The Bloomberg BNA Tax Management Weekly State Tax Report filters through current state developments and analyzes those critical to multistate tax planning.
By David I. Kempler, Esq. and Elizabeth Carrott Minnigh, Esq.
Buchanan Ingersoll & Rooney PC, Washington, DC
While New York State may only tax New York source income of nonresidents, it may tax all income for residents. In order to impose New York personal income taxes as a resident individual, the individual must have both spent more than 183 days in New York State and maintained a permanent place of abode in New York State. In re Barker (No. 822324 (NY Tax App. 1/13/11)), the New York Tax Appeals Tribunal ruled that all income earned by a Connecticut couple was subject to New York state taxes because the husband spent more than 183 days a year in New York and they owned a vacation home in the Hamptons that they used a few times a year. This case brings into question whether any individual who works in New York should directly hold any real estate in New York unless they intend to be a New York resident for state income tax purposes.
Taxpayers were Connecticut domiciliaries during the years 2002, 2003 and 2004 (the "audit period"). Husband was an investment manager for an asset management firm in New York City and spent more than 183 days in New York State during the audit period. Wife was a stay-at-home mom who spent less than 183 days in New York State. Taxpayers purchased a three bedroom home in the Hamptons on April 30, 1997 for $260,000.00. Although the property had previously been a summer rental, Taxpayers made only minor improvements. The house had heat, electric and telephone service, hot water, cable television and internet service. The Hamptons residence contained approximately 1,122 square feet of living space. During the audit period, Taxpayers spent an average of 17 days a year in their Hamptons residence.
Taxpayers permitted Wife's parents to use the Hamptons residence during the years in issue and they utilized it several days a week during the summer months and on many weekends the remainder of the year. Wife's father operated a small-scale fishing charter business, which listed the Hamptons residence as its address and he maintained a post office box in the area, as well. In fact, Wife's parents' use of the home was so pervasive that Taxpayers called them before planning a stay in order to be sure that there was no conflict with visits by other family members or friends. Although Taxpayers acknowledge their ultimate dominion and control over the use of the property, they chose to allow Wife's parents to have liberal use of the premises.
For each of the three years in the audit period, Taxpayers filed timely New York State nonresident income tax returns, Forms IT-203. On each of the returns they answered "NO" to the question lettered "F," which asks: "Did you or your spouse maintain living quarters in New York State in [applicable year]?" On each return, immediately below question "F" appears the signatures of Taxpayers, as well as their tax preparer.
In March 2005, the New York Division of Taxation began an audit of Taxpayers for the years 2002 and 2003, which was subsequently extended to cover the year 2004. Understanding that Husband had spent more than 183 days in New York State and City during the audit period, the auditor's chief focus was on the Hamptons residence, which he determined was a permanent place of abode, because it appeared to be suitable for year-round habitation. Accordingly, in October 2006, the Division issued a consent to field audit adjustment with respect to the audit period. The additional tax determined to be due for the audit period together with interest and penalties was $904,489.
Upon review, the Administrative Law Judge sustained both tax and penalty within the determination. Taxpayers conceded that they spent over 183 days within New York State. In reaching its determination, the Administrative Law Judge rejected Taxpayers' argument that they had ceded control of the property to Wife's parents because Taxpayers retained ultimate dominion and control over the Hamptons residence. The Administrative Law Judge also rejected Taxpayers' argument that the house was not livable for Taxpayers year-round.
Taxpayers filed an exception to the determination of the Administrative Law Judge. Taxpayers alleged that the Administrative Law Judge erred by: (i) misconstruing the "permanent place of abode" analysis; (ii) failing to consider the Hamptons house as a camp or a cottage; and (iii) upholding negligence penalties.
Pursuant to N.Y. Tax Law §601 New York imposes state personal income tax on "resident individuals." N.Y. Tax Law §605(b)(1) defines a "resident individual" as an individual: (A) who is domiciled in this state, unless (i) he maintains no permanent place of abode in this state, maintains a permanent place of abode elsewhere, and spends in the aggregate not more than thirty days of the taxable year 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 … .
In order to impose New York person income taxes as a resident individual, the individual must have both spent more than 183 days in New York State and maintained a permanent place of abode in New York State. The New York Tax Law does not define "permanent place of abode." However, the following interpretation of this term is provided in 20 NYCRR former 105.20(e)(1), as in effect during the years at issue and unchanged in the current regulation: A permanent place of abode means a dwelling place permanently 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.
Taxpayers asserted that they were not resident individuals under N.Y. Tax Law §605(b)(1)(B) because the dwelling was not their permanent place of abode and was unsuitable to be used as such by their family of five because of the limited square footage and lack of sound insulation. Taxpayers noted that they purchased the home for vacation use only, and they used it exclusively for vacations at all times.
The Tax Appeals Tribunal rejected Taxpayer's contention that in Matter of Evans(Tax Appeals Tribunal, June 18, 1992, confirmed Matter of Evans v. Tax Appeals Tribunal, 199 AD2d 840 (1993)) the Tribunal adopted a subjective standard for establishing a permanent place of abode by setting forth that permanence "must encompass the physical aspects of the dwelling place as well as the individual's relationship to the place." Instead the Tax Appeals Tribunal stated that its holding in Matter of Evans stood solely for the proposition that a permanent place of abode may be found whether the taxpayer bears no legal right or relationship to the property, and, therefore, was not relevant to Taxpayers' case. Moreover, the Tax Appeals Tribunal rejected Taxpayers' argument that the subjective use of a dwelling by a taxpayer is determinative of where a dwelling is a permanent place of abode, noting that it was well settled under New York law that a dwelling is a permanent place of abode where the residence is objectively suitable for year round living and the taxpayer maintains dominion and control over the dwelling.1
The Tax Appeals Tribunal also rejected Taxpayers' argument that the Administrative Law Judge erred by not considering the totality of the evidence in this case. The Tax Appeals Tribunal found that the determination issued showed that the Administrative Law Judge had carefully considered the physical attributes of the Hamptons residence in determining that it was suitable for year round use.
Finally, the Tax Appeals Tribunal stated that Taxpayers' arguments that the Hamptons residence constituted a "camp or cottage" were rendered moot because it was objectively suitable for year-round habitation.
Accordingly, the Tax Appeals Tribunal denied Taxpayers' claims except with respect to the issue of whether petitioners established reasonable cause for the abatement of the penalties imposed. The Tax Appeals Tribunal remanded the matter to the Administrative Law Judge to issue a supplemental determination to address whether Taxpayers established reasonable cause for the abatement of penalties imposed pursuant to N.Y. Tax Law §685. Specifically, the Tax Appeals Tribunal asked the Administrative Law Judge to determine whether the record demonstrated a reasonable basis for Taxpayers' claim that they did not maintain a permanent place of abode in New York State or whether Taxpayers' conduct was "intentionally obfuscatory or wilfully negligent."
In light of this decision, any individual who works in New York but resides in another state should use extreme caution when contemplating the purchase of real property in New York. Under this ruling, Connecticut and New Jersey residents who work in New York City and own a Hamptons summer house or a Manhattan pied-a-terre could expose all of their income to state and local taxation in New York. While such taxpayers can claim credits on taxes paid on the same income in other states, the overall tax payable may still be greater.
For more information, in BNA's Tax Management Portfolios, see Plattner, 2210 T.M., New York Personal Income Tax, and Genetelli, 3020 T.M., Personal Income Taxes: Minnesota Through Wyoming.
1 See e.g., Matter of Roth, Tax Appeals Tribunal, March 2, 1989 (stating that "[t]here is no requirement that the petitioner actually dwell in the abode, but simply that he maintain it"); see also, Stranahan v. New York State Tax Commn., 68 AD2d 250 (1979); People ex rel. Mackall v. Bates, 278 AD 724 (1951).
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