Last month, New York’s highest court denied leave to appeal in Matter of Obus v. New York State Tax Appeals Trib., 206 A.D.3d 1511 (3d Dep’t. 2022), closing the book on litigation that will have lasting implications on New York’s ability to tax vacation-home owners, and perhaps others with tenuous connections to a New York dwelling, as tax “residents” of the New York. The New York Court of Appeals’ refusal to hear the appeal leaves the lower court’s decision in Obus intact.
In that decision, which we’ve covered here and here, New York’s Appellate Division struck down the Department of Taxation and Finance’s attempt to hold a New Jersey couple as income tax residents of New York by virtue of a seldom-used vacation home they owned in upstate New York. In doing so, the court expressly rejected the rigid, formulaic approach the tax department had been applying to New York’s so-called statutory residency test, and mandated a more subjective review of when a home can be considered a “permanent place of abode” for residency purposes.
This is a pretty big deal in the New York residency area.
Indeed, Obus is probably the most consequential decision in the New York residency realm since the Court of Appeals’ 2014 decision in Matter of Gaied v New York State Tax Appeals Trib., 22 N.Y.3d 592 (2014). (See our commentary here). While Gaied established that a dwelling can’t constitute a permanent place of abode if the taxpayer himself lacks a “residential interest” in the place, Obus went further, applying that rational directly to the vacation-home scenario—an issue that has previously sparked litigation in New York. And in determining that the taxpayers’ vacation home was not a permanent place of abode, the court (as in Gaied) focused directly on the 1922 legislative history underlying New York’s statutory residency rules, which (as the Legislature stated 100 years ago when enacting them) were designed to tax only those individuals who were really, and for all intents and purposes, living their lives as New York residents but seeking to avoid taxation by claiming to live elsewhere. The Obus court found that the taxpayers, who used their vacation home (which was located hours from the husband’s New York City office) no more than three weeks a year were simply “not among the target class of taxpayers who were intended to qualify as statutory residents.”
Obus stopped short of announcing any straightforward test or rule for when a vacation home or other dwelling can constitute a permanent place of abode; the court even acknowledged that the taxpayers’ vacation home could have been used in a manner to render it a permanent place of abode. Instead, the court held that to determine whether a taxpayer meets the Gaied “residential interest” requirement with respect to a dwelling, “it is imperative to consider a variety of factors, including the nature and duration of use,” an analysis which “inherently involves a subjective analysis of the taxpayer’s use.” Thus, Obus is perhaps most significant for rejecting the tax department’s long-held view (and abrogating prior case law supporting it) that as long as a taxpayer had free access to an objectively suitable year-round dwelling, it constituted a permanent place of abode for residency purposes, regardless of how it was used.
Understandably, this new subjective facts-and-circumstances standard leaves the tax department with some tough decisions to make. The Obus court focused on ensuring the statutory residency rules were appropriately applied to “the target class of taxpayers who were intended to qualify as statutory residents”. Consequently, applying the rules in a way that treats taxpayers with only tenuous residential ties to New York as income tax “residents” will have to be reexamined, especially with regard to the thousands of taxpayers who, like the taxpayers in Obus, live in other states but maintain vacation homes in New York. However, the analysis could extend beyond the vacation-home scenario, perhaps to commuters from Connecticut or other states who maintain rarely-used apartments in Manhattan. Are such commuters in the “target class” of taxpayers the statutory residency rules were intended to reach?
Since the Court of Appeals’ refusal to hear the tax department’s appeal, the department has indicated that some further guidance on the implications of the case could be coming. We also wonder whether the department will end up reconsidering legislation that has been introduced over the years that would specifically exclude certain vacation-home owners from residency-based taxation. Under that proposed legislation, a second home would be excluded from being considered a permanent place of abode if it is located more than 50 miles from the individual’s primary place of employment and used for less than 90 days during the tax year. That approach might be the tax department’s best option here, since it could arguably insulate the department from further expansion of the Obus rationale to all sorts of varying factual circumstances in which taxpayers are sure to argue that their tenuous connections to New York no longer justify resident taxation. And it would give those who maintain (or would like to maintain) a second-home in New York a practical standard and some certainty.
For now, practitioners like us will be eager to see how the tax department adapts in this post-Obus world!