The New York State Court of Appeals in Albany. Photo by Flickr user wadester16
The New York State Department of Taxation and Finance has taken a peculiar position in the wake of a Court of Appeals decision that curtailed its power to declare a taxpayer a resident of the state.
The agency responsible for enforcing the Empire State’s tax laws acknowledged the decision by the state’s highest court, and then proceeded to issue guidelines that more or less ignore it.
I wrote about the court case earlier this year. John Gaied fought New York’s determination that he was a resident for the good reason that he never actually lived in New York. His home was in New Jersey. Gaied owned a three-unit residence in Staten Island, however, which he bought for investment purposes and to provide a home for his parents. Gaied never resided there, though he occasionally slept on his parents’ couch while visiting to help care for his ill father.
The Court of Appeals unanimously rejected the Tax Appeals Tribunal’s determination that Gaied was a New Yorker, finding “no rational basis” for it. Though Gaied did satisfy one prong of the two-pronged residency test - his work meant he was in New York for more than 183 days in the year, which he did not dispute - the court roundly rejected the idea that access to a dwelling and proximity to his place of work were sufficient to make his parents’ apartment his permanent place of abode, satisfying the second part of the test.
The decision made clear that to tax someone as a resident of New York, there must be some basis to conclude that the taxpayer actually resides in the dwelling in question.
A few months later, in its first public reaction to the decision, the Department of Taxation and Finance issued a revised version of its nonresident audit guidelines. Those guidelines carry on as though the Court of Appeals decision never happened, by claiming that the court’s test for residency is the same as the standards the department already used. (Yes, those would be the standards for which the court found “no rational basis.”)
“The Court’s finding is consistent with current Audit policy that the taxpayer must have a relationship to the dwelling for it to constitute a permanent place of abode,” the guidelines assert. This raises the obvious question: If the department’s policy and the court’s finding were consistent with one another, how did the department lose the case?
The answer is, of course, that they are not consistent at all. Timothy P. Noonan, an attorney who served as counsel for John Gaied before the Court of Appeals, wrote a column reacting to the new guidelines. He succinctly asked, “[…] how can the department continue to say that the test it used to sustain its assessment against Gaied remains correct?” The only way is by simply ignoring the parts of the ruling the department finds inconvenient. As Noonan wrote, “It’s an incredible assertion,” and one that defies the Court’s ruling while offering lip service to it.
The examples in the new audit guidelines include those of a woman who moves to Florida but hasn’t yet sold her New York home, or a couple who have an apartment in New York City that they use only incidentally for social engagements. Time and again, the department’s new guidelines assert that “unfettered access” to a dwelling unit determines whether a taxpayer is maintaining an abode in New York. This is exactly what the Court of Appeals rejected. It is not enough to have access to a residence in New York; to be a resident, the court said, an individual must actually reside in that residence.
The tax department does not get the last word on what the law says; that is the province of the Court of Appeals. If the department’s auditors follow the guidelines they have been given - as, of course, they will - they will inevitably conclude that nonresident individuals are subject to taxation as New York residents. If those nonresidents take the department to court, the department will most likely lose. But to obtain relief from genuinely independent judges, challengers must first run a gauntlet of the department’s own internal appeals, which I would call a kangaroo court except that I hate to gratuitously insult kangaroos. It is an unfair and expensive burden to impose on taxpayers.
Tax administrators rightly expect taxpayers and their tax advisers to follow the law the way legislators write it and courts interpret it. Those administrators are subject to the same obligation. New York’s tax collectors, however, see their function as being to extract the most money they can, rather than the correct amount required by the law. The new audit guidelines serve this purpose by forcing taxpayers to choose between waging a long and expensive fight to establish their nonresident status, or to settle cases either during the audit itself or in the department’s internal appeals process, the first step of which is a “conciliation conference” in which a mediator plays good cop to the auditor’s bad cop.
This is exactly the sort of government conduct that often makes New York such an exasperating place to do business and to live. Or, in some cases, not to live.