Statutory Residence for the “Former” New Yorker
February 16, 2021
“Tax the Rich” in N.Y.
Over the last few months, we’ve considered on several occasions how Albany may respond to the fiscal crisis arising from the pandemic and the ensuing reduction in economic activity. These circumstances have placed an incredible strain upon the State’s various social safety nets,[i] as many individuals find themselves in need of government assistance in one form or another; they have also compromised New York’s ability to maintain these programs, at a time when they are needed most, by severely impairing the State’s tax revenues.[ii]
At the same time, however, many of the State’s residents seem to have not only weathered the proverbial storm, but to have emerged from it relatively unscathed – at least from an economic perspective – or, in many cases, even wealthier than before.[iii]
The juxtaposition of these two extreme outcomes has, predictably, given rise to demands that the folks in Albany impose higher taxes upon the folks on Wall Street. “Tax the rich” has become the rallying cry for those who support a wealth tax on billionaires,[iv] a more progressive income tax on high-earning taxpayers,[v] a tax on financial transactions,[vi] a tax on inherited wealth,[vii] and other wealth-redistribution measures.
In the face of what promises to turn into an even more hostile tax environment, New Yorkers ranging from the moderately well-off[viii] to the obscenely wealthy are doing what they have always done: they are threatening to leave the State. This time, however, there are three additional factors in play that were absent from earlier versions of this game of chicken:
- first, as a result of the pandemic experience, many of these New Yorkers – including business owners, investors, and well-paid employees – have discovered they neither have to live nor physically work in New York[ix] in order to engage in the commercial activity by which they make money – indeed, they have realized that they can even save money by losing the Manhattan co-op with the confiscatory common charges, and by giving up the outrageously priced office lease;
- second, other jurisdictions are no longer shy about openly soliciting and enticing New Yorkers away from the Empire State – just look at what Florida’s Governor DeSantis and Miami’s Mayor Suarez are doing to attract finance and technology companies to the Sunshine State;[x] and
- third, the State Legislature in Albany now has a veto-proof Democratic majority that seems committed to increasing taxes, come what may.
Although tax increases are very likely – at both the State and Federal levels – it remains to be seen how aggressive a tax posture New York will ultimately adopt toward its more economically secure residents. Query whether the State’s actions will be enough to convince many of these residents to leave New York and to take their businesses with them?
Among those residents who decide to abandon the State as their permanent home,[xi] there will be several who will nevertheless want to maintain a “second home” in New York – perhaps a pied-a-terre in the City, or a vacation property on the East End or in the Hudson Valley. However, a decision issued by New York’s Tax Appeals Tribunal late last month may cause some of these folks – especially those that plan to continue working or doing business in New York – to reconsider having any such connection to the State.[xii]
“Obus” – Round One[xiii]
Taxpayer was domiciled in New Jersey, worked primarily out of an office in New York City, and was present within New York for over 183 days during each of the years in issue.
Taxpayer owned a house in Upstate New York (the “House”), more than 200 miles from their office, which they used for vacation purposes only. During the years at issue, Taxpayer spent no more than two to three weeks at the House.
The property included an attached apartment which was rented, year-round, to an unrelated tenant pursuant to an oral lease under which the tenant paid a de minimis amount of rent, while Taxpayer paid all of the expenses associated with the property, which far exceeded the rent received.
Taxpayer filed a New York State nonresident income tax return, on Form IT-203, for each of the years at issue. The Form contains a question regarding whether the taxpayer maintained “living quarters” within the State during the taxable year for which the return is being filed. Taxpayer indicated that no living quarters were maintained within the State during the years at issue.[xiv]
After an audit conducted by the Division of Taxation (the “Division”), the Division found that Taxpayer was a statutory resident: they maintained a permanent place of abode in New York (the House), and were present within the State in excess of 183 days. A notice of deficiency was issued to Taxpayer asserting additional New York State income tax due, plus interest and penalty, for the years at issue.
Taxpayer protested the notice by filing a timely petition with the Division of Tax Appeals. After a formal hearing, the Administrative Law Judge (the “ALJ”) observed that the only issue before the Court was whether Taxpayer maintained a permanent place of abode in New York during the years at issue.
The ALJ noted that Taxpayer’s argument primarily challenged the definition of the term “permanent place of abode,” and the Division’s interpretation thereof, in light of the Court of Appeals’ holding in Matter of Gaied v. New York State Tax Appeals Trib.[xv]
Taxpayer claimed that because the property was maintained for the use of another (the tenant), the House could not be deemed Taxpayer’s own permanent place of abode.
The ALJ compared the facts of Gaied with Taxpayer’s, determined that Gaied was distinguishable, and concluded that the House was maintained by Taxpayer for their own use.[xvi]
The ALJ next rejected Taxpayer’s argument that the House was not a permanent place of abode because it was used and suitable only for vacations. According to the ALJ, Taxpayer was at no point prevented from using the property for substantially all of the year. The House, it stated, could be (and was) used year-round and, as such, was considered permanent. The fact that Taxpayer chose to use the property exclusively for vacations did not transform its characterization as a permanent place of abode.
The ALJ also found Taxpayer’s contention that, under Gaied, their subjective use of the House should be determinative of its status as a permanent place of abode, was without merit, stating that it was the physical characteristics of the House that made it suitable for year-round use.
“Obus” – Round Two
Taxpayer appealed the ALJ’s decision, sustaining the notice of deficiency, to the Tax Appeals Tribunal (“TAT”), claiming that the ALJ erred in finding that the House qualified as a permanent place of abode in light of the Court of Appeals’ holding in Gaied.[xvii]
In furtherance of this argument, Taxpayer maintained that the Division’s regulations regarding statutory residency were invalid to the extent they define “permanent place of abode” in terms of ownership and maintenance, without considering the taxpayer’s subjective use of the dwelling.
According to Taxpayer, Gaied stands for the proposition that the correct analysis for determining whether a residence is “permanent” depends on a taxpayer’s use of the dwelling, rather than the physical characteristics of the dwelling.[xviii]
The Division countered that the ALJ properly determined Taxpayer to be a statutory resident because they were present in the State for the required number of days and maintained dominion and control over the House during the tax years in question.
According to the Division, the ALJ correctly recognized the validity of the Division’s regulation regarding a permanent place of abode after Gaied, which the Division claimed did not invalidate its regulation regarding the permanency of a dwelling for purposes of determining residency.
The TAT’s Opinion
The Court explained that New York Tax Law provides two bases for state tax residency: (a) individuals “domiciled” in New York, and (b) individuals not domiciled in the State but who (i) are present therein for more than 183 days, and (ii) maintain a “permanent place of abode” in the State for “substantially all of the taxable year” (“statutory residence”).
At issue in this case, the Court continued, was Taxpayer’s status as a New York statutory resident. The Court noted there was no dispute that Taxpayer, (i) by virtue of working in New York City,[xix] was present in New York for at least 183 days in each of the years at issue, and (ii) by their continuing ownership and upkeep of the House, maintained the House for those years.
Taxpayer’s disagreement with the determination of the ALJ, the Court stated, concerned the ALJ’s finding that Taxpayer’s House was a “permanent place of abode.”
The Court began its analysis with the Division’s regulation, which provides:
“A permanent place of abode means a dwelling place of a permanent nature maintained by the taxpayer, whether or not owned by such taxpayer, and will generally include a dwelling place owned or leased by such taxpayer’s spouse. However, a mere camp or cottage, which is suitable and used only for vacations, is not a permanent place of abode. Furthermore, a barracks or any construction which does not contain facilities ordinarily found in a dwelling, such as facilities for cooking, bathing, etc., will generally not be deemed a permanent place of abode.”[xx]
The Court next turned to Taxpayer’s contention that the Division’s above regulatory interpretation of the term “permanent place of abode” was no longer valid in light of the Court of Appeals’ ruling in Gaied.
In Gaied, the taxpayer was domiciled in New Jersey and owned an apartment building in Staten Island, where he provided an apartment for his parents with whom he would occasionally stay overnight, although he kept no personal items at the apartment and only stayed overnight at his parents’ request. Due to the taxpayer’s commuting to his business on Staten Island on a daily basis, the taxpayer was also physically present in New York for more than 183 days.
The Court explained that, in accordance with prior decisions, the lower courts in Gaied determined that the taxpayer qualified as a statutory resident because, on its face, the Tax Law only required a taxpayer to maintain a dwelling in order for it to be considered a permanent place of abode.
Taxpayer’s Interest in the House
The Court of Appeals[xxi] in Gaied, however, held there was no rational basis for the above interpretation, that the mere maintenance of a dwelling was sufficient to qualify it as a permanent place of abode of a taxpayer for purposes of determining statutory residence. It concluded that:
“[t]he legislative history of the statute, to prevent tax evasion by New York residents, as well as the regulations, supports the view that in order for a taxpayer to have maintained a permanent place of abode in New York, the taxpayer must, himself, have a residential interest in the property.”
In light of Gaied, the question as to Taxpayer, according to the Court, was whether Taxpayer had a “residential interest” in the House sufficient to sustain the Division’s determination that the House was a permanent place of abode.
Taxpayer argued that their infrequent, short stays at the House for vacations, when compared to the use of their primary residence in New Jersey, were insufficient for such use to deem the House to be a permanent place of abode.
The Court properly rejected Taxpayer’s argument that the Court of Appeals’ holding in Gaied excluded use of a dwelling as a vacation home from the meaning of a “residential interest.”
The question of statutory residency, the Court stated, should turn on whether a taxpayer “maintained living arrangements for himself to reside at the dwelling.” In the present case, the Court continued, Taxpayer had the right to reside in the House, maintained living arrangements at the House, and exercised that right, albeit sparingly, during the years at issue.
The fact that Taxpayer used the House for vacation purposes, and subjectively considered it suitable only for such purposes, did not exclude the House as a permanent place of abode as to Taxpayer.[xxii]
Accordingly, the Court found that Taxpayer maintained the House as a permanent place of abode in New York, and exercised their residential interest therein by using it as a vacation home.
The Court’s conclusion that Taxpayer maintained the House as a permanent place of abode was absolutely correct under current law: (i) Taxpayer was present in New York for more than 183 days during the taxable year;[xxiii] (ii) Taxpayer maintained the House for substantially all of the taxable year; and (iii) Taxpayer had a “residential interest” in the House – they had the right to reside in the House, and “maintained living arrangements” at the House – as evidenced by their use of the House as a vacation home.
The implication for individuals, like Taxpayer, is obvious: if you (i) are domiciled outside New York, (ii) work anywhere in New York, and (iii) maintain and use a vacation home anywhere in New York – without regard to the distance between your workplace and the vacation home – you will be taxed as a resident of the State.
More significant than this fairly predictable outcome, however, was the Court’s “interpretation” of the opinion rendered by the Court of Appeals in Gaied and, in particular, the question of what constitutes a “residential interest.”
The Court clearly stated clearly that, before Gaied, the Tax Law only required a taxpayer to maintain a dwelling in order for it to be considered a permanent place of abode. There was no rational basis, the Court stated, for the interpretation that the mere maintenance – generally speaking, bearing the related costs – of a dwelling was sufficient to qualify it as a permanent place of abode of a taxpayer for purposes of determining statutory residence. Something more was required.
According to the Court of Appeals, in order for a taxpayer to have maintained a permanent place of abode in New York, the taxpayer must have maintained living arrangements for themselves at the property – they must have a residential interest in the property.
The Court explained that the taxpayer’s subjective view of a property was not determinative of whether the taxpayer had a residential interest in the property and, therefore, of its status as a permanent place of abode.
It also indicated that a taxpayer’s dominion and control over a property, and the fact that they were at no point prevented from using the property, were consistent with a residential interest; for example, they do not have to ask permission to remain at the property; they do not have to wait to be invited to the property.
The short period of time that a taxpayer remains at a property, or the taxpayer’s infrequent use of the property, does not, by itself, demonstrate that the taxpayer does not have a residential interest therein, especially where the taxpayer has dominion and control over a property.
Which brings us to the question of “living arrangements.” This term is not defined in the statute, but some of the case law is helpful; for example, the Gaied court indicated that the taxpayer kept no personal items at his parents’ apartment, while in Evans[xxiv] (which found that the taxpayer maintained a permanent place of abode) the taxpayer kept personal items in the rectory, including clothes, and also furnished his room with various pieces of furniture.
Based on the foregoing, “living arrangements” may be defined as the plans someone makes, either on their own or with others, which allow them to live at a place (whether indefinitely, for a specific period of time, or whenever they wish to), and to decide how they want to live at that place (for example, by leaving their personal items at the place, or by otherwise “making it theirs”). It may be said that an individual who has such an “arrangement” with respect to a place, and who contributes toward its maintenance, has a residential interest in that place for purposes of the statutory residence test.
Hopefully, the Courts will continue to shed light upon what it means to have a residential interest in a property, as that term was used in Gaied. Until then, many questions will remain, and taxpayers domiciled outside New York will have to tread warily before retaining or acquiring a residence in the State or, having done so, how they interact with that residence.
[i] Governor Cuomo has proclaimed New York the most “progressive” State in the nation.
[ii] In particular, income taxes and sales taxes. In the case of New York City, one would add real property transfer taxes. To this list, we will eventually be adding real property taxes, as failed or failing brick and mortar retailers (and maybe their landlords) are taken off the tax rolls, and as tenants at office buildings adjust to the reality of working remotely and, consequently, have less need for office space.
[iii] When someone figures out the scientific correlation between the stock market’s performance relative to that of the economy generally, please send me an email: firstname.lastname@example.org .
[iv] https://www.taxlawforchb.com/2020/12/new-yorks-proposed-billionaires-tax-bad-idea/ .
[v] https://www.taxlawforchb.com/2021/01/taxes-in-new-yorks-fy-2022-budget/ .
[vi] Bill number S3980.
[vii] Bill number S3462.
[viii] By New York standards. Can’t stress this enough.
[ix] Of course, these folks have to be aware of New York’s “convenience of the employer rule” (for purposes of allocating income to New York), and of the dispute between New Hampshire and Massachusetts that may be heard by the U.S. Supreme Court. https://www.taxlawforchb.com/2020/10/new-york-business-nonresident-telecommuters-and-the-taxation-of-wages-earned-remotely/ ; https://www.taxlawforchb.com/2020/12/state-taxation-of-telecommuting-employees-and-their-nonresident-employers/ .
[x] The friendlier tax environment and warmer weather also help.
[xi] Specifically, they cease to be taxed as individuals who are domiciled in New York.
[xii] Nelson Obus and Eve Coulson, Tax Appeals Tribunal, Decision DTA No. 827736.
[xiii] We reviewed “Round One” of this contest in 2019: https://www.taxlawforchb.com/2019/09/statutory-residence-in-ny-the-permanent-place-of-abode-test-is-in-need-of-repair/ .
[xiv] A taxpayer who answers this question in the affirmative must complete and file Schedule B of Form IT-203-B, on which they are required to identify the property and indicate the number of days spent in New York.
This drives me nuts. I have seen returns, like Taxpayer’s, that answer this question in the negative notwithstanding the preparer’s knowledge of a New York house or apartment. I have seen returns with respect to which the preparer never asked whether the taxpayer had such a house or apartment, but answered in the negative, or simply repeated the response given on the preceding year’s return.
The burden of proof is already on the taxpayer; now the taxpayer’s representative also has to contend with a loss of credibility.
In the present case, the Court rejected Taxpayer’s request that penalties be abated based, in part, upon Taxpayer’s having reported that they did not maintain any living quarters in New York on their nonresident tax returns for the years at issue. Such a denial, the Court explained, was inconsistent with a finding of good faith, and supported the imposition of negligence penalties.
[xv] 22 NY3d 592 (2014). According to the Court of Appeals, “[t]he legislative history of the statute, to prevent tax evasion by New York residents, as well as the regulations, supports the view that in order for a taxpayer to have maintained a permanent place of abode in New York, the taxpayer must, himself, have a residential interest in the property.”
[xvi] The Tribunal rejected Taxpayer’s argument that he maintained the residence for the tenant’s use. The tenant had their own separate living quarters and, as such, their occupancy did not affect the use of the House by Taxpayer as a vacation home.
[xvii] Taxpayer also argued, unsuccessfully, that New York’s statutory residency statute is unconstitutional as applied to them in that it violates the Commerce Clause of the U.S. Constitution (Art I, Sec. 8).
[xviii] Did Taxpayer misunderstand the ALJ’s position? The latter was merely explaining that the House could be a permanent residence because it was suitable for year-round use.
Indeed, according to the Court, the threshold question, when examining whether a taxpayer maintained a permanent place of abode, is whether the dwelling exhibits the physical characteristics ordinarily found in a dwelling suitable for year-round habitation. If answered in the negative, the dwelling is not a permanent place of abode. If answered in the affirmative, the question then becomes whether the taxpayer has a legal right to occupy that dwelling as a residence. If this question is answered in the affirmative, and if the taxpayer exercised that right by enjoying their residential interest in that dwelling, it can be concluded that the taxpayer maintained a permanent place of abode.
The Court agreed with the ALJ’s conclusion that Taxpayer’s House constituted a permanent place of abode. The dwelling exhibited physical characteristics that made it suitable for year-round habitation.
[xix] There are approximately 260 weekdays in a taxable year.
[xx] 20 NYCRR 105.20[e].
[xxi] New York’s highest court.
[xxii] Just look at all the “city folks” who abandoned their Manhattan apartments to quarantine in their vacation homes on the East End – I daresay that most of them are still there.
[xxiii] Yes, he was over 200 miles away from the New York abode, but that’s irrelevant under the Tax Law. That’s a silly law.
[xxiv] Decision DTA No. 806515.