New York’s second-home market just got a lift from an unexpected source.
In a ruling that shocked tax experts, an appeals court said out-of-staters with New York vacation homes don’t have to pay income taxes as if they lived in them full-time.
The Appellate Division overturned a longstanding, counter-intuitive state rule that New York tax attorney Glenn Newman called a “disincentive for coming to New York.”
“This helps the vacation home market,” the Greenberg Traurig lawyer said of the decision. “It makes it less likely that someone who uses a vacation home would be subject to the 183-day test.”
That test has long plagued owners of multiple homes. In determining whether someone spends more than half of the year in New York, any part of a day spent in the state is counted as a full day of living in the state.
“The deck is stacked against people,” said Newman. “The burden of proof that you were not in New York is on the taxpayer. How do you prove a negative? How do you prove you were not here?”
The system made no sense to Nelson Obus, an investor and New Jersey resident who commuted to work in New York City and had a vacation home upstate, four hours away. Although Obus only visited the second home only a few weeks each year and kept no personal items there, because he owned it, New York counted his work days in the city as days lived in the state.
Absurd as that sounds, vacation-home owners and their accountants have long accepted it as something they had to live with.
But Obus decided to challenge the system.
That also made no sense, at least financially, because the taxes he paid New York reduced the taxes he owed New Jersey by the same amount. Even if his challenge succeeded, which tax professionals considered a long shot, he would save little or no money.
Obus didn’t care. When his attorney, Newman, mentioned the lack of upside, his client said, “I pay to New York what’s due to New York and I pay to New Jersey what’s due to New Jersey.”
“It was a principled stance,” Newman said.
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Obus is not the typical investor making money and staying under the radar. He is known for taking on the Securities and Exchange Commission, which is not something most people do in their spare time.
In this case, the New Jerseyan first had to go before an administrative law judge. After being denied, he asked an obscure body called the Tax Appeals Tribunal to set things straight. Again, the tribunal sided with the state.
Obus was not deterred. He went to the Appellate Division, a court that real estate players know as a place they can get justice if they are victimized by hack judges in state Supreme Court.
A shot at redemption
There are two ways that people who don’t live in New York can be pegged as residents by the state’s roughly 250 notoriously aggressive tax auditors. One is what Berdon LLP partner Wayne Berkowitz calls the “touchy-feely” way: if you consider New York home, based on family and social connections and an intention to move back there.
The other is the statutory way: a permanent place of abode plus 183 or more days in a calendar year. It was those boxes that Obus checked.
“In the past, the standard for a permanent place of abode was fairly low: A place you could live in, with unfettered access,” said Berkowitz. “Didn’t matter if you didn’t stay there, didn’t matter if you didn’t use it.”
Glenn Newman (Greenberg Traurig)
Berkowitz and Newman are part of a cottage industry of tax lawyers trying to get New York’s tax collectors to see reason instead of dollar signs. It’s a losing battle, marked by cases like that of John Barker, a Connecticut hedge fund manager who bought a house in the Hamptons so his father-in-law could live there. But Barker stayed there a few weeks a year, and New York claimed him as its own.
Perhaps the most famous case in the insular world of Empire State taxation involved a New Jersey resident named John Gaied who owned a 24-hour auto repair shop and an apartment building on Staten Island. Gaied’s parents lived in the building and he paid their utility bills, did tasks for them and occasionally crashed on their couch after a long day’s work. The state declared him a New Yorker.
Gaied fought the decision all the way to the Court of Appeals — it was the first time in nearly 100 years the state’s highest court had taken a tax residency case — and won.
Even that landmark victory for taxpayers, in 2014, didn’t humble the state. Berkowitz said he expected tax officials to make sweeping changes in their residency regulations, but they just made a few tweaks and went right back to dogging wealthy filers.
“They have a very robust residency audit program,” Newman said diplomatically. “They’ve had it for many years.” About 30, in fact.
Determinations by New York’s Division of Taxation and Finance are hard to undo, but its ruling against Obus was struck down decisively — “to the surprise of every lawyer and practitioner I know,” said Berkowitz.
The judges felt so strongly that they ordered the state to pay Obus’ court costs. And because they ruled unanimously, the state has no automatic appeal. At best, it can ask the Court of Appeals justices to take the case.
“I think there’s going to be enormous pressure on them to take it, because this really upends New York’s whole order,” said Berkowitz. “People who might have been filing as residents because they work in New York and have a vacation home are clearly going to be affected.”
Newman is hopeful that the state will accept the verdict. “It was 5-0,” he said. “It’s not like they convinced any of the judges.”