Major Win for NY Statutory Residents Brings Potential Refund Opportunities

By Sandy Weinberg, JD, Principal and Lior Roth, JD, Manager

A unanimous New York Supreme Court Appellate Division decision has resulted in potential personal income tax refund opportunities to those domiciled outside of New York but who have vacation homes in the State. The New York refund opportunity may also exist for others previously considered New York statutory residents. The case, Matter of Nelson Obus v. New York State Tax Appeals Tribunal, No. 533310 (NY App. Div. June 30, 2022), has been hailed by practitioners as “big news” and “a major decision in favor of taxpayers.” However, the State has appealed the case, so stay tuned.

The Obus Decision

In Obus, the court ruled that a seldom-used vacation home in New York is not a “permanent place of abode” for statutory residency purposes. Under New York tax law, a nondomiciliary is considered a New York resident for income tax purposes if the individual maintains a permanent place of abode in New York and spends more than 183 days of the year in the State.

More generally, in New York, for personal income tax purposes, residency is established if either of two tests — domicile or the above statutory residency threshold — is met. These tests are discussed in detail in our article regarding New York Residency Audit Keys.

In Obus, the key taxpayer was domiciled in New Jersey, worked in New York City and spent more than 183 days in New York State. He also owned a vacation home near Saratoga, New York. He spent three weeks during the year at this home, either skiing or visiting the racetrack.

The lower court in Obus ruled the vacation property was a permanent place of abode, as it was suitable for year-round living and Mr. Obus had access to the abode and paid all the maintenance on the property. The lower court held the taxpayer was a New York statutory resident subject to New York personal income tax on all of his income.

The Appellate Division thought otherwise and reversed the lower court decision, ruling that the rarely-used upstate home was not a “permanent place of abode.” The court applied a subjective test articulated in Matter of Gaied v New York State Tax Appeals Trib., 22 NY3d 592, 598 (2014). In Gaied, the court ruled that an abode must be used as a residence. The Appellate Division in Obus found the taxpayer visited the abode for three weeks in a year, did not keep personal items there and if he lived there throughout the year, would have a four-hour commute each way to work. The Appellate Division found these facts insufficient to show that the dwelling could be a permanent place of abode. Therefore he was not a New York statutory resident.

Observations

Last week, the State filed its appeal to the state’s highest court, the New York State Court of Appeals. The appeal is expected to be reviewed on August 22, 2022. Note: Because the Appellate Division decision was unanimous, there is no right of appeal. The Court of Appeals is not required to take the case.
If the decision stands at the Court of Appeals level, the Obus case’s focus on the purpose of the statutory residency test — to tax people who are truly residents — is a major development. This decision could impact how vacation-home cases are addressed by New York State. More broadly, it could impact any statutory residency situation. The key question to be asked is, “do the subjective facts suggest that the taxpayer really is not living as a resident of New York?”
The Obus decision’s positive development for those under consideration as statutory residents is tangentially offset by another 2022 development – namely, the change in policy by the New York State Department of Taxation and Finance regarding the length of time during a year that a taxpayer is required to have a permanent place of abode in New York before the taxpayer can be considered a statutory resident. Where the period had previously been 11 months, it has been lowered to 10 months.

Refund Opportunities

The Obus decision creates potential refund opportunities – but not for all statutory residents. While the decision is certainly taxpayer-friendly, it is fact-specific. To the extent that any of the facts change, so too may any determination. Of course, New York auditors are already aware of this. For example, what if the vacation or second home was used frequently by the owner while in New York for business purposes?

Nevertheless, in light of the Obus case, a refund opportunity may exist for those who are domiciled outside of New York, have New York vacation homes and have filed as New York residents because they spend more than 183 days in New York. Taxpayers in this situation should examine their facts and speak to their tax advisors.