Anthony R. & Elizabeth M. Bott v. Commissioner of Revenue (December 30, 2014)

Commonwealth of Massachusetts

Appellate Tax Board


ANTHONY R. &				v.		COMMISSIONER OF REVENUE
ELIZABETH M. BOTT

Docket No. C302737					Promulgated:
								December 30, 2014

							
This is an appeal filed under the formal procedure pursuant to G.L. c. 58A, § 7 and G.L. c. 62C, § 39(c) from the refusal of the Commissioner of Revenue ("Commissioner" or "appellee") to abate personal income taxes and penalties assessed against Anthony R. Bott ("appellant") and Elizabeth M. Bott for the tax years ending December 31, 2002, through December 31, 2005 ("tax years at issue"). 
	Commissioner Scharaffa heard this appeal and was joined by Chairman Hammond and Commissioners Rose and Chmielinski in a decision for the appellee.  
These findings of fact and report are made pursuant to a request by the appellee under G.L. c. 58A, § 13 and 831 CMR 1.32. 
Anthony R. Bott, pro se, for the appellant.

Celine E. Jackson, Esq., and John DeLosa, Esq. for the
appellee.
FINDINGS OF FACT AND REPORT

On the basis of an Agreed Statement of Facts and the testimony offered into evidence at the hearing of this appeal, the Appellate Tax Board ("Board") made the following findings and rulings. 
The appellant and Ms. Bott timely filed a Joint Massachusetts Resident Income Tax Return, Form 1 ("Form 1"), for each of the tax years at issue and timely paid the amounts of tax reported due. Based on illegal activity engaged in by the appellant, which is discussed below, the Commissioner issued assessments of additional personal income taxes for the tax years at issue by a Notice of Assessment dated May 29, 2008. The assessments were issued pursuant to G.L. c. 62C, § 28 at double the amount determined to have been due, totaling $11,926.00, exclusive of interest, for each of the four tax years at issue.
The appellant and Ms. Bott filed an Application for Abatement, Form CA-6, on June 30, 2008, seeking abatement of all additionally assessed sums. The Commissioner denied the abatement application by a Notice of Determination dated April 27, 2009. On June 20, 2009, the appellant and Ms. Bott timely filed a Petition Under Formal Procedure with the Board. On the basis of the foregoing, the Board found and ruled that it had jurisdiction to hear and decide this appeal.
Beginning in 1979 and continuing until April of 2005, the appellant was a practicing attorney in Massachusetts. The appellant operated his own law practice, Anthony R. Bott, P.C. ("Bott P.C.") in East Orleans and was the corporation's sole officer, director, and shareholder. According to the appellant, he became professionally overburdened in 2002 and, to meet his financial obligations, began appropriating substantial sums from his corporation's Interest on Lawyers Trust Account (IOLTA), which consisted entirely of client funds. His clients had no knowledge of these transfers.
The appellant characterized the appropriations as loans from Bott P.C. to its shareholder, himself, on the corporation's U.S. Corporation Income tax Returns, Forms 1120, for the tax years 2002 and 2003. The returns reflected loans in the amounts of $179,150 and $182,992 for 2002 and 2003, respectively, and "client escrow" liabilities of $309,437 for 2002 and $400,121 for 2003. The appellant did not report income relating to the appropriated sums on his Massachusetts Forms 1 for any of the tax years at issue. 
During 2004, a concerned client of the appellant who had yet to receive any information regarding disposition of her case hired an attorney to investigate the appellant's treatment of the matter. The appellant lied to the investigating attorney and the client about the resolution of the case. More specifically, the appellant had settled the client's case for $115,000 and took at least $75,000 of the settlement funds for his personal use. He informed the investigating attorney that the case had been settled for $20,000, a representation he made in writing to the client sometime thereafter. The appellant also sent the client a check in the amount of $12,834.82, which purported to represent her portion of the $20,000 settlement after deduction of the appellant's contingent fee and expenses.
The appellant's actions, which were in violation of Massachusetts law and Rules of Professional Conduct applicable to attorneys, were described in a Statement of Disciplinary Charges filed against the appellant by the Board of Bar Overseers of the Supreme Judicial Court that was issued during March of 2005. In an Affidavit of Resignation from the Massachusetts Bar, the appellant "acknowledged freely and voluntarily that the material facts set forth in the Statement of Disciplinary Charges [were] true." The Affidavit was accepted as a disciplinary sanction, and the appellant was disbarred as of April 1, 2005. 
Over time, it came to light that the appellant had taken funds from several clients without their knowledge and, during March of 2006, the appellant was criminally charged with forgery of documents under G.L. c. 267, § 1, larceny under G.L. c. 266, § 30(1), and larceny from a person sixty years or older under G.L. c. 266, § 30(5).  During September of 2006, the appellant pled guilty to two counts of larceny and one count of forgery and was sentenced to thirty months in the House of Corrections followed by ten years of probation. The appellant served fifteen months and was then paroled. 
As previously noted, on May 29, 2008, the Commissioner issued a Notice of Assessment to the appellant and his spouse. The assessments were based on attribution of income equal to the sums the appellant took from his clients. Lacking a definitive timeline of the thefts, but knowing that they took place during the tax years at issue, the Commissioner evenly distributed the additional income across the four tax years at issue. 
The appellant did not dispute the manner in which the commissioner calculated the contested liability. Rather, during the hearing of this appeal and in his "hearing/trial brief," the appellant asserted that he intended to repay the funds he had taken from his clients as soon as possible and therefore the appropriations constituted loans and not illegally obtained taxable income. The appellant stated that, consistent with this intent, he filed Bott P.C.'s federal tax returns reflecting his transfers of client funds as loans, relying on the informed advice of his accountant, James J. Bombanti, CPA ("Mr. Bombanti"). 
	The Board found that, based on the appellant's actions and admissions, as well as the improbability of his assertions, the appellant lacked any credibility and afforded his self-serving assertions no weight. In particular, the appellant pled guilty to forgery and theft of substantial sums from his clients. There was virtually no evidence of restitution, notwithstanding court ordered restitution which, as of 2008, totaled more than $400,000. The appellant also freely admitted to the Board of Bar Overseers that he had deceived a client and her attorney, having underrepresented a settlement by more than 80%, absconded with at least 65% of the settlement, and attempted to dispose of the case by paying the client approximately 10% of the true settlement amount. Not only were these deceptions quite damaging to the appellant's credibility, but they fatally undermined the appellant's assertion that he intended to repay misappropriated client funds. To wit, no reasonable person could believe that the appellant intended to repay settlement funds that he falsely represented to interested parties had never been received.   
 	The appellant also failed utterly to demonstrate that he had in good faith relied on Mr. Bombanti's counsel to appropriately document the purported loans. Mr. Bombanti was not present to testify at the hearing of this appeal and the appellant did not submit an affidavit or other substantiating documentation from Mr. Bombanti to support his assertion that Mr. Bombanti sanctioned or was even aware of the appellant's illegal actions. Indeed, the appellant's comments at the hearing of this appeal indicated that the appellant was aware of the impropriety of his actions, thereby undermining his assertion that Mr. Bombanti, a C.P.A., advised him to characterize the appropriation of client funds as loans. More specifically, the appellant stated that he "realize[d] obviously there [was] a problem with [the] reporting on [his] federal tax returns of a loan from the P.C. IOLTA account." 
After considering all of the evidence and the reasonable inferences drawn therefrom, the Board found and ruled as follows: the appellant's assertions offered in opposition to the contested assessment were self-serving, unsubstantiated and lacked credibility; contrary to his assertions, the appellant did not intend to repay the funds he had taken from his clients and the transfers of these funds did not constitute loans; the appellant did not rely in good faith on Mr. Bombanti in characterizing his misappropriations as loans on Bott P.C.'s federal tax returns; and the appellant's Massachusetts Forms 1 for the tax years at issue were filed falsely or fraudulently with a willful attempt to defeat or evade a tax as contemplated by G.L. c. 62C, §§ 26(d) and 28.
	Based on the foregoing, and for the reasons explained in the following Opinion, the Board found and ruled that the disputed assessments were proper. Accordingly, the Board issued a decision for the appellee in this appeal.
    
		OPINION

Generally, the Commissioner may assess additional taxes "anytime within three years from the date a return was filed or the date it was required to be filed, whichever occurs later."  G.L. c. 62C, § 26(b). In such cases, the taxpayer bears the burden of demonstrating entitlement to an abatement. See Comm'r of Revenue v. J.C. Penney, 431 Mass. 684, 686 (2000)(citing Towle v. Comm'r of Revenue, 397 Mass. 599, 603 (1986)).  
However, in the case of a "false or fraudulent return filed with intent to evade a tax . . . the commissioner may make an assessment at any time." G.L. c. 62C, § 26(d). Further, if a taxpayer: 
has filed a false or fraudulent return or has filed a return with a willful attempt in any manner to defeat or evade the tax, the Commissioner may determine the tax due, according to his best information and belief, and may assess the same at not more than double the amount so determined, which additional tax shall be in addition to the other penalties provided by this chapter. 

G.L. c. 62C, § 28. 

In these cases, the Commissioner bears the burden of proving that a taxpayer has filed a false or fraudulent return or a return filed with a willful attempt to defeat or evade the tax. See Scagel v. Comm'r of Revenue, Mass. ATB Findings of Fact and Reports, 1990-311, 330.
In the present appeal, only the assessment for the tax year 2005 falls within the statutory three-year period for assessment provided by G.L. c. 62C, § 26(b). The validity of the assessments for the tax years 2002, 2003, and 2004, as well as the additional tax assessed under G.L. c. 62C, § 28, hinges upon the correct application of G.L. c. 62C, §§ 26(d) and 28.
Although he did not dispute the method by which the assessments were calculated, the appellant nonetheless claimed that the assessments were erroneous, primarily because the client funds he took from Bott P.C.'s IOLTA account "were monies [he] intended to repay and earnestly hoped to repay as quickly as possible" and were therefore properly characterized as non-taxable loans. The appellant further asserted that any "actual fraud on [his] part and/or a willful attempt to defeat or evade a tax liability is plainly not established by the evidence at bar unless the standard of review . . . is that all inferences in every respect are to be presumed negatively against any given appellant." The Board disagreed. 
"The credibility of witnesses, the weight of evidence, and inferences to be drawn from the evidence are matters for the [B]oard."  Cummington School of the Arts, Inc. v. Assessors of Cummington, 373 Mass. 597, 605 (1977). "ʽOne who has been convicted of crime is presumed to be less worthy of belief than one who has not been so convicted.'"  Commonwealth v. Harris, 443 Mass. 714, 720 (2005)(quoting Brillante v. R.W. Granger & Sons, 55 Mass. App. Ct. 542, 545 (2002))(other citations omitted).
The appellant's guilty pleas damaged his credibility, but they were not, standing alone, dispositive. However, the evidence presented by the Commissioner, viewed as a whole, compelled the conclusion that the appellant was not credible and that his claims could not be believed. The appellant took hundreds of thousands of dollars of his clients' money without their knowledge and failed to comply with court-ordered restitution. He represented to a client and her attorney that he had never received a substantial portion of these sums, thereby eliminating any expectation of full payment and precluding an assertion of intent to repay. He admitted misdeeds involving dishonesty and criminal intent to the courts and regulatory authorities. 
In sum, the appellant acted consistently to deceive and deprive, and the Board therefore found that he did not intend to return his clients' funds, which he had taken without their knowledge. Moreover, the Board found and ruled that he did not in fact consider the misappropriations to be loans, nor could they qualify as such, despite having been so represented on the Bott P.C. federal tax returns. See, e.g., Janie Foster & Ronnie Whitfield v. Comm'r of Internal Revenue, T.C. Memo 1989-276 (holding that embezzled funds could not qualify as loans despite a claimed intent to repay and statements on tax returns that the funds had been borrowed where there was no consensual recognition between the parties that a loan existed). Rather, the appellant stole his clients' money, sums which were therefore properly included in income for Masssachusetts tax purposes. See James v. U.S., 366 U.S. 213 (1961); G.L. c. 62, § 2.	 Consequently, the Board ruled that the Massachusetts Forms 1 filed by the appellant for the tax years at issue were false or fraudulent and that they were filed with a willful attempt to defeat or evade a tax. Thus, the Commissioner appropriately issued assessments for the tax years 2002 through 2004 under G.L. c. 62C, § 26(d) and incorporated additional tax for the tax years 2002 through 2005 under G.L. c. 62C, § 28.
Lastly, the appellant argued that even if the assessments were warranted, imposition of additional tax under G.L. c. 62C, § 28 violated the Double Jeopardy Clause of the U.S. Constitution, which bars "the imposition of multiple criminal punishments for the same offense," but does not "prohibit the imposition of all additional sanctions that could . . . be described as punishment." Hudson v. United States, 522 U.S. 93, 98-99 (1997). As a general rule, sanctions that play a legitimate role in a non-punitive regulatory scheme do not violate the Double Jeopardy Clause. See, e.g., id. at 105; Commonwealth v. Bogannam, 50 Mass. App. Ct 913, 914-15 (2001). 
The Board looks to appellate court precedent when addressing constitutional issues. "Given that the Board's expertise lies in fact-finding and interpretation of taxing statutes and rules, constitutional issues are appropriately considered within the framework of established doctrines received from the United States Supreme Court, the Supreme Judicial Court, and the Appeals Court." Mullins v. Comm'r of Revenue, Mass. ATB Findings of Fact and Reports 1997-973, 988, aff'd 428 Mass. 406 (1998).  
Based on its similarity to the present appeal, the decision of the Appeals Court in Bogannam indicates that the additional taxes at issue here do not violate the Double Jeopardy Clause. Like the instant case, Bogannam addressed the assessment of income taxes under G.L. c. 62C, § 26(d), along with additional tax under G.L. c. 62C, § 28, where a taxpayer faced separate criminal charges for the same illegal income-generating conduct.  See id. at 913-14. The court in Bogannam asked whether the assessment coupled with the criminal proceedings implicated the Double Jeopardy Clause and held that it did not. See id. at 914-15. The court reasoned that a taxpayer who is assessed under G.L. c. 62C, §§ 26(d) and 28 because of a failure "to pay income tax on income from illegal activities is treated no differently from any other person who fails to pay a tax on income from whatever source derived." Id. The assessment of additional tax under G.L. c. 62C, § 28 is therefore distinct from taxes imposed solely on illegal activities, which have been held to violate the Double Jeopardy Clause. See id. (distinguishing Bogannam from Dep't of Revenue of Montana v. Kurth Ranch, 511 U.S. 767, 780-783 (1994) (holding that a heavy tax on possession of controlled substances violated the Double Jeopardy Clause because it exclusively targeted illegal activity and served an aim that is pursued through criminal, rather than civil, statutes); see also Mullins, 428 Mass. at 411-416 (following Kurth Ranch in holding that a heavy Massachusetts tax on possession of controlled substances violated the Double Jeopardy Clause).
The present appeal does not differ in any meaningful way from Bogannam, which has been neither abrogated nor overturned.  Thus, the Board ruled that the additional taxes assessed pursuant to G.L. c. 62C, § 28 did not violate the Double Jeopardy Clause.
 For the foregoing reasons, the Board issued a decision for the appellee in this appeal.



  THE APPELLATE TAX BOARD 

             


				   By: ________________________________
					  Thomas W. Hammond, Jr., Chairman






A true copy:

Attest: _________________________
	      Clerk of the Board

 Elizabeth M. Bott, the appellant's spouse, filed this appeal together with the appellant. However, prior to the hearing of the appeal, Ms. Bott applied for and was granted "innocent spouse relief" under G.L. c. 62C, § 84. Consequently, the contested liability addressed in these Findings of Fact and Report relates only to Anthony R. Bott.
 The amounts alleged stolen in the various larceny charges totaled approximately $450,000.
 The court also upheld collection of the tax at issue in the appeal by way of a "jeopardy assessment" under G.L. c. 62C, § 29.

ATB 2014-1293