Revised Nonresident Audit Guidelines

Barry Horowitz, CPA, MST, and Alex Fishbane, JD, LLM
Published Date:
Oct 1, 2014

New York State has once again revised its nonresident audit guidelines and released several cases that clarified previously murky areas of New York’s residency rules. The new guidelines reflect these changes.

Who Is a New York Resident?

A taxpayer deemed to be a New York resident must pay tax to New York on income from all sources, whereas a nonresident has to pay New York income tax only on New York source income. Individuals are New York residents if they are either domiciled in New York or are “statutory residents”—that is, an individual who “is not domiciled in this state but maintains a ‘permanent place of abode’ [PPA] in New York State and spends in the aggregate more than one hundred and eighty-three days of the taxable year in this state.” But determining whether a dwelling rises to the level of a PPA is not always an easy task.

The determination of a taxpayer’s residence can create significant tax consequences for the taxpayer. For instance, consider a taxpayer who lives and works in New York City, then retires to Florida, but does not immediately sell the New York home. If the taxpayer continues to earn New York wages or other New York source income, New York will tax these amounts; however, if the taxpayer earns non–New York source income, New York will only tax these amounts if the taxpayer is deemed to be a resident. The residency determination might very well hinge on whether the taxpayer’s New York dwelling is determined to be a PPA, as discussed below. If the dwelling is not a PPA, the taxpayer cannot be a statutory resident, but if it is, the taxpayer will be a statutory resident if at least 183 days are spent in New York. This determination is crucial to the taxpayer, because, whereas New York State and City have a combined maximum income tax rate of nearly 13 percent, Florida’s personal income tax rate is zero.

Find out more from Barry Horowitz on the NYS taxation of non-residents & dual residents—and get your questions answered—at the full-day New York State Taxation Conference, Oct. 20, New York City Bar Association. Can’t attend in-person? Register for the live video webcast. In another conference session, Barry leads a panel of agency officials on NYS and NYC audit and enforcement issues. Find out more here.

Permanent Place of Abode

The definition of PPA has been developed by a series of cases over the years, including Matter of Evans, Matter of Barker, and most recently, Matter of Gaied. The new audit guidelines reflect these changes.

Evans involved a taxpayer who owned a home in Dutchess County, New York, where he was domiciled, and who shared living quarters with a priest in a rectory near his office in New York City. The taxpayer would typically commute to the city on Sunday or Monday, stay at the rectory during the week, and return to his home on weekends. The Tribunal concluded that the rectory was a PPA for the taxpayer, stating that “permanence, in this context, must encompass the physical aspects of the dwelling place as well as the individual’s relationship to the place.”

Barker also addressed permanence of a PPA. The taxpayers were domiciliaries of Connecticut who owned a second home in the Hamptons. Their actual use of the New York residence was minimal, generally limited to the summer months; in fact, the wife’s parents used the home more than the taxpayers themselves throughout the year, which led the administrative law judge to determine that it was clearly suitable for year-round use. The Tribunal rejected the taxpayers’ argument that “the subjective use of a dwelling by a taxpayer” determines whether it is a PPA; thus, because the Barkers used the Hamptons home only for vacations does not mean that it was not suitable for year-round use. This suitability and the fact that the taxpayers maintained “dominion and control over the dwelling” were sufficient for the Tribunal to conclude that the home was a PPA.

In Gaied, the taxpayer, a New Jersey domiciliary, owned a multiple-family apartment in Staten Island, New York, where his parents lived. He paid all the expenses and occasionally stayed there. The residence was located two miles from the taxpayer’s business. The Court of Appeals overturned a lower court decision and ruled that, for a taxpayer to maintain a PPA, he must have a “residential interest” in the dwelling; thus, “there must be some basis to conclude that the dwelling was utilized as the taxpayer’s residence.”

The audit guidelines incorporate these rulings by stating that the dwelling must be permanent and that “the taxpayer must have a relationship to the dwelling for it to constitute a permanent place of abode”

For a dwelling to be permanent, it must be suitable for year round use. The physical attributes of a dwelling will determine whether it is suitable for year round use; for example, a mere camp or cottage, which is suitable and used only for vacations, is not a PPA. For a dwelling to be considered a PPA, it must contain ordinary facilities (i.e., those used for cooking, bathing, etc.). 
In determining whether the taxpayer has the requisite relationship to a dwelling, the guidelines have identified certain factors that should be considered:

  • Whether the taxpayer has a legal right to the dwelling
  • Whether the taxpayer maintains the dwelling either in money or in kind
  • Whether the taxpayer uses the dwelling or otherwise has access to it
  • The taxpayer’s relationship to other occupants of the dwelling
  • Whether the taxpayer has separate living quarters or keeps personal items at the dwelling
  • Whether the taxpayer uses the address of the dwelling for government or business purposes.

The guidelines provide several examples to illustrate their position. These examples hinge on the determination of who—if anyone—is the primary resident. As the examples indicate, when a taxpayer who lives out of state owns an apartment that his mother lives in, the taxpayer does not have a PPA, even if the taxpayer pays all expenses relating to the residence, has unfettered access, and occasionally sleeps there. The guidelines explain that the reasoning for this is because “the residence is used primarily by the mother and the taxpayer’s occasional use does not change its character.”

Conversely, consider a taxpayer who moves from New York to Florida, lists her New York home for sale but keeps the home furnished, and retains unfettered access even though she lives a plane ride away. The guidelines consider that taxpayer to have retained a residential interest in the home, which would thus constitute a PPA. The guidelines stress that no one else is using the home as a residence currently; as such, the taxpayer has retained a residential interest in the property, and it is her PPA. But the guidelines specify that if the taxpayer moved the contents to her home to Florida, she would not have a residential interest.

The guidelines provide an example of a New Jersey domiciliary who rents an apartment in New York City, where he stays when he attends events, rather than driving back to his home in New Jersey. He lets friends and relatives use the apartment occasionally, but no one else lives there on a regular basis. The guidelines consider the taxpayer to have a residential interest in the property, and it therefore constitutes a PPA. It is immaterial that the apartment is vacant for the majority of the year; a residence that is owned and maintained by a taxpayer with unfettered access will generally be deemed to be a PPA, regardless of how often the taxpayer actually uses it.

The rules for determining whether the taxpayer has a PPA are complex and difficult to navigate. Taxpayers should consult with an experienced tax advisor if they contemplate their residency changing in any way.

Dual Resident Credit

One of the most confusing areas relating to the computation of the resident credit is the dual resident issue. Many times, taxpayers are deemed residents of two taxing jurisdictions. The intent of the dual resident credit is to avoid “double taxation.” Many states have different solutions for this issue. For example, New Jersey allows a full tax credit for New Jersey domiciliaries who are statutory residents of another state.

Taxpayers who are determined to be residents of New York and are residents of another state are taxable on all income, regardless of source, by both states. Since the income includes items for which a resident credit would normally not be allowed, such as interest and dividends, the tax paid to the other state must be prorated by the following formula:

Other State Income Subject to the Resident Credit x Total Tax Due to Other State = Total Income Taxable by the Other State

It is this adjusted figure, and not the tax that was actually computed on the other state’s resident return, that is entered on line 24 of Form IT-112-R.

The double taxation of investment income to which dual residents are subjected was the basis for a legal challenge to New York’s statutory residency law. In Matter of Tamagni, the Court of Appeals ruled that it was not unconstitutional for New York State to tax the intangible income of taxpayers who were determined to be statutory residents. The guidelines provide an example based on this case, in which a Connecticut domiciliary who is a New York statutory resident shows ordinary income of one million dollars, $800,000 of which is derived from New York sources, $200,000 of which is derived from Connecticut sources. Both states have 6 percent tax rates. The Connecticut tax before credits was $60,000 ($1,000,000 x 6 percent). The dual resident credit is calculated as follows:

Connecticut Income Subject to Resident Credit $200,000 x $60,000 = $12,000
Total Income Taxable by Connecticut $1,000,000    

The dual resident credit is complex and, at times, can seem unfair. Dual resident taxpayers should consult with their tax advisor about the workings of the credit and how to minimize tax liability.

Barry H. Horowitz, CPA, MSTBarry H. Horowitz, CPA, MST, is a partner at WithumSmith+Brown, New York, NY, and is the team leader of its Tax Services State and Local Tax Team. He has more than 30 years of professional experience and advises clients in residency issues, nexus issues, entity-level taxes, sales and use taxes, and other business and personal tax matters. He also counsels clients in strategic planning, transaction reviews, risk assessment, tax law compliance, and corporate restructuring. Mr. Horowitz is a member of the NYSSCPA’s Multistate & Local Taxation Committee and served as chairman in prior years. He is also a member of the NJSCPA’s New Jersey Tax Committee.

Alexander Fishbane, JD, LLMAlexander Fishbane, JD, LLM, is a senior accountant and tax lawyer at WithumSmith+Brown, New York, NY. He advises clients, structures transactions, and handles tax controversy issues. He is a member of the American Bar Association and the NYS Bar Association and belongs to the tax and young lawyers section of each.

This article originally appeared in the August 15, 2014 issue of SALT SHAKER. Copyright, WithumSmith+Brown, PC, 2014, reprinted with permission.

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