For two decades, the New York State Department of Taxation and Finance (DTF) has been at the forefront of residency issues, developing one of the most sophisticated residency audit programs in the nation. Recently, however, the DTF has received a lot of negative publicity in tax publications and the popular press for its aggressive enforcement in this area. And for good reason. Never before has the DTF opened up so many new audits and, at least according to some, taken such outlandish positions. The message, however, is clear: Avoiding New York state taxes is more difficult than ever.

Residency Rules

Under New York’s residency rules, you’ll be taxed as a resident if either: (1) you’re domiciled in New York (domicile refers to the location of one’s true, fixed and permanent home or the place to where a person intends to return whenever absent); or (2) you maintain a permanent place of abode in New York and spend more than 183 days there during the tax year (making you a “statutory resident”).

Residency is an all-important concept in state taxes, and New York is no different. Residents of New York are taxed oneverything. Thus, taxpayers face the prospect of full taxation on their world-wide income if they qualify as residents of New York. And since New York City residents must also pay a separate tax of almost 4 percent, residency classifications in New York State and New York City can carry huge consequences.

New York’s Audit Program

Back in 1989, the DTF began an experimental audit program, focused on those who claimed nonresident status. The initial program was incredibly successful for the state, and over the past 20 years, the DTF has continued to step up its enforcement efforts. Audits focus not only on domicile issues and statutory residency questions, but also on nonresident income-allocation issues. And whatever the issue, every one of these audits is time-intensive, intrusive and expensive.

Recent Cases

All of this audit activity means lots of litigation. Several recent residency cases demonstrate the types of issues that arise in these audits.

Domicile cases always raise difficult issues, as questions concern personal and private issues related to the taxpayer’s intent. For instance, in Matter of Ingle,1 the issue was whether the taxpayer could prove that she changed her domicile from New York to Tennessee on April 1, 2004, as opposed to July 9, 2004, as the DTF claimed. A domicile change date in April would have allowed the taxpayer to avoid New York taxes on significant income she earned from the sale of stock—income typically not subject to tax for a nonresident. And the taxpayer’s case was fairly strong: she had rented an apartment in Tennessee, moved furniture there, registered to vote and changed her driver’s license, all in early April. But in October 2010, an administrative law judge in New York’s Division of Tax Appeals held that the taxpayer didn’t provide enough proof about where she was spending her time from April 2004 through July 2004, or about what belongings were moved to Tennessee or why she maintained her New York City apartment through July. Thus, even though the taxpayer took several steps toward making her new home in Tennessee, the judge didn’t believe that she actually accomplished a domicile change until July 2004. The issues in Ingle are typical of domicile cases, in which the focus is on determining the taxpayer’s subjective intent.

But recently, most of the real action has been in the “statutory residency” area, in which questions center on the number of days a taxpayer spends in New York and whether the taxpayer maintains a “permanent place of abode” in New York. On the “days” issue, a recent case involving the noted hedge fund manager Julian Robertson, highlights the “high-stakes poker” that can go on in these residency cases. In Matter of Robertson,2 the issue concerned Robertson’s location in or out of New York City over the course of two days during a tax year. If Robertson couldn’t prove his non-New York City location on either of those days, he would have been hit with a $26 million tax bill. Luckily for Robertson, the New York State Tax Appeals Tribunal (the Tribunal) held that he presented adequate proof of his non-New York City location on the two days in question. This case highlights, however, how incredibly difficult and intrusive the day-count investigation can be. Robertson culminated in a trial lasting over four days, with extensively detailed evidence, testimony and documentation focused on Robertson’s whereabouts on a few days during the tax year.

To help taxpayers defend against these types of audits, our firm is in the process of developing an iPhone application to help a person track his whereabouts in and out of New York using GPS technology. That may help reduce the burden in some of these audits, since the taxpayer in a statutory residency audit has the arduous task of proving each and every day spent outside of New York. Of course it depends on whether the DTF ` GPS evidence as reliable proof of location.

Two other recent cases highlight some problematic issues in the statutory residency area, specifically regarding whether a person’s dwelling constitutes a “permanent place of abode” in New York. In Matter of Gaied,3 the Tribunal ruled that an apartment maintained by the taxpayer for his elderly parents was not his “permanent place of abode” because he had no living quarters of his own in the apartment and didn’t use it as his own residence. That case, however, is still creating controversy. The DTF was so rankled by its defeat in that case that it was able to convince the Tribunal to reconsider its decision, which it’s in the process of doing. The other case generating publicity is Matter of Barker.4 In that case, John Barker lived in Connecticut but worked in New York City, commuting to work each day from his Connecticut home. He didn’t maintain any New York living quarters near his office or home. However, John and his wife, Laura, owned a small cottage in the Hamptons, several hours from their home and John’s workplace, where they spent about 10 to 12 nights a year. Applying the statutory-residency rules in a mechanical fashion, the Tribunal held that the taxpayers could be taxed as statutory residents of New York, taxable on all income from all sources, because John spent more than 183 days in New York and “maintained a permanent place of abode” in New York. The case is still under review, but the Tribunal’s ruling made headlines in the New York Times, Wall Street Journal and several other notable publications. Reviews of the case have been critical. The ruling has surprised many tax practitioners and upset many real-estate professionals, who fear that rulings like this will discourage nonresidents from purchasing second homes in New York. Legislation has also been proposed to reverse the ruling in the case, even while it’s still under appeal.

Endnotes

1. Matter of Ingle, NYS Division of Tax Appeals (Oct. 14, 2010).

2. Matter of Robertson, NYS Tax Appeals Tribunal (Sept. 23, 2010).

3. Matter of Gaied, NYS Tax Appeals Tribunal (July 24, 2010).

4. Matter of Barker, NYS Tax Appeals Tribunal (Jan. 14, 2011). The author represents the Barkers in this case.