In this action for breach of contract, plaintiff, The Port Authority of New York and New Jersey (the Port Authority), is suing defendant, Martin Gurses, to recover damages for failing to pay fees to the Port Authority in accordance with the terms of a privilege permit.

The trial was held before this court without a jury on April 12, 13 and 16. The court heard the testimony of plaintiff's witness, Port Authority auditor Michael Dundas, and the testimony of defendant, Metin Gurses.

Defendant, Metin Gurses, operated the Moho Service Station at John F. Kennedy Airport on property owned by the Port Authority. The service station was leased in June 1983 to Amoco Oil Company under Lease number AYB-577. The lease provided that the lessee was to use the premises only for the purpose of operating an automobile service station.

In 1984, Amoco sublet the service station to Moho with the consent of the Port Authority. The defendant operated an automobile service station on the premises. In 1989, defendant opened and operated a convenience store on the premises. The convenience store was engaged in the sale of snacks, drinks, cigarettes and other related items.

In 1995, six years after he opened the convenience store, the Port Authority conducted an audit of the service station and discovered that Mr. Gurses was operating the convenience store on the premises. The Port Authority determined that because the operation of a convenience store was not provided for in the "use clause" of the lease, Mr. Gurses would be required to execute a privilege permit in order to continue operating the store. Mr. Gurses was then approached by an employee of the Port Authority and was told that in order to continue operation of the food [*2]store on the premises, he would have to execute a privilege permit under which he would be required to pay the Port Authority 10 percent of the gross receipts of the convenience store on a monthly basis. Mr. Gurses signed the permit without an attorney in March 1995.

The permit, known as AYC-612, commenced on January 1, 1995 and contained a termination date of April 30, 1998. Under the terms of the permit, defendant was granted a privilege "for the sale of packaged food snacks and beverages, prepared snack foods, candy, cigarettes and such related items as shall be consented to in advance in writing by the Port Authority." In return, defendant was to pay "ten percent of gross receipts."

Mr. Gurses testified that he operated the snack shop from 1989 until 1995 without being asked for a permit. According to defendant's testimony, the Port Authority was aware that Mr. Gurses was operating the shop prior to 1995 as Mr. Burnham, a Port Authority manager, would regularly purchase cigarettes at the shop.

Mr. Gurses also testified that he was told in March 1995 that he had to sign the permit to continue selling snacks. He signed the agreement because he thought he would lose the entire service station if he didn't sign. He did not consult a lawyer before signing and he said that although no one actually told him he would lose the shop if he didn't sign the permit, that is what he believed.

According to the audit conducted by the Port Authority, Mr. Gurses reported the gross receipts from the convenience store and paid ten per cent of the reported receipts to the Port Authority on a monthly basis from April 1998 to January 2004. Pursuant to the audit document, Mr. Gurses reported a total of $178,456 as his gross receipts from the snack shop during the audit period. Based on those gross receipts, Mr. Gurses was given credit for $17,846 for fees that he paid to Port Authority. The gross receipts reported by Mr. Gurses averaged approximately $32,000 per year. In addition, from September 2003 to January 2004, Mr. Gurses reported gross receipts of $11,730 and paid Port Authority an additional $1,173.90 as his ten per cent fee for that five month period. (Plaintiff's Exhibit 5).

The audit conducted by the Port Authority in October 2003 was performed in order to determine whether Mr. Gurses correctly reported and correctly paid 10 per cent of the gross receipts from the snack shop. As stated above, the audit only covered the period April 1, 1998 to October 2003, despite the fact that Mr. Gurses operated under the terms of the permit since January 1995. The Port Authority is not, however, contesting payments Mr. Gurses made pursuant to the permit from 1995 through 1998.

Mr. Dundas, the Port Authority auditor, testified that when the Port Authority decided to audit defendant's business in 1998, [*3]he made an appointment with defendant's accountant to review defendant's book and records. Mr. Dundas stated that he found that Mr. Gurses did not maintain records which separated the gross receipts of the convenience store from the gross receipts of the service station. Mr. Dundas stated that since he was not supplied with a break down of each entity's separate gross sales, he took the total number and based the audit findings on the total figure.

After reviewing the materials provided by Mr. Gurses' accountant, the auditors concluded that defendant had under reported his percentage fees in the amount of $165,827 for the period from April 1,1998 through December 31, 2003 based upon understated gross receipts of $1,232,212 from the snack shop and non-reported gross receipts of $426,047 from ATM and Lottery commissions. The auditors included ten per cent of the ATM and Lottery commissions, $42,605, in the amount they are asking the court to award. The plaintiff is also requesting that the court award late fees of $81,545 for a total judgment of $247,372 plus interest from July 6, 2004.

Although the audit found that Mr. Gurses under reported his gross receipts in the amount of $1,658,259, Mr. Dundas, the Port Authority auditor, testified that the disparity in the difference in the gross receipts reported by Mr. Gurses and the gross receipts found by the auditors was because the gross receipt figure calculated by the auditors was based on total gross receipts from both the operation of the auto repair and maintenance shop, taken together with gross receipts of the convenience store.

Plaintiff contends that because they were unable to obtain records or supporting documentation of gross receipts for the snack shop alone from the defendant, they had no choice but to base the audit upon the figures contained in defendant's tax returns which only contained the combined gross receipts for snack shop and service station.

The defendant filed an answer in which he contends that since the permit expired in 1998, he is not obligated to pay a privilege fee after that time. The permit states that it was to expire on April 30, 1998. The permit had not been expressly renewed after its termination date. This court does not find this argument to have merit. Although the permit was not expressly in effect, it is clear from the testimony that it was the intent of the parties to continue the terms of the permit on a month to month basis. Since defendant continued to operate the store after the expiration date, he was also required to continue paying ten percent of the gross receipts as he continued to receive the right to operate the convenience store.

See New York Tel. Co. v. Jamestown Tel. Corp., 282 NY 365 (1940); Daskolopoulos v. European American Bank & Trust Co., 104 AD2d [*4]1020 (2d Dept. 1984).

With respect to defendant's claim that he signed the permit based upon fraudulent misrepresentations and under duress, this court finds that defendant has not made sufficient showing of either claim. Defendant did not testify to any wrongful economic or physical threats made to him at the time of the signing that put him in fear, nor did he testify that he was induced to sign the permit by Port Authority misrepresentations. He was free to reject the terms of the permit and he was also free to consult an attorney before he agreed to the terms of the permit. 805 Third Avenue Co., v. M.W. Realty Associates, 58 NY2d 447(1983).American Surety Co of New York v. Patriotic Assurance Co., 242 NY 54(1926).

Defendant also contends that the complaint should be dismissed because the damages requested by plaintiff are based upon an improper or flawed audit. As stated above, there is no dispute that the objective of the audit was to verify plaintiff's reported gross receipts regarding the convenience store under Permit AYC-612. Defendant contends and plaintiff concedes that the damages requested by plaintiff at trial are based, however, upon an audit which combined the gross receipts of the snack shop with the gross receipts of the service station.

In order to establish that, based upon the audit, the defendant breached the permit agreement, plaintiff is required to establish that the amount paid by the defendant was insufficient.However, this court finds that the method used by the Port Authority to calculate gross receipts under Permit AYC-612 was not reasonably calculated to ascertain the amount of gross receipts from the convenience store alone. Although no case law was submitted by the parties regarding breach of a privilege permit, the court finds a line of cases regarding the calculation of tax liability to be instructive on the propriety of audit procedures. In those cases, it has been established that a taxing authority may base its claim on a audit of the books and records of a business entity. However, in situations where the entity has failed to produce adequate records to provide a sufficient ground to establish tax liability, the auditor, "is authorized to select a method reasonably calculated to estimate sales tax liability." Matter of Grecian Square,Inc., v. New York State Tax Commission, 119 AD2d 948(3rd Dept. 1986); Matter of Ristorante Pulia v. Chu, 102 AD2d 348(3rd Dept. 1984).

Therefore, where there is a failure to provide adequate supporting documentation for an audit, the taxing authority is free to fashion a method reasonably calculated to reflect the taxes due. However, if the method used is shown to be erroneous or arbitrary and capricious, then the court may find that the audit is flawed and deny an award of damages.

The evidence shows that Mr. Dundas testified that Defendant [*5]paid monthly fees from April 1998 through August 2003. The audit document introduced into evidence by the plaintiff substantiates the fact that monthly payments were made by defendant through January 2004. The documents in evidence show defendant reported his gross earnings for the snack shop every month during the audit period and paid ten percent of same to the Port Authority as required under the permit in question. The audit was an attempt by the Port Authority to verify that the amounts paid by the defendant were correct. However, when the plaintiff could not obtain the appropriate supporting documentation, they arbitrarily derived a formula under which they would add the gross receipts of the service station to the gross receipts of the snack shop and thereby show that defendant under reported his gross receipts for the snack shop. This was a capricious method that the Port Authority utilized to show that the plaintiff under reported the gross receipts of the snack shop. The auditor did not testify as to a reasonable or rational basis for the accounting method which was utilized.

This accounting technique was not reasonably calculated to provide an appropriate estimate of the snack shop receipts. There was no testimony that the methodology used was consistent with established accounting principles. The auditors could have utilized more appropriate methods which would have borne a more rational estimate of the gross receipts of the snack shop. The audit conducted in this case, although appropriate to show the combined receipts of the service station and snack shop, was clearly punitive in nature and was not rationally calculated to provide a sufficient basis for the court to determine that defendant under reported his gross receipts from the snack shop. It is evident that the gross receipts from the convenience store would have been substantially less than the gross receipts derived from the service station, which was the primary purpose of the defendant's business.

In addition, this court does not find that the Port Authority was entitled under the terms of the permit to assess a ten per cent fee on defendant's commission on lottery and ATM sales. The permit, as stated above, was related only to the sale of snacks and other related items. Although the use of an ATM machine and the sale of lottery tickets may have been beyond the privileges extended to defendant, plaintiff's option in that case would be to cancel or amend the permit. However, to charge the defendant ten per cent of the ATM and lottery commissions would be in the nature of a fine which is not provided for in the lease.

Accordingly, this court finds that the plaintiff has failed to meet their burden of proof that the defendant did not pay the required amounts under the permit, and as such has failed to prove that plaintiff was in breach of the permit. Therefore, [*6]defendant's motion for a verdict dismissing plaintiff's complaint in its entirety is granted.

Date:April 20, 2007_____________________

Gloria D'AmicoSheri S. Roman, J.S.C.Clerk