On February 18, 2014, the New York State Court of Appeals, in a 7-0 decision, reversed a decision of the New York State Tax Appeals Tribunal (the "Tribunal") and rejected years of administrative interpretation by the New York State Department of Taxation and Finance (the "Department") regarding New York’s statutory resident test. Under the New York Tax Law, New York may impose its personal income tax on the worldwide income of an individual who is domiciled in another state if the individual: (i) maintains a permanent place of abode in New York for substantially all of the tax year; and (ii) spends more than 183 days in the state.1 With respect to the first prong of the test, the Department had long asserted (and the Tribunal ultimately agreed) that a taxpayer need not actually dwell in the abode in order to be taxed as a statutory resident.2 Relying on statutory and regulatory authority, as well as on legislative history, the Court of Appeals rejected this interpretation as irrational and held that, in order to qualify as a permanent place of abode, "there must be some basis to conclude that the dwelling was utilized as the taxpayer’s residence."3 The decision, Gaied v. New York State Tax Appeals Tribunal, significantly curtails the Department’s ability to subject an individual to New York’s personal income tax based on statutory residency.
Mr. Gaied immigrated to Staten Island in his early 20s and opened an automotive repair business. He lived in New Jersey and commuted each day to work. In 1999, Mr. Gaied purchased a multi-family apartment building near his business for investment purposes and as a place for his elderly parents to live. He supported his parents financially, including paying many of the expenses related to the apartment. Mr. Gaied had a key to and stayed at the apartment on occasion to visit and care for his parents, but he did not have sleeping accommodations at the apartment (he slept on the couch). He did not live in the apartment or keep any clothing or personal belongings there. Because he commuted to New York for work each day, Mr. Gaied conceded that he spent more than 183 days in the state during the 2001 through 2003 tax years. However, for these years he filed as a nonresident of New York on the grounds that he was domiciled in New Jersey and did not maintain a permanent place of abode in New York.4
Following an audit, the Department determined that Mr. Gaied was a statutory resident of New York State and City, and issued a Notice of Deficiency asserting additional New York State and City personal income taxes of $253,062. Mr. Gaied filed a petition with the New York State Division of Tax Appeals seeking a redetermination of the deficiency. Following a hearing, the Administrative Law Judge ruled that Mr. Gaied was taxable as a statutory resident because he maintained the Staten Island apartment building and could access it any time.5 On appeal, the Tribunal initially ruled that Mr. Gaied was not taxable as a statutory resident because he did not have "living quarters" at his parents’ apartment. Specifically, the Tribunal noted that Mr. Gaied did not have a bed, bedroom, or personal effects in the apartment building, and visited it only to care for his ailing father.6
Following the Tribunal’s decision, the Department filed a motion for rehearing on the grounds that the law clearly does not require the taxpayer to "actually live at the subject property for it to be considered a permanent place of abode."7 The Tribunal granted the Department’s motion8 and—in a divided opinion—overturned its initial decision.9 In doing so, the Tribunal rejected Mr. Gaied’s position that a taxpayer must maintain an abode for personal use before it may be considered a permanent place of abode, stating that "where a taxpayer has a property right to the subject premises, it is neither necessary nor appropriate to look beyond the physical aspects of the dwelling to inquire into the taxpayers’ subjective use of the premises."10
In another divided opinion, the Supreme Court Appellate Division, Third Department, upheld the Tribunal’s revised determination.11
Highest Court: Department’s Position "Has No Rational Basis"
On further appeal, the New York State Court of Appeals resoundingly rejected the Department’s and Tribunal’s interpretation of the law as irrational. The court noted that while the statute does not define permanent place of abode, "nowhere in the statute does it provide anything other than the ‘permanent place of abode’ must relate to the taxpayer."12 Similarly, the court viewed the Department’s regulations as supporting the conclusion that an abode cannot qualify as a permanent place of abode for statutory residency purposes unless it is maintained by the taxpayer for his or her own use.13
Moreover, the court held that the legislative history of the Tax Law compels an interpretation that a taxpayer must actually reside in an abode before it can qualify as a permanent place of abode for statutory residency purposes. In particular, the court cited its decision in Matter of Tamagni v. Tax Appeals Tribunal.14 In Tamagni, the court explained that the legislative purpose of the statutory residency provisions is to fulfill "the significant function of taxing individuals who are ‘really and [for] all intents and purposes . . . residents of the state,’ but ‘have maintained a voting residence elsewhere and insist on paying taxes to [New York] as nonresidents.’"15 Because the law was intended to tax individuals who are, in essence, "residents" of New York, the court found it irrational to conclude that taxpayers may be subject to tax as statutory residents if they don’t use the dwelling as a "residence."
Reed Smith Insights
The Gaied decision is a significant victory for taxpayers. For years, the Department has asserted that—so long as a taxpayer has free and continuous (i.e., unfettered) access to an abode—it is a permanent place of abode for statutory residency purposes. The Department’s mantra has long been that "voluntary nonuse" of an abode is irrelevant and that a taxpayer "need not actually use or dwell" in an abode for it to be considered a permanent place of abode. The Gaied decision finally puts this irrational position to bed.
While Gaied decisively establishes that a taxpayer must actually "reside" in an abode in order for it to qualify as a permanent place of abode, the decision provides little guidance as to when a taxpayer’s connection to a dwelling will rise to the level of using it as a "residence." In Gaied, the taxpayer maintained the apartment for his parents’ use, did not have sleeping arrangements at the apartment, stayed at the abode only on occasion, and kept no personal belongings there. Gaied opens the door for taxpayers with some additional connection to a New York abode to argue that they are not statutory residents. Consider a taxpayer domiciled in another state who regularly commutes to work in New York (and is thus in the state for more than 183 days) and owns an apartment in New York that is used for personal reasons. If the personal use is limited and infrequent, Gaied leaves open the possibility that the requirement that a taxpayer actually use the dwelling as a "residence" would not be met.
Taxpayers undergoing residency audits should strongly consider challenging the Department’s assertion of additional tax on statutory residency grounds if they can argue that their connection to an abode does not rise to the level of using it as a "residence." Taxpayers should consider consulting with their tax advisor on the subject since this is likely to entail a detailed factual and legal analysis. Similarly, taxpayers who filed as residents of New York State or City based on the Department’s now-rejected definition of a permanent place of abode should consider filing refund claims. Under New York’s three-year statute of limitations, refund claims for the 2010 tax year must be filed by April 15, 2014 (unless the taxpayer’s return was filed on extension). Additionally, taxpayers who made payments as statutory residents based on an audit by the Department may be permitted to file refund claims up to two years from the date of payment.
If you are interested in further details on Gaied decision and its implications for residency issues and personal income taxes, please contact one of the authors of this alert, or the Reed Smith attorney with whom you normally work. For more information on Reed Smith’s New York tax practice, visit www.reedsmith.com/nytax. For more information on Reed Smith's multistate tax practice, visit http://www.reedsmith.com/statetax/.
1. Tax Law § 605(b)(1).
2. See Matter of John Gaied, Division of Tax Appeals, DTA No. 821727 (Aug. 6, 2009).
3. N.Y. Decision No. 26 (Feb. 18, 2014) (not officially published), available at https://www.nycourts.gov/ctapps/Decisions/2014/Feb14/26opn14-Decision.pdf.
4. See Gaied, supra at fn. 2.
5. See id.
6. Matter of John Gaied, Tax Appeals Tribunal, DTA No. 821727 (Jul. 8, 2010).
7. Matter of John Gaied, Tax Appeals Tribunal, DTA No. 821727 (Jun. 16, 2011).
8. Matter of John Gaied, Tax Appeals Tribunal, DTA No. 821727 (Feb. 24, 2011).
9. Gaied, supra at fn. 7.
11. Gaied v. Tax Appeals Tribunal, 101 A.D.3d 1492 (App. Div. 3rd Dep’t. 2012).
12. N.Y. Decision No. 26 (not officially published), supra, fn. 2 at 7
13. 20 NYCRR 105.20(e)(1).
14. 91 N.Y.2d 530 (1998).
15. N.Y. Decision No. 26 (not officially published), supra, fn.2 at 7 (emphasis added).
Client Alert 2014-062