Out-of-State Children Supporting Elderly Parents May Be Subject to New York Residency Tax

by Akerman LLP

In a split decision (3-2), the New York State Appellate Division, in In the Matter of John Gaied v. NYS Tax Appeals Tribunal (App. Div. 12/27/2012), upheld the ruling of the New York State Tax Appeals Tribunal that a taxpayer domiciled in New Jersey was a New York resident because he maintained a New York residence for his dependent parents. The facts of the case show that a caring son supporting his elderly, sick parents, was inadvertently whipsawed into a finding of residency because he failed to take prudent steps to minimize his contacts with and access to their apartment. The inequity of the decision was acknowledged by two dissenting justices who characterized the ruling as “irrational and unreasonable” and contrary to the purpose of the underlying statute. A brief overview of the applicable law and an analysis of the facts and the Court’s reasoning provides guidance for avoidance of New York tax residency traps.

New York State and New York City tax as residents either (1) any individual who maintains his domicile in New York State/New York City, or (2) any individual who is not domiciled in New York State/New York City but who: (a) maintains a permanent place of abode in New York State/New York City, and (b) is physically present in New York State/New York City for more than 183 days in any taxable year. This second category, also known as the two-prong statutory residency test, was the subject of the Gaied decision, which determined residency because the taxpayer both worked full-time in New York and maintained his parents' apartment in New York. The decision focused on whether the taxpayer maintained a permanent place of abode at the three-unit apartment property he owned and in which his parents lived in one unit rent-free while the other two units were rented as investment property. The details of the taxpayer's connections to the apartment property were essential to the Gaied decision.

The Gaied court enumerated and weighed the following important factors regarding the taxpayer's connections to the premises: (i) the taxpayer's parents had no source of income and relied upon the taxpayer for 100% of their support; (ii) the taxpayer's workplace was closer to his parents' apartment than to his New Jersey home; (iii) the taxpayer maintained incomplete records related to the rented investment property; (iv) utility and telephone service at his parents' apartment were maintained in taxpayer's name and paid by taxpayer; (v) leases for the two rented investment units listed the parents' apartment as the taxpayer's address; (vi) the taxpayer did not keep clothing or personal possessions at his parents' apartment; (vii) the taxpayer did not have a bed or bedroom at his parents' apartment and would sleep on the couch in the apartment when he infrequently provided overnight care to his ailing father; (viii) the taxpayer was registered to vote in New York; (ix) the taxpayer possessed keys to his parents' apartment; and (x) the taxpayer kept at his parents' apartment keys that provided emergency access to the two rental investment units.

In New York residency tax cases, taxpayers carry the burden of proof. Thus, in Gaied, the taxpayer needed to establish by clear and convincing evidence that he did not maintain a permanent place of abode in the three-unit apartment building. Although his connections to the apartment property established that he maintained the premises, the taxpayer argued that he maintained the premises for his parents and reasoned that the statute required that the premise must be maintained for his own use. However, after weighing the above-enumerated factors, the Court rejected the taxpayer's reasoning and ruled that "where a taxpayer has a property right to the subject premises, it is neither necessary nor appropriate to look beyond the physical aspects of the dwelling place to inquire into the taxpayer's subjective use of the premises." In deciding that the taxpayer had a property right in the apartment property, the Court focused upon the taxpayer's unfettered access to his parents' apartment (i.e., possessing keys to his parents' unit), where he kept the keys necessary to access in an emergency the two rental units, and the taxpayer's tax returns, which failed to establish that he maintained the premises solely as an investment property. The taxpayer could have avoided this tax trap by carefully considering his operation of the apartment and appropriate wording of documents and bills.

Because the Gaied decision was split three to two, the taxpayer can as a matter of right appeal to the New York Court of Appeals, New York's highest court. Such appeal will determine whether the standard for New York's statutory residency test will be expanded to exclude consideration of the taxpayer's subjective use of the premises where the taxpayer has a property right to such premises.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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