Gaied Decision: Upon Video Review, Case Closed

By:
Timothy Noonan, JD, and Joshua Lawrence
Published Date:
Dec 1, 2014

We know what you are thinking. Another article on the Gaied case? By now anyone who follows New York tax developments to any degree has seen articles analyzing the New York Court of Appeals’ landmark decision on New York’s residency rules. We’ve written a few (here and here), and there’s even a YouTube video out there:

If you’re YouTube account is in “safety mode,” please click here to learn how to disable it.

So enough already, right?

Apparently, though, the lesson from the court’s decision hasn’t fully sunk in. There is still significant debate about what the court really meant, and how the decision should be applied in future residency cases. This article presents a new and different take. Rather than another 1,000-foot view on the decision and debate about what the court may have meant, we thought we’d add insight into the Court of Appeals’ reasoning by showing actual footage of the oral argument proceedings. We think that watching the court grappling with some of the concepts in the case adds context to the ultimate decision, and might help people (read: New York tax auditors) understand how big a deal it actually is.

Background

First, some quick background. The Gaied case deals with the scope and intent of New York’s “statutory residence” test, under which a person not domiciled in New York can still be taxed as a “resident individual” of the state by spending more than 183 days in New York and “maintaining a permanent place of abode” in the state [See N.Y. Tax Law section 605(b)(1)(B)]. Gaied involved the “permanent place of abode” (or PPA) test—specifically, whether that test requires a person to actually live in an abode for it to qualify as a PPA for residency purposes. The Department of Taxation and Finance had taken a broad view of statutory residence, culminating prior to Gaied in the position that if a taxpayer owned and maintained a dwelling, there was no reason to consider the taxpayer’s use of or relationship to the place (that is, whether he or she lived there or used it as a residence). Under that view, for example, a vacation home owned by the taxpayer and made available for year-round use would qualify as a PPA even if the taxpayer rarely (or even never) chose to use it.

The Gaied case presented a similar question. By now readers likely know the facts. The taxpayer was domiciled in New Jersey, worked in New York, and owned a three-unit apartment building in New York, with his parents residing in one of the units. Although the taxpayer paid all the expenses on the parents’ apartment, he kept none of his own belongings there and only stayed overnight when requested to by his parents (once or twice a month on average), sleeping on a couch when he did. The Tax Department assessed Mr. Gaied as a statutory resident of New York, setting off a string of litigation that ultimately culminated in the Court of Appeals’ 2014 decision. Read this article if you want all that history.

Live Action at the Court of Appeals

The real action, of course, came at the Court of Appeals. This represented the first time the state’s highest court had undertaken a substantive review of New York’s statutory residency rules, and the result was compelling, as you’ll see. What better way to explain the case than by looking at what actually happened during oral argument.

To give you a feel for the scene, here’s how we got started:

Our strategy was to get the court to focus on the original legislative intent of the residency statute, because without it, the term “maintains a permanent abode” is admittedly subject to a broad range of interpretations. Did the legislature intend that ownership of a place is all that counts? Or do we have to look at whether a taxpayer is actually “residing” there in order to tax him as a “resident?” This plays out in the following exchange with Chief Judge Jonathan Lippman.

The Department seemed to agree that the legislature’s intent was indeed to tax people who resided in New York but claimed to be domiciled elsewhere. But as Judge Eugene Pigott suggested in this exchange with counsel for the Tax Department, taxing someone like John Gaied as a resident appeared to be the reverse of that intent!

Sure enough, in its written decision in Gaied, the Court of Appeals cited to the exact language we outlined in the above clip from the Tamagni case [Matter of Tamagni v. Tax App. Trib. of State of N.Y., 91 N.Y.2d 530 (1998), cert. den. 525 U.S. 931 (1998)], acknowledging that the original legislative purpose of the statutory residence provision was to prevent tax evasion and ensure that people who actually resided in New York were taxed appropriately—not to expand the tax to cover persons who had only transient connections to the state. According to the court:

In Matter of Tamagni [citation omitted], this court examined the legislative history of the tax statute, and noted that there had been “several cases of multimillionaires who actually maintain homes in New York and spend ten months of the every year in those homes…but…claim to be nonresidents.” …We explained that the statutory residence provision fulfills 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 us as nonresidents.” …In short, the statute is designed to discourage tax evasion by New York residents.

So we argued that, construed in light of this legislative intent, a “permanent place of abode” for residency purposes required far more than merely owning a place and having it potentially available for use. Rather, a person must actuallyreside in the place in order to be considered a “resident.”

Judge Lippman’s question in the next clip captures the difference between our view of what it means to maintain a “residence” in New York and view the Department maintained throughout the litigation.

But it was clear that the court was not buying into the Department’s position that ownership and maintenance of an abode is all that is required to establish it as a “residence.”

To Judge Pigott, the notion that a person can maintain a “permanent place of abode” for residency purposes simply by having a place available for his use “just doesn’t make sense.”

It’s starting to look good for the home team, isn’t it?!

But here’s where it really gets good. And here’s the clip you should play over and over again if you’re faced with a debate about what this residency test is all about. Listen to what “makes sense” to the Chief Judge of New York’s highest court:

Finally, as we urged in closing, our test for a permanent place of abode—one that considers both the attributes of the dwelling and the person’s relationship to the place—is not a new interpretation of the law. In fact, it’s the same standard that the Tax Appeals announced over 20 years ago in Matter of Evans [Matter of Evans, Tax Appeals Tribunal, June 19, 1992, confirmed Matter of Evans v. Tax Appeals Tribunal, 199 A.D.2d 840 (3d Dep’t. 1993)] and that has been cited in virtually every case involving statutory residency since then.

The Court’s Decision

Of course, we all know how it turned out. The Court of Appeals decided that Mr. Gaied could not be taxed as a resident of New York because he did not reside in the dwelling alleged to be his “permanent place of abode” in New York:

We agree with petitioner and hold that in order for an individual to qualify as a statutory resident, [there must be some basis to conclude that the dwelling was utilized by the taxpayer as a residence].

The court added that:

The legislative history of the statute, to prevent tax evasion by New York residents, as well as the regulations, support the view that in order for a taxpayer to have maintained a permanent place of abode in New York, [the taxpayer must, himself, have a residential interest in the property].

Some of the commentary on Gaied has emphasized that controversies will still likely arise over what it means to “reside” in a dwelling. And we don’t disagree. We have already seen the Department’s attempt to reconcile the decision in redrafting its Nonresident Audit Guidelines. But these clips from the oral argument should provide some color to the language the court used in its decision. The taxpayer has to actually reside in New York to be taxed as a resident of New York. Put another way, a taxpayer should have to live in New York in order to be taxed as a resident of New York. Relying on the legislative intent of the state, that’s what “makes sense.”

To see the entire oral argument, click here.


Timothy P. NoonanTimothy P. Noonan, JD, is the practice group leader of Hodgson Russ LLP’s New York Residency Practice, and he is one of the leading practitioners in this area of the law. He has handled some of the most high-profile residency cases in New York over the past decade, including the Gaied case discussed here, one of the first New York residency cases to ever reach New York’s highest court. He also co-authored the 2014 edition of the CCH Residency and Allocation Audit Handbook, and he is often quoted by media outlets, including the Wall Street Journal, New York Times, and Forbes, on residency and other state tax issues. As the “Noonan” in “Noonan’s Notes,” a monthly column in Tax Analysts’ State Tax Notes, Tim is also a nationally recognized author and speaker on state tax issues. He can be reached at 716-848-1265 or tnoonan@hodgsonruss.com.

Joshua K. LawrenceJoshua K. Lawrence is a senior associate in the state & local tax practice at Hodgson Russ LLP. In addition to personal income tax audits and litigation, Mr. Lawrence has extensive experience counseling clients in sales and use tax matters, including audits, controversies, and multistate sales tax planning. He can be reached at jlawrenc@hodgsonruss.com or (716) 848-1403.

 
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