The New York State Court of Appeals on February 19, issued a decision in Gaied v. New York State Tax Appeals Tribunal, which held that a taxpayer, John Gaied, was a New York nonresident for New York income tax purposes. Mr. Gaied resided and was otherwise domiciled in New Jersey. He commuted daily to his automotive repair business in Staten Island, New York, where he owned an apartment building in which his parents resided. Although Mr. Gaied was ultimately successful in defending the position that he was a New York nonresident, he was forced to litigate this case all the way to New York’s highest court.  This decision has serious implications for taxpayers with similar ties to more than one state.

New York Test for Income Tax “Residence” Includes Individuals Spending 183 Days and Maintaining a Permanent Place of Abode in New York

A taxpayer is a New York resident if they are: i) domiciled in New York (the “domicile test”); or ii) in New York 183 or more days in a year and “maintain a permanent place of abode” in the state (the “statutory residence test”). New York, like other states, taxes residents on their entire income, but allows a credit, at least in part, for taxes paid other states.

Taxpayer Maintained New York Apartment For His Parents

The parties agreed that Mr. Gaied was domiciled in New Jersey. At issue was whether Mr. Gaied was a statutory New York resident.  There was no dispute that Mr. Gaied spent more than 183 days per year in New York.  The point of contention was whether Mr. Gaied’s maintenance of a Staten Island apartment for his parents made him a statutory New York resident.

Mr. Gaied paid the electric, gas and telephone bills for his parent’s apartment. However, he never lived in the apartment, nor did he keep any clothing or personal effects there. He had keys to the apartment, but he did not have unfettered access. He stayed at the apartment on occasion overnight, sleeping on the couch, at his parent’s request in order to attend to their medical needs.

New York Department of Taxation Contended Maintenance of Staten Island Apartment Made Taxpayer a New York Resident

The New York Department of Taxation audited Mr. Gaied’s 2001 – 2003 New York nonresident income tax returns. The Department asserted maintenance of the Staten Island apartment made Mr. Gaied a New York statutory resident. The Department determined that New York law did not require Mr. Gaied to live in the apartment, but simply to maintain the apartment to be considered a statutory resident. The New York Tax Appeals Tribunal and the New York Appellate Division each upheld the $253,062 deficiency in taxes and interest the Department assessed against Mr. Gaied based on this determination.

Court of Appeals Ruled Taxpayer Was a New York Nonresident Because He Did Not Have a “Residential Interest” in the Apartment He Maintained for His Parents

The New York Court of Appeals, reversed the Appellate Division’s decision. The Court of Appeals observed that the legislative history reflected the test was enacted to prevent tax evasion – specifically aimed at individuals maintaining homes, and spending the vast majority of the year, in New York, but claiming they were income tax nonresidents. With this purpose in mind, the court stated that the only rational interpretation of the statutory language “maintain a permanent place of abode in New York” was that the taxpayer actually “have a residential interest in the property.” Because Mr. Gaied never lived in the Staten Island apartment, the court ruled that Mr. Gaied was a New York nonresident.

Perspective

While the taxpayer in Gaied ultimately was successful in challenging the Department’s formalistic interpretation of New York law, other taxpayers have not been so fortunate. For example, the New York Division of Tax Appeals recently ruled that a Connecticut resident, who commuted to New York from his Connecticut home, was taxable as a New York statutory resident simply because he maintained a seldom used modest beach house in New York.

While many states focus on domicile in determining whether a taxpayer is a resident, over one-third of states imposing income taxes also adopt a statutory residence test like New York’s. These states include Connecticut, Indiana, Minnesota, New Jersey, Oregon, Pennsylvania, and Utah.

Taxpayers who are domiciled in one state, but maintain living quarters in another state by careful tax planning, may be able to avoid more than one state asserting they are a resident for income tax purposes. For example, this could be accomplished simply by limiting days spent in the non-home state to less than 183 days per year.