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By Robert Plautz, Esq.

The rules of the New York State Division of Tax Appeals provide that affidavits from nonparties may be introduced and admitted into evidence to prove facts at issue in tax trials before the Division. A recent decision by the Division illustrates how affidavits from nonparties can mean the difference between success and failure to a taxpayer. In Matter of O'Connell (March 6, 1997), the New York State Tax Appeals Tribunal reversed an administrative law judge on the law but did not disturb the facts that the administrative law judge had found in favor of the taxpayer and which were proved, in part, by affidavits from nonparties.

In O'Connell, the factual issue before the administrative law judge (ALJ) was the amount of time that the taxpayer spent in and out of New York State. The legal issue was how much of the taxpayer's income could be allocated to New York. The taxpayer, who earned his income from commissions by selling municipal bonds, testified that approximately 50% of his business time was spent outside New York. The taxpayer testified that his work outside New York included visits to ten clients in New Jersey and Connecticut, which he visited at least once a week. The taxpayer was subject to cross-examination.

The taxpayer introduced affidavits from four of the ten clients located in New Jersey and Connecticut to corroborate his testimony. All four affidavits affirmed that the taxpayer visited the client on an average of at least once per week. The taxpayer did not introduce affidavits from the six other clients located in New Jersey and Connecticut.

The ALJ held that 50% of the income earned from the four clients in New Jersey and Connecticut, from whom the taxpayer obtained corroborating affidavits, could be allocated outside New York. However, as to the income earned from the six other clients in New Jersey and Connecticut from whom the taxpayer did not introduce affidavits, the ALJ held that all such income must be allocated to New York. The ALJ stated explicitly that, "Petitioner has provided credible testimony supported by affidavits that he spent considerable time with four New Jersey and Connecticut customers on a regular basis." Given the decision by the ALJ, the only conclusion that can be drawn is that the ALJ did not deem the taxpayer's testimony credible with respect to the six customers from whom the taxpayer did not introduce corroborating affidavits. The only difference in proof between what might be called the group of four and the group of six were the corroborating affidavits.

Undoubtedly, had the tribunal affirmed the ALJ on both the law and facts the taxpayer would have been kicking himself or worse for not spending more effort in obtaining six additional affidavits. There was over $500,000 involved in O'Connell. The extra time and money would have been well spent.

Admissible Affidavits Are Not Always Credible.

The rule of the Division of Tax Appeals that provides for the introduction of affidavits in its proceedings states in relevant part:

Affidavits as to relevant facts may be received, for whatever value they may have, in lieu of the oral testimony of the persons making such affidavits. [20 NYCRR section 3000.15(d)(1)].

The rule provides only that affidavits are admissible in a proceeding in the Division of Tax Appeals. The weight or credibility of the affidavits is another matter. Perhaps the best case to illustrate the difference between the admissibility and credibility of affidavits in the Division of Tax Appeals is Orvis Company, Inc. v. Tax Appeals Tribunal, et al., 86 NY 2d 165 (1995). The Court of Appeals held in Orvis that the rule permitting the introduction and admission into evidence of affidavits does not mean that the affidavits are to be necessarily deemed credible.

The factual issue in Orvis was the nature and amount of activity in New York State by Orvis, an out-of-state vendor. The legal issue was whether Orvis was required to collect and pay over sales and use taxes on sales made to New York customers. During the early stages of an audit, Orvis's treasurer, Thomas Vaccaro, wrote a letter to an auditor describing some of Orvis's activities in New York. Ten years later, the tax dispute still had not been resolved and a trial was held before an ALJ in the Division of Tax Appeals. At the trial, Orvis introduced two detailed affidavits from officers of Orvis describing Orvis's activities in New York State. One of the affidavits was from Vaccaro. The affidavits were admitted into evidence. The state introduced Vaccaro's letter as part of its case to prove that Orvis was a vendor within the meaning of the Tax Law. Orvis relied exclusively on the affidavits and did not introduce any other factual evidence to challenge the state's allegations concerning the nature and amount of activities in New York State.

The ALJ admitted the affidavits into evidence; he did not, however, give them any weight. The ALJ held that he could not evaluate the credibility of the affiants without cross-examination and found against the taxpayer for this and other reasons. The Tax Appeals Tribunal affirmed the determination of the ALJ. The tribunal held, in one of its more righteous moments, that Orvis "seeks to have unilateral power, through the use of the affidavits, to determine the facts. This result is untenable because it would absolutely negate the role of the adversary and fact finder in this proceeding." In addition, the tribunal specifically stated that the Vaccaro letter "contradicts" the affidavits.

On appeal to the Appellate Division, however, the court reversed and had a different view of the affidavits and the Vaccaro letter. The court held that there was "no rational basis for [the tribunal's] decision to accept Vaccaro's unsworn letter [for purposes of establishing that Orvis was a vendor but] disregard his sworn affidavit which merely expands on and does not contravene the information contained in his letter." The court further held that "it was arbitrary and capricious to penalize [Orvis] for using affidavits in lieu of oral testimony when the department's regulations authorize such procedure."

There was a further appeal of Orvis to the New York Court of Appeals. The Court of Appeals reversed the Appellate Division. The court did not get involved in the issue of whether Vaccaro's letter contradicted the affidavits. Rather, in so many words, it held that if the tribunal said the letter contradicted the affidavit, it does. The Court of Appeals held that although there is a regulation that authorized the submission of affidavits in lieu of oral testimony it "did not . . . prevent the tribunal from rejecting the credibility of the affidavits . . . . The fact is, on the crucial issue in this litigation, Orvis declined to expose its witnesses to cross-examination by producing them at the hearing before the State Tax Appeals Tribunal."

As the O'Connell and Orvis decisions show, the issue as to the usefulness of affidavits goes beyond the introduction of affidavits. Rather, the issues are whether the affidavits are being introduced to prove the ultimate factual issues, as in both O'Connell and Orvis, and, if they are, is there some corroboration that is subject to cross-examination, such as there was in O'Connell but not in Orvis. Also to be considered is whether the affidavits are from non parties who are ostensibly neutral. The affidavits in O'Connell were from the taxpayer's clients. The affidavits in Orvis were from corporate officers employed by the taxpayer.

The Use of Affidavits in
Residency Cases

Perhaps the most significant use of affidavits in litigation before the Division of Tax Appeals has been in cases involving residency issues, including both the domicile issue and the statutory residence or 183-day issue. Analyzing these cases with respect to the submission of affidavits is especially useful because disputes over domicile under Tax Law section 605(b)(1)(A) are largely decided on evidence of the taxpayer's intent, i.e., where the taxpayer intends to indefinitely return and call home. Such evidence of intent does not ordinarily lend itself to an affidavit. The party opposing the affidavit will usually charge that the affidavit is self-serving as to intent. The more black and white issue of statutory residence under Tax Law section 605(b)(1)(B) usually deals with specific days-in and days-out of New York, along with "permanent place of abode," and does seemingly lend itself to proof via affidavit. But as at least one case shows, proof of statutory residence via affidavits can also be problematic.

In Matter of Erdman, Tax Appeals Tribunal, April 6, 1995, the issue was, at least initially, solely domicile. (The state conceded the statutory residency issue.) On the eve of trial, an allocation issue was also raised by the state. The taxpayers, a husband and wife, relied exclusively on affidavits to prove their case. In their affidavits, both the husband and wife claimed that they could not testify because of ill health and doctors' advice. Only the husband supplied supporting medical documentation.

The affidavits in Erdman were extremely detailed. The affidavits alleged the taxpayers' activities in New York and elsewhere including their history, property ownership interest, business activities, social activities and family ties. In addition, the affidavits alleged the usual factors proving domicile (e.g., where the taxpayers voted, and held drivers' licenses). The ALJ found against the taxpayers.

The taxpayers appealed to the tribunal, which held that the taxpayers had separate domiciles, the wife in Florida and the husband in New York. As to the allocation issue, given that the husband was found to be a resident of New York and that therefore all of his income was subject to New York taxes, his dispute over allocation was moot. As to the wife, however, because she was not found to be a New York resident, she was permitted to allocate her income according to source. Unfortunately, she did not deal with this issue in her affidavit. The tribunal held that in the absences of evidence on the issue, all of her income was deemed attributable to New York sources. Negligence penalties were also assessed in Erdman and the tribunal affirmed those penalties because "the Erdmans have provided no substantive basis for abatement of the negligence penalty." The Erdmans did not deal with the penalty issue in their affidavits.

In their appeal to the tribunal, the Erdmans argued that they wanted a remand of the case to the ALJ in order to give oral testimony. They argued that they were too ill to testify and ". . . felt they were being penalized by the submission of affidavits in lieu of personally appearing." The tribunal dismissed the argument. The tribunal held that the ALJ properly weighed the affidavits in light of all the other evidence and found, at least with respect to Mr. Erdman, that the affidavits "creat[ed] more questions than they resolved." The tribunal further stated
that "petitioners' use of affidavits
does not prompt the outcome of this matter." Rather, the taxpayers lose because "of the lack of a fully developed record clarifying Mr. Erdman's ties with the State of New York and the fact that some evidence was submitted which contradicts petitioners' position." The Erdmans also claimed surprise with respect to the allocation issue raised on the eve of trial. The tribunal dismissed this argument as well, stating that petitioners' representative had neither asked for an adjournment nor leave to file further submissions (i.e., affidavits) before the ALJ.

What is important about Erdman is that the wife did win on the domicile issue and her proof was offered exclusively by affidavit. What is also important about Erdman is that if a case is tried on the basis of affidavits, the affidavits had better be thorough and cover all issues. The taxpayer might not get a second chance.

In Matter of Armel, Tax Appeals Tribunal, August 17, 1995, the taxpayers were also husband and wife, and the issue was also residency, both domicile and statutory residence. At trial, only the husband testified. He testified that he was aware of the 183 day rule and that they were in New York "only from May 15 to October 15, 1988." In addition, the petitioners submitted four documents signed by at least ten people from New York and Florida that alleged petitioners' pattern of life of spending mid-October to mid-May in Florida. One of the documents was in affidavit form and signed by two neighbors of petitioners in New York. Three were letters from other neighbors and friends in New York. One was an unsworn statement signed by six members of a poker club in Florida in which Mr. Armel was a member.

The ALJ found Mr. Armel's testimony credible with respect to the domicile issue and held that both taxpayers were not New York domiciliaries. Apparently, the state did not appeal the ALJ's decision on the domicile issue. However, the ALJ did find the taxpayers to be New York statutory residents for 1988 notwithstanding Mr. Armel's testimony. The ALJ explicitly stated that he gave the affidavits and letters from neighbors and friends "little weight."

The taxpayers appealed the ALJ's decision regarding statutory residency to the Tax Appeals Tribunal. The tribunal had held in an earlier case, Matter of Avildsen, May 19, 1994, that credible oral testimony is sufficient to prove time spent in and out of New York. The tribunal held in Armel that they could find no basis in the ALJ finding Mr. Armel's testimony credible for purposes of proving a change of domicile but not credible for purposes of proving that he was not present in New York for more than 183 days. The tribunal reversed the ALJ and found the Armels not to be statutory residents of New York for 1988. However, in doing so, the tribunal did not rely entirely on Mr. Armel's testimony. The tribunal also found that Mr. Armel's testimony was corroborated by the four signed documents from neighbors and friends. The same documents that the administrative law judge had given little weight, the tribunal gave great weight.

It could be argued that Armel was decided solely on the language in Avildsen that seemingly holds that oral testimony standing alone is sufficient if deemed credible. But that is a stretch. In Avildsen, there was also live oral testimony from a nonparty that was subject to cross-examination that corroborated Avildsen's oral testimony. In addition, in Avildsen, there was some documentary proof, albeit weak, as to Avildsen's days in and days out of New York. This type of proof was missing in Armel. In Armel, the month of December 1988 was specifically in dispute and there was no documentary material for the month of December 1988. Nor was there a live witness in Armel to give oral testimony to corroborate Mr. Armel. Because of this lack of proof in Armel, it is not unreasonable to say that the four documents submitted by Mr. Armel made the difference between winning and losing. For example, in a later decision from the tribunal (Matter of Kern, Tax Appeals Tribunal, November 9, 1995), the tribunal described Armel as being decided on the basis of Mr. Armel's "credible testimony and corroborating affidavits."

What is also instructive about Armel is that not all of the corroborating written proof need be in the strict form of an affidavit. Letter form may be permitted. But this should be regarded only as an accommodation to otherwise trustworthy writings and exercised with some thought on the part of the taxpayer. Introducing some writings that are notarized and others that are
not may raise
the question of whether the witness in the unsworn writing is as credible as the affiant in the notarized affidavit. There have been explicit statements from the Division of Tax Appeals that an unsworn writing cannot be given any weight. Matter of Burns, Tax Appeals Tribunal, April 28, 1994. Also, in one case the petitioners introduced four unsworn letters, from clergymen no less. The letters described the petitioners' past statements concerning petitioners' intent to move and change their domicile. The ALJ kindly said that the letters "do not sufficiently address the issue of domicile." The taxpayers lost. Matter of Lohse, Administrative Law Judge, April 6, 1995.

Other Cases in Which Affidavits
Can Be Used

Cases before the Division of Tax Appeals that deal with the nature and amount of time spent in New York such as residency, nexus, or allocation are not the only cases where affidavits from non-parties can be critical. An affidavit and a letter won a case for a corporate officer who had been personally assessed a 100% penalty for the corporation's failure to pay over employee withholding taxes under Tax Law section 685(g). In Matter of Schermerhorn, Administrative Law Judge, February 10, 1994, the petitioner, Schermerhorn, was the treasurer and executive vice-president of a small closely held corporation. The corporation eventually went bankrupt. Among other duties, Schermerhorn was the bookkeeper and responsible for the review of employee withholding tax returns. Schermerhorn signed the returns and checks accompanying the returns. He testified that he knew, at least from time to time, that employee withholding taxes were not always being paid or, if paid, the checks were bouncing.

In most cases, this evidence of Schermerhorn's duties and knowledge would have been enough under Tax Law section 685(g) to impose liability on the petitioner for the corporation's failure to pay over employee withholding taxes. However, Schermerhorn submitted a letter and an affidavit from the corporation's sole shareholder, Foster, who was also a director and officer of the corporation. Foster stated in his letter and affidavit that, among other things, he was the person who had "ultimate authority over the corporation" and that he "always made the final decisions and determinations with regard to which creditors were to be paid and the order of their repayment." Further, Foster stated:

My wife and I became ill during this time and Earl Schermerhorn was given signatory privileges during this time only upon my prior direction and approval.

. . . Earl Schermerhorn was the treasurer and vice president of the company. In this position, he had absolutely no power and could do nothing without my prior consent. He had absolutely no authority to operate on his own whatsoever.

Mr. Schermerhorn had absolutely no authority over the financial, operational and managerial functions of this corporation and was not responsible for the corporation's failure to pay withholding taxes.

Based on Foster's affidavit, the ALJ held that Schermerhorn was not a responsible officer of the corporation within the meaning of Tax Law section 685(g). This decision merits some analysis, however. First, there is case law to the effect that notwithstanding the facts alleged in the affidavit, Schermerhorn is still on the hook for withholding taxes. The theory is that Schermerhorn had a choice, either pay the taxes or refuse to go along with Foster's decisions and resign. See, Hochstein v. United States, 900 F.2d 543, 549 (2nd Cir. 1990), Matter of Ross, Administrative Law Judge, August 3, 1995, Matter of Kotis, Administrative Law Judge, August 4, 1994. The state did not appeal the ALJ's decision.

Second, it appears from the opinion that both Schermerhorn and Foster were up in years and in financial straights if not judgment proof. Since someone is always liable for the taxes in responsible officer cases, and Foster, as sole shareholder, a director and an officer, was obviously on the hook even without his admissions, the ALJ might have concluded that there was no need to spread around the wreckage left from the bankrupt corporation. The affidavit was an easy out. Indeed, Foster, by being liable for the taxes anyway, was not exactly a "non-party" or disinterested witness in the classic sense. Whether such an affidavit would be equally successful in other responsible officer cases with different facts is unknown. Also, whether the affidavit would have been enough to absolve Schermerhorn from responsible officer status for failure to pay over sales taxes under Tax Law sections 1131 and 1133 which, unlike Tax Law section 685(g), does not require an element of willfulness, was not at issue in the case. In any event, Schermerhorn and the use of affidavits is something to remember when representing someone in the Division of Tax Appeals who is charged with being a responsible officer under
either Tax Law sections 685(g) or
1131 and 1133.

Caveat: Affidavits Can Also Be Used Against Taxpayers

The rule concerning admissibility of affidavits in the Division of Tax Appeals is a two-way street. In Matter of Midon, Administrative Law Judge, June 13, 1991, the state attempted to prove a fraud penalty through affidavits. This case is noteworthy because the state has the burden of proving fraud by clear and convincing evidence. The affidavits were from the supplier of the taxpayer and introduced to prove that there were missing or altered documents produced by the taxpayer on audit. Over objection by the taxpayer, the ALJ admitted and weighed the affidavits. The ALJ held that there were numerous deficiencies in the affidavits and did not sustain a fraud penalty. (A negligence penalty was sustained, but apparently not based on information in the affidavits.) The point is, the state could introduce affidavits in an attempt to prove issues that it has the burden of proving. A taxpayer should therefore never lie back and think that the state will fail its burden by being unable to produce nonparty witnesses. Indeed, this should cause taxpayer to consider ways to counter the state's proof such as obtaining counter
affidavits if the taxpayer can not produce live witnesses.

Related to this point is that the state, in order to dispense with calling in person an auditor or other person from the Tax Department, frequently uses affidavits from auditors concerning the audit methodology or the department's record keeping practices. The taxpayer can object, but the affidavits will be admitted and usually given full weight. This should be anticipated by the taxpayer and evaluated as part of the taxpayer's trial strategy. If it is determined that the auditor will be helpful to the taxpayer but will not be called as a witness by the state, the taxpayer must subpoena the auditor for trial. Ordinary courtesy should not be expected from opposing counsel as in a regular court that a witness under the control of the opposing party will be produced upon request. If the auditor fails to appear after being served with a subpoena, the tribunal will draw the "strongest possible negative inferences" from the failure to appear (Matter of Donahue, Tax Appeals Tribunal, December 8, 1994). It is unknown whether the tribunal would draw a similar inference if there was only an understanding between the parties that the witness would appear.

Sometimes Yes, Sometimes No

As shown from the ALJs' decisions in O'Connell and Schermerhorn, and the tribunal's decision in Armel, along with a portion of the tribunal's decision in Erdman, credible affidavits can sometimes make the difference between winning or losing in litigation before the New York State Division of Tax Appeals. But as shown in Orvis and other parts of the Erdman decision, affidavits are not always enough. Successful use of affidavits depends on such things as whether the facts alleged in the affidavits go to proving the ultimate issue in the case (such as a taxpayer's lifestyle or "pattern of life" traveling in and out of New York) or only one discreet fact (such as where the taxpayer votes). Also to be considered is the relationship between the taxpayer and the affiant. An affidavit from a neighbor of the taxpayer alleging that the taxpayer is never in his or her New York residence from October 15th to May 15th might be weighed differently than an affidavit from a business competitor of the taxpayer who alleges that the taxpayer never attends trade association meetings in New York in the winter. These and other types of questions going to the credibility of affidavits must be considered by the practitioner in determining whether affidavits can be useful in litigation before the New York State Division of Tax Appeals.

Robert Plautz is an attorney specializing in tax litigation. He is a former assistant counsel to the New York State Department of Taxation and Finance and frequently appears before the New York State Division of Tax Appeals.

State and Local Editor:
Marshall L. Fineman, CPA
David Berdon & Co. LLP

Interstate Editor:
Stuart A. Rosenblatt, CPA
Wiss & Company LLP

Contributing Editors:

Henry Goldwasser, CPA
M. R. Weiser & Co LLP

Leonard DiMeglio, CPA
Coopers & Lybrand L.L.P.

Steven M. Kaplan, CPA
Konigsberg Wolf & Co., PC

John J. Fielding, CPA
Price Waterhouse LLP

Warren Weinstock, CPA
Paneth Haber & Zimmerman LLP

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