In Suprisingly Favorable Tax Ruling, New York "Statutory Residence" Rules Held Not To Apply To Portion Of Year A Part-Year Resident Is Domiciled In New York
10/22/2015Whether an individual is a New York resident for tax purposes can be very significant. A NYS and NYC resident is generally subject to NYS and NYC income tax on income from all sources while a nonresident is subject to NYS tax only on income from New York sources and is not subject to NYC tax. In general, two types of individuals are New York residents: (1) An individual who is domiciled in New York is, except in unusual circumstances, considered a New York resident; and (2) an individual who is not domiciled in New York is considered a “statutory resident” for a year if he or she maintains a permanent place of abode in New York for substantially all of that year and spends more than 183 days in New York in that year. For this purpose, an individual’s domicile is where he or she resides with an intention to remain permanently or indefinitely. A taxpayer whose domicile changes to or from New York during a year may be considered a part-year resident – a resident for only the portion of the year he or she is domiciled in New York (the “domicile period”) and a nonresident for the balance of the year (the “non-domicile period”).
In Matter of Sobotka, DTA 826286, decided on August 20, 2015, the taxpayer changed his domicile to NYC on August 18, 2008 and filed as a part-year resident for 2008, claiming that he was a NYC resident only for the domicile period (August 18 - December 31, 2008). The NYS Department of Taxation and Finance (the “Department”), applying its published audit policy, took the view that even though Sobotka’s domicile changed during the year, the statutory residence rules are to be applied to the entire year. Applying this view, and determining that Sobotka had a permanent place of abode in New York City and had not met his burden of proving that he did not spend more than 183 days in New York City in 2008, the Department concluded that he was a statutory resident for all of 2008. Sobotka appealed to the Division of Tax Appeals and moved for a summary determination, arguing that because only individuals who are not domiciled in New York can be treated as statutory residents, an individual such as Sobotka who was domiciled in New York for part of a year is precluded as a matter of law from being treated as a statutory resident for that year.
The ALJ charted a course somewhere between the two parties’ positions. First, he rejected Sobotka’s argument that an individual who is domiciled in New York for part of a year is precluded from being treated as a statutory resident for that year, largely on the basis of a 1922 amendment to the statute that effectively authorized part-year resident status for one who changes domicile during the year. Citing the legislature’s intention to ensure that individuals are taxed according to their actual connection to New York during the two portions of the year, the ALJ reasoned that to accept Sobotka’s argument would be to allow taxpayers to frustrate this intention by changing their domicile from New York early in that year or to New York late in that year and thus precluding any inquiry as to their connection to New York during the resulting lengthy non-domicile period.
But the ALJ also rejected the Department’s position that where a taxpayer changes domicile during a year, all of his or her New York days during the year, including during the domicile period, are to be counted for purposes of the more-than-183-days test. Rather, the ALJ read the provision in the statute applying the statutory residence rules only to individuals not domiciled in New York to mean that where a taxpayer is a domiciliary and thus a resident for a part of a year and claims nonresident status for the balance of the year, the only question permitted by the statute is whether the taxpayer is also properly considered a statutory resident for the non-domicile period, standing alone. Significantly, the ALJ determined that the statutory residence test is to be applied to the non-domicile period by determining whether the taxpayer maintained a permanent place of abode and spent more than 183 days in New York during the non-domicile period. Under this approach, any days such a taxpayer spent in New York during the domicile period are not counted for purposes of determining whether the taxpayer was a statutory resident for the year.
Under the ALJ’s approach in Sobotka, an individual who changes his or her domicile to or from New York during a year may be precluded as a matter of law from being considered a statutory resident for the non-domicile period, depending on when during the year the change took place. Because Sobotka changed his domicile to New York on August 18, it was physically possible for him to have spent more than 183 days in New York during the resulting 230-day non-domicile period (January 1 - August 17). On this basis, the ALJ denied Sobotka’s motion for summary determination and ordered a hearing to determine whether Sobotka in fact spent more than 183 days in New York and maintained a permanent place of abode in New York during the period January 1 - August 17, 2008. By contrast, suppose a taxpayer becomes a New York domiciliary before July 4 (July 3 in a leap year such as 2008). Under Sobotka, such a taxpayer would be entitled to a summary determination that he or she is not a statutory resident for the non-domicile period, regardless of how much of the domicile period was spent in New York: Since the non-domicile period in that case would not exceed 183 days, it would be impossible for the taxpayer to have spent more than 183 days in New York during the non-domicile period.
The rules governing tax proceedings in New York do not permit either party to appeal an ALJ ruling (appeals go to the Tax Appeals Tribunal) until the ALJ decides all of the issues and matters contained in the taxpayer’s petition. As a result, the Tribunal will not be in a position to weigh in on the ALJ’s approach in Sobotka unless and until there has been a determination in the case after a hearing (or possibly a stipulation concerning whether Sobotka spent more than 183 days in New York during the non-domicile period) and one or both parties appeal the ALJ’s determination. (For example, the taxpayer might appeal the ALJ’s determination that an individual who is domiciled in New York for part of a year is precluded from being treated as a statutory resident for that year, and the Department might appeal the ALJ’s determination that days during the domicile period are not counted in determining statutory residence.) In the case of the Department, the decision whether to appeal the ALJ’s legal conclusion would likely take into account that absent an appeal the decision of the ALJ would technically be non-precedential, whereas if an appeal were taken and the Tribunal were to affirm the ALJ’s legal conclusion on this issue, the Tribunal decision would be precedential and the Department could not further appeal that decision. By contrast, if the Tribunal were to reverse the ALJ decision, the taxpayer could appeal the matter further to the Appellate Division.
Arguably, the reason statutory residence status is limited to non-domiciliaries is that the legislature intended to provide an alternative means for individuals who are not already resident by reason of being domiciled in New York for the entire year nonetheless to be considered resident. On this basis, it could be argued that the ALJ correctly determined that a taxpayer who is a part-year resident by reason of a change of domicile is not precluded from being a statutory resident for the year. But this may also suggest that the ALJ’s conclusion that the taxpayer’s New York days during the domicile period are not to be counted toward the statutory residence requirement of more than 183 New York days is questionable, particularly in light of the reference in the statute to spending more than 183 days “of the taxable year” in New York. Moreover, if the statutory residence test is to be applied to a part-year resident’s non-domicile period standing alone, it is not readily apparent as a logical matter (if not as a matter of statutory construction) why the more-than-183-day requirement should not be pro-rated to the length of the non-domicile period. Thus, for example, if a part-year resident who has a permanent place of abode in New York has a non-domicile period of 270 days, should the taxpayer not be considered a statutory resident for the non-domicile period if he or she spends more than 135 days (270/365 x 183) in New York during that period? Likewise, under the approach taken by the ALJ it is not clear how the permanent place of abode test is to be applied to the non-domicile period standing alone, particularly given the current regulations that require that the permanent place of abode be maintained by the taxpayer for substantially all of the year.
In the meantime, Sobotka, although a non-precedential ALJ opinion, is some authority for the proposition that New York days during the period a part-year resident is domiciled in New York are not to be counted in determining whether the individual is a statutory resident for the year. This appears to be a surprising result given the language of the statute and, if upheld, could give rise to some interesting, topsy-turvy situations. For example, suppose a taxpayer who has a permanent place of abode in New York throughout 2015 receives a large amount of income in the first three months of 2015, spends very little time in New York during those months, and spends the entire last nine months of 2015 (275 days) in New York. Prior to Sobotka, one might have assumed that irrespective of the taxpayer’s domicile, the taxpayer, having spent more than 183 days in New York in 2015, would be subject to tax as a New York statutory resident on all of her 2015 income, and that if anything, it would be the Department that might claim in the alternative that the taxpayer was domiciled in New York. Under Sobotka, however, it would be the taxpayer who would be attempting to prove that she was domiciled in New York during, say, the last nine months of 2015 so that the statutory residence tests would be applied only to the first three months of 2015, and the Department, wishing to count the taxpayer’s 275 New York days during the last nine months of 2015, arguing that she had not changed her domicile to New York.
As a result of Sobotka, certain taxpayers who changed their domicile during a year and filed on the basis of being a statutory resident for that year may wish to consider filing a claim for refund. An example of such a taxpayer is one who spent more than 183 days in New York during the entirety of the year and maintained a permanent place of abode in New York for substantially all of that year, but spent 183 days or fewer in New York during the non-domicile period. Other taxpayers might wish to consider whether Sobotka, if not reversed, could be used as a planning tool. If you wish to discuss the ramifications of and potential for refund claims or planning on the basis of the Sobotka case, or if you have any questions about the New York residency rules in general, please contact Mark E. Berg or the attorney with whom you have a relationship at Feingold & Alpert.
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