Use your browser's "back" button to return to the text.Matter of GROH
DTA NO. 810532 AND 813342; TSB-D-98(18)I;
STATE OF NEW YORK-DIVISION OF TAX APPEALS
May 8, 1997
OPINION:
CONCLUSIONS OF LAW
A. It has been held that "residence" means living in a particular locality but domicile means living in that locality with the intent to make it a fixed and permanent home. To acquire a new domicile [*79] there must be a union of residence and intention, animus et factus, either without the other being insufficient. (See, In re Newcomb's Estate, 192 NY 238.) B. Tax Law @ 605(b) provides, in pertinent part, as follows: "(1) Resident individual. A resident individual means an individual:
"(A) who is domiciled in this state, unless (i) he maintains no permanent place of abode in this state, maintains a permanent place of abode elsewhere, and spends in the aggregate not more than thirty days of the taxable year in this state, or . . .
"(B) who is not domiciled in this state but maintains a permanent place of abode in this state and spends in the aggregate more than one hundred eighty-three days of the taxable year in this state, unless such individual is in active service in the armed forces of the United States."
C. While there is no definition of "domicile" in the Tax Law the Division's regulations (20 NYCRR former 102.2[d]) provided, in pertinent part: "(d) Domicile.
(1) Domicile, in general, is the place which an individual intends to be his permanent home -- the place to which he intends to return whenever he may be absent.
"(2) A domicile once established [*80] continues until the person in question moves to a new location with the bona fide intention of making his fixed and permanent home there. No change of domicile results from a removal to a new location if the intention is to remain there only for a limited time; this rule applies even though the individual may have sold or disposed of his former home. The burden is upon any person asserting a change of domicile to show that the necessary intention existed. In determining an individual's intention in this regard, his declarations will be given due weight, but they will not be conclusive if they are contradicted by his conduct. The fact that a person registers and votes in one place is important but not necessarily conclusive, especially if the facts indicate that he did this merely to escape taxation in some other place.
"(3) Domicile is not dependent on citizenship; that is, an immigrant who has permanently established his home in New York State is domiciled here regardless of whether he has become a United States citizen or has applied for citizenship. However, a United States citizen will not ordinarily be deemed to have changed his domicile by going to a foreign country unless [*81] it is clearly shown that he intends to remain there permanently. . . .
"(4) A person can have only one domicile. If he has two or more homes, his domicile is the one which he regards and uses as his permanent home. In determining his intentions in this matter, the length of time customarily spent at each location is important but not necessarily conclusive. As pointed out in subdivision (a) of this section, a person who maintains a permanent place of abode in New York State and spends more than 183 days of the taxable year in New York State is taxable as a resident even though he may be domiciled elsewhere." Permanent place of abode is defined in the regulations at 20 NYCRR former 102.2(e)(1) as: "a dwelling place permanently maintained by the taxpayer, whether or not owned by him, and will generally include a dwelling place owned or leased by his or her spouse."
D. To effect a change in domicile, there must be an actual change in residence, coupled with an intent to abandon the former domicile and to acquire another (Aetna National Bank v. Kramer, 142 App Div 444, 126 NYS 970). Both the requisite intent as well as the actual residence at the new location must be [*82] present (Matter of Minsky v. Tully, 78 AD2d 955, 433 NYS2d 276). The concept of intent was addressed by the Court of Appeals in Matter of Newcomb (192 NY 238, 250-251):
"Residence means living in a particular locality, but domicile means living in that locality with intent to make it a fixed and permanent home. Residence simply requires bodily presence as an inhabitant in a given place, while domicile requires bodily presence in that place and also an intention to make it one's domicile.
"The existing domicile, whether of origin or selection, continues until a new one is acquired and the burden of proof rests upon the party who alleges a change. The question is one of fact rather than law, and it frequently depends upon a variety of circumstances, which differ as widely as the peculiarities of individuals . . . . In order to acquire a new domicile there must be a union of residence and intention. Residence without intention, or intention without residence, is of no avail. Mere change of residence although continued for a long time, does not effect a change of domicile, while a change of residence even for a short time, with the intention in good faith to change the domicile, [*83] has that effect . . . . Residence is necessary, for there can be no domicile without it, and important as evidence, for it bears strongly upon intention, but not controlling, for unless combined with intention, it cannot effect a change of domicile . . . . There must be a present, definite and honest purpose to give up the old and take up the new place as the domicile of the person whose status is under consideration . . . . Every human being may select and make his own domicile, but the selection must be followed by proper action.
Motives are immaterial, except as they indicate intention. A change of domicile may be made through caprice, whim or fancy, for business, health or pleasure, to secure a change of climate, or a change of laws, or for any reason whatever, provided there is an absolute and fixed intention to abandon one and acquire another and the acts of the person affected confirm the intention . . . . No pretense or deception can be practiced, for the intention must be honest, the action genuine and the evidence to establish both, clear and convincing. The animus manendi must be actual with no animo revertendi. . . . "This discussion shows what an important and [*84] essential bearing intention has upon domicile. It is always a distinct and material fact to be established. Intention may be proved by acts and by declarations connected with acts, but it is not thus limited when it relates to mental attitude or to a subject governed by choice."
E. The test of intent with respect to a purported new domicile has been stated as "whether the place of habitation is the permanent home of a person, with the range of sentiment, feeling and permanent association with it" (Matter of Bodfish v. Gallman, 50 AD2d 457, 378 NYS2d 138, 140). Moves to other states in which permanent residences are established do not necessarily provide clear and convincing evidence of an intent to change one's domicile (Matter of Zinn v. Tully, 54 NY2d 713, 442 NYS2d 990). The Court of Appeals articulated the importance of establishing intent, when, in Matter of Newcomb (supra at 251) it stated, "No pretense or deception can be practiced, for the intention must be honest, the action genuine and the evidence to establish both clear and convincing." Performance declarations are less persuasive than informal acts which demonstrate an individual's "general habit of [*85] life" (see, Matter of Silverman, Tax Appeals Tribunal, June 8, 1989, citing Matter of Trowbridge, 266 NY 283, 289). A taxpayer may change his or her domicile without "severing all ties with New York State" (see, e.g., Matter of Sutton, Tax Appeals Tribunal, October 11, 1990). The question is whether petitioners' overall conduct contradicted their formal declarations of a change of domicile to Denver, Colorado, Sparta, New Jersey and St. Croix, Virgin Islands.
F. As is evident from the cases cited above, in determining an individual's domicile, the facts and circumstances of the case are paramount. As stated in Matter of Silverman (supra), while certain declarations may evidence a change of domicile, such declarations are less persuasive than informal acts which demonstrate an individual's "general habit of life." A physical move to another place in which a permanent residence is established does not necessarily provide the clear and convincing evidence of an intent to change one's domicile (Matter of Zinn v. Tully, supra). Only when coupled with the clear intent to change one's domicile does the fact of a changed residence become a true changed domicile. [*86]
G. As previously discussed, the question of intent is paramount to the determination of where one has established his or her domicile or whether an individual has changed his or her domicile to another jurisdiction. Initially, through their testimony, petitioners alleged that they were domiciled in New York until 1974, moved to Colorado where they lived until 1982, moved to New Jersey and lived there from 1982 through 1985 and in 1985 moved to St. Croix through the end of the audit period. Petitioners' brief, however, outlined a slightly different schedule of domicile changes. The brief claimed a move from New York to Colorado in 1972, a change to New Jersey in 1983 followed by a move to St. Croix in 1987. In the audit questionnaire that petitioners personally prepared, signed and submitted, petitioners stated that they never stayed in New York during the audit years. This assertion is in direct conflict with their testimony as presented at the hearing. Furthermore, petitioners stated in the audit questionnaire that they first occupied their dwelling at Annas Hope, St. Croix in 1985. This statement is clearly untrue as they did not purchase this property until April 1986 and the house [*87] built upon the property was not completed until November 1987. These statements on the part of petitioners not only impair their testimony in general but exhibit a willingness to adjust their "intent" as to their domicile to fit the particular theory being offered. It is again noted that their declarations of intent are less persuasive than the informal acts which demonstrate their "general habit of life".
H. In support of their asserted change of domicile to Denver, Colorado, petitioners put forth testimony but little documentation. There is some documentation in the record, however, that tends to cast a shadow over their testimony. Furthermore, the weight of the testimony offered by petitioners is so impaired by the contemporaneous legal and certified documents in the record that their testimony as to the issue of their move to Denver is entitled to little or no weight.
Petitioners claimed that they neither owned, rented nor maintained a place of abode in New York during the time when they were in Denver between 1972 through 1983. However, the record is clear that they not only maintained residences in New York City during the period that they claimed to have been in Denver, but [*88] that there was never a time after they first moved to New York City in the 1960s that petitioners did not own or rent real property in New York City. Mr. Smith purchased and resided at 211 East 62nd Street in the fall of 1964. He sold this property in March 1977. Petitioners' certified marriage license in 1976 and the certified birth certificate of their first son in 1977 listed their residence as 252 East 51st Street, New York, New York. In January 1978, petitioners had already owned and had telephone service installed at 175 East 62nd Street, New York, New York. The certified birth certificate of their second son listed their residence in 1981 as 175 East 62nd Street, New York, New York. This apartment was owned and maintained by petitioners throughout the audit period.
The record contravenes petitioners' testimony that they did not maintain a permanent place of abode in New York City during the period they claim to have been in Denver, as it has been established that they either owned or rented a place of residence in New York City from 1964 through the audit period. It is interesting to note that the certified documents which contain the information that contrasts with petitioners' [*89] testimony are legal documents with information about their residences which was undoubtedly supplied by petitioners. These documents directly contradict the testimony of petitioners and diminish the weight to be given such testimony.
The certified copy of their marriage license stated that petitioners resided at 251 East 51st Street in the Borough of Manhattan and State of New York. The certified birth certificate of their first son stated that on July 15, 1977, the "Mother's Usual Residence" was at 251 East 51st Street, City of New York, County of New York and State of New York. The document further stated that, pursuant to the Bureau of Vital Records, Department of Health, City of New York, the mailing address of the mother was "Mrs. Carol Smith, 251 East 51st Street, Apt. 20-M, New York, New York 10022." The certified birth certificate of their second son stated that on August 18, 1981, the "Mother's Usual Residence" was at 175 East 62nd Street, City of New York, County of New York and State of New York. The birth certificate further provided that pursuant to the Bureau of Vital Records, Department of Health, City of New York, the mailing address of the mother was "Mrs. Carol [*90] Smith, 175 East 62nd Street, New York, New York 10021." Finally, the deed to the Sparta residence listed petitioners' address as 175 East 62nd Street. As to the topic of their marriage, petitioners testified that they were not married in New York, but rather, were married on the high seas, outside of the jurisdiction of New York State. A review of the certified copy of their marriage license revealed that they were, in fact, married in Yonkers, New York. T
hus, petitioners were again less than candid in their testimony, this time concerning the location of their marriage in 1976. Finally, although initially claiming domicile in Colorado beginning in 1974 through 1981, and later in 1972 through 1982, they filed no returns in Colorado for the years 1974 and 1975.
Under these circumstances, it cannot be found that petitioners exercised a change of domicile to Denver, Colorado during the years 1972 through 1982.
I. Petitioners claimed to have changed their domicile to New Jersey in 1983. As with the earlier attempt to prove that they changed their domicile to Denver, petitioners' testimony is severely impaired by documentation in the record which undermined many of the claims that they [*91] made. Initially it is noted that despite the claim of domicile in New Jersey beginning in 1983, which would be consistent with the purchase of the Sparta house in December 1982 and the moving of the furniture into the house in April 1983, petitioners, without explanation, filed as New Jersey residents for the year 1982. Petitioners had their New Jersey telephone bills, New Jersey real property tax bills and Lake Mohawk Country Club statements sent to the New York apartment. A review of the monthly telephone bills for the New Jersey house indicated that usage was minimal during the winter months and increased during the warmer months, which suggested that the house was used on a seasonal basis rather than year round.
This conclusion is supported by petitioners having written on checks imprinted with their New York City address that their New Jersey address was a "summer residence". In addition, petitioners' children attended school in New York City during all of the audit years, and the records of The Allen-Stevenson School listed the childrens' home address as 175 East 62nd Street, New York, New York. Finally, all of the pictures presented of the Sparta house during the summer months [*92] were taken in the 1980s while those taken in the wintertime were dated 1992, three years after the commencement of the initial audit. It is also important to note that, although the Sparta house was purchased in December 1982, furniture was not moved into the house until April 1983, again indicating spring and summer month usage of the Sparta house. J. Initially, petitioners had claimed a change of domicile to St. Croix in 1985, but revised that claim in their brief to November 1987.
Inconsistent statements were made during the course of the hearing as they related to the original claim of 1985, including the allegations that, whenever possible, all weekends were spent in Sparta in the year 1986 and petitioners considered Sparta to be home in 1986. Yet Mr. Smith also claimed that between 1986 and 1991, he did not consider himself a resident of any of the 50 United States, but rather a resident of St. Croix. However, this testimony was also contradicted by the fact that petitioners owned no place of abode on St. Croix for the first three years (1985-1987) they originally claimed to have been domiciled there. Petitioners purchased the Green Cay property in August 1985 without a building [*93] on it and it was established that they never resided there. The Annas Hope property was purchased in April 1986 with rental units on it, but petitioners never resided in them. Petitioners first occupied the house they built at Annas Hope, St. Croix in November 1987. Thus they were without a house to live in during the years 1985, 1986 and 1987 when they originally claimed to have been domiciled on St. Croix. Although petitioners claimed to have resided in a rental house on their visits to St. Croix prior to the completion of the house, these visits appear to have been more in the nature of a vacation, as indicated by the monthly calendars of petitioners.
Finally, petitioners' children attended school in New York City, spent the nonschool part of the year in New Jersey during all of the years at issue, and, at least for the years 1986 through 1989, spent at least twice as much time in New York City as Sparta or St. Croix. This is a pattern of life which speaks to New York City, not Sparta or St. Croix, as petitioners' domicile for the years 1986 through 1991. Throughout the audit period, petitioners continued to maintain the extensive business ties to New York City that they had prior [*94] to 1986. Mr. Smith was the partner-in-charge of the New York City office of Skidmore during the years at issue. Ms. Groh also had a business location in New York City during the audit period, as indicated by various magazine and newspaper articles. The 1986 corporate franchise tax return of GN Design Associates, Inc. stated that GN Design was a New York corporation which began business in 1979. Articles from the August 1987 edition of Working Woman magazine and an article from Business Week in June 1988 both stated that GN Design was located in New York City in 1979. An article in the Washington Post from January 1988 referred to "New York interior designer Carol Groh of GN Associates." Finally, it is noted that throughout the audit period, petitioners were claiming business deductions from their business activities in New York City. "Active" business ties have been considered an indication of a failure to abandon a New York domicile (see, Matter of Kartiganer, Tax Appeals Tribunal, October 17, 1991, confirmed 194 AD2d 879, 599 NYS2d 312).
Petitioners continuously represented themselves to be residents of New York City during the 1970s, 1980s and early 1990s, especially on [*95] various administrative and legal documents, although during the same time they now claim to have been domiciled elsewhere. Petitioners' marriage license listed their residence to be in New York City in 1976. In 1977 and again in 1981, their sons' birth certificates listed their legal address to be New York City. The deed purchasing the Sparta house in December 1982 indicated New York City to be their legal residence. Throughout the audit period, the address of record for the children with The Allen-Stevenson School was their New York City apartment. Furthermore, other important documents were mailed to petitioners at their New York City address.
The Appellate Division, Third Department has recently held in Buzzard v. Tax Appeals Tribunal (205 AD2d 852, 613 NYS2d 294) that a most significant factor in determining whether an individual has established a change of domicile to another jurisdiction is the number of days the individual has spent in New York as compared to the number of days spent in the other jurisdiction. Such a comparison for the days spent in New York City, Sparta and St. Croix by petitioners during the years 1986 through 1989 is shown below. Information for the [*96] years 1990 and 1991 was not presented. The New York days include only those days admitted by petitioners to have been spent in New York and the days in which documentation placed petitioners in New York, although petitioners claimed to have been elsewhere. The Sparta and St. Croix days include the days asserted by petitioners to have been spent in each of those jurisdictions less any days in which documentation placed them elsewhere.
NEW YORK SPARTA ST. CROIX
Mr. Smith:
1986 138 59 64
1987 168 48 67
1988 150 60 61
1989 158 51 53
Ms. Groh:
1986 158 80 50
1987 150 68 71
1988 140 82 42
1989 148 77 25
For the years 1990 and 1991, a comparison for the days spent by Mr. Smith in New York, Sparta and St. Croix as indicated in the audit report is shown below:
New York Sparta St. Croix
1990 126 69 57
1991 143 84 38
As can be seen by the above figures, petitioners spent at least twice as much time in New York as they did in either Sparta or St. Croix during the years 1986 through 1989. In 1990 and 1991, Mr. Smith spent at least twice as much time in New York as he spent in St. Croix, his claimed place of domicile. For some [*97] of the years at issue, petitioners spent three times as many days in New York as they spent in either of the other two jurisdictions. This breakdown of petitioners' whereabouts during each of these years strongly suggests that petitioners did not change their domicile to Sparta or St. Croix, and also strongly suggests that petitioners did not give up their domicile in New York.
Furthermore, no information was presented which indicated that petitioners' general pattern of life was any different in 1990 and 1991 than in 1986 through 1989. In fact, the breakdown of the days for 1990 and 1991 for Mr. Smith is consistent with the breakdown for the earlier years. The breakdown also established that the monthly calendars prepared by petitioners for the years 1986 through 1989 are less than accurate. The signed receipts which indicated petitioners were in New York City when they claimed to be elsewhere also contradicted petitioners' claims as to the amount of time they spent in Sparta on the weekends, the amount of time Ms. Groh spent in Fairfield, Connecticut and the claim that when taking a trip by airplane, petitioners always went directly from Sparta to the airport and from the airport [*98] to Sparta. Besides tarnishing the testimony of petitioners, they reduced the weight to be given to the affidavits whose purpose were to support petitioners' claimed whereabouts during the years at issue. Petitioners' retention of title to real property in New York City (Matter of Chrisman, 43 AD2d 771, 350 NYS2d 468; Matter of Roth, Tax Appeals Tribunal, March 2, 1989), continued maintenance of a New York City apartment (Matter of Cooper v. State Tax Commn., 82 AD2d 950, 441 NYS2d 30), and considerable time spent working in New York City during the years at issue (Matter of Clute v. Chu, 106 AD2d 841, 484 NYS2d 239; Matter of Simon, Tax Appeals Tribunal, March 2, 1989) are other factors adverse to petitioners' attempt to establish themselves as domiciliaries of New Jersey and St. Croix during the years 1986 through 1991.
Finally, it is noted that there are numerous other factors which tend to show that petitioners did not change their domicile from New York. These factors include: petitioners' checking and mortgage accounts in New York City banks; petitioners' children attending school in New York City; petitioners' receipt of important documents at their New [*99] York City apartment and their childrens' nanny residing in New York City. I
t is impossible to find a change of domicile based on the record herein. The facts indicating that petitioners did not change their domicile from New York, when taken together with the numerous occasions that petitioners' testimony was inconsistent with documentation in the record, affords such testimony little consideration in the determination of the issues and severely hinders petitioners in this matter. Petitioners have failed to carry their burden of establishing by clear and convincing evidence that they intended to change their domicile from New York (State and City) to New Jersey and St. Croix during the years 1986 through 1991.
K. Even if it were to be concluded that petitioners were not domiciled in New York during the years 1986 through 1989, they would be properly assessed herein if they maintained a permanent place of abode within New York and spent in the aggregate more than 183 days there during the years 1986 through 1989 (Tax Law @ 605[former (a)(2)]; [b][1][B]). The Division has conceded that petitioners spent fewer than 184 days in New York State and City during 1990 and 1991.
A "permanent [*100] place of abode" includes "a dwelling place permanently maintained by the taxpayer, whether or not owned by him" (20 NYCRR 102.2[e][1]). There is no requirement that the petitioner actually dwell in the abode, but simply that he maintain it (see, Matter of Smith v. State Tax Commn., 68 AD2d 993, 994, 414 NYS2d 803). Here, petitioners owned and maintained an apartment in New York City, located at 175 East 62nd Street, throughout the audit period.
Petitioner had a telephone listing at the apartment since 1978. Therefore, this apartment constituted a "permanent places of abode" within the meaning of Tax Law @ 605(former [a][2]; [b][1][B]). The remaining issue then is whether petitioners spent in the aggregate more than 183 days of the taxable year in New York. It is concluded that petitioners have failed in their burden to prove that they did not (Tax Law @ 689[e]; 20 NYCRR 3000.10[d][4]).
L. In determining whether the petitioners have met their burden of establishing that they spent fewer than 184 days in New York State and City during the years at issue, review was made of the calendars presented by petitioners, the backup documentation, the testimony of petitioners and the evidence [*101] introduced at the hearing to establish the various expenses claimed by petitioners. It is noted with regard to this last item that each petitioner had his or her own charge accounts and when it is noted that a credit card sale was made, it is the individual under discussion whose signature appeared on the charge slip.
There are several recurring items within this issue that will be briefly discussed herein prior to dealing with the individual years. Petitioners claimed in their testimony that the procedure followed when they travelled was to always go directly from Sparta to the airport or train station and upon returning from the trip to go directly from the airport or train station to Sparta. However, as indicated in Finding of Fact "45", there are numerous weekdays on which purchases were made in New York City by either Mr. Smith or Ms. Groh on the date of departure or arrival from a trip taken outside New York State and City. As a result of these discrepancies, all "travel days" were considered New York State and City days where the trip originated or ended in New York City. Petitioners claimed to have been outside of New York City and State for numerous days each year, but submitted [*102] no documentation to substantiate this claim.
As petitioners have the burden of proof on this issue and submitted nothing to substantiate their claim, these days were also counted as New York State and City days. These days include the days claimed by Ms. Groh to have been spent in Fairfield, Connecticut. In fact, as indicated in Finding of Fact "47", there were days claimed by Ms. Groh to have been spent in Fairfield but where a signed American Express receipt placed her in New York City. It is noted that for the 252 days claimed to have been spent in Fairfield by Ms. Groh over the 4-year period, not one piece of documentation was offered establishing Ms. Groh's presence there. It is concluded that as a result of the discrepancies that existed in the record between the testimony of petitioners and the affidavits presented by them with various documents introduced into the record, the testimony and affidavits were given little weight in the determination of the number of days spent by petitioners in New York State and City during the years 1986 through 1989.
Finally, it is observed that the days claimed to have been spent in Sparta but for which no documentation was presented could [*103] also be counted as New York days. However, this issue was not addressed as the total of the other types of days exceeded 183, and there is some indication in the record that at least some weekends, especially during the warmer months, were spent in Sparta.
M. For the year 1986, Mr. Smith had 46 travel days, 32 days claimed to have been spent outside New York State but without supporting documentation and 121 days admitted to have been spent in New York. In addition, there were 17 days where Mr. Smith claimed to have been out of the State, but receipts indicated he was in New York City. Mr. Smith claimed to have been in Hartford, Connecticut on 6 of these 17 days, and in Sparta on 5 of these days. Of the 5 Sparta days, 4 were weekend days, in contrast to petitioners' claim that all weekends were spent in Sparta.
For the year 1987, Mr. Smith had 52 travel days, 23 days claimed to have been spent outside New York State but without supporting documentation and 118 days admitted to have been spent in New York. In addition, the documentation presented by petitioners to substantiate certain business expenses revealed discrepancies between the monthly calendar and the receipts for 50 days [*104] where Mr. Smith claimed to be out of State but the receipts indicated his presence within the State. Mr. Smith claimed to have been in Hartford, Connecticut for 16 of the 50 days, and in Sparta for 5 of those days. Of the 5 days, 3 were weekend days. For the year 1988, Mr. Smith had 41 travel days, 22 claimed non-New York days without backup documentation and 136 days admitted to have been spent in New York. There are, in addition, 14 more days which Mr. Smith indicated on his monthly calendar were spent out of New York State but for which there existed signed American Express receipts indicating his presence within the City. Of these additional 14 days, 13 involved charges made by Mr. Smith either before departing from or after arriving in New York City by airplane. This is in direct contrast to petitioner's testimony that when traveling, he always went directly to the airport from Sparta and directly to Sparta from the airport.
For the year 1989, Mr. Smith had 34 travel days, 24 undocumented days claimed to have been spent outside New York State and 145 days admitted to have been spent in New York. In addition, there are eight days for which an American Express receipt indicated [*105] Mr. Smith was in New York City on days he stated were spent in other locations, and five days where other receipts placed Mr. Smith in New York City although his monthly calendar placed him elsewhere.
In all, there are four receipts which placed Mr. Smith in New York City on weekends when he claimed to be in Sparta.
N. One recurring item not relevant to Mr. Smith was involved in the determination of Ms. Groh's day count both within and without the State. It involved the number of days claimed to have been spent in Fairfield, Connecticut during the year but for which no substantiation was provided. In addition, numerous days claimed by Ms. Groh to have been spent in Fairfield are contradicted by American Express receipts signed by Ms. Groh indicating that she was in New York City that particular day. Therefore, as petitioners have the burden of proving that they spent less than 184 days in New York City and State during the years at issue, and no documentation was presented as to Ms. Groh's claim of days spent in Fairfield, Connecticut, the days claimed to have been spent in Fairfield will be counted as New York days.
For the year 1986, Ms. Groh had 26 travel days, 60 Fairfield days [*106] and 141 days admitted to have been spent in New York City. Furthermore, there were 17 days which were claimed to have been spent outside of New York, but American Express receipts signed by Ms. Groh established that she was in New York City on those days. Of the 17 days, 9 were claimed to have been spent in Fairfield and 5 were claimed to have been spent in Sparta on weekend days. For the year 1987, Ms. Groh had 28 travel days, 63 Fairfield days and 144 days admitted to have been spent in New York City. There were, in addition, six days with American Express receipts indicating Ms. Groh was in New York City when her monthly calendar indicated she was outside the State. Of the six days, two were claimed to have been spent in Fairfield and three were claimed to have been spent in Sparta on weekend days.
For the year 1988, Ms. Groh had 27 travel days, 65 Fairfield days and 137 days admitted to have been spent in New York City. There are three additional days for which there existed documentation that established that Ms. Groh was in New York City on those days.
For the year 1989, Ms. Groh had 37 travel days, 64 Fairfield days and 145 days admitted to have been spent in New York City. [*107] There are three additional days for which there existed documentation that established that Ms. Groh was in New York City on those days.
O. Based upon the documents in the record, the lack of documentation in the record as to the days claimed to have been spent outside the State and the lack of credibility afforded petitioners' testimony due to the numerous contradictions in the record, it is clear that petitioners have failed to meet their burden of establishing that they spent less than 184 days in New York City during the years 1986 through 1989.
P. Petitioners contend that the absence from the hearing of the individuals who conducted the audits for the years 1988 through 1991 deprived them of their fundamental rights to due process and to confront their accusers. This contention is rejected. The Division of Taxation is not required to produce the auditor who conducted the audit (see, Matter of Mira Oil Co. v. Chu 114 AD2d 619, 494 NYS2d 458, lv denied 68 NY2d 602, 505 NYS2d 1026; Matter of Array Service, Inc., Tax Appeals Tribunal, December 1, 1988).
Furthermore, petitioners contend that the notices of deficiency relating to the years 1988 through 1991 are not supported [*108] by "substantial evidence" within the meaning of State Administrative Procedure Act @ 306(1) and therefore must be cancelled. Petitioners argue that because the auditors involved in the years 1988 through 1991 were not subject to cross-examination, and the hearsay audit reports were the only evidence to support the notices of deficiency, those notices must be cancelled. This contention is also rejected. State Administrative Procedure Act @ 306(1) provides, in part, as follows:
"No decision, determination or order shall be made except upon consideration of the record as a whole or such portion thereof as may be cited by any party to the proceeding and as supported by and in accordance with substantial evidence. . . ." It is initially noted that the substantial evidence requirement of section 306(1) applies to the determination as a whole and not to each individual document introduced into the record. Furthermore, not only is hearsay admissible in administrative proceedings, it may even serve as the basis for the administrative determination (see, Matter of EJG Corp. v. State Liquor Authority, 213 AD2d 924, 624 NYS2d 68; Matter of Gray v. Adduci, 73 NY2d 741, 536 NYS2d [*109] 40). Moreover, while not the case herein, the determination "may consist entirely of hearsay evidence" (Matter of Hirsch v. Corbisiero, 155 AD2d 325, 548 NYS2d 1, 2, lv denied 75 NY2d 708, 555 NYS2d 691). While an assessment of tax must have a rational basis (see, Matter of Donahue v. Chu, 104 AD2d 523, 479 NYS2d 889, 892), the Division does not have an affirmative burden to establish the rational basis for its assessment (see, Matter of Metzger, Tax Appeals Tribunal, February 11, 1993). Rather, a presumption of correctness attaches to an assessment issued by the Division which, in itself, provides the rational basis, so long as no evidence is introduced challenging the assessment (Matter of Leogrande v. Tax Appeals Tribunal, 187 AD2d 768, 589 NYS2d 383, lv denied 81 NY2d 704, 595 NYS2d 398see, Matter of Tavolacci v. State Tax Commn., 77 AD2d 759, 431 NYS2d 174). In the present matter, the field audit report, the audit workpapers, the documentation obtained by the auditors from petitioners and petitioners' personal income tax returns for the years at issue are sufficient to allow a trier of fact to determine that the audits and the resulting notices [*110] of deficiency had a rational basis (see, Matter of Grecian Square v. State Tax Commn., 119 AD2d 948, 501 NYS2d 219).
Q. Section 170 of the Internal Revenue Code allows individuals a deduction for charitable contributions subject to certain limitations. In general, charitable contributions may be substantiated by a cancelled check, a receipt or a reliable written record setting forth the name of the donee, the date of the contribution and the amount of the contribution (Treas Reg @ 1.170A-13). For the year 1986, petitioners have established through the introduction of copies of cancelled checks issued to The Allen-Stevenson School and letters from the school acknowledging the gifts from petitioners that they made contributions to the school of $ 2,500.00 (check, letter and publication), $ 40.05 (check), $ 500.00 (letter) and $ 10,000.00 (letter), for a total of $ 13,040.05.
For the year 1987, petitioners have established that they donated $ 2,500.00 (check) to the school's annual fund drive. The testimony of Mr. Smith as to the remaining two cancelled checks totalling $ 6,000.00 was too vague to establish the reason why the checks were given to the school and certainly did not [*111] establish that the money was donated as a charitable contribution. As no documentation was offered as to the amounts claimed to have been donated to the Christ Church for either year, these amounts are disallowed. In conclusion, petitioners are entitled to charitable contribution deductions relating to the amounts originally claimed to have been donated to The Allen-Stevenson School and the Christ Church of $ 13,040.05 in 1986 and of $ 2,500.00 in 1987.
R. Section 165(a) of the Internal Revenue Code allows a deduction for any loss sustained during the taxable year and not compensated for by insurance. Section 165(c)(3) limits the deduction to losses of property where such losses arise from fire, storm, shipwreck, or other casualty. Petitioners have established through the introduction of repair invoices that the cost of the repairs to the rental units on St. Croix was $ 798,839.00 and the cost of the repairs to their residence on St. Croix was $ 945,750.00 as a result of the damage caused by Hurricane Hugo. Insurance coverage as indicated by checks and correspondence from the insurance companies was $ 353,598.00 toward the losses sustained by the rental units and $ 765,000.00 toward [*112] the losses sustained by the residence, resulting in net casualty losses of $ 445,241.00 and $ 180,750.00 for the rental units and residence, respectively. Petitioners are entitled to deduct these net casualty losses in the year 1989.
S. Petitioners are entitled to the passive losses computed on their Federal Form 8582 and claimed on their Federal Schedule E for the years 1988 and 1989, as permitted by Internal Revenue Code @ 469. This issue was all but conceded by the auditor when he told petitioners' representative by telephone and by letter that the full passive losses for both years should have been allowed.
T. Petitioners claimed a capital loss under Internal Revenue Code @ 1231 upon the sale of 848 shares of stock held in a cooperative apartment at 212-214 East 77th Street during 1987. Section 1001(a) of the Internal Revenue Code states, as follows:
"The gain from the sale or other disposition of property shall be the excess of the amount realized therefrom over the adjusted basis provided in section 1011 for determining gain, and the loss shall be the excess of the adjusted basis provided in such section for determining loss over the amount realized." Under section [*113] 1011(a), the adjusted basis for determining the gain or loss from the sale of property shall be the basis determined pursuant to section 1012. Section 1012 provides that the basis of property shall be the cost of such property. In order to establish the claimed loss on the sale of the 848 shares, it was necessary for petitioners to establish the basis, or cost, of the property. During the course of the hearing petitioners had in their possession the original closing statement relating to the purchase of the building in 1981.
This document would have adequately addressed the question of the basis of the property at issue. However, petitioners chose not to introduce the original closing statement into evidence and this failure must be viewed in a light most unfavorable to petitioners. Therefore, petitioners have failed to substantiate the basis and thus establish their entitlement to the claimed capital loss on the sale of the 848 shares of stock held in the cooperative apartment located at 212-214 East 77th Street in 1987. U. Internal Revenue Code @ 162 provides for deductions for all ordinary and necessary expenses incurred during the taxable year in carrying on any trade or business. [*114] To qualify as allowable trade or business expense deductions under section 162(a), the item must (1) be "paid or incurred during taxable year," (2) be for "carrying on any trade or business," (3) be an "expense," (4) be a "necessary" expense, and (5) be an "ordinary" expense (Commissioner v. Lincoln Sav. & Loan Asso., 403 US 345, 29 L Ed 2d 519).
Addressing the issue of the ordinary and necessary business expenses claimed by petitioners for the year 1986, petitioners have submitted sufficient documentation in the form of checks and charge card summaries to be entitled to claim the following expenses on their Statement 1 for 1986: Office supplies $ 8,751.00 Labor 6,919.00 Travel 5,187.00 Entertainment 7,669.00 Maintenance 3,350.00 The subscription expense of $ 2,821.00 is to be reduced by the amount of the four checks ($ 468.00) which appear as substantiation here as well as in labor expenses. The claim for utility expenses of $ 185.00 and telephone expenses of $ 192.00 are denied in full as they do not appear to be related to a trade or business and are personal or living expenses, relating to the house in New Jersey (see, IRC former @ 262). As to the New York [*115] telephone expenses, it was incumbent upon petitioners to establish a reasonable allocation of the charges between personal and business use; without such an allocation no deduction can be allowed (see, International Trading Co. v. Commissioner, 275 F2d 578).
As to the Statement 2 expenses on the 1986 return, petitioners have established through charge card statements and cancelled checks entitlement to the following business expenses: Entertainment $ 15,317.00 Maintenance 30,151.00 Travel 16,932.00 Claimed office supplies expenses of $ 81,087.00 are properly reduced by $ 4,248.00, which includes checks to the Sparta housecleaner, a personal expense, and the six checks which were not cashed by any banking institution. The claimed professional expenses of $ 8,017.00 are to be reduced by $ 2,592.00, which is the amount of the check not cashed. In addition, the labor expenses of $ 32,015.00 should be reduced by the amount of the seven checks which appear twice in the exhibit, or $ 3,826.00.
The utility expenses which include personal items relating to the Sparta house and other items which could relate to both personal and business items but which petitioners have not [*116] allocated, the insurance expenses which are not allocated between business and personal and which also, on their face, could be personal in nature and the miscellaneous expenses which are documented by cash register receipts which do not identify the items purchased, are all denied in full. For the year 1987, petitioners were able to substantiate through the introduction of charge statements, cancelled checks and expense statements from Skidmore the following business deductions and amounts:
Supplies $ 20,285.00
Professional fees 14,489.00
Mortgage 14,268.00
Entertainment 25,293.00
Travel 27,171.00
Cleaning & Maintenance 7,506.00
Maintenance 30,238.00
The expenses claimed for office supplies are denied in full. Many of the checks submitted are clearly for expenses not properly deductible as business expenses and/or not properly included in this category. Some of the checks were for expenses incurred at the Sparta house and others appear to be for other personal items. Without the invoices to verify the purpose or item purchased, the remaining items must also be disallowed. The utility expenses are disallowed in full as they relate either to the Sparta house or to the New [*117] York apartment without a proper allocation between personal and business use. The latter rationale applies to the disallowance of the insurance expenses as well. In addition, one insurance check was not cashed by a banking institution.
The expense for labor must be disallowed because of an accumulation of deficiencies in the documentation presented. The checks presented contained thirteen which were not cashed, ten addressed to the Sparta housecleaner and two which appear twice. The inclusion of these obviously incorrect documents brings into question the remaining checks, and without an explanation of the recipients and how they are related to petitioners' businesses, they are also disallowed. The miscellaneous expenses are also disallowed in full as the cash register tapes, in the main, do not identify the items purchased, and the items that are identified appear to be personal in nature.
For the year 1988, petitioners submitted sufficient documentation in the form of cancelled checks to be entitled to the business deduction for the following expenses:
Professional Fees $ 95,616.00
Payroll & other taxes 3,500.00
The documentation for the office supplies expense included [*118] items that are personal in nature and receipts that do not identify the items purchased. There are also checks written to American Airlines, GN Associates and the Connecticut Broadcasting Co. which do not appear, without explanation, to relate to office supplies. Without any explanation of the items purchased and the purpose of the items, the office supplies expense is disallowed in full. A similar rationale applies to the claimed supplies expenses. Many of the checks are written to companies or individuals which clearly did not provide supplies to petitioners' business operations, including: the Buccaneer Bay Landowners Assoc., the Morgan-Francis Co. which sold the flagpole for the St. Croix property, Fisher Skylights which contracted to do the lighting in the St. Croix house, K. Robert Najarian, Ms. Groh's partner in GN Design, and A & S Landscaping. Without an explanation as to how these and the remaining expenses relate to petitioners' business activities, the supplies expense is denied in full. The utility expenses are denied in full as the expenses are either personal in nature, as they relate to the Sparta or St. Croix property or are not properly allocated between business [*119] and personal use. There are twelve checks written to "Madelyn Simon" totalling $ 3,045.00 which are not accompanied by an explanation as to her relationship to the utilities which were provided. The insurance expense deduction fails for want of information. Of the five different insurance companies for which checks were presented, one insured the St. Croix property and another the Sparta house. There was no information provided as to the remaining three companies and therefore all such expenses are denied in full. The labor expenses are denied in full due to the 15 checks which were presented in support of other expense categories as well, the 9 checks written to the Sparta housekeeper and the lack of any explanation as to who the payees were and what services they performed for petitioners.
Petitioners submitted sufficient documentation in the form of credit card statements, invoices, checks and Skidmore expense statements to establish entitlement to the following expenses claimed for the year 1989:
Business $ 35,213.00
Publications 3,983.00
Maintenance & Repair 13,505.00
Professional Fees 11,932.00
Supplies 11,026.00
Payroll Taxes 2,166.00
Petitioners' claimed transportation [*120] expenses of $ 40,828.00 are to be reduced by the three uncashed checks addressed to Skidmore, totalling $ 9,097.00. The amount of the fourth Skidmore expense statement, in the amount of $ 1,395.00, is also disallowed as there is an obvious pattern of Mr. Smith's not having reimbursed Skidmore for the expenses shown on its statements in this year. The meals and entertainment expenses in the amount of $ 28,114.00 are to be reduced by the adding machine tape totals of $ 24,926.00 as there is no original source documentation supporting the amount claimed and by the Skidmore expense statement in the amount of $ 1,798.00 as there is no proof of its having been paid. Such expense remaining is $ 1,112.00 ($ 1,390.00 X 80%). The office supplies expense of $ 15,711.00 is to be reduced by $ 7,957.00, which represents the checks not cashed by a banking institution, including those written to cover the Skidmore expense statements. Miscellaneous expenses of $ 1,594.00 are to be reduced by $ 575.00, which is the amount of the check written to the Lake Mohawk Club and not documented as a business expense. Advertising expenses of $ 950.00 are to be reduced by $ 360.00, which is the amount of the four [*121] checks which clearly were not written for advertising (one check written for "pillowcovers-kware", one to Woolworth and two to Bloomingdales).
Petitioners submitted checks and other documentation to support their claimed
expenses for the year 1990 as follows:
Maintenance $ 45,357.00
Publications & Supplies 1,739.00
Miscellaneous 666.00
Professional Fees 23,559.00
Meals & Entertainment 5,774.00
Labor expenses of $ 40,913.00 are to be reduced by the checks written to the Sparta housekeeper and the children's nanny, neither of whose services were performed for petitioners' business ventures. Petitioners' testimony that the nanny performed clerical services is not credible. In addition, no proof was offered that the nanny was paid separately for her clerical and child supervision services. These checks totalled $ 18,940.00. Business expenses are to be reduced by the amount of the uncashed check, $ 250.00. Claimed transportation expenses in the amount of $ 16,548.00 were supported by checks, credit card statements, credit card receipts and travel agency receipts. All the expenses are properly documented except for the uncashed check in the amount of $ 465.00, which is to [*122] be eliminated from the amount claimed. The telephone expenses claimed are denied in full. No allocation was made as to those expenses which could possibly be business expenses but also have the potential to be personal expenses. Without such an allocation, it is impossible to determine which New York telephone expenses are related to petitioners' businesses. No explanation was provided as to how the New Jersey expenses were related to the New York businesses. The insurance expenses are denied in full as no explanation was provided as to what these companies insured and therefore their relationship, if any, to the business activities of petitioners. The claimed utility expenses are denied in full as the payees do not in any way appear to be providers of utility services.
Petitioners produced sufficient documentation to be entitled to the following
expenses claimed for the year 1991:
Maintenance $ 46,524.00
Publications & Supplies 957.00
Plants & Maintenance 3,594.00
Checks in the amount of $ 9,566.00 which were not cashed by any banking institution are to be removed from the amount claimed as professional expenses. The transportation expenses allowed are to be reduced [*123] to $ 4,239.00, eliminating the claimed expenses documented only by adding machine tapes and handwritten notations as they provide no source documentation for these expenses. Cleaning expenses of $ 5,146.00 are to be reduced by the checks written to the Sparta housekeeper, totalling $ 760.00. Repair expenses are to be reduced by the amount of the check written to Sparta Electric, $ 432.00, as no explanation was provided as to the relation of this obvious personal expense to petitioners' business operations. The claimed office supplies expense of $ 9,028.00 is to be reduced by $ 2,286.00, which is the amount of the expense substantiated only by adding machine tapes and without original source documentation. The labor, telephone, insurance and meals and entertainment expenses are denied in full. The labor expenses are supported only by checks and a Federal form 1099 issued to petitioners' nanny, a personal expense. The telephone and insurance expenses were not allocated between possible business and personal expenses. Finally, the meals and entertainment expenses are not supported by original source documentation but only adding machine tapes which do not identify the items purchased. [*124]
An examination of the documentation submitted in support of the business expenses claimed by petitioners for their business ventures revealed a willingness upon the part of the petitioners to employ less than straightforward methods in their attempts to substantiate the amount of the expenses claimed. Petitioners continuously and consistently claimed as expenses of their New York office the utility and telephone expenses of their Sparta house, the cost of their housekeeper in Sparta, the cost of their nanny and the amounts indicated on checks which were not cashed by any banking institution. In addition, they frequently claimed the same expenses more than once.
V. It is noted that since petitioners have been determined to be domiciliaries of New York State, they are not entitled to any business expenses listed on their Federal Schedule A under the following categories; maintenance, plants and plant maintenance, telephone, insurance, cleaning, repairs, utilities, office supplies, general supplies and miscellaneous expenses as they relate to the apartment located at 175 East 62nd Street.
W. Pursuant to Internal Revenue Code @ 163(a), a taxpayer may generally deduct interest paid [*125] within the tax year on indebtedness. However, a taxpayer not a corporation may not deduct personal interest paid during the taxable year (IRC @ 163[h][1]). The term "personal interest" does not include investment interest (IRC @ 163[h][2][B]). The deduction by a noncorporate taxpayer for interest on investment indebtedness is limited to the taxpayer's net investment income (IRC @ 163[d]). Net investment income is the excess of investment income over investment expenses.
Petitioners have established that they paid and claimed $ 140,544.00 in investment interest in 1988 and $ 71,990.00 in investment interest in 1989. As petitioners' net investment income in both years exceeded the amount claimed, they are entitled to the investment interest deduction as claimed in the years 1988 and 1989.
X. Penalties were imposed herein pursuant to Tax Law @ 685(b) and (p). Petitioners have failed to articulate any rationale for the abatement of such penalties. Under such circumstances and considering the discrepancies that existed between petitioners' claimed days outside of New York State and City and the documentation which established otherwise, the discrepancies that existed between the claimed [*126] expenses and deductions and the documentation presented, the numerous contradictions between the testimony and the documents and the use of certain items as deductions when they clearly were not, penalties imposed herein are properly sustained.
Y. In summary, petitioners have established entitlement to the following items for the years indicated: The total business expenses are based upon petitioners' being determined domiciliaries of New York State for the years 1986 through 1991 (see, Conclusion of Law "V").
For 1986:
charitable contributions of $ 13,040.05.
total business expenses of $ 22,128.00 for statement 1.
total business expenses of $ 65,863.00 for statement 2.
For 1987:
charitable contributions of $ 2,500.00.
total business expenses of $ 66,953.00.
For 1988:
passive losses of $ 47,782.00.
total business expenses of $ 99,116.00.
investment interest expense of $ 140,544.00.
For 1989:
passive losses of $ 148,104.00
total business expenses of $ 85,332.00.
investment interest expense of $ 71,990.00.
net casualty losses of $ 625,991.00.
For 1990:
total business expenses of $ 85,926.00.
For 1991:
total business expenses of $ 57,047.00.
[*127]
In the alternative, if petitioners had been determined to be nondomiciliaries of New York, they would have been entitled to the following business expenses:
Year Amount
1986 - statement 1 $ 34,599.00
1986 - statement 2 172,859.00
1987 139,250.00
1988 99,116.00
1989 118,636.00
1990 131,949.00
1991 118,293.00
Z. The petitions of Carol A. Groh and Donald C. Smith are granted as indicated in Conclusion of Law "Y"; the notices of deficiency issued February 15, 1991 and October 13, 1994 are modified accordingly and except as so granted the petitions are denied.
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