March 08, 2011
Robert Spielman, Tax & Business Partner, Quoted in The Wall Street Journal Article: State Tax Probe Expands
By Craig Karmin
Excerpt:New York tax authorities have identified a potentially lucrative source of income: out-of-state residents who buy New York homes for their relatives.
At the state's urging, a New York tax appeals tribunal has agreed to rehear a case involving a New Jersey resident who worked in Staten Island, bought a Staten Island home for his parents and stayed there occasionally. The tribunal last year cleared him of having to pay any additional New York taxes.
If New York prevails in the case, it raises the possibility that other out-of-state residents who work in the city and allow family to live in their New York homes will pay more taxes.
It will be the second high-profile case in which the tribunal has ruled in recent months concerning out-of-state residents. It recently ruled that a Connecticut man who worked in Manhattan and owned a rarely used Long Island summer house owed $1 million in additional taxes.
New York tax experts say that with the state under financial stress, authorities are getting tougher on out-of-state residents who spend more than half a year in the state and own New York property.
"The state is clearly raising the stakes for those people," says Philip London, an accountant at WISS & Co. in Manhattan.
In the reopened case, the tribunal will consider whether John Gaied, a small-business owner, maintained a permanent residence at his Staten Island home where his parents lived.
Mr. Gaied lived in Old Bridge, N.J., and owned a business in Staten Island, which meant he was in the state for more than 183 days a year during the 2001 to 2003 period in question. If the tribunal determines the Staten Island home was his permanent residence under state tax law, New York would be able to tax all his income—including such things as dividends and investments—not just his income earned in the state.
In 2009, an administrative law judge ruled against Mr. Gaied, saying the Staten Island home counted as a permanent abode. But the tax appeals tribunal last year ruled in favor of Mr. Gaied.
The tribunal noted that he didn't have a bed at the Staten Island home, didn't keep any personal effects there and would stay there only when required because of his father's poor health.
But in late February, the tribunal agreed to rehear the state's case against Mr. Gaied.
Gary Kanaley, Mr. Gaied's attorney, said his client bought the property as an investment with the intention of it being home for his elderly parents, though Mr. Gaied paid the bills.
A spokesman for the state Tax Department said the tribunal ruling last year took a "subjective approach" that was "not only inconsistent with long-standing department policy, it could also undermine voluntary compliance and enforcement of the law to the detriment of all taxpayers."
If the tribunal reverses itself, accountants say it could have widespread effects for many out-of-state residents who have relatives living in a New York home.
These individuals might have to require parents or adult children to sign formal leases and act more like tenants than family. Until now, many accountants have counseled that if family members lived full-time in a nonresident's New York home, there would be no additional tax exposure. "It might mean that children who let their elderly parents stay at a New York home should not have keys and that the parents should pay all the bills," says Robert Spielman, an accountant with Marcum LLP in Melville, N.Y.
Timothy Noonan, a tax attorney at Hodgson Russ in New York, says the recent New Jersey and Connecticut cases underscore confusion surrounding the New York residency rules. The tax tribunal should use this case to clarify and make rules "more consistent with the original intent behind New York's statutory residency rules," he says.