Last Week
What a week it was.
It began relatively well, with the Cowboys losing the NFC wild card game, albeit to a California team.[i]
It ended disturbingly, with the Arizona Democratic Party censuring Senator Sinema for having opposed the changes to the Senate’s filibuster rule proposed by Senate Majority Leader Schumer.[ii]
What occurred in the interim was anything but reassuring.
Earlier in the week, the entertainer, Stephen Colbert, suggested “if we can’t get rid of the filibuster . . . what if we just get rid of the Senate?” He then added, “I don’t understand what possible positive purpose the United States Senate provides right now.” [Applause]
What did he mean by “right now”? It may be useful later? To whom?
Doomed to Repeat It?[iii]
James Madison addressed the unique role of the Senate in Federalist Paper No. 62, in which he wrote:
“Another advantage accruing from this ingredient in the constitution of the senate is, the additional impediment it must prove against improper acts of legislation. No law or resolution can now be passed without the concurrence, first, of a majority of the people, and then, of a majority of the states. It must be acknowledged that this complicated check on legislation may, in some instances, be injurious as well as beneficial . . . and as the facility and excess of law-making seem to be the diseases to which our governments are most liable, it is not impossible that this part of the constitution may be more convenient in practice, than it appears to many in contemplation . . .
“. . . The necessity of a senate is not less indicated by the propensity of all single and numerous assemblies, to yield to the impulse of sudden and violent passions, and to be seduced by factious leaders into intemperate and pernicious resolutions . . .
“. . . The mutability in the public councils, arising from a rapid succession of new members, however qualified they may be, points out, in the strongest manner, the necessity of some stable institution in the government . . .”
Athens Calling
Anyone recall their ancient Greek history? Time to dust off your copies of Thucydides and Plutarch.[iv] Do you remember that most “democratic” of Athenian practices, ostracism?
Once a year, the people – the “demos,” or “ecclesia” when in assembly – had the right to proffer the name of one individual for expulsion from the city-state for a period of ten years. No reason had to be given – though the practice originated with the goal of subduing those who were identified as having accumulated “too much” political or economic power – and no defense was permitted. A majority vote, held by secret ballot,[v] is all that was needed to send away the individual in question.[vi]
Meet the Press?
Mid-week, President Biden held one of his rare “solo” press conferences. I missed the broadcast, but I read the transcript.[vii]
When he called on a reporter, he used their full name and the name of their organization; for example, “Mary Bruce, ABC,” or “How about Jen Epstein, Bloomberg,” or “Alex Alper, Reuters.” Was he reading from a list?
The President expressed his belief that “major chunks” of the Administration’s Build Back Better plan can be enacted before the mid-term elections. However, he admitted that certain proposals would have to be dropped. He also conceded the plan would probably have to be “broken up” and repackaged into smaller bills capable of making it through both Chambers of Congress.
Mr. Biden repeated that the goals he has set may be accomplished “without raising a single penny in taxes on people making under $400,000 a year or raising the deficit.”
“The American public,” he added, “is outraged about the tax structure we have in America.” He then asked, in what I suppose was intended to be a rhetorical flourish, what the Republicans were “proposing to do about it? Anything? Have you heard anything? I mean, anything. I haven’t heard anything.”
The late Edmund Muskie[viii] once explained, “In Maine, we have a saying that there’s no point in speaking unless you can improve on silence.”
Shush, Be Quiet
Closer to home, early last week (just before my last post) I realized that New York’s Department of Taxation and Finance had revised its Nonresident Audit Guidelines.
New York on the Prowl
In May of 2021, it was reported[ix] that the New York tax authorities had started auditing the 2020 personal income tax returns filed by nonresidents who normally were employed in the state but who began working remotely following the pandemic-related closure of most offices and other places of business in New York.
According to the report, a nonresident taxpayer would have to explain why the days they worked from their home outside the state should be respected as such, and not treated as taxable “New York days” under New York’s “convenience of the employer rule.” Stated differently, a nonresident would have to demonstrate that their home outside the state was a bona fide place of business of their New York employer such that the wages allocable to the days worked from home were not subject to New York’s personal income tax.
The Rule
In the case of a nonresident employee who performs services for their employer both within and without the state, New York’s tax law provides that the nonresident’s income derived from New York sources includes that proportion of their total compensation for services rendered as an employee which the total number of working days employed within New York bears to the total number of working days employed both within and without New York.
However, any allowance claimed for days worked outside New York must be based upon “the performance of services which of necessity, as distinguished from convenience, obligate the employee to out-of-state duties” in the service of their employer.[x]
In June of 2021, the U.S. Supreme Court denied New Hampshire’s request that the Court exercise its original jurisdiction under the Constitution to hear and resolve a conflict involving the application of Massachusetts’s version of the “convenience of the employer rule” to tax the income earned by certain residents of New Hampshire.[xi]
In the wake of the Court’s refusal to exercise its original jurisdiction, it was reported[xii] in August of 2021 that New York had expanded its enforcement efforts to include nonresident individuals who, by most standards, would not be characterized as the kind of high income or high net wealth taxpayers on whom New York had previously focused its attention.
The Audit Guidelines
Then, in December of 2021 – while most New York tax advisers were either immersed in year-end M&A transactions or gift-planning transfers – the state, without any prior notice or announcement, released updated Nonresident Audit Guidelines.
The Guidelines were last updated in 2014. As their name suggests, the guidelines are issued primarily to provide guidance to the audit staff of the Department of Taxation. They have no legal force or effect; they do not establish precedent in the particular subject matter.[xiii] They seek to explain the state’s tax law and regulations concerning residency, but they also discuss audit policies and procedures and address various technical and complex residency issues.
A lot happened during the intervening years, but one would be disappointed if they expected to find major, let alone taxpayer-friendly, revisions in this most recent iteration.
Indeed, the most significant change signals a more “expansive” application of the so-called “statutory residence” test.
Statutory Residence
An individual will be treated as a resident of New York for tax purposes – generally meaning they will be subject to tax by the state on their worldwide income – if they are domiciled[xiv] in New York or if they are statutory residents.
Day Count
A statutory resident is an individual who is not domiciled in New York but who (i) maintains a permanent place of abode[xv] in the state and (ii) spends in the aggregate more than one hundred and eighty-three days[xvi] of the taxable year in the state.”[xvii]
PPA
A permanent place of abode can be a house, co-op, apartment, condo, or other dwelling.[xviii] It must be a “dwelling place of a permanent nature maintained by the taxpayer,” whether or not owned by the taxpayer; it will generally include a dwelling owned or leased by the taxpayer’s spouse.[xix]
Suitable Year-Round
It must be suitable for year-round use. The fact that a taxpayer’s use of a dwelling was limited – for example, it was used only for vacations – does not mean that the dwelling was not suitable for year-round use.[xx]
In addition to being suitable for year-round use, a place of abode must generally contain “facilities ordinarily found in a dwelling, such as facilities for cooking, bathing, etc.” in order for it be permanent.[xxi]
Residential Interest
Finally, for a taxpayer to be treated as maintaining a permanent place of abode, they must have a “residential interest” in the dwelling.[xxii] There must be some basis to conclude that the dwelling was utilized by the taxpayer as the taxpayer’s residence.
A residence that is owned and maintained by a taxpayer with unfettered access will generally be deemed to be a permanent place of abode regardless of how often the taxpayer actually uses it. A taxpayer with an ownership or property right in a dwelling in which another may be living would normally be considered to have the requisite relationship to that dwelling if the taxpayer has access to their own living quarters where personal items are kept.
A taxpayer would not have the requisite relationship to a dwelling that is used exclusively by others despite having ownership rights. For example, an apartment owned by a taxpayer that is rented to someone else would not constitute a permanent place of abode to that taxpayer.[xxiii]
“Substantially All of The Taxable Year”
Notwithstanding that an individual maintains a permanent place of abode in New York during a taxable year and is present in the state for more than 183 days during such year, the individual will not be taxed by New York as a statutory resident unless they maintain such an abode for “substantially all of the taxable year”; generally, the entire taxable year disregarding small portions of such year.[xxiv]
Although this requirement applies only to statutory resident cases, it is important to note that statutory residency will be considered whenever an individual changes domicile during the taxable year from or to New York. For example, an individual who has abandoned their New York domicile and landed elsewhere toward the end of the year may still be taxed as a resident of New York for the entire year if they satisfy the criteria for statutory residency, including the maintenance of an abode for substantially all of the year.
Pre-2022
Prior to tax year 2022, New York’s audit policy defined “substantially all of the year” to mean a period exceeding eleven (11) months.
For example, an individual who acquired a permanent place of abode on February 15 of the taxable year and spent more than 183 days in New York would not have been a statutory resident for such taxable year because the permanent place of abode was not maintained for substantially the entire year.[xxv]
Similarly, if an individual maintained a permanent place of abode at the beginning of the year but disposed of it on October 15 of the tax year, they would not be a statutory resident despite spending more than 183 days in New York.
Because the individual in each of the above examples did not maintain their permanent place of abode in New York for more than 11 months during the year, the individual would not be considered a statutory resident of New York for any part of such year.
Significantly, in recognition of the potential for abuse inherent in this rule, the Department of Taxation stated in the 2014 Guidelines that the “substantial part of a year” rule was a general rule rather than an absolute rule, and that it would “generally” be applied to those years where a taxpayer acquired or disposed of a residence.
For example, suppose a couple rented a NYC apartment year after year, but each year they sublet the apartment to their son for the month of December. Under an absolute rule, the couple would not be maintaining a permanent place of abode in New York because they did not maintain it for more than 11 months of any particular year. However, the Department’s position was that the couple should nevertheless be covered by the 183-day rule because they maintained a permanent place of abode on a regular and continuing basis except for occasional or brief absences including short-term rentals.
Post-2021
Beginning with tax year 2022, the Department of Taxation will define “substantially all of the year” to generally mean a period exceeding ten (10) months.
In addition, according to the revised Guidelines, the “10-month rule” will be applied only (not just “generally” as under the 2014 Guidelines) for tax years in which a taxpayer either acquires or disposes of their residence.
For example, a taxpayer who works in New York City throughout the year and initially begins renting an apartment in New York City in March (fewer than 10 months during the year) generally will not be deemed a statutory resident on account of spending more than 183 days in New York in that year because it occurred in the year of acquisition.
However, a taxpayer who rents out their East End home for a few months each summer will still be determined to be maintaining a permanent place of abode in New York for substantially all of the year since that rental did not occur during the year of acquisition or disposition and it is available for use on a regular, continuing basis except for occasional or brief absences including short-term rentals.
Plan Ahead
The reduction of the “holding period” under the “substantially all of the year” rule from 11 months to 10 months would, without more, make the finding of statutory residence more likely.
However, by limiting the application of the “substantially all of the year” component of the statutory residence test to the year in which a residence is acquired or disposed of, the state may have presented individuals who are not domiciled in New York with an opportunity to reduce their New York tax liability if they are planning to (i) acquire a residence in the state or (ii) dispose of a New York residence they already have.
In these instances, the taxpayer may avoid statutory residence by timing their acquisition or disposition of the residence such that the taxpayer owns the residence for fewer than 10 months during the year in question; for example, an acquisition in March or a sale in October.
At the same time, non-domiciliary taxpayers who own residences in New York and who spend more than 183 days in the state must recognize that the short-term leasing of such residences to third parties will not avail them in avoiding statutory residency.
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[i] You can’t have everything.
[ii] The State Party Chair stated the Senator had failed “to do whatever it takes to ensure the health of our democracy.”
[iii] Winston Churchill wrote, “Those that fail to learn from history are doomed to repeat it.” Let’s not repeat the mistakes of others.
[iv] Yes, Plutarch was a Hellene. And, yes, you know the Founders were well-read in what some ignorant people would describe as “useless” Classics.
[v] Those voting in favor of ostracism would write the person’s name on a shard of pottery. The shards would be collected and counted.
[vi] Thus, in the years preceding the Second Persian War, Aristides and Xanthippus – both heroes of Marathon – were ostracized (some said at the insistence of Themistocles – see later) only to be called back early to help defend Athens against a second Persian invasion, by Xerxes, the son of Darius, who led the first invasion. After the defeat of the Persians, the Athenians ostracized Themistocles, a hero of Salamis. When a new load of silver was discovered not far from the city, many urged that the wealth it represented be shared among all the citizens. Themistocles convinced them that Athens would be better served by building a navy to protect itself and to pursue trade. That navy – a citizen navy in which the rowers were not slaves but the residents of the city – ultimately saved them, first by evacuating the city, and then by defeating the huge Persian fleet at Salamis. People can be fickle – you’re loved one minute, canceled the next; but what comes around goes around, as Themistocles learned.
[vii] https://www.whitehouse.gov/briefing-room/speeches-remarks/2022/01/19/remarks-by-president-biden-in-press-conference-6/ .
[viii] Governor of Maine, U.S. Senator, and President Carter’s Secretary of State.
[ix] https://www.bloomberglaw.com/product/tax/bloombergtaxnews/true/XOS1MIG000000?bna_news_filter=true#jcite.
[x] 20 NYCRR 132.18.
[xi] https://www.rivkinradler.com/publications/like-a-good-neighbor-new-york-is-still-free-to-tax-you-sorry-for-the-inconvenience/#_edn5 .
[xii] https://news.bloombergtax.com/daily-tax-report-state/new-york-widens-scope-of-tax-audits-targeting-remote-workers.
[xiii] In Pirates of the Caribbean, Captain Barbosa explained to Miss Swan that the pirates’ code “is more what you’d call ‘guidelines’ than actual rules.”
[xiv] For a discussion of domicile, please see last week’s post: https://www.taxslaw.com/2022/01/leaving-new-york-but-what-about-ones-new-york-business/ .
[xv] An individual who is not domiciled in New York and who does not maintain a permanent place of abode in the state will be subject to tax in the state only with respect to their New York source income.
[xvi] According to NYCRR Sec. 105.20, “presence within New York State for any part of a calendar day constitutes a day spent within New York State.” Thus, any part of a day spent in New York State, for whatever reason (business or pleasure), would count as a day toward the 183-day rule, even if the taxpayer comes into New York and leaves on the same day.
The statutory residency rules do not require that the taxpayer utilize the New York place of abode on every day that New York presence is demonstrated. The 183-day rule and the permanent place of abode test are separate and distinct factors in determining statutory residence.
[xvii] Tax Law Sec. 605(b)(1)(B).
[xviii] NYCRR Sec. 105.20(e).
[xix] Under certain circumstances, a corporate-owned apartment may be treated as a permanent place of abode for a shareholder or officer of the corporation. Think constructive dividend or compensation.
[xx] Suitability for year-round use turns on the physical attributes of the dwelling; that is, whether its construction and other features (such as a heating system) make it suitable for year-round use.
[xxi] NYCRR 105.20(e)(1).
[xxii] The Court of Appeals decision in Gaied. 22 NY3d 592 (2014).
[xxiii] This is true even during periods when the apartment is temporarily not being rented provided the taxpayer has made efforts to secure a new tenant and there is no evidence that it has been converted to personal use.
[xxiv] NYCRR Sec. 105.20(a)(2).
Note that the same permanent place of abode need not be maintained under this definition. Thus, an individual who rents an apartment in NYC until June 30 and then another apartment in Westchester or Nassau County from July 1 until the end of the year will be deemed to be maintaining a permanent place of abode for substantially the entire year. If the individual spends more than 183 days in New York State during the year they will be treated as a statutory resident of the state.
[xxv] Mid-February through December is fewer than 11 months.