Entrepreneurs can use various tax tools to their advantage. When done wisely, this can result in tax benefits and financial gain, but a misstep can result in serious consequences. In a recent example, business owners attempted to use a business entity to purchase interests in hotels throughout New York. In exchange for funding remodeling projects and renovating the buildings, the owners hoped to make the most of some tax benefits. Unfortunately, the process did not work out the way they had planned.
What went wrong?
The issue began when New York’s Division of Taxation audited the President Hotel. During the audit, the agency became aware of the business owners noted above. The business, Cushlin Limited, acquired and refurbished over a dozen small hotels throughout New York. The agency audited Cushlin to see if it had reported gains and losses for its work with President and other hotels. This audit resulted in allegations the business owed over $13 million in taxes for 2002 through 2006, and $1.5 million for 2007 through 2009.
Cushlin challenged this claim, noting they had negative capital and losses for the tax years in question, but the agency stated that they had failed to properly support these claims and were thus liable for the tax bill. Upon review, the New York State Division of Tax Appeals notes that it provides a presumption of correctness to notices of deficiencies prepared by the Division of Taxation. Thus, the taxpayer is at a disadvantage from the beginning and bears the burden of establishing that the division was erroneous in its finding.
Since Cushlin was unable to provide adequate documentation to back up their claim of negative capital and real estate losses, the division upheld the notice of deficiency. In addition to taxes due, the agency also added penalties for:
- Failure to file in a timely manner, and
- Deficiency due to negligence or intentional disregard.
This resulted in a tax bill of $14 million.
How can business owners avoid a similar issue?
Taxpayers can push back against a penalty for failure to file in a timely manner if they can establish that there was a reasonable basis for the failure. This is just one of many defenses that a taxpayer could explore when facing these or similar tax issues. Taxpayers can also take proactive action, making sure to keep careful records to defend their interests in the event of an audit.
Those who find themselves facing these types of disputes are wise to seek legal counsel. The attorneys at Goldburd McCone are familiar with these types of cases and can discuss this and other potential defenses to counter claims of unpaid taxes.