F-D Oil Co., Inc. v. Commissioner of Revenue

• Decision Date: 27 March 1997
• Docket Number: No. C1-96-1589,F-D,C1-96-1589
• Citation: 560 N.W.2d 701
• Parties: OIL COMPANY, INC., et al., Relators, v. COMMISSIONER OF REVENUE, Respondent.
• Court: Minnesota Supreme Court

Page 701

560 N.W.2d 701

F-D OIL COMPANY, INC., et al., Relators, v. COMMISSIONER OF REVENUE, Respondent.

No. C1-96-1589.

Supreme Court of Minnesota.

March 27, 1997

Syllabus by the Court

1. Taxpayer has the burden of proof regarding application of a fraud penalty under Minn.Stat. § 289A.60, subd. 6 (1996).

2. Tax court's decision affirming the Commissioner of Revenue's assessment of additional income tax and a fraud penalty under Minn.Stat. § 289A.60, subd. 6, is supported by the evidence.

Mark A. Pridgeon, Edina, for Relators.

Hubert H. Humphrey, III, Minnesota State Attorney General, Thomas K. Overton, Assistant Attorney General, Tax Litigation Division, St Paul, for Respondent.

Considered and decided by the court en banc without oral argument.

OPINION

BLATZ, Justice.

Relators appeal a tax court judgment affirming orders of the Commissioner of Revenue assessing additional income taxes and statutory fraud penalties against relators. The Minnesota Tax Court held that relators had the burden of proof regarding whether a fraud penalty should be assessed pursuant to Minn.Stat. § 289A.60, subd. 6 (1996) and held that the commissioner properly assessed both the additional income taxes and fraud penalties. We affirm.

In June 1994, the commissioner issued three orders assessing relators F-D Oil Company, John and Jill Fleming, and Robert and Mary Fries for unpaid Minnesota income taxes and assessing fraud penalties pursuant to Minn.Stat. § 289A.60, subd. 6. Relators filed notices of appeal with the Minnesota Tax Court. The tax court held an evidentiary hearing, after which it affirmed the commissioner's orders.

Fleming is the president and 50 percent shareholder of F-D Oil, a Minnesota corporation that operates a convenience store and automobile service station in South St. Paul, Minnesota. Fleming is also the president and shareholder of Fleming Fuel Stops (Normandale) which operates a service station on Normandale Boulevard in Bloomington, Minnesota. Fries began working at F-D Oil in 1975. In 1982, Fries purchased a portion of F-D Oil's stock and became its general manager.

In early 1992, based on informant information from a bookkeeper, the Internal Revenue Service and the Minnesota Department of Revenue (department) audited Normandale and uncovered a skimming scheme. The auditors discovered that Normandale's bookkeepers had charged customers one amount for labor as reflected on the work orders but entered a lesser amount for labor into the computerized record system. Using Normandale's work orders, the auditors concluded that approximately $30,000 per year in revenue was not reported at Normandale from 1987 through 1991.

In January 1994, upon completion of a criminal trial, Fleming was found guilty of a felony for skimming cash from Normandale. At his criminal trial, Fleming denied involvement in the skimming at Normandale, but, in his testimony before the tax court in this case, Fleming admitted that he directed the bookkeepers at Normandale to underreport labor income and give him the skimmed money.

After Fleming's conviction, the department began investigating F-D Oil because the bookkeepers at Normandale believed that skimming was also occurring at F-D Oil. The department did not have the assistance of any F-D Oil employees as informants. When the department subpoenaed F-D Oil's records in February 1994, F-D Oil produced only copies of customers' credit card receipts and daily reports. Daily reports are computer-generated financial records. F-D Oil did not produce any work orders for auto repairs. Using the credit card receipts, the department was able to locate some of F-D Oil's customers who had retained their copies of work orders. After comparing the customers' work orders to F-D Oil's daily reports, the department concluded that F-D Oil had underreported labor income in its daily reports in a manner that was similar to the skimming scheme proven at Normandale.

Based upon this conclusion, the commissioner estimated the amount of F-D Oil's unreported income and issued three orders. The commissioner issued one order assessing F-D Oil for tax years ending June 30, 1987 through June 30, 1992. Specifically, the commissioner assessed additional income tax, a fraud penalty equal to 50 percent of the additional tax, and interest, for a total of $65,031.75. The commissioner also issued two orders assessing additional income taxes, 50 percent fraud penalties, and interest, against Fleming and Fries, and their wives, for tax years ending December 31, 1987 through December 31, 1992.

At a 2-day evidentiary hearing before the tax court in this case, Fleming and Fries denied participating in skimming at F-D Oil and attributed the discrepancies to employee theft. Fries testified that he suspected theft at F-D Oil on several occasions. He testified that the convenience store profits "weren't up to where we thought they should have been" so a security camera was installed. Fleming testified that after the camera was put in, convenience store sales increased by $500 per month and profits on auto repairs increased by about 5 percent. In support of the allegations of theft, Fleming testified that there were instances where the tow truck would show mileage driven without anything being rung on the cash register and that he suspected problems with employees because of shortages and missing inventory.

Margaret Anderson testified that she had worked as F-D Oil's bookkeeper since 1984. Anderson tracked the inventory of gasoline, cigarettes, oil, batteries, tires, and pop on a daily basis. She used the daily cash register tape, an inventory sheet, her personal notebook, credit card receipts, and work orders to create the computer-generated daily reports for F-D Oil. When Anderson took vacations, Fries would handle bank deposits, but all other work would await her return.

All of F-D Oil's transactions were rung into the cash register except for auto repairs. When a customer paid the cashier for auto repairs, the transaction was rung up as a "no sale" and therefore it was not reflected on the cash register tape. The cashier then gave the customer one copy of the work order. Two other copies of the work order were given to Anderson, who then entered data from the work order into the computer. After the computer entries were made, the remaining two copies were separated and placed into two files. One copy was placed in the mechanics file for one month and the other copy was placed in the customer file in case a customer raised questions about repair work or information was needed regarding warranties.

After the evidentiary hearing, the tax court affirmed the commissioner's orders assessing additional income taxes and fraud penalties. The tax court determined that Fleming and Fries engaged in a scheme to skim income from F-D Oil; that the amount assessed by the commissioner was reasonable; that relators had the burden of proof regarding the fraud penalty; and that relators did not meet their burden of proving that the fraud penalty did not apply.

The tax court's findings of fact supporting its decision included: the amounts for labor entered into F-D Oil's computer record system were lower than the amounts charged to customers; F-D Oil's accountant used the lower amounts in preparing F-D Oil's income tax returns; cash was skimmed at F-D Oil in the same manner as it was skimmed at Normandale; and the testimony of Fleming, Fries, and Anderson denying involvement in the skimming scheme at F-D Oil was not credible.

On appeal to this court, relators claim: (1) the evidence does not support the tax court's decision that Fleming and Fries engaged in a scheme to skim income from F-D Oil; (2) the tax court erred in holding that relators had the burden of proof regarding the fraud penalty; and (3) the evidence does not support imposition of the fraud penalty.

I.

This court may review decisions of the tax court "on the ground that the tax court was without jurisdiction, that the order of the tax court was not justified by the evidence or was not in conformity with law, or that the tax court committed any other error of law." Minn.Stat. § 271.10, subd. 1 (1996). In reviewing whether the tax court's findings are justified by the evidence, this court reviews the record to determine whether there is sufficient evidence to support the decision. Carlson v. Commissioner of Revenue, 517 N.W.2d 48, 51 (Minn.1994). Conclusions of law, including interpretations of statutes, however, are subject to de novo review. Id.; Green Giant v. Commissioner of Revenue, 534 N.W.2d 710, 711 (Minn.1995).

As a result of the department's investigation, the commissioner concluded that Fleming and Fries had engaged in a scheme to skim income from F-D Oil. The commissioner's tax assessments are presumed to be valid and correctly determined and relators have the burden of demonstrating the incorrectness or invalidity of the commissioner's assessments. Minn.Stat. §§ 270.68, subd. 3 (1996); 289A.37, subd. 3 (1996).

After an evidentiary hearing, the tax court found that the commissioner had proven that Fleming and Fries engaged in such a skimming scheme. Relators contend that the evidence does not justify the tax court's decision because: (1) the discrepancies were the result of mistakes; (2) the discrepancies were caused by employee theft; and (3) Fleming, Fries, and Anderson testified and denied involvement. ¹

First, relators contend that the tax court's finding that Fleming and Fries engaged in a skimming scheme is not supported by the evidence because the discrepancies at F-D Oil between labor charged and labor reported were different than the discrepancies at Normandale and were thus a result of mistakes. Rather than supporting relators' contention, however, a close examination of the discrepancies at F-D Oil supports the tax court's finding that there was a skimming scheme at F-D Oil.

By way of background, it was difficult for the...