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Attention New York Residential Property Owners Living Outside of New York: Will You Be Subject to New York Resident Taxation?


Synopsis:
According to a recent New York ruling, a taxpayer who owns a place of residence in New York may be subject to being taxed as a statutory resident of New York – even if the taxpayer did not live in the residence. On December 27, 2012, a New York appellate court ruled, in Gaied v. New York State, N.Y. App. Div. No. 513825, that an apartment in New York that was owned by a taxpayer and maintained for his elderly parents counts as a “permanent place of abode.” If this ruling survives appeal, the taxpayer, and others with similar situations, may be taxed as full New York statutory tax residents without actually living in New York (e.g., maintaining a permanent place of abode for substantially all of the taxable year and spending more than 183 days within the state/city).

Suggested Action:
After reading this alert, please contact a CohnReznick tax professional to determine whether this ruling could impact on your tax position.

Issue:
The taxpayer bought a three-unit apartment building, as an investment and for his parents use, in New York City. The taxpayer’s aging parents, who relied on him for support, lived in one of the units. A few days a year, the taxpayer would sleep on his parents’ couch at their request. The other two units were rented. The taxpayer maintained his residency in New Jersey, but worked in New York and did not challenge the fact that he spent over 183 days in New York each year during the audit period. The New York State Department of Taxation and Finance (“Department”) examined the taxpayer’s return, claiming that the parents’ apartment was a “permanent place of abode” kept by the taxpayer. In 2009, the New York Division of Tax Appeals ruled that, even though the taxpayer’s access to his parents’ apartment was limited, such access justified taxing the taxpayer as a full resident of New York.

The New York Tax Appeals Tribunal reversed that ruling. The Tribunal found that the taxpayer had limited access to the apartment, no personal effects there, and did not use the apartment with enough regularity to make it his permanent place of abode. In an unusual move, the Department requested a re-argument of the case to determine whether mere “property rights” in a dwelling suitable for usage created a permanent place of abode for the holder of the rights, regardless of whether the rights holder actually used the dwelling. On re-examination, a three-judge panel at the Tribunal ruled that property rights alone made a usable dwelling a “permanent place of abode” for the owner. The decision was subsequently appealed to the Third Department of the New York State Supreme Court, Appellate Division.

By a three to two decision, the Third Department upheld the Tribunal’s ruling that the taxpayer’s parents’ apartment was a permanent place of abode for New York resident income tax purposes. However, the majority did not use the Tribunal’s ruling that the taxpayer’s property rights in the apartment created the permanent place of abode. The decision evaluated the taxpayer’s actual connection to New York to determine that the Tribunal’s classification of the taxpayer as a New York resident was supportable.

The two dissenting judges found that the Tribunal’s property rights standard for resident status was irrational in light of New York’s resident taxation law. According to the dissent, the purpose of New York’s statutory residency standard is to tax those people with “real” residency in New York. Under state tax law and regulations, a “permanent place of abode” means a dwelling that is “permanently maintained” by the taxpayer. The dissent placed its emphasis on that standard to argue that the taxpayer clearly maintained his permanent home in New Jersey, not New York, regardless of his ownership of New York dwelling property.

Because the decision was split three to two, the taxpayer can appeal to the New York Court of Appeals, the state’s highest court, as a matter of right. The outcome of such appeal will determine whether the standard for New York residency will be expanded to the Tribunal’s interpretation, or limited to the statutory residency test.

Contact:
For more information, please visit the CohnReznick State and Local Tax webpage and contact Corey Rosenthal, Director, State and Local Tax Services, at 646-625-5729 or Patrick Duffany, Partner and National Director of State and Local Tax Services, at 860-368-3607.

 


Circular 230 Notice: In compliance with U.S. Treasury Regulations, the information included herein (or in any attachment) is not intended or written to be used, and it cannot be used, by any taxpayer for the purpose of i) avoiding penalties the IRS and others may impose on the taxpayer or ii) promoting, marketing, or recommending to another party any tax related matters.

 

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