IN RE: CUSHLIN LIMITED (2026)

MEMORANDUM AND JUDGMENT

Calendar Date:  May 27, 2026

Proceeding pursuant to CPLR article 78 (initiated in this Court pursuant to Tax Law § 2016) to review a determination of respondent Tax Appeals Tribunal sustaining two notices of deficiency of corporate franchise tax imposed under Tax Law article 9–A.

Petitioner is a corporation based in the Isle of Man that acquires, refurbishes and resells hotels in New York City. During the years at issue here, it held controlling interests in a subsidiary, Hampshire Hotels Manhattan LLC, as well as 12 other entities (hereinafter collectively referred to as the hotel entities).  In 2009, the Department of Taxation and Finance (hereinafter the Department) commenced field audits of petitioner for tax years 2002–2006 and 2007–2009 to investigate whether petitioner had accurately reported gains and losses from certain sales of real property.  During the audits, the Department learned that petitioner had not filed tax returns for these years.  Over the following years, petitioner worked to prepare returns, and, while doing so, petitioner provided the Department with “pro forma” numbers – preliminary numbers reflecting its income and losses that it intended to incorporate into its tax returns.  When petitioner eventually filed its tax returns in 2016, the income and losses claimed on these returns were significantly higher than the pro forma numbers.  Seeking to verify the information contained in the tax returns, the Department sent three information document requests (hereinafter IDRs) seeking further information.  In 2018, after responses by petitioner were late and incomplete, the Department closed the audits and sent notices of deficiency assessing in excess of $13 million in unpaid corporate franchise tax, plus interest and penalties, for the 2002–2006 period, and in excess of $1.5 million in unpaid corporate franchise tax, plus interest and penalties, for the 2007–2009 period.

Petitioner sought a conciliation conference, after which the notices of deficiency were sustained.  It then sought review of the notices of deficiency before the Division of Tax Appeals and, following a hearing, an Administrative Law Judge (hereinafter ALJ) sustained the notices of deficiency.  Petitioner filed an exception to the ALJ's decision with respondent Tax Appeals Tribunal, and the Tribunal affirmed the ALJ's decision.  Petitioner thereafter commenced this proceeding to annul the Tribunal's determination.

“Petitioner, as the party attacking the notices of deficiency, was required to establish by clear and convincing evidence that the selected audit method and the resulting assessment was unreasonable” (Matter of Mayo v New York State Div. of Tax Appeals, Tax Appeals Trib., 172 AD3d 1554, 1554–1555 [3d Dept 2019] [internal quotation marks, brackets and citations omitted], lv denied 34 NY3d 1140 [2020];  see Matter of Scarpulla v. State Tax Commn., 120 A.D.2d 842, 843 [3d Dept 1986] ).  “The burden was not upon the Department to demonstrate the propriety of the deficiency” (Matter of Scarpulla v. State Tax Commn., 120 A.D.2d at 843 [citation omitted];  see Matter of Guiragossian v. Chu, 130 A.D.2d 901, 901 [3d Dept 1987] ).  The Tribunal found that petitioner had not met its burden and, “as long as that determination is rationally based and is supported by substantial evidence, it must be confirmed, even if a different conclusion would not have been unreasonable” (Matter of Mayo v New York State Div. of Tax Appeals, Tax Appeals Trib., 172 AD3d at 1555 [internal quotation marks and citation omitted];  see Matter of A & J Gifts Shop–Vanni v Chu, 145 A.D.2d 877, 878 [3d Dept 1988], lv denied 74 N.Y.2d 603 [1989] ).

The record demonstrates that, while the audit was ongoing, petitioner provided the pro forma numbers to the Department.  In September 2015, more than six years after the audit was commenced, petitioner still had not filed tax returns.  The Department prepared a draft audit adjustment showing taxes due using the pro forma numbers and sent it to petitioner.  Ten months later, in June 2016, petitioner filed its tax returns for tax years 2002–2009.  These tax returns reported income and expenses that were significantly higher than what petitioner had informed the Department they would be and resulted in negative income bases for every year.  Rather than ending the audit and assessing the deficiencies at that point in time, the Department attempted to verify the amounts on the tax returns by sending petitioner the three IDRs. Over the following 21/212 years, petitioner provided belated and incomplete responses to the IDRs that lacked externally verifiable substantiation.  As such, the Department used the pro forma numbers, which it was able to verify using an internal real estate database, to compute petitioner's tax due.

Throughout both the administrative proceeding and on appeal, petitioner has claimed that there is no rational basis for the assessed deficiencies, however, petitioner has not proffered any evidence or testimony to support this conclusory assertion.  At the hearing, petitioner did little other than offer the testimony of two accountants in an attempt to belatedly substantiate petitioner's tax returns.  “Thus, the failure of petitioner to produce any evidence demonstrating that the assessment was erroneous left standing the presumption of correctness which attached to the notice of deficiency” (Matter of Leogrande v. Tax Appeals Trib., 187 A.D.2d 768, 769 [3d Dept 1992] [internal quotation marks, brackets and citations omitted], lv denied 81 N.Y.2d 704 [1993];  see Matter of Parikh v. Schmidt, 200 AD3d 1237, 1241 [3d Dept 2021] ).  Although petitioner's assertions that the methods used to compute its tax due were imprecise are not completely devoid of merit, it was petitioner's “failure to maintain proper records [that] prevent[ed] exactness in determination of ․ tax liability, [thus] exactness is not required” (Matter of Emerald Intl. Holdings Ltd. v Tax Appeals Trib. of the State of N.Y., 181 AD3d 1003, 1007 [3d Dept 2020] [internal quotation marks and citations omitted];  see Matter of Blackhat Chimney & Fireplace, Inc. v Tax Appeals Trib. of the State of N.Y., 145 AD3d 1213, 1214 [3d Dept 2016] ).  “[E]ven if the methodology is imperfect or flawed, petitioner's conclusory allegations of error are insufficient to meet its burden of proof” (Matter of Emerald Intl. Holdings Ltd. v Tax Appeals Trib. of the State of N.Y., 181 AD3d at 1007 [internal quotation marks, brackets and citation omitted] ).  Therefore, “[a]s the Tribunal rationally concluded that petitioner failed to meet [its] burden of establishing that the audit was unreasonable either as to method or result, and its determination is supported by substantial evidence, we confirm” (Matter of Parikh v. Schmidt, 200 AD3d at 1241;  see Matter of Blackhat Chimney & Fireplace, Inc. v Tax Appeals Trib. of the State of N.Y., 145 AD3d at 1215;  Matter of Scarpulla v. Sate Tax Commn., 120 A.D.2d at 843;  see also Matter of Drebin v Tax Appeals Trib. of State of N.Y., 249 A.D.2d 716, 719 [3d Dept 1998] ).  Petitioner's remaining contentions, to the extent not specifically addressed herein, have been considered and found to be without merit.

Aarons, J.P., Ceresia, Fisher and McShan, JJ., concur.

ADJUDGED that the determination is confirmed, without costs, and petition dismissed.

Pritzker, J.