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A Spotlight on New York State Residency Requirements

Mark A. Nickerson, CPA, CMA, MBA
Published Date:
Jan 1, 2020

In October 2019, President Donald Trump became the most recent high-profile individual to announce his departure from New York, choosing to make Florida his place of permanent residence. The move is heavily, if not entirely, motivated by the fact that Florida does not have any personal income or estate tax, whereas New York’s top income tax rate is 8.82% (and even higher for individuals living in New York City) and the top estate tax rate is 16%. Though Trump has filed a Declaration of Domicile with the Palm Beach county clerk and comptroller, that declaration alone is nowhere near enough to satisfy New York State’s nonresidency requirements for income tax purposes moving forward. Due partially to the discord between Trump and New York Governor Andrew Cuomo, it is widely thought that the New York State Department of Taxation and Finance (DTF) will be taking a very close look at this case, as it has done recently in many other cases of far less significance. New York State uses two separate and distinct tests to determine residency: domicile and statutory residence.

The Domicile Test

The first test is based on whether the taxpayer is domiciled in New York State—that is, their primary residence or true home is located within the state. New York State makes it explicitly clear that taxpayers may have multiple residences but can only have one domicile. In order to determine domicile, the DTF uses five primary factors: home, active business involvement, time, items near and dear, and family connections. No single factor can be looked at individually as an indicator or deciding factor of domicile; they must be examined in the aggregate before any determination is made.

The first factor, home, generally leads auditors to focus on the individual use and maintenance of a New York residence compared with any out-of-state residences a taxpayer owns. If the taxpayer only owns one home and sells his New York residence—separating completely from the old community, home, and state—domicile is generally easy to establish. If more than one home is owned or rented, auditors may examine whether the taxpayer is attempting to sell one home, the size and value of the multiple residences in question, and the nature of the homes’ uses. Individual facts, such as the relative values of multiple residences, may not be used as a sole determinant of domicile but will most certainly be looked at in totality by auditors, along with any other evidence indicating the taxpayer’s true home.

The second factor, active business involvement, includes the taxpayer’s pattern of employment and compensation during the tax year in question. Active business involvement also includes participation in a New York trade or business or in any decision-making or management of a business located within the state. It is important to note that the courts held in Matter of Herbert L. Kartiganer et al. that the taxpayer need not be present in New York State to exercise control or supervision over an active trade or business.

The third factor, time, is fairly straightforward; it measures where the taxpayer spends most of their time. Auditor decisions regarding the time factor are based upon a comparison of time spent within New York State versus other locations.

The next factor, items near and dear, is commonly referred to as the “teddy bear test.” At which residence does the taxpayer keep their teddy bear or other sentimental items close to their heart? Auditors look for indicators like where the taxpayer’s pets, antiques, family, or wedding photo albums are located.

The fifth and final factor, family connections, focuses on immediate family, normally meant to include spouse and any minor children. The children’s school location can be one of the most important factors in the decision of where to live, and is often linked to the quality of schools. It bears repeating that no single factor can be considered a sole determinant of domicile.

The Statutory Residence Test         

The second test, the statutory residence test, has been the subject of two recent noteworthy court cases. Under this test, taxpayers may be considered a statutory resident of New York State under section 605(b)(1)(B) of New York Tax Law if they are not domiciled in the state but spend more than 183 days there in the aggregate and maintain a permanent place of abode within in New York, often referred to as the 183-day rule. A permanent place of abode is defined as a “dwelling place of a permanent nature maintained by the taxpayer, whether or not owned by him, and will generally include a dwelling place owned or leased by his or her spouse.” For a dwelling to be considered permanent, it must be suitable for year-round use—a vacation home that lacks heat for the winter or isn’t accessible during certain times of the year would not be considered permanent.

The courts have also ruled that a taxpayer must have a relationship to or residential interest in the dwelling for it to be considered a permanent place of abode. One such example, provided within the NYSDTF Nonresident Audit Guidelines is below:

In connection with her change of domicile to Florida, a taxpayer listed her New York home for sale. The home remained fully furnished and the taxpayer had unfettered access although she no longer resided there. … In the Department’s view, the taxpayer retained a residential interest in the home and it would constitute a PPA despite the fact that it was listed for sale. This is because the taxpayer continues to have unfettered access to the home which had been her primary residence in the past and no one else is using it as a residence currently. Therefore, she will be subject to being a statutory resident in any year in which she spends more than 183 days in New York while the property is for sale. … The taxpayer demonstrated that the contents of the home were moved to her Florida residence and the New York home was vacant. In this situation, the taxpayer would not have a residential interest in the property as it would not be reasonable to expect her to use a vacant home despite having unfettered access.”

Taxpayers are required to keep adequate records to substantiate the number of days spent within New York State during the taxable year in question. The evidence must be clear and convincing; however, the burden of proof will depend on the separate facts and circumstances of each case. It is important to note that being in the state for any part of a day counts as a full day toward the 183-day test. Therefore, if an individual arrives in New York on Sunday evening and departs Wednesday morning, it counts as four days for statutory residence purposes. The only exceptions are for continuing travel that has begun outside the state to a destination also outside the state (i.e., flight layovers) and for medical-treatment days.

Two Recent Court Cases

Two recent court cases have focused on taxpayer’s resident status under the statutory residence test. In the Matter of Leslie Maysthe New York State Tax Appeals Tribunal provided a clearer picture of how the New York State DTF may define a permanent place of abode moving forward (no clear definition exists in tax law). Leslie Mays accepted a position with Avon Products Inc. in New York City in January and moved into a furnished apartment provided by the company until she could find permanent housing. Mays stayed in the apartment for approximately four months before moving into her fiancé’s apartment, also in New York, for the rest of the year. Upon audit, the New York State DTF determined that Mays maintained a permanent place of abode for the entire year and, therefore, was a statutory resident for income tax purposes.

The Administrative Law Judge (ALJ) and the Tribunal both upheld the DTF’s initial findings, ruling against the taxpayer. In doing so, they established a clearer explanation of how the determination of permanent place of abode will be made. The Tribunal focused on only a few specific questions: First, did the dwelling exhibit the physical characteristics ordinarily found in a dwelling suitable for year-round habitation? If so, did the taxpayer have the legal right to occupy the dwelling, and did they in fact exercise that right? Finally, did the taxpayer maintain the dwelling?  The Tribunal defined “maintaining” as simply doing what was necessary to continue living in the dwelling, thus continuing their residential interest. Those three questions create a precedent that taxpayers and preparers may use to help determine whether a permanent place of abode was present, thus determining statutory residence.

The second recent case, In the Matter of Nelson Obus and Eve Coulson, the taxpayer was found to be a statutory resident, resulting in dual-resident status. Obus was domiciled in New Jersey but worked in New York City and was present in New York State for more than 183 days in the tax year. He also owned a residence in New York State, but that dwelling was approximately 200 miles from his job in New York City. Obus used this home occasionally as a vacation home, spending a total of 21 days there during the tax year. While the vacation home included a small apartment that Obus rented out, the main residence was maintained and available for Obus at any time. The ALJ upheld the determination of the New York State DTF finding that Obus held dual residency in both New York and New Jersey. While no mention of Mays was made in the determination, the three questions addressed in that case would lead to the same result. The downside is that dual-resident status may result in intangible income being taxed by both states. Resident credits may only be allowed for income sourced to a specific state, however, with the end result being double taxation of items such as interest, dividends, and gains. In Obus, dual residence resulted in a tax liability of more than $526,000, plus interest and penalties.

Future Considerations

As states continue to focus on opportunities to make up dwindling tax revenues, preparers must be aware of residency tax laws in place and—more importantly—how the New York State DTF, ALJ, and Tribunal have recently interpreted those laws with respect to domicile and statutory residence.

Mark A. Nickerson, CPA, CMA, MBA, is a lecturer at the State University of New York at Fredonia in Fredonia, New York, and owner of Mark A. Nickerson CPA PLLC in Buffalo, New York.