A recent unanimous decision by the New York State Court of Appeals with respect to the application of the state’s statutory residency law demonstrates that it is still possible for a lone taxpayer to challenge the Department of Taxation and Finance (the “Department”) regarding one of its favorite audit darlings, and prevail.
The taxpayer, John Gaied, was domiciled in New Jersey during the years at issue. He did, however, own and operate a business located on Staten Island. In 1999, the taxpayer purchased a multi-family apartment building on Staten Island as an investment property, and also as a place for his elderly parents to reside. The taxpayer’s parents lived in a first-floor apartment located in the building, and relied on the taxpayer for their support. He paid the utility bills and maintained a telephone number for their use in his name. Mr. Gaied did not live at the apartment, nor did he keep clothing or personal effects there.
He did not have any sleeping accommodations at the apartment. He did have keys to the apartment, but did not have unfettered access to the premises. He only stayed at the apartment on the occasions when his parents requested him to so that he could attend to their medical needs. On such evenings, he would sleep on a couch.
The two other apartments in the building were rented to tenants. The taxpayer reported the income and expenses associated with the apartment building on his tax return.
The taxpayer filed nonresident income tax returns in New York for the years under review. Upon audit, the Department determined that he was a “statutory resident” of New York within the meaning of the law because he spent more than 183 days per year in the state and maintained a “permanent place of abode” at the Staten Island apartment building during the relevant time period.
Mr. Gaied challenged the Department’s conclusion that he was a statutory resident. He admitted that he was in New York more than 183 days a year (since he operated his business located on Staten Island), but objected to the Department’s determination that he maintained a permanent place of abode in the state.
The Department prevailed at the taxpayer’s administrative hearing. Upon appeal to the Tax Appeals Tribunal, the Administrative Law Judge’s decision favoring the Department was initially overturned on the ground that the taxpayer did not having living quarters at his parents’ apartment and accordingly, did not maintain a permanent place of abode in the state.
The Department moved for re-argument with respect to the Tribunal’s original decision, contending that under the Tax Law there is no requirement that a taxpayer actually dwell in a permanent place of abode to be found to be a statutory resident. In the Department’s view, a finding of statutory residency only required that a taxpayer maintain such a place.
Upon re-argument, in a split decision, the Tribunal held that” where a taxpayer has a property right to the subject premises, it is neither necessary nor appropriate to look beyond the physical aspects of the dwelling to inquire into the taxpayers’ subjective use of the premises.” It rejected the taxpayer’s argument that the premises must be maintained for personal use, and concluded that there is “no requirement that the [taxpayer] actually dwell in the abode, but simply that he maintain it.”
The taxpayer challenged the Tribunal’s decision in favor of the Department, by bringing an action in the Appellate Division. With two Justice’s dissenting, that Court upheld the Tribunal’s conclusion.
The Court of Appeals Decision
In a precedential opinion, which delivered a “hammer blow” to the Department’s position, the Court of Appeals held that “in order for an individual to qualify as a statutory resident, there must be some basis to conclude that the dwelling was utilized as the taxpayer’s residence.” Since the Tax Law does not define the term “permanent place of abode,” the Court focused on the purported support for the Department’s position set forth in the Tax Regulations. Specifically, the regulatory definition of the term provides “a dwelling place of a permanent nature maintained by the taxpayer, whether or not owned by such taxpayer, [which] will generally include a dwelling place owned or leased by such taxpayer’s spouse” (20 NYCRR 105.20 [e].
The Court, in articulating its position, looked to the Tribunal’s interpretation of “maintains a permanent place of abode” to mean that a taxpayer need not “reside” in the dwelling, but only maintain it, to fall within the statutory residency rules. In perhaps the strongest language possible, the Court concluded that “there is no rational basis for that interpretation.” Thus, the Court held in favor of the Taxpayer.
Undoubtedly, the Department will need time to consider this decision and the ultimate impact the Court’s holding will have on its audit policies. Taxpayers should take comfort in the Court’s holding, but be wary of depending on it too much until the Department provides some guidance regarding its plans for the future.
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