Travia’s Inc., and Mellion v. State of Vermont, Department of Taxes, 2013 VT 62
Someone once said that the only things certain in life are death and taxes. This case, to a degree, disproves the latter. The Department of Taxes gets to “guesstimate” taxes when business records are questionable.
Taxpayers, husband and wife, own and operate a small bar and grill as an S-corporation (which means that only the profits passed to the owners are taxed; this is known as a pass-through basis in the trades). The records they kept were not exactly impeccable. In fact, there were some—perhaps a lot of—discrepancies. The Department of Taxes (Department) audited the corporation and found an outside-the-norm cost-of-goods-to-gross-receipts ratio. During its investigation, the Department found some discrepancies between cash-register receipts and handwritten accounts. Long story short—according to the Department, something didn’t add up.
So the Department assessed additional taxes for three years on meals and alcohol based primarily on its determination of appropriate cost-of-good-to-gross-receipts ratios. Taxpayers requested an administrative hearing, which did not go in their favor. An appeal to the civil division ensued, where the trial court upheld the assessment. And . . . yep, you guessed it . . . that’s how we end up at the SCOV.