COHEN, INEMER & BOROFSKY - DECISION - 10/19/94 In the Matter of COHEN, INEMER & BOROFSKY TAT (E) 93-151 (UB) - DECISION NEW YORK CITY TAX APPEALS TRIBUNAL APPEALS DIVISION UNINCORPORATED BUSINESS TAX - PETITIONER DID NOT MEET ITS BURDEN OF PROOF TO ESTABLISH THAT IT HAD A REGULAR PLACE OF BUSINESS AT AN OFFICE IN THE HOME OF A GENERAL PARTNER, FOR PURPOSES OF ALLOCATING INCOME OUTSIDE NEW YORK CITY, BECAUSE THE EVIDENCE SUBMITTED WAS INCONCLUSIVE AND THE TESTIMONY OFFERED DID NOT PROVIDE SUFFICIENT DETAIL TO FILL IN THE GAPS. OCTOBER 19, 1994
New York City Tax Appeals Tribunal -----------------------------------x : In the Matter of : : DECISION COHEN, INEMER & BOROFSKY, : : TAT (E) 93-151 (UB) Petitioner. : : -----------------------------------x The Commissioner of Finance of the City of New York ("Commissioner"), filed an exception to the Determination of the Administrative Law Judge ("ALJ") issued on August 31, 1993. The Determination canceled a portion of an unincorporated business tax ("UBT") deficiency for the tax year 1989. The Commissioner appeared by Frances J. Henn, Esq., Assistant Corporation Counsel, New York City Law Department. Cohen, Inemer & Borofsky ("Petitioner") appeared by one of its partners, Gerald B. Cohen, CPA. Oral argument was granted by the Tribunal and both parties filed briefs. Petitioner is an accounting partnership consisting of three partners. During the tax year at issue Petitioner maintained an office in New York City (the "City") located at 570 Seventh
Avenue. 1 Petitioner allocated 14.8717% of the excess of its unincorporated business gross income over its unincorporated business deductions ("income") outside the City (using the threefactor formula) on its 1989 UBT return, based on its claim that it maintained a regular place of business at 86 Valley Road, New Rochelle, New York in the home of one of its partners Gerald B. Cohen, CPA. On January 16, 1992 the New York City Department of Finance (the "Department") issued a Notice of Determination to Petitioner and its partners, Gerald B. Cohen, Ira H. Inemer, and Jeffrey Borofsky which asserted the following UBT deficiency: Tax Period Principal Interest 2 Total 01/01/89-12/31/89 $1,731.72 $288.26 $2,019.98 3 The deficiency resulted from the Department's disallowance of Petitioner's allocation of a portion of its income outside the City on the ground that the office in Mr. Cohen's home did not qualify as Petitioner's regular place of business within the meaning of 11-508(a) of the New York City Administrative Code (the "Code") 1 In this decision, the ALJ findings of fact have been paraphrased and/or amplified where necessary. Any finding of fact expressly rejected has been so noted. 2 Interest computed to 9/15/91. 3 Petitioner made a payment of $2,031.72 on March 17, 1992 on account of this disputed UBT deficiency to stop the running of interest. -2-
and (former) 7-2 of the New York City Unincorporated Business Tax Regulations, (currently 19 RCNY 28-07). Petitioner filed a petition for hearing. The hearing was held on January 19, 1993. Petitioner was represented by Gerald B. Cohen, C.P.A. who also testified on its behalf. Mr. Cohen testified that in addition to Petitioner's City office, there was an office in his home in New Rochelle for the primary purpose of meeting with certain of Petitioner's clients who were primarily located in Westchester and Suffolk counties and who did not want to come into the City. Mr. Cohen further testified (a) that he also used such office during tax season on Saturdays and (b) that on days when he visited clients north of the City he would return to his house to work in that office instead of returning to Petitioner's City office. 4 The office was a separate room in Mr. Cohen's house that in 1989 was used only as an office. 5 Mr. Cohen was the only member of Petitioner to use the said office although he testified that on occasion Mr. Borofsky visited him at his "home office." (Transcript p. 52). All secretarial services were performed in the City. 4 The ALJ stated as part of Finding of Fact No. 4 that "Mr. Cohen used the New Rochelle Office to meet with [P]etitioner's clients who did not want to come into the City, especially clients located in Westchester and Suffolk counties." However, Mr. Cohen also testified to the two other uses of said office noted above. 5 The ALJ stated in Finding of Fact No. 5 that "[t]he New Rochelle office,..., was used exclusively for the business of the [P]etitioner." See infra p. 12 where this Finding of Fact is rejected. -3-
The office in Mr. Cohen's home had a separate entrance, although, he testified, most clients used the front door of his house to reach the office. The office was furnished with a desk, a file cabinet, two chairs, a small easy chair, a small table and a small couch. In addition, there was the following equipment: adding machines, a typewriter, a computer, a telephone and some tax services. The furniture and equipment were the property of Mr. Cohen, rather than Petitioner. Petitioner did not have a telephone listing for the office in Mr. Cohen's home in any telephone directory and Petitioner did not list the New Rochelle location on the firm's stationery. No business cards listing the office in Mr. Cohen's home were offered into evidence and there was no sign at Mr. Cohen's home indicating that Petitioner had an office there. There was no written lease between Mr. Cohen and Petitioner for Petitioner's use of the office. Furthermore, although Mr. Cohen testified that Petitioner paid him rent for that office, Petitioner did not substantiate that rent was paid to Mr. Cohen, in cash or other compensation, for the use of the office. However, Petitioner took a deduction on its federal return for $2,400 in rent for the office in Mr. Cohen's home. 6 Mr. Cohen testified that 6 However, Petitioner on its UBT return for 1989, answered "No" in response to the following questions: "1. Is any place of business listed above located in a partner's home? -4-
he did not report such rental income on his individual tax return and did not claim any of the expenses related to the cost of the office in his home. A copy of Mr. Cohen's 1989 business diary (the "diary"), indicating the days or parts thereof that he spent in the office in his home was submitted into evidence. During 1989 the diary was kept at Petitioner's office in the City. The diary, which was used for billing purposes, contained the names of clients on whose matters Mr. Cohen worked on a given day. Mr. Cohen testified that he marked certain dates in his diary with an "H" if, on such day or part thereof, he worked at the office in his home. He testified that he did not always indicate in the diary whether the client was present in the office in his home on a certain day. 7 He also testified that, if he visited a client outside the City and later came back to his home rather than commuting to the City for a portion of the day, he would put an "H" in the diary for that date. Mr. Cohen testified that the diary did not indicate how many hours he worked in the office in his home on any given day. 8 (Transcript 2. Did you claim a deduction for expenses of an office in a partner's home?" (City's Exhibit B-2, p. 89-9). 7 A review of the diary shows no notation of whether a client was present on any given day. 8 However, during cross-examination, Mr. Cohen stated that he usually did record the number of hours he was at the office in his home on any given day. (Transcript pp. 62-63). While there are diary entries indicating the number of hours spent on various client matters, it is unclear from many of the entries whether the -5-
p. 34). Additionally, Petitioner introduced four unnotarized letters from clients stating that they met Mr. Cohen at the office in his home during 1989. 9 The ALJ found that Mr. Cohen's diary for 1989 and the letters from clients indicated that Mr. Cohen met with clients at the office in his home on at least 30 days during 1989. The ALJ concluded that Petitioner established that it maintained a regular place of business at the office in Mr. Cohen's home because the office was exclusively available for use by Petitioner all year and the use of said office by Mr. Cohen to meet with Petitioner's clients on at least 30 days during the year clearly manifested regular and systematic use of such office. The ALJ also concluded that Petitioner's failure to list the New Rochelle location on its letterhead or in the local telephone directory was not fatal because Petitioner amply demonstrated actual use of the office on a regular and systematic basis. Accordingly, the ALJ determined that Petitioner had a regular place of business outside the City which entitled it to allocate its income within and without the hours were spent at the home office or elsewhere. 9 The ALJ stated in Finding of Fact No. 6 that "[a]s indicated by Mr. Cohen's business diary for the tax year at issue, and several letters from [P]etitioner's clients, Mr. Cohen met with [P]etitioner's clients at the New Rochelle Office on at least 30 different days during that year." See discussion infra pp. 10-12 where Finding of Fact No. 6 is rejected. -6-
City. 10 The Commissioner contends that the ALJ's Determination should be reversed by this Tribunal because neither the testimony nor the exhibits in the record support the ALJ's conclusion that "the use of that office to meet with [P]etitioner's clients on at least 30 days during the year clearly manifests a regular and systematic use of said premises." (Conclusion of Law E). The Commissioner argues that the notations in the diary are inconclusive because Mr. Cohen testified that on any given date the notation of "H" could indicate that (a) he met with a client at the office in his home or that (b) he worked there on a client file or that (c) he returned to the office in his home after visiting a client's place of business. The Commissioner also contends that the ALJ's Determination disregarded those factors repeatedly articulated by appellate courts 11 in decisions pertaining to a regular place of business. 10 The ALJ also concluded that since Petitioner did not own any of the equipment or furniture in the office in Mr. Cohen's home and failed to establish that it paid rent to Mr. Cohen for the use of said office, Petitioner's business allocation percentage should be recomputed using a property factor of 100%. Additionally, the ALJ concluded that the Department properly disallowed Petitioner's rent expense deduction because Petitioner was unable to substantiate the deduction. Petitioner did not file an exception to these two conclusions of law. Therefore, these two issues have not been addressed in this decision. 11 The factors referred to by the Commissioner include a letterhead listing the location, a telephone listing for the location, ownership of furniture or equipment at the location, the payment of rent and the presence of full-time employees. The Commissioner relies on several New York State Franchise Tax, New York State UBT and City UBT regular place of business cases in which appellate courts supported the agencies' finding that no regular place of business outside the State/City existed. The most -7-
In response, Petitioner contends that the ALJ's Determination is supported by Mr. Cohen's testimony, the diary and the letters from clients. The Petitioner argues that, since the ALJ was in the best position to evaluate and weigh first-hand the credibility of Mr. Cohen, the ALJ's Determination should be affirmed. For the reasons set forth below, we reverse the ALJ's Determination to the extent indicated. Section 11-508(a) of the Code provides that: If an unincorporated business is carried on both within and without the city, as determined under the regulations of the commissioner of finance, there shall be allocated to the city a fair and equitable portion of the excess of its unincorporated business gross income over its unincorporated business deductions. If the unincorporated business has no regular place of business outside the city, all of such excess shall be allocated to the city. relevant of these is Kramer, Rosen & Company v. Carol O'Cleireacain 191 A.D. 2d 231 (1st Dept. 1993) In Kramer, the First Department held that the "failure to provide documentation such as a business sign or shingle outside the alleged offices, bills for the telephone, utilities, or real estate taxes, insurance policies in [taxpayer's] name, rental agreements or other business expenses, business correspondence addressed to [taxpayer] at the out-of-city locations, and business cards listing these offices, supports the determination...that its three "offices", located outside the City of New York and in the homes of partners of the [taxpayer] do not constitute regular places of business..." Note, however, the instant decision is based on the insufficiency of the record below rather than on a weighing of the indicia cited in Kramer. -8-
follows: Title 19 RCNY 28-07(a) provides, in pertinent part, as If an unincorporated business is carried on both within and without New York City, there shall be allocated to the City a fair and equitable portion of the excess of its unincorporated business gross income... over its unincorporated business deductions subject to allocation... If the unincorporated business has no regular place of business outside the City, all such excess shall be allocated to the City. Title 19 RCNY 28-07(b) provides, in part, that: (1) A regular place of business is any bona fide office, factory, warehouse or other place which is systematically and regularly used by the unincorporated business entity in carrying on its business. (2) If the unincorporated business entity has no regular place of business outside New York City, all of the excess of its unincorporated business gross income over its allocable unincorporated business deductions shall be allocated to the City. An unincorporated business entity does not have a regular place of business outside the City merely because sales may be made to, or services performed for or on behalf of, persons or corporations located without the City, or because such sales or services are made by or performed by an independent factor, agent or contractor having a regular place of business without New York City. Example 1: An accountant whose only office is in New York City cannot a llocate his income fo r unincorporated business tax purposes because some of his services are performed at his clients' places of business outside the City. Similarly, the accountant's residence outside the City will not -9-
be considered a regular place of business for allocation purposes, even though the accountant has for his own convenience set aside some space in his home to maintain business records, prepare reports or perform incidental business activities. (3) The foregoing provisions of this subdivision (b) are not exclusive in determining whether an unincorporated business has a regular place of business outside New York City or in determining whether the business is carried on both within and without New York City. Where any question on these points exists, consideration should be given to all of the facts pertaining to the conduct and operation of the business including (i) the nature of the business, (ii) the type and location of each place of business used in the activity, (iii) the nature of the activity engaged in at each place of business, and (iv) the regularity, continuity and permanency of the activity at each location. Section 11-529(e) provides that: In any case before the tax appeals tribunal under this chapter, the burden of proof shall be upon the petitioner except for the following issues, as to which the burden shall be upon the commissioner of finance... A review of the diary, the letters and Mr. Cohen's testimony reveals that Petitioner has not met its burden of proof to establish that it had a regular place of business in Mr. Cohen's home. Although the diary appears to indicate that Mr. Cohen was at the office in his home, for at least part of the day, on approximately 30 different days (plus 10 Saturdays) during 1989, it does not show that he met clients there on those days. In fact, -10-
there is no indication in the diary as to whether any of the clients was actually present in the office on the day that Mr. Cohen worked on its account. Nor did Mr. Cohen ever testify that he met with clients in the office in his home on 30 separate occasions. At the most, Mr. Cohen testified that "[clients] met with me during 1989 in my home office." (Transcript p. 27) Moreover, the letters merely state that the clients met with Mr. Cohen at the office in his home and furnish neither the dates of such meetings nor their frequency. Furthermore, the letters were not notarized and since the clients in question did not appear at the hearing they were, therefore, not available for crossexamination. Finally, although Mr. Cohen appeared as a witness, he did not testify as to the frequency of client visits or otherwise offer testimony to provide the data missing from the diary entries and unsworn client letters. At most, the record in this case only establishes that Mr. Cohen worked at an office he set up in his home on all or a portion of approximately 30 days (plus 10 Saturdays) in 1989. Many employees or partners, however, take work home and may even set up a separate room in their home which they designate as their office. The existence of an office in the home of an employee or partner who occasionally does taxpayer's work there does not transform a "home office" into a regular place of business for the taxpayer. This is not to say that a taxpayer can never establish that it has a regular place of business outside the City at an office in the -11-
home of an employee or a partner. However, it is clear that a taxpayer must show more than that there was a separate room in a home which was furnished as an office and at which the employee or partner occasionally performed work for the taxpayer. Significantly, a taxpayer claiming a regular place of business at such location must maintain records clearly documenting which of its activities took place at that office. That is not what happened here. 12 The ALJ determined that Petitioner regularly and systematically used the office in Mr. Cohen's home based on his finding of fact that the office was used to meet with clients at least 30 days during the year. Since we have concluded that such a finding is not supported by the record, we expressly reject: (a) Finding of Fact No. 6 13 and; (b) the ALJ's determination that Petitioner's use of Mr. Cohen's home office was systematic and regular. For all of the reasons given hereinabove, we further reject the ALJ's Finding of Fact No. 5 to the extent that it stated 12 Mr. Cohen testified at the hearing that with regard to calculating Petitioner's business allocation percentage "[i]t would be too difficult to keep these accurate records. It just doesn't pay to keep the records as accurately as may be required by this Tribunal." See Transcript p. 40. 13 As indicated, Mr. Cohen's testimony alone is not sufficient to support such a finding. Since we have found that Mr. Cohen's diary and the client letters do not indicate that Mr. Cohen met with clients at the office in his home on at least 30 different days during 1989 and that Petitioner has not otherwise shown that the office in Mr. Cohen's home was its regular place of business, it is not necessary for us to address the issue of whether the facts as found below, if accepted, would constitute systematic and regular use of an out-of-city location. -12-
that the office in Mr. Cohen's home was "used exclusively for the business of the [P]etitioner." We cannot accept Petitioner's argument that the ALJ's Determination should be affirmed because the ALJ was in the best position to determine Mr. Cohen's credibility as a witness. It is true that the ALJ who hears the witness testify is normally in the best position to judge his credibility. However, the flawed finding here relied not on the testimony of Mr. Cohen, but on a misreading of the significance of written exhibits which the ALJ specifically cited in support of his result. Where the evidence submitted (the diary and the letters) is inconclusive and the testimony offered does not provide sufficient detail to fill in the gaps, such testimony cannot support the instant finding, even if it is credible. In sum, Petitioner has failed to sustain its burden of establishing that the office in Mr. Cohen's home was its regular place of business. 14 14 While we reject the ALJ's Conclusions of Law E and F, we do not reject the ALJ's general statement that a taxpayer's failure to list a location on its letterhead or in a local telephone directory need not be fatal in a case where a taxpayer can otherwise demonstrate systematic and regular use of an out-of-city location in carrying on its business. However, as discussed above, that is not what happened here. -13-
Accordingly, we reverse the ALJ's Determination to the extent that he concluded that Petitioner had a regular place of business outside the City and was, therefore, entitled to allocate its income within and without the City. Dated: October 19, 1994 New York, New York JOHN TRUBIN Commissioner MARK FRIEDLANDER Commissioner and President SUSAN GROSSMAN Commissioner -14-