A New York State Administrative Law Judge has held that an assessment against the purchaser of a restaurant arising out of an alleged bulk sale transaction should be cancelled because, while there had been a bulk sale, there was no evidence of a pre-existing tax liability on the part of the seller rather than his son, and even if there had been, the Department did not establish a rational basis for the underlying assessment. Matter of Chang Liu Jiang, DTA No. 826063 (N.Y.S. Div. of Tax App., Oct. 15, 2015).

Facts. Mr. Chang Liu Jiang, the petitioner, doing business as Sky Wok Chinese Restaurant, entered into a six-year lease agreement with Mr. Banke Tung as landlord for a premises in Brooklyn where he intended to operate a Chinese take-out restaurant. He heard of the opportunity from Mrs. Tung, the landlord’s wife. The premises were fully equipped with appliances and equipment that could be used to operate the business. Petitioner has formerly operated his own nearby restaurant, and was interested in this lease as a “turnkey” business opportunity. He applied for and received a sales tax certificate of authority, and on his application identified the date the business would begin as March 1, 2012, the same date his tenancy began.

In November 2012, the Department’s Bulk Sale Unit received a written communication from a Tax Compliance Agent that a bulk sale had occurred between petitioner and Mr. Fan Chuen Tung, the son of Banke Tung and the manager of the former restaurant located at the same address. The communication noted that the name of petitioner’s business was New Sky Wok Kitchen, and the former business operated by Fan Chuen Tung had been called Sky Wok Garden Restaurant. No source for the information concerning the alleged bulk sale was identified, and no equipment list, inventory of the business, sales price, or appraisal of assets was provided. The agent did not indicate he had visited the premises or spoken with the alleged seller or buyer. No bulk sale notice had been filed by any party.

On December 4, 2012, the Bulk Sales Unit sent petitioner a request for more information and a warning that if he did not reply within 20 days, his liability for tax, penalties, and interest would be determined based on “‘all available information.’” In response to the letter, the Bulk Sale Unit received, first, a phone call from an accounting firm “allegedly” representing petitioner advising that no bulk sale had occurred, and then a letter from petitioner in an envelope from the accounting firm stating that his business was a take-out restaurant that he leased from the landlord, and that he had not paid any consideration for or bought the business from the former occupant of the space. No documentation was provided.

The Bulk Sale Unit determined that a bulk sale had occurred because the two businesses were virtually identical, located at the same address, used the same telephone number, and had similar names. They also had the same accounting firm and reported similar sales, and no documentation had been provided of the “purchase of the business assets and inventory.”

There was an outstanding sales tax assessment against the alleged “seller,” Fan Chuen Tung. Since petitioner failed to provide evidence that no bulk sale had occurred, or proof of the value of the assets allegedly “purchased,” the Bulk Sale Unit issued a Notice of Determination assessing estimated tax against petitioner for the “seller’s” sales tax.

At the hearing, petitioner explained that the name of the restaurant, chosen by the landlord, was deliberately similar to the former name to attract customers. He testified that the equipment at the premises, while functioning, was heavily used and worn, and that he purchased food inventory and supplies himself with cash. He paid monthly rent to the landlord which included utilities, consistent with the terms of the lease. In August 2013, he surrendered possession of the premises back to the landlord.

ALJ Decision. The ALJ first reviewed the bulk sale provisions of Tax Law § 1141, which require the purchaser to give notice at least ten days before taking possession or making payment, and then affords the purchaser protection against liability for the seller’s unpaid sales tax obligations. A “bulk sale” includes a sale or transfer “in bulk of any part or the whole of business assets,” and the term “sale” can include a lease. Here, the ALJ found that the petitioner leased the premises for a specific consideration, including tangible property necessary to operate a take-out restaurant. Therefore, the transaction constituted a bulk sale. However, the “seller” was not Fan Chuen Tung, who had been the manager of the previous restaurant, but Banke Tung, the landlord who actually transferred the business assets to petitioner along with the premises. The Department “offered no evidence of a sale between Fan Chuen Tung and petitioner,” and the ALJ found that petitioner credibly testified he had learned of the opportunity from Mrs. Tung, leased the premise from Banke Tung, and received the equipment for the operation of the business from Banke Tung. Since the only bulk sale that occurred arose from the lease, the bulk sale seller was Banke Tung, and no sales and use taxes were due from Banke Tung; the assessment was based on taxes allegedly owed by his son, Fan Chuen Tung.

In addition, the ALJ found that even if there had been a bulk sale between Fan Chuen Tung and petitioner, the Department had not established a rational basis for issuance of the Notice of Determination, which indicated that it was estimated. The Department had offered no evidence of any external index it may have relied upon to determine the seller’s liability, produced no witness or documents to explain the audit methodology, and gave the petitioner no “opportunity to meaningfully question the audit performed or the derivative liability asserted.” In the absence of any such evidence, the ALJ concluded the assessment lacked a rational basis and canceled it.

Additional Insights

As described by the ALJ, the basis for the Notice of Assessment seems remarkably slim, relying as it did on surface similarities between the two businesses, including use of similar names at the same address, use of the same accounting firm, and reports of similar sales volumes. The lease agreement was entered into with Banke Tung as landlord, and the premises were later surrendered back to Banke Tung, with no apparent involvement by his son, who had the allegedly outstanding sales and use tax liability. Unlike most reported decisions, where the Department offers evidence of the method it used to compute liability, including reliance on external indices in the absence of adequate records, here the ALJ found no such support for the underlying assessment, noting that “it was incumbent upon the Division to identify the external index it used to establish a rational basis for the audit methodology” and that no such information had been provided. Under those circumstances there was nothing to justify an assessment.