NOT FOR PUBLICATION WITHOUT APPROVAL OF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 07102

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 plaintiffs’ 

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 
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shareholder is Joseph 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 this 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 tapes, 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 maintaining 

separate liquor licenses. 

Plaintiff YoJo, LLC 

Plaintiff 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 inventory 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, JoYo, 

LLC and YoJo, LLC will collectively be referred to as “Taxpayer”. 

The Audit 

Based on the foregoing, the Division decided to simultaneously audit both businesses 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 1st 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 1st 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 1st 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. Lastly, 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 multiple occasions 

when the Taxpayer closed out the register with no transactions. 

The auditor determined that the Taxpayer’s books and records were inadequate to verify the 

information reported on the sales tax returns, the late filed NJ-1040 returns, and/or litter control 

fee returns. The auditor also determined that taxpayer had insufficient internal controls. 

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 accepted purchases 

as reported on the taxpayer’s general ledger. After reviewing all of the purchase information, 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 to 

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 failure 

to file timely returns, the auditor determined that a markon analysis was necessary. The auditor 

selected March 2013 as the sample period for the markon because the auditor believed it was 

representative of the Taxpayer’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 determine 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 markon for that category to the 

purchases per the Taxpayer’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 usage, 

etc. The auditor subtracted the allowances for non-receipts, and for coupons from the estimated 

sales before allowance to determine audited sales. The auditor then totaled the audited net sales 

for each category and compared it to the audited purchases and determined that there was an overall 

markon of 1.21 rounded. 

Since the two liquor stores shared inventory, the auditor needed to determine the purchases 

that should be allocated 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 auditor then applied this 

percentage to the total purchases in each category for each business. Then for each business, 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 applied the 

applicable sales 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 determine 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 amount 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 tax due and

issued a Notice of Assessment Related to Final 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 Taxpayer 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 mark-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 for this audit in 

determining gross receipts. 
8 

For the administrative conference, Conferee Victor Jasey asked the Taxpayer 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 Taxpayer 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. Therefore, 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 Taxpayer. Conferee Jasey also gave the Taxpayer an allowance for nontaxable 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 Taxpayer 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 Taxpayer 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. Liaison 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 for 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 reported 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 Greene 

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 business 

interruption from Superstorm Sandy1

 also had to be factored into the audit. 

Taxpayer offers as evidence against the markon audit, the fact that a subsequent 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, cash 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 Jersey’s shore 

communities. Streets were flooded, houses and buildings swept off their foundations, and trees 

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 fact . . 

. 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 nonmoving party, is ‘sufficient to permit a rational factfinder to resolve the alleged dispute in favor 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 challenged.’” 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 to grant summary 

judgment.” Id. at 540 (quotations omitted). 

This case brings into question whether the Defendant’s auditor properly conducted a markup analysis for the tax year in question, or if a mark-up analysis should have been conducted at all. 

“In general terms, markup methodology is used when the Director’s auditor deems the records 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 returns.” 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 

cost 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 calculated by the 

taxpayer’s menu or other documents indicating price. Ibid. From these two numbers the auditor 

creates a ratio of selling price to cost, or “markup,” which is developed from a smaller sample 

period that is then applied to the taxpayer’s entire audited year. Ibid. 

The two-issues 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 improper; 

and (2) if the subsequent audit cannot be admitted as evidence, whether the mark-on analysis of 

the first 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 Division'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 Division "[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," 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 price, or cash 

register tapes . . . after the lapse of a period not less than 90 days from the last date 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 later 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. The 

court explained that “the reliability of the findings of the subsequent audit could be determined 

only after evidence was presented as the reliability of the records maintained by the taxpayer 

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. Ibid. However, the court 

stated that even when a “complete and final set of work papers” are offered the taxpayer must still 

prove the reliability of the records maintained by the taxpayer during the later period as 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 records 

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 established 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 had “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 documents 

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 Disbursement 

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 presumption.’”

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 markon 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 Superstorm 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 that 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. Taxpayer’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 issues of material 

fact. This court finds 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 Taxpayers’ motions for summary judgment and the Division’s cross-motions 

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 scheduled 

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 reasonable. 

/s/ Mary Siobhan Brennan 

Hon. Mary Siobhan Brennan, J.T.C.