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Tax Appeals Tribunal

State of New York

*1 IN THE MATTER OF THE PETITION OF JOHN G. AVILDSEN

FOR REDETERMINATION OF A DEFICIENCY OR FOR REFUND OF NEW YORK CITY PERSONAL

INCOME TAX UNDER THE NEW YORK CITY ADMINISTRATIVE CODE FOR THE YEARS 1986 AND

1987.

DTA No. 809722

TSB-D-94(15)I

May 19, 1994

Opinion

The Administrative Law Judge determined that petitioner was not a domiciliary of New York City during the years 1986 and 1987. However, the Administrative Law Judge found that petitioner was a resident of New York City pursuant to section 11-1705(b)(1)(B) of the Administrative Code of the City of New York because apartment 33E at 45 East 89th Street was a permanent place of abode maintained in New York City and because petitioner failed to substantiate that he did not spend more than 183 days in New York City during each of the years at issue. The Administrative Law Judge held that the testimony of Ms. Fetherolf as to the contents of petitioner's business diaries was credible, but that credible testimony alone was insufficient to prove that petitioner did not spend more than 183 days in the City and that petitioner was required, by 20 NYCRR Appendix 20, section 1-2(c) (hereinafter "section 1-2[c]") to submit "adequate records" in order to prevail on this issue. The Administrative Law Judge also found that the audit had a rational basis. Finally, the Administrative Law Judge decided that the Division of Tax Appeals did not have jurisdiction to review petitioner's challenge that by taxing a non-domiciliary's worldwide income the New York City personal income tax violated the United States Constitution. The Administrative Law Judge concluded that this was a challenge to the constitutionality of the statute on its face.

On exception, petitioner asserts that the interpretation and application given to section 1-2(c) by the Administrative Law Judge, requiring the production of a business diary, violates the constitutional right to privacy against unreasonable government intrusion. Petitioner also asserts that the requirement of corroborating documentary evidence is not required by the law nor stated in the regulation on its face. Further, petitioner argues that to give the regulation an interpretation that allows the Division of Taxation to prescribe what is required of a taxpayer to satisfy his burden of proof is inconsistent with the independence of the Division of Tax Appeals.

*11 In response, the Division argues that the regulation is a reasonable rule and as such within the authority of the Commissioner to promulgate. The Division also argues that a similar record keeping regulation, former 20 NYCRR 102.2 has been upheld in Matter of Smith v. State Tax Commn. (68 AD2d 993, 414 NYS2d 803), Matter of Getz (Tax Appeals Tribunal, June 10, 1993), Matter of Shapiro (Tax Appeals Tribunal, July 3, 1991) and Matter of Feldman (Tax Appeals Tribunal, December 15, 1988). The Division states that "[t]he decisions requiring documentary corroboration appear to acknowledge that the limitations of the fact finding process are such that if nothing more than credible testimony was required in order to defeat an assessment than [sic] no assessment could be sustained at hearing. Credible, in the context of testimony given at a hearing, is taken to mean truthful in appearance rather than truthful in fact because the latter defies measurement by any objective standard" (Division's letter on exception, p. 2).

We agree with petitioner that the Administrative Law Judge erred in concluding that documentary evidence was required, as a matter of law, and that credible testimony was necessarily insufficient to satisfy petitioner's burden with respect to the 183 day issue.

The pertinent law, section 11-1705(b)(1)(B) of the Administrative Code of the City of New York, provides simply that a City resident individual includes an individual:

"(B) who is not domiciled in this city but maintains a permanent place of abode in this city and spends in the aggregate more than one hundred eight-three days of the taxable year in this city...."

Petitioner correctly notes that the statute does not address the issue of the type of proof required by a taxpayer to prove that he was not in the City more than 183 days. The statute simply states the rule that an individual who spends more than 183 days in the City and maintains a permanent place of abode in the City is defined to be a resident of the City.

As petitioner also notes, when the Legislature intends to require corroborating evidence it is explicit in doing so. The grandfather exemption of Article 31-B exempts a transfer from the tax if it "is pursuant to a written contract entered into on or before the effective date of this article" (Tax Law § 1443[6]). With respect to the application of this exemption, the Legislature was not content to simply state the rule of exemption, it explicitly described the type of proof that would be required of a taxpayer to obtain the benefit of the exemption. Thus, section 1443(6) is limited to those transfers where the grandfathered contract is "confirmed by independent evidence, such as recording of the contract, payment of a deposit or other facts and circumstances as determined by the [tax commissioner]" (Tax Law § 1443[6]).

In Matter of Old Nut Co. v. New York State Tax Commn. (126 AD2d 869, 511 NYS2d 161, lv denied 69 NY2d 609, 516 NYS2d 1025), the Division contended that testimonial evidence could not satisfy the statutory requirement of independent evidence. In response, the Court stated that even this very explicit requirement of independent evidence could rationally be interpreted to be satisfied by testimonial evidence, but because it could "with at least equal rationality be construed, as did [the Division], to require objectively verifiable corroboration of the date of execution, independent of the testimony of the parties to the transaction ..." the Court upheld the Division's interpretation (Matter of Old Nut Co. v. New York State Tax Commn., supra, 511 NYS2d 161, 162-163).

*12 The regulation at issue also does not require the result reached by the Administrative Law Judge. The regulation [FN7] requires a taxpayer to maintain records to substantiate days spent outside of New York, but does not address the failure to produce such records at a Division of Tax Appeals hearing. We agree with the Division that a record keeping regulation like this (the Division's regulation is set forth at 20 NYCRR 105.20[c]) is within the Division's rule making authority under section 171 of the Tax Law.

If the Division had a regulation that attempted to define the consequences of failing to produce records at a hearing, we would conclude that it exceeded the Division's authority, absent a legislative direction like that in section 1443(6) of the Tax Law. The functions of the Division of Tax Appeals are independent of the Division (Tax Law, § § 2000, 2002) and it is the Tax Appeals Tribunal who has the authority to prescribe the rules for the hearing process (Tax Law § 2004), not the Division.

An effort by the Division to absolutely require documentation to corroborate testimony in the hearing process would also be called into question by the fact that the Division does not place such restrictions on its own auditors during the audit process. The Division's Audit Manual on Nonresident Audits states:

"[a]uditors need to evaluate the written and oral statements of taxpayers. These statements, when not contradicted by other evidence, can be accepted or be tested by requesting certain limited documentation from taxpayers. This information will usually surface during an opening interview with the taxpayer. Auditors and supervisors are empowered to accept written or oral statements by taxpayers subject to evaluation based on all other information gathered during the audit" (District Office Audit Manual, Nonresident Audits, p. 3).

As stated above, we find no support in the statute or regulation for the Administrative Law Judge's conclusion that testimony alone was insufficient as a matter of law to prove that petitioner did not spend more than 183 days in New York. Nor does the decision in Matter of Smith v. State Tax Commn. (supra) support this conclusion, as this case did not address this issue. Finally, contrary to the statements of the Administrative Law Judge and the Division, we do not see the practical need for such a rule. By rejecting the principle that credible testimony is insufficient as a matter of law, we do not believe that we are paving the way to the result that no assessment will be sustained at a hearing. Obviously, any taxpayer who attempts to sustain his burden of proof solely on testimonial evidence runs a very great risk that he will not prevail at the hearing because the Administrative Law Judge will determine that the testimony is not credible to establish the necessary facts (see, e.g., Matter of Airport Indus. Park, Tax Appeals Tribunal, April 11, 1991).

Contrary to the contention of the Division, the Administrative Law Judge's responsibility in finding facts is not to determine whether the witness appears to be truthful. Instead, "[d]etermined by the trier of facts and rarely upset by appellate courts, credibility has two components: competency and veracity. Opportunity and capacity to perceive combined with capacity to recollect and communicate constitute the ingredients of competency. The truthfulness of the witness determines his veracity" (Fisch, New York Evidence, § 446 [2d ed 1977]). To prove that a taxpayer was not present in New York or New York City for more than 183 days through only testimony is a very significant task because the witness will have to convince the Administrative Law Judge that the witness was in a position to know the taxpayer's whereabouts on every day of a specific year or years, that the witness can accurately remember such details and, as well, that the witness is truthfully recounting these details. To portray such a standard as leading to the cancellation of all statutory resident assessments does not accurately describe the burden before the taxpayer.

*13 In this case, it is obvious that the Administrative Law Judge found Ms. Fetherolf's testimony credible because: 1) the testimony was based on her examination and analysis of the diaries that she maintained with respect to petitioner's activities; 2) she specifically summarized these diaries in the schedule introduced into evidence (Exhibit "U"); 3) the diaries were created at the time the activities were scheduled and 4)petitioner offered a rational justification for not offering the diaries themselves. If Ms. Fetherolf's testimony had simply been a general statement that petitioner was not present in New York for more than 183 days each year and was based simply on her recollection of events occurring five years ago, rather than on records she had made of these events, it is doubtful that the Administrative Law Judge would have found the testimony credible. Further, in the unlikely event that an Administrative Law Judge would find such a general statement, based solely on recollection, credible, it is possible that we would find such general testimony insufficient to satisfy the petitioner's burden of proof (see, Matter of Dacs Trucking Corp., Tax Appeals Tribunal, March 21, 1991). Finally, if the taxpayer were unable to offer a valid justification for not producing business diaries, this in itself would seem to undermine any testimony about the contents of the diaries.

We do not believe that our conclusion here will mean that the Division will be "in the untenable position of having to accept a taxpayer's uncorroborated statements on whether a tax return was properly filed" (Determination, conclusion of law "P"). The Division always has the power to impeach the testimony of the witness through cross examination, i.e., to show that the witness was not in a position to know the facts or is not able to accurately remember them. Given the two components of credibility, the Division is not limited to challenging the truthfulness of the witness. Beyond challenges to the credibility of the witness, the Division can utilize information gathered during the audit process to controvert the facts as stated by the taxpayer. Finally, if the Division wishes to obtain documents in the possession of the taxpayer that the taxpayer refuses to introduce into evidence, the Division can use its subpoena power to obtain these documents (Matter of Capital Dist. Better TV v. Tax Appeals Tribunal, ___ AD2d ___, 606 NYS2d 930).

Because we find that the Administrative Law Judge erred in deciding that credible testimony was insufficient as a matter of law to satisfy petitioner's burden of proof, we conclude that the Administrative Law Judge's determination that Ms. Fetherolf credibly testified that petitioner was not present in New York City for more than 183 days in 1986 and 1987 requires our ultimate conclusion that petitioner has proved that he was not a resident of New York City for these years.

Although we have reversed the Administrative Law Judge's determination, we acknowledge that the Administrative Law Judge reasonably relied on our decision in Matter of Feldman (supra), to reach his conclusion. The precise issue raised in this case was not raised nor considered by us in Feldman. Now that we have had the opportunity to consider this specific issue, we conclude that to the extent that Feldman stands for the proposition that the Division's regulations require documentary evidence to corroborate credible testimony, the Feldman decision is in error and is overruled.

*14 Accordingly, it is ORDERED, ADJUDGED and DECREED that:

1. The exception of John G. Avildsen is granted;

2. The determination of the Administrative Law Judge is reversed to the extent it found that petitioner spent more than 183 days in New York City in 1986 and 1987, but is in all other respects affirmed;

3. The petition of John G. Avildsen is granted; and

4. The Notice of Deficiency dated February 22, 1990 is cancelled.