By: Juliya L. Ismailov
This week the U.S. Supreme Court denied review of constitutional challenges of New York statutory residency.
New York State and City generally will tax an individual as a resident if he or she: (i) spends more than 183 days in New York, and (ii) maintains a “permanent place of abode” in New York, which can be either owned or rented and must be suitable for year-round use.
New York has angered many non-resident taxpayers, who commute into New York City and own a pied-à-terre in Manhattan, a vacation home in the Hamptons or a property that is used by other family members. These taxpayers found out the hard way in an audit that New York treats them as full-time residents, and imposes income tax on their worldwide income, just like the state where their primary residence is actually located.
According to the audit defense company Monaeo statistics, between 2010 and 2017, New York State collected more than $1 billion from residency audits from an average of about 3,000 non-residents per year. For example, hedge fund manager Nelson Obus, a New Jersey resident, is fighting New York on an over $500,000 tax bill plus interest and penalties resulting from owning a modest vacation home more than 200 miles north of New York City in Northville, where he spends no more than three (3) weeks per year. This tax treatment is consistent with the New York Appeals Tribunal decision in Matter of Barker (Tax App. Trib. 2011), where Connecticut residents’ rarely-used Hamptons home caused them to be treated as New York statutory residents.
What is more unsettling for the dual-residency taxpayer is that, while both Connecticut and New York offer a resident credit on tax paid in another jurisdiction, the underlying income has to be sourced to the other jurisdiction where tax was also paid. At times, the income cannot be so neatly traced and, as a result, neither state grants the credit, resulting in double tax imposed on the same income by two states.
Both the New York Court of Appeals, its highest court, and now the U.S. Supreme Court, have been asked to address this issue of double taxation by New York. The Court of Appeals denied the appeal on the basis that “no substantial constitutional question is directly involved.”
The U.S. Supreme Court has now denied the petition as unsuitable for its consideration without owing an explanation.
The following facts were at the center of the current cases appealed to the U.S. Supreme Court: In 2010, Sam Edelman sold his shares in his shoe company. At the time the designer lived in Connecticut and also owned a residence in New York City. The New York Department of Taxation and Finance (“Department”) audited the Edelmans and assessed $6.2 million of New York tax on their income, mostly from the sale of the business. Connecticut also taxed the same income. Likewise, the Department assessed $2.7 million of New York tax against Richard Chamberlain and his wife Martha Crum, also residents of Connecticut, on the income from the sale of shares of their communications business. Both of the businesses generating the income, though based in New York, had multi-state operations.
Since each set of taxpayers spent more than 183 days in New York, coupled with owning a residence there, they were treated as New York statutory residents. As a result, they were required to file resident tax returns in both states and pay taxes to both states. The complicating factor in these cases, unlike others that are resolved with the resident credit granted by one of the two states, is that this income from the sale of interest in multi-state businesses is deemed intangible income that cannot be sourced directly to either jurisdiction (New York or Connecticut). For this reason, both states have denied the taxpayers the resident credit, resulting in double taxation of the same income.
The taxpayers sued the Department in Chamberlain v. Department, 18-1569, and Edelman v. Department, 18-1570, but have been unsuccessful to date at every level of the New York courts. Resorting to seeking help from the highest court in the land, the taxpayers argued that New York's tax regime violates the U.S. Constitution's dormant commerce clause and the 2015 Supreme Court precedent in Maryland v. Wynne. In Wynne, the U.S. Supreme Court ruled in the taxpayers’ favor to strike down a “special nonresident tax” that Maryland imposed on non-residents. The tax was found to fail the “internal consistency test” by overburdening non-residents compared to residents of the state and, therefore, discouraging interstate commerce.
Many practitioners following the present Edelman and Chamberlain cases had predicted that the U.S. Supreme Court would not hear them, and even if it did, that the Wynne precedent would not apply. Wynne involved a claim of disparate tax treatment of non-residents compared to residents. The present cases involve double taxation arising from New York treating out-of-state statutory residents and domiciliaries too much alike, and further denying them the customary resident credit.
Some believe, however, that this is not the end of the challenge against New York by its happenstantial residents. If they do not decide to throw in the towel, sell their Northeast residences and move to Florida to avoid state income tax altogether, they will just have to wait for a better set of facts brought to the courts against New York’s unfair double taxation.