A New York State Administrative Law Judge held that a lawyer licensed in New York but practicing solely in Florida is not subject to New York personal income tax on income earned in a Florida matter. Matter of Patrick J. Carr, DTA No. 825989 (N.Y.S. Div. of Tax App., July 23, 2015). The ALJ rejected the Department’s argument that, despite arising from work done entirely in Florida, the income was subject to New York tax because of the lawyer’s license to practice in New York.

Facts and Audit Issues. Mr. Carr, a Florida domiciliary, had been admitted to the New York bar in 1964 and to the New Jersey bar in 1987, and both licenses remained valid during 2007 through 2009, the years at issue. In 2001, he was admitted to practice pro hac vice in Florida to represent a plaintiff in a matter in the Florida courts. He earned income from that representation during the years in issue, and reported it for federal income tax purposes on Schedule C. He reported a Florida home address on his federal returns, and did not file New York income tax returns for those years. He maintained an office in Florida during the years in issue, but no office or other place of business in New York.

The Department’s audit of Mr. Carr began as a residency audit, during which the Department reviewed his change of domicile from New York to Florida, and eventually conceded that Mr. Carr had changed his domicile to Florida. However, the Department then argued that, since Mr. Carr was not licensed to practice law in Florida—despite his pro hac admission—all of his income was attributable to a “profession carried out in New York” because he maintained a license to practice law in New York. The Department relied on Tax Law § 631, which treats as New York source income any income earned by a nonresident from a business or profession carried on in New York. It also relied on two cases that it claimed supported its position, Carpenter v. Chapman, 276 A.D. 634 (3d Dep’t 1950), and Matter of Vigliano, DTA No. 809303 (N.Y.S. Tax App. Trib., Jan. 20, 1994), both of which involved lawyers who had offices in New York but were seeking to apportion income outside the State.

ALJ Decision. The ALJ readily concluded that the Department’s position was baseless. First, she reviewed the statute, Tax Law § 631, and the regulations promulgated pursuant to the statute, and found no support in them for the Department’s position. The regulations state that a business is carried on wholly within New York State when it is conducted solely within New York and no activities are carried on outside New York. 20 NYCRR § 132.12. A business is carried on partly in New York if activities are “systematically and regularly” conducted in New York and also outside New York. 20 NYCRR § 132.14, and when the business is carried on partly outside New York, income is apportioned both inside and outside New York by using one of a variety of apportionment methods. 20 NYCRR §§ 132.12, 132.15. Since Mr. Carr maintained no office or place of business whatsoever in New York, nothing in the regulations provided a basis for allocating 100% of Mr. Carr’s income to New York without applying any method of apportionment.

The ALJ also reviewed the cases relied upon by the Department and found them inapplicable. In both Carpenter v. Chapman and Matter of Vigiliano the attorneys did not merely maintain a New York license, but had New York offices where they actually practiced, had no law offices outside the state and were not licensed in any other state. In both cases, the taxpayers were nonresidents during the years in issue, and argued they should be permitted to apportion outside New York income earned either while working at a non-New York residence (Chapman), or on projects that were taking place outside New York (Vigliano). The ALJ found those cases were inapposite because the taxpayers, unlike Mr. Carr, had maintained offices in New York, and had no offices outside New York. The ALJ explicitly found that “merely holding a license to practice law in New York is not the equivalent of carrying on a profession in New York State,” in the absence of any evidence that activities were systematically and regularly carried out in New York “with a fair measure of permanence and continuity,” and that the Department’s position was inconsistent with its own regulations. In addition, the ALJ found no support in the record for the Department’s contention that Mr. Carr’s pro hac vice admission in Florida was solely based on his New York license, noting that the Florida rules require that an attorney seeking pro hac vice admission list all jurisdictions in which the attorney is licensed to practice, and Mr. Carr was licensed in both New York and New Jersey.

The ALJ also concluded that, although later found unconstitutional, during the years in issue, Judiciary Law § 470 required that nonresident attorneys who were licensed to practice in New York maintain a physical office in New York. Since Mr. Carr had no such office, the ALJ found he was not authorized to practice in New York under the Judiciary Law, yet another reason why his income could not be allocated entirely to New York.

Additional Insights

Based on the facts as set out in the decision, it is hard to understand what support there could possibly have been for the Department’s arguments in this audit. Its own regulations deal with lawyers who maintain offices and regularly practice in New York, and appear to have no application to a lawyer with no office in New York at all. The cases on which it relied arose from very different facts and involved lawyers who were licensed only in New York, had active practices in New York and were seeking to apportion part of their income outside the state based on where work was physically done — a very different situation from Mr. Carr’s, who had no office in New York and had been properly admitted pro hac vice in Florida to perform legal services in one matter.

As the ALJ noted, the “office” requirement in Judiciary Law § 470 was found unconstitutional by a federal district court after the years in issue in this matter. On appeal, the federal Court of Appeals asked New York State’s highest court to interpret the statute and rule on what exactly was required under the statutory direction that a nonresident lawyer maintain “an office for the transaction of law businesses,” as that term is used in Judiciary Law § 470. In response, the state Court of Appeals held that the statute required nonresident attorneys to maintain a physical law office within the State — further support for the ALJ’s conclusion that, under Judiciary Law § 470, Mr. Carr would not have met the State’s requirements for being authorized to practice law in New York, despite his bar admission. The question of the constitutionality of the statute is, as of this writing, still pending before the federal Court of Appeals.