There are always “traps” in the tax law, where taxpayers unwittingly walk into a tax problem that they didn’t see coming. In the residency area, some taxpayers often got trapped on a move-in or move-out situation, with the Tax Department taking the position that “statutory residency” trumps “domicile.” Thus, a taxpayer who didn’t move into New York until, say, August of a particular tax year still could be taxed as a full-year resident if they ran afoul of New York’s statutory residency test (i.e., they maintained a permanent place of abode for almost the whole year and spent more than 183 days in the state). Indeed, the Nonresident Audit Guidelines (see page 64) contained a whole section about this.

Guess what? We may have closed this trap! 

In the Sobotka case, just issued today, an ALJ in New York’s Division of Tax Appeals concluded that, although the tests of domicile and statutory residency are not mutually exclusive (i.e., a taxpayer can be both during the same tax year), a taxpayer can only be a statutory resident of New York during any nondomiciliary period if he meets both the abode and day count tests during the nondomiciliary period. In other words, when the nondomiciliary period at issue covers only part of a tax year, the taxpayer must exceed the 183-day limit during the non-domiciliary part of that tax year in order to be a statutory resident.  .

Here are a couple of examples to illustrate how this works:

1. Andrew was previously domiciled in North Carolina, but frequently worked in New York and rented an apartment in New York to use during his trips to New York. During the middle of 2014, Andrew received a promotion at work that required him to be in New York on a full-time basis. So on September 1, 2014, Andrew bought a home in New York and moved his family into the state. During the entirety of the 2014 tax year, Andrew spent more than 183 days in New York. But here’s the kicker: if Andrew did NOT spend more than 183 days in New York between January 1 and September 1, he CANNOT be taxed as a full-year statutory resident in 2014!
2. Tim was a longtime domiciliary of New York who retired in mid-2014. On July 15, 2014, Tim moved to Florida, but kept his place in New York so he’d have a place to visit in future years. So he had a place in New York for all of 2014 and spent more than 183 days in New York in all of 2014, too. But Tim can’t be taxed as a full-year statutory resident in 2014 because, under the Sobotka rule, we only count the days in his non-domicile period—and there are less than 183 days in such period. 

This is a complete reversal of the Tax Department’s prior policy in this area. In both examples, the Tax Department would have taken the position that statutory residency “trumps” the domicile change, and it would have taxed Tim and Andrew as full-year residents. And there were a few cases out there that could have been read to suggest otherwise, as the Tax Department’s Audit Guidelines note. Really, though, no court had ever addressed this “trap” head-on. And for the most part, courts, taxpayers, auditors, and even practitioners didn’t appreciate this nuanced view of the residency law. But as the judge’s decision outlines, this is a result that flows clearly from the plain language of the law and is supported fully by the statute’s legislative history.

Of course, decisions of administrative law judges are not binding, so the Tax Department will have to decide how it wishes to handle this order. 

In the meantime, taxpayers and practitioners should take notice. If you are a taxpayer who has paid tax as a full-year statutory resident of New York for a tax year during which you changed your domicile into or out of New York, you should consider a refund claim (if still timely). Or if you are a taxpayer who is being audited for a year during which you changed your domicile and the Tax Department is asserting that you were a statutory resident of New York during that year, you should adjust the way the statutory days are being counted to see if this order would impact that determination.