Residency

In this episode of How Tax Works, host Matt Foreman discusses state residency rules to determine where an individual is a resident for income tax purposes.  Focusing on New York’s rules, Matt will discuss rules for residency, domicile, and how to change both.  This episode is for business owners, attorneys, accountants, and their advisors, as well as the Franchise Tax Board of California, which litigated this issue and a variety of ancillary issues with Gilbert Hyatt for roughly 30 years.

How Tax Works, hosted by FRB Partner Matthew E. Foreman, Esq., LL.M. at Falcon Rappaport & Berkman LLP, delves into the intricacies of taxation, breaking down complex concepts for a clearer understanding of how tax laws impact your financial decisions.

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Transcript

Matt Foreman [00:00:07]:
And welcome to the third episode of How Tax Works. I'm Matt Foreman. In this episode, I will discuss residency and domicile for individuals in the income tax context, How Tax Works is meant for informational and entertainment purposes only. This may be attorney advertising and is not legal advice. Please hire your own attorney. How tax works is intended to help listeners navigate the intricacies and complexities of tax law, regulations, case law, and guidance to demystify how taxes shape the financial and business choices we all make. This topic is one of the ones that's going to be a little more general. I'm really going to focus on New York state law, which I know is probably inapplicable to a lot of people, but a lot of the states really follow generally similar rules.

Matt Foreman [00:00:56]:
They're much harder to deal with in New York State for a variety of reasons, which I think are relatively important. First, New York has a lot of borders to other states where the bulk of its population lives in other states, or close to the border. Right. New York City is very close to New Jersey and Connecticut, and it's really not far from Pennsylvania either. Frankly, even Delaware is not all that far. So, you know, New York really gets this focus on it. It has a reputation, it's somewhat well deserved of being really aggressive. But also, New York City has a unique feature where it has an income tax that is only on residents of New York City.

Matt Foreman [00:01:40]:
The state taxes more similarly to other states, but the city tax is really specific. So people will go to somewhat outlandish lengths to avoid that tax. It's 3.876%, basically a flat tax. And if you think, you know, this is New York City, there are people who make a lot of money. They're going to go to pretty aggressive lengths to try to get out of it. So while New York has the reputation of being the most aggressive, I actually think that California might take it. It's just that the population centers in California aren't that close to other states. I know San Diego is close to another country, and they're not that far from Arizona, but for the most part gave us much more significant drive.

Matt Foreman [00:02:19]:
Plus, to be honest, there's a lot of people who live on Long island, or they live in Westchester, for example. Just a quick hop, skip, and a jump into this, into New York City, and they're the ones trying to avoid it, whether allowed or not or whatever. I'm not going to go through the details, but California had a whole bunch of stuff with Gilbert Hyatt that dealt with whether he was a California or Nevada resident, obviously, California said he was a California resident at the time he sold his company, and it went to the Supreme Court three times, which is kind of crazy to think about that, you know, that there were so many, so much of a fight that it fought that much for that long, for that many years at that expense. So, you know, whether New York or California is the most aggressive. They're both pretty aggressive, so I think we have to worry about it. New York's just, because of its nature, very, very detailed. The first thing, you know, and there's a lot of definitions as I go through it. The first one is, you know, you're subject to the tax if you're a resident.

Matt Foreman [00:03:20]:
I'm going to go into a lot of detail as to what's a statutory resident in a moment, but I want to kind of knock this one out. And to be a statutory resident, you must maintain a permanent place of abode. I'll discuss what is a permanent place of abode in a moment. And you must spend more than 183 days in New York. It doesn't matter if it's a leap year and there's 366 days or 365, then you have to be in New York State or City, you know, if you're gonna be a New York state resident in New York state, if you're a New York City resident in New York City for more than. For at least 184. So 184, no matter what, is more than 50%. So they kind of got around that issue by doing that.

Matt Foreman [00:03:56]:
There's an exception for active duty military. Right. So if you're up at West Point, you might not be a statutory resident, even if you're there for a while and you have a permanent place of bode, somewhere you can stay. So that's it. The other one is, if you are a resident, if you are domiciled in New York state, and I'll get into what domicile is in a little bit, that what's later. Unless there's what's called the 30 day rule, which has three requirements. First, you do not have a permanent place of abode. Again, I will get to this in a moment.

Matt Foreman [00:04:25]:
Just no PPA. Permanent place of abode. Also PPA. Two, you have a permanent place of vote somewhere else and you spend no more than 30 days in New York. So the 30 day rule is real tough, but the basic premise is, look, you're not here if you're really not here, and that's it. The second one is what's called the 548 day rule. Obvious reasons, right? The first requirement is that over a 548 day period, basically a year and a half, you are present in the foreign country for at least four to 50 of those days. So the vast majority.

Matt Foreman [00:05:04]:
Right. Basically five, six second, during the 548 day period, the taxpayer, this one includes spouse and children, are not in New York more than 90 days. Right. And if the period is less than 548, right. So you leave New York and then you come back, or there's other things you have to pro rate. You do a ratio for those numbers. This one's a hard one to prove. It's really common for people who leave, move out of New York, move out of the US for a period of time, and they want to basically say immediately, I'm not a New York resident.

Matt Foreman [00:05:38]:
But they still have a perfect place of abode in New York. Right. 30 day says no permanent place of boat in New York. 548 day says you can keep that apartment in the city, you can keep that house in Ron Kankama, whatever. So that's the idea behind it. Those ones are really, really, really, the facts are pretty easy to prove and the numbers matter more. But the concept of a resident is really interesting, right? So if you're thinking about statutory residency, right. You're a resident.

Matt Foreman [00:06:05]:
For statutory, under the statutes, you have to count your days. And the rule is if you're not out, you're in, right. You spend 15 minutes in New York, with some fairly limited exceptions, you're in. So if you fly in New York, you land 11:30 p.m. and you land at Kennedy and you go to your apartment, you go to your house, whatever, you're in New York the whole day, 1 minute, you're in. The exception is, you know, and I've never met anyone who's done this one, but they land at Kennedy, drive to LaGuardia and fly out, right? Nope, that's fine. That's not a day in New York. There are people who will land at Kennedy, drive to, like Newark and fly out, or they land at Kennedy and then they drive to New Jersey.

Matt Foreman [00:06:42]:
That's not a day in New York, right. You really have to be here a little more than that. Driving through New York does not count as well. So, like, there are places where if you live in New York, so you're going to New Jersey and you're going to Connecticut, right. You cannot get from New Jersey to Connecticut unless you go through New York, I guess. Unless you took a boat or I guess theoretically you could go through Canada, right? That'd be a pretty excessive trip, you can just drive across New York, that's fine. The key is don't stop, don't have lunch, don't do anything. The rest stops aren't that nice anyway.

Matt Foreman [00:07:12]:
So don't even do it. People always ask, well, how are they going to prove this? And the answer is they will look at your credit card and debit card statements. They will look at your outlook calendar, right. Or, you know, Google calendar, whatever, to figure out where you were on every single day. They will look at frequent flier miles, flight records, passports. They're going to look at easy pass. They're going to check cell phone towers to see where your phone, you know, pinged. They're going to look at landline and mobile phone records.

Matt Foreman [00:07:39]:
They're going to look at office card swipes. I've had them get those from buildings. Whenever I talk about cell phone towers, you know, I had one audit that I defended a number of years ago, gosh, it's probably eight years ago now, seven or eight years ago now, where the auditor was like, well, if you see, they kept hitting a tower in New York, so they must have been in New York that day. And I said, no, they live a mile from New York in Connecticut. So the closest cell phone tower was actually in New York, but they were in Connecticut during those times. So basically we took those cell phone tower hits as irrelevant. They slightly supported being in Connecticut because it suggested, right, he wasn't somewhere else, he wasn't farther in New York, but that kind of stuff said, well, he's kind of in Connecticut, but we're going to mostly ignore it. But, you know, they can track where you are, anyone.

Matt Foreman [00:08:25]:
I've been on a grand jury. They really can track where you are. If they have your cell phone number, it's pretty incredible. So just be aware that you have to prove the negative. You have to prove that you are out. So I always talk about the two things you want to watch out for to be a resident. And you can be a resident without being here for 183 days. The first one is the ten month.

Matt Foreman [00:08:47]:
It used to be eleven month rule. Basically, if you're here for ten months and then you just kind of disappear at the end of the year. Well, you know, you don't have a permanent place of boat for the last two months of the year. And there's other factors. You might not be a resident even though you go over the number of days if you don't have a permanent place of abode for the entire year. There are people who have places in New York that are unsuitable for the winter. Hard to think this is a very cold weather state. We have real winters, but there are people who just have places that during this, you know, they don't have proper heating.

Matt Foreman [00:09:16]:
So during the winter they just drain the pipes and they let it go really cold. Then they go up in April and they deal with the cost and expense and headache of kind of restarting everything. And if you don't have proper heating, then it's not a permanent place of abode because it's not permanent. It's not the full year. The second one is what's called nature of relationship or closer connection. This one's really, really, really important because what you see is people who live, frankly, they lived in New York for years. The most common fact pattern is they moved to Florida, but their business is still here. All their friends are here, but they're in Florida six, seven, eight months a year.

Matt Foreman [00:09:51]:
Pretty solid, right? They go down early November. They don't come back until March. They'll be down there for two weeks here, three weeks there, et cetera, et cetera, to keep things going. But their business is still here. Their social life is still here. New York is going to say, no, no, your closer connection is still New York. You're a New York resident. Watch out for those.

Matt Foreman [00:10:11]:
They're very, very fact and feeling specific. You know, where's your dog? Where's your art? Where do your kids go to school? How do you do it? Some people will literally buy flights where the first flight is New York to Florida, and then they buy a return flight, Florida to New York. I tell them to buy the other way. You know, buy the first flight is Florida to New York, the second one back or just do it. When you go to Florida, don't have a return flight. Just book it open ended. Just the thought process, how you're doing it and how you view it, the relationship between you and the state. People say that's unfair.

Matt Foreman [00:10:47]:
And I say that's the government. The government doesn't really have to be fair. To paraphrase Tina Turner, what's fair got to do with it? Permanent place of a boat. I know I've mentioned it. I brought it up a number of times. I think it's a really important concept. The rules that deal with it is defined as the dwelling place of a permanent nature by the taxpayer, whether or not owned by the taxpayer. And generally it would and will generally include a dwelling place owned or leased by the taxpayer or the spouse.

Matt Foreman [00:11:25]:
Right. So what they're looking for is a dwelling, permanent nature maintained by the taxpayer. You can own it or lease it, and if your spouse owns it or leases it, it's the same as you. Right? That's the idea. Permanent nature. Right. Guy Ed was an interesting one. His parents, he owned a house, his parents lived there.

Matt Foreman [00:11:47]:
He lived in New Jersey, his parents had a house in Staten island, and he slept on the couch. Right. That's an interesting fact pattern. There's another one in Evans, which is the physical aspects of the dwelling place as well as the individual's relationship to the place. Right. So you think about it, and this is what I talked about. Like, if you can't stay there twelve months a year, or it's a one bedroom apartment that you own, and sometimes, you know, your child stays there or whatever, and sometimes you go out, you have dinner, it's 11:00 you don't want to go, drive back wherever or take a taxi or whatever, and you stay there on the couch. Sometimes there are meaningful questions as to whether that's a permanent place of abode for you and how it is.

Matt Foreman [00:12:26]:
It depends. So get an advisor because it's really important. Even if you only use it as a vacation house or infrequent overnight stays. This is Evans again, and this is Donovan's, another one that dealt with this issue that still can be a permanent place to vote. It's not whether you use it, it's whether it's available to be used as a permanent place of abode. And gaiad is the beneficial ownership, the beneficial use, not ownership. So if someone else owns it, but you can always. Oh, don't worry, Jim, you can always stay there.

Matt Foreman [00:12:57]:
That can be problematic. Put restrictions. Put restrictions. Put restrictions. If the doorman will always give you keys, believe it or not, as nice as that is, that could be problematic. Corporate apartments can be very problematic. So a lot of bankers have that. Or people who work late, there might be a corporate apartment.

Matt Foreman [00:13:12]:
That can be a permanent place of abode. There's a really interesting permanent place of abode. You know, I'd say recent, but. But it was in 20, you know, it was last year. Right. So the premise of, of it is Nathan Nathaniel onus or Obus, or Nate Nathan Obus. I forget his first name, but Obus Obus. And the basic premise was that he had a house up.

Matt Foreman [00:13:39]:
Bye. Whiteface Mountain, right? In Lake Pla. In Lake Placid, right near Lake Placid. You know, great mountain. You know, people, people in the Rockies will scoff at it, but you know, it was an Olympic mountain twice. And Lake Placid was the place of perhaps the most famous hockey game in the history of the United States of America. Right? So fun place to go. You know, not, not the biggest city in the world, but definitely a fun place for a day or two.

Matt Foreman [00:14:07]:
Great place to kids. There's cool stuff. So he had a house up there. He lived in New Jersey. He had an office in New York City. Okay. He made a pretty substantial amount of money. This information goes on public record.

Matt Foreman [00:14:19]:
And the basic premise was that whether that house upstate was a permanent place to vote, he could use it whenever he wanted. That was not up for discussion. They knew that was absolutely the case, that he could use it whenever he wanted. The question is, could he actually do it? And the argument made by the attorney, Glenn Newman. Great, great attorney that he made was, I don't really care that it's available all the whole year. It's not realistic. Right. He can't go.

Matt Foreman [00:14:49]:
This is someone who never worked from home. Okay? He always went into the office. Obviously, pre pandemic fact pattern. But the premise was that it's so far away up in Lake Placid, and Lake Placid is far up there. Right. Albany is only about halfway or two thirds of the way up from. From New York City. So it's pretty far up.

Matt Foreman [00:15:09]:
And the basic premise that goes into it is that it is not a permanent place of bode, because it's so far that he could not conceivably do work there. So what ended up happening was, you know, it was 200 some miles. Right? And we talk about it, and they. The court basically said, yeah, we agree with you. We agree with the taxpayer. This is not a permanent place of boat. Even though he could use it all year round and unfettered access, he only actually used it for a couple weeks a year. That's not its purpose.

Matt Foreman [00:15:40]:
So it really reigned in the permanent place of a boat. Right. That New York state basically said, look, if it's there and you can use it all year round, then you have a permanent place of boat. And they were very aggressive on what is and what is not a permanent place of abode. Basically, if you had a toilet, a sink, and heat, you had a perfect place of abode. That's it. That worked. Obviously, having a toilet merely itself doesn't help you, and that's the idea.

Matt Foreman [00:16:04]:
Right? 200 miles. But what I always point out to people is if you have a house all the way east in the hamptons, it's about 200 miles north to Northville. That's where his house was. But if you think about Northville, Princeton, New Jersey, about 230 miles, or, I'm sorry, New York City to Princeton is about 230 miles. Right. You know, from Queens, from Glen Oaks, Queens, which is, I believe, the easternmost point of New York City to Montauk is about 100 miles. Right. So it's a question of how far is too far.

Matt Foreman [00:16:40]:
You know, how far is far enough? And I don't know the answer. And I think that the New York state and a lot of states will tell you. We think this was a one off, very specific fact pattern. Know, if you had a house in the finger lakes, that probably falls. That certainly falls into it, too. What finger lakes? For those who don't know New York geography or in the northern western part of the state, you know, not quite by buffalo, but they're gonna be past Ithaca or if you have a place all the way north. Right. Lake Champlain or something up by Canada that will.

Matt Foreman [00:17:11]:
But if you're in the. If you're in the Hamptons, you're too close, you know, we're not gonna like that. So I think it's really important to think through what is too much, what is a bridge too far, and try to rein it in. You know, get your facts on your side and really abide by those facts. Now, I want to talk about domicile. I know I threatened you with talking about domicile for a bit, but I think domiciles are. The domiciliary rules are really interesting. Domicile is about intent.

Matt Foreman [00:17:37]:
Right. I talked about the 548 day rule and the 30 day rule, but domicile is about intent, and domicile is defined. I think the best one is in Terra Nova, a New York state tax bills tribunal case. And I believe it's Wyson, w e I s E N, which is also a tax bills tribunal case decision. Right. And it says, the idea is the place which an individual intends to be their permanent home. The place where you intend to return whenever from, you know, whenever you're absent. Right.

Matt Foreman [00:18:11]:
So people always say, oh, well, I moved to California or I moved to Florida or moved to Tennessee for a couple years and see how I like it. And I always say that actually is not a change of domicile. You have to actually intend to move to California or Tennessee or Florida or wherever you want. I had a case a number of years ago where gentleman took alts, had a fairly large exit from a business he started and wanted to take five years off and travel the world. I would take airplanes, but he loved boats, so he got a crew. He bought a very large boat. I believe he already owned it, actually. And he sailed around the world for a few years, and New York said, oh, that's great.

Matt Foreman [00:18:57]:
You didn't change your domicile because you didn't actually pick a place where you intended to go. Domicile requires an actual move to the new place. He took all his belongings. He put them in a storage unit up by his sister. He paid for five years. He told her, if anything happens to him, you know, kind of a terrible comment, but if anything happens to him, just throw it all out. I don't care, you know, that kind of thing. And I think that's really important to say.

Matt Foreman [00:19:26]:
Like, you must say, like, okay, I'm moving to Tennessee. I'm going to work for Jack Daniel's distillery. And that's it. That's my life. That's the decision I made, and that's enough. But New York state, you know, bless them, we'll fight you on that. They'll say, you know, we're not sure you actually intended to move to the state or anything like that. So you have to actively show.

Matt Foreman [00:19:45]:
I tell people, you know, enroll your kids in school. A lot of times people move after they have kids or out of the house, so it's less of an issue. But I'm a big fan. Move your art, move your dogs, things like that. There are cases where they'll have celebrities who say, oh, no, no, my dog stays in whatever state, and they take out a picture of that celebrity at the US open with their dog. Right. So, you know, you want to avoid things like that. People always ask me, okay, what if I live in Westchester, go to school at Columbia? No, that's not a domicile.

Matt Foreman [00:20:12]:
That could be residency in New York City, but you're definitely still domiciled in Westchester. Live in Manhattan, you go to college in Maryland, right? You know, Maryland or Hopkins or something. No, no. You intend domiciles intent, intend to come back. You know what? What if another state says, oh, well, you also have domicile in this state. You can have domicile under state laws in every single state in DC. It is the weirdest thing. It always has struck me as strange, to put it politely, that this is the case, but you can do it.

Matt Foreman [00:20:47]:
The fact that another state, under another state's law views it, I suspect there's a point where a judge is going to say, this is ridiculous, but theoretically, you can have domicile in multiple states, which makes no sense. The non resident, all this stuff coming back to it is residency is really answered for non residents, answered the negative. Anyone who is not a resident and is not a domiciliary, you don't have residency or domicile in New York state, then you're a non resident. So it's a small, you know, it's a larger group, but it's easier to be a resident, they're domiciliary than it is to be a non resident. Unless you just don't come here, don't have a home here, don't, you know, don't have a lot of business here, don't come here very often. I always say, people ask, what can I do? What is the big thing? And I always think about the burden of proof. And there's a fairly famous case, you can look it up, it's about Derek Jeter. He talked about how he loved being a New Yorker.

Matt Foreman [00:21:42]:
New York was his home and blah, blah, blah, except the problem is he lived in Tampa, New York, audited and said, hey, you said New York, what's going on here? And he was defended by an attorney. He hired someone to help him. I forget her name, she's since retired. And, you know, look, the burden of proof was on him to show that he didn't live in New York, he didn't dust domicile in New York, he didn't reside in New York. I think he was still playing with the Yankees at the time, although I must admit, I'm not 100% sure if he had retired by then. And so you have to really think about what you're saying and what you're doing and showing your proof. You know, the key is look for your fact patterns, right, set them up. And people say, oh, well, what do I have to do? And I always say, look, if you're going to leave New York, leave, join a gym elsewhere.

Matt Foreman [00:22:32]:
Bank's not as good as big of a one as it is, because for a lot of us, our banks are everywhere. If you're chase or JP Morgan Chase or Bank of America or whatever, there's banks of yours in 40 states or whatever. So bank is not a bigger one. But where do you worship, what clubs are you a member of? Where do you spend your time? That's the key. Time, effort, what you're doing. Look at lifestyle changes, whether you're a snowbird, you've retired, so your business is not here anymore. Upsizing and downsizing the states always talk about near and dear, where's your dog? Where's your teddy bear? So people laugh when I say, oh, where's your teddy bear, but it's a real thing. The things that are near and dear to your heart, where are they? And that's really important.

Matt Foreman [00:23:19]:
I talked about it earlier, having a business in New York that you're still operating, even if you live in Florida, might not totally work. It depends. You really have to push the facts in your favor. People say, oh, well, isn't it dishonest? Or is it a problem that I'm just doing this for tax reasons? I'm like, no, it's not a problem. You're doing it for tax reasons. It is a problem if you're doing it for tax reasons and you don't actually do it. You have to really do it. And that's the key.

Matt Foreman [00:23:46]:
And my final point, as I do it, people will always say, oh, what happens if I do get the letter? What happens if I am getting a residency audit? The first thing is, and this is my cardinal rule, do not blow off the auditor. Do not give a half answer or assume that they're just going to go away. There are hundreds of them. He has since retired, but the head of audit for New York state began his career, and I think the first ten years of his career as a residency auditor. They do it. They do it well. They know what they're doing and they're aggressive. So definitely bring it.

Matt Foreman [00:24:22]:
Hire someone. Make sure to go through and that you're really focusing on your case. Provide information in a timely and well organized manner. I think all of us know that if the information you get is clean and presents a narrative and is easy to follow, you're more likely to just listen to what they have to say and believe what they're saying rather than if they just come in with something completely disorganized, with a shoebox full of receipts. Not helpful. They don't care. Your goal is to present a narrative. Be polite, but don't be afraid to push back.

Matt Foreman [00:24:55]:
I have some great stories about a client who was out of the country a lot and proving they were out of the country on certain days. I won't tell it here, but it's a really funny one on sort of taking a chance to push back pretty hard. There's a lot of appeals in New York state. You have the audit. Then you have the Bureau of Conciliation Mediation Services, BCMS, which sometimes I use, sometimes I don't, for the first level of appeal. Then there's division of tax Appeals, which is an administrative law judge. Then you have the tax Appeals tribunal, which will go through what the ALJ decided then the second appeal is what's called an Article 78, which is the state supreme court appellate division. That's your first real true court appeal.

Matt Foreman [00:25:43]:
I'm sure tribunal judges will chafe at the notion that it's not a real appeal, but those are judges that are elected, and then the final appeal is the court of appeals, which is the highest court in New York state, which they may not hear your case. It is elective. They can choose what they hear and what they don't. A lot of times, they don't hear cases because they're basically the same facts they've heard before, especially in this space. So I think it's important to really do well in the audit unless you have a unique fact pattern. Obis, I gotta tell you, you know, to the attorney, you know, to Glenn Newman's credit, fought a unique fact pattern case and saying the state was too broad, the way they interpreted it and read the law was wrong, and he was willing to fight for it. But a lot of times, you, you want that auditor. You want to show how you're within the rules, and.

Matt Foreman [00:26:31]:
And, you know, Obis was. Was not a great one for that. And so you fight with, you know, you disagree, and you argue with the facts you have, and that's what they did. So this is the third episode of How Tax Works, you know, hope you enjoyed. I hope you learned something. Be back shortly with another episode. Have a nice day.