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Yilmaz, Inc. v. Director, Division of Taxation

390 N.J. Super. 435, 915 A.2d 1069 (App. Div. 2007)

TAXATION; SALES TAX —Where a business has virtually no records of its receipts, the reasonableness of the method employed by the Division of Taxation to estimate those receipts is presumed to be correct and the taxpayer has the burden of overcoming the presumption with cogent evidence that is definite, positive, and certain in quality and quantity.

The owner of a restaurant that served alcohol was audited by the New Jersey Division of Taxation. The owner had little record of the business receipts for a three year audit period (as required by statute) from which to verify the gross receipts reported on its tax returns. Therefore, the Division’s auditor used an indirect markup procedure to reconstruct the income from the owner’s cash business so as to determine both sales tax deficiencies and resulting corporate and gross income tax withholding assessments. The auditor compared costs of goods sold to its menu prices for one calendar year within the audit period and then extended the results to the entire audit period. The auditor concluded his findings and issued a notice of assessment, which was reduced slightly upon a protest and conference hearing. The owner appealed the reduction to the Tax Court, arguing that the Division utilized unreasonable and arbitrary assumptions in the markup analysis and failed to account for inventories maintained by the restaurant. The Court affirmed the final determination, and entered an order of judgment against the owner. The owner appealed this judgment.

The Appellate Division first stated that the reasonableness of the methods employed by the Division for an audit where an owner has virtually no records of its receipts is presumed to be correct and the owner has the burden of overcoming the presumption with cogent evidence that is definite, positive, and certain in quality and quantity. The Court found that an aberrant methodology will overcome the presumption of correctness, but an imperfect methodology will not. The Court held that a taxpayer may produce competent independent evidence, expert or otherwise, or many produce evidence through cross-examination of the auditor that could be sufficient to overcome the presumed correctness of the assessment. Here, however, the Court found that the Tax Court’s findings of fact in favor of the state’s auditor were supported by substantial credible evidence and were to be left undisturbed.


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