New York State Department of Taxation and Finance at the W. Averell Harriman State Office Building Campus in Albany, N.Y.
Photo by Matt Wade via Wikimedia Commons, licensed under CC-BY-SA-3.0.Nelson Obus probably thought of himself as a more or less typical commuter as he traveled between his Manhattan office and his home in Princeton, New Jersey. Little did he know that for tax purposes, he actually resided in the frosty foothills of the Adirondack Mountains, more than 200 miles away.
Obus walked into a New York tax trap that has snared many residents of nearby states of both lesser and greater renown than Obus. (Martha Stewart is a prominent example.) Obus is a hedge fund manager who won a lengthy insider trading case against the Securities and Exchange Commission several years back.
For the years 2012 and 2013, Obus paid New York state taxes on his income as chief investment officer of Wynnefield Capital, while he only paid taxes to New Jersey on his capital gains, interest and dividends from sources outside New York. That is the standard treatment for a New York nonresident.
But Obus and his wife also maintained a vacation home in Northfield, New York, a rural community northwest of Albany. The couple only used the home for two to three weeks per year at most, while a tenant occupied a small apartment in the residence year-round. There was no dispute that the couple’s domicile is in New Jersey.
Domicile is one of two tests that New York (and many other states with an income tax) applies to determine if someone is a resident. The other test is for “statutory residence.” To be a statutory resident of New York, an individual must be present in the state on at least 184 days in the year, and must also maintain a “permanent place of abode” within the state’s boundaries.
Pay attention: There is nothing in these requirements, which have been in place for decades, which says the individual must be present at that permanent place of abode on 184 days. If a permanent place of abode is maintained, being anywhere in the state on 184 days or more in the year makes you a resident for tax purposes.
Obus’ work in New York City plus his vacation time in the mountains brought him within the Empire State’s borders on at least 184 days in each of the years at issue, while the vacation home was deemed by the state’s tax auditors to be a “permanent place of abode.” Obus and his attorneys challenged that finding before an administrative law judge working for the New York Department of Taxation and Finance. They lost. His attorneys have said they will appeal. If they do, I would be amazed if they do not lose again. For these two tax years, Obus owes nearly $527,000 in New York taxes, plus an unreported additional amount in interest and penalties. He might get a partially offsetting credit from New Jersey for taxes he already paid to that state on the double-taxed income, but only if his representatives have kept the statute of limitations open for claiming a refund.
In challenging New York’s claim that Obus was a statutory resident, his lawyers argued that the way the vacation home was actually used – as a year-round residence by someone else, and only a very limited getaway space for Obus – controls whether it is a permanent place of abode for Obus. The problem with that argument is that it does not conform to the way the state’s regulations define a permanent place of abode. Those regulations state that “a mere camp or cottage, which is suitable and used only for vacations, is not a permanent place of abode.” Note the two words I emphasized. The home in the mountains had five bedrooms, three bathrooms, a completely separate unit for the tenant, and all-year heat and other utilities, for which Obus paid. It may have been used by Obus only for vacations, but it was clearly suitable and available for full-time use if he so chose.
Some commentators have pointed to a case the state tax authorities lost in the New York Court of Appeals. In that case, the tax department argued that New Jerseyan John Gaied was a New York resident because he maintained a home on Staten Island in which his elderly parents resided. Gaied did not have so much as his own bedroom in that home; when he stayed overnight to help his parents with medical issues, he slept on a sofa. The Court of Appeals found that having a dwelling in which there is no place for one to dwell does not constitute maintaining a permanent place of abode. That was the right result in that case, but the facts are not like the situation in which Obus placed himself. I think commentators who believe Gaied points toward a similarly favorable outcome for Obus on appeal are confusing the result they believe is fair with the result the law will produce.
There is nothing new here. In 2000, another administrative law judge found that Martha Stewart was a New York resident for tax purposes despite having her primary home in Westport, Connecticut. Her company was based in Manhattan, which brought her into New York more than 183 days per year. She also maintained a vacation home in East Hampton on Long Island. Her representatives argued that in the years at issue the home was undergoing renovations and was not suitable for habitation, but the state found otherwise.
A similar issue affects many other commuters who maintain a part-time apartment in New York City for convenience when they work late or attend social gatherings. These apartments are known locally by the fancy French name pied-a-terre. I and other tax professionals think of them more as giant boulders ready to roll downhill and crush the unwary Connecticut resident or New Jerseyan, or even a suburban New Yorker. Not only can these dwellings bring someone into the New York state tax system as a resident, but they can also expose the hapless owners or tenants (a rental counts as much as a co-op or condominium apartment) to New York City income taxes, which ordinarily apply only to city dwellers.
I am not in the habit of defending New York’s tax system. The rules are deliberately written in a heads-we-win-tails-we-also-win manner. If a Florida snowbird arrives at LaGuardia Airport at 11:59 p.m., it counts as a full day toward the 184-day statutory tripwire. A departure at 12:01 a.m. also counts as a full day. If that snowbird flies to Buffalo at the other end of the state for business reasons, staying in a hotel, each day or part of a day in that snow belt locale counts toward making the snowbird a New York statutory resident, even if the snowbird’s New York place of abode is on faraway Long Island. And as for domicile, suffice to say that if the state’s tax collectors can make any sort of claim without blushing stoplight-red or breaking into uncontrollable guffaws, you should expect them to do exactly that.
Maybe someday Congress or the U.S. Supreme Court will impose a higher standard of fairness on New York and similarly revenue-hungry states. Until that happens, whether the rules are reasonable or ridiculous is not the issue. They are what they are. Nonresidents forget this at significant peril to their purse.
Posted by Larry M. Elkin, CPA, CFP®
New York State Department of Taxation and Finance at the W. Averell Harriman State Office Building Campus in Albany, N.Y.
Photo by Matt Wade via Wikimedia Commons, licensed under CC-BY-SA-3.0.
Nelson Obus probably thought of himself as a more or less typical commuter as he traveled between his Manhattan office and his home in Princeton, New Jersey. Little did he know that for tax purposes, he actually resided in the frosty foothills of the Adirondack Mountains, more than 200 miles away.
Obus walked into a New York tax trap that has snared many residents of nearby states of both lesser and greater renown than Obus. (Martha Stewart is a prominent example.) Obus is a hedge fund manager who won a lengthy insider trading case against the Securities and Exchange Commission several years back.
For the years 2012 and 2013, Obus paid New York state taxes on his income as chief investment officer of Wynnefield Capital, while he only paid taxes to New Jersey on his capital gains, interest and dividends from sources outside New York. That is the standard treatment for a New York nonresident.
But Obus and his wife also maintained a vacation home in Northfield, New York, a rural community northwest of Albany. The couple only used the home for two to three weeks per year at most, while a tenant occupied a small apartment in the residence year-round. There was no dispute that the couple’s domicile is in New Jersey.
Domicile is one of two tests that New York (and many other states with an income tax) applies to determine if someone is a resident. The other test is for “statutory residence.” To be a statutory resident of New York, an individual must be present in the state on at least 184 days in the year, and must also maintain a “permanent place of abode” within the state’s boundaries.
Pay attention: There is nothing in these requirements, which have been in place for decades, which says the individual must be present at that permanent place of abode on 184 days. If a permanent place of abode is maintained, being anywhere in the state on 184 days or more in the year makes you a resident for tax purposes.
Obus’ work in New York City plus his vacation time in the mountains brought him within the Empire State’s borders on at least 184 days in each of the years at issue, while the vacation home was deemed by the state’s tax auditors to be a “permanent place of abode.” Obus and his attorneys challenged that finding before an administrative law judge working for the New York Department of Taxation and Finance. They lost. His attorneys have said they will appeal. If they do, I would be amazed if they do not lose again. For these two tax years, Obus owes nearly $527,000 in New York taxes, plus an unreported additional amount in interest and penalties. He might get a partially offsetting credit from New Jersey for taxes he already paid to that state on the double-taxed income, but only if his representatives have kept the statute of limitations open for claiming a refund.
In challenging New York’s claim that Obus was a statutory resident, his lawyers argued that the way the vacation home was actually used – as a year-round residence by someone else, and only a very limited getaway space for Obus – controls whether it is a permanent place of abode for Obus. The problem with that argument is that it does not conform to the way the state’s regulations define a permanent place of abode. Those regulations state that “a mere camp or cottage, which is suitable and used only for vacations, is not a permanent place of abode.” Note the two words I emphasized. The home in the mountains had five bedrooms, three bathrooms, a completely separate unit for the tenant, and all-year heat and other utilities, for which Obus paid. It may have been used by Obus only for vacations, but it was clearly suitable and available for full-time use if he so chose.
Some commentators have pointed to a case the state tax authorities lost in the New York Court of Appeals. In that case, the tax department argued that New Jerseyan John Gaied was a New York resident because he maintained a home on Staten Island in which his elderly parents resided. Gaied did not have so much as his own bedroom in that home; when he stayed overnight to help his parents with medical issues, he slept on a sofa. The Court of Appeals found that having a dwelling in which there is no place for one to dwell does not constitute maintaining a permanent place of abode. That was the right result in that case, but the facts are not like the situation in which Obus placed himself. I think commentators who believe Gaied points toward a similarly favorable outcome for Obus on appeal are confusing the result they believe is fair with the result the law will produce.
There is nothing new here. In 2000, another administrative law judge found that Martha Stewart was a New York resident for tax purposes despite having her primary home in Westport, Connecticut. Her company was based in Manhattan, which brought her into New York more than 183 days per year. She also maintained a vacation home in East Hampton on Long Island. Her representatives argued that in the years at issue the home was undergoing renovations and was not suitable for habitation, but the state found otherwise.
A similar issue affects many other commuters who maintain a part-time apartment in New York City for convenience when they work late or attend social gatherings. These apartments are known locally by the fancy French name pied-a-terre. I and other tax professionals think of them more as giant boulders ready to roll downhill and crush the unwary Connecticut resident or New Jerseyan, or even a suburban New Yorker. Not only can these dwellings bring someone into the New York state tax system as a resident, but they can also expose the hapless owners or tenants (a rental counts as much as a co-op or condominium apartment) to New York City income taxes, which ordinarily apply only to city dwellers.
I am not in the habit of defending New York’s tax system. The rules are deliberately written in a heads-we-win-tails-we-also-win manner. If a Florida snowbird arrives at LaGuardia Airport at 11:59 p.m., it counts as a full day toward the 184-day statutory tripwire. A departure at 12:01 a.m. also counts as a full day. If that snowbird flies to Buffalo at the other end of the state for business reasons, staying in a hotel, each day or part of a day in that snow belt locale counts toward making the snowbird a New York statutory resident, even if the snowbird’s New York place of abode is on faraway Long Island. And as for domicile, suffice to say that if the state’s tax collectors can make any sort of claim without blushing stoplight-red or breaking into uncontrollable guffaws, you should expect them to do exactly that.
Maybe someday Congress or the U.S. Supreme Court will impose a higher standard of fairness on New York and similarly revenue-hungry states. Until that happens, whether the rules are reasonable or ridiculous is not the issue. They are what they are. Nonresidents forget this at significant peril to their purse.
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