Revised Nonresident Audit Guidelines
In this edition, we cover breaking news in State and Local Tax developments and provide more detailed coverage of the developments for nonresident audits in NYS. If you have any questions about the information presented below, please reach out to a member of the WithumSmith+Brown SALT Team.
REVISED NONRESIDENT AUDIT GUIDELINES
New York State has revised its nonresident audit guidelines. The guidelines serve as a procedural manual for department audit staff to ensure uniformity and consistency when examinations are conducted on nonresident tax returns. The revision is mainly in response to a recent New York State Court of Appeals decision in the Matter of Gaied v. New York State Tax Appeals Tribunal, which helped to clarify some previously murky areas of New York’s residency rules. The new guidelines reflect multiple changes, including those that are a result of Gaied.
A taxpayer who is deemed to be a New York resident is required to pay tax to New York on income from all sources, whereas a nonresident has to pay New York income tax only on New York source income. Individuals are New York residents if they are either domiciled in New York, or they are “statutory residents.” A statutory resident is an individual who “is not domiciled in this state but maintains a ‘permanent place of abode’ in New York State and spends in the aggregate more than one hundred and eighty-three days of the taxable year in this state.” Determining whether a dwelling rises to the level of a ‘permanent place of abode’ is not always an easy task.
The determination of a taxpayer’s residence can create significant tax consequences for the taxpayer. For instance, consider a taxpayer that lives and works in New York City then retires to Florida, but does not immediately sell his New York home. If the taxpayer continues to earn New York wages or other New York source income, New York will tax these amounts. However, if the taxpayer earns non New York source income, New York will only tax these amounts if the taxpayer is deemed to be a resident. The residency determination may very well hinge on whether the taxpayer’s New York dwelling is determined to be a permanent place of abode, as discussed below. If the dwelling is not a permanent place of abode, the taxpayer cannot be a statutory resident. However, if the dwelling is a permanent place of abode, then the taxpayer will be a statutory resident if he spends at least 183 days in New York. This determination is crucial to the taxpayer, because whereas New York State and City have a combined maximum income tax rate of nearly 13%, Florida’s personal income tax rate is zero.
PERMANENT PLACE OF ABODE
The definition of permanent place of abode (PPA) has been developed by a series of cases over the years, including Matter of Evans, Matter of Barker, and most recently, Matter of Gaied. The new audit guidelines reflect these changes.
In Gaied, the taxpayer, a New Jersey domiciliary, owned a multiple family apartment in Staten Island where his parents lived. He paid all the expenses and occasionally stayed there. The residence was located two miles from the taxpayer’s business. The Court of Appeals overturned a lower court decision and ruled that for a taxpayer to maintain a permanent place of abode, he must have a “residential interest” in the dwelling. Thus, “there must be some basis to conclude that the dwelling was utilized as the taxpayer’s residence.”
Evans involved a taxpayer who owned a home in Dutchess County where he was domiciled, and shared living quarters with a priest in a rectory near his office in New York City. The taxpayer would typically commute to the city on Sunday or Monday and stay at the rectory during the week and then return to his home on weekends. The Tribunal concluded the rectory was a PPA for the taxpayer and stated, “permanence, in this context, must encompass the physical aspects of the dwelling place as well as the individual’s relationship to the place.”
Barker also addressed permanence of a PPA. The taxpayers were domiciliaries of Connecticut who owned a second home in the Hamptons. The taxpayers’ actual use of the New York residence was minimal, generally limited to the summer months. In fact, the wife’s parents used the home more than the taxpayers themselves throughout the year, which led the administrative law judge to determine that it was clearly suitable for year-round use. The Tribunal rejected the taxpayers’ argument that “the subjective use of a dwelling by a taxpayer” determines whether it is a PPA. Thus, because the Barkers used the Hamptons home only for vacations does not mean that it was not suitable for year-round use. This suitability and the fact that the taxpayers maintained “dominion and control over the dwelling” were sufficient for the Tribunal to conclude that the home was a PPA.
The audit guidelines incorporate these rulings by stating that the dwelling must be permanent and “the taxpayer must have a relationship to the dwelling for it to constitute a permanent place of abode.” For a dwelling to be permanent, it must be suitable for year round use. The physical attributes of a dwelling will determine whether it is suitable for year round use. A mere camp or cottage, which is suitable and used only for vacations, is not a PPA. For a dwelling to be considered a PPA, it must contain ordinary facilities such as those used for cooking, bathing, etc. In determining whether the taxpayer has the requisite relationship to a dwelling, the guidelines have identified certain factors that should be considered in such an analysis: whether the taxpayer has a legal right to the dwelling; whether he maintains the dwelling either in money or in kind; whether he uses the dwelling or otherwise has access to it; his relationship to other occupants of the dwelling; whether he has separate living quarters or keeps personal items at the dwelling; and whether he uses the address of the dwelling for government or business purposes.
The guidelines provide several examples which illustrate the state’s positions. The examples hinge on the determination of who, if anyone, is the primary resident. As the examples indicate, when a taxpayer owns an apartment and his mother lives therein and the taxpayer lives out of state, the taxpayer does not have a PPA. The dwelling place is not a PPA even if the taxpayer pays all expenses relating to the residence, has unfettered access, and occasionally sleeps there. The guidelines explain that the reasoning for this is because “the residence is used primarily by the mother and the taxpayer’s occasional use does not change its character.”
Conversely, consider a taxpayer who moves from New York to Florida, lists her New York home for sale but keeps the home furnished, and retains unfettered access even though she lives a plane ride away. The guidelines consider that taxpayer to have retained a residential interest in the home, which would thus constitute a PPA. The guidelines stress that no one else is using the home as a residence currently, and as such the taxpayer has retained a residential interest in the property, and it is her PPA. However, the guidelines specify that if the taxpayer moved the contents to her home to Florida, the taxpayer would not have a residential interest.
The guidelines also provide an example of a New Jersey domiciliary who rents an apartment in New York City where he stays when he attends events, rather than driving back to his home in New Jersey. He lets friends and relatives use the apartment occasionally, but no one else lives there on a regular basis. The guidelines consider the taxpayer to have a residential interest in the property and it therefore constitutes a PPA. It is immaterial that the apartment is vacant for the majority of the year. A residence that is owned and maintained by a taxpayer with unfettered access will generally be deemed to be a permanent place of abode regardless of how often the taxpayer actually uses it.
The rules for determining whether the taxpayer has a PPA are complex and difficult to navigate. Taxpayers should consult with an experienced tax advisor if they contemplate their residency changing in any way.
DUAL RESIDENT TAX CREDIT
This topic is covered in the guidelines, but is not one of the changes. It is worth addressing because it is one of the most critical, but confusing areas relating to New York individual income tax audits. Many times, taxpayers are deemed residents of two taxing jurisdictions. The intent of the dual resident credit is to avoid “double taxation.” Many states have different solutions for this issue. For instance, New Jersey allows a full tax credit for New Jersey domiciliaries who are statutory residents of another state.
Taxpayers who are determined to be residents of New York and are residents of another state are taxable on all income, regardless of source, by both states. Since the income includes items for which a resident credit would normally not be allowed, such as interest and dividends, the tax paid to the other state must be prorated by the following formula:
It is this adjusted figure, and not the tax that was actually computed on the other state’s resident return, that is entered on line 24 of Form IT-112-R.
The double taxation of investment income to which dual residents are subjected was the basis for a legal challenge to New York’s statutory residency law. In Matter of Tamagni, the Court of Appeals ruled that it was not unconstitutional for New York State to tax the intangible income of taxpayers who were determined to be statutory residents.
The guidelines provide an example based on this case, in which a Connecticut domiciliary who is a New York statutory resident shows ordinary income of one million dollars, $800,000 of which is derived from New York sources, $200,000 of which is derived from Connecticut sources. Both states have 6% tax rates. Her Connecticut tax before credits was $60,000 ($1,000,000 x 6%). Her dual resident credit is calculated as follows:
The dual resident credit is complex and at times can seem unfair. Dual resident taxpayers should consult with their tax advisor about the workings of the credit and how to minimize tax liability.
Need More Information?
If you would like to learn more about any of the topics addressed in this edition, please contact a member of the WithumSmith+Brown SALT Team.
Barry Horowitz, CPA, MST, Partner
Team Leader, SALT Services
212.829.3211
[email protected]
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