Out-of-State Attorney Not Subject to New York State Income Tax

https://www.hodgsonruss.com/practices-State_Local_Tax.htmlWe have all heard the jokes. “How many lawyers does it take to screw in a light bulb?” “Why won’t sharks attack lawyers?” “What’s the difference between an accountant and a lawyer?” Or, “How many lawyer jokes are there?” Well, actually, the last one’s easy. Only three. The rest are true stories.

But despite the general public’s lampooning of attorneys, New York State taxpayers might have found a lawyer they can celebrate (in addition, of course, to their friends at Hodgson Russ). Meet Patrick J. Carr, a retired New York State attorney living in Florida. Last month, a state administrative law judge (ALJ) ruled that Mr. Carr did not have to pay a $68,000 tax bill for services rendered in Florida. Mr. Carr was a member of the New York and New Jersey state bars and was admitted pro hac vice in Florida (for non-lawyer readers, “pro hac vice” is a fancy Latin way of saying that an attorney who has not been admitted to practice in a certain jurisdiction is permitted to help litigate a particular case in that state). And although Mr. Carr did not perform any services or maintain any office in the state, New York attempted to tax his income solely because of his New York law license. Are you starting to root for Mr. Carr? Thankfully, however, ALJ Barbara Russo dismissed the state’s position and announced that “merely holding a license to practice in New York is not the equivalent of carrying on a profession in New York state.” So why did New York think that it had the right to tax Mr. Carr?

New York State actually has a long history of going after nonresident’s income. And as was the case with Mr. Carr, issues of nonresident allocation (that is, determining what portion of a nonresident’s income is subject to New York tax) often arise in the context of a residency audit. This is because New York does have the right to tax the income of nonresidents if that income is derived from or connected to New York sources (residents, on the other hand, are taxed on all their income, regardless of where it is earned). More specifically, and as was relevant to Mr. Carr, Tax Law section 631 provides that New York-source income includes income from a business or profession carried on in the state. Income from intangible assets (such as professional legal licenses) is generally not considered to be connected with New York sources, unless the intangible property is employed in a New York business.

Although the state in Mr. Carr’s case agreed that he performed no services in New York and did not maintain a New York office, the state argued that “because the income was received from Florida on the basis of [a] pro hac vice admission, it is subject to New York income tax since it was attributable to a profession carried out in New York State.” The state’s theory was that Mr. Carr’s pro hac vice admission in Florida was based on his New York law license (the state conveniently left out the fact that his pro hac vice license could have also been attributable to his New Jersey law license). And the state attempted to rely on two prior rulings that upheld New York’s right to tax the out-of-state services of New York attorneys (Carpenter v. Chapman, 276 A.D. 634 (3d Dept. 1950) and Matter of Vigliano, Tax Appeals Tribunal, January 20, 1994). But as highlighted by ALJ Russo, the two cases relied on by the state both involved attorneys who were only licensed in New York and nowhere else, had New York offices, maintained practices in New York, and did not have offices outside of the state. Conversely, Mr. Carr did not maintain a New York office, was admitted (albeit pro hac vice) to practice in another state, and his Florida legal work was conducted entirely from a Florida office location. Accordingly, ALJ Russo found that Mr. Carr’s income was not subject to New York tax.

This case highlights just how aggressive New York State can be at targeting individuals who claim to have moved out of the state. As noted above, Mr. Carr’s case began as a residency audit, and although he successfully convinced the state that he had moved to Florida, his case underscores that taxpayers need to understand that even if they establish residency outside of New York, the state may still seek (and, in many cases, be entitled to) a portion of their income. But, as Mr. Carr’s case also highlights, New York State can go too far. And when someone stands up to the state to check its overly-aggressive interpretation of the tax law, most New Yorkers will applaud. Because if there’s one thing the general public laments more than lawyers, it’s taxes. 

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