**NOT FOR PUBLICATION WITHOUT APPROVAL OF THE TAX COURT COMMITTEE ON OPINIONS** 
TAX COURT OF NEW JERSEY

J ONATHAN A. O RSEN

**JUDGE 153 Halsey Street**  **Gibraltar Building -**  **8th Floor Newark, New Jersey 07101**  **(609) 815**

**- 2922**  **Ext. 54600**  **Fax: (609) 815** 

**- 2923**  **March 27, 2020 Carl David Gensib, Esq.**  **850-870 Route 1 North North Brunswick, New Jersey 08902**  **Heather Lynn Anderson, Esq. Office of the Attorney General**  **Division of Law R.J. Hughes Justice Complex**  **25 Market Street P.O. Box 106**  **Trenton, New Jersey 08625**

**Re:** Nino Pizza Star Corp v. Director, Division of Taxation **Docket No**  **. 015828-2014** Antonio Spera and Daniela Ciminella v. Director, Division of Taxation **Docket No. 015567-2014 Dear Counsel:**  **This opinion constitutes the court’s decision of the parties’ respective summary j udgment**  **motions in the above matters. Defendant, Director, Division of Taxation (the “Divisi on”) move**  **d for summary judgment claiming that it properly assessed additional tax, interest, and pena**  **lties on Nino Pizza Star Corp. and Antonio Spera and Daniela Ciminella (together “plain**  **tiffs” , and “Nino”**  **to reference the corporate plaintiff ), for the audit period January 1, 2008 through September 30,**  **2012. The Division argued that Nino**  **failed t o maintain and provide adequate books and records,**  **which authorized the Division to use the mark**

**- on methodology to reconstruct**  **Nino’ s gross sales**  **, and deem the increased imputed sales as personal income of the individual plaintiffs,**  **in order to calculate p**  **laintiffs’ respective**  **tax liabilit ies**  **. Therefore, the Division maintained, plaintiffs had 2** 

**failed to present the evidence needed to overcome the presumption of correctness that attaches to**  **its final determinations assessing additional tax**  **upon plaintiffs, which permits this court to grant judgment in its favor and dismiss the above** 

**- captioned com**  **plaints with prejudice. Plaintiffs**  **opposed the Division’s motion, filed a cross**

**- motion, and argued**  **that the books and records provided during the audit period were adequate**  **so that the Division did not have to engage in an artificial mark** 

**- on method to unr**  **easonably inflate the corporate receipts , and that the Division’s**  **refusal to consider any explanation for the discrepancy in purchase invoices resulted i n a flawed**  **reconstruction of Nino’s gross sales and subsequent tax liabilities.**  **For the reasons state d more fully below, the court finds that plaintiffs have provided**  **meritorious opposition to show that there are material facts in genuine dispute re garding the**  **correctness of the Division’s final determinations. As such, the court denies both par ties’ mot**  **ions for summary judgment.** 
FACTS **All the facts herein are based on the certifications in the moving papers, which compr ise**  **of the information gathered by the Division during the audit process as incorporated in the auditor ’s**  **correspondence, pre**

**- audit questionnaire, audit and conference reports, and plaintiffs’ responses**  **provided to the Division during this process. Nino is a New Jersey C** 

**- corporation, wholly owned and operated by Antonio Spera. Mr.**  **Spera is a New Jersey resident. The business of the**  **corporation is a pizzeria located in Princeton, New Jersey. The pizzeria has a total seating capacity for eighty** 

**- two people and sells pizza,**  **sandwiches, appetizers, calzones, deserts, various entrees, bottled and founta in drinks.**  **Approximately 80% of its business is eat** 

**- in, 20% is take** 

**- out services and**  **the pizzeria does not** **3**

**offer delivery services. The restaurant is open seven days a week from 10:30 a.m. to 10:30 p.m., except certain holidays. There were no daily specials and no coupons were accepted.**  **The pizzeria has one cash register, which is not computerized. Plaintiffs stated that due to**  **its age, the machine often did not produce register tapes, and thus was used primarily a s an adding**  **machine. When the register ran tapes, according to plaintiffs, these tapes w ere not retained.**  **Nonetheless, p laintiffs explained**  **that all of the monies the company received in sales**  **are deposited**  **in Nino’s corporate bank account. On November 13, 2012, the Division mailed an initial contact letter advising plaint**  **iffs that it would be conducting an audit of the pizzeria. On December 14, 2012, an auditor met with Mr.**  **Spera who referred the auditor to plaintiffs’ accountant, Stan Segal. The auditor me t with Mr.**  **Segal on January 3, 2013 to review the pizzeria’s business records and on January 24, 2013 to complete the pre** 

**- audit questionnaire. Mr. Segal subsequently emailed the auditor on May 1, 2013,**  **stating that he no longer represented plaintiffs, and that Mr. Carl Gensib, Esq. was plai ntiffs’ new**  **representative. The auditor met with plaintiffs’ representative on five separate occasions in**  **2013: June 11, September 11, October 11, November 12, and November 21. It was agreed by both parties that**  **the 2011 tax year was to be the sample year. As stated in the Audit Report, the following documentation and records were provided by plaintiffs for the 2011 sample year:** 

**a general ledger, Excel spreadsheet in lieu of a sales or receipts journal, some purchase and expense invoices, bank statements and**  **cancelled checks, payr oll information, depreciation schedules, a**  **purchase journal, its Corporation Business Tax return, and a copy of the pizzeria’s menu.**  **The records that were not available for 2011 included a sales or receipts journal (although**  **the auditor notes that the tax payer had an Excel spreadsheet summary), cash register tapes, and**  **some purchase and expense invoices. As set forth in the auditor’s certification a nd corresponding** **4**

**Audit Report with regard to the specified records as being inadequate or not being availa bl**  **e, the auditor substantiated the use of the mark** 

**- on method. The Audit Report further explains, “Records**  **were not acceptable for the audit, as some were missing or not available. [Ample] t ime was**  **provided to the Taxpayer to produce these documents. Therefore an alternative method was utilized to audit gross receipts.”**  **Accordingly, the auditor determined that a mark**

**- on analysis was**  **necessary in order to compute gross sales. The auditor formulated a mark** 

**- on figure by first entering all of the purchase invoices**  **provided by plaintiffs for 2011 into a spreadsheet, then compared the total amount to the purchases listed in the pizzeria’s general ledger. The general ledger, and the**  **amount included on Nino’s**  **Corporation B usiness**  **T ax (**  **CBT )**  **return, listed purchases of $191,418. The purchase**  **invoices plaintiffs provided**  **however totaled $284,454, after a reduction for non** 

**- taxable supplies. The**  **auditor noted that the pizzeria had been receiving deliveries from supplier Vesuvi o Foods under**  **two different names and account numbers: (1) 922093 designated Pizza Star –**  **North Harrison, and (2) 16101 designated Pizza Star**  **– D. Plaintiffs assert that the customer invoices for the second** 
**account number were not used in**  **Nino’s business. The two different names and account numbers**  **could not be explained during the audit. After**  **considering beginning and ending inventories, the**  **auditor determined that the total audited cost of goods**  **sold (i.e., purchases) for 2011 was $287,454.**  **This number when compared to the total of the purchase invoices, he concluded, showed that the purchases were under** 

**- reported by 147.85% ($287,454 ÷ $194,418 = 1.4785). The auditor**  **then applied the error percentage**  **to determine**  **the audited cost of goods sold for each year under audit** 

**. Without determining the actual mark** 

**- on for any of the products, products mixes, or**  **portions sold by the pizzeria, the auditor rejected the mark**

**- on ratio reported on**  **Nino’ s CBT returns**  **and decided to use an estimated 3 .0**  **average mark -on**  **ratio , which he felt was the average rate**  **for 5** 

**pizzerias located in Princeton. He**  **then decreased the estimated average mark -on**  **ratio to 2.8 in**  **order to reflect allowances for non**

**- receipts such as waste, sp**  **illage, spoilage, and any employee meals.**  **After plaintiffs’ accountant submitted additional documentation in support of tax** 

**- exempt**  **sales, the auditor reduced the audited gross sales for each year and applied the es timated 2.8 mark** 

****

**on ratio**  **to each year ’s audited cost of goods sold to obtain the audited gross sales for the audit**  **period. The auditor reduced this amount by the total taxable sales reported by plaintiff s on its** 
**S ales & Use tax (S**  **UT )**  **returns and determined additional taxable sales for the au dit period by**  **applying a 7% sales tax rate. The additional sales tax liability was calculate d to be $90,405.64**  **under N.J.S.A. 54:32B-19. The auditor further determined that**  **Nino owed an additional $61,994.90 in**  **CBT as a result of the additional gross taxa**  **ble sales derived from the mark -on analysis under N.J.S.A. 54:10A-6.**  **Mr. Spera was deemed to have received a “constructive distribution” of C -corporation**  **income, resulting in a gross income tax (TGI**

**- EE)**  **assessment for him and his wife, for the audited**
**tax periods in the amount of $39,935.32, including penalty and interest.**  **1 Although**  **plaintiffs certified during the audit that the pizzeria only had two full**

**- time**  **employees: Mr. Spera and another employee, the auditor certified that he personally obser ved five**  **employees at the pizzeria on two separate occasions . For purposes of this summary judgment**  **motion, plaintiffs certified that the two employees were paid weekly in cash, and that**  **Mr. Spera received an annual salary of $57,000 via paycheck.**  **Consequently, the auditor estimated the cost**  **of three additional employees at $10 per hour, 40 hours per week, 52 weeks per year, for eac h year** 

**1 Daniela Ciminella is included in the final determinations and these complaints due to fi**  **ling joint gross income tax returns with her spouse, Antonio Spera.** **6**

**under the audit. He**  **applied a 2.5% tax w**  **ithholding rate, and**  **calculated the**  **gross income tax**

  ** employer withholding (GIT**

**- ER) ta**  **x liability due for the audit period to be $4,680. Plaintiffs den**  **y the allegation of additional employees working at the pizzeria but did not provide payroll**  **summaries or W -2s for its alleged single employee.**  **According to the auditor, Nino**  **never reported litter tax. Plaintiffs admitted to never paying**  **litter tax. The auditor calculated litter tax due in the amount of $870.98. On March 14, 2014 and March 25, 2014, plaintiffs filed protest**  **s with the Division’s**  **Conference and Appeals Branch against the audit disputing the issued Notices of Tax Due to**  **them**

**. Conferee Jeffrey Schwab (“conferee”) contacted plaintiffs’ representative and r**  **equested that the following documents be provided: cash register tapes for the audit period, sales journals**  **for the audit period, a reconciliation of cash register tapes for one quarter, and any additional**  **documentation that plaintiffs wanted to be included in the audit record. An administrat ive**  **conference was held on June 17, 2014, to which the accountant failed to call in as “it wa s obvious**  **from the conferee’s communication he had no intention to make a good faith review.” On October 17, 2014, the Division issued a Final Determination in the amount of**  **$212,820.63, including penalty and interest for Nino**  **, a nd $**  **39,935.32, including penalty and interest**  **for individuals Spera and Ciminella.**  **Mr. Spera filed a complaint with the Tax Court on November 12, 2014, while Nino Pizza Star, Inc. filed a complaint with the Tax Court on December 18, 2014. Subsequently, a**  **ll parties moved for summary judgment, with the Division moving initially and the plaintiffs cross-m**  **oving thereafter. The Division argued that its motion for summary judgment should be granted as the**  **plaintiffs had allegedly failed to provide adequate books and records, and that its determi nations**  **were entitled to a presumption of correctness. Plaintiffs countered by asserting f irstly, that** **7**

**adequate books and records were provided to the Division during the audit period; and secondly, even after reviewing**  **all of the information and records provided during the audit period, the Division erroneously and intentionally determined that plaintiffs books and records were**  **inadequate, necessitating the application of an arbitrary mark**

**- on analysis. Further, they ar**  **gued, the Division should have used corroborative evidence as a check for its conclusions, s**  **uch as “contacting Vesuvio Foods, [Nino’s] supplier and making basic inquiries as to why product wa**  **s being delivered under a second account number,” rather than art**  **ificially inflating Nino’s sales.**
DISCUSSION **In order to determine whether summary judgment is appropriate at this juncture, the cou rt**  **must determine whether there exists a disputed material fact concerning the def endant’s audit.** 
**In Brill v. Guardian Life**  **Ins. Co. of Am., 142 N.J. 20 (1995), the New Jersey Supreme Court articulated the summary judgment standard as follows:** 

**[W]hen deciding a motion for summary judgment under Rule 4:46- 2, the determination whether there exists a genuine issue with**  **respect to a material fact challenged requires the motion judge to**  **consider whether the competent evidential materials presented, when viewed in the light most favorable to the non** 

**- moving party in**  **consideration of the applicable evidentiary standard, are sufficient to permit a rational fact finder to resolve the alleged disputed issue**  **in favor of the nonmoving party. [**  **Brill , 142 N.J. at 523.]**  **“Furthermore, ‘the court must accept as true all evidence which supports the positi on of**  **the party defending against the m otion and must accord him (or her) the benefit of all legitimate**  **inferences which can be deduced therefrom, and if reasonable minds could differ, th e motion must**  **be denied.’” Alpha I, Inc. v. Dir., Div. of Taxation, 19 N.J. Tax 53, 56 (Tax 2000) (citing B**  **rill ,**  **142 N.J. at 535). 8** 

**Additionally, Brill**  **also provided that, By its plain language, Rule 4:46** 

**- 2 dictates that a court should deny**  **a summary judgment motion** only **where the party opposing the motion has come forward with evidence that creates a “genuine**  **issue as to any material fact challenged.” That means a non -moving**  **party cannot defeat a motion for summary judgment merely by pointing to**  any **fact in dispute. [**  **Brill , 142 N.J. at 529.]**  **In fact, disposition by summary judgment is only proper “where the party opposing summary judgment points only to disputes issues of fact that are ‘of an insubstantial na**  **ture.’” Brill**  **, 142 N.J. at 529. “Substantial” in the context of summary judgment is “[h]aving substance; not imaginary, unreal, or apparent only; true solid real, . . . firmly based, a substantial argume**  **nt.” Ibid. (quoting**  Substantial **, The Compact Oxford English Dictionary (2d ed. 1993)). It is firmly establish**  **ed that “an assessment of sales or use tax is presumptively correct.” Quest Diagnostics, Inc. v. Dir., Div. of Taxation, 21 N.J. Tax 484, 490 (Tax 2004),**  **aff’d , 387 N.J.**  **Super. 104 (App. Div. 2006). If the challenge to the Division’s audit methodology ste ms from an**  **assertion of inadequate books and records, a plaintiff can only rebut the presumptive correct ness**  **of the assessment through “cogent evidence that must be ‘definite, positive and cer tain in quality**  **and quantity to overcome the presumption.’” Yil**  **maz, Inc. v. Dir., Div. of Taxation, 22 N.J. Tax 204, 236 (Tax 2005),**  **aff’d , 390 N.J. Super. 435 (App. Div. 2007). Plaintiffs must offer evidence**  **that focuses on the “reasonableness of the underlying data used by the Director and the reasonableness of the**  **methodology used.” Ibid.**  **Only an aberrant methodology will overcome the presumption of correctness; an imperfect methodology will not.**  **Ibid. Further, “naked assertions**  **of a taxpayer, without supporting records or documentation, are insufficient to rebut th e**  **presumption that the Director’s assessment was correct where it produced no e vidence to support**  **its claim that the Director’s assessment is correct.” Id.**  **at 231. 9** 

**The general legal principles applicable to a claim involving a challenge to the aud it**  **methodology used by the Division due to inadequate books and records are well settled. One is that a corporate taxpayer is required to keep sufficient books and records in order**  **for the Division to determine proper tax liabilities. A second is that a**  **presumption of correctness attaches to the Division’s assessment of tax.**  **Pursuant to statute, a corporate taxpayer must keep sufficient books and records in orde r**  **for Taxation to determine proper sales tax liabilities. N.J.S.A. 54:32B**

**- 16; N.J.A.C. 18:24**  **-2.3, - 2.4. As further set forth in the regulations, a taxpayer must make available to Taxation “[a**  **] true copy of all sales slips, invoices, receipts, statements, memoranda of price,**  **or cash register tapes, issued to any customer . . . and records of every purchase and purchase for lease,” which m**  **ust be retained “for four years from the date of filing of each quarterly sales tax ret**  **urn.” N.J.A.C. 18:24**

**- 2.3(a).**  **For tax periods prior to the regulation change in 2016, if summary records are maintained that**  **“show . . . total receipts and taxable receipts,” during the tax years under appeal in thi s case,**  **a taxpayer could “dispose of individual sales slips, invoices, receipts, statements, m emoranda of**  **price, or cash register tapes . . . after the lapse of a pe riod not less than 90 days from the last date**  **of the most recent quarterly (or monthly) period for the filing of sales tax retur ns to which such**  **individual sales documents pertained.” N.J.A.C. 18:24 -2.4(a);**  **see also 47 N.J.R. 2919(a) (Dec. 7,**  **2015); 48 N.J.R. 824(a) (May 16, 2016) (amending regulation to eliminate ninety**

**- day exception**  **for individual records and imposing four-year retention period). 2** 

**2 Effective May 16, 2016, a taxpayer must “maintain individual sales slips, invoices, rece**  **ipts, statements, memoranda of price, cash register tapes, or guest checks for a pe**  **riod of four years from the last date of the most recent quarterly period for the filing of sales tax ret**  **urns.” N.J.A.C. 18:24**

**- 2.4(a). As the audit period extends only from January 1, 2008 through September 30, 2012, this**  **amended provision does not apply in this case. 10** 

**If the taxpayer has failed to keep the required books and records, or if the books and records maintained**  **do not clearly reflect income, Taxation has broad authority to reconstruct income “ by**  **using any information available, whether from the vendor’s place of business or from any other**
**source.” See**  **N.J.S.A. 54:32B -19;**  **Yilmaz , 22 N.J. Tax at 231, 235;**  **Alpha I ,**  **19 N.J. Tax at 57; L.B.D. Const., Inc. v. Dir., Div. of Taxation, 8 N.J. Tax 338 (Tax 1986); Ridolfi, t/a Hub Bar v.**  **Dir., Div. of Taxation, 1 N.J. Tax 198 (Tax 1980). The determination whether a taxpayer's records**  **are "inadequate" depends on the facts and circumstances of each case. Saulwil, Inc. v. Dir., Div.**  **of Taxation, 2020 N.J. Tax LEXIS 1, at *21 (Tax 2020).** **3 Further, while this court can decide,**  **based on evidence properly before it, whether a taxpayer has overcome the presumptive correctness of an audit determination, such evidence can also be examined to d**  **ecide whether Taxation’s initial conclusion as to th**  **e inadequacy of books and records was reasonable. Id.**  **at** ***20–21. In the current case, the Division’s moving papers included a detailed certificat**  **ion and Audit Report of the auditor who conducted the examination of plaintiffs’ business. It explains the**  **documents requested, those provided, and those not provided by the plaintiffs. As set forth in the auditor’s certification and Audit Report, plaintiffs provided a general ledger, Exce**  **l spreadsheet in lieu of a sales or receipts journal, some purchase and expense invoices, bank statements**  **and cancelled checks, payroll information, depreciation schedules, a purchase journal, CB**  **T returns, and a copy of the pizzeria’s menu. The records not available included a sales or rece**  **ipts journal as noted, cash register tapes and some purchase and expense invoices. The Audit Report fu**  **rther**

**3 This decision has been approved for publication but has yet to be published in the New Jer**  **sey Tax Reports, the official publication for Tax Court cases.** **11**

**explains that since the provided**  **records were not acceptable for the audit, as some were missing or not available, an alternative method was utilized to audit gross receipts.**  **It is un clear why Taxation’s mark** 

**- on analysis was necessary to determine the gross sales**  **if Taxation had access to the summary receipts Excel spreadsheet ,**  **purchase journal, and bank**  **statements without review and explanation. T**  **he regulations do not explicitly requ ire the retention**  **of register tapes provided that summary records were available. Irrespective of whether the records exist or whether their production would be unduly**  **burdensome, it is clear that plaintiffs retained summary records of total a nd taxable re**  **ceipts in the form of an Excel spreadsheet. As these summary records provide income information, the**  **regulation may have permitted plaintiffs to dispose of their cash register tapes. Plaintiffs must still**  **retain complete purchase and expense invoices for four years from the filing date. N.J.A.C. 18:24** 

**- 2.8(a). The regulations do not appear to explicitly require plaintiff to retain deposi**  **t slips, cash payout records, or check registers.**  **See, e.g. , N.J.A.C. 18:2** 

**- 7.11 (retention requirements for**  **corporati ons); N.J.A.C. 18:24** 

**- 2.1 to** 

**- 2.15 (retention requirements for sales and use tax).**  **But cf.**
**N.J.A.C. 18:2**

**- 7.3(a) (“A taxpayer shall maintain all records that are necessary to a determinatio**  **n of the correct tax liability. . . . Such records shall include, but not be necessarily limi**  **ted to, books of account, invoices, sales receipts or other documents required to be maintained by any speci**  **fic tax statute or regulation of this State.”). The lack of some purchase and expense invoice**  **s ,**  **or of the cash register ta** 

**pes ,**  **is not a strong justification for a mark**

**- on analysis**  **when bank statements, checks and the menu**  **were provided as information to corroborate Nino’s gross sales or receipts. Further, t**  **he Division’s exhibits in support of its motion include a spreadsheet showing a list of orders from one of the pizzeria’s suppliers, Vesuvio Foods, for which plaintif**  **fs apparently provided 29 invoices for “Pizza Star**  **– North Harrison” and 22 invoices for “Pizza Star**  **– D” of** **12**

**106 total orders. For each order, including those without invoices, the Division**  **had the order date, order number, and payment amount listed in the spreadsheet.**  **It thus had third** 

**- party information**  **from which it could decide whether plaintiffs’ assertion that the additional purc hase invoices billed**  **to a d ifferent account, were for “the business of a family member operating another pizz**  **eria in the**
**area.” However, the Division apparently chose not to believe plaintiffs, and decided to include**  **these purchases as Nino’s. The court finds that plaintiffs have formulated a particularized issue**  **(namely, the inclusion of the additional invoices), further establishing that genuine issue s of**  **material fact exist under Brill**  **concerning the data used in the Division’s reconstruction methodology to warrant trial in this**  **matter**

**. Such an assertion also implicates credibility issues, as**  **to which summary judgment is wholly inappropriate. Because the justification for embarking upon a mark** 

**- on analysis was the inadequacy of**  **plaintiffs’ records, the court finds that summary judgment on the reasonableness of t he assessed**  **taxes is inappropriate. Further, the necessity and determination of the reasonabl eness of the mark** 

**** **on percentage for 2011 and as applied to the other tax years needs to be evaluated at trial in thi s**  **case. It i s inappropriate to summarily decide the material issue of the adequacy of books and**  **records without considering contrary factual proofs available from plaintiffs that T axation did not** 
**peruse. See, e.g.**  **, Yilmaz**  **, 22 N.J. Tax at 236 (presumptive correctness of an assessment can be**  **overcome if the taxpayer can prove otherwise with cogent evidence that must “focus on the reasonableness of the underlying data used by the Director and the reasonableness of the**  **methodology used”). In addition to sales and use tax,**  **t he above stated reasons also constitute the basis for**  **denying summary judgment on the gross income tax employer withholding, corporat ion business**  **tax, litter tax, and personal gross income tax assessments on the individual plaintiffs , as those** **13**

**assessment s are purely a consequence of the corporate audit. Until the Division’s corporate audi**  **t’s validity is tried, the court cannot confirm these assessments by way of summary judgment.** 
CONCLUSION **For the reasons set forth above, the court concludes that parti**  **es’ respective motion**  **s for**  **summary judgment are**  DENIED **, and the matters will be tried**

**. Very truly yours,** 

**Hon. Jonathan A. Orsen**  **, J.T.C.**