New York guidelines on domicile. (State & Local Taxation)by Furman, Leonard D.
Accountants and tax lawyers involved in New York/Florida domiclie issues reviewed the guidelines to determine the new elements of the field audit. The director of the state's Personal Income Tax Audit acknowledged that the guidelines are really not new but, for the first time, are organized into one comprehensive document. If the guidelines are to resolve many of the controversies and problems of the past, the conduct of the audits will require fundamental change to reflect the stated purpose of New York's tax department and a better understanding by agents of the way wealthy taxpayers view their residences.
An analysis of the guidelines and audit practices reveals many discrepancies. The burden has been put on the taxpayer to demonstrate not how much of his lifestyle is transferred to Florida but how much of his business, personal, and social connections are still left in New York. In the discussion below, the guidelines are in italics followed by comments on how domicile claims have been examined by the state's auditors and how they can be changed in practice to meet the guidelines.
The non-resident field audit program is not designed "to place a heavy burden on taxpayers to prove domicile or to verify their physical location on every day spent during a particular year." Taxpayers are spending an inordinate amount of time to prepare for exams. The amount of money spent and accountant and attorney fees is significant and at times disproportionate to the amount of tax involved. It can take one to two years for the audit and over five years to go through the appeal process.
Visits to New York
The non-resident audit program is not designed to "discourage visitors and former New York residents from returning to New York to visit family, shoping excursions, and otherwise take actions which bolster the New York State ecomony." Many CPAs have found auditors seriously questioning taxpayers about retaining memberships in a place of worship. In one case, the taxpayer was a founding member of the religious institution but only attended services twice a year on the high holidays. The auditor's protest resulted in the resignation of the taxpayer's membership.
Auditors have also questioned why taxpayers continue to use their previous CPAs and doctors in New York if they have moved to another state. While these visits should count as days in and out of New York, they should not be considered as evidence for or against New York domicile since these aid the New York economy.
Limiting New York Contacts
"Individuals do not have to limit all their contacts with New York to be determined to be non-residents." While the guidelines indicate that New York should encourage former New York domiciliaries to return for visits, shopping trips, ect., it is the experience of many CPAs that agents can harass taxpayers regarding any connections, no matter how slight, to New York.
For example, if the taxpayer retains his New York place of abode, visits his children or grandchildren, and keeps one bank account or brokerage account in New York, the agent contends the taxpayer is still domiciled in New York although he has 30 or 40 different connections to Florida.
"Auditors should not request documentation of secondary or tertiary factors without having frist established a basis using primary factors." Auditors automatically request all documentation to develop a case. They seemingly presume in advance that taxpayers have not changed their domicile and abandomed New York. Unlike the IRS whose goal is to settle cases, New York's objective seems to be take cases to court. For example, there was a matter with a New York State attorney who wanted to settle a case but the agent would not agree to a settlement. It took many months for the practitioner to convince the New York State attorney that it was in the best interests of the taxpayer and New York State to settle the case.
Common Sense Approach
"A common sense, practical approach" should be applied to auditing nonresident cases and to evaluate the written and oral statement of taxpayer. The experience of practitioners is that agents frequently take unyielding positionf no matter how much documentation indicating the taxpayer's domicile is in Florida, is furnished them because the taxpayer retains a New York residence and maintains a few minor contacts with New York.
Rather than unsing a common sense approach, auditors have requested every document and piece of information in existence over the audit years. In addition, the agents require taxpayers to account for all their time. They also ask such questions as why do you visit your children in New York? Their you use your CPA in New York? Their assumption is that people who move to Florida are trying to evade the law.
Motivation for Change
"The fact that a person is motivated by self interest does not operate to prevent a change of domicile. Therefore, the fact that a change of domicile is motivated primarily by a desire to gain a tax advantage is immaterial, if the intention of the individual to acquire a new domicile is absolute and fixed and his/her acts confirm that intention." The experience of accountants and lawyers has been that agents want specific reasons for changing domicile. They have not been amendable to a person just moving on a whim or to receive a tax advantage.
Retention of Historical Home
"Without one or more of the primary factors evident, the auditor need not explore the secondary and tertiary factors with relation to domicile. The first factors deals with the historical home. The guidelines state, "It must be emphasized that retention of a residence in New York is not, by itself, sufficient evidence that the taxpayer did not change domicile. While retention of the historical home is certainly a strong New York contact to be conssidered, it is not a determinative." These guidelines state that, "Taxpayers can keep/ maintain their original New York residence and change their domicile." New York agents are very reluctant to decide that the taxpayer has abandoned his New York domicile if he still retains his New York residence.
Auditors should recognize that in almost all cases the nonresident audits involve taxpayers who are wealthy and financially able to retain both New York and Florida residence. They prefer to maintain a place to stay when they or their adult children visit New York. Also, in the last several years, selling real estate has been very difficult.
Size and value of New Domicile
Agents should consider "the size and value of the newly acquired or newly claimed domicile." The Sutton case, decided in late 1990 by the Tax Appeals Tribunal, had one of the most despairing differences in residences. The taxpayer had an 800 sq. ft rent stabilized apartment in New York with a montlhy rent of $800 per month. He was being evicted from his apartment because the owner indicated it was not his primary or principal residence. In Florida, he co-owned with his brother a magnificant 6,500 sq. ft condominium costing about $2,000,000. The agent and the attorney for New York State indicated that this discrepancy had no bearing on the domicile issue. The New York Tax Tribunal ruled in favor of the taxpayer. This was the first time the state has lost in the highest tax appeals court.
"Business interests in New York, including active participation in New York trade, business, occupation or profession, or substantial investment in, and management of New York closely held partnerships, corporations" is a major factor in deciding domicile cases. Agents frequently do not recognize the difference between actively involved and passive investments. Often, especially in closely-held family businesses, taxpayers have retired but may still own an interest. They receive a minimum salary or no compensation and their children or other relative operate the business.
This is especially true in real estate in which management companies run the businesses. The taxpayer who moves out of state is not actively involved and is considered a passive investor. Many agents do not understand the difference between this type of real estate investment and owning, for example, a construction company which requires daily on- site management.
Near & Dear Items
The Guidelines discuss the location in New York or Florida of items which the individual holds 'near and dear' to his/her heart or those items which have a significant sentimental values, such as family heirlooms, works of art, collections of books, stamps and coins, and those personal items which enhance the quality of lifestyle. These are reasonable requests but agents frequently ask why the taxpayer has not moved his furniture to Florida. They should be aware that because of different climates, furniture which would be appropriateX in a New York residence would not be appropriate in Florida.
An "analysis of taxpayer's time during year" such as "comparison of daily expenditure and the type of expenditures made at each location" is part of the audit procedures done by New York State. The examples given are credit card receipts, utility usage, ATM access records, telephone bills, ect. Often when agents are shown telephone bills they ask how to they know it was the taxpayer that made the calls. when shown utility bills, the agents are unwilling to accept that the utilities frequently stay on, even though people are not there.
"A review of the general habit of life may reveal that taxpayers retain a deep and substantial tie with their children and grandchildren, thus intending to spend as much time as possible with them. From this desire to spend time with their children and grandchildren, it can be concluded that this quality time is a central part of the taxpayer's lifestyle, and as a result there is no change in lifestyle or abandonment of the established domicile." In practice, agents have automatically assumed that when the taxpayer's children live in New York, the taxpayer has not abandoned New York. In addition, if only one child out of three lives in New York, they still weigh this heavily against the taxpayer.
The secondary factors section indicates "individuals, both residents and nonresidents, should be encouraged to partake in the unique treasures offered by New York's business, financial, cultural, medical, social, entertainment, etc. communities." By contrast, accountants have found that when nonresident domicilaries maintain a brokerage and/or bank account, attend opera at Lincoln Center, use their doctors and dentists, go to social events, or play golf--all in New York--the agents view these activities as pro-New York domicile factors.
Concern With Secondary Factors
"Without establishing a strong case with primary factors, the auditor need not be concerned with the secondary factors." Experienced practitioners find that agents automatically review all factors.
Non-essential items listed as tertiary factors, "below secondary and far below primary in importance," which are "incidental in determining domicile include, but are not limited to, the location where taxpayer's will is executed and probated; passive interest in partnerships and small corporations; the mere location of bank accounts and contrast to the activity of the account; passive, honorary, or lifetime membership in clubs and organizations, including religious or cultural affiliations where active participation is not required or demonstrated; and the location where the taxpayer's individual income tax returns are prepared and filed." New York auditors frequently review these factors and hold them to be important items.
It is unreasonable to expect and a cultural deprivation for a taxpayer to give up all ties to New York, after a change in residence. Will reason prevail?
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