Thanks to its highest court, New York’s tax treatment has downshifted from crazy to merely unreasonable.
John Gaied had never lived on Staten Island, or in any other part of New York, at the time the state audited him. He did own a three-unit home there, however. His parents resided in one apartment, while renters occupied the other two units. Occasionally, Gaied slept on his parents’ couch when he visited to look after them and help pay their bills.
But in an tax audit and appeals process that was obviously stacked against Gaied, New York determined that he lived there anyway - because his job took him to Staten Island more than 183 days a year, and because he also owned a home he never used as a home. The one-two punch of owning a New York residence (even if you never live in it but only “maintain” it) and working in the state more days than the threshold allows is enough to create “statutory residency” in New York, thus allowing the state to tax the resident’s worldwide income.
Crazy, no?
Crazy, yes, but not unprecedented, or even unusual, in New York. Martha Stewart, who had a higher-profile job in the higher-profile borough of Manhattan, fell into the same trap. So have countless others. Still others have taken to meticulously monitoring their time in the state, and making sure to head home before midnight, in order to head off claims of residency at the pass.
It is only a mild surprise that the Court of Appeals has restored some sanity. The court recently ruled in Gaied’s favor, overturning the tax appeals tribunal’s finding of statutory residency. “We conclude there is no rational basis for [the tribunal’s] interpretation,” the court stated of the position that a taxpayer need not reside in a residence. For a taxpayer’s home to make him a resident of New York, it has to actually be the taxpayer’s home. There are not many places besides New York where this concept would require adjudication by the state’s most powerful judges. Gaied’s lawyer, Timothy Noonan, told The Wall Street Journal the decision “restores some normalcy to residency rules.”
Then again, the Court of Appeals has decided - twice - that nonresidents can be considered to “work” in New York when they are actually working in their homes, dozens or even hundreds of miles away. That’s because the court has found merit in New York’s “convenience of the employer” rule, which actually should be called the “convenience of the auditor” rule.
I think it is highly likely that any federal court would find this concept of taxing out-of-staters on work actually performed out-of-state would violate the Constitution’s Commerce and Due Process clauses. Unfortunately, not just any federal court can review a state’s determination of its own tax rules. Only the Supreme Court can do this, and the justices have thus far shown a distinct disinterest in wading into New York’s unique approach to tax administration.
In the meantime, Gaied has moved to New York City, so he can look forward to paying New York taxes for years to come. Given the state’s aggressive approach to residents who claim a new domicile elsewhere, he probably can look forward to them long after he moves away, too.
As long as the Supreme Court remains disinclined to intervene, we are left to be grateful for whatever crumbs of tax justice we get from Albany. In this case, we’ll have to be satisfied with just a little taste of sanity.
Posted by Larry M. Elkin, CPA, CFP®
Thanks to its highest court, New York’s tax treatment has downshifted from crazy to merely unreasonable.
John Gaied had never lived on Staten Island, or in any other part of New York, at the time the state audited him. He did own a three-unit home there, however. His parents resided in one apartment, while renters occupied the other two units. Occasionally, Gaied slept on his parents’ couch when he visited to look after them and help pay their bills.
But in an tax audit and appeals process that was obviously stacked against Gaied, New York determined that he lived there anyway - because his job took him to Staten Island more than 183 days a year, and because he also owned a home he never used as a home. The one-two punch of owning a New York residence (even if you never live in it but only “maintain” it) and working in the state more days than the threshold allows is enough to create “statutory residency” in New York, thus allowing the state to tax the resident’s worldwide income.
Crazy, no?
Crazy, yes, but not unprecedented, or even unusual, in New York. Martha Stewart, who had a higher-profile job in the higher-profile borough of Manhattan, fell into the same trap. So have countless others. Still others have taken to meticulously monitoring their time in the state, and making sure to head home before midnight, in order to head off claims of residency at the pass.
It is only a mild surprise that the Court of Appeals has restored some sanity. The court recently ruled in Gaied’s favor, overturning the tax appeals tribunal’s finding of statutory residency. “We conclude there is no rational basis for [the tribunal’s] interpretation,” the court stated of the position that a taxpayer need not reside in a residence. For a taxpayer’s home to make him a resident of New York, it has to actually be the taxpayer’s home. There are not many places besides New York where this concept would require adjudication by the state’s most powerful judges. Gaied’s lawyer, Timothy Noonan, told The Wall Street Journal the decision “restores some normalcy to residency rules.”
Then again, the Court of Appeals has decided - twice - that nonresidents can be considered to “work” in New York when they are actually working in their homes, dozens or even hundreds of miles away. That’s because the court has found merit in New York’s “convenience of the employer” rule, which actually should be called the “convenience of the auditor” rule.
I think it is highly likely that any federal court would find this concept of taxing out-of-staters on work actually performed out-of-state would violate the Constitution’s Commerce and Due Process clauses. Unfortunately, not just any federal court can review a state’s determination of its own tax rules. Only the Supreme Court can do this, and the justices have thus far shown a distinct disinterest in wading into New York’s unique approach to tax administration.
In the meantime, Gaied has moved to New York City, so he can look forward to paying New York taxes for years to come. Given the state’s aggressive approach to residents who claim a new domicile elsewhere, he probably can look forward to them long after he moves away, too.
As long as the Supreme Court remains disinclined to intervene, we are left to be grateful for whatever crumbs of tax justice we get from Albany. In this case, we’ll have to be satisfied with just a little taste of sanity.
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