By its decision dated October
15, 2009 (click here for a copy of the
decision), the New York State Division of Tax Appeals (the “DTA”) dismissed a
deficiency asserted by the NYS Department of Taxation and Finance (the “Department”) against our
clients which, had it been sustained, would have resulted in a liability for New
York City personal income tax and interest of approximately $48 million. The decision of the DTA dismissing the
deficiency was based on the record developed in a four-day evidentiary hearing
before an Administrative Law Judge at which we represented the taxpayers and adopted
much of the reasoning set out in detailed briefs we filed in connection
therewith.
By way of background, an
individual who is not a domiciliary of NYC is nevertheless considered a
resident of NYC for income tax purposes for a year if that individual (a) has a
permanent place of abode available in NYC and (b) spends more than 183 days in
NYC during such year (other than while in transit between two points outside
NYC). Such an individual is commonly
referred to as a “statutory resident.” In
the case referred to above, our client, a non-domiciliary of NYC, acknowledged
that he had a permanent place of abode in NYC and spent exactly 183 days in NYC
during the year in question, but maintained that did not spend any additional
days in NYC during the year. The
Department, over the course of an audit lasting over six years, initially
questioned whether our client had established his whereabouts on a great many
days during the relevant year. However, having
submitted to the Department documentary and other evidence establishing that our
client had not spent many of the days initially questioned in NYC, we were able
to obtain from the Department several significant concessions prior to the
hearing, including a concession that our client had established that he spent
179 specified days outside NYC in the relevant year. As a result of these concessions by the
Department, the sole issue before the DTA was whether our client established
that he did not spend the remaining four days in the relevant year in NYC.
Throughout the audit and
the DTA proceeding, our client maintained that he had met the applicable standard
of proof regarding his non-NYC presence on each of the questioned days by
submitting clear and convincing evidence of his whereabouts through a combination
of documentary evidence, including an electronic calendar maintained in the
ordinary course of business and other business records, testimony of numerous witnesses
regarding the maintenance of the electronic calendar and the facts and circumstances
regarding the days in issue and our client’s general patterns of conduct and
habits of life.
By contrast, the
Department was steadfast in its position that, given the client’s acknowledgement
that he had spent 183 days in NYC, any possibility that the client might have
been present in NYC on any of the days in issue, regardless how improbable such
presence might be, would be sufficient to prevent the client from meeting his
burden of proof. In essence, the
Department argued that absent proof positive that the client was not present in
NYC on a day in issue, any possibility that the client was present in NYC on
any such day required a decision in its favor. In this regard, the Department pointed to the proximity
to NYC of certain of the client’s non-NYC residences, the absence of
documentary evidence that the client, on days when he was physically present at
such places of residence outside NYC, was not also present in NYC on the same
day, and in certain cases the absence of documentary evidence that the client
left NYC on a day prior to a day in question.
The Department also sought
to attack the reliability of the documentary evidence submitted on behalf of our
client. For example, the Department
sought to discredit the client’s electronic calendar, on which the client’s
assistants kept track of his days of presence in NYC, on the basis that it was
not technically possible to prove the date(s) that entries were made on such
calendar. However, the Department’s own
expert admitted at the hearing, on our cross-examination, that there was no
evidence that the electronic records he examined had ever been altered, nor was
there any evidence to refute the clear and convincing testimony of our client
and other witnesses at the hearing that the entries on the electronic calendar were
made contemporaneously. As another
illustration, the Department sought to argue that business records of a car
service placing the client outside NYC could not meet the client’s burden of
proof because the records themselves did not clearly remove the possibility that
the client was not in the car referred to in such records. Furthermore, much
weight was placed by the Department on the telephone records from the client’s
places of residence, which had been subpoenaed by the Department in a manner
that clearly violated the applicable New
York rules including the CPLR and even federal
statutes. The telephone records obtained
through the use of such subpoenas indicated that calls were made from the
client’s NYC residence on the days in issue putting into question the
possibility that the
client made the calls in question and therefore was present in NYC when the
calls were made. To meet his burden of proof, the client was required to
establish at the hearing that numerous others besides the client had access to
the telephones, frequently used such telephones, and in many instances made
calls to the very persons to whom calls were made on the days in issue, and the
resulting probability that such other persons made such calls on the days in
question.
Rejecting each of the
arguments advanced by the Department and dismissing the asserted deficiency, the
DTA held that the totality of the evidence taken as a whole, including the
client’s electronic calendar, the other documentary evidence submitted at the
hearing and the extensive corroborating testimony of the client and the nine
other witnesses who testified on the client’s behalf, made it abundantly clear
that the client had met his burden and established that he was not present in
NYC on any of the days in issue. In
light of the DTA’s conclusion that our client met the applicable burden of
proof, it was unnecessary for the DTA to deal with any issue relating to the
admissibility of telephone records obtained by the Department in contravention
of the applicable rules, and such issue was therefore not addressed in the
opinion. However, in light of the DTA’s
explicit findings of fact that the Department in issuing its telephone
subpoenas not only failed to provide the taxpayer with the notice and
opportunity to object required under the CPLR, but also went out of its way to
instruct the telephone companies not to notify the taxpayer of the subpoenas, it
is submitted that the Department may wish to reexamine its policies regarding
the issuance of any such subpoenas in future cases.
While in the end, in
words expressed in the opinion, this case “presents no new or novel concepts of
statutory or caselaw interpretation”, the case is nonetheless
noteworthy in several respects. First,
it is the first reported statutory residence decision of which we are aware
involving an electronic calendar rather than a paper diary or calendar. As indicated above, the DTA firmly rejected
the Department’s argument that electronic calendars are inherently less
reliable than other calendars, holding that our client adequately established
that his electronic calendar was reliable and accurate. More generally, the DTA resoundingly rejected
the Department’s argument that in order to prevail, a taxpayer in a statutory
residence case must produce documentary proof positive that he or she was not
in New York on each of the days in question, noting that the Department’s
approach would impose on taxpayers a much higher burden of proof than the
courts have required. In the latter
connection, the reaffirmation of the relevant standard of proof as enunciated
in the following passages taken from the DTA’s opinion is worth bearing in
mind:
“[T]he standard as to
counting days so as to determine whether one did or did not spend, in the
aggregate, more than 183 days in New York City (or State) is not that there
must be an objectively verifiable piece of documentary evidence establishing an
individual’s whereabouts on every day in question. . . . [W]hile the
‘gold standard’ of proof would be a document, definitively and objectively
verifying a taxpayer’s presence in a particular place outside New York City (or State), to the exclusion of
any other place, on a particular day (e.g., a jailer’s record of
incarceration), there are days for which such objectively verifiable
documentary proof simply does not exist.
In fact, requiring such evidence for all days would leave the taxpayer’s
burden of proof to be ‘beyond all doubt,’ higher even than the criminal
conviction standard of ‘beyond a reasonable doubt’ and far above the standard
of ‘clear and convincing’ proof as is required in matters of statutory
residence . . . .” (slip
op. at 52)
“Thus, where there is no
definitive document establishing or locking down one’s whereabouts on a given
date, the evidence of date, time, place and event becomes, as here, a
combination of testimony or testimonies to be evaluated in light of each other,
in light of the surrounding events which aid the person or persons testifying
in recalling the event, date, time and place concerning which the testimony is
given, and in light of any additional evidence relied upon by a witness in
conjunction with providing his testimony, so as to accrue ultimately in a
determination of whether such testimony, as a whole, constitutes credible
testimony.” (slip
op. at 53)
“[W]hen viewed in light
of all of the evidence presented, [the] mere possibility [that the taxpayer was
physically present in NYC on one or more of the disputed days] is insufficient
to outweigh the most likely actual fact and conclusion that [the taxpayer] was
not present in New York City on those days.
To accept that the possibility of presence outweighs the most likely
actual conclusion to be drawn from all of the evidence would be to impose upon
a taxpayer . . . the burden of providing proof positive of presence somewhere
other than in New York City so as to eliminate
all possibility of New York City
presence. This is simply not consonant
with the standard of clear and convincing evidence as developed by the
significant body of case law concerning statutory residence.” (slip op. at 75)
We are delighted to have
obtained this victory for our clients.