In February 1993, the New York State Department of Taxation and Finance issued a 48-page Technical and Procedural Guideline addressing issues raised during nonresident audits. The guidelines set parameters to be followed by tax examiners in performing audits.

Generally, a taxpayer may be deemed a resident of New York under one of the following two tests:

1. The taxpayer is domiciled in New York State. However, the taxpayer is not a resident if he or she maintains no permanent place of abode in New York, maintains one outside the state, and spends no more than 30 days in New York State.

2. The taxpayer is not domiciled in New York State, but maintains a permanent place of abode in New York and spends more than 183 days of the taxable year in New York State.

Residency audits focus on the domicile issue and the statutory residency 183-day count. Domicile is deemed to be the place where the individual maintains his or her true, fixed permanent home. The permanent home is defined as the home where the individual intends to return whenever absent. A person's domicile continues until the taxpayer abandons the old and moves to a new location with the intention and motive of making the new home their fixed and permanent home. The burden of proving a change of domicile is on the taxpayer.

The 183-day test is a factual test. The taxpayer must document his or her days spent outside New York. The best proof is through documentation such as credit cards, hotel bills, passports, and a contemporaneous diary kept by the taxpayer.

The new audit guidelines concentrate on establishing procedure to be followed by auditors in examining these issues. For domicile issues, the guidelines set forth in the introduction state:

Individuals do not have to eliminate all of their contacts with New York to be determined to be nonresidents. We should encourage former New York domiciliaries to return to New York visits, shopping, trips, etc. We should let nonresident taxpayers know that if they happen to keep a bank account open in New York or seek some professional advice in New York, they will not be hounded by an auditor or assumed to be a New York resident. Auditors can reinforce this position with taxpayers and practitioners by focusing first on the primary factors as discussed in this guideline. Auditors should not request documentation of secondary or tertiary factors unless they have first established a basis using primary factors.

The guidelines list the following primary factors that auditors must examine to determine a change of domicile. The list is not intended to be all-inclusive.

Historical Home. Factors are--

1. The continued use and maintenance of the historical home compared to the nature and use patterns of a newly acquired residence.

2. Size and value of the newly acquired or newly claimed domicile.

3. Other aspects of the historical home including the use of domestic help, chauffeurs, etc. and a sudden change in their use and location.

Business Connections. This area examines a taxpayer's pattern of work or employment. The key is whether a taxpayer maintains an active participation in a trade, business, occupation, or profession in New York or holds a substantial investment in and management of New York closely held partnerships or corporations.

Items "Near and Dear" to the Taxpayer. Included are the location of items to which the taxpayer attaches significant sentimental value such as family heirlooms, art, books, stamp or coin collections, and other personal items that enhance the quality of life. The agent will often examine insurance policies to determine the location of these items based on insurance coverage.

Analysis of Taxpayer's Time During the Year. Even in situations where taxpayers spend less than 183 days in New York State, the analysis of a diary, log, or calendar maintained by the taxpayer can be utilized in supporting domicile based on the nature of time spent in the state.

Family Connections. An analysis of family connections such as a review of the schools attended by minor children is a factor in considering domicile. In addition, the retention by taxpayers of deep and substantial ties with their children and grandchildren is a central part of the taxpayer's lifestyle.

Social Connections. This area deals with the taxpayer's active involvement or membership in clubs or organizations particularly where physical presence in New York State is involved.

Secondary Factors

If the above primary factors established a strong case toward New York domicile, only then should the auditor review secondary factors such as:

* The address where bank statements, bills, etc. are sent;

* The location of safe-deposit boxes;

* Location of automobile, boat, and airplane registrations as well as the individual's licenses;

* The location of voter registration and actual participation in elections;

* A comparison of legal, medical and other professional services utilized both in and outside of New York State;

* An analysis of telephone services at each residence; and

* Possession of a New York City parking tax exemption.

The guidelines state these factors are not as important in determining domicile as the primary factors. In conjunction with the primary factors, however, they will allow an agent to make a domicile determination.

The guidelines go on further to list tertiary factors that "are below secondary in importance and are far below primary in importance." They include the location of a burial plot, the location where the taxpayer's will was executed, the mere location of bank accounts in contrast to the activity of the account, and the location where the taxpayer's individual income tax returns are prepared and filed. These factors are incidental in determining domicile. Charitable contributions of property or money to an organization are a non-factor according to the guidelines and should not be used in determining domicile.

Statutory Issues

When examining statutory residency issues, the auditor analyzes the 183- day rule. With two exceptions, any time spent in New York State during a day taints the entire day as a New York day even if the taxpayer enters and leaves New York on the same day. The two instances are 1) boarding a plane, ship, train, or bus for a destination outside New York State or 2) continuing travel through New York State where the trip begins and ends outside of New York State.

In addition to spending 183 days in New York, to be deemed a statutory resident, a taxpayer must also maintain a permanent place of abode in New York. The guidelines state a house, co-op, apartment, condo, or other dwelling place will qualify as a permanent place, whether it is owned by the taxpayer, and will include a dwelling place owned or leased by his or her spouse. A permanent place will not include a camp or cottage that is suitable only for vacation. It should be noted that the taxpayer must maintain the residence, but does not have to use it on a regular basis. Thus, a nonresident taxpayer who works in New York State and spends more than 183 days in the State, but maintains a secondary home in New York may be deemed a statutory resident even if he returns to his primary home each night.

The audit guidelines also discuss the impact of a prior audit. In situations where a previous audit has determined that the taxpayers are domiciliaries of New York, the auditor should concentrate on specific actions that a taxpayer has taken to change his or her domicile.

Under the statutory-residence test, each year stands on its own. Therefore, a taxpayer must maintain documentation for each year under examination. However, if the taxpayer's work pattern and lifestyle are consistent with the results of the previous audit, the guidelines direct the auditor to exercise "good judgment" when determining the scope of further audit. For example, where a taxpayer has successfully verified days worked in New York for several years with a diary and supporting documentation and the current year is consistent with the previous years, then the auditor could test check the diary rather than requesting full substantiation.

The auditors and supervisors are also empowered to accept and evaluate written or oral statements from taxpayers.

The State recognizes that a heavy burden is placed upon taxpayers to produce documentation to substantiate their position and therefore, an auditor must exercise judgment when requesting these records. The burden of proof, however, remains with the taxpayer. Adequate records must still be maintained to prove nonresidency.

Barry Horowitz, CPA, Eisner & Lubin