Excel Drug Co., Inc. v. Missouri Dept. of Revenue, 62333

• Decision Date: 15 December 1980
• Docket Number: No. 62333,62333
• Citation: 609 S.W.2d 404
• Parties: EXCEL DRUG CO., INC., Appellant, v. MISSOURI DEPARTMENT OF REVENUE, Respondent.
• Court: Missouri Supreme Court

Page 404

609 S.W.2d 404

20 A.L.R.4th 941

EXCEL DRUG CO., INC., Appellant, v. MISSOURI DEPARTMENT OF REVENUE, Respondent.

No. 62333.

Supreme Court of Missouri, En Banc.

Dec. 15, 1980.

Henry L. Graf, Kansas City, for appellant.

John Ashcroft, Atty. Gen., Richard L. Wieler, Asst. Atty. Gen., Jefferson City, for respondent.

DONNELLY, Judge.

This is an appeal from a judgment of the Circuit Court of Jackson County which affirmed the decision of the Director of Revenue to assess additional sales tax, interest, and a fraud penalty against Excel Drug Company.

The appeal was initially taken to the Missouri Court of Appeals, Western District. That court, however, by its order of June 17, 1980, transferred the case to this Court for the reason that the case involves construction of the revenue laws of the State of Missouri and therefore is within the exclusive appellate jurisdiction of the Supreme Court. Mo.Const. art. V, § 3.

Appellant is in the drug and sundry business in Kansas City, Missouri. Its president is Louis Ferro.

An investigation by the Special Investigation Bureau of the Department of Revenue was begun in September 1975. The Bureau examined appellant's books and records for the period January 1, 1970, through March 31, 1973, and, as a result, the appellant was assessed additional state sales tax, Kansas City sales tax, Kansas City transportation sales tax, interest and a 25% fraud penalty.

As the assessment was not resolved at an informal hearing, appellant filed a Petition for Reassessment. The Department's formal hearing on this petition was held March 21, 1978. Testimony of the Bureau's agents established that appellant's president, who prepared the sales tax returns involved, admitted to the investigating agents that the gross sales amounts shown on the returns, and from which the tax liability was determined were "pulled * * * out of his head." At the request of Chief Justice Bardgett during oral argument in this Court, the state and appellant prepared a synopsis of the sales figures reported by Ferro on the returns and those found by the Bureau's audit. This synopsis was made part of the Court's record on September 24, 1980. Broken down by year, these figures show:

                                       GROSS
                          GROSS      SALES AS
                        SALES AS     SHOWN ON
                        FOUND BY    APPELLANT'S
                YEAR      AUDIT       RETURNS    DIFFERENCE
                -----  -----------  -----------  -----------
                1970   $192,454.92  $ 56,148.27  $136,306.65
                1971    215,074.63    52,976.31   162,098.32
                1972    265,459.45    54,931.61   210,527.84
                1973     70,209.07    15,261.13    54,947.94
                       -----------  -----------  -----------
                Total  $743,198.07  $179,317.32  $563,880.75
                

Because of the discrepancy between the gross sales figures reported by Ferro and the actual gross sales as found by the audit (which appellant does not challenge), the Director assessed a deficiency and interest. Because of the gross discrepancy and evidence that appellant's president, Ferro, took the figures out of his head and attempted to amend the returns after the Department's investigation began, the Director assessed a fraud penalty of 25% under § 144.500. The exact assessment was:

                Additional Missouri state sales tax:    $16,202.92
                   Interest computed as of 3/31/78:      15,363.50
                Additional K.C. Pub. Mass Transp. tax:    1,713.92
                   Interest computed as of 3/31/78:       1,271.83
                Fraud penalty:                            4,479.18
                                                        ----------
                Total:                                  $39,031.35
                

The Director also concluded that additional interest in the sum of one-half of one per cent per month or six per cent per annum would be charged from April 1, 1978, until July 31, 1978, and that from July 31, 1978, interest would accrue at the rate of one per cent per month or twelve per cent per annum until the assessment was paid in full.

The first question on appeal is whether the Jackson County Circuit Court erred in taking jurisdiction and reviewing this case. It is contended that review should have been in the Administrative Hearing Commission.

Section 161.273, RSMo 1978, enacted as part of Senate Bill No. 661, provides for appeals from decisions of the Director of Revenue to be taken to the Administrative Hearing Commission. Section A of that bill provided:

"This act shall become effective August 13, 1978. Any hearing or review commenced prior to such date shall proceed pursuant to the law applicable at the time of its commencement."

As the Director's decision in this case was filed August 14, 1978, it is argued that review of that decision could only have commenced after August 13, 1978, and therefore such review should have been in the Administrative Hearing Commission rather than the circuit court.

Upon a motion for rehearing in Labrayere v. Goldberg, 605 S.W.2d 79 (Mo. banc 1980), this jurisdictional issue was settled when the Court by order dated October 15, 1980, modified its opinion by adding the following:

"By this decision we do not foreclose review in the Administrative Hearing Commission of certain pending disputes in which certain taxpayers chose to pursue review in that forum. Sections 144.261 and 536.100, RSMo 1969, confer jurisdiction for judicial review by circuit courts. Sections 144.261 and 161.273, RSMo 1978, confer jurisdiction for review by the Administrative Hearing Commission. * * * Because of the latent legislative ambiguity, the governmental interpretation thereof, and taxpayers' reliance thereon, the jurisdiction of the circuit courts and the Administrative Hearing Commission is deemed to be concurrent for the purpose of reviewing cases filed in either forum between August 13, 1978, and October 15, 1980." Id. at pp. 84-85.

By reason of Labrayere, supra, jurisdiction was proper in the circuit court as well as the Administrative Hearing Commission in this sales tax case.

Appellant challenges the circuit court's affirmance of the Director's finding of fraud on the ground that no fraud was proved.

Section 144.500 provides a penalty for fraud or evasion of the sales tax. It reads:

"If fraud or evasion on the part of a person is discovered by the director of revenue, he shall determine the amount of which the state has been defrauded, shall add to the amount so determined a penalty equal to twenty-five percent thereof, and shall assess the same against the person. The amount so assessed shall be immediately due and payable; provided, however, that the director of revenue shall promptly thereafter give to said person written notice of such assessment and penalty, which notice shall be served personally on such person, or by registered mail. Such person shall have the right to petition for hearing of such assessment as is provided herein."

The Missouri courts have addressed this provision only once, in State ex rel. Die Casting Corp. v. Morris, 358 Mo. 1170, 219 S.W.2d 359 (banc 1949). In that case, this Court defined "fraud or evasion" under the statute as "a positive, intentional deceit or subtle device to escape the tax." Id. at 1175, 219 S.W.2d at 362.

In our case the Director, without citing authority, determined that fraud was proved. His decision states:

"What appears from the documents introduced without objection at the hearing is a consistent pattern of gross under-reporting of sales tax. * * * (I)n no fewer than five instances, testimony was adduced that the figures contained on the sales tax returns were purely imaginary and taken out of the air. No attempt was made by the taxpayer to accurately report his state sales tax. Petitioner maintains that this consistent pattern of operation showed mere error on the part of Petitioner and not an attempt to fraud (sic) the state of Missouri. Such an assertion is wholly without merit.

"Evidence was adduced at the hearing that Mr. Ferro, President of Excel Drug, amended various returns in 1973. These amendments were filed after the investigation had begun by the Department of Revenue. Once the tax deficiency was brought to the attention of Mr. Ferro by his bookkeeper, he attempted to make up the sales tax deficiency.

"The consistent pattern of under-reporting of sales tax, the undisputed testimony of the Department of Revenue's investigators at the formal hearing and the fact that Petitioner's president signed all the sales tax returns under penalty of purjury (sic) as having examined all of the records upon which the returns were based clearly indicate an intent on the part of Petitioner to defraud the state of Missouri of sales tax properly owed, or at the very least to engage in a course of conduct intended to evade the paying of sales tax."

The Director's conclusion that fraud was present in this case can be sustained by reference to general fraud principles. It has been said that each case of fraud must be decided upon its own facts. Wood v. Robertson, 245 S.W.2d 80, 82 (Mo.1952). "And while it is true that fraud is, of course, never to be presumed it must be borne in mind that fraud is seldom susceptible of proof by direct evidence, but must almost invariably be shown by circumstances surrounding the transaction from which the fraud of the one charged with its commission may be reasonably inferred." Salmon v. Brookshire, 301 S.W.2d 48, 53 (Mo.App.1957).

The federal courts find fraud in tax cases where there has been, as in our case, a consistent pattern of underreporting of income. The cases hold that although specific intent must be established by evidence other than the mere understatement of income, United States v. Coblentz, 453 F.2d 503, 505 (2d Cir. 1972), wilfulness may be established by a consistent pattern of not reporting large amounts of income. United States v. Vannelli, 595 F.2d 402, 405 (8th Cir. 1979). See also Holland v. United States, 348 U.S. 121, 139, 75 S.Ct. 127, 137, 99 L.Ed. 150, reh. den. 348 U.S. 932, 75 S.Ct. 334, 99 L.Ed. 731 (1955); Gatling v. Commissioner, 286 F.2d 139, 145 (4th Cir. 1961) (...