As many practitioners representing clients in New York residency audits have found, it can be a daunting task to convince a New York State auditor that the taxpayer spent a day outside the State (or City) without furnishing a third party document conclusively establishing the out-of-State presence. Indeed, even undocumented weekend days for non-New York domiciliaries are routinely treated as New York days (or, at best, as undocumented days) by State auditors for purposes of the 183-day rule. A recent decision of the Tax Appeals Tribunal involving statutory residency is instructive because it reaffirms earlier Tribunal case law – often ignored by auditors – regarding a taxpayer’s burden of proof on the 183-day rule. Matter of Julian H. Robertson, DTA No. 822004 (N.Y.S. Tax App. Trib., Sept. 23, 2010).
A New York State “resident” includes an individual who maintains a permanent place of abode in the State and spends more than 183 days of the year in the State, including any part of a day (a “statutory resident”). A resident is taxed on all of his or her income from all sources. New York State taxes nonresidents only on their New York State source income. There is no New York City tax on nonresidents.
The Robertson case involved the applicability of the New York City resident income tax to a hedge fund manager. It was undisputed that his domicile was outside New York City, in Locust Valley, Long Island. However, because the taxpayer also maintained a permanent place of abode in New York City, statutory residence was squarely in issue. Robertson had been fully aware of the 183-day rule, and his assistant kept track of his daily whereabouts and regularly advised him of his day count to make sure he would not be present in New York City more than 183 days in the year. After the audit, the parties agreed that Robertson was present in the City on 183 days in the year 2000. The Division agreed that Robertson was outside the City on 179 days. In other words, since the year 2000 was a calendar leap year, there remained only four days in dispute. If Robertson was in the City on any one of those four days, he would by his own admission be considered a New York City resident.
After a hearing, the Administrative Law Judge ruled in favor of the taxpayer, holding that he had established that he was outside the City on all four days, and therefore he was not a New York City statutory resident because he was not present in the City more than 183 days that year. The Division filed an exception, but dropped its disagreement with two of the disputed days, meaning that only two days were before the Tribunal, which is authorized to review the facts de novo.
On one of the two days that remained in dispute (Saturday, April 15), at issue was whether the taxpayer was at his New York City apartment that evening with his wife, where there was evidence of both a telephone call made from his Long Island home to the apartment, and a call from the apartment to his Manhattan office. On the other disputed day (Sunday, July 23), the taxpayer initially believed that he had flown into LaGuardia Airport from overseas at 2:15 a.m. on Monday (July 24), but later discovered that because of the time zone difference, his flight actually landed at 9:15 p.m. on Sunday night (July 23), early enough for him to have gone straight to his apartment since he worked at his Manhattan office the next day.
At the hearing, Robertson presented a combination of both his testimony, and that of family, friends and colleagues. None of the witnesses could testify with specific recall regarding Robertson’s whereabouts on the two disputed days. But, taken together with other documents also in evidence, and based on their familiarity with his established patterns of activity, they were able to testify that Robertson was in all likelihood outside the City on those days.
The ALJ ruled that the taxpayer met his burden of proof, and therefore was not taxable as a New York City statutory resident. The Division argued on appeal that the ALJ misapplied the burden of proof, the proper test being the “clear and convincing evidence” standard. The Tribunal, in a rare 2-1 split decision, affirmed the ALJ’s determination that the taxpayer met his burden of proof with respect to the two disputed days. It is not so much the result, but the Tribunal’s rationale for the result, that makes the decision noteworthy.
The Tribunal first traced what it referred to as “well-developed case law” regarding a taxpayer’s burden of proof with respect to the 183-day rule. Perhaps most significantly, the Tribunal clarified language from its 2008 decision in Matter of R. Michael Holt, DTA No. 821018 (N.Y.S. Tax App. Trib., July 17, 2008), in which it held that a taxpayer must provide “specific evidence through substantiating contemporaneous records to show a taxpayer’s whereabouts on a day-to-day basis” (emphasis added). The Tribunal in Robertson considered whether this language meant that, as a matter of law, a taxpayer must furnish documentary proof for every day he or she claimed to be outside the City. The Tribunal held that it did not, stating:
[T]he standard as to counting days . . . is not that there must be an objectively verifiable piece of documentary evidence establishing an individual’s whereabouts on every day in question . . .
[T]here 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.
(Emphasis added) (citation omitted).
The Tribunal noted that where there is no definitive document establishing one’s whereabouts on a particular date (which it referred to as the “gold standard”), the evidence to be considered is a combination of testimony evaluated in light of surrounding events and other evidence which aid the person in recalling the events on a particular date.
In light of this standard, the Tribunal first concluded that on April 15, while the witnesses had no specific recollection of Robertson’s whereabouts that day, their non-specific recollections were consistent with other documentary evidence placing him outside the City. For July 23, the testimony of the witnesses was supported by other facts, such as a call made by the taxpayer’s wife from their Manhattan apartment to their Long Island home early the following morning, which would not have been made if Robertson had stayed in the Manhattan apartment the previous night. Moreover, the Tribunal noted that the Division did not offer anything to contradict this factual determination. According to the Tribunal, “[c]redible testimonial evidence becomes clear and convincing when it is backed up by documentary evidence.” Since the Division cannot appeal Tribunal decisions, the decision is final and controlling.
The Tribunal’s decision was not, however, unanimous. In a sharply worded dissent, the dissenting Commissioner pointed out that the witnesses did not have a specific recollection of the April 15 date, and did not testify to a clear “pattern of conduct” by the taxpayer that would have made their non-specific testimony credible. As for July 23, the dissent viewed the evidence as conflicting – since the taxpayer’s initial calendar submission erroneously showed him to be out of the country – and therefore the record did not contain “clear and convincing evidence” to support the taxpayer’s position.
The Robertson decision provides the first meaningful guidance in some time on how a taxpayer can meet the statutory burden of proof regarding the 183-day rule. Although the majority suggests that it was merely following its own precedent, the decision is a breath of fresh air in addressing the approach of many auditors that a taxpayer must furnish a dispositive written “record” for each claimed non-New York day in order to meet the 183-day rule. It also calls into question the tendency of some auditors to disregard even a third-party affidavit regarding a taxpayer’s whereabouts on a particular day.
Although the Tribunal’s decision hinged on the taxpayer having produced both testimony and supporting documentary evidence, the Division’s current Nonresident Audit Guidelines address the use of “credible testimony” even in the absence of corroborating documentary evidence. The Audit Guidelines “strongly encourage” that auditors conduct personal interviews with taxpayers to determine whether there is an overall living pattern to explain undocumented days. Curiously, the guidelines go on to say that this is not always possible because “representatives may bar access to the taxpayer.” Whether or not that statement is generally true, auditors should give taxpayers the opportunity to be interviewed to explain their patterns of conduct regarding undocumented days. Provided adequate guidelines are in place to insure that the interviews are conducted thoroughly but fairly, and provided the auditors are instructed to give appropriate weight to the results of the interviews, many representatives and their clients would welcome interviews as an opportunity to ease the audit burden.