In a significant development, a New York appeals court recently held that a taxpayer’s vacation home did not, in fact, qualify as a “permanent place of abode” under New York’s personal income tax statutory residency rules. On June 30, 2022, the New York Supreme Court, Appellate Division, Third Department, reversed a lower court ruling and decided in favor of the taxpayer, Nelson Obus, concluding he was not a New York resident [In re Obus v. N.Y. Tax App. Trib., Dkt. No. 533310 (N.Y. S.Ct., App. Div., 3d Dept.)]. This article will provide an overview of this key personal income tax decision.

Residency Rules Overview

Under New York’s residency rules, a taxpayer can be a “resident” in one of two ways. First, a taxpayer whose domicile or true home is within New York, is a resident. Second, taxpayers whose domiciles are elsewhere can nevertheless be treated as New York residents if they satisfy the “statutory residency” test, which has two elements. Generally speaking, a taxpayer who maintains a permanent place of abode within New York and who spends greater than 183 days within New York will be treated as a statutory resident. The issue of whether a vacation home satisfies the definition of a “permanent place of abode” has been a hotly contested issue that, until now, taxpayers have generally lost.

Obus Overview

In Obus, the taxpayer was a domiciled resident of New Jersey who worked in New York City and owned a vacation property in the Adirondacks in upstate New York. It was conceded that he spent greater than 183 days in New York. Accordingly, the sole issue focused on whether the lower court properly concluded that his vacation house constituted a permanent place of abode. The lower court reasoned that Obus had the right to reside in the house, he did maintain living arrangements there, and he exercised those rights, albeit infrequently during the years in issue. Accordingly, the lower court concluded that Obus maintained a permanent place of abode and therefore was a New York statutory resident.

On appeal, however, the Appellate Division disagreed. The court first looked to the legislative history behind the statutory residency rules, which was to prevent tax evasion. The court then looked to precedent, where the Court of Appeals has previously concluded that it must be demonstrated as a factual matter that a taxpayer has a “residential interest” in a dwelling before it can constitute a permanent place of abode [In re Gaied v N.Y. Tax App. Trib., 22 N.Y.3d 592 (2014)].

New York argued that the taxpayer maintained the vacation dwelling for his own use, thus satisfying the residential interest requirement. The taxpayer argued, among other things, that his residence is located in New Jersey and that his vacation home is more than 200 miles from his office in Manhattan.

The Appellate Division concluded that a finding of a residential interest requires that there must be some basis to demonstrate the dwelling was, in fact, utilized as a residence. The inquiry must go beyond the mere objective characteristics of the house and evaluate the nature and duration of the taxpayer’s “subjective use” of the property.

Under the facts, the court concluded that the taxpayer did not utilize the dwelling in a manner which demonstrates that he had a residential interest in the home. First, Obus used the property at most for three weeks during the year for vacation purposes. Second, the house was not suitable for regular commuting to Obus’ job in New York City, which was more than four hours away. Third, the taxpayer did not keep personal items at the property and brought such items with him each time he visited. Lastly, a year-round tenant resided in an attached property, whom Obus would notify of his visits before his arrival. In other words, the facts supported the taxpayer’s use of the dwelling as a vacation property, not as a residence. Accordingly, the taxpayer’s use of the property did not satisfy the statutory residency test.

The Obus decision represents a noteworthy development in the residency audit arena. Historically, New York has treated vacation homes as sufficient to satisfy the “permanent place of abode” prong of the statutory residency test. It would seem that taxpayers may now argue that a vacation property does not qualify as a permanent place of abode under similar facts: inter alia, provided they use it infrequently, it is too far for regular commuting, and personal effects and belongings are not kept at the dwelling. To this end, residency matters are highly fact-specific, with each case rising and falling on the facts and circumstances presented.

With the increase in remote work likely increasing the use of vacation homes, these arguments might lose steam for certain taxpayers. For others, this may present planning opportunities as well as a new line of defense. At the end of July, the Department of Taxation and Finance filed a motion requesting permission to appeal this decision to the Court of Appeals, which could mean the battle will continue. CPAs should closely monitor these issues and advise affected taxpayers accordingly.

Corey L. Rosenthal, JD, is a principal and the state and local tax practice leader at CohnReznick LLP, New York, N.Y.
Lance E. Rothenberg, JD, LLM, is a state and local tax director and the tax controversy services practice leader at CohnReznick LLP, in both New York, N.Y. and Parsippany, N.J.