In a decision that reminds nonresidents of the perils of owning vacation homes (or other secondary residences) in New York State and City, the Tax Appeals Tribunal has held that a Connecticut couple’s vacation home in the Hamptons constitutes a “permanent place of abode” for income tax purposes. Since the taxpayer was present in the State for more than 183 days during each of the years in issue, the taxpayer was thus held to be taxable as a New York resident. Matter of John J. and Laura Barker, DTA No. 822324 (N.Y.S. Tax App. Trib., Jan. 13, 2011).

John and Laura Barker lived in New Canaan, Connecticut, together with their three school-age children. It was undisputed that they were domiciled in Connecticut. Mr. Barker commuted daily to his job in Manhattan as an investment manager for Neuberger Berman. He conceded that he was present in the State more than 183 days during the years 2002, 2003 and 2004.

In 1997, the Barkers purchased a modest vacation home in the Hamptons, Long Island, which they sporadically used for less than three weeks each year. The house was 138 miles from their Connecticut home, and beyond regular commuting distance to Mr. Barker’s Manhattan office. Mrs. Barker’s parents, who live on Long Island, frequently used the vacation house several days a week in the summer months, and on many weekends year round. The house was concededly usable throughout the year, having the necessary amenities for yearround habitation such as heat, electricity, hot water, and telephone and cable TV service.

On audit of their nonresident tax returns, the Department’s auditor concluded that their vacation home was a “permanent place of abode” within the meaning of the income tax law. Therefore, since the taxpayer was present in the State more than 183 days each year, the Department assessed resident income tax on all their income, as well as negligence and substantial understatement of tax penalties.

“[t]here is no requirement that the petitioner actually dwell in the abode, but simply that he maintain it.”

At the hearing before the Administrative Law Judge, the taxpayers had argued that their vacation home should not be considered a permanent place of abode. They maintained that under their circumstances—the intended purpose for the vacation home, the lack of full access because of the regular use by Mrs. Barker’s parents, and the size of their immediate family which made it difficult to use the home for anything more than sporadic vacation use—it should qualify as a “camp or cottage, which is suitable and used only for vacations,” which under the regulations is excluded from the definition of a permanent place of abode. The ALJ rejected these arguments, and held that the vacation home was a permanent place of abode, and therefore the taxpayers were New York residents. The ALJ also upheld the imposition of penalties.

On appeal to the Tax Appeals Tribunal, the taxpayers raised substantially similar arguments to those raised before the ALJ. The Tribunal upheld the ALJ’s determination that the vacation home was their permanent place of abode. First, it rejected the taxpayers’ assertion that under its decision in Matter of Evans DTA No. 806515 (N.Y.S. Tax App. Trib., June 18, 1992), confirmed Matter of Evans v. Tax Appeals Tribunal, 199 A.D.2d 840 (3d Dept. 1993), the Tribunal had adopted a subjective standard for determining whether a dwelling constituted a permanent place of abode, which required consideration of “the individual’s relationship to the place.” The Tribunal disagreed, saying Evans merely stands for the proposition that a dwelling could be a permanent place of abode even where the taxpayer did not own or otherwise have a legal right to the dwelling. According to the Tribunal, since the Barkers owned the Hamptons home, Evans was inapplicable. The Tribunal also rejected the claim that the vacation home was, under the circumstances, in the nature of a “camp or cottage.” The Tribunal found that the home was “objectively suitable for year-round habitation” and, quoting from its decision in Matter of Roth, DTA No. 802212 (N.Y.S. Tax App. Trib., Mar. 2, 1989), noted that “[t]here is no requirement that the petitioner actually dwell in the abode, but simply that he maintain it.”

After ruling that the taxpayers were statutory residents, the Tribunal remanded the case to the ALJ on the issue of penalties. Specifically, it directed the ALJ to address “whether the record demonstrates a reasonable basis for petitioners’ claim that they did not maintain a permanent place of abode … or whether petitioners’ conduct was intentionally obfuscatory or willfully negligent” by reason of having answered “NO” to the question on the tax return, “Did you or your spouse maintain living quarters in New York State?”

Additional Insights

The Tribunal’s decision, which the taxpayer can appeal to the New York courts, is a stark reminder of the ramifications of a nonresident owning or leasing a secondary home or pied-a-terre in New York, including a vacation home, unless the taxpayer is not present in the State for more than 183 days (and can reasonably document that on audit). It certainly seems to be an unduly harsh consequence to arise from ownership of a sporadically used vacation home, located hours away from the taxpayer’s domicile in Connecticut and his place of employment in New York.

Regardless of the eventual outcome of the case, the question remains whether the Department’s policy—which will undoubtedly give many pause before they acquire secondary homes in the State—is reasonable under the law and fair as a matter of policy. Since the Department has long interpreted the tax law, by regulation, to exclude “camps and cottages” from the definition of a “permanent place of abode,” it should consider amending the regulations or, if necessary, the tax law itself, to avoid results such as this. The decision is an example of an interpretation of the tax law that results in a finding of residency far beyond the intended purpose for the statutory residency definition.

The Tribunal’s remand of the penalty issue back to the ALJ for a supplemental determination is curious. The ALJ did address the penalty issue, concluding that the taxpayers’ denial on their tax returns that they maintained living quarters in New York supported the imposition of the negligence penalties. Yet, the Tribunal directed that the case be remanded, seemingly not to develop additional facts, but for the ALJ to address the penalty issue again, rather than the Tribunal ruling on the question de novo as it could have done.