THE BLOG
08/11/2014 04:18 pm ET | Updated Oct 11, 2014

States Welcome Taxpayers but Make It Hard for Them to Leave

In my more than 25 years of helping individuals and businesses navigate the complexities of state and local taxes, I have found there to be one constant: States are very welcoming to new residents but make it extremely difficult for them to leave.

State tax laws typically provide for three categories of residency: (1) domiciliary resident -- the state which the taxpayer considers his/her permanent home; (2) statutory resident -- the state(s), other than the taxpayer's state of domicile where the taxpayer maintains a permanent place of abode (PPA) and spends more than 183 days during the calendar year; and (3) nonresident -- the state(s) where the taxpayer earns income but is not a domiciliary or statutory resident.

Many states seem to follow New York State and City's (NY) lead in determining who is and is not a resident because of the significant number of laws, regulations and judicial rulings NY deals with on the subject of residency. Over the past 20 years, the issue of determining whether a taxpayer is a statutory resident appears to be the most controversial, despite the requirements being relatively straightforward aka "maintain a PPA and spend more than 183 days in the state."

While many taxpayers don't like the way states count the 183 days -- step foot in the state at any point during the day or night (except for certain exceptions) and that day becomes an "in-state/city day" -- the rules are clear. Unfortunately how states apply the "maintains a PPA" test is not nearly as clear as the 183 day test.

States tend to broadly define the term "PPA" to mean a dwelling that is available for use by the taxpayer and suitable for human habitation. States have interpreted the term "maintaining" to mean when a PPA is used exclusively by a taxpayer or if he/she has free and unlimited access to the dwelling, regardless of who is paying the expenses. In my experience, the two "hot" PPA audit issues in this area involve (1) situations where an executive uses a corporate apartment and (2) when one family member owns/rents a dwelling and another family member(s) resides in it.

When an executive (or his/her family) has exclusive access to a corporate apartment, states will likely consider the executive to be maintaining a PPA despite the fact he/she may not be contributing to the cost of such apartment. In order to avoid such treatment, the apartment should be used by other company personnel or clients and the usage should be carefully documented by the company.

In situations where one family member owns/rent a dwelling and other family member(s) reside in it, (e.g., a parent purchases an apartment for their child) NY has historically taken the position that the dwelling's owner/renter (i.e., parent) is maintaining a PPA despite the fact the tenant (i.e., child) "pays" some or all of the monthly expenses (i.e., utilities, condo maintenance, etc.). For example, in the case of John Gaied (Matter of John Gaied v. Tax Appeals Tribunal), Mr. Gaied lived in New Jersey and worked in New York City. He purchased an apartment building in NY as an investment. His elderly parents lived in one of the apartments, and he rented the other two apartments to tenants. One or two times a month, Mr. Gaied stayed at his parents' apartment to attend to their medical needs. After being audited, both the NYS Department of Taxation (Department) and NY Tax Tribunal ultimately found Mr. Gaied to be a NYS and City resident. The central issue in the case was whether Mr. Gaied's "investment" was also a PPA for purposes of the statutory resident test.

Landmark Decision

In February 2014, the Court of Appeals (New York's highest court) reversed the Tax Tribunal's Gaied decision (noted above) as well as the Division's long-held position that a person can be maintaining a PPA even if he or she never actually stayed overnight in the dwelling.

The Court reasoned that based on the legislative history of the statute, in order for a taxpayer to have maintained a PPA in NY, the taxpayer must have a "residential interest" in the property.

"The courts finally got it right," said Tim Noonan, a partner at Hodgson Russ, LLP and the lead attorney representing Mr. Gaied before the Court. According to Mr. Noonan, the statutory resident test was

originally intended to discourage tax evasion by people who really were residents of New York. Thus, the Court held that in order for an individual to be a resident, there must be some basis to conclude that the taxpayer maintained a dwelling in the state that was used as the taxpayer's residence.

The Lasting Effect of Gaied

The Gaied decision will likely have both immediate and long-term effects on taxpayers in NY and other states that have followed NY's lead in this area. In the short-term, New York nonresidents currently under audit and who own residential real estate have reason to celebrate. "No longer will the Division be able to argue that mere access to or availability of a place is enough to subject a taxpayer to NY resident tax," Mr. Noonan said.

We'll still need to go through the factual exercise of proving that the taxpayer didn't live in the place or maintain living arrangements, but now the test is more in line with the intent of the statutory resident rules.

While I agree conceptually with Mr. Noonan, my experience since Gaied was decided is that state auditors either don't know about the case or are taking the position that it only applies to a very narrow fact pattern -- whatever that means.

The long-term effect of Gaied will, unfortunately, likely continue to be played out in court. Questions left unanswered include: (1) What does having a "residential interest" in a property mean, and (2) Are New York nonresidents with vacation homes in New York affected by Gaied?

Regardless of the answers, it appears the courts have finally made some sense out of New York's statutory resident laws - a rarity when it comes to state taxes.

David Seiden, CPA is a leading authority on state and local tax (SALT) matters. He is a partner based in the White Plains, NY office of accounting and consulting firm Citrin Cooperman, where he leads the firm's SALT Practice. He can be reached by phone at (914) 949-2990 or via email at dseiden@citrincooperman.com.

Citrin Cooperman is the 25th largest accounting and business consulting firm in the United States, with offices in New York City, Philadelphia, PA; White Plains, NY; Plainview, NY; Norwalk, CT; and Livingston, NJ.