Hexalon Real Estate, Inc. v. Commissioner of Revenue (August 11, 2008)

COMMONWEALTH OF MASSACHUSETTS

APPELLATE TAX BOARD

HEXALON REAL ESTATE, INC.	v.	COMMISSIONER OF REVENUE

Docket No. F271851				Promulgated:
							August 11, 2008


	This is an appeal under the formal procedure, pursuant to G.L. c. 58A, § 7 and G.L. c. 62C, § 39, from the refusal of the appellee, the Commissioner of Revenue ("Commissioner"), to abate corporate excise for the tax year ending December 31, 1997 ("tax year at issue").
	Commissioner Scharaffa ("Presiding Member") heard this appeal and was joined in the decision for the appellee by Commissioners Egan, Rose, and Mulhern.
	These findings of fact and report are made pursuant to requests by the appellant and the appellee under        G.L. c. 58A, § 13 and 831 CMR 1.32.

	Philip S. Olsen, Esq. for the appellant.

	Daniel A. Shapiro, Esq. and Laura Kershner, Esq. for the appellee.




FINDINGS OF FACT AND REPORT
On the basis of testimony and exhibits introduced at the hearing of this appeal, the Appellate Tax Board ("Board") made the following findings of fact.
By letter dated June 18, 1999, the Multistate Audit Bureau of the Audit Division of the Massachusetts Department of Revenue ("Department") notified the appellant, Hexalon Real Estate, Inc. ("Hexalon"), that it had selected its corporate excise return for the tax year at issue for audit.  After the audit, the Commissioner issued to the appellant a Notice of Intent to Assess ("NIA") dated October 13, 2001.  On October 5, 2002, the Commissioner assessed the appellant additional corporate excise in the amount of 1,151,682, plus interest of $603,045 and penalties of $69,669.86, and issued to the appellant a Notice of Assessment ("NOA") dated October 9, 2002, for a total assessment of $1,688,656.  The appellant timely filed its abatement application with the Commissioner on March 18, 2003.  The Commissioner issued to the appellant a Notice of Determination dated October 25, 2003, denying the abatement application.  The appellant seasonably filed its Petition with the Board on     December 23, 2003.  On the basis of the foregoing, the Board found and ruled that it had jurisdiction over this appeal.
The assessment at issue was based on the Commissioner's disallowance of a certain capital loss deduction which the appellant claimed on its corporate excise return for the tax year at issue.  On February 6, 2004, in the course of pretrial preparations, the appellant served upon the Commissioner a request for production of documents, which the Commissioner responded to on May 26, 2004.  The Commissioner subsequently served upon the appellant interrogatories and requests for production of documents on September 10, 2004.  The Commissioner's discovery requests probed essential factual issues:  the nature of the subject transactions; whether there was a capital loss; and the amount of any such capital loss. (Document Request Nos. 3 and 4; Interrogatories No. 5, 6, and 7).  One of the interrogatories, Interrogatory No. 3, asked the appellant to "[p]lease identify each and every document the Appellant intends to introduce into evidence at any hearing on this matter and summarize its contents."  The appellant did not timely respond to any of these discovery requests.  
A pre-trial conference was held on January 31, 2006 ("January 31 conference").  After the January 31 conference, the Board entered an Order ("January 31 Order"), which provided that:
Appellant is ordered to produce documents per appellee's outstanding discovery request no later than March 20, 2006.  Failure to provide documents will preclude any reliance on their content by appellant during trial.

The January 31 Order also scheduled a trial for July 18, 2006.
The appellant did not respond to the Commissioner's discovery requests by March 20, 2006, nor did the appellant take any action to extend the discovery response time.  On April 28, 2006, the Commissioner filed a motion to dismiss, which the Board heard on May 8, 2006.  The Board denied that motion but issued a second Order ("May 10 Order"), which limited the evidence which the appellant could submit at trial. 
A trial was scheduled for October 5, 2006.  On September 29, 2006, less than one week before the trial, more than two years from the Commissioner's September 10, 2004 document request, and nearly eight months from the Board's January 31 Order, the appellant filed a response to the Commissioner's document request, in which it objected to all but two of the document requests.  The appellant produced no documents with its response, did not identify the documents that it intended to introduce at trial, and never filed answers to interrogatories.  
Counsel for the appellant attended the trial armed merely with a copy of the Commissioner's audit file, which he had received in discovery, two subpoenas that the appellant had served on the Commissioner's keepers of records, an Instruction to Bill, and some jurisdictional documents, including the Petition, Answer, NIA, and NOA.  The appellant's only witness was the program coordinator for the Department's Records Management Unit, who testified that the audit file which the appellant wanted to introduce at the trial was the same file which the Records Management Unit had maintained.  The appellant tried to introduce into evidence the copy of the Commissioner's audit file in its entirety, including the following documents contained within the file: the auditor's workpapers; the audit narrative; a conference request; a conference report; an interoffice memorandum from the Department of Revenue ("Department"); and an unsigned copy of the appellant's federal tax return from the tax year at issue. 
During the trial, counsel for the Commissioner objected to the admission of the audit file on the grounds that the appellant should not be allowed to evade discovery and then circumvent the May 10 Order, and that the audit file contained unsworn statements relayed to the auditor by the appellant.  Counsel for the appellant contended that the audit file was being offered "only to demonstrate the auditor's position . . . .  We are not trying to prove the existence of the losses, how these losses were generated.  All we are trying to prove is what was the position taken with the auditors, what did the auditors determine, a straight legal issue."  The appellant did not offer any other evidence or witnesses to support the appellant's contention that it was entitled to the deduction at issue.  The Presiding Member sustained the Commissioner's objection and excluded the copy of the audit file from evidence.
For the reasons explained in the following Opinion, the Board found that the appellant failed to meet its burden of proving its entitlement to the deduction at issue and, therefore, its entitlement to the abatement requested.  Accordingly, the Board issued a decision for the appellee in this appeal.

OPINION
The substantive issue raised in this appeal is whether the appellant was entitled to a capital loss carry-forward deduction.   A person who claims to be aggrieved by the refusal of the Commissioner to abate a tax in whole or in part has the burden of establishing the right to an abatement.  Staples v. Commissioner of Corp. & Tax.,     305 Mass. 20, 26 (1940).  See also Commissioner of Corp. & Tax. v. Filoon, 310 Mass. 374, 376 (1941); Stone v. State Tax Commission, 363 Mass. 64, 65-66 (1973).  "'Burdens of proof are meaningful elements of legal analysis, and occasionally, where the evidentiary record is wanting, the burden of proof will determine the outcome of [an action].'"  Horvitz v. Commissioner of Revenue, Mass. ATB Findings of Fact and Reports 2002-252, 255 (quoting Simon v. Ward, 80 F.Supp.2d 464, 472 (E.D. Penn. 2000), aff'd,  60 Mass. App. Ct. 1103 (2003), rev. denied, 441 Mass. 1102 (2004) (citation omitted).    
As explained by the Supreme Judicial Court in Commissioner of Corporations and Taxation v. J.G. McCrory Company, 280 Mass. 273 (1932), the Board conducts a de novo review of the Commissioner's actions and the issues raised in an appeal:
The jurisdiction of the Board is to "decide appeals" permissible under numerous provisions of the tax laws . . . . The word "appeal" in our statutes usually has been interpreted to mean a full new trial or an entire rehearing upon all matters of fact and questions of law.  It is used in contrast to the word "review" which signifies a reexamination of proceedings already had       . . . .  It follows that the board was authorized to retry every issue raised by the petition and answer filed with it.  

Id. at 277.  Because an appellant at the Board bears the burden of proof within the framework of a de novo trial, the appellant must produce the evidence which will prove each element of its theory of recovery:  "It is well settled that petitioner's burden of proof consists of two burdens: first the burden of producing sufficient evidence on an issue of fact that the Tax Court could decide the issue for him, and second, the burden of persuading the Court to decide the issue for him."  Waban, Inc. d/b/a BJ's Wholesale Club v. Commissioner of Revenue, Mass ATB Findings of Fact and Report 1997-472, 483  (citing 2A Lawrence F. Casey, Federal Tax Practice § 8.7 (1994 Rev.)).  See also Hon. Paul J. Liacos, Handbook of Massachusetts Evidence § 5.1 (1994 Ed.).  
General Laws c. 58A, § 8A provides that sections 61 to 70, inclusive, of G.L. c. 231 shall apply to all appeals before the Board.  General Laws c. 231, § 64 specifically provides that "[i]f a party interrogated fails to answer interrogatories, . . . the court may make and enter such order, judgment or decree as justice requires . . . ."  Moreover, "[i]n the matter of 'discovery' much must be left to the judgment and discretion of the Appellate Tax Board."  Board of Assessors of Provincetown v. Vara Sorrentino Realty Trust, 369 Mass. 692, 694 (1976).  The Board has the discretion to dismiss appeals for an appellant's refusal to comply with its discovery orders.  See Giurleo v. Board of Assessors of the Town of Raynham, 69 Mass. App. Ct. 1102 (2007) (upholding the Board's dismissal of an appeal for the appellant's refusal to comply with an order requiring an inspection of the subject property), John P. & Barbara MacKay Ligor, Trustees v. Board of Assessors of Wellesley, Mass. ATB Findings of Fact and Reports 2008-547 (dismissing an appeal for the appellant's refusal to comply with a Board order requiring inspection of the subject property).  
In the instant appeal, the appellant failed to comply with the January 31 Order, which required it to answer interrogatories and produce documents pursuant to the Commissioner's request.  Consequently, the Board properly entered its May 10 Order, which limited the evidence that the appellant would be permitted to introduce at the trial.  The appellant attempted to challenge the extent of this Order by offering evidence into the record.  Yet, during the trial, the appellant had nothing to offer into evidence other than the copy of the Commissioner's audit file, which it had received in discovery from the Commissioner, the subpoenas it had issued, the Instruction to Bill and some jurisdictional documents.  The only document from the audit file which could have been useful to the appellant's case was the copy of the appellant's federal tax return.  However, the copy was unsigned, and thus, without any witness, could not be verified as a true copy of the return that had actually been filed with the taxing authority.  The appellant offered no explanation why it could not produce a signed copy of the return.  Moreover, the appellant produced no witness to testify as to whether it was actually entitled to the deduction which it took on that return, or the federal return's relevance to establishing the appellant's entitlement to a state tax deduction.  See Rohrbough, Inc. v. Commissioner of Revenue, 385 Mass. 830, 832 (1982) ("Although the figure shown as gross income on a taxpayer's Federal return will normally be the gross income for State tax purposes for the same tax year, this is not always the case.").  Therefore, the Presiding Member was within his discretion to exclude the unsigned return as unauthenticated and unreliable evidence.  
In attempting to avoid any issues regarding hearsay, counsel for the appellant contended that the audit file and its contents were being offered "only to demonstrate the auditor's position . . . .  We are not trying to prove the existence of the losses, how these losses were generated.  All we are trying to prove is what was the position taken with the auditors, what did the auditors determine, a straight legal issue."  However, the auditor's position is not relevant for purposes of proving the appellant's entitlement to the deduction; what is relevant is whether the deduction was proper, a finding for which the appellant bears the burden of proving through the production of probative evidence.  Cf. Interface Group-Nevada, Inc. v. Commissioner of Revenue, Mass. ATB Findings of Fact and Reports 2000-324, 369 ("Interface produced ample evidence, including testimony and flight records, . . . [which] was sufficient to support the conclusion that the Commissioner's inclusion of one hundred percent of the airplanes' values could not be sustained.").  The appellant produced no testimony or other relevant, reliable evidence which could be admitted at the trial before the Board.  The Board thus found and ruled that the appellant failed to meet its burden of proving its entitlement to the deduction at issue.
The appellant contended that the Commissioner violated G.L. c. 58A, § 7 and 830 CMR 1.12 ("Board Rule 12") by failing to admit or deny certain allegations contained in the Petition.  The appellant contended that the Commissioner's responses in which he claimed to be "without knowledge sufficient to form a belief at this time as to the truth of the allegations" within the Petition were not in compliance with § 7, which requires "an answer admitting or denying each and every allegation of fact contained in the petition," and Board Rule 12, which requires that the appellee's answer contain "[a] specific admission or denial of each allegation of fact contained in the petition."  The appellant claimed that the Commissioner was not "without knowledge sufficient to form a belief" because "[m]ost of the facts alleged had been previously noted, admitted or acknowledged by the Commissioner during the course of the audit."  Appellant's Post-Trial Brief at 8.  The appellant produced no witnesses to testify as to the appropriateness of the Commissioner's response. 
According to the Massachusetts Rules of Civil Procedure, an answer which avers that the party is without sufficient knowledge to admit or deny is an acceptable response for purposes of pleading practice in Massachusetts courts.  See Mass.R.Civ.P. Rule 8(b) (a party "without sufficient knowledge or information to form a belief as to the truth of the averment . . . shall so state and this has the effect of a denial.").  While the Board is not bound by the Rules of Civil Procedure, the Board has looked to these rules for guidance in certain instances.  See, e.g., Brownell v. Commissioner of Revenue, Mass. ATB Findings of Fact and Reports 2003-324, 326-7 (despite the fact that the Rules of Civil Procedure do not apply to Board proceedings, the Board used the "no genuine issue as to any material fact" standard from Mass.R.Civ.P. Rule 56 in applying Board Rule 1.22).  Moreover, the appellant did not object to the Commissioner's answer during the pretrial phase by filing a motion to compel further answer.  Nor did it make a "Demand for Admissions of Fact" in accordance with G.L. c. 231,    § 69.  Therefore, the appellant cannot now complain that it was prejudiced by the Commissioner's failure to either admit or deny the specific allegations.  Accordingly, the Board ruled that the Commissioner's responses that he was "without knowledge sufficient to form a belief" in the veracity of the statements contained in the Petition were in proper form and served as a denial to the averments in the Petition.



Conclusion
The Board found that the appellant provided no basis upon which a trier of fact could make a determination that it was entitled to the deduction at issue.  The Board thus found and ruled that the appellant failed to meet its burden of proving its entitlement to the deduction at issue and, therefore, the abatement requested.  Accordingly, the Board issued a decision for the appellee in this appeal. 
	
					THE APPELLATE TAX BOARD



By:  ____________________________________
Frank J. Scharaffa, Commissioner

  

A true copy,


Attest: ____________________________
	      Clerk of the Board

  Counsel for the appellant withdrew his appearance subsequent to requesting a copy of the Board's Findings of Fact and Reports for this appeal.  No replacement counsel entered an appearance in his stead.
  The NOA indicates that the appellant had a credit of $135,740.
  One subpoena was issued to the "Keeper of the Records" for the Department, which also demanded  copies of the Form CA-6 Application for Abatement, Notice of Determination, and "a complete copy of the Abatement File."  The other subpoena was issued to the "Keeper of the Records" for the Customer Service Bureau for the Department, which also demanded copies of the NIA, NOA, the 1996 and 1997 Form 355B Corporate Excise Returns filed by the appellant, and "a complete copy of the Audit file."
  Section 70 was repealed by St. 1975, c. 377, § 91.

ATB 2008 - 1052