Archive

Archive for the ‘New York – Residency’ 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).

Albert Heads West

December 12th, 2011 2 comments

Last week, the Los Angeles Angels signed first baseman Albert Pujols to a 10-year, $254 million contract. The contract is the second largest in baseball history, bested only by Alex Rodriguez’s current $275 million deal with the New York Yankees.

via Wikipedia

Leaving the St. Louis Cardinals and the State of Missouri, Pujols will now play a majority of his games in the State of California. The Bronze Golden State imposes the highest personal income tax rate for players with annual salaries exceeding $1 million among all states hosting Major League Baseball teams. The rate is 10.3%.

But Pujols’ state income tax burden from his baseball play isn’t calculated by simply taking 10.3% of his annual salary. That’s because he plays baseball in many states throughout the season. Assuming he doesn’t become a resident of California, the 10.3% rate applies only to the number of “duty days” he spends in California. The remainder of his salary is prorated based upon the other states he plays in. This taxation structure is often called the “Jock Tax.”

According to Fangraphs, Pujols’ effective state income tax rate as an Angel is 7.2% for the 2012 season. Interestingly, had Pujols instead signed with the Los Angeles Dodgers, a team just 30 miles from the Angels, he’d be subject to a 7.7% effective rate. The difference is because, in large part, Pujols will play more games in states with no personal income tax—such as Texas (Rangers) and Washington (Mariners)—than if he became a Dodger. If Pujols re-signed with the St. Louis Cardinals, his 2012 effective rate would have been 5.2%.

If Pujols does become a resident of California, however, then his effective rate goes up, because then he must report his worldwide income to California. We’ve seen this type of issue arise before. In 2007, the New York State Department of Taxation and Finance asserted that a certain professional baseball player should have filed as a New York resident for his 2001 through 2003 tax years, and thus be subject to NYS income tax on all of his income. The player: Derek Jeter.

via Wikipedia

At the time, Derek Jeter owned a home near the Yankees’ spring training complex in Tampa, Fla. The problem for Jeter was that he also owned an apartment in the Trump World Towers in Manhattan. Of course, NYS auditors took the position that Jeter was domiciled in New York. Jeter eventually reached a private, out-of-court settlement for the case.

Although we’ll likely never learn the outcome of Jeter’s settlement, what we do know is that state residency for professional athletes is a topic that isn’t going away anytime soon. An article discussing the Jeter case suggests that LeBron James’ decision to play for the Miami Heat over the New York Knicks may have been in part influenced by Florida’s personal income tax haven.

A part of me thinks some of these athletes make so much money that the bottom line tax implications to them is negligible. But, since we see contract holdouts, arbitration, and other forms of intense negotiations for professional athletes all the time, another part of me believes taxes play a role.

Give Up the Keys

December 2nd, 2011 No comments

A taxpayer who works in New York and moves outside of New York may become a residency audit target, particularly if the taxpayer does not immediately sell the New York residence upon the move. With the real estate market what it is today, it’s not uncommon to move out of a home before selling it. As a result, NYS may assert the taxpayer is a NYS resident even if the NY home is no longer occupied by the taxpayer. The downside to this, of course, is that as a NYS resident a taxpayer is subject to NYS income tax on worldwide income.

As I’ve written before, taxpayers have faced large NYS tax bills under these circumstances. Often the heart of the issue is whether the taxpayer “maintains a permanent place of abode.” In a few recent decisions, the NYS Tax Appeals Tribunal has broadly interpreted the term “maintains.” These decisions beg the question: If I continue to own a residence in NY but move outside the state, what can I do to shield myself from NYS residency status going forward?

One apparent answer: Give up the keys because you are legally bound to do so.

In a recent advisory opinion issued by the New York State Department of Taxation and Finance, the department stated that because the taxpayers were legally bound to turn over all keys to their NYS residence to the real estate agent, the taxpayers did not “maintain” a permanent place of abode.

The advisory opinion quotes a recent tribunal decision:

Where a taxpayer has a property right to the subject premises, it is neither necessary nor appropriate to look beyond the physical aspects of the dwelling place to inquire into the taxpayer’s subjective use of the premises.

The taxpayers seeking the advisory opinion presented a seemingly compelling set of facts. Vehicle registrations, drivers’ licences, voter registrations, back accounts, etc. were moved from New York to Connecticut. The taxpayers also moved all personal items to Connecticut. Upon moving out of the home, the taxpayers spent two months extensively renovating the NY home to make it more attractive to prospective buyers.

Applied to the tribunal’s interpretation above, those facts alone apparently are not enough to show the taxpayers did not maintain a permanent place of abode. What made the difference for these taxpayers, according to NYS, were the terms of the listing agreement for the NY home with the real estate agent.

In the listing agreement, the taxpayers agreed to not live in the apartment while the house remained up for sale. The intent of the provision had nothing to do with residency issues. It had everything to do with ensuring the agent could show the house to a prospective buyer at a moment’s notice. The “key”: The taxpayers turned over all residence keys to the real estate agent.

Keep in mind this is merely an advisory opinion. In other words, we are told how the state’s tax department views the issue under this particular set of facts. Although the state may not take such a taxpayer-favorable position if the taxpayers do not turn over the keys, it doesn’t mean the tribunal would not as well.

The bottom line is that we now have some favorable guidance for taxpayers who may be subject to statutory residency. For taxpayers who commute into NY to work but have significant non-NY source income, it’s certainly good to know.

If You Own a Second Home in New York, Beware…

June 29th, 2011 No comments

Another NYS residency case, another taxpayer loss, and a seemingly expanding interpretation of the NYS statutory residency provisions.

Last week the NY Tax Appeals Tribunal released its decision for Matter of John Gaied.  Before delving into the facts, I feel compelled to note the case’s dizzying procedural history.

The taxpayer appealed to the Tax Appeals Tribunal after losing before the Administrative Law Judge, and successfully had the ALJ determination overturned.  NY’s Division of Taxation must have been rather unhappy with that outcome, because the Division subsequently filed a motion for reargument.  As noted in Foley v. Roche:

A motion for reargument is designed to afford a party an opportunity to establish that the court overlooked or misapprehended the relevant facts, or misapplied any controlling principle of law.

If a court grants a motion for reagrument, it is essentially succumbing to political forces admitting it somehow messed up on the first go around.  To the surprise of many, the Tribunal granted the motion, the parties re-presented their arguments, and then the Tribunal decided to vacate its decision overturning the ALJ, ultimately sustaining the ALJ’s determination in favor of NYS.

Yes, it takes either a unique set of facts or a striking misinterpretation of the law to generate such vacillation.  The main issue in the case was whether Mr. Gaied was considered a NYS statutory resident for the 2001, 2002, and 2003 tax years.  As a reminder:

A taxpayer is considered a NYS statutory resident if she (1) maintains a permanent place of abode in New York; AND (2) spends more than 183 days of the taxable year in New York, unless such individual is in active service in the armed forces of the United States.

Like in the recently decided Barker case, the issue further narrowed to whether Mr. Gaied maintained a permanent place of abode in NYS.  Also like in Barker, the abode in question, a residential unit owned by the taxpayer in Staten Island, NY, was allegedly occupied by the taxpayer’s parents during the periods in question.

The taxpayer put in long hours at the auto service station he owned in Staten Island, NY, located a mere two miles from the Staten Island residence.  The taxpayer also owned and allegedly lived in his primary residence in Old Bridge, New Jersey, a 30 to 45 minute drive from the service station.

If you know anything about NYS residency cases, you can see where this is heading:  The taxpayer had significant non-NY source income and filed a nonresident return, NYS noticed the taxpayer owns a NY residence in close proximity to his job, the taxpayer insisted that he rarely or never stayed at the residence, etc., etc., etc.

So why did the taxpayer lose?  Keep in mind there are two components to the “maintains a permanent place of abode” analysis: (a) maintenance; and (b) permanence.

The taxpayer “maintained” the Staten Island, NY residence, held the court, because he (i) owned the property and paid expenses for the property’s upkeep; (ii) maintained an apartment for his parents and paid for all of his parent’s household expenses, including the utility and telephone bills, which were in his name, and (iii) listed the Staten Island residence as his address for notices to be sent to the landlord in the apartment leases at the address.

The court reviewed its analysis of the permanent place of abode standard applied in other recent cases, declared that its previous Gaied decision was made “in error and is hereby reversed,” and essentially re-established the objective test applied in Barker:  “[W]here a taxpayer has a property right to the subject premises, it is neither necessary nor appropriate to look beyond the physical aspects of the dwelling place to inquire into the taxpayer’s subjective use of the premises….”

The property in question “clearly” met the attributes of a “permanent” place of abode to the court, because the apartment the taxpayer’s parents lived in was fully furnished, and because the taxpayer stayed there overnight on occasion.  It seems rather clear that so long as the landlord taxpayer does not rent out a furnished apartment year-round and may occasionally use it, the taxpayer has a losing case on the “permanence” point.

Bottom line:  A taxpayer who files a NYS nonresident tax return, owns a “secondary” residential unit in NYS, and has significant non-NY source income, beware.  Beware of receiving a letter in the mail that begins with: “Dear Taxpayer: Your NYS tax return has been selected for audit.”  A taxpayer who maintains detailed documentation clearly demonstrating year-round use of the “secondary” residence by unrelated parties may, just may, stand a chance.

Beach House Blues for the Barkers

June 6th, 2011 No comments

Back in February, I promised to discuss nuances of the New York State residency rules.  Today I begin to fulfill that promise.  For taxpayers who currently work in New York or may in the future, this post is well worth the read.  A quick refresher:

NYS residents must pay to NYS income tax on income from all sources, regardless of where the income is generated, or the nature of it.  NYS nonresidents, however, pay to NYS income tax only on income actually generated in New York.

A taxpayer is considered a NYS statutory resident if she (1) maintains a permanent place of abode in New York; AND (2) spends more than 183 days of the taxable year in New York, unless such individual is in active service in the armed forces of the United States.

A taxpayer who works full-time in New York almost always easily satisfies (2).  How about (1)?  Suppose the taxpayer lives in her primary residence located somewhere outside of New York, such as New Jersey or Connecticut.  In that case, the taxpayer cannot possibly be a NYS statutory resident, right?  John and Laura Barker of New Canaan, CT, went to court to learn the answer: Wrong.

The issue in Matter of John and Laura Barker was whether the beach house the taxpayers owned in Napeague, NY satisfied the “maintains a permanent place of abode in NY” component to statutory residency.  New York’s Tax Appeals Tribunal held that it did.  To highlight the egregiousness of this decision, let’s look more closely at the facts.

Mr. Barker regularly commuted from his New Canaan, CT home to his office in Manhattan, where he worked as an investment manager.  For the tax years in question, Mr. Barker filed New York State nonresident income tax returns, and paid NYS tax on the compensation he earned in Manhattan.  Mr. Barker also had investment income during these years, and properly paid tax on this income to his state of residence, Connecticut.

NYS selected Mr. Barker’s nonresident income tax returns for audit, and claimed that by virtue of owning a beach home in New York, Mr. Barker was a NYS statutory resident and must also pay tax on his investment income to NYS.

If you read the court’s opinion, you’ll quickly realize the taxpayers spent very little time at this beach home: In 2002, 19 days; in 2003, 16 days; and in 2004, 18 days.  The Barkers argued that because the beach home was not their permanent place of abode, they cannot be considered NYS statutory residents.  Instead, Mr. Barker’s in-laws spent substantial time in the home, as the house was fit for year round use.

By keeping up the beach house, the Barkers ultimately sunk themselves.  The court held that the beach house was a permanent place of abode as to the Barkers, applying an objective test to examine whether the residence is objectively suitable for year round living and the taxpayers maintain dominion and control over the dwelling.  This test made the decision easy for the court to make.

Considered NYS statutory residents, the Barkers were required to file NYS resident income tax returns, and pay NYS tax on all of their income.  You may be thinking, does that mean Mr. Barker pays tax on his investment income to both New York and Connecticut?  You bet.  The offsetting credits for this double state tax apply only to certain types of income.  Timothy Noonan, who represented the Barkers before the NY Tax Appeals Tribunal, explains:

[U]nder New York Tax Law section 620, residents of New York are permitted to take a credit for ‘‘any income tax imposed for the taxable year by another state . . . upon income both derived therefrom and subject to tax under this article.’’ The regulations then define income derived from another state for purposes of Tax Law section 620 as compensation for services performed in that jurisdiction, income from a trade or business carried on in that state, or from tangible personal property situated in the other jurisdiction. The regulation specifically excludes the available credit for taxes paid to the other jurisdiction on income from intangibles. Connecticut has a similar rule. Thus, if a Connecticut domiciliary is subject to tax as a statutory resident of New York, Connecticut will provide a credit for New York taxes paid on New York-source income, and vice versa. But the intangible income? It gets taxed twice.

The resulting tax burden can be enormous.  That’s why NY Assemblyman Fred Thiele and Sen. Ken LaValle recently introduced a bill offering tax relief to taxpayers with vacation homes more than 50 miles from their primary place of employment in New York.  The Barkers surely could have taken advantage of this proposed legislation: Napeague is well over 100 miles away from Manhattan.

I’m not very confident this bill will become law, as providing relief based upon an arbitrarily determined distance seems overly simplistic.  But I’ve seen crazier things happen in the state legislature, so you never know.

Introduction to New York State Residency Rules

February 11th, 2011 1 comment

Today’s entry turns to New York State. I live and work in New York, representing taxpayers facing NYS Department of Taxation and Finance audit and collection matters. Indeed, a tremendous source of NYS tax revenue are from the state’s residents. Unsurprisingly, many taxpayers who file NYS nonresident returns while earning most of their income outside the state face NYS audits.

This post provides some introductory and fundamental NYS residency concepts, with the nuances and complexities to follow in the future.

NYS residents must pay to NYS income tax on income from all sources, regardless of where the income is generated, or the nature of it. NYS nonresidents, however, pay to NYS income tax only on income actually generated in New York.

Clearly, one can see the significance of a taxpayer’s NYS residency status. There’s also the issue of a NYS resident earning income in other states. Under NY tax law, a taxpayer can be determined to be a NY resident under either of two tests:

1) Statutory Residency

A taxpayer is a NYS statutory resident if he:

  • Maintains a permanent place of abode in New York, and
  • Spends more than 183 days of the taxable year in New York, unless such individual is in active service in the armed forces of the United States.

This test is known as the “183 Day Rule,” and is a year-to-year determination.

2) Domiciled in New York

A taxpayer is treated as a NYS resident if the person is domiciled in New York State.

The domicile test is based on many factors, and looks to determine where the taxpayer’s true home lies: What is the one place to which the taxpayer intends to return?

Once a taxpayer’s domicile is established, it remains there until changed. The burden of proof is always on the party asserting a change of domicile. If the taxpayer has always claimed to be a NYS nonresident, for example, the burden is on the State to prove that the taxpayer changed her domicile from out of New York to New York.

UPDATE (April 7, 2012): Learn more about NYS residency issues by reading all of my posts on the topic, found here.

Categories: New York, New York - Residency Tags:
COMPENSATION DISCLAIMER: Please note that Taxes in the Back has financial relationships with some of the merchants mentioned here. Taxes in the Back may be compensated if consumers choose to utilize the links located throughout the content on this site and generate sales for the said merchant.