Domicile Guide - A seminar for the Florida Snowbird

Tax Appeals Tribunal

State of New York

*1 IN THE MATTER OF THE PETITION OF NICHOLAS F. ALBANESE, JR. AND DAILE A.

ALBANESE

for Redetermination of a Deficiency or for Refund of New York State Personal

Income Tax under Article 22 of the Tax Law for the Years 1987 through 1989.

DTA No. 813032

TSB-D-97(44)I

July 17, 1997

Opinion

*14 The critical issue to be decided in this matter is whether the Administrative Law Judge properly denied petitioners' motion to reopen the record. In her conclusions of law, the Administrative Law Judge summarized petitioners' arguments in support of their motion, to wit: that the appendices were submitted to the auditor during the audit and relate directly to both the domicile issue and the evidence submitted by the Division at the hearing; that it was always their intent that the appendices be part of the record; and that they believed that they would be able to submit evidence to the Administrative Law Judge at any point in the proceeding up to and including the time for submission of their brief. On appeal before us, petitioners have raised the argument that the Administrative Law Judge breached the Tax Appeals Tribunal's Rules of Practice and Procedure, 20 NYCRR 3000.0(c), which requires that such rules "be liberally construed to secure the just ... determination of every controversy ...." Petitioners contend that there is no rule barring the Administrative Law Judge from considering evidence presented with a brief after a hearing, and the failure of the Administrative Law Judge to consider the additional evidence deprived petitioners of justice and denied them their constitutional due process.

The Administrative Law Judge held that petitioners did not demonstrate any extraordinary circumstances to warrant reopening the record. The Administrative Law Judge noted that the evidence was available at the time of the hearing; that petitioners knew their burden of proof at that time, as stated in the Notice of Hearing; that the Administrative Law Judge at the hearing informed the parties that any evidence previously submitted in earlier proceedings must be submitted at the hearing in order for it to be considered; that petitioners' representative stated on the record that he had neither witnesses nor exhibits to offer into evidence; and that the record was closed by the Administrative Law Judge at the conclusion of the hearing.

We agree with the Administrative Law Judge. As we stated in Matter of Schoonover (Tax Appeals Tribunal, August 15, 1991):

"[i]n order to maintain a fair and efficient hearing system, it is essential that the hearing process be both defined and final. If the parties are able to submit additional evidence after the record is closed, there is neither definition nor finality to the hearing. Further, the submission of evidence after the closing of the record denies the adversary the right to question the evidence on the record. For these reasons we must follow our policy of not allowing the submission of evidence after the closing of the record."

In Matter of Anzilotti (Tax Appeals Tribunal, February 22, 1996), the petitioner submitted additional evidence with a reply brief. We noted that the record had been closed by the Administrative Law Judge at the conclusion of the hearing after the Administrative Law Judge had given the parties a last opportunity to submit testimonial or documentary evidence. The petitioner objected to the rejection of the additional evidence but we upheld the Administrative Law Judge, citing the reasoning in Schoonover and the fact that the evidence had been submitted long after the record had been closed at hearing. It made no difference that the evidence submitted referred to something in the record.

*15 In the instant matter, the Administrative Law Judge clearly informed petitioners' representative of his opportunity to produce witnesses or submit exhibits into evidence. The representative stated he had no witnesses or exhibits. After setting briefing dates, the Administrative Law Judge closed the hearing on April 27, 1995. Petitioners submitted an extensive set of exhibits with their brief on June 27, 1995, long after the record had been closed. As in the Anzilotti matter, the exhibits were properly rejected. Although petitioners argue that the evidence submitted with the brief related to prior submissions, there was no provision in the record for any further submissions, regardless of relevance or whether it related to material previously submitted.

In the determination below, the Administrative Law Judge found that petitioners did not carry their burden of proof with regard to the issue of domicile for the years 1987 and 1988, having submitted no testimony or documentary evidence. Without any proof, petitioners failed to show that the assessment was erroneous and the Administrative Law Judge found that the Notice of Deficiency was, therefore, presumed valid.

As we held in Matter of Atlantic & Hudson Ltd. Partnership (Tax Appeals Tribunal, January 30, 1992):

"[a]lthough a determination of tax must have a rational basis in order to be sustained upon review (see, Matter of Grecian Sq. v. New York State Tax Commn., 119 AD2d 948, 501 NYS2d 219), the presumption of correctness raised by the issuance of the assessment, in itself, provides the rational basis, so long as no evidence is introduced challenging the assessment (see, Matter of Tavolacci v. State Tax Commn., 77 AD2d 759, 431 NYS2d 174; Matter of Leogrande, Tax Appeals Tribunal, July 18, 1991, confirmed Matter of Leogrande v. Tax Appeals Tribunal, 187 AD2d 768, 589 NYS2d 383, lv denied 81 NY2d 704, 595 NYS2d 398)."

Petitioners have presented us with no arguments that they did not present to the Administrative Law Judge. We conclude that the Administrative Law Judge fully and adequately addressed each argument made by petitioners and affirm her on this issue.

For the year 1989, petitioners were nonresidents of New York State. For that period, they declared income from two sources, which the Division allocated to New York pursuant to Tax Law § 631 as derived from or connected with New York sources. Specifically, the items were consulting fees received by petitioner Nicholas Albanese and income received pursuant to a restrictive covenant not to compete. [FN3]

With regard to the $70,000.00 in income received for consulting services from West-Fair in 1989, the Administrative Law Judge determined that said fees were properly New York source income. The Administrative Law Judge noted that the burden of proof was on petitioners to show that the fees were non-New York source income and they failed to carry their burden. The record indicated that West-Fair was located in New York and that Mr. Albanese received consulting fees from it during each of the years in issue. Although petitioners made allegations in their brief concerning the nature and location of the consulting services, none of the claims were substantiated by testimony or documentation.

*16 Once again, the failure of petitioners to submit any evidence at hearing proved fatal to their claims. The Administrative Law Judge noted that petitioners' failure to establish what the consulting fees represented was an adequate basis for sustaining the Division's characterization of the fees as New York source income.

We agree with the determination of the Administrative Law Judge on this issue and find that she fully and adequately dealt with the issue below. The only argument petitioners raised with respect to this issue was that the Division was mistaken to rely on the terms of the contract with West-Fair since it did not specifically state that the work would be done in New York. However, as the Administrative Law Judge said, it was incumbent upon petitioners to resolve any confusion or lack of clarity with regard to what the fees represented and they submitted no evidence to support their position. Petitioners believe that the case of Matter of Linsley v. Gallman (38 AD2d 367, 329 NYS2d 486, affd 33 NY2d 863, 352 NYS2d 199) is analogous to their situation, but the Administrative Law Judge correctly distinguished Linsley due to the fact that the court there had specific facts upon which to make a finding that no work was done in New York and other facts which clearly explained the circumstances surrounding the payment of moneys to a former employee after his retirement. Additionally, petitioners continue to rely on the case of Matter of Donahue v. Chu (104 AD2d 523, 479 NYS2d 889 [wherein the court held that future rights in regard to consultative fees and regular salary were not taxable by New York State after the petitioner and his company moved to Connecticut and that it was incumbent upon the Division to produce substantial evidence in support of its rational basis for the determination that money paid was for services performed in New York]) to support their argument that the Division has the burden to produce substantial evidence that the consulting fees were for services performed in New York. However, the Division submitted testimony of the auditor, subject to cross-examination, which demonstrated that on field audit he saw a contract which called for services to be rendered in New York. Although more information was requested to better understand the consulting services and fees, petitioners provided nothing. Petitioners are mistaken in their belief that the burden of proof has shifted herein because they were no longer domiciled in New York in 1989 and their reliance on Donahue is misplaced. Unlike the facts in Donahue, where that petitioner and his company moved to Connecticut, diminishing the likelihood that consulting fees would be performed in New York, West-Fair remained a New York company with a New York location and the contract reviewed by the auditor called for services to be rendered in New York. It was absolutely incumbent upon petitioners to clarify and elaborate on this uncontroverted evidence. Even if petitioners had not been determined to be domiciliaries of New York, the uncontroverted evidence proffered by the Division established that the services were to be rendered in New York.

*17 The last income issue before us is the income received in 1989 pursuant to the restrictive covenant not to compete. The Administrative Law Judge determined that the covenant not to compete restricted petitioner Nicholas Albanese from engaging in certain business activities in New York and Connecticut for a period of five years. Mr. Albanese received amounts in each year of the audit pursuant to the covenant. The Administrative Law Judge decided that since petitioners failed to show what portion of the income was allocable to Connecticut, the Division was correct in apportioning all of the income from the covenant to New York.

The Division argues that the source of a covenant not to compete is the place where the promisor forfeits his right to act (citing Korfund Co. v. Commissioner, 1 TC 1180), and that abstinence of performance is sourced for tax purposes in the place that the performance would have occurred and that such income is taxable for New York State personal income tax purposes (20 NYCRR 131.4[d][1]).

This Tribunal has recently held that the income received pursuant to a covenant not to compete was not attributable to a business, trade, profession or occupation carried on in New York where the agreement provided that the nonresident recipient would not compete with the employer, either directly or indirectly, for a period of five years as a specialist broker on the New York Stock Exchange in specific securities (Matter of Haas, Tax Appeals Tribunal, April 17, 1997). In another case, we decided that payments received by a taxpayer pursuant to a covenant not to compete were in lieu of future employment which was unconnected with a New York source (Matter of Penchuk, Tax Appeals Tribunal, April 24, 1997). In Penchuk, the petitioner gave up his right in the future to be self-employed or to be employed by a competitor of the corporation and, given the national and international nature of the business, there was no basis to assume that the competitive business would be located in New York. Further, even if Mr. Penchuk had engaged in a competitive business located outside New York State, the amount received under the covenant could not be construed as being from New York sources on the mere speculation that the petitioner could have located a competitive business in New York State as well as outside the State.

In the instant matter, there is no basis to hold that petitioner would engage in a competitive business located in New York as opposed to Connecticut. Based upon the reasoning in Haas and Penchuk, the amount received under the covenant for the year 1989 was not derived from or connected with New York sources and was, therefore, not New York source income of a nonresident (Tax Law § 631[a]). For the years 1987 and 1988, however, the income was properly taxed as income to a resident, as established above.

Relative to the issue of the lump-sum payment received in 1987, it is noted that since petitioner was found to be a New York State resident for the tax year 1987, the full amount of the payment to him is taxable.

*18 Finally, petitioners did not specifically challenge the penalties imposed pursuant to the Administrative Law Judge's determination, except to mention in their reply brief that they "challenge the imposition of penalties as they relate to the items of income contested" (Petitioners' reply brief, p. 2). It must be held that petitioners did not preserve their right to pursue this issue and we will not disturb the determination of the Administrative Law Judge which held petitioners liable for the penalties asserted pursuant to Tax Law § 685(a)(1)(A) and (b) (see, Matter of Friendly Motors, Tax Appeals Tribunal, March 20, 1997). Even if the assertion in their reply brief could be construed to have preserved the issue, petitioners submitted no evidence on the issue of penalty before the Administrative Law Judge and we would affirm her determination on the issue nonetheless (Matter of Hull, Tax Appeals Tribunal, December 8, 1994; Matter of Etheredge, Tax Appeals Tribunal, July 26, 1990).

Accordingly, it is ORDERED, ADJUDGED and DECREED that:

1. The exception of Nicholas F. Albanese, Jr. and Daile A. Albanese is granted with regard to the issue of the payment received pursuant to the restrictive covenant for the year 1989, but in all other respects is denied;

2. The determination of the Administrative Law Judge is modified as specified in paragraph "1" above, but is otherwise affirmed;

3. The petition of Nicholas F. Albanese, Jr. and Daile A. Albanese is granted consistent with paragraph "1" above, but in all other respects is denied; and

4. The Notice of Deficiency, dated August 2, 1993, is modified consistent with paragraph "1" above, but in all other respects is sustained.