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Home > Practice Areas > Alphabetical Listing > State & Local Tax > Articles > Personal Income Tax > An End to the Temporary Stay Test in New York?
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State & Local Tax An End to the Temporary Stay Test in New York?Over the past three years, I have twice written in State Tax Notes to analyze New York's special residency rules involving so-called temporary stays.1 Like many of the other topics I generally cover in this column on a monthly basis, the topics were basically a response to audit activity within the New York State Department of Taxation and Finance. In 2005 I reported on the department's new interpretation of the "temporary stay" rules, and some early taxpayer victories in those types of cases. Just last year I penned a follow-up article addressing some of the more recent cases in which the department's interpretation of the temporary stay test was generally upheld. In both articles, I suggested that somewhere, somehow, a change needed to be made. Other practitioners took the same position.2 In particular, it seemed that the department's interpretation of the temporary stay test was not consistent with either the spirit or the letter of the tax law and regulations. Well, it looks like we may have gotten our wish -- sort of. The tax department has recently proposed a repeal of the regulatory provisions regarding temporary stays that is contained in New York's Personal Income Tax Regulations. On October 15 the department published its proposal for repealing these provisions for tax years ending in 2008.3 In this article, we examine the proposed change.
Over the past few years, there has been confusion, not so much with the rule per se, but regarding the tax department's interpretation of it. Although the regulation appears to, on its face, contain only two criteria (that the stay must be "temporary" and that the apartment be maintained for a "particular purpose"), the department took a much more stringent interpretation both in its nonresident audit guidelines and in personal income tax audits. The department interpreted the word "temporary" to mean "fixed and limited," and its guidelines also created a presumption that contemplated a three-year period as the maximum time someone could be in New York under this test. It also interpreted the "particular purpose" requirement as requiring that the taxpayer be present in New York state "to accomplish a specific assignment that has readily ascertainable and specific goals and conclusions, as opposed to a general assignment with general goals and conclusions."5 That interpretation has caused problems over the years, created difficulty in many audits, and been the subject of litigated cases.
The department further justifies the change because "the temporary stay rule has also proven difficult to administer" and "will provide taxpayers and the Department with clear, objective, and easily applied rules for assessing residency status for New York State personal income tax purposes." The regulatory impact statement also attempts to estimate the cost of that change, focusing on the total number of nonimmigrants in New York on H-1B visas, based on information received from the department's audit division indicating that nearly all the identified cases involving temporary residents "involve foreign nationals in the United States on working visas (H-1Bs)." Temporary Versus Permanent Place of Abode The department is granted wide latitude when it comes to adopting regulations interpreting the Tax Law. Nonetheless, it is well established that a regulation will not be deemed valid if it is inconsistent with or contrary to a legislatively enacted statute.6 Consequently, it is unsurprising that practitioners who are familiar with the tax law's definition of resident have some concerns regarding the validity and efficacy of the department's attempt to eliminate the temporary stay rule. New York's tax law defines a statutory resident (the class of residents affected by the department's attempted rule change) to include any individual who "is not domiciled in this state but maintains a permanent place of abode in the state and spends in the aggregate more than one hundred eighty-three days of the taxable year in this state."7 Clearly, the plain language of the statute requires that a taxpayer's abode be "permanent" in nature before the state can tax the individual as a resident. It would appear, therefore, that the maintenance of a "temporary" place of abode should not suffice to trigger resident taxation under the tax law. Put differently, one could argue forcefully that a temporary stay rule is already embodied in the statute's definition of resident and that taxpayers should be permitted to avoid resident taxation on the basis of a claimed temporary stay regardless of the department's proposed rule change. Indeed, a review of the legislative history strongly suggests that an individual may not be taxed as a statutory resident if the individual's presence in New York lacks some level of the permanence that must be present to tax an individual as a domiciliary. The memorandum in support of the original statutory residency provision says New York has "several cases of multimillionaires who actually maintain homes in New York and spend ten months of every year in those homes . . . but they claim to be nonresidents."8 Thus, the statutory residency provisions were designed to tax those "who, while really and [for] intents and purposes [are] residents of the state, have maintained a voting residence elsewhere and insist on paying taxes to [New York] as nonresidents."9 In short, and as noted by the Court of Appeals, the statutory residency statute is "intended to discourage tax evasion by New York residents."10 That legislative history suggests that statutory residency was intended, in large part, to be a surrogate for domicile. The State Legislature was concerned about individuals who should have been paying taxes as "residents" (that is, as domiciliaries), but who avoided resident taxation by claiming to fall outside the often elusive legal definition of domicile (for example, by registering to vote in another state). The statutory residency provisions provide a disincentive to that behavior by setting forth a mechanical test for resident taxation that focuses on the presence of some factors (other than voter registration and so forth) that are typically present when one has established a domicile in the state. Specifically, statutory residency looks to the maintenance of a home in New York and to whether the taxpayer has spent the majority of his or her time in the state. But because the Legislature intended to capture those who were avoiding taxation despite their true status as domiciliaries, it limited taxation on the basis of statutory residency to those who maintained a "permanent" home in New York. Just as the Legislature may not tax individuals on the basis of domicile if they are in the state temporarily, it did not intend to tax individuals on the basis of statutory residency if the abode maintained in the state was not permanent in nature. Case law interpreting the Tax Law's statutory residency provisions has done so in a manner that is consistent with the legislative history outlined above. In Matter of Evans,11 the Tax Appeals Tribunal held that the permanence of an abode "depends on a variety of factors and must encompass the physical aspects of a dwelling as well as the individual's relationship to the place."12 Applying that standard, the tribunal held that the taxpayer was properly held to be a statutory resident because "nothing in [his] living arrangements suggests that they were temporary."13 In particular, the tribunal noted that the "long-standing (12 years) and regular nature of petitioner's arrangements are certainly evidence of what can reasonably be described as 'permanence.'"14 Matter of Evans demonstrates that there is a "temporary stay" exception inherent in the tax law's definition of resident. The taxpayer in Evans did not lose because he failed to meet the criteria set forth in the temporary stay regulation that the department now seeks to eliminate. Rather, he lost because there was no evidence that his abode was not a permanent place of abode as required by the tax law. The taxpayer's living arrangements in Evans were not temporary; to the contrary, the evidence demonstrated that his living arrangements in New York were "long-standing" and "regular." Had the taxpayer in Evans shown he was in the state temporarily, he could have prevailed in proving his abode was not permanent. In light of that legislative history and case law, there is a real question whether the department's elimination of the temporary stay regulation would change anything at all. Even without the regulation, it appears that there is significant support for the argument that there is a temporary stay exception built into the tax law itself. And to the extent that the proposed regulatory change seeks to affirmatively write that exception out of the tax law, there exists a compelling argument that the revised regulation is invalid because it is inconsistent with and contrary to the statute. The department, in its proposed rule change, claims the tax law "does not contemplate a temporary stay exception,"15 but the discussion above makes that assertion questionable. Consequently, taxpayers who are not domiciled in New York and who maintain an abode in the state on a temporary basis should consider whether the department's proposed regulatory change suffices to prevent them from filing as nonresidents. That analysis should, of course, be done giving due consideration to the risks involved in failing to file as a resident, including the potential for audit, imposition of penalties, and the accrual of interest that may have to be paid on any asserted tax deficiency. Source of the Confusion Also, as alluded to in the discussion above, we think the department's change might make interpretation of New York's residency rules even more problematic from an audit perspective. At the end of the day, the rules still require a "permanent" place of abode. Thus, a "temporary" place of abode would not qualify. And what is meant by "temporary" place of abode? At least the current regulations attempt to define it. If that definition is removed, what are we left with? In short, although the department's attempts to make New York's residency rules clearer are laudable and noteworthy, this proposed change, if made final, probably will create even more confusion and uncertainty. Retroactivity? © Hodgson Russ LLP 2008 |
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