December 22, 2011
ANTHONY MURPHY, INC. T/A MURPHS LIQUOR & BAR AND PETER MURPHY, INDIVIDUALLY, PLAINTIFFS-APPELLANTS,
DIRECTOR, NEW JERSEY DIVISION OF TAXATION, DEFENDANT-RESPONDENT.
On appeal from the Tax Court of New Jersey, Docket No. 011495-2009.
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
Argued August 9, 2011
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 corporate plaintiff. He lowered their assessment accordingly.
On May 4, 2009, plaintiffs filed a complaint in Tax Court challenging their assessments.*fn2 Following some discovery, the Director moved for summary judgment in October 2009. The motion was opposed. Following oral argument on October 1, 2010, the Tax Court judge delivered a brief oral decision granting the Director's motion. This appeal followed.
On appeal, plaintiffs argue that the Tax Court judge erred in granting summary judgment because there were issues of fact requiring a plenary trial. The Director argues that the judge properly determined that plaintiffs did not offer sufficient evidence to warrant a trial because they were unable to overcome the presumption of correctness that attaches to an assessment by the Division.
We review a grant of summary judgment de novo, applying the same standard governing the trial court under Rule 4:46-2(c). Brill v. Guardian Life Ins. Co. of Am., 142 N.J. 520, 539-40 (1995); Chance v. McCann, 405 N.J. Super. 547, 563 (App. Div. 2009) (citing Liberty Surplus Ins. Corp. v. Nowell Amoroso, P.A., 189 N.J. 436, 445-46 (2007)).
We must recognize the Director's expertise in "'the specialized and complex area'" of taxation. Reck v. Dir., Div. of Taxation, 345 N.J. Super. 443, 446 (App. Div. 2001) (quoting Metromedia, Inc. v. Dir., Div. of Taxation, 97 N.J. 313, 327 (1984)), aff'd, 175 N.J. 54 (2002). We also recognize the Tax Court's expertise in the same area. Little Egg Harbor Twp. v. Bonsangue, 316 N.J. Super. 271, 285 (App. Div. 1998). Most importantly, the Director's assessment is presumptively correct, and plaintiffs bear the burden to prove the contrary. Atlantic City Transp. Co. v. Dir., Div. of Taxation, 12 N.J. 130, 146 (1953) ("'The settled rule is that there is a presumption that an assessment made by the proper authority is correct and the burden of proof is on the taxpayer to show otherwise.'" (quoting Aetna Life Ins. Co. v. City of Newark, 10 N.J. 99, 105 (1952))).
In this case, plaintiffs sought to overcome the presumption of correctness by attacking the credibility of Thompson and Schwab, as well as by questioning their methodology. They do so in generalities rather than specifics. They do not contradict the Director's assertions that the bulk of the cash-register tapes were not produced or that there were insufficient books and records to complete the audit. They do not point to particular documents or calculations that demonstrate one or more specific errors with respect to the assessments. They provided no expert report pointing to errors of fact, methodology, or calculation with respect to the Division's mark-up analysis.
The approach followed by plaintiffs is not sufficient to overcome the presumption of correctness. In that regard, we adopt the reasoning outlined by the Tax Court in Coliseum Pizzeria, Inc. v. Director, Division of Taxation, 24 N.J. Tax 369, 376-77 (Tax 2008).
The Division's assessment is afforded a presumption of correctness. Atlantic City Transportation Co. v. Director, Division of Taxation, 12 N.J. 130, 146 (1953); Yilmaz, [Inc. v. Dir., Div. of Taxation], 390 N.J. Super. , 440, 23 N.J. Tax 361. To rebut the presumption of correctness, a taxpayer must show "cogent evidence that is 'definite, positive and certain in quality and quantity.'" Yilmaz, supra, 390 N.J. Super. at 440, 23 N.J. Tax 361 (quoting Pantasote Co. v. Passaic, 100 N.J. 408, 413 (1985)). Here, taxpayer merely provides the certification of its president expressing an unsubstantiated claim that the Division's assessment was "too high." It bears reiterating that the court granted taxpayer's request for additional time to submit the sufficient evidence to rebut the Division's presumption of correctness.*fn3
In TAS Lakewood, Inc., this court affirmed an assessment on the basis of the presumption of correctness where the Director used the only available records to determine the taxes due. TAS Lakewood, Inc. v. Director, Division of Taxation, 19 N.J. Tax 131, 139 (2000); See also Kramer v. Director, Division of Taxation, 24 N.J. Tax 105 (2008). Judge Andrew concluded that the "naked assertions" of the taxpayer's vice-president (the only evidence produced by the taxpayer) were insufficient to rebut the presumption of correctness for the Director's determination. TAS Lakewood v. Director, supra, 19 N.J. Tax at 140. In the current case, taxpayer's president also makes "naked assertions" that the Division's assessment was incorrect. Furthermore, taxpayer provided no cogent evidence to rebut the presumption of correctness beyond the unsubstantiated assertions of its president.
Under the standard of review applicable to assessments formulated by audit reconstructions, taxpayer must tender some particularized issue concerning the data utilized or the soundness of the reconstruction methodology. This is not a case where summary judgment can be avoided by a demand for cross-examination of the auditor without the tender of such an issue, developed either in the course of the audit or in discovery. Where there are questions of state of mind, or intent or credibility, summary judgment is inappropriate. Ricciardi v. Weber, 350 N.J. Super. 453, 470 (App. Div. 2002), certif. denied, 175 N.J. 433 (2003). There is no question of that kind here, where the issue concerns selection of data and methods employed to analyze that data.
Because plaintiffs have not provided the type of proofs required to rebut the presumption of correctness, the judge correctly determined that summary judgment was appropriate.