In a rare victory for taxpayers, the New York Court of Appeals recently rejected the ruling of the New York Tax Appeals Tribunal and held that on the facts of the case before it, a non-domiciliary homeowner was not a “statutory resident” within the meaning of Tax Law § 605(b)(1)(B), and therefore did not owe New York State and City taxes for the years in question. That section of the Tax Law sets forth New York’s infamous “183-day” rule by which non-domiciliaries are taxed as residents if they spend more than 183 days in New York and have a “permanent place of abode” here. As it was conceded that the taxpayer had spent more than 183 days in New York, the case turned on whether he “maintain[ed] a permanent place of abode” in New York. The Tax Tribunal interpreted “maintains a permanent place of abode” to mean that a taxpayer does not need to “reside” in the dwelling but only maintain it in order to be a resident under § 605(b)(1)(B). The Court of Appeals disagreed and held that in light of the statutory language, there was no rational basis for the Tribunal’s interpretation. The practical import of this decision is that people who purchase an apartment in New York for another, including a family member, to live in and do not reside there themselves should not be deemed “statutory residents” and therefore will not have to comply with the “183 day” rule to avoid New York State and City taxes.
In In re Gaied, __ NE3d __, 2014 WL 590486 (Feb. 18, 2014), Gaied, who lived in New Jersey and worked on Staten Island, purchased an apartment on Staten Island as an investment property and as a place for his parents to live. Gaied claimed his parents as dependents on his Federal, New Jersey, and New York tax returns and paid the utilities for their apartment on Staten Island. However, he insisted that he did not live at the apartment and did not have unfettered access. Instead, he maintained that he occasionally stayed at the apartment to attend to his parents’ medical needs and would sleep on the couch on those occasions.
From 2001 to 2003, Gaied filed nonresident income tax returns in New York. After an audit, the New York Department of Taxation and Finance informed him that he owed $253,062 in New York State and City taxes, plus interest. The Department’s decision was based on its determination that Gaied was a “statutory resident” of New York within the meaning of Tax Law § 605(b)(1)(B) because he had spent over 183 days in New York City and maintained a “permanent place of abode” on Staten Island during those years.
After a hearing, the Department’s decision was sustained by an Administrative Law Judge. Gaied appealed to the Tax Appeals Tribunal which initially reversed the ALJ’s decision, finding that Gaied did “not have living quarters at his parents’ apartment” and therefore did not maintain a permanent place of abode in New York. On the Department’s motion for reargument, the Tribunal reversed itself, affirmed the ALJ’s decision, and sustained the $253,062 deficiency.
The Tribunal based its about-face on its conclusion that “where a taxpayer has a property right to the subject premises, it is neither necessary nor appropriate to look beyond the physical aspects of the dwelling to inquire into the taxpayers’ subjective use of the premises.” The Tribunal additionally found that there was “no requirement that [Gaied] actually dwell in the abode, but simply that he maintain it.” On Gaied’s Article 78 proceeding, the Appellate Division affirmed and noted that “although a ‘contrary conclusion would have been reasonable based upon the evidence presented,’ it was nevertheless ‘constrained to confirm, since [the court’s] review is limited and the Tribunal’s determination [was] amply supported by the record.’”
The Court of Appeals disagreed. The Court began its analysis with a review of the legislative history of the tax statute and its purpose to “discourage tax evasion by New York residents.” Although the statute does not define “permanent place of abode, regulations promulgated pursuant to it define that term as “a dwelling place of a permanent nature maintained by the taxpayer, whether or not owned by the taxpayer . . .” 20 NYCRR 105.20(e)(1). The Court noted that “nowhere in the statute does it provide anything other than the ‘permanent place of abode’ must relate to the taxpayer.” The Court then concluded that “in order for a taxpayer to have maintained a permanent place of abode in New York, the taxpayer must, himself, have a residential interest in the property.” Since Gaied did not have a residential interest in the Staten Island property, there was no rational basis for the Tribunal’s interpretation of the Tax Law.
This is not the only respect in which New York’s taxing authorities take an aggressive position. But at least in this one instance, any taxpayer subject to a “statutory residence” audit should consider challenging the assertion of tax if the taxpayer can argue that his or her use of the property does not meet the statutory hurdle of “residence.” At the very least, based on this decision, parents who purchase an apartment in New York for their children to reside in (or children for their parents) should be able to argue successfully that they are exempt from New York State and City taxes – even if they spend more than 183 days here (assuming no other contacts).