BBM Ventures, LLC, Ballery Bully and Greta Bully v. Herb Frierson, in his Official Capacity as the Commissioner of Revenue of the Mississippi Department of Revenue

IN THE COURT OF APPEALS OF THE STATE OF MISSISSIPPI

NO. 2021-CA-00248-COA

BBM VENTURES, LLC, BALLERY BULLY AND APPELLANTS
GRETA BULLY

v.

HERB FRIERSON, IN HIS OFFICIAL APPELLEE
CAPACITY AS THE COMMISSIONER OF
REVENUE OF THE MISSISSIPPI
DEPARTMENT OF REVENUE

DATE OF JUDGMENT: 02/04/2021
TRIAL JUDGE: HON. J. DEWAYNE THOMAS
COURT FROM WHICH APPEALED: HINDS COUNTY CHANCERY COURT,
FIRST JUDICIAL DISTRICT
ATTORNEY FOR APPELLANTS: JAMES GARY McGEE JR.
ATTORNEYS FOR APPELLEE: MATTHEW TIMMONS HENRY
KRISTEN NAJUANA BLANCHARD
NATURE OF THE CASE: CIVIL - STATE BOARDS AND AGENCIES
DISPOSITION: AFFIRMED - 08/30/2022
MOTION FOR REHEARING FILED:
MANDATE ISSUED:

BEFORE BARNES, C.J., GREENLEE AND LAWRENCE, JJ.

BARNES, C.J., FOR THE COURT:

¶1. Ballery and Greta Bully own or hold a majority interest in BBM Ventures LLC (BBM)

and Bully’s Restaurant.1 BBM is a Mississippi limited liability company formed in 2012,

which does business as “Toast and Sip,” a liquor and spirits retail store. On September 2,

2014, the Mississippi Department of Revenue (MDOR) issued an “Audit Selection Letter”

1
We will collectively refer to the Appellants—BBM and the Bullys—as “the
Taxpayers.” The Bullys also have ownership in other businesses not relevant to this appeal.
to BBM (account no. 1277-9598), stating the department’s intention to conduct a sales and

special tax audit; use tax audit; and a withholding tax audit, and requesting records from

January 1, 2012, through the current period.2 The primary contacts during the audit were

Greta and the Taxpayers’ bookkeeper, Pat Williams. The MDOR also sent an audit notice

to Ballery and Greta on October 3, 2014, indicating its intention to conduct an individual

income tax audit, as well as a sales tax audit, a use tax audit; and a withholding tax audit for

Bully’s Restaurant (account no. 1285-3707). The letter requested records from January 1,

2011, through the current period.

¶2. On August 21, 2015, a notice of assessment for sales tax liabilities was issued to BBM

in the amount of $14,407, inclusive of penalties and interest. On August 24, 2015, the

MDOR issued a notice of assessment for individual income tax liabilities against Ballery and

Greta in the amount of $32,600, which included a seventy-five percent penalty for fraudulent

underreporting of income. See Miss. Code Ann. § 27-7-105 (Rev. 2017). Also on August

24, 2015, a separate assessment for sales tax liabilities related to Bully’s Restaurant was

issued to Ballery in the amount of $76,591.

¶3. On October 20, 2015, the Taxpayers appealed the BBM sales tax assessment and the

Bullys’ individual income tax assessment to the MDOR’s Board of Review.3 The Board of

Review upheld and affirmed both assessments against the Taxpayers on August 9, 2016.

2
Because BBM did not commence operations until August 2012, the audit period
was actually from July 1, 2012, through July 31, 2014.
3
The Taxpayers’ failure to appeal the assessment for Bully’s Restaurant will be
addressed in part I of this opinion. See infra ¶¶12-15.

2
Aggrieved, the Taxpayers appealed to the Mississippi Board of Tax Appeals (BTA). A

hearing was held before the BTA on March 22, 2017, and the BTA granted the Taxpayers

additional time to produce documentation to support their appeals. After reviewing the

supplemental documentation, the MDOR reduced the sales tax assessment against BBM to

$10,803; the individual income tax assessment against the Bullys was also reduced to

$13,180.81. On May 16, 2017, the BTA entered separate orders affirming the amended

assessments.

¶4. The Taxpayers filed a petition with the Hinds County Chancery Court on July 13,

2017, challenging the BTA’s findings. Specifically, they asserted that (1) the sales tax

assessment was based upon a 30.78% markup of 100% of BBM’s inventory; (2) the

individual income tax assessment was “arbitrary and completely unreasonable”; and (3) the

MDOR unjustly assessed the fraud penalty to the individual income tax assessment. The

MDOR denied that the Taxpayers were entitled to any relief.

¶5. The Taxpayers filed a motion for summary judgment on May 15, 2018. Opposing the

motion, the MDOR “submit[ted] that the sales tax assessment against BBM [was] prima

facie correct” and that “the current sales tax assessment against BBM, as affirmed by the

BTA, [did] not utilize a markup percentage analysis” but rather was “based on BBM’s point

of sale records.” The MDOR also averred that the sales tax assessment did not contain any

unsold inventory. Lastly, the MDOR asserted that the Bullys had “wholly failed to provide

documentation to substantiate their claimed expenses” and that the fraud penalty was

supported by the evidence. After a hearing, the chancery court denied the summary judgment

3
motion on July 16, 2019, finding there were “genuine issues of material fact in this cause that

m[ight] result in ‘triable issues.’”

¶6. A trial was held on January 13-14, 2020. Both parties submitted proposed findings

of fact and conclusions of law to the court by February 28, 2020. The MDOR additionally

submitted a response to the Taxpayers’ proposed findings of fact and conclusions of law on

March 20, 2020.

¶7. Despite these court filings, the chancery court clerk filed a motion to dismiss for want

of prosecution on October 6, 2020, which stated that there had been “no action of record in

said case during the preceding twelve (12) months.” The attorney for the Taxpayers brought

this motion to the court administrator’s attention, believing it was a clerical error. The

Taxpayers filed a motion for reconsideration on November 18, 2020, in response to an order

of dismissal without prejudice entered by the chancery court on November 9, 2020.

However, this order of dismissal is not in the record, nor is it listed on the chancery court’s

docket. Mississippi Rule of Civil Procedure 58 provides that “[a] judgment shall be effective

only when entered as provided in [Mississippi Rule of Civil Procedure] 79(a).” Rule 79(a)

requires “all . . . orders, verdicts, and judgments shall be noted in this general docket on the

page assigned to the action and shall be marked with its file number. . . . The entry of an

order or judgment shall show the date the entry is made. In the event a formal order is

entered, the clerk shall insert the order in the file of the case.”

¶8. On February 4, 2021, the chancery court entered a final judgment on the merits. The

court noted that although the MDOR’s initial audit “did, in fact, utilize a marked up

4
percentage on all inventory due to a lack of adequate records,” the MDOR had “reconsidered

its audit methodology and based the amended assessment solely on the point of sales records”

once the Taxpayers provided the additional documentation after the BTA hearing. The

chancery court affirmed the BTA’s findings and dismissed the Taxpayer’s petition with

prejudice.

¶9. The Taxpayers appeal from the judgment, claiming that (1) Ballery was never

“properly noticed or afforded his appeal rights” with regard to the tax assessments for Bully’s

Restaurant; (2) the sales tax assessment for BBM was “flawed,” as it failed to take into

account inventory that was for personal use or donated; (3) the MDOR failed to review the

“voluminous amounts” of business records provided by the Bullys thereby overstating their

taxable income; and (4) there was insufficient evidence at trial to support the seventy-five-

percent fraud penalty imposed on the Bullys’ individual income tax assessment. Finding no

error, we affirm.

STANDARDS OF REVIEW

¶10. Mississippi Code Annotated section 27-77-7(5) (Rev. 2017) establishes a chancery

court’s standard of review of the MDOR’s and BTA’s decisions:

[T]he chancery court shall give no deference to the decision of the [BTA], the
Board of Review or the [MDOR], but shall give deference to the department’s
interpretation and application of the statutes as reflected in duly enacted
regulations and other officially adopted publications.[4] The chancery court
shall try the case de novo and conduct a full evidentiary judicial hearing on all
factual and legal issues raised by the taxpayer which address the substantive
or procedural propriety of the actions of the Department of Revenue being

4
This underlined portion has since been held unconstitutional by HWCC-Tunica Inc.
v. Mississippi Department of Revenue, 296 So. 3d 668, 677 (¶37) (Miss. 2020).

5
appealed. The chancery court is expressly prohibited from trying any action
filed pursuant to this section using the more limited standard of review
specified for appeals in [s]ection 27-77-13 of this chapter. Based on the
evidence presented at trial, the chancery court shall determine whether the
party bringing the appeal has proven by a preponderance of the evidence or a
higher standard if required by the issues raised, that he is entitled to any or all
of the relief he has requested.

Further, “issues related to tax appeals are questions of law, which are reviewed by [our

appellate courts] de novo.” Miss. Dep’t of Rev. v. Comcast of Ga./Va. Inc., 300 So. 3d 532,

535 (¶12) (Miss. 2020).

¶11. Nevertheless, because the issues raised by the Taxpayers challenge the chancery

court’s findings of fact, not the court’s interpretation of the law, “we apply a limited standard

of review in that the factual findings of the chancery court, if supported by substantial

evidence, will not be disturbed unless the chancery court abused its discretion, applied an

erroneous legal standard, or its findings are manifestly wrong or clearly erroneous.” Rucker

v. Miss. Dep’t of Rev., 281 So. 3d 253, 254 (¶6) (Miss. Ct. App. 2019) (quoting In re Estate

of Smith v. Boolos, 204 So. 3d 291, 305 (¶22) (Miss. 2016)).

DISCUSSION

I. Whether the chancery court erred in ruling that the Taxpayers
failed to appeal the sales tax assessment against Bully’s Restaurant.

¶12. On October 30, 2014, the MDOR sent an “Audit Closing Notice” addressed to Ballery

for account number 1285-3707, the account for Bully’s Restaurant. Greta signed this

document, indicating she was “in disagreement with the audit findings.” A notice of

assessment dated August 24, 2015, was subsequently issued to Ballery in the amount of

6
$76,591 related to Bully’s Restaurant.5

¶13. Mississippi Code Annotated section 27-77-5(1) states that a taxpayer has sixty days

“from the date the agency mailed or delivered written notice of the action” to appeal a tax

assessment. Because the Taxpayers did not appeal this assessment, the chancery court noted

in its final order that they had failed to appeal those tax assessments against Bully’s

Restaurant.

¶14. The Taxpayers do not dispute that they failed to file an appeal of the assessment.

Rather, they argue that the chancery court’s ruling was in error because there was no

evidence to show that the MDOR had “mailed or delivered” the notice of assessment to them.

Although Greta admitted that she signed the audit closing notice, she emphatically claimed

at trial that neither she nor her husband Ballery received the subsequent notice of assessment

for Bully’s Restaurant. The Taxpayers contend that “Mississippi law clearly provides that

MDOR must provide sufficient record evidence that a notice was in fact mailed to a taxpayer;

simply providing a copy of the notice in question is insufficient.” However, they cite no

authority for this assertion.

¶15. Furthermore, when asked if the notice of assessment was sent to Ballery, the MDOR

auditing supervisor Curtis Covington replied, “Mr. Bully, yes. This letter is generated when

the audit is finally approved and it’s mailed out. . . . [T]his letter doesn’t exist without it

going into the mail.” (Emphasis added). Covington later testified:

Again, the system that we use when the audit is approved and this letter is
generated, generally this letter is generated and mailed out that night, but I’m

5
This notice referenced the same account number.

7
not the one that sticks that in the mail. It’s automatically done for every audit
assessment letter that’s mailed.

....

And the fact that [the letter] is [in the system] tells me that it got mailed.

We find that the copy of the notice of assessment and Covington’s testimony constituted

substantial evidence for the chancery court, the fact-finder, to conclude that the MDOR

mailed the notice and the Bullys failed to appeal the assessment as required by section 27-77-

5(1).

II. Whether the chancery court erred in affirming the sales tax
assessment against BBM because the MDOR did not properly
account for personal use and donations of inventory.

¶16. The chancery court determined that the MDOR’s sales tax assessment against BBM

relied “solely upon . . . BBM’s actual sales records in the provided point of sales [(POS)]

records . . . and . . . that the same is proper and correct.” The Taxpayers acknowledge that

the amended sales tax assessment for BBM “was based on the Taxpayers’ [POS] reports.”

They argue, however, that the POS reports failed to account “for personal use and donations

of inventory.”

¶17. Greta explained at trial, “Items that we use for personal use, we didn’t have to pay

sales tax on it because we’ve already previously prepaid taxes, so that . . . was like a fringe

benefit of owning a liquor store.” When asked why there was a $6,000 discrepancy between

the POS records and BBM’s “Detailed Daily Report” for December 2012, Greta said that it

was because one of BBM’s former partners6 had given “out liquor for Christmas gifts.” She

6
This partner died in 2014, and the business is now a sole proprietorship.

8
further testified:

I gave items away as well as Christmas gifts. And I think we had in our
documents where we sponsored a couple of community events that we donated
liquors that you all did not give me credit for. That was in the paperwork, and
it was stated “Given away for Christmas events,” so we documented the reason
why we subtracted it out of the sales.

Greta admitted, however, that this particular inventory was rung through the POS system in

order to take it out of inventory.

¶18. Although the Taxpayers assert that this evidence was “contemporaneously

documented and subsequently provided to MDOR,” the only cited reference in their brief is

to Greta’s testimony, not to any specific documentation. Moreover, when asked if this was

an “accurate way of reporting sales tax and taking credits,” MDOR auditing supervisor Curtis

Covington testified:

No. You usually -- this shows whatever has been rung up in the [POS] system,
at the cash register, and what you would normally do is you ring it up at the
whatever price you’re going to ring it up at, as the cost or whatever, and that
would be included in the net sales. You report the total net sale this shows,
and then you would still take the credit on the sales tax return for the tax you
paid on the liquor when you bought it from ABC.

Covington added that he had seen no evidence or documentation that BBM was taking

credits or donating inventory.

¶19. As this Court recently recognized, “[t]he auditor is not required to use ‘the best

information available’ to make an assessment; ‘in order for the assessments to be prima facie

correct, the auditor must make them from any information available.’” Jackson Land Food

Mart Inc. v. Frierson, 314 So. 3d 146, 151 (¶28) (Miss. Ct. App. 2021) (quoting United

Roofing & Constr. of MS Inc. v. Miss. Dep’t of Revenue, 319 So. 3d 1164, 1173 (¶25) (Miss.

9
Ct. App. 2020)). “Once the auditor’s assessment is made and the presumption of prima facie

correctness attaches, ‘the taxpayer bears the burden of proof showing that a genuine dispute

exists regarding the correctness of the assessment.’” Id.

¶20. The only record evidence at trial of these donations or personal use of inventory was

Greta’s own testimony. In Marx v. Bounds, 528 So. 2d 822, 827 (Miss. 1988), the

Mississippi Supreme Court found that a taxpayer’s “own undocumented recollection,” which

was “uncorroborated[,] . . . does not fulfill the taxpayer’s burden of proof” to overcome the

prima facie presumption of correctness of the tax assessment. Because the Taxpayers have

not corroborated Greta’s testimony regarding the donated items and gifts, we find no error

in the chancery court’s determination that the MDOR’s calculation of the sales tax

assessment was “proper and correct.”

III. Whether the chancery court erred in finding that the Taxpayers
failed to produce source documentation for the majority of their
business expenses and in affirming the individual income-tax
assessment.

¶21. In its order addressing the individual income-tax assessment against the Bullys, the

BTA noted that the “[r]eported expenses . . . reviewed and sampled” by the MDOR “could

not be substantiated.” Furthermore, the “spreadsheet that summarized expenses . . . provided

little to no source documentation to verify the expenses.” The BTA concluded:

During the hearing and in their submissions, the taxpayers made general
allegations of why the [MDOR’s] assessment was incorrect and provided us
with copies of bank statements and various unverified schedules that had been
previously submitted to the [MDOR], but the taxpayers provided absolutely
nothing to verify or substantiate their arguments or the documents and
schedules presented. . . . Although we understand the [T]axpayers believe they
are entitled to more deductions, it appears to this Board that the [MDOR]

10
allowed all of the expenses claimed by the taxpayer that are both allowable as
deductions and for which the taxpayer provided documentation to properly
substantiate their payment of those expenses.

Affirming the BTA’s order, the chancery court likewise noted that “the self-prepared

spreadsheet of [the Taxpayers’] business expenses lacked source documentation” and that

the Taxpayers “failed to provide any receipts, cancelled checks, or any other source of

documentation [at trial] to support the vast majority of expenses sought as deductions that

were denied by MDOR.”

¶22. The Taxpayers, however, contend that they provided the source documents necessary

to substantiate the business expenses deducted on their individual income-tax returns but the

auditor “failed to review all documents” and, instead, “arbitrarily sampled the documents

produced and decided they were inadequate.” Thus, the Taxpayers argue that the chancery

court erred in affirming the amended individual income-tax assessment.

¶23. Greta testified that after she received the notice of the audit, she contacted the MDOR

auditor, Lee Pittman, and “gave him full access to the POS system . . . [and] inventory.”7 She

further claimed:

I gave them everything that I thought they needed and more. I gave them
everything I had access to. I opened my doors; I opened my books. I gave
them tons of documents that is illustrated in the picture. In fact, it was so
much documents, the auditors [were] overwhelmed.

....

7
Responding to Greta’s testimony that she had provided access to those reports,
Covington explained that the auditors “need to have someone that has the authority to pull
those reports for us out of the system.” However, the MDOR’s access to the POS reports
for BBM is not relevant to the issue of the documentation for the individual income-tax
assessment.

11
I was never informed that the records were inadequate.

Greta repeatedly asserted that she “gave [the auditors] everything.”

¶24. Covington disputed Greta’s testimony, stating that the Taxpayers did not provide all

the documents requested during the audit. He testified:

Some of the records that were not provided are not all the bank statements
were provided; the records detailing asset valuation were not provided;
inventory records, total inventory records were not provided. There was one
year of Mississippi income tax returns that were not provided. . . . Payroll
records were not provided; no profit and loss statement was provided, balance
sheets; general ledger was not provided.

Covington noted that it was not until after the BTA hearing that the Taxpayers provided

“additional records,” all of which had been requested both prior to and during the audit. The

MDOR amended the assessments once those additional documents were reviewed. Pittman,

the auditor, also averred in his affidavit “[t]hat the Taxpayers provided only a portion of the

necessary records request[ed], including copies of bank statements, federal and state income

tax returns, and sales tax returns for the audit period” and “failed to provide adequate

documentation to support nearly all of the numerous claimed expenses which were

disallowed by the MDOR.”

¶25. The auditor’s comments summary further stated:

The taxpayer provided copies of income tax returns for the tax years 2011-
2012. A request was made for the 2013 return. Ms. Williams stated that the
2013 return has not been prepared. The 2013 return was prepared and filed
during the audit process. The taxpayer failed to provide substantiation for the
majority of deductions claimed on the returns.

Although Greta later provided spreadsheets detailing expenses, Covington testified that “only

about five to eight percent of the expenses could be substantiated for all the businesses put

12
together.” Covington also stated “that the taxpayer was less than cooperative throughout the

process,” noting there had been several scheduled meetings where the “taxpayer’s

representative did not show up.”8

¶26. The supreme court has held: “Deductions on an income tax return are not a matter of

right; they are a statutory grant, which must be provided clearly under the statute. . . . The

taxpayer has the burden of proving that the facts bring the case squarely within the deduction

provisions of the statute.” Purcell Co. v. Miss. State Tax Comm’n, 569 So. 2d 297, 301

(Miss. 1990) (citing State v. L. & A. Contracting Co., 241 Miss. 783, 792, 133 So. 2d 546,

549 (1961)). Reviewing this testimony and the record, we find the Taxpayers failed to

demonstrate that the chancery court’s ruling was not supported by substantial evidence or

was manifest error.

IV. Whether there was sufficient evidence to support the fraud penalty
assessed in conjunction with the individual income-tax assessment
against the Bullys.

¶27. Affirming the individual income-tax assessment against the Bullys, the BTA further

determined that “the fraud penalty imposed under Miss[issippi] Code Ann[otated section]

27-7-105 [was] appropriate.” Mississippi Code Annotated section 27-7-105(1) (Rev. 2017)

provides, “If any part of any underpayment of tax required to be shown on a return required

by this chapter or if any underpayment is finally assessed due to failure to file a return

required by this chapter is due to fraud, there shall be added to the tax an amount equal to

8
On cross-examination, Covington clarified that the Taxpayers’ level of cooperation
was not a factor in assessing the fraud penalty, which will be discussed in part IV of this
opinion. See infra ¶¶27-32.

13
seventy-five percent (75%) of the portion of the underpayment which is attributable to

fraud.”

¶28. The BTA also cited to 26 U.S.C. § 6663 (“Imposition of fraud penalty”) and federal

case law that outlines several indicia or “badges of fraud.” See Niedringhaus v. Comm’r, 9

T.C. 202, 211 (1992). These include:

(1) Understatement of income; (2) inadequate records; (3) failure to file tax
returns; (4) implausible or inconsistent explanations of behavior; (5)
concealment of assets; (6) failure to cooperate with tax authorities; (7) filing
false W-4’s; (8) failure to make estimated tax payments; (9) dealing in cash;
(10) engaging in illegal activity; and (11) attempting to conceal illegal activity.

Niedringhaus, 9 T.C. at 211 (citing Bradford v. Comm’r, 796 F.2d 303, 307 (9th Cir. 1986)).

The BTA concluded that the MDOR had presented the following facts by “clear and

convincing evidence”:

(1) the taxpayers under-reported income; (2) the gross overstatement of
approximately $750,000.00 of claimed expenses by the taxpayers that were
unsupported by their records; (3) there was a consistent pattern of
underreporting taxable income over all three years of the audit; (4) failure of
the taxpayers to maintain adequate records; and (5) the taxpayers’ failure to
disclose several bank accounts that the [MDOR] discovered while reviewing
the taxpayers’ supplemental records.

The chancery court upheld the BTA’s finding, noting:

The evidence at trial clearly demonstrated more than a misunderstanding of
appropriate deductions or a less than ideal system of record keeping. Instead,
the testimony and exhibits clearly showed that [Taxpayers] substantially
understated income for a period of at least the three (3) years of the audit. . . .
The evidence further demonstrated that [Taxpayers] failed to maintain
adequate records[,]. . . [and] wilfully withheld relevant documentation
throughout the course of the audit until during the actual hearing before the
BTA. Finally, [the Taxpayers] failed to file a return in 2011.

The Taxpayers appeal the court’s ruling, arguing that the MDOR’s belief that “the records

14
produced were insufficient . . . does not indicate any fraudulent intent on behalf of the

Taxpayers.”

¶29. According to the auditor’s affidavit, the MDOR applied the seventy-five-percent

penalty due to “the Taxpayers’ pattern of substantially understating income while also grossly

overinflating their expenses in order to lower their tax liabilities.” Specifically, he noted that

there was a variance of 286% between the net income reported by the Taxpayers compared

to the net income verified by the audit. The Taxpayers claim that their income was actually

“overstated . . . for much of the audit period” and that the “alleged variance stems from

business deductions improperly disallowed by the MDOR.” We already have determined

that argument is without merit. See supra ¶¶21-26.

¶30. Furthermore, as Covington explained at trial, the fraud penalty was imposed because

(1) not all three years of tax returns had been filed when the audit began; (2) documentation

was not provided to substantiate costs of goods sold and expenses; and (3) several categories

of expenses were not “ordinary and necessary to those types of businesses, and . . . were very

large in nature and could not be substantiated.” As noted in the BTA’s order, the Bullys

“derived their primary source of income from their operation of Bully’s Restaurant and

BBM[.]” The auditor’s worksheets indeed reflect that there were several expenses for the

Bully’s Restaurant and BBM that could not be substantiated through the audit. For example,

the Taxpayers’ reported “Car and Truck Expenses” for Bully’s Restaurant was over $100,000

in 2012 and $65,671 in 2013; neither expense was substantiated in the audit. Covington also

noted that although the Taxpayers reported $86,425 in supplies for Bully’s Restaurant in

15
2012, only $8,622.57 “could be substantiated[.]” Additionally, the individual income audit’s

work papers show that the Taxpayers claimed $750,825 of combined expenses for BBM for

2012 and 2013, yet only $49,528.63 (7%) of the claimed expenses were verified by the

audit.9 When asked whether that was “an unusually high amount of expenses claimed that

couldn’t be substantiated,” Covington replied, “Yes. It’s very high.”

¶31. Lastly, the MDOR’s audit worksheets clearly indicated that the Bullys had

underreported their income from 2011 to 2013. Covington explained at trial:

So on this sheet, we’ve looked at all three years, the total taxable income for
both individuals, and the next tab is just 2011, and so what this shows is Mr.
Bully, on the 2011 return, as prepared, he reported a loss of $1,290. We found
additional income of $112,000, so an adjustment was made. Net taxable
income was made of $113,000. Mrs. Bully had no taxable income reported or
audited in 2011. . . . 2012 is the next tab, and so on the return filed for 2012,
Mr. Bully reported a loss of $521. The audit findings resulted in taxable
income of $228,000. Mrs. Bully reported a loss of $389,000. On the 2012
return[,] the audit findings show that she had a loss of $58,000, so an
adjustment was made through the audit.

....

This is 2013 for Mr. Bully and Mrs. Bully. Mr. Bully reported a loss of
$138,000 on the 2013 return. The audit findings show that he had taxable
income of $126,000, a $265,000 adjustment for just 2013. Mrs. Bully reported
a loss of $386,000. . . . So Mrs. Bully reported a loss of $386,000 in 2013. She
reported a loss in [20]12, also reported a large loss in 2013. The audit findings
show that she had taxable income that year of $93,000.

We therefore find no error in the chancery court’s determination that they “substantially

understated income for a period of at least the three (3) years of the audit.”

9
The following are examples of the expenses for BBM that could not be
substantiated: $258,798 reported for “Taxes and Licenses in 2012 and 2013,” $83,962 for
“Car & Truck Expenses” in 2012, and $50,000 for “Advertising” in 2012 (only $1,600 was
substantiated).

16
¶32. Section 27-77-7 provides that “[t]he chancery court shall decide all factual and legal

questions presented, including those as to legality and the amount of tax, refund, tax credit

or tax incentive due as well as whether and to what extent the imposition of interest and/or

penalties are warranted under the facts of the case[.]” (Emphasis added). In this case, we

conclude that the Taxpayers have failed to demonstrate that the court committed manifest

error in affirming the imposition of the fraud penalty.

¶33. Accordingly, we affirm the chancery court’s judgment.

¶34. AFFIRMED.

WILSON, P.J., GREENLEE, LAWRENCE, SMITH AND EMFINGER, JJ.,
CONCUR. WESTBROOKS AND McDONALD, JJ., DISSENT WITHOUT
SEPARATE WRITTEN OPINION. CARLTON, P.J., AND McCARTY, J., NOT
PARTICIPATING.

17