Chung Wah Hong Co., Inc. v. Commissioner of Revenue (June 12, 2013)

 COMMONWEALTH OF MASSACHUSETTS
APPELLATE TAX BOARD

CHUNG WAH HONG CO., INC. 	v. 		COMMISSIONER OF REVENUE
Docket No. C304858					Promulgated:
								June 12, 2013


This is an appeal filed under the formal procedure pursuant to G.L. c. 58A, § 7 and G.L. c. 62C, § 39, from the refusal of the Commissioner of Revenue ("Commissioner" or "appellee") to abate cigarette excise for the periods beginning June 1, 2001 and ending March 31, 2005 and sales taxes for the periods beginning January 1, 2001 and ending March 31, 2005 assessed to  Chung Wah Hong Co., Inc. ("CWH" or "appellant"), under G.L. c. 64C and G.L. c. 64H.
	Chairman Hammond heard this appeal.  Commissioners Rose, Mulhern, and Chmielinski joined him in the decision for the appellee. 
	These findings of fact and report are issued pursuant to requests by the appellant and appellee under G.L. c. 58A, § 13 and 831 CMR 1.32.

Karnig Boyajian, Esq. and Timothy F. O'Brien, Esq. for the appellant.

Timothy R. Stille, Esq. and Arthur M. Zontini, Esq. for the appellee. 


FINDINGS OF FACT AND REPORT
Based on the testimony and exhibits entered into evidence at the hearing of this appeal, the Appellate Tax Board ("Board") made the following findings of fact. 
At all times relevant to this appeal, the appellant was a Massachusetts corporation which owned and operated a grocery store located at 51-55 Beach Street in Boston.  The grocery store was a family business, run by members of the Chin family, including Michael Chin and his wife Oi Nar Woo, and their son, David Chin.  Sundry items, including cigarettes, were sold at the grocery store.  
In February of 2005, Massachusetts Department of Revenue ("DOR") investigators received a tip that a shipment of cigarettes which lacked stamps evidencing payment of cigarette excise, as required by law, had been sent to the appellant from a vendor in Virginia.  DOR staff then contacted the Massachusetts Attorney General's Office with this information.  On March 11, 2005, pursuant to valid search warrants, the Massachusetts State Police ("State Police") entered the appellant's grocery store and discovered a substantial amount of unstamped cigarettes.  
Thomas Nowicki, a criminal investigator for DOR, accompanied the State Police during their search of the appellant's grocery store.  Mr. Nowicki, who testified at the hearing of this appeal, stated that 10,911 packs of unstamped cigarettes were seized from inside the appellant's grocery store, along with numerous boxes containing records and financial information such as invoices, cancelled checks, receipts, bank statements, and ledgers.  Mr. Nowicki stated that the boxes seized were enough to fill a "large room."  He further stated that he personally reviewed all of the records which had been seized.  Among them were checks and invoices in a binder labeled "China Trade" ("China Trade Binder"), which also contained a ledger recording the appellant's cigarette purchases from China Trade, a cigarette vendor located in Manassas, Virginia.  Financial records relating to Boston Communications Company, Inc. ("BCCI"), which was another company owned and operated by the Chin family, were also among the materials seized.  
As a result of this seizure and the subsequent criminal investigation, the appellant was indicted on three counts of failure to file corporate excise returns, one count of willfully delivering false sales tax returns, one count of evading or defeating the cigarette excise, and one count of possession with intent to sell unstamped cigarettes.  On March 13, 2006, the appellant plead guilty to all six counts of the indictment.  In addition, David Chin, Michael Chin, and Oi Nar Woo each pleaded guilty to a variety of charges related to the appellant's failure to file tax returns and pay cigarette excise, and BCCI also pleaded guilty to failing to file tax returns. On June 12, 2007, Mr. Nowicki returned the records which had been seized to the appellant's attorney.    
During the pendency of the criminal investigation of the appellant, the Commissioner commenced a cigarette excise and sales tax audit of the appellant.  Allan Ferullo of DOR's Audit Bureau conducted the cigarette excise audit, while Christine Keane of DOR's Audit Bureau conducted the sales tax audit.  For these audits, Mr. Ferullo and Ms. Keane used copies of the records which had been seized from the appellant by the State Police, as well as additional information which was obtained by subpoena.  The methodology used in each of the audits is summarized below.

	   The Commissioner's Cigarette Excise Audit
Allan Ferullo, a field audit supervisor who has worked at DOR for 37 years, testified at the hearing of this appeal about the methodology he used in conducting the cigarette excise audit of the appellant.  He began with reviewing the materials that had been seized by the State Police.   He described this process as being "a little overwhelming" because of the volume of records seized.  
Ultimately, Mr. Ferullo focused on the records contained in the China Trade Binder.  The ledger contained therein had dated entries, beginning on May 24, 2004 and ending on March 8, 2005.  Each entry in the ledger contained an invoice number and the amount of payment, and each ledger entry matched exactly with a corresponding invoice in the binder, and copies of checks and money orders seized by the State Police or obtained by the Commissioner through subpoena also corresponded to the purchase dates and amounts contained in the ledger.  
Mr. Ferullo concluded that the China Trade Binder contained the most complete and accurate records of the appellant's cigarette purchases from China Trade, and he therefore selected the period of May 24, 2004 through March 8, 2005 as a sample period for his audit, pursuant to G.L. c. 62C, § 24 ("§ 24"), which permits the Commissioner to use a statistical sample method in an audit if the taxpayer's records are so voluminous as to make a complete audit "impractical and inefficient."  Because the China Trade Binder contained data for only part of May of 2004 and March of 2005, Mr. Ferullo considered those months to be incomplete and removed them from his sample period, proceeding with the nine-month period of June of 2004 through February of 2005.  
Using the information contained in the China Trade Binder, Mr. Ferullo created a worksheet listing all of the appellant's cigarette purchases from China Trade during these months.  The total number of cigarette cartons purchased by the appellant from China Trade during this nine-month period was 18,370, or an average of 2,041 cartons per month.  Mr. Ferullo then applied that monthly average to each month back to June of 2001, because the records seized indicated that the appellant had been purchasing unstamped cigarettes from China Trade as far back as 2001.  For the periods of June of 2004 through March of 2005, Mr. Ferullo did not use his monthly average of cartons purchased to calculate the excise due, but instead used the actual number of cartons purchased because the China Trade Binder provided evidence of the appellant's actual cigarette purchases from Virginia during that period.  
To these actual or average monthly carton purchases, Mr. Ferullo then applied the appropriate excise amount per carton. Prior to July 25, 2002, the cigarette excise was $7.60 per carton.  Thereafter, it increased to $15.10 per carton.  After applying the appropriate excise to the average or actual number of cartons purchased by the appellant for the periods at issue, Mr. Ferullo calculated a cigarette excise deficiency assessment of $1,261,286.50.
A Notice of Failure to File ("NFF") was issued to the appellant on April 27, 2007, instructing the appellant to file cigarette excise returns by May 28, 2007.  The appellant's attorney thereafter contacted Mr. Ferullo, requesting an extension of time to file the cigarette excise returns.  That request was granted, and the appellant was allowed until July 12, 2007 to file cigarette excise returns for the periods at issue.  
As reflected in the Audit Log, which was entered into evidence, Mr. Ferullo received a letter from the appellant's attorney on July 9, 2007, requesting another extension of time to file the returns.  The contemporaneous notes in the Audit Log indicated that Mr. Ferullo informed the appellant's attorney that DOR would proceed with the issuance of a Notice of Intention to Assess ("NIA"), but if the appellant filed the returns within 30 days of the issuance of the NIA, DOR would consider the appellant to have timely responded to the NFF.  Consequently, the Commissioner issued to the appellant an NIA dated July 23, 2007, notifying the appellant of her intention to assess $1,261,286.50 in cigarette excise, as well as a double assessment of same under G.L. c. 62C, § 28 ("§ 28"), along with statutory penalties and interest.  
The appellant requested and received a pre-assessment hearing at DOR's Office of Appeals, which was held on December 10, 2007.  In the interim, on August 29, 2007, the appellant filed cigarette excise returns - Forms CT-11 - for the following periods: May of 2003, July of 2003, October of 2003, June of 2004, September through December of 2004, and January through March of 2005.  On November 4, 2008, the Office of Appeals issued a Letter of Determination, upholding the Commissioner's proposed assessment in full.  However, the Audit Division later reduced the proposed assessment by $141,001.30, to reflect the amounts of cigarette excise reported and paid by the appellant with the filing of the CT-11s.  By notice dated December 3, 2008, the Commissioner gave the appellant notice of her assessment of cigarette excise in the amount of $1,120,285.20, along with the § 28 assessment, penalties, and interest.  
		The Commissioner's Sales Tax Audit
Christine Keane testified at the hearing of this appeal about the methodology that she used in conducting the sales tax audit of the appellant.  Like Mr. Ferullo, she began by reviewing the records which had been seized from the taxpayer, including the China Trade Binder, to create a preliminary worksheet detailing cigarette purchases.  Ms. Keane also reviewed records obtained directly from one of the appellant's Massachusetts-based cigarette vendors, J. Polep.  
Like Mr. Ferullo, Ms. Keane considered the China Trade Binder to contain the most accurate set of records detailing the appellant's cigarette purchases, and she, too, selected June 2004 through February of 2005 as a sample-period.  Ms. Keane was able to consult with Mr. Ferullo with respect to the appellant's cigarette purchases, and she determined that her numbers matched his exactly.  Ms. Keane noted in her audit log that payment for the cigarettes from Virginia had been made in a variety of ways, including via checks issued by CWH and BCCI, personal checks issued by Michael Chin and Oi Nar Woo, direct deposits into China Trade's bank account, American Express Traveler's Checks, Traveler's Express Money Grams, and Postal money orders.  After reviewing the records with Thomas Nowicki, Ms. Keane also concluded that there was sufficient evidence showing purchases of unstamped cigarettes from Virginia by the appellant as early as 2001, so she also extended the audit period back to 2001.
After arriving at her final purchase amounts, Ms. Keane added the appropriate cigarette excise and applied a standard retail mark-up of 25%.  Like Mr. Ferullo, she used CWH's actual purchases for the months of June of 2004 through February of 2005, but used average monthly purchase amounts for all other periods.  
In addition to sales taxes associated with cigarettes, Ms. Keane also determined in her audit that the appellant had failed to pay sales taxes on pre-paid telephone calling cards which it sold.  Pre-paid telephone calling cards became subject to sales tax in Massachusetts effective April 1, 2003, so Ms. Keane began her audit period for the appellant's sales of the cards as of that date.  
Ms. Keane had records of actual purchases of pre-paid telephone calling cards for the period beginning August of 2003 and ending July of 2004, so she used that as her sample period.   These purchases were reflected on invoices by several telecommunications companies, such as TCI Total Call Int'l, Double Dragon Telephone, Transpac Telecom, and Oblio Telecom.  Although the invoices were made out to BCCI, each invoice amount was paid by CWH, as evidenced by checks issued by CWH for the invoice amounts to the telecommunications companies.  The pre-paid telephone calling cards purchased during this time period totaled $476,777.04, to which Ms. Keane applied a 33% mark-up.  Ms. Keane used this mark-up rate because she determined, based on the face value of the cards, that this rate was the mark-up applied by the appellant.  After applying this mark-up amount, Ms. Keane calculated taxable sales of pre-paid telephone calling cards in the total amount of $634,113.46, or a monthly average of $52,842.79.  Using the actual purchases for the sample period, and the average monthly purchase amount for the remaining periods, Ms. Keane calculated taxable sales of pre-paid telephone calling cards in the total amount of $1,268,226.93 for the monthly periods beginning in April of 2003 and ending in March of 2005, resulting in sales taxes of $63,411.35.  
Ms. Keane also made minor additional assessments with respect to sales of miscellaneous other items sold at the appellant's store as well as sales of cigarettes purchased from J. Polep, on which the Massachusetts cigarette excise had been paid.  The appellant did not contest those portions of the assessment.  After allowing credit for the sales taxes reported and paid by the appellant, as well as credit to account for the cartons of cigarettes that were seized by the State Police, Ms. Keane calculated sales taxes due in the amount of $302,826.34, to which was added the § 28 assessment, penalties, and interest.
   			  The Appellant's Case-in-Chief
The appellant presented its case-in-chief through the testimony of one witness, Nancy Mui.  Ms. Mui is an accountant who currently operates her own accounting and tax services business in Quincy, Massachusetts.  She testified that she first became familiar with the appellant and the Chin family when she was retained to tutor a niece of Michael Chin.  
In 2007, Ms. Mui was engaged by the appellant to examine its books and records in order to make a determination as to whether the Commissioner's assessments were accurate.  Ms. Mui reviewed invoices, checks and other documents that were made available to her by the appellant, including one document entitled "Cigarettes with Virginia Stampers as the Invoices."  That document, which was entered into the record, showed the number of cartons and carton price of cigarettes purchased by the appellant from Virginia cigarette vendors for the period beginning June 4, 2004 and ending March 8, 2005.  Ms. Mui admitted on cross-examination that she did not know who had prepared that document.  After reviewing the appellant's records, Ms. Mui prepared the CT-11s that were filed with the Commissioner for the periods May of 2003, July of 2003, October of 2003, June of 2004, September through December of 2004, and January through March of 2005.  She provided no explanation of why CT-11s for the other periods were not filed.  
In addition, Ms. Mui testified regarding her knowledge of BCCI.  Ms. Mui stated that BCCI was a wholesaler of pre-paid telephone calling cards.  Ms. Mui testified that BCCI purchased the pre-paid telephone calling cards from approximately 15 vendors and sold them to between 30 and 40 companies.  Ms. Mui also testified that she had seen a large machine for printing the cards during a visit at the apartment of Michael Chin.  
Ms. Mui testified that although BCCI did not maintain a separate office from CWH, it did maintain a separate telephone line for taking orders.  She also testified that employees of CWH worked part-time for BCCI.  Through Ms. Mui, the appellant offered into evidence numerous invoices for telephone calling cards purchased from telecommunications companies such as TCI Total Call Intl. and Double Dragon Telephone.  As with the invoices and checks examined by Ms. Keane, the invoices were made out to BCCI, but the checks for payment corresponding to the invoices were issued by CWH.  Ms. Mui testified that she did observe instances of CWH paying the bills of BCCI, which she attributed to their joint ownership by the Chin family.  Ms. Mui testified that she advised them to discontinue that practice.  
It was the appellant's contention that the Commissioner's assessments were overstated and erroneous for several reasons.  First, the appellant asserted that the Commissioner's use of the sample methodology was both unwarranted and flawed.  The appellant argued that the sample methodology was unwarranted because the appellant did not agree to it, and further, because such a methodology is only appropriate where the records are so voluminous that a complete audit is not feasible.  It was the appellant's position that although the totality of the records reviewed by DOR were voluminous, the records relating to the purchases of cigarettes and pre-paid telephone calling cards were not so extensive as to make a complete audit impracticable.  
Additionally and alternatively, the appellant argued that even if it was appropriate for the Commissioner to use the sample methodology for some of the periods at issue, it was improper for the Commissioner to apply estimates from the cigarette excise sample period - June of 2004 through February of 2005 - back to 2001 and 2002.  In support of this argument, the appellant pointed out that the record contained a total of four checks from the appellant evidencing payment for cigarettes from Virginia in 2001 and 2002.  Taken together, these four checks reflected the purchase of approximately 418 cartons of cigarettes.  
Further, the evidence showed that the appellant's cigarette purchases from Massachusetts vendor J. Polep were higher in 2001 and 2002, then declined in 2003 and 2004 before increasing again in 2005, ostensibly after the seizure of unstamped cigarettes by the State Police.  The appellant argued that this purchasing pattern provided further evidence that it purchased most of its cigarettes in Massachusetts in 2001 and 2002, and only began purchasing cigarettes more frequently from Virginia in 2003 and 2004.  However, the appellant offered no additional documentary evidence - such as general ledgers or corporate tax returns - to support its claims.  Based on the evidence, the appellant argued that the Commissioner's application of her estimated average purchase amount of 2,041 cartons per month to periods in 2001 and 2002 was improper.  
Second, the appellant contended that the Commissioner improperly failed to allow credit for cigarette excise paid to Virginia in computing the sales taxes and cigarette excise due on the cigarettes obtained by the appellant from China Trade. Certain of the invoices for cigarette purchases from Virginia contained the statement "Virginia cigarette tax included," while others did not.  In making the assessments at issue, the Commissioner used the same price per carton - either $24.50 or $26.50, as indicated on the invoice - regardless of whether the invoice stated that the Virginia cigarette taxes were or were not included.  
Third, the appellant contended that the Commissioner improperly attributed the sales of pre-paid telephone calling cards to CWH, when in actuality they were sold by BCCI as a wholesaler and as such, no sales taxes should have been imputed on those sales. 
Lastly, the appellant argued that the double assessment of cigarette excise should be abated as the appellant had "reasonable cause" for failing to timely respond to the Commissioner's NFF.  Specifically, the appellant contended that it was unable to prepare and file its tax returns in response to the NFF because it was not in possession of its records, which had been seized.  
		     The Board's Conclusions
Jurisdiction and Burden of Proof 
The appellant timely filed an Application for Abatement with the Commissioner for each of the periods at issue on February 25, 2009.  By Notice of Abatement Determination dated August 12, 2009, the Commissioner denied the appellant's Application for Abatement of sales tax for each of the periods at issue, and the appellant timely filed its appeal with the Board on October 9, 2009.  Accordingly, based on these facts, the Board found that it had jurisdiction to hear and decide the appellant's claims with respect to sales taxes.   
For reasons unknown, a Notice of Abatement Determination relating to the cigarette excise periods at issue was not entered into the record, and it was unclear from the record whether such a notice was ever issued.  The Board found that, to the extent the appellant filed its appeal with the Board before the Commissioner acted on its Application for Abatement of cigarette excise tax, its prematurity in filing was not an impediment to the Board's jurisdiction.  
However, the Board found that it did not have jurisdiction over most of the appellant's claims for abatement with respect to cigarette excise.  The record indicated that the appellant filed cigarette excise returns - Forms CT-11 - for only the following periods: May of 2003, July of 2003, October of 2003, June of 2004, September through December of 2004, and January through March of 2005.  Because filing a tax return for the relevant tax period is a prerequisite to abatement, the Board found that it did not have jurisdiction over the appellant's claims for abatement relating to cigarette excise for the remaining periods at issue, which were: June through December of 2001, January through December of 2002, January through April of 2003, June of 2003, August, November, and December of 2003, January through May of 2004, and August of 2004.  
With respect to the appellant's remaining claims, on the basis of all of the evidence, the Board found that the appellant failed to meet its burden of proving its entitlement to an abatement. The appellant's case relied primarily on the testimony of Nancy Mui, whom the Board found lacked personal knowledge of the specific facts and documents relevant to the appellant's claims for abatement.  In fact, Ms. Mui did not commence a professional relationship with the appellant or BCCI, or become familiar with their records, until 2007, well after the last period at issue in this appeal.  The Board's specific findings with respect to each issue raised by the appellant are set forth below.  
The Sample Methodology 
 Pursuant to § 24, the Commissioner may use a sample methodology to conduct an audit if the "books, papers, records, and other data of the taxpayer are so voluminous as to make a complete audit thereof impractical and inefficient."  G.L. c. 62C, § 24.  The sample method may be used in these circumstances if "agreed to by the parties."  Id.  If the taxpayer does not agree to the use of a sample method, the Commissioner may still use such a method, as long as it complies with the provisions of the Internal Revenue Code.  Id.  
The Board found that the Commissioner's use of the sample method here, although not agreed to by the appellant, complied with the requirements of § 24.  The consistent, credible testimony of the witnesses established that the records obtained by the Commissioner were sufficiently voluminous so as to justify the use of the sample methodology.   Mr. Nowicki stated that the records seized from the appellant were enough to fill a large room.  Mr. Ferullo likewise testified to the copious volume of records.  In addition, as will be discussed further in the Opinion below, the Board found that the method used by the Commissioner comported with provisions of the Internal Revenue Code.  
The evidence further indicated that the cigarette excise sample period selected by the Commissioner - June of 2004 through February of 2005 - was chosen because the most complete and accurate records of the appellant's cigarette purchases existed for this period.  Thomas Nowicki and Allan Ferullo both testified that they were able to match each entry in the ledger contained in the China Trade Binder to invoices and checks for cigarette purchases from Virginia, and Christine Keane testified that her number matched Mr. Ferullo's exactly.  Even Nancy Mui testified that her figures matched the Commissioner's for that period.  The Board therefore found that the Commissioner's use of the sample method was proper.  
The appellant also argued that the Commissioner erred by applying the data obtained through the sample to periods too remote in time from the sample periods, and that the evidence did not support such a broad application of that data.  The Board disagreed.  As will be discussed further in the Opinion below, the Board found that the audit method used by the Commissioner was neither unreliable nor invalid under the circumstances of this appeal.  
Credit for Taxes Paid to Virginia
The evidence indicated that the appellant took credit for cigarette taxes paid to Virginia on the CT-11s which it filed with the Commissioner, and that the Commissioner fully credited the amounts reported by the appellant against the deficiencies assessed for each of those periods.  Thus the issue of credit for cigarette taxes paid to Virginia was rendered moot with respect to the cigarette excise assessments, as the Commissioner already allowed the credit as reported by the appellant on the CT-11s which it filed, and, as stated above, the Board had no authority to grant abatements for the periods for which the appellant did not file CT-11s.  
	To the extent that the issue was not rendered moot, that is, insofar as it impacted the sales tax assessments, the Board found that the appellant failed to produce conclusive evidence on this point.  The appellant's argument was based on the fact that certain of the invoices for cigarette purchases from China Trade contained the statement "Virginia cigarette tax included."  However, each invoice containing that language also contained a notation stating "Please note that state taxes haven't been paid, buyer is responsible for paying those taxes."  Many of the invoices did not contain language stating that Virginia cigarette tax had been included, but did include the language stating "Please note that state taxes haven't been paid, buyer is responsible for paying those taxes."  
Regardless of whether the invoice contained language indicating that the Virginia taxes were included, the list price per carton on the invoice remained consistent.  For example, the price for a carton of Marlboro Light cigarettes was $26.50, regardless of whether the invoice did or did not indicate that Virginia taxes were included.  The Board was therefore unable to discern whether the stated purchase price - for example, $26.50 for Marlboro lights - included Virginia cigarette tax, or did not, nor was it able to determine the amount of tax paid, if any.  Additionally, the appellant offered no documentary evidence to clarify the inconsistency, nor did it offer the testimony of any witnesses with knowledge of whether the Virginia cigarette taxes had or had not been paid.  The Board therefore found that the evidence was inconclusive as to this issue, and accordingly it found that the appellant failed to meet its burden of demonstrating that it was entitled to credit for cigarette taxes paid to Virginia. 
Pre-Paid Telephone Calling Cards
The appellant additionally contended that BCCI, and not CWH, sold the pre-paid telephone calling cards at issue as a wholesaler, such that the sales were not subject to sales tax.  However, the Board found that the evidence was insufficient to support this assertion.  It was apparent from the record that CWH employees also worked for BCCI, that BCCI did not maintain separate premises from that of CWH, and that CWH paid for the pre-paid telephone calling cards at issue, although the invoices were made out to BCCI.  Moreover, no invoices or orders from BCCI were entered into evidence to show that it, and not CWH, sold the pre-paid telephone calling cards at issue at wholesale.   In fact, the purchases at issue appeared to be bulk purchases from telecommunications companies.  The Board found that the logical inference from this evidence was that the purchases at issue were bulk purchases from telecommunications wholesalers, to be sold at retail.  
Moreover, the testimony of Ms. Mui on this point was not persuasive.  Ms. Mui stated that BCCI was a wholesaler of pre-paid telephone calling cards, and that she personally observed a large machine for printing the cards in the apartment of Michael Chin.  The Board found that this testimony, which lacked a temporal tie to the periods at issue, did not have sufficient nexus to the sales of the pre-paid telephone calling cards at issue.  BCCI may have at some time created and sold pre-paid telephone calling cards at wholesale, but BCCI clearly did not create the pre-paid telephone calling cards at issue, which were purchased in bulk from telecommunications companies.  On the basis of the evidence presented, the Board found that the appellant failed to prove that the Commissioner improperly treated the sales of the pre-paid telephone calling cards at issue as retail sales made by CWH, and thus the Board found that the appellant was not entitled to an abatement of the sales taxes attributed to those sales.  


The § 28 Double Assessment 
The Board next addressed the appellant's contention that it was entitled to an abatement of the double assessment of cigarette excise on the grounds that it had "reasonable cause" for failing to timely file tax returns in response to the Commissioner's NFF.  In this case, the Commissioner issued an NFF to the appellant, dated April 27, 2007, instructing it to file cigarette excise returns for the periods of June 1, 2001 through March 31, 2005 by May 28, 2007.  The appellant's attorney contacted Mr. Ferullo, requesting an extension of time in which to file the cigarette excise returns.  That request was granted, and the appellant was allowed until July 12, 2007 to file cigarette excise returns for the periods at issue.  In the interim, Thomas Nowicki returned the appellant's records to its attorney on June 12, 2007.  
As reflected in the Audit Log, which was entered into evidence, Mr. Ferullo received a letter from the appellant's attorney on July 9, 2007, requesting another extension of time to file the returns.  The contemporaneous notes in the Audit Log indicated that Mr. Ferullo informed the appellant's attorney that DOR would proceed with the issuance of an NIA, but if the appellant filed the returns within 30 days of the issuance of the NIA, DOR would consider the appellant to have timely responded to the NFF.  The NIA was issued on July 23, 2007.  On August 29, 2007, the appellant filed cigarette excise returns with the Commissioner for just 11 of the 46 monthly periods at issue.  
Despite its failure to file CT-11s by the extended filing deadline, the appellant argued that the double assessment of cigarette excise should be abated because it had "reasonable cause" for failing to timely file returns in response to the Commissioner's NFF.  Specifically, the appellant argued that it had not been in possession of its records until one month before the extended filing deadline, and it was therefore unable to prepare and file the returns. However, with respect to the cigarette excise periods over which it had jurisdiction, and as discussed more fully in the Opinion below, the Board found that the appellant's actions did not display the degree of care necessary to support a finding of "reasonable cause."  The Board found that to exercise the degree of care of an ordinary taxpayer in the same circumstances, at a minimum, the appellant should have estimated the taxable amounts due for each period and filed the returns based on those estimates by the extended filing deadline, filing corrected returns later if necessary.  Instead, the appellant filed less than one quarter of the returns due approximately one and a half months after the extended filing deadline.  Further, the Board found that additional factors to be considered in making a determination of "reasonable cause" - such as the number of periods involved; the appellant's failure to voluntarily disclose its delinquency; and the fact that a financial gain arose from its failure to timely file returns - did not support a finding of "reasonable cause" in this case. Accordingly, the Board found that the appellant was not entitled to an abatement of the § 28 double assessment of cigarette excise.  
In conclusion, on the basis of the evidence presented, the Board found and ruled that the appellant failed to meet its burden of proving its entitlement to abatements of cigarette excise or sales taxes.  Accordingly, the Board issued a decision for the appellee in this appeal.

					  OPINION
"No tax assessed on any person liable to taxation shall be abated unless the person assessed shall have filed, at or before the time of bringing his application for abatement, a return as required by this chapter for the period to which his application relates[.]"  G.L. c. 62C, § 38.  Thus, when a taxpayer fails to comply with the statutory prerequisite of filing a tax return, the Board is without authority to grant an abatement.  The Supreme Judicial Court has held that a taxpayer's failure to file a tax return deprives the Board of jurisdiction over his appeal.  See Commissioner of Revenue v. Pat's Super Market, Inc., 387 Mass. 309, 310 (1982); Assessors of Boston v. Suffolk Law School, 295 Mass. 489, 492 (1936) (citing International Paper Co. v. Commonwealth, 232 Mass. 7, 10 (1919)) ("Since the remedy by abatement is created by statute the board . . . has no jurisdiction to entertain proceedings for relief by abatement begun at a later time or prosecuted in a different manner than is prescribed by the statute.").  
The evidence in this case showed that the appellant filed cigarette excise returns - Forms CT-11 - for only the following periods: May of 2003, July of 2003, October of 2003, June of 2004, September through December of 2004, and January through March of 2005.  Because the appellant failed to file tax returns for the remaining cigarette excise periods at issue - June through December of 2001; January through December of 2002; January through April of 2003; June of 2003; August, November, and December of 2003; January through May of 2004; and August of 2004 - the Board found and ruled that it was without jurisdiction over the appellant's claims for abatement of cigarette excise for those periods.  
With respect to its remaining claims, the appellant asserted numerous grounds for abatement, which the Board will address in turn. First, the appellant asserted that the Commissioner's use of the sample method to determine the assessments at issue was improper and erroneous.  Specifically, the appellant contended that the sample methodology was neither agreed to by the appellant nor warranted by the amount of the records obtained, and further, the appellant argued that the Commissioner's use of the averages obtained from the nine-month sample period - June of 2004 through February of 2005 - to make assessments for monthly periods in 2001, 2002, and 2003, was overly broad.  
The Commissioner may use a sample methodology to conduct an audit if the "books, papers, records, and other data of the taxpayer are so voluminous as to make a complete audit thereof impractical and inefficient," and the taxpayer agrees to the use of such a method.  G.L. c. 62C, § 24.  If the taxpayer does not agree to the use of a sample method, the Commissioner may still use such a method, as long as it complies with the provisions of the Internal Revenue Code.  Id.  
Here, although the appellant did not agree to the use of the sample method, based on the evidence presented, the Board found and ruled that the Commissioner's use of that method was warranted by the volume of records.  The witnesses consistently and credibly testified to the large volume of records seized by the State Police during their raid of the appellant's premises; still more records were obtained by subpoena.  
Moreover, no evidence was offered to show that the Commissioner's methods conflicted with the provisions of the Internal Revenue Code.  Like § 24, Internal Revenue Code § 446 allows for the assessment of tax based upon an estimation, rather than a computation, of taxable income.  26 U.S.C. § 446.  It has been held that "[w]here a reconstruction of a taxpayer's income is necessary, [the Commissioner of Internal Revenue] has great latitude in the method used to make the reconstruction."  Bruno v. Comm'r, 49 T.C.M. (CCH) 1147 (1985), at *27.  Reconstructions of income need not be exact, rather, they must "'be reasonable in light of all the attendant facts and circumstances.'" Id. (quoting Schroeder v. Comm'r, 40 T.C. 30, 33 (1963)).  Accordingly, the determination of the tip income of a cocktail waitress at one establishment, based upon average tip amounts determined by observing cocktail servers for 30-minute shifts at that establishment and six others in the area, was found to be reasonable, see Ross v. Comm'r, 58 T.C.M. (CCH) 1069 (1989), at *14-15, as was the estimation of the cash tip income of restaurant servers at a restaurant based upon a statistical analysis of the credit card tips given to servers at the same restaurant.  See United States v. Fior D'Italia, Inc., 536 U.S. 238, 248 (2002).  
Massachusetts cases addressing assessments derived through statistical sample methods under § 24 have employed similar analyses.  In Rule Industries, Inc., and its Subsidiary, Rule Cutting Tools, Inc. v. Commissioner of Revenue, Mass. ATB Findings of Fact and Reports 1997-1008, 1026, the Board found that, given the total volume of the records, and in light of the taxpayer's failure to introduce evidence to the contrary, the Commissioner's use of one year of the taxpayer's records to generate assessments for three years was "appropriate" and "reasonable."  Similarly, in Circuit City Stores, Inc. v. Commissioner of Revenue, Mass. ATB Findings of Fact and Reports 2002-85, aff'd, 439 Mass. 629 (2003), the Board found that the Commissioner's assessment for quarterly periods spanning three years, which was based upon a statistical sample of sales occurring over a two-day period at three of the taxpayer's 18 in-state stores, complied with the requirements of § 24.  The Board's finding in that case was based, in part, on the taxpayer's failure to produce evidence demonstrating an actual defect in the Commissioner's methodology.  The Board found that the "naked assertion that a sampling was 'unnecessary'" was not enough.  Id. at 2002-119.  
In contrast, in cases where the taxpayer has presented persuasive evidence illustrating defects in the Commissioner's sampling methodology, the Board has found that the assessments produced through that methodology cannot stand.  For example, in Chef Chang's House, Inc.  v. Commissioner of Revenue, Mass. ATB Findings of Fact and Reports 1996-738, 757, the Board rejected the methodology used by the Commissioner to estimate alcohol sales at a restaurant when that methodology completely disregarded the restaurant's actual records in favor of the auditor's own speculative and flawed assumptions.  Further, the taxpayer in that case presented the credible testimony of restaurant employees who were able to refute the data and assumptions used by the Commissioner.  Likewise, in Suprenant v. Commissioner of Revenue, Mass. ATB Findings of Fact and Reports 1991-209, 214-16, the Board rejected the Commissioner's estimates of the taxable sales of a restaurant when the uncontroverted testimony of six witnesses established that business was slow at the restaurant and the estimates used by the Commissioner were significantly greater than the actual sales generated by the restaurant.  
No such evidence was presented to rebut the Commissioner's estimates in this case.  The appellant offered only the testimony of Nancy Mui, who was not employed by CWH during the relevant time period.  Ms. Mui had no first-hand knowledge of CWH's cigarette purchases, or sales, during the periods at issue.  Rather, Ms. Mui was retained by the appellant in 2007, two years after the last period at issue in this appeal, to review documents and records. 
In addition, the Commissioner's estimates in this case were not based on "speculative" assumptions, Suprenant,  Mass. ATB Findings of Fact and Reports at 1991-217, but on the appellant's own records, as contained in the China Trade Binder, which the appellant conceded was an accurate record of its cigarette purchases.  Further, the Board was not persuaded by the argument that the Commissioner's application of the monthly average of carton purchases, derived from the nine-month sample period, to monthly periods in 2001, 2002, and 2003 was overly broad because there were a total of only four checks evidencing payment for cigarettes from China Trade in 2001 and 2002.  The evidence showed that the appellant had been making purchases of unstamped cigarettes from China Trade since 2001, and that it had been making payment for its purchases in diverse ways, such as through direct deposits into China Trade's bank account, American Express Traveler's Checks, Traveler's Express Money Grams, and Postal money orders.  The record also showed entries in CWH's check ledger for checks for substantial amounts made out to "cash."   Based on the evidence presented, the Board found and ruled that the Commissioner's application of the sample data to each of the periods at issue was "reasonable in light of all the attendant facts and circumstances," Bruno, 49 T.C.M. (CCH) 1147 (1983), at *27, and it further found and ruled that the appellant failed to show an actual defect in the Commissioner's methodology.  See Circuit City Stores, Inc., Mass. ATB Findings of Fact and Reports at 2002-119.  
It is well-settled that when a taxpayer challenges an assessment made by the Commissioner, "[t]he burden is on the taxpayer to show error in the assessment and impropriety in the method used."  Allied Building Credits, Inc. v. State Tax Comm'n, 344 Mass. 503, 509 (1962) (citing State Tax Comm'n v. John H. Breck, Inc., 336 Mass. 277, 299 (1957)).  The appellant failed to present sufficient evidence to overcome the presumptive validity of the assessments, and the Board therefore rejected its claims.  
The appellant also contended that the Commissioner improperly failed to allow credit for cigarette excise paid to Virginia in computing the sales taxes and cigarette excise due on the cigarettes obtained by the appellant from China Trade.  While it is true, generally, that a taxpayer is entitled to offset the Massachusetts cigarette excise by the amount of cigarette excise paid to another jurisdiction, see Department of Revenue Directive 02-14 (November 26, 2002), the Board was unable to determine from the evidence presented in this appeal whether cigarette excise had actually been paid to Virginia, or in what amount. "The venerable and 'fundamental rule as to burden of proof is, that whenever the existence of any fact is necessary in order that a party may make out [its] case . . . the burden is on such party to show the existence of such fact.'"  Barrett v. Commissioner of Revenue, Mass. ATB Findings of Fact and Reports 1997-875, 880 (quoting Willet v. Rich, 142 Mass. 356, 357 (1886)). Because the Board found that the evidence was inconclusive as to this issue, it found and ruled that the appellant failed to demonstrate that it was entitled to credit for cigarette excise paid to Virginia.
In addition, the appellant contested the assessment of sales taxes relating to the pre-paid telephone calling cards because, it contended, they were sold not by CWH, but by BCCI at wholesale, and as such the sales were not subject to sales taxes.  The Board found that the evidence was insufficient to support this assertion.  As discussed above, the Board did not find the testimony of Ms. Mui on this point to be persuasive.  In addition, no documentary evidence, such as orders or invoices, was offered to show that the calling cards were sold at wholesale, rather than at retail.  The only invoices offered into evidence were invoices for the purchase of the calling cards, which were invoiced to BCCI, but paid for by CWH, which operated a retail store.  
Further, courts and the Board have upheld the Commissioner's re-allocation of income among related corporate entities when it has been shown that one corporation bore the burdens of the business or assets giving rise to the income, but did not recognize the income for tax purposes. See e.g., Syms Corp. v. Commissioner of Revenue, 436 Mass. 505, 509 (2002) (holding that the Commissioner properly re-allocated royalty income to parent company where it "continued to pay all the expenses" related to income-producing intangible property that had been transferred to a subsidiary); IDC Research, Inc. v. Commissioner of Revenue, 78 Mass. App. Ct. 352, 355 (2010) (holding that Commissioner properly re-allocated royalty income from a subsidiary to its parent company where evidence showed that the parent company retained the "benefits and burdens" of the ownership of the income-producing intangible asset). In the present appeal, the evidence showed that CWH bore the burdens relative to the telephone calling cards at issue - it paid for them.  The Board therefore found and ruled that the Commissioner properly treated the sales of those cards as sales at retail by CWH.  
Lastly, the appellant sought an abatement of the double assessment of cigarette excise made under § 28.  That section provides that:
If a person who has been notified by the commissioner that he has failed to file a return or has filed an incorrect or insufficient return refuses or neglects within thirty days after the date of such notification to file a proper return, or if a person 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.  

Here, the NFF was issued to the appellant on April 27, 2007, instructing the appellant to file cigarette excise returns by May 28, 2007.  The appellant then received an extension of time to file the returns until July 12, 2007.  However, the appellant did not file cigarette excise returns until August 29, 2007, at which time, and without explanation, it filed returns for just 11 out of the 46 periods at issue.  
Though there was no dispute that the appellant failed to file cigarette excise returns by the extended filing deadline of July 12, 2007, the appellant nevertheless argued that the double assessment should be abated because it had "reasonable cause" for failing to timely file its returns.  Specifically, the appellant argued that it had not been in possession of its records until one month before the extended filing deadline, and it was therefore unable to prepare and file the returns. 
	The appellant's argument is based on the language of G.L. c. 62C, § 33 ("§ 33") and G.L. c. 62C, § 34 ("§ 34"), which impose penalties for, among other things, failure to timely pay taxes or file returns or other required reports.  §§ 33 and 34 provide for the abatement or partial abatement of penalties imposed thereunder if the taxpayer can demonstrate, respectively, "reasonable cause" for its transgression.  Although § 28 contains no provision permitting the abatement of assessments made thereunder for "reasonable cause," the Commissioner has interpreted § 28 to permit abatement or partial abatement of a double assessment when a taxpayer has demonstrated "reasonable cause" for failing to timely respond to an NFF, see Administrative Procedure 633 ("AP 633"), and the Board found and ruled that the Commissioner's interpretation is reasonable.  See FMR Corp. v. Commissioner of Revenue, 441 Mass. 810, 819, (2004) (holding that weight is to be accorded to an  administrative interpretation of the agency charged with interpreting a statute if, among other criteria, the interpretation is reasonable) (citing Lowell Gas Co. v. Commissioner of Corps. & Tax'n, 377 Mass. 255, 262 (1979); see also Ace Heating Service, Inc. v. State Tax Comm'n, 371 Mass. 254, 256 (1976); Assessors of Holyoke v. State Tax Comm'n, 355 Mass. 223, 243-44 (1960).  
Per AP 633, the same criteria used to determine whether reasonable cause exists to allow for the abatement of §§ 33 and 34 penalties will be considered in determining whether to abate § 28 assessments.  Id.  One factor supporting a claim for abatement is when the delay in filing arose from the taxpayer's inability to obtain the records or information necessary to determine the amount of tax due, for reasons beyond its own control.  The following example is provided by AP 633: 
In 1998, the taxpayer and his spouse separated. In early 1999, the taxpayer requested documents from the spouse that contained information needed to file his 1998 tax return. The spouse refused to hand over the documents. The taxpayer estimated the amount of tax due and timely filed an extension with an estimated payment. In December 1999, after the expiration of the extension period, the spouse withholding the information relented and allowed taxpayer the opportunity to duplicate the records. In April 2000, when taxpayer also submitted his 1999 return, taxpayer filed a complete and accurate 1998 return with full payment showing a liability substantially greater than previously estimated. DOR assessed the taxpayer penalties and interest. 

AP 633 indicates that in this fact pattern, the abatement would be granted, because even though the taxpayer was without all of the necessary records, he estimated the taxes due and timely filed an extension with an estimated payment, and upon receiving all of the necessary information, filed a complete and accurate return.  
No matter the specific circumstances, the dispositive inquiry for a finding of reasonable cause is whether the taxpayer exercised the same degree of care that an ordinary taxpayer in the same situation would exercise.  See AP 633; Commissioner of Revenue v. Wells Yachts South, Inc., 406 Mass. 661, 664 (1990); Blakeley v. Commissioner of Revenue, 28 Mass. App. Ct. 499, 501 (1990).  The Supreme Judicial Court has held that this is an objective analysis, in which there is "no place  . . . for a consideration of what one might consider fairness or equity."  Stella v. Commissioner of Revenue, Mass. ATB Findings of Fact and Reports 2003-44, 55, (finding that, even though the records of the decedents, who were elderly and suffered from dementia prior to their deaths, were in "deplorable" condition, no reasonable cause existed for a delay in filing where executor failed to seek an extension for filing) (citing Wells Yachts South, Inc., 406 Mass. at 663); see also Itrato v. Commissioner of Revenue, Mass. ATB Findings of Fact and Reports 1990-344, 349 (finding that the death of the taxpayers' accountant, though inconvenient, did not provide reasonable cause for their failure to file a tax return for more than a year where they did not attempt to obtain the necessary information themselves or request an extension of time to file).
In the present appeal, the Board found and ruled that the appellant's actions did not evidence the degree of care of an ordinary taxpayer in the same circumstances.  As an initial matter, the records that were seized from the appellant were returned one month prior to the July 12, 2007 extended filing deadline.  The Board notes that a taxpayer, working diligently, could most likely prepare and file the returns within that period of time.  But even assuming arguendo that it could not, the Board found that, to exercise the degree of care of an ordinary taxpayer in the same circumstances, the appellant should have estimated the taxable amounts due for each period and filed the returns based on those estimates, filing corrected returns later if necessary. See AP 633.   
Moreover, the evidence showed that the appellant's attorney waited until three days before the expiration of the extended deadline to request an additional extension, which was denied.
Further, notwithstanding Mr. Ferullo's suggestion that the appellant could submit the returns within 30 days of the issuance of the NIA to avoid the § 28 assessment, the appellant did not file any returns until August 29, 2007, and even then, it filed returns for less than one quarter of the total periods at issue.  The Board found that these actions did not evidence the degree of care necessary to support a finding of "reasonable cause." G.L. c. 62C, § 33 and G.L. c. 62C, § 34.  
In addition, AP 633 sets forth a number of non-determinative factors to be considered when making a determination in a claim for the abatement of penalties.  Those factors include, but are not limited to: whether the taxpayer voluntarily disclosed the delinquency, the number of periods involved in the delinquency, and whether a financial benefit arose from the taxpayer's delinquency.  See AP 633.  The record in this case indicated that the appellant did not voluntarily disclose its delinquency but instead, its delinquency was discovered following a raid by the State Police; that its failure to file returns involved numerous periods spanning years; and that the appellant gained a financial benefit from its failure to file.  The Board found and ruled that, here, the factors set forth in AP 633 further militated against a finding of "reasonable cause."  Accordingly, the Board found and ruled that the appellant did not have "reasonable cause" for its failure to file cigarette excise returns, and it was not entitled to an abatement of the § 28 double assessment of cigarette excise. 
	 The burden of proof is upon the appellant to prove his right as a matter of law to abatement of the tax. M & T Charters, Inc. v. Commissioner of Revenue, 404 Mass. 137, 140 (1989); Stone v. State Tax Commission, 363 Mass. 64, 65-66 (1973); Staples v. Commissioner of Corps. and Taxation, 305 Mass. 20, 26 (1940).  In conclusion, on the basis of all of the evidence presented, the Board found and ruled that the appellant failed to meet its burden of proving its entitlement to an abatement, and it therefore issued a decision for the appellee.  

						  THE APPELLATE TAX BOARD

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



A true copy,


Attest: ________________________
	      Clerk of the Board

 The Commissioner originally assessed cigarette excise for the monthly periods beginning January of 2001 through March of 2005.  Prior to the hearing of this appeal, the parties agreed that the excise assessed for January of 2001 through May of 2001 would be abated, leaving June of 2001 through March of 2005 as the periods at issue with respect to cigarette excise.  

 Certain checks and other records in evidence relate to an entity called L.K. Group, which was also a cigarette vendor located at the same address as China Trade.  There was some indication that L.K. Group was the former name of China Trade, but the relationship between the two entities was not completely clear from the record.  For ease of reference, the Board will refer only to China Trade when discussing the appellant's purchase of and payment for unstamped cigarettes from Virginia.  
  "Good and sufficient cause" has been found to be equivalent to "reasonable cause," and for convenience, the Board will hereinafter refer only to "reasonable cause." See Central Water District Associates, Limited Partnership v. Commissioner of Revenue, 76 Mass. App. Ct. 311, 313-14 (2010).  
 The NFF actually related to the periods January 1, 2001 through March 31, 2005, but as discussed above, the parties agreed that the cigarette excise assessed for the periods January 1, 2001 through May 31, 2001 would be abated, leaving June 1, 2001 through March 31, 2005 as the periods at issue.  
 For example, the testimony established that the restaurant provided complimentary alcoholic beverages to more than a dozen employees and regular patrons, and to patrons on New Year's Eve.  Nevertheless, the auditor assumed that all alcohol purchased by the restaurant was sold at retail.  
  In particular, with respect to cigarette excise, the appellant filed CT-11s for just three monthly periods in 2003 - May, July, and October. The other periods for which the appellant filed CT-11s - June of 2004, September through December of 2004, and January through March of 2005, constituted in essence the sample period used by the Commissioner.  The evidence showed that for all months contained in the sample period - June of 2004 through February of 2005 - the Commissioner's assessments were based on the actual cartons purchased, not the monthly average number of cartons. Thus, of the cigarette excise periods over which the Board had jurisdiction, only four months - May, July, and October of 2003, and March of 2005, were assessed using sample data averages, and the Board rejected the appellant's assertion that the Commissioner's application of the averages obtained through the sample method was overly broad or otherwise unreliable.  

 As noted above, this issue was moot with respect to the cigarette excise assessments because the Commissioner gave credit to the appellant for cigarette taxes paid to Virginia, as reported by the appellant on its CT-11s, for each of the periods for which a CT-11 was filed, and the Board did not have jurisdiction over the appellant's remaining claims for abatement of cigarette excise.  

ATB 2013-420