"Tax the Rich" in N.Y.
Over the past few months we have thought several times about how Albany can respond to the financial crisis resulting from the pandemic and the resulting decline in economic activity. These circumstances have placed tremendous strains on the various social safety nets of the state: (i) Many people are in need of some form of government support. They have also impacted New York's ability to maintain these programs at a time when they are most needed by severely impacting the state's tax revenues. (ii)
At the same time, however, many residents of the state not only seem to have weathered the proverbial storm, but also to have emerged relatively unscathed – at least from an economic point of view – or in many cases even richer than before. (iii)
The juxtaposition of these two extreme results has predictably led to demands that the Albany people impose higher taxes on the Wall Street people. "Tax the Rich" has become a rallying cry for those who support a wealth tax on billionaires, (iv) a more progressive income tax on high-income taxpayers, (v) a tax on financial transactions, (vi) a tax on inheritance wealth, (vii) and other measures to redistribute wealth.
Given what promises to turn into an even more hostile tax environment, New Yorkers who range from the moderately wealthy (viii) to the obscenely rich are doing what they always have: threatening to leave the state. This time, however, there are three additional factors in the game that weren't present in previous versions of this chicken game:
- First, because of the pandemic, many of these New Yorkers – including business owners, investors, and well-paid employees – have found that they don't need to live or physically work in New York (ix) to get involved in the business that makes them money – in fact, they have realized that they can even save money by losing the Manhattan Cooperative with the confiscating joint charges and abandoning the outrageous office lease;
- Second, other jurisdictions no longer shy away from openly luring and luring New Yorkers away from the Empire State. Just look at what Florida Governor DeSantis and Miami's Mayor Suarez are doing to bring finance and technology companies to the Sunshine State. (x) and
- Third, state legislation in Albany now has a veto-proof democratic majority that appears to be committed to raising taxes.
While tax increases are very likely at both the state and federal levels, it remains to be seen how aggressive New York's tax stance will ultimately be towards its economically safer residents. Wonder if the state's actions will be enough to convince many of these residents to leave New York and take their businesses with them?
Among those residents who choose to give up the state as their permanent home (xi) there will be some who still want to maintain a "second home" in New York – perhaps a pied-a-terre in town or a vacation property in the East End or in the Hudson Valley. However, a decision by the New York Tax Appeals Tribunal late last month may cause some of these individuals – especially those who wish to continue working or doing business in New York – to reconsider such a link with the state. (Xii)
"Trolleybus" – Round One (xiii)
The taxpayer was based in New Jersey, worked primarily in an office in New York City, and was present in New York for 183 days in each of the years in question.
The taxpayer owned a house in New York State (the "House") more than 200 miles from his office, which he used for vacation purposes only. In the years in question, the taxpayer spent no more than two to three weeks in the house.
The property comprised an attached apartment rented year-round to an independent tenant under an oral lease where the tenant paid a de minimis rental amount while the taxpayer paid any property-related costs that far exceeded receive the rent.
The taxpayer filed a New York State income tax return on Form IT-203 for each of the years in question. The form includes a question as to whether the taxpayer maintained “housing” within the state during the tax year for which the tax return is being filed. The taxpayer stated that no housing was maintained within the state in the years in question. (Xiv)
Upon review by the Department of Taxation (the “Department”), the Department determined that the taxpayer has a legal residence: You had permanent residence in New York (the house) and had been in state for more than 183 days. A notice of deficiency was issued to the taxpayer claiming that additional New York State income tax plus interest and penalty was due for the years in question.
The taxpayer protested the notice by filing an application with the Tax Complaints Department in good time. After a formal hearing, the administrative judge (the "ALJ") found that the only question before the court was whether the taxpayer was a permanent resident of New York in the years in question.
The ALJ found that the taxpayer's argument primarily challenged the division's definition of "permanent residence" and its interpretation in the light of the Court of Appeal's finding in Gaied v New York State Tax Appeals Trib (xv.) posed)
The taxpayer argued that the house could not be considered the taxpayer's permanent residence because the property was maintained for the use of another (the tenant).
The ALJ compared Gaied's facts with those of the taxpayer, found that Gaied was distinguishable, and concluded that the taxpayer maintained the house for their own use. (Xvi)
The ALJ next rejected the taxpayer's argument that the house was not a permanent residence as it was only used and suitable for vacation. According to the ALJ, at no point was the taxpayer prevented from using the property essentially all year round. The house could (and was) used all year round and as such was considered permanent. The fact that the taxpayer used the property exclusively for vacation did not change its characterization as a permanent residence.
The ALJ also found that the taxpayer's claim that, under Gaied, their subjective use of the home should govern his permanent residence status was unfounded and that it was the physical characteristics of the home that made it suitable for the year – general use.
"Trolleybus" – round two
The taxpayer appealed the ALJ's decision to the Tax Appeals Tribunal ("TAT"), claiming that the ALJ had wrongly found that the house qualified as a permanent residence given the appeal court's involvement in Gaied. (Xvii)
In support of this argument, the taxpayer argued that the department's provisions on legal residence were invalid in that they define “permanent residence” in relation to property and maintenance without taking into account the taxpayer's subjective use of the home.
According to the taxpayer, Gaied supports the hypothesis that the correct analysis to determine whether a residence is “permanent” depends more on the use of the home by the taxpayer than on the physical characteristics of the home. (Xviii)
The department countered that the ALJ duly classified the taxpayer as a resident because he had been present in the state for the required number of days and retained rulership and control of the house during the tax years in question.
According to the department, the ALJ rightly recognized the validity of the department's permanent residence ordinance, which the department alleged did not invalidate its permanent dwelling regulation for determining residence.
The opinion of the TAT
The Court stated that New York Taxes Act provides two bases for state tax residency: (a) residents of New York and (b) non-residents who (i) have been present for more than 183 days, and ( ii) have "permanent residence" in the state for "substantially the entire tax year" ("legal residence").
This case continued to concern the taxpayer's status as a legal resident of New York City. The Court found that it was common ground that the taxpayer (i), because of his activity in New York City (xix), was in New York for at least 183 days in each of the years in question, and (ii) continued to operate in the property and maintenance of the house , maintained the house for these years.
According to the court, the taxpayer's disagreement with the determination of the ALJ concerned the ALJ's determination that the taxpayer's house was a “permanent residence”.
We started our analysis with the division's regulation, which provides for:
“A permanent residence is a permanent residence maintained by the taxpayer, whether or not owned by that taxpayer, and which generally includes a place of residence owned or rented by the taxpayer's spouse. A mere camp or house that is only suitable and used for vacation is not a permanent place of residence. In addition, a barracks or structure that does not contain facilities normally found in an apartment, such as B. facilities for cooking, bathing, etc., are generally not considered a permanent place of residence. "(Xx)
The court next turned to the taxpayer's allegation that the department's above regulatory interpretation of the term "permanent residence" was no longer valid in light of the Gaied Court of Appeal's decision.
In Gaied, the taxpayer was resident in New Jersey and owned a residence in Staten Island, where he made an apartment available to his parents who he stayed at occasionally, although he did not keep personal effects in the apartment and only stayed in his apartment Parents wish. Because the taxpayer commutes to his Staten Island business on a daily basis, the taxpayer was physically present in New York for more than 183 days.
The Court stated that the lower courts in Gaied, in line with previous decisions, found that the taxpayer qualifies as a legal resident, since at first sight the tax law only requires a taxpayer to maintain an apartment in order for it to be considered a permanent residence .
The taxpayer's interest in the house
However, the Court of Appeal (xxi) in Gaied ruled that there was no reasonable basis for the above interpretation that the mere maintenance of an apartment is sufficient to qualify it as a taxpayer's permanent residence for the purpose of determining legal residence. It concluded that:
"(T) The legislative history of the New York City Resident Tax Evasion Prevention Act, as well as the regulations, support the view that the taxpayer must be permanent residents of New York in order for a taxpayer permanent residents to have a resident interest in the property . "
In view of Gaied, the court found the taxpayer question asked was whether the taxpayer had a "residential interest" in the house sufficient to maintain the department's determination that the house be a permanent residence.
The taxpayer argued that her infrequent, short stays in the house for vacations compared to using her primary New Jersey residence were insufficient to make the house a permanent place of residence.
The court duly rejected the taxpayer's argument that the appeal court's involvement in Gaied precluded the use of an apartment as a holiday home from the meaning of a "residential interest".
The question of legal residence, the Court said, should relate to whether a taxpayer "maintained the living conditions for himself to live in the home". In the present case, the taxpayer had the right to live in the house, maintained the living conditions in the house and exercised this right, albeit sparingly, during the years in question.
The fact that the taxpayer used the house for vacation purposes and subjectively only considered it suitable for such purposes did not rule out the house as a permanent residence for the taxpayer. (Xxii)
Accordingly, the court found that the taxpayer had the house as a permanent residence in New York and exercised his residential interest in it by using it as a vacation home.
Residential interest
The Court's conclusion that the taxpayer had permanent residence in the house was perfectly correct under applicable law: (i) the taxpayer was present in New York for more than 183 days during the tax year; (xxiii) (ii) The taxpayer maintained the home for essentially the entire tax year; and (iii) the taxpayer had a "residential interest" in the home – they had the right to live in the home and "sustained living conditions" in the home – evidenced by their use of the home as a vacation home.
The implication for individuals like taxpayers is obvious: if you (i) are a resident of New York City, (ii) work anywhere in New York City, and (iii) maintain and use a vacation home anywhere in New York – regardless of who Distance between your place of work and the vacation home – you will be taxed as a resident of the state.
More important than this rather predictable result, however, was the court's “interpretation” of the opinion of the appellate court in Gaied and in particular the question of what constitutes a “residential interest”.
The Court made it clear that the Gaied Tax Act required only one taxpayer to maintain an apartment so that it could be regarded as permanent residence. There was no reasonable basis for interpreting that the mere maintenance – generally with the associated costs – of an apartment was sufficient to qualify it as a taxpayer's permanent residence for purposes of determining legal residence. A little more was needed.
According to the appeals court, in order for the taxpayer to have permanent residence in New York City, he must maintain a living conditions for himself on the property – he must have a residential interest in the property.
The Court stated that the taxpayer's subjective view of a property was not decisive in determining whether the taxpayer had a residential interest in the property and therefore its permanent residence status.
It was also suggested that a taxpayer's rule and control over a property and the fact that they were never prevented from using the property were compatible with a residential interest. For example, they don't need to ask for permission to stay on the property. You don't have to wait to be invited to the property.
The short length of time a taxpayer remains in a property or the infrequent use of the property by the taxpayer alone does not show that the taxpayer has no residential interest in it, especially if the taxpayer has dominion and control over property.
That brings us to the question of "living conditions". This term is not defined in the law, but some case law is helpful. For example, the Gaied court stated that the taxpayer did not keep personal items in his parents' home, while the Evans (xxiv) taxpayer (who found the taxpayer was a permanent resident) kept personal items in the rectory, including clothing and furnished his room with various furniture.
Based on the foregoing, "living conditions" can be defined as the plans one makes, either alone or with others, that enable them to live in a place (whether indefinitely, for a period of time, or whenever they choose) ) and to decide how they want to live in this place (for example, by leaving their personal belongings at the place or “making them theirs” in some other way). It can be said that a person who has such an “agreement” in relation to a place and who contributes to its maintenance has an interest in living in that place for the purposes of the legal residence check.
Hopefully the courts will continue to shed light on what it means to have a residential interest in a property as that term was used in Gaied. Until then, many questions remain unanswered, and taxpayers residing outside of New York must exercise caution as to how to maintain or acquire a residence in the state or how to deal with that residence.
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(i) Governor Cuomo has declared New York the "most advanced" state in the nation.
(ii) In particular, income taxes and sales taxes. In the case of New York City, property transfer taxes would be added. Finally, to this list we will add real estate taxes as failed or failing brick and mortar retailers (and possibly their landlords) will be removed from the tax list and tenants in office buildings will adapt to the reality of remote working and, consequently, use less office space.
(iii) If anyone can find the scientific correlation between stock market performance and that of the economy in general, please email me at [email protected].
(iv) https://www.taxlawforchb.com/2020/12/new-yorks-proposed-billionaires-tax-bad-idea/.
(v) https://www.taxlawforchb.com/2021/01/taxes-in-new-yorks-fy-2022-budget/.
(vi) Invoice number S3980.
(vii) Invoice number S3462.
(viii) By New York standards. Can't stress this enough.
(ix) Of course, these people need to be aware of the "convenience of employers rule" in New York (for purposes of income distribution in New York) and the dispute between New Hampshire and Massachusetts which can be heard by the US Supreme Court. https://www.taxlawforchb.com/2020/10/new-york-business-nonresident-telecommuters-and-the-taxation-of-wages-earned-remotely/; https://www.taxlawforchb.com/2020/12/state-taxation-of-telecommuting-employees-and-their-nonresident-employers/.
(x) The friendlier tax environment and warmer weather also help.
(xi) Specifically, they will no longer be taxed as residents of New York.
(xii) Nelson Obus and Eve Coulson, Tax Appeals Tribunal, Decision DTA No. 827736.
(xiii) We reviewed the first round of this competition in 2019: https://www.taxlawforchb.com/2019/09/statutory-residence-in-ny-the-permanent-place-of-abode-test-is -in-in-need of repair /.
(xiv) A taxpayer who answers yes to this question must complete and submit Appendix B of Form IT-203-B, which must identify the property and indicate the number of days spent in New York.
This drives me crazy. I've seen returns like the taxpayer's that say no to this question regardless of the creator's knowledge of a New York home or apartment. I've seen returns where the creator never asked if the taxpayer had such a house or apartment, instead negating or simply repeating the answer to the previous year's return.
The burden of proof is already on the taxpayer; Now the taxpayer's representative also has to struggle with a loss of credibility.
In the present case, the Court of Justice denied the taxpayer's request for a reduction in sanctions, based in part on the taxpayer's report that he had not had New York residential property on his non-resident tax returns in the years in question. Such a refusal, the Court stated, contradicts a determination of good faith and supports the imposition of penalties for negligence.
(xv) 22 NY3d 592 (2014). According to the appeals court, “(t) the legislative history of the New York City Residents' Prevention of Tax Evasion Act and regulations support the view that a taxpayer must have permanent residence. In New York, the taxpayer must have a resident interest in the property. "
(xvi) The Tribunal rejected the taxpayer's argument that he retained the residence for use by the tenant. The tenant had his own living space and, as such, its occupancy did not affect the use of the house by the taxpayer as a holiday home.
(xvii) The taxpayer also unsuccessfully argued that New York's statutory residency law was unconstitutional because it violated the commercial clause of the US Constitution (Art. I, para. 8).
(xviii) Has the taxpayer misunderstood the ALJ's position? The latter merely stated that the house could be a permanent residence as it was suitable for year-round use.
According to the Court, the threshold issue in determining whether a taxpayer has permanent residence is whether the dwelling has the physical characteristics normally found in a dwelling that is suitable for year-round living. If the answer is no, the apartment is not a permanent place of residence. If this is answered in the affirmative, the question arises whether the taxpayer has a legal right to use this apartment as a residence. If this question is answered in the affirmative and the taxpayer has exercised this right by enjoying his residential interest in this apartment, it can be concluded that the taxpayer had a permanent residence.
The Court agreed with the ALJ's conclusion that the taxpayer's home is a permanent residence. The apartment had physical properties that made it suitable for all year round.
(xix) There are approximately 260 days of the week in a tax year.
(xx) 20 NYCRR 105.20 (e) (1).
(xxi) New York Supreme Court.
(xxii) Just look at all of the "townspeople" who have left their Manhattan apartments to be quarantined in their East End vacation homes – I think most of them are still there.
(xxiii) Yes, he was more than 200 miles from the New York accommodation, but that is irrelevant under tax law. That's a stupid law.
(xxiv) Decision DBA No. 806515.
(View source.)