A Bar Called Murphs - New Jersey Politics - Understated Income - Shocking Combination

Originally Published on forbes.com on February 4th,2012

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There are some cases I just cannot resist. ANTHONY MURPHY, INC. t/a MURPHS LIQUOR & BAR and PETER MURPHY, Individually, Plaintiffs-Appellants, v. DIRECTOR, NEW JERSEY DIVISION OF TAXATION, Defendant-Respondent is one of them.

Murphs Liquor & Bar in Totowa strikes me as the type of place I spent too much time in while young.  Undoubtedly it is the type of place where everybody knows your name:

unless you happen to be in witness protection.

Here are some pictures from a site called the Totowa Book of the Dead byLaurie Giardino.  Looking at some of those fellows makes me think it might have been a little intimidating for  Hyacinth Thompson, an agent of the great state of New Jersey, who was tasked with auditing “Murphs”. On top of that it appears that Peter Murphy is something of a political force at least in his county, if not the state according to this article: 

The power struggle between Rumana and Murphy loyalists stretches back five years, after Murphy — the county GOP head until a 2001 federal conviction — felt betrayed by Rumana, who took the reins and became a state assemblyman. The clash has dug into many elections since then. GOP Strong last year, for example, backed Democratic Passaic CountyFreeholder Terry Duffy, whose campaign signs adorned Peter Murphy’s bar in Totowa.

Murphs had a single non-computerized cash register and apparently, the owner was less than diligent in preserving the register tapes.  Ms. Thompson had to do a mark-up analysis to arrive at estimated gross receipts.  She came up with a deficiency of just short of $140,000 from a variety of taxes including sales and use and personal income tax.  Apparently she had tried to be generous:

Consequently, she completed a mark-up analysis, which required computation of the percentage mark-up of the cost of various goods. In making her calculations, Thompson allowed a ten percent allowance for goods that were lost due to causes such as spoilage, theft, waste, giveaways, discounts, and personal usage. The usual allowance was five percent, but Thompson used the higher figure in an effort to obtain an amicable resolution of the audit.

The “giveaways” factor brings back memories.  As I recall the procedure one would sit at the bar and place a large denomination bill, such as one with a picture of Lincoln, in front of you.  Each time the bartender filled your glass, he would extract something from the dwindling pile of cash.  Except, that every third or fourth fill would be a “knock” meaning he did not take anything.  The etiquette was that you could not leave on a knock which was rather insidious because it meant that if you had more than one beer, you would have at least four.  Having had four beers it was relatively easy to go for a fifth, which by operation of knock etiquette would get you to seven.  When I came to Massachusetts, somebody told me the practice was illegal there, which would be a very wise law.

Jerry Schwab, an appelate conferee, who was perhaps more coversant with knocks than Ms. Thompson cut the tab by over $15,000, but that was not enough to prevent Mr. Murphy from going to court.  He did not do too well.  Apparently the trial plan was to cross-examine the auditors, but the Court was not having any of that:

In this case, plaintiffs sought to overcome the presumption of correctness by attacking the credibility of Thompson and Schwab, as well as by questioning their methodology. They do so in generalities rather than specifics. They do not contradict the Director’s assertions that the bulk of the cash-register tapes were not produced or that there were insufficient books and records to complete the audit. They do not point to particular documents or calculations that demonstrate one or more specific errors with respect to the assessments. They provided no expert report pointing to errors of fact, methodology, or calculation with respect to the Division’s mark-up analysis.

 Here, taxpayer merely provides the certification of its president expressing an unsubstantiated claim that the Division’s assessment was “too high.” It bears reiterating that the court granted taxpayer’s request for additional time to submit the sufficient evidence to rebut the Division’s presumption of correctness.

Given Mr. Murphy’s political connections, it would not surprise me if there were even more of a story here, but I’ve taken it about as far as I can.

You can follow me on twitter @peterreillycpa.