In a recent unanimous decision, the New York Court of Appeals determined that a taxpayer domiciled in New Jersey was not a New York resident because he did not maintain a permanent place of abode in the state. The Court determined that maintenance of a permanent place of abode in New York meant that "there must be some basis to conclude that the dwelling was utilized as the taxpayer's residence." This landmark ruling, Gaied v. New York State Tax Appeals Tribunal, reversed the Tax Tribunal's decision and rejected the long-standing position of the New York State Department of Taxation and Finance that a mere "property right" to a dwelling regardless of use constitutes maintaining a permanent place of abode. A brief overview of the applicable law and an analysis of the facts and the Court’s reasoning provides guidance for successful avoidance of New York tax residency traps.
New York State and New York City tax residents as either (1) any individual who maintains his domicile in New York State/New York City, or (2) any individual who is not domiciled in New York State/New York City but who: (a) is physically present in New York State/New York City for more than 183 days in any taxable year, and (b) maintains a permanent place of abode in New York State/New York City. This second category, also known as the two-prong statutory residency test, was the subject of the Gaied decision.
In Gaied, the taxpayer, who was domiciled in New Jersey, worked full-time in New York and maintained an apartment in New York for his parents' use. Because the taxpayer conceded that his full-time work in New York satisfied the physical presence prong of the statutory residency test, the decisions of both the Tax Tribunal and the Court of Appeals focused on whether the taxpayer maintained a permanent place of abode in New York. The details of the taxpayer's connections to the apartment property were essential to the Gaied decisions, which enumerated the following important factors: (i) the taxpayer owned the three-unit apartment property with his parents living in one unit rent-free while the other two units were rented as investment property, (ii) the taxpayer's parents had no source of income and relied upon the taxpayer for 100% of their support; (iii) the taxpayer's workplace was closer to his parents' apartment than to his New Jersey home; (iv) the taxpayer maintained incomplete records related to the rented investment property; (v) utility and telephone service at his parents' apartment were maintained in taxpayer's name and paid by taxpayer; (vi) leases for the two rented investment units listed his parents' apartment as the taxpayer's address; (vii) the taxpayer did not keep clothing or personal possessions at his parents' apartment; (viii) the taxpayer did not have a bed or bedroom at his parents' apartment and would sleep on the couch in the apartment when he infrequently provided overnight care to his ailing father; (ix) the taxpayer possessed keys to his parents' apartment; and (x) the taxpayer kept at his parents' apartment keys that provided emergency access to the two rental investment units.
Although the facts were not in dispute, the Court of Appeals relied on statutory and regulatory authority, legislative history, as well as common sense, and rejected as irrational the Tax Tribunal's administrative interpretation. The Tax Tribunal decision endorsed the Department's long held position that a taxpayer who owned or rented any residence (i.e., a property right) within New York State/New York City, regardless of whether the taxpayer actually used the property as his personal residence, satisfied the permanent place of abode prong of the statutory residence test. In rejecting this reasoning, the Court of Appeals found that the "'permanent place of abode' must relate to the taxpayer" and "the taxpayer must, himself, have a residential interest in the property."
In its Gaied decision, New York's highest court established a standard around which taxpayers may plan. Individuals from other states who work in New York and own New York residential property may shield themselves from unintended tax consequences. Out-of-state individuals who may benefit from this planning opportunity include investors in New York residential property, individuals who purchase or rent property for use by a child or other relative, and owners selling New York real estate in a slow market. Moreover, if the personal use of an available apartment is limited and infrequent, it is possible (but uncertain) that Gaied might permit the taxpayer's narrow use of the dwelling to not constitute a residence for his use. We emphasize that it is essential to establish a credible record substantiating the use of the property as one other than a permanent place of abode.
Taxpayers currently under audit for residency-related issues should consult their tax professionals to determine whether the Gaied decision supports their audit position. Taxpayers who paid tax as a result of an unsuccessful residency audit are permitted to file refund claims up to two years after the date of payment. Taxpayers who filed and pay personal income tax based on the Department's now-rejected interpretation of the statutory residency test, should consider filing refund claims that may be viable under New York's three-year statute of limitations.