“Life” Goes On
Over the last month or so, most of the nation’s tax practitioners have been devoting an extraordinary amount of time to analyzing the recently enacted changes to the Code, to understanding the resulting consequences, and to determining how they may advise their clients.
Based upon the volume of material that these tax professionals have produced in this endeavor – myself included[1] – one might think that these folks have nothing else to do, or that the very clients that they are seeking to assist may, in fact, be suffering from neglect.
Rest assured that this is not the case. Speaking for myself, life has gone on with the usual flow of projects, including a smattering of corporate transactions and reorganizations, partnership formations and break-ups, deferred compensation and succession planning, not-for-profit compliance and UBIT, plus a healthy dose of New York residency audits.
The Residency Exams
As to the residency exams, the focus has not been on whether the clients were “domiciled” in NY during the years at issue – they clearly were not – or on whether the clients spent over 183 days in NY – they clearly did because the businesses that they owned and operated were located in NYC during those years.
Rather, the state’s emphasis has been on demonstrating that each of the clients maintained a permanent place of abode (“PPA”) in NYC, near his place of business and, consequently – according to the state – was an NY statutory resident.
Our own position has been that neither client maintained a PPA in NY because he did not have a residential interest in the property at issue. We argued that, aside from the proximity of the property to the place of business – from which the state deduced that “he must have used” the property as a residence – there was no basis to conclude that either client maintained his property as a personal dwelling. Simply stated, the property did not “relate to him” in the manner required by the NY Court of Appeals.[2]
It appears, however, that the Court’s holding is either being conveniently ignored by the Department of Taxation, or it is being interpreted in such a way as to render it meaningless.[3]
In any case, because of these circumstances, we have been following any NY decisions that address the PPA requirement for a statutory residence. One such decision is described below.[4]
Welcome to NY
Taxpayer entered into an employment contract with Corp, after which she participated in Corp’s relocation program, which provided her with several options for apartments in NYC.
In late January 2011, Taxpayer chose a fully furnished apartment with a bedroom, bathroom, living area, and kitchen. She testified that there was no lease, but that the original arrangement for the apartment was for 90 days, or approximately until the end of April 2011. The taxpayer had exclusive use of this apartment for the duration of her stay there.
In early April 2011, Taxpayer’s fiancé entered into a lease on a different NYC apartment, following which Taxpayer contacted Corp’s relocation manager to inquire whether she might be able to give the requisite 30-day notice to leave her apartment early. The relocation manager was able to extend Taxpayer’s living arrangement at the apartment until the end of May so as to accommodate her. The taxpayer then moved into her fiancé’s apartment in early June 2011.
The state audited Taxpayer’s income tax return and determined that she was liable as a statutory resident of NY and of NYC for 2011.[5] Specifically, the state found that Taxpayer maintained a PPA in NYC during 2011, and was present within NYC in excess of 183 days.
The Taxpayer did not dispute that she was within NYC in excess of 183 days during the year 2011; after all, she worked there for Corp. However, she did challenge the state’s finding that she maintained a PPA in NYC.
Statutory Residence
For purposes of NY’s and NYC’s personal income tax, a “resident individual” is defined as one:
*****
(B) who is not domiciled in this state [city] but maintains a permanent place of abode in this state [city] and spends in the aggregate more than one hundred eighty-three days of the taxable year in this state [city], *****.
As there was no dispute that Taxpayer was physically present within the city for more than 183 days during 2011, the sole issue in the case involved whether Taxpayer maintained a PPA in NYC during 2011.
“Permanent place of abode” is defined by regulation as:
a dwelling place of a permanent nature 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.
The Court’s Analysis
According to the Court, the determination of a taxpayer’s status as a resident or nonresident for purposes of the personal income tax has long been based on the principle that the result “frequently depends on a variety of circumstances.”
Given the various meanings of the word “maintain,” the Court continued, and given “the lack of any definitional specificity on the part of the Legislature, we presume that the Legislature intended, with this principle in mind, to use the word in a practical way that did not limit its meaning to a particular usage so that the provision might apply to the ‘variety of circumstances’ inherent” to this subject matter.
“In our view,” the Court stated, “one maintains a place of abode by doing whatever is necessary to continue one’s living arrangements in a particular dwelling place.” This would include making contributions to the household, in money or otherwise.
With regard to whether a place of abode is “permanent” within the meaning of the statute, the Court did not agree with Taxpayer that the statute required that the place of abode be owned, leased, or otherwise based upon some legal right in order for it to be permanent.
Rather, the Court stated, “the permanence of a dwelling place for purposes of the personal income tax can depend on a variety of factors and cannot be limited to circumstances which establish a property right in the dwelling place.” Thus, the absence of a lease was not determinative.
The Court noted that “permanence,” in this context, “must encompass the physical aspects of the dwelling place as well as the individual’s relationship to the place.”
For example, it seemed clear to the Court that an apartment leased by one individual, and shared with other unrelated individuals, may be the permanent place of abode of those who are not named on the lease, given other appropriate facts (for example, contributing to living expenses and having unfettered access).
The Court observed that Taxpayer’s apartment was permanent in nature: the apartment contained a bedroom, bathroom, living area and kitchen; and Taxpayer had exclusive access to this apartment from January 2011 through May 2011.
Taxpayer argued that, during the period January 29 through the end of May, she stayed at the apartment for only 79 days. However, this argument did not establish that anyone else stayed at the apartment when she was out of town or that, because she did not spend every day during this time period at the apartment, her use was not exclusive.
Taxpayer also argued that her living in the apartment was temporary in nature, since the duration of the rental was for a fixed period of time. She pointed to language in the correspondence between her and Corp wherein it was stated that her living arrangement at the apartment was temporary.
The Court explained that a permanent place of abode meant a dwelling place of a permanent nature. It concluded that the apartment was permanent: it had a bedroom, bathroom, living area and kitchen. Taxpayer’s belief that her living arrangement was temporary based upon the agreement with Corp was misplaced, the Court added.
The Court clarified that a place of abode “is not deemed permanent if it is maintained only during a temporary stay for the accomplishment of a particular purpose.” The regulation’s use of the word “temporary,” it stated, did not apply to the intention of living in a certain, physical living space as temporary, but rather, a taxpayer who travels to NY for a temporary stay for the accomplishment of a particular purpose.
Clearly, Taxpayer accepted employment with Corp in NYC, and such employment did not have a certain, fixed duration. Therefore, her travel to NYC was not “temporary” within the meaning of the regulation, despite her intention to remain at the apartment for a limited time.
Taxpayer also asserted that she did not maintain the apartment. The Court replied that this argument was also without merit. Taxpayer had exclusive use of the apartment for the entire length of her stay. There was no suggestion that she was prohibited from using it at any time during her stay. Indeed, she kept her clothes and personal belongings there.
Since it was determined that Taxpayer maintained a PPA at the apartment and, subsequently, at her fiancé’s apartment, the Court next determined whether Taxpayer maintained a PPA for substantially all of 2011.
According to the applicable regulation, a resident is:
any individual . . . who maintains a permanent place of abode for substantially all of the taxable year (generally, the entire taxable year disregarding small portions of such year) in New York State and spends in the aggregate more than 183 days of the taxable year in New York State.
The Court observed that, although the statute does not “numerically” define what constitutes “substantially all” of the taxable year, the state’s Audit Guidelines indicate a length of time in excess of 11 months.
In this case, Taxpayer maintained a PPA within NYC continuously from late January through December; more than 11 months. The Court concluded that this constituted substantially all of the taxable year.
Taxpayer accepted employment for Corp in New York City; such employment was not limited in duration. Taxpayer lived at the first apartment until she found suitable living arrangements with her fiancé; then she lived in his apartment. Thus, the Court determined that Taxpayer was a statutory resident for the tax year 2011.
Observations
The Court’s conclusion was consistent with the principles underlying the statutory residence test, and Taxpayer was rightfully assessed as a statutory resident.
The test was enacted to discourage tax evasion by New York residents, and “serves the important function of taxing those who, while really and [for] all intents and purposes [are] residents of the state, have maintained voting residence elsewhere and insist on paying taxes to [NY] as nonresidents.”[6]
With respect to determining the “permanence” of a dwelling place, the Court rightly stated that it can depend on a variety of factors, and cannot be limited to circumstances that establish a property right in the dwelling place. Other courts have held that permanence in this context “must encompass the physical aspects of a dwelling place as well as the individual’s relationship to the place.[7]
That “relationship to the place” element should be key; the taxpayer himself should have a residential interest in the place in order for it to constitute his PPA. It is not enough to base a residency determination on the fact that a taxpayer had a property interest in a dwelling, nor should it suffice that the property was located relatively near to his place of business. There must be some basis to conclude that the dwelling was used as the taxpayer’s residence; the inquiry must focus on whether the dwelling is actually “utilized as the taxpayer’s residence.”[8]
Unfortunately, it appears that the state and its examiners will continue to either interpret this requirement out of the law or to distinguish Gaied. Stay tuned.
[1]
U.S. Taxation of Foreign Income After Tax Reform
Will Tax “Reform” Affect Domestic M&A?
The Real Property Business and the Tax Cuts & Jobs Act
The Federal Estate Tax Lives On, But “Where, O death, is your sting?” (*)
Some of the TC & JA’s Corporate Tax Changes
The New Deduction for “Qualified Business Income”: Tax Simplification Gone Awry?*
[2] Gaied v. New York State Tax Appeals Tribunal, N.Y., No. 26, 2/18/14, 2014 NY Slip Op 1101, 2014 WL 590486, rev’g 101 App Div 3d 1492, 957 NYS2d 480, 2012 NY Slip Op 9108, 2012 WL 6699044 (3d Dept., 2012). The Court of Appeals considered whether a taxpayer can have a PPA in New York unless “[he], himself, ha[s] a residential interest in the property.” The Court concluded that he could not.
[3] For example, by allowing the most attenuated of connections to establish a personal residential interest.
[4] Some are more interesting than others.
[5] It was conceded that Taxpayer was not domiciled in New York for 2011.
[6] 91 N.Y.2d 530, 535 (1998), cert. denied, 525 U.S. 931 (1998).
[7] Matter of Evans v. Tax Appeals Tribunal, DTA No. 806515 (N.Y. Tax App. Trib. 1992), confirmed, 199 A.D.2d 840 (N.Y. App. Div. 3d Dept. 1993).
[8] See Gaied, FN 1, supra.