New York Residency Audits: Defending Foreign Domicile Changes

Published Date:
Mar 1, 2015

In an earlier column, we addressed the New York State Department of Taxation and Finance’s (the “Department”) aggressive nonresident audit program and the unique challenges that arise when a taxpayer’s change of residency is followed by a transaction in which he or she recognizes a large capital gain.  (Defending New York Residency Audits that Target Capital Gain).  In this column, we address another type of audit where the Department has demonstrated a propensity for aggressively pursuing full resident taxation.  These audits involve individuals who have claimed a change of domicile to a foreign country.

Foreign Domicile Changes

Generally, to establish a change of domicile, a taxpayer must demonstrate a change of lifestyle such that the taxpayer’s subjective intent to make a new location his or her permanent home is substantiated by objective evidence.  In determining whether the taxpayer has established the requisite intent to live outside of New York, the Department considers the following five primary factors: a review of the taxpayer’s homes, active business involvement, time spent in and out of New York, the location of near and dear items (i.e., valuable and sentimental belongings), and the location of the taxpayer’s immediate family.

Although these factors should be relevant in any domicile audit, cases involving a foreign domicile change present unique challenges.  For starters, it is the Department’s view that the presumption against a change of domicile to a foreign country is greater than in cases involving a change of domicile to another jurisdiction within the United States.  (See Matter of Irenee D. May, Admin. Law Judge (Jan. 8, 2015)).  Additionally, the Department’s Nonresident Audit Guidelines (the Guidelines) contains the following troubling language that we have seen auditors misconstrue and misapply in cases involving foreign domicile changes:

A change of domicile from New York to a foreign country presents a unique set of issues unlike those found in the typical nonresident audit.  In such cases, a comparison of the domicile factors between New York and the foreign country may not necessarily be a true measure of the taxpayer’s intent.  This is particularly true for moves prompted by employment rather than retirement considerations.  For example, the factors of time and active business ties will likely favor the foreign country which, other things being equal, may lead the auditor to conclude that the taxpayer has changed his domicile.  This would not be the case, however, where the employment is of a temporary nature and the intention is to return to New York upon completion of the assignment. (See Guidelines at section V.F.1 (emphasis added)).

In the reverse situation, the Guidelines provide similar instructions:

Note: The same reasoning would apply in auditing a foreign domiciliary who is residing in New York in connection with a temporary work assignment.  Unless the individual has manifested an intention to remain in New York permanently as evidenced, for example, by possession of a green card, it is not likely that he would be deemed to be domiciled in New York.  (See Guidelines at section V.F.1 (emphasis added)).

The Guidelines are clearly concerned about a situation in which the time being spent in a foreign country is for the purpose of completing a temporary work assignment.  In that case, the Department presumes the taxpayer’s employment does not establish an “anchor” to the alleged new domicile, but rather that the taxpayer will return to New York once the assignment is completed.  To overcome that presumption, the Guidelines require the taxpayer to demonstrate some other evidence of an intention to remain in the foreign country indefinitely.  While we believe that a variety of evidence (including the taxpayer’s testimony) should suffice to meet this burden, the example in the Guidelines focuses solely on the taxpayer obtaining a permanent visa.

Unfortunately, in cases involving foreign domicile changes, the Department frequently misinterprets its Guidelines and essentially disregards the relevance of the time and business factors.  Ironically, the Department often deems these same factors to be the most critical in residency audits.  See, e.g.Matter of Craig F. Knight, Tax Appeals Trib. (Nov. 9 2006); Matter of Kartiganer v. Koenig, 194 A.D.2d 879 (3rd Dep’t 1993).  As a practical matter, the result is an undue emphasis on the home factor, especially if the taxpayer continues to maintain his or her historical New York home.  Moreover, the Department tends to characterize every work opportunity in a foreign country as a “temporary assignment” and usually concludes that, in the absence of securing a permanent residency visa (as opposed to a “temporary” work visa), taxpayers cannot meet their burden of proving a change of domicile to a foreign country.

In our experience, the Department’s rigidly unfavorable view on foreign domicile changes is due to a misunderstanding of the law and how practical realities affect the lives of many taxpayers.  For example:

Maintenance of a New York Home – The Department argues that the maintenance of a New York home indicates the move to a foreign country is temporary.  The Department’s position fails to account for the fact that many of the individuals it audits are financially able to maintain multiple homes, and retaining a second home is often nothing more than a financial investment. Moreover, given the 2008 financial crisis, many taxpayers chose to retain their New York home to avoid realizing a loss or reduced profit on the sale of their property.  And, as we have previously noted, the law does not require a taxpayer to sever all ties with New York in order to effectuate a change of domicile. [See Matter of Charlotte Gemmel, Admin. Law Judge (Nov. 11, 2004)].

Employment Contract Terms – One of the most frustrating points of contention in a foreign domicile audit involves the significance of the taxpayer’s employment contract.  If the contract designates a fixed term, the Department argues the employment is temporary.  If the contract is open ended, the Department asserts it can be terminated at any time, and therefore the taxpayer’s connection to the foreign country is tenuous.  Since both assertions essentially reach the same conclusion, they cannot both be correct.  Moreover, the Department’s view on fixed contract terms fails to recognize that, especially in certain fields, it is customary for employers to routinely renew fixed-term contracts for its higher-level executives and employees.

Lack of a Permanent Visa – The Department essentially maintains that taxpayers cannot change their domicile to a foreign country unless they obtain a permanent residency visa.  This position fails to recognize that the intent necessary to establish a new domicile need not be an intention to remain at the new location forever.  Rather the intention to remain for an indefinite period without any present intention to leave at some point in the future is sufficient.  (See Matter of McKone v. State Tax Comm’n, 490 N.Y.S.2d 628 (3rd Dep’t 1985).  Curiously, the Department’s position also contradicts its prior stance on the "temporary stay" exception to statutory residency. In those cases, the Department routinely asserted that foreign individuals could be treated as maintaining an abode in New York on a permanent basis because their temporary work visas were renewable (and in reality often were) regularly renewed.  Parenthetically, although the Department claims that it eliminated the “temporary stay rule by repealing the applicable regulation, we contend the exception to statutory residency remains in place since the Tax Law requires the maintenance of a permanent place of abode in order to be taxed as a statutory resident.  See Tax Law section 605(b)(1)(B).

Matter of Irenee D. May

A recent determination issued by the New York State Division of Tax Appeals against the Department indicates the Department’s views on foreign domicile changes are questionable.  In Matter of Irenee D. May, Admin. Law Judge (Jan. 8, 2015), the Department argued that the taxpayer failed to prove an intent to remain indefinitely in the United Kingdom, and therefore remained a New York domiciliary.  In support of its position, the Department noted that the taxpayer retained a home in New York where members of his immediate family resided while he was in England on a temporary visa working pursuant to an “at will” employment contract that could be terminated at any time.  Despite the taxpayer’s return to the United States after only three years in the United Kingdom, the administrative law judge ruled that he had changed his domicile to the United Kingdom. 

As with all domicile cases, the administrative law judge’s determination in Maywas fact-specific and relied heavily on the taxpayer’s credible testimony.  Nonetheless, the case validates our contention that the Department’s position is routinely wrong on important questions of factual interpretation and law.  First, in holding in favor of the taxpayer, the administrative law judge rejected the Department’s contention that its regulations impose a greater presumption against a change of domicile in cases involving a move to a foreign country.  Second, the administrative law judge clearly rejected the notion that establishing a foreign domicile change could not be established absent the taxpayer securing a permanent residency visa.  Third, the administrative law judge found the taxpayer’s maintaining a New York home was not sufficient to rule in favor of the Department.  Finally, the administrative law judge rejected the Department’s view that an “at will” employment arrangement was a negative factor to be held against the taxpayer in establishing a foreign domicile change.  Indeed, the administrative law judge held that, compared to an employment contract with a fixed term, an at-will arrangement should be viewed favorably in making such a determination. 


We understand that the Department is appealing the May determination to the Tax Appeals Tribunal.  Given the administrative law judge’s thoughtful and carefully crafted determination, we view the appeal as an opportunity for the Tribunal to provide much needed binding guidance with respect to the issues discussed in this article.  In the meantime, the determination undoubtedly lends credence to the very arguments that taxpayers have been making for years in cases involving foreign domicile changes.  Taxpayers involved in a foreign domicile audit should consult their tax advisor as early in the process as possible, since these cases present unique factual, legal and procedural issues that must be carefully addressed to maximize the potential for a favorable resolution of the audit.

Jack Trachtenberg, JD, Esq., is counsel in the State Tax Group at Reed Smith LLP, in New York City.  Mr. Trachtenberg’s practice focuses on corporate income, franchise, gross receipts, sales and use, and personal income taxes. He also advises and represents clients regarding the application of state False Claims Act statutes in tax cases. Mr. Trachtenberg advises clients on all aspects of state and local tax from planning and compliance to controversy and litigation before administrative bodies and trial and appellate courts across the country. He has extensive experience advising clients on New York State and New York City tax matters, having successfully litigated cases before the New York State Division of Tax Appeals, the New York State Tax Appeals Tribunal and the New York State Supreme Courts. In 2009, Mr. Trachtenberg temporarily left private practice when he was appointed by the Governor of New York to serve as the first Deputy Commissioner and Taxpayer Rights Advocate at the New York State Department of Taxation and Finance. He can be reached at

Jennifer S. Goldstein, JD, Esq., is an associate in the State Tax Group at Reed Smith LLP. She  focuses her practice on all issues concerning New York State and City Tax law and has experience in civil and criminal audits, administrative appeals, voluntary disclosures, State Court and other tax collection matters.   She has particular experience with New York City general corporation tax matters, due to time spent working at the NYC Department of Taxation and Finance in the Tax Audit, Policy and Enforcement Division. She can be reached at

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