Affirming a decision of an Administrative Law Judge, the New York State Tax Appeals Tribunal has held that an individual failed to prove that he was not a New York domiciliary during 2001 and 2002, and that the Schedule K-1 income he received from a federal S corporation was properly included in his New York State adjusted gross income because the S corporation was not subject to the corporation franchise tax. Matter of Philip Terranova, DTA No. 822699 (N.Y.S. Tax App. Trib., Sept. 20, 2012).
Facts. Until 1999, Mr. Terranova resided in Amherst, New York. Following the sale of his home in that year, Mr. Terranova moved into a home owned by his parents in Buffalo, New York, and moved his personal items from his former residence into storage. In lieu of paying rent to his parents, Mr. Terranova performed repair and maintenance on the residence.
For each of the years 2001 and 2002, Mr. Terranova filed New York nonresident and part-year resident tax returns, claiming to have an address in Florida. On audit, the Department of Taxation and Finance determined that Mr. Terranova failed to provide clear and convincing evidence that he had changed his domicile from New York to Florida. In particular, the Department found Mr. Terranova was only present in Florida for 11 days in 2001 and nine days in 2002.
The Proceedings Before the ALJ. Mr. Terranova had relied on various evidence indicating that he moved to Florida in 2001, including construction of a new home in Florida, acquisition of a Florida driver’s license, and Florida voter registration. At the hearing before the ALJ, however, Mr. Terranovar admitted that he “never really spent a significant amount of time in Florida” in the years 2001 and 2002.
Mr. Terranova owned and ran several business operations, including Niagara Chocolates, Inc. (“Niagara Chocolates”), a family business that manufactured chocolate in New York, and Oak Leaf Confections of North America, Inc. (“Oak Leaf”), a federal S corporation that manufactured chewing gum and other types of candy in Canada. In addition to running the business of Niagara Chocolates, which had facilities a short distance from his parents’ home, Mr. Terranova also worked at Oak Leaf’s Toronto facilities on a regular basis in the years 2001 and 2002.
In computing his New York adjusted gross income reported on his nonresident income tax return for the year 2001, Mr. Terranova did not subtract the K-1 income in the amount of $2,233,979 received from Oak Leaf from his federal adjusted gross income reported on that return. However, during the audit Mr. Terranova claimed that the flow-through income from Oak Leaf should not have been included in his New York adjusted gross income because Oak Leaf was a foreign corporation subject to tax under Article 9-A, even though Oak Leaf did not file a New York State corporation franchise tax return.
Mr. Terranova relied on the following facts provided in his own affidavit to describe the activities of Oak Leaf: (1) Oak Leaf was an S corporation for federal purposes but did not make an election to be a New York S corporation; (2) Oak Leaf had more than $1 million in New York sales in 2001, which were made by a broker on Oak Leaf’s behalf; and (3) from time to time Oak Leaf’s inventory was warehoused at the facilities of Niagara Chocolates in New York; this fact was supported by copies of eight invoices for the shipment of Oak Leaf’s products to Niagara Chocolates. At the hearing, Mr. Terranova also testified that he performed substantial services related to Oak Leaf from his office in New York, that Oak Leaf had several employees performing work in New York, and that Niagara Chocolates performed third-party warehouse storage and distribution services for Oak Leaf in 2001.
The Tribunal Decision. Agreeing with the ALJ, the Tax Appeals Tribunal found that Mr. Terranova had failed to prove by clear and convincing evidence that he had given up his New York State domicile and acquired a domicile in Florida. In particular, the Tribunal noted that active business ties to New York have been considered an indication of a failure to abandon a New York domicile. See Matter of Kartiganer v. Koenig, 194 A.D. 2d 879 (3d Dep’t 1993). The record showed that Mr. Terranova had worked very few days in Florida as compared to the number of days he had worked in New York. Additionally, the Tribunal relied on the Department’s regulations, which provide that where an individual has more than one home, the length of time customarily spent at each location is an important factor in determining domicile. See 20 NYCRR 105.20(d) (4). Thus, even though it agreed that Mr. Terranova “had a number of connections with Florida,” the Tribunal found he failed to prove that he had changed his domicile during the years in question.
The Tribunal also rejected Mr. Terranova’s argument that Oak Leaf was subject to corporation franchise tax and, therefore, the income he received from Oak Leaf in 2001 should be subtracted from his federal adjusted gross income under N.Y. Tax Law § 612(c)(22). The Tribunal concluded that the documentation provided by Mr. Terranova to support the fact that Niagara Chocolates provided storage and distribution services to Oak Leaf was inadequate, because the invoices were ambiguous and only covered a very limited number of transactions over a short period of time. Moreover, in the absence of corroborating documentary evidence, Mr. Terranova’s assertions were not enough to prove that Oak Leaf maintained an office at Niagara Chocolates’ facilities in New York, the amount of Oak Leaf’s New York sales, or that Oak Leaf had employees performing work in New York. Therefore, Mr. Terranova was required to include the Schedule K-1 income from Oak Leaf in his New York adjusted gross income.
Additional Insights. For purposes of determining an individual’s status as a resident of New York, a “domicile” is defined as the place that an individual intends to be his or her permanent home—that is, the place to which the individual intends to return whenever the individual may be absent. A domicile is presumed to continue until a new domicile is established. Despite establishing some of the indicia of a new domicile in Florida, such as the construction of a new home, Mr. Terranova failed to overcome the presumption and establish that he had severed his ties with his New York domicile.
With regard to the determination that Oak Leaf was not subject to corporation franchise tax, the Terranova decision may appear to be helpful to corporations disputing a nexus determination by New York State. However, it should be kept in mind that neither the ALJ nor the Tribunal determined that storage of inventory in New York, coupled with services of employees in New York and substantial New York sales conducted by brokers in New York, do not constitute doing business in New York. Rather, the ALJ and the Tribunal determined that Mr. Terranova had not provided adequate evidence to prove that Oak Leaf actually stored inventory in New York, used the services of employees in New York, or made substantial sales to New York. Thus, Terranova does not chart any new territory for what constitutes doing business in New York, since the decision turns entirely on a failure of proof.