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Comptroller of the Treasury v. Zorzit

Court of Special Appeals of Maryland

January 30, 2015


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[Copyrighted Material Omitted]

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For Appellant: Julia D. Bernhardt (Donald K. Krohn, Douglas F. Gansler, Attorney General on the brief) all of Baltimore, MD.

Zarnoch, Nazarian, Leahy, JJ.[*] Opinion by Leahy, J.


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[221 Md.App. 280] Leahy, J.

In this appeal, we consider whether the Comptroller's Notice of Lien for Unpaid Taxes was properly challenged and vacated in the circuit court during pendency of the taxpayer's appeal in the Maryland Tax Court. Appellee John Zorzit (" Zorzit" )--

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the taxpayer in this case--was the president of Nick's Amusements, Inc. (" Nick's" ), a company charged in federal court with money laundering and operating an illegal gambling operation. Appellant, Comptroller of Maryland, assessed deficiency taxes and penalties against Zorzit and Nick's for under-reported gross income in Nick's' tax returns.

Zorzit and Nick's protested the amount of the assessment and the fraud penalties before the Comptroller's Hearings and Appeals Section. Following a hearing on the matter, the hearing officer reduced the amount of taxes owed, but Zorzit and Nick's continued to protest the assessment by appealing to the Maryland Tax Court. While this appeal was pending, the Comptroller filed a notice of lien against Zorzit, who then filed a petition for declaratory and injunctive relief in the Circuit Court for Baltimore County. Zorzit asked the court to vacate the lien, contending that the Comptroller was not authorized to file the lien under Title 13 of the Tax-General Article prior to the Tax Court's disposition of his appeal, and that by filing the lien, the Comptroller deprived him of his property without due process of law.

The circuit court found that although it was not necessary to conduct a hearing prior to imposition of the lien, Zorzit's due process rights under the United States Constitution and the Maryland Declaration of Rights were violated because the Tax-General Article of the Maryland Code fails to specify an exact deadline by which the Tax Court must hold a post-deprivation hearing following imposition of a tax lien under § 13-807. The court granted Zorzit's motion for summary judgment, declared the statute unconstitutional, and vacated the lien until the Tax Court rendered a decision in Zorzit's appeal. The Tax Court has since rendered a decision affirming, with some alterations, the Comptroller's assessment.

[221 Md.App. 281] The Comptroller appealed and presents two questions for our review:

I. " Did the circuit court lack statutory authority to enter an order voiding the tax lien because (a) the taxpayer[] failed to exhaust administrative remedies and (b) § 13-[5]05 of the Tax-General Article prohibits courts from enjoining or preventing the assessment or collection of a tax?"
II. " Did the circuit court err in declaring that due process is denied by the tax lien provision of Maryland's statutory scheme, which affords taxpayers both an opportunity to be heard prior to final assessment and a prompt post-assessment de novo appeal to the Tax Court that is subject to judicial review?"

Although the issues raised in this appeal are moot, similar cases may recur, and it is a matter of significant public concern that similar challenges would obstruct the Comptroller's statutory duty to collect monies due under the tax laws of Maryland. For the reasons set forth herein, we hold that the circuit court did not have the authority to vacate the tax lien because Maryland Code (1988, 2010 Repl. Vol.), Tax-General Article (" Tax-Gen." ), § 13-505 expressly prohibits courts from issuing an injunction or any other process enjoining or preventing the Comptroller's collection of a tax. Only in exceptional and narrow circumstances may a taxpayer obtain collateral recourse from the judiciary to prevent the assessment or collection of a tax. Because the underlying action was barred under Tax-Gen. § 13-505, we do not reach the constitutional issue presented in the Comptroller's second question. Accordingly, we vacate the circuit court's judgment and remand the matter to that

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court with instructions to dismiss Zorzit's petition for declaratory relief.


A. Disputing Taxes

The Comptroller is charged with the duty to collect and account for certain enumerated taxes, see Tax-Gen. § 2-102, [221 Md.App. 282] and the General Assembly has assigned the Comptroller broad authority and special powers to carry out these duties.[1] The tax assessed in the instant case was an admissions and amusement tax.[2] A taxpayer is required to submit an admissions and amusement tax return " on or before the 10th day of the month that follows the month in which the person has gross receipts subject to the admissions and amusement tax." Tax-Gen. § 4-201(1). If an audit of the tax return reveals that " the tax due exceeds the amount shown on the return," the Comptroller, or another authorized tax collector,[3] must assess the deficiency. Tax-Gen. § 13-401. The Comptroller then must " mail a notice of assessment . . . to the person or governmental unit against which an assessment is made." [4] Tax-Gen. § 13-410. The assessment is " prima facie correct." Tax-Gen. § 13-411.

Within thirty days after the date on which the notice of assessment was mailed, the taxpayer may submit an application [221 Md.App. 283] to the Comptroller for revision of the assessment or, if the taxpayer paid the assessment, a claim for a refund. Tax-Gen. § 13-508(a). If the taxpayer fails to pursue either remedy, the assessment becomes final. Tax-Gen. § 13-508(b). If the taxpayer does pursue these remedies, the Comptroller must " promptly" hold an informal hearing and thereafter must " act on the application for revision" and " may assess any additional tax, penalty, and interest due." Tax-Gen. § 13-508(c)(1). A notice of final determination is then mailed to the taxpayer. Tax-Gen. § 13-508(c)(2).

A taxpayer must " exhaust all available administrative remedies before the appropriate tax determining agency" before he or she may appeal the Comptroller's final determination to the Tax Court for a de novo hearing. Tax-Gen. § § 13-514, 13-510(a)(2). The Tax Court must " hear and determine [the] appeal[] promptly." [5]

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Tax-Gen. § 13-519. The Tax Court, as a " quasi-judicial" agency, has the power to " hear, try, determine, or remand any matter before it." Tax-Gen. § 13-528(a)(1). It also " may reassess or reclassify, abate, modify, change or alter any valuation, assessment, classification, tax or final order appealed to the Tax Court." Tax-Gen. § 13-528(a)(2). The Tax Court will affirm the decision unless there is some " affirmative evidence in support of the relief being sought or an error apparent on the face of the proceeding." Tax-Gen. § 13-528(b).

If, after de novo proceedings in the Tax Court, the taxpayer still seeks to challenge the assessment, Tax-Gen. § 13-532(a)(1) permits judicial review. The Tax Court's final order [221 Md.App. 284] is enforceable " unless the reviewing court grants a stay upon such condition, security or bond as it deems proper." Tax-Gen. § 13-532(a)(2).

B. The Tax Lien

The Tax-General Article provides that " [u]npaid tax, interest, and penalties constitute a lien, in favor of the State, extending to all property and rights to property belonging to: (1) the person required to pay the tax[.]" Tax-Gen. § 13-805(a)(1). " [A] lien arises on the date of notice that the tax is due and continues to the date on which the lien is (1) satisfied; or (2) released by the tax collector because the lien is: (i) unenforceable by reason of lapse of time; or (ii) uncollectible." Tax-Gen. § 13-806(a).

The Comptroller must file a notice of tax lien in order for it to have " the full force and effect of a judgment lien." Tax-Gen. § 13-808. The notice of lien is filed in the circuit court for the county where the property that is subject to the lien is located. Tax-Gen. § 13-807(a). A tax lien takes priority over the proceeds of any sale of the taxpayer's property, except that it is " not valid against any purchaser, holder of a security interest, mechanic's lienor, or judgment lien creditor until notice of the tax lien has been filed[.]" [6] Tax-Gen. § 13-809(a), (b)(1). Even upon the filing of the notice of lien, " the lien is not valid against any claim described in § 6323(b), (c), or (d) of the Internal Revenue Code[,]" which includes, for example, claims by purchasers of certain kinds of property who did not, at the time of purchase and possession, have actual notice of the filed lien. Tax-Gen. § 13-809(b)(2).

[221 Md.App. 285] If the taxpayer fails to satisfy the properly filed lien within fifteen days after the notice of lien is issued, or the tax collector does not otherwise release the lien, the Comptroller " may bring an action in a court of the State to enforce the lien." Tax-Gen. § 13-810(a). Upon the filing of such an action, " [t]he court, acting without a jury, shall: (1) adjudicate all matters involved in the proceedings; and (2) determine

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the merits of all claims or liens." Tax-Gen. § 13-810(c).

C. Tax-Gen. § 13-505

A court " may not issue an injunction, writ of mandamus, or other process against the State or any officer or employee of the State to enjoin or prevent the assessment or collection of a tax." Tax Gen. § 13-505. The unambiguous language of Tax Gen. § 13-505 reflects the General Assembly's intent to preclude courts from interfering with the detailed administrative process available to taxpayers outlined above. Bancroft Info. Grp., Inc. v. Comptroller of the Treasury, 91 Md.App. 100, 115, 603 A.2d 1289 (1992).


A. Initial Tax Assessment and the Hearing before the Comptroller

A federal money-laundering investigation into Nick's in connection with the operation of illegal video-poker machines prompted the Comptroller to conduct a review of Nick's' past tax returns.[7] After completing this audit, the Comptroller issued a " Notice of Assessment for Admissions & Amusement Taxes," dated April 23, 2010, against Nick's for the tax period of January 1, 2000 through January 31, 2009. The assessment totaled $8,184,360.87, comprising the tax assessed ($2,963,844.74), [221 Md.App. 286] interest ($2,256,671.39), and penalties for purported fraud ($2,963,844.74). The Comptroller issued an identical Notice to Zorzit personally as an officer of Nick's.[8] Upon receipt of these notices, Nick's and Zorzit requested an informal hearing before the Comptroller's Hearings and Appeals Section pursuant to § 13-508.

At the hearing held on October 6, 2010, witnesses testifying on behalf of the Comptroller's office explained that the Baltimore County Police Department and Internal Revenue Service's (" IRS" ) investigation revealed that approximately 60% of Nick's' gross receipts were paid out to winning customers. Nick's' reported gross receipts on its admissions and amusement tax returns were based on Nick's' net profits after paying winning customers. To calculate Nick's' actual gross receipts, the Comptroller's office added the 59.13% payout to customers, as calculated in the police department's report.

Zorzit did not dispute his personal liability or that taxes were owed. Zorzit and Nick's did dispute, however, the penalty for fraud as well as the overall amount of taxes owed. Specifically, they argued that the fraud assessment was based solely on Nick's' purported underpayment of the admissions and amusement tax, and that the mere understatement of ...

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