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Hasta La Vista N.Y.

Wealthy individuals continue to leave New York[i] for tax friendlier jurisdictions.

Be Prepared[ii]

Some of these taxpayers take a very methodical approach toward planning for their departure. They consult their tax advisers many months, if not a few years, in advance of any move.[iii] They educate themselves in the rules that New York will apply to determine their tax residence. Then they formulate a plan and implement it in a very deliberate way.

These taxpayers also consider what New York source income they will continue to receive after their change of residence, and whether it may be possible to relocate, or somehow change the character of, such income – no simple task.[iv]

Finally, they plan for their final taxable year as New York residents, including how they may reduce the so-called “exit tax” that may be imposed upon them as they head out the door.  

Or Not

Then there are those who may not have been planning to move – at least not yet – but for whom a sudden or perhaps unexpected change in circumstances or financial prospects led them to the realization that they would be better off from a tax perspective if they did not reside in New York. 

For example, one of these individuals may receive a very attractive offer for the sale of their business or for an interest therein. Alternatively, the business in which the taxpayer is merely a passive investor may decide to dispose of its assets.

After consulting with their tax advisers, some of these taxpayers, often based on a misunderstanding of the tax law, may decide to leave New York before the sale is consummated, their goal being to claim nonresident status before the sale occurs.[v]

The above scenario arises with some frequency; indeed, it’s probably safe to say that most tax practitioners have encountered some variation thereof.

New York’s Division of Tax Appeals recently considered one such case[vi] which is instructive for anyone who has not had the experience of seeing how intrusive a residency audit can be, and how futile a taxpayer’s efforts can be if they are undertaken without sufficient planning.

Taxpayer’s Residence

Throughout Tax Year, Taxpayer was employed in New York City and allocated all of their wages to New York. Taxpayer also reported a large capital gain from the sale of a membership interest in Target LLC during Tax Year.

Taxpayer filed their New York tax return as a nonresident and part-year resident.[vii] Taxpayer’s return provided a New Jersey address for their permanent home address. It also reported that Taxpayer lived in New York City for five months during Tax Year and moved out of the state in mid-May of Tax Year. The return did not allocate any of the above-referenced capital gain to New York.

The Audit

Approximately six months after filing their New York return, Taxpayer was informed that the Department of Taxation had selected their return for audit due to the asserted change of domicile.

Enclosed with the letter was a Nonresident Audit Questionnaire that, among other things, asked what Taxpayer had done to change their status from a resident of New York to a nonresident. Taxpayer responded that they had moved from New York to New Jersey.

The Questionnaire also asked whether Taxpayer had maintained living quarters in New York for Tax Year and, if so, the address thereof and the dates such living quarters were maintained. Taxpayer responded that they lived in New York from January 1 through May 12 of Tax Year.

When asked how many days Taxpayer was present in New York for work during Tax Year, Taxpayer replied they were employed in New York “all year” and were a resident from January 1 through May 12 of Tax Year, and a non-resident from May 13 through December 31 of Tax Year. Taxpayer also stated they had resided in a New York apartment until May 12 of Tax Year, and lived in New Jersey from that date through the end of the year.[viii]

Credit Cards

Taxpayer provided a copy of their credit card statement for the month of May of Tax Year. This statement listed charges through June 5 of Tax Year. A review of the charges from May 15 through June 5 of Tax Year established purchases made in New Jersey on four days, including purchases for the New Jersey Path Train, a New Jersey Portable Train ticket, and a charge from Newark International Airport.

However, most of the charges listed on the statement were for purchases made in New York City.[ix]

EZ Pass

The auditor reviewed the EZ Pass charges made on Taxpayer’s credit card statement and offered to issue a subpoena to obtain those records to further verify Taxpayers’ location.

Cell Phones

The Department subpoenaed Taxpayer’s cell phone records for May of Tax Year. These records reflected phone calls and text messages originating in New Jersey on May 14, but the next time a call or message originated or was received in New Jersey was on May 21. Calls and texts originated from New Jersey from 12:42 p.m. until 1:30 p.m. that day.

Each night in May, other than the night of May 26, when Taxpayers were in Newark, New Jersey, the last call or text message of the night was made in New York City, and the first message or call the following morning was made from New York City. This remained true until the morning of June 8, where the first call or message that the day originated in New Jersey. The first and last call or message of the day regularly originated from New Jersey beginning June 13 of Tax Year.

Management Company

Approximately seven months after the audit began, the auditor pointed out to Taxpayer’s representative that although Taxpayer indicated they moved out of their apartment in New York City on May 15 of Tax Year, the information from the management company for the building stated that the Taxpayer moved out on June 3. The auditor requested moving documentation to show when Taxpayer moved out of the New York City residence – none was ever provided.[x]

The Sale

The auditor also referenced the gain from the sale of Target LLC and requested documentation to support the sale, including the purchase and sale agreement.

Taxpayer provided details surrounding the sale of the membership interest in Target LLC to Buyer. It turned out that prior to Tax Year – the year of the sale – Target LLC and Buyer had entered into a confidentiality and non-disclosure agreement.

Taxpayer also provided the Department with documents indicating that Taxpayer was notified that Target LLC had been sold and that they would be receiving income from the sale.

The purchase and sale agreement included certain conditions that needed to be met for the sale transaction to be finalized. For example, Buyer was required to confirm all its financing needs, remit all commitment or other related fees, and provide documentation confirming such to Target LLC.

All conditions for finalization of the transaction were completed on or before May 12 of Tax Year.

The sale of Target LLC was finalized on May 23 of Tax Year. Taxpayer submitted a bank statement reflecting that they received a wire transfer from the sale in the amount of $8.28 million on May 24.

Deficiency Notice

A little more than two years after the start of the audit, the auditor advised Taxpayer that she was going to propose an increase to their New York income tax of more than $930,000.[xi]

Specifically, the auditor found that Taxpayer failed to properly allocate the gain from the sale of Taxpayer’s interest in Target LLC to their period of New York residency.


However, prior to formally proposing an adjustment to Taxpayer’s income and New York tax liability, the auditor requested additional information to verify Taxpayer’s domicile and explained what factors were evaluated for a change of domicile.

The auditor described one’s domicile as the place that an individual intends to be their permanent home; once established, domicile continues until the individual moves to a new location with the intention of making that new location their permanent home.

The auditor also explained that when evaluating a change of domicile, there are five primary factors that are reviewed, including: home, active business involvement, items near and dear, family ties, and time spent. Each of these factors is reviewed, the auditor stated, and a conclusion on the intent to change one’s domicile is based on the analysis of the five factors collectively.

Off to Court

The following year – almost three years after Taxpayer’s tax return had been filed – the Department issued Taxpayer a notice of deficiency asserting additional State and City personal income tax due of almost $935,000, plus interest, for Tax Year.

Taxpayer timely filed a petition with the Division of Tax Appeals protesting the Department’s finding that Taxpayer was domiciled in New York until mid-June of Tax Year and asserting that Taxpayer abandoned their New York domicile on May 15 of Tax Year,[xii] when Taxpayer moved to their apartment in New Jersey.

The Issues

A hearing was held before an Administrative Law Judge at which the following issues were considered:   

  • Whether the Department properly determined that Taxpayer was domiciled in New York State and City through mid-June of Tax Year.
  • Whether, in the alternative, the Department properly accrued the capital gain from Taxpayer’s sale of their membership interest in Target LLC to their resident period of Tax Year.

Taxpayer asserted that the evidence submitted by Taxpayer established that they accepted the key for the New Jersey apartment on May 14 of Tax Year and moved in the following day with all of their belongings. Taxpayer made a number of other assertions in support of the May 15 change in domicile but no documentary evidence or sworn testimony was submitted in support of these assertions.

Auditor’s Testimony

At the hearing, the auditor testified that when reviewing at taxpayer’s change of domicile, the Department looked at the five factors described above: “home, employment, time, family, and items near and dear.”

When asked about the home factor, the auditor testified that she received documentation regarding Taxpayer’s lease of their New York City apartment showing that Taxpayer moved out on June 13.[xiii] The auditor determined that they did not abandon their New York City home until June 13 of the Tax Year.

When asked about the time factor, the auditor testified that she reviewed Taxpayers’ cell phone records and credit card statements for May and June of Tax Year. These records indicated that Taxpayer was traveling from their New York City apartment to work and then returning to their New York City apartment in May and in the beginning of June and that it was not until the end of June that Taxpayer’s “pattern of life” changed to going to and from work from New Jersey.[xiv] Thus, Taxpayer’s credit card statements did not reflect any significant changes that would have evidenced a move from New York City to New Jersey before the middle of June.

The auditor also testified regarding Taxpayer’s business ties – Taxpayer was employed in New York City for the duration of Tax Year and, during that time, allocated all their wages to New York.[xv]

The auditor ultimately concluded that Taxpayer did not change their domicile until June 13 of the Tax Year.

The ALJ’s Analysis

The ALJ began with the basics.

New York imposes personal income taxes on resident and nonresident individuals.[xvi] Residents are taxed on their income from all sources.[xvii] Nonresidents are taxed on their New York State source income.[xviii]

The Tax Law[xix] sets forth the definition of a New York State resident individual for income tax purposes as follows:

“A resident individual means an individual: (A) who is domiciled in this state, . . . or . . . . (B) who is not domiciled in this state but maintains a permanent place of abode in this state and spends in the aggregate more than one hundred eighty-three days of the taxable year in this state.”

As set forth above, there are two bases upon which a taxpayer may be subjected to tax as a resident of New York. Here, the Department did not assert Taxpayer was a statutory resident.[xx] Accordingly, the only issue regarding residency was whether Taxpayers qualified as a New York domiciliary for the first six months of Tax Year – i.e., the period during which the sale occurred.

The ALJ explained that domicile is not defined in the Tax Law, but the Department’s regulations describe it as “the place which an individual intends to be such individual’s permanent home.”[xxi] Once established, the ALJ continued, a domicile continues until the individual moves to a new location with the bona fide intention of making such a place the individual’s fixed and permanent home.[xxii] An individual can only have one domicile at a time.[xxiii] A temporary relocation does not result in a change of domicile.[xxiv]  

Ultimately, the burden of proving a change in domicile rests with the party asserting the change. The ALJ stated that, as it was Taxpayers who was claiming a change of domicile to New Jersey on May 15 instead of June 13 of Tax Year, Taxpayer had the burden of showing such a change by clear and convincing evidence. Toward that end, formal declarations were considered in determining a change of domicile, but more weight was accorded to the informal acts that demonstrate an individual’s “general habit of life.” In other words, a taxpayer must show a change of lifestyle to prove a change of domicile.

The ALJ noted it was well established that New York courts examine certain objective criteria to determine whether a taxpayer’s general habits of living have demonstrated a change of domicile. Among the factors considered are retention of a home in the historical domicile; location of business activity; location of family ties; location of social and community ties; and time spent in the historic domicile relative to the purported new domicile.

Upon a review of the entire record, and pursuant to the foregoing standards, the ALJ concluded that Taxpayer had not proven that they abandoned their New York domicile and became domiciled in New Jersey on May 15, instead of June 13 of the Tax Year.

Taxpayer’s cell phone records suggested that Taxpayer did not change their lifestyle of going from their New York City apartment to work, and back to their New York City apartment at night, until mid-June. Taxpayer’s credit card statements indicated minimal activity in New Jersey, with most charges for the period at issue occurring in New York City. The management company for Taxpayer’s New York City apartment provided the Department with documentation showing Taxpayer did not move out of their apartment until June 13. When considering business ties to New York, Taxpayer conceded that they worked in New York and allocated all of their wages to New York.

Accordingly, Taxpayers were properly held subject to tax as residents of New York through June of the Tax Year.

The Exit Tax

For good measure, the ALJ next considered how the gain from the sale of Target LLC would have been taxed by New York if Taxpayer had successfully transitioned to New Jersey on May 15.

According to the ALJ, the capital gain from the sale of the membership interest in Target LLC was properly accruable to Taxpayer’s New York State and City resident period. Income that accrues before a residency change, the ALJ explained, must be included on the tax return for the portion of the taxable year prior to the residency change regardless of when the income is received.

The Tax Law[xxv] provides that “[i]f an individual changes status from resident to nonresident he shall, regardless of his method of accounting, accrue to the period of residence any items of income, gain, loss, deduction, or ordinary income portion of a lump sum distribution accruing prior to the change of status . . . .”[xxvi]

Under the accrual method, the ALJ stated, an item must be included in the taxable year “when all the events have occurred that fix the right to receive the income and the amount of the income can be determined with reasonable accuracy . . . ”[xxvii]

If Taxpayer had changed their status from resident to nonresident during Tax Year, they would have been required to apply the accrual method to any items of income, gain, loss or deduction that would have been reportable at the time of their change of residence.[xxviii]

The sale of the membership interest in Target LLC to Buyer required several “events,” including the execution of a confidentiality and non-disclosure agreement dated November 23, 2015, the confirmation of all Target LLC’s financing needs, and the remittance of all commitment or other related fees pursuant to the Agreement.

On March 26 of Tax Year, Taxpayer was notified that Target LLC was being sold and that they would be receiving income from the sale. There was no dispute that all conditions for finalization of the transaction were completed on or before May 12. The only events that occurred after May 12 were the formal May 23 closing and the May 24 wire transfer of the sale proceeds to Taxpayer.

As all the events which fixed Taxpayer’s right to receive the income from the sale of Target LLC and the amount of money Taxpayer was entitled to from such sale could be determined with reasonable accuracy on or before May 12, the capital gain from the sale was properly accruable to Taxpayer’s New York State and New York City resident period.[xxix]

Thus, the notice of deficiency was sustained.

Be Careful

Most sophisticated business owners and their advisers can appreciate that any attempt to change one’s domicile from New York to a lower tax state on the eve of a sale, or even immediately after reaching an agreement to sell their business, will likely be futile.

There are just too many things to be done in too short a period of time – just look at the five principal domicile factors on which the Department will focus during an audit – all while negotiating the terms of the sale of the business, assisting in the due diligence, initiating certain steps toward transition, etc.

Indeed, by the time a taxpayer will have checked most of the factors off their list – like acquiring a new home outside New York, selling their primary New York residence, moving their important personal items to the new home, perhaps registering kids in new schools, etc. – the sale of the business will, for all intents and purposes, have been completed, or will likely have become a foregone conclusion, thereby inviting application of the state’s accrual-based exit tax.

As stated at the beginning of this post, the imminent sale of a taxpayer’s business should not be the impetus for, and should not determine the timing of, a change in the taxpayer’s domicile. Rather, the desire to abandon one’s New York home and to establish a new domicile elsewhere should dictate the actions necessary to accomplish this goal.

Among the steps to be undertaken on the way toward abandoning New York is the sale of one’s New York business.

According to the state, a taxpayer’s continued employment, or active participation in a New York business, or the taxpayer’s substantial investment in, and management of a New York business, is a primary factor in determining domicile.

If a taxpayer continues active involvement in a New York business by managing or actively participating in such a business, but does not engage in similar activity in a business outside the state, such actions will weigh heavily in favor of continued New York domicile. In fact, only the sale of the business will tip the scales in favor of the taxpayer’s having changed their domicile. Of course, the gain from such a sale will be taxable to the taxpayer as a New York resident.

I know what you’re thinking – this is a major “chicken-and-egg” problem for the New York business owner. The degree of active involvement in a New York business is an essential element that must be addressed during the process of removing oneself from the state.

What is the owner to do? Perhaps transition from an active to a passive, non-managerial/operational role? How likely is it that the owner of a closely held business will give up day-to-day control? Does the owner even have someone to whom this responsibility may be entrusted? Have we gone from a chicken-and-egg problem to a “between-a-rock-and-a-hard-place” problem?

Assuming the owner is able to surmount the foregoing issue, will they enjoy the hoped-for tax savings on the sale of the business?

Unfortunately, that will depend upon a number of factors, including the form of business entity out of which the business is operated (say, corporation or LLC), the tax elections made by or for such entity (for example, S corporation), and the source of the gain from the sale of such business (New York or the residence of the owner).

It seems nothing is easy.

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The opinions expressed herein are solely those of the author(s) and do not necessarily represent the views of the Firm.

[i] And California and Massachusetts.

[ii] The Boy Scout Motto. The years I spent as a Scout were formative.

[iii] You have to love them.

[iv] I’ve successfully represented taxpayers in demonstrating their change of residence where their major source of revenue was rental property in New York. Their New York taxable income wasn’t affected much by the change. Perhaps they should have used like kind exchanges to “remove” their investment from the state; however, they liked these properties.

Of course, the successful defense of their nonresident status ensured them that New York would not be able to tax their income from intangibles including, for example, dividends and interest from securities and the gain from the sale of such securities.

[v] These scenarios are not unique to New York. See, for example, The 2009 Metropoulos Family Trust v. California Franchise Tax Board, Cal. Ct. App., 4th Dist., D078790, opinion 5/27/22.  

[vi] Division of Tax Appeals, In the Matter of the Petition of Garg, Determination DTA NO. 829955.

[vii] Form IT-203.

[viii] Taxpayer submitted a copy of the lease for their New Jersey apartment, reflecting a term that began on May 12 of Tax Year and ended on April 30 of the following year.

[ix] Taxpayer’s representative explained to the Department that Taxpayer worked in New York City; thus, their daytime calls and credit card expenses were from New York City, but their weekend calls and expenses were from New Jersey, where the representative claimed they lived beginning May 15 of Tax Year.

[x] Approximately a year and a half after the beginning of the audit, the Department received documentation from the management company for Taxpayers’ lease for the New York City apartment, showing that they moved out of their New York City apartment on June 13 of Tax Year.

[xi] Not including interest and penalties.

[xii] Reminder: the sale of Target LLC was closed on May 23 of Tax Year.

[xiii] The auditor did not receive any listings for a New Jersey apartment or any documentation regarding the status of a New Jersey apartment regarding furnishings. She did not receive any moving records and testified that Taxpayers indicated that they personally moved their items and borrowed a bed from a family member that they used in New Jersey when they moved.

[xiv] The auditor testified that she did not receive any documentation regarding the use of any public transportation or evidence regarding Taxpayers’ commuting during the period at issue.

[xv] The auditor also testified that Taxpayer did not have any minor children during the Tax Year and, therefore, family ties were not considered.

Moreover, the auditor did not review any documentation regarding items near and dear and stated that both the family ties factor and the items near and dear factor “were basically non-factors in this matter.”

[xvi] Tax Law Sec, 601

[xvii] Tax Law Sec. 611 (a).

[xviii] Tax Law Sec. 631 (a).

[xix] Tax Law Sec. 605(b)(1)(A).

[xx] Pursuant to Tax Law Sec. 605(b).

[xxi] 20 NYCRR 105.20(d)(1).

[xxii] 20 NYCRR 105.20(d)(2).

[xxiii] 20 NYCRR 105.20(d)(4).

[xxiv] 20 NYCRR 105.20(d)(2).

[xxv] Tax Law Sec. 639 (a).

[xxvi] 20 NYCRR 154.10.

New York City Administrative Code Sec. 11-1754(c)(1) makes this requirement applicable to the City.

[xxvii] Quoting Treas. Reg. Sec. 1.446-1(c)(1)(ii)(A).

[xxviii] Tax Law Sec. 639(a); New York City Administrative Code Sec. 11-1754(c)(1).

[xxix] It is imperative that one not lose sight of this rule.