NOT FOR PUBLICATION WITHOUT APPROVAL OF THE TAX COURT COMMITTEE ON OPINIONS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

**495 Dr. Martin Luther King, Jr. Blvd. Floor**  **4** MARY SIOBHAN BRENNAN **Newark , New Jersey 0**  **7102**

JUDGE **609 815**

**- 2922, Ext. 54560**  **Fax: 609 815** 

**- 3079** 

**May 10, 2024 Ronald J. Cappuccio, Esq.**  **Attorney for Plaintiff 1800 Chapel Avenue West, Suite 128**  **Cherry Hill, NJ 08002 Valerie Ann Hamilton**  **, Esq. Attorney for Defendant**  **Deputy Attorney General Division of Taxation**  **25 Market Street**  **PO BOX 106 Trenton, New Jersey 08625-0106**  **Via ECourts**
RE: JOYO, LLC V DIRECTOR, DIVISION OF TAXATION Docket No. : 013001-2019 and YOJO, LLC V DIRECTOR, DIVISION OF TAXATION Docket No.: 013002-2019

**Dear Counsellors:**  **This letter opinion sets forth the court’s findings of fact and conclusions of law on p laintiff**  **s’**
**R. 4:46 motions**  **for summary judgment, and defendant’s cross-motions for summary judgment.** 

**I. Background and Procedural History**  **Plaintiff JoYo, LLC Plaintiff JoYo, LLC is a New Jersey**  **single member limited liability company**  **that operates as a discount liquor store located at 527 Washington Boulevard, Seagirt**  **, New Jersey.**  **Plaintiff’s sole 2** 

**shareholder is Jo**  **seph Egan, Jr**

**. (“Egan”)** 

**. The business is**  **operated as “Egan’s Sea Girt Wine and Liquors” and is located in**  **a unit in a commercial strip mall. The plaintiff leases half of**  **t his space**  **to a catering company. The business focuses on walk-**  **in sales and**  **does not provide delivery services**  **but occasionally provides alcohol for parties** 

**. Egan reports the income and loss from the**  **business on Form 1040 Schedule C of his tax returns Plaintiff is open for business seven days a week. Sunday hours are 10:00**  **AM to 8:00**  **PM throughout the year. Monday through Saturday hours are from 10:00**  **AM to 9:00**  **PM in the shore**  **area’s off season, and 10:00 AM**  **to 10:00 PM**  **during the summer**  **season. Plaintiff had two**  **full time employees**  **(including Egan) and between 3 to**  **5 part- time**  **employees. Additional employees were hired during the summer season as needed. The business had one computerized register. Cash payouts were used for purchases and**  **expenses , including**  **inventory, employee wages, and business expenses. Defendant, Director**  **Division of Taxation, (“ Division’)**  **commenced an audit of the plaintiff’s**  **sales and use tax liability for the period April 1, 2010 through March 31, 2014 and litter tax liability**  **for the period January 1, 2010 through December 31, 2014. When the audit began, Egan had yet**  **to file NJ**

**- 1040 tax returns**  **, including Schedule C, since 2009.**  **During the audit, Egan filed his delinquent NJ-1040 returns, all of which showed a profit.**  **Additionally, plaintiff**  **had not filed litter control fee returns for 2010-2014.**  **During the pre- audit interview, plaintiff disclosed that it maintained a general ledger, a cash**  **disbursements journal, a purchases journal, a sales journal, detailed register ta pes, summary**  **register tapes (Z tapes), deposit slips, NJ-1040 Schedule C’s cash receipts journal, depreciation**  **schedule, vendor bills, bank statements, payroll records, and cash payout records. Copies of Egan’s**  **filed federal 1040 returns, and plaintiff’s**  **cancelled checks and check registers were not retained. 3** 

**Egan also disclosed that he owned a related business, YoJo, LLC with both businesses mai ntaining**  **separate liquor licenses. Plaintiff YoJo, LLC**  **Plaintif f**  **YoJo, LLC also**  **is a single member New Jersey limited liability company with a**  **discount liquor store located at 515 Warren Avenue, Spring Lake, New Jersey. The business primarily focuses on walk-in sales, however approximately 30 % of its business was**  **also providing delivery services.**  **Plaintiff YoJo ,**  **LLC is open for business seven days a week. Its**  **Sunday hours are 12:00 PM to 8:00 PM in the winter; Monday through Friday hours are from 11:00 AM to 10:00 PM in the shore**  **area’s off season, and 10:00 AM to 10:00 PM during the summer season with Sunday’s being 11**
**AM to 8 PM. There were both full time and part time employees as needed.**  **The shared ownership of both plaintiffs resulted in a shared operational structure and**  **commingling of the various income and expense items associated with the businesses. Most**  **notably, the two businesses shared inventory without records showing the invent ory allocated to**  **each store. Egan informed the auditor that he purchased as much as 90% of alcoholic beverage inventory through YoJo, LLC to receive bulk pricing from vendors, and then would transfer some**  **inventory to JoYo, LLC. Due to the commonality of issues, for purpose of these motions**  **, the related**  **plaintiffs , Jo**  **Yo, LLC and YoJo, LLC will**  **collectively be referred to as “Taxpayer”. The Audit**  **Based on the foregoing, the Division decided to simultaneously audit both business**  **es for years**  **2010, 2011, 2012, 2013, and 2014. During the audit, the auditor requested the following:** **4**

**1. Schedule C’s for 2009-2014.**  **2. Tax return worksheets used to prepare the Schedule C’s.**  **3. General ledgers for 2009-2014.**  **4. Sales journals and register tapes for 2013 (detailed and summary tapes).**  **5. Cash receipts and cash disbursement records for 2013.**  **6. Bank statements for 2010-2014, payroll records for 2011-2013.**  **7. Invoices for purchases and expenses for 2013.**  **8. Detailed depreciation schedules and paid bills for the audit period.**  **9. Third party confirmations to support reported cost of goods sold.**  **10. Purchase invoices for March 2015, selling prices for March 2015.**  **11. Party books for the 1**  **st quarter of 2013.** 

**In response, Taxpayer provided the following records:**
**1. NJ** 

**- 1040 Schedule C’s for 2009-2013 (all of which were filed approximately two years**  **after the audit commenced). 2.**  **Tax return worksheets for the Schedule C’s. 3.**  **General ledgers for 2009-2012, sales journals for 2013, detailed and summary register tapes for 2013.**  **4. Incomplete bank statements for 2010-2014.**  **5. Payroll records for 2011-2013.**  **6. Invoices for purchases and expenses for 2013.**  **7. Detailed depreciation schedules and paid bills for the audit period.**  **8. Invoices and selling prices for March 2015.**  **9. Party books for the second half of the 1**  **st quarter of 2013.** 

**Taxpayer did not provide the auditor with a NJ-1040 Schedule C for 2014 and the worksheet used to prepare such return, general ledgers for 2013-2014, cash disbursement records for 2013,**  **third party confirmations to support**  **reported costs of goods sold, complete bank statements, or party books for the first half of the 1**  **st quarter of 2013.**  **Upon review of Taxpayer’s records, the auditor deemed**  **Taxpayer’s records**  **insufficient and incorrect for three reasons. First, Taxpayer’s reported gross**  **receipts as reported on the per ST50s**  **(sales and use tax returns) and Egan’s Schedule C reported gross receipts did not reconcile. Second,**  **Taxpayer was unable to reconcile the bank statements to reported receipts. Last ly, Taxpayer’s**  **register tapes did not reconcile to reported receipts. Additionally, the auditor’s review of the** **5**

**summary register tapes for the first quarter of 2013 disclosed that there were mul tiple occasions**  **when the Taxpayer closed out the register with no transactions. The auditor determined that the Taxpayer’s books and records were inadequate to veri**  **fy the information reported on the sales tax returns, the late f**  **il ed NJ** 

**- 1040 returns, and/or litter control**  **fee returns. The auditor also determined that taxpayer had insufficient internal cont rols.**  **Consequently, the auditor determined that an indirect method was required to conduct the audit. The auditor reviewed the Taxpayer’s purchases using the 2013 calendar year.**  **While the Division states that Egan**  **verbally consented**  **to using 2013, Taxpayer disputes this. The auditor’s examination of third**  **-party liquor purchases confirmed that Taxpayer often**  **purchased inventory under only one business for bulk pricing, and then reallocated inventory between the businesses. In the absence of third party verification, the auditor accept**  **ed purchases as reported on th**  **e taxpayer’s general ledger. After reviewing all of the purchase informat ion, the**  **auditor determined that Taxpayer underreported its purchases only slightly (less than 1% difference). The auditor**  **decided to accept the purchases as reported by Taxpayer.**  **With the issues of purchases resolved, the auditor moved on to determine the sales subject t o**  **taxation. The auditor concluded that due to lack of internal controls and adequate records –**  **especially the exchange of inventory between the businesses without recordkeeping, and the f ailure**  **to file timely returns, the auditor determined that a markon analysis was necessa ry. The auditor**  **selected March 2013 as the**  **sample period for the markon because the auditor believed it**  **was representative**  **of the T**  **axpayer’s business, and the Taxpayer was able to provide invoices for that month.**  **While the Division states that Egan verbally consented to using March 2013, Taxpayer disputes this.** **6**

**The auditor made a list of all**  **the items contained on the Taxpayer’s purchase invoices for March 2013, including each items purchase price (from the invoice), grouped by type (beer,**  **wine/liquor, and an “other**  **” category for items such as chips, snacks and candy), and the selling**  **price as provided by Taxpayer. The auditor then compared the purchase price per item to the selling**  **price per item to determ i**  **ne the markon for each item. The auditor compared the total purchase price for all items in each category to**  **the total selling price for all items in that same category. This calculation provided the markon for each category.**  **The auditor determined a markon for beer of 1.24, a markon for wine and liquor of 1.26 and a markon of other of 1.98. For each category the auditor applied the**  **mar kon for that category to the**  **purchases per the Tax payer’s records to determine the estimated sales before allowance for each**  **category. The auditor then reduced that number by 5% for non-receipts, which allowed for the**  **recognition that goods are lost due to spoilage, theft, waste, giveaways, discounts, personal usa ge,**  **etc. The auditor subtracted t he allowances for non** 

**- receipts, and for coupons**  **from the estimated**  **sales before allowance to determine audited sales. The auditor then totaled th e audited**  **net sales for each category and compared it to the audited purchases and determined that there w**  **as an overall markon of 1.21 rounded.**  **Since the two liquor stores shared inventory, the auditor needed to determine the purchase s**  **that should be allocat**  **ed to each business. The auditor did this**  **by comparing the reported gross sales for each store to the total gross sales for each year under audit. The a**  **uditor then applied this percentage to the total purchases in each category for each business. Then for each busi**  **ness, the auditor totaled the three categories to**  **determine the total**  **purchases for each business for each year under audit. This led to the auditor’s determination of the audited cost of goods sold for**  **each business**  **each year under audit. The auditor then applied the overall markon of 1.21 to each year’**  **s 7** 

**audited costs of goods sold to obtain the audited gross sales for each year. The auditor applie d the**  **applicable s**  **ales tax rate of 7% to each year’s audited gross sales to determine the total sales tax due for each year. The auditor than substrated the Taxpayer’s reported sales tax to det**  **ermine the amount of any additional sales tax due.**  **The auditor concluded that plaintiff**  **JoYo ,**  **LLC owed additional sales tax in the amount of $86,526.04**  **, and additional litter tax in the amo u**  **nt of $1,020.64. For YoJo ,**  **LLC the auditor concluded an additional sales tax in the amount of $119,618.62 and additional litter tax in the**  **amount of $407.79. The Division calculated the applicable interest and penalties on the additional ta**  **x due and**  **issued a Notice of Assessment Related to Fina l**  **Determination to JoYo ,**  **LLC on October 13, 2016 ,**  **in the amount of $120,538.56 and to YoJo, LLC in the amount of $165,220.11. The**  **T axpayer filed a protest of its assessment with**  **the Conference and Appeals Branch of the**  **Division of Taxation on January 6, 2017. Taxpayer’s basis for the appeal listed the following: Mark on and percentage is**  **incorrect. Gross sales calculated is incorrect**  **Items are included that are non**

**- taxable**  **End of test year inventory is incorrect Grocery key with non-tax items are included for full amount in audit**  **Example items used by auditor do not properly reflect items being sold. No allotments for breakage, theft or in-**  **store sampling No allowance for uncollected debt**  **All bank deposits were based into audit figures. No exemptions for non- sale deposits.**  **Discounts taken at the register were not taken into consideration when calculating m ark-on.** 

**Taxpayer challenged the methodology utilized by the auditors as being incorrect, which presupposes that profit margins applicable in prior years audits would be the same fo**  **r this audit in determining gross receipts.** **8**

**For the administrative conference, Conferee Victor Jasey asked the T**  **axpayer to provide the following documents: 2014 Federal and State tax returns,**  **including the Egan’s**  **Federal Schedule C; cash disbursement journals for**  **2013; cash register tapes for the 1st quarter of 2013; 3rd party confirmation letters**  **for 2013 to support the Taxpayer’s reported cost of goods sold; appointment party/event calendar books for 2013.**  **The T**  **axpayer provided a copy of its 2014 Federal Schedule C; disbursements journal for the**  **period April 2013 through December 2013; cash register tapes for the 1st quarter of 2013; general**  **ledgers for 2013 and 2014 (combining the two businesses); a handwritten journal for the 1st quarter**  **of 2013 summarizing sales; and a handwritten journal for the 1st quarter of 2013**  **summarizing**
**expenses. Conferee Jasey reviewed the register tapes from February 17, 2013.**  **There were several receipts found to be**  **missing, and the items listed in the transactions were not included or were difficult**  **for the conferee to determine. The tapes were deemed inadequate. After the audit was**  **completed, Egan**  **filed his**  **2014 Schedule C returns. T**  **herefore, Conferee Jasey recalculated the sales tax due by adjusting the cost of goods sold to reflect the amounts reported in the Schedule**  **C returns for those years. Conferee Jasey**  **also recalculated the cost of goods sold for each year under audit by**  **including the beginning and ending inventory for each year as reported in its Schedule C returns. Conferee Jasey reviewed the workpapers and reduced the**  **percentage allowed for nonreceipts (e.g., waste, theft, spoilage) from 5% to 3%**  **to better represent the level of waste for the type of business engaged by the**  **T axpayer. Conferee Jasey also gave the T**  **axpayer an allowance for non taxable**  **sales (e.g., water, exempt organizations) of 2.4% based upon invoices presented. These adjustments reduced the overall sales tax**  **due for JoYo, LLC**  **from $86,526.04 to $82,738.31**  **and YoJo, LLC from $119,618.62 to $109,239.26.** **9**

**On June 12, 2019, Conferee Jasey issued the T axpayer a Final**  **Determination**

**. As to plaintiff**  **JoYo, LLC the Division assessed $138,512.40 in overdue sales and use tax, litter tax, penalties, and interest. As to plaintiff, YoJo, LLC the assessment was $$181,286.18.**  **The T**  **axpayer timely filed complaints**  **with the Tax Court of New Jersey on August 30, 2019. After litigation commenced**  **, Tax Appeal Liaison Ericca Greene reviewed the workpapers**  **prepared by the auditor. Liaison Greene discovered there were some typographical errors in**  **the workpapers. Specifically, in the markon calculation for wine/liquor, the auditor**  **utilized an incorrect number of units of certain liquor available for sale in**  **multipacks. Liaison Greene reviewed the invoices provided by the**  **Taxpayer during discovery in this matter and adjusted the**  **units available for sale to match the invoices.**  **Li aison Greene did this for the following items: J**  **Walker Black, J Walker Red, and Makers Mark 120/12. Liaison Greene recalculated the audited**  **costs of goods sold, including the reported beginning and ending inventory as reported on the**  **taxpayer’s filed returns. Liaison Greene also increased the percentage allowance f or**  **nonreceipts from the 3% given by Conferee Jasey to the 5% originally allowed**  **by the auditor. This calculation led to an overall markon for the audit period of 1.2140 (1.21 rounded).**  **Liaison Greene applied this overall markon to the audited cost of goods sold for each year**  **(which now included the beginning and ending inventory reported by the Taxpayer), applied the**  **7% sales tax rate to each year, and determined that the total sales tax due for the audit period**  **(including adjusting 2010 and 2014 to remove quarters outside of the audit period)**  **totaled $257,071.05**  **for JoYo, LLC and $407,037.22 for YoJo, LLC. Liaison Greene reduced this amount by the amount of sales tax**  **r eported for these periods, and determined additional sales tax is due in**  **the amount of $69,224.52**  **for JoYo, LLC and $99,804.56 for YoJo, LLC**

**. Liaison Green**  **e calculated the interest and penalty due on this**  **amount, and determined the total sales tax due, with 10** 

**interest to March 2022, is $137,706.32.**  **for JoYo, LLC and $198,538.31 for YoJo, LLC . Liaison**  **Greene also recalculated the total litter tax due, based upon the adjusted gross sales calculated.**  **Liaison Greene determined that additional litter tax was due in the amount of $1,933.11**  **for JoYo, LLC and $668.64 for YoJo, LLC inclusive of penalty and interest.**  **Taxpayer disputes both the auditor’s determination of insufficient records ,**  **and the selection of March 2013 as the sample period.**  **Taxpayer argues**  **that there were sufficient records for a full audit, that liquor stores in New Jersey rely on quantity purchasing for profit, that there is a**  **seasonal component to be factored into liquor stores located in New Jersey shore towns, and that busine**  **ss interru**  **ption from Superstorm Sandy 1**  **also had to be factored into the audit. Taxpayer**  **offer s**  **as evidence against the markon**  **audit, the fact that a s ubsequent audit**  **conducted by the Division for later years did not result in the use of a sample period and markon**  **audit. With the support of a certification from Taxpayer’s expert CPA, Taxpayer claims**  **that the same type of accounting documents deemed insufficient for the 2010-2014 audit,**  **were sufficient for an actual audit analysis**  **for the audit period 2015 -2018.**  **Those documents are listed as Schedule C, business tax returns, general ledgers, cash receipt and cash disbursement books, bank**  **statements, sales book, cas h register tapes, purchase books, third party confirmation letters, and**  **party books.**

**1 On**  **October 29, 2012**  **the center of 900- mile**  **-wide Superstorm Sandy made landfall in**  **New Jersey**  **near Brigantine. The massive storm and its accompanying 80 mph sustained wind, heavy rains, and a record-breaking storm surge that**  **coincided with a high tide and a full moon caused massive destruction many New Jersey communities and most significantly in New Je**  **rsey’s shore communities. Streets were flooded, houses and buildings swept off their foundations, and tre**  **es and powerlines toppled. Recovery took years.** **11**

**An exception to the above was for Schedule C’s and tax return information for 2014. Taxpayer**  **was not able to provide those documents when requested in 2014 because Egan’s**  **tax returns had yet to be completed and filed.**  **Regarding the bank statements, Taxpayer**  **combined the sales receipts from both liquor stores when making bank deposits.**  **Taxpayer asserts that this was for convenience only, however the**  **auditor failed to acknowledge this and combine the bank statements of both stores.**
**II. Legal**  **Analysis Rule 4:46-1 allows a party to move for summary judgment before the case is tried. The**  **court**
**may grant the motion if, from the pleadings, depositions, answers, admissions, and/or**  **certifications, it appears that there is “no genuine issue as to any material fact challenged.”**  **R . 4:46-**  **2. Summary Judgment shall be granted where “there is no genuine issue as to any material f act . .**  **. and . . . the moving party is entitled to a judgment or order as a matter of law.” R. 4:46- 2(c).**  **“The key inquiry is whether the evidence presented, when viewed in the light most favorable to the non**  **moving party ,**  **is ‘sufficient to permit a rational factfinder to resolve the alleged dispute in fav or of**  **the non-moving party.’” T.B. v. Novia, 472 N.J. Super. 80, 93 (App. Div. 2022) (quoting Brill v.**  **Guardian Life Ins. Co. of Am., 142 N.J. 520, 540 (1995) ).**  **The movant bears the “burden to exclude any reasonable doubt as to the existence of any genuine issue of material fact” regarding the claims asserted.**  **Judson v. Peoples Bank and Trust ,**  **17 N.J. 67, 74 (1954) (citation omitted). The Supreme Court has cautioned 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 c hallenged.’”**  **Brill v. Guardian Life Ins. Co. of**  **Am. , 142 N.J. 520, 529 (1995) (emphasis in original; quoting R. 4:46-**  **2(c)). “That means a non-moving party cannot defeat a motion for summary judgment merely by pointing to** **12**

**any fact in dispute.” Ibid**  **. (emphasis in original). Moreover, “when the evidence is so one sided**  **that one party must prevail as a matter of law the trial court should not hesitate t o grant summary**  **judgment.” Id**  **. at 540 (quotations omitted). This case brings into question whether the Defendant’s auditor properly**  **conducted a mark**

  ** up analysis for the tax year in question, or if a mark-up analysis should have been conducted a** **t all. “In general terms, markup methodology is used when the Director’s auditor deems the r**  **ecords of a taxpayer, whose receipts are primarily**  **in cash, are insufficient to verify the gross receipts as reported on the taxpayer’s sakes tax returns and income tax return**  **s. ”**  **Yilmaz, Inc. v. Dir., Div. of**
**Tax’n , 22 N.J. Tax 204, 212 (**  **Tax 2005)**  **. During the markup the auditor compares the taxpayer’s**

**cos t of the goods sold to the selling prices of those goods. Ibid. The costs of the good sold are**  **calculated by the invoices and records by the suppliers, white the selling price is ca lculated by the**  **taxpayer’s menu or other documents indicating price. Ibid. From these two numbers the audi tor**  **creates a ratio of selling price to cost, or “markup,” which is developed from a smal ler sample**  **period that is then applied to the taxpayer’s entire audited year. Ibid. The**  **two**

**- issue**  **s presented to this court**  **are : (1)**  **whether Plaintiff can cite a subsequent audit**  **as evidence that the auditor’s decision to do a mark-up analysis in the first audit was im proper;**  **and (2) if the subsequent audit cannot be admitted as evidence, whether**  **the mark**

**- on analysis of**  **the f**  **irst audit was improper**  **based on facts of the case. The general legal principles applicable to a claim involving a challenge to the audit**  **methodology used by the Division due to inadequate books and records**  **are well settled. One is that a taxpayer**  **is required to keep sufficient books and records**  **for the Division to determine proper**  **tax liabilities. A second is that a presumption of correctness attaches to the Div ision's assessment**  **of tax. 13** 

**Pursuant to statute, a taxpayer must keep sufficient books and records**  **in order for the Division 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 the Divisi**  **on "[a] true copy of all sales slips, invoices, receipts, statements, memoranda of price, or cas**  **h register tapes, issued to any customer . . . and**  **records of every purchase," which must be retained "for four years from**  **the date of filing of each quarterly sales tax**  **return ."**  **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, a taxpayer could**  **"dispose of individual sales slips, invoices, receipts, statements, memoranda of pr ice, or cash**  **register tapes . . . after the lapse of a period not less than 90 days from the last dat e of the most**  **recent quarterly (or monthly) period for the filing of**  **sales tax returns 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).** 
**If the taxpayer**  **has failed**  **to keep**  **the required**  **books and**  **records ,**  **or if** 

**the books and**  **records maintained** 

**do not clearly**  **reflect income,**  **the Division**  **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).**
**As stated**  **in Saulwil,**  **Inc. v.**  **Dir., Div.**  **of Taxation**  **, 31 N.J.**  **Tax 433**  **(Tax 2020):**  **Clearly, then, under**  **the statute**  **and precedent,**  **Taxation can**  **reconstruct a taxpayer's**  **receipts subject**  **to tax**  **and determine**  **the correct**  **tax if** 

**the taxpayer's**  **books and**  **records are**  **inadequate or**  **there are**  **justifiable reasons**  **to believe**  **that a**  **filed tax**  **return "is** **14 incorrect**  **or insufficient." Thus, Taxation's audit determinations**  **are not**  **set in**  **stone. Rather,**  **they are**  **presumptively correct,**  **which means**  **that a**  **taxpayer can**  **rebut the**  **same with**  **proof of "bona fide**  **business records**  **" that**  **are qualitatively**  **and quantitatively**  **credible. Duncan**  **Truck**

**Stop, Inc.**  **v. Dir.,**  **Div. of**  **Taxation , 4**  **N.J. Tax**  **367, 375-76 (Tax**  **1982). The**  **term "inadequate"**  **is not**  **defined anywhere.**  **Nonetheless the**  **broad discretion**  **allowed Taxation**  **under N.J.S.A. 54:32B-19, and**  **the presumptive correctness**  **afforded its**  **determinations, are**  **based on the**  **expectation that**  **Taxation, as**  **a governmental agency,**  **will be**  **reasonable in**  **its initial**  **determination that**  **a taxpayer's**  **books and**  **records are**  **inadequate. See**  **e.g. S.**  **Burlington County NAACP**  **v. Township of Mount**  **Laurel , 92**  **N.J. 158, 305, (1983) (presumption**  **of correctness**  **to government decisions**  **attaches because**  **"those in**  **government generally**  **act within**  **the powers granted to**  **them and**  **do so**  **properly"); Borough of**  **Rumson v. Peckham**  **, 7 N.J.**  **Tax 539, 548**  **(Tax 1985)**  **("Nonstatutory presumptions**  **such as,**  **inter alia**  **, the**  **presumption of correctness**  **of a county board of taxation**  **judgment, are**  **based on considerations of public policy").**  **Additionally, the square corners**  **doctrine impacts**  **Taxation's determinations,**  **and**

**thus, balances**  **with the presumption of**  **correctness provided**  **to those**  **determinations. See**  **Milligan v.**  **Dir., Div.**  **of Taxation**  **, 29 N.J.**  **Tax 381, 398-99**  **(Tax 2016)**  **("the square**  **corners doctrine**  **is a long-**  **established legal**  **principle limiting**  **Executive Branch**  **action which**  **would otherwise be authorized by law").**  **Thus, the government cannot "conduct itself**  **so as**  **to achieve**  **or preserve**  **any kind**  **of**

**bargaining or litigational**  **advantage over"**  **a taxpayer**  **since "[i]ts**  **primary obligation**  **is to**  **comport itself**  **with compunction**  **and integrity";**  **therefore, it**  **cannot act**  **like "private**  **citizens**

**. . . in**  **dealing with**  **one another"). F.M.C.**  **Stores Co. v.**  **Borough of Morris**  **Plains , 100**  **N.J. 418, 426-27, 495 A.2d 1313**  **(1983). As the Court pointed out: [S]tatutory**  **provisions governing substantive standards**  **and procedures**  **for taxation,**  **including the administrative**  **review process,**  **are premised**  **on the concept**  **that government**  **will act**  **scrupulously, correctly,**  **efficiently, and honestly.**  **It is**  **to be**  **assumed that**  **the [taxing agency]**  **will exercise**  **its governmental**  **responsibilities in**  **the field**  **of taxation**  **conscientiously, in**  **good faith**  **and without**  **ulterior motives.**  **[ Id.**  **at 427**  **]. 15**  **Consequently, 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 decide**  **whether Taxation's initial**  **conclusion as**  **to the**  **inadequacy of books**  **and records**  **was reasonable.**  **Thus, a taxpayer**  **can provide**  **credible evidence**  **(documentary and/or testimonial)**  **to show**  **that Taxation's**  **reasons for**  **performing a**  **markup were**  **unreasonable, and**  **further that**  **the consequent audited**  **tax assessments**  **were arbitrary**  **and aberrant.**  **See TAS**  **Lakewood v. Dir.,**  **Div. of**  **Taxation , 19**  **N.J. Tax**  **131, 139-41 (Tax**  **2000) (court's "review**  **[of] the audit**  **figures" allowed**  **it to**  **"conclude that**  **the tax**  **deficiency imposed**  **based on the only**  **available records,**  **the tax**  **returns**

**. . . [was]**  **reasonable and**  **justified by**  **law"); Yilmaz**  **, 390 N.J.**  **Super. at**  **441-42, (taxpayer can**  **present "competent**  **independent evidence,**  **expert or**  **otherwise, to**  **challenge that**  **presented by"**  **Taxation to**  **prove either**  **an aberrant**  **methodology or excessive**  **assessment amount, or provide**  **evidence through**  **cross -**  **examination of the auditor**  **that Taxation's**  **assessment is**  **incorrect); United**  **States v.**  **Carson , 560 F.2d 693, 698**  **(5th Cir.**  **1977) (government reliance**  **on simply**  **a presumption of correctness**  **untenable since**  **it "would**  **support the most arbitrary**  **of assessments**  **so long**  **as the**  **taxpayer found**  **himself**

**unable to**  **prove a negative");**  **Walker v.**  **Commissioner , 757 F.2d 36, 37**  **(3d Cir.**  **1985) ("In**  **unreported income**  **cases, the presumption of**  **correctness imposes on the**  **taxpayer the**  **difficult burden of proving a**  **negative, that**  **he did not earn**  **the income the government claims**  **he earned"**  **and while**  **this is**  **often "from**  **the taxpayer's**  **own failure**  **to keep**  **business records**  **of transactions**  **known only to**  **him," yet**  **these "**  **record keeping**  **failures do not**  **justify" an**  **unreasonable or "naked**  **assessment"). Whether a taxpayer's**  **records are "inadequate" depends on the facts**  **and circumstances of each case. It is not necessarily the quantity of**  **records , but also the quality. That a taxpayer does not maintain,**  **or cannot produce, each and every record**  **demanded by Taxation is not a conclusive indication of inadequacy in**  **record**

**- keeping. A**  **taxpayer need not maintain the best**  **or perfect**  **records . Rather, its**  **records should be sufficiently enough to support the veracity of its**  **filed returns. A contrary construction would render meaningless the**  **discretion afforded Taxation in examining books and records**  **, and the presumptive correctness afforded its determinations.** 

**[ Saulwil**  **at 447-449] 16** 

**Subsequent audits are generally irrelevant as “**  **[e] ach audit period**  **stands on its own, and a**  **taxpayer cannot establish that an earlier audit was erroneous by contending that a lat er audit was** 
**correct.” Yilmaz**  **, 22 N.J. Tax 204, 226.**  **However ,**  **in Yilmaz**  **the court established certain**  **requirements a taxpayer would need to satisfy to introduce a subsequent audit as evidence. First,**  **the taxpayer would need to prove the reliability of the records of the subsequent audit. Ibid**  **. T he**  **court explained that “the reliability of the findings of the subsequent audit could be dete rmined**  **only after evidence was presented as the reliability of the records maintained by the t axpayer**  **during the later period as well as the methodology employed by the Division.” Id. at 227**

**. In**  **Yilmaz , the taxpayer only submitted workpapers from the subsequent audit which**  **the court emphasized was**  **“not a final audit determination.**  **” Id. at 226.**  **The period covered by the subsequent**  **audit was “unknown” and the methodology of the auditor was not clear. I bi**  **d. However, t he court**  **stated that even when a “complete and final set of work papers” are offered the taxpayer mu st still**  **prove the reliability of the records maintained by the taxpayer during the later period a s well as**  **the methodology employed by the division. Id**  **. at 227. Plaintiff**  **claims to have submitted the**  **subsequent audit’s final audit determination as part of it proofs but no such document has been**  **submitted**

**. Plaintiff also asserts the final audit determination was based on all books and rec**  **ords covered the audited entire period.**  **Even if Plaintiff submitted the final determination what arises is a material fact that is not proper for**  **summary judgment.**
**Second, even if the court were**  **to find that Taxpayer has**  **establishe d**  **that the subsequent**  **audit is reliable**  **, Taxpayer**  **would then still need to**  **prove the subsequent audit is relevant to the**  **reasonableness of the audit at issue**  **. “Only relevant evidence is admissible.” Ibid . In**  **Yilmaz the**  **subsequent audit ha d**  **“no bearing” on whether the audit at issue was conducted reasonably as** **17**

**“[n]othing about the documents proffered by the plaintiff would have any tendency to prove anything about the audit at issue here.” Ibid.**  **Here, the relevance of the subsequent audit to the case at bar is whether the document s**  **used in both audits are “substantially similar” or “virtually identical” as Taxpayer**  **contends. The specific records the**  **Division requested in both audits were: (a) Schedule C; Business Tax Returns;**  **and Tax Return Worksheets; (b) General Ledgers; (c) Cash Receipts and Cash Disbur sement**  **Books and Records; (d) Bank Statements; and**  **(e) Party Books. Taxpayer**  **contends that these types of records were submitted in both the 2013 and 2020 audits making them substantially similar.**  **The Division contends a 2014 Schedule C and Tax Return Worksheet was never received. Taxpayer claims the request for documents for the year 2014 was improper because tax**  **filing for the year 2014 was not due yet.**  **The Division’s auditor indicated that he never received**  **Taxpayer’s 2013 General Ledger. Taxpayer disputes this and claims the 2013 General Ledger was provided** 

**. These are all factual**  **determinations that cannot be resolved**  **without a hearing and credibility determinations.**  **Taxpayer also argues that the audit’s mark** 

**- up analysis was flawed irrespective of the**  **subsequent audit. An audit’s presumption of correctness “can be rebutted only by cogent evidence that must be ‘definite, positive and certain in quality and quantity to overcome the presumpt**  **ion. ’”**  **Yilmaz , 22 N.J. Tax 204, 236**  **(citing Pantasote Co. v. Passaic, 100 N.J. 408, 413 (1985)**  **). Such**  **evidence must “focus on the reasonableness of the underlying data” used by the auditor as well as**  **the auditor’s methodology for “aberrant methodology will overcome the presumption of correctness... imperfect methodology will not.” Id. at 236.**  **Taxpayer asserts that**  **the mark on methodology was improper due to the auditor’s decision**  **to use March 2013 as the sample period, emphasizing that since the liquor stores are in**  **New Jersey 18** 

**shore communities they have a primary season of May through September. Taxpayer**  **argues that in March of 2013 shore town businesses**  **were impacted by Super s**  **torm Sandy making the sample period inaccurate**  **and flawed**

**. Taxpayer also argues that the**  **discrepancies in gross receipts are because of non**

**- taxable**  **income received from alcohol distributors. Specifically, Taxpayer claims t hat it received Refunds**  **on Purchases (“ RIPS**  **”) from alcohol distributors due to bulk purchasing of certain liquor items. Taxpayer posits that the RIPS income is not taxable as it does not relate to sales. T**  **axpayer’s bank statements allegedly contain these RIPS deposits, and they account, at least in**  **part, to the discrepancy between gross receipts and taxable income.**  **These disputes**  **directly relate to the**  **determination of the adequacy of Taxpayer’s**  **documents and to the methodology of the auditor, and consequently give rise to issue s**  **of material fact. This court find**  **s that**  **neither Taxpayer nor**  **the Division has**  **overcome its burden on summary judgment. Without a full record and fact findings by the court, the issues presented by both parties**  **cannot be reconciled as a matter of law** 

**.**
**III. Conclusion** 

**The court denies**  **Taxpayer s’**  **motions for**  **summary judgment and the Division’s**  **cross -**  **motion s**  **for summary judgment as**  **there are issues of material fact that cannot be ruled on as a matter of**  **law**

**. Furthermore, in accordance with the court’s directive on the record, the court has sche**  **duled a preliminary hearing on Tuesday August 13, 2024**  **, at 9:00 a.m. for the sole purpose of determining**  **whether Taxation’s initial conclusion as to the inadequacy of books and records was reasonabl e.** 

**/s/ Mary Siobhan Brennan Hon. Mary Siobhan Brennan, J.T.C.**