Published in Anderson Kill & Olick, P.C. Estate Planning & Tax Advisor (Summer 2011)

Residents of Connecticut and New Jersey who work in the Big Apple are thinking twice about buying homes in the Hamptons this summer in light of a recent decision by the New York Tax Appeals Tribunal that all income earned by a New Canaan, Connecticut, couple was subject to New York State income tax because the husband worked in Manhattan and the couple owned a summer home in Long Island. For many, this is an unduly harsh consequence arising from ownership of a seldom-used vacation home, located hours away from the couple's domicile in Connecticut and the husband's place of employment in New York City.

While it has long been the law that owning or leasing a home or apartment in New York and spending more than 183 days within the state's borders can subject a person to residency taxation, there was perhaps a naïve expectation that the 183 days and the property had to be connected in some sense, such as working in Manhattan and keeping a pied-à-terre there. What is startling to many is the lack of connection between the job location, Manhattan, and the sporadically used summer home on Long Island over 100 miles away.

New York's Tax Law

Like many other states, New York taxes its residents on worldwide income, while nonresidents are taxed only on income attributable to New York sources (such as wages from a New York business). A determination of a taxpayer's residency is important because it determines whether a taxpayer is taxed as a resident on all income or as a nonresident taxed only on New York–source income. So, a Connecticut resident, working in New York, who is deemed a nonresident, does not pay New York tax on income from intangibles such as interest, dividends and capital gains.

Merely owning a second home in New York is not enough to cause a taxpayer to be treated as a resident for New York State income tax purposes. Property ownership must be coupled with physical presence in New York for 183 days or more during the year. If the individual has little other income besides New York–source income, the practical effect will be minimal, if at all, because the New York–source income is already subject to New York income tax.

According to the New York Tax Law, a resident individual is one "who is not domiciled in this state but maintains a permanent place of abode in this state and spends in the aggregate more than [183] days of the taxable year in this state." "Permanent place of abode" is defined as a "dwelling place permanently maintained by the taxpayer, whether or not owed by such taxpayer." "Permanently maintained" is defined as "doing whatever is necessary to continue one's living arrangements in a particular dwelling place," including making contributions to the household — monetarily or otherwise.

In The Matter of John J. and Laura Barker

For John and Laura Barker, their sole dispute with New York was whether their vacation home in Long Island constituted a "permanent place of abode." Since the couple rarely stayed at the house, they argued that it did not count as a New York State residence because state law says a "camp or cottage, which is suitable and used only for vacations" does not count as a permanent abode. The Tribunal disagreed, stating that because the home was suitable for year-round use, the Barkers could have used it for that purpose and thus it was a permanent place of abode. The house was concededly usable throughout the year, having the necessary amenities for all year living, including heat, electricity, hot water, telephone and cable TV service. The Barkers kept the services on throughout the year because Mrs. Barker's parents used the house on a more regular basis.

183 Days — Prove It!

The Tribunal's decision is a stark reminder of the ramifications of a nonresident owning or leasing a secondary home in New York, including a vacation home, unless the taxpayer is not present in the state for more than 183 days and can reasonably document such whereabouts if necessary (by means of diaries, credit card slips, E-ZPass statements, email and phone records, etc.). The burden of proof lies with the taxpayer to establish that he or she neither maintained a permanent place of abode in New York nor spent more than 183 days in the state during the tax year in dispute. Presence in New York for even a part of a day is counted as a whole day.

For more information about Anderson Kill's Estate Planning & Tax department, please visit www.andersonkill.com

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Anderson Kill practices law in the areas of Insurance Recovery, Anti-Counterfeiting, Antitrust, Bankruptcy, Commercial Litigation, Corporate & Securities, Employment & Labor Law, Health Reform, Intellectual Property, International Arbitration, Real Estate & Construction, Tax, and Trusts & Estates. Best-known for its work in insurance recovery, the firm represents policyholders only in insurance coverage disputes, with no ties to insurance companies and no conflicts of interest. Clients include Fortune 1000 companies, small and medium-sized businesses, governmental entities, and nonprofits as well as personal estates. Based in New York City, the firm also has offices in Newark, NJ, Philadelphia, PA, Stamford, CT, Ventura, CA and Washington, DC. For companies seeking to do business internationally, Anderson Kill, through its membership in Interleges, a consortium of similar law firms in some 20 countries, assures the same high quality of service throughout the world that it provides itself here in the United States.

Anderson Kill represents policyholders only in insurance coverage disputes, with no ties to insurance companies, no conflicts of interest, and no compromises in its devotion to policyholder interests alone.

The information appearing in this article does not constitute legal advice or opinion. Such advice and opinion are provided by the firm only upon engagement with respect to specific factual situations