By: The Attorneys of Tenenbaum Law, P.C.
As published in the New York State Society of CPA’s Tax Stringer for February 2014.
In recent years, the issue of New York State residency has attracted considerable attention as the law has evolved regarding statutory residency. The focus primarily has been on whether the taxpayer has a permanent place of abode in New York, as highlighted by Matter of Gaied and Matter of Barker. In 2013, two cases sought to change the law regarding another aspect of statutory residency: counting the days in New York.
The law provides two tests for taxpayers to be treated as residents of New York and thus taxed on their worldwide income. Taxpayers are residents if they are domiciled in New York. Taxpayers who are domiciled outside of New York state also may be taxed as residents if they fall within the definition of a “statutory resident” of New York. To be considered statutory residents, the taxpayers must have a permanent place of abode within New York state for substantially all of the year, and also be present in the state for more than 183 days within the year. Similar law applies when determining whether taxpayers are statutory residents of New York City; the law and regulations substitute New York City for New York state. (See New York State Tax Law § 605(b)(1)(B) and New York City Administrative Code § 11-1705(b)(1)(B).) The burden is on the taxpayers to prove that they are not statutory residents of New York and therefore not subject to income tax on their worldwide income; and they must do so by clear and convincing evidence.
For Mr. and Mrs. Knoebel (Matter of Knoebel), the 183-day rule was a difficult hurdle to overcome; and they had to make two separate and distinct arguments regarding their days in New York. The Knoebels were domiciled in Pennsylvania and generally stayed in their apartment in Manhattan when visiting New York. Relying heavily on phone records, the state argued that the Knoebels were in New York City for 199 days during the year concerned. The Knoebels took the position that these documents did not reflect the taxpayers’ true location. Using credible testimony, the Knoebels showed that certain calls were made by their two daughters who liked to use the apartment while the senior Knoebels were in Pennsylvania. Other calls relied on by the state were made to, not from, the apartment. By pointing out these “false positives” and using other evidence, the taxpayers were able to prove that they were not in New York City for more than 183 days.
But there were more day count problems ahead for the Knoebels. The facts showed that the Knoebels were in New York state for more than 183 days, including eight days in Utica, New York. To contest these numbers, they needed a different angle. The Knoebels maintained that the Utica days should not be counted since they were required to be there to care for a relative with medical needs. It is well established that days spent as an in-patient in a medical facility are not counted when calculating whether the patient should be treated as a statutory resident. (See Stranahan v. NYS Tax Commission, 68 A.D. 2d 250 (3d Dep’t 1979).) The Knoebels argued that the Stranahan ruling should be expanded to cover days spent by non-residents as medically necessary caregivers. The Administrative Law Judge did not agree. He noted that it would be “impossibly cumbersome” to administer such a rule, requiring the state to determine medical necessity and reasonable alternatives to care by the non-resident, in each matter. The result was that the Knoebels were held to be statutory residents of New York state but not New York City.
The 2012 Nonresident Audit Guidelines instruct auditors to be “sensitive” to the taxpayer’s presence in New York to receive medical care, when calculating days for statutory residency purposes. As the Knoebels found out, however, voluntarily coming to New York to help others with health issues is not viewed the same way as days spent in New York for one’s own personal needs.
Medical issues were not a factor for Mr. Zanetti (Matter of Zanetti), Rather than try to expand an existing exception to the day count rule, Zanetti used creative counting techniques to calculate the number of days in and out of New York. The parties agreed that Zanetti was out of New York state on 172 days. On a further 26 days, it was agreed that Zanetti was in New York for only a portion of each day, either arriving at or departing from his Long Island residence by private plane. Zanetti asserted that a “day” should consist of 24 hours, calculating that during the 26 days at issue, he spent over 330 hours, constituting 13 days, out of New York. Adding these 13 days to the 172 undisputed days out of New York, Zanetti took the position that he was not in New York state for more than 183 days and therefore was not a statutory resident.
Unfortunately for Zanetti, the administrative law judge refused to disturb the long-standing rule that any part of a day in New York counts as a day in New York for purposes of the 183-day rule of statutory residency.
The administrative law judge emphasized that Zanetti’s 26 disputed days did not fall within the limited exception for travel, which allows a taxpayer’s presence in New York to be disregarded when the taxpayer is merely traveling through the state or boarding a plane in New York to travel to a location outside of the State. The administrative law judge specifically noted that the travel exception does not apply to a taxpayer leaving or returning to his home in New York. Based on his days in New York, Zanetti was held to be a statutory resident.
As these cases show, the law regarding statutory residency may be strictly applied with respect to day count, and taxpayers need to be alert to the potential income tax consequences. Taxpayers should be aware of the applicable rules so they can count their days accurately. They should also be vigilant in maintaining adequate documentation of their days in and out of New York. Determining days in New York for statutory residency purposes is not always a straightforward calculation, and it may be advisable to seek assistance from a professional.