Two tax experts discussed relevant and recent New York state and city tax changes at the Foundation for Accounting Education's New York and Tri-State Taxation Conference on Nov. 30.

Jack Trachtenberg, an attorney and principal at Deloitte Tax LLP, started his review of New York state changes by discussing what he found to be some cases of interest.

One case that he said he could not name due to prohibitions from his firm appears to be Walt Disney Co. .Tax Appeals Tribunal of the State of New York, decided this past October. The issue in the case was whether a corporation can deduct royalty payments as income from its foreign affiliate, when the "related member" is a non-New York taxpayer. Under New York law, an entity that receives royalty payments is entitled to the deduction from its income if the entity that made the royalty payments is entitled to add them back in. The New York State Appellate Division’s Third Department affirmed the findings of the administrative law judge and Tax Tribunal that the corporation  was not entitled to take the deduction based on the existing tax law.

In the Disney case, the Third Department reasoned, "Under the statute, petitioner would be entitled to deduct royalty payments received from its foreign affiliates unless the foreign affiliates would not be required to add back the royalty payments on their own tax returns. ... Since only taxpayers are required to add back royalty payments to their tax returns, the foreign affiliates, as nontaxpayers, would not be required to add back the payments. ... Therefore, since the foreign affiliates, as nontaxpayers, would not be required to—and simply could not—add back royalty payments on their nonexistent tax returns, petitioner is statutorily precluded from deducting the royalty payments from its income."

“This [argument] has been successful for states in three cases,” said Trachtenberg. “Taxpayers lost each time,” adding that one petitioner used a constitutional argument by claiming discrimination under the commerce clause.

He then discussed s a case that has attracted much attention in recent years: Does a non-New York taxpayer having a New York vacation home meet the statutory resident test?

He reviewed the outcome of Obus v. New York State Tax Appeals Tribunal, in which the New York State Supreme Court, Appellate Division, Third Department held that the New York state vacation home of a New Jersey resident who worked in New York City was not a permanent place of abode and, accordingly, did not subject him, or his wife, to New York state tax as a resident. Initially, the New York State Department of Taxation and Finance asserted, and the Tax Appeals Tribunal agreed, that the petitioner’s upstate vacation home was suitable for year-round use and, therefore he met the 183-day test to be a statutory resident.

But the Third Department reversed, finding that even though the vacation home was suitable for year-round use, that fact alone was insufficient to satisfy the residential interest requirement to classify the home as a permanent place of abode, and to deem the taxpayers as statutory residents during the audit period. The Third Department found that, "at most, petitioners utilized the ... home for three weeks during each tax year"; that the home "was not used for access to Obus' job in New York City and was not suitable for such purposes, given that it is over a four-hour drive each way"; and that the "petitioners do not keep personal effects in the ...home, instead bringing with them what they will need for their visits." The court concluded that "even though the ...  home could have been used in a manner such that it could constitute a permanent place of abode within the meaning of Tax Law § 605, because petitioners did not use it in this manner, it does not constitute a permanent place of abode."

“You have to look at the nature of the use and the duration of the use” of the residence, Trachtenberg said. In this case, the house was used as a vacation home. He called the ruling “a huge victory" for taxpayers.

Related to that case, Trachtenberg highlighted nonresident audit guidelines, which were updated in December 2021. Prior to tax year 2022, New York interpreted permanent place of abode (PPA) to mean a period exceeding 11 months. Now, New York defines "substantially all of the year" for purposes of PPA to mean a period exceeding 10 months, a decrease in one month.

Zal Kumar, a state and local tax partner at law firm Mayer Brown, followed Trachtenberg with a presentation on New York City tax updates.

Starting with discussion of some legislative changes for New York business taxes, he cited a bill signed into law by Gov, Hochul at the end of August. The new law “relates to certain grants as taxable income, the imposition of the business corporation tax, the credit of certain overpayments of tax, the disclosure of owners of LLCs, and the city pass-through entity tax,” according to the text of the bill, L. 2022, S9454 (c.555). The importance of the bill, as Kumar saw it, is that partnerships that are “deriving receipts from activity within the city” may create a nexus for their corporate partners, creating a conflict with positions New York City is taking on audit.

He also highlighted a change in the real property transfer tax that treats the exchange of real estate as two taxable events, and a change in the commercial rent tax that allows a subtenant to deduct co-working membership fees if the occupancy exceeds the de minimus threshold of 14 days a year.

Kumar urged the attendees to pay attention to two pending issues: New York City apportionment of partnership income for corporate partners, and realtors experiencing limits under the False Claims Act.

Also during the session, Chaim Kofinas, director at Katz Sapper & Miller, presented New Jersey tax updates, and Luke T. Tashijian, an attorney and partner at Whitman Breed Abbott & Morgan LLC, presented Connecticut tax updates.