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Sunday, July 20, 2014
You Can Be Two Places at Once if One of Them is New York
Originally Published on forbes.com on July 25th,2011
Most states and a few cities tax their residents on their world-wide income. They tax non-residents on the money that the non-residents earn in that state. Typically the resident state will provide a creditfor some or all of the tax that its residents paid to other states. If the state where you work has higher taxes than the state where you live, the credit will likely be less than the amount of tax that you pay as a non-resident. What your state of residence is can be a complicated question. It is one that has sometimes plagued celebrities like Joe Dimaggio. Generally high tax states like New York and California are going to want to hang onto you. Massachusetts can be pretty ferocious also. There is a concept called domicile. The idea is that once you have established a place as your domicile it will remain even if you spend a lot of time someplace else. So if you lived in New York and started globe trotting but still maintained a lot of connections to New York and never set up a real home anyplace else, New York would say you are a resident of New York by virtue of your domicile even in a year in which you spent no time at all in New York.
People generally can’t have their cake and eat it too, but states, being sovereign, sometimes can. New York was annoyed by people who spent a lot of time in New York, but were clearly domiciled someplace else. New York could tax them on the money they earned in New York, but not on their world wide income. So we got something called the “New York rule”, which has also been adopted by Massachusetts. If you have a permanent place of abode in New York (even though it is not your primary residence) and spend more than 183 days in New York, you are a statutory resident of New York, regardless of your domicile. In terms of counting your days in New York don’t think about clicking a stopwatch as you pass that point in the Lincoln Tunnel that says you are now in New York. Unless you got on that Orange and Black Bus atNungessers so you could get the Greyhound to Worcester, like I used to do, you have spent a full day in New York as soon as you click:
In counting the number of days spent within and without New York State, presence within New York State for any part of a calendar day constitutes a day spent within New York State, except that such presence within New York State may be disregarded if such presence is solely for the purpose of boarding a plane, ship, train or bus for travel to a destination outside New York State, or while traveling through New York State to a destination outside New York State.
So anybody with a full time job in Manhattan, for example, will be a statutory resident, if they also have a place of abode in New York. It’s probably not that common. I doubt you could buy a decent parking place in Manhattan for the price of the house I grew up in in Fairview. New York, though, is pretty expansive on this abode thing though as the case of John Gaied shows.
Mr. Gaied owned two gas stations on Staten Island. He spent a lot of time at them, often having to cover shifts for his employees. His residence was in Old Bridge NJ. There is no dispute about either his having spent 183 days in New York or having his domicile in New Jersey. Here is what creates the problem:
For the years 2001 through 2003, petitioner claimed head of household filing status and two dependent exemptions, for his parents, Nouh Gaied Abdelshied and Yvonne Ishak Abdelmessih, on his federal, New Jersey and New York State tax returns.
In each of the years 2001 through 2003, petitioner filed a federal Schedule E, which reported, among other items, income and associated expenses from rental real estate listed in Part 1 as a one-family home at 14 MacFarland Avenue, Staten Island, New York (MacFarland Avenue property). 1 With respect to the rental real estate listed in Part 1 of Schedule E, petitioner responded “No” to the question posed in item 2 of Part 1: “Did you or your family use [14 MacFarland Avenue] during the tax year for personal purposes for more than the greater of: 14 days, or 10% of the total days rented at fair market value?”
Mr. Gaied’s parents had been living with him in his dream house in New Jersey. There were problems:
it was “kind of getting annoying in the end” because apparently his mother took over the kitchen and it was interfering with his lifestyle.
So he bought the place on Staten Island not far from where he worked. He rented part of it out and part of it was a home for his parents. He stayed there occasionally because of the needs of his parents, but he did not have a room in their apartment and slept on the couch. The story gets even more complicated. He had financial difficulties. Faced with the choice of selling his dream home or displacing his parents, he was a dutiful son. He did not, however, move in with them right away:
Petitioner argues that the proof that the Staten Island apartment was not for his use was that when he sold his New Jersey home in December 2003, he stayed with an uncle in New Jersey until an apartment was made in the rear basement section of the MacFarland Avenue property. Petitioner argues that if he had access to his parents’ apartment, he surely would have used it, rather than creating a new apartment in the rear of the basement.
The Division of Taxation assessed Mr. Gaied over $250,000 in additional tax for 2001, 2002 and 2003. Mr. Gaied appealed. An adminstrative hearing upheld the assessement, but in July 2010 a Tax Appeals Tribunal decision held in favor of Mr. Gaied. In an unusual move, Division of Taxation applied for a rehearing. That decision came down on June 16th in favor of the Division. It makes it clear that having the “place of abode” is enough regardless of how it is used:
We reject petitioner’s argument that the MacFarland Avenue property was not a permanent place of abode because it was maintained for his parents and he would only stay there at their request to care for his father. As we have stated previously, “[t]here is no requirement that the petitioner actually dwell in the abode, but simply that he maintain it”
Mr. Gaied’s request for another rehearing was rejected. I don’t follow state matters as intensely as I do federal. I learned about this case from Rick Genetelli of Genetelli Consulting. He clarified the procedural history which I had found a bit confusing. The result is fairly harsh. Mr. Gaied would have received a credit from New Jersey for some of the tax that he paid on his New York source income, but he will not receive a credit for this additional tax. Rick indicated to me that sometimes a person working long hours in the financial district might have a small city apartment. This rule could come as a surpise to those folks. Even if the apartment is used by someone else, parents, children or perhaps a friend, maybe a very close friend, the rule will apply and the Division of Taxation seems fairly zealous in pursuing these cases.