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Grand Liquor Co. v. Dept. of Revenue

OPINION FILED JUNE 1, 1977.

GRAND LIQUOR COMPANY, INC., APPELLEE,

v.

THE DEPARTMENT OF REVENUE, APPELLANT.



Appeal from the Appellate Court for the First District; heard in that court on appeal from the Circuit Court of Cook County, the Hon. Raymond S. Sarnow, Judge, presiding.

MR. JUSTICE CLARK DELIVERED THE OPINION OF THE COURT:

Rehearing denied October 3, 1977.

This case involves the evidentiary effect given to a Department of Revenue estimated tax correction predicated upon a computer printout.

Plaintiff, Grand Liquor Company, Inc., received a final assessment for an alleged tax deficiency due under the Retailers' Occupation Tax Act (Ill. Rev. Stat. 1973, ch. 120, par. 440 et seq.), and the Municipal Retailers' Occupation Tax Act (Ill. Rev. Stat. 1973, ch. 24, par. 8-11-1) from the Department of Revenue of the State of Illinois (hereinafter referred to as the Department).

There were four administrative hearings held at which the Department's auditor who corrected the returns was present to answer questions. On examination by the hearing officer the auditor stated that he based his correction on a computer printout which relates to the records on file with the State in Springfield as to payment of the retailers' occupation tax and municipal retailers' occupation tax. On cross-examination by the taxpayer's attorney, the auditor testified that the correction was based on "sales tax returns, monthly filing of these returns, [and] the receipts." He also asserted that an additional 20% fraud penalty was added to the estimated assessment based on the computer results. Pursuant to further questioning, the auditor for the Department acknowledged that he did not know what data were fed into the computer and that the end-result answer was controlled by the computer and measured by the conditions of and basic input to the electronic machine.

The circuit court of Cook County confirmed the Department's assessment. However, the appellate court in Grand Liquor Co. v. Department of Revenue (1976), 36 Ill. App.3d 277, reversed the circuit court and remanded the cause for a new hearing by the Department, holding that before the Department's correction of the retailers' occupation tax returns based on the computer printout is deemed prima facie proof of its correctness pursuant to the Retailers' Occupation Tax Act (Ill. Rev. Stat. 1973, ch. 120, par. 443), the Department must explain the method it employed in reaching the assessment.

Section 4 of the Retailers' Occupation Tax Act (Ill. Rev. Stat. 1973, ch. 120, par. 443) provides for the examination and the correction of returns:

"As soon as practicable after any return is filed, the Department shall examine such return and shall, if necessary, correct such return according to its best judgment and information, which return so corrected by the Department shall be prima facie correct and shall be prima facie evidence of the correctness of the amount of tax due, as shown therein. In correcting transaction by transaction reporting returns provided for in Section 3 of this Act, it shall be permissible for the Department to show a single corrected return figure for any given period of a calendar month instead of having to correct each transaction by transaction return form individually and having to show a corrected return figure for each of such transaction by transaction return forms. In making a correction of transaction by transaction, monthly or quarterly returns covering a period of 6 months or more, it shall be permissible for the Department to show a single corrected return figure for any given 6-month period.

Instead of requiring the person filing such return to file an amended return, the Department may simply notify him of the correction or corrections it has made.

Proof of such correction by the Department may be made at any hearing before the Department or in any legal proceeding by a reproduced copy of the Department's record relating thereto in the name of the Department under the certificate of the Director of Revenue. Such reproduced copy shall without further proof, be admitted into evidence before the Department or in any legal proceeding and shall be prima facie proof of the correctness of the amount of tax due, as shown therein." (Emphasis added.) Ill. Rev. Stat. 1973, ch. 120, par. 443.

Under this Act "[p]roof of such correction by the Department may be made at any hearing before the Department or in any legal proceeding by a reproduced copy of the Department's record relating thereto * * *. Such reproduced copy [of the Department's record] shall without further proof, be admitted into evidence before the Department or in any legal proceeding and shall be prima facie proof of the correctness of the amount of tax due, as shown therein." (Emphasis added.) (Ill. Rev. Stat. 1973, ch. 120, par. 443.) Previous to the advent of computer use by the Department in the assessment of tax deficiencies, the corrected returns, deemed to be prima facie correct, were products of the Department auditors' personal investigations, computations, and verifications of records, invoices, or other data. At a hearing to challenge the additional tax imposed by the correction, an auditor who corrected the returns, or another personally familiar with the case involved, would be present to answer questions as to the nature of the personal computations of the corrected assessment. Anderson v. Department of Finance (1938), 370 Ill. 225; Copilevitz v. Department of Revenue (1968), 41 Ill.2d 154; Du Page Liquor Store, Inc. v. McKibbin (1943), 383 Ill. 276; Novicki v. Department of Finance (1940), 373 Ill. 342.

The general question raised for the first time before this court is whether, within the meaning of the Retailers' Occupation Tax Act (Ill. Rev. Stat. 1973, ch. 120, par. 443), an estimated tax correction based upon a computer printout should, "without further proof," be accorded prima facie evidentiary status as to "the correctness of the amount of tax due."

Under the conventional nonautomated record-keeping method of correction, the taxpayer, confronted with the deficiency under the Retailers' Occupation Tax Act, was afforded the opportunity to cross-examine a department auditor personally knowledgeable of the source records and accounting method of assessment. The problem we now face is that evidentiary rules must accommodate the automated record-keeping systems of sophisticated technology.

A computer printout is a figure result of electronic data processing: data from written documents is keypunched on cards, then transferred onto magnetic tapes or magnetic disks and processed according to a program consisting of a list of instructions in machine language fed to the computer on cards, tapes or disks.

Three potential sources of error underlie a computer record-keeping, data-processing system: "the input of information by encoding or translating it [source documents] into machine language, the creation of the program which instructs the computer, and the actual mechanical operation of the machine." (Tapper, Evidence from Computers, 8 Ga. L. Rev. 562, 566 (1974).) Moreover, "if the information from which the print-out is made has not been accurately compiled the computer's output will be similarly incorrect." (8 Ga. L. Rev. 562, 567.) The latter aspect has been succinctly described in the cybernetics maxim, "garbage in, garbage out." 8 Ga. L. Rev. 562, 567.

Although section 8 of the Retailers' Occupation Tax Act dictates that the conduct of an investigation or hearing shall not be bound by the technical rules of evidence (Ill. Rev. Stat. 1973, ch. 120, par. 447), this court has previously recognized in Novicki v. Department of Finance (1940), 373 Ill. 342, that the legislature did not intend this provision to abrogate the fundamental rules of evidence. We asserted further that the rule against hearsay evidence "is founded on the necessity of an opportunity for cross-examination, and is a basic and not a technical rule." 373 Ill. 342, 344.

The record shows that on March 9, 1972, the date of the first hearing held by the Department of Revenue, in relation to the introduction of the "correction of returns," the following dialogue took place on direct examination between the hearing referee of the Department, and Mr. Carey Blum, an auditor with the Department of Revenue, the only State witness:

"Q. What did you next then do?

A. Because the books and records have not been made available nor has the taxpayer returned my calls, an estimated assessment was set up and a 20 percent civil fraud penalty was added to the ...


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