Only 347 Days to Go
What a year it has already been, and we are just beginning the third full week of 2021. The Democrats swept Georgia, thereby giving that Party a majority in the U.S. Senate and ostensible control over Congress. The U.S. began vaccinating high risk health care workers against the COVID-19 virus. The NFL playoffs began.[i] The U.S. Capitol was stormed while Congress was in session to confirm the vote of the Electoral College.[ii] National Guard units from all over the country have been deployed to D.C. to ensure that the January 20 presidential inauguration remains secure and peaceful. Mr. Trump was impeached by the House, again.
Closer to home, the New York Attorney General sued the New York City Police Department, alleging that its officers had abused protesters during last summer’s demonstrations.[iii] Query whether this is the first time a state’s Attorney General has sued the law enforcement agency of a municipality within that state?
State of the State
Governor Cuomo reported on the State of the State last week. “We now turn towards 2021 with the spirit of optimism that is grounded in experience,”[iv] he began. Optimism? Experience? I am less optimistic, in no small part because of the historical record;[v] and delivering his report in the War Room[vi] at the State Capitol does not change the historical record.
Finally, he moved onto the crux of his presentation. “To close our $15 billion budget gap on our own,” he said, “would require extraordinary and negative measures. Imagine this: If we raise taxes to the highest income tax rate in the nation, on all income over $1 million – billionaires, multi-millionaires, millionaires – any income over $1 million, we would only raise $1.5 billion.”[x]
It seems, then, that the Governor does not want to tax the wealthy residents of New York,[xi] the State which he proclaimed as “the progressive capital of the nation.” The State’s legislators, we know, feel very differently about taxing the wealthy; what’s more, the Governor’s own Party now has a veto-proof majority in both the New York Senate and the Assembly.
At the same time, however, he stated, “If we postponed our important tax cut for our struggling middle class, we would save $500 million.[xii] If we froze labor contracts on our hard working public employees, we would save $1 billion. If we cut education funding for our children 20 percent, we would save $5.2 billion.[xiii] Even after all of that pain, we would still need billions in cuts to healthcare in the middle of a pandemic.”
Translated: New York will not cut its costs (i.e., programs or personnel).
How, then, will the State maintain its status as the progressive capital of the nation?
The Governor tells us that “We would need to borrow billions at the cost of future generations. It would be devastating to all New Yorkers.”
OK, so the Governor will not increase taxes, will not cut costs, and will not borrow the necessary funds. What does that leave? Raise the entrance fees at State parks? Solicit contributions from the public?[xiv] No, on both counts.
Where, then, are these billions of dollars to be found?
Drugs and Gambling?
Remember this scene from “The Godfather”?
Don Corleone: [to Sollozzo] “I must say no to you, and I’ll give you my reasons. It’s true. I have a lot of friends in politics, but they wouldn’t be friendly very long if they knew my business was drugs instead of gambling, which they rule that as a – a harmless vice. But drugs is a dirty business…It makes, it doesn’t make any difference to me what a man does for a living, understand. But your business, is uh, a little dangerous.”[xv]
According to the Governor, “[a]fter 4 years of Washington’s assault on New York . . . [o]ur federal representatives must deliver fairness for New York and they must do it quickly.” Basically, a federal grant.[xvi]
To dispel that notion, however, the Governor told us that “New York will do its part,” by legalizing the recreational use of cannabis by adults. This will raise revenue, he said.
According to projections from the State, however, the tax revenue from the marijuana industry is expected to generate only around $300 million annually once the program is “stabilized.”[xvii]
Mr. Cuomo also proposed that the State allow and tax sponsored mobile sports betting in order to raise additional funding. According to the Governor’s Budget Director, the standard sports betting model would net New York approximately $50 million a year in tax revenue, whereas a single-operator monopoly may bring in as much as $500 million per year.[xviii]
By my math, the combined estimated tax revenue from marijuana and sports betting would be less than $1 billion – generated by legalizing the use of a harmful drug and by promoting gambling. I’d be less offended, I suppose, if Albany’s “reforms” were motivated by Will Rogers’s statement, “We don’t seem to be able to stop crime, so why not legalize it and put a heavy tax on it. We have taxed other industries out of business; it might work here.” Unfortunately, I doubt many legislators in Albany are familiar with the humorist’s work.[xix]
In any case, that still leaves us about $14 billion shy. But the Governor says he won’t raise taxes, or cut spending, or borrow money. Why is each of these options presented as an all-or-nothing proposition? Why not combine elements of these? Perhaps then Mr. Cuomo can genuinely assure the federal government, as he did in his address, that “We are a fiscally responsible state; we only ask for an equitable partnership from Washington.”[xx]
The Country Owes Us (?)
An equitable partnership. According to Mr. Cuomo, “Washington raised our taxes to benefit other states and those states then appeal to our residents to relocate to their lower tax states. The infuriating irony is that New York subsidizes those state’s lower rates.”
It’s clear that New York fears the migration of residents and businesses from the State to points south. In recognition of the “out-migration” from New York to Florida that has occurred to-date, and of what is expected to be the continued flow of wealthy individuals from North to South, Goldman Sachs is said to be considering South Florida as the new home for its asset management division. Other financial services firms have already made the move, or have announced plans to move.
At least New York has company. Texas has become to California what Florida has been, and continues to be, to New York. Indeed, last week, Digital Realty Trust announced that it was moving its headquarters from the Golden State to Texas; in doing so, it joins Oracle, Hewlett Packard, Tesla and others.[xxi]
Will California make the same argument as New York? After all, it has the highest marginal tax rate for personal income in the country: in the case of a married couple filing jointly, 13.3% for taxable income in excess of $1.18 million; compare New York’s top rate of 8.82% for taxable income in excess of $2.155 million; add New York City’s 3.876% and you’re at approximately 12.7%.
Maybe not. By late November, California was projecting a surplus of $15 billion; beginning with the 2022-23 budget, it projects a deficit of more than $6 billion; “and by the 2024-25 budget, the deficit could grow to $11 billion if no adjustments to spending or revenue are made.”[xxii]
In any case, we’ll see soon enough how generous Washington will be to New York, but will that generosity be enough to spare New York from having to make some difficult decisions?
Probably not, and one has to assume that Albany has come to the same conclusion, and has prepared to act accordingly.
What if the Country Disagrees?
Under those circumstances, why wouldn’t Albany raise taxes (and cut some expenses), notwithstanding the Governor’s stated reluctance to do so? Wouldn’t it be irresponsible not to?
Among the revenue sources upon which the State will most surely rely is the collection of tax from those individuals who claim to have ended their status as New York residents.
As long as enough of these folks continue to delude themselves into believing that they “know” what it takes to successfully (1) establish Florida, or Tennessee, or whatever, as their new home, and (2) to abandon New York as their place of residence – yes, there are two elements that have to be satisfied – the State will be assured of a steady stream of funds from taxes, interest and penalties.
Truth is, there’s nothing to buying a place in Florida, filing a declaration of domicile, filing a homestead exemption, registering to vote, registering a car, getting a driver’s license, joining a place of worship, and counting days. Having checked the box on each of the foregoing “action steps,” many taxpayers believe they’re home-free (like the pun?). But it’s not nearly enough, as so many – especially those who can count – are dismayed to learn.
Then there are those hopefully (in their minds) “former” New Yorkers who sought professional advice, but who often didn’t like what they heard. The “sacrifice” required of them was too dear. They told their adviser that they planned to remain active in their New York-based business – “all I need is my tablet and I can manage operations from anywhere”[xxiii] – and they refused to give up their gorgeous New York City apartment or Westchester home. What’s more, they clearly stated their intention of spending up to one-half of the year minus one day in New York, primarily during the warmer months and holidays. “Why bother?” I ask such clients. “You’ll just have to pay me to defend you over many months. You will be anxious. You’ll get frustrated. You will ask me to stop saying, ‘I told you so.’ Then you’ll probably end up paying most of the tax, with interest.”
Finally, there are some, like the taxpayer in a recent ALJ ruling, who truly are a godsend to the State’s treasury.[xxiv]
Fool for a Client
The question before the Court was whether Taxpayer (a lawyer who represented himself) was domiciled in New York City for 2012[xxv] and, as such, was taxable as a resident of New York State and New York City.
Taxpayer owned two apartments in the same New York City building during 2012, one of which he acquired and renovated in 2011, before selling it in March 2012. The other apartment was his residence (the “NYC apartment”).
Taxpayer moved to Florida to be closer to his brother, who lived there. Taxpayer stayed with his brother through most of 2012. Taxpayer had no family in the New York City area.
Taxpayer explained that he had a nervous system condition that was aggravated by the cold. He found Florida and the warm weather easier to live in. Taxpayer also explained that he enjoyed the “American suburban chain restaurants” found in Florida (which I’m sure did wonders for his heart condition – just kidding).[xxvi]
Taxpayer spent the majority of his time in 2012 looking for apartments in Florida by searching on-line for Florida apartments, or traveling the State. He spent 177 days in New York during 2012, but also spent a number of days outside both states.
In November 2012, Taxpayer purchased a residence in Florida, which he described as being “nicer” than the residence he owned in New York City. The Florida home was more than 30 percent larger than his New York City apartment, and had a balcony overlooking a canal.
The following month, Taxpayer registered to vote in Florida, and also obtained a Florida driver’s license.
Taxpayer also purchased three investment properties in Florida. Although he originally planned to sell the New York City apartment, Taxpayer decided to keep it, and maybe rent it out for a couple of years.
Taxpayer worked as an attorney and had only one case in 2012, which was handled almost entirely from Florida. Taxpayer did not work for any employer in New York during 2012, and his only New York business activity was the sale of the apartment described above. Otherwise, all business activity was in Florida, which included searching for and making real estate investments for income.
Approximately 95 percent of Taxpayer’s near and dear items were moved to Florida in January 2013. The moving of these items – with the exception of two very important new “vintage-styled” pairs of sneakers[xxvii] –was delayed from mid-December 2012 until early January 2013 at the request of the previous owner of the Florida property.[xxviii] Taxpayer finally moved into his Florida residence on December 16, 2012. Even after doing so, he left his bed in the New York City apartment.
Taxpayer’s 2011 New York State resident income tax return, form IT-201, identified the New York City apartment as his permanent home address. His 2012 New York State nonresident and part-year resident income tax return, form IT-203, identified North Miami Beach, Florida as such address.
However, Taxpayer’s 2012 New York State nonresident and part-year resident income allocation worksheet, on form IT-203-B, indicated that Taxpayer maintained living quarters at the New York City address throughout 2012; the form also indicated that Taxpayer spent 177 days of 2012 in New York State.
Then, in 2013, Taxpayer filed a resident income tax return, form IT-201, providing the New York City apartment as his permanent address.
His 2012 federal form 1040, Schedule C, profit or loss from business, identified the New York City apartment as Taxpayer’s business address.
According to the State’s Tax Law and the City’s Administrative Code,[xxix] a resident individual means an individual:
(A) who is domiciled in this city, unless (i) [h]e maintains no permanent place of abode in this city, maintains a permanent place of abode elsewhere, and spends in the aggregate not more than thirty days of the taxable year in this city, or … (B) who is not domiciled in this city but maintains a permanent place of abode in this city and spends in the aggregate more than one hundred eighty-three days of the taxable year in this city. . .”[xxx]
The classification of an individual’s status as a resident versus a nonresident is significant because nonresidents are taxed only on their New York State source income, whereas residents are taxed on their worldwide income.[xxxi]
Because Taxpayer was in New York for only 177 days during 2012, he was not a statutory resident for that year. Thus, the matter before the Court involved only Taxpayer’s domicile.
The State’s regulations define “domicile” as follows:[xxxii]
“(1) Domicile, in general, is the place which an individual intends to be such individual’s permanent home — the place to which such individual intends to return whenever such individual may be absent.
(2) A domicile once established continues until the person in question moves to a new location with the bona fide intention of making such individual’s fixed and permanent home there. No change of domicile results from a removal to a new location if the intention is to remain there only for a limited time, this rule applies even though the individual may have sold or disposed of such individual’s former home. The burden is upon any person asserting a change of domicile to show that the necessary intention existed. In determining an individual’s intention in this regard, such individual’s declarations will be given due weight, but they will not be conclusive if they are contradicted by such individual’s conduct.
* * *
(4) A person can have only one domicile. If such person has two or more homes, such person’s domicile is the one which such person regards and uses as such person’s permanent home. In determining such person’s intentions in this matter, the length of time customarily spent at each location is important but not necessarily conclusive.”
The Court explained that the party alleging the change of domicile bears the burden to prove, by clear and convincing evidence, the change in domicile. Whether there has been a change of domicile, the Court continued, is a question “of fact rather than law, and it frequently depends upon a variety of circumstances.”
The test of intent with regard to a purported new domicile is “whether the place of habitation is the permanent home of a person, with the range of sentiment, feeling and permanent association with it.” While certain declarations may evidence a change in domicile, such declarations are less persuasive than informal acts that demonstrate an individual’s “general habit of life.”
The Court then distinguished between (i) “residence,” which simply requires bodily presence as an inhabitant in a given place and (ii) “domicile,” which requires both bodily presence in that place and also an intention to make it one’s fixed and permanent home.
The Court stressed that, in order to acquire a new domicile there must be “a union of residence and intention. Residence without intention, or intention without residence, is of no avail.” And mere change of residence, although continued for a long time, does not effect a change of domicile, while a change of residence even for a short time, with the intention “in good faith” to change the domicile, has that effect.
While the standard is subjective, the Courts have consistently looked to certain objective criteria to determine whether a taxpayer’s general habits of living demonstrate a change of domicile. “The taxpayer must prove his subjective intent based upon the objective manifestation of that intent displayed through his conduct.” Among the factors that have been considered are the retention of a permanent place of abode in New York, the location of business activity, the location of family ties, the location of social and community ties, and formal declarations of domicile.[xxxiii]
With respect to the factor regarding the retention of a permanent place of abode, there was no question that Taxpayer maintained his residence at the New York City apartment throughout 2012. Retention of a permanent place of abode in the location of the historic domicile is a factor in consideration of the domicile issue.
Furthermore, Taxpayer’s own tax filings reflected that he filed as a resident of New York the following year, 2013, with the address of the New York City apartment, his historic domicile.
Factors, including the location of business activity in Florida and not New York, the location of his family ties in Florida, and his ownership of a residence in Florida, showed evidence of Taxpayer’s interest in making Florida his domicile. Travel to Florida, moving a few prized possessions to Florida, changing his driver’s license and voting registration to Florida also showed evidence of an interest in changing his domicile.
The Court concluded, however, that those factors could not outweigh the fact that Taxpayer’s own tax filings showed he was a resident of New York City for both 2011 and 2013, the immediately preceding and subsequent years to the year in question. This fact combined with the fact that Taxpayer maintained a residence in New York City for the entire year at issue, spent significant portions of the year at issue traveling to several locations other than Florida, most of his near and dear possessions were not moved to Florida until after the year at issue, and he in fact spent a significant portion of the year at issue, 177 days, in New York weighed strongly against Taxpayer’s claim that, for 2012, he abandoned his New York domicile and established a new one in Florida.
Accordingly, the Court concluded that Taxpayer did not prove, by clear and convincing evidence, that he gave up his New York City domicile and acquired a domicile in Florida for the year at issue. As such, Taxpayer was taxable as a resident individual of New York State and New York City for 2012.
A Fool Indeed
What more is there to say about Taxpayer’s case? Not much.
Although the facts were somewhat entertaining, and the outcome was a foregone conclusion, they do demonstrate the importance of preparing one’s exit plan – one’s narrative, you might say – before implementing it.
Such forethought will be especially important for those who have not yet departed New York but are planning to do so before the inevitable tax hikes are enacted. The State has a well-deserved reputation for aggressively pursuing those who have left its fold, and it will probably increase its efforts if the hoped-for federal largess does not materialize.
[i] I confess that I didn’t even know the season had begun, let alone ended. Seriously, who has time or cares at this point, other than those states that have legalized sports betting and that are eagerly awaiting the tax revenues it brings?
That said, yesterday I learned that the Brooklyn Nets signed James Harden. Are they really a contender? So much has happened and continues to happen in spite of the crisis in which we find ourselves. Now, if only the Knicks had some good news to share – or have I missed that too?
[ii] Remember Shay’s Rebellion? How about the Whiskey Rebellion? No? Do the New York City Draft Riots ring a bell? They should – lots of parallels. Not that either? Then the more obscure Election Riot of 1874 is out of the question. Let’s get more current: The Coal Wars, the San Juan Nationalist Revolt? Still doesn’t ring a bell? Hmm. Wait, I have it. The Capitol Hill Autonomous Zone – summer of 2020.
[v] Any fan of the Greco-Roman Age (on which the Founding Fathers were educated, whether you like it or not) will tell you that the plague weakened Athens sufficiently to hasten her defeat by Sparta, the Antonine Plague killed the philosopher-emperor, Marcus Aurelius, and the Justinian Plague put the kibosh (so I snuck in a little Yiddish) on the Emperor Justinian’s plans to reunite the Roman world.
[vi] Hardly ideal, at least to my thinking.
[vii] For example, “We expect SALT to be removed from our wounds,” and “I know the height of the mountain.”
[viii] Mostly attacking the folks in Washington, and describing how they abused New York. For example, “Washington has savaged us,” ‘The abuse was unrelenting,” “Washington took even more funding from New Yorkers as a sheer exercise of political extortion,” and “Today, New York subsidizes 42 other states.”
As to the last point, he could have added, “regardless of the Party in power.”
[x] Query what brackets he’s talking about, and what rates he is applying.
[xii] These cuts are part of a plan that seeks to reduce the tax burden by 20% by 2025.
[xiii] The “big three” expenses are Medicaid, education and labor.
[xiv] Don’t laugh. A concept close to this was at the heart of Mr. Cuomo’s earliest plan to get around the limitation (enacted by the Tax Cuts and Jobs Act) on the itemized deduction for state and local taxes.
[xv] Allow me some license here.
[xvi] After all, “There is no printing press in Albany that makes money,” as the Governor once quipped. https://www.washingtonexaminer.com/politics/cuomo-reiterates-call-for-federal-bailout-of-new-york .
[xix] Speaking of which, in 1931 Mr. Rogers wrote: “If your Income Taxes go to help out the less fortunate, there could be no legitimate kick against it in the world. This is becoming the richest, and the poorest Country in the world. Why? Why, on account of an unequal distribution of the money.” Folks, today’s situation is old news.
[xx] There’s a story – a parable, some might say – that may have been attributed to President Reagan, or so I recall. In the two following scenarios, he asked, which is the better approach to saving a drowning man (I paraphrase): First, you toss into his hands a life preserver to which a rope of sufficient length is attached for you to pull him in, but then you let go of the rope, leaving the man in the water. Second, you toss the man a life preserver to which a shorter rope is tied, such that the preserver will not reach the drowning man, but you urge him to swim toward it, at which point you will pull him in.
[xxi] Miami is being hailed as the next “Tech Hub.” https://news.crunchbase.com/news/why-miami-is-the-next-hot-tech-hub/ .
[xxiii] The domicile factors have not yet been updated to account for such remote management. Query whether the State believes they need to? The Nonresident Audit Guidelines point to the Kartiganer decision, 194 AD2d 879, as an example of how a taxpayer’s active involvement in a New York business may continue from outside the State, thereby dooming the taxpayer to continued taxation as a resident of New York.
[xxiv] ADAMS, DTA NO. 828793.
[xxv] Yep. The decision came more than eight years after the year in question.
[xxvi] You can’t make this shit up, though I must confess that I, too, enjoy most “American suburban chain restaurants,” including the breakfast (for breakfast, lunch and dinner) at Bob Evans in Ohio. This is not a paid endorsement.
[xxvii] I hope you find this as entertaining as I do. “Vintage-styled” sneakers? Seriously? So they’re not really vintage? Would they be worth more if they had been? And people pay real dollars to purchase them? We used to tie old sneakers together by their laces, then throw them over the power lines by the MTA substation down the block and across the street from us. Why? No idea. There were plenty others there before ours. You used to see the such displays of sneakers throughout the City’s Boroughs. (I can’t speak for Staten Island which, I was told as a child, is a borough, though I never understood why. If I recall my history correctly, its residents sided with the English during the American Revolution).
[xxviii] It seems the previous owner did not want to pay for storage. Go figure – he was more comfortable leaving his things with a stranger.
[xxix] NY Tax Law Sec. 605 (b) (1) (A) and (B), and New York City Administrative Code Sec. 11-1705 (b) (1) (A) and (B).
[xxx] The definition of a New York City statutory resident is identical to the definition of a New York State statutory resident, except for substitution of the term “City” for “State.” New York City Administrative Code Sec. 11-1705 [b]  [B] and Tax Law Sec. 605 [b]  [B].
[xxxi] Tax Law Sec. 612 and Sec. 631.
[xxxii] 20 NYCRR 105.20(d).
[xxxiii] Basically, the primary factors set out in the State’s Nonresident Audit Guidelines.