Penalties Sustained in Unusual Tribunal Case

Vilma Bautista once worked for Imelda Marcos, the former first lady of the Philippines – who was so incredibly rapacious and wealthy that she famously owned more than 2,700 pairs of shoes. Last week, she found herself in the news for another, less interesting issue: as a party in a New York Tax Appeals Tribunal case.

Ms. Bautista worked for Mrs. Marcos in New York City and was convicted in Supreme Court, New York County – after a jury trial – of three felonies under New York State law: The first was conspiracy in the fourth degree, the second filing a false instrument in the first degree and the third criminal tax fraud in the first degree. She was given several concurrent prison terms. The convictions emanated from the 1995 acquisition by Ms. Bautista of several high-value paintings that mysteriously disappeared earlier that year from the walls of a townhouse owned by the Philippine government, which was located on the Upper East Side of Manhattan.

Mrs. Marcos used the townhouse when she was in New York City. In 2010, Ms. Bautista sold one of the paintings, the 1899 artwork by French impressionist Claude Monet, for $32,160,000, to a private purchaser and received the proceeds from the sale during that year. Before the sale, Ms. Bautista secretly stored the paintings – including the Monet – at her apartment at 188 East 64^th Street in New York City for what could have been 25 years.

As part of her criminal conviction, New York State found she didn’t pay the tax on this painting. As a result, New York State told her she must pay this tax – and it issued a restitution order for the unpaid State and City taxes.

But shortly after that, the Tax Department also issued her a notice of deficiency asserting fraud penalties based on the tax amount due. In her recent Tax Appeals Tribunal case, Ms. Bautista made several futile arguments about why she shouldn’t have to pay the additional tax amount determined that the fraud penalties were based upon.

She tried to argue that notice of deficiency proposing fraud penalties must propose an income tax assessment or be based on a prior income tax assessment. In her case, there was no prior income tax assessment, per se, from the tax department—it emanated from the criminal conviction. But the Tribunal found that tax liability may nonetheless provide a basis for penalties regardless of whether it is “assessed” through normal channels, in a “Notice of Deficiency.” Similarly, she argued the additional tax owed was improperly based on the restitution order. She said the restitution was not a determination of tax, so it couldn’t be the basis of the notice of deficiency. The Tribunal said that also was wrong, because it wasn’t the restitution order itself, but the calculations and supporting evidence behind the restitution order.

And finally, Ms. Bautista argued her criminal conviction and restitution order couldn’t substitute for a proposed deficiency of tax leading to income tax liability. But, again, the Tribunal found the asserted deficiency was valid because it was based off of the auditor’s calculations. The calculations were sound. In other words, the Tribunal had a rational basis behind the notice of deficiency from the testimony, records and more in the criminal trial that proved she committed tax fraud.

So there you have it. The basic lesson from the Tribunal ruling is that there really was no sound technical or procedural reason to void the penalty notice here. Some taxpayers often try to do so on the merits, arguing that there wasn’t really fraud. She couldn’t do that here, for obvious reasons, but she sought another avenue of relief—and a justifiable one at that—which was that the Tax Department didn’t follow normal protocols for this type of situation. She failed in that effort, but it’s still a good lesson: sometimes you can win these cases, even if the merits are against you. When the dollars are stake are this large, you may as well take a shot.

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