Texas Comptroller of Public Accounts    STAR System


201110280H



SOAH DOCKET NO. 304-11-7612.73
CPA HEARING NO. 105,113

RE: *************
TAXPAYER NO.: *************
AUDIT OFFICE: Advanced Processes 2S52
AUDIT PERIOD: May 1, 2007 THROUGH February 28, 2010

Mixed Beverage Gross Receipts Tax/RDT

BEFORE THE COMPTROLLER
OF PUBLIC ACCOUNTS
OF THE STATE OF TEXAS

SUSAN COMBS
Texas Comptroller of Public Accounts

TREVOR MOORE
Representing Tax Division

*************
Representing Petitioner


COMPTROLLERíS DECISION

The Texas Comptroller of Public Accounts (Comptroller) assessed personal 
liability against ************* (Petitioner) under TEX. TAX CODE ANN. Section 
111.0611 for the mixed beverage gross receipts tax liability of ************* 
(COMPANY A), which operated a bar named COMPANY B. Petitioner requested 
redetermination contending that: (1) Petitioner was not directly involved in 
the day-to-day operations of the bar, and (2) the Comptroller cannot assess the 
additional 50% fraud penalty against either corporate taxpayers or the 
individual corporate officer where the audit assessment was estimated. In his 
Proposal for Decision, the Administrative Law Judge (ALJ) recommends that the 
assessment be affirmed in its entirety.

I. PROCEDURAL HISTORY, NOTICE & JURISDICTION

On July 14, 2011, Comptroller Staff (Staff) referred the case to the State 
Office of Administrative Hearings for a written submission hearing. Staff was 
represented by Assistant General Counsel Trevor Moore. Petitioner was 
represented by *************, Principal of COMPANY C. The record closed on 
September 7, 2011, by order of ALJ Peter Brooks.

There are no issues of notice or jurisdiction in this proceeding, and those 
matters are set out in the Findings of Fact and Conclusions of Law without 
further discussion here.

II. REASONS FOR DECISION

A. Evidence Submitted

The following documents were submitted by Staff:
1. Articles of Organization and Franchise Tax Public Information Reports of 
COMPANY A;
2. Audit Referral Report for Additional Penalty of COMPANY A;
3. Petitionerís Corrected Texas Notification of Personal Liability for 
Fraudulent Tax Evasion;
4. Letter denying redetermination hearing request of COMPANY A;
5. Texas Notification of Amended Audit Results issued to COMPANY A;
6. Inventory receipts of COMPANY D;
7. Texas Mixed Beverage Gross Receipts Tax Report filed by COMPANY A;
8. Texas Notification of Personal Liability for Fraudulent Tax Evasion;
9. Successor Liability Exam; and
10. Audit Plan.

The documents were admitted into the record without objection.

B. Background

The personal liability assessed against Petitioner stems from an unpaid tax 
liability of COMPANY A, a limited liability company, arising from the 
Comptrollerís mixed beverage audit of COMPANY Aís operation of a full-service 
convenience store for the period July 1, 2006, through February 28, 2010 
(COMPANY A audit period). The Comptroller issued COMPANY A a Texas Notification 
of Amended Audit Results dated August 17, 2010, assessing a deficiency in the 
amount of $*************, consisting of tax, the standard 10% and the 
additional 50% fraud penalties, and interest accrued through the date of 
Notification. The assessment was a jeopardy determination. COMPANY Aís request 
for a redetermination hearing was denied by the Comptroller because the request 
was not timely filed. The COMPANY A assessment became final on September 7, 
2011.

Petitioner was a member and manager of COMPANY A during its audit period. On 
August 17, 2010, the Comptroller issued a Texas Notification of Personal 
Liability for Fraudulent Tax Evasion against Petitioner assessing a deficiency 
consisting of tax, the standard 10% and 50% fraud penalties, and interest 
accrued through the date of the Notification covering the period of May 1, 
2007, through February 28, 2010. The assessment against Petitioner totaled 
$*************. The personal liability assessment is for a lesser amount than 
that assessed against COMPANY A because the period from July 1, 2006, through 
April 30, 2007, was not included. The basis for personal liability, TEX. TAX 
CODE ANN. Section 111.0611, was not effective until June 15, 2007. The report 
for May of 2007, which was due in June of 2007, was the first report that was 
subject to the new personal liability statute.

C. Analysis and Recommendation

This case involves the assessment of personal liability for fraudulent tax 
evasion under TEX. TAX CODE ANN Section 111.0611, which imposes personal 
liability on 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 
ďas an officer, manager, director, or partner, took an action or participated 
in a fraudulent scheme or fraudulent plan to evade the payment of taxes ....Ē 
The personal liability is for the taxes, the standard 10% penalty, an 
additional 50% penalty if applicable, and interest that are due from the 
corporation, association, or limited liability company.

With regard to other analogous tax imposition statutes, the Comptroller has 
held that in a redetermination proceeding Staff bears the burden of proof to 
present a prima facie case for imposition of the tax. Once Staff has presented 
such facts, the burden of proof shifts to the taxpayer to prove by a 
preponderance of the evidence that liability should not be imposed. This rule 
has been followed for individual liability for tax collected and not remitted 
under TEX. TAX CODE ANN. Section 111.016, [ENDNOTE: (1)] for successor 
liability under TEX. TAX CODE ANN. Section 111.020, [ENDNOTE: (2)] for persons 
who acquire businesses through a fraudulent transfer or sham transaction under 
TEX. TAX CODE ANN Section 111.024, [ENDNOTE: (3)] and for liability of officers 
and directors for corporate debts after forfeiture of corporate privileges 
under TEX. TAX CODE ANN Section 171.255. [ENDNOTE: (4)] TEX. TAX CODE ANN 
Section 111.0611 is similar in that it provides for personal liability on the 
part of an officer, manager, director, or partner for an underlying assessment 
against a corporation, partnership, or other business entity. Therefore, as a 
preliminary matter, it is necessary to inquire whether the written submission 
record establishes the necessary facts to support personal liability. [ENDNOTE: 
(5)]

One of the first facts that must be established is that Petitioner was an 
officer, manager, or director of COMPANY A during the liability period. Staff 
states that Petitioner was a manager and member, which is supported by the 
COMPANY A Texas Franchise Tax Public Information Report for 2006, 2007, 2008, 
and 2009 that identifies Petitioner variously as a member, partner, or officer. 
Petitioner is identified as the ďmanager/memberĒ on the Articles of 
Organization for a Texas Limited Liability Company filed for COMPANY A with the 
Secretary of State. These documents are sufficient to establish that Petitioner 
was a member and manager of COMPANY A.

The next fact to be established is that Petitioner, in his capacity as a member 
and manager of COMPANY A, ďtook an action or participated in a fraudulent 
scheme or fraudulent plan to evade the paymentĒ of taxes that were due. 
[ENDNOTE: (6)] TEX. TAX CODE ANN Section 111.0611(b) provides the following 
guidance regarding the factors to consider in determining whether personal 
liability attaches:

For purposes of this section, actions that may indicate the existence of a 
fraudulent scheme or fraudulent plan to evade payment of taxes include:

(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.

The liability imposed under TEX. TAX CODE ANN Section 111.0611 is based on 
fraud as evidenced by the plain wording of the statute. The use of this 
language strongly suggests that the appropriate standard of proof should be 
clear and convincing evidence, which is the standard required to establish that 
imposition of the Section 111.061(b) 50% fraud penalty is warranted. [ENDNOTE: 
(7)] The Comptroller, in COMPTROLLERíS DECISION NO. 104,433 (2011), held that 
Staff bears the burden of proving by clear and convincing evidence that the 
assessment of personal liability under TEX. TAX CODE ANN Section 111.0611 is 
warranted.

The provisions most relevant to this case are Subsections 111.0611(b)(1) and 
(b)(3) regarding filing fraudulent tax returns or filing returns that contain 
intentionally false statements that result in tax errors of 25% or more. The 
mixed beverage gross receipts tax returns filed on behalf of COMPANY A reported 
only a fraction of the taxes found to be due in the audit. The percentage of 
tax that was not reported for the period for which the personal liability was 
assessed (May 1, 2007, through February 28, 2010) was 82.67%. [ENDNOTE: (8)] 
The percentage rate actually increases to 84.50% if the tax assessed and the 
tax reported is adjusted to reflect the period that was not included in the 
personal liability assessment. Each of the returns filed during the audit 
period contained a gross error. [ENDNOTE: (9)]

The written submission record establishes Petitionerís role in filing the mixed 
beverage gross receipts tax returns and in the day-to-day operations of the 
bar. COMPANY Aís Audit Referral Report states that Petitioner not only prepared 
and signed the mixed beverage gross receipts tax returns and remittances, but 
also identifies Petitioner as the individual who ordered and paid for the barís 
expenses and taxable inventory, accepted and signed for the inventory, and made 
the deposits. Staff submitted copies of receipts for delivery of liquor to the 
bar which Petitioner had signed. Petitionerís involvement in the day-to-day 
operations of the bar, plus the gross underreporting of tax, suffice by clear 
and convincing evidence to establish that Petitioner filed the mixed beverage 
gross receipts tax returns as part of a fraudulent scheme or plan to evade the 
payment of taxes that were due.

Petitionerís contentions are not supported by the record. Contrary to his 
representation, Staff has established by clear and convincing evidence 
Petitionerís role in filing the mixed beverage gross receipts tax returns and 
in the day-to-day operations of the bar. Petitionerís reliance on COMPTROLLERíS 
DECISION NO. 103,918 (2011), in which the personal liability assessment was 
dismissed, is misplaced because Staff had failed to establish that Petitioner, 
in her capacity as president of the company, was responsible for the gross tax 
underreporting.

Petitioner also contends that the Comptroller cannot assess the additional 50% 
fraud penalty where the assessment was estimated. Petitioner offers no 
authority in support of this contention. Petitionerís contention is 
contradicted by Decision No. 104,433 in which the personal liability was 
imposed on the corporationís president and the audit assessment was estimated. 
Similarly, the Comptroller has repeatedly affirmed the imposition of the 
additional 50% fraud penalty in cases where the audit assessment was estimated. 
[ENDNOTE: (10)]

It should also be noted that the assessment became final after COMPANY Aís 
request for redetermination was rejected. To the extent Petitioner is 
challenging the validity of the underlying mixed beverage tax liability of 
COMPANY A such a challenge is barred. Under a long-standing policy applied in 
successor or individual assessments, an underlying assessment that is final may 
not be contested in a redetermination hearing of the successor or individual. 
In order to contest the underlying assessment the taxpayer must pay the 
assessment and file a refund claim. [ENDNOTE: (11)]

The ALJ finds that Petitionerís contentions should be rejected and that the 
personal liability assessment should be affirmed.

III. FINDINGS OF FACT

1. The Texas Comptroller of Public Accounts (Comptroller) assessed personal 
liability against ************* (Petitioner) for the audit period of May 1, 
2007, through February 28, 2010, under TEX. TAX CODE ANN Section 111.0611 for 
the mixed beverage gross receipts tax liability of ************* (COMPANY A). 
Petitioner timely requested redetermination.

2. Comptroller Staff (Staff) referred the case to the State Office of 
Administrative Hearings for a written submission hearing.

3. Staff 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.

4. The mixed beverage gross receipts tax liability of COMPANY A is final.

5. The mixed beverage gross receipts tax liability of COMPANY A was based on 
its operation of a bar named COMPANY B.

6. Petitioner was a manager and member of COMPANY A during the audit period.

7. Petitioner, as a manager and member of COMPANY A, filed fraudulent tax 
returns on behalf of COMPANY A.

8. Petitioner, as a member and manager of COMPANY A, filed returns on behalf of 
COMPANY A that contained intentionally false statements that contained gross 
errors of 25% or more.

9. Petitioner filed mixed beverage gross receipts tax returns for COMPANY A 
that resulted in an overall error rate of 82.67%.

IV. CONCLUSIONS OF LAW

1. The Comptroller has jurisdiction over this matter pursuant to TEX. TAX CODE 
ANN. ch. 111.

2. The State Office of Administrative Hearings 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. GOVíT CODE ANN. ch. 2003.

3. The Comptroller provided proper and timely notice of the hearing pursuant to 
TEX. GOVíT CODE ANN. ch. 2001.

4. Effective June 15, 2007, an officer, manager, or director of a corporation, 
association, or limited liability company, 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 due under Title 2 or 3 is personally liable for the taxes and any 
penalty and interest due. TEX. TAX CODE ANN Section 111.0611(a).

5. Staff in a redetermination proceeding bears the burden of proving by clear 
and convincing evidence that the assessment of personal liability against 
Petitioner is warranted under TEX. TAX CODE ANN. Section 111.0611.

6. Based on the foregoing Findings of Fact, Staff established by clear and 
convincing evidence that the assessment of personal liability under TEX. TAX 
CODE ANN Section 111.0611 was warranted.

7. Based on the foregoing Findings of Fact and Conclusions of Law, the assessed 
tax, penalties, and interest should be affirmed.

Hearing No. 105,113

ORDER OF THE COMPTROLLER

On September 16, 2011, the State Office of Administrative Hearingsí (SOAH) 
Administrative Law Judge (ALJ), Peter Brooks, 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, and the 
Comptroller has determined that the ALJís Proposal for Decision, except for 
minor changes to correct typographical or clerical errors, should be adopted as 
written.

The above Decision resulting in Petitionerís liability as set out in Attachment 
A, which is incorporated by reference, is approved and adopted in all respects. 
The Decision becomes final twenty days after the date Petitioner receives 
notice of this Decision, and the total sum of the tax, penalty, and interest 
amounts is due and payable within twenty days thereafter. If such sum is not 
paid within such time, an additional penalty of ten percent of the taxes due 
will accrue, and interest will continue to accrue. 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 7th day of October 2011.


SUSAN COMBS
Texas Comptroller of Public Accounts

by: Martin A. Hubert
Deputy Comptroller

ENDNOTE(S)
(1) SEE E.G., COMPTROLLERíS DECISION NO. 43,867 (2004).
(2) SEE E.G., COMPTROLLERíS DECISION NOS. 40,036 (2002) and 42,112 (2004). 
(3) SEE E.G., COMPTROLLERíS DECISION NOS. 102,143 (2009), 48,289 & 49,580 
(2009), 49,475 (2009), 100,503 (2009), and 102,707 (2010). 
(4) SEE E.G., COMPTROLLERíS DECISION NOS. 29,852 (1993) and 43,294 (2004). 
(5) SEE COMPTROLLERíS DECISION NO. 104,433 (2011). 
(6) SEE TEX. TAX CODE ANN. SECTION 111.0611(a).  
(7) SEE 34 TEX. ADMIN. CODE Section 1.40(1)(B).
(8) COMPANY Aís Audit Referral Report. The error rate was calculated by using 
the amount reported on the sales tax returns filed during the period covered by 
Petitionerís audit and the tax adjustments made for the same period. The tax 
assessed ($*************) was divided by the sum of the tax reported 
($*************) and the tax assessed ($*************). 
(9) ID.
(10) SEE COMPTROLLERíS DECISION NOS. 103,124 (2010), 103,900 & 104,186 (2011), 
and 104,540 (2011).  
(11) SEE COMPTROLLERíS DECISION NO. 104,433.




ACCESSION NUMBER: 201110280H
SUPERSEDED: N
DOCUMENT TYPE: H
DATE: 10/07/2011
TAX TYPE: MIX