United States: Common Sense Prevails – NY High Court Clarifies Tax Residency Test

Isn't it common sense that in order to be a "resident" of a State one must actually reside in the State? Not so for the State of New York's taxing authority.

Until February 18, 2014, when New York's highest court clarified certain contours of New York's statutory residency test, the New York State Department of Taxation and Finance had long-held that a person could be a resident even if he or she did not actually live in the State or sleep within the State's borders for even a single night. On February 18, in Gaied v. New York State Tax Appeals Tribunal, the Court of Appeals of New York unanimously rejected the Department's long standing position, and now many people who live outside of New York but own property within its borders may find relief from onerous New York State and City taxes.

In general, New York taxes its residents (a.k.a. "resident individuals") on all of their income – both New York-sourced income and income sourced elsewhere. See Tax Law sec. 601 (New York State); New York City Administrative Code § 11-1701 (New York City). Constitutional issues aside, an individual may be taxed as a "resident individual" in one of two ways: (1) he or she is "domiciled" in New York, i.e. the taxpayer's permanent and primary home is located in New York (see Tax Law § 605 [b] [1][A]); or (2) he or she is a "statutory resident," which is defined as someone "who is not domiciled in this state but maintains a permanent place of abode in this state and spends in the aggregate more than [183] days of the taxable year in the state." (Tax Law § 605 (b) (1) (B)). The rationale for the "statutory resident" test is to ensure residency status for people who are for all intents and purposes residents of the State but maintain sufficient indicia of domicile (e.g., place registered to vote) in an adjacent State to avoid New York taxes.

It is the second way – by being a "statutory resident" – that was at issue in Gaied v. New York State Tax Appeals Tribunal. There, the petitioner, Mr. Gaied, owned an auto repair business in Staten Island, New York, and commuted daily to work from his home in New Jersey. He also maintained a multi-family apartment building in Staten Island, which he in part rented to third parties and in part maintained for his elderly parents to reside. For purposes of discussion, Mr. Gaied really never used the apartment as his home, although in maintaining the apartment for his elderly parents he paid utilities and on occasion, to attend to their medical needs, he slept over on the couch in the apartment.

Ostensibly, whether Mr. Gaied fell within the "statutory resident" definition depended on whether he met the two part test: (1) "maintained a permanent place of abode," and (2) spent more than 183 days in New York. Mr. Gaied conceded that he spent more than 183 days in New York (commuting to his auto repair business), but contended that he did not "maintain a permanent place of abode." In construing that phrase – "maintain a permanent place of abode" – the Department argued that a taxpayer need not actually dwell in the permanent place of abode, but need only maintain it. Ultimately, the lower courts sided with the Department, and Mr. Gaied appealed to New York's high court, the Court of Appeals.

On appeal, the high court observed that New York's tax statutes do not define "permanent place of abode" but that tax regulations do. By regulation, "permanent place of abode" is "a dwelling place of a permanent nature maintained by the taxpayer, whether or not owned by such taxpayer, [which] will generally include a dwelling place owned or leased by such taxpayer's spouse." See 20 NYCRR 105.20 [e] [1]. The regulation further provides as an example that, "a mere camp or cottage, which is suitable and used only for vacations, is not a permanent place of abode" (id.). The Tax Tribunal had 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][1][B].

The Court of Appeals disagreed, holding that in order to "maintain a permanent place of abode," the taxpayer must, himself, have a residential interest in the property. Consequently, to be a resident, there must be evidence that the taxpayer's dwelling was actually utilized as a residence by the taxpayer. Common sense prevailed.

The Court of Appeals' decision may be significant to a variety of taxpayers, not only those similarly situated to Mr. Gaied. For example, the decision may hold implications to certain part-year residents, and determining when the partial-year period commences and ends. If a resident re-locates to another State, the taxpayer's residency status should terminate when he or she ceases to live in their New York place of abode; under the Department's now-repudiated view, the residency period may have continued during the taxpayer's process of selling or renting the property, even after the taxpayer had relocated. Similar issues arise for determining the commencement of the partial-year period.

The Court's decision may also embolden taxpayers to challenge other rules surrounding statutory residency that may run counter to common sense. Less than one week prior to the Court of Appeal's decision in Gaied, the New York Tax Appeals Tribunal, in Matter of Zanetti (DTA No. 824337, Feb. 13, 2014), reiterated its stance that in computing the 183 days under the statutory resident rule, a day counts if the taxpayer spent any part of the calendar day in New York. Presumably, even a 30-minute jaunt over the George Washington Bridge to pick up a thin-crust pizza for the family back in Fort Lee, New Jersey counts. In light of Gaied, a taxpayer, on the right set of facts, may be emboldened to test the Tax Appeals Tribunal's position.

The Gaied decision – and questions of statutory residency—may also increase in importance if the tax burden for New York State and City residents increases. There are several efforts in the works, including a hotly debated bill backed by NYC Mayor Bill de Blasio, to raise taxes on the wealthy; if successful, such efforts would commensurately raise the stakes and interest to avoid statutory resident status by legitimate and legal means.

This article is designed to give general information on the developments covered, not to serve as legal advice related to specific situations or as a legal opinion. Counsel should be consulted for legal advice.