable to it. Despite several conceptual concerns, use of the 46.5% ratio to determine Petitioner's proportionate liability for penalties and interest is a reasonable allocation method in light of the paucity of underlying documentation in the record. 22 See Finding of Fact 20 Such a wrong or injustice, for example, would be the evasion of tax liability. There is no direct evidence in the record, however, that the existence of separate corporations furthered a tax evasion scheme. By illustration, there is no evidence that the separate corporate existences were designed or used to funnel money out of Century to Petitioner thus leaving Century unable to pay its tax liability. 21 If the Plea Agreement was intended to make Petitioner liable for Century's penalties and interest as well as for its taxes, it should have explicitly stated so. The Plea Agreement, however, only provides that the Department may "institute any civil proceeding to collect outstanding accrued interest, and/or civil penalties, if any." If the Department believes that the Plea Agreement should be construed to make Petitioner liable for Century's penalties and interest, it might be appropriate for it to institute a civil proceeding to collect such alleged liability. This, however, is not such a proceeding. Our function is limited to determining the appropriateness of the deficiencies asserted against Petitioner as a matter of law and not contract. See Code section The first concern is that the 46.5% figure was based on the relative amounts of bank deposits of Petitioner and Century (Method 1), whereas the amounts of gross income being allocated were obtained from the gross income figures provided by Petitioner's accountant (Method 3). The second concern is that the 46.5% figure

18 12 and 13, supra. The last issue is the appropriateness of the penalties asserted by the Department. The Department asserted five separate penalties against Petitioner. 23 The Department asserted a fifty percent fraud penalty as well as a fifty percent fraud interest penalty under Code section (formerly section R ): (a) If any part of a deficiency is due to fraud, there shall be added to the tax an amount equal to fifty percent of the deficiency. (b) There shall be added to the tax (in addition to the amount determined under paragraph (a) of this subdivision) an amount equal to fifty percent of the interest payable under subdivision of section [formerly section R ] with respect to the portion of the underpayment described in such paragraph (a) was derived by comparing the total deposits available for Century and Petitioner on a fiscal year basis but is being applied to income derived on a calendar year basis. However, since Petitioner failed to provide a break-down of its own combined gross income figures, any method of apportioning such combined numbers between the two corporations is, of necessity, an estimate. The 46.5% estimate is a reasonable estimate under the circumstances -- as Petitioner appears to acknowledge by not challenging its accuracy. 23 The current Code sections, effective in 1986, recodified and renumbered the prior Code sections. Most of the Tax Years were governed by the prior Code sections. The prior Code sections and any differences therein are indicated in parentheticals and brackets. 24 The 50% fraud interest penalty was enacted in the 1985 Session Laws Ch Therefore, the Department properly did not assert the fifty percent fraud interest penalty for the tax years ended December 1982, 1983, and Subdivisions 5,6,7,8 and 9 were renumbered as subdivisions 6,7,8,9 and 10 by L.L. 1983, No. 43, effective September 28, All references are to the subdivisions as renumbered

19 which is attributable to fraud, for the period beginning on the last day prescribed by law for payment of such underpayment (determined without regard to any extension) and ending on the date of the assessment of the tax.... The Department also asserted the additional fraud penalty of $1,000 per year under Code section (formerly section R ): 26 Any person who with fraudulent intent shall fail to pay under the named subchapters [parts] any tax, or to make, render, sign or certify any return or declaration of estimated tax, or to supply any information within the time required by or under any of the named subchapters [parts], shall be liable to penalty of not more than one thousand dollars, in addition to any other amounts required under this subchapter part] to be imposed, assessed and collected by the Commissioner of Finance [Director of Finance]. The Commissioner of Finance [Director of Finance] shall have the power, in his or her discretion, to waive, reduce or compromise any penalty under this subdivision. The Department bears the burden of proving whether Petitioner committed fraud with intent to evade tax. Code section (a). Petitioner pled guilty to the criminal charge of repeatedly failing to file the requisite GCT returns. The pertinent statutory provision, Code section (a) provides that an element of the crime of repeated failure to file is that Petitioner must act with "intent to evade payment of any tax." Thus the guilty plea under Code section (a), coupled with Petitioner's acceptance of a significant criminal penalty, suffices to meet the Department's burden of proof on this issue. 26 This subdivision was applicable for the tax years beginning after December 31,

20 Although not raised by Petitioner, the $1,000 additional penalty, however, did not become effective until January 1, Thus, the Department's assertion of the $1,000 fraud penalty for the tax year ended December 31, 1982 was improper and must be abated. With respect to the remaining penalties, the burden is on Petitioner to prove that the penalties were improperly assessed by the Department. Code section ; LT & B Realty Corp. v. State Tax Comm., 141 A.D.2d 185 (3rd Dept. 1988). The fourth penalty that the Department asserted was the 25% penalty for failing to file a return under Code section (a)(A) (formerly section R (a)): In case of failure to file a return under the named subchapters [parts] on or before the prescribed date (determined with regard to any extension of time for filing), unless it is shown that such failure is due to reasonable cause and not due to willful neglect, there shall be added to the amount required to be shown as tax on such return five percent of the amount of such tax if the failure is for not more than one month, with an additional five percent for each additional month or fraction thereof during which such failure continues, not exceeding twenty-five percent in the aggregate. Although not addressed by the Petitioner, it was improper for the Department to assert both the failure to file penalty and the fraud penalties as Code section (c) (formerly section R (c)) specifically provides that the fraud penalty is in lieu of the failure to file penalty under Code section (a) (formerly section R (a)): The addition to tax under this subdivision shall be in lieu of any other addition to tax imposed by subdivision one or two. (Emphasis added.)

21 The Department's assertion of the failure to file penalty for all of the Tax Years was therefore improper and must be abated. The fifth penalty the Department asserted was the 10% substantial underpayment penalty under Code section (formerly section R ): 27 If there is a substantial understatement of tax for any taxable year, there shall be added to the tax an amount equal to ten percent of the amount of any underpayment attributable to such understatement. For purposes of this subdivision, there is a substantial understatement of tax for any taxable year if the amount of the understatement for the taxable year exceeds the greater of ten percent of the tax required to be shown on the return for the taxable year or five [ten] thousand dollars.... Although the statute bases the substantial understatement penalty on the difference between the amount of tax owed and the amount of tax shown on the return, no returns were filed here. The "tax shown on the return" of a nonfiling taxpayer must be treated as zero, otherwise this penalty could not be computed and would be vitiated with respect to a nonfiler. See Hesselink v. Commissioner, 97 T.C. No. 7 (1991) (which held that where a nonfiling taxpayer filed a return after being contacted by the Internal Revenue Service, the amount of "tax shown on return" of that initially nonfiling taxpayer is nonetheless zero). See Bittker and Lokken, Federal Taxation of Income, Estates and Gifts, 2d Ed., Vol. 4 (Warren, Gorham & Lamont 1990), at page This subdivision also was only applicable for the tax years beginning after December 31,

22 However, as with the $1,000 additional fraud penalty discussed above, the 10% substantial underpayment penalty did not become effective until January 1, Thus although not raised by Petitioner, the Department's imposition of a 10% substantial underpayment penalty of $ for the tax year ended December 31, 1982 was improper and must be abated. The only reason Petitioner asserts why the above penalties should be abated is that the imposition of such penalties violates its constitutional rights against Double Jeopardy. Petitioner asserts that the Sixth Amendment to the United States Constitution prohibits multiple punishment for the same criminal offense and that the Department is therefore precluded from imposing any penalties in addition to those already imposed with respect to its criminal plea. The United States Supreme Court held in Helvering v. Mitchell, 303 U.S. 391 (1938), that criminal and civil sanctions may be imposed with respect to the same act or omission without violating Double Jeopardy so long as the civil sanctions are intended to be remedial and not a second punishment. In Mitchell, the Supreme Court examined the penalties imposed under former 26 U.S.C.A. sections 293(b) (a 50% fraud penalty), 291 (a 25% failure to file a return penalty), 293(a) (a 5% negligence penalty), and 294 (a 1% per month penalty for nonpayment of tax). In sum, these penalty provisions were materially similar to the penalty provisions here at issue. The Supreme Court concluded in Mitchell that all of the asserted penalties had a remedial character because they were "provided primarily as a safeguard for the protection of the revenue and to reimburse the Government for the heavy expense of investigation and the fiscal loss resulting from the taxpayer fraud" and were "(o)bviously... intended by Congress as civil incidents of the assessment and collection of the income tax."

23 28 Id. at 303 U.S For the same reasons enunciated by the Supreme Court, the penalties at issue are found to have been intended to be remedial in nature (rather than to serve as punishment) and Double Jeopardy is not found to attach. 29 ACCORDINGLY, IT IS CONCLUDED THAT: A. Both the method and amount of the Department's estimate of Petitioner and Century's net incomes were proper and appropriate. B. Century's corporate veil should not be pierced under the alter ego theory as the Department failed to establish: (1) Petitioner's complete domination of Century, or (2) that through the domination of Century, Petitioner's owner or owners abused the privilege of doing business in the corporate form in order to perpetrate a wrong or injustice against the Department. The assessment against Petitioner of penalties and interest relating to Century's tax liability therefore was improper. 28 By illustration, the $1,000 additional fraud penalty at issue hardly could be deemed punitive (rather than remedial), particularly when compared with the $100,000 penalty imposed under the Plea Agreement. 29 Petitioner cites Montana v. Kurth Ranch, 114 S.Ct 1937 (1994) (involving a dangerous drugs "tax"), and U.S. v. Halper, 490 U.S. 435, (1989) (involving medicare fraud penalties), in support of its contention. In Kurth Ranch and Halper, however, the "penalties" asserted were significant multiples of the amounts of financial benefit obtained or attempted to be obtained from the underlying criminal conduct. The penalties at issue and in Mitchell, however, are significantly lesser in degree as they are a mere percentage of the amounts of financial benefit attempted to be obtained from the underlying criminal conduct. Therefore, this is not a case in which the civil penalties on their face appear to so extreme and divorced from the Government's actual damages and expenses as to constitute prohibited punishment

24 C. It was improper for the Department to assert the failure to file penalty and the fraud penalties as Code section (c) (formerly section R (c)) specifically provides that the fraud penalty is in lieu of the failure to file penalty. The Department's assertion of the failure to file penalty for all of the Tax Years was therefore improper. D. The additional penalty of $1,000 per year did not become effective until January 1, Thus, the Department's assertion of a $1,000 penalty for the tax year ended December 31, 1982 was improper. E. The 10% substantial underpayment penalty did not become effective until January 1, Thus, the Department's imposition of a 10% substantial underpayment penalty of $ for the tax year ended December 31, 1982 was improper. F. The imposition of civil penalties against Petitioner did not violate its constitutional right against Double Jeopardy since those penalties were remedial; i.e., they were asserted primarily as a safeguard for the protection of the revenue and to reimburse the Government for the heavy expense of investigation and loss resulting from taxpayer fraud and underreporting. For the reasons set forth above, the petition of Intercity Electrical Contracting Corp., is granted in part and is denied in part. The Department is directed to recompute the deficiencies by: 1. Reducing the tax base for each year upon which penalties and interest were computed by 53.5% (thus attributing only 46.5% of the underlying tax liability to Petitioner);

25 2. Excluding the failure to file penalty for all of the Tax Years; 3. Excluding the $1,000 additional penalty for the tax year ended December 31, 1982; and 4. Excluding the substantial underpayment penalty for the tax year ended December 31, The Notice of Determination dated May 3, 1989 is sustained to the extent provided above. DATED: February 29, 1996 New York, New York H. GREGORY TILLMAN Administrative Law Judge