The Department of Taxation and Finance’s attempt to apply precedent under the “convenience of the employer” rule to treat a portion of a nonresident individual’s salary as New York source income has been rejected by an Administrative Law Judge in Matter of Carmelo and Marianna Giuffre, DTA No. 826168 (N.Y.S. Div. of Tax App., Mar. 31, 2016)
Mr. Giuffre is a Florida domiciliary and the sole member and employee of his own consulting firm, Giuffre Management Consulting, LLC (“GMC”), located in Palm Beach, Florida. Prior to 2009, Mr. Giuffre was president of a family-owned business in Brooklyn comprised of car dealerships located in New York and New Jersey. The car dealerships were operated by family members, including his two sons.
Under an agreement entered into in November 2008 between GMC and the Brooklyn-based family auto dealership business, GMC provided management “consulting services” for the New York and New Jersey dealerships. The agreement specified that the services would be provided “via telephone or electronically.” Mr. Giuffre provided unspecified management advice to the dealerships from GMC’s Palm Beach offices. Although he did visit New York during 2009, and even visited the New York dealerships operated by his family members, those visits were personal in nature. He was not involved in the daily operations of those dealerships.
In 2009 (the tax year in issue), Mr. Giuffre earned a salary of $1.3 million from GMC. Although the decision does not so indicate, it is assumed that he did not report any of his salary as New York source income. The Department assessed personal income tax against Mr. Giuffre, treating a portion of his salary as being from New York sources. The Department sourced his $1.3 million salary to New York based on the ratio of the number of auto dealerships the family business operated in New York to the total number of auto dealerships it operated in New York and New Jersey, which came to 59%.
The issue presented was whether Mr. Giuffre had income derived from New York sources, where the facts (based on evidence which seems to have consisted principally of continued on page 6 6 MoFo New York Tax Insights, May 2016 affidavits) indicated that he did not perform any services in New York State. The Department appears to have taken the position that Mr. Giuffre’s income should be sourced to New York under Matter of Speno v. Gallman, 35 N.Y.2d 256 (1974), which held that nonresident individuals employed by a New York employer but who for their own convenience rather than necessity worked both within and outside the State had New York source income even for work performed outside the State — i.e., the “convenience of the employer” rule.
A nonresident individual is subject to New York State personal income tax to the extent the individual derives income from New York sources. This includes income from a trade or business carried on in New York. Tax Law §§ 631(a) and (b). A trade or business is carried on in New York State where the taxpayer regularly and systematically carries on business at a location in the State. 20 NYCRR 132.4(a)(2). This is separate from the so-called “convenience of the employer” rule, which sources to New York State a nonresident employee’s salary and other compensation earned outside the State for the employer’s convenience. That rule typically is invoked in the case of nonresidents whose primary work location is at the employer’s New York office, but who seek to source a portion of their salary outside the State.
Here, the ALJ rejected application of the convenience of the employer rule, as applied in Speno, since Mr. Giuffre was employed in Florida, not New York, and did not perform any services or have an office in New York. The ALJ distinguished the case from Matter of Huckaby v. N.Y. State Div. of Tax Appeals, 4 N.Y.3d 427 (2005), which upheld application of the convenience of the employer rule against a Tennessee resident who worked in Tennessee as a convenience to his New York-based employer. Having found no evidence here that Mr. Giuffre actually worked in New York State, despite having clients in the State, the ALJ concluded that he did not have New York source income with respect to his salary, and the ALJ directed that the assessment be cancelled.
Under the limited facts presented, the ALJ’s decision certainly seems correct, and any analogy to application of the convenience of the employer rule upheld in Matter of Huckaby would clearly be erroneous since Mr. Giuffre was employed by a Florida employer and did not perform any consulting services in the State. The decision does not address—possibly because the issue was not raised—the nature and extent of the consulting services that he performed. Indeed, the decision contains no description of those services. Had Mr. Giuffre’s compensation represented not salary for his ongoing consulting services performed in Florida, but rather some form of deferred compensation from his former employment in New York, that compensation would have resulted in New York source income as arising from his prior in-State employment.