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Major Change Delivered in New York’s Law on Statutory Residency

July 28, 2022, 8:45 AM

Welcome to New York, where a vacation home is not a permanent place of abode and having a vacation home here just became possibly more attractive, tax-wise.

In Obus v. New York State Tax Appeals Tribunal, the New York State Appellate Division, Third Department, on June 30 held that the New York vacation home of a New Jersey man was not a “permanent place of abode” that would make him subject to New York tax as a resident. The ruling is a major change in New York’s law on statutory residency.

The issue in the case was whether the petitioner, Nelson Obus, domiciled in New Jersey and working more than 183 days in his Manhattan office, were statutory residents of New York subject to New York tax on all their income. Obus owns a vacation home in Northville, Fulton County, more than 200 miles from his office and 240 miles from his New Jersey home. He paid tax to New York on all his earned income and paid tax to New Jersey, his state of domicile, on his income from investments.

New York Tax Law Section 605(b) can be infamously tricky. It provides two separate bases for imposing the state’s resident income tax on an individual. Generally, anyone living in New York is subject to resident income tax unless they meet specific requirements. Even if living elsewhere, a person can be a “statutory resident” subject to resident income tax if they have a permanent place of abode in New York and spend more than 183 days (or parts of days) in a year in New York.

If someone is determined to be a New York resident, whether domiciliary or statutory, the person is subject to New York income tax on all their income. Nonresidents only pay New York tax on New York source income that includes income from real property located in New York, wages earned for working in New York or income from pass-through entities based upon the entity’s apportionment to New York. A nonresident with New York-sourced income would pay tax to New York on that income but not on income from intangibles such as stocks or bonds that would be taxed (or not) by their state of domicile.

In Obus, the New York State Department of Taxation & Finance asserted, and the Tax Appeals Tribunal held, that because Obus spent two or three weeks a year at his Northville home and had free and continuous access to that home and exercised that right—albeit sparingly—during the years at issue, the home was a permanent place of abode. Additionally, the home had a tenant renting an attached unit with heat and water used year-round.

Obus presented four arguments in his appeal:

  1. The matter wasn’t subject to the substantial evidence standard of review but rather was an issue of statutory construction. Therefore, the court didn’t need to defer to the administrative agency;
  2. The Court of Appeals decision in Gaied v. NYS Tax Appeals Tribunal held that merely considering the physical attributes of a property is insufficient to find it to be a permanent place of abode, and the facts in Obus are more compelling than in Gaied;
  3. The regulations in 20 NYCRR 105.20 (e)(1) support finding that a vacation home is not a permanent place of abode; and
  4. Imposing a resident income tax on the taxpayers would result in multiple taxation in violation of the commerce clause of the US Constitution.

The court addressed the standard of review first, stating that this was a matter of statutory interpretation and not subject to the substantial evidence standard of review. The appellate panel found it “unreasonable for the Tribunal to focus solely on the Northville home’s objective characteristics.” The court then held that “even though the Northville home could have been used in a manner such that it could constitute a permanent place of abode within the meaning of Tax Law §605, because petitioners did not use it in this manner, it does not constitute a permanent place of abode.”

Examining the actual use of the Northville home, the court found it was used only for vacations. It noted that no personal effects were kept there, Obus had to inform his tenant when he went to the Northville home, his wife had only been there two times since its purchase in 2011. The panel held that “petitioners have not utilized the dwelling in a manner which demonstrates that they had a residential interest in the property.”

This ruling makes clear that it is irrational to only consider the physical characteristics of the dwelling to determine whether it is a permanent place of abode. Rather, the taxpayer’s use of the dwelling must be considered to determine whether someone is “really and for all intents and purposes” a resident of the state.

The tax department will have to review its regulation on vacation homes since the court footnoted that focusing solely on the objective characteristics was unreasonable and “[t]o the extent that 20 NYCRR 105.20 (e) (1) could be read to support otherwise, such an interpretation would run afoul of the requirement that there be a residential interest in the property.”

New York has had a robust residency audit program for many years, and these audits do not raise ordinary issues in audits of verifying income or documenting deductible expenses. These are lifestyle audits that look at where a taxpayer spends time, has family and business contacts, and where “items near and dear” are kept. These audits can be very intrusive, and without great care and meticulous record-keeping, they can be very costly.

Auditors will now have to look beyond whether the dwelling has a bathroom, a kitchen, and a place to sleep to see whether the nature and use of the property by a taxpayer makes it sufficiently “residential,” something they disregarded up to now.

This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Glenn Newman is an attorney at Greenberg Traurig, LLP. His practice includes handling audits and litigation involving income tax including residency matters, sales and use tax, hotel taxes and real estate transfer taxes in New York and other states.

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