Chak Fai Hau v. Dep't of Revenue & Constance Beard

2019 IL App (1st) 172588

127 N.E.3d 995

431 Ill.Dec. 462

CHAK FAI HAU, d/b/a Joye Chop Suey, Plaintiff-Appellant,

v.The DEPARTMENT OF REVENUE and Constance Beard, in Her Official Capacity as Director of Revenue, Defendants-Appellees.

No. 1-17-2588

Appellate Court of Illinois, First District, Third Division.

Opinion filed February 27, 2019

William P. Drew III, of Chicago, for appellant.

Lisa Madigan, Attorney General, of Chicago (David L. Franklin, Solicitor General, and Laura Wunder, Assistant Attorney General, of counsel), for appellees.

JUSTICE COBBS delivered the judgment of the court, with opinion.

¶ 1 Plaintiff-taxpayer, Chak Fai Hau, doing business as Joye Chop Suey, appeals from the circuit court's judgment affirming in part the Department of Revenue's (Department) tax assessment for the period from January 1, 2008, through December 31, 2010. For the reasons that follow, we affirm.

¶ 2 I. BACKGROUND

¶ 3 Hau is the sole proprietor of Joye Chop Suey, a carryout-only Chinese restaurant located at 4829 West Chicago Avenue in Chicago, Illinois. The Department assigned Denise Berry to audit Hau's business taxes for the period from January 1, 2008, through December 31, 2010. The Department found that Hau fraudulently underreported his total sales during this period and issued corrected tax returns requesting Hau pay $ 206,455 to cover tax deficiencies under the Retailers' Occupation Tax Act (Act) ( 35 ILCS 120/1 et seq. (West 2014) ), penalties for fraud and late payment, and accumulated interest. On June 13, 2012, the Department issued two Notices of Tax Liability (NTLs) to Hau, covering the tax periods from January 1, 2008, through June 30, 2009, and from July 1, 2009, through December 31, 2010, detailing the breakdown of the corrected tax assessment.¹ Per the instructions on the NTLs, Hau filed a protest on July 16, 2012, and requested an administrative hearing. The evidentiary hearing before an administrative law judge (ALJ) took place on December 11, 2013.

¶ 4 A. The Evidentiary Hearing

¶ 5 The Department limited its case-in-chief to submitting records, certified by the Department's director, into evidence. These records consisted of a completed form titled "Audit Correction and/or Determination of Tax Due" and copies of the NTLs issued to Hau. The ALJ found that such certified documents were prima facie correct and overruled Hau's counsel's hearsay objections. The ALJ also asked counsel if he understood that the admitted documents established the Department's prima facie case. Counsel responded that he understood but nevertheless argued that a prima facie case was not made because the exhibits failed to establish whether the Department employed minimum standards of reasonableness to determine Hau's tax liability. Counsel further complained that the auditor was not present to testify. The Department responded once again that the law supported finding the proffered exhibits as prima facie correct irrespective of anything else. The ALJ agreed and counsel commented, "We'll see, yeah. I'm—Sure."

¶ 6 Hau testified, with the help of a Chinese interpreter, that he was 73 years old at the time of the hearing. He opened the restaurant in 2001 and operated it with the help of his wife. From the restaurant's opening through early 2012, Hau retained Maria Tai, an accountant from First Quality Financial Group, to file his taxes. During the audit period, Hau had two part-time employees who assisted with food preparation and other small tasks. His wife worked the front of the store taking orders and "handl[ing] purchase transactions" while Hau managed everything else, including all the cooking.

¶ 7 Hau prepared his sales tax returns by calculating total daily sales and reporting those figures along with his expenses to Tai on a monthly basis. He did not provide Tai with any of the physical sales receipts. Hau also initially testified that he only accepted cash payments during the audit period because he did not have the machine to read credit cards, however he changed his statement and acknowledged that there were a small percentage of credit transactions during the audit period. He later testified that the register machine had been stolen at least twice, although he only reported the theft once, and it was unclear during which periods of time he did not have a register.

¶ 8 Hau submitted into evidence copies of his tax returns for 2008, 2009, and 2010. The copies were signed by a preparer from First Quality Financial Group but did not bear Hau's signature. Hau commented, unprompted, that he did not understand the tax forms and just signed what his accountant had prepared. When asked specifically about the Schedule C figures, Hau responded, "To be honest, I never see this. I never see that because I have no knowledge how to calculate this number." Hau further testified that although he reported the information to Tai, he had forgotten the amounts due to his old age. The Department objected to the admission of the tax returns because Hau could not authenticate the documents. The ALJ admitted the evidence over the Department's objection.

¶ 9 Hau also submitted a copy of the restaurant's menu representing the prices charged during the audit period. The most expensive item on the menu cost $ 16.45, the cheapest cost $ 0.60, and the majority of items cost $ 3 to $ 8. He testified that he used four sizes of containers, ranging from 8 to 38 ounces, to package food. The extra-large 38-ounce container was sparingly used for items like egg foo young. Rice would be packed for free, in a separate small or large container, with each purchase of a small or large entree. Some appetizers, such as egg rolls, were not packaged in a container at all and were placed in a small white bag instead. Hau also gave rough estimates about the percentage each type of item accounted for from his total sales, with fried rice at 50%, seafood entrees at 30%, and other meat entrees at 20%. Hau estimated his average sales revenue to be $ 300 per day for Monday through Thursday, around $ 600 to $ 700 on Fridays and Saturdays, and that his profit margin for sales averaged 25%. The restaurant was closed on Sundays, holidays, and on slow nights when there was no business.

¶ 10 Hau testified about his expenses and stated that he would buy containers whenever they were on sale and place them into storage. He could not estimate how often he would deplete and restock the containers, which came in packs of 500.

Hau also estimated that he would lose money on 10% of phone orders after the customers failed to pick up and pay for their food.

¶ 11 Hau was questioned about a previous hearing he had against the Department regarding a sales tax issue. It was elicited that in relation to an audit for the period of January 1, 2005, through December 31, 2007, Hau and the Department reached an agreement that he would reduce the percentage of markup on sales. Hau denied that he had received notice or was informed by his accountant about the need for cash register tapes after the first audit. However, he stated that, in the last six months, he had begun to maintain records in a new way. He then attempted to submit the physical sales receipts and a prepared statement recording the daily gross receipts for August 2013. Although Hau testified the figures were "probably the same" as a monthly statement for the audit period would be, the ALJ sustained the Department's objection and excluded the evidence as irrelevant to the audit period. Hau was asked if he also maintained purchase records, to which he stated, "Now we have, yeah," and he indicated that he would have produced them for the hearing if he had been asked. Lastly, Hau testified that during the audit he complied fully and turned over all the sales receipts and purchase records he had available. He also noted that there was a leak in his restaurant's roof at one point in time and there was water damage to some records, which he threw away.

¶ 12 After the conclusion of Hau's testimony, the Department offered into evidence an "Audit Narrative" prepared by Berry on April 30, 2012, and filed with the certificate of the Department's director. Berry wrote that during the audit she examined invoices, some guest checks, Hau's personal tax returns and the related Schedule Cs, the monthly sales tax returns, bank statements, EDA-20s, as well as numerous documents prepared by Hau in Chinese and transmitted to Tai. These self-prepared documents included monthly receipt summaries, cash payouts, and inventory purchases as well as yearly recaps of sales/receipts, expenses, and gross profit. Berry thus found that "[t]he owner is in control of all figures that go on the [monthly sales tax returns] and personal returns."

¶ 13 Berry noted that Hau's bank deposits and cash payout reports did not match up. She calculated that $ 135,642 of unreported receipts were missing from the bank deposits. Berry found that Hau paid for inventory with cash and other expenses and investments were paid by money orders. Berry further noted that Hau also retained Tai as a personal financial investor and was well diversified. Although Berry worked with Tai at the beginning of the audit, Tai expressed that she would stop representing Hau in 2012 citing her company's inability to spare the time needed to continue compliance with the audit.

¶ 14 Berry described Hau's restaurant and her personal experience ordering food for carryout. She related that when paying using her debit card, she was provided with a receipt, however, she did not receive one when paying with cash. Rather, she noted that customers were given their orders with the "guest check" stapled to the bag. These guest checks were written in Chinese and copies of the guest checks were turned over for the audit. Berry attempted to schedule the receipts based on the June 2010 guest checks despite the checks being out of numerical order and her belief that "[t]here's no control whatsoever for guest checks." Berry...