United States: New York High Court Rules Use Of Actual Residence Critical To Residency Determination

In a case determining statutory residency for New York personal income tax purposes, the New York Court of Appeals held that to be classified as a resident, a person domiciled outside New York that frequently travels into New York must actually use a residence as a personal residence to be considered maintaining a permanent place of abode in the state.1

Background

The taxpayer challenging the New York residency determination was domiciled in New Jersey from 2001 to 2003, the tax years in question. He owned an automotive service and repair business in New York and commuted daily to work from New Jersey. The taxpayer purchased a multi-family apartment building near his business in New York in late 1999 as an investment property and as a place for his elderly parents to reside. The taxpayer claimed his parents as dependents for federal and state income tax purposes and maintained the utility bills for the apartment in his name. However, the taxpayer insisted that he did not live at the apartment during this time period, but only occasionally stayed at the apartment to attend to his parents' medical needs. He did not keep personal items there, have unfettered access to the apartment, or have a bed on which to sleep. The other units in the apartment were leased to tenants.

In late 2003, the taxpayer sold his New Jersey residence, stayed with a relative in New Jersey for several months, renovated a space in the New York property, and subsequently used the renovated space as his own residence beginning in 2004.

The taxpayer filed non-resident New York personal income tax returns from 2001 to 2003. The New York State Department of Taxation and Finance issued a Notice of Deficiency as a result of an audit determining that the taxpayer was a statutory resident of New York. A New York resident is statutorily defined to include any individual who is not domiciled in New York, but who maintains a permanent place of abode in New York and spends in the aggregate more than 183 days of the taxable year in New York.2

The taxpayer, while conceding that he spent more than the required 183 days in New York, sought a redetermination of the deficiency challenging the determination that he maintained a "permanent place of abode" required to be considered a New York resident. The Administrative Law Judge sustained the determination,3 after which the taxpayer filed an exception. The Tax Appeals Tribunal initially reversed the determination of the ALJ, based on the evidence that the taxpayer did not have living quarters at his parents' apartment, and thus did not maintain a permanent place of abode.4 However, upon reargument, the Tribunal, with one member dissenting, reversed its prior decision and affirmed the ALJ's determination.5 The Tribunal concluded that its initial decision was invalid, noting there is "no requirement that the petitioner actually dwell in the abode, but simply that he maintain it." The Tribunal decision was upheld by the Supreme Court Appellate Division, Third Department and was appealed by the taxpayer.6

Court of Appeals Decision

Focusing on the statute at issue,7 the Court noted that whether the taxpayer is a statutory resident depends on whether he maintained a permanent place of abode in New York. "Permanent place of abode" is defined by regulation as a dwelling place of a permanent nature maintained by the taxpayer and does not include a mere camp or cottage, which is suitable and used only for vacations. There is no requirement that the dwelling be owned by the taxpayer. Notably, the regulations also exclude from the definition barracks or any other construction which does not contain facilities ordinarily found in a dwelling, such as facilities for cooking or bathing.8

The Court considered the legislative history of the residency statute, which was examined in a previous case9 and noted its enactment to address the perceived issue of tax avoidance by individuals who actually maintained homes in New York and spent up to ten months a year living in the state, but claimed to be nonresidents for personal income tax purposes.

The Court concluded that the Tax Tribunal erred in its interpretation of the statute when it ruled that, to be a resident, a taxpayer need only maintain a permanent place of abode, but need not live there. The Court reversed the earlier decision, stating that in order for a taxpayer to have maintained a permanent place of abode in New York, the taxpayer must, himself, actually have a residential interest in the property. Finally, the Court instructed the Appellate Division to remand the case to the Tribunal for further proceedings and awarded legal costs to the taxpayer.

Commentary

The New York State courts and the Tax Appeals Tribunal have entertained a plethora of residency cases. High-income individuals that are frequently present in New York have much to gain in trying to prove that they either do not meet the 183-day test or do not reside in a permanent place of abode. A New York State residency classification results in taxation on all sources of income worldwide at a relatively high rate of state tax (which is an even higher rate if in New York City, which imposes a separate level of tax). In contrast, New York nonresidents are only subject to tax on income sourced to the state. The Department historically has been aggressive in searching out high-income nonresidents and challenging their residency status at audit.

The Court of Appeals' decision highlights the fact that certain taxpayers domiciled outside New York State who meet the 183-day test nevertheless may still be classified as nonresidents because of the lack of a permanent place of abode. The narrowing of the permanent place of abode test may be relevant for out-of-state residents that commute regularly to New York State, and own or lease property but for some reason do not actually live in the property. Similarly, foreign investors in New York City real estate, who may at times stay in the jurisdiction for work or personal reasons (but not at their investment property), can appreciate this narrowed residency test and its potentially positive impact. One can expect that the Department will continue to challenge out-of-state residents on this issue when the facts and circumstances show that a permanent place of abode may exist.

It is interesting that the Court awarded legal costs to the taxpayer, forcing New York State to bear this burden. The Court is not obligated to award costs if the Department was "substantially justified"10 in issuing its initial assessment and has not always done so. Though the New York residency requirements have been clarified, since the case will be remanded to the Tribunal for further proceedings, there may be further developments in this matter. As residency challenges become an issue11 for New York and other states with aging populations who are increasingly likely to spend time in multiple (and often tax-free) jurisdictions, taxpayers should be attentive to the courts' interpretation of who should be taxed as residents.

Footnotes

1 Gaied v. New York State Tax Appeals Tribunal, New York Court of Appeals, No. 26, Feb. 18, 2014.

2 N.Y. TAX LAW § 605(b)(1)(B).

3 Matter of John Gaied, Tax Appeals Tribunal, DTA No. 821727 (Aug. 6, 2009).

4 Matter of John Gaied, Tax Appeals Tribunal, DTA No. 821727 (Jul. 8, 2010).

5 Matter of John Gaied, Tax Appeals Tribunal, DTA No. 821727 (Jun. 16, 2011).

6 Gaied v. Tax Appeals Tribunal, App. Div. 3rd Dep't., 101 A.D. 3d 1492 (Dec. 27, 2012).

7 N.Y. TAX LAW § 605(b)(1)(B).

8 N.Y. COMP. CODES R. & REGS. tit. 20, § 105.20(e)(1).

9 Citing In Matter of Tamagni v. Tax Appeals Trib. of State of N.Y., 91 N.Y.2d 530 (1998).

10 N.Y. TAX LAW § 3030(C)(5)(B).

11 See GT SALT Alert: SALT Outlook, Trends and Predictions for 2014

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