COUNTING THE DAYS (Help for NYS Residency Audits)

I will be discussing the confusion and complications involved in recordkeeping to meet your burden of clear and convincing evidence in a NYS or NYC Residency Tax Audit, as well as a promising solution.

State Residency has been a hot topic for some time now, and whether the issue is domicile or statutory residence, the amount of time spent in New York vs. another state is a prime concern. 

Domicile may be described as your primary residence - the place that you feel in your heart is your home.

Statutory Residence is defined in NYS and/or NYC as being domiciled in another state, having a permanent place of abode in NY and being present in NY for more than 183 days, or partial days.  A permanent place of abode is any suitable living quarters to which you have unrestricted access.  You may own it, rent it, or have some other arrangement.

Let’s focus on a particular case that is often discussed with regard to statutory residency.

The case is Matter of Avildsen.(1)  Avildsen is thought of as an important case because at the NYS Tax Appeals Tribunal, the point was made that credible oral testimony regarding the number of days spent in NY is sufficient to meet the burden of clear and convincing evidence.  This appears to contradict the regulations, which indicates the need for “adequate records to substantiate”.

The substance of NYS regulations 20 NYCRR Appendix 20, § 1-2(c) states:

Any person claiming to be a nonresident must have adequate records to substantiate the fact that he did not spend more than 183 days within New York. 

The standard is clear and convincing evidence.  Understanding and satisfying the requirements of clear and convincing evidence has been quite challenging.

Avildsen was a NYC case.  Taxpayers claimed that they were domiciled on Long Island.  NYC Audit Division determined that the taxpayers were domiciled in NYC and/or were statutory residents of NYC.

At the Administrative Law Judge hearing Mr. Avildsen’s secretary testified that she kept a contemporaneous diary of petitioner’s days in and out of NYC. A schedule of the days in and out was submitted, but not the diary itself due to the sensitive nature of its contents.  The schedule showed that Mr. Avildsen was not in NYC for more than 183 days.  Some airline tickets were submitted as corroboration for his travel days.

The ALJ found this and other testimony to be credible, and found that taxpayers were not domiciled in NYC, however, the ALJ found that the taxpayers were statutory residents of NYC, because the regulation requires that adequate records must be submitted for substantiation of the 183 day rule.  The ALJ stated:

The evidence presented by petitioner is not sufficient to sustain his burden. There is no question that a business diary bolstered by credible testimony and other documents may be sufficient to substantiate the number of days spent in New York (see, Matter of Moss, Tax Appeals Tribunal, November 25, 1992). However, in this instance, in order to accept petitioner's argument, one is forced to accept testimony as to what those diaries show. Such testimony, although credible (emphasis added), is not sufficient to meet the "adequate records" requirement of 20 NYCRR Appendix 20, § 1-2(c) (see, Matter of Feldman, supra).

The taxpayer took the case to the Tax Appeals Tribunal.  The Tribunal reversed the decision of the ALJ and determined that the Avildsens were not statutory residents.

Why did the Tribunal reverse?  Don’t the regulations require “adequate records”?

Look at the ALJ’s comments very carefully.

Such testimony, although credible (emphasis added), is not sufficient to meet the "adequate records" requirement…

What does this mean?  “Such testimony, although credible”…

It appears that the ALJ believed the testimony to be truthful.

The crux of the matter is, that according to the Tribunal, since the ALJ stated that the testimony for the taxpayer was credible (truthful), then the taxpayer should prevail.  The law does not require records at hearing.  This is what leads to confusion or misinterpretation of this case.  The Tribunal did not say the testimony was credible.  The Tribunal said that the ALJ found it to be credible. 

The Tribunal went on to further state:

“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.”

Did the ALJ really believe the testimony to be truthful?  I don’t know.  He found against the taxpayer.  Wasn’t he really saying in his commentary above that he didn’t accept petitioner’s argument?

“However, in this instance, in order to accept petitioner's argument, one is forced to accept testimony as to what those diaries show.”

If the ALJ did not state “although credible…”, but stated it differently such as:

“Without the actual diary, testimony wasn’t sufficient to be credible”, we would have had a different Tribunal result.

So what can we learn from this?  Should someone as a result of this case expect to prevail on oral testimony alone?  No!  How should someone prepare to file as a nonresident of NY and expect to be successful on audit?

In order to be clear and convincing, we should be better prepared than to go in with oral testimony and a few documents.  A detailed contemporaneously kept diary should be the starting point.  This should be bolstered by documents such as credit card receipts, travel records, and any other document which indicates someone’s location on a particular date which support the entries in the diary.  Once documentary evidence is found to be credible, oral testimony is more likely to also be found credible if there is a question on some undocumented days.  See Matter of Robertson. (2)

Unfortunately, many taxpayers have failed to adequately maintain their diary.  See Matter of Holt (3) where the diary was a poor photocopy.

Solution for the 21^st century:

Have you heard of a company called MONAEO? (4) 

MONAEO is software that is installed on your smartphone, which tracks your whereabouts like an electronic diary. It keeps track of your days in a potential tax jurisdiction, and even warns you when you are getting close to the residency limit such as the 183 days in New York.

Really?  Yes! 

Too often, people go into court rolling the dice hoping their documents will be accepted.  I was involved with residency cases for over 20 years for the NYS Tax Department.  I’ve seen diaries in a wide range of quality and accuracy.  I’ve seen this new product and was so impressed that I agreed to become a special advisor to the company.  If used properly it is 100% accurate and not subject to human error.  You don’t have to remember to make entries.  It does that automatically based on your location.  You will know exactly how many days you were present in New York or other taxing jurisdictions.  Based on my years of experience with NYS Audit Division I know the State will look at it with the proper amount of skepticism, but it will prove to be reliable.

If you’ve been involved in a State residency audit, you know that this could make your life a lot easier.  This will save you time, energy, and maybe a lot of tax money.  Stay Tuned.

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1 Matter of Avildsen, N.Y. Tax Appeals Tribunal (May 19, 1994) DTA No. 809722
2 Matter of Robertson, N.Y. Tax Appeals Tribunal (September 23, 2010) DTA No. 822004

3 Matter of Holt, N.Y. Tax Appeals Tribunal (July 17, 2008) DTA NO. 821018

4 Visit www.monaeo.com for more information.