Statutory Residence in NY: The “Permanent Place of Abode” Test Is in Need of Repair
September 16, 2019
Moving To Florida?
A few days ago, one of the daily tax services reported that the billionaire investor and businessman, Carl Icahn, was planning to move his home from New York City to Florida, presumably for tax reasons. What’s more, the article continued, Icahn was planning to move his NYC-based business (including employees) to Florida.[i]
The article noted that, over the years, a number of prominent investors and hedge fund managers have relocated to Florida for tax reasons – it cited David Tepper, Paul Tudor Jones and Eddie Lampert as examples – explaining that Florida has no personal income tax, and a corporate tax rate of 5.5-percent, as compared to NY’s corresponding rates of 8.82-percent and 6.5-percent.[ii]
Shortly after reading this article, I came across a recent decision by NY’s Tax Appeals Tribunal regarding the tax status of another hedge fund manager: Nelson Obus (the “Taxpayer”), a co-founder, and the Chief Investment Officer, of NYC-based Wynnefield Capital; specifically, the Tribunal considered whether Taxpayer was a statutory resident of NY during the 2012 and 2013 tax years.[iii]
“It’s no wonder,” I thought to myself after reviewing the Tribunal’s opinion, “that NY is among the lowest-ranked states in terms of ‘tax climate’ – not only will we tax non-resident owners on the profits they realize from operating their business within the State, we’ll also tax them on their non-NY-source income if they decide to spend some of those profits by vacationing in the State.”[iv]
“I Love NY” – Unrequited Love?
The general fact pattern was not at all unusual and, unfortunately, the outcome was not at all unexpected – indeed, it was consistent with many other decisions under similar circumstances – which is why it is instructive for individuals who are not domiciled in NY, but who own and operate a NY-based business, and who are considering the purchase of a “second home” in the State.[v]
It was undisputed that Taxpayer was domiciled in New Jersey during the years at issue – that was his “permanent” home.
It was also undisputed that Taxpayer, who worked primarily out of his NYC office,[vi] was present in NY for over 183 days during each of the years in issue.
The question of Taxpayer’s statutory residence, therefore, turned on whether he maintained a permanent place of abode in NY.
In fact, just prior to the years at issue, Taxpayer had purchased a house in Northville, New York, which is located more than 200 miles from NYC, on a northern extension of Great Sacandaga Lake, in the Adirondack Park.[vii] The house had five bedrooms and three bathrooms, with year-round climate control.
It was undisputed that Taxpayer and his family used this house for vacation purposes[viii] only: Taxpayer enjoyed cross-country skiing in the winter months and attending the Saratoga Race Track in the summer. Taxpayer spent no more than two to three weeks at a time in Northville.
The Issue is Joined
Taxpayer filed NY State nonresident income tax returns, on Form IT-203, for each of the years at issue.[ix] In response to a question on Form IT-203, Taxpayer responded that he did not maintain any living quarters within NY State for either 2012 or 2013.[x]
After an audit conducted by the Department of Taxation, a notice of deficiency was issued to Taxpayer in 2016. The notice asserted additional NY State income tax due in excess of $525,000 (plus interest and penalty) for the two years at issue.[xi]
The additional liability was based upon the Department’s finding that, because Taxpayer maintained a permanent place of abode in the NY, and was present within the State in excess of 183 days, he was liable as a statutory resident for income tax purposes for the years 2012 and 2013.
Taxpayer protested the notice by filing a timely petition with the Division of Tax Appeals.
Unfortunately, Taxpayer didn’t stand a chance of succeeding under the current state of the law relating to NY statutory residence.
The NY Tax Law sets forth the definition of a NY State resident individual for income tax purposes. A resident individual means an individual: “(A) who is domiciled in this state, . . . or (B) who is not domiciled in this state but maintains a permanent place of abode in this state and spends in the aggregate more than one hundred eighty-three days of the taxable year in this state, . . .”[xii]
As set forth above, there are two alternative bases upon which an individual taxpayer may be subjected to tax as a resident of NY State, namely (A) the domicile basis, or (B) the statutory residence basis – i.e., the maintenance of a permanent place of abode in the NY, and physical presence in the State on more than 183 days during a given taxable year.
Because Taxpayer was domiciled in New Jersey during the audit years, the issue for the Tribunal was whether Taxpayer was liable for NY personal income tax on the basis of statutory residence. As there was no dispute that Taxpayer was physically present within NY for more than 183 days – after all, he worked in the City, where his business was located – the sole issue in the case involved whether Taxpayer maintained a permanent place of abode in NY during the years at issue.
Permanent Place of Abode
The phrase “permanent place of abode” is interpreted in the Department’s regulations as “a dwelling place of a permanent nature maintained by the taxpayer, whether or not owned by such taxpayer, . . . However, a mere camp or cottage, which is suitable and used only for vacations, is not a permanent place of abode. Furthermore, . . . 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.”[xiii]
Taxpayer framed his argument as whether his limited use of the Northville house, which he claimed was otherwise rented out during the year, constituted a permanent place of abode. Taxpayer relied on the NY Court of Appeals decision in Gaied [xiv] to emphasize that, because his property was maintained for another’s use, such residence did not qualify as a permanent place of abode for him.
In Gaied, the petitioner owned a multi-family apartment building in Staten Island that contained three rental units. Two of these units were rented out and the third unit was maintained by the petitioner for use by his parents. The petitioner was domiciled in New Jersey; however, he owned an automotive service and repair business on Staten Island[xv] and commuted daily from New Jersey. The Tax Appeals Tribunal concluded that the petitioner was liable as a statutory resident based upon his presence within NYC for over 183 days and his maintenance of a permanent place of abode in Staten Island. The Tribunal based its decision on the fact that the petitioner had access to the permanent place of abode[xvi] although he maintained it for his parents. The Tribunal held that access was enough, and there was no requirement that petitioner actually reside there. The Tribunal was affirmed by the Appellate Division.[xvii]
The Court of Appeals, however, disagreed and reversed. The court held that:
“The Tax Tribunal has interpreted ‘maintains a permanent place of abode’ to mean that a taxpayer need not ‘reside’ in the dwelling, but only maintain it, to qualify as ‘statutory resident’ under Tax Law § 605 [b]  [B]. Our review is limited to whether that interpretation comports with the meaning and intent of the statutes involved . . . Notably, nowhere in the statute does it provide anything other than the ‘permanent place of abode’ must relate to the taxpayer. The legislative history of the statute, to prevent tax evasion by New York residents, as well as the regulations, support the view that in order for a taxpayer to have maintained a permanent place of abode in New York, that taxpayer must, himself, have a residential interest in the property.” [Emph. added]
In Taxpayer’s case, the Tribunal rejected his argument that he maintained the residence for a tenant’s use. Primarily, 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. The decision in Gaied simply did not apply to the facts of this case.
Taxpayer also urged the Tribunal to find that the language in the above-quoted regulation regarding “a mere camp or cottage, which is suitable and used only for vacations,” described his Northville house. Taxpayer asserted that because his use was limited to only vacations, it could not be determined that Taxpayer, in fact, maintained the home for substantially all of the year.
The Tribunal responded by pointing out that Taxpayer was at no point prevented from using the property for substantially all of the year for both 2012 and 2013. The Northville 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.[xviii]
Therefore, the Tribunal concluded that the Northville house was a permanent place of abode maintained by Taxpayer for his use. Because Taxpayer maintained a permanent place of abode in NY, and was present within the State for more than 183 days during each of the years in question, the Tribunal found that he was properly taxable as a statutory resident of NY for the years 2012 and 2013.[xix]
The fact that the house was located more than 200 miles away from where Taxpayer logged almost all of those 183-plus NY-days was of no consequence to either the Department or the Tribunal. The question, however, is whether it should it have been.
Think About It
Say I lived in Burlington, Vermont, and work in Plattsburgh, New York.[xx] I commute to work almost every day, just 32 miles each way.[xxi] Say my spouse is originally from Long Island, and her family used to spend their summers in Montauk. She misses the ocean beaches, so we purchase a year-round studio apartment in Montauk – almost 400 miles away from Burlington, but within walking distance of the Atlantic – that we use on long weekends, some holidays, and vacations.
Most of my wages are earned in NY and, thus, are subject to NY income tax; I get a credit for the tax paid to NY against the income tax I owe to Vermont as a domiciliary of that State.
Imagine my surprise when NY informs me that I am a statutory resident of the State and, therefore, owe NY tax on all of my income, which includes that part of my wages that I earned outside NY, my investment portfolio income, and my rental income from a condominium in Stowe, Vermont.[xxii]
The Department explains to me that even though I am not domiciled in NY, I am nevertheless subject to income taxation as a resident of the State because I maintain a permanent place of abode in NY – one in which I clearly have some residential interest, notwithstanding that it is almost 400 miles from my job in northern NY – and (b) spend more than 183 days in NY during the year.
Would the result have been any different if I lived in eastern Pennsylvania, worked in western NY, and had a studio apartment on the East End, over 500 miles away? Under the current interpretation of the statute, nope.
You get the picture. What’s wrong with this analysis? Does it make sense?
The beginnings of an answer may be found in the dissent to the Appellate Division’s decision in Gaied, where the court held for the State. The dissent there explained that the intent of the statutory residence law, as stated in its legislative history, is to tax those individuals who, as a matter of fact, are NY residents.[xxiii]
Before Gaied, the Court in Tamagni[xxiv] considered the constitutionality of two states taxing someone as a resident. The Court there referenced the legislative history of the permanent residence test – signed into law in 1922 – stating that the test was enacted to discourage tax evasion by NY residents.
The Court explained that, at the time the statute was enacted, the Department of Taxation[xxv] noted in its memorandum in support of the legislation that, “[w]e have several cases of multimillionaires[xxvi] who actually maintain homes in New York and spend ten months of every year in those homes . . . but they . . . claim to be nonresidents.”[xxvii] According to the memorandum, the statutory residence test serves the important function of taxing those “who, while really and [for] all intents and purposes [are] residents of the state, have maintained a voting residence elsewhere and insist on paying taxes to us as nonresidents.”
Similarly, the Tax Department’s memorandum in support of the 1954 amendment to the statute, which established the “more than one hundred eighty-three days” requirement, specifically states that the amendment was necessary to deal with “many cases of avoidance and . . . evasion” of income tax by NY residents.[xxviii]
Turning again to Gaied in the Appellate Division, the dissent continued, “[a] permanent place of abode means a dwelling place of a permanent nature maintained by the taxpayer.” Using language that would later be adopted by the Court of Appeals in Gaied, and heavily emphasizing the distinction between “permanently maintaining” and “continuing living arrangements at” a particular dwelling place, the dissent asserted that the inquiry should focus on the person’s own living arrangements in the purported place of abode, and on whether the taxpayer had a personal residential interest in the place.
In reaching its decision, the Court of Appeals in Gaied concluded that there was no rational basis to interpret “maintains a permanent place of abode” to mean that a taxpayer need not “reside” in a given dwelling, but only maintain it, to qualify as a statutory resident. The Court rejected the Department’s and the Appellate Division’s analyses, and made a distinction between having a property interest, as opposed to a residential interest, in a dwelling.
The Court of Appeals explained that the legislative history supported the idea that the law was intended to prevent tax evasion by de facto NY residents. Thus, the permanent place of abode had to actually relate to the taxpayer, and the taxpayer themselves must have a residential interest (as opposed to just a property interest) in the property.
Nowhere, however, did the Court discuss any requirement that there be a nexus between the permanent place of abode in which the taxpayer has a personal residential interest and the location(s) within NY at which the taxpayer spends the requisite number of days that cause them to be treated as a resident. In fact, some courts – including the Tribunal in the Taxpayer’s case, above – have rejected such arguments based upon the Department’s interpretation of the law, which fails to require such a nexus.
For example, in Barker,[xxix] a Connecticut domiciliary who worked in Manhattan every day, as an investment manager, and who owned a vacation home in East Hampton (which they used for less than three weeks in any of the years at issue), was found to be liable for NY income tax on all of their income because they spent over 183 days in NY during the year – working in NYC – and owned a permanent place of abode in NY – approximately 110 miles away from Manhattan. The Tribunal rejected the taxpayer’s argument that the house was not suitable for use by the taxpayer’s family as a permanent home – which it characterized as “subjective” – stating that it was “well settled that a dwelling is a permanent place of abode where, as here, the residence is objectively suitable for year round living and the taxpayer maintains dominion and control over the dwelling. There is no requirement,” the Tribunal added, “that the [taxpayer] actually dwell in the abode, but simply that he maintain it.”
As we just saw, the Court of Appeals in Gaied rejected this last statement, that maintenance of a dwelling alone sufficed for purposes of the statutory residence test. Relying on the legislative history, the Court held that a taxpayer cannot have a permanent place of abode in NY unless “[he], himself, ha[s] a residential interest in the property.” The purpose of the test, the Court explained by reference to the legislative history, was to prevent avoidance by people who really live in NY but attempt to be taxed as nonresidents.
A Call to Action?
What does this mean for cases like the Taxpayer’s? Presumably, it requires that a more subjective inquiry occur before a non-NY domiciliary who spends more than 183 days a year in NY – as a result of operating a business in the State – can be taxed as a resident simply by virtue of having a dwelling somewhere in NY; what’s more, this inquiry must focus on whether the dwelling is actually “utilized as the taxpayer’s residence.”
Does this inquiry necessarily include a consideration of nexus? It should. There is a huge difference between finding a residential interest in a NY-situs property that is located near the NY place of business of someone who is not domiciled in NY,[xxx] as opposed to “looking for” such an interest in a vacation property situated in NY, but many miles from the NY place of business, such that a reasonable person would not entertain a daily commute between the two points.[xxxi]
When applying the statutory residence rule, the Department and the courts should take into account its intended purpose: to tax people who actually live in NY, and to discourage tax evasion by such individuals. The rule was not enacted to tax non-resident commuters who do not live in NY, even if they have some connection to NY real property, like a vacation home.
[i] “Carl Icahn Is Said to Be Heading to Florida for Lower Tax Rates,” Bloomberg’s Daily Tax Report, Dec. 12, 2019. Another article indicated that his employees were being offered a moving allowance to back their bags and head south with him.
Clearly, he has been advised that it will not suffice for him to move from NY while leaving his business behind – the business must come along too if he is to successfully demonstrate that he has abandoned his NY domicile and has established Florida as his new domicile. https://www.taxlawforchb.com/2019/07/escape-from-new-york-it-will-cost-you/
[ii] The article could have added that New York City imposes a personal income tax on its residents at a rate of 3.876%; it also imposes a corporate tax at the rate of 8.85%, and a tax on unincorporated businesses of 4%. https://www.taxlawforchb.com/2017/03/an-overview-of-the-nyc-business-tax-environment/
The article also could have mentioned that Florida has no estate tax, whereas NY imposes an estate tax of 16%.
[iii] Nelson Obus and Eve Coulson, DTA NO. 827736 (August 22, 2019).
[iv] Yes, some hyperbole, but I’m making a point here.
[v] The opinion’s reasoning applies equally in determining the NYC resident status of a NY State domiciliary – for example, an individual whose permanent home is in Westchester or Nassau County – who owns and operates a business in NYC, and who is considering the purchase of an apartment in the City.
[vi] This is important to note because NYC did not claim he was a resident of the City, though he worked there most of the time.
[vii] A car drive of almost 4 hours; a bus or train ride of almost 5 hours; almost 5 hours by plane and car (flying from Newark to Albany then to Saratoga Springs, then by car to Northville).
[viii] It was obvious that he hasn’t going to commute to his office in NYC from Northville.
[ix] Taxpayer’s share of the profits from his NYC-based business probably included NY-source income.
[x] This drives me crazy. Whether it is done inadvertently or intentionally, I cannot say; its effect is the same: the NY auditor is left with the impression that the taxpayer is looking to avoid having their return selected for a residency exam. Why start behind the eight ball?
[xi] This translates, roughly, into additional taxable income of approximately $6 million in each of the years at issue. This income would, for example, represent wages earned outside of NY, rental income sourced outside NY, and investment income.
[xii] Tax Law Sec. 605(b)(1)(A) and (B).
[xiii] 20 NYCRR 105.20(e)(1).
[xiv] Matter of Gaied v New York State Tax Appeals Trib., 22 NY3d 592 .
[xv] AKA Richmond County, and somehow one of NYC’s five boroughs.
[xvi] It was located in the same neighborhood as his business.
[xvii] Matter of Gaied v New York State Tax Appeals Trib., 101 AD3d 1492 [3d Dept. 2012].
[xviii] The regulation at 20 NYCRR 105.20[e], in interpreting the phrase permanent place of abode, provides guidance concerning certain living quarters maintained by a taxpayer that are not permanent in nature, where the property is not suitable for year-round use or does not contain cooking facilities or bathing facilities.
[xix] Finally, Taxpayer argued that the imposition of a resident income tax in his circumstances was unconstitutional because it would lead to multiple taxation of his income. Specifically, Taxpayer asserted that New Jersey would not allow a credit for taxes paid to other states on income – such as investment portfolio income (which represents a significant portion of the income of most money managers) – that had no identifiable situs.
According to the Tribunal – and unfortunately for Taxpayer – the Court of Appeals had already rejected this argument. Matter of Tamagni v Tax Appeals Trib., 91 NY2d 530 , cert. denied, 525 U.S. 931 (1998), wherein the statutory residence statute was upheld as constitutional.
[xx] Ah, Lake Champlain.
[xxi] About the distance from Jericho, NY (a bedroom community) to Manhattan.
[xxii] Which, ironically, I lease mostly to people from NY. Again, this is my story, so I can take as much license as I need to make a point. Besides, I am told that it’s good to dream.
[xxiii] Gaied v. New York State Tax Appeals Tribunal, 957 N.Y.S. 2d 480.
[xxiv] See EN xix.
[xxv] Then known as the Income Tax Bureau.
[xxvi] No one talks about millionaires today. Billionaires are now the fashion.
[xxvii] Bill Jacket, L. 1922, ch. 425.
[xxviii] Memorandum of Dept. of Taxation and Finance, 1954 N.Y. Legis. Ann., at 296.
[xxix] Matter of Barker, DTA No. 822324 (N.Y. Tax App. Trib. 2011).
[xxx] The classic Manhattan pied-a-terre owned by a non-NY domiciliary who works in the City.
[xxxi] The question, of course, is where does one draw the line? There are people who commute to NYC every day from the East End, or from parts of Dutchess and Orange Counties. How far away is too far for this purpose?