On appeal from the Tax Court of New Jersey, Docket No. 011495-2009.
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
Before Judges Waugh and Koblitz.
Plaintiffs Peter Murphy and Anthony Murphy, Inc., which does business as Murph's Liquor and Bar, appeal from the order of the Tax Court dismissing their complaint against defendant Director of the Division of Taxation (Division). We affirm.
The corporate plaintiff is a subchapter-S corporation owned by Maria Murphy, the wife of Peter Murphy.*fn1 Murph's is a bar, operated by Maria and Peter, which also engages in retail sales of liquor. It is located in Totowa. At the times relevant to this appeal, Murph's operated with a single, non-computerized cash register. The tapes from the cash register were not routinely saved. Instead, Peter took the cash proceeds home each day, and Maria recorded the amount and deposited the cash in their bank account.
In October 2005, Hyacinth Thompson, an auditor employed by the Division, notified Murph's that the Division would be conducting a tax audit of the business. After some difficulty, Thompson scheduled a pre-audit meeting with Peter for the end of January 2006. Over the next several months, Thompson sought various documents needed for the audit. Although some were received, others, including most of the cash-register tapes, were not produced.
Based upon her analysis of the records received, the absence of records such as the cash-register tapes, and the inconsistency of income reported for specific years on different reports and deposit records, Thompson concluded that there were insufficient books and records to complete the audit. Consequently, she completed a mark-up analysis, which required computation of the percentage mark-up of the cost of various goods. In making her calculations, Thompson allowed a ten percent allowance for goods that were lost due to causes such as spoilage, theft, waste, giveaways, discounts, and personal usage. The usual allowance was five percent, but Thompson used the higher figure in an effort to obtain an amicable resolution of the audit.
Based upon the average mark-up derived from her analysis, Thompson calculated the gross sales for the years 2001 through 2005. She met with Peter in September 2006 for a post-audit conference. She subsequently responded to his letter raising questions with respect to her conclusions.
Thompson then reviewed defendants' returns for sales and use tax, litter tax, corporate business tax, and personal income tax. She recalculated the taxes due based on the additional gross income resulting from the mark-up analysis and deducted the amounts of those taxes already paid. Thompson concluded that the corporation owed an additional $85,478.60, including interest and penalties. She also calculated that the Murphys owed an additional $52,016.41, also including interest and penalties, in personal income tax. She issued notices of assessment reflecting those amounts on November 2, 2006.
The corporate plaintiff sent a protest to the Division on November 10, 2006. In March 2007, Jeffrey Schwab, a "conferee" at the Division, met with counsel for the corporate plaintiff. Although additional cash-register tapes to support the business's position were promised at the meeting, they were never submitted. Instead, at a meeting in August 2007, counsel provided Schwab with an annotated adding machine tape and some other documents. Schwab subsequently requested additional documentation, which he asked be supplied by the beginning of October. No additional documents were provided.
Schwab concluded that Thompson was correct in her determination that the books and records of the corporate plaintiff were inadequate. However, he made some adjustments in Thompson's preliminary calculations to reflect the additional information provided by counsel for the corporate plaintiff. He then went through essentially the same process followed by Thompson to determine the taxes due and the amount of the deficiencies. Schwab concluded that the corporate plaintiff owed $69,905.54, rather than the $85,478.60 calculated by Thompson. A letter of determination, which contained a revised assessment, was issued on February 17, 2009.
Although the Murphys had not filed a protest with respect to their personal income tax assessment, Schwab nevertheless performed a recalculation of their personal income tax obligation, based upon the revised amounts of income for the ...