On February 9, 2023, in a major victory for the taxpayer, the New York State Court of Appeals (New York State’s highest court), denied the motion by the New York State Department of Taxation and Finance to appeal the New York Supreme Court, Appellate Division’s decision annulling the New York State Tax Appeals’ decision in the Matter of Nelson Obus et al (Mo. No. 2022-758). A history of this landmark decision follows.

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Background

On June 30, 2022, in a major victory for the taxpayer, the New York Supreme Court, Appellate Division annulled the New York State Tax Appeals Tribunal’s decision in the Matter of Nelson Obus et al. (DTA No. 827736).

The taxpayers, Nelson Obus and Eve Coulson, New Jersey domiciliaries, were audited by the New York State Department of Taxation and Finance (DTF) for the years 2012 and 2013. DTF found that, because the taxpayers maintained a permanent place of abode and were present within the state in excess of 183 days, they were liable as statutory residents for income tax purposes for the years 2012 and 2013.

On or about December 8, 2011, petitioner purchased a home located in Northville, N.Y., for $290,000. This home, located more than 200 miles from his office, has two stories with five bedrooms and three bathrooms, with year-round climate control. In addition to the main house, there is an attached apartment with a separate entrance and key. The apartment is occupied year-round by a tenant who had an existing rental agreement with the prior owners of the home. No rental or lease agreement was submitted into evidence, yet petitioner testified that the monthly rental amount was $200. Petitioner paid all the expenses associated with the property including housekeeping, pest control, snow removal, and yard maintenance, which expenses exceeded the amount of money he received monthly from his tenant. The National Grid account for electric service is in petitioner’s name.

It was undisputed that petitioners use this home for vacation purposes only. The petitioner enjoys cross-country skiing in the winter months and attending the Saratoga Racetrack in the summer. Although the parties did not agree with respect to the specific numbers of days that the petitioners spent at the Northville home, they spent no more than two to three weeks there. The petitioners contended it was even less.

The petitioners filed New York State nonresident income tax returns, form IT-203, for each of the years at issue. Form IT-203 contains a question regarding whether petitioners maintained living quarters within New York State. The petitioners indicated that they did not maintain any living quarters within the state for either 2012 or 2013.

Although this decision lessens New York’s ability to tax nonresidents as statutory residents, it must be noted that this decision can only be utilized in very limited circumstances.

On April 11, 2016, the DTF issued an assessment to the petitioners for an additional New York State income tax due in the amount of $526,868.00 plus interest and penalty for the years 2012 and 2013. The petitioners were assessed based upon the DTF’s finding that, because they maintained a permanent place of abode and were present within the state in excess of 183 days, they were liable as statutory residents for income tax purposes for the years 2012 and 2013.

In a decision dated January 25, 2021, the Tribunal denied the petition of Nelson Obus and Eve Coulson and upheld the DTF’s determination that the taxpayers were statutory residents for income tax purposes for the years 2012 and 2013, and the notice of deficiency, dated April 11, 2016, was sustained.

The taxpayers appealed the Tribunal’s decision to the Appellate Division, Third Judicial Department under Article 78. In a decision dated June 30, 2022, the Appellate Division ruled that a vacation home of a New Jersey resident more than 200 miles from the place where he worked was not a permanent place of abode that would make him subject to New York tax as a resident.

In its decision, the Tribunal stated, “it is not disputed that, at most, petitioners utilized the home for three weeks during each tax year for either skiing or to visit the racetrack in the City of Saratoga Springs, Saratoga County. The home was not used for access to Obus’ job in New York City and was not suitable for such purposes, given that it is over a four-hour drive each way. In fact, there is a year-round tenant that occupies an attached apartment, who Obus informs of his presence prior to his arrival. Moreover, petitioners do not keep personal effects in the Northville home, instead bringing with them what they will need for their visits. Based on these undisputed facts, petitioners have not utilized the dwelling in a manner which demonstrates that they had a residential interest in the property.”

The Appellate Division held that “even though the home could have been used in a manner such that it could constitute a permanent place of abode within the meaning of Tax Law § 605, because petitioners did not use it in this manner, it does not constitute a permanent place of abode, and a contrary finding by the Tribunal is inconsistent with the legislative intent underlying the statute. As such, it was inappropriate for the Tribunal to deem that the petitioners were statutory residents of this state. Given the foregoing, the Tribunal’s decision did not have a rational basis and must be annulled.”

Establishing Precedent

The New York State Court of Appeals’ February 9, 2023, refusal to hear the motion by the DTF to appeal the Appellate Division’s decision in Obus means that its decision in the Matter of Nelson Obus et al. becomes final, and it may be used as precedent in similar cases.

Although this decision lessens New York’s ability to tax nonresidents as statutory residents, it must be noted that this decision can only be utilized in very limited circumstances where the facts and circumstances make it apparent that the New York State dwelling was meant solely for limited vacation use and not a nearby pied-à-terre for use on those occasions where the taxpayer wishes to stay in New York. Tax advisors with clients in these particular circumstances, however, should take note of this landmark decision.

Mark H. Levin, CPA, MST, own account, is a member of The CPA Journal Editorial Advisory Board.