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SALT TALK: Love vs. the Tax Department – Love Wins Round One

Wayne Berkowitz CPA, J.D., LL.M. 06.26.2017 | SALT TALK

They[1] say love conquers all.  While that has been my experience, I’m not so sure it is an effective tax planning tool. That is until I read the recent New York State Administrative Law Judge (ALJ) decision, In the Matter of the Petition of Stephen C. Patrick.[2] I had another topic in mind for this week’s blog, but just had to push it aside once I realized the great lawyering[3] that won this case.

You really should read the case. The facts read like a true love story years in the making. While I won’t delve into the details here, the taxpayers were both high school sweethearts who both went their separate ways. They both married others and had established families of their own.  Many years later they were reunited.

While the love story is fascinating, what really got my attention was the detail and precision of the facts presented and the acknowledgment of those facts by the ALJ, to recognize that the taxpayer did in fact change his domicile from New York City and accordingly was not a tax resident. Remember, tax residents are subject to tax on their worldwide income regardless of where earned and New York (State and City rules being identical) has two ways to get you.  The statutory residency test, the one most people know, is an objective test involving day count. If you are in New York for more than 183 days and have what is referred to as a permanent place of abode, the game is over and you are a resident.

The extremely subjective domicile test, looks to a person’s intentions to decide if New York is the place they call home. There are five primary factors looked at to try to measure those intentions.  While they are all important, the factor examining time spent can be particularly problematic.

I explain to all my clients that this is not a mechanical counting of days. There is no “183 day test” for domicile. I also explain that a red flag is often raised that while the taxpayer may spend significantly under half the year in New York (let’s say 100 days), it is possible that more days were spent in New York than your domicile.

And this was exactly the case here. But through careful recordkeeping and analysis, the taxpayer was able to demonstrate the “quality” of the days in New York as compared to the quality of the days spent elsewhere. Fractions of days were examined and it became clear that a large part of the time in New York was attributable to necessary medical treatments and travel time. The quality time was spent elsewhere, particularly the taxpayer’s domicile.

The other striking item in this case is that all of these detailed facts were bolstered by the taxpayer’s credible testimony before the ALJ. Often fact-intensive cases are won (or lost) on the testimony of the stakeholder. 

While there is so much more to say about this case, this blog is already twice as long as usual.  The takeaway is keep great records and be prepared to testify if need be. Unfortunately auditors don’t always understand the lifestyle of more affluent taxpayers and credibility must be at its highest level to prevail.

If you have questions about the kind and quality of records you need to keep or other issues in establishing residency; I can be reached at WBerkowitz@BerdonLLP.com or your Berdon advisor.

Wayne Berkowitz, a tax partner and head of the State and Local Tax Group at Berdon LLP, advises on the unique requirements of governments and municipalities across the nation.

[1] They being the same they who decide what’s in fashion.
[2] (Matter of Patrick; DTA No. 826838; DTA No. 826839,  JUNE 15, 2017)
[3] This is a blatant shout-out to one the attorneys that handled this case.  I know he reads my blog and I know he has felt I have been a little “hard on him” in the past in this forum.  While I don’t believe that to be true, I offer this example of a brilliant victory.

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