From 2010 through 2013, the company and the Department communicated multiple times, and the company repeatedly stated that it was preparing tax returns for the audit years for the LLCs and the company and that it required more time to prepare those returns. In 2013, the company provided the Department with draft tax returns for the company and the LLCs. In May 2016, after another three years passed without final tax returns being filed, the Department informed the company that it was assessing additional corporation franchise tax computed based on the amounts in the draft returns plus interest and penalties. In June 2016, the company filed final tax returns for all of the audit years, and the final returns reflected income and deductions that were larger than the amounts previously included in the draft returns.

The Department then issued three information document requests over the next two years that requested information substantiating the deductions claimed on the filed returns. In response to these requests, the Tribunal found that the company “provided only partial responses that lacked any externally verifiable substantiation” and repeated Department requests were “met with partial, inconclusive responses.” Finally, in 2018, the Department issued the notices of deficiency that assessed the amount of additional corporation franchise tax that the Department had previously computed using the company’s draft returns plus updated additional interest and penalties. The company appealed and the Administrative Law Judge (“ALJ”) sustained the notices finding: (1) that the company had failed to meet its burden of proving that the notices were incorrect; and (2) that penalties were properly imposed as the company also failed to demonstrate that its failure to file timely returns was a result of reasonable cause and not willful neglect.

The Tribunal agreed with the ALJ, concluding that there was a rational basis for the notices because “[w]orking without returns or supporting documentation more than six years after it began, the [Department] used the available information provided by petitioner, verified by other information contained in the [Department’s] own database, to arrive at a computation of tax due from petitioner.” Moreover, the Tribunal reasoned, the Department provided the company with numerous opportunities to substantiate the amounts that the company reported on its filed returns and the company’s failure to provide substantiating information left the Department with “little choice” but to “use another method to arrive at a determination of tax liability.” Finally, the Tribunal concluded that the ALJ correctly determined that penalties were properly imposed as the company did not meet its burden to demonstrate reasonable cause.