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Another Critical Rise in the Legal Residency Area!

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Another Critical Rise in the Legal Residency Area!

There will always be “traps” within the tax law, where taxpayers unknowingly enter a tax problem they missed coming. Within the residency area, some taxpayers frequently got trapped on the move-in or move-out situation, using the Tax Department using the position that “statutory residency” trumps “domicile.” Thus, a citizen who didn’t transfer to New You are able to until, say, August of the particular tax year still might be taxed like a full-year resident when they ran afoul of recent York’s legal residency test (i.e., they maintained a lasting host to abode for nearly the entire year and spent greater than 183 days within the condition). Indeed, the Nonresident Audit Recommendations (see page 64) contained an entire section relating to this.

Guess what? We may have closed this trap!

Within the Sobotka situation, just released today, an ALJ in New York’s Division of Tax Appeals came to the conclusion that, even though the tests of domicile and legal residency aren’t mutually exclusive (i.e., a citizen could be both throughout the same tax year), a citizen are only able to be considered a legal resident of recent You are able to during any nondomiciliary period if he meets both abode and day count tests throughout the nondomiciliary period. Quite simply, once the nondomiciliary period at issue covers only a part of a tax year, the citizen must exceed the 183-day limit throughout the non-domiciliary a part of that tax year to become a legal 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 can be a complete turnaround of the Tax Department’s prior policy in this region. Both in good examples, the Tax Department might have taken the positioning that legal residency “trumps” the domicile change, also it might have taxed Tim and Andrew as full-year citizens. There were a couple of cases available that might have been read to point out otherwise, because the Tax Department’s Audit Recommendations note. Really, though, no court had ever addressed this “trap” mind-on. And typically, courts, taxpayers, auditors, as well as practitioners didn’t understand why nuanced look at the residency law. But because the judge’s decision outlines, this can be a result that flows clearly in the plain language from the law and it is supported fully through the statute’s legislative history.

Obviously, choices of administrative law idol judges aren’t binding, therefore the Tax Department will need to choose how it wishes additional order.

Meanwhile, taxpayers and practitioners should take serious notice. If you’re a citizen that has compensated tax like a full-year legal resident of recent You are able to for any tax year and you altered your domicile into or from New You are able to, you should think about reimbursement claim (if still timely). Or if you’re a citizen who’s being audited for any year and you altered your domicile and also the Tax Department is asserting that you simply were a legal resident of recent You are able to in that year, you need to adjust how a legal days are now being counted to find out if this order would impact that determination.

 

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