Posts Tagged ‘Residency’

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.

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