A case concerning New York State statutory residency for the years 2012 and 2013 was recently decided by an Administrative Law Judge (ALJ) in the matter of Nelson Obus. This case reveals specifics of the law surrounding statutory residency, and how that law can potentially trip up taxpayers.

Background

There are two ways an individual can be a resident for New York State tax purposes. First, they can be domiciled in New York State. In simple terms, this is their primary residence and home base. Or, second, they can be a statutory resident: someone who is generally domiciled in a state other than New York, but maintains a permanent place of abode in New York and spends more than 183 days in New York. It’s important to note that any part of a day counts as a day—technically, even a few minutes would count as a day. To be clear, the taxpayer does not have to use the place of abode. 

The case at hand involves only statutory residency. Thus, the first step is to understand what it means to maintain a permanent place of abode in New York. A permanent place of abode is defined as a residence suitable for year-round use, meaning it must have heat for winter and it generally must have cooking facilities. According to New York State regulations, an unheated cabin that is only suitable for vacations does not qualify.

Furthermore, the residence in question does not have to be owned by the taxpayer. It may be leased, or by any other means that the taxpayer has a legal right to use it as their own residence. The term “maintaining a permanent place of abode” means doing whatever is necessary to continue use of the residence, which can be as basic as paying the mortgage or rent.

Specifics of the Case

The relevant facts in the Obus case are as follows:

• Obus is domiciled in New Jersey.
• He works in Manhattan (New York City) and spent more than 183 days per year there.
• Obus owns a residence in the Adirondacks, in northern New York State, about 200 miles from New York City. His residence has five bedrooms and three bathrooms. It also has a small attached apartment, which has a year-round tenant who pays $200 per month. Obus used this residence for vacations, spending no more than 21 days there per year—a short period of time in the summer and again in the winter.

The New York State Tax Department took the position that Obus meets the requirements for statutory residency because he maintained a permanent place of abode in New York State and spent more than 183 days in New Yok State. It doesn’t matter that almost all of these days were in New York City, more than 200 miles from his Adirondacks residence.

The representatives for Obus argued that the facts in this case are similar to the facts in the case of Gaied v. New York State Tax Appeals Tribunal. Gaied owned a four-family residence, in which one apartment was occupied by his parents; Gaied himself would stay there occasionally.  Since this multifamily rental property was maintained for the tenants’ use, it was not found to be a permanent place of abode for Gaied. He did not have a residential interest in the property; he was a landlord.

However, in Obus the ALJ rejected the argument that the residence was maintained for the tenants’ use. The small apartment rented in the Obus house did not encumber the main residence, which was maintained for Obus and was available whenever he wanted to use it.

The second argument made by the representatives was that this was a vacation home only, and that the regulations (mentioned above) exclude a vacation home from the definition of permanent place of abode. Again, this argument was rejected. This home is not an unheated cabin; it is a five-bedroom home that is suitable for year-round use, and was in fact used in summer and winter.

This same argument was made and rejected in the matter of Barker in 2011. Interestingly, the Barker case also involved a residence that was a far distance (about 100 miles) from where the petitioner spent most of his New York State days. It was found that the distance from the residence in question is not a factor. If there is a qualifying residence in New York State, and there are over 183 days spent in New York State, the person is a resident. It does not matter if the days are spent near the residence or not. The issue of days spent within a certain radius of the residence has been brought to the New York State legislature, but there has been no change in the law.

Outcome of the Case

This case resulted in dual residence for Obus. He is a resident of New Jersey because he is domiciled there, yet he is a statutory resident of New York State due to the laws described above.  As a result, his intangible income (interest, dividends, capital gains) is taxed by both states.  Resident credits are allowed only for income sourced to a particular state. Intangible income has no source, thereby creating the double taxation. Representatives for Obus argued that this type of double taxation is unconstitutional, but this argument had been rejected by the Court of Appeals in 1988 in the matter of Tamagni, in which the statute was upheld as constitutional.

There is certainly a question of fairness or equity in a case like this. Should a house that is used only for vacations result in residency for the owner? Should days spent in New York City cause an individual to be a New York State resident when their house is 200 miles away? The resulting tax for this audit was $526,000, plus interest and penalty, which brings the total to around $1 million. There are numerous taxpayers forced to pay similar amounts due to these statutory residency laws; however, it is unlikely that New York State will change these laws and give up this type of revenue.