Originally published on Forbes.com on September 21st, 2012
A ruling by the New York Department of Taxation should give a huge boost to private residence clubs in Manhattan. In a private residence club you own a share in a city apartment. You have the right to use it a certain number of days per year (45 in this case) and more if other members don’t use all their days. An example of such a club is The Phillips Club at Lincoln] Square. Although, the concept of fractional ownership has a clear non-tax economic logic to it, there is a particularly compelling tax argument to go this route, thanks to this ruling. It takes a little bit of explaining.
The ruling is anonymous. As it happens the advance copy I received from CCH was not as well redacted as the link I gave you, so I can say that the taxpayer involved lived in Alpine, NJ. I’ll just make the rest up and say that his name is Harry Hedgefund and his office is in Midtown Manhattan. He works at a hedge fund, of course. His measly million dollar salary is supplemented by forty million in carried interest income and another couple of million from personal investments.
According to William Baldwin of Forbes, Alpine is tied for fourth place as one of America’s millionaire capitals. Alpine NJ 07620 was ranked as the fourth most expensive zip code in America. It is number one on the East Coast. Only about 10 miles north of the George Washington Bridge, it is half an hour from Midtown Manhattan, when traffic is light. Despite that propinquity to high finance, it is bucolic enough to have a Boy Scout Camp, where the youth of the 99%, including Troop 193 of Fairview NJ could experience nature. The camp is probably not that big, but it seemed vast to me. Vast enough for a kid who lived on a 37 by 100 lot, who used the New York City skyline to orient to get lost in the woods anyway. My daughter once met a young man at an expensive boarding school who grew up in Alpine. When she told him about her father who grew up in Fairview (about 13 miles to the south of Alpine and in the same county), he said I must be ghetto. I have not yet found the young man and thrashed him, but it is only a matter of time. Regardless, the point is that if you have a house in Alpine, you could probably afford a small Manhattan apartment, for the nights that you work late.
English: George Washington Bridge from New Jersey (Photo credit: Wikipedia)
The compelling tax reason to not have that Manhattan apartment, is something called the “New York rule which is a trap laid for the likes of Harry Hedgefund. Generally most states tax residents on their worldwide income and non-residents on income sourced to that state. The state of residence will generally give a credit for taxes paid to other states on income sourced to those states. Your state of residence is not as straight-forward a question as you might think, but Harry’s monstrous house in Alpine along with some other indicia would probably make establishing New Jersey as his domicile pretty easy. The “New York” rule is insidious. If you are present in New York for more than 183 days (and a day means any part of a day unless you are in transit to someplace else) and you maintain a “permanent place of abode” in New York, then you are a statutory resident, regardless of domicile. Of course, Harry would still be a resident of New Jersey. Thus two states could be taxing him on his worldwide income. (There may be some relief from the double taxation, but it is a little complicated to explain. Even if state double taxation is totally avoided, there is the New York City income tax to consider.)
The question before the Department of Taxation and Finance was whether ownership of the interest in the residential club should be considered a “permanent place of abode”.
In addition to his New Jersey home, Petitioner is considering purchasing an ownership interest in The Club, which offers studio, one- and two-bedroom luxury apartments. Each member in The Club owns a one-eighth tenancy-in-common deeded fee interest in one of The Club’s residences. Ownership is evidenced by a real estate deed that is recorded and is guaranteed by a title insurance policy. Members also own the furnishings and accessories in the residences which include bedding, linens, kitchen utensils, cookware, flatware and silverware. Like any other form of real estate in New York, the ownership interest can be sold or transferred by the owner, subject to The Club and Condominium Declarations and Bylaws.
The question is framed as follows:
Whether or not the taxpayer has free and continuous access to a place of abode is a primary consideration in determining if the taxpayer maintains a permanent place of abode for substantially all of the taxable year.
As is usual in this type of ruling they examine comparable cases. Here is the one that I found most entertaining:
Conversely, in the Matter of the Petition of Leon Moed (Tax Appeals Tribunal, January 26, 1995, DTA No. 810997), the Tribunal found that the petitioner did not maintain a permanent place of abode in New York as a result of his ability to occasionally stay at his wife’s New York City apartment after their marital separation, when she was in residence and with prior notice to his wife.
That one definitely had the makings of a Seinfeld episode, if not Sex in The City. At any rate, the limitations of the club prevent the interest from being considered a “permanent place of abode”:
In the case at hand, Petitioner’s right to use a residence is subject to the Club’s Policies and Procedures, which restrict his access. Although there is no absolute limit to the amount of use, each member has a priority right to use a residence for only 45 days per year. The reservations are given on a first-come, first-served basis, subject to the other members’ priority rights to use a residence for 45 days, and members are limited in the number of reservations they may make at any given time. Owners and guests accompanied by an owner have day use of The Club’s amenities and services except the Athletic Facility which is available to owners or unaccompanied guests only when they are in residence. The Club has a right to limit day use, and as such, day use of The Club is subject to availability and priority usage rights assigned to owners and/or guests lodging at The Club.
I have to say that Harry’s SALT (state and local tax) advisers were very much on the ball in getting this ruling. New York is very aggressive on these issues and I have heard from some people who work in this area that many fellows like Harry have a place in the city, without realizing the tax exposure they are creating for themselves. Private residence clubs might want to use the ruling as a marketing tool.
So if you have the big house in Alpine but want to be able to stay at your own place in the city quite a few nights a year, you should definitely consider a private residence club like The Phillips Club. If you want something permanent between work and home, though, perhaps for your mistress, you should consider something like The Colony in Fort Lee.
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