MacLeod v. Megna

• Decision Date: 22 July 2010
• Citation: 75 A.D.3d 928,905 N.Y.S.2d 376
• Parties: In the Matter of Michael MacLEOD, Petitioner, v. Robert L. MEGNA, as Commissioner of Taxation and Finance, et al., Respondents.
• Court: New York Supreme Court — Appellate Division

905 N.Y.S.2d 376 75 A.D.3d 928 In the Matter of Michael MacLEOD, Petitioner, v. Robert L. MEGNA, as Commissioner of Taxation and Finance, et al., Respondents. Supreme Court, Appellate Division, Third Department, New York. July 22, 2010.

Edward W. Hayes, P.C., New York City (Edward W. Hayes of counsel), for petitioner.

Andrew M. Cuomo, Attorney General, Albany (Julie S. Mereson of counsel), for Commissioner of Taxation and Finance, respondent.

Before: SPAIN, J.P., LAHTINEN, STEIN, McCARTHY and GARRY, JJ.

McCARTHY, J.

Proceeding pursuant to CPLR article 78 (initiated in this Court pursuant to Tax Law § 2016) to review a determination of respondent Tax Appeals Tribunal which sustained a sales and use tax assessment imposed under Tax Law articles 28 and 29.

Petitioner was the president and sole shareholder of MJM Studios of New York, Inc., a New Jersey company that specialized in fabricating and constructing architectural enhancements to buildings in several states. Respondent Department of Taxation and Finance notified petitioner that it would be conducting a field audit and required petitioner to make all of MJM's records available. Petitioner responded that he could not provide the records because they were in the possession of a bankruptcy trustee in New Jersey. After the Department's auditor madean unsuccessful attempt to contact the bankruptcy trustee and several more requests to petitioner for the records, the auditor calculated an estimated sales and use tax assessment based on deposits in MJM's bank records, adjusted through reliance on MJM's franchise tax returns to include only New York sales. The assessed amount was reduced following a conciliation conference. Petitioner filed a petition for administrative review. Following a hearing, at which the Department agreed to further reduce the assessment, the Administrative Law Judge (hereinafter ALJ) sustained the reduced tax assessment. Petitioner sought review from respondent Tax Appeals Tribunal, which affirmed the ALJ's determination. This proceeding ensued.

The Tribunal properly affirmed the tax assessment against petitioner. ¹ Petitioner was subject to a statutory presumption that all money MJM received for its products and services was taxable, with the burden on petitioner to establish by clear and convincing evidence that the money was not taxable and the tax assessment was erroneous ( see Tax Law § 1132[c][1]; Matter of Attea v. Tax Appeals Trib., 64 A.D.3d 909, 910, 883 N.Y.S.2d 610 [2009], appeal dismissed 13 N.Y.3d 830, 890 N.Y.S.2d 441, 918 N.E.2d 955 [2009], cert. denied --- U.S. ----, 130 S.Ct. 2403, 176 L.Ed.2d 923 [2010]; Matter of Clapes v. Tax Appeals Trib. of State of N.Y., 34 A.D.3d 1092, 1093-1094, 825 N.Y.S.2d 168 [2006], appeal dismissed 8 N.Y.3d 975, 836 N.Y.S.2d 545, 868 N.E.2d 227 [2007] ). The Tax Law imposes sales tax upon the receipts from retail sales of tangible personal property, as well as from installation, maintenance, servicing or repair of tangible personal property ( see Tax Law § 1105[a], [c][3] ). An exemption applies for the sale or installation of tangible personal property that will constitute a capital improvement as defined in the Tax Law ( see Tax Law § 1105[c][3][iii]; § 1115[a][17]; see also Tax Law § 1101[b][9][i] [defining capital improvement] ).

Petitioner failed to meet his burden of proving that the capital improvement exemption applies so as to render MJM's salesnontaxable. Petitioner did not provide the auditor with exemption certificates, contracts or other records to indicate that MJM's work on construction projects constituted capital improvements ( cf. Matter of Attea v. Tax Appeals Trib., 64 A.D.3d at 911, 883 N.Y.S.2d 610).² Although the records were in the possession of a bankruptcy trustee who would not release the originals, there was no evidence that petitioner attempted to obtain copies of those documents. Petitioner's representative admitted that petitioner did not file an objection when the Bankruptcy Court issued a notice of abandonment concerning MJM's documents. Had an objection been filed, petitioner presumably could have obtained those documents and presented them at the hearing. Even without any documents, petitioner could have testified at the hearing to explain his company's operations. Instead, petitioner relied on the testimony of his representative who had no specific knowledge of MJM's activities with regard to any of the projects during the audit period.

Considering the lack of documentation from petitioner, the Department wasrequired to select a reasonably accurate method to determine the tax assessment "from such information as may be available," which could include an estimate based on external indices (Tax Law § 1138[a][1]; see Matter of Estate of Manno v. State of New York Tax Commn., 147 A.D.2d 805, 807, 537 N.Y.S.2d 683 [1989], lv. denied 74 N.Y.2d 610, 546 N.Y.S.2d 554, 545 N.E.2d 868 [1989], appeal dismissed 75 N.Y.2d 864, 552 N.Y.S.2d 929, 552 N.E.2d 177 [1990], cert. denied 498 U.S. 813, 111 S.Ct. 50, 112 L.Ed.2d 26 [1990] ). The use of an otherwise acceptable audit method is not rendered unreasonable merely because "a different audit methodology might provide a more precise estimate of tax liability" ( Matter of Petak v. Tax Appeals Trib. of State of N.Y., 217 A.D.2d 807, 809, 629 N.Y.S.2d 547 [1995]; see Matter of Shukry v. Tax Appeals Trib. of State of N.Y., 184 A.D.2d 874, 875-876, 585 N.Y.S.2d 531 [1992] ). While this Court has acknowledged that an auditor's personal observations could be used as part of a reasonable method of tax assessment ( see Matter of Petak v....