SIXTH DIVISION March 30, 2007
No. 1-05-0157
FARID SWEILEM and KHALIL SWEILEM, ) Appeal from the ) Circuit Court Petitioners-Appellants, ) of Cook County. ) v. ) Nos. 01 L 51089 and ) 01 L 51090 ILLINOIS DEPARTMENT OF REVENUE, ) ILLINOIS DEPARTMENT OF REVENUE ) BOARD OF APPEALS; and DIRECTOR of ) THE ILLINOIS DEPARTMENT OF ) REVENUE, ) The Honorable ) Alexander P. White, Respondents-Appellees. ) Judge Presiding.
JUSTICE O'MALLEY delivered the opinion of the court:
Appellant-taxpayers Farid and Khalil Sweilem (taxpayers)
appeal the judgment of the circuit court of Cook County affirming
the denial by the Illinois Department of Revenue (the Department)
of taxpayers' request to vacate notices of penalty liability
(NPL) and remand the matter to the Department for a hearing on
the issue of taxpayers' personal liability. Taxpayers allege
that the Department's NPL's were ineffective because it failed to
notify their attorneys pursuant to statute and, alternatively, if
the NPL's were properly issued to taxpayers, the Department
failed to meet due process requirements for notice under the
Illinois and the United States Constitutions.
For the reasons that follow, we reverse the judgment of the 1-05-0157
circuit court and the ruling of the board of appeals and remand
this matter for further proceedings.
BACKGROUND
In 1977 taxpayers purchased Jet Food Market, a grocery store
in Chicago, Illinois. Farid was the president of Jet Foods Inc.,
and Khalil was the secretary. On December 2, 1984, the
Department issued a notice of taxpayer liability to Jet Foods for
deficiencies for a period of time beginning in July 1978, through
November 1981, pursuant to the Retailers' Occupation Tax Act (the
Act) (Ill. Rev. Stat. 1981, ch. 120, par. 440 et seq. (currently
35 ILCS 120/1 et seq. (West Supp. 2005)). The amount of
liability assessed against Jet Foods, including interest,
deficiency penalties, fraud penalties and the underlying tax
owed, was $476,622.63. Taxpayers hired the law firm of Barnstein
& Berman to represent Jet Foods in the proceedings initiated by
the Department.
In December 1986, a hearing commenced but was continued,
when taxpayers discharged their law firm during the course of the
hearing. Taxpayers hired the law firm of Burke & Smith and
proceeded with the hearing on June 4, 1987. Following the June
4, 1987 hearing, the administrative law judge (ALJ) found that
Jet Foods was liable for the unpaid sales tax and assessed
against taxpayers an amount of $431,272.39. The amount
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represented liability for the underlying sales tax, deficiency
penalty and interest; however, the ALJ specifically held that the
evidence did not support the imposition of a 20% civil fraud
penalty. The Department attempted to collect the debt from Jet
Foods in 1988, but was unsuccessful because the corporation had
been involuntarily dissolved by the Illinois Secretary of State
prior to 1987 and was insolvent.
On October 13, 1989, the Department issued NPL's to
taxpayers based on their liability as corporate officers for Jet
Foods' unpaid sales tax amounting to $149,612.06, penalties of
$8,441.60 and interest of $477,218.97, totaling $635,272.63. The
NPL's were sent to addresses listed on taxpayers' most recent
Illinois income tax returns. Farid's NPL was returned to the
Department marked "undeliverable" by the United States Postal
Service. Khalil's NPL was returned by the post office to the
Department on October 19, 1989, and bore a sticker indicating
that Khalil had moved to a new address and notifying the
Department of the new address. The Department chose not to
forward the NPL to Khalil's new address. On October 31, 1989,
Farid directed attorney John Wickert from the law firm of Burke &
Smith to file a power of attorney with the Department reflecting
Farid's new address and signature as president of Jet Foods.
On June 1, 1990, taxpayers filed petitions with the
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Department seeking to vacate the NPL's, reopen the matters and
hold hearings on taxpayers' personal liability for the corporate
tax deficiency. Both taxpayers alleged that the NPL's were not
received and should have been delivered to their attorneys Burke
& Smith. Khalil alleged that he was not a responsible person and
Farid alleged that his failure to pay taxes on behalf of the
corporation was not willful. The Department summarily denied
both petitions.
Taxpayers filed separate petitions for writs of certiorari
in the circuit court and following several successful motions to
dismiss by the Department, the circuit court granted both writs
for certiorari in 1997. Following a review of the matter, the
circuit court remanded it back to the ALJ for a hearing to
determine whether the Department complied with section 12 of the
Act (Ill. Rev. Stat. 1989, ch. 120, par. 451). Section 12 of the
Act provides, in pertinent part:
"Whenever notice is required by this Act, such notice may
be given by United States registered or certified mail,
addressed to the person concerned at his last known address,
and proof of such mailing shall be sufficient for the
purposes of this Act. Notice of any hearing provided for by
this Act shall be so given not less than 7 days prior to the
day fixed for the hearing. Following the initial contact of
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a person represented by an attorney, the Department shall
not contact the person concerned but shall only contact the
attorney representing the person concerned." Ill. Rev.
Stat. 1989, ch. 120, par. 451.
On December 2, 1999, a hearing was held before a Department
ALJ pursuant to the circuit court's remand order. Taxpayers
called attorney Richard Miller, Farid and Khalil Sweilem and
Carol Harper as witnesses. Attorney Miller testified that he
represented Jet Foods and taxpayers individually in 1987. He
testified that in or around April 1987, a document was issued by
the Department commanding the appearance of taxpayers before an
ALJ for a hearing. Attorney Miller stated that it was the same
ALJ that ultimately heard the case against Jet Foods on June 4,
1987. He testified that he was engaged by taxpayers to represent
them individually at this hearing. Attorney Miller characterized
the meeting as unusual and "much more informal than the
subsequent one that [was] had in terms of witnesses were not
sworn in, there was no court reporter. It was more in the order
of a hearing, if you will, to show probable cause why the
brothers should not be added to the Jet Foods lawsuit that was
underway, and in which there was a formal charge of fraud
[pending] for years ***."
Attorney Miller testified that he, taxpayers,
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representatives from the Department and the ALJ were present.
During the course of the hearing, the issue was limited to
whether or not taxpayers could be liable for the corporate tax
deficiency. He stated during his testimony that "[his] clients
were very visibly pleased because essentially the whole issue of
why we were there was whether or not in their personal capacity
they should be responsible for substantial dollars in potential
tax revenue which was going to be the subject of the subsequent
adjudication against Jet Foods." Attorney Miller argued that
taxpayers should not be held personally liable and, according to
his testimony, the ALJ agreed finding that there was no basis to
pursue the individuals.
On cross-examination, the Department asked whether attorney
Miller filed a power of attorney with the Department indicating
that he represented taxpayers personally. Attorney Miller could
not recall whether he filed a power of attorney on behalf of
taxpayers. The Department further inquired as to whether or not
attorney Miller knew that the original proceeding commenced in
December of 1986 and was continued when taxpayers fired their
original attorney. He acknowledged this fact. On redirect,
attorney Miller stated that he informed the Department that he
was representing taxpayers individually and that his practice was
to leave his business card with the Department.
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Khalil testified that he, his brother Farid and Jet Foods
were represented by the firm of Burke & Smith and that attorney
Miller was the attorney who handled the matters that arose before
the Department on their behalf. He further testified that a
conference was held in the spring of 1987 where attorney Miller
represented him and his brother. Khalil testified that the issue
discussed at the meeting was whether or not he and his brother
Farid should be personally liable in the Jet Foods matter.
Khalil testified that the outcome of the hearing was that he and
Farid would not be personally liable for Jet Foods' tax
liability. He also testified that he and Farid celebrated
following this hearing.
Khalil testified that he was contacted by a Department
collection agent in 1990. He told the agent that he was
represented by Burke & Smith and that it surprised him that he
was being contacted about this tax matter because he believed
that it had been resolved. Khalil denied ever receiving an NPL
from the Department and testified that he moved in July 1989 and
notified the post office of his forwarding address.
Farid testified that he, his brother and Jet Foods were
represented by Burke & Smith in 1987. Farid indicated that he
moved from Illinois to Arizona due to health problems in 1989.
Farid denied ever receiving an NPL from the department. Farid
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stated he, his brother and attorney Miller attended a meeting in
the spring of 1987, a few months before the Jet Foods hearing on
June 4, 1987. Farid testified that the purpose of the meeting
was to determine if he and Khalil would be personally responsible
for the tax liability in the Jet Foods matter. He told the ALJ,
"After we finished meeting I asked the judge, 'What can I do
now?' She said 'Go and live your life. Congratulations, nothing
against you.' Then I went outside, told my brother what's
happening, we celebrate [sic] and went home." Subsequently, the
following colloquy occurred between Farid and his attorney:
"MR. SMITH: Q. Did Rick Miller continue to represent Jet
Foods at the hearing in June?
A. I remember he said about two months I'm going to
leave, and Mr. Burke & Smith going [sic] to represent me and
my brother, too.
Q. And when did you first have anything to do with Burke
& Smith, to the best of your memory?
A. It's about - - when did we start with Burke & Smith,
do you mean [sic]?
Q. Yes. Was it '86 or '87? When was it approximately?
A. Before '86.
A. Did they have power of attorney? Did Burke & Smith
have power of attorney on your behalf with the Department of
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Revenue?
A. Yes, sir.
Q. Around that time?
Q. And so in addition to Mr. Miller representing you
individually on that date, Burke & Smith had a power of
attorney on file at that time too, in the spring of 1987; is
that right?
A. Yes, sir."
On cross-examination, the Department asked Farid if he had
copies of the powers of attorney that he testified were filed on
his behalf by the firms of Barnstein & Berman and Burke & Smith.
Farid testified that he did not and that all documents were filed
with the Department by his attorneys. Farid further testified
that he did not notify the Department of his move to Arizona, but
that he informed his attorneys at Burke & Smith. He also
testified that he lost his driver's license in 1989 and had to
apply for a new license in Illinois in order to receive a
driver's license in Arizona. He used his former Illinois address
to obtain a new license though he no longer lived in Illinois.
Taxpayers called attorney Wickert who testified that he was
an attorney for the law firm of Burke & Smith from 1984 until
1992. He testified that during the late 1980s Burke & Smith
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represented taxpayers and Jet Foods and he was assigned to do
work on the case as an associate. Attorney Wickert testified
that he filed a power of attorney on behalf of Jet Foods at
Farid's direction relative to an income tax matter on October 31,
1989.
Taxpayers then called Carol Harper, a public service
administrator for the Department in the 100% penalty unit.
Harper testified that the Department attempts to notify and
collect payment from the responsible taxpayer, in this case Jet
Foods. If efforts are unsuccessful, the collections bureau
attempts to collect the debt from the responsible taxpayer. Once
it is determined that collection from the responsible taxpayer is
not possible, the matter will be referred to the 100% penalty
unit. Harper testified that the unit will issue NPL's to the
responsible officers. Harper also explained the methods used to
obtain information about responsible officers including checking
tax returns, filings with the Secretary of State and checks
issued to the Department for taxes.
Harper also testified that she was asked by counsel to check
the Jet Foods files. She ordered the Jet Foods files and learned
that the audit file had been destroyed and the general file had
been "purged" or, according to Harper, nothing was in the file.
In this case Harper testified that she relied on filings from the
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Illinois Secretary of State. Harper further testified that had
she received the NPL that was returned with a forwarding address
that she would resend the NPL out of fairness and reasonableness.
She did, however, acknowledge on cross-examination that she was
not required to do so under any policy or regulations in place
within the Department.
Throughout the hearing, the Department objected to any
mention of a hearing that took place in the spring of 1987
contending that no procedure existed in the regulations that
allowed for such a hearing. The parties do not dispute that the
spring 1987 hearing took place before the June 4, 1987
disposition of Jet Foods' liability. The Department asserted
that a determination of individual liability of corporate
officers could not be made until the liability of the corporation
was established. The Department, however, presented no
testimony or evidence that negated a meeting with the Department,
taxpayers, attorney Miller from Burke & Smith as taxpayers'
personal attorney and an ALJ during which taxpayers were made
aware of their potential liability for Jet Foods' tax liability.
Following the hearing after the circuit court's first remand
and further briefing by the parties, the ALJ ruled that taxpayers
were required to file a power of attorney with the Department
pursuant to Sweis v. Sweet, 269 Ill. App. 3d 1 (1995); taxpayers
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could not produce a copy of the power of attorney; testimony
offered by attorney Miller and taxpayers was not credible;
section 200.110 of the Department's regulations prohibits anyone
from appearing on behalf of a taxpayer without first filing a
power of attorney relative to the particular matter; and even if
the meeting took place, initial contact occurred when the NPL was
sent because corporate liability must be determined first and
corporate officers' liability cannot be intermingled with
corporate liability.
Taxpayers appealed this ruling and the matter was fully
briefed before the circuit court. The circuit court held that
the ALJ erred in excluding the testimony of attorney Miller
concerning the hearing alleged to have taken place in the spring
of 1987; his testimony was relevant and should have been
considered by the ALJ in determining whether the Department had
complied with section 12 of the Act. The court ordered the
matter remanded a second time to the Department's board of
appeals and that the testimony of attorney Miller be admitted
into evidence. The ALJ was instructed to review the testimony of
attorney Miller and the rest of the record to determine whether
taxpayers were personally represented by Burke & Smith at the
time of the 1987 meeting and whether this meeting or any other
contact by the Department occurred prior to the issuance of the
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NPL's during which taxpayers were made aware of their potential
for individual liability within the meaning of Sweis. The
Department was given leave of court to present evidence or
testimony to rebut the testimony of attorney Miller.
On the second remand, the Department indicated to the ALJ
that it would not call any witnesses or seek to admit any
evidence. The Department explained to the court that:
"The ALJ in that particular case to our best
understanding is a federal administrative law judge, and the
department did not think it was appropriate policy to go
about calling federal officers, judges, indirectly as
witnesses in departmental hearings.
We don't believe that that's an appropriate role for a
federal judge or an appropriate role for a federal ALJ nor
is it an appropriate role for a department ALJ to become a
witness. Nor do we feel that we want to expose in the
future our litigating attorneys to becoming potential
witnesses about conversations or things that happened within
the scope of hearings.
So for that reason, from a policy prospective, we didn't
think that was an appropriate way to go.
As it turns out, the ALJ in that case is Valerie Bablick
(phonetic), and it is also our understanding that she is in
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either Kentucky or West Virginia and may have been difficult
to find and would have been more difficult to subpoena if
she didn't want to come. But we didn't really want to get
into that kind of an issue."
The Department continued to argue that no procedural
mechanism existed for a hearing or meeting to discuss personal
liability of a responsible officer prior to a disposition in the
underlying corporate liability case. The Department asked the
ALJ to take judicial notice that no regulations or statutes exist
that permit such a proceeding.
On August 8, 2001, the ALJ ruled that the Department was not
legally required to mail the NPL's to taxpayers' attorneys. The
ALJ based her conclusion on the fact that taxpayers could not
produce a copy of a power of attorney filed with the Department
on their behalf; attorney Miller's testimony was contradicted by
an affidavit filed in the circuit court in 1996 by Farid wherein
he indicated that the hearing at issue occurred in 1988 as
opposed to 1987; taxpayers could not be joined in the
Department's case against Jet Foods because the corporation must
be found liable first and "you simply cannot combine a cause of
action that does not yet exist and over which an ALJ has no
authority with a pending action on another issue" (Emphasis in
original.); and attorney Miller's testimony regarding the unusual
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proceeding was indicative of his "ignorance with regards to the
mechanics of the issuance and finalization of *** notices and
their interrelation and serves to undermine the credibility of
his testimony and his rendition of the events." Taxpayers
appealed this ruling to the circuit court.
On December 22, 2004, the circuit court issued an order
confirming the board of appeals' August 8, 2001 decision. The
circuit court, however, specifically found that the ALJ's finding
that attorney Miller's testimony was not credible and not
entitled to any weight was against the manifest weight of the
evidence. The court, in a 28-page written order, wrote the
following relative to attorney Miller's testimony:
"Although the events in Miller's testimony occurred more
than twelve years before his testimony, Miller testified
that in anticipation of being a witness in this case, he
went through his files of the case he handled at Burke &
Smith in 1987. After he left Burke & Smith in August 1987,
he did not work for the Sweilems and, therefore, these
events had to occur before August 1987. The most important
self-corroborating factor of Miller's testimony is the
minute details he related concerning what happened before
and at this spring 1987 meeting. Miller's testimony cannot
be the result of a faulty memory or an unfamiliarity with
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procedures.
If Miller's testimony is not true, he is guilty of
perjury. Everything in Miller's career belies such a
conclusion. Miller, who has gone on to a completely new
position, had no incentive to lie as an officer of this
Court on behalf of the Sweilems. Miller never spoke with
the Sweilems from August of 1987 until moments before his
testimony in 1999. Yet we see the similarities in their
statements: (1) Farid said in the affidavit there was a
meeting that he attended at the State of Illinois Building
between the Attorneys for [sic] Burke & Smith and the
Department; and (2) Farid says in an affidavit that he was
told by the Department it would not pursue him as an
individual for the tax liability of Jet Foods. Miller's
testimony is uncontradictory.
The only differences present are: (1) Farid says in the
affidavit that the meeting occurred in April of 1988 while
Miler says that it occurred one year earlier. We know that
Miller is correct because he left Burke & Smith in August of
1987. It is likely that in 1996 when Farid filed this
affidavit, he forgot the meeting was in April of 1987
instead of April of 1988. Farid's memory of an April
meeting corroborates Miller's testimony that the meeting
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occurred in the months before June of 1987; and (2) Farid,
in an affidavit prepared by his attorneys, Burke, Burns &
Pinelli in 1996, said he was told by the Department at this
meeting that there would be no individual liability because
there was no finding of fraud against Jet Foods. The Burke
firm did not interview Miller prior to filing the 1996
affidavit. Miller testified that at the spring 1987 meeting
he convinced the ALJ the Sweilems should not be held
individually responsible and the ALJ so informed the
Sweilems. This was corroborated by the Sweilems testimony.
The Department presented no testimony or evidence that
negated a meeting at the State of Illinois Building among
the Department, the Sweilems and Burke & Smith at which the
Sweilems, with Burke & Smith as their attorneys, were made
aware of their potential individual liability for Jet Foods'
taxes." (Emphasis added).
The circuit court, notwithstanding its finding, held that
the hearing could not have been an "initial contact" because
there had been no determination that Jet Foods was liable for the
taxes owed, there was no power of attorney on file and there was
no previous proceedings commenced against taxpayers individually.
The court held that the potential for individual liability that
was the basis for the court's decision in Sweis was not present
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in this case, and the ALJ's ultimate finding that the
Department's initial contact was not at the spring 1987 meeting
was not against the manifest weight of the evidence. Taxpayers
filed the instant appeal.
ANALYSIS
I. STANDARD OF REVIEW
Despite the fact that the parties collectively identify 12
issues on appeal which they contend must be answered by this
court, we are of the view that the central question is whether
there was an initial contact made by the Department prior to
issuance of the NPL's to taxpayers. In order to answer this
question, we must resolve both questions of fact and law. "As a
preliminary matter, we note that this court reviews the
administrative agency's decision and not the circuit court's
decision." Wigginton v. White, 364 Ill. App. 3d 900, 905 (2006),
citing Lindsey v. Board of Education, 354 Ill. App. 3d 971, 978
(2004). The standard of review applied to an administrative
agency's decision depends upon whether the issue presented is one
of fact or one of law. Carpetland U.S.A., Inc. v. Illinois
Department of Employment Security, 201 Ill. 2d 351, 369 (2002).
An administrative agency's factual findings are reviewed by
applying a manifest weight of the evidence standard. Lindsey,
354 Ill. App. 3d at 978. An administrative agency's legal
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conclusions, on the other hand, are reviewed de novo. Lindsey,
354 Ill. App. 3d at 979.
The framework for deciding whether the Department made an
initial contact with taxpayers pursuant to section 12 of the Act
requires two analyses. First we must decide whether it was
permissible for the ALJ to disregard attorney Miller's and
taxpayers' unrebutted testimony that a proceeding took place
during which they were informed of their potential future tax
liability. If not, we must then determine whether the proceeding
was sufficient to constitute an initial contact pursuant to Sweis
v. Sweet, 269 Ill. App. 3d 1 (1995).
II. UNREBUTTED TESTIMONY
Because we have previously recounted the facts, we need not
revisit the evidence again in detail which the circuit court
relied upon. We agree with the circuit court’s conclusion that
the Department failed to produce any evidence to rebut taxpayers’
assertion that a proceeding took place during which they were
informed of their potential responsibility for future tax
liability.
Our supreme court has clearly indicated that in Illinois a
finder of fact may not simply reject unrebutted testimony.
Bucktown Partners v. Johnson, 119 Ill. App. 3d 346, 353-55
(1983), citing People ex rel. Brown v. Baker, 88 Ill. 2d 81, 85
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(1981); Bazydlo v. Volant, 164 Ill. 2d 207, 215 (1995). As the
Illinois Supreme Court has explained, although "the credibility
of witnesses and the weight to be accorded their testimony are
typically jury considerations [citations], a jury cannot
arbitrarily or capriciously reject the testimony of an
unimpeached witness [citations]." People ex. rel. Brown, 88 Ill.
2d at 85. This is true even though the witness may be an
interested party or an employee of one of the parties. Chicago &
Alton R.R. Co. v. Gretzner, 46 Ill. 74, 80 (1867); Bucktown
Partners v. Johnson, 119 Ill. App. 3d at 352.
Under the standards announced in Bucktown Partners and
People ex rel. Brown, a fact finder may not discount witness
testimony unless it was impeached, contradicted by positive
testimony or by circumstances, or found to be inherently
improbable. Bucktown Partners, 119 Ill. App. 3d at 353, citing
People ex rel. Brown, 88 Ill. 2d at 85. "Under Illinois law, a
witness' testimony is inherently improbable if it is
'contradictory of the laws of nature or universal human
experience, so as to be incredible and beyond the limits of human
belief, or if facts stated by the witness demonstrate the falsity
of the testimony.' " Bucktown Partners, 119 Ill. App. 3d at 354,
quoting Kelly v. Jones, 290 Ill. 375, 378 (1919).
In our view, it is not inherently improbable that the
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Department attempted to join or pursue taxpayers individually.
It is conceivable that the Department attempted to hold taxpayers
responsible in the suit against Jet Foods especially since the
corporation had been dissolved and was insolvent prior to the
June 4, 1987 hearing. The fact that the Department regulations
do not provide a specific framework for such a procedure neither
renders the corroborated testimony of three witnesses inherently
improbable nor conclusively proves that it could not occur.
Taxpayers produced evidence that following the commencement
of the Jet Foods tax matter they received a summons to appear
before an ALJ. At this proceeding, they were represented by
their attorney who argued on their behalf explaining why they
should not be personally liable for the Jet Foods tax liability.
In our view, it is more likely that the Department, in its
thorough and zealous representation of the state, unsuccessfully
attempted to hold taxpayers responsible for the tax liability of
the bankrupt corporation prior to the completion of the Jet Foods
tax liability determination. It is less likely that three
witnesses, one of whom is entirely independent, would fabricate
corroborative testimony of an event that took place more than 10
years ago without speaking to each other in over 12 years.
Consequently, we find that it was not incredible testimony beyond
the limits of human belief that is contrary to the laws of nature
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or human experience. Bucktown Partners, 119 Ill. App. 3d at 354.
The fact that no supporting documents were produced such as
the summons or a power of attorney does not persuade this court
that the proceeding did not occur. Nor is it proof by
circumstances that refutes taxpayers’ evidence. We point out
that the Department destroyed the audit file while this matter
was still pending before the Department’s appeals board and the
circuit court. The master file also was purged of all
information prior to the hearing ordered by the circuit court on
its first remand. Moreover, the Department had the opportunity
to rebut the testimonial evidence offered by taxpayers by calling
the ALJ who allegedly presided over the meeting at issue.
The Department argues that taxpayers had the same
opportunity to call the ALJ who presided over the spring 1987
proceeding and should have done so to prove their case. We
reject this argument for two reasons. First, taxpayers produced
more than sufficient evidence that the proceeding occurred in the
form of unrebutted testimony from three witnesses. Second, after
taxpayers produced the only evidence during the first hearing on
remand, the circuit court ordered a limited remand a second time
specifically indicating that only the Department was granted
leave to call additional witnesses or admit evidence. The
Department, without explanation, simply stated that it was
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improper, in its view, to call a former ALJ or seek to obtain an
affidavit to rebut taxpayers’ evidence and chose to stand on its
theory that it could not have happened because no statutory
mechanism existed to facilitate it.
When assessing the hearing officer's fact determinations, we
apply a manifest weight of the evidence standard of review.
Wigginton, 364 Ill. App. 3d 900, 911 (2006), citing Lindsey, 354
Ill. App. 3d at 978. However, in the absence of any evidence
contradicting taxpayer's testimony or a showing that it is
inherently improbable pursuant to Bucktown Partners, 119 Ill.
App. 3d at 353-55, and People ex rel. Brown v. Baker, 88 Ill. 2d
at 85, we find that an ALJ cannot reject the evidence under any
standard of review. Wigginton, 364 Ill. App. 3d at 911. We thus
hold that the ALJ erred in rejecting the testimony of attorney
Miller, Farid and Khalil and the unrebutted evidence must be
taken as true.
III. INITIAL CONTACT
Taxpayers contend that the NPL's were ineffective because
they were sent directly to them instead of to their attorneys
pursuant to section 12 of the Act because the spring of 1987
proceeding was an initial contact. The Department argues that
pursuant to section 12 of the Act and the Sweis case, it is only
required to send NPL's to a representative of a taxpayer after
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(1) an initial contact has been made; and (2) when a taxpayer has
a power of attorney on file with the department. Both the
circuit court and the Department ruled that personal liability is
not possible until the hearing on the corporation's tax liability
is completed. We disagree.
Section 12 of the Act states: "Following the initial contact
of a person represented by an attorney, the Department shall not
contact the person concerned but shall only contact the attorney
representing the person concerned. Ill. Rev. Stat. 1989, ch.
120, par. 451.
The purpose of the Act is to collect a tax and, as a result,
the rights and liabilities of the parties accrue at the time the
tax becomes due and owing, even though the exact amount of the
taxes may not have yet been determined. Sweis, 269 Ill. App. 3d
at 6. In the instant case, the taxes at issue became due in
1978, 1979, 1980 and 1981. Jet Foods' tax liability was set at
that time and the Department was entitled to payment of the tax,
and any officers or employees' potential future liability sprung
to life. Sweis, 269 Ill. App. 3d at 6. We also noted that
"[s]ection 13 1/2 clearly designates that personal liability
'represents the tax unpaid by the corporation,' and this
corporate tax is the sole 'basis of such penalty liability.' The
exact amount of liability is based on either (1) the final or
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revised final assessment, or (2) the corporate taxpayer's return
filed with the Department." Sweis, 269 Ill. App. 3d at 6.
The Act, as we pointed out in Sweis, gives the Department
three methods to collect taxes where a corporation has not timely
and/or accurately paid its taxes: (1) collect the unpaid amount
from the corporate taxpayer; (2) institute criminal proceedings
against the corporate taxpayer and/or responsible officers and
employees; and (3) collect the unpaid amount from the responsible
officers or employees under section 13 1/2. Although these
alternatives may encompass separate proceedings, they are
nonetheless connected and dependent upon the unpaid corporate
taxes. Sweis, 269 Ill. App. 3d at 7. Due to the interconnected
nature of these proceedings we characterized them as "different
spokes of the same wheel," and found that "initial contact occurs
when the Department for the first time advises or notifies an
officer or employee that he or she may be potentially liable for
any unpaid taxes of the corporation." Sweis, 269 Ill. App. 3d at
7. Based on the testimony of attorney Miller, Farid and Khalil
that the Department communicated its intent to hold Khalil and
Farid personally responsible for Jet Foods' deficiency, we hold
that the initial contact occurred in the spring of 1987.
We also find that the protections of section 12 do not
depend exclusively upon the execution of a valid power of
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attorney. In our view, it is important to accentuate the fact
that, contrary to the Department's assertion, neither the Sweis
case nor section 12 of the Act requires a taxpayer to submit a
power of attorney as a prerequisite to receiving the protections
contemplated therein. The statute and the Sweis case require the
protections at issue here following an initial contact. Sweis
269 Ill. App. 3d at 9. Simply put, the Department cannot limit
the protections created by the legislature by reading
requirements into the statute which do not exist. Undoubtedly,
the fact that the taxpayer in Sweis previously submitted a valid
power of attorney for the relevant period and matter was
particularly damning to the Department's position in there.
Sweis, 269 Ill. App. 3d at 9, citing Pape v. Department of
Revenue, 40 Ill. 2d 442, 452 (1968) (holding that section 12 of
the Act required the Department to rely on the information in its
files and a valid power of attorney which the taxpayer had
previously executed). In our view, the production of a power of
attorney for the relevant time and matter in Sweis was
conclusive, but not necessarily requisite proof.
In the instant case, however, the only testimony presented
relative to this issue was that taxpayers received a notice to
appear on a certain day in the State of Illinois Building, they
appeared represented by counsel, who had previously represented
26 1-05-0157
Jet Foods in various other matters with the Department and,
according to Farid's unrebutted testimony, filed a power of
attorney with the Department. Moreover, we will not presume, in
the Department's favor, that a power of attorney never existed
when it destroyed the files and documents that would serve as
evidence to support or refute the claim.
Additionally, we emphasized in Sweis the protective nature
of section 12 of the Act:
"Prior to 1975, section 12 allowed the Department to
contact and send notices merely to the 'person concerned.'
However, in an effort to provide greater protection for
individuals and to ensure that their rights were safeguarded
and preserved, Senate Bill 55 was introduced. The debates
surrounding this bill clearly indicate that the legislature
intended to give greater protection to taxpayers and others
concerned against the government's imposition and collection
of this tax. (See 79th Ill. Gen. Assem., House Proceedings,
June 9, 1975, at 11; June 11, 1975, at 104-06; November 20,
1975, at 72-79; November 21, 1975, at 136-48; Senate
Proceedings, June 20, 1975, at 73; November 5, 1975, at
12-16.) ***. [Relative to] the language pertinent here[,]
Senator Nudelman stated: '[T]he amendment to Senate Bill 55,
requires only that once there has been a proceeding started
27 1-05-0157
that the department have contact with *** the respondent's
lawyer, if in fact he has a lawyer who has filed an
appearance.' (79th Ill. Gen. Assem., Senate Proceedings,
June 20, 1975, at 73.) The debate in the House is more
enlightening. ***.
'Madison: Representative Kosinski, ah *** it seems like
in the discussion on this Bill an aspect of this Bill has
been left out which seems to me to be very important. As I
understand it, this Bill also prohibits the Department of
Revenue from contacting a person represented by an attorney
except from the initial contact. Is that not true?
* * *
Kosinski: You're understanding, Mr. Madison, is
perfectly correct. This was in the form of an Amendment
offered by Representative Berman on the premise that once
the taxpayer is contacted by the Department of Revenue and
has the good judgment to turn this over to a competent
attorney, in the future, the Department would then deal
through the attorney so that the taxpayer is properly
represented and the answers are correct. You're right, Mr.
Madison.
Madison: Ah *** What is your reaction to the argument,
Representative Kosinski, that this procedure interferes with
28 1-05-0157
the individual[']s rights of being informed of the status of
a suit or hearing?
Kosinski: Ah *** I have a negative reaction to that
statement in that the taxpayer is originally contacted.
His rights are told him. He knows the subject of the case.
He knows the problems of the case and only after that and
after consideration of thought does he turn it over to a tax
ah *** attorney to represent him, and I think that man is
most fitted properly to represent the taxpayer.' (79th Ill.
Gen. Assem., House Proceedings, November 20, 1975, at
75-76.)
This exchange confirms that the legislature intended, in
amending section 12, to protect individuals from such
disastrous results as occurred in this case. Although the
legislature did not explicitly discuss what it meant by
initial contact, the legislature did not limit it to initial
contact per notice or proceeding." (Emphasis added.) Sweis,
269 Ill. App. 3d at 8-9.
It is clear from the plain language of section 12 of the Act
and its legislative history that the intention of the legislature
was to protect the taxpayer from technically defaulting in a
matter with potentially catastrophic financial implications.
Indeed, in this case where taxpayers defaulted for failure to
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respond within 20 days, the initial tax liability exclusive of
penalties and interest which amounted to less than $150,000 grew
exponentially to nearly $1 million. This is an amount that the
Department seeks to recover from taxpayers without the benefit of
a hearing on whether the individuals are legally responsible for
the corporation's deficiency. Based on the unrebutted evidence
of a proceeding held in the spring of 1987 where taxpayers were
represented by counsel and informed of their potential liability
for Jet Foods' tax, we hold that the Department made an initial
contact with taxpayers within the meaning of section 12 of the
Act and Sweis. The Department, as a result, violated section 12
of the Act by not mailing the NPL's to taxpayers' attorneys.
Thus, the NPL's did not become final and taxpayers have not
waived their rights to contest them. Sweis, 269 Ill. App. 3d at
5.
IV. CONCLUSION
For the foregoing reasons, we hold that the ALJ was not
entitled to disregard the unrebutted testimony presented by
taxpayers; the proceeding to which taxpayers and attorney Miller
testified was an initial contact as contemplated by section 12 of
the Act and Sweis, 269 Ill. App. 3d at 6; the Department violated
section 12 of the Act by failing to mail the NPL's to taxpayers'
attorneys and taxpayers have not waived their right to contest
30 1-05-0157
the NPL's. Because this matter is remanded for further
proceedings, we need not address taxpayers' due process claims.
Accordingly, the judgment of the circuit court is reversed and
this matter is remanded to the Department's board of appeals for
further proceedings consistent with this opinion.
Reversed and remanded with directions.
JOSEPH GORDON and McNULTY, JJ., concur.