New Residency Ruling Creates Uncertainty For Taxpayers

Hedge Fund Client Alert: A recent decision issued by the New York Tax Appeals Tribunal which further expands the definition of “permanent place of abode” (PPA) opens the door to increased taxation for out-of-staters who own a second home in New York State.

The Tribunal ruled (in Matter of Gaied) that a New Jersey resident, who worked in Staten Island and bought his elderly parents a home there, is subject to pay New York resident income taxes. Prior to this decision, the determination of a PPA was based on a detailed assessment of a taxpayer’s use, access, and relationship to a specific dwelling, not merely their ownership status.

“This is a frightening ruling with widespread ramifications,” according to Sharon Ackerman, Anchin’s Director of Tax Controversy Services. “The ruling means you can now be taxed as New York State resident based solely upon property ownership. Prior to this ruling, under the current residency statutory regime, taxation was based upon usage. Anyone who maintained a PPA and spent more than 183 days (including working days) in the state could be taxed as a resident, regardless of the location of their primary residence. It will be interesting to see if this new ruling holds up under appeal.”

“Prior to this ruling, determinations of PPA were guided by Matter of Evans, which stipulated that an intensive and fact-based analysis must be performed to establish whether an abode was actually “permanent.”

The Matter of Gaied involved an individual who owned an apartment which he maintained for the use of his elderly parents. After losing on the administrative judge level, and then winning an appeal, the taxpayer lost in a final re-argument delivered by the New York State Tax Department. The department successfully made the case that ownership or property rights in a dwelling outweigh all other facts and contingencies and automatically qualify the abode as permanent. In its ruling, the Tribunal held 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 place to inquire into the taxpayers’ subjective use of the premises.”

“This reversal of previous policy creates significant uncertainty in how the Tax Department will apply this new formula for the statutory residence test,” Ackerman said. “Conceivably, if a taxpayer has any property rights over a residence, whether or not he or she uses it for any purpose or even sets foot in it, the residence could be classified as a PPA and, coupled with the 183-day rule, may qualify the person as a New York statutory resident.”

This ruling marks the second time in recent months that the Tribunal has ruled against an out-of-state taxpayer. In an earlier ruling, the Tribunal held that a Connecticut man who worked in Manhattan and owned a rarely used Long Island summer home owed $1 million in additional taxes.

“This posture on behalf of the State is clear evidence that New York State is getting tougher on individuals with part-time homes or home ownership in the State,” Ackerman said. “It is part of a concerted effort by the State to increase revenue by finding untapped sources of tax revenue.”

For further information or assistance on this topic, contact Ackerman at Professionals in Anchin’s Tax Controversy Services Team are experienced in helping taxpayers who face a challenge of their income, sales and use tax, or residency status by the IRS, state, or local taxing authority.

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