Archive for the ‘Connecticut’ Category

Timing of Move to NY Proves Costly for CT Homeowner

May 11th, 2012 No comments

Suppose you land a new job in New York City. At the time, you live in Connecticut and don’t want to make the commute, so you put the home on the market. You find a willing buyer, and then attend the closing and sign all papers you believe are necessary for the closing.

Four days later, you close on the purchase of a condo in New York City and move into it immediately. You start your new job the next day.

Later that same month, your attorney handling the sale of the CT home obtains a check from the purchaser for the balance due on the sale.

The question: Is the gain on the sale of the CT home subject to NYS and NYC income tax?

For taxpayer Glenna Michaels, the answer is yes, according to a recent decision by the NYS Division of Tax Appeals. As a result, she owes NYS $811,735 in tax, plus $144,343.54 in interest, which continues to accrue.

The home in question sat at 245 Byram Shore Road in Greenwich, Connecticut. The buyer was Bonnie Tisch, who is the daugther-in-law of billionaire Wilma Tisch.

The issue in the case was the timing of the accrual of the taxpayer’s $11.6 million gain on the sale of her CT home. If the accrual occurred before she moved to NYS and established residency there, then CT would be the only state to tax the income. If, however, the accrual took place after the move to NYC, then NYS and NYC would also have the right to tax the income.

The outcome is significant. In 2004, the year of sale, the highest NYS & NYC combined individual income tax rate was 12.15%, and the highest CT income tax rate was 5%.

NY Tax Law says when an individual changes resident status during a taxable year, apply the Internal Revenue Code to determine the accrual of a capital gain. Under the IRC, a closed and completed sale triggers accrual of income. Transfer of ownership is completed upon title passage or passage of benefits and burdens of ownership. Passage of such items are determined by state law, so we go back to NY law, which says a grant of real property takes place only from delivery of a valid deed by grantor to grantee.

So why did the taxpayer lose? I haven’t yet mentioned section 10 of the sales contract, entitled “RISK OF LOSS”:

[P]etitioner assumed “[t]he risk of loss by fire of other casualty to the buildings on said premises until the time of the delivery of the deed.” In the event that such fire or casualty occurred, petitioner would have been provided 30 days to “repair or replace such loss or damage” or, in the event that petitioner failed to do so, the purchaser would be given the option of terminating the agreement or accepting the deed upon payment of the purchase price and receiving the benefit of all insurance moneys recovered, less actual expenditures on repairs.

Petitioner is the taxpayer. The taxpayer retained the risk of loss until transfer of title took place. Only until after the delivery of the deed would the risk of loss shift over to the purchaser, at which point there would be a completed transaction for tax purposes.

But the taxpayer executed the deed before buying and moving into her new NYC condo. Doesn’t that complete delivery of the deed?

Not in this case.

The deed, a mortgage deed, was to be held in escrow pending the taxpayer’s full performance under the sales contract. Performance of the covenants, agreements, and provisions contained in the mortgage deed and the sales contract would only occur at closing when full payment was made on delivery of the deed to the purchaser.

The final payment on the CT home was made after the taxpayer moved into the NYC condo. As a result, NYS deemed the sale of the CT home as taxable income because the taxpayer was a NYS resident then the sale was completed.

Timing can be critical when taxpayers change their state of residence. This case is a perfect example.

Case: In re Michaels, DTA No. 823370 (N.Y. Div. Tax App. Apr. 12, 2012).

It Could Happen To You

September 23rd, 2011 1 comment

via Wikipedia

In the film, a struggling police officer named Charlie Lang (Nicholas Cage) uses his lottery ticket to tip a waitress named Yvonne Biasi (Bridget Fonda). They then win $4 million. Unfortunately for the officer, his wife subsequently divorces him, and she is awarded their entire $2 million share. After making some investments and succumbing to coercion, Yvonne depletes her funds. As a result, the two original winners are back to their blue-collar status. But they did win something that money can’t buy:

Yvonne: Because of me, you have nothing.

Charlie: Because of you, I have you.

Sharing a winning lottery ticket can cause problems in real life too. In this story, a dream came true for an illegal immigrant, who had a winning $3 million stratch-off instant lottery ticket.

When he presented the ticket to a New York store clerk, the clerk told the illegal immigrant that he would be deported if he claimed the winnings. The dream quickly turned into a nightmare. The clerk convinced the winner to give the clerk the ticket. The clerk promised to claim the ticket and then give the immigrant the winnings.

You probably can guess what happens: The clerk claimed the ticket but never paid the winner. The immigrant then sought legal counsel, and an investigation resulted in charges brought against the store clerk and two other men involved in the scam for first-degree grand larceny.

Let’s clear this up: The New York Lottery does not ask for the immigration status of ticket winners.

Will the illegal immigrant obtain all of his winnings? He should, but it may not happen. After collecting the first $150,000 annual payout, the store clerk sold the rights to the winnings to a company named Advance Funding for $600,000. We’ll see what happens.

Now for the part you’ve been waiting for, the tax consequences. Fortunately, the NYS Department of Taxation and Finance put together a comprehensive FAQ for New York State lottery winners.

Essentially, NYS residents must pay NYS tax on the full amount of NY lottery winnings, and NYS will withhold at the highest effective rate. For NYS nonresidents, only prizes in excess of $5,000 are subject to NYS income tax.

What would happen in Connecticut? Indeed, this story grabbed the attention of the Connecticut Lottery Corporation. Regarding citizenship status, the answer is the same as it is in New York: Anyone can claim a prize. Regarding tax consequences, it’s a bit more complicated, because the answer depends on three factors: the type of lottery winnings, amount of gross income for the year, and residency status. Informational Publication 2009(38) has the details.

Speaking of Connecticut, I was recently perusing the state’s online Law Library covering gambling. Apparently, someone asked the state to comment on the legality of online poker. In response, the Office of Legislative Research put together a well-written report that’s worth the read.

It’s refreshing to see that state governments are both willing to and capable of addressing politically controversial and complex legal issues, especially when the state isn’t required to comment on the subject.

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