Common Sense Prevails – NY High Court Clarifies Tax Residency Test

The Tax Management Transfer Pricing Report ™ provides news and analysis on U.S. and international governments’ tax policies regarding intercompany transfer pricing.

By Peter A. Lowy, Esq

Caplin & Drysdale, New York, NY

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
, 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

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 §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
. 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

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

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.

For more information, in the Tax Management Portfolios, see
Maule, 525 T.M.
, State, Local, and Federal Taxes,
 and in Tax Practice Series, see ¶2340, Deduction of
State, Local, and Federal Taxes.

Copyright©2014 by The Bureau of
National Affairs, Inc.

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