Zorzit v. Comptroller of Md.
| Decision Date | 01 October 2015 |
| Docket Number | No. 825, Sept. Term, 2014.,825, Sept. Term, 2014. |
| Citation | 123 A.3d 627,225 Md.App. 158 |
| Parties | John ZORZIT, et al. v. COMPTROLLER of Maryland. |
| Court | Court of Special Appeals of Maryland |
Todd M. Reinecker (Jeffrey P. Reilly, Miles & Stockbridge PC, on the brief), Baltimore, MD, for appellant.
Donald K. Krohn (Brian E. Frosh, Atty. Gen., on the brief), Baltimore, MD, for appellee.
Panel: KRAUSER, C.J., GRAEFF, NAZARIAN, JJ.*
John Zorzit and Nick's Amusements (collectively, “Nick's”) were ordered to pay $5,770,353.18 by the Maryland Tax Court—$2,159,724.97 in unpaid admissions and amusement taxes, interest on those taxes, and a fraud penalty of $1,079,862.45. Nick's does not dispute failing to pay taxes, but contests the amount owed and disagrees with the fraud penalty. It argues that the Comptroller's assessment that was the basis for the Tax Court's Order was fatally flawed and that the Comptroller failed to prove the necessary intent to defraud. We disagree with both arguments and affirm.
From 1993 until 2009, Mr. Zorzit owned and operated Nick's Amusements. Nick's provided coin-operated entertainment machines to bars and restaurants, including jukeboxes, pool tables and video poker machines. Nick's retained ownership of the machines, and split the profits with the owner of the venue. With video poker machines, owners and managers of the locations made cash payouts to winning customers, with Nick's knowledge and approval, and these payouts were deducted from the profit they split. Nick's concedes that these payouts were illegal. Moreover, Nick's kept no records of the payouts—indeed, as counsel for the Comptroller suggested at the Tax Court, keeping records would have been recording a criminal enterprise.1
Nick's was charged criminally as a result of the video poker business many times. Mr. Zorzit testified that prior to 2009, Nick's was a defendant in more than fifteen cases in the Circuit Court for Baltimore County, but none of these ever yielded a conviction. He claimed, in fact, that there was an understanding between Nick's and the former State's Attorney for Baltimore County:
It is, of course, lawful to operate video poker machines without making payouts, at least so long as the machines are properly licensed and taxes are paid. See Md.Code (1992, 2010 Repl.Vol.), §§ 17–405, 17–408, and 17–414 of the Business Regulation Article. Video poker machines and other “games of entertainment” are subject to an “admissions and amusement” tax of 10% in Baltimore County. Baltimore County Code § 11–4–601. Although counties impose these taxes, businesses are required to remit admissions and amusement taxes to the Comptroller. Md.Code (1988 Repl.Vol.2010), §§ 2–109, 4–201, 4–301 of the Tax General Article (“TG”).
Nick's helped its Baltimore County customers obtain licenses for their video poker machines and collected the taxes.2
After the machines were installed and running, Nick's “route men” visited each location, opened the machines, counted the cash, calculated the admission and amusement taxes to be paid on the revenue at that location, and, then-and-there, split the profits with the location's owner.
But Nick's did not consider illegal payouts to be taxable, and the route men did not include payouts when calculating Nick's tax liability. What's more, Nick's route men did not keep records that would allow anyone to calculate the taxes due on payouts. First, the route men kept no records of payouts at all. Second, they did not record revenue on a per-machine basis—they tallied all of the revenue by location, net of payouts, and wrote down only that total before calculating taxes and license fees, and splitting the profits. Thus, when a route man returned to Nick's office with the day's receipts, video poker revenue was indistinguishable from revenue from jukeboxes, pool tables, or any other cash revenue.
Beginning in 2006, the Baltimore County Police Department (“County Police”) conducted a wide-scale investigation of Nick's video poker operations. After significant undercover work and speaking with informants, the County Police seized eighty-three video poker machines owned by Nick's from twenty-nine locations on January 28, 2009.3 Police opened the machines and analyzed their motherboards in an effort to determine how much money was paid into the machines and how much had been won (the “in-credits” and “out-credits,” respectively). County Police officers later called to testify conceded that bar and restaurant owners likely did not pay out every credit won,4 and that if Nick's had purchased used machines, the in-and out-credits from previous owners would still be recorded on those machines. But having no way to distinguish between previous out-credits and out-credits during Nick's ownership of machines, the County Police compiled the raw data from these motherboards into a report, and turned that report over to the Comptroller's Office.
The Comptroller independently analyzed the report. The Comptroller at no time took possession of or tested the machines. Using the figures from the motherboards, the Comptroller's Office devised a “payoff percentage,” representing the percentage of out-credits to in-credits. The Comptroller assumed that every out-credit was paid, and ultimately hypothesized that 55% of the money paid into a machine would be paid back to customers.5 The Comptroller then applied this figure to the gross revenue that Nick's had recorded for the period of August 2003 to January 2009. Nick's had not retained records for January 2000 through July 2003, so the Comptroller devised a monthly average return for the 2003–2009 period, used that number for the months without records, then applied the payoff percentage.6 After estimating the amount of money bar and restaurant owners had paid out over the years, and applying a 10% admissions and amusement tax rate, the Comptroller ultimately arrived at a tax deficiency of $2,159,724.97 for the 2000–2009 period. The Comptroller then added interest on the outstanding tax bill and imposed a 100% fraud penalty.
Mr. Zorzit later testified that after the raid, he sought access to the video poker machines from the County Police, but his request was denied. Sergeant Thomas Hench of the County Police testified, however, that no one at Nick's asked for access to the machines to conduct their own testing of the motherboards. He also testified that the Comptroller never asked for the machines, nor asked the County Police to preserve them, and that after storing the machines for “[a] year or two” they were destroyed.
Nick's appealed the assessment to the Tax Court. It argued that the deficiency assessment was inadequate because the assessment (1) assumed all of Nick's revenue claimed by Nick's came from video poker; (2) used out-credits from the life of the video poker machines when a significant number of Nick's machines had been bought used; and (3) assumed that all out-credits represented payouts even though bar and restaurant management often would not pay and repairmen might accumulate out-credits while testing the machines. At the hearing, Nick's offered testimony from Ben Cummings, one of Nick's route men,7 who estimated that only 65% of Nick's revenues came from video poker, and that the payoff percentage was between 20 and 25%. Nick's also offered expert testimony from a statistician, who applied Mr. Cummings's numbers to the Comptroller's methodology and calculated a tax deficiency of only $466,016.10. Finally, Nick's disputed the fraud penalty, claiming that neither of the two CPAs they employed, nor their retained attorney, nor anyone else on staff were aware that payouts were taxable, and that Mr. Zorzit and the company lacked the requisite intent to defraud.
The Comptroller in turn called two police officers who had participated in investigating Nick's, Corporal Montgomery and Sergeant Hench. They described their investigation and the illegal video poker business in general. The Comptroller also called one of its auditors, Charles Drasher, who testified that Nick's did not maintain records or program the machines in a way that allowed auditors to determine which out-credits resulted in payouts and which did not:
Mr....
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