Appeal from the Circuit Court of Sangamon County; the Hon.
Richard J. Cadagin, Judge, presiding.
PRESIDING JUSTICE WEBBER DELIVERED THE OPINION OF THE COURT:
The Department of Revenue (Department) conducted an audit of the plaintiff's business and as a result thereof issued corrected State and municipal retailers' occupational tax returns. Two notices of tax liability followed, one for the period April 1, 1976, through December 31, 1976, during which Rosolino and Filippo Puleo were doing business as a copartnership under the name of La Roma Pizza. The second was for the period January 1, 1977, through April 30, 1979, during which Rosolino Puleo conducted the business as a sole proprietorship. Both notices included interest and a fraud penalty. Timely protests were filed and a series of hearings were held by the Department. It was stipulated that the evidence taken would apply to both assessments.
At the conclusion of the hearings the Department issued final assessments which included interest and a fraud penalty. Plaintiffs, Filippo and Rosolino Puleo, filed a complaint for an administrative review in the circuit court of Sangamon County. In due course plaintiffs filed a motion for summary judgment and the Department filed objections thereto. Both parties filed extensive briefs with the trial court, which reversed the assessments. For reasons which are unclear the court also remanded the case. The Department has appealed, and the plaintiffs have cross-appealed. We reverse the order of the circuit court and affirm the assessments.
A tangled procedural problem presents itself at the outset. The Department has filed a motion to strike the major portion of a reply brief filed by the plaintiffs as cross-appellants. We have taken the motion with the case and now allow it.
Plaintiffs' position as a cross-appellant is somewhat tenuous. They obtained complete relief at the trial level — the assessments were reversed. Their motion for summary judgment on which the trial court's order was based alleged a single ground: that the Department's assessment was based upon hearsay evidence. Nonetheless, in briefing the matter before the trial court, plaintiffs raised a variety of other reasons for the purported invalidity of the assessments. The trial court's order of reversal was specific; it reversed on the ground of hearsay only; and the Department's brief is confined to this subject and to the fraud penalty. However, plaintiffs' brief, as appellees, raises and argues the same additional reasons for affirming the trial court as appeared in their trial brief, and the Department in its reply brief has answered them. Plaintiffs then filed a reply brief as cross-appellants, which is the subject of the motion.
We question the authority of plaintiffs to cross-appeal. Their motion for summary judgment was limited as was the order of the circuit court thereon. The only indication of the other issues is the presence of the trial brief, which we assume was considered by the trial court in making its decision. If plaintiffs desired that these matters be properly preserved, it was their burden to make the proper motion in the circuit court under section 3-111(c) of the Code of Civil Procedure (Ill. Rev. Stat. 1981, ch. 110, par. 3-111(c)).
However, the Department has not moved to strike the cross-appeal and asks only that the major portion of plaintiffs' reply brief be stricken. This is the only relief sought and the only relief which may be granted without our proceeding sua sponte, something which we decline to do, since it is our obligation to examine the total proceedings before the Department. We do suggest a more meticulous attention to procedural detail.
A brief summary of the evidence presented before the Department's hearing officer follows. A revenue auditor visited plaintiffs' place of business for the purpose of audit. Books and records of the business were not available, and plaintiff Rosolino Puleo informed him that they were in Chicago, the business being located in Canton, Illinois, and its principal object being the sale at retail of pizza and soft beverages. The auditor then used a reconstruction method to determine sales. He obtained information from six of plaintiff's suppliers showing plaintiff's purchases from them for the years 1976, 1977, 1978, and January through April 1979. He also examined plaintiff's monthly retailers' occupation tax returns for the same period. By comparing the two he found it apparent that the purchases totaled more than the receipts for the period. He was advised by the Department to apply a factor of 36% as the cost of sales. These projected sales were then offset by sales reported by the plaintiffs and the difference yielded the tax deficiency. He recommended a fraud penalty because the purchasers exceeded what was reported as sales. He also testified that he preferred to work from books and records and if they were available at the time of hearing, even then he would consider them.
At a second hearing a revenue fraud agent testified that he visited the plaintiff Rosolino Puleo together with another agent in February 1979 and learned that there were no books or records; he therefore requested an audit. After it was completed, he and the other agent again visited the plaintiff, who then told him that he did not keep a record of sales; that at the end of the month he would estimate sales and give the figure to the bookkeeper. He admitted to the revenue fraud agents that prior to the audit he had not filed correct tax returns; that he knew he had not been furnishing actual sales and knew that he was understating and underreporting purchases and sales. The agents offered him a statement to sign; he stated that everything in the statement was correct but he would not sign until he had talked with his attorney.
The agent further testified that he had obtained data from other pizza companies concerning their cost of sales; that Heritage House Enterprises, which owns several pizza places throughout the State, stated it to be 35-40%; that he had computed it for Pizza Hut Corporation and found it to be 27.24%. He also identified an exhibit which was the record of plaintiff's plea of guilty to filing fraudulent retailers' occupation tax returns and for which he received one years' probation and a fine of $1,000.
Plaintiff testified before the hearing officer that he understood the purpose of the fraud agent's visit was to determine if his brother were still in business with him. He stated that he had a bookkeeper who never told him what records were required to be kept and that the agent did not seem interested in seeing the records in Chicago. He further stated that the agent on the second visit told him the amount of tax which he owed and that he desired to see his lawyer; he denied that he stated that the statement offered to him was accurate. He also claimed that he pleaded guilty to the criminal charge because of the expense of contesting the matter, and he believed that his cost of goods sold was higher than the 36%; that it was 45-47% at the time of the hearing and even higher during the audit period. He testified that there were records in Chicago but that they were only purchase records; that he had no sales records because the bookkeeper did not tell him to keep sales receipts and he thought they were wastepaper.
The hearing officer recommended that the final assessments and the fraud penalty not be reduced; he found that during almost all the period in question purchases exceeded receipts and that reported receipts rose dramatically following the fraud agent's visit; he also found that the factor of 36% had been objected to by the plaintiff, but plaintiff was unable to offer any better method of fixing the cost of sales. He concluded that the Department had prepared the audit according to its best judgment and information as required by section 4 of the Retailers' Occupation Tax Act (Ill. Rev. Stat. 1981, ch. 120, par. 443); that the 36% factor met the statutory requirement since the taxpayer had no books and records for audit, any sales records having been destroyed and any purchase records supposedly being in Chicago but never presented.
With regard to the fraud penalty, the statement of the hearing officer is instructive:
"[E]xcept for the short audit year of 1979, the Taxpayer reported sales for each audit year which were several thousand dollars less than his purchases as found by the Department's investigation of his suppliers. I note that in the short audit period in the year 1979, his reported sales increased following a visit from the Department's Fraud Agent, Scheller. The Taxpayer is a man unaccustomed to American business procedures, however, under penalties of perjury he did sign Retailer's Occupation Tax Returns which understated his tax liability month after month. The Taxpayer did plead guilty to filing fraudulent Retailer's Occupation Tax Returns for the period of February 1978 ...