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Noonan’s Notes Blog is written by a team of Hodgson Russ tax attorneys led by the blog’s namesake, Tim Noonan. Noonan’s Notes Blog regularly provides analysis of and commentary on developments in the world of New York and multistate tax law. Noonan's Notes Blog is a winner of CreditDonkey's Best Tax Blogs Award 2017.

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Day Count Relief from the IRS: Is New York Listening?

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The COVID-19 crisis continues to throw off a variety of tax questions and issues that 60 days ago likely would have been unimaginable. In an article we published this month in Tax Notes State, we talked about different types of New York residency and income allocation issues that could arise as a result of shutdown or travel-related restrictions put in place by state governments. A couple of those issues involved some of the strict day counting requirements that arise under New York’s residency rules. For example, the statutory residency test limit certain taxpayers to spending 183 days in New York. Also, the 548-day rule, which is a special safe harbor available to protect certain taxpayers from New York residency taxation, requires that a taxpayer spend 450 days in a foreign country over the course of a 548-day period and also limits the taxpayer’s presence in New York to 90 days. In both cases, we know of taxpayers who will fail these tests in 2020 because of travel-related restrictions.

In our article, we wondered aloud whether states like New York could loosen such day count limitations or requirements for taxpayers impacted by shutdown or travel restrictions. This of course has to be balanced with an understanding that state budgets in particular – like pretty much every other American’s budget this year – is thrown into chaos because of economic slowdowns.

Interestingly, the Treasury Department seemed to jump in front of some of these issues recently, at least with respect to different types of federal tests that have similar day count requirements. Specifically, the IRS issued guidance providing relief to individuals and businesses affected by travel disruptions in new published guidance:

  • First they issued an FAQ, providing that certain business activities conducted by a nonresident alien or foreign corporations will not be counted for up to 60 days in determining whether the taxpayer was engaged in a trade or business or had a permanent establishment;
  • Also, a new Revenue Procedure provides that exclusions from gross income under IRC § 911 for individuals outside the country for at least 330 full days will not be impacted as a result of days spent away from a foreign country due to the travel restrictions, through July 15, 2020.
  • Another Revenue Procedure provides that for purposes of counting U.S. residency and determining whether an individual applies for tax treaty benefits, a period of up to 60 consecutive calendar days of U.S. presence that relate to travel restrictions will not be counted.

Of interest, this Revenue Proc also contains an excellent justification for the relaxation of day-count restrictions, given the powerful impact it has had on a taxpayer’s ability to travel freely:

“The COVID-19 Emergency, as defined in section 3.01 of this revenue procedure, may have affected the travel plans of foreign travelers who intended to leave the United States. Regardless of whether they were infected with the COVID-19 virus, individuals may have become severely restricted in their movements, including by order of government authorities. Individuals who do not have the COVID-19 virus and attempt to leave the United States may also face canceled flights and disruptions in other forms of transportation, shelter-in-place orders, quarantines, and border closures. Additionally, even those who can travel may feel unsafe doing so during the COVID-19 Emergency due to recommendations to implement social distancing and limit exposure to public spaces.”

Because of these unprecedented developments, the IRS has rightfully and reasonably taken steps to protect taxpayers who would otherwise be negatively impacted through no fault of their own. These are exactly the kind of day-count relief provisions that our article outlines as possible in New York and other states. Indeed, like the gross income exclusion relief in IRC § 911, the 548-day rule requires a taxpayer to spend a certain amount of days outside the country during a specified period in order to qualify for relief from New York’s residency tests. So it will be interesting to see if states like New York follow the federal government’s lead.

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